BILL ANALYSIS
SB 772
Page 1
Date of Hearing: February 2, 2004
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Sarah Reyes, Chair
SB 772 (Bowen) - As Amended: January 29, 2004
SENATE VOTE : Senate vote not relevant.
SUBJECT : Electricity: financing energy recovery.
SUMMARY : Permits the California Public Utilities Commission
(PUC) to authorize, the issuance of bonds secured by a dedicated
rate component to finance a portion of Pacific Gas & Electric's
(PG&E) bankruptcy related debts. PUC may only authorize the
issuance of bonds if the action will benefit ratepayers through
lower rates. Specifically, this bill :
1)Requires PG&E, no later than 120 days from enactment of this
bill, to apply to PUC to recover costs associated with the
regulatory asset approved as part of PG&E bankruptcy
settlement agreement, and authorizes PUC to approve recovery
of these cost through the issuance of bonds backed by a
property right in a non-bypassable charge on utility rates if
PUC finds such bonds will result in lower rates.
2)Provides that the recovery bond cost shall be financed from
all existing and future consumers in PG&E's service area as of
December 18, 2003, but shall not be imposed on new or
incremental load that is meet through direct transactions and
does not require the use of PG&E transmission or distribution
facilities (over the fence transactions) or departing load
that is already exempted from Department of Water Resources
Power Charges pursuant to PUC decisions (mainly customer owned
renewable generation). The obligation to pay bond financing
costs cannot be avoided by the formation of a local publicly
owned electrical utility.
3)States that any financing order issued under this bill shall
not constitute a debt or liability of the state, and does not
constitute a pledge of the full faith and credit of the state.
4)Requires that any payments, offsets or other credits that PG&E
receives from electric generators or energy suppliers shall be
credited to ratepayers.
SB 772
Page 2
5)Provides for an expedited judicial review process of PUC
decisions implementing the act.
6)States that the Legislature is not ratifying or endorsing any
particular outcome of the PG&E's federal bankruptcy
proceeding, but rather is authorizing a means by which the PUC
can reduce ratepayer costs.
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 (Brulte), Chapter 854, Statutes
of 1996. 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.
In June 2003, PG&E and staff from PUC agreed to a Proposed
Settlement Agreement to the bankruptcy proceeding that would
allow PG&E to recover from bankruptcy. PUC, after making
several changes from the original proposal, approved the
agreement in December 2003. Parties to the proceeding anticipate
the agreement will be approved by the Bankruptcy Court shortly.
Central to the agreement is a component that will allow PG&E to
refinance a large portion of existing debts by first creating a
"Regulatory Asset" against which PG&E can borrow more than $3
billion. The agreement then calls for the regulatory asset to
be quickly replace with revenue generated from recovery bonds
backed by utility ratepayers. While the bonds will be issued by
PG&E, the Legislature must give PUC the authority to approve the
bond financing. If the Legislature fails to approve the
recovery bonds the regulatory asset will remain in place for the
next nine years until it is paid off in full by ratepayers.
The 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. 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
SB 772
Page 3
return will give PG&E the financing it needs to repay its debt.
A regulatory asset will be subject to federal taxes and high
rates of return, it will be a very expensive way of financing
PG&E's debt. If the regulatory asset can be replaced with the
recovery bonds, the overall ratepayer cost of PG&E's bankruptcy
can be reduced by over $1 billion.
The Recovery Bonds
This bill gives PUC the authority to approve the recovery bonds
which are 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. Bonds backed by a dedicated
rate component will be viewed as highly secure bonds and can be
sold at low interest rates. Additionally, using the recovery
bonds will significantly reduce the tax consequences and
eliminate other costs associated with the regulatory asset.
This means that the bonds will be a more affordable way to
finance the same debt that is covered by the regulatory asset.
This savings in financing cost will be passed on to ratepayers
through lower rates.
Opponents to this measure are concerned that this bill would
require ratepayers located within PG&E's current service
territory to continue to pay the dedicated rate component even
if they become customers of another service provider. However,
this mechanism of creating a non-by-passable charge is
consistent with the requirements in similar bonds issued in the
past. According to the supporters of this measure, this
provision is absolutely necessary to assure the predictable
customer base that the bond rating companies will demand before
giving the bonds the highest investment ratings. Additionally,
the provision assures that there will be no cost shifting and
that customers that do no have an option of alternate service
will not be burdened with increased costs.
Impact on PG&E Bankruptcy Proceeding
This measure grants PUC authority to approve the issuance of
recovery bonds. While the settlement agreement between PG&E and
PUC calls for such bonds, this measure does not incorporate any
SB 772
Page 4
portion of the PUC approved settlement agreement. Instead this
measure should be view as a stand-alone action of Legislature.
The Legislature is neither directly nor impliedly ratifying the
overall actions of PUC relating to the PG&E bankruptcy
proceedings. Consequently, language in this measure that
explicitly states that the Legislature is not ratifying or
endorsing any particular outcome of the PG&E's federal
bankruptcy proceeding is unnecessary.
Failure to Approve Legislation
Despite the complexities of the financing involved in this
legislation and PG&E settlement agreement, the actions already
taken by PUC leave the Legislature with a simple choice.
Because the regulatory asset is already authorized and
legislation is needed to replace it with less expensive
financing, the Legislature can either approve the recovery bonds
and reduce rates for PG&E customers by close to $1 billion or
leave the regulatory asset in place with its resulting higher
rates.
REGISTERED SUPPORT / OPPOSITION :
Support
Pacific Gas and Electric Company
California Manufacturers and Technology Association
California Farm Bureau Federation
California Retailers Association
Western States Petroleum Association
Coalition of California Utilities Employees (CUE)
California Large Energy Consumers Association (CLECA)
Office of Ratepayer Advocates (ORA)
Building Owners and Managers Association of California
The Utility Reform Network (TURN)
Opposition
California Municipal Utilities Association
Analysis Prepared by : Edward Randolph / U. & C. / (916)
319-2083