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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

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