BILL ANALYSIS 1 1 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 2 3 0 7 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