BILL ANALYSIS 1 1 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE DEBRA BOWEN, CHAIRWOMAN ------------------------------------------------------------ |SB 1063 - Bowen |Hearing Date:April 13, | S| | |1999 | | |------------------------------+--------------------------+--| |As Introduced: February 26, | | B| |1999 | | | |------------------------------+--------------------------+--| | | | | |------------------------------+--------------------------+--| | | | 1| |------------------------------+--------------------------+--| | | | 0| |------------------------------+--------------------------+--| | | | 6| |------------------------------+--------------------------+--| | | | 3| |------------------------------+--------------------------+--| | | | | ------------------------------------------------------------ DESCRIPTION This bill requires utility-owned hydroelectric facilities to be retained and operated by the utility and regulated by the California Public Utilities Commission (CPUC). KEY QUESTIONS 1) Notwithstanding restructuring of the electric industry, should the CPUC retain its regulatory authority over hydroelectric facilities that have been constructed and operated as public utility assets? 2) Is the CPUC capable of balancing the variety of complex environmental and economic issues sparked by a proposed change in ownership and operation of hydroelectric facilities in California? 3) How should these facilities be valued for purposes of calculating the Competition Transition Charge (CTC)? BACKGROUND Passage of AB 1890 (Brulte), Chapter 854, Statutes of 1996, triggered a restructuring of the electricity generation market over a four-year transition period. The transition to a competitive generation market has included significant divestiture of utility-owned generation facilities and recovery of utilities' historic uneconomic investments through a transition charge paid by customers. To calculate the CTC, AB 1890 requires the negative value of above-market generation assets to be netted against the positive value of below-market generation assets. Whether assets are retained or disposed of, their relative value must be determined based on "appraisal, sale, or other divestiture" by December 31, 2001. AB 1890 requires that utility-owned generation assets be assigned a value, but it does not expressly require that they be divested from the utility. California's investor-owned electric utilities have already divested a significant share of their generation assets, most notably natural gas powerplants. The utilities with hydroelectric assets, Pacific Gas and Electric Company (PG&E) and Southern California Edison (SCE), have not yet valued or divested any hydroelectric facilities. California's network of utility-owned hydroelectric powerhouses has a total generation capacity of about 5,000 megawatts (MW), which meets approximately 15% of the state's electricity demand. Because of their ability to start and stop on short notice, hydroelectric powerhouses are uniquely suited to supply peak demand and ancillary services (reserve capacity), the most valuable segments of the electricity market. Beyond generating electricity, the operation of hydroelectric facilities has a profound impact on water supply and quality for downstream users, including people, farms and fish. In addition, reservoirs and watershed lands adjacent to hydroelectric facilities provide extensive water storage, recreation and wildlife habitat. Finally, these facilities are a significant, and in some cases, the largest source of property tax revenue for the counties in which they are located. Historically, utility-owned hydroelectric facilities have been financed by electricity ratepayers and operated for their benefit. Licenses, permits, contracts and agreements governing their operation have been secured by utilities regulated by the CPUC. The Federal Energy Regulatory Commission (FERC) maintains general jurisdiction over licensing and operation of these facilities, regardless of who owns them. California's principal jurisdiction through the CPUC applies to the extent that they are owned by public utilities. If they are transferred or sold to unregulated entities, the CPUC will have no jurisdiction. Other state agencies, such as the State Water Resources Control Board and the Department of Fish and Game, have discreet jurisdictions over certain issues, such as water rights and endangered species. Both PG&E and SCE have filed applications at the CPUC seeking to value their hydroelectric assets pursuant to AB 1890's requirement. PG&E, which owns the majority of the system (68 powerhouses generating 3,890 MW), has further proposed to divest all of its hydroelectric facilities through a transfer to an unregulated affiliate, U.S. Generating Company of Maryland, at a value fixed through appraisal. SCE has not formalized a proposal for its facilities (35 powerhouses generating 1,173 MW), but has indicated a preference for retaining them within the regulated utility, establishing a negotiated value to credit to the CTC and sharing 90% of future revenues with ratepayers. In its first proceeding to consider the fate of utility-owned hydroelectric assets, the CPUC has limited the scope to establishing principals for valuation of assets that PG&E and SCE will retain. Because it does not want to retain any of its hydroelectric assets, PG&E has withdrawn from this proceeding and announced its intent to file a new application to value specific assets later this month. This bill would require that utility-owned hydroelectric facilities be retained and operated by the utility and regulated by the CPUC. According to the author, AB 1890 did not contemplate the multitude of non-electric issues raised by a potential change in ownership and operation of hydroelectric facilities in California. Further, there is not yet a process in place to adequately address these issues and ensure that the public retains its investment in the multiple-use values of these facilities. The author supports the establishment of a comprehensive public process and standards to address the disposition and future operation of utility-owned hydroelectric facilities and associated properties. This bill is intended to prevent an irrevocable divestiture of hydroelectric assets before those issues are resolved. COMMENTS 1) Can the existing restructuring process handle hydro? The divestiture model envisioned in AB 1890 does not fit hydroelectric assets very well. No provision was made in the law to balance the variety of non-electric considerations related operating a dam in an unregulated environment, such as water supply, fisheries and recreation. The CPUC's established process for valuation and divestiture of utilities' generation assets has not yet had to balance the variety of environmental and economic issues sparked by a change in ownership and operation of hydroelectric facilities. While it has recognized the broader scope of issues surrounding the future ownership and operation of hydroelectric assets, the CPUC, as a regulatory body, does not likely have the authority or expertise to address all of them. 2) Is the CPUC the public's best venue for hydro issues? Notwithstanding the author's intent to explore alternatives to CPUC regulation, few parties think that continued CPUC regulation is the best way to balance all of the issues related to operation of hydroelectric facilities. While the CPUC may not be the public's ideal venue, it is no doubt preferable to the current alternative presented by divestiture, which would leave the public with no regulatory venue at the state level to address overall operation of hydroelectric facilities. 3) How did they treat hydro in Oregon? - Last year, Portland General Electric, a major Oregon public utility, proposed to divest its generation assets as part of plan to transition to competition. In a January 27 ruling, the Oregon CPUC authorized the divestiture of Portland's fossil generation assets, but not its hydroelectric assets, which it ordered Portland to keep in order to retain their benefits for ratepayers. POSITIONS Support: California State Council of Laborers Office of Ratepayer Advocates Oppose: Association of California Water Agencies PG&E Planning and Conservation League Lawrence Lingbloom SB 1063 Analysis Hearing Date: April 13, 1999