BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 936|
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THIRD READING
Bill No: SB 936
Author: Monning (D), et al.
Amended: 5/6/14
Vote: 21
SENATE GOVERNANCE & FINANCE COMMITTEE : 7-0, 4/2/14
AYES: Wolk, Knight, Beall, DeSaulnier, Hernandez, Liu, Vidak
SENATE ENERGY, UTILITIES & COMMUNIC. COMM. : 10-0, 4/29/14
AYES: Padilla, Fuller, Block, Cannella, Corbett, DeSaulnier,
Hill, Knight, Pavley, Wolk
NO VOTE RECORDED: De León
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
SUBJECT : Monterey Peninsula Water Management District:
financing order
and water rate relief bonds
SOURCE : Monterey Peninsula Water Management District
DIGEST : This bill allows the Monterey Peninsula Water
Management District and other financing entities to issue water
rate relief bonds to finance water supply infrastructure.
ANALYSIS : Existing law:
1.Authorizes the California Public Utilities Commission (PUC) to
regulate water corporations and establish just and reasonable
rates for recovering the costs of providing water service,
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including costs of water supply infrastructure. California
American Water (Cal-Am), a water corporation subject to PUC
jurisdiction, is the primary provider of water service to the
Monterey Peninsula.
2.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.
This bill:
1.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 PUC.
2.Authorizes the PUC 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 PUC finds that the
tax-exempt bond financing "will provide savings to water
customers on the Monterey Peninsula."
3.Requires the PUC 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."
4.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.
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5.Requires the PUC to approve periodic true-up adjustments to
the water supply charge to ensure full and timely recovery of
all water supply costs and financing costs.
6.Requires an annual customer notice to customers explaining the
water supply charges and true-up 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. 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 PUC.
In 1995, the State Water Resources Control Board 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 Board
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 PUC, 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 PUC
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% of the proposed project.
Rate Relief Bonds . Sometimes called rate reduction bonds, are
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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 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
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
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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. This bill's
provisions are nearly identical to the rate reduction bond
statutes that legislators enacted for IOUs. This bill is also
similar to legislation enacted last year authorizing specified
public water agencies to use rate reduction bond financing (AB
850, Nazarian, Chapter 636, Statutes of 2013). This bill 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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
SUPPORT : (Verified 5/19/14)
Monterey Peninsula Water Management District (source)
CalDesal
California Water Association
City of Carmel-by-the-Sea
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
Sand City
OPPOSITION : (Verified 5/19/14)
WaterPlus
ARGUMENTS IN SUPPORT : The sponsor states, "SB 936 authorizes
the California Public Utilities Commission to allow Cal-Am to
work jointly with the Monterey Peninsula Water Management
District to issue Water Rate Relief Bonds to the public for the
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purpose of financing a portion of the Cal-Am Monterey Peninsula
Water Supply Project. Such use of Water Rate Relief Bonds will
result in lower costs to customers of Cal-Am as compared to
traditional utility financing mechanisms."
ARGUMENTS IN OPPOSITION : The opposition states that the water
management district would take on an obligation of $124.5
million to save $93 million, when for little more than twice
$124.5 million ($276 million) it could own the whole project and
save ratepayers $995 million.
AB:nl 5/20/14 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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