BILL ANALYSIS 1 1 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE DEBRA BOWEN, CHAIRWOMAN SB 418 - Polanco Hearing Date: September 9, 1999 S As Amended: September 7, 1999 FISCAL B 4 1 8 DESCRIPTION This bill provides the California Public Utilities Commission (CPUC) with the flexibility to alter a previous decision regarding the disposition of excess rate reduction bond proceeds for the San Diego Gas and Electric Company (SDG&E). KEY QUESTION Should the CPUC be given the flexibility to alter a prior decision regarding the disposition of excess rate reduction bond money by SDG&E? BACKGROUND As part of the recent electric industry restructuring, investor-owned electric utilities (i.e. SDG&E) were required to provide residential and small commercial customers with a 10% rate reduction until either March 31, 2002 or whenever the utilities' stranded costs have been recovered -- whichever comes first. The legislation authorized the electric utilities to finance the rate reduction through bonds that are repaid by the ratepayer beneficiaries over a ten-year period. SDG&E obtained CPUC approval to issue $658 million in rate reduction bonds. Those bonds are now being repaid by residential and small commercial customers via a separately-stated charge on their monthly bill, known as the Trust Transfer Amount. On June 30, 1999, SDG&E completed the collection of its stranded costs. Because of the early completion, $423 million of the rate reduction bonds aren't needed. Simply returning the unused bond money (i.e. prepaying the interest and principal, as in a home mortgage) is not an option because the bonds are non-callable. The CPUC's order approving the $658 million bond issuance obligated SDG&E to return any excess bond proceeds to ratepayers at its CPUC-authorized rate of return of 12.54%. Pursuant to the electric restructuring statutes (Public Utilities Code Section 841c), the CPUC's order is "irrevocable." This bill permits the CPUC to alter the terms of the order as it pertains to SDG&E so that customers receive a fair and reasonable credit. COMMENTS 1.This bill was referred to the committee pursuant to Rule 29.10. 2.This bill is sponsored by Sempra Energy, the corporate parent of SDG&E. Sempra believes the bill is necessary to give the CPUC the flexibility to alter its current decision on the terms for refunding the excess bond money. It argues that the 12.54% interest on the bonds is punative and unreasonable because they are unable to earn that rate of interest on the excess bond funds. SDG&E's ability to complete the collection of its stranded costs early was due to the unforseeable circumstance where a buyer was willing to purchase an SDG&E power plant at a huge premium. SDG&E, therefore, argues that it should not be penalized for this unforseeable, though fortunate, circumstance. 3.TURN and UCAN, representing San Diego ratepayers, oppose the bill, believing that "a deal is a deal." Before issuing its bonds, SDG&E knew that any excess bond proceeds would cost it 12.54%, yet it chose to issue those bonds anyway. To now come back and ask for that rate to be lowered is simply taking away money from ratepayers. TURN and UCAN further argue that SDG&E earned far more than 12.54% because it used the excess bond money to acquire energy assets in other states and countries. 4.The CPUC is currently considering whether to change the interest rate on the excess bond proceeds and in that proceeding, SDG&E has suggested that the interest rate be lowered to 9.5%. The CPUC is neutral on the bill, believing SB 418 provides it with the latitude to change the interest rate if it desires. 5.During the electric industry restructuring discussions, it was generally believed that SDG&E would take the full four-year transition period to collect its stranded costs. That the collection was complete two-and-a-half years early is a windfall to both the utility and its ratepayers. The ideal circumstance would be to use the bond proceeds to completely offset the future payments made by residential and small commercial customers on the bonds, but in any event, there must be a way to divvy up the spoils of this happy circumstance. Giving the CPUC the authority to alter its prior order would seem to be the best way to facilitate this. POSITIONS Support: Sempra Energy Oppose: TURN UCAN Randy Chinn SB 418 Analysis Hearing Date: September 9, 1999