30. Reasonableness Review-Headquarters Office Complex (Office Complex)
SGV's Office Complex consists of a 26,381 square foot administrative office building (Building A) and a 14,293 square foot operations, maintenance and warehouse building (Building B). Total project costs are $18,124,864, which SGV proposes to include in ratebase for the Fontana District and the General Office (GO).
30.1. Positions of Parties
DRA points out that SGV's calculation of the proportion of office space dedicated to the GO is simply the amount of space dedicated to the GO divided by total space. DRA says this method allocates all common space, such as copy areas, bathrooms and hallways, to the Fontana Division. DRA recommends that common space should be allocated to both GO and the Fontana Division. As a result, DRA recommends that the allocation of costs to the GO be calculated as the amount of space dedicated to only the GO divided by the total space excluding common spaces. This yields an allocation to the GO of 34.1% rather than SGV's allocation of 30.0%.
DRA says Building B should be allocated only to the Fontana Division because none of its space is used for GO personnel or functions.
For construction costs not attributable to a specific building, DRA recommends that the allocation to GO be calculated as the ratio of space allocated only to GO use to the space allocated to only GO or Fontana use (i.e. excluding common areas) in both buildings. This yields an allocation to the GO of 20.1%.
DRA represents that Building A is larger than it needs to be. DRA points out that SGV did not perform a space allocation study as part of its design in order to determine space needs for the building. DRA calculated the necessary square footage of office space based on the California Department of General Services State Administrative Manual that provides maximum square footage recommendations for office space. DRA also utilized industry standards for non-personnel office space and SGV's recommended sizes for some areas such as restrooms, storage space and copy areas. DRA concluded that the necessary square footage is 16,910 square feet or 64.1% of the 26,381 square foot space actually built.
DRA agrees with the size of Building B except for the vehicle service garage and associated office space (2,340 square feet). DRA states that the cost of the garage portion of Building B is $461,240, which yields a revenue requirement of $84,000 per year. DRA states that the cost of outsourcing all vehicle maintenance would be approximately $40,000 per year. Therefore, DRA concludes that the cost of SGV `s increased garage space is greater than the cost of outsourced vehicle maintenance. As a result, DRA recommends that only 11,910 square feet of Building B be allowed in rate base.
DRA says SGV retained Earl Construction Corporation (Earl) as the general contractor without soliciting competitive bids for the general contractor and incurred higher costs as a result.
To estimate appropriate costs for the Office Complex, DRA used the RS Means Square Foot Cost 2008 Edition. DRA points out that SGV used R S Means Cost Guidelines in estimating costs for some facilities in the forecast phase of this proceeding. Overall, DRA found that the appropriate cost of the Office Complex at the size actually built would be $10,488,618, of which DRA recommends including $7,856,990 in ratebase.
DRA recommends that, if the Commission orders the sale of the old building site, the sale should not be to an affiliate of SGV because of the attempt in the last GRC to overcharge for the land the Office Complex sits on.
COF states the Office Complex is larger than it needs to be. COF says that previously all Fontana Division employees were located in approximately 13,020 square feet of office space.
COF states that SGV has not justified the 25% employee growth factor it used in determining its space requirements.
COF states Building A includes an excessively large break room and lobby and that some offices are 250-300 square feet in size.
COF states that Building B is significantly larger than the current facilities and SGV has not justified the need for the additional size.
COF states that there are costs included in the project costs ($22,205) that were incurred by SGV's affiliate, between September, 2002 and March 31, 2004, prior to SGV's acquisition of the property on December 31, 2004. COF recommends that these costs be disallowed.
COF states that SGV has not updated the cost to refurbish the existing facilities, that would comprise an alternative to the Office Complex.
COF represents that SGV has not come up with a plan for disposing of the existing facilities.
COF states that SGV did not perform any studies to determine the size of the Office Complex based on the space needed or any cost-benefit analysis of alternatives. COF also states SGV has no written policy regarding solicitation of competitive bids for construction projects.
Based on the above, COF recommends that no more than $6,000,000, the amount presented as the estimated cost in the last two Fontana District GRCs (A.02-11-044 and A.05-08-021), be allowed in ratebase for the Fontana District and GO. COF also recommends that SGV be required to sell its existing facilities and use the profits from the sale to offset the costs of the Office Complex.
FUSD states that because Building A was built to accommodate 65 people rather than the 34 actual employees, it is too large. In addition, FUSD states the inclusion of GO employees as an afterthought to occupy the excess space does not change the fact that Building A was imprudently overbuilt.
FUSD states that in the 2005 GRC, SGV stated the space needed was 12,625 quare feet of office space and 9,250 square feet of warehouse space. This included an allowance for 25% growth in office space. This is about half of the office space and 65% of the warehouse space actually built.
FUSD states that SGV should have reevaluated alternatives such as refurbishing the existing facilities or changing the design when the cost of constructing the Office Complex escalated, but did not do so.
FUSD recommends that the entire cost of the Office Complex less the $4.9 million refurbishment cost should be excluded from ratebase for the Fontana District and the GO.
SGV claims that the Office Complex was built at a reasonable size and cost and will be fully utilized by the Fontana Division or GO employees.
30.2. Discussion
The need for the Office Complex was addressed in D.07-04-046. In Section IX.B.7(b) of that decision, the Commission stated:
"While we do not doubt that more office space is needed by San Gabriel, it has not convinced us that its proposed size is reasonable."
The Commission also stated in Section IX.B.7(b):
"In its next rate case, costs should be reviewed for prudence and the facility's size evaluated to determine whether the entire facility is used and useful."
In addition, the Commission stated in Section IX.B.7(b):
"San Gabriel shall remove from rate base the existing HQ facilities...once it is no longer used and useful or upon inclusion of the New Headquarters building in ratebase, whichever comes sooner."
In Finding of Fact 51, the Commission found:
"In regard to the new office/warehouse, San Gabriel should remove the facilities that are to be replaced from ratebase immediately upon the occupation of a new headquarters building."
Thus, the Commission has found that the Office Complex is needed to provide some amount of office space, but has not determined that the size as previously proposed or as constructed is reasonable.
The issues between the parties concern the size of the Office Complex, the resulting cost and treatment of the existing office facilities.
SGV's breakdown of costs is as follows:
Project Cost Breakdown16
Component |
Total Cost |
Cost Attributable to Building A (72%)17 |
Cost Attributable to Building B (28%) |
Construction costs for the buildings |
$ 8,099,514 |
3,154,580 | |
Site work |
3,517,490 |
2,532,593 |
984,897 |
Design fee |
1,217,211 |
876,392 |
340,819 |
Subtotal |
$15,988,795 |
$11,508,499 |
$4,480,296 |
Permits, fees, etc. |
$ 749,347 |
539,530 |
209,817 |
Overheads |
502,144 |
361,544 |
140,600 |
AFUDC18 |
884,578 |
636,896 |
247,682 |
Total19 |
$18,124,864 |
$13,046,468 |
$ 5,078,396 |
DRA says that SGV retained Earl as the general contractor without soliciting competitive bids for the general contractor. This is true. DRA then compares the general manager costs for the Office Complex to a building constructed by the same contractor for the City of Fontana, and concludes the general costs for the city building were less than for the Office Complex. SGV demonstrated the tasks performed for each of the two projects were different and that costs for comparable tasks were comparable. SGV's explanation is persuasive and no disallowance based on the choice of general contractor is appropriate. The rest of the construction costs resulted from a competitive bidding process where the lowest reasonable bids were selected. Therefore, there is no reason for a disallowance on that basis.
The Office Complex was originally designed, according to SGV, to accommodate current employees from the Fontana Division plus enough space for a 25% increase in employees by buildout.20 This is based on the assumption that the number of customers will increase by 50% through buildout. Since the Office Complex should last 40 years or more, this is a reasonable assumption.
The number of current Fontana Division employees to be located in Building A is 35. Allowing sufficient space for a 25% increase in employees will increase this number by nine to 44 employees. Therefore, using SGV's design criteria, Building A should have been designed to accommodate 44 employees. However, as discussed below, Building A is large enough to accommodate about 64 employees. This is an 83% increase over the current number of Fontana Division employees rather than 25%.
In D.08-06-022 in Application (A.) 07-07-003, the Commission determined that it would be reasonable to move 27 GO employees to Building A to relieve overcrowding in the GO facilities, but left the allocation of space and costs to this proceeding. The decision recognized the fact that Building A will have sufficient room to accommodate the additional GO employees, but did not determine that Building A should be built to accommodate the GO employees. SGV now plans to temporarily relocate 25 GO employees to Building A, which will leave space for an additional four employees unused, in addition to the 35 current Fontana Division employees. Thus, Building A has sufficient space for 64 employees (25+4+35).
Building A should have been designed to accommodate the needs of the Fontana Division. It should not have been designed with the intent of relocating GO employees and the record does not indicate that it was. Therefore, the reasonableness of the size of Building A should be assessed against the needs of the Fontana Division.
Building A and Building B have different functions. The record does not indicate that growth in the number of employees in Building B would overflow to Building A. Therefore, SGV should have designed Building A to accommodate the existing 35 employees plus an additional 25% (nine employees) for a total of 44 employees according to its own employee growth projections. Since Building A was actually built to accommodate 64 employees, it was built too large and the decision to do so was unreasonable.
The costs of Building A that would have been incurred if it had been built to accommodate 44 employees should be included in ratebase for the Fontana Division. However, as described below, all costs attributable to the space utilized temporarily by nine GO employees will be allocated to the GO until such time as the space is needed for Fontana Division employees. There is no reason to handle Building A differently simply because SGV chose to build it too large for Fontana Division needs and to temporarily relocate GO employees to occupy some of the extra space.
The per-employee space allocations in Building A are significantly larger than the general guidelines for maximum space allowances provided in the State Administrative Manual. For example, for clerical employees, the allowance is 75 square feet. In contrast, SGV allocated 200 square feet for customer service representatives. For a technical professional, the allowance is 100 square feet. In contrast, SGV allocated 160 square feet for senior inspectors and 200 square feet for central control operators. While the maximum space allowances specified in the State Administrative Manual do not govern what is allowable for a water company, they demonstrate that SGV's space allocations are at least ample. For the purpose of determining reasonable Building A costs, SGV's per- employee space allocations, while ample, are reasonable.
If SGV had designed Building A to accommodate only a 25% allowance for Fontana Division employee growth (44 employees), it would have space for nine GO employees until the forecast growth occurs. Such space could be utilized to temporarily accommodate nine GO employees until the additional space is needed for the Fontana Division. In that case, the additional 16 GO employees would have to be located elsewhere.
If Building A had been properly designed to meet the needs of the Fontana Division, it would have had room for 44 employees instead of 64 employees. Accordingly, the layout of Building A would have been different and the amount of space not directly used as office space, such as restrooms, conference rooms, etc., would be correspondingly smaller. It is reasonable, given the ample space SGV allocated to the various functions in the actual Building A design, to expect that the space allocated for common facilities (lobby, restrooms, meeting rooms, etc.) would have been reduced in proportion to the significantly lower employee count. Therefore, Building A should have been 68.8 % (44/64) of the size it currently is. However, the building site would not have been appreciably different. Therefore, the reasonable cost of Building A, excluding site related costs, is 68.8% of the costs or $6,837,873, a reduction of $3,100,896.21 The resulting total reasonable cost for Building A, including site-related costs, is $13,046,468 less $3,100,896 or $9,945,572.
The record does not indicate that GO employees will use the facilities other than office space, such as rest rooms, conference rooms, parking, etc. any differently than Fontana Division employees. Thus, the Building A related costs attributable to the 9 GO employees are 20.5% (9/44) of the total reasonable costs of Building A or $2,034,322. These costs will be included in the GO ratebase and excluded from the Fontana Division ratebase. The remaining reasonable Building A related costs, $7,911,251, will be included in the Fontana Division ratebase.
The extra space in Building A will never be needed by the Fontana Division and was not constructed for the purpose of temporarily relocating GO employees. Therefore, it should not be treated as utility property. However, there remains the issue of what costs should be allowed for the remaining 16 relocated GO employees.
The record does not indicate that GO employees need to be located in the Fontana Division. Indeed, they are not currently located there, and will move to Building A only because it will have sufficient space to accommodate them. Therefore, they could have been relocated elsewhere. SGV has not indicated that it has plans to construct a new GO office building in the next few years. It would not be reasonable to expand Building A just to temporarily accommodate GO employees. Therefore, it is reasonable to assume that space would have to be rented for these 16 GO employees. Since SGV has chosen to relocate the GO employees to Building A, a reasonable rent will be allowed for the space the 16 GO employees will occupy.
The record does not indicate what rental office space would cost. However, there is no basis for assuming the cost would be as much as the cost of including the excess space in Building A in ratebase. This is especially true of the first few years in ratebase, because the return and resulting income taxes will be the largest due to the fact that the amount in ratebase has not accrued much depreciation.
If SGV had gone into the rental market for office space, it is reasonable to assume that space would have been rented in an older building, and the rent would have been market-based, but the record does not include such information. As a proxy for rental costs, the revenue requirement for an equivalent amount of space in an older building will be used for this GRC cycle only.
The record does not indicate the cost of an equivalent amount of space in an older building. However, the record does indicate that SGV estimated the cost of the Office Complex as $6,000,000 in 2005. Thus, based on SGV's own cost estimates, it is reasonable to conclude that an equivalent facility could have been built in 2005 or before for $6,000,000.
While the SGV claims the current facilities are larger than the size assumed in the $6,000,000 estimate, the record does not indicate that the Office Complex size the $6,000,000 estimate was based on would not be sufficient for temporary use by GO employees. Additionally, if the Office Complex had been constructed before 2005, it could have been constructed at a lower cost resulting in more square footage for the $6,000,000 amount. Overall a $6,000,000 estimated cost for a comparable older office complex is reasonable.
SGV's estimated cost for the Office Complex is approximately $18,000,000. Thus, the cost of a comparable older office complex would be about one third ($6,000,000/$18,000,000) of the actual cost of the office complex. Therefore, it is reasonable to assume an older building comparable to Building A, built in 2005 or before, would cost one-third as much.
The reasonable cost for Building A, based on the needs of the Fontana Division, is $9,945,572. Therefore, the cost for a comparable older building is one third of that amount or $3,315,191. Since the Building A reasonable cost is for 44 employees, the portion of the comparable older building attributable to 16 GO employees would be $1,205,524 ($3,315,191 x 16/44). This amount will be used to develop a proxy for the cost of renting space for the 16 GO employees.
The revenue requirement, to be used as a proxy for the rent, should include a return on the cost of the building and depreciation. The return will be $126,580 ($1,205,524 x 10.5%).22 Assuming a 40-year life, depreciation will be $30,138 ($1,205,524 x 2.5%). The total is $156,718 which amounts to $816 per employee per month.
Since the cost of the land on which the Office Complex sits is included in ratebase and is not reduced due to the disallowance discussed above, no return on land is included in the rent calculation. Since no disallowance of operations and maintenance (O&M) costs or administrative and general (A&G) costs is made due to the disallowance of part of the Building A costs, such costs are already in rates. To avoid double counting such costs, no O&M or A&G costs are included in the rent calculation. Additionally, no income taxes on the rent are included because that is the responsibility of the landlord, and depend on the landlord's overall financial situation. Therefore, the reasonable proxy for annual rent for the 16 GO employees is $156,718.
In the next GRC, SGV shall provide information on the historical (2009-2011) costs and forecast costs of rental office space throughout SGV's service territories, not just the Fontana Division, of a type suitable for the 16 GO employees addressed herein. This information can be used to determine future rent costs for the 16 GO employees.
DRA agrees with the size of Building B except for the vehicle service garage and associated office space. DRA states that the revenue requirement associated with the cost of the increased garage space will be greater than the savings that would result from elimination of outsourced vehicle maintenance. As a result, DRA recommends that 2,340 square feet of Building B be excluded from rate base.
Current garage space for vehicle maintenance accommodates one vehicle. SGV's design accommodates two vehicles. Since SGV has two personnel performing vehicle maintenance, each person could be working on a separate vehicle. Therefore, it is reasonable to have sufficient garage space for two vehicles. SGV has not proposed to outsource vehicle maintenance in this proceeding and the record does not indicate that it would be cost-effective to do so. Therefore, DRA's recommendation is not adopted and the reasonable costs for Building B are $5,078,396.
SGV acquired the land for the Office Complex on December 31, 2004 from its unregulated affiliate. However, prior to that time, SGV recorded $22,205 in costs for a survey, demolition of an existing structure and asbestos abatement of the land. Since these costs were incurred before SGV acquired the land, they are attributable to the unregulated affiliate, are not recoverable from ratepayers and are excluded from recoverable costs.
The reasonable costs for Building A for the Fontana District are $7,911,251 for Building A and $5,078,396 for Building B. 23 As discussed above, $22,205 attributable to SGV's regulated affiliate are excluded. The resulting reasonable costs for the Fontana District are $12,967,441. In addition, as discussed above, $2,034,322 shall be included in the GO ratebase for reasonable Building A space for nine GO employees and $156,718 shall be included in the GO expenses as a proxy for rent for the remaining 16 GO employees.
In Finding of Fact 51 of D.07-04-046, the Commission found: "In regard to the new office/warehouse, San Gabriel should remove the facilities that are replaced from ratebase immediately upon the occupation of a new headquarters building." In Section IX.B.7(b) of the decision, the Commission indicated that the existing facilities with the exception of half of the land where Plant F25 is located would no longer be used and useful and should be excluded from ratebase. SGV has indicated it will do that.
COF recommends that SGV be required to sell its existing facilities and use the profits from the sale to offset the costs of the new facilities.
Public Utilities Code Sections 789.1 and 790 require that the proceeds from the sale of water utility property that was once used and useful in providing service to customers shall be reinvested in utility infrastructure that goes into ratebase. Any proceeds not reinvested in utility infrastructure within eight years are to be allocated to ratepayers. Given these requirements, requiring SGV to use the proceeds to offset the cost of the Office Complex is not an option. COF's recommendation is not adopted.
16 Exhibit SG-8, Attachments S and T.
17 $8,099,514/$11,254,094.
18 Allowance for Funds used During Construction.
19 The cost of the land on which the Office Complex sits is already in rates and is not included in this table.
20 Buildout will occur when the utility's service area is completely occupied with customers such that no additional growth can occur.
21 Total Building A costs, less site-related costs, are $9,938,769.
22 10.5% is the return on equity included in the settlement.
23 All numbers are rounded to the nearest whole number.
