BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          SB 1441 (Leno) - Natural gas:  methane emissions
          
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          |Version: April 25, 2016         |Policy Vote: E., U., & C. 8 -   |
          |                                |          1, E.Q. 5 - 2         |
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          |Urgency: No                     |Mandate: No                     |
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          |Hearing Date: May 16, 2016      |Consultant: Narisha Bonakdar    |
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          This bill meets the criteria for referral to the Suspense File.


          Bill  
        Summary: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% below  
          2013 methane emissions levels by 2025. The bill also prohibits  
          the CPUC from allowing gas corporations to recover 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 when  
          establishing rates for gas corporations in an individual  
          rulemaking proceeding or in general rate cases.


          Fiscal  
          Impact:  

           Up to $1.15 million annually (COI) for ARB staffing costs.







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           One-time cost of $500,000 to establish the natural gas  
            procurement tracking system, and ongoing costs of $100,000  
            annually to maintain the system (COI). 

           Approximately $6,000 annually (Out-of-State travel funds) for  
            staff to travel to out-of-state facilities.

           Minor and absorbable costs to the CPUC.

          * COI = Cost of Implementation Fee


       Background:1)  Fugitive methane from the natural gas sector. A growing body of  
          evidence suggests that national and state estimates of methane  
          emissions have been significantly underestimated. Studies  
          suggest that U.S. methane emissions from all sources are likely  
          anywhere from 25 to 75% higher than EPA estimates, and they note  
          the discrepancy may in large part be due to a small number of  
          very large leaks from natural gas production and distribution  
          system. 
          Additionally, several recent analyses of atmospheric  
          measurements in state suggest that actual California methane  
          emissions may be 30 to 70% higher than estimated in ARB's  
          emission inventory. The Short-Lived Climate Pollutant draft  
          strategy notes that several efforts are underway at the CEC and  
          ARB to improve emissions monitoring to help identify sources of  
          fugitive methane emissions and reduce them, including from oil  
          and gas operations.  Additionally, ARB and NASA's Jet Propulsion  
          Laboratory are collaborating to identify large "hot spot"  
          methane sources through a systematic survey of high methane  
          emitters throughout California using both aerial and ground  
          measurements. 


          By state, California is the second largest user of natural gas  
          in the country (Texas is the largest user).  Although the state  
          has worked to reduce fugitive methane emissions from various  
          sources over recent years, including new efforts to reduce  
          fugitive leaks from natural gas infrastructure in the state, 91%  
          of the natural gas used in California is imported. 


          State efforts to reduce natural gas system leaks. SB 1371. In an  








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          effort to address systemic natural gas leaks from an aging  
          infrastructure as well as address climate impacts due to  
          methane, SB 1371 (Leno, Chapter 525, Statutes of 2014) requires  
          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 emissions 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.


          On January 15, 2015, CPUC opened a rulemaking proceeding to  
          implement the requirements of SB 1371, with an expected decision  
          in the first quarter of 2017.  On July 7, 2015, CPUC released a  
          scoping memo that raises questions and issues in implementing  
          the legislation to be addressed by the rulemaking.  Among many  
          other questions raised, the memo asks how ratepayer and  
          shareholder financial incentives should be aligned when  
          accounting for and paying for "lost gas."


          SB 1441 clarifies this issue by requiring CPUC, to the extent  
          feasible, to prohibit gas corporations from recovering the value  
          of natural gas lost to the atmosphere during the extraction,  
          production, storage, processing, transportation, and delivery of  
          natural gas, from ratepayers. 


          ARB draft oil and gas regulations. In April of last year, ARB  
          released a draft regulation to address fugitive and vented  
          emissions from new and existing oil and gas facilities, pursuant  
          to authority under AB 32 to regulate GHGs. Specifically, the  
          proposed regulation applies to crude oil and natural gas  
          production, crude oil storage, underground natural gas storage,  
          natural gas processing plants and transmission stations. The  
          draft regulation contains requirements for natural gas  
          underground storage facility well monitoring, restrictions for  








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          natural gas venting and specifications for leak detection and  
          repair, as well as other requirements.


          Aliso Canyon and DOGGR's emergency regulation. 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  
          (DOGGR) adopted emergency regulations for 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. 


          National efforts to reduce natural gas sector emissions. In  
          August 2015, the United States Environmental Protection Agency  
          (US EPA) 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 to  
          45% 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; requiring 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.




          Proposed Law:  
             1)     
          1)Makes findings and declarations about California's natural gas  








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            usage, impacts of methane, methane leakage during the  
            drilling, production, and transportation of natural gas, and  
            how the accountability measures and initiatives to address  
            imported natural gas will benefit the environment and reduce  
            the leakage associated with the state's climate programs.


          2)Requires, by January 1, 2020, the California Air Resources  
            Board (ARB), in consultation with the Public Utilities  
            Commission and other relevant state agencies, to adopt  
            regulations will achieve a reduction in methane emissions of  
            at least 40 percent below 2013 levels for systemwide methane  
            emissions from emissions associated with the extraction,  
            production, storage, processing, and transportation of natural  
            gas used in the state, including imports, by 2025. 


          3)Requires that the regulations include: (1) information  
            gathered to determine the 2013 levels for systemwide methane  
            emissions, and (2) interim targets to reach the methane  
            emissions level.


          4)Requires ARB, in consultation with the CPUC and other relevant  
            state agencies, to consider all of the following:


               a.     Developing new incentives or investment programs to  
                 facilitate emissions reductions in basins and fields from  
                 which the state receives a significant portion of its  
                 natural gas.


               b.     Imposing new requirements on the state's regulated  
                 gas corporations related to natural gas procurement and  
                 the tracking of interstate deliveries.


               c.     Modifying the state's market-based emissions  
                 reduction measures, including a market-based compliance  
                 mechanism adopted pursuant to Section 38570, to account  
                 for and include methane emissions within the compliance  
                 obligations of natural gas utilities or fuel importers.









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               d.     Participating in or forming interstate and federal  
                 working groups, compacts, or agreements.


               e.     Regulations adopted pursuant to subdivision (a)  
                 shall be designed in a manner that seeks to minimize the  
                 costs and maximize total benefits.


               f.     Specifies that the bill must be implemented to the  
                 extent feasible and consistent with law.


          5)Prohibits the CPUC from allowing gas corporations to recover  
            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  
            when establishing rates for gas corporations in an individual  
            rulemaking proceeding or in general rate cases.




          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.









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          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. Currently on the Suspense File.


          Staff Comments: The ARB notes that "Substantial new resources  
          are necessary to perform the tasks required by this bill because  
          it covers imports of natural gas, which comprises approximately  
          90 percent of all natural gas consumed in California.  ARB would  
          need to determine 2013 lifecycle methane emissions from natural  
          gas supplied to the State and the 2025 and interim emissions  
          target reductions, evaluate and implement other alternatives,  
          such as incentive programs, and develop and implement a  
          regulation that includes a methane emissions standard.  Staff  
          would also require contract funds to develop a natural gas  
          procurement tracking system (estimated $500,000 to establish the  
          system and $100,000 annually to maintain).  Further, staff would  
          be required to travel out of state (three times per year for  
          site visits to the three main pipeline routes for natural gas  
          entering California, gather information on imported gas  
          emissions, and establish the standards required under the bill,  
          as well as provide ongoing implementation, enforcement, and  
          auditing functions upon adoption of the regulation."




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