BILL ANALYSIS                                                                                                                                                                                                              1
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                SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
                                 ALEX PADILLA, CHAIR
          

          AB 1106 -  Fuentes/Ruskin                              Hearing  
          Date:  July 7, 2009             A
          As Amended:         June 25, 2009            FISCAL       B

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                                      DESCRIPTION
           
           Current law  requires the state's investor-owned utilities (IOUs)  
          to increase procurement from renewable energy resources until  
          they reach 20% by 2010. To achieve that goal, the IOUs rely on a  
          competitive wholesale market for generation and issue annual  
          solicitations for renewable energy. Renewable energy may also be  
          procured through bilateral and standardized contracts.

           Current law  establishes the California Solar Initiative, which  
          provides $3.2 billion in ratepayer-funded incentives to  
          encourage the deployment of solar photovoltaic (PV) panels. 

           Current law  requires all electrical corporations to develop a  
          standard tariff (aka feed-in-tariff or FIT) for all retail  
          customers to compensate those customers for excess renewable  
          energy produced up to a maximum of 1.5 megawatts (MW). Statewide  
          participation is capped at 500 MW and the price paid is the  
          market price referent. 

           This bill  sunsets the current FIT program on June 30, 2011. 

           This bill  requires the CPUC to adopt FIT rate structures and  
          approve related standard offer contracts for eight specified  
          renewable resources by June 1, 2011.  There would be 16 total  
          tariffs and contracts - two for each specified renewable  
          technology at tier one, for facilities sized up to five MW and  
          tier two, for facilities sized five to ten MW.  

           This bill  permits the CPUC to develop tariffs and contracts for  
          any other eligible renewable energy resource that the CPUC finds  











          "holds promise" for meeting RPS goals.

           This bill  specifies that tier one tariffs and contracts be set  
          at the reasonable cost of production plus a reasonable profit,  
          but capped at $0.30 per kilowatt-hour, for a fixed period of 25  
          years.

           This bill  specifies that tier two tariffs and contracts would be  
          priced at the total benefit of the electricity to ratepayers, on  
          a time of delivery basis, and any other renewable attributes for  
          a period of 10, 15, or 20 years at a fixed price.

           Current law  requires the state's investor owned utilities  
          (IOUs), publicly owned utilities (POUs) (except the Los Angeles  
          Department of Water and Power), and any other entity offering  
          retail electric service, to credit all electricity generated by  
          a customer-owned solar or wind system against the customer's  
          usage of electricity sold by the utility, on a kilowatt hour  
          basis, a procedure known as "net energy metering" (NEM).   
          Participation by all utilities is capped at 2.5 percent of each  
          utility's aggregate peak electricity demand.

           This bill  permits the CPUC to cap participation in the tariffs  
          and contracts required by this bill if the CPUC finds that a  
          reduced capacity limitation is necessary to maintain system  
          reliability with the territory of an IOU.

                                      BACKGROUND
           
           What is a feed-in-tariff?  - A FIT is a rate structure that  
          provides a simple, comprehensible, transparent mechanism for  
          electricity generators to sell power to a utility at predefined  
          terms and conditions (standardized contract), without contract  
          negotiations. For the IOUs, the FIT operates as a "must-take"  
          contract in its portfolio. If the participant generates the  
          power, the IOU must take it.  Under current law small renewable  
          generator FITs are available to customers of the three largest  
          IOUs and provide a 10, 15, or 20-year fixed-price,  
          non-negotiable contract for systems sized up to 1.5 MW.

          The FIT option is distinct from NEM and direct financial  
          incentives offered to customers to generate electricity onsite  
          to offset their own electrical load. Under the CSI and the  
          Self-Generation Incentive Program, customers are offered upfront  










          incentives to install solar, wind, and fuel cell generating  
          capacity that can offset their customer load. 
           
           Net Energy Metering  - The primary benefit of the CSI program is  
          derived from the solar customer's eligibility for NEM which is  
          authorized under state law separately from the CSI program.  
          Utility customers that generate power from a wind or solar  
          system are eligible for NEM under which the electricity  
          purchases of the customer are netted against the electricity  
          generated by the customer's own solar or wind electric system.   
          The full retail price of electricity includes the utility's cost  
          of generating, distributing and transmitting the power, public  
          goods programs (e.g. energy efficiency), low-income customer  
          assistance (e.g. CARE), energy crisis costs and other charges  
          not related to generation. 

                                       COMMENTS
           
              1.   Need for Renewable Generation  - The author notes that  
               "California is not on track to meet its renewable energy  
               goal of 20 percent by 2010.  It is clear that a new policy  
               framework will be necessary to achieve the expanded goal of  
               33 percent by 2020.  A number of market barriers exist to  
               meeting the current RPS, including permitting and siting  
               challenges, transmission availability, timing, and cost  
               allocation, development risks, including securing site  
               control and obtaining financing and complexity of the RPS  
               solicitation processes."  He further states that  
               "California is missing opportunities to expand the use of  
               solar energy because excellent sites with space and  
               interest in installing solar energy equipment cannot use  
               solar because they cannot participate in either the CSI  
               incentive program or the RPS solicitation program." 

               Supporters of FITs believe they can be an effective way to  
               promote the development of new renewable resources by  
               guaranteeing the developer a set price for their generation  
               at standard contract terms and eliminate the need for the  
               generators to negotiate with the utility.  They state that  
               FITs have been credited for the rapid deployment of wind  
               and solar energy in Germany and Spain. The European feed-in  
               tariffs have set the rate paid to the generator based on  
               the cost of each renewable technology plus a reasonable  
               profit for the generator. The rate meant there was little  










               risk on the developer for bringing new renewable generation  
               on line. The prices paid to renewable generation in Germany  
               and Spain have exceeded the price terms of renewable  
               contracts in California.

              2.   Competitive Procurement vs. Fixed Price  - Since the  
               restructuring of the electricity industry in California,  
               the CPUC has relied on a "competitive market first"  
               approach for the procurement of electricity.  The IOUs  
               develop an annual procurement plan which includes plans  
               under which the IOUs solicit bids for electricity  
               deliveries.  The underlying premise of wholesale  
               competitive procurement is that ratepayers benefit as a  
               result of lower cost electricity deliveries.  Competitive  
               procurement also underlies the RPS program which requires  
               IOUs to establish a competitive process to select renewable  
               contracts based on least cost and best fit.  Competitive  
               markets are generally thought to benefit ratepayers by  
               using competitive pressures to lower total costs.  

               In contrast FITs use administrative processes to set a  
               fixed price for the purchase of electricity by the IOU, the  
               price of which does not benefit from competition.  Although  
               a FIT may result in lower transaction costs to renewable  
               developers, it is not clear that it will result in the best  
               price for renewable electricity deliveries for ratepayers.   
               It is difficult if not impossible to set the right price  
               for a FIT.  If the FIT price is too high the FIT results in  
               a gold rush for renewable developers at the expense of  
               ratepayers who will overpay; if the FIT price is too low  
               the FIT will not attract new investment.  What is the  
               chance that a regulatory agency can set just the right  
               price which will protect ratepayers and bring new projects  
               online?

               Additionally under a FIT structure the utility generally  
               has no control over where power is built, whether they need  
               it, or whether it is consistent with its renewable  
               procurement plan.  This is particularly critical for  
               renewable resources, some of which (e.g. solar and wind) do  
               not provide base load power but are intermittent and must  
               be firmed and shaped by the IOU or ISO.  This bill does not  
               address these issues.











              3.   FIT Cost Structure  - This bill proposes 16 separate  
               tariffs.  Two for each of eight technologies with two  
               separate rate structures - tier one for projects at one to  
               five MW and tier two for projects sized at five to ten MW.   
               Tier one pricing is directed to be the cost of each  
               technology plus profit to the developer.  Total costs would  
               be capped at $0.30 per kWh.  This provision looks much like  
               renewables at any cost.  Whatever the cost of the  
               technology, IOUs would be required to purchase the  
               generation at unlimited quantities for a minimum of two  
               years until the CPUC could revisit the tariff.  Competition  
               between and among the different renewable technologies is  
               completely eliminated.

               Tier two does acknowledge the value of the electricity to  
               ratepayers in the pricing structure but is still a vague  
               standard with no comparison basis - the value of the  
               electricity to ratepayers in comparison to what?

               In the 1980s California authorized a FIT then called the  
               Interim Standard Offer 4 (ISO4). According to SDG&E the  
               ISO4 had "high guaranteed prices and the CPUC was forced to  
               suspend it less than a year later because the prices the  
               commission had assumed would be reasonable were not."

              4.   Net Energy Metering Impacts  - Instead of taking a  
               standardized contract under the tier one FIT, an eligible  
               resource would be permitted to take service under any one  
               of several NEM programs.  Most likely is the NEM for solar  
               and wind which provides credit for generation at the full  
               retail rate of electricity.  The effect of this provision  
               would be that a large electricity user (up to five MW)  
               could install, for instance, a large solar farm, and be  
               eligible for full retail NEM. 

               The current NEM program for solar and wind is capped.  It  
               is targeted to support CSI installations which are limited  
               to one MW.  Statewide NEM is limited to 2.5 percent of the  
               IOU's peak load.<1>  This bill would place pressures on the  
               NEM cap which would jeopardize CSI program participation.   
               Significant concern has been expressed about raising the  
               NEM cap to a level beyond that needed to fully support CSI  
               -------------------------
          <1> To support all budgeted CSI installations an NEM cap of five  
          percent would be needed.









               installations until a time when the NEM program can be  
               fully evaluated.  This bill potentially squeezes out CSI  
               customers.

              5.   Eligible Technologies  - Eight renewable technologies are  
               specified as eligible in this bill.  They are also  
               specified in the RPS program.  Since the FIT in this bill  
               is designed to help the IOUs meet their RPS obligations,  
               this bill should cross-reference eligibility to the RPS  
               program as provided for in Public Resources Code Section  
               25741.  To date only the Legislature has specified eligible  
               RPS technologies.  However, this bill gives broad authority  
               to the CPUC to add additional technologies that it finds  
               "hold promise" to contributing to the RPS program.  This  
               provision is not consistent with current law which places  
               clear responsibility in the hands of the Legislature to  
               specify technologies eligible for the RPS program.   
               Moreover ratepayer funds should be used to support  
               renewable technologies that can deliver, not technologies  
               that merely "hold promise." 

              6.   But Germany Does It  - California policy makers involved  
               in the RPS program have been extensively lobbied by  
               advocates of a strong FIT to increase renewable generation  
               in California.  In fact Germany has brought a great deal of  
               PV generation onto its grid and other renewable  
               technologies as a result of the FIT.  But what is rarely  
               discussed is the cost paid for those resources which is  
               exorbitant.  Rates for solar PV range from $0.47 to $0.62 a  
               kilowatt hour (kWh).  In comparison, contracts for  
               renewable resources in California's RPS program are running  
               between $0.08 to $0.15 kWh.  In 2008 Germany generated 14.4  
               percent of its electricity from renewable resources.  Not  
               including the POUs, at the end of 2007, California was at  
               12.7 percent and is anticipated to reach 20 percent by  
               2013.  

               Advocates of a FIT argue that a FIT is warranted because of  
               the challenges of siting renewable generation and that  
               California will fail to meet its RPS goal of 20 percent by  
               2010.  However, it is critical to note that the original  
               RPS goal was established in 2002 and set a timeline of  
               2017.  In 2006 that date was moved up ten years to 2010.   
               It is not at all clear that the 2010 deadline was  










               achievable when it was set.

               It appears that Germany's only renewable generation program  
               is a FIT.  They do not have a CSI program, a 30 percent  
               federal tax credit, or an RPS mandate which have been  
               California's chosen means for greening the grid.   
               California's RPS program is fundamentally different from a  
               FIT since it relies on a competitive wholesale market in  
               which developers bid to deliver renewables. 

               Advocates are correct that small-scale renewable facilities  
               can reduce transmission requirements and, when properly  
               located, assist with reliability on the distribution grid.  
               They further point to a lack of renewable facilities at one  
               to five MW capacities as a necessity for a FIT. This latter  
               argument is hollow since there is no technical difference  
               between an electron from a one to five MW generator or a  
               500 MW generator.

              7.   Federal Power Act  - It is not clear that individual  
               states have the power to establish FITs at anything more  
               than the avoided cost of electricity.  The Federal Power  
               Act grants the Federal Energy Regulatory Commission  
               jurisdiction over wholesale electric sales in interstate  
               commerce, including sales made entirely intrastate and  
               sales delivered locally to a distribution system.  The CPUC  
               can set rates but the rate at which a utility must purchase  
               power from a facility must be:

                  a)        "just and reasonable" to consumers,
                  b)        be in the public interest, 
                  c)        not discriminate against the facility, and
                  d)        not exceed the purchaser's incremental  
                    alternative cost.

               The tier one rate structure specified in this bill is  
               solely related to the cost of the generation and profit to  
               the developer which bear no relation to the FERC  
               requirements.  The tier two structure is questionable.  The  
               IOUs and ratepayer groups also question the ability of the  
               Legislature, CEC or CPUC to set a wholesale rate for the  
               sale of electricity under federal law at a level as high as  
               this bill proposes.  











               The Attorney General has submitted an opinion on the  
               interplay of the Federal Power Act on a FIT rate and opined  
               that a rate could be set.  However, the A.G. did not review  
               the tariff provisions specified in this bill.

              1.   Committee Acted Earlier this Year  - Earlier this year  
               this committee approved SB 32 (Negrete McLeod) to expand  
               the current FIT from 1.5 MW to three.  An expanded pricing  
               mechanism is also established at the MPR plus renewable  
               attributes and locational value.  Amendments in the Senate  
               Appropriations Committee required all costs of the FIT to  
               be under the RPS cost cap and prohibit the CPUC from  
               developing any other FIT program.  This bill is set for  
               hearing in the Assembly Utilities and Communications  
               Committee on July 6th.

              2.   CPUC Rulemaking Underway  - The CPUC is considering  
               whether or not the project size eligible for its current  
               FIT should be increased from 1.5 MW to 20 MW.<2>  Among the  
               critical issues to be evaluated is the pricing structure.   
               The CPUC is exploring a tariff structure which would  
               provide standardized contracts to lower transaction costs  
               but overlay the tariff with a competitive element.

              3.   Technical Amendment  - Author intends to amend the bill  
               on page 8, line 33, strike "thirty dollars ($30)" and  
               insert "$0.30."

                                    ASSEMBLY VOTES
           
          Assembly Floor                     (50-26)*
          Assembly Appropriations Committee  (12-5)*
          Assembly Natural Resources Committee                            
          (6-3)*
          Assembly Utilities and Commerce Committee                       
          (10-4)*
          *Votes on prior version of the bill.
                                           
                                      POSITIONS
                             ---------------------------
          <2> Current law caps the program at 1.5 MW; there is no clear  
          authority for the CPUC to expand the program to 20 MW.  SB 32  
          (Negrete McLeod) expands the program to 3 MW and clearly  
          specifies that the CPUC has no authority to expand the program  
          further.









           
           Sponsor:
           
          Author

           Support:
           
          Applied Materials
          California Public Utilities Commission (if amended)
          RightCycle (if amended)
          The Vote Solar Initiative (if amended)
          Union of Concerned Scientists (if amended)
          One Individual

           Oppose:
           
          Pacific Gas and Electric Company
          Sempra Energy
          Southern California Edison Company (unless amended)
          The Utility Reform Network


          Kellie Smith 
          AB 1106 Analysis
          Hearing Date:  July 7, 2009