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 ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: April 27, 2016 |Policy Vote: E.Q. 7 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: May 9, 2016 |Consultant: Narisha Bonakdar | | | | ----------------------------------------------------------------- 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 SB 1456 (Galgiani) Page 1 of ? 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 SB 1456 (Galgiani) Page 2 of ? 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. SB 1456 (Galgiani) Page 3 of ? 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. -- END --