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  


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          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.