LAO 2005-06 Budget Analysis: General Government

Analysis of the 2005-06 Budget Bill

Legislative Analyst's Office
February 2005

Elimination of Energy-Related Agencies

Governor's Reorganization Plan

The Governor's Reorganization Plan Number One (GRP 1), related to reforming boards and commissions, proposes eliminating two energy-related agencies and moving their duties to the Energy Resources Conservation and Development Commission.

The Governor's Reorganization Plan Number One (GRP 1) focuses on reforming California's boards and commissions. As is discussed in detail in our companion document, The 2005-06 Budget: Perspectives & Issues (P&I), GRP 1 proposes moving or eliminating 88 of the more than 300 independent boards and commissions in California's state government, based largely on the work of the California Performance Review. In most cases, an existing state agency or department will assume the duties and responsibilities of the board or commission. According to GRP 1, its purpose is to "improve the productivity of state government by removing duplication, leveraging the state's resources, and streamlining decision-making."

The GRP 1 proposes to eliminate two energy-related agencies—the California Consumer Power and Conservation Financing Authority (CPA) and the Electricity Oversight Board (EOB). In both cases, the duties and responsibilities will be moved to the Energy Resources Conservation and Development Commission (CEC, commonly known as the Energy Commission).

Current Energy Agency Organization

There are multiple state agencies involved in implementing and overseeing the state's energy-related responsibilities, including the California Consumer Power and Conservation Financing Authority (CPA) and the Electricity Oversight Board (EOB). The CPA is currently inactive; the budget proposes $3.9 million for EOB in 2005-06.

At least seven state governmental entities are involved in implementing, overseeing, and managing the state's energy-related policies and responsibilities. These include the CEC, California Public Utilities Commission (CPUC), EOB, CPA, California Energy Resources Scheduling (CERS) division within the Department of Water Resources, the Division of Oil, Gas, and Geothermal Resources within the Department of Conservation, and the California Independent System Operator (ISO).

History of CPA. The CPA was created by Chapter 10x, Statutes of 2001 (SB 6x, Burton), to assure a reliable supply of power to Californians at

 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. Chapter 10x authorized CPA to issue up to $5 billion in revenue bonds to finance these activities, and directs that the operation of the authority sunset on January 1, 2007.

Funding authorized in the 2004-05 Budget Act for CPA ran out in October 2004, and the proposed 2005-06 budget contains no funding for CPA.

The CPA exercised only a small portion ($28 million) of its bonding authority, and when operations ceased, it had only one ongoing program. Through its Demand Reserves Partnership Program, CPA provided electricity at peak times to CERS, by paying other large electricity users to reduce their electricity use during these peak demand times. The Demand Reserves Program is in the process of being transferred to Pacific Gas & Electric, under the direction of CPUC. It should be noted that the California Infrastructure and Economic Development Bank also has the authority to issue revenue bonds to finance power plant construction.

History of EOB. The EOB was created by Chapter 854, Statutes of 1996 (AB 1890, Brulte), which deregulated California's wholesale electricity industry. The board was created to oversee ISO, which manages the transmission grid serving most of California, and the Power Exchange (PX), which for a time was the marketplace in which all electricity in the state was bought and sold. The EOB was also given very broad authority over ensuring reliability of the state's supply of electricity.

Central to the original role of EOB was oversight of the activities of ISO and PX and determining the composition of the governing boards of these two organizations. However, among the many developments associated with the 2001 energy crisis was the bankruptcy of the PX in March 2001, and the replacement of the EOB-appointed ISO stakeholder board with a board of gubernatorial appointees. Thus, EOB no longer carries out these original duties. However, subsequent legislation has given it authorization to conduct certain other activities. These include the following:

As a result of these statutory responsibilities, EOB's primary duty at this time is to act as a market monitor, overseeing the state's electricity market and initiating proceedings at FERC in response to market manipulation. The EOB has been a participant in over 400 proceedings at FERC and is a litigant in approximately 40 cases in the federal courts of appeal. In 2004-05 alone, EOB has been a party to settlements of $990 million for various overcharges.

The EOB has a staff of 22 positions and a 2005-06 proposed budget of $3.9 million, the majority of which comes from the Public Utilities Commis sion Reimbursement Account. The governing board currently has only one governor-appointed member and has not met since March of 2003. Since that time, EOB staff has reported directly to the Governor's office.

Issues for Legislative Consideration

The Governor's proposal to transfer the responsibilities of the California Consumer Power and Conservation Financing Authority and the Electricity Oversight Board to the Energy Resources Conservation and Development Commission raises a number of issues for legislative consideration. These include potential conflicts of interest that may result from the proposed reorganization and whether the reorganization is premature pending potential future changes in the energy market and a potential proposal to establish an energy agency. We recommend that the Department of Finance advise the policy committees charged with reviewing the Governor's reorganization plan on these issues.

We have previously raised the issue of reorganizing the state's energy agencies in light of a multiplicity of energy agencies, some of which have overlapping functions (see The 2002-03 Budget: Perspectives and Issues, page 113.) We therefore think that the energy agency component of GRP 1 looks at an issue that needs to be addressed. However, as part of the Legislature's overall evaluation of GRP 1, we think that it should consider a number of specific issues identified below regarding the proposed transfer of responsibilities of CPA and EOB to CEC.

Potential Conflicts of Interest. Moving the responsibilities of CPA and EOB into CEC raises two potential conflicts of interest.

First, moving CPA's bonding authority into CEC sets up a potential conflict of interest with CEC's responsibility for permitting electricity plant construction projects which meet a certain size. For example, if CEC approved bond financing for the construction of a power plant, it would then have a financial interest in that plant being constructed, even while at the same time it was responsible for deciding whether to issue it a permit for construction.

Similarly, moving EOB's electricity market monitoring duties into CEC raises potential conflicts of interest. Specifically, FERC requires that entities that monitor the electricity market (FERC recognizes EOB as such) be independent from any market participation or interest. However, CEC could be considered a market participant given some of its existing programs or if the transfer of CPA's bonding authority to it were to occur. For example, CEC's Renewable Energy Program provides financial incentives to both new and existing renewable energy producers, such as wind generation or solar energy. By providing such incentives, CEC may in effect be a market participant, because it has a financial and policy interest in encouraging certain energy production. Additionally, some of CEC's Public Interest Energy Research funds are used to support increased efficiency projects at existing power plants. This direct financial relationship with certain power plants may also make CEC a defacto market participant. Finally, the transfer of CPA's bonding authority to finance power plant construction is likely to be seen as making CEC a market participant. We believe this poses the most direct conflict of interest. If viewed as a market participant, CEC may not be able to perform EOB's current role as an electricity market monitor that represents the state in FERC proceedings.

If the responsibilities of either or both CPA and EOB were to move to CEC, it would be necessary to create a system of internal "firewalls" to separate CPA's financing ability from CEC's permitting responsibilities, as well as keeping separate EOB's oversight duties from CEC's electricity funding activities. The Legislature could establish these firewalls by enacting companion legislation to the Plan.

Uncertainty of California's Future Electricity Market Structure. Chapter 854, Statutes of 1996 (AB 1890, Brulte), was designed to move the state's wholesale electricity market, and ultimately the retail market, from a rate-regulated market to a more deregulated structure that would allow electricity customers more choice over their electricity provider. However, movement toward the goals of energy deregulation and consumer choice of energy provider was put on hold during the energy crisis. Since the energy crisis, the state has not resolved the question of what California's ultimate electricity market will look like. Accordingly, it may be premature to reorganize components of the state's electricity regulating agencies until legislative decisions are made as to what type of electricity market these agencies will regulate in the long term.

Recent Developments in the Electricity Market May Reduce the Demand for State Financing. In considering the issue of where the responsibility for financing power plant construction should lie in state government, the Legislature may also wish to consider how recent developments that may reduce the demand for public financing of power plant construction affect the state's interest in continuing to participate in such financing. Until recently, power plant developers were limited in their ability to obtain the revenue stream required for private financing of power plants because they were not able to acquire long-term contracts with utilities. However, in December 2004, CPUC adopted long-term energy procurement plans for the state's major public utilities, which will allow the utilities to more easily enter into long-term contracts with electricity generators. The increased market certainty from this decision may improve the financing market for new power plants. As the state moves towards a system in which the utilities have an ability to enter into long-term contracts for power gen eration, private financing should become more available and the need for public financing will correspondingly decrease.

Potential Savings Are Minimal. Eliminating the governing boards of CPA and EOB would result in minimal savings to the state. While it was in operation, CPA board members were paid a per diem plus expenses (the former chairman position was a full-time position, but that was eliminated in 2003-04). At this time, CPA is inactive and there are no ongoing expenses for board members. Similarly, the governing board of EOB has not met since March 2003, and EOB has spent less than $500 in board member expenses in the last three years. Transfer of the responsibilities of CPA may in fact increase costs to the state. Since CPA is currently inactive and there is no proposed spending in 2005-06, if CEC were to resume the activities of CPA, there would be additional costs for staff not included in the proposed budget.

Larger Energy Agency Reorganization Plan May Be Forthcoming. The California Performance Review Report proposes transferring the state's energy-related agencies and departments (including CEC, CPUC, EOB, and CPA) to a new, consolidated Infrastructure Department. The Governor has indicated that additional reorganization plans will be forthcoming, based on the work of the California Performance Review. This could include a plan that results in a larger energy agency reorganization than just transferring CPA and EOB to CEC. It would be premature to perform an initial reorganization of CPA and EOB if a larger, more comprehensive energy reorganization plan is forthcoming.

Recommend Department of Finance Advise Legislature on Issues Raised. In order that the Legislature may evaluate more fully the issues discussed above regarding the energy agency component of GRP 1, we recommend that the Department of Finance advise the policy committees charged with evaluating it on these issues.

Return to Resources Table of Contents, 2005-06 Budget Analysis