2. Background
The Site is approximately 41.55 acres and is located on a portion of SCE's Santiago-Estrella No. 2 ROW in the City of Irvine.2 The Site will be used for the development and operation of a retail center, medical office complex, office complex and horticulture and/or agriculture growing grounds, which is compatible with its primary use as a right-of-way for aboveground and underground sub-transmission lines. SCE acquired the Site from the Irvine Company in April, 1973.3 The Site is currently vacant. Under the proposed lease with Centra, the Site will generate an average base rent of $710,200 during the initial 20 years of the rental term. At the end of the initial rental term and every five years thereafter, the base rent shall be increased based on the then current fair market rental value of the Site; however, in no event will the adjusted base rent be less than the base rent otherwise payable immediately prior to such adjustment, or more than 10%. Thus, SCE concludes, revenue from the proposed lease will generate substantial revenue for the benefit of SCE's ratepayers. (See Section 2.5 below.)
2.1. Agreement
The Agreement grants Centra the option to lease the Site for the development and operation of a retail center, medical office complex, office complex, and horticulture and/or agriculture growing grounds. Upon approval of this application, a lease will be created upon Centra's exercise of the option. The term of the lease is 65 years, beginning on the date Centra exercises the option.
Under the lease, Centra will pay base rent of $95,500 in Year 1 of the rental term, $169,000 in Year 2, $291,000 in Year 3, and $682,000 in Year 4. Base rent will then increase annually by 2% each year through Year 20. The average annual base rent over the initial 20 years of the rental term is $710,200. The base rent shall further be adjusted upon the expiration of the 20th year of the rental term and every five years thereafter based on the then current fair market rental of the property. However, in no event will the adjusted base rent be less than the base rent otherwise payable immediately prior to such adjustment, or more than 10%.
The Agreement provides that Centra's activities must not interfere with the operation of the electric facilities that cross the Site. In connection with its development of the Site, Centra will be responsible for undergrounding a portion of the Santiago-Estrella No. 2 sub-transmission line at no cost to SCE. Centra is not allowed to use or store hazardous substances, explosives, or flammable materials on the Site. Any equipment used by Centra on or adjacent to the Site must be used and operated to maintain a minimum clearance of 16 feet from all overhead electrical conductors. SCE requires Centra to maintain a minimum 50-foot radius around all tower legs, and a 10-foot radius around all steel poles and anchors. Additionally, Centra must provide and maintain access roads on the Site that are at least 16 feet wide and capable of supporting a gross load of 40 tons on a three-axle vehicle.
SCE retains the right and authority to enter the Site at any and all reasonable times to inspect the Site. SCE also has the right to impose temporary restrictions on Centra's right to enter, occupy, and use the Site to allow SCE to perform any necessary work on the electrical facilities located on the Site. SCE also retains the right to take all or a part of the leasehold by eminent domain or inverse condemnation.
Centra is responsible for all personal property taxes, as well as other general or special assessments or fees levied against the Site or the improvements thereon. Centra is also responsible for obtaining all permits and approvals for construction and any zone changes or use permits required for the improvements to and operation of a retail center, medical office complex, office complex, and horticulture and/or agriculture growing grounds. Centra must also maintain specified comprehensive general liability insurance, comprehensive auto liability insurance, and workers' compensation insurance. Centra further agrees to indemnify SCE against all liability for damages or injury to persons on the Site except to the extent caused by SCE's negligent or willful misconduct.
2.2. Determination of Best Secondary Use
SCE says its objective in selecting secondary uses of its utility property is to provide revenue to its ratepayers and shareholders while safeguarding the utility's obligations to maintain the safety and reliability of its facilities. The facilities located on the Site are used in the transmission of electricity. Because aboveground sub-transmission lines and future underground sub-transmission lines cross portions of the Site, secondary land uses thereon are limited by restrictions and height clearances.
Of the land uses allowed by the City of Irvine that are compatible with planned utility operations, SCE determined that leasing the Site for a retail center, medical office complex, office complex, and horticulture and/or agriculture growing grounds offered a high level of potential revenues for this particular Site.
Traditional market value appraisal methods that attempt to determine the highest price that land would bring if sold on the open market for any use or purpose, are not ideally suited for valuing secondary uses. Instead, SCE established the rental value of the property based on the value the property has for a specific secondary use. To evaluate the rental value for the Site, SCE appraised the Site with comparable sites in the Orange County area. SCE believes the revenue it will receive from Centra falls within an acceptable market range and was determined using methodologies similar to those used in the transactions approved in Decision (D.) 07-10-029, D.05-11-022, D.03-10-009, D.03-08-031, and D.01-10-053.
Since 2000, Centra Realty Corporation (the sponsor of Centra Sand Canyon II, LLC) has successfully developed over 1.2 million square feet of office, industrial, retail, storage, and mixed-use projects; including nearly 850,000 square feet of office space. The Centra management team has experience collectively in building over 12 million square feet of industrial, storage, manufacturing, and R&D; three million square feet of office/mixed-use facilities; and been involved with tens of thousands of acres of land with a combined build-out value of over $10 billion.
In accordance with Article 6.2(g) of the Agreement, Centra will procure and deliver to SCE evidence of compliance with all applicable codes, ordinances, regulations, and requirements for permits and approvals, including but not restricted to grading permits, building permits, and zoning and planning approvals from various governmental agencies and bodies having jurisdiction. Prior to the date of this application, Centra has procured all discretionary entitlements, zoning, and planning approvals for the Site.
Under the California Environmental Quality Ace (CEQA), the Commission is obligated to consider the environmental consequences of a project that is subject to the Commission's discretionary approval (Public Resources Code 21080). The City of Irvine was the lead agency for CEQA review of the Centra project. On June 19, 2008, the City of Irvine Planning Commission approved Resolution No. 08-2909 recommending City Council certification of the Environmental Impact Report (EIR) and adoption of a general plan amendment and zone change. On July 22, 2008, the Irvine City Council adopted Resolution No. 08-82 certifying the EIR. Also on July 22, 2008, the Irvine City Council adopted Resolution No. 08-83 approving the General Plan Amendment. On August 15, 2008, the Irvine City Council adopted Ordinance No. 08-08, which approved a change in the zoning for the Site and determined that the project, as modified by design review and conditions of approval, will not result in any potentially significant impacts upon the environment.
Pursuant to Ordering Paragraph 5 of D.01-08-022, SCE has attached the City's final CEQA findings regarding the development project to the application as Appendix D.
2.3. Commission Imposition of Environmental Conditions on This Transaction
The Site is, and will continue to be, a utility operating property. Thus, ratepayers should continue to have certain financial responsibilities for the operation and maintenance of utility facilities on the Site. Environmental claims arising out of utility operations are precisely the type of claims for which SCE should be allowed to seek cost recovery from ratepayers.
The Commission addressed this precise issue in D.01-05-004 and D.01-05-005. SCE does not object to Commission imposition of those same provisions which permit cost recovery from ratepayers for claims relating to utility operations and which preclude ratepayer liability for environmental claims related to the tenancy or activity of the lessee.
2.4. The Proposed Transaction Will Benefit the Public
Under the proposed lease, the primary use of the Site for sub-transmission lines will remain. Further, while some local fire departments have raised issues concerning commercial improvements being placed underneath overhead transmission lines, the lines on this site are being undergrounded and will not raise these issues. The project master plan was reviewed by the City of Irvine Community Development, Public Works, and Building Departments, in addition to review by the Orange County Fire Authority (OCFA) (the contract fire service provider for the City of Irvine). The riser on the north portion of the property has a minimum horizontal clearance of 64 feet from the proposed building. The riser on the south portion of the property has a minimum horizontal clearance of 606 feet from the proposed building. Additionally, a Fire Master Plan was separately prepared, reviewed, and approved by the OCFA on December 29, 2007. No special or unique conditions of approval have been imposed for the development of this Site by the City of Irvine or OCFA. As such, SCE stated that the lease is not expected to affect the utility's planned operation of the sub-transmission lines which cross the Site.4 Because the proposed lease will provide revenues for the benefit of ratepayers with low risk to the ratepayers and without interfering with SCE's operations or affecting service to SCE's customers, SCE requests the Commission to issue an order authorizing the Agreement.
2.5. Ratemaking Considerations
In accordance with the categories listed in Attachment B to Advice-1286-E-A, SCE is offering Centra a lease for the secondary use of utility assets. SCE asserts that under the terms of the proposed lease, operation of a retail center, medical office complex, office complex, and horticulture and/or agriculture growing grounds is compatible with SCE's planned operation of the sub-transmission lines located on the Site. Utility service is therefore not expected to be affected as a result of Commission approval of this lease. The lease will generate Other Operating Revenue (OOR) for the benefit of the ratepayers.
On January 30, 1998, SCE filed Advice 1286-E which set forth proposed categories of non-tariffed products and services offered for sale by SCE and provided descriptions for each category. This Advice filing was made pursuant to Rule VII.F of the Affiliate Transaction Rules contained in Appendix A of D.97-12-088. Attachment B to Advice 1286-E-A (filed April 5, 2000) identified the Secondary Use of Transmission Right of Ways and Land and the Secondary Use of Distribution Right of Ways, Land, Facilities and Substations as categories of existing non-tariffed products and services. SCE states that leasing the utility right-of-way to Centra fits within these categories. This filing complies with the requirements of Rule VII for existing non-tariffed products and services.
The revenue from the proposed lease will be treated as OOR. For the non-tariffed products and services deemed "passive" by the Commission, the revenues in excess of the annual threshold will be split between shareholders and ratepayers on a 70% to 30% basis. (See D.99-09-070.) Products or services offered under the Secondary Use of Transmission Right of Ways and Land and the Secondary Use of Distribution Right of Ways, Land, Facilities and Substations categories have been deemed "passive" for revenue sharing purposes.
2 The Site is bounded on the west by residential development; on the south by the San Diego (I-450) Freeway; on the east by medical offices and hospitals; and on the north by the Barranca Channel.
3 The book value of the Site is $252,679.
4 As noted earlier, if the leased property becomes necessary for utility operations, SCE has reserved the right to exercise its power of condemnation to acquire any or all of the leasehold.
