LAO 2004-05 Budget Analysis: General Government

Analysis of the 2004-05 Budget Bill

Legislative Analyst's Office
February 2004

California Consumer Power and Conservation Financing Authority (8665)

The California Consumer Power and Conservation Financing Authority (California Power Authority, or CPA) was created by Chapter 10x, Statutes of 2001 (SB 6x, Burton), to assure a reliable supply of power to Californians at just and reasonable rates, including planning for a prudent energy reserve. The CPA was also created to encourage energy efficiency, conservation, and the use of renewable resources. The CPA is authorized to issue up to $5 billion in revenue bonds to finance these activities. Chapter 10x also directs that the operation of the authority sunset on January 1, 2007.

Potential Role of California Power Authority

The budget proposes eliminating the California Consumer Power and Conservation Financing Authority (CPA). In the sections that follow, we find CPA has been unable to finance any new power plants. However, we find that this is largely due to market conditions affecting the entire market for new power plant development and that there continue to be significant uncertainties regarding the adequacy of the state's energy supply to meet future energy demand. Given this, we find the elimination of some of CPA's functions to be premature. We provide options for keeping some of these functions intact until future policy decisions are made that assure sufficient supply will be available to meet the state's energy demands. These options include either retaining these functions in CPA or eliminating CPA and transferring its functions to other existing state agencies.

Budget Proposes Elimination of Authority

The budget proposes elimination of the California Consumer Power and Conservation Financing Authority (CPA). The CPA was created to assure a reliable energy supply was available to meet the state's electricity demands. However, due to market conditions, it has not financed any electricity generation. Nevertheless, we find that CPA has contributed to the state's energy conservation and planning efforts.

Budget Proposes Elimination of Authority. The budget proposes to eliminate CPA in the budget year. The administration has indicated that the decision to eliminate CPA was based on a number of factors. These include findings that CPA has had limited success in fulfilling its statutory objectives and that CPA has not achieved financial self-sufficiency as intended when it was created. In addition, the administration is of the view that other state energy agencies and private entities already perform activities similar to that performed by CPA.

Specifically, the proposal would eliminate three positions and five contract positions and an administrative budget of $3.4 million (special funds). The budget provides $424,000 to CPA through September 30, 2004 for purposes of winding down the agency, including finishing remaining work and terminating existing contracts.

The budget proposes to eliminate CPA's bonding authority (almost $5 billion remaining). Furthermore, the budget proposes terminating all of CPA's current work in progress. This work includes an initiative to install solar energy on state buildings and background work on financing several peak electricity generation projects and a base load power plant in the San Diego area. Finally, the budget proposal terminates CPA's Demand Reserves Partnership Program that provided 250 megawatts of energy conservation during the summer of 2003.

What Was the Intended Role of CPA? The CPA was established during the height of the energy crisis that started in 2000. The crisis was partially the result of electricity supply that did not keep pace with growing demand, which caused energy prices to reach historically high levels and some areas of the state to experience power blackouts. The CPA was created in statute with the broad charge of assuring a reliable supply of power to Californians at just and reasonable rates, including planning for a prudent energy reserve. In order to meet these goals, CPA was au thorized to purchase, lease, or build new power plants using its revenue bonding authority to supplement private and public sector power supplies, and was granted eminent domain powers. These significant powers reach beyond those of other state energy agencies. It was intended that CPA would be able to exercise these powers in the event that the market did not produce enough electricity to serve all of the state's needs.

In addition to these core powers, CPA was also charged with encouraging energy conservation and the use of renewable energy sources. It was also given the authority to finance natural gas transportation and storage projects recommended by the California Public Utilities Commission (CPUC), as well as to provide financing to retrofit old and inefficient power plants. Finally, CPA was also required to develop an energy resource investment plan for California.

The CPA Has Not Financed New Power Plants. Since CPA was established in 2001, it has been unsuccessful in financing any new power plants, although it has been in discussions with power plant developers regarding potential financing. This has been the result of the lack of a market for new long-term power contracts in California since the Department of Water Resources' authority to sign long-term contracts on behalf of the utilities terminated at the end of 2002. Without the ability to acquire long-term contracts to finance projects, CPA has not been able to assure the revenue stream required for bond financing. This has been compounded by the uncertainty in the financial markets regarding energy-related investments, caused by the bankruptcy of Pacific Gas and Electric Company and a handful of other energy companies, including Enron. These factors—outside of CPA's control—have affected the entire market for new power plant development.

The CPA Has Implemented Energy Conservation Programs. Despite a lack of success in financing new power plants, CPA has had success in implementing projects that encourage energy conservation. First, CPA established the Demand Reserves Partnership Program that contracts with commercial and industrial customers to conserve energy during peak energy usage periods (typically the summer). This program contributed about 250 megawatts of energy conservation during the summer of 2003 at relatively cost-competitive prices. Second, CPA issued $28 million of its revenue bond authority in April of 2003 to support the California Energy Commission's (CEC's) Energy Efficiency and Conservation Loan Program. This program provides loans to schools, cities, counties, non-profit hospitals, and public care institutions to make energy conservation improvements on their facilities. The CEC has already awarded approximately 70 percent of the bond sale in the form of loans to qualified recipients.

The CPA Has Contributed to State Planning Efforts. The CPA has also been a significant contributor to the state's Energy Action Plan. The Energy Action Plan is a blueprint developed in conjunction with CPUC and CEC for ensuring adequate, reliable, and reasonably priced electricity and natural gas for California's consumers. The plan includes specific actions the state should take to optimize energy conservation, provide for a reliable and affordable electricity supply, promote renewable energy resources, upgrade the transmission system, promote distributed generation, and ensure a reliable supply of natural gas. This effort represents a significant improvement in the coordination of activities among the state's main energy agencies. The CPA had a significant role in developing a target for the level of reserves to use when planning for the state's future electricity demand.

Adequacy of Long-Term Energy Supply Remains Uncertain

Construction has been suspended or delayed for several new power plants in California that have been approved for construction. It is also not clear whether the utilities' plans to procure energy that have been approved by the California Public Utilities Commission provide sufficient incentives for new power plants to be built to meet future power demands.

Several New Approved Power Plants Are Not Being Built. Since the onset of the energy crisis in 2000, over 8,000 megawatts of additional electricity supply from new power plants has come on-line. Projects supplying another 2,600 megawatts are currently under construction and scheduled to come on-line over the next few years. Despite this, 13 projects (supplying 7,000 megawatts) that are already permitted by CEC have either delayed or suspended construction activities and it is unknown when many of these projects will resume construction. Many of these delays are caused by the inability of companies to obtain long-term contracts for the power to be generated by the plants they plan to build. Therefore, without an assured revenue stream, these plants have had a difficult time acquiring financing resulting in construction suspension or delays.

Also contributing negatively to the amount of power generation available in the state is the fact that many of the state's natural gas-fired power plants are old. Nearly 50 percent of the state's gas-fired generation is from plants that are over 30 years old. These plants are less efficient and more expensive to run than newer power plants. Given this, it is likely that many of these plants will be retired for economic reasons by their owners. If new generation or conservation efforts are not planned to supplant these old plants as they retire, this could also have a negative impact on the power supply available to meet future energy demand.

Unclear Whether Current Energy Procurement Plans of the Utilities Adequately Address Long-Term Demand. The CPUC recently approved interim procurement plans for each of the utilities as directed by Chapter 835, Statutes of 2002 (AB 57, Wright). These procurement plans are intended to ensure the utilities have enough resources to provide a reliable supply of energy for their customers at just and reasonable rates. The utilities can meet their projected demand by various means, including increasing energy conservation, signing additional contracts for electricity, and/or building new power plants. While these interim plans address how the utilities will meet their needs in the short term, it is not clear whether they provide sufficient assurances for meeting long-term electricity demand. For example, CPUC has only approved procurement plans for demand projected through 2005, meaning that the utilities have no assurances that they will be compensated for long-term contracts or construction costs for new plants that provide power beyond 2005. Since it takes several years to plan and construct an average sized base load power plant, it is not clear that the incentives to build new generation will be sent to the market in time to deliver energy supply when needed.

Elimination of Some of CPA's Functions Premature

We find the elimination of some of the California Consumer Power and Conservation Financing Authority's (CPA's) functions premature given the uncertainty that still exists regarding the adequacy of the state's long-term energy supply. Given this, we provide the Legislature with two options for retaining certain of CPA's functions, either retaining these functions in CPA provided it is self-supported or eliminating CPA and transferring these functions to other existing state agencies.

Elimination of Some of CPA's Functions Premature. Until greater assurances are provided that sufficient generation will be available to meet future energy demand, we think CPA's broad authority to finance power plants to supplement private and public sector power supplies, if needed using its revenue bonding authority, remains valuable. This authority is unique to CPA. On the other hand, there are other state agencies in addition to CPA involved in promoting energy conservation and renewable energy, including CEC and CPUC.

In spite of the uncertainty surrounding the adequacy of the state's long-term energy supply, we find that the budget proposal to eliminate CPA is not accompanied by a plan that provides adequate assurances that electricity generation will be built to meet future energy demands. Given the incompleteness of the budget proposal in addressing the avail ability of adequate supply and/or conservation to meet the state's future energy demand, we think the Legislature may wish to retain some of CPA's functions. We offer two options for the Legislature to consider as alternatives to the Governor's proposal to eliminate the authority.

Option One: Retain CPA, But Only as a Self-Supporting Entity. The CPA has been criticized over the past year for failing to reach financial self-sufficiency in supporting its operations. This has been largely a result of CPA's inability to finance any significant electricity generation projects due to market conditions. (The CPA receives an administration fee when financings are successful.) Nevertheless, CPA estimates that it will generate approximately $1.2 million in revenues from its administration of its Demand Reserves Partnership Program in the current year.

We think that CPA could continue to provide a useful role at a level where its operations are supported solely by revenues it generates. This option would allow the state to continue to retain the authority to augment energy supplies if needed, until adequate incentives are in place to assure a sufficient energy supply to meet future demand. We think the role of CPA should be evaluated as policy changes continue to be made in the future.

Option Two: Transfer Certain Functions to Other Existing Agencies. As an alternative to retaining CPA as mentioned above, the Legislature could eliminate CPA as proposed by the Governor. However, if CPA were eliminated, we would recommend transferring some of its functions to other existing agencies.

Specifically, we would recommend transferring the bonding authority so that the state could retain its ability to finance power plants if needed. The CPA's bonding authority could be transferred to an existing financing authority which has a consistent mission with CPA's bond financing authority (for example, the California Infrastructure Bank). We do not think that it would be appropriate for either CEC or CPUC to assume this function given their responsibilities for approving power plants and regulating the investor owned utilities, respectively.

Furthermore, if CPA were eliminated, we would also recommend transferring CPA's Demand Reserve Partnership Program to another entity so that it may continue to provide energy savings over the next several years (CPA's program currently has a contract to deliver energy savings that does not expire until 2007). This program could be transferred to another existing state agency involved in promoting energy conservation, such as CEC.

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