BILL ANALYSIS �
SB 936
Page 1
Date of Hearing: August 13, 2014
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
SB 936 (Monning) - As Amended: August 4, 2014
Policy Committee: Utilities and Commerce
Vote: 14-0
Urgency: No State Mandated Local Program:
Yes Reimbursable: No
SUMMARY
This bill authorizes the California Public Utilities Commission
(PUC) to allow the California American Water Company (Cal-Am)
and the Monterey Peninsula Water Management District (District)
and other financing entities to issue water rate relief bonds to
finance water supply infrastructure.
FISCAL EFFECT
Minor, if any, costs to the PUC.
COMMENTS
1)Rationale. Various regulatory and legal constraints on
Cal-Am's ability to obtain water from its current sources are
creating an urgent need to develop new sources of water for
the Monterey Peninsula. In response, Cal-Am is proposing to
construct a desalination plant and additional storage and
conveyance facilities that may cost up to $400 million.
This bill enables Cal-Am, in partnership with the District, to
use an alternative financing mechanism which will result in
lower costs when compared to traditional utility financing
mechanisms.
2)Rate Relief Bonds. Rate relief bonds are tax-exempt public,
asset-back securities structured to minimize borrowing costs
by qualifying for high credit ratings. The rate relief
securitization structure was developed in response to
electricity market deregulation in the 1990s to allow
investor-owned utilities in deregulated markets to recover the
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stranded costs of investment the utilities made before
deregulation.
Rate relief bond financing typically includes the statutory
authority to impose a dedicated charge on utility customers to
repay pay the bonds, with a requirement that the bonds be
issued, and the dedicated charge imposed, by a bankruptcy
remote special purpose entity (SPE) to protect ratepayers from
the potential insolvency of the utility.
This bill authorizes the District and Cal-Am to use rate
relief bonds to finance some of the costs of a new
desalination plant and other elements of the proposed water
supply project.
3)Background. The District was created by a special act (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, and Seaside plus unincorporated territory. 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.
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. 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% 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 by 70%.
A July 31, 2013 settlement agreement among parties to a PUC
proceeding provides for the development, construction,
operation and financing of the Monterey Peninsula Water Supply
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Project, as well as the recovery of costs in rates. 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 an SPE, a financing order by the PUC, and
legislative authorization.
4)Amendments. The author is proposing amendments to provide
further rate relief for low-income customers.
Analysis Prepared by : Jennifer Galehouse / APPR. / (916)
319-2081