BILL ANALYSIS                                                                                                                                                                                                    Ó




                                                                  SB 936
                                                                  Page A
          Date of Hearing:   June 23, 2014

                    ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
                               Steven Bradford, Chair
                    SB 936 (Monning) - As Amended:  June 11, 2014

           SENATE VOTE  :   32-0   
           
          SUBJECT  :   Monterey Peninsula Water Management District:  
          financing orders and water rate relief bonds.

           SUMMARY  :   This bill would authorize the California Public  
          Utilities Commission (PUC) to allow the Monterey Peninsula Water  
          Management District (MPWMD) and other financing entities to  
          issue water rate relief bonds to finance water supply  
          infrastructure. Specifically,  this bill  :   

          1)Makes legislative findings concerning the obstacles faced by  
            California American Water (Cal-Am) in obtaining adequate water  
            supply from the Carmel River and groundwater sources.

          2)Authorizes the PUC to issue financing orders, upon application  
            of a qualifying water utility, to facilitate the recovery,  
            financing, or refinancing of water supply costs, as specified.

          3)Allows the qualifying water utility, beginning January 1,  
            2015, to apply to the PUC for a determination that no more  
            than 50 percent of the water supply costs may be recovered  
            through water supply charges.

          4)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."

          5)Requires the PUC to establish in a financing order an  
            effective mechanism that ensures recovery of water supply  
            costs and financing costs through nonbypassable water supply  
            charges.

          6)Requires customers to pay water supply charges until the water  
            rate relief bonds and all financing costs are paid.










                                                                  SB 936
                                                                  Page B
          7)Requires the PUC to approve periodic true-up adjustments to  
            the water supply charge.

          8)Requires an annual customer notice to customers explaining the  
            water supply charges and true-up adjustments to that charge.

          9)Increases the length of time from 20 days to 210 days in which  
            the PUC must issue a decision and order or rehearing regarding  
            the implementation of certain provisions of law related to the  
            Department of Water Resources.


           EXISTING LAW  

          a)Establishes that access to an adequate supply of healthful  
            water is a basic necessity of human life, and shall be made  
            available to all residents of California at an affordable  
            cost.  (Public Utilities Code § 739.8)

          b)Authorizes the PUC to regulate water corporations and  
            establish just and reasonable rates for recovering the costs  
            of providing water service, including costs of water supply  
            infrastructure.  (Public Utilities Code § 2701 and 789)

          c)Establishes provisions related to the Monterey Peninsula Water  
            Management District. (Public Contract Code § 21620)

           FISCAL EFFECT  :   Unknown.

           COMMENTS  :   

           1)Author's statement:  According to the author, "Working as a  
            public-private partnership with Cal-Am, the Monterey Peninsula  
            Water Management District is offering its access to the public  
            financial markets in order to possibly reduce ratepayer  
            impacts of a large capital outlay project.

            This project will address the Monterey Peninsula's mandatory  
            water reductions they are facing by working with Cal-Am on a  
            desalination plan, plus conveyance and storage facilities that  
            are estimated to cost $277 to $320 million.

            By enabling an alternative financing mechanism, known as  
            'Water Rate Relief Bonds' to be issued, this could result in  
            lower costs to Cal-Am customers when compared to traditional  









                                                                  SB 936
                                                                  Page C
            utility financing mechanisms."

           2)The Monterey Peninsula Water Management District (MPWMD).   
            MPWMD was created by a special act in 1977 (AB 1329, Mello,  
            1977) and formed with local voter approval in 1978. The  
            District is comprised of 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, with five directors elected  
            from voter divisions, one a member of the Monterey County  
            Board of Supervisors, and the final an elected official or  
            chief executive officer. 

            MPWMD is responsible for (1) augmenting water supply through  
            integrated management of ground and surface water resources;  
            (2) promoting water conservation, water reuse, and storm and  
            wastewater reclamation; and (3) fostering scenic values,  
            environmental quality, native vegetation, fish and wildlife,  
            and recreation.<1> 

            The Monterey Peninsula's retail water service is provided by  
            the California-American Water Company (Cal-Am), an investor  
            owned water utility regulated by the PUC.

           3)Need for alternative water supply.  The Monterey Peninsula has  
            relied upon the Carmel River as its main source of water for  
            over a century, and Cal-Am has traditionally supplied  
            customers with water from wells located near the river in the  
            Carmel Valley Aquifer.<2> Until recently, the water was  
            considered groundwater, which is not under the jurisdiction of  
            the State Water Resources Control Board (SWRCB). 

            In 1995 SWRCB ruled that Cal-Am's wells were diverting from  
            the underflow of the Carmel River, thus making diversion  
            subject to SWRCB jurisdiction. Order 95-10 held that Cal-Am  
            did not have valid permits for about 70 percent of the  
            community's water supply. Supply restrictions increased in  
            2006, when cutbacks were ordered in the Seaside Groundwater  
            Basin, the Peninsula's only other water source. A 2009 cease  
            and desist order issued by SWRCB imposed a December 2016  
            deadline on Cal-Am to reduce its pumping from the Carmel River  
            --------------------------
          <1>  http://www.mpwmd.dst.ca.us/  
          <2>  
           http://www.amwater.com/caaw/customer-service/rates-information/mo 
          nterey-coastal-water-project.html  








                                                                  SB 936
                                                                  Page D
            by 70%. 
             
             Cal-Am customers have decreased their water usage by more than  
            20% through water conservation, but these efforts are not  
            enough to meet the order for reduced pumping. To replace the  
            water supply reductions ordered by SWRCB, Cal-Am applied to  
            the PUC on April 23, 2012 with a proposal for the Monterey  
            Peninsula Water Supply Project (MPWSP).<3> The three pronged  
            approach consists of: (1) a desalination plant and  
            infrastructure, (2) groundwater replenishment, and (3) aquifer  
            storage and recovery. Cal-Am has has requested a $1 million  
            grant from the state Department of Water Resources to  
            part-fund a slant test well required for its proposed  
            desalination project.<4>

            A July 31, 2013 settlement agreement among parties to a PUC  
            proceeding provides for the development, construction,  
            operation and financing of the MPWSP, as well as the recovery  
            of costs in rates.<5> The agreement specifies that a  
            tax-exempt securitization mechanism will be used to finance  
            27% of the proposed project. Securitization will require  
            several steps, including:

                 Cal-Am's establishment of a Special Purpose Entity  
               (SPE); 
                 Sale to the SPE of the right to collect a non-bypassable  
               charge from MPWMD customers;
                 Authorization by the California Legislature (i.e.,  
               through this bill); and 
                 A financing order by the PUC.

           1)Rate relief bonds (RRB, and a.k.a. rate reduction bonds).  The  
            deregulation of electricity markets in the 1990s resulted in  
            decreased revenue for utilities, and many utility company  
            assets became uneconomic to operate. These uneconomic assets  
            are referred to as "stranded assets." RRBs were developed to  
          ---------------------------
          <3>  
           http://www.cpuc.ca.gov/Environment/info/esa/mpwsp/pdf/CAW_Applica 
          tion_PDFA_.pdf  
          <4>  
           http://www.desalination.com/wdr/50/6/grant-sought-swro-intake-tes 
          t  
          <5>  
           http://www.dra.ca.gov/WorkArea/linkit.aspx?LinkIdentifier=id&Item 
          ID=2466&libID=2488  








                                                                  SB 936
                                                                  Page E
            enable utilities to bridge the gap between the book value of  
            stranded assets in the previously regulated environment and  
            their market value in a deregulated one.<6>

            Essentially a RRB is the securitization of a cashflow stream  
            generated by a fee charged to utility consumers. These  
            asset-backed securities minimize borrowing costs by qualifying  
            for AAA credit ratings, as AAA ratings allow a utility to  
            borrow funds at an interest rate well below the rate typically  
            applicable to the utility's long-term debt.  The use of RRBs  
            allows for an extended recovery period of those stranded  
            assets at a AAA funding rate. To qualify for AAA ratings, RRB  
            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 (SPE)"; 
                 A "true-up" mechanism by which charges collected to pay  
               debt service are regularly adjusted to ensure bonds are  
               paid off at the final maturity date; and
                 A pledge made by the state not to impair the right to  
               collect charges until bonds are paid in full.

            Public officials from the Monterey region want the Legislature  
            to authorize the District and Cal-Am to use RRBs to finance  
            some of the costs of a new desalination plant and other  
            elements of the proposed water supply project. 

           1)Shifting risk to ratepayers and cost controls.   This bill uses  
            a bankruptcy-remote special purpose entity (SPE) to issue RRBs  
            and insulate bondholders from potential insolvency of Cal-Am.  
            This 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 this 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  



          ---------------------------
          <6>  http://pages.stern.nyu.edu/~igiddy/cases/rrb.pdf  








                                                                  SB 936
                                                                  Page F
            bear the costs of restructuring.  

            By requiring ratepayers to share costs of a desalination plant  
            and other water supply facilities through a non-bypassable  
            charge, this bill increases ratepayers' exposure to risks  
            associated with the water supply infrastructure (e.g.,  
            construction and operation). The bill requires ratepayers to  
            pay the water supply charge that secures the RRBs even if the  
            financed infrastructure fails to function properly or is  
            unusable because of design flaws, construction failures, or  
            operational problems. It is unclear whether the potential -  
            but not guaranteed - lower rates that securitization may  
            generate justify shifting a greater share of project risks to  
            ratepayers.
           
             Related to cost overruns, following an informational hearing  
            this committee held in February 2014 on the affordability of  
            water rates,<7> additional information was obtained regarding  
            costs borne by ratepayers when the cost of a PUC-approved  
            water treatment facility almost doubled. In 2006 the  
            California Water Service Company, a PUC-regulated water  
            utility, requested authority to borrow funds from the Safe  
            Drinking Water State Revolving Fund (SDWSRF) for a new water  
            treatment facility to serve the community of Lucerne,  
            California.  The requested loan amount was $4.5 million.  On  
            December 2, 2006, Cal Water amended A.06-02-003 to increase  
            the loan amount to $5,676,277.  On November 20, 2007, Cal  
            Water filed A.07-11-020 increasing the requested loan amount  
            to $7,442,700.  The PUC approved the change in the loan amount  
            without reviewing the reasonableness of the costs (a  
            reasonableness review supposedly was conducted by the  
            Department of Public Health, the agency administering SDWSRF).  
            Although the sponsors believe this is unlikely, water  
            ratepayers in Monterey could be exposed to similar cost  
            overruns.

            To limit ratepayer risk and contain costs,  the author may wish  
            to consider an amendment specifying that financed  
            infrastructure is limited to the desalination plant and  
            necessary equipment solely for that facility,  amending 849(l)  
            of the proposed bill, as follows: 

               "Water supply activity" means an activity or  
               activities by or on behalf of a qualifying water  



               ----------------------
          <7>  http://autl.assembly.ca.gov/2014hearings  








                                                                  SB 936
                                                                  Page G
               utility in connection with the acquisition and  
               construction of infrastructure,  plants, including,  
               desalination facilities, pipelines, and other  
               facilities, to develop new sources of supply,   directly  
               related to a desalination facility and necessary  
               equipment solely for that facility, including the  
               pipes necessary for conveyance and tanks necessary for  
               water storage,  as authorized by the commission in  
               proceeding A.12-04-019.
           
             To further contain costs,  the author also may wish to consider  
            an amendment specifying that the amount authorized in the PUC  
            financing order cannot increase by more than 5%,  amending a  
            to-be-determined section of the Public Utilities Code, as  
            follows:

                The commission shall not approve in its financing  
               order any increase of more than 5% for the special  
               purpose entity created to finance the Monterey  
               Peninsula Water Supply Project.  
           
          2)Ratepayer impacts.  According to Cal-Am, the average ratepayer  
            will be subject to a rate increase of 41% over a period of  
            five years, with estimated bills increasing from $75.74 at the  
            end of 2013 to $106.73 at the end of 2018 (94 cents/day).<8>  
            The charge will be assessed volumetrically based on water  
            usage, rather than a fixed charge.  

             This bill does not currently provide qualifying low-income  
            ratepayers (i.e., those who meet federal poverty guidelines)  
            with an exemption from the non-bypassable water supply  
            charges. Cal-Am reports about 9% of ratepayers (3,500 out of  
            38,000) in this district are in the low-income water rate  
            assistance program (LIRA). A 41% rate increase on a low income  
            ratepayer is likely to be extremely burdensome.

            To assist low-income ratepayers,  the author may wish to  
            consider an amendment specifying that ratepayers participating  
            in commission-approved low-income water rate assistance  
            program are exempt from nonbypassable MPWSP charges, as  
            specified  , amending a to-be-determined section of the Public  
            --------------------------
          <8>  
           http://coastalwater.publishpath.com/Websites/coastalwater/files/C 
          ontent/3984326/CA-Mtry_RateDesign-RateImpactFactSheet_FINAL2-rev. 
          pdf  








                                                                  SB 936
                                                                  Page H
            Utilities Code, as follows:
                
               If the commission finds that the surcharge exclusion has no  
               impact on the marketability of the financing, the  
               commission shall order California American Water Company to  
               exclude low income customers from payment of the surcharge.

               If the low income customers are excluded from payment of  
               the surcharge and if computer programming upgrades are  
               necessary to accommodate this exclusion, the Commission  
               shall allow California American Water Company to recover  
               just and reasonable costs from the Monterey ratepayers.

            3)Related legislation.  AB 850 (Nazarian), Chapter 636, Statutes  
            of 2013, authorized joint powers authorities to issue rate  
            reduction bonds to finance publicly owned water utility  
            projects until December 31, 2020.  The bonds will be secured  
            by utility project property and repaid through a separate  
            utility project charge imposed on customer bills.  
             
           4)Voters reject transfer of Cal-Am assets to the District.  In  
            the June 3, 2014 primary election, voters within the MPWMD  
            rejected Measure O (55% to 45%), which would have directed  
            MPWMD to "adopt a policy to move toward public ownership of  
            all water systems within its boundaries [i.e., Cal-Am] by  
            conducting a feasibility study, and if deemed feasible, move  
            forward with acquisition of all such water systems' assets."

           5)Support and opposition.  Supporters state the need for an  
            alternative water supply to the Monterey Peninsula, and  
            contend that use of water rate relief bonds will result in  
            lower costs to customers of Cal-Am as compared to traditional  
            utility financing mechanisms.  
                
            In opposition, WaterPlus questions why MPWMD would take on an  
            obligation of $124.5 million to save $93 million, when for  
            $276 million, it could own the project and save ratepayers  
            $995 million.  

          REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          CalDesal
          California Water Association (CWA)









                                                                  SB 936
                                                                  Page I
          City Council of Monterey
          City Council of Sand City
          City Council of the City of Carmel by the Sea
          City Council of the City of Pacific Grove
          City Council of the City of Seaside
          Coalition of Peninsula Businesses
          Monterey County Board of Supervisors
          Monterey Peninsula Chamber of Commerce Board of Directors
          Monterey Peninsula Regional Water Authority
          Monterey Peninsula Water Management District
          Office of Ratepayer Advocates (ORA)
          Planning and Conservation League
           
            Opposition 
           
          WaterPlus

           Analysis Prepared by  :    Brandon Gaytan / U. & C. / (916)  
          319-2083