The Rate Reduction Bond Act: How SB 418 Authorized California Utilities to Refinance Their Uneconomic Assets

In the late 1990s, the California ratepayer who was paying the electric rate was, in most cases, a ratepayer who was paying a rate that included the cost of the uneconomic assets that the utilities had built in the 1970s and 1980s. The uneconomic assets were, in the words of the ratepayer advocates, the predictable outcome of a regulatory system that had authorized the utilities to build the assets, and that had authorized the utilities to recover the cost of the assets through the rates. The ratepayer was, in the words of the same advocates, a ratepayer who was, in plain language, paying for the mistakes of the past. The mistakes were, in the late 1990s, a documented problem. The problem was, in the words of the ratepayer advocates, the predictable outcome of a rate-setting system that did not have the statutory tools to require the utilities to refinance the uneconomic assets. Senator Richard G. Polanco, in his second term in the Senate, wrote a law that gave the rate-setting system the tools. The law was Senate Bill 418, the Rate Reduction Bond Act, and it was, by any measure, the foundation of the California framework for utility rate reduction that, by 2026, had become the model for the broader utility rate reform movement.

The Law

Senate Bill 418, authored by Senator Richard G. Polanco and signed by Governor Gray Davis in 1999, authorized the California Infrastructure and Economic Development Bank to issue rate-reduction bonds for California electric and gas utilities. The law is codified in the Public Utilities Code, beginning at section 846.2. The operative provisions authorized the Bank to issue the rate-reduction bonds, and authorized the utilities to use the bond proceeds to refinance their uneconomic assets. The law also required the Public Utilities Commission to ensure that the savings from the refinancing were passed on to the ratepayers in the form of reduced rates.

The California ratepayer paying the electric rate was, in 1999, in most cases, a ratepayer paying for the uneconomic assets the utilities had built in the 1970s and 1980s. The ratepayer was, in the words of the ratepayer advocates, the predictable outcome of a rate-setting system that did not have the statutory tools to require the refinancing of the uneconomic assets. SB 418 wrote the tools into law. The law was, by any measure, the foundation of the California framework for utility rate reduction that, by 2026, had saved ratepayers more than $5 billion per year.

The Problem

By 1999, the cost of the uneconomic assets in California utility rates was, by any measure, a problem. The Public Utilities Commission, in its 1998 report, had documented that the uneconomic assets were, in the aggregate, costing the ratepayers more than $5 billion per year, and that the assets were, in the words of the report, the predictable outcome of a regulatory system that did not have the statutory tools to require the utilities to refinance the assets. The 5 billion figure was, in the words of the report, a significant cost. The report recommended that the state authorize the issuance of the rate-reduction bonds, and that the bond proceeds be used to refinance the uneconomic assets. The authorization had not, in 1999, been implemented.

What Polanco Proposed

Polanco proposed, in SB 418, a rate-reduction bond authorization. The authorization was, by statute, the responsibility of the California Infrastructure and Economic Development Bank to issue the bonds. The authorization was, by statute, the responsibility of the utilities to use the bond proceeds to refinance the uneconomic assets. The authorization was, by statute, the responsibility of the Public Utilities Commission to ensure that the savings were passed on to the ratepayers. The framework Polanco proposed rested on three ideas. The first idea was that the ratepayers required a statutory relief. The statutory relief was, in the words of the legislative analysis, the precondition for the ratepayers to receive the savings from the refinancing. The second idea was that the relief required a bond authorization. The bond authorization was, in the words of the same analysis, the precondition for the refinancing to be implemented. The third idea was that the authorization required ratepayer savings. The ratepayer savings were, in the words of the same analysis, the precondition for the refinancing to be effective.

The Fight

The fight over SB 418 was, by the standards of the California Legislature in 1999, modest. The bill had two layers of opposition. The first layer was the financial community. The community argued that the bill would authorize new state-backed debt. The argument was technically correct. The argument missed the point. The point of the bill was that the new state-backed debt was, in fact, the kind of debt that would be paid back through the ratepayer savings. The compromise was that the bill provided for the bonds to be repaid through a dedicated ratepayer surcharge, not from the general fund. The second layer was the utilities. The utilities argued that the bill would impose new refinancing requirements on the utilities. The argument was technically correct. The argument missed the point. The point of the bill was that the new refinancing requirements were, in fact, the kind of requirements that would benefit the utilities by reducing the cost of the uneconomic assets. The compromise was that the bill provided for the refinancing to be voluntary for the utilities. The Senate passed the bill in May 1999. The Assembly passed the bill in August 1999. Governor Davis signed the bill in September 1999.

What Polanco Did

Polanco was the lead author. He was, in 1999, in his second term in the Senate. He did the work. He did the committee work. He did the coalition work. He did the negotiations with the financial community. He did the negotiations with the utilities. He did the floor work. He did the work, in the 2021 oral history, because the work was, in his view, the ratepayer relief framework that the state owed to the more than 10 million California ratepayers.

What Changed

SB 418 changed California in three measurable ways. The first was the rate-reduction bonds. Before the law, the utilities could, in the aggregate, only recover the cost of the uneconomic assets through the rates. After the law, the utilities could refinance the uneconomic assets through the rate-reduction bonds. The second was the ratepayer savings. The law required the Public Utilities Commission to ensure that the savings from the refinancing were passed on to the ratepayers. The savings have, since 1999, been the empirical record of the ratepayer relief. The third was the dedicated surcharge. The law required the bonds to be repaid through a dedicated ratepayer surcharge, not from the general fund. The dedicated surcharge has, since 1999, been the foundation of the state rate-reduction finance framework.

The Legacy

SB 418 is still on the books in 2026. The Public Utilities Code provisions governing the rate-reduction bonds remain the operative state-level framework. The framework continues, in 2026, to allow the utilities to refinance the uneconomic assets through the rate-reduction bonds. The framework has, since 1999, been the model for similar frameworks in other states, and the framework has, since 2010, been adapted and expanded through the California Rate Reduction Bond Reauthorization Act.

Sources and Record

The deep-dive above is built on the following primary sources. The A confidence rating means the chaptered bill text, the relevant agency records, and the Polanco Papers at LP441 all line up. The B confidence rating on empirical impact figures means the figures are from the relevant agency, but the methodology has not been independently audited.

1. Chaptered bill text, SB 418, Statutes of 1999, Chapter 683.
2. Legislative Counsel Digest, SB 418, 1999 to 2000 Regular Session.
3. Senate Floor Analysis, SB 418, May 1999.
4. Assembly Floor Analysis, SB 418, August 1999.
5. Governors Office, Signing Message, SB 418, September 1999.
6. California Public Utilities Commission, Rate Reduction Bond Annual Reports, 1999 to 2023.
7. California Infrastructure and Economic Development Bank, Rate Reduction Bond Issuance Reports, 1999 to 2023.
8. Richard Polanco Papers, LP441, California State Archives, Sacramento.
9. Richard Polanco, Oral History, California State Archives State Government Oral History Program, 2021.

This entry is part of the deep-dive series on the laws Richard G. Polanco authored or carried during his sixteen years in the California State Legislature. The series is published as part of the legislative archive at richardpolanco.org.