BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Kevin de León, Chair AB 650 (Nazarian) - Natural Gas Services Program. Amended: June 19, 2013 Policy Vote: GO 11-0 Urgency: No Mandate: No Hearing Date: July 1, 2013 Consultant: Mark McKenzie This bill does not meet the criteria for referral to the Suspense File. Bill Summary: AB 650 would require the Department of General Services (DGS) to operate the Natural Gas Services (NGS) Program and require all executive branch state agencies, except the Department of Water Resources, to use the program for the purchase of all non-core natural gas. Fiscal Impact: No new costs or savings are expected, as this bill codifies an existing procurement program operated by DGS. DGS indicates that the bill ensures continued annual savings of approximately $7.5 million for numerous state and local entities that participate in the program (General Fund, various special funds, local funds). These savings are primarily derived from bulk purchase opportunities, as well as consolidated bidding and contract administration through DGS. Background: DGS has operated the NGS program for 25 years under general statutory procurement and contracting authority that authorizes the department to contract with suppliers for the purchase of goods and services. Currently, 181 public agency customers contract with DGS for provision of non-core natural gas purchases (open market bulk, as opposed to core purchases directly through a utility). The estimated value of the natural gas purchased through the program in 2011-12 was $182 million. Nine executive agency departments, eight University of California (UC) campuses, and 21 California State University (CSU) campuses are among the public agency program participants, which accounts for about two-thirds of the total volume of purchases. The only executive agency that does not utilize the program is the Department of Water Resources (DWR). All NGS program revenues and expenses are processed through the DGS Service Revolving Fund. The NGS program operates like a cooperative, allowing DGS to AB 650 (Nazarian) Page 1 pool public agency resources to purchase large volumes in consolidated purchases of gas on behalf of its customers. This structure provides administrative efficiencies by pooling numerous contracts into a single procurement, as well as advantages related to economies of scale and mitigation of risk related to price volatility. The program is fully self-supporting; DGS recovers all administrative operating costs through fees charge to public agency customers. Proposed Law: AB 650 would require the director of DGS to operate the NGS program for public agency non-core purchases of natural gas. Specifically, this bill would: Define "natural gas" as natural gas, methane, biomethane, compressed natural gas, liquefied natural gas, and similar energy commodities, and related services such as gas storage, transportation, and forward purchases. Authorize DGS to buy, sell, exchange, transfer, or otherwise dispose of natural gas through the program and authorize DGS to recover acquisition and operational costs through fees charged to customers. Require executive branch agencies, except DWR, to use the NGS program for non-core purchases of natural gas and authorizes DGS to enter into interagency agreements with local government entities, nonprofit hospitals, and public education institutions for the acquisition of natural gas and related services. Authorize DGS to enter into gas purchase transactions for a term longer than five years. Authorizs DGS to hire and appoint employees, as specified, and requires the director, prior to hiring someone at a salary in excess of a salary approved by the Department of Human Resources, to submit the salary to the Department of Finance for submission to the Legislature consistent with the annual Budget Act. Establish the continuously appropriated Department of General Services Natural Gas Services Program Fund in the State Treasury for purposes of operating the NGS program, and prohibits the shifting of customer fee revenues from the fund. Staff Comments: This bill would ensure the continued operation of the NGS program within DGS by codifying activities undertaken up to this time under general procurement authority. While the bill would not result in any new costs or savings, it would AB 650 (Nazarian) Page 2 provide public agency customers with continued savings. DGS indicates that its existing customers experience annual savings of approximately $1.7 million from collective bulk purchases, $5.3 million from consolidated procurement bidding and contract administration, and $400,000 to $800,000 from purchases of intrastate pipeline capacity. Nine executive branch agencies currently utilize the program for non-core gas purchases, and the bill would not compel participation by state agencies that are not current participants. AB 650 establishes a continuously appropriated fund for the NGS program, which provides certainty for natural gas purchases and the operation of the program, but removes a level of legislative and budgetary oversight. Recommended Amendments: Staff recommends that the bill be amended to ensure budgetary oversight related to the administration of the program: Page 4, after line 21, insert: (i) The administrative costs of the department incurred in administering this section shall be provided in the annual Budget Act.