BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 18 X2
                                                                  Page  1

          SENATE THIRD READING
          SB 18 X2 (Burton)
          As Amended September 6, 2001
          2/3 vote.  Urgency 

           SENATE VOTE  :35-2  
           
           ENERGY              18-0        APPROPRIATIONS      15-0        
           
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          |Ayes:|Wright, Pescetti, Bill    |Ayes:|Migden, Bates, Aroner,    |
          |     |Campbell,                 |     |Ashburn, Washington,      |
          |     |John Campbell,            |     |Daucher, Goldberg, Robert |
          |     |Canciamilla, Diaz,        |     |Pacheco, Papan, Pavley,   |
          |     |Dickerson, Dutra, Florez, |     |Runner, Simitian,         |
          |     |Jackson, Keeley, Leonard, |     |Thomson, Wiggins Zettel   |
          |     |Oropeza, Reyes, Richman,  |     |                          |
          |     |Steinberg, Vargas, Wesson |     |                          |
          |     |                          |     |                          |
           ----------------------------------------------------------------- 

           SUMMARY  :  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  








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            requires CPUC to conduct at least one public hearing and  
            provide for public comment prior to adoption of revenue  
            requirements. 

           EXISTING LAW  :

          1)Authorizes DWR to contract with an electrical corporation to  
            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 $620,000.

           COMMENTS  :  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 that the bonds  
          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  








                                                                  SB 18 X2
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          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.

          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 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.  








                                                                  SB 18 X2
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          This bill specifies that DWR's revenue requirement includes only  
          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.

          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.

          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  
          takes place, the contract costs are recovered through the  
          Electric Power Fund.








                                                                  SB 18 X2
                                                                  Page  5


          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.  


           Analysis Prepared by  :  Kelly Boyd / E. C. & A. / (916) 319-2083 



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