BILL ANALYSIS                                                                                                                                                                                                    





          SENATE COMMITTEE ON ENERGY, UTILITIES AND COMMUNICATIONS
                              Senator Ben Hueso, Chair
                                2015 - 2016  Regular 

          Bill No:          SB 1301           Hearing Date:    4/5/2016
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          |Author:    |Hertzberg                                            |
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          |Version:   |2/19/2016    As Introduced                           |
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          |Urgency:   |No                     |Fiscal:      |Yes             |
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          |Consultant:|Jay Dickenson                                        |
          |           |                                                     |
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          SUBJECT:  Natural gas:  greenhouse gas allowance:  allocation

            DIGEST:  This bill directs the California Public Utilities  
          Commission to require 25 percent of revenues received by a gas  
          corporation as a result of the direct allocation of greenhouse  
          gas allowances to be used for energy projects or energy  
          efficiency projects that reduce fossil natural gas consumption.

          ANALYSIS:
          
          Existing law:

          1.Requires the California Air Resources Board (ARB), pursuant to  
            the California Global Warming Solutions Act of 2006, to adopt  
            rules and regulations that would reduce greenhouse gas  
            emissions (GHGs) in the state to 1990 levels by 2020.  (Health  
            and Safety Code 38500 to 38599)

          2.Establishes the Greenhouse Gas Reduction Fund (GGRF), and  
            requires all monies collected by ARB from the auction or sales  
            of allowances, pursuant to a market-based compliance  
            mechanism, be deposited in the fund and made available for  
            appropriation.  (Government Code 16428.8)

          3.Establishes the GGRF Investment Plan and Communities  
            Revitalization Act to set procedures for the investment of  
            regulatory fee revenues derived from the auction of GHG  









          SB 1301 (Hertzberg)                                   PageB of?
            allowances, including the requirement that such revenue be  
            used to reduce emissions of GHGs.  (Health and Safety Code  
            39710 to 39720)

          4.Requires the GGRF Investment Plan to allocate:  (a) at least  
            25 percent of the available monies in the fund to projects  
            that provide benefits to disadvantaged communities, and (b) at  
            least 10 percent of monies in the fund to projects located  
            within disadvantaged communities.  (Health and Safety Code  
            39711 to 39723)

          5.Requires the California Public Utilities Commission (CPUC) to  
            require revenues, including any accrued interest, received by  
            an electrical corporation as a result of the direct allocation  
            of GHGs allowances to electric utilities to be credited  
            directly to the residential, small business, and  
            emissions-intensive trade-exposed retail customers of the  
            electrical corporation; requires CPUC to require each  
            electrical corporation to implement an outreach plan to obtain  
            the maximum feasible public awareness of the crediting of GHG  
            allowance revenues; and authorizes the CPUC to allocate up to  
            15 percent of the GHG allowance revenue for clean energy and  
            energy efficiency projects established pursuant to statute  
            that are administered by the electrical corporation and that  
            are not otherwise funded by another funding source. (Public  
            Utilities Code 748.5)

          This bill:

          1.Directs the CPUC, no later than June 1, 2017, to require 25  
            percent of revenues, including any accrued interest, received  
            by a gas corporation as a result of the direct allocation of  
            GHG emissions allowances to natural gas suppliers pursuant to  
            ARB's cap-and-trade regulations to be used for "clean energy"  
            and "energy efficiency" projects or programs approved by the  
            CPUC.

          2.Limits funding eligibility to projects and programs that are  
            able to quantify and report reductions in GHGs.

          3.States that a "clean energy" project or program may include  
            one that does one of the following:
                        
               a.     Supports the development, deployment,  
                 interconnection or use of pipeline biogas.
               b.     Supports the development, deployment or use of  








          SB 1301 (Hertzberg)                                   PageC of?
                 alternative fuels.
               c.     Reduces or abates GHGs related to the use of fossil  
                 natural gas.

          4.States that an "energy efficiency" project or program may  
            include one that reduces that reduces fossil natural gas  
            consumption through more efficient appliances, heating,  
            cooling, industrial use, or other end uses.

          5.States the clean energy projects or programs and energy  
            efficiency projects or programs may also include those of the  
            type established pursuant to statute administered by a gas  
            corporation, the CPUC, or a qualified third-party  
            administrator approved by the CPUC.

          6.Directs the CPUC to require each gas corporation to annually  
            report and post on its website all expenditures and quantified  
            reductions in GHGs from funded projects and programs.

          Background

          ARB cap-and-trade program generates auction revenue.  Following  
          passage of the Global Warming Solutions Act of 2006 (aka AB 32),  
          ARB adopted regulations to reduce GHGs to 1990 levels by 2020.   
          One such regulation establishes the cap-and-trade program, under  
          which ARB distributes GHGs allowances to capped sectors.  For  
          the most part, ARB auctions the allowances, generating billions  
          in regulatory fee revenue.  Statute directs the revenue to the  
          GGRF, from which the Legislature makes appropriations for  
          GHG-reducing projects according to various statutory  
          restrictions and directions.  In some cases, however, ARB  
          distributes emissions allowances for free, generally to reduce  
          the cost of compliance to the entities receiving the free  
          allowances.  

          The investor-owned utilities (IOUs) - both electrical and  
          natural gas - are among the entities that receive emissions  
          allowances from ARB for free.  The ARB requires IOUs to consign  
          a portion of these allowances at ARB's quarterly allowance  
          auctions.  ARB regulation requires any allowance allocated to an  
          IOU be used exclusively for the benefit of retail ratepayers of  
          the IOU, consistent with the goals of AB 32, and prohibits the  
          use of allowances for the benefit of entities or persons other  










          SB 1301 (Hertzberg)                                   PageD of?
          than ratepayers.<1>

          Legislature directed electrical IOU auction revenue spending.   
          In 2012, the Legislature adopted a budget trailer (SB 1018) to  
          further restrict the CPUC's discretion over the electrical IOUs'  
          use of emissions allowance auction revenue.  Specifically, SB  
          1018 requires that revenues from the GHG allowances received by  
          the electrical IOUs be credited back to residential, small  
          business and emissions-intensive trade-exposed businesses.  SB  
          1018 also authorizes the CPUC to allocate up to 15 percent of  
          the emissions allowance auction revenues, including any accrued  
          interest, received by an electrical IOU for clean energy and  
          energy efficiency projects not funded by another source.

          To implement the requirements of SB 1018, the CPUC directed the  
          state's three largest electrical IOUs - Pacific Gas and Electric  
          Company (PG&E), Southern California Edison and San Diego Gas and  
          Electric (SDG&E) - to allocate GHG allowance revenues, including  
          accrued interest, in the following manner:<2>

                     Compensate emissions-intensive and  
                 trade-exposed entities using methodologies  
                 based upon those developed by ARB.

                     Offset the rate impacts of the  
                 cap-and-trade program in the electricity rates  
                 of small businesses through a volumetrically  
                 calculated rate adjustment.

                     Neutralize the rate impacts of the  
                 cap-and-trade program on residential  
                 electricity rates through a volumetrically  
                 calculated rate adjustment.

                     Distribute all revenues remaining after  
                 accounting for the revenues allocated pursuant  
                 to the prior three uses to residential  
                 customers on an equal per residential account  
                 basis delivered as a semi-annual, on-bill  
                 credit.


          The on-bill credit described in the final bullet is known as the  
          ---------------------------
          <1> California Code of Regulations, Chapter 17, sections 95892  
          and 95893. 
          <2> See CPUC decision D-12-12-033.








          SB 1301 (Hertzberg)                                   PageE of?
          California Climate Credit.  According to the CPUC, the 2016  
          California Climate Credit equates to an annual payment to each  
          ratepayer of ranging roughly from $35 to $287.<3>  

          Auction revenue of natural gas IOUs treated like auction revenue  
          of electrical IOUs, for the most part.  There are several  
          natural gas IOUs in the state-PG&E, Southern California Gas  
          Company (SoCalGas), SDG&E, and Southwest Gas Company (SWG).  The  
          natural gas IOUs, like electrical IOUs, receive emissions  
          allowances from ARB for free.  The ARB requires each natural gas  
          IOU, like the electrical IOUs, to consign a portion of its  
          emissions allowances to ARB's quarterly allowance auctions.  ARB  
          requires the natural gas IOUs to use the proceeds of the  
          auctions exclusively for the benefit of ratepayers, subject to  
          the direction of the CPUC, just as it does the auction revenues  
          of the electrical IOUs.  And, as it has for the electrical IOUs,  
          the CPUC has adopted a decision - D-15-10-032 - directing  
          natural gas IOUs' use of auction revenues.  That decision  
          requires the natural gas IOUS to return allowance proceeds to  
          ratepayers as a bill credit in an equal, non-volumetric manner.   
          The CPUC refers to the bill credit as the natural gas California  
          Climate Credit.  According to the CPUC, the natural gas  
          California Climate Credit equates to roughly $20 annually to  
          each ratepayer.

          Unlike its treatment of electrical IOU auction proceeds, the  
          Legislature has never provided direction to the CPUC in its  
          allocation of natural gas IOU auction proceeds.  This bill seeks  
          to provide such direction.

          Bill seeks to use natural gas IOU auction revenue to reduce use  
          of conventional natural gas.  The author notes that the  
          Legislature has not provided direction to the CPUC on the uses  
          of natural gas IOU auction proceeds and that this silence  
          differs from the Legislature's treatment of electrical IOU  
          auction proceeds.  This is true, as described above.  However,  
          the Legislature's inaction on natural gas auction proceeds is  
          not, in itself, justification for this bill:  current law  
          provides CPUC the necessary legal authority to allocate natural  
          gas IOU auction proceeds in a way that benefits IOU ratepayers.

          The author also notes the state's many policies and programs to  
          displace the use of conventional natural gas.  The author  
          contends that these programs have, thus far, had limited  
          success, and that the main impediment to further success is a  
          ---------------------------
          <3> http://www.cpuc.ca.gov/climatecredit/








          SB 1301 (Hertzberg)                                   PageF of?
          lack of money for infrastructure development.  This bill would  
          solve the problem described by the author by dedicating a  
          portion of natural gas IOU auction revenue - 25 percent - to  
          "clean energy" projects or programs and "energy efficiency"  
          projects or programs that reduce the use of conventional natural  
          gas.  The CPUC estimates this would make available about $40  
          million to $60 million annually for clean energy and energy  
          efficiency programs and projects.  The money would come from a  
          reduction in the natural gas California Climate Credit of about  
          $5 per ratepayer.  This is a reasonable proposal.  The natural  
          gas IOU auction proceeds exist because of the use of  
          conventional natural gas.  The use of conventional natural gas  
          produces a variety of harms, including the release of GHGs and  
          criteria pollutants.  This bill dedicates a portion of those  
          proceeds to projects and programs that have the potential to  
          reduce the use of conventional natural gas.  This is a very  
          tight policy circle.  

          There are, however, other potential uses of the natural gas IOU  
          auction proceeds that both benefit ratepayers and, potentially,  
          reduce GHGs.  One such use is returning the proceeds directly to  
          natural gas ratepayers, consistent with current law and  
          practice.  This bill, by dedicating a portion of natural gas IOU  
          auction proceeds to prescribed uses, precludes other uses of the  
          money.

          Currently, there are over a dozen bills before the Legislature  
          that propose to dedicate the use of auction revenues to a wide  
          variety of projects with the potential to reduce GHGs.  In every  
          case, those bills would dedicate funds in the GGRF, a special  
          fund in the State Treasury that receives all moneys collected by  
          ARB from the auction or sale of emissions allowances.  Money in  
          the GGRF is subject to appropriation by the Legislature.  Uses  
          of the money must meet several statutory requirements beyond the  
          basic hurdle of reducing GHGs.  

          The natural gas IOU auction revenue differs from money in the  
          GGRF in several ways.  A key distinction is that, unlike most  
          other auction revenues, ARB does not collect IOU auction  
          revenue.  This means IOU auction revenue is never placed in the  
          GGRF or in state coffers at all.  It is not subject to statutory  
          the requirements and parameters that govern uses of monies in  
          the GGRF, including the requirement that funded projects reduce  
          GHGs.

          IOU emissions allowance auction revenue, however, is not  








          SB 1301 (Hertzberg)                                   PageG of?
          completely distinct from revenue generated by auctioning other  
          emissions allowances.  In both cases, the revenue is generated  
          by selling the right to emit GHGs.  It makes sense that the  
          Legislature consider collectively proposals to fund GHGs  
          reduction efforts with revenue collected from sources of GHGs.   
          The budget process seems the appropriate venue for such  
          consideration.  This is because the budget allows the  
          Legislature to consider funding proposals comprehensively:  
          eligible funding programs can be compared; tradeoffs assessed;  
          competing policy goals prioritized.  And there is precedent, as  
          described above:  the Legislature directed uses of a portion of  
          the electrical IOU auction revenue in the 2012-13 Budget.

          Flexibility might be needed.  This bill directs the CPUC to  
          require the natural gas IOUs to use 25 percent of their auction  
          revenues for clean energy and energy efficiency projects or  
          programs.  This treatment differs from the Legislature's  
          direction on the use of electrical IOU auction proceeds in at  
          least two important ways.  First, statute allows, but does not  
          obligate, the CPUC to direct electrical IOUs to allocate auction  
          revues for clean energy and energy efficiency projects.  This  
          bill, in contrast, requires CPUC to direct natural gas IOUs to  
          allocate auction revues for such projects.  Second, statute  
          allows CPUC to direct electrical IOUs to make up to 15 percent  
          of the revenue available for clean energy and energy efficiency  
          projects.  This bill differs in that it requires CPUC to direct  
          the IOUs to allocate a set proportion - 25 percent - of proceeds  
          of auction revenues for clean energy and energy efficiency  
          programs and projects.  

          Statute provides CPUC flexibility in directing the electrical  
          IOUs use of emissions auction proceeds.  This is because the  
          Legislature recognized there might not be enough qualifying  
          clean energy and energy efficiency programs or projects to  
          receive 15 percent of the electrical IOUs' emissions auction  
          revenues.  It is hard to imagine such a dearth of clean energy  
          or energy efficiency programs or projects to reduce consumption  
          of conventional natural gas.  Such a situation is not, however,  
          impossible to image.  The author and committee may want to amend  
          the bill, as follows, to provide CPUC flexibility in directing  
          the use of natural gas IOU auction proceeds similar to the  
          flexibility provided in statute to the CPUC in directing the use  
          of electrical IOU auction proceeds:

          748.6.
                (a) No later than June 1, 2017, the commission  shall may  








          SB 1301 (Hertzberg)                                   PageH of?
               require up to 25 percent of revenues, including any accrued  
               interest, received by a gas corporation as a result of the  
               direct allocation of greenhouse gas allowances to natural  
               gas suppliers pursuant to subdivision (f) of Section 95890  
               of Title 17 of the California Code of Regulations to be  
               used for clean energy and energy efficiency projects or  
               programs approved by the commission.

          Not every alternative.  This bill makes available funding for  
          support for the development, deployment, or use of alternative  
          transportation fuels.  The author's stated goal is to reduce  
          dependence on fossil fuels.  However, in some contexts,  
          conventional natural gas is considered an "alternative" fuel.   
          For example, the Alternative and Renewable Fuel and Vehicle  
          Technology Program, administered by the California Energy  
          Commission (CEC), have funded vehicles fueled by the combustion  
          of conventional natural gas.<4>  The author may wish to clarify  
          the types of fuels he envisions, or does not envision, receiving  
          funding.  Regardless, it is impossible to imagine the CPUC or a  
          natural gas IOU interpreting "alternative transportation fuel,"  
          as used in this bill, to mean the combustion of conventional  
          natural gas or of any other fossil fuel.  

          Double-referred.  Should this bill be approved by this  
          committee, it has been referred to the Senate Committee on  
          Environmental Quality.

          Prior/Related Legislation
          
          AB 693 (Eggman, Chapter 91, Statutes of 2015) required the CPUC  
          to authorize $100 million annually, or 10 percent of electrical  
          IOU cap-and-trade auction allowance funds, whichever is less,  
          for a financial assistance program for qualifying solar energy  
          systems on low-income multifamily housing properties, as  
          defined. The bill passed the Senate 26-14.

          AB 1900 (Gatto, Chapter 602, Statutes of 2012) directed the CPUC  
          to identify landfill gas constituents, develop testing protocols  
          for landfill gas injected into common carrier pipelines, adopt  
          standards for biomethane to ensure pipeline safety and  
          integrity, and adopt rules to ensure open access to the gas  
          pipeline system.  

          AB 2196 (Chesbro, Chapter 605, Statutes of 2012) ensured that  
          biogas qualifies for RPS credit, provided its production,  
          ---------------------------
          <4> http://www.energy.ca.gov/drive/projects/natural_gas.html








          SB 1301 (Hertzberg)                                   PageI of?
          delivery and use meet certain conditions.

          SB 1122 (Rubio, Chapter 612, Statutes of 2012) required IOUs to  
          collectively procure at least 250 MW of generation eligible for  
          the RPS from bioenergy generation project, including biogas  
          projects.

          AB 577 (Bonilla, 2015) would have required the CEC to develop  
          and implement a grant program for projects related to biomethane  
          production.  The bill was held on suspense by the Senate  
          Committee on Appropriations.

          AB 2206 (Williams) requests that the California Council on  
          Science and Technology undertake and complete a study analyzing  
          the regional and gas corporation specific issues relating to  
          minimum heating value and maximum siloxane specifications for  
          biomethane before it can be injected into common carrier gas  
          pipelines.  The bill is pending consideration by the Assembly  
          Committee on Utilities and Commerce.

          AB 2313 (Williams) requires the CPUC to modify its monetary  
          incentive program for biomethane projects.  The bill is pending  
          consideration by the Assembly Committee on Natural Resources.
            
          AB 2773 (Quirk) requires the CPUC to modify its technical  
          standards applicable to biomethane to be injected into a common  
          carrier pipeline.  The bill is pending consideration by the  
          Assembly Committee on Utilities and Commerce.

          SB 687 (Allen, 2015) would have established the renewable gas  
          standard (RGS), requiring all sellers of natural gas to provide  
          to retail end-use customers in California increasing amounts of  
          "renewable gas," so that, by January 1, 2030, at least ten  
          percent of the natural gas supplied is "renewable gas."  The  
          bill passed this committee on a vote of 7 to 3 and was held on  
          suspense by Senate Committee on Appropriations.

            SB 1043 (Allen) requires ARB to consider and adopt policies to  
          significantly increase the sustainable production and use of  
          "renewable gas."  The bill is pending consideration by this  
          committee.

            SB 1153 (Canella) requires the ARB to provide a comprehensive  
          overview of state efforts to encourage the development of  
          instate biomethane and renewable natural gas.  The bill is  
          pending consideration by this committee.








          SB 1301 (Hertzberg)                                   PageJ of?

          FISCAL EFFECT:                 Appropriation:  No    Fiscal  
          Com.:             Yes          Local:          Yes


            SUPPORT:  

          Bioenergy Association of California
          California Association of Sanitation Agencies
          Clean Energy
          Los Angeles County Waste Management Association
          Sierra Energy
          Solid Waste Association of Orange County
          TSS Consultants

          OPPOSITION:

          The Utility Reform Network, unless amended

          ARGUMENTS IN SUPPORT:    According to the author:

          The state has several policies aimed at reducing or displacing  
          fossil natural gas consumption, largely under the rubric of  
          combatting climate change:

                     Increase renewable energy generation to 50 percent  
                 by 2030 (RPS, SB 350).
                     Reduce GHGs by 2020 and beyond (AB 32).
                     Reduce petroleum consumption by 50 percent (2015  
                 Governor Brown State of the State).
                     Reduce carbon intensity of fuels and diversify fuel  
                 supplies (LCFS, Executive Order S-01-07).
                     Divert solid waste from landfills, especially  
                 organic waste (AB 1826).
                     Reduce wildfire risk and increase forest health  
                 (Governor Brown Tree Mortality State of Emergency).
                     Double the amount of savings from energy efficiency  
                                                                               (SB 350).
                     Increase savings specifically from existing building  
                 stock (AB 758).

          Achieving these goals will require new investments in  
          infrastructure and technology that meaningfully replaces fossil  
          energy sources - petroleum and fossil natural gas. According to  
          the AB 32 Scoping Plan, funding for infrastructure is critical  
          to these goals, especially waste management and forestry goals.  








          SB 1301 (Hertzberg)                                   PageK of?
          And a key recommendation from the Bioenergy Action Plan (part of  
          the AB 32 Scoping Plan) is to promote the development of  
          pipeline biogas and bioenergy.

          The problem is that these investments all cost money. Given the  
          many shared benefits of biogas and energy efficiency, SB 1301  
          attempts to address these costs and help develop the new,  
          coordinated, infrastructure necessary to achieve our  
          environmental goals. 

          Moreover, the Legislature has not yet weighed in on how the gas  
          utility Cap and Trade auction revenues should be used.  The  
          Legislature has specifically directed the expenditures for all  
          of the cap and trade accounts except those from the natural gas  
          utilities. The GGRF money is appropriated as part of the annual  
          budget process and the electrical utility auction revenue was  
          directed in Public Utilities Code 748.5. 
          
          ARGUMENTS IN OPPOSITION:  The Utilities Reform Network (TURN)  
          objects to this bill because it prevents a substantial portion  
          of the revenue from the auction of natural gas IOU emissions  
          allowances from offsetting the cost the cap-and-trade program to  
          natural gas IOU ratepayers.  TURN contends ratepayers should  
          remain the sole beneficiaries of natural gas auction proceeds.    
            
          
          

                                      -- END --