BACKGROUND PAPER

Senate Energy Utilities and Communications Committee
Senator Debra Bowen, Chairwoman

Informational Hearing

Future Ownership and Operation of Utilities’ Hydroelectric Assets
Issue One: Valuation and Credit Toward Transition Costs

Thursday, April 22, 1999
11:00 a.m. or upon adjournment of session – 1:00 p.m.
Room 3191

AGENDA
 

• Douglas Long – California Public Utilities Commission
• Thomas Bottorff – Pacific Gas and Electric Company
• Ann Cohn – Southern California Edison
• Robert Kinosian – Office of Ratepayer Advocates
• Michael Florio – The Utility Reform Network
• Barbara Barkovich – California Large Energy Consumers Association
• Daniel Kirshner – Environmental Defense Fund 

Valuation Background

AB 1890 requires that utilities’ generation assets be assigned a value by the end of 2001 in order to calculate recovery of uneconomic investments (transition costs). Asset values can be based on "appraisal, sale, or other divestiture."

Utilities’ generation assets that have been valued by sale, such as natural gas and geothermal power plants, have generally sold for more than their "book value" – as much as four times their book value. These higher-than-anticipated values have allowed utilities to recover their transition costs more quickly.

Once these costs are recovered, the electric rate freeze that is currently in effect for residential and small commercial customers will be lifted and the share of transition costs paid by those customers will be significantly reduced.

Utility-owned hydroelectric assets have a combined book value of over $2 billion ($1.6 billion for PG&E and $450 million for Southern California Edison), 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 competitive sale of its hydroelectric assets.

General questions:

 

1. What do the utilities’ hydro assets include – physical facilities, supplies, adjacent land, licenses, permits, contracts, agreements and/or rights? How should hydro assets be categorized for valuation purposes?
2. What are the critical factors to consider in determining the value of hydro assets? Which factors are reliable and which are not?
3. Can the value of hydro assets be accurately determined at present? What are the hazards of inaccurate valuation? How can any hazards be avoided?
4. In your estimation, what is the approximate value of these assets, compared to book value? What valuation procedure will yield a value that supports your estimate?
5. What, if anything, should the Legislature do to address valuation of hydro assets?

Witnesses should prepare to address valuation under each of the following scenarios:

 

• Scenario 1: The utility retains its hydro assets.
   
• Scenario 2: The utility divests its hydro assets through a transfer to a preferred recipient
  (e.g., utility affiliate, county or state).
   
• Scenario 3: The utility divests its hydro assets through a competitive auction to third parties.