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

Oversight of Electricity Contract Settlement Funds

In order for the Legislature to evaluate the proposed and future uses for settlement funds to the state resulting from renegotiated electricity contracts, we recommend that the Legislature's budget subcommittees and energy policy committees hold hearings on this issue. In addition, we recommend the enactment of legislation to establish a fund for the deposit of any cash settlements to the state and make the funds available upon appropriation by the Legislature.

Electricity Contract Settlement Agreements. The state has been actively renegotiating the long-term electricity contracts that the Department of Water Resources (DWR) entered into over the past two years to serve the customers of the state's three largest investor owned utilities. The majority of these contracts were signed at relatively high prices during the "energy crisis" in 2001. The Attorney General, the Governor's office, the Electricity Oversight Board (EOB), and the California Public Utilities Commission (CPUC) have all been involved at some level in renegotiating these contracts. At the time this analysis was prepared, approximately 22 long-term contracts had been renegotiated resulting in an estimated $5.2 billion in savings over the life of the contracts. The majority of these savings are a result of shortening the term of the contracts and lowering contact prices for future electricity deliveries. In addition, the state has also received some cash and assets (six electricity generation turbines) as part of the settlements.

Renegotiated Agreements Direct the Expenditure of Settlement Funds. Figure 1 lists the cash and asset settlements received by the state. Thus far, the state has received approximately $200 million in cash and assets in three separate settlements. The majority of cash and assets are a result of a settlement negotiated with Williams Energy Company and are to be received over the next seven years.

The settlement agreements for the three energy corporations listed in Figure 1 each directed the allocation of the cash and assets received by the state. These settlements direct each energy corporation to transfer cash and assets to the Attorney General, who then distributes the cash and assets as set forth in the agreement. Thus far, the state has been allocated $110 million in cash and $90 million in assets. The assets the state has received include six gas-fired turbine generators that the Attorney General has allocated to two local districts (four of the turbines have been allocated to the San Francisco Public Utilities Commission and two to the Kings River Conservation District for use in the Fresno area). In addition, $20 million of the $110 million has been allocated to the California Consumer Power and Conservation Financing Authority (California Power Authority, or CPA) to assist with the siting and installation of these turbines in the representative areas. (The DWR has entered into long-term contracts for the energy that will be generated from these turbines starting in 2005.)

Additionally, the settlements allocate some cash funds (around $69 million) to CPA for deposit in a newly created Alternative Energy Retrofit Account. The funds deposited in this account are directed by the settlement to be used to retrofit school and other public buildings with renewable energy and energy efficiency projects. The remaining cash settlements have been allocated to cover the legal costs of the Attorney General, EOB, and CPUC relating to these contract renegotiations. 

Future Settlements Also Likely. The state continues to negotiate with seven other energy corporations regarding DWR's remaining contracts, with potentially $5 billion in reduced state costs at stake. It is possible that these future settlements will include a distribution of cash and/or assets to the state, in addition to contractual changes. Therefore, in addition to those settlements already completed, the Legislature will likely be presented with additional opportunities to consider and direct the expenditure of settlement funds provided to the state from future electricity contract renegotiations consistent with its priorities.

Legislature Has Opportunity to Direct Use of Settlement Funds Provided to State. Under current law, the Attorney General has the authority to direct the expenditure of settlement funds that are provided to the state, unless the Legislature provides other direction in statute. Since statute does not currently direct settlements resulting from the renegotiation of electricity contracts, the cash and assets resulting from the settlements are being deposited in the Attorney General's Litigation Fund, which is the default account if no other account is specified statutorily.

It appears, however, that the Legislature may redirect the use of settlement funds (cash and assets) already received by the state to uses other than those specified in the settlement agreements to the extent these funds have not been encumbered. The Legislature has the authority to do this, provided no harm results to any of the nonstate parties to the agreement. (The Williams Energy settlement agreement also included settlement funds for other states, local governments, and water districts based on separate claims made against Williams Energy by these entities.)

Recommend Hearings to Consider Uses for Settlement Funds. In order for the Legislature to assess the use of electricity contract settlement funds (both cash and assets) received by the state to date, as well as of potential future settlement funds, we recommend that the Legislature's budget subcommittees and energy policy committees hold hearings regarding the proposed and future uses for such settlement funds. At these hearings, the Legislature should evaluate the Governor's proposal (reflected in the budget display) to spend $2.3 million in the current year and $500,000 in the budget year from the cash settlements received to date. These funds are proposed to be transferred from CPA to the Energy Resources Conservation and Development Commission (California Energy Commission) for expenditure in the commission's Solar Schools Program. (This program provides rebates to public schools that purchase and install solar energy systems on their facilities.) The settlement funds proposed for expenditure in the budget display represent a small portion of the funds received by the state for this purpose. 

In considering alternative uses for these settlement funds, the Legislature may want to consider directing the settlement funds so that they benefit the electricity ratepayers served by DWR's electricity purchases. This is because the ratepayers served by DWR's electricity purchases are responsible for paying all of the costs associated with DWR's long-term electricity contracts, including those purchases made by the department during the state's "energy crisis."

Recommend Legislation to Create Special Fund. In order to provide ongoing legislative oversight of the electricity contract settlement funds received by the state, we recommend the enactment of legislation to establish a special fund in which cash from the settlements would be deposited and require that expenditures from the fund be made upon appropriation by the Legislature. By requiring legislative appropriation of these funds, the Legislature would be able to direct expenditures to ensure that they are consistent with its priorities for these settlement funds.