Subject: Ontario's Emissions Trading Regulation....
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Date: Thu, 25 Oct 2001 13:51:57 -0700 (PDT)

The Ministry of Environment in Ontario released its final emissions trading regulation yesterday.   Based on a quick review, several changes were made that Enron asked for in its submission earlier this month.
 
Specifically:

OPG's allocations will be partitioned through 2007 (not 2010)
Allowances will be allocated on a prospective basis, baned on the previous year's generation (output).  Estimations of energy production will be used (subject to a true-up) to accommodate new generators which come on line during a compliance year.  
Direction and distance provisions that would discount emissions reductions credits (foreign allowances) have been removed.
The SO2 set aside for renewable energy and energy efficiency is raised to 4 KT (NOx --expressed as NO - remains at 1 KT).

There is no restriction on banking of credits.
ERC credit lifetime extended from five to seven years.
Approval of ERCs by the Ministry of the Environment before registration of the credits (rather than after registration but before use).  

Please see the summary of the regulation below compiled by Lisa DeMarco of Donahue Ernst & Young in Toronto.  Environmental Strategies will analyze the regulation and be back in touch with more information on its impact for Enron.  Do not hesitate to contact me with any questions.
 
Link to MOE summary of regulation changes and links to regulation:
 
<http://204.40.253.254/envregistry/016576er.htm> 
_______________________________________________________________________________________________________ 
On October 24, 2001, the Ontario Minister of Environment released the final emissions trading regulation which includes several significant changes to the draft regulation. The release of this regulation and an additional regulation governing emissions from the Lakeview generating station is broadly thought to signify the likely opening of the Ontario electricity market in Spring, 2002 (please see attached article).  

A brief overview of the central aspects of the Ontario emissions trading regulation, which sets out a hybrid ("Cap, Credit and Trade") system of emissions trading for Ontario, follows 
 
Applicability: 

Starting in 2002, the regulation will apply to Ontario Power Generation's ("OPG") 6 fossil fuel generating stations.  In 2004, the requirements will be extended to large (>25MW) Independent Power Producers ("IPPs") in the province.  Most notably, the regulation is accompanied by an announcement that caps and the associated hybrid trading scheme will be extended to other major industrial sectors in the near future.  Consultation with those sectors regarding the level of their sector caps will commence immediately. 

Caps: 

NOx (measured as NO): 

An overall cap of 36 KT in 2002 will decline to 28 KT in 2010.  The cap will be partitioned between OPG and IPPs  between 2004 and 2007.  Each year renewable and energy conservation projects will be eligible for 1 KT of "set-aside" allowances.  Starting in 2007, the allocation of allowances will also be subject to a North/South partition to comply with obligations under the Ozone Annex to the Canada / US A Air Quality Agreement.  Trading between these areas is not, however, restricted. 

SO2: 

An overall cap of 157.5 KT in 2002 will decline to 131 KT in 2007.  The cap will not be partitioned between OPG and IPPs and will apply to OPG facilities in 2002 and all large IPPs in 2004.  Each year renewable and energy conservation projects will be eligible for 4 KT of "set-aside" allowances.   

Allocation: 

Prospective allocation of allowances will be on the basis of a facility's pro-rata share of energy production (output) in the province.  OPG will receive a corporate based allocation each year until the end of 2007, at which point all allocations will be on a facility basis.  The proposed mechanism allows for estimations of energy production to be used (subject to a true-up) to accommodate new generators which come on line during a compliance year.  Measurement of emissions must be by CEMs or equivalent technology. 

Credit Creation: 

Emission reduction credits ("credits") may be created in accordance with MOE "Standard Methods" from baseline project emission rates in the year prior to creation.  Specific requirements are set out in the Ontario Emissions Trading Code ("OETC").  Generally credits may be created from any of the following jurisdictions: 

Ontario, New York, Pennsylvania, New jersey, Delaware, Maryland, West Virginia, Kentucky, Ohio, Michigan, Indiana, Illinois, Wisconsin, and the District of Columbia (with possible science-based extension of the eligible jurisdictions) 

In addition, US allowances which are issued by these jurisdictions may be acceptable for use as Ontario credits if they meet the requirements set out in the OETC. 

Early action credits may be eligible for use if they:  meet the requirements of the OETC; were submitted for review by the PERT program before July 1, 2001;  and were created between July 1, 1998 and January 1, 2000. 

Credits will be approved for use by the MOE before they are registered on the Emissions Trading Registry. 

Credit and Allowance Use: 

Use of credits is limited to 33% of allowances used for NOx and 10% of allowances used for SO2.  These limits do not apply if the facility is operating under an IMO must run contract.   

All credits will be subject to a 10% environmental discount.  The ratio of smog season to non-smog season NOx credits must reflect the same ratio of actual emissions. 

There is no restriction on banking of credits.  There is no distance and directionality discounting for the eligible jurisdictions. 
Trading 

There is generally unrestricted trading through the Ontario Emissions Trading Registry.