BILL ANALYSIS                                                                                                                                                                                                    




                                                                  SB 107
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          Date of Hearing:   August 17, 2006

                    ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
                               Lloyd E. Levine, Chair
              SB 107 (Simitian and Perata) - As Amended:  August 7, 2006

           SENATE VOTE  :   25-14
           
          SUBJECT  :   Renewable energy.

           SUMMARY  :  Accelerates California's Renewables Portfolio Standard  
          (RPS) to require retail sellers of electricity to procure at  
          least 20% of their retail sales from renewable power by 2010  
          instead of 2017.  Clarifies existing rules to allow renewable  
          power to count toward a retail seller's RPS even if the  
          associated electricity is not delivered to the retail seller.   
          Specifically,  this bill  :  

          1)Requires that all retail sellers of electricity, excluding  
            local publicly owned electric utilities (municipal utilities),  
            procure at least 20% of the total electricity sold from  
            eligible renewable resources by 2010. 

          2)Allows renewable electricity that is provided to any location  
            within California or is scheduled and settled for delivery in  
            California to count toward a retail seller's RPS obligations.

          3)Changes the definition of "eligible renewable resource" to  
            allow renewable power that is produced outside of California  
            from a facility that commences operation after January 1,  
            2005, to count toward a retail seller's RPS if the associated  
            electricity is delivered to an in-state location, and it  
            complies with California environmental quality standards.  
            Electricity from a facility that was operating prior to the  
            year 2005 can count toward a retail seller's RPS if the  
            electricity is part of incremental load resulting from  
            repowering or that facility has been part of the baseline of  
            renewable power of a retail seller. 

          4)Prohibits the awarding of Supplement Energy Payments (SEPs)  
            for the purchase of Renewable Energy Credits (RECs) or for  
            renewable electricity purchase agreements of less than 10  
            years in length. 

          5)Allows eligible renewable generation facilities located  









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            outside of California to receive SEPs.

          6)Allows renewable energy projects to receive SEPs for the  
            above-market cost of the renewable electricity for the value  
            of the life of the contract instead of just for the first 10  
            years of the contract.

          7)Requires municipal utilities to annually prepare a report to  
            the California Energy Commission (CEC) on the mix of eligible  
            renewable resources used in their portfolio and on their  
            progress toward meeting the municipal utility's RPS.

          8)Defines Renewable Energy Credit to mean a certificate that one  
            unit of electricity was generated by an eligible renewable  
            energy resource and includes all renewable and environmental  
            attributes associated with the production of electricity,  
            except for emission reduction credits. 

          9)Allows municipal utilities to sell RECs to retail sellers of  
            electricity if the municipal utility has established a RPS  
            that is comparable to the RPS of the Investor Owned Utilities  
            (IOUs) and is in compliance with that RPS. 

          10)Allows the Public Utilities Commission (PUC) to authorize the  
            use of RECs to meet the RPS once the CEC has developed a  
            system to track RECs. 

          11)Deletes a requirement in current law that prohibits an IOU  
            from sharing the results of any competitive solicitation for  
            eligible renewable energy resource until the PUC has  
            established a market price referent (MPR). 

          12)Requires the PUC to develop flexible rules for compliance  
            with the RPS that shall address situations where, as a result  
            of transmission constraints, a retail seller is unable to  
            procure eligible renewable energy resources sufficient to  
            satisfy their RPS obligations. 

          13)Allows a contract for eligible renewable resources that is  
            less than 10 years in duration to count toward a retail  
            seller's RPS. Such contracts shall not be eligible for SEPs. 

          14)Allows the PUC to authorize a procurement entity to enter  
            into contracts for renewable energy on behalf of a retail  
            seller. The procurement entity will be allowed to recover  









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            administrative and procurement costs through the retail rates  
            of the end-use customers whom directly benefit from the  
            procurement of the renewable electricity.  

          15)States that a retail seller that has met its 20% renewable  
            obligation in one year shall not be required to increase its  
            renewable energy procurement in the following year. 

          16)Requires the CEC to develop a system to certify, track and  
            verify that RECs are produced by renewable energy resources.

          17)Specifies that a renewable energy project selected by an  
            Energy Service Provider (ESP) may only receive SEPs if the ESP  
            selects the project through a "least-cost best-fit process"  
            and the SEPs are reasonable in comparison to other projects.  

          18)Provides that renewable power generated under terms of a  
            contract executed before January 1, 2002, shall count toward a  
            retail seller's RPS obligations.

          19)Provides renewable power generated under terms of contracts  
            awarded to Qualifying Facilities (QFs) under the Public  
            Utility Regulatory Policies Act (PURPA) of 1978, shall count  
            toward a retail seller's RPS obligations.

          20)Provides that the cost of a new transmission facility that is  
            built to deliver electricity from areas with high  
            concentrations of renewable power shall be paid for by all  
            electricity customers in California. 

          21)Requires all long-term procurement plans entered into by an  
            electrical corporation or a municipal utility to adopt a  
            strategy to achieve efficiency in the use of fossil fuel and  
            to address carbon emissions. 

           EXISTING LAW  :

          1)Requires retail sellers of electricity, except municipal  
            utilities, to increase their existing level of renewable  
            resources by 1% of sales per year such that 20% of their  
            retail sales are procured from eligible renewable resources by  
            2017.

          2)Defines eligible renewable resources to include all generation  
            from a renewable electricity generation facility that uses  









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            biomass, solar thermal, photovoltaic, wind, geothermal, fuel  
            cells using renewable fuels, small hydroelectric generation of  
            30 megawatts or less, digester gas, municipal solid waste  
            conversion, landfill gas, ocean wave, ocean thermal, or tidal  
            current, and any additions or enhancements to the facility  
            using that technology. Requires the renewable resource to be  
            located in California or be directly connected with the  
            California transmission system.

          3)Exempts municipal utilities from the statutory requirements of  
            RPS and instead requires municipal utilities to implement and  
            enforce their own RPS programs that recognize the intent of  
            the Legislature to encourage renewable resources. 

          4)Allows the CEC to award SEPs to generators of eligible  
            renewable resources to cover above market costs of renewable  
            energy, but SEPs may not be paid to one project for more than  
            10 years.

           FISCAL EFFECT  :   Unknown.

           COMMENTS  :   The purpose of this bill is to accelerate the  
          state's existing RPS requirements so that 20% of retail sales of  
          electricity in California come from renewable resources by the  
          year 2010 and to address issues that may make compliance with  
          the RPS difficult.

          1)  Brief history  : In 2002, the Legislature approved SB 1078  
          (Sher), Chapter 516, Statutes of 2002, and SB 1048 (Sher),  
          Chapter 515, Statutes of 2002. Together these bills created  
          California's RPS.  Under the RPS, the 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 PUC is required  
          to adopt comparable requirements for direct access providers  
          (Energy Service Providers or ESPs) and community choice  
          aggregators (CCAs).  Municipal utilities are not required to  
          meet the same RPS as the IOUs, but instead must implement and  
          enforce their own RPS program that recognizes the intent of the  
          Legislature to encourage renewable resources.

          The RPS also allows new renewable energy providers to apply to  
          the CEC for SEPs.  SEPs will be awarded to renewable energy  
          providers to cover the difference between the prices they bid in  









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          a competitive solicitation and a market price as established by  
          the PUC (known as the Market Price Referent or MPR).  The RPS  
          requires IOUs, and certain other retail energy providers, to buy  
          renewable electricity to the extent Public Goods Charges (PGC)  
          funds<1> are available to pay for SEPs.  If no PGC funds are  
          available, the retail energy providers are not required to  
          purchase additional renewable power.

          The RPS requires the PUC to adopt a rulemaking within six months  
          of its enactment (January 2003), to implement the RPS and to  
          determine market prices from which SEPs can be determined.  On  
          June 9, 2004, the PUC approved two decisions that established  
          standard market terms for renewable contracts and a method for  
          calculating market prices for renewable resources.  Since then,  
          the IOUs have issued Requests for Proposals (RFPs) for renewable  
          energy contracts that would comply with the RPS and potentially  
          be eligible to receive SEPs.  These RFPs have resulted in the  
          IOUs signing a number of contracts for renewable power. To date  
          all contracts have been for prices below the MPR and thus no  
          SEPs have been issued. However, reports from parties involved in  
          the current renewable procurement process indicate that SEPs  
          will be needed for contracts that will be approved this year and  
          next. 

           2) Accelerated RPS compliance  :  The "Energy Action Plan"(EAP)  
          adopted by the PUC, 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. The PUC has mandated this accelerated goal without  
          additional legislation.  
           
          Currently, all of the three major IOUs may have difficulty of  
          meeting 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 16.7% of eligible renewable  
          power in its portfolio.  San Diego Gas & Electric (SDG&E)  
          currently only receives 5.4% of its electricity from renewable  
          resources. 

          ---------------------------
          <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.









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          3)  Making 20% an achievable goal:  Currently, provisions in the  
          RPS statute may prevent some retail sellers from meeting the  
          mandate to procure 20% of their electricity from renewable  
          resources by 2010.  Transmission constraints may limit SDG&E's  
          ability to buy new renewable electricity and have that  
          electricity delivered to its service territory.  The current RPS  
          statute requires that ESPs procure their renewable resources  
          through contracts that are at least 10 years in length, but  
          because of the long-term uncertainty of direct access markets in  
          California, ESPs may not be able to sign enforceable contracts  
          of that length.  

          4)  Transmission constraints  : This bill attempts to address the  
          problem of transmission constraints by clarifying that  
          electricity from eligible renewable resources does not have to  
          be delivered to the service territory of the retail seller and  
          instead only requires that the electricity be provided to the  
          retail seller at a location within California.  This provision  
          would maintain the RPS's objective of reducing consumption of  
          fossil fuels within California, but would allow for more  
          flexibility in the delivery of electricity.  If the renewable  
          electricity were actually provided to the retail seller in  
          another IOU's service territory, the retail seller and the IOU  
          would merely arrange to swap other electricity. This type of  
          swapping has been a common practice in the past. The PUC has  
          already issued a decision that allows for renewable power that  
          is delivered anywhere in the state to count toward an IOU's RPS  
          obligations. 

          The bill also addresses problems with transmission constraints  
          by allowing a retail seller to meet its RPS obligations through  
          the purchase of tradable RECs. A tradable REC is a credit for  
          the renewable attributes of the renewable generation. It allows  
          a retail seller to purchase the renewable attributes while  
          another party can buy the actual electricity. 

          5)  Contract length:  This bill attempts to address the problems  
          ESPs have in signing long-term contracts by allowing the PUC to  
          approve renewable contracts that are less than 10 years in  
          length. Such contracts, however, will not be eligible for SEPs. 

          The ESPs believe that restrictions in the bill will still  
          prevent them from signing long-term contracts. First the bill  
          provides that they cannot receive SEPs for contracts that are  
          shorter than 10 years. The ESPs believe that any term contract  









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          should be eligible for SEPs since any term contract results in  
          added renewable power to the state's portfolio. Alternatively,  
          TURN argues that determining the market price for these  
          shorter-term contracts, which would be necessary before SEPs  
          could be issued, would require a new proceeding at the PUC which  
          could delay implementation of parts of the RPS for another 18  
          months. TURN also believes that allowing SEPs for long-term  
          contracts will encourage inefficient buying behavior and  
          potentially sabotage the RPS program goals by allowing  
          higher-priced short-term contracts to reap large amounts of the  
          available SEPs.

          ESPs are also concerned with language that requires the PUC to  
          set a minimum amount for each utility that must come from  
          long-term contracts. The ESPs believe that they should be  
          allowed to sign as many short-term contracts as they need to  
          meet their RPS obligations and to meet the flexibility they need  
          to serve their customers. 

          The bill also attempts to address problems the ESPs have with  
          signing long-term contracts by allowing the PUC to authorize a  
          procurement entity that could purchase power on behalf of other  
          retail sellers. The procurement entity would have the ability to  
          sign long-term contracts for renewable electricity and could  
          then provide this electricity to ESPs. While most retail sellers  
          support the idea of a procurement entity they all are concerned  
          that the language in the bill could result in the PUC ordering  
          an IOU to act as a procurement entity and forcing ESPs to  
          purchase renewable power from that entity. They have suggested  
          that the procurement entity should be voluntary.  To meet this  
          suggestion, the committee may wish to consider amending the bill  
          to provide that the PUC may authorize the creation of a  
          procurement entity but may not require any party to act as or  
          purchase from a procurement entity.  

          6)  Out-of-state delivery:  Current law is ambiguous as to whether  
          renewable power produced outside of California can count toward  
          California's RPS and can qualify for SEPs.  One of the main  
          goals of the RPS is to reduce the need for fossil fuel fired  
          electricity in California.  This goal can still be achieved if  
          electricity from other states is allowed to count toward the  
          RPS, provided the electricity is actually delivered to the  
          state. Allowing out-of-state produced renewable electricity to  
          count toward the RPS will create a significantly larger market  
          for renewable power and could potentially lower the overall cost  









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          of renewable power. 

          This bill addresses the issue by allowing renewable power that  
          is produced outside of California to count toward a retail  
          seller's RPS obligations, provided it is delivered to  
          California. The bill also allows these projects to qualify for  
          SEPs. 

          While allowing out-of-state produced renewable power to count  
          toward California's RPS could lead to lower costs for renewable  
          power, the committee may want to consider if these projects  
          should also qualify for subsidies from California ratepayers in  
          the form of SEPs.  The goal of creating more California jobs may  
          be better maintained if California ratepayer money is only used  
          to fund California projects and is not used to subsidize  
          out-of-state projects.  Therefore, the committee may want to  
          consider amending the bill to provide that only projects located  
          within California can qualify for SEPs. 
           
          7) Credit is as good as cash:  This bill allows retail sellers of  
          electricity to use RECs to meet their RPS obligations. REC  
          trading may help retail sellers 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.  
           
          Since SB 107 contains explicit provisions against double  
          counting 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, a REC program will allow the retail providers  
          to more efficiently meet their renewable obligations.  










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          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 107 leaves much of the task of developing a REC program  
          to CEC and PUC, 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)   The associated electricity must be delivered for use  
               within California so that the renewable power actual  
               offsets the need for non-renewable power within the state. 

             c)   No party may receive SEPs for the sale of RECs.

             d)   The PUC may limit the total amount of RECs that can be  
               separately procured to meet annual procurement targets.

          The bill however fails to address some issues of REC trading for  
          situations where an IOU is required to purchase the renewable  
          power from a third party today, but the existing contracts or  
          statutes do not address who owns the associated RECs. The  
          problem is that the IOUs are paying a premium for the renewable  
          power.  But if it is not clear that the IOU owns the RECs or if  
          no RECs are created in this situation, the third party may be  
          able to collect the premium and sell the RECs and the IOU will  
          not be able to count this power toward their RPS. The end result  
          will be that ratepayers pay for the renewable power twice-once  
          through the IOUs purchase of the electricity at a premium price  
          and again when the IOU must by the REC. 

           To address this problem the committee may want to consider  
          amending the bill to: 1) Clarify that 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; 2)  
          provide 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  









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          of energy credits. 
           
          8)  Flexible rules for compliance:  Along with the changes to the  
          RPS to make compliance with the 20% by 2010 easier, the bill  
          also requires the PUC to create flexible rules for complying  
          with the RPS that, among other considerations, take into account  
          situations where due to transmission constraints, a retail  
          seller cannot procure sufficient renewable resources. Given that  
          the bill now allows a retail seller to count renewable power  
          that is delivered to any part of California to count toward a  
          retailer seller's RPS obligation and that retail sellers can use  
          RECs, it is unclear when transmission constraints would make it  
          difficult for a retail seller to procure sufficient renewable  
          resources.  

          9)  Related legislation  : AB 1362 (Levine), which was approved by  
          this committee on an 8 to 3 vote in 2005, mandated the  
          acceleration of the RPS to 20% by 2010. AB 1362 is on the Senate  
          Inactive File. 

          AB 1585 (Blakeslee & Levine), which passed this committee on an  
                                                 11 to 0 vote in 2005, requires the CEC to study the feasibility  
          of attaining a 33 percent RPS standard. AB 1585 was signed by  
          the Governor, however it contained language to make its  
          enactment contingent on the enactment of SB 107.

          AB 2189 (Blakeslee), which was approved by this committee in  
          April on an 11 to 0 vote, provides that a small hydroelectric  
          generation facility shall not lose its eligibility as a  
          renewable energy resource even if efficiency improvements  
          increase the facility's capacity to greater than 30 megawatts.  
          AB 2189 is pending action on the Senate Floor. 

           
          
           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          Pacific Gas & Electric (PG&E) (with amendments)
          Southern California Edison (SCE) (with amendments)

           Opposition 

           None on file.









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           Analysis Prepared by  :    Edward Randolph / U. & C. / (916)  
          319-2083