BILL ANALYSIS �
AB 427
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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