PG&E's Auction Proposal

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

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

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

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

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

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

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

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

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

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

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

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

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