Under the Public Utilities Act, the Public Utilities Commission has regulatory jurisdiction over public utilities, including electrical corporations and gas corporations. A violation of the Public Utilities Act or any order, decision, rule, direction, demand, or requirement of the commission is a crime. The California Global Warming Solutions Act of 2006 and its implementing regulations provide for a greenhouse gas emissions limit to be achieved through a market-based compliance mechanism. That mechanism includes the requirement that certain greenhouse gas producers acquire allowances for their emissions. Those regulations specifically provide for the direct allocation of greenhouse gas allowances to gas corporations.

A decision of the commission requires the gas corporations to return to certain customers the proceeds generated from the sale of those greenhouse gas allowances as a bill credit in an equal, non-volumetric manner, and to conduct outreach and education activities to customers receiving the bill credit.

The Public Utilities Act authorizes the commission to allocate 15% of the revenues received by an electrical corporation as a result of the auction of greenhouse gas allowances for clean energy and energy efficiency projects established pursuant to statute that are administered by electrical corporations or a qualified 3rd-party administrator approved by the commission and requires the commission to direct the balance of the revenues to be credited directly to the residential, small business, and emissions-intensive trade-exposed retail customers of the electrical corporations, as specified.

This bill would require authorize the commission, no later than June 1, 2017, commission to require up to 25% of revenues received by a gas corporation as a result of the auction of greenhouse gas allowances to be used for clean energy and energy efficiency projects or programs approved by the commission, as specified. The bill would require the commission to require each gas corporation to annually report and post on its Internet Web site all expenditures of these revenues and the quantified reductions in greenhouse gases from projects or programs funded under these provisions. Because the provisions of this bill require or authorize action by the commission to implement its requirements, and a violation of these commission-ordered requirements would be a crime, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Under the Public Utilities Act, the Public Utilities Commission has regulatory jurisdiction over public utilities, including electrical corporations and gas corporations. A violation of the Public Utilities Act or any order, decision, rule, direction, demand, or requirement of the commission is a crime. The California Global Warming Solutions Act of 2006 and its implementing regulations provide for a greenhouse gas emissions limit to be achieved through a market-based compliance mechanism. That mechanism includes the requirement that certain greenhouse gas producers acquire allowances for their emissions. Those regulations specifically provide for the direct allocation of greenhouse gas allowances to gas corporations.

A decision of the commission requires the gas corporations to return to certain customers the proceeds generated from the sale of those greenhouse gas allowances as a bill credit in an equal, non-volumetric manner, and to conduct outreach and education activities to customers receiving the bill credit.

The Public Utilities Act authorizes the commission to allocate 15% of the revenues received by an electrical corporation as a result of the auction of greenhouse gas allowances for clean energy and energy efficiency projects established pursuant to statute that are administered by electrical corporations or a qualified 3rd-party administrator approved by the commission and requires the commission to direct the balance of the revenues to be credited directly to the residential, small business, and emissions-intensive trade-exposed retail customers of the electrical corporations, as specified.

This bill would require the commission, no later than June 1, 2017, to require 25% of revenues received by a gas corporation as a result of the auction of greenhouse gas allowances to be used for clean energy and energy efficiency projects or programs approved by the commission, as specified. The bill would require the commission to require each gas corporation to annually report and post on its Internet Web site all expenditures of these revenues and the quantified reductions in greenhouse gases from projects or programs funded under these provisions. Because the provisions of this bill require action by the commission to implement its requirements, and a violation of these commission-ordered requirements would be a crime, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

SB 1301 (Hertzberg) - Natural gas: greenhouse gas allowance: allocation

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 the projects.
• Cost pressures resulting from the redirection of 25% of revenues (approximately $20 million to $40 million annually) to the specified purpose.

Background:

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 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 (Nuñez, 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.

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.

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:
   1. Support for the development, deployment, interconnection, or use of pipeline biogas;
   2. Support for the development, deployment, or use of alternative transportation fuels;
   3. 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 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 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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SENATE COMMITTEE ON ENVIRONMENTAL QUALITY

Senator Wieckowski, Chair

2015 - 2016 Regular

Bill No: SB 1301

SUBJECT: Natural gas: greenhouse gas allowance: allocation

ANALYSIS:

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 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:
   1. Support for the development, deployment, interconnection, or use of pipeline biogas;
   2. Support for the development, deployment, or use of alternative transportation fuels;

• 1. Any other project or program that reduces or abates GHGs related to the use of fossil natural gas.

1. 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.
2. 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.
3. 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.

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 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.

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

1. 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.

1. 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.

1. 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.

Comments

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.

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

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.

1. 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.
2. PUC will decide. SB 1301 specifies that a “clean energy” 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 1371.

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

SUPPORT:

None received

OPPOSITION:

None received

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SENATE COMMITTEE ON ENERGY, UTILITIES AND COMMUNICATIONS

Senator Ben Hueso, Chair

2015 - 2016 Regular

Bill No: Hearing Date: 4/5/2016

SUBJECT:

DIGEST: This bill directs the California Public Utilities Commission to require 25 percent of revenues received by a gas corporation as a result of the direct allocation of greenhouse gas allowances to be used for energy projects or energy efficiency projects that reduce fossil natural gas consumption.

ANALYSIS:

Existing law:

1. Requires the California Air Resources Board (ARB), pursuant to the California Global Warming Solutions Act of 2006, to adopt rules and regulations that would reduce greenhouse gas emissions (GHGs) in the state to 1990 levels by 2020. (Health and Safety Code §§38500 to 38599)
2. Establishes the Greenhouse Gas Reduction Fund (GGRF), and requires all monies collected by ARB from the auction or sales of allowances, pursuant to a market-based compliance mechanism, be deposited in the fund and made available for appropriation. (Government Code §16428.8)
3. Establishes the GGRF Investment Plan and Communities Revitalization Act to set procedures for the investment of regulatory fee revenues derived from the auction of GHG allowances, including the requirement that such revenue be used to reduce emissions of GHGs. (Health and Safety Code §§39710 to 39720)
4. Requires the GGRF Investment Plan to allocate: (a) at least 25 percent of the available monies in the fund to projects that provide benefits to disadvantaged communities, and (b) at least 10 percent of monies in the fund to projects located within disadvantaged communities. (Health and Safety Code §§39711 to 39723)
5. Requires the California Public Utilities Commission (CPUC) to require revenues, including any accrued interest, received by an electrical corporation as a result of the direct allocation of GHGs allowances to electric utilities to be credited directly to the residential, small business, and emissions-intensive trade-exposed retail customers of the electrical corporation; requires CPUC to require each electrical corporation to implement an outreach plan to obtain the maximum feasible public awareness of the crediting of GHG allowance revenues; and authorizes the CPUC to allocate up to 15 percent of the GHG allowance revenue for clean energy and energy efficiency projects established pursuant to statute that are administered by the electrical corporation and that are not otherwise funded by another funding source. (Public Utilities Code §748.5)

This bill:

1. Directs the CPUC, no later than June 1, 2017, to require 25 percent of revenues, including any accrued interest, received by a gas corporation as a result of the direct allocation of GHG emissions allowances to natural gas suppliers pursuant to ARB’s cap-and-trade regulations to be used for “clean energy” and “energy efficiency” projects or programs approved by the CPUC.
2. Limits funding eligibility to projects and programs that are able to quantify and report reductions in GHGs.
3. States that a “clean energy” project or program may include one that does one of the following:

• 1. Supports the development, deployment, interconnection or use of pipeline biogas.
  2. Supports the development, deployment or use of alternative fuels.
  3. Reduces or abates GHGs related to the use of fossil natural gas.

1. States that an “energy efficiency” project or program may include one that reduces that reduces fossil natural gas consumption through more efficient appliances, heating, cooling, industrial use, or other end uses.
2. States the clean energy projects or programs and energy efficiency projects or programs may also include those of the type established pursuant to statute administered by a gas corporation, the CPUC, or a qualified third-party administrator approved by the CPUC.
3. Directs the CPUC to require each gas corporation to annually report and post on its website all expenditures and quantified reductions in GHGs from funded projects and programs.

Background

ARB cap-and-trade program generates auction revenue. Following passage of the Global Warming Solutions Act of 2006 (aka AB 32), ARB adopted regulations to reduce GHGs to 1990 levels by 2020. One such regulation establishes the cap-and-trade program, under which ARB distributes GHGs allowances to capped sectors. For the most part, ARB auctions the allowances, generating billions in regulatory fee revenue. Statute directs the revenue to the GGRF, from which the Legislature makes appropriations for GHG-reducing projects according to various statutory restrictions and directions. In some cases, however, ARB distributes emissions allowances for free, generally to reduce the cost of compliance to the entities receiving the free allowances.

The investor-owned utilities (IOUs) – both electrical and natural gas – are among the entities that receive emissions allowances from ARB for free. The ARB requires IOUs to consign a portion of these allowances at ARB’s quarterly allowance auctions. ARB regulation requires any allowance allocated to an IOU be used exclusively for the benefit of retail ratepayers of the IOU, consistent with the goals of AB 32, and prohibits the use of allowances for the benefit of entities or persons other than ratepayers.^[1]

Legislature directed electrical IOU auction revenue spending. In 2012, the Legislature adopted a budget trailer (SB 1018) to further restrict the CPUC’s discretion over the electrical IOUs’ use of emissions allowance auction revenue. Specifically, SB 1018 requires that revenues from the GHG allowances received by the electrical IOUs be credited back to residential, small business and emissions-intensive trade-exposed businesses. SB 1018 also authorizes the CPUC to allocate up to 15 percent of the emissions allowance auction revenues, including any accrued interest, received by an electrical IOU for clean energy and energy efficiency projects not funded by another source.

To implement the requirements of SB 1018, the CPUC directed the state’s three largest electrical IOUs – Pacific Gas and Electric Company (PG&E), Southern California Edison and San Diego Gas and Electric (SDG&E) – to allocate GHG allowance revenues, including accrued interest, in the following manner:^[2]

• Compensate emissions-intensive and trade-exposed entities using methodologies based upon those developed by ARB.
• Offset the rate impacts of the cap-and-trade program in the electricity rates of small businesses through a volumetrically calculated rate adjustment.
• Neutralize the rate impacts of the cap‑and-trade program on residential electricity rates through a volumetrically calculated rate adjustment.
• Distribute all revenues remaining after accounting for the revenues allocated pursuant to the prior three uses to residential customers on an equal per residential account basis delivered as a semi-annual, on-bill credit.

The on-bill credit described in the final bullet is known as the California Climate Credit. According to the CPUC, the 2016 California Climate Credit equates to an annual payment to each ratepayer of ranging roughly from $35 to $287.^[3]

Auction revenue of natural gas IOUs treated like auction revenue of electrical IOUs, for the most part. There are several natural gas IOUs in the state—PG&E, Southern California Gas Company (SoCalGas), SDG&E, and Southwest Gas Company (SWG). The natural gas IOUs, like electrical IOUs, receive emissions allowances from ARB for free. The ARB requires each natural gas IOU, like the electrical IOUs, to consign a portion of its emissions allowances to ARB’s quarterly allowance auctions. ARB requires the natural gas IOUs to use the proceeds of the auctions exclusively for the benefit of ratepayers, subject to the direction of the CPUC, just as it does the auction revenues of the electrical IOUs. And, as it has for the electrical IOUs, the CPUC has adopted a decision – D-15-10-032 – directing natural gas IOUs’ use of auction revenues. That decision requires the natural gas IOUS to return allowance proceeds to ratepayers as a bill credit in an equal, non-volumetric manner. The CPUC refers to the bill credit as the natural gas California Climate Credit. According to the CPUC, the natural gas California Climate Credit equates to roughly $20 annually to each ratepayer.

Unlike its treatment of electrical IOU auction proceeds, the Legislature has never provided direction to the CPUC in its allocation of natural gas IOU auction proceeds. This bill seeks to provide such direction.

Bill seeks to use natural gas IOU auction revenue to reduce use of conventional natural gas. The author notes that the Legislature has not provided direction to the CPUC on the uses of natural gas IOU auction proceeds and that this silence differs from the Legislature’s treatment of electrical IOU auction proceeds. This is true, as described above. However, the Legislature’s inaction on natural gas auction proceeds is not, in itself, justification for this bill: current law provides CPUC the necessary legal authority to allocate natural gas IOU auction proceeds in a way that benefits IOU ratepayers.

The author also notes the state’s many policies and programs to displace the use of conventional natural gas. The author contends that these programs have, thus far, had limited success, and that the main impediment to further success is a lack of money for infrastructure development. This bill would solve the problem described by the author by dedicating a portion of natural gas IOU auction revenue – 25 percent – to “clean energy” projects or programs and “energy efficiency” projects or programs that reduce the use of conventional natural gas. The CPUC estimates this would make available about $40 million to $60 million annually for clean energy and energy efficiency programs and projects. The money would come from a reduction in the natural gas California Climate Credit of about $5 per ratepayer. This is a reasonable proposal. The natural gas IOU auction proceeds exist because of the use of conventional natural gas. The use of conventional natural gas produces a variety of harms, including the release of GHGs and criteria pollutants. This bill dedicates a portion of those proceeds to projects and programs that have the potential to reduce the use of conventional natural gas. This is a very tight policy circle.

There are, however, other potential uses of the natural gas IOU auction proceeds that both benefit ratepayers and, potentially, reduce GHGs. One such use is returning the proceeds directly to natural gas ratepayers, consistent with current law and practice. This bill, by dedicating a portion of natural gas IOU auction proceeds to prescribed uses, precludes other uses of the money.

Currently, there are over a dozen bills before the Legislature that propose to dedicate the use of auction revenues to a wide variety of projects with the potential to reduce GHGs. In every case, those bills would dedicate funds in the GGRF, a special fund in the State Treasury that receives all moneys collected by ARB from the auction or sale of emissions allowances. Money in the GGRF is subject to appropriation by the Legislature. Uses of the money must meet several statutory requirements beyond the basic hurdle of reducing GHGs.

The natural gas IOU auction revenue differs from money in the GGRF in several ways. A key distinction is that, unlike most other auction revenues, ARB does not collect IOU auction revenue. This means IOU auction revenue is never placed in the GGRF or in state coffers at all. It is not subject to statutory the requirements and parameters that govern uses of monies in the GGRF, including the requirement that funded projects reduce GHGs.

IOU emissions allowance auction revenue, however, is not completely distinct from revenue generated by auctioning other emissions allowances. In both cases, the revenue is generated by selling the right to emit GHGs. It makes sense that the Legislature consider collectively proposals to fund GHGs reduction efforts with revenue collected from sources of GHGs. The budget process seems the appropriate venue for such consideration. This is because the budget allows the Legislature to consider funding proposals comprehensively: eligible funding programs can be compared; tradeoffs assessed; competing policy goals prioritized. And there is precedent, as described above: the Legislature directed uses of a portion of the electrical IOU auction revenue in the 2012-13 Budget.

Flexibility might be needed. This bill directs the CPUC to require the natural gas IOUs to use 25 percent of their auction revenues for clean energy and energy efficiency projects or programs. This treatment differs from the Legislature’s direction on the use of electrical IOU auction proceeds in at least two important ways. First, statute allows, but does not obligate, the CPUC to direct electrical IOUs to allocate auction revues for clean energy and energy efficiency projects. This bill, in contrast, requires CPUC to direct natural gas IOUs to allocate auction revues for such projects. Second, statute allows CPUC to direct electrical IOUs to make up to 15 percent of the revenue available for clean energy and energy efficiency projects. This bill differs in that it requires CPUC to direct the IOUs to allocate a set proportion – 25 percent – of proceeds of auction revenues for clean energy and energy efficiency programs and projects.

Statute provides CPUC flexibility in directing the electrical IOUs use of emissions auction proceeds. This is because the Legislature recognized there might not be enough qualifying clean energy and energy efficiency programs or projects to receive 15 percent of the electrical IOUs’ emissions auction revenues. It is hard to imagine such a dearth of clean energy or energy efficiency programs or projects to reduce consumption of conventional natural gas. Such a situation is not, however, impossible to image. The author and committee may want to amend the bill, as follows, to provide CPUC flexibility in directing the use of natural gas IOU auction proceeds similar to the flexibility provided in statute to the CPUC in directing the use of electrical IOU auction proceeds:

748.6.

 (a) No later than June 1, 2017, the commission shall may 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 allowances to natural gas suppliers pursuant to subdivision (f) of Section 95890 of Title 17 of the California Code of Regulations to be used for clean energy and energy efficiency projects or programs approved by the commission.

Not every alternative. This bill makes available funding for support for the development, deployment, or use of alternative transportation fuels. The author’s stated goal is to reduce dependence on fossil fuels. However, in some contexts, conventional natural gas is considered an “alternative” fuel. For example, the Alternative and Renewable Fuel and Vehicle Technology Program, administered by the California Energy Commission (CEC), have funded vehicles fueled by the combustion of conventional natural gas.^[4] The author may wish to clarify the types of fuels he envisions, or does not envision, receiving funding. Regardless, it is impossible to imagine the CPUC or a natural gas IOU interpreting “alternative transportation fuel,” as used in this bill, to mean the combustion of conventional natural gas or of any other fossil fuel.

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

Prior/Related Legislation

AB 693 (Eggman, Chapter 91, Statutes of 2015) required the CPUC to authorize $100 million annually, or 10 percent of electrical IOU cap-and-trade auction allowance funds, whichever is less, for a financial assistance program for qualifying solar energy systems on low-income multifamily housing properties, as defined. The bill passed the Senate 26-14.

AB 1900 (Gatto, Chapter 602, Statutes of 2012) directed the CPUC to identify landfill gas constituents, develop testing protocols for landfill gas injected into common carrier pipelines, adopt standards for biomethane to ensure pipeline safety and integrity, and adopt rules to ensure open access to the gas pipeline system.

AB 2196 (Chesbro, Chapter 605, Statutes of 2012) ensured that biogas qualifies for RPS credit, provided its production, delivery and use meet certain conditions.

SB 1122 (Rubio, Chapter 612, Statutes of 2012) required IOUs to collectively procure at least 250 MW of generation eligible for the RPS from bioenergy generation project, including biogas projects.

AB 577 (Bonilla, 2015) would have required the CEC to develop and implement a grant program for projects related to biomethane production. The bill was held on suspense by the Senate Committee on Appropriations.

AB 2206 (Williams) requests that the California Council on Science and Technology undertake and complete a study analyzing the regional and gas corporation specific issues relating to minimum heating value and maximum siloxane specifications for biomethane before it can be injected into common carrier gas pipelines. The bill is pending consideration by the Assembly Committee on Utilities and Commerce.

AB 2313 (Williams) requires the CPUC to modify its monetary incentive program for biomethane projects. The bill is pending consideration by the Assembly Committee on Natural Resources.

AB 2773 (Quirk) requires the CPUC to modify its technical standards applicable to biomethane to be injected into a common carrier pipeline. The bill is pending consideration by the Assembly Committee on Utilities and Commerce.

SB 687 (Allen, 2015) would have established the renewable gas standard (RGS), requiring all sellers of natural gas to provide to retail end-use customers in California increasing amounts of “renewable gas,” so that, by January 1, 2030, at least ten percent of the natural gas supplied is “renewable gas.” The bill passed this committee on a vote of 7 to 3 and was held on suspense by Senate Committee on Appropriations.

SB 1043 (Allen) requires ARB to consider and adopt policies to significantly increase the sustainable production and use of “renewable gas.” The bill is pending consideration by this committee.

SB 1153 (Canella) requires the ARB to provide a comprehensive overview of state efforts to encourage the development of instate biomethane and renewable natural gas. The bill is pending consideration by this committee.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT:

Bioenergy Association of California

California Association of Sanitation Agencies

Clean Energy

Los Angeles County Waste Management Association

Sierra Energy

Solid Waste Association of Orange County

TSS Consultants

OPPOSITION:

The Utility Reform Network, unless amended

ARGUMENTS IN SUPPORT: 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:

• Increase renewable energy generation to 50 percent by 2030 (RPS, SB 350).
• Reduce GHGs by 2020 and beyond (AB 32).
• Reduce petroleum consumption by 50 percent (2015 Governor Brown State of the State).
• Reduce carbon intensity of fuels and diversify fuel supplies (LCFS, Executive Order S-01-07).
• Divert solid waste from landfills, especially organic waste (AB 1826).
• Reduce wildfire risk and increase forest health (Governor Brown Tree Mortality State of Emergency).
• Double the amount of savings from energy efficiency (SB 350).
• Increase savings specifically from existing building stock (AB 758).

Achieving these goals will require new investments in infrastructure and technology that meaningfully replaces fossil energy sources - petroleum and fossil natural gas. According to the AB 32 Scoping Plan, funding for infrastructure is critical to these goals, especially waste management and forestry goals. And a key recommendation from the Bioenergy Action Plan (part of the AB 32 Scoping Plan) is to promote the development of pipeline biogas and bioenergy.

The problem is that these investments all cost money. 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.

Moreover, the Legislature has not yet weighed in on how the gas utility Cap and Trade auction revenues should be used. The Legislature has specifically directed the expenditures for all of the cap and trade accounts except those from the natural gas utilities. The GGRF money is appropriated as part of the annual budget process and the electrical utility auction revenue was directed in Public Utilities Code §748.5.

ARGUMENTS IN OPPOSITION: The Utilities Reform Network (TURN) objects to this bill because it prevents a substantial portion of the revenue from the auction of natural gas IOU emissions allowances from offsetting the cost the cap-and-trade program to natural gas IOU ratepayers. TURN contends ratepayers should remain the sole beneficiaries of natural gas auction proceeds.

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1. California Code of Regulations, Chapter 17, sections 95892 and 95893. ↑

2. See CPUC decision D-12-12-033. ↑

3. http://www.cpuc.ca.gov/climatecredit/ ↑

4. http://www.energy.ca.gov/drive/projects/natural_gas.html ↑