California Senate Bill SB540

California 2025-2026 Regular Session

• Introduced: 9/9/25
• Introduced: 2/20/25
• Refer: 3/5/25
• Refer: 3/24/25
• Report Pass: 4/22/25
• Refer: 4/22/25
• Report Pass: 4/30/25
• Refer: 5/1/25
• Report Pass: 5/27/25
• Engrossed: 6/4/25
• Refer: 7/10/25

Caption

An act to amend Sections 337 and 399.12 of, to add Sections 345.6 and 399.16.5 to, to repeal Section 352 of, and to repeal Article 4 (commencing with Section 355), Article 5 (commencing with Section 359), and Article 5.5 (commencing with Section 359.5) of Chapter 2.3 of Part 1 of Division 1 of, the Public Utilities Code, relating to electricity.

Summary

SB 540 would substantially revise California law governing the California Independent System Operator (ISO) and the state’s participation in regional electricity markets. The bill repeals the existing statutory framework that contemplated transforming the ISO into a regional organization and replaces it with a new structure allowing the ISO and participating utilities to use voluntary energy markets run by an independent regional organization, but only if a long list of state-protective conditions is met. Those conditions include preserving state authority over procurement, resource adequacy, environmental and reliability policy, maintaining open governance and public participation, avoiding centralized capacity markets and mandatory resource adequacy requirements, and allowing unilateral withdrawal without penalties or unreasonable costs. The bill also creates a new Regional Energy Market Oversight Council, composed of top state officials and legislative leaders, to approve or reject initial participation in the independent regional organization and to later require withdrawal if participation threatens California policy goals or ratepayers. The council must evaluate whether participation weakens renewable portfolio standard requirements, forces procurement or subsidy of fossil generation, creates adverse policy impacts, or imposes costs that outweigh benefits. In addition, the ISO would have to keep the technical ability to operate separate market services, continue as a balancing authority, and report periodically on implementation and job impacts. SB 540 would also amend the Renewables Portfolio Standard statutes to clarify that the independent regional organization is not a California balancing authority and its footprint is not a balancing authority area for RPS purposes. It adds a new eligibility rule for renewable energy products that are not directly interconnected to a California balancing authority, requiring proof of pseudo-tie or dynamic scheduling arrangements, or firm transmission rights, before those resources can count toward portfolio content requirements. The bill further repeals several older Public Utilities Code provisions related to the Power Exchange and related market structures, while preserving the state’s existing renewable energy and resource adequacy authority. The general sentiment reflected in the voting history is strongly favorable, with unanimous or near-unanimous committee support and broad floor support in the Senate. The bill advanced through committee with no recorded opposition in several votes, though it was placed on the suspense file in Appropriations, indicating fiscal or implementation concerns were reviewed. The final Senate actions show overwhelming approval, suggesting the concept of regional market participation with strong state safeguards had substantial legislative backing. The main points of contention are structural and policy-based rather than partisan in the available record. The bill’s core tension is between expanding access to voluntary regional energy markets and preserving California control over clean energy, reliability, and ratepayer protections. Potential concerns include whether an independent regional organization could weaken California’s renewable standards, create exposure to fossil generation costs, or impose transition costs and operational complexity. Supporters appear to have addressed those concerns by building in strict approval, withdrawal, transparency, and compensation requirements, as well as a state oversight council with veto power.

Impact

SB 540 would repeal or replace major portions of the Public Utilities Code governing the ISO’s prior regionalization framework and the Power Exchange, while adding a new statutory regime for participation in independent regional energy markets. It would also amend the Renewables Portfolio Standard provisions to exclude the independent regional organization from California balancing authority status and to tighten eligibility rules for certain imported renewable resources. The bill would leave the ISO’s core balancing authority, transmission, reliability, and resource adequacy responsibilities intact, but would authorize it to operate markets under a new regional structure if state and federal conditions are satisfied.

Sentiment

The bill appears to have enjoyed broad support in the Legislature, with multiple committee votes passing unanimously or nearly unanimously and strong Senate floor approval. The available voting history suggests lawmakers were generally receptive to the idea of regional market participation so long as California retained strong oversight and exit rights. The suspense-file referral indicates fiscal and implementation questions were considered, but the overall trajectory was positive.

Contention

The central contention is whether California should participate in an independent regional electricity market at all, and if so, under what safeguards. Critics or cautious lawmakers would likely focus on risks to California’s renewable portfolio standard, resource adequacy authority, ratepayer exposure, and the possibility of subsidizing out-of-state fossil generation. Supporters appear to have insisted on strict conditions: state veto power through the oversight council, transparency requirements, no centralized capacity market, no mandatory resource adequacy rules, and a unilateral withdrawal mechanism. Another likely point of debate is the bill’s impact on jobs and market transition costs, which the bill addresses by requiring a job-impact study and periodic reporting.