Analysis of the 2008-09 Budget Bill: Resources

Electricity Oversight Board (8770)

The Electricity Oversight Board (EOB) was created in 1996 as part of the Legislature’s restructuring of California’s electricity industry. The board’s main role has been overseeing the electricity market and the activities of the California Independent System Operator (ISO), the nonprofit organization that manages the portion (approximately 75 percent) of the electricity transmission system owned by the state’s three investor–owned utilities—Pacific Gas and Electric, Southern California Edison, and San Diego Gas and Electric. In addition, the board has been responsible for representing the state before the Federal Energy Regulatory Commission, which has jurisdiction over some aspects of California’s restructured electricity market.

In the current year, the EOB has a staff of 23 positions and a budget of $3.1 million, the majority of which comes from the fee–funded Public Utilities Commission Reimbursement Account. The EOB’s governing board has not met since March 2003. Since that time, EOB staff has reported directly to the Governor’s office. The Governor’s proposed budget for 2008–09 includes no expenditures for the EOB, reflecting the Governor’s intent—stated in his 2007–08 Budget Act veto message—that EOB will be eliminated and its remaining duties transferred to the California Public Utilities Commission (CPUC) by April 1, 2008.

Governor Once Again Sidesteps Legislature’s Policy–Setting Role

The administration has begun the process to eliminate the Electricity Oversight Board (EOB) and to transfer its remaining duties to other state energy agencies, without the Legislature having determined its policy position on this issue. We recommend the administration present, at budget hearings, its plan to assign EOB’s duties and workload to other state agencies. We also recommend that the Legislature enact legislation to implement its own policy determinations regarding the future of the board, including the placement of transferred responsibilities should the board be eliminated.

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 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. Presently, EOB is actively involved in 12 separate cases of pending FERC litigation.

Governor Proposed Eliminating EOB in 2007–08 Budget Process. As part of the 2007–08 budget process, the Governor proposed an EOB budget of $4.1 million, but also proposed budget bill language allowing the Director of Finance to reduce appropriations to EOB included in the budget to reflect savings from elimination of the board. However, the Governor’s budget proposal did not specify how EOB’s existing workload and authority would be transferred to another state agency.

Legislature Rejected Governor’s Proposal to Eliminate EOB. In response to the Governor’s proposal, the Legislature stated in budget hearings that elimination of the board and transfer of its remaining duties is a policy decision best addressed in the policy committee process. Accordingly, the Legislature approved the EOB’s operating budget of $4.1 million for 2007–08 while rejecting the proposal to authorize the Director or Finance to reduce the EOB’s budget appropriation.

Governor Vetoed Legislature’s Decision to Fully Fund the EOB in 2007–08. In response to the Legislature’s decision to appropriate $4.1 million to the EOB in 2007–08, the Governor exercised his veto authority to reduce EOB’s 2007–08 budget by 25 percent. In a statement accompanying the veto, the Governor declared his expectation that, by April 1, 2008, the EOB would be eliminated and have transferred its remaining duties to CPUC.

Governor’s 2008–09 Budget Seeks to Eliminate Both EOB and the Legislature’s Policy–Making Prerogative. Despite the Legislature’s direction that elimination of the EOB and dissemination of its remaining duties be considered as part of the Legislature’s policy–making process, the Governor’s budget proposal includes no funding for the EOB in 2008–09. Indeed, documents supporting the Governor’s budget proposal restate his intent that EOB cease operation on April 1, 2008, claiming that, because other state agencies have already taken on the duties of the EOB, the board’s continued operation is no longer necessary.

Elimination of EOB Already Underway. The administration has initiated a number of actions in anticipation of the EOB’s imminent elimination, although the Legislature has not yet adopted its policy position on this issue. Of 23 positions authorized for EOB in the current year, only 11 are currently filled. According to the administration, those 11 positions are subject to an active layoff plan by which the administration seeks to place the remaining EOB employees with another state energy agency, most likely the Energy Commission or the CPUC. In addition, the CPUC is already involved in and preparing to assume responsibility for EOB’s remaining litigation–based workload in April of this year.

Proposed EOB Elimination Involves Policy Choices. We have previously raised the issue of reorganizing the state’s energy agencies in light of the current multiplicity of organizations, some of which have overlapping functions. (See, for example, The 2006–07 Budget: Perspectives & Issues, page 199.) And we agree that there may be merit in consolidating EOB’s functions in another energy entity. We nonetheless think that, despite the administration’s claims to the contrary, EOB has statutory duties that are unique to it, although other state energy agencies may have duties that are similar or related to those of EOB. For example, while both EOB and CPUC monitor electricity markets, only EOB monitors the day–to–day performance and outcomes of the electricity market, whereas CPUC has focused its efforts on the evaluation of electricity market design. In addition, EOB has ongoing workload, including its participation in a number of FERC proceedings and litigation on behalf of the state’s ratepayers that has added value to, rather than being merely duplicative of, the involvement of other state agencies in these matters. Accordingly, any proposal to eliminate EOB must provide a plan for the assumption of EOB’s duties and workload—an important policy choice.

In 2004, the Legislature passed legislation that called for the elimination of EOB and transfer of its responsibilities to specified state agencies. While that legislation—SB 920, Bowen—was subsequently vetoed by the Governor, its passage underscores the Legislature’s recognition of the inherent policy making involved in the board’s elimination and the Legislature’s prerogative to provide its policy direction in this matter.

As we recommended previously, (see page B–66 of the Analysis of the 2007–08 Budget Bill) we recommend that that Legislature require the administration to present at budget hearings a comprehensive plan to assign EOB’s duties and pending legal workload to other state agencies, including its justification for its choice of agencies to assume the duties and workload. We further recommend that the Legislature consider the administration’s plan as part of its budget and policy–making processes. Finally, once the Legislature has considered the policy merits of the administration’s plan and other options for assigning the duties of the EOB, we recommend that legislation be enacted to reflect the Legislature’s policy determination on these issues.

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