Analysis of the 2007-08 Budget Bill: Resources

Elimination of Energy-Related Agencies

Budget Proposes to Eliminate Energy Agencies

The budget proposes budget bill and trailer bill language eliminating two energy-related agencies, the California Consumer Power and Conservation Financing Authority (CPA) and the Electricity Oversight Board (EOB), with no plan to shift their authority to other agencies. Below we provide a brief history of CPA and EOB and energy agency organization in the state, and raise issues for the Legislature to consider, particularly relative to the proposed elimination of EOB.

In conjunction with his budget proposal, the Governor has proposed eliminating five of California’s boards and commissions, of which two are energy-related, on the basis that they are “no longer needed.” The proposal is in part based on the work of the California Performance Review, which identified a number of opportunities to streamline and reorganize state government organization. The Governor has proposed budget bill and trailer bill language to eliminate two energy-related agencies—CPA and EOB. In both cases, the proposed language to eliminate the agencies contains no plan to shift authority from these entities to other energy-related agencies.

Current Energy Agency Organization

There are multiple state agencies involved in implementing and overseeing the state’s energy-related responsibilities, including the California Consumer Power and Conservation Financing Authority (CPA) and the Electricity Oversight Board (EOB). While CPA is currently inactive, EOB is currently fully operational.

At least seven state governmental entities are involved in implementing, overseeing, and managing the state’s energy-related policies and responsibilities. These include the Energy Resources Conservation and Development Commission (CEC); California Public Utilities Commission (CPUC); EOB; CPA; California Energy Resources Scheduling (CERS) division within the Department of Water Resources; the Division of Oil, Gas, and Geothermal Resources within the Department of Conservation; and the California Independent System Operator (ISO).

History of EOB. The EOB was created by Chapter 854, Statutes of 1996 (AB 1890, Brulte), which deregulated California’s wholesale electricity industry. The board was created to oversee ISO, which manages the transmission grid serving most of California, and the Power Exchange (PX), which for a time was the marketplace in which all electricity in the state was bought and sold. The EOB was also given very broad authority over ensuring reliability of the state’s supply of electricity.

Central to the original role of EOB was oversight of the activities of ISO and PX and determining the composition of the governing boards of these two organizations. However, among the many developments associated with the 2001 energy crisis was the bankruptcy of the PX in March 2001, and the replacement of the EOB-appointed ISO stakeholder board with a board of gubernatorial appointees. Thus, EOB no longer carries out these original duties. However, subsequent legislation has given it authorization to conduct certain other activities. These include the following:

As a result of these statutory responsibilities, EOB’s primary duty at this time is to act as a market monitor, overseeing the state’s electricity market and initiating proceedings at FERC in response to market manipulation. The EOB has been a participant in over 400 proceedings at FERC and has been a litigant in over 100 cases in the federal courts of appeal. Through 2005-06, EOB has been a party to settlements of over $1 billion for various overcharges.

The EOB currently has a staff of 23 positions and a budget of $4.1 million, the majority of which comes from the fee-funded Public Utilities Commission Reimbursement Account. The EOB’s governing board currently has not met since March 2003. Since that time, EOB staff has reported directly to the Governor’s office.

History of CPA. The CPA was created by Chapter 10x, Statutes of 2001 (SB 6x, Burton), to assure a reliable supply of power to Californians at reasonable rates, including planning for a prudent energy reserve. The CPA was also created to encourage energy efficiency, conservation, and the use of renewable resources. Chapter 10x authorized CPA to issue up to $5 billion in revenue bonds to finance these activities, and prohibits the authority from approving any new program or project after January 1, 2007, unless statutory authorization has been granted for such activity.

The CPA exercised only a small portion ($28 million) of its bonding authority, and its administrative operations ceased in October 2004, at which time it only had one operational program—the Demand Reserves Partnership Program. Under this program, CPA provided electricity at peak times to CERS, by paying other large electricity users to reduce their electricity use during these peak demand times. The Demand Reserves Program has been transferred to Pacific Gas & Electric, under the direction of CPUC. While funding for this program has passed through CPA’s budget through the current year, this program is scheduled to expire on June 30, 2007.

Elimination of CPA Warranted

The budget proposes to statutorily eliminate the California Consumer Power and Conservation Financing Authority (CPA) and transfer any remaining CPA funds to the Energy Commission for repayment of loans. We think this proposal is warranted and recommend its approval.

Budget Proposes Elimination of CPA. As noted, CPA has long ceased its administrative operations, and the remaining program which it has been funding is scheduled to expire on June 30, 2007. The CPA has no other current or future activities authorized by statute. Consistent with the de facto termination of CPA under current law as of January 1, 2007, the budget proposes to formally eliminate CPA in statute and transfer remaining funds in the amount of $2.5 million to CEC to repay loans made to CPA in 2002 and 2003. We recommend approval of the Governor’s proposal.

Proposal to Eliminate EOB Raises Issues

The Governor’s proposal to eliminate the Electricity Oversight Board (EOB) is incomplete in that it does not address which entity will assume EOB’s current duties and its pending legal-related workload. We recommend the administration report at budget hearings with a plan for assigning EOB’s duties and legal workload to other state agencies. With the administration’s plan in hand, the Legislature will then need to make its own determination as to the appropriate assignment of these duties and workload.

Administration Lacks Plan to Shift EOB Duties. While the Governor’s budget proposes EOB expenditures of $4.1 million in 2007-08 (essentially the same as the current-year level), the Governor’s Budget Summary states the administration’s intention to eliminate EOB. The proposed budget bill contains language (Control Section 4.26) that would give the Director of Finance the authority to reduce appropriations made in the bill to EOB to reflect savings from eliminating the board. We note, however, that the proposed trailer bill language to eliminate EOB does not specify how current workload and authority at the board would be transferred to other agencies. Rather, the proposed statutory language simply eliminates any references to the board in statute, and gives the Governor power to designate a successor for all of EOB’s duties and authority including legal matters.

Energy Agency Reorganization Concept Has Merit, but Governor’s Proposal Falls Short. We have previously raised the issue of reorganizing the state’s energy agencies in light of the current multiplicity of energy agencies, some of which have overlapping functions (see, for example, The 2006-07 Budget: Perspectives & Issues, page 199). While there may be merits in consolidating EOB’s functions in another energy entity, the Governor’s proposal is incomplete in that it does not address the energy-related activities in several other state entities, nor does it provide a plan on which state agency would be assuming EOB’s current duties and workload. The issue of which state entity would assume EOB’s duties is particularly relevant given that moving EOB’s electricity market monitoring duties into certain other energy agencies raises potential conflicts of interest. The FERC requires that entities that monitor the electricity market be independent from any market participant or interest. Some of the state’s energy entities—such as CEC and CERS—could be considered market participants. Additionally, EOB is currently involved in a number of FERC proceedings and litigation as noted above. The Governor’s proposal is silent on who would be assuming EOB’s role in these cases to ensure that the cases continue to be pursued aggressively on behalf of the state’s ratepayers.

We think it is important to note that, unlike CPA, EOB is currently fully operational and has ongoing workload, which, absent the Governor’s proposal or another plan to reorganize the state’s energy entities, would carry on into the budget and future years. The EOB’s current workload includes involvement in about 240 cases pending at FERC. The EOB legal workload also includes over 100 items of appeal in United States Court of Appeals. These cases, largely, are pursuing settlements for electricity price overcharges during the energy crisis, on behalf of the state’s electricity ratepayers.

Assumption of Duties Should Be Evaluated and Determined by Legislature. The Legislature has previously proposed a plan to eliminate EOB. Senate Bill 920 (Bowen), enrolled in 2004 and vetoed, proposed to eliminate the board and provided a plan for the assumption of EOB’s pending legal cases—these cases were to be transferred to the Attorney General. Other EOB duties were to be assigned to a successor agency by the Governor. In contrast, the Governor’s proposal does not specify who will handle EOB’s caseload before FERC. We think that it is an important policy matter for the Legislature to evaluate how EOB’s duties, and its current legal workload, should be assumed by other entities. To that end, we recommend the Legislature withhold action on the EOB budget, and require the administration to present at budget hearings a plan to assign EOB’s duties and pending legal workload to other state agencies. The Legislature will then need to make its own determination on these issues. We further recommend the Legislature deny budget bill language allowing the Department of Finance to reduce appropriations to the board, pending legislative determination of a more complete plan for the assumption of EOB duties and workload.

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