BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 936
                                                                  Page  1

          Date of Hearing:   August 13, 2014

                        ASSEMBLY COMMITTEE ON APPROPRIATIONS
                                  Mike Gatto, Chair

                   SB 936 (Monning) - As Amended:   August 4, 2014

          Policy Committee:  Utilities and Commerce                         
                         Vote:  14-0

          Urgency:     No                   State Mandated Local Program:  
          Yes    Reimbursable:              No

           SUMMARY 

          This bill authorizes the California Public Utilities Commission  
          (PUC) to allow the California American Water Company (Cal-Am)  
          and the Monterey Peninsula Water Management District (District)  
          and other financing entities to issue water rate relief bonds to  
          finance water supply infrastructure.  

           FISCAL EFFECT  

          Minor, if any, costs to the PUC.

           COMMENTS  

           1)Rationale.   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 storage and  
            conveyance facilities that may cost up to $400 million.

            This bill enables Cal-Am, in partnership with the District, to  
            use an alternative financing mechanism which will result in  
            lower costs when compared to traditional utility financing  
            mechanisms. 

           2)Rate Relief Bonds.   Rate relief bonds are tax-exempt public,  
            asset-back securities structured to minimize borrowing costs  
            by qualifying for high credit ratings.  The rate relief  
            securitization structure was developed in response to  
            electricity market deregulation in the 1990s to allow  
            investor-owned utilities in deregulated markets to recover the  








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            stranded costs of investment the utilities made before  
            deregulation.

            Rate relief bond financing typically includes the statutory  
            authority to impose a dedicated charge on utility customers to  
            repay pay the bonds, with a requirement that the bonds be  
            issued, and the dedicated charge imposed, by a bankruptcy  
            remote special purpose entity (SPE) to protect ratepayers from  
            the potential insolvency of the utility.  

            This bill authorizes 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.

           3)Background.   The District was created by a special act (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, and Seaside plus unincorporated territory.  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.

            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.  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% 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 by 70%. 
             
             A July 31, 2013 settlement agreement among parties to a PUC  
            proceeding provides for the development, construction,  
            operation and financing of the Monterey Peninsula Water Supply  








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            Project, as well as the recovery of costs in rates. 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 an SPE, a financing order by the PUC, and  
            legislative authorization.

           4)Amendments.   The author is proposing amendments to provide  
            further rate relief for low-income customers.


             Analysis Prepared by  :    Jennifer Galehouse / APPR. / (916)  
            319-2081