BILL ANALYSIS
SB 772
Page A
Date of Hearing: September 10, 2003
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Sarah Reyes, Chair
SB 772 (Bowen) - As Amended: September 9, 2003
SENATE VOTE : Senate vote not relevant.
SUBJECT : State Energy Resources Conservation and Development
Commission: reports: confidentiality and disclosure.
SUMMARY : Permits the California Public Utilities Commission
(PUC) to authorize, as part of a plan of reorganization, the
issuance of bonds secured by a dedicated rate component to
secure an electrical corporation's emergence from bankruptcy.
PUC may only authorize the issuance of bonds if the action will
benefit ratepayers through lower rates. Specifically, this
bill :
1)Permits PUC to issue energy recovery bonds secured by a
dedicated rate component as part of a plan of reorganization
for an electrical corporation that filed for bankruptcy prior
to December 31, 2002, so long as PUC finds that the
corporation's ratepayers will benefit from lower rates as a
result of the issuance of the bonds.
2)Establishes that the Legislature is not ratifying or endorsing
any particular outcome of the federal bankruptcy proceeding.
3)Permits PUC to authorize the issuance of energy recovery bonds
in the amount and manner that PUC determines provides the
maximum benefit to the corporation's ratepayers.
4)Provides that any PUC endorsed plan of reorganization shall
include the dismissal of all pending federal court litigation
brought by the electrical corporation against PUC or other
agency of the State of California for the violation of the
filed rate doctrine, for a taking of property, for impairment
of obligations of contract, or any related claims.
5)Allows the California Infrastructure and Economic Development
Bank to issue the energy recovery bonds if they are authorized
by PUC. This includes provisions to:
a) Assure that bonds will be repaid as nonbypassable rates;
SB 772
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b) State that the bonds do not constitute debt by the
state; and
c) Specify that the energy recovery bonds will not impact
or impair bonds issued by the Department of Water Resources
(DWR).
FISCAL EFFECT : Unknown.
COMMENTS : Beginning in the summer of 2000, wholesale
electricity rates began to skyrocket and exceeded the fixed
rates established under AB 1890. With wholesale costs exceeding
retail revenues, PG&E began loosing money and by January 2001,
they had run up debts of $13 billion. PG&E's credit rating was
downgraded to junk bond status. Finally on April 6, 2001, PG&E
filled for Chapter 11 bankruptcy protection in Federal Court.
On June 19, 2003, PG&E and staff from PUC agreed to a Proposed
Settlement Agreement (PSA) to the bankruptcy proceeding that
would allow PG&E to recover from bankruptcy. This agreement
with PUC staff must now be approved by the Commissioners.
The Regulatory Asset
The agreement includes a proposal to allow PG&E to finance part
of its debt by creating a "regulatory asset." A regulatory
asset is a paper asset that allows PG&E to show more equity on
its books without actually constructing any new facilities or
making new investments. The increased equity allows PG&E to
borrow more money than it otherwise could. This increase in
equity will increase PG&E's tax liabilities by $1.5 billion,
which are passed on to ratepayers.
The regulatory asset will be treated in rates the same way a
power plant would be - meaning PG&E will recover the cost of the
asset plus a guaranteed rate of return of no less than 11.22%.
This return will allow PG&E to repay its debt, but also adds to
PG&E's profits and shareholder returns.
Alternative Financing
This bill gives PUC the authority to consider an alternative
financing mechanism that may result in lower rates to PG&E
ratepayers without delaying PG&E's emergence from bankruptcy.
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The alternative financing mechanism is an energy recovery bond
that is backed by ratepayers through a dedicated rate component.
These bonds would be similar to rate reduction bonds that were
issued in 1997. Since the bonds would be backed by ratepayers,
they should not impact PG&E's credit ratings but can still be
used to pay PG&E debts. Additionally, bonds backed by a
dedicated rate component will likely be viewed as highly secure
bonds and can be sold at low interest rates.
Supporters of this bill believe that these bonds can be issued
at lower interest rates than PG&E can obtain. Additionally,
using energy recovery bonds will significantly reduce the tax
consequences and eliminate other costs associated with the
regulatory asset. This means that the bonds could be a cheaper
way to finance the same debt that is covered by the regulatory
asset.
Supporters also argue that this bill does not endanger the PSA
since this bill merely gives PUC the option of using an energy
recovery bond. If such a bond will endanger the settlement
agreement PUC will not approve the bond.
PG&E argues that, even though SB 772 only grants PUC the
authority to consider an energy recovery bond, it "would blow up
the settlement agreement."
The Settlement Proceeding at the PUC
Before the PSA can go into effect PUC Commissioners, and the
Board of Directors of both PG&E Corporation and PG&E Company
must approve it. As part of its process to approve the PSA, PUC
has opened a proceeding to take public testimony on the
agreement.<1> Initial comments from PG&E and many intervening
parties have already been filed with PUC and PG&E filed reply
comments on September 8, 2003. After several months of
testimony, PUC expects to vote on the matter on December 18,
2003.
TURN filed comments suggesting that the use of energy recovery
bonds could save the ratepayers over $2.8 billion compared to
the use of a regulatory asset. The Office of Ratepayer
Advocates (ORA) filed comments stating that the savings from the
use of similar bonds could be above $3.6 billion. In its reply,
PG&E stated that these proposals are flawed on several grounds.
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<1> I.02-04-026
SB 772
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First, several of PG&E's witnesses do not believe that TURN's
estimated savings are accurate and that actual savings could be
as low as $405 million. Second, they believe that the PSA is a
take it or leave it proposal and any attempt to modify the
proposal will mean PG&E walks away from the deal. This bill
does not accept the financial forecasts of TURN, ORA, or PG&E as
accurate statements, but instead leaves that determination to
PUC as part of its ongoing proceeding. If PUC finds that a
proposal to issue energy recovery bonds will not result in
ratepayer savings or will threaten an agreement that is
otherwise in the public interest it may not approve the issuance
of energy recovery bonds.
Finally, PG&E witnesses believe that energy recovery bonds will
only work if authorized by the Legislature. This bill is
modeled after other legislation that authorized similar bonds in
the past and is intended to directly address the concerns that
Legislative approval is needed to issue energy recovery bonds.
REGISTERED SUPPORT / OPPOSITION :
Support
California Farm Bureau
California Large Energy Consumers Association (CLECA)
California Manufactures and Technology Association (CMTA)
California Small Business Association (CSBA)
The Utility Reform Network (TURN) (Sponsor)
Opposition
Pacific Gas & Electric
Analysis Prepared by : Edward Randolph / U. & C. / (916)
319-2083