BILL ANALYSIS �
SB 936
Page A
Date of Hearing: June 23, 2014
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Steven Bradford, Chair
SB 936 (Monning) - As Amended: June 11, 2014
SENATE VOTE : 32-0
SUBJECT : Monterey Peninsula Water Management District:
financing orders and water rate relief bonds.
SUMMARY : This bill would authorize the California Public
Utilities Commission (PUC) to allow the Monterey Peninsula Water
Management District (MPWMD) and other financing entities to
issue water rate relief bonds to finance water supply
infrastructure. Specifically, this bill :
1)Makes legislative findings concerning the obstacles faced by
California American Water (Cal-Am) in obtaining adequate water
supply from the Carmel River and groundwater sources.
2)Authorizes the PUC to issue financing orders, upon application
of a qualifying water utility, to facilitate the recovery,
financing, or refinancing of water supply costs, as specified.
3)Allows the qualifying water utility, beginning January 1,
2015, to apply to the PUC for a determination that no more
than 50 percent of the water supply costs may be recovered
through water supply charges.
4)Requires the PUC to authorize imposition and collection of the
water supply charge if it determines the bond financing "would
reduce the rates on a present value basis that customers
within the qualifying water utility's service territory would
pay as compared to the use of traditional utility financing
mechanisms."
5)Requires the PUC to establish in a financing order an
effective mechanism that ensures recovery of water supply
costs and financing costs through nonbypassable water supply
charges.
6)Requires customers to pay water supply charges until the water
rate relief bonds and all financing costs are paid.
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7)Requires the PUC to approve periodic true-up adjustments to
the water supply charge.
8)Requires an annual customer notice to customers explaining the
water supply charges and true-up adjustments to that charge.
9)Increases the length of time from 20 days to 210 days in which
the PUC must issue a decision and order or rehearing regarding
the implementation of certain provisions of law related to the
Department of Water Resources.
EXISTING LAW
a)Establishes that access to an adequate supply of healthful
water is a basic necessity of human life, and shall be made
available to all residents of California at an affordable
cost. (Public Utilities Code � 739.8)
b)Authorizes the PUC to regulate water corporations and
establish just and reasonable rates for recovering the costs
of providing water service, including costs of water supply
infrastructure. (Public Utilities Code � 2701 and 789)
c)Establishes provisions related to the Monterey Peninsula Water
Management District. (Public Contract Code � 21620)
FISCAL EFFECT : Unknown.
COMMENTS :
1)Author's statement: According to the author, "Working as a
public-private partnership with Cal-Am, the Monterey Peninsula
Water Management District is offering its access to the public
financial markets in order to possibly reduce ratepayer
impacts of a large capital outlay project.
This project will address the Monterey Peninsula's mandatory
water reductions they are facing by working with Cal-Am on a
desalination plan, plus conveyance and storage facilities that
are estimated to cost $277 to $320 million.
By enabling an alternative financing mechanism, known as
'Water Rate Relief Bonds' to be issued, this could result in
lower costs to Cal-Am customers when compared to traditional
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utility financing mechanisms."
2)The Monterey Peninsula Water Management District (MPWMD).
MPWMD was created by a special act in 1977 (AB 1329, Mello,
1977) and formed with local voter approval in 1978. The
District is comprised of six cities (Carmel-by-the-Sea, Del
Rey Oaks, Monterey, Pacific Grove, Sand City, Seaside) plus
unincorporated territory. The District is governed by a
seven-member Board of Directors, with five directors elected
from voter divisions, one a member of the Monterey County
Board of Supervisors, and the final an elected official or
chief executive officer.
MPWMD is responsible for (1) augmenting water supply through
integrated management of ground and surface water resources;
(2) promoting water conservation, water reuse, and storm and
wastewater reclamation; and (3) fostering scenic values,
environmental quality, native vegetation, fish and wildlife,
and recreation.<1>
The Monterey Peninsula's retail water service is provided by
the California-American Water Company (Cal-Am), an investor
owned water utility regulated by the PUC.
3)Need for alternative water supply. The Monterey Peninsula has
relied upon the Carmel River as its main source of water for
over a century, and Cal-Am has traditionally supplied
customers with water from wells located near the river in the
Carmel Valley Aquifer.<2> Until recently, the water was
considered groundwater, which is not under the jurisdiction of
the State Water Resources Control Board (SWRCB).
In 1995 SWRCB ruled that Cal-Am's wells were diverting from
the underflow of the Carmel River, thus making diversion
subject to SWRCB jurisdiction. Order 95-10 held that Cal-Am
did not have valid permits for about 70 percent of the
community's water supply. Supply restrictions increased in
2006, when cutbacks were ordered in the Seaside Groundwater
Basin, the Peninsula's only other water source. A 2009 cease
and desist order issued by SWRCB imposed a December 2016
deadline on Cal-Am to reduce its pumping from the Carmel River
--------------------------
<1> http://www.mpwmd.dst.ca.us/
<2>
http://www.amwater.com/caaw/customer-service/rates-information/mo
nterey-coastal-water-project.html
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by 70%.
Cal-Am customers have decreased their water usage by more than
20% through water conservation, but these efforts are not
enough to meet the order for reduced pumping. To replace the
water supply reductions ordered by SWRCB, Cal-Am applied to
the PUC on April 23, 2012 with a proposal for the Monterey
Peninsula Water Supply Project (MPWSP).<3> The three pronged
approach consists of: (1) a desalination plant and
infrastructure, (2) groundwater replenishment, and (3) aquifer
storage and recovery. Cal-Am has has requested a $1 million
grant from the state Department of Water Resources to
part-fund a slant test well required for its proposed
desalination project.<4>
A July 31, 2013 settlement agreement among parties to a PUC
proceeding provides for the development, construction,
operation and financing of the MPWSP, as well as the recovery
of costs in rates.<5> The agreement specifies that a
tax-exempt securitization mechanism will be used to finance
27% of the proposed project. Securitization will require
several steps, including:
Cal-Am's establishment of a Special Purpose Entity
(SPE);
Sale to the SPE of the right to collect a non-bypassable
charge from MPWMD customers;
Authorization by the California Legislature (i.e.,
through this bill); and
A financing order by the PUC.
1)Rate relief bonds (RRB, and a.k.a. rate reduction bonds). The
deregulation of electricity markets in the 1990s resulted in
decreased revenue for utilities, and many utility company
assets became uneconomic to operate. These uneconomic assets
are referred to as "stranded assets." RRBs were developed to
---------------------------
<3>
http://www.cpuc.ca.gov/Environment/info/esa/mpwsp/pdf/CAW_Applica
tion_PDFA_.pdf
<4>
http://www.desalination.com/wdr/50/6/grant-sought-swro-intake-tes
t
<5>
http://www.dra.ca.gov/WorkArea/linkit.aspx?LinkIdentifier=id&Item
ID=2466&libID=2488
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enable utilities to bridge the gap between the book value of
stranded assets in the previously regulated environment and
their market value in a deregulated one.<6>
Essentially a RRB is the securitization of a cashflow stream
generated by a fee charged to utility consumers. These
asset-backed securities minimize borrowing costs by qualifying
for AAA credit ratings, as AAA ratings allow a utility to
borrow funds at an interest rate well below the rate typically
applicable to the utility's long-term debt. The use of RRBs
allows for an extended recovery period of those stranded
assets at a AAA funding rate. To qualify for AAA ratings, RRB
financing typically includes:
Statutory authority to impose a dedicated charge on
utility customers to repay the bonds;
A requirement that the bonds must be issued, and the
dedicated charge must be imposed, by a "bankruptcy remote
special purpose entity (SPE)";
A "true-up" mechanism by which charges collected to pay
debt service are regularly adjusted to ensure bonds are
paid off at the final maturity date; and
A pledge made by the state not to impair the right to
collect charges until bonds are paid in full.
Public officials from the Monterey region want the Legislature
to authorize the District and Cal-Am to use RRBs to finance
some of the costs of a new desalination plant and other
elements of the proposed water supply project.
1)Shifting risk to ratepayers and cost controls. This bill uses
a bankruptcy-remote special purpose entity (SPE) to issue RRBs
and insulate bondholders from potential insolvency of Cal-Am.
This allows for higher bond ratings and lower costs of debt
issuance. However, by protecting rate reduction bondholders
from becoming creditors if Cal-Am files for bankruptcy
protection, the bill may increase the risks borne by vendors,
employees, investors holding other forms of debt, and other
potential creditors in a bankruptcy proceeding. It is unlikely
that this bill's bankruptcy-remoteness provisions will be
necessary to shield bondholders from a bankruptcy case.
However, in the event that Cal-Am does become insolvent, it is
unclear whether state law should shield some potential
creditors, leaving a smaller pool of remaining creditors to
---------------------------
<6> http://pages.stern.nyu.edu/~igiddy/cases/rrb.pdf
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bear the costs of restructuring.
By requiring ratepayers to share costs of a desalination plant
and other water supply facilities through a non-bypassable
charge, this bill increases ratepayers' exposure to risks
associated with the water supply infrastructure (e.g.,
construction and operation). The bill requires ratepayers to
pay the water supply charge that secures the RRBs even if the
financed infrastructure fails to function properly or is
unusable because of design flaws, construction failures, or
operational problems. It is unclear whether the potential -
but not guaranteed - lower rates that securitization may
generate justify shifting a greater share of project risks to
ratepayers.
Related to cost overruns, following an informational hearing
this committee held in February 2014 on the affordability of
water rates,<7> additional information was obtained regarding
costs borne by ratepayers when the cost of a PUC-approved
water treatment facility almost doubled. In 2006 the
California Water Service Company, a PUC-regulated water
utility, requested authority to borrow funds from the Safe
Drinking Water State Revolving Fund (SDWSRF) for a new water
treatment facility to serve the community of Lucerne,
California. The requested loan amount was $4.5 million. On
December 2, 2006, Cal Water amended A.06-02-003 to increase
the loan amount to $5,676,277. On November 20, 2007, Cal
Water filed A.07-11-020 increasing the requested loan amount
to $7,442,700. The PUC approved the change in the loan amount
without reviewing the reasonableness of the costs (a
reasonableness review supposedly was conducted by the
Department of Public Health, the agency administering SDWSRF).
Although the sponsors believe this is unlikely, water
ratepayers in Monterey could be exposed to similar cost
overruns.
To limit ratepayer risk and contain costs, the author may wish
to consider an amendment specifying that financed
infrastructure is limited to the desalination plant and
necessary equipment solely for that facility, amending 849(l)
of the proposed bill, as follows:
"Water supply activity" means an activity or
activities by or on behalf of a qualifying water
----------------------
<7> http://autl.assembly.ca.gov/2014hearings
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utility in connection with the acquisition and
construction of infrastructure, plants, including,
desalination facilities, pipelines, and other
facilities, to develop new sources of supply, directly
related to a desalination facility and necessary
equipment solely for that facility, including the
pipes necessary for conveyance and tanks necessary for
water storage, as authorized by the commission in
proceeding A.12-04-019.
To further contain costs, the author also may wish to consider
an amendment specifying that the amount authorized in the PUC
financing order cannot increase by more than 5%, amending a
to-be-determined section of the Public Utilities Code, as
follows:
The commission shall not approve in its financing
order any increase of more than 5% for the special
purpose entity created to finance the Monterey
Peninsula Water Supply Project.
2)Ratepayer impacts. According to Cal-Am, the average ratepayer
will be subject to a rate increase of 41% over a period of
five years, with estimated bills increasing from $75.74 at the
end of 2013 to $106.73 at the end of 2018 (94 cents/day).<8>
The charge will be assessed volumetrically based on water
usage, rather than a fixed charge.
This bill does not currently provide qualifying low-income
ratepayers (i.e., those who meet federal poverty guidelines)
with an exemption from the non-bypassable water supply
charges. Cal-Am reports about 9% of ratepayers (3,500 out of
38,000) in this district are in the low-income water rate
assistance program (LIRA). A 41% rate increase on a low income
ratepayer is likely to be extremely burdensome.
To assist low-income ratepayers, the author may wish to
consider an amendment specifying that ratepayers participating
in commission-approved low-income water rate assistance
program are exempt from nonbypassable MPWSP charges, as
specified , amending a to-be-determined section of the Public
--------------------------
<8>
http://coastalwater.publishpath.com/Websites/coastalwater/files/C
ontent/3984326/CA-Mtry_RateDesign-RateImpactFactSheet_FINAL2-rev.
pdf
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Utilities Code, as follows:
If the commission finds that the surcharge exclusion has no
impact on the marketability of the financing, the
commission shall order California American Water Company to
exclude low income customers from payment of the surcharge.
If the low income customers are excluded from payment of
the surcharge and if computer programming upgrades are
necessary to accommodate this exclusion, the Commission
shall allow California American Water Company to recover
just and reasonable costs from the Monterey ratepayers.
3)Related legislation. AB 850 (Nazarian), Chapter 636, Statutes
of 2013, authorized joint powers authorities to issue rate
reduction bonds to finance publicly owned water utility
projects until December 31, 2020. The bonds will be secured
by utility project property and repaid through a separate
utility project charge imposed on customer bills.
4)Voters reject transfer of Cal-Am assets to the District. In
the June 3, 2014 primary election, voters within the MPWMD
rejected Measure O (55% to 45%), which would have directed
MPWMD to "adopt a policy to move toward public ownership of
all water systems within its boundaries [i.e., Cal-Am] by
conducting a feasibility study, and if deemed feasible, move
forward with acquisition of all such water systems' assets."
5)Support and opposition. Supporters state the need for an
alternative water supply to the Monterey Peninsula, and
contend that use of water rate relief bonds will result in
lower costs to customers of Cal-Am as compared to traditional
utility financing mechanisms.
In opposition, WaterPlus questions why MPWMD would take on an
obligation of $124.5 million to save $93 million, when for
$276 million, it could own the project and save ratepayers
$995 million.
REGISTERED SUPPORT / OPPOSITION :
Support
CalDesal
California Water Association (CWA)
SB 936
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City Council of Monterey
City Council of Sand City
City Council of the City of Carmel by the Sea
City Council of the City of Pacific Grove
City Council of the City of Seaside
Coalition of Peninsula Businesses
Monterey County Board of Supervisors
Monterey Peninsula Chamber of Commerce Board of Directors
Monterey Peninsula Regional Water Authority
Monterey Peninsula Water Management District
Office of Ratepayer Advocates (ORA)
Planning and Conservation League
Opposition
WaterPlus
Analysis Prepared by : Brandon Gaytan / U. & C. / (916)
319-2083