VII. Discussion

Should the Commission Grant an Exemption under Section 853?

Sierra initially requested that its auction and divestiture be exempted from review pursuant to Section 853(b). The settlement between Sierra and ORA also urges the Commission to grant this exemption. Both Sierra and ORA assert that exemption is appropriate mainly because of FERC and PUCN oversight and involvement in the auction process.

Section 851 provides that no public utility may transfer its property that is necessary or useful in performing its duties to the public without first having secured the Commission's authorization. Sierra's generating plants are currently required for system reliability and for service to California customers. Therefore, the plants are presently useful in the performance of Sierra's duties as a public utility and Section 851 applies.

The purpose of Section 851 is to enable the Commission, before any transfer of useful public property is consummated, to review the situation and to take such action, as a condition of the transfer, as the public interest may require.¹¹ Further, Section 851 is designed "to prevent the impairment of the public service of a utility by the transfer of its property into the hands of agencies or persons incapable of performing an adequate service at reasonable rates or upon terms which will bring about the same undesirable result."¹² We have held that the relevant inquiry is whether the proposed transaction is "adverse to the public interest."¹³

We reject Sierra's request for an exemption under Section 853(b) because we believe review of this auction and divestiture is necessary in the public interest. We find that the public interest in protecting the interests of Sierra's California ratepayers mandates that we retain review over the transaction. Over the past year, this Commission has witnessed tremendous price volatility in wholesale power markets and increasing reliability problems due to electricity supply shortages. These wholesale market occurrences impact California's retail ratepayers. Our experience with price volatility and reliability has prompted us to investigate the wholesale power market and the associated impacts on retail rates, ¹⁴ and to investigate whether utilities should be required to construct or contract for new power plants.¹⁵ The events of the past year underscore the

Commission's responsibility to scrutinize the proposed transfer of Sierra's generating plants.

We acknowledge that we have given exemptions from Section 851 to Sierra in the past, most recently in D.00-03-049 for stock and securities transactions. Nevertheless, we believe that a divestiture of generating assets deserves greater scrutiny because it is a more significant transaction and has greater long-term ramifications than a financing transaction. And although we previously stated our preference to allow a utility's dominant state to establish an asset valuation plan for generation assets, we do not believe a complete exemption from Section 851 makes sense at this time. Furthermore, that statement was made in 1997, long before the current reliability and pricing issues in California electricity markets that cause us now to give greater scrutiny to transactions that may impact regional wholesale electricity prices and supply. In support of our decision to deny an exemption from Section 851, we note that we have performed several reviews under Section 851 for other recent divestiture proposals,¹⁶ including proposals by Pacificorp and Edison to dispose of generating plants located in other states and have not granted these requests.¹⁷

Therefore, we conclude that the public interest does not warrant granting Sierra's request for an exemption from Section 851.

Should We Approve the Settlement?

Having denied Sierra's exemption request, we now consider the reasonableness of the settlement presented in the joint motion, which recommends Commission authorization of Sierra's auction and divestiture plan under Section 851.

We must consider whether the settlement conforms to the requirements of Article 13.5 of our Rules of Practice and Procedure, including Rule 51.1(e), which requires that the settlement is "reasonable in light of the whole record, consistent with law, and in the public interest."

We find that the proposed settlement is not consistent with the law or in the public interest. The settlement provisions do not provide adequate assurance that facilities needed to maintain the reliability of the electric supply will remain available and operational. The parties do not convince us that the settlement provisions avoid an overconcentration of market power, as required by Section 362. The settlement attempts to explain how the auction and divestiture will satisfy Section 362 by describing how Sierra will retain an obligation to serve as "Provider of Last Resort" for retail service within its service territory. Additionally, the settlement details how the purchasers of Sierra's generation facilities must enter into contracts that will allow Sierra to meet these service obligations. The settlement also explains how the "recourse tariff" is designed to protect customers from any abuse of market power by the new generation owners.

Despite these explanations, we are not convinced that the terms of the TPPCs and the "recourse tariff" filed at FERC adequately protect California ratepayers. For one thing, the settlement provides no assurance that the terms of the TPPCs and the recourse tariff might not change before the auction is finalized. The settlement provides no guarantee that the terms it describes will remain intact and unchanged.

Second, the settlement asks us to rely on FERC and the PUCN to protect the interests of California ratepayers. However, the price spikes and power shortages in California during the last nine months, coupled with FERC's response to these events, suggest we cannot rely solely on FERC to protect the interests of California's electric consumers, particularly when the settlement describes how FERC must set the rate for the recourse tariff after the TPPCs expire. Sierra's application admits that the plants in question operate in a load pocket condition and "likely...will have the ability to exercise market power."¹⁸ The application also describes how Sierra's California customers are served by a Nevada-based network and control area and "what happens to customers in northern Nevada necessarily will happen to California customers."¹⁹ Given these statements, we are not assured that the settlement adequately protects Sierra's California ratepayers.

Third, the increasingly regional nature of the electricity marketplace suggests the divestiture of these Nevada generating plants could affect the rates and services of California customers. The settlement does not provide assurance to the contrary. We have no guarantee that the divestiture will not have a detrimental effect on the entire California electricity supply and the price that is charged for it. Given the Commission's ongoing obligation under Section 362 to ensure reliability and avoid excess market power, we find the settlement is not in the public interest.

Furthermore, the settlement is not consistent with legislation recently passed to deal with California's current power crisis. In a special session called by California's Governor, the California Legislature passed Assembly Bill (AB) 6X, which the Governor signed on January 18, 2001.²⁰ The legislation took effect immediately as an urgency statute. AB 6X modifies Section 377 to state that:

Notwithstanding any other provision of law, no facility for the generation of electricity owned by a public utility may be disposed of prior to January 1, 2006. The commission shall ensure that public utility generation assets remain dedicated to service for the benefit of California ratepayers.

Given this provision and the fact that Sierra is a public utility serving California and subject to this statute, the Commission cannot at this time allow Sierra to proceed with its auction of electric generation assets, even if these assets are located in Nevada. Therefore, the Commission must reject the settlement as unlawful.

We do not address whether the proposed settlement complies with Section 363(a) because we are rejecting the settlement on other grounds.

¹⁴ Investigation 00-08-002, issued August 3, 2000.