BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 18XX|
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THIRD READING
Bill No: SB 18XX
Author: Burton (D)
Amended: 7/19/01
Vote: 27 - Urgency
SENATE ENERGY, U.&C. COMMITTEE : 10-0, 7/19/01
AYES: Bowen, Alarcon, Battin, Dunn, Murray, Poochigian,
Sher, Speier, Vasconcellos, Vincent
SENATE APPROPRIATIONS COMMITTEE : 11-0, 7/19/01
(Roll call not available at time of writing)
SUBJECT : Department of Water Resources: electricity:
bond financing order
SOURCE : Author
DIGEST : This bill requires the revenue bond repayment
mechanism for electrical power to include a State
Department of Water Resources Bond Set-Aside, as specified.
ANALYSIS : Existing law, AB 1X, authorizes the State
Department of Water Resources (DWR) to contract with an
electrical corporation to transmit or provide for the
transmission of, and distribute the power ad provide
billing, collection, and other related services, as the
agent of DWR, on terms and conditions that reasonably
compensate the electrical corporation for its services, and
requires the California Public Utilities Commission (PUC),
at the request of DWR, to order such actions. Existing law
authorizes DWR to issue revenue bonds for certain purposes
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not to exceed a certain amount, containing specified terms
and conditions, upon authorization by written determination
of DWR and with the approval of the Director of the State
Department of Finance and the State Treasurer. Existing
law permits DWR to have the PUC issue finance orders to
recover revenue requirements, and delegates to DWR the
authority to determine if the revenue requirements are just
and reasonable. Existing law requires DWR, before the
issuance of bonds, to establish a mechanism to ensure that
the bonds will be sold at investment grade ratings and
repaid on a timely basis from pledged revenues. Certain of
these provisions enacted by Senate Bill 31 of the 2001-02
First Extraordinary Session become effective on August 13,
2001.
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 thorough PUC
review, lenders would not finance those purchases. Second,
a utility is a for-profit entity which, without PUC review,
would be an unregulated monopoly with no incentive to keep
costs down. In contrast, 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 PUC. The
rate agreement contains provisions requiring the PUC to
pass through the costs of 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 review.
This bill requires the bond repayment mechanism to include
a DWR Bond Set-Aside, as defined fixed by an irrevocable
PUC bond financing order, sufficient to pay the costs of
issuing, servicing, and retiring the bonds, and to be
adjusted as required, applicable to all electric power
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delivered in this state by an electrical corporation
subject to the jurisdiction of the PUC. This bill requires
the total of DWR Bond Set-Asides to be designated as a
separate rate component of a retail and user's bill for
electrical services and requires any DWR Bond Set-Aside to
consist of and be derived from a portion of the rate levels
in effect on August 31, 2001. The bill establishes the DWR
Bond Repayment Fund, to be continuously appropriated to DWR
and available for the purpose of the payment of principal,
premium, if any, and interest on bonds and associated
issuance costs, thereby making an appropriation. The bill
requires the revenues form the DWR Bond Set-Aside to be
deposited in the DWR Bond Repayment Fund.
Existing law requires DWR to establish and revise certain
revenue requirements relating to the purchase and sale of
electric power and to advise the PUC as DWR determines to
be appropriate.
This bill defines the term "revenue requirements." The
bill entitles the PUC to any information necessary to
review the revenue requirements of DWR and requires the PUC
to conduct at least one public hearing and provide an
opportunity for public comment on the revenue requirements
prior to their adoption.
This bill revises certain of the provisions enacted by SB
31 of the 2001-02 First Extraordinary Session and makes
other conforming changes.
The bill defines "administrative costs" to mean those
reasonable expenses, including any consulting, legal,
technical, or engineering services, incurred by DWR in
administering the law. The administrative costs of DWR
incurred in administering this law may only be paid for
from appropriations by the Legislature. DWR may not incur
administrative costs in excess of those appropriations.
The bill defines "DWR Bond Set-Aside" means a rate to
recover a separate dedicated revenue stream fixed by a PUC
bond financing order. The total of all DWR Bond Set-Asides
shall be designated as a separate rate component of a
retail end-user's bill for electrical services.
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This bill defines "revenue requirements" to mean only the
revenue necessary to pay the actual costs for any of the
following:
1.Purchasing power.
2.Contracting for the purchase of power.
3.Administrative costs.
4.Purchasing natural gas as required pursuant to a contract
for the purchase of power.
5.Using transmission or distribution facilities prior to
the delivery or utilization of purchased power, including
scheduling and other related expenses.
6.Amounts to enable DWR to comply with Section 80134.
Makes certain load management or reduction program
expenditures authorized and receivable.
This bill specifies that "revenue requirements" does not
include costs incurred under conservation, load management,
or other programs implemented by the PUC, DWR, or any other
entity.
This bill is an effort to develop alternative to the rate
agreement and to lower the cost of borrowing for
ratepayers. Instead of a rate agreement, this bill crates
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.
The Senate Energy, Utilities and Communications Committee
analysis made the following comments:
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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 PUC 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 contractor.
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 pruchase
electricity elsewhere, then DWR will sell fewer kwhs which
will raise DWR's unit costs, which will then require higher
rates for DWR poer. This bill 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 PUC 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 PUC can simply end direct access,
and/or the Legislature can establish appropriate rules.
Either way direct access remains open for discussion under
this bill.
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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
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difficult.
FISCAL EFFECT : Appropriation: Yes Fiscal Com.: Yes
Local: Yes
DLW:cm 7/19/01 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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