California update

October 23, 2018 | By James M. Berger in Los Angeles

Two new laws enacted in September will have a major effect on the California energy market.

100% clean energy

Senate Bill 100 will require all electricity in California to come from clean energy by 2045, and it increases the existing 2030 target from 50% to 60%. Governor Jerry Brown signed the measure on September 10.

“Clean energy” for this purpose is not yet defined. It will include “eligible renewable energy resources,” which presumably would include everything that is eligible under current law: biodiesel, biomass, bio-methane, fuel cells with renewable fuels, geothermal, certain kinds of hydroelectricity, municipal solid waste, ocean wave, ocean thermal, solar, tidal current and wind. It will also include “zero-carbon resources,” which are also not defined. This could include nuclear energy, but it seems unlikely because California is shutting down its last nuclear plant by 2025.

The interim goals along the road to 100% clean energy are 44% clean energy by 2024, 52% by 2027 and 60% by 2030. The state is currently at about 44% clean energy, including 15% from large hydroelectric projects and 29% from renewables.

The law requires retail electricity sellers to procure at least the required percentages from clean energy sources. Municipal utilities must reach the same percentages, but they can do so by buying clean energy credits.

The real goal is to reduce carbon emissions that contribute to global warming. The electricity sector is responsible for only 16% of California carbon emissions, while the transportation sector is responsible for 41%, the industrial sector for 23%, agriculture for 8%, residential energy use for 7% and commercial energy use for 5%.

To address all of these other sectors, which account for 84% of carbon emissions, Governor Brown issued Executive Order B-55-18, which sets a goal to achieve carbon neutrality by 2045 and to maintain net negative emissions thereafter.

Executive Order B-55-18, if fully implemented, could have a larger effect than SB 100 because it will affect all sectors of the economy and not just electricity generation. It is likely to tie disparate sectors of the economy together. For example, certain industrial sectors may not be able to eliminate carbon emissions completely; they will end up making transfer payments to other sectors, such as agriculture or forestry, that do.

The executive order directs the California Air Resources Board, or CARB, to come up with a way to track progress and to work with state agencies to ensure that future “scoping plans” recommend measures to achieve the goal. Scoping plans are plans, updated every five years, that focus on how each agency can reduce greenhouse gas emissions.

To have negative carbon emissions after 2045, more carbon dioxide will have to be sucked out of the air than is released into the air. The executive order directs CARB, the California Natural Resources Agency, the California Environmental Protection Agency and the California Department of Food and Agriculture to set sequestration targets in the “natural and working lands climate change implementation plan,” which is a plan that state agencies are developing, among other things, to find more ways to sequester carbon underground.

Transforming transportation — which accounts for the largest source of carbon emissions — to reduce emissions could significantly affect the power industry. The most likely way to reduce carbon emissions is to electrify transportation. However, doing this would significantly increase electricity demand, further increasing demand for clean sources of electricity.

One measure that failed to become law is AB 813, which was a bill that would have converted the California Independent System Operator, which operates the California electricity grid, into a regional transmission organization. (For more details about AB 813, see the “California Update” in the August 2018 Newswire). The lack of a regional grid could make it harder to reach the other goals the state has set. Brown has supported the measure, but the bill failed to make it through the upper house of the state legislature after passing the lower house in August.

Wildfires

Senate Bill 901 limits the damages for which the three investor-owned utilities can be held liable on account of wildfires that are started by electrical equipment belonging to the utilities. However it did not eliminate the doctrine of inverse condemnation as both the utilities and the governor had wanted. Inverse condemnation makes a utility liable for all fire damages where utility equipment contributed to a fire, regardless of whether the utility was at fault.

The bill has been widely seen as a rescue for Pacific Gas & Electric, which serves northern California, to avoid pushing the utility into bankruptcy.

PG&E may be found liable for $15 billion or more in damages tied to wildfires in 2017. No one wants to see PG&E pushed again into bankruptcy. The effects of its last bankruptcy in 2001 during the California energy crisis were felt for years. The state also needs a healthy PG&E to help meet its aggressive clean energy goals.

The utilities themselves have also suffered destruction of power lines, utility poles and substations.

The new law is not a model of clarity, and significant questions remain that will have to be answered by the California Public Utilities Commission, or CPUC, as it implements the provisions.

An initial issue is that the bill addresses wildfires that started in 2017 and wildfires that start in 2019 (and after), but does not address the 2018 wildfires. The legislature will have to deal with the effects of the 2018 wildfires next year.

For the 2019 wildfires, the CPUC may allow the utilities to increase rates to recover costs if the costs are just and reasonable, after considering the utility’s conduct. In evaluating the reasonableness of costs, the CPUC is supposed to consider 12 factors, including the nature and severity of the utility’s conduct, whether fire warning signs were ignored, whether the utility failed to operate and maintain assets in a reasonable manner and to what extent the fires were caused by circumstances beyond the utility’s control.

The CPUC has to go through a similar analysis for costs tied to the 2017 wildfires and determine whether the costs are just and reasonable. The law implies that only just and reasonable costs are recoverable from ratepayers.

The law creates a “stress test.” The test is run once a utility applies to recover costs from a 2017 wildfire. The test is not a pass-or-fail type of test, but rather an effort to measure the amount of wildfire costs the utility can bear before having to pass costs through to ratepayers. The CPUC cannot allow a utility to start passing costs to ratepayers until the utility has absorbed all it is able.

Costs that will be borne by ratepayers may be recovered from ratepayers over time through a surcharge added to utility bills. The utilities can seek a financing order from the CPUC that would allow them to borrow against the future revenue stream from the surcharges.

A utility may also seek a financing order to cover costs of a 2019 wildfire.

Typically, utilities have rate cases before the CPUC once a year. It is conceivable that PG&E will file to recover its 2017 wildfire costs outside of the ordinary course through an additional rate case. The California fire department has determined that PG&E was at fault for 12 of the October 2017 wildfires. It has not yet determined the cause of others. It will take time for the final tally of PG&E’s liability to be determined. When PG&E files to recover costs, it will have to bring data and consultants to prove what it can pay under the stress test. Ratepayer advocates will argue that PG&E can pay significantly more. The CPUC will have to sort through it all, as it tries to apply the unclear, and at times contradictory, language in SB 901.