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IN THIS ISSUE –
LET’S GET FISCAL…
- Newsom Signs Record State Spending; Sweeping New Policies
- State Budget Safety Net is a First
- With Budget Signed, Major Issues On the Capitol Table
- Governor & Legislature OK $2 Billion for Housing & Homelessness
- California Fiscal Picture Remains Rosy…Mostly
Capital News & Notes (CN&N) harvests California legislative and regulatory insights from dozens of media and official sources for the past week, tailored to your business and advocacy interests. Please feel free to forward.
READ ALL ABOUT IT!!
FOR THE WEEK ENDING JUNE 28, 2019
Due to the short holiday week, CN&N will next publish July 12
California’s new $215 billion budget will cut costs for some Californians and raise taxes on others though a sweeping set of new policies ranging from ending sales taxes on diapers and tampons to fining people who don’t buy insurance.
Gov. Gavin Newsom signed the budget last night. The deal boosts spending on child care, health insurance subsidies and homelessness. It also relies on a big surplus to fill the state’s reserve accounts with more than $19 billion.
Here’s a look at how Newsom’s first budget, which takes effect July 1, will affect Californians.
HELP AFFORDING HEALTH INSURANCE, BUT FINES IF YOU DON’T SIGN UP
If you make less than 600 percent of the federal poverty level — about $150,600 for a family of four — you might get some help paying your health care costs under the new budget.
More than 900,000 Californians who buy their own health insurance will be eligible for new help paying their insurance premiums. It’s an effort to strengthen the Affordable Care Act, the federal law also known as Obamacare.
The subsidies will cap premiums to a percentage of income on a sliding scale for people between 200 and 600 percent of the federal poverty level.
At one end of that scale, an individual making $24,280 will see their premiums capped at about 6 percent of income, according to Health Access, a group that advocated for the subsidies. On the other end, people earning $72,840 would see their premiums capped at 18 percent.
To pay for those subsidies, the state will fine people who don’t buy insurance through a policy known as the individual mandate, which was first implemented as part of the Affordable Care Act.
Republicans have since ended the fines at the federal level. Newsom and legislative leaders say re-imposing the penalty at the state level will shore up the state’s health insurance marketplace and keep premiums from rising dramatically. It’s expected to bring in roughly $1 billion for premium assistance over three years.
In addition to revenue from the mandate, the premium subsidies will also be supplemented by an additional $450 million over three years.
SUSPENDING SALES TAXES ON DIAPERS AND TAMPONS
The budget eliminates sales taxes on diapers and feminine hygiene products for two years.
That marks a victory for female lawmakers who had tried for years to end the taxes, which they say unfairly penalize women and young families. They had advocated for the ban to extend beyond two years, but were ultimately unable to persuade the governor.
In recent years, legislative committees have estimated ending sales taxes on diapers would cost the state about $35 million per year and ending taxes on feminine hygiene products would cost about $20 million.
NEW CHARGES ON YOUR PHONE BILL
Newsom also signed a budget trailer bill that will charge fees of up to 80 cents per month per phone line to upgrade the state’s 911 system.
The money will build a “Next Generation 911,” which will have more accurate call location data and texting capabilities.
MORE MONEY TO HOUSE THE HOMELESS
Sacramento and other large cities will get more money to help homeless people under a deal announced Thursday by Newsom and legislative leaders.
Under the agreement, $275 million will go to big cities including Sacramento that have more than 300,000 people. Counties will get $175 million and regional agencies called continuums of care will receive $190 million.
Sacramento Mayor Darrell Steinberg had been pushing for the $275 million for cities, which Newsom had called for in May. He said Sacramento will use its share of the money to build more shelters to get people off the streets.
The bill to allocate the homeless aid funding wasn’t finalized in time for Newsom to sign it Thursday, but he and legislative leaders announced it as part of the final budget deal.
MORE HELP FOR YOUNG AND LOW-INCOME FAMILIES
The budget includes funding to increase the state’s paid family leave plan from six to eight weeks.
It’s intended to help new parents spend more time with their babies, and will also help families who are taking care of relatives.
The budget also increases funding for childcare and allocates $125 million for new preschool slots.
The budget also makes about 3 million California families eligible for the state’s earned income tax credit, which can give households up to $2,559 per year. It raises the income level to qualify for the credit to $30,000 and also creates an additional $1,000 credit for low-income families with children under 6.
Governor’s media release (budget is not yet posted):
Altogether, the budget Gov. Gavin Newsom signed aims to build up reserves to more than $19 billion in four separate savings accounts by next year.
One account, the so-called rainy day fund with $16.5 billion, can only be tapped in a recession. Another unlocks funding for social services. One more piles up $400 million for education, and the last one is projected to hold $1.4 billion for emergencies and natural disasters.
It’s an unprecedented sum for a state that’s famous for its boom-and-bust budgets.
“We’ve never taken action to be prepared before,” said Sen. Holly Mitchell, D-Los Angeles, chair of the Senate’s Budget Committee. “We’ve only managed by expanding and cutting, cutting and expanding. This is the first time we’ve had something considered a safety net reserve.”
Mitchell a dozen years ago led one of the largest nonprofit agencies in the state, which delivered assistance to low-income families. She had to take out loans to keep checks moving to families every time the Legislature failed to pass a budget on time.
To her, the reserves represent an effort to end the cycle of welfare cuts and IOUS that characterized the years of chronic deficits and prolonged budget battles. In 2009, the state faced a $42 billion deficit. This year, it’s projecting a surplus greater than $21 billion.
“We have worked for years to get to this,” Senate President Pro Tem Toni Atkins, D-San Diego, said last week.
But others argue the Democratic governor and Legislature could do more to guard against the reductions they may have to make in a recession.
The nonpartisan Public Policy Institute of California last month issued a report suggesting the state had adequate reserves for a mild recession, but could see revenue fall by to $185 billion over five years in a severe downturn. The Legislative Analyst’s Office also has consistently made a case for more savings this year.
“By building even more reserves than it already has, the Legislature could mitigate the need for program cuts, tax increases, or spending deferrals when the next recession strikes,” Legislative Analyst Gabriel Petek wrote in April.
California and the U.S. as a whole now are in one of the longest-ever periods of economic growth. Newsom and lawmakers say they know a recession is on the horizon. Here’s a look at what keeps California budget hawks up at night, and what comforts them.
THE GLASS IS HALF EMPTY–VOLATILE REVENUE
When California’s wealthiest residents catch a cold, the state’s budget gets the flu.
California collects 70 percent of its general fund revenue from personal income tax, and almost half of that money comes from the state’s wealthiest 1 percent of households, according to thePublic Policy Institute of California report.
The ratio leads California tax collections to swing dramatically in recessions because wealthy taxpayers are less likely to cash in big bonuses or capital gains in down economies.
California has taken a number of steps to moderate its tax volatility since the Great Recession, but its fundamental reliance on the wealthiest households persists.
LOCAL GOVERNMENT WARNING SIGNS
While state leaders in Sacramento sock away a surplus, school districts and local governments around California are raising taxes and trimming their budgets.
In general, schools and local governments are reporting tight margins because of the rising cost of funding their employees’ pensions and benefits. Newsom’s budget offers schools some help by making supplemental payments toward their pension debts at the California State Teachers’ Retirement System, but Republicans say the financial distress is a sign that more severe cuts will come.
“Here we are in a time of plenty, and I don’t see any money other than the amount flowing to CalSTRS to help out local school districts. I don’t see anything going to help cities or counties. They’re going to be hit really hard,” said Sen. John Moorlach, R-Costa Mesa.
Despite the surplus, some California state leaders talk about the economy in terms of looming austerity.
Devastating wildfire seasons can wipe out savings in a heartbeat, for instance. Newsom is proposing a $24 billion plan to prepare for the kinds of catastrophe that wiped out Paradise and parts of Santa Rosa over the past two years.
Meanwhile, changes in the way people work can alter how they pay taxes. The gig economy and robotics could lead to fewer Californians paying payroll taxes.
Those changes are hard to predict, and they could lead to serious consequences in a downturn.
In a recession, “it will all converge in terms of challenges we have,” State Controller Betty Yee said. “The best thing we can do now is just keep building up these reserves.”
THE GLASS IS HALF FULL–BIG SAVINGS
The rainy day fund and other state savings accounts are designed to cushion cuts in a recession, and lawmakers plan to use them when the time comes.
Since the Great Recession, California voters and lawmakers adopted a number of new taxes that will keep money flowing to the state in a downturn. They include:
- Proposition 55, the voter-approved tax on households with incomes greater than $250,000 that expires in 2030.
- The gas tax, a 2017 law that aims to raise about $52 billion for transportation projects over a decade.
- Cannabis taxes are coming in below initial projections, but they’re still on track to raise hundreds of millions of dollars for programs every year.
- And, California now demands thatout-of-state online retailers collect state and local taxes on behalf of their Golden State customers. That wasn’t the case a decade ago.
Some parts of Newsom’s budget avoid ongoing commitments by committing to only temporary funding.
One example is a measure that eliminates sales tax on diapers and tampons for just two years. The short window lets lawmakers decide whether they want to continue the tax breaks and services if the economy changes.
The Legislative Analyst’s Office last month projected that Newsom’s budget included $1.8 billion in spending that would “sunset within a couple of years.”
Newsom and the Legislature celebrated paying off the “wall of debt” the state accumulated during the recession. Former Gov. Jerry Brown chipped away at the $33 billion in liabilities during his terms, and the new budget puts away the last of those short-term debts.
To be sure, California still owes tens of billions of dollars that it doesn’t have on hand for pensions and other debts, but clearing Great Recession debts heartened lawmakers who were in the Capitol when they last made serious cuts.
“If you look at the new revenue, 82 percent of this surplus money either goes to a reserve account of which there are a number, pays down (debt) or pre-pays pensions,” Senate Majority Leader Bob Hertzberg, D-Los Angeles, said last week. “It evidences a level of responsibility of where we’re focused.”
Now that they’ve locked down major new investments for health care, housing and education, Gov. Gavin Newsom and California lawmakers are turning their attention to priorities they say didn’t get enough love in the budget: Wildfires and housing.
With the budget deal behind him, Newsom said in a recent interview with POLITICO that tackling legislation to address the crushing costs brought on by catastrophic wildfires, and who will pay — electric utilities found to be responsible for sparking blazes, or their customers — is the immediate focus of his administration.
“It’s critical we get that done,” Newsom said. “We’re still not close to where we need to be.”
The governor last week proposed a $21 billion insurance fund that electric utilities would use to pay claims stemming from equipment-sparked wildfires. Under his proposal, ratepayers would pay half and utility company shareholders would pick up the other half. Newsom hopes to strike a deal before July 12, when lawmakers are slated to leave for summer recess. Fueling that timeline is a concern that Wall Street credit rating agencies will downgrade utility companies around that date if the Legislature doesn’t take “concrete steps” to address massive financial liabilities brought on by the fires.
Newsom pointed to $971 million tucked into the budget for wildfire preparedness in the upcoming fiscal year, which begins July 1. But he said California needs to do more to address increased wildfire threats and costs associated with the conflagrations.
His first budget has new spending for emergency response system upgrades, including to California’s 911 operation and a suite of networks that deploy emergency alerts, early earthquake warnings and emergency power shutdowns system during wildfires. There’s also funding for city and county fire departments to assist state wildfire prevention and mitigation work.
Newsom and his advisers have already stepped up their outreach with key lawmakers, meeting with Senate Majority Leader Bob Hertzberg, Senate Select Wildfire Chair Bill Dodd (D-Napa) and Senate Energy, Utilities and Communications Chair Ben Hueso (D-San Diego) in his Capitol office last week to discuss wildfire issues.
Both Newsom and Senate President Pro Tempore Toni Atkins pointed to a renewed focus on housing, homelessness and wildfires this summer and fall, now that major budget negotiations have concluded.
“We’ve got a commission report that talks about the investment we need to make to the tune of billions of dollars, and we need to get into conversation about what the structure of that looks like,” Atkins said. “We’ve got a lot of work to do on wildfires.”
Meanwhile, top leaders are training a spotlight on housing and homelessness — areas they say need greater investment.
Although Atkins and Newsom have touted new investments in those areas of the budget, they said the state must do more to spark new residential construction and address the underlying causes of homelessness. But devising a specific plan to ramp up private- and public-sector housing production has been a thorny and elusive issue for the state.
“We’re not solving all these problems overnight,” Atkins said. “We’ve got to figure out how we’re going to house people.”
It’s a theme Newsom has pushed too: California has many priorities, and Democratic leaders have made major across-the-board investments to help low- and middle-income people struggling to afford rising housing and health care costs, while also paying down debt and unfunded liabilities.
“This budget’s pretty extraordinary — the amount of things we actually got accomplished in a short year,” Newsom said in the interview, rattling off a list of priorities from early childhood education to health care. “But I’m trying to do a lot of things.”
And last week he told business leaders in San Francisco that he hopes to tackle an agenda that encompasses climate change, early childhood programs and workforce stagnation in rural California.
“All of these things are important,” Newsom said. “There’s focus, but you also have to be the multitasker.”
While Newsom can argue that he’s making a dent in major policy initiatives, it may also set him up for criticism that he’s trying to do too much and lacks a coherent legislative focus.
On housing, Atkins and Newsom were criticized earlier this year for not doing enough to publicly support a controversial bill by state Sen. Scott Wiener (D-San Francisco) that sought to ease some local zoning restrictions in favor of denser housing development near job centers and public transit. The bill ultimately died in the Senate Appropriations Committee.
“I’m just winding up on housing,” Newsom said. “The world is not SB 50 … It’s tough stuff because your principal opponents are the League of California Cities and [the California State Association of Counties] and the votes just aren’t there.
“You can say the votes are there — they’re not. There’s a reason what happened, happened,” he said.
The budget this year includes $1 billion in new spending on state efforts to combat homelessness, and an additional $1.75 billion to boost housing production. A major part of Newsom’s policy platform includes encouraging private-sector housing development.
Last week, Newsom applauded tech giant Google for pledging to spend $1 billion to build 20,000 Bay Area homes, saying on Twitter that he hopes the “announcement inspires other companies — big and small — to make similar direct investments in housing affordability throughout our state.”
Money in the budget includes $500 million in grants for cities and counties to launch new housing projects, $500 million for local development of low-income housing and $650 million for emergency shelter construction. The state is also allocating $20 million for legal assistance programs for tenants facing eviction, and $270 million to expand mental and physical health programs that seek to help people get off the streets and into housing.
“No one’s denying the crisis of homelessness,” Newsom said.
Assemblyman Phil Ting (D-San Francisco) said that he too wants to see a greater appetite in the Legislature to rally attention to housing and homelessness.
“Even with the great budget package we did … . It’s not clear that we’ve done enough to make sure we’re doing enough building of housing,” he said in an interview.
Ting said to expect an uptick in action from him and other lawmakers on environmental issues, particularly when it comes to cutting down the consumption of plastics.
“Plastics is going to be a major issue,” Ting said. “Without foreign countries taking our plastics, we are now figuring out how do we actually recycle plastics — also use less plastics … . We feel like we’re doing such a good job by throwing all of our stuff into the blue bin, but people don’t realize most of the blue bin stuff now is going into the landfill,” he said.
Potential high-profile 2020 ballot issues are also poised to pull Newsom’s eye this summer and unless a deal is struck to curtail them, some measures could easily become bruising and money-burning fights.
Newsom said a ballot push to lift caps on commercial property taxes set under California’s landmark Proposition 13 — which froze rates in 1978 and limited annual increases to 2 percent — was the “biggest” fight headed for the ballot, and while he said preliminary talks had started, he demurred on the details for fear of affecting the outcome of a “huge, tectonic issue.”
“To screw this one up, it’s really consequential,” Newsom said.
The governor said he’s participating in a wide swath of conversations about ballot initiatives, including those concerning a budding 2020 soda tax measure, leading up to August, when decisions will be made about which ones interest groups seek to place on the November 2020 ballot.
While Newsom has repeatedly talked about the need to make California’s tax system less volatile by reducing its reliance on income taxes, there appears to be scant political will to touch Prop 13, which critics fault for tilting the state’s revenue base from property taxes to income and sales taxes.
Since the decades-old initiative was passed by voters, voters would need to approve any changes. With at least one so-called split-roll measure, dubbed the “Schools & Communities First” initiative by its backers, already qualified for the ballot, vulnerable Democrats have little incentive to take politically risky votes on legislation.
Deep-pocketed interest groups on both sides have been piling up campaign contributions and backers of the initiative have already said they’re uninterested in accepting a legislative deal.
Meanwhile, the shape the soda tax fight takes appears less certain. Industry groups haven’t ruled out getting involved in a statewide initiative campaign, and lawmakers who say they see public perception shifting in favor of tighter consumer regulations on sugar-sweetened beverages are also mulling involvement in a 2020 battle.
Gov. Gavin Newsom and legislative leaders agreed to spend a fresh $2 billion to combat the state’s housing
and homelessness woes. Democratic lawmakers and the new governor settled relatively quickly on the amount—which advocates say is the biggest in recent memory dedicated to housing.
Ever since, they’ve been trying to resolve the politically thornier questions that remain: Should big cities have exclusive dibs on the new homelessness dollars, or should counties get a slice? Should cities that don’t permit their “fair share” of new housing be punished by withholding money for potholes and broken roads? Should state law allow emergency homelessness shelters to be fast-tracked to avoid “NIMBY” opposition?
Today the Newsom administration announced a deal with lawmakers that answered some of those questions. Barring the unexpected, legislators could approve the new housing rules early next week. The highlights:
Last week, budget negotiations stalled over where $650 million in new state funds to construct homeless shelters and provide other homelessness services should go. Newsom wanted some dollars reserved for counties and regional agencies, while some lawmakers wanted all of the funding to go to the state’s largest cities, where homelessness is most acute. New counts reported earlier this year showed dramatic increases in homelessness across the state.
Under today’s agreement, the state’s 13 largest cities will receive the largest share of the funding, at $275 million. Counties will receive $175 million, and regional agencies $190 million.
While homelessness advocates were still parsing the details, they are elated with the overall level of spending for a state in which at least 130,000 people lack consistent shelter.
“It’s the largest single investment out of the general fund in recent memory,” said Chris Martin, legislative advocate for Housing California, an affordable housing advocacy group. “It recognizes this crisis is just getting worse and we need to have the state’s leadership.”
Accompanying the new spending: an expedited approval process for constructing “low barrier navigation centers”—temporary living shelters that connect people experiencing homelessness with more permanent housing and other services. Under the new rules, proposed shelters will not have to go through a full environmental review, a procedure homelessness advocates say is often abused by neighborhoods seeking to delay or derail new shelters.
Newsom made waves earlier this year when he announced his administration would take advantage of a new state housing law to sue Huntington Beach. The coastal Southern California city of 200,000 had long been a target of state housing authorities and affordable housing advocates for flouting state laws requiring cities to zone enough land for new housing.
New rules introduced in today’s budget compromise spell out what punishments cities like Huntington Beach could expect if they don’t comply with state housing law. If a city fails for a year to fix its housing plans, a judge could fine that city between $10,000 and $600,000 per month. Judges also would be granted power to approve permits for new housing developments.
“We don’t like to go to war with the local governments,” said Dan Dunmoyer, president of the California Building Industry Association, which represents developer interests in the Capitol. “But unfortunately, some cities frankly are doing nothing to address the housing crisis—literally nothing—and fighting every effort to do something.”
While those penalties may sound severe, many of the 42 California cities currently in violation of state housing law have very small populations. And, as both developers and local elected officials will tell you, forcing a city to plan for new housing does not mean new housing will be built. Many localities that affordable housing advocates have long charged with excluding new developments are actually in compliance with state housing law (Marin County, for example).
Back in January, Newsom talked tough, warning that cities failing to meet their housing production goals would be denied revenue from the state’s new gas tax, which voters had approved last November to fix crumbling roads and infrastructure.
Amid major pushback from local elected officials and lawmakers, that “stick” has been winnowed down to a twig. For cities that don’t comply with state housing law, a judge could conceivably force a city to use gas tax dollars to pay hefty fines. But that’s about it. Gas-tax dollars are not tied to the amount of new housing permitted by a city, or whether cities meet their state-mandated housing goals.
An earlier proposal from Newsom that would have empowered a judge to divert any state-administered funding from a city—including gas tax money—is noticeably absent from the final budget agreement.
New data released in May show that California remained the 5th largest economy in the world in 2018, behind Germany and ahead of the United Kingdom, with a Gross Domestic Product (GDP) of $3.0 trillion in current dollar terms. In real terms, California’s GDP growth was 3.5 percent for the year compared to 2.9 percent for the nation. Through the first four months of 2019, California exports totaled $57.5 billion, down 2.7 percent from the same period last year, while California imports totaled $127.6 billion, down 8.8 percent.
nCalifornia’s unemployment rate fell 0.1 percentage point to 4.2 percent in May while the U.S. unemployment rate remained at 3.6 percent in May. California’s labor force participation rate fell 0.2 percentage point to 62.4 percent in May while the nation’s remained at 62.8 percent.
nCalifornia gained 19,400 nonfarm jobs in May, following an upwardly revised gain of 48,600 jobs in April. During the first five months of 2019, the average monthly job gain was 24,700 compared to 23,800 during the same period in 2018. In May, seven of the eleven major industry sectors added jobs, three lost jobs, and one (mining and logging) reported no change. Construction added the most (12,800). Leisure and hospitality (4,500), government (1,800), professional and business services (1,600), information (1,400), trade, transportation, and utilities (800), and educational and health services (200), also added jobs. Job losses occurred in other services (2,600), manufacturing (700), and financial services (400).
Commentary from CalMatters
The careers of political executives – presidents, governors and big city mayors – are often, fairly or not, defined by how they deal with the crises they encounter.
Franklin Roosevelt and the Great Depression (and later World War II), John Kennedy and the Cuban missile confrontation, Lyndon Johnson and the Vietnam War, Jimmy Carter and the Iranian hostage taking, and George H.W. Bush and the Iraqi invasion of Kuwait are just a few of the more obvious examples.
Gavin Newsom, a devotee of the “big hairy audacious goals” advocated in one of his favorite books, is confronting his first genuine crisis – actually two crises in one. They are the scourge of wildfires that exact a heavy economic and human toll, and their financial impacts on the major electrical utilities that threaten their corporate existence.
Last week, Newsom unveiled the framework of a plan to deal with both, with the centerpieces being lessening the financial risk to utilities to shore up their shaky creditworthiness, and creating a new multi-billion-dollar fund to quickly compensate fire victims.
“Climate change has created a new reality in the state of California,” Newsom said in a statement. “It’s not question of if wildfire will strike, but when.”
It’s just a framework and given the legal, financial and political complexities of both issues, the devil will very much be in the details.
One might expect those details to emerge during weeks or even months of negotiations between Newsom and legislative leaders, plus talks with the countless outside interests such as the utilities themselves, their unions, consumer groups, fire victims, insurers, Wall Street lenders and stockholders.
However, Newsom wants the Legislature to act by July 12, when it is scheduled to take a month-long summer break and also the deadline for credit rating agencies to decide whether utilities, particularly bankrupt Pacific Gas and Electric, will have their debt downgraded, making it much more difficult for them to borrow money.
That’s a very tight time frame and the plan faces some stiff criticism, especially from consumer advocates who say it may unfairly shift the financial burden from the companies to their ratepayers when downed utility lines cause wildfires.
Newsom and other Capitol politicians are acutely aware that PG&E, et al, are not popular these days and that if they appear to let them and their executives off the hook for wildfire damages, there could be a political backlash.
Under current law, dubbed “inverse condemnation,” utilities are strictly liable for losses from wildfires their equipment causes. Utilities say that’s an unfair burden because they cannot control nature and are powerless, as it were, to prevent fires when hot weather and high winds cause even well-maintained electric cables to fall.
The Newsom plan would presume the utilities to be innocent if they have met the higher safety standards to be imposed and otherwise acted prudently, thus allowing damage claims to be shifted from stockholders to ratepayers.
The $21 billion damages fund – details still to be worked out – would be financed by the utilities themselves and by extending a utility bill surcharge, originally imposed to pay for power purchased during the state’s infamous energy crisis nearly two decades ago.
“We think this will be well received,” an administration official told CALmatters writer Julie Cart. “We think this provides a path to stabilize our two utilities that are facing potential downgrades and provides a path out of bankruptcy for PG&E.”
That’s the “big hairy audacious goal” that Newsom has set for himself and his political standing, not only in California but nationally, may hinge on the outcome.
General Electric Co said it plans to demolish a large power plant it owns in California this year after only one-third of its useful life because the plant is no longer economically viable in a state where wind and solar supply a growing share of inexpensive electricity.
The 750-megawatt natural-gas-fired plant, known as the Inland Empire Energy Center, uses two of GE’s H-Class turbines, developed only in the last decade, before the company’s successor gas turbine, the flagship HA model, which uses different technology.
The closure illustrates stiff competition in the deregulated energy market as cheap wind and solar supply more electricity, squeezing out fossil fuels. Some utilities say they have no plans to build more fossil plants.
It also highlights the stumbles of Boston-based GE with its first H-Class turbine. The complex, steam-cooled H design takes hours to start, suffered technical problems and sold poorly, experts said.
“We have made the decision to shut down operation of the Inland Empire Power Plant, which has been operating below capacity for several years, effective at the end of 2019,” GE told Reuters. The plant “is powered by a legacy gas turbine technology … and is uneconomical to support further.”
GE declined to comment on whether it would take a charge for shutting the plant. GE operates few power plants of its own.
In a filing with the California Energy Commission on Thursday, GE said the plant is “not designed for the needs of the evolving California market, which requires fast-start capabilities to satisfy peak demand periods.”
GE’s newer HA turbine can power up in under an hour, more quickly than the H to match fluctuating supplies of wind and solar power, GE said. The large market for the H turbine that GE anticipated “did not develop and has resulted in an orphan technology installation at IEEC,” the filing said.
It added that GE will no longer support or make replacement parts for the H turbine. Only one other plant uses H turbines, Baglan Bay in Wales.
California approved the Inland Energy Center, located in Riverside County, about 75 miles (120.7 km) east of Los Angeles, in 2003 and the plant opened in 2009. Industry experts estimated it cost nearly $1 billion. Similar combined-cycle gas-power plants run for 30 years before being decommissioned, according to a recent study by S&P Global Market Intelligence.
One of the two Inland Empire turbines was mothballed in 2017, cutting the plant’s output to about 376 megawatts, according to the filing and the California Independent System Operator, which oversees the state’s electricity grid. Closing the plant will eliminate about 23 jobs, the filing said.
GE has been promoting its “H-Class” turbines amid a severe downturn in demand for fossil-fuel power plants.
The two “H” turbines being demolished in California differ from GE’s current HA, which uses air cooling, said a former GE engineer familiar with both turbine types.
Still, premature closure of a turbine marketed as “H-Class” is a negative for GE as it struggles to restore profits at its power business, the expert noted. Power, once GE’s largest division, lost $22.8 billion last year as the company grapples with slack demand for fossil-fuel plants. The company is set to lose up to $2 billion in cash this year.
GE is selling the California power plant site to a company that makes battery storage, which is increasingly used to make wind and solar power available when needed, replacing the need for some fossil fuel plants.