INFORMATIONAL HEARING
Proposed Rate Agreement Between The California Department Of Water Resources And The California Public Utilities Commission
State Capitol, Room 2040
August 21, 2001
1:30 p.m.
I. Opening Comments
- Senator Debra Bowen, Chairwoman
Senate Energy, Utilities & Communications Committee
- Senator Bill Morrow, Vice-Chairman
Senate Energy, Utilities & Communications Committee
II. Panelists
- Stan Dirks
California Department of Water Resources
- Chris Warner
Pacific Gas & Electric
- Gary Schoonyan
Southern California Edison
- Jim Hay
San Diego Gas & Electric
- Mike Florio
The Utility Reform Network
- Dave Morse
Office of Ratepayer Advocates
- Dan Carroll
California Industrial Users
- Douglas Heller
Foundation for Taxpayer and Consumer Rights
- Bill Julian
California Public Utilities Commission
BACKGROUND
At the peak of California’s electricity crisis, two of California’s investor-owned utilities were financially unable to purchase electricity on behalf of their customers. AB 1x (Keeley), Chapter 4, Statutes of 2001, authorized the California Department of Water Resources (DWR) to begin buying power on behalf of the customers of those two utilities and San Diego Gas & Electric ratepayers, as well as to issue bonds to finance such purchases. DWR wasn’t authorized to utilize the credit of the state to back those purchases. Instead, it was authorized to recover the money needed to pay for its electricity purchases through electric rates charged to consumers and to perform is own "reasonableness review" of those costs. The California Public Utilities Commission’s (CPUC) discretion to perform a reasonableness review is rarely abrogated (an exception being the costs of collective bargaining agreements), but AB 1x made an exception in this case for two basic reasons: First, if the CPUC decided to preclude certain power costs from being passed along to ratepayers, the effect would be to simply shift those costs from ratepayers to taxpayers. Second, the goal of a reasonableness review, which is to create an incentive to do the best possible job, on behalf of the ratepayers could be accomplished through DWR’s accountability to ratepayers. The theory was the political process would provide the check on DWR’s activities much in the same way customers provide a check on the activities of a municipal utility.
To fulfill its obligations under AB 1x, DWR spent $7.6 billion through May 2001. That money was originally loaned from the General Fund. In addition, the state obtained a short-term bank loan of $4.3 billion to help pay for ongoing electricity purchases. That short-term loan, the outstanding debt owed to the General Fund, and the difference between actual electricity costs and electricity rates paid to DWR will all be financed through a $12.5 billion bond offering, which was authorized by SB 31x (Burton), Chapter 9, Statutes of 2001, and may take place as early as October. DWR has stated that the bond offering is contingent upon the CPUC taking a number of actions on August 23, 2001, one of which is to approve the DWR-constructed Rate Agreement (Agreement) between DWR and the CPUC.
The Agreement provides the irrevocable contractual and enforceable assurance that the CPUC will allow DWR’s electricity power purchase costs to be recovered in a timely manner. Specifically, the Agreement:
- Creates a Rate Covenant where the CPUC acknowledges DWR’s right to recover its self-determined revenue requirement as specified;
- Defines DWR’s revenue requirement to include the repayment of the bonds, the cost of DWR’s electricity procurement, including the long-term contracts, administrative, consulting and legal costs, and the cost of demand management programs;
- Requires the CPUC to establish rates to allow recovery of DWR’s revenue requirement within 30 days or 90 days, as determined by DWR;
- Authorizes DWR to take the CPUC to court to enforcement its provisions.
DWR has stated the Agreement is an essential element to obtaining the bond financing. J.P. Morgan, the senior managing underwriter for the DWR bonds, has similarly stated that without the Agreement, the bonds won’t be viewed as investment grade quality, thereby jeopardizing the bond issuance.
The Agreement is currently being considered by the CPUC. A number of parties, including small and large consumer groups who will be responsible for paying the rates, along with the investor-owned utilities, have commented on DWR’s proposed Agreement and raised a number of concerns. The Treasurer has offered some suggested amendments to the Agreement to try and answer some of the concerns without impairing his ability to sell the bonds.
Issues & Questions The Committee May Wish To Consider
Must an Agreement be Signed?
AB 1x permits the CPUC to enter into a rate agreement with DWR, but such an agreement is not required by the statute. Given the irrevocable nature of DWR’s proposed Agreement, is it necessary for the CPUC to approve the agreement, or will some other, less binding agreement suffice? One alternate approach to the Agreement is SB 18xx (Burton), which provides a dedicated rate to pay for the bonds and specifies exactly what DWR may include as a part of its costs. SB 18xx passed the Senate 35-2 on July 20, 2001, and is pending at the Assembly desk.
Public Review
DWR’s revenue requirement, at least as it pertains to power purchase costs, bond repayment, and associated administrative costs, clearly isn’t subject to CPUC review or adjustment pursuant to AB 1x. Rather than have an independent party like the CPUC review its efforts, AB 1x envisioned that public review and accountability would motivate DWR to do the best possible job to get the best value possible for ratepayers. However, the Agreement neither contemplates nor provides for public review, which has raised concerns from a number of parties about what costs beyond the cost of buying power DWR is attempting to pass along to ratepayers as a part of the Agreement.
Scope of Revenue Requirement
AB 1x specifically permits DWR to cover the cost of the bonds, power purchases, and associated administrative costs. The Agreement submitted by DWR to the CPUC for adoption allows DWR to recover much more than those costs, including the cost of demand management programs and legal, consulting, and technical services. By including such costs in the Agreement, these costs are subject to neither legislative nor public review. The demand management programs have historically been the purview of the CPUC. (The California Independent System Operator has attempted this year to
create and administer some of these programs with mixed success.) However, DWR has no background in demand management and no public process for considering and approving such programs. Given the lack of a public process and DWR’s lack of expertise on demand management programs, is it appropriate to allow DWR to include the unknown costs of these programs in the Agreement?
30 and 90 Day Review
The Agreement requires the CPUC to review and implement rates which allow DWR to recover its revenue requirement within 90 days, or 30 days if DWR finds that an expedited change is necessary. This is an extremely short window of time for the CPUC to analyze any DWR request and provide for full public review and comment.
Auditing
DWR’s revenue requirement will be tens of billions of dollars which will be paid for exclusively by the ratepayers of the state’s investor-owned utilities. Despite the fact that billions of dollars will be changing hands, the Agreement fails to include an auditing requirement to ensure that appropriate revenues are provided to DWR, that surplus revenues are returned to ratepayers, and that there is ongoing monitoring of DWR’s accounts.
Court Challenges
The purpose of the rate agreement is to facilitate the issuance of the bonds to repay the General Fund and the short-term loan. It’s possible that some party may challenge this Agreement or any of the other related CPUC decisions (i.e. establishing the DWR revenue requirement, creating a servicing agreement between DWR and the utilities, etc.), in either federal or state court. How will such a challenge effect the issuance of the bonds?
Contract Renegotiation
The DWR contracts, negotiated at the height of the energy crisis, are viewed by some as expensive. The state and ratepayers would certainly be better off if those contracts can be renegotiated based upon current circumstances. The Agreement binds the CPUC to set rates sufficient for DWR to recover its revenue requirement, including the cost of the contracts it has already signed. Does the signing of this Agreement diminish DWR’s ability or incentive to renegotiate any of the contracts? Does it eliminate any incentive DWR has to negotiate the best possible price on any future contracts that it may sign, since the costs of those contracts won’t be subject to review or adjustment?