BILL ANALYSIS Ó AB 327 Page A Date of Hearing: September 11, 2012 ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE Steven Bradford, Chair AB 327 (Perea) - As Amended: September 6, 2013 SUBJECT : Electricity rates: net energy metering: California Renewables Portfolio Standard Program. SUMMARY : Modifies statutory requirements specific to residential rate design applicable to the customers of Investor Owned Utilities (IOUs); modifies the provisions applicable to Net Energy Metering, allows the California Public Utilities Commission (PUC) to require procurement beyond the current 33% renewable procurement mandate; requires IOUs to develop and implement distributed generation resources plans. Specifically, this bill : a)Requires the California Public Utilities Commission (PUC), when it approves changes to electric service rates charged to residential customers, to determine that the changes are reasonable, including that the changes are necessary in order to ensure that the rates paid by residential customers are fair, equitable, and reflect the costs to serve those customers. b)Requires PUC to consider specified principles in approving any changes to electric service rates. c)Requires PUC to report to the Legislature its findings and recommendations relating to tiered residential electric service rates in a specified rulemaking by January 31, 2014. d)Recasts and revises limitations on electric and natural gas service rates of residential customers, including the rate increase limitations applicable to electric service provided to California Alternate Rates for Energy (CARE) customers. e)Requires the IOUs to provide annual distributed energy resource plans and for the PUC to approve those plans, if it finds them reasonable, in each IOU General Rate Case. f)Revises the current Net Energy Metering (NEM) Statute to specify the maximum program capacity for customers in IOU service areas, require the PUC to develop a new NEM program by AB 327 Page B July 2015 and establish a transition to the new NEM program by 2017. The new NEM program is to be based on electrical system costs and benefits to nonparticipating ratepayers and remove both the total system capacity cap and the 1 Megawatt project size limit. Existing NEM customers will be transitioned for a length of time to be determined by the PUC by March 2014. g)Provides the PUC with authority to require IOUs to procure renewable energy generation above that which is required in the 33% Renewable Portfolio Standard. h)Authorizes the PUC to approved fixed monthly charges no greater than $10 for residential customers and $5 for low-income customers beginning in 2015 and may allow a cost of living adjustment beginning in 2016. i)Specifies discounts for low-income customers are not to exceed 30% to 35% of the average non-low-income customer. j)Prohibits the CPUC until January 1, 2018 from authorizing or imposing by the default rate schedule for residential customers based on Time of Use and establishes provisions to protect senior or other vulnerable customers, in hot climate zones, from unreasonable hardship aa)Technical amendments to the provisions related to residential electricity rate reform. EXISTING LAW 1)Requires the PUC to allocate a 'baseline quantity of electricity based on 50% to 60% of average residential electricity consumption for customers served with both gas and electricity or 60% to 70% for all electric residential customers and to take climatic and seasonal variations into account. (Public Utilities Code 739(a)(1) 2)Requires the PUC to set rates for the baseline quantity to be the lowest rate and to allow increasing rates for usage in excess of the baseline quantify. (Public Utilities Code 739(d)(1)) 3)Requires the PUC to avoid excessive rate increases for residential customers and to establish an appropriate gradual differential between the rates for the respective blocks of AB 327 Page C usage (Public Utilities Code 739(d)(1)) 4)Requires the PUC to retain an appropriate inverted rate structure for residential customers and that if the PUC increases baseline rates revenues resulting from those increases they are to be used exclusively to reduce nonbaseline residential rates. (Public Utilities Code 739.7) 5)Allows the PUC to make higher allocations for persons with medical needs, such as emphysema, pulmonary patients, or persons on life-support equipment. (Public Utilities Code 739(c)) 6)Restricts the PUC from approving IOU rates that increase the residential rates for electricity usage up to 130 percent of the baseline quantities, by the annual percentage change in the Consumer Price Index from the prior year plus 1 percent, but not less than 3 percent and not more than 5 percent per year. The annual percentage change in the Consumer Price Index is calculated using the same formula that was used to determine the annual Social Security Cost of Living Adjustment on January 1, 2008. This restriction sunsets January 1, 2019. (Public Utilities Code 739.9(a)) 7)Restricts approval of mandatory or default time-variant or real time pricing, or critical peak pricing for residential customers and establishes these as opt-in programs only. In addition, requires that customers be provided with one year of data and one year of bill protection and caps billings to no more than they would otherwise have been under the customer's previous rate schedule. Also exempts medical baseline customers. (Public Utilities Code 745) 8)Further restricts rates charged residential customers for electricity usage up to the baseline quantities, including any customer charge revenues, to not exceed 90 percent of the system average rate prior to January 1, 2019, and not exceed 92.5 percent after that date. (Public Utilities Code 739.9(b)) 9)Establishes a program of assistance to low-income residential AB 327 Page D customers with annual household incomes no greater than 200% of federal poverty guidelines which reflects discounts based on level of need and allows limited rate increase of up to 3% annually, subject to limitations. CARE rates cannot exceed 80% of the corresponding rates charged to non-CARE customers (excluding non-bypassable charges). (Public Utilities Code 739.1(b)(4) 10)Allows low income customers to be exempt from paying Department of Water Resources bond charge imposed pursuant to Division 27 (commencing with Section 80000) of the Water Code, the CARE surcharge portion of the public goods charge, any charge imposed pursuant to the California Solar Initiative, and any charge imposed to fund any other program that exempts CARE participants from paying the charge. (Public Utilities Code 739.1(g), 2851(d)(3), 379.6(h) 11)Establishes a program that allows bill credits for energy not consumed on site for customers who self-generate electricity from specified renewable energy technologies which can be applied against both the generation and non-generation charges on the customer's bill.(Public Utilities Code 2827) 12)Establishes a program that allows bill credits for customers using specified fuel cell electric generation technology. (Public Utilities Code 2827.10). 13)Exempts customers using specified fuel cell technologies from nonbypassable charges. (Public Utilities Code 371) 14)Provides a discounted rate for natural gas purchases from IOUs that sell natural gas to customers using specified fuel cell technologies. (Public Utilities Code 379.8) 15)Establishes a requirement for utilities (IOU and publicly owned) to procure electricity from specified renewable energy technologies to achieve a generation portfolio that is 33% renewable by 2020. (Public Utilities Code 399.11 et seq). AB 327 Page E 16)Requires the PUC to publish a study, biennially, evaluating the impacts of distributed generation on the state's distribution and transmission grid. (Public Utilities Code 321.7) FISCAL EFFECT : According to the Senate Appropriations Committee: Annual costs of approximately $116,000 from the Public Utilities Reimbursement Account (special) for the workload involved in conducting a triennial assessment of the needs of low-income electricity and gas customers. Cost pressures in the millions to tens of millions of dollars to the General Fund and various special funds to the state as a ratepayer should the CPUC exercise the authority in this bill to raise renewable energy procurement requirements. One-time costs of at least $120,000 from the Public Utilities Reimbursement Account for the development of a new NEM standard contact and tariff, a transition period for existing NEM customers, and the eligible period for a fuel-cell standard tariff. One-time costs of at least $120,000 and ongoing costs of up to $120,000 from the Public Utilities Reimbursement Account to review distribution resource plans and to establish criteria on evaluating the success of investments made pursuant to such a plan. Cost pressures in the hundreds of thousands of dollars to the General Fund and various special funds to the state as a ratepayer to the extent that the distribution resources plan proposals lead to necessary infrastructure spending that will be paid by the ratepayers. COMMENTS : 1)Statement . "The energy crisis is long over, but laws meant to protect residential rate users are now preventing CPUC from governing the rate structure and making necessary changes for the thousands of middle to low income families struggling to pay high energy costs. For example, the gap between Tier 2 and Tier 5 increased from 5 cents per kWh to 16 cents per kWh today. Absent rate reform, the gap between Tier 2 and Tier 5 will double to nearly 29 cents per kWh by 2022 causing tens of AB 327 Page F thousands of customers to pay rates significantly higher than the actual cost of electricity. Without legislative changes, the CPUC has only very limited ability to fix this unfair residential electric rate structure." 2)Background. During the 2000-2001 energy crisis, AB 1 X1 (Keeley), Chapter 4, Statutes of 2001, protected ratepayers from rampant price fluctuations due to a dysfunctional wholesale electricity market. Among other stabilizing efforts, AB1 X1 prohibited PUC from increasing rates for usage under 130% of baseline until DWR bond charges are paid off. These restrictions did not apply to customers of publicly owned utilities, about 25% of electricity customers in California. Subsequent legislation(SB 695, Kehoe, Chapter 227, Statutes of 2009) removed the freeze on Tiers 1 and 2 and allowed very limited rate increases. On June 28, 2012, PUC initiated a proceeding to examine current residential electric rate design, including the tier structure in effect for residential customers, the state of time variant and dynamic pricing, potential pathways from tiers to time variant and dynamic pricing, and preferable residential rate design. This PUC proceeding is open to the public and allows interested parties opportunities to participate by making comments on PUC rulings, making rate design proposals, commenting on proposals made by others, commenting on proposals made by staff, and commenting on any decision made by PUC. According to the public schedule, final rounds of comments are due mid-summer 2013. This would be followed by a draft decision, which is also open to comments. However, the PUC is limited in the way it can implement changes to rate design because of the statutory restrictions on Tier 1 and 2 rates. It is important to make a distinction between rate design and the customer's bill. Redesigning rates does not necessarily result in a change in the customer's bill. This bill includes language to maintain protections for low income ratepayers to ensure affordable energy bills, regardless of the outcome of redesigning residential electricity rates. 3)Allows PUC to Design Residential Rates . Under current law, rate increase for residential must be disproportionately placed on the price paid for electricity by residential customers whose usage exceeds their Tier 2 allocation. This AB 327 Page G bill addresses this by removing the restrictions on Tier 1 and Tier 2 rates and including provisions to ensure a transition that will not result in rate shocks. In addition, this bill allows the PUC to approve a fixed charge of up to but no more than $10 or $5 for low-income customers. The bill further specifies that the fixed charge is not to unreasonably impair incentives for conservation or energy efficiency and requires a reasonable transition from current rates to the new rates. Non-low income customers will continue to fund a number of programs authorized by the Legislature. In addition to CARE, the Legislature has authorized several ratepayer funded programs to assist low income households procure energy efficiency. The Legislature has also authorized that ratepayers fund the development of new technologies and business models. These include the Self Generation Incentive Program (SGIP), the California Solar Initiative (CSI), Energy Efficiency Incentive Programs (EEIP), the Energy Savings Assistance Program and Net Energy Metering. 4)Rate Reform Impacts on Low Income households . Currently, CARE customers are to receive a 20% discount off of their electric and gas bills. However, because of the cap on Tiers 1 and 2, the effective discount can be much higher if CARE customer is using more than 130% of the baseline allocation. In some instances, PG&E has reported providing discounts in the range of 60% off of the otherwise applicable bill. This bill addresses this by limiting the CARE discount to not less than 30% or more than 35% of a non-CARE customer bill. 5)Time of Use Rates . In order to move toward pricing electricity based on its time of use, AB 327 allows the PUC to require the default rate for customers be based on time of use beginning January 1, 2018. It also specifies that the PUC shall ensure that these rates do not cause an unreasonable hardship on senior citizens or economically vulnerable customers in hot climate zones. 6)Net Metering Reform . Current NEM statute allows a utility customer who self-generates using specified renewable technologies to receive a credit on their utility bill, for generation that is not consumed on site, equal to the retail electricity rate in effect at the time the generation occurs. The credits may be used to offset most of the utility bill, including fixed charges and transmission and generation AB 327 Page H charges. The credit is calculated in a manner that reduces the NEM customer's contributions to public purpose programs such as CARE, energy efficiency and renewable incentives, and research and development programs that other customers pay. Amendments made in the Senate establish a transition from the current NEM program to a new NEM program. The PUC may develop the NEM reforms prior to December 2015 and may offer it to customers in areas where the NEM capacity limit has been reached. By July 2017 or when they reach their NEM capacity limits, the electrical corporations must use the new NEM. Significant NEM reforms include: the total benefits are approximately equal to the costs to all customers and the electrical system and set a payment equal to the cost and benefits of the renewable generation facility. Additional provisions direct the PUC to ensure customer-sited renewable distributed generation continues to grow sustainably and include specific alternatives designed for growth among residential customers in disadvantaged communities. In addition, the amendments provide that the PUC may authorize charges specific to customers who self-generate, such as demand or other charges. Some matters related to sustainable growth may be outside of the control of the PUC with respect to ensuring sustainable growth, such as federal tax rules (tax credits and depreciation) and minimal regulatory requirements, which have also helped spur the growth of customer-sited generation. The current 30% federal tax credit is scheduled to expire in 2016. Federal legislation to allow renewable projects to qualify for Master Limited Partnership tax treatment may also add new growth opportunities. The state's greenhouse gas regulations may also help to increase customer-sited renewable generation, particularly for commercial businesses required to comply with those regulations. Federal law allows NEM credits to be excluded from income but the new NEM could require income tax assessments, depending on its final design. The new NEM may also allow more customers to take advantage of federal depreciation - which is currently limited to commercial customers and third party financing providers. Recent rule changes at the Energy Commission now allow customers to sell the renewable attribute in a compliance market established through the Renewable Portfolio Standard. In addition, current law excludes owners of solar facilities from property AB 327 Page I tax reassessment. In order to assess whether the changes to NEM will impact the sustained growth of the industry the PUC will need to consider the growth effects of these other programs and ensure that it does not develop sustainability rules to compensate for changes in other programs that are beyond its control. For customers who are using the current NEM program, this bill establishes a transition to the new NEM. The PUC is to establish a transition period for existing and new NEM customers added prior to July 2017 and adopt rules for this transition. The PUC must consider a reasonable expected payback period based on the year the customer initially took service. Self-generation customers receive an array of support, some of which are described in this analysis. A recent report by the Climate Policy Initiative found that the financial value of bill savings and the sum of only a few of the incentives mentioned above exceed average system prices.<1> The PUC will need to define what is meant by a "reasonable expected payback period" and establish standard assumptions for calculating the payback period, particularly the price paid for the on-site generation because this value varies widely and the price affects payback. In addition, the bill language refers to reasonable payback from the perspective of the utility customer. However, some customers may elect to assign benefits to a third party financier, such as but not limited to tax credits or local rebates. The PUC will need to address how to adjust the reasonable payback period if a customer transfers some of these values to another entity. 7)Fuel Cell NEM . Current law provides a separate NEM in Section 2827.10 specifically for customers who use specified fuel cell technologies and allow the use of nonrenewable fuels. Currently, only one fuel cell manufacturer meets these specifications. Fuel cells that use renewable fuels also included in the NEM statute in 2827. This bill would make the fuel cell NEM available until 2017. In addition to the NEM credits fuel cell customers are exempt from nonbypassable charges pursuant to Section 371 of the Public Utilities Code. Customers who use fuel cells also receive a discounted rate for natural gas purchases from gas -------------------------- <1> Improving Solar Policy: Lessons from the Solar Leasing Boom in California, Climate Policy Initiative, July 2013. AB 327 Page J corporations that the same as the rate charged for natural gas generation facilities. 8)Distributed generation resource plans. AB 327 was amended in the Senate to require electrical corporations to evaluate locational benefits and costs of distributed resources located on their distribution systems. This evaluation shall be based on reductions or increases in local generation capacity needs, avoided or increased investments in distribution infrastructure, safety benefits, reliability benefits, and any other savings the distributed resources provides to the electric grid or costs to ratepayers of the electrical corporation. The bill specifies that the electrical corporation propose ways to deploy cost-effective distributed resources and methods of coordination with existing incentives to minimize the incremental cost of the distributed resources and to identify barriers to deployment, including safety standards or reliable operation of the electricity distribution system. The bill further specifies that the PUC will review and modify or approve the plans to minimize cost and maximize ratepayer benefits. This provision may help promote increased renewable generation within communities, which could displace procurement for larger central generation facilities. This provision also includes planning for electric vehicles, which are being studied for both the potential increased demand for electricity and their potential to help increase flexibility in procurement as a storage technology. 9)Renewable Portfolio Standard . Current law prohibits the PUC from requiring electrical corporations to procure renewable energy above the 33% requirement in the Renewable Portfolio Standard. The amendment will allow the PUC to require procurement above the 33% requirement. The PUC usual procurement proceeding is conducted annual in its Long Term Planning and Procurement Proceeding. In this proceeding the PUC determines the least-cost, best fit procurement for each electrical corporation. Costs for electricity generated by some renewable generation facilities are now competitive with conventional natural gas generation. Thus, moving beyond the 33% mandate is possible to do, without adversely impacting AB 327 Page K electricity rates. According to the California Independent System Operator, current procurement trends will result in substantial excess generation that could cause reliability problems for customers. In addition, because most of the procurement is using wind and solar technologies, large quantities of backup generation may be needed to generate power quickly when the wind stops blowing or the sun stops shining. Ratepayers will pay for the standby capacity of those generators. One means of addressing the issue could be to for the PUC to increase its consideration of time of deliverability when it authorizes additional renewable procurement. Other types of renewable generation technologies, such as but not limited to biopower (biomass, digester gas, biodiesel, landfill gas, municipal solid waste) or geothermal. An example of concentrated reliance one type of renewable technology can be found in one of the recent compliance reports filed by the electrical corporations. One company reports that it plans to meet its 2020 33% obligation using 63% solar photovoltaic, 33% wind generation, and 3% biopower. The PUC will need to carefully review the deliverability characteristics of those renewable facilities to ensure that procurement is balanced to ensure that the electricity from those facilities will coincide with when electricity is needed. 10)Related Legislation . AB 792 (Mullin, 2013) would exempt renewable generation and specified fuel cells from utility user taxes imposed by local governments. AB 796 (Muratsuchi, 2013) would extend a discounted natural gas rate to specified fuel cell technologies. SB 43 (Wolk) would create a 600 megawatt shared renewable program to allow customers who cannot locate a solar facility on their premises to voluntarily purchase renewable energy through a program approved by the PUC. The renewable facilities are limited in size to enable a developer to place the project as close as possible to the customer. This may include on the distribution line of the electricity corporation. REGISTERED SUPPORT / OPPOSITION : AB 327 Page L Support Pacific Gas and Electric (PG&E) Independent Energy Producers Association (IEP) Clean Power Finance REC Solar SolarCity Sunrun SunPower Verengo Solar Southern California Edison (SCE) Solar Energy Industries Association (SEIA) Opposition Easton Pacific Construction Company California Large Energy Consumers Association California League of Food Processors California Manufacturing & Technology Association (CMTA) Analysis Prepared by : Susan Kateley / U. & C. / (916) 319-2083