• Move the administration of energy efficiency and research and development programs to the Department of Conservation in order to separate the neutral oversight function of the Energy Commission from the advocacy function associated with the public purpose programs.

• Expand the Attorney General's consumer protection and antitrust role in the energy and telecommunications markets.

• Transfer rate setting of investor-owned water providers from the PUC to the State Water Resources Control Board, which is more familiar with the investments needed to improve water quality and to stretch existing water supplies to meet growing demand.

• Move the PUC's safety and licensing authority over transportation providers to the Department of Motor Vehicles and the California Highway Patrol, and the PUC's responsibilities for rail safety and planning to the Department of Transportation.

Attachments

Over the last 20 years policy makers have charted a course toward competition among utility providers allowing whenever possible for market forces to replace government regulation. But the promised benefits of competition -- lower prices, better service, more choices among providers -- may not be reaped unless California restructures the government agencies that historically have regulated these industries.

The work of the Public Utilities Commission over the past two years and the landmark bill passed by the Legislature last summer laid the groundwork for opening the electricity market to competition. Competition among telecommunications providers has been underway for more than a decade and in the coming years will involve nearly all aspects of the industry. The Little Hoover Commission recommendations begin the next step: realigning state government to match those competitive markets.

Specifically, the Little Hoover Commission analyzed three factors: What state government functions are obsolete in a competitive environment. What activities are needed to protect the public interest and facilitate competition. And what agencies have the necessary competencies and culture to perform the needed tasks. In conducting this year-long study the Little Hoover Commission held five days of public hearings at which we heard from 45 witnesses. The Commission also held more than a dozen meetings with two advisory committees each made up of more than 50 public officials, academic experts and representatives from industry, environmental and consumer groups.

In these meetings and hearings we heard two overriding concerns:

• The first related to how quickly -- or slowly -- government regulation should end. If it ends too quickly consumers may lose the benefits of regulation without receiving the benefits of a competitive market. Or, if regulators retreat too slowly, competition won't have a chance to work. The Little Hoover Commission believes the State needs to take affirmative action to gradually phase out activities that would impede competition in the utility sector.

• The second concern was whether the State should make fundamental changes to its governance structure when so many of the details of the future market are unknown. The Little Hoover Commission believes that fundamental changes to the State's structure must begin now, and be refined later.

In 1974, the California Energy Resources Conservation and Development Commission was created to work with energy suppliers -- including monopoly utilities -- to provide more efficient energy solutions.

But the landscape has changed. In place of monopolies, competing companies are vying to provide utility services. In place of government rate-setting, consumers need agencies committed to ensuring that markets operate fairly -- by policing fraudulent business practices and preventing the largest companies from controlling the market.

Because of the importance of energy to the economy, the public welfare and the environment, the Little Hoover Commission recommends that the State consolidate the oversight of that industry into a single agency expert in energy issues.

Over the past 20 years, the Energy Commission has developed an expertise in many of the functions needed by more competitive energy markets. For example, the Energy Commission has a record for expeditiously approving new power plants while protecting the environment and public health. This expertise will be crucial in a market where the first competitive pressures will be among electricity generators.

Because of its expertise, the Energy Commission is a good place to consolidate oversight of the industry. This transfer should occur as the monopoly portion of the industry diminishes.

In addition, the Energy Commission's research and development programs should be moved to the Department of Conservation. This reform will protect the Commission's neutrality among market players by placing elsewhere the advocacy role associated with the public goods programs. The chart illustrates this evolution of responsibilities.

In the telecommunications industry, the increasing number of market players and the complexity of policy issues requires an agency focused on that specialized market. Because of its experience, the PUC is uniquely qualified to fill that role. And if relieved of other responsibilities, the PUC could concentrate on that fast- changing industry.

The time also has come to transfer oversight of transportation carriers and investor-owned water companies to agencies better equipped to address the public interests now affecting those industries.

The PUC no longer sets rates for the transportation industry. As a result, it is left with safety and licensing responsibilities that are similar to functions performed by the Department of Motor Vehicles and the California Highway Patrol. The Legislature this year moved responsibility for licensing and safety of trucking companies to the DMV and the CHP. The Little Hoover Commission recommends that the State complete this process expeditiously by transferring the safety and licensing duties for all transportation providers to those agencies.