BILL ANALYSIS �
SB 936
Page A
SENATE THIRD READING
SB 936 (Monning)
As Amended August 14, 2014
Majority vote
SENATE VOTE :32-0
UTILITIES & COMMERCE 14-0
APPROPRIATIONS 17-0
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|Ayes:|Patterson, Bonilla, |Ayes:|Gatto, Bigelow, |
| |Buchanan, Ch�vez, Dahle, | |Bocanegra, Bradford, Ian |
| |Fong, Beth Gaines, | |Calderon, Campos, |
| |Garcia, Roger Hern�ndez, | |Donnelly, Eggman, Gomez, |
| |Jones, Mullin, Quirk, | |Holden, Jones, Linder, |
| |Rendon, Skinner | |Pan, Quirk, |
| | | |Ridley-Thomas, Wagner, |
| | | |Weber |
|-----+--------------------------+-----+--------------------------|
| | | | |
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SUMMARY : Authorizes 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)Prohibits the PUC from approving an increase in a financing
order that exceeds a total amount of 5% of the water supply
costs.
4)Limits financed infrastructure to the desalination plant and
necessary equipment solely for that facility, including the
pipes necessary for conveyance and tanks necessary for water
storage.
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5)Allows the qualifying water utility, beginning January 1,
2015, to apply to the PUC for a determination that no more
than 50% of the water supply costs may be recovered through
water supply charges.
6)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."
7)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.
8)Requires customers to pay water supply charges until the water
rate relief bonds and all financing costs are paid.
9)Requires the PUC to approve periodic true-up adjustments to
the water supply charge.
10)Directs the PUC to implement a program to allow the water
utility to exclude low-income water ratepayers participating
in low-income rate assistance programs from the payment of any
water supply charge imposed, if it determines that the
exclusion from the charge will have no significant impact on
the ability of the financing entity to finance the water
supply activity, and also authorizes the PUC to allow the
adjustment of the amount of the charge, as necessary, to cover
any costs associated with implementation of the exclusion.
11)Requires an annual customer notice to customers explaining
the water supply charges and true-up adjustments to that
charge.
12)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.
FISCAL EFFECT : According to the Assembly Appropriations
SB 936
Page C
Committee, minor, if any, costs to the PUC.
COMMENTS :
1)Purpose. 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 utility financing mechanisms."
2)The Monterey Peninsula Water Management District (MPWMD).
MPWMD was created by a special act in 1977 (AB 1329 (Mello),
Chapter 527, Statutes of 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. MPWMD is
responsible for: a) augmenting water supply through
integrated management of ground and surface water resources;
b) promoting water conservation, water reuse, and storm and
wastewater reclamation; and c) fostering scenic values,
environmental quality, native vegetation, fish and wildlife,
and recreation. 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. 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
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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%.
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).<1> The three pronged
approach consists of: a) a desalination plant and
infrastructure, b) groundwater replenishment, and c) aquifer
storage and recovery. Cal-Am 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.
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.<2> 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:
a) Cal-Am's establishment of a Special Purpose Entity
(SPE);
b) Sale to the SPE of the right to collect a non-bypassable
charge from MPWMD customers;
c) Authorization by the California Legislature (i.e.,
through this bill); and
d) A financing order by the PUC.
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<1>
http://www.cpuc.ca.gov/Environment/info/esa/mpwsp/pdf/CAW_Applica
tion_PDFA_.pdf
<2>
http://www.dra.ca.gov/WorkArea/linkit.aspx?LinkIdentifier=id&Item
ID=2466&libID=2488
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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
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.
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.
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.
2)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 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
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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,<3> 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.
This bill currently provides for various protections for
ratepayers, as it:
a) Limits financed infrastructure to the desalination plant
and necessary equipment solely for that facility, including
the pipes necessary for conveyance and tanks necessary for
water storage.
b) Prohibits the PUC from approving an increase in a
financing order that exceeds a total amount of 5% of the
water supply costs.
1)Ratepayer impacts. According to Cal-Am, the average ratepayer
will be subject to a rate increase of 41% over a period of
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<3> http://autl.assembly.ca.gov/2014hearings
SB 936
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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).<4>
The charge will be assessed volumetrically based on water
usage, rather than a fixed charge.
This bill does authorize the PUC to allow the water utility to
exclude low-income ratepayers participating in low-income rate
assistance programs from paying the non-bypassable water
supply charges, if the PUC finds that the exclusion has no
significant impact on the ability of the financing entity to
finance the water supply activity. 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.
Analysis Prepared by : Brandon Gaytan / U. & C. / (916)
319-2083
FN: 0004958
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<4>
http://coastalwater.publishpath.com/Websites/coastalwater/files/C
ontent/3984326/CA-Mtry_RateDesign-RateImpactFactSheet_FINAL2-rev.
pdf