Factual Background - California

?ALJ/ZK1/jnfPROPOSED DECISIONAgenda ID #18749 (Rev. 1)Ratesetting9/24/2020 Item #13Decision __________BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIAApplication of Pacific Gas and Electric Company (U39E) for Commission Approval Under Public Utilities Code Section 851 to Sell the Kern Canyon Hydroelectric Project to Kern & Tule Hydro LLC.Application 20-02-005DECISION AUTHORIZING PACIFIC GAS AND ELECTRIC COMPANY’S SALE OF KERN CANYON HYDROELECTRIC PROJECT TO KERN & TULARE HYDRO LLCSummaryThis decision grants Pacific Gas and Electric Company’s (PG&E) application to sell the Kern Canyon Hydroelectric Project (Project) to Kern & Tule Hydro LLC pursuant to Section?851 of the California Public Utilities (Pub. Util.) Code. PG&E shall recover a net cost of $6.3 million for the Project from bundled and vintage departed-load customers. This proceeding is closed.Factual BackgroundThe Kern Canyon Hydroelectric Project (Project) is a 700-acre parcel of land, which includes a small hydroelectric plant constructed across the Kern River. The Project is located approximately 15 miles east of the City of Bakersfield, California. Pacific Gas and Electric Company (“PG&E” or “Seller”) has owned the Project since the Kern Canyon Hydroelectric Project began operations on August?8,?1921. The Project consists of “a small forebay diversion dam (20?acrefoot) and intake structure which diverts water from the Kern River into a 1.6-mile tunnel and penstock to the single-generator unit at Kern Canyon powerhouse.” The dam provides non-flexible base-load energy, with its operations directed by upstream releases from Isabella Reservoir.The dam incurred heavy storm damage to its gates, piers, catwalk, tunnel inlet and access road on January?5,?2017, which to date is not repaired. After conducting a Request for Offers (RFO) for sale of the Project, PG&E entered into a Purchase and Sale Agreement (PSA) with Kern & Tule Hydro LLC (“Kern & Tule” or “Buyer”) on January 17, 2020, to transfer ownership of the Project, as shown in Appendix A. The sale includes the 700-acre parcel of land, the dam and the water rights for electrical generation. The sale does not include a local electric substation or electric transmission and distribution equipment associated with the dam. Kern & Tule intends to repair the dam and operate it as a hydroelectric project.Procedural BackgroundOn February 12, 2020, PG&E filed this Application for authority to sell the Project to Kern & Tule pursuant to Section?851 of the Pub. Util. Code. The Public Advocates Office of the Public Utilities Commission (Cal Advocates) filed a motion for party status on March 11, 2020. A prehearing conference was held on April 21, 2020, to discuss the issues of law and fact, determine the need for hearing, set the schedule for resolving the matter, and address other matters as necessary. The parties filed a joint motion, dated May 1, 2020, in which the parties indicated there were no remaining issues in dispute and requested to enter evidence into the record. The assigned Commissioner issued a scoping memo on May 13, 2020, which deemed this matter submitted.On July 15, 2020, the assigned Administrative Law Judge (ALJ) reopened the record and requested additional information. On July 28, 2020, PG&E responded to the request for additional information. This matter is deemed submitted as of July 28, 2020.JurisdictionPG&E has operated as a public utility providing electric and gas services in California since 1905. PG&E is an electric utility subject to the Commission’s jurisdiction.Issues Before the CommissionThe issues to be determined are:Whether PG&E’s proposed sale of the Project to Kern & Tule, subject to the terms and conditions of the January?7,?2020 PSA between Seller and Buyer, complies with all Commission requirements, and should thus be approved by the Commission as in the public interest pursuant to Section?851?Whether the Commission should approve PG&E’s proposed ratemaking treatment of its estimated $6.3 million pre-tax loss from this transaction as recorded in the Portfolio Allocation Balancing Account (PABA) consistent with Decision (D.) 06-05-041, as modified by D.0612043?Compliance with Section?851Section?851 provides, in relevant part, that no public utility: shall sell, lease, assign, mortgage, or otherwise dispose of or encumber the whole or any part of its . . . line, plant, system, or other property necessary or useful in the performance of its duties to the public, or any franchise or permit or any right thereunder . . . without first having either secured an order from the commission authorizing it to do so for qualified transactions valued [at or] above five million dollars ($5,000,000) . . . .In evaluating the transaction pursuant to Section?851, we look to see whether the project is “necessary or useful” for PG&E’s performance of its duties for the public. The transaction includes the Kern Canyon Hydroelectric Project, which PG&E owned and operated since 1921 to provide hydroelectric power for the benefit of its customers. The Project is currently shut down, having sustained injury due to storm damage on January 5, 2017. However, the plant is reparable and has an active Federal Energy Regulatory Commission (FERC) license (Project?178) valid through January 1, 2039. PG&E reports it currently has excess generation supply due to load migration. While PG&E’s current excess generation no longer renders PG&E’s operation of the Kern Canyon Hydroelectric Project necessary, we find the plant useful for its ability to generate hydroelectric power when properly maintained. Therefore, the provisions of Section?851 apply to this transaction.We also look to the value of the property to determine whether it is at or above $5 million. PG&E’s total historical cost for the Project as of December?30,?2020 is $15.3 million. The net book value, which is the historical cost less depreciation value, is $8.1 million. The negotiated price is $3.0?million and the transaction costs, primarily related to electrical interconnection, are estimated at $1.2 million. Overall, the pre-tax loss-on-sale is estimated to be $6.3 million and the after-tax loss-on-sale is estimated to be $4.5 million as of December 30, 2019. The parties will adjust the pre-and post- loss-on-sale value to the book value as of the PSA closure date. Therefore, the total value of the transaction represents a loss of approximately $6.3 million to PG&E’s customers, which is above the $5?million threshold for Commission review of the transaction pursuant to Section?851 through review by an application.Having determined that the provisions of Section?851 apply to PG&E’s transaction and this application is properly before the Commission, our inquiry turns to an assessment of whether the transaction is in the public interest. When evaluating the viable options for ownership and operation of the Kern Canyon Hydroelectric Project, PG&E conducted a cost and benefits analysis of three options: 1) repair and continue to operate the plant; 2) sell the plant; or 3)?decommission the plant by surrendering the FERC license. PG&E’s cost-benefit analysis shows that selling the plant to the Buyer will reduce costs to PG&E’s customers compared to the other alternatives identified. PG&E also determined the transaction helps address PG&E’s excess energy supply and will not interfere with its operations or its ability to provide safe and reliable utilities service to its customers. An RFO conducted for sale of the property yielded bidders from 13?entities, by which means PG&E assessed the market value of the project. The number of bids in this instance is sufficient to show that the $3.0?million negotiated price is a good faith value for the property.Upon review, we agree that selling the Project is the least-cost alternative to PG&E’s customers and, having identified no other foreseeable adverse impacts as a result of this transaction, find PG&E’s sale of the Project to Buyer is in the public pliance with CEQAEnvironmental regulation of the Project is governed under both federal agencies, including FERC and the United States Fish and Wildlife Service, as well as state agencies, including the State Water Resources Control Board and the California Public Utilities Commission (Commission). The Commission is the lead agency for this Project under CEQA. Therefore, we must determine what environmental review is required pursuant to CEQA prior to approval of this transfer of assets.PG&E requests a Commission finding that this project is categorically exempt from CEQA review, since the transaction contemplates repairs to existing hydroelectrical infrastructure with no expansion of the former use.CEQA provides for a categorical exemption for the “the operation, repair, maintenance, permitting, leasing, licensing, or minor alteration of existing public or private structures, facilities, mechanical equipment, or topographical features, involving negligible or no expansion of existing or former use,” including “existing facilities of both investor and publicly-owned utilities used to provide electric power, natural gas, sewerage, or other public utility services.” The “key consideration is whether the project involves negligible or no expansion of use.”The Buyer asserts an intent to repair the Kern Canyon Hydroelectric Project and resume prior operations without modification. Therefore, we find the sale exempt from CEQA as proposed in this Application. In the event Buyer resolves to modify the operations of the Kern Canyon Hydroelectric Project, Buyer will be responsible for obtaining any necessary CEQA approval from the lead CEQA agency. Ratemaking Treatment of the ProjectThe Commission’s gain on sale of utility assets allows utilities to seek allocation of an after-tax loss of $50 million or less pursuant to the percentage allocation rule, wherein 100% of depreciable assets are allocated to customers, 67% of non-depreciable assets are allocated to customers, and 33% of non-depreciable assets are allocated to shareholders.While the sale is not reflected in the 2020 GRC forecast, PG&E proposes to adjust the Project’s retired rate base and operations and maintenance (O&M) costs upon close of sale. PG&E proposes to reduce the rate base and capital work in progress by approximately $6.3 million, which is the historical cost less the depreciated value and the net sale proceeds at the time the sale closes. PG&E also proposes to record the approximately $6.3 million loss from the sale of the Kern Canyon Hydroelectric Project to the Utility Generation Balancing Account (UGBA) as authorized utility-owned generation revenue requirement. This amount will be allocated to PG&E’s bundled and vintage customers through the Power Charge Indifference Adjustment (PCIA) and recovered from departed load customers through the PABA.We agree that it is appropriate for PG&E to adjust its rate base for 100% of the $6.3?million loss according to the percentage allocation rule for a depreciable asset and authorize the rate base and O&M adjustment in PG&E’s next General Rate Case. We also authorize recovery of the $6.3 million loss through the UGBA, to be allocated to bundled and departed load customers through the PCIA and recovered from departed load customers through the PABA in accordance with existing PCIA rules.Land Use and Cultural Resources The Commission approved PG&E’s grant of a perpetual Land Conservation Easement for the Project to the Sequoia Riverlands Trust on February 5, 2015. The easement was recorded in the Official Records of Kern County, California on June 23, 2015. Though the conservation easement binds future owners, PG&E, Buyer and the Sequoia Riverlands Trust will also enter into a Conservation Easement Assignment Assumption Agreement to “ensure full transparency, acknowledgement, and commitment to compliance with the terms of the Conservation Easement,” as detailed in Appendix A.The conservation easement includes provisions to ensure that public access to the land and informal uses of the land shall continue. The cultural resources of the Project are managed under the Historic Properties Management Plan, as required by the FERC license. PG&E’s RFO for sale of the Project, launched in June 2018, predates the Commission’s adoption of the Final Tribal Land Transfer Policy on December 5, 2020. That policy therefore does not apply to this pliance with the Authority Granted HereinPG&E must file a Tier 1 Advice Letter to the Commission’s Energy Division within 45 days of the PSA closing date to implement the authority granted herein. The Tier 1 Advice Letter shall include the final calculation of the loss-on-sale and tax information related to the transaction.Related ProceedingsIn additional to Commission approval for the sale of the Project, PG&E and Buyer will jointly file an application at FERC to transfer: 1) the plant’s operating license and 2) the title in fee to Buyer. PG&E also filed for bankruptcy under Chapter 11 of the Bankruptcy Code on January 29, 2019. PG&E asserts that the Creditors Committee raised no concerns with the proposed sale at the time of the application, and PG&E subsequently exited bankruptcy.Also, Section 854.2 defines “change of control” events and statutory requirements that are triggered when a “change of control” event occurs. Section 854.2(b)(1)(A) defines “change of control” as an "event that triggers the application of Section 851 or 854." PG&E requests approval in this application under Section 851, which would typically trigger the "change of control provisions" of Section 854.2. However, Section 853(b) states "[t]he commission may...exempt any public utility...from this article if it finds that the application thereof with respect to the public utility...is not necessary in the public interest." The Kern Canyon Hydroelectric Project has not operated since January 2017 and has no commensurate workforce for which to address a transition. Accordingly, the Commission exempts this application from the change of control requirements contained in Section 854.2.Admission of Testimony and Exhibits in the RecordIn order to fairly assess the evidentiary record, it is necessary to consider all relevant testimony and other exhibits offered for consideration by the parties. By joint motion, dated May 1, 2020, PG&E and Cal Advocates requested, pursuant to Rule?13.8 of the Commission’s Rules of Practice and Procedure, that the Commission receive PG&E’s testimony and Cal Advocates’ declaration into the record of A.20-02-005. Therefore, we identify PG&E’s testimony and Cal?Advocates’ declaration as Exhibits PGE-01, PGE-02, PGE-03 and Cal?Advocates01. Given the necessity of PG&E and Cal Advocates’ testimony and declaration to our assessment of the Project sale, we admit into evidence the public and confidential exhibits discussed above.Confidential Treatment of Testimony and ExhibitsPG&E submitted public and confidential testimony. Pursuant to Rule?11.5 and D.06-06-066, PG&E’s joint motion, dated May 1, 2020, requested that the Commission grant confidential treatment to confidential information provided in Exhibit PG&E-02. The information referenced in the motion to file under seal and the information contained in the testimony filed under seal constitute commercially sensitive material and include information that falls under the “Confidential” category in the Confidentiality Matrix of D.14-10-033.We grant confidential treatment of and seal (as detailed in the ordering paragraphs herein) confidential portions of PG&E’s testimony in Exhibit PGE-02. The documents placed under seal shall remain under seal for the applicable period of time set forth in the Confidentiality Matrix in D.14-10-033.Other Procedural MattersAll rulings by the assigned Commissioner and assigned ALJ are affirmed herein. All motions not specifically addressed herein or previously addressed by the assigned Commissioner or ALJ, are ments on Proposed DecisionThis is an uncontested matter in which the decision grants the relief requested. Accordingly, as provided in Rule?14.6(c)(2) of the Commission’s Rules, the otherwise applicable 30day public review and comment period for this decision is waived.Assignment of ProceedingMarybel Batjer is the assigned Commissioner and Zita Kline is the assigned ALJ in this proceeding.Findings of FactThe PSA includes a small forebay diversion dam (20 acre-foot) and intake structure which diverts water from the Kern River into a 1.6mile tunnel and penstock to the single-generator unit at Kern Canyon powerhouse, situated on a 700acre parcel of land.The PSA does not include a local electric substation or electric transmission and distribution equipment associated with the dam.The Kern Canyon Hydroelectric Project at issue was damaged from a storm on January 5, 2017.The Kern Canyon Hydroelectric Project can be repaired to restore it to operation. The Kern Canyon Hydroelectric Project is licensed under FERC (Project?178) until 2039.The total historical cost of the Project as of December 30, 2020, is $15.3?million.The net book value of the Project is $8.1 million.PG&E solicited bids for the sale of the Project through an RFO conducted in June 2018.PG&E executed the term sheet for the sale of the Project on January 7, 2019.The negotiated sale price of the Project is $3.0 million.PG&E receive bids from 13 bidders for the Project.The total value of the transaction represents a loss of $6.3 million to PG&E’s customers.Sale of the Project is the least cost option for PG&E’s customers, when considering repair or decommission of the plant as alternatives.Kern & Tule LLC intends to repair the Kern Canyon Hydroelectric Project and operate it in the same manner as PG&E operated the plant prior to the storm on January 5, 2017. PG&E’s bundled and vintage departed load customers received a benefit from operation of the Kern Canyon Hydroelectric Project.The Sequoia Riverlands Trust currently manages the 700 acres of land on the Project under the Land Conservation Commitment. The Sequoia Riverlands Trust will continue to manage the 700 acres of land on the Project under the Land Conservation Commitment after the sale of the Project to Buyer. The Land Conservation Commitment will run with the deed to parcels sold through the transaction.The Commission’s Final Tribal Land Transfer Policy was adopted on December 5, 2019.Kern & Tule and PG&E intend to jointly apply to transfer PG&E’s FERC license to Buyer prior to repair and operation of the Kern Canyon Hydroelectric Project.Conclusions of LawThe Kern Canyon hydroelectric plant is useful but not necessary to PG&E’s customers.The negotiated price for the Project is a good faith value. The PSA meets the requirements of Section 851.Sale of the Project is in the public interest.The Commission should authorize the sale of the Project pursuant to Section 851.The Commission is the lead agency for CEQA purposes in authorizing this PSA.The sale of the Kern Canyon hydroelectric plant, as represented, is categorically exempt under CEQA.The allocation rules rule per D.06-05-041, as modified by D.06-12-043, apply to the ratemaking treatment of this transaction. The Land Conservation Commitment runs with the title of the 700 acres of land associated with the Project.The cultural resources of the Project are managed under the Historic Properties Management Plan, as required by the Project’s FERC license.The Commission’s Tribal Land Transfer Policy does not apply to this sale of the Project.The Kern Canyon Hydroelectric Project is a depreciable asset and 100% of losses can be allocated to ratepayers.PG&E should recover a $6.3 million loss from the sale of the Kern Canyon Hydroelectric Project through the UGBA, which should be allocated to bundled and departed load customers through the PCIA and recovered through the PABA.Within 45 days after the closing date of the PSA, PG&E should submit the closing financial, and other, information to the Commission’s Energy Division as a Tier 1 Advice Letter. The financial information should consist of the final calculation of the loss-on-sale, tax information related to the transaction and verification of any modifications of the PSA ordered herein. Exhibits PGE-01, PGE-02, PGE-03 and Cal Advocates-01 should be admitted into the evidentiary record.It is reasonable to grant confidential treatment of Exhibit PGE-02.All rulings of the assigned Commissioner and the assigned ALJ should be affirmed herein; and all motions not specifically addressed herein or previously addressed by the assigned Commissioner or ALJ, should be denied.This proceeding should be closed.ORDERIT IS ORDERED that:Pursuant to Public Utilities Code Section 851, Pacific Gas and Electric Company is authorized to enter into the Purchase and Sale Agreement, attached as Attachment A to this application, with Kern & Tule Hydro LLC.Pacific Gas and Electric Company shall recover the $6.3 million loss from the sale of the Kern Canyon Hydroelectric Project through the Utility Generation Balancing Account, to be allocated to bundled and departed load customers through the Power Charge Indifference Adjustment and recovered through the Portfolio Allocation Balancing Account.Within 45 days after the closing date of the Purchase and Sale Agreement, Pacific Gas and Electric Company shall submit the closing financial information to the California Public Utilities Commission’s Energy Division as a Tier 1 Advice Letter. The financial information shall consist of the final calculation of the loss-on-sale and tax information related to the transaction. Exhibits PGE-01, PGE-02, PGE-03, Cal Advocates-01 are received into evidence.Pacific Gas and Electric Company’s (PG&E) request to treat as confidential exhibit PGE-02, including pertinent testimony thereunder, is granted for a period of three years from the date of this order. During this three-year period, this information shall not be publicly disclosed except on further Commission order or Administrative Law Judge ruling. If PG&E believes that it is necessary for this information to remain under seal for longer than three years, it may file a new motion showing good cause for extending this order by no later than 30 days before the expiration of this order.All rulings of the assigned Commissioner and the assigned Administrative Law Judge (ALJ) are affirmed herein; and all motions not specifically addressed herein or previously addressed by the assigned Commissioner or ALJ, are denied.Application 20-02-005 is closed.This order is effective today.Dated , at San Francisco, California.Appendix APurchase AND Sale Agreement ................
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