BILL ANALYSIS
SB 418
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Date of Hearing: August 23, 1999
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Roderick Wright, Chair
SB 418 (Polanco) - As Amended: August 19, 1999
SENATE VOTE : 26-8
SUBJECT : Electric restructuring: rate reduction bonds.
SUMMARY : Permits an electrical corporation to redeem or defease
a portion of outstanding rate reduction bonds in order to reduce
the charges utility customers would be required to pay over the
life of the bonds. Specifically, this bill :
1)Permits an electrical corporation that completed its
transition to a deregulated electric generation market prior
to July 15, 1999 to redeem or defease a portion of outstanding
rate reduction bonds.
2)Authorizes the electrical corporation to transfer governmental
securities to a trustee to set the repurchase price, as
prescribed.
3)Requires that the repurchase and extinguishment of transition
property will be credited in a specified manner against rate
reduction financing.
EXISTING LAW requires each electrical corporation to provide a
10% rate reduction to all small commercial and residential
customers until March 31, 2002, or until California Public
Utilities Commission (CPUC) authorized costs for utility
generation-related assets and obligations were fully recovered,
whichever came first.
Authorized each electrical corporation to finance the rate
reduction through rate reduction bonds to be repaid by utility
customers with Fixed Transition Amount (FTA) payments over a
ten-year period.
FISCAL EFFECT : Unknown.
COMMENTS :
1)On June 30, 1999, San Diego Gas & Electric completed its
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transition from a monopoly provider of service in a regulated
market to a fully competitive market by the early payment of
its competition transition charges (CTC) as a result of its
voluntary initiating the divestiture of its generation
facilities. By its figures, SDG&E reports that its early
completion nearly triples the benefits customers would have
received had the transition period continued for the full
4-1/4 years initially projected.
2)As part of the Legislature's electric restructuring efforts in
AB 1890 (Brulte), [Chapter 854, Statutes of 1996] electric
corporations were required to provide all residential and
small commercial customers a 10% rate reduction until March
31, 2002, or until commission authorized costs for utility
generation related assets and obligations were fully
recovered, whichever came first. AB 1890 also authorized the
electrical corporations to finance the rate reduction through
rate reduction bonds that would be repaid by utility
ratepayers with FTA payments over a ten-year period. SDG&E
obtained CPUC approval to issue $658 million in rate reduction
bonds (RRB) to support its rate reduction to its customers.
Because SDG&E completed the transition period early, a
significant amount of the bonds proceeds originally thought
necessary to finance the rate reduction are not needed. Under
the terms of SDG&E's financing order, CPUC ordered that they
are obligated to return any RRB proceeds not needed to provide
the 10% rate reduction for the 4 year period at their
authorized rate of return of 12.54 percent. Decision
97-09-057, Financing Order, Ordering Paragraph 19.
3)Since filing its end-of-rate freeze application, SDG&E has
been exploring ways to return the unneeded RRB proceeds to its
ratepayers. Some of the various means that have been
considered include modification of the interest rate, lump sum
payment, placement of the unneeded bonds in a trust and the
defeasance approach contained in this bill. Defeasance
relieves ratepayers of the responsibility to pay the amount
placed in trust. This approach involves placing the existing
funds on hand, approximately $439 million, or 80% of the
amount required to pay off the RRB, in the trust and
collecting the last 20% from customers to pay off the trustee.
SDG&E chose the defeasance approach because they believe that
customers receive the greatest benefit from that model. Due
to the termination of the rate freeze, SDG&E asserts that
under this model customers will experience an approximate $365
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million present value benefit as opposed to the $126 million
present value benefit they were projected to receive if the
rate freeze lasted until the statutory termination date.
4)The Utility Reform Network (TURN) opposes this bill because
they assert that to do anything other than comply with the
Financing Order (FO) would be harmful to ratepayers as under
the terms of that proposal, customers receive the greatest
benefit. Customers would have received approximately $440
million in present value benefit under the terms of the FO.
TURN asserts that SDG&E's decision to issue all the bonds at
once was a decision made at their own risk and they should be
required to refund the RRBs at their rate of return. SDG&E
acknowledges that proposed benefits to ratepayers under the FO
would have amounted to a figure greater than that proposed by
the defeasance model. They assert that because they are not
earning an amount equivalent to their rate of return for the
RRBs they should not be penalized and required to use
shareholder profits to make up the difference.
5)TURN believes that SDG&E has used the RRBs as excess cash to
support mergers and acquisitions. This bill would remove the
RRB from SDG&E's possession. The funds would instead be used
to purchase federal securities and placed it in a defeasance
account under the control of the bond trustee. The trustee
would then administer the defeasance account. Even though
SDG&E would not longer be able to use the RRB to increase its
overall new worth through this approach, TURN seeks full
compliance with the FO and wants SDG&E to meet the obligations
as if they were operating pursuant to the FO. SDG&E argues
that to force payment of interest higher than the RRBs are
accruing would be punitive, placing a considerable strain on
the company and is unfair to its shareholders.
REGISTERED SUPPORT / OPPOSITION :
Support
Sempra Energy (sponsor)
Opposition
TURN
SB 418
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Analysis Prepared by : Carolyn Veal-Hunter / U. & C. / (916)
319-2083