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.

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.

• Energy Commission—$10 Million ($6.4 Million General Fund). Long-Term Energy Baseload Reduction Initiative, which includes electricity analysis, renewable energy, and energy efficiency components. Continuation of current-year funding for (1) expected workload in the power plant siting program and (2) solar and distributed generation grant programs.
• Department of Justice—$4 Million General Fund. Investigation of electricity generators and natural gas suppliers for evidence of collusion, market manipulation, or other unfair business practices.
• Public Utilities Commission—$3.4 Million ($2.7 Million General Fund). Continuation of current-year funding for Green Team responsibilities, promoting self-generation, identifying transmission system congestion problems, and improving energy efficiency programs currently administered by the utilities (pursuant to Chapter 329, Statutes of 2000 [AB 970, Ducheny]). Implementation of Chapter 328, Statutes of 2000 (AB 265, Davis), which requires the Public Utilities Commission (PUC) to track San Diego Gas and Electric costs to purchase electricity above the consumer rate cap and determine the reasonableness of those costs.
• Electricity Oversight Board—$2.3 Million ($0.5 Million General Fund). Expand oversight of the electricity market with additional staff, continuation of Green Team funding provided by Chapter 329, and contract funds for research purposes and legal activities related to proceedings before the Federal Energy Regulatory Commission.

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:

• We withhold recommendation on the proposals for (1) the $1 billion energy initiatives set-aside, (2) $50 million for departments' utilities costs, (3) $3.1 million for the Energy Commission's power plant siting activities, and (4) $0.5 million in consultant funds for the Electricity Oversight Board, pending receipt and review of information justifying the proposed expenditures (this chapter).
• We recommend that the Legislature delete the $100 million ARB diesel engine grant proposal from the budget bill and adopt the proposal in separate legislation if the Legislature wishes, given the policy implications of trading off emission reductions for additional power plant capacity (see "Resources" chapter).
• For the Energy Commission, we recommend that the Legislature (1) approve for one year only the $2.8 million request for General Fund support to continue survey activities regarding electricity use and (2) change the fund source for specified energy efficiency and grant proposals (this chapter).

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:

• Chapter 3x, Statutes of 2001 (SB 7x, Burton). Appropriated $400 million from the General Fund for DWR to purchase electricity for 12 days beginning January 19 (the day the statute became effective), and sell it at cost to the Independent System Operator (ISO), municipal utilities, or directly to utility customers.
• Chapter 4x, Statutes of 2001 (AB 1x, Keeley). Authorized DWR to enter into long-term contracts to purchase electricity, authorized the sale of revenue bonds (discussed further below), appropriated $500 million from the General Fund for the state to continue purchasing electricity, and authorized a ten-day notification process to the Legislature for deficiency requests from the Department of Finance (DOF) for additional funds.

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.