(Updates with regulator's comment and additional details)

SAN FRANCISCO -(Dow Jones)- California utilities can use renewable energy credits to comply with state renewable-energy requirements, state regulators decided Thursday.

Being able to use renewable energy credits, or RECs, should make it easier for utilities to meet California's aggressive renewable energy rules, the California Public Utility Commission said.

California law requires utilities to use renewable sources for a fifth of the power they sell by the end of this year, with the mandate set to expand to one-third renewables by 2020. The mandate is part of the state's 2006 plan to combat climate change.

While other states that have renewable energy requirements allow utilities to use RECs in lieu of actual power deliveries to meet part of their obligation, California hasn't allowed utilities to use RECs until now, in part over concerns that cheaper out-of-state resources would be favored over local development.

However, Gov. Arnold Schwarzenegger and other state officials later concluded that the state wouldn't be able to meet its renewable energy and greenhouse-gas reduction goals unless utilities were allowed to tap large amounts of out-of-state renewable energy.

None of California's three large utilities--owned by PG&E Corp. (PCG), Edison International (EIX) and Sempra Energy (SRE)--are expected to meet their 20% renewable-energy targets this year, though the companies have a three-year grace period in which to comply. The utilities have said that being able to tap more renewable energy in other states, where new projects often require less time to obtain permits and start construction, would help them meet their requirements.

The new regulation allows the utilities to use RECs for up to a quarter of their renewable energy requirement. The CPUC initially planned to allow utilities to use RECs for up to 40% of their requirement, but revised the figure at the last minute to 25%. CPUC commissioners did not discuss the last-minute change during their meeting Thursday.

"The essential elements of this framework are intended to support this market well into the future," said CPUC President Michael R. Peevey.

It was unclear how the utilities viewed the 25% cap on out-of-state renewable energy purchases.

Pacific Gas & Electric Co., Southern California Edison and San Diego Gas & Electric did not immediately return telephone calls seeking comment.

The regulation also places a price cap of $50 a megawatt-hour on any RECs the utilities buy for compliance. The commission will review both limits for possible changes over the next two years, the commission said.

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