BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB1 X1
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           Date of Hearing:   January 16, 2001
           
                 ASSEMBLY COMMITTEE ON ENERGY COSTS AND AVAILABILITY
                              Roderick D. Wright, Chair
           AB 1 X1 (Keeley) - As Proposed to be Amended:  January 16, 2001
           
          SUBJECT  :  Electric power.

           SUMMARY  :  Authorizes the Department of Water Resources (DWR) to  
          enter into long-term power purchase contracts with electricity  
          generators for a price not more than 5.5 cents per kilowatt hour  
          (kWh), and to sell the power, directly or indirectly, to  
          electric consumers in California.  Specifically,  this bill  : 

          1)Provides legislative findings and declarations that:

             a)   The furnishing of reliable reasonably priced electric  
               service is essential for the safety, health, and well-being  
               of the people of California.

             a)   The lack of new generation resources, transmission  
               constraints, increased demand, and other factors have  
               resulted in a rapid, unforeseen shortage of electric power  
               in the state and rapid and substantial increases in  
               wholesale energy costs and retail energy rates, with  
               statewide impact, to such a degree that it constitutes an  
               immediate peril to the health, safety, life and property of  
               the inhabitants of the state, and the public interest,  
               welfare, convenience, and necessity require the state to  
               participate in markets for the purchase and sale of power  
               and energy.

          1)Authorizes DWR to:

             a)   Assess the need for power in the state in consultation  
               with the California Public Utilities Commission (CPUC),  
               public and private utilities in the state, and other  
               entities as determined by DWR.

             a)   Enter into power purchase contracts on such terms and  
               for such periods as DWR determines for a price not more  
               than 5.5 cents per kWh.

             a)   Sell power acquired pursuant to these provisions,  
               directly or indirectly, to electric consumers in  








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               California.

             a)   Exchange, transfer, or otherwise dispose of, or grant  
               options with respect to any power acquired pursuant to  
               these provisions, directly or indirectly, to electric  
               consumers in California.  Provides that to the extent any  
               acquired power is not required for use within the state, or  
               if it is otherwise advantageous or necessary, the power may  
               be sold, exchanged, transferred, or otherwise disposed of  
               to any person or entity. 

             a)   Fix and establish the procedure and charges for the sale  
               or other disposal of power purchased by DWR.

             a)   Borrow money in anticipation of the receipt of revenues  
               or for cash flow management, and for such purpose issue  
               notes or other evidence of indebtedness and provide for  
               repayment with respect thereto, and to renew or refund any  
               such notes or other evidence of indebtedness.  However,  
               provides that any such notes or other evidence of  
               indebtedness shall be payable solely from the fund and  
               shall mature within 90 days of issuance.

             a)   Hire and appoint employees as required, at salary levels  
               determined by the director to be competitive to attract and  
               retain persons with the necessary expertise and skills.   
               Prior to hiring or appointing an employee at a salary in  
               excess of a salary approved by the Department of Personnel  
               Administration, the DWR director shall submit the proposed  
               salary to the Director of Finance who shall submit it to  
               the Legislature in accordance with specified provisions of  
               the annual Budget Act.

             a)   Engage the services of private parties to render  
               professional and technical assistance and advice.

             a)   Contract for the services of other public agencies.

             a)   Adopt emergency regulations, which shall be considered  
               by the Office of Administrative Law to be necessary for the  
               immediate preservations of the public peace, health and  
               safety, and general welfare.  The regulations shall be  
               repealed 180 days after their effective date, unless the  
               adopting authority or agency complies with specified  
               existing law.








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          1)Stipulates that the provisions of the Government Code and  
            Public Contract Code applicable to state contracts, including  
            but not limited to, advertising and competitive bidding  
            requirements and prompt payment requirements, applied to  
            contracts entered into pursuant to these provisions, unless  
            DWR determines that application of any such provision to such  
            contracts is detrimental to accomplishing the purposes of  
            these provisions.

          2)Requires DWR to do those things necessary and authorized under  
            Chapter 2 (commencing with Section 80100) to make power  
            available directly or indirectly to electric consumers in  
            California.

          3)Provides that a contract or agreement pursuant to these  
            provisions may include provisions for the indemnification of  
            parties with whom DWR contracts, except as specified.

          4)Provides that contracts may provide for the assignment thereof  
            to public or private entities on any terms and conditions as  
            the contracts may specify.

          5)Provides that any contract for the sale of electric power  
            shall contain any contractual terms and security provisions as  
            are determined by DWR to be necessary and appropriate,  

          6)Establishes the Department of Water Resources Electric Power  
            Fund, and provides that all moneys in the fund are  
            continuously appropriated, without regard to fiscal year. 

          7)Provides that payments from the fund may be made only for the  
            purposes authorized by these provisions, including but not  
            limited to, payments for any of the following:

             a)   The cost of electric power purchased by DWR.

             a)   The pooled money investment rate on funds advanced for  
               electric power purchases prior to the receipt of payment  
               for those purchases by the purchasing entity.

             a)   Payment of any other obligation incurred by DWR.

             a)   Repayment to the General Fund of any advances made to  
               DWR from that fund.








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             a)   Administrative costs incurred in administering these  
               provisions.

          1)Provides that obligations authorized by these provisions shall  
            be payable solely from the fund, and that neither the full  
            faith and credit nor the taxing power of the state are or may  
            be pledged for any payment under any obligation authorized by  
            these provisions.

          2)Provides that, solely with regard to the issue of DWR's  
            obligation under contracts for the purchase or sale or both of  
            electricity, the state pledges and agrees with parties to and  
            holders of obligations of DWR entered into pursuant to these  
            provisions that the state will not do, until such obligations  
            are fully performed and discharged on the part of DWR, any of  
            the following:

             a)   Limit, alter, or restrict the rights vested in DWR under  
               these provisions.

             a)   Impair the terms of any obligations of DWR entered into  
               pursuant to these provisions.

             a)   Impair the rights or remedies of the holders of or other  
               parties to any such obligations.

          1)Transfers unspecified amount from the General Fund to DWR for  
            the purposes of these provisions.

          2)Requires DWR to make quarterly and annual reports to the  
            Governor and the Legislature regarding its activities pursuant  
            to these provisions during the respective reporting periods. 

          3)Authorizes all state agencies and other official state  
            organizations, and all persons connected therewith, to give  
            DWR reasonable assistance or other cooperation in carrying out  
            these provisions, upon the request of DWR.

          4)Adds an urgency clause.

           EXISTING LAW  authorizes DWR, under such regulations and upon  
          such terms, limitations, and conditions as it prescribes, may  
          fix and establish the prices, rates, and charges at which the  
          resources and facilities made available by the Central Valley  








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          Project shall be sold and disposed of, and enter into contracts  
          and agreements for the movement of water.

           FISCAL EFFECT  :  Unknown.

           COMMENTS  :  Assembly Bill 1890 (Brulte), [Chapter 854, Statutes  
          of 1996] restructured California's electric industry in order to  
          establish a competitive generation market.  The CPUC, in  
          D.95-12-063 (as modified by D.96-01-009) required the IOUs to  
          divest at least 50 percent of their fossil generating assets.   
          While the IOUs have divested most of their generating assets,  
          they are still required to provide distribution service to all  
          retail customers, and to procure power for customers who do not  
          choose direct access; i.e., an alternate supplier. 

          Beginning last summer wholesale prices for electricity have  
          skyrocketed in California.  The IOUs' power procurement costs  
          have been increased dramatically as a result.  Customers of  
          Southern California Edison (SCE) and Pacific Gas and Electric  
          (PG&E) are currently protected by the AB 1890 rate freeze  
          (although the CPUC recently approved an interim order increasing  
          rates for 90 days), which means SCE and PG&E have to absorb the  
          financial costs of paying extremely high prices to buy wholesale  
          electric power without being able to recover those costs in  
          retail rates.  The current uncollected out-of-pocket power  
          procurement costs for SCE and PG&E is currently estimated at  
          approximately $12 billion.

          San Diego Gas and Electric (SDG&E) ratepayers, no longer  
          protected by the AB 1890 rate freeze, have seen their energy  
          bills increase substantially beginning last summer.  AB 265  
          (Davis) [Chapter 328, Statutes of 2000] established a "soft"  
          floating rate cap of 6.5 cents per kWh, with an undercollection  
          balancing account.  Since enactment of AB 265, a continued rise  
          in wholesale electric prices has caused SDG&E's undercollection  
          to increase substantially, to $450 million.  

          SCE and PG&E have indicated that they may be forced to declare  
          bankruptcy if they do not receive legislative, regulatory, or  
          judicial relief.  Both utilities assert they need some form of  
          relief by Tuesday, January 16 when they both face major debt  
          payment deadlines.  What's more, in recent weeks, the utilities  
          have found that their weakening financial condition has  
          jeopardized their ability to borrow money to cover their  
          procurement costs. 








                                                                  AB1 X1
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          This bill would authorize DWR to enter into long-term contracts  
          with wholesale energy providers for a price not more than 5.5  
          cents per kWh, and to then sell the power to the utilities or  
          directly to end-users.  According to the author, the purpose of  
          this bill is to use the fact that generators are willing to sell  
          to the state because of the state's good credit rating.  This  
          bill enables DWR to purchase long-term power contracts at  
          reasonable prices in order to ensure the utilities' solvency and  
          encourage some forbearance of payments by wholesale generators.

          The ability to enter into long-term power contracts is a  
          critical and necessary component for the long-term rate  
          stability in regional wholesale electricity markets.  The  
          limited authority of IOUs to enter into long-term contracts, and  
          the specter of after-the-fact reasonableness reviews by CPUC,  
          has caused the IOUs to purchase a disproportionate amount of  
          their needs in the spot market, which is the most expensive  
          power available.  CPUC is presently engaged in a proceeding  
          relating to forward, long-term contracting by the IOUs, with  
          proposed price benchmarks for CPUC reasonableness reviews.     

          This bill authorizes DWR to enter into long-term power contracts  
          for a price not more than 5.5 cents per kWh.  With some  
          exceptions, and depending on the length of the contracts, many  
          generators have indicated a preference for contracts at rates  
          closer to 7 or 8 cents per kWh and higher.  A question remains  
          as to how many contracts DWR will be able to sign with  
          generators at the 5.5 cents per kWh price.  The more contracts  
          that are signed at this price or lower, the more this bill will  
          help utilities address the utilities' undercollection crisis.   
          Conversely, if the market responds poorly and relatively few  
          contracts are signed, this bill will provide only limited relief  
          and who will absorb the undercollection?  

          The author, who has pledged to amend this bill further in the  
          Senate, may wish to consider the following issues:  (1)  
          Clarification that local publicly-owned utilities are eligible  
          to participate in the DWR power contracts; (2) This bill will  
          likely decrease the level of participation in spot markets; the  
          author may wish to consider the impact of this bill on spot  
          markets, and those entities that for various reasons elect not  
          to participate; will this bill significantly decrease the  
          availability of low-cost power in the spot markets in an adverse  
          way ?; (3) In light of the possibility that legislative and  








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          regulatory efforts to address the utilities' undercollection  
          could prove unsuccessful, the author may wish to consider  
          establishing provisions to ensure that only ratepayers of the  
          IOUs or publicly-owned utilities that elect to participate in  
          DWR contracts are liable for the contracts incurred; and (4)  
          This bill appropriately does not change the ratemaking authority  
          of the CPUC to set rates for IOUs.  The author may wish to  
          consider the impact of the proposed DWR program on retail rates,  
          utility undercollection, and the flexibility CPUC currently has  
          with regard to retail rates.

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          None on file.

           Opposition 
           
          None on file.
           
          Analysis Prepared by  :   Joseph Lyons / E. C. & A. / (916)  
          319-2083