Plight of the dammed

Within a few weeks, a showdown in federal bankruptcy court between energy giant PG&E and California’s Public Utility Commission will decide whether the utility can split off its nuclear power plant and shatter its hydroelectric system into numerous limited liability companies.

Critics believe PG&E is using its bankruptcy plan to skirt environmental issues and to self-deregulate. They fear the plan will turn California’s rivers into rivulets and drain down reservoirs to maximize its profits from generating hydropower—diverting water through turbines to produce electricity.

By the end of March, the bankruptcy trial is expected to conclude. Judge Dennis Montali will decide whether to approve PG&E’s plan, an alternative plan proposed by the CPUC and PG&E’s creditors or neither.

“This is the largest privately owned hydroelectric system in the United States,” said Michael Neville, deputy attorney general for the state of California. He’s representing state agencies in opposition to the plan. “It’s not your typical run-of-the-mill bankruptcy. We view this as an attempt to deregulate PG&E by using the bankruptcy code. We’ve seen the mischief that can happen when energy markets are deregulated in a not prudent manner.”

PG&E’s plan would split the utility into four separate private companies: a gas company, an electric company to transmit power over transmission lines, a distribution company to deliver power to commercial and private customers, and an energy-generation company to produce energy through nuclear and hydropower facilities. The plan calls for the generation company to be divvied up into 26 separate limited liability companies, one for each hydropower project. Diablo Canyon, the nuclear facility, would become part of PG&E’s parent company.

If PG&E’s plan prevails, regulatory power would be handed over to the Federal Energy Regulatory Commission, cutting the CPUC, and its more stringent environmental standards, out of the loop.

PG&E spokeswoman Jann Taber said the utility is not attempting to dodge state reviews. “We’re not seeking to pre-empt current environmental and safety issues,” she said.

Taber acknowledged that PG&E’s plan wouldn’t trigger an evaluation by the California Environmental Quality Act. However, anything else that “we did that required CEQA” would still necessitate a CEQA review, she said.

This lack of a comprehensive environmental review alarms environmentalists and state officials. PG&E’s hydroelectric system is huge, containing rivers from Mount Shasta to Bakersfield. Within the system are 250 dams and diversions, 99 reservoirs and 68 powerhouses.

PG&E’s plan creates “economic incentives for environmental harm,” the state attorney general’s office argued in its legal brief, and violates state law prohibiting the transfer of electric generation assets without CPUC approval until 2006.

However, Taber said PG&E believes “the bankruptcy statutes give the bankruptcy court the right to pre-empt state law.”

Since declaring bankruptcy nearly two years ago, PG&E has spent more than $40 million in legal fees, said Chuck Bonham, attorney for Trout Unlimited and co-counsel with the Natural Heritage Institute in a related lawsuit. “It’s been a pitched battle on every step, every issue,” he said. “It’s a challenge for a bunch of conservation groups who don’t have a $40 million budget.”

“There is a David and Goliath aspect,” agreed Steve Wald of the California Hydropower Reform Coalition. Wald views PG&E’s plan as an entry into the open market for selling its hydro and nuclear power at a rate “many times more than the cost of producing it.”

For decades, PG&E has been governed by “rate of return regulation,” which guarantees repayment of operating costs plus a reasonable profit. Whenever PG&E has taken voluntary measures to mitigate environmental damage, such as upgrading fish ladders for migrating steelhead and salmon or installing “fish friendly” turbines, it has been repaid through CPUC-approved rate increases.

Through its reorganization plan, PG&E is seeking to lift this cap on profits. In doing so, it also will lose the ability to be repaid for environmental improvements.

Informal agreements the utility has made to supply extra water in rivers and dams may fall by the wayside, also. Among these agreements are provisions for whitewater rafting at Chili Bar Dam on the south fork of the American River and for recreation at Bass Lake, south of Yosemite, said Wald. That PG&E “can currently cover costs and make a certain rate of return leaves room for them to do things [like that],” he said.

“The regulated company may be a good corporate citizen because it doesn’t really cost it anything to be one,” said Lee S. Friedman, professor of public policy at UC Berkeley, in testimony in opposition to PG&E’s plan. “When profit and the environment conflict, one should not expect the environment to win.”

But the unregulated generation company proposed by PG&E’s plan would have no incentive to continue to operate in a more environmentally friendly manner than required by FERC’s minimal standards. It no longer would be able to recoup environmental mitigation expenses, which would come directly out of its profits and result in a loss to shareholders.

The PG&E plan automatically transfers FERC licenses issued decades ago, before legislation was enacted that safeguards the environment, such as the Clean Water Act, the National Environmental Protection Act and Federal Endangered Species Act. Until these licenses expire, they permit operations under rules now considered environmentally damaging.

Long stretches of rivers could be reduced to a trickle, and the companies would still be in compliance with these old FERC licenses. “As a rule, 95 percent of the water [could be] removed during the summer,” said Wald.

These proposed limited liability companies could hoard water in the spring, wait for the price to soar in summer months and then release the stored water through power turbines, to generate electricity at peak prices.

This hoarding and spending of water could lead to a host of negative environmental effects, such as increased water temperature, lowered pH, decreased oxygen and growth of algae, all of which affect fish and other aquatic life.

Taber denied that PG&E’s plan of reorganization would change procedures. Hydro facilities “will continue to be operated under the FERC-approved licenses that currently exist,” she said.

But, unlike the CPUC, which examines multiple hydropower projects in a system-wide overview, FERC regulates each individual hydropower project separately, said Neville, the deputy district attorney for the state.

Without a “comprehensive environmental review,” Neville argued, “no one will know if there will be significant environmental impacts with this huge change of corporate structure.”

PG&E’s hydropower system already has “substantially disrupted … the natural pattern of rainfall, snowmelt and spring accretion on the rivers controlled by this system. The size, health and diversity of fisheries is already fragile,” and further disruption “could push these resources beyond critical thresholds,” says a lawsuit filed by the Natural Heritage Institute and Trout Unlimited.

State officials and environmentalists fear PG&E’s plan will undermine these conditions further.

“FERC has the right to set minimum flows. We’re not challenging that,” said Neville. What concerns him is the “zone of discretion” in how hydroelectric plants may be operated. Though the proposed new company would release enough water to satisfy FERC licenses, it could discontinue informal agreements with fishing groups and lakefront-property owners.

“What’s going to happen to these informal agreements that have benefited everyone, including PG&E?” Neville asked. “Economic incentives will change,” he said, and PG&E’s claims that nothing about its hydropower operations will change are “a guarantee of nothing.”