BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 1550|
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THIRD READING
Bill No: AB 1550
Author: Assembly Banking and Finance Committee
Amended: 4/15/09 in Assembly
Vote: 21
SENATE BANKING, FINANCE, AND INS. COMMITTEE : 11-0, 6/17/09
AYES: Calderon, Cogdill, Correa, Cox, Harman, Kehoe, Liu,
Lowenthal, Padilla, Runner, Wolk
NO VOTE RECORDED: Florez
SENATE APPROPRIATIONS COMMITTEE : 11-0, 6/29/09
AYES: Kehoe, Cox, Corbett, Leno, Oropeza, Price, Runner,
Walters, Wolk, Wyland, Yee
NO VOTE RECORDED: Denham, Hancock
ASSEMBLY FLOOR : 73-0, 5/14/09 (Consent) - See last page
for vote
SUBJECT : Department of Water Resources: refunding bonds
SOURCE : State Treasurer Bill Lockyer
DIGEST : This bill authorizes the Department of Water
Resources to restructure a portion of its power supply
revenue bonds, with the aim of reducing its long-term
borrowing costs.
ANALYSIS :
Existing law:
CONTINUED
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1. Provides that the purchase or other acquisition of bonds
by or on behalf of the state or a local government that
issued the bonds does not cancel, extinguish, or
otherwise affect the bonds (Section 5925 of the
Government Code).
2. Requires the Department of Water Resources (DWR) to
recover costs associated with the 2000-2001 energy
crisis through the issuance of up to $13.4 billion in
bonds, which are to be repaid by ratepayers (Section
80130 of the Water Code).
3. Authorizes DWR to refund (i.e., buy back and
restructure) those bonds, if the refunding is done to
obtain a lower interest rate, but further specifies that
any refunding done for any other purpose counts toward
the aggregate amount of bonds authorized to be issued
(Section 80130 of the Water Code).
This bill:
1. Adds to the number of circumstances in which DWR is
authorized to refund its power bonds, by authorizing
refunding in any of the following additional
circumstances:
A. Refunding variable rate bonds with fixed rate
bonds.
B. Refunding bonds, if any nationally recognized
rating agency reduces or withdraws, or proposes to
reduce or withdraw, the rating assigned to securities
secured by bond insurance policies, credit or
liquidity facilities issued by the provider of a bond
insurance policy, or a credit or liquidity facility
securing the bonds being refunded.
2. Provides that all refunding bonds issued by DWR before
January 1, 2010, are deemed to have been issued for one
or more purposes authorized under existing law or under
this bill, and that these refunding bonds shall not be
included in calculating the aggregate amount of bonds
that DWR may issue under its existing power supply
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revenue bond cap.
Background
In late 2000 and early 2001, California's energy market
failed, and the state was forced to step in and purchase
power to stabilize the market and prevent continued
statewide power outages. DWR was given the authority to
purchase power and sell it, both directly and indirectly,
to consumers, through a division within DWR (the California
Energy Resources Scheduling Division) expressly created for
those purposes [AB 1X (Keeley), Chapter 4, Statutes of
2001].
AB 1X directed that the cost of that power be covered
through the issuance of up to $13.423 billion in Power
Supply Revenue bonds, which were to be paid back over time
by the ratepayers of California's investor-owned utilities
(Pacific Gas and Electric, Southern California Edison, and
San Diego Gas and Electric). The California Energy
Resources Scheduling Division manages the long-term
contracts entered into by DWR in 2001, with funding for the
contracts provided by the ratepayer-supported Power Supply
Revenue bonds. California's investor-owned utilities
manage the receipt and delivery of the energy procured by
through contracts.
Due to recent turmoil in the capital markets, and the high
interest rates demanded by some investors, DWR has found it
necessary to restructure more than $2 billion of its
variable rate Power Supply Revenue bonds, to address
investor concerns with bond insurers and/or banks providing
credit enhancement for the bonds. Some of these bonds have
been refinanced as fixed rate bonds, and others have been
restructured as variable rate bonds, with credit
enhancement provided by stronger banks.
Unfortunately, as DWR and the State Treasurer's Office
(STO) have worked to restructure DWR's debt, to lower DWR's
cost of borrowing, they have encountered an obstacle
created by the wording of AB 1X. According to the Attorney
General's office, any bond debt that is restructured must
be counted against DWR's $13.4 billion cap, unless the
restructuring can be shown, with certainty, to produce debt
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servicing savings. Because most of the bonds being
restructured are variable rate bonds, and because future
rates cannot be known with certainty, DWR has been unable
to conclusively demonstrate that its restructurings meet
the savings test.
Because it lacks the ability to conclusively demonstrate
savings, the STO has been unable to refinance the variable
rate bonds, and has instead issued new fixed rate debt,
which it has used to pay off the variable rate debt. To
date, DWR has expended $1.76 billion of its bond
authorization to restructure debt. After the last bond
sale in mid-January, only $45 million is left under the
original $13.4 billion bond cap. The STO believes that it
is highly likely there will be a need to restructure far
more than $45 million in additional variable rate bonds, by
changing them to fixed rate bonds. Such a restructuring
cannot occur, without a change in law.
Neither the STO, nor DWR, wants to increase the $13.4
billion bond cap. Instead, they would like to amend
Section 80130 of the Water Code to include conditions,
other than debt servicing savings, which will allow the
remaining variable rate power bonds to be restructured.
According to the STO, the flexibility being sought through
this bill is similar to flexibility allowed in other state
bond programs administered by the STO.
With the flexibility given to it through this bill, the STO
indicates it would seek to utilize a restructuring
transaction known as a "current refunding," which the STO
characterizes as the most cost-effective option within
today's marketplace. Under a current refunding, the old
variable rate bonds could be replaced with new fixed rate
bonds, which could be structured to meet specific investor
demands on the day of the sale.
If DWR is unable to utilize a current refunding or is
unable to gain more room under the authorization cap, it
will be limited to a "conversion" of the existing bonds
from a variable to a fixed interest rate mode. Because the
mechanics of a conversion are much more restrictive than
those of a refunding, DWR will be forced to sell bonds
under terms that are less desirable to investors.
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Investors will demand a premium to accept these terms, and
DWR will not be able to obtain interest rates as favorable
as those that could be obtained with a current refunding
issue.
In background material provided to the Senate Banking,
Finance and Insurance Committee, the STO provided the
following example to document some of the problems it faces
under existing Section 80130 of the Water Code: On
November 20, 2008, DWR and the STO entered the market to
convert $523 million of variable rate bonds to fixed rate
bonds. Because investors wanted a bond structure that
required features which could not be fully accommodated
with a conversion, DWR was only able to obtain acceptable
interest rates for $173 million of the $523 million.
The underwriter of the bonds, J.P. Morgan Securities, while
not confident that there were buyers for the bonds at any
price, estimated that the minimum rates which would have
been required to place the $350 million balance of bonds
using the conversion mechanics would have been at least
0.45-0.50 percent higher than what could have been achieved
with a more flexible bond structure. These higher rates
would have equated to an additional interest cost of $17.6
million over the 14-year remaining life of the bonds.
Another complicating factor is that variable rate bonds
which cannot be remarketed, and which are surrendered by
bondholders, must be purchased by the banks originally
contracted to provide credit enhancement for the bonds.
The $350 million of bonds DWR was unable to convert to
fixed rate bonds became "bank bonds". The banks were
obligated to hold these bonds until DWR could successfully
remarket the bonds in fixed rate mode (something it was
able to do in January 2009). While the bonds were "bank
bonds", the interest rate on the bonds was set at the prime
rate (4.00 percent at the time) plus 2.00 percent, for a
total of 6.00 percent. If the bonds had been successfully
remarketed, DWR would only have paid a fixed rate of 5.30
percent. The difference between the 5.3 percent rate the
state was unable to get (because we lacked the necessary
flexibility) and the 6.0 percent rate the state paid on the
bank bonds would have equated to an additional $2.4 million
per year in additional interest. All of that interest
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would have been paid by ratepayers, pursuant to the
original terms of AB 1X.
Finally, and perhaps most onerous, if bank bonds are not
remarketed within six months, DWR is required to begin
repaying the principal of the bonds, ahead of their
scheduled amortization. If this situation occurred, it
could increase annual debt service costs by more than $90
million in 2009, and by more than $120 million annually for
each of the next two years, until the bonds are fully
amortized.
The language proposed by the STO is intended to give DWR
maximum flexibility to restructure the remaining Power
Supply Revenue bonds, with the aim of obtaining the lowest
possible interest rates for ratepayers.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2009-10 2010-11 2011-12 Fund
Bond debt service costs Unknown, likely long-term
savings Special*
* Department of Water Resources Electric Power Fund
SUPPORT : (Verified 6/30/09)
State Treasurer Bill Lockyer (source)
ASSEMBLY FLOOR :
AYES: Adams, Anderson, Arambula, Beall, Bill Berryhill,
Tom Berryhill, Blakeslee, Block, Blumenfield, Brownley,
Buchanan, Caballero, Charles Calderon, Carter, Chesbro,
Conway, Cook, Coto, Davis, De La Torre, De Leon, DeVore,
Duvall, Emmerson, Eng, Evans, Feuer, Fletcher, Fong,
Fuller, Furutani, Galgiani, Gilmore, Hagman, Hall,
Harkey, Hayashi, Hernandez, Hill, Huber, Huffman,
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Jeffries, Jones, Knight, Krekorian, Lieu, Logue, Bonnie
Lowenthal, Ma, Mendoza, Miller, Monning, Nava, Nestande,
Niello, Nielsen, John A. Perez, V. Manuel Perez,
Portantino, Price, Ruskin, Salas, Silva, Skinner,
Solorio, Audra Strickland, Swanson, Torlakson, Torres,
Torrico, Tran, Villines, Yamada
NO VOTE RECORDED: Ammiano, Fuentes, Gaines, Garrick,
Saldana, Smyth, Bass
JJA:mw 6/30/09 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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