3. Discussion

We agree with SCE, TURN, CMTA and CLECA that the rate control period became ineffective, was mooted and ended in early 2001. In particular, we find that the rate control period ended on January 18, 2001, the effective date of AB 6X. We also find that we are not required to undertake market valuation of remaining utility generation assets for the purpose of determining when the rate control period ended.

3.1. End of Transition and Return to Regulation with AB 6X

The purpose of AB 1890 was to transition California's electricity generation market from cost-of-service rate regulation to competition. The AB 1890 paradigm was essentially based on the assumption that California's generation market would be competitive by no later than April 1, 2002.

Recognizing the failure of the deregulation scheme established by AB 1890, the California Legislature called a halt to the transition by adopting AB 6X in January 2001. That is, AB 1890 had provided that the utilities' generation assets would be rate regulated by the Commission until those assets were subject to market valuation. AB 6X ended the transition and deleted the market valuation requirement relative to the transition. It also continues Commission regulation of utility generation facilities, unless and until the Commission authorizes disposal of those facilities, with disposal permitted no sooner than January 1, 2006. Moreover, it requires that the Commission ensure public utility generation assets remain dedicated to service for the benefit of California ratepayers, without any legislatively defined conditions or time limits.

Specifically, AB 1890 enacted, but 6X deleted, the following in its entirety:

"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." (Former § 216(h).)

Similarly, AB 1890 enacted, but AB 6X deleted, the following language:

"...and utility generation should be transitioned from regulated status to unregulated status through means of commission-approved market valuation mechanisms." (Former § 330(l)(2).)

Further, prior to amendment by AB 6X, the law read:

"The commission shall continue to regulate the nonnuclear generating 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." (Former § 377.)

As amended by AB 6X, the law now reads:

"The commission shall continue to regulate the facilities for the generation of electricity owned by any public utility prior to January 1, 1997, that are subject to commission regulation until the owner of those facilities has applied to the commission to dispose of those facilities and has been authorized by the commission under Section 851 to undertake that disposal. 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." (§ 377.)

Thus, effective January 18, 2001, the transition was terminated, the valuation requirement relative to the transition from regulated to unregulated status was terminated, Commission regulation continues, and public utility generation assets are to remain dedicated to service for the benefit of California ratepayers.

3.2. Rate Controls

The rate control period was to last until the earlier of March 31, 2002, or the date on which Commission-authorized uneconomic costs (also called transition or stranded costs) were fully recovered. Specifically:

"These [June 10, 1996] rate levels for each customer class, rate schedule, contract or tariff option shall remain in effect until the earlier of March 31, 2002, or the date on which the commission-authorized costs for utility generation-related assets and obligations have been fully recovered." (§ 368(a).)

AB 1890 delegated to the Commission the responsibility of identifying and determining these recoverable costs. (§§ 367 and 368.) AB 6X did not delete or modify this responsibility.

Transition or stranded costs, full recovery of which would end the rate control period, were those that might become uneconomic as a result of the transition to a competitive market. In particular, transition or stranded costs were defined as:

"...the uneconomic costs of an electrical corporation's generation-related assets and obligations identified in Section 367." (§368.)

Pursuant to § 367:

"The commission shall identify and determine those costs and categories of costs for generation-related assets and obligations...that may become uneconomic as a result of a competitive generation market, in that these costs may not be recoverable in market prices in a competitive market." (§ 367, emphasis added.)

AB 6X ended the transition of utility generation from regulated to unregulated status, and continues Commission regulation of those assets. In this new context, there are no longer any uneconomic costs (i.e., "costs for generation-related assets and obligations...that may become uneconomic as a result of a competitive market..." § 367). There are no remaining uneconomic costs because AB 6X ended the transition to a competitive market for utility generation assets. Hence, there are no transition or stranded costs that remain within the meaning of AB 1890.

Specifically in this context we have said:

"Moreover, by conferring upon the Commission the authority to continue to regulate the utilities' retained generation under a cost-of-service approach, and deleting provisions requiring generation to be transitioned from regulated to unregulated status, these provisions [in AB 6X] removed any danger that the investment in such assets `may become uneconomic as a result of a competitive generation market.' [Footnote 7.] (§ 367.) In other words, the investment in these assets no longer is a stranded or transition cost within the meaning of AB 1890."

"[Footnote 7] Under cost-of-service ratemaking, the concept of `uneconomic' costs is not applicable. The concept only has relevance under a market-based rate regime." (D.02-11-026, mimeo., page 13.)

Thus, we find that the rate control period ended on January 18, 2001. It ended on January 18, 2001, because, effective that date, there are no longer any uneconomic, stranded or transition costs within the meaning of AB 1890 to recover. Recovery of these costs was otherwise put at risk by the transition to a competitive market. The purpose of the rate freeze was to give the utilities an opportunity to recover some or all of these costs. AB 6X stopped the transition, and ended the risk. Uneconomic, stranded or transition costs ceased to exist as a cost category on January 18, 2001.

Our analysis of the fundamental changes brought by AB 6X was confirmed by the California Supreme Court in Southern California Edison Co. v. Peevey (2003) 31 Cal. 4^th 781, reh'g denied (October 22, 2003). The Court held that AB 6X "constituted a major retrenchment from the competitive price-reduction approach of Assembly Bill 1890, reemphasizing instead PUC's duty and authority to guarantee that the electric utilities would have the capacity and financial viability to provide power to California consumers." Id. at 793. The Court further agreed with the Commission that by restoring the Commission's cost-of-service ratemaking over the utilities' generation-related costs, AB 6X had largely eliminated the category of "uneconomic" generating asset costs, which were at risk under AB 1890. Id. at 795.

3.3. Other Possible Dates

A limited number of other dates are candidate dates for the end of the rate control period. For the following reasons, however, these dates are not determinative.

3.3.1. March 31, 2000

PG&E asserts that the rate freeze ended no later than March 31, 2000. We are not persuaded by PG&E's arguments, as we discuss below.

According to PG&E, the Commission was required by AB 1890 to complete the final valuations of non-nuclear utility retained generation assets by December 31, 2001. Not having yet done so, PG&E says we must do so now. PG&E believes that any reasonable range of valuations will produce a determination that the rate freeze ended no later than March 31, 2000, based on the "zeroing out" of transition cost balances in various accounts (e.g., the Transition Cost Balancing Account or TCBA).

We disagree. Final valuation was not required by January 18, 2001. With the enactment of AB 6X on that date, we are no longer required to complete valuation.

After enactment of AB 6X, only one reference to market valuation remains in the sections dealing with the transition to competition and the rate freeze. The reference, in § 367(b), requires that calculation of the amount of transition costs eligible for recovery be based in part on market valuation of certain assets. But, costs eligible for recovery and that might otherwise have been "subject to valuation" (§ 367(b)) consisted only of costs associated with generation assets that "may become uneconomic as a result of [the transition to] a competitive market." (§ 367.) As discussed above, such potentially uneconomic costs within the meaning of AB 1890-including § 367-no longer exist.⁸

Said differently, valuation was only relevant in the context of recovery of "the uneconomic portion of the net book value" and "uneconomic costs." (§ 367(b) and § 367.) Uneconomic costs were in turn only relevant in the context of "a competitive generation market, in that these costs may not be recoverable in market prices in a competitive market..." (§ 367.) AB 6X continues Commission rate regulation, and deletes provisions requiring generation to be transitioned from regulated to unregulated status, as we discussed previously. Valuation in the context of uneconomic costs is no longer meaningful.

In Southern California Edison Co. v. Peevey, supra, 31 Cal. 4^th at 795, the California Supreme Court reached this same conclusion as to the effect of AB 6X on the market valuation requirement in AB 1890, when it explicitly found that "Assembly Bill 6X eliminated Assembly Bill 1890's requirement for market valuation of utility-retained generating assets..." As the Court further explained, "[t]he passage of Assembly Bill 6X, which ended the sale of generating assets and returned them to traditional PUC rate regulation, removed the rationale and opportunity for market valuation..." Id. at 796.

In addition, even if we were to undertake valuation now, completion of the valuation process would be unreasonably complex and controversial. PG&E, for example, has estimated different valuation amounts at different times. According to TURN, PG&E first estimated an interim market value of $2.8 billion in August 2000, but then proposed final market valuation of $4.1 billion only a few months later in the utility retained generation (URG) proceeding. This is an increase of $1.3 billion (46%) over a short period of time, and may or may not be dependent upon many variables (e.g., estimates of the cost of natural gas, oil, interest rates; the state of competition in the generation market). Parties may have other estimates of value. Hearings would be necessary to take evidence on disputed appraised values. This could be an exceedingly costly use of limited utility, party and Commission time and resources for results that are largely moot on a revenue requirement basis. That is, we have already determined that reasonable utility financial health must be considered in the determination of rate levels.⁹ Other proceedings have, and will, allow us to do that, and we need not use limited resources to consider that further here.

Thus, we are neither persuaded by PG&E that the rate control period ended no later than March 31, 2000, nor that we are required to, or otherwise should, now undertake the final valuation process to determine the end of the rate control period.

3.3.2. January 17, 2001

The Legislature stated several guiding principles for the purpose of carrying out its intended electricity market restructuring. In particular, one such principle was:

"The transition to a competitive generation market should be orderly, [and] protect electric system reliability..." (§ 330(t).)

On January 17, 2001, the Governor proclaimed a State of Emergency. The proclamation was based on a crisis in the electricity market (e.g., shortages of electricity, rolling blackouts affecting millions of Californians, threatened insolvency of California's major public utilities, imminent threat of disruptions constituting a condition of extreme peril to the safety of persons and property). The situation was not the Legislature's intended "orderly" transition protective of "system reliability."

We might conclude that the rate control period ended with the Governor's proclamation of a State of Emergency on January 17, 2001. We do not. Rather, on January 17, 2001, the Public Utilities Code still contained provisions calling for the transition, market valuation in the context of the transition, and eventual unregulated status of generation assets. (§§ 216(h), 330(l), and 377.) On January 18, 2001, those provisions were terminated by AB 6X. January 18, 2001 provides the clearer change in both context and law for Commission determination of the status of uneconomic costs that define the end of the rate control period.

3.3.3. February 1, 2001

TURN argues that AB 6X prevented any further divestiture of utility generation assets as a means of determining the market value of those assets, but did not change the allocation of risk and opportunity under the rate freeze, and was not the critical change in the statutory and regulatory landscape for purposes of determining whether or not the AB 1890 rate controls had ended. Rather, TURN asserts that AB 1X was the critical instrument in shifting the risk of procurement cost incurrence and rate recovery from utilities to customers.

According to TURN, AB 1X relieved the utilities of the burden of purchasing wholesale power on behalf of their customers (beyond the amounts provided by utility retained generation), and assigned that burden to the State in the form of DWR. TURN says that AB 1X also provided that rates be increased, if necessary, to recover DWR's costs, and directed that generation revenues not required by utilities be redirected to DWR.

TURN contends that the rate freeze was intended to create both an opportunity for transition cost recovery and the risk of non-recovery. TURN asserts that AB 1X granted utilities virtual certainty of cost recovery. Under TURN's theory, as of February 1, 2001, all generation cost components were recoverable on a cost-of-service basis, with utility retained generation costs recovered in utility rates and wholesale market costs recovered by DWR. As a result, TURN says that with AB 1X on February 1, 2001, all further headroom and stranded cost accruals ceased to exist, and the rate freeze came to an end.

We disagree. Commission determination of uneconomic costs irreversibly changed upon the cessation of the transition to competition pursuant to AB 6X on January 18, 2001. With that cessation, uneconomic costs within the meaning of AB 1890 no longer exist. (D.02-11-026, mimeo., page 13.)

Moreover, the continuation of Commission regulation beginning January 18, 2001, fundamentally altered the system for cost recovery, along with the risk of non-recovery. That shift did not depend upon AB 1X (although AB 1X provided further guidance and authority for implementation). Rather, AB 6X, was the critical change in the statutory and regulatory landscape for purposes of determining whether or not the AB 1890 rate controls had ended.

In addition, DWR acquisition of electricity did not wait until February 1, 2001. Rather, it began on January 18, 2001, or shortly thereafter, pursuant to the State of Emergency proclaimed by the Governor on January 17, 2001, and the authority granted therein for DWR to begin procurement of electricity.¹⁰

TURN argues that AB 6X may have been necessary in rendering the AB 1890 cost recovery scheme unworkable and moot, but was not sufficient to bring about that result. Rather, TURN contends that absent AB 1X, the utilities would have continued to accrue a negative Competition Transition Charge (CTC) as a result of wholesale power costs in excess of the frozen rate level. TURN says it was AB 1X that relieved utilities of the burden of purchasing wholesale power, and provided for rate increases to recover DWR's costs.

TURN's argument is not compelling. AB 6X was both necessary and sufficient to render meaningless the concept of uneconomic costs, and to continue Commission regulation of utility generation assets. With this changed regulatory structure, utilities would not necessarily have had to continue to collect a negative CTC. Rather, given that AB 6X ended the rate control period on January 18, 2001, rate levels could have been adjusted to prevent a negative CTC. Rate levels were in fact adjusted by surcharges totaling $0.04/kWh. TURN is correct that AB 1X modified the rate recovery scheme, but is incorrect that it took AB 1X to end the rate freeze.

TURN also contends that it is inaccurate to interpret AB 6X as returning Commission rate regulation to generation assets that, in the absence of AB 6X, would have otherwise become unregulated upon market valuation. In support, TURN cites a Commission statement interpreting § 377 before enactment of AB 6X. TURN says:

"In D.00-01-024, the Commission interpreted Section 377 as it existed before AB 6X was enacted as providing for `continuing regulation even after market valuation.' D.00-01-024, fn.1 [emphasis added]. The notion that market valuation would yield deregulated assets appeared to the Commission then to be `overly broad.' Ibid." (TURN Opening Brief dated May 28, 2002 at page 4, quoting from D.00-01-024, footnote 1.)

To the contrary, we had not conclusively determined that regulation generally continued after market valuation. Rather, the Commission statement cited by TURN is a footnote in an order denying rehearing of a decision. (D.00-01-024 denying rehearing of D.99-07-031.) The footnote states: "PG&E maintains that under AB 1890, the generation lands are freed from Commission regulation after market valuation." We responded: "We do not find it necessary to address the merits of this interpretation...D.99-07-031 does not deal with the issues of what happens after market valuation." (D.00-01-024, footnote 1, 2000 Cal. PUC LEXIS 4.) Thus, rather than finding continued regulation, we found we did not need to address the issue.

TURN is correct that the footnote goes on to say:

"Furthermore, we note that PG&E's interpretation of AB 1890 appears to be overly broad. (See Pub. Util. Code § 377, for one example of continuing Commission regulation even after market valuation.)" (Id.)

At that time, however, § 377 contained the following language (which has since been repealed):

"If, after market valuation, the public utility wishes to retain ownership of nonnuclear generation assets in the same corporation as the distribution 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."

This was one example of possible continuing Commission regulation even after market valuation. The statement in the footnote in D.00-01-024, however, does not show that we generally did or did not interpret AB 1890 as conferring continued Commission rate regulation over all utility generation assets after valuation. Rather, the matter was not conclusively decided.

Thus, we are not persuaded by TURN that the rate freeze ended with AB 1X on February 1, 2001.

3.3.4. March 31, 2002

Several parties suggest that the rate control period must have ended on March 31, 2002, the last date allowed by statute. We decline to adopt this date.

To determine that the rate control period did not end before March 31, 2002-and therefore that it ended on March 31, 2002-requires that (a) there were authorized transition costs that remained on March 31, 2002, and (b) we now complete the asset valuation process. For all the reasons stated above, there were no transition costs within the meaning of AB 1890 following enactment of AB 6X, and completion of the valuation process does not make sense, and is not required, after January 18, 2001.