BILL ANALYSIS Ó 1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
ALEX PADILLA, CHAIR
SB 936 - Monning Hearing Date:
April 29, 2014 S
As Amended: April 21, 2014 FISCAL B
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DESCRIPTION
Current law authorizes the California Public Utilities
Commission (CPUC) to regulate water corporations and establish
just and reasonable rates for recovering the costs of providing
water service, including costs of water supply infrastructure.
California American Water (Cal-Am), a water corporation subject
to CPUC jurisdiction, is the primary provider of water service
to the Monterey Peninsula. (Public Utilities Code §§ 2701, 789)
Current law establishes the Monterey Peninsula Water Management
District (District) with authority for integrated water
management on the Monterey Peninsula. As a public agency, the
District has authority to issue tax-exempt bonds for financing
capital projects. (Chapter 527, Statutes of 1977)
This bill makes legislative findings regarding Cal-Am's
obstacles to obtaining adequate water supply from the Carmel
River and groundwater sources and authorizes the District to
issue tax-exempt bonds to finance Cal-Am's construction of a
proposed desalination plant with all "financing costs" and
"water supply costs, as defined, to be repaid through a
dedicated customer surcharge ("water supply charge") ordered by
the CPUC.
This bill authorizes the CPUC to issue a financing order upon
application of Cal-Am for a determination that "some or all" of
its water supply costs (i.e., the desalination plant) be
recovered through the water supply charge only if the CPUC finds
that the tax-exempt bond financing "will provide savings to
water customers on the Monterey Peninsula."
This bill requires the CPUC to authorize imposition and
collection of the water supply charge if it determines the bond
financing "would reduce the rates on a present value basis that
customers within the qualifying water utility's service
territory would pay as compared to the use of traditional
utility financing mechanisms."
This bill requires that this water supply charge be
non-bypassable and obligates Cal-Am's existing and future
customers to pay the surcharge until all financing and water
supply costs are paid in full, even if the proposed desalination
plant is never completed, does not perform, if Cal-Am goes
bankrupt, or if Cal-Am fails "to apply the proceeds of water
rate relief bonds in a reasonable, prudent, and appropriate
manner" or otherwise comply with the provisions of this bill.
This bill requires the CPUC to approve periodic adjustments to
the water supply charge to ensure full and timely recovery of
all water supply costs and financing costs.
This bill requires an annual customer notice to customers
explaining the water supply charges and adjustments to that
charge.
BACKGROUND
District and Cal-Am Authority - Created by a special act in 1977
and formed with local voter approval in 1978, the District
covers six cities (Carmel-by-the-Sea, Del Rey Oaks, Monterey,
Pacific Grove, Sand City, Seaside) plus unincorporated territory
(AB 1329, Mello, 1977). The District is governed by a
seven-member Board of Directors and is responsible for
augmenting water supply through integrated management of ground
and surface water resources, promoting water conservation, water
reuse, storm and wastewater reclamation, and fostering scenic
values, environmental quality, native vegetation, fish and
wildlife, and recreation.
The Monterey Peninsula's retail water service comes from the
Cal-Am, an investor owned utility regulated by the CPUC.
In 1995, the State Water Resources Control Board (SWRCB) ordered
Cal-Am to develop an alternative water supply to replace a
significant portion of the water supply that Cal-Am diverts from
the Carmel River system. A 2009 Cease and Desist Order issued
by the SWRCB imposes a deadline on Cal-Am to sharply reduce its
diversion of water from the Carmel River. To expand
alternative water supplies, Cal-Am is proposing, through a
proceeding that is before the CPUC, to construct a desalination
plant, and possibly invest in groundwater recharge projects, on
the Monterey Peninsula.
A July 31, 2013 settlement agreement among parties to the CPUC
proceeding specifies conditions under which Cal-Am can develop,
construct, operate, and finance its proposed Monterey
Peninsula Water Supply Project. The settlement agreement
provides that a tax-exempt securitization mechanism will be used
to finance about 25 percent of the proposed project.
Rate Relief Bonds - which are sometimes called 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 that
utility's long-term debt. To qualify for AAA ratings, rate
relief 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;" and
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 relief bond securitization structure was introduced in
response to electricity market deregulation in the 1990s to
allow investor-owned-utilities (IOUs) in deregulated markets to
recover so-called "stranded" costs of investments the utilities
made before deregulation. For example, California's IOUs used
rate relief 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 IOUs to use rate relief bond financing
for other purposes.
Public officials from the Monterey region want the Legislature
to authorize the District and Cal-Am to use rate relief bonds to
finance some of the costs of a new desalination plant and other
elements of the proposed water supply project
COMMENTS
1. Purpose of the Bill . Various regulatory and legal
constraints on Cal-Am's ability to obtain water from its
current sources are creating an urgent need to develop new
sources of water for the Monterey Peninsula. In response,
Cal-Am is proposing to construct a desalination plant and
additional conveyance and storage facilities, which may
cost nearly $400 million. Financing water infrastructure
projects with rate relief bonds will produce lower
borrowing costs for these vitally-needed water supply
infrastructure projects. Rate relief bonds are tax-exempt
public debt instruments and are structured to obtain a high
credit rating. As a result, financing project costs with
the bonds will 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. SB 936's provisions are nearly
identical to the rate reduction bond statutes that
legislators enacted for IOUs (AB 1890, Brulte, 1996; SB
477, Peace, 1997; and SB 772, Bowen, 2004). The bill is
also similar to legislation enacted last year authorizing
specified public water agencies to use rate reduction bond
financing (AB 850, Nazarian, 2013). SB 936 relies on this
established financing method to help reduce the charges
that Monterey businesses and residents will pay to cover
the costs of extensive water infrastructure improvements.
2. Is Shifting the Risk to Ratepayers Justified ? This
bill's use of the District as a bankruptcy-remote special
purpose entity to issue rate reduction bonds insulates
bondholders from potential insolvency of Cal-Am. This
structure allows for higher bond ratings and lower costs of
debt issuance. However, by protecting rate reduction
bondholders from becoming creditors if Cal-Am 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 bankruptcy
proceeding. It is unlikely that the bill's
bankruptcy-remoteness provisions will be necessary to
shield bondholders from a bankruptcy case. However, in the
event that Cal-Am 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.
By requiring ratepayers to cover a share of the costs of a
desalination plant and other water supply facilities
through a separate, irrevocable, non-bypassable charge,
this bill increases ratepayers' exposure to risks
associated with the construction and operation of that
water supply infrastructure. The bill requires ratepayers
to pay the water supply charge that secures the rate relief
bonds even if the infrastructure that is financed fails to
function properly or is unusable because of design flaws,
construction failures, or operational problems. This bill
requires the CPUC to issue a financing order for this
purpose only if it finds that it will provide savings to
water customers. It is unclear whether the predicted
savings from lower rates that securitization may generate
justify shifting a greater share of project risks to
ratepayers.
3. Should All Project Costs Be Covered ? Some stakeholders
point out that the risk to ratepayers extends to the
portion of desalination project costs financed by rate
relief bonds. The proposed settlement agreement specifies
about a quarter of costs to be financed by these bonds.
This bill provides that "some or all" of the desalination
plant costs may be funded by rate relief bonds with payment
guaranteed by the water supply charge. Thus, to mitigate
potential risk to ratepayers, and maintain flexibility for
financing the project, the author and committee may wish to
consider amending the bill on page 13, line 39, by striking
"some or all" and inserting "no more than 50 percent."
4. Rate Component or Stand-Alone, Line Item Surcharge ? This
bill includes various provisions requiring that revenues
from the water supply charge be kept in a separate account,
be used only for the authorized purpose of financing the
desalination project, and be subject to audit. However,
the bill is not explicit in requiring that the water supply
charge be a stand-alone, line-item surcharge on customer
bills. On page 4, lines 33 and 34, the bill refers to a
"dedicated rate component," implying that it might be
embedded in other rates. In order to ensure transparency
and accountability for imposition of the surcharge and
expenditure of the revenues from the surcharge, the author
and committee may wish to consider amending the bill to
require the water supply charge to appear as a stand-alone,
line item on customer bills.
5. Open-Ended Adjustments to the Surcharge or True-Up
Mechanism ? This bill includes multiple provisions
requiring the CPUC to periodically adjust the water supply
charge to ensure full and timely recovery of the financing
costs and water supply costs (page 11, lines 36 to 39; page
15, lines 23 to 25; page 15, line 40 and page 16, lines 1
to 2; page 25, lines 33 and 34). The bill also includes,
in subdivision (g) on page 17, lines 3 to 18, a more
detailed provision for approval of surcharge adjustments
submitted to the CPUC by advice letter at least once a
year. According to the author, these provisions are
intended to require an annual "true-up" adjustment of the
amount of the surcharge collected each year to ensure that
it is on track to recover all allowable costs over the term
of the financing - up to 30 years. These provisions are
not intended to authorize adjustments to the surcharge to
add in more total revenue to be collected from ratepayers
beyond that specified in the original financing order.
(That would require an additional financing order.) The
total amount to be collected over the term will be known
and fixed at the time bonds are issued in accordance with
categories of costs authorized and specified in a financing
order.
Recent amendments to this bill specify that the surcharge
adjustment shall be no less than annually. According to
the author, an annual adjustment may be sufficient but
flexibility is needed for more frequent adjustments if
required by bond issuers. It may be most beneficial to
customers to have a required annual true-up followed by the
annual customer notice (see next Comment) with flexibility
for more frequent true-ups if needed. Thus, to ensure the
bill reflects the author's intent, the author and committee
may wish to consider amending the bill to strike all
references to the adjustment and insert a revised version
of subdivision (g) on page 17, lines 3 to 18, to recast the
adjustment as a true-up adjustment required annually and
authorized more frequently as needed.
6. Align Annual Customer Notice With Annual True-Up . This
bill requires Cal-Am to annually provide its customers a
concise explanation of the water supply charges approved in
a financing order, as modified by any adjustments, which
may be by bill inserts, Internet Web site information, or
other appropriate means. Given the requirement to make
annual true-up adjustments to the water supply charge,
which will result in a new surcharge amount on customer
bills, it would benefit customers if the annual customer
notice included current information about each annual
adjustment to the charge. Thus, the author and committee
may wish to consider amending the bill to require that the
annual customer notice be made after the required annual
true-up adjustment and prior to, or simultaneous with, the
adjusted water supply charge appearing on customer's bills.
7. Definitions and Technical Corrections . This bill
includes definitions of key terms yet includes provisions
that both use the defined term and restate the words in the
definition, creating ambiguity. The attached amendments
are agreed to by the author to correct provisions of the
bill to conform to definitions, avoid unnecessary
repetition, or make other technical corrections.
8. Ensuring No Service Disconnection . This bill on page
15, lines 19 to 21, authorizes the CPUC to specify how
amounts collected from a customer shall be allocated
between water supply charges and other charges. The author
states that this is intended to govern what happens when a
customer does not pay his or her bill in full. Current law
and CPUC decisions establish an escalating series of
procedures for a utility to follow when a residential
customer fails to pay charges for utility service,
including customer notice, payment options, site visits,
and culminating with service disconnection. Current law
also prohibits utilities from disconnecting residential
service for nonpayment of debt owed to a third party
(Public Utilities Code § 779.2). It is unclear if the
water supply charge would be considered a debt owed to a
third party for purposes of this prohibition on
disconnection. Thus, the author and committee may wish to
consider amending the bill to make this provision on page
15, lines 19 to 21, "consistent with § 779.2."
9. Public Ownership . In response to a voter initiative
petition, the District's Board of Directors placed a
measure on the June 3, 2014 ballot asking voters within the
District's boundaries to adopt or reject a policy of
pursuing public ownership of the Monterey Peninsula water
system. If approved, the ballot measure would require the
District's General Manager to complete a Feasibility
Analysis and Acquisition Plan for the District's
acquisition, long-term ownership, and management of
Cal-Am's assets. If the plan concludes that acquisition is
feasible, the District would be required, as soon as
practicable, to take all necessary and proper actions
consistent with its powers under state law to acquire
Cal-Am's water system assets. If Monterey-area voters
approve the June ballot measure, legislators may wish to
consider whether the securitization financing mechanism
authorized by SB 936 would be compatible with, or an
impediment to, efforts to pursue public ownership of
Cal-Am's water system.
10. Special Legislation . The California Constitution
prohibits special legislation when a general law can apply
(Article IV, §16). SB 936 contains findings and
declarations explaining the need for legislation that
applies only to the Monterey Peninsula, Cal-Am, and the
District.
11. Ratepayer Impact . This bill will result in Cal-Am
customers paying an irrevocable water supply charge which
could be lower than rates they would pay for the cost of a
desalination plant if it were financed by traditional
financing.
12. Double Referral . This bill was approved by the Senate
Committee on Governance and Finance on April 2, 2014, by a
vote of 7-0.
POSITIONS
Sponsor:
Monterey Peninsula Water Management District
Support:
CalDesal
California Water Association
City of Carmel-by-the-Sea
City Council of Sand City
City of Monterey
City of Pacific Grove
City of Seaside
Coalition of Peninsula Businesses
Monterey County Board of Supervisors
Monterey Peninsula Chamber of Commerce
Monterey Peninsula Regional Water Authority
Office of Ratepayer Advocates
Planning and Conservation League
Oppose:
WaterPlus
Jacqueline Kinney
SB 936 Analysis
Hearing Date: April 29, 2014