Hydroelectric Divestiture

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Pacific Gas & Electric Co. (PG&E) and the California Public Utilities Commission (CPUC) have reached an agreement that could end the utilities’ five-year pursuit of approval to transfer, or "divest," its 68 California hydroelectric facilities to an unregulated affiliate of its parent company, Pacific Gas & Electric Corp (PG&E Corp.).
Under the terms of the proposed settlement filed June 20, 2003, with the U.S. Bankruptcy Court, PG&E would not divest its generation assets, at least for another nine years. However, before it goes into effect, the proposed settlement will be subject to a CPUC public review process, the PG&E Corp. Board of Directors will have to approve it, the utility’s creditors will have to vote on it, the bankruptcy court judge will have to approve it, Standard & Poor’s and Moody’s will have to issue investment-grade ratings for the utility and the securities to be issued under the plan, and the CPUC must give final approval for rates, tariffs and agreements to implement the plan. PG&E's divestiture odyssey started in the fall of 1998 when it attempted to get the California Public Utilities Commission (CPUC) to approve the transfer. When that failed, the utility in 1999 launched an intensive campaign to get the state Legislature to legislate the transfer, thereby bypassing the CPUC. The Legislature rejected the proposal. Then, in a financial crisis resulting from California's aborted electricity deregulation debacle, the utility went into bankruptcy. A key component of its plan of reorganization filed with the bankruptcy court is the transfer of its hydroelectric and electric transmission assets to newly created and unregulated subsidiaries of PG&E Corp. Again, wanting to bypass the CPUC, the utility contends that the court can order the transfer of the assets without the Commission's authorization. PG&E's 68 hydroelectric facilities are spread across northern and central California over rivers and streams. The operation of these facilities are integral to water supply and reliability in California and their ownership is of great importance to members of the Association of California Water Agencies (ACWA). PG&E currently schedules 30 rivers and major streams in the state, operating 163 reservoirs in 16 counties. These facilities collectively harness 2.28 million acre-feet of water and generate approximately 4,000 megawatts of electricity. Virtually all fresh surface water in northern and central California flows through these facilities. Throughout this century, PG&E has operated these facilities in accordance with CPUC requirements and guidelines agreed to with individual water agencies. The utility has balanced its need for power with the ecosystem and the water supply needs of the larger watershed. In the current bankruptcy court proceeding, the CPUC submitted an alternative plan to PG&E's own plan of reorganization. The CPUC plan would require the utility to maintain ownership of its hydroelectric facilities, which would continue to be subject to CPUC regulation. The proposed settlement is the result of three months of closed discussion between the utility and the CPUC. ACWA actively participated in the CPUC and legislative processes, expressing concern that a one-size-fits-all treatment of the PG&E hydroelectric assets fails to recognize the facilities' varied impacts on surrounding communities and would be a mistake that should be avoided. Moreover, since many of the operational agreements between the utility and water agencies were never formally documented, ACWA insists that it is especially important that any transfer, if such should occur, be conditioned on the new owner committing to those agreements, especially if the new owner is not CPUC regulated.

Status

A lot of work remains to be done to get the required approvals and to get PG&E’s credit rating upgraded as specified in the proposed settlement. At best, it will be early 2004 before PG&E will be able to emerge from Chapter 11 protection.

ACWA's Position

While the Association has not taken a position on whether PG&E should be permitted to transfer ownership of the assets to a new owner, the Association feels that utility assets historically dedicated to public uses - generation, transmission, and distribution - should remain under state or local regulation and be cost-of-service priced. ACWA also insists that any owner of the assets should be required to honor all pertinent water rights, contracts, agreements and undocumented operating parameters. The utility historically has coordinated operation of its generators and release of water with downstream water users, and ACWA feels that practice should continue. Such facilities are also significant for downstream flood control and should be operated so as to provide flood protection. In these matters the proposed settlement appears to be consistent with ACWA’s position.

Contacts

  • Dan Smith, ACWA Director of Regulatory Affairs, 916.441.4545
  • Lon House, ACWA Energy Consultant 530.676.8956