BILL ANALYSIS Ó AB 2363 Page A Date of Hearing: April 28, 2014 ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE Steven Bradford, Chair AB 2363 (Dahle) - As Amended: April 10, 2014 SUBJECT : Electricity procurement. SUMMARY : This bill would require the California Public Utilities Commission (PUC) to adopt a nonzero integration cost adder methodology to use when approving procurement of eligible renewable resources by a retail seller in excess of the minimum quantities required by the renewables portfolio standard. Specifically, this bill : 1)Requires the PUC to adopt, by rulemaking, by October 1, 2015, a nonzero integration cost adder methodology that reflects a reasonable estimate of the costs of procuring capacity and energy required to accommodate the electrical generation of the particular eligible renewable energy resource. 2)Requires the PUC to consider nonzero integration cost adders prior to approving procurement of eligible renewable energy resources by a retail seller in excess of the minimum quantities of electricity products required to be purchased pursuant to the renewables portfolio standard. 3)Requires the PUC to direct electrical corporations to include nonzero integration cost adders in their proposed procurement plans. EXISTING LAW a)Establishes procurement requirements which electrical corporations and public utilities must meet in order to attain a target of 33% renewable generation in their electricity supply portfolios by 2020. (Public Utilities Code 399.11) b)Establishes a renewables portfolio standard requiring all retail sellers to procure a minimum quantity of electricity products from eligible renewable energy resources as a specified percentage of total kilowatt-hours sold to their retail end-use customers each compliance period to achieve various targets. (Public Utilities Code 399.15) AB 2363 Page B c)Directs the PUC to review and approve electricity procurement plans proposed by electrical corporations. The plans are to meet specified objectives, including just and reasonable rates and moderating price risks associated with serving utility customers. (Public Utilities Code 454.5) d)Authorizes the PUC to require each electrical corporation to annually prepare a renewable energy procurement plan. FISCAL EFFECT : Unknown COMMENTS : 1)Author's statement: "Despite the CPUC's longstanding interest in integration cost adders that accurately reflect the differing integration costs associated with particular renewable technologies, the CPUC has failed to take action to level the playing field. As a result, biomass and geothermal projects with low integration costs but high operational and capital costs cannot compete with intermittent renewables that have relatively lower operational and capital costs but much higher integration costs that are simply ignored. AB 2363 obliges the CPUC to determine appropriate integration cost adders so that the IOUs' LCBF analysis accurately reflects the total costs, both direct and indirect, of particular renewable resources. This is significant given the range of renewable procurement options available to California public utilities. It is important to promote a policy that will assist the state's RPS to ensure that the procurement process creates a more level playing field and evaluates all new and existing renewable resources accurately and fairly. The result will be a more diverse and cost-effective portfolio of renewable energy resources, which will help to balance the grid and maintain reliability while keeping consumer electric rates affordable." 2)Integration costs. California's Renewable Portfolio Standard (RPS) mandates that electrical corporations and public utilities must meet or exceed a target of 33% renewable AB 2363 Page C generation in their electricity supply portfolios by 2020. A wide variety of renewable resources are available, and each has diverse operating characteristics and costs. Solar and wind energy are classified as intermittent renewables - they are dependent upon the sun shining or wind blowing. In order to ensure a reliable and steady flow of energy to customers, they require additional generation to be available as a backup. The costs of backup generation are referred to as "integration costs" and are a necessary element of integrating intermittent renewable resources into the grid. Other renewable energy resources are classified as baseload facilities - they are able operate 24 hours per day. These include certain geothermal and biopower facilities. As such, these types of facilities do not require additional backup generation and thus may have lower integration costs than intermittent resources such as solar and wind. 3)The PUC's least cost best fit analysis. Electricity procurement plans and renewable energy contracts proposed by investor owned utilities (IOUs) are subject to the PUC's least cost best fit (LCBF) requirements. Currently, the PUC does not include integration costs in its LCBF analysis. Therefore, all renewables are considered to have no integration costs even though certain renewable resources have higher integration costs than others. As background, in the first year of the RPS program (2004), the PUC recognized that integration costs for intermittent renewables needed to be captured in a cost adder so that these costs could inform and improve the renewable procurement decisions. At the time, with limited renewables penetration and low associated integration costs, the PUC approved an adder of zero.<1> Today, estimates of integration costs for intermittent renewables have suggested that this value is no longer zero, but the PUC continues its consideration as to whether a nonzero integration cost adder is appropriate for such resources. 4)State of RPS procurement. California's electricity portfolio must be balanced and diversified to promote reliability. Due to the RPS and the increasingly competitive prices for --------------------------- <1> PUC Decision 04-07-029. http://docs.cpuc.ca.gov/word_pdf/FINAL_DECISION/38287.pdf AB 2363 Page D renewable generation, renewable technologies are providing much larger amounts of electricity for California. However, due to the performance characteristics of the technologies, reliance on intermittent and variable renewable resources (wind energy is available when the wind blows and solar energy is available when the sun shines) balanced with other renewable technologies, such as geothermal and biopower, which can generate electricity at any time. However, the most recent quarterly reports from the investor-owned utilities (IOUs) show that renewable procurement is weighted toward intermittent and variable resources. The table below is based on data reported by PG&E, SDG&E, and SCE in the most recent compliance reports. With forecasts extended out to 2020, the data for all three large IOUs generally show a large shift toward solar PV and wind, with a corresponding decrease in geothermal and biopower. SDG&E shows the most dramatic trend from 2011 to 2020, with a large shift from 0.1% solar PV to 51.9%, and a decrease in geothermal from 23.2% to 0%. The other IOUs display similar, although not as dramatic, trends. The percentages below represent the percentage of megawatt-hours, by technology each utility has contracted with to meet the RPS goals. ---------------------------------------------------------------- | RPS Procurement: August 1, 2013 Compliance Reports | ---------------------------------------------------------------- --------------------------------------------------------------- | | PG&E | SDG&E | SCE | --------------------------------------------------------------- |---------+---------+---------+---------+---------+---------+---------+---------+---------+---------| |Energy | 2011 | 2012 | 2020 | 2011 | 2012 | 2020 | 2011 | 2012 | 2020 | |source | | | | | | | | | | |---------+---------+---------+---------+---------+---------+---------+---------+---------+---------| |Biopower | 24.4% | 23.9% | 11.1% | 16.8% | 25.0% | 2.8% | 5.5% | 4.1% | 0.5% | |---------+---------+---------+---------+---------+---------+---------+---------+---------+---------| |Geotherma| 25.0% | 26.0% | 10.2% | 23.2% | 28.1% | 0.0% | 46.8% | 43.4% | 20.0% | |l | | | | | | | | | | |---------+---------+---------+---------+---------+---------+---------+---------+---------+---------| |Small | 18.2% | 12.4% | 9.2% | 0.0% | 0.0% | 0.3% | 5.1% | 3.2% | 3.3% | |Hydro | | | | | | | | | | |---------+---------+---------+---------+---------+---------+---------+---------+---------+---------| AB 2363 Page E |Conduit | 0.0% | 0.0% | 0.0% | 0.5% | 0.6% | 0.1% | 0.8% | 1.0% | 0.5% | |Hydro | | | | | | | | | | |---------+---------+---------+---------+---------+---------+---------+---------+---------+---------| |Solar | 1.4% | 8.0% | 33.4% | 0.1% | 0.1% | 51.9% | 0.7% | 1.1% | 33.1% | |Photovolt| | | | | | | | | | |aic | | | | | | | | | | |---------+---------+---------+---------+---------+---------+---------+---------+---------+---------| |Solar | 0.0% | 0.0% | 14.4% | 0.0% | 0.0% | 0.0% | 5.7% | 5.8% | 3.2% | |Thermal | | | | | | | | | | |---------+---------+---------+---------+---------+---------+---------+---------+---------+---------| |Wind | 31.0% | 29.7% | 21.8% | 59.4% | 46.2% | 44.9% | 35.4% | 41.5% | 39.5% | --------------------------------------------------------------------------------------------------- |Ocean/Tid| 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | |al | | | | | | | | | | |---------+---------+---------+---------+---------+---------+---------+---------+---------+---------| |Fuel | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% |0.0% | |Cells | | | | | | | | | | --------------------------------------------------------------------------------------------------- In the PUC's proceeding to establish RPS procurement plans, comments were received from PG&E that suggested a renewable integration adder. The Center for Energy Efficiency and Renewable Technology (CEERT), California Wind Energy Association, and SCE filed comments asking that a process and timeline for the development of a renewable integration cost adder be established. The PUC decided in 2012 that integration costs would remain set at zero until more information and a public review had occurred.<2> The PUC invited comments on the integration cost adder in a separate Long Term Procurement Planning (LTPP) proceeding, R.12-03-014. This proceeding started in March 2012 and is still underway. By restricting integration costs to zero, the PUC provides no value to renewable technologies with different characteristics (intermittent, variable, dispatchable, baseload). This may be a contributing factor to the shift in utility procurement toward intermittent and variable renewable generation. 5)The Duck Chart. The absence of integration costs may also be a contributor to the "Duck Chart", a graphic released in 2013 by the California Independent System Operator (CAISO). --------------------------- <2> PUC Decision 12-11-016. http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M033/K783/33 783021.PDF AB 2363 Page F Essentially, the chart demonstrates that as California adds certain intermittent and variable sources of renewable energy (i.e., wind and solar), the state will need more fossil-fuel power plants to supply electricity when the sun and the wind don't. Furthermore, it shows that those plants must be able to cut or boost their output much faster than older plants can. The Duck Chart also warns that California may experience challenges with grid reliability due to a convergence of policies, including: closure of at least some of the coastally-located gas power plants; closure of the San Onofre Nuclear Generation Station (SONGS); lack of transmission flexibility into regions of San Diego and southern Orange County; updated hourly demand forecasts; and performance characteristics of forecasted wind and solar procurement facilities. Because wind and solar facilities can produce large upward and downward ramps of output without predictability or advance warning (i.e., when the wind starts/stops or the sun is blocked by cloud cover), the Duck Chart demonstrates that if current procurement trends continue, there may be added cost burdens and reliability challenges needed to maintain compliance with federal reliability standards. Possible remedies include paying (1) renewable generators to curtail generation; (2) natural gas generators to stand by to respond to large ramps; or even (3) other states to take excess generation. These scenarios may occur if nothing is done to reduce the size of the ramps, such as but not limited to building more natural gas plants, modifying renewable procurement practices within the renewable portfolio, or increasing the size and effectiveness of energy efficiency and demand response programs. Renewable technologies such as geothermal and biopower have different characteristics and can provide power output consistently over a 24 hour period. These energy sources may be part of the mix of possible policy actions to address the issues raised by the Duck Chart. One important factor to consider is their costs, as described below. AB 2363 Page G 1)Cost Comparisons . The cost of generation is paid by ratepayers. The PUC is charged with ensuring safe, reliable, affordable supplies of electricity to customers and that the costs paid are just and reasonable. According to the February 2014 report to the Legislature on RPS costs<3>: the weighted average time-of-delivery (TOD) adjusted contract price was approximately 7.5 cents/kilowatt hour (kWh) for all contracts approved in 2013 (including renewable energy credit only, or REC only, transactions), and approximately 8.4 cents/kWh for bundled energy product (excluding REC only transactions). This 2013 average RPS contract price is lower than the RPS contracts approved in 2012, which were 9.7 cents/kWh on average, because of price declines in the renewable market. Table A-1 in this report also reports that the average TOD RPS procurement from geothermal projects ranged from 6.5 to 7.19 cents/kWh - numbers relatively similar to those in 2012. Photovoltaic projects ranged from 10 to 15.18 cents/kWh, a decrease from the 2012 range of 15.33 to 23 cents/kWh. With the absence of a non-zero integration cost adder, it is difficult to perform an "apples to apples" cost comparisons between different renewable resources. 2)Cost integration in excess of RPS requirements. Currently bill language mandates the PUC to use nonzero integration cost adder methodology when approving procurement of eligible renewable resources by a retail seller in excess of the minimum required RPS quantities. This provision may have the unintended consequence of halting renewable procurement in excess of the minimum quantities, as the PUC does not currently have an approved nonzero integration cost adder methodology. The author may wish to consider an amendment that removes language related to the use of nonzero cost adder methodology when procurement is in excess of the RPS requirements. --------------------------- <3> PUC. Padilla Report to Legislature. February 2014. http://www.cpuc.ca.gov/NR/rdonlyres/775640F8-38D7-4895-9252-7E172 61776FE/0/PadillaReport2014FINAL.pdf AB 2363 Page H 3)Cost integration of all technologies and examining least-cost integration solutions. This bill focuses on the cost of the RPS qualified technologies. However, all energy facilities are likely to have integration costs to some extent. It may be a worthwhile for the PUC to provide integration costs for all generation technologies so that it does not single out renewables as the only technologies that has such costs. It may also be worth considering how renewable integration costs are defined. For example, it may not be appropriate to include an assumption for natural gas generation as the only way to address ramping or intermittency issues (as shown in the duck chart). Smart demand response or energy storage may be examples of some mechanisms that could address this in a cost-effective manner. Smart demand and energy response were two of four alternate scenarios for addressing potential over-generation that could occur if the state's RPS is raised to 50% in the January 2014 report by the consulting firm E3: "Investigating a Higher Renewables Portfolio Standard in California." 4)Support and opposition. Supporters claim the bill will improve the procurement process by recognizing the integration costs of intermittent resources, and that the full costs and benefits of various choices should be as transparent as possible to improve the analysis of least cost, best fit and to protect ratepayers. Additional supporters say the bill will assist the state's RPS to ensure that the procurement process creates a more level playing field and evaluates all new and existing renewable resources accurately and fairly. They further state the result will be a more diverse and cost-effective portfolio of renewable energy resources, which will help to balance the grid and maintain reliability while keeping consumer electric rates affordable. Others are concerned that the term "non-zero" could force a value onto some resources where the correct value may in fact be zero. Opponents claim this bill inappropriately requires assignment of an additional cost to renewable resources regardless if any additional cost exists and could unnecessarily result in negative impacts on both renewable energy procurement and ratepayer costs. Additionally, they claim this requirement circumvents the work underway by the PUC and the CAISO to AB 2363 Page I determine whether and to what extent there are costs related to integration of renewable energy onto the California electricity grid. Furthermore, the PUC has a process underway to determine the appropriate costs of integration to assign-if any. Other opponents argue specifically mandating a non-zero adder, particularly in advance of demonstrated need, may have the perverse impact of raising costs for consumers without reason. 5)Suggested amendments. SECTION 1. The Legislature finds and declares all of the following: (a) California is leading the world in adopting comprehensive programs that reduce emissions of greenhouse gases, including passage of the California Global Warming Solutions Act of 2006 (Division 25.5 (commencing with Section 38500) of the Health and Safety Code) and the California Renewables Portfolio Standard Program (Article 16 (commencing with Section 399.11) of Chapter 2.3 of Part 1 of Division 1 of the Public Utilities Code). (b) The state has an abundant supply of renewable energy resources, including geothermal, biomass, biomethane, wind, and solar, that have contributed to the state's ability to reduce its emissions of greenhouse gases and meet its renewables portfolio standard procurement targets. (c) It is in the public's interest that the state continue to promote policies to ensure eligible renewable energy resources be procured and contributed to the state's ability to reduce its greenhouse gas emissions and meet the targets of the California Renewables Portfolio Standard Program (Article 16 (commencing with Section 399.11) of Chapter 2.3 of Part 1 of Division 1 of the Public Utilities Code). (d) There are eligible renewable energy resources in the state that, if developed and retained, would not require additional capacity to maintain the reliability of the bulk electrical system and could generate during periods in which electricity is likely to be the most valuable, prospectively. (e) Procuring and retaining a diversified portfolio of eligible renewable energy resources may do all of the following: (1) Assist electrical corporations in satisfying renewable energy procurement and greenhouse gases emissions reductions goals in a cost-effective manner. (2) Partially meet peak load requirements with electricity AB 2363 Page J generated by eligible renewable energy resources, which will have substantial benefits from reduced emissions of greenhouse gases, and cobenefits from reduced emissions of criteria pollutants. (3) Maintain the reliability of the electrical grid to meet demand for electricity on a 24-hour basis. (4) Contribute to local employment and economic growth throughout the state. SEC. 2. Section 399.13 of the Public Utilities Code is amended to read: 399.13. (a) (1) The commission shall direct each electrical corporation to annually prepare a renewable energy procurement plan that includes the matter in paragraph (5), to satisfy its obligations under the renewables portfolio standard. To the extent feasible, this procurement plan shall be proposed, reviewed, and adopted by the commission as part of, and pursuant to, a general procurement plan process. The commission shall require each electrical corporation to review and update its renewable energy procurement plan as it determines to be necessary. (2) Every electrical corporation that owns electrical transmission facilities shall annually prepare, as part of the Federal Energy Regulatory Commission Order 890 process, and submit to the commission, a report identifying any electrical transmission facility, upgrade, or enhancement that is reasonably necessary to achieve the renewables portfolio standard procurement requirements of this article. Each report shall look forward at least five years and, to ensure that adequate investments are made in a timely manner, shall include a preliminary schedule when an application for a certificate of public convenience and necessity will be made, pursuant to Chapter 5 (commencing with Section 1001), for any electrical transmission facility identified as being reasonably necessary to achieve the renewable energy resources procurement requirements of this article. Each electrical corporation that owns electrical transmission facilities shall ensure that project-specific interconnection studies are completed in a timely manner. (3) The commission shall direct each retail seller to prepare and submit an annual compliance report that includes all of the following: (A) The current status and progress made during the prior year toward procurement of eligible renewable energy resources as a percentage of retail sales, including, if applicable, the AB 2363 Page K status of any necessary siting and permitting approvals from federal, state, and local agencies for those eligible renewable energy resources procured by the retail seller, and the current status of compliance with the portfolio content requirements of subdivision (c) of Section 399.16, including procurement of eligible renewable energy resources located outside the state and within the WECC and unbundled renewable energy credits. (B) If the retail seller is an electrical corporation, the current status and progress made during the prior year toward construction of, and upgrades to, transmission and distribution facilities and other electrical system components it owns to interconnect eligible renewable energy resources and to supply the electricity generated by those resources to load, including the status of planning, siting, and permitting transmission facilities by federal, state, and local agencies. (C) Recommendations to remove impediments to making progress toward achieving the renewable energy resources procurement requirements established pursuant to this article. (4) The commission shall adopt, by rulemaking, all of the following: (A) A process that provides criteria for the rank ordering and selection of least-cost and best-fit eligible renewable energy resources to comply with the California Renewables Portfolio Standard Program obligations on a total cost basis. This process shall take into account all of the following: (i) Estimates of indirect costs associated with needed transmission investments and ongoing electrical corporation expenses resulting from integrating and operating eligible renewable energy resources. (ii) The cost impact of procuring the eligible renewable energy resources on the electrical corporation's electricity portfolio. (iii) The viability of the project to construct and reliably operate the eligible renewable energy resource, including the developer's experience, the feasibility of the technology used to generate electricity, and the risk that the facility will not be built, or that construction will be delayed, with the result that electricity will not be supplied as required by the contract. (iv) Workforce recruitment, training, and retention efforts, including the employment growth associated with the construction and operation of eligible renewable energy resources and goals for recruitment and training of women, minorities, and disabled veterans. AB 2363 Page L (v) A nonzero integration cost adder methodology, to be initially determined by the commission no later than October 1, 2015, that reflects a reasonable estimate of the costs of procuring capacity and energy required to accommodate the electrical generation of the particular eligible renewable energy resource. (B) Rules permitting retail sellers to accumulate, beginning January 1, 2011, excess procurement in one compliance period to be applied to any subsequent compliance period. The rules shall apply equally to all retail sellers. In determining the quantity of excess procurement for the applicable compliance period, the commission shall deduct from actual procurement quantities, the total amount of procurement associated with contracts of less than 10 years in duration. In no event shall electricity products meeting the portfolio content of paragraph (3) of subdivision (b) of Section 399.16 be counted as excess procurement. (C) Standard terms and conditions to be used by all electrical corporations in contracting for eligible renewable energy resources, including performance requirements for renewable generators. A contract for the purchase of electricity generated by an eligible renewable energy resource, at a minimum, shall include the renewable energy credits associated with all electricity generation specified under the contract. The standard terms and conditions shall include the requirement that, no later than six months after the commission's approval of an electricity purchase agreement entered into pursuant to this article, the following information about the agreement shall be disclosed by the commission: party names, resource type, project location, and project capacity. (D) An appropriate minimum margin of procurement above the minimum procurement level necessary to comply with the renewables portfolio standard to mitigate the risk that renewable projects planned or under contract are delayed or canceled. This paragraph does not preclude an electrical corporation from voluntarily proposing a margin of procurement above the appropriate minimum margin established by the commission. (5) Consistent with the goal of increasing California's reliance on eligible renewable energy resources, the renewable energy procurement plan submitted by an electrical corporation shall include all of the following: (A) An assessment of annual or multiyear portfolio supplies and demand to determine the optimal mix of eligible renewable AB 2363 Page M energy resources with deliverability characteristics that may include peaking, dispatchable, baseload, firm, and as-available capacity. (B) Potential compliance delays related to the conditions described in paragraph (4) (5) of subdivision (b) of Section 399.15. (C) A bid solicitation setting forth the need for eligible renewable energy resources of each deliverability characteristic, required online dates, and locational preferences, if any. (D) A status update on the development schedule of all eligible renewable energy resources currently under contract. (E) Consideration of mechanisms for price adjustments associated with the costs of key components for eligible renewable energy resource projects with online dates more than 24 months after the date of contract execution. (F) An assessment of the risk that an eligible renewable energy resource will not be built, or that construction will be delayed, with the result that electricity will not be delivered as required by the contract. (6) In soliciting and procuring eligible renewable energy resources, each electrical corporation shall offer contracts of no less than 10 years duration, unless the commission approves of a contract of shorter duration. (7) In soliciting and procuring eligible renewable energy resources for California-based projects, each electrical corporation shall give preference to renewable energy projects that provide environmental and economic benefits to communities afflicted with poverty or high unemployment, or that suffer from high emission levels of toxic air contaminants, criteria air pollutants, and greenhouse gases. (b) A retail seller may enter into a combination of long- and short-term contracts for electricity and associated renewable energy credits. The commission may authorize a retail seller to enter into a contract of less than 10 years' duration with an eligible renewable energy resource, if the commission has established, for each retail seller, minimum quantities of eligible renewable energy resources to be procured through contracts of at least 10 years' duration. (c) The commission shall review and accept, modify, or reject each electrical corporation's renewable energy resource procurement plan prior to the commencement of renewable energy procurement pursuant to this article by an electrical corporation. (d) Unless previously preapproved by the commission, an AB 2363 Page N electrical corporation shall submit a contract for the generation of an eligible renewable energy resource to the commission for review and approval consistent with an approved renewable energy resource procurement plan. If the commission determines that the bid prices are elevated due to a lack of effective competition among the bidders, the commission shall direct the electrical corporation to renegotiate the contracts or conduct a new solicitation. (e) If an electrical corporation fails to comply with a commission order adopting a renewable energy resource procurement plan, the commission shall exercise its authority pursuant to Section 2113 to require compliance. The commission shall enforce comparable penalties on any retail seller that is not an electrical corporation that fails to meet the procurement targets established pursuant to Section 399.15. (f) (1) The commission may authorize a procurement entity to enter into contracts on behalf of customers of a retail seller for electricity products from eligible renewable energy resources to satisfy the retail seller's renewables portfolio standard procurement requirements. The commission shall not require any person or corporation to act as a procurement entity or require any party to purchase eligible renewable energy resources from a procurement entity. (2) Subject to review and approval by the commission, the procurement entity shall be permitted to recover reasonable administrative and procurement costs through the retail rates of end-use customers that are served by the procurement entity and are directly benefiting from the procurement of eligible renewable energy resources. (g) Procurement and administrative costs associated with contracts entered into by an electrical corporation for eligible renewable energy resources pursuant to this article and approved by the commission are reasonable and prudent and shall be recoverable in rates. (h) Construction, alteration, demolition, installation, and repair work on an eligible renewable energy resource that receives production incentives pursuant to Section 25742 of the Public Resources Code, including work performed to qualify, receive, or maintain production incentives, are "public works" for the purposes of Chapter 1 (commencing with Section 1720) of Part 7 of Division 2 of the Labor Code. SEC. 3. Section 399.15 of the Public Utilities Code is amended to read: 399.15. (a) In order to fulfill unmet long-term resource AB 2363 Page O needs, the commission shall establish a renewables portfolio standard requiring all retail sellers to procure a minimum quantity of electricity products from eligible renewable energy resources as a specified percentage of total kilowatthours sold to their retail end-use customers each compliance period to achieve the targets established under this article. For any retail seller procuring at least 14 percent of retail sales from eligible renewable energy resources in 2010, the deficits associated with any previous renewables portfolio standard shall not be added to any procurement requirement pursuant to this article. (b) The commission shall implement renewables portfolio standard procurement requirements only as follows: (1) Each retail seller shall procure a minimum quantity of eligible renewable energy resources for each of the following compliance periods: (A) January 1, 2011, to December 31, 2013, inclusive. (B) January 1, 2014, to December 31, 2016, inclusive. (C) January 1, 2017, to December 31, 2020, inclusive. (2) (A) No later than January 1, 2012, the commission shall establish the quantity of electricity products from eligible renewable energy resources to be procured by the retail seller for each compliance period. These quantities shall be established in the same manner for all retail sellers and result in the same percentages used to establish compliance period quantities for all retail sellers. (B) In establishing quantities for the compliance period from January 1, 2011, to December 31, 2013, inclusive, the commission shall require procurement for each retail seller equal to an average of 20 percent of retail sales. For the following compliance periods, the quantities shall reflect reasonable progress in each of the intervening years sufficient to ensure that the procurement of electricity products from eligible renewable energy resources achieves 25 percent of retail sales by December 31, 2016, and 33 percent of retail sales by December 31, 2020. The commission shall require retail sellers to procure not less than 33 percent of retail sales of electricity products from eligible renewable energy resources in all subsequent years. (C) Retail sellers shall be obligated to procure no less than the quantities associated with all intervening years by the end of each compliance period. Retail sellers shall not be required to demonstrate a specific quantity of procurement for any individual intervening year. (3) The commission may require the procurement of eligible AB 2363 Page P renewable energy resources in excess of the quantities specified in paragraph (2).Prior to approving any procurement of eligible renewable energy resources that would be in excess of the quantities specified in paragraph (2), the commission shall consider the nonzero integrated cost adder methodology determined pursuant to clause (v) of subparagraph (A) of paragraph (4) of subdivision (a) of Section 399.13.(4) Only for purposes of establishing the renewables portfolio standard procurement requirements of paragraph (1) and determining the quantities pursuant to paragraph (2), the commission shall include all electricity sold to retail customers by the Department of Water Resources pursuant to Division 27 (commencing with Section 80000) of the Water Code in the calculation of retail sales by an electrical corporation. (5) The commission shall waive enforcement of this section if it finds that the retail seller has demonstrated any of the following conditions are beyond the control of the retail seller and will prevent compliance: (A) There is inadequate transmission capacity to allow for sufficient electricity to be delivered from proposed eligible renewable energy resource projects using the current operational protocols of the Independent System Operator. In making its findings relative to the existence of this condition with respect to a retail seller that owns transmission lines, the commission shall consider both of the following: (i) Whether the retail seller has undertaken, in a timely fashion, reasonable measures under its control and consistent with its obligations under local, state, and federal laws and regulations, to develop and construct new transmission lines or upgrades to existing lines intended to transmit electricity generated by eligible renewable energy resources. In determining the reasonableness of a retail seller's actions, the commission shall consider the retail seller's expectations for full-cost recovery for these transmission lines and upgrades. (ii) Whether the retail seller has taken all reasonable operational measures to maximize cost-effective deliveries of electricity from eligible renewable energy resources in advance of transmission availability. (B) Permitting, interconnection, or other circumstances that delay procured eligible renewable energy resource projects, or there is an insufficient supply of eligible renewable energy resources available to the retail seller. In making a finding AB 2363 Page Q that this condition prevents timely compliance, the commission shall consider whether the retail seller has done all of the following: (i) Prudently managed portfolio risks, including relying on a sufficient number of viable projects. (ii) Sought to develop one of the following: its own eligible renewable energy resources, transmission to interconnect to eligible renewable energy resources, or energy storage used to integrate eligible renewable energy resources. This clause shall not require an electrical corporation to pursue development of eligible renewable energy resources pursuant to Section 399.14. (iii) Procured an appropriate minimum margin of procurement above the minimum procurement level necessary to comply with the renewables portfolio standard to compensate for foreseeable delays or insufficient supply. (iv) Taken reasonable measures, under the control of the retail seller, to procure cost-effective distributed generation and allowable unbundled renewable energy credits. (C) Unanticipated curtailment of eligible renewable energy resources necessary to address the needs of a balancing authority. (6) If the commission waives the compliance requirements of this section, the commission shall establish additional reporting requirements on the retail seller to demonstrate that all reasonable actions under the control of the retail seller are taken in each of the intervening years sufficient to satisfy future procurement requirements. (7) The commission shall not waive enforcement pursuant to this section, unless the retail seller demonstrates that it has taken all reasonable actions under its control, as set forth in paragraph (5), to achieve full compliance. (8) If a retail seller fails to procure sufficient eligible renewable energy resources to comply with a procurement requirement pursuant to paragraphs (1) and (2) and fails to obtain an order from the commission waiving enforcement pursuant to paragraph (5), the commission shall exercise its authority pursuant to Section 2113. (9) Deficits associated with the compliance period shall not be added to a future compliance period. (c) The commission shall establish a limitation for each electrical corporation on the procurement expenditures for all eligible renewable energy resources used to comply with the renewables portfolio standard. In establishing this limitation, the commission shall rely on the following: AB 2363 Page R (1) The most recent renewable energy procurement plan. (2) Procurement expenditures that approximate the expected cost of building, owning, and operating eligible renewable energy resources. (3) The potential that some planned resource additions may be delayed or canceled. (d) In developing the limitation pursuant to subdivision (c), the commission shall ensure all of the following: (1) The limitation is set at a level that prevents disproportionate rate impacts. (2) The costs of all procurement credited toward achieving the renewables portfolio standard are counted towards the limitation. (3) Procurement expenditures do not include any indirect expenses, including imbalance energy charges, sale of excess energy, decreased generation from existing resources, transmission upgrades, or the costs associated with relicensing any utility-owned hydroelectric facilities. (e) (1) No later than January 1, 2016, the commission shall prepare a report to the Legislature assessing whether each electrical corporation can achieve a 33-percent renewables portfolio standard by December 31, 2020, and maintain that level thereafter, within the adopted cost limitations. If the commission determines that it is necessary to change the limitation for procurement costs incurred by any electrical corporation after that date, it may propose a revised cap consistent with the criteria in subdivisions (c) and (d). The proposed modifications shall take effect no earlier than January 1, 2017. (2) Notwithstanding Section 10231.5 of the Government Code, the requirement for submitting a report imposed under paragraph (1) is inoperative on January 1, 2021. (3) A report to be submitted pursuant to paragraph (1) shall be submitted in compliance with Section 9795 of the Government Code. (f) If the cost limitation for an electrical corporation is insufficient to support the projected costs of meeting the renewables portfolio standard procurement requirements, the electrical corporation may refrain from entering into new contracts or constructing facilities beyond the quantity that can be procured within the limitation, unless eligible renewable energy resources can be procured without exceeding a de minimis increase in rates, consistent with the long-term procurement plan established for the electrical corporation pursuant to Section 454.5. AB 2363 Page S (g) (1) The commission shall monitor the status of the cost limitation for each electrical corporation in order to ensure compliance with this article. (2) If the commission determines that an electrical corporation may exceed its cost limitation prior to achieving the renewables portfolio standard procurement requirements, the commission shall do both of the following within 60 days of making that determination: (A) Investigate and identify the reasons why the electrical corporation may exceed its annual cost limitation. (B) Notify the appropriate policy and fiscal committees of the Legislature that the electrical corporation may exceed its cost limitation, and include the reasons why the electrical corporation may exceed its cost limitation. (h) The establishment of a renewables portfolio standard shall not constitute implementation by the commission of the federal Public Utility Regulatory Policies Act of 1978 (Public Law 95-617). SEC. 4. Section 454.5 of the Public Utilities Code is amended to read: 454.5. (a) The commission shall specify the allocation of electricity, including quantity, characteristics, and duration of electricity delivery, that the Department of Water Resources shall provide under its power purchase agreements to the customers of each electrical corporation, which shall be reflected in the electrical corporation's proposed procurement plan. Each electrical corporation shall file a proposed procurement plan with the commission not later than 60 days after the commission specifies the allocation of electricity. The proposed procurement plan shall specify the date that the electrical corporation intends to resume procurement of electricity for its retail customers, consistent with its obligation to serve. After the commission's adoption of a procurement plan, the commission shall allow not less than 60 days before the electrical corporation resumes procurement pursuant to this section. (b) An electrical corporation's proposed procurement plan shall include, but not be limited to, all of the following: (1) An assessment of the price risk associated with the electrical corporation's portfolio, including any utility-retained generation, existing power purchase and exchange contracts, and proposed contracts or purchases under which an electrical corporation will procure electricity, electricity demand reductions, and electricity-related AB 2363 Page T products and the remaining open position to be served by spot market transactions. (2) A definition of each electricity product, electricity-related product, and procurement related financial product, including support and justification for the product type and amount to be procured under the plan. (3) The duration of the plan. (4) The duration, timing, and range of quantities of each product to be procured. (5) A competitive procurement process under which the electrical corporation may request bids for procurement-related services, including the format and criteria of that procurement process. (6) An incentive mechanism, if any incentive mechanism is proposed, including the type of transactions to be covered by that mechanism, their respective procurement benchmarks, and other parameters needed to determine the sharing of risks and benefits. (7) The upfront standards and criteria by which the acceptability and eligibility for rate recovery of a proposed procurement transaction will be known by the electrical corporation prior to execution of the transaction. This shall include an expedited approval process for the commission's review of proposed contracts and subsequent approval or rejection thereof. The electrical corporation shall propose alternative procurement choices in the event a contract is rejected. (8) Procedures for updating the procurement plan. (9) A showing that the procurement plan will achieve the following: (A) The electrical corporation, in order to fulfill its unmet resource needs, shall procure resources from eligible renewable energy resources in an amount sufficient to meet its procurement requirements pursuant to the California Renewables Portfolio Standard Program (Article 16 (commencing with Section 399.11) of Chapter 2.3). (B) The electrical corporation shall create or maintain a diversified procurement portfolio consisting of both short-term and long-term electricity and electricity-related and demand reduction products. (C) The electrical corporation shall first meet its unmet resource needs through all available energy efficiency and demand reduction resources that are cost effective, reliable, and feasible. (10) The electrical corporation's risk management policy, AB 2363 Page U strategy, and practices, including specific measures of price stability. (11) A plan to achieve appropriate increases in diversity of ownership and diversity of fuel supply of nonutility electrical generation. (12) A mechanism for recovery of reasonable administrative costs related to procurement in the generation component of rates. (c) The commission shall review and accept, modify, or reject each electrical corporation's procurement plan. The commission's review shall consider each electrical corporation's individual procurement situation, and shall give strong consideration to that situation in determining which one or more of the features set forth in this subdivision shall apply to that electrical corporation. A procurement plan approved by the commission shall contain one or more of the following features, provided that the commission may not approve a feature or mechanism for an electrical corporation if it finds that the feature or mechanism would impair the restoration of an electrical corporation's creditworthiness or would lead to a deterioration of an electrical corporation's creditworthiness: (1) A competitive procurement process under which the electrical corporation may request bids for procurement-related services. The commission shall specify the format of that procurement process, as well as criteria to ensure that the auction process is open and adequately subscribed. Any purchases made in compliance with the commission-authorized process shall be recovered in the generation component of rates. (2) An incentive mechanism that establishes a procurement benchmark or benchmarks and authorizes the electrical corporation to procure from the market, subject to comparing the electrical corporation's performance to the commission-authorized benchmark or benchmarks. The incentive mechanism shall be clear, achievable, and contain quantifiable objectives and standards. The incentive mechanism shall contain balanced risk and reward incentives that limit the risk and reward of an electrical corporation. (3) Upfront achievable standards and criteria by which the acceptability and eligibility for rate recovery of a proposed procurement transaction will be known by the electrical corporation prior to the execution of the bilateral contract for the transaction. The commission shall provide for expedited review and either approve or reject the individual AB 2363 Page V contracts submitted by the electrical corporation to ensure compliance with its procurement plan. To the extent the commission rejects a proposed contract pursuant to this criteria, the commission shall designate alternative procurement choices obtained in the procurement plan that will be recoverable for ratemaking purposes. (d) A procurement plan approved by the commission shall accomplish each of the following objectives: (1) Enable the electrical corporation to fulfill its obligation to serve its customers at just and reasonable rates. (2) Eliminate the need for after-the-fact reasonableness reviews of an electrical corporation's actions in compliance with an approved procurement plan, including resulting electricity procurement contracts, practices, and related expenses. However, the commission may establish a regulatory process to verify and ensure that each contract was administered in accordance with the terms of the contract, and contract disputes that may arise are reasonably resolved. (3) Ensure timely recovery of prospective procurement costs incurred pursuant to an approved procurement plan. The commission shall establish rates based on forecasts of procurement costs adopted by the commission, actual procurement costs incurred, or combination thereof, as determined by the commission. The commission shall establish power procurement balancing accounts to track the differences between recorded revenues and costs incurred pursuant to an approved procurement plan. The commission shall review the power procurement balancing accounts, not less than semiannually, and shall adjust rates or order refunds, as necessary, to promptly amortize a balancing account, according to a schedule determined by the commission. Until January 1, 2006, the commission shall ensure that any overcollection or undercollection in the power procurement balancing account does not exceed 5 percent of the electrical corporation's actual recorded generation revenues for the prior calendar year excluding revenues collected for the Department of Water Resources. The commission shall determine the schedule for amortizing the overcollection or undercollection in the balancing account to ensure that the 5 percent threshold is not exceeded. After January 1, 2006, this adjustment shall occur when deemed appropriate by the commission consistent with the objectives of this section. (4) Moderate the price risk associated with serving its retail customers, including the price risk embedded in its long-term AB 2363 Page W supply contracts, by authorizing an electrical corporation to enter into financial and other electricity-related product contracts. (5) Provide for just and reasonable rates, with an appropriate balancing of price stability and price level in the electrical corporation's procurement plan. (e) The commission shall provide for the periodic review and prospective modification of an electrical corporation's procurement plan. (f) The commission may engage an independent consultant or advisory service to evaluate risk management and strategy. The reasonable costs of any consultant or advisory service is a reimbursable expense and eligible for funding pursuant to Section 631. (g) The commission shall adopt appropriate procedures to ensure the confidentiality of any market sensitive information submitted in an electrical corporation's proposed procurement plan or resulting from or related to its approved procurement plan, including, but not limited to, proposed or executed power purchase agreements, data request responses, or consultant reports, or any combination, provided that the Office of Ratepayer Advocates and other consumer groups that are nonmarket participants shall be provided access to this information under confidentiality procedures authorized by the commission. (h) Nothing in this section alters, modifies, or amends the commission's oversight of affiliate transactions under its rules and decisions or the commission's existing authority to investigate and penalize an electrical corporation's alleged fraudulent activities, or to disallow costs incurred as a result of gross incompetence, fraud, abuse, or similar grounds. Nothing in this section expands, modifies, or limits the State Energy Resources Conservation and Development Commission's existing authority and responsibilities as set forth in Sections 25216, 25216.5, and 25323 of the Public Resources Code. (i) An electrical corporation that serves less than 500,000 electric retail customers within the state may file with the commission a request for exemption from this section, which the commission shall grant upon a showing of good cause. (j) (1) Prior to its approval pursuant to Section 851 of any divestiture of generation assets owned by an electrical corporation on or after the date of enactment of the act adding this section, the commission shall determine the impact of the proposed divestiture on the electrical corporation's AB 2363 Page X procurement rates and shall approve a divestiture only to the extent it finds, taking into account the effect of the divestiture on procurement rates, that the divestiture is in the public interest and will result in net ratepayer benefits. (2) Any electrical corporation's procurement necessitated as a result of the divestiture of generation assets on or after the effective date of the act adding this subdivision shall be subject to the mechanisms and procedures set forth in this section only if its actual cost is less than the recent historical cost of the divested generation assets. (3) Notwithstanding paragraph (2), the commission may deem proposed procurement eligible to use the procedures in this section upon its approval of asset divestiture pursuant to Section 851. (k) The commission shall direct electrical corporations to include in their proposed procurement plans the use of any nonzero integration cost adders determined pursuant to clause (v) of subparagraph (A) of paragraph (4) of subdivision (a) of Section 399.13. REGISTERED SUPPORT / OPPOSITION : Support Athens Services California Forestry Association California Manufacturers & Technology Association (CMTA) California Wind Energy Association (CalWEA) California Women for Agriculture Calpine Corporation Covanta HL Power Company Individual Letters (5) Lassen County North Coast Chapter of California Women in Timber PacifiCorp (if amended) Paramount Farming Company Plumas County Fire Safe Council (PCFSC) Sierra County Board of Supervisors Sierra Pacific Industries Tubit Enterprises, Inc. Wadham Energy LP Opposition AB 2363 Page Y Large-scale Solar Association (LSA) (unless amended) Solar Energy Industries Association (SEIA) Analysis Prepared by : Brandon Gaytan / U. & C. / (916) 319-2083