BILL ANALYSIS                                                                                                                                                                                                              1
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                SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
                               DEBRA BOWEN, CHAIRWOMAN
          

          AB 2767 -  Richman                                Hearing Date:   
          June 22, 2004              A
          As Introduced: February 20, 2004             Non-FISCAL       B

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                                      DESCRIPTION
           
           Existing law  , which authorizes the Department of Water Resources  
          (DWR) to purchase electricity to serve electric utility  
          customers, prohibits DWR from contracting for the purchase of  
          electricity after January 1, 2003 (AB 1X (Keeley), Chapter 4,  
          Statutes of 2001).  

           Existing law  provides this contracting prohibition does not  
          affect DWR's authority to "administer" contracts entered into  
          prior to 2003.

           This bill  defines "administer" to provide DWR broad authority to  
          "renegotiate, novate, or otherwise amend" its existing  
          contracts, "notwithstanding any other provision of law."  

           This bill  finds that this change is declaratory of existing law.

                                      BACKGROUND
           
          Pursuant to AB 1X, DWR entered 56 long-term electricity  
          contracts with 28 counter-parties to serve the customers of  
          investor-owned utilities.  DWR's contracts, entered into under  
          extremely unfavorable market conditions in 2001, have been  
          criticized for their high prices and inflexible terms.

          DWR has renegotiated 34 contracts with 18 counter-parties.   
          Sixteen contracts have expired or been terminated.  Several of  
          the contracts have been renegotiated since January 1, 2003,  
          under DWR's authority to "administer" as it exists today.  DWR  
          has sought and received an opinion from the Attorney General's  
          office confirming DWR's authority, in one case, to renegotiate  
          under its continuing authority to administer contracts.









          However, according to DWR, some contract counter-parties have  
          argued DWR lacked authority to renegotiate long-term contracts  
          after December 31, 2002 in order to create leverage against the  
          state and extract a premium for renegotiations risks.  This bill  
          would settle that argument and, according to DWR, put DWR in a  
          stronger bargaining position to lower ratepayer costs and  
          improve contract terms.

          Four contracts remain under their original 2001 terms.  The  
          remaining contracts which have not been renegotiated, and their  
          forecasted costs, are:

               Coral Power - $2.3 billion
               Dynegy Power Marketing - $3 billion
               Pacificorp Power Marketing - $909 million
               Sempra Energy Resources - $6.6 billion






































                                       COMMENTS

          Authority to amend contracts is open-ended, could increase  
          overall costs.   This bill grants authority to DWR which is  
          broader than the stated need to renegotiate its existing  
          contracts to lower ratepayer costs and improve contract terms.

          First, the authority is granted "notwithstanding any other  
          provision of law."  This statement overrides, for example,  
          applicable provisions of AB 1X and the Public Utilities Act and  
          seems unnecessary to carry out the discreet purpose of the bill.  
            The author and the committee may wish to consider  whether this  
          statement should be removed.

          Second, the bill permits DWR to "renegotiate, novate, or  
          otherwise amend that contract to include any contractual term  
          (DWR) determines to be necessary, appropriate, or convenient to  
          further the purposes of (AB 1X)."  This would seem to permit DWR  
          to enter a completely new contract, as long as it had its origin  
          in an existing contract.  Contract terms could be shortened or  
          lengthened and costs could be reduced or increased, with the  
          result depending on DWR's discretion.   The author and the  
          committee may wish to consider  whether the clarification of  
          DWR's authority should be limited to its authority to  
          "renegotiate," or whether the broader authorities in the bill  
          are appropriate.

          Third, the bill permits DWR to "enter into arrangements that it  
          determines to be necessary, appropriate, or convenient to  
          implement this subdivision."  This appears duplicative of  
          authorities already contained in AB 1X.   The author and the  
          committee may wish to consider  whether this provision should be  
          removed.  

                                     PRIOR VOTES
           
          Assembly Floor                     (76-0)
          Assembly Utilities and Commerce Committee                       
          (10-0)

                                       POSITIONS
          
           Sponsor:
           
          Department of Water Resources

           Support:







           
          Southern California Edison (if amended)

           Oppose:
           
          None on file

          


          Lawrence Lingbloom 
          AB 2767 Analysis
          Hearing Date:  June 22, 2004