Background:

The Energy Independence Act.

The Energy Independence Act (EIA) was approved by voters in 2006. The EIA requires an electric utility with more than 25,000 customers to meet targets for energy conservation and to meet a certain percent of its annual load with eligible renewable resources. Utilities that must comply with the EIA are called "qualifying utilities."

Energy Conservation Targets.

A qualifying utility must pursue all available conservation that is cost-effective, reliable, and feasible. Every two years, the qualifying utility must review and update an assessment of its achievable cost-effective conservation potential for the subsequent 10-year period. The qualifying utility must establish and make publicly available a biennial acquisition target for cost-effective conservation consistent with its 10-year assessment. At a minimum, each biennial target must be no lower than the qualifying utility's pro rata share for that two-year period of its cost-effective conservation potential for the subsequent 10-year period.

Eligible Renewable Resource Targets.

A qualifying utility must use eligible renewable resources or acquire equivalent renewable energy credits (RECs), or a combination of both, to meet the following annual targets:

at least 3 percent of its load by January 1, 2012, and each year thereafter through December 31, 2015;

at least 9 percent of its load by January 1, 2016, and each year thereafter through December 31, 2019; and

at least 15 percent of its load by January 1, 2020, and each year thereafter.

Eligible Renewable Resources.

For a renewable resource to be considered an eligible renewable resource under the EIA, the electricity must be produced from:

a generation facility powered by a renewable resource other than freshwater that commences operation after March 31, 1999, where the facility is located in the Pacific Northwest or the electricity is delivered into the state on a real-time basis;
certain incremental hydroelectricity due to efficiency improvements;
hydroelectricity from a project completed after March 31, 1999, where the generation facility is located in irrigation pipes, irrigation canals, municipal water pipes, and wastewater pipes;
qualified biomass energy;
a generation facility powered by a renewable resource other than freshwater that commences operation after March 31, 1999, where: the facility is located within a state in which the qualifying utility serves retail electrical customers, and the qualifying utility owns the facility in whole or in part or has a long-term contract with the facility of at least twelve months; or
incremental electricity resulting from certain capital investments at a qualified biomass energy facility.

"Pacific Northwest" has the same meaning as defined for the Bonneville Power Administration (BPA) in the Pacific Northwest Electric Power Planning and Conservation Act, and includes the states of Washington, Oregon, and Idaho, as well as certain parts of California, Montana, Nevada, Utah, and Wyoming.

Renewable Energy Credits.

A REC is a tradable certificate of proof, verified by the Western Renewable Energy Generation Information System, of at least one megawatt-hour of an eligible renewable resource generated by a facility that is not powered by freshwater. Under the EIA, a REC represents all the nonpower attributes associated with the power. A REC can be bought and sold in the marketplace to comply with annual renewable energy targets, and may be used during the year it is acquired, the previous year, or the subsequent year.

Accountability and Enforcement.

The Utilities and Transportation Commission (UTC) determines compliance with the requirements of the EIA for investor-owned utilities. The State Auditor's Office is responsible for auditing compliance with the EIA for consumer-owned utilities and the Office of the Attorney General is responsible for enforcing that compliance.

Business and Occupation Tax.

Washington's major business tax is the business and occupation (B&O) tax. The B&O tax is imposed on the gross receipts of business activities conducted within the state, without any deduction for the costs of doing business. The tax is imposed on the gross receipts from all business activities conducted within the state. Revenues are deposited in the State General Fund. There are several rate categories, and a business may be subject to more than one B&O tax rate, depending on the types of activities conducted. Current law authorizes multiple exemptions, deductions, and credits to reduce the B&O tax liability for specific taxpayers and business industries.

Public Utility Tax.

Income from utility operations is taxed under the Public Utility Tax (PUT) and is in lieu of the B&O tax; other income of the utility firm, e.g. retail sales of tangible personal property, is subject to the B&O tax. Unlike the B&O tax which pyramids, the PUT applies only on sales to consumers. Five different rates apply, depending upon the specific utility activity. The current rates, including permanent surtaxes, are as follows:

distribution of water, 5.029 percent;
generation or distribution of electrical power, 3.873 percent;
telegraph companies, distribution of natural gas, and collection of sewerage, 3.852 percent;
urban transportation and watercraft vessels under 65 feet in length, 0.642 percent; and
railroads, railroad car companies, motor transportation, and all other public service businesses, 1.926 percent.

Tax Preferences.

All new tax preference legislation is required to include a tax preference performance statement. The performance statement must clearly specify the public policy objectives of the tax preference, and the specific metrics and data that will be used by the Joint Legislative Audit and Review Committee (JLARC) to evaluate the efficacy of the tax preference. In addition, an automatic 10-year expiration date is applied to new tax preferences if an alternate expiration date is not provided in the new tax preference legislation.

Summary of Bill:

Eligible Renewable Resource Targets.

The annual renewable resource target of 15 percent of a qualifying utility's load ends January 1, 2028.

Beginning January 1, 2020, a qualifying utility is in compliance with an annual renewable resource target if:

the utility uses any combination of eligible renewable resources and clean energy resources that are not eligible renewable resources to serve 100 percent of its load; and
the utility makes carbon reduction investments in a dollar amount that is at least equal to the incremental cost of complying with an annual renewable resource target.

"Clean energy resource" includes:

hydroelectric, wind, and solar energy;
geothermal energy;
energy conservation measures, including combined heat and power;
nuclear energy; and
any other energy resource that has the potential to be deployed to serve electric load at the utility scale and is effectively carbon neutral.

"Carbon reduction investment" means an investment in support of eligible projects or actions that reduce, prevent, or remove from the atmosphere the emissions of greenhouse gases in the state.

Eligible Renewable Resources.

The definition of "eligible renewable resource" is expanded to include:

electricity from a generation facility powered by a renewable resource other than freshwater that commences operation after March 31, 1999, where the facility is located anywhere within the Western Interconnection;
beginning January 1, 2018, the portion of incremental electricity produced as a result of efficiency improvements completed after March 31, 1999, attributable to a qualifying utility's share of electricity output from hydroelectric generation projects marketed by the BPA; and
the environmental attributes, including RECs, from federal incremental electricity transferred to investor-owned utilities under the BPA's Residential Exchange Program.

Requirements for Meeting New Energy or Capacity Needs.

Beginning January 1, 2028, each electric utility must use clean energy resources to meet any new energy or capacity need. This requirement applies, at a minimum, to:

any new or increased ownership interest in a new or existing electricity generation facility or unit; and
any new or increased contractual commitment that obligates or allows an electric utility to purchase a specified amount of megawatts or megawatt-hours from an electricity generation facility or unit, or a specified percentage of an electricity generation facility or unit.

Exceptions.

An electric utility may procure one or more natural gas-fired generation units if such natural gas-fired generation is necessary to avoid potential conflicts with or compromises to the electric utility's obligation to comply with the mandatory and enforceable reliability standards of the North American Electric Reliability Corporation (NERC).

Upon its own motion or at the request of an electric utility, the UTC or the governing board of a consumer-owned utility, as applicable, may open an investigation to determine whether a utility's compliance with the requirements for meeting new energy or capacity needs is likely to compromise the utility's electrical system or its obligation to comply with the mandatory reliability standards of the NERC. The UTC or the governing board may issue an order temporarily exempting a utility from the requirements for meeting new energy or capacity needs. The order must require the utility to file a progress report within six months after an order granting an exemption is issued, or within an amount of time determined to be reasonable by the UTC in the case of an investor-owned utility, on achieving full compliance with the requirements.

Tax Preferences.

A business and occupation (B&O) tax credit and public utility tax (PUT) credit are established for persons who reduce greenhouse gas emissions through carbon reduction investment projects in an amount equal to the total amount of the person's carbon reduction expenditures.

A PUT deduction is established for light and power businesses in an amount equal to the cost of production of electrical energy or gas produced from renewable resources generated by new facilities on which construction or installation is begun after January 1, 2020, and before January 1, 2028.

A sales and use tax deferral is established for eligible renewable energy investment projects in an amount up to $1 million per project per person, beginning January 1, 2020, and until January 1, 2028.

A ten-year property tax exemption is established until January 1, 2028, for all buildings, machinery, equipment, and other personal property which are used primarily for the generation of electricity by new renewable energy generation facilities or additions to existing generation facilities.

Expiration Dates.

The new energy and capacity need requirements and the requirements of the Energy Independence Act are expired upon the effective date of any act by the Legislature which imposes a tax, fee, or other monetary price on the carbon content of fossil fuels and electricity sold or used within the state, such as a carbon tax or cap-and-trade program.