BILL ANALYSIS Appropriations Committee Fiscal Summary 18 (Burton) Hearing Date: 7/19/01 Amended: 7/16/01 Consultant: Lisa Matocq Policy Vote: E, U & C - Not available ____________________________________________________________ ___ BILL SUMMARY: SB 18xx, an urgency bill, makes changes to statutes governing the Department of Water Resources (DWR) power purchasing program. Fiscal Impact (in thousands) Major Provisions 2001-02 2002-03 2003-04 Fund PUC Unknown costs, potentially $310-620 Special* annually, probably offset by increased fee revenues DWR-power purchasing See comments below Special**/*** program *Public Utilities' Reimbursement Account (PURA) **Electric Power Fund ***DWR Bond Repayment Fund STAFF COMMENTS: Revised analysis. This bill may meet the criteria for referral to the Suspense File if demand reduction programs continue and departments are unable to recover costs from ratepayers. However, the DRC could result in significant, offsetting interest cost savings. AB 1x (Keeley, Ch. 4, St. of 2001), among other things, (1) authorized DWR to enter into contracts to purchase power and then sell it to electricity consumers, (2) specified that the Electric Power Fund shall be used for related revenues and expenditures, (3) authorizes DWR to sell revenue bonds for the purposes of the program, and (4) requires DWR to submit it "revenue requirement" to the PUC in order to recover its costs. This bill requires DWR, prior to issuing up to $13.4 billion in revenue bonds for power purchases, to apply to the PUC for a bond financing order establishing a DWR Bond Set-Aside for the exclusive purpose of paying the costs of issuing, servicing, and retiring the revenue bonds, and requires the PUC to comply with the request within 30 days of receipt of the application. The revenues for the Set-Aside are to be derived from a dedicated rate component (DRC), a portion of the rates in effect as of August 31, 2001, and deposited into the DWR Bond Repayment Fund, a continuously appropriated fund. The bill also: specifies that the DRC is to come out of existing rates in effect on August 31, 2001. However, the PUC's ability to otherwise change rates is unaffected, requires the PUC to determine at least once per year whether adjustments are necessary to the DWR Bond Set-Aside, changes the definition of "administrative costs", clarifies that administrative costs are subject to appropriation, and prohibits DWR from incurring administrative costs in excess of amount appropriated, further defines "revenue requirement" by, among other things, authorizing recovery of expenditures for natural gas purchases if required by a contract for the purchase of power, and for using transmission or distribution facilities prior to delivery or utilization of purchased power, and prohibiting recovery, from the Electric Power Fund, of expenditures for demand reduction programs implemented by the PUC, DWR, or any other entity, clarifies that the PUC is entitled to any information necessary to review DWR's revenue requirement, and requires the PUC to hold at least one public hearing on the revenue requirements prior to their adoption, and contains related findings. At the request of DWR, the Department of Finance, and the State Treasurer, the PUC is considering (a decision is expected August 23, 2001) entering into a binding "rate agreement" with DWR to irrevocably implement provisions of AB1x and subsequent legislation. The proposed rate agreement, submitted by DWR contains provisions that differ from this bill, including but not limited to, the inclusion of demand reduction programs as an authorized and recoverable expenditure, and potentially expanded administrative expenditures. Although demand reduction programs are not explicitly authorized in AB 1x, several of the Governor's Executive Orders have directed agencies to implement such programs using Electric Power Fund revenues. Through July 9, 2001, payments otherwise due to DWR from investor-owned utilities (IOUs) for energy purchases have been reduced by $1.5 million in order to provide credits to ratepayers under the Governor's 20/20 program. If the demand reduction programs continue and departments are unable to recover their costs from ratepayers, there are unknown, potentially significant, cost pressures. The demand reduction programs reduce the amount of power that DWR must purchase. Increased costs to the PUC are unknown, but potentially $310,000-620,000 annually for staff, depending on the number of revenue requirements submitted each year. PURA revenues are derived from an annual fee charged to public utilities and used to cover the PUC's budget. Therefore, increased costs to the PUC should be offset by increased fee revenues. There are potential unknown cost savings for the restrictions on DWR's administrative costs (including bond issuance costs), which through May 31, 2001 were about $17 million. By establishing a dedicated rate stream with which to service and retire the bonds, some have suggested that the interest rate at bond issuance could be reduced. To the extent that that occurs, there are unknown interest cost savings, potentially $1 billion.