BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 1456|
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THIRD READING
Bill No: SB 1456
Author: Galgiani (D)
Amended: 4/27/16
Vote: 21
SENATE ENVIRONMENTAL QUALITY COMMITTEE: 7-0, 4/20/16
AYES: Wieckowski, Gaines, Bates, Hill, Jackson, Leno, Pavley
SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/27/16
AYES: Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen
SUBJECT: Safe Drinking Water State Revolving Fund Law of
1997: public water systems: financing
SOURCE: Author
DIGEST: This bill expands the eligibility for loan forgiveness
for capital improvements to all water systems serving severely
disadvantaged communities with fewer than 200 service
connections.
ANALYSIS:
Existing law:
1)Requires, under the California Safe Drinking Water Act (SDWA),
the State Water Resources Control Board (SWRCB) to regulate
drinking water and enforce the federal Safe Drinking Water Act
and other regulations.
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2)Establishes the Safe Drinking Water State Revolving Fund
(SDWSRF), and moneys in the Fund are continuously appropriated
to the 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.
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 expands the eligibility for loan forgiveness for
capital improvements to all water systems serving severely
disadvantaged communities with fewer than 200 service
connections. By expanding the use of moneys in a continuously
appropriated fund, this bill makes an appropriation.
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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 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.
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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.
In California, these water service providers who own and
operate utilities are regulated by the 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.
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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
1) Purpose of bill. According to the author, CPUC-regulated
water utilities are eligible for loans from the SDWSRF
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 SDWA
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 SWRCB is able to authorize a
grant or principal loan forgiveness. SB 1456 allows CPUC
regulated water utilities (for-profit investor-owned
utilities) to access loan forgiveness.
2) Apples to oranges evaluation of "ability to repay loan"?
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
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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), it is less clear whether
for profit companies should be treated the same as
not-for-profit systems when it comes to subsidizing their
infrastructure.
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.
FISCAL EFFECT: Appropriation: Yes Fiscal
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Com.:YesLocal: No
According to the Senate Appropriations Committee, there are cost
pressures on the SDWSRF resulting from eligibility for loan
forgiveness for an increased number of water systems.
SUPPORT: (Verified 5/27/16)
California Association of Mutual Water Companies
California Public Utilities Commission
California Water Association
OPPOSITION: (Verified5/27/16)
None received
Prepared by:Rachel Machi Wagoner / E.Q. / (916) 651-4108
5/28/16 17:08:41
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