II. Regulatory and Statutory Mandates Relating to DWR Power Procurement

The actions we take in today's order follow the statutory scheme that was enacted in response to emergency conditions confronting California's major electric utilities and their customers. On January 17, 2001, Governor Davis issued a Proclamation that a "state of emergency" existed within California resulting from unanticipated and dramatic increases in the wholesale price of electricity.³ The Governor's Proclamation stated that "unanticipated and dramatic increases in the price of electricity have threatened the solvency of California's major public utilities, preventing them from continuing to acquire and provide electricity sufficient to meet California's energy needs." Governor Davis therefore ordered DWR to assume responsibility for procurement of a major portion of electric power resources for customers of California's three major electric utilities in order help stabilize market conditions. On January 19, 2001, Governor Davis signed Senate Bill 7 from the First Extraordinary Session of 2001-2002 (SB7X). This bill directed DWR to procure electricity on an interim basis and appropriated $400 million for this purpose.⁴

DWR formally began procuring electric power for customers in the service territories of Pacific and SCE on January 17, 2001, and for customers in the service territory of SDG&E on February 7, 2001.⁵ DWR undertook to meet the utilities' net short requirements⁶ through a combination of contractual power purchases and spot market purchases, including purchases of ancillary services. DWR has also, from time to time, assumed responsibility for imbalance energy and Independent System Operator (ISO) charges. The utilities continue to have the obligation to serve pursuant to Public Utilities Code Section 451 and Water Code Section 80002.

On February 1, 2001, the California Legislature enacted AB1X, which added Division 27 to the California Water Code, Sections 80000 et seq. AB1X authorized DWR to continue its power purchasing activity through December 31, 2002. The statutory enactment prohibits DWR from executing contracts after the end of 2002, but it does not affect DWR's authority to administer its contracts or to sell power under previously executive contracts after 2002. Among other things, that statutory enactment provides the following measures relating to DWR's procurement of power for California consumers:




· Authorizes DWR to purchase power and sell it to retail customers of PG&E, SCE, and SDG&E, as well as to municipal utilities. (Water Code Sections 80100 and 801160.)




· Establishes the DWR Electric Power Fund in the State Treasury, into which are deposited all revenues payable to DWR relating to power procurement, including proceeds from power sales, bond sales, appropriations and other sources. (Water Code Section 80200.)




· Authorizes DWR to sell bonds. (Water Code Section 80130.)




· Requires DWR to establish a revenue requirement to defray the costs of its activities and to communicate that revenue requirement to the Commission for recovery in retail electric rates. (Water Code Section 80134.)




· Allows DWR to recover charges for power established by the Commission after providing its revenue requirement to the Commission. (Water Code Section 80110.)

Thus, AB1X contains provisions to provide funds to DWR from revenues generated by applying charges to the electricity that it sells to the customers of the investor-owned utilities. AB1X requires that DWR include in its revenue requirement "...amounts necessary to pay for power purchased by it..." (Water Code Section 80134(a)(2).) Amounts in the Electric Power Fund are to be spent on the "...cost of electric power...." (Water Code Section 80200(b)(2).) The term "power" is specifically defined as "electric power and energy, including but not limited to, capacity and output or any of them." (Water Code Section 80010(f).)

Water Code Section 80002.5 states that "[i]t is the intent of the Legislature that power acquired under this division shall be sold to all retail end use customers served by electrical corporations, ...." Water Code Section 80104 explains that "[u]pon the delivery of power to them, the retail end use customers shall be deemed to have purchased that power from the department. Payment for any sale shall be a direct obligation of the retail end use customer to the department."

AB1X assigns roles to the Commission and DWR respectively in establishing the terms of the relationship between DWR as interim power seller and the customers of the investor-owned utilities. The key provision of the statute is Water Code Section 80110, which provides in relevant part:




The department shall retain title to all power sold by it to the retail end use customers. 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, and shall advise the commission as the department determines to be appropriate. Such revenue requirements may also include any advances made to the department hereunder or hereafter for purposes of this division, or from the Department of Water Resources Electric Power Fund, and General Fund moneys expended by the department pursuant to the Governor's Emergency Proclamation dated January 17, 2001.

Water Code Section 80110 provides that DWR is entitled to recover in rates amounts sufficient to enable it to comply with Section 80134, which are, under the bond structure currently being undertaken by the Administration and the State Treasurer, the revenues that may be pledged for support of bonds that DWR is authorized to issue pursuant to Section 80130. Section 80134(a) provides:




The department shall, and in any obligation entered into pursuant to this division may covenant to, at least annually, and more frequently as required, establish and revise revenue requirements sufficient, together with any moneys on deposit in the fund, to provide all of the following:




(1) The amounts necessary to pay the principal of and premium, if any, and interest on all bonds as and when the same shall become due.




(2) The amounts necessary to pay for power purchased by it⁷ and to deliver it to purchasers, including the cost of electric power and transmission, scheduling, and other related expenses incurred by the department, or to make payments under any other contracts, agreements, or obligations entered into by it pursuant hereto, in the amounts and at the times the same shall become due.




(3) Reserves in such amount as may be determined by the department from time to time to be necessary or desirable.




(4) The pooled money investment rate on funds advanced for electric power purchases prior to the receipt of payment for those purchases by the purchasing entity.




(5) Repayment to the General Fund of appropriations made to the fund pursuant hereto or hereafter for purposes of this division, appropriations made to the Department of Water Resources Electric Power Fund, and General Fund moneys expended by the department pursuant to the Governor's Emergency Proclamation dated January 17, 2001.




(6) The administrative costs of the department incurred in administering this division.⁸

(b) The department shall notify the commission of its revenue requirement pursuant to Section 80110.

⁷ Prior to commencing any program of power purchases DWR is required to "... assess the need for power in the state in consultation with the Public Utilities Commission and local publicly owned electric utilities and electrical corporations in the state and such other entities in the state as the department determines are appropriate." (Water Code Section 80100(f).)