PG&E's Hydro
Workout: Can This Deal Be Saved?
February 15, 2001
By Bill Nesbit Pacific
For the utility, wresting
its assets from PUC control is the real point.
Gas
& Electric Co.'s 17-month-old proposal to divest its hydro assets via
auction likely is dead, a casualty of California's ongoing
energy market turmoil. Despite this reality, the utility's auction proposal
remained active at the California Public Utilities Commission (PUC) as
of press time in mid-January, even as the governor and state legislature
held emergency meetings amid rolling blackouts.
In his Jan. 8 State of the
State address, California Gov. Gray Davis proposed repeal of the state
law permitting its three IOUs—PG&E, Southern California Edison Co.
(Edison), and San Diego Gas & Electric Co. (SDG&E)—to sell their
remaining generating facilities. "Instead," Davis said, "we must require
them to hold on to those facilities and sell their power to California
consumers."
Separately, within the state
legislature, Assembly Speaker Pro Tem Fred Keeley (D-Santa Cruz/Monterey)
has proposed legislation that floundered last year to buy generating assets
and run them as part of a state authority. Gov. Davis and others also
have floated the idea of a California public power authority to correct
what he has described as the state's energy "mess."
"California's deregulation
scheme is a colossal and dangerous failure," Davis said in his speech.
"It has not lowered consumer prices. And it has not increased supply.
In fact, it has resulted in skyrocketing prices, price gouging, and an
unreliable supply of electricity—in short, an energy nightmare."
Sentiment for blocking the
divestiture also is strong within the state commission.
PUC commissioner Carl Wood
recently issued a statement bluntly expressing his feeling that divestiture
must stop. "[D]ivestiture of utility-owned power plants is a core feature
of this [deregulation] disaster," he says. "It is perhaps the single largest
factor in bringing about the totally dysfunctional wholesale markets that
we find ourselves in today. ... I am frankly in a state of disbelief that
anyone would still be seriously considering authorizing the further divestiture
of some of the very little remaining generation that is owned by the utilities
in California."
Others at the PUC, and more
broadly within the state, echo these sentiments.
"Several [speakers at recent
PUC rate hearings] have said this is an insane situation," says Bruce
Kaneshiro, PUC project manager for the environmental impact report on
PG&E's auction proposal. "Why would you allow divestiture of even more
plants to the very people who are gouging California-especially when these
plants are infinitely more valuable because they're not dependent on gas?"
Adds Robert Kinosian, a senior
analyst in the PUC's Office of Ratepayer Advocates, "I don't think there's
any chance the commission is going to approve any more divestitures, so
why are we having a proceeding talking about selling off the hydro plants?
... Our position ... is [the assets] should be retained by the regulated
utility subject to regulation. They should not be sold at this time. They
should not be transferred to the utility affiliate."
At Stake, Ownership
and Oversight
PG&E's hydro facilities represent
the largest private hydroelectric power system in the nation. Vast and
diverse, they include 68 powerhouses, 99 reservoirs, 174 dams, and approximately
140,000 acres of land stretching 500 miles from Mount Shasta in the north
to Bakersfield in the south along 16 different river basins (see sidebar,
"PG&E's Hydropower System"). Together, they represent 3,896 megawatts
of installed capacity, some of which is said to be as much as 100 years
old, and provide approximately 5 percent of the state's electric energy.
The impetus for valuation and
divestiture of these—and other—generation assets in California
is Assembly Bill (AB) 1890, the state's deregulation legislation, passed
in 1996 and signed into law by then-Gov. Pete Wilson in September of that
year. Among its provisions, it deregulated wholesale electricity prices
effective March 31, 1998, and required that PG&E, Edison, and SDG&E determine
the market value of all of their non-nuclear power plants by Dec. 31 of
this year. Retail electricity prices were capped and scheduled to be deregulated
in March 2002, allowing a four-year transition period during which the
IOUs could recoup costs of their "stranded assets."
PG&E auctioned—and thereby
valued—6,934 MW of its fossil and geothermal facilities in two phases
in 1997 and 1998 to companies including Duke Energy Corp., Southern Energy
Inc., and Calpine Corp. That left it with 3,896 MW of hydro, 2,200 MW
of nuclear, and a small amount of fossil scheduled for replacement or
co-existing at a retired nuclear facility.
PG&E's position is that AB
1890 requires that it not only determine market value but also divest
its hydro assets by the end of this year. PUC staffers counter that the
legislation requires only that the assets be valued, not that they be
divested. As with the proceeds from the sale of fossil and geothermal
assets, any value over book is then to be dedicated to paying down costs
for stranded assets. This difference in book vs. market value is not trivial.
While the hydro facilities have yet to be appraised formally, PG&E estimates
a book value of approximately $700 million and a market value as high
as $4.2 billion.
Furthermore, PG&E feels it
is bound by PUC stricture to continue pursuing the auctioning process-a
position that others dispute. Moreover, it holds that once valued, the
assets are freed from regulation by the PUC under provisions of AB 1890.
This position is another point of contention, however.
"PG&E is pushing very hard
to get those assets out of rate base," says PUC commissioner Wood. "They
are very unhappy with commission treatment over the years and claim they
haven't gotten sufficient return on their investment. And they would prefer
to do that through their unregulated subsidiary. They [further] claim
that after the valuation of assets is supposed to occur ... that [those
assets] will be free of regulatory rate control. At the commission we
disagree with that."
The Tortuous
Road to Divestiture
PG&E first filed with the PUC
to divest its hydropower system in May 1998. Subsequently, in December
of that year, it applied to hire an appraiser to assign value to the system.
PG&E feels it was blocked in this appraisal attempt, but PUC staff say
the proceedings were only suspended and could be reopened. Be that as
it may, PG&E changed tack in early January of 1999, proposing to value
and then transfer the system to its unregulated affiliate, then U.S. Generating
Co., now PG&E Generating Co.
When this proposed transfer
met with stiff opposition at the PUC—causing a "huge uproar," according
to one source—the company switched venues to the California legislature.
But the legislature adjourned on Sept. 10, 1999 without taking action
on the transfer, and so PG&E 20 days later filed back at the PUC for approval
to sell off the assets through auction. In October of that year it filed
its proponent's environmental assessment on the divestiture, and last
April the PUC issued its notice of preparation of an environmental impact
report (EIR) as required under the California Environmental Quality Act
(CEQA).
The matter rested there until
last August, when PG&E filed a proposed settlement agreement in conjunction
with various consumer, agricultural, and water user groups. In this agreement,
PG&E again proposed transferring the assets to its unregulated affiliate,
but also included a revenue-sharing mechanism, environmental enhancement
fund, land set-aside, market power mitigation agreement, and other elements
to alleviate consumer and regulatory concerns. PG&E again valued the system
at $2.8 billion.
As the state moved fully into
the recent energy meltdown, however, changing market conditions and disagreements
with some of its initial partners in the agreement led PG&E to withdraw
the proposal in November. The company said that as one consideration of
this move, it felt that the $2.8 billion valuation of the system "was
no longer a true representation of the market value of the asset."
As Proposed,
An Auction to One or Many Buyers
The PG&E proposal is to auction
its hydropower system in 20 different groups, or "bundles," to the highest
bidders. It would retain the related electric transmission and distribution
facilities. These 20 bundles are distributed throughout five so-called
"watershed regions" that align with how PG&E currently manages the assets.
One reason for this approach
is that it keeps existing FERC licenses and water rights intact. PG&E
also says the assets in each bundle belong together because of geography,
hydrology, water rights, and system management requirements.
Individual bundles consist
of one or more powerhouses along with the associated water systems, support
facilities, equipment, watershed lands, licenses, permits, contracts,
agreements, and obligations. These include environmental permits and agreements,
such as regulatory requirements with federal, state, and local agencies,
as well as local facility operation safety standards, and leasing and
permitting agreements. Also included are historical and voluntary practices,
such as informal agreements regarding summer recreational water levels,
and compliance with water rights held by current water and irrigation
districts.
Under the proposal, bidders
may bid on any or all of the identified bundles (for example, a bidder
may pursue one of the 20 bundles, or it may pursue an entire watershed
region). Or a party may bid on any other grouping of the assets that the
PUC determines is appropriate. As a result, at the end of the auction,
one or several new purchasers could own each regional bundle.
If the auctioning process were
allowed to continue, likely purchasers would not be utilities. As a result,
the PUC most likely would cease to regulate these facilities. In addition,
three of the facilities are not subject to oversight by the FERC, and
would not be subject to regulatory oversight by either FERC or the PUC
following an auction.
While PG&E's auction proposal
is bucking strong headwinds in forums throughout the state, Edison is
finding relatively smooth sailing at the PUC with a hydropower application
of its own filed in December 1999. Edison's hydro assets are considerably
smaller than PG&E's—about a third the size on a capacity basis—and
the utility is not looking to divest. Instead, it is proposing to keep
its hydro facilities in the rate base and under regulation, but with more
favorable rate treatment. A settlement on this application is before the
commission now, but no decision has been reached.
Others with hydroelectric operations
in the state include the U.S. Bureau of Reclamation, the California Department
of Water Resources, and the Sacramento Municipal Utility District.
For Environment,
Status Quo Seen as Best Option
In November the PUC's draft
EIR on PG&E's auction application hit the streets and new debate erupted.
The draft, a 4,000-page, nine-volume document, estimates that the auction
would produce 49 significant adverse effects on the environment in areas
relating to land use, forestry, hydrology and water quality, fisheries
and aquatic biology, terrestrial biology, recreation, air quality, aesthetics,
geology, soils and minerals, and more.
Of these, it reports that two
impacts could not be reduced, avoided, or mitigated: harm to fish as a
result of anticipated changes in system operation, and adverse affect
to air quality in local air basins attributable to anticipated development
of watershed land.
Significantly, the draft also
identifies 16 alternative dispositions to auctioning and ranks these based
on how many environmental impacts each would avoid or mitigate. The "top-ranked
alternative"—the one that would avoid all of the auction's significant
negative environmental effects—is that PG&E retain the facilities
under PUC regulation.
PG&E's response to this suggestion
is that AB 1890 would need to be changed to accommodate it. That is consistent
with the company's contention—challenged by others—that once
the assets are market valued they are freed from regulation, and that
AB 1890 requires that this valuation be completed by year end. PG&E also
has identified what it views as a number of technical and analytical flaws
in the water and power models used to come up with some of the report's
other conclusions.
PG&E's
Hydropower System
At stake is ownership of the largest U.S. hydro system.
|
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Gen Capacity. Total
of 3,896 megawatts, consisting of 68 powerhouses with 110 electricity
generating units.
Reservoirs. Approximately
2.3 million acre-feet.
Water Flow System.
99 reservoirs, 174 dams, and 76 diversions that alter rivers. Plus
184 miles of canals, 44 miles of flumes, 135 miles of tunnels, 19
miles of pipes, five miles of natural waterways.
Land Rights. Interest
in approximately 140,000 acres of lands (88,000 acres of which are
outside the boundaries of the Federal Energy Regulatory Commission).
Water Rights.
The right to use water to generate power and the right to approximately
200,000 acre-feet of consumptive water for municipal, industrial,
and agricultural uses.
Operations. Remote
control switching centers, central service centers, fleet vehicles,
communication systems, instrumentation, and monitoring equipment.
Plant Licenses. Transferable
regulatory licenses for each facility, including 26 licenses from
FERC (three unlicensed projects).
Site Permits.
Permits, agreements, and authorizations for each hydroelectric facility.
|
Other significant impacts noted
in the report include the potential effect on the more than 200,000 acre-feet
of consumptive water rights supporting municipal, industrial, and agricultural
uses-a hugely important issue in water-tight California. A variety of
economic and social issues also are discussed, including effects on customers
and ratepayers, the appropriateness of the auction's design, the effects
of the auction on the electricity market generally, and the effect on
PG&E's rate structure and accounts.
Public hearings on the EIR
began in January and end in March; written comments were due Feb. 5.
Johanna Thomas, regional managing
director in California for Environmental Defense (formerly the Environmental
Defense Fund), is among those with strong opinions about the draft EIR
and proposed divestiture. "We have been concerned all along about the
wisdom of deregulating these assets," she says, "because ... there are
severe potential implications for the environment by running them, as
we say, 'pedal to the metal' in a deregulated market."
Another is Stephen Wald, coordinator
of the California Hydropower Reform Coalition-a group including over 100,000
Californians representing sporting, environmental, and other interests.
"It's less important to us what color uniform the owners of the dams wear
than how the dams are operated," Wald says. "Even regulated retention
does not maintain the environmental status quo. That is because so much
of the status quo is tied to voluntary and informal arrangements.
If the state is interested in continuing these often beneficial practices,
it will have to do something affirmatively. Our position is that regardless
of who owns the system, whether it's sold off as a unit or in pieces,
it's time for the state to consider whether the broader public interest
is really being met on these rivers. One critically important aspect of
this is to begin systematic collection of data about the impacts of these
dams and powerhouses on the environment, something that is not now being
done and never has."
Both Wald and Thomas share
the opinion that divestiture of these assets is likely a dead issue-unless
the plants are to be sold to the state.
For Now, Assets
in Limbo?
PG&E's auction proposal remains
alive at the PUC, but recently was supplemented by a rate stabilization
plan filed by the company in December. As part of this plan, PG&E says
it "... recognizes, given the current dysfunctional state of the energy
markets in California, that the divestiture of its remaining generation
assets should be delayed until such time as the wholesale energy markets
are functioning appropriately and competitively." The plan goes on to
say that PG&E hopes the supply shortage will be addressed within the next
two years.
Under the plan, PG&E would
sell the output of its remaining generating assets directly to its retail
customers on an "incentive ratemaking basis." As regards its hydroelectric
facilities, the utility says "the commission should market value the assets
(as it is required by AB 1890 to do), write-up the book value to their
market value, and operate the hydro assets subject to a cost of service
mechanism [that] provides certainty of recovery for capital improvements
and expenses and provides for a reasonable rate of return."
According to PG&E spokesman
Jon Tremayne, "If [we] were allowed to continue to operate them we think
that would be the best outcome for Californians, because we've got the
experience and relationships ... and we are good stewards of the land
and water."
Bill Nesbit, a writer with
25 years of experience in the energy industry, is based in Davis, Calif.
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