BILL ANALYSIS                                                                                                                                                                                                    




                                                                  SB 1368
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          Date of Hearing:   June 26, 2006

                    ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
                               Lloyd E. Levine, Chair
             SB 1368 (Perata) - As Proposed to be Amended:  June 26, 2006

           SENATE VOTE  :   21-13
           
          SUBJECT  :   Electricity: emissions of greenhouse gases.

           SUMMARY  :   Creates a Greenhouse Gas (GHG) performance standard  
          for baseload generation.  Specifically,  this bill  :   

          1)Makes legislative findings concerning the adverse consequences  
            of global warming, the historic context of California's  
            promotion of energy efficiency, conservation, and renewable  
            energy resources; and the necessity for reducing emissions of  
            greenhouse gases with respect to both electricity consumption  
            and production, including establishing performance standards  
            for procurement of electricity by load serving entities.

          2)Provides various definitions, including: "load serving entity"  
            which refers to every electrical corporation, community choice  
            aggregator, electric service provider, and local publicly  
            owned electric utility serving end-use customers in  
            California; and, "long-term financial commitment" which means  
            either a new ownership investment in baseload generation or a  
            new or renewed contract with a term of five or more years,  
            which includes procurement of baseload generation.

          3)Prohibits a load serving entity from entering into a long-term  
            financial commitment unless any baseload generation supplied  
            under the long-term financial commitment complies with a  
            greenhouse gases emission performance standard, to be  
            established by the California Energy Commission (CEC).

          4)Prohibits the California Public Utilities Commission (PUC)  
            from approving a long-term financial commitment by an  
            electrical corporation, unless any baseload generation  
            supplied under the long-term commitment complies with the GHG  
            emission performance standards established by the CEC.

          5)Authorizes the PUC to review any proposal for a long-term  
            financial commitment by an electric service provider (ESP) or  
            a community choice aggregator, in order to enforce the  









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            requirements relating to GHG emission performance standards.

          6)Requires the PUC to adopt rules to enforce GHG emission  
            performance standards for electrical corporations, electric  
            service providers, and community choice aggregators and to  
            adopt procedures to verify the emissions of greenhouse gases  
            from any baseload generation supplied under a contract subject  
            to the GHG emission performance standard in order to ensure  
            compliance.

          7)Authorizes the CEC to adopt regulations to enforce this act  
            with respect to a local publicly owned electric utility.  The  
            CEC is also authorized to apply the procedures for verifying  
            emissions of GHG from baseload generation to ensure compliance  
            by publicly owned electric utilities with GHG emission  
            performance standards.

          8)Requires the CEC, in consultation with the Independent System  
            Operator and the California Air Resources Board (CARB), to  
            establish a GHG emission performance standard for all baseload  
            generation at an emission rate of GHG that is not higher than  
            the emission rate of GHG for combined-cycle natural gas  
            baseload generation. 

          9)Requires the CEC to establish an output-based methodology to  
            ensure that the calculation of GHG emission for cogeneration  
            plants recognizes the total usable energy output and includes  
            all greenhouse gases emitted by the facility in the production  
            of both electrical and thermal energy. 

          10)  Requires the CEC, in calculating GHG emissions of biomass  
            facilities, to consider net emissions from the process of  
            growing, processing and generating the electricity from the  
            biomass feedstock. 

          11)  States that carbon dioxide captured from a power plant  
            shall not be considered to have been emitted from such power  
            plant if it is permanently disposed of in geological  
            formations in compliance with applicable regulations. 

          12)  Requires the CEC to consider the effects of the standard on  
            system reliability and overall costs to electricity customers.

          13)  Requires the CEC to re-evaluate the GHG gas emission  
            standard when and if an enforceable  greenhouse gas emission  









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            limit applying to the electricity sector is established and in  
            operation. 

           EXISTING LAW  :

          1)Requires the Secretary of the Resources Agency to establish a  
            non-profit public benefit corporation, known as the California  
            Climate Action Registry (Registry) to administer a voluntary  
            greenhouse gases (GHG) emissions registry.  The legislation  
            required the California Energy Commission (CEC) to qualify  
            third-party organizations to provide certification services  
            and technical assistance to Registry participants.  The CEC is  
            required to provide technical guidance to the Registry on  
            protocol development.  The CEC is required to periodically  
            update the state's inventory of GHG emissions and serve as an  
            information clearinghouse for information on climate change  
            issues.  SB 1771 (Chapter 1018, Statutes of 2000.)

          2)Requires the Registry to develop and adopt protocols to report  
            and certify forestry sector projects and entity-wide GHG  
            emissions inventories.  The intent of the bill is to foster  
            carbon sequestration and other co-benefits in California's  
            forests through sustainable forest management practices.  SB  
            812 (Chapter 423, Statutes of 2002.)


          3)Requires the California Air Resources Board (CARB) to adopt  
            regulations to reduce the emissions of greenhouse gases from  
            motor vehicles, starting with the 2009 model year.  The  
            regulations would take effect no sooner than January 1, 2006.   
            The CARB adopted regulations in 2004, but these regulations  
            are currently the subject of legal challenges in both federal  
            and state courts.  AB 1493 (Chapter 200, Statutes of 2002.)

           FISCAL EFFECT  :   Unknown.

           COMMENTS  :   The purpose of this bill is to prevent long-term  
          investments in power plants with GHG emissions in excess of  
          those produced by a combined-cycle natural gas power plant.  

          1)  Is it just me or is it hot in here?  : The terms "global  
          warming" and "global climate change" refer to  the rise in the  
          average temperature of the earth's climate due  to an  
          accumulation of "greenhouse gases" in the atmosphere.  GHGs  
          include carbon dioxide (CO2), methane, nitrous oxide,  









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          hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride.

          According to a 2002 CEC inventory of GHG emissions, current  
          research has largely supported earlier scientific findings that  
          GHG emissions from human activities have been steadily  
          increasing since the industrial revolution. <1>  In addition,  
          the United Nations-sanctioned technical body, the  
          Intergovernmental Panel on Climate Change, reported in 1999:   
          "There is new and stronger evidence that most of the warming  
          observed over the last 50 years is attributable to human  
          activities."

          California uses fossil fuels differently than the United States  
          as a whole.  Compared to most other states, California uses less  
          fossil energy to generate electricity.  Close to 40% of  
          California's instate electricity generation comes from non-GHG  
          emitting sources, including hydroelectric, nuclear, and  
          renewable resources.  The predominant fossil fuel for  
          electricity generation in California is natural gas, which emits  
          less GHG than oil or coal, which is the predominant fuel in many  
          other parts of the country. 

          The Governor announced ambitious goals and schedules for  
          reducing GHG emissions in an Executive Order last year.  The  
          strategy for achieving these goals is expected to rely heavily  
          on achieving reductions in the utility sector, primarily  
          electric generation.  In its 2005 Integrated Energy Policy  
          Report, the CEC recommended setting a GHG standard for utility  
          procurement at level no higher than emission levels from new  
          combined-cycle natural gas turbines.  

          The PUC has already begun the process of introducing GHG factors  
          into utility procurement and place a cap on utility GHG  
          emissions.  The PUC directed the IOUs to employ a GHG adder when  
          evaluating fossil and renewable bids for long-term procurement.   
          The GHG adder requires the utilities to account for the  
          financial risk associated with GHG emissions when evaluating  
          fossil fuel generation bids. The GHG value is to be calculate on  
          top of the actual prices of bids to help develop a more accurate  
          price comparison between and among fossil, renewable and  
          demand-side bids. The GHG adder is an analytical tool only, and  
          does represent a price that is actually paid to generators or  
          charged to ratepayers. The effect of the adder is to potentially  


          ---------------------------
          <1> Inventory of California  Greenhouse Gas Emissions and Sinks:  
          1990-1999








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          change which bids and resources are selected.

          On October 6, 2005, the PUC issued a Policy Statement on  
          Greenhouse Gas Performance Standards.  The Policy Statement  
          directs staff to investigate adoption by the PUC of a greenhouse  
          gas emissions performance standard for IOU procurement that is  
          no higher than the GHG emissions levels of a combined-cycle  
          natural gas turbine for all procurement contracts that exceed  
          three years in length and for all new IOU-owned generation.  In  
          effect, Senate Bill 1368 and the PUC Policy Statement mirror  
          each other.  

          In February, 2006, the PUC stated its intent to develop a  
          load-based cap on GHG emissions for the IOUs and non-utility  
          load serving entities (LSEs) that is compatible with other GHG  
          cap-and-trade regimes that may be developed in the future,  
          either in the Western Region, nationally, or internationally.   
          As such, the GHG emissions allowances associated with the PUC's  
          load-based cap will be in the form of "tons of carbon-dioxide  
          equivalent."  

          2)  What is a long-term contract  : This bill currently applies to  
          all contracts for baseload power that are at least five years in  
          length. The PUC's procurement planning process currently defines  
          "long-term" as five years or longer.  Under PUC rules, long-term  
          contracts require PUC approval.  The IOU's currently plan their  
          procurement activities based on this five-year period.  The PUC  
          resource adequacy rules require IOUs to have almost all of the  
          forecasted demand contracted for at least a year in advance.  
          This means they make very few purchases on the spot market. Most  
          utilities do have numerous contracts for terms shorter than 5  
          years.  These contracts would not be subject to this bill.  

          3)  What is baseload  : The bill currently only applies to  
          contracts for baseload power. Baseload power is defined as  
          electricity generation from a power plant that is designed to  
          provide electricity at least 60 percent of the total hours in a  
          year (a 60% capacity factor). Baseload power contracts are for  
          power that is intended to be operating to meet demand night and  
          day and throughout the year. This is different from peak power,  
          which is intended to be available only at those times of the day  
          and year when demand spikes. Baseload power generally comes from  
          more efficient power plants and tends to be cleaner and cheaper  
          than peak power. 










                                                                  SB 1368
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           Opponents Concerns  : Several opponents of the bill are concerned  
          that the bill will result in most utilities only purchasing  
          short-term contracts or relying on the spot market for power  
          purchases. This argument is based on a belief that most  
          utilities will want to avoid the requirements of the bill and  
          can do so by signing contracts of less than 5 years. It is  
          unclear why utilities would wish to avoid the requirement of the  
          bill if it is enacted, given the fact that most of the energy  
          consumed in California today already meets this standard.   
          Additionally, the PUC's long-term procurement plans will require  
          utilities to make long-term electricity procurement decisions so  
          they will not be able to enter into many short-term contracts or  
          rely on the spot market simply to avoid the GHG standards. 

          Some opponents have also argued that this bill will eliminate  
          one of the cheapest sources of electricity in the United States,  
          coal. Today, coal represents only 20% of California electricity  
          portfolio, and that number will likely decline as California  
          meets an increasing amount of its electricity demand through  
          renewable resources and energy efficiency. Supporters of coal  
          believe that "new clean coal technology is being developed to  
          burn coal more efficiency" and thus should not be excluded from  
          California's electricity portfolio. The bill however, does not  
          prohibit the use of any fuel source, including coal, provided it  
          is designed to have the same emission as natural gas. If new  
          technologies do in fact result in low coal emissions, this power  
          can be used under the provisions of the bill. 

          The opposition is concerned that upwards of 45% of California's  
          current generation would not meet the standards of this bill and  
          would be forced to shut down. This number is somewhat suspect  
          since 43% of California's electricity, by definition, today  
          comes from resources that produce little or no GHGs (hydro,  
          nuclear, and renewable) and many of the existing natural gas  
          plants meet the standard set by this bill. Additionally, many of  
          the facilities citied by the opponents as being non-compliance,  
          are not used to meet baseload power today and thus not subject  
          to the requirements of this bill, are scheduled to be repowered,  
          or are scheduled to be taken off line in the near future.  

          Additionally, some parties have specific process concerns with  
          the bill. Some of the IOUs believe that the PUC and not the CEC  
          should set the rules this bill requires and they believe that  
          the regulatory agency, and not the Legislature, should set  
          performance standard they must meet. 









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          One final concern is that this bill requires the CEC to  
          implement some of the standards in a new proceeding while the  
          PUC has already begun a proceeding to set GHG portfolio emission  
          standards. The PUC is expected to issue a decision in its  
          proceeding in December of this year. This bill would require the  
          CEC to start a new process that the PUC may be close to  
          completing.  


           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          American Lung Association
          California Coastal Protection Network
          California League of Conservation Voters
          Calpine (as proposed to be amended)
          Clean Power Campaign
          Coalition for Clean Air
          Environment California
          Environmental Defense
          Environmental Entrepreneurs (E2)
          Natural Resources Defense Council (NRDC)
          Pacific Gas and Electric (PG&E) (if amended)
          Planning and Conservation League (PCL)
          Sierra Club California
          TURN
          Union of Concerned Scientists
           
            Opposition 
           
          California Municipal Utilities Association (CMUA)
          Center for Energy and Economic Development (CEED)
          Sempra Energy
          Sustainable Environment & Economy for California
          Western States Petroleum Association (WSPA)

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