BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
SB 6X - Burton/Bowen Hearing
Date: February 13, 2001 S
As Amended: February 9, 2001 FISCAL B
X
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DESCRIPTION
This bill establishes the California Consumer Power and
Conservation Financing Authority (CPFA) which has the
following purposes:
1.Build, finance, own, or acquire, either on its own or
with others, electric powerplants;
2.Provide financial assistance, through programs
administered by others, for energy efficient appliance
and renewable energy projects;
3.Provide financing for energy efficiency and environmental
improvements of existing powerplants;
4.Develop and implement strategies for ensuring adequate
natural gas supplies;
5.Achieve an adequate energy reserve capacity in California
by 2006.
To accomplish these purposes the CPFA is authorized to have
employees and contractors, adopt rules, exercise the power
of eminent domain, and issue up to $5 billion in bonds.
These bonds are not a debt of the state.
The CPFA is governed by a five-member board comprised of
two appointments of the Governor who are approved by the
Senate, a member of the public appointed by the Senate, a
member of the public appointed by the Assembly, and the
State Treasurer. Meetings of the board are subject to the
Bagley-Keene Open Meetings Act and all board members are
subject to the Political Reform Act of 1974.
This bill contains no appropriation.
BACKGROUND
California opened its electric generation market to
competition when it restructured the electric industry in
1996. Rather than relying on regulators to ensure that an
adequate and reasonably priced supply of electricity was
available to Californians, the electric restructuring
effort instead relied on the private sector. The result
has been skyrocketing wholesale electricity prices, an
electric system with suspect reliability, air quality that
has suffered, and electric utility stockholders and
bondholders who have seen their investments plummet.
The basic problem with the current electric market
structure is that supply is too tight relative to demand,
which has caused prices to rise and increased the potential
for blackouts. Theoretically, one could argue that the
price hikes would provide an adequate incentive for
generators to build more plants, which would increase the
supply of electricity and drive down the cost. On the
other hand, it could also be argued that with decisions to
build and finance new powerplants completely in the hands
of the private sector, generators have little incentive to
build new plants that will significantly drive down the
price of each kilowatt hour of electricity sold.
One way to deal with this market failure is to create a
public power authority, as is envisioned in this bill.
Where private sector generators have an incentive to
maximize shareholder return, a public power authority would
have a mission of ensuring a that the state has a
sufficient supply of electricity that can be delivered at
reasonable rates. Municipal utilities, such as the
Sacramento Municipal Utility District (SMUD) and the Los
Angeles Department of Water and Power (LADWP), are examples
of public power authorities which have managed to deliver
adequate service at reasonable rates. These authorities
can coexist with private sector power generators in that
the authorities both self-provide electricity and buy
electricity from the private generators.
California is already home to over 30 municipal electric
utilities. On average, the residential and commercial
rates of these utilities are lower than the rates charged
by investor-owned utilities.
Public power authorities exist in several states, the most
well-known of which is the New York Power Authority, which
owns and operates powerplants and transmission lines.
Arizona, Nebraska, South Carolina, and Oklahoma also have
power authorities.
Public power authorities have a clear financial advantage
over private generators in that they aren't required to
generate a profit, pay fewer taxes, and can take advantage
of tax-free financing. However, private generators have
their owns set of advantages, including compensation
systems which may better motivate employees, a non-public
decision-making processes, and an ability to pick and
choose when and where to invest their resources.
COMMENTS
1.Governance Structure
The governance structure set forth in this bill includes
representation from the Governor's office, the Senate,
the Assembly, and the Treasurer.
While this structure has the benefit of being inclusive,
it also dilutes accountability because no one institution
will have a majority on the board. As this authority has
the potential to make multi-billion dollar decisions
affecting an essential part of the California economy, it
seems vital that there be clear accountability.
As such, the author and committee may wish to consider
changing the governance structure to require all 5
appointees to be selected by the Governor and approved by
the Senate, as is the case with the New York Power
Authority. An alternative structure is would be to
require 4 of the people to be appointed by the Governor
and approved by the Senate, along with the State
Treasurer as the fifth appointee in an effort to provide
greater financial expertise. Either way, these
governance structures would place accountability squarely
on the desk of the chief executive of the state, where it
properly belongs.
2.Scope of Activities
The bill gives the CPFA broad authority over a number of
different energy-related areas, raising the question of
whether the CPFA, as a new agency, should have a broad
mission which allows it to have a big picture view and
intervene where the need is greatest, or whether it
should have a narrower focus until it builds its
institutional credibility and subject matter expertise.
Today, the California Energy Commission (CEC) is
responsible for energy siting and conservation, the
California Public Utilities Commission (CPUC) is
responsible for the economic regulation of investor-owned
utilities, and the Independent System Operator (ISO), is
responsible for electric grid management.
As such, the duties of the CPFA must be carefully
described in order to reduce the risk that it will either
duplicate the work of the CEC, CPUC, and ISO, or enact
policies that run counter to those three agencies.
Noted below are the responsibilities provided to the CPFA
by this bill:
A) Powerplants
The CPFA has authority to finance, own, operate, and
construct powerplants, either on its own or jointly
with public or private-sector partners. It can also
provide financial assistance to repower and improve
the environmental performance of existing, older
powerplants. Power generated by plants funded by the
CPFA must be sold at cost-based rates to Californians.
The power to build powerplants is the heart of this
bill. If private sector providers are unable or
unwilling to build powerplants where there is a need,
the CPFA may step in and initiate construction. The
building of powerplants to serve peak needs is a risky
proposition because sales are uncertain and fuel
supplies must be bought on the spot market. Private
generators understandably demand high profits to serve
this risky market, yet even when the ISO requested
bids to serve this summer's peak demand it received
few offers. This seems like an ideal market for the
CPFA to serve and it's a market that the New York
Power Authority entered when it was ordered by the
Governor to build a number of peak supply generators.
Given the non-profit nature of the CPFA, the
electricity it produces will sell for less than
comparable private sector produced power.
One of the largest unanswered questions posed by this
bill is what the process for determining whether
additional generation is needed will be and how
proposals will be created and/or evaluated.
While the decision to create additional generation may
be obvious now, in time when generation is more
plentiful the decision may not be so easy. The author
and committee may wish to consider directing the CPFA
to rely on the needs analysis expertise from the CEC,
the ISO, and perhaps the CPUC prior to initiating any
project.
Using the expertise provided by these existing
agencies, the CPFA will need to render judgements
about whether the private sector will adequately
provide for new generation, or whether the need will
be served by the CPFA. The creation and evaluation of
proposals is a new function for which no state agency
currently has expertise. Some in-house expertise will
be necessary; moreso if the CPFA is going to initiate
generation projects, though that expertise can be
obtained by contract.
Ultimately, the financial markets will be the final
arbiter of the financial viability of any project.
Unless the financial community is convinced that a
generation project will make money, funding won't be
available. (A good-sized baseload power plant of 500
MW will cost $400-$500 million.) Yet the financial
markets aren't concerned about whether the project is
the most cost-effective or is necessary to meet the
energy needs of the state. Those evaluations will
need to be done somewhere at the state level.
B) Financing of energy efficiency and renewable energy
resources
This bill authorizes the CPFA to provide loans for
energy efficiency and the use of renewable energy
resources. These could include loans for home
appliances, as well as agricultural and commercial
energy efficiency building and equipment retrofits,
buy-downs of energy efficiency loans made by others,
and additional funding for existing CEC loan programs.
This role is currently filled by the CEC, the CPUC,
and by municipal utilities. While it would be useful
to have the CPFA secure funding for existing programs
and potentially propose new programs, having the CPFA
create and evaluate new or existing programs could be
both duplicative and unproductive. As such, the
author and committee may wish to consider clarifying
the bill to ensure that the CPFA will act solely as a
banker in this role, leaving any decision as to
whether a given energy efficiency program is
cost-effective and should be undertaken with the CEC,
the CPUC, or the municipal utility, as appropriate.
As a technical matter, the author and committee may
wish to consider clarifying that with respect to the
loan authority described in Section 3365 of the bill,
the phrase "public utility" is intended to mean
municipal utility.
C) Natural gas
This bill authorizes the CPFA to develop and implement
strategies to facilitate a dependable, reasonably
priced supply of natural gas.
This is a very broad charge which will require
substantial expertise in natural gas supply, demand,
and market structure. Under these authorities, the
CPFA could enter the gas transportation business or
even the gas exploration business - duties which may
be too much for a newly created power authority to
digest while it is also evaluating electric supply and
financing energy conservation activities. Further,
while high natural gas prices and potential shortages
are a current problem, those problems relate more to a
regulatory dispute over gas transmission pricing and
the poor financial condition of PG&E. At least at
this point, California's natural gas problems can't be
attributed to failures in the natural gas market
structures. Consequently, the author and committee
may wish to consider removing this section of the
bill.
3.Sunset
Given the broad powers of the CPFA and its mission to
create an adequate energy capacity in California by 2006,
does it make sense to sunset the CPFA's authority to
develop new projects by 2006 to assess it success and
reassess its needs?
POSITIONS
Sponsor:
California State Treasurer Philip Angelides
Support:
American Federation of State, County and Municipal
Employees, AFL-CIO
Clean Power Campaign
Congress of California Seniors
Consumers Union
Gray Panthers of Sacramento
Older Women's League of California
Planning and Conservation League
Sierra Club
Two individuals
Oppose:
None on file
Randy Chinn
SB 6X Analysis
Hearing Date: February 13, 2001