Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

Petroleum Violation Escrow Account

Background

In the early 1970s, the Organization of Petroleum Exporting Countries embargoed crude oil exports to the United States. In response to this severe restriction in oil supply, the federal government regulated oil prices from 1973 to 1981 to prevent price gouging by domestic crude oil producers and to ensure fair allocation of oil resources. The federal Department of Energy was responsible for identifying violations, recovering overcharges, and obtaining restitution for wronged parties.

Settlements. Through the 1980s, several overcharge cases against domestic oil producers were settled or decided in court.

• The first case was settled in 1981. Standard Oil of California (Chevron) paid a $50 million fine for oil overcharges, of which California received $6.6 million.
• n 1983, California received $19 million in settlement funds pursuant to the Warner amendment of the federal budget act.
• In 1986, Exxon Corporation paid $2.1 billion in restitution for overcharges, of which California received $207 million based on historical usage patterns of petroleum products.
• Also in 1986, the Stripper Well settlement resulted from charges that producers miscertified oil to avoid government price restrictions. California received $169 million of the $993 million that went to states, again based on historical usage patterns.
• California also received $25 million from subsequent smaller settlements.

In total, California has received $426 million from these settlements.

Allowable Uses of Funds. The allowable uses of overcharge funds varied by case or settlement and included programs such as the following:

• Public transportation, computerized school bus routing, and ridesharing.
• Building energy audits, energy assistance, and home weatherization.
• Highway, bridge, and airport maintenance and reduction in airport user fees.
• Specified federal programs.

In general, the penalties levied against oil producers were intended to provide restitution to victims of the oil overcharges. Expenditure of the funds was required to benefit energy consumers and could not supplant state funds already allocated for energy-related programs. (The Energy Commission is the state agency responsible for certifying that proposed projects meet these standards for allowable uses of the Petroleum Violation Escrow Account [PVEA] funds.) The courts also specified that interest earned on these funds must be used for the same purposes.

Expenditure of PVEA Funds. From 1985-86 through the current year, the state has spent $624 million in PVEA funds for program and administrative costs (see Figure 1, next page). This includes the $426 million in settlement funds the state received over the years plus interest earned on these funds. Projects and programs have addressed many issues, including the following:

• Transportation. Traffic flow improvements, transit capital improvements, traffic signal management, and ridesharing vanpool loans.
• Fuel. Fishing fleet fuel efficiency, school buses that use cleaner burning fuels, and alternative fuels demonstration projects.
• Low-Income Persons. Low-income energy assistance and weatherization.
• School Assistance. Air conditioning for year-round schools.

Funding for these projects and programs has been allocated to several departments. The Energy Commission and the Department of Transportation have been the principal recipients of PVEA funds. The California Conservation Corps, the Department of Community Services and Development (formerly the Department of Economic Opportunity), the Air Resources Board, and the Office of Planning and Research also received funding.

Administrative Costs. In addition to these program expenditures, the Energy Commission compiled data from available information for PVEA funds allocated to administrative costs. The Energy Commission incurred the large majority of administrative costs--$23 million of $30 million. These administrative costs are approximately 5 percent of total PVEA expenditures.

Interest Repaid to PVEA. As mentioned above, the court settlements and decisions required that states use interest earned on PVEA funds for the same energy-related purposes as the settlement funds allocated to them. In 1996, however, the Department of Finance (DOF) audited PVEA and found that the account had not been credited with interest for settlement monies that had been transferred or appropriated to other funds. This "loss" of interest to PVEA was related to transactions involving loans to the General Fund and the deposit of interest earned on PVEA funds into the General Fund and the Public Transportation Account rather than PVEA.

The DOF audit identified a total of $43 million that should have been credited to PVEA. The full amount identified by DOF, plus interest accrued since the 1996 DOF audit, has been repaid to PVEA. As shown in Figure 2, the total amount repaid was $56 million—$33 million from the General Fund and $23 million from the Public Transportation Account.

Current Status of PVEA

The 2001-02 Governor's Budget indicates that PVEA has a $3.1 million balance at the beginning of the fiscal year. In the 1990s, settlement revenues allocated to the states from the federal government declined to just a few million dollars as more and more overcharge cases concluded. The Governor's budget shows that in 2001-02, for the first time, California will receive no new settlement funds. Thus, the only budget-year revenues will be interest earned on the $3.1 million fund balance and on PVEA monies transferred to other funds for projects approved in prior years. The budget projects this interest income will total $3.7 million, providing $6.8 million in total resources for the budget year (see Figure 3).

The Governor proposes expenditures totaling $5.8 million—$967,000 for Energy Commission administrative costs and $4.9 million for the Department of Community Services and Development to fund low-income energy assistance and weatherization programs. This leaves $1 million in uncommitted resources at the end of the budget year.

The Future of PVEA

We recommend that the Energy Commission report to the Legislature, prior to budget hearings, on a multiyear projection of expected (1) administrative costs, based on schedules for current and proposed projects, and (2) interest earnings, so that the Legislature can determine how many years PVEA can be expected to provide some funding for energy-related projects.

With no further settlement revenues expected, the state cannot con-tinue to fund many projects from PVEA. Two other factors influence the amount of PVEA funds that will be available for projects: Energy Com-mission administrative costs and interest earnings. The Energy Commis-sion currently oversees approximately 300 active PVEA-funded projects. As these projects are completed, the commission’s administrative expenses should decline, but there will still be administrative costs over the next several years. Also, funds in PVEA will continue to earn interest until the funds are actually spent. The commission should be able to provide the Legislature a multiyear projection of expected (1) administrative costs, based on schedules for current and proposed projects, and (2) interest earnings. Consequently, we recommend that the commission report prior to budget hearings on these two factors. With this information, the Legis-lature can determine how many years PVEA can reasonably be expected to provide some funding for energy-related projects.