BILL ANALYSIS 1
1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 1X - Keeley
Hearing Date: January 25, 2001 A
As Amended: January 16, 2001 FISCAL
B
As Mocked-Up: January 24, 2001
X
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1
DESCRIPTION
The January 24 mock-up version of AB 1X (Keeley) is
designed solely to reflect the issues and amendments that
the author and the committee agreed to insert into the bill
at the January 22 hearing.
Language that was included in the January 22 mock-up but
was not agreed to by the members or the author has been
removed from the January 24 mock-up - but the issues raised
in connection with the removed language are discussed in
the analysis.
This analysis attempts to cover the issues that were left
open by the committee and the author at the last hearing,
answer some questions raised by members during the hearing,
and suggest language in several places.
As mocked-up on January 24, 2001, this bill:
Authorizes the California Department of Water Resources
(DWR) to contract with any person or entity to purchase
electricity for up to 5.5 cents per kilowatt hour (kwh).
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.
Prohibits the state from taking ownership of the
transmission assets of any investor-owned utility.
Allows DWR to adopt emergency regulations, which are, by
definition, exempt from the Administrative Procedures Act
(APA) and review by the Office of Administrative Law (OAL).
Requires that the regulations be repealed after 180 days
unless DWR 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.
Allows DWR to enter into contracts that include provisions
for the indemnification of parties with whom the department
contracts. However, the contract may not indemnify any
party for acts or omissions (or any costs of defense
related to any acts or omissions) involving negligence,
gross negligence, recklessness, or willful misconduct by
that party or that party's employees, agents, or
contractors.
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 (IOU), 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.
OPEN ISSUES
State Ownership Issues
The issue of whether this bill promotes or precludes state
ownership of an IOU's generation, transmission, or
distribution assets is addressed in several places in the
bill.
The findings section on Page 3, Lines 14-25 contains
language relative to the need for the state to engage in
the purchase and sale of electricity, but not in the
ownership of the transmission or distribution assets of an
IOU in this state.
Page 4, Lines 20-21 prohibit the state from taking
ownership of the transmission or distribution assets of any
IOU in this state.
Page 5, Lines 22-24 state that nothing in this division
authorizes the department to enter into or engage in a
transmission or distribution enterprise.
The discussion in committee on January 22 focused on
drafting language that would reconcile the three sections
by making it clear that nothing in this bill shall be
construed to authorize the department to take ownership of
an IOU's generation, transmission, or distribution assets.
However, the committee also wanted to ensure that if the
state obtains a security interest in an IOU asset, the
ownership prohibition contemplated here wouldn't preclude
the state from exercising that security interest.
Legislative Counsel has suggested achieving that goal in
the following manner:
1. Strike the relevant language on Page 3 (Lines
23-25) and Page 5 (Lines 20-21) as noted above.
2. On Page 4, Line 20, strike out "The state may
not" and insert "Except as otherwise stated,
nothing in this chapter authorizes the department
to"
3. On Page 6, between Lines 10-11, insert:
(6) A contract with an investor-owned utility for
the utility to purchase electric power from the
department shall include a provision giving the
department an enforceable security interest in
assets of the of the utility to secure the payment
for the power sold to the utility. If the utility
defaults on the contract, and the department has
to take possession of the assets pledged to secure
payment under the contract, the department is
authorized to take possession of those assets,
including transmission, distribution, and
generation assets, and to operate those assets.
Pricing & Contract Issues
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 to remove the 5.5 cent cap
(striking Line 17 after "determines") and replace it with
the following:
and at such prices the department deems appropriate
taking into account all of the following:
(A) The intent of the program described in
this division is to achieve an overall
portfolio of contracts for energy resulting in
a weighted average priced of 5.5 cents per
kilowatt-hour.
(B) The need to have contract supplies to fit
each aspect of the overall energy load profile
(C) The desire to secure as much low-cost
power as possible under contract.
(D) The duration and timing of contracts made
available from sellers.
(E) The length of time sellers of electricity
offer to sell such electricity.
(F) The desire to secure as much firm and
non-firm renewable energy as possible.
The committee raised the issue during the January 22
hearing as to whether the state would be opening itself up
to lawsuits if this language were to be placed into statute
and the department then accepted some bids but rejected
others, even if all of the submitted bids met the criteria
established by this language.
Legislative Counsel provided the chairwoman's office with
an opinion that, while it's impossible to preclude the
state from ever being subject to a lawsuit, this language
probably doesn't increase the chances that a lawsuit would
be successful. Counsel provided two reasons for its
rationale.
First, Page 4, Lines 35-39 and Page 5, Lines 1-2 give DWR
broad authority to waive or ignore provisions of the
Government Code and the Public Contract Code that relate to
advertising, competitive bidding, bid protest procedures,
etc.
Second, in the Request for Bids for Energy Purchase (CDWR
RFB E2001-01) put out by the department on January 23, it
included the following section:
Disclaimer and CDWR Rights: This RFB shall not be
construed as an offer, and CDWR is not bound, to
purchase energy from any Bidder pursuant to this
RFB. No rights shall be vested in any Bidder,
individual or entity by virtue of its preparation to
participate in, or its participation in, such
process. No binding commitment shall arise on the
part of CDWR to any Bidder under this Request for
Bids until and unless the parties sign documents of
agreement that become effective in accordance with
their terms. This RFB does not commit CDWR to pay
any costs incurred by Bidders in the preparation of
their proposal. The bids received will be evaluated
and selected based on the supplied information,
including any supplemental information, submitted
pursuant to this RFB. CDWR expressly reserves the
right to modify, or withdraw from, the process
initiated and described herein, or modify the
schedule and any provision contained herein, for any
reason. CDWR reserves to itself the selection of
winning Bidders, if any, in the exercise of its sole
discretion; the right to reject any and all bids,
and any portion of a specific bid for any reason, as
well as the right to waive any informality or
irregularity in any bid received by it. CDWR also
reserves the right to award an agreement to a Bidder
based on factors other than price. CDWR assumes no
obligation to provide a reason for rejection of a
Bidder's bid.
While giving DWR the broad authority to waive provisions of
the Public Contract Code and the Government Code related to
bidding and bid-protest procedures may preclude any lawsuit
against the state from being successful, the committee may
wish to consider whether giving DWR this broad authority
may also reduce the number of entities willing to enter the
bid process.
Indemnification Issues
Some members were concerned that the indemnification
language on Page 5, Lines 35-40 and Page 6, Lines 1-4 could
inadvertently make the state financially liable if power
suppliers defaulted on existing contracts in order to enter
a contract to provide power to DWR.
During the January 22 hearing, DWR indicated that when it
enters into contracts in conjunction with its State Water
Project duties, contractors often demand that the contract
include provisions to ensure the contractor will be held
harmless by the state in the event the contractor can't
fulfill its contractual obligations due to circumstances
beyond its control.
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 DWR 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.
The committee asked whether having this indemnification
language in Water Code Section 11454 but not in Water Code
Section 80100 as contemplated by this bill would preclude
DWR from including an indemnification clause in its
contracts with power suppliers. Legislative Counsel
provided the chairwoman's office with an oral opinion that
excluding this language from the measure probably wouldn't
preclude DWR from including indemnification language in its
individual contracts with power suppliers. However,
Legislative Counsel noted that it's certainly possible that
someone could make a legal argument that DWR doesn't have
such authority, since it has the explicit authority to do
so in contracts entered into related to Water Code Section
11454, but not Section 80100 (if the indemnification
language were removed from this bill).
If the committee is concerned that the language contained
in the bill is too broad, Legislative Counsel suggested
replacing it with one of two different approaches.
The first, which is similar to the existing language in the
bill, grants DWR broad indemnification authority but adds
to the list of things it can't indemnify a third party
against by replacing the existing language with:
(3) A contract or agreement pursuant to this section
may include provisions for the indemnification of
parties with whom the department contracts, as the
department determines to be necessary to accomplish
the purpose of this division. However, a contract
or agreement pursuant to this section may not
include provisions for the indemnification,
including indemnification for any costs or defense,
of any party to the contract or agreement for acts
or omissions involving negligence, gross negligence,
recklessness, interference with contract rights, or
willful misconduct by that party or by the party's
employees, agents, or contractors.
The second approach would be to, instead of stating what
DWR can't indemnify a third party for, simply list what DWR
can hold a third party harmless for by replacing the
existing language with:
(3) A contract or agreement pursuant to this section
may include provisions to hold harmless any
contracting party for any breach of contract caused
solely by an act of war, hostilities, civil war, or
insurrection, or by an unanticipated grave natural
disaster or other act of God of an exceptional,
inevitable, and irresistible character.
Rate-Making & Charging Issues
Some members were concerned the bill would allow DWR to
enter contracts requiring retail end-users to pay more than
the existing CPUC-approved rate for their power. Language
aimed at precluding that from happening could be inserted
on Page 6, Line 12, to read:
With respect to electric power made available to
retail end-use customers, the customers shall be
responsible for costs at no more than the rates
established by the Public Utilities Commission in
effect on the date the power is made available to
the customers.
This language was in the January 22 version of the mock-up
and is taken from SB 7X in an attempt to ensure that the
power granted to DWR by this bill won't cause electricity
rates to rise above the statutory rate freeze that could be
in effect through March 2002.
What isn't clear is how this language can be reconciled
with the language on Page 5, Lines 28-29, which requires
power purchased under this section to be sold to retail
end-use customers "at the department's acquisition costs
plus" any administrative costs.
The committee may wish to discuss how to these two sections
should be reconciled.
Sunset Review Issues
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 potential way to redraft Page 8, Lines 9-13 into a
"hard sunset" would be as follows:
The provisions of this chapter that authorize the
department to contract for the purchase of
electrical power shall become inoperative on January
1, 20__, unless a later enacted statute deletes or
extends that date. This Section does not effect the
authority of the department to implement contracts
entered into prior to January __, 20__.
One potential way to redraft Page 8, Lines 9-13 and keep
the current "soft sunset" approach would be as follows:
(a) The authorization for the department to purchase
power pursuant to this chapter shall be reviewed by
January 1, 20__.
(b) The Bureau of State Audits shall conduct a
financial and performance audit of the department's
implementation of this chapter. The audit shall be
completed before December 31, 20__ and the bureau
shall issue a final report on or before December 31,
20__.
Intent Language
Some members have raised an issue relative to the intent
language on Page 3, Lines 14-25 and whether it only covers
some, but not all, of the reasons for the energy crisis.
Rather than enumerating the various reasons the, committee
may simply wish to say that a variety of factors have led
to the crisis.
That could be accomplished by striking the language on Page
3, Lines 14-15 and "electricity, and other" on Line 16,
replacing it with "A number of".
California Municipal Utilities Association (CMUA) Issues
At the January 22 hearing, CMUA raised the issue of
clarifying that municipal utilities may sell to and buy
from DWR.
The amendments it has provided would do the following:
1.Page 4, Line 17, insert: "'Local publicly owned electric
utility' has the same meaning as that term is defined in
Section 9604(d) of the Public Utilities Code."
2.Page 5, Line 15, after "person" insert: ", local publicly
owned electric utility,".
3.Page 5, Line 15, after "or" insert: "other".
4.Page 5, Lines 20-21, strike "public and private
utilities" and insert: "local publicly owned electric
utilities and electrical corporations".
5.Page 5, Line 30, after "of Section 80200", insert:
"either".
6.Page 5, Line 30, after "consumers", insert: "of
electrical corporations, or to any local publicly owned
electric utility".
7.Page 5, Line 33, after "disposed of", insert: "outside
California".
Co-Op Issues
The author has indicated an interest in adding an amendment
to specifically allow for the assignment of contracts to
electric co-ops. The author has proposed adding the
following amendment to accomplish that goal:
1.Page 6, Line 6, after "entities", insert: ", including
consumer owned and operated entities".
Fund Name - Technical Issue
This Fund created by this bill is identical to the Fund
created as a result of SB 7X (which is located in a
different section of the code). To prevent funds from
being commingled, it may be preferable to create a
separate fund for these purposes.
Written Declaration - Technical Issue
The structure of the transaction envisioned by this bill
requires the state to be a mandatory seller to all
customers. The Public Utilities Code requires that
whenever a consumer changes his/her seller of electricity,
the new seller must obtain a positive written declaration
by the customer. This bill should be amended to ensure
that provision of the Code is waived.
Contract Assignability Issue
Page 6, Line 5 of the bill provides that DWR "may" assign
contracts to public or private entities at a later date.
If members would like to see DWR get out of the
power-buying business, it may wish to require DWR to
include an assignability clause in each contract.
Does The State Need To Be A Party?
The presumption that DWR should purchase electricity
instead of the IOUs is premised on the reality that the
state is much more creditworthy that an IOU at this moment
in time. Instead of requiring the state to offer its "full
faith and credit" in support of the purchases contemplated
by this bill, this measure envisions a dedicated payment
stream from customers so that in the event a utility files
for bankruptcy, the state's payments are separately
identified and therefore continue to flow to the state.
Given the security of the rate stream, is there a need for
the state to be the middleperson in this transaction?
Alternatively, is there some other means of providing
sufficient security to sellers so the state doesn't need to
and isn't required to play the middleperson role?
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 25, 2001