BILL ANALYSIS                                                                                                                                                                                                    Ó



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

          Bill No:          SB 1441           Hearing Date:    4/5/2016
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          |Author:    |Leno and Pavley                                      |
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          |Version:   |3/28/2016    As Amended                              |
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          |Urgency:   |No                     |Fiscal:      |Yes             |
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          |Consultant:|Nidia Bautista                                       |
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          SUBJECT: Natural gas:  methane emissions

            DIGEST:    This bill would require the California Air Resources  
          Board (ARB), in consultation with the California Public  
          Utilities Commission (CPUC), and other relevant agencies, to  
          adopt regulations to achieve a reduction of methane emissions of  
          40 percent below 2012 levels by 2025 for emissions associated  
          with the extraction, production, storage, processing, and  
          transportation of natural gas used in the state, including  
          imports.  This bill would also prohibit the CPUC from allowing  
          gas corporations to seek or receive recovery from ratepayers for  
          the value of natural gas lost to the atmosphere during the  
          extraction, production, storage, processing, transportation and  
          delivery of the natural gas.

          ANALYSIS:
          
          Existing law:

          1.Establishes the California Global Warming Solutions Act of  
            2006 and requires the 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. Defines methane as a greenhouse gas.   
            Authorizes ARB to include the use of market-based mechanisms  
            to comply with these regulations.  (Health and Safety Code  
            §38500 et seq.) 

          2.Requires the ARB to complete a comprehensive strategy to  
            reduce emissions of short-lived climate pollutants in the  








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            state.  (Health and Safety Code §39730)

          3.Requires the ARB to monitor high-emission methane hot-spots in  
            the state, consult with specified entities to gather  
            information for purposes of carrying out life-cycle GHG  
            emissions analyses of natural gas imports, update relevant  
            policies and programs based on those updated life-cycle  
            analyses, and review scientific information on atmospheric  
            reactivity of methane as a precursor to the formation of  
            photochemical oxidants.  (Health and Safety Code §39731)

          4.Requires the CPUC, in consultation with the ARB, to open a  
            proceeding to adopt rules and procedures that minimize natural  
            gas leaks from CPUC-regulated gas pipeline facilities while  
            giving priority to safety, reliability, and affordability of  
            service.  Requires gas corporations to file a report that  
            includes a summary of utility leak management practices, list  
            of leaks and a best estimate of gas loss due to leaks.   
            Requires the rules and procedures adopted to accomplish  
            specified actions, including: provide for the maximum  
            technologically feasible and cost-effective avoidance and  
            repair of leaks and leaking components in CPUC-regulated gas  
            pipeline facilities that are intrastate transmission and  
            distribution lines; and establish protocols and procedures for  
            the development and use of metrics to quantify the volume of  
            emissions from leaking gas pipeline facilities and for  
            evaluating and tracking leaks geographically and over time  
            that may be incorporated into the ARB's mandatory GHG emission  
            reporting.   (Public Utilities Code §975)

          5.Requires the CPUC to consider as part of its accountability  
            for rate revenues and best value for ratepayers, consistent  
            with existing ratemaking procedures and authority, to provide  
            revenues for all activities identified and required to address  
            leaks, including any adjustment of allowance for lost and  
            unaccounted for gas related to actual leakage volumes, among  
            other provisions. (Public Utilities Code §977)

          6.Establishes that the CPUC is the state authority responsible  
            for regulating and enforcing intrastate gas pipeline  
            transportation and pipeline facilities pursuant to Chapter 601  
            (commencing with Section 60101) of Subtitle VIII of Title 49  
            of the United States Code, including the development,  
            submission, and administration of a state pipeline safety  
            program certification for natural gas pipelines pursuant to  









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            Section 60105 of that chapter.  (Public Utilities Code §955 et  
            seq.)

          7.Establishes that the Division of Oil, Gas, and Geothermal  
            Resources (DOGGR) in the Department of Conservation at the  
            Natural Resources Agency is the state authority responsible  
            for regulating oil and gas, including natural gas storage  
            wells.  Provides the division's leader, the state's oil and  
            gas supervisor, with broad authority to supervise oil and gas  
            operations to prevent damage to life, health, property and  
            natural resources, among other requirements.  (Public  
            Resources Code §3100 et seq.)

          8.Authorizes the CPUC to fix rates, establish rules, and examine  
            records for all public utilities subject to its jurisdiction,  
            including gas corporations. (California Constitution Article  
            XII, Section 6)
          This bill:

          1.Requires the ARB, in consultation with the CPUC and other  
            relevant agencies, to adopt by regulation methane emissions  
            reductions measures for the emissions associated with the  
            extraction, production, storage, processing, and  
            transportation of natural gas used in the state, including  
            imports, that will achieve a reduction in methane emissions of  
            at least 40 percent below 2012 methane emissions levels by  
            2025.

          2.Requires the regulation adopted to include information  
            acquired as part of ARB's existing efforts to carry out  
            life-cycle GHG emissions analysis of natural gas imports.

          3.Requires the regulation to include interim targets to reach  
            the methane emissions goal.

          4.Requires ARB, in consultation with CPUC and other relevant  
            state agencies, to consider specified approaches in efforts to  
            establish measures for reducing methane emissions, including: 

               a.     developing new incentives and investment programs in  
                 basins and fields from which the state receives natural  
                 gas; 

               b.     imposing new procurement and tracking requirements  
                 of interstate deliveries on the state's regulated natural  









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                 gas corporations; 

               c.     modifying the state's market based-emissions  
                 reductions measures to include compliance obligations of  
                 natural gas utilities and fuel importers;

               d.     participating or forming interstate and federal  
                 working groups, compacts or agreements; and

               e.     designing regulations in a manner that seeks to  
                 minimize costs and maximize the total benefits. 

          5.Requires the CPUC to prohibit gas corporations from seeking or  
            receiving recovery from ratepayers the value of natural gas  
            lost to the atmosphere during the extraction, production,  
            storage, processing, transportation, and delivery of natural  
            gas.
          


          Background

          Natural gas.  Natural gas is often referred to as the fossil  
          fuel of choice because it is lighter and burns cleaner than oil  
          and coal.  Natural gas is used to fuel power plants that  
          generate electricity, as a heating and cooking fuel in homes and  
          industrial processes, and as a transportation fuel. According to  
          the U.S. Energy Information Agency, California is the second  
          largest consumer of natural gas as compared to other states,  
          with Texas being the top consumer.  The majority of the natural  
          gas used in California, about 90 percent, is imported from  
          outside the state. Most of the imports come from the Southwest  
          and the Rocky Mountains, with an additional portion coming from  
          Canada. In California, just over 40 percent of natural gas is  
          used to generate electricity.  In recent years, there's been a  
          growing reliance on natural gas-fired power plants to meet local  
          reliability needs, to provide emergency system support and to  
          provide additional services to keep the system running reliably.  
           When generation from renewable sources of energy decline but  
          energy load does not, other generation sources must be called on  
          to maintain the electric grid.  The increased dependency on  
          natural gas-fired generation can be attributed to the shift away  
          from more carbon-intensive resources (such as coal), effects of  
          the drought which has reduced hydroelectric power supply, the  
          retirement of the San Onofre Nuclear Generating Station (SONGS),  









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          and increased use of other renewables, including solar and wind,  
          which are intermittent resources.  Other resources, particularly  
          those fired by natural gas, are needed to ramp up production  
          quickly, as the renewables generation falls off, and be turned  
          down quickly as the renewables production increases.  The result  
          is greater variation in gas load, as well as large draws on the  
          gas system, sometimes very quickly.<1>

          About methane emissions.  Methane is the primary component of  
          natural gas and is also produced biologically under anaerobic  
          conditions in animals with a four-part stomach (such as cattle  
          and sheep), 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 a  
          short-lived climate pollutant with an atmospheric lifetime of  
          about 12 years.  Like other GHGs, methane warms the atmosphere  
          by blocking infrared radiation (heat) that is re-emitted from  
          the earth's surface from reaching space.  Methane is a potent  
          GHG, with roughly 28 times the warming power of carbon dioxide  
          over a 100-year period and more than 80 times over a 20-year  
          timespan. Methane also affects local air quality by contributing  
          to the formation of global background levels of ozone.  Ozone  
          itself is a powerful short-lived climate pollutant as well as a  
          regional ground level air pollutant (a.k.a. smog) which  
          negatively impacts human health and can lead to asthma attacks,  
          hospitalizations, and even premature death. About two-thirds of  
          the rise in global levels of background ozone can be attributed  
          to methane emissions.

          Efforts to address methane emissions.  Methane emissions come  
          from both intentional and unintentional releases of natural gas.  
           Unintentional releases of methane, or fugitive emissions, can  
          come from multiple sources and phases of the natural gas system,  
          such as from leaking pipelines, abandoned wells, or inefficient  
          combustion. Intentional releases are purposeful and known  
          emissions that occur in the normal operations of the natural gas  
          system.  For example, safety dictates the venting of natural gas  
          ---------------------------
          <1> California Energy Commission. AB 1257 Natural Gas Act  
          Report: Strategies to Maximize the Benefits Obtained from  
          Natural Gas as an Energy Source. Final Staff Report. November  
          2015.  
           http://docketpublic.energy.ca.gov/PublicDocuments/15-IEPR-04/TN20 
          6470_20151030T160233_STAFF.pdf  









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          when pressures reach levels where there could be a safety  
          risk.<2> 

          There are many ongoing regulatory initiatives being undertaken  
          by various agencies in the state (mostly relating to air  
          pollution, greenhouse gases, and the increased use of renewable  
          energy sources), as well as, the federal government to address  
          methane emissions from the natural gas system both directly and  
          indirectly.  These include: efforts to reduce short-lived  
          climate pollution, improvements to pipeline safety requirements  
          largely in response to the 2010 PG&E San Bruno fatal explosion,  
          legislative requirements to address natural gas leaks, emergency  
          regulations to address storage well integrity, federal proposals  
          to address methane emissions and others.  Of these efforts,  
          perhaps the most relevant are the state's efforts to develop a  
          strategy for reducing short-lived climate pollutants, including  
          methane emissions, and implementation of legislative  
          requirements to address leaks. 

          Short-lived climate pollutant strategy.  SB 605 (Lara and  
          Pavley, Chapter 523, Statutes of 2014) requires ARB to develop a  
          strategy for reducing short-lived climate pollutants, including  
          methane.  ARB has developed a draft strategy, solicited public  
          comment and is currently expecting to finalize the strategy in  
          mid-2016. The draft strategy includes a proposed goal of  
          reducing overall methane emissions by 40 percent below 2013  
          levels by 2030. SB 1383 (Lara, 2016) proposes to codify this and  
          the other proposed goals within the draft strategy.  The  
          strategy acknowledges the need to further minimize fugitive  
          emissions of methane from natural gas infrastructure.  However,  
          the report also notes the current aging natural gas  
          infrastructure which may pose challenges to the ability to  
          minimize emissions.  Below are the methane emissions sources for  
          the 2013 benchmark year and the 2030 emissions goals, including  
          the roughly 13% of the emissions attributed to oil and gas  
          extraction and pipelines in the state.


          Source: ARB, Draft Short-Lived Climate Pollutant Reduction  
          Strategy: September, 2015. See  
          http://www.arb.ca.gov/cc/shortlived/2015draft.pdf.htm.

          Addressing leaks from natural gas system.  In an effort to  
          address systemic natural gas leaks from an aging infrastructure,  



          ---------------------------

          <2> Ibid.







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          as well as, climate impacts due to methane, SB 1371 (Leno,  
          Chapter 525, Statutes of 2014) requires the CPUC, in  
          consultation with ARB, to open a proceeding to adopt rules and  
          procedures that minimize natural gas leaks from CPUC-regulated  
          gas pipeline facilities.  SB 1371 requires the rules and  
          procedures include procedures for the development of metrics to  
          quantify the volume of emissions from leaking gas pipeline  
          facilities, and for evaluating and tracking leaks geographically  
          and over time that may be incorporated into ARB's mandatory GHG  
          emission reporting.   SB 1371 also requires, to the extent  
          feasible, the owner of each commission-regulated gas pipeline  
          facility that is an intrastate transmission or distribution line  
          to calculate and report to the commission and ARB a baseline  
          system-wide leak rate, along with any data and computer models  
          used in making that calculation.  The CPUC is currently in the  
          midst of implementing the requirements of SB 1371, having opened  
          a rulemaking proceeding in January 2015 with an expected  
          decision in the first quarter of 2017.  As of the date of this  
          analysis, the CPUC, working with ARB, has hosted several public  
          workshops, solicited comments on a Safety and Enforcement  
          Division "Best Practices" report, gathered reports from the  
          utilities on gas leaks and leak management practices, and has  
          scheduled a joint workshop with ARB on emission reduction  
          targets, compliance, and enforcement on April 12, 2016.

          In response to the state of emergency from the recent natural  
          gas leak at the Southern California Gas Company's Aliso Canyon  
          storage well facility, the Division of Oil Gas and Geothermal  
          Resources has adopted new emergency regulations of oil and gas  
          storage facilities.  The new regulations are in effect for six  
          months beginning February 5, 2016, but can be extended. DOGGR is  
          requiring increased inspections and monitoring requirements for  
          all wells, regular testing of all safety valves, minimum and  
          maximum pressure limits for each gas storage facility in the  
          state, and each storage facility to establish a comprehensive  
          risk management plan that evaluates and prepares for risks at  
          each facility, including corrosion of potential pipes and  
          equipment.

          Additionally, the CPUC enforces statutes and rules (General  
          Order 112-E) which establish, in addition to the Federal  
          Pipeline Safety Regulations that CPUC enforces, minimum  
          requirements for the design, construction, quality of materials,  
          locations, testing, operations and maintenance of facilities  
          used in the gathering, transmission and distribution of gas and  









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          in liquefied natural gas facilities to safeguard life or limb,  
          health, property and public welfare and to provide that adequate  
          service will be maintained by gas utilities operating under the  
          jurisdiction of the commission. 

          In February of this year, ARB proposed new emissions regulations  
          for oil and gas facilities aimed at tackling fugitive and vented  
          methane emissions in the state. The proposed regulations require  
          underground storage well facility owners to develop a plan for  
          surface-leak monitoring on a continuous or daily basis, and  
          require that intentional venting be limited to the use of  
          no-vent devices, vapor collection, and other measures. 

          In August 2015, the United States E.P.A. proposed standards to  
          directly reduce methane emissions from the oil and gas sector to  
          help address climate change. The standards are strategies to  
          support the Administration's goal of reducing methane emissions  
          from the oil and gas sector by 40-45 percent from 2012 levels by  
          2025. The proposed requirements address emissions from the  
          production to transmission segments, including: expanding the  
          federal  New Source Performance Standards for the oil and gas  
          industry to include methane emissions directly upstream; require  
          leak detection and repair at well sites, gathering and boosting  
          stations and compressor stations across the transmission and  
          storage segments; new standards to reduce methane emissions from  
          hydraulically fractured oil wells; and emission guidelines to  
          reduce smog-forming emissions from existing oil and gas sources  
          in areas where smog reaches unhealthy levels.

          Goal merits clarification.  This bill proposes codifying a goal  
          to reduce methane emissions from natural gas processes, but it  
          is unclear whether the proposed goal aligns, or may not align,  
          with California's existing GHG emission reduction goals and  
          proposed goals.  Specifically, this bill proposes to require a  
          reduction of methane emissions from natural gas processes that  
          would result in a 40 percent reduction below 2012 levels by  
          2025.   The goal is modeled after the U.S. E.P.A. goal announced  
          in 2015. However, currently ARB's proposed related emissions  
          goals use 2013 as the emissions inventory benchmark year. For  
          example, the methane emissions reduction goal proposed in ARB's  
          draft strategy to reduce short-lived climate pollutants,  
          proposed to be codified in SB 1383 (Lara), would require a 40  
          percent reduction from 2013 levels in overall methane emissions  
          (from all sources in the state) by 2030.   Should this bill move  
          forward, the Senate Committee on Environmental Quality may wish  









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          to ensure the proposed goal is aligned with and complimentary to  
          related emissions goals. 

          Not a single penny.  The language as currently proposed would  
          not allow gas corporations to recover from ratepayers even a  
          single penny for the value of any gas lost to the atmosphere.  
          The author's intent is to eliminate all fugitive and other  
          emissions during the full life-cycle of the natural gas  
          extraction, production, distribution and delivery.   However, it  
          may not be feasible, or cost-effective, to capture 100 percent  
          of all potential lost gas during the full life-cycle of the  
          natural gas system.  It's also unclear how much of the natural  
          gas system is under the control of the utility, beyond the  
          facilities it owns and operates in the state. Moreover, the  
          current state of emissions accounting is very uncertain due to  
          the complexities of the natural gas system.  In order to  
          maintain the intent of the bill, while recognizing the practical  
          realities and limitations to capture all lost gas 100 percent of  
          the time, the author and committee may wish to have the CPUC  
          determine what, if any, of the value of lost gas may be recouped  
          in rates by gas corporations. Specifically:

          SEC 3. Section 977 of the Public Utilities Code:

          (b) (2) In establishing rates for gas corporations, in an  
          individual rulemaking proceeding or in general rate cases, the  
          commission shall not allow gas corporations to seek or receive  
          recovery from ratepayers for the value of natural gas lost to  
          the atmosphere during the extraction, production, storage,  
          processing, transportation, and delivery of the natural gas, to  
          the extent feasible as determined by the California Public  
          Utilities Commission.  
           
          In-state vs. out-of-state investments.  This bill allows for ARB  
          to consider investments in fields and basins that supply natural  
          gas to California.  However, the bill does not make a  
          distinction regarding in-state vs. out-of-state basins and  
          fields. As noted above, a majority of the natural gas consumed  
          in California is imported from outside the state (about 90  
          percent), including from the Southwest, Rocky Mountains and  
          Canada.  However, to-date investments from the revenues of  
          California's greenhouse gas reduction funds have been made for  
          projects in-state, including high speed rail, intercity transit  
          and rail, affordable housing, low-income weatherization and  
          solar installations, zero and near-zero emissions vehicles,  









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          urban forests, and many others.  The list of in-state potential  
          projects and programs that could benefit from the GHG reductions  
          funds continues to expand.  Since these revenues are derived  
                                        from facilities subject to the cap-and-trade program  
          requirements in California, this bill raises questions and  
          concerns regarding whether out-of-state projects that may help  
          to reduce GHG emissions attributed to California's consumption  
          should be considered eligible to receive some of these funds  
          and, if so, to what extent California can and should verify that  
          those investments are to the benefit of Californians. 

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

          Prior/Related Legislation
          
          SB 1371 (Leno, Chapter 525, Statutes of 2014) required the CPUC  
          to open a proceeding to adopt rules and procedures that minimize  
          natural gas leaks from CPUC-regulated gas pipeline facilities  
          with the goal of reducing GHG emissions.
           
          SB 605 (Lara, Chapter 523, Statutes of 2014) required the ARB to  
          complete a comprehensive strategy to reduce emissions of  
          short-lived climate pollutants, as defined, including methane  
          emissions, in the state.

          AB 1496 (Thurmond, Chapter 604, Statutes of 2015) required the  
          ARB to monitor high-emission methane hot-spots in the state,  
          consult with specified entities to gather information for  
          purposes of carrying out life-cycle GHG emissions analyses of  
          natural gas imports, update relevant policies and programs based  
          on those updated life-cycle analyses, and review scientific  
          information on atmospheric reactivity of methane as a precursor  
          to the formation of photochemical oxidants.
           
          SB 1383 (Lara) would require the state board to approve and  
          implement a comprehensive strategy to reduce emissions of  
          short-lived climate pollutants to achieve a reduction in methane  
          of 40 percent, hydrofluorocarbon gases of 40 percent, and  
          anthropogenic black carbon of 50 percent below 2013 levels by  
          2030, as specified. The bill has been referred to the Senate  
          Committee on Environmental Quality and is scheduled to be heard  
          April 6th.
          FISCAL EFFECT:                 Appropriation:  No    Fiscal  









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          Com.:             Yes          Local:          No


            SUPPORT:  

          California Interfaith Power & Light
          California League of Conservation Voters
          Clean Water Action
          Consumer Federation of California
          Engineers & Scientists of California
          Environment California
          Environmental Defense Fund
          Moms Clean Air Force
          Sierra Club California
          Union of Concerned Scientists
          Utility Workers Union of America

          OPPOSITION:

          None received

          ARGUMENTS IN SUPPORT:  The Environmental Defense Fund states  
          that "SB 1441 closes two important loopholes that undermine the  
          state's overall effort and create a new era of accountability  
          for natural gas leakage. Since utilities are compensated for the  
          gas they lose, utility incentive to reduce leakage above and  
          beyond regulatory requirements are muted, thus reducing overall  
          signals to minimize overall emissions. SB 1441 removes this  
          incentive in order to increase the overall incentive to minimize  
          methane pollution. California's strategies [to reduce methane  
          pollution] stop at the border and fail to consider 91 percent of  
          gas California imported into the state - and the 20 and 100  
          million metric tons of carbon dioxide equivalent pollution  
          associated with it. SB 1441 removes this loophole in the state  
          climate program and requires ARB to integrate methane reductions  
          from imported gas into its long term plan for pollution  
          reduction."
           
          Utility Workers Union of America and Engineers & Scientists of  
          California argue "it is high time that the safety culture of our  
          gas utilities be fundamentally shifted to a system that creates  
          strong incentives to stop gas leaks rather than financially  
          rewarding them.  Had SB 1441 been law, we doubt that the leak at  
          Aliso Canyon would ever have happened."
          









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