The 2026-27 Budget

California Public Utilities Commission’s
Implementation of AB 1207

Summary

The Governor proposes $2.2 million on an ongoing basis from the Greenhouse Gas Reduction Fund (GGRF) and seven positions for the California Public Utilities Commission (CPUC) to implement changes to the electric investor-owned utility (IOU) California Climate Credit pursuant to Chapter 117 of 2025 (AB 1207, Irwin). In our assessment, CPUC proposes to undertake activities that go beyond AB 1207’s statutory requirements. We recommend the Legislature (1) assess whether these additional activities are consistent with legislative intent, as well as whether they are high priorities for funding given the state’s serious budget challenges and (2) make corresponding changes to the level of staffing and funding provided, as relevant. We further recommend that—regardless of which activities the Legislature elects to fund—it authorize such funding on a limited-term rather than ongoing basis, as much of the workload appears to be short term in nature.

Background

Cap-and-Invest Program Aims to Limit the State’s Overall Emissions Through a System of Allowances. Since the cap-and-invest program was created through the passage of Chapter 488 of 2006 (AB 32, Núñez), it has served as one of the state’s core policies intended to help it achieve its ambitious greenhouse gas reduction goals. The program establishes a “cap” on aggregate emissions through the issuance of a limited number of permits to emit, also known as allowances.

State Gives Away Roughly Half of Available Allowances. Under current regulations, the California Air Resources Board (CARB) sells about half of the cap-and-invest allowances at quarterly auctions and the revenues are deposited into GGRF. The state gives away the remaining half of these allowances for free to industrial facilities, electric utilities, and natural gas suppliers.

Electric Utility Allowances Are Intended to Benefit Consumers. Electric utilities typically receive roughly one-quarter of the total number of annual allowances issued by CARB. These free allowances are intended to protect electric consumers from significant cost increases associated with the program. To that end, utilities are required to consign most of these free allowances to auction and use the proceeds to provide rebates to consumers, known as the “California Climate Credit.” These rebates currently are provided to residential customers each year in April and October. The amounts of these twice annual rebate amounts vary by utility, ranging from about $36 to $50 per residential customer for the three largest IOUs in the state.

AB 1207 Extended and Modified the Cap-and-Invest Program. In September 2025, the Legislature adopted AB 1207, which extended the cap-and-invest program through 2045. Assembly Bill 1207 also made various changes to the program, including to the California Climate Credit. It tasked CPUC with helping to effectuate some of these changes, as discussed below. (For more information on recent changes to the cap-and-invest program, see our December 2025 publication, Overview of New Updates to the Cap-and-Invest Program.)

Governor’s Proposal

Proposes $2.2 Million Ongoing for CPUC to Implement AB 1207. The Governor’s budget provides CPUC with $2.2 million ongoing from GGRF to support seven positions and a $756,000 annual contract to help comply with provisions in AB 1207. Specifically, the funding would support CPUC’s implementation of a requirement that instead of the current twice-yearly rebate, the California Climate Credit instead be provided to electric residential customers of IOUs “in no more than four high-billed months of each year to maximize customer electric bill affordability, or as otherwise directed by the commission to address extreme, unforeseen, and temporary circumstances.”

Assessment

Proposal Includes Activities That Appear to Go Beyond Statutory Requirements. In our view, CPUC could take a simple approach to implementing AB 1207’s changes to the California Climate Credit. For example, CPUC could elect to only change the specific months in which the credits are provided—switching them from April and October to four typically high-billed months (such as June, July, August, and September). (We note that many electric utilities charge higher rates during these four summer months, as they tend to be associated with higher electricity usage.) Instead of opting to take this simple approach, however, CPUC is proposing to implement a more complex methodology. Specifically, it proposes to undertake assessments of whether credits should be provided differentially based on various potential factors—such as climate zones, household income levels, and utility service territories—as well as whether they should be allocated volumetrically rather than as fixed amounts. (A volumetric rebate would be based on the amount of electricity used.) CPUC then envisions implementing a new credit structure based on the results of its assessments. As CPUC expects this new structure is likely to include credits that vary in size across different customer segments, it proposes to provide additional outreach—beyond typical efforts already conducted by the IOUs—to communicate its new, more complex and segmented approach to the public. CPUC also envisions needing to make ongoing adjustments to the structure of the credits over time. CPUC indicates it believes this more complicated approach is required by the statute’s direction “to maximize customer affordability.”

CPUC’s Proposed Approach to AB 1207 Implementation Raises Important Policy Choices… Assembly Bill 1207 does not make it clear how, if at all, the Legislature would like the California Climate Credit to vary based on factors such as geography or income, nor whether the Legislature would prefer the credits to be provided as fixed payments or
volumetrically based. Choices about how to distribute these credits have important implications, as they will affect the allocation of rebates that could be worth tens of billions of dollars in total through 2045. Given the high stakes involved, it will be important for the Legislature to consider whether it is comfortable with deferring decisions on the structure of the credits to CPUC, as is envisioned in this proposal, or whether it would like to provide CPUC with further statutory direction to guide its approach.

…And Also Presents Funding Trade-Offs. We expect that minimal, if any, new resources would be required for CPUC to undertake a simple approach to implementing AB 1207. However, the commission estimates needing significantly more resources—seven ongoing positions and a consulting contract—to implement its proposed, more complex approach. In light of the state’s budget condition—and as we discuss in greater detail in our recent publication, The 2026-27 Budget: Framework for Approaching the Natural Resources, Environmental Protection, and Agriculture Budget—we recommend the Legislature apply a very high bar to its review of new proposals. Moreover, we note that this specific request is proposed to be funded from the state operations category of GGRF. We suggest the Legislature be particularly cautious about making new commitments from this funding source, as it leaves less funding for GGRF expenditures, including statutorily identified programs and providing General Fund relief. (We discuss the specific considerations that apply to GGRF state operations in our recent publication, The 2026-27 Budget: Cap-and-Invest Expenditure Plan.)

Regardless of Preferred Approach, Weak Rationale for Ongoing Resources for CPUC’s AB 1207 Implementation. Even if the Legislature would like CPUC to analyze and administer a more complex California Climate Credit and finds that this approach is a high priority for limited state funding, we think that the workload should largely be short term in nature. In our view, making significant changes to the basic structure of the credit on a regular or ongoing basis is problematic. This is because frequent changes to the approach could increase customer confusion and make bills more unpredictable. While we expect that CPUC might need to reevaluate the specific amounts of credits that are provided each year, it is unclear why the commission would need to regularly rethink the core approach or implement significant changes. We expect that undertaking such relatively minor modifications should require a much-reduced level of staffing compared to the proposed level. Given that the exact level of ongoing resources that will be required is uncertain until the work is underway, supporting whatever activities the Legislature elects to fund on a limited-term basis would allow for time to ascertain what level of ongoing support might be needed in the future. If the state were to approve limited-term funding, CPUC could return to the Legislature with a future budget proposal to request ongoing resources once it has a clearer idea of its ultimate approach to implementing the California Climate Credit and the associated ongoing workload.

Recommendations

Decide Upon Desired Scope of Activities and Adjust Level of Resources Accordingly. We recommend the Legislature (1) assess whether the activities that appear to go beyond the required scope of AB 1207 are consistent with legislative intent, as well as whether they are high priorities for funding given the state’s serious budget challenges, and (2) make corresponding changes to the level of staffing and funding provided, as relevant. Specifically, if the Legislature’s vision is for the state to continue to provide a simple, fixed amount of California Climate Credit to all residential customers of each IOU—just provided in different months of the year—we recommend the Legislature provide minimal, if any, new resources to CPUC. If, instead, the Legislature would prefer that CPUC analyze and ultimately implement a more complex California Climate Credit, we recommend the Legislature approve the requested level of resources in the near-term.

Approve Resources on a Limited-Term Rather Than Ongoing Basis. Regardless of the Legislature’s preferred approach, we recommend approving resources on a two-year
limited-term basis. This is because the ongoing workload is uncertain but likely to be relatively small. To the extent CPUC determines it needs continued resources, it could request them through a future budget request. This approach would have the advantage of placing the commission and Legislature in a better position to assess the level of ongoing workload, as they would have the benefit of more details on the approach to the credit that CPUC ultimately decides to undertake.

Consider Making Statutory Clarifications, as Relevant. To the extent the Legislature has a clear vision for its preferred approach to implementing the California Climate Credit, we recommend it consider memorializing that vision in statute. Doing so would ensure its preferred approach is carried out. For example, if the Legislature would like households to receive fixed credits in specific, designated summer months, it could clarify that guidance. Alternatively, if the Legislature would prefer a different approach—such as larger credits for low-income customers or credits that are provided volumetrically—it could specify that alternative intent in statute. Absent such additional direction, the Legislature will largely be deferring to CPUC to make decisions about how to allocate this funding—which could total in the tens of billions of dollars over the next twenty years—to utility customers.