3. Discussion

Section 851 provides in relevant part that:

"A public utility ... shall not sell, lease, assign, mortgage, or otherwise dispose of, or encumber the whole or any part of its ... line, plant, system, or other property necessary or useful in the performance of its duties to the public, ... without first having ... secured from the commission an order authorizing it to do so ... ."4

Thus, the DCA may not take effect absent our authorization. Since Section 851 does not specify the standard by which the Commission is to review such requests, we look to how the Commission and the courts have applied the statute in the past.

SDG&E points to D.09-07-035, where the Commission noted that in applying Section 851, it:

"historically looked to public interest as its guiding post. While the minimal standard we consider in our review is that the transaction being proposed in a particular application is `not adverse to the public interest,' we do foster and encourage transactions ... where the transaction is also `in the public interest.'"5

SDG&E also points to D.09-04-013, where, the Commission held that:

"The primary question for the Commission in Section 851 proceedings is whether the proposed transaction serves the public interest: `The public interest is served when utility property is used for other productive purposes without interfering with the utility's operation or affecting service to utility customers.'"6

Based on these decisions, SDG&E asserts that the minimum standard for reviewing Section 851 applications is that the proposed transaction may not be adverse to the public interest. SDG&E also asserts that although Section 851 review may encompass rate impacts, it is not limited to such impacts; instead, it encompasses a broader range of public interest effects.

UCAN contends that a stricter standard should be applied. Specifically, according to UCAN, an applicant must prove that ratepayers will benefit from a proposed transaction before the Commission can approve it under Section 851. UCAN cites Hanlon v. Eshleman7 in support of this proposition. Hanlon, an early California Supreme Court decision regarding Section 51a of the Public Utilities Act,8 said among other things that "[t]he commission's power is to be exercised for the protection of the rights of the public interested in the service, and to that end alone."9

UCAN also relies on D.00-07-010, which approved an application by Southern California Edison Company to lease communication facility sites and equipment placements to Pacific Bell Mobile Services. Noting the benefits of such joint use of utility facilities, the Commission said that:

"The public interest is served when utility property is used for other productive purposes without interfering with the utility's operation or affecting service to utility customers. [¶] Also, revenues generated by the Agreements will flow to and benefit ratepayers under the sharing arrangement approved in D.99-09-070. [¶] The Agreements will allow improved service to Pacific's customers. Since Pacific is a public utility, the welfare of its customers also enters into our consideration of this application."10

Finally, UCAN cites D.02-09-024, which denied rehearing of and modified an earlier decision (D.02-04-005) authorizing a sale of property by Pacific Gas and Electric Company. The Commission stated that:

"[Section 851] confers on the Commission virtually unlimited discretion to determine whether the sale of a public utility's property should be approved - and on what conditions in order that it prove sufficiently beneficial to ratepayers and the public generally."11

We find that none of the cases relied upon by UCAN supports its proposed standard of proven ratepayer benefits. Instead, we find that the Section 851 review standard stated in D.09-07-035 and D.09-04-013 should be applied, i.e., that the subject transaction should not be adverse to the public interest and that transactions that are in the public interest are to be encouraged. First, Hanlon's provision for protecting the public's rights cannot be equated to requiring public benefits. Moreover, Hanlon also stated that "[a]ll that the commission is concerned with ... is whether a proposed transfer will be injurious to the rights of the public."12 This is fully consistent with D.09-07-035, which confirmed that the minimal standard for Section 851 review is that the transaction being proposed in a particular application is not adverse to the public interest. Also, while the "public interest in the service" obviously includes ratepayers, it is not limited to that portion of the public. Members of the public may be affected by, and therefore interested in, a utility's facilities even if they are not served by that utility.

UCAN also misreads D.00-07-010. As noted above, that decision said that "[t]he public interest is served when utility property is used for other productive purposes without interfering with the utility's operation or affecting service to utility customers." This is consistent with the "not adverse to the public interest" standard. While it is true that D.00-07-010 also recognized that ratepayer benefits were present in that particular situation, that is simply an indication that the transaction not only met the minimal "not adverse" standard for Section 851 but exceeded it.

Finally, we do not find that D.02-09-024 supports UCAN's proposed standard of proven ratepayer benefits. That decision addressed a dispute over the ratemaking treatment of the proceeds of the sale, not the standard of review to be applied under Section 851. Accordingly, the introductory dicta of that decision relied upon by UCAN, including its reference to "sufficiently beneficial to ratepayers," cannot be taken as a statement of intent by the Commission to overturn the long-standing "not adverse to the public interest" standard for Section 851 review.

The Scoping Memo stated that two of the issues to be resolved in this proceeding are:

1. Whether the transaction described in the DCA will be adverse to the public interest, i.e., the continued ability of SDG&E to offer adequate service to customers and the members of the public interested in receiving utility service at fair and reasonable rates; and

2. Whether the ratemaking aspects of this transaction will be adverse to the interests of impacted ratepayers.

The Scoping Memo's statement of the minimal standard of review to be applied in this proceeding is consistent with the foregoing discussion, and we therefore affirm it. Additionally, consistent with D.09-07-035, we determine whether the proposed transaction is in the public interest.

SDG&E claims that allowing Citizens' participation in the Border-East Line has four public interest benefits: SDG&E will receive $83 million as prepaid rent; development of the line will bring employment and tax benefits to Imperial County; Citizens would be an independent and "new" developer bringing competition to transmission development; and costs are capped and levelized over the 30-year term of the lease providing certainty and rate stability. These benefits are ways by which SDG&E's utility property would be put to productive use if the DCA is approved and the lease option is exercised by Citizens.
Section 3.2 of this decision reviews these claims.

Pursuant to the DCA, SDG&E will receive an estimated $83 million lump sum as prepaid rent payment at the closing of the transaction after Citizens exercises its option. This $83 million is the proportional share of the actual cost incurred by SDG&E to develop, design, permit, engineer and construct the Border-East Line through the Imperial Valley. UCAN essentially agrees that SDG&E would benefit from the DCA, noting that SDG&E would effectively be borrowing $83 million for 30 years at an interest rate of 4%.

This lump sum payment will be allocated over the lease term and will be reported as rent accruing for tax purposes quarterly in arrears according to the schedule agreed to by the parties. This provision is designed to maximize the tax position of the parties, and appears to be indifferent to ratepayers. Therefore, we will not consider this provision of the DCA as promoting, or harming, the public interest since there is no affirmative showing presented in the record that supports a finding either way. However, we do make a finding that approval of this term will not interfere with SDG&E's operations or service.

In addition, there is another potential, and hard-to-quantify benefit from Citizens pre-payment of rent: with the receipt of the $83 million, SDG&E could direct other monies toward other investments because Citizens is supplying such a large portion of the financing for the Sunrise. This benefit was not fully developed in the record and therefore we do not make a finding on this issue.

Citizens has agreed to spend 50% of its DCA-related after-tax profits on programs serving low-income families in Imperial County, which, according to SDG&E, is one of the poorest counties in California. Citizens estimated that distributions to low-income residents in the county would be $1 million per year for 30 years. This provision is a significant public benefit even though, as UCAN observes, SDG&E does not serve Imperial County. As SDG&E argues "the DCA's positive impact on their lives should be considered as weighing against potential negative rate impacts."13

DRA fully supports Citizens commitment to contributing 50% of their after-tax profits from this project to benefit low income consumers in Imperial Valley. As DRA states "DRA does not know of any other investor in the electrical industry such as Citizens, whose corporate goal is to engage in business ventures that generate revenues for the funding of social and charitable assistance programs for the elderly and the poor."14 The record fully supports a finding that this provision of the DCA is in the public interest.

SDG&E also claims that by enhancing the development potential of renewable projects in this area of California, employment opportunities and the tax base of Imperial County will be improved. We address whether approval of the DCA will improve transmission development opportunities in Section 3.2.3 below. Here, we note that to the extent that transmission development in Imperial County occurs, improved employment opportunities and an improved tax base in the County could be realized. We find that these factors are a public benefit and support approval of the application.

SDG&E and Citizens contend that another significant public benefit of the DCA would be its catalytic effect on transmission development and development by a non-utility financial participant─signaling "a new competitor in an industry that is traditionally absent of competition."15 SDG&E further states that Citizens, as a new, "non-utility" competitor,16 has expressed interest in facilitating the development of new transmission resources beyond the
Border-East Line. For example, Citizens plans to investigate the feasibility of a project that could enhance the transfer capacity between California and Arizona by as much as several thousand megawatts, providing renewable developers greater opportunity to reach the transmission grids in those states. Citizens has been a leader in spearheading discussions among regional utilities regarding transmission development.

We acknowledge that while having Citizens' as a new, non-utility participant in the Border-East Line is a positive element of the DCA, we also note that the extent of the "catalytic effect" that approval of the DCA would have on the propensity of both Citizens and other investors to participate in other transmission development opportunities is not readily measured. Among other things, it is unclear how likely Citizens' participation in other projects might be if the DCA is not approved, and, therefore, what the incremental impact of the DCA might be. Still, on a theoretical basis, the presence of another firm with a significant interest in transmission investment in and near Imperial County increases the potential for such development, and approval of the DCA would make it more likely than not that Citizens will become and remain a viable competitor in transmission development beyond its interest in Sunrise. In summary, approval of the DCA would set in motion a series of possible outcomes that could lead to needed transmission development in a more competitive environment. In this respect, the DCA provides a potential, if intangible and unmeasured, public interest benefit.

In addition, development of the Sunrise line can help to alleviate transmission bottlenecks in Southern California to facilitate the delivery of renewable energy. Citizens promotes both renewable energy and mitigating the cost of this more expensive resource through its public interest entities and donating money to help the most economically vulnerable pay their electricity bills.

The DCA provides that Citizens' capital cost recovery rate, which is the largest cost component in the rate that Citizens will be able to charge, will remain fixed for the 30-year term of the lease. This capital-cost cap provision contrasts with typical financing for investor-owned utilities, where
capital-related costs paid by ratepayers are subject to equity market fluctuations. Where the Citizens rate for the Border-East Line would be fixed, we note that in the absence of the DCA with Citizens, SDG&E would be able to seek a higher rate of return for Sunrise after 2013, when its FERC TO3 Settlement Agreement expires. In addition, if the DCA is approved and the lease option is exercised, any rate increase that FERC might authorize for SDG&E would not be applicable to Citizens' proportionate share of the Border-East Line.

SDG&E contends that the DCA's provision for locking in project financing costs constitutes a significant ratepayer benefit to the extent that capital market costs increase significantly during the 30-year lease. As SDG&E argues, "Citizens would be providing long-term rate stability to the extent that capital market costs ever increased significantly during the 30 years of Citizens' participation by locking in all 100% of its required financing over 30 years as opposed to a traditional investor-owned utility's financing that would have half of its costs subjected to swings in the equity markets."17 Citizens and DRA concur in this view.

UCAN, on the other hand, points out that CAISO ratepayers would not benefit from the Citizens' fixed rate provision if, after 2013, SDG&E's
FERC-approved return on equity or debt cost were to decline. UCAN claims that the current capital costs are arguably high on a long term basis because they reflect capital market conditions during the credit crisis of 2008. According to UCAN, this suggests that transmission rates could decline in the future in the absence of the DCA. UCAN submits that in order for the DCA's fixed rate provision to be a benefit for ratepayers, future returns on equity would have to exceed significantly the 11.35% return in effect under the current FERC TO3 Settlement Agreement or future debt costs would have to rise significantly.

In response to this argument, SDG&E takes the position that since future capital costs (both equity and debt) are unknown, and it is reasonably possible they could rise above the capital cost assumptions in the DCA, there is some rate stability value in locking Citizens into a capped rate. We concur with SDG&E that capital costs 30 years into the future are unknown. Thus, we do not attempt to forecast the future performance of capital markets over the next 30 years. Although approval of the DCA would establish a potential for ratepayer gain by enabling them to pay less than SDG&E's capital cost in the event that cost rises, that possibility is offset by the DCA's risk of ratepayers having to pay more than SDG&E's cost in the event that cost falls.

DRA also argues that this rate stability provision is a benefit to ratepayers because it does protect them from capital cost increases. As SDG&E posits, this position by DRA "can't be ignored . . ." Since DRA has the statutory mandate to "represent and advocate on behalf of the interests of public utility customers" and "to obtain the lowest possible rate for service consistent with reliable and safe service levels,"18 if DRA finds rate stability to be a benefit, we should weigh it carefully.

Accordingly, since we are not prescient, we do not know the ratepayer benefit of the rate stability provision of the DCA, but we do find value in the fact that the cost component is capped and provides certainty to a key component of potential costs to ratepayers. In a sense, this is "insurance" against future higher costs. We find, therefore, that this provision of the DCA is not harmful to the public or to ratepayers, and only the passage of time will clearly tell us whether it was a benefit.

At the expiration of the Citizens' 30-year lease, the capital costs for the portion of the Border-East Line will be fully depreciated and customers will have the benefit of 28 years remaining of useful life for this facility. SDG&E claims this provision is a ratepayer benefit because ratepayers will still have a valuable and useful asset, but without continuing to pay for depreciation. This is the advantage of the lease arrangement with Citizens instead of a sale of the asset. SDG&E will continue to have the transmission line as part of its utility owned resources

This arrangement, however, only provides a clear benefit to future ratepayers, and not to those current ratepayers paying for the 30-year lease. We therefore, do not find that this feature of the DCA is a benefit to current ratepayers.

3.2.4.3. Levelized Cost Recovery

SDG&E touts the levelized cost recovery component of the DCA as another benefit of the Citizens project. In contrast to conventional utility ratemaking, where capital investment cost recovery is "front end loaded" because revenue requirements decline as rate base depreciates, the DCA provides for levelized revenue requirements over the 30-year lease period. Citizens contends this is a significant consumer advantage because, according to its witness Dr. Wilson, in any long term projection the early years are important and "distant forecasts (30, 40, 50 years into the future) are scarcely worth the air they ride on."19

DCA's provision for levelized capital cost recovery over the 30-year term of the lease, (compared to conventional ratemaking) provides a net benefit to ratepayers, because ratepayers are paying a constant amount for the lease period. While some could argue that this levelization is merely an inter-temporal shift of cost responsibility among ratepayers, it is a benefit to the ratepayers of today to not have to pay the front-ended costs. It is fair to ratepayers to levelize the costs out, at a set, but lower amount, for the entire 30 years rather than burdening some ratepayers today. Under the circumstances, we conclude that the DCA's levelized rate methodology provides a ratepayer benefit

In Section 3.3 we evaluate SDG&E's claim that the DCA has built-in protections to ensure that there are no potential adverse impacts on its utility operations and service to customers. We also consider UCAN's claim that it fails to do so.

For the most part SDG&E's protection claims are straightforward, uncontested, and do not require detailed discussion here. Most importantly among these non-controversial claims, the DCA provides that Citizens shall become a Participating Transmission Owner under the CAISO tariff. Citizens' entitlement to the transfer capability in its portion of Sunrise shall be provided for the benefit of and made available to CAISO eligible customers at just and reasonable rates and terms. Also, SDG&E has taken adequate measures to ensure it would not "double recover" costs from both Citizens and
FERC-approved rates. In addition, Citizens intends to securitize the financing of its participation cost with a pledge of the revenues it will receive from the CAISO. Except as discussed below, we find that the DCA provides adequate protection against adverse impacts on utility operations and service.

SDG&E states that one of its goals in negotiating the DCA was to ensure that ratepayers would not have to pay rates above those it would charge in the absence of the DCA. SDG&E was concerned that Citizens could obtain
FERC-approved rates much greater than the rates SDG&E would charge if the DCA were not approved. To address this concern, the DCA provides for a "SDG&E Representative Rate" which is a model specified and agreed to in the DCA. This Representative Rate calculates a theoretical annual rate that SDG&E could recover at the time of commercial operation, if SDG&E held Citizens' Transfer Capability, and then amortized that rate over a 30-year period on a level basis to produce a theoretical Levelized Annual Amount. This Rate addresses capital requirements and incorporates Depreciation Expense, Return on Common Equity, Return on Debt, Federal and State Income Taxes, and Property Taxes. A revenue requirement including these items is calculated for each of the 58 years of the estimated 58-year depreciable life of the Citizens' portion of Sunrise. A net present value is then calculated for each of the 58 annual revenue requirements. A Levelized Annual Amount is then calculated to amortize the sum of the net present value of the 58 years of annual revenue requirements over a 30-year period. This Levelized Annual Amount is the SDG&E Representative Rate for Capital Requirements. Under the DCA, SDG&E's Representative Rate constitutes a ceiling or cap on the capital cost rate that Citizens may charge. In other words, Citizens' cost recovery from the CAISO is limited to this Representative Rate.

SDG&E states that since the SDG&E Representative Rate is to be based on actual costs, it is impossible to predict with certainty what that rate would be when Citizens exercises its lease option under the DCA. However, SDG&E has estimated these costs. The testimony of SDG&E witness Michael Calabrese includes an illustrative comparative analysis of the annual levelized revenue requirement that results from the DCA. The analysis uses what is described as a "current snap shot case" for SDG&E (assuming that Citizens does not exercise its lease option under the DCA) and "current snap shot" and "high" cases for Citizens (assuming Citizens does exercise its lease option). According to SDG&E, this testimony shows that the annual discounted and levelized revenue requirement under the snap shot case would be $77,000 (0.6%) higher for Citizens than for SDG&E, and the annual discounted and levelized revenue requirement under the high case would be $734,000 (5.8%) higher for Citizens than for SDG&E. SDG&E acknowledges that these are estimates, and that actual differences could prove to be higher or lower.

As SDG&E argues, however, before any actual costs can be collected, Citizens will have to file its proposed tariff with FERC in a Section 205 rate proceeding where all affected parties will have an opportunity to examine their justness and reasonableness. In addition, it is important to note that Citizens' costs, whether it be the de minimus 0.6% or the higher 5.8%more than SDG&E's might be, these costs will be collected from all California electric consumers who receive transmission service from load serving entities that are participants in the CAISO, through the CAISO's Transmission Access Charge.20

As SDG&E further contends, any rate difference between the Citizens' rate and the non-citizens' rate becomes diluted by both the magnitude of the number of ratepayers who will be sharing in the cost, as well as by the proportionality of the $83 million which is out of a total estimated Sunrise cost of $1.9 billion.

Finally, we are dealing with forecasting issues and a margin of error over a 30-year period involving multiple factors over which no party has control. In the context of the totality of Citizens' proposal for the Sunrise project, and the benefits that ratepayers will receive, and in particular the residents of Imperial County who will be the recipients of Citizens' largess, and the de minimus possible increase to all California electric consumers, we find that the DCA is in the public interest.

4 Section 851 was amended effective January 1, 2010. (Stats. 2009, Ch. 370, Sec. 1.) Among other things, the basic sentence structure was modified from "no public utility shall sell, etc." to "a public utility shall not sell, etc." We do not find that the amendments to Section 851 affect the disposition of this proceeding.

5 D.09-07-035 at 13, emphases in original.

6 D.09-04-013 at 6, quoting D.02-01-058.

7 Hanlon v. Eshleman, 169 Cal 200 (1915).

8 Section 51a is the predecessor to Section 851.

9 Hanlon, 169 Cal at 202.

10 D.00-07-010 at 6-7.

11 D.02-09-024 at 3.

12 Hanlon, 169 Cal at 202.

13 Reply Brief of SDG&E, July 2, 2010 at 8.

14 DRA's Opening Brief, June 18, 2010 at 6.

15 Opening Brief of SDG&E, June 18, 2010 at 11.

16 SDG&E and Citizens both state that "Citizens is a FERC-jurisdictional public utility." (Application 09-10-010 at 8; Citizens Opening Brief at 9.) SDG&E also states:

"Citizens is not a public utility with an obligation to serve and, as such, is significantly different from a traditional utility, both in structure and in its exposure to regulatory risk. Citizens, as a non-utility financial participant in electric transmission, is a new competitor in an industry that is traditionally absent of competition." (SDG&E Opening Brief at 11.)

SDG&E may be referring in the second instance to the fact that Citizens is a
FERC-regulated, transmission-only utility that does not serve retail electric customers. Nevertheless, in light of the confusion surrounding these statements, we give no weight to how Citizens' utility status is characterized as we evaluate whether the DCA will lead to further transmission development. The important question that we consider is whether Citizens would be a viable new competitor in the transmission industry.

17 SDG&E's Opening Brief, June 18, 2010 at 13.

18 SDG&E's Reply Brief, July 2, 2010 at 7 citing the P.U.C. Section 309.5(a).

19 Exhibit 6 at 26.

20 SDG&E's Opening Brief, June 10, 2010 at 15.

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