Subject: PG&E's Auction Proposal
From: [email-masked]
To: [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked]
Cc: [email-masked], [email-masked]
Date: Mon, 4 Oct 1999 12:08:00 -0700 (PDT)

Here is a short summary of PG&E's application.  I haven't gone through the 
appendices which contain the agreements that would need to be executed as 
part of a final bid proposal.  There are seven agreements in five volumes.  
The following represents PG&E's proposal, unless otherwise designated.

PG&E filed its application and agreements relative to the sale of its 
hydro-electric facilities.  This represents nearly 4,000 MW of generating 
capacity at a net book value of $1.3 billion (as of 12/31/98).  This proposal 
excludes the 1,000 MW of generating capacity owned by public agencies under 
contract to PG&E.  PG&E will submit testimony and a proponent's environmental 
assessment (PEA) within 30 days.

The auction will be held in two-stages.  The first stage is a Request for 
Qualifications.  The second will be a binding bid process.  PG&E hopes to 
complete selection of a winning bidder within 21 weeks, after Commission 
approval of its plan.  After valuation, the assets will no longer be subject 
to Commission jurisdiction, regulation.  The sale is contingent upon CPUC 
approval of contract terms acceptable to PG&E and approval by FERC of the 
license transfer.  PG&E also proposes that the RMR contracts be transferred 
with the generation assets.  (I would assume ISO/FERC need to approve that as 
well.)  PG&E has also retained exclusive right to reject any bid or all bids 
and to terminate the sale of any facility, at its sole discretion.

PG&E proposes to auction its assets by watershed (of which there are five 
watershed areas) or in bundles within a watershed (of which there are 20).  
This makes 25 possible bid packages.  PG&E also states that it is receptive 
to other packages, including run-of-river.  The winner will be selected based 
on price alone.  PG&E Gen will be able to bid under the same terms and 
conditions as others with the following exceptions:

1.  PG&E Gen's bid will reflect the benefit to consumers of avoided capital 
gains tax.  PG&E's application states that PG&E Gen will then have an 
offsetting increase in income tax as a result of a reduced tax basis.  It is 
not explicit as to how those offsetting affects will be reflected.  This 
treatment would be commensurate with the tax advantage provided to municipal 
bidders, who have the benefit of tax-exempt financing.

2.  PG&E Gen would be exempt from entering into a 2-year O&M agreement with 
PG&E, as the sale to the affiliate will be essentially a spin-off.  PG&E Gen 
would give preferential treatment to existing PG&E employees.  (We are 
looking into the statute language to see if this is a correct interpretation.)

PG&E is also maintaining certain T&D facilities for reliability purposes.  
PG&E will also require an "islanding agreement" where certain generators will 
provide energy to PG&E during transmission outages.  PG&E states that "to the 
extent the islanding agreement conflicts with the mandatory buy-sell 
requirement in the preferred policy decision, PG&E requests the Commission to 
waive that requirement."  (This raises an interesting question:  outside of 
those islanding agreement, does PG&E envision the mandatory buy/sell 
requirement would transfer to the new owners of generation?)

Some of the issues/questions that are not explicit are:

1.  The timing of the credit against CTCs.  I'm assuming it occurs only upon 
close of sale and after requisite regulatory approvals.  This means interim 
valuation will still be important.

2.  The interaction, if any, between a Proponents Environmental Assessment 
and California Environmental Quality Act (CEQA) review?

3.  The consolidation of PG&E's proposal into the Commission's valuation 
proceeding.

4.  The issues relative to market power, environmental, etc. is not 
addressed.  While the auction might indicate a natural mitigation of market 
power if the assets are sold in bundles, if the bid for the system is larger 
than the accumulation of individual bids, this would allow for a total system 
sale.  A quote in CEM from Steve Peace said that if the Commission tries to 
incorporate other issues into the sale, the hydro issue will probably just 
end up back in Sacramento.

Any questions or comments on PG&E's proposal, feel free to contact me.