Issue 3: What measures are appropriate to ensure ratepayers are not adversely affected by the lease of water rights to Folsom?

ORA recommended that the Commission "order whatever measures will make the ratepayers whole," and specifically suggested that SCWC replace the 5,000 AFY sold to Folsom with a like-kind water rights. SCWC offered no recommendations.

Discussion

The record shows that ratepayers have not suffered any diminution in service or extra expense due to the sale of water rights to Folsom. In fact, ratepayers have benefited from their portion of the revenue being used to offset other expenses. The sale of water rights to Folsom, however, is permanent. Confronted with an uncertain future, we are unable to conclude that over the term of the sale ratepayers will not at some point suffer some form of harm. Our challenge is to craft a means to mitigate the risk of unknown and unpredictable harm. This risk is also at the core of our analysis of whether this agreement should be approved pursuant to § 851.

As a certificated public utility, SCWC is obligated to "furnish and maintain such adequate, efficient, just, and reasonable service ... as are necessary to promote the safety, health, comfort, and convenience of its patrons." § 451. Meeting this obligation requires that SCWC prudently acquire such water resources as are necessary to meet the needs of its customers. SCWC remains under this obligation notwithstanding the absence of the 5,000 AFY transferred to Folsom.

The risk that alternative resources may be more expensive or of lower quality is a risk that we cannot fully mitigate at this point. The best alternative is to give ratepayers the benefit of the transaction, i.e., the revenue, with the hope that these immediate benefits will offset any future burdens. In the context of SCWC's obligation to provide efficient service, and given the unique facts of this case, we find that this resolution is reasonable and in the public interest.

ORA's recommends that we order SCWC to acquire similar resources at shareholder expense, and to also allocate the full revenue from the permanent lease to ratepayers. We reject this recommendation because ratepayers are not entitled to have the 5,000 AFY and the revenue from the sale of the same resource.

Should the permanent lease of 5,000 AFY be approved pursuant to § 851?

Pursuant to § 851, no public utility shall "sell, lease, assign, mortgage, or otherwise dispose of or encumber the whole or part of any of its ... property necessary or useful in its performance of its duties to the public ... without having secured from the Commission an order authorizing it to do so." Every sale made without "an order of the Commission authorizing it is void." The statute exempts good faith purchasers for value from its requirements.

In D.04-03-039, we determined that § 851 applied to the transaction with Folsom, and that SCWC had failed to file the required application. Consequently, we determined that the transaction was void, and fined SCWC for its failure to file the agreement. We subsequently modified that decision with D.04-04-069 to clarify that Folsom met the requirements for the exception to § 851, and that § 851 protects Folsom acquired interest in the water rights. Today's decision denying § 851 approval has no impact on Folsom because its rights are not contingent on Commission approval. Folsom's rights flow from the statute. Accordingly, today's decision makes no changes to Folsom's rights.

In D.04-03-039, we stated that § 851 review would have included assessing "whether the lease in perpetuity of the water rights could have an adverse impact on ratepayers by undermining SCWC's ability to respond to water supply contingencies," and potentially imposing conditions such as limiting the term or requiring termination rights for SCWC. See Conclusion of Law 21. In the subsequent decision, we also stated that § 851 requires that we determine whether the Folsom agreement serves the public interest, Conclusion of Law 4.

We are unable to make the findings required by § 851 for approval of the permanent lease of water rights to Folsom. SCWC bears the burden of proving that this transaction is in the public interest. ORA has raised significant questions about SCWC's future ability to provide its customers with a water resource of similar quality and price. At a minimum, SCWC's decision to transfer the water rights in perpetuity substantially limits SCWC's flexibility to address future water supply contingencies. We, therefore, conclude that SCWC has not shown that the permanent transfer of 5,000 AFY of water rights to Folsom is in the public interest, and we do not approve the transaction pursuant to § 851.