BILL ANALYSIS                                                                                                                                                                                                    Ķ

                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          SB 1301 (Hertzberg) - Natural gas:  greenhouse gas allowance:   
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          |Version: April 7, 2016          |Policy Vote: E., U., & C. 8 -   |
          |                                |          1, E.Q. 5 - 2         |
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          |Urgency: No                     |Mandate: Yes                    |
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          |Hearing Date: May 9, 2016       |Consultant: Narisha Bonakdar    |
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          This bill meets the criteria for referral to the Suspense File.

          Summary:  SB 1301 authorizes the California Public Utilities  
          Commission (CPUC) to 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 (GHG)  
          allowances to natural gas suppliers to be used for clean energy  
          and energy efficiency projects or programs approved by the CPUC.  
           The bill also requires the CPUC to require each gas corporation  
          to annually report, and post on its website all expenditures of  
          these revenues and the quantified reductions in GHG emissions  
          from projects or programs funded under this section.

           Approximately $844,354 (Public Utilities Commission Utilities  
            Reimbursement Account) to the CPUC to establish a new  
            proceeding, or to expand the scope of one or more existing  
            proceedings, and provide ongoing management and oversight of  


          SB 1301 (Hertzberg)                                    Page 1 of  
            the projects.
           Cost pressures resulting from the redirection of 25% of  
            revenues (approximately $20 million to $40 million annually)  
            to the specified purpose. 


          Short-lived climate pollutants.  Greenhouse gases or climate  
          pollutants, such as CO2, work to warm the earth by trapping  
          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  


          SB 1301 (Hertzberg)                                    Page 2 of  
          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.

          Cap and trade background.  Pursuant to authority under AB 32  
          (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  

          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 reductions.  

          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. 


          SB 1301 (Hertzberg)                                    Page 3 of  
          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.   
          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 ratepayers.

          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.

          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  

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


          SB 1301 (Hertzberg)                                    Page 4 of  
          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.

          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 ratepayer.

          Proposed Law:   This bill:  

          1) Authorizes the 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 to 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  


          SB 1301 (Hertzberg)                                    Page 5 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  
             CPUC, or a qualified third-party administrator approved by  
             the CPUC.

          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.

          Staff Comments

          According to the CPUC, "Currently, D.15-10-032 directs the  
          natural gas IOUs to distribute all proceeds to residential  
          customers as an annual bill credit called the California Climate  
          Credit.  Implementation of this credit was suspended pending  
          CPUC deliberation on an application for rehearing of  
          D.15-10-032.  Regardless of the outcome of the rehearing, SB  
          1301 will reduce each household's annual bill credit by as much  
          as 25%.

          SB 1301, as amended, now gives the CPUC the flexibility to  
          choose to spend proceeds on clean energy/EE projects.  However,  
          the CPUC will still require additional resources to determine  
          whether to use Cap and Trade proceeds for clean energy/EE  


          SB 1301 (Hertzberg)                                    Page 6 of  
          projects, establish rules and process to determine how to use  
          the funds in a manner that results in quantifiable GHG  
          reductions, and provide ongoing management and oversight of the  

          SB 1301 would significantly increase the CPUC's near-term and  
          ongoing workload. 

          SB 1301 would require the CPUC to establish a new proceeding, or  
          to expand the scope of one or more existing proceedings, to  
          establish rules and processes to determine how to use the $40 -  
          $60 million in annual funding for clean energy and energy  
          efficiency projects in a manner that results in quantifiable GHG  
          reductions.  Formal proceedings would likely need to address  
          issues related to the following: defining rules to solicit and  
          prioritize proposals; defining which entities should administer  
          this program, whether the CPUC, the utilities, or a third-party  
          administrator; and establishing methods to quantify and evaluate  
          GHG emission reductions achieved by funded projects, among other  

          The work in support of formal proceedings to implement SB 1301  
          would require one new Administrative Law Judge (ALJ) and one new  
          Public Utilities Regulatory Analyst (PURA), in addition to  
          support from other CPUC staff.

          In addition to establishing program rules, CPUC staff would need  
          to administer and oversee funding solicitations on a regular  
          basis and make recommendations about which projects are eligible  
          for funding.  Although the CPUC would likely establish program  
          guidelines in a formal proceeding, ongoing program management  
          and evaluation would require significant staff-level analytical  
          work to design solicitations for proposals, review project  
          proposals, recommend projects for approval, and evaluate and  
          verify project performance.  This substantial analytical work  
          may be in support of an informal process (e.g. CPUC resolutions)  
          or a formal process (CPUC decisions); depending on the level of  
          formal review and approval the CPUC determines is warranted.   
          Additional analytical work will be necessary to identify  
          high-value and under-funded project opportunities, as well as to  


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          coordinate funding and project outcomes with other CPUC  
          proceedings, such as integrated resource planning, which are  
          focused on developing strategies to achieve California's  
          long-term GHG emission reduction goals.  All of this analytical  
          work is additional to current staff obligations and  

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