California Government Reorganization Commission Rejects Schwarzenegger Energy Agency Reorganization Plan

By Chris Hilen
[June 2005]

California Governor Arnold Schwarzenegger’s energy agency reorganization plan (Reorganization Plan) suffered a setback on June 23, 2005. The California Commission on California State Government Organization and Economy (commonly referenced as the “Little Hoover Commission” or the “Commission”) recommended that the California Legislature reject the Governor’s plan to restructure California’s multiple energy agencies. The Governor submitted the Reorganization Plan, A Vision for California’s Energy Future, to the Little Hoover Commission on May 12. He submitted a revised version of the Reorganization Plan on June 13, and at the same time submitted the Reorganization Plan and implementing legislation to the Legislature.

The Little Hoover Commission based its recommendation against the Reorganization Plan on two legal opinions issued by the California Attorney General and one legal opinion issued by the Legislative Counsel of California. Those legal opinions concluded that several elements of the Reorganization Plan are “illegal” on the basis that they impermissibly transfer from the California Public Utilities Commission (CPUC) to the proposed new State Department of Energy (Department) ratemaking powers and functions that are conferred on the CPUC by the California Constitution. The legal opinions reasoned that functions that are conferred on a state agency by the Constitution cannot be transferred to a different agency through the governmental reorganization process; such transfers require constitutional amendment. The Commission stated that if the Reorganization Plan were allowed to go into effect “it would be subject to legal challenge.”

Little Hoover Commission Endorsed Many Elements of Reorganization Plan

The Reorganization Plan establishes a State Department of Energy that would be responsible for the state’s energy policy and a significant number of related functions. The Department would be headed by a Cabinet-level appointed Secretary of Energy who reports directly to the Governor. The California Energy Commission would remain in existence, with the Secretary of Energy serving as its Chairperson. The remaining Energy Commission members would serve staggered four-year terms appointed as they are now by the Governor subject to confirmation by the California State Senate. The president of the CPUC and the president of the California Independent System Operator (CAISO) would sit as ex-officio non-voting members of the reformed Energy Commission.

Under the Reorganization Plan, most of the current functions of the Energy Commission would be assumed by the new Department of Energy, including its energy analysis and strategic planning functions. The Energy Commission, as a component of the new Department, would retain its authority for the permitting of power plants that are 50 MW or larger. The California Power Authority and the California Electricity Oversight Board would each be eliminated. A new Office of Energy Market Oversight (OEMO) within the Department would perform electricity market monitoring and oversee the CAISO.

The Little Hoover Commission found no legal fault with these organizational changes and recommended the creation of a State Department of Energy as an important step toward improving “leadership and accountability” in the state’s efforts to ensure safe, clean, affordable and reliable energy. The Commission encouraged the Governor to resubmit the Reorganization Plan with these provisions.

Similarly, the Commission found no legal impediment to the following elements of the Reorganization Plan:

• Provision to the OEMO of shared responsibility with the CPUC for representing California before the Federal Energy Regulatory Commission (FERC) and exclusion of all other state agencies and offices from representing the state before FERC. The original Reorganization Plan would have also eliminated the CPUC’s role and made the OEMO the state’s exclusive representative before FERC. (Under the present practice, it is not uncommon for up to half a dozen California regulatory agencies and executive offices to file separate pleadings, often advocating different positions “on behalf of the People of State of California” with the FERC).
  
• The transfer to the Department of responsibility for certification of non-utility owned natural gas transmission pipelines and storage facilities. In another change from the original Reorganization Plan, this provision does not remove the CPUC’s historic, constitutionally-mandated responsibility for issuing CPCNs for utility-owned natural gas facilities.
  
• The transfer from the CPUC to the Department of responsibility for determining whether construction of proposed new electric transmission lines is necessary to facilitate achievement of the state’s renewable power goals.

Three Elements of Reorganization Plan Are Subject to Legal Challenge

The Little Hoover Commission recommended against approval of the Reorganization Plan, based on the legal opinions by the Attorney General and the Legislative Counsel. These legal opinions collectively concluded that three elements of the Reorganization Plan illegally transfer from the CPUC to the Department's constitutionally-conferred utility ratemaking functions:

• It unlawfully deprives the CPUC of the responsibility for issuing CPCNs for utility-owned electric transmission facilities. Certification of utility-owned electric facilities is an integral part of the CPUC’s utility ratemaking functions (as noted above, the revised Reorganization Plan leaves the CPUC with authority for issuing CPCNs for utility-owned natural gas facilities).
  
• It unlawfully deprives the CPUC of its existing responsibility for making statutorily-required cost recovery determinations for utility infrastructure projects on which the CPUC issues CPCNs. These cost recovery determinations are integral to the CPUC’s ratemaking function.
  
• It unlawfully transfers to the Department the CPUC’s current responsibility for ensuring the electric transmission rates established by FERC are fully reflected in any retail rates established by the CPUC. The flowing through of wholesale transmission rates is an explicit ratemaking function conferred on the CPUC by the California Constitution.

Reorganization Plan Becomes Law Unless Rejected by the State Legislature

Under California’s governmental reorganization process, the Reorganization Plan cannot be amended by the Legislature, which may only reject it or let it become law in its entirety. If neither body of the Legislature rejects the Reorganization Plan within 60 days of its submission to the Legislature, the energy agency reorganization will become operational by law. The deadline for either the State Assembly or the State Senate to reject the Reorganization Plan is September 12 (the days of the Legislature’s recess from July 15 to August 15 are not included in the 60-day period).

This Advisory is a publication of the Energy Department of Davis Wright Tremaine LLP. Our purpose in publishing this Advisory is to inform our clients and friends of recent developments in energy law. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

Copyright © 2005, Davis Wright Tremaine LLP.

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