6. Discussion

A. The Service Area Agreement and Tolling and Mutual Release Agreement

Under Section 8102, electric corporations and districts may enter into service area agreements to limit the areas within which each will provide electricity to customers, subject to Commission approval. In adopting Sections 8101 et seq., which authorize service area agreements, in l954, the Legislature expressed its intent as follows:

Under certain conditions the sale and distribution of electric power in the same geographical area both by an electrical utility and by an irrigation district, results in duplication of service, waste of materials, increase in costs, waste of manpower and economic loss, and is detrimental to the efficiency and best interests of such districts. It is the policy of this State to induce such utilities and irrigation districts to prevent or remove such economic waste and to adopt more efficient and economic methods of distribution of electric power and energy, and to that end encourage the definition of areas to be served or not to be served by each.³⁴

The Legislature has more recently reaffirmed its policy in favor of separate service areas for electric distribution providers in AB 2638 (codified in pertinent part at Sections 9607-9613). In Section 9610(b), the Legislature specifically encouraged service area agreements between electric corporations and irrigation districts in order to further the policies articulated in Section 8101 against duplication of services and facilities and in favor of the efficient and economical distribution of electricity.³⁵ Section 9608 also authorizes service area agreements that allocate certain territory between districts and electric corporations and prohibit them from serving customers in each other's territory, if a district acquires all of the electric distribution and related subtransmission facilities of the electric corporation that has an obligation to serve the area.

Section 9605(b), adopted by A.B. 1890 in 1996, states that A.B. 1890's provisions regarding electrical restructuring do not modify or abrogate service area agreements between retail electric service providers.

In D.98-06-020, we denied approval of a service area agreement between PG&E and Modesto Irrigation District, because the agreement would restrict competition among electric distribution providers in the territory for 25 years. We reasoned that, in view of the deregulation of the electric generation industry under AB 1890, the Commission's policy was to promote competition in the electrical market when it would not compromise other public policy objectives. We also noted that under federal anti-trust law, the parties could not agree not to compete unless the agreement is consistent with a clearly articulated state policy that is directly supervised by the state. We therefore found that the service area agreement would not serve the public interest.

Clearly, times have changed since l998, and we recognize that competition in the electric industry has not always worked to the benefit of the public. Moreover, in view of the Legislature's recent reaffirmation of a policy in favor of service areas agreements between utility corporations and districts in AB 2638, we find it appropriate to consider the proposed service area agreement here. ³⁶

Under Section 8104, the Commission may approve a service area agreements if the agreement is "in the best interest of the State and the utility and is not adverse to the public interest." Here, our approval of the service area agreement will resolve a long-standing conflict between PG&E and TID regarding the applicability of the 1953 Agreement and avoid costly litigation to be financed by ratepayers and public funds. The service area agreement will avoid duplication of service, waste of materials and increased costs by dividing the territory between PG&E and TID and will facilitate a more efficient delivery of electric distribution service within each party's territory. If we did not approve the service area agreement, PG&E, TID, PID, and WPA could all potentially serve customers in the Westside Zone. Since PG&E is retaining the vast majority of its transmission system in the Salado/Patterson area, PG&E customers will continue to receive safe and reliable transmission services.³⁷ The division of territory in the agreement will also avoid the possibility that TID would selectively market its services to large commercial users and other customers who are inexpensive to serve, leaving PG&E with the obligation to serve remaining higher-cost customers and to maintain its facilities in the area despite declining revenues, at the expense of ratepayers.³⁸ For example, the Westside Zone includes not only the City of Patterson and the community of Crows Landing, but also the entire area west to the Alameda/Stanislaus County Line, which is hilly and sparsely populated. This area would have been expensive for PG&E to serve after its other assets in the Westside Zone had been sold to TID. The agreements will also financially benefit PG&E by saving operations and maintenance costs on the facilities sold to TID.³⁹ TID has a strong record of providing good service to its customers. For example, in 1998, RKS Research and Consulting conducted a blind survey of TID residential customers to determine their satisfaction with TID's electric service. Seventy-one percent of TID's customers reported that they were very satisfied with TID, as compared with 58 percent of utility customers n the rest of the United States. In a 2001 blind survey of commercial and industrial customers conducted by RKSs, TID's service ranked above other California municipal utilities and other national service providers in providing reliable service. (PG&E Testimony at pp. 5-1, 5-2.) TID will provide a number of public purpose programs that will benefit ratepayers and the public, including demand-side management programs, renewable resource programs, research, development, and demonstration programs, and low-income programs.⁴⁰ TID will provide universal service to customers within the territory and anticipates that its rates will be lower than PG&E's rates.⁴¹ For all of these reasons, we find that approval of the service area agreement is in the best interests of the State and the parties and will serve the public interest.⁴²

We will, however, require PG&E and TID to strike the provisions of the service area agreement that permit them to add or delete territory from their service areas without Commission approval. If PG&E wishes to change its service area, PG&E shall petition the Commission for an amendment to the service agreement pursuant to Section 8101 et seq. PG&E shall also obtain advance Commission approval of any amendments to the service area agreement or any superseding agreements.

We will also require PG&E and TID, PID, and WPA to modify sections 6a. and 7a., b., and c of the service area agreement regarding direct access transactions. These sections state that the agreement does not preclude or prohibit PG&E or TID, PID, and WPA from providing electricity to customers in each others' service areas through direct access transactions, if certain conditions are met.⁴³ However, in D.01-09-060, the Commission suspended the right to enter into new direct access contracts and to verify any new agreements for direct access transactions effective September 20, 2001, in order to implement AB 1X, as codified at Water Code Section 80110. In D.02-03-055, we subsequently adopted standards to implement the suspension of direct access, which allowed limited exceptions for customers who had entered into direct access contracts before September 20, 2001(pre-existing direct access contracts).^{44 45}

Under this authority, PG&E, TID, PID, and WPA may not engage in direct access transactions with customers, except as authorized in D.02-03-055 and any subsequent Commission decisions. The record of this proceeding contains no evidence to show that PG&E, TID, PID, or WPA were providing direct access to customers in the territory subject to the service area agreement as of September 20, 2001. Therefore, although D.02-03-055 permits customers with pre-existing direct access contracts to change from one ESP to another and allows the assignment of pre-existing direct access contracts under some circumstances, it appears that neither PG&E nor TID, PID, WPA may be authorized to enter into direct access transactions with customers in each others' service areas, regardless of the provisions of the service area agreement.

However, the term of the service agreement is 25 years, and state law and Commission policy regarding direct access may change during this time. We therefore direct PG&E and TID, PID, and WPA to modify the provisions of the service area agreement regarding direct access to clarify that the Commission has previously suspended direct access in order to implement AB 1X, and that PG&E and TID, PID, and WPA may enter into direct access transactions only as permitted by state law and Commission decisions. Further, since non-utility ESPs, rather than utilities, generally provide direct access, we direct the parties to clarify the language in section 6a. which refers to the provision of direct access by PG&E.⁴⁶

LID argues that the service area agreement's restrictions on the number and type of services that TID may provide to other local utilities prevent mutual aid and collaboration between local utilities. PG&E and TID maintain that these limitations prevent PG&E and TID from indirectly serving customers in each other's territory in violation of the service area agreement through another entity that differs from PG&E or TID in name only.

We find that the service area agreement does not limit the ability of either PG&E or TID to provide mutual aid to other local utilities. On the contrary, sections 6(d) and 7(k) of the service area agreement specifically permit PG&E and TID to provide mutual aid without limitation.⁴⁷ The service area agreement also permits PG&E and TID to perform a number of services for other local utilities, which could typically be performed by a consultant.⁴⁸ Under certain circumstances, PG&E and TID may also provide two of four "core distribution services," including engineering estimating, operations and maintenance, planning engineering, and construction, as well as recordkeeping and mapping, to an established local utility. We agree that these restrictions on PG&E's and TID's provision of "core distribution services" will reduce the risk that PG&E or TID could indirectly serve customers in each others' service areas through another entity financed or controlled by them.

We note that the agreement does not permit PG&E or TID to provide "core distribution services" to new local utilities or to existing local utilities that do not qualify as "established local utilities," because they have not provided service to at least 25 percent of the customers within their boundaries for at least five years. This restriction may reduce competition in the retail electric distribution market in the territory subject to the service area agreement. However, PG&E and TID have no legal obligation to provide these types of services to other entities in the absence of a pre-existing contract, and the service area agreement does not prevent the formation or operation of new local utilities to the extent otherwise permitted by law. Moreover, the Legislature has expressed a strong public policy against duplication of electric distribution services and facilities and the resulting economic waste. Therefore, LID's request to strike the sections of the service area agreement that limit PG&E's and TID's ability to provide core distribution services to other local utilities is denied.

PG&E also asks the Commission retain jurisdiction to adjudicate future disputes between PG&E and TID under the service area agreement, if they cannot resolve the issues through informal negotiations and mediation. Section 26(b) of the service area agreement permits either party to file a complaint at the Commission or its successor agency, if any, or at any other regulatory agency to which the Legislature has granted authority over service area agreements between electric corporations and districts, 60 days after the commencement of the mediation. TID has not opposed this request.

We decline to retain jurisdiction over future disagreements between PG&E and TID under the service area agreement. The relevant statutes regarding service area agreements do not specifically provide for dispute resolution by the Commission. After our approval, the service area agreement is a contract between PG&E and TID,⁴⁹ and the California courts have the knowledge and experience to adjudicate contract disputes.

In addition, the Commission has only limited jurisdiction over districts and in some cases, may not be able to properly consider a complaint filed against TID by PG&E.⁵⁰ We will not approve a dispute resolution process in which one party, but not the other, could obtain relief through complaint proceedings at the Commission.

B. Approval of Asset Sale Agreement, Leases, and Related Agreements

Section 851 provides that no public utility "shall . . . sell ...or lease ... the whole or any part of . . . 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." The primary question for the Commission in Section 851 proceedings is whether the proposed transaction is adverse to the public interest.⁵¹ For example, pursuant to Section 851, we consider whether a proposed sale would transfer utility property to persons incapable of delivering adequate service at reasonable rates and whether the utility could continue to deliver adequate service at reasonable rates with only the remaining property.⁵² We may also consider whether the proposed transaction would serve 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.⁵³ In reviewing a Section 851 application, the Commission may "take such action, as a condition to the transfer, as the public interest may require."⁵⁴

We find that the asset sale agreement, the installment sales contract, and the assignment of private electrical lines to TID serve the public interest. PG&E's sale of assets and assignment of private electrical lines to TID will not prevent PG&E from providing adequate service at reasonable rates to ratepayers in its new, reduced service area with its remaining facilities. As previously discussed, TID has a strong history as an electric distribution provider and will be able to deliver adequate service to customers in the Westside Zone and the Don Pedro South Shore Area at rates that may be lower than those charged by PG&E. The sale of assets to TID will also avoid costly litigation between PG&E and TID regarding their respective service areas to be financed by ratepayers and the public. PG&E is adequately protected from liability by the indemnification and hold harmless provisions in each agreement.

We also find that the provisions of the asset sale agreement regarding special facilities, final meter reads by PG&E, PG&E refunds to parties under electric line extension agreements, and PG&E's sale of parts to TID under certain circumstances are reasonable and in the public interest.

However, we will also require the parties to amend Section 4.4 of the asset sale agreement, regarding direct access. In Section 4.4, in consideration of PG&E's sale of the facilities used to serve current PG&E customers receiving direct access in the Westside Zone to TID, TID has agreed to either: (1) offer direct access to PG&E customers in the Westside Zone on direct access as of the closing date, on terms reasonably comparable to PG&E's existing direct access service, or (b) obtain the written consent of each such customer receiving bundled TID service in lieu of direct access service. As previously discussed, in D.01-09-060, the Commission suspended new direct access transactions after September 20, 2001, in order to implement AB 1X, as codified at Water Code Section 80110. The parties may currently provide direct access to customers who did not have pre-existing direct access contracts only as authorized by D.02-03-055 and subsequent Commission decisions. Therefore, the parties shall amend Section 4.4 to state that PG&E and TID may provide direct access only as authorized by state law and Commission decisions.⁵⁵

LID argues that PG&E and TID considered only one method of determining the value of the assets, replacement cost less depreciation new (RCNLD), and that other valuation methods might have yielded a lower and more reasonable sales price. LID therefore asks the Commission to include a condition which provides that the use of RCNLD to value the assets sold to TID shall not be precedent in other cases involving transfers of utility assets.

Laguna has been recently involved in litigation with PG&E to condemn certain electric distribution facilities. (Laguna Irrigation District v. Pacific Gas and Electric Company, Kings County Superior Court No. 99 C 052.) Laguna is therefore concerned that the valuation method here may be precedent in its pending litigation. We agree with PG&E that the courts will assess whether evidence regarding the valuation of utility assets in Commission proceedings should be considered in the condemnation proceedings, as well as the weight to be given Commission decisions pursuant to California law. LID does not oppose the sales price and has presented no evidence to show that the use of the RCNLD method of valuation has created an unfair or unrealistic price for the assets being sold to TID, or that another method of valuation would have resulted in a different price. Previous Commission decisions have found that a sales price for utility assets based on RCNLD, when negotiated between the parties in arms-length transactions, is fair and reasonable.⁵⁶ We therefore approve the sales price here based on RCNLD. However, we recognize that RCNLD is only one method of valuation, and we may consider different valuation methodologies in other cases.

In addition, we find that the Patterson and Salado substation leases serve the public interest. These leases will not interfere with PG&E's operations at the substations or service to PG&E customers and will enable TID to maintain certain assets purchased from PG&E at the substation properties for a period of time and to access them as necessary to serve its customers.

We also approve the closing agreement and the tolling and mutual release agreement. The provisions of the closing agreement are reasonable, and the dispute resolution process will give PG&E and TID an adequate means to resolve resolve conflicts through mediation and arbitration, rather than costly litigation. The tolling and mutual release agreement also serves the public interest by waiving any remaining claims between PG&E and TID regarding the 1953 agreement.

⁵⁵ The parties shall also amend Section 4.4 to clarify the reference to PG&E's direct access service, because non-utility ESPs, rather than utilities, generally provide electricity through direct access.