BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          SB 1456 (Galgiani) - Safe Drinking Water State Revolving Fund  
          Law of 1997:  public water systems:  financing
          
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          |Version: April 27, 2016         |Policy Vote: E.Q. 7 - 0         |
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          |Urgency: No                     |Mandate: No                     |
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          |Hearing Date: May 9, 2016       |Consultant: Narisha Bonakdar    |
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          Bill Summary:  This bill expands the eligibility for loan  
          forgiveness for capital all water systems serving severely  
          disadvantaged communities with fewer than 200 service  
          connections.

          Fiscal  
          Impact:  

           Cost pressures on the SDWRF resulting from eligibility for  
            loan forgiveness for an increased number of water systems.

          Background: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  







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          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.


          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.


          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  








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          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.



          Proposed Law: This bill expands the eligibility for loan  
          forgiveness for capital all water systems serving severely  
          disadvantaged communities with fewer than 200 service  
          connections.  

          Related  
          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.








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          Staff  
          Comments:  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.

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