BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          AB 692 (Quirk) - Low-carbon transportation fuels.
          
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          |Version: June 2, 2015           |Policy Vote: T. & H. 8 - 2,     |
          |                                |          E.Q. 5 - 2            |
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          |Urgency: No                     |Mandate: No                     |
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          |Hearing Date: August 17, 2015   |Consultant: Marie Liu           |
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          This bill meets the criteria for referral to the Suspense File. 


          Bill  
          Summary:  AB 692 would require state agencies to procure at  
          least three percent of their total aggregate transportation  
          fuels from very low carbon transportation fuel sources by  
          January 1, 2017, with the amount to increase by one percent  
          annually until January 1, 2024.


          Fiscal  
          Impact:  
           Unknown costs to the General Fund and various special funds,  
            including the Greenhouse Gas Reduction Fund (GGRF), for  
            increased fuel prices.
           Unknown costs, but potentially minor, to the General Fund and  
            various special funds to the Department of General Services  
            (DGS) to manage fuel purchases to meet the purchase  
            requirements.
           Potential costs up to $175,000, but likely minor, to the Cost  
            of Implementation Account (special) to the Air Resources Board  







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            (ARB) to assist state agencies with compliance with the  
            purchase requirements.


          Background:  In January 2007, Governor Schwarzenegger issued Executive  
          Order S-01-07 in which he ordered the establishment of a  
          statewide goal of reducing the carbon intensity (CI) of  
          California's transportation fuels by at least 10% by 2020 and  
          ordered ARB to establish a low-carbon fuel standard (LCFS) for  
          the state.
          The ARB adopted the LCFS regulation in April 2009 that was  
          designed to reduce the CI of transportation fuels by 10% by  
          2020. In May 2009, the ARB adopted its AB 32 Scoping Plan to map  
          out how to achieve the reduction in GHG emissions by 2020, as  
          required by AB 32.  The Scoping Plan included the LCFS as an  
          early action measure and projected the program to result in 15  
          million metric tons (MMT) of emissions reductions, or about 20%  
          of the GHG emissions reductions needed to reach the 2020 GHG  
          emissions target of 427 MMT.


          The LCFS achieves a 10% reduction in average CI by establishing  
          an initial intensity level for specified providers of  
          transportation fuels ("regulated parties") and incrementally  
          lowering the allowable CI in each subsequent year. For example,  
          modest targeted reductions of 0.5 and 1.0% are required for 2012  
          and 2013, respectively.  The reductions become more substantial  
          with each year, such that by 2020, the 10% average reduction is  
          achieved.  This reduction makes room for low-CI fuels to enter  
          the market.  A regulated party needs to meet each year's  
          specified target, taking into account all of its transportation  
          fuels.  If the reduction in intensity exceeds the target, the  
          provider earns a credit, which can be sold or carried forward.   
          The LCFS allows fuels like electricity, hydrogen, and natural  
          gas, which already meet the CI standards through 2020, to  
          generate LCFS credits that may be sold.  Regulated fuel  
          providers, therefore, can meet their annual CI levels through  
          several compliance strategies: making low-GHG fuels, such as  
          biofuels made from waste products; carrying forward credits from  
          previous years from their own production process; buying credits  
          from other fuel producers; or reducing the amount of fuel they  
          sell.  A fuel provider meets the requirements of the LCFS if the  
          amount of credits at the end of the year is equal to, or greater  
          than, the deficits.  A provider determines its credits and  








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          deficits based on the amount of fuel sold, the CI of the fuel,  
          and the efficiency by which a vehicle converts the fuel into  
          useable energy.  Under the LCFS, a regulated party's compliance  
          with the annual CI requirements is based on end-of-year  
          credit/deficit balancing.


          The CI requirement has been frozen at 1% since 2013 as a result  
          of litigation, but the ARB plans to re-adopt the LCFS in  
          September this year.  


          AB 236 (Lieu) Chapter 593, Statutes of 2007 established the goal  
          of reducing or displacing the consumption of petroleum products  
          by the state fleet compared to the 2003 consumption levels by 10  
          percent by 2012 and 20 percent by 2020. According to DGS's 2015  
          progress report for this requirement, the state fleet has  
          surpassed the 2012 target of 10% and is on pace to meet or  
          exceed the 2020 20% target. 




          Proposed Law:  
            This bill would require that at least three percent of the  
          state agencies aggregated fuel purchases to be from very low  
          carbon (VLC) transportation fuel sources beginning on January 1,  
          2017. This minimum requirement would increase by one percent  
          every year until it reaches 10% in January 1, 2024. DGS would be  
          required to coordinate with state agencies that buy  
          transportation fuel and to report to the Legislature on actions  
          taken pursuant to this requirement.
          The bill would define VLC transportation fuel as a liquid or  
          gaseous transportation fuel having no greater than 40 percent of  
          the carbon intensity of the closest comparable petroleum fuel  
          for that area as measured by ARB's low-carbon fuel standard  
          regulation.


          The bill would explicitly allow the Legislature to appropriate  
          money from the Greenhouse Gas Reduction Fund (GGRF) to offset  
          any increased costs resulting from the purchase of VLC  
          transportation fuel.









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          Staff  
          Comments:  DGS administrative costs: State agencies buy  
          transportation fuel through retail and bulk purchases. Bulk fuel  
          purchases are made through contracts negotiated by DGS. As DGS  
          already coordinates the bulk purchases of fuel, ensuring that  
          sufficient bulk purchases are made from VLC transportation fuels  
          is unlikely to add workload to DGS. 
          Retail purchases, on the other hand, would require additional  
          workload for both DGS and individual agencies to manage.  
          However, as approximately 50% of the state's transportation fuel  
          is purchased in bulk according to DGS, the requirements of this  
          bill are likely to be met with bulk purchases only, avoiding  
          complications and costs associated with managing retail sales. 


          Fuel costs: This bill may also have costs to the extent that  
          there is a price difference between VLC fuels and comparable  
          petroleum fuel. As the price of both VLC fuels and petroleum  
          fuels are constantly changing, this fuel cost is unknown. Staff  
          notes that the state bought over 32 million gallons of petroleum  
          fuels in 2012 so a small difference in price, say ten cents per  
          gallon, could change state fuel costs by hundreds of thousands  
          of dollars. A difference of fifty cents per gallon would bring  
          the difference into the millions of dollars. 


          Staff notes that the price of VLC transportation fuel may also  
          depend on the supply availability and the number of suppliers.  
          The simplest and least expensive way for state agencies to  
          comply with this bill's requirement is to increase the use of  
          renewable diesel because it can be used interchangeably with  
          petroleum diesel. ARB has preliminary estimates that here are  
          two suppliers of renewable diesel that can supply necessary fuel  
          volumes for the state. There are additional suppliers of  
          biodiesel, though not all biodiesel fit the bill's definition of  
          a VLC transportation fuel. While ARB expects other suppliers to  
          be created as demand increases, staff notes that a small number  
          of suppliers may limit the ability of the state to negotiate on  
          the price of VLC fuels especially as the as the suppliers will  
          know that the state is under a mandated purchase requirements.  
          Staff notes that there are no "off ramp" provisions of the bill  








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          that would allow for a modification or a release of the purchase  
          requirement should there be substantial price differentials in  
          fuel costs or supply issues.


          The bill would allow GGRF to be used to offset any increased  
          costs upon appropriation by the Legislature. If such an  
          appropriation is not made, the costs would come from the General  
          Fund and various special funds. Staff notes that there are  
          multiple bills being considered by both houses of the  
          Legislature that propose projects that would be eligible to  
          receive GGRF funds. It is unclear how these bills will interact  
          with each other. Staff notes that a discussion on the spending  
          of GGRF is anticipated in August as part of a budget discussion.


          New Vehicle, retrofit, and infrastructure costs: The cost of  
          switching to VLC fuels could be larger if such a switch would  
          necessitate retrofits to vehicles or new vehicle purchases. The  
          state is likely to be able to meet the bill's requirements  
          simply by purchasing more renewable diesel, which, as mentioned  
          above, can be used interchangeably with petroleum diesel.  
          However, should the state need to use other VLC fuels, such as  
          natural gas, the state could incur costs to purchase new  
          vehicles, retrofit existing vehicles, or to build infrastructure  
          allow the use of other VLC transportation fuels. 


          Potential costs to the ARB: ARB believes that it may have costs  
          associated with the implementation of this bill in order to  
          assist other state agencies in developing compliance strategies  
          as compliance with the bill will require CI calculations. ARB  
          estimates $175,000 in costs annually for one Air Resources  
          Engineer from the Cost of Implementation Account (special).  
          While ARB may be consulted for assistance, staff notes that ARB  
          already assigns a CI to all fuels sold in the state as part of  
          the LCFS program so limited assistance may be needed. Also, this  
          bill's purchase requirement is on the aggregate amount of  
          transportation fuel bought by the state. As such, compliance  
          could be achieved with purchases made by just a few agencies,  
          minimizing the number of agencies that may request ARB  
          assistance. 










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          This bill requires DGS to submit a report on the progress in  
          meeting this bill's requirements.  Staff recommends  that this  
          report be combined with the AB 236 report.




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