Legislative Analyst's Office

Analysis of the 2001-02 Budget Bill

Energy-Related Proposals

The Governor's budget proposes a number of augmentations totaling $1.2 billion ($1.1 billion General Fund) related to the state's energy crisis (see Figure 1). These proposals would add nearly 100 positions across six departments. These proposals are summarized below.

Set-Aside $1 Billion for Energy Initiatives. The largest share of proposed expenditures is for a $1 billion General Fund set-aside for energy initiatives to address the energy crisis. Proposed budget bill language specifies that (1) the funds are for "projects awarded by the Governor's Clean Energy Green Team" and (2) allocation of the amount appropriated will be subject to legislation. No further information is available on this set-aside at this time.

Rising Department Energy Costs. The budget also proposes $50 million ($25 million General Fund) for the increased costs departments will face due to higher natural gas and electricity costs.

Indirect Emission Offsets for New Power Plants. Both the Air Resources Board (ARB) and Department of Transportation (Caltrans) propose emission offset programs that are at least partly designed to support efforts to build new power plants. The $100 million General Fund ARB proposal would establish a grant program to replace or retrofit older diesel engines to provide emission offset credits for proposed "peaker" power plants that would operate during times when electricity demand is high, such as the summer months. The $20.3 million Caltrans proposal would upgrade its car fleet by retrofitting diesel engines and replacing cars with "greener" alternatives, partly to provide emission offset credits that could be used for new power plants.

Figure 1
Energy-Related Budget Proposals
2001-02 Governor's Budget
(Dollars in Thousands)
Proposal General Fund Special Funds Positions
Energy Initiatives (Item 3365)
Set-aside for energy projects


Air Resources Board (Item 3900)
Diesel engine grant program to offset new power plant emissions


Utilities Costs (Item 9911)
For increased state department costs for natural gas and electricity



Department of Transportation (Item 2660)

Diesel retrofit and green fleet program to offset emissions from new power plants

Energy Commission (Item 3360)
Long Term Energy Baseload Reduction Initiative: electricity market analysis, Renewable Energy Program administration, and energy efficiency standards update


2,626 8
Power plant siting program


Alternative energy grant programs

Subtotals (Item 3360)


($3,626) (27)
Department of Justice (Item 0820)
Investigate electricity generators and natural gas suppliers


Public Utilities Commission (Item 8660)
Green Team activities


Track San Diego Gas and Electric costs to purchase electricity

$682 4
Subtotals (Item 0820)


($682) (38)
Electricity Oversight Board (Item 8770)
Augment and reorganize staff by function to improve market oversight

$983 7
Green Team activities


Contract funds for the University of California Energy Institute for market research

Reauthorize expired positions

249 3
Contract funds for legal services

Subtotals (Item 8770)


($1,807) (14)
Totals $1,138,584 $51,447 98.5

Administrative Activities. The remaining proposals, totaling $19.7 million ($13.6 million General Fund), would fund departments' administrative efforts to oversee and investigate the electricity market.

LAO Recommendations. We do not raise concerns with the Caltrans, Department of Justice, or PUC proposals. For the remaining departments, our recommendations appear in our analyses of those budget bill items. Briefly:

Recent Legislation

In addition to these proposals in the Governor's budget, the Legislature convened in a special session on electricity beginning in January. At the time this analysis was written, the special session was continuing and the Legislature had approved several bills related to the state's electricity crisis.

State Purchases of Electricity. On January 17, 2001, the Governor declared a state of emergency in response to the financial condition of Pacific Gas and Electric (PG&E) and Southern California Edison (SCE). The Governor ordered the Department of Water Resources (DWR) to buy electricity for these two utilities to meet customer demand. Under this emergency authority, DWR spent $150 million buying electricity.

Subsequently, two special session bills were enacted authorizing the state to purchase and sell electricity. These bills are:

As the state began negotiating cheaper long-term contracts, pursuant to AB 1x, DOF submitted a deficiency request to the Legislature for an additional $500 million. Thus, the state had committed to $1.6 billion from the General Fund to buy electricity at the time this analysis was written.

Assembly Bill 1x also authorized DWR to issue revenue bonds to help finance the cost of the state's electricity purchases. These bonds would be used in part to reimburse the General Fund for the funds already committed for this purpose, presumably before the end of the current year. In addition, the bonds would prospectively finance the difference between the actual cost DWR pays for electricity and the rate consumers pay. A portion of ratepayers' payments will be designated to pay off these bonds.

Other Legislation. In addition to these two bills, the Legislature has also revised some provisions of the original restructuring legislation. Chapter 1x, Statutes of 2001 (AB 5x, Keeley), replaced the 26-member stakeholder board of ISO with a five-member board of gubernatorial appointees. Board members cannot be affiliated with any participants in the electricity market and do not require Senate confirmation.

Chapter 2x, Statutes of 2001 (AB 6x, Dutra), prohibits the utilities from selling any more power plants until January 1, 2006. Remaining utility-owned power plants are to be dedicated to providing electricity to utility customers.

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