BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 850
                                                                  Page  1

          Date of Hearing:   April 29, 2013

                      ASSEMBLY COMMITTEE ON BANKING AND FINANCE
                               Roger Dickinson, Chair
                   AB 850 (Nazarian) - As Amended:  April 15, 2013
           
          SUBJECT  :   Public capital facilities: water quality.  

           SUMMARY  :  Authorizes a joint powers authority (JPA) to issue  
          rate reduction bonds for local publicly-owned water utilities to  
          finance projects necessary to comply with water quality, water  
          conservation or water reclamation mandates.  Specifically,  this  
          bill  :  

          1)Authorizes a JPA to finance utility projects through the  
            issuance of rate reduction bonds, and to impose and adjust  
            utility project charges in connection with the financing  
            pursuant to the provisions of this bill.

          2)Allows a local agency that owns and operates a publicly owned  
            utility (POU) that provides water service to apply to a JPA to  
            finance costs of a utility project for the POU with the  
            proceeds of rate reduction bonds.  In its application to a JPA  
            for the financing, the local agency shall specify the utility  
            project to be financed, the maximum principal amount, the  
            maximum interest rate, and the maximum stated terms of the  
            rate reduction bonds.

          3)Prohibits a local agency from applying to a JPA for financing  
            of a utility project pursuant to this bill unless the  
            legislative body of the local agency has determined all of the  
            following:

             a)   The project to be financed is a utility project;

             b)   The local agency is electing to finance costs of the  
               utility project pursuant to this bill and the financing  
               costs associated with the financing are to be paid from  
               utility project property, as defined, including the utility  
               project charge for the rate reduction bonds issued for the  
               utility project in accordance with this bill; and,

             c)   Based on information available to, and projections used  
               by, the legislative body, the financing is expected to  
               result in lower rates to the customers of the local  








                                                                  AB 850
                                                                  Page  2

               agency's POU compared with financing the utility project  
               through bonds payable from revenues of the POU.

          4)Provides, subject to the requirements of Article XIII D of the  
            California Constitution, that a JPA financing the costs of a  
            utility project or projects for a local agency's POU with rate  
            reduction bonds is authorized and directed to impose and  
            collect a utility project charge with respect to the rate  
            reduction bonds as provided in this bill.  The imposition of  
            the utility project charge shall be made and evidenced by the  
            adoption of a financing resolution by the governing body of  
            the JPA.  

          5)Requires the financing resolution described above to include a  
            number of components, including a separate charge to the bill  
            of each customer, as specified; a description of the financial  
            calculation, formula, or other method that the JPA is to use  
            to determine the utility project charge, which includes a  
            periodic adjustment method to be applied at least annually to  
            correct for any overcollection or undercollection of financing  
            costs or to make any other adjustment necessary to ensure  
            timely payment of the financing costs of the rate reduction  
            bonds, as specified; and, a requirement that the JPA enter  
            into a servicing agreement with the local agency for the  
            collection of the utility project charge, as specified.

          6)Requires the financial calculation, formula, or other method,  
            including the periodic adjustment method, established in the  
            financing resolution, and the allocation of utility project  
            charges to, and among, water distribution customers to be  
            decided solely by the governing body of the JPA and requires  
            it to be final and conclusive.  

          7)Prohibits the periodic adjustment method from being applied  
            less frequently than required by the financing resolution and  
            the documents relating to the applicable rate reduction bonds.  
             Once the financial calculation, formula, or other method for  
            determining the utility project charge, and the periodic  
            adjustment method, have been established in the financing  
            resolution and have become final and conclusive, they shall  
            not be changed.

          8)Provides that moneys collected by the local agency or its POU,  
            acting as a servicing agent on behalf of the JPA, as a utility  
            project charge shall be held in trust for the exclusive  








                                                                  AB 850
                                                                  Page  3

            benefit of the persons entitled to the financing costs to be  
            paid, directly or indirectly, from the utility project charge  
            and shall not lose their character as revenues of the JPA by  
            virtue of possession by the local agency or its POU.  The  
            local agency or its POU shall provide the JPA with the  
            information as to estimated sales of water and any other  
            information concerning the POU required by the JPA in  
            connection with the initial establishment and the adjustment  
            of the utility project charge.

          9)Provides that the determination of the legislative body of the  
            local agency that a project to be financed with rate reduction  
            bonds is a utility project shall be final and conclusive and  
            the rate reduction bonds issued to finance the utility project  
            and the utility project charge shall be valid and enforceable  
            in accordance with the terms of the financing resolution and  
            the documents relating to the rate reduction bonds. 

          10)Provides that the JPA shall require, in its financing  
            resolution with respect to a utility project charge, that as  
            long as a customer obligated to pay the utility project charge  
            obtains water distribution service from the applicable POU,  
            the customer shall pay the utility project charge regardless  
            of whether or not the customer obtains water or water services  
            other than water distribution service from a person or entity  
            other than the POU. 

          11)Provides that the utility project charge shall be a  
            nonbypassable charge to all water distribution customers of  
            the POU in the class or classes of customers specified in the  
            financing resolution that are receiving water distribution  
            service from the POU at the time of adoption of the financing  
            resolution and all future water distribution customers in that  
            class or classes.  If a customer of the POU that is subject to  
            a utility project charge ceases taking water or water services  
            other than water distribution service from the POU, the  
            customer shall remain liable for the payment of its share of  
            the utility project charge as if it had not ceased taking the  
            water or water service from the POU.  The liability may be  
            discharged by the continued payment of its share of the  
            utility project charge as it accrues or by a one-time payment,  
            as determined by the JPA.  

          12)Provides that all provisions of a financing resolution  
            adopted pursuant to this bill shall be binding on the JPA.








                                                                  AB 850
                                                                  Page  4

          13)Requires the timely and complete payment of all utility  
            project charges by a person liable for the charges to be a  
            condition of receiving water service from the POU of the local  
            agency and provides that the local agency and its POU are  
            authorized to use established collection policies and all  
            rights and remedies provided by law to enforce payment and  
            collection of the utility project charge.  In no event shall a  
            person liable for a utility project charge be entitled or  
            authorized to withhold payment, in whole or in part, of the  
            utility project charge for any reason.

          14)Requires the JPA to determine whether adjustments to the  
            utility project charge are required upon the issuance of the  
            rate reduction bonds and at least annually, and at additional  
            intervals as may be provided for in the financing resolution  
            or the documents relating to the rate reduction bonds, as  
            specified.

          15)Requires all revenues with respect to utility project  
            property related to rate reduction bonds, including payments  
            of the utility project charge, to be applied first to the  
            payment of the financing costs of the related rate reduction  
            bonds then due, including the funding of reserves for the rate  
            reduction bonds, with any excess being applied as determined  
            by the JPA for the benefit of the utility for which the rate  
            reduction bonds were issued.

          16)Requires the JPA to be obligated to impose and collect the  
            utility project charge in amounts, based on estimates of water  
            usage subject to the utility project charge, sufficient to pay  
            on a timely basis the financing costs associated with the rate  
            reduction bonds when due.  

          17)Provides that the pledge of a utility project charge to  
            secure the payment of rate reduction bonds shall be  
            irrevocable, and the State of California, the JPA, or any  
            limited liability company (LLC) acting pursuant to 38),  
            (below), shall not reduce, impair, or otherwise adjust the  
            utility project charge, except that the JPA shall implement  
            the periodic adjustments to the utility project charge  
            relating to rate reduction bonds as required by the applicable  
            financing resolution and the documents relating to the rate  
            reduction bonds.  Revenue from a utility project charge shall  
            be deemed special revenue of the JPA and shall not constitute  
            revenue 








                                                                  AB 850
                                                                  Page  5

          of the local agency or its POU for any purpose, as specified.

          18)Provides that a utility project charge shall constitute a  
            utility project property when, and to the extent that, a  
            financing resolution authorizing the utility project charge  
            has become effective in accordance with its terms, and the  
            utility project property shall thereafter continuously exist  
            as property for all purposes with all of the rights and  
            privileges of this bill for the period, and to the extent,  
            provided in the financing resolution, but in any event until  
            all financing costs with respect to the related rate reduction  
            bonds are paid in full, including all arrearages.

          19)Provides that utility project property shall constitute a  
            current property right notwithstanding that the value of the  
            property right will depend on consumers using water or, in  
            those instances where consumers are customers of the POU, the  
            POU performing certain services.

          20)Provides that, in the event a local agency for which rate  
            reduction bonds have been issued and remain outstanding ceases  
            to provide water distribution services, either directly or  
            through its POU, references in this bill to the local agency  
            or to its POU shall be to the entity providing water  
            distribution service in lieu of the local agency and the  
            entity shall assume and perform all obligations of the local  
            agency and its POU required by this bill and the servicing  
            agreement with the local agency while the rate reduction bonds  
            remain outstanding.

          21)Requires rate reduction bonds to be within the parameters of  
            the financing set forth by the local agency pursuant to this  
            bill in connection with the rate reduction bonds and requires  
            the proceeds of the rate reduction bonds made available to the  
            local agency or its POU to be utilized for the utility project  
            identified in the application for financing of the utility  
            project or projects, as specified.

          22)Requires a JPA to authorize the issuance of rate reduction  
            bonds by a resolution of its governing body.  Rate reduction  
            bonds shall be nonrecourse to the credit or any assets of the  
            local agency and the POU for which the utility project is  
            financed and shall be payable from, and secured by a pledge  
            of, the utility project property relating to the rate  
            reduction bonds and any additional security or credit  








                                                                  AB 850
                                                                  Page  6

            enhancement specified in the documents relating to the rate  
            reduction bonds.

          23)Requires a JPA issuing rate reduction bonds to pledge the  
            utility project property relating to the rate reduction bonds  
            as security for the payment of the rate reduction bonds, as  
            specified.  All rights of a JPA with respect to utility  
            project property pledged as security for the payment of rate  
            reduction bonds shall be for the benefit of, and enforceable  
            by, the beneficiaries of the pledge to the extent provided in  
            the documents relating to the rate reduction bonds.

          24)Provides, to the extent that any interest in utility project  
            property is pledged as security for the payment of rate  
            reduction bonds, that the applicable local agency or its POU  
            shall contract with the JPA, which contract shall be part of  
            the utility project property, that the local agency or its POU  
            will continue to operate its publicly owned utility system  
            that includes the financed utility project to provide service  
            to its customers, will, as servicer, collect amounts in  
            respect of the utility project charge for the benefit and  
            account of the JPA and the beneficiaries of the pledge of the  
            utility project charge and will account for and remit these  
            amounts to, or for the account of, the JPA.

          25)Provides that a financing resolution, any other resolution of  
            the JPA, or the provisions of the documents relating to rate  
            reduction bonds to the effect that the JPA shall take action  
            with respect to the utility project property relating to the  
            rate reduction bonds shall be binding upon the JPA, as its  
            governing body may be constituted from time to time, and the  
            JPA shall have no power or right to rescind, alter, or amend  
            any resolution or document containing the requirement.

          26)Provides, except as otherwise provided in this bill, that the  
            recovery of the financing costs for the rate reduction bonds  
            from the utility project charge shall be irrevocable and the  
            JPA shall not have the power either by rescinding, altering,  
            or amending the applicable financing resolution or otherwise,  
            to revalue or revise for ratemaking purposes the financing  
            costs of rate reduction bonds, determine that the financing  
            costs for the related rate reduction bonds or the utility  
            project charge is unjust or unreasonable, or in any way reduce  
            or impair the value of utility project property that includes  
            the utility project charge, either directly or indirectly; nor  








                                                                  AB 850
                                                                  Page  7

            shall the amount of revenues arising with respect to the  
            financing costs for the related rate reduction bonds or the  
            utility project charge be subject to reduction, impairment,  
            postponement, or termination for any reason until all  
            financing costs to be paid from the utility project charge are  
            fully met and discharged. 
          27)Provides, except as otherwise provided in this bill, that the  
            State of California does hereby pledge and agree with the  
            owners of rate reduction bonds that the State of California  
            shall neither limit nor alter the financing costs or the  
            utility project property, including the utility project  
            charge, relating to the rate reduction bonds, or any rights  
            in, to or under, the utility project property until all  
            financing costs with respect to the rate reduction bonds are  
            fully met and discharged.  This provision does not preclude  
            limitation or alteration if and when adequate provision shall  
            be made by law for the protection of the owners.  

          28)Authorizes the JPA to include the pledge described above and  
            undertaking by the State of California in the governing  
            documents for rate reduction bonds, and requires the JPA to  
            make the adjustments to the utility project charge relating to  
            rate reduction bonds provided by this bill and the documents  
            related to those rate reduction bonds as may be necessary to  
            ensure timely payment of all financing costs with respect to  
            the rate reduction bonds.  The adjustments shall not impose  
            the utility project charge upon classes of customers which  
            were not subject to the utility project charge pursuant to the  
            financing resolution imposing the utility project charge.

          29)Provides that financing costs in connection with rate  
            reduction bonds do not constitute a debt or liability of the  
            State of California or of any political subdivision thereof,  
            other than the special obligation of the JPA, and do not  
            constitute a pledge of the full faith and credit of the State  
            of California or any of its political subdivisions, including  
            the JPA, but are payable solely from the funds provided for  
            under this bill and in the documents relating to the rate  
            reduction bonds.  This provision in no way precludes  
            guarantees or credit enhancements in connection with rate  
            reduction bonds.  

          30)Requires all the rate reduction bonds to contain on their  
            face a statement to the following effect:  Neither the full  
            faith and credit nor the taxing power of the State of  








                                                                  AB 850
                                                                  Page  8

            California or any political subdivision thereof is pledged to  
            the payment of the principal of, or interest on, this bond.

          31)Provides that the issuance of rate reduction bonds shall not  
            directly, indirectly, or contingently obligate the State of  
            California or any political subdivision thereof to levy or to  
            pledge any form of taxation to pay the rate reduction bonds or  
            to make any appropriation for their payment.

          32)Provides that utility project property shall constitute  
            property for all purposes, including for contracts securing  
            rate reduction bonds, whether or not the revenues and proceeds  
            arising with respect thereto have accrued.

          33)Provides, subject to the terms of the pledge document with  
            respect to a pledge of utility project property, that the  
            validity and relative priority of a pledge created or  
            authorized under this bill is not defeated or adversely  
            affected by the commingling of revenues arising with respect  
            to the utility project property with other funds of the local  
            agency or the POU collecting a utility project charge on  
            behalf of a JPA.

          34)Creates a statutory lien on the utility project property  
            relating to rate reduction bonds.  Upon the effective date of  
            the financing resolution relating to rate reduction bonds,  
            there shall exist a first priority statutory lien on all  
            utility project property, then existing or, thereafter  
            arising, to secure the payment of the rate reduction bonds.   
            This lien shall arise pursuant to law by operation of this  
            bill automatically without any action on the part of the JPA,  
            the local agency or its POU, or any other person.  This lien  
            shall secure the payment of all financing costs, then existing  
            or subsequently arising, to the holders of the rate reduction  
            bonds, the trustee or representative for the holders of the  
            rate reduction bonds, and any other entity specified in the  
            financing resolution or the documents relating to the rate  
            reduction bonds.  This lien shall attach to the utility  
            project property regardless of who shall own, or shall  
            subsequently be determined to own, the utility project  
            property including any local agency or its POU, the JPA, or  
            any other person.  This lien shall be valid and enforceable  
            against the owner of the utility project property and all  
            third parties upon the effectiveness of the financing  
            resolution without any further public notice.








                                                                  AB 850
                                                                  Page  9


          35)Provides that the statutory lien on utility project property  
            created by this bill is a continuously perfected lien on all  
            revenues and proceeds arising with respect thereto, whether or  
            not the revenues or proceeds have accrued.  Utility project  
            property shall constitute property for all purposes, including  
            for contracts securing rate reduction bonds, whether or not  
            the revenues or proceeds arising with respect thereto have  
            accrued.

          36)Allows the JPA to require, in a financing resolution creating  
            utility project property, that, in the event of default by the  
            local agency or its POU, in payment of revenues arising with  
            respect to the utility project property, the JPA, upon the  
            application by the beneficiaries of the statutory lien, and  
            without limiting any other remedies available to the  
            beneficiaries by reason of the default, shall order the  
            sequestration and payment to the beneficiaries of revenues  
            arising with respect to the utility project property.

          37)Provides that a JPA that has financed a utility project  
            through the issuance of rate reduction bonds is not  
            authorized, and no governmental officer or organization shall  
            be empowered to authorize the JPA, to become a debtor in a  
            case under the United States Bankruptcy Code or to become the  
            subject of any similar case or proceeding under any other law,  
            whether federal or State of California, as long as any payment  
            obligation from utility project property remains with respect  
            to the rate reduction bonds.

          38)Provides that a JPA may elect to effect a financing of a  
            utility project pursuant to this bill through a single member  
            LLC formed by the JPA, as specified.

          39)Provides that this bill and all grants of power and authority  
            in it shall be liberally construed to effectuate their  
            purposes, and all incidental powers necessary to carry into  
            effect the provisions of this bill are expressly granted to,  
            and conferred upon, public entities.

          40)Provides that the provisions of this bill are severable.  If  
            any provision of this bill or its application is held invalid,  
            that invalidity shall not affect other provisions or  
            applications that can be given effect without the invalid  
            provision or application.

           






                                                                  AB 850
                                                                  Page  10


          41)Makes conforming changes to the Joint Exercise of Powers Act  
            (Act).

          42)Provides the following terms and definitions:

             a)   "Authority" includes any successor to the powers and  
               functions of that entity.

             b)   "Conservation or reclamation purposes" means a utility  
               project designed to reduce the amount of potable water to  
               be supplied by a POU or reduce the amount of water imported  
               by the POU, including without limitation, storm water  
               capture and treatment, water recycling, development of  
               local groundwater resources, groundwater recharging, and  
               water reclamation.

             c)   "Financing costs" means any of the following:

               i)     Interest and redemption premiums that are payable on  
                 rate reduction bonds;

               ii)    The cost of retiring the principal of rate reduction  
                 bonds, whether at maturity, including acceleration of  
                 maturity upon an event of default, or upon redemption,  
                 including sinking fund redemption;

               iii)   A cost related to issuing or servicing rate  
                 reduction bonds, including, but not limited to, servicing  
                 fees, trustee fees, legal fees, administrative fees, bond  
                 counsel fees, bond placement or underwriting fees,  
                 remarketing fees, broker dealer fees, independent manager  
                 fees, payment under an interest rate swap agreement,  
                 financial advisor fees, accounting report fees,  
                 engineering report fees, and rating agency fees;

               iv)    A payment or expense associated with a bond  
                 insurance policy, financial guaranty or a contract,  
                 agreement, or other credit enhancement for rate reduction  
                 bonds or a contract, agreement, or other financial  
                 agreement entered into in connection with rate reduction  
                 bonds; or,

               v)     The funding of one or more reserve accounts related  
                 to rate reduction bonds.








                                                                  AB 850
                                                                  Page  11


             d)   "Financing resolution" means a resolution adopted by the  
               governing body of a JPA financing a utility project with  
               rate reduction bonds that establishes and imposes a utility  
               project charge in connection with the rate reduction bonds  
               in accordance with the provisions of this bill.  A  
               financing resolution may be separate from a resolution  
               authorizing the issuance of the rate reduction bonds.

             e)   "Mandate" means a requirement, imposed by a mandating  
               entity by any means, including without limitation, a  
               statute, rule, regulation, an administrative or judicial  
               order, a building, operating, or licensing requirement or  
               condition, or an agreement with, or license or permit from,  
               the mandating entity, on a facility of a POU or a facility  
               operated in whole or in part for the benefit of a POU, or  
               on the operations of the POU, or on the water pumped,  
               acquired, or supplied by the POU.

             f)   "Mandating entity" means the United States (US); a state  
               of the US; an agency, department, commission, or other  
               subdivision of the US or a state of the US; a court of the  
               US or a state of the US; or any other body or organization,  
               that has jurisdiction over the operations of a POU, the  
               facility of a POU, or a facility operated in whole or in  
               part for the benefit of a POU, or the water pumped,  
               acquired or sold by a POU.  "Mandating entity" does not  
               include a local agency that owns the POU.

             g)   "Publicly owned utility" means a utility furnishing  
               water service to retail customers that is owned and  
               operated by a local agency or a department or other  
               subdivision of a local agency and includes any successor to  
               the powers and functions of the department or other  
               subdivision.

             h)   "Rate reduction bonds" mean bonds that are issued by a  
               JPA, the proceeds of which are used directly or indirectly  
               to pay or reimburse a local agency or its POU for the  
               payment of the costs of a utility project, and that are  
               secured by a pledge of, and are payable from, bonds as  
               provided in this bill.

             i)   "Utility project" means the acquisition, construction,  
               installation, retrofitting, rebuilding, or other addition  








                                                                  AB 850
                                                                  Page  12

               to, or improvement of, any equipment, device, structure,  
               improvement, process, facility, technology, rights or  
               property, located either within, or outside of, the State  
               of California, and that is used, or to be used, in  
               connection with the operations of a POU for conservation or  
               reclamation purposes or in response to a mandate related to  
               water quality.

             j)   "Utility project charge" means a charge paid or to be  
               paid by water distribution customers of a POU to pay  
               financing costs of rate reduction bonds issued to finance a  
               utility project for a POU that is imposed pursuant to this  
               bill, including any adjustment of the charge pursuant to  
               this bill.

             aa)  "Utility project property" means the property right  
               created pursuant to this bill, including without  
               limitation, the right, title, and interest of a JPA for any  
               of the following:

               i)     In and to the financing resolution and the utility  
                 charge established with respect to the rate reduction  
                 bonds, as adjusted from time to time in accordance with  
                 this bill;

               ii)    To be paid the financing costs of the rate reduction  
                 bonds and to all revenues, collections, claims, payments,  
                 moneys, or proceeds for, or arising from, the utility  
                 project charge relating to the rate reduction bonds; or,

               iii)   In and to all rights to obtain adjustments to the  
                 utility project charge relating to the rate reduction  
                 bonds pursuant to this bill.

           EXISTING LAW  

          1)Authorizes, under the Act, two or more public agencies (i.e.  
            federal government, any state, any state department or agency,  
            county, county board of education, county superintendent of  
            schools, city, public corporation, public district, and  
            regional transportation commission in any state) to enter into  
            a joint powers agreement to exercise jointly any power common  
            to the contracting agencies that each can do by itself.  
            (Government Code, Section 6500)









                                                                  AB 850
                                                                  Page  13

          2)Authorizes JPAs to issue tax-exempt bonds for a variety of  
            purposes.

          3)Regulates POU activities and rates at the local level, through  
            locally-elected boards and/or city councils.

           FISCAL EFFECT  :   None. 

           COMMENTS  :   

          According to the author, "AB 850 will result in interest  
          savings, lower debt service, and reduce local borrowing costs to  
          decrease future utility rate increases. JPAs, formed under  
          existing law, have successfully allowed public agencies to  
          finance the construction of capital projects by issuing  
          tax-exempt revenue bonds. JPAs have helped meet critical needs,  
          within the state, by helping to accelerate the construction,  
          repair and maintenance of public capital improvements. AB 850  
          will simply expand this same authority and benefit to JPAs  
          formed by municipal water utility companies. 

          The advantages of rate reduction bonds to water ratepayers and  
          the City include: 

          o The ability for ratepayers to more transparently track and  
            mitigate the costs of mandated projects; 
          o Lower financing costs due to the expectation that the rate  
            reduction bonds will obtain triple-A ratings; 
          o Strengthening water utilities' credit rating - the rate  
            reduction bonds are not treated as a debt of the utility for  
            rating purposes, which assists in maintaining bond credit  
            ratings to fund other water capital projects; 
          o Lower water rates for customers - the enhanced security of  
            rate reduction bonds allow the water utility to lower the  
            excess margin of revenues over bond payments from the  
            customary 2x bond payments to 1x bond payments, which results  
            in only collecting the amount owed from the water utility  
            ratepayer, not 2x the amount owed as in traditional bonds."

          AB 850, allows the JPA to issue rate reduction bonds to finance  
          projects for POUs that provide water service.  Eligible projects  
          must be necessary to respond to or comply with a water quality  
          mandate, such as a mandate under the Safe Drinking Water Act  
          (SDWA), or to reduce customer water demand or the amount of  
          imported water the POU provides.  








                                                                  AB 850
                                                                  Page  14


           RATE REDUCTION BOND:
           A rate reduction bond is the securitization of a cash flow  
          stream generated by a fee charged to utility consumers.  
          Deregulation of the electric utilities was introduced to foster  
          a competitive environment and to reduce the rates charged to  
          customers. However, when states deregulated utilities, the  
          resulting decrease in revenue caused many utility company assets  
          to become uneconomic to operate. These uneconomic assets are  
          referred to as "stranded assets." Rate reduction bonds were  
          developed to enable utilities to bridge the gap between the book  
          value of stranded assets in the previously regulated environment  
          and their current market value in a deregulated one. The use of  
          rate reduction bonds allows for an extended recovery period of  
          those costs at AAA rated.

          Under this bill, bonds would be issued to investors by the JPA  
          and the bond proceeds would go the participating municipal water  
          utility.  The security for repayment of the bonds (the asset)  
          takes the form of a non-bypassable, dedicated special tariff  
          that would be collected by the participating water utility on  
          behalf of the JPA as a separate line item on water utility  
          customers' bills.

          Rate reduction bonds were used by California's investor-owned  
          electric utilities (IOUs) when the state restructured its energy  
          industry in the late 1990's.  In that instance, the California  
          Infrastructure and Development Bank (I-Bank) formed a trust that  
          issued the bonds on behalf of the IOUs.  These instruments  
          proved to be very successful on the bond market despite a  
          challenge by The Utility Reform Network (TURN), which argued  
          that ratepayers should have received a greater rate reduction  
          under the state's deregulation law - which provided an  
          across-the-board 10% rate cut - because ratepayers were  
          shouldering the debt service of the bonds.  After losing an  
          appeal before the California Public Utilities Commission (PUC),  
          TURN petitioned the Supreme Court, which refused to grant a  
          judicial review of the PUC's decision.  

          This bill restricts the issuance of rate reduction bonds  
          exclusively to fund capital utility projects for publicly-owned  
          water utilities that are required to respond to or comply with a  
          water quality mandate, such as a mandate under the SDWA.  Bond  
          proceeds can fund projects that reduce the amount of potable  
          water supplied by the utility or reduce the amount of water  








                                                                  AB 850
                                                                  Page  15

          imported by the utility.  This would include projects for storm  
          water capture and treatment, water recycling, development of  
          local groundwater resources, groundwater recharging, and water  
          reclamation.

          In addition, the rate reduction bond issuer must be bankruptcy  
          remote from the municipal water utility collecting the special  
          tariff.  An entity that is separate from the municipal water  
          utility (such as a JPA) must issue the rate reduction bonds in  
          order to meet this requirement.

          This method of securitization allows a lower debt service  
          coverage ratio by the bond rating agencies due to the enhanced  
          security provided by the dedicated special tariff and bankruptcy  
          remoteness.  As a result, the amount of funds collected from  
          customers to meet the debt service coverage ratio is reduced.   
          Individual municipal utilities can have debt service coverage  
          requirements of about two times the annual principal and  
          interest payments of the bonds.  With the rate reduction bonds,  
          this can be reduced to one times coverage.

          California's joint powers agreements are federations of federal,  
          state, and local public agencies that jointly perform duties  
          that each entity could perform on its own.  Joint powers  
          agreements collaborate to address public needs, such as  
          financing public facilities, forming insurance pools, and  
          enhancing planning and regulation.  Joint powers agreements can  
          be structured as an agreement between existing agencies or as a  
          creation of a new, separate entity called a JPA.

          POU activities and rates are regulated by locally elected boards  
          and/or city councils.  POUs are subject to the Ralph M. Brown  
          Act, the Public Records Act, and Competitive Bid Requirements.   
          LADWP is the largest POU in California, serving 3.9 million  
          customer owners.

          LADWP is seeking this financing structure because it qualifies  
          for a higher bond-rating (AAA) than other types of financing  
          available to the utility, thereby reducing interest rates and  
          financing costs and, ultimately, rates for its customers.  LADWP  
          argues that a JPA is necessary because rate reduction bonds  
          require a special tariff that is dedicated as a secured asset to  
          the rate reduction bondholders.  LADWP states that, like other  
          municipal water utilities with outstanding revenue bonds, it is  
          limited in its ability to pledge a portion of its revenues only  








                                                                  AB 850
                                                                  Page  16

          to the rate reduction bondholders.  A JPA charging the special  
          tariff would not have such restrictions.

          LADWP estimates that ratepayers would save as much as $3 million  
          per year for each $100 million of financing under this bill's  
          provisions.  In the case of LADWP, with its planned spending for  
          water quality and local water supply projects, rates are  
          projected to be 2-4% lower during the course of the next five  
          years than they would be absent this financing approach.

          LADWP cites several types of projects that could be financed  
          under the structure created by this bill:

           Water quality compliance  :  LADWP is currently working to  
          implement multiple projects as part of a Water Quality  
          Improvement Program (WQIP) to comply with two primary drinking  
          water standards under the SDWA: the Long-Term 2 Enhanced Surface  
          Water Treatment (LT2) Rule and the Stage 2 Disinfectants and  
          Disinfection Byproduct (Stage 2 DBP) Rule.

          The LT2 Rule requires open distribution reservoirs to be  
          covered, treated, or removed from service to protect finished  
          tap water from microbial pathogens such as Cryptosporidium.  The  
          Stage 2 DBP Rule addresses disinfection byproducts suspected to  
          have carcinogenic and reproductive health effects.

          LADWP expects to spend about $1.4 billion between fiscal years  
          2011/12 through 2015/16 to complete the WQIP and meet the  
          compliance deadlines set by the California Department of Public  
          Health.  This expenditure amount represents 40% of LADWP's total  
          Water System capital budget for that period.

           Groundwater cleanup  :  Despite efforts that began in the late  
          1980's under the US Environmental Protection Agency's Superfund  
          program, groundwater contamination has continued to spread in  
          the San Fernando Basin (SFB), forcing LADWP to shut down half of  
          its local groundwater wells in the basin.  Typically, local  
          groundwater provides approximately 11% of the City of Los  
          Angeles' total water supply and up to 30% during drought years.   
          Recent projections indicate that local groundwater is expected  
          to provide only 8% of total supply during this upcoming water  
          year (April - March) due to increasing contamination.   
          Replacement water is purchased from the Metropolitan Water  
          District of Southern California, which imports their supplies  
          from the Sacramento-San Joaquin Delta and the Colorado River.








                                                                  AB 850
                                                                  Page  17


          In 2009, LADWP began an $11.5 million 6-year study to develop a  
          comprehensive remediation and cleanup strategy to address the  
          contamination in the SFB and preserve the basin's public and  
          environmental benefits.  This strategy includes the development  
          of a state-of-the-art Groundwater Remediation Complex that will  
          include both centralized and localized (well head) treatment  
          facilities.  The design and construction of the Groundwater  
          Remediation Complex is estimated to cost between $600 and $900  
          million.  The Complex is anticipated to be operational by 2021.

           Water recycling  :  The City of Los Angeles' Water Recycling  
          Program includes planned investments to expand the "purple pipe"  
          network for non-potable water use, upgrade existing treatment  
          plants, and use advanced-treated, recycled water for groundwater  
          replenishment.  These projects would be candidates for funding  
          through rate reduction bonds.

          An example of a "purple pipe" project is the Elysian Park Water  
          Recycling Project, which is currently in the planning phase.   
          The project scope includes the construction of about 10,800  
          linear feet of pipe, a 3,000 gallons-per-minute pump station,  
          and a two-million-gallon storage tank.  The project would  
          replace about 400 acre-feet per year of potable water with  
          recycled water for Elysian Park and future customers in central  
          Los Angeles.  The total cost of the project is currently  
          estimated at about $30 million.

          Groundwater replenishment (GWR) is a process in which  
          advanced-treated recycled water can be sent to spreading basins  
          to percolate underground and augment the City's groundwater  
          supply for later use.  GWR is a proven alternative for expanding  
          availability of safe, high-quality drinking water, and has been  
          successfully implemented in communities across the US. GWR for  
          Los Angeles will require an additional treatment system to be  
          built at an existing water reclamation plant in Van Nuys.  The  
          additional treatment will include microfiltration, reverse  
          osmosis and other purification processes.

           Stormwater capture  :  Stormwater capture projects facilitate  
          groundwater recharge and help maintain healthy water levels in  
          groundwater basins. The projects can also provide local flood  
          control benefits, improve surface water quality, increase water  
          conservation and reuse, and result in societal benefits  
          including open space enhancements, habitat restoration, and  








                                                                  AB 850
                                                                  Page  18

          watershed education opportunities.

          Centralized stormwater capture projects typically include  
          projects such as spreading grounds upgrades and dam  
          improvements.  Distributed stormwater capture projects can  
          include residential-level improvements (e.g., rain barrel, rain  
          garden installation) and neighborhood-level improvements (e.g.,  
          vegetated swales, infiltration basins).

          An example of a centralized stormwater capture project is the  
          Hansen Dam Water Conservation Project, which will create a water  
          conservation pool behind Hansen Dam to allow for stormwater  
          capture and storage.  The stored water would allow for  
          additional dam releases to downstream spreading grounds, where  
          an additional 3,400 acre-feet per year would then percolate back  
          into the groundwater basin.  The design and construction cost of  
          this project is estimated at about $5 million.

          An example of a decentralized stormwater capture project is the  
          Woodman Avenue Stormwater Capture Project, which will capture  
          surface runoff and stormwater from a 130-acre drainage area and  
          divert it to a new street median containing a vegetated swale.   
          The project will create new habitat with native and  
          California-friendly plants, provide about 80 acre-feet-per year  
          of groundwater recharge, and include other amenities that  
          benefit the neighborhood.  The total cost of this on-going  
          project is estimated at $3.5 million.

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          Association of California Water Agencies (ACWA)
          California Municipal Utilities Association (CMUA)
          California Special Districts Association (CSDA)
          Los Angeles Department of Water and Power (LADWP)

           Opposition 
           
          None on file.
           
          Analysis Prepared by  :    Kathleen O'Malley / B. & F. / (916)  
          319-3081 










                                                                  AB 850
                                                                  Page  19