Energy Law Alert: California Net Metering Reform Passes California Legislature; Heads to the Governor for Signature

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Originally introduced by Henry T. Perea (D) in February 2013, Assembly Bill 327 ("AB 327") cleared its second-to-last hurdle on September 12, 2013 when it was passed out of the California Assembly and on to Governor Brown for signature. The bill, touted as a law that will reform both residential electricity rate structures and solar net metering policy, has been widely debated among utilities, ratepayer advocates, and solar industry groups over the past several months.

Broadly speaking, AB 327 would effect policy reform in three major areas: (1) the tiered rate structure for residential customers, generally, and the fixed charges assessed to customers of the California Alternate Rates for Energy ("CARE") program, in particular; (2) time-of-use pricing for residential customers; and (3) the net metering programs for the three largest investor-owned utilities: Pacific Gas & Electric ("PG&E"), Southern California Edison ("SCE"), and San Diego Gas & Electric ("SDG&E"). The bill also requires all electrical corporations to submit distribution resource plans that identify optimal locations for the deployment of distributed resources and makes the statewide 33% renewables portfolio standard a floor and not a ceiling with respect to renewable energy procurement. This alert focuses only on the provisions of AB 327 that would impact the net metering programs for PG&E, SCE, and SDG&E.

A. Structural Changes

AB 327 is, in part, aimed at addressing uncertainties facing future customer-generators, solar developers, and financing parties with respect to these utilities' net metering programs. In particular, once signed into law by Governor Brown, the bill will make the following changes:

  1. Suspension of Net Metering Lifted. On May 24, 2012, the California Public Utilities Commission ("CPUC") issued Decision (D.) 12-05-036, which put all parties on notice that it would suspend the net metering program for new customer-generators on December 31, 2014. AB 327 would effectively lift that suspension for customer-generators in the PG&E, SCE, and SDG&E service territories and allow those net metering programs to continue for the time being. Specifically, Section 9 of AB 327 amends Cal. Pub. Util. Code § 2827(c)(4) to include the following statement:

    (B) The commission shall require every large electrical corporation [i.e., PG&E, SCE, and SDG&E] to make the standard contract or tariff available to eligible customer-generators, continuously and without interruption, until such times as the large electrical corporation reaches its net energy metering program limit or July 1, 2017, whichever is earlier.

    After a utility meets its program limit, the terms of a customer-generator's contract will depend on when the contract was executed. AB 327 mandates a transition period for contracts executed before the utility meets its program limit and directs the CPUC to develop a new standard contract that each utility would be required to offer customer-generators after reaching its limit.
  2. Net Metering Program Limits Specified. Section 9 of AB 327 clarifies the amount (in total MW) of net metering projects that PG&E, SCE, and SDG&E must allow on their systems. Currently, the law states that a utility is not obligated to provide net metering once the peak demand of customer-generators reaches 5% of its aggregate customer peak demand. For PG&E, SCE, and SDG&E, AB 327 clarifies that "aggregate customer peak demand" means "the highest sum of the noncoincident peak demands of all of [the utility's] customers that occurs in any calendar year" (emphasis added) and states that the program limits must not be less than 2,409 MW for PG&E, 2,240MW for SCE, and 607 MW for SDG&E. AB 327 also obligates each of PG&E, SCE, and SDG&E to file monthly progress reports with the CPUC to inform the public and the commission about its progress toward the limit.
  3. Grandfathering of Existing Net Metering Contracts. Section 11 of AB 327 adds Cal. Pub. Util. Code § 2827.1, which sets forth a process for grandfathering existing net metering contracts with PG&E, SCE, and SDG&E. As each utility reaches its program limit, customer-generators with existing net metering contracts will enter into a transition period, the length of which will be specified by the CPUC no later than March 31, 2014. During the transition period, the customer-generators will receive service and sell power back to the utility according to the terms of their existing agreements. After the transition period lapses, the utility must then offer the customer-generator a new standard contract that the CPUC will develop through a formal rulemaking process no later than December 31, 2015. With respect to the length of the transition period, AB 327 states specifically that "[a]ny rules adopted by the commission shall consider a reasonable expected payback period based on the year the customer initially took service under the tariff or [net metering contract]" (emphasis added). What "reasonable expected payback period" means is unclear and may lead to some consternation among existing customer-generators and those looking to develop additional residential solar projects in the coming years.
  4. Development of New Standard Contracts. Section 11 of AB 327 also directs the CPUC to develop a new standard contract for customer-generators that PG&E, SCE, and SDG&E must offer after reaching their respective net metering program limits. The new standard contract must be developed through a formal rulemaking process no later than December 31, 2015. If a customer-generator does not have an existing contract with the utility and the utility meets its program limit prior to July 1, 2017, then the CPUC may order the utility to offer the new standard contract to that customer-generator. However, after July 1, 2017, the utility must offer the new standard contract to all new customer-generators and (upon their expiration) to all customer-generators with existing, grandfathered net metering contracts.

    Importantly, AB 327 states explicitly that the new standard contract may include net metering and that PG&E, SCE, and SDG&E's obligation to provide a standard contract will not be governed by Cal. Pub. Util. Code § 2827 after the earlier of (i) July 1, 2017 and (ii) the date it reaches its net metering program limit. Instead, those three utilities will only be obligated to provide the new standard contract. Thus, the regulatory regime for customer-generators in the PG&E, SCE, and SDG&E service territories (even those with an existing net metering contract at the time their utility meets its program limit) will change after July 1, 2017, and it is unclear what that regime will look like. AB 327 defines the parameters within which the CPUC must develop the new standard contract, but the details will not be worked out until the formal rulemaking with all parties. In addition to establishing a transition period for grandfathering existing contracts, the CPUC must:

    (a) ensure that the new standard contract "ensures that customer-sited renewable distributed generation continues to grow sustainably and include specific alternatives designed for growth among residential customers in disadvantaged communities";

    (b) establish terms of service and billing rules;

    (c) ensure that the standard contract is based on the costs and benefits of the renewable energy facility;

    (d) ensure that the total benefits of the standard contract to the customer-generator approximately equal the total costs; and

    (e) allow projects greater than 1 megawatt (MW) that do not have a significant impact on the distribution grid to be built to the size of the on-site load, subject to reasonable interconnection charges under the CPUC's Rule 21 and applicable state and federal requirements.

    AB 327 includes one other provision with respect to the new standard contract that should be troubling to developers. Pub. Util. Code § 2827.1(b)(7), added in Section 11 of AB 327, states that "[a]ny fixed charges for residential customer generators that differ from the fixed charges allowed [under the CARE program] shall be authorized only in a rulemaking proceeding involving [PG&E, SCE, and SDG&E]." Although this provision protects the public process for the approval of new fixed fees, it does not carry the current law with respect to standby charges forward into the new standard contract. Prior to AB 327, Cal. Pub. Util. Code § 2827 governed all net metering contracts and § 2827(g), in particular, protected customer-generators from having to pay standby charges on the electrical generating capacity or the kilowatt hour production of their renewable generating facility. The new standard contract that will govern customer-generators after the utility reaches its program limit may result in the utility's option (or worse, its obligation) to assess standby charges to the customer-generator. This is a substantial change to the current state of play for net metered projects and solar developers should be aware that PG&E, SCE, and SDG&E may push for standby charges to be added to the new standard contract during the rulemaking process.

  5. No Limit on Number of Eligible Customer-Generators After July 1, 2017. One bright spot that solar developers can point to in AB 327 is that there will be no limit to the amount of generating capacity or the number of eligible customer-generators that will be entitled to receive the new standard contract after July 1, 2017.
B. Issues to Watch

Despite the added certainty that AB 327 provides, there are a few things that solar developers should keep an eye on as the process unfolds at the CPUC between now and December 31, 2015:

  1. Grandfathering: The CPUC must decide by March 31, 2014 how long the transition period for existing net metering contracts will be once PG&E, SCE, and SDG&E reach their program limits. That decision will be made, at least in part, based on what the CPUC considers "a reasonable expected payback period based on the year the customer initially took service under the tariff or contract authorized by Section 2827." This is very loose language that is open to CPUC interpretation.
  2. New Standard Contract: The CPUC must develop a new standard contract no later than December 31, 2015, through a formal rulemaking process. However, that contract is not required to include net metering. Moreover, the CPUC is not obligated to follow the current ban on standby charges. The CPUC is mandated to ensure that "customer-sited renewable distributed generation continues to grow sustainably"; but, it is also obligated to "[e]nsure that the standard contract . . . is based on the costs and benefits of the renewable electrical generation facility." The simultaneous mandates to encourage growth and reflect costs and benefits equally will surely play out in the rulemaking process.

AB 327 represents a significant step forward in gaining certainty for customer-generators and the residential solar industry in California. However, both of these issues require close attention and warrant involvement by solar developers and industry advocates in the CPUC's formal rulemaking process. With no guarantee that net metering will continue beyond July 1, 2017 (remember, the bill says only that the new standard contract may include net metering), and with the spectre of standby charges looming, passage of the bill should be seen as winning a battle, and not the war, for the future of distributed solar generation in California.

If you have any questions about the content of this alert, please contact a key contributor.

Key Contributors

Seth D. Hilton
Chad T. Marriott
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