Legislative Analyst's Office Analysis of the 2003-04 Budget Bill

Energy Resources Conservation and Development Commission (3360)

The Energy Resources Conservation and Development Commission (commonly referred to as the California Energy Commission, or CEC) is responsible for forecasting energy supply and demand, developing and implementing energy conservation measures, conducting energy-related research and development programs, and siting major power plants.

Proposed Funding. The budget proposes commission expenditures of $350 million from various state and federal funds in 2003-04. This is $29.8 million, or 9 percent, more than current-year estimated expenditures. This increase is mainly due to $30 million received from a revenue bond sale by the California Consumer Power and Conservation Financing Authority that would be used as loans to local public entities for energy efficiency projects.

Rethinking Funding the CEC's Power Plant Siting Program

The California Energy Commission is responsible for siting the majority of large power plants in the state. It was directed by the Legislature to report on establishing fees on the developers seeking the commission's siting approval and on generators subject to the commission's enforcement. In the sections that follow, we discuss the findings of the commission's siting fee study, establish that siting fees are appropriate for funding the commission's siting program, including enforcement, and recommend legislation be enacted to establish siting fees on power plant developers and generators.

CEC's Power Plant Siting Program

The commission's siting program licenses the majority of large power plants built in California. The program has traditionally been funded primarily by the Energy Resources Program Account, which is funded by a fee assessed on ratepayers.

Program Overview. The CEC's Energy Facilities Licensing Program (referred to as the siting program) is responsible for licensing thermal power plants of 50 megawatts (MW) or greater (thereby excluding hydroelectric facilities), as well as related transmission lines, fuel supply lines, and other facilities. After licensing, the commission is required to monitor compliance of the facility with all applicable federal, state, and local laws, as well as any conditions of certification required by the commission. The commission also must approve any modifications, expansions, or repowers of existing plants.

Budget Proposal. The budget proposes $17.4 million for the siting program in 2003-04. This is $3.7 million less than the current year, a reduction of 18 percent. This reduction largely reflects the sunset of 40 limited-term positions initially allocated to the siting program in 2000-01 to expedite the siting of power plants to help address the electricity shortages in California. The siting program, along with the majority of CEC's general operations, is primarily funded by a surcharge on ratepayers' electricity bills that is deposited in the commission's Energy Resources Program Account (ERPA). Historically, fees have not been levied on developers wishing to site power plants through CEC's process. The 2002-03 Governor's Budget, however, proposed a $25,000 flat siting fee to cover a nominal amount (less than 5 percent) of the commission's average costs of siting a power plant. This particular fee proposal was not adopted by the Legislature.

CEC's Siting Fee Study

In a report to the Legislature, the commission evaluated alternative structures for assessing siting application fees and annual compliance fees on the power plant developers/generators they regulate. However, the commission recommended against assessing siting fees.

Supplemental Report Requirements. The Supplemental Report of the 2002 Budget Act directed CEC to report to the Legislature on alternative fee structures for imposing fees on (1) developers seeking approval to site power plants and (2) generators for ongoing costs associated with compliance. The Legislative Analyst's Office was directed to review the study and report its findings and recommendations in this Analysis.

CEC Recommends Status Quo. The commission's siting fee study recommends retaining the existing funding structure for the siting program (ERPA support). The report maintains that the public's perception that the commission is objective and independent is paramount, and that establishing siting fees on power plant developers may undermine this objectivity. However, CEC recognizes that the power plant developer is a direct beneficiary of the services provided by the siting program. Despite this bottom-line recommendation, the commission's study does evaluate alternative fee structures, as directed by the supplemental report language.

CEC's Fee Alternatives. The CEC evaluated four different fee structures to cover some or all of its costs associated with power plant siting, as follows:

• Developer Pays 100 Percent of Actual Costs—The developer would pay for the actual hours charged by CEC staff for siting a particular power plant.
• Developer Pays 100 Percent of Average Review Costs—The developer would pay 100 percent of CEC's average cost to review a power plant application (currently around $665,000).
• Developer Pays 50 Percent of Actual Review Costs—The developer would pay 50 percent of actual costs for application review.
• Developer Pays Flat Fee Based on Size—The developer would pay $100,000 plus $250 per MW of generating capacity up to a maximum of $350,000, which represents about one-half of CEC's current average costs to review a power plant application.

For each of the above scenarios, CEC also suggested imposing an additional annual fee on the power plant owner to cover ongoing compliance activities. The CEC estimates that the average annual cost to monitor compliance of a power plant is approximately $15,000.

In its report, the commission evaluated these four fee structures and ranked them based on a number of criteria, including ease of administration and predictability of revenues. The CEC found the flat fee structure the most favorable, mainly due to the relative ease of administration. Figure 1 lists CEC's suggested criteria for a fee structure should one be implemented.

Siting Fees on Power Plant Developers and Generators Are Appropriate

We find that power plant developers/generators should share in the responsibility of supporting the siting program since they are direct beneficiaries of the services provided by the siting program. 

Siting Fees More Justified Under Deregulated Energy Market Structure. Before deregulation of the state's electricity industry, investor owned utilities (IOUs), whose revenues are subject to regulatory review by the California Public Utilities Commission (CPUC), built the bulk of new power plants in California. Since siting fees were not assessed by CEC when new power plants were sited, the IOUs' overall costs were lower than they otherwise would be, and these "savings" were passed on to California ratepayers through lower rates. Therefore, there was a basis for recovering CEC's siting program costs from ratepayers through the use of ERPA funding.

Under the current deregulated system, however, merchant generators (energy wholesalers) are the primary applicants for new power plants, and their revenues are not subject to regulation by CPUC. These generators make investments in power plants for financial gain and are direct beneficiaries of CEC's siting process. These generators are also not required to sell their power in California for use by California ratepayers nor are the prices at which they sell their electricity regulated by the state.

Therefore, the current funding structure, which relies on ratepayers to support the siting program, raises funding inequities. This is because California ratepayers do not necessarily benefit from the siting program, to the extent that additional investment in energy infrastructure approved under the siting program benefits energy users outside California. Accordingly, it is more appropriate under the current deregulated environment for the developer/generator—who directly benefits financially from the siting program—to cover at least some of the siting program's costs.

Fees Not Likely to Deter Investment in New Generation. The estimated cost of building a natural gas-fired power plant is approximately $700,000 per MW, or about $350 million for the typical 500 MW plant. The CEC reports that its average cost for siting a power plant is about $665,000. Therefore, a fee representing CEC's average cost to site a typical power plant, for example, would represent an increase in total project costs of less than one-quarter of 1 percent. We do not think that the magnitude of such a fee is likely to deter developers from making investments in power plants.

Other States Assess Siting Fees. The CEC's siting fee study also included a survey of power plant siting fees in other states. Of the eight states surveyed, all charged some level of fee on applications for new power plants. The fees ranged from very comprehensive in terms of the program costs that were covered—Oregon and Washington bill developers for the state's actual costs associated with a power plant application—to one-time flat fees that were insignificant in covering the state's costs in siting a new power plant. In most cases, support for a state's power plant siting program was a shared responsibility between a fee assessed on the developer/generator and some other revenue source. This survey clearly indicates that paying fees to site a power plant is a regular part of doing business for generators investing in other states around the country.

California's State and Local Programs Typically Assess Fees on Parties They Permit and Regulate. Central to CEC's recommendation against establishing siting fees is CEC's belief that its historical independence would be damaged if it collected fees from the generators it regulates. However, in the resources and environmental protection areas of state and local government, we find that there are numerous instances where agencies assess fees on the parties they permit and regulate, without undue concerns having been raised about a resulting lack of agency objectivity. For example, the State Water Resources Control Board assesses fees on the more than 17,000 waste dischargers it permits and regulates. Similarly, local agencies typically charge fees to cover environmental review costs with respect to a development proposal under consideration.

Support for Siting Program Is Appropriately a Shared Responsibility. As mentioned previously, both siting fees and some other funding source support most of the siting programs in other states. We think that it would be appropriate for the state's siting program to be funded with a mix of siting fees assessed on developers/generators and ERPA funds (which are derived from ratepayers). This is because both developers/generators and ratepayers benefit from the siting program. Ratepayers benefit from the siting program to the extent that additional investments in energy infrastructure increase the reliability of the state's electricity system. In addition, siting fee revenues are likely to be volatile from year to year, which poses challenges for funding a core siting staff from siting fee revenues alone. Since ERPA is a relatively steady funding source, it brings some predictability to the program's revenue stream. In addition, recent legislation allows CEC to reassess its ERPA surcharge annually (up to a capped amount) depending on expected expenditure needs.

Recommend Enactment of Fee Legislation

We recommend the enactment of legislation to establish a siting application fee and an annual compliance fee on power plants under the jurisdiction of the California Energy Commission (CEC), in order to provide partial funding support for CEC's siting and compliance-related activities. We also recommend the enactment of legislation to create a new special fund into which these fees would be deposited.

Legislature Should Enact a Siting Application Fee. As discussed above, we think it is appropriate for power plant developers seeking CEC's siting approval to help fund CEC's siting activities since they are direct beneficiaries of the permits issued by the commission. We therefore recommend the enactment of legislation to establish a siting application fee on power plant developers. The fee should encompass not only applications for new power plants, but also applications for modifications, expansions, or repowers of existing plants. We think that a fee that covers at least 50 percent of CEC's program costs would be reasonable based on the direct financial benefits that accrue to power plant developers that site power plants with CEC.

Consistent with CEC's fee criteria, we also believe that the siting application fee level should be known in advance of the siting process so the developer can plan for it. This is especially important in light of the uncertainty in financing new energy-related projects in the current financial market. Given this, we recommend a flat base fee plus a per MW fee based on power plant capacity. Of the fee proposals evaluated by CEC, the one most favored by the commission was one that proposed a flat $100,000 fee, plus $250 per MW, up to a maximum of $350,000. The maximum fee represents roughly one-half of CEC's current average costs to permit a power plant. As stated above, while we think that siting fees should cover at least 50 percent of the program's costs to site power plants, the Legislature may wish to consider a fee covering a higher percentage of program costs—up to 100 percent.

Legislature Should Enact Annual Compliance Fee. Similarly, we also recommend the enactment of legislation to establish an annual compliance fee to cover the commission's ongoing compliance monitoring costs. Consistent with CEC's criteria, we recommend establishing a flat fee that is assessed annually on power plant licensees. The CEC estimates that it costs on average $15,000 per power plant, annually, for compliance monitoring. We believe that a fee of this magnitude would be reasonable.

Interaction With Recent Legislation. In establishing the new siting fees, the Legislature should consider the interplay between the fee structure and recently enacted energy legislation. First, Chapter 567, Statutes of 2002 (SB 1269, Peace), authorizes CEC to revoke its certification for any power plant that does not start construction within 12 months after receiving its final permits and resolving its administrative and judicial appeals. It also allows CEC to extend the 12-month limit by an additional two years if the owner reimburses the commission's actual cost of licensing the project. If siting fees were enacted, Chapter 567 should be amended to require a developer to pay the commission's actual cost of licensing the power plant less any siting fees already paid.

Second, Chapter 516, Statutes of 2002 (SB 1078, Sher), establishes the Renewable Energy Portfolio Standard. This statute requires IOUs to invest 20 percent of their energy supply portfolio in renewable energy by 2017. Given this new requirement, additional investments are likely to be made in new renewable energy projects in the upcoming years. In order to facilitate these investments, CEC has suggested exempting renewable energy projects from the new siting fees. Depending on how the fee is structured, this would have the impact of shifting the costs associated with siting new renewable energy power plants to the developers of other types of power plants (fossil fueled) and/or ratepayers.

Legislature Should Create a Special Fund. We recommend that the Legislature enact legislation to establish a special fund into which the new siting fees would be deposited. Expenditures from the special fund should be made upon appropriation by the Legislature. We think that this would increase the Legislature's oversight of the use of the new fees.

Enactment of Fee Creates ERPA Savings. Establishing siting fees to fund CEC's siting program will create savings to ERPA to the extent fees replace ERPA as a source of funding for the program. The savings will depend on the level of the fee and therefore the percent of the program costs covered. The ERPA funds have traditionally been used to support CEC's general operations, including forecasting energy supply and demand, and developing and implementing energy conservation measures. The Legislature could appropriate the freed-up ERPA funds to address other legislative priorities for CEC expenditures. Alternatively, the freed-up funds could be added to the ERPA fund balance, which may facilitate a future reduction of the ERPA surcharge assessed on ratepayers.