BILL ANALYSIS                                                                                                                                                                                                    

                                                                  AB 796
                                                                  Page  1

          Date of Hearing:   September 11, 2013

                               Steven Bradford, Chair
                  AB 796 (Muratsuchi) - As Amended:  August 26, 213
          SUBJECT  :   Advanced electrical distributed generation technology
          SUMMARY  :   Extends eligibility for cogeneration natural gas  
          rates to fuel cells that are operational before January 1, 2016.  
           Specifically,  this bill  :  

          This bill would make certain existing limitations upon gas rates  
          and surcharges charged  to cogenerators applicable to a customer  
          using advanced electrical distributed generation, as defined.  

           EXISTING LAW  :

          1)Defines an advanced electrical distribution technology with  
            the characteristics of a specific fuel cell technology.  
            Extends eligibility for a specified natural gas rate to these  
            fuel cells technologies that are operational before January 1,  
            2014. (Public Utilities Code 379.8)

          2)Provides that the surcharge assessed for natural gas used to  
            generate electricity by a nonutility facility must be the same  
            as the surcharge assessed for gas used to generate electricity  
            by the electric utility for that quantity of gas used to  
            generate electricity. Prohibits surcharges for electricity for  
            the sale of electricity from a cogeneration or nonutility  
            facility to an entity for resale to a retail customer. (Public  
            Utilities Code 6352)

          3)Requires the California Public Utilities Commission (PUC) to  
            establish rates for gas utilized in cogeneration technology  
            projects not higher than the rates established for gas  
            utilized as a fuel by an electric plant in the generation of  
            electricity, except that this rate shall apply only to that  
            quantity of gas which an electrical corporation serving the  
            area where a cogeneration technology project is located, or an  
            equivalent area, would require in the generation of an  
            equivalent amount of electricity based on the corporation's  
            average annual incremental heat rate and reasonable  
            transmission losses or that quantity of gas actually consumed  
            by the cogeneration technology project in the sequential  


                                                                  AB 796
                                                                  Page  2

            production of electricity and steam, heat, or useful work,  
            whichever is the lower quantity. (Public Utilities Code 454.)

           FISCAL EFFECT  : Unknown

           COMMENTS  :

          1)Author's Statement. "AB 796 will extend a sunset date, by two  
            years, to allow advanced electrical distributed generation  
            technologies to receive the same gas rate as every other  
            customer that produces electricity from natural gas.   
            Extending the sunset date will allow these clean technologies  
            to continue to provide electricity that doesn't produce NOx  
            and SOx or particulate matter and has greenhouse gas emission  
            reduction benefits.  AB 796 ensures that all technologies are  
            treated equally and that customers who chose to generate  
            electricity onsite continue to have a choice of what  
            technologies they chose to use." 

           2)Background  . Current law requires that gas corporations provide  
            a rate for natural gas purchases for customers who operate a  
            fuel cell for on-site electricity generation if that fuel cell  
            meets certain criteria related to greenhouse gas and pollution  
            emissions. The rate is the same rate that merchant natural gas  
            generators and cogeneration facilities receive.

            The author opines that customers that use natural gas to  
            generate on-site electricity are eligible for a particular gas  
            rate and that this rate should be available for all  
            technologies that generate on-site electricity and that meet  
            the intent of the law and allows for customer choice and fair  

           3)Should Fuel Cells receive this rate?  The Legislature mandated  
            (AB 1110, Fuentes, 2009) that certain fuel cell models be  
            eligible for natural gas at rates available to cogeneration  
            and electrical generation facilities. Utility customers that  
            purchase CHP fuel cell models receive the benefit of this gas  
            rate, but these same rates were not offered to customers with  
            non-CHP fuel cells. The original argument to allow fuel cells  
            to qualify for this gas rate was based on the reasoning that  
            fuel cells are an efficient method of electrical production.   
            Certain fuel cells are not configured to be used as  
            cogeneration technologies, also known as  
            combined-heat-and-power (CHP). Some fuel cells operate in a  


                                                                  AB 796
                                                                  Page  3

            manner that only produces electricity. 

           4)Fuel Cell Emissions  . This bill primarily impacts stationary  
            fuel cell technologies that generate power for large  
            institutions or facilities and use natural gas for fuel. In  
            comparison to natural gas plants, fuel cells generate lower  
            amounts of criteria pollutants including NOx, SOx, and  
            particulate matter. The benefits from an emissions standpoint  
            of non-CHP fuel cells are the de minimis NOx, SOx, and  
            particulate matter emissions.

            Fuel cell technologies that use natural gas generate CO2  
            emissions. Depending on the efficiency of the fuel cell  
            technology, there can be emission reductions due to direct  
            displacement of grid based electricity, displacement of  
            natural gas burned in boilers, or by using recovered waste  
            heat to run chillers for cooling (thereby reducing electricity  
            that would otherwise have been provided from the electricity  
            grid). Some fuel cells are electric only and do not capture  
            waste heat for other uses.

            The California Public Utilities Commission (PUC) published an  
            analysis of SGIP and found that electric-only fuel cells were  
            the only non-renewable technology that had a net-reducing  
            effect on GHG emissions for the SGIP in 2011, shown by a  
            negative value in the chart below (excerpted from the PUC's  
            analysis). Note that this analysis is based on the SGIP  
            program before it was amended to focus on GHG reduction  
            characteristics (SB 412, Stats. 2009, Ch. 182).

            |   Type   |  SGIP  | Baseline Emissions (Metric Tons |  GHG  |
            |          |Emission|        of CO2 per Year)         |Emissio|
            |          |   s    |                                 |  ns   |
            |          |(Metric |                                 |Impact |
            |          |Tons of |                                 |(Metric|
            |          |CO2 per |                                 |  Tons |
            |          | Year)  |                                 |of CO2 |
            |          |   A    |                                 |  per  |
            |          |        |                                 | Year) |
            |          |        |                                 | F=A-E |
            |          |        |                                 |       |


                                                                  AB 796
                                                                  Page  4

            |          |        |Electric|Heating|Cooling| Total  |       |
            |          |        |  Power |       |       |Baseline|       |
            |          |        | Plant  |Service|Service|        |       |
            |          |        |   B    |   s   |   s   |E=B+C+D |       |
            |          |        |        |   C   |   D   |        |       |
            |FC - CHP  | 23,522 | 20,126 | 2,487 |  32   | 22,645 |  877  |
            |FC -      | 7,561  | 7,811  |   0   |   0   | 7,811  | -250  |
            |Elec.     |        |        |       |       |        |       |
            |FC - PEM  |  656   |  529   |  67   |   0   |  596   |  61   |
            |GT        |111,071 | 78,780 |12,218 | 2,002 | 93,000 |18,071 |
            |ICE       |157,237 |109,878 |33,038 | 2,861 |145,778 |11,459 |
            |MT        | 58,447 | 29,949 | 9,430 |  529  | 39,908 |18,539 |
            |Total     |358,495 |247,073 |57,240 | 5,425 |309,738 |48,756 |
            (Type Abbreviations: Fuel Cell - Combined Heat and Power, Fuel  
            Cell - Electric, Fuel Cell - Proton Exchange Membrane, Gas  
            Turbine, Internal Combustion Engine, Microturbines)

            The current SGIP program requires that a product or a  
            technology must produce fewer GHG emissions than it avoids  
            from the grid. As California's electricity resource mix adds  
            more renewable generation it is likely that the baseline  
            emissions shown above will be lower, which may make it more  
            difficult for fuel cell technologies to achieve net GHG  

            Fuel cells customers are eligible for a ratepayer funded  
            incentive called the Self Generation Incentive Program (SGIP).  
            The incentive is a maximum of $2.25 per watt of capacity. One  
            fuel cell manufacturer has benefitted from approximately  
            $250,000,000 in incentives through this program since 2009.

           5)Is there a cost-shift?  PG&E estimates that approximately $4  
            million per year is shifted to other ratepayers as a result of  
            providing this rate to fuel cell facilities.

            In addition to this discount on natural gas purchases, fuel  
            cell facilities are eligible for net metering credits as a  


                                                                  AB 796
                                                                  Page  5

            result of their electricity generation. A report on the costs  
            and benefits of net energy metering is due by October 1, 2013  
            from the Public Utilities Commission.

           6)Additional Support for Fuel Cells  . In addition to the natural  
            gas rate and the net metering credits, fuel cells customers  
            are also exempted from responsibility to contribute to  
            'nonbypassable charges.' Nonbypassable charges include  
            contributions to support discounts for low income customers  
            and incentives for customers who make certain energy  
            efficiency expenditures or acquire fuel cells or renewable  
            energy facilities. 

           7)Future extension of this statute should review total  
            incentives for this technology  . If this statute is later  
            proposed to be extended, the Legislature should review the  
            total incentives made available and whether the statute has  
            achieved its desired results with respect to cost reductions  
            and competitiveness in the market for this technology.

           8)Support for AB 796  .

             a)   The Fuel Cell and Hydrogen Energy Association states  
               that, "Historically, energy policies have been focused on  
               one or two technologies. As technological innovation  
               continues, our existing policies need to become 'technology  
               neutral' to allow new technologies enter the market. For  
               instance, because the cogeneration definition is used to  
               determine eligibility for special gas tariffs and other  
               state incentive programs, it can act as a disincentive for  
               customers to install the latest and most efficient  
               technologies that best fit their needs."

             b)   TechNet states that this exemption from surcharges  
               "promotes the development of the most effective, innovative  
               clean energy technologies by making available favorable  
               natural gas rates - on a technology-neutral basis -- for a  
               broader range of clean, distributed generation  

             c)   The National Fuel Cell Research Center states that "  
               continuation of this policy is critical in ensuing that  
               fuel cells have a fair opportunity to participate in the CA  
               energy market."


                                                                  AB 796
                                                                  Page  6


          Fuel Cell and Hydrogen Energy Association (FCHEA)
          National Fuel Cell Research Center (NFCRC)
          The Technology Network (TechNet)

          None on file.
          Analysis Prepared by  :    Susan Kateley / U. & C. / (916)