BILL ANALYSIS 1 1 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE DEBRA BOWEN, CHAIRWOMAN SB 703 - Florez Hearing Date: July 8, 2003 S As Amended: July 2, 2003 FISCAL/URGENCY B 7 0 3 DESCRIPTION This bill requires the California Public Utilities Commission (CPUC) to establish "incentive rates" for agricultural customers to induce the replacement of diesel-powered irrigation pumps and other agricultural equipment with electric-powered equipment, subject to specified criteria and a cap on the net cost of $50 million per year. Under existing law , the CPUC and the California Energy Commission (CEC) provide grants to subsidize the purchase of certain distributed generation systems, subject to eligibility criteria which include a requirement that the systems be connected to the grid. This bill requires electric generation systems utilizing "ultra-clean and low-emission" technologies to be eligible for the CPUC and CEC grants, regardless of whether they're connected to the grid, if they are used in agricultural operations. This bill is an urgency measure. BACKGROUND Irrigation pumps and certain other agricultural equipment can be operated by either diesel engines or electric motors. Based on current diesel prices and investor-owned utility (IOU) electricity rates, the operating costs of an electric pump is significantly higher (probably 50-100%) than the operating costs of a diesel pump. Equipment costs vary widely and pending air quality permitting requirements will make operating diesel pumps more expensive. According the Air Resources Board, there are over 8,200 diesel irrigation pumps in the state, which emit almost 44 tons per day of oxides of nitrogen (NOx) during the high-ozone summer season. Most of these pumps are located in the Central Valley and are responsible for about 16% of stationary source NOx emissions in the valley. Although diesel pumps and other diesel agricultural equipment are a significant contributor to severe Central Valley air pollution from NOx and particulate matter emissions, agricultural equipment is exempt under state law from the air quality permitting requirements that apply to other stationary sources. This exemption has been found to be a violation of the federal Clean Air Act pursuant to a settlement of a lawsuit against the U.S. Environmental Protection Agency. The Clean Air Act violation exposes the state to federal enforcement and significant financial sanctions. SB 700 (Florez), pending in the Assembly, addresses this by repealing the exemption for agricultural equipment and requiring air districts to require operating permits for agricultural equipment no later than July 1, 2004. While permitting requirements will increase the cost of diesel pumps, particularly older, more polluting engines, diesel may remain more economical than electricity at high IOU rates. The goal of this bill is to reduce agricultural electricity rates to the point that electric equipment is cost competitive with diesel equipment. Given the uncertainty about the future cost and feasibility of operating diesel agricultural equipment, it's unclear how much electricity rates would need to drop to make electric equipment cost competitive. COMMENTS 1)Should air quality programs be funded out of electricity rates? While the public interest rationale for the existing ratepayer-funded energy efficiency and renewable energy programs relies in part on air quality benefits, most programs are intended to benefit ratepayers by increasing reliability and decreasing reliance on conventional sources of electricity. The program established by this bill is unusual in that it isn't intended to produce a electric system benefit, but instead rewards increased electricity consumption to offset a more polluting energy source (diesel). The costs of the program are capped at $50 million per year, and are to be "allocated equitably among those customers benefiting from the resulting improvements in air quality." It's not clear how the CPUC might determine who will pay the costs of the program. The easiest approach would be to spread the costs evenly across all customer classes throughout an IOU's territory. If the intent is to recover the costs from specific customers or geographic areas, the author and the committee may wish to consider specifying which customers and/or areas the costs are to be recovered from. 2)Is the incentive sufficiently linked to the conversion of diesel equipment? In establishing "incentive rates" pursuant to this bill, it's unclear if the CPUC will adopt rates applicable only to electric load that's been converted from diesel. There is some precedent for this type of rate. For example, according to the CPUC, Southern California Edison currently has a time-of-use agricultural rate that includes equipment-specific qualifications. Under this particular rate schedule, a customer is eligible if natural gas or diesel fuel is being considered as an alternative energy source to serve pumping load. (This rate schedule is currently closed to new customers.) If the rates set pursuant to this bill are available to other load, to other customers, or to existing electric pumps, there will be a significant number of "free riders" who aren't encouraged to do anything other than use more electricity. The author and committee may wish to consider whether, instead of establishing an incentive rate, this bill should establish an incentive program where individual customers apply for ratepayer-funded loans or grants to cover the conversion cost. 3)What will it take to make electric pumps feasible on the farm? As noted above, the basic energy cost of an electric pump is significantly higher than a diesel pump. Part of the reason diesel has remained a relatively cheap energy source for farmers is the exemption from air pollution controls and, more recently, the exemption from the state sales tax. In addition to energy cost, the cost of converting a diesel pump to an electric pump may include the extension of electric distribution lines to a remote location and the purchase of an electric motor. While these costs would typically be borne by the customer, this bill implies that other ratepayers might pay them in order to offset the economic advantages of diesel and make electric pumps competitive. Accomplishing all this could require a very significant rate discount. The author and the committee may wish to consider defining "competitive" for the purposes of this bill to clarify whether the rate discount is supposed to be sufficient to make energy (fuel) costs comparable, or whether line extensions, equipment, permitting and other costs are to be factored in. 4)Should off-grid projects be eligible for ratepayer-funded grant programs? Existing grant programs for renewable and ultra-clean distributed generation require the projects to be connected to the electric grid in part because the programs are intended to provide electric system benefits, like peak load reduction and increased reliability, and in part because they are funded by distribution rates from grid-connected IOU customers, so there's a nexus between who pays and who benefits. This bill makes off-grid systems eligible for the grant programs, but only in agricultural operations. It is not clear why, in expanding eligibility to include off-grid systems, eligibility is then limited to agricultural applications. The bill's provisions also override all other existing eligibility criteria and make installation in agricultural operations the only criteria. If the intent is to permit off-grid systems to be eligible, in agricultural applications or otherwise, the author and the committee may wish to consider replacing the current section with specific exemptions to the grid-connection requirements in the sections of law governing the CPUC and CEC programs (Public Utilities Code Sections 379.5 and 383.5) POSITIONS Sponsor: Author Support: Agricultural Energy Consumers Association California Air Pollution Control Officers' Association California Citrus Mutual California Cotton Ginners and Growers Associations California Farm Bureau Federation Fresno County Farm Bureau Support (continued): Monterey Bay Unified Air Pollution Control District San Joaquin Valley Air Pollution Control District Sunkist Growers WM Bolthouse Farms, Inc. Oppose: California Manufacturers and Technology Association (unless amended) The Utility Reform Network (unless amended) Lawrence Lingbloom SB 703 Analysis Hearing Date: July 8, 2003