4. Discussion

4.1. Preliminary Matters

There are three preliminary matters related to the Commission's jurisdiction and the parties' capacity: the timeliness of the complaint, the interests of Breiholz and Adcock in this proceeding, and the verification of the complaint. We affirm the ALJ's rulings on these matters as set forth below.

As to the timeliness of the requests for reformation of the contracts, the ALJ ruled at the February 18, 1993 hearing that the request to reform the 1988 contracts to be "refundable" in character was filed beyond the three-year statute of limitations of Pub. Util. Code § 736, since the contracts were executed and carried out in 1988, but the request for reformation was not filed until April 1992.³ As to the requests for CIAC refunds, the ALJ ruled that the complaint was timely. The three-year statute of limitations on the refund claim could not begin to run before complainants had an opportunity to inspect the 1988 Annual Reports of Toro and Cal Utilities. These reports were not filed with the Commission until May 9, 1989 (although due March 31, 1989). The complaint was therefore timely filed on April 28, 1992.

Defendants moved to dismiss the complaint on the basis that Breiholz, at the time he signed the Castlerock complaint both as an individual and for Castlerock, and verified the complaint on April 25, 1992 as "PRES," lacked both personal interest and capacity to verify. In reply, Castlerock submitted a declaration by its president (Palma) purporting to show that the Castlerock Board had authorized Breiholz to act for it as "President pro tem." On May 2, 1994, after receipt of extensive briefing, the ALJ ruled that the evidence clearly showed that Breiholz had no interest either in Castlerock or in the water and sewer contracts, and lacked any standing as a possible complainant. Accordingly Breiholz was dismissed as an individual complainant. Breiholz's role as the verifier of the complaint was a closer question under the evidence presented. Inasmuch as dismissal would merely have delayed the issue, since Castlerock's present principals would immediately refile, the ALJ denied the motion to dismiss the complaint for lack of appropriate verification.

Adcock, as an individual, was named a defendant in the Complaint. The Commission, pursuant to Pub. Util. Code § 1702, has jurisdiction over public utilities, not individuals, in a complaint proceeding. Although Adcock was not appropriately named as a defendant, and the complaint should be dismissed as to him, the two utilities were properly named in this proceeding.

4.2 Castlerock's Refund Claim

Castlerock asserted two bases for its claim for a refund of part of the CIAC gross-up: that the actual federal income taxes paid by the utilities must be the basis for calculating the gross-up; and that, regardless of the actual taxes paid, the gross-up amount was wrongly calculated.

This refund dispute is governed by Commission decisions in response to the Federal Tax Reform Act of 1986, which for the first time included CIAC payments in the federally taxable income of water and sewer utilities.⁴ In D.87-09-026, the Commission identified methods for utilities to use to ensure that the new tax consequences of CIAC would neither burden ratepayers nor result in windfalls for developers. During the course of this proceeding, the parties sought clarification of ambiguities in D.87-09-026 that had become evident as it was sought to be applied in this case. We responded by issuing D.96-10-037, which clarified the Commission's requirements related to tax gross-ups. Among other things, we clarified that Conclusion of Law 12, and thus the refund question, was limited to utilities choosing Method 2. This clarification effectively eliminated Toro as a defendant, since Toro utilized Method 5. (See Toro Tariff Sheet No. 163-W, effective January 1, 1988.) Accordingly, this proceeding thereafter was limited to Castlerock's complaint against Cal Utilities.

Castlerock's initial argument focused on the need to determine the actual tax paid by the utility in order to figure the correct gross-up amount. Although this was arguably a possible reading of D.87-09-026, we considered and rejected that reading in D.96-10-037. We emphasized that the actual incremental tax rate, not the tax paid, is the basis for calculating the gross-up. In so doing, we identified a number of tax-reducing elements of federal taxation that we would not apply in the gross-up calculation.⁵

Conclusion of Law 12, as modified in D.96-10-037, states:

For utilities which elect Method 2, if the utility collects a gross-up using an incremental tax rate that is more than its incremental tax rate as determined on a taxable year basis without consideration of a tax credit or tax loss carry forwards, the difference between what was and what should have been collected should be refunded to the contributor.

This clarification had the incidental effect of eliminating the need to determine whether the utilities' federal tax returns were discoverable. The parties expended much effort on this issue. The clarification provided by D.96-10-037, however, rendered the entire question of the content of Cal Utilities' tax returns irrelevant. In D.96-10-037, the focus is on the appropriate incremental tax rate-about which there is no disagreement in this proceeding.

Under the methodology established to make the CIAC from a developer revenue neutral to a utility, the information needed to identify the proper incremental tax rate for the developer contribution is contained in the utility's Annual Report.⁶ In this case, there was no dispute that 34% was the appropriate incremental tax rate. Nothing else was needed to determine whether Castlerock was entitled to a refund, except consideration of whether the Commission's decisions had been properly applied and the calculations properly performed.

Castlerock's remaining argument addressed the propriety of the calculation of the gross-up paid to Cal Utilities. Castlerock's principal complaint was that it should have been liable for a gross-up consisting of only 34% (the incremental tax rate) of the basic CIAC amount ($354,790), or $120,629, rather than the gross-up of $182,717 collected by Cal Utilities.⁷ This idea about how to apply the incremental rate was, however, rejected by the Commission in D.87-09-026. Rather than a simple percentage of the CIAC, the gross-up under Method 2 was defined to include "tax-on-tax."⁸ In that decision, we pointed out that "[i]n 1988, at the 34% federal tax rate, under Method 2 an advance or contribution of $1,000 would require an additional $515 to cover the federal tax." 25 CPUC 2d at 303. That is exactly the situation here, where Cal Utilities applied the 51.5% addition to the $354,790 amount of the contribution, yielding the correct total for the gross-up of $182,717.

Castlerock half-heartedly advanced the alternative claim that a refund of $21,062 of the gross-up was due. This claim was based on a methodology that Castlerock conceded was not based on application of the incremental tax rate to the CIAC. It is therefore not a viable alternative ground for any refund.