BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 1036
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          SENATE THIRD READING
          SB 1036 (Perata)
          As Amended July 12, 2007
          2/3 vote

           SENATE VOTE  :22-13  
           
           UTILITIES & COMMERCE           7-3                  NATURAL  
          RESOURCES           6-3         
           
           -------------------------------------------------------------------------------------- 
          |Ayes:|Levine, Bass, Davis,      |Ayes:|Hancock, Brownley, Fuentes,                    |
          |     |Dymally, Huffman, Jones,  |     |Laird, Saldana, Wolk                           |
          |     |Krekorian                 |     |                                               |
          |     |                          |     |                                               |
          |-----+--------------------------+-----+-----------------------------------------------|
          |Nays:|Keene, Smyth, Tran        |Nays:|Fuller, Aghazarian, Keene                      |
          |     |                          |     |                                               |
           -------------------------------------------------------------------------------------- 
           APPROPRIATIONS      12-5                                        
           
           -------------------------------- 
          |Ayes:|Leno, Caballero, Davis,   |
          |     |DeSaulnier, Huffman,      |
          |     |Karnette, Krekorian, Lieu |
          |     |Ma, Nava, Solorio, De     |
          |     |Leon                      |
          |     |                          |
          |-----+--------------------------|
          |Nays:|Walters, Emmerson, La     |
          |     |Malfa, Nakanishi, Sharon  |
          |     |Runner                    |
          |     |                          |
           -------------------------------- 
           SUMMARY  :  Deletes the authority for the California Energy  
          Commission (CEC) to award Supplemental Energy Payments (SEPs)  
          for the above-market cost of renewable power and instead  
          authorizes the California Public Utilities Commission (PUC) to  
          allow the investor-owned utilities (IOUs) to pay renewable  
          developers for above-market costs as approved by PUC with a cap  
          on the total amount of above-market costs an IOU must pay set at  
          a level equal to the maximum SEP payments that would have been  
          allowed for each investor-owned utility.  Specifically,  this  
          bill  : 








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          1)Deletes provisions allowing the CEC to award 51.1% ($64.5  
            million) of Public Goods Charge Funds (PGCs) deposited in the  
            New Renewable Resources Account to fund SEPs for the  
            above-market costs of renewable generators who bid into a  
            retail seller of electricity's RPS solicitations.

          2)Requires CEC to transfer all funds currently in the New  
            Renewable Resources Account that could have been allocated as  
            SEPs back to the ratepayers of the investor owned utilities. 

          3)Eliminates the authority of PUC to collect $64.5 million  
            annually from IOU ratepayers to fund renewable resource  
            projects. This is the amount of funds that were allocated to  
            fund SEPs.

          4)Provides that PUC shall establish a cap on the total amount of  
            money each IOU ratepayers could be required to pay for above  
            market-costs of renewable electricity.  The cap will be equal  
            to the amount of funds each IOU would have transferred to the  
            CEC to fund SEPs out of the New Renewable Resources Account.  
            (Roughly $600 million through 2012)

          5)Provides that the if above-market costs of an IOU's renewable  
            solicitations to meet its RPS obligations exceeds the cost  
            caps, IOU shall be allowed to limit its renewable procurement  
            to the  amount of renewable electricity that can be purchased  
            at or below the cost cap. 

           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  
            2010.

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








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            using that technology. 

          3)Allows CEC to award SEPs to generators of eligible renewable  
            resources to cover above-market costs of renewable energy.   
            Once SEP funding is exhausted, they are no longer required to  
            purchase additional renewable energy at above-market prices.  
            Funding for the SEPs comes from an existing surcharge on  
            electric bills which is designated for developing new in-state  
            renewable electricity generation facilities.

           FISCAL EFFECT  :  PUC would incur minor ongoing special fund costs  
          for one-half position to implement the above market cost  
          recovery.  The CEC would incur one-time minor absorbable  
          administrative costs. The CEC indicates that about $400 million  
          estimated to be in the  New Renewable Resources Account as of  
          March 2008 will transferred to the IOUs for the benefit of  
          ratepayers.

           COMMENTS  :   Under California's renewal portfolio standard (RPS),  
          all retail sellers of electricity 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, 2010.  To ensure that IOU ratepayers are not  
          saddled with unlimited above-market costs, RPS requires PUC to  
          determine the market price for electricity (known as the Market  
          Price Referent or MPR) and then provides that IOU are only  
          required to pay the renewable generators the contract costs that  
          do not exceed MPR.  RPS also allows new renewable energy  
          providers to apply to CEC for SEPs to cover any costs above MPR.  
           RPS requires IOUs, and certain other retail energy providers,  
          to buy renewable electricity only to the extent PGC funds are  
          available to pay for SEPs.  If no PGC funds are available, the  
          retail energy providers are not required to purchase additional  
          renewable power.

          Since 2004, IOUs have issued three 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 IOUs signing a number of contracts for renewable  
          power. To date all most all approved 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 a significant amount of SEPs  
          will be needed for contracts that will be approved this year and  








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          next. 

          Since there have been no requests for SEPs prior to last year  
          date the system of awarding SEPs was not tested. However,  
          starting last year, renewable developers began to express  
          concerns that the mechanism for funding above market costs was  
          making it impossible for them to get project financing.  The  
          first part of the problem is the fact that the current SEP  
          system requires reasonableness reviews of all contracts by two  
          separate agencies. The contracts must first be approved as  
          reasonable by PUC, then if the developer wants to apply for SEPs  
          CEC can review the reasonableness of the contact a second time,  
          and may deny SEPs even if PUC determined the contract was  
          reasonable.

          The second problem is that since the funds for above-market  
          costs are held in a state account for which the Legislature has  
          the authority to change the expenditure requirements at any  
          time, financial institutions do not view that funding source as  
          reliable enough to issue low-cost loans against. Thus projects  
          that could exceed MPR may not be able to get the financing they  
          need. 

          This bill attempts to resolve these problems by eliminating SEP  
          provisions entirely. The bill then provides that IOU will pay  
          the entire costs of renewable contracts that are deemed  
          reasonable, including the above market costs. PUC would use  
          current practices it has in place to review renewable contracts  
          for reasonableness, and to make sure the specific contracts are  
          written so they are the least costs and best fit for IOU's  
          needs. 

           Keeping costs in check  :  This bill maintains another goal of the  
          RPS, which was to ensure that the RPS was not a renewable energy  
          at all costs program. SEPs provision in current law that provide  
          that retail electivity sellers are not required to procure  
          renewable electricity above the MPR if there are no funds  
          available for SEPs acts as a de facto cost cap since there is a  
          limited amount of funding allocated to SEPs accounts. This bill  
          leaves that same cost cap in place by imposing a direct cost cap  
          on renewable procurement that equals the amount of funds the  
          IOUs would have been obligated to collect for SEPs. 

          Additionally, this bill provides that the money that has already  








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          been collected and held by CEC to fund SEPs shall be returned to  
          the benefit of the ratepayers since that money will no longer be  
          need to cover any above market costs associated with RPS.


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


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