COM/JB2/avs Date of Issuance 10/18/2010

Decision 10-10-018 October 14, 2010

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking on the Commission's Own Motion to Develop Rules and Procedures to Ensure 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.

Rulemaking 09-03-014
(Filed March 12, 2009)

DECISION ADOPTING RULES FOR ACCOUNTING
TREATMENT OF CONTAMINATION PROCEEDS ARISING FROM GOVERNMENT GRANTS AND PROPOSING COUNTERPART RULES FOR GOVERNMENT LOANS AND DAMAGE AWARDS

TABLE OF CONTENTS

Title Page

DECISION ADOPTING RULES FOR ACCOUNTING TREATMENT OF CONTAMINATION PROCEEDS ARISING FROM GOVERNMENT GRANTS AND PROPOSING COUNTERPART RULES FOR GOVERNMENT LOANS AND DAMAGE AWARDS 2 2

1. Summary 2 2

2. Background 3 3

2.1. Overview 3 3

2.2. Prior Decisions 4 4

2.2.1. Selective Case Examples 4 4

2.2.2. Generic Proceedings 6 6

2.3. Procedural History 7 7

3. Issues Posed for Rulemaking 9 9

4. Workshop Content, Report and Related Commentary 11 11

4.1. Local and Federal Government Grant-Funded Plant 11 11

4.2. Government Loan-Funded Plant 11 11

4.3. Plant Funded by Damage Awards, Settlements, Government Order or Insurance 17 17

4.3.1. General Positions of Parties 17 17

4.3.2. Proportional Assumption of Costs and Risks: Competing Views 20 20

4.3.3. Suggestion that Complex Contamination Litigation Can Exceed Obligation to Serve 26 26

4.4. Valuation of Replacement Plant 27 27

4.5. Sharing of Proceeds Remaining After Specified Expenses are Deducted 28 28

4.5.1. Qualified Consensus on Case-by-Case Approach 28 28

4.5.2. Competing Definitions of "Net Proceeds" 28 28

4.5.3. Perceptions of Risk and of Where It Resides 29 29

4.6. Effect, if any, of past decisions of the Commission on resolution of foregoing issues 31 31

5. Discussion 32 32

5.1. Local And Federal Government Grants Used To Fund Replacement Plant Should Be Given Basically The Same Accounting Treatment As State Grants Were Given In D.06-03-015 32 32

5.2. Government Loans Used To Fund Replacement Plant Should Be Recorded As Contributions In Aid of Construction 35 35

Title Page

5.3. Damage Awards, Settlements, Government Ordered Funds Or Insurance Proceeds Used To Fund Replacement Plant Should Be Recorded As CIAC 42 42

5.4. Sharing of net damage award proceeds 46 46

5.4.1. Portion Of Proceeds Subject To Sharing 46 46

5.4.2. Analytical Framework For Allocating Shares Of The Net Proceeds 47 47

5.5. Mechanisms For Responding To Utilities' Asserted Need For Incentives Relative To Risks And Responsibilities Undertaken In Connection With Contamination 49 49

5.5.1. Responding To Contamination Comes Within A Water Utility's Obligation To Serve 49 49

5.5.2. Available Cost Recovery Mechanisms For Addressing Risk and Costs 51 51

5.5.2.1 Cost of capital proceedings 51 51

5.5.2.2. General Rate Cases 52 52

5.5.2.3. Memorandum Accounts For Litigation Expenses 53 53

5.6. Commission's Discretion In Dealing With Smaller Water Utilities 55 55

5.7. Prospective Effect of this Decision 55 55

6. Comments on Proposed Decision 55 55

7. Assignment of Proceeding 58 58

Findings of Fact 58 58

Conclusions of Law 59 59

ORDER 63 63

APPENDIX A - Rules for Grant Funds

APPENDIX B - Proposed Rules for Government Loans

APPENDIX C - Proposed Rules for Damage Awards, Settlements, Government Ordered Funds and Insurance Proceeds Related to Water Contamination

APPENDIX D - Factors to Inform Allocation of Net Proceeds

DECISION ADOPTING RULES FOR ACCOUNTING
TREATMENT OF CONTAMINATION PROCEEDS ARISING FROM GOVERNMENT GRANTS AND PROPOSING COUNTERPART RULES FOR GOVERNMENT LOANS AND DAMAGE AWARDS

1. Summary

This decision sets out policies, a framework for analysis, rules and proposed rules to govern the accounting and ratemaking treatment variously of local and federal government grants, public loans and damage awards (see below for the various sources) received by an investor-owned water utility following contamination of its water supply. It resolves issues regarding the inclusion or exclusion of replacement plant in rate base, serving the dual 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.

The decision extends to local and federal government grant-funded plant the rules previously adopted by the Commission which treat state government grant proceeds that fund replacement plant as Contribution in Aid of Construction (CIAC). Rules for accounting treatment of local and federal government grants are adopted in the decision and set out in Appendix A. The decision concludes that government loan proceeds, as well as proceeds from damage awards, settlements, government orders (i.e., proceeds derived via government order from public or private funding sources) or insurance, that fund replacement plant should be treated as CIAC rather than being included in rate base and earning a rate of return. Proposed rules for accounting treatment of government loans are in Appendix B. Proposed rules for accounting treatment of damage awards, settlements, government order and insurance proceeds are in Appendix C.

After the contaminated plant is replaced, remediation has occurred, and all recoverable costs have been determined, the remaining amount of contamination proceeds arising from damage awards, settlements, government order and insurance proceeds may be shared between ratepayers and shareholders on a case-by-case basis under a framework for analysis provided in this decision (Table 2 and Appendix D). The decision provides that, where appropriate in the individual case, the Commission may provide incentives, e.g., in the form of increments in rate of return, in the cost of capital proceeding for Class A water utilities and in the General Rate Case (GRC) for Classes B, C and D water utilities, for above normal risks associated with a utility seeking recovery of contamination proceeds from polluters. The decision also allows for utilities to seek compensation in the GRC, on the basis of an approved memorandum account obtained through an advice letter filing, for the responsibility over the ownership, operation and maintenance of replacement plant that is not accounted for in CIAC treatment.

With the issuance of this interim decision the rulemaking proceeding remains open for the limited purpose of receiving comments and, if needed, conducting one or more workshops considering rules appropriate for the accounting of contamination proceeds from government loans, damage awards, settlements, government order or insurance as CIAC. (See Appendices B and C for proposed rules.)