BILL ANALYSIS �
AB 850
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 850 (Nazarian)
As Amended August 12, 2013
Majority vote
-----------------------------------------------------------------
|ASSEMBLY: |72-0 |(May 9, 2013) |SENATE: |38-0 |(September 3, |
| | | | | |2013) |
-----------------------------------------------------------------
Original Committee Reference: L. GOV.
SUMMARY : Authorizes joint powers authorities to issue rate
reduction bonds to finance local publicly-owned water utility
projects, until December 31, 2020.
The Senate amendments :
1)Limit the bill's provisions to water utilities that serve not
less than 25,000 retail customers.
2)Clarify that the bill's authority to finance utility projects
via rate reduction bonds is limited to joint powers
authorities (JPAs) whose financing activities are limited to
financing utility projects and projects for the use and
benefit of pubic water agencies.
3)Clarify that local agencies that own and operate a publicly
owned utility (POU) may apply for financing as authorized by
this bill if, at the time of application, bonds payable from
revenues of the POU are, or upon issuance would be, rated
investment grade by a nationally recognized rating agency.
4)Require the California Pollution Control Financing Authority
(CPCFA) to review each issue of bonds and determine whether
the issue is qualified for issuance under the bill's
provisions, and outline the conditions that must be satisfied
for the CPCFA to reach such a determination.
5)Require the CPCFA to establish procedures for the expeditious
review of a proposed bond issuance, including, but not limited
to, the establishment of reasonable application fees to
reimburse the CPCFA for administrative costs.
6)Require the CPCFA to provide a written explanation for any
AB 850
Page 2
refusal to qualify a proposed bond issuance, but specify that
the CPCFA may not alter or modify any term or condition
related to utility project property.
7)Require the CPCFA to take action on any completed application
no later than its next meeting that occurs at least 60 days
following receipt of the application.
8)Allow CPCFA review and qualification to be concurrent with a
JPA's processing of an application for financing so as to
allow for the issuance of rate reduction bonds as quickly as
feasible.
9)Allow the CPCFA to adopt emergency regulations, pursuant to
current law, relating to this bill's provisions, as specified.
10)Require, until December 31, 2020, the CPCFA to annually
submit by March 31 to the Legislature a report of its
activities pursuant to this bill for the preceding calendar
year ended December 31, and outline the required contents of
the report, as specified.
11)Specify that in no event shall a utility project charge
exceed the maximum rate permitted under Article XIII D of the
California Constitution (added by Proposition 218 in 1996).
12)Require a JPA that issues rate reduction bonds to include in
its preliminary notice and final report to the California Debt
and Investment Advisory Commission (CDIAC), which are required
under current law, a statement that the rate reduction bonds
are being issued pursuant to this bill.
13)Require a JPA that issues rate reduction bonds to include in
its final report to CDIAC the savings realized by issuing the
rate reduction bonds rather than bonds payable from the
revenues of the POU for whose benefit the rate reduction bonds
were issued.
14)Terminate the authority to issue rate reduction bonds
pursuant to this bill after December 31, 2020.
15)Make additional technical and clarifying changes.
AS PASSED BY THE ASSEMBLY , this bill:
AB 850
Page 3
1)Authorized 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)Allowed a local agency that owns and operates a 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)Prohibited 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
agency's POU compared with financing the utility project
through bonds payable from revenues of the POU.
4)Provided, 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)Imposed a number of additional requirements pertaining to:
AB 850
Page 4
financing mechanisms; ratepayer responsibilities and
protections; protections for bondholders; protections for and
responsibilities of the state; JPA and POU obligations and
authorities; bankruptcy remoteness; and, other provisions.
6)Provided 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.
7)Provided 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.
8)Made conforming changes to the Joint Exercise of Powers Act
(Act).
9)Provided terms and definitions, as specified.
FISCAL EFFECT : None
COMMENTS : This bill allows JPAs to issue rate reduction bonds
to finance projects for POUs with at least 25,000 retail
customers that provide water service. Eligible projects must be
for conservation or reclamation purposes or must be necessary to
respond to or comply with a mandate. This bill is sponsored by
the author.
Amendments taken in the Senate require the CPCFA to review each
issue of bonds and determine whether the issue is qualified for
issuance under the bill's provisions, "in order to allow the
state to review the issuance of rate reduction bonds, collect
data, ensure transparency, and conduct an independent analysis
of the effectiveness of the use of rate reduction bonds pursuant
to" this bill. The CPCFA is housed in the State Treasurer's
office, and provides low-cost financing for projects that
control pollution. It also assists with clean-up of
contaminated sites. Among other activities, CPCFA assists the
California Alternative Energy and Advanced Transportation
Financing Authority, which provides financing for facilities
needed to develop and commercialize advanced transportation and
alternative energy technologies that reduce air pollution,
AB 850
Page 5
conserve energy, and promote economic development and jobs.
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."
California's JPAs 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.
Los Angeles Department of Water and Power (LADWP) is the largest
POU in California, serving 3.9 million customer owners.
A rate reduction bond is a type of financing method, one of
several types of asset-backed securities, that provides for
lower borrowing costs than traditional financing sources used by
municipal water utilities. 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 1990s. 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
AB 850
Page 6
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
mandate, such as a mandate under the Safe Drinking Water Act.
Bond proceeds can fund projects that reduce the amount of
potable water supplied by the utility or reduce the amount of
water 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.
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
to the rate reduction bondholders. A JPA charging the special
tariff would not have such restrictions.
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
AB 850
Page 7
interest payments of the bonds. With the rate reduction bonds,
this can be reduced to one times coverage.
The required debt service coverage ratio for the LADWP Water
System (currently at 2.00x, with a pending proposal to reduce it
to 1.85x) is a financial metric adopted by the LADWP Board of
Commissioners. These metrics are adopted based on standards of
the bond rating agencies, which publish guidelines for financial
metrics related to each rating category, as well as specific
rating considerations for the LADWP Water System. Rated
entities that wish to qualify for a good credit rating need to
establish financial metrics consistent with those rating
criteria or risk a downgrade, which increases borrowing costs.
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.
Please see the policy committee analysis for a full discussion
of this bill.
Analysis Prepared by : Angela Mapp / L. GOV. / (916) 319-3958
FN: 0001700