Biomethane Rising

Recent California legislation has sought to promote the use of biomethane as a mainstream energy source in furtherance of California’s clean energy goals. Pursuant to these statutory mandates, the California Public Utilities Commission (CPUC) is addressing biomethane health and safety standards, pipeline open access rules, promotion of biomethane production and capture, and biomethane use as a qualified energy source for procurement via standard feed-in-tariff contracts by the California energy utilities in ongoing regulatory proceedings.

The recent legislative focus on biomethane in California has increased the number and potential value of opportunities to sell biomethane as a gas energy resource as well as for entities seeking to sell electric power generated from biogas. The related regulatory proceedings afford a forum for stakeholders to contribute to the formation of the regulatory framework that will govern the implementation of recent legislation and the use of biogas as an energy source in California.

Current Regulatory Proceedings

Two pending proceedings at the California Public Utilities Commission (CPUC) will substantially influence market opportunities for in-state biomethane producers. The first is a rulemaking that is addressing a number of regulatory issues related to biomethane health and safety standards and pipeline open access. The second is the CPUC’s long, ongoing rulemaking regarding the California renewable portfolio standard (RPS) program, which has recently been expanded to address biomethane-related regulatory changes mandated by new legislation. Both proceedings likely will be of critical importance to the production and distribution of biomethane in California.

Biomethane Safety and Pipeline Access

The CPUC opened a rulemaking proceeding in February 2013 to address and adopt: 1) standards relating to health, safety, and facility integrity for biomethane injected into pipelines and requirements for related monitoring, testing, reporting, and recordkeeping; and 2) access rules for gas utility pipelines, providing for non-discriminatory open access for biomethane. The rulemaking also will consider issues relating to the enforcement of CPUC biomethane rules.

The CPUC instituted this rulemaking in light of Assembly Bill (AB) 1900. The California Legislature enacted AB 1900 last year to remove barriers to the in-state transmission of biomethane. AB 1900 directs the CPUC and other agencies to develop new biomethane gas safety standards and requirements to prevent utilities from creating anti-competitive barriers to biomethane gas.

On May 15, the Office of Environmental Health Hazard Assessment (OEHHA) in conjunction with the California Air Resources Board (CARB) prepared a joint report, titled Health Protective Standards for the Injection of Biomethane into the Common Carrier Pipeline (Joint Report), that included a list of constituents that are found in biomethane in greater concentrations than in natural gas and that pose a risk to human health. The Joint Report identifies the health risks associated with these constituents based on four exposure scenarios; proposes appropriate concentration limits based on these scenarios; and identifies reasonable monitoring, testing, reporting, and recordkeeping requirements for each source of biomethane. The CPUC must give the proposed standards set forth in the Joint Report due deference when adopting standards for biomethane injected into pipelines.

CARB’s and OEHHA’s risk management approach identifies trigger levels and lower and upper action levels for the proposed constituents of concern for both cancer and non-cancer risks. CARB and OEHHA suggest that each constituent be monitored annually if it’s below the trigger level (the OEHHA health protective level), and quarterly if it’s between the trigger level and the lower action level. The Joint Report states that if a constituent of concern hits the lower action level three times, the biomethane source should be shut off; the biomethane source should be shut off immediately if the upper action level is hit.

CARB and OEHHA also recommend implementing pre-injection start-up testing for constituents of concern and that the gas utility and biomethane producer should agree on an approach to monitor performance of biogas treatment systems. CARB and OEHHA assert that pre-injection start-up testing be repeated when there’s a change in the biogas cleanup equipment design, a new source of biogas is accepted, or biomethane production has been shut-off due to exceeding the action levels.

The parties to the proceedings have submitted comments, testimony, and briefings concerning whether the CPUC should adopt the standards recommended in the Joint Report, and if not, what standards and requirements the CPUC should adopt instead. Several major theses and areas of disagreement have become the focus of attention.

The major gas utilities in California have expressed concern that data concerning biomethane is still preliminary and, thus, might be insufficient to establish sound protections for pipeline facilities and human health. The utilities have requested that the CPUC adopt testing and monitoring requirements in addition to those proposed by CARB and OEHHA. The utilities also have proposed modifications to their interconnection tariff rules that provide the terms of access to common carrier gas pipelines to remove restrictions on the injection of biomethane, which meets their proposed definition.

Biomethane producers and their representatives have emphasized their concern that biomethane be treated fairly as an energy resource on the premise that biomethane is no more harmful to human health than natural gas. They generally support the proposed standards set forth in the Joint Report, sometimes suggesting slight modifications. These entities have opposed the gas utilities’ suggestions that standards be adopted for constituents of concern not included in the Joint Report as well as the gas utilities’ proposals for monitoring, testing, reporting, and record keeping. The biomethane producers also have urged the CPUC to be critical of proposed gas utility tariffs to ensure that they don’t discriminate against biomethane, such as by requiring gas injected into pipelines to have a heat content that isn’t practicable for biomethane resources.

A proposed decision is expected by the end of this year that will address standards relating to health, safety, and facility integrity for biomethane injected into pipelines; requirements for monitoring, testing, reporting, and recordkeeping; and pipeline access rules providing for non-discriminatory open access for biomethane. The CPUC hasn’t yet requested comments from parties concerning how the compliance costs associated with the standards promulgated in this proceeding should be allocated between biomethane entities and the investor-owned gas utilities. This issue is likely to be highly contentious as gas utilities will resist paying for such costs. However, CARB has specifically cautioned against imposing too many costs on biomethane producers as this would inhibit biomethane production in California. Interested parties should follow this proceeding closely as there will be opportunities to influence its outcome through comments on the forthcoming proposed decision, as well as through input on how compliance costs should be allocated among various parties.

Bioenergy and California’s RPS

The CPUC’s RPS proceeding recently was expanded to address the requirements of Senate Bill (SB) 1122. In the RPS proceeding, the CPUC will be establishing procedures to require the major California energy utilities to procure at least 250 MW of generation from bioenergy projects that commence operation on or after June 1, 2013. The CPUC also will direct the utilities to develop standard contract terms and a streamlined contracting process for bioenergy producers. Finally, the CPUC will be encouraging the utilities to offer programs and services that facilitate the development of the biomethane industry.

Toward this end, the CPUC’s Energy Division staff recently held a workshop to engage stakeholders in an informal discussion and to receive input on biogas resource potential, and potential market, technical, or policy barriers to implementation of SB 1122. The CPUC’s Energy Division staff also provided an outline of the procedural schedule for the proceeding during the workshop. The next step in the proceeding will be to issue a scoping memorandum within the next few months, which will request formal comments from interested parties regarding the CPUC’s implementation of SB 1122. A proposed decision by the administrative law judges who are overseeing the proceeding is expected to be available for public comment by the end of this year.

New Legislation and Developments

While the CPUC is busy implementing legislation that was enacted last year, the legislature and other state agencies have been occupied with new policymaking that will also significantly determine the future of biomethane in California.

In September, the legislature passed and Governor Brown signed SB 96, which directs the CPUC to develop and implement a new ratepayer surcharge, called the Electricity Program Investment Charge (EPIC), to fund investments in bioenergy among other clean energy sources. Because the CPUC had been planning this program since last year at the governor’s direction, the state is immediately prepared to initiate EPIC and begin disbursing grants. EPIC will provide an estimated $145 million annually for applied research and development ($55 million), technology demonstration and deployment ($75 million), and market facilitation ($15 million). The CPUC requires that at least 20 percent ($9 million) of the technology demonstration and deployment funds go to bioenergy. Under the CPUC’s supervision, the EPIC funds will be administered by each of California’s investor-owned utilities and the CEC.

Additionally, last week, the governor signed AB 1257, which requires the CEC to prepare a report every four years examining the role of natural gas in California, including opportunities to substitute biomethane for natural gas. The CEC will submit its report to the legislature, which historically has resulted in subsequent legislation to implement such reports’ findings and recommendations.

Several other bills could have expanded market opportunities for biomethane, although those bills did not make it through the legislative process. For example, AB 1079 would have amended California’s Enterprise Zone Act to allow municipal governments and gas companies to jointly develop an energy management plan to reduce air pollution and promote economic development. AB 1079 would have required the CPUC to expedite its review of an energy management plan that incorporates the use of biogas for direct injection into common carrier pipelines.

Setting the Trajectory

Whereas 2012 was a landmark year for legislation that promoted biomethane in California, 2013 has been a year of implementing that legislation and other recent laws at the periphery of the state’s bioenergy policies. As a quasi-legislative and also quasi-independent body charged with implementing the legislature’s and the governor’s policies in its own proceedings, the CPUC is its own arena for complex and contentious decision-making regarding the future of biomethane in California.

The CPUC’s decisions over the next year will have important effects on the trajectory of biomethane and biomethane-generated electricity procurement in California. CPUC decisions will influence the foreseeable markets for biomethane used as gas and electricity by determining safety standards and procurement policies. CPUC decisions will also determine the share of California’s upcoming and massive public subsidy of renewable electricity that will focus on biomethane. These decisions will not only have immediate effects on markets and funding, but also will inform future legislative actions in this area of bioenergy.

ABOUT THE AUTHORS: Martin A. Mattes is a partner and Jill N. Jaffe is an associate at Nossaman LLP. They have significant experience in public utilities regulatory matters and can be reached at mmattes@nossaman.com and jjaffe@nossaman.com.