7. Assignment of Proceeding
The proceeding was assigned to Commissioner John A. Bohn and ALJ Gary Weatherford on March 16, 2009.
1. Over about eighteen years, the Commission has considered several matters in which a water IOU received one or more types of funds as a result of the contamination of its sources of water. Different accounting treatment of new plant (replacing contaminated plant) funded by contamination proceeds has resulted. Some of those plants have been placed in rate base, where they earn a return; others have been treated as CIAC where they do not.
2. New plant funded by contamination proceeds arising from state grants were determined to be treatable as CIAC in a 2006 decision, D.06-03-015.
3. Contamination events are among the contingencies which a contemporary water utility needs to be prepared to confront and manage. Being ready and able to respond to contamination, however arduous and frustrating that task, is now part and parcel of doing business as a water company and generally comes within the obligation to serve.
4. If a utility can show that it is assuming an above normal risk related to contamination litigation, the Commission may take that circumstance into account in the water utilities' cost of capital proceeding for class A water utilities and in the GRCs for the Class B, C and D water utilities.
5. Receipt of contamination proceeds by water IOUs allows those utilities and their customers to benefit by providing either cost-free or low cost funds for needed investments in water supply, treatment, and security.
6. CIAC treatment of contamination proceeds results in less cost to the ratepayer than does rate basing.
7. The valuation of CIAC under the Assessors' Handbook , Section 542 (Assessment of Water Companies and Water Rights), at 14, issued by the BOE is said to be generally zero, making it important for property tax purposes to have any CIAC treatment for new plant funded by local and federal government grants, government loans, damage awards, settlements, government ordered funds or insurance proceeds to carry an account number bearing the base number of 265 that is reserved for CIAC in the Uniform System of Accounts for Water Utilities.
1. Pursuant to Article XII, Section 6 of the California Constitution, the Public Utilities Code statutes, and our own adopted rules and regulations, the Commission prescribes all accounting and ratemaking practices for investor owned utilities.
2. We should adopt rules that govern the accounting and ratemaking treatment of new plant (replacing contaminated plant) funded by local and federal government grants in a manner that meets the twin objectives of assuring a fair and reasonable allocation of proceeds between ratepayers and shareholders, and assuring that ratepayers only pay a return on used and useful plant in service funded by shareholders. We should propose rules to be considered for later adoption to govern government loans, damage awards, settlements, government order or insurance that meet the same objectives.
3. The adopted rules preserve the public interest integrity of local and federal government grant funds by ensuring that investor-owned water utilities and their shareholders will not be able to profit in any way through the receipt of public funds, and that the public retains the benefit of public funding.
4. New plant (replacing contaminated plant) funded by local and federal grant contamination proceeds should be given CIAC accounting treatment because it results in less cost to the ratepayer than does ratebasing.
5. New plant funded by government loans should be treated as CIAC rather than being included in rate base and earning a rate of return.
6. New plant funded by proceeds from damage awards, settlements, government order or insurance should be treated as CIAC rather than being included in rate base and earning a rate of return.
7. Where a utility can show that it is assuming above normal risks related to contamination litigation, the Commission may take those risks into account in setting the company's rate of return in the cost of capital proceeding for class A water utilities and in the GRCs for Class B, C and D water utilities.
8. The following sub-accounts within Account 265 of the Uniform System of Accounts for Water Utilities should be established for all investor-owned water utilities. A sub-account number 265.1, entitled "Government Grant Contamination Proceeds," should be used for booking contamination related local and federal government grant proceeds. A sub-account number 265.2, entitled "Government Loan Contamination Proceeds," should be used for booking contamination related government loan proceeds. A sub account number 265.3, entitled "Damage Award Contamination Proceeds," should be used for booking contamination proceeds derived from damage awards. A sub-account number 265.4, entitled "Settlement Contamination Proceeds," should be used for booking contamination related settlement proceeds. A sub-account number 265.5.1, entitled "Government Order Contamination Proceeds From Private Funds," should be used for booking contamination related proceeds deriving from a private funding source via government order. A sub-account number 265.5.2, entitled "Government Order Contamination Proceeds From Public Funds," should be used for booking contamination related proceeds deriving from a public funding source via government order. A sub-account number 265.6, entitled "Insurance Contamination Proceeds," should be used for booking insurance contamination proceeds These various 265 sub-accounts should follow the existing format for Account 265 as it pertains to not being eligible for rate base recovery, records and depreciation.
9. When contamination proceeds arising from federal and local government grants and government loans are received they should be placed directly in the appropriate dedicated 265 sub-account.
10. When contamination proceeds arising from damage awards, settlements, government order or insurance are initially received from the funding source, they should be placed in a memorandum account until the need for making expenditures arises, whereupon an approval to transfer the proceeds to the appropriate dedicated 265 sub-account should be sought by a Tier 3 advice letter filing.
11. The following definition of "net proceeds" should be adopted:
Gross proceeds received minus all (1) reasonable legal expenses related to litigation, (2) costs of remedying plants, facilities, and resources to bring the water supply to a safe and reliable condition in accordance with General Order 103-A standards, and (3) all other reasonable costs and expenses that are the direct result and would not have to be incurred in the absence of such contamination, including all relevant costs already recovered from ratepayers (for which they have been, or will be, repaid or credited).
12. Only "net proceeds" from damage awards, settlements, government ordered funds or insurance proceeds should compose the pool subject to allocation between ratepayers and shareholders, and the allocation should be based on factors relevant to the individual case, including factors set out in Table 2 (and repeated in Appendix D) of this decision.
13. To the extent, if any, that the Commission allocates to shareholders a share of the net proceeds and the IOU elects to invest those proceeds in utility plant, those funds should be treated as shareholder funds for the purpose of determining whether the plant should be included in rate base.
14. In cases where planning and construction expenditures for replacement plant have preceded the receipt and application of contamination proceeds, the IOUs should establish and maintain separate tracking, consistent with the USOA of all expenditures associated with the replacement plant, in addition to the regular USOA treatment of such expenditures.
15. Going forward, the accounting treatment and rules adopted in this decision should govern. The decisions issued in this rulemaking should not be intended to disturb decisions and settlements reached in prior proceedings that have been closed.
16. The federal and local grant rules described in the foregoing decision and set forth in Appendix A should be adopted. The rules proposed in Appendices B and C should be considered in a comment and, if needed, workshop process preparatory to the adoption of appropriate rules governing contamination proceeds arising from government loans, damage awards, settlements, government order and insurance.
17. This proceeding R.09-03-014 should remain open pending the development and adoption of rules pertaining to contamination proceeds arising from government loans, damage awards, settlements, government order and insurance.
1. Each investor-owned water utility shall account for local or federal grants, government loans, damage awards, settlements, government ordered funds and insurance proceeds used to replace contaminated water supplies as Contributions in Aid of Construction as set forth in sections 5.1 through 5.3 of this decision. The rules in Appendix A are adopted. The rules proposed in Appendices B and C shall be considered in a comment and, if needed, workshop process preparatory to our adoption of rules pertaining to contamination proceeds arising from government loans, damage awards, settlements, government orders and insurance.
2. Each investor-owned water utility shall establish the following numbered sub-accounts within Account 265 of the Uniform System of Accounts for Water Utilities.
a. Sub-account number 265.1, entitled "Government Grant Contamination Proceeds," shall be used for booking contamination related local and federal government grant proceeds.
b. Sub-account number 265.2, entitled "Government Loan Contamination Proceeds," shall be used for booking contamination related government loan proceeds.
c. Sub-account number 265.3, entitled "Damage Award Contamination Proceeds," shall be used for booking contamination proceeds derived from damage awards.
d. Sub- account number 265.4, entitled "Settlement Contamination Proceeds," shall be used for booking contamination related settlement proceeds.
e. Sub- account number 265.5.1, entitled "Government Order Contamination Proceeds From Private Funds," shall be used for booking contamination related proceeds deriving from a private funding source via government order.
f. Sub- account number 265.5.2, entitled "Government Order Contamination Proceeds From Public Funds," shall be used for booking contamination related proceeds deriving from a public funding source via government order.
g. Sub-account number 265.6, entitled "Insurance Contamination Proceeds," shall be used for booking insurance contamination proceeds.
These various 265 sub-accounts shall follow the existing format for Account 265 as it pertains to not being eligible for rate base recovery and depreciation.
3. When contamination proceeds arising from federal and local government grants and government loans are received they shall be placed directly in the appropriate dedicated 265 sub-account.
4. When contamination proceeds arising from damage awards, settlements, government order or insurance are initially received from the funding source, they shall be placed in a memorandum account until the need for making expenditures arises, whereupon an approval to transfer the proceeds to the appropriate dedicated 265 sub-account shall be sought by a Tier 3 advice letter filing.
5. If an investor-owned water utility receives proceeds from any of the funding sources identified in Ordering Paragraph 1 after the contaminated plant is replaced or remediated and all costs have been determined, the remaining amount of proceeds ("net proceeds" as defined in Ordering Paragraph 6) may be shared between ratepayers and shareholders upon Commission approval where circumstances warrant and on the basis of factors relevant to the individual case, including factors set out in Appendix D to this decision.
6. "Net Proceeds" are hereby defined as:
Gross proceeds received minus all (1) reasonable legal expenses related to litigation, (2) costs of remedying plants, facilities, and resources to bring the water supply to a safe and reliable condition in accordance with General Order 103-A standards, and (3) all other reasonable costs and expenses that are the direct result and would not have to be incurred in the absence of such contamination, including all relevant costs already recovered from ratepayers (for which they have been, or will be, repaid or credited).
7. If the Commission allocates to the shareholders of an investor-owned water utility a share of the net proceeds and that utility elects to invest those proceeds in plant, those funds shall be treated as shareholder funds for the purpose of determining whether the plant should be included in rate base.
8. If an investor-owned water utility anticipates requesting compensation in a general rate case for costs not previously approved and associated with the responsibility of owning, operating, and maintaining replacement plant, it shall first seek authority to establish a memorandum account to track such costs.
9. Where a utility can show that it is assuming an above normal risk related to contamination litigation, the Commission shall, where appropriate, take that risk into account in setting the company's rate of return in the cost of capital proceeding for class A water utilities and in the general rate case for the Class B, C and D water utilities.
10. Rulemaking 09-03-014, adopting rules for the accounting treatment of contamination proceeds, remains open pending the development and adoption of rules pertaining to contamination proceeds arising from government loans, damage awards, settlements, government order and insurance. The assigned Commissioner or assigned Administrative Law Judge shall issue a ruling within 10 days of this date scheduling a comment and, if needed, workshop process concerning the rules proposed in Appendices B and C.
This order is effective today.
Dated October 14, 2010, at San Francisco, California.
MICHAEL R. PEEVEY
President
DIAN M. GRUENEICH
JOHN A. BOHN
TIMOTHY ALAN SIMON
NANCY E. RYAN
Commissioners
RULES FOR THE ACCOUNTING OF LOCAL AND FEDERAL CONTAMINATION GRANT FUNDS
These rules shall apply to all transactions involving local and federal Contamination grant funds (Grant Funds.)
1. No return shall be earned by Commission-regulated water utilities (Utilities) on grant-funded plant.
2. No gain shall be recovered by utilities on the disposition of local and Federal grant-funded plant.
3. When Grant Funds are received from the funding agency, the utility must place these funds in a separate account that is restricted to Grant Funds only. On the books of the company, it shall record the funds as a Debit to Account 121-3 - Cash-Miscellaneous Special Deposits and a Credit to Account 265.1 - Publicly Funded Grant Plant. As the grant- funded plant is being constructed, the utility shall record those dollars expended as a Debit to Account 100-3 - Construction Work in Progress (CWIP) and a Credit to Account 121-3 - Cash-Miscellaneous Special Deposits. When the authorized plant has been constructed, a second set of entries shall be recorded as a Debit to Account 100-1 - Utility Plant in Service and a Credit to Account 100-3 - Construction Work in Progress. Account 265.1 shall follow the following rules:
3.1 This account shall include only publicly funded grants.
3.2 The records supporting the entries to this account must be so kept that the utility can furnish information as to the purpose of each grant, and shall be segregated between depreciable and non-depreciable property.
3.3 Depreciation accrued on the depreciable portion of properties included in this account shall be charged to this account rather than to Account 503, Depreciation, and the charges to this account to continue until such time as the balance in this account applicable to such properties has been completely amortized. (See Utility Plant Instruction 3.F.)111 The balance in the account applicable to non-depreciable property shall remain unchanged until such time as the property is sold or otherwise retired. At time of retirement of non-depreciable property, which was acquired by Grant Funds, the costs thereof shall be credited to the appropriate plant account and charged to this account in order to eliminate any credit balance in the grant account applicable thereto.
3.4 It is intended under the provisions contained in the preceding paragraph that the credit balance in the account will be written off over a period equal to the actual service life of the property involved. The net salvage realized on the retirement of grant-funded property shall be recorded as a credit to Account 250, Reserve for Depreciation of Utility Plant.
4. Operating Expenses, Administrative and General Expenses, and Taxes associated with grant-funded plant, but not funded with Grant Funds, shall be allowed, if determined to be reasonable by this Commission. The reasonableness of these costs shall be determined in the general rate case that addresses the results of operations for the district these expenses occur in.
5. Any indirect benefits resulting from grant-funded plant such as reductions in operating expenses resulting from infrastructure improvements must be projected as cost savings and imputed into the utilities' revenue requirement.
6. Unless the utility has received authorization from the funding agency, Grant Funds shall not be spent on expenses. Grant Funds that are expended for expenses authorized by the funding agency must not be included in the determination of the Results of Operations and the forecast of future expenses in a general rate case. Within 45 days after a funding agency authorizes a utility to spend Grant Funds on expenses the utility must file a Tier 3 advice letter filing that sets forth an accounting treatment to exclude such expenses from the Results of Operations and forecast of future expenses in a general rate case.
7. Depreciation on grant-funded plant must be calculated using the existing methodology detailed in the Commission's Standard Practice U-4. Grant Funds used to acquire land should not be amortized or included in this category as well as other non-depreciable property such as water rights.
8. The utilities must deduct depreciation expenses for income tax purposes and flow through to their customers any benefits derived from the tax deduction in the most direct fashion possible.
9. In the event construction or study completion time limits are not established by the funding agency, then the following provisions are reasonable and should apply:
- Construction of the project must start within one year after execution of the funding agreement;
- The project shall conclude within three years after execution of the funding agreement;
- Utilities must seek Commission approval for extensions of time limits at least two months prior to the expiration of those limits or risk loss of undelivered funding; and
- Extension requests may be submitted by a Tier 3 advice letter to the Commission's Division of Water and Audits Director.
10. Neither utilities nor their affiliate companies and their shareholders should be allowed to engineer or install the facilities for grant-funded projects.
11. Water utilities shall use a competitive bidding process specified by the funding agency when awarding contracts for the construction of grant-funded projects. If the funding agency does not require specific competitive bidding process the utility shall use the competitive bidding process set forth below in item #12.
12. In the event construction or study completion time limits are not established by the funding agency, then the following provisions are reasonable and should apply:
- A minimum of three competitive bids shall be required unless justification is provided showing why the minimum could not be met;
- If the utility does not choose the lowest bid, it must provide a detailed justification explaining why it chose not to accept the lowest bid;
- Utilities should be allowed to enter sole source contracts under special circumstances. Utilities must seek by a Tier 3 advice letter filing a waiver for sole source contracts;
- Affiliate companies are not allowed to participate.
13. Water utilities may not use Grant Funds for work done prior to the execution of the grant funding agreement unless the funding agency has authorized this use. To the extent approval is given to use grant funds for work already performed such activity shall be accounted for pursuant to the accounting procedures set forth in this appendix for grant work not yet undertaken. At the time of the utility's next general rate case, the utility shall provide as part of its filing sufficient information for the Commission to review and determine the appropriate ratemaking treatment for any work performed that was not authorized by the funding agency.
14. These rules apply to all tangible property funded with Grant Funds. In determining the proceeds in each of the following types of sales, the cost of disposal shall be deducted from the amount received in arriving at the final amount received. In cases of intangible property, such as the intellectual property of a study, the utility shall request the Commission to individually review the matter in the utility's general rate case or, sooner if requested, by separate application.
15. In order to ensure that the Commission has prior review and approval over all grant-funded plant transactions, water utilities shall notify the Director of the Division of Water and Audits and the Director of the Division of Ratepayer Advocates 45 days prior to the disposition and encumbrance of grant-funded plant.
16. The following rule should apply to the sale or transfer of an asset, district, or total utility to another Commission-regulated water utility. If the asset to be sold or transferred has been paid for with Grant Funds in whole or part, the utility selling or transferring the asset may not receive compensation for the portion of the asset that has been funded with Grant Funds, and the purchasing utility shall record a non-rate base asset in Account 265.1. The non-grant portion of the asset, if any, should sell or transfer at fair market value.112
17. When grant-funded plant is sold to a publicly-owned water provider that will deploy the asset to provide water service to the public, the public interest integrity of the grant is preserved, and the rules governing the transaction from the selling utility's position would be the same as if the sale were to a utility.
18. When grant-funded assets are sold to an entity other than a utility or public water provider, such as private unregulated companies or cities or counties exercising eminent domain powers for purposes other than acquiring a municipal water system, the public interest integrity of the grant is not preserved. In these instances, the appropriate treatment is for the buyer to pay fair market value and for the selling utility to remit all proceeds received from the sale of the grant-funded asset to the original funding agency, or another designated agency.
19. For plant wholly funded by a grant, as well as for the partially funded portion of a plant, the utility must notify the Director of the Division of Water and Audits within 45 days after the utility signs a letter of commitment with the agency administering the fund and again within 45 days after completing the funding agreement execution with the responsible agency. For any portion of plant that is paid for by non-grant funds, the utility must obtain Commission approval in its general rate case or through separate application.
20. All utilities that receive Grant Funds must provide the following information regarding its grant-funded plant in its Annual Report to the Commission: (1) Amount of Grant Funds received, (2) Amount of Grant Funds spent in the year covered by the Annual Report, and (3) Description of plant constructed with Grant Funds.
21. When the "fair market value" valuation of a district or total utility is difficult or impossible to perform without the grant-funded plant, the grant-funded plant must be deducted from the "fair market value" of the total utility that has been determined by the valuation. Since the value of the grant-funded plant in the valuation has most likely been inflated, the selling utility should inflate the depreciated book value of the grant-funded plant using the Handy-Whitman index.113 This inflated value of grant-funded plant should be deducted from the "fair market value" of the utility. This "Adjusted Fair Market Value" would then be used to determine the reasonable purchase price of the utility.
APPENDIX B
PROPOSED RULES FOR THE ACCOUNTING OF GOVERNMENT CONTAMINATION LOAN FUNDS
These rules shall apply to all transactions involving government contamination loan funds (Govt. Loan Funds).
22. All government contamination loan funds shall be repaid by ratepayer contributions through surcharges similar to the accounting method used by the Commission for loans from the Safe Drinking Water State Revolving Fund as set forth in Water Division's Standard Practice U-13-W and summarized in the example below:114
Assumptions:
Total Loan Amount: $154,500
Loan Proceeds to the Utility: $150,000
Administrative Fee: $ 4,500
Term of Loan: 15 years with semi-annual payments
a) Utility receives loan proceeds from government. Proceeds are deposited in separate bank account. Set up the administrative fee as a prepaid asset to be amortized over life of loan.
Debit Credit
Cash in Bank $150,000
Deferred Charges 4,500
Long-Term Debt- Govt. Loan $154,500
b) Plant is constructed with Government loan proceeds. Plant is to be depreciated over life of loan.
Plant in Service (Accounts 301-341) $150,000
Cash in Bank $150,000
c) Monthly billing of customers for ordinary revenue of $4,000 plus Government loan surcharge of $1,850 ($9.25 surcharge x 200 customers = $1,850.
Accounts Receivable - Customers $ 5,850
Water Revenue $ 4,000
Govt. Loan Surcharge 1,850
d) Monthly collections of customer receivables from 188 customers. Consists of $3,760 of regular revenue and $1,739 of Government Loan surcharge revenue.
Cash in Bank $ 5,499
Accounts Receivable - Customers $ 5,499
e) Government loan surcharge collections are transferred monthly to an account with a fiscal agent.
Special Deposits - Fiscal Agent $ 1,739
Cash in Bank $ 1,739
f) Semi-annual payment of principal and interest to Government Agency by fiscal agent.
Interest Expense - Govt. Loan $ 7,725
Long-Term Debt - Govt. Loan 2,325
Special Deposits - Fiscal Agent $ 10,050
g) Credit of interest earned on surcharge collections deposited with fiscal agent.
Special Deposits - Fiscal Agent $ 100
Non-Utility Income - Interest $ 100
h) Annual amortization of 15 year Government plant ($150,000 divided by 15 years = $10,000, $4,500 divided by 15 years = $300). Amortize in lieu of booking depreciation.
Govt. Loan Amortization Expense $ 10,300
Accumulated Amortization - Govt. Loan $ 10,000
Account 180 Deferred Charges 300
23. No return shall be earned by Commission-regulated water utilities (Utilities) on government loan-funded plant repaid through ratepayer surcharges.
24. A rate surcharge shall be established which provides for a period of one year an amount of revenue approximately equal to the periodic payment which includes principal and interest. Any surplus surcharge revenue shall be refunded to ratepayers. The annual adjustments to the surcharge shall be done through a Tier 2 Advice Letter filing.
25. No gain shall be recovered by utilities on the disposition of government contamination loan-funded plant repaid through ratepayer surcharges.
26. Capital charges for this loan shall be offset by a quantity surcharge which last as long as the loan. The charges shall not be intermingled with other utility charges; special accounting requirements and a refund condition are necessary to ensure that there are no unintended windfalls to private utility owners.
27. Operating Expenses, Administrative and General Expenses, and Taxes associated with government contamination loan-funded plant, shall be allowed, if determined to be reasonable by this Commission. The reasonableness of these costs shall be determined in the general rate case that addresses the results of operations for the district these expenses occur in.
28. Any indirect benefits resulting from government contamination loan-funded plant such as reductions in operating expenses resulting from infrastructure improvements must be projected as cost savings and imputed into the utilities' revenue requirement.
29. Unless the utility has received authorization from the funding agency, government contamination loan funds shall not be spent on expenses. Loan Funds that are expended for expenses authorized by the funding agency must not be included in the determination of the Results of Operations and the forecast of future expenses in a general rate case. Within 45 days after a funding agency authorizes a utility to spend Loan Funds on expenses the utility must file a Tier 3 advice letter filing that sets forth an accounting treatment to exclude such expenses from the Results of Operations and forecast of future expenses in a general rate case.
30. In the event construction or study completion time limits are not established by the funding government agency, then the following provisions are reasonable and should apply:
- Construction of the project must start within one year after execution of the funding agreement;
- The project shall conclude within three years after execution of the funding agreement;
- Utilities must seek Commission approval for extensions of time limits at least two months prior to the expiration of those limits or risk loss of undelivered funding; and
- Extension requests may be submitted by a Tier 3 advice letter to the Commission's Division of Water and Audits Director.
31. Neither utilities nor their affiliate companies and their shareholders should be allowed to engineer or install the facilities for government loan-funded projects.
32. Water utilities shall use a competitive bidding process specified by the funding government agency when awarding contracts for the construction of government loan-funded projects. If the funding government agency does not require specific competitive bidding process the utility shall use the competitive bidding process set forth below in item #12.
33. In the event construction or study completion time limits are not established by the funding government agency, then the following provisions are reasonable and should apply:
- A minimum of three competitive bids shall be required unless justification is provided showing why the minimum could not be met;
- If the utility does not choose the lowest bid, it must provide a detailed justification explaining why it chose not to accept the lowest bid;
- Utilities should be allowed to enter sole source contracts under special circumstances. Utilities must seek by a Tier 3 advice letter filing a waiver for sole source contracts;
- Affiliate companies are not allowed to participate.
34. Water utilities may not use Loan Funds for work done prior to the execution of the loan agreement unless the funding government agency has authorized this use. To the extent approval is given to use loan funds for work already performed such activity shall be accounted for pursuant to the accounting procedures set forth in this appendix for loan work not yet undertaken. At the time of the utility's next general rate case, the utility shall provide as part of its filing sufficient information for the Commission to review and determine the appropriate ratemaking treatment for any work performed that was not authorized by the funding agency.
35. These rules apply to all tangible property funded with Loan Funds. In determining the proceeds in each of the following types of sales, the cost of disposal shall be deducted from the amount received in arriving at the final amount received. In cases of intangible property, such as the intellectual property of a study, the utility shall request the Commission to individually review the matter in the utility's general rate case or, sooner if requested, by separate application.
36. In order to ensure that the Commission has prior review and approval over all government loan-funded plant transactions, water utilities shall notify the Director of the Division of Water and Audits and the Director of the Division of Ratepayer Advocates 45 days prior to the disposition and encumbrance of loan-funded plant.
37. The following rule should apply to the transfer or sale of an asset, district, or total utility to another Commission-regulated water utility. If the asset to be sold or transferred has been paid for with Loan Funds in whole or part, the utility transferring or selling the asset may not receive compensation for the portion of the asset that has been funded with Loan Funds, and the purchasing utility shall record a non-rate base asset as a separate component of Account 265.2. The non-loan funded portion of the asset, if any, should sell or transfer at fair market value.115
38. When government loan-funded plant is sold to a publicly-owned water provider that will deploy the asset to provide water service to the public, the public interest integrity of the loan is preserved, and the rules governing the transaction from the selling utility's position would be the same as if the sale were to a utility.
39. When government loan-funded assets are sold to an entity other than a utility or public water provider, such as private unregulated companies or cities or counties exercising eminent domain powers for purposes other than acquiring a municipal water system, the public interest integrity of the loan is not preserved. In these instances, the appropriate treatment is for the buyer to pay fair market value and for the selling utility to apply all proceeds received from the sale of the government loan-funded asset paid by ratepayer surcharges to the benefit of ratepayers.
40. For plant wholly funded by Loan Funds, as well as for the partially funded portion of a plant, the utility must notify the Director of the Division of Water and Audits within 45 days after the utility signs a letter of commitment with the agency administering the loan and again within 45 days after completing the loan agreement execution with the responsible agency. For any portion of plant that is paid for by non-government loan funds, the utility must obtain Commission approval in its general rate case or through separate application.
41. All utilities that receive Loan Funds must provide the following information regarding its loan-funded plant in its Annual Report to the Commission: (1) Amount of Loan Funds received, (2) Amount of Loan Funds spent in the year covered by the Annual Report, (3) Amount of ratepayer surcharges billed and received, (4) Amount of loan repaid by ratepayer surcharges and (5) Description of plant constructed with Loan Funds.
42. When the "fair market value" valuation of a district or total utility is difficult or impossible to perform without the loan-funded plant, the government loan-funded plant must be deducted from the "fair market value" of the total utility that has been determined by the valuation. Since the value of the loan-funded plant in the valuation has most likely been inflated, the selling utility should inflate the depreciated book value of the loan-funded plant using the Handy-Whitman index.116 This inflated value of loan-funded plant should be deducted from the "fair market value" of the utility. This "Adjusted Fair Market Value" would then be used to determine the reasonable purchase price of the utility.
(END OF APPENDIX B)
APPENDIX C
PROPOSED RULES FOR THE ACCOUNTING OF WATER CONTAMINATION PROCEEDS
These rules shall apply to all transactions involving contamination proceeds from damage awards, settlements, government order, or insurance (Water Contamination proceeds.)
43. No return shall be earned by Commission-regulated water utilities (Utilities) on plant funded by Water Contamination proceeds.
44. No gain shall be recovered by utilities on the disposition of plant funded by Water Contamination proceeds.
45. When Water Contamination proceeds are received by a utility, it must place these funds in a designated account, as specified in this order, and transactions associated with each account shall be restricted to the types of proceeds only. On the books of the company, it shall record the funds as a Debit to Account 121-3 - Cash-Miscellaneous Special Deposits and a Credit to designated account as specified in this order. As the plant funded by Water Contamination proceeds is being constructed, the utility shall record those dollars expended as a Debit to Account 100-3 - Construction Work in Progress (CWIP) and a Credit to Account 121-3 - Cash-Miscellaneous Special Deposits. When the plant has been constructed, a second set of entries shall be recorded as a Debit to Account 100-1 - Utility Plant in Service and a Credit to Account 100-3 Construction Work in Progress. The designated account (e.g., account 265.3, "Damage Award Contamination Proceeds") shall follow the following rules:
45.1 The respective account shall include only designated Water Contamination proceeds to that account.
45.2 The records supporting the entries to this account must be so kept that the utility can furnish information as to the purpose of the Water Contamination proceeds and shall be segregated between depreciable and non-depreciable property.
45.3 Depreciation accrued on the depreciable portion of properties included in each respective account shall be charged to the designated account rather than to Account 503, Depreciation, the charges to each respective account shall continue until such time as the balance in the account applicable to such properties has been completely amortized. (See Utility Plant Instruction 3.F.1)117 The balance in the account applicable to non-depreciable property shall remain unchanged until such time as the property is sold or otherwise retired. At time of retirement of non-depreciable property, which was acquired through Water Contamination proceeds, the costs thereof shall be credited to the appropriate plant account and charged to this account in order to eliminate any credit balance in the Water Contamination proceeds designated account applicable thereto.
45.4 It is intended under the provisions contained in the preceding paragraph that the credit balance in the designated Water Contamination proceed account will be written off over a period equal to the actual service life of the property involved. The net salvage realized on the retirement of property funded by Water Contamination proceeds shall be recorded as a credit to Account 250, Reserve for Depreciation of Utility Plant.
46. Operating Expenses, Administrative and General Expenses, and Taxes associated with plant funded through Water Contamination proceeds shall be allowed, if determined to be reasonable by this Commission. The reasonableness of these costs shall be determined in the general rate case that addresses the results of operations for the district these expenses occur in.
47. Any indirect benefits resulting from plant funded by Water Contamination proceeds such as reductions in operating expenses resulting from infrastructure improvements must be projected as cost savings and imputed into the utilities' revenue requirement.
48. Depreciation on plant funded by Water Contamination proceeds must be calculated using the existing methodology detailed in the Commission's Standard Practice U-4. Water Contamination proceeds used to acquire land should not be amortized or included in this category as well as other non-depreciable property such as water rights.
49. The utilities must deduct depreciation expenses for income tax purposes and flow through to their customers any benefits derived from the tax deduction in the most direct fashion possible.
50. These rules apply to all tangible property funded through Water Contamination proceeds. In determining the proceeds in each of the following types of sales, the cost of disposal shall be deducted from the amount received in arriving at the final amount received. In cases of intangible property, such as the intellectual property of a study, the utility shall provide as part of its general rate case filing sufficient information for the Commission to individually review the matter in the utility's general rate case or, sooner if requested, by separate application.
51. In order to ensure that the Commission has prior review and approval over all transactions associated with plant funded by Water Contamination proceeds, water utilities shall notify the Director of the Water Division and the Director of the Division of Ratepayer Advocates 45 days prior to the disposition and encumbrance of plant funded by Water Contamination proceeds.
52. The following rule should apply to the transfer or sale of an asset, district, or total utility to another Commission-regulated water utility. If the asset to be sold or transferred has been paid for with Water Contamination proceeds in whole or part, the utility transferring or selling the asset may not receive compensation for the portion of the asset that has been funded by Water Contamination proceeds, and the purchasing utility shall record a non-rate base asset in Account 265.3. The non-grant portion of the asset, if any, should transfer at fair market value.118
53. When plant funded by Water Contamination proceeds is sold to a publicly-owned water provider that will deploy the asset to provide water service to the public, the rules governing the transaction from the selling utility's position would be the same as if the sale were to a utility.
54. When plant funded by Water Contamination proceeds is sold to an entity other than a utility or public water provider, such as private unregulated companies or cities or counties exercising eminent domain power for purposes other than acquiring a municipal water system, the public interest integrity of the plant funded by Water Contamination proceeds is not preserved. In these instances, the appropriate treatment is for the buyer to pay a fair market value and for the selling utility to retain all funds for the benefit of the ratepayer and submit an application for authority to apply such funds to the benefit of ratepayers.
55. For plant wholly funded by Water Contamination proceeds, as well as for the partially funded portion of a plant, the utility must notify the Director of the Water Division within 45 days after the utility receives the funds. For any portion of plant that is paid for by non-Water Contamination proceeds, the utility must obtain Commission approval in its general rate case or through separate application.
56. All utilities that receive Water Contamination proceeds must provide the following information regarding plant funded by Water Contamination proceeds in its Annual Report to the Commission: (1) Amount of Water Contamination proceeds received, (2) Amount of Water Contamination proceeds spent in the year covered by the Annual Report, and (3) Description of plant constructed with Water Contamination proceeds.
57. When the "fair market value" valuation of a district or total utility is difficult or impossible to perform without the plant funded by Water Contamination proceeds, the plant funded through these proceeds must be deducted from the "fair market value" of the total utility that has been determined by the valuation. Since the value of the plant funded by Water Contamination Proceeds in the valuation has most likely been inflated, the selling utility should inflate the depreciated book value of the plant using the Handy-Whitman index.119 This inflated value of such plant should be deducted from the "fair market value" of the utility. This "Adjusted Fair Market Value" would then be used to determine the reasonable purchase price of the utility.
(END OF APPENDIX C)
APPENDIX D
Table 2
Factors to Inform the Allocation of Net Proceeds
I. Contamination Occurrence, Impact and Response
A. Health threat, anxiety and toxic exposure
B. Well closures; interruption of supply
C. Obtaining replacement supply
E. Property and water right diminution
F. Diversion and straining of resources for response
G. Cash flow and capital demands of response.
H. Management generally of response.
I. Uncertainty as to scope, severity and duration of event.
J. Threat to and diminution of reputation.
K. Cash flow and rate adjustment impacts.
L. Circumstances or mechanisms that offset or mitigate risk or Impacts.
II. Cost and Damage Recovery Efforts, Claims and Events
A. Risk or reality of not receiving full recovery.
B. Risk or reality of higher water rates.
C. Requirement and conditions accompanying grants or loans.
D. Risk or reality of being sued; exposure to costs and damages.
E. Undertaking litigation as a utility or ratepayer.
1. Risk of counter suits or cross claims.
2. Uncertainty of outcome; risk of no or low damage award.
3. Cost of experts.
4. Attorneys' fees (if not contingency contract).
5. Relative complexity; number and nature of parties, competing experts and models, duration and depth of discovery, length of pre-trial and trial proceedings or settlement negotiations, and duration overall.
6. Extent to which management resources diverted and strained.
7. Extent to which water service is affected.
8. Outcome concerning settlement or compensatory, general and punitive damage award; relative success or failure; amount of recovery relative to damage and cost of replacement and remediation.
F. Mitigating or off-setting circumstances, incentives and mechanisms; balancing and memorandum accounts; cost of capital premiums.
(END OF APPENDIX D)
111 Utility Plant Instruction 3.F. "Utility plant contributed to the utility or constructed by it from contributions to it of cash or its equivalent shall be charged to the utility plant accounts at cost of construction. There shall be credited to the depreciation and amortization reserve accounts the estimated amount of depreciation and amortization applicable to the property at the time of this contribution to the utility. The difference between the amounts included in the utility plant account and the reserve accounts shall be credited to Account 265.1."
112 For example, Utility A decides to sell one of its three districts (call it District X) to Utility B. District X includes government grant-funded plant with a depreciated value of $50,000. Valuation of the district shall not include the government grant-funded plant. Therefore, not only does Utility A not receive payment for the depreciated book value of the government grant-funded plant, it receives no gain on its disposition, either. Utility B must record the government grant-funded plant at the depreciated book value of the seller ($50,000) in Account 100-1 and Account 265.1. Since the selling utility did not receive payment for the government grant-funded plant, it receives no gain or reimbursement for the book value of the grant-funded plant. Since Utility B records the rant-funded plant it has acquired in Account 265.1 at its depreciated book value, no return is earned by it.
113 The Handy-Whitman index is a widely recognized publication which reflects the costs of different types of utility construction.
114 Specific USOA account numbers will vary by utility.
115 For example, Utility A decides to sell one of its three districts (call it District X) to Utility B. District X includes government loan-funded plant with a depreciated value of $50,000. Valuation of the district shall not include the government loan-funded plant. Therefore, not only does Utility A not receive payment for the depreciated book value of the government loan-funded plant, it receives no gain on its disposition, either. Utility B must record the government loan-funded plant at the depreciated book value of the seller ($50,000) in Account 100-1 and Account 265.2. Since the selling utility did not receive payment for the government loan-funded plant, it receives no gain or reimbursement for the book value of the grant-funded plant. Since Utility B records the loan-funded plant it has acquired in Account 265.2 at its depreciated book value, no return is earned by it.
116 The Handy-Whitman index is a widely recognized publication which reflects the costs of different types of utility construction.
117 Utility Plant Instruction 3F. "Utility plant contributed to the utility or constructed by it from contributions to it of cash or its equivalent shall be charged to the utility plant accounts at cost of construction. There shall be credited to the depreciation and amortization reserve accounts the estimated amount of depreciation and amortization applicable to the property at the time of this contribution to the utility. The difference between the amounts included in the utility plant account and the reserve accounts shall be credited to each respective account as specified in this order."
118 For example, Utility A decides to sell one of its three districts (call it District X) to Utility B. District X includes plant funded by Water Contamination proceeds with a depreciated value of $50,000. Valuation of the district shall not include the plant funded by Water Contamination proceeds. Therefore, not only does Utility A not receive payment for the depreciated book value of such plant funded by Water Contamination proceeds, it receives no gain on its disposition, either. Utility B must record the plant funded by Water Contamination proceeds at the depreciated book value of the seller ($50,000) in Account 100-1 and designated account, as specified in this order. Since the selling utility did not receive payment for the plant funded by Water Contamination proceeds, it receives no gain or reimbursement for the book value of such plant. Since Utility B records the plant funded by Water Contamination proceeds it has acquired in the designated account at its depreciated book value, no return is earned by it.
119 The Handy-Whitman index is a widely recognized publication which reflects the costs of different types of utility construction.
