BILL ANALYSIS                                                                                                                                                                                                              1
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                SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
                               DEBRA BOWEN, CHAIRWOMAN
          

          AB 2307 -  Kehoe                                  Hearing Date:   
          June 25, 2002              A
          As Amended:         June 6, 2002             FISCAL       B

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                                      DESCRIPTION
           
          Under  existing law  (SB 28X (Sher), Chapter 12, Statutes of  
          2001), distributed generation (DG) projects under five  
          megawatts, operating in a combined heat and power application,  
          meeting established air pollution standards, and commencing  
          operation by  June 1, 2003  are eligible for a waiver of utility  
          standby charges until 2011

           This bill  extends the installation deadline for these projects  
          to  June 1, 2005  .

                                      BACKGROUND
           
          DG is typically considered to be a site-specific generation  
          resource which is owned by the customer and used to meet some or  
          all of that customer's energy needs, including electricity and,  
          in many applications, heating.

          Examples of DG units range from a residential rooftop solar  
          array to a collection of large combustion turbines at a  
          commercial office building or industrial facility.  DG can be  
          used for reliability back-up (standby or emergency generation),  
          to meet base load requirements, to meet peaking requirements, or  
          to meet all on-site requirements, and sell power to adjacent  
          sites ("over the fence" transactions).

          For a customer that owns a DG unit that is connected to the  
          utility distribution system, on-site generation is complemented  
          by power purchased through, and delivered by, the utility.   
          Depending on the reliability, capacity and purpose of the DG  











          unit, the customer may, at various times, buy some or all of its  
          power from the utility, or even, in the case of smaller solar or  
          wind projects, "sell" power back to the utility through a  
          net-metering arrangement.

          Grid-connected DG customers pay a standby charge to the utility  
          to reserve the capacity need to serve that customer.  For DG  
          units meeting specified conditions, most importantly that they  
          be installed no later than June 1, 2003, SB 28X established a  
          waiver of standby charges of as long as 10 years (no standby  
          charges may be assessed before June 1, 2011).  SB 28X also  
          established a lesser waiver for non-cogeneration DG units  
          installed by September 1, 2002 (until June 1, 2006).  This bill  
          would extend eligibility for the former waiver to units  
          installed no later than June 1, 2005.

                                       COMMENTS

          1)Hark back to yesteryear.   There were two reasons for the 2003  
            cut-off established by this committee last year in SB 9X  
            (Morrow) and transferred to SB 28X (SB 9X originally contained  
            the 2005 cut-off proposed by this bill, but was amended to  
            2003 in the Extraordinary Session version of this committee).   


            The first was to address the urgent need for additional  
            electric generation capacity.  SB 9X was heard in committee on  
            March 15, 2001, at the height of the utilities' financial  
            crises, in the midst of rampant abuse of market power on the  
            part of generators and marketers, and prior to any substantive  
            action from the Federal Energy Regulatory Commission to  
            discipline the wholesale market.  The waiver was justified on  
            the basis that it would attract needed generation and  
            eligibility was limited to reward a quick response.  The  
            waiver was intended to diminish between 2001 and 2003, and  
            then expire.

            The second reason for the 2003 cut-off was that the waiver was  
            intended to be a stop-gap, pending the California Public  
            Utilities Commission's (CPUC) adoption of new, cost-based  
            standby tariffs for DG customers.  SB 28X established a  
            deadline of January 1, 2003 for the adoption of these tariffs,  
            so that they would be effective upon the expiration of the  
            waiver.











            Since last year, the potential customer advantages of DG  
            relative to wholesale electricity prices, system reliability,  
            and other customers' interests seem much less favorable.   
            Notwithstanding the value of the relatively clean generation  
            resources that this bill may induce, the desirability of  
            relieving utilities of customer load depends in large part on  
            whether the departing customers pay for costs incurred on  
            their behalf while they were bundled-service customers, or  
            leave those costs to be paid by the utility's remaining  
            customers (see Comment 3 below).

           2)Who pays for the waiver?   As long as a DG customer remains  
            connected to the utility distribution system, and the utility  
            remains obligated to serve that customer, the capacity to  
            serve that customer must be maintained.  If a DG customer is  
            entirely self-sufficient and "off-grid," there is no standby  
            charge and there is no obligation to serve.

            Like SB 28X, this bill prevents utilities from recovering the  
            cost of maintaining capacity for eligible DG customers in the  
            form of standby charges.  The likely result is a proportional  
             increase  in the distribution rates charged to customers  
            without eligible DG.  A provision of the bill (subdivision  
            (g)) references existing law, which confines such rate  
            increases to the same customer class as the customer  
            benefiting from the standby charge waiver.  This prevents  
            shifting of distribution (but not procurement) costs  between   
            customer classes, so residential customers will not pay the  
            direct cost of waiving standby charges for commercial  
            customers, or vice-versa.

            The consequence is that any distribution cost shifting is  
            limited to  within  customer classes.  For example, the cost of  
            waived standby charges for commercial customers who install an  
            eligible DG unit will be paid by other commercial customers.

           3)Another potential ratepayer subsidy.   Customers departing  
            utility service since the energy crisis bear some  
            responsibility for a share of procurement costs and  
            obligations incurred by their utility and the Department of  
            Water Resources (DWR) to serve them that have not yet been  
            recovered via customer rates.  Recoverable procurement costs  
            attributable to departing customers will be shifted to  










            remaining utility customers if they are not recovered from the  
            departing customers.

            The question of departing customers' responsibility for  
            outstanding procurement costs and obligations incurred on  
            their behalf is being addressed currently at the CPUC, as well  
            as in a number of pending bills - SB 1519 (Bowen), SB 1755  
            (Soto) AB 80 (Havice) and AB 117 (Migden).  Each of these  
            measures makes reimbursing DWR for power costs incurred on  
            their behalf a condition of the benefit they offer (in the  
            case of those bills, the benefit is allowing customers to  
            leave utility service).

            Under other provisions of SB 28X which would continue to be  
            applicable under this bill, DG customers qualifying for a  
            standby charge waiver are required to be served under  
            identical rates, rules and requirements to comparable  
            bundled-service customers.  SB 28X also stated that the waiver  
            would not relieve any customer of obligations determined by  
            the CPUC to result from purchase of power through DWR.

             The author and the committee may wish to consider  whether,  
            like the bills referenced above, this bill should explicitly  
            address the departing customers' obligation for unrecovered  
            procurement costs.
           
                                   ASSEMBLY VOTES
           
          Assembly Floor                     (75-1)
          Assembly Appropriations Committee  (22-0)
          Assembly Utilities and Commerce Committee                       
          (13-2)

                                       POSITIONS
           
           Sponsor:
           
          Clarus Energy

           Support:
           
          Building Owners and Managers Association of California
          California Chamber of Commerce
          California Independent Petroleum Association










          California Manufacturers & Technology Association
          California State University
           hotel  Power, Inc.
          San Diego Regional Chamber of Commerce
          University Mechanical & Engineering Contractors

           Oppose:
           
          Association of California Water Agencies
          Pacific Gas and Electric Company
          Southern California Edison

          Lawrence Lingbloom 
          AB 2307 Analysis
          Hearing Date:  June 25, 2002