Analysis of the 2007-08 Budget Bill: Resources

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 expenditures of $417.3 million from various state and federal funds in 2007-08. This is $92.3 million, or 19 percent, less than current-year estimated expenditures. This decrease is mainly due to a decrease of $77 million in expenditures from the Renewable Resource Trust Fund (RRTF) for lower estimated renewable energy production incentive payments. The budget also proposes increases of $1.1 million and 4.8 positions to implement the Global Warming Solutions Act; $994,000 to implement both the Million Solar Roofs Initiative and New Solar Homes Partnership; and a $24.8 million transfer from the Ratepayer Relief Fund to implement a new program to support energy conservation projects at schools using funds from the Williams Energy settlement.

Proposed Use of Williams Energy Settlement Funds Contrary to Legislative Intent

The budget proposes to use funds from the Williams Energy settlement for a new program of grants and loans to schools for solar power. The Legislature previously stated its intent in policy legislation (that was vetoed) that these funds are to be used to maximize energy efficiency in schools without specifying a technology, thus giving schools flexibility in how to achieve efficiencies. We recommend that the Legislature deny the Governor’s proposal, and instead provide the funding in a policy bill directing the use of settlement funds. (Eliminate transfer Item 3360-011-3061 for $24,796,000.)

Electricity Contract Settlement Agreements. During the energy crisis of 2001, the Department of Water Resources (DWR) entered into a number of longer-term contracts to purchase electricity to serve the customers of the state’s three largest investor owned utilities (IOUs). The majority of these contracts were signed at relatively high prices. As a result of litigation, the state renegotiated its contract with Williams Energy and settled other claims against that company, resulting in an allocation of cash and assets to the state. Among other purposes, the settlement directed that $69 million in cash be used to retrofit schools and other public buildings with renewable energy and energy efficiency projects.

Legislative Opportunity to Direct Use of Settlement Funds. In our Analysis of the 2003-04 Budget Bill (page B-64), we recommended that the Legislature consider uses for the settlement funds, including funds already received by the state and potential future settlement funds related to the energy contracts. Under then current law, the Attorney General had the authority to direct the expenditure of settlement funds that are provided to the state, unless the Legislature provided other direction in statute. Chapter 228, Statutes of 2003 (AB 1756, Committee on Budget), was enacted to prospectively direct that settlement funds (from settlements entered into after August 2003) be appropriated by the Legislature for the benefit of ratepayers to (1) finance energy litigation expenses by the state, (2) reduce rates for customers in the affected service areas, and (3) reduce debt on bonds related to DWR energy purchases. The allocation of the Williams Energy settlement funds is not governed by this legislation, given that the settlement was entered into before the legislation took effect. However, as discussed below, the Legislature has stated its intent on the use of these funds.

Legislature Has Previously Directed Use of Williams Energy Settlement Funds. In keeping with the original settlement agreement, the Legislature passed AB 2756 (Levine) which created a plan to expend Williams Energy settlement funds for energy efficiency retrofits of public schools and buildings. The legislation directed CEC, upon legislative appropriation, to provide grants to K-12 public schools and public universities or community colleges, based on specific criteria and expectations, for various energy conservation projects. The bill did not specify a specific energy technology, but rather allowed the schools to select the most effective energy efficiency projects to be submitted for grant consideration. The legislation was vetoed by the Governor in 2006.

Budget Proposal. The budget proposes to use $24.8 million of Williams Energy settlement funds to fund a new photovoltaic (PV) energy efficiency program for public K-12 schools. This is achieved by transferring funds from the Ratepayer Relief Fund to the continuously appropriated Energy Conservation Assistance Account. Of this amount, $1.1 million is for program administration (four positions) and the balance of $23.7 million is for grants, loans, and technical support contracts. The proposal assumes that loans under this program could be repaid by using the monies saved by energy efficiencies.

Concerns With Budget Proposal. The proposed use of the Williams Energy settlement funds is inconsistent with prior legislative intent (as indicated in AB 2756) on a number of counts. First, the budget proposal specifies a single energy efficiency technology—PV—as a necessary criterion for grants and loans under the program. However, the budget already proposes multiple ongoing solar programs at CEC and the California Public Utilities Commission (CPUC) for the New Solar Homes Partnership; the Solar Initiative; and implementation of Chapter 132, Statutes of 2006 (SB 1, Murray), that serve to promote this technology. Consistent with legislative intent in AB 2756, we think that settlement funds should be awarded for a broader array of energy efficiency upgrades, beyond those that are PV in nature. Examples of other types of energy efficiencies are retrofitting heating and cooling systems, replacing lighting fixtures, improving insulation, and using alternative building materials. Second, the budget proposal includes using settlement funds for loans. This again contrasts with AB 2756, which provided funding only for grants in keeping with legislative policy that the electricity settlement fund should be used for purposes of ratepayer relief. Loans to ratepayers may not serve the purpose of ratepayer relief as effectively as grants.

Recommend Legislature Direct the Use of Settlement Funds Through Policy Bill. To ensure legislative oversight and consistency with legislative intent for the use of the Williams Energy settlement funds, we recommend that the budget request be denied and instead recommend the enactment of legislation directing the use of Williams Energy settlement funds (in accordance with the settlement agreement), such as was done in AB 2756. The bill could include an appropriation to allow for expenditure of the funds. Consistent with prior legislative intent, we recommend that the legislation provide for the maximum feasible use of grants with matching funds to afford ratepayer relief, and allow for an array of energy efficiency projects to be eligible for grants.

Improving Renewable Energy Program Effectiveness

The commission has experienced difficulty in getting renewable energy program funds out the door, as reflected in a projected fund balance of $142 million in the Renewable Resources Trust Fund at the end of the budget year. To ensure that the state gets back on track to meeting statutory renewable energy goals, we recommend that the Legislature hold joint policy and budget hearings to review the state’s progress in meeting these goals and to consider statutory changes that may be needed to improve program effectiveness.

Renewables Portfolio Standard (RPS). Under current law, IOUs and other energy providers are required to obtain 20 percent of their delivered power from renewable sources (such as wind, small hydroelectric, and PV) by 2010. In furtherance of this statutory target, the commission administers a renewable energy program funded by RRTF. The RRTF receives its funding from a surcharge on consumers’ energy bills. The program provides incentives for the production and purchase of renewable energy. One component of the program is the provision of “supplemental energy payments” (SEPs) to renewable energy producers to cover above-market costs of producing renewable energy relative to nonrenewable sources. This program component is designed to make renewable energy more price-competitive for IOUs when IOUs seek energy contracts.

Getting the State Back on Track to Meeting Renewable Energy Goals. The CEC as well as CPUC have indicated that the state is not on target to reach the 20 percent RPS goal by 2010 unless corrective action is taken. The CEC has recently completed an update to its statutorily required Integrated Energy Policy Report (IEPR) that includes recommendations for a number of midcourse changes to the renewable energy program, some of which may require statutory changes. Among the recommended changes are changes to the SEP process, to address concerns that renewable energy producers have had difficulty securing financing for their projects, even with the potential of their receiving SEP production incentives. This has lead to fewer SEP claims, allowing RRTF to build up a substantial fund balance—projected to be $142 million at the end of the budget year.

Recommend Joint Hearings on RPS Progress and Potential Program Changes. We think that the recommendations in the IEPR for changes in the renewable energy program to put the state back on track to meeting the 2010 goals merit legislative consideration. The Legislature should require the commission to report at hearings on its proposals to increase the effective use of RRTF, thereby reducing the fund balance. We therefore recommend joint policy and budget hearings on the state’s progress in meeting the RPS goals, the commission’s proposals for improving program effectiveness or adjusting fee levels, and any recommendations from the commission for statutory changes to implement their proposed program changes.

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