BILL ANALYSIS 1
1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
SB 18XX - Burton Hearing Date:
July 19, 2001 S
As Amended: July 16, 2001 FISCAL/URGENCY
B
X
2
1
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DESCRIPTION
This bill authorizes the Department of Water Resources (DWR) to
apply for an irrevocable bond financing order from the
California Public Utilities Commission (CPUC). Such order shall
establish a DWR Bond Set-Aside (Set-Aside), a non-bypassable,
separately identified charge on retail customers of
investor-owned utilities to pay for up to $13.4 billion in bonds
previously authorized in SB 31x (Burton; Chapter 9 of the First
Extraordinary Session of 2001). Those bonds were authorized to
repay the General Fund for advances made for electricity
purchases by DWR for customers of investor-owned utilities and
to finance the cash-flow of ongoing DWR purchases.
This bill establishes in the State Treasury the DWR Bond
Repayment Fund which shall receive all monies collected from the
Set-Aside for repayment of the bonds.
This bill clarifies DWR's revenue requirement to include the
cost of purchasing power, purchasing natural gas as required for
power purchase contracts, and administrative costs as
appropriations are provided for by the Legislature. Revenue
requirement does not include conservation or load management
programs. The CPUC is required to review the DWR revenue
requirement and conduct at least one public hearing with an
opportunity for public comment prior adoption, though the
requirement for the CPUC to pass through the DWR costs without
alteration remains.
This bill requires that the Set-Aside come out of existing rates
as of August 31, 2001. However, the CPUC's authority to
otherwise change rates is unaffected.
BACKGROUND
AB 1X (Keeley; Chapter 4, First Extraordinary Session of 2001)
authorized DWR to contract for electricity in place of
electrical corporations. That statute, as amended by SB 31X,
authorized DWR to issue up to $13.4 billion in bonds to finance
such purchases. As part of the contracting/financing mechanism
DWR, the Department of Finance, and the State Treasurer desires
DWR to enter into a binding rate agreement with the CPUC. That
agreement will have the effect of an irrevocable financing order
meaning that as DWR submits its revenue requirement for its
power purchases, the CPUC will be obligated to pass those costs
through in retail rates without adjustment, save for
mathematical errors. This authority to pass through costs
without CPUC review would never be permitted for costs incurred
by a utility.
There were three reasons for allowing this. First, this
provision was created when the state had to assume the
utilities' power procurement role. At the time the state had to
issue bonds to finance costly wholesale purchases. Without an
agreement to pass the costs without through CPUC review lenders
would not finance those purchases. Second, a utility is a
for-profit entity which, without CPUC review, would be an
unregulated monopoly with no incentive to keep costs down. In
contrast, the DWR is a non-profit entity which would have no
reason to increase costs. Third, as a non-profit entity DWR has
an elected boss (the Governor) who could be held accountable for
DWR's performance, just as any municipal utility.
In order to complete the financing of the DWR costs lenders are
requiring a rate agreement with the CPUC. The rate agreement
contains provisions requiring the CPUC to pass through the costs
of the DWR's power purchase contracts without review and in an
expedited manner. The agreement also contains provisions for
passing through costs of specified demand management programs
(i.e. the 20/20 program) as well as expenses for legal,
consulting, and technical services.
This bill is an effort to develop an alternative to the rate
agreement and to lower the cost of borrowing for ratepayers.
Instead of a rate agreement this bill creates a dedicated
payment stream for the bonds, known as the Set-Aside. The
Set-Aside provides better security to bondholders which should
reduce the cost of the bonds and therefore the cost to
ratepayers. However, because DWR's contracts are also secured
by the bonds, a bond only surcharge arguably makes the contracts
less secure. This could lead to contractor claims of contract
impairment which in turn could lead to damages against the
state. Such claims could cast some uncertainty on the bonds
potentially jeopardizing their issuance.
COMMENTS
Lower Cost to Ratepayers . There seems to be little disagrement
that a surcharge to repay the bonds provides better security
that a rate agreement and therefore results in lower costs to
ratepayers. Savings have not been reliably estimated but could
amount to as much as $1 billion over the life of the bonds.
Rate Agreement . One of the primary benefits of a bonds-only
surcharge is the avoidance of a rate agreement. While AB 1X
provides that any reasonableness review of DWR's contracts will
be performed by DWR, the statute does not authorize DWR to
engage in demand management programs and requires administrative
costs to be reviewed as part of the budget. However, if the
rate agreement is approved there will be no legislative or CPUC
oversight of any of those costs, nor any opportunity for public
comment for as long as bonds are outstanding. If a rate
agreement can be avoided there will be opportunities to review
and alter the various demand management and administrative costs
contained in the agreement. In either event the power contract
costs remain an obligation of DWR and may not be altered except
by mutual consent of DWR and the contactor.
Direct Access. This bill indirectly preserves the opportunity
to discuss the potential for direct access. As part of the
$13.4 billion bond issuance the lenders have required that
direct access be ended. The reason for this is that contract
payments have a priority over bond payments. If customers leave
the utility to purchase electricity elsewhere then DWR will sell
fewer kwhs which will raise DWR's unit costs which will then
require higher rates for DWR power. This will make alternative
electric suppliers more attractive leading to more customer
losses and even higher rates. This death spiral of rate
increases jeopardizes the viability of DWR's entire power
procurement program and hence the security of repayment of the
bonds. To protect against this circumstance lenders have
demanded that direct access be ended, as the CPUC is permitted
to do under AB 1X.
If instead of the rate agreement the bonds have a separate,
non-bypassable Set Aside, as envisioned in this bill, the
lenders have no need to end direct access because the Set Aside
is non-bypassable. Therefore, direct access customers will
remain obligated for the bond payments. However, the question
of who pays for the DWR contract costs remains. The CPUC can
simply end direct access, and/or the Legislature can establish
appropriate rules. Either way direct access remains open for
discussion under this bill.
Contract Impairment. The major concern over this bill is
whether it impairs DWR's contracts. The impairment argument
results from a provision contained in most, if not all, of the
contracts which says the following:
"Payments under this Agreement shall constitute an
operating expense of the (Electric Power) Fund payable
prior to all bonds, notes or other indebtedness
secured by a pledge or assignment of the Trust Estate
or payments to the generaly fund."
The effect of this section is to make contract payments a
priority over bond repayment. This bill does not violate this
provision because the bond repayments are not made from the
Electric Power Fund but rather from a new fund called the DWR
Bond Repayment Fund. Because this fund, rather than the
Electric Power Fund, pays the bond costs the agreement is
arguably not violated. Further, the proceeds of the bond sale
are deposited in the Electric Power Fund, providing cash to
ensure the contracts can be repaid.
Other argue that this bill creates at least a reasonable
argument that the power purchase contracts are impaired because
the contractors believed that their payments were secure since
they had a priority over the bonds, on which the state would
never default. By only securing the bonds through a dedicated
surcharge (Set Aside) their security is lost and the contracts
are therefore impaired. This would lead to litigation, or
arbitration as specified in the contracts, which could result in
significant damages. Either way the sale of the bonds could be
impaired, jeopardizing repayment of the General Fund.
Though the impairment argument may be legitimate, no impairment
could occur unless this bill becomes law.
Contract Renegotiation. Some commenters have urged that the DWR
renegotiate its contracts as they are relatively expensive
compared to current market prices. Whether this bill helps or
hurts any renegotiation effort is a matter of judgement. Some
argue that the threat of this bill will encourage the
contractees to renegotiate while others argue that this bill
poisons the atmosphere making renegotiation difficult.
POSITIONS
Sponsor:
Author
Support:
None on file
Oppose:
None on file
Randy Chinn
SB 18XX Analysis
Hearing Date: July 19, 2001