BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: AB 723 HEARING: 6/29/11 AUTHOR: Bradford FISCAL: Yes VERSION: 6/20/11 TAX LEVY: No CONSULTANT: Grinnell PUBLIC BENEFITS CHARGE Extends the public benefits charge until 2020; revises energy efficiency programs. Background and Existing Law In 1996, the Legislature dismantled the traditional model for providing electricity by requiring previously vertically integrated utility monopolies to sell their electricity generation, turn over control of its distribution systems to an independent operator and board, and allow wholesale and retail competition under specified rules and timelines (AB 1890, Brulte). At the time, Legislators were concerned that the state's three investor owned utilities (IOUs), Pacific Gas & Electric, Southern California Edison, and San Diego Gas& Electric, would not invest in public interest research, because research generally adds costs that reduces profit, and if they did, the utilities would treat any research breakthroughs as proprietary. Additionally, the Legislature wanted to promote energy efficiency and renewable energy resources as substitutes to fossil fuel-generated electricity. AB 1890 first established a public goods charge from January 1, 1998 until December 31, 2001. All ratepayers within an IOU's service territory pay the public goods charge based on the amount of energy they consume. The bill directed the California Energy Commission (CEC) to allocate revenues from the public goods charge for: Cost-effective energy efficiency and conservation activities Public interest research (PIER) and development not adequately provided by competitive and regulated markets In-state operation of development of existing and new renewable energy resources. AB 723 -- 6/20/11 -- Page 2 Benefits for low-income consumers, although this program was not subject to the sunset. In 1997, the Legislature created the Renewable Resources Trust Fund (RRTF), where the utilities deposited that share of the public goods charge revenues for renewable resources (SB 90, Sher). Initially intended to last for only five years, SB 90 codified a CEC report divided up AB 1890's $540 million in the following ways: $54 million for the Emerging Renewables Program, which provided rebates to consumers who install renewable resources at home or at their business. $162 million for the New Renewable Resources Account, which allocated production incentives for new renewable energy systems placed in service between 1996 and 2002. $81 million for consumer side, initially including credits to renewable energy generators to allocate to its customers, although the Legislature ended that allocation (SB 1250, Perata, 2006). Today, this account principally pays to educate consumers about renewable energy, and now uses $1 million per year. SB 90 also directed the allocation of $243 million of the public goods charge revenues to pay for energy from existing renewable resources. The bill grouped renewable sources into three tiers based on the difference between the current market price for that source of electricity, and the target price CEC thought would make that resource competitive. SB 90 wasn't specific about allocating the public interest research funds, instead directing CEC to convene a panel of experts to recommend public interest research allocations. In 2000, the Legislature extended the public benefits charge until 2012 (AB 995, Wright and SB 1194, Sher). The bills set funding amounts for the utilities to collect by applying the public benefits charge from 2002 to 2012, but only authorized the CEC and CPUC to spend funds until 2007. The measures directed CEC to develop investment plans for renewable energy and public interest research funding, which the Legislature had to ratify before CEC allocated funds. The bills also transferred the authority to allocate energy efficiency funds to the California Public Utilities Commission (CPUC), which added the proceeds onto funds it already directs IOUs to spend on energy efficiency AB 723 -- 6/20/11 -- Page 3 under its own authority. In 2002, the Legislature blessed CEC and CPUC fund allocations that changed the formulas listed above (SB 1038, Sher). That year, the Legislature also enacted the renewable portfolio standard (RPS) that year, which requires IOUs to purchase a specified percentage of electricity from renewable sources by a certain year (SB 1078, Sher). The Legislature just increased the percentage to 33% by 2020 (SBx1 2, Simitian). In 2005, the Legislature authorized spending public goods charge revenues from 2007 to 2012, but reallocated the funds, substituting its priorities for the CEC's (SB 1250, Perata). The measure also expanded the goals of the PIER program. As amended by SB 1250 and SB 76 (Committee on Budget, 2005), PIER's research priorities now include: Advanced electricity generation Climate change and environment Energy efficiency and demand response strategies Renewable energy Transmission and distribution of power Transportation-related research In 2007, the Legislature changed the funding percentages from the RRTF to send 20% to the Existing Renewable Facilities Program, 79% to the Emerging Renewables Program, and 1% to the Consumer Education Program (SB 1036, Perata). From 1998 to 2006, the Emerging Renewables program provided rebates for persons and businesses to install solar thermal and photovoltaic systems; however, in 2007, CEC reallocated funds to its New Solar Homes Partnership which complements the California Public Utilities Commission's California Solar Initiative, which pays rebates for consumers installing solar energy systems. The Emerging Renewables Program now funds small scale wind programs. The Existing Renewables Program still subsidizes solar thermal and biomass plants. SB 1036 also ended the New Renewable Resources Account, instead granting authority for the CPUC to subsidize above market renewable energy production out of rates. Currently the public goods charge raises $62.5 million for PIER, $65.5 million for renewable energy programs, and $228 million for energy efficiency, adjusted annually at a rate equal to the lesser of the annual growth in electric commodity sales or inflation. AB 723 -- 6/20/11 -- Page 4 Proposed Law Assembly Bill 723 extends the Public Goods Charge until January 1, 2020, leaving in place existing allocations. AB 723 reprograms the energy efficiency program currently implemented by the CPUC. AB 723 states that CPUC shall implement the following elements and principles: The state's investments in cost-effective energy efficiency improvements protect ratepayers and promote reliable electric service. Moneys collected prioritize energy efficiency programs for low and moderate income customers, customers with higher energy usage, and customers in more extreme heating and cooling climates. Ensure that opportunities are made available to all ratepayer classes paying the charge. Establish measurement verification and evaluation criteria. If the commission establishes a risk-reward inventive mechanism, align electrical corporation incentives for administering energy efficiency activities with actual utility accomplishments. The state's investments in cost-effective energy efficiency improvements achieve accountability and transparency by: o Making data publicly available that shows the total installed cost of energy efficiency measures, the amount of expected energy savings, the total amount of incentives provided and their location, the type of measures in each IOU service territory, the processing time for providing incentives, and any type or cause of failure of energy efficiency measures. o Verify energy demand reductions by region and assess progress toward energy efficiency goals, ensure that consumer information is made publicly available to assist customers in finding reliable contractors and energy efficiency measures, to understand the cost and benefit of energy efficiency measures, to understand their energy bills, and to understand the costs and benefits of various means of financing energy efficiency measures. o Make all contract bidding opportunities AB 723 -- 6/20/11 -- Page 5 publicly available, including contracts administered by electrical corporations or third-party administrators, and ensure that small businesses and minority, women, and disabled veteran-owned businesses are considered during the contract bidding process. o Ensure all products of all consultant contracts are made available in a timely manner on the commission's website. The cost-effectiveness of investments in energy efficiency are evaluated consistent with the commission's flexibility when evaluating the cost-effectiveness of measures installed in low-income households, allow projects to reasonably exceed cost limitations for measures installed in low-income neighborhoods, ensure that all energy efficiency programs are designed to account for benefits and costs of the program. That all of the following program design elements are incorporated into the state's investments in cost-effective energy efficiency improvements: o Ensure that program funds are only used to support deployment of energy efficiency measures, training on California health and safety codes and regulations to ensure quality of installation, measurement, and evaluation, cost-effectiveness analyses, and program administration. o Require all energy efficiency measures allowed to participate maximize electricity demand reduction. o Ensure that combined total expenditures for measurement and evaluation, cost-effectiveness, and program administration don't exceed 10% of total funding. o Ensure that third-party entities, including regional government energy management centers, directly administer a reasonable portion of the program. o Include comprehensiveness approaches to maximize energy efficiency, avoid lost opportunities, and overcome implementation barriers. o Utilize rebates, loans, interest rate reductions, or a combination thereof, for the installation of energy efficiency measures. AB 723 -- 6/20/11 -- Page 6 o Incorporate integrated demand side management principles to the maximum extent practicable. o Establish dollar-per-kilowatt limits for individual projects and establish maximum energy efficiency project incentives to ensure that incentives do not exceed more than 30 percent of the installed cost of a specific energy efficiency project, with the commission retaining the authority to periodically reduce the total incentives available in response to reduced installation costs or market response that indicates that the then existing amount of available incentives are no longer needed to encourage use of energy efficiency measures. o Ensure that projects that receive incentives funded pursuant to this article are not also receiving incentives through other ratepayer funded programs. o Evaluate whether to administer programs to raise public awareness, generally, or programs targeted to particular customer groups, to encourage implementation of energy efficiency measures, including behavior changes that reduce energy consumption, provided that the commission ensure that any funds expended for those programs do not significantly reduce the funding available for encouraging the adoption of energy efficiency measures or behavioral changes that reduce energy consumption. o Ensure that moneys collected by an electrical corporation are not expended to provide incentives to customers outside of the service territory of the electrical corporation. That the state's investments in cost-effective energy efficiency improvements coordinate with the state's research, development, and demonstration programs and building code energy efficiency programs by doing both of the following: o Ensure that moneys collected through the nonbypassable system benefits charge to fund energy efficiency not be used to fund research, development, and demonstration or to develop or create amendments to the state building codes. o Coordinate with the Public Interest Research, Development, and Demonstration Program AB 723 -- 6/20/11 -- Page 7 identify specific areas of research or to identify work needed to amend building codes that can be addressed through the Public Interest Research, Development, and Demonstration Program. That program results be reported annually to the Legislature and posted on the commission's Internet Web site for each program administered by an electrical corporation, third-party administrator, or local government, to include verifiable energy use reductions achieved through the program, the number of measures implemented, the demographics where the measures were implemented, and the demographics of any jobs created. The report submitted to the Legislature pursuant to this paragraph shall be submitted in compliance with Section 9795 of the Government Code. State Revenue Impact By extending the charge in its existing amounts, the state will receive $62.5 million for PIER, $65.5 million for renewable energy programs, and $228 million for energy efficiency. Comments 1. Purpose of the bill . According to the Author, "AB 723 will bring additional accountability and oversight to the Public Goods Charge program for energy efficiency. Whenever ratepayer funds are used for a public purpose it is imperative that the ratepayer gets what he or she pays for: reduced energy costs, real local job creation, and big savings on the cost of building new generation and transmission facilities." 2. A Tax without a cause ? AB 723 extends the public benefits charge for eight additional years, extracting $2.84 billion from California's economy through surcharges on all IOU ratepayers for the next eight years for programs of questionably effectiveness. The Legislative Analysts' Office (LAO) doubts the return on investment the state has received from the PIER program, and suggests several reforms (See Comment 4). The $228 million in energy AB 723 -- 6/20/11 -- Page 8 efficiency funding comes on top of $750 million the CPUC already takes from ratepayers and gives to utilities to fund these programs. The renewable energy industry has changed dramatically since the Legislature enacted public goods charge's enactment; large, diversified renewable energy companies are now some of the darlings of Wall Street, availing themselves of generous federal tax credits, investing billions worldwide, and no longer need subsidies from general ratepayers, as well as the questionable policy rationale for ratepayers subsidizing other energy sources that can't sell electricity at competitive prices. Additionally, state law already requires IOUs to buy renewable products, giving renewable generators the best business incentive possible - the guarantee that a buyer will pay you for your product. Given the state's economic malaise, why isn't this money best left with ratepayers? The Committee may wish to consider whether the programs funded are worth the high price, or whether a smaller charge is needed for a better focused program. 3. Say what ? On June 2, 2011, the Author amended AB 723 to provide direction to the CPUC on how to implement the energy efficiency programs paid for by the public good charge's extension. The Committee may wish to consider deleting, amending or clarifying the bill's standards to address the following problems. A few examples: Vagueness. The bill provides no definitions of its terms, where many are needed. For example, where are "extreme cooling and heating climates?" What's "high energy usage?" How should the CPUC "protect ratepayers and provide reliable electric service?" Who are the "third party entities" that should directly administer an undefined "reasonable portion" of the program? Duplication. How do the energy efficiency programs proscribed by the bill complement or frustrate CPUC's existing programs? What does the state and its ratepayers get on the margin with the additional standards in the bill that it's not getting now? Questionable policy. Why should the law explicitly allow for cost overruns in low-income areas? Why should 10% of funds be reserved for program administration and performance measurement? Enforceability. How can the Legislature ensure that utilities and third parties "consider" AB 723 -- 6/20/11 -- Page 9 contracting opportunities for small businesses and minority, women, and disabled veteran-owned businesses? 4. Assessing returns . The Senate Energy, Utilities, and Communications Committee held five informational hearings in the last three months to review the programs funded by the public goods charge, including the PIER program, energy efficiency, and the RRTF. The Committee's findings, documentation and hearing presentations can be found at its website: http://seuc.senate.ca.gov/informationalhearings As part of the Committee's review, it asked LAO to review the PIER program. In its January, 2011, response to Senator Padilla's request to evaluate the program, LAO stated: First, in evaluating the current program, we find that the CEC has not demonstrated that there has been a substantial payoff to date from the state's investment of more than $700 million in ratepayer funds. We find that the CEC has generally funded projects in line with the broad categories of eligible investments that are set out in statute (such as promoting "energy efficiency" and "demand response" strategies). However, state law establishes several goals for the PIER program, including the creation of tangible ratepayer benefits. While some particular PIER-sponsored research projects have served these goals, CEC has not demonstrated that the majority of the projects allocated PIER funding by CEC has produced similar benefits. Second, we find that the legislative and regulatory enactment of several new ambitious energy policy objectives has created an energy landscape that differs greatly from the one that existed in 1996, when the PIER program was created. In order to help address technological barriers which may prevent attainment of these state goals, we find that there is a role for the state to continue to support public interest energy research beyond the 2012 sunset date. Third, if the Legislature decides that there should be a continuing state role in this area of research, we find that improvements could be made to the AB 723 -- 6/20/11 -- Page 10 implementation of this role, including by tightening funding eligibility parameters and changing the process by which research funding is allocated. 5. Tax Increase . AB 723 is an increase in the proceeds of state taxes for the purposes of Section Three of Article XIIIA of the California Constitution, and must be enacted by 2/3 vote of each house of the Legislature. 6. Related Bills : The Legislature is also considering two other bills that address the public goods charge in different ways: AB 1303 (Williams), currently in the Senate Energy, Utilities, and Communications Committee, extends the sunset date for CEC to fund the PIER program. SB 35 (Padilla) - currently in the Assembly Utilities and Commerce Committee, repeals the current public goods charge, the RRTF, and the CEC's authority to fund renewable energy projects, instead replacing the programs with the "California Energy Research and Technology Program Act of 2011". 7. Double-referred . AB 723 is also referred to the Senate Energy, Utilities, and Communications Committee. Assembly Actions Assembly Utilities and Commerce10-0 Assembly Natural Resources 6-2 Assembly Appropriations 12-5 Assembly Floor 58-14 Support and Opposition (6/23/11) Support : South Bay Cities Council of Governments, City of Chula Vista, California Association of Sanitation Agencies, Association of Bay Area Governments; California Biomass Energy Alliance; California Energy Efficiency Industry Council; California State Pipe Trades Council; Coalition of California Utility Employees; International Brotherhood of Electrical Workers; Western States Council of Sheet Metal Workers, International Union of Elevator Constructors; Utility Workers Union of America; Los Angeles County Board of Supervisors; Santa Clara County Board of Supervisors; AB 723 -- 6/20/11 -- Page 11 Environmental Defense Fund; The Nature Conservancy; Union of Concerned Scientists; Clean Power Campaign; NRDC. Opposition : California Manufacturers and Technology Association; Howard Jarvis Taxpayers Association.