July 7, 2009

Pursuant to Elections Code Section 9005, we have reviewed a proposed constitutional amendment initiative relating to voting requirements for expanding or establishing publicly owned electricity providers (A.G. File No. 09‑0015).

Background

Provision of Electricity Service in California

California Electricity Providers. Californians generally receive their electricity service from one of three types of providers: investor-owned utilities (IOUs), local publicly owned electric utilities, and electric service providers (ESPs). These providers provide 68 percent, 24 percent, and 8 percent, respectively, of retail electricity service in the state.

Investor-Owned Utilities. The IOUs are owned by private investors and provide electricity service for profit. The three largest electricity IOUs in the state are Pacific Gas and Electric, Southern California Edison, and San Diego Gas and Electric. Each IOU has a unique, defined geographic service area and is required by law to serve customers in that area. The California Public Utilities Commission (CPUC) regulates the rates charged by IOUs and how they provide electricity service to their customers.

Publicly Owned Utilities. Publicly owned electric utilities are public entities that provide electricity service to residents and businesses in their local area. Not regulated by CPUC, publicly owned electric utilities set their own terms of service, including the rates charged to their customers. Electricity service is currently provided by local governments through several different governmental structures authorized under state law, including:

Electric Service Providers. The ESPs provide electricity service to customers who have chosen not to receive service from the IOU or publicly owned utility that would otherwise serve their geographic area. Under this approach, an electricity customer enters into what is termed a "direct access" contract with an ESP that delivers electricity to the customer through the local utility's transmission and distribution system. Electric service provider rates are not regulated by CPUC. There are currently eighteen registered ESPs, mainly serving large industrial and commercial customers. Individual electricity consumers are currently barred from entering into ESP contracts, although state law will again permit this to occur several years from now.

Community Choice Aggregation

In addition to the ESP arrangements discussed above, state law allows a city or a county, or a combination of the two, to arrange to provide electrical service within their jurisdiction through a contract with an electricity provider other than the IOU that would otherwise serve that local area. This version of direct access is referred to as "community choice aggregation." Although no community choice aggregator (CCA) currently exists to provide electricity service in California, several communities are exploring this option.

Under this approach, electricity would be purchased by the CCA from an ESP instead of the local IOU. However, the transmission and distribution system of the IOU serving that local area would continue to be used to deliver the electricity to the customers. Electricity customers within that jurisdiction would automatically get their electricity from the CCA unless they elected to continue to receive service from the IOU serving their local area.

Voter Approval Requirements for Publicly Owned Electricity Providers

As noted above, publicly owned utilities can be organized under several different types of government structures, such as municipal utility districts. Each type of local government entity that is authorized to provide electricity service, and that is considering either the start-up of electricity service or the expansion of existing service beyond its current service area, is subject to certain state requirements. Various statutes specify whether voter approval is required for the start-up of electricity service by authorized local government entities. Under state law, if a local government intends to expand its electricity service into a new territory, that new area must be annexed and a majority of the voters in the area proposed for annexation must approve the expansion. However, no vote of the public is generally required in such cases within the existing service territory of the local governmental entity that is proposing the expansion. (In some cases, a local commission requires such a vote as a condition of approving the annexation.) Local agency action to create a CCA, in contrast, may be undertaken upon a vote of the local agency governing board and does not require local voter approval.

Proposal

The measure places new voter approval requirements on local governments before they can use "public funds"—defined broadly in the measure to include tax revenues, various forms of debt, and ratepayer funds—to start up electricity service, expand electricity service into a new territory, or to create a CCA. First, if an authorized local government entity seeks to start up electricity service, it must receive approval by two-thirds of the voters in the area proposed to be served. Second, if an existing publicly owned utility seeks to expand its electric delivery service into a new territory, it must receive an approval by two-thirds of the voters in both the area currently served by the utility and the new area proposed to be served. Third, the measure requires two-thirds voter approval for a local government to create a CCA.

The measure provides three exemptions to local governments from these voter approval requirements:

Fiscal Effects

Local Administrative Costs for Elections. Because this measure requires voter approval for specified local government actions, it would result in additional costs to local governments each time a proposal requiring voter approval was placed on the ballot. These costs would primarily be related to preparing and mailing election-related materials. In most cases, the balloting could be consolidated with already scheduled elections. The increased election-related costs due to this measure would probably be minor.

Potential Impact on State and Local Government Costs and Revenues. This measure could affect local government costs and revenues due to its potential effects on the operation of publicly owned utilities and CCAs. It could also affect the finances of state and local government agencies in California because of its potential impact on electricity rates. These effects would largely depend upon future actions of voters and local governments. We discuss these potential effects in more detail below.

First, the new public voter approval requirements for the start-up or expansion of publicly owned utilities or the formation of CCAs could, in some cases, result in public disapproval of such changes. Also, the existence of these new voter approval requirements could deter some local government agencies from proceeding with such plans. To the extent that this occurred, local government agencies could collect lower revenues from electricity customers, and incur lower costs for the operation and coordination of electricity services, than would otherwise be the case.

Second, the enactment of this measure could also affect the finances of state and local government agencies in California due to its potential impact on electricity rates. As noted above, some local government agencies might not start up or expand a publicly owned utility into a new territory or create a CCA as a result of the measure's new voter approval requirements. In this event, the rates paid by electricity customers in that and neighboring jurisdictions could be higher or lower than would otherwise have been the case. This could affect state and local government costs, since many public agencies are themselves large consumers of electricity. To the extent that changes in electricity rates affect business profits, sales, and taxable income, these factors could affect state and local tax revenues.

The net fiscal effect of all of these factors on the finances of state and local government agencies is unknown.

Summary

In summary, the initiative would have the following major fiscal effect:

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