BILL ANALYSIS                                                                                                                                                                                                              1
          1





                SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
                            MARTHA M. ESCUTIA, CHAIRWOMAN
          

          SB 1 -  Murray                Hearing Date:  August 8, 2006       
           S
          As Amended:         June 29, 2006            FISCAL       B
                                                                        
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                                      DESCRIPTION
           
           Current law  and regulations establish subsidy programs for the  
          installation of solar photovoltaic (PV) systems administered by  
          California Energy Commission (CEC) and the California Public  
          Utilities Commission (CPUC).  These programs, known collectively  
          as the California Solar Initiative (CSI), provide $3.2 billion  
          in subsidies through rebates for the installation of  
          photovoltaic projects.

           Current law  requires investor-owned utilities (IOUs) to increase  
          their existing level of renewable resources by one percent of  
          sales per year until a portfolio of 20 percent renewable  
          resources is achieved by no later than 2017.  Municipal electric  
          utilities are not subject to these standards, but are required  
          to implement and enforce their own renewable resource  
          procurement programs.

           This bill  establishes goals of installing 3000 MW of solar  
          generation capacity, establishing a self-sufficient solar  
          industry, and placing PV systems on 50% of new homes in 13  
          years.

           This bill  requires the CPUC, in implementing the CSI, to:
                 Adopt a subsidy that declines not less than an average  
               of 7% per year, and shall be zero as of December 31, 2016.
                 Adopt performance-based subsidies (e.g. subsidies that  
               pay based on the amount of electricity produced) by January  
               1, 2008 for all large PV systems and for half of all  
               medium-sized systems.  Peformance-based subsidies are  
               encouraged, but not required, for smaller systems.   
               Performance-based incentives shall also decline at an  
               average of not less than 7% per year.

           This bill  authorizes the CPUC to award $101 million in subsidies  
          for solar thermal systems.










           This bill  authorizes the CPUC to award $50 million for solar  
          research and development.

           This bill  requires municipal utilities to establish solar energy  
          programs in support of the 3000 MW goal.  Such programs shall be  
          established by January 1, 2008 and shall cost $784 million.

           This bill  establishes an aggregate cost cap for these solar  
          programs of $3.4 billion.

           This bill  prohibits the CPUC from imposing the cost of the CSI  
          on low income customers and bars the CPUC from imposing a  
          surcharge on natural gas to pay for the CSI.
           
          This bill  requires the CEC to commence a proceeding by July 1,  
          2006, and conclude that proceeding within 3 years, to consider  
          if and when solar energy systems should be required on new  
          buildings.  


































           This bill  requires sellers of production homes, as defined, to  
          offer PV systems on new homes for which tentative subdivision  
          maps are completed on or after January 1, 2011.

           This bill  raises the net metering cap from 0.5% to 2.5%.  

           This bill  requires the CEC to establish eligibility criteria,  
          installation guidelines, and equipment rating standards for  
          solar energy systems receiving ratepayer subsidies.   The CEC is  
          also required to perform random performance audits on PV  
          systems.

           This bill  requires the Contractors' State Licensing Board to  
          review and, if needed, revise its licensing classifications to  
          ensure that PV contractors have the proper qualifications.

                                      BACKGROUND
           
          As passed by the Senate in 2005, SB 1 established the Governor's  
          Million Solar Rooftops proposal.  Because SB 1 did not pass the  
          Assembly in 2005, the CPUC instead created a solar program by  
          regulation, known as the California Solar Initiative (CSI).   
          That program is similar to the one envisioned in SB 1, though  
          there are important differences noted below.   Rather than  
          create a solar program, the current version of SB 1 now creates  
          limits on the CPUC's solar program and includes municipal  
          utilities, over which the CPUC has no jurisdiction.

           California Solar Initiative
           After the 2005 session adjourned without passing SB 1, the CPUC  
          established the CSI by regulation.  The CSI shares the goals and  
          basic mechanism of SB 1, which is to provide a long-term subsidy  
          for photovoltaic systems with incentives that are reduced  
          annually.  But the CSI differs from SB 1 in important ways, some  
          of which are due to the jurisdictional limitations of the CPUC  
          and others which are differences in policy.

          The major difference is that the cost of the program increased  
          substantially.  The last 2005 version of SB 1 had a cost cap of  
          $2.5 billion.  This amount reflects what the solar industry said  
          it would take to accomplish the goals of the program.  But the  
          CPUC's CSI raised the cost cap to $3.2 billion.  The CPUC has  
          never justified the cost-effectiveness of the higher price tag.   
          And the increased program cost will not lead to more installed  
          solar capacity.  Part of the cost increase will cover $160  









          million in new R&D expenditures.  Funding is also made available  
          for a solar water heating subsidy program.  And the CPUC allows  
          $250 million to be spent on utility administration.  The cost of  
          the CSI is recovered exclusively from CPUC-regulated utility  
          customers, both gas and electric.

          Importantly, the CSI does not raise the net metering cap.  Net  
          metering is a major benefit to PV customers because it allows  
          the customer to sell his excess electricity production back to  
          the utility at retail rates.  Because net metering creates an  
          additional, substantial subsidy, the amount of PV capacity that  
          can be net metered has been limited by statute.  PG&E and  
          Southern California Edison are nearing their limit.   
          Consequently, a bill raising the net metering cap is required  
          for any significant solar capacity to be added.

           Current Subsidies
           Even without the CSI, solar energy is already heavily  
          subsidized.  For commercial customers federal tax credits and  
          accelerated depreciation cover about 50% of the cost of the  
          system.  Accelerated depreciation for state tax purposes is  
          worth another 6%. 































          Since 1976 California has provided $1.1 billion in tax credits  
          and another $1 billion in rebates for solar energy systems,  
          resulting in over 160 MW of solar power. State and federal  
          policy has been generous to the solar industry.  And, just as  
          high gasoline prices make alternative transportation fuels more  
          attractive, so too do high (and rising) electric prices make  
          solar more attractive.

           California a Green Energy Leader
           By any measure, California has been a leader in the pursuit of  
          alternative energy sources and energy efficiency.  Every year  
          customers of California's IOUs, through a surcharge on  
          CPUC-regulated utility bills, pay at least an extra $228 million  
          to fund energy efficiency and conservation, $135 million for  
          renewable energy, and $62.5 million for energy research,  
          development and demonstration.   Legislation authorizing the  
          surcharge was enacted in 1996 (AB 1890 - Brulte: Chapter 854 of  
          1996) and again in 2000 (AB 995 - Wright: Chapter 1051 of 2000),  
          both on a bipartisan basis.  Authorization of a 5-year spending  
          plan for some of these funds is pending again this year in SB  
          1250 (Perata). California's Renewable Portfolio Standard is a  
          further major commitment to renewable energy.  It requires  
          electric utilities to increase their purchase of renewable  
          energy by 1% of total energy needs annually until 20% of their  
          energy is from renewable sources.

                                       COMMENTS
          
           1. Overview  -- The Assembly amendments have changed character  
             of this bill.  When first considered by this committee in  
             2005, the bill contained the Governor's Million Solar Roofs  
             Initiative, creating a long-term subsidy program for the  
             photovoltaic industry.  After SB 1 stalled in the Assembly,  
             the CPUC created a solar program much like that contained in  
             SB 1.  But the CPUC could not deal with the biggest hurdle to  
             a successful solar program, which is raising the cap on the  
             amount of PV systems that can benefit from net metering, a  
             crucial benefit in the eyes of the solar industry.  And the  
             CPUC could not impose a PV program onto municipal utilities,  
             over which is has no jurisdiction.  These CPUC shortcomings,  
             as well as concern over potentially lax CPUC administration,  
             led to a reinvigoration of SB 1.  SB 1 no longer creates a  
             solar program.  Instead it deals with the issues which the  
             CPUC could not and imposes some constraints on the program.
           









           2. Issues which concerned the committee during the first  
             hearing on the bill  -- When this bill was last heard in this  
             committee, members were interested in encouraging  
             performance-based incentives, capping the cost of the  
             program, and enabling affordable housing projects to  
             participate.  These issues are discussed below:

                Performance-based incentives  -- Recent evaluations of PV  
               systems raise questions about their performance.  These  
               studies indicate that PV systems may be underperforming,  
               highlighting the need for performance-based incentives.   
               Current PV rebates are awarded up front and are based on  
               the rated capacity of the PV system.  If instead of  
               up-front rebates the incentives were based on electricity  
               production the PV system manufacturer and customer would  
               have a much greater incentive to install the system in a  
               way to maximize production and to maintain the system to  
               achieve optimum performance.  

               This bill is very strongly supportive of performance-based  
               incentives.  It requires that all incentives for large  
               solar installations and at least half the incentives for  
               medium-sized installations be performance-based by January  
               1, 2008.  Performance-based incentives for smaller,  
               residential-sized systems are encouraged.

                Capping the cost of the program  -- The version of SB 1 that  
               was pending during the last legislative days of 2005  
               contained a cost cap of $2.5 billion.  The CPUC's CSI  
               raised the cost cap to $3.2 billion.  The current version  
               of SB 1 raises the cost cap to $3.35 billion.  Included in  
               that higher number is $101 million in subsidies for solar  
               heating devices, which create no electricity, and $50  
               million in solar R&D administered by the CPUC (which is in  
               addition to the $62.5 million already funded for renewable  
               energy R&D administered by the CEC), both of which were  
               encouraged, if not insisted upon, by the Governor's office  
               and included in the latest set of amendments.  This is a  
               much costlier program with no justification for the higher  
               cost nor the additional spending on solar heating and R&D.

               California's recent heat wave set records for energy  
               consumption.   While regulators can take comfort in having  
               weathered the heat storm, very soon customers will be hit  
               with their bills.  There are reports that recently approved  









               rate increases, coupled with record consumption, will lead  
               to extraordinarily high bills.  This may prompt renewed  
               interest in the causes of California's high electricity  
               rates.  There may well be widespread support for  
               cost-effective solar energy even if it results in rate  
               increases.  But given California's already high electric  
               rates, there can be little room for programs which are not  
               cost-effective.

                Affordable housing  -- The CSI requires that 10% of program  
               funding be made available to affordable housing projects.   
               If that funding isn't used in any given year then it  
               becomes available for other CSI purposes.  SB 1 no longer  
               contains an affordable housing component.  Legislation  
               requiring an affordable housing component is pending in the  
               Senate Appropriations Committee (AB 2723 - Pavley).  

           3. Municipal Utilities  -- This bill requires municipal  
             utilities to establish their own PV programs at an aggregate  
             cost of $784 million, which is within the $3.35 billion cost  
             cap.  It requires that subsidies start at not less than  
             $2.80/watt and decline by 7% annually thereafter.  

            4. Net Metering  -- Last year's version of SB 1 raised the net  
             metering cap to 5%.  The current version raises the net  
             metering cap to 2.5%, meaning that the Legislature will see  
             this issue again in a couple of years if SB1 achieves its  
             goals for installing PV capacity.

            5. Labor Opposition Removed  -- Concerns from organized labor  
             contributed to the demise of SB 1 last year.  Those concerns  
             have been addressed and organized labor is no longer opposed  
             to the bill.

            6. Committee Options  -- The committee can take four actions in  
             a 29.10 hearing:
                 Return the bill to the floor recommending approval of  
               the amendments.
                 Return the bill to the floor recommending disapproval of  
               the amendments.
                 Return the bill to the floor without recommendation.
                 Hold the bill in committee.











                                       POSITIONS
           
           Sponsor:
           
          Author

           Support:
           
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          |Schwarzenegger Administration   |Merced/Mariposa County Asthma      |
          |Akeena Solar                    |Coalition                          |
          |Alliance for Nuclear            |National Wildlife Federation       |
          |Responsibility                  |New Vision Technologies            |
          |American Federation of State,   |NorCal Solar                       |
          |County and                      |Northern California Power Agency   |
          |        Municipal Employees     |Our Children's Earth               |
          |American Lung Association       |Pacific Environment                |
          |American Solar Energy Society   |Pacific Gas and Electric Company   |
          |Bluewater Network               |(if amended)                       |
          |California Alliance For         |Physicians for Social              |
          |Consumer Protection             |Responsibility                     |
          |California Building Officials   |Planning and Conservation League   |
          |California Interfaith Power &   |Powerlight Solar Electric Systems  |
          |Light                           |Public Citizen                     |
          |California League of            |PV Manufacturers Alliance          |
          |Conservation Voters             |Rainforest Action Network          |
          |California Public Interest      |Real Goods                         |
          |Research Group                  |Relational Culture Institute       |
          |California Public Utilities     |Sempra Energy (if amended)         |
          |Commission                      |Sharp Solar                        |
          |California Solar Energy         |Sierra Club California             |
          |Industries Association City of  |South Coast Air Quality Management |
          |Santa Cruz                      |District                           |
          |Clarum Homes                    |Sun Power & Geothermal Energy      |
          |Clean Power Campaign            |The Better World Group             |
          |Coalition for Clean Air         |Union of Concerned Scientists      |
          |Community Environmental Council |Vote Solar                         |
          |East Bay Municipal Utility      |Working Assets                     |
          |District                        |World Council for Renewable Energy |
          |Environment California          |Yolo county Board of Supervisors   |
          |Global Green USA                |Several                            |
          |Gray Panthers                   |individuals                        |
          |Green Lease, Inc.               |                                   |
          |Greenpeace USA                  |                                   |
          |Henry T. Perea, Councilmember   |                                   |









          |7th District KYOCERA            |                                   |
          |International, Inc.             |                                   |
          |                                |                                   |
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           Oppose:
           
          The Utility Reform Network

          




          Randy Chinn 
          SB 1 Analysis
          Hearing Date:  August 8, 2006