The State of California has once again stepped into the vanguard by enacting the most far-reaching renewable energy policies in the United States. For developers of renewable energy facilities and advocates of new energy technologies and small-scale generation, these new statutes and rules represent a tremendous boost. Although the ultimate impact of these laws largely will depend on how they are implemented by the California Public Utilities Commission and California Energy Commission, the laws themselves represent an important shift in energy policy toward more reliance on renewable energy.

The fundamental feature of California's new program is the requirement that all major utilities in the state buy 1 percent more renewable energy each year so that at least 20 percent of their total electric supply portfolio is made up of renewable generation by 2017. This requirement could result in procurement of up to an additional 21,000 GWh of renewable energy each year.

Under the new rules, the utilities must use a bidding process for selecting renewable resources, and all generators selected will be offered long-term power purchase contracts (10 to 20 years). The utilities must pay renewable generators a contract price based on the cost of a new conventional generating resource, and the state will separately pay renewable generators an amount intended to cover any "above-market" costs. One of the new laws enacted creates a fund of $70 million a year to help cover this above-market cost.

This article briefly summarizes California's new renewable energy statutes and considers their impact on California and the energy companies operating in the state. It also contains a status report on the major proceedings and rulemakings that have been instituted by the California Public Utilities Commission (CPUC) and the California Energy Commission (CEC) to implement these new laws.


OVERVIEW

Although it is difficult to predict how California's new renewable energy statutes and regulations will change the energy picture, we believe they represent at least three major shifts in energy policy.

First, state leaders have recognized the tremendous value of renewable energy generation and seek to overcome any utility reluctance to buying this generation by explicitly requiring utilities to increase purchases to the point where renewable generation makes up at least 20 percent of their total supply. The command-and-control approach of the legislation also reflects a determination to assure that these new policies are in fact implemented.

Second, the state has embraced both the philosophy that more fuel diversity is needed and a belief that even small or customer-owned generation should be actively encouraged. Unlike prior legislative efforts, the new laws take aim at specific tariffs, regulations and practices that traditionally have inhibited the use of renewable energy technologies.

Third, the new statutes and rules must be seen as both a reaction to California's devastating energy crisis and a window on what state leaders have concluded is needed to prevent future energy shortages. These conclusions include a preference for in-state generation, a strong belief in fuel diversity and a recognition that renewable energy, while perhaps more expensive than fossil fuel, provides both stability and previously undervalued environmental benefits.

Over the last year, CPUC and CEC have sought to implement the new legislation by developing a renewable portfolio standard (RPS), establishing funding rules and drafting a model procurement contract. For those involved in this process, the proceedings have been highly contentious and the pace slow. Although some of the state's utilities have embraced the new programs, others continue to fight implementation or seek to weaken any acquisition mandates. This difficult process has led to concerns by many that the great promise of the state's legislation may not be fulfilled on a timely basis or at all.

Although CPUC issued orders in June and December 2003 aimed at implementing the renewable portfolio standard program, important program elements remain undeveloped or pending. The development of a standard contract for long-term power purchases from renewable generators seems particularly bogged down by disagreements between the parties, and the failure to have an approved power purchase agreement impedes progress on almost all other fronts. In addition, CEC has issued numerous implementation orders and in April 2004 finally adopted Guidebooks on RPS eligibility requirements and qualifications for supplemental energy payments. It is hoped that all of the major components of the renewable energy procurement program will be developed and in place by the end of 2004.

Although California will have more to say on energy policy in 2004, it remains to be seen whether the state actually will implement the renewable energy future that it envisioned more than two years ago. It is encouraging that many renewable energy developers remain interested in the state's programs and continue to participate in this long and difficult rule development process. If California succeeds and if its laws and policies result in a vibrant new market for renewable generation, many other states are likely to use all or parts of the model that California develops. If the California program remains mired in controversy or implements rules that actually impede development, then the more modest approaches to renewables development that have been used in states such as Massachusetts and Texas are likely to be emulated. The results in California not only will have a significant effect on our most populous state but are likely to greatly influence the approaches used in other regions. Thus, 2004 is likely to be a turning point on how California's energy future will develop and, perhaps, for how the nation will structure programs to encourage the increased use and development of renewable energy.


LEGISLATIVE FRAMEWORK FOR RENEWABLE ENERGY

Changes in Utility Procurement (AB 57)

Significant changes were made in utility procurement practices by Assembly Bill 57, which was enacted in 2002 and went into effect on January 1, 2003. AB 57 is one of several new laws implementing California's Renewable Portfolio Standard and establishing the process by which utilities will procure electricity for their customers.

The goal of this legislation is to promote the development and use of renewable energy by requiring the state's investor-owned utilities to buy more of their electricity from such renewable generating resources as biomass, landfill gas, small hydro, geothermal, solar and wind. Utilities are required to prepare a procurement plan that sets out how they will develop a diversified portfolio of renewable generating resources, using both short- and long-term contracts, and that procures electricity from multiple generating sources. These procurement plans are subject to regulatory approval. As part of the procurement process, CPUC will develop criteria for evaluating whether individual contracts executed by the utilities comply with the new law.

CPUC also is required to develop and expedite the approval process for all contracts that are executed by utilities and developers. Once contracts are approved, CPUC is prohibited from engaging in any after-the-fact "reasonableness" review but is permitted to review the reasonableness of the utility's administration of the contracts. CPUC is in the process of implementing these new requirements through a rulemaking proceeding that is discussed below. 1/


Renewable Portfolio Standard (SB 1078)

Senate Bill 1078, another new law aimed at implementing California's Renewable Portfolio Standard, establishes the primary guidelines for requiring utilities to procure renewable electricity. It requires the state's investor-owned utilities to procure, through a competitive solicitation process, an additional 1 percent of their electricity needs from renewable generators each year so that by 2017 at least 20 percent of their total supply consists of renewable generation.

Significantly, the utilities are not obligated to commence procuring renewable electricity until they are given a credit rating of investment grade by at least two credit rating agencies -- a status that neither Southern California Edison Co. nor Pacific Gas & Electric Co., the state's two largest utilities, currently enjoy. The utilities also are not obligated to purchase renewable electricity unless funds are available under Senate Bill 1038 to pay for the above-market costs of such electricity.

This statute also requires CPUC to identify transmission upgrades that are needed to foster the development of renewable resources, and it permits existing renewable generators to elect to obtain five-year, fixed price contracts rather than receive payments from utilities based on the short-run avoided cost of electricity. CPUC is in the process of implementing this law through a rulemaking proceeding.


Renewable Generation and Emerging Technology Funding (SB 1038)

The Renewable Generation and Energy Technology Funding Act, Senate Bill 1038, is the third law enacted in 2002 that governs implementation of the Renewable Portfolio Standard. It obligates electric utilities to purchase renewable energy to the extent funds are available to pay the above-market portion of the cost of the electricity purchased from renewable generators.

This law also requires CEC to develop a process under which a portion of the funds collected under Public Utilities Code §381 (c), the Public Goods Charge Funds, will be distributed to renewable resource developers to pay these above-market costs. This law also establishes a new process of allocating funds collected by the utilities, with 20 percent of the funds allocated among existing in-state renewable generating resources; 51.5 percent allocated to new in-state renewable facilities; 17.5 percent allocated to emerging renewable technologies in distributed generation applications; 10 percent allocated to provide credits to customers that enter into direct access transactions to purchase renewable electricity; and 1 percent allocated to consumer education efforts.

The law authorizes CEC to conduct studies addressing energy efficiency and emerging technologies and authorizes loans and grants to foster emerging energy technologies and research and development of energy efficiency. CEC is developing regulations to implement these requirements, and CPUC has begun a rulemaking proceeding to comply with its responsibilities under the statute.


STATE IMPLEMENTATION PROCEEDINGS

CPUC Rulemakings

CPUC issued an Order Initiating Implementation of the Senate Bill 1078 Renewable Portfolio Standard Program (Rulemaking 01-10-024) on June 19, 2003. The order directed the state's major utilities to procure a net 1 percent increase in their energy from renewable resources each year up to a total of 20 percent, based on a competitive bidding process for new power purchase contracts. Significantly, the procurement total is a net requirement. Thus, any expiring renewable energy contracts either must be extended or replaced.

Under the program, the utilities conduct a CPUC-approved solicitation for new renewable energy resources. In responding to this solicitation, renewable energy generators must submit bids to deliver power and certain renewable energy attributes at a fixed contract price. Once all the bids are received, CPUC develops the market price referent (MPR), which is a proxy for the cost of a conventional new power plant. The MPR looks at the all-in costs of a new, combined cycle, base-load plant and looks at the costs of a new combustion turbine for a peaking facility. Both serve as a proxy for the market price for the varying types of projects that are bid. The MPR that is developed for a particular year is not released until after the bidding for contracts has closed so that it does not affect the price at which prospective developers bid.

Under the CPUC program, renewable generators will be paid the full value of the MPR that is developed (up to their bid price) through contract payments made by the utilities, and any increment above this amount will be paid from Supplemental Energy Payments (SEP) administered and funded by CEC. Thus, the deemed market price for a conventional energy source will be paid by the utility, and any above-market increment for the renewable project will be paid through a long-term SEP award.

By statute, utilities are required to award the contracts on a least-cost and best-fit basis. To meet this standard, the utilities first will rank all bids received by price and certain other factors to produce a rank-ordered list of possible renewable energy contracts. A second ranking is then conducted in which bids are reordered to take into consideration such factors as system integration and transmission costs. This process is intended to develop a workable approximation of the costs and benefits to the transmission system of each new renewable generator. Further, so long as it is disclosed, utilities are permitted to factor in a preference value for projects that offer curtailability and dispatchability. The second ranking determines the utility's proposed list of winning bidders, and the selected bids should be sufficient to meet the utility's 1 percent procurement target for that year. Winning bids then are submitted to a review committee within CPUC and, following approval, are forwarded to CEC for the potential award of a supplemental energy payment.

All contract bids submitted by prospective renewable energy developers must be evaluated on a total cost basis and using a consistent set of economic assumptions. On an annual basis, the state's major utilities must submit a plan that sets out the utility's portfolio supply/demand balance, include a bid solicitation for each product and location preference, and call for bids for long-term contracts of 10, 15 or 20 years' duration.

The order adopted the master, generic contract developed by the Edison Electric Institute for short-term electric transactions as the starting point for the developing standard contract terms and conditions. Although the parties to the CPUC proceeding were charged with developing these standard contract terms through negotiations and workshop proceedings, certain terms could not be changed. For example, utilities must seek bids for these multi-year energy products, and the standard contract terms must include set performance requirements.

A central issue in this CPUC proceeding has involved the development, definition and ownership of renewable energy attributes or credits. These credits include not only the right to claim that renewable energy has been procured and used by the utility but also could be deemed to include certain clean air and emission reduction attributes. It is recognized that these credits or attributes are separate from the energy product. The CPUC order made a preliminary determination that to be eligible for the RPS program, renewable generators would have to convey many of these environmental and renewable attributes to the utility. But, some attributes, such as the methane reduction benefits provided by landfill gas projects, are to be retained by the renewable generator. The possibility of establishing a renewable energy credit trading system was deferred, and responsibility for developing such a program entrusted to CEC.

CPUC directed that utilities meet at least 75 percent of their annual procurement target for renewable energy each year but allowed them to carry-over a 25 percent deficit for up to three years, without explanation or penalty. Utilities that do not satisfy annual procurement targets after this carry-over period will be automatically assessed a 5 cent/KWh penalty, with an overall penalty cap of $25 million per utility, per year. Although utilities that are not currently creditworthy (e.g., PG&E and Southern California Edison) are excused from procuring renewable generation until their credit status has been restored, the annual 1 percent acquisition requirement took effect immediately. Thus, for example, if it took a utility three years to become creditworthy, the company would start the RPS program with a 3 percent renewables acquisition requirement.

In a December 15, 2003, rehearing order (Rulemaking 01-10-024), CPUC reaffirmed the basic structure of its renewables procurement program but made some minor changes to the earlier decision. CPUC reaffirmed its intent to apply penalties or to impose other requirements to ensure utility compliance with the RPS program but clarified that penalties would not be automatically imposed for failing to timely meet procurement targets.

Proceedings are under way before a CPUC administrative law judge to develop a standard form contract for renewable energy procurement. There are three primary issues:

	1.	Which contract terms and conditions will be standardized and which will be left up to the contracting parties to negotiate.
	2.	Whether the standardized provisions can themselves be renegotiated if both the utility and generator agree.
	3.	Whether there will be a formal CPUC review process to resolve potential issues with any RPS solicitation before the solicitation actually is used by the utility.

As these issues suggest, there is a great deal of concern that utilities may exert undue influence in the contracting process and, without oversight, may not procure renewable resources through a fair or balanced process. Besides resolving these issues, this process is intended to actually draft the language to be used for all standardized contract terms.


CEC Proceedings

CEC also was given a number of important policy development and implementation roles under the new laws. These include developing specific resource eligibility guidelines, certification of renewable facilities and distribution of the state's "above market" or SEP payments.

CEC has issued three primary orders to carry out these responsibilities: (1) Comparative Cost of California Central Station Electricity Generation Technologies (100-03-00H, June 2003); (2) Renewables Portfolio Standard Decision on Phase 1 Implementation Issues (500-03-023F, June 2003); and (3) Renewable Portfolio Standard Decision on Phase 2 Implementation Issues (500-03-0490D, August 2003).

In the Phase 1 decision, CEC began developing standards for certifying eligible renewable energy resources and established criteria to determine incremental output from existing geothermal resources. It also began the process of designing and implementing an accounting system to verify compliance by utilities and other retail sellers. In the Phase 2 decision, the CEC proposed a process for distributing supplemental or SEP payments as well as for certifying renewable electricity generation. It also undertook development of an accounting system for the RPS.

In March 2004, CEC issued three draft Guidebooks that took effect in late April 2004. These Guidebooks provide detailed administration and eligibility rules and include the: (1) Renewables Portfolio Standard Eligibility Guidebook, which addresses RPS eligibility and certification; (2) New Renewable Facilities Program Guidebook, addressing SEP payments; and (3) Overall Program Guidebook for the Renewable Energy Program, addressing program administration.

Pursuant to these CEC decisions, the following types of renewable resources or fuels are eligible for the RPS program:

		Biomass, biodiesel
		Fuel cells using renewable fuels
		Digester gas
		Geothermal
		Landfill gas
		Small hydro (30MW or less)
		Ocean wave, tidal current, ocean thermal
		Municipal solid waste
		Solar thermal
		Wind
		Photovoltaic

ADDITIONAL RENEWABLE ENERGY LEGISLATION

Besides the RPS program, the California Legislature also enacted other laws aimed at encouraging new, small-scale renewable facilities and facilitating project development. Although these laws have received less attention, they too play an important role in the state's overall renewable energy program.


Net Metering (AB 58)

The new net metering law modifies prior standards in an effort to encourage development and use of small, renewable generating facilities by utility customers. The law permits utility customers to install up to 1 megawatt of solar or wind generation on their property and to receive a per kilowatt-hour credit for each kilowatt-hour of electricity delivered to the customer's utility. Utility customers that install eligible distributed generation technologies will continue to take service from the local utility under standard tariffs, thereby avoiding the payment of standby charges normally associated with the installation of customer-owned generation. This is a major step forward for distributed generation and other small producers because high standby charges can make these resources uneconomic.

While the new law permits customers to carry forward, month-to-month, any net surplus of electricity generated by the resource, the utilities are not obligated to pay the customer for any net surplus generation that remains at the end of each 12-month period. At the end of each year, any outstanding credits are eliminated. Customers also are required to pay any surcharges established by CPUC.


Tougher Deadlines for New Plant Certifications (SB 1269)

To encourage prompt construction of new electric generating projects, Senate Bill 1269 requires developers of certain power projects to begin construction within 12 months after obtaining CEC final certification or within limited time extensions. Developers also are required to submit construction and commercial operation milestones within 30 days after project certification. If they fail to do so, the milestones can be set by CEC. In addition, if a developer fails to start construction before the deadline or fails to meet the milestones without good cause, CEC can revoke the project certification and offer it to the California Consumer Power and Conservation Financing Authority, which then has the option to construct the project, either independently or with another private or public entity.


New Permitting Law to Help Small Wind Generators (AB 1207)

In enacting AB 1207, the state sought to further promote and encourage the use of small wind systems by eliminating any existing obstacles to their use. The statute authorizes and encourages local governments to adopt ordinances that facilitate the siting of small wind turbines and establishes limited approval criteria for these sites. Local governments that fail to enact their own wind-friendly ordinances by July 1, 2002, must review applications under default provisions, contained in the new law, which provides for expedited approval and minimal siting requirements. This statute and the default ordinance will remain in effect until July 1, 2005.


Confirmation that Renewable Energy Incentives Are Not Taxable (AB 1968)

To encourage renewable projects, AB 1968 excludes from a taxpayer's gross income, for the purposes of the state income tax, all solar, wind and fuel cell rebates, vouchers and other financial incentives paid by CEC, CPUC or any publicly-owned utility. While existing federal and state laws do not generally treat tax rebates, vouchers or similar incentives as taxable income, the Legislature has provided taxpayers with certainty on this issue.


Additional Protections Promoting Solar Energy Systems (SB 1534)

Senate Bill 1534 amended the existing Solar Rights Act (California Civil Code §714) in order to protect homeowners who want to install solar energy systems. The new statute provides that any attempt to prohibit or restrict the installation or use of a solar energy system is void and unenforceable. This statute seeks to prevent homeowner associations and subdivision developers from establishing unreasonable restrictions or outright bans on the use of solar energy systems.


Real-Time Metering (SB 1976)

Senate Bill 1976 requires CEC to report to the Legislature and the Governor on the feasibility of implementing real-time, critical peak and other dynamic pricing tariffs for electricity sold in California. Such time-sensitive tariffs are seen as a way to reduce peak demand by shifting costs from lower to higher demand periods. The report must consider how to calculate wholesale real-time prices and the best ways to make them available to customers, including options for day-ahead and hour-ahead retail prices, estimates of potential peak load reductions, and options for incorporating demand responsiveness into the wholesale competitive market and the operations of the ISO. The statute lists the potential benefits of real-time pricing, which include the opportunity to integrate information technology into the energy industry and the creation of new markets for communications, microelectronic controls and information.


Incentives for Livestock Farmers to Become Customer-Generators (AB 2228)

The Legislature established this pilot program requiring utilities to provide eligible customers that produce electricity from animal byproducts or bio-gas with net energy metering. To qualify, these facilities must be: 1 megawatt or less; located on or adjacent to the customer's property; interconnected to the transmission grid; and capable of supplying at least part of the customer's power needs. In addition, these facilities must generate power using manure, methane or other fuel utilizing animal byproducts.

Utilities are required to file a standard tariff with CPUC for this service and then make it available to all qualifying biogas customer-generators on a first-come, first-served basis until the total capacity from such resources reaches 5 MW in each affected utility's service area.


CONCLUSION

California has committed substantial resources to develop and implement a renewable energy program that could dramatically change the state's energy resource mix. Under the new legislation and rules, up to 2,400 MW of new capacity from renewable energy resources will be added to the state's already substantial renewable energy resource base. If this ambitious program succeeds, California will implement some of the lessons that it learned from the disastrous energy crisis of 2001: Diversifying supply, increasing in-state production and reducing reliance on natural gas-fired production makes its citizens more independent and more secure. In addition, under these programs the state will finally link its ambitious clean air goals with its energy acquisition decisions.

To accomplish these ambitious objectives, the state has embarked on an 18-month, multi-agency implementation process. The scope of this undertaking exceeds anything that has been done to encourage renewable energy use in any other state. In fact, the sheer scope and scale of this undertaking is itself threatening the success of California's renewable energy program. It remains unclear whether the thousands of pages of draft and final rules and procedures and the many compromises that have been made to develop procurement procedures, bidding rules and standardized contracts actually will result in a program that works or whether the entire program will end with a thud on the discarded program trash pile. Certainly, 2004 will tell much about which way this balance will tip.

If the ambitious renewables program that was crafted by the California Legislature in 2002 actually succeeds, it will be the biggest boon to renewable energy development in the United States in a generation. If it completely or largely fails, only the least expensive renewable energy is likely to be developed in the state for the foreseeable future. In addition, we will all have to look to other jurisdictions for a regulatory model on renewables development that actually works. Although it remains to be seen whether California's experiment will create a vibrant renewable energy market, certainly the state's ambitious plans and exhaustive consultation process befit our most populous and activist state.

Paul Lacourciere contributed to this article.


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ENDNOTES

1/ AB is an abbreviation for California Assembly Bill. SB is an abbreviation for California Senate Bill. Click here to view Assembly and Senate bills. Click here to view California laws.


©2004 Thelen Reid Brown Raysman & Steiner LLP