BILL ANALYSIS                                                                                                                                                                                                    �



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          Date of Hearing:   May 6, 2013

                    ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
                               Steven Bradford, Chair
                    AB 427 (Mullin) - As Amended:  April 22, 2013
           
          SUBJECT  :   Electrical corporations: bottoming cycle waste heat  
          recovery.

           SUMMARY  :  The bill would exempt electrical corporation customers  
          who use bottoming cycle waste heat recovery from all  
          nonbypassable charges. Specifically,  this bill  :  

             a)   Defines "bottoming cycle waste heat recovery" to mean a  
               form of energy efficiency by which waste heat from a  
               commercial or industrial process is used to produce  
               electricity, excluding any electricity produced as a result  
               of combusting fossil fuels to supplement the waste heat.

             b)   Modifies the current statutory definition of "changes in  
               usage" to include bottoming cycle waste heat recovery.

             c)   Exempt changes in usage, as defined, are from all  
               nonbypassable charges.

           EXISTING LAW  :



          1)Defines cogeneration as the sequential use of energy for the  
            production of electrical and useful thermal energy and  
            specifies that at least 5 percent of the facility's total  
            annual energy output shall be in the form of useful thermal  
            energy and where useful thermal energy follows power  
            production, the useful annual power output plus one-half the  
            useful annual thermal energy output equals not less than 42.5  
            percent of any natural gas and oil energy input. (Public  
            Utilities Code 216.6)

          4)Provides that the cost of the competition transition charge  
            exemptions granted to members of the combined class of  
            customers other than residential and small commercial  
            customers shall be recovered only from those customers.  
            (Public Utilities Code 330)

          5)Authorizes allocation, as specified of costs for procurement  







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            contracts entered into to meet local capacity needs and  
            resource adequacy. (Public Utilities Code 365.1)

          6)Provides that each retail end-use customer should bear a fair  
            share of the Department of Water Resources power purchase  
            costs, as well as power purchase contract obligations incurred  
            as of January 1, 2003, and to prevent any shifting of  
            recoverable costs between customers. (Public Utilities Code  
            366.1(d)(1)

          7)Established nonbypassable costs to be paid by all ratepayers:  
            Requires that the cost of divesting generation related assets,  
            nuclear settlements, and power purchase contracts that were  
            part of rates approved by the Public Utilities Commission as  
            of December 20, 1995 shall be recovered from all customers on  
            a nonbypassable basis, amortized over a reasonable period of  
            time. (Public Utilities Code 367)

          8)Provides authorization for cost recovery through rates for  
            specified expenditures by electrical corporations prior to  
            1998 (Public Utilities Code 368)

          9)Provides that nonbypassable charges will be applied to each  
            customer based on the amount of electricity purchased by the  
            customer from an electrical corporation or alternate supplier  
            of electricity, subject to changes in usage. (Public Utilities  
            Code 371(a)

          10)Defines "change in usage" to generally mean changes occurring  
            in the normal course of business resulting from changes in  
            business cycles, termination of operations, departure from the  
            utility service territory, weather, reduced production,  
            modifications to production equipment or operations, changes  
            in production or manufacturing processes. (Public Utilities  
            Code 371(b)

          11)Exempts fuel cell facilities and replacement of existing  
            cogeneration facilities from nonbypassable charges by  
            including them within the definition of change in usage.  
            (Public Utilities Code 371(b)

          12)Exempts specified cogeneration facilities placed in service  
            or committed to construction prior to December 20, 1995 from  
            specified nonbypassable charges. (Public Utilities Code 374)

          13)Provides the following exemptions from nonbypassable charges  







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            and provides that the costs of these exemptions be borne by  
            all ratepayers in the affected service area:

             a)   110 megawatts of cogeneration serving irrigation  
               districts served by electrical corporations with specific  
               allocations to Merced Irrigation District and Castle Air  
               Force Base.
             b)   Irrigation districts, joint power authorities, and  
               publicly owned utility districts that were owned prior to  
               December 20, 1995.
             c)   A federal power marketing agency that existed as of  
               January 1, 1996, or its successor, from nonbypassable  
               charges.
             d)   A portion of the load at the University of California  
               campus in Yolo County not served by power from a federal  
               marketing agency provided that the power is used for the  
               facility load and not directly or indirectly for sale.
             e)   (Public Utilities Code 374)

          1)Provides authorization for cost recovery to accommodate  
            implementation of direct access (Public Utilities Code 376)

           FISCAL EFFECT  :   Unknown

           COMMENTS  :   

           1)Author's Statement.  "The imposition of departing load charges  
            on bottoming cycle waste heat recovery is a barrier to  
            investment in energy efficiency in the form of bottoming cycle  
            waste heat recovery; that barrier should be removed given that  
            this is a clean source of energy and the rate impacts within  
            the same rate class are inconsequential."

           2)Exemption from Nonbypassable Charges.  This bill would include  
            any existing or new bottoming cycle waste heat recovery  
            facility in the statutory definition of "change in usage."  In  
            addition, this bill would add a provision that exempts change  
            in usage from nonbypassable charges established by the Public  
            Utilities Commission (PUC).

            As a result, this bill would exempt existing and new customers  
            from the requirement that they be assessed nonbypassable  
            charges that are specified in statute or established by the  
            PUC.

           3)What is bottoming cycle waste heat recovery?  There are several  







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            types of waste heat recovery. This bill is specific to  
            bottoming cycle waste heat recovery (WHR). In a bottoming  
            cycle WHR facility, the energy in the fuel first serves a  
            thermal need, and then is used for electricity generation. In  
            this way, the site increases the efficiency of its natural gas  
            usage. 

            According to PG&E there are currently 61 MW of bottoming cycle  
            waste heat recovery facilities in operation in PG&E service  
            area and approximately 32 megawatts of potential new  
            facilities. According to SCE there are currently 128.5 MW of  
            these facilities and potentially 14 MW of new facilities.  
            Information on existing and potential in SDG&E service areas  
            is not known at this time.

           4)Is this energy efficiency or on-site generation?  This bill  
            also adds a definition of bottoming cycle waste heat recovery  
            that would define this technology as a form of energy  
            efficiency. 
            
             When a customer installs on-site generation (waste heat  
            recovery, photovoltaics, etc.) they are generating electricity  
            on-site using the excess heat available through another  
            process on site, such as kiln. The amount of electricity and  
            natural gas used on site could be the same as it was before  
            the on-site generator was placed in service. But the use of  
            the gas will be more efficient because the otherwise unused  
            waste heat from gas combustion is used to produce electricity.

            Energy efficiency means using less energy to perform the same  
            task (i.e., heating, air conditioning, motors, lighting,  
            refrigeration, etc.). Energy efficiency reduces the amount of  
            energy consumed to produce the same outcome.

            Performing a dual use with the same energy is important and  
            desirable. To the extent that a waste heat recovery system  
            generates electricity without supplemental fuel, it improves  
            the efficient use of energy consumption on site, considering  
            both both natural gas and electricity consumption. But it does  
            not necessarily reduce energy demand for either natural gas or  
            electricity.

            At industrial facilities, typical electricity-consuming  
            devices including pumps, motors, lighting, and air handling  
            systems, as well as office space conditioning, lighting, and  
            equipment. The facility's on-site generation would serve these  







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            loads. There is currently no provision in this bill that would  
            require that these devices be energy efficient.

            According to the California Large Energy Consumers Association  
            (CLECA), "Most industrial facilities in California accordingly  
            already strive for as much energy efficiency as possible.   
            Several sectors in CLECA must comply with California Air  
            Resources Board Energy Efficiency and Co-Benefits Assessment  
            Regulation, which is aimed at identifying any further  
            cost-effective energy efficiency."

             The author may wish to amend the definition of bottoming cycle  
            waste heat recovery to recast this technology as on-site  
            electricity generation to accurately describe its attributes,  
            specify that this technology does not use supplemental fuel,  
            and specify that it does not export electricity to the grid.

            In addition, the author may wish to amend the bill to include  
            a requirement that eligible entities receive an energy  
            efficiency audit and commit to making all cost-effective  
            energy efficiency improvements to the site.
           
           5)Distinct charges for different purposes  . A variety of charges  
            appear on a typical electricity bill and each of the  
            electrical corporations (PG&E, SCE, SDG&E) present the charges  
            differently, depending on the format of their billing system.  
            Some of these charges apply only to certain types of  
            customers, such as industrial customers. Some apply to nearly  
            all customers, and some customers have received statutory or  
            PUC exemptions from these charges.  
           
             Nonbypassable charges  are rate components that are required by  
            statute and/or the PUC to be assessed on each kilowatt-hour of  
            electricity used by a customer.  Current law provides some  
            exemptions from these charges, primarily related to  
            arrangements made prior to electricity restructuring.  
            Nonbypassable charges include:

              a)   Public Purpose Program Charges  fund a variety of  
               programs, including the California Alternate Rates for  
               Energy (CARE) low income rate assistance, the Energy  
               Savings Assistance program (energy efficiency retrofits for  
               low income households), Energy Efficiency Procurement, the  
               Electric Program Investment Charge authorized by the PUC,  
               and the Energy Data Center authorized by the PUC. 








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               According to CLECA, the 2012 cost of the CARE program in  
               PG&E and SCE service areas and the contribution of large  
               energy users to support these programs were:

                     For SCE: CARE Electric Costs were $346,208,897;  
                 large industrial customer classes funded approximately  
                 11.1% of these costs.  
                     For PG&E, CARE Electric Program costs were  
                 $603,588,209; large industrial customer classes funded  
                 approximately 20.22% of these costs.

              a)   Other Nonbypassable Charges  were authorized by statute  
               to address stranded investment during electricity  
               deregulation and market manipulation during the electricity  
               crisis. When these obligations are paid ratepayers they  
               will no longer be assessed.

            These charges are not considered nonbypassable charges and,  
            depending on the tariff (the customer's rate schedule), they  
            may or may not be assessed these charges:

             Demand charges  are typically applied to customers who use  
            large amounts of electricity. They are based on a customer's  
            maximum kilowatt demand incurred during a monthly period. They  
            can also be based on customers' maximum kilowatt demands over  
            on-peak and over partial-peak hours of the month. 

             Standby charges  are similar to an insurance premium, assessed  
            to the customer's "reservation capacity." They are  
            dollar-per-kilowatt typically assessed to customers who  
            regularly meet their own load (or a portion of their load)  
            every hour of the month via on-site generation, but who pay  
            the serving utility to "stand by" with immediate power if/when  
            their generator has an unexpected outage.  The charges are  
            owed each month, whether or not the customer actually has a  
            generator failure that month.

             Other charges  fund renewable electricity program procurement  
            and other programs, such as the Self Generation Incentive  
            Program, the California Solar Initiative, and the New Solar  
            Home Partnership are among the charges assessed, along with  
            other charges, in monthly distribution service charges.

           1)Helping the Economics of Bottoming Cycle WHR.  This bill  
            proposes to improve the economics of using this technology by  
            exempting electrical corporation customers who use bottoming  







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            cycle WHR from certain electricity surcharges known as  
            'nonbypassable charges." According to the sponsor, the  
            nonbypassable charges for industrial customers are less than 2  
            cents per kilowatt-hour. Because of their large volume of  
            electricity consumption they pay a large portion of these  
            charges.

            The author provides an example of how nonbypassable charges  
            are assessed when a site has a bottoming cycle WHR facility:  
            "When a customer purchases 150,000 Megawatt-hours (MWh)  
            annually and installs a facility that provides 40MWh of its  
            load, the customer must remit an ongoing payment ranging from  
            $14.06 to $16.29 for each MWh of electricity it  
            self-generates. These charges increase the investment cost of  
            these facilities.

            If this bill is enacted, the portion of the customer's load  
            that is served by the bottoming cycle WHR facility would be  
            exempt from nonbypassable charges.

            A March 2013 report by The American Council for an Energy  
            Efficient Economy (ACEEE) examined barriers to advancing  
            energy efficiency. One of the recommendations in the report  
            highlights that one of the possible disincentives to improving  
            efficiency may be that businesses are allowed to treat energy  
            expenses as a business expense. They recommend restructuring  
            the corporate income tax to remove barriers to energy  
            efficiency investments:

               "Businesses are taxed on their profits, and virtually all  
               expenses are deductible, including energy costs. However,  
               capital expenses must be depreciated, meaning they are  
               recovered over a multiyear period-as much as 39 years in  
               the case of commercial buildings and equipment installed in  
               these buildings. If depreciation periods are too long,  
               investment in new efficient equipment is discouraged, since  
               many businesses are reluctant to replace equipment until it  
               is fully depreciated. 

            They go on to say that: 

               "Subsidizing energy costs enables higher energy  
               consumption. When businesses do invest in energy  
               efficiency, a portion of the energy savings go to the  
               federal government in the form of higher taxes (e.g., 25%  
               for a business with the typical effective rate of 25%,  







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               before adjusting for the effects of depreciation). When the  
               full value of the savings does not accrue to the firm, the  
               incentive to make investments goes down. Similarly, when a  
               firm makes capital investments, these expenses must be  
               depreciated, meaning that they are gradually charged  
               against income."

           2)Cost shifting.  This bill would allow all bottoming cycle WHR  
            to be exempt from nonbypassable charges. Ratepayers are  
            required to pay these charges, thus in order to provide this  
            exemption, other ratepayers will be obliged to fund the  
            shortfall in charges that this exemption would create. These  
            increased collections would be obtained from other customers,  
            such as residential, small commercial, large commercial,  
            government, agricultural, and industrial customers.

            These funds include not only the electricity restructuring and  
            electricity crisis costs but also those public purpose  
            programs that serve low income ratepayers and fund energy  
            efficiency programs.

            PG&E estimates a cost shift of $8 million to $10 million  
            annually to other bundled service customers within the PG&E  
            service area. SCE estimates the effect of this exemption would  
            be to shift from $12 million to $14 million annually to other  
            bundled service customers within the SCE service area. It is  
            not clear whether those estimates include the cost of public  
            purpose programs.

             In order to limit the impact of this cost shift on other  
            ratepayers the author may wish to consider amending the bill  
            to prohibit the cost of this exemption from being shifted to  
            residential customers and those customers who use less than  
            500 kilowatts monthly.  This provision would protect some, but  
            not all customers from rate impacts as a result of this  
            exemption.

             There is no current assessment of the market potential for  
            this technology if this exemption were to be enacted. Thus it  
            is difficult to accurately quantify the cost shift that could  
            result. By including all existing facilities, not less than  
            approximately 190 MW will be exempted from these charges.  

            The author may wish to consider an amendment to restrict the  
            total MW allowed to be exempted to no more than 200 MW of  
            gross nameplate capacity.  







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              3)   Cost of Service.  Electrical corporations offer a variety  
               of rate schedules, approved by the commission, in order to  
               provide safe, reliable, and affordable service to their  
               customers. A number of alterative rate schedules are  
               available, within any one electrical corporation service  
               area, that provide discounts or special rates in order to  
               meet the needs of various customers. Large energy users may  
               be not be alike and therefore may be under differing tariff  
               schedules.  

            In order to ensure that the effect of the exemption proposed  
            by this bill does not impact the general need of ratepayers  
            for electrical corporations to maintain a safe, reliable, and  
            affordable electric grid, the author may wish to consider an  
            amendment that notwithstanding this exemption, electrical  
            corporations shall assess cost of service charges.
           
              4)   Ratepayer-funded Incentives.  In 2010 the Legislature  
               reauthorized the Self Generation Incentive Program (SGIP),  
               which provides ratepayer-funded incentives to qualified  
               self-generation facilities placed in service in California.  
               Among the eligible technologies are WHR facilities, which  
               currently receive an incentive of up to $1.19 per watt. The  
               facilities eligible for this exemption would likely receive  
               this incentive.

              5)   Creating a problem for a future Legislature?  This bill  
               provides an exemption from nonbypassable charges that were  
               either approved by the Legislature or by the PUC. To the  
               extent that a nonbypassable charge may be considered a tax,  
               to remove or modify this exemption could require a 2/3 vote  
               of the Legislature.

          11)  Proposed amendments. 


            371. (a) Except as provided in Sections 372 and 374, the  
            uneconomic costs provided in Sections 367, 368, 375, and 376  
            shall be applied to each customer based on the amount of  
            electricity purchased by the customer from an electrical  
            corporation or alternate supplier of electricity, subject to  
            changes in usage occurring in the normal course of business.

            (b) (1)  Changes in usage occurring in the normal course of  
            business are those resulting from changes in business cycles,  







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            termination of operations, departure from the utility service  
            territory, weather, reduced production, modifications to  
            production equipment or operations, changes in production or  
            manufacturing processes, fuel switching, including  
            installation of fuel cells, enhancement or increased  
            efficiency of equipment or performance of existing  
            self-cogeneration equipment, the production of electricity  
            using bottoming cycle waste heat recovery,  replacement of  
            existing cogeneration equipment with new power generation  
            equipment of similar size as described in paragraph (1) of  
            subdivision (a) of Section 372, installation of demand-side  
            management equipment or facilities, energy conservation  
            efforts, or other similar factors.
            (2) For the purposes of this subdivision, "bottoming cycle  
            waste heat recovery" means  a form of energy efficiency by  
            which   the use of  waste heat from a commercial or industrial  
            process  is used  to produce electricity,  excluding any  
            electricity produced as a result of combusting fossil fuels to  
            supplement the waste heat   without consuming fuel or  
            electricity to supplement the waste heat, to supply  
            electricity for on-site use without exporting electricity to  
            the electrical grid  .
            (c)  (1) Except for the limitation in paragraph (2), changes  in  
            usage occurring in the normal course of business as described  
            in subdivision (b) are exempt from all nonbypassable charges  
                                                                              approved by the commission. 
             (2)(A) For electricity generated using bottoming cycle waste  
            heat recovery, the exemption of paragraph (1) applies only to  
            the cumulative total of 200 megawatts within all service areas  
            of the electrical corporations.
            (B) A site generating electricity using bottom cycle waste  
            heat recovery does not qualify for the exemption of paragraph  
            (1) unless an energy audit has been conducted for the site and  
            the owner or operator of the site has committed to make all  
            cost-effective energy efficiency improvements.
            (d) No nonbypassable charge avoided pursuant to subdivision  
            (c) as a result of the use of electricity generated using  
            bottoming cycle waste heat recovery shall be recovered from  
            residential ratepayers or other ratepayers with an average  
            monthly usage of 500 or less kilowatthours.
            (f) The commission shall ensure that customers exempt from the  
            nonbypassable charges pursuant to subdivision (c) shall pay  
            their cost of receiving service from the electrical  
            corporation.

          REGISTERED SUPPORT / OPPOSITION  :   







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           Support 
           
          California Large Energy Consumers Association (CLECA) (Sponsor)
          California Manufacturers & Technology Association (CMTA)
          California Nevada Cement Association
          Environmental Defense Fund

           Opposition 
           
          Pacific Gas and Electric Company (PG&E)
          San Diego Gas & Electric Company (SDG&E) (unless amended)
           
          Analysis Prepared by  :    Susan Kateley / U. & C. / (916)  
          319-2083