Existing law vests the Public Utilities Commission with regulatory authority over public utilities, including electrical corporations and gas corporations.

This bill would express the intent of the Legislature to enact legislation relating to the oversight of electrical corporations and gas corporations.

Date of Hearing: May 14, 2025

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Buffy Wicks, Chair

ABPCA Bill Id:AB 388

Author:(Rogers) – As Amended Ver:March 25, 2025

Urgency: No State Mandated Local Program: Yes Reimbursable: No

SUMMARY:

This bill provides two exemptions from existing law for an entity that sells electricity generated from solar or wind energy if the entity supplies the electricity exclusively for electrolytic hydrogen production and electrifying industrial heat processes.

Specifically, this bill:

1. Exempts Certain Entities from State Law Governing Regulation of Electrical Corporations. Exempts from the definition of “electrical corporation” under California law an entity selling electricity generated by a solar or wind electric generation facility of at least five megawatts (MW), provided the electricity is transmitted solely using private electric lines to a separate facility owned by a different entity that uses the electricity exclusively to produce hydrogen from electrolysis or for industrial process heat, including the use of a thermal energy storage system. In effect, this exemption removes the electricity generating facility from regulation by the California Public Utilities Commission (CPUC).
2. Exempts a qualified self-generation project (QSGP) from federal Public Utility Holding Company rules.
   1. Defines QSGP as a customer that (i) uses electricity from either solar or wind technology, or storage facilities exclusively charging from solar or wind technology, that is transmitted exclusively and directly on private transmission lines for use by the customer to power either an electrolytic hydrogen production facility or to provide industrial heat process heat; (ii) bears responsibility for the cost of any infrastructure constructed for the purpose of connecting the QSGP with the generation or storage facility; (iii) uses the electricity for only new load and not for departing load; and (iv) files wildfire mitigation plans (WMPs) if any part of the private electric lines are located in high fire threat districts as identified in the CPUC’s fire threat map.
   2. Requires the CPUC to establish a tariff by July 1, 2026, if just and reasonable, that allows for a solar or wind electricity generation facility, and associated storage, greater than 80 MWs and providing retail service to QSGP to be exempt from federal Public Utility Holding Company Act (PUHCA) rules due to the generation facility’s designation as an exempt wholesale generator, so that an electrical corporation (also known as investor-owned utility, or IOU) may serve as a contractual intermediary between the generation facility and the customer, where the rates for both purchasing and reselling the electricity will be at cost, but include an adder for incremental administrative or operational costs to be paid to the IOU serving as the intermediary.
   3. Explicitly states that (i) the customer may take supplemental service under standard tariffs, (ii) the generation facility may also participate in wholesale electricity markets and (iii) any costs associated with this exemption are to be paid solely by the participating customer such that nonparticipating customers bear no additional cost.
3. Applicable to Each Exemption.
   1. States that private electric lines located on property other than the property on which a single electrolytic hydrogen production facility or industrial process heat facility or solar or wind generating technology are located are subject to all applicable CPUC general orders, as determined by the CPUC, except in circumstances where all the property is owned by the same corporation or person owning the electrolytic hydrogen production facility or industrial process heat facility.
   2. Requires an entity that owns private electric lines for the purposes described above to file WMPs if any part of the private electric lines are located in high fire threat districts as identified in the CPUC’s fire threat map.

FISCAL EFFECT:

While this bill exempts certain electricity generating facilities from CPUC regulation, it also creates new work for the CPUC. Specifically, the bill requires the CPUC to establish a tariff, if just and reasonable, that allows for a solar or wind electricity generation facility, and associated storage, greater than 80 MWs and providing retail service to QSGPs to be exempt from federal PUHCA rules. In addition, it requires the CPUC to determine whether applicable CPUC general orders apply to private electric lines located on property other than the property on which a single electrolytic hydrogen production facility or industrial process heat facility or solar or wind generating technology are located.

The CPUC anticipates ongoing annual costs of approximately $725,000 (likely funded by the Public Utilities Commission Utilities Reimbursement Account) for three new positions, as follows:

1. An attorney ($250,000 annually) to represent the commission in a proceeding to implement the new tariff and other requirements of the bill, and to represent the CPUC’s Safety Enforcement Division in enforcement actions and investigations.
2. A utilities engineer ($255,000 annually) to conduct audits and inspections of the private power lines to ensure the safety of the public and infrastructure.
3. A regulatory analyst ($210,000 annually) to support the commission’s proceeding to establish the new tariff and to assess proposals for alternative special tariff designs to support eligible solar and wind projects operated in conjunction with storage facilities to power large customers developing electrolytic hydrogen and industrial process heat.

Associated travel and equipment costs of less than $10,000 annually.

COMMENTS:

1. Purpose. According to the author:

It’s crucial that we make it as easy as possible to produce hydrogen using clean energy sources, which is known as green hydrogen. This is possible because California has entered an exciting era of abundant and relatively cheap renewable power. Electricity generated from solar and wind continues to expand and fall rapidly in price. There is often so much renewable energy that the entire state cannot consume all of it, forcing California to essentially pay other markets to accept our excess clean power. This presents an opportunity for green hydrogen production to utilize this excess power through a few key changes to utility regulations. The most crucial change is modifying California’s over the fence rules, allowing clean energy to travel farther to power green hydrogen production.

1. Background. Production and use of hydrogen—made using carbon-free resources—is likely key to the state achieving its clean energy goals. The Air Resources Board’s “2022 Scoping Plan for Achieving Carbon Neutrality” calls for the supply of “renewable” hydrogen to increase by 1,700 times from current levels.

Hydrogen is extraordinarily abundant in the natural environment; however, isolating and conditioning it for industrial use is energy intensive and, therefore, costly. Hydrogen may be produced through the use of electricity supplied by the interconnected electrical grid. Doing so, however, means the electricity used is generated, in part, using greenhouse gas-emitting resources (at least for the foreseeable future). It also means the retail price of the electricity has numerous costs embedded into it beyond just the cost to generate the electricity. These costs include utility profits, charges to support low-income utility customers and expenses to “harden” electrical wires and equipment so they are less likely to spark fires, among many others.

The author envisions using renewable energy supplied directly to a hydrogen production facility through privately owned cables. Doing so ensures the electricity used to produce the hydrogen is 100% renewable, with minimal, if any, associated greenhouse gas emissions. It also means the electricity is, generally, cheaper than grid-supplied electricity as it is not subject to the many charges, described in the preceding paragraph, that are applied to grid-supplied electricity.

Existing law, however, prevents realization of this vision. This is because existing law, generally, considers an entity that generates electricity and sells it to another party for use to be an electrical corporation, subject to regulation by the CPUC. This bill provides an exemption from this regulation, for the most part, as described above.

Customers of the state’s electric IOUs have financial incentives to shed the many charges that are bundled into the rates for each kilowatt of electricity, approved by the CPUC and charged by the IOUs. And many customers have, or have attempted, to do so. Yet one customer successfully avoiding these charges oftentimes creates problems for the IOU customers who are left to pay the costs that are recovered through those charges, which remain unchanged. This phenomenon is commonly known as a “cost shift” and has been the subject of intense debate for well over a decade.

Arguably, this bill will not shift costs to nonparticipating IOU customers. This is because the bill does not apply to existing IOU customers who currently pay those costs, and who could use the exemption provided by this bill to escape them. Rather, the bill applies to facilities not yet in operation and that will not use the IOU electrical grid (at least not for the electricity used to produce hydrogen).

However, to the extent electricity users avoid using the electrical grid, those users avoid the generally shared burden of supporting the greater electrical system. This bill is narrowly targeted—its provisions apply only to one favored industrial activity, green hydrogen production. But there are many industrial activities that further state goals and generally benefit the state. The Legislature may want to encourage general modifications to the way the state funds its electrical system so that users may make economically rational decisions about their use of electricity, rather than approving one-offs that allow one type of electricity user or users to escape costs borne by all other electricity users.

Bill supporters—generally hydrogen industry organizations and labor groups—note the state’s plans for reducing emission of greenhouse gases rely on the use of hydrogen produced from renewable resources and contend, absent the provisions of this bill, hydrogen is too expensive to produce using electricity from the grid.

Opponents—Pacific Gas and Electric and Edison International—argue, among other things, this bill “unnecessarily erodes the definition of an electrical corporation, which would undermine grid planning, reliability, and safety, and will result in cost avoidance/cost shifting.”

1. Prior Legislation. Last year, the committee considered and held on the suspense file SB 1018 (Becker), of the 2023-24 Legislative Session, which was very similar to this bill.

Analysis Prepared by: Jay Dickenson / APPR. / (916) 319-2081

Date of Hearing: April 30, 2025

ASSEMBLY COMMITTEE ON UTILITIES AND ENERGY

Cottie Petrie-Norris, Chair

ABPCA Bill Id:AB 388 (

Author:Rogers) – As Amended Ver:March 25, 2025

SUBJECT: Electricity

SUMMARY: Provides two exemptions – one from state and one from federal law regulating utilities – for entities that sell electricity from solar and wind generation if those entities provide electric generation exclusively for electrolytic hydrogen production and electrifying industrial heat processes. Specifically, this bill:

1. Exempts from the definition of “electrical corporation” under California law an entity selling solar or wind electric generation of at least five megawatts (MW), if the generated electricity is transmitted solely using private electric lines to a separate facility owned by a different entity that uses the electricity exclusively for either:
   1. Producing hydrogen from electrolysis.
   2. Providing industrial process heat, including the use of a thermal energy storage system.
2. Specifies that exempt solar and wind generation facilities may have associated battery storage on-site, and may not serve departing load.
3. Requires private electric lines crossing non-contiguous property to comply with California Public Utilities Commission (CPUC) General Orders. Additionally requires owners of private lines in High Fire Threat Districts to file wildfire mitigation plans aligned with existing utility standards.
4. Requires the CPUC to establish a tariff by July 1, 2027, that allows for solar and wind generation facilities, and associated storage, greater than 80 MWs providing retail service to qualified self-generation projects (QSGP), as defined, to be exempt from federal Public Utility Holding Company Act (PUHCA) rules due to designation as an exempt wholesale generator.
5. Specifies the tariff shall be structured such that electrical corporations serve as intermediaries between the generation facilities and the customer, where the rates for both purchasing and reselling the electricity will be at cost, but include an adder for incremental administrative or operational costs to be paid to the electrical corporation serving as the intermediary.
6. Specifies customers may take supplemental service under standard tariffs, and that generation facilities may also participate in wholesale electricity markets.
7. Requires customer load that is served by the QSGP to be excluded from electrical corporation procurement requirements, including resource adequacy, the Renewables Portfolio Standard, and integrated resource planning.
8. Defines QSGP as a customer that meets all of the following:
   1. Uses electricity from either solar or wind technology, or storage facilities exclusively charging from solar or wind technology, that is transmitted directly to the customer’s QSGP;
   2. Bears responsibility for the cost of any infrastructure constructed for the purpose of connecting the QSGP with the generation facilities;
   3. Consumes the electricity for electrolytic hydrogen production or industrial process heat.

EXISTING LAW:

1. Authorizes the CPUC to regulate public utilities, including electric and natural gas corporations and establish rates for these utilities. (Public Utilities Code § 201 et. seq.)
2. Defines an “electrical corporation” as every corporation or person owning, controlling, operating, or managing any electric plant for compensation in the state, except where electricity is generated on or distributed by the producer through private property solely for its own use or the use of its tenants and not for sale or transmission to others; establishes limited exemptions to the definition of an electrical corporation; and generally designates any entity that sells electricity to more than two contiguous parcels or across the street as an “electrical corporation.” (Public Utilities Code § 218)
3. Subjects entities who directly, or indirectly through affiliates or holding companies, own or operate facilities used for the generation, transmission, or distribution of electric energy or natural gas for sale to various regulations under the Federal Energy Regulatory Commission (FERC), including requiring access to books and records, requiring specified record keeping and accounting practices, and federal rate regulation. (Public Utility Holding Company Act of 2005 [18 Code of Federal Regulations §§ 365-366, Vol. 71 FR 28457])
4. Exempts specified Qualifying Facilities (those under 80 megawatts [MWs]), Exempt Wholesale Generators, and foreign utility companies from the Public Utility Holding Company Act of 2005. (18 Code of Federal Regulations § 366.3)
5. Defines an “exempt wholesale generator” (EWG) as any person determined by FERC to be engaged directly, or indirectly through one or more affiliates, and exclusively in the business of owning or operating (or both) eligible facilities and selling electric energy at wholesale. Specifies an “affiliate” for these purposes as any company in which the person claiming EWG status owns 5% or greater voting interest. (18 Code of Federal Regulations § 366.1)

FISCAL EFFECT: Unknown. This bill is keyed fiscal, and will be referred to the Assembly Committee on Appropriations for its review. A similar measure (SB 1018, Becker, 2024) was analyzed last year in the Assembly Appropriations Committee. The CPUC noted at the time ongoing annual costs of approximately $725,000 for three new positions to implement that measure.

CONSUMER COST IMPACTS: Unknown, likely negligible.

BACKGROUND:

California’s Hydrogen Future – As in most matters of long-term, deep decarbonization, there is a range of plausible futures for the use of hydrogen in California. The California Air Resources Board’s 2022 Scoping Plan Update envisioned a mix of technologies providing California’s burgeoning hydrogen supply.^[1] Although it is not explicitly clear exactly which end-uses are expected to be powered by hydrogen, some sectors appear to be entirely reliant on hydrogen to decarbonize. Iron and steel production, ammonia synthesis, and some functions in oil refining will almost certainly require hydrogen, and supplying that hydrogen in a sustainable manner will require major scale-up of the paltry clean hydrogen production that exists today.

What is not as clear is where that clean hydrogen will come from. One of the scenarios in the draft scoping plan update considered using only electrolysis to meet the projected demand for hydrogen.^[2] It found that doing so would require 40 gigawatts (GW) of renewable electricity dedicated to electrolysis: an amount roughly equivalent to today’s statewide summer peak grid demand. Instead, the final update prescribed a mix of steam methane reforming of biomethane, gasification of biomass with carbon capture, and electrolysis from (21 GW of) off-grid solar resources to produce the statewide hydrogen supply needed in 2045.^[3]

Hydrogen Incentives – In recent years, the concept of using hydrogen to decarbonize certain hard-to-abate sectors has gained greater attention. However, effectively using hydrogen as a decarbonization strategy depends upon the ability to produce large quantities of hydrogen without relying on fossil fuels or increasing emissions through the hydrogen production process. Currently, over 90% of the hydrogen used in the United States is produced from fossil fuels –mostly using steam methane reforming.^[4]

Both California and the federal government have taken steps to encourage the development of clean hydrogen. In 2021, the Infrastructure Investment and Jobs Act (IIJA) was signed; that Act included $8 billion to the federal Department of Energy (DOE) to establish regional clean hydrogen hubs across the nation. In 2022, the Legislature passed AB 157 (Committee on Budget, Chapter 570, Statutes of 2022), which authorized GO-Biz to take steps to prepare and submit an application to receive funding from the regional clean hydrogen hubs program. This legislation led to the establishment of California’s clean hydrogen hub administrator, known as the Alliance for Renewable Clean Hydrogen Energy Systems (ARCHES). In July 2024, DOE announced a $1.2 billion award for ARCHES, with $30 million for the first round of funding.^[5] However, in April 2025, under a new federal administration, the funding for ARCHES was rumored to be targeted for cuts.^[6]

In addition to funding provided under the IIJA, the Inflation Reduction Act (IRA) provides a number of production tax credits for certain types of clean energy and manufacturing acceleration projects. The IRA tasked the federal Treasury Department with developing a federal tax credit to incentivize the production of clean hydrogen, otherwise known as the 45V production tax credit. The 45V tax credit is structured to provide up to a $3 tax credit per kg of hydrogen produced, with higher credits granted to lower-carbon intensity (CI) hydrogen. In December 2023, the Treasury Department released its draft proposal, which included a version of the “three pillars,” which are principles intended to ensure that hydrogen production supports decarbonization and does not result in an increase in emissions.^[7] Final regulations were released on January 3, 2025, and specified states with clean energy policies and emissions caps – like California – were considered meeting the requirements of one pillar (incrementality).^[8] The future of these tax credits is also uncertain under the new administration.

Costs of Hydrogen Production – Most of the continued operations costs to developers for producing hydrogen in California will arise from the purchase of electricity, and vary by the utility serving the hydrogen production facility. A recent study by the National Renewable Energy Lab (NREL) projected the cheapest way to produce hydrogen in California is to have the hydrogen production plant connected directly to the California Independent System Operator (CAISO) transmission system.^[9] Such a scenario, under 2019 tariffs and rates, would be approximately $3 per kg,^[10] or $24 per million British thermal units (MMBtu).^[11] (For comparison, fossil natural gas prices in the state average around $9.40/MMBtu, while biomethane prices average around $17.70/MMBtu.^[12] So even these “cheapest” hydrogen prices are costly.) The statewide cap on direct access currently prevents this pathway from new development in California, but it served as a base case for the study.^[13]

The next cheapest pathway found in the study involved hydrogen production directly connected to onsite renewable generation, via an electrolyzer combined with a wind plant operating under a Pacific Gas and Electric time-of-use tariff, at $4.29/kg or $34.3/MMBtu.^[14] If colocation of a renewable resource was not considered, the cheapest pathway was a hydrogen production facility taking grid power under Southern California Edison’s real-time pricing tariff, at $4.7/kg or $37.6/MMBtu. (Note these models optimized for the large IOU rates; they did not run the models against the publicly owned utility rates, which are typically lower.) These pathways differ largely in how the electric upgrade costs will be borne by the hydrogen facility. In the colocation scenario, the obligation to install onsite renewable generation would fall on the hydrogen developer, presumably as part of the financing for the hydrogen facility. In the grid-connected scenario, any additional electricity needed to serve the load of the hydrogen production facility would presumably be paid for by utility ratepayers.

Over-the-Fence – The definition of “electrical corporations” provided in Public Utilities Code § 218 is the subject of a long-standing point of division colloquially known as the “over-the-fence” rule. Current statute limits the ability of an entity to serve multiple customers (greater than two on adjacent properties) if that entity is not an electric utility. Statute ensures regulatory oversight of a private entity providing electric service for compensation, that is not otherwise a corporation or person employing cogeneration, landfill gas technology, or digester gas technology. The implications for defining an electrical corporation are to ensure adequate regulatory oversight, including the bedrock principles of safe, reliable, and affordable service. The CPUC has regulatory oversight of all electrical corporations, maintaining broad authority, including the ability to review books, set rates, fine and penalize, and revoke licenses to operate. However, many private entities seeking unique electrical generation arrangements – such as microgrid developers – see these legal limitations as a hurdle to deploying greater use of emergent technologies.

Industrial Process Heat – According to the Department of Energy, industrial process heat is the use of thermal energy to produce, treat, or alter manufactured goods. This process often employs steam, hot water, or other hot gases. Process heating systems raise or maintain the temperature of materials involved in the manufacturing process, such as the melting of scrap in electric arc furnaces to make steel, separating components of crude oil in petroleum refining, drying paint in automobile manufacturing, or processing food for safe consumption. Application temperatures range from 80°C, used to pasteurize milk and cream, to well over 1000°C to make cement. Process heat is the most significant source of energy use and greenhouse gas emissions in the industrial sector, accounting for about 50% of all onsite energy use and 30% of greenhouse gas emissions.^[15] The high energy demand of industrial process heat applications makes any effort to decarbonize the process extremely sensitive to electricity price signals.

COMMENTS:

1. Author’s Statement. According to the author, “Hydrogen is a ubiquitous presence in our modern life. Processes such as the production of ammonia for fertilizers, synthesizing of methanol, and oil refining all require hydrogen. The vast majority of those products use hydrogen derived from natural gas power sources. It’s crucial that we make it as easy as possible to produce hydrogen using clean energy sources, which is known as green hydrogen. This is possible because California has entered an exciting era of abundant and relatively cheap renewable power. Electricity generated from solar and wind continues to expand and fall rapidly in price. There is often so much renewable energy that the entire state cannot consume all of it, forcing California to essentially pay other markets to accept our excess clean power. This presents an opportunity for green hydrogen production to utilize this excess power through a few key changes to utility regulations. The most crucial change is modifying California’s over the fence rules, allowing clean energy to travel farther to power green hydrogen production. These changes must be accompanied by robust safety guidelines, as well as guardrails to prevent costs from being passed onto utility ratepayers. This bill strikes the careful balance of greater flexibility in the sale of clean power while maintaining California’s safety and consumer regulations.”
2. Purpose of Bill. The author intends this bill to create a “narrow” exemption to existing law to allow “green” hydrogen production facilities to directly connect with renewable energy resources without coming under regulation as a utility, thereby lowering production costs. This bill provides two avenues for regulatory relaxation – one of state rules, through an outright exemption and one of federal rules, through a contractual work-around – for specified hydrogen production and industrial heat processing powered by solar or wind facilities. These projects are sensitive to electricity prices, as both electrolytic hydrogen production and industrial process electrification require a substantial amount of electricity. The ability to connect these facilities “off-grid” with renewables has been suggested to be a cheaper way to ensure projects are zero-emission, as they would bypass the extra costs for transmission, distribution, taxes, fees, and utility profits, while ensuring the clean power is delivered directly to the production facility.

However, the economics of how such an arrangement – where the production facilities, generating facilities, and electrical lines are all privately owned and presumably part of the capitalized cost of the project – compares against the cost to take directly from the grid is unclear. As noted above for hydrogen production facilities,^[16] unique arrangements that colocate resources near production facilities actually are modeled to provide cheaper electricity than arrangements utilizing California grid power. As California’s investor-owned utility electric rates continue to rise, the economics may further advantage non-traditional onsite generator arrangements for these high load applications.

1. Peering Over the Fence. Existing law generally classifies any entity selling electricity to more than two adjacent parcels as an electrical corporation, subject to full regulation by the CPUC. While existing law establishes very limited exemptions to this definition, those exemptions generally only apply to electricity generated for on-site energy consumption or electricity provided to no more than two parcels that are contiguous to the property on which the electricity is generated. These restrictions are generally known as the “over-the-fence” rules due to the requirement that parcels be adjacent to each other.

This bill establishes a new exemption to the “over-the-fence” rules for certain wind and solar projects that provide electricity solely over private lines to another entity exclusively for producing electrolytic hydrogen and electrifying industrial heat process. This bill specifies that this exemption can only be provided for generation serving new electrical loads; as a result, this exemption may not be used to enable an existing electrical customer to leave their existing utility service. In this way, the exemption provided under this bill is unique from past “over-the-fence” efforts, where often departing loads were the intended recipient of the new arrangement and the cost savings were provided to these loads through bypassing traditional departing load charges. To the extent that a hydrogen production or industrial facility seeks to co-locate new renewable generation to support their activities, it may not be feasible to site a sufficient amount of generation on just two adjacent parcels even when such parcels are available.

1. Eroding CPUC Oversight. The CPUC’s “over-the-fence” rules have been the subject of intense debate in recent legislation and CPUC decisions.^[17] The over-the-fence exclusion established under this bill constitutes a substantial departure from existing policy by allowing certain generators to sell electricity to off-takers that are not on adjacent properties without those generators being classified as an electrical corporation. As a result, this bill prevents those generators and their facilities from facing CPUC regulation; regulation that seeks to protect consumers from unfair prices, unsafe or unreliable infrastructure, or unscrupulous marketers. This bill specifies the off-taking customers will be commercial operations, presumably savvy enough in their understanding of electricity pricing and contracting that foregoing CPUC rate protections or remedies is an absorbable corporate risk.

This bill’s exemption also applies solely to those facilities that deliver the generation entirely over private electrical facilities. This limitation may reduce the likelihood that developers will establish generation facilities in distant locations from their off-takers; however, this bill does not require generation facilities to be located within a certain distance from associated off-takers. While both public and private electrical facilities have ignited catastrophic wildfires in the past, the CPUC’s authority over electrical corporations enables them to direct electrical corporations to take certain steps to mitigate the potential for ignitions and catastrophic fires. As we have found in the wildfire context, the safety of utility infrastructure goes beyond the safety of the owner or purchaser of that electricity, but serves the safety of the general public as well. This bill attempts to address these concerns by requiring these lines be subject to all applicable CPUC general orders, and requiring the developer be subject to wildfire mitigation plan filings as required for other private transmission operators if the lines are located in high fire threat districts.

1. What’s Up Your Sleeve? The second avenue to bypass regulatory oversight provided under this bill is through a contractual arrangement where an electrical corporation serves as an intermediary on paper to take financial ownership but not the physical delivery of the electricity; although this arrangement is not explicit in the bill and is left for the CPUC to articulate in establishing a tariff. Such an arrangement is known as a “sleeve” transaction. This avenue is available under this bill to any solar or wind generating facility greater than 80 MWs, as facilities under 80 MW are considered Qualifying Facilities already exempt from most FERC regulations. This arrangement would seemingly allow for generating facilities to oversize their production so that some portion of the electricity would be sent to the grid at wholesale (where the facility would be acting as a traditional exempt wholesale generator [EWG], per federal rules) while a portion of the electricity would be sent to the electrolyzer or industrial heat facility to serve that customer load at retail. If such a multipurpose arrangement were not offered, the facility would not need the specific tariff called for under this bill: if they exported all their power onto the grid, the generator would already be considered an EWG and exempt from FERC regulation; and if they only sent their power to serve retail load via private lines they would only need the over-the-fence exemption already provided in this measure.

It is this retail arrangement alongside the wholesale exporting of power that would subject the facility to FERC regulation under the Public Utility Holding Company Act of 2005. As a result, the scheme envisioned by this bill would ask the electrical corporation to be the financial intermediary of the retail transaction, so that on paper, the generating facility is not technically serving retail customers (i.e. the hydrogen or industrial heat facility), and thus bypassing FERC rules. Supporters of this arrangement have evoked a similarity between what is being proposed in this measure and the traditional arrangements for rooftop solar, with the distinction being the enormous difference in magnitude of the MWs.^[18] However, the legal robustness of the proposed arrangement is unknown. The committee is unaware how and where this arrangement might be deployed to date, or whether FERC has issued any guidance or rulings that such sleeve transactions are permitted. (FERC has allowed for sleeve transactions in other circumstances.)^[19]

An additional concern with such an arrangement is whether it is operating as a “sham transaction,” which is forbidden under the Federal Power Act (FPA). Sham transactions occur when an entity financially trades electricity and obtains wheeling services without actually owning any facilities that distribute the electricity. FPA § 212(h)(1) precludes FERC from issuing any order that requires the transmission of energy directly to an ultimate consumer (direct retail wheeling). FPA § 212(h)(2) prohibits sham transactions that are intended to evade the ban on direct retail wheeling.^[20] The "sham" prohibition precludes FERC from issuing any order under the FPA that is conditioned upon or requires the transmission of electric energy to, or for the benefit of, an entity if such electric energy would be sold by that entity directly to an ultimate consumer, unless certain conditions are met. One of those conditions is if the entity “utilizes transmission or distribution facilities that it owns or controls to deliver all such electric energy.”^[21] In the circumstance envisioned by this bill, electrical corporations would potentially be running the “sham transaction,” unless some element of the electricity from the generating facility to the electrolyzer or industrial heat facility utilizes the IOU’s facilities. The joint electric utilities, writing in opposition, note this issue, stating: “electrical corporations should not be forced to participate in what FERC might consider sham wholesale transactions to effectuate retail transactions between an electricity producer and its preferred customer.”

To the committee’s knowledge, the arrangement contemplated under this measure would be unique in California law, uncertain in federal preemption, and provide special treatment to these generators, resulting in large uncertainty and risk as to the consequence of granting such statutory favor. These provisions, however, are subject to the CPUC development of a tariff that expressly mandates the arrangement must be “just and reasonable.” Just how the CPUC may contemplate such a directive in this arrangement is also uncertain.

1. Related Legislation.

AB 716 (Carrillo, 2025) requires the State Fire Marshal to adopt the National Fire Protection Association Hydrogen Technologies Code as the statewide fire safety standards and guidelines for hydrogen production, storage, and distribution facilities, as specified. Status: Set for hearing in the Assembly Committee on Emergency Management on April 28, 2025, and upon passage, in this committee on April 30, 2025.

AB 1104 (Pellerin, 2025) makes changes regarding specified solar facilities, including exempting all solar production facilities selling power to any number of customers from being an “electrical corporation.” Status: Set for hearing in this committee on April 30, 2025, after passage in the Assembly Committee on Labor and Employment on a 6-0-1 vote.

1. Prior Legislation.

AB 2083 (Berman, 2024) requires the California Energy Commission (CEC) to assess the state’s potential to reduce emissions from high-heat industrial processes. Status: Held in the Senate Committee on Appropriations.

SB 993 (Becker, 2024) requires the CPUC to consider establishing a new tariff to encourage new grid-responsive electricity consumption for electrolytic hydrogen production and electrifying industrial heat processes. Status: Held in the Senate Committee on Appropriations.

SB 1018 (Becker, 2024), largely similar to this bill, provides two exemptions from existing law for an entity that sells electricity generated from solar or wind energy if the entity supplies the electricity exclusively for electrolytic hydrogen production and electrifying industrial heat processes. Status: Held in the Assembly Committee on Appropriations.

SB 1420 (Caballero) provides for expedited California Environmental Quality Act (CEQA) and California Energy Commission (CEC) review for hydrogen production facilities that have received state or federal funding. Status: Chapter 608, Statutes of 2024.

AB 841 (Berman, 2023) would have required the CEC to develop an Industrial Heat Electrification Roadmap to identify opportunities to decarbonize certain high-heat industrial processes through electrification. Status: Held in the Senate Committee on Appropriations.

REGISTERED SUPPORT / OPPOSITION:

Support

California State Association of Electrical Workers
California State Pipe Trades Council
Coalition of California Utility Employees
Green Hydrogen Coalition
Novohydrogen, INC.

Oppose

Edison International and Affiliates, Including Southern California Edison
Pacific Gas and Electric Company

San Diego Gas & Electric Company

Analysis Prepared by: Laura Shybut / U. & E. / (916) 319-2083

1. CARB, 2022 Scoping Plan for Achieving Carbon Neutrality; December 2022; https://ww2.arb.ca.gov/sites/default/files/2023-04/2022-sp.pdf ↑

2. See footnote 151, pg. 88, CARB 2022 Scoping Plan; Ibid. ↑

3. CARB, 2022 Scoping Plan Appendix H, AB 32 GHG Inventory Sector Modeling; https://ww2.arb.ca.gov/sites/default/files/2024-01/nc-2022-sp-appendix-h-ab-32-ghg-inventory-sector-modeling.pdf.pdf ↑

4. Pg. 5, DOE, “Hydrogen Strategy: Enabling A Low-Carbon Economy;” July 2020; https://www.energy.gov/sites/prod/files/2020/07/f76/USDOE_FE_Hydrogen_Strategy_July2020.pdf ↑

5. DOE Office of Clean Energy Demonstration, “Regional Clean Hydrogen Hubs Program, California Hydrogen Hub (ARCHES) Awardee Fact Sheet;” 2024; https://www.energy.gov/sites/default/files/2024-07/H2Hubs%20ARCHES_Award%20Fact%20Sheet.pdf ↑

6. Hayley Smith, “Trump’s Department of Energy targets California and other blue states for budget cuts, according to internal documents,” Los Angeles Times; April 1, 2025; https://www.latimes.com/environment/story/2025-04-01/trumps-doe-cuts-target-california-blue-states-internal-documents-show ↑

7. These pillars include the following: 1) Additionality/Incrementality: the hydrogen must be produced from new units of renewable electric generation to prevent hydrogen from diverting clean energy resources away from the grid. 2) Deliverability: the hydrogen must be regionally deliverable to ensure that the hydrogen is not being produced from dirty resources that cannot be verified or are so far away as to never being delivered to the facility. 3) Hourly Matching: the hydrogen’s production must match a clean power supply on an hourly basis to ensure that hydrogen production does not increase demand for fossil fuel generation. ↑

8. Department of the Treasury; “U.S. Department of Treasury Releases Final Rules for Clean Hydrogen Production Tax Credit;” Press Release; January 3, 2025; https://home.treasury.gov/news/press-releases/jy2768 ↑

9. The actual cheapest pathway was a scenario of the hydrogen production facility using federal hydropower; however the author’s noted it is institutionally complicated and may be legally infeasible. Nevertheless it produced costs approaching the U.S. DOE’s $1/kg target. Pg. 25, Guerra Fernández, O.J., et al., NREL, Integrating Hydrogen Production and Electricity Markets: Analytical Insights from California, June 2022; https://www.nrel.gov/docs/fy22osti/80902.pdf ↑

10. Guerra Fernández, O.J., et al., NREL, 2022, Ibid. ↑

11. Using the conversion of $1/kg = ~$8/MMBtu; Seeking Alpha, ”Hydrogen vs. Natural Gas for Electric Power Generation;” December, 2, 2020; https://seekingalpha.com/article/4392471-hydrogen-vs-natural-gas-for-electric-power-generation https://seekingalpha.com/article/4392471-hydrogen-vs-natural-gas-for-electric-power-generation ↑

12. D. 22-02-025, Decision Implementing Senate Bill 1440 Biomethane Procurement Program, R. 13-02-008, February 24, 2022; https://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M454/K335/454335009.PDF ↑

13. PUC § 365.1 ↑

14. Pg. v, Guerra Fernández, O.J., et al., NREL, 2022. Ibid. ↑

15. 2018 Manufacturing Energy and Carbon Footprints; https://www.energy.gov/eere/iedo/manufacturing-energy-and-carbon-footprints-2018-mecs ↑

16. Guerra Fernández, O.J., et al., NREL, Integrating Hydrogen Production and Electricity Markets: Analytical Insights from California, June 2022; https://www.nrel.gov/docs/fy22osti/80902.pdf ↑

17. D. 21-01-018 ↑

18. Orders of magnitude difference in this case. Residential rooftop solar averages below 10kW; these generators are over 80MW. ↑

19. ConocoPhillips Co., 175 FERC ¶ 61,226 (2021) (Guidance Order) ↑

20. 16 U.S.C. § 824k(h)(2) (1994) ↑

21. 16 U.S.C. § 824k(h)(2)(B); https://www.law.cornell.edu/uscode/text/16/824k ↑