BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 1647 - Jerome Horton Hearing
Date: June 29, 2004 A
As Amended: June 21, 2004 FISCAL B
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DESCRIPTION
Current law , as provided in Proposition 50 passed by the
voters in the 2002 General Election, provides for the sale
of up to $3.44 billion in General Obligation (GO) bonds for
various water-related programs as follows:
q Coastal Protection $950 million
q CALFED $825 million
q Integrated Regional Water Management$640
million
q Safe Drinking Water $435 million
q Clean Water and Water Quality $370 million
q Desalination and Water Treatment$100 million
q Colorado River Management $70 million
q Water Security $50 million
Current law does not specifically address what entities are
eligible to use these funds.
This bill finds investor-owned water utility and mutual
water companies should be entitled to compete for bond
proceeds.
This bill authorizes investor-owned water utility and
mutual water companies to be eligible for grant funding
from the sale of any GO bond unless they are not included
or excluded by the express provisions of the bond
authorization act. If an investor-owned water utility
receives grant funding, the California Public Utilities
Commission (CPUC) shall not authorize the utility to earn a
return on the grant funds. If the utility sells any water
facility originally purchased with the grant funding, the
utility shall refund to the state the lesser of the
depreciated value of the plant, less any cost of removal or
restoration, or the net proceeds from the sale.
BACKGROUND
Drinking water is provided by three types of entities in
California:
q Municipal water agencies, which are nonprofit public
agencies run by elected or appointed boards.
q Investor-owned public water utilities, which are
for-profit corporations regulated by the CPUC.
q Mutual water companies, which are, for the most part,
non-profit corporations owned by the customers they serve
and are regulated by the CPUC.
About 80% of the state's residents receive their water from
a municipal water agency, which the remaining 20% receive
their water from a public water utility or a mutual water
company.
According to the Legislative Analyst's Office (LAO), there
are about 170 privately owned for-profit CPUC-regulated
water companies in the state. The LAO notes about 75% of
those companies serve fewer than 500 customers, but nine
companies have more than 10,000 service connections apiece.
Californians periodically authorize the issuance of GO
bonds for specified purposes. Historically, bonds for
water-related purposes have been utilized solely by public
entities , such as municipal water providers, not by private
entities , such as investor-owned water utilities.
Proposition 50, which was approved by the voters in 2002,
was silent on the issue and this measure proposes to
eliminate the ambiguity by clearly making private water
companies eligible for public bond dollars.
While this bill applies to all bond measures, present and
future, the focus has been on the money available pursuant
to Proposition 50. The Legislative Analyst believes $1.4
billion of the $3.44 billion authorized by Proposition 50
could potentially be allocated to private water companies.
The Governor has directed each department administering
these funds to decide, on a department-by-department basis,
whether to allow private water company participation.
COMMENTS
1.New Bill . Prior to June 21, this was a bill by
Assemblywoman Wiggins dealing with livestock stockponds
and irrigation. The new language in this bill is
virtually identical to language placed into SB 909
(Machado) in June 2003 after an unrelated version of that
bill passed the Senate in May 2003. This language was
amended into SB 909 in the Assembly Water, Parks &
Wildlife Committee on June 23, 2003, but the bill was
never heard by the committee.
2.Runs Contrary To Action Of Budget Conference Committee,
Gives Private Companies Access To All Future Bond Money .
The Budget Conference Committee has adopted language
dealing solely with the portion of the bond money
administered by the Department of Health Services (DHS)
in the 2004-05 fiscal year, which is $90 million of the
$3.44 billion authorized by Proposition 50. This measure
not only overturns the action of the Budget Conference
Committee, it also gives private water companies access
to all Proposition 50 bond funds and access to any future
GO bond money authorized by the voters, unless the bond
act itself specifically excludes private water companies.
The author and committee may wish to consider why it's
appropriate to set as a "default" a requirement that all
current and future bonds make private water companies
eligible for funding.
3.Bill Could Award Public Subsidies To Private Desalination
Plants . Proposition 50 specifically set aside a minimum
of $50 million - and as much as $100 million - to fund
grants to pay for the desalination of ocean or brackish
waters. The measure specifically states "The Legislature
may enact such legislation as is necessary to implement
this chapter." By making private water companies
eligible for Proposition 50 bond funds, this measure will
allow private entities to receive public bond money to
build private desalination plants.
There are more than 20 desalination proposals are under
consideration on the California coast. While most of
them are being put forward by public agencies, some
private companies are also looking to build these plants.
For example, California-American Water Company, a
private water utility that's a subsidiary of American
Water and provides water service to more than 500,000
Californians and 20 million customers in 27 states, 4
Canadian provinces, Puerto Rico and South America, is
proposing to build a 9 million-gallon-a-day desalination
facility at Moss Landing on Monterey Bay. Poseidon, a
small, privately held company based in Connecticut, has
proposals to build desalination plants in Huntington
Beach and Carlsbad.
4.Measure Runs Contrary To Analysis of Proposition 50 .
While Proposition 50 doesn't specifically exclude private
water companies from receiving grants or loans from the
bonds authorized to be sold by the measure, it also
doesn't expressly permit them to receive money either.
Based on the LAO's analysis of Proposition 50 that
appeared on the ballot, it's arguable that CPUC-regulated
water companies were never intended to be eligible for
funding. Specifically, the analysis reads:
"This measure allows the state to sell $3.44
billion in general obligation bonds for various
water-related programs. Figure 1 summarizes the
purposes for which the bond money would be
available for expenditure by various state
agencies and for loans and grants to local
agencies and nonprofit associations . It shows
that more than half of the funds would be
allocated to two purposes-coastal protection and
the CALFED Bay-Delta Program." (Emphasis
added).
The text of the Proposition defines a "nonprofit
organization" as "any nonprofit corporation formed
pursuant to the Nonprofit Public Benefit Corporation Law
(Division 2 (commencing with Section 5000) of Title 1 of
the Corporations Code) and qualified under Section
501(c)(3) of the United States Internal Revenue Code."
5.Access to Capital . Unlike municipal water companies,
private water corporations have better access to capital,
and have the ability to issue stock and debt. They're
only required to go before the CPUC if they want to raise
their water rates.
While municipal water corporations may not have access to
equity markets, some have substantial capital reserves.
The largest of these, the Metropolitan Water District of
Southern California has about $500 million in
unrestricted reserves.
As noted in the "Background" section, of the 170
CPUC-regulated private water corporation, 75% serve fewer
than 500 customers. There are nine large water companies
that have more than 10,000 service connections -
including one, California-American Water Company, which
has 500,000 California customers and provides water
service to 20 million people in four countries - and four
of those nine companies are publicly traded and have
access to equity markets.
If an ability to access capital issue, the author and
committee may wish to consider whether the bill should be
limited to affecting just those nonprofit mutual water
companies or companies that demonstrate an inability to
generate private funding.
6.Public Money, Private Interests . If private water
companies are eligible to receive Proposition 50 - or any
future bond - money, would this constitute an
impermissible gift of public funds? The Legislative
Counsel has opined this would not be a gift of public
funds if the funds were extended for a public purpose.
The LAO reached a similar conclusion, assuming the CPUC
ensures there is no benefit to shareholders.
The language in this bill doesn't preclude a water
utility or its shareholders from profiting from the use
of public funds. Page 4, Lines 6-9 say the CPUC shall
not authorize a rate of return on the grant funds, but
the language doesn't bar an unauthorized return. The
author and committee may wish to consider adopting
stronger language to preclude a public water system
regulated by the CPUC from earning a rate of return on
those grant funds used to acquire or construct a utility
plant.
Of greater concern is the language on Page 4, Lines 18-40
and Page 5, Lines 1-5, which allow any gains made on the
sale of the plant to accrue to the water company, not to
the state or to the taxpayers. Since those plants were
funded by taxpayers, the author and committee may wish to
consider whether it would be more equitable to require
all gains on the sale accrue to the taxpayers who are
financing the bonds, not to the shareholders or the
ratepayers.
7.Related Legislation . SB 909 (Machado) is virtually
identical to this measure. It's pending in the Assembly
Water, Parks & Wildlife Committee, though no hearing date
has been scheduled.
AB 1157 (Canciamilla) allows investor-owned water
companies to increase their rates without CPUC-approval
under certain circumstances. That bill has passed this
committee and is pending in the Senate Appropriations
Committee.
AB 1908 (Canciamilla) moves regulation of investor-owned
water companies from the CPUC to the Department of Water
Resources. That bill is scheduled to be heard in this
committee today.
PRIOR VOTES
Senate Appropriations Committee(7-5)*
Senate Education Committee(8-1)*
Assembly Floor (72-6)*
Assembly Appropriations Committee(24-0)*
Assembly Education Committee(11-0)*
* Votes on a prior, unrelated version of the bill.
POSITIONS
Support:
Central Basin Water Association
California Water Service Company
California Water Association
California American Water
City of Carlsbad
City of Artesia
Fontana Water Company
San Gabriel Valley Water Company
Oppose:
Association of California Water Agencies
California Coastal Commission
East Bay Municipal Utilities District
Randy Chinn
AB 1647 Analysis
Hearing Date: June 29, 2004