BILL ANALYSIS                                                                                                                                                                                                    Ķ

                              Senator Wieckowski, Chair
                                2015 - 2016  Regular 
          Bill No:            SB 1301
          |Author:    |Hertzberg                                            |
          |Version:   |4/7/2016               |Hearing      | 4/20/2016      |
          |           |                       |Date:        |                |
          |Urgency:   |No                     |Fiscal:      |Yes             |
          |Consultant:|Rebecca Newhouse                                     |
          |           |                                                     |
          SUBJECT:  Natural gas:  greenhouse gas allowance:  allocation

          Existing law:  
          1) Under the California Global Warming Solutions Act of 2006  
             (also known as AB 32), requires the California 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 §38500 et seq.) 

          2) Requires the California Public Utilities Commission (CPUC) to  
             require revenues received by an electrical corporation as a  
             result of the direct allocation of greenhouse gas allowances  
             to electric utilities, to be credited directly to the  
             residential, small business, and emissions-intensive  
             trade-exposed retail customers of the electrical corporation.

          3) Authorizes CPUC to allocate up to 15% of the revenues  
             received by an electrical corporation as a result of the  
             direct allocation of greenhouse gas allowances to electrical  
             distribution utilities for clean energy and energy efficiency  
             projects established pursuant to statute that are  
             administered by the electrical corporation, or a qualified  
             third-party administrator as approved by the commission, and  


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             that are not otherwise funded by another funding source.

          This bill:  

          1) Authorizes CPUC to require up to 25% of revenues received by  
             a gas corporation as a result of the direct allocation of  
             greenhouse gas allowances to natural gas suppliers for clean  
             energy and energy efficiency projects or programs approved by  
             the CPUC.
          2) Requires any clean energy or energy efficiency program or  
             project funded under the bill be able to quantify and report  
             GHG emissions reductions. 

          3) States that "clean energy" project or program may include:

             a)    Support for the development, deployment,  
                interconnection, or use of pipeline biogas;

             b)    Support for the development, deployment, or use of  
                alternative transportation fuels;
             c)    Any other project or program that reduces or abates  
                GHGs related to the use of fossil natural gas.

          4) States that "energy efficiency" projects or programs may  
             include the reduction of fossil natural gas consumption  
             through more efficient appliances, heating, cooling,  
             industrial use, or other end uses.

          5) Specifies that clean energy and energy efficiency projects or  
             programs may also include those established pursuant to  
             statute that are administered by the gas corporation, the  
             commission, or a qualified third-party administrator approved  
             by the commission.

          6) Requires CPUC to require each gas corporation to annually  
             report and post on its website all expenditures of these  
             revenues and the quantified reductions in GHGs from projects  
             or programs funded under the bill.
          1) Short-lived climate pollutants.  Greenhouse gases or climate  
             pollutants, such as CO2, work to warm the earth by trapping  


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             solar radiation in the earth's atmosphere.  Depending on the  
             molecule, these pollutants can vary greatly in their ability  
             to trap heat and the length of time they remain in the  
             atmosphere.  CO2 remains in the atmosphere for centuries,  
             which makes it the most critical greenhouse gas to reduce in  
             order to limit long-term climate change.  However, climate  
             pollutants including methane, tropospheric ozone,  
             hydrofluorocarbons (HFCs), and soot (black carbon), are  
             relatively short-lived (anywhere from a few days to a few  
             decades), but when measured in terms of how they heat the  
             atmosphere (global warming potential, or GWP), can be tens,  
             hundreds, or even thousands of times greater than that of  
             CO2.  These climate forcers are termed short-lived climate  
             pollutants (SLCPs).

             Because SLCPs remain in the atmosphere for a relatively short  
             period of time, but have a much higher global warming  
             potential than CO2, efforts aimed at reducing their emissions  
             in the near term would result in more immediate climate, air  
             quality, and public health benefits, than a strategy focused  
             solely on CO2.  According to ARB's SLCP draft strategy,  
             "while the climate impacts of CO2 reductions take decades or  
             more to materialize, cutting emissions of SLCPs can  
             immediately slow global warming and reduce the impacts of  
             climate change."  Recent research estimates that SCLPs are  
             responsible for about 40% of global warming to date and that  
             actions to significantly reduce SLCP emissions could cut the  
             amount of warming that would occur over the next few decades  
             by half. 

             According to ARB's 2015 updated AB 32 Scoping Plan, methane  
             is one of the three short-lived climate pollutants with the  
             greatest implications for California. 

             Methane (CH4) is the principal component of natural gas and  
             is also produced biologically under anaerobic conditions in  
             ruminants, landfills, and waste handling.  Atmospheric  
             methane concentrations have been increasing as a result of  
             human activities related to agriculture, fossil fuel  
             extraction and distribution, and waste generation and  
             processing.  Methane is 84 times more powerful as a global  
             warming pollutant than CO2 on a 20-year time scale.

          2) Cap and trade background.  Pursuant to authority under AB 32  


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             (Nuņez, Pavley, Statutes of 2006, Chapter 488), ARB approved  
             cap-and-trade regulations in December of 2011.  Beginning on  
             January 1, 2013, the cap-and-trade regulation sets a firm,  
             declining cap on total GHG emissions from sources that make  
             up approximately 85% of all statewide GHG emissions. Sources  
             included under the cap are termed "covered" entities. The cap  
             is enforced by requiring each covered entity to surrender one  
             "compliance instrument" for every metric ton of carbon  
             dioxide equivalent (MTCO2e) that it emits at the end of a  
             compliance period.  Over time, the cap declines, resulting in  
             GHG emission reductions. Compliance instruments include  
             allowances and offsets, where allowances are generated by the  
             state in an amount equal to the cap, and offsets result from  
             emission reductions achieved in an uncapped sector pursuant  
             to an approved protocol adopted by ARB. Offsets may be used  
             to satisfy up to 8% of a covered entity's compliance  
             obligation.  The program authorizes entities to buy or sell  
             their allowances, creating a market that is intended by ARB  
             to minimize the cost of compliance and encourage entities to  
             invest in GHG emissions reductions

             Other than a small percentage of allowances used for a  
             cost-containment reserve, allowances are either freely  
             provided to entities or sold at quarterly auctions. Auction  
             proceeds, other than proceeds resulting from electric and  
             natural gas Investor Owned Utility (IOU) allowances, are  
             deposited in the Greenhouse Gas Reduction Fund (GGRF), and  
             subject to various requirements for their use, including that  
             they must facilitate the achievement of GHG emissions  

             For the first two years, the cap-and-trade program only  
             covered electricity generation, and large industrial sources  
             and processes with annual GHG emissions at or above 25,000  
             MTCO2e.  In 2015, the program expanded to include  
             transportation fuels and natural gas distributors. 

          3) Proceeds from consigned allowances are not GGRF moneys.  ARB  
             allocates allowances to electric utilities and natural gas  
             suppliers, on the behalf of their ratepayers, to ensure that  
             electric and natural gas ratepayers do not experience sudden  
             increases in their utility bills associated with the  
             cap-and-trade program.  The regulation requires electrical  
             IOUs to consign all of their allocated allowances to auction.  


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              Natural gas utilities are required to consign 30% of their  
             allocated allowances to auction in 2016, increasing up to 50%  
             in 2020. These consigned allowances are then sold at auction,  
             and the proceeds are returned to the utilities.  These  
             proceeds are not deposited in the GGRF, and are not subject  
             to the requirements of GGRF moneys in statute.  The  
             cap-and-trade regulation, however, does require the moneys be  
             used for the benefit of ratepayers, consistent with the goals  
             of AB 32, and specifies that the proceeds may not be used for  
             the benefit of entities or persons other than such  

             Publicly owned utilities (POUs) are not required to consign  
             their allowances.  However, both IOUs and POUs are required  
             to use the value associated with these allowances for the  
             benefit of their ratepayers.

          4) Electric utility revenues.  SB 1018 (Budget and Fiscal  
             Review, Chapter 39, Statutes of 2012) requires that CPUC  
             oversee the return of all electrical IOU-allocated allowance  
             auction proceeds to their residential, small business, and  
             emissions-intensive, trade-exposed (EITE) retail customers,  
             except for up to 15% for approved clean energy and energy  
             efficiency projects.

             CPUC has conducted a series of proceedings to determine how  
             the IOUs should use allocated allowance value within this  
             framework, and ruled that after compensating EITE entities,  
             offsetting electricity rate impacts of the cap-and-trade  
             program on small businesses, and residential customers, the  
             remaining revenues would be awarded as a "California Climate  
             Credit"-small business customers receive the rebate each  
             month on their electric bill, and residential households  
             receive the credit each April and October.  

             According to CPUC, the 2016 California Climate Credit comes  
             out to an annual payment to each ratepayer ranging from $35  
             to $287.

             CPUC Decision 14-10-033 developed the procedures for approval  
             of an electrical IOU clean energy or energy efficiency  
             project funded through auction proceeds.  To date, CPUC has  
             not approved any specific projects.


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          5) Natural gas utility revenues.  There are several natural gas  
             IOUs in the state, including PG&E, Southern California Gas  
             Company (SoCalGas), SDG&E, and Southwest Gas Company (SWG).  
             ARB's cap-and-trade regulation requires the natural gas IOUs  
             to use the proceeds of the auctions exclusively for the  
             benefit of ratepayers, subject to the direction of CPUC, just  
             as it does the auction revenues of the electrical IOUs.   
             Similarly to what CPUC decided for electrical IOUs, on  
             October 23, 2015, CPUC adopted a decision directing natural  
             gas IOUs' use of auction revenues that requires the natural  
             gas IOUs to return allowance proceeds to ratepayers as a  
             non-volumetric (not based on usage) bill credit.  CPUC refers  
             to the bill credit as the natural gas California Climate  
             Credit.  According to CPUC, the natural gas California  
             Climate Credit equates to roughly $20 annually to each  
          1) Purpose of Bill.  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.  The author notes that achieving  
             these goals will require new investments in infrastructure  
             and technology that meaningfully replaces fossil energy  
             sources, including petroleum and fossil natural gas. The  
             author also states that the development of pipeline biogas  
             and bioenergy is a key recommendation from the CEC's  
             Bioenergy Action Plan.  

             However, according to the author, the problem is that these  
             infrastructure and technology investments are costly.  SB  
             1301 addresses this issue by authorizing CPUC to reserve up  
             to 25% of natural gas utility auction revenue for energy  
             efficiency and renewable energy projects.  The author states  
             that this bill is needed because the Legislature has not yet  
             weighed in on how the gas utility cap-and-trade auction  
             revenues should be used.  He adds that 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.

          2) Legislature weighing in.  As noted in the background, SB 1018  
             in 2012 provided statutory direction for the spending of  


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             cap-and-trade auction proceeds from consigned electric IOUs  
             allowances, and authorizes up to 15% of those proceeds for  
             clean energy and energy efficiency projects. 

             There has been no similar statutory direction for proceeds  
             consigned by natural gas IOUs, newly covered under the  
             cap-and-trade program in 2015.  Even so, CPUC has the  
             authority to direct those proceeds for the benefit of the  
             ratepayer, and pursuant to that authority, they completed a  
             rulemaking process last year to specify that natural gas  
             utility proceeds be returned to customers as a $20/year  

             According to CPUC, a 25% allocation of the proceeds would  
             result in $40 to $60 million annually for clean energy and  
             energy efficiency projects specified in SB 1301, and would  
             reduce the natural gas California Climate Credit by about $5.  
              For a dollar amount likely to go unnoticed by the average  
             consumer, these moneys may work to offset high costs  
             associated with biogas interconnection and development of  
             alternative and renewable fuels. 

          3) Taking a holistic look.  Although SB 1301 does not propose to  
             use GGRF moneys, the proceeds that would be allocated to  
             clean energy and energy efficiency programs specified in SB  
             1301 also originate from the cap-and-trade auction.  The  
             clean energy and energy efficiency projects, in reducing  
             fossil fuel natural gas, would be working to meet similar  
             climate goals as several proposed and current programs funded  
             through GGRF.  Since directing these revenues from consigned  
             allowances to similar types of projects may reduce some of  
             the need to spend GGRF in the same sector, it may be  
             advantageous to consider this proposal with GGRF proposals to  
             better assess which set of proposals best meets the  
             requirements of the fund, uses resources most efficiently,  
             maximizes policy objectives moneys, and is not already funded  
             through other programs.  As the budget committees are  
             considering the Governor's proposal of GGRF expenditures, the  
             budget process may be an ideal way to comprehensively  
             consider the numerous policy bills that propose programs for  
             GHG emissions reductions funded through auction proceeds,  
             including SB 1301. 

          4) PUC will decide.  SB 1301 specifies that a "clean energy"  


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             program may be any project or program that reduces or abates  
             GHG emissions related to the use of fossil natural gas. 

             Additionally, the bill specifies that clean energy and energy  
             efficiency projects or programs "may also include projects or  
             programs of that type established pursuant to statute" and  
             administered by PUC, the gas corporation, or a third-party.  

             As these provisions are very broad, projects authorized under  
             this bill could capture a whole host of activities, including  
             actions and activities that may later be required as a result  
             of ARB's oil and gas regulations, or required pursuant to SB  

             Ultimately, PUC will open a rulemaking to interpret and  
             implement the provisions of this bill, and decide what  
             constitutes an eligible "clean energy" and energy efficiency"  
             project or program that reduces GHG emissions, and provides  
             ratepayer benefits.

             However, as the author specifies this bill is needed because  
             the Legislature has not weighed in on how the gas utility  
             cap-and-trade auction revenues should be used, the author may  
             wish to provide more clarity and legislative direction for  
             PUC in determining which clean energy and energy efficiency  
             projects and programs are eligible under this bill. 

          DOUBLE REFERRAL:  

          This measure was heard in Senate Energy, Utilities, and  
          Communications Committee on April 5, 2016, and passed out of  
          committee with a vote of 8-1.

          SOURCE:                    Author  


          None received  


          None received  


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