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 SB 772 Page 2 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 SB 772 Page 3 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 SB 772 Page 4 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) SB 772 Page 5 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 Page 6 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