BILL ANALYSIS                                                                                                                                                                                                    




                                                                  AB 2307
                                                                  Page A
          Date of Hearing:  April 15, 2002

                    ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
                              Roderick D. Wright, Chair
                 AB 2307 (Kehoe) - As Introduced:  February 21, 2002
          
          SUBJECT  :  Electrical corporations:  distributed energy  
          resources.

           SUMMARY  :  Extends the date by which small distributed generation  
          systems must be installed in order to qualify for waiver of a  
          standby fee.  Specifically,  this bill  :

          Extends by 3 years the deadline by which distributed energy  
          resources must commence operation in order to qualify for the  
          waiver of electrical corporation standby fees, which is in  
          effect until June 1, 2011.

           EXISTING LAW  :

          1)Defines "distributed energy resources" (DER) for purposes of  
            standby fee waivers as electric generation technology that:

             a)   Commences initial operation between May 1, 2001 and June  
               1, 2003;<1>

             b)   Is located within a single facility;

             c)   Has a capacity of 5 megawatts or less;

             d)   Serves onsite loads or over-the-fence<2> transactions;

             e)   Is powered by a fuel other than diesel; and

             f)   Complies with applicable air emission standards of the  
               State Air Resources Board.
             --------------------------
          <1> Except that gas-fired distributed energy resources that are  
          not operated in a combined heat and power application must begin  
          operation no later than September 1, 2002.

          <2> Examples of over-the-fence transactions include, electric  
          power sold to entities located on land immediately adjacent to  
          the generation site, and sales to an electric company or to a  
          state or local agency. 









                                                                  AB 2307
                                                                  Page B

          2)Provides that all standby charges imposed by electrical  
            corporations, on customers who have installed distributed  
            generation equipment that is in operation by June 1, 2003,  
            shall be waived until June 1, 2011, except that gas-fired  
            units enjoy the waiver only until June 2006.

          3)Specifies that each customer with DER to participate in a  
            real-time metering and pricing<3> program when available.

          4)Requires each electrical corporation to consider nonutility  
            owned distributed energy resources as a possible alternative  
            to investments in its distribution system.
           FISCAL EFFECT  :  Unknown.

           COMMENTS  :

          Last year, the Legislature passed SB X1 28 (Sher) [Chap. 12,  
          Stats. 2001], which established the standby fee waiver  
          provisions for DER, which is also known as "distributed  
          generation" (DG).  Power generated onsite by DG is normally used  
          to meet some of the energy needs of a utility customer.  DG can  
          be used as backup power, to meet base or peak load needs, or to  
          sell to adjacent sites in an "over-the-fence" transaction.

          Customers who operate a DG unit that is connected to the  
          utility's distribution system normally supplement on-site  
          generation with power purchased from the public utility.

          Grid-connected DG customers pay a standby charge to the utility  
          to reserve the capacity need to serve that customer.  The  
          standby charges are based on the installed capacity of the DG  
          unit.  Last year's legislation suspended standby fees until June  
          2011 for DG units with a capacity of 5 megawatts or less.

          According to the author, the 2003 deadline to install DG  
          equipment and thereby take advantage of the standby fee waiver  
          is too soon for businesses to make significant investments in DG  
          systems, particularly in light of the fact that the DG industry  
          is relatively new.

          The California Energy Commission is actively promoting the  

          ---------------------------
          <3> Under real time metering and pricing, rates for energy  
          purchased reflect the actual cost to the electrical corporation  
          of energy it buys at the time it is consumed by the customer. 








                                                                  AB 2307
                                                                  Page C
          development of standardized interconnection rules on a statewide  
          basis, providing outreach services to publicly owned utilities,  
          irrigation districts, and electric cooperatives to accommodate  
          further development of DG.

          In July 2001, the California Public Utilities Commission (PUC)  
          adopted interim standby rate design policies for onsite  
          generation facilities that are interconnected to and operate in  
          parallel with the distribution system. 

           Burdens vs. benefits
           
          This measure was heard in Committee last week.  During the  
          hearing, several Members of the Committee discussed views about  
          what should be the appropriate Legislative and public policy  
          concerning DG, net metering and other special energy programs  
          and incentives, that are subsidized to a greater or lesser  
          degree by the remaining ESP customers.  

          In general, Members suggested that the beneficiaries of these  
          incentives and subsidies should themselves provide benefits to  
          the ratepayers or the state in return for those enjoyed -- or at  
          least do no economic harm to the remaining customers on the  
          grid.  Examples might be, providing power to the grid during  
          peak demand times of the day, agreeing to power interruption  
          during times when energy reserves are deficient.

           Proposed amendment by author and sponsor
           
          In response to the issues raised last week by the Committee, the  
          author proposes to amend this bill as follows:

               "To the extent that [PUC] determines that there is a  
               net cost to [this bill], those costs shall not be  
               borne by ratepayers and shall be borne by the  
               distributed generators that come online between June  
               1, 2003 and May 31, 2006."

           Opponents  

          Among other things, opponents argue that numerous subsidies  
          already exist for distributed generation that should not be  
          extended further without a review of the cost-effectiveness of  
          the existing programs.










                                                                  AB 2307
                                                                  Page D
          Opponents contend that the above statement, that directs PUC to  
          ensure that costs are borne by those who install new DG, does  
          not suffice to remove their opposition to this bill.  It is the  
          view of opponents that PUC's rulemaking hearing, now going on,  
          already covers cost determinations for DG.  Opponents therefore  
          believe that this bill adds nothing to what is already out  
          there.

          While it is clear that opponent ESPs generally object to standby  
          fee waivers for DG, it has been suggested that DG customers who  
          provide "physical assurance"<4> -- allowing the ESP to thus  
          defer adding distribution capacity -- might resolve the issue.  

          It appears that, when DG is relied on by ESP for distribution  
          capacity goes down, the load on the electric grid increases  
          during the time the unit is not working, unless there is a  
          physical assurance that a corresponding amount of electric load  
          will be dropped when DG is not operating.  

          Physical assurance or similar measures may also solve ratepayer  
          equity and grid demand issues raised by the Committee. 

           Conflict  

          This bill is in apparent conflict with SB X2 9 (Morrow) and SB  
          X2 35 (Morrow), which amends the same sections of law.

           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          Clarus Energy (source)
          California Independent Petroleum Association (CIPA)
          Capstone Turbine Corporation
          California State University
           hotel Power, Inc.
          California Chamber of Commerce
          Building Owners and Managers Association of California
          California Manufacturers & Technology

           

          Opposition 


          ---------------------------
          <4> Physical assurance means use of switching equipment that  
          interrupts a DG customer's normal load when DG does not operate.








                                                                 AB 2307
                                                                  Page E
           
          Pacific Gas & Electric
          Southern California Edison


           Analysis Prepared by  :    Paul Donahue / U. & C. / (916) 319-2083