BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 772
                                                                  Page  1

          Date of Hearing:  March 31, 2004

                    ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
                                 Sarah Reyes, Chair
                     SB 772 (Bowen) - As Amended:  March 22, 2003

           SENATE VOTE  :  Senate votes 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 (DRC) 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's bankruptcy  
            settlement agreement, and authorizes PUC to approve recovery  
            of these costs 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 costs shall be financed from  
            all consumers in PG&E's service territory that received  
            electric distribution services from PG&E after January 1,  
            2000, but shall not be imposed on:

             a)   New or incremental load that is met through direct  
               transactions and the transaction does not require the use  
               of PG&E transmission or distribution facilities;

             b)   Departing load that is already exempted from Department  
               of Water Resources (DWR)  power procurement charges  
               pursuant to PUC decisions; and

             c)   Pumping, generation, and transmission facilities of DWR  
               if such facilities did not receive electric service from  
               PG&E before December 19, 2003, or does not receive electric  
               service from PG&E thereafter. 

          3)States that any financing order issued under this bill shall  
            not constitute a debt or liability of the state, and does not  








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            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.

          5)Provides for an expedited judicial review process of PUC  
            decisions implementing this act.

          6)States that the Legislature is not ratifying or endorsing any  
            particular outcome of PG&E's federal bankruptcy proceeding,  
            but rather is authorizing a means by which the PUC can reduce  
            ratepayer costs.

          7)States that this bill shall take effect immediately. 

           EXISTING LAW: 

           1)Provides for the issuance of rate reduction bonds by the  
            California Infrastructure and Economic Development Bank to  
            finance a 1997 10% rate reduction for residential and small  
            commercial consumers. 

          2)Provides that the Competitive Transitions Costs (CTC)  
            associated with deregulation under AB 1890, Chapter 854,  
            Statutes of 1996, shall be borne by all consumers in the  
            service territory in which the utility provided electricity  
            services, excepting new or incremental load of over the fence  
            transactions. Such costs cannot be avoided by the formation of  
            a local publicly owned electrical corporation, or by  
            annexation of any portion of an electrical corporation's  
            service area by an existing local publicly owned electric  
            utility. 

          3)Provides that it is the intent of the Legislature that each  
            retail end-use customer that has purchased power from an  
            electrical corporation after February 1, 2001, should bear a  
            fair share of the DWR's electricity purchase costs, as well as  
            electricity purchase contract obligations that are recoverable  
            from customers in commission approved rates. 

           FISCAL EFFECT  :  Unknown.

           COMMENTS  :  The committee initially heard and approved SB 772  
          with amendments on February 4, 2004.  This bill codifies and  








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          authorizes a portion of the settlement agreement between PG&E,  
          PUC and TURN to finance PG&E's exit from bankruptcy.   
          Specifically, SB 772 grants PUC the authority to issue recovery  
          bonds to finance a portion of PG&E's bankruptcy costs. The  
          recovery bonds will be used to replace a regulatory asset that  
          has already been authorized by the PUC to finance PG&E's debts.   
          The recovery bonds will be backed by ratepayers through a  
          dedicated rate component (DRC). 
           
           These bonds will be similar to rate reduction bonds that were  
          issued in 1997.  Since the bonds are 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. This means that the bonds will be a more  
          affordable way to finance the same debt that is currently  
          covered by a regulatory asset. Based on current interest rates,  
          financing PG&E's debt through a recovery bond will save  
          ratepayers close to $1 billion. 

          For more information on PG&E's bankruptcy agreement, the  
          regulatory asset, and the recovery bond refer to the January 30,  
          2004 analysis of SB 772.

           Previous Positions on SB 772
           
          During the February 4th hearing concerns were raised over  
          provisions in the bill specifying which ratepayers would bear  
          the cost responsibilities of the bonds in the future.   
          Specifically, the California Municipal Utility Districts, the  
          Merced Irrigation District, and the Turlock Irrigation District  
          were all concerned that the bill would require customers that  
          were either customers of PG&E prior to December 18, 2003, or are  
          located in new developments that were part of PG&E's service  
          territory prior to December 18th 2003, to be pay a portion of  
          the bond costs.  

          In committee, the opponents of SB 722 requested that all  
          customers of publicly owned utilities be exempted from the DRC,  
          regardless of whether or not the customer was previously a  
          customer of PG&E or is located in an area that was once part of  
          PG&E's service territory.

          Supporters of the bill argue that exempting these customers from  
          the DRC will undermine the rate savings that SB 722 tries to  








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          achieve and will shift additional costs onto PG&E ratepayers.  
          The supporters claim their bond counsels believe that any  
          exemption will introduce an element of risk that future customer  
          bases will decrease, leaving fewer people to pay off the bonds.  
          They believe that this risk could threaten the credit rating of  
          the bonds and result in increased costs for the remaining PG&E  
          ratepayers. 

           Green Field Exemptions
           
          While some of the opponents wish to completely exempt all  
          customers of a publicly owned utility from the DRC, even if the  
          customers were once customers of PG&E, the current debate over  
          customer exemptions centers on exempting green field annexation.  
           Green fields annexation involves the annexation by a publicly  
          owed utility of land within the PG&E service territory that is  
          undeveloped and contains no existing customers served by PG&E. 

           Past Legislative Action
           
          At the February 4, 2004,  hearing the committee agreed with some  
          of the concerns of the publicly owned utilities and passed the  
          bill with amendments to exempt load served by cities annexing  
          green fields.  The amendments left all other annexed land  
          subject to the DRC, including all annexations by municipal  
          utility districts and irrigation districts. The February 9,  
          2004, version of SB 772 reflects the committee action.

          However, amendment to SB 722 taken on March 22, 2004, takes the  
          bill one step further by exempting all green field development.   


          Additionally, the March 22, 2004 amendments address a concern  
          raised by DWR that the bill could be read to impose the DRC on  
          DWR facilities that have historically received power through  
          wholesale transactions and not from PG&E.

           Consistent with Existing Law? 
           
          Both sides argue that their position is consistent with existing  
          law and PUC actions.  However,  PUC's past actions relating to  
          allocation of other costs associated with the energy crisis do  
          not create a clear, consistent method for allocating the DRC. 

          In allocating the costs responsibility surcharge (CRS)  








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          associated with DWR's power procurement costs the PUC ruled that  
          green field annexations by existing publicly owned utilities is  
          exempt from the obligation to pay the CRS.  The PUC also ruled  
          that any green field annexation by a publicly owned utility  
          created after February 1, 2001, will be subject to the CRS.   
          This last portion of PUC's allocation of the CRS is now subject  
          to rehearing and could potentially change. 

          However, PUC has also ruled that the costs of the regulatory  
          asset, which the DRC will replace, is non-bypassable and will be  
          paid by all customers located within PG&E current service  
          territory. This includes any future customers in green fields  
          annexed by a publicly owned utility.  PUC also noted that the  
          allocation of the bankruptcy costs should be treated the same as  
          the CRS.  The PUC will allow the publicly owned utilities to  
          file for a change in the rate allocation consistent with the CRS  
          allocation once the rehearing for the CRS rate allocation is  
          completed. 
           
          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  
          portion of the PUC approved settlement agreement.  Instead this  
          measure should be viewed as a stand-alone action of the  
          Legislature. The Legislature is neither directly nor implicitly  
          ratifying the overall actions of PUC relating to the PG&E  
          bankruptcy proceedings. 
           
          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








                                                                 SB 772
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           California Large Energy Consumers Association
          California Manufacturers & Technology Association 

           Opposition

           California Municipal Utilities Association
          Northern California Power Agency (NCPA)
           
           


           Analysis Prepared by  :    Edward Randolph / U. & C. / (916)  
          319-2083