BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 1456| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- 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. SB 1456 Page 2 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. SB 1456 Page 3 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. SB 1456 Page 4 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. SB 1456 Page 5 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 SB 1456 Page 6 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 SB 1456 Page 7 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 **** END ****