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.




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                 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 





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          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.






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                                   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 





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                    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.





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                  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 





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                    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 





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          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" 





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               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 





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               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; 





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          Environmental Defense Fund; The Nature Conservancy; Union 
          of Concerned Scientists; Clean Power Campaign; NRDC.

           Opposition  :  California Manufacturers and Technology 
          Association; Howard Jarvis Taxpayers Association.