BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON ENVIRONMENTAL QUALITY
                               Senator Wieckowski, Chair
                                 2015 - 2016  Regular 
           
          Bill No:            AB 1176
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          |Author:    |Perea                                                |
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          |Version:   |7/7/2015               |Hearing      | 7/15/2015      |
          |           |                       |Date:        |                |
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          |Urgency:   |Yes                    |Fiscal:      |Yes             |
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          |Consultant:|Rebecca Newhouse                                     |
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          SUBJECT:  Vehicular air pollution.

            ANALYSIS:
          
          Existing law:  
          
          1) Under the California Global Warming Solutions Act of 2006  
             (commonly referred to as AB 32), requires the Air Resources  
             Board (ARB) to determine the 1990 statewide greenhouse gas  
             (GHG) emissions level and approve a statewide GHG emissions  
             limit that is equivalent to that level, to be achieved by 2020,  
             and to adopt GHG emissions reductions measures by regulation.   
             ARB is authorized to include the use of market-based mechanisms  
             to comply with these regulations.  (Health and Safety Code  
             (HSC) §38500 et seq.)

          2) Establishes the Greenhouse Gas Reduction Fund (GGRF) in the  
             State Treasury and requires all moneys, except for fines and  
             penalties, collected pursuant to a market-based mechanism be  
             deposited in the fund and requires the Department of Finance,  
             in consultation with ARB and any other relevant state agency,  
             to develop, as specified, a three-year investment plan for the  
             moneys deposited in GGRF.  (Government Code §16428.8)

          3) Requires the investment plan to allocate a minimum of 25% of  
             the available moneys in the fund to projects that provide  
             benefits to disadvantaged communities, and a minimum of 10% of  
             the available moneys in the fund to projects located within  
             disadvantaged communities.  (HSC §39713).








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          4) Requires moneys from GGRF be used to facilitate the achievement  
             of reductions of GHG emissions in this state consistent with  
             the California Global Warming Solutions Act of 2006, and to the  
             extent feasible complement efforts to improve air quality, and  
             direct investment toward the most disadvantaged communities and  
             households in the state, among other things.  (HSC §39712).

          5) Requires the State Energy Resources Conservation and  
             Development Commission (CEC) to implement the Alternative and  
             Renewable Fuels and Vehicle Technology Program (ARFVTP) to  
             provide funding measures to specified entities to develop and  
             deploy technologies and alternative and renewable fuels in the  
             marketplace to help attain the state's climate change policies.  
              (HSC §43865 et seq.),

          6) Creates the Air Quality Improvement Program (AQIP), to be  
             administered by ARB in consultation with local air districts,  
             to fund air quality improvement projects.  (HSC §44274). 

          7) Establishes certain vehicle and vessel related surcharges and  
             fees, until January 1, 2016, including an $8 fee increase in  
             the smog abatement, a $3 fee increase in the annual vehicle  
             registration fee, a $5 fee increase for special identification  
             plates and a $10-20 fee increase for vessel registration, to  
             fund the AQIP and ARFVT programs, among others.  (HSC §44060.5  
             and Vehicle Code §§9250.1, 9261.1, & 9853.6).

          8) Establishes the Carl Moyer Program, administered by ARB, to  
             fund the incremental cost of cleaner-than-required vehicles,  
             engines, and equipment and authorizes the funding of projects  
             reducing NOx, particulate matter (PM) and reactive organic  
             gases emissions under the Carl Moyer Program until January 1,  
             2015, after which date, only the reduction of oxides of  
             nitrogen (NOx) emission reduction projects will be eligible for  
             funding.  (HSC §44275). 

          9) Creates the California Clean Truck, Bus, and Off-Road Vehicle  
             and Equipment Technology Program, to fund development,  
             demonstration, pre-commercial pilot, and early commercial  
             deployment of zero- and near-zero-emission truck, bus, and  
             off-road vehicle and equipment technologies.  

          This bill:  









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          1) Establishes the Advanced Low-Carbon Diesel Fuels Access Program  
             under CEC, in consultation with ARB.

          2) Requires the program to provide capital assistance for projects  
             to expand low-carbon diesel fueling infrastructure in  
             communities that are disproportionately impacted by  
             environmental hazards and where additionally the greatest air  
             quality impacts can be identified.

          3) Defines "low-carbon diesel fuel" as a biomass-based diesel fuel  
             that meets the definition of a low-carbon diesel fuel under the  
             Low Carbon Fuel Standard Regulation. 

          4) Defines "low-carbon diesel fueling infrastructure" as equipment  
             to store and dispense low-carbon diesel fuel to motor vehicles  
             that is open to the public.  Eligible equipment includes, but  
             is not limited to, storage, tanks, piping, fittings, fuel  
             dispensers, signage, and point-of-sale systems. 

          5) Provides for the program to be funded with GGRF moneys, upon  
             appropriation by the Legislature.

          6) Requires CEC, by March 1, 2016, to develop guidelines to ensure  
             the program focuses on communities that are disproportionately  
             impacted by environmental hazards and where the greatest  
             vehicular pollution is identified, and on low-carbon diesel  
             fuels that have approved fuel pathways, as specified. 

          7) Requires CEC to select disadvantaged communities for funding in  
             consultation with the California Environmental Protection  
             Agency.

          8) Requires the CEC, in evaluating projects for funding, to  
             prioritize the following characteristics:

             a)    Occurs in or near disadvantaged communities.

             b)    Demonstrates potential for co-benefits or multi-benefits,  
                including reducing significant emissions of criteria  
                pollutants or toxic air contaminants.

             c)    Quantifies and measures cost-effectiveness and impacts on  
                disadvantaged and low-income populations.









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             d)    Demonstrates the ability to leverage additional public or  
                private funding.

             e)    Demonstrates the ability to obtain immediate benefits.

             f)    Includes marketing and education outreach strategies  
                designed to increase the effectiveness of program goals.

          9) Prohibits the program from funding a project that is already  
             required to be undertaken pursuant to state, federal, or local  
             laws.

          10)Specifies that CEC may amend a contract, grant, loan, or other  
             agreement awarded under the Alternative and Renewable Fuels and  
             Vehicle Technology Program to extend the terms of that  
             contract, grant, loan, or other agreement or award by two years  
             if the moneys are reprioritized by the commission to apply  
             toward a project that benefits disadvantaged communities. 

            Background
          
          1) Cap-and-trade auction revenue.  ARB has conducted 11  
             cap-and-trade auctions.  The first 10 have generated almost  
             $1.6 billion in proceeds to the state.

             Several bills in 2012, and one in 2014, provided legislative  
             direction for the expenditure of auction proceeds including the  
             following:

                       SB 535 (de León, Chapter 830, Statutes of 2012)  
                  requires that 25% of auction revenue be used to benefit  
                  disadvantaged communities and requires that 10% of auction  
                  revenue be invested in disadvantaged communities. 

                       AB 1532 (J. Pérez, Chapter 807, Statutes of 2012)  
                  directs the Department of Finance to develop and  
                  periodically update a three-year investment plan that  
                  identifies feasible and cost-effective GHG emission  
                  reduction investments to be funded with cap-and-trade  
                  auction revenues.  AB 1532 specifies that GGRF moneys may  
                  be allocated to reduce GHG emissions through investments  
                  including, but not limited to, development of  
                  state-of-the-art systems to move goods and freight,  
                  advanced technology vehicles and vehicle infrastructure,  








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                  advanced biofuels, and low-carbon and efficient public  
                  transportation.

                       SB 1018 (Budget and Fiscal Review Committee, Chapter  
                  39, Statutes of 2012) created the GGRF, into which all  
                  auction revenue is to be deposited.  The legislation  
                  requires that before departments can spend moneys from the  
                  GGRF, they must prepare a record specifying, among other  
                  things, how the expenditures will be used, and how the  
                  expenditures will further the purposes of AB 32. 

                       SB 862 (Budget Committee, Chapter 36, Statutes of  
                  2014) requires the ARB to develop guidelines on maximizing  
                  benefits for disadvantaged communities by agencies  
                  administering GGRF funds, and guidance for administering  
                  agencies on GHG emission reduction reporting and  
                  quantification methods. 

             Legal consideration of cap-and-trade auction revenues.  The  
             2012-13 Budget analysis of cap-and-trade auction revenue by the  
             Legislative Analyst's Office noted that, based on an opinion  
             from the Office of Legislative Counsel, the auction revenues  
             should be considered mitigation fee revenues, and their use  
             requires that a clear nexus exist between an activity for which  
             a mitigation fee is used and the adverse effects related to the  
             activity on which that fee is levied.  Therefore, in order for  
             their use to be valid as mitigation fees, revenues from the  
             cap-and-trade auction must be used to mitigate GHG emissions or  
             the harms caused by GHG emissions. 

             In 2012, the California Chamber of Commerce filed a lawsuit  
             against the ARB claiming that cap-and-trade auction revenues  
             constitute illegal tax revenue.  In November 2013, the superior  
             court ruling declined to hold the auction a tax, concluding  
             that it is more akin to a regulatory fee.  The plaintiffs filed  
             an appeal with the 3rd District Court of Appeal in Sacramento  
             in February of last year.

             AB 32 auction revenue investment plan.  The first three-year  
             investment plan for cap-and-trade auction proceeds, submitted  
             by Department of Finance, in consultation with ARB and other  
             state agencies in May of 2013, identified sustainable  
             communities and clean transportation, clean energy and energy  
             efficiency, and natural resources and waste diversion, as the  








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             three key sectors that provide the best opportunities for  
             achieving the legislative goals and supporting the purposes of  
             AB 32.  The plan recommended the aforementioned sector receive  
             the largest allocation of funds from the GGRF, but did not  
             specify a monetary amount. 

             Budget allocations.  The 2014-15 Budget allocates $832 million  
             in GGRF revenues to a variety of transportation, energy, and  
             resources programs aimed at reducing GHG emissions.  Various  
             agencies are in the process of implementing this funding.  SB  
             862 (Committee on Budget and Fiscal Review), a budget trailer  
             bill, established a long-term cap-and-trade expenditure plan by  
             continuously appropriating portions of the funds for designated  
             programs or purposes.  The legislation appropriates 25% for the  
             state's high-speed rail project, 20% for affordable housing and  
             sustainable communities grants, 10% to the Transit and  
             Intercity Rail Capital Program, and 5% for low-carbon transit  
             operations.  The remaining 40% is available for annual  
             appropriation by the Legislature.  

             Of that 40%, $200 million was appropriated to ARB to implement  
             low carbon transportation programs.

          2) LCFS.  The Low Carbon Fuel Standard (LCFS) was established  
             through a Governor's Executive Order in January 2007.  ARB  
             adopted the LCFS regulation in April 2009, effective the  
             following year.  The LCFS aims to reduce GHG emissions from the  
             transportation sector by about 16 million metric tons by 2020.   
             It is also designed to reduce California's dependence on  
             petroleum, create a lasting market for clean transportation  
             technology, and stimulate the production and use of alternative  
             low-carbon fuels.

             The LCFS requires producers of petroleum-based fuels to reduce  
             the carbon intensity (CI) of transportation fuels ("well to  
             wheels" accounting of GHG emissions from the production,  
             delivery and use of the fuel) used in California by an average  
             of 10% by 2020.  It consists of two elements: a cap on total  
             GHG emissions from the entire fuel sector, and a carbon  
             credit-trading mechanism that incentivizes the production and  
             use of low-carbon fuels.  Petroleum importers, refiners, and  
             wholesalers may either develop their own low-carbon fuel  
             products or buy LCFS credits from other companies that sell  
             low-carbon alternative fuels such as biofuels, electricity,  








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             natural gas, or hydrogen.  The CI has been frozen at 1% since  
             2013 as a result of litigation, but ARB plans to re-adopt the  
             LCFS this year.  After re-adoption, the CI will begin to  
             decrease toward the 10% reduction required by 2020.

         3)NOx and ozone.  Smog is formed from the reaction of oxides of  
            nitrogen (NOx) with volatile organic compounds (VOCs) to produce  
            ground-level ozone, or tropospheric ozone.  Ozone has a number  
            of negative health effects including irritated respiratory  
            system, reduced lung function, aggravated asthma and  
            inflammation and damage of the lining of the lung.  Active  
            children are the group at highest risk from ozone exposure.  In  
            addition to negative public health impacts, ozone itself is a  
            powerful SCLP.

             Under the federal Clean Air Act, the United States  
             Environmental Protection Agency (US EPA) established National  
             Ambient Air Quality Standards (NAAQS) that apply for outdoor  
             air throughout the country.  These standards exist for several  
             air pollutants due to their negative impact on public health  
             above specified concentrations, including ozone.  ARB has also  
             adopted state ambient air quality standards for various air  
             pollutants that are, in some cases, more stringent than federal  
             standards.  Local air districts are required to adopt and  
             enforce rules to achieve and maintain the state and federal  
             ambient air quality standards.  Nonattainment areas are regions  
             that do not meet the ambient air quality standard for one of  
             those pollutants.  There are several nonattainment designations  
             ranging from concentrations slightly above the standard, termed  
             marginal nonattainment, to extreme nonattainment, where  
             pollution levels far exceed the national standard.  

             To comply with the standards for ozone, local air districts  
             have regulations limiting emissions of NOx and VOCs for  
             stationary sources located in their jurisdiction.  These local  
             air district requirements have cut in half the emissions of  
             VOCs and NOx, and significantly reduced ozone concentrations  
             throughout California. 

             On November 25, 2014, the US EPA proposed to strengthen the  
             current 2008 NAAQS for ground-level ozone, based on extensive  
             scientific evidence about ozone's effects on public health and  
             welfare.  US EPA's proposal finds that the current level of the  
             standard, 75 parts per billion, is not adequate to protect  








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             public health.

             The San Joaquin and South Coast air basins are both in extreme  
             nonattainment for the 2008 NAAQS for ozone.  States with  
             nonattainment areas would have until 2020 to late 2037 to meet  
             the proposed health standard, with attainment dates varying  
             based on the ozone level in the area.

          4) Renewable diesel and biodiesel.  Renewable diesel, often called  
             "green diesel" or "second generation diesel," refers to fuels  
             derived from recently living biological sources but has the  
             same chemical makeup as petroleum diesel, and can be produced  
             using a variety of feedstocks, such as vegetable oils and  
             animal fats. 

             Biodiesel is also created using a large variety of feedstocks,  
             such as soybean oil, waste vegetable oil, animal fats or algae.  
              Biodiesel is chemically different from petroleum diesel and  
             renewable diesel.  Biodiesel can be used in its pure form, or  
             blended with petroleum-based diesel as an additive.  A fuel  
             blend comprised of 20% biodiesel and 80% petroleum diesel is  
             called B20.  Renewable diesel can be blended in the same way  
             (where a similar blend of renewable fuel and petroleum diesel  
             would be termed R20). 

             CI of biodiesel and renewable diesel.  Depending on the  
             feedstock, the carbon intensity of biodiesel and renewable  
             diesel can range from one of the lowest of any alternative fuel  
             available (with fuels from waste oils or tallow), to a CI near  
             that of conventional diesel (when using Midwest soybeans to  
             produce the fuel). 

             NOx of renewable diesel and biodiesel.  Although renewable  
             diesel reduces NOx emissions relative to conventional diesel,  
             biodiesel can increase NOx emissions compared to diesel fuel. 

          5) Alternative fuels and infrastructure funding.  AB 118 (Núñez,  
             Chapter 750, Statutes of 2007) created the Alternative and  
             Renewable Fuels and Vehicle Technology program (ARFVT) and the  
             Air Quality Improvement program (AQIP).  AQIP, administered by  
             ARB in consultation with local air districts, provides  
             competitive grants to fund projects to improve the air quality  
             impacts of alternative fuels and vehicles, vessels, and  
             equipment technologies.  AB 118 provides, upon appropriation by  








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             the Legislature, approximately $180 million annually until 2023  
             for these programs.  These funds primarily come from additional  
             fees on vehicle registrations and vessel registrations. 

             ARFVTP, administered by CEC, provides funding for development  
             and deployment of alternative and renewable fuels and advanced  
             transportation technologies to help attain the state's climate  
             change goals.  Eligible projects include, for example,  
             development, improvement, and production of alternative and  
             renewable low-carbon fuels; improvement of light-, medium-, and  
             heavy-duty vehicle technologies; and expansion of  
             infrastructure connected with existing fleets, public transit,  
             and transportation corridors.

            Comments
           
           1) Purpose of Bill.  According to the author, "AB 1176 provides an  
             opportunity for the Legislature and the Governor to facilitate  
             important cost-effective transportation infrastructure that can  
             achieve immediate, tangible, and measurable air quality  
             benefits for residents living in California communities most  
             impacted by pollution and GHG emissions.  Just as importantly,  
             the bill provides a cost-effective way for thousands of  
             Californians of moderate- or low-income means, including my  
             constituents living in the San Joaquin Valley, to participate  
             in California's low carbon economy, thereby making significant  
             contributions on their own towards meeting California's  
             important environmental and public health objectives."

             The author states that AB 1176 is needed because the current  
             funding available in the private sector for clean energy  
             infrastructure projects is very limited.   Additionally, the  
             author notes that there exist other business and contractual  
             impediments and practices that substantially impede the market  
             penetration of renewable fuels in California and throughout the  
             nation.  As examples, the author cites fuel contracts that can  
             have terms of 20 years or longer and typically require supplier  
             exclusivity and allow distributors to sell only those fuels  
             made available by the supplier.  The author also notes that  
             often contracts require minimum sales volumes of branded fuels,  
             meaning increased sales of renewable fuels could jeopardize the  
             retailer's ability to meet minimum volume quotas for  
             fossil-based fuels.  Additionally, the author states that  
             branding agreements discourage or prohibit retailers from  








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             promoting or advertising the availability of renewable fuels. 

          2) Do we need another program?  There are already multiple  
             programs under CEC and ARB to fund infrastructure related to  
             clean cars.  The committee may wish to weigh the benefits of  
             creating another new program against providing more funding to  
             existing programs.

          3) Not just a financing problem.  Although more funding for  
             infrastructure designated for low carbon diesel may help make  
             low carbon diesel more available, as noted by the author, there  
             seem to be broader contractual issues preventing the widespread  
             availability of biodiesel and renewable diesel that cannot  
             necessarily be addressed through creation of a new grant  
             program.  It may be more prudent for the author to work to  
             address these issues before creating a new program to fund a  
             specific type of alternative fueling infrastructure, especially  
             in light of the fact that CEC already administers a program  
             broadly focused on funding infrastructure for vehicles that run  
                                            on alternative fuels. 

          4) Appropriate use of GGRF funds?  GGRF funds are required to  
             facilitate the achievement of GHG emission reductions.  This  
             bill provides GGRF funding for low-carbon diesel fueling  
             infrastructure that includes equipment such as signage and  
             point-of-sale systems.  It is unclear how ARB could quantify  
             the GHG emissions of such equipment.  

          5) Definition.  Concerns were raised in the Senate Transportation  
             and Housing Committee staff analysis that there may only be one  
             company (the sponsor, Propel Fuels) "currently producing fuel  
             that meets the requirements of this bill."  In order to allow  
             more fuel types to qualify, amendments taken in that committee  
             struck all of the requirements that narrowed what types of  
             fuels would qualify and instead simply defined "low-carbon  
             diesel fuel" as a biomass-based diesel fuel that is used in  
             diesel engines and meets the definition of low-carbon diesel  
             fuel pursuant to the LCFS regulations.

             However, the LCFS regulations do not define low-carbon diesel  
             fuel.  Therefore, a diesel fuel that is blended with any amount  
             of biomass-based diesel may qualify as a "low-carbon diesel  
             fuel" under the current definition in the bill. 









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             If the committee believes this bill is necessary, an amendment  
             is needed to redefine "low-carbon diesel fuel" as a  
             biomass-based diesel fuel that has a carbon intensity of at  
             least 50% lower than petroleum diesel, to ensure that there are  
             GHG emission reduction benefits from using this fuel, and  
             thereby providing justification for the use of GGRF moneys.

             Additionally, as noted in the background, some blends of  
             biofuel result in an increase in NOx emission relative to  
             conventional diesel.  As the bill proposes infrastructure in  
             disadvantaged communities, many of which are severe  
             nonattainment areas for ozone pollution as well as particulate  
             matter, it is critical that these fuels do not exacerbate  
             ozone, or other air pollution problems in these regions.  To  
             address this issue, an amendment is needed to require that "low  
             carbon diesel fuel," as defined in the bill, does not increase  
             either NOx, or particulate matter, as compared to conventional  
             diesel.

          6) If you build it, will they use it?  Proponents state that AB  
             1176 will result in GHG emission reductions, and criteria air  
             pollutant reductions from low-carbon renewable diesels and  
             biodiesels as compared to conventional diesel.  One of the  
             benefits of these types of fuels is that they are "drop in"  
             fuels, and can be used in diesel-engine vehicles in place of  
             conventional fossil-fuel diesel.  Therefore, proponents note  
             that they do not require changing out the vehicle fleet to  
             realize the benefits of the fuel.  This differs from other  
             types of technologies where the vehicle technology requires a  
             certain type of alternative fuel, as is the case for fuel cell  
             vehicles that only run on hydrogen.  In the fuel cell vehicle  
             case, getting fuel cell vehicles on the road ensures a market  
             for the hydrogen fuel.  However, diesel trucks, as noted, can  
             run on conventional diesel or low-carbon diesel fuels.  How  
             then does the funding of this infrastructure ensure fleets will  
             change over to these low-carbon diesel fuels?  How much  
             infrastructure is needed to make significant market gains and  
             change consumer behavior?  

          7) Reprioritize funding.  In addition to creating a new program to  
             fund low-carbon diesel infrastructure, AB 1176 amends CEC's  
             Alternative and Renewable Fuel and Vehicle Technology (ARFVT)  
             Program that currently funds alternative vehicle and fuels  
             infrastructure.  This bill would amend that program to specify  








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             that CEC can extend by two years contracts or grants awarded  
             under that program if the moneys are reprioritized by CEC to  
             apply toward projects in disadvantaged communities.  

             It is unclear why this provision is needed, since CEC already  
             has the authority to extend contracts or grants awarded through  
             the ARFVT program. 

          8) Piece by piece.  GGRF investments must facilitate the  
             achievement of GHG emissions reductions.  However, after that  
             requirement is fulfilled, there are number of other policy  
             goals that should be considered, including benefits to  
             environmental quality, resource protection, public health and  
             the economy, as well as benefits to disadvantaged communities.   
             And although the fund is growing, it is still a limited source  
             of revenue.  In order to create an optimized investment  
             strategy from GGRF moneys, proposals should not be considered  
             in isolation, but be assessed in aggregate to determine what  
             suite of measures best meets the requirements of the fund, uses  
             resources most efficiently, and maximizes policy objectives. 

             As budget discussions on a cap-and-trade investment strategy  
             have been pushed to later this session, an opportunity exists  
             to have a comprehensive discussion on the universe of GGRF  
             proposals currently in the Legislature, during budget  
             negotiations this summer.  If the Legislature feels that the  
             program established through AB 1176 is an appropriate  
             expenditure of GGRF moneys, then this measure should also be  
             considered through the budget process for cap-and-trade  
             expenditures, along with all other measures proposing to  
             expend, or authorize for expenditure, GGRF moneys.

            


          Related/Prior Legislation
          
          AB 692 (Quirk) would require 3% of the aggregate amount of  
          transportation fuel purchased by state agencies to be procured  
          from very low-carbon fuel sources.  AB 692 is also being heard by  
          this committee today.
            
          DOUBLE REFERRAL:  









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          This measure was heard in Senate Transportation and Housing  
          Committee on June 30, 2015, and passed out of committee with a  
          vote of 10-0.
           
           SOURCE:                    Propel Fuels  

           SUPPORT:               

          Agron
          Fresno Chamber of Commerce
          San Joaquin Valley Air Pollution Control District
          San Joaquin Valley Regional Transportation Planning Agencies
          Coalition for Clean Air
           
           OPPOSITION:    

          None received  

                                            
                                       -- END --