Since 1998 all ratepayers within an investor-owned utility’s (IOU) service territory have paid a fee or charge to fund programs such as energy efficiency, renewable energy development, and invest in research and development. While this fee, better known as the public goods charge (PGC), technically expired on January 1, 2012, ratepayers continue to pay a surcharge to fund similar programs. The constitutionality of the surcharge, now administratively imposed by the California Public Utilities Commission (CPUC), is in question.
In 1996, when the Legislature deregulated California’s electricity market (AB 1890/Ch. 854), they were concerned that the state’s three IOUs – Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric – would not invest in public interest research and if they did, the utilities would consider the research proprietary. To ensure funding would be used to promote energy efficiency programs and support the development of alternative energy resources, AB 1890 created a nonbypassable surcharge, the PGC, charged on the basis of usage. The bill directed the California Energy Commission (CEC) to allocate the PGC funds to programs which would enhance system reliability and provide in-state benefits for the following: 1) cost-effective energy efficiency and conservation activities; 2) public interest research (PIER) and development not adequately provided by competitive regulated markets; 3) in-state operation and development of existing and new renewable energy resources; and 4) benefits for low-income consumers (this program was not subject to the sunset date).
The PGC was originally set to expire in March 2002; however, the Legislature extended the PGC until January 2012 (AB 995/Ch. 1051/2000). The rationale for the PGC extension was the belief the 2000-01 energy crisis and near-bankruptcy of two utilities would result in utilities cutting costs and therefore not funding these programs.
During the 2011-12 legislative session, several attempts were made to extend the PGC. The extension required a two-thirds vote because the PGC was considered a tax. While the funds were collected for the benefit of certain programs, the funds were distributed generally and did not always provide a direct ratepayer benefit. All attempts to extend the PGC failed, largely on party-line votes (with Democrats in support and Republicans in opposition).
While the Legislature’s attempts to extend the PGC failed, the CPUC worked administratively to implement a similar surcharge. In September 2011, Governor Brown requested the CPUC take action to ensure the programs funded by the PGC continued with some modifications. In a series of decisions the CPUC created a new surcharge, the Electric Program Investment Charge (EPIC).
In December 2011, the CPUC established the EPIC and directed the IOUs to continue collecting the surcharge formerly known as the PGC. The funds were to be collected at the same levels as the expiring PGC and were used to fund: 1) renewables programs and 2) research, development, and demonstration (RD&D) programs. The surcharge would no longer be used for energy efficiency programs because a new funding source had been designated in another CPUC decision.
The CPUC ordered the collection of the EPIC surcharge on an interim basis for renewables and RD&D programs. The continued collection of these funds was dependent on the resolution of policy, programmatic, governance, and allocation issues in phase 2 of their rulemaking proceeding. Like the PGC, the EPIC funds were collected as a line item on the customer’s utility bill (generally listed as public purpose program).
On May 24, 2012 the CPUC issued the phase 2 decision authorizing the EPIC program to continue through 2020. The EPIC funding was authorized for applied research and development, technology demonstration and deployment, and market facilitation. The funding is administered 80% by the CEC and 20% by the IOUs, with the IOUs limited to the area of technology demonstration and deployment. The decision authorized the continued funding collection at a level of $162 million per year beginning January 1, 2013 and ending December 31, 2020. The amounts collected will rise on January 1, 2015 and on January 1, 2018 at the rate of the consumer price index change over the previous three-year period.
EPIC and Energy Efficiency
Energy efficiency has been a priority in California, so the IOUs were ordered to include all cost effective energy efficiencies in their energy procurement portfolio. Energy efficiency programs were partially funded by the PGC and the Procurement Energy Efficiency Balancing Act (PEEBA). When the new EPIC program was established, energy efficiency was removed from the funding allocation list.
With the PGC set to sunset on January 1, 2012, the CPUC adopted a decision to ensure the continuation of adequate funding for IOU energy efficiency programs without the PGC. The decision took additional PEEBA funds to backfill the PGC funding to maintain energy efficiency funding in 2012 at the then authorized levels. The PEEBA funds are collected in accordance with the rate design established in each of the IOU’s General Rate Case before the CPUC. The CPUC believes the PGC funding for energy efficiency is no longer necessary because an adequate funding mechanism is available within their statutory authority.
Constitutionality of EPIC: Is it a Tax?
The constitutionality of the CPUC’s actions to establish the EPIC program is in question. The CPUC has ratemaking authority, but the rates charged must provide a direct benefit to the ratepayers. Like the PGC, the funds generated under the EPIC program do not necessarily stay in the IOU territory for the benefit of the ratepayer paying the surcharge. This is especially true for the funds administered by the CEC. Since the funds are being transferred to another state agency and are not being used for the direct benefit of the ratepayer, the EPIC surcharges would likely be a tax which cannot be administratively imposed by the CPUC.
The CPUC asserts they have been granted broad statutory authority, which supports the implementation of the EPIC program. They also assert the EPIC is a legitimate regulatory fee, and not a tax, in that its purpose is “to serve the public interest and benefit ratepayers by investing in research, development and demonstration that is ‘vital to achieving our state’s aggressive policy goals related to energy efficiency, renewable energy, petroleum reduction, smart grid integration and reliability, and greenhouse gas reductions.’ ”
Southern California Edison has filed petitions for review of the CPUC decisions in phase 1 and phase 2 of the EPIC proceedings. The petitions have been assigned to Division 3 of the California Court of Appeals, 2nd District and are currently pending. The petitions allege the CPUC does not have jurisdiction to establish a charge (i.e. EPIC) to fund another state agency (i.e. CEC), the EPIC is an unlawful tax, and the EPIC involves an unlawful delegation of discretionary authority from the CPUC to the CEC.
While the Legislature attempted to pass a bill last session essentially authorizing the collection of the EPIC funds and resolving the legal question (AB 723 was held on the suspense file in the Senate Appropriations Committee), no bill has been introduced in the 2013-14 session (as of late April).
Despite the questions of the legality of the EPIC program, the 2012-13 budget included $1 million for the CEC to develop a plan to administer funds from the new program. It was estimated the EPIC program would raise roughly $200 million between January 2012 and June 2013.
The Governor’s 2013-14 budget proposes to spend $192 million from the EPIC for the following CEC increases:
- $5.7 million to support an additional 58.5 permanent positions to implement the EPIC program and the New Solar Home Partnership (NSHP).
- $159.3 million to fund EPIC program projects, which had previously been funded from the PGC.
- $25 million to fund NSHP projects, which had previously been funded from the PGC.
- $2 million to support technical assistance for the EPIC program and NSHP.
While ratepayers may have seen benefits from programs funded by the PGC, it does not mean the programs should continue in perpetuity. Nor does it mean the programs should continue without some legislative oversight if they are going to be funded with tax dollars.
The Legislature imposed the PGC to fund public research due to concerns about the decisions of the IOUs in the newly deregulated electricity market and the 2000-01 energy crisis. A great deal has changed in the last 17 years. California has adopted policies such as reducing greenhouse gas emissions and requiring 33% renewable energy resource procurement by 2020. These policy changes give IOUs greater incentive to invest in research and development as they strive to meet California’s energy mandates and maintain costs. Therefore, is it appropriate for the state to continue funding this research?
For more information on this report or other Energy, Utilities, & Communications issues, contact Kerry Yoshida, Senate Republican Office of Policy at 916/651-1501.
 California Public Utilities Commission Decision 13-01-016, January 11, 2013.
2 Legislative Analyst Office, The 2013-14 Budget: Resources and Environmental Protection, Page 28, February 2013.