Energy Supplier Assessment Budget Note Report December 2010 Contact: Lisa Pinheiro Phone: 503-373-2293 Email: Lisa.Pinheiro@odoe.state.or.us
Executive Summary The 75 th Oregon Legislative Assembly directed the Oregon Department of Energy (ODOE) to review, study, and develop policies to guide the Department's assessment on energy resource suppliers (HB 5013 Budget Note). The review was to include a determination of department programs and activities that are appropriately funded through the Energy Supplier Assessment (ESA), and a determination of policy to guide the amount collected, the frequency of the assessment, and an appropriate ending balance. A stakeholder group was formed that included various representatives from organizations that pay the energy supplier assessment. A complete list of participants is provided in Attachment A. The group met twice, on May 12, 2010 and August 16, 2010, in addition to reviewing this report. Topics discussed include an overview of the ESA; ESA expenditures and uses; policies governing ESA collections and management; and report recommendations. This report captures the key information presented and discussed at stakeholder meetings along with issues and recommendations going forward. The stakeholder group s feedback centered on two key issues: ODOE s process of determining ESA expenditures and the associated rate has historically not been a transparent process. The Governor s Office and the Legislature have directed ODOE to spend ESA on activities and staffing in other agencies that may not have a clear link to ODOE priorities and programs. Based on issues identified by the stakeholder group and the interests of ODOE, the following recommendations emerged from this process: Draft and support legislation introduced by the ODOE that defines what activities are appropriately funded with ESA. Form an ongoing ESA stakeholder advisory group to improve transparency and communications. For more information about this process, contact Lisa Pinheiro, Government Relations Manager at Oregon Department of Energy. Energy Supplier Assessment Budget Note Report, December 2010 Page i
SECTION 1 Overview of the Energy Supplier Assessment Energy Supplier Assessment ORS Authority Oregon Revised Statutes (ORS) 469.421 (8) establishes an energy supplier assessment (ESA) to fund the Energy Facility Siting Council, the Oregon Department of Administrative Services and ODOE including all significant activities referenced under ORS 469.020. The assessment is a ratio based on an energy supplier s annual gross operating revenue derived within the state, and is not to exceed five-tenths of one percent (0.50 percent) of the total gross operating revenues of all energy suppliers in the state. Current ESA Rate The current assessment rate is set at 0.069 percent. The current assessment is approximately one-tenth of what is allowed under law. The most recent increase in the ESA rate occurred in the 2005-07 biennium increasing from 0.055 percent to the current 0.069 percent. 0.10000% ESA Assessment History 0.08000% 0.06000% 0.04000% 0.02000% 0.00000% Energy Supplier Assessment Budget Note Report, December 2010 Page 1
SECTION 2 ESA Expenditures and Uses ESA Expenditures The ESA generally funds the following ODOE activities: Staffing, including technical, management and administrative staff, funded fully or partially when no other funding source exists. Over the last few biennia, staffing and related services and supplies costs totaled approximately 70-80 percent of total ESA expenditures. Each ODOE program is allotted a proportion of ESA revenues based on historical and emerging funding needs. The majority of ESA funds used for staffing are for the Energy Policy Development Division and the Administrative Services area which includes the Director s Office and Central Services Division. Energy Facility Siting Council and program activities that cannot be directly associated with a specific site or business activity. This accounts for approximately 10 percent of ESA expenditures. Whenever possible, Council and siting program activities related to a specific site are funded by fees assessed to recover actual costs. Special Projects or Transfers such as information technology improvements within ODOE, research, sponsorships, and Governor or legislatively directed expenditures account for the remaining ESA expenditures and have ranged between 5-20 percent. Other ESA Uses Another important use of ESA funds is to cover cash flow needs of the agency. The primary program that ESA floats is the Energy Siting Program, which is currently experiencing growth due to increased local and federal siting activities. ESA also is used to cover unanticipated revenue shortfalls or short-term cash flow needs in other program areas. ODOE s Increasing Dependence on ESA ODOE s reliance on ESA revenues to fund agency activities increased during the 2009-11 biennium due to investments made by the legislature to increase agency transparency and accountability. The roll-up costs associated with these investments further increases the agency s dependence on ESA during the 2011-13 biennium. Page 2 Energy Supplier Assessment Budget Note Report, December 2010
Millions ESA as Percent of Operating Budget $35 $30 $30.5 $34.9 $34.1 $25 $20 $23.3 Operating Budget $15 $10 26% 22% 32% 37% ESA Expenditures $5 $0 2005-2007 2007-2009 2009-2011 Projections 2011-2013 ARB Projections Stakeholder Issues On Use of ESA The stakeholder group s concerns related to the use of ESA funds centered on two issues: ODOE s process of determining ESA expenditures and the associated rate has historically not been a transparent process. The Governor s Office and the Legislature have directed ODOE to spend ESA on activities and staffing in other agencies that may not have a clear link to ODOE priorities and programs. To address these concerns, ODOE worked with the stakeholder group to craft a legislative concept to clarify that ESA funds are to be used only to fund the activities and expenses of the State Department of Energy, Department of Administrative Services related to the Energy Facility Siting Council (ORS Chapter 469), administration of the Renewable Portfolio Standard (ORS 469A.005 to 469A.210), administration of the State Energy Loan Program (ORS Chapter 470) and other Department of Energy activities as authorized by law (see Attachment B). While there was strong stakeholder support for the concept when ODOE submitted the concept to Legislative Counsel for drafting, an additional issue emerged. Given that ODOE s numerous duties and activities are codified throughout various statutory references, Legislative Counsel, in its construction of the concept, retained a broader reference so as not to inadvertently restrict ODOE s ability to fund those activities. As a result, ODOE and the stakeholder group are not entirely sure that the concept as drafted accomplishes what was intended. Energy Supplier Assessment Budget Note Report, December 2010 Page 3
SECTION 3 Policies Governing the Collection and Management of ESA funds Summary of ESA Collection Process Oregon Revised Statute (ORS) 469.421 (8) provides ODOE with the authority to assess energy resource suppliers a fee to fund the activities of the department (see Attachment C). Within statute the timing and process for determining the assessment are fairly prescriptive, and ODOE s current process follows the statutory direction. Key ESA process steps include: Annually in March, ODOE requests Gross Operating Revenue (GOR) information from energy suppliers who are subject to the assessment. Once ODOE s Legislatively Adopted Budget (LAB) is determined, an ESA revenue target is set at a level sufficient to fund the LAB. 1 The assessment rate is determined as a ratio of the target revenues to total GORs for the timeframe. For example, if ODOE s ESA revenue target is $6 million (M) annually and GORs are $882.8M, the ESA factor would be.0068. Next, each entity s GORs are divided by the total of all entities GORs to determine ratios. Each entity s ratio is multiplied by total revenues required. Since assessment for each entity cannot be more than 0.50% of its GOR, a double check is calculated to ensure that the assessment is within those parameters. Example: Entity GOR Total GOR Entity Ratio Entity s Share of ESA Entity A $882.8M $6.82B 12.9% 12.9% x ODOE ESA Target Finally, ODOE s Director issues the ESA Order to each impacted entity along with an invoice. Entities have 90 days to pay. This process is repeated in year two of the biennium, and can take into account budget adjustments made by the legislative body during the budget interim. 1 In the last couple of biennia, ODOE has set the ESA rate and managed to that rate rather than set the rate at the level to fund the LAB. Beginning with the 2011-13 biennium, ODOE will be returning to setting ESA at the level sufficient to fund the LAB. Page 4 Energy Supplier Assessment Budget Note Report, December 2010
Management of ESA Funds ODOE policy recommends that the ESA fund hold a six month ending reserve to help ensure financial stability (see Attachment D). ODOE revenues for operations come from three primary sources: ESA, business fees for services, and federal grants. Business fees are generally set at a level to cover services provided; however, in most programs fees are collected 2-3 months after services are provided. As a result, ESA is used to cover short-term cash flow needs of those programs. The program most dependent on ESA funds to cover cash flow needs is Energy Siting. At this time, the demand for energy siting activities is trending upward, which will likely put further pressure on ESA. The coverage of short-term cash flow needs also exists with reimbursement of federal funds; however, ODOE has taken actions to reduce the payment lag to less than a month. Overall, a six month ending reserve would equate to approximately $3.5 million. Energy Supplier Assessment Budget Note Report, December 2010 Page 5
SECTION 4 Recommendations Based on issues identified by the stakeholder group and the interests of ODOE, the following recommendations emerged from this process: A) Draft and support legislation introduced by the ODOE that defines what activities are appropriately funded with ESA. The legislative concept (LC) 837 specifies that funds collected through the Energy Resource Supplier Assessment be used only to fund the activities and expenses of the State Department of Energy, Department of Administrative Services related to the Energy Facility Siting Council (ORS Chapter 469), administration of the Renewable Portfolio Standard (ORS 469A.005 to 469A.210), administration of the State Energy Loan Program (ORS Chapter 470) and other Department of Energy activities as authorized by law. It also instructs the Director of the ODOE to make available ODOE account records prior to entering an order of determination and establishment of the amount of revenues needed from the Energy Resource Supplier Assessment. This report will provide transparency to stakeholders as the Department makes its determination. B) Form an ongoing ESA stakeholder advisory group to improve transparency and communications. The group will be invited to review ODOE s determination of ESA rates, provide input on agency goals and outcomes, and discuss future ESA funding spending plans and priorities. The goal is to create enhanced transparency and improve information flow relative to the ESA process and expenditures. While the stakeholder group all supported an ongoing advisory group, some members of the group believed that codifying the group in statute was important. This action was not taken by ODOE in the concept introduced by the group because not all members agreed that it was necessary to accomplishing the goal of improved transparency and communication. As a result, there may be amendments introduced that suggest this action. Attachments A. List of Stakeholders B. Legislative Concept C. ORS 469.421 (8) D. ODOE s Fund Balance Policy Page 6 Energy Supplier Assessment Budget Note Report, December 2010
Attachment A Stakeholders Energy Supplier Representatives Brendan McCarthy Portland General Electric Brian Doherty Miller Nash Danelle Romain Oregon People s Utility District Association Gary Bauer NW Natural Jim Anderson Avista Corporation Margi Hoffman Strategies 360 Marion Haynes Portland General Electric Michelle Slater Miller Nash Niki Terzieff Strategies 360 Paul Romain Oregon People s Utility District Association Sandra Flicker Oregon Rural Electric Cooperative Assoc. Shawn Miller PacifiCorp Tom Barrows Lincoln and Northern Wasco PUDs Tom Gallagher Portland General Electric Tom O Connor Oregon Municipal Electric Utilities Assoc. Oregon Department of Energy Bob Repine Dawn Farr Lisa Pinheiro Andrea Simmons Acting Director Central Services Division Administrator Government Relations Manager Policy Division Administrator Energy Supplier Assessment Budget Note Report, December 2010 Page 7
Attachment B Page 8 Energy Supplier Assessment Budget Note Report, December 2010
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Attachment C Oregon Revised Statute 469.421 (8) ORS 469.421 Fees; exemptions; assessment of certain utilities and suppliers; penalty. (1) Subject to the provisions of ORS 469.441, any person submitting a notice of intent, a request for exemption under ORS 469.320, a request for an expedited review under ORS 469.370, a request for an expedited review under ORS 469.373, a request for the State Department of Energy to approve a pipeline under ORS 469.405 (3), an application for a site certificate or a request to amend a site certificate shall pay all expenses incurred by the Energy Facility Siting Council, the State Department of Energy and the Oregon Department of Administrative Services related to the review and decision of the council. These expenses may include legal expenses, expenses incurred in processing and evaluating the application, issuing a final order or site certificate, commissioning an independent study by a contractor, state agency or local government under ORS 469.360, and changes to the rules of the council that are specifically required and related to the particular site certificate. (8) In addition to any other fees required by law, each energy resource supplier shall pay to the State Department of Energy annually its share of an assessment to fund the activities of the Energy Facility Siting Council, the Oregon Department of Administrative Services and the State Department of Energy, determined by the Director of the State Department of Energy in the following manner: (a) Upon approval of the budget authorization of the Energy Facility Siting Council, the Oregon Department of Administrative Services and the State Department of Energy by a regular session of the Legislative Assembly, the Director of the State Department of Energy shall promptly enter an order establishing the amount of revenues required to be derived from an assessment pursuant to this subsection in order to fund the activities of the Energy Facility Siting Council, the Oregon Department of Administrative Services and the State Department of Energy, including those enumerated in ORS 469.030 and others authorized by law, for the first fiscal year of the forthcoming biennium. On or before June 1 of each even-numbered year, the Director of the State Department of Energy shall enter an order establishing the amount of revenues required to be derived from an assessment pursuant to this subsection in order to fund the activities of the Energy Facility Siting Council, the Oregon Department of Administrative Services and the State Department of Energy, including those enumerated in ORS 469.030 and others authorized by law, for the second fiscal year of the biennium. The order shall take into account any revisions to the biennial budget of the Energy Facility Siting Council, the State Department of Energy and the Oregon Department of Administrative Services made by the Emergency Board or by a special session of the Legislative Assembly subsequent to the most recently concluded regular session of the Legislative Assembly. However, an assessment under this section may not be used to derive revenue for funding State Department of Energy activities related to the energy efficiency and sustainable technology loan program described in ORS chapter 470. (b) Each order issued by the director pursuant to paragraph (a) of this subsection shall allocate the aggregate assessment set forth therein to energy resource suppliers in accordance with paragraph (c) of this subsection. Energy Supplier Assessment Budget Note Report, December 2010 Page 17
(c) The amount assessed to an energy resource supplier shall be based on the ratio which that supplier s annual gross operating revenue derived within this state in the preceding calendar year bears to the total gross operating revenue derived within this state during that year by all energy resource suppliers. The assessment against an energy resource supplier shall not exceed fivetenths of one percent of the supplier s gross operating revenue derived within this state in the preceding calendar year. The director shall exempt from payment of an assessment any individual energy resource supplier whose calculated share of the annual assessment is less than $250. (d) The director shall send each energy resource supplier subject to assessment pursuant to this subsection a copy of each order issued, by registered or certified mail. The amount assessed to the energy resource supplier pursuant to the order shall be considered to the extent otherwise permitted by law a government-imposed cost and recoverable by the energy resource supplier as a cost included within the price of the service or product supplied. (e) The amounts assessed to individual energy resource suppliers pursuant to paragraph (c) of this subsection shall be paid to the State Department of Energy as follows: (A) Amounts assessed for the first fiscal year of a biennium shall be paid not later than 90 days following the close of the regular session of the Legislative Assembly; and (B) Amounts assessed for the second fiscal year of a biennium shall be paid not later than July 1 of each even-numbered year. (f) An energy resource supplier shall provide the director, on or before May 1 of each year, a verified statement showing its gross operating revenues derived within the state for the preceding calendar year. The statement shall be in the form prescribed by the director and is subject to audit by the director. The statement shall include an entry showing the total operating revenue derived by petroleum suppliers from fuels sold that are subject to the requirements of section 3a, Article IX of the Oregon Constitution, and ORS 319.020 with reference to aircraft fuel and motor vehicle fuel, and ORS 319.530. The director may grant an extension of not more than 15 days for the requirements of this subsection if: (A) The energy supplier makes a showing of hardship caused by the deadline; (B) The energy supplier provides reasonable assurance that the energy supplier can comply with the revised deadline; and (C) The extension of time does not prevent the Energy Facility Siting Council, the Oregon Department of Administrative Services or the State Department of Energy from fulfilling their statutory responsibilities. (g) As used in this section: (A) Energy resource supplier means an electric utility, natural gas utility or petroleum supplier supplying, generating, transmitting or distributing electricity, natural gas or petroleum products in Oregon. (B) Gross operating revenue means gross receipts from sales or service made or provided within this state during the regular course of the energy supplier s business, but does not include either revenue derived from interutility sales within the state or revenue received by a petroleum supplier from the sale of fuels that are subject to the requirements of section 3a, Article IX of the Oregon Constitution, or ORS 319.020 or 319.530. (C) Petroleum supplier has the meaning given that term in ORS 469.020. (h) In determining the amount of revenues that must be derived from any class of energy resource suppliers by assessment pursuant to this subsection, the director shall take into account all other known or readily ascertainable sources of revenue to the Energy Facility Siting Council, Page 18 Energy Supplier Assessment Budget Note Report, December 2010
the Oregon Department of Administrative Services and the State Department of Energy, including, but not limited to, fees imposed under this section and federal funds, and may take into account any funds previously assessed pursuant to ORS 469.420 (1979 Replacement Part) or section 7, chapter 792, Oregon Laws 1981. (i) Orders issued by the director pursuant to this section shall be subject to judicial review under ORS 183.484. The taking of judicial review shall not operate to stay the obligation of an energy resource supplier to pay amounts assessed to it on or before the statutory deadline. Energy Supplier Assessment Budget Note Report, December 2010 Page 19
Attachment D OREGON DEPARTMENT OF ENERGY Internal Policies and Procedures Subject: FUND BALANCE POLICY Policy Number: FIN-01 Effective Date: December 8, 2010 Approved: Bob Repine, Acting Director Applicability: The Agency s Chief Financial Officer (CFO) in conjunction with impacted Division Administrators are responsible for ensuring appropriate account balances for all agency accounts. Appropriate account balance are to be reviewed annually as part of the budget development process, or, more often if outside factors necessitate a more regular review. Policy: It is the policy of the Oregon Department of Energy (ODOE) to plan for the revenues and expenditures of its dedicated accounts in such a manner as to ensure that each account has an adequate, but not excessive, account balance in order to meet the agency s account balance objectives. When determining the level of adequate fund balances the following factors should be taken into account: economic factors; workload factors; agency cash flow needs; statutory requirements; legislative direction; and, stakeholder commitments. Page 20 Energy Supplier Assessment Budget Note Report, December 2010
The following guidelines are used to determine what is adequate and not excessive. Account Balance Objectives An adequate account balance should: meet the cash flow needs of the account; accommodate the timing of receipts and expenditures; ensure stable funding and program services during uncertain economic times; and, minimize the volatility of fees and assessments. Each programmatic fund balance consists of two components: 1. A minimum monthly required cash balance. This equates to the funds sufficient to meet the monthly cash flow needs of the account based on the timing of receipts and expenditures for the month and the recurring cyclical dynamics that may impact the account. 2. Additional risk-adjusted working capital. Additional working capital ensures sufficient account reserves are retained to meet the unique financial requirements and risks of the program or activities supported by the fund. Some examples of risks include: regulated industry risks, business cycle risks, fee volatility risk, and economic risks. The agency s fund balance goal is to retain a three month minimum and six month maximum fund balance in all accounts. Factors that govern the selection of a specific fund balance targets within the three to six month coverage ratio are: Flexibility of fund expenditures. Overall health of the agency s accounts portfolio. Volatility of fees, assessments, and charges. Rates and other funding models should remain unchanged for as long as possible. When it is necessary to change rates or other funding models, the rate change should be as small as possible. Allowable Fund Variances Account balances generally should not persist below one quarter of established Account Balance Goal. However, if forecasted account balances are below the minimum coverage ratio band, but are forecasted to increase continually during the period in which rates are in effect, then this is a permissible outcome. Energy Supplier Assessment Budget Note Report, December 2010 Page 21
Account balances generally should not remain above six months unless it can be demonstrated that one of the following factors apply: The fund balance is forecasted to decrease continually during the period in which the revenue rate, policy, or activity is still ongoing. There is sufficient additional financial risk or potential or anticipated program changes faced by the program and that fees, assessments, and charges should not be reduced. The agency or program has obligations occurring after a program end or sunset date. Page 22 Energy Supplier Assessment Budget Note Report, December 2010
The following table identifies the ODOE dedicated accounts, the account balance goals and objectives. ODOE Dedicated Accounts and Account Balance Goals for the 2009-11 Biennium Accounts Monthly Cash Account Balance Target Comments & Justification for Target Energy Supplier Assessment (ESA) $600,000 Includes siting activity. Six months of projected expenditures. ESA is the primary funding source to cover cash flow needs of energy siting activities as well as unanticipated shortfalls in other areas. ESA revenues are collected once a year, so reserves will be higher at the start of each fiscal year. ESA currently covers the cash flow needs of the Energy Siting Division. The ESA monthly cash need for siting is approximately $100,000. A six month reserve is the siting target to accommodate revenue volatility and growth. Business Energy Tax Credit account $ 200,000 2009-11 program ending balance target $2.3 million. The target ensures sufficient reserves are retained to cover program obligations through 2017 (program sunsets in 2012). The BETC program has responsibilities including but not limited to monitoring and reporting of activity after tax credits have been issued. These activities have the potential to continue at least five years after the program ends. Other Smaller Programs $ 280,000 Three months of projected expenditures. Three months ensure sufficient cash flow is available in all accounts to cover program financial needs. SHOW $30,000 Six months of projected expenditures. Business cycle requires having six months of reserves as program is administrated via contract services which are budgeted on a calendar year basis, while revenues are collected annually in June/July. SELP Loan Fund n/a Not applicable. Funded with bond proceeds. SELP Sinking Fund $25,000,000 One year's debt service and program operating expenditures. Additional financial risk associated with loan defaults warrants the retention of the highest reserve possible at this time. Energy Supplier Assessment Budget Note Report, December 2010 Page 23