BILL ANALYSIS                                                                                                                                                                                                    1
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   SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
                  DEBRA BOWEN, CHAIRWOMAN


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|SB 1063 - Bowen               |Hearing Date:April 13,    | S|
|                              |1999                      |  |
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|As Introduced: February 26,   |                          | B|
|1999                          |                          |  |
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                         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