BILL ANALYSIS 1
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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
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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regulations shall be repealed after 180 days unless DWR formally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