BILL ANALYSIS                                                                                                                                                                                                    

                                                                  SB 1078
                                                                  Page A
          Date of Hearing:  August 19, 2002

                              Roderick D. Wright, Chair
                    SB 1078 (Sher) - As Amended:  August 15, 2002

                              AS PROPOSED TO BE AMENDED
           SENATE VOTE  :  Vote not relevant.
          SUBJECT  :  Renewable energy:  California Renewables Portfolio  
          Standard Program.

           SUMMARY  :  Requires utilities to increase procurement of  
          electricity from renewable energy sources by at least one  
          percent per year.  Specifically,  this bill  : 

          1)Requires a retail seller of electricity to increase its total  
            amount of eligible renewable resources by at least one percent  
            per year, until 20 percent of its retail sales are procured  
            from renewables, provided sufficient public goods charge  
            (PGC)<1> funds are available to cover any above-market costs  
            of renewables.  This constitutes the California Renewables  
            Portfolio Standard, or RPS. 

          2)Defines a retail seller to include community choice  
            aggregators, investor-owned utilities (IOUs), and, once  
            specified conditions<2> are met, electric service providers  

          3)Specifies that if an IOU fails to procure enough renewables in  
          <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.

          <2> An ESP is considered a retail seller, and subject to RPS for  
          sales to any customer acquiring service after January 1, 2003,  
          and for sales to all its customers beginning on January 1, 2005.  
           Before an ESP is considered a retail seller, PUC must institute  
          a rulemaking to determine the manner in which ESPs will  
          participate in RPS program.  In addition, this bill expressly  
          declares that contracts entered into between an ESP and a retail  
          customer prior to the suspension of direct access by PUC shall  
          not be impaired.


                                                                  SB 1078
                                                                  Page B
            a given year, it would be required make up the shortfall in  
            subsequent years.   

          4)Directs the California Public Utilities Commission (PUC) to  
            order IOUs to enter into contracts for renewable energy  
            resource generators with at least 10 years, unless PUC  
            approves shorter terms.  

          5)Requires PUC to establish a process for determining the market  
            price of electricity from renewable generators; for rank  
            ordering and selection of renewables to fulfill program  
            obligations; and for standard terms and conditions to be used  
            by IOUs in contracting with renewables contractors. 

          6)Requires PUC to review the results of a renewable energy  
            resources solicitation submitted for approval by an IOU.  If  
            PUC determines that bid prices are elevated due to a lack of  
            effective competition among bidders, PUC shall require that  
            the contracts be renegotiated. 

          7)Considers renewable energy purchases by IOUs made pursuant to  
            a RPS procurement plan reasonable per se, and therefore  
            recoverable in rates charged to retail customers. 

          8)Requires each governing body, of a local publicly owned  
            electric utility, to implement and enforce an RPS that takes  
            into consideration the impact on rates, reliability, the goal  
            of environmental improvement, and the impact on financial  
            resources.  The governing board would annually report to its  
            customers concerning , RPS program. 

          9)Among other things, directs the California Energy Commission  
            (CEC) to certify the renewable energy resources that are  
            eligible to participate in , RPS, to develop an accounting  
            system to verify RPS compliance, and to award supplemental  
            energy payments to eligible renewable energy resources to  
            cover above-market costs of renewable energy.

          10)Provides that failure by an IOU to comply with a PUC order  
            adopting a renewable procurement plan is punishable as  
            contempt, and that PUC shall exercise this authority to  
            require compliance.

          11)Specifies that an application by an IOU to allow construction  
            of new transmission facilities that are necessary in  


                                                                  SB 1078
                                                                  Page C
            connection with renewables shall be deemed necessary by PUC in  
            determining whether to issue a certificate of public  
            convenience and necessity.

          12)Specifies that an eligible renewable energy resource that  
            receives PGC funds shall comply with prevailing wage laws.

           EXISTING LAW  directs PUC to require utilities to reserve or set  
          aside a specific portion of future generating capacity for  
          renewable resources.

           FISCAL EFFECT  :  Unknown.

           COMMENTS  :   

           Renewables Portfolio Standard 
          The RPS in this bill is consistent with that contained in  
          Assembly Bill 57 (Wright).<3>  It directs retail sellers, in  
          order to fulfill unmet resource needs, to increase renewables  
          purchases by at least an additional one (1) percent annually,  
          until a 20 percent renewable resources portfolio is achieved,  
          provided sufficient PGC funds are available to cover  
          above-market costs.  PUC has already incorporated this RPS into  
          its procurement rulemaking now underway.  [R.01-10-024]

           Who participates  

          The RPS is imposed primarily on IOUs.

          This bill specifies that PUC shall, through rulemaking,  
          determine how RPS should apply to ESP's.  Apparently implying  
          that ESP's, who cannot enter into new contracts with retail  

          <3> AB 57, an urgency bill, passed the Legislature July 3, 2002.  
           It appropriates money, and could remain in Engrossing &  
          Enrollment until the budget bill has been enacted.  [see Cal.  
          Const. Art. 4,  12 (c)] 


                                                                  SB 1078
                                                                  Page D
          customers, until direct access resumes,<4> will not be required  
          to participate in RPS program until PUC allows direct access and  
          completes an RPS compliance rulemaking.  Because it is unclear  
          when PUC will allow direct access to resume,<5> the author or  
          the Committee may wish to clarify in this bill that the  
          obligation of ESPs to participate in RPS is contingent not only  
          on completion of RPS rulemaking for ESPs, but also upon  
          resumption of direct access. 

          This bill requires local publicly owned electric utilities<6> to  
          implement and enforce a renewables portfolio standard that  
          "recognizes the intent of the Legislature to encourage renewable  
          resources, while taking into consideration the impact on rates,  
          reliability, the goal of environmental improvement, and the  
          impact on financial resources."  Additionally, the local utility  
          must annually report to its customers concerning expenditures of  
          PGC funds for renewable energy resource development, and the  
          resource mix used to serve its customers by fuel type.  

          Critics contend that this bill contains a superficial RPS for  
          <4> Water Code  80110, enacted by AB X1 1 (Keeley) [Chapter 4,  
          Statutes of 2001] provides in part that, "[a]fter the passage of  
          such period of time . . . as shall be determined by the [PUC],  
          the right of retail end use customers . . . to acquire service  
          from [ESP's] shall be suspended until [DWR] no longer supplies  
          power.  (DWR has the same rights to payment for power by retail  
          customers they sell as do providers of power to those  

          <5> DWR's authority to purchase spot market power expires  
          December 31, 2002, but it has entered into several long-term  
          bilateral contracts for power, some of which continue for many  
          years.  It has not been conclusively determined if (1) all of  
          these contracts are assignable by DWR to IOUs as they resume the  
          obligation to serve customers, or (2) if such assignment means  
          in each case that DWR no longer "supplies power" within the  
          meaning of AB X1 1 (Keeley) -- which is necessary prior to  
          resumption of direct access transactions between ESPs and retail  

          <6> Local publicly owned electric utilities include any of the  
          following entities that furnish electric services: a city  
          operating as a public utility, a municipal utility district, a  
          public utility district, an irrigation district, or a joint  
          powers authority that includes one or more of these agencies,  
          and that owns generation or transmission facilities, or  
          furnishes electric services over its own or its member's  
          electric distribution system.


                                                                  SB 1078
                                                                  Page E
          local utilities, compared to that which would apply to IOUs and  
          community choice aggregators, thus creating an unfair incentive  
          for local government to form a municipal utility and thereby  
          avoid not only RPS, but also many other costs, fees and  
          obligations applicable to utilities generally. 
           Market price
          In 1978, Congress passed PURPA<7> to encourage development of  
          cogeneration and small power production facilities.  Under  
          PURPA, utilities "must buy" power from qualifying facilities<8>  
          (QFs) at a rate equal to the utility's full avoided cost, which  
          is the equivalent of the incremental cost of alternative  
          electric energy.<9>

          The cost of renewable energy from QFs and other generators has  
          historically been higher than energy generated by traditional  
          power facilities.  In some cases, the market price for renewable  
          energy is greater than twice the price of power from traditional  
          fuels.  But research advances have helped reduce the cost of  
          wind energy -- the cost of wind energy dropped by more than 70%  
          during the last 20 years.

          PUC is directed, in this bill, to establish a market price of  
          electricity for terms corresponding to the length of contracts  
          with renewable generators.  If the actual contract price of  
          renewable energy with the utility exceeds the market price, PGC  
          payments would flow to the renewable energy generator to cover  
          the above-market costs.

          <7> Public Utility Regulatory Policies Act of 1978, 16 U.S.C.  et  
          seq  .

          <8> A qualifying facility can either be a cogeneration facility  
          or a small power production facility using renewable energy  
          technologies.  To qualify as a QF, a facility must meet various  
          federal regulatory requirements and must be owned by an entity  
          not primarily engaged in the generation or sale of electric  
          power.  16 U.S.C.  796 (18)(B)

          <9> Avoided costs are costs of electricity to the utility that  
          the utility would generate or purchase from another source if  
          not for having purchased it from a QF.  [See 16 U.S.C.   
          824a-3(b); Cal. Pub. Util. Code  390]


                                                                  SB 1078
                                                                  Page F
          This bill directs PUC, in determining the market price (of  
          non-renewable energy), to take into account the long-term market  
          price of electricity for fixed price contracts.  This is  
          determined pursuant to the IOU's general procurement activities,  
          and the long-term ownership, operating, and fixed-price fuel  
          costs associated with fixed-price electricity from new  
          generating facilities. 

          SB 1078 requires that the renewable energy procurement plan to  
          be adopted by PUC be part of a general procurement plan process,  
          to the extent feasible.  That process specifies that IOUs may  
          request bids for procurement-related services, yet this bill  
          nevertheless directs PUC to determine the market price (of  
          non-renewable energy) after the closing date of a competitive  
          solicitation conducted by an IOU for eligible renewable energy  
          resources.  The reference in this bill to a competitive bid thus  
          implies that an IOU is required to separate the renewable  
          contract negotiations from its general procurement process,  
          which departs from the requirement of this bill to do all of  
          this in one process.  The author or the Committee may wish to  
          clarify this by elimination of the reference to a competitive  
          solicitation in this bill.<10> 


          Caithness Energy
          California State Association of Counties (unless amended)
          California Wind Energy Association
          California Public Interest Research Group
          Clean Power Campaign
          Coalition for Clean Air
          East Bay Municipal Utility District (if amended) 
          Geothermal Energy Association (unless amended)
          Geothermal Resources Council (unless amended)
          League of California Cities (unless amended)
          Natural Resources Defense Council
          Sierra Club California
          <10> This would also obviate the need to retain language in this  
          bill that prohibits prohibiting IOUs from transmitting or  
          sharing the results of any competitive solicitation for eligible  
          renewable energy resources until PUC has established a market  


                                                                  SB 1078
                                                                  Page G
          Solid Waste Association of North America, California Chapters  
          (unless amended)

          Brightstar Environmental
          California Municipal Utilities Association
          California State Pipe Trades Council
          California State Association of Electrical Workers
          California State Building & Construction Trades Council
          Coalition of Utility Employees
          Los Angeles County Solid Waste Management Committee
          Sempra Energy (unless amended)
          Silicon Valley Power
          Southern California Edison (unless amended)
          Western States Council of Sheet Metal Workers

           Analysis Prepared by  :    Paul Donahue / U. & C. / (916) 319-2083