Future of Land, Reservoirs at Stake in PG&E; Battle

The most coveted chess piece in the Pacific Gas & Electric Co. bankruptcy is a multibillion-dollar system of hydroelectric facilities and real estate stretching from Mt. Shasta to Bakersfield and from the Sierra to the coast.

With 273 dams and reservoirs, 68 powerhouses and almost 140,000 acres of land, this is considered the largest privately held hydroelectric network in the country.

And now this system that harnesses the power of major rivers also is a central flash point in the battle over whether PG&E; will be able to preempt state laws to achieve its plan for repaying $13 billion in debts and restoring its financial viability.

PG&E; wants to move these assets, along with its nuclear power plants, into new California-based subsidiaries of its parent company, PG&E; Corp.

But the proposal has environmentalists and state officials flocking to court, because it would transfer some of the state’s most sensitive land holdings and important generation facilities without either state environmental review or the permission of the Public Utilities Commission.

Although some opponents praise PG&E;’s long stewardship of its vast holdings, they say the transfer would not be in the public interest and would open the door to harmful development and logging. And they allege the plan is a backdoor way to accomplish the transfer of hydro facilities that PG&E; could not achieve through the PUC and the Legislature in recent years.

Federal bankruptcy Judge Dennis Montali has scheduled a hearing for Friday on this and other PG&E; proposals to preempt state laws and regulations. The outcome could make or break PG&E;’s plan for reorganizing the company and emerging from Chapter 11.

The hydroelectric system was developed over the last century by the giant utility, which retreated to Bankruptcy Court last April to keep thousands of creditors at bay. The system generates about 15% of the power used by PG&E;’s Northern and Central California customers, and makes PG&E; one of the state’s largest landowners. The facilities and watershed have been valued at $2.7 billion to $4.2 billion.

Company spokesman John Nelson said PG&E; wants to move the assets out of the utility so that it can leverage them to pay its debts without a rate increase or a state bailout.

He said PUC rules for utilities prevent the company from borrowing sufficient funds on the assets, so it wants to shift them to federal regulation.

PG&E; said in a recent court filing that “there are no plans to change the management of the lands ... or to dispose of such lands.” And it promised its operations will be “consistent with sound environmental stewardship policies.”

But government agencies and environmentalists are concerned that PG&E;’s plan would create a serious regulatory gap, increasing development pressures and weakening protections for fisheries, old-growth forests, endangered species and public access.

“PG&E; takes the position that they do not have to get PUC approval to transfer the assets,” said Irving Sulmeyer, who is representing several counties in Bankruptcy Court. “Therefore, there is no one ... enforcing the California Environmental Quality Act.”

The attorney general’s office said the PG&E; plan would have “devastating” effects on the environment.

The PUC historically has provided PG&E; with financial incentives to manage the hydroelectric facilities and the lands “at stewardship levels higher than the minimum legal standards,” the attorney general said in a court filing. “This meant trees did not have to be cut aggressively, land did not need to be developed, and powerhouses did not have to be run at their maximum capacity.”

Diablo Canyon nuclear power plant in San Luis Obispo County is licensed by the Nuclear Regulatory Commission, but rates from power produced there are set by the state PUC. Rates for PG&E;’s hydroelectric power are set by the PUC too.

Under the utility’s proposal, the Federal Energy Regulatory Commission in Washington would take over rate-setting and other regulatory functions--an action the PUC says would result in less protection for California consumers and PG&E;’s land.

“Who is to say that a timber company won’t come to town in a year and want to buy it,” said Brian Hermann, a New York bankruptcy lawyer hired by the PUC. “What would FERC care about that?”

PG&E; “offers only vague promises of continued environmental stewardship in lieu of the concrete assurances provided by ongoing PUC oversight and cost of service regulation,” said court documents filed by Environmental Defense, a 300,000-member nonprofit group.

The organization is concerned that most of the PG&E; watershed lands, including waterfowl habitat, will be placed under a new subsidiary called Land Holdings LLC and later developed.

PG&E; spokesman Ron Low said the fears are unfounded. “The company has more than a 100-year history in operating the hydro facilities,” he said. “And under the plan of reorganization, we will continue to operate in the same environmentally safe way.”

Low said any future development by the new land holding company could be subject to California Environmental Quality Act reviews.

“We’re not asking for a lifetime exemption,” he said.

Even so, state Resources Secretary Mary D. Nichols said, “We lose comprehensive state review over much larger pieces of land and the ability to help the company maintain a higher level of stewardship than will occur once they are thrown into the free market.”

During the last few years, PG&E; has tried to transfer its hydroelectric assets. But the company met resistance from the PUC, environmentalists and others, and those efforts stalled.

In 1999, the company asked the PUC for permission to split its hydroelectric system into up to 20 “bundles” of lots and to auction them to the highest bidder.

A draft environmental impact report commissioned by the PUC found in 2000 that the most likely buyers would have a strong financial incentive to operate the facilities at higher rates, altering stream flows and harming fisheries. PG&E; disputed many of the conclusions.

PG&E; officials said removing the hydroelectric facilities from PUC oversight would “harmonize” the utility’s generation facilities under federal regulation and complete the sell-off of power plants that began under the state’s deregulation plan several years ago.

The PG&E; Corp. subsidiary that controls generation assets would enter into a 12-year contract with the utility, which officials say is designed to provide reasonably priced power with no rate increase.

In opposing PG&E;’s reorganization plan, the PUC has argued that state law adopted during the energy crisis bars the transfer or sale of the hydroelectric facilities until 2006, so that power from the facilities is available to Californians.

Last week, PG&E; filed a $4-billion claim against the state, alleging that the state breached its obligations to allow PG&E; to shift these generation facilities to federal regulation and sell the power at higher market rates.