Coherent Policy Making

Finding 4: The State has a fractured and confused process for setting energy-related policies that results in conflicting public efforts with no clear venue for resolving the conflicts.

The legendary conflicts between the Energy Commission and the PUC are a consequence of competing venues, competing missions, and an unnatural segregation between policy making in the abstract and policy making in everyday decisions of governance.

Many conflicts of the past will not be repeated as the Energy Commission and the PUC stop the regulatory proceedings that attempted to make the supply-and-demand decisions of the market place. But both agencies continue to have different goals for the State and different views for their own future. Not surprisingly, the two conflict.

The first three findings and resulting recommendations of this report would clarify the roles these agencies will play in the future, reassign functions based on developed expertise and contemporary needs and prevent unnecessary conflicts between the two.

Beyond the history of the two agencies, energy is so integral to the economy and a number of environmental and resource issues -- from transportation to air and water protection -- more than one public agency always will impact the formation and implementation of energy policy.

As a result, the State has both the opportunity and the need to establish a policy-making framework that is more accountable and effective, and that provides a clear and timely response to public concerns.

A Fractured Process

Few places in the statutes of California has the Legislature created such a specific policy-making process as in energy, and in few subject areas has there been as much conflict and confusion about who should set policies.

In its authorizing legislation, the Energy Commission was instructed to prepare every two years what the law calls the "Biennial Report." Beginning with Section 25309 of the Resources Code, the law provides specific instructions for preparing the report. The core of the document is the Energy Commission's projection of the State's energy needs over the next 20 years, the alternatives for meeting those needs, and the Energy Commission's recommendations for how those needs should be met. The law provides for the report to be submitted to the Governor. The Governor is required to review the plan and forward it, along with his critique, to the Legislature. In that transmittal, the document is deemed "the official statement of energy policy."

In addition to the "official" policy, the Energy Commission, the Public Utilities Commission, the Air Resources Board, the State Water Resources Control Board, the Department of General Services and a number of small agencies make decisions that effectively set energy-related policies. These situational policies have been particularly important in the case of the PUC -- which in setting rates, approving utility expansion plans and establishing public programs dramatically shapes how the State's energy needs will be met. The Secretary of the Resources Agency described the problem in a legislative hearing as poor coordination:

While all of the people who work at these different specialty agencies recognize that their set of problems are not the only problems the State must address, they have no mandate to work together within a common policy and regulatory structure to identify and achieve a "low-cost solution" that simultaneously does the best job possible on each of the problems while allowing consumers and businesses to have reliable low cost energy supplies that they need to thrive.⁽⁵⁷⁾

While the current discussion of energy agency restructuring is fueled by market competition, the political debate has historically been charged by competition between the Energy Commission and the PUC.

In 1974, when the Energy Commission was newly born, the Little Hoover Commission recognized the potential for conflict and urged the coordination of policy making and policy implementation. In 1984, the Little Hoover Commission recommended ways to solve what by then had become a significant problem for the State.⁽⁵⁸⁾

While critics and reformers over the years have placed the blame for these problems at the doors of different agencies, an assessment prepared in 1994 by the Assembly Natural Resources Committee staff captures the protracted and serious nature of the problem:

One of the fundamental issues driving the debate over energy agency reorganization for the past 15 years has been the overlapping responsibilities and conflicting approaches of the CEC and the CPUC. Many observers believe that CPUC/CEC competition and conflict, as well as CPUC's alleged overweening deference to protection of the status quo, have given California a confused and, at times, self-defeating energy policy. Many observers believe that any reorganization proposal should alleviate this problem, first and foremost.⁽⁵⁹⁾

Shortcomings and Consequences

Several analyses have identified the weaknesses in the current policy-making process. Some of the problems are not unique to energy policy, and can be expected to persist even in a restructured energy market. Among the shortcomings and their consequences:

• The Official Policy is Not Binding on Other Agencies. While the Biennial Report is official -- and may be of the highest technical caliber -- the policy document bears little legal or political weight. The document is not binding on other state agencies and the Energy Commission has no authority to take actions against agencies that do not comply with the document. Even the tone of the document is more advisory than compulsory.
• No Mechanism for Legislative Approval. While the policy is forwarded to the Legislature, the Legislature does not approve the document, and there is no direct connection between the report and specific statutory amendments or budget priorities that should be considered by the Legislature.
• Energy Commission Policies Require PUC implementation. In the case of both the Biennial Report, the electricity forecast and other policy documents prepared by the Energy Commission, implementation often has rested with the PUC. This arrangement invites frustration. And given the turf battles between these two agencies, that arrangement has been a source of great conflict -- creating uncertainty for market players and inflaming cynicism among the public.

Some inefficiencies are inherent in democratic policy making, particularly because of the intentional division of power between legislative, executive and judicial branches. But the inefficiencies are compounded, and the consequences increase, when fourth-branch agencies -- substantially independent commissions with policy making and adjudicatory authority -- are allowed to battle out policy differences.

Ironically, the problems between the Energy Commission and the PUC began to escalate when federal policies encouraged the beginnings of competition in the generation sector and left to the states the task of creating market-like mechanisms for integrating independent producers into the monopoly paradigm. The result in California was what a former public manager with experience in both agencies referred to in testimony to the Little Hoover Commission as an ever-escalating cold war:

The California Public Utilities Commission and the Energy Commission have acted as superpowers in that conflict, each with its satellite constituency groups, but while the superpowers of the nuclear Cold War resided on opposite sides of the Iron Curtain, the superpowers in California's's Cold War over energy policy both reside in the executive branch.⁽⁶⁰⁾

The Berlin Wall in this dispute was a 15-year battle over the Biennial Resource Planning Update -- a process that was intended to last two years and determine how much additional electricity generation the State would need and the best way to acquire it. In the course of the dispute, the PUC refused to accept the Energy Commission's analysis of future energy needs and a bidding process intended to yield low-priced providers turned into a regulatory free-for-all.

The experience provided ample evidence of the need to coordinate efforts, consolidate oversight authority when possible and provide quicker ways to resolve inevitable disputes between agencies with different missions. The Legislature is the traditional venue for establishing major policies and resolving disputes over major policies. But almost routinely, interest groups that are unsatisfied by the outcomes from the regulatory process have appealed to the Legislature. The Legislature, as a result, finds itself in a position of trying to sift through detailed regulatory decisions to resolve major policy issues, or tinkering with the details to satisfy the interest groups.

PUC commissioners, meanwhile have taken the position that unless the Legislature takes action, they are free to do as they please. In characterizing the "plenary power" granted to the Legislature by the Constitution over the Commission, the PUC's former president testified that the Commission does not have the authority to "hold to a course which the Legislature deems antithetical to the public interest":

Yet it is equally clear that unless the Legislature elects to act, we have created in California the fullest expression of a tool for quickly and decisively defending the public interest, and we have vested that tool with a combination of legislative and judicial function and powers.⁽⁶¹⁾

The legislative debate and reworking of the PUC's electrical restructuring plan is evidence of the policy-making dysfunction. The enormous policy decision to pursue competitive electricity markets -- and the general parameters of that transition -- is a decision that should be made by officials directly responsible to the people. At the same time, it may not be reasonable to expect legislators to fashion the specifics of a plan that must accommodate complicated engineering and economic analysis.

In this instance, however, the PUC proceeded to make both large and small decisions without formal involvement of the Legislature or even a public plan for involving the Legislature. Lawmakers responded by passing Assembly Concurrent Resolution 143, which required the PUC to assess certain issues, solicit public opinions, and report to the Legislature on those issues before further developing the plan to unravel monopoly electrical service. Even then, lawmakers complained that PUC officials responded to the Legislature requirements as if the lawmakers were unnecessarily meddling into the Commission's regulatory arena. The Chairman of the Assembly Joint Oversight Committee on Lowering the Cost of Electric Service, told PUC officials in a public hearing that a better policy making framework was needed:

We are on a merry-go-round here. The Commission issues a Bluebook in the spring of 1994 laying out certain dramatic proposals for restructuring the electric services industry in California and moving away from traditional ratemaking procedures as well as traditional ways in which electric services have been delivered to consumers with an indications they are going to move very quickly in doing this.

The Legislature, to try to become involved in what we consider an appropriate way, rushes to adopt a resolution which sets up this committee and sets certain dates so that we can get into the game. Now the Commission rushes to set up these evidentiary hearings which they think are a bad thing to do and wasteful of time and energy in response to ACR 143. I'm looking for a way to get off the merry-go-round and do it in a way that's more rational and cost-effective for the Legislature and for the Commission.⁽⁶²⁾

Two years later, policy makers, consumers and industry representatives again found themselves negotiating the same details of the restructuring plan simultaneously in regulatory and legislative arenas -- months after the State's utilities had petitioned federal officials to allow competition.

Just as the problems between the PUC and the Legislature will not go away with restructuring, these problems between the PUC and the Energy Commission will persist after competition. In responses to the Little Hoover Commission, both agencies described themselves as the major venue for setting energy policies -- with the PUC focusing on the effects that policies have on energy prices, and the Energy Commission on its statutory obligation to set the State's energy course.

Even if one of these agencies were to be abolished, the problem would persist because of the need to coordinate energy policies between air and water pollution agencies and with other states and the federal government. Those realities point reformers toward a combination of structural and procedural remedies.

Clarifying Policy Roles

Policy analysts frequently debate how much policy-making responsibility should rest in the Legislature and how much should be delegated to departments and commissions. To the extent that major policy decisions are left to appointed commissions, the system is vulnerable to criticism that policy is being set by officials who are not directly accountable to the public. History also shows that interest groups who are unhappy with a regulatory outcome will seek redress in the Legislature, luring lawmakers into "micro-managing" the commissions.

For generations, political scientists and government reformers have considered policy making models that can efficiently yield "good" decisions. Most of those models can accommodate some, but not all of the human weaknesses responsible for many policy failures: overwhelming special interests, competing political views, insufficient information and human error. As a result, California should rely on the Legislature to do what it does best and let the Commission do what it can do best.

The Joint Committee on Energy Regulation and the Environment in 1991 developed recommendations that attempted to solve the problem. Some of the solutions were structural -- such as merging the energy functions of the PUC and the Energy Commission into a single agency. But the committee's research also recognized that consolidation -- while perhaps essential in the long term -- would only go so far, given the dynamics of energy policy. Policy making is an ongoing process that requires the technical skills of expert agencies and the political direction of elected leaders. Among the Committee's recommendations:

The Legislature and the Governor should provide energy agencies and energy-related environmental agencies with clear and uniform policy direction and goals in their enabling statutes. And the Legislature and the Governor should provide mechanisms for the ongoing development and articulation of State energy policies, concrete goals, plans and implementation programs of the Governor and his administration energy agencies.⁽⁶³⁾

That recommendation is consistent with a recommendation long advocated by the Chairman of the Energy Commission. The Chairman believes that the current policy making process articulated in the Warren Alquist Act should be amended to include legislative approval of the policy. As a result the Legislature would then be expected to convince or compel other state agencies to comply with the policy.

One solution would be for the Legislature to annually establish policy goals for the commissions and for the commissions to then use their technical expertise to pursue those goals. That process would allow the Legislature to do what it does best -- express the desires of the voting public. It also would allow the commissions to do what they do best -- gather the detailed information and provide the careful deliberations that are essential to making new policies work in the realities of the marketplace.

This process is similar to performance-based budgeting. That process is geared toward making line agencies more productive and accountable by focusing them on outcomes rather than inputs. Rather than assessing budget proposals based on personnel years, for example, they are assessed on how many children will be educated. A byproduct of performance-based budgeting can be a better relationship between the Legislature and the agencies. Legislators can make the policy-oriented choices they want without having to manipulate budgets. The agencies, in turn, get clear direction on what is expected of them in the next year and can be held accountable to those goals at the end of that year.

To fully adopt performance-based budgeting is an involved process that would be too much to expect of the agencies guiding dramatic restructuring in utility markets. But adapting elements of performance-based budgeting that could clarify policy-making duties would be easier than debating broad and detailed policy issues before both the oversight commissions and the Legislature.

Recommendations

Recommendation 4-A: The Governor and Legislature should enact legislation requiring the Energy Commission to annually appear before the Legislature to review the agency's performance toward meeting established policy goals and to set specific goals for the Commission to pursue over the next year.

This process would allow the Legislature to better monitor and more timely influence the direction of the oversight commission, provide an opportunity for better relationships to develop and discourage venue shopping.

Recommendation 4-B: The Governor and the Legislature should enact legislation requiring the director of the Department of Conservation to biennially prepare an assessment of the department's existing energy-related programs and propose changes to eliminate obsolete programs, improve existing programs or create new programs.

The document should be submitted to the Governor for approval and forwarded to the Legislature for consideration as statutory amendments or budget reallocations. The document should specify what actions would need to be taken by other departments to accomplish the policy changes. It should also specify what actions other departments would have to take, if any, to make the policy recommendations work.

Recommendation 4-C: The Governor and the Legislature should enact legislation requiring the Secretary of the Resources Agency to participate as a non-voting advisor in Public Utilities Commission proceedings concerning energy-related issues.

A significant failing of the current policy making framework is the gap between the Energy Commission, the Public Utilities Commission and the State's executive. Providing for a member of the Governor's cabinet who also oversees the Energy Commission to take part in the PUC's energy-related proceedings would bridge that gap. This arrangement would only be needed as long as the PUC retains jurisdiction over energy utilities.