Gov. Gavin Newsom’s announcement in his State of the State speech in February that he didn’t believe California had the resources to complete its $77 billion statewide bullet-train project produced a backlash that Newsom didn’t seem to expect. Within hours after the speech, his aides said the media was inaccurately reporting that Newsom’s only commitment was to build a $12.2 billion, 119-mile high-speed link between Merced and Bakersfield in the Central Valley and nothing more. They said he remained a supporter of the full project.

But nearly two months later, the initial reaction to Newsom’s speech remains the enduring takeaway for most Capitol watchers: He’s off the bullet train bandwagon. Building unions and green lawmakers who believe in the statewide project’s potential to help in the fight against climate change remain among the most upset.

Yet easily the most intense reaction is in the area where Newsom still wants the project to proceed: the Central Valley.

Coverage from The Bakersfield Californian, the Los Angeles Times and small newspapers in the region reflect anger over how the valley has been treated. Valuable farmland and family homes have been acquired with eminent domain for a project that no longer will link the area with the rest of the state – despite promises from Govs. Arnold Schwarzenegger and Jerry Brown.

‘My mouth was just open with shock’

“I don’t want to talk political because I don’t do it very well,” Fairmead resident Vickie Ortiz told the Times. “But you know, you had a governor that was pushing-pushing-pushing for the high-speed train, and we started getting used to the idea that we can’t stop a train but maybe we can use it to help the community. But then you get another governor and he says: ‘No, I don’t want to do that any more.’ My mouth was just open with shock.”

In the Antelope Valley Press, retiree Bill Deaver, a former official in the Federal Railroad Administration, blasted the “politics and ignorance” of project critics who he blamed for Newsom’s decision.

“Politicians used [high-speed rail] to score political points rather than supporting something that will be able to handle huge increases in traffic projected in coming years. That sort of behavior is one of the biggest barriers to progress.”

Newsom’s decision didn’t surprise some in the Central Valley who never believed a statewide bullet train would get built. “People lost their homes and businesses. And for what?” Visalia farmer Randy Van Eyk told the Times.

Some see commitment to help region

But other remarks the governor made about the Central Valley have resonated more positively – and created an expectation that he will do more than past governors to help the region.

“The people of the Central Valley endure the worst air pollution in America as well as some of the longest commutes. And they have suffered too many years of neglect from policymakers here in Sacramento. They deserve better,” Newsom said in the same speech in which he outlined his views on the bullet-train project’s future.

Bakersfield Californian columnist Robert Price said if Newsom was serious, he should help Kern County diversify its economy away from “two industries under assault in the Central Valley: agriculture and, especially, oil and gas.”

Anna Smith, another columnist for the Californian, also said Newsom should promote economic diversification. But she also called on him to address the Central Valley’s social ills, including “high rates of illiteracy and obesity, lack of access to quality education and health care (especially in rural communities), water contamination and extreme poverty.”

California High-Speed Rail Authority Chief Executive Brian Kelly sent two letters defending Gov. Gavin Newsom’s January remarks that he would focus on completing a 119-mile segment now being built in the Central Valley – backing away from a promise to state voters in 2008 and to the federal government in 2009 and 2010 to build a statewide bullet-train system. Kelly said the state was comporting with key federal regulations.

The limited segment linking Bakersfield and Merced is expected to cost up to $18 billion. Were it ever built, the costs of the originally envisioned statewide bullet-train system – ranging along the coast from San Francisco to Los Angeles to San Diego and inland to Sacramento – could have been 10 times as much or more. The cost of each end of the Los Angeles to San Francisco segment was so extreme that in 2012, the rail authority gave up on true high-speed rail in those links – opting for a “blended” system that relied on regular rail to cover the final 45 miles or so into each of the population centers.

The Trump administration has already canceled a $929 million grant issued to the project in 2010 by the Obama administration. It has indicated it hopes to recover $2.5 billion the federal government has already allocated to California as part of the 2009 economic stimulus package on the grounds that the project is far behind schedule and no longer meets promises of sound planning and financial viability made to secure the $2.5 billion.

But Kelly argued that the Federal Railroad Administration under the Obama administration and for the first two years of Trump’s administration concluded that the project was meeting minimum benchmarks to qualify for federal funding.

“Any clawback of federal funds already expended on this project would be disastrous policy,” Kelly wrote. “It is hard to imagine how your agency – or the taxpayers – might benefit from partially constructed assets sitting stranded in the Central Valley of California.”

LAO questioned project’s finances in 2010

Kelly’s letter hinted at but did not explicitly suggest the DOT’s attempts to recover the $2.5 billion were motivated by President Donald Trump’s two-year-plus war of words with California’s governors, which began under Jerry Brown and has continued with Gavin Newsom. In that span, state Attorney General Xavier Becerra has filed or joined in nearly 50 lawsuits against the Trump administration. Newsom has called the targeting of California’s project politically motivated.

Kelly’s argument that the “clawback” of that much in federal funds would be unprecedented appears correct. But the state’s arguments are weakened by the difficulty it will face in asserting it acquired the federal funds while acting in good faith. Despite telling the U.S. Department of Transportation repeatedly, beginning in 2009, that the bullet-train project was in good shape financially, rail authority officials couldn’t persuade state watchdogs that was the case in the same time frame.

In January 2010, the Legislative Analyst’s Office warned the authority didn’t have a legal business plan because it anticipated that revenue or ridership guarantees could be provided to attract private investors to help fund the project. Because such guarantees amounted to a promise of subsidies if forecasts weren’t met, they were illegal under Proposition 1A, the 2008 state ballot measure providing $9.95 billion in bond seed money for the then-$33 billion project.

The LAO and the California State Auditor’s Office have been uniformly critical of the project for a decade.

Rep. McCarthy: Move $ to other transportation projects

If the Trump administration takes steps to recover the $2.5 billion by withholding unrelated federal dollars bound for California, the dispute seems certain to end up in federal court.

Meanwhile, the California congressman whose district has arguably been most affected by early construction of the bullet train on Thursday introduced a bill that would “repurpose” all $3.4 billion in federal funds for the project to water infrastructure projects in California and other Western states. The measure by House Minority Leader Kevin McCarthy, R-Bakersfield, faces long odds in a chamber in which Democrats retook control in January.

The Republican candidates – Assemblyman Travis Allen of Huntington Beach and Rancho Santa Fe businessman John Cox – reflect the GOP consensus that the project is a boondoggle that’s unlikely to ever be completed. But the major Democratic hopefuls – Lt. Gov. Gavin Newsom, former Los Angeles Mayor Antonio Villaraigosa, state Treasurer John Chiang and former Superintendent of Public Instruction Delaine Eastin – have all indicated they would continue with rail project, albeit with little of the enthusiasm shown by present Gov. Jerry Brown.

While the new business plan was depicted by the California High-Speed Rail Authority’s new CEO, Brian Kelly, as a constructive step toward salvaging the project, the plan’s key details were daunting:

The estimated cost of the project, which has yo-yoed from $34 billion to $98 billion to $64 billion, changed once again. The business plan abandoned the previous $64 billion estimate for an estimate of $77 billion – accompanied by a warning that the cost could go as high as $98 billion.

Even at the lower price tag, the state didn’t have adequate funds to complete a first $20 billion-plus bullet-train segment linking populated areas. The present plan for a Central Valley route has an eastern terminus in a remote agricultural field north of Shafter. That’s because the $9.95 billion in bond seed money that state voters provided in 2008 has only been buttressed to a relatively slight degree by additional public dollars from cap-and-trade pollution permits.

The business plan cites the possibility of additional federal funds beyond the $3.3 billion allocated by Washington early in the Obama administration. It doesn’t note, however, that domestic discretionary spending has plunged in recent years amid congressional concern about the national debt blowing past $20 trillion.

The business plan also promotes the possibility of outside investors. It doesn’t mention that such investors have passed on the project for years because state law bars the California High-Speed Rail Authority from offering them a revenue or ridership guarantee.

From 5 years behind schedule to 10 years behind

The initial operation of a bullet-train link serving California residents went from five years behind schedule, in the estimate of the Los Angeles Times, to 10 years behind schedule. The business plan said the project would begin operations no sooner than 2029.

The potential immense cost overrun of the bullet train segment in the mountains north of Los Angeles was fully acknowledged for the first time. A 2015 Times story laid out the “monumental” challenge.

Democratic candidates to succeed Brown have chosen to focus on housing, single-payer health care, immigration and criticism of President Donald Trump in most early forums and campaign appearances. But front-runners Newsom and Villaraigosa in particular seem likely to be pressed on how they can square their claims to be experienced, tough-minded managers with support for a project which seems less likely to be completed with every passing year.

Proposition 70 on the June primary ballot also will keep the bullet train on the campaign’s front burner, to some extent. It was placed on the ballot as part of a 2017 deal cut by the governor to extend the state’s cap-and-trade program until 2030. If Proposition 70 passed, it would require a one-off vote in 2024 in which cap-and-trade proceeds could only be used for specific needs with two-thirds support of each house of the Legislature. Republicans may be able to use these votes to shut off the last ongoing source of new revenue for the high-speed rail project.

The California High-Speed Rail Authority’s rough year continues with the departure of another top executive at the agency overseeing the state’s $64 billion bullet-train project.

Jon Tapping, the agency’s director of risk management since 2012, is leaving, the Los Angeles Times reported in a story that quoted an unnamed agency official describing internal “chaos.” Authority Chief Executive Jeff Morales left in June. Morales’ second-in-command, Dennis Trujillo, quit in late 2016.

This leaves the authority with three high-profile vacancies as it tries to move ahead with a long-troubled project that’s taken a series of hits throughout 2017. Among the bad news:

– On Oct. 1, the Times printed a report that internal authority documents showed the initial 119-mile segment being built in the Central Valley would cost $8 billion, 27 percent more than the authority’s public declarations that the segment would cost $6.3 billion. The overrun estimate may prove low. In January, documents surfaced that showed federal rail officials expected an overrun in the 50 percent range.

– On Sept. 24, a critical Fresno Bee analysis showed how the authority’s original plan to complete a Merced-to-Bakersfield segment by Sept. 30, 2017, had long since been abandoned because of the authority’s unrealistic expectations about how quickly property could be obtained and environmental approvals be secured. The analysis also cited ongoing lawsuits. The Bee noted that the starting date for passenger service was now projected to be 2025 – 17 years after California voters approved $9.95 billion in bond seed money for the project, initially estimated to cost $32 billion.

Court ruling clears way for potent CEQA lawsuits

– On July 27, the California Supreme Court overturned a lower-court ruling and said state-owned rail projects were not completely exempt from the California Environmental Quality Act and other state environmental laws. The case involved another state project besides the bullet train, but legal analysts said there was no question it would apply.

CEQA has been a powerful tool against projects large and small in California for decades. The state Supreme Court ruling paves the way for a wave of CEQA lawsuits by deep-pocketed interest groups against now-pending environmental impact reports for bullet-train segments in Silicon Valley and the Los Angeles area.

Even individual citizens without high-powered legal teams can stall projects using CEQA. San Francisco’s plan to add bicycle lanes to encourage bicycle commuting was delayed for five years by a self-described “dishwasher from Mendocino.”

– On July 17, the Legislature approved a measure to extend the state’s emissions cap-and-trade program by 10 years, with a handful of Republicans providing crucial support after then-Assembly GOP leader Chad Mayes of Yucca Valley secured support for a provision that could eventually halt the bullet-train project.

“The concession … places a constitutional amendment drafted by Mayes before state voters in June 2018,” CalWatchdog reported in July. “If passed, it would lead to a one-time up-and-down vote in the Legislature in 2024 on whether to continue allowing the use of cap-and-trade revenue to fund the project. But the threshold wouldn’t be a simple majority. A two-thirds vote would be required to allow continued use of the funds – presumably giving GOP lawmakers a prime chance to pull the plug.

This amounts to a bet that the bad news about the project would continue. With the exodus of top staff, the confirmation of major cost overruns and the new certainty about another round of legal challenges, so far that’s what’s come to pass.

Train company owned by Germany may win key contract

Rail authority officials, however, say critics of the project ignore the steady progress it is making, with more than 400 small businesses and 1,400-plus “craft workers” proceeding in building the initial segment.

The rail authority board is likely to make a crucial decision at its meeting Thursday. DB Engineering & Consulting USA, a subsidiary of Deutsche Bahn AG, is expected to be given a $30 million contract to design and operate the initial segment from San Jose to the Central Valley.

Deutsche Bahn AG, which is owned by the German government, is competing with companies from Spain, Italy and China for the contract. In 2015, it was the world’s largest railway company based on revenue and the ninth-biggest carrier of global freight, according to industry reports.

The chief executive of the California High-Speed Rail Authority – former Caltrans director Jeff Morales – is resigning in June from the agency after five years overseeing the state’s $64 billion bullet train project.

The announcement Friday prompted Gov. Jerry Brown and others to praise Morales for leading the authority during a contentious period in which it managed to break ground on the bullet train’s system initial 118-mile segment but struggled to find funding that would actually allow for construction of a statewide network. That’s what voters were promised in 2008 when they approved Proposition 1A, which provided $9.95 billion in bond seed money to a project then estimated to cost $43 billion.

But the timing of Morales’ departure could lead to a melancholy final two months on the job for the rail executive if House Republicans get their way. House Majority Leader Kevin McCarthy, R-Bakersfield, and the other 13 California House GOP members have launched a several-pronged front to try to get the Trump administration to prevent already-committed federal dollars from ever being spent on the project.

Their most visible effort came in February. That’s when their lobbying was seen as prompting Transportation Secretary Elaine Chow to put on hold a promise made late in the Obama administration to provide $647 million to electrify tracks in Silicon Valley leading to San Francisco – a crucial part of the governor’s plan to have a “blended” system of high-speed and regular rail.

Key Obama administration decisions could be rolled back

But California House Republicans also want to “claw back” some of the funding and procedural decisions in Washington made related to the project. This push received an unexpected boost in the final weeks of the Obama presidency when a confidential Federal Railroad Administration report was leaked to the Los Angeles Times. It predicted the first segment of the bullet train that the rail authority had long said would cost $6.4 billion could instead cost $9.5 billion to $10 billion.

Based on this evidence of dubious management and on the rail authority’s inability to attract investors – raising questions about financing – the U.S. Transportation Department appears to have grounds to rescind decisions made in 2009 and 2012 that enabled the project to end up getting about $3 billion in federal funds.

The 2009 decision was the original DOT move to make the California bullet-train project eligible for federal funding from the massive omnibus stimulus bill adopted soon after President Obama took office. The decision required an analysis concluding the project was properly funded and had responsible and thorough planning that substantiated expectations of success.

The 2012 decision was in the form of an agreement that allowed California to bypass the tradition of state and federal infrastructure projects being jointly funded on a dollar-for-dollar basis. Instead, California was allowed for at least three years to get an advance on federal dollars in return for guaranteeing eventual matching funds – totaling $200 million as of June 2015. The federal government has the authority to demand the state match what it has already spent before allowing another dollar to go California’s way.

Is new state law a tweak or a ‘material’ change?

A revocation of these bullet-train-friendly decisions isn’t the only possible twist that Morales faces in his final two months on the job.

Central Valley farmer John Tos, Kings County, the city of Atherton and several other Central Valley groups – the same coalition that previously filed, with some success, legal challenges against the state project – may have their first hearing this week on a new lawsuit in Sacramento Superior Court. (A previous hearing scheduled for last week was delayed, so another delay is possible.)

The lawsuit challenges the legality of the December vote of the California High-Speed Rail Authority to authorize the selling of $3.2 billion in state bonds for the project under the authority granted it by Assembly Bill 1889, a measure by Assemblyman Kevin Mullin, D-South San Francisco, that was enacted last year. It loosened bond-spending restrictions in Proposition 1A, the 2008 measure funding the rail project.

Mullin and other Democrats depicted the change as a routine tweak in the law. Attorneys for Tos, Kings County and Atherton will seek an injunction against any sale of the bonds on the grounds that there is no provision in Proposition 1A allowing for it to be subsequently “materially” altered by the California Legislature.

H.R. 2577 is the House appropriations bill determining financial support for all federally-funded transportation, housing and urban development projects. This includes the Federal Aviation Administration, Federal Highway Administration, Federal Railroad Administration, as well as other transportation and housing authorities across the U.S.

House Amendment 434, introduced by Rep. Jeff Denham, R-Calif., prohibits “the use of funds for high-speed rail in the State of California or for the California High-Speed Rail Authority” and also disallows any funds to be “used by the Federal Railroad Administration to administer a grant agreement with the California High-Speed Rail Authority that contains a tapered matching requirement.” The amendment was agreed to by voice vote during the H.R. 2577 floor consideration.

House Majority Leader Kevin McCarthy, R-Calif., released a prepared statement on Wednesday, praising the passage of the bill:

“This bill prioritizes projects to ensure tax dollars from hardworking Americans aren’t wasted on projects that don’t reflect today’s reality and tomorrow’s potential.

 

“In my home state of California where driving is essential to our daily lives, we know that some dollars spent on transportation are more effective than others. For example, it’s better to fix the roads and ensure rail safety than it is to waste millions on a high-speed rail boondoggle. That is why the House has routinely blocked federal taxpayer dollars from being wasted on California’s high-speed rail, helping to make sure we spend every taxpayer dollar in the most productive way possible.”

This decision comes on the heels of a 300-person protest at a meeting of the California High-Speed Rail Authority on Tuesday. According to the L.A. Times:

“During more than six hours of public comment by about 150 people, one speaker after another attacked the project as the eight-member California High-Speed Rail Authority board listened quietly. The testimony came from residents and leaders in small towns and growing suburbs along proposed routes through the mountains north of the Los Angeles basin. Many speakers said the project would devastate their quality of life or their local economy.”

Supporters of the high-speed rail included Palmdale Mayor James Ledford, who has called it a “game changer” for families facing a long commute home from their jobs in downtown L.A.

“We’re excited about being connected to where jobs are in Southern California,” said Ledford. “If not high-speed rail, then what?” Anaheim officials also stated their supportive comments during the meeting.

But opponents to the project point out the fact that voters are not getting what they were promised back in 2008. The San Diego Union-Tribune highlighted these concerns regarding the high-speed rail project in an editorial:

[I]f Richard and the CHSRA are sincere about addressing local concerns, it’s time they also sincerely address big-picture concerns, which hinge on legally binding promises made to state voters in 2008 to win passage of Proposition 1A. The measure provided $9.95 billion in bond seed money for the project.

 

One of those promises was that construction would not begin until all the money was in hand to build a route that could be self-sustaining if full project funding wasn’t available. The rail authority has never identified how it will pay for the $31 billion, 300-mile initial operating segment from Merced to the San Fernando Valley. Attorney General Kamala Harris declined to appeal the section of a broader Sacramento Superior Court ruling that concluded the state didn’t have a legal business plan.

Assemblyman Scott Wilk, R-Santa Clarita, introduced Assembly Bill 6, which would cancel outstanding bond funds approved by Proposition 1A, a 2008 voter-approved initiative to fund the state’s high-speed rail project with $9 billion in bonds. In its place, voters would be asked to spend the remaining funds on constructing and modernizing dilapidated school facilities throughout the state.

“Don’t get me wrong, I love trains and would be happy to be able to take one from Los Angeles to San Francisco for ‘dinner and a show’ and back,” Wilk wrote in a recent piece at the Los Angeles Daily News, “but not at the expense of the people of California.”

Before allocating up to  $8 billion for school construction, AB6 first would first pay off the outstanding debts incurred for the state’s high-speed rail project. The bill requires two-thirds approval of the state Legislature and a majority approval of voters.

“Our students deserve to have well-maintained facilities and it is irresponsible to continue prioritizing the crazy train over our schools,” Wilk said, echoing a favorite phrase coined by GOP gubernatorial candidate Neel Kashkari, who on Nov. 4 lost to Gov. Jerry Brown. “The high-speed rail boondoggle has been a proven failure and it’s time we spend taxpayer dollars in a responsible way.”

State Allocation Board: California needs as much as $12 billion for schools

Wilk points to a Jan. 2014 report by the State Allocation Board that contends California needs to devote as much as $12 billion toward new school construction and another $5 billion to modernization of existing facilities. The obscure board, which includes representatives from the governor’s office and the Legislature, couldn’t definitively peg the total cost of school modernization.  Other State Allocation Board estimates put the figure between $5.9 billion and $6.6 billion.

“There is demand for new construction and modernization funding,” the State Allocation Board School Facility Program Review Subcommittee concluded earlier this year. “The Subcommittee did not come to a consensus on a total dollar amount needed for future school facilities or the exact structure of a future bond.”

The committee struggled to identify the state’s total school modernization costs, in part, because “California does not track the number of schools and classrooms available for use. …

“Currently, data on the number of school sites and classrooms and/or the age of the facilities in the State is unknown.”

Wilk: Put schools before bullet train

How likely is Wilk’s idea to gain traction in Sacramento? Brown remained a steadfast supporter of the project during his reelection campaign. However, support is wavering among other Democratic leaders and state lawmakers. Wilk’s proposal to transfer rail funds to schools could provide liberal Democrats a reason to join a burgeoning right-left alliance against the state’s rail project.

CalWatchdog.com contributor Chris Reed, who has reported extensively on the problems with California’s high-speed rail project, noted that one of the  biggest critics has been Kevin Drum, a reporter for the liberal Mother Jones magazine.

Drum has questioned the ridership assumptions produced by New York-based Parsons Brinkerhoff, which claimed “the high-speed rail system could carry 116 million passengers a year, based on running trains with 1,000 seats both north and south every five minutes, 19 hours a day and 365 days a year.” Drum also pointed out the potential conflict of interest: Parsons Brinkerhoff  helped fund the initiative and has a stake in the outcome.

Flaws in California’s use of school facilities

Wilk’s idea is likely to gain support among conservatives and taxpayer groups, who view the state’s high-speed rail project as an irresponsible boondoggle that enriches private companies at public expense. Since 1998, state voters have approved $35 billion in school construction and modernization bonds. The most recent state bond package, $5 billion approved in 2006, has nearly been exhausted, with just $187.3 million remaining for school construction and $142.4 million left for seismic repair.

California’s school facility repair program, much like the state’s high-speed rail project, has faced similar questions about flawed oversight and accountability. School bond funds have been spent to modernize portable school buildings, despite their shorter life spans.

“Some concerns about the current program included whether a portable can be truly modernized, as well as the concern that was also expressed in the new construction section that 30 year funds were being spent on buildings that would not have a 30 year life span,” the State Allocation Board found in its Jan. 2014 report.

Any attempt to shift the high-speed rail bonds to schools would different state political functions to the head of the class. Brown has made the rail project his baby, but also is working on reforming school finances.

The teachers’ unions are strong Brown allies. But in addition to the need for school construction and repairs, the California State Teachers Retirement System needs $4.5 billion a year from the general fund to remain solvent.

With such financial problems ahead on the train tracks, high-speed rail may be a ready candidate for the junk yard.

“I’m simply asking to let the people re-vote on High-Speed Rail,” said Vidak in a statement Monday. “This runaway money train needs to be returned to the station before another taxpayer penny is spent.”

The bill, AB 1317 by Assemblyman Jim Frazier, D-Oakley, proposes changes in statutes regarding the Governors’ Reorganization Plan 2, creating three new agencies, one of which would be “The Transportation Agency – responsible for addressing the state’s transportation needs,” according to bill analysis.

Vidak’s amendment were inspired out of the colossal changes in the high-speed rail plan since voters first passed Proposition 1A in 2008, authorizing the $35 billion High-Speed Rail project. That projected cost escalated to more than $100 billion, but HSR officials, under severe criticism, dropped the cost to $68 billion.

“Instead of taking on further debt to finance High-Speed Rail, we should redirect that money to areas that need real investment such as water, education, healthcare and public safety,” Vidak said. His amendments would prevent any bond sales on high-speed rail.

“Voters were told that High-Speed Rail would take them from Los Angeles to San Francisco in two hours and 40 minutes at a cost of $50 per ticket,” said Vidak. “The estimated trip is now closer to four hours and the cost is more than $100 per ticket.”

A March 2013 Public Policy Institute of California poll found that only 43 percent of Californians currently support building High-Speed Rail. A 2011 a Field poll found that 64 percent of Californians wanted to revote on High-Speed Rail.

It is doubtful Vidak’s amendments will go anywhere as the Democratically-controlled  Legislature appears bound and determined to railroad the high-speed rail project, at any cost.

By Wayne Lusvardi

The mere mention of the words Cap and Trade in California and people just tune out because it sounds too complicated to understand.   While it is complicated, it is nevertheless understandable.

What we’re learning about the California’s Cap and Trade program is that it is ending up as a giant government program to socialize the extraordinarily high rates that will be added to your electricity, natural gas and water bills from shifting to 33 percent green power in California by 2020.

Plans are in the works to include some form of rebate in your water and power bills for the higher cost of green power.  But it will be politically determined who gets larger or smaller rebates.  According to a report by the think tank Next 10, low-income and low-volume energy users are insulated by law against any energy increases in their utility bills due to the high cost of Green Power.  So it will be the middle class that ends up bearing the higher costs for green power for lower-income communities.

By socialized electricity rates is not meant the placing of power companies under government ownership or control.   What is meant is the spreading of higher energy costs from rebates by a formula to be politically determined.  Assembly Bill 32, the Global Warming Solutions Act of 2006, did not nationalize or socialize the means of producing electric power.  But it will be socializing or spreading the higher cost of green power to the middle class.

Usurping Supermajority Democracy for Taxes?

But this raises an issue: Who brought to the voters a bill or ballot proposition to socialize electricity rates resulting from expensive green power?   Answer: No elected legislator has publicly stated that the intent of Cap and Trade was to socialize power rates.  But that is the apparent end result.

For any “tax, charge, levy, or tax allocation,” didn’t Proposition 26, passed in 2010,  require a two-thirds vote of the electorate?

The problem is that AB 32 was passed not by the people, but by a majority vote of the state legislature and signed by the governor in 2006.

AB 32 authorized the California Air Resources Board to adopt rules for what is called a Cap and Trade program at a later date.  Cap and Trade is a program that requires industrial and utilities to buy pollution credits in an auction.  The proceeds of that auction would be collected by CARB.

The Strategic Growth Council, authorized under AB 732, in 2008 would reallocate the proceeds of the Cap and Trade auctions to reduce high utility bills and fund anti-pollution projects.  The Strategic Growth Council was originally funded by $500,000 from Prop. 84 — the Water Bond Act of 2006.

CARB adopted the Cap and Trade portion of AB 32 on Dec. 17, 2010.

Usurping Democracy?

But Prop. 26, limiting any new “taxes, charges, levies or tax allocations,” passed by a vote of 52.5 percent on Nov. 10, 2010.

So there has been no vote about either Green Power or Cap and Trade.

But does Prop. 26 restrict CARB and the Strategic Growth Council from collecting pollution taxes under the guise of an auction and then redistributing the proceeds to reduce the high cost of Green Power?

To answer this question, we contacted reputable legal experts. An agency which “implements” a fee under an existing law passed in 2006 does not probably require a supermajority vote under Prop 26.

Cap & Trade Energy Rebates Could Backfire

However, this may not mean that any piece of subsequent legislation adopted by the Legislature can go beyond the intent of AB 32 and Cap and Trade.  There are several bills in the legislature queuing up to tap Cap and Trade proceeds to fund “schools, hospitals, affordable housing,” etc.  Gov. Brown has also proposed tapping Cap and Trade funds to finance the California High-Speed Rail. Neither of these is likely to be considered a legal use of Cap and Trade funds at this time.

But what is being considered a legal use of the $6.25 to $12.5 billion per year in Cap and Trade taxes is energy rebates to “customers” and funding for a stimulus program of home energy efficiency projects. Ratepayers would get rebates to reduce the shock of high Green Power costs; or they would get home insulation grants or loans.

The California Energy Commission estimates 40 percent of the state’s housing stock already is energy efficient due to Title 24 Building Energy Efficiency regulations adopted in 1978 under AB 758.  The 60 percent of older housing, commercial and industrial building stock built prior to 1978 would be the likely target for Cap and Trade building energy improvement projects.

Assembly Bill 1103, authored by Assemblywomen Lori Saldana, D-San Diego, and passed in 2007, would require owners and operators of non-residential buildings to disclose a building’s energy performance ratings to any prospective buyers, tenants, or even lenders financing any building sale.  AB 1103 would assign “benchmark” energy ratings to buildings and would encourage building owners to “upload” their rating to the U.S. Environmental Protection Agency’s Energy Star Portfolio Manager each year.  Electric and gas utility companies would be required to upload all energy consumption data on each building into the same database.  There is no exemption provided in this bill for historical properties, churches or “as-is” real estate transactions.

The California Public Utilities Commission has been requiring regulated public utilities to offer home and commercial energy efficiency rebate programs since the oil embargo and resulting energy crisis of the mid-1970’s.   California’s Statewide Multi-family Housing Energy Efficiency Rebate Program completed retrofits on 330,437 apartment units alone from 2005 to 2006 at a cost of about $50 million.

According to the U.S. Census, there are 4,199,785 apartment units in California.  Almost 8 percent of those were retrofitted with energy efficiency improvements from just 2004 to 2006.  How California could suck up $6.25 to $12.5 billion per year in more building energy improvements, as recommended by the University of California, Berkeley and Next-10, is questionable.

Of the 18 spending options for Cap and Trade proceeds recommended by the think tank Next 10, five of them involve building energy efficiency improvements.  As already stated, these have been undertaken by public utilities for decades and would be redundant to their ongoing programs.

Offsetting general gund expenditures is probably legally excluded at this time.

The State Legislative Office has already recommended against using Cap and Trade taxes to fund high-speed rail.

Establishing a green bank could lead to a repeat of another bubble like the mortgage sub-prime loan program.

If energy bill rebates are implemented ratepayers may believe that energy costs are lower and use more energy.  Or ratepayers may believe that if they use more energy that they will receive more rebate.  Thus, Cap and Trade could backfire.

Sending monthly rebates to energy customers separately might raise public perception problems of why utility rates were raised in the first place and then absurdly rebated back to them.

In short, California evidently doesn’t yet know what to do with huge amount of taxes that will be collected from industries and utilities under Cap and Trade.  As with all complex public policies, there is still a large amount of uncertainty as to the outcome of California’s Cap and Trade program.  And the unintended negative consequences that could arise from such a program are a growing concern.