BILL ANALYSIS Ó SENATE COMMITTEE ON ENERGY, UTILITIES AND COMMUNICATIONS Senator Ben Hueso, Chair 2015 - 2016 Regular Bill No: SB 1301 Hearing Date: 4/5/2016 ----------------------------------------------------------------- |Author: |Hertzberg | |-----------+-----------------------------------------------------| |Version: |2/19/2016 As Introduced | ----------------------------------------------------------------- ------------------------------------------------------------------ |Urgency: |No |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant:|Jay Dickenson | | | | ----------------------------------------------------------------- SUBJECT: Natural gas: greenhouse gas allowance: allocation DIGEST: This bill directs the California Public Utilities Commission to require 25 percent of revenues received by a gas corporation as a result of the direct allocation of greenhouse gas allowances to be used for energy projects or energy efficiency projects that reduce fossil natural gas consumption. ANALYSIS: Existing law: 1.Requires the California Air Resources Board (ARB), pursuant to the California Global Warming Solutions Act of 2006, to adopt rules and regulations that would reduce greenhouse gas emissions (GHGs) in the state to 1990 levels by 2020. (Health and Safety Code §§38500 to 38599) 2.Establishes the Greenhouse Gas Reduction Fund (GGRF), and requires all monies collected by ARB from the auction or sales of allowances, pursuant to a market-based compliance mechanism, be deposited in the fund and made available for appropriation. (Government Code §16428.8) 3.Establishes the GGRF Investment Plan and Communities Revitalization Act to set procedures for the investment of regulatory fee revenues derived from the auction of GHG SB 1301 (Hertzberg) PageB of? allowances, including the requirement that such revenue be used to reduce emissions of GHGs. (Health and Safety Code §§39710 to 39720) 4.Requires the GGRF Investment Plan to allocate: (a) at least 25 percent of the available monies in the fund to projects that provide benefits to disadvantaged communities, and (b) at least 10 percent of monies in the fund to projects located within disadvantaged communities. (Health and Safety Code §§39711 to 39723) 5.Requires the California Public Utilities Commission (CPUC) to require revenues, including any accrued interest, received by an electrical corporation as a result of the direct allocation of GHGs allowances to electric utilities to be credited directly to the residential, small business, and emissions-intensive trade-exposed retail customers of the electrical corporation; requires CPUC to require each electrical corporation to implement an outreach plan to obtain the maximum feasible public awareness of the crediting of GHG allowance revenues; and authorizes the CPUC to allocate up to 15 percent of the GHG allowance revenue for clean energy and energy efficiency projects established pursuant to statute that are administered by the electrical corporation and that are not otherwise funded by another funding source. (Public Utilities Code §748.5) This bill: 1.Directs the CPUC, no later than June 1, 2017, to require 25 percent of revenues, including any accrued interest, received by a gas corporation as a result of the direct allocation of GHG emissions allowances to natural gas suppliers pursuant to ARB's cap-and-trade regulations to be used for "clean energy" and "energy efficiency" projects or programs approved by the CPUC. 2.Limits funding eligibility to projects and programs that are able to quantify and report reductions in GHGs. 3.States that a "clean energy" project or program may include one that does one of the following: a. Supports the development, deployment, interconnection or use of pipeline biogas. b. Supports the development, deployment or use of SB 1301 (Hertzberg) PageC of? alternative fuels. c. Reduces or abates GHGs related to the use of fossil natural gas. 4.States that an "energy efficiency" project or program may include one that reduces that reduces fossil natural gas consumption through more efficient appliances, heating, cooling, industrial use, or other end uses. 5.States the clean energy projects or programs and energy efficiency projects or programs may also include those of the type established pursuant to statute administered by a gas corporation, the CPUC, or a qualified third-party administrator approved by the CPUC. 6.Directs the CPUC to require each gas corporation to annually report and post on its website all expenditures and quantified reductions in GHGs from funded projects and programs. Background ARB cap-and-trade program generates auction revenue. Following passage of the Global Warming Solutions Act of 2006 (aka AB 32), ARB adopted regulations to reduce GHGs to 1990 levels by 2020. One such regulation establishes the cap-and-trade program, under which ARB distributes GHGs allowances to capped sectors. For the most part, ARB auctions the allowances, generating billions in regulatory fee revenue. Statute directs the revenue to the GGRF, from which the Legislature makes appropriations for GHG-reducing projects according to various statutory restrictions and directions. In some cases, however, ARB distributes emissions allowances for free, generally to reduce the cost of compliance to the entities receiving the free allowances. The investor-owned utilities (IOUs) - both electrical and natural gas - are among the entities that receive emissions allowances from ARB for free. The ARB requires IOUs to consign a portion of these allowances at ARB's quarterly allowance auctions. ARB regulation requires any allowance allocated to an IOU be used exclusively for the benefit of retail ratepayers of the IOU, consistent with the goals of AB 32, and prohibits the use of allowances for the benefit of entities or persons other SB 1301 (Hertzberg) PageD of? than ratepayers.<1> Legislature directed electrical IOU auction revenue spending. In 2012, the Legislature adopted a budget trailer (SB 1018) to further restrict the CPUC's discretion over the electrical IOUs' use of emissions allowance auction revenue. Specifically, SB 1018 requires that revenues from the GHG allowances received by the electrical IOUs be credited back to residential, small business and emissions-intensive trade-exposed businesses. SB 1018 also authorizes the CPUC to allocate up to 15 percent of the emissions allowance auction revenues, including any accrued interest, received by an electrical IOU for clean energy and energy efficiency projects not funded by another source. To implement the requirements of SB 1018, the CPUC directed the state's three largest electrical IOUs - Pacific Gas and Electric Company (PG&E), Southern California Edison and San Diego Gas and Electric (SDG&E) - to allocate GHG allowance revenues, including accrued interest, in the following manner:<2> Compensate emissions-intensive and trade-exposed entities using methodologies based upon those developed by ARB. Offset the rate impacts of the cap-and-trade program in the electricity rates of small businesses through a volumetrically calculated rate adjustment. Neutralize the rate impacts of the cap-and-trade program on residential electricity rates through a volumetrically calculated rate adjustment. Distribute all revenues remaining after accounting for the revenues allocated pursuant to the prior three uses to residential customers on an equal per residential account basis delivered as a semi-annual, on-bill credit. The on-bill credit described in the final bullet is known as the --------------------------- <1> California Code of Regulations, Chapter 17, sections 95892 and 95893. <2> See CPUC decision D-12-12-033. SB 1301 (Hertzberg) PageE of? California Climate Credit. According to the CPUC, the 2016 California Climate Credit equates to an annual payment to each ratepayer of ranging roughly from $35 to $287.<3> Auction revenue of natural gas IOUs treated like auction revenue of electrical IOUs, for the most part. There are several natural gas IOUs in the state-PG&E, Southern California Gas Company (SoCalGas), SDG&E, and Southwest Gas Company (SWG). The natural gas IOUs, like electrical IOUs, receive emissions allowances from ARB for free. The ARB requires each natural gas IOU, like the electrical IOUs, to consign a portion of its emissions allowances to ARB's quarterly allowance auctions. ARB requires the natural gas IOUs to use the proceeds of the auctions exclusively for the benefit of ratepayers, subject to the direction of the CPUC, just as it does the auction revenues of the electrical IOUs. And, as it has for the electrical IOUs, the CPUC has adopted a decision - D-15-10-032 - directing natural gas IOUs' use of auction revenues. That decision requires the natural gas IOUS to return allowance proceeds to ratepayers as a bill credit in an equal, non-volumetric manner. The CPUC refers to the bill credit as the natural gas California Climate Credit. According to the CPUC, the natural gas California Climate Credit equates to roughly $20 annually to each ratepayer. Unlike its treatment of electrical IOU auction proceeds, the Legislature has never provided direction to the CPUC in its allocation of natural gas IOU auction proceeds. This bill seeks to provide such direction. Bill seeks to use natural gas IOU auction revenue to reduce use of conventional natural gas. The author notes that the Legislature has not provided direction to the CPUC on the uses of natural gas IOU auction proceeds and that this silence differs from the Legislature's treatment of electrical IOU auction proceeds. This is true, as described above. However, the Legislature's inaction on natural gas auction proceeds is not, in itself, justification for this bill: current law provides CPUC the necessary legal authority to allocate natural gas IOU auction proceeds in a way that benefits IOU ratepayers. The author also notes the state's many policies and programs to displace the use of conventional natural gas. The author contends that these programs have, thus far, had limited success, and that the main impediment to further success is a --------------------------- <3> http://www.cpuc.ca.gov/climatecredit/ SB 1301 (Hertzberg) PageF of? lack of money for infrastructure development. This bill would solve the problem described by the author by dedicating a portion of natural gas IOU auction revenue - 25 percent - to "clean energy" projects or programs and "energy efficiency" projects or programs that reduce the use of conventional natural gas. The CPUC estimates this would make available about $40 million to $60 million annually for clean energy and energy efficiency programs and projects. The money would come from a reduction in the natural gas California Climate Credit of about $5 per ratepayer. This is a reasonable proposal. The natural gas IOU auction proceeds exist because of the use of conventional natural gas. The use of conventional natural gas produces a variety of harms, including the release of GHGs and criteria pollutants. This bill dedicates a portion of those proceeds to projects and programs that have the potential to reduce the use of conventional natural gas. This is a very tight policy circle. There are, however, other potential uses of the natural gas IOU auction proceeds that both benefit ratepayers and, potentially, reduce GHGs. One such use is returning the proceeds directly to natural gas ratepayers, consistent with current law and practice. This bill, by dedicating a portion of natural gas IOU auction proceeds to prescribed uses, precludes other uses of the money. Currently, there are over a dozen bills before the Legislature that propose to dedicate the use of auction revenues to a wide variety of projects with the potential to reduce GHGs. In every case, those bills would dedicate funds in the GGRF, a special fund in the State Treasury that receives all moneys collected by ARB from the auction or sale of emissions allowances. Money in the GGRF is subject to appropriation by the Legislature. Uses of the money must meet several statutory requirements beyond the basic hurdle of reducing GHGs. The natural gas IOU auction revenue differs from money in the GGRF in several ways. A key distinction is that, unlike most other auction revenues, ARB does not collect IOU auction revenue. This means IOU auction revenue is never placed in the GGRF or in state coffers at all. It is not subject to statutory the requirements and parameters that govern uses of monies in the GGRF, including the requirement that funded projects reduce GHGs. IOU emissions allowance auction revenue, however, is not SB 1301 (Hertzberg) PageG of? completely distinct from revenue generated by auctioning other emissions allowances. In both cases, the revenue is generated by selling the right to emit GHGs. It makes sense that the Legislature consider collectively proposals to fund GHGs reduction efforts with revenue collected from sources of GHGs. The budget process seems the appropriate venue for such consideration. This is because the budget allows the Legislature to consider funding proposals comprehensively: eligible funding programs can be compared; tradeoffs assessed; competing policy goals prioritized. And there is precedent, as described above: the Legislature directed uses of a portion of the electrical IOU auction revenue in the 2012-13 Budget. Flexibility might be needed. This bill directs the CPUC to require the natural gas IOUs to use 25 percent of their auction revenues for clean energy and energy efficiency projects or programs. This treatment differs from the Legislature's direction on the use of electrical IOU auction proceeds in at least two important ways. First, statute allows, but does not obligate, the CPUC to direct electrical IOUs to allocate auction revues for clean energy and energy efficiency projects. This bill, in contrast, requires CPUC to direct natural gas IOUs to allocate auction revues for such projects. Second, statute allows CPUC to direct electrical IOUs to make up to 15 percent of the revenue available for clean energy and energy efficiency projects. This bill differs in that it requires CPUC to direct the IOUs to allocate a set proportion - 25 percent - of proceeds of auction revenues for clean energy and energy efficiency programs and projects. Statute provides CPUC flexibility in directing the electrical IOUs use of emissions auction proceeds. This is because the Legislature recognized there might not be enough qualifying clean energy and energy efficiency programs or projects to receive 15 percent of the electrical IOUs' emissions auction revenues. It is hard to imagine such a dearth of clean energy or energy efficiency programs or projects to reduce consumption of conventional natural gas. Such a situation is not, however, impossible to image. The author and committee may want to amend the bill, as follows, to provide CPUC flexibility in directing the use of natural gas IOU auction proceeds similar to the flexibility provided in statute to the CPUC in directing the use of electrical IOU auction proceeds: 748.6. (a) No later than June 1, 2017, the commissionshallmay SB 1301 (Hertzberg) PageH of? require up to 25 percent of revenues, including any accrued interest, received by a gas corporation as a result of the direct allocation of greenhouse gas allowances to natural gas suppliers pursuant to subdivision (f) of Section 95890 of Title 17 of the California Code of Regulations to be used for clean energy and energy efficiency projects or programs approved by the commission. Not every alternative. This bill makes available funding for support for the development, deployment, or use of alternative transportation fuels. The author's stated goal is to reduce dependence on fossil fuels. However, in some contexts, conventional natural gas is considered an "alternative" fuel. For example, the Alternative and Renewable Fuel and Vehicle Technology Program, administered by the California Energy Commission (CEC), have funded vehicles fueled by the combustion of conventional natural gas.<4> The author may wish to clarify the types of fuels he envisions, or does not envision, receiving funding. Regardless, it is impossible to imagine the CPUC or a natural gas IOU interpreting "alternative transportation fuel," as used in this bill, to mean the combustion of conventional natural gas or of any other fossil fuel. Double-referred. Should this bill be approved by this committee, it has been referred to the Senate Committee on Environmental Quality. Prior/Related Legislation AB 693 (Eggman, Chapter 91, Statutes of 2015) required the CPUC to authorize $100 million annually, or 10 percent of electrical IOU cap-and-trade auction allowance funds, whichever is less, for a financial assistance program for qualifying solar energy systems on low-income multifamily housing properties, as defined. The bill passed the Senate 26-14. AB 1900 (Gatto, Chapter 602, Statutes of 2012) directed the CPUC to identify landfill gas constituents, develop testing protocols for landfill gas injected into common carrier pipelines, adopt standards for biomethane to ensure pipeline safety and integrity, and adopt rules to ensure open access to the gas pipeline system. AB 2196 (Chesbro, Chapter 605, Statutes of 2012) ensured that biogas qualifies for RPS credit, provided its production, --------------------------- <4> http://www.energy.ca.gov/drive/projects/natural_gas.html SB 1301 (Hertzberg) PageI of? delivery and use meet certain conditions. SB 1122 (Rubio, Chapter 612, Statutes of 2012) required IOUs to collectively procure at least 250 MW of generation eligible for the RPS from bioenergy generation project, including biogas projects. AB 577 (Bonilla, 2015) would have required the CEC to develop and implement a grant program for projects related to biomethane production. The bill was held on suspense by the Senate Committee on Appropriations. AB 2206 (Williams) requests that the California Council on Science and Technology undertake and complete a study analyzing the regional and gas corporation specific issues relating to minimum heating value and maximum siloxane specifications for biomethane before it can be injected into common carrier gas pipelines. The bill is pending consideration by the Assembly Committee on Utilities and Commerce. AB 2313 (Williams) requires the CPUC to modify its monetary incentive program for biomethane projects. The bill is pending consideration by the Assembly Committee on Natural Resources. AB 2773 (Quirk) requires the CPUC to modify its technical standards applicable to biomethane to be injected into a common carrier pipeline. The bill is pending consideration by the Assembly Committee on Utilities and Commerce. SB 687 (Allen, 2015) would have established the renewable gas standard (RGS), requiring all sellers of natural gas to provide to retail end-use customers in California increasing amounts of "renewable gas," so that, by January 1, 2030, at least ten percent of the natural gas supplied is "renewable gas." The bill passed this committee on a vote of 7 to 3 and was held on suspense by Senate Committee on Appropriations. SB 1043 (Allen) requires ARB to consider and adopt policies to significantly increase the sustainable production and use of "renewable gas." The bill is pending consideration by this committee. SB 1153 (Canella) requires the ARB to provide a comprehensive overview of state efforts to encourage the development of instate biomethane and renewable natural gas. The bill is pending consideration by this committee. SB 1301 (Hertzberg) PageJ of? FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes SUPPORT: Bioenergy Association of California California Association of Sanitation Agencies Clean Energy Los Angeles County Waste Management Association Sierra Energy Solid Waste Association of Orange County TSS Consultants OPPOSITION: The Utility Reform Network, unless amended ARGUMENTS IN SUPPORT: According to the author: The state has several policies aimed at reducing or displacing fossil natural gas consumption, largely under the rubric of combatting climate change: Increase renewable energy generation to 50 percent by 2030 (RPS, SB 350). Reduce GHGs by 2020 and beyond (AB 32). Reduce petroleum consumption by 50 percent (2015 Governor Brown State of the State). Reduce carbon intensity of fuels and diversify fuel supplies (LCFS, Executive Order S-01-07). Divert solid waste from landfills, especially organic waste (AB 1826). Reduce wildfire risk and increase forest health (Governor Brown Tree Mortality State of Emergency). Double the amount of savings from energy efficiency (SB 350). Increase savings specifically from existing building stock (AB 758). Achieving these goals will require new investments in infrastructure and technology that meaningfully replaces fossil energy sources - petroleum and fossil natural gas. According to the AB 32 Scoping Plan, funding for infrastructure is critical to these goals, especially waste management and forestry goals. SB 1301 (Hertzberg) PageK of? And a key recommendation from the Bioenergy Action Plan (part of the AB 32 Scoping Plan) is to promote the development of pipeline biogas and bioenergy. The problem is that these investments all cost money. Given the many shared benefits of biogas and energy efficiency, SB 1301 attempts to address these costs and help develop the new, coordinated, infrastructure necessary to achieve our environmental goals. Moreover, the Legislature has not yet weighed in on how the gas utility Cap and Trade auction revenues should be used. The Legislature has specifically directed the expenditures for all of the cap and trade accounts except those from the natural gas utilities. The GGRF money is appropriated as part of the annual budget process and the electrical utility auction revenue was directed in Public Utilities Code §748.5. ARGUMENTS IN OPPOSITION: The Utilities Reform Network (TURN) objects to this bill because it prevents a substantial portion of the revenue from the auction of natural gas IOU emissions allowances from offsetting the cost the cap-and-trade program to natural gas IOU ratepayers. TURN contends ratepayers should remain the sole beneficiaries of natural gas auction proceeds. -- END --