BILL ANALYSIS SB 18 X2 Page 1 Date of Hearing: September 6, 2001 ASSEMBLY COMMITTEE ON APPROPRIATIONS Carole Migden, Chairwoman SB 18 X2 (Burton) - As Amended: July 20, 2001 Policy Committee: E.C.&A.Vote:18-0 Urgency: Yes State Mandated Local Program: Yes Reimbursable: No SUMMARY This bill, as proposed to be amended , requires that the bond repayment mechanism specified for Department of Water Resources (DWR) procurement financing be fixed by an irrevocable Public Utilities Commission (PUC) 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)Requires the bond set-asides to be designated as a non-bypassable, separate rate component on an electrical corporation's retail end-user's bill. Requires that a DWR set-aside rate component consist of and be derived from a portion of rate levels already established and in effect on September 30, 2001. 3)Establishes the DWR Bond Repayment Fund, continuously appropriated to DWR and available for the purpose of payment of bond financing costs. 4)Entitles the PUC to review the revenue requirements of DWR and requires the PUC to conduct at least one public hearing and provide for public comment prior to adoption of revenue requirements. FISCAL EFFECT 1)Absorbable costs to the PUC. 2)To the extent that establishing the dedicated rate set-aside for bond repayment provides greater security for the bonds, SB 18 X2 Page 2 total debt payments will be reduced due to a higher bond rating, lower interest rate and lower reserve requirements on the bonds. These reduced debt payments translate to savings for ratepayers. COMMENTS 1)Background . Since January 2001, the DWR has assumed power procurement responsibilities from the electrical corporations. To finance these purchases, DWR is authorized to issue up to $13.4 billion in revenue bonds, subject to specified terms and conditions. Existing law also 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 further 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. In order to complete the financing of the DWR costs, lenders are requiring a rate agreement with the PUC. 2)Purpose . The bonds and all other DWR power costs are payable from revenues derived from sales of DWR power. According to the author's office, the costs and rates associated with DWR power, as proposed in DWR's pending rate agreement with the PUC, are subject to ongoing disputes that are jeopardizing the sale, and potentially increasing the cost, of the bonds. This bill is intended to provide 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. This set-aside should provide better security to bondholders which should reduce the cost of the bonds and, therefore, the cost to ratepayers. 3)Contract Payments vs. 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 (the January legislation authorizing DWR to purchase power), and in that way do not violate the previous legislation. Proceeds from the bond sale go into the Electric Power Fund, providing cash 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 contracts is lost in this process. The contracts are controversial, as it has been revealed that very SB 18 X2 Page 3 high unit costs per kilowatthour (kWh) were paid, and some parties have urged that DWR renegotiate those contracts. Whether or not that renegotiation 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, reduce the 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. End user rate revenues through the non-bypassable DWR set-aside go into the separate fund to repay the bonds, and contract costs are repayed from the Electric Power Fund pursuant to existing law. 4)Amendments . The author's amendments are generally technical or clarifying amendments to address issues raised by the State Treasurer. Analysis Prepared by : Chuck Nicol / APPR. / (916)319-2081