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PG&E's Hydro Workout: Can This Deal Be Saved?

For the utility, wresting its assets from PUC control is the real point.
Fortnightly Magazine - February 15 2001

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 . 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