BILL ANALYSIS Ķ
SENATE COMMITTEE ON ENVIRONMENTAL QUALITY
Senator Wieckowski, Chair
2015 - 2016 Regular
Bill No: SB 1301
-----------------------------------------------------------------
|Author: |Hertzberg |
-----------------------------------------------------------------
|-----------+-----------------------+-------------+----------------|
|Version: |4/7/2016 |Hearing | 4/20/2016 |
| | |Date: | |
|-----------+-----------------------+-------------+----------------|
|Urgency: |No |Fiscal: |Yes |
------------------------------------------------------------------
-----------------------------------------------------------------
|Consultant:|Rebecca Newhouse |
| | |
-----------------------------------------------------------------
SUBJECT: Natural gas: greenhouse gas allowance: allocation
ANALYSIS:
Existing law:
1) Under the California Global Warming Solutions Act of 2006
(also known as AB 32), requires the California Air Resources
Board (ARB) to determine the 1990 statewide greenhouse gas
(GHG) emissions level and approve a statewide GHG emissions
limit that is equivalent to that level, to be achieved by
2020, and to adopt GHG emissions reductions measures by
regulation. ARB is authorized to include the use of
market-based mechanisms to comply with these regulations.
(Health and Safety Code §38500 et seq.)
2) Requires the California Public Utilities Commission (CPUC) to
require revenues received by an electrical corporation as a
result of the direct allocation of greenhouse gas allowances
to electric utilities, to be credited directly to the
residential, small business, and emissions-intensive
trade-exposed retail customers of the electrical corporation.
3) Authorizes CPUC to allocate up to 15% of the revenues
received by an electrical corporation as a result of the
direct allocation of greenhouse gas allowances to electrical
distribution utilities for clean energy and energy efficiency
projects established pursuant to statute that are
administered by the electrical corporation, or a qualified
third-party administrator as approved by the commission, and
SB 1301 (Hertzberg) Page 2
of ?
that are not otherwise funded by another funding source.
This bill:
1) Authorizes CPUC to require up to 25% of revenues received by
a gas corporation as a result of the direct allocation of
greenhouse gas allowances to natural gas suppliers for clean
energy and energy efficiency projects or programs approved by
the CPUC.
2) Requires any clean energy or energy efficiency program or
project funded under the bill be able to quantify and report
GHG emissions reductions.
3) States that "clean energy" project or program may include:
a) Support for the development, deployment,
interconnection, or use of pipeline biogas;
b) Support for the development, deployment, or use of
alternative transportation fuels;
c) Any other project or program that reduces or abates
GHGs related to the use of fossil natural gas.
4) States that "energy efficiency" projects or programs may
include the reduction of fossil natural gas consumption
through more efficient appliances, heating, cooling,
industrial use, or other end uses.
5) Specifies that clean energy and energy efficiency projects or
programs may also include those established pursuant to
statute that are administered by the gas corporation, the
commission, or a qualified third-party administrator approved
by the commission.
6) Requires CPUC to require each gas corporation to annually
report and post on its website all expenditures of these
revenues and the quantified reductions in GHGs from projects
or programs funded under the bill.
Background
1) Short-lived climate pollutants. Greenhouse gases or climate
pollutants, such as CO2, work to warm the earth by trapping
SB 1301 (Hertzberg) Page 3
of ?
solar radiation in the earth's atmosphere. Depending on the
molecule, these pollutants can vary greatly in their ability
to trap heat and the length of time they remain in the
atmosphere. CO2 remains in the atmosphere for centuries,
which makes it the most critical greenhouse gas to reduce in
order to limit long-term climate change. However, climate
pollutants including methane, tropospheric ozone,
hydrofluorocarbons (HFCs), and soot (black carbon), are
relatively short-lived (anywhere from a few days to a few
decades), but when measured in terms of how they heat the
atmosphere (global warming potential, or GWP), can be tens,
hundreds, or even thousands of times greater than that of
CO2. These climate forcers are termed short-lived climate
pollutants (SLCPs).
Because SLCPs remain in the atmosphere for a relatively short
period of time, but have a much higher global warming
potential than CO2, efforts aimed at reducing their emissions
in the near term would result in more immediate climate, air
quality, and public health benefits, than a strategy focused
solely on CO2. According to ARB's SLCP draft strategy,
"while the climate impacts of CO2 reductions take decades or
more to materialize, cutting emissions of SLCPs can
immediately slow global warming and reduce the impacts of
climate change." Recent research estimates that SCLPs are
responsible for about 40% of global warming to date and that
actions to significantly reduce SLCP emissions could cut the
amount of warming that would occur over the next few decades
by half.
According to ARB's 2015 updated AB 32 Scoping Plan, methane
is one of the three short-lived climate pollutants with the
greatest implications for California.
Methane (CH4) is the principal component of natural gas and
is also produced biologically under anaerobic conditions in
ruminants, landfills, and waste handling. Atmospheric
methane concentrations have been increasing as a result of
human activities related to agriculture, fossil fuel
extraction and distribution, and waste generation and
processing. Methane is 84 times more powerful as a global
warming pollutant than CO2 on a 20-year time scale.
2) Cap and trade background. Pursuant to authority under AB 32
SB 1301 (Hertzberg) Page 4
of ?
(Nuņez, Pavley, Statutes of 2006, Chapter 488), ARB approved
cap-and-trade regulations in December of 2011. Beginning on
January 1, 2013, the cap-and-trade regulation sets a firm,
declining cap on total GHG emissions from sources that make
up approximately 85% of all statewide GHG emissions. Sources
included under the cap are termed "covered" entities. The cap
is enforced by requiring each covered entity to surrender one
"compliance instrument" for every metric ton of carbon
dioxide equivalent (MTCO2e) that it emits at the end of a
compliance period. Over time, the cap declines, resulting in
GHG emission reductions. Compliance instruments include
allowances and offsets, where allowances are generated by the
state in an amount equal to the cap, and offsets result from
emission reductions achieved in an uncapped sector pursuant
to an approved protocol adopted by ARB. Offsets may be used
to satisfy up to 8% of a covered entity's compliance
obligation. The program authorizes entities to buy or sell
their allowances, creating a market that is intended by ARB
to minimize the cost of compliance and encourage entities to
invest in GHG emissions reductions
Other than a small percentage of allowances used for a
cost-containment reserve, allowances are either freely
provided to entities or sold at quarterly auctions. Auction
proceeds, other than proceeds resulting from electric and
natural gas Investor Owned Utility (IOU) allowances, are
deposited in the Greenhouse Gas Reduction Fund (GGRF), and
subject to various requirements for their use, including that
they must facilitate the achievement of GHG emissions
reductions.
For the first two years, the cap-and-trade program only
covered electricity generation, and large industrial sources
and processes with annual GHG emissions at or above 25,000
MTCO2e. In 2015, the program expanded to include
transportation fuels and natural gas distributors.
3) Proceeds from consigned allowances are not GGRF moneys. ARB
allocates allowances to electric utilities and natural gas
suppliers, on the behalf of their ratepayers, to ensure that
electric and natural gas ratepayers do not experience sudden
increases in their utility bills associated with the
cap-and-trade program. The regulation requires electrical
IOUs to consign all of their allocated allowances to auction.
SB 1301 (Hertzberg) Page 5
of ?
Natural gas utilities are required to consign 30% of their
allocated allowances to auction in 2016, increasing up to 50%
in 2020. These consigned allowances are then sold at auction,
and the proceeds are returned to the utilities. These
proceeds are not deposited in the GGRF, and are not subject
to the requirements of GGRF moneys in statute. The
cap-and-trade regulation, however, does require the moneys be
used for the benefit of ratepayers, consistent with the goals
of AB 32, and specifies that the proceeds may not be used for
the benefit of entities or persons other than such
ratepayers.
Publicly owned utilities (POUs) are not required to consign
their allowances. However, both IOUs and POUs are required
to use the value associated with these allowances for the
benefit of their ratepayers.
4) Electric utility revenues. SB 1018 (Budget and Fiscal
Review, Chapter 39, Statutes of 2012) requires that CPUC
oversee the return of all electrical IOU-allocated allowance
auction proceeds to their residential, small business, and
emissions-intensive, trade-exposed (EITE) retail customers,
except for up to 15% for approved clean energy and energy
efficiency projects.
CPUC has conducted a series of proceedings to determine how
the IOUs should use allocated allowance value within this
framework, and ruled that after compensating EITE entities,
offsetting electricity rate impacts of the cap-and-trade
program on small businesses, and residential customers, the
remaining revenues would be awarded as a "California Climate
Credit"-small business customers receive the rebate each
month on their electric bill, and residential households
receive the credit each April and October.
According to CPUC, the 2016 California Climate Credit comes
out to an annual payment to each ratepayer ranging from $35
to $287.
CPUC Decision 14-10-033 developed the procedures for approval
of an electrical IOU clean energy or energy efficiency
project funded through auction proceeds. To date, CPUC has
not approved any specific projects.
SB 1301 (Hertzberg) Page 6
of ?
5) Natural gas utility revenues. There are several natural gas
IOUs in the state, including PG&E, Southern California Gas
Company (SoCalGas), SDG&E, and Southwest Gas Company (SWG).
ARB's cap-and-trade regulation requires the natural gas IOUs
to use the proceeds of the auctions exclusively for the
benefit of ratepayers, subject to the direction of CPUC, just
as it does the auction revenues of the electrical IOUs.
Similarly to what CPUC decided for electrical IOUs, on
October 23, 2015, CPUC adopted a decision directing natural
gas IOUs' use of auction revenues that requires the natural
gas IOUs to return allowance proceeds to ratepayers as a
non-volumetric (not based on usage) bill credit. CPUC refers
to the bill credit as the natural gas California Climate
Credit. According to CPUC, the natural gas California
Climate Credit equates to roughly $20 annually to each
ratepayer.
Comments
1) Purpose of Bill. 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. The author notes that achieving
these goals will require new investments in infrastructure
and technology that meaningfully replaces fossil energy
sources, including petroleum and fossil natural gas. The
author also states that the development of pipeline biogas
and bioenergy is a key recommendation from the CEC's
Bioenergy Action Plan.
However, according to the author, the problem is that these
infrastructure and technology investments are costly. SB
1301 addresses this issue by authorizing CPUC to reserve up
to 25% of natural gas utility auction revenue for energy
efficiency and renewable energy projects. The author states
that this bill is needed because the Legislature has not yet
weighed in on how the gas utility cap-and-trade auction
revenues should be used. He adds that 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.
2) Legislature weighing in. As noted in the background, SB 1018
in 2012 provided statutory direction for the spending of
SB 1301 (Hertzberg) Page 7
of ?
cap-and-trade auction proceeds from consigned electric IOUs
allowances, and authorizes up to 15% of those proceeds for
clean energy and energy efficiency projects.
There has been no similar statutory direction for proceeds
consigned by natural gas IOUs, newly covered under the
cap-and-trade program in 2015. Even so, CPUC has the
authority to direct those proceeds for the benefit of the
ratepayer, and pursuant to that authority, they completed a
rulemaking process last year to specify that natural gas
utility proceeds be returned to customers as a $20/year
credit.
According to CPUC, a 25% allocation of the proceeds would
result in $40 to $60 million annually for clean energy and
energy efficiency projects specified in SB 1301, and would
reduce the natural gas California Climate Credit by about $5.
For a dollar amount likely to go unnoticed by the average
consumer, these moneys may work to offset high costs
associated with biogas interconnection and development of
alternative and renewable fuels.
3) Taking a holistic look. Although SB 1301 does not propose to
use GGRF moneys, the proceeds that would be allocated to
clean energy and energy efficiency programs specified in SB
1301 also originate from the cap-and-trade auction. The
clean energy and energy efficiency projects, in reducing
fossil fuel natural gas, would be working to meet similar
climate goals as several proposed and current programs funded
through GGRF. Since directing these revenues from consigned
allowances to similar types of projects may reduce some of
the need to spend GGRF in the same sector, it may be
advantageous to consider this proposal with GGRF proposals to
better assess which set of proposals best meets the
requirements of the fund, uses resources most efficiently,
maximizes policy objectives moneys, and is not already funded
through other programs. As the budget committees are
considering the Governor's proposal of GGRF expenditures, the
budget process may be an ideal way to comprehensively
consider the numerous policy bills that propose programs for
GHG emissions reductions funded through auction proceeds,
including SB 1301.
4) PUC will decide. SB 1301 specifies that a "clean energy"
SB 1301 (Hertzberg) Page 8
of ?
program may be any project or program that reduces or abates
GHG emissions related to the use of fossil natural gas.
Additionally, the bill specifies that clean energy and energy
efficiency projects or programs "may also include projects or
programs of that type established pursuant to statute" and
administered by PUC, the gas corporation, or a third-party.
As these provisions are very broad, projects authorized under
this bill could capture a whole host of activities, including
actions and activities that may later be required as a result
of ARB's oil and gas regulations, or required pursuant to SB
1371.
Ultimately, PUC will open a rulemaking to interpret and
implement the provisions of this bill, and decide what
constitutes an eligible "clean energy" and energy efficiency"
project or program that reduces GHG emissions, and provides
ratepayer benefits.
However, as the author specifies this bill is needed because
the Legislature has not weighed in on how the gas utility
cap-and-trade auction revenues should be used, the author may
wish to provide more clarity and legislative direction for
PUC in determining which clean energy and energy efficiency
projects and programs are eligible under this bill.
DOUBLE REFERRAL:
This measure was heard in Senate Energy, Utilities, and
Communications Committee on April 5, 2016, and passed out of
committee with a vote of 8-1.
SOURCE: Author
SUPPORT:
None received
OPPOSITION:
None received
SB 1301 (Hertzberg) Page 9
of ?
-- END --