BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
SB 1063 - Bowen Hearing
Date: July 13, 1999 S
As Amended: July 7, 1999 FISCAL B
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DESCRIPTION
This bill establishes a general framework to govern the
disposition and future operation of utility-owned
hydroelectric facilities.
Specifically, the bill :
Clarifies that utility-owned generation assets, including
hydroelectric facilities, shall be subject to California
Public Utilities Commission (CPUC) regulation until their
disposition has been reviewed and approved by the CPUC.
Requires the CPUC to assign an unspecified interim value to
any hydroelectric asset whose value has not otherwise been
determined by March 31, 2000, notwithstanding the existing
valuation deadline of December 31, 2001.
Requires, as a condition of CPUC approval of the
disposition of any hydroelectric facility, measures to
mitigate the potential abuse of market power, compliance
with state water quality standards by December 31, 2001,
ownership of facilities located on the same river will not
be divided, and existing rights, contracts, licenses and
permits will be honored according to their existing terms.
KEY QUESTION
How should the Legislature ensure that the various public
interests associated with the operation of utility-owned
hydroelectric facilities are maintained regardless of who
owns them?
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 competition transition charge (CTC) 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 and
profitable 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 non-utility owners, the CPUC
will no longer have any jurisdiction over them. 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.
Earlier this year, both PG&E and SCE 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), proposed to divest all of its hydroelectric facilities
through a transfer to an unregulated affiliate at a value
fixed through appraisal. SCE proposed to retain its
facilities (35 powerhouses generating 1,173 MW), 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 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 withdrew from
this proceeding. The proceeding has essentially been
suspended pending the Legislature's consideration of the
issue.
In response to the PG&E and SCE applications, and the
introduction of legislation on the matter, this Committee
held a series of hearings in April and May to investigate
issues associated with the future ownership and operation
of these hydroelectric assets. This bill is intended to
address the most significant concerns identified during
those hearings and serve as a vehicle for a continuing
discussion of the issues.
COMMENTS
1.Applicability of Section 851. PG&E's application to
value its hydroelectric assets sparked a debate about the
CPUC's authority to review and approve the disposition of
utility assets conferred by Section 851 of the Public
Utilities Code. In CPUC filings, PG&E argued that,
according to Sections 216(h) and/or 377, CPUC
jurisdiction over its assets ends when those assets are
assigned a value, whether or not the CPUC reviewed and
approved their disposition under Section 851. By
clarifying that valuation of generation assets for the
purpose of calculating uneconomic costs does not, in and
of itself, relieve the CPUC of its obligation to continue
to regulate the asset until divestiture of the asset from
the utility has been explicitly approved, this bill
resolves that debate in favor of Section 851.
2.Valuation insurance. Utility-owned hydroelectric assets
have a combined book value of nearly $2 billion ($1.4
billion for PG&E and $450 million for SCE), but the
market values of these assets have not yet been
determined for the purpose of transition cost recovery.
Faithfully satisfying AB 1890's valuation requirement is
particularly challenging in the case of hydroelectric
assets for a variety of reasons. In particular, no
comparable assets have been sold or otherwise valued
under comparable conditions, the range of conditions that
might apply remains uncertain and neither utility has
proposed a competitive sale of its hydroelectric assets.
For PG&E, the value assigned to its hydroelectric assets
is expected to have a significant effect on its recovery
of CTC. A large and timely valuation could yield an end
to PG&E's rate freeze within a year. In order to protect
ratepayers from CTC overpayment if valuation of
hydroelectric assets is not resolved by March 31, 2000,
this bill requires any asset not otherwise valued by that
date to be assigned an unspecified interim value.
3.Market power mitigation. For a number of reasons, the
hydroelectric systems currently owned by PG&E and SCE are
uniquely suited to influence market power. The reasons
include the significant generation capacity of the
systems (combined, they serve nearly 15% of the state's
electricity demand and as much as 50% of certain
ancillary services, or reserves) and their unique
potential to serve peak demand and ancillary services
because of their short ramping, or start-up time.
Detailed measures to mitigate market power abuse by
restricting anti-competitive bidding have been developed
by the Independent System Operator (ISO). This bill
would subject owners of hydroelectric facilities who
exceed an unspecified threshold to such market power
mitigation measures, to be administered by the ISO.
4.Environmental and water protections. The concern has
been raised that deregulated hydroelectric facilities
will be operated in a more aggressive and/or
unpredictable fashion in order to capture the highest
rate of return in the energy market. This type of
operation could come at the expense of other values
dependent on the facilities, including maintaining flows
for fisheries, water supply and recreation. In addition
to creating a physical obstacle to fish migration, many
of these facilities fall significantly short of water
quality compliance, mainly due to inadequate releases of
water to maintain sufficient instream flows.
This bill would make divestiture of hydroelectric assets
from the utility contingent on an enforceable agreement
with the new owner to achieve and maintain compliance
with state water quality standards determined by the
State Water Resources Control Board. The bill would also
ensure that, in the event that ownership of hydroelectric
assets is divided among multiple owners through auction
or other disposition, facilities located on the same
river won't be divided among different owners. Finally,
the bill requires existing rights, contracts, licenses
and permits to be honored according to their existing
terms to protect vested water interests.
5.So, who gets the hydros? This bill is essentially
neutral with respect to the ultimate disposition of
hydroelectric facilities, at least if they are divested
from the current utility owners. The conditions that it
imposes apply equally to any future owner, whether the
facilities are transferred to a utility affiliate or
auctioned to other competitors.
POSITIONS
Support:
Office of Ratepayer Advocates (ORA)
Regional Council of Rural Counties
Oppose:
None reported to Committee
Lawrence Lingbloom
SB 1063 Analysis
Hearing Date: July 13, 1999