BILL ANALYSIS 1 1 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE DEBRA BOWEN, CHAIRWOMAN AB 1X - Keeley Hearing Date: January 22, 2001 A As Amended: January 16, 2001 FISCAL B X 1 1 DESCRIPTION The mock-up version of AB 1X (Keeley) and this analysis are not designed to represent any type of consensus or agreement. Rather, they are merely designed to reflect the discussions and desires expressed by the members of the committee at the January 19 hearing to narrow the contracting authority this measure proposes giving to DWR. The changes to the January 16 version of the bill found in the mock-up are explained in the "Comments" section of the analysis. As mocked-up on January 22, 2001, this bill: Authorizes the California Department of Water Resources (DWR) to contract with any person or entity to purchase electricity at prices it deems appropriate, taking into account all of the following: q A weighted average price of 5.5 cents per kilowatt hour (kwh) for the overall portfolio of contracts. q The need to have contract supplies to fit each aspect of the overall energy load profile. q The desire to secure as much low-cost power as possible under contract. q The duration and timing of contracts made available from sellers. q The length of time sellers of electricity offer to sell such electricity. Allows DWR to determine the terms of such a purchase and the length of time for which the power will be purchased. Authorizes DWR to sell electricity to any entity so long as it results in the lowest costs for consumers. States that nothing in this division shall be construed to authorize DWR to take ownership of the transmission, distribution, or generation assets of any investor owned utility. Allows DWR to adopt emergency regulations, which are, by definition, exempt from the Administrative Procedures Act (APA) and from review by the Office of Administrative Law (OAL). The regulations shall be repealed after 180 days unless DWR formally files its emergency regulations with OAL for formal adoption. Allows DWR to waive provisions of the Government Code and the Public Contract Code applicable to state contracts, including, but not limited to, advertising and competitive bidding requirements and prompt payment requirements, if it determines those provisions are detrimental to accomplishing the purposes of this bill. Establishes the Department of Water Resources Electric Power Fund (Fund), allowing it to accept all revenues payable to DWR pursuant to this bill and make payments only for the purposes set forth in the bill. Obligations authorized by this bill are only payable from the Fund. Neither the full faith and credit nor the taxing power of the state may be pledged for payment of any obligation under this bill. Authorizes expenditures from the fund to cover: q The cost of electric power. q The pooled money investment rate on funds advanced for electric power purchases prior to the receipt of payment for those purchased by the purchasing entity. q Repayment to the General Fund of any advances made to DWR from the Fund. Authorizes DWR to hire employees, engage the services of private parties, contract for services of other public agencies, and borrow money in anticipation of the receipt of revenues. Authorizes DWR to engage the services of private parties to render professional and technical assistance and advice in carrying out the purposes of this bill, as well as to contract for the services of other public agencies. Appropriates $400 million dollars from the General Fund to the Fund as a loan for working capital purposes. Requires DWR to make quarterly and annual reports to the Governor and the Legislature regarding its activities pursuant to this division. Is subject to sunset review as of January 1, 2006. Is an urgency statute. BACKGROUND The deteriorating financial condition of California's two largest investor-owned utilities, Pacific Gas & Electric (PG&E) and Southern California Edison (SCE), has made it difficult, if not impossible in some instances, for them to purchase electricity. SB 7X (Burton), Chapter 3, Statutes of 2001-2002 First Extraordinary Session, provided $400 million to DWR to allow it to purchase electricity through February 1, 2001 (the contracts themselves can run through February 15, 2001). This action was taken with the hope of avoiding rolling blackouts throughout the state while the Legislature crafted a mechanism to allow DWR to enter into longer term contracts to buy a certain amount of electricity for the residents of California. COMMENTS Explanation of Mock-Up Changes 1.Page 3, Lines 11-13. Some members felt this language could be interpreted as turning any private entity furnishing electricity service to the people of California into a public utility, which could have the effect reducing the number of entities willing to sell electricity to DWR under the provisions of this bill. 2.Page 3, Line 36. Some members felt the "liberally construed" language was too broad, so the author has proposed replacing it with language designed to ensure the division shall be construed in a manner to ensure its objectives are met. 3.Page 3, Lines 38-39. Some members felt this language could be used to override any number of unknown general, special, and local laws. 4.Page 4, Lines 20-21. Some members were concerned about this language, which would have precluded the state from taking ownership of the transmission or distribution assets of any investor owned utility under any circumstance. The new language clarifies that nothing in this bill authorizes DWR to take ownership of the transmission, distribution, or generation assets of any investor owned utilities in this state. 5.Page 5, Line 17. Some members were concerned about the 5.5 cent per kilowatt-hour cap on the price of electricity that DWR could purchase under this measure. The author has proposed language that removes the 5.5 cent cap and replaces it with a more flexible mechanism, which encourages DWR to achieve an overall portfolio of contracts for energy that result in a weighted average price of 5.5 cents per kilowatt-hour. The language in the bill as amended on January 16 places a hard 5.5 cent per kilowatt-hour cap on all contracts that DWR could enter into as a result of this bill. The mock-up changes that hard cap to an encouragement that DWR have a portfolio of contracts where the weighted average is 5.5 cents per kilowatt-hour. The author and committee may wish to consider whether the language in the mock-up swings the pendulum too far the other way and instead consider whether the 5.5 cent per kilowatt-hour weighted average should be a mandate that DWR achieve or merely a goal that it should strive to achieve. 6.Page 5, Lines 35-40 and Page 6, Lines 1-4. Some members were concerned that the indemnification language in the measure could inadvertently make the state financially liable if power suppliers broke or defaulted on existing contracts in order to enter a contract to provide power to DWR. The language in this section is virtually identical to Water Code Section 11454, which deals with the general powers and duties of DWR. The original version of Water Code Section 11454 was added in 1943 to allow the department to enter into contracts and "do any and all things which in its judgment are necessary, convenient, or expedient for the accomplishment of the purposes and objects of this part." The specific authority to include indemnification clauses in those contracts was granted in 1997 as a part of SB 543 (Committee on Agriculture & Water Resources), Chapter 566, Statutes of 1997, an omnibus bill sponsored by DWR which also authorized the funding of various water projects from bond proceeds. 7.Page 6, Line 12. Some members were concerned the bill would inadvertently grant rate-making authority to DWR. The language suggested in the mock-up, which ensures that retail end-use customers won't be responsible for costs that exceed the rates established by the California Public Utilities Commission (CPUC) in effect on the date the power is made available to customers, is taken directly from SB 7X (Burton) in an attempt to address this issue. 8.Page 7, Lines 16-17 and Lines 20-22. Some members were concerned the continuous appropriation contained in the bill (Page 7, Lines 1-4) would allow DWR to spend money from the fund on things other than buying power and that such expenditures wouldn't be subject to legislative review. Striking Lines 16-17 is an attempt to ensure the money set aside as a part of this fund won't be used for other departmental activities. The replacement language for Lines 20-22 provided by the author is an attempt to ensure that all administrative costs incurred by DWR in conjunction with this bill are reviewed and authorized each year as a part of the normal budget process. 9.Page 7, Lines 26-38. Some members raised the question as to whether this language was superfluous relative to trying to bind the actions future legislatures (which cannot be done by statute) and protect the contractual rights of various parties (which are already protected by the California Constitution). Article I, Section 9 of the California Constitution provides that: A bill of attainder, ex post facto law, or law impairing the obligation of contracts may not be passed. 10. Page 8, Line 5. This is a technical change designed to eliminate the confusion of the phrase "during the respective reporting periods." Issues Not Addressed In Mock-Up Following are a number of issues that were discussed briefly or not at all during the January 19, 2001 hearing on the bill that the committee may wish to consider: 1.How can the state establish a credible bidding process which will result in the widest possible participation? 2.What process should the state use to evaluate bids and what criteria should be used to evaluate which bids will result in the "lowest cost for consumers" as this bill calls for? 3.The sunset review provisions of the bill (Page 8, Lines 9-13) were the subject of some discussion at the prior hearing. As drafted, this isn't a "true" sunset clause because arguably every law is "subject" to sunset review on an annual basis. One suggestion made during the January 19 hearing was to sunset the contracting authority in 2-3 years but to allow the contracts themselves (and the necessary mechanisms to carry them out) to run for 7-8 years. 4.Page 5, Lines 30-34 of the bill allow DWR to sell any excess power it may acquire as a result of the contracting authority extended to it by this bill. At the January 19 hearing, one witness suggested it might be more advantageous to the state to require DWR to return any and all surplus power to the hour-ahead market because doing so might allow it to get more competitively priced long term contract bids. 5.Does the financing mechanism provide adequate assurance that the state's General Fund isn't at risk? 6.How can the state assure that these long-term contracts don't result in additional stranded costs that may be forced to be borne by the taxpayers, the ratepayers, or the utilities? 7.Is it appropriate to allow DWR to exempt the purchases made pursuant to this bill from certain state contracting provisions in the Government Code and the Public Contract Code? Other Issues Raised At The January 19 Hearing Following is a synopsis and an analysis of amendments and proposals brought before the committee at the January 19 hearing: CALPIRG CALPIRG has five comments: The parameters of the long-term contracts must be stated before the bill is voted upon. The committee chairwoman has indicated her intention not to bring the bill to a vote until the state has considered the bids it receives. If the long term contracts entered into allow power to be provided at less than the frozen retail rate, then customers must be given a rate cut. Allowing the utilities to, in such a circumstance, keep the excess "headroom" would amount to a ratepayer bailout of the utilities. The mock-up contains language, as did SB 7X, to ensure that if the long term contracts entered into as a result of this bill are above the existing rate level, consumers won't be charged more than the existing rate. It could be argued that protecting consumers against higher wholesale prices on one hand but guaranteeing a rate cut on the other hand if the wholesale price dips below the existing rate is an attempt to have it both ways. Furthermore, if the market were working as envisioned by the original deregulation legislation and the price utilities were paying for power was less than the frozen retail rate, the utilities would still be permitted to collect the excess headroom and dedicate it to paying off their stranded costs. The bill should guarantee that the state will be paid back for the power it sells. While the bill attempts to ensure the state will be paid back for the power it purchases and re-sells, it's unclear how the state could "guarantee" it will be able to recoup 100% of its costs. The bill should require a renewable portfolio standard. This is an issue the committee may wish to deal with in the context of establishing a criteria by which it will evaluate bids. The bill should require that residential and small-commercial customers be sold the power generated by the utility-owned and controlled generation. This would ensure that residential and small business customers would receive the entire benefit of the relatively low-cost (estimated to average 3 cents per kilowatt-hour) utility generation. Large customers would then be subject to whatever market prices accompany the long term contracts entered into as a result of this bill. Calpine Calpine would like the Legislature to direct the CPUC to approve amendments to existing contracts to permit qualifying facilities (QFs) to generate and sell additional power in excess of the original contract capacity. These appear to be contracts using pricing methodologies that Calpine entered into voluntarily with PG&E. The committee may wish to consider whether it's appropriate to direct the CPUC to effectively abrogate an existing contract. Dynegy Dynegy believes the bill doesn't offer adequate assurances with respect to the creditworthiness of the DWR Fund and that explicit state credit support is necessary. This request seems to be unconstitutional on two grounds: Article XVI, Section 6 of the California Constitution, bars the state from using it's credit to back the credit of the utilities: The Legislature shall have no power to give or to lend, or to authorize the giving or lending, of the credit of the State . . . or to pledge the credit thereof, in any manner whatever, for the payment of the liabilities of any individual, association, municipal or other corporation whatever; nor shall it have power to make any gift or authorize the making of any gift, of any public money or thing of value to any individual, municipal or other corporation whatever; Article XVI, Section 3 of the California Constitution bars the state from spending funds to enhance the credit of the utilities: No money shall ever be appropriated or drawn from the State Treasury for the purpose or benefit of any corporation, association, asylum, hospital, or any other institution not under the exclusive management and control of the State as a state institution . . . Dynegy believes that without an assurance in this bill that the unpaid debts for power already delivered to SCE and PG&E will be repaid, it is "unlikely that bankruptcy can be avoided in any event." The committee has not indicated an interest in dealing with existing undercollections in this bill. Several legal issues must be resolved, including whether the charges for power were just and reasonable. At least two class-action lawsuits have been filed contesting the legality of the charges and to the extent that such charges are just and reasonable, the issue of whether ratepayers or shareholders are responsible for that debt is the subject of two federal lawsuits, neither of which is near resolution. Furthermore, wholesale rates have been subject to refund liability pursuant to an order from the Federal Energy Regulatory Commission (FERC) since October 2, 2000. El Paso Energy Corporation El Paso Energy Corporation would like the bill to be amended to authorize DWR to give credit support for natural gas purchases such as home heating, re-heating for manufacturing purposes, production of petroleum-based products such as fertilizer, etc. This bill is designed solely to deal with electricity purchases and the committee has indicated a desire to keep the bill as narrow as possible. PG&E PG&E has put forth four proposed amendments which were also supported by SCE at the January 19 hearing: Amendments 1 and 2 essentially propose to clarify the bill to allow DWR to purchase different types of power, including ancillary services. Given the role that DWR is being asked to assume, this appears to be a technical amendment. Amendment 3 would permanently relieve the investor-owned utilities of their obligation to procure electricity for all their customers and would instead make the state permanently liable for buying power to supply those customers who the IOUs couldn't serve using their own generation or existing contracts. Procuring electricity is an essential element of utility service. The purpose of this bill is to provide a temporary, financially sound purchaser for the sellers of electricity until the utilities can restore their financial health, not to restructure the fundamental responsibilities of the utilities. Furthermore, on January 19, the CPUC issued a temporary restraining order preventing PG&E and SCE from refusing to provide adequate service to all of their customers. In its order, the CPUC noted: We affirm that regulated California utilities must serve their customers. This requirement, known as the 'obligation to serve' is mandated by state law. A utility's obligation to serve is part and parcel of the entire regulatory scheme under which the Commission regulates and controls utilities under the Public Utilities Act. A bankruptcy filing or the threat of insolvency has no bearing on this aspect of state law. Even utilities that file for reorganization must serve their customers. The public's safety, and the economy's health will be impaired if utilities avoid their obligation to serve. We will take all action necessary to enforce this obligation, while regulating and controlling utilities in a manner consistent with state law. Amendment 4 requires the CPUC to establish a separate rate component to recover the costs of the electricity purchased under this bill and ensures that if the cost for power exceeds the frozen rate ratepayers can be charged, the utilities will not bear any financial responsibility for ensuring that money is collected and paid. By passing on any cost of power above the frozen rate level to either the ratepayers or the taxpayers, this amendment appears to have the effect of ending the current retail rate freeze. It also conflicts with the mock-up language on Page 6, Line 12, which is designed to protect the rate freeze and ensure this bill doesn't confer any rate-making authority on DWR. Kern County Water Agency KCWA is concerned the electricity purchases made by DWR on behalf of the Independent System Operator (ISO) may not be repaid and would like to ensure the state's General Fund will repay DWR in the event that the ISO fails to pay. It would also like to clarify that contracts entered into pursuant to the bill are separate from those incurred by the State Water Resources Development System. It's unclear why retroactively shifting the reimbursement responsibility from the ISO to the state's General Fund is fair to the state's taxpayers. Regarding the second issue, the bill appears to accomplish this goal by ensuring that the funding and procurement responsibilities established by this measure are separate and apart from DWR's other functions. Western States Petroleum Association WSPA is concerned the deteriorating financial condition of PG&E will cause a natural gas suppliers to stop selling to PG&E, which in turn will disrupt refinery operations and create a shortage of gasoline and other petroleum products. WSPA suggests that refinery operations be granted a higher priority so they are among the last to be interrupted when natural gas supplies are curtailed. The committee has expressed an interest in dealing only with the long term electric contracting issue in this bill. In a related matter, on January 20, the CPUC notified two gasoline suppliers who have interruptible contracts that they could operate without being interrupted for the next six days because the California Energy Commission (CEC) had noted that the public health and safety may be jeopardized by a shortage of petroleum products. WSPA has also suggested that DWR be authorized to purchase natural gas, in addition to electricity in the event that suppliers are unwilling to sell to the utilities. Again, this bill is designed solely to deal with electricity purchases and the committee has indicated a desire to keep the bill as narrow as possible. California Wind Energy Association CWEA submitted to the committee its letter to the Governor, requesting a number of amendments to AB 1X: Contracts to purchase wind-generated energy should be offered at the average price paid to other resources for the same contract periods. This fails to recognize the intermittent nature of wind energy and that wind energy is often unavailable during times of peak demand. The committee may wish to consider whether it's appropriate to provide wind energy providers with the same financial terms as other power providers when wind energy is, unfortunately, one of the more unreliable sources of power. Wind energy producers should have the option of suspending existing contracts with utilities and instead entering into contracts with the state. Aside from the constitutional question about whether the state can or should legally abrogate existing contracts, there's a more fundamental question raised by this suggestion. If the goal of AB 1X is to have the state cover the "net short" position of the state's IOUs, this amendment runs contrary to that goal because it proposes to spend money to cover existing contracts instead of using it to buy new power to cover the net short position. Put another way, this amendment won't decrease the net short position, it will instead reduce the amount of money available to decrease the net short position. Utilities must abandon any outstanding actions of claims against any wind producer with a firm capacity contract. It's unclear how legislation can force the utilities, or anyone for that matter, to abandon all legal claims. Payments are required to be made based on the meter delivery point without further adjustment for line losses. The effect of this suggestion is unclear, but it doesn't appear to relate to the long term contracting authority of DWR, which is the focus of this bill. Wind energy producers must be paid for the amounts outstanding under their existing contracts up until the execution of the state contract. This amendment could mean one of two things. If it's an attempt to require the utilities to pay any outstanding money delivered to wind energy producers, it's not clear why the state should move wind producers to the front of the payment line. If it's an attempt to have the state pay the wind producers money that is otherwise owed to them by the utilities, this appears to be unconstitutional. The CEC shall be authorized to use the SB 90 Renewable Energy Trust Fund to make support payments to existing renewable resources on an interim basis until utility payments are made. The effect of this suggestion is unclear, but it may be more appropriately addressed in SB 5X (Sher & Burton), which deals with conservation and renewable energy programs. If new transmission capacity is necessary to deliver power under state contracts to transmission lines, the state shall build or pay to build that capacity on an expedited basis. The state would pay to bring the transmission lines to the wind energy producers' site, while the wind producers would pay to upgrade their internal transformers. Again, this bill is designed to deal with electricity purchase, not long term infrastructure issues. California Municipal Utilities Association CMUA - along with the San Francisco Public Utilities Commission and the Sacramento Municipal Utility District - would like to clarify that municipal utilities may sell to and buy from DWR. Seeing as how the bill permits DWR to contract with "any person or entity," it appears the bill already includes municipal utilities. Power Exchange The PX suggests that the bill be clarified to permit DWR to provide collateral to assure performance of its contractual obligations and to request collateral from participants to protect the state from default. The latter provision, designed to ensure the state receives the money that it's owed, seems clear, but it isn't clear how the prior provision to authorize DWR to provide collateral as requested by the marketers and/or generators is beneficial to the state. The underlying assumption in the bill is that the state's credit and ability to pay on a cash (or nearly cash) basis is needed to buy power at lower prices - something PG&E and SCE can't do at this moment. Why should DWR be authorized to provide collateral in lieu of cash, when the measure already lets DWR borrow money (Page 6, Lines 28-34) to cover unanticipated cash flow shortfalls? ASSEMBLY VOTES Assembly Energy Cost & Availability Committee (10-0) Assembly Appropriations Committee (15-0) Assembly Floor (60-5) POSITIONS Sponsor: Author Support: None on file. Oppose: None on file. Randy Chinn AB 1X Analysis Hearing Date: January 19, 2001