Apparently the link to the Senate website which contains information on
today's Senate Energy Committee hearing does not work.  Therefore, I have
cut and paste the document and attached it to my e-mail.


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.


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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

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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?