BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 850 HEARING: 7/3/13
AUTHOR: Nazarian FISCAL: No
VERSION: 6/19/13 TAX LEVY: No
CONSULTANT: Weinberger
RATE REDUCTION BONDS FOR LOCAL UTILITIES
Allows joint powers authorities to finance projects for
public retail water utilities using asset-backed securities
called "rate reduction bonds."
Background and Existing Law
Rate reduction bonds are asset-backed securities that are
structured to minimize borrowing costs by qualifying for
AAA credit ratings. AAA ratings allow a utility to borrow
funds at an interest rate that is well below the rate that
would otherwise apply to a utility's long-term debt. To
qualify for the AAA rating, rate reduction bond financing
typically includes:
Statutory authority to impose a dedicated charge on
utility customers to repay the bonds.
A requirement that the bonds must be issued, and
the dedicated charge must be imposed, by a "bankruptcy
remote special purpose entity."
A "true-up" mechanism by which charges collected to
pay debt service are regularly adjusted to ensure that
bonds are paid off at the final maturity date.
A pledge made by the state not to impair the right
to collect charges until bonds are paid in full.
The rate reduction bond securitization structure was
introduced in response to electricity market deregulation
in the 1990s to allow investor-owned-utilities in
deregulated markets to recover so-called "stranded" costs
of investments the utilities made before deregulation. For
example, California's investor-owned electric utilities
used rate reduction bonds when the state restructured its
energy industry. In that instance, the California
Infrastructure and Development Bank (I-Bank) formed a trust
that issued the bonds on behalf of the utilities. More
recently, other states have adopted statutes allowing
AB 850 -- 6/19/13 -- Page 2
investor owned utilities to us rate reduction bond
financing for other purposes.
The Joint Exercise of Powers Act allows two or more public
agencies to use their powers in common if they sign a joint
powers agreement. Sometimes an agreement creates a new,
separate government called a joint powers authority (JPA).
The Marks-Roos Local Bond Pooling Act allows public
agencies to use JPAs to finance infrastructure. These JPAs
issue Marks-Roos Act bonds and loan the capital to local
agencies for public works, working capital, and insurance
programs (SB 17, Marks, 1985).
In response to substantial demands for investments in
projects to enhance water quality, conservation, and
supplies, officials from the Los Angeles Department of
Water and Power (LADWP) and other public water agencies
want to decrease their agencies' borrowing costs by forming
JPAs that can issue rate reduction bonds to finance water
utility projects.
Proposed Law
Assembly Bill 850 allows a joint powers authority (JPA)
that limits its financing activities to financing utility
projects and projects for the use or benefit of public
water agencies to finance specified utility projects by
issuing rate reduction bonds and imposing utility project
charges. Specifically, AB 850:
I. Details how local agencies must apply to JPAs to
finance utility projects.
II. Specifies how JPAs must impose utility project
charges.
III. Specifies how JPAs must issue rate reduction bonds.
IV. Creates a statutory lien on property related to rate
reduction bonds.
V. Shields JPAs that issue rate reduction bonds from
bankruptcy cases.
VI. Allows JPAs to finance utility projects through
limited liability companies.
VII. Defines terms used in the bill.
VIII.Makes other declarations and conforming changes to
state law.
I. Financing local agencies' utility projects . Assembly
AB 850 -- 6/19/13 -- Page 3
Bill 850 allows a local agency that owns and operates a
utility that provides retail water service to apply to a
JPA to finance costs of a utility project with the proceeds
of rate reduction bonds. The bill defines a "utility
project" as acquiring, constructing, installing,
retrofitting, rebuilding, adding to, or improving, any
equipment, device, structure, improvement, process,
facility, technology, rights or property, located either
within, or outside of, the State of California, that is
used in connection with the a utility's operations for
conservation or reclamation purposes or in response to a
requirement imposed by a federal or state entity.
Assembly Bill 850 allows a local agency to apply for
financing only if, at the time of application, the
utility's revenue bonds are, or upon issuance would be,
rated investment grade by a nationally recognized rating
agency.
Assembly Bill 850 requires that a local agency's
application to a JPA for financing must specify the utility
project to be financed by the rate reduction bonds, the
maximum principal amount, the maximum interest rate, and
the maximum stated terms of the rate reduction bonds.
Assembly Bill 850 prohibits a local agency from applying to
a JPA to finance a utility project unless the agency's
legislative body has determined that:
The project to be financed is a utility project.
The local agency is electing to finance costs of
the utility project pursuant to the bill's provisions
and the financing costs associated with the financing
are to be paid from utility project property,
including the utility project charge for the rate
reduction bonds issued for the utility project in
accordance with the bill's provisions.
The financing is expected, based on available
information and projections, to result in lower total
charges to the customers of the local agency's
publicly owned utility compared with financing the
utility project through bonds payable from the
publicly owned utility's revenues.
II. Utility project charges . Assembly Bill 850 defines a
"utility project charge" as a charge imposed and adjusted
pursuant to specified provisions of state law which is paid
by a retail water utility's customers to pay financing
AB 850 -- 6/19/13 -- Page 4
costs of rate reduction bonds issued to finance a utility
project.
Assembly Bill 850 allows and directs a JPA financing a
utility project with rate reduction bonds to impose and
collect a utility project charge with respect to the rate
reduction bonds, subject to Article XIIID of the California
Constitution. To impose a utility project charge, the
JPA's governing body must adopt a financing resolution,
which must include:
The addition of a separate charge to the bill of
each customer of the publicly owned utility in the
class or classes of customers specified in the
financing resolution.
A description of the financial calculation,
formula, or other method that the authority is to use
to determine the utility project charge.
A requirement that the authority enter into a
servicing agreement for collecting the utility project
charge with the local agency for which the financing
is undertaken or its publicly owned utility.
Assembly Bill 850 requires that the method for determining
the project utility charge must include a periodic
adjustment method to the then current utility project
charge, to be applied at least annually, that the JPA must
use to correct for any overcollection or undercollection of
financing costs from the utility project charge or any
other adjustment needed to ensure timely payment of rate
reduction bonds' financing costs, including debt service
coverage requirements. Assembly Bill 850 requires that the
method for determining the project utility charge and the
allocation of utility project charges to, and among, the
publicly owned utility's customers must be decided solely
by the JPA's governing body. The bill declares the JPA's
decision to be final and conclusive. Assembly Bill 850
prohibits any changes to the method for determining the
utility project charge, and the periodic adjustment method,
after they have been established in the financing
resolution and have become final and conclusive. Assembly
Bill 850 prohibits the periodic adjustment method
established in the financing resolution from being applied
less frequently than required by the financing resolution
and the documents relating to the applicable rate reduction
bonds.
AB 850 -- 6/19/13 -- Page 5
Assembly Bill 850 requires that the servicing agreement for
collecting the utility project charge must require the
local agency or its publicly owned utility to act as a
servicing agent for purposes of collecting the utility
project charge as long as the servicing agreement remains
in effect. Funds collected as a utility project charge by
the local agency or its publicly owned utility, acting as a
servicing agent on behalf of the JPA, must be held in trust
for the exclusive benefit of the persons entitled to the
financing costs to be paid, directly or indirectly, from
the utility project charge and must not lose their
character as revenues of the JPA by virtue of possession by
the local agency or its publicly owned utility. The local
agency or its publicly owned utility must provide the JPA
with the information about estimated water sales and any
other information concerning the publicly owned utility
required by the JPA in connection with the utility project
charge.
Assembly Bill 850 contains provisions that:
Define the utility project charge as a
non-bypassable charge.
Establish a customer's obligation to pay a utility
project charge regardless of whether or not the
customer has an agreement to purchase water from a
person or entity other than the publicly owned
utility.
Require timely and complete payment of all utility
project charges, specify collection procedures, and
prohibit withholding payment of the utility project
charge.
Detail the manner in which a JPA must determine
whether adjustments to the utility project charge are
required and the manner in which a JPA must make such
adjustments.
Specify how revenues must be applied to the payment
of the financing costs of the rate reduction bonds.
Require a JPA to impose and collect utility project
charges sufficient to pay, on a timely basis, rate
reduction bonds' financing costs.
Declare the pledge of a utility project charge to
secure the payment of rate reduction bonds to be
irrevocable.
Prohibit the reduction, impairment, or adjustment
of the utility project charge, with specified
exceptions.
AB 850 -- 6/19/13 -- Page 6
Deem revenue from a utility project charge as
special revenue of the JPA, not revenue of a local
agency or its publicly owned utility.
Define the conditions under which a utility project
charge constitutes a utility project property.
Apply the bill's provisions to any entity providing
water distribution service in lieu of a local agency
for which rate reduction bonds have been issued and
remain outstanding.
III. Rate reduction bonds . Assembly Bill 850 defines "rate
reduction bonds" as bonds issued by a JPA, the proceeds of
which are used directly or indirectly to pay or reimburse a
local agency or its publicly owned utility for the payment
of the costs of a utility project, and that are secured by
a pledge of, and are payable from, utility project property
as specified in state law.
Assembly Bill 850 requires that:
Rate reduction bonds must be within the parameters
set forth by a local agency.
Rate reduction bonds' proceeds must be used for the
utility project identified in the local agency's
application for financing.
A JPA's governing body must, by resolution,
authorize the issuance of rate reduction bonds.
Rate reduction bonds must be nonrecourse to the
credit or any assets of the local agency and the
publicly owned utility for which the utility project
is financed.
Rate reduction bonds must 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 enhancement specified in
the documents relating to the rate reduction bonds.
Assembly Bill 850 defines "utility project property" as the
property right created pursuant to state law, including a
JPA's right, title, and interest:
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 state law.
To be paid the financing costs of the rate
reduction bonds and to all revenues, collections,
claims, payments, moneys, or proceeds for, or arising
AB 850 -- 6/19/13 -- Page 7
from, the utility project charge relating to the rate
reduction bonds.
In and to all rights to obtain adjustments to the
utility project charge relating to the rate reduction
bonds pursuant to state law.
Assembly Bill 850 requires a JPA issuing rate reduction
bonds to pledge the utility project property relating to
the rate reduction bonds as security for payment. The
pledge must be made pursuant to, and with the effect set
forth in, a specified statute governing a public body's
pledge of collateral to secure bonds. The bill declares
that all of a JPA's rights with respect to utility project
property pledged as security for the payment of rate
reduction bonds must 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.
Assembly Bill 850 declares that utility project property
constitutes property for all purposes, including for
contracts securing rate reduction bonds, whether or not
specified revenues and proceeds have accrued.
To the extent that any interest in utility project property
is pledged as security for the payment of rate reduction
bonds, Assembly Bill 850 requires a local agency or its
publicly owned utility to contract with the JPA that the
local agency or its publicly owned utility will:
Continue to operate its publicly owned utility
system that includes the financed utility project to
provide service to its customers,
Collect amounts in respect of the utility project
charge for the benefit and account of the authority
and the beneficiaries of the pledge of the utility
project charge, and
Account for and remit these amounts to, or for the
account of, the authority.
Assembly Bill 850 specifies that such a contract is part of
the utility project property.
Assembly Bill 850 states that any requirements that a JPA
must take action with respect to utility project property
are binding upon the JPA. The bill prohibits the JPA from
rescinding, altering, or amending any resolution or
document containing the requirement.
AB 850 -- 6/19/13 -- Page 8
Assembly Bill 850 declares that the recovery of the
financing costs for the rate reduction bonds from the
utility project charge is irrevocable. The bill prohibits
a JPA from:
Revaluing or revising for ratemaking purposes the
financing costs of rate reduction bonds,
Determining that the financing costs for the
related rate reduction bonds or the utility project
charge is unjust or unreasonable, or
Reducing or impairing the value of utility project
property that includes the utility project charge,
either directly or indirectly.
Assembly Bill 850 prohibits any reduction, impairment,
postponement, or termination of the amount of revenues
arising with respect to the financing costs for rate
reduction bonds or the utility project charge until all
financing costs to be paid from the utility project charge
are fully met and discharged.
Assembly Bill 850 contains a pledge and agreement made by
the State of California that the State of California will
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, with specified exceptions. The bill
allows a JPA to include this pledge in the governing
documents for rate reduction bonds.
Assembly Bill 850 requires a JPA to adjust the utility
project charge relating to rate reduction bonds 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
must 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.
Assembly Bill 850 declares 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
AB 850 -- 6/19/13 -- Page 9
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. The bill
specifies that this provision does not preclude guarantees
or credit enhancements in connection with rate reduction
bonds.
Assembly Bill 850 states that the issuance of rate
reduction bonds does not obligate the State of California
or any political subdivision to levy or to pledge any form
of taxation to pay the rate reduction bonds or to make any
appropriation for their payment.
Assembly Bill 850 requires all rate reduction bonds to
contain a statement to the following effect:
"Neither the full faith and credit nor the taxing power of
the State of California or any political subdivision
thereof is pledged to the payment of the principal of, or
interest on, this bond."
IV. Statutory lien . Assembly Bill 850 declares that upon
the effective date of the financing resolution relating to
rate reduction bonds, a first priority statutory lien
exists on all utility project property to secure the
payment of the rate reduction bonds. The lien arises
pursuant to state law automatically, without any action on
the part of the authority, the local agency or its publicly
owned utility, or any other person. Assembly Bill 850
contains additional provisions relating to property secured
by the lien and the lien's validity and enforceability.
Assembly Bill 850 allows a JPA's financing resolution to
require the JPA, upon application by the beneficiaries of
the statutory lien, and without limiting any other remedies
available, to order the sequestration and payment to the
beneficiaries of revenues arising with respect to utility
project property in the event of default by the local
agency or its publicly owned utility.
V. Applicability of federal bankruptcy law . Assembly Bill
850 states that, notwithstanding any other law, 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
AB 850 -- 6/19/13 -- Page 10
case or proceeding under any other law as long as any
payment obligation from utility project property remains
with respect to rate reduction bonds.
VI. Limited liability company financing . Assembly Bill
850 allows a JPA to elect to effect a financing of a
utility project through a single member limited liability
company formed by the authority by authorizing the company
to adopt the financing resolution and the JPA's issuing
rate reduction bonds payable from, and secured by a pledge
of, amounts paid by the company to the JPA from the
applicable utility project property pursuant to an
agreement. The bill specifies statutory provisions that
must apply to and be the exclusive method of perfecting a
pledge of utility project property by the company securing
the payment of financing costs under any agreement of the
company in connection with the issuance of rate reduction
bonds. The bill provides that specified statutory
references to the JPA mean or include the company as
necessary to implement the bill's provisions.
VII. Definitions . Assembly Bill 850 defines the following
terms:
"Conservation or reclamation purposes" means a utility
project designed to reduce the amount of potable water to
be supplied by a publicly owned utility or reduce the
amount of water imported by the publicly owned utility,
including without limitation, storm water capture and
treatment, water recycling, development of local
groundwater resources, groundwater recharging, and water
reclamation.
"Customer" means a person or entity receiving water through
facilities of a publicly owned utility.
"Financing costs" means any of the following:
Interest and redemption premiums that are payable
on rate reduction bonds.
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.
A cost related to issuing or servicing rate
reduction bonds, including, but not limited to,
servicing fees, trustee fees, legal fees,
AB 850 -- 6/19/13 -- Page 11
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.
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.
The funding of one or more reserve accounts related
to rate reduction bonds.
"Financing resolution" means a resolution adopted by the
governing body of an authority 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 a specified statute. A
financing resolution may be separate from a resolution
authorizing the issuance of the rate reduction bonds.
"Mandate" means a requirement, imposed by a mandating
entity by any means, including 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 publicly owned utility or a facility operated
in whole or in part for the benefit of a publicly owned
utility, or on the operations of the publicly owned
utility, or on the water pumped, acquired, or supplied by
the publicly owned utility.
"Mandating entity" means the United States; a state of the
United States; an agency, department, commission, or other
subdivision of the United States or a state of the United
States; a court of the United States or a state of the
United States; or any other body or organization, that has
jurisdiction over the operations of a publicly owned
utility; the facility of a publicly owned utility, or a
facility operated in whole or in part for the benefit of a
publicly owned utility; or the water pumped, acquired or
sold by a publicly owned utility. "Mandating entity" does
not include a local agency that owns the publicly owned
utility.
AB 850 -- 6/19/13 -- Page 12
"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.
VIII. Other changes and declarations . Assembly Bill 850
makes additional conforming and clarifying changes to state
law. Assembly Bill 850 declares that its provisions must
be liberally construed to effectuate their purposes, and
that all incidental powers necessary to carry into effect
its provisions are expressly granted to, and conferred
upon, public entities. Assembly Bill 850 declares that its
provisions are severable.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . To comply with federal and state
clean drinking water standards, remediate groundwater
contamination, and address the constant challenge of water
scarcity, public water utility operators anticipate
investing billions of dollars in vital water infrastructure
projects over the coming years. For example, just to
comply with two primary drinking water standards under the
Safe Drinking Water Act, the Los Angeles Department of
Water and Power expects to spend $1.4 billion between
2011-12 and 2015-16 to complete its water quality
improvement program. Financing water infrastructure
projects with rate reduction bonds will produce lower
borrowing costs for public agencies. These cost savings
reduce the rates that water customers will pay compared to
the rates they would pay if the water infrastructure had
been financed using more traditional financing mechanisms,
like revenue bonds. LADWP estimates that ratepayers would
save as much as $3 million per year for each $100 million
of financing under this bill's provisions. Given its
planned spending for water quality and local water supply
projects, LADWP projects that rate reduction bond financing
would lower rates by 2-4% during the course of the next
AB 850 -- 6/19/13 -- Page 13
five years. In addition to lower borrowing costs, rate
reduction bonds also can, under certain conditions, qualify
for off balance-sheet accounting treatment that benefits
the public utility. AB 850 will allow communities
throughout California to realize the benefits of making
critical water project investments at lower costs.
2. Shifting risk . AB 850's use of a bankruptcy-remote
special purpose entity to issue rate reduction bonds
insulates bondholders from potential insolvency of the
public agency that receives the bond proceeds. This
structure allows for higher bond ratings and lower costs of
debt issuance. However, by protecting rate reduction
bondholders from becoming creditors if a public agency
files for bankruptcy protection, the bill may increase the
risks borne by vendors, employees, investors holding other
forms of debt, and other potential creditors in a municipal
bankruptcy proceeding. Municipal bankruptcies are rare
events and it is unlikely that AB 850's
bankruptcy-remoteness provisions will ever be necessary to
shield rate reduction bondholders from a bankruptcy case.
However, in the event that a publicly owned utility does
become insolvent, it is unclear whether state law should
shield some potential creditors, leaving a smaller pool of
remaining creditors to bear the costs of restructuring.
3. Don't overlook oversight . Government programs start
with the best intentions but, if no one pays attention,
they can sometimes go awry. Recent experiences in the
financial markets demonstrate that complex
structured-financing mechanisms that receive AAA ratings
don't always work as expected and can harbor unanticipated
risks. The type of securitization financing AB 850
authorizes has never been used by public agencies to
finance the types projects described in the bill.
Fundamental assumptions underlying an JPA's decision to
issue rate reduction bonds may prove to be flawed. A
projection that ratepayers will pay lower overall rates as
a result of rate reduction bond financing is no guarantee
that ratepayers will actually realize those savings.
Allowing local utilities to use off balance-sheet
accounting for assets involved in rate reduction bond
financing may distort measures of a public utilities fiscal
condition. Legislators sometimes use sunset clauses,
evaluations, reports, and oversight hearings to make sure
that new programs stay on track and function properly.
AB 850 -- 6/19/13 -- Page 14
However, imposing a sunset clause on provisions authorizing
long-term financing can be counter-productive, sometimes
creating uncertainty among investors about the long-term
security of the debt. As an alternative approach to
oversight, the Committee may wish to consider amending AB
850 to:
Authorize rate reduction bonds to be used to
finance a fixed number of projects statewide.
Require a state entity, such as the I-Bank or the
State Treasurer's Office, to review and approve the
use of rate reduction bond financing for each project.
Require the California Debt and Advisory Commission
to evaluate the results of the financing used for the
authorized projects.
Assembly Actions
Assembly Local Government Committee: 9-0
Assembly Banking and Finance Committee:12-0
Assembly Floor: 72-0
Support and Opposition (6/27/13)
Support : City of Los Angeles Department of Water and
Power; Association of California Water Agencies; California
Municipal Utilities Association; California Special
Districts Association.
Opposition : Unknown.