2. Background
2.1. Overview
This rulemaking was initiated to establish standardized rules and policies to govern the accounting and ratemaking treatment of government loans and damage awards received by an investor-owned water utility as a result of contamination of its water supply. Given the current lack of standardized rules that govern contamination-related proceeds, the Commission found it imperative that clear rules and pathways be laid out regarding the inclusion or exclusion of replacement plant in rate base, in order to assure a fair and reasonable allocation of proceeds between ratepayers and shareholders, and that ratepayers only pay a return on used and useful plant in service.
2.2. Prior Decisions
Over about eighteen years, the Commission has considered numerous cases in which an investor-owned water utility received various types of funds as a result of the contamination of its sources of water. Each of these proceedings, none of which were precedential, resulted in a unique outcome based on the specific circumstances of each case. The Commission also conducted generic proceedings that focused on the gain on sale of utility property and the receipt of state government grant funds.
The following brief review illustrates some of the various ways in which the Commission has addressed the allocation and ratemaking treatment of contamination proceeds in the past, and serves as a backdrop for the decision here.
In 1993, the Commission approved a settlement for Great Oaks Water Company (Great Oaks), which split 50/50 the contamination proceeds invested in plant in service: half to Contribution in Aid of Construction (CIAC)1 and half to rate base (which earns a rate of return).2
In the 2003 matter of Bakman Water Company (Bakman), the Commission approved various funding mechanisms for the repair of contaminated wells, including: (1) a loan from the Department of Water Resources under the Safe Drinking Water Bond Act, a portion of which was recorded in rate base and the balance was not recorded in rate base; (2) lawsuit damages from E&J Gallo totaling $300,000, of which $75,000 were used to reimburse the utility for legal fees and $225,000 were recorded in CIAC;3 and (3) lawsuit damages from Shell Oil Company, with half of these net proceeds recorded in CIAC.4
In the 2004 matter of Southern California Water Company (now Golden State Water Company), the Commission gave some contamination proceeds to the ratepayers to compensate them for higher water rates that were due to the contaminated groundwater, and approved the balance for use in infrastructure improvements that would be rate based.5
In the 2006 Fruitridge Vista Water Company (Fruitridge Vista) matter,6 in which the Commission approved a settlement, funding came from five sources: (1) a California Department of Public Health (CDPH) Drinking Water Treatment and Research Fund loan; (2) a State Revolving Fund zero interest loan; (3) a 20-year loan from the City of Sacramento; (4) special facilities fees to be paid by specified existing developers and future developers; and (5) ratepayers. Fruitridge Vista was allowed to rate base the $1.98 million loan from the City of Sacramento. Under the settlement, if Fruitridge Vista is able to recover damages from polluters, it may rate base up to $5 million of the plant funded with the proceeds from the lawsuit invested in lieu of the above-listed funding.
By 2007 and 2008 decisions,7 the Commission authorized the allocation of $8.4 million of net contamination proceeds received by San Gabriel Valley Water Company (San Gabriel) from the County of San Bernardino, in a settlement of an inverse condemnation suit, as follows: ratepayers (67%) and shareholders (33%). Replacement plant was recorded as CIAC.
While the two generic proceedings summarized next did not deal with the specific type of proceeds involved here, they have provided some general guidance for our decision here.
In a 2004-2006 rulemaking on how to account for the gain on sale of utility property,8 the Commission in part considered whether that rulemaking was the appropriate proceeding to address contamination proceeds. The Commission determined that since contamination proceeds received from a third party do not involve sales of real property, the Infrastructure Act does not apply and the contamination proceeds are not gains on sale.9
In a contemporaneous rulemaking,10 however, the Commission adopted rules that govern the accounting and ratemaking treatment of all state grant funds received by investor-owned water utilities.11 Those rules preserve the public interest integrity of state grant funds by ensuring that water utilities not be able to profit in any way through the receipt of state grant funds.
2.3. Procedural History
The Order Instituting Rulemaking (OIR)12 was opened March 12, 2009, and identified seven issues for purposes of a preliminary scoping memo. The Commission directed that all investor-owned water utilities, and several other interested entities, be served with the order. The OIR invited any person or representative of an entity interested in monitoring or participating in the proceeding to request status on the service list. Interested parties were invited to file opening comments by June 1, 2009, which seven parties did.
The proceeding was assigned to Commissioner John Bohn and Administrative Law Judge (ALJ) Gary Weatherford on March 16, 2009.
On May 1, 2009, ALJ Weatherford issued a ruling granting motions for party status. On June 4, 2009, ALJ Weatherford ruled that parties could serve reply comments by July 1, 2009. He also modified the timetable to provide for a scoping memo in August 2009, and a Division of Water and Audits (DWA) workshop on September 22 and 23, followed by a DWA workshop report on October 22, and by party comments on that report on November 18, 2009.
In a Ruling and Scoping Memo of August 21, 2009, Commissioner Bohn provided for the contingency of extra workshop discussions, which occurred on October 8, 2009. He also moved the deadlines for the filing of the workshop report to November 11 and for the opening and reply comments on that report to December 16, 2009, and January 21, 2010, respectively. On November 12, 2010, ALJ Weatherford reset the deadline for the Workshop Report to November 25 and for the opening and reply comments to January 5 and February 2, 2010, respectively. The Workshop Report of November 25 was filed on December 9, 2009. On December 23, 2009, in an e-mail response to an e-mail request on behalf of the California Water Association, the January 5 opening comments deadline was extended to January 12, 2010. Reply comments were received in a timely fashion on February 2, 2010.
On April 20, 2010, ALJ Weatherford issued a ruling inviting specific comments on the comparative cost to ratepayers of treating government loans as CIAC and placing them in rate base, and on the array of factors that should be expected to guide cost allocation relative to contamination proceeds. Opening comments relative to that request were filed by May 12, 2010, followed on May 28, 2010, by reply comments. The Proposed Decision mailed on August 3, 2010. Opening Comments and Reply Comments were filed on September 9 and 20, 2010, respectively.
1 Plant recorded in CIAC is not included in rate base and, therefore, does not earn a rate of return.
2 Great Oaks Water Company, Decision (D.) 93-04-061, 49 CPUC2d 116 and D.93-09-077, 51 CPUC2d 366.
3 Resolution W-3785.
4 D.03-10-002.
5 D.04-07-031.
6 D.06-04-073.
7 See D.07-04046 and D.08-04-005 (correcting errors in the former).
8 Rulemaking (R.) 04-09-003.
9 D.06-05-041. The decision drew a distinction between developer CIAC and contamination proceeds CIAC, indicating, at 69, that gains on sale of assets recorded under the former were to be reinvested in new water infrastructure on which a reasonable rate of return could be earned.
10 R.04-09-002.
11 D.06-03-015.
12 Order Instituting Rulemaking on the Commission's Own Motion to Develop Rules and Procedures to Insure That Investor-Owned Water Utilities Will Not Recover Unreasonable Return on Investments Financed by Contamination Proceeds, Including Damage Awards, and Public Loans Received Due to Water Supply Contamination.
