Edison Snafu Skews Demand in First California Carbon Sale

Photographer: Reed Saxon/AP Photo

Work being done on a Southern California Edison substation in Redlands, Calif., 2010. Edison, owner of California's second-biggest power utility, submitted a proposal in the wrong format and sold all of its carbon permits in the state’s first auction. Close

Work being done on a Southern California Edison substation in Redlands, Calif., 2010.... Read More

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Photographer: Reed Saxon/AP Photo

Work being done on a Southern California Edison substation in Redlands, Calif., 2010. Edison, owner of California's second-biggest power utility, submitted a proposal in the wrong format and sold all of its carbon permits in the state’s first auction.

California, the world’s ninth- largest economy, has Edison International (EIX) to thank for selling all of its carbon permits in the state’s first auction. The company unintentionally bid for twice as many allowances as were for sale.

Edison, owner of the state’s second-biggest power utility, submitted a proposal in the wrong format and offered to buy 21 times more allowances than it wanted on Nov. 14, documents obtained by Bloomberg show.

When the state Air Resources Board said last month that it had received three bids for every available permit, it failed to mention that Edison accounted for nearly 72 percent of the offers. Had the company submitted its proposals in the right format, about 225,000 permits would have gone unsold at auction, Bloomberg calculations based on data from the report show.

The utility used “a format that was different than what the air resources board’s bid processes were looking for,” Gary Stern, Edison’s market strategy director, said by phone Dec. 18, declining to specify how many permits were involved.

The company asked the board if it could resubmit the proposal, and was refused. “I guess they considered it and determined that they could not, or would not,” he said.

California, which adopted an emissions-trading program after efforts to pass a national cap-and-trade plan failed, has hailed its effort as a model for the rest of the world, even as carbon prices in the U.S. Northeast and Europe declined.

‘Vibrant’ Market?

Mary Nichols, chairman of the state’s air board, described the Nov. 14 sale as proof that such a system could create a “vibrant and successful” market for carbon allowances.

The auction “went without a hitch,” Nichols said Nov. 19, when her agency released initial results of the sale.

Most of Edison’s bids were eventually disqualified after exceeding auction limits, and the company ended up buying 4.05 million allowances, still 1.61 million permits more than it had intended to, according to an Edison report presented to company executives. Permits sold for $10.09 each, 9 cents above the state’s lowest allowable price, known as the “floor,” the air board said.

“The ultimate implications, the impact, on the auction, I can’t say what they are,” said Stern, based at Edison’s headquarters in Rosemead, California. “The auction cleared at $10.09 and the floor was $10, so what might’ve happened differently was in that range, and that’s all I know.”

Participants Trained

Dave Clegern, a spokesman for the air board in Sacramento, declined to comment on Edison’s bids. The air board provided training for participants in August to give them a “hands-on look” at the auction platform and bidding process, he said by e-mail Dec. 18. The agency also held a test sale on Aug. 30 to familiarize companies with the bidding system.

“This revelation calls the agency’s credibility into question,” William Nelson, a Bloomberg New Energy Finance analyst in New York, said in an e-mailed statement yesterday. “For SoCal Ed, it appears now to have 1.61 million allowances it never intended to buy on its hands for which it spent approximately $16 million. The irony is that Edison was ultimately rewarded for its mistake, procuring credits at a price that is ‘in the money’ today.”

Futures based on California carbon allowances for 2013, the first year that companies must comply with emissions limits, “fell off a fair amount” on news that Edison had overbid in last month’s auction, Dusty Granet, a broker at BGC Environmental Brokerage Services LP in New York, said by telephone yesterday. Allowances traded at $14.75 a metric ton after the story broke yesterday, down from $15.10 to $15.20 earlier in the day, he said.

Market Expectations

“The price decrease is from the expectation now that one of the largest buying entities won’t go into the auction as much as people thought in the next four auctions,” Granet said. “Prices are really based on what the market is expected to do over the year in 2013.”

California carbon future contracts cleared by IntercontinentalExchange Inc. (ICE) settled at $14.90 a ton yesterday, down from $15 a day earlier, according to data compiled by the Atlanta-based exchange. Prices have risen 30 percent since the air board posted the initial results of the auction on its website Nov. 19.

Futures based on permits for the U.S. Northeast’s Regional Greenhouse Gas Initiative, or RGGI, have been trading at $1.97 a ton since March, 4 cents above the floor price in its latest auction this month. Contracts for the European Union’s carbon system rose 2.1 percent to 7.38 euros ($9.77) yesterday in London. Prices there slumped to an all-time low earlier this month on speculation that rising supplies will outpace demand.

Later Results

On Dec. 6, California’s air board released a second set of results from its auction, saying there were just 1.06 bids for every permit offered in the Nov. 14 sale once it disqualified bids from a “very small number of auction participants” who exceeded purchasing, holding or bid guarantee limits. Permits still sold out at 9 cents above the floor, it said.

“I don’t believe we intend to do anything more except to move forward at this time,” Stern said. “There’s another auction coming up in February. We’ll develop a plan and use the right format this time.”

The Federal Energy Regulatory Commission is monitoring California’s emissions-trading program to see if it affects U.S. West Coast power markets, the agency’s staff said in a presentation to the group today. Among other things, the commission will be tracking California permit trading, allowance derivatives trading and results of the state’s carbon auctions, the report shows.

The costs that companies incur to comply with California’s emissions program “may soon contribute to the establishment of market prices in California, and possibly other parts of the West,” Jon Wellinghoff, the commission’s chairman, said in a statement. “It is important that our staff monitor and understand the effects on electricity prices in the region.”

To contact the reporter on this story: Lynn Doan in San Francisco at ldoan6@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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