Draft Amendments to SB 1133

Chapter 2.4 – Disposition of Hydroelectric Assets

Findings

SECTION 1.

The Legislature finds and declares that AB 1890 restructured the California electricity industry and created a competitive electricity generation market. Under this structure, electrical corporations were allowed an opportunity to recover, over a reasonable transition period, those uneconomic costs for generation related assets and obligations the commission had, prior to December 20, 1995, authorized for collection in rates that might not be recoverable in competitive generation markets. In determining those uneconomic costs, it was deemed appropriate to net the negative value of above market assets against the positive value of below market assets, such as hydroelectric assets. Pending the collection of those uneconomic costs, AB 1890 established a rate cap freeze to allow the collection of those costs in rates through the transition period. It is now clear that the proposed valuation of the below market hydroelectric assets of Pacific Gas and Electric Company if credited against remaining uneconomic costs will be sufficient to recover much of the remaining uneconomic costs, accelerate the end of the rate cap freeze and significantly reduce the price of electricity to Pacific Gas and Electric Company’s customers. It is therefore in the interest of such customers to facilitate the valuation of Pacific Gas and Electric Company’s below market hydroelectric assets to bring about the end of the rate cap freeze, prevent the over-collection of unneeded transition cost revenues from customers and ensure the timely receipt of the benefits of lower electric rates to Pacific Gas and Electric Company’s customers.

Definitions

SEC. 2. Section 400.1 is added to the Public Utilities Code, to read:

400.1. For purposes of Sections 400.1 through 400.8, inclusive, the following terms have the following meanings:

(a) "Hydroelectric Assets" means all of the hydroelectric related assets and obligations of Pacific Gas and Electric Company, including, but not limited to all of the following: hydroelectric power purchase contracts with irrigation districts, water agencies and operationally linked qualifying facilities that are beneficially transferred through a contract arrangement or assigned; real property; real property rights and water rights; joint license agreements; production assets including capital additions after March 31, 1998, and construction work in progress; related transmission, generation-tie and other integrated facilities; off-site, on-site and allocated common and general assets; governmental permits, licenses or variances; personal property, intangible assets and intellectual property rights used or associated with the production assets; post-employment benefits and obligations as specified in paragraph (3) of subdivision (f) of Section 400.3; improvements, buildings and structures located at or near the hydroelectric facilities or otherwise related to the operations of the Hydroelectric Assets and associated water contracts and related facilities. "Hydroelectric Assets" does not include Pacific Gas and Electric Company's El Dorado project that it has agreed to sell to the El Dorado Irrigation District.
(b) "Pacific Gas and Electric Company" means the public utility, incorporated in California in 1905, which is principally engaged in the business of providing electric and natural gas services throughout most of Northern and Central California and is a subsidiary of PG&E Corporation.
(c) "PG&E Corporation" means the San Francisco, California based holding company which provides energy services throughout the United States and is the parent company of Pacific Gas and Electric Company.
(d) "Transferee" means a California based affiliate or affiliates controlled by PG&E Corporation.

Termination of Rate Freeze and Competition Transition Charge Credit

SEC. 3. Section 400.2 is added to the Public Utilities Code, to read:

(a) For purposes of subdivision (b) of Section 367, the value of the Hydroelectric Assets of Pacific Gas and Electric Company is three billion three hundred million dollars ($3,300,000,000).
(b) (1) The value in subdivision (a), minus the then current depreciated book value of the Hydroelectric Assets (including capital additions after March 31, 1998, and construction work in progress), shall be credited to offset transition costs on the date that Pacific Gas and Electric Company or the Transferee receives authorization from the Federal Energy Regulatory Commission to charge market based rates for sales from the Hydroelectric Assets during the period following the end of the retail rate freeze under subdivision (a) of Section 368, provided that (A) such authorization occurs on or before June 30, 2000; (B) the Federal Energy regulatory Commission accepts substantially as filed the market power mitigation contract between PG&E Corporation and the Independent System Operator specified in Section 400.4; and (C) such authorization is not subject to any condition or requirement that Pacific Gas and Electric Company or the Transferee divest any Hydroelectric Assets.
(2) The valuation set forth in subdivision (a) shall be the credit to transition costs for purposes of Section 367. All hydroelectric-related plant, regulatory assets and deferred income taxes identified and eligible for recovery pursuant to commission Decision 97-11-074 shall remain fully recoverable as transition costs.
(c) As of the date of such credit offsetting transition costs under subdivision (b), the Hydroelectric Assets shall no longer be subject to any form of regulation by the commission.
(d) As provided in this subdivision, effective January 15, 2000, Pacific Gas and Electric Company, in connection with the transfer of its Hydroelectric Assets to Transferee, shall establish an additional ten percent rate discount for residential and small commercial customers.
(e) Commencing on January 15, 2000, and continuing until the end of the rate freeze as provided in Section 368(a), Pacific Gas and Electric Company shall provide a credit against the monthly bills of residential and small commercial customers, equal to an additional ten percent below the level of rates in effect for such customers under the rate freeze pursuant to section 368(a) and under the initial 10% rate reduction financed through rate reduction bonds pursuant to section 841. This discount shall be deducted from the excess rate reduction bond financing balance as provided in subdivision (d).
(f) (1) The discount provided in subdivision (d) shall be deducted from the excess rate reduction bond financing balance that may be required to be paid or credited, pursuant to commission Decision 97-09-055, to such customers at the end of the rate freeze as provided in section 368(a). Such balance shall be reduced by the amount of any advance credits provided to such customers under subdivision (d) plus a return at the rate specified in commission Decision 97-09-055. The amount of the additional ten percent discount provided under subdivision (d) shall be added to the amount of the original ten percent discount provided pursuant to section 368(a) when calculating the revenue requirement for transition cost recovery in the transition cost balancing account. If any excess rate reduction bond financing balance remains after the end of the rate freeze, such balance shall be credited or refunded to residential and small commercial customers in accordance with commission Decision 97-09-055.
(g) For purposes of this section, the following definitions apply:
(1) "Residential and small commercial customers" are those customers eligible to receive the 10% rate reduction financed by rate reduction bonds pursuant to section 841.
(2) "Excess rate reduction bond financing balance" is the balance that may be required to be paid or credited, pursuant to commission Decision 97-09-055, to residential and small commercial customers in respect of savings originally expected to be achieved in connection with the issuance of rate reduction bonds, which expected total savings exceed the amount of savings actually provided through the 10% rate reduction provided during the transition period pursuant to section 368(a).

Authorization for Transfer

SEC. 4. Section 400.3 is added to the Public Utilities Code, to read:

400.3. (a) (1) Notwithstanding any other provision of law, and subject to the certification of the Governor pursuant to Section 400.8, the transfer of the Hydroelectric Assets of Pacific Gas and Electric Company to the Transferee and operation in accordance with Sections 400.1 through 400.6 is in the public interest and shall occur upon receipt of Federal Energy Regulatory Commission approval of the transfer of the project licenses and without further commission action. The commission shall not oppose any interim arrangement between Pacific Gas and Electric Company and the Transferee, which transfers to the Transferee the economic benefits of the Hydroelectric Assets during the period after the value specified in subdivision (a) of Section 400.2 has been credited to offset transition costs, but prior to their actual transfer.

(2) The Hydroelectric Assets shall be operated by the Transferee in accordance with all applicable terms and conditions of Federal Energy Regulatory Commission licenses and other environmental and regulatory permits and with agreements governing existing economic uses of the Hydroelectric Assets. Subject to the obligation to comply with the terms and conditions of applicable licenses and environmental permits, the Transferee will not impair any contracts, contractual commitments, or legal entitlements associated with the operation of the Hydroelectric Assets as they relate to agricultural reasonable and beneficial uses of water, including continuing the level of financial assistance currently provided to support watershed restoration and protection projects above its hydroelectric facilities, and shall comply with all existing water agreements with water agencies and irrigation districts.

(b) In the event that Pacific Gas and Electric Company or the Transferee does not receive authorization from the Federal Energy Regulatory Commission by June 30, 2000, to charge market based rates for sales from the Hydroelectric Assets valuation and regulation of Pacific Gas and Electric Company's Hydroelectric Assets shall be in accordance with existing law prior to the enactment of Sections 400.1 to 400.6, inclusive.

Term of Ownership

Alternative A

(c) (1) Except as provided in paragraphs (2) and (5), PG&E Corporation may not dispose of the Hydroelectric Assets to any third party other than the Transferee for a period of five years from August 16, 1999, and shall retain operational control of each hydroelectric project at least until FERC approves a new license for that project which includes the State Water Resources Control Board’s certification of compliance with applicable water quality standards under Section 401 of the federal Clean Water Act, or the Federal Energy Regulatory Commission authorizes decommissioning of that project.

(2) During the five year period specified in section 400.3(c)(1), PG&E Corporation may dispose of any Hydroelectric Assets in the event the Federal Energy Regulatory Commission has adopted a license amendment or relicensing condition that renders continued ownership of the hydroelectric asset uneconomic, and during the five year period specified in section 400.3(c)(1), PG&E Corporation may dispose of any hydroelectric asset in the event that legislation or regulatory action imposes obligations inconsistent with Sections 400.1 to 400.6, inclusive.

Alternative B

(c) (1) Except as provided in paragraphs (2) and (5), PG&E Corporation may not dispose of the Hydroelectric Assets to any third party other than the Transferee for a period of ten years from January 1, 2000, and shall retain operational control of the Hydroelectric Assets through December 31, 2010.

(2) During the ten year period specified in section 8, PG&E Corporation may dispose of any Hydroelectric Assets in the event the Federal Energy Regulatory Commission has adopted a license amendment or relicensing condition that renders continued ownership of the hydroelectric asset uneconomic, and during the ten year period specified in section 400.3(c)(1), PG&E Corporation may dispose of any hydroelectric asset in the event that legislation or regulatory action imposes obligations inconsistent with Sections 400.1 to 400.6, inclusive.

(3) To the extent that the Transferee determines that it may need to dispose of any hydroelectric asset pursuant to paragraph (2), the Transferee agrees to notify, meet, and confer with interested parties to advise them of this possible course of action and to discuss possible alternative courses of action.

(4) In the event that the Transferee disposes of any Hydroelectric Asset to a third party as provided in paragraph (2), the Transferee shall condition any transfer or subsequent transfer on such third party's agreement during this period not to voluntarily significantly impair any contracts, contractual commitments, or legal entitlements associated with the operation of the Hydroelectric Assets as they relate to agricultural reasonable and beneficial uses of water.

(5) This section shall not apply to the Memorandum of Understanding dated August 16, 1999, between Pacific Gas and Electric Company, Nevada Irrigation District and Placer County Water Agency.

Exemptions from Affiliate Transaction Rules

(d) The commission shall not apply its rules and regulations governing affiliate transactions to any of the following:

(1) The transfer to Transferee of the Hydroelectric Assets.

(2) Back-to-back or other arrangements Pacific Gas and Electric Company may enter into in with Transferee that confer upon the Transferee substantially equivalent rights and obligations to those of Pacific Gas and Electric Company under hydroelectric power purchase agreements that are Hydroelectric Assets but are restricted as to their assignability or transferability. Such retained Hydroelectric Asset agreement shall be treated by the commission as an unregulated asset and the economic value associated with such contract shall be fully retained by the shareholders of Pacific Gas and Electric Company.

(3) Software, data, or manuals used by Pacific Gas and Electric Company in connection with its hydroelectric generation operations and elsewhere within Pacific Gas and Electric Company, which, to the extent retained by Pacific Gas and Electric Company shall be licensed (to the extent transferable) by Pacific Gas and Electric Company to the Transferee on a nonexclusive basis, perpetually and without charge.

(4) Transfers of Pacific Gas and Electric Company employees to the Transferee pursuant to subdivision (f).

(5) Other agreements and arrangements to provide for the sharing of facilities and services where, due to the integrated design of the Hydroelectric Assets with the electric transmission or distribution systems, complete separation is impractical or uneconomic, provided Pacific Gas and Electric Company files with the commission any contract for sharing of facilities and services between Pacific Gas and Electric Company and the Transferee, together with the rates and charges to be paid and collected by Pacific Gas and Electric Company.

(A) The rates and charges under these agreements and arrangements to provide for the sharing of facilities and services shall be approved by the commission upon a showing that they are based upon a reasonable allocation of actual costs, reflecting depreciation based on historical costs and an allocation of capital costs using a reasonable rate of return.

(B) Notwithstanding paragraphs (1) to (5), inclusive, the affiliate rules and regulations shall apply to any purchase of power by Pacific Gas and Electric Company from the Transferee except during an emergency event in a geographic location when there is no source of power other than the Hydroelectric Assets to serve Pacific Gas and Electric Company's retail customers.

(e) Pacific Gas and Electric Company shall file an advice letter with the commission no later than June 30, 2000, identifying any common and general plant and utility personnel that have been or will be transferred with the Hydroelectric Assets to the Transferee and the associated operating and maintenance and administrative and general expenses. These transfers shall be without charge and shall not be subject to the commission's affiliate transfer pricing rules. The commission shall authorize the reallocation and recovery of any remaining hydroelectric generation classified or allocated common and general plant or fixed administrative and general costs to the utility electric and gas distribution function within 90 days of such advice letter filing.

Employee Provisions

(f) (1) In order to minimize the economic impact of any transfer of operations on current Pacific Electric and Gas Company collective bargaining unit employees who have regularly assigned jobs at affected hydroelectric facilities, and to minimize potential dislocation of these employees and their families, the Transferee shall be obligated to offer preferential employment rights to the employees needed by the Transferee to operate the hydroelectric facilities at wages, hours, and working conditions at least equal to those provided pursuant to the employees' then current, or most recently expired collective bargaining agreement with Pacific Electric and Gas Company. These wages, hours, and conditions shall be maintained unless and until the collective bargaining obligation in paragraph (2) of subdivision (f) has been exhausted.

(2) When current employees of Pacific Gas and Electric Company having preferential hiring rights with the Transferee at the affected hydroelectric generation facilities provide written evidence of intent to exercise preferential hiring rights to their collective bargaining representative or to the Transferee, and when the number of these employees providing written notice of intent to exercise preferential hiring rights constitutes a majority of the collective bargaining unit employees needed by the Transferee to operate the facility, the Transferee shall be obligated to recognize and bargain with the collective bargaining representative of these employees notwithstanding that the Transferee may not have commenced operating the affected facility independently of Pacific Gas and Electric Company.

(3) The commission shall authorize an allocation of assets in the defined benefit pension plan maintained by Pacific Gas and Electric Company for the benefit of employees who are transferred as part of the transfer of the Hydroelectric Assets. The allocation of pension assets shall be consistent with the valuation methodology used for the allocation of pension assets between Pacific Gas and Electric Company and Pacific Gas Transmission Company described and approved in commission Decision 99-04-068. For the benefit of employees who are transferred as part of the Hydroelectric Assets, the commission shall also authorize the recognition of service for benefit purposes consistent with commission Decision 99-04-068.

Equity Ratio Exemption

SEC. 5. Section 400.35 is added to the Public Utilities Code, to read:

400.35. (a) The commission shall ensure that the financial impacts of the credit under Section 400.2 and the transfer under section 400.3 are fully segregated for ratemaking purposes from the remaining distribution and transmission services provided by Pacific Gas and Electric Company, as follows:

(1) Any costs of debt, interest, and preferred stock and related dividends attributable to the Hydroelectric Assets and the transition costs offset under Section 400.2 shall be segregated and shall not be recoverable in commission-approved distribution rates.

(2) The commission shall segregate and assign the effect on the equity accounts of any write-off associated with the credit under Section 400.2 and the transfer solely to Pacific Gas and Electric Company’s utility generation-related assets and not to its transmission or distribution assets.

(3) The financial and ratemaking segregation of generation-related assets required by this section shall not affect the return on the ratebase of the transmission and distribution assets of Pacific Gas and Electric Company.

(b) In order to not adversely affect the ability of Pacific Gas and Electric Company or PG&E Corporation to pay dividends or make distributions to shareholders, for all purposes under California law (including Section 500 and notwithstanding Section 114 of the Corporations Code), any accounting charges required by Pacific Gas and Electric Company and PG&E Corporation to implement Sections 400.2 and 400.3, including charges attributable to the ratemaking treatment and associated transfer of the assets, shall be made to equity capital accounts other than retained earnings.

Market Power Mitigation

SEC. 6. Section 400.4 is added to the Public Utilities Code, to read:

400.4. (a) In order to ensure that the transfer of Hydroelectric Assets by Pacific Gas and Electric Company to the Transferee (1) does not allow for the exercise of market power by the new owner by means of the strategic withholding of available capacity or energy from relevant markets to increase market prices in those markets, and (2) does not disrupt the proper functioning of affected electricity markets through the adoption of rules which distort normal decision-making for the dispatch of hydroelectric facilities, the transfer of any Hydroelectric Assets owned by Pacific Gas and Electric Company shall be accompanied by the following conditions:

(b) The owner of the Hydroelectric Assets shall, as a condition of transfer enter into a contract with the Independent System Operator, subject to the approval of the Federal Energy Regulatory Commission, such that, at the Independent System Operator’s discretion:

(1) Up to 95 percent of available capacity from units capable of providing ancillary services shall be bid into either the Independent System Operator’s or Power Exchange’s ancillary services markets or the Power Exchange energy markets. The contractual procedure for the weekly determination of such available capacity shall be transparent and auditable.

(2) Up to 50 percent of available ancillary services capacity shall be bid into the Independent System Operator’s or Power Exchange’s ancillary services market, except that the amount of capacity bid into any ancillary service market may not exceed 60 percent of total Independent System Operator system-wide requirements for each ancillary service market during the time periods for which they are bid. In order to ensure that such bids do not facilitate the exercise of market power, the price at which such ancillary services capacity will be bid shall be capped at levels that ensure that the owner is a price-taker whose bid does not distort the market clearing price in those markets.

(3) All capacity above the minimum ancillary service requirement may be bid into either the Independent System Operator’s or Power Exchange’s ancillary services or Power Exchange’s energy markets at prices no higher than a specified market index cap for energy or regulation, or 50 percent of the market index for reserve services, including spin, non-spin and replacement reserves.

(4) All remaining capacity, after relevant energy markets are cleared, must be bid into all ancillary service markets that a unit is technically capable of providing at prices no higher than the market index cap for regulation or 50 percent of the market index for reserve services, including spin, non-spin and replacement reserves.

(5) When the Independent System Operator’s minimum ancillary service requirement exceeds 15 percent of the available hydroelectric capacity, the owner may request that the Independent System Operator’s minimum bid requirements for ancillary services be lowered if, using a formula for calculating relative net benefits approved by the Independent System Operator, scheduling such additional capacity into the Power Exchange would provide the owner with a greater net benefit.

(6) Energy bids into the Power Exchange market are subject to the same index caps as bids for regulation. Energy bids submitted by units capable of providing ancillary services and supplemental real-time energy bids shall not be subject to bid caps, except as apply to any other Power Exchange market participant.

(7) Any sale or transfer of the specified Hydroelectric Assets in the state or the acquisition of additional resources in the state by the transferee shall be contingent upon approval by the Independent System Operator of a comparable market power mitigation contract, if necessary, which itself shall be subject to the approval of the Federal Energy Regulatory Commission.

(8) Discretionary maintenance of hydroelectric facilities that would temporarily diminish the capacity of those facilities shall not be scheduled during periods deemed by the Independent System Operator as critical without advance approval from the Independent System Operator.

(9) As long as the controlling ownership of these Hydroelectric Assets is a subsidiary of PG&E Corp, sales of hydroelectric power or capacity outside the Independent System Operator or Power Exchange energy and capacity markets shall be limited to no more than 5 percent of available capacity or energy until the power Exchange develops, by at least December 31, 2000, a method for scheduling bilateral sales which has a transparency that is comparable to that of sales in the Independent System Operator and Power Exchange markets. When such a method is available, the PG&E Corp subsidiary may exceed said 5 percent limitation as long as such bilateral sales exceeding said 5 percent limitation are scheduled through the Power Exchange. Any bilateral sales shall be subject to appropriate restrictions to ensure that the buyer can not exercise any market power.

(10) In the event of significant structural changes to energy or ancillary services markets, either the Independent System Operator or the owner shall have the right to provide notice of termination of contract. In the absence of such changes, the initial terms of the contract shall be reassessed after four years. However, whether due to structural market changes or the expiration of the initial contract term, the contract shall continue in effect until it has been superseded by a new agreement or the Federal Energy Regulatory Commission has determined the contract need not be replaced or has specified appropriate replacement measures.

(11) Nothing in the provisions of this section, or any contract adopted pursuant to this section, which may physically influence the operation of a hydroelectric facility shall be construed to override existing operational obligations contracts and agreements associated with the facility, including water supply and environmental protection, except where those contracts and agreements provide for override to accommodate electrical emergencies.

(c) The commission shall accept the determination of the Independent System Operator that the contracts it has signed with the owner of Hydroelectric Assets adequately mitigate market power.

Protection of Watershed Lands

SEC. 7. Section 400.5 is added to the Public Utilities Code, to read:

400.5. In furtherance of its environmental stewardship objectives, Pacific Gas and Electric Company or Transferee may donate an interest in the lands associated with the Hydroelectric Assets. The donation by Pacific Gas and Electric Company of fee simple title or conservation easements in any of the approximately 140,000 acres of the land associated with its hydroelectric utility generation to a public agency or not for profit entity for the purpose of protecting the scenic, forestry, and natural resource values of such lands is in the public interest and benefits consumers. Such donation shall be effective no sooner than the date the Federal Energy Regulatory Commission authorizes the transfer of the licenses for the Hydroelectric Assets to Transferee.

Environmental Stewardship

SEC. 8. Section 400.6 is added to the Public Utilities Code, to read:

Alternative A

400.6. (a) In connection with the transfer of the Hydroelectric Assets to the Transferee, PG&E Corporation has executed the Environmental Stewardship Memorandum of Understanding dated September ___, 1999. In accordance with such Memorandum of Understanding, PG&E Corporation shall establish and implement at least a two hundred and twenty-five million dollar ($225,000,000) and up to two hundred and seventy-five million dollar ($275,000,000) PG&E Environmental Improvement Fund to pay for improvements in the environmental quality of the rivers, watersheds and other beneficial public uses affected by the Hydroelectric Assets. One hundred and seventy-five million dollars ($175,000,000) of the Fund shall consist of contributions and commitments from PG&E Corporation, fifty million dollars ($ 50,000,000) shall consist of an increase in Pacific Gas and Electric Company’s utility generation-related transition costs eligible for recovery from customers, other than residential and small commercial customers, prior to the end of the rate freeze pursuant to sections 368 and 400, and the fund will seek up to fifty million dollars ($50,000,000) from other non-ratepayer sources.

(b) To the extent that funds initially dedicated to the fund are insufficient to achieve the applicable objectives of the California Regional Water Quality Control Boards’ Water Quality Control Plans for a project during the period prior to that project’s certification of compliance with applicable water quality standards under Section 401 of the federal Clean Water Act , PG&E Corporation the project licensee shall dedicate a share of the revenues from that project sufficient to achieve those objectives during that period.

(c) The Legislature finds and declares that the State of California is a third party beneficiary of the Environmental Stewardship Memorandum of Understanding. Therefore, it is the intent of the Legislature that the provisions of the Environmental Stewardship Memorandum of Understanding shall be enforceable by the State of California and that the state will assist in achieving its objectives.

Alternative B

400.6. It is the intent of the Legislature that Pacific Gas and Electric Company enter into a binding Memorandum of Understanding on Environmental Stewardship with interested parties to establish and implement a framework for improvement in the environmental quality of rivers, watersheds and other public trust resources associated with Pacific Gas and Electric Company’s hydroelectric facilities and operations. The memorandum shall include consideration of public interests in electric reliability, flood risk management, water supply, irrigation and other agricultural uses, recreation, and improvements in environmental quality. Pacific Gas and Electric Company shall enter into such a memorandum of understanding no later than November 15, 1999 and provide the text of the agreement, by registered mail, to all qualified proposing parties by December 1, 1999.

Market Valuation Process

SEC. 9. Section 400.8 is added to the Public Utilities Code, to read:

400.8. The Hydroelectric Assets may be transferred to Transferee pursuant to Section 400.3 only if the value of such Hydroelectric Assets is verified in accordance with the following procedures and the Hydroelectric Assets are not acquired by a third party in accordance with such procedures:

(a) By March 31, 2000, Pacific Gas and Electric Company shall have completed a process to solicit and obtain binding proposals from qualified third parties ("proposal parties") for the acquisition of all of the Hydroelectric Assets. It is the preference of the Legislature that such binding proposals be for the acquisition of the Hydroelectric Assets as a single undifferentiated bundle. However, proposals may be tendered for an auctionable subset of the Hydroelectric Assets which is defined as all the corporation’s hydroelectric facilities that are located in the same watershed.

(b) All proposal parties who bid for the Hydroelectric Assets as a single undifferentiated bundle will be required at a minimum to:

(1) commit to pay more than the 3.3 billion dollar ($3,300,000,000) value proposed by PG&E Corporation;

(2) fully assume (equivalent obligations) or (obligations, or the economic equivalent thereof, ) which PG&E Corporation or the Transferee has under its proposal, including but not limited to:

(i) an Environmental Stewardship Memorandum of Understanding, consistent with the objectives described in Section 400.6;

(ii) the Memorandum of Understanding regarding Environmental Stewardship of Watershed Lands Surrounding Pacific Gas and Electric Company’s Hydroelectric Facilities;

(iii) the Memorandum of Understanding between Pacific Gas and Electric Company, Nevada Irrigation District and Placer County Water Agency;

(iv) An Independent System Operator-PG&E Corporation Hydroelectric Market Power Mitigation Agreement, consistent with Section 400.4;

(3) provide a nonrefundable cash deposit equal to ten percent of the value it proposed within 10 days after being selected to acquire the Hydroelectric Assets.

(1) fully assume (equivalent obligations) or (obligations, or the economic equivalent thereof, ) proportional to those, which PG&E Corporation or the Transferee has under its proposal, including but not limited to

(i) an Environmental Stewardship Memorandum of Understanding, consistent with the objectives described in Section 400.6;

(ii) the Memorandum of Understanding regarding Environmental Stewardship of Watershed Lands Surrounding Pacific Gas and Electric Company’s Hydroelectric Facilities;

(iii) the Memorandum of Understanding between Pacific Gas and Electric Company, Nevada Irrigation District and Placer County Water Agency, if relevant to the auctionable subset for which the bid is proffered;

(iv) An Independent System Operator Hydroelectric Market Power Mitigation Agreement, consistent with Section 400.4;

(3) provide a nonrefundable cash deposit equal to ten percent of the value it proposed within 10 days after being selected to acquire the Hydroelectric Assets.

(d) By October 15, 1999, Pacific Gas and Electric Company shall provide information to proposal parties regarding the Hydroelectric Assets to allow them to submit indicative bids and information that would allow an independent evaluation of their qualifications to submit binding proposals. By December 1, 1999, Pacific Gas and Electric Company shall, using the results of such an independent evaluation, identify the proposal parties qualified to submit binding proposals and provide such information that is necessary for such qualified proposal parties to perform due diligence prior to submitting proposals. Information provided to qualified proposal parties shall be made available in a manner to protect confidentiality and shall be subject to a non-disclosure agreement. The Secretary of Resources shall be deemed a qualified proposal party and, notwithstanding any other provision of law, shall be subject to the same confidentiality and non-disclosure requirements as all other proposal parties.

(e) Not later than March 31, 2000, Pacific Gas and Electric Company shall transmit all proposals received, under a confidential seal, to the Governor. The Governor shall either:

(1) Certify that the proposal by PG&E Corporation is reasonable and that it may proceed with the transfer of the Hydroelectric Assets to the Transferee authorized in Section 400.3; or,

(2) Certify that an alternate proposal or proposals should be selected for the acquisition of the Hydroelectric Assets.

(f) In the event the Governor exercises the option in subsection (e)(1), not less than 90 days prior to certifying the Pacific Gas and Electric Company proposal, the Governor shall notify, in writing, the chairpersons of the Senate Energy Utilities and Communications Committee and the Assembly Utilities and Commerce Committee regarding the intention to certify and the reasons supporting certification. Those reasons may include, but shall not be limited to:

(1) No alternative proposal or proposals taken as a whole provide a purchase price substantially greater than the 3.3 billion dollar ($3,300,000,000) transfer price proposed by PG&E Corporation and Transferee;

(2) No alternative proposal or proposals taken as a whole provide substantially greater public benefits, compared to the proposal of Pacific Gas and Electric Company, PG&E Corporation and Transferee, in the following categories:

(i) environmental improvement, including but not limited to the quality of the Memorandum of Understanding on Environmental Stewardship identified in Section 400.6.

(ii) consumer protection

(iii) market power mitigation, and

(iv) protection of workers;

(g) In the event that the Governor certifies an alternate proposal or proposals to acquire the Hydroelectric Assets, Pacific Gas and Electric Company and the proposal party shall close the sale and complete the transfer of the Hydroelectric Assets by December 1, 2001. On the closing date, transition costs will be credited with the amount the selected alternate proposal is in excess of the 3.3 billion dollar ($3,300,000,000) value credited by Pacific Gas and Electric Company.

Clarification of Review Process in Proceedings Before the Public Utilities Commission

SEC. 10. Section 216 (h) of the Public Utilities Code is amended to read:

216. (h) Generation assets owned by any public utility prior to January 1, 1997, and subject to rate regulation by the commission, shall continue to be subject to regulation by the commission until those assets have undergone market valuation in accordance with procedures established by the commission. The commission shall not set any valuation prior to completing necessary reviews of disposition pursuant to Section 377 or 851, including review pursuant to the California Environmental Quality Act.

SEC. 11. Section 377 of the Public Utilities Code is amended to read:

377. The commission shall continue to regulate the nonnuclear generation assets owned by any public utility prior to January 1, 1997, that are subject to commission regulation until those assets have been subject to market valuation in accordance with procedures established by the commission. The commission shall not set any valuation prior to completing necessary reviews of disposition pursuant to Section 377 or 851, including review pursuant to the California Environmental Quality Act. If, after market valuation, the public utility wishes to retain ownership of nonnuclear generation assets in (a) A public utility may file an application with the commission pursuant to this section requesting valuation of nonnuclear generation assets and permission to retain ownership of such assets within the same corporation as the distribution utility, the utility. The public utility shall demonstrate to the satisfaction of the commission, through a public hearing, that it would be consistent with the public interest and would not confer undue competitive advantage on the public utility to retain that ownership in the same corporation as the distribution utility.

(b) If the public utility applies to the commission to retain hydroelectric assets within the regulated distribution utility in accordance with this section and proposes a mechanism to share the results of future operations with ratepayers, the commission may accept a deemed valuation for purposes of Section 367 in lieu of market valuation. The commission may establish a ratemaking mechanism for such hydroelectric assets that creates an incentive to operate efficiently, that enables a utility to recover its costs, and that equitably allocates the benefits of continued operation between shareholders and ratepayers.

Watershed Management

SEC. 12. Section 72000 is added to the Public Resources Code, to read:

72000. (a) It is the intent of the Legislature that watershed plans developed in accordance with this Section serve as comprehensive state water plans under Section 10(a) of the Federal Power Act.

(b) A local watershed council is defined as a local organization, such as a county, resource conservation district, Coordinated Resource Management Planning group, conservancy, or nonprofit organization which convenes a broad spectrum of interests with authorities for watershed management and has a demonstrated intent and capacity to develop and oversee implementation of a comprehensive watershed plan and watershed projects.

(c) The Secretary for Resources and the Secretary for Environmental Protection shall convene a Task Force to develop a watershed management program for watersheds with hydropower facilities licensed by the Federal Energy Regulatory Commission. The Task Force shall include, at a minimum, the Department of Fish and Game, the State Water Resources Control Board, the Department of Water Resources, the Energy Resources Conservation and Development Commission, the Department of Parks and Recreation and the Department of Forestry and Fire Protection.

(d) Goals of the watershed management program shall include:

(1) Implementation of a comprehensive watershed management program for each watershed including watershed assessment, development of a watershed plan, implementation, monitoring and adaptive management, outreach, education, and stakeholder involvement.

(2) A comprehensive review of Federal Energy Regulatory Commission licenses on a watershed basis, to the extent permitted under federal law, including an evaluation of all uses, including energy production, environmental restoration, creating and maintaining recreational values, and water management.

(3) Implementation of existing laws, authorities and programs by state agencies at the watershed level. Watershed plans should contain commitments necessary to ensure water quality objectives are attained and public trust resources are protected consistent with existing law.

(4) Support for voluntary actions needed to improve watershed health and build communities.

(5) Recognition of and support for local watershed councils which are capable of developing and implementing watershed plans.

(e) The watershed management program shall, at a minimum, include the following components:

(1) Watershed management principles.

(2) A program for watershed assessment, data collection and information sharing.

(3) A timeline and staffing plan for work in each watershed which considers the schedule of Federal Energy Regulatory Commission relicensing and lead time necessary for plan completion.

(4) Guidance to be used by watershed councils for watershed monitoring and the preparation of watershed management plans.

(5) Work to be conducted by state agencies, including implementation of existing laws and authorities.

(6) Work to be conducted by watershed councils and a process for state support for watershed councils.

(7) A plan for participation in Federal Energy Regulatory Commission relicensing procedures consistent with program goals.

(8) A description of the relationship to the CALFED Bay-Delta Program and eligibility of projects for CALFED funds.

(f) Any organization may petition the Secretaries for recognition as a watershed council for purposes of this Section.

(g) The Secretaries shall present a program plan to the Legislature by July 1, 2000.

(h) The Secretaries may convene an advisory team to the Task Force consisting of federal and local governments, the Independent System Operator, industry representatives and environmental, fishing and recreational organizations.

(i) Sunset January 1, 2001.

Special Statute Disclaimer

SEC. 13. Due to the unique facts and circumstances surrounding the potential divestiture of hydroelectric assets owned by Pacific Gas and Electric Company, the Legislature finds and declares that a general statute cannot be made applicable within the meaning of Section 16 of Article IV of the California Constitution. Special legislation is, therefore, necessarily applicable to only Pacific Gas and Electric Company, and its parent corporation, PG&E Corporation.

Draft Amendments to SB 1133