Legislative Analyst's Office

The 2002-03 Budget Bill:
Perspectives and Issues

Reorganizing California's Energy-Related Activities

Does California Need to Reorganize Its Energy-Related Activities, Given Its Recent Deregulation of Electricity, 2001 Electricity Crisis, and Multiplicity of Different State Energy-Related Entities?


California has a number of different state departments, boards, and commissions involved in implementing, overseeing, and managing the state's various energy-related policies and responsibilities. Some of these entities are long-standing, while others have come into being only recently as a result of electricity deregulation and the 2001 electricity crisis.

This multiplicity of agencies, and evidence of certain duplicative activities and other problems, suggests that it is time for the state to "stand back" and assess how its various energy-related entities are organized and interacting with one another.

This review describes the state's various energy-related activities and entities and discusses certain observed problem areas associated with them. It then suggests steps and organizational principles that may be helpful to the Legislature as it considers how to most effectively and efficiently organize and coordinate the state's energy-related activities.


Over the years, a number of different state agencies have been involved at any one time in implementing, overseeing, and managing the state's various energy-related policies and responsibilities. Given this, ensuring that California's overall energy-related activities are consistent with one another, well coordinated, and handled in an effective and efficient manner is not a new challenge. What is new is that the energy market has changed significantly since deregulation in 1996, and the state has undertaken new responsibilities in the energy area. Some of these include large-scale electricity buying and statewide energy resource planning. In addition, new state entities to carry out these tasks have come into being.

This analysis deals with the issue of effectively reorganizing and coordinating the state's various energy-related activities, especially in light of deregulation. Specifically, in considering the state's energy-related agencies, we:

Characteristics and Organization of California's Current Energy-Related Entities

Several agencies play a role in developing, implementing, and managing the state's energy-related policies. These include the:

Figure 1 shows the total state funding for the above energy-related entities as reported in the 2002-03 Governor's Budget. It indicates total funding of $680 million for the prior year, an estimated $471 million in 2001-02, and a proposed $314 million in 2002-03.

Figure 1

Summary of Total State Spending on
Energy-Related Activities, by Entity

All Funds (In Millions)





California Energy Entity

California Energy Commission




California Public Utilities Commission
(Energy Division)




Electricity Oversight Board




California Power Authoritya




California Energy Resources Scheduling
(division within Department of Water Resources)




Division of Oil, Gas, and Geothermal Resources
(division within Department of Conservation)








a   The support for the California Power Authority is a General Fund loan.


As discussed below, these state energy-related entities vary from one another in a variety of respects. Some, for example, were established nearly a century ago, while others are relatively new. Likewise, some have very broad responsibilities, while the mission of others is narrower in scope. However, because all have energy-related duties and responsibilities, each merits review from the perspective of coordinating and effectively organizing the state's energy-related activities. Figure 2 summarizes selected activities and responsibilities of the state's energy-related agencies. Information is also included on the ISO.

Figure 2

Selected Activities and Responsibilities of the
State's Energy-Related Agencies









Representing state at FERCb








Promoting energy








Forecasting electricity demand








Licensing generators








Promoting renewable resources








Planning natural gas infrastructure








Planning transmission infrastructure








Conducting integrated
resource planning








Monitoring the electricity market








Monitoring/planning system  reliability








a   The ISO is not considered a state agency.

b   Federal Energy Regulatory Commission.


California Energy Commission

History and Purpose. The CEC (formally the Energy Resources Conservation and Development Commission) was created in 1974 following the Mid-East oil embargo and rapidly rising fuel prices of the previous year. The CEC was initially established to address the many energy challenges facing the state at the time, and act as the state's primary energy policy and planning organization.

Governing Structure. A board of five commissioners, appointed by the Governor and confirmed by the Senate, governs the CEC. The Governor appoints a chair and vice chair every two years and these appointments require Senate confirmation. The commissioners represent expertise in the fields of engineering, economics, and environmental protection, except for one commissioner that is required, by law, to be selected from the public at large. The Governor also appoints a Public Advisor who is responsible for ensuring that the public is adequately represented in all of CEC's decision making activities.

Basic Duties and Responsibilities. The CEC is the primary department that implements the state's energy policy. Its primary responsibilities include:

Funding Structure. The CEC receives funding for the majority of its activities from an electricity consumption surcharge collected by the electric utilities through customer billings. This surcharge amounts to around 40 cents per month for an average residential customer. The CEC also receives some funding from other energy resources surcharges collected to administer specific public-purpose programs. In addition, it also receives a limited amount of federal funding to finance specific programs.

California Public Utilities Commission (Energy Division)

History and Purpose. The CPUC was established by constitutional amendment as the Railroad Commission in 1911. A year later, the Public Utilities Act was passed, expanding the CPUC's regulatory authority to include electricity, natural gas, telephone, and water companies. The CPUC was created as the primary agency responsible for regulating privately owned companies that provide basic services to California residents. It is also responsible for assuring that utility customers receive safe, reliable service at reasonable rates.

Governing Structure. Five commissioners appointed by the Governor govern the CPUC. The commissioners serve six-year staggered terms and are confirmed by the Senate. The Governor also appoints one individual to serve as the CPUC's President. In addition, the Governor is responsible for appointing the director of the CPUC's Office of Ratepayer Advocates, which represents the interests of consumers in decisions made by the CPUC.

Basic Duties and Responsibilities. With regard to electricity and natural gas utilities, the CPUC is responsible for the following:

The CPUC is also responsible for overseeing energy efficiency programs and programs that provide reduced utility rates for low-income customers. It oversees the merger or reorganization of utility corporations and also enforces the California Environmental Quality Act for construction of energy facilities. The CPUC is additionally responsible for representing California's interests in utility proceedings at the federal government on issues that affect California utility rates or services.

Funding Structure. Fees collected from the utility industries that the CPUC regulates support its programs. In 2000-01, $25 million was collected from electric corporations and $13 million from gas corporations to partially support the Energy Division.

Electricity Oversight Board

History and Purpose. Chapter 854, Statutes of 1996 (AB 1890, Brulte), the statute that restructured California's electricity industry, created the EOB. The EOB was established to oversee both the newly created ISO and Power Exchange (PX) in carrying out their role in ensuring the reliability of the electricity supply to the state. The EOB also was to serve as an appeal board for decisions made by the ISO's governing board.

Governing Structure. The EOB is comprised of five members. Three of these members are appointed by the Governor and confirmed by the Senate for three-year staggered terms. The other two members include one representative each from the Assembly and Senate. The legislative members are nonvoting members.

Basic Duties and Responsibilities. As noted above, the original role of the EOB was to oversee the activities of the ISO and the PX, as well as determine the composition of the governing boards of these organizations. However, among the many developments and changes associated with the energy crisis this past year, these duties no longer exist. This is because (1) the PX declared bankruptcy and was dissolved in January 2001 when the utilities could no longer pay their bills, and (2) the ISO's stakeholder board appointed by the EOB was dissolved this past January by Chapter 1x, Statutes of 2001 (AB 5x, Keeley). This latter measure replaced the ISO's 26-member stakeholder board with a 5-member panel appointed by the Governor.

While the EOB's statutorily defined duties have been sharply curtailed, it also monitors the electricity market. This includes reviewing market and reliability rules, transmission and grid plans, and emergency and contingency plans. It also plays a role in representing the state's interests before the Federal Energy Regulatory Commission (FERC)—the federal commission that oversees wholesale electricity markets. In addition, there is currently pending legislation that would give EOB oversight over scheduling planned power outages, as well as monitoring, investigation, and enforcement activities relating to unplanned power outages.

Funding Structure. The majority of the funding for the EOB is from the fees collected from electricity utilities by the CPUC for regulation of the industry. Additional support is from the electricity consumption surcharge on utility bills collected for support of the CEC.

California Power Authority

History and Purpose. The CPA was created by Chapter 10x, Statutes of 2001 (SB 6x, Burton). It was established last spring in the wake of rolling blackouts and historically high electricity prices, in an effort to provide stability and rationality to California's electricity market. The CPA was given the authority to build new generation capacity so as to assure a reliable supply of power to Californians at just and reasonable rates.

Governing Structure. The CPA is governed by a five-member board of directors, four of whom are appointed by the Governor and confirmed by the Senate. The fifth board member is the State Treasurer. The board members are appointed to serve staggered four-year terms and the Governor appoints the chairperson of the board.

Basic Duties and Responsibilities. Because of the short history of the CPA, it is difficult to assess what exactly its role will be in California's electricity market in the future. The CPA was created with the broad charge of assuring a reliable supply of power to Californians at just and reasonable rates, including planning for a prudent energy reserve. In addition, the CPA is charged with encouraging energy efficiency, conservation, and the use of renewable energy resources. In order to meet these goals, the CPA has $5 billion in revenue bonding authority, with any bonds issued being secured by the revenues generated from the specific projects being financed by the CPA. In addition, the CPA has also been given the authority to finance natural gas transportation and storage projects, as well as to provide financing to retrofit old and inefficient power plants. Finally, the CPA is required to develop an Energy Resource Investment Plan (ERIP) due to the Legislature on February 15. At the time this review was prepared, a draft of the plan had been completed and it appeared that the plan would be submitted on time.

Funding Structure. The 2001-02 Budget Act provided the CPA with a $10 million General Fund loan to start up its activities. However, on an ongoing basis the CPA's administrative expenses are to be funded from the proceeds of the revenue bonds the CPA is authorized to issue to build new power plants and implement energy conservation.

Department of Water Resources, California Energy Resources Scheduling Division

History and Purpose. The CERS division was created by Chapter 4x, Statutes of 2001 (AB 1x, Keeley), a year ago. This statute provides for DWR to purchase and sell electricity on California's markets on behalf of the state's major IOUs. The state "stepped in" to take this role after the credit-worthiness of the state's three largest IOUs deteriorated because they were purchasing electricity on the wholesale market at much higher prices than they were allowed to charge retail customers under California's regulated electricity rate structure. This, and the increasingly dysfunctional electricity market, raised fears regarding chronic blackouts if the state did not undertake the electricity-buying responsibility.

Governing Structure. Since CERS is a division contained within DWR, it is governed by DWR's gubernatorially appointed director.

Basic Duties and Responsibilities. The primary responsibility of CERS is to purchase enough electricity to meet the "net short" demand of the customers of the state's three largest IOUs. (The net short refers to the amount of electricity needed to serve the demand in the IOUs' service area that exceeds the sum of the IOUs' retained generation resources, qualifying facility contracts, and other bilateral contracts.) The CERS division was directed to enter into long-term contracts in order to stabilize the price the state was paying for electricity, and thus far has contracted for $40-plus billion in electricity for the future. The primary activity of CERS over the next ten-plus years will be to manage these contracts and minimize the costs involved for ratepayers.

The CERS division is also responsible for the purchase of electricity on the short-term spot market, if needed, to meet the total demand of the IOUs' customers. However, at the end of calendar year 2002 CERS will be prohibited under current law from buying additional electricity on the spot market. This is because it was assumed when CERS was set up that the utilities would have returned to financial health and, thus, be able to resume purchasing electricity themselves by the end of 2002. At this time, this is uncertain.

Funding Structure. Assembly Bill 1x provides a complex funding structure that contemplated financial support for CERS' electricity purchases and administration of this activity from several sources.

Department of Conservation, Division of Oil, Gas, and Geothermal Resources

History and Purpose. The DOGGR, located within DOC, was created in 1915 to regulate statewide oil and gas activities. The division is responsible for supervising the drilling; operation; maintenance; and plugging and abandonment of onshore and offshore oil, gas, and geothermal wells. The division is charged with protecting the environment and preventing damage to the state's natural resources.

Governing Structure. Since DOGGR is a division contained within DOC, it is governed by DOC's gubernatorially appointed director.

Basic Duties and Responsibilities. The DOGGR regulates around 88,000 active oil, gas, and geothermal wells currently drilled in California. It also oversees oil production of roughly 860,000 barrels a day, which ranks California fourth among oil producing states. In addition, the division oversees the state's relatively large geothermal electricity generation sector. The division is specifically responsible for the permitting and testing of wells, as well as safety inspections. It also inspects oil field tanks and pipelines, as well as handles hazardous well plugging and abandonment contracts. Lastly, DOGGR is responsible for collecting data regarding the state's oil, gas, and geothermal resources.

Funding Structure. The DOGGR is supported primarily by the General Fund. It also receives some minimal amounts of funding from federal sources and penalty income.

Problems With the Current System

Below, we examine various problems and shortcomings with the current structure of energy-related organizations.

Difficulties in Coordinating Efforts

While there was coordination amongst the state's energy agencies in responding to the state's energy crisis in 2001, shortcomings involving interagency coordination also have existed.

Excessive Duplication and Overlaps

As noted above, new energy-related agencies have recently been formed and the responsibilities of others have expanded. (Please see Figure 2—earlier in this write-up—for a summary of the responsibilities of these state entities.) Given the number of these organizational changes and the speed with which they have occurred, it is not surprising that a number of potentially unnecessary duplications and overlaps have come to light. Four, for example, involve:

Potential Conflicts of Interest

With the role being played by CERS and the creation of the CPA, the state is now a direct participant in the wholesale energy market. This is a different role for the state to play than previously, since in the past it has primarily been responsible for energy-related regulation and monitoring activities. This raises some potential conflicts, for example, involving:

Difficulty in Speaking With "One Voice"

Some industry observers have noted that the current decentralized organization of the state's energy-related agencies means that the state will not always be able to present a "unified front" when working with the federal government and other bodies regarding energy-related issues. It is argued that this, in turn, inherently can hinder the state's ability to be effective in achieving its energy-related objectives.

Unnecessary Costs

The concern here is that, the greater the number of different entities involved in energy-related activities, the greater the total overhead expenses for the collective managerial and support staff, office facilities, equipment, and supplies. Another concern relates to the large amount of contracting being done in some areas as opposed to handling workload internally.

Staffing Issues

Another issue involves the ability of some of the state's energy-related entities to hire and retain appropriate staff, given the current uncertainties about their long-term mission and activities. For example, the CPA is slated for termination as of January 1, 2007, and CERS is prohibited from purchasing any new electricity contracts after the end of calendar year 2002. (However, CERS will be involved in managing its existing electricity contracts until they expire—after 2010.)

Another important staffing issue is the continued heavy reliance on contract services, as opposed to state employees. This includes the use of contractors to both manage the activities in some new state agencies and perform certain ongoing activities not done by the state previously. Such contracts were helpful this past year because it was important to work expeditiously to hire the expertise needed to manage activities related to the state's energy crisis. Now that the crisis has subsided, however, these contracts may need to be reconsidered. In addition, many of these contracts are relatively expensive when compared to similar state employee positions or even positions within the energy industry.

Interagency Differences in Accountability

Some observers argue that the current structure of the state's energy agencies tends to result in different levels of accountability. That is, whether the administering agency is a board (or commission) versus a department can influence the decision making process used and how programs are implemented and managed. Four of the six energy agencies described above are administered by boards—the CEC, CPUC, EOB, and CPA. Each of these boards is an independent body whose membership is appointed by the Governor and in most cases confirmed by the Legislature. The members themselves serve set terms and each of the boards appoints its entity's executive director. In contrast, the remaining two energy programs—CERS and DOGGR—are located within departments whose directors serve at the pleasure of the Governor and whose appointments are confirmed by the State Senate. These different structures can result in different accountability characteristics. For example:

Current and Past Reform Proposals

In response to the various problems and issues raised regarding the state's management of energy-related matters in the past and currently, a number of reform proposals have been offered for better coordinating and organizing the state's activities.

Previous Proposals. Several reform proposals have been offered in past years. For example, in the 1995-96 Governor's Budget, Governor Wilson proposed consolidating various state energy-related activities and entities into a new Department of Energy and Conservation. This proposal was never implemented.

Current Proposals. The administration has not thus far offered a plan of its own for better coordinating and organizing the state's energy-related activities. However, SB 6x, which created the CPA, appears to have anticipated the possible need for, and appropriateness of, an administration proposal in this area, stating that:

"Nothing in this division shall be construed to obviate the need to review the roles, functions, and duties of other state energy oversight agencies and, where appropriate, change or consolidate those roles, functions, and duties. To achieve that efficiency, the Governor may propose to the Legislature a Governmental Reorganization Plan . . . "

There is one proposal currently circulating to reorganize the state's energy agencies (a second plan had previously been circulating in the Legislature, but recently was put aside). The main features of this proposal by the California Chamber of Commerce and California Business Roundtable are:

In addition to these and other provisions, the ISO, although not a state agency, would be reconstituted as a Regional Transmission Organization or have its grid operations functions returned to the various investor and municipal utility corporations. Also, the CEC's and CPUC Energy Division's functions would be subsumed within the new department, and the CPA and EOB would be eliminated.

So—What Should the Legislature Do?

In approaching the issue of how best to coordinate and organize the state's energy-related activities and agencies, we believe that the Legislature should begin with four steps.

Step One—Inventory the State's Needs and Objectives

This step involves developing a comprehensive, detailed inventory of the various types of energy-related activities that the state currently engages in or might wish to undertake in the future. This inventory should cover:

Step Two—Identify Specific Problem Areas That Need Fixing

This involves taking a close look at the way that the state's energy agencies currently operate and interact, and identifying such shortcomings as inefficiencies, duplication of effort, overlapping responsibilities, inconsistent policies, ineffective coordination, programs that work at cross purposes, and similar issues.

Step Three—Uncover the Underlying Reasons for Why These Performance Problems Exist

Simply reorganizing how the state's existing energy-related agencies are structured may or may not "make things better," depending on the underlying reasons for the problems that need to be fixed. For example, problems requiring the reorganization of state agencies need to be distinguished from problems involving: (1) poor management, (2) funding problems, (3) ill-defined and/or conflicting missions and objectives, and (4) inadequate mechanisms to effectively accomplish missions and objectives.

Step Four—See What Has and Has Not Worked Elsewhere

This involves taking a look at the lessons learned by other states and the federal government in managing its energy-related activities. Although differences exist between California and these other entities, it may be helpful to see what has and has not worked well elsewhere, and how these other entities have solved or avoided some of the problems encountered in California. The Legislature should also carefully review all current and previous reorganization proposals made in California and identify their strengths and weaknesses to aid in developing its own plan.

Basic Principles to Incorporate

In addition to being guided by the above information, we believe that whatever organizational form the Legislature ultimately adopts for the state's energy-related activities should reflect the key organizational principles shown in Figure 3.

We have grouped these principles into three main areas—basic organizational framework needed for the state's energy-related functions, interrelationships between state energy agencies, and effectiveness and efficiency of state energy-related activities. For example:

Figure 3

Key Organizational Principles for the
State’s Energy-Related Activities


ü  Framework and Basic Structure

·   Adopt appropriate forms of governance.

·   Establish clear lines of accountability and decision-making authority.

·   Prioritize goals and objectives.

ü  Interrelationships, Communication, and Coordination

·   Do not work at cross-purposes.

·   Resolve issues and conflicts quickly.

·   Guard against inconsistent outcomes.

·   Avert conflicts of interest.

ü  Effectiveness and Efficiency

·   Eliminate overlapping responsibilities.

·   Avoid duplication of effort.

·   Take advantage of scale economies.

·   Minimize costs to private sector parties.

·   Limit over-reliance on contracting.


We believe that legislative focus on these basic organizational principles is the key to ensuring that California's different energy-related priorities are successfully addressed, and its energy-related activities are carried out effectively and efficiently.

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