BILL ANALYSIS 1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
SB 1973 - Perata Hearing
Date: April 25, 2000 S
As Amended: April 13, 2000 FISCAL B
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DESCRIPTION
Current law requires the California Public Utilities
Commission (CPUC) to ensure that rates for retail water
service provided by investor-owned water utilities are
"fair and reasonable."
Current law dictates what an organization can use to
determine what is "fair and reasonable" when it establishes
a rate for wheeling water from one part of California to
another.
This bill requires the CPUC to determine "fair
compensation" for the use of the unused capacity of a water
conveyance facility owned by a state, regional, or local
public agency upon the filing of a petition by a transferor
of water, as defined.
This bill provides the CPUC with the exclusive authority to
determine the amount of fair compensation.
BACKGROUND
Current law, passed in 1986, provides that an agency owning
a water conveyance facility (e.g. a canal, pipeline,
aqueducts, pump stations) with excess capacity can't deny
use of the facility to an entity who wishes to transfer
water through those facilities, a process known as
wheeling. The agency owning the water conveyance facility
must determine in a timely manner the amount and
availability of unused capacity, as well as the terms,
conditions, and amount of "fair compensation" that the
wheeling parties have to provide for its use. The agency
must "act in a reasonable manner consistent with the
requirements of law to facilitate the voluntary sale,
lease, or exchange of water ? ." (California Water Code
Sections 1810 - 1814)
This bill allows a wheeling party to ask the CPUC, instead
of the state, regional, or local public agency that owns a
water conveyance facility, to set a wheeling rate on a
transfer-by-transfer basis. The belief is that by having a
presumably neutral third party (the CPUC) establish the
wheeling rates, that the rates are more apt to be fairer
(and/or lower), which will facilitate more water transfers.
Water transfers are increasingly seen as an important tool
in helping the state meet its water needs. The Legislative
Analyst, in a September 1999 report, considered the role of
water transfers in meeting California's water needs and
laid out six problems with California's water transfer laws
and practices, then made several recommendations to change
the law if the state wanted to facilitate and encourage a
greater reliance on water transfers.
Among those recommendations was to clarify the meaning of
"fair compensation." According to the Analyst, some water
transfers have been held up over disputes as to the
definition of "fair compensation" for the use of the
conveyance facilities. This refers in part to a January
12, 1998, action by the Superior Court of the County of Los
Angeles in which the Metropolitan Water District of
Southern California (MWD) asked the Court to validate its
proposed wheeling rates. The Court declined to validate
those rates, concluding that:
"Under the wheeling statutes, 'fair compensation'
is limited to costs attributable to the actual
facilities to be used in a particular proposed
water transfer, and the 'fair compensation'
determination cannot be made ahead of time and
without reference to a particular proposed
transaction. (MWD's) inclusion of system-wide
costs and its setting of rates before receiving a
request for use of its facilities, are
incompatible with the wheeling statutes."
(California Superior Court, County of Los
Angeles, No. BC164076, p. 15)
MWD has appealed this decision.
KEY QUESTIONS
1.Should a bona fide transferor have the ability to ask the
CPUC, instead of the state, regional, or local agency
that owns a water conveyance facility, to determine the
amount of "fair compensation" and set a wheeling rate?
2.Instead of allowing the CPUC to set the initial wheeling
rate, would it be more appropriate to set the CPUC up as
an appellate body, where a bona fide water transferor
could appeal a wheeling rate set by a state, regional, or
local agency?
3.Is the CPUC the appropriate body to make determinations
of what is "fair compensation?"
4.How will this bill effect water rates, both for the
parties involved in a particular water transfer and the
parties that rely on a particular water conveyance
facility to provide them with water on a ongoing basis?
COMMENTS
1) Fair Is Fair . The central issue in this bill is whether
the agencies which own water conveyance facilities (e.g.
MWD) are or will in the future fairly execute state law
which encourages water transfers and gives them the sole
authority to determine the amount of "fair compensation"
that should be associated with each transfer.
Under the current system, there's an inherent conflict of
interest between the agency's role as the exclusive water
provider for a specific geographic area and its role of
pricing the use of its water facilities for use by
competitors who don't want to buy water from the agency
but merely want to wheel water through the agency's
system.
More generally, the legitimate parochial interests of the
agency (such as keeping water rates low for its paying
customers) may well conflict with the broader statewide
public interest (such as promoting water transfers).
The approach this bill takes is to enlist a third party,
the CPUC, which has the expertise, public process, and
broad public interest perspective, to determine what is
and isn't "fair compensation" in the context of Water
Code 1811(c):
"'Fair compensation' means the reasonable charges
incurred by the owner of the conveyance system,
including capital, operation, maintenance, and
replacement costs, increased costs from any
necessitated purchase of supplemental power, and
including reasonable credit for any offsetting
benefits for the use of the conveyance system."
2) Keep It Local .
Opponents generally argue that local elected officials,
or in the case of MWD, appointed boards representing
local elected officials, are in the best position to set
wheeling rates because they're democratically-chosen to
represent the interests of the entities that have paid
for the facilities.
While that's true to a certain extent, it's also the
source of the conflict of interest. The local governing
boards naturally respond to local interests - but water
transfers are a state interest and may in fact run
counter to perceived local interests, particularly if the
purchaser of the water would otherwise purchase the water
from the local water district.
3) Losing A Customer Or A Prospective Customer ? By
definition, water transfers can only occur where there is
unused capacity in a conveyance facility. Because the
embedded costs of the agency's facilities are already
recovered from its existing customers, it's difficult to
see how use of the facilities for water transfers would
hurt current customers or impair the agency's ability to
recover its costs. In fact, if the water wheeling rate
included all incremental costs and some contribution to
fixed costs, it could be argued that existing customers
would be better off if water is wheeled through that
unused capacity because their costs would drop.
On the flip side, it could be argued that if the water
transfers didn't exist, the recipient of such a transfer
would have no option but to purchase water from the
agency that now does the wheeling and would have pay all
of the costs associated with such a water purchase, not
just the "fair compensation" costs. Therefore, as long
as water transfers are permitted and unused capacity
exists, the owners of existing water conveyance
facilities will have difficulty "growing" their customer
base and any move to drive down water transfer rates will
simply turn prospective customers into non-customers.
4) Should The CPUC Set The Rate Or Review The Rate ? The
bill allows any water transferor to petition the CPUC for
a determination of fair compensation, but it doesn't
require the transferor to attempt to establish a fair
rate with the owner of the water conveyance facility.
The author and Committee may wish to consider whether it
would be more appropriate to instead require the water
conveyance facility owner to establish the rate first and
have the CPUC act as an appellate body. Having the CPUC
as an appellate "hammer" may facilitate a negotiated
agreement between the facility owner and the transferor,
as the parties may want to avoid the cost and delay (see
below) of working through the CPUC's process.
5) Why The CPUC ? Because of its experience with water
utilities, the CPUC is technically capable of performing
the activities specified in the bill, which are
essentially of a cost-accounting nature. The CPUC also
has established public processes for executing its
duties, as well as an established process for appeal.
However, the CPUC process has never been described as
speedy, which may jeopardize some types of water
transfers. The CPUC may not be the perfect agency to
perform this work, but there may not be any "perfect"
agency to perform the functions called for in this bill.
6) How "Immediate" Is "Immediate" ? Page 3, Line 24 of the
bill directs the CPUC to "immediately" commence hearings
once a petition is filed by a water transferor. This
would give this type of proceeding precedence over all
other CPUC proceedings, including the electric, natural
gas, and telecommunications cases that traditionally come
before it. The author and Committee may wish to consider
whether this priority handling is appropriate and whether
it may be more appropriate to establish a time frame in
which petitions must be acted upon and resolved.
7) Other Entities ? Page 3, Line 12 of the bill permits the
CPUC to establish fair compensation only for state,
regional, or local public agencies owning water
conveyance facilities. Should this provision be expanded
to apply to any entity owning water conveyance facilities
or does this description cover all of the entities that
can own such facilities?
8) Double Referral . Should this bill be approved by this
Committee, the Senate Rules Committee has double-referred
the measure to the Senate Agriculture and Water Resources
Committee.
POSITIONS
SPONSOR:
Western Water Company
SUPPORT:
California Water Association
San Diego County Water Authority
OPPOSE:
Association of California Water Agencies
California Farm Bureau Federation
California Municipal Utilities Association
Central Basin Municipal Water District
City of Long Beach Board of Water Commissioners
City of San Bernardino Municipal Water Department
City of Torrance
Contra Costa Water District
Eastern Municipal Water District
Independent Cities Association
Inland Empire Utilities Agency
Las Virgenes Municipal Water District
Long Beach Water Department
Metropolitan Water District of Southern California
Municipal Water District of Orange County
Regional Council of Rural Counties
Roseville Electric
Santa Clara Valley Water District
West Basin Municipal Water District
Western Growers Association
Randy Chinn
SB 1973 Analysis
Hearing Date: April 25, 2000