BILL ANALYSIS Ķ
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 1301 (Hertzberg) - Natural gas: greenhouse gas allowance:
allocation
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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.
Bill
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.
Fiscal
Impact:
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
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the projects.
Cost pressures resulting from the redirection of 25% of
revenues (approximately $20 million to $40 million annually)
to the specified purpose.
Background:1)
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
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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
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 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.
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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
October.
According to CPUC, the 2016 California Climate Credit comes out
to an annual payment to each ratepayer ranging from $35 to $287.
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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
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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
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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
projects.
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
issues.
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
responsibilities."
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