March 13, 2015
(Originally posted February 24, 2015. Revised March 13, 2015 based on CPUC President's proposal.)
Penalty Assessments Typically a Minor General Fund Revenue Source. Each year, the state General Fund receives payments from administrative penalties and fines. These payments are a minor General Fund revenue source. In 2013-14, for example, the General Fund received $90.3 million of these penalty assessments (which totaled less than 0.1% of all state General Fund revenues and transfers). This $90.3 million consisted of $54.6 million of penalties levied by the California Public Utilities Commission (CPUC), $34.2 million levied by the state's labor regulator, the Department of Industrial Relations (DIR), and $1.5 million of penalty assessments by various departments.
$300 Million PG&E Fine Receipt Assumed in State Budget Plan. As we discussed last fall, the state's 2014-15 budget plan—passed in June 2014—assumed that the state would receive $323 million of penalty payments in 2014-15, including a $300 million payment from the Pacific Gas and Electric Company (PG&E) related to the September 2010 explosion of a pipeline in San Bruno. The Governor's January 2015 budget proposal assumes the $300 million PG&E payment to the General Fund, as well as $52.9 million of other penalty assessments principally by CPUC and DIR, for a total of $352.9 million of penalty payments to the General Fund in 2014-15.
This note provides an update on the possible PG&E penalty payment to the General Fund based in part on a February 10, 2015 PG&E financial filing that addressed the topic, as well as the CPUC's March 13, 2015 press release on the topic.
CPUC Penalty. On August 1, 2013, CPUC's Safety and Enforcement Division recommended that PG&E be penalized $2.25 billion, consisting of a $300 million fine payable to California's General Fund and $1.95 billion of other payments, related to the San Bruno explosion. On September 2, 2014, CPUC administrative law judges issued decisions that sought to impose a lower $1.4 billion overall penalty on Pacific Gas and Electric Company, including a $950 million payment to the state General Fund. CPUC noted in its press release that this would be the largest safety related penalty it has ever levied.
Recent PG&E Update. As a company with shares traded on public stock exchanges, PG&E regularly files financial updates for the investing public. In its annual report filed on February 10, 2015, PG&E noted that the September 2 decisions described above "are not the final decisions of the CPUC," adding that three of the five CPUC commissioners have requested a review of the decisions. In addition, the company noted that it and other parties have appealed the September 2 decisions to the commission.
PG&E's report notes: "In its appeals, the Utility (PG&E) argued that the penalties imposed and the findings and conclusions on which they are based do not meet applicable legal standards, are based on [a] misapplication of California law and regulations, and are unconstitutional. The Utility has asked the CPUC to order the Utility to pay a significantly reduced penalty that is reasonable and proportionate in light of the nature of the violations and that takes into account the substantial unrecovered amounts the Utility has already spent and forecasts that it will spend on gas system safety. The Utility requested that it be allowed 180 days to raise the funds it may be ordered to pay to the State General Fund rather than the 40 days specified in the decision. The Utility also argued that the entire penalty should go toward funding investments in [its] gas transmission system." Other parties, PG&E notes, "jointly filed an appeal urging the CPUC...to require the Utility to pay $473 million to the State General Fund." "It is uncertain," the filing states, "when the final outcome of the investigations will be determined."
CPUC March 13 Update. On March 13, CPUC issued a press release noting the proposal of the commission president for $1.6 billion in remedies to be paid by PG&E related to San Bruno and other pipeline issues. Included in the CPUC president's proposal was a $300 million General Fund fine. The press release noted that CPUC administrative law judges had proposed revisions to their proposed decisions, keeping a proposed $1.4 billion penalty that includes the same $950 million fine discussed above. The proposed decisions will come before the CPUC commissioners for a vote "no sooner than the April 9" voting meeting, the release stated.
Uncertainty As to Amount of Revenue. As is clear from the history described above, the amount that PG&E may pay to the General Fund is uncertain. While the Governor's proposed budget plan continues to assume receipt of a $300 million PG&E payment to the General Fund, the amount proposed to be levied by CPUC administrative law judges is substantially greater ($950 million). The CPUC president suggests a $300 million General Fund fine. Other proposed General Fund payments are either more or less than the $300 million assumed in the Governor's budget proposal.
Uncertainty As to Timing of Revenue. It is also uncertain when the state would receive any such revenue. The timing of CPUC's final decisions is uncertain, as well as the timing of any subsequent appeals by PG&E or other parties. Among the issues in PG&E's appeal is the amount of time the company would have to raise the funds necessary to make a payment to the General Fund. While the proposed budget assumes a $300 million PG&E payment is booked to the General Fund for the 2014-15 fiscal year (ending on June 30), it now appears uncertain that such a payment will be received prior to June 30. Under the state's revenue accrual rules, this does not necessarily foreclose the possibility of booking the payment to 2014-15 or 2015-16 even if the payment is received somewhat later.
Comparison to November LAO Fiscal Outlook. In light of all the uncertainties, our office's November 2014 Fiscal Outlook assumed no PG&E payments to the General Fund now or in the future. Nevertheless, we noted, "It is quite possible that the General Fund will receive some payments from PG&E in the coming years, and if so, these payments would improve the budget’s bottom line."
Non-Tax Revenue Source. Penalty assessments are classified as a non-tax revenue source for the General Fund. This is important because it means that the assessments do not directly affect the state's annual Proposition 98 constitutional funding obligations for schools and community colleges. In effect, the penalty payments can be used in their entirety for any public purpose—either school-related or non-school-related.
Assumption Will Be Required When Passing 2015-16 Budget. It seems possible that the CPUC process or related appeals will not be completed by the time the Legislature must pass the 2015-16 state budget by June 15. If so, the Legislature will have to make an assumption in the budget concerning the amount of PG&E penalty payments, if any, it anticipates the state will book to either the 2014-15 or 2015-16 fiscal years. For purposes of this year's budget package, it is largely irrelevant which of those two fiscal years any PG&E payment is booked to. Instead, the key issue is the amount of assumed penalty payments in the budget plan. The Legislature could assume no PG&E payments in the budget plan, the same $300 million amount now assumed by the administration, $950 million based on the CPUC proposed administrative law judges' decision, or another amount. If the CPUC approves a particular fine by June 15, the Legislature could assume that amount in the budget, although appeals by PG&E seem possible.
Could Affect Reserves and Funds Available for Other Budget Priorities. The Governor's 2015-16 budget proposal anticipates the state ending 2015-16 with $3.4 billion of reserves: $1.6 billion in pre-Proposition 2 deposits to a state Budget Stabilization Account (BSA), $1.2 billion in post-Proposition 2 BSA deposits, and over $500 million in the state's traditional General Fund reserve, the Special Fund for Economic Uncertainties (SFEU). The reserves could help the state build fiscal capacity to deal with the next economic downturn, but the SFEU (and perhaps the pre-Proposition 2 BSA deposits) is also available, with a majority vote of the Legislature, to fund state budgetary priorities.
Assuming no other changes in the Governor's budget plan or projections, adopting a smaller estimate of PG&E payments than the $300 million in the budget proposal would result in a smaller SFEU balance. Similarly, all other things being equal, adopting a larger estimate of PG&E payments, such as the full $950 million sought by CPUC, would result in a larger SFEU balance.
Legislative Proposals. Proposed legislation would place specific requirements on use of PG&E payments related to the San Bruno explosion. SB 18 (Hill) would require CPUC to allocate $300 million to the General Fund, but would allow its allocations to be adjusted if fines and penalties in specified proceedings fall below a given amount.