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IN THIS ISSUE – “Shortfalls will be coming, they will be ample and we’ll make adjustments.”

          Gov. Newsom on the State’s revenue drop 

Capital News & Notes (CN&N) harvests California policy, legislative and regulatory insights from dozens of media and official sources for the past week. Please feel free to forward this unique client service.

FOR THE WEEK ENDING NOV. 4, 2022

 

Declining Revenue Hits State Spending

Associated Press

The good times might soon be over for California’s government.

The nation’s most populous state has had so much cash lately that lawmakers have spent freely — handing out free health care to low-income immigrants, paying for every 4-year-old to attend kindergarten and sending more than $21 billion in stimulus checks to taxpayers over the past two years.

That seemingly endless flow of money has started to dry up as state tax collections have fallen below expectations for four months in a row. There’s now an 80% chance California will be about $8 billion short when its fiscal year ends next summer, according to the latest estimate from the nonpartisan Legislative Analyst’s Office.

The trend of declining revenues is already having an impact. Last month, Democratic Gov. Gavin Newsom blocked a tax cut for manufacturers, halted an expansion of full-day kindergarten programs and nixed unemployment benefits for immigrants living in the country without legal permission — all while citing the state’s potential shortfall.

“Those shortfalls not only will be coming, they will be ample and we’ll have to make some adjustments,” Newsom said. “We’re working with the Legislature right now to do just that.”

Despite the shortfall, California is likely not headed toward another cash crisis like the one that engulfed the state during the Great Recession more than a decade ago. California had less than $8 billion available to spend at the end of September 2008 during the Great Recession. This year, California has more than $130 billion available, including $37.2 billion in its various savings accounts.

“I think the state is far better positioned for a potential economic downturn this time around than it has been in contemporary history,” said Chris Hoene, executive director of the California Budget & Policy Center.

What’s happening in California could be a sign of troubling things to come for other states. Nationally, tax collections in most states appear to be above expectations so far, according to Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers. But revenue is growing much slower, with states anticipating a 1.4% average increase this year compared to a 16.5% jump in 2021.

A declining stock market means there’s less incentive for tech startups to begin selling shares of stock to the public. Tech companies “going public” has been a reliable source of cash for California’s government, because it makes a lot of people very rich very fast — and all money that is taxable.

Last year, 206 California-based companies went public, creating a huge windfall of tax revenue for the state. This year, less than 50 California-based companies will go public, according to an estimate from the California Department of Finance — the Newsom administration’s budget agency.

“It doesn’t mean that tech itself is not a source of strength, though it may not be a source of as rapidly increasing revenues as it was a year ago for the state general fund,” said Jerry Nickelsburg, faculty director for the UCLA Anderson Forecast, which projects economic trends.

California collects the majority of its income taxes in April, the deadline for people to file their state tax returns. But the state does get money each month from “withholding taxes” — money companies withhold from workers’ paychecks each month and send to the government. That revenue has been down significantly since June.

“What that suggests to our forecasters is … there have been layoffs and cutbacks in some of the high-wage, high-tech sectors of the state’s economy,” Department of Finance spokesperson H.D. Palmer said. “It’s a reflection of the volatility of the stock markets.”

It could also signal some volatility between Newsom and California’s Democratic-controlled state Legislature. This year, Newsom scolded lawmakers for passing bills at the end of the session that, when added all together, would have allowed $22 billion in new spending that was not accounted for in the state budget.

https://apnews.com/article/business-california-economy-government-and-politics-efcfe1ebc2d034175cd40e75e43fea5e

 

California Dems Brace for Impact

CalMatters

How concerned are Democrats in California and across the country about a Republican “red wave” cresting in the Nov. 8 election and clinching the GOP’s control of Congress?

Three hints:

  1. President Joe Biden campaigned for Democratic Rep. Mike Levin, who’sfacing a tough battle against Republican challenger Brian Maryott. On Tuesday, Levin was among the candidates identified by the Democratic Congressional Campaign Committee as requiring “immediate resources” to win their seats.
  2. Also Tuesday, analysts for the nonpartisan Cook Political Report said that 10 Democratic-leaning districts across the country had shifted in the GOP’s direction,including three in California. (CalMatters is tracking nine particularly hot House races in California — follow along here.)
  3. And when Gov. Gavin Newsom was asked ina Saturday interview with CBS News if it feels like a red wave is coming, he said simply, “Yeah. Of course it does. … Look, I can be the cheerleader” for Democrats, but “I’m also pragmatic. … You feel it. It’s not just intellectualization based on polling.”

Newsom: “It goes to my fundamental grievance with my damn party. We’re getting crushed on narrative. We’re going to have to do better in terms of getting on the offense and stop being on the damn defense.”

The House races most likely to see upsets may be those in blue states where there aren’t competitive statewide races driving turnout, where Democratic governors are underperforming and where GOP candidates have been able to leverage crime and inflation as campaign issues, Dave Wasserman, U.S. House editor for the Cook Political Report, wrote in a blog post.

At least two of those three conditions apply in California, where the most exciting statewide race may be for the relatively obscure office of controller and where the state GOP has repeatedly hammered Democrats for high gas prices and skyrocketing inflation rates.

Jessica Millan Patterson, chairperson of the California Republican Party, said in a Tuesday statement: “Joe Biden and Gavin Newsom have no greater friends than California Democrats in advancing new taxes and reckless policies that make us increasingly dependent on foreign oil. A vote for a California House Democrat candidate is a vote for handing over more of your hard-earned money to pay for higher gas prices.”

Democrats, meanwhile, continue to attack Republicans for their stance on reproductive rights. In a Wednesday fundraising email, Democrat Jay Chen — who’s seeking to oust GOP Rep. Michelle Steel of Orange County — slammed Steel for signing “an amicus brief asking the Supreme Court to overturn Roe v. Wade” and for voting “against the Women’s Health Protection Act, which would codify reproductive freedoms into law.”

 

Newsom’s “Ducking and Covering” in LA Mayor Election May Hurt His POTUS Ambitions

Politico

Seemingly every major player in the Democratic Party has endorsed Rep. Karen Bass to be the next mayor of Los Angeles: President Joe Biden, Vice President Kamala Harris, Hillary Clinton, Sen. Bernie Sanders and former President Barack Obama.

Missing from the list is California Gov. Gavin Newsom.

Newsom’s unusual choice to stay out of a contest that has become surprisingly close likely stems from his reluctance to oppose Rick Caruso, a billionaire former Republican who has spent enormous sums to beat Bass, according to two people close to the governor who are familiar with his thinking.

The two men share professional connections — and political consultants. And Newsom has been clear publicly that he’s fond of Caruso, a prolific campaign donor.

“I’ve known Rick Caruso for years and years and years,” Newsom said in August.

The governor’s neutral position has become more glaring as Bass, who would be the first Black woman to lead Los Angeles, is seeing her advantage slip away. As her opponent pours tens of millions of dollars into an advertising blitz and a recent poll had the candidates in a statistical dead heat, the Democratic establishment is rallying around the congresswoman.

For Caruso, “a non-endorsement is a win, honestly,” said Michael Trujillo, a Democratic consultant who has run LA mayoral campaigns, of the governor’s decision.

Newsom has defended his neutrality as a reluctance to meddle in Dem-on-Dem fights, but he’s had no problem weighing in on other such races — and the struggle between Bass and Caruso isn’t your typical intraparty battle. Caruso only recently switched his party affiliation after years of oscillating between Republican and no party preference.

Those factors make Newsom’s silence all the more mysterious, said Bill Burton, a Democratic consultant who advised Obama’s first presidential campaign and is supporting Bass.

“It just makes it strange in a race where you have essentially a Democrat versus a Republican that Newsom is neutral,” he said.

Caruso gave nearly $60,000 to Newsom’s 2018 gubernatorial campaign and donated $500,000 to California’s Covid-19 Response fund in 2020 at the governor’s behest. Caruso was also one of the several dozen members on Newsom’s business recovery task force.

Newsom, the former mayor of San Francisco, has on multiple occasions praised Bass for her decades of political leadership, but the two aren’t particularly close. In 2018, Bass endorsed former LA Mayor Antonio Villaraigosa in the gubernatorial primary over Newsom.

The governor’s decision to sit this election out could also expose him to criticism from within the core constituencies of the Democratic Party, said one California Democratic consultant, who has known Newsom for many years.

“He’s made the calculation that ducking and covering on this one is the safest approach, but he looks more and more like he’s on an island,” the consultant said.

The consultant said Newsom wants “literally no part in this race,” but that by not backing Bass, he’s helping her opponent — someone who has spent $92 million painting California’s largest city as a den of corruption and ineptitude.

“Him staying out when every other Democrat in the city, state, and country is with [Bass] is a huge victory for Caruso,” the consultant said.

Black political groups have already knocked Newsom for not endorsing Bass. A group of organizations late last month released a letter calling the governor’s support of Black women “selective.”

Those critiques could come back to haunt him in a presidential primary.

Newsom’s longtime consultants at Bearstar Strategies are also running Caruso’s campaign. But other Bearstar clients, including Attorney General Rob Bonta, Sen. Alex Padilla and Lt. Gov. Eleni Kounalakis, have endorsed Bass.

Newsom’s campaign spokesperson, Nathan Click, pointed to the governor’s earlier statements saying he liked both candidates. “I have great respect for the congresswoman,” Newsom said when he was asked about the race in August.

Partners at Bearstar did not respond to two requests for comment.

Newsom frequently endorses candidates in races with two Democrats, including in this election cycle. He recently threw his support behind Sacramento City Councilmember Angelique Ashby, who is running for state Senate against California Democrats’ preferred candidate, Dave Jones. He’s also backing former state Senate Majority Leader Bob Hertzberg in his LA County supervisor race against West Hollywood Mayor Lindsey Horvath.

MORE:

https://www.politico.com/news/2022/11/02/gavin-newsom-la-mayors-race-00064785?nname=california-playbook&nid=00000150-384f-da43-aff2-bf7fd35a0000&nrid=0000016a-7368-d919-a96b-f7f9c66d0000&nlid=641189

 

US Electricity Generating Capacity is Far Short of Demand & Empowering Renewables

NY Times commentary

“World War Zero” — the battle to save the planet by zeroing out carbon emissions — ought to be a bonanza for generators of electricity. Electric vehicles, heat pumps and other planet-saving technologies that don’t use fossil fuels do consume a lot of electricity. By one estimate, for the United States to eliminate fossil fuels entirely would require three to possibly even five times as much electricity-generating capacity in the coming decades as the country has now.

Gearing up to meet a surge in demand is what businesses do. It’s profitable. I’m pretty sure Hershey and Mars have been manufacturing more candy than usual in the past few weeks to satisfy trick-or-treaters.

But electricity-generating capacity in the United States grew just 0.3 percent from 2011 to 2021, according to my calculation based on data from the Energy Information Administration.

The agency doesn’t expect any big increase in the future, either. Its Annual Energy Outlook, a report that looks ahead to 2050, predicts capacity growth of just 1.7 percent a year in its central, or “reference,” case, which assumes current laws and regulations are unchanged (unless they’re already scheduled to expire). Capacity grows just 2.2 percent a year assuming a low cost for renewable energy. Incentives in the Inflation Reduction Act might bump those numbers up in next year’s forecast, but probably not a lot.

It’s far short of what would be needed for a fully electrified U.S. economy. So, no financial bonanza. And no planetary salvation.

As the world’s climate diplomats prepare to gather in Sharm el Sheikh, Egypt, for their annual summit beginning Nov. 6, this should be an issue on the front burner, or rather the front coil.

I understand why electricity generators haven’t been adding capacity. They have an obligation to their owners — whether investors or governments — not to overspend on capacity that isn’t needed, and so far it has not been needed. Because of increasing efficiency, consumption of electricity in the United States has risen just 0.4 percent annually on average over the past decade. It would also be unfair to customers to raise their rates to cover construction of solar or wind farms that won’t be needed anytime soon. Still, if capacity really does grow that little, we’re all in trouble.

The estimate that three to possibly five times as much generating capacity will be needed for full electrification of the U.S. economy comes from Saul Griffith, whose research and design company, Otherlab, was contracted by the Department of Energy in 2018 to study patterns of electricity consumption. He put his findings into a 2021 book, “Electrify: An Optimist’s Playbook for Our Clean Energy Future.”

Of course, this assumes the new generation will be from renewable sources. It won’t do the planet any good if the new generation is from fossil fuels such as coal. It also assumes that transmission lines will be built to carry the juice to where it’s needed — not an easy problem given strong resistance to new power lines.

For a reaction to Griffith’s estimate, I interviewed Emily Fisher, the general counsel and senior vice president for clean energy at the Edison Electric Institute, which represents investor-owned utilities. Could suppliers meet such a large demand, I asked her. She said, “That is a problem we are not likely to have this decade.”

OK, I said, but what about the next decade and beyond? After all, electricity generation and transmission lines can take years to plan and build. She said continued efficiency gains and time-of-day pricing would help limit the need for more capacity. Aside from that, she said utilities will be sure to build what’s needed.

“We’re the most heavily regulated and scrutinized industry in America,” she said. “So many people are watching.” And not only regulators — shareholders have a financial incentive to make sure the companies build enough to meet demand. “We are actively involved in a ton of scenario planning,” she said.

One way or another, supply and demand for electricity will have to be in perfect balance, because the electrical grid can’t operate any other way. (Too much demand can cause blackouts; too much supply can cause destabilizing voltage surges.)

The other way to achieve long-term balance in the grid would be to settle for less than full electrification.

“Electrification is a centerpiece of global decarbonization efforts,” James Bushnell and David Rapson, economists at the University of California, Davis, wrote in a recent National Bureau of Economic Research working paper titled “The Electrical Ceiling: Limits and Costs of Full Electrification.” “Yet there are reasons to be skeptical of the inevitability, or at least the optimal pace, of the transition.”

Price, as usual, will be the equilibrating mechanism. If electricity is in tight supply, its price will be higher and the most costly electrification projects — say, the manufacture of cement, steel, chemicals, glass and ceramics, which is now done with fossil fuels — simply won’t happen. “There is probably some level of electrification where doing more of it is going to get extremely costly,” Rapson said in an interview. “We don’t know what that level is.”

Done wrong, mass electrification of the economy could also harm reliability and equity, Ella Zhou, a senior model engineer for grid operations and planning at the National Renewable Energy Laboratory in Golden, Colo., wrote in an email. For example, a big increase in home charging of electric vehicles, if not accompanied by strengthening of the distribution network or scheduling vehicle charging carefully, “could be a complete disaster,” she wrote. As for equity, she said technologies such as heat pumps, which provide heating, air conditioning and hot water, have a big upfront cost that could shut out lower-income families if no one’s paying attention.

Ari Matusiak, the chief executive of the nonprofit group Rewiring America, told me that batteries in homes and cars will improve the reliability of the network by standing ready to provide power to the grid to meet surges in demand. The answer to the high cost of devices such as heat pumps will be mass production, he said. As for the concerns raised by the economists at the University of California, Davis, he doesn’t deny that there are limits to electrification, but he’s optimistic that those limits are far from being reached. “The vast, vast, vast majority of the solution is electrification,” he told me.

Let’s just hope that the electrification of the economy won’t be short-circuited by a shortage of electricity.

https://www.nytimes.com/2022/10/31/opinion/energy-transition-electricity-us.html

 

Power Grid Operator Reveals Several Electric System Issues

California Independent System Operator

The California Independent System Operator (CalISO), the public entity operating most of the state’s power grid, yesterday issued its quarterly report, which details new “unintended consequences” from heat wave response.

Text:

From August 31 through September 9, 2022, California and much of the Western United States experienced record-setting heat resulting in all-time high demand for electricity across the region (September heat wave). The prolonged heat event precipitated an unprecedented number of calls for consumer conservation. This included 10 consecutive days of voluntary Flex Alerts and new state programs that provided non-market resources to address extreme events culminating on September 6, the only day when the ISO system reached its highest emergency alert level. Despite the sustained heat wave and unprecedented load levels, the California Independent System Operator (ISO) did not order rotating outages and maintained reliable system operations at all times.  This would not have been possible without the significant mobilization of new generating resources and the enhanced communication and coordination between the ISO, state and federal agencies, and industry that have occurred over the past two years. At the same time, the ISO’s analysis of the event reveals several issues that led to unintended consequences that impacted specific components of the market. The ISO is addressing those issues in a transparent and rigorous fashion and they are discussed in detail later in this report.

Report:

http://www.caiso.com/Documents/SummerMarketPerformanceReportforSeptember2022.pdf?utm_source=CalMatters+Newsletters&utm_campaign=14a80b7e1e-WHATMATTERS&utm_medium=email&utm_term=0_faa7be558d-14a80b7e1e-150181777&mc_cid=14a80b7e1e&mc_eid=2833f18cca

 

Nation’s Largest Natural Gas Company Faces California Challenge

Wall Street Journal excerpt

As California expands its efforts to phase out natural-gas use in homes, the nation’s largest gas utility is trying to reinvent itself for a future in which far fewer customers use its core service.

Southern California Gas Co., a unit of Sempra SRE -0.08%decrease; red down pointing triangle, is studying how to repurpose its system—and handle the costs of doing so—as the state works to ban the sale of gas furnaces and water heaters starting in 2030. The state’s initiatives are the latest in a series of measures aimed at reducing future gas use to address climate-change concerns. Already, about 50 California cities and towns have regulations in place to ban or limit gas hookups in new buildings.

SoCalGas faces an acute challenge in transforming its business away from natural gas, one that will require billions of dollars to build new pipelines and reuse or retire existing ones. Unlike California’s other large utilities, PG&E Corp. PCG 1.22%increase; green up pointing triangle and Sempra’s San Diego Gas & Electric Co., SoCalGas doesn’t have an electricity business and relies entirely on its gas system for revenue.

The utility, which serves 21.8 million customers primarily in Southern California, said it envisions overhauling much of its system to transport what is known as green hydrogen, an energy source that doesn’t emit carbon when burned. As more homes and businesses install electric heaters and appliances, the company anticipates growing its industrial customer base by delivering hydrogen for use in electricity generation, heavy transportation and other carbon-intensive processes.

Betting on green hydrogen, which is made using renewable energy, isn’t a sure thing. It is expensive to produce, and there isn’t yet a widespread market for it, though the Inflation Reduction Act created substantial tax credits for its production. There are also safety risks and engineering hurdles associated with retrofitting pipelines to carry hydrogen and using it to fuel power plants and trucks.

Gas utilities nationwide are grappling with similar challenges as dozens of other cities and states look to limit gas use. But California has some of the most ambitious plans for doing so as it works to achieve carbon neutrality by 2045. In September it became the first state in the U.S. to target a ban on the sale of gas furnaces and heaters following a vote by the California Air Resources Board.

“I do foresee a reduction in demand for natural gas in the state, and I think it raises a lot of questions about how that transition is going to play out,” said CARB Chairwoman Liane Randolph.

Each of California’s large gas utilities, including SoCalGas as well as PG&E and San Diego Gas & Electric, have plans to study blending hydrogen into their gas systems. The CPUC this summer released a study showing that hydrogen blends of up to 5% are generally safe to transport in many existing pipelines, but that more research is needed to address the safety risks of higher-percentage blends.