Redirect the Expenditure of the State s Oil Overcharge Funds

Redirect the expenditure of the state s oil overcharge funds to address priority needs.


Background
Texas oil overcharge funds are a result of the U.S. Department of Energy s (DOE) rulings on oil company pricing practices under the Emergency Petroleum Allocation Act in effect from 1973 to 1981. Various DOE and court decisions created a billion-dollar windfall for states, employment for attorneys and a battle among states, courts and the federal government. In addition, the numerous divisions and agencies within the DOE and the courts have been involved in micro-managing these funds by setting allowable uses for oil overcharge funds. 1

The primary purpose of the funds is to provide restitution either directly or indirectly to the parties who were overcharged. After direct user groups are identified, then low-income groups, commuters, mass-transit users and taxpayer-supported institutions have been targeted for the funds.

Each court case (primarily the Exxon, Stripper Well and Diamond Shamrock cases) and those that were settled through administrative hearings at Department of Energy s Office of Hearings and Appeals (OHA) have settlements with different strings attached. 2 Interpretation of these settlements is specified by the U.S. Congress, federal district courts, the OHA and the DOE Office of State and Local Assistance Programs.

Restrictions Over the Use of Oil Overcharge Funds
Several general rules state that primary program outcomes must be energy conservation or other energy-related benefits. In general, restitution must be linked to the aggrieved consumer, benefits must be timely and funds must supplement, not supplant, existing sources of funds. Federal approval and reporting are required, and the Governor s office is responsible for getting approval and reporting on expenditures for these funds. (Unfortunately, each pool of oil overcharge funds comes with its own court mandated restrictions, needlessly complicating the state s use of the funds.)

Exxon oil overcharge funds are required to be spent in five federal energy conservation programs. No administrative expenses are allowed, and they may not supplant either state or federal funding. These five programs are: state energy conservation program, ene rgy extension service, institutional conservation program, low income weatherization and low income home energy assistance program. They may not be used for capital expenditures for state go vernment, except in the form of a loan for energy conservation items that may be repaid out of energy savings.

Stripper Well funds are less restrictive and may be used in broader energy-related programs, including administrative expenses and partially allowable legal expenses. Diamond Shamrock funds follow restrictions similar to Stripper Well funds, except that legal fees are allowable expenses. The types of projects under these two funds generally can be categorized as transportation (like the fuel eff icient traffic signal programs, highway traffic management program, car clinics and vehicle fleet maintenance programs), residential i.e., weatherization, retrofitting, tune-ups and energy audits and commercial i.e., energy loans, audits and cogeneration.

An August 1992 report on oil overcharge funds reveals that $390.2 million have been allocated to Texas under these settlements. Of this amount, $37l.2 million have been designated or set aside for specific programs. For money to be spent, these programs m ust first be authorized by the Legislature. 3 A review committee of the Lieutenant Governor and the Speaker must approve the specific plan item within a program. Then, the Governor may obligate funds to specific groups for expenditure.

In August 1992, $299.2 million were in the approved plan, with $262.9 million obligated. Expenditures from the obligated funds amount to only $132.6 million. Currently, interest on the funds balance accrues to the specific fund from which interest was earn ed, although questi ons persist about whether interest carries the same restrictions as the original funds. So far, interest earnings account for $99.5 million of the $371.2 million total oil overcharge funds. The current general revenue balance of dedicated oil overcharge fu nds is about $260 million.

Roadblocks to Using Oil Overcharge Funds
Historically, plans for these funds have been difficult to get approved at the state and federal levels due to the restrictive requirements and regulations and other factors. Changing app roved plans may be burdensome and time consuming. Federal approval of contracts to obligate funds under previously approved energy-saving programs takes from 60 to 90 days. Federal approval of energy-saving programs may take a year or longer.

In addition, approval at the state level has also delayed expenditures of these funds. The state faces a deadline on the expenditure of the funds that is seven to ten years from the settlement date. 4 However, any funds that have not been obligated would be eligible t o be reviewed and appropriated by the Legislature for other programs, if federal approval is obtained. The amount of funds available for reprogramming is $108.3 million as of August 1992, with most in Exxon ($71.7 million) and Stripper Well ($35.8 million) funds. The Governor s office reported in October 1992 that oil overcharge balances after all recent and pending approvals were $3.8 million in undesignated funds. Any attempt to use oil overcharge funds differently from currently designated and approved a bove the $3.8 million will require funds to be redesignated and replanned, possibly requiring statutory changes and federal approval.

One program the LoanSTAR Program has designated funds of $98.6 million and obligated funds of $67.4 million. This program makes loans to tax-supported institutions at 4.04 percent annually for energy-saving retrofittings of state, public school and local g overnment facilities. One concern is that the DOE has defined any funds being paid back from such loans as restricted by the same court cases, rules and regulations as the original funds. In contrast, Texas has planned to treat loan repayments as general revenue, no longer restricted by the court case or federal rules.

This case is comparable to an earlier ruling by the Attorney General s office affecting federal highway funds reimbursed to the state for highway construction. 5 In that case, a Texas constitutional amendment was necessary to ensure that these federal funds became dedicated to the highway fund. In the case of oil overcharge funds, the DOE has asserted that these loan repayments are the same as the original funds and fall under all of the same restrictions. However, it is unclear whether DOE technically has authority over these repayment funds.

Time to Redirect the Use of Oil Overcharge Funds
Several needs have been identified for which these funds could be used. There is a backlog of maintenance and repairs on state buildings of $6 to $7 million that could be loaned under this program.

In addition, Exxon funds of at least $30 million could begin to address school districts financing needs for fleet conversions to alternative fuels. This conversion is required under state law and backed by less restrictive federal law. It will cost more than $110 million to c onvert 27,500 vehicles at an estimated $4,000 per vehicle. Priority could be given to those schools that have consolidated or contracted school transportation with other districts or with transit authorities to make their operations more efficient.

A $15 0,000 study on the cost effectiveness and energy efficiency of meshing school and public transportation is identified as a need in another part of this report. The purchase and installation of school bus scheduling and routing software and the training of school personnel in its use could make school district transportation more efficient. 6

A sufficient amount of oil overcharge funds could be set aside under existing oil overcharge programs. For example, a new program to pay utility bills for schools tha t have a high percentage of low-income students should be established with oil overcharge funds.


Recommendations
A. The Legislature should redirect and prioritize oil overcharge funds including addressing some maintenance and repair needs of the state ($6 to $7 million), schools alternative fuels transportation purchases ($30 million), schools transportation efficiency study ($150,000), schools transportation scheduling and routing, and utility bill payments in districts with high numbers of low inco me students.

Oil overcharge funds should be used for these reprioritized projects when a clear need has been established. Funds for school transportation should be allocated first to those schools that have consolidated or contracted with other school districts or loc al transit operations to gain operating efficiencies. Funds for school utility payments should be made to schools with a high percentage of low income students.

B. The Legislature should direct the Governor s Energy Office to spend these funds in a more rapid and focused manner; the Governor s Energy Office should prepare a plan by December 1, 1993 to accomplish this task.

Texas should prepare a simple and effective plan to put oil overcharge settlement funds to work. From a management perspective, the funds could be better spent on a few well focused projects rather than a shotgun approach spreading small amounts of funding among numerous programs.

C. The Legislature should direct the Attorney General s office to work with representative s of the Lieutenant Governor, the Speaker and the Comptroller of Public Accounts to aggressively pursue the issue of treating oil overcharge loan repayments and interest as general revenue.

The Attorney General should report to the Legislature by September 1, 1994 on the status of these efforts. The Legislature should establish an account within general revenue to hold oil overcharge loan repayments and loan interest until this matter is set tled or until the Governor, Lieutenant Governor and Speaker authorize its release.


Implications
Refocusing and redirecting the use of oil overcharge funds will benefit the State of Texas. These funds will directly serve Texans to provide immediate restitution and energy conservation benefits. The payment of utility costs for schools will have to be d eveloped as a new program and may take a year to accomplish. In addition, the Governor s Energy Office could be phased out as soon as this function is no longer necessary.


Fiscal Impact
The prioritization of funds for sta te maintenance and repair will allow energy conservation projects to be completed, saving the state long-term energy costs. This will allow projects totaling between $6 and $7 million to be loaned for up to five years and repaid from energy savings. Only a small portion of these expenditures will be completed by the end of the biennium so interest payments would begin for the most part in the next biennium. Deferred maintenance and repairs can be made that may reduce long-term operational costs for the stat e.

The funding of transportation and utility payments for school districts will allow the schools to use other state and local funds for educational purposes. Additional funding for transportation will be at least $30 million over this biennium and next bienn ium. Reserving these funds will allow the state to cover the costs of these state mandates.



Endnotes
1 Evans, Felicity. An Analysis of Oil Overcharge Refunds, (Pasha Publications Inc., Arlington, Virginia) pp. 1-62. No date.
2 According to a table prepared March 1989 by the Governor s Energy Office, the Exxon case settlement was handled by the U.S. District Court of the District of Columbia (Washington, D.C.), Stripper Well by the U.S. District Court for the District of Kansas (Wichita, Kansas) and Diamond Shamrock by the U.S. District Court for the Southern District of Ohio (Columbus, Ohio). Each case has a different set of federal approval and reporting procedures.
3 Vernon s Texas Civil Statutes, Article 4413 (56).
4 Interview with Harris Worcester, Director, Governor s Energy Office, Austin, Texas, September 29, 1992; and interview with Bob Otto, Transportation Coordinator, Governor s Energy Office, Austin, Texas, December 15 and 16, 1992.
5 Attorney General Opinion, No. JM-323, May 31, 1985.
6 Texas State Auditor s Office, Looking Ahead... Making the Most of our Education Dollars (Austin, Texas, November, 1992), p. 66.