Senate Energy, Utilities and Communications Committee
Senator Debra Bowen, Chairwoman

April 22, 1999

Background on Divestiture of Hydro Facilities

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 Competition Transition Charge (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 California Public Utilities Commission (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 in late April.