Air Resources Board chairwoman Mary Nichols, who will come before the Senate Rules Committee Wednesday, faces  tough questions about an environmental proposal that has drawn anger from Los Angeles legislators.

There is little doubt that Nichols ultimately will be confirmed. But not before she is aggressively questioned about a proposal from the Public Utilities Commission—in conjunction with the California Energy Commission—that would set up an auction system of selling and treading emission credits as part of California’s landmark greenhouse gas emissions law, AB 32.

That plan, advocated by PUC chairman Michael Peevey, has angered Los Angeles lawmakers, who say municipal utilities are unfairly targeted by the proposal. 

As head of the ARB, Nichols will vote on whether that plan--or any other--will be approved at the ARB’s  October meeting. The debate over the structure of a “cap-and-trade system” under AB 32 is the most controversial aspect of the first-in-the-nation law. Although definitions vary, cap-and-trade commonly means that rules are put into place limiting the level of emissions, but that emitters can acquire credits allowing them to stay in business. Over time, the mix of penalties and incentives hopefully would reduce greenhouse gases, although some environmental critics contend that cap-and-trade only would allow the wealthiest, big emitters to keep polluting.

The problem is the impact of the PUC plan on Los Angeles, which is served by the state’s largest municipal utility, the Los Angeles Department of Water and Power.  Two members of the Rules Committee, Sen. Alex Padilla, D-Los Angeles, and Gil Cedillo, D-Los Angeles represent much of the DWP’s service area.

The DWP, which gets much of its energy from dirty, coal-fired generators, serves about 2 million water and electricity customers. Because the DWP’s power comes from heavily carbon-emitting sources, the department—under the PUC plan--would have to obtain credits to continue operating—credits that could ultimately could cost millions or dollars.

“This decision does little more than create financial winners and losers, a strategy that will never get us to our collective goals to make California the leader in climate-change action,” DWP spokesman Joseph Ramallo said earlier.

Padilla said the PUC’s proposal would “harm low-income residents, make fewer funds available for energy efficiency investments and renewables, and undermine Los Angeles’ ability to reach its goals.”

The plan “would likely result in using an auction mechanism that would force municipal utilities to buy emissions allowances. That would result in a shift of dollars away from Los Angeles residents and the (DWP) to the state for redistribution to market interests who have no stake in serving Los Angeles customer,” Padilla wrote to Gov. Arnold Schwarzenegger.

The Senate confirmation comes at a critical time for Nichols. The ARB is in the midst of putting together the final pieces of AB 32, including the so-called market mechanism, to go into effect in January. The law requires a cut in greenhouse gases to 1990 levels by 2020. The ARB is the lead agency to develop and enforce AB 32, and Nichols and the board are under intense public scrutiny as the January launch nears.