BILL ANALYSIS Ó
SENATE COMMITTEE ON ENVIRONMENTAL QUALITY
Senator Wieckowski, Chair
2015 - 2016 Regular
Bill No: SB 1456
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|Author: |Galgiani |
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|Version: |2/19/2016 |Hearing |4/20/2016 |
| | |Date: | |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Rachel Machi Wagoner |
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SUBJECT: Safe Drinking Water State Revolving Fund Law of 1997:
public water systems: financing
ANALYSIS:
Existing law:
1) Under the California Safe Drinking Water Act (SDWA):
a) Requires the State Water Resources Control Board
to regulate drinking water and enforce the federal Safe
Drinking Water Act and other regulations.
2) Establishes the Safe Drinking Water State Revolving Fund
(SDWSRF), and moneys in the fund are continuously
appropriated to the State Water Resources Control Board
(SWRCB) for the provision of grants and revolving fund loans
to provide for the design and construction of projects for
public water systems that will enable suppliers to meet safe
drinking water standards.
a) For community public water systems and
not-for-profit noncommunity public water systems,
allows planning and preliminary engineering studies,
project design, and construction costs incurred by
those public water systems to be funded by loans and
other repayable financing.
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b) Additionally allows, if those public water
systems are owned by public agencies or not-for-profit
water companies, those specified costs to be funded by
grants, principal forgiveness, or a combination of
grants and loans or other financial assistance.
c) Deems a public agency or private not-for-profit
water company serving a severely disadvantaged
community with fewer than 200 service connections and
that owns a small community water system or
nontransient community water system to have no ability
to repay any financing for a project serving the
severely disadvantaged community.
3) Requires the California Public Utilities Commission (CPUC) to
establish rates for investor-owned utilities water service
providers.
This bill:
1) Authorizes the above-described capital and design costs to be
funded by loans or other repayable financing, grants,
principal forgiveness, or a combination of grants and loans
or other financial assistance, regardless of whether the
public water system is a community public water system, a
not-for-profit noncommunity public water system, or is owned
by a public agency or private not-for-profit investor-owned
utility water service provider. By expanding the use of
moneys in a continuously appropriated fund, this bill would
make an appropriation.
2) Specifies that any public water system serving a severely
disadvantaged community with fewer than 200 service
connections does not have the ability to repay any financing
for a project serving the severely disadvantaged community.
Background
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1) SDWSRF.
Congress established the SDWSRF as part of the 1996 Safe
Drinking Water Act amendments to better enable public water
systems to comply with national primary drinking water
standards and to protect public health. The SDWSRF provides
financial assistance in the form of capitalization grants to
states to provide low-interest loans and other assistance to
public water systems.
In order to receive these funds, states must provide a state
match equal to 20% of the federal capitalization grants and
must create a drinking water state revolving fund program for
public water system infrastructure needs and other drinking
water-related activities. In response, California
established the SDWSRF through SB 1307 (Costa, Chapter 734,
Statutes of 1997) to help fund the state's drinking water
needs.
SDWSRF provides low-interest preconstruction and construction
loans or grants to drinking water systems. These loans or
grants cover capital improvements that increase public health
and compliance with drinking water regulations.
Financial incentives including reduced interest rates,
extended financing terms, principal forgiveness and grants
targeted toward small disadvantaged communities with
financial hardship.
SWRCB division of drinking water evaluates financial hardship
and ability to repay based on affordability criteria
including population, median household income, and rates as a
percent of median household income.
2) What are investor-owned water utilities?
Investor-owned water companies are water service providers
that own regulated water and wastewater utilities, partner
with municipalities to form public-private partnerships, or
operate and maintain water and wastewater systems as
contracted services providers. These companies may be
privately owned or publicly traded.
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In California, these water service providers who own and
operate utilities are regulated by the California Public
Utilities Commission (CPUC). CPUC establishes rates and
terms of service. In setting rates, CPUC reviews the
company's costs, audits system needs, conducts public
hearings for customers, holds formal evidentiary hearings
adjudicated by administrative law judges, and issues a final
decision authorizing the utility to establish approved rates
and terms of service.
Rates are set to collect an authorized revenue requirement to
compensate for just and reasonable expenses for operating and
maintaining a water system and costs related to capital
expenditure, including an authorized rate of return on the
undepreciated capital investment (rate base), depreciation
expense, property and income taxes.
There are 108 investor-owned water utilities under the CPUC's
jurisdiction providing water service to about 16% of
California's residents. Approximately 95% of that total is
served by nine large water utilities each serving more than
10,000 connections. Annual water and wastewater revenues
under the CPUC's regulation total $1.4 billion.
CPUC regulates 70 Class D water utilities that have less than
500 connections. Of these 70, 55 have less than 200 service
connections. There are also eight districts of Class A and B
multi-district utilities that have less than 200 connections.
CPUC's regulation of water utilities does not consider
whether or not the utility is serving severely disadvantaged
communities. As such, CPUC does not maintain information to
know if any of the 55 Class D water utilities or the eight
districts of the Class A and B multi-district utilities serve
severely disadvantaged communities.
The after-tax authorized rate of return on a utility's rate
base is between 10.2% and 11.2% for Class D water utilities.
Comments
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1) Purpose of Bill. According to the author, CPUC-regulated
water utilities are eligible for loans from the Safe Drinking
Water State Revolving Fund Program. The author asserts that
these loans are necessary to help finance the cost of
drinking water infrastructure projects needed to achieve or
maintain compliance with Safe Drinking Water Act
requirements. The author states that when a public agency or
private not-for-profit water company is unable to repay the
full cost of the financing, the State Water Resources Control
Board is able to authorize a grant or principal loan
forgiveness. SB 1456 would allow CPUC regulated water
utilities (for-profit investor-owned utilities) to access
loan forgiveness.
2) Concerns raised.
In a letter received from Clean Water Action the following
concern is raised:
I am writing to express our organization's concerns with SB
1456, which expands eligibility for loan forgiveness for
SDWSRF to investor-owned public water systems.
In some cases, investor-owned public water systems are the
only option to provide safe drinking water to small
severely disadvantaged communities in California. For that
reason, Clean Water Action supports the proposal in the
legislation to expand loan forgiveness for projects serving
such communities.
Where we disagree with the author's proposal is in section
(b) (2), which allows the State Board to allocate loan
forgiveness for a project. The difficulty is that the
SDWSRF determines whether a project qualifies for loan
forgiveness based upon the rates paid by ratepayers as a
percentage of their median household income. But water
rates for customers of investor-owned systems include
profit, making such an allocation a potential gift of
public funds. For that reason, we recommend that this
paragraph be removed from the bill.
3) Apples to Oranges evaluation of "ability to repay loan"?
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There is clear evidence that small water systems serving
severely disadvantages communities do not have the ability to
bear the costs of major capital improvements through the rate
base. Therefore, there is clear value in expanding the
definition in statute of those systems that are deemed unable
to repay any financing for a project serving the severely
disadvantaged community serving 200 connections or less to
treat equally all systems regardless of whether the water
provider is not-for-profit or for-profit in order to ensure
clean drinking water delivery is not dependent on the
severely disadvantaged communities' ability to bear the cost.
However, the value is less clear on providing loan
forgiveness for those for-profit water systems whose
investors are earning a rate of return between 10% and 11%
and that are large enough that the economy of scale is such
that the rate base and investor's profit may be able to bear
some portion of the cost of the capital improvement.
While there is value to the state's, and thereby taxpayers,
investment in capital upgrades to water systems to ensure
clean drinking water regardless of nature of water system
(i.e. not-for-profit or for-profit), the current statutory
authorization for SWRCB to consider "ability to repay" loans
granted from the SDWSRF was constructed assuming no profit
being made and does not contemplate that the water system's
profit margin should potentially be a factor in considering
the ability to repay a loan made at taxpayer expense.
Additionally, the SDWSRF was constructed to be a revolving
loan program. If California expands the pool (to every water
system in the state) for loan forgiveness of a continuously
appropriated program, it increases the probability of
depleting the revenue more quickly and the program eventually
ceasing to be a revolving loan program and rather becoming a
grant program that does not serve the ongoing needs of
California's most vulnerable communities and water systems.
It is not clear that the current SDWSRF loan forgiveness
criteria as set by SWRCB is limiting enough to prevent this
from happening.
Suggested Amendments.
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In order to ensure that the SDWSRF remain a viable, ongoing
program, the bill should limit eligibility for investor-owned
utility water service providers' loan forgiveness to those
providers that are serving small, severely disadvantaged
communities of 200 service connections or less and where the
capital improvement is specifically for that community.
Additionally, the bill should be amended to create a separate
process by which SWRCB assesses an investor-owned utility
water service provider's ability to repay an SDWSRF loan,
which factors in the extent at which the investors profit in
considering the ability to repay the loan.
Related/Prior Legislation
AB 983 (Perea) Chapter 515, Statutes of 2011 makes several
changes to the SDWSRF regarding providing grants and loans for
safe drinking water projects, including allowing certain
disadvantaged communities to be eligible for grants up to 100%
of project costs.
SOURCE: Author
SUPPORT:
California Water Association
California Public Utilities Commission
OPPOSITION:
None received
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