IV. Status of Rate Freeze

In this phase of the proceeding, the Commission is considering whether the rate freeze has ended on a prospective basis. While parties differ in their reasons, several support the Commission deciding that the rate freeze enacted under the AB 1890 statutes is over. Other parties, while acknowledging that the purpose of the rate freeze may have been overtaken by the recently enacted legislation AB1X, argue that the Commission should not end the rate freeze outside the provisions of the AB 1890 statutes.

The statutory requirements of AB 1890 are that the rate freeze remain in place for PG&E and Edison until the earlier of March 31, 2002 or the date relevant cost balances are zero.⁴¹ In making this determination, Section 367(b) provides that the Commission shall determine the market value of each utility's economic assets and use this valuation to offset the costs of each utility's uneconomic assets.⁴²

In looking at whether the rate freeze has ended, we first look to the balance in each utility's TCBA of transition costs before valuation and then determine the value of remaining non-nuclear utility generation assets that would be applied as an offset to these transition costs.⁴³ As we estimated in the previous section, the balance in PG&E's TCBA at January 31, 2001 is $6.3 billion and the balance in Edison's TCBA at January 31, 2001 is $3.7 billion.

A. Valuation of Remaining Utility Generation

15. Is valuation required before the Rate Freeze may end?

The Commission has always been very clear that the rate freeze under the AB 1890 statutes cannot end until valuation of all remaining non-nuclear utility generation assets has occurred. This is because the level of Commission-authorized "uneconomic costs" which may be recovered during the rate freeze cannot be determined without netting above-market generation assets against below-market generation assets.⁴⁴ In D.99-10-057, the Commission found: "The timing of market valuations is critical in cases where those valuations might accelerate the end of the rate freeze to a date prior to the statutory deadline. Accordingly, we find that interim or final market valuations, to the extent they remain the Commission's responsibility, will precede the end of the rate freeze."⁴⁵

CIU states that with the passage of ABX6, the Commission is no longer required to market value PG&E's and Edison's remaining generation assets because the assets cannot be sold until 2005 and thus are no longer subject to the market valuation of Section 367(b). CLECA agrees with this position.

PG&E and Edison argue in their applications that Commission approved valuation is not required to end the rate freeze and assert that the rate freeze ended prior to commencement of this proceeding by virtue of their own estimation of the value of their facilities. They also assert that all remaining generation assets are economic in today's power market, therefore the Commission should not delay ending the rate freeze if TCBA balances are zero or overcollected and valuation of remaining generation assets has not been completed. They argue that the requirements of D.99-10-057 are in addition to what AB 1890 requires and are therefore not controlling.

PG&E and Edison base their positions on an assessment of the TCBA without considering the impact of TURN's proposal. By netting the TRA and the TCBA, the TCBA is undercollected. Furthermore, Section 367(b) leaves "the determination of costs eligible for recovery and the valuation of the assets" in the hands of the Commission.⁴⁶

Without the Commission having adopted a final valuation of remaining non-nuclear generation assets, we cannot find that PG&E and Edison have recovered their stranded costs. While CIU and CLECA may be correct in their reading of the interaction of Sections 367(b) and 377, the Commission still retains the discretion, even if not the requirement, to value remaining generation assets. Until the Commission approves a valuation of PG&E's and Edison's remaining non-nuclear generation assets, this valuation would be a credit to the current TCBA balances. Therefore, without such valuation, there is no way to determine whether the utilities have recovered the "Commission authorized" level of uneconomic generation costs.

Therefore, the primary criterion for ending the rate freeze imposed by Public Utilities Code Section 368(a) - recovery of the utilities' Commission-authorized stranded costs - has not occurred. The utilities cannot unilaterally establish a value for their facilities that allows their TCBA balance to be zero or overcollected and then declare the rate freeze has ended.

16. May interim valuation be used in determining whether the rate freeze has ended?

Parties have differed, and changed positions, on the issue of whether the valuation used for determining the end of the rate freeze can be an interim estimated valuation or must be a final market valuation.

PG&E states that in the past it has objected to an interim valuation being used to determine when the rate freeze is over. However, as PG&E witness McManus testified, the Commission decided against PG&E on this point and "did not make the changes in the GABA⁴⁷ decision that PG&E had asked for.... Therefore, it is appropriate to use an interim valuation to determine if the rate freeze is over."⁴⁸

In its rebuttal testimony, PG&E sponsored the use of an estimated market value of $2.8 Billion for its hydro facilities, based on a 1999 settlement it reached with ORA and other parties, and later withdrew, in A.99-07-053. Cross-examination established that this valuation was based on a discounted cash flow analysis using gas prices that do not reflect today's market.⁴⁹

PG&E argues that even a book value is a reasonable proxy for the value of its remaining generation assets because until the rate freeze is over there is substantial uncertainty over whether PG&E's costs going forward will be recovered. Nevertheless, it asserts that AB 1890 requires the Commission to market value its remaining non-nuclear generation assets before December 31, 2001 and net book value is not a reasonable estimate of market value.⁵⁰

All other parties state that rather than using an interim valuation estimate, the Commission should value the remaining generation assets at net book value due to the passage of ABX6, effective January 18, 2001. ABX6 replaces former Section 377 which stated that non-nuclear generation assets were to continue under Commission regulation "until those assets have been subject to market valuation in accordance with procedures established by the commission." Parties argue that the new Section 377 no longer renders any utility generation assets "subject to valuation." Instead, it clarifies that the Commission retains regulatory authority over all utility electrical generation until and unless the Commission allows disposal of any such generation assets under Section 851, and further bars disposal of any such assets until after December 31, 2005.

Edison states that ABX6 requires cost-of-service ratemaking based on book value until December 31, 2005 and thus net book value is not only reasonable, but required. Aglet, CLECA/ CMTA, GSPC, Los Angeles, ORA, and TURN agree that net book value is the proper valuation under ABX6.

Aglet and ORA go even further, and argue that net book value meets the final market value requirement of Section 367(b). Aglet does this by asserting that net book value is market value under cost of service ratemaking and cites Edison witness Dominski as agreeing with this conclusion.⁵¹ ORA draws a similar conclusion in its brief.⁵²

CIU states that the Commission should not allow the utilities to use interim valuation but instead, consistent with our past decisions, conduct a final market valuation before determining whether the rate freeze has ended. Enron states that it is unclear whether interim valuation would be sufficient to end the rate freeze.

We find that net book value rather than PG&E's proposed interim estimated valuation is the appropriate valuation for non-nuclear generation assets subject to cost of service ratemaking under ABX6. Under cost of service ratemaking the utilities will have the opportunity to earn a return on the cost of their investment. Cost of service regulation has always used net book value for valuation. Because the Commission is determining a value that reflects a dedication to public service and Commission regulation, it is reasonable for the Commission to determine the assets' value to reflect that regulation.

We find that net book value may also meet the statutory requirements of Section 367(b) for the Commission to determine a final market value for PG&E's and Edison's non-nuclear remaining generation assets prior to December 31, 2001. Unlike prior disposition of utility assets, which were sold to third parties, reliance on third party values makes little sense under present circumstances.

Valuation cannot be determined by sale or divestiture under ABX6. Any appraisal done would take into consideration that the generation assets are dedicated to public service and Commission regulation and would use a discounted cash flow analysis that reflected cost-based prices.

We should not make a determination of final market value without first giving notice, and an opportunity to comment, to all parties in Commission proceedings addressing this issue for PG&E and Edison. Therefore, we will provide an opportunity for comment and address final market valuation in a later decision. ⁵³

17. Valuation Date for Purpose of Determining if the Rate Freeze Has Ended.

Edison uses December 31, 2000 as the date it credits the net book value of its remaining non-nuclear generation assets to its TCBA. PG&E's position is to use its interim estimated valuation it has booked previously, to be trued up later when a market valuation is done.

ORA states a date after the January 26, 2001 ACR issued would be consistent with the scope of this phase and also be more accurate as it would reflect the changed circumstances that have occurred with the passage of ABX6 and AB1X. Specifically, ORA recommends the Commission use a valuation date of February 1, 2001 or later.

Farm Bureau assumes the valuation date is synonymous with the date of the end of the rate freeze and argues that the criteria for ending the rate freeze have not been met for either PG&E or Edison

TURN does not recommend a specific date, stating that if the Commission uses net book value, the date of valuation is less of a determining factor.

For purpose of determining if the rate freeze has ended, we will use a valuation date of January 31, 2001 for the net book value of PG&E's and Edison's remaining non-nuclear generation assets. This date is reasonable because it (1) is consistent with the January 26^th ACR, (2) after the date of ABX6 which establishes net book value as the appropriate valuation, and (3) compatible with the utilities' end of the month accounting balances.

B. Has the Rate Freeze Ended on a Prospective Basis?

PG&E and Edison state the rate freeze has ended, based on their claims that their transition costs have been fully recovered under the accounting mechanisms of Resolution E-3527. Because all stranded costs have been fully recovered, they assert there is no legal basis for not ending the rate freeze in this decision, and later examining the utilities' claim that the rate freeze ended even earlier. Both also cite policy reasons why the Commission should declare an end to the rate freeze as of today. PG&E states that nothing is to be gained, and much is potentially lost, by prolonging the uncertainty over whether the freeze is over. Specifically, continuing the rate freeze exacerbates the concerns of lenders and creditors that their position may deteriorate if they do not take PG&E into bankruptcy. Edison states that there is a broad consensus among parties, citing to TURN and ORA, to end the rate freeze and there is no legal or policy reason to delay declaring an end.

ORA states that the rate freeze has ended on a prospective basis because AB1X and ABX6 together make retail ratepayers responsible for the cost of any wholesale power procured by CDWR whether a rate freeze is needed or not. Without this legislation, says ORA, the rate freeze could only be over if the Commission fails to adopt TURN's accounting proposal.

TURN states that AB1X renders the rate freeze largely irrelevant and, therefore, the Commission should declare the freeze over as of the date of the statute's enactment. TURN states that AB1X is premised on the notion that each utility's generation rate component will exceed the costs of its own generation resources, providing a component that will become the CPA that flows to CDWR, rather than being "headroom" available to the utility for transition cost recovery. Further, the legislation provides for rate increases if the generation rate component is insufficient to meet CDWR's procurement costs, a provision that cannot be reconciled with a continuing rate freeze. In the absence of AB1X, TURN states the rate freeze would not be over for either utility under any reasonable set of assumptions and appropriate accounting practices.

Parties that do not support a determination that the rate freeze has ended for either PG&E or Edison are Aglet, CIU, CLECA, CMTA, Farm Bureau, Greenlining/LIF, Los Angeles, and SMUD. All cite that the conditions of AB 1890 have not been met. In addition, Farm Bureau cautions the Commission against arbitrarily ending the rate freeze without the utilities accepting the companion proposition that costs incurred during the rate freeze cannot be recovered from customers. SMUD urges the Commission to adopt measures to mitigate the real and potential exercise of market power by PG&E, and other generators prior to lifting the rate freeze. CLECA states the Commission would be best served to await further word from the administration and the Legislature before deciding whether the rate freeze has ended.

FEA, while not taking a position on whether the Commission should end the rate freeze, states that the Commission needs to clearly reaffirm that consistent with the intent and requirements of AB 1890 and prior decisions, any uncollected balances at the end of rate freeze, cannot be collected from customers and must be written off by the utilities under Financial Accounting Standards Board (FASB) 71.

We find that under AB 1890 the rate freeze has not ended for either PG&E or Edison. Using January 31, 2001 TCBA balances and the net book value of remaining non-nuclear generation assets, all transition costs specified under Section 368(a) have not been recovered by the utilities. The adjusted TCBA balances for PG&E and Edison are $6.3 and $3.7 billion, respectively, as of January 31, 2001, before applying net book values of approximately $700 million for each utility.

We recognize that there may be incompatibilities between the rate freeze and AB1X, particularly if headroom is not available to allow the utilities the opportunity to recover their remaining transition costs. However, until we have completed implementation of AB1X, it is premature to reach conclusions regarding the interaction between AB1X and AB 1890. Further, we agree with CIU that to find existing AB 1890 statutes inconsistent with AB1X, and to take action based on that conclusion, would be to repeal portions of AB 1890 by implication.

To end the rate freeze would require us to address the disposition of the balances in the TCBA. As we stated in D.99-10-057, these balances cannot be collected from customers after the rate freeze ends.