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