Submitted July 17, 2008
Renewable Energy. Statute.
California Electricity Providers
Californians generally receive electricity service from
one of three types of providers:
- Investor-owned utilities (IOUs), which provide 68
percent of retail electricity service.
- Local, publicly owned utilities, which provide 24
percent of retail electricity service.
- Electric service providers (ESPs), which provide 8
percent of retail electricity service.
(See the nearby text box for definitions of commonly
used terms throughout this analysis.)
Commonly Used Terms—Proposition 7
Energy Commission (Energy
Resources Conservation and Development Commission). The
state agency that forecasts energy supply and demand, implements
energy conservation programs, conducts energy-related research, and
permits certain power plants.
ESP (Electric Service
Provider). A company that provides electricity service
directly to customers who have chosen not to receive service from
the utility that serves their geographic area.
IOU (Investor-Owned Utility). A privately owned electric utility that has a defined
geographic service area and is required by state law to serve
customers in that area. The Public Utilities Commission regulates
the IOU’s rates and terms of service.
Market Price of Electricity. A benchmark price of electricity that is determined by a
state agency according to a definition and criteria specified in
Publicly Owned Utility. A local government agency, governed by a board—either elected by
the public or appointed by a local elected body—that provides
electricity service in its local area.
PUC (Public Utilities
Commission). The state agency that regulates various types
of utilities, including IOUs and ESPs.
RPS (Renewables Portfolio
Standard). Requirement that electricity providers increase their share of
electricity from renewable resources (such as wind or solar power)
according to a specified time line.
Investor-Owned Utilities. The IOUs are
owned by private investors and provide electricity service for profit. The
state’s three largest electricity IOUs are Pacific Gas and Electric, Southern
California Edison, and San Diego Gas and Electric. Each IOU has a unique,
defined geographic service area. State law requires each IOU to provide
electricity service to customers within its service area. The rates that IOUs
can charge their customers are determined by the California Public Utilities
Commission (PUC). In addition, PUC regulates how IOUs provide electricity
service to their customers. These conditions on electricity rates and service
are known as “terms of service.”
Publicly Owned Utilities. A publicly owned
electric utility is a local government agency, governed by a board—either
elected by the public or appointed by a local elected body—that provides
electricity service in its local area. Publicly owned electric utilities are not
regulated by PUC. Rather, they set their own terms of service. California’s
major publicly owned electric utilities include the Los Angeles Department of
Water and Power and the Sacramento Municipal Utility District.
Electric Service Providers. The ESPs
provide electricity service to customers who have chosen not to receive service
from the utility that serves their geographic area. Instead, these customers
have entered into “direct access” contracts with ESPs. Under a direct access
contract, an ESP delivers electricity to the customer through the local
utility’s electricity transmission wires.
There are currently around 20 registered ESPs in the
state. These ESPs generally serve large industrial and commercial customers. The
ESPs also provide electricity to some state and local government agencies, such
as several University of California campuses and some local school districts.
The state’s regulatory authority over ESPs is limited.
Although the PUC does not set an ESP’s terms of service, including the rates it
charges its customers, it does require ESPs to meet a limited set of
requirements, including proof that they have enough electricity supply to meet
Major Components. Four principal
components comprise California’s system for generating and delivering
- Electricity generating facilities.
- The interstate electricity transmission grid.
- Electricity transmission lines that tie generation
facilities to the grid.
- Electricity distribution lines that connect the
electricity grid to electricity consumers.
responsibility for permitting this infrastructure is held by one or more
federal, state, and local agencies, depending on the particular project.
Permitting Authority. Permitting authority
for an electricity generating facility is determined by the type and size of the
facility to be operated. For example, hydroelectric generating facilities, such
as dams, are permitted by the Federal Energy Regulatory Commission (FERC).
Thermal electricity generating facilities—primarily natural gas-fired power
plants—capable of generating 50 megawatts or more of electricity are issued
permits by the state’s Energy Resources Conservation and Development Commission
(Energy Commission). Most other electricity generating facilities—including many
types of renewable energy generating facilities, such as wind turbines and
nonthermal solar power plants—are permitted by local government.
Permitting authority over electricity transmission lines
depends upon the function of the line to be built, as well as the type of
electricity provider that will own the line. Depending upon its function and
ownership, a line may be permitted by FERC, the Energy Commission, PUC, or local
Energy Commission’s Permit Processing Time Frames.
Existing law defines the time frames within which the Energy Commission
must approve or deny an application to construct and operate an electricity
generating facility or transmission line under its jurisdiction. Those time
frames are 18 months for most applications, or 12 months for applications
meeting certain conditions.
Energy From Renewable Resources
Renewables Portfolio Standard. Current law
requires IOUs and ESPs to increase the amount of electricity they acquire (from
their own sources or purchased from others) that is generated from renewable
resources, such as solar and wind power. This requirement is known as the
renewables portfolio standard (RPS). Each electricity provider subject to the
RPS must increase its share of electricity generated from eligible renewable
resources by at least 1 percent each year so that, by the end of 2010,
20 percent of its electricity comes from renewable sources. (As discussed later,
publicly owned utilities are subject to a different renewable energy
IOU Obligations Under the RPS Limited by a Cost
Cap. Current law limits the amount of renewable electricity an IOU is
required to acquire under the RPS, regardless of the annual RPS targets that
apply to the IOU. The limit is based on two cost-related factors:
- The “market price of electricity,” as that price is
defined by PUC according to criteria specified in state law.
- The amount of money that would have been collected from
electricity ratepayers under a previously operating state program to
subsidize the cost of renewable electricity.
An IOU is required to acquire
renewable electricity even at a cost that exceeds the PUC-defined market price
of electricity. An IOU that does not acquire sufficient amounts of renewable
electricity may face monetary penalties. However, an IOU is required to acquire
such higher-cost renewable electricity only to the extent that the above-market
costs are less than the amount of funds that the IOU would have collected under
the previously operating state subsidy program. In this way, current law caps
the annual cost of complying with the RPS, both to IOUs and to their customers
who ultimately pay these costs through rates charged to them.
Enforcing the RPS. Current law requires PUC
to enforce IOU and ESP compliance with the RPS. Only the IOUs are required to
submit plans that describe how they will meet RPS targets at the least possible
cost. In addition, IOUs and ESPs generally must offer contracts to purchase
renewable resources of no less than ten years.
The PUC may fine an IOU or an ESP that fails to meet its
year-to-year RPS target. The PUC has set the amount of the penalties at 5 cents
per kilowatt hour by which the IOU or ESP falls short of its RPS target. The PUC
has capped the total amount of penalties an IOU or ESP can be charged in a year
at $25 million. Current law does not direct the use of these penalty monies,
which generally are deposited in the state General Fund.
Publicly Owned Utilities Set Their Own Renewable
Energy Standards. Current law does not require publicly owned utilities
to meet the same RPS that other electricity providers are required to meet.
Rather, current law directs each publicly owned utility to put in place and
enforce its own renewables portfolio standard and allows each publicly owned
utility to define the electricity sources that it counts as renewable. No state
agency enforces publicly owned utility compliance or places penalties on a
publicly owned utility that fails to meet the renewable energy goals it has set
Progress Towards Meeting the State’s RPS Goal.
The different types of electricity providers vary in their progress towards
achieving the state’s RPS goal of having
20 percent of electricity generated from renewable sources by 2010. As of 2006
(the last year for which data are available), the IOUs together had 13 percent
of their electricity generated from renewable resources. The ESPs had 2 percent
of their electricity generated from those same types of resources. Using their
own, various definitions of “renewable resources,” the publicly owned utilities
together had nearly 12 percent of their electricity generated from renewable
resources. If the current definition of renewable resources in state law that
applies to IOUs and ESPs (which does not include large hydroelectric dams, for
example) is applied to the publicly owned utilities, their renewable resources
count falls to just over 7 percent as of 2006. However, in recent years,
publicly owned utilities have increased their renewable electricity deliveries
at a faster rate than have the IOUs, according to data compiled by the Energy
Overview of Measure
This measure makes a number of changes
regarding RPS and the permitting of electricity generating facilities and
transmission lines. Primarily, the measure:
- Establishes additional, higher RPS targets for
- Makes RPS requirements enforceable on publicly owned
- Changes the process for defining “market price of
- Changes the cost cap provisions that limit electricity
provider obligations under the RPS.
- Expands scope of RPS enforcement.
- Revises RPS-related contracting period and obligations.
- Sets a lower penalty rate in statute and removes the
cap on the total penalty amount for failure to meet RPS requirements.
- Directs the use of RPS penalty revenues.
- Expands Energy Commission’s permitting authority.
Each of these components is
Individual Components of Measure
Establishes Additional, Higher RPS Targets.
The measure adds two new, higher RPS targets—40 percent by
2020 and 50 percent by 2025. Each electricity provider would need to meet the
targets by increasing the share of electricity that it acquires that is
generated from renewable energy by at least 2 percent a year, rather than the
current 1 percent per year. The measure eliminates the requirement under current
law that an electricity provider compensate for failure to meet an RPS target in
any given year by procuring additional renewable energy in subsequent years.
Makes RPS Requirements Enforceable on Publicly
Owned Utilities. The measure requires publicly owned utilities generally
to comply with the same RPS as required of IOUs and ESPs, including the current
RPS goal to increase to 20 percent by 2010 the proportion of each electricity
provider’s electricity that comes from renewable resources. The measure also
gives the Energy Commission authority to enforce RPS requirements on publicly
owned utilities. The measure, however, specifies that the Energy Commission does
not have the authority to approve or disapprove a publicly owned utility’s
renewable resources energy contract, including its terms or conditions.
Changes Process for Defining “Market Price of
Electricity.” The measure makes two major changes in how the market
price of electricity is defined for purposes of implementing the RPS. First, the
measure shifts from PUC to the Energy Commission responsibility for determining
the market price of electricity. Second, the measure adds three new criteria to
current-law requirements that the Energy Commission would need to consider when
defining the market price of electricity. These criteria include consideration
of the value and benefits of renewable resources.
Changes the Cost Cap Provisions That Limit
Electricity Provider Obligations Under the RPS. As under current law,
the measure provides a cost cap to limit the amount of potentially higher-cost
renewable electricity that an IOU must acquire regardless of the annual RPS
targets. The measure extends the cost cap limit to ESPs as well. The measure
requires that an electricity provider acquire renewable electricity towards
meeting annual RPS targets, or face monetary penalties, only as long as the cost
of such electricity is no more than 10 percent above the Energy
Commission-defined market price for electricity. The potentially higher cost of
electricity generated from renewable resources would be recovered by IOUs and
ESPs through rates charged to their customers, but subject to this 10 percent
cost cap. Publicly owned utilities also could recover these potentially higher
costs through rates charged to their customers. However, the costs of publicly
owned utilities would not be subject to a cost cap similar to that which applies
to IOUs and ESPs.
Expands Scope of RPS Enforcement. The
measure expands PUC’s current RPS-related enforcement mechanisms over IOUs to
encompass ESPs. The enforcement mechanisms include review and adoption of
renewable resources procurement plans, related rate-setting authority, and
penalty authority. The measure grants to the Energy Commission similar RPS-related
enforcement authority over publicly owned utilities.
Revises RPS-Related Contracting Period and
Obligations. The measure requires all electricity providers—including
publicly owned utilities—to offer renewable energy procurement contracts of no
less than 20 years, with certain exceptions. The measure further requires an
electricity provider to accept all offers for renewable energy that are at or
below the market price of electricity as defined by the Energy Commission.
Sets Lower Penalty Rate in Statute and Removes Cap
on Total Penalty Amount. The measure includes a formula to determine
monetary penalties for an electricity provider that fails to sign contracts for
sufficient amounts of renewable energy. The penalty formula is 1 cent per
kilowatt hour by which the provider falls short of the applicable RPS target.
The measure’s formula therefore reflects a penalty rate that is lower
than the 5 cents per kilowatt hour penalty rate currently established by the PUC.
However, the measure also specifies that neither PUC nor the Energy Commission
shall cap the total amount of penalties that may be placed on an
electricity provider in any given year.
In addition, the measure states that no electricity
provider shall recover the cost of any penalties through rates paid by its
customers. However, it is unclear how this prohibition will apply to publicly
owned utilities. This is because publicly owned utilities typically have no
other source of revenues which could be used to pay a penalty other than rates
paid by their customers.
Finally, the measure also specifies the conditions under
which PUC or the Energy Commission, as applicable, may waive the statutorily
prescribed penalty, such as when the electricity provider demonstrates a “good
faith effort” to meet the RPS.
Directs Use of Penalty Monies. The measure
directs that any RPS-related penalties (along with other specified revenues) be
used to facilitate, through property or right-of-way acquisition and
construction of transmission facilities, development of transmission
infrastructure necessary to achieve RPS. The measure specifies that the Energy
Commission will hold title to any properties acquired with such funds.
Expands Energy Commission’s Permitting Authority.
The measure expands the Energy Commission’s existing permitting
authority in two major ways, not limited to the RPS. Specifically, the measure:
- Grants the Energy Commission the authority to permit
new nonthermal renewable energy power plants capable of producing 30
megawatts of electricity or more. The new permitting authority would include
related infrastructure, such as electricity transmission lines that unite
the plant with the transmission network grid. Currently, this permitting
authority rests with local governments.
- Gives the Energy Commission the authority to permit
IOUs to construct new transmission lines within the electricity transmission
grid, currently a responsibility solely of the PUC at the state level. It is
unclear, however, whether the measure has removed PUC’s authority in giving
it to the Energy Commission.
The measure specifies that the Energy Commission is to
issue a permit for a qualifying renewable energy plant or related facility
within six months of the filing of an application. However, the commission is
not required to issue the permit within the six-month time frame if there is
evidence that the facility would cause significant harm to the environment or
the electrical system or in some way does not comply with legal or other
Declares Limited Impact on Ratepayer Electricity
Bills. In its findings and declarations, the measure states that, in the
“short term,” California’s investment in solar and clean energy (which would
include the implementation of the measure) will result in no more than a 3
percent increase in electricity rates for consumers. However, the measure
includes no specific provisions to implement or enforce this declaration.
State and Local Administrative Impacts
Increased Energy Commission Costs. The
measure will increase the annual administrative costs of the Energy Commission
by approximately $2.4 million due to new responsibilities and expansion of
existing duties. Under current law, the additional costs would be funded by
fees paid by electricity customers.
The measure gives the Energy Commission new
responsibilities which currently are carried out by PUC—namely, defining the
market price of electricity and permitting IOU-related transmission lines.
However, significant offsetting reductions in PUC’s costs may not result under
this measure. This is because the measure does not amend the State Constitution
to delete from PUC’s portfolio of responsibilities those which are given to the
Energy Commission. To the extent PUC continues to carry out its existing duties,
there likely will not be offsetting savings to PUC.
Increased PUC Costs. In addition, the
measure’s other requirements will increase annual administrative costs of the
PUC by up to $1 million. These additional costs will result from greater
workload related to the increased RPS targets. Under current law, these
additional costs would be funded by fees paid by electricity customers.
Uncertain Effect on Local Government Administrative
Costs. The measure shifts from local government to the Energy Commission
responsibility for permitting certain renewable energy facilities. As a
consequence, the measure will result in administrative cost savings of an
unknown amount to local governments. However, local governments may face new
costs associated with representing their interests at Energy Commission
proceedings to permit renewable energy facilities. It is uncertain whether, on
balance, savings to local governments will outweigh costs resulting from this
measure. In any event, the overall net impact on local government administrative
costs statewide is likely to be minor.
State and Local Government Costs and Revenues
The primary fiscal effect of this measure on state and
local governments would result from any effect it would have on electricity
rates. As discussed below, changes in electricity rates would affect both
government costs and revenues.
Unknown Effect on State and Local Government Costs
Overview. Changes in electricity rates
would affect government costs since state and local governments are large
consumers of electricity. It is unknown, however, how the measure will affect
electricity rates, both in the short term and in the longer term. This is
because it is difficult to predict the relative prices of renewable resources
and those of conventional electricity sources, such as natural gas. The measure
could result in higher or lower electricity rates from what they would otherwise
Short Term. We conclude that the prospects
for higher electricity rates are more likely in the short term, based on a
comparison of current cost factors for key renewable resources with those for
conventional resources. These cost factors include the cost of facility
construction and technology, as well as day-to-day operational costs, which
include the cost of inputs into the electricity generation process such as fuel.
Over the short term at least, these cost factors are more likely to keep the
cost of electricity generated from renewable resources, and hence the rates paid
by electricity customers for that electricity, above the cost of electricity
generated from conventional resources. However, the potential for higher
electricity rates to the customer, including state and local governments, might
be limited by the measure. This is because the measure caps the cost that
privately owned electricity providers must pay for electricity from renewable
resources. The cap will be set in relation to the market price of electricity,
which will be determined by the Energy Commission. However, because the measure
allows the commission substantial discretion in determining the market price of
electricity, it is uncertain how the commission will set this cap. In turn, the
effect of the cap on the price of electricity paid by customers is unknown.
Long Term. In the long run, there are
factors that may be affected by the measure that have the potential either to
increase or to decrease electricity rates from what they otherwise would be. For
example, to the extent that the measure advances development of renewable energy
resources in a manner that lowers their costs, electricity customers might
experience longer-term savings. On the other hand, the same cost factors that
could lead to short-term electricity rates that are higher might also lead to
higher long-run electricity rates. To the extent that the measure requires
electricity providers to acquire more costly electricity than they otherwise
would, they will experience longer-term cost increases. It is unknown whether,
on balance, factors that could increase electricity rates over the long term
will outweigh those that could decrease electricity rates over the long term.
Therefore, the long-term effect of the measure on government costs is unknown.
Unknown Effect on State and Local Government Revenues
Overview. State and local revenues
also would be affected by the measure’s impact on electricity rates. This is for
two reasons. First, some local governments charge a tax on the cost of
electricity use within their boundaries. To the extent that the measure results
in an increase or a decrease in electricity rates compared to what they would be
otherwise, there would be a corresponding increase or decrease in these local
tax revenues. Second, tax revenues received by governments are affected by
business profits, personal income, and taxable sales—all of which in turn are
affected by what individuals and businesses pay for electricity. Higher
electricity costs will lower government revenues, while lower electricity costs
will raise these revenues.
Short Term. On balance, as explained above,
we believe that the prospects for electricity rates that are higher than they
would otherwise be are more likely in the short term. However, as also is the
case with state and local government costs, the measure’s potential to lower
state and local government revenues due to higher electricity rates might be
limited by the measure’s cost cap provision. Thus, for the short term, to the
extent that the measure results in higher electricity rates from what they would
otherwise be, local utility user tax revenues would increase and state and local
sales and income tax revenues would decrease. The overall short-term net effect
of the measure on state and local revenues is unknown.
Long Term. As for the long run, as
explained above, the measure has the potential to either increase or decrease
electricity rates. Because the measure’s effect on long-term electricity rates
is unknown, the measure’s effect on long-term government revenues is also
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