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 SB 936 Page 2 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 SB 936 Page 3 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