II. Background

On February 1, 2001, Assembly Bill (AB) 1 from the First Extraordinary Session (AB 1X) was signed into law. Wholesale energy prices that had soared to unprecedented levels had caused a deterioration in Southern California Edison Company's (Edison) and Pacific Gas & Electric Company's (PG&E) financial condition, leaving them unable to buy all the power needed to serve their customers. In response to this emergency situation, AB 1X authorizes DWR to purchase electric power for AB 1X sale directly to retail end-use customers² being served by utilities.³ When these customers take delivery of DWR's power, they are deemed to have purchased it. DWR power is to be allocated for delivery to all classes of retail end-use customers on a pro rata basis, to the extent possible.⁴

AB 1X contains a number of mechanisms to pay DWR for the electricity it sells. Several are relevant here. Section 2 of AB 1X adds Section 360.5 to the Public Utilities Code. Section 360.5 contains detailed requirements for the calculation of an amount know as the "California Procurement Adjustment" or "CPA." That statute provides:

"The commission shall determine that portion of each existing electrical corporation's retail rate effective on January 5, 2001, that is equal to the difference between the generation related component of the retail rate and the sum of the costs of the utility's own generation, qualifying facility contracts, existing bilateral contracts, and ancillary services. That portion of the retail rate shall be known as the California Procurement Adjustment. The commission shall further determine the amount of the California Procurement Adjustment that is allocable to the power sold by the department. That amount shall be payable, by each electrical corporation, upon receipt by the electrical corporation of the revenues from its retail end use customers, to the department for deposit in the Department of Water Resources Electric Power Fund, established by Section 80200 of the Water Code. The amount determined pursuant to this subdivision shall be known as the Fixed Department of Water Resources Set-Aside."

AB 1X also establishes the DWR Electric Power Fund (the "Fund") in the State Treasury, and authorizes DWR to issue bonds, notes, and other evidences of indebtedness (collectively, "Bonds") for certain limited purposes, including:

· paying the costs of electric power and transmission, scheduling, and other related expenses, or to reimburse expenditures from the Fund for those purposes.

· repaying to the General Fund certain advances made to DWR for the power purchase program; and

· establishing or maintaining reserves in connection with the Bonds and paying certain costs incidental to the issuance, payment and security of the Bonds.

Water Code Section 80130, enacted as part of AB 1X, addresses the issuance of bonds by DWR to finance electricity purchases. That statute provides in relevant part:

"In no event shall the [DWR] authorize the issuance of bonds ... in an aggregate amount greater than the amount calculated by multiplying by a factor of four the annual revenues generated by the California Procurement Adjustment, as determined by the commission pursuant to Section 360.5."