THE NEW JERSEY DIVISION
OF THE
RATEPAYER ADVOCATE
PRELIMINARY
POSITION PAPER
ON
DIVESTITURE OF
ELECTRIC UTILITY GENERATION ASSETS
FEBRUARY 1998
31 CLINTON STREET, 11TH FLOOR
P.O. BOX 46005
NEWARK, NJ 07101
| TEL. (973) 648-2690 | FAX: (973) 648-2193 |
| EMAIL: njratepayer@rpa.state.nj.us | WEBSITE: http:/www.njin.net/rpa |
INTRODUCTION
GPU Energy (GPU) and Rockland Electric Company (Rockland) have announced their intent to divest non-nuclear generation. It is the view of the Ratepayer Advocate that the New Jersey Board of Public Utilities (Board or BPU) should prescribe procedures and standards for divestiture. Additionally, at some point the question of incentives for divestiture may need to be considered if the market shares of one or more incumbent utilities are so large as to create undue market power, or there are potential problems related to utility-affiliated generators and marketers. This document outlines some key divestiture issues and presents the preliminary positions of the Ratepayer Advocate on those issues.
A threshold question is the extent to which the Board has jurisdiction over divestiture issues. This paper assumes that the Board has the necessary jurisdiction to deal appropriately with the current divestiture proposals, including the authority to establish and enforce standards for voluntary divestiture. In general, however, as the pricing of generation of electricity production is deregulated in New Jersey, it would seem prudent for the legislature to give the Board explicit and clear authority to act in these matters according to detailed and appropriate guidelines. The promise of price deregulation is that there will be effective competition in the deregulated marketplace, and divestiture policy is one of the means by which effective competition can be assured.
GOALS OF A DIVESTITURE POLICY
The central goal of divestiture policy is to ensure that electricity generation is competitive. During the transition period, a secondary goal of divestiture is to determine the market value of utility generation assets for purposes of stranded cost determination. A utility's amount of stranded costs, simply stated, is equal to the book value of the utility's generation assets less their market value.
Other goals of divestiture policy are treated here as a set of standards and other considerations that should be applied when divestiture proposals are being reviewed by the Board. These standards and other considerations are presented here as a checklist of issues that the Board should consider in its review of the divestiture process.
DIVESTITURE TO ENSURE THAT ELECTRICITY GENERATION IS COMPETITIVE.
When price deregulation is ended in the electricity generation market in New Jersey, effective competition will be the primary mechanism to protect consumers from excessive prices. The exercise of market power resulting from concentration in the generation market (or other features of the generation market that create impediments to entry by competitive suppliers) can lead to excessive pricing. This is called horizontal market power. In some circumstances, divestiture of all or part of a supplier's generation assets may be appropriate to ensure effective competition.
During the transition to competition, one or more incumbent utilities may have generation market shares that are too large as measured by tests to determine excessive market concentration. On an ongoing basis the Board needs to have the authority to make periodic determinations regarding the effectiveness of competition in the generation market and the need to take remedial action, if necessary, to avoid the accumulation of market power as it affects the retail electricity market. Incentives favoring divestiture of part or all of a generator's assets are among the means that should be within the authority of the Board.
Undue market power can also come about as a result of the affiliation of a generator with a transmission or distribution utility. This is called vertical market power. The new electricity market structure that is established in New Jersey must have features that prevent the abuse of affiliate relationships between generators and transmission and distribution utilities. One of the means that should be within the authority of the Board to ensure that the affiliate relationship does not favor the affiliated generation against competitive non-affiliated suppliers is to provide incentives for divestiture of a utility's generation assets.
DIVESTITURE TO DETERMINE THE MARKET VALUE OF UTILITY GENERATION ASSETS FOR PURPOSES OF STRANDED COST DETERMINATION
During the transition to competition in the generation market, the determination of the amount of stranded costs and the degree to which the utility should be permitted to recover them from ratepayers is probably the single most controversial issue.
The Ratepayer Advocate addresses stranded costs in detail in another Position Paper. Here, the issue of determining the amount of a utility's stranded costs by means of divestiture is considered briefly. The Ratepayer Advocate notes that the determination of the amount of stranded costs is ultimately based on how the marketplace values the plant and its output. The amount of stranded costs is the excess of book value of generation assets (and of the cost of purchased power commitments) over the market value of such assets (and commitments). Determination of the book value of generation assets is not free of controversy, because it raises issues of cost mitigation. Absent a sale of the plant, an even greater problem is the determination of market value: what will the future market prices of electricity generation be?
There are many uncertainties involved in the forecasting of regional market prices of electricity in the restructuring proceedings that are taking place in New Jersey, Pennsylvania and elsewhere. Prices have to be projected for energy, capacity and ancillary services. Each one of these areas raises problems. The fact is that no one can predict with any degree of certainty how prices will be formed in the new competitive electricity marketplace. That marketplace is totally different from the traditional regulated marketplace. Electric energy prices will be set by processes that are different from traditional economic dispatch. Fuel prices may change in ways that are unpredictable. Environmental protection requirements will change. Capacity prices will depend upon the amount of generation reserves, the rules regarding capability responsibility of suppliers, transmission considerations, etc.
Under these circumstances, the best means of determining the market prices of utility generation assets (and, implicitly, projected market prices of electricity) is a well-designed sale of at least some utility generation assets. In an arm's length sale, the financial incentives of the utility will lead it to obtain the highest possible price for its assets, an outcome which is also in the interests of consumers. This contrasts with the process for the administrative determination of stranded costs, in which the utility has the incentive to minimize its market valuation, thereby maximizing its stranded cost estimate, an outcome which may be adverse to consumers.
Although it is possible to conceive of circumstances in which the market will temporarily under-value generation assets, it seems more likely that a well-designed auction process will bring out favorable bids. Many new entrants to the market will be willing to pay top dollar to establish themselves early on in the regional market. Some may be willing to pay a premium (like a loss-leader situation) for generating plant rather than fail to get into the new market on the ground floor. The difficulty and the time delay involved in obtaining licensing for, arranging transmission access and pricing for, and constructing new generating capacity can be avoided by buying rather than building. Not least, where the utility has little incentive to maximize cost mitigation and the value of its assets in an administrative valuation process, buyers in an auction will be basing their valuations on their own assessment of mitigation and economic opportunities, and their prospective efforts to get the most value out of the assets. Bidders will tend to include some of the smartest and most experienced independent power producers, and it is to be expected that they will base their bids on their own experience of power plant cost mitigation and efficiency, and their plans for marketing the output.
TYPES OF INCENTIVES FOR DIVESTITURE
There are several types of incentives that could be used by the Board to encourage voluntary divestiture by utilities during the restructuring process. One method, used by the California Public Utility Commission, is to increase the utility's allowed rate of return if it divests part or all of its generation assets, or, conversely, reduce its allowed rate of return if it fails to do divest.
The Massachusetts Department of Public Utilities considered making full stranded cost recovery contingent on divestiture.
The New York Public Service Commission has applied pressure to divest in the context of its preferred negotiated approach to restructuring.
CHECKLIST OF STANDARDS AND OTHER ISSUES FOR VOLUNTARY DIVESTITURE
When utilities propose to divest their generation assets, as GPU Energy, Inc. and Rockland Electric Company have, the Board must determine whether the utilities' proposals are acceptable. The Board should establish standards for divestiture at the outset, and review the proposed divestiture against those standards. These standards should cover issues such as insuring generation sector competition; ensuring system reliability; ensuring that divestiture proceeds are applied to defray stranded cost exposure; environmental and conservation considerations; use of benchmark and floor prices; and the need for a regulatory framework to ensure that divested generation assets are operated in a manner consistent with the public interest.
STANDARDS FOR UTILITIES WHO DO NOT PROPOSE DIVESTITURE
The Ratepayer Advocate submits that the standards adopted for voluntary divestiture should serve as a yardstick for restructuring proposals that do not encompass divestiture, keeping in mind the goals of restructuring, e.g. lower rates, customer choice and effective competition. In a competitive world, the performance of competitors must also be evaluated with reference to a benchmark. Proposals to engage in voluntary divestiture and proposals to restructure without divestiture should each be evaluated in their own terms. However, such proposals should serve as competitive yardsticks or benchmarks for one another.
Therefore, as discussed in this paper, proposals to voluntarily divest must be evaluated on their own merits. At the same time, the Board should make use of divestiture proposals in assessing restructuring proposals that do not include divestiture. In this context, utility divestiture proposals help focus on the answer to the following question:"In light of the goals of restructuring, what is the minimum that a utility must do in furtherance of competition in order to gain approval for a restructuring plan that does not include divestiture?"
This section of the paper addresses the question of the minimum a utility that does not propose divestiture must show in order to gain Board approval.
A. The Core Issues and Criteria for Judgment: Unbundling and Stranded Investment.
1. Unbundling
By definition, and if the process works as it should, divestiture should result in the "unbundling" of generation from transmission and distribution. Furthermore, electric utilities cannot use their lawful monopoly over one service (or facility) to exclude competitors in an area of service that is open to competition. This principle is embodied in antitrust law, and is embraced by public utility regulators as an element of the regulatory obligation to further the "public interest" (which includes public laws and policies in favor of competition).
During unbundling, each of the services provided by a utility (at this stage of restructuring transmission, distribution, generation, and societal benefits) is separately priced out. Customers are then permitted to pay the utility only for the services they choose to take. Customers cannot be required by the utility to pay the utility for a service which they choose to take from a competitor.
If utilities were free to require customers to pay for services not taken, the effect would not only be to overcharge customers, but also to eliminate competing generators (who would be hard pressed to sell their generation at a price lower than the utility's combined price for distribution, transmission, and generation). Thus, while the law will enable customers to shop around and permit competing suppliers of generation to use the utility's distribution and transmission facilities, the failure of a utility to unbundle will in itself negate competition.
When a utility divests itself of generation, it does not, by definition have the ability to sell customers generation and, therefore, cannot charge customers for generation. Divestiture, if done properly, therefore, should clearly accomplish unbundling.
2. Stranded Investment
In a world where some utilities are undertaking voluntary divestiture, there is a competitive benchmark by which stranded costs can be measured. Utilities that have proposed to undertake voluntarily (and even 100%) generation divestiture through auctions often state that this method provides protection to consumers because it will help identify and attain the true market price of the generation. In addition, this approach (1) permits a relatively simple and clear-cut regulatory determination of the any sharing of recovery between stockholders and ratepayers; (2) may be viewed as a mitigation effort; and (3) can be benchmarked by the results of other ongoing auctions. (Indeed, the early auctions have brought prices substantially in excess of book value).
In summary, in a competitive world, the divestiture alternative can serve as a benchmark for unbundling and the treatment of stranded costs by a utility which does not seek to divest. The Ratepayer Advocate submits that a utility restructuring proposal that does not include divestiture should, at a minimum:
1. meet the minimal requirements of unbundling;
2. clearly identify the level of stranded investment costs that have been recovered and that remain;
3. identify to what extent and how stranded costs are to be mitigated; and
4. demonstrate how its stranded investment recovery may be adjusted to meet market tests for any stranded cost recovery --e.g., prices obtained in a divestiture auction.
In sum, the Board should exercise its authority to establish standards for utilities that do not propose divestiture, to ensure that the goals of the State's restructuring efforts are met. The Ratepayer Advocate urges the Board to consider these preliminary comments regarding standards for reviewing restructuring proposals which do not propose divestiture.
CONCLUSION
The Ratepayer Advocate notes that it is important to emphasize that divestiture affects fundamental issues being addressed in the pending stranded cost and rate unbundling filings, as well as the Board's ultimate decisions on utilities' overall restructuring plans. It is our position that the essential purpose of restructuring and divestiture is the achievement of competition. It is the Ratepayer Advocate's goal to reduce electric rates for all classes of customers; to expand the choices of services and products for all consumers; and to ensure that New Jersey remains competitive in the regional, national and international markets. We believe that divestiture, if properly implemented and overseen, can bring benefits to New Jersey's ratepayers. Attached as an Appendix to this Preliminary Position Paper on Divestiture are the Initial Comments of the Ratepayer Advocate on GPU's Divestiture Plan Report (dated December 24, 1997), and Rockland Electric Company's Proposed Divestiture Plan (dated December 11, 1997), filed on January 22, 1998, which sets forth in greater detail the Ratepayer Advocate's positions on Divestiture. Also attached are the comments filed by the Ratepayer Advocate at the BPU on February 17, 1998 on auction standards and criteria for electric utility divestiture related sales.
INITIAL COMMENTS OF THE DIVISION OF THE RATEPAYER ADVOCATE ON ROCKLAND ELECTRIC COMPANY'S PRELIMINARY DIVESTITURE PLAN
JANUARY 22, 1998
INTRODUCTION
The Division of the Ratepayer Advocate (Ratepayer Advocate) submits these initial comments on Rockland Electric
Company's (RECO or Company) preliminary divestiture plan (plan) dated December 11, 1997.1 These comments are filed
in conjunction with the procedures agreed to at the status conference conducted on January 13, 1998 at the Board of Public
Utilities (Board or BPU) offices. The first section of our comments presents principles that the Board should apply to any
utility's voluntary divestiture proposal. The second section focuses specifically on RECO's plan. Finally, we attach an
Appendix that provides supporting detail and analysis for the points and questions raised, including further detail on the
divestiture process as it is being experienced in other states.
Section 1.
Summary
When placed in the context of the BPU's goals for restructuring and the procedures and tools available to meet them, the
GPU and RECO proposals are deficient in several crucial areas.
First, the proposals provide no formal role for the BPU, Ratepayer Advocate, or other parties to the restructuring cases in
the shaping of the divestiture process. In the case of GPU, the failure to provide for a formal BPU role until the winning
bidders are chosen may leave the BPU in a position where it will not only be asked to judge a fait accompli, but may also
lack the data and benchmarks needed to do so. In the case of RECO, which takes the position that the BPU is not entitled to
any formal approval role, the proposal calls into question the BPU's ability to question possible shortcomings in the process
when, at some later date, it is asked to judge its fruits (for example, in the context of RECO's stranded costs case).
Hopefully, the review procedure that the Board has now determined to undertake, in conjunction with the Board's ultimate
review of the stranded cost and restructuring dockets, will give all stakeholders, and the Board, sufficient input into the
structure of the divestiture processes.
Second, the proposals do not show how non-price goals will be considered in the divestiture process. These goals include
reliability, but also, as the BPU has recognized, environmental protection, and the continuation of social and demand-side
management programs are both relevant and important.
Thirdly, the proposals do not take into account the post-divestiture framework needed to assure that the divested entities act
will remain accountable to acknowledged public purposes. The GPU and RECO proposals may not be faulted for limiting
their plans to the immediate divestiture setting. However, in other states where divestiture is proceeding this vacuum has been
filled in tandem with the divestiture process.
Fourth, the divestiture proposals do not clearly earmark any surplus proceeds to mitigate recoverable stranded costs. It is
important that this objective of divestiture be explicit from the outset.
I. The GPU and RECO Proposals: A Brief Summary and Comparison
GPU and RECO both propose to auction off all of their non-nuclear generating assets.2 They both emphasize that speed is
the essence, evidently on the view that the best prices for their assets will be those obtainable in the immediate future. GPU
proposes no formal role for the BPU until the end of the process, when the Board is to approve the sale. GPU states that,
prior to that time, it will engage in consultation with the BPU and interested parties. RECO, taking the position that the Board
has no jurisdiction over divestiture at all, provides for no formal role for the Board (but offers to keep the Board and
interested parties informed, and to consult with them).3
The planning documents before the Board provide some detail on the nature of the assets. They also indicate that market
power will be considered in the auction process, and that stakeholders will be consulted. Neither, however, provides detail
on the auction method, the specific criteria to be employed in evaluating bids, how market power issues will be resolved, the
method by which reliability and other non-price goals are to be addressed, and the means of operation in the post-divestiture
world.
The RECO Plan is devoid of many essential details. RECO proposes that it will fill in the details through revision of the
Preliminary Plan and review of the plan by the New York Public Service Commission. GPU proposes that it will fill in the
details by itself, with the BPU to review the results of its chosen process.
II. The Context Needed to Gauge the Proposals
To gain a perspective on the GPU and RECO proposals, they must be placed in context. First, "What are the goals of
divestiture within the context of utility industry structuring?" and second, "What processes does recent experience show to be
available to meet these goals?"
A. Divestiture Goals
The maximization of the sales price is a central and obvious goal of divestiture, but it is not the only goal.
First, as the BPU has recognized, the aim of divestiture is not simply to get the highest immediate price for assets, but the
highest price consistent with other goals, such as the assurance of future reliability, competitive markets, environmental
quality, and social and demand-side-management (DSM) programs.
Moreover, divestiture is an important means, but not the end. Following divestiture, GPU and RECO hope to be out of the
generation business. However, the BPU must remain concerned about whether the generators taking their place will operate
reliably and fairly, and will continue environmental, social, and DSM programs.
Means are available to assure that competition does become the reality, and that the ends of reliability and further relevant
goals are not sacrificed or lost. The tools available include the conditioning of divestiture approval, BPU rules to deal with
post-divestiture circumstances, reliance on the market, reliance on quasi-public means such as ISOs and power pools or
exchanges.
B. Procedural and Regulatory Alternatives
GPU and RECO proposals can be compared to the rules and procedures at work in California and Massachusetts, two
states that are among those who have taken the lead in divestiture activities. The rules and laws in effect in these states show
how New Jersey might: 1) provide for proactive BPU and Ratepayer Advocate involvement in the divestiture process; 2)
assure adequate consideration of reliability and other non-price goals; and 3) establish the framework for post-divestiture
accountability in tandem with the divestiture process.
In regard to the immediate goal of assuring that divestiture obtains the best price without sacrificing reliability, the proposals
here may be compared to the procedures in California.
Where GPU seeks approval only after the sale is consummated, and RECO sought to avoid any BPU review, California
employs a multi-step process. There, the steps are l) Commission review and approval of the proposed sale method (e.g.,
auction as proposed here); 2) Commission review of reliability issues; 3) final review of proposed sale. Thus, in contrast to
that which GPU proposes, the California Commission plays an active role at each step, and the steps have formality. The
virtues of the California method include:
1. It assures that the sale method incorporates principles that the Commission will deem essential in the final review;
2. It assures that reliability -- the most critical non-price factor -- is independently and adequately provided for;
3. It provides a standard for final review--- adherence to pre-approved procedures. The final review can focus on fidelity to a pre-approved process. There is less need to test the sale by independent valuation, or by a prudence review of the auction process.
4. As a corollary to "3", all concerned -- including bidders -- have reasonable notice of the terms on which regulatory approval (or not) will be made.
In both California and Massachusetts there are established frameworks for the post-divestiture world. The California
legislation provides that the State of California will establish and oversee the mechanisms needed to assure reliability and
efficiency. The Massachusetts law provides a relatively substantial framework for post-divestiture monitoring and, where
need be, regulation of competitive conduct and non-price goals. Thus, the law creates and defines an entity called a
"generating company." It then further 1) provides for the licensing of generating companies, 2) limits the ability of generating
companies to discontinue service where there is a billing dispute; 3) requires generating companies to disclose price and
environmental information to consumers; and 4) provides a complaint process that encompasses claims of anticompetitive
behavior.
III. Further Issues to be Addressed
Within the setting just discussed, the proposals raise further specific issues. The issue common to both proposals are briefly
identified now. Section II. contains a detailed discussion of these issues with respect to RECO's preliminary plan. The
common issues include:
Balancing the need for thorough consideration of the proposals with the need for expedition, the formal role of the Board, and the potential consequences of regulatory reactiveness;
The need for an advance standard for final judgment on the sufficiency of the sales price;
The need to assure the timely availability of information needed to judge the results;
The need to assure that post-divestiture reliability is provided for;
The need to establish criteria for the protection of New Jersey's other non-price goals, including social programs, environmental policies, and energy conservation;
The need to assure that bidders will be financially and technically qualified to own the generation units;
The need to carefully review the allocation of environmental responsibilities between buyer and seller;
The need for advance consideration of the timing, procedures, and criteria to assure consideration of market power;
The need for criteria and timing of the evaluation of stranded investment cost levels and mitigation efforts;
The need for timely definition of legitimate divestiture related costs;
The need to establish benchmark and reserve prices;
The need for timely definition of the criteria for allocation of the proceeds of the sale;
The need to consider the treatment of NUG contracts and whether they should also be subject to an auction process;
The need to assure appropriate protections for the incumbent workforce in the transition period;
The need to assure post-divestiture competitive fairness;
The need to consider the divestiture of ancillary assets;
The need to provide for dispute resolution;
The need to provide timely criteria and rules for the post-divestiture world.
SECTION II.
I. The Rockland Preliminary Divestiture Plan
The preliminary plan was initially filed in a docket before the New York Public Service Commission and subsequently
submitted to the BPU on behalf of RECO. It provides:
(1) that O&R will auction all of its generating assets;
(2) that neither O&R nor any of its affiliates will submit a bid in the auction;
(3) that the preliminary plan will be subject to public comment, following which a Final Plan will be prepared for March 18, 1998 NYPSC approval;
(4) O&R's six objectives for the divestiture;
(5) that time is of the essence if stakeholders are to reap maximum benefit of divestiture;
(6) milestone target dates;
(7) a description of the assets to be sold; and
(8) a brief, bare-bones description of a two-phase auction process.
The Plan does not describe the procedures for final review of the process (referring only to "necessary regulatory
approvals"). Consistent with O&R's position that BPU approval is not required, the Plan does not contemplate any
approvals in New Jersey. However, RECO acknowledges that the BPU does have jurisdiction over RECO's claims for
stranded costs, and, by implication, the quality of the divestiture process by which they were arrived at.4
II. How Does the RECO Process Comport with What is Needed?
The RECO Preliminary Plan does not address many critical issues. Thus, many questions need be addressed in advance of
any Board acceptance of a Final Plan. At the forefront, the RECO proposal calls for examination of the implications of
RECO's determination to avoid formal BPU review.
The issues include:
1. The need for a formal role for the Board, and the consequences of regulatory reactiveness.
As noted, RECO takes the position that the Board's approval is not required for divestiture. Meanwhile it effectively concedes that Board approval of the consequences of divestiture will be needed. In this context, the Board should consider the potential consequences of limited involvement at this stage. If the BPU's formal role is to be nonexistent or limited, two distinct questions are raised.
First, to what extent can New Jersey assume that it will be protected by New York regulators? Can it be assumed that the choices made by New York regulators are identical to those that would be made in New Jersey, or are there areas where the states might differ (e.g., the weighting and measurement of the non-price goals of divestiture, such as environmental protection, and the provision for the post-divestiture world, as discussed below?
Second, if the Board does not assert a formal role in the divestiture, will
RECO argue in future cases (e.g., where RECO seeks approval for stranded investment claims or to provide retail service) that New Jersey is estopped from challenging the divestiture process, its results, and perhaps other matters that were arguably related to the divestiture process? Will RECO agree that it will not claim unfairness if the BPU undertakes, as might be necessary and appropriate, a retrospective review of the divestiture process?
2. The need for speedy process, and the best way to get it. Along with GPU, RECO argues that speed is of the essence. This premise may be correct, but what is its basis? To the extent that the rules of the game are not better defined at the outset will, for reasons discussed below, both RECO and its New Jersey customers be worse off later?
3. The need for an advance standard for final judgment on the sufficiency of the sales price. What will be the criteria for judging the results of the auction? If the New Jersey Board does not pre-approve the auction process, what will be the benchmark for determining whether value has been maximized, and whether stranded investment requests should be honored?
4. The need to assure the timely availability of information needed to judge the results. What assurance is there that when the time comes for final review, the Board (and interested parties) have data and analysis needed to judge the results?
5. The need to assure that post-divestiture reliability is provided for. How and when will reliability be considered in RECO's proposed process? Who will define the criteria for satisfying reliability concerns? Will bidders be pre-qualified in regard to their ability to meet reliability needs? If so, by what standards? In this regard we note that California requires the early identification of must-run units so that they can be accounted for in advance.
6. The need to establish criteria for the protection of New Jersey's other non-price goals, including social programs, environmental policies, and energy conservation. RECO states (Preliminary Plan at 3) that its objective is to "[m]aximize the value received for the Generating Assets." However, in addition to reliability, the Board recognizes further non-price goals. Moreover, as in the case of the environment, the measure of these goals for New Jersey may not be identical to the measures employed by other states served by the O&R group. The RECO Preliminary Plan, at 3, alludes to a willingness to "recognize" the "concerns" possessed by "stakeholders". But it does not address the "concerns" embodied in state law, and BPU decisions and policy. As identified by the BPU (in its April 30, 1997 report), these include environmental quality, social programs (e.g., weatherization, low income assistance) and DSM. What provision will be made in the auction process for other non-price factors that the BPU (and New Jersey) have deemed essential goals of restructuring?
7. The need to assure that bidders will be financially and technically qualified to own the generation units. The bidding process must provide for independent determination that bidders have the financial stability and the technical experience needed to serve as successful owners of generation. In addition, the need for continued availability of selling utility expertise in the post-sale transitional period. In California there has been provision for a transitional role for the selling utility in the provision of operations and maintenance services needed to assure transitional reliability.
8. The need to carefully review the allocation of environmental responsibilities between buyer and seller. Above and beyond assuring that bidders should be on notice that they will be subject to the same environmental protection rules and policies that the utility has been subject to with regard to the divested assets, the Board must have the information and timely opportunity to review the proposed allocation of environmental responsibilities between buyer and seller.
9. The Need for Advance Consideration of the Timing, Procedures and Criteria to assure consideration of market power. The question of the effect of the sale on market power is central to the divestiture process. At the forefront, divestiture inherently involves a choice as to whether assets should be sold in bundled or unbundled form. RECO has proposed to auction all its generating units as a single package. However, no rationale is provided for this proposal. Nor is their any detailed discussion of how the Board can be assured that the single-package auction will not result in undue market power by the purchaser. There needs to be explicit provisions by which the BPU , Ratepayer Advocate, and other interested parties will be provided the data and rationale for the this proposed auction format. In addition, while the proposal indicates that a market power screening process will be employed by the utility, it will be necessary to provide opportunity for independent review of the process, and the need for further data and analyses.
10. The need for criteria and timing of the evaluation of stranded investment cost levels and mitigation efforts. The treatment of stranded costs is another central question that must be addressed in a timely fashion. There must be opportunity to review the extent to which the divestiture process constitutes the required maximum effort to mitigate stranded costs.
11. The need to establish benchmark and reserve prices. RECO anticipates that the auction process will, ipso facto, be the best determinant of market value. In doing so, its asserts that a speedy auction is in order, indicating that the market price may well be subject to volatility. In light of this, and other, factors it is necessary to consider whether the Board should establish a benchmark price, and a reserve price which, if not met, would preclude the sale.
12. The need for timely definition of legitimate divestiture related costs. The allocation of sales proceeds between the utility and the ratepayer involves some issues which should not await post-sale review. As the utility undertakes divestiture related expenditures the utility and ratepayers need to know which kinds of expenditures will be recoverable by the utility. In its Revised Stranded Cost Petition, RECO proposed that the proceeds of the divestiture be measured net of all divestiture-related costs. However, there is no mention of this issue in the Preliminary Plan. Moreover, RECO has not, either in its Preliminary Plan or Revised Stranded Costs Petition, provided any estimate of the consulting, legal and financing costs that it expects to incur in the divestiture process. Nor did the Company provide copies of any contracts with third parties for related outside services. Furthermore, we anticipate that many of these costs will not be known until after the divestiture process is complete.
With regard to employee costs, the Company has not indicated why any such employee costs would be necessary. Such costs may not be necessary if the purchaser of the units retains all current operating employees, either permanently or as a transitional means of ensuring continued reliable operation of the facilities. The Company has not provided any employee restructuring plan or other documentation to suggest that it will incur employee transition costs, or what level of such costs it can expect. Therefore, at this time, RECO has not justified recovery of any employee related costs.
13. The need for timely definition of the criteria for allocation of the proceeds of the sale. For example, to the extent that the sales price exceeds book cost, 100% of any net gain might be used to offset legitimate NUG-related stranded investment costs. In addition, there should be provision for allocation where the price falls significantly above or below that anticipated. For example, the utility asserts that expedition will increase the sale price; if the Board truncates or foregoes procedures towards this end, how will the increase in sales price be measured and allocated? For example, if the plants are sold at less than book value, there should be provision for assuring that ratepayers are no worse off than if divestiture had not taken place.
In addition, the Company's filing states that the allocation of sale proceeds among the various jurisdictions will be determined by FERC. While RECO has indicated in informal discussions that they plan to request that the allocations are performed in a manner consistent with the allocation of costs under the Power Supply Agreement, that is not specifically addressed in either the Revision Stranded Cost Petition or the divestiture plan.
The New Jersey Board, and not the FERC, should be responsible for determining the appropriate share of gains or losses to be allocated to New Jersey retail ratepayers. The gains or losses allocated to the New Jersey jurisdiction should be based on the same allocations as those used for the underlying plant. Therefore, we recommend that the Board condition any approval of the Company's divestiture plan and Revised Stranded Cost Filing on its review and approval of the specific allocation of gains or loses to New Jersey ratepayers. In addition, the Board should have the ability to review any claims for recovery of costs related to the sale and to recommend adjustments to that amount if warranted.
We note that these issues may be addressed in RECO's stranded cost case, currently pending at the Office of Administrative Law. Nonetheless, this crucial issue must be addressed before the proposed auction occurs.
14. The need to consider the treatment of NUG contracts. The utility proposal does not contemplate the sale of NUG contracts. There should be consideration of the potential value of such sale. In addition, there should be consideration of the potential that some amount of the sale price might be allocated to the buy-down of NUG contracts.
15. The need to assure appropriate protections for the incumbent workforce in the transition process. The divestiture proposal should be accompanied by a reasonable transition plan for the incumbent workforce. We note that California and Massachusetts have provided specific means to this end.
16. The need to assure post-divestiture Competitive Fairness. RECO proposes to divest itself of its generation assets. There is need to consider whether it retains assets that will be "barriers to entry" to competition. For example, ratepayer dollars and monopoly status have given utilities varying degrees of name recognition and brand loyalty -- "good will assets." The BPU, consumers, and potential competitors may reasonably question the value of these assets, and their availability to all competitors.
17. The need to consider divestiture of ancillary assets. Since RECO proposes to divest itself of all of its generation, the BPU need not consider the level of divestiture that is in order. However, there may be questions about divestiture of ancillary assets, particularly to the extent that RECO may not succeed in the goal of full divestiture. It is unclear whether the RECO proposal includes the sale of all fuel supply/handling facilities and other ancillary facilities which may be integral to the operation of the generating units.
18. The need to provide for dispute resolution. Assuming RECO's proposal is followed, there will be some opportunity to discuss the divestiture process and "stakeholder concerns." What happens when and if there is not unanimity about the resolution of these matters? What if RECO's New Jersey customers and regulators have reason to question, for example, the terms of the auction method employed by RECO (even where, for example, the method might suit the distinct needs of New York)? Does RECO pursue its own way, with any dispute to be preserved for a later proceeding -- such as that involving stranded investment claims?
19. The need to provide timely criteria and rules for the Post-Divestiture World. RECO's primary interest lies in divesting itself of its assets. That is, RECO is less interested in the consequences of the sale itself. The BPU and ratepayers, however, must live in the post-divestiture world with the new owners. Thus, the BPU must determine not only whether the sales price is adequate, but whether the transaction lays the groundwork for a world in which new purchasers will 1) provide safe, reliable, and efficient service; 2) provide service in keeping with the State's environmental, social program, and DSM goals. As discussed in more detail in the Appendix, the BPU has tools available to assure that the new owners perform as the public interest requires. These tools, many of which are embodied in the Massachusetts and California restructuring legislation, include:
* conditioning any sale on the undertaking of obligations by the winning bidders;
* defining a new category of regulated entity that will be created by divestiture, and subjecting it to appropriate regulation (for example, that its portfolio must have certain environmental qualities);
* providing that new rules (e.g., environmental portfolios) will not focus on generation owners per se, but apply to any entity (whether a generation owner, broker, or distribution entity) that sells directly to an end user;
* creating regulatory oversight/complaint processes to meet the new industry structure.
* some combination of the above.
CONCLUSIONS
The Ratepayer Advocate has submitted these comments in response to the Board's decision to review RECO's proposed divestiture plan on an expedited basis. However, it is important to emphasize that the divestiture impacts many fundamental issues that are being litigated in RECO's pending stranded costs and rate unbundling cases, as well as the Board's ultimate decision on the Company's overall restructuring plan. While it is our understanding that the Board may issue an Order in March 1998 addressing certain aspects of the divestiture, final resolution of issues implicated by the divestiture cannot be accomplished until after the sale is completed and the RECO stranded cost, rate unbundling, and restructuring cases are conclusively resolved.
Accordingly, the Ratepayer Advocate will continue to raise issues related to divestiture in those proceedings as well as in this expedited comment proceeding. In addition, it is our position that, under N.J.S.A. 48:3-7, RECO is required to obtain Board approval prior to O&R's sale of the generating assets. Therefore, we reserve our right to participate in any subsequent filing for such approval. Finally, it is our understanding that legislation may soon be introduced in the New Jersey Legislature that substantially revises Title 48 of the Revised Statutes. Such legislation, if enacted, could impact the proposed divestiture.
In sum, we request that the Board, in its review of the RECO preliminary divestiture plan, direct the Company to incorporate the suggested additional provisions and elements set forth herein, in the "Final" divestiture plan. The Board should also direct RECO to file the "Final" plan with the Board for approval. Parties to these proceedings should be afforded the opportunity to file comments on the "Final" plan prior to the Board's anticipated consideration at a March 1998 agenda meeting.
Very truly yours,
_________________________________________________
BLOSSOM A. PERETZ, ESQ., RATEPAYER ADVOCATE
N.J. DIVISION OF THE RATEPAYER ADVOCATE
INITIAL COMMENTS OF THE DIVISION OF THE RATEPAYER ADVOCATE ON GPU ENERGY'S DIVESTITURE PLAN REPORT
JANUARY 22, 1998
INTRODUCTION
The Division of Ratepayer Advocate (Ratepayer Advocate) submits these initial comments on GPU Energy's (GPU) Divestiture Plan Report, dated December 24, 1998. We attach an Appendix that provides supporting detail and analysis for the points and questions raised here, including further detail on the divestiture process as it is occurring elsewhere.
Background and Summary
The December 24, 1997 "GPU Divestiture Plan Report" l) provides for a multistage competitive bid process; 2) places GPU itself in charge of divestiture procedures and terms, leaving itself broad discretion to craft and modify the scope of the auction and the terms of sale based on input from interested bidders; and 3) provides for review by the Board only at the end of the process. GPU states that it will proceed in consultation with interested parties and government agencies, but there is no suggestion that any formal process will be employed, nor that GPU will make any commitments (save as may be practically required) to listen to comments and incorporate them in the process. GPU indicates that the process is similar to that employed in Massachusetts.
GPU identifies attractive features of the process it proposes. These include:
1. The process will be quick, thereby, says GPU, permitting GPU and ratepayers to reap the benefit of being early to market.
2. The process will include all GPU generation assets, will consider how best to bundle these assets to maximize value, and will seek to screen for market power concerns. Thus, GPU proposes to maximize value consistent with the requirement that the sale not create undue market power.
3. GPU promises an open process.
Despite these positive features, GPU's divestiture proposal is deficient in several crucial respects.
First, the proposal provides no formal role for the BPU or Ratepayer Advocate or any othr party in the shaping of the divestiture process until after winning bidders have been chosen. This may leave the BPU is a position where it is being asked to judge a fait accompli, with no real opportunity to correct harm already done. This is particularly the case, since GPU's initial filing is very sketchy, and leaves itself almost unlimited flexibility to modify the sale package(s) and the terms of sale based on input from interested bidders. Additionally, under the plan, the BPU will lack data and benchmarks needed to judge the adequacy of the sale. The Ratepayer Advocate's primary recommendation at this time is to create a procedural mechanism for timely review of GPU's divestiture at meaningful milestones within the process.
Second, the proposal does not show how non-price goals will be considered in the divestiture process. These goals include reliability, market competition, environmental protection, and the continuation of social and demand-side management programs are both relevant and important.
Thirdly, the proposal does not provide a post-divestiture framework needed to assure that the divested assets are operated in a manner accountable to acknowledged public purposes. In other states where divestiture is proceeding, this vacuum has been filled in tandem with the divestiture process.
Fourthly, the divestiture proposal does not clearly earmark any surplus proceeds to mitigation of recoverable stranded costs. It is important that this objective of divestiture be explicit from the outset.
I. The Context for Evaluating GPU's Divestiture Proposal
A. Divestiture Objectives and Hazards
The maximization of the sales price is a central and obvious goal of divestiture, but there are other important goals, such as the assurance of future reliability, competitive markets, environmental quality, and social and demand-side-management (DSM) programs.
Moreover, many of the potential problems posed by divestiture of these assets will manifest themselves only after divestiture has been finalized. Following divestiture, GPU hopes to be out of the generation business. The BPU, however, must be able to ensure that the generators taking their place do not exercise market power, operate reliably and fairly, and will continue environmental, social, and DSM programs, and will need appropriate powers and standards to do so.
A tentative list of unanswered substantive concerns raised by GPU's divestiture proposal is enumerated below. It may be premature to seek to resolve all these concerns dispositively at this time. It is, however, imperative that procedural safeguards be established to preserve the opportunity for the BPU and Ratepayer Advocate to address these concerns at crucial milestones.
B Procedural and Regulatory Framework for Divestiture
The BPU should consider subjecting GPU's divestiture proposal to rules and procedures similar to those at work in California, which has taken the lead in successful divestiture activities. Under rules along these lines, New Jersey can 1) provide for proactive BPU Ratepayer Advocate and other insured parties involvement in the divestiture process; 2) assure adequate consideration of reliability and other non-price goals; and 3) establish the framework for post-divestiture accountability in tandem with the divestiture process.
While GPU would obtain approval only after the sale is consummated, California employs a multi-step process. There, the steps are l) Commission review and approval of the proposed sale method (e.g., auction as proposed here); 2) Commission review of reliability issues; 3) final review of proposed sale. Thus, in contrast to that which GPU proposes, the California Commission plays an active role at each step, and the steps have formality. The virtues of the California method include:
1. It assures that the sale method incorporates principles that the Commission will deem essential in the final review;
2. It assures that reliability -- the most critical non-price factor -- is independently and adequately provided for;
3. It provides a standard for final review--- adherence to pre-approved procedures. The final review can focus on fidelity to a pre-approved process. There is less need to test the sale by independent valuation, or by a prudence review of the auction process.
4. As a corollary to "3", all concerned -- including bidders -- have reasonable notice of the terms on which regulatory approval (or not) will be made.
Moreover, in both California and Massachusetts, there are established regulatory frameworks governing the operation of generation facilities in the post-divestiture world. The California legislation provides that the State of California will establish and oversee the mechanisms needed to assure reliability and efficiency. The Massachusetts law provides a relatively substantial framework for post-divestiture monitoring and, where need be, regulation of competitive conduct and non-price goals. Thus, the law creates and defines an entity called a "generating company." It then further 1) provides for the licensing of generating companies, 2) limits the ability of generating companies to discontinue service where there is a billing dispute; 3) requires generating companies to disclose price and environmental information to consumers; and 4) provides a complaint process that encompasses claims of anticompetitive behavior.
II. Creating a Procedural Mechanism for Timely Review of
GPU's Divestiture Plan at Crucial Milestones
Because GPU has not filed a concrete divestiture plan, one way to address some of the deficiencies in GPU's filing would be to order GPU to resubmit a divestiture plan addressing the full range of concerns enumerated below, one that would, for example, prescribe the particular "bundle" or "bundles" of assets to be sold, set a floor price, and disclose eligibility criteria and terms of sale. We recognize, however, that this rigidity might be counter-productive, and could, perhaps, delay the proposed divestiture. Accordingly, we propose that the BPU make provision for interim review of GPU's divestiture process at the following milestones:
A. Before GPU issues its Preliminary Commercial Terms of Sale (Proposal 3-2);
B. Before GPU issues its Offering Memorandum and Sales Documentation (Proposal 3-2);
C. Before GPU issues its Bidding Instruction and P&S Agreement (Proposal 3-2).
Appropriate provision can be made to preserve confidentiality, and to expedite review to prevent unnecessary delay.
III. Preliminary Identification and Discussion of Issues Raised by
GPU's Initial Divestiture Proposal
Basic issues raised by GPU's preliminary divestiture proposal which need be addressed in a timely fashion include:
6. The need to assure that bidders will be financially and technically qualified to own the generation units. The bidding process must provide for independent determination that bidders have the financial stability and the technical experience needed to serve as successful owners of generation. In addition, the need for continued availability of selling utility expertise in the post-sale transitional period. In California there has been provision for a transitional role for the selling utility in the provision of operations and maintenance services needed to assure transitional reliability.
15. The need to assure post-divestiture competitive fairness. While GPU proposes to divest itself of its generation assets, there is need to consider whether, in doing so, it retains assets that will be "barriers to entry" to competition. For example, ratepayer dollars and monopoly status have given utilities varying degrees of name recognition and brand loyalty -- "good will assets." The BPU, consumers, and potential competitors may reasonably question the value of these assets, and their availability to all competitors.
16. The need to address divestiture of ancillary assets. Since GPU proposes to divest itself of all of its generation, the BPU need not consider the level of divestiture that is in order. However, there may be questions about divestiture of ancillary assets, particularly to the extent that GPU may not succeed in the goal of full divestiture. Does the GPU proposal include, for example, fuel supply/handling facilities-the operation of which may be integral to the operation of the generating units?
17. The need to provide for dispute resolution. Assuming GPU's proposal is followed, there will likely be opportunity to discuss the way in which the auction process should consider, e.g., environmental quality, DSM, social programs, competitive fairness and further issues that may come up. What happens when and if there is not unanimity about the resolution of these matters? Does GPU pursue its own way, with any dispute to be preserved for the final review process? Is this the best way towards the end of efficiency which GPU deems essential?
18. The need to provide timely criteria and rules for the Post-Divestiture World. GPU's primary interest lies in divesting itself of its assets. That is, GPU is less interested in the consequences of the sale itself. The BPU and ratepayers, however, must live in the post-divestiture world with the new owners. Thus, the BPU must determine not only whether the sales price is adequate, but whether the transaction lays the groundwork for a world in which new purchasers will 1) provide safe, reliable, and efficient service; 2) provide service in keeping with the State's environmental, social program, and DSM goals. As discussed in the Appendix in more detail, the BPU has tools available to assure that the new owners perform as the public interest requires. These tools include:
* conditioning any sale on the undertaking of obligations by the winning bidders;
* defining a new category of regulated entity that will be created by divestiture, and subjecting it to appropriate regulation (for example, that its portfolio must have certain environmental qualities);
* providing that new rules (e.g., environmental portfolios) will not focus on generation owners per se, but apply to any entity (whether a generation owner, broker, or distribution entity) that sells directly to an end user;
* creating regulatory oversight/complaint processes to meet the new industry structure.
* some combination of the above.
As discussed in the Appendix, these tools are being put to use in other jurisdictions. For present purposes, however, the question is not the particular options to be selected, but whether a divestiture process that proceeds in the absence of a focus on the means of post-divestiture regulation will result in a world where l) bidders will not be on notice of the world which they are bidding to enter into; 2) the results of the auction may not produce the best new owners; 3) as a practical and legal matter there may be difficulties in proceeding with the most desirable options at a later date.
19. The need to consider the potential implications of Regulatory Reactiveness. If the BPU's formal role is left to the end, will it be difficult as a practical matter to undo whatever GPU has done, even if the public interest would otherwise require an alteration of GPU's result? Similarly, if the BPU does not set criteria for judgment in advance, will GPU agree that it will not claim unfairness if they are set at the end stage of the process? At the least a decision to abide by GPU's proposal must be accompanied by assurance that GPU (and bidders) will not object to full and fair BPU review at the end of the day.
Finally, there are some additional specific issues that are not addressed in the Preliminary Plan. We note that in the Board's December 4, 1997 Order in this matter, it directed to file information in conformance with the Ratepayer Advocate's October 20, 1997 Motion to Suspend Schedules, et al., with reference to its divestiture plan. These items include: the eligibility criteria for bidding; the criteria to be used to determine the viability of bids received; whether a minimum bid will be required; whether a minimum number of bids will be required; the non-price factors that will impact the Company's selection of the winning bidder; and the other approvals that it believes are required to consummate the divestiture. Should update its preliminary plan to include all information required pursuant to the Board's Order prior to its divestiture plan being approved.
CONCLUSION
The Ratepayer Advocate has submitted these comments in response to the Board's decision to review GPU's proposed divestiture plan on an expedited basis. However, it is important to emphasize that the divestiture impacts many fundamental issues that are being litigated in GPU's pending stranded costs and rate unbundling cases, as well as the Board's ultimate decision on the Company's overall restructuring plan. While it is our understanding that the Board may issue an Order in March 1998 addressing certain aspects of the divestiture, final resolution of issues implicated by the divestiture cannot be accomplished until after the sale is completed and the GPU's stranded cost, rate unbundling, and restructuring cases are conclusively resolved.
Accordingly, the Ratepayer Advocate will continue to raise issues related to divestiture in those proceedings as well as in this expedited comment proceeding. In addition, it is our position that, under N.J.S.A. 48:3-7, GPU is required to obtain Board approval prior to GPU's sale of the generating assets. Therefore, we reserve our right to participate in any subsequent filing for such approval. Finally, it is our understanding that legislation may soon be introduced
in the New Jersey Legislature that substantially revises Title 48 of the Revised Statutes. Such legislation, if enacted, could impact the proposed divestiture.
Very truly yours,
_________________________________________________
BLOSSOM A. PERETZ, ESQ., RATEPAYER ADVOCATE
N.J. DIVISION OF THE RATEPAYER ADVOCATE
APPENDIX
Introduction and Summary
With the announcement by GPU and RECO of their intent to divest non-nuclear generation, the Board will have to prescribe procedures and criteria for divestiture. In this document we attempt to describe the divestiture issues, process and alternatives. There is limited experience in divestiture in the electric industry. Our research is based primarily on review of the efforts in California, Massachusetts, New York and New Hampshire. The memorandum therefore is a first step toward a guide for internal decision making.
The bulk of this memorandum assumes that the divestiture is voluntary. Mandatory divestiture would raise distinct issues, as briefly treated in the appendix.
This memorandum is organized as follows. The first part discusses policy goals to be served by the divestiture process. The second part outlines factors which should be considered when reviewing a divestiture proposal and which a utility might be required to address in its divestiture plan. Finally, we conclude with a checklist summary of the novel questions posed by the divestiture process that will require upfront thought and strategic decisions.
In our review, several points stand out:
1. Price is important, but not the only issue: The aim of divestiture is not simply to get the highest immediate price for assets, but the highest price consistent with other goals, such as the assurance of future reliability, competitive markets, environmental quality, and social and DSM programs.
2. Divestiture is an important means, but not the end: the BPU's task must be seen in the context of the post-divestiture world; what actions in the divestiture context will ensure that these goals are met? Here, several kinds of tools are available; these include the conditioning of divestiture approval on adherence to these goals, the creation of BPU rules to deal with post-divestiture circumstances, reliance on the market (with whatever appeal to the courts that may lie under, for example, antitrust laws), and reliance on further quasi-public mechanisms such as ISOs and pools.
3. A multi step process may be needed:
a) A step to identify the criteria for an adequate sale process that, if followed, would likely lead to an acceptable result;
b) A step to consider non-price goals-particularly reliability;
c) A step for final approval of the resulting deal.
I. What Should be the Goals of a Divestiture Policy?
A. Ameliorate certain features of the status quo so as to maximize the benefits from a competitive market in utility services.
The essential purpose of restructuring and divestiture is the achievement of competition for "three primary reasons: 1) to reduce electric rates for all ratepayers; 2) to expand the choices of services and products for all consumers; 3) to ensure that New Jersey remains competitive in the regional, national and international markets. It is the State's goal to tap into the burgeoning competitive energy marker in the most effective and environmentally protective way possible to reduce generation and production costs." BPU April 30, 1997 Restructuring report, at 1.
B. Preserve (or not impair) certain features of the status quo.
At the same time, the BPU has emphasized the need to adhere to further goals, which may or may not be immediately achievable solely through competition. These include assurance of an electric system that continues to plan and operate in for reliability and safety, pursuit of environmental goals, maintenance of social programs and DSM activities.5
C. What needs to be done now to assure that the goal of competition and the further goals (to the extent not congruent) are identified and provided for?
In the context of divestiture, then, the question is not simply how to get the highest price for assets to be divested, but how to do so in keeping with both the goal of competition and the further public purposes identified by State law and the BPU.
II. What Specific Findings Are Necessary to Ensure That a Divestiture Proposal Advances the Public Interest?
A. Competition: No Chance of Market Power After Divestiture
l. What amount/quality of divestiture is needed to mitigate market
power?
Since divestiture is recognized as a device to mitigate market power, 6 an essential factor in evaluating a divestiture proposal is its effect on reducing market power. Commissions have made findings regarding the impact of divestiture on market power both on a case specific7 and industry wide basis.8 However, a general, industry wide finding that a minimum amount of divestiture will address market power problems does not preclude a case specific inquiry when a divestiture plan is filed.9
In general, the impact of divestiture on competition should be considered in a divestiture proceeding. What are the geographic and product markets affected? The Board should consider requiring a filing utility to submit sufficient information on market impacts.10 This information would enable the Board to evaluate the impact of the divestiture proposal on competition and market power.11 In addition, based on experience elsewhere, at least the following issues will merit specific consideration.
a. What percentage/type of generation should be divested?
The jurisdictions studied adopted different approaches to the percentage of generation assets to be divested. The differences in each commission's approach is at least partly attributable to its respective view of the scope of its authority over voluntary divestiture.
In its Restructuring Decision, the California Commission determined that utilities be "required" to voluntarily divest at least 50 percent of their fossil fuel generating assets.12It concluded that this level of divestiture was necessary to eliminate cross subsidization and mitigate market power arising out of a concentration of generation ownership, and found that it was within the California Commission's authority to promote competition to require a minimum of 50 percent be divested.13
California also indicates that the analysis must consider the buyer, as well as the seller. Thus, recent draft decisions in the PG&E case14 caution bidders that "we will not approve any sale that merely changes the identity of the possessor of market power from PG&E to another entity...we are unlikely to approve any sale in which one or more related entities [fn. omitted] purchases more than 50% of the rated capacity of PG&E's generation assets offered in this sale."
The Massachusetts Department found that full or complete divestiture would mitigate market power.15 However, the Department also concluded that it lacked authority to order divestiture. Likewise, the New Hampshire Commission found that full divestiture would mitigate market power. By contrast with Massachusetts, that Commission found statutory authority to make full divestiture a condition of providing retail service within the state.16
The New York Commission did not identify a particular percentage of generation assets which utilities would be required to divest.17 However, an administrative law judge found Con Ed's proposal to divest 50 percent of its fossil fuel generation serving New York City by the end of 2002 might not be sufficient "to alleviate market power."18 He ordered Con Ed to submit a new divestiture plan, noting that the Commission could presumably order divestiture of a different percentage of generation assets upon review of that plan.
. b. When should there be divestiture of ancillary assets?
In considering the requisite divestiture amount, there is also need to define that which must be divested. Should generation divestiture include, for example, fuel supply/handling facilities--the operation of which may be integral to the operation of generating units? There should be opportunity for bidders and others to comment on the identity of such facilities, and whether they may be treated by conditioning divestiture on their availability to all comers, or by requiring their divestiture as well.
c. How should must run units be treated?
A variant of "b" is the treatment of "must run units"-- units that must be operated for reliability purposes. Section 362 of the California Public Utilities Code provides that, in proceedings involving a request for approval of divestiture, the CPUC must identify facilities which must remain available and operational, in accordance with standards that are no less stringent than the Western Systems Coordinating Council and North American electric Reliability Counsel standards for planning reserve criteria. The CPUC is required to ensure, through whatever means found appropriate, that these must run facilities will remain available and operational consistent with open competition, following divestiture.19
For example, one solution suggested is to require the buyers of designated must run units to enter into local reliability contracts with the ISO.20 The CPUC found that the proposed reliability agreement with the ISO would require FERC review and thus, deferred findings on whether the ISO proposal would ensure reliability pending a FERC decision.
2. Competitive Fairness
Any number of factors may give some competitors advantage over others. Advantages may be earned through hard competition, in which case the public interest lies in their encouragement, not their limitation. In some cases, however, advantages may have accrued by virtue of protected monopoly status, and not competitive testing. Thus, there is need to consider the extent to which such advantages will be "barriers to entry" that may unfairly thwart competitive entry.
For example, ratepayer dollars and monopoly status have given utilities varying degrees of name recognition and brand loyalty -- "good will assets."21 The BPU, consumers, and potential competitors may reasonably question the value of these assets, and their availability to all competitors.
Similarly, public utilities have rights of eminent domain, a factor of importance to those who wish to develop generation in competition with the utilities. Should similar rights be available to new entrants, including those to whom divested properties are transferred? The new Massachusetts law appears to provide eminent domain rights to "generators", as well as traditional utilities ("electric or gas companies"). Section 224, amending Section 69 R of chapter 164 provides:
"Any electric or gas company, generation company [ 22], or wholesale generation company, may petition the department for the right to exercise the power of eminent domain...'
Similarly, the BPU report (at 48) notes that "electric utilities...may file with the Board for an override of a siting denial by a municipality...The intent of the law is essentially to provide the Board with the ability to override decisions...which do not serve the larger public benefit. Non-utility generators (NUGs) do not enjoy similar State-sanctioned redress against adverse local decisions. In order to provide for a competitive generation market, there must be equal treatment of all generators with respect to siting."
On the other side of the coin, privately owned utilities have long pointed out that, in contrast to publically-owned systems, they lack access to tax-free financing, and are therefore disadvantaged in the construction of generators (and other capital intensive facilities).
The elimination of all competitive advantage is impossible and undesirable. Nonetheless,
in the context of restructuring stakeholders (including utilities) should be given opportunity to is important to identify advantages which are artifacts of a privileged status that is no longer warranted, and which should be accounted for in the new light..
B. Ratepayers: Appropriate Allocation of the Costs and Benefits of Divestiture
1. The alternatives available (auction, spin-off, other?)
The likely mechanisms for disposing of generation assets are auction, spin-off 23 and negotiated sale.24 The California Commission described the auction and spin-off options, noting some of the benefits of each option:
Under the [auction] proposal, each energy utility would have the option to conduct a competitive auction for individual generating assets or pre-determined blocks of assets, created by the utility and approved by the Commission. An auction would allow direct observation of the market value of the assets[...]
Each utility may [also] opt to spin off its regulated generation assets to its shareholders [...]A spin-off allows the utility's shareholders to decide how to organize the divested assets and how to manage these assets after a spinoff. [...] Most important, spun-off companies would be under separate management, separate corporate ownership and a separate board of directors from the [previous utility].25
Ultimately, the California Commission did not mandate a particular mechanism. Similarly, the New Hampshire Commission stated:
To ensure the maximum possible value [from divestiture], each utility is directed to consider an appropriate mix of asset sale, business unit sale or business unit spin off. We do not presume to know the best structure for each utility nor the best timing of such sales. We intend to evaluate each sale proposal to ensure that the auction process is non-discriminatory as well as designed to produce the maximum possible value.26
2. Considerations in Selecting The Sale Mechanism
The choice of sale mechanism has substantial implications for both the review process and the criteria for review.
Where the auction route is taken, there appears to be a presumption that competition (among bidders) will assure an acceptable result, with the regulatory objective to ensure that the auction process is well-defined and well-followed.
Thus, in the initial phase of the ongoing CPUC PG&E and SCE divestiture proceedings the companies asked for a determination that the their proposed auction process be approved and that it "be found to determine fair market value." Consistent with this request, the draft CPUC
decisions conclude that:
The auction and sale of the plants will, absent some significant irregularity, determine the market valuation of the plants.
If the less than "full and open competition" route (i.e., spin-off or negotiated sale) is followed, regulators must have a standard by which the resulting sale is to be judged-since it cannot be presumed that the resulting sale is a good measure of fair market value.
In sum, in choosing between auction and non-auction alternatives, the BPU (and utilities) are, in important respects, making a judgment about whether it is more comfortable to construct a standard to guage a result by or a process which will presumptively ensure a good result.
a. Auction: Process as Standard
If the auction route is followed, BPU review must assure a process through which:
* The specifications for bidders fairly and completely encompass all criteria (as discussed further in this memo) that bidders must address;
* There is reasonable likelihood that many bidders will participate (i.e., that the presumption of competition will bear out)
* Bidders (and the public) have access to all relevant information;
* Bidders (and the public) have reasonable opportunity to provide feedback on proposed auction procedures and bid terms;
* The auction goes as planned--- the utility adhered to the auction process, a sufficient number of bids were forthcoming, and the criteria for evaluating them were, in fact, employed.
The California Commission similarly explained the characteristics of an acceptable auction process:
At a minimum, a properly conducted auction would be one in which the property to be sold has been actively exposed to potential buyers, the qualified buyers have been given equal access to relevant information about the property, all buyers are bidding on the basis of the same transaction documents and the procedures for receiving bids are known in advance to all participants. In short, it is a fair process in which all potential buyers vie in competition. That competition gives assurance that the price arrived at is an objective one.27
The California Commission's decision on Edison's unbundling proposal also suggests that in a reasonable auction process, buyers would have ample flexibility to bid on any one plant or combination of plant. Thus, the California Commission rejected Edison's proposal to auction plants in "bundles" which would have restricted buyers' ability to bid on plants singly or to offer a bid on another combination of plants is not whether the price obtained is fair, but whether the process by which the price was obtained was fair.
b. Spin-off, negotiated price: A Results Standard
If a spin-off or a less than fully competitive sale is employed, there
is less reason (i.e., less competition) to support the presumption that process itself will ensure a good result. The BPU therefore needs other means to validate the result.
There is limited discussion of the use of the spin-off and less than full competition options in the current context. However, the traditional principles of regulatory review of asset transfers appears to be relevant. At the outset, a utility proposing a spin-off would need to disclose details of the proposed arrangement between the existing and newly formed company including contractual, accounting and service obligations.28 The company would also need to identify how the value of a newly formed generation company would reduce or eliminate stranded costs. As to price, the regulatory tradition of review of asset transfers relies on alternative benchmarks for "valuation:
* How is the asset valued when measured by book and reproduction cost methods? Thus, New England Power used net book value as a benchmark for comparison in its divestiture application where it stated that it would receive "$1.59 billion in cash or about 145 percent of the net book value" of the facilities being sold.29
* Are there any comparable transactions that can be used to establish current market value?
If a spinoff or less than fully competitive sale is employed, the BPU should be prepared to call on its own independent expertise on valuation. Even where an auction is employed, as discussed below, "results" oriented benchmarks may be of value.
4. How can we be sure that divestiture is the best method of mitigating stranded cost, i.e, extracting maximum value from the generation assets; or might the utility extract more value by retaining ownership?
In addition to the price obtained, divestiture must (where stranded costs are involved) also be measured by its success in maximizing the mitigation of stranded costs.30 Can it simply be assumed that divestiture is the best way to mitigate them? At first blush, the answer might seem to be "yes." However, the answer may not be so obvious.
For example, the BPU report noted that: (at 52)
It has been argued by utility companies...that the offering for sale of large blocks of utility-owned generating capacity as a result of forced divestiture (a so-called 'fire sale') could depress market value and thereby exacerbate the stranded cost problem. Moreover, an issue was raised in this proceeding as to the impact which large-scale divestiture of utility-owned generating plants in the state would have on the labor force at those facilities.
Thus, while couched in the context of forced divestiture, the cited utility "argument" suggests that poor market timing may deprive ratepayers of the ability to maximize the mitigation of stranded costs. From another perspective, the quoted material suggests that a cost item that might be of value to the selling utility (the experienced workforce) will not be of value to the purchaser--in which case sale will not maximize value to the ratepayers.
In the divestiture review process it should be possible to identify expenditures that, if not attended to, may be stranded, and then to consider ways in which bidders can be alerted to the potential value in these expenditures. Thus, bidders may be told that the workforce has experience that will be of considerable value. But it may also be the case that the purchaser will take the information into account by reducing its offer because they do not see the same value (for example, bidders may assume that the existing workforce is less efficient and more costly than a new workforce it would otherwise employ).
Finally, there may be elements of cost (particularly overhead) that are not clearly identifiable or, if identifiable, segregable, in which case it may be difficult to assure that bidders include them in their valuation.
In sum, rather than assume that a proposed divestiture is automatically the best way to mitigate stranded cost, the BPU should consider how divestiture may fall short, and the ways in
which divestiture can be structured to close the gap.
5. Performance: How should we measure it?
Should the Board establish an expected level of proceeds, with the utility retaining any excess and absorbing any deficit; or should the Board simply pass through to ratepayers the results of the utility-managed divestiture? (There is an analogy to cost plus ratemaking vs. performance-based ratemaking). Whatever method of divestiture is employed, the BPU should consider the use of incentive mechanisms to maximize the value to ratepayers.
For example, if an auction is used, traditional valuation methods (book, reproduction cost, market) might be used as benchmarks for the establishment of incentives.
The BPU and parties should be encouraged to propose alternative incentive mechanisms.
6. Will divestiture be consistent with bond obligations?
At this point, filings and orders pertaining to voluntary divestiture are typically in preliminary phases. Thus, there is limited discussion about specific financial arrangements and potential impacts on utility bondholders. However, some commentators have raised concerns about the impact of divestiture on bondholders and financial markets. Thus, as one commentator writes:
Virtually all utility plant and equipment is pledged as collateral under mortgage bonds, of which the largest part tends to be generating plant. If a utility were required to divest, questions arise as to whether the debt would or should remain with the generating plant. As an alternative, if generating plant were divested, other property could be swapped to meet bonding needs, but questions would arise as to the value of the property. In addition, there are questions as to the legal ability to make such changes. Some bond mortgages do not allow such exchanges or may require the approval of bondholders to make changes.
Another area of concern is the difference in capital structure between a regulated utility and a competitive company. Regulated utilities have debt ratios in the range of 50 percent. This would be much too high in an unregulated market, which would require much more equity in the capital structure. This would further increase the difficulty of leaving the debt with the generation portion of the company in the event of divestiture.31
The BPU should be alert to the details of financial transactions underlying the divestiture proposal.
7. Is it clear that nuclear decommissioning costs and obligations will not be affected in non-nuclear divestitures?
It appears that the divestitures immediately before the BPU will be limited to non-nuclear assets. However, because of the extent of assets being divested and the magnitude of decommissioning costs, the BPU should verify that divestitures will not adversely impact the availability of decommissioning funds.
8. Responsibility for Recovery of Divestiture Related Costs
Divestiture itself encompasses a wide range of costs, which were identified in one utility's divestiture application as including: (1) direct transaction costs such as investment banker, attorney and consultant fees, costs of environmental assessments, title reports, permits and filing fees and taxes and (2) environmental remediation costs and (3) worker benefits.32 Divesting utilities should be required to identify these costs in their proposals.
In its interim order preliminarily approving Edison's proposed divestiture ratemaking methodology, the California Commission, with no discussion, effectively allowed Edison to recover the direct transactional costs.33 In its ratemaking proposal, Edison said that it would calculate net revenues from the divestiture sale by deducting direct transaction costs from gross proceeds. Edison would then compare net revenues to the sunk cost of the assets34 at the time of sale. Any net revenues from the sale would be applied as a credit to the Transition Cost Balancing Account, which would then offset other transition costs. If net revenues from the divestiture sale are less than sunk costs, Edison would seek recovery of this difference as an additional transition cost.35 Under this method, ratepayers are effectively responsible for divestiture costs, because they only receive a credit of net revenues rather than gross revenues to offset potential stranded cost liability. As noted, the California Commission approved this proposal.36
The Board will need to determine whether shareholders or ratepayers or both should bear these direct, transactional costs associated with divestiture. With the exception of the California cases, no other restructuring related divestiture cases could be found which address this issue. It should be noted, however, that in a divestiture case which resulted from a Securities and Exchange Commission PUHCA compliance order, the Connecticut Commission required shareholders to pay the costs of divestiture of gas portion of operations.37 The Connecticut Commission concluded that shareholders should have known that the utility's pre-divestiture structure might violate PUHCA and "thus, they should bear the cost of bringing [the utility] into compliance with federal law."
The California Commission approved Pacific Gas and Electric's proposed treatment of environmental costs38 and advised Southern California Edison to adopt a similar approach.39 Pacific Gas and Electric stated that it would file a subsequent application for recovery of environmental remediation costs.
Costs associated with worker displacement benefits were treated as follows in Edison's application. These were not deducted from gross proceeds to determine net revenues, but instead were classified in appropriate transition cost accounts for eventual recovery in the CTC.40 The California Commission approved this treatment as well.
C. The Post-Divestiture World: Life With the New Owners
How should we evaluate the prospective owners of generation serving New Jersey (e.g., is the sole criterion their ability to pay a high price, or should other measures be relevant)? Put another way: in evaluating bids, how should we balance the promised financial benefits with the quality and stability of the service to be provided? The jurisdictions reviewed, as well as the BPU's April. 1997 report, indicate that a variety of non-price factors (in addition to market structure/competition, as discussed above).
15. Reliability
Divestiture may result in disposition of generation to entities which have not been subject to traditional regulatory strictures governing reliability or might even lack operational experience.41 In addition, the disaggregation of generating units may alter longstanding operations and maintenance patterns. How, then, might divestiture alter reliability patterns?.What assurances are there that reliability will not be impaired? What means should be provided for post-divestiture monitoring and enforcement?
The BPU report declares that "we reiterate our precondition that a fully independent ISO, consistent with the FERC's ISO's principles be in place prior to the introduction of retail competition." (52) To the extent that the ISO can be relied on, FERC approval of the ISO would be required which could delay the divestiture process.42 To the extent that the ISO might not fill any gap, then the divestiture process must contemplate how it can be filled.
Thus far, only California has addressed reliability issues in a detailed manner. Section 363 of the Public Utilities Code requires that purchasers of divested generating facilities contract with the selling utility to "operate and maintain the facility for at least two years." This provision is designed to ensure a smooth transition between operators.
In the current PG & E and SCE divestiture proceedings the CPUC is considering the reliability issues in a separate portion of the proceedings in which "we decide whether the proposed form of agreement between the buyers and the Independent System Operator (ISO) should be approved." Draft Decisions, supra.
The BPU most likely has sufficient authority and an obligation to review reliability in the context of a divestiture proceeding; if it determines it does not, it should consider seeking legislative authorization to address the issues.
2. Environmental Concerns
Divestiture raises a number of environmental considerations: (1) the need for review of impacts under a state environmental review statute; (2) liability for environmental remediation at sites, including the allocation of liabilities that emerge in the future; (3) transfer of emissions reductions credits; 4) environmental disclosure requirements. The following discussion
notes how these issues have been treated in other jurisdictions. Additional research is required to determine relevant New Jersey law. In addition, there is the question of whether the BPU can condition divestiture to apply environmental conditions to out of state companies/generators, and the further question of BPU/state authority over the purchaser in the post divestiture world.
a. State Environmental Review Statutes
At the outset, the Board should determine whether there are state environmental review statutes which would apply to the transfer. For instance, the California Commission determined that the California Environmental Quality Act ("CEQA") would apply to approval of a divestiture application under Section 851 of the California Public Utilities Code.43 The CEQA thus required the California Commission to prepare a study to assess the potential effects on the environment of divestiture, which it recently completed with respect to Southern California Edison's proposal.44 The California Commission's study examined a wide array of impacts, including air quality and biological and cultural resources and required some mitigation to address adverse impacts.45
b. Environmental Remediation
Responsibility for clean up of environmental contamination at a divested plant site is another issue which the Board must examine. The Board must first determine whether the buyer, seller or both has liability for environmental contamination and then assess whether the divestiture plan proposes a reasonable solution for resolving liability issues. Resolution of the liability issue is significant because uncertainty about liability could deter prospective purchasers or diminish the price of the asset.
The California Commission recently gave initial approval to PG & E's proposal for resolving environmental liability issues arising out of divestiture.46 PG&E proposed to indemnify the buyer for contamination prior to the closing in exchange for an indemnification from the buyer for contamination after the closing. In addition, PG&E proposed a real property covenant that would restrict the use of the plant site to low occupancy and commercial and industrial uses to limit the potential cost of environmental remediation.47
The California Commission found PG&E's proposed covenant to be a reasonable way to protect ratepayers from excessive environmental remediation costs. The Commission also directed PG&E to file its estimated environmental remediation costs and request for rate recovery of those estimated costs in a subsequent application.48
c. Compliance With Emissions Limits
How will compliance with applicable emissions limitations be affected by plant transfer? The issue has been addressed in divestiture applications. Southern California Edison proposed to transfer its interest in air pollution control credits (related to the plants being sold) as part of the divestiture proposal.49 The New England Power settlement generally committed New England Power or its successors through divestiture "to nitrogen oxide and sulphur dioxide emissions" at two generation facilities.50
To the extent that the Board (as opposed to state or federal environmental agencies) has authority over this subject, it should direct utilities filing divestiture proposals to include their plans for ensuring continued compliance with emissions levels following divestiture.
d. Disclosure/ratings/Portfolio standards
New Jersey is among many jurisdictions in presuming that competition must go hand in hand with the promotion of green energy production. In general, the two approaches are l) requiring that green sources be a specified percentage of supplier "portfolios"; and/or 2) requiring disclosure of supplier portfolios, so that consumers can choose to assert their preference for green supplies.
Thus, in the first regard, the new Massachusetts law provides that the DPU shall "establish a renewable energy portfolio standard for all retail electric suppliers selling electricity to end use customers..." Section 11(F)(a). Thus, in the second regard, the BPU endorses actions to ensure that consumers have access to information about the "environmental signature" of
supppliers' portfolios (BPU Report at 144). BPU did not recommend immediate action, but urged monitoring of the environmental impacts of restructuring to determine if action is needed.
New Jersey must consider the jurisdictional, as well as regulatory, means by which such environmental policies are to be effectuated in the post-divestiture world. As discussed further below, the basic choice is whether to apply the requirements directly to the entity owning the generation sources, or to whatever further entity directly deals with the enduser.
4. Social Programs
New Jersey, again among other jurisdictions, views the maintenance of social programs as an essential to restructuring. Thus, the BPU report, at 149, says "[I]n order to avoid unnecessary disruption of these [winter moratorium, bad debt, low income assistance and weatherization] services, it is an appropriate goal that as part of electric industry restructuring and the transition to competitive markets, the State should preserve the provision and funding of social programs currently provided by the "bundled" electric utilities in the State."
What level and quality of social programs (e.g., weatherization) is the utility presently responsible for? Assuming the level and quality is to be maintained, where is responsibility to lie in the post-divestiture world? Here, again, the task is to ensure that divestiture is consistent with this goal. Here, again, as discussed below, the options are the regulation of whatever entity sells to the end-user and/or regulating "generators" directly.
5. DSM
New Jersey, along with other jurisdictions, places a premium on continued commitment to DSM programs.
The BPU report advises that in the long term there will be the phase out of distributor obligation to provide for DSM. However in the transition period "the direct economic benefits of DSM to the general utility base is much less clear. For example, the current justification that DSM will reduce the need for the utility to build or purchase new generating capacity, and thereby reduce costs for all ratepayers, will no longer apply"( BPU, at 152.) BPU further explains, at 153: "it is our determination that budgets should not be slashed...and that during the transition to a restructured industry, the DSM programs continue to be implemented by utilities, and funded through rates."
Assuming DSM programs are to be maintained, how is responsibility to be allocated in the post-divestiture world? Is it clear that the responsibility will/can be placed on the shoulders of the distribution utility? Here, again, the key is to identify the post-divestiture source of responsibility for DSM programs, and to ensure a means for holding that source accountable. Thus, the California legislation, at Article 7, provides that distribution utilities shall collect, on the basis of usage, sums for research, environmental, and low income funds. These sums will go for energy efficiency, renewable and conservation activities and research.
6. Utility Workforce
New Jersey, along with other jurisdictions, recognizes the importance of assuring fair treatment of the incumbent workforce in the restructuring divestiture process. Indeed, N.J.S.A. 48:3-7 (a) provides that the BPU shall not approve proposed utility sales in the absence of assurance that pension obligations will be satisfied as they come due.
.California's restructuring legislation provides that utilities accomplish necessary workforce reductions through "offers of voluntary severance, retraining, early retirement, outplacement and related benefits.51 The legislation also provides that stranded costs can include "reasonable employee related transition costs incurred and projected for severance, retraining, early retirement, outplacement and related expenses..." Section 375. The California Commission has preliminarily approved Edison's proposal to record reasonable worker protection benefits for workers who are impacted by divestiture as a recoverable cost associated with divestiture eligible for inclusion in the competition transition charge ("CTC").52
The Massachusetts DPU recommended legislative resolution of the workforce impact:
[...]we note that our statutory mandate is to protect the interests of ratepayers. The welfare of displaced workers, a particular group of citizens, is the province of elected representatives because it requires a balancing of ratepayer interests with the interests of electric utility workers. Therefore, the Department shall defer to the Legislature to determine whether transition and termination policies for electric utility workers should be legislated.53
The recent Massachusetts legislation does provide that transition costs shall include those incurred (Section 193; Section 1G(2)( i):
In order to mitigate potential negative impacts on utility personnel directly affected by electric industry restructuring...including costs incurred and projected for severance, retraining, early retirement, outplacement, supplemental unemployment benefits, and related expenses for the personnel.54
Thus, experience indicates that the question of workforce transition must be addressed, and alternatives have been provided. The New Jersey Board can seek legislative guidance on resolution or consider whether it has sufficient authority to address labor impacts under existing statutes.
7. Corporate Character and Stability
In addition to price, jurisdictions considering divestiture have made clear that acceptable bidders must have stability and corporate character sufficient to ensure continued service in the long run. These factors include the prospective acquirers record of compliance with relevant laws and its financial stability.
The potential adverse impacts of financial failure of the acquiring company were identified in Edison's divestiture application, where Edison expressed the following doubts about the financial viability of a spin-off as compared to a company purchasing generation assets through a sale:
By contrast [to purchase by diversified company, a spin-off] would likely have relatively less assets and capitalization and no history as a stand-alone business...In addition, the failure of a [spin-off] could undermine system reliability, increase market concentration, reduce consumer confidence and adversely impact the viability of other small market participants.55
Edison noted that questions about financial viability would be less likely to occur under its proposed auction process, where the acquiring companies "would likely be going concerns with strong balance sheets and extensive operating histories that had been subject to review for financial qualification as part of the auction process.56
Thus, the Board should either develop procedures for review of the financial stability of the acquiring company.
III. What Role Should the Board Play in Reviewing Divestiture Proposals?
A. Assessment of Board Authority
The tools available to state regulators in directing divestiture may include l) existing divestiture specific authority, 2) generic regulatory conditioning authority; 3) specific authority that, while not directly related to divestiture, bears on it; 4) legislation and/or regulation crafted with current restructuring in mind--particularly that which recognizes and treats the new kinds of entities that will be involved in the electric supply market.
l. Divestiture specific authority
As in other jurisdictions (See Appendix A), there does not appear to be New Jersey statutory authority that expressly provides BPU the authority to order divestiture. However, N.J.S.A. 48:3-7 provides generally for BPU approval of utility sales. As noted above, the criteria that have been long used under this provision (and similar laws in other jurisdictions) should be a considerable guide in addressing the more conventional aspects of the current divestiture activities.
2. Generic BPU conditioning authority
Regulatory commissions, and there is no reason to believe the BPU is an exception, have historically had authority to condition grants of public benefits (here, the approval of requested property transfers) on terms consistent with not only specific mandates, but also the broader public interest. (The breadth of such authority may depend on the statutory terms, such as the presence, vel non, of express reference to the "public interest" or similarly broad mandate).57
In recent draft Interim Orders, supra, in the PG&E and SCE divestitures, for example, the CPUC gave notice that environmental and reliability related conditions may be included in any final approval:
The sale of the plants shall be subject to conditions that we may require (a) to avoid or reduce to non-significant levels any adverse environmental impacts that we may determine will arise from physical changes reasonably foreseeable in connection with the transfer of the plants and (b) in connection with ensuring the continued availability of must-run plants consistent with maintaining open competition and avoiding an overconcentration of market power.
If the plants are sold, the sale shall be subject to the Operations and Maintenance Agreement in the form proposed in the application. (SCE)
3. Further relevant existing rules
In addition to conditioning authority, new entrants into the competitive market may be subject to further existing rules.
Thus, plant siting and related environmental regulations should apply to new entrants into the generation market.
4. Needed Post-divestiture authority
a. Tools In Use by Other Jurisdictions
In light of existing statutes and rules, the question is what further statutes or rules may be needed to deal with those, including new entrants, who own and/or operate generating assets in the post-divestiture world. The examples of other jurisdictions indicates that options include:
l. defining a new category(ies) of regulated entity that will be created by divestiture and other restructuring activities, and subjecting them to certain regulatory requirements;
2. applying rules to whoever directly sells to endusers, with the assumption that obligations will be enforced backward up the supply chain;
3. creating regulatory oversight/complain processes tailored to the new circumstances;
4. some combination of the above.
The California statute provides that the CPUC can authorize "direct transactions between electricity suppliers and end use customers, subject to implementation of the nonbypassable charge" (Section 365(b)(1) for stranded investment (Section367) However, it appears that California has determined that, absent direct sale to end users, generating companies will not be subject to substantial direct PUC regulation. One consequence is that in regard to environmental goals, portfolio or disclosure rules will be directed at those supplying end users.
The California law does provide that (except for "electrical corporations") each "entity offering electrical service to residential and small commercial customers within the service territory of an electrical corporation shall register with the commission." The law requires basic information (name, address, phone number, agent for service of process), but also provides that the "commission shall accept, compile, and help resolve consumer complaints regarding entities offering electrical service that are required to be registered..." Section 394.
In Massachusetts, on the other hand, "generation company" is a statutory term of art, and appears to be the object of active regulation. Section 189 of the new law defines "generation company" to mean "a company engaged in the business of producing, manufacturing, or generating electricity for retail sale to the public.58
As to registration, Massachusetts provides more than the name and address called for by California. Section 193 1F(1)(i) provides:
All generation companies shall submit a license application to the department for approval to sell electric power...Such application shall include the following: the company's technical ability, as defined pursuant to regulations promulgated by the dept...documentation of financial capability...a description of the company's form of ownership...documentation regarding any valid purchase power contracts...
The Massachusetts law even appears to apply a limited form of the traditional utility service obligation to generators, providing:
No distribution or generation company may disconnect or discontinue service to a customer for a disputed amount if the customer has filed a complaint which is pending with the dept.
Massachusetts also appears to impose broad disclosure obligations on generators. Section 193 F1(6) provides that:
The department shall promulgate uniform labeling regulations which shall be applicable to suppliers as a condition of licensure pursuant to paragraph 1. Such information...shall include price data, information on price variability, and information about whether the generation company or supplier operates under collective bargaining agreements and whether such generating company or supplier operates with employees hired as replacements in the course of a labor dispute, fuel sources and air emissions of sulfur dioxide, nitrogen dioxides, carbon dioxide, heavy metals, and any other which the department may determine causes significant health or environmental impact...
See also Section IF(5), which provides for generating company disclosure to customers and advertising rules.
In addition, though its application to generators is also not quite clear, there is a dispute resolution process that encompasses claims of anticompetitive behavior (Section 193 F(1)(3):
3. The department is hereby authorized and directed to establish rules...to (i) promote effective competition (ii) investigate disputes; (iii) to institute a complaint mechanism for the resolution of disputes, including, but not limited to , those arising from alleged vertical or horizontal market power disputes...
Generators are also covered by customer complaint dispute resolution procedures. Section 193 F(1)(2).
Similarly, there is a code of conduct, although its application to generators is not totally clear. Section F1(7) provides that:
The department shall establish a code of conduct...including, but not limited to...the confidentiality of customer records...and conformance with fair labor practices...The dept is authorized and directed to oversee quality and reliability of service and to require quality and reliability are the same or better than levels that exist on Nov. 1m 1997." [Mass Code Title 220; sections 25, 27-29 apply to generators; appear to relate to customer complaints].
b. Will new legislation be needed in New Jersey
As just quoted, in California and Massachusetts new jurisdictional entities and regulatory activities have been expressly identified by the legislatures. Of course, express legislative directive may clarify and simplify the scope of the BPU's authority. In addition, for obvious practical and political reasons the voice of the legislature in matters of change and controversy is of considerable value. At the same time, there is an historic understanding that a utility commission may act generally within its basic command, bounded by Constitutional provisions and credible showing that it is acting on matters that are plainly within its subject matter expertise and purview (for example, electric power production vs. employment practices).
It may be relevant that the legislature's general grant of jurisdiction to the BPU defines "public utility" in a manner which may permit inclusion of entities to whom generation is transferred (RS 48:2-13):
The term 'public utility' shall include every individual...corporation...that now...may own, operate, manage or control within this State any...electric light...plant or equipment for public use.....
B. What procedures should BPU employ?
If divestiture is proposed through a negotiated sale where information such as the prospective buyer, price of assets and method of financing are known at once,59 a regulatory body will be able to comprehensively review all of the listed factors in evaluating the application.
In an auction is used, as discussed above, there is an initial requirement to establish the process which, if followed, would lead to presumptive acceptability of the result. In addition, the identity of the purchaser, the purchase price and other information about the transaction would be still be undetermined at the time of application, thus making it impossible to review the impacts of divestiture on issues such as market power or the purchaser's ability to maintain reliability of the units. (Similarly, pre- approval of the auction process would maximize the chance that the bid ultimately selected from the auction process would be likely to receive final regulatory approval, thereby avoiding costs and delay and perhaps maximizing the number of bidders).
Finally, in either case there may be need for independent consideration of the relation of the transaction at issue to reliability, environmental factors (which may be considered by another agency), and the further social program and DSM goals.
In light of these considerations, timing may depend on the stage of development of institutional reliability and planning mechanisms (e.g., ISO Formation and pool/exchange arrangements)? As noted, the BPU report appears to make the existence of the ISO a predicate for divestiture. Moreover, the BPU has suggested the need for a fallback mechanism--- until matters are sorted out consumers should have option of choosing not to choose (BPU, at 148).
The California Commission resolved the foregoing problems by breaking up review of the auction/divestiture process into three stages. In the first stage the Commission approves those parts of the auction process for which sufficient information was available, e.g., proposed rate treatment of proceeds of divestiture, proposed treatment of environmental issues and general reasonableness of the auction as the appropriate means for disposing of generation assets. In the second stage, the California Commission reviews the adequacy of proposed measures to ensure reliability in subsequent proceedings.60 In a final decision, the California Commission determines whether whether the sale is in the public interest "with special attention to market power issues and the fairness of the auction process.61
Similarly, the New Hampshire Commission suggested that at the outset of a proposed divestiture, it would review and approve plans to auction or spin-off generation assets. The New Hampshire Commission stated that the review "is intended to establish the sale mechanics and timing which have the highest likelihood of securing the maximum value."
Appendix: Non-Voluntary Divestiture
I. Submission of Voluntary Divestiture Plans
One practical issue for the Board to resolve at the outset is the procedure through which a utility's voluntary divestiture plan will actually get before the Board for review. Both California and Massachusetts determined that respective statutes authorizing transfers of utility property determined by the commission to be in the public interest62 provided a sufficient mechanism for submission and review of divestiture proposals. By contrast, the New York Commission directed divestiture proposals be filed as part of utilities' restructuring plans,63 while the New Hampshire Commission required divestiture plans to be included as compliance filings pursuant to its restructuring order.64
Ultimately, the choice of procedures through which a divestiture proposal should come before the commission has not been sufficiently significant to warrant discussion, with one exception. The Massachusetts Board explained that it had authority to approve a divestiture proposal under its utility transfer statute but otherwise lacked authority to require or implement divestiture.
In deciding whether divestiture proposals should be filed pursuant to an existing utility transfer statute or as part of a restructuring plan, the Board should assess the following:
(1) Does the Board have sufficient authority to require proposals to be submitted as part of a restructuring plan? If the answer is no (as the Massachusetts Board determined), then the Board could examine whether an existing utility transfer statute would provide a means for reviewing a divestiture proposal.
(2) If a proposal is submitted pursuant to a utility transfer statute, does New Jersey's specific utility transfer statute afford the Board sufficient leeway to consider the broad array of factors discussed in Part II of this memo which are relevant to review of a divestiture proposal? The California and Massachusetts utility transfer statutes are broad and allow the commission ample discretion over whether a transfer should be authorized.65 However, if a transfer statute directs the commission to approve a transfer provided that certain statutory criteria are met, the commission may not have the ability to consider the other factors proposed in Part II of this memo. In that situation, submission of the plan pursuant to a state restructuring plan or separate regulations (promulgated either through existing authority or after seeking legislative authorization) would be the preferred alternative.
II. Incentives for Divestiture
Can and should the Board actively encourage voluntary divestiture by giving utilities incentives to divest? California, Massachusetts and New York have addressed this issue.
The California Commission declared that:
To provide incentive for utilities to divest assets [...] the Commission will grant an increase in the rate of return of equity (ROE) component [of the competition transition charge (CTC)] up to 10 basis points for each 10 percent of fossil generating capacity divested...provided that we have resolved all locational market power issues and [authorized the transfer pursuant to Section 851].66
The California Commission had previously reduced the return on equity component of the competition transmission charge to ten percent below debt return, finding that risks associated with generation assets would be reduced when the net book value of assets is accelerated through recovery of transition costs.67 The California divestiture incentive does not so much provide an additional reward the utilities for divestiture, but rather provides an opportunity to recapture a portion of the ROE component of the CTC which was reduced by the California Commission as part of its restructuring plan.
The Massachusetts Board had initially considered an allowance of less than full recovery of stranded costs as a penalty for failure to divest. However, it declined to implement this measure or any other incentives finding that (1) divestiture was the "cleanest" way to mitigate market power and should be implemented as a matter of public interest and not because of incentives and (2) the incentives proposed could increase consumer stranded cost liability and favor some utilities over others, thereby raising the potential for anti-competitive impacts. The Massachusetts Board also made note comments arguing that divestiture incentives served as a means of enabling the Board to accomplish indirectly what it lacked the authority to order directly.68 Although the Massachusetts Board did not seek an expansion of authority from the legislature to implement incentives, nevertheless, a bill was recently introduced in Massachusetts which would reportedly implement an incentive for divestiture, i.e., making securitization and stranded cost recovery contingent on divestiture.69
Rather than establishing incentives for divestiture across the board as did California and the Massachusetts legislature, the New York Commission adopted a case by case approach. The New York Commission determined that "incentives for divestiture should be worked out individually for each company in conjunction with its restructuring filing.70
As these cases illustrate, the decision of whether to award incentives for divestiture and what an appropriate incentive should be are typically resolved in the context of a state's overall restructuring plan and with reference to its authority over a voluntary restructuring program. For instance, both of the "incentives" discussed -- California's allowance of additional ROE points and Massachusetts' eventual decision not to tie recovery of stranded costs to divestiture -- are directly related to other policy determinations made as part of those states' respective restructuring programs, e.g, California's decision to reduce the ROE component of the CTC; Massachusetts' decision to allow all utilities a reasonable opportunity to recover stranded costs. Likewise, New York's decision to evaluate the appropriateness of incentives on a case by case basis reflects its decision to treat divestiture as a component of a utility's restructuring plan rather than as a separate program.
To summarize, the following guidance can be gleaned from these jurisdictions' position on incentive programs. First, the Board must evaluate whether its authority over voluntary divestiture is sufficiently broad to also enable it to pro-actively encourage divestiture through an incentive program. In the event that the Board determines that it lacks authority, it can seek legislative intervention--or, as was the case in Massachusetts, the legislature may step in even absent a specific request. Second, the Board should review other aspects of its restructuring program to determine whether incentives are necessary or desirable at all and if so, what sort of incentive would be appropriate and consistent with the overall goals and policies set forth in the Board's restructuring plan.
APPENDIX
Footnotes
1) The Preliminary Divestiture Plan is actually that of RECO's parent company, Orange and Rockland Utilities, Inc. (O&R), which owns all of the generating facilities. Back
2) GPU has announced that it is attempting to sell its nuclear facilities outside of the proposed auction, through negotiated sales. O&R does not own nuclear generating facilities. Back
3) However, we note that RECO has requested in its Amended and Restated Stranded Costs Petition, that it "seeks a declaration of non-applicability of N.J.S.A. 48:3-7, or, in the alternative, approval of the sale." Amended and Restated Stranded Costs Petition, at p. 1 (fn. 1). Back
4) See RECO's "Amended and Restated Stranded Costs Petition", which states, at 8-9:
Since the Generating Assets are operated as part of an integrated system on behalf of all system customers, and since the Board has an obvious interest in the stranded costs recovery sought, RECO will file all appropriate information with the Board and the parties' to the proceeding, and will undertake to address the Board, Staff, and the parties' concerns. Back
5) For example, the BPU report states:
"These findings and recommendations are intended to accomplish the goals of restructuring in a manner that ensures the
continuation of service reliability and quality, assures strong consumer protection, protects and creates jobs and businesses,
maintains the commitment to social goals currently embedded in bundled electric rates and services, protects the
environment, and promotes energy efficiency." BPU, at 15
****
"The Order specifically directed that the Proceeding investigate the appropriate manner of continuing existing consumer and
environmental protections in a restructured market; ensuring universal, non-discriminatory access to service; a safe and
adequate power supply and system reliability; and achieving the State's environmental and energy efficiency goals. These are
all State policy goals within P.L. 1995, c. 180." BPU, at17-18
The BPU further notes that "...there is a legitimate concern that, at least during the initial transition to a competitive power
market, certain public policy goals that have been traditionally fulfilled by electric utilities must be maintained, until it is shown
that the competitive marketplace can adequately provide these services." BPU, at 128 Back
6) California Restructuring Decision, 166 PUR 4th 1 (Cal. Pub. Util. Comm'n 1996); Massachusetts Restructuring Decision, DPU96-100 (Mass. Bd. Pub. Util. 1997); New Hampshire Restructuring Decision, 175 PUR 4th 193 (N.H. Pub. Util. Comm'n. 1997); Competitive Opportunities in New York Re: Electric Service, 168 PUR 4th 515 (N.Y. Pub. Util. Comm'n. 1996). Back
7) See, e.g., Matter of Con Edison's Plan for Restructuring, Case No. 96-E-0897, Initial Decision (N.Y. Pub. Serv. Comm'n. July 1997) (finding by ALJ that Con Ed's initial proposal to divest 50 percent of city fossil fuel generating assets by the end of 2002 may not be sufficient to mitigate market power but defers judgement pending submission of final divestiture plan). Back
8) California Restructuring Decision, 166 PUR 4th 1 (Cal. Pub. Util. Comm'n. 1996) (finding that divestiture of 50 percent of generation assets by utilities will "eliminate most of the market power problems identified by the Department of Justice and FERC and allow for a competitive market."). Back
9) Id. (emphasizing that "In those proceedings [for review of divestiture applications], we will review the potential that the asset has for exercising locational market power..."). Back
10) The FERC Merger Policy Statement describes a market screen analysis which can be used to evaluate both the impacts of merger on market power as well as the effectiveness of mitigation measures such as generation divestiture in reducing market power. III FERC Stats. and Regs. para. 31,044 (1996). Back
11) It should be noted that a full evaluation of competitive impacts may not be possible until the utility has identified a specific purchaser. See e.g., Southern California Edison, Application No. 96-11-046, Interim Order at 7 (Cal. Pub. Util. Comm'n. September 1997) (authorizing proposed auction but noting that effects on market power cannot be evaluated until subsequent proceeding when results of auction are known). Back
12) California Restructuring Decision, 166 PUR 4th 1 (Cal. Pub. Util. Comm'n. 1996). Back
13) Id., see also Order Instituting Rulemaking on Commission's Proposed Restructuring Policies, 175 PUR 4th 127 (Cal. Pub. Util. Comm'n. 1997) Cal. PUC LEXIS 83, *54. Back
14) "Interim Opinion"; Draft Decision of Commissioners Conlon and Silas; Application of Pacific Gas & Electric Company for Authorization to Sell Certain Generating Plants and Related Assets Pursuant to Public Utilities Code Section 859, August 1, 1997. Similar language appears in the parallel draft Southern California Edison decision. Back
15) Massachuset Restructuring Decision, DPU 96-100 (Mass. Bd. Pub. Util. 1996). Back
16) New Hampshire Restructuring Decision, 175 PUR 4th 193 (N.H. Pub. Util. Comm'n. 1997). The decision has been challenged in federal court. Back
17) Competitive Opportunities in New York re: Electric Service, 168 PUR 4th 515 (N.Y. Pub. Serv. Comm'n. 1996) Back
18) Matter of Con Edison's Plans for Restructuring, Case No. 96-E-0897, Initial Decision, July 1997. Back
19) Southern California Edison, Application 96-11-046, Interim Order, Slip. Op. at 7 (Cal. Pub. Util. Comm'n. 1997) citing Cal. Pub Util Code sec. 362. Back
20) Southern California Edison, Application No. 96-11-046, Exhibit SCE-5 - Reliability Issues at 2, (filed November 1996). Back
21) Courts have recognized the role of brand loyalty as a barrier to the entry of new competitors. See, e.g., Southern Pacific Communications Co. v. American Tel. & Tel. Co., 740 F 2d 980, 1001 (D.C. Cir. 1984) (citing entrenched consumer preferences in the telecommunications industry); Federal Trade Commission v. Proctor & Gamble, 386 U.S. 568 (1967) (brand loyalty and consumer preference). Back
22) As discussed further below, the Massachusetts law specifically defines and provides regulatory jurisdiction over "generation" entities." Back
23) A spin-off is created through a transfer of generation assets to a newly created subsidiary in exchange for stock in the new subsidiary which would subsequently be distributed to the parent corporation's public shareholders. See New Hampshire Restructuring Decision, 175 PUR 4th 193 at nt. 17, (N.H. Pub. Util. Comm'n. 1997) (describing spin-off); Southern California Edison, Exh. SCE 3 - Description of Auction Process at 4, Docket No. U338-E, Cal. Pub. Util. Comm'n. (filed November 1996). Back
24) To date, most of the utilities undertaking voluntary divestiture have proposed an auction mechanism, See e.g., Order Instituting Rulemaking on Commission's Proposed Restructuring Policies, 175 PUR 4th 127 (Cal. Pub. Util. Comm'n. 1997), 1997 Cal. PUC LEXIS 83, *18 (noting that both divestiture plans submitted have involved auction mechanism); Megawatt Daily, Vol. 2, No. 189 (October 14, 1997) (noting that Niagara Mohawk will auction of non-nuclear generating assets as part of restructuring settlement before New York Public Service Commission). However, one recent restructuring proposal in Massachusetts involved a negotiated sale. New England Power Company, Petition to Transfer NEP's Generating assets to USGenNE, Docket No. DPU 96-25 (October 1, 1997). Back
25) Re: Proposed Policies Governing Restructuring California's Electric Services Industry, 161 PUR 4th 217 (Cal. Pub. Util. Comm'n. 1995). Back
26) New Hampshire Restructuring Decision, 175 PUR 4th 193 (N.H. Pub. Util. Comm'n. 1997). Back
27) Southern California Edison, Decision 97-09-049, Interim Order, Slip. Op. at 12 (Cal. Pub. Util. Comm'n. September 1997) (declining to require minimum bid since fair auction process found sufficiently reliable to determine market value of asset). Back
28) New Hampshire Restructuring Decision, 175 PUR 4th 193 (N.H. Pub. Util. Comm'n. 1997). Back
29) New England Power, Application for Divestiture, DPU 96-25A, Transmittal Letter at 2 (filed October 1, 1997) (adding that in addition to receiving $1.59 billion cash for assets, NEP will also issue up to $100 million of financing to support payments for obligations under purchase power arrangements with independent power producers). Back
30) The new Massachusetts law provides that an approval include the finding that "such transfers will mitigate to the maximum extent possible the total amount of transition costs of the utility and will minimize the impact of the transition costs on ratepayers..." Section 193; Section 1 A b 1. Back
31) Della Valle, "Separating Transmission from Generation: What's Required and Why" The Electricity Journal Limited Partnership, (March 1997). Back
32) See Southern California Edison, Application 96-11-046, Exhibit SCE-7-Divestiture Ratemaking (filed November 1996). Back
33) Southern California Edison, Application 96-11-046, Interim Order, (Cal. Pub. Util. Comm'n. September 1997). Back
34) Sunk costs would be determined in the CTC proceedings before the California Commission. Southern California Application 96-11-046, Exhibit SCE-7-Ratemaking at 4 (filed Nov. 1996) Back
35) Id. (discussing ratemaking proposal). Back
36) The California Commission did not state whether it would review the reasonableness of these costs at a later time; however, there is nothing in the interim order which would preclude such review. Back
37) Connecticut Power and Light, 99 P.U.R. 4th 102 (Conn. Bd. Pub. Util. 1988). Back
38) Pacific Gas and Electric, Decision 97-09-046, Interim Order at 13 (September 1997). Back
39) Previously, Southern California Edison had proposed to recover environmental remediation costs through a Hazardous Substance Clean-Up Fund, which the California Commission found could not be used for generation related costs. Southern California Edison, Interim Decision at 15. Back
40) Southern California Application, 96-11-046, Exhibit SCE-7-Ratemaking (filed No. 1996). Back
41) Cf. Decision Instituting Rulemaking, 175 PUR 4th 127 (Cal. Pub. Util. Comm'n. 1997); 1997 Cal. PUC LEXIS 83, *60 (discussing some of concerns raised by intervenors regarding reliability and divestiture and legislative resolution). Back
42) Southern California Edison, Application No. 96-11-046, Interim Order at 9 (Cal. Pub. Util. Comm'n. September 1997) (noting that FERC approval of ISO agreement will cause "substantial delay" but adds that such approval is necessary to reduce uncertainty for prospective buyers.) Back
43) See, e.g., Pacific Gas and Electric, Application 96-11-020, Interim Order, Slip. Op. at 7 (Cal. Pub. Util. Comm'n. 1997) (describing that CEQA applies to approvals of divestiture plans under Section 851 since such approvals are discretionary and proposed activity "may cause a direct physical change in the environment...and is undertaking by a person who receives from a public agency [i.e., the CPUC]...an entitlement for use."). Back
44) Southern California Edison, Mitigated Negative Declaration for Divestiture Proposal, Application No. 96-11-046 (Cal. Pub. Util. Comm'n. October 11, 1997). Back
45) Id. Much of the mitigation consisted of conditions requiring Edison to assist and familiarize the new owners with the environmental efforts undertaken by Edison at the project. Back
46) Pacific Gas and Electric, Decision 97-09-046, Interim Order, Slip. Op. at 11 (Cal. Pub. Util. Comm'n. September 1997). Back
47) PG&E's ratepayers could be subject to increased environmental remediation costs if PG&E were required to clean up sites to standards required for non-industrial uses, such as hospitals, parks, etc... Back
48) Pacific Gas and Electric, Decision 97-09-046, Interim Order, Slip. Op. at 13 (Cal. Pub. Util. Comm'n. September 1997). Back
49) Southern California Edison, Decision 97-09-049, Interim Opinion, Slip Op. at 5 (September 1997). Back
50) New England Power, Order Approving Settlement, Docket No. 96-25-A, Slip. Op. at 10 (1997). Back
51) Cal. Pub. Util. Code sec.330. Back
52) Id. at 8 (recommending that Edison's proposed accounting and ratemaking treatment of sale should be approved subject to net confirmation of net book value of plants); see also Southern California Edison, Application 96-11-046, Exhibit No. SCE-7 at 12 (filed November 1996) (describing proposal to record divestiture related workforce management costs as recoverable amounts to be subtracted from net value of plant). Back
53) Massachusetts Restructuring Decision, DPU 96-100, Slip. Op. at 305-306 (Mass. Bd. Pub. Util. 1996). Back
54) Interestingly, the law further provides that "there shall be no recovery for employee-related transition costs associated with officers, senior supervisory employees, and professional employees performing predominantly regulatory functions..." Back
55) Southern California Edison, Application 96-11-046, SCE-3-Description of Auction Process at 11 (filed November 1996). Back
57) Thus, the FERC's consideration of competition and antitrust principles did not initially follow from an express obligation to consider competition (much less express jurisdiction to enforce the antitrust laws), but from the "public interest" mandate in the Federal Power Act. See Gulf States Utilities Co. v. FPC, 411 U.S. 747 (1973). On the other hand, the ability to invoke the "public interest" mandate as basis for conditioning is not without limit; thus the Supreme Court rejected the FPC's effort to remedy racial discrimination by a regulated utility. NAACP v. FPC, 425 U.S., 662 (1976). Back
58) Section 193 Section 1(A)(3)(e) provides that "[A] generation company shall not be subject to regulation as a public utility or as an electric company, except as specified in this Section 193 Section 1(A)(3)(e) provides that "[A] generation company shall not be subject to regulation as a public utility or as an electric company, except as specified in this chapter." Back
59) See, e.g., New England Power Application for Divestiture, DPU 96-25 (October 1, 1997) (describing that New England Power and US Gen New England agree to sale and purchase of generation assets and related contracts for $1.59 billion in cash (or 145 percent of net book value) with payments for independent power contracts to be financed through issuance of $100 million in notes issued by New England Power). Back
60) See, e.g. Southern California Edison, Decision No. 97-09-049, Slip. Op. at 9 (Cal. Pub. Util. Comm'n. September 1997) Back
62) Section 851 California Pub Util Code; Gen Law 164 Mass (both authorizing Commission to approve transfers of utility property when found "in the public interest). Back
63) Competitive Opportunities in New York re: Electric Service, 168 PUR 4th 515 (New York Pub. Serv. Comm'n. 1996) (directing utilities to submit restructuring plans and encouraging "total divestiture") (hereinafter cited as "New York Restructuring Decision"). Back
64) New Hampshire Restructuring Decision, 175 PUR 4th 193 (New Hamp. Pub. Serv. Comm'n. 1997). Back
65) Cal. Pub. Util. Code sec. 851 (requiring California Commission to approve transfers of property); Mass. Gen. Laws Ann. ch. 164, sec. 96 (authorizing Massachusetts Board to approve transfers of utility property when found in the public interest) Back
66) California Restructuring Decision, 166 PUR 4th 1 (Cal. Pub. Util. Comm'n. 1996). Back
67) See Order Instituting Rulemaking on Commission's Proposed Restructuring Policies, 175 PUR 4th 127 (Cal. Pub. Util. Comm'n. 1997), 1997 Cal. PUC LEXIS 83, *18 (summarizing California Commission's decision on ROE component of CTC) Back
68) Massachusetts Restructuring Decision, DPU 96-100, Slip. Op. at 282-292 (Mass. Bd. Pub. Util. 1996). Back
69) See "Massachusetts Legislature Gets Close To Restructuring Vote," Energy Report (November 3, 1997). Back
70) See Competitive Opportunities In New York, 168 PUR 4th 515 (N.Y. Pub. Serv. Comm'n. 1996). Back