LEGISLATIVE SUBCOMMITTEE RECOMMENDATION: OPPOSE UNLESS AMENDED

SUMMARY OF BILL:

· This bill would require all electric utilities with more than 10,000 service connections to develop and adopt a `smart grid' system deployment plan by June 2009 and issue Request for Proposals (RFPs) by September 2009. "Smart grid" is defined in the bill as two-way communications equipment installed on the utility distribution system as well as in the end-use customer premises and narrowly defines certain aspects of the smart grid, leading to potential elimination of technologies that could effectively operate a smart grid.

· The bill also authorizes electric utilities to recover from ratepayers all reasonable costs for the planning, development and deployment of the smart grid system, and it requires the California Public Utilities Commission (Commission) to adopt specific incentive mechanisms to generate interest by the utilities in smart grid.

SUMMARY OF SUPPORTING ARGUMENTS FOR RECOMMENDATION:

· The bill narrowly defines certain aspect of the smart grid, which could favor a particular technology over another. For example, it states that the smart grid "utilizes the electrical delivery system to provide real-time monitoring...." This text appears to limit communication to technologies like broadband over powerline, and would thus exclude other means of communication such as wireless technologies. The Commission has traditionally favored open competition when it comes to technology choices.

· The bill requires the Commission to establish rules by that will provide utilities adequate incentives to deploy smart grid systems, specifically determining that utilities will receive an enhanced rate of return on its investment (capital and operational costs) or receive a portion of cost savings attributable to the smart grid system. The Commission has its own processes for making determinations as to what, if any, incentives the utilities receive for smart grid systems.

· The timeline for implementation is too aggressive and will result in confusion in the marketplace and possibly missed opportunities. The bill requires utilities to submit their smart meter plans by 2009, with RFPs issued by September 2009. Much more time is needed to appropriately define what smart grid is, so that the investment makes the most sense for California ratepayers. There are many potential stakeholders who need to provide their input, most notably the California Independent System Operator (CAISO) as well as the technology industry.

· The Commission is already in the process of moving the utilities to the smart grid concept, via the advanced metering proceedings and through its staff paper that outlines additional inquiries into smart grid technology. The Commission and the California Energy Commission (CEC) are in active discussion as to how to proceed with respect to pursuing additional smart grid technologies, which makes this bill unnecessary.

· The bill would mandate a smart grid system without apparent regard to the advanced metering systems currently under Commission review which could lead to a misalignment of systems and thus unnecessary costs.

SUMMARY OF SUGGESTED AMENDMENTS:

· None

DIVISION ANALYSIS (Energy Division):

The bill has implications for both publicly-owned and investor-owned utilities in the state. The following analysis is limited to just the investor-owned utilities (IOUs) and Commission policy and practices.

· When an investor-owned utility procures equipment for the purpose of providing electric service to its ratepayers, the Commission has the authority to determine what expenditures will be recoverable from ratepayers and the method by which the expenditures will be recovered. The bill mandates that all `reasonable' costs associated with smart grid planning and development will be recovered from ratepayers, but provides no definition of `reasonable' costs, nor recognizes the Commission's authority to determine reasonable costs. The Commission has the ability and process to make the best determination for cost recovery of utility capital investments.

· The bill requires the Commission to establish rules by that will provide utilities adequate incentives to deploy smart grid systems, specifically determining that utilities will receive an enhanced rate of return on its investment (capital and operational costs) or receive a portion of cost savings attributable to the smart grid system. The Commission has its own processes for making determinations as to what, if any, incentives the utilities receive for smart grid systems.

· The Commission is already in the midst of approving advanced meters for each investor-owned utility. The Commission will need to ensure that the definition of smart grid is appropriately aligned with the current investment in advanced meters. This can best be done via a Commission-lead proceeding where the technical functionalities of the smart grid are completely vetted and understood in the context of the advanced meters that will be deployed.

· Title XIII of the Energy Independence and Security Act of 2007 Pub. L. 110-140 addresses smart grid technology. Section 1306(a) of the bill creates a matching Smart grid Investment Program up to 1/5 of qualifying smart grid investments. Sec. 1307 requires states to consider smart grid investment by regulated utilities and recover of associated smart grid investments.

· The Commission has the authority and the processes to best determine how the smart grid investments should be pursued and recovered from ratepayers. The Commission has already indicated its interest in smart grid technology via its formal proceedings on advanced metering and has also indicated via a staff paper that it is interested in additional smart grid technology. The Commission and CEC staffs are currently in discussion as to developing concrete next steps.

LEGISLATIVE HISTORY:

None.

FISCAL IMPACT:

Likely absorbable, but not zero.

STATUS:

SB 1438 is scheduled to be heard in the Senate Committee on Energy, Utilities and Communications on April 15, 2008.

SUPPORT/OPPOSITION:

None on file.

STAFF CONTACTS:

Byran Crabb brd@cpuc.ca.gov

Office of Governmental Affairs (916) 322-8858

Date: April 10, 2008

BILL LANGUAGE:

BILL NUMBER: SB 1438 INTRODUCED

BILL TEXT

INTRODUCED BY Senator Padilla

FEBRUARY 21, 2008

An act to add Chapter 4 (commencing with Section 8360) to Division

4.1 of the Public Utilities Code, relating to electricity.

LEGISLATIVE COUNSEL'S DIGEST

SB 1438, as introduced, Padilla. Electricity: smart grid systems.

Under existing law, the Public Utilities Commission has regulatory

authority over public utilities, including electrical corporations,

as defined. Existing law provides that the Commission has no

authority to establish rates or regulate the borrowing of money, the

issuance of evidences of indebtedness, or the sale, lease,

assignment, mortgage, or other disposal or encumbrance of the

property of any electrical cooperative, but that electrical

cooperatives are otherwise subject to the regulatory authority of the

Commission pursuant to the Public Utilities Act. Under existing law,

the governing board of a local publicly owned electric utility, as

defined, generally has authority over the activities of the utility.

This bill would state that it is the policy of the state to

encourage, and where appropriate, mandate the utilization of smart

grid systems, as defined, by electric utilities, defined as including

electrical corporations, electrical cooperatives, and local publicly

owned electric utilities. The bill would require each electric

utility with more than 10,000 service connections to develop and

adopt a smart grid system deployment plan by June 30, 2009, and by

September 31, 2009, to issue a smart grid system request for

proposals consistent with the deployment plan. The bill would require

respondents to the request for proposals to offer to serve at least

a majority of the utility's subscribers. The bill would require the

electric utility to make a final selection of a winning response to

the request for proposals no later than 120 days after the request is

issued. The bill would authorize an electric utility to decline to

select a winning proposal only if there are no proposals meeting the

requirements of the request or the electric utility makes written

findings that the costs to implement any bids meeting the

requirements of the proposal would clearly outweigh the potential

benefits of deploying a smart grid system.

The bill would provide for the recovery by the electric utility of

its reasonable costs for planning, building, and operating a smart

grid system from ratepayers, subject to certain restrictions. The

bill would require the Commission, by April 1, 2009, to establish

rules to ensure that electrical corporations with more than 10,000

service connections have adequate economic incentives to deploy smart

grid systems. The bill would authorize the governing board of an

electric utility that is not an electrical corporation to establish

incentives to deploy smart grid systems consistent with those adopted

by the Commission for an electrical corporation with more than

10,000 service connections. Electrical corporations with 10,000 or

fewer service connections would be authorized to file an application

with the Commission seeking authorization to establish incentives to

deploy smart grid systems. The bill would prohibit a city, county, or

city and county from prohibiting or regulating (1) the installation

or operation of a smart grid system by an electrical corporation or

electrical cooperative, or a contractor or affiliate, within the

service area of the electrical corporation or electrical cooperative,

and (2) the installation or operation of a smart grid system by a

local publicly owned electric utility, or a contractor, within the

service area of the utility, when approved by its governing board.

Vote: majority. Appropriation: no. Fiscal committee: yes.

State-mandated local program: no.

THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

SECTION 1. Chapter 4 (commencing with Section 8360) is added to

Division 4.1 of the Public Utilities Code, to read:

CHAPTER 4. SMART GRID SYSTEMS

8360. The Legislature finds and declares all of the following:

(a) Smart grid systems that allow real-time, two-way digital

communications between electric utilities and their distribution grid

and with their customers can greatly improve the efficiency and

reliability of electrical distribution systems and facilitate

conservation by enabling real-time demand response pricing.

(b) Smart grid systems constitute critical infrastructure that can

support important homeland security needs, both by providing

disaster prevention and recovery capabilities to protect the state's

electric grid and by enabling remote monitoring of other critical

infrastructure and key assets.

(c) Smart grid systems will permit the state to take full

advantage of distributed generation resources that will increase

distribution efficiency, lower customer prices, stimulate innovation

and new job creation, and ultimately reduce emissions of greenhouse

gases and decrease dependence on foreign oil.

8361. For purposes of this chapter, the following terms have the

following meanings:

(a) "Electric utility" means an electrical corporation, electrical

cooperative, or local publicly owned electric utility.

(b) "Electrical delivery system" means those facilities that are

not under the control of the Independent System Operator that are

used by an electrical corporation, electrical cooperative, or local

publicly owned electric utility to transmit, deliver, or furnish

electricity to retail end-use customers.

(c) "Smart grid system" means a two-way communications system and

associated equipment and software, including equipment installed on

the electrical delivery system and on the premises of retail end-use

customers, that utilizes the electrical delivery system to provide

real-time monitoring, diagnostic, and control information and

services that improve the efficiency and reliability of the

distribution and use of electricity, including automated load control

or demand response, power loss detection and prevention, remote

outage and restoration detection, continuous reporting of utility and

customer demand, dynamic pricing of electrical service, performance

monitoring of electrical distribution network equipment, and

predictive maintenance and diagnostics. An electric utility may treat

an electrical meter installed to enable the electrical delivery

system to function properly as being part of the smart grid system if

the meter has the capability of measuring and recording electricity

usage data on a time-differentiated basis of at least 15-minute

intervals for at least four separate time segments per day.

8362. (a) It is the policy of the state to encourage, and where

appropriate mandate, the utilization of smart grid systems by

electric utilities.

(b) An electric utility shall recover its reasonable costs for

planning, building, and operating a smart grid system from

ratepayers, including administrative and operational costs, costs for

services rendered by utility employees, contractors, and

subcontractors, capital investment and depreciation, taxes,

financing, financial incentives paid to customers for participation

in demand response, load control, and other conservation programs,

and marketing and advertising costs for such programs.

(c) An electric utility shall recover the reasonable costs of

equipment rendered obsolete by deployment of a smart grid system,

based on the remaining depreciable life of the obsolete equipment.

(d) An electric utility shall not recover the costs of equipment

or software from ratepayers unless the equipment and software is

compatible with, and capable of interoperating with, a smart grid

system.

(e) Subdivision (d) does not apply in the following situations:

(1) The electric utility has, prior to February 22, 2008, entered

into a binding financial commitment to make a purchase of, or

expenditure for, the equipment or software that is not compatible

with, or capable of interoperating with, a smart grid system.

(2) The equipment or software is for providing service in a

geographical area where the demonstrated cost of deploying a smart

grid system exceeds the reasonably anticipated benefits of

deployment, including benefits to the utility, ratepayers, the

environment, and homeland security.

8363. (a) Each electric utility with more than 10,000 service

connections shall develop and adopt a smart grid system deployment

plan by June 30, 2009. An electric utility with 10,000 or fewer

service connections may elect to develop and adopt a smart grid

system deployment plan.

(b) Each electric utility shall, by September 31, 2009, issue a

smart grid system request for proposals consistent with the

deployment plan. Respondents to a request for proposal shall offer to

serve at least a majority of the electric utility's residential

electric subscribers.

(c) Unless subdivision (d) is applicable, an electric utility

shall make a final selection of a winning response to its smart grid

system request for proposals no later than 120 days after the date

request for proposals is issued. Any winning response selected shall

propose to construct a smart grid system that provides sufficient

capacity and capabilities to meet anticipated demands for management

and control of the electric utility's electrical delivery system

until at least December 31, 2023.

(d) An electric utility may decline to select a winning proposal

only if there are no proposals meeting the requirements of the

request or the electric utility makes written findings that the costs

to implement any bids meeting the requirements of the proposal would

clearly outweigh the potential benefits of deploying a smart grid

system, including environmental benefits and direct and indirect

benefits to the utility's ratepayers.

8364. By April 1, 2009, the Commission shall establish rules to

ensure that electrical corporations with more than 10,000 service

connections have adequate economic incentives to deploy smart grid

systems. The rules shall encourage electrical corporations to deploy

smart grid systems that have sufficient capacity and capabilities to

meet anticipated future demands for management and control of the

electrical distribution system until at least December 31, 2023. The

economic incentives shall, for smart grid systems deployed on or

after December 31, 2007, include one or more of the following:

(a) An enhanced return on its reasonable capital expenditures and

on a portion of its reasonable operations and maintenance costs for a

smart grid system.

(b) Retention of a portion of any cost savings attributable to the

use of a smart grid system.

8365. (a) The governing board of an electric utility that is not

an electrical corporation may establish incentives to deploy smart

grid systems consistent with Section 8364.

(b) An electrical corporation with 10,000 or fewer service

connections may file an application with the Commission seeking

authorization to establish incentives to deploy smart grid systems

consistent with Section 8364.

8366. (a) An electric utility or its contractors installing a

smart grid system shall be permitted access to any poles, ducts,

conduits, and rights-of-way on terms and conditions at least as

favorable as those granted to a holder of a state franchise pursuant

to Division 2.5 (commencing with Section 5800). The rights granted by

this section do not limit either of the following:

(1) Any right that a utility or a third party installing a smart

grid system may have to access poles, ducts, conduits, and

rights-of-way pursuant to contract or under any other law.

(2) The services that may be offered over a smart grid system.

(b) A smart grid system is an integral component of the electrical

delivery system and the installation of a smart grid system shall

not require an electric utility or its contractor to obtain or expand

easements or other rights-of-way or to provide additional

consideration as a result of the installation or operation of the

smart grid system. Installation of a smart grid system is consistent

with, and part of, the installation of the electrical distribution

system.

8367. An electrical corporation may elect to own and operate a

smart grid system on its own electrical delivery system, or may

permit an affiliated or unaffiliated entity to own or operate the

smart grid system.

8368. A city, county, or city and county shall not prohibit or

regulate either of the following:

(a) The installation or operation of a smart grid system by an

electrical corporation or electrical cooperative, or a contractor or

affiliate, within the service area of the electrical corporation or

electrical cooperative.

(b) The installation or operation of a smart grid system by a

local publicly owned electric utility, or a contractor, within the

service area of the utility, when approved by the governing board of

the utility.