BILL ANALYSIS Ó SB 224 Page 1 Date of Hearing: June 14, 2011 ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER PROTECTION Mary Hayashi, Chair SB 224 (Pavley) - As Amended: April 14, 2011 SENATE VOTE : 37-0 SUBJECT : Public contracts: Department of Water Resources. SUMMARY : Exempts Department of Water Resources (DWR) goods and services contracts from Department of General Services (DGS) approval if they are authorized to be entered into under the Water Code or if they are are federally or locally funded. EXISTING LAW : 1)Provides that state goods and services contracts are void until approved by DGS, and exempts specified contracts entered into by the following entities: a) The California State University, the California Community Colleges, or a department under the State Contract Act or the California State University Contract Law; b) The California Department of Transportation (CalTrans), including contracts funded by federal and local taxes; c) The Department of Personnel Administration; d) The Legislature; or, e) The State Compensation Insurance Fund. FISCAL EFFECT : Unknown COMMENTS : Purpose of this bill . According to the author's office, "Each year, DWR enters into hundreds of contracts, often valued in the millions. Despite having an extensive contracting operation staffed by dozens of experienced attorneys and contract specialists, DWR must still have many of its contracts reviewed SB 224 Page 2 and approved by DGS. This additional level of review delays the execution of contracts and adds unnecessary costs to each contract. SB 224 will provide DWR the same exception to DGS's contract review that has been given to CalTrans. In doing so, SB 224 will eliminate costly contract delays and unnecessary bureaucratic review." Background . DGS's Procurement Division is the central purchasing authority for all state departments and agencies. DGS also has the statutory authority to delegate its purchasing authority to departments that meet specific requirements. DWR has an information technology (IT) purchasing authority limit of $1 million, and a non-IT purchasing authority limit of 100,000, similar to Caltrans. There are only a few state agencies with higher purchasing authority limits. According to the State Contracting Manual, each state agency is responsible for making sure that its contracts comply with applicable legal requirements and is based on sound business practices. DGS provides the final approval if required by law. In some instances additional approvals may be needed, such as those from the Attorney General, State Personnel Board, State Fire Marshal, DGS/Office of Risk and Insurance Management, or other DGS offices. Contract approval by DGS serves to assist state agencies by ensuring effective compliance with applicable laws and policies, conserving the fiscal interests of the state and preventing improvident acts, and applying contract knowledge and legal expertise prior to final approval. Some specific types of contracts which would require DGS approval, regardless of dollar amount, include, but are not limited to contracts that: limit the contractor's liabilities or require the state to indemnify or hold the contractor harmless, require the state to assume liabilities beyond the state's control, provide for advance payment of services, create a contingent liability against the state, contain moving services, or contain hazardous activity. DGS reviews state procurement contracts, and charges state agencies a fee of 1.6% of the overall contract value. This bill would eliminate DGS review of DWR contracts, which annually amount to billions of dollars. DWR's powers, duties, responsibilities in relation to water and dams are authorized by the Water Code. This bill would eliminate DGS review of a broad range of DWR goods and services contracts that include, but are SB 224 Page 3 not limited to, maintenance, construction, energy, levee inspections, management of wildlife areas, legal services, and auditing services. In Fiscal Year 2009-10, the top 30 non-IT service contracts had a value between $2 million to $770 million. The proponents of this bill, the majority of which are water districts and agencies, contend that time delays in purchasing energy can result in increased prices due to the fluctuating prices of the energy market coupled with the high volume of energy that water districts and agencies purchase. In addition, any construction or maintenance to the State Water Project (SWP) is paid for by the users, or the water districts and agencies. Previous legislation has attempted to exempt DWR from state contracting requirements for energy purchases. SB 1506 (Margett) of 2006, would have waived provisions of state contracting requirements for DWR to buy and sell electricity and natural gas, and engage in other financial instruments for the operation of the SWP. This bill was held in the Assembly Water, Parks, and Wildlife Committee. The committee analysis for SB 1506 noted that during the 2001 energy crisis, DWR was granted authority to purchase energy for public utilities, including waivers from Government Code and Public Contract Code contracting provisions. Subsequent questions arose over DWR's contracting performance, and many of the energy contracts were renegotiated. Support . According to the Desert Water Agency and the Valley Ag Water Coalition, "SB 224 seeks to expedite the making of contracts in particular when timing is of critical importance for the procurement of goods and services. For example, the energy marketplace can be very volatile and energy rates can change rapidly. Delay in the approval of contracts by DGS can affect DWR's ability to procure electricity in a timely manner, thus driving up energy costs that ultimately result in increased water costs for business and consumers. This situation has had costly, multimillion dollar consequences for the SWP and the 29 state water contractors who pay all SWP-related expenses. "Furthermore, DGS charges the contracting department for DGS's time in the reviewing process of the contract. The DGS fee for contracts for last fiscal year was 1.6% of the value of the contract. Each year, DWR enters into hundreds of contracts, often valued in the millions of dollars. Despite having an SB 224 Page 4 extensive contracting operation staffed by dozens of experienced attorneys and contract specialists, DWR must still have many of its contracts reviewed and approved by DGS. Our clients believe that this additional level of review not only delays the execution of contracts, but it also adds unnecessary costs to each contract." Previous Legislation . AB 1383 (Fuller) of 2007, would have authorized DWR to enter into contracts and agreements for the purchase, sale, exchange, trading, financial hedging, commodities and energy brokerage services, information subscription, transmission, or interconnection of electric power or natural gas that would be exempt from the Government Code and Public Contract Code contracting provisions. This bill was held in the Assembly Utilities and Commerce Committee. SB 1506 (Margett) of 2006, would have waived provisions of state contracting requirements for DWR to buy and sell electricity and natural gas, and engage in other financial instruments for the operation of the SWP. This bill was held in the Assembly Water, Parks, and Wildlife Committee. REGISTERED SUPPORT / OPPOSITION : Support Alameda County Flood Control and Water Conservation District Zone 7 Alameda County Water District Association of California Water Agencies Burbank Water and Power California Municipal Utilities Association Calleguas Municipal Water District Castaic Lake Water Agency Central Coast Water Authority Cucamonga Valley Water District Desert Water Agency East Valley Water District Eastern Municipal Water District Glendale Water and Power Kern County Water Agency Las Virgenes Municipal Water District Metropolitan Water District of Southern California Mojave Water Agency Newhall County Water District SB 224 Page 5 Rancho California Water District San Bernardino Valley Municipal Water District Santa Clara Valley Water District Southern California Water Committee State Water Contractors Three Valleys Municipal Water District Tulare Lake Basin Water Storage District Upper San Gabriel Valley Municipal Water District Valley Ag Water Coalition Opposition None on file. Analysis Prepared by : Joanna Gin / B.,P. & C.P. / (916) 319-3301