BILL ANALYSIS
AB 1 X1
Page 1
(Without Reference to File)
ASSEMBLY THIRD READING
AB 1 X1 (Keeley)
As Amended January 16, 2001
2/3 vote. Urgency
ENERGY 10-0 APPROPRIATIONS 15-0
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|Ayes:|Canciamilla, Diaz, Dutra, |Ayes:|Migden, Bates, Cardenas, |
| |Jackson, Kelley, Migden, | |Aroner, Keeley, Corbett, |
| |Oropeza, Reyes, | |Correa, Goldberg, Papan, |
| |Steinberg, Vargas | |Romero, Shelley, |
| | | |Simitian, Thomson, |
| | | |Wesson, Wiggins |
|-----+--------------------------+-----+--------------------------|
| | | | |
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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; and,
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),
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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, exchange, transfer, or otherwise dispose of, or
grant options with respect to any power acquired pursuant to
these provisions, directly or indirectly, at DWR's
acquisition costs plus those costs as provided in Water Code
Section 80200 (b)(2) through (5) to electric consumers,
whichever results in the lowest cost to consumers, in
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. Provide 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. Provide that any such notes
or other evidence of indebtedness shall be payable solely
from the DWR Electric Power Fund (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;
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a) Engage the services of private parties to render
professional and technical assistance and advice;
a) Contract for the services of other public agencies; and,
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.
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, applies 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
Water Code 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 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;
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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 (GF) of any advances made to
DWR from that fund; and,
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; and,
a) Impair the rights or remedies of the holders of or other
parties to any such obligations.
1)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.
2)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.
3)Prohibits the state from taking ownership of the transmission
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and distribution assets of any IOU in this state.
4)Specifies that these provisions, and in particular Chapter 3,
which authorizes the purchase of electrical energy by DWR, shall
be subject to sunset review effective January 1, 2006.
5)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 Project shall
be sold and disposed of, and enter into contracts and agreements
for the movement of water.
FISCAL EFFECT : According to the Assembly Appropriations Committee
analysis:
1)In the event of a GF appropriation of $400 million, a potential
cost to the GF in foregone interest earnings could be in the
range of about $7 million to $40 million.
(The GF could forego interest earnings from the period of the
transfer to the fund until complete repayment of the
appropriated amount to the GF. This should be clarified as the
bill moves forth. The amount of these foregone interest
earnings would depend on the amount f the appropriation and the
time until full repayment. The estimate assumes an average 5%
interest and a repayment within two years.)
2)Administrative costs for DWR in the range of $2 million annually
paid by revenues in the fund.
COMMENTS : Assembly Bill 1890 (Brulte), Chapter 854, Statutes of
1996, restructured California's electric industry in order to
establish a competitive generation market. CPUC, in D.95-12-063
(as modified by D.96-01-009) required investor-owned utilities
(IOUs) to divest at least 50% of their fossil generating assets.
While 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. IOUs' power procurement costs have
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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 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.
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, whichever results in the lowest costs to
consumers. 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 IOUs to
purchase a disproportionate amount of their needs in the spot
market, which is the most expensive power available. CPUC is
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presently engaged in a proceeding relating to forward, long-term
contracting by 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 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.
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.
Analysis Prepared by : Joseph Lyons / E. C. & A. / (916) 319-2083
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