BILL ANALYSIS                                                                                                                                                                                                    




                                                                  SB 1478
                                                                  Page A
          Date of Hearing:  June 24, 2004

                       ASSEMBLY COMMITTEE ON NATURAL RESOURCES
                             Hannah-Beth Jackson, Chair
                     SB 1478 (Sher) - As Amended:  June 23, 2004

           SENATE VOTE  :  28-6
           
          SUBJECT  :  Renewable energy.

           SUMMARY  :  This bill makes numerous changes to the Renewable  
          Portfolio Standards Program (RPS) and the Renewable Energy  
          Program (REP).

           EXISTING LAW  : 

          1)Requires the California Public Utilities Commission (CPUC) to  
            reserve a portion of future electrical generating capacity for  
            renewable resources. 

          2)Expresses legislative intent to increase renewable electricity  
            to 17% of consumption in the state by 2006 (SB 1038 (Sher)  
            Chapter 515, Statutes of 2002). 

          3)Requires investor owned utilities (IOUs) to increase their  
            existing level of renewable resources by 1% of sales per year  
            until a 20% renewable resources portfolio is achieved (AB 57  
            (Wright) Chapter 835, Statutes of 2002). 

          4)Creates RPS programs that require IOUs and certain other  
            retail sellers to meet essentially the same renewable  
            procurement goals as AB 57, but sets a deadline of 2017 for  
            achieving a 20% renewable portfolio and establishes a detailed  
            process and standards for renewable procurement.  Local  
            publicly-owned electric utilities (municipal utilities) are  
            exempt from the statutory requirements of RPS and instead are  
            required to implement and enforce their own RPS programs (SB  
            1078, Sher, Chapter 516, Statutes of 2002). 

           THIS BILL  :

          1)Advances the deadline for achieving a 20% renewable portfolio  
            from 2017 to 2010. 

          2)Provides that a renewable energy project may only receive an  









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            award of Supplement Energy Payments (SEP) if the project is  
            selected by an IOU pursuant to a competitive solicitation or  
            by other retail electricity providers through a solicitation  
            process approved by CPUC. 

          3)Repeals the requirement that the California Energy Commission  
            (CEC) direct 10% ($13.5 million/year) of renewable funds  
            collected via the Public Goods Charge (PGC) for credits to  
            existing renewable direct access customers (CEC has suspended  
            the customer credit program and redirected the funds to other  
            renewable programs).

          4)Authorizes a renewable energy credit (REC) trading program to  
            allow the sale of the renewable attribute of renewable  
            electricity as a commodity unbundled from the physical  
            production and delivery of renewable electricity, subject to  
            the following limitations: 

             a)   RECs may not be counted more than once for compliance  
               with a RPS or for verifying a retail product claim.

             b)   RECs may not be counted for compliance with RPS unless  
               it is purchased from an instate renewable generator,  
               another retail electricity provider, or an entity that has  
               procured the electricity associated with REC under a long  
               term contract.

             c)   RECs must originate from an eligible renewable resource.

             d)   Revenues from the sale of RECs by an IOU must be  
               credited to ratepayers. 

             e)   RECs must be certified by CEC and comply with all the  
               provision of this bill before a utility can recover REC  
               procurement expenses in rates.

             f)   Retail sellers are not obligated to procure RECs if  
               funds are not available to award SEP for above market costs  
               of renewable power.

             g)   RECs can be sold by municipal utilities only if they are  
               in compliance with the same RPS standards as other retail  
               providers.

          5)Provides that CEC may not award SEPs for the sale or purchase  









                                                                  SB 1478
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            or RECs.

          6)Provides that a contract for the purchase of electricity  
            generated by an eligible renewable resource shall include REC  
            associated with all electricity generation specified in the  
            contract. 

          7)Provides that there are no RECs associated with renewable  
            power generated under terms of a contract executed before  
            January 1, 2005, that did not contain explicit terms  
            specifying ownership of energy credits.

          8)Provides that there are no RECs associated with contracts  
            awarded to Qualifying Facilities (QFs) under the Public  
            Utility Regulatory Policies Act (PURPA) of 1978, but  
            deliveries under these contracts shall count toward RPS  
            obligations.

          9)Allows an IOU serving fewer than 60,000 customers in  
            California that also serves customers in another state (i.e.  
            PacifiCorp and Sierra Pacific Power) to count out of state  
            renewable resources toward its RPS compliance.

           FISCAL EFFECT  :  According to the Senate Appropriations Committee  
          analysis, $85,000 for the first year, to PUC, offset by fee  
          revenues.

           COMMENTS  :

           1)Background  

          In 2002, the Legislature passed SB 1078, SB 1038, and AB 57.   
            These bills taken together created a RPS in California.  Under  
            the RPS, IOUs are required to increase their renewable  
            procurement each year by at least 1% of total sales, so that  
            20% of their sales are from renewable energy sources by  
            December 31, 2017.  Once a 20% portfolio is achieved, no  
            further increase is required.  The CPUC is also required to  
            adopt comparable requirements for direct access providers and  
            community choice aggregators. The RPS requires IOUs, and  
            certain other retail energy providers, to buy renewable  













                                                                  SB 1478
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            electricity to the extent PGC funds<1> are available.  If no  
            PGC funds are available, the retail energy providers are not  
            required to purchase additional renewable power.

          Specifically, the RPS applies to: 

             a)   IOUs;
              
             b)   Direct access providers, for any new customers or new  
               contracts, and for all customers beginning January 1, 2006;  
                and,

             c)   Community choice aggregators. 

            RPS explicitly does not apply to: 

             a)   Co-generation supplying customers on-site and via "over  
               the fence" transactions;
              
             b)   The State Department of Water Resources (DWR): and,
              
             c)   Municipal utilities.  These utilities are responsible  
               for implementing and enforcing their own, unspecified, RPS.  


            The RPS required the CPUC to adopt a rule by July 1, 2003,  
            including processes for determining market prices, ranking  
            renewable bids according to cost and fit, flexible compliance  
            rules, and standard contract terms and conditions.  On June 9,  
            2004, the CPUC approved two decisions that established  
            standard market terms for renewable contracts and a method for  
            calculating market prices for renewable resources. 

            The CPUC has also approved a number of renewable contracts  
            through an ad hoc process lacking clear rules or consistency  
            with the statutory scheme of RPS.  To address concerns with  
            this ad hoc process, this bill provides that an IOU may count  
            renewable resources toward its RPS requirements and receive  
            PGC funds only if the contract is selected pursuant to a  
            competitive solicitation that complies with RPS and is  
            --------------------------
          <1> Existing law requires electric utilities to identify and  
          collect a separate rate component to fund energy efficiency,  
          public interest renewable energy research, and related "public  
          goods" programs.









                                                                  SB 1478
                                                                  Page E
            approved by CPUC. 

           1)Accelerated RPS Compliance  

          The "Energy Action Plan" adopted by the CPUC, the CEC and the  
            Power Authority (PA) pledges that the agencies will accelerate  
            RPS implementation to meet the 20% goal by 2010, instead of  
            2017.  The Governor has also endorsed "20% by 2010" and  
            proposed an additional goal of 33% by 2020. 

          Currently, two of the three major IOUs appear to be able to meet  
            the 20% by 2010 goal.  Pacific Gas & Electric's (PG&E) current  
            baseline of renewable power is at 12%, while Southern  
            California Edison (SCE) already has 17% of eligible renewable  
            power in its portfolio.  However, San Diego Gas & Electric  
            (SDG&E) currently only receives 1.8% of its electricity from  
            renewable resources. 

          Due to SDG&E's miniscule renewable electricity baseline and  
            transmission constraints that will limit its ability to  
            procure new renewable power from outside its service  
            territory, SDG&E believes it will not be able to meet a 20% by  
            2010 goal without the addition of a REC program. 

           2)Renewable Energy Credits  

          Renewable Energy Credits (REC) program established in this bill  
            may help IOUs and other retail electric providers meet the  
            accelerated RPS goals by allowing them to purchase the  
            attributes of renewable power without having to purchase  
            unneeded or undeliverable generation.  A REC program will  
            allow the environmental attributes of renewable energy to be  
            unbundled from the energy itself and allow the energy and the  
            attributes to be trade as separate commodities.  A REC program  
            would allow SDG&E to purchase RECs from a wind farm in  
            Northern California while the wind farm sells its electricity  
            output to another retail electricity provider that does not  
            need the environmental attributes.  SDG&E would not need to  
            rely on congested transmission lines for delivery of the  
            actual electricity and instead could produce the needed energy  
            from non-renewable sources within its service territory.   
            Alternatively, a small retail seller, such as an ESP, who may  
            not be able to sign the long-term contracts necessary to  
            develop new renewable resources, can buy RECs instead. 










                                                                  SB 1478
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          Since SB 1478 contains explicit provisions against double  
            counting of RECs, the same amount of new renewable power would  
            need to be built to meet RPS as would be needed without a REC  
            program.  However, REC program will allow the retail providers  
            to more efficiently meet their renewable obligations.  

          Similar trading programs are already in place in Texas and  
            Massachusetts.  Additionally, programs have been in place for  
            some time that allow for the trading of the environmental  
            benefits of reduced SO2 and NOx emissions. 

          While SB 1478 leaves much of the task of developing a REC  
            program to CEC and CPUC, this bill establishes a narrow  
            definition of RECs and further limits how RECs can be traded.   
            The limits are an effort to prevent a wide open REC market,  
            which might undermine RPS goal of promoting investment in new  
            renewable resources in California and could create the  
            potential for market gaming.  Specifically, under this bill:

             a)   RECs may only be counted once for compliance with RPS.

             b)   RECs may not be counted for compliance with RPS unless  
               it is purchased from an instate renewable generator,  
               another retail electricity provider, or and entity that has  
               procured the electricity associated with REC under a long  
               term contract.

             c)   Renewable generators who elect to contract with an IOU  
               under the preferential terms provided to a QF under PURPA  
               may not separately sell the renewable attributes of the  
               electricity they produce as RECs. 

             d)   RECs may not be resold by a retail electricity provider  
               and still be counted toward RPS obligations.  

             e)   Provides that no party may receive SEP for the sale of  
               RECs.

             f)   CPUC may limit the total amount of RECs that can be  
               separately procured to meet annual procurement targets.

             Even with these limitations, opponents of this bill are  
               concerned that a poorly structured REC program will be a  
               target for market manipulation. 










                                                                  SB 1478
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           4)Application to Municipal Utilities  

          Prior versions of SB 1478 required municipal utilities to comply  
            with the RPS program on the same terms as any other retail  
            provider of electricity.  However, this bill was amended  
            before it left the Senate to strike the municipal utility  
            provisions.  Without these provisions, municipal utilities  
            will only have to comply with current law, which requires them  
            to develop their own renewable programs, but does not require  
            them to meet the same standard as other retail providers. 

          Under existing law, many municipal utilities have adopted  
            renewable portfolios but a survey of these plans shows that  
            most of the plans do not come close to meeting the goals of  
            RPS and that most municipal utilities include sizeable amounts  
            of large hydroelectric generation as part of their portfolio,  
            which other retail providers are not allowed to do.  Given the  
            fact that municipal utilities serve close to 30% of the total  
            electrical load in California, allowing municipal utilities to  
            set renewable portfolio that are significantly less than the  
            other retail providers could undermine the state's overall  
            renewable objectives and make it impossible to ever reach a  
            statewide benchmark of 20% renewable power.

          Municipal utilities have argued that they should not be required  
            to meet the same RPS goals as other retail providers.  They  
            believe that as municipal utilities they are accountable to  
            voters and not shareholders, and this accountability will  
            ultimately lead them to make sound decisions on renewable  
            procurement.  Additionally, most of the municipal utilities  
            serve very small customer bases and have already procured  
            most, if not all of their power needs for next few years.   
            Consequently, they have no ability to build or buy additional  
            power to meet a state mandated RPS.  In order to meet a 20%  
            RPS standard, many municipal utilities would be forced to buy  
            significantly more power than they actually need.

          With municipal utilities representing close to 30% of the total  
            electricity demand in the state, there is concern that any RPS  
            that excludes the municipal utilities will always fall short  
            of meeting its statewide goals.   To assure that the RPS  
            succeeds statewide, the committee may want to consider  
            amending this bill to require municipal utilities to meet the  
            same RPS standards as other retail providers. 










                                                                 SB 1478
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           Additionally, under the terms of this bill, municipal utilities  
            will be allowed to sell RECs.  If municipal utilities are not  
            required to meet the same RPS as other retail providers, they  
            may have a distinct incentive to reduce their own renewable  
            portfolio in order to sell available RECs.  This would result  
            in increased profits to municipal utilities but will not add  
            to the overall renewable portfolio of the state.   To avoid  
            this risk, the committee may want to consider amending this  
            bill to allow a municipal utility to sell RECs only if they  
            are in compliance with the same RPS standards as other retail  
            providers.  

           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          American Lung Association of California
          California Public Utilities Commission
          Clean Power
          League of Women Voters of California
          Sierra Club
          Sempra Energy
          TURN

           Opposition
           
          PG&E 
          City of Roseville 


           Analysis Prepared by  :  Kyra Emanuels Ross / NAT. RES. / (916)  
          319-2092