BILL ANALYSIS SB 772 Page 1 Date of Hearing: April 21, 2004 ASSEMBLY COMMITTEE ON APPROPRIATIONS Judy Chu, Chair SB 772 (Bowen) - As Amended: April 13, 2004 Policy Committee: UtilitiesVote:11-0 Urgency: Yes State Mandated Local Program: Yes Reimbursable: No SUMMARY This bill authorizes the issuance of bonds, secured by a dedicated rate component, to finance a portion of Pacific Gas and Electric's (PG&E's) bankruptcy settlement agreement. Specifically, this bill: 1)Requires PG&E, within 120 days of the bill's enactment, to apply to the Public Utilities Commission (PUC) to recover costs associated with the regulatory asset-approved as part of PG&E's bankruptcy settlement agreement-and authorizes the PUC to approve recovery of those costs through bonds backed by a non-bypassable charge on utility rates. 2)Establishes 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. 3)Requires the recovery bond costs to be repaid by existing and future consumers within PG&E's service area as it existed on December 19, 2003, except for: a) New or incremental load met through direct (over-the-fence) transactions not requiring PG&E transmission or distribution facilities. b) Departing load already exempted from Department of Water Resources power charges pursuant to previous PUC decisions (mainly customer-owned renewable generation). c) Pumping, generation, and transmission facilities of DWR SB 772 Page 2 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. d) Retail electric load continuously served by a local publicly-owned utility since January 1, 2000. e) Up to 50 megawatts of new load in PG&E's service territory that, after December 19, 2003, is annexed to a city that provides the same municipal services, including electric service, to that territory as the city provides throughout its jurisdiction. 4)Requires the commission to determine, consistent with a prior decision and rehearing regarding a portion of that decision, the extent to which bond recovery costs must be paid by new municipal utility load within the PG&E service territory. FISCAL EFFECT Absorbable costs to the PUC to review the request for recovery bond financing and to determine the allocation of bond repayment costs through the dedicated rate component. COMMENTS 1)Background . As a result of multi-billion debts accrued during the state's energy crisis, PG&E filled for Chapter 11 bankruptcy protection in April 2001. In December 2003, the PUC approved a proposed settlement agreement to allow PG&E to recover from bankruptcy, and this agreement was recently approved by the federal Bankruptcy Court. Regulatory Asset. A key component of the agreement allows PG&E to refinance a large portion of its existing debts by first creating a "regulatory asset." This is a paper asset that will allow PG&E to show more equity on its books without actually constructing any new facilities or making new investments. The increased equity will, in turn, allow PG&E to borrow more money than it otherwise could in order to repay its creditors. The regulatory asset will be treated through electricity rates in the same way as a power plant, thus PG&E will recover the cost of the asset plus a guaranteed rate of return of no less than 11.22 percent. Because the regulatory SB 772 Page 3 asset will be subject to federal taxes and high rates of return, it will be a relatively expensive way of eliminating PG&E's bankruptcy-related debt. 2)Purpose . This bill, which is sponsored by PG&E, the PUC, and The Utility Reform Network (TURN), gives the PUC the authority to approve the issuance of recovery bonds as a financing mechanism to replace the regulatory asset. (The recovery bonds are also part of the bankruptcy settlement agreement, but require legislative authorization.) These bonds will be backed by ratepayers through a dedicated rate component and thus their high degree of security should yield the lowest possible interest rates. In addition, the recovery bonds will significantly reduce the tax consequences and eliminate other costs associated with the regulatory asset. The sponsors estimate that issuance of the recovery bonds will reduce the ratepayer cost of PG&E's bankruptcy settlement by over $1 billion. 3)Opposition . Earlier versions of the bill were opposed by the municipal electric utilities (munies), including irrigation districts that provide electricity. Opponents have no issue with the recovery bond mechanism, but maintained that the bill's exemptions from responsibility for paying the dedicated rate component are too narrow. Principally, the munies believe that any "greenfield" development within current PG&E territory that is annexed to the munies should be exempt from paying the dedicated rate component. The munies argue that consumers in these new developments have never been, nor ever will be, PG&E customers, and thus should bear no responsibility for a PG&E bankruptcy-related charge. At the time this analysis was written, the committee had only received written opposition to the current version from the Northern California Power Agency. PG&E argued, on the other hand, that exempting customers in new developments from the dedicated rate component will give the munies a competitive advantage to "cherry pick" new developments in adjoining PG&E territory. The bill has a more narrow exemption for greenfields annexed from PG&E by those cities that would provide all municipal services, including electricity, to the annexed areas. 4)Recent Amendment . The most recent amendment, as adopted by the policy committee, requires the commission to determine SB 772 Page 4 whether new municipal utility load in general-whether through annexation of PG&E territory that is a greenfield or existing development-is subject to the recovery bond costs. The determination must be consistent with a prior commission decision related to this issue, part of which is subject to appeal. Specifically, in allocating the costs responsibility surcharge (CRS) associated with DWR's power procurement costs resulting from the energy crisis, the PUC ruled that greenfield annexations by existing publicly owned utilities are exempt from the obligation to pay the CRS. The PUC also ruled that any greenfield 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. Analysis Prepared by : Chuck Nicol / APPR. / (916) 319-2081