| Word Document PDF Document |
ALJ/TIM/tcg Mailed 2/22/2002
Decision 02-02-051 February 21, 2002
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
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Application of Southern California Edison Company (E 3338-E) for Authority to Institute a Rate Stabilization Plan with a Rate Increase and End of Rate Freeze Tariffs. |
Application 00-11-038 (Filed November 16, 2000) |
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Emergency Application of Pacific Gas and Electric Company to Adopt a Rate Stabilization Plan. (U 39 E) |
Application 00-11-056 (Filed November 22, 2000) |
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Petition of THE UTILITY REFORM NETWORK for Modification of Resolution E-3527. |
Application 00-10-028 (Filed October 17, 2000) |
OPINION ADOPTING A RATE AGREEMENT BETWEEN THE COMMISSION AND THE CALIFORNIA DEPARTMENT OF WATER RESOURCES
I. Summary 2
II. Background 3
A. The Statutory Scheme 4
B. The Bonds 7
C. The Roles of the Commission and DWR 9
D. Development of the Proposed Rate Agreement 10
III. Summary of the Proposed Rate Agreement 11
IV. Discussion 25
A. The Rate Agreement Is in the Public Interest 26
1. Issuing Bonds Is in the Public Interest 26
2. Establishing Separate Bond and Power Charges Is in the Public Interest 28
3. The Rate Setting Provisions in the Rate Agreement Are in the Public Interest 29
B. Imposition of Bond Charges on the Electric Power Sold by ESPs 34
C. The Financing Documents and the Commission's Designee 36
D. Legal Authority for Rate Agreement 40
1. General Legal Authority 40
2. Legal Authority for Separate Power Charges and Bond Charges 40
a. Legal Authority for Power Charges 41
b. Legal Authority for Bond Charges Under the Act 42
c. Legal Authority for Bond Charges Under the Public Utilities Code 45
d. The Use of a Bond Charge is Reasonable Under the Circumstances 47
3. Legal Authority for Designating Power and Bond Charges the Property of DWR 56
4. Legal Authority for the Irrevocable Provisions in the Rate Agreement 58
5. Conclusion 60
V. Revisions to the Proposed Rate Agreement 62
VI. The Adopted Rate Agreement 62
VII. Pub. Util. Code Section 311(g) - Public Review and Comment 63
VIII. Rehearing and Judicial Review 65
Findings of Fact 65
Conclusions of Law 81
INTERIM ORDER 94
Appendix A: Summary of Comments on the Proposed Rate Agreement and the Draft Decision
Appendix B: Proclamation by Governor Davis Issued on January 17, 2001
Appendix C: Adopted Rate Agreement
This decision adopts a Rate Agreement between the Commission and the California Department of Water Resources (DWR) pursuant to Water Code §§ 80110 and 80130.1 The purpose of the Rate Agreement is to facilitate DWR's issuance of the bonds authorized by Water Code § 80130.2 DWR will use the bond proceeds to repay more than $ 10 billion of debt that DWR incurred to finance power purchases during the electricity crisis, including more than $6 billion owed to the State's General Fund. The Rate Agreement terminates when the bonds and associated financial obligations have been paid or otherwise provided for. The adopted Rate Agreement is attached hereto as Appendix C.
This decision adopts the Rate Agreement because it is in the public interest, in part because it will allow the General Fund to be repaid. The adopted Rate Agreement establishes a framework for discharging DWR's and the Commission's statutory obligations set forth in AB 1X, as amended by SB 31X (referred to hereafter as "the Act"). Under the Act, the Commission has an obligation to impose charges on electric customers that are sufficient to compensate DWR for its costs under the Act, including procuring and delivering power, and paying bond principal and interest.
The adopted Rate Agreement establishes two streams of revenues. One stream of revenues will come from Bond Charges imposed on electric customers, and is designed to pay for bond-related costs. The second stream of revenues will come from Power Charges imposed on electric customers who buy power from DWR, and is designed to pay for the costs that DWR incurs to procure and deliver power. Both streams of revenue are necessary for DWR to issue bonds with investment-grade ratings.
The Commission is not required to enter into the Rate Agreement, but does so pursuant to its discretion under the Act.3 The many reasons for adopting the proposed Rate Agreement are discussed below. Once executed, Sections 5.1(a) and 5.1(b)4 of the Rate Agreement will have the force and effect of an irrevocable financing order issued by the Commission pursuant to Pub. Util. Code § 840 et seq., and these sections may not be amended once the bonds have been issued.
Beginning in the summer of 2000, the price for wholesale electricity in California skyrocketed to exorbitant levels. The inflated prices caused financial distress for Pacific Gas and Electric Company (PG&E) and Southern California Edison Company (SCE), and resulted in legislation to protect the ratepayers of San Diego Gas & Electric Company (SDG&E) from excessive prices. Despite emergency action by the Commission to raise electric rates, the situation became a crisis when wholesalers refused to sell electricity to the utilities that they themselves had crippled, thereby endangering the supply of power for millions of Californians.
To avert a collapse of the electric system, Governor Davis proclaimed a state of emergency on January 17, 2001, and ordered DWR to immediately purchase and sell electric power, as necessary, to mitigate the effects of the emergency.5 The Legislature subsequently granted DWR temporary, then long-term authority to purchase and sell power by passing SB 7X and AB 1X. DWR ultimately spent billions of dollars borrowed from the State's General Fund to procure power, which has not yet been repaid. To date DWR has borrowed approximately $6.1 billion from the State's General Fund, and approximately $4.3 billion from a group of lenders led by Morgan Guaranty Trust Company. DWR's ability to repay the General Fund is now critical.
On January 19, 2001, Governor Davis signed SB 7X,6 which directed DWR to buy electricity and sell the power to retail customers for a period not to exceed 12 days from the effective date of the legislation.7 On February 1, 2001, Governor Davis signed AB 1X.8 This statute provides DWR with longer-term authority to procure electric power and to sell the power directly to the retail customers served by electrical corporations9 (i.e., the retail customers of PG&E, SCE, and SDG&E).10 AB 1X appropriated $496 million from the State's General Fund for this purpose,11 and requires DWR to repay the General Fund as soon as practicable.12
The Act provides DWR with authority to purchase electric power "on such terms and for such periods as the department determines, and at such prices as the department deems appropriate[,]" taking into account certain enumerated factors.13 In addition, "any just and reasonable review" of the revenue requirements designated to pay for DWR's power purchases "shall be conducted and determined by the department.14" DWR's authority under the Act to enter into new contracts for electric power expires on January 1, 2003. However, AB 1X does not prevent DWR from administering contracts executed prior to January 1, 2003.15
Any money that the electrical corporations collect for power sold by DWR must be segregated by the electrical corporations on terms and conditions established by DWR, and held in trust for the benefit of DWR.16 The Act allows DWR to enter into contracts with electrical corporations (Servicing Agreements) for the collection of money owed to DWR for power that DWR sells to the electrical corporations' customers. The Act also provides that, at the request of DWR, the Commission shall order the electrical corporations to undertake such activities.17 Certain changes to the existing Servicing Agreements and Servicing Orders may be necessary or desirable to implement the Rate Agreement.18
DWR's costs and revenues are tracked in the Department of Water Resources Electric Power Fund (the Electric Power Fund) held in the State Treasury. All revenues payable to DWR pursuant to AB 1X must be deposited into the Fund. These revenues include bond proceeds and revenues from the sale of electric power. Amounts held in the Electric Power Fund may be spent only on the items specified in AB 1X, which include power purchases, debt service, and repayment of the General Fund.19
To provide DWR with money to procure power and to repay the General Fund, AB 1X authorizes DWR to (1) issue bonds, and (2) recover its power costs and bond-related costs from electric charges established by the Commission.20 AB 1X requires DWR to determine annually, if not more frequently, a revenue requirement. The statute defines "revenue requirement" as the amount that is sufficient, together with any moneys in the Electric Power Fund, to provide all of the following: (1) the amounts necessary to timely pay the principal, interest, and other costs associated with the bonds issued by DWR; (2) the amounts necessary to pay for power purchased by DWR, including costs for transmission, scheduling, and other related expenses, or to make payments under any other contracts, agreements or obligations entered into under AB 1X; (3) reserves in such amount as DWR deems necessary or desirable; (4) repayment of advances from the General Fund; (5) interest on moneys advanced by the General Fund; and (6) the costs incurred by DWR to administer AB 1X.21
DWR is entitled by AB 1X to recover its revenue requirement from electric charges established by the Commission. However, AB 1X limits the rates paid by certain residential customers for this purpose. In particular, AB 1X states that until DWR has recovered its costs for power procured under the statute, the Commission shall not increase rates that were in effect at the time AB 1X was enacted for residential usage up to 130% of baseline quantities.22
On May 10, 2001, Governor Davis signed SB 31X.23 Among other things, SB 31X amended AB 1X to provide DWR with authority to issue bonds in the maximum aggregate amount of $13.423 billion.24
DWR is authorized by the Act to issue bonds for the purposes specified in AB 1X. These purposes include (1) paying for the cost of electric power procured by DWR pursuant to the Act and the Governor's Emergency Proclamation dated January 17, 2001; (2) reimbursing the General Fund for advances; and (3) establishing and maintaining reserves in connection with the bonds.25 The price, terms, conditions, and manner of offering the bonds will be determined by DWR and approved by the Director of Finance and the State Treasurer. At the discretion of DWR, the bonds may be secured by a trust agreement between DWR and a trustee.26
The Act states that the bonds and other obligations of DWR shall be payable solely from the funds provided for in the Act. Such obligations shall not constitute a debt or liability of the State or any political subdivision of the State. The Act also requires all bonds to contain a statement to the following effect: "Neither the faith and credit nor the taxing power of the State of California is pledged to the payment of the principal of or interest on this bond.27" While any obligations incurred by DWR under the Act remain outstanding, the Act provides that the rights, powers, duties, and existence of DWR and the Commission shall not be impaired in a way that adversely affects the interests and rights of the parties to such obligations.28
DWR must establish a mechanism to ensure that bonds will be sold at investment-grade ratings and repaid on a timely basis.29 This mechanism may include an agreement with the Commission (a "Rate Agreement") that provides for the timely recovery of DWR's revenue requirement (including DWR's costs to procure power) in electric rates.30 Any such agreement may be structured to have the force and effect of a financing order adopted by the Commission pursuant to Pub. Util. Code § 840 et seq., to the extent determined by the Commission.31
On June 18, 2001, Governor Davis issued an Executive Order that authorized DWR to accept up to $5 billion in loans for the following purposes: (1) to purchase electric power, (2) to purchase natural gas to generate electricity; and (3) to fund capitalized interest and reserves required in connection with the loans. The Executive Order indicates that all provisions in the Act apply to the loans.32
On June 26, 2001, DWR exercised its authority under the Governor's Executive Order to obtain a loan that converted to a three-year term loan in the amount of $4.3 billion (the "Interim Loan").33 Under the terms of the Interim Loan, DWR must repay the must repay the Interim Loan before it repays the General Fund.34
The Commission and DWR each have distinct roles under the Act. The Commission has exclusive authority under the Act to set electric charges to recover DWR's costs. The Commission also has sole authority to establish the procedures that it will use set electric charges, and to allocate DWR's revenue requirement among Service Areas and electric customers. DWR has authority to issue bonds and to enter into power contracts. DWR also is entitled to recover in electric rates its bond costs, power procurement costs, and other costs listed in Water Code § 80134. In addition, the Act provides DWR with exclusive authority to conduct any review of the justness and reasonableness of the costs it seeks to recover in electric rates under Pub. Util. Code § 451.35
Although the Act specifies the purpose of the Rate Agreement, the legislation provides the Commission and DWR with discretion on whether to enter into such an agreement. The Act also provides each agency with discretion to negotiate the specific details regarding the discharge of each agency's responsibilities under the Act, including the details of each agency's responsibilities regarding the recovery of DWR's revenue requirement.
The Act specifies the purpose of the Rate Agreement, but leaves it to the Commission and DWR to work out the details of the agreement. During the summer of 2001, DWR asked the Commission to enter into a Rate Agreement that had been drafted by DWR ("the summer Rate Agreement"). A central feature of the summer Rate Agreement was an irrevocable commitment by the Commission under Pub. Util. Code § 840 et seq., to set charges for electricity sold by DWR that would recover not only DWR's bond-related costs, but also DWR's power-related costs. Parties were provided an opportunity to submit written comments on the summer Rate Agreement. In response to these comments, a draft decision was prepared that proposed numerous amendments to the summer Rate Agreement. The draft decision was taken up by the Commission at its meeting on October 2, 2001, at which time a majority of the Commission voted against the decision.
Following the Commission's rejection of the summer Rate Agreement, the staffs of the Commission, DWR, and other State agencies continued to work on a bond transaction and a Rate Agreement that would be acceptable to all of the involved agencies. Their work eventually produced a substantially revised bond transaction and Rate Agreement. On January 31, 2002, the revised Rate Agreement (referred to hereafter as "the proposed Rate Agreement") was mailed to the parties for comment. Comments regarding the proposed Rate Agreement were filed on February 5, 2002 by the following parties: DWR, the California Industrial Users, the Energy Producers and Users Coalition ("EPUC/CIU"), the Foundation for Taxpayer and Consumer Rights (the "Foundation"), PG&E, SCE, SDG&E, Sunrise Power Company LLC ("Sunrise"), The Utility Reform Network ("TURN"), and JP Morgan Chase Bank. Most of the commentators found the proposed Rate Agreement far superior to the summer Rate Agreement. A summary of the comments on the proposed Rate Agreement is contained in Appendix A of this decision.
III. Summary of the Proposed Rate Agreement
The purpose of the proposed Rate Agreement is to facilitate the issuance of Bonds in accordance with the Bond transaction that will be set forth in the Financing Documents. The proposed Rate Agreement describes the Bonds and Financing Documents as follows:
Bonds means evidences of indebtedness issued by DWR for the purposes specified in the Act pursuant to Water Code § 80130 and the Governor's Executive Order dated June 18, 2001, in an aggregate principal amount up to $ 13,423,000,000; provided, however, that (i) notes issued in anticipation of the Bonds and retired from the proceeds of the Bonds shall not be counted against said dollar limitation, (ii) Bonds includes debt issued to refund prior Bonds, but such debt shall not be counted against said dollar limitation; and (iii) Bonds excludes the Interim Loan. (Paraphrase of Section 1.1.)36
Financing Documents means any resolution, indenture, trust agreement, loan agreement, revolving credit agreement, reimbursement agreement, standby purchase agreement, bond offering documents, or other agreement or instrument adopted or entered into by DWR authorizing, securing or enhancing the Bonds, as amended or supplemented, copies of which shall be provided to the Commission. (Paraphrase of Section 1.1.)
Although DWR is responsible for developing the Financing Documents, DWR must (1) involve the Commission, to the fullest extent possible, in the development and completion of all Financing Documents, and (2) consult with the Commission regarding (i) the sizing of operating and debt service reserves, (ii) debt service coverage, (iii) the maturity and maximum amount of Bonds to be issued, and (iv) any other matters in the Financing Documents which the Commission deems material.37 The proposed Rate Agreement also states that DWR "has submitted to the Commission a summary of the material terms of the Financing Documents securing its Bonds.38"
The proposed Rate Agreement provides that DWR must obtain approval from the Commission's designee prior to making any "material changes" to the "material terms.39" The Commission is to appoint a designee at the time it adopts the Rate Agreement. Nothing in the Rate Agreement is meant to imply that the Commission or its designee will have the right to approve (i) the final amortization, interest rates, or methods of determination, denominations, redemption provisions or pricing of the Bonds, (ii) final sizing of reserves and debt service coverage based on pricing considerations, (iii) except to the extent set forth in the previous paragraph, the terms of any revolving credit agreement, reimbursement agreement, standby purchase agreement, liquidity or credit enhancement facility, or swap agreement or other hedging agreement entered into in connection with the Bonds, (iv) any agreements or arrangements with any Fiduciary incident to the issuance of the Bonds, or (v) any offering document used in connection with the offering of the Bonds, except with respect to sections of the offering document relating to the Commission.40
To facilitate the issuance of Bonds, the proposed Rate Agreement establishes two separate streams of revenue. One stream of revenues will come from Bond Charges, which the Rate Agreement describes as follows:
Bond Charges means charges imposed by the Commission upon customers in the Service Areas of PG&E, SCE, and SDG&E based on the aggregate amount of electric power sold to each customer by an Electrical Corporation, DWR, and, to the extent determined by the Commission under Section 4.3 of the Rate Agreement,41 by an Electric Service Provider (ESP),42 for the purpose of providing sufficient funds to pay for, or provide for the payment of, Bond-Related Costs as they come due. Bond Charges shall be imposed upon customers at all times required by the Rate Agreement whether or not DWR is selling, or deemed to be selling, Power to such customers until such time as DWR has recovered the portion of its revenue requirements under Water Code § 80134 constituting Bond-Related Costs. (Paraphrase of Section 1.1.)
Revenues from Bond Charges will be used to pay Bond-Related Costs, which Section 1.1 of the Rate Agreement describes, in paraphrased form, as follows:
Bond-Related Costs means payments or deposits or other provisions by DWR pursuant to the Financing Documents or the Act for the following components of DWR's revenue requirement under Water Code § 80134:
(i) Bond principal, interest, and premium, and any additional amount required under the Financing Documents to be deposited into the Bond Charge Collection Account to provide debt service coverage of the Bonds.
(ii) Payments required to be made pursuant to: (1) agreements with issuers of credit and liquidity facilities and their participants, including letters of credit, bond insurance, guarantees, debt service reserve fund surety bonds, lines of credit, reimbursement agreements, and standby bond-purchase agreements; (2) agreements relating to other financial instruments entered into in connection with the Bonds, including investment agreements, hedges, interest-rate swaps, caps, options and forward-purchase agreements; and (3) agreements relating to the remarketing of Bonds, including remarketing agreements, dealer agreements, and auction agent agreements.43
(iii) Deposits to the Debt Service Reserve Account established under the Financing Documents to the extent necessary to provide therein an amount equal to the requirement for such account under the Financing Documents if not otherwise replenished from Power Charges.
(iv) The cost of Fiduciaries associated with the issuance and administration of the Bonds.
(v) The following costs incurred by DWR when and if DWR no longer sells Power under the Act and Bonds remain outstanding: (i) Bond Charge servicing costs, (ii) costs to prepare and provide the information and reports required by the Financing Documents, the Rate Agreement, and the Act, and related audit, legal, consulting, and administrative costs, and (iii) costs to comply with arbitrage restrictions and rebate requirements.
Section 5.1(a) of the Rate Agreement requires the Commission to impose Bond Charges that are sufficient to pay all Bond-Related Costs as they come due. The actual Bond Charge for each customer will be based on the aggregate amount of electric power sold to the customer by DWR, an Electrical Corporation, and an ESP under the circumstances described in Section 4.3 of the Rate Agreement.44 The Bond Charges will be imposed upon customers whether or not DWR is selling power to those customers, until DWR has recovered the portion of its revenue requirements under Water Code § 80134 constituting Bond-Related Costs.
DWR may pledge the revenues from Bond Charges to repay the Bonds.45 Section 5.1(b) states that DWR's right to receive Bond Charges shall be the property of DWR for all purposes under California law. Section 5.1(c) provides that Sections 5.1(a) and 5.1(b) shall have the force and effect of an irrevocable "financing order" adopted by the Commission pursuant to Pub. Util. Code § 840 et seq. Importantly, only Sections 5.1(a) and 5.1(b) of the proposed Rate Agreement, and no others, will have the force and effect of an irrevocable financing order.
Revenues from Bond Charges will be deposited into the Bond Charge Collection Account (Collection Account).46 Funds in the Collection Account will be transferred periodically to the Bond Charge Payment Account (Payment Account).47 Funds in the Payment Account may only be used to pay for Bond-Related Costs.48 However, so long as funds remain in the Collection Account, they may be used under the conditions specified in the Financing Documents to pay amounts due under DWR's Priority Long-Term Power Contracts (discussed below).49 If the Collection Account is used to fund amounts due under Priority Long-Term Power Contracts (defined below), then the Collection Account will be replenished from Power Charges (defined below).50 The Debt Service Reserve Account will be used to pay for Bond-Related Costs in the event there are insufficient funds available in the Payment Account, the Collection Account, or other funds provided for in the Bond Indenture.51 The Debt Service Reserve Account will be funded initially with Bond proceeds, and may be replenished, as appropriate, from Bond Charges and Power Charges.52
The second stream of revenues established by the Rate Agreement will come from Power Charges, which the Rate Agreement defines as charges imposed by the Commission on Retail End Use Customers53 for electric power deemed sold by DWR.54 Revenues from Power Charges will be used to pay for Department Costs, which the Rate Agreement defines as all amounts that DWR incurs to comply with Water Code § 80134 that DWR is entitled to recover under Water Code § 80110, with the exception of Bond-Related Costs that are recovered through Bond Charges.55 Section 6.1(a) of the Rate Agreement requires the Commission to impose Power Charges that are sufficient to provide moneys in the amounts and at the times necessary to satisfy the Retail Revenue Requirements (defined below) specified by DWR.56 Section 6.1(c) provides that Power Charges shall be property of DWR for all purposes under California law.
Revenues from Power Charges will be deposited into the Operating Account. Funds in the Operating Account will be used to pay for Department Costs,57 and funds also will be transferred to the Priority Contract Account. The Priority Contract Account will be used to pay for the costs that DWR incurs under its Priority Long-Term Power Contracts (PLTPCs).58 The Operating Reserve Account will be used to pay for Department Costs in the event there are insufficient funds in the Operating Account or the Priority Contract Account to pay Department Costs.59
To enable the Commission to set Bond Charges and Power Charges, the proposed Rate Agreement requires DWR to submit its Retail Revenue Requirement to the Commission.60 The Rate Agreement defines Retail Revenue Requirement as the amount of Department Costs that must be recovered from Power Charges.61 The Agreement uses DWR's submittal of its Retail Revenue Requirement as a vehicle for DWR to notify the Commission not only about Department Costs, but also about Bond-Related Costs.62
DWR must review, determine, and revise its Retail Revenue Requirement at least annually, and more frequently as deemed necessary or appropriate by either DWR or the Commission.63 DWR must also revise its Retail Revenue Requirement if it projects that any of the following will occur within 120 days: (1) there will be insufficient funds in the Priority Contract Account to pay amounts due under the PLTPCs; (2) the balance in the Operating Reserve Account will fall below that required by the Financing Documents; (3) it will be necessary to use funds in the Bond Charge Collection Account to pay for costs incurred by DWR under the PLTPCs; or (4) it will be necessary to use funds in the Debt Service Reserve Account to pay Bond-Related Costs. DWR must also revise its Retail Revenue Requirement, if it has not already done so, no later than three business days after (1) DWR makes a withdrawal from the Bond Charge Collection Account to pay for Department Costs, or (2) the balance in the Operating Reserve Account or the Debt Service Reserve Account falls below that required by the Financing Documents.64
In determining its Retail Revenue Requirement, the proposed Rate Agreement requires DWR to take into account any deficiency or surplus in the amounts recovered in earlier periods, as well as any anticipated surpluses.65 In addition, DWR may include in its Retail Revenue Requirement only those costs that DWR is permitted to collect under the Act.66
Each time DWR determines or revises its Retail Revenue Requirement, it must submit the Revenue Requirement to the Commission.67 Prior to any submittal, DWR must conduct whatever procedures are required by law to determine that the amounts included in the Retail Revenue Requirement communicated to the Commission are just and reasonable within the meaning of Pub. Util. Code § 451.68 DWR may also submit a separate request to increase Bond Charges under the circumstances described in Section 5.1(d).
After DWR submits its Retail Revenue Requirement and/or a request to increase Bond Charges, the Commission must revise Power Charges and Bond Charges, as necessary, to provide sufficient revenues to pay for Department Costs and Bond-Related Costs, respectively, as they come due.69 In the event DWR fails to submit a revised Retail Revenue Requirement within the previously specified time frames, and the Commission believes that Power Charges are not sufficient to pay Department Costs (which for this purpose includes replenishment of the Bond Charge Collection Account, Bond Charge Payment Account, or the Debt Service Reserve Account), the Commission may revise Power Charges on an interim basis to cover the shortfall pending DWR's submittal of a revised Revenue Requirement.70
The proposed Rate Agreement requires the Commission to impose revised Bond Charges and/or Power Charges, as appropriate and necessary, no later than 120 days following the submittal of DWR's Retail Revenue Requirement and/or request to increase Bond Charges.71 In addition, the Commission must establish Power Charges and Bond Charges without regard to rates or charges for electric power sold by Electrical Corporations.72 The Rate Agreement acknowledges that the Commission has exclusive authority to spread DWR's revenue requirement among customer classes and service territories, and to determine the extent and timing of rate changes, consistent with the Commission's obligations under the Rate Agreement.73
So that the Commission has an adequate record to establish and revise Power Charges and Bond Charges, the Rate Agreement requires DWR, at the request of the Commission, to participate in Commission proceedings on matters related to the establishment of Bond Charges or Power Charges. Such participation may include providing witnesses, attending public hearings, and submitting information and documents.74 DWR must also submit with any Retail Revenue Requirement a projection that contains the following information for each month covered by the Revenue Requirement:75
i. The beginning balance of funds in the Electric Power Fund, including the amounts on deposit in each account and subaccount of the Fund.
ii. The amounts necessary to pay or provide for all Bond-Related Costs under the Financing Documents, when payments are due, and the amount of the Bond Charges that must be collected for such purpose.
iii. The amount of its Retail Revenue Requirement for each month.
iv. Any other information requested by the Commission in its proceedings implementing a Retail Revenue Requirement.
In addition to the above information, DWR must provide the Commission with (1) a copy of DWR's annual audit of the Electric Power Fund and any audit conducted pursuant to Water Code § 80270,76 (2) any financial reports prepared by DWR pursuant to the Financing Documents,77 and (3) a monthly report of costs and revenues presented in a form that enables reasonable comparison to the monthly estimates contained in the latest Retail Revenue Requirement.78
The proposed Rate Agreement contemplates that DWR will sell Bonds as soon as practicable in amounts sufficient to repay the State for advances made under the Act, together with interest on such advances as provided by the Act. The Agreement contemplates that DWR will use the Bond proceeds to repay the General Fund with the understanding that repayment of the Interim Loan has priority, and that the following costs may have priority also: creation of adequate reserves for Bond-Related Costs and payment of Bond-issuance costs.79
The Rate Agreement contains numerous provisions that are designed to protect bondholders. Among those not mentioned above are the following. First, the Agreement requires both the Commission and DWR to comply with the Act and the Rate Agreement.80 Second, the Agreement requires both agencies to act, as necessary, to protect the tax-exempt status of the Bonds.81 Third, the Commission may not allow, to the extent it has the authority to do so, any lien on Power Charges or Bond Charges except for liens created pursuant to the Act.82 Fourth, if either party breaches the Agreement, and the breach is not cured within 30 days of receiving written notice, the aggrieved party may take whatever action at law or in equity that it deems necessary to enforce performance.83 Finally, DWR may assign to a Trustee the Commission's obligation under the Rate Agreement to impose Bond Charges that are sufficient to pay Bond-Related Costs when due.84 The Trustee may enforce this obligation only after DWR has both defaulted on its obligations contained in the Financing Documents and has failed to enforce the Commission's obligations in accordance with the Agreement.85 Prior to exercising its rights, the Trustee must (i) give 30-day's written notice,86 (ii) certify to the Commission that an event of default has occurred under the Financing Documents that is not predicated solely on the Commission's failure to act as required by the Rate Agreement, and (iii) comply or cause DWR to comply with the provisions in the Rate Agreement pertaining to DWR's rights, duties, and obligations.87
The proposed Rate Agreement requires DWR to use its best efforts to renegotiate its long-term power contracts.88 The Rate Agreement does not limit the ability of the Commission or DWR to assert any right that it might have regarding contracts entered into by DWR pursuant to the Act. Nor does the Rate Agreement limit the Commission's right to contest in any venue the legality or effect of any contract entered into by DWR under the Act.89
The proposed Rate Agreement applies only to those Retail Revenue Requirements that DWR submits to the Commission after the two parties sign the Agreement.90 Once in effect, the Agreement may be amended upon the written consent of both the Commission and DWR,91 except for Sections 5.1(a) and 5.1(b) which will have the force and effect of an irrevocable "financing order." The Agreement terminates when the Bonds have been retired and all other Bond-Related Costs have been paid or provided for in accordance with the Financing Documents.92
Except as set forth in Section 8.3, neither the Commission nor DWR may assign any of its rights or delegate any of its duties under the Rate Agreement without the express written consent of the other party. However, if another governmental entity is designated by law to carry out the rights, powers, duties, and obligations of the Commission and/or DWR, then the Commission and DWR may, if required by such law, transfer and assign its rights, title, and interest in the Rate Agreement to such successor, provided that the successor is bound by the Rate Agreement.93
For the reasons set forth below, we find that the proposed Rate Agreement will allow DWR to issue Bonds to repay the General Fund. This is a compelling reason to adopt the Rate Agreement. We also find that the proposed Rate Agreement establishes a reasonable framework for implementing the Legislature's intent expressed in Water Code § 80110 and § 80130 to provide for the recovery of DWR's Bond-Related Costs and Department Costs. For the same reasons, we conclude that the proposed Rate Agreement is, on balance, in the public interest, and we shall adopt it.
A. The Rate Agreement Is in the Public Interest
Our decision to adopt this Rate Agreement takes place in the context of the circumstances that led to the passage of the Act and our authority thereunder to enter into the Rate Agreement. These circumstances are succinctly described in AB 1X wherein the Legislature declared: "The furnishing of reliable reasonably priced electric service is essential for the safety, health, and well-being of the people of California. A number of factors have resulted in a rapid, unforeseen shortage of electric power and energy available in the state and rapid and substantial increases in wholesale energy costs and retail energy rates, with statewide impact, to such a degree that it constitutes an immediate peril to the health, safety, life and property of the inhabitants of the state, and the public interest, welfare, convenience and necessity require the state to participate in markets for the purchase and sale of power and energy.94"
DWR took prompt action to procure electric power to mitigate the effects of the electric emergency. However, DWR lacked the financial liquidity to procure all the power that was needed to avert the immediate peril to California, which resulted in DWR having to borrow more than $ 10 billion, much of which was borrowed from the State's General Fund. DWR now seeks to issue Bonds to (1) provide long-term and less costly financing for the billions it previously borrowed, and (2) repay the General Fund.
DWR represents that the proposed Rate Agreement is essential to its ability to issue Bonds. Simply put, DWR cannot sell the Bonds with investment-grade ratings as required by the Act unless investors are confident that DWR will be able to timely pay Bond principal and interest. The Rate Agreement provides the necessary assurance.95 The Bonds, in turn, are vital to the public interest, since the proceeds will repay the Interim Loan (which has priority) and the State's General Fund.96 It is imperative that the General Fund be repaid as soon as possible, as the State currently faces a large budget deficit.97
In addition to fulfilling DWR's legal obligation to repay the General Fund, the issuance of Bonds provides other significant benefits. First, it allows DWR to spread over many years the huge costs that it incurred during 2001 to stabilize electric rates in the face of outrageously high electricity prices, thereby preventing rate shock and economic dislocation. Second, as described in more detail later in this decision, DWR's procurement of electric power during the height of the electricity crisis averted the economic collapse of the electricity grid, and may have averted the physical collapse as well. Had either collapse occurred, the costs to California would have been significant and long lasting. Issuance of the Bonds allows the costs incurred during the crisis to be paid over several years. It is in the public interest to spread those costs over several years, because, as DWR explains in its comments on the Draft Decision,98 the consequences of the avoided collapse would have been felt long into the future. Finally, because the Bonds will have an investment-grade rating as required by the Act, DWR will be able to finance a portion of the debt it incurred in response to the electricity crisis at lower cost to ratepayers.99
2. Establishing Separate Bond and Power Charges Is in the Public Interest
The Rate Agreement segregates Bond Charges from Power Charges. Establishing a separate surcharge for Bond-Related Costs in the manner set forth in Section 5.1(a) will provide a secure stream of revenue that may be pledged by DWR for the repayment of Bonds. Creating this independent, secure stream of revenue will facilitate the issuance of Bonds with investment-grade ratings. This revenue stream is all the more secure because it is broad based, i.e., based on the total power sold to customers by both DWR and the utilities. A separate surcharge for Bond-Related Costs also enables DWR to enter into a Bond transaction that does not require DWR to sell power for the life of the Bonds. Under this Rate Agreement, DWR will not have to sell power to pay for its Bond-Related Costs. This should accelerate the time when DWR can terminate its power sales and transfer its procurement activities back to the utilities. The separation of Bond Charges from Power Charges also provides DWR maximum flexibility to renegotiate its power contracts as contemplated by the Rate Agreement. This separation further removes uncertainty associated with the statutory "sunset" of DWR's authority to enter into new contracts from the bond transaction.
In order to ensure timely repayment of Bond principal and interest, which is a prerequisite to obtaining investment-grade ratings for the Bonds as required by the Act, it is necessary for the Rate Agreement to provide for the recovery of Department Costs. DWR's Priority Long-Term Power Contracts (PLTPCs) have terms that may require DWR to pay for power purchased under these contracts ahead of Bond-Related Costs.100 The Commission agrees in the Rate Agreement to impose Power Charges that are sufficient to pay for DWR's power-related costs, including amounts due under its PLTPCs. This provision should make it unnecessary to use revenues from Bond Charges to pay for PLTPCs 101 DWR also notes that the mechanisms created by the Rate Agreement as a whole are necessary for its financial transactions, for example, to provide credit enhancement. Sunrise and PG&E are incorrect to suggest that these provisions are not properly addressed in the Rate Agreement.
3. The Rate Setting Provisions in the Rate Agreement Are in the Public Interest
An important attribute of the Rate Agreement is the protection it provides to ratepayers. These protections include: (1) limiting the costs that that DWR may recover in rates to only those that are authorized by the Act; (2) requiring DWR to use its best efforts to renegotiate its long-term power contracts,102 which may result in new or revised contracts that provide for cheaper power compared to the existing power contracts; and (3) allowing any party to challenge DWR's contracts before the Federal Energy Regulatory Commission (FERC) or a court,103 consistent with the Commission's continuing legal efforts to revise DWR's power contracts in ways that are beneficial to the public interest, and (4) providing the Commission with an appropriate role in the Bond transaction, which provides an opportunity to structure the transaction in a way that is beneficial to ratepayers.
The Rate Agreement also requires DWR to follow whatever procedures are required by law to determine if its costs are just and reasonable. Contrary to the position taken by several parties, there is no need for the Rate Agreement to prescribe the specific procedures that DWR must use to determine whether its costs are just and reasonable under Pub. Util. Code § 451 because DWR has exclusive authority under the Act to conduct "any just and reasonable review under section 451."104 Parties' requests that DWR disclose its procedures should be addressed to DWR, not to the Commission.
Likewise, the Rate Agreement properly reflects the Commission's exclusive authority under the Act and the Public Utilities Code to allocate DWR's costs among Service Areas and customers, and to set rates to recover these costs. EPUC/CIU expresses concern that the Rate Agreement binds the Commission to a particular rate design in setting Bond Charges. This concern is misplaced. The Rate Agreement does not determine how Bond Charges should be allocated among service territories or customer classes. Rather, the Commission will determine in future decisions how DWR's costs should be allocated.105 The Commission's authority to allocate DWR's costs necessarily includes the power to (i) modify at any time the way the Commission allocates Bond Charges and Power Charges; (ii) prospectively modify the rate design and cost allocation methods used to recover Bond-Related Costs and Department Costs; and (iii) modify utility rates at different times from when rates are set to recover Bond Charges and Power Charges.
The Rate Agreement does not limit how often the Commission may adjust Bond Charges and Power Charges. Because the Rate Agreement will be in effect for many years, it is prudent to provide flexibility regarding how often rates may be revised up or down. Indeed, if the frequency of rate adjustments were restricted, DWR would likely have to increase the amount of money held in reserve for contingencies, which could result in higher costs for ratepayers. EPUC/CIU's comments do not take the benefits of this flexibility into account. Furthermore, because there is no limit on the frequency of rate adjustments, the Commission may require DWR to submit a revised revenue requirement whenever necessary or appropriate.106 This might be the case, for example, if there is a change in law that affects DWR's Revenue Requirement, or wholesale generators are ordered to refund prior overcharges.
So that we may set rates in a timely manner, the proposed Rate Agreement requires DWR to provide the Commission with an extensive amount of information regarding DWR's costs and financial condition. In addition to providing revenue requirements and revised revenue requirements, we predicate our adoption of the Rate Agreement, in part, on DWR's legal ability to perform its obligation to provide information and revenue requirements according to the Rate Agreement's terms. In the Rate Agreement, DWR covenants that its obligations are valid and enforceable. We interpret this to mean that under existing law, DWR can comply with its obligations, and that, at the time of closing, when DWR indicates the Rate Agreement is valid and enforceable, it will confirm that it can so comply, and the Commission will be able to rely on such confirmation.
All information provided by DWR will be made available to the public in accordance with applicable laws and regulations. In addition, the Rate Agreement requires DWR, when requested by the Commission, to participate in our proceedings where Bond Charges and/or Power Charges are set. Although DWR will be subject to the same Commission Rules as the other parties, such as those pertaining to ex parte communications, we will accord DWR deference, particularly regarding matters that the Rate Agreement indicates are the exclusive responsibility of DWR. Thus, parties should not expect to use Commission proceedings as a vehicle to investigate or contest whether costs included in DWR's Revenue Requirement are just and reasonable under Pub. Util. Code § 451.107
We will provide an opportunity for the public and affected interests to participate fully in proceedings where rates are set to recover DWR's Bond-Related Costs and Department Costs. Where necessary, we will provide an opportunity for appropriate hearings in accordance with applicable laws and regulations. However, because the Rate Agreement expressly requires the Commission to set rates within 120 days, we cannot commit in the Rate Agreement to any particular procedures or process.
We recognize that the proposed Rate Agreement provides DWR with considerable influence over electric rates, since the Agreement allows DWR to recover in electric rates its Bond-Related Costs and Department Costs. However, contrary to the Foundation's assertions, the fact that DWR will have this influence does not constitute an unlawful transfer of the Commission's regulatory authority to DWR. Water Code § 80110, § 80130, and § 80134 provide authority for those provisions in the Rate Agreement because these statutes already require the Commission, when requested by DWR, to set rates to recover Bond-Related Costs and Department Costs. Similarly, Water Code § 80110 already makes DWR exclusively responsible for determining whether its costs are just and reasonable.
Due to the unprecedented size of the Bond offering, it is important that the Bond Trustee be above reproach. To this end, the Rate Agreement requires DWR to select a Trustee that has no conflicts of interest to the extent it is practicable to do so.108 The Rate Agreement also provides that the Trustee's power to enforce the Commission's covenants in the Agreement begins only when there is a default under the Financing Documents that is caused by both the Commission's failure to act and DWR's failure to enforce the Commission's covenants.109 This provision ensures that the Trustee may act only when there is an adverse impact on the bondholders that is caused by the Commission's failure to fulfill its obligations under the Agreement.
B. Imposition of Bond Charges on the Electric Power Sold by ESPs
The Rate Agreement states that the Commission will not impose Bond Charges at this time on power that is sold by ESPs.110 The Rate Agreement also provides that the Commission will impose Bond Charges on ESP power only after (1) the Commission issues an order that provides for such charges, and (2) the order becomes final and unappealable.111
There is no doubt that the imposition of Bond Charges on the electric power sold by ESPs would help ensure the recovery of DWR's Bond-Related Costs and thereby improve the security of the bondholders. It would also be good public policy to impose Bond Charges on ESP power, since all customers benefited from the debt that was incurred by DWR to procure power during the height of the electricity crisis. However, the issues associated with the imposition of Bond Charges on ESP power are too complicated and time consuming to address at this point, and it is in the public interest to adopt the Rate Agreement and implement separate Power Charges and Bond Charges as soon as possible. We place parties on notice that we plan to consider in a future proceeding whether to impose Bond Charges on the electric power sold by ESPs, and if so, how to do it. Any and all legal or policy challenges to this concept may be raised in this future proceeding. Among the issues that parties may raise in that proceeding are whether Bond Charges should apply to (1) ESP power delivered to customers that have never received power from DWR, and (2) ESP power delivered by a generator that is not connected to the grid. These concerns are raised in EPUC/CIU's comments. EPUC/CIU should raise these issues in later proceedings, and we decline to make EPUC/CIU's suggested changes to the definition of ESP.
In order to identify which entities are ESPs in the event that Bond Charges are imposed on the power sold by ESPs, Section 1.1 of the Rate Agreement defines an ESP as follows:
Electric Service Provider shall mean an entity that provides electrical service to one or more retail customers located within the Service Areas of [PG&E, SCE, or SDG&E] or any of their respective successors, except that Electric Service Provider excludes: the Department, any other public agency to the extent that it offers electrical service to customers within its jurisdiction or within the service territory of a local publicly owned electric utility,112 and Electrical Corporations. Electric Service Provider includes the unregulated affiliates and subsidiaries of an Electrical Corporation.
The above definition of ESP is only for purposes of the Rate Agreement and is not applicable for the purpose of determining whether the power sold by any entity is subject to franchise fees.
The Bond transaction that is being undertaken by DWR and the State Treasurer's Office (STO) will be implemented in accordance with the Financing Documents. The Financing Documents are not yet final, as the Financing Documents are subject to revision until the Bond transaction is closed. Once the transaction is closed, the Commission will be provided with a copy of the final Financing Documents.
It is not possible to condition our approval of the Rate Agreement on our review and approval of the final Financing Documents. Because the Bond transaction depends on the Rate Agreement, the Financing Documents cannot be finalized until after the Commission and DWR have entered into a Rate Agreement.113 Furthermore, the Financing Documents are being prepared by DWR and STO as part of their responsibility for issuing the Bonds. It is neither our role to decide whether the Bonds should be issued, nor our responsibility to determine the detailed terms and conditions of the Bond transaction. Our role is to review the Financing Documents as a sister State agency that is required by law to provide for the recovery of the costs that DWR incurs under the Act while simultaneously protecting ratepayer interests.114 As discussed below, we approve the Rate Agreement for the reason that it contains a mechanism allowing us to participate in the drafting of the Financing Documents, and that the General Counsel will keep us informed of any "material" changes to the transaction.
The Rate Agreement establishes a mechanism for the Commission to provide appropriate advice and assistance to DWR and STO. More specifically, Section 7.10 of the Rate Agreement states that DWR has submitted to the Commission a summary of the "material terms" of the Financing Documents ("the Summary").115 If DWR makes any "material changes" to the material terms, the Rate Agreement provides that the Commission's "designee" must approve those changes.116 The Summary also allows DWR to revise the material terms within designated parameters without the consent of the Commission's designee. Any changes beyond the designated parameters will require approval by the designee. The Rate Agreement states that the Commission will appoint a designee at the time the Commission adopts the Rate Agreement.
In order to ensure the timely sale of the Bonds, it is essential that a person be authorized to approve additional material changes within guidelines established by the Commission. Accordingly, we will appoint the Commission's General Counsel as our designee for the purposes set forth in Section 7.10 of the Rate Agreement. We may, by separate action today, and from time to time, authorize the General Counsel to approve additional changes beyond the parameters specified in the Summary, as necessary or desirable, to ensure timely Bond issuance. However, it is not, as TURN suggests, necessary for us to review the final terms of the Bond transaction to approve the Rate Agreement. Our consideration of any subsequent changes will not occur in the rubric of this formal proceeding. In fact, we have separately heard today the General Counsel's report to the Commission describing the terms of the Summary.117
By today's decision we delegate to the General Counsel the ministerial tasks of (1) reviewing the Financing Documents for the purpose of determining whether they are in compliance with the Summary or such changes beyond the Summary that we have approved, and (2) issuing whatever certificate, opinion, or similar documentation on the part of the Commission that is necessary to verify DWR's compliance with Section 7.10.118 The General Counsel shall not approve a material change to any material term that falls outside the guidelines approved by the Commission. The Commission may alter its delegation of authority to the General Counsel beyond the parameters expressed in the Summary without an opportunity for parties to comment on that. This is because we will not be making a formal Commission decision. Rather, we will be acting in our capacity as a State agency providing advice and assistance to a sister agency.119
In its comments on the Draft Decision, DWR raises the issue of granting additional authority to the General Counsel, beyond that already provided by the Summary, to approve changes to the "material terms" of the Bond transaction. Today's decision does not address the Summary. We will address the issue of granting additional authority to the General Counsel in accordance with the mechanism described herein.
In its comments on the Draft Decision, PG&E objects to the fact that several terms in the Rate Agreement are defined, in part, by reference to the Financing Documents. Contrary to PG&E's contention, not all of the significant definitions contain references to the Financing Documents. This reference occurs only in the definitions that describe the accounts that will be established pursuant to the Financing Documents. Furthermore, in addition to containing a reference to the fact that these terms will be more precisely defined in the Financing Documents, each of these definitions contains a brief statement of the purpose of the account. This form of definition is entirely appropriate. The Rate Agreement sets out a general definition of each of these accounts and then permits a more detailed definition to be included in the Financing Documents. As explained above, it is impossible to determine all of the details of the Bond transaction at this time, and inadvisable to wait until all of those terms are known before approving the Rate Agreement.120
D. Legal Authority for Rate Agreement
The Commission and DWR have explicit legal authority under Water Code § 80110 and § 80130 to enter into the Rate Agreement. Many provisions in the Agreement are also expressly authorized by the Act. For example, Sections 3.2, 6.1(c), and 7.9 of the Rate Agreement are expressly authorized by the Water Code or address topics expressly referred to in the Act (e.g., Water Code §§ 80132(f), 80112, and 80132(b)). Authority for the remaining provisions in the Rate Agreement comes from the discretion that the Commission and DWR have under the Act to negotiate terms and conditions that are not expressly provided for in the Act, so long as such terms and conditions are not inconsistent with the Act or other laws.121 In addition to its authority under the Act, the Commission may adopt the proposed Rate Agreement pursuant to its authority under the Public Utilities Code (see, e.g., Pub. Util. Code §§ 701, and 840 et seq.).
5. Legal Authority for Separate Power Charges and Bond Charges
The Rate Agreement requires the Commission to impose Power Charges to recover DWR's Department Costs, and separate Bond Charges to recover DWR's Bond-Related Costs. The Agreement also requires the Commission to impose (1) Power Charges on the electric power that is sold to Retail End Use Customers by DWR under the Act, and (2) Bond Charges on the electric power sold to all customers in the Service Areas of PG&E, SCE, and SDG&E, regardless of whether the power is sold by DWR, the utility, or, under the circumstances described in Section 4.3, by an ESP. Legal authority for the imposition of separate Power Charges and Bond Charges is described below.
a. Legal Authority for Power Charges
Both the Act and the Public Utilities Code provide legal authority for Power Charges. Water Code § 80002.5, § 80012, et al., authorize DWR to sell power to Retail End Use Customers. Water Code § 80110, § 80134, et al., authorize DWR to recover as a revenue requirement the costs that it incurs to procure and deliver power, as well as other costs that it incurs to administer the Act. Water Code § 80104 obligates Retail End Use Customers to pay DWR for power they receive from DWR, and Water Code § 80110 authorizes the Commission to establish electric charges to collect DWR's revenue requirement from electric customers. We note that both relevant agencies interpret the Act to allow the imposition of Power Charges.
The adopted Rate Agreement establishes a mechanism for DWR to submit its revenue requirement to the Commission and for the Commission to set Power Charges to recover the revenue requirement from Retail End Use Customers that receive power from DWR. This mechanism is properly contained in the Agreement,122 since the financial well being of DWR, which is of keen interest to potential bondholders, depends on Power Charges. Also, the availability of funds to pay Bond principal and interest depends, in part, on Power Charges being adequate to recover DWR's Department Costs, particularly the costs incurred under its Priority Long Term Power Contracts.
b. Legal Authority for Bond Charges Under the Act
The portions of the Rate Agreement that most affect the Bond transaction-those pertaining to Bond Charges-will be irrevocable. Legal authority for Bond Charges is provided by both the Act and the Public Utilities Code. The Act provides the Commission and DWR with authority to agree on the provisions in the Rate Agreement pertaining to Bond Charges. Water Code § 80110 states, in pertinent part, as follows:
The department shall be entitled to recover, as a revenue requirement, amounts and at the times necessary to enable it to comply with Section 80134,123 and shall advise the commission as the department determines to be appropriate...For purposes of this division...the Public Utility Commission's authority as set forth in Section 451 of the Public Utilities Code shall apply, except any just and reasonable review under Section 451 shall be conducted and determined by the department. The commission may enter into an agreement with the department with respect to charges under Section 451 for purposes of this division, and that agreement shall have the force and effect of a financing order adopted in accordance with Article 5.5 (commencing with Section 840) of Chapter 4 of Part 1 of Division 1 of the Public Utilities Code, as determined by the commission. (Emphasis added.)
Because the Act allows the Commission and DWR to enter into an agreement regarding the nature of the charges the Commission will impose to recover DWR's costs, the Act necessarily allows DWR and the Commission to jointly develop the terms and conditions of a mutually agreeable recovery mechanism. Therefore, because the separate Bond Charge mechanism is a product of negotiation between DWR and the Commission, it is a charge that is specifically contemplated by the Act. We also note that both agencies interpret the Act to authorize the imposition of Bond Charges.
Moreover, by explicitly stating in § 80110 that "the [Commission's] authority as set forth in Section 451 of the Public Utilities Code shall apply," and by providing for an agreement "with respect to charges under Section 451 of the Public Utilities Code," the Act specifically contemplates that the Commission might use its broad ratemaking authority124 and discretion to devise and implement charges to recover DWR's revenue requirement.
Water Code § 80110 places no restrictions on the ratemaking mechanisms that may be used to recover DWR's Bond-Related Costs. Because there is nothing in § 80110 or elsewhere in the Act that requires the use of a particular ratemaking method to recover DWR's Bond-Related Costs, we conclude that we may use our discretion to devise and implement an appropriate ratemaking mechanism to recover such costs.125
Water Code § 80130 similarly demonstrates the Legislature's intent to provide the Commission and DWR with great flexibility in establishing a mechanism to repay the Bonds. That section states: "[B]efore the issuance of bonds, the department shall establish a mechanism to ensure that the bonds will be sold at investment grade rates and repaid on a timely basis from pledged revenues. This mechanism may include, but is not limited to, an agreement between the department and the commission as described in Section 80110." (Emphasis added.) This broad language contains no restrictions on the means by which DWR may recover its Bond-Related Costs.
Other provisions in the Act support the conclusion that the Legislature did not intend to limit the recovery of Bond-Related Costs in any particular way, for example to electric charges that are imposed only on the power sold by DWR. Water Code § 80100 authorizes DWR to enter into power contracts that terminate at a time determined by DWR. Water Code § 80132 authorizes DWR to issue Bonds that mature at such time or times as determined by the Director of DWR and approved by the Director of Finance and the State Treasurer. Nothing in the Act requires DWR to repay the Bonds prior to, or simultaneously with, the termination of its power sales under the Act. In fact, DWR has authority under the Act to issue Bonds with maturities that extend well beyond the term of DWR's power contracts. As a result, the Act cannot be read to require DWR to sell power in order to recover its Bond-Related Costs.126 Indeed, at the time the Act was passed, it was unknown how the energy crisis would unfold and how long DWR might be selling power.
Water Code § 80132(a) further reinforces the conclusion that the Commission and DWR have authority to devise the Bond Charge mechanism contained in the Rate Agreement. Water Code § 80132(a) states, in pertinent part, as follows: "The bonds shall be sold...on such terms and conditions, as shall be specified in such determination [of DWR approved by the Director of Finance and the State Treasurer], and such determination may contain or authorize any other provision, condition, or limitation not inconsistent herewith and such provisions as may be deemed reasonable and proper for the security of the bondholders." Thus, in selling the Bonds, DWR is authorized to include provisions not specifically mentioned in the Act, so long as they are not inconsistent with the Act. It would not be inconsistent with the Act for DWR to include a provision in the Bond offering which states that the Bonds will be repaid with revenues from Bond Charges that are imposed on the electric power sold to customers, regardless of whether it is sold by DWR, the utility, or an ESP under the circumstances described in Section 4.3 of the Rate Agreement.
c. Legal Authority for Bond Charges Under the Public Utilities Code
Water Code § 80110 authorizes the Commission to use its powers under Pub. Util. Code § 451 to establish a mechanism that provides for the recovery of DWR's Bond-Related Costs. Section 451, in turn, provides the Commission with broad authority to devise ratemaking mechanisms for the recovery of costs associated with the provision of utility service, including a surcharge mechanism such as the Bond Charge.127 The Commission has used this authority to devise surcharge mechanisms in the past. For example, in cases implementing the California Safe Drinking Water Bond Act of 1976,128 the Commission implemented a surcharge mechanism to provide water utilities with the funds necessary to repay loans that the utilities had obtained under the Water Bond Act.129 The Commission's broad authority under § 451 allowed it to design a surcharge as a means to address a variety of concerns, including the need to provide lender's security and the need to inform customers of financing costs.130 The Commission did not require express statutory authority to implement a surcharge mechanism to recover costs in those cases. In addition, there is no constitutional impediment to the imposition of Bond Charges for the reasons described herein.
In addition to its ratemaking authority under Public Util. Code § 451, Public Util. Code § 701 provides the Commission with plenary authority to take necessary actions, such as imposing Bond Charges. That section states:
The commission may supervise and regulate every public utility in the State and may do all things, whether specifically designated in this part [the Public Utilities Act] or in addition thereto, which are necessary and convenient in the exercise of such power and jurisdiction.
As explained in Consumers Lobby Against Monopolies v. Pub. Util. Commission (1979) 25 Cal. 3d 891, 905-06, Pub. Util. Code § 701 provides the Commission with an open-ended grant of authority that allows the Commission to do things for which there is otherwise no express statutory authorization. This broad authority empowers the Commission to fill the interstices and gaps of statutes directing how public utilities shall be regulated.131 The Commission has, for example, relied on § 701 to interpret statutes where specific terms are not defined.132 While the courts have recognized the broad authority the Commission has under § 701, they note that this authority may not be used in a manner that would contravene legislative directives or express restrictions on its authority in the Public Utilities Code.133 The Bond Charge does not contravene any express direction of the Legislature, and actually advances the purpose of the Act. Reading Pub. Util. Code § 701 and Water Code § 80110 together provides a clear legislative foundation for the Commission to impose the Bond Charge.
d. The Use of a Bond Charge is Reasonable Under the Circumstances
As described earlier, it was necessary for DWR to incur billions of dollars of debt to finance power purchases during the height of the electricity crisis. If DWR had not purchased the power and incurred the related debt, there would have been repeated and prolonged blackouts extending over large portions of the State. Because of the imbalance between supply and demand, and because of the restrictions placed utilities buying power, it can be inferred that DWR's participation in the electricity markets averted blackouts that would have been caused by the lack of a creditworthy purchaser. As we observed in March 2001 during the height of the crisis:
SCE's and PG&E's financial problems have compromised the integrity of the state's electrical system. The utilities are in debt to the ISO and to power sellers that will not or cannot sell additional power unless they are paid. The state's energy supply system is further compromised because some suppliers have also refused to sell PG&E natural gas that it needs to purchase for its natural gas customers. Blackouts across the state on March 19 and 20 were attributable in part to the refusal of energy suppliers, including qualifying facilities (QFs), to sell electricity to the ISO and the utilities. While the failure of some of these suppliers to provide available power to the grid may stem from their desire to maximize profits, others say they are on the verge of insolvency as a result of the utilities' failure to pay. Whether or not the power sellers' actions are lawful, and whether or not we approve of those actions, without a rate increase it will become increasingly difficult to keep the lights on in California. (D.01-03-082, mimeo., pp. 13 - 14).
As DWR points out, the Western Systems Coordinating Council and other independent sources predicted up to 300 hours of outages for California during 2001, resulting in rolling blackouts to maintain operations of the grid.134 Widespread and prolonged blackouts would have disrupted California's emergency services, law enforcement, schools, hospital, homes, businesses, and agriculture.135 Furthermore, had there been 300 hours of blackouts, there would have been repeated cycling of circuits, thereby causing abnormal wear on circuit breakers, switches, transformers, and series compensators, which would have jeopardized the physical integrity of the State's electricity grid.136
We agree with DWR's comments that the loss of current and future business from the blackouts would have been enormous.137 Indeed, we believe that the economic costs from widespread blackouts and the collapse of the electricity grid would have been long lasting138 and far in excess of the debt that DWR incurred to avert the disaster. Ultimately, all Californians will benefit from DWR's expenditures and the related debt that was incurred by DWR, including future customers who were not living in California at the height of electricity crisis.
The specific facts of the electricity crisis weigh heavily in favor of separate Bond and Power Charges. Separate charges will give the State flexibility to shape the future structure of the retail electric market. Nothing in the Bond financing structure reflected in the proposed Rate Agreement will prevent the discontinuation of DWR power purchases and sale of power to Retail End Use Customers, if that is desirable. As a result, at least two policy goals become achievable. First, California's electric utilities can resume their traditional role of meeting the power needs of their customers. Second, the long-term power contracts that DWR was forced to sign at the height of the crisis can be re-evaluated.
The importance of these goals should not be underestimated. DWR stepped into its energy role at a time of great crisis, but the Act does not contemplate that this emergency role should be expanded to establish DWR as a permanent supplier of electricity to Californians. If DWR were required to sell electricity in order to generate revenue to pay for bonds it would effectively be required to adopt that permanent role, frustrating California's efforts to rehabilitate its utilities and restore the status quo ante. The Commission's ability to separate Power and Bond Charges into two revenue streams in order to obtain this flexibility is a proper exercise of our authority to establish charges under the Act and the Public Utilities Code.
Similarly, the establishment of a separate Bond Charge facilitates on-going efforts to renegotiate DWR's long-term power contracts. The adopted Rate Agreement specifically provides that DWR will use its best efforts to renegotiate those contracts. By separating monies that flow to bondholders from monies that flow to the providers of electric power, DWR will not be hampered in its negotiations. For example, DWR will not be required to choose specific contracts that it must keep in place so that it has at all times enough power available to generate sufficient revenues to pay for its Bonds.
The establishment of a separate Bond Charge also recognizes the nature of the costs that DWR will finance with its bond transaction. These are costs that DWR incurred at the height of a crisis. The Legislature designated DWR as the agency that would act to maintain the physical and economic structure of California's power grid. The fact that DWR bought power when no other entity was available to buy power preserved the structure of the grid to the benefit of California now and in the future. While some parties criticize DWR's actions, and while DWR itself may overstate the benefits of its long-term contracts as opposed to its purchases in 2001, DWR's actions to prevent the collapse of the electricity grid, even at a high price, provided a service to all California electricity consumers now and in the future. Because the costs that DWR incurred to save the grid have future benefits, they should be amortized over time.
The Commission's authority under Pub. Util. Code § 451 and § 701 to impose rate mechanisms such as Bond Charges extends to situations where the charge is not in proportion to the direct benefit received by each customer paying the Charge.139 This would be the case, for example, for future ratepayers who will pay Bond Charges despite the fact that they only received the benefits of DWR's grid-stabilizing activities, and did not receive any of the electric power that was procured by DWR during the height of the electricity crisis. There is precedent for requiring future ratepayers to pay off bonds. In AB 1890, which enacted Pub. Util. Code § 849, the Legislature directed electric utilities to reduce their rates by 10%, and to finance the rate reduction by issuing bonds. In D.00-06-034, the Commission held that it is reasonable for future ratepayers to pay off the bonds issued pursuant to AB 1890, even though some future ratepayers might not have benefited from the bonds:
We recognize that this will result in certain future customers paying bond costs without the benefit of the offsetting credit. However, AB 1890 recognized that bond costs would be paid by certain future customers well after the benefits from rate reduction bonds were realized. To the extent that this specific outcome is inequitable to future ratepayers, we defer to the overall wisdom of the Legislature in balancing the overall benefits and costs of restructuring. (2000 Cal. PUC LEXIS 505, *111)
Addressing timing differences between costs and revenues is a normal part of the Commission's ratemaking responsibility. The general rule established by the California Constitution is that the Commission may devise and implement ratemaking procedures "subject to statute and due process." (California Constitution Article XII, Section 5.) For example, in Southern California Edison (SCE) v. Commission, 20 C. 3d 813, the Court addressed a case where the Commission had ordered an electric utility to refund excess revenues it had collected over a three-year period beginning on the date of the order. The utility had received the excess revenues for several years prior to the order. In the absence of a contrary statutory directive, the Court approved this procedure, applying a "fair and reasonable" standard to the Commission's action.140 Significantly, the Court in SCE drew on a line of cases involving federal income tax expense that assumed that so long as the Commission adopted an approach that fairly balanced the interests of ratepayers as a class with the utility, significant timing differences between costs and revenues would be tolerated.141
In the mid-1970's the Legislature acted in two specific instances involving refunds and balancing accounts to limit the Commission's discretion by prescribing a relatively close temporal relationship between the occurrence of a cost and the recovery of the cost in rates. In Public Utilities Code § 453.5142 the Legislature prescribed a procedure for distributing refunds that attempted to match refund payment with the customers whose rates reflected the excessive costs that were the subject of the refund. In Pub. Util. Code § 792.5143 the Legislature authorized the use of balancing accounts and required "subsequent rate adjustments" to amortize any over- or undercollection recorded in the balancing accounts.
These cases and statutes demonstrate that ratemaking mechanisms involving the temporal shifting of costs or revenues are not automatically suspect. Where the Legislature has prescribed a method, it must be followed. Where there is no statutory direction, the Commission may exercise its discretion and the result will be upheld so long as it is fair and reasonable.
Here the Legislature, in Water Code § 80130 and § 80200(b)(4), authorized DWR to issue bonds to repay General Fund advances "as soon as practicable." Water Code § 80110 explicitly incorporates the provisions of Pub. Util. Code § 840 et seq., which deals with securitization of current costs, i.e., the creation of a stream of revenue over time that may be sold or pledged, with the proceeds of the sale or pledge being used to defray current costs. In addition, Water Code § 80110 provides the Commission with authority to devise a ratemaking mechanism to recover the bond-related costs. These statutory provisions provide clear authority (1) to issue bonds for the purpose of shifting much of the cost of the electricity crisis to future ratepayers, and (2) for the Commission to use its discretion to implement a ratemaking mechanism to recover these costs from future ratepayers.
As a result, the shifting of bond costs to the future is contemplated by the Act when it provides DWR with authority to issue Bonds that have maturities that extend far into the future,144 and directs DWR to notify the Commission of its revenue requirement associated with the Bonds at least annually, if not more frequently, for as long as the Bonds remain outstanding.145 These provisions make all ratepayers liable for electricity costs incurred by DWR during the emergency. Likewise under the Act, the Commission is required to impose charges that are sufficient to recover DWR's Bond-Related Costs for as long as the Bonds remain outstanding.146 In light of these provisions in the Act, the Legislature must have foreseen the possibility that future ratepayers who did not consume the electricity that was financed with the Bond proceeds would nonetheless have to pay rates to recover DWR's Bond-Related Costs. We note that DWR concurs in our interpretation of the Act.
In addition to temporal shifting of costs and revenues, there are many other examples where customers are required to pay rates that are not based on the exact cost of utility service provided to each customer.147 For instance, the Commission in 1979 established a program authorizing Pacific Bell Telephone Company to provide specialized equipment to hearing impaired customers at a subsidized rate. The Commission found it had discretionary authority to provide specialized equipment at subsidized rates148. The Commission initially elected to embed the subsidy in basic exchange rates charged to all customers, which had the effect of spreading the cost of the subsidy across the entire customer base. Subsequently, the Legislature codified a requirement for the Commission to create such a program, but left the funding mechanism unspecified.149 The Commission then established the Deaf Equipment Acquisition Fund (DEAF) and changed the funding from an implicit subsidy hidden in rates to an explicit surcharge for each access line.150 Later, the Legislature codified the express surcharge on every telephone as a funding mechanism for this program.
In the DEAF case, the Commission exercised its general authority to fund a program with a surcharge that bore no relationship to the direct individual benefit each customer received, without express statutory authorization. When the Legislature eventually codified the program, it initially left the funding mechanism unspecified and the Commission continued to use its authority to maintain the surcharge. In this case, the Act leaves the funding mechanism for resolving the electricity crisis unspecified, and the Commission will, in conjunction with DWR, exercise its authority to establish Bond Charges.
6. Legal Authority for Designating Power and Bond Charges the Property of DWR
Section 5.1(b) of the Rate Agreement provides that Bond Charges shall be the property of DWR for all purposes under California law. Similarly, Section 6.1(c) provides that Power Charges shall be the property of DWR for all purposes under California law. Authority for these sections is provided by Water Code § 80110 and § 80112, which state, in relevant part, as follows:
§ 80110: "The [Department] shall retain title to all power sold by it to the retail end use customers...The [Department] shall have the same rights with respect to payment by retail end use customers for power sold by the [Department] as do the providers of power to such customers...The [commission} may enter into an agreement with the [Department] with respect to charges...for purposes of this division, and that agreement shall have the force and effect of a financing order adopted in accordance with [Pub. Util. Code § 840 et seq.] as determined by the [Commission]." (Emphasis added.)
§ 80112: "All money collected with respect to any power acquired and sold pursuant to this division and the Governor's Emergency Proclamation dated January 17, 2001, and all money paid directly or indirectly to or for the account of the [Department] with respect to any sale, exchange, transfer, or disposition of power acquired pursuant hereto, shall constitute property of the [Department]...." (Emphasis added.)
The above-quoted provisions provide that all money collected "with respect to" any power acquired and sold pursuant to the Act and the Governor's Executive Order are the property of DWR. These provisions clearly apply to Power Charges, which are meant to recover the cost of power sold by DWR. These provisions also apply to Bond Charges, since DWR is authorized by the Water Code to use Bond proceeds to pay for past, current, and future power-related costs.151 Thus, the provisions in § 80112 which establish that revenues "with respect to" any power acquired and sold by DWR are the property of DWR apply with equal force and effect to Bond Charges, as the revenues from the Bond Charges will ultimately be used to pay for power-related costs.
Water Code § 80110 also supports the conclusion that Bond Charges are the property of DWR. This section authorizes the Commission to enter into an agreement with DWR that (1) establishes "charges" for the recovery of DWR's Bond-Related Costs, and (2) has the force and effect of a "financing order" adopted by the Commission pursuant to Pub. Util. Code § 840 et seq. The effect of Pub. Util. Code § 840 et seq., is to allow the Bond Charge to be established by a financing order. Any financing order created pursuant to § 840 et seq., establishes a property right in the rates and charges imposed by the financing order and the proceeds that flow from the rates and charges imposed pursuant to the financing order.152 Accordingly, Pub. Util. Code § 840 et seq., may be used to create a DWR property right in the proceeds from the Bond Charges.
Although revenues from Bond Charges are the property of DWR, this does not affect the ability of the utilities to recover their revenue requirement over time. Section 6.1 (b) of the Rate Agreement provides:
Power Charges and Bond Charges shall be established by the Commission without regard to the levels or amounts of any particular rates or charges authorized by the Commission to be charged by any Electrical Corporation for electrical power sold by such Electrical Corporation.
The effect of Section 6.1(b) is that the utilities' ability to recover their own revenue requirements over time cannot be affected by Bond Charges. We recognize, however, that the timing of a utility's recovery of its revenue requirement, and decisions about which customers' rates will pay for revenue requirements may be affected by the size of Bond Charges. For example, the Commission's recent settlement with SCE provides that the timing of SCE's recovery of certain costs will be determined by residual calculations. Also, Water Code § 80110 provides that rates for residential usage of up to 130% of baseline are capped at the rates that were in effect at the time AB 1X was enacted. We note that DWR concurs in this interpretation of the Act.
7. Legal Authority for the Irrevocable Provisions in the Rate Agreement
Section 5.1(c) of the Rate Agreement provides that Sections 5.1(a) and 5.1(b) of the Agreement shall have the force and effect of an irrevocable financing order adopted by the Commission pursuant to Pub. Util. Code § 840 et seq. Authority for Section 5.1(c) is provided by Water Code § 80110, which states that the Commission may enter into an agreement with DWR that has the force and effect of a financing order adopted in accordance with Pub. Util. Code § 840 et seq. Pub. Util. Code § 841(c) and 842(d), in turn, permit a financing order issued pursuant to § 840 et seq., to be irrevocable.153
In its comments on the proposed Rate Agreement, PG&E argues that numerous provisions of the Rate Agreement, beyond those made irrevocable by Section 5.1(c), "bind" future Commissions, and that this is improper. PG&E ignores the Commission's express authority under the Act to enter into an "agreement" with DWR. Because the Rate Agreement is, in essence, a contract with a sister State agency, and is specifically authorized by statute, it can bind future Commissions in a way that would not occur if the Commission were simply issuing a decision in the normal course of regulating utilities.
Because the Rate Agreement is a contract, it may be amended in the future by mutual agreement of the parties, except that Sections 5.1(a) and 5.1(b) are irrevocable and cannot be amended on or after the issuance of Bonds in reliance on the Rate Agreement. (See Sections 5.1(c) and 10.1.) However, we anticipate that DWR will agree in the Financing Documents not to permit any amendments to those other portions of the Rate Agreement that would be detrimental to bondholders. These terms of the Rate Agreement still allow for some flexibility. For example, DWR and the Commission could mutually agree on a change that was also acceptable to bondholders. Similarly, the Legislature could determine that DWR and the Commission should adopt a specific change (again, only if it did not impair the rights of bondholders). This greater flexibility contrasts with the "irrevocable" portions of the Rate Agreement, which will not change for the life of the Bonds. We intend the "non-irrevocable" portions of the Rate Agreement to be amended or terminated only in accordance with the provisions of the Rate Agreement itself, and not as a result of any unilateral Commission action. PG&E indicates that this is an appropriate result in its comments on the Draft Decision, since PG&E believes these provisions should not be irrevocable.
PG&E asks that the Commission amend these provisions, so that they are not read as having any binding effect on future Commissions. We disagree with this approach. Pursuant to our discretion over the content of the Rate Agreement, we have determined the terms on which the Rate Agreement should be amended or terminated, and have agreed upon those terms with DWR. Once the Commission enters into that agreement, it cannot unilaterally change those provisions. Such is the nature of agreements, and the Commission has authority to enter into an "agreement" with DWR by virtue of AB 1X, which is the basis for the representation in Section 2.2 of the proposed Rate Agreement.
As a result, we believe it is clear from existing law that the Commission has the ability to enter into the proposed Rate Agreement. However, to the extent this is not clear, we note that AB 1X authorizes us to determine how the Rate Agreement will have the "force and effect" of a financing order. We have exercised that discretion by agreeing to the amendment and termination provisions of the proposed Rate Agreement. If it is necessary for the Commission to characterize the proposed Rate Agreement as a financing order-albeit not an "irrevocable" one-those portions of the Rate Agreement not now characterized as a financing order, we will do so.
The Act requires the Commission to set rates to recover DWR's revenue requirement without limiting the methods by which that revenue requirement is to be recovered. There is no legislative directive that compels the Commission to recover DWR's revenue requirement strictly by means of charges imposed on power sold by DWR, nor is any restriction found elsewhere in California law that prevents the Commission from collecting DWR's revenue requirement by the separate Bond Charges and Power Charges set forth in the Rate Agreement. Accordingly, the language of the Act, as well as the Commission's plenary authority to regulate public utilities, provides the Commission with the authority to collect DWR's revenue requirement by directing the relevant utilities to collect Bond Charges and Power Charges from their customers.
When the Act and the Commission's authority are considered together, the adoption of a separate surcharge mechanism to recover DWR's Bond-Related Costs is reasonable and lawful. California law recognizes an administrative agency's right to interpret a statute, especially if such an interpretation is needed to put the statute into effect. For legislatively created agencies, judicial deference is at the level of "respect" if a court must decide whether or not an agency has authority to act.154 Separate law exists defining the Commission's authority to interpret statutes, because the Commission is constitutionally created. Those cases confirm that there is a strong presumption that the Commission's orders are valid, and, at least with respect to the Public Utilities Code, and that the Commission's interpretation of statutes should not be disturbed unless it fails to bear a reasonable relation to statutory purposes.155 The Act concerns the Public Utilities Code as well as the Water Code, and it is clear that the Commission has a role in its implementation. Accordingly, it is within the Commission's authority to interpret relevant provisions of the Act.
V. Revisions to the Proposed Rate Agreement
We have made minor revisions to the definition of Priority Long Term Power Contracts in Section 1.1 of the proposed Rate Agreement as circulated for comment on January 31, 2002, and other minor revisions to Sections 10.1 and 11.11.
In its comments on the Draft Decision, DWR recommends that the word "may" in the fourth line of Section 5.1(d) be changed to "shall," at the request of a rating agency. The effect of this change would be to impose an additional duty on DWR. Since this change imposes an additional duty on DWR, which it wishes to assume, we see no reason not to adopt this change. The adopted Rate Agreement is revised accordingly.
VI. The Adopted Rate Agreement
The Rate Agreement adopted by this decision is contained in Appendix C. The Commissioners voting to adopt the Rate Agreement, should they constitute a majority of this Commission, shall sign the adopted Rate Agreement on behalf of the Commission. Once executed by DWR and finalized through the Commission's rehearing process, Sections 5.1(a) and 5.1(b) of the Commission-adopted Rate Agreement will have the force and effect of a financing order issued pursuant to Pub. Util. Code § 840 et seq. Once DWR has signed the Rate Agreement, the Commission's Executive Director shall file and serve a copy of the signed Rate Agreement. The Commission's General Counsel will retain the Commission's copies of the original signed Rate Agreement.
VII. Pub. Util. Code Section 311(g) - Public Review and Comment
Pub. Util. Code § 311(g)(1) generally requires that a draft decision be served on all parties and subject to at least 30 days of public review and comment prior to a vote of the Commission. However, pursuant to Rules 77.7(f) and 77.7(f)(9), the Commission may waive the 30-day period if required by public necessity. These rules state, in relevant part, as follows:
The Commission may reduce or waive the period for public review and comment . . . for a decision where the Commission determines, on the motion of a party or on its own motion, that public necessity requires reduction or waiver of the 30-day period for public review and comment. For purposes of this subsection, "public necessity" refers to circumstances in which the public interest of the Commission adopting a decision before expiration of the 30-day review and comment period clearly outweighs the public interest in having the full 30-day period for review and comment . . . When acting pursuant to this subsection, the Commission will provide such reduced period for public review and comment as is consistent with the public necessity requiring reduction or waiver.
DWR and the Department of Finance represent that it is imperative for the Commission to approve the Rate Agreement as soon as possible in order to protect and maintain the financial condition of the State. DWR explains that in order to issue the Bonds no later than June 30, 2002, the Commission must adopt the Rate Agreement in February 2002. The Department of Finance indicates that the budget for the State of California assumes that DWR will repay the State's General Fund by June 2002.
The proposed Rate Agreement was jointly developed after October 2001, and contains significant changes, as Edison, PG&E, and TURN note. It has also been vetted with the financial community, as DWR notes. Contrary to EPUC/CIU's claims, this was accomplished as quickly as possible, and the Rate Agreement could not have been circulated any earlier. Because the Bonds cannot be issued until a final Rate Agreement is in effect, we determine pursuant to Rule 77.7(f)(9) that the public interest in the Commission issuing a decision regarding the Rate Agreement before the expiration of the 30-day review and comment period outweighs the public interest in having the full comment period.156
The proposed Rate Agreement was provided to the parties via a ruling issued by Administrative Law Judge (ALJ) Kenney on January 31, 2002. Comments regarding the proposed Rate Agreement were submitted on February 5, 2002. The substance of these comments was reflected in the Draft Decision of ALJ Kenney that was mailed to the parties on February 14, 2002, in accordance with Pub. Util. Code § 311(g)(1). The Draft Decision, however, did not include citations to specific portions of the parties' comments on the proposed Rate Agreement. Comments regarding the Draft Decision were filed properly on February 19, 2002, by DWR, the Department of Finance, EPUC, PG&E, SCE, and SDG&E. These comments have been reflected, as appropriate, in the final decision adopted by the Commission. In addition, the final decision has been revised to indicate where in the decision we have addressed the parties' comments on the proposed Rate Agreement that are relevant to today's decision, and to explain how we have disposed of certain comments on the proposed Rate Agreement.
VIII. Rehearing and Judicial Review
This decision construes, applies, implements, and interprets the provisions of AB 1X. Therefore, Pub. Util. Code § 1731(c) (applications for rehearing are due within 10 days after the issuance of the order or decision) and Pub. Util. Code § 1768 (procedures applicable to judicial review) are applicable.
1. In AB 1X the Legislature declared: "The furnishing of reliable reasonably priced electric service is essential for the safety, health, and well-being of the people of California. A number of factors have resulted in a rapid, unforeseen shortage of electric power and energy available in the state and rapid and substantial increases in wholesale energy costs and retail energy rates, with statewide impact, to such a degree that it constitutes an immediate peril to the health, safety, life and property of the inhabitants of the state, and the public interest, welfare, convenience and necessity require the state to participate in markets for the purchase and sale of power and energy."
2. In response to the electricity crisis, Governor Davis proclaimed a state of emergency on January 17, 2001, and ordered DWR to immediately procure electricity to mitigate the effects of the emergency.
3. The State's General Fund has loaned more than $ 6 billion to DWR in response to the electricity crisis. DWR has used the funds to procure electric power for millions of Californians.
4. On June 18, 2001, Governor Davis issued an Executive Order that authorized DWR to accept up to $5 billion in loans for the following purposes: (i) purchase electric power, (ii) purchase natural gas to generate electricity; and (iii) fund capitalized interest and reserves required in connection with the loans. The Executive Order indicates that all provisions in the Act apply to the loans. On June 26, 2001, DWR obtained an Interim Loan in the amount of $4.3 billion pursuant to its authority under the Governor's Executive Order.
5. DWR is required by the terms of the Interim Loan to (i) repay the Interim Loan prior to repaying the General Fund, and (ii) pay higher rates of interest on the Interim Loan the longer the Loan remains outstanding.
6. The purpose of the proposed Rate Agreement is to facilitate the issuance of Bonds by DWR. DWR will use the Bond proceeds to (i) repay the Interim Loan, and (ii) repay the State's General Fund for billions of dollars that were loaned to DWR to purchase electric power in response to the electricity crisis.
7. The Rate Agreement defines Bonds as follows: Indebtedness issued by DWR pursuant to Water Code § 80130 and the Governor's Executive Order dated June 18, 2001, in an aggregate principal amount up to $ 13,423,000,000; provided, however, that (i) notes issued in anticipation of the Bonds and retired from the proceeds of those Bonds shall not be counted against said dollar limitation, and (ii) Bonds shall include indebtedness issued to refund prior Bonds, but such refunding indebtedness shall not be counted against said dollar limitation; and, (iii) the definition of Bonds excludes the Interim Loan.
8. The Bond transaction will be subject to the Financing Documents. The proposed Rate Agreement defines Financing Documents as follows: Any resolution, indenture, trust agreement, loan agreement, revolving credit agreement, reimbursement agreement, standby purchase agreement or other agreement or instrument adopted or entered into by DWR authorizing, securing, or enhancing the Bonds, as amended from time to time or supplemented in accordance therewith.
9. The proposed Rate Agreement requires DWR to (i) involve the Commission to the fullest extent possible in the development of the Financing Documents, (ii) consult with the Commission on the sizing of operating and debt service reserves, debt service coverage, the maturity and maximum amount of Bonds to be issued, and any other matters in the Financing Documents that the Comm