California's Legislative Analyst's Office rejected the governor's proposal allocating $25 million to fund the creation of a greenhouse gas cap-and-trade program. The recommended budget would fund the California Air Resources Board's and the California Public Utilities Commission's climate change efforts in the 2007-08 budget cycle. "The governor's climate change budget proposal circumvents the legislative direction, by moving prematurely to implement a market-based regulatory mechanism and assigning a role to the CalEPA Secretary that goes beyond coordination," states a February 21 LAO analysis of Governor Arnold Schwarzenegger's proposed upcoming state budget. The conclusion partly reflects the legislative leadership's insistence that the air board - not the California Environmental Protection Agency - be the lead agency in greenhouse gas reduction implementation as called for by state law AB 32. After the bill was signed into law, Democrats took issue with Schwarzenegger's executive order giving CalEPA authority to direct agency implementation (Circuit, Oct. 20, 2006). The governor's budget blueprint proposes using $24.4 million of the air board's special funds to develop rules regulating utilities, oil and gas refineries, and other major sources of stationary global warming gases (Circuit, Jan. 12, 2007). The CPUC would be allocated $1.3 million to establish a cap on emissions from power plants. However, the LAO warned that that commission's effort improperly precedes the air board's global warming gas reduction work. "We have a fundamental disagreement with the analyst," said H.D. Palmer, Department of Finance spokesperson, speaking on the administration's behalf. He insisted that the CalEPA secretary has the authority to create a Climate Action Team to assist her in guiding and coordinating AB 32 implementation, which involves 10 departments, 4 cabinet positions, and 150 new positions. Palmer noted that funding a CPUC study to evaluate the impacts of creating a cap on utility carbon emissions, including on electricity rates, was important. The sooner there is information to guide future decisions, the better, he added. The Legislative Analyst's Office also objected to the lack of secure long-term funding for implementing the state's greenhouse gas reduction law. Also rejected by the nonpartisan office is the governor's plan to eliminate the Electricity Oversight Board, which is involved in more than 300 energy crisis-related lawsuits and regulatory proceedings at the state and federal levels. The governor's plan to give the Department of Finance authority to wipe out the EOB's budget raised alarms because of the lack of direction as to which agency would take over the board's ongoing work. "The issue of which entity would assume EOB's duties is particularly relevant given that moving EOB's electricity market monitoring duties into certain other energy agencies raises potential conflicts of interest," the analysis states. It notes that the Department of Water Resources and the California Energy Commission could be considered market participants. LAO also opposed the governor's proposal to apply $69 million of the money from the Department of Water Resources' energy crisis settlement reached with Williams Energy solely for grants and loans for photovoltaic installations at schools and public buildings. "[W]e think that settlement funds should be awarded for a broader array of energy efficiency upgrades, beyond those that are PV in nature," states the LAO's budget analysis. That includes retrofitting heating, cooling, and lighting systems and using alternative building materials. The analyst also recommended that the Legislature reject the proposed funding for the CPUC's capacity-market proposal and possible rekindling of direct access. The 2007-08 commission budget includes $307,000 to fund a consultant's capacity-market study and $101,000 to evaluate the hybrid electricity market. "We think it is premature and beyond the jurisdiction of the CPUC to begin investigation and evaluation of a market design without further statutory direction from the Legislature." The CPUC was asked to reconsider allowing energy service to be provided by nonutilities and is expected to vote on the proposal March 1.