First Name | Marcie |
---|---|
Last Name | Milner |
Email Address | marcie.milner@shell.com |
Affiliation | Shell Energy North America (US), L.P. |
Subject | Comments of Shell Energy North America (US), L.P. |
Comment | Shell Energy North America (US), L.P. (“Shell Energy”) provides its comments on the Staff’s September 4, 2013 proposed amendments to the Air Resources Board (“ARB”) Cap and Trade Regulations. Shell Energy submitted comments jointly with Shell Oil Products US (“SOPUS”) on August 2, 2013, in response to the “Discussion Draft” of proposed amendments that was released by the ARB Staff on July 15, 2013. Unfortunately, upon review of the September 4 proposed amendments, it appears that most, if not all, of these comments were ignored. Shell Energy requests that the ARB consider the comments herein on specific proposed amendments to the Regulations in view of the importance of these issues to an efficient and effective regulatory structure. In particular, the ARB should strike or withdraw proposed amendments that would impose unreasonable and unnecessary burdens on covered entities, as well as proposed amendments that would interfere with existing contracts. Shell Energy’s comments, which track specific sections of the proposed amendments, are as follows: 1. Section 95830(c)(1)(H): The Staff’s proposed amendment provides that a registered entity must identify every other entity with which the registered entity has a “corporate association,” a “direct corporate association,” or an “indirect corporate association,” as defined in Section 95833(a), whether or not the entity is registered with or intends to register with the ARB. This proposed requirement is unreasonable and unduly burdensome. As Shell Energy noted in its August 2 comments, large multi-national corporations such as Royal Dutch Shell have hundreds, if not thousands, of affiliates that would meet the definition of either a “direct” or an “indirect” corporate association. It would serve no useful purpose for a large corporation to disclose all of these entities, unless the entities intend to register with the ARB. For purposes of compliance with the Cap and Trade Regulations, it should be enough for a registered entity to identify all related entities that are “registered” with the ARB, or registered with a “linked” External Greenhouse Gas Emissions Trading System. Inquiry into a direct or indirect corporate association with an entity that is not so registered is neither appropriate nor necessary. The “Staff Report: Initial Statement of Reasons” (“Staff Report”) states that the proposed language requiring disclosure of all “corporate associations,” “direct corporate associations” and “indirect corporate associations” “is a clarification [of] an existing requirement and not a new requirement or change in policy.” Staff Report at p. 112. Regardless of whether or not this is a “change” to an existing requirement, the proposed language should be stricken. As Shell Energy noted in its August 2 comments, the purpose of the “corporate association” rules is to place purchasing limits and holding limits on entities that are registered with the ARB (or a “linked” Trading System) and that have a “direct corporate association.” No reasonable justification exists to disclose an entity’s “corporate association” with an entity that is not participating in the Cap and Trade program. The Staff has not provided a reasonable basis for this requirement. This proposed amendment should be stricken or withdrawn. 2. Section 95830 (c)(1)(I), (J): The Staff Report states that new Section 95830(c)(1)(I), which would require registered entities to disclose the names of all persons employed by the entity in a capacity that would give them knowledge of the entity’s decisions on compliance instrument transactions or holdings, is needed to identify individuals who gain knowledge of a registered entity’s transaction strategy through their work as employees of a registered entity. See Staff Report at pp. 104-05. Similarly, the Staff Report states that Section 95830(c)(1)(J) is needed to disclose the identities of registered entities’ auction bidding advisors or consultants for Cap and Trade activities. The Staff states that the new language would add disclosure requirements for individuals who gain knowledge of a registered entity’s compliance and transaction strategy through their work as consultants. The Staff states that because these individuals may serve as consultants for multiple registered entities, disclosure is needed to enable the ARB to monitor for “collusive activity.” Staff Report at p. 105. The proposed language in these two sections is overbroad and unduly burdensome. In a large corporate organization such as Royal Dutch Shell, this proposed language, if adopted, could require disclosure of numerous individuals that are only tangentially involved in the Cap and Trade program, including individuals in foreign countries. Moreover, the Staff’s failure to provide clear limits regarding the required disclosure would make it difficult to comply. Shell Energy suggests that the ARB withdraw the proposed amendment and replace it with a provision that requires a registered entity to adopt a policy that prohibits its employees (and their family members) from trading products in personal accounts that the company trades or originates as part of its business. Alternatively, Shell Energy recommends that the ARB narrow the proposed language to require disclosure of employees and consultants who have been delegated authority to commit the company to purchases and sales of compliance instruments, and who have access to the entity’s CITSS account. The regulation could further require an attestation by any individual who seeks to register, that the individual’s family members are not employees of a registered entity. 3. Section 95833(a)(2)(F): The Staff’s proposed amendment includes a “limited liability corporation” within the meaning of a “direct corporate association,” if one entity owns more than 50 percent of the other entity. Shell Energy does not object to including limited liability corporations (“LLC”) within the meaning of the disclosure rules. However, it is not enough to establish a “direct corporate association” with an entity by showing that the entity owns more than 50 percent of the LLC. In order to establish the level of “control” that is required for a direct corporate association, the terms of the LLC’s operating agreement must be considered. This consideration should be added to the amended language. 4. Section 95856(h): The Staff’s proposed amendment establishes the “order” or “priority” in which a covered entity’s compliance instruments will be retired. The Staff states that this provision is necessary “because it provides participants with details regarding the order in which compliance instruments will be considered by the Executive Director for compliance with the annual surrender event.” Staff Report at p. 138. The proposed amendment to order (prioritize) the retirement of compliance instruments should be modified to provide that the Executive Director will only dictate the order in which a covered entity’s compliance instruments are retired if the covered entity has not otherwise designated the order in which the instruments are to be retired. The Staff Report states, for example, that “allowances from California and linked jurisdictions will be the third type of compliance instrument to be considered in the Compliance Account . . . based on earliest vintage first.” Staff Report at p. 139. For a variety of reasons (including but not limited to corporate taxation and financial accounting), however, the covered entity may prefer to retire “offsets,” or compliance instruments with a more recent vintage ahead of instruments with an older vintage. One reason for this is that most companies recognize their free allocations at $0 on their balance sheet, but recognize purchased allowances at “cost.” A company may wish to retire all of its freely allocated Vintage 2014 allowances before the company retires its purchased Vintage 2013 allowances, in order to optimize its balance sheet. The proposed Compliance Instrument Retirement Order would not permit this. The order in which a covered entity’s compliance instruments are retired should be within the discretion of the covered entity (both for its annual compliance obligation and its triennial compliance obligation), with the possible exception of “true-up” allowances, as provided in Section 95856(h)(3). The Executive Director should only prescribe the order of retirement as the “default.” 5. Section 95912(d)(4)(C), (D): The proposed amendment would require a covered entity’s auction participation application to include an allocation of the “purchase limit” and the “holding limit” among members of a “direct corporate association” as defined in Section 95833. The Staff states that the purpose of this provision is to require covered entities to report any change in the distribution of the purchase limit and/or the holding limit among corporate associates. Staff Report at p. 176. Whether or not this proposed amendment is adopted, each of the covered entities with a “direct corporate association” that is subject to the purchase limits and the holding limits should be permitted to establish its own subaccount for compliance and retirement in accordance with Section 95856(c), and should be allowed to transfer compliance instruments between and among the compliance accounts for each covered entity, subject to the overall holding limits. This approach provides entities that have a direct corporate association, and that are subject to the purchase and holding limits, greater flexibility in the timing and allocation of compliance instruments for retirement. The Regulation should be amended to include a provision that allows covered entities to establish their own subaccounts for compliance and retirement as discussed above. 6. Section 95912(d)(4)(E): The Staff’s proposed amendment to the items that must be included in the “application” for auction participation would require an attestation that the entity participating in the auction, “and all other entities with whom the entity has a corporate association, direct corporate association, or indirect corporate association” (pursuant to Section 95833) has not been subject to “any previous or ongoing investigation with respect to any alleged violation of any rule, regulation or law associated with any commodity, securities, or financial market . . . .” The Staff states that this new provision is needed “to improve ARB’s ability to monitor investigation of alleged violations in other financial markets . . . .” Staff Report at p. 176. This proposed amendment is overreaching and unreasonable. Under Section 95833(a)(4), an “indirect” corporate association can be established with an ownership interest that is no more than 20 percent. It is unreasonably burdensome to require the applicant to undertake the research to ascertain whether an entity with an “indirect corporate association” is the subject of an allegation of wrongdoing under financial market rules. If such a disclosure requirement is to be imposed, the requirement should be limited to entities with which the applicant has a “direct corporate association.” This proposed amendment should be modified or stricken. 7. Section 95920(a): As Shell Energy stated in its August 2 comments, the “holding limit” (for entities with a direct corporate association) referenced in this section of the Rules is unreasonably low. The holding limit fails to take into account the nature of a covered entity’s business. Different holding limits should be established based on the type of business in which the entity is engaged. The current limits are punitive, especially for companies that have large compliance obligations and/or large purchase commitments by virtue of new or existing contractual arrangements. This latter point (new or existing contractual arrangements) is particularly important, because the limited exemption offered by the Compliance Account does not help an entity that has to transfer large volumes to a third party by virtue of some separate contractual arrangement. The holding limits should be re-examined. 8. Section 95921(b)(3)(C), (4)(E,F,G), (5)(E): The Staff’s proposed amendment would require disclosure of the price term in a transfer request for the sale of compliance instruments, whether the transaction is over-the-counter or an exchange-based agreement. The Staff’s proposal would require disclosure of a “fixed price” or, in the alternative, a description of the pricing method in the secondary market transaction. The Staff attempts to justify a “price disclosure” requirement by stating that the “provision is needed to enable ARB market monitoring staff to understand the basis for pricing carbon instruments.” Staff Report at p. 200. The Staff also asserts that the “provision is needed to allow ARB to interpret the price entered for the transfer request as part of market monitoring.” Id. 199. The Staff’s reasoning does not justify a price disclosure requirement; disclosure of the price of a private transaction is not supported by law. The ARB does not approve or regulate the prices of compliance instruments that are sold in secondary market transactions. The ARB also does not regulate or limit the price that an entity may charge to sell, or pay to purchase compliance instruments in the secondary market. Secondary market price regulation is outside the scope of the ARB’s authority under AB 32. The ARB does not have the authority to require mandatory price disclosure as a part of a participating entity’s “transfer request.” As Shell Energy stated in its August 2 comments, mandatory price disclosure to the ARB would risk the potential for public disclosure (inadvertent or through a Public Records Act request), which could in turn inhibit or distort competition in the secondary market. The secondary market for compliance instruments can and should be a robust and competitive market. Price disclosure could have a chilling effect on secondary market transactions. In this connection, a “liquid” secondary market is dependent on a large volume of trades. Requiring price disclosure for secondary market transactions would reduce liquidity and create conditions that would make price manipulation relatively more likely. The Staff seems to justify a price disclosure requirement for secondary market transactions based on a concern about price manipulation. In fact, a mandatory price disclosure requirement could lead to reduced liquidity, creating a greater potential for market manipulation. In addition, some of the compliance instruments that will be purchased and sold in the secondary market represent “offsets,” as well as allowances from jurisdictions (e.g., Quebec) with which the Cap and Trade program is “linked.” There is a serious question whether the ARB can legally demand disclosure of prices agreed upon in transactions that occur outside California. Finally, because the ARB does not regulate secondary market prices for compliance instruments, no legitimate purpose would be served by having the ARB demand price disclosure as a part of a transfer request. The ARB has a valid reason for requiring the disclosure of information regarding transaction dates, quantities and products transferred. Price, however, is not within the ARB’s authority. Price disclosure should not be required. 9. Section 95985(i): Under the current Regulation addressing the treatment of offset credits for U.S. forest projects, if a covered entity retires a forestry ARB offset credit and thereafter the project is invalidated, the Forest Owner is responsible and the covered entity is still considered to be in compliance, even if it does not have enough valid compliance instruments. The Staff proposes to amend the current Regulation. The Staff asserts that a change to the existing rule is needed to “clarify” that this section only applies to ARB offset credits issued to U.S. forest projects prior to the effective date of these amendments. Staff Report at pp. 277-78. The Staff states that, after the effective date of these amendments, the provisions in section 95985(h) will apply to ARB offset credits issued to U.S. forest projects, meaning that the risk of project invalidation will be shifted to the purchaser of the offset. Id. As currently written, the subsection imposes the obligation to replace the ARB offset credits on the “Forest Owner” if the offset credit is determined to be invalid after retirement of the offset. Entities have relied upon this provision in the negotiation and execution of contracts for the purchase of offsets, and in the allocation of costs and risks under those contracts. The Staff’s proposed change would shift responsibility for “replacement” of offset credits (credits issued prior to the effective date of these amendments) from the Forest Owner to the purchaser of the offset credit, thereby undermining the terms of existing contracts. The Staff has not adequately explained why this subsection should be amended in this manner. The current language provides a clear, understandable assignment of responsibility in the event an offset credit from a forestry project is deemed to be invalid. Reversing direction with respect to the assignment of liability will create uncertainty and will be disruptive to entities with existing contracts. If the ARB nevertheless decides to adopt the Staff’s recommendation to amend this subsection, the ARB must afford “grandfathered” treatment to contracts that pre-date the effective date of the amended regulations. The Staff’s proposal would only “grandfather” offset credits issued to U.S. forest projects prior to January 1, 2014. See Staff Report at pp. 277-78. Grandfathered treatment should apply to all pre-January 1, 2014 contracts, as well. Parties that relied upon the pre-existing rules at the time they entered into an agreement for the purchase and sale of forest project offsets should continue to be able to rely upon these pre-existing rules for the duration of their contract. 10. Sections 95891(f), 95894: These sections address the “Transition Assistance” (direct allocation of allowances) that the Staff proposes for eligible “legacy contract” generators. As a general matter, the direct allocation of allowances should be available to all otherwise eligible legacy contracts. Staff’s proposed Section 95894(a)(3)(C) would require an attestation that the operator of the legacy contract generator made a good faith effort, but was unable to renegotiate the legacy contract with the counterparty. The Staff states that the purpose of this new section is to ensure that the “operator has discussed the possibility of allocating these costs with the counterparty and has exhausted all other options to cover the cost of compliance.” Staff Report at p. 168. Shell Energy supports the Staff’s revised (October 16, 2013) proposal to provide free allowances as Transition Assistance to non-industrial legacy contract holders. ARB should clarify, however, that the Transition Assistance will continue to be provided through the second compliance period (2017) even if the parties are able to renegotiate the legacy contract. This assurance is necessary in order to support contract renegotiation efforts. Parties to an otherwise eligible legacy contract should not be discouraged from renegotiating their contract based on the potential loss of a direct allocation of allowances. For this reason, proposed Section 95894(a)(3)(C) should be clarified to confirm that non-industrial legacy contract holders will receive Transition Assistance whether or not the parties are able to renegotiate the legacy contract. Shell Energy appreciates the opportunity to provide these comments on the Staff’s proposed amendments to the Cap and Trade Regulations. If Staff has any questions regarding these comments, Shell Energy would be pleased to discuss the concerns raised in these comments in greater detail. |
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Date and Time Comment Was Submitted | 2013-10-17 16:15:07 |
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