BILL ANALYSIS
SB 18 X2
Page 1
Date of Hearing: September 4, 2001
ASSEMBLY COMMITTEE ON ENERGY COSTS AND AVAILABILITY
Roderick D. Wright, Chair
SB 18 X2 (Burton) - As Amended: July 20, 2001
SENATE VOTE : 35-2
SUBJECT : Department of Water Resources: electricity: bond
financing order.
SUMMARY : This bill requires that the bond repayment mechanism
specified for Department of Water Resources (DWR) procurement
financing be fixed by an irrevocable California Public Utilities
Commission (CPUC) bond financing order. Specifically, this
bill :
1)Requires that the financing order be sufficient to pay costs
of issuing, servicing and retiring DWR bonds.
2)Provides for adjustment to the repayment mechanism as
required.
3)Requires the bond set-asides to be designated as a separate
rate component on an electrical corporation's retail
end-user's bill.
4)Requires that a DWR set-aside rate component consist of and be
derived from a portion of rate levels already established an
in effect on August 31, 2001.
5)Establishes DWR Bond Repayment Fund continuously appropriated
to DWR and available for the purpose of payment of bond
financing costs.
6)Entitles CPUC to review the revenue requirements of DWR and
requires CPUC to conduct at least one public hearing and
provide for public comment prior to adoption of revenue
requirements.
7)Contains and urgency statute.
EXISTING LAW :
1)Authorizes DWR to contract with an electrical corporation to
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provide transmission and distribution of power procured by DWR
on terms and conditions that reasonably compensate the
electrical corporation for its services.
2)Requires DWR to establish and revise certain revenue
requirements relating to purchase and sale of electric power.
3)Requires DWR to establish and revise certain revenue
requirements.
FISCAL EFFECT : Unknown - potentially up to $620 thousand.
COMMENTS :
Summary of DWR procurement role and rate recovery
Under existing law (AB 1 X1, Chapter 4, Statutes of 2001) DWR is
authorized to contract with electrical corporations to provide
transmission, distribution and billing and collection services
to retail end use customers for power procured by DWR. The
electrical corporation is entitled to reasonable compensation
for its services. DWR is also authorized under existing law to
issue revenue bonds not to exceed a certain amount subject to
approval of the Director of the State Department of Finance.
Finally, existing law allows DWR to have CPUC issue financing
orders to recover revenue requirements determined by DWR.
Crucial to DWR's procurement role is its ability to ensure that
bonds are sold at investment grade rating and are repaid on a
timely basis from pledged revenues. Because the state has
assumed the electrical corporation's procurement
responsibilities during the state's energy crisis and a time of
financial uncertainty for the electrical corporations, the state
had to issue bonds to finance costly energy purchases.
Unlike investor owned utilities, subject to review of revenue
requirements due to their monopoly nature and lack of incentive
to keep costs down, DWR is a state agency with no motivation to
increase costs. DWR also has built in accountability through
the governor, an elected official accountable for the agency's
performance. However, in order to complete financing of DWR
procurement costs, lender's require a rate agreement with CPUC
to ensure a sufficient revenue stream for repayment of the
bonds. Under the agreement CPUC is required to pass through
DWR's costs without review in an expedited manner.
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Given this reality, SB 18 X2 requires the bond repayment
set-aside, the rate mechanism for timely repayment of DWR costs,
to be fixed by an irrevocable CPUC bond financing order
sufficient to pay all costs of issuing, servicing and retiring
bonds. The bill further requires CPUC to be able to adjust the
rate mechanism as required to ensure continued repayment at
sufficient levels. The rate component must be identified
separately on customer's bills, so that it is easily
identifiable, and that it be derived from a portion of rate
levels already in effect as of August 31, 2001. This bill
establishes a DWR Bond Repayment Fund, continuously appropriated
to DWR and available to the department for payment of principal,
premium, if any, and interest on the bonds. The bill also
requires that revenues from the repayment set-aside are to be
deposited in DWR Bond Repayment Fund.
Revenue Requirements of DWR
Revenue requirement treatment for DWR is separate and apart from
traditional revenue requirement treatment of electrical
corporations subject to CPUC jurisdiction. This bill requires
that DWR adjust its revenue requirement relating to purchase and
sale of electric power and provide CPUC of adjustments as the
department determines is appropriate. CPUC is required to
periodically review the revenue requirement of the department,
and entitles CPUC to obtain and review any information it deems
necessary to conduct such reviews. Finally, CPUC is required to
open a proceeding and conduct at least one public hearing taking
public comment on DWR's revenue requirement prior to its
adoption.
In the normal course of utility regulation CPUC would open a
formal evidentiary proceeding to determine and adopt of revenue
requirement. However, DWR is a state agency procuring power on
behalf of the state and recovering only reasonable costs of
procurement. CPUC is also a state agency. It is problematic
for CPUC to review, and especially to reject or request revision
to a DWR revenue requirement. This bill puts into place specific
guidelines for calculation of DWR's revenue requirement to
ensure that an appropriate amount is always recovered in rates
sufficient to repay bond costs without including extraneous
amounts.
This bill specifies that DWR's revenue requirement includes only
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costs necessary to pay actual costs of: procuring power;
contracting for purchase of power; administrative costs;
purchase of natural gas pursuant to a power procurement
contract; transmission and distribution facilities use costs;
and amounts required to enable DWR to comply with Section 80134
of the Water Code. Administrative costs are strictly defined as
reasonable expenses inclusive of consulting, legal, technical or
engineering service costs incurred by DWR in administering this
law. Finally, this bill clarifies that DWR Bond Set-Aside is a
rate to recover a separate dedicated revenue stream fixed by
CPUC bond financing order. In short, this bill revises certain
rate specific areas first detailed in SB 31 X1 (Burton), Chapter
9, Statutes of 2001.
Direct Access and Rate Agreements
SB 18 X2 indirectly preserves the opportunity for potential
direct access. The lending community has been fearful of direct
access in financing bonds for DWR procurement, believing that
migration to alternative electric service providers will raise
DWR's unit costs, resulting in higher DWR rates for power. By
avoiding a rate agreement and using a non-bypassable set-aside,
the fear of direct access is minimized, as the costs are not
avoidable simply by changing providers. While this bill does
not address direct access, its provisions are not inconsistent
with resumption of direct access with an exit fee to assist in
recovery of DWR contract costs and with imposition of a
non-bypassable set-aside to recover DWR procurement costs.
Contract Payments vs. Bond Repayment
One of the major changes from the direction given in AB 1 X1 is
that this bill places repayment of contract costs above the
priority given to bond repayment. This bill's establishment of
the Bond Repayment Set-Aside Fund provides that bond repayments
are not made into the Electric Power Fund established in AB 1
X1, and in that way do not violate the previous legislation.
Proceeds from the bond sale go into the Electric Power Fund,
ensuring that cash is available to pay contract costs. The
non-bypassable charge on retail end user bills goes into the new
set-aside fund to repay the bonds. It is arguable that security
for the bonds is lost in this process. The contracts are
controversial, as it has been revealed that very high unit costs
per kilowatthour (kWh) were paid, and it has been urged that DWR
renegotiate those contracts. Whether or not that renegotiation
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takes place, the contract costs are recovered through the
Electric Power Fund.
This bill appears to neither help nor hurt the effort to
renegotiate the contracts and reduce going forward procurement
costs of the department, and reduce passed on costs to users.
What this bill does is establish different revenue streams for
contract payments and bond repayment. Bond proceeds directly
pay contract costs, whether or not those costs can be reduced
through re-negotiation. End user rate revenues through the
non-bypassable DWR set-aside go into the separate fund to repay
the bonds.
Staff recommends:
Ultimately, a non-bypassable charge remains at least on its face
consistent with a resumption of direct access, as long as DWR
bond costs can be passed along as users move to new providers.
Whether or not establishment of this separate revenue stream
puts pressure on DWR or contractors to renegotiate existing DWR
contracts to reduce going forward procurement costs remains to
be seen. In both regards, as to encouragement of direct access
and encouragement of further cost reduction through
re-negotiation of existing contracts, this bill has a benign
impact. This bill provides a reasonable process for repayment
of DWR bonds and provides parameters for assessment of
reasonable cost recovery for power procurement costs of DWR in
the process of establishment of its revenue requirement. In
that regard the bill ensures equitable re-payment
responsibilities across customer classes for the bond costs.
REGISTERED SUPPORT / OPPOSITION :
Support
American Federation of State and County Municipal Employees
(AFSCME)
Opposition
None on file.
Analysis Prepared by : Kelly Boyd / E. C. & A. / (916)
319-2083
SB 18 X2
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