9. Affiliated Company Activities

DRA took issue with some affiliated company activities that do not impact SJWC's test year. These activities were sales of utility property and non-tariff activities.

DRA recommended that SJWC should be required to file Section 851 applications for the sale of its Blossom Hill Station Property #214 and First Street Station Property #276.76 DRA also recommended that SJWC should be required to file a Section 851 application for the sale of its Doyle Street Property #181.

DRA determined from data responses received from SJWC that two properties were sold to SJWC's affiliate San Jose Land Company, without Commission authority, prior to SJWC determining that the properties were no longer necessary and useful. Hence, DRA recommended that SJWC be required to file a Section 851 application for Property #214 and Property #276. The following tabulation compares the dates provided to DRA from SJWC that these properties were transferred out of utility plant in service, memorandums designating non-utility status were prepared, and the properties were sold.77

As shown by the above tabulation, Property #214 was sold in December 1999, approximately three years prior to a March 2001 memorandum designating that property no longer useful for utility purpose. Similarly, Property #276 was sold in September 2000, approximately four years prior to the April 2004 memorandum designating that property no longer useful for utility purpose.

SJWC's procedure in considering the removal of property from utility service has been to prepare a memorandum to evaluate the need for the property in regulated water service. However, the memorandum date does not determine when a property is no longer necessary and useful. The controlling issue is whether the property was actually necessary or useful at the time of the sale.

SJWC undertook a forensic investigation into its Microsoft WORD software to determine why the justification memorandums for these properties were dated after they were sold. It discovered that each time memorandums related to Properties #214 and #276 were opened, Microsoft WORD automatically updated the date listed on each memorandum to the date the document was opened for printing. Those changes in dates resulted from an employee who mistakenly activated a feature in the WORD program to automatically update a date when the memorandums were reopened over time.78 The following tabulation shows the dates that the justification memorandums were initially issued, based on SJWC's forensic investigation.

The corrected memorandum dates substantiate that these properties were not sold prior to a determination that the properties were no longer necessary or useful for utility purposes. SJWC has also reasonably explained that an employee computer error caused the dates of its justification memorandums to be updated each time when those memorandums were printed.

Section 851 applications are not required for property that was not necessary or useful when sold.79 SJWC should not be required to file Section 851 applications for Properties #214 and #276 because they were not necessary or useful when sold.

DRA also recommended that SJWC should be required to file a Section 851 application for its sale of its Property #181 because SJWC did not provide advance notice of its proposed sale of that property as required by D.06-05-041.

D.06-05-041 specifically required water utilities, including SJWC, to provide the Director of the Division of Water and Audits and the Director of DRA 30 days' advance written notice whenever they plan to sell land, buildings, water rights, or all or part of a water system. This notice requirement applies to water utility assets that the water utility has determined are no longer used and useful for utility purposes. Notice does not preclude later review of such sales in a water utility's GRC or a later proceeding.80

SJWC reported in its GRC minimum data response to DRA that Property #181 was no longer necessary or useful for public utility service and that it was in the process of selling that property but, due to inadvertence, SJWC had not provided the notice required by D.06-05-041.81

A memorandum justifying the transfer of Property #181 to non-utility use from plant in service was issued in November 2001, and the property was transferred to non-utility property on its accounting records on March 13, 2002, and sold in October 2008.82 Although SJWC did not provide a formal written notice to the Directors, it did provide notice and disclose certain details of the sale in this GRC. Although SJWC disclosed to DRA its intent to sell the property not used or useful for utility purposes in advance of being sold, DRA did not review the transaction in this GRC. To require SJWC to file a Section 851 application for the review of a single transaction that involved the sale of property not used or useful for utility purposes that could have been reviewed in this GRC proceeding may not be a productive use of Commission or SJWC resources. However, there is insufficient information in this proceeding to substantiate without a doubt that Property #181 was no longer useful for utility purposes at the time of sale. SJWC should not be required to file a Section 851 application for the sale of its Property #181.

SJWC operates a number of non-tariff activities that utilize utility assets and resources that would otherwise be underutilized. These non-tariff activities include billing services, operation and maintenance services, and antenna leases. Revenues received from these activities are allocated between SJWC's shareholders and ratepayers in accordance with the "Excess Capacity" rules and guidelines set forth in D.00-07-018 and as modified by D.04-12-023.83 The ratepayers' share of these revenues is applied directly to revenue requirement as a composite credit (offset) to operating expenses, as addressed in the prior Non-Tariff Services section of this decision.

DRA did not undertake a full audit of SJWC's non-tariff activities in this GRC because it did not have the time or resources to do so. Concerned that the ratepayers' share of revenues from these non-tariff business activities may not be sufficient to cover all of the associated expenses, DRA recommended that the Commission order a full audit of SJWC's non-tariff activities in its next GRC.

SJWC is always subject to an audit in its GRCs, as acknowledged by DRA.84 Therefore, it is not necessary to adopt DRA's audit recommendation.

76 Section 851 requires a utility to file an application for approval of a sale of utility property necessary or useful in the performance of its public utility responsibilities.

77 Exhibit 9 at 11-6 and 11-8.

78 Exhibit 5 at 6-2 and 6-3.

79 Exhibit 9 at 11-7.

80 D.06-05-041 (2006), mimeo. at 77.

81 Exhibit 5 at 6-3.

82 Exhibit 9 at 11-9.

83 Order Instituting Rulemaking 09-04-012 was opened on April 23, 2009 to develop standard rules for the use of regulated assets for non-tariff services.

84 Reporter's Transcript Vol. 4, p. 480.

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