BILL ANALYSIS                                                                                                                                                                                                              1
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                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
                                                                        
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                                      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