ALJ/RAB/avs DRAFT Item 3

1/4/2001

Decision PROPOSED DECISION OF ALJ BARNETT (Mailed 12/5/2000)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

In the Matter of the Application of Southern California Edison Company (U 338-E) for Authority to Sell Its interest in the Mohave Generation Station.

Application 99-10-023 (Filed October 14, 1999)

(See Appendix A for List of Appearances.)

INTERIM OPINION

Southern California Edison Company (SCE) sought authorization to sell, through an auction process, SCE's share of the Mohave Generating Station, a coal-fired electrical generation facility of which SCE owns a partial, undivided interest. SCE sought authorization to accomplish this divestiture in order to set the market value of its interest pursuant to Section 367(b) of the Public Utilities Code. That authority was granted in Interim Opinion Decision (D.) 00-04-009.

The Mohave Generating Station (referred to as the Plant, Mohave, the Mohave Facility, or the Mohave Plant) is a 1580 megawatt (MW), coal-fired generating station that is located in the community of Laughlin in Clark County, Nevada. SCE is the sole operating agent for Mohave; however, the Plant is jointly owned by SCE, the Department of Water and Power of Los Angeles (LADWP), Nevada Power Company (NPC) and Salt River Project Agricultural Improvement and Power District (SRP) (collectively, the Participants), as tenants-in-common. The Participants' undivided interests in and to the Mohave

Facility are as follows:

Southern California Edison Company 56%

Department of Water and Power of Los Angeles 20%

Nevada Power Company 14%

Salt River Project Agricultural

Improvement and Power District 10%

In our Interim Opinion Decision (D.) 00-04-009, we made the following Findings of Fact:

"1. SCE's ownership of its interest in the Mohave Plant is no longer `necessary or useful in the performance of [utility] duties to the public' under Pub. Util. Code § 851, in light of the Commission's Restructuring Policy Decision and AB 1890.

"2. SCE's divestiture of its interest in the Mohave Plant will not impair the reliability of electric supply." (D.00-04-009, at mimeo., p. 10.)

In our Interim Order we provided for a post auction filing to authorize SCE to close the sale, should the auction prove successful.

"4. In SCE's post auction filing, we will determine whether to: (i) find that SCE has conducted the auction substantially in accordance with the procedures and protocols approved by this decision (or that SCE has justified any deviation as reasonable); (ii) authorize SCE to close the sale in accordance with the executed agreements; (iii) accept the sale price as an adequate determinant of the market value of the generating station for transition cost purposes; and (iv) make certain appropriate findings relating to the buyer's ability to qualify as an Exempt Wholesale Generator." (D.00-04-009 at mimeo., p. 12.)

On June 28, 2000, SCE filed its Divestiture Compliance Filing, in conformity with D.00-04-009. In that filing SCE asserted that it has signed an asset sale agreement with The AES Corporation (AES) for the sale of SCE's interest in Mohave; that the executed transactional agreements are substantially similar to the form transactional agreements approved by the Commission in D.00-04-009; and that the purchase price for SCE's interest in Mohave is $533.244 million, which is approximately five times the estimated net book value of SCE's interest in the Plant ($103 million as of April 30, 2000). SCE requested approval of the sale and transfer of its interest in Mohave pursuant to § 851 of the Public Utilities Code.¹

On September 1, 2000, the Utility Workers Union of America (UWUA) filed a motion for permission to Late-File its Petition to Intervene. UWUA alleges:

1. UWUA is a nation-wide union with 50,000 members in the utility industry, including electric, gas, and water companies. UWUA has several locals in California. Approximately 250 UWUA members are employees of SCE who work at Mohave.

2. The proposed sale of Mohave to AES Corporation will directly affect UWUA's members who work at that plant. After an initial two year period, AES will be free to reduce staffing levels at the plant. AES has not made any commitment to maintain current staffing levels.

3. The proposed sale of Mohave also may have an adverse impact on electricity consumers in California. Recent, exorbitant increases in prices charged to electricity consumers in the San Diego area highlight the risks to consumers when utilities divest their generating assets. The more that distribution companies divest generating assets that they own or control, the more that consumers are exposed to unregulated market prices. In the near term, unregulated market prices, particularly in California, will be highly volatile and expensive, due to a relative shortage of power supply, strong growth in demand, and difficulties in establishing a fluid market for transmission service.

4. UWUA believes that sale of Mohave is not currently in the best interest of consumers of electricity. The plant produces nearly 1,600 MW of efficient base-load capacity. In the hands of SCE, which owns 56% of Mohave, the plant provides reliable power for California consumers at an attractive price. In the hands of AES, the plant is an attractive investment generating power that can be sold to the highest bidder, whether in California or elsewhere.

5. UWUA understands that AES owns at least 4,500 MW of capacity at Redondo Beach, Alamitos, and Huntington Beach. Should AES complete its purchase of Mohave, it will own at least 6,000 MW of capacity in and near California. UWUA is concerned that this will allow AES to obtain prices for its electricity that will adversely affect California consumers.

6. UWUA is willing to comply with all existing schedules and procedures established in this docket and does not seek to expand the scope of this proceeding in any manner.

SCE opposes the Petition. It argues that the UWUA's petition is an untimely attempt to relitigate the Commission's decision in the first phase of this proceeding authorizing SCE to sell its interest in Mohave. It says SCE, the other parties that have actively participated in the proceedings to date, and all of the entities that participated in the auction process relied on the Commission's original decision, and UWUA should not be permitted to attack it at this late date through what amounts to an untimely petition for reconsideration. SCE reminds us that in D.00-04-009 we: (1) approved SCE's proposed auction protocols and transactional agreements, including its proposal concerning operation of the plant during the two-year period after the sale; (2) found that SCE's continued ownership of an interest in Mohave is no longer "necessary or useful" within the meaning of § 851; and (3) found that the divestiture of SCE's interest in Mohave will not impair reliability. By suggesting that SCE should be required to retain ownership of its interest in Mohave, SCE contends that UWUA effectively asks the Commission to ignore its findings and to reverse its decision allowing SCE to auction its interest.

SCE claims that the bidders for Mohave acted in reliance on D.00-04-009, and the result was a robust auction that produced the highest possible price for the asset. Having provided the assurances set forth in D.00-04-009, it would be unfair to SCE and to the auction participants for the Commission to revisit those rulings by entertaining UWUA's Petition. At a broader level, SCE asserts, the success of any future auctions would be undermined if the Commission were to entertain the UWUA's post-auction challenge. Potential bidders are likely to refrain from participating in an auction if they have reason to believe that the Commission may reverse course after the auction by revisiting its pre-auction approval decision. The Commission should not set such a precedent by entertaining UWUA's last-minute petition. AES supports SCE, declaring that it is the successful bidder who relied on our Interim Order.

Public hearing on the motion of UWUA to file its Petition to Intervene was held October 10, 2000, before Commissioner Bilas and ALJ Barnett. Because of the importance of the issues presented by the motion, the presiding officers have referred the matter to the full Commission.

Discussion

We grant the motion of UWUA to file its Petition to Intervene and we stay further proceedings in this application until further order of the Commission. We are concerned that the transfer of utility electric generating capacity to an entity that is not a California utility will violate §§ 362² and 851.³

On August 3, 2000, we issued our Order Instituting Investigation into the Functioning of the Wholesale Electric Market and Associated Impact on Retail Rates (I.00-08-002). We observed that "a combination of heat waves across the West, a drop in reserves, and significantly increased demand have accompanied much higher wholesale energy costs in the forward and real time energy markets. The Independent System Operator (ISO) has declared several reliability emergencies this summer, which have led to both voluntary curtailments and rolling outages. The ISO Board of Governors recently voted to drop its FERC-authorized price cap from $750 per megawatt (MW) to $500 per MW and then to $250 per MW in an effort to control prices in the real time markets in which it purchases energy for resale. . . ." (I. 00-08-002, at mimeo., p. 1.)

We ordered:

"1. An investigation is instituted on the Commission's own motion into the functioning of the wholesale electric markets and associated impact on electric rates.

"2. San Diego Gas and Electric Company (SDG&E), Pacific Gas and Electric Company (PG&E), and Southern California Edison Company (Edison) are made respondents to this proceeding. . . ." (I.00-08-002, at mimeo., p. 7.)

Although I.00-08-002 was triggered by events of the past summer in SDG&E's territory where customers received electric bills showing increases of as much as 80%, the effects of last summer's electric markets have been felt throughout California.

As a result of the events of last summer, the Legislature promptly requested further action by the Commission. (Assembly Bill (AB) 265.) Consistent with AB 265, we issued D.00-09-040 to provide a rate stabilization plan that will ensure that SDG&E establishes a ceiling of six and five-tenths ($0.65) cents per kilowatt-hour (kWh) for the energy component of electric bills for its residential, small commercial, and lighting customers. We ordered that I.00-08-002 be broadened to specifically address the issues raised in Assembly Joint Resolution (AJR) 77.

For reference, we provide relevant details of AB 265 and our discussion of AJR 77.

AB 265 reads in relevant part, as follows:

SECTION 1.

"(a) The Legislature finds and declares that the San Diego Gas and Electric Company is the only electrical corporation in this state whose customers are no longer protected by a statutorily imposed rate freeze, and that those customers alone are therefore subject to severe economic hardship because of unprecedented bill volatility and extraordinarily high rate levels.

"(b) It is the intent of the Legislature to protect against a simple deferral of payment by future customers by establishing incentives for prudent procurement by the San Diego Gas and Electric Company, encouraging appropriate action by federal and state oversight agencies, and offsetting any undercollection in the balancing accounts with revenues associated with sales of energy from utility owned or managed generation assets." (Emphasis added.)

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SECTION 332.1:

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"(b) The commission shall establish a ceiling of six and five-tenth cents ($0.65) per kilowatt hour on the energy component of electric bills for residential, small commercial, and street lighting customers of the San Diego Gas and Electric Company, through December 31, 2002, retroactive to June 1, 2000. If the commission finds it in the public interest, this ceiling may be extended through December 2003 and may be adjusted as provided in subdivision (d).

"(c) The commission shall establish an accounting procedure to track and recover reasonable and prudent costs of providing electric energy to retail customers unrecovered through retail bills due to the application of the ceiling provided for in subdivision (b). The accounting procedure shall utilize revenues associated with sales of energy from utility-owned or managed generation assets to offset an undercollection, if undercollection occurs. The accounting procedure shall be reviewed periodically by the commission, but not less frequently than semiannually. The commission may utilize an existing proceeding to perform the review. The accounting procedure and review shall provide a reasonable opportunity for San Diego Gas and Electric Company to recover its reasonable and prudent costs of service over a reasonable period of time." (Emphasis added.)

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In D.00-09-040 we said:

"Assembly Joint Resolution (AJR) 77, adopted by the Assembly and the Senate on August 31, 2000, directs the Electricity Oversight Board and this commission to take certain actions to address the `extraordinarily high electric costs' now facing California. Among other things, AJR 77 provides the following:

Resolved, That the Public Utilities Commission, on or before September 21, 2000, shall issue an order instituting an investigation to review the impact of the current electricity crisis on consumers and those electrical corporations subject to the `Section 368(a) rate freeze,' with emphasis on the options for correcting the electricity market, methods to eliminate price volatility for consumers, and methods of cost recovery and cost allocation. . . .

"Pacific Gas and Electric Company (PG&E) and Southern California Edison Company (Edison) are electrical corporations subject to the Section 368(a) rate freeze. The impact of the current electricity crisis on these utilities, along with the impact on consumers, is the subject of the investigation requested in AJR 77. The August 3, 2000 order instituting this investigation (OII) specifies that the investigation will address `wholesale electric markets and associated impact on electric rates.' (OII, Ordering Paragraph 1.) The OII names PG&E and Edison as respondents as well as SDG&E. (Id., Ordering Paragraph 2.) Thus, the issues that the Legislature asks us to investigate are arguably within the scope of this investigation. However, to ensure that full effect is given to the Legislative intent in AJR 77, we will order that the investigation be broadened to specifically include the issues raised in AJR 77."

On May 22, 2000, the California ISO declared a Stage 2 emergency and asked utilities to interrupt supply to several hundred large industrial and commercial customers. On June 14, 2000, tens of thousands of electric customers suffered rolling blackouts. As recently as October 3, 2000, with much cooler temperatures prevailing than during the summer, prices in the day-ahead market still ranged from $114 to $138 per megawatt-hour, five times and more the levels that prevailed not so long ago. Wholesale prices increased an average of 270%, comparing the summer of 2000 to the summer of 1999, and California consumers thus paid over $1 billion in excess payments for electricity. In A.99-01-016, SCE on October 4, 2000, in its Emergency Petition to Modify D.99-10-057, and D.00-03-058, has submitted information to the Commission that it contends shows that the rate freeze for SCE could end within six months of today, if not earlier.

Given those facts, SCE has not demonstrated that sale of Mohave to AES presently meets the statutory requirements that the auctioned property is not "necessary or useful in the performance of its duties to the public" (Pub. Util. Code § 851). To the contrary, the sale of Mohave places 1,580 MW of dependable capacity in the hands of an entity that is not subject to Commission control and that has no obligation to maintain reliable or affordable supply for customers. AES is free to sell the output of Mohave in whichever markets it chooses and at whatever price the market will bear. Mohave is a 1,580 MW unit which has run at a 71.5% capacity factor for much of the past decade. The plant thus can produce approximately 10 billion kWh per year (SCE's 56% share would be approximately 5.5 billion kWh).

In comparison to the prices customers will have to pay if Mohave is sold, it is estimated that Mohave can generate power at around 3.5 cents per kWh. In today's market, this represents tremendous value that will be forever lost if SCE sells Mohave. SCE customers benefit from its ownership of low-cost units even if the power output is sold into the California Power Exchange (PX) because they are credited with the difference between the revenues obtained at market-clearing prices and the incremental costs of production.

We believe this is exactly the situation envisioned by the Legislature when it authorized offsetting revenue associated with the sales of energy from utility owned or managed generation assets. (Section 332.1(c).)⁴ Changed circumstances require a rethinking of past policies. This is reflected in the purview of I.00-11-001.⁵ The public interest demands that the Commission evaluate this sale under current conditions, not under the vastly different conditions that prevailed only six months ago.

From the evidence in SDG&E's territory, from the evidence of recent events in the California electric market, and from our expertise in these matters, we conclude that under current conditions when the rate freeze ends for SCE, it is reasonable to expect that the instantaneous increase in rates seen in SDG&E's territory will occur in SCE's. It would be imprudent not to take preventative measures at this time. In our opinion the prudent course is to maintain the status quo until our investigations in I.00-08-002 and I.00-11-001 are completed.

The proposed decision of ALJ Barnett in this matter was mailed to the parties in accordance with Pub. Util. Code § 311(d) and Rule 77.1 of the Rules of Practice and Procedure. Comments were filed on ___________ and reply comments were filed on _______________.

Findings of Fact

1. When the rate freeze ended in SDG&E's territory rates increased by as much as 80%.

2. In the summer of 2000 California experienced several electric reliability emergencies declared by the California ISO, and tens of thousands of electric customers suffered rolling blackouts.

3. Wholesale prices increased an average of 270% in summer 2000 over summer 1999.

4. A generation plant which is not subject to California regulation can sell its generation in any market it finds.

5. The issue of whether Mohave is no longer "necessary or useful in the performance of its duties to the public" must be decided under current conditions.

6. The issue of whether SCE's divestiture of its interest in Mohave will impair "the reliability of the electric supply" must be decided under current conditions.

Conclusions of Law

1. The Petition to Intervene of UWUA should be granted.

2. The issues raised by the Petition to Intervene are subsumed under the issues raised in I.00-08-002, regarding the functioning of the wholesale electric markets and associated impact on electric rates.

3. This application should be stayed until further order of the Commission.

INTERIM ORDER

IT IS ORDERED that:

1. The Petition to Intervene of the Utility Workers Union of America is granted.

2. Further proceedings in this application are stayed until further order of the Commission.

This order is effective today.

Dated , at San Francisco, California.

APPENDIX A

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