BILL ANALYSIS                                                                                                                                                                                                    



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          Date of Hearing:  April 20, 2016


                    ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE


                                  Mike Gatto, Chair


          AB 2454  
          (Williams) - As Introduced February 19, 2016


          SUBJECT:  Energy:  procurement plans


          SUMMARY:  Modifies the procurement plans that electrical  
          corporations must propose and that the California Public  
          Utilities Commission (CPUC) must approve, as specified.    
          Specifically, this bill:  


          1)Includes "demand response" in existing requirements for  
            electrical corporation to first meet their need resource needs  
            in their procurement proposals.


          2)Requires electrical corporations, in determining the  
            availability of cost-effective, reliable, and feasible demand  
            response resources, to consider the findings of a study  
            authorized by the CPUC.


          3)Requires the CPUC to demonstrate to report to the Legislature,  
            60 days after the CPUC issues a final decision approving new  
            capacity additions in excess of 500 thousand watts, that the  
            prioritized procurement of energy efficiency and demand  
            response resources is achieved.









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          EXISTING LAW:  


          1)Requires the CPUC to 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 CPUC not later than 60 days after  
            the CPUC 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 CPUC's adoption of a procurement plan, the CPUC  
            shall allow not less than 60 days before the electrical  
            corporation resumes procurement pursuant to this section.  
            (Public Utilities Code Section 454.5) 


          FISCAL EFFECT:  Unknown.


          COMMENTS:  


          1)Author's Statement: "Demand response is a valuable tool that  
            can enhance system reliability by reducing peak demand on the  
            grid when it is most expensive to generate electricity,  
            provide economic alternatives to generation, reduce greenhouse  
            gas emissions, help with renewable resource integration, and  
            provide customers options for managing their energy needs.   
            Demand response (DR) occurs when customers change their  
            electricity usage (typically reducing use or shifting use to  
            other times in the day) at certain times in response to  
            economic incentives, price signals, or other conditions."









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          2)Background: In 2014, the CPUC issued a decision indicating its  
            intention to adopt a firm DR goal specific to each utility to  
            increase participation in DR.  To that end, the CPUC  
            authorized the undertaking of a DR Potential Study to  
            determine the amount of the DR capacity in California. This  
            report is due to be completed in 2016. In order to ensure that  
            the CPUC does not reach decisions that could reduce the  
            potential of DR, this bill requires utilities take into  
            account the facts and findings of the DR potential study  
            during the Long Term Procurement Planning proceeding as they  
            consider how to meet unmet need with preferred resources like  
            efficiency and DR.

            The bill additionally requires the CPUC to report to the  
            Legislature every time they approve 500 megawatts (MW) of new  
            generation.  While existing statute (Public Utilities Code  
            Section 454.5 (b)(9)(c)) requires procurement of all  
            cost-effective, feasible and reliable energy efficiency and  
            demand response first, before other resources are purchased,  
            there has not been any way of ensuring that the existing  
            statute is enforced.  Therefore, the CPUC should notify the  
            Legislature when they approve the equivalent of a new  
            gas-fired power plant instead of preferred resources. 

          3)What is Demand Response? Demand response refers to altering  
            energy usage in response to an event or a schedule. By  
            altering demand for energy at a given time in a specified  
            amount DR can help maintain reliable operation of the  
            electricity grid. Used correctly, it can also reduce overall  
            cost of energy procurement because it has been generally true  
            that the electricity demanded when load is highest is always  
            the most expensive electricity. A reduction in demand can  
            avoid the need for that most expensive electricity. 
            According to a CPUC description of DR in one of its decisions:  



             a)   A DR supply resource could include, but not be limited  
               to the use of on-site or local solar generation, energy  








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               storage, or other types of clean energy generation (such as  
               a fuel cell that uses biogas). 
             b)   A load-modifying DR resource includes, but is not  
               limited to base interruptible rates, agricultural pump  
               controller, and air conditioner cycling programs, critical  
               peak pricing, real time pricing, time-of-use rates,  
               permanent load shifting, and peak time rebates.


          4)Back Up Generation (BUGs):  At this time the CPUC has not yet  
            completed a proceeding on how it will address DR and BUGs. The  
            CPUC stated in a recent decision (D.14-12-024) "the [CPUC's]  
            action to bar fossil-fueled BUGs both furthers the intent of  
            SB 1414 [Wolk, 2014] and meets the EPA's stationary source  
            requirements."

            In this same decision the CPUC points out that federal law  
            does not preempt the CPUC's action to bar fossil-fueled BUGs. 


            As the CPUC has not yet reached a final decision on many  
            aspects of DR. The CPUC is currently examining, among other  
            things:  


             a)   Goals for DR (including how to measure and increase  
               participation in demand response);
             b)   Resource Adequacy Concerns (including the cause of these  
               concerns and recommendations for resolving them);  


             c)   California Independent System Operator (CAISO); 


             d)   Market Integration Costs (Determine whether the  
               estimated costs are considered high, and the extent to  
               which they are a barrier to CAISO market integration);  










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             e)   Supply Resources Issues (Determine the characteristics  
               of each DR program the CPUC should use to categorize the  
               current and future DR programs and develop, pilot, and  
               implement a competitive procurement mechanism for DR design  
               new programs that meet forecasted needs); and 


             f)   Determine the roles of the Utilities and Third Party  
               Providers in administering the supply resources.


             The author may wish to consider an amendment that would  
            require the CPUC to, when determining the availability of  
            cost-effective, reliable, and feasible demand reduction  
            resources, require electrical corporations to consider the  
            findings regarding technical, economic, and achievable demand  
            reduction in the Demand Response Potential Study required  
            pursuant to CPUC D.14-12-024, to the extent those findings are  
            not superseded by subsequent demand reduction potential  
            studies and to the extent that any demand reduction is  
            consistent with CPUC policy.
           
          5)Arguments in Support:  Supporters state that DR encourages  
            customers to conserve energy during times when power plants  
            are pushed to their limits. They also state that DR resources  
            are being integrated into the wholesale market as supply-side  
            resources to address transmission level reliability issues and  
            can be used on the distribution system to address local  
            reliability needs. 


          6)Arguments in Opposition: Opponents are concerned that this  
            bill will establish a process that will unnecessarily delay  
            the procurement of resources necessary to maintain  
            reliability.












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          7)Suggested Amendments:


            SECTION 1. 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  
             authorized pursuant to either this section or Section 454.52   
            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 demand responses,  and   
            electricity-related 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.








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            (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  and demand response   products.
            (C) The electrical corporation shall first meet its unmet  
            resource needs through all available energy efficiency and  
            demand reduction  and demand response   resources that are cost  
            effective, reliable, and feasible.  In determining the  
            availability of cost-effective, reliable, and feasible demand  
            reduction and demand response resources, the electrical  








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            corporation shall consider the findings regarding technical,  
            economic, and achievable demand reduction and demand response  
            potential in the Demand Response Potential Study required  
            pursuant to Commission Order D.14-12-024, to the extent those  
            findings are not superseded by subsequent demand response  
            potential studies, and shall consider both load-modifying and  
            supply-side demand reduction and demand response resources.   In  
            determining the availability of cost-effective, reliable, and  
            feasible demand reduction resources, the electrical  
            corporation shall consider the findings regarding technical,  
            economic, and achievable demand reduction in the Demand  
            Response Potential Study required pursuant to Commission  
            D.14-12-024, to the extent those findings are not superseded  
            by subsequent demand reduction potential studies and to the  
            extent that any demand reduction is consistent with commission  
            policy.  
            (10) The electrical corporation's risk management policy,  
            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:








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            (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  
            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  








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            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  
            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  








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            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 Energy 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  
            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  





                         


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            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 integration  
            costs described and determined pursuant to clause (v) of  
            subparagraph (A) of paragraph (4) of subdivision (a) of  
            Section 399.13.
             
             SEC. 2. Section 921 is added to the Public Utilities Code, to  
            read:

            921.  To the extent that additional procurement is authorized  
            for the electrical corporation in the integrated resource plan  
            or the procurement process authorized pursuant to Section  
            454.5, the commission shall demonstrate to the Legislature, in  
            a report submitted pursuant to Section 9795 of the Government  
            Code not more than 60 days after the commission issues a final  
            decision approving new capacity additions in excess of  500,000  
            watts   one half of one megawatt  , that the prioritized  
            procurement of energy efficiency and demand reduction and  
            demand response resources required by subparagraph (C) of  
            paragraph (9) of subdivision (b) of Section 454.5 is achieved.



          REGISTERED SUPPORT / OPPOSITION:




          Support









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          Clean Power Campaign (Sponsor)


          Advanced Energy Management Alliance


          Environmental Defense Fund


          EnerNOC


          TechNet




          Opposition


          Independent Energy Producers




          Analysis Prepared by:Sue Kateley / U. & C. / (916) 319-2083




















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