When Gov. Arnold Schwarzenegger used his veto power to eliminate the obscure Electricity Oversight Board, he put at risk $3 billion in state funds – money due the state from settlements with power merchants who victimized California during the electricity crisis.

The governor’s 2007 action removing the EOB also means oversight over the state’s electricity grid is likely to be placed under the control of the PUC, which would entail a significant expansion of the authority of the Public Utilities Commission.  

This maneuvering comes amid an intensifying power clash between the Legislature and the Public Utilities Commission, led by president Michael Peevey.

Experts say the EOB, which was created to ride herd on the manager of California’s power grid, was the signatory to billions of dollars worth of hard-fought agreements, legally binding, that the state negotiated after the crisis eased. The EOB represented California’s interests before federal regulators in more than 135 federal appeals, served as a consumer representative and, most importantly, served as the state’s overseer of the Independent System Operator, which runs most of California’s vast power grid.

Now that the EOB no longer exists, it is unclear what will happen to those settlement payments. That has gotten the attention of the attorney general’s office, and Democratic lawmakers.

“The A.G. (attorney general) had been trying to work around the absence of an EOB signature. However, the settlements are at risk of falling through…,” Assemblyman Lloyd Levine, the head of the Assembly Utilities and Commerce Committee wrote the governor.

“The longer the EOB is absent, the amount at stake will continue and may reach the hundreds of millions of dollars in losses to ratepayers. The PUC estimates the total outstanding claims that ratepayers won’t recover as ‘up to $2 billion.’ The AG quantifies the total outstanding claims plus interest as exceeding $3 billion.”

Levine added that banks “cannot release settlement funds that the EOB negotiated because the funds are held in escrow accounts and the EOB is the owner of the accounts. The deputy AG estimated that tens or hundreds of millions of dollars thayt belong to ratepayers cannot be released.”  He noted that the state has refund claims outstanding against 60 energy-market participants “which cannot be consumated unless the EOB can sign off.”

The money was “blue penciled” from last year’s budget by the governor, who said the EOB was no longer necessary or functional--a move that may ultimately widen the PUC’s authority. This increase in the commission’s power comes at a time when its president, Peevey, is under increased scrutiny from Capitol lawmakers after repeated clashes. One clash with the Legislature stems from Peevey’s attempts to engineer the creation of a $600 million ratepayer-financed institute at UC to study climate change—an institute over which he would wield influence. Senators have vocally opposed Peevey’s plan.

In another dispute, Peevey is pushing for reinstatement of what is known as “direct access,” a key component of market deregulation, in which electricity users bypass utilities and purchase power directly on the open market. It was intended to increase competition and lower prices, but critics contend it was instrumental in contributing to California’s power market meltdown of 2000-2001. Direct access was suspended in September 2001.

But five months ago, the PUC opened a proceeding to reinstate direct access. The PUC said it had full authority to bring back direct access, but the move outraged then-Assembly Speaker Fabian Nunez and Senate Leader Don Perata, both of whom asked the PUC to halt. The PUC continued anyway.

The result of these big-ticket disputes—there are others, as well—is to create an intense political battleground pitting the state’s powerful utilities regulator against the lawmakers who hold the purse strings. Potentially, billions of dollars are at stake—a critical consideration in a tight budget year.

Those purse strings already are being pinched.

A subcommittee of the Senate Budget Committee decided to cut $60 million in the PUC’s operating budget for 2008-09. The cut, destined to be included in the Senate’s initial version of the state budget, means that the money likely will get an airing by the  two-house conference committee that writes the final version of the budget.

There is little chance that the PUC’s budget ultimately will be cut. But such a move has a time-honored history in the Capitol, where lawmakers choke off dollars—at least temporarily--in order to get the agency’s attention.

But the most dramatic dispute involves the Electricity Oversight Board, which even before its elimination was relatively little known in California, even during the electricity crisis, when the public focused more on soaring prices and rolling blackouts.

The functions of the EOB ultimately will be shifted elsewhere—presumably to the PUC—but its legal status in the settlements raises questions.

Absent the EOB, “California ratepayers are left without a state agency actively monitoring the wholesale energy markets, investing anomalies and substantiating demands for restitution on behalf of all California ratepayers. Ratepayers now remain vulnerable to being saddled with even more costs resulting from market manipulation and energy overcharges,” Levine wrote.

The final resolution of the dispute over the EOB is likely to be contained in a so-called “trailer bill,” a bill that accompanies the state budget and makes legal changes needed to put the budget agreement into effect.

Meanwhile, Peevey’s California Institute for Climate Change, is being renegotiated. Like the EOB, the climate change institute will be placed in budget trailer bill. Its leadership will include legislative representatives, and its funding will include money from municipal utility customers – not just the ratepayers of the investor-owned utilities, PG&E, Edison and San Diego Gas & Electric.

Sen. Christine Kehoe, D-San Diego, the chair of the Senate Energy Committee, said discussions with Peevey were underway, and that negotiations over the climate institute were separate from talks involving direct access or the EOB.

“President Peevey and I have talked numerous times about this. These are perfectly cordial conversations,” Kehoe said. Several senators, she said, had concerns about “the setting and the funding of the institute without legislative oversight,” and they want “greater legislative involvement, transparency and accountability.”

Kehoe said the idea of climate research was supported in the Senate. “But we want it done correctly. One of the questions we have is, who’s in charge?”