The purpose of pursuing competition in utility services is to replace
the inherent inefficiencies of government regulation with the
promised efficiency of market forces. In making that choice, the
State has the opportunity and obligation to realign its oversight of these
markets and to resolve notorious inter-agency disputes and overlaps.
As soon as feasible, California needs a keen and unified energy oversight
agency, schooled in the economic dynamics and environmental sciences
that permeate the public interest in this area. The State cannot reach
this goal overnight. But the emerging markets provide for an evolutionary
consolidation of authority in the California Energy Commission that could
accomplish this long-sought objective with minimal disruption to public
agencies and private concerns. The chart at the end of this summary
illustrates this transition.
Despite the growing faith in the ability of markets to provide utility
services, the State will maintain programs intended to make up for the
possible failure of the market: to utilize the most energy-efficient
construction techniques and to provide research, development and
demonstration of efficiency technology, renewable resources and
alternative fuels. These programs, however, can best be managed by a
department and, to reduce the potential of government intervention into
the market, are best separated from the agency charged with market
The emerging telecommunications market by itself presents an enormous
challenge. The Public Utilities Commission is uniquely qualified to nurture
competition and to redefine the public interest in this rapidly changing
industry. Its chances of success in this endeavor would be greatly
improved if telecommunications were to become its sole focus.
Deregulation of the transportation industry is nearly complete, but the
State has yet to eliminate the PUC's jurisdiction in transportation and
consolidate the functions related to licensing and safety of transportation
service providers so as to streamline the role of government and better
serve the public. That consolidation should occur immediately, as
indicated in the organizational chart.
Investor-owned water companies may be the last monopolies of the sort
the PUC was created to regulate. But water quality and water supply
issues now dominate the finances of the State's relatively few private
water companies. The economic regulation of those companies should
be moved immediately from the PUC to the State agency more familiar
with those challenges.
And finally, as more Californians receive utility service from competitive
enterprises, California will need to enhance the role of the Attorney
General in protecting consumer interests, bolster the credibility of public
decision making and enlist cooperation in managing the public work
The findings and recommendations in this report do not assess or
endorse the policy choices that have been made in PUC hearing rooms
and the halls of the Legislature to replace monopoly utility services with
competition and consumer choice. Rather, they offer a government
structure that matches the market-oriented choices that have been made.
Where feasible, the structure removes the economic regulator when the
need for economic regulation ceases to exist. Where necessary, it
provides for market oversight -- such as gathering detailed information
and monitoring for potential market power abuses -- that is needed for
investors and consumers to make decisions. Where appropriate, it
preserves public policy goals that competitive markets may shortchange,
including research and development and universal access to essential
The findings and recommendations represent what the Little Hoover
Commission believes to be the best solutions at this time. The path to
competition is both promising and unknown, and the recommendations
offer a course for navigating the transition.
While the recommendations set some structural goals -- such as a single
energy oversight authority -- unforeseen particulars will define the
ultimate shape and timing of these changes. The best strategy the State
could craft would begin with a constant commitment to assess what has
been done and to make needed course corrections.
Discussions of PUC reform are often stymied by a debate over the degree
that the PUC can be changed without amending the State Constitution.
If that issue persists, it should be resolved expeditiously by the
appropriate authorities. The Little Hoover Commission makes its
recommendations independent of that issue. The government structure
advocated here should be pursued -- either statutorily, or if necessary by
amending the Constitution.
After 10 months of research and analysis, with the cooperation of the
agencies involved, and generous assistance from the regulated
companies, consumer and environmental interests, the Little Hoover
Commission has reached the following findings and recommendations:
Finding 1: As presently constituted, neither the Public Utilities
Commission nor the California Energy Commission is well-designed to perform the state functions needed by competitive
The need and political consensus to reform the State's energy regulatory
structure is increasing as energy markets undergo fundamental change.
Because of the physical nature of electricity and natural gas and because
of their importance to the economy and public welfare, some state
oversight of a competitive energy industry may be essential. The agency
will have to be focused on energy and expert on the economic forces and
environmental issues that shape energy markets and public policies.
The PUC's economic regulation of generation and transmission facilities will not be needed when competition begins and the transmission system is managed by the Independent System Operator, which is now slated for January 1998. The PUC will no longer need to conduct environmental reviews of new generation and transmission facilities and will not be in a position to monitor safety and reliability of new generation and transmission facilities.
The obsolete functions known at this time are the Energy Commission's
economic forecasting and needs analysis associated with approving most
generating facilities, its load management responsibilities and its periodic
informational reports. As competitive markets develop, additional
functions may prove to be unneeded, as well.
In a competitive electricity generation market, the State will need a
consolidated siting, environmental review and safety compliance
authority for generation and transmission facilities. The State also will
need to provide variations of functions already performed by the Energy
Commission -- in particular, the gathering and disseminating of detailed
market information, monitoring for possible market power abuses and
representing the State in regional, national and international regulatory
venues. The Energy Commission also should be given the ability to grant
facility applicants the power of eminent domain on a case-by-case basis.
The Legislature correctly realized the important role in a competitive
market of making sure that a reliable system is maintained. It is unclear
at this time how much of that responsibility will rest with federal
authorities. To the extent that the State can play a significant role in
system reliability, that function should be consolidated with other market-oriented oversight responsibilities. One potential model would rely on the
Independent System Operator to make recommendations to the Energy
Commission regarding standards, notify the Energy Commission of
potential violations and investigate system failures. The legal authority,
however, for setting and enforcing standards should be vested in the
Finding 2: The Energy Commission's dual responsibilities as an
energy regulator and an advocate for alternative energy
solutions are not compatible with its new mission of encouraging
competition and consumer choice.
Emerging competition requires that the linkage between regulatory and
advocacy functions be reconsidered, along with the long-term need for
advocacy programs. In competitive markets government cannot pick the
market solution and it must be careful in how it tries to influence the
decisions that producers and consumers make.
Placing these functions in a department will make two significant
reforms: It will separate advocacy from oversight and it will enable more
significant changes in how the programs operate to reflect new funding
and market needs. At the same time, the move would preserve the
important functions that have saved Californians considerable amounts
of money and facilitated the advancement of other energy-related public
policies, including clean air and responsible use of other resources.
The advisory panel should include key legislators, representatives of
environmental and consumer groups, and the home building and
manufacturing industries. The director of the department should be
instructed to explore other institutional arrangements for managing the
research program, including a joint powers agreement involving energy
policy officials and representatives from public and private universities.
Finding 3: The PUC, while it will play a transitional role in
nurturing competition, could jeopardize the success of the
energy restructuring plans if it were to assume oversight of the
competitive aspects of energy markets.
The PUC will continue to have critical tasks in the transition to
competitive energy markets, in redefining rate regulation of remnant
monopolies and in facilitating the evolution of distribution services. How
the PUC performs those tasks will greatly influence the success of
competition. And how competition unfolds will, in turn, shape the
ultimate structure of the State's energy oversight agency.
While the Legislature should expeditiously divest the PUC of functions that will be obsolete with the advent of competition, other regulatory functions will become obsolete over time. Thresholds should be established in statute ahead of time determining when the PUC will cease regulating in a given arena. The benchmarks also will serve to better coordinate activities between the Energy Commission and the PUC.
The goal of the State should be a single agency with energy oversight
authority. But the State should pursue this goal in a way that does not
jeopardize emerging markets or compromise consumer protection. The
first step is to consolidate those new functions over the expanding
competitive market into a single agency. The second step is to
consolidate the regulation of remnant monopolies at the Energy
Commission. The precise timing and scope of the government
restructuring will depend upon market developments.
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.
Energy is so integral to the economy and a number of environmental and
resource issues -- from transportation to air and water protection -- that
more than one public agency always will impact the formation and
implementation of energy policy. Many of the legendary conflicts
between the Energy Commission and the PUC will end as the two
agencies stop the regulatory activities that attempted to make the supply
and demand decisions of the marketplace. Beyond the functions of these
agencies, the advent of competition provides the State with both the
opportunity and the need to establish a more effective and more
accountable policy-making framework.
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
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 the department 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.
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 will only be
needed as long as the PUC retains jurisdiction over energy utilities.
Finding 5: The fast-paced dynamics of the telecommunications
industry, with its importance to the California economy and the
complexity of new public policy issues, is not being adequately
overseen by a commission that regulates numerous other essential
The trends in the rapidly changing telecommunications industry create
complex policy choices involving conflicting public interests.
Implementing these policy choices may be just as challenging -- given the
need to infuse competition into monopolies in ways that are economically
sound, legally correct and satisfying to a demanding public. Because
PUC decisions will influence the economic health of the market, the
timeliness and quality of its decision-making is paramount.
A number of policy reviews in recent years have found that the PUC has
too many responsibilities to adequately fulfill them all. Changes in
technologies and emerging competitive utility markets have increased the
Commission's workload. Successful oversight of the telecommunications
revolution will rest in large part on the time and focus the PUC can bring
to the job.
Finding 6: As new telecommunications technologies and services
emerge, the State does not have a systematic way for
determining areas of public interest or the extent of government
oversight that is necessary.
Telecommunications has not changed overnight from a monopolistic
service into a fully competitive market. Rather, competition has come
gradually to different parts of the telecommunications network at
different times. In the past, the PUC's role has been to use regulation to
perform price setting and other market functions in the absence of a
competitive market. The competitive market raises the question of what
regulations if any the PUC should impose. While the PUC has conducted
numerous proceedings in an attempt to fairly usher competition into the
market, even its supporters do not believe the PUC has done enough to
predetermine when it will stop regulating.
The PUC should be required to use those standards to establish the scope
of its activities and routinely review the consequences of those activities.
The standards should include a time line and the PUC should report to the
Legislature on its progress. The goal is consistent and accountable
progress toward aligning regulation with the markets.
The sunset review will provide at least two benefits. The first would be
to make sure that any basic function, or the PUC itself, has not outlived
it usefulness and is no longer providing significant benefit to Californians.
The second benefit would be to provide the Legislature with the
opportunity to reassess the State's role in telecommunications and the
best way to fulfill those roles.
Finding 7: The State's practice of setting telecommunications
policies on a case-by-case basis encourages market players to
seek the same changes from the Legislature and the Public Utilities
Commission. This venue shopping spurs occasional conflicts and
confusion among government entities that could prove costly to
nascent competitive markets.
In telecommunications, as in energy, it has not always been clear when
the Legislature will be the venue for establishing a policy, and when the
Public Utilities Commission is the appropriate policy maker. While there
is some public benefit to this tension, there is evidence that in
telecommunications policy the relationship between the Public Utilities
Commission and the Legislature has devolved. The rapidly changing
telecommunications industry and its customers will be better served by
some agreement in how major and minor policies will be set.
While the PUC was intended to be insulated from day-to-day politics, it
cannot operate in a vacuum. Over the long term, the legitimacy of
fourth-branch commissions to chart significant policy changes is
enhanced by routine reality checks from directly elected legislators.
Similarly, while given the authority to make tough decisions day in and
day out, the PUC's legitimacy will be enhanced by an annual public
accounting of its progress.
Finding 8: Some of the PUC's transportation regulatory
activities are remnants from an era when industry asked for
government intervention as a shield against the rigors of
competition. Those regulations, disguised as consumer protection,
can have the effect of raising prices without a commensurate
benefit to the public.
The PUC is now pre-empted by federal law from regulating rates for
railroads and trucks, but has yet to abandon rate setting for other
carriers. Beginning in the 1930s, when the trucking industry asked for
government protection against cutthroat competition, the PUC has
gradually come to confuse protecting the industry with guarding the
public interest. A number of the Commission's requirements discourage
new market entrants and can lead to higher consumer prices.
Policy makers at the federal and the state level have determined that competition, not regulators, should set prices for transportation providers. Preserving remnants of economic regulation -- such as issuing certificates of public convenience and necessity for new providers, posting tariffs and requiring detailed financial reports -- can reduce competition and increase consumer prices without providing significant consumer benefits.
Finding 9: The PUC's transportation safety and insurance
functions overlap with the duties of the California Highway
Patrol and the Department of Motor Vehicles. The overlap results
in unnecessary regulation and contributes to gaps in safety.
As the PUC's role in economic regulation has been pre-empted at the
federal level, it is no longer logical for the Commission to be responsible
for imposing licensing and safety regulations on passenger carriers,
household movers, railroads and other common carriers.
Primary responsibility for transportation in California has long been vested in the Business and Transportation Agency, and departments within that agency are responsible for licensing drivers and enforcing safety laws. Common sense and economic realities prompted the Legislature in 1996 to move safety and licensing of truckers to the CHP and the DMV. Common sense dictates that the same functions for other transportation providers be transferred to those agencies as well.
Shuttle vans provide an opportunity for economics and convenience to
actually work in favor of the State's policies of discouraging single
occupancy vehicles. The State should take advantage of this trend by
providing shuttle passengers the same level of safety as those of other
commercial passenger carriers.
The State has an enduring interest in making sure its citizens are not
cheated or victimized by thieves. The State pursues this interest daily
with generalized law enforcement and consumer protection agencies and
that protection may prove to be adequate in the case of household
Finding 10: As the PUC's role as a rate setter for railroads has
been eliminated, it is left with railroad safety functions that are
more related to the core competencies of transportation planners
and accident investigators than to those of an economic regulator.
The PUC has retained some jurisdiction over safety for both heavy rail
and rail transit systems, even though the federal government has virtually
pre-empted the states from creating their own safety programs. The
public interest demands a continued state role in rail safety, but how the
State can best fill that safety role is influenced by the place of rail in the
State's overall transportation scheme.
The precise form the new consolidated program will take should be based
on a thorough review of how to best link rail safety with statewide rail
planning and how to best coordinate funding of safety projects within
Caltrans to avoid the conflicts that have slowed projects in the past.
Finding 11: While the rates charged by private monopoly water
providers still need government scrutiny, the greater public
interest lies in ensuring adequate and safe drinking water supplies --
challenges that fall outside the PUC's expertise of thwarting
Water companies in California face the dual challenges of meeting federal water quality standards and conserving water supplies to provide future customers. The PUC's focus on protecting customers by keeping rates as low as possible impedes companies from fulfilling these needs. These issues -- along with dramatic changes underway in the energy and telecommunications industries -- provide the opportunity to reconsider the State's choices for economic regulation of private water suppliers.
The State has more choices today for assigning the economic regulation
of private water companies than it did at the dawn of the century when
utilities shared the commonality of monopoly status. The State Water
Resources Control Board has the procedural experience and the water
expertise needed to address the primary concern facing California's water
suppliers and their customers -- a safe and adequate supply over the long
The State Water Board is the agency best suited to bring about these
changes, but the opportunity provided by federal loans and the
willingness of some larger systems to take over small, under-financed
companies should be pursued by whatever agency has responsibility for
regulating the private water industry.
Finding 12: In competitive markets, as public decisions may be
diffused, residential and small business customers may not be
well-represented in a number of regulatory, legislative,
administrative and judicial venues.
The original purpose of the PUC was to protect consumers in the absence
of a functioning market. The State's new strategy is to facilitate the
market wherever possible -- policing those industries as it does others for
antitrust behavior and consumer fraud. As utility services become
competitive, the role of the PUC will shrink -- requiring other agencies,
most notably the Attorney General, to play a larger role in consumer
The Attorney General in the past has relied more on the full-service
regulatory strategy of the PUC to protect utility consumers. As the
monopolies give way to the market, the Attorney General's role in this
arena will naturally increase. To encourage cooperation, prevent
duplication and provide effective consumer protection, resources and
expertise should be shifted over time to enable the Attorney General's
Consumer Law Section to better fill this role. The legislation should
specify that the unit will employ a combination of attorneys, engineers,
economists and policy analysts and will be funded by reallocating a
portion of the existing user fees assessed to fund the Public Utilities
Commission and the California Energy Commission.
Process and Management
Finding 13: The PUC's procedures, even as amended by the
Legislature in 1996, provide the least accountability to the
public and the fewest assurances that decisions will be based on the
factual record in precisely those cases where the greatest profits and
the greatest public interests are at stake.
As the PUC participates in the development of competitive utility markets
and its jurisdiction is curtailed to focus solely on telecommunications, the
credibility of its decision-making procedures will be critical. The PUC
envisions spending less time in the judge-and-jury role of a full-time
regulator and more time setting policy -- defining the public interest and
shaping the rules that market players and consumers will live by.
Commissioners have asserted that policy making is legislative in nature,
and when acting as legislators they should be given freedom to meet
privately with stakeholders and among themselves. The Commissioners
also asserted that they should retain freedom from expanded judicial
review, effectively making their decisions final. Freedom, however, must
be commensurate with accountability. It should not be granted in a way
that erodes confidence in public decision making.
The Legislature in SB 960 made significant improvements in the PUC's
decision-making process. That effort could be further advanced by
increasing the accountability in policy-making proceedings, as well. The
greatest conflict between the need for Commissioners to discuss issues
with individual parties and the need to preserve the integrity of a fact-based process from political lobbying comes after proposed decisions are
issued. The integrity of the process will be further enhanced if the
notification procedures are expanded to include substantive policy
discussions between Commissioners and parties -- even if they are not
based on the particulars of a pending case.
Even when acting in a policy-making capacity, Commissioners differ
fundamentally from legislators: They are not elected and so are never
held directly accountable to the public. And with a membership of only
five, the effects of special interest lobbying are significantly more
concentrated than in a 120-member legislature. As the number of market
players increases, the importance of giving everyone a chance to speak --
and to listen to the arguments made by their adversaries -- will increase
in importance. As its caseload is diminished by transferring some
responsibilities to agencies better able to perform them, it will be more
possible for the PUC to rely on an open decision-making process.
Experience in other states suggests that the accountability provided by
broader judicial review can be achieved without significant delays in the
public process. To encourage uniformity of decisions and subject
expertise, appeals should be restricted to the court located in the same
city as the Commission, now the First District Court of Appeal in San
Francisco. The standard of review should include a review of the facts
to determine whether they support the Commission's decision.
Finding 14: The Commission's reputation for hiring and
promoting the best and the brightest is being undermined by
the rigidity of civil service rules.
The civil service system rigidly prescribes how managers will make
decisions concerning job assignments, rewards and punishments.
Keeping the PUC's energy focused on serving the public interest as it
transforms itself for a post-monopoly future, will require the Commission
to be able to tap the deep skills and full creativity of its staff.
As the PUC's role radically shrinks, it is in a unique position to benefit
from the flexibility that the Legislature already has granted to state
agencies facing considerable changes and looking for ways to forge a
partnership between management and labor that transcends the rigidity
of the civil service rules. While the Energy Commission has a reputation
for involving employees in changes, it also might benefit from the
flexibility of a civil service demonstration project as it goes about
redefining its mission to meet the needs of competition.