BILL ANALYSIS SB 1036 Page 1 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 : SB 1036 Page 2 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 SB 1036 Page 3 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 SB 1036 Page 4 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 SB 1036 Page 5 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 FN: 0002932