Procedural Background
July 30, 2004. SDG&E files this application with the California Public Utilities Commission (CPUC), seeking approval for the transaction described above, as required by Public Utilities Code Section 851.3 Accompanying the application is a motion, requesting expedited approval of the application, and requesting expedited authorization to permit grading pending approval of the application. The application included a 2001 appraisal prepared for Whispering Hills, which provided the basis for the proposed sale price of $100,000.
SDG&E's application did not include the Environmental Impact Report (EIR) prepared by the City, and the application and motion were served only on SDG&E, Sempra, and Whispering Hills.
August 20, 2004. Commissioner Geoffrey F. Brown and Administrative Law Judge (ALJ) Peter V. Allen are assigned to the proceeding.
October 14, 2004. The ALJ issues a ruling requesting SDG&E to file the EIR with the Commission, in order for the Commission to satisfy its obligation as a responsible agency under the California Environmental Quality Act, and requiring SDG&E to more broadly serve its application on potentially interested parties.
October 22, 2004. SDG&E provides the City's EIR and proof of additional service.
November 16, 2004. The Commission receives a letter from the Capistrano Unified School District in support of SDG&E's application.
November 19 and 20, 2004. The Commission receives three letters from individual citizens arguing that the proposed $100,000 sale price for the 14-acre property is significantly too low. Specifically, the letters argued that the 2001 appraisal used to set the price was based upon outdated zoning that was more restrictive than the current zoning, and failed to consider the most recent comparable land sale, which was the sale of land to the local high school district for approximately $1 million per acre.4
December 1, 2004. The ALJ issues a ruling providing SDG&E and other parties an opportunity to respond to the allegations in the three letters.
December 10, 2004. SDG&E, Whispering Hills, the Commission's Office of Ratepayer Advocates (ORA), and local residents Anne Fox, Mark Nielsen, and Mike Mathewson submit comments.
SDG&E submitted a short pleading, with an attached Declaration of James Seifert, SDG&E's Manager of Corporate Real Estate. Mr. Seifert described the negotiation process between SDG&E and Whispering Hills,5 and defended the adequacy of the 2001 appraisal and the proposed $100,000 sale price.6
Whispering Hills detailed the various encumbrances on the site, pointed out the significant sums of money spent by Whispering Hills on the project as a whole, and emphasized that the acreage of the easements to be received by SDG&E was almost the same as the acreage of land to be received by Whispering Hills. Whispering Hills also noted that SDG&E was selling the land to Whispering Hills in an "as is" condition, not a graded pad like the high school site, so comparisons with that land sale are mixing "apples and oranges." (Whispering Hills Comments, p. 6.)
Mr. Mathewson submitted a portion of a 2003 Purchase and Sale Agreement between Whispering Hills and the Capistrano Unified School District. According to the Agreement, Whispering Hills contracted to sell to the School District 0.95 acres of the land Whispering Hills acquired from SDG&E for $965,000. As characterized by Mr. Mathewson, the Agreement shows that a portion of the land purchased from SDG&E for approximately $7,000 per acre will be immediately re-sold for approximately $1,000,000 per acre.
Ms. Fox argued that the value of land at issue in the application is closer to $1 million per acre, as shown by the resale of the 0.95 acre parcel. In addition, according to Ms. Fox, absent relocation of the power lines Whispering Hills would lose roughly 15 single family detached lots, which has very significant value to Whispering Hills, and should be reflected in the sale price. (Fox Comments, p. 2.)
Mr. Nielsen generally concurred with Mr. Mathewson and Ms. Fox, but additionally noted that the City of San Juan Capistrano has set the average per-acre value for calculating in-lieu parks and recreation fees for developers at $725,000.7 In addition, Mr. Nielsen argued that "[T]here is no evidence to suggest that the differential between graded and non-graded land in Orange County is anywhere near 99% for the grading and only 1% of the value for the underlying land." (Nielsen Comments, pp. 3-4.)
ORA observed that SDG&E's application "may have left out, or alternatively, given incomplete information, about this transaction." (ORA Comments, p. 1.)
SDG&E, ORA, and Mr. Nielsen expressed a desire to submit additional information to the Commission.
December 16, 2004. The ALJ issues a ruling allowing for a second round of comments.
January 7, 2005. SDG&E, Whispering Hills, ORA, and Mr. Nielsen submit second-round comments.
SDG&E denied that the sale to Whispering Hills is a "sweetheart deal," and argued that the local citizens' criticisms are comparing apples and oranges, because the value of the land that Whispering Hills would resell to the School District is based on the School District receiving "a developed , unencumbered graded pad site," while the transaction at issue in the application is for "an encumbered utility easement of raw land." (SDG&E Reply Comments, p. 3.)
Similarly, Whispering Hills points out that it is spending over $62 million to grade the project area and to provide infrastructure and access, and another $10 million for entitlement and mitigation purposes. Whispering Hills acknowledges that the value of the high school site is over $1 million per acre, but notes that that value is based on the assumptions that the land is clear of liens and encumbrances and is in a finished, mass graded condition with all infrastructure of streets, utilities, and storm drains completed to the site. (Whispering Hills Reply Comments, pp. 3-4.)
Mr. Nielsen reiterated his criticisms of the 2001 appraisal, arguing that the comparable properties it used were distant and outside city limits, while ignoring much closer and recent comparable transactions. Mr. Nielsen, based in part on the sale of 0.95 acres for $965,000 discussed above, argued that the value of the property should be between $500,000 and $1 million per acre, taking into consideration any grading to be performed by Whispering Hills. (Nielsen, Reply Comments, pp. 1-3.)
ORA expressed a desire for more information, stating that legitimate concerns had been raised about the appraisal and marketing of the property. (ORA Reply Comments, p. 2.)
January 24, 2005. Ms. Fox submitted late-filed comments, primarily addressing the relevance of zoning to the value of the land, but also arguing that the fair market value of the land (based on the 2003 contract between Whispering Hills and the School District for the 0.95 acres of land), considering grading and other improvements, should be a minimum of $430,000 per acre. (Fox Reply Comments, p. 2.)
February 3, 2005. SDG&E submits a motion, seeking leave to file its attached response to ORA's second-round comments, providing additional background information and analysis requested by ORA.
February 9, 2005. The ALJ grants SDG&E's motion to allow its response to ORA's comments.
March 8, 2005. The ALJ issues a draft decision, allowing Whispering Hills to grade the property, but finding that the record did not support a determination that the proposed $100,000 sale price was adequate, and directing SDG&E to enter further negotiations with Whispering Hills regarding the sale price.
March 28, 2005. SDG&E, Whispering Hills, and ORA submit opening comments on the draft decision.
April 4, 2005. SDG&E and ORA submit reply comments on the draft decision.
April 7, 2005. Commission unanimously approves draft decision, adopted as D.05-04-007. That Decision considered the various arguments presented, and held:
Nevertheless, based on the record before us, we cannot say that $100,000 is a reasonable price for the property that SDG&E proposes to sell. The information presented by the local residents casts significant doubt upon the adequacy of that price. While we understand the counterbalancing factors presented by SDG&E and Whispering Hills, we do not find them adequately persuasive to completely rebut the argument of the local residents that the proposed sale price is inadequate. (D.05-04-007, p. 6.)
Accordingly, rather than try to set a price based on the conflicting record, the Commission directed SDG&E to enter into further negotiations with Whispering Hills regarding the price to be paid for the property, taking into consideration the information provided by the local residents regarding the potential value of the property, with the expectation that these further negotiations would result in SDG&E receiving a higher price. (Id.)
The Decision directed SDG&E to submit a motion requesting leave to modify its application to reflect the results of its further negotiations with Whispering Hills.
September 2, 2005. SDG&E submits a motion to modify the application to reflect the renegotiated sales price. SDG&E obtained a new appraisal, and based on that appraisal, negotiated a sale price of $287,967. This amount is the amount (determined by the appraisal) by which the value of the land conveyed in fee by SDG&E exceeds the value of the easement rights conveyed by Whispering Hills.
Contained in the appraisal is the following chart, which sets forth the calculation of the $287,967:
(SDG&E Motion, tab 2, p. 27.)
SDG&E also proposed an allocation of the $287,967 sale proceeds which would provide ratepayers with $120,033.50.
September 19-22, 2005. Whispering Hills, Mr. Mathewson, Mr. Nielsen and ORA file responses to SDG&E's motion.
Whispering Hills supported SDG&E's motion, and urged the Commission to promptly approve the sale at the price of $287,967.
Mr. Mathewson argues that the appraisal "has in essence issued a $961,228 credit to Whispering Hills for the demolition and removal of power lines." (Mathewson Response, p. 4.) According to Mr. Mathewson:
Whispering Hills is proactively attempting to purchase this parcel so that they are able to satisfy the terms of the $52 million agreement that they have entered into with CUSD and to allow them to build more homes than they would otherwise be able to. If it were not for the Whispering Hills project, SDG&E would not be considering any changes at all to the power lines in question, and they certainly would not be going out to bid for the demolition and removal of power lines that are in excellent operating condition. (Id., pp. 4-5.)
Mr. Nielsen raises a number of criticisms of the new appraisal of the property. Like Mr. Mathewson, he objects to the appraisal's inclusion of the $961,228 offset for the removal of SDG&E power lines, which he argues amounts to "double dipping" by Whispering Hills. (Nielsen Response, p. 3.) He also argues that the appraisal ignores the diminished value of some of the land being traded by the developer because it is designated ridgeline, which cannot be graded or developed, and he states that in examining the sale of land to the School District, the appraisal attributes the cost of mitigations to Whispering Hills:
By so doing, the appraisal substantially reduces the value of this comparable due to assuming the developer must bear the cost of the mitigation measures. Unfortunately, the appraiser completely ignores the fact that the developer is the beneficiary of a Mello-Roos tax that has been approved by the school district and the City of San Juan Capistrano that will effectively reimburse the developer for most, if not all of these mitigation costs. There is absolutely no mention of the Mello-Roos tax agreement in the Anderson report. In fact, on page 24 of the Anderson report, the appraiser specifically cites the mitigation that must be completed by the seller (Whispering Hills) as a reason to downward adjust the comparable price. Adding back the mitigation costs that are being reimbursed by the Mello-Roos would again further increase the land value. (Id., p. 4.)
ORA supported SDG&E's motion for a sale at the new price, arguing that it confirmed the inadequacy of the originally proposed sale price. However, ORA criticized SDG&E's proposed allocation of the sales revenues as unfair and inconsistent with D.05-04-007, and argued that according to the express language of D.05-04-007 ratepayers should receive $193,983.50, rather than the $120,033.50 proposed by SDG&E.
September 27, 2005. SDG&E requests leave to respond to ORA, Mr. Nielsen and Mr. Mathewson. The ALJ grants SDG&E leave to respond to the issue of the $961,228 offset for removal of towers and lines raised by Mr. Nielsen and Mr. Mathewson.
October 3, 2005. SDG&E submits its reply to Mr. Nielsen and Mr. Mathewson. In its reply, SDG&E states:
The appraisal clearly states that the Offset to the value of the SDG&E property arises from costs incurred by the Buyer to demolish and remove the improvements from the SDG&E property (the "Removal Costs"). The purpose of the transaction is to sell the unimproved land to the Buyer. SDG&E could add the Removal Costs to the selling price and receive that added sum from the Buyer, but SDG&E would then pay out the Removal Costs to have the facilities removed. The net impact to SDG&E is the same as the transaction proposed here - SDG&E receives the value of the unimproved land. (SDG&E Reply, p. 2.)
October 5, 2005. Mr. Nielsen and Whispering Hills seek leave to file additional pleadings. The ALJ denies their requests.
January 4, 2006. The Assigned Commissioner and ALJ issued a Joint Ruling requesting additional documentation from SDG&E, because a review of the record on the issue of the $961,228 offset found language in the Purchase and Sale Agreement between SDG&E and Whispering Hills that referred to a: "separate agreement between Buyer and Seller, not a part of this Agreement, by which Buyer agrees to pay the total cost of the permanent relocation..."8 SDG&E had not provided the Commission or the parties this "separate agreement," and accordingly it was not in the record of this proceeding. The Joint Ruling requested that the "separate agreement" be filed and served, and allowed parties to comment on the meaning and significance of the "separate agreement."
January 12, 2006. SDG&E submitted a compliance filing consisting of an "Electric Transmission Facility Relocation Agreement" between SDG&E and Whispering Hills, prepared on November 17, 2005 and signed by Whispering Hills on November 21, 2005 and by SDG&E on January 10, 2006. According to the Relocation Agreement, the engineering services and construction work necessary for the project are defined in a separate document called an Engineering Fee Request, which SDG&E did not file and serve. The ALJ requested SDG&E to also file and serve the Engineering Fee Request.
January 13, 2006 SDG&E filed and served the Engineering Fee Request, along with a payment fee summary schedule in support of its approximately $7.5 million relocation cost estimate.
January 23, 2006 Mr. Mathewson and Whispering Hills submit comments on the compliance filing.
Mr. Mathewson largely reiterated his earlier arguments that the proposed sale price is significantly too low, and proposed a basis for calculating a sale price of around $7 million.
Whispering Hills argues that the documents in the compliance filing, which it refers to as the "Relocation Documents" are of no significance to the application, except to memorialize that Whispering Hills has paid the entire cost of relocating SDG&E's transmission and distribution lines. (Response of Whispering Hills to Filing of SDG&E, pp. 1-2.) The Relocation Documents report the terms on which SDG&E has carried out the permanent relocation, including Whispering Hills' payment of approximately $7.5 million to SDG&E to cover the entire cost of the relocation. "That relocation cost is irrelevant to the price SDG&E should charge Whispering Hills for the exchange of properties involved in the proposed transaction, because the relocation cost, whatever it may be, has been borne entirely by Whispering Hills." (Id., p. 2.) The documented $7.5 million payment, however, does not appear to include the cost of removing the existing power lines.
3 On February 17, 2004, SDG&E submitted advice letter 1566-E to the CPUC, providing notice of the proposed relocation of transmission lines to accommodate the Whispering Hills project. The advice letter became effective March 28, 2004.
4 For a 52-acre parcel.
5 According to Mr. Seifert, "[T]he Developer [Whispering Hills] initially approached SDG&E in early 1998." However, "No substantive progress was made toward any negotiations between the Developer and SDG&E until December of 2001 when the Developer delivered the appraisal that is included in the pending application."
6 According to Mr. Seifert, the appraisal valued the property at $82,320, but the price was increased 21% to $100,000 to account for the increased value of the property due to the passage of time since the date of the appraisal.
7 He also notes that the per-acre price paid by Whispering Hills for approximately 350 acres of adjacent land 10 years ago was higher than the price being proposed in this application, but he does not state what that price was.
8 From Paragraph 16.2. Similar language also appears in Paragraph 16.1.
