BEFORE THE PUBLIC UTILITIES COMMISSION

OF THE STATE OF CALIFORNIA

Application of Pacific Gas and Electric Company to Market Value Hydroelectric Generating Plants and Related Assets Pursuant to Public Utilities Code Sections 367(b) and 851
	
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A. 99-09-053	

LIMITED PROTEST 
OF THE 
INDEPENDENT ENERGY PRODUCERS ASSOCIATION

							Diane I. Fellman
							Attorney at Law
							234 Van Ness Avenue
							San Francisco, CA 94102
							Telephone:	(415)703-6000
							Facsimile: 	(415)703-6001
							email: difellman@earthlink.net
							Attorney for Independent
November 3, 1999					Energy Producers Association

BEFORE THE PUBLIC UTILITIES COMMISSION

OF THE STATE OF CALIFORNIA

Application of Pacific Gas and Electric Company to Market Value Hydroelectric Generating Plants and Related Assets Pursuant to Public Utilities Code Sections 367(b) and 851
	
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A. 99-09-053	

LIMITED PROTEST 
OF THE 
INDEPENDENT ENERGY PRODUCERS ASSOCIATION

I.	Introduction and Summary

		Pursuant to Rule 44 of the California Public Utilities Commission’s (“Commission”) Rules of Practice and Procedure, the Independent Energy Producers Association (“IEP”) hereby protests the Application of Pacific Gas and Electric Company (“PG&E”) to Market Value Hydroelectric Generating Plants and Related Assets Pursuant to Public Utilities Code Section 367(b) and 851 (“Application”).  IEP endorses PG&E’s position that AB 1890 requires a competitive market and the best market valuation of the hydroelectric assets will be through an open and competitive auction.  Indeed, IEP commends PG&E for moving forward with a proposal that, with modification, could result in a true market value of PG&E’s hydro assets and enhance the degree of competitiveness in the State’s electric generation market.  However, IEP must protest aspects of PG&E’s approach as being incomplete and recommend approval only after the modifications described in this protest.  
To be successful, PG&E’s auction must adhere to three key objectives – thoroughness, transparency, and timeliness (3Ts).
•	Thoroughness.  The auction design must reflect consideration of the market power and environmental issues and impacts associated with the valuation and disposition by auction of PG&E’s hydroelectric assets.  These must include input from local, state and federal governmental interests.  

•	Transparency.  The auction must, in reality and perception, be fair to all bidders with clear bid evaluation criteria.  In addition, it must identify and clarify all pertinent issues that will affect valuation and disposition of the hydroelectric assets.  Such information includes existing and future operational and ownership constraints.   

•	Timeliness.  The auction must occur in a timely manner in order to provide certainty for PG&E, PG&E ratepayers, and prospective bidders.  The Commission should proceed with the intent of completing the initial phases within six months and the final decision on environmental issues within one year.   

Applying these fundamental principles leads IEP to protest PG&E’s Application on the following grounds:

1.	Transparency:
–	Becaue an affiliate of PG&E is a declared bidder, the Commission, rather than PG&E, must conduct the auction based on the auction protocols proposed by PG&E as modified and adopted by the Commission.
–	Selection criteria for qualified bidders and bid evaluation criteria must be clearly defined.
–	Market power must be mitigated through a baseline criterion of divided ownership created by a limit on the total capacity that may be held by a single owner.
2.	Thoroughness:
–	All relevant data must be made available, and PG&E cannot be the arbiter of what is relevant.
–	Analysis of critical, additional environmental issues, the valuation of the California Public Power Agency (“CAPPA”) contracts in relation to the other hydroelectric assets, key legal issues and the appropriateness of a price-only auction must be considered in parallel with the Application through an Order Instituting Investigation (“OII”).
–	Public hearings are required.
3.	Timeliness
–	The OII should be used as a vehicle to inform consideration of the Application on a coordinated schedule that provides for an auction within one year of the Commission’s Scoping Memo.

II.	The Commission should conduct the auction under its auspices to avoid any potential challenges of impropriety and to achieve transparency.

	A.  	To Avoid the Potential for Conflicts of Interest, PG&E Cannot Conduct the Auction as Long as a PG&E affiliate is a Bidder.

PG&E’s Application seeks an open and competitive auction.  (Application, p. 1).  Further, PG&E proposes to follow the auction protocols and procedures that were successful in the past auctions.  IEP agrees that these protocols and procedures have worked in the past to produce robust bids in a timely fashion.  However, a pivotal difference exists in the auction of the hydroelectric assets – an affiliate of PG&E intends to bid.  With the advantages that PG&E’s affiliate brings to the auction, e.g. the widely discussed tax benefits, IEP recognizes that the affiliate stands in good stead to be a winner of the auction.  However, that victory should not be tainted through even the appearance of impropriety.  This makes it essential to conduct the auction in a different way to ensure that it leaves no question as to its fairness and transparency.  
Regardless of the employment of the Commission-sanctioned affiliate rules the conduct of the auction by PG&E heightens concerns regarding fairness and transparency by making the auction process more opaque.  An Independent Auditor, selected by PG&E, does not resolve this dilemma.  IEP urges the Commission to avoid the question of whether PG&E has violated the Commission’s objectives by conducting the auction under its own auspices.  If the Commission prefers, it could select an independent third party, such as the major accounting firm PG&E proposes, to conduct the auction and certainly can incorporate the recommendations of PG&E in the selection process for both qualified bidders and winners.  In any case, the accounting firm should work for the Commission, and not PG&E.   
	B.	A first principle of the Commission’s affiliate rules requires transparency through an open, competitive bidding process for any transaction in which the affiliate chooses to participate.  

IEP has no objection to PG&E’s affiliate, PG&E Generating, participating in an auction of the hydroelectric assets provided the auction is designed and managed in a transparent, fair manner.  The Commission has previously ruled that utility affiliate can participate in the competitive electricity market as long as any transactions involving the regulated utility follow the Commission’s affiliate rules adopted pursuant to D. 97-12-088 and D. 98-08-035.  A first principle of the affiliate rules centers on PG&E using an open, competitive bidding process for any transaction in which the affiliate chooses to participate.   Adherence to this principle is essential to transparency and to assuring participants that the auction will be truly open and competitive.  
Bidders cannot be confident of compliance with the Commission’s affiliate rules, however, without the changes that IEP recommends in this protest.  The recommendations ensure compliance with the nondiscrimination requirements of the affiliate rules that preclude PG&E from providing preferential treatment to its affiliate, including pricing and terms and conditions of any transactions.  Moreover, they ensure that all similarly situated market participants will have access to information on the same terms and conditions.  During its review of the auction protocols, the Commission can adjust the provisions to ensure compliance with the affiliate rules.	
	C.	If the Commission allows PG&E to conduct the auction with an Independent Auditor, the Commission must directly supervise.

		In the Application, PG&E seeks Commission approval to employ an Independent Auditor, a major accounting firm, to participate in and monitor the entire auction process.  The Independent Auditor will be involved in each stage of the auction process and will notify PG&E if it “believes that PG&E is not acting even-handedly.” Application, p. 20.  Under PG&E’s proposal, the Independent Auditor will first notify PG&E and only report to the Commission in the cases where the Independent Auditor finds that PG&E has been unfair.  At the end of the auction, the Independent Auditor certifies the auction as fair.
		IEP views this proposal as failing to ensure a transparent, fair auction.  Should the Commission approve PG&E’s request to conduct the auction with an Independent Auditor, then PG&E cannot be the employer and court of first resort for the Independent Auditor.  It is imperative that the Commission have direct supervisory responsibility of the selection and function of the Independent Auditor.  While PG&E may recommend candidates, it is critical for the Commission to retain control.  True independence of the Independent Auditor will increase the transparency of the auction and eliminate the potential for subsequent challenges of unfairness.
III.	Auction Protocols Must Be Transparent and Thorough with Full Disclosure of Data.
	A.	Stage 1 selection criteria must be defined.
		In its proposed auction protocols, PG&E does not define the criteria by which Stage 1 bidders will be deemed qualified.  At a minimum, regardless of who the Commission ultimately selects to conduct the auction, these selection criteria must be clearly delineated in advance.  For example, what are the minimum balance sheet requirements?  Ideally, these criteria should be objective so that all bidders understand the selection process.  However, IEP appreciates that the synergistic effects of some bidders’ qualifications would provide an attractive option to PG&E for selecting that bidder or bidder group.  
		B.	All relevant data must be made available to all bidders.
		Under PG&E’s Application, PG&E controls the access to data and is sole determiner of what is “relevant”.  In other words, PG&E can selectively disclose data.  Instead, PG&E should be required to provide all data related to the Commission’s review and let the bidders determine relevance.  Furthermore, given the participation of PG&E’s affiliate as a bidder, as stated in the affiliate rules, all bidders must have equal access to the same data.  Thus, what PG&E’s affiliate utilizes, other bidders must be allowed to review as well.
		Additionally, the Application proposes that all information must be viewed in a Confidential Data Room and that only bidders entering into a Confidentiality Agreement should be permitted to view it.  Based on PG&E’s comprehensive list of the information that it intends to include, IEP observes that much of the information is not confidential.  Thus, PG&E’s confidentiality requirements for data review impose an unreasonable barrier.  For a thorough review of the issues before the Commission, interested stakeholders, as well as bidders, must have access to data, especially those data that may be considered public information. Much of the material information has been filed either with this Commission or the Federal Energy Regulatory Commission (“FERC”).  To allow the thorough and comprehensive review necessary for this Application, IEP suggests that the Commission require the data room to be open to stakeholders.  For the selective information that is truly confidential and must not be disclosed, the Commission should require PG&E to bear the burden of proving the need for confidentiality.  In such limited instances, only bidders would have the right to review the data pursuant to the Confidentiality Agreement.
IV.	Single Ownership of the Assets Cannot Be Allowed; Market Power Mitigation Through Divided Ownership is Essential.

		As part of its Application review, the Commission must determine the market power impacts of auction winners.  Public Utilities Code Section 362 states:
In proceedings pursuant to Section 851.., the commission shall ensure that facilities needed to maintain the reliability of the electric supply remain available and operational, consistent with maintaining open competition and avoiding an over-concentration of market power.

Despite this statutory requirement, the Application makes no mention of market power and the impacts of possible single ownership of all PG&E’s hydroelectric facilities on the operation and reliability of the electric system.    In the past auctions, the Commission has made its statutory determination once the winners have been selected.  However, this auction is unique given that it encompasses just one type of generation with characteristics that give it a dominant role in certain electricity markets.
		As a result, single ownership of all the hydroelectric generating assets automatically triggers significant concerns regarding the impacts of the operation of the hydroelectric facilities in relation to the electricity market.  The market operations must be as transparent as possible.  Certainly no single market participant should be permitted to control all units of a generating resource with the inherent market power of PG&E’s hydroelectric generation.  To achieve the truly competitive market envisioned under Public Utilities Codes Section 330(g), it is not enough for these hydroelectric facilities to move from the regulated to an unregulated affiliate by auction.  Rather, it is incumbent upon the Commission to implement the goals and objectives of AB 1890 through creating the greatest possible amount of competition in the electric markets by establishing baseline criteria for divided ownership.
		As a fundamental principle, divided ownership is essential. IEP supports PG&E’s efforts to allow for the widest number of bidders by dividing the assets into various bundles.   Also, IEP recognizes that a market power analysis may only be performed after the winners of the auction are selected.   IEP recommends that, through the OII, the Commission identify the minimum division of assets required, e.g. by watershed, and adopt that division as the baseline criteria for the Stage 2 review of the bids in the auction protocols.
V.	Critical Issues Must Be Addressed for a Thorough Review of the PG&E Auction Proposal and Hydroelectric Asset Market Valuation; An OII Can Address These Issues Timely and Without Undue Delay
		
		PG&E agrees that critical policy issues are associated with its hydroelectric assets.  In its Reply Comments, PG&E stated that it:
	is not opposed to the Commission considering overarching policy issues as part of this auction.  Indeed, it is incumbent upon the Commission to address any larger policy considerations prior to the auction occurring, so that participants can value the assets accordingly.

IEP agrees that the Commission must address the “larger policy considerations” raised by PG&E’s Application.  Without Commission identification and review of these issues, bid values will be dampened.  IEP disagrees, however, that the Application proceeding is the proper forum.  Instead, IEP supports an Order Instituting Investigation (“OII”) as the best vehicle for review of these issues.
An OII provides the flexibility to address a variety of critical issues including: (a) the scope of environmental inquiry for the California Environmental Quality Act (CEQA) review of the auction application including input from local, state and governmental interests; (b) whether a price-only auction best reflects the value of a bid; (c) establishment of an interim credit;  (d) whether it is appropriate for PG&E to retain the CAPPA contracts under Public Utilities Code Section 377 and  (e) the Commission’s presumptions on other critical legal issues, such as the role of the FERC.  IEP urges the Commission to conduct such an OII in parallel with the Commission’s review of this Application. The information gathered and examined in parallel with the Application will permit the Commission to reach a final decision in a timely manner.  			A.  No party opposes the OII.
		In A. 98-05-014 and 98-05-022, many parties have requested that the Commission establish an OII to investigate environmental, market power and legal issues.  PG&E’s stated view in that proceeding is that the OII would delay Commission action on the Application by duplicating the issues to be considered.  By these remarks, IEP believes that PG&E has misunderstood the intent of the OII.  To the contrary, IEP anticipates that the Commission would conduct the OII in parallel with the procedural requirements delineated in the Application, including the CEQA process, and, in fact, would help accelerate the auction. By completing the OII in a timely manner with full development of the issues relating to future ownership, the Commission will create an auction milieu to achieve the highest market valuation prior to the end of the AB 1890 transition period.  
	B.	Environmental issues can be identified in the OII for the CEQA review of the Application.

		IEP understands that PG&E will shortly file its Proponent’s Environmental Assessment and, as a consequence, reserves the right to address the environmental issues at that time.  At a minimum, a complete CEQA review is required.  However, the particular approach to how the Commission will conduct its environmental review and the scope of issues to be considered can begin immediately.  PG&E maintains that CEQA will address all concerns.  Other parties believe that it may not.  No need exists to delay identification of the elements necessary for a thorough review of PG&E’s auction proposal.  As discussed previously, the Commission should initiate that inquiry now. 
		Although the Commission has jurisdiction to review the Application, a narrow approach to the environmental analysis such as utilized in previous divestiture proceedings will not work given the nature of the hydroelectric assets and their direct relationship to water supply, recreation uses, fisheries, land use, and other critical considerations.  Commission coordination of input from interested local, state and federal agencies is essential to the success of this effort – particularly local county government and water agencies, the Department of Fish and Game, the State Water Resources Control Board and the Federal Energy Regulatory Commission (FERC). 
	 	Additionally, an OII permits the Commission to contemplate whether, given the broad range of issues raised by PG&E’s application, factors other than price should be considered as part of the bidder selection process.  IEP agrees that a price-only auction as proposed by PG&E in its Application is the simplest method to select a winner.  However, IEP also recognizes that other issues may arise that the Commission believes should be considered with the auction.  More thought needs to be given to this issue before adopting the PG&E proposal as presented.
	C.	An interim credit can be established in the OII that would not represent an interim valuation of PG&E’s hydroelectric assets.

		PG&E has proclaimed that the Commission does not have authority to impose an “interim valuation” for its hydroelectric assets to end the rate freeze.  PG&E’s concern centers on the possibility that the value of the assets received in the auction would not allow PG&E full recovery.  However, to create a CTC shortfall for PG&E was not IEP’s intent.  Rather, IEP does not believe there should be interim valuation but an interim credit based on the approach described by the Commission’s Office of Ratepayer Advocates (“ORA”) in A. 98-05-014, et. seq.   Under the current proposed schedule, market valuation of the hydroelectric assets through auction might not occur for 18 months.  With an interim credit, the rate freeze ends, PG&E has full recovery of its CTC and the auction can proceed in a timely manner, but without undue haste.
	D.	Key legal issues must be addressed in the context of disposition of PG&E’s hydroelectric assets.

		In the valuation proceedings, parties have raised legal issues associated with disposition of the hydroelectric assets:
	1.	Does the Commission jurisdiction continue after market valuation of the hydroelectric assets when the assets are retained by the utility?

	2.	Does the Commission have the authority to adopt an interim credit for ending the rate freeze without establishing an interim valuation for the hydroelectric assets in the context of a valuation proceeding, an OII or the Application?

	3.	What procedural requirements are necessary for the State of California to impose environmental or market conditions on the disposition of PG&E’s hydroelectric assets in relation to FERC jurisdiction?

	4.	Does retention of the CAPPA power purchase contracts within the utility – contracts associated with facilities uniquely essential to electric system reliability – require PG&E to demonstrate that retention of these below-market contracts does not confer undue competitive advantage on PG&E, as required by Public Utilities Code Section 377?  On what grounds can PG&E justify not including the CAPPA projects in the disposition of assets?   

VI.	Public Hearings are Necessary on the Application and the OII
		In submitting this Protest, IEP does not object to the relief sought by PG&E.  Rather, IEP’s position is that PG&E’s proposal does not go far enough to accomplish PG&E’s goals.  Disposition of the magnitude proposed by PG&E should not occur without all interested stakeholders having an opportunity to be heard.  Hearings are necessary to allow stakeholders to present positions to the Commission and to afford the Commission an opportunity to elicit views from entities that are not Commission “regulars”.  		
VII.	Conclusion
		For the reasons stated above, the Application should be approved but only after an expanded scope of Commission inquiry.   IEP recommends that the Commission apply the principles of transparency, thoroughness and timeliness in selecting auction protocols that will yield the greatest values for the hydroelectric assets while at the same time incorporate the myriad of factors necessary to address before PG&E’s auction would be deemed final and fair.
		Respectfully submitted, this 3rd day of November, 1999,

								
							Diane I. Fellman
							Attorney at Law
							234 Van Ness Avenue
							San Francisco, CA 94102
							Telephone:	(415)703-6000
							Facsimile:	(415)703-6001
							email: difellman@earthlink.net

							Attorney for Independent
							Energy Producers Association

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