Price

The consensus of all parties is that the total cost of relocating SDG&E's power lines is to be borne entirely by Whispering Hills. The issue we have to address and resolve is whether the transaction, as currently proposed by SDG&E, is consistent with that understanding. The removal of the existing power lines is the only area where there is a contested issue regarding who is bearing the costs of the relocation.

SDG&E does not argue that it has received the removal costs from Whispering Hills, but rather that it is reasonable for the costs incurred by Whispering Hills for removing the existing power lines to be deducted from the selling price of the property. Nielsen and Mathewson argue that the deduction of the cost of removing the existing power lines shifts part of the cost of relocating the transmission lines from Whispering Hills to SDG&E's ratepayers.⁹

The way the transaction, as currently proposed, treats the removal costs is set forth in the latest appraisal:

(SDG&E Motion, tab 2, p. 27.)

As set forth above, in the new appraisal, the appraiser determined the market value of the land that SDG&E proposed to sell to Whispering Hills to be $2,059,600, minus a deduction of $961,228 for the cost of demolition and removal of the existing power lines on the land, for a total value of $1,098,372. The appraiser also determined that the easements that SDG&E would receive from Whispering Hills have a market value of $810,405. The difference between the value of the land ($1,098,372) and the easements ($810,405) is $287,967. (SDG&E Motion, tab 2, pp. 26-27.)

Mr. Nielsen and Mr. Mathewson argue that the appraiser's deduction of the cost of removing the existing power lines shifts part of the cost of relocating the lines from Whispering Hills to SDG&E's ratepayers. As Mr. Mathewson put it: "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." (Mathewson Response, p. 5.)

SDG&E attempts to rebut Nielsen and Mathewson's criticism of the $961,228 offset by offering this description of the transaction:

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.)

This statement is not supported by the record. SDG&E claims that "The purpose of the transaction is to sell the unimproved land to the Buyer," but provides no citation or other support for that statement. Furthermore, SDG&E does not provide any reason why, if it added the removal costs to the sale price, it would then have to pay the cost of having the existing facilities removed.¹⁰

In fact, the record contradicts SDG&E's position. The Purchase and Sale Agreement (Agreement) between SDG&E and Whispering Hills (attached as Tab 2 to the Application) states: "Buyer will pay Seller's actual costs of this relocation pursuant to a separate agreement not a part of this Agreement." (Agreement, Paragraph 16.1.)

Similar language appears in Paragraph 16.2: "After the Commission decision permitting the grading requested in Section 16.1 above and approving the sale of the Property (reserving the Reserved Easement to Seller), and subject to the 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, Seller will relocate the Temporarily Relocated Facilities into the permanent underground and overhead Easement, attached as Exhibit C." (Id.) ¹¹

Given that Paragraph 16.1 of the Agreement states that Whispering Hills will pay the "actual costs" of SDG&E's temporary relocation of its facilities, and Paragraph 16.2 states that Whispering Hills will pay the "total cost" of the permanent relocation of the facilities, we find no basis for SDG&E's claim that it would somehow be required to pay for the cost of removing the existing facilities.

Whispering Hills agrees that it is to pay the entire cost of the relocation of SDG&E's power lines. (Response of Whispering Hills to Filing of SDG&E, 1/23/06, p. 2.) Whispering Hills also acknowledges that it is taking the property "as is." (Whispering Hills Comments, 12/10/04, p. 6.) Paragraph 10.1 of the Agreement between SDG&E and Whispering Hills (attached as Tab 2 to the Application), states that the "Buyer agrees to accept the Property "as is," "where is," and "with all faults" which may exist..." (emphasis in original).¹²

SDG&E's original application states that: "At Developer's request and expense, SDG&E has agreed to relocate three (3) overhead 138kV transmission lines and one (1) overhead 12 kV distribution line first on a temporary basis and then underground on a permanent basis." (SDG&E Application, p. 4.)

Also in its application, SDG&E argues that the transaction with Whispering Hills is in the public interest because: "First, Developer's agreement to permanently locate the Facilities underground, at its own expense, is consistent with the parties' intent, State regulation and Commission policy." (Id., p. 8.)

The clear intent of the application was that the relocation would be at the developer's expense. If SDG&E removed the existing lines, Whispering Hills should have paid SDG&E for the cost of removing the lines. If SDG&E preferred that Whispering Hills perform the removal, Whispering Hills should both pay and bear the cost of that removal, and should not then be able to subtract that cost from the price it paid to SDG&E. The cost of removing the existing lines is part of the cost of relocating the lines. If the cost of removing the existing transmission lines is subtracted from the price the developer pays for the land, the developer is not paying the cost of removal of the existing lines.

By reducing the amount received for the sale of the land, SDG&E is indirectly requiring its ratepayers and shareholders to pay for the cost of the removal of the existing lines.

One possible explanation of the logic behind the $961,228 offset, and the source of the disagreement between SDG&E and Nielsen and Mathewson, may be that the appraisal defined "relocation" as not including the removal of the existing facilities, but only the costs of constructing the new, replacement facilities. James Brabant, who prepared the most recent appraisal, states:

That cost [$961,228] is only for the demolition and removal of the high-tension power lines that were on the portion of the SDG&E property that will be utilized by Whispering Hills for development. It does not include any costs for the temporary relocation of those high-tension lines or the permanent under-grounding of utilities for their development. (Declaration of James Brabant, p. 1, attached to SDG&E Reply.)

However, under standard Commission usage, relocation of utility facilities (such as electric lines and poles) includes removal of the existing facilities. (See, e.g. D.04-08-036 and D.04-04-013.) In general, and particularly in cases like this, where the primary desire of the buyer is for the existing facilities to be removed from their existing location, Commission policy is that "relocation" of utility facilities includes the removal of existing facilities. We do not see any reason why SDG&E ratepayers should be paying for the cost of removing functioning utility facilities.

Requiring ratepayers to pay for the cost of relocating a transmission line in order to accommodate a developer is inconsistent with Commission precedent. In D.03-05-063, the Commission sought assurance that utility ratepayers would not pay any part of the cost of relocating a transmission line to accommodate a developer, and specifically found that: "Ratepayers will not be charged the cost of relocating the transmission line." (Id., p. 9, Finding of Fact #3.) SDG&E has not presented any reason ratepayers should be charged part of that cost here.

Sale of the property in question for the price of $287,967, as requested by SDG&E, is not in the public interest. Neither ratepayers nor shareholders are adequately compensated at that price, as they would be paying the cost of removing existing utility facilities.¹³ The removal of the existing facilities is not necessary for utility purposes, but only to accommodate Whispering Hills' development project. Whispering Hills, not SDG&E ratepayers and shareholders, should be paying the cost of removing the existing facilities. We will only approve this transaction if the sale price is increased by $961,228, to a total sale price of $1,249,195, to remove the inappropriate cost shift to SDG&E ratepayers and shareholders.¹⁴

⁹ It also shifts part of the costs to SDG&E's shareholders, under the shared revenue allocation adopted in D.05-04-007.

¹⁰ When SDG&E says it "could add the Removal Costs to the selling price," that appears to mean adding them to the current selling price, which would be equivalent to not subtracting them in the calculation of the selling price. It is unclear why SDG&E would somehow become responsible for the cost of removal if it is not subtracted from the selling price.

¹¹ The "separate agreement not a part of this Agreement" referred to in Paragraphs 16.1 and 16.2 was not part of the record of this proceeding until SDG&E was ordered to provide in the Joint Assigned Commission and ALJ Ruling. Upon review, we generally agree with Whispering Hills' characterization of the separate agreement as not significant to this proceeding.

¹² If Whispering Hills had not agreed to pay the cost of relocating the lines, they might be able to claim that "as is" means taking the land with the existing power lines, but reducing its value because the "as is" condition makes it worth less to them as a buyer. That position is not tenable given their agreement to pay the entire cost of relocation.

¹³ Under D.05-04-007, shareholders and ratepayers share the proceeds of the sale of the property at issue.

¹⁴ We do not reach the other issues raised by Mr. Nielsen and Mr. Mathewson.