LAO 2003 Budget Analysis: Resources

Legislative Analyst's Office

Analysis of the 2003-04 Budget Bill


Coordinating State Agency Representation Before the Federal Energy Regulatory Commission

Several agencies represent state energy-related issues at the Federal Energy Regulatory Commission (FERC). In the sections that follow, we provide an overview of the agencies and the perspectives that they represent before FERC, report on the coordination of the agencies in their representation, and make recommendations on how the Legislature could improve the coordination.

Several State Agencies Represent the State Before FERC

Since deregulation of the state's electricity industry, the state's representation before the Federal Energy Regulatory Commission (FERC) has increased significantly. The state has several agencies that represent or have represented various state perspectives on state energy-related issues before FERC.

FERC Overview. The FERC is an agency within the United States Department of Energy that regulates the transmission and sale of wholesale electricity and natural gas and the transmission of oil by pipeline. It has jurisdiction over these issues because of the interstate nature of them.

Deregulation of California's Electricity Industry. The state's involvement with FERC has increased significantly over the last several years. This is a direct result of the state's decision to deregulate its electricity market starting in 1996. As a consequence of deregulation, a large portion of the investor owned utilities' (IOUs') generating assets were transferred to unregulated energy corporations (merchant generators), thereby creating a larger wholesale market for electricity in California. Wholesale electricity markets, and the merchant generators that sell electricity into these markets, fall under the regulatory jurisdiction of FERC. Deregulation, therefore, resulted in greater federal oversight of the state's electricity industry.

Overview of Agencies Representing State Before FERC. There are several state agencies responsible for representing the state before FERC. Some of these agencies have provided such representation for many years, while others' representation came about as a result of deregulation and/or the "energy crisis" that started in 2000. These agencies also represent different state perspectives, such as the perspective of a ratepayer or as a market participant. The following state agencies either represent or have represented state energy-related issues before FERC:

FERC Representation Reasonable Given Current Organization of State's Energy Agencies

We find that a number of state agencies represent similar state energy-related issues before the Federal Energy Regulatory Commission (FERC), but that informal efforts have been made to coordinate FERC representation resulting in reasonable coordination given the current organization of the state's energy agencies.

Supplemental Report Requirement. The Supplemental Report of the 2002 Budget Act directed various state agencies to submit to the Legislature reports on the perspectives they represent before FERC. The reports were to specifically identify (1) the state energy-related issues represented by the agency before FERC, (2) the personnel-years and budget resources dedicated to these activities, and (3) a description of each matter the agency was participating in at FERC as of November 1, 2002. The Legislative Analyst's Office was directed to review these reports and present its findings and recommendations in this Analysis.

Funding for FERC Activities. Figure 1 summarizes the state resources currently dedicated to FERC representation, as outlined in the reports submitted by the various agencies. Approximately 44 full-time equivalent positions and $7.4 million were reported to be expended annually on FERC representation. The majority of the funding for these activities comes from utility fees and electricity ratepayers. However, the General Fund supports the FERC-related activities at DOJ. No significant changes in these funding levels have been proposed in the 2003-04 Governor's Budget

Figure 1

State Resources Dedicated to FERC Representation

(Dollars in Millions)

Agency

Full-Time Positions

2002-03 Expenditures

Electricity Oversight Board

26

$3.7

California Energy Commission

2

0.1

Department of Justice

3

1.8

California Public Utilities Commission

14

1.4

California Energy Resources Scheduling

0

0.4

 Totals

44

$7.4

State Agencies Currently Represent Similar Issues Before FERC. Figure 2 provides a summary of the major state energy-related issues currently represented before FERC, by state agency. This figure shows that several agencies are involved in representing some of the same state energy-related issues before FERC. This is especially the case with regard to EOB and CPUC, both of which are involved in representing most of the state's major energy-related issues before FERC. Specifically, EOB and CPUC have each been involved in FERC proceedings related to state requests for refunds from generators, charges of market manipulation, and proposed changes in market design. Recently, the Attorney General has also been involved in the state's proceedings related to refunds from generators and market manipulation. The CERS' involvement before FERC has been limited to a few filings that are specific to its role as a major electricity buyer in the market. The CEC has not directly represented the state before FERC in recent years. 

Figure 2

Major State Energy-Related Issues Currently Represented Before FERC by Agency a

(As of November 1, 2002)

Energy Issue

EOB

DOJ

CPUC

CERS

Reducing and mitigating wholesale energy costs

ü

ü

ü

 

Energy market design and mitigation of market abuse

ü

ü

ü

 

Maintaining the reliability of the energy system

ü

 

ü

 

Matters relating to the California Energy Resources Scheduling division's market participation

ü

 

ü

ü

a Although the California Energy Commission has statutory authority to represent the state before FERC, it has not done so in recent years.

Some Coordination Among Agencies Identified. Despite the evidence that several state agencies represent similar state energy-related issues before FERC, evidence of some informal coordination mechanisms does exist. For example, EOB reports that it maintains ongoing communications with CPUC in relation to various FERC proceedings and in some cases litigates matters jointly with CPUC by dividing the labor between the two agencies. In addition, CEC, CPUC, EOB, and the California Consumer Power and Conservation Financing Authority (California Power Authority, or CPA) have been involved in an informal interagency working group that meets to coordinate input to FERC proceedings regarding redesign of the wholesale electricity market.

FERC Representation Reasonable Given Current Organization of State's Energy Agencies. Since deregulation of the state's electricity industry and the subsequent energy crisis, there has been a proliferation of agencies involved in implementing the state's energy policy. This has resulted in the current organization of the state's FERC representation, where several state agencies represent the state on similar energy-related issues before FERC. In some cases, this proliferation of energy agencies has resulted in evidence of duplicative efforts and efforts that work at cross-purposes. For example, there are currently several agencies responsible for administering energy conservation and peak-load reduction programs. (These include the CEC, CPUC, and CPA.) However, we have not found this duplication to be the case in general with the state's FERC representation. We think that the informal coordination mechanisms being used by the agencies representing the state before FERC are helping to minimize the duplication of efforts that could arise from the current organizational structure of the state's energy agencies.

Future of State's FERC Representation Depends on State's Energy Agency Organization

The best way to organize and coordinate the state's representation at the Federal Energy Regulatory Commission (FERC) in future years will be dictated by decisions made regarding the structure of the electricity market, as changes to the market structure could result in changes to how the state's energy agencies are organized. For the interim, we recommend the adoption of budget bill language and supplemental report language to direct the agencies representing state energy-related issues before FERC to establish a memorandum of understanding to ensure continued coordination of their activities. We also recommend designating a lead agency to coordinate the memorandum of understanding among the agencies.

Future of State's FERC Representation Depends on State's Energy Agency Organization. There continues to be significant uncertainty regarding the future structure of the state's electricity market. This has made it difficult to evaluate what role the state will have in overseeing the state's electricity market in the future and whether the current organizational structure of the state's energy-related agencies is appropriate. We think this is also the case for the organization of the state's FERC representation. For example, the state would likely have more involvement at FERC if it continues to pursue a deregulated electricity market and less involvement if it returned to a more regulated market. Given this, we recommend that the Legislature evaluate the organization of the state's energy agencies after key decisions have been made regarding the future structure of the electricity industry. This evaluation should also include assessing the current organization of the state's efforts in representing energy-related issues before FERC.

Recommend Interim Solution to Ensure Ongoing Coordination. For the near term, we recommend that the Legislature take a number of actions to ensure ongoing coordination of the agencies representing the state before FERC. First, we recommend the adoption of the following budget bill language directing the agencies involved in representing the state before FERC to develop a memorandum of understanding (MOU) to ensure continued coordination of their efforts. We think that the implementation of a MOU would provide a more formal means of coordinating efforts among agencies in order to avoid duplication of work and to avoid state agencies working at cross purposes, which would reduce effectiveness in representing the state's energy-related issues before FERC. A MOU was adopted in the 1998-99 Budget Act to coordinate FERC representation between CPUC and EOB, but is no longer valid. In addition, MOUs have been used to coordinate the activities of other state agencies and have been found to be helpful in achieving better coordination among agencies and avoiding duplication.

We would also recommend that the Legislature designate a lead agency that would be accountable for coordinating the MOU. We recommend that the following budget bill language be adopted in the budgets of all of the agencies representing the state before FERC:

In order to ensure that California's interests are represented effectively and consistently before the Federal Energy Regulatory Commission (FERC), the Electricity Oversight Board, Energy Resources Conservation and Development Commission, Department of Justice, California Public Utilities Commission, and the Department of Water Resources' California Energy Resources Scheduling division should enter into a memorandum of understanding (MOU) that sets forth their respective responsibilities in representing state energy-related issues before FERC. This MOU should specify the involvement of each state agency in representing the state before FERC and designate a lead agency.

Second, we recommend the adoption of the following supplemental report language requiring the designated lead agency, in conjunction with the other agencies, to submit a report on the implementation of the MOU to the Legislature by December 1, 2003:

The departments representing the state before the Federal Energy Regulatory Commission (FERC) shall submit to the Joint Legislative Budget Committee and the fiscal committees of both houses of the Legislature by December 1, 2003 a copy of its memorandum of understanding (MOU) that sets forth the respective responsibilities of each party in representing state energy-related issues before FERC. This should include descriptions of all mechanisms used to coordinate efforts as to comply with the MOU.


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