Analysis of the 2007-08 Budget Bill: Resources

Public Utilities Commission (8660)

The California Public Utilities Commission (CPUC) is responsible for the regulation of privately owned “public utilities,” such as gas, electric, telephone, and railroad corporations, as well certain passenger and household goods carriers. The CPUC’s primary objective is to ensure adequate facilities and services for the public at equitable and reasonable rates. The CPUC also promotes energy conservation through its various regulatory decisions.

Proposed Funding. The budget proposes CPUC expenditures of $1.3 billion in 2007-08, mostly from various special funds. This is a decrease of $4.8 million from the current year due, in part, to the elimination of a one-time expenditure in the Teleconnect Program that occurred in the current year. The budget also proposes $1.3 million and 2.9 positions to implement the CPUC’s greenhouse gas emissions reduction efforts (please see our analysis of “Implementation of “AB 32”—Global Warming Solutions Act of 2006” in the Crosscutting Issues section of this chapter); $2.5 million and 2.9 positions to implement the Million Solar Roofs Initiative and the California Solar Initiative; $950,000 and 10.3 positions to implement the Digital Infrastructure and Video Competition Act; and a number of administratively created new programs as discussed later.

Administratively Created New Programs Raise Multiple Concerns

The budget proposes funding for two new programs created administratively—one related to electricity market design and the other establishing a utility infrastructure security branch. The programs collectively total $908,000 in special and federal funds, and five new positions. We think that it is premature to fund both of these programs until the Legislature evaluates their policy merits and authorizes them in statute. In addition, the proposal for a critical utility infrastructure security branch has unclear objectives and highly uncertain funding. We recommend that the Legislature deny both requests. (Reduce Item 8660-001-0462 by $408,000 and Item 8660-001-0890 by $500,000.)

Electricity Market Design Proposal. The budget requests one-time funding of $307,000, mostly for consulting services to design a “wholesale capacity market” for electricity, and $101,000 (ongoing funds) for one new position to evaluate and plan for the electricity market, both at the wholesale and retail levels. A capacity market is a type of market framework where wholesale generators sell their excess capacity to other generators who have unmet supply requirements. In 2005, the CPUC commissioned a white paper investigating capacity market design, which largely favored the establishment of this type of market.

Legislature Should Direct Energy Agencies on Market Design. While the electricity market has seen increased stability recently, the Legislature continues to evaluate issues, such as whether consumers should have “direct access” to the energy provider of their choice, the resolution of which could result in changes to the market structure in future years.

While there may be merit to the idea of a capacity market design, we believe that market design is a policy issue that should be evaluated by the Legislature. In evaluating market mechanisms, the Legislature would be in a position to consider the role of all state energy agencies and all types of energy providers, not just those under the regulatory jurisdiction of CPUC.

We think it is premature and beyond the jurisdiction of CPUC to begin investigation and evaluation of a market design without further statutory direction from the Legislature. We therefore recommend the Legislature deny the budget request.

Critical Utility Infrastructure Security Branch Proposal. The budget proposes $500,000 (federal funds) and four positions for a new Critical Utility Infrastructure Security branch at CPUC. The proposed branch would coordinate state activities for disaster preparedness, response, and recovery for utilities under a federal Department of Homeland Security program. Other state agencies eligible to participate in this federal effort include all state and local law enforcement authorities, the Office of Homeland Security, the Office of Emergency Services, and the Governor’s Emergency Operations Executive Council. There are no other state regulatory agencies included in the proposal.

Based on our review of the commission’s proposal, we found the proposed duties of the new branch are often very broad, typically vague, and lacking a clear purpose. The commission has stated that municipal utilities, currently not regulated by CPUC, would be included in this program. The inclusion of municipal utilities is an expansion of authority for the commission.

We also find that the federal funding proposed to support this new program is highly uncertain. According to the commission, there is no certainty that federal funds will be allocated to this effort, and those federal funds the commission has identified as potentially available may require matching state funds. Given the uncertainty of federal funding, the lack of clear duties, and an apparent expansion of the commission’s jurisdiction without statutory authorization—we recommend the Legislature deny the request.

High Fund Balance in Universal Service Telephone Program Fund Allows for Ratepayer Relief

The California High-Cost Fund-B Administrative Committee Fund—one of the commission’s six universal service telephone program funds—has a projected fund balance of $333.5 million at the end of the budget year. This fund balance has remained high for several years. We recommend that the commission report at budget hearings on (1) a plan to phase out and eliminate the telephone surcharge and (2) when it intends to submit a report on the statutorily required review of the program. Pending receipt of the report, we recommend that the Legislature withhold action on the program’s budget.

High-Cost Fund-B Program Established in 1996. In October 1996, the commission established a program to provide subsidies to larger telephone companies serving high cost areas. The purpose of the program was to reduce the disparity in rates charged by these telephone companies. The program is referred to as the California High-Cost Fund-B Administrative Committee Fund (CHCF-B) Program.

The subsidies have been paid to such service carriers as the currently named Frontier, Verizon, and SureWest, among others. Though it is difficult to evaluate how the subsides have been used due to a lack of reporting by the commission, the program expenditures continue to serve such areas as Malibu, Roseville, and Elk Grove. While some of the geographic area covered under the program may have been difficult to reach and therefore were considered a higher cost area in 1996, these areas today may no longer be difficult to serve with new technologies. The authorizing legislation that established CHCF-B sunsets January 1, 2009, at which time the subsidies would be discontinued.

Surcharge Rate Has Varied, Substantial Fund Balances Have Developed. The CHCF-B is funded by a surcharge on telephone bills collected by telecommunications carriers. Customers who have services (such as “call waiting” or “caller ID”) on their phones pay this charge on their bill. The budgeted surcharge rate—which is set administratively by the commission by resolution—has varied significantly from a high of 3.8 percent on the cost of services in 1999 to a low of 1.4 percent in 2002. Currently, the rate is 2 percent.

Revenues and expenditures have varied widely as a result of these rate changes. In the first eight years of the program, over $3 billion in subsidies were paid to carriers, mostly four companies, to provide affordable rates in hard-to-service areas. In recent years, a substantial fund balance has developed in the program, as revenues have consistently exceeded expenditures. While the budget projects a $333.5 million balance in the fund at the end of the budget year, the balance would actually be much higher were it not for a $250 million loan to the General Fund made from the fund in 2002. (There is no specified repayment date for this loan.)

Fund Condition and Impending Sunset of Program Allows for Ratepayer Relief. We think that the magnitude of the fund balance projected to remain in CHCF-B at the end of the budget year, combined with the impending sunset of the CHCF-B program in 2009, affords the commission an opportunity to eliminate the surcharge that supports the fund for the remainder of the program’s life. We therefore recommend that the commission present a plan to the Legislature at budget hearings to phase out by January 1, 2008, the telephone bill surcharge that supports the fund.

Statutorily Required Review of Program Long Overdue. Chapter 847, Statutes of 2004 (SB 1276, Bowen), required CPUC to conduct a review of the CHCF-B program by January 1, 2006. The review requirement was prompted by concerns of the commission‘s Office of Ratepayer Advocates about the program’s cost-effectiveness. Specifically, the review was required to (1) adjust subsidy payments to carriers to reflect updated operating costs and (2) evaluate whether subsidy levels could be reduced while still meeting the goals of the program. This review has not been completed and thus it is difficult for the Legislature to evaluate the appropriateness of the proposed expenditures for subsidies. We recommend CPUC report at budget hearings on when it intends to deliver this report. Pending receipt of the report, we recommend the Legislature withhold action on the overall program budget.

Climate Change Proposal Contrary to Legislative Direction

In our analysis of “Implementation of “AB 32”—Global Warming Solutions Act of 2006” in the “Crosscutting Issues” section of this chapter, we address a CPUC request to establish a “cap-and-trade” market mechanism for utilities as a greenhouse gas emission reduction strategy. We find the proposal moves ahead of the statutorily directed effort at the California Air Resources Board, and recommend the Legislature deny the budget request.

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