Głowacki Law Firm

Beneficial holdings disclosure requirements for emissions agents under the California cap-and-trade
Tuesday, 17 January 2012 20:48

The process for registration of participants under the Californian scheme is currently underway and covered entities must register by January 31, 2012.

Emissions brokers should consider specific requirements applicable to them in that scheme.


The California Air Resources Board (ARB) have provided an online registration form for covered entities to register for the cap-and-trade program as required by the California Cap on Greenhouse Gas Emissions and Market-Based Compliance Regulation.

Voluntary market participants may also use the form to register for the program, but they are not subject to the January 31, 2012 deadline.

In the context of the undergoing registration of participants in the California cap-and-trade it may seem noteworthy to mention an interesting approach to disclosure of beneficial holding relationships, adopted in the Californian regulations (specifically in § 95834 of the Final Regulation Order on California cap on greenhouse gas emissions and market-based compliance mechanisms).

The types of beneficial holdings identified under California cap-and-trade

Pursuant to the said provisions generally there are two types of participants in a beneficial holding relationship:

(1) The agent in the beneficial holding relationship is the registered entity acquiring and holding compliance instruments to be transferred to another entity under an agreement with that entity that is disclosed to Californian regulator (Air Resources Board - ARB); and

(2) The principal in the beneficial holding relationship is the registered entity to whom the compliance instruments will be transferred by an agent under an agreement with that entity that is disclosed to ARB.

 

Note that provisions on beneficial holdings disclosure requirements for emissions agents under the California cap-and-trade lapsed on 1 September 2012 (for details see here).

 

The justification was that they didn't solve electricity contracting issues and the market monitor identified associated oversight concerns.

 

See also 'Major overhaul of the California cap-and-trade - linkage with the Quebec scheme and the KYC-checks substitution for the beneficial holding disclosure provisions.'

 


The Californian regulation name the two main relationships where the said principal-agent linkage could be in particular applied.

The first is a situation where an electrical distribution utility serves as the agent in a beneficial holding relationship for a second registered entity with whom it has a contract for the delivery of electricity for the sole purpose of supplying the second entity with compliance instruments to cover emissions resulting from satisfying the electricity contract. In such a situation the  disclosure must be made to ARB prior to any such purchases, and must include:
- the terms of the contract governing the eventual transfer,
- the principal’s confirmation that the electrical distribution utility is authorized to serve as an agent on its behalf.

An entity serving as an agent in this type of a beneficial holding relationship may not, however, also serve as the agent in a beneficial holding relationship with an entity with whom it does not have a contract for the delivery of electricity.

The second specific application of the beneficial holding relationship occurs when an entity acquires compliance instruments for the eventual transfer to registered entities that are part of a corporate association to be used for the affiliated entities’ compliance obligations. An entity cannot have this type of beneficial holding relationship unless the corporate association is disclosed to ARB (Californian cap-and-trade regulations contain elaborate stipulations on Disclosure of Direct and Indirect Corporate Associations - see: § 95833 of the Final Regulation Order on California cap on greenhouse gas emissions and market-based compliance mechanisms).

Besides the two above-mentioned specific legal relationships it is however worth to observe that the agent-principal linkage in its shape described in § 95834 of the Californian Final Regulation Order is also an inherent element of general agency (or brokerage) agreements as most widely used in emissions trading throughout the world. In this context the requirements concerned would have most common practical application.

The procedure for the disclosure of beneficial holding

An entity that establishes an agreement to participate in a beneficial holdings arrangement as either an agent or a principal must report the identity of the second entity in the arrangement, its account information, and the nature of the relationship to the ARB within 10 days of establishing the agreement, notwithstanding the other disclosure requirements specified above.

The agent will disclose the identity and account number of the principal when acquiring compliance instruments on behalf of a principal when submitting a transfer request to the accounts administrator. The accounts administrator will notify the principal of the transaction and the principal must confirm the transfer within three calendar days.

After confirmation of the transfer by the principal, the compliance instruments acquired under the transfer and held by the agent will count against the holding limit of the principal and must be transferred to the principal within one year after the agent acquired them.

It is apparent from these provisions that under the California cap-and-trade very specific disclosure regime for agency agreements is foreseen – absent in the EU ETS. Notably, the requirement to disclose to the regulator the “nature of the relationship” under which the agent operates is quite original especially when it comes to the mandate for indirect representation. Also the procedure for approval of each transaction by the principal seems to be unique as regards the practical functioning of the cap-and-trade schemes.

In any way the agents purporting to be present on the California emissions market need to bear in mind the above-mentioned specific legal regime in order not to conflict with the law.


 

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