7. Water Main Relocation Costs

VTA claims that the water main relocation projects necessitated by the construction of its light rail transit lines provide a benefit to SJWC customers by extending the life of the water mains or improving the operation of the water system. VTA therefore requests that $5.5 million of its relocation costs be refunded and recovered through water rates as additional rate base. As discussed below, since we find that the ratepayer benefits of the relocation projects are minor in comparison to the costs, we deny VTA's request.

a. Background

VTA, in its PHC Statement, indicated that it would seek ratepayer reimbursement for 100% of its payment to SJWC for the cost of relocating certain water mains during the construction of its light rail transit facilities on the Tasman, Capitol and Vasona corridors. At the PHC, the details of VTA's request were discussed. Certain aspects were unclear, and pursuant to the Assigned Commissioner's Scoping Memo and Ruling, VTA filed a preliminary brief and report on its request.

In its preliminary brief, VTA stated, "Upon an assignment of rights from SJWC, VTA is entitled to participate in this case for the limited purpose of determining whether and to what extent relocation costs can be included into the rate base." VTA's preliminary report on ratemaking states that it is requesting that the Commission direct SJWC to refund VTA's contributions in aid of Construction (CIAC) for the projects, which totaled $15.7 million to that date, and to direct SJWC to pay the remaining costs of the Vasona relocations. Those reimbursements and remaining costs would then be included in rate base and recovered from ratepayers through increased customer rates.

Both SJWC and ORA responded to VTA's filing. SJWC stated that, through its proposal, VTA sought to breach its August 2000 contract with SJWC, and that the Commission should deny the request. Specifically, SJWC claimed that no assignment of rights ever took place and that VTA agreed to seek reimbursement of only 50% of the costs and only from SJWC's customers, not the company itself. ORA stated that VTA has not justified burdening ratepayers with paying for water main relocation costs incurred to build a transit system. ORA asserted that utility ratepayers realize little or no benefit from the relocation and that none of the authority cited by VTA established a VTA right to receive ratepayer reimbursement for relocation costs incurred to build its transit system.

VTA's direct testimony modified the preliminary report in that the testimony requested 50%, rather than 100%, of the water main relocation costs be included in rate base and refunded to VTA. Also, VTA provided analysis that indicated SJWC ratepayers receive a benefit of about 39% of the total project cost, primarily because the new pipes extend operating life relative to the existing pipes. The analysis considered three factors: pipe age and material, pipe length and new facilities providing new functions or enhanced benefits.

SJWC's rebuttal to VTA's testimony stated that ratepayers have already paid for a portion of the costs for the Vasona 326/346 segments; the rebuttal adjusted VTA's benefit analysis accordingly. SJWC further adjusted the VTA analysis to reflect the time value of money, zero ratepayer benefit for new fire hydrants and a reduced benefit for parallel mains. SJWC concluded that approximately 4% of the total main relocation costs at issue benefited ratepayers, and that this incidental benefit did not justify SJWC's ratepayers paying for any of the relocation costs.³

In its opening brief, VTA acknowledged that its calculations should be corrected to exclude the Vasona 326/346 segments, and indicated that the ratepayer benefit would then be $5.5 million, which is 37.4% of the remaining $14.6 million in relocation project costs. VTA argued that the other adjustments proposed in SJWC's rebuttal testimony were inappropriate. While VTA has proposed that the $5.5 million be refunded to VTA by SCWC and included in SJWC's rate base, it indicated that it is not opposed to the use of a surcharge, provided that it is accompanied by a refund of its contribution in aid of construction from SJWC through either a lump sum payment or issuance of a promissory note.

SJWC's position is that any refund to VTA should be through a surcharge to customers. The company, however, concluded that the Commission should deny any rate relief for VTA, since the pipeline relocations provided very little, if any, benefit to SJWC's ratepayers, and any incidental benefit is outweighed by the incremental costs incurred solely as a result of the nature of VTA's light rail projects.

ORA argued that the proper test is to determine who is the "primary beneficiary" of the facilities relocation and have that beneficiary pay the costs. ORA concluded that VTA was the "primary beneficiary" and should pay all the costs. ORA also argued that VTA's request is inappropriate in that it seeks rate base recovery of costs that are neither prudent nor used and useful for providing water utility service.

In its reply brief, VTA addressed ORA's "primary beneficiary" argument by indicating that ORA applied the benefit test too narrowly. VTA argued that the real beneficiaries of the light rail transit service provided by VTA are virtually all the residents of the Bay Area. Benefits include reductions of pollution, traffic congestion and commuting stress. VTA concluded that since there is no particular "primary beneficiary," it is reasonable to allocate 37.4% of the costs to SJWC.

b. Discussion - Ratemaking Considerations

In seeking reimbursement for utility relocation costs, VTA presents two scenarios. First, in cases where a jurisdiction, such as a city, has granted a franchise to a utility for transmitting and distributing utility service within the limits of the municipality, § 6297 specifically requires the utility to relocate its facilities at no cost to the municipality. While VTA asserts that it has such authority under § 100164 of its enabling act, it also recognized that SJWC did not agree with that proposition. VTA indicates that a compromise with SJWC was struck in July 2000 to allow VTA the opportunity to seek rate base recovery of 50% of its relocation costs. However, VTA states that if the Commission agrees that VTA has the franchise authority of a municipality it could apply City of Livermore v. Pacific Gas and Electric, 51 Cal.App.4th (1997), which requires the utility to relocate its facilities at its own expense.

VTA did not grant a franchise to SJWC. Section 6297 is therefore not directly applicable in this case, since it is predicated on a franchise agreement. However, in arguing that its enabling act did grant it the same right for utility relocation at no cost, as granted to municipalities, VTA cites § 10064, which states:

"The district [VTA] may construct and operate or acquire and operate transit works and facilities in, under, upon, over, across, or along any state or public highway or any stream, bay or water course, or over any of the lands which are the property of the state, to the same extent that such rights and privileges appertaining thereto are granted to municipalities within the state."

While granting VTA the authority to construct and operate transit facilities to the same extent such rights are granted to municipalities, VTA's enabling act is silent as to whether VTA specifically has the right to require utility relocations at no cost to the district. If that were the legislative intent, the legislation could have so specified, as it did for other granted rights. For instance, regarding eminent domain, § 100131 states:

"The district may exercise the right of eminent domain to take any property necessary or convenient to the exercise of the powers granted in this part. The district, in exercising such power, shall in addition to the damages for the taking, injury, or destruction of property, also pay the cost, exclusive of betterment and with credit for salvage value, of removal, reconstruction, or relocation of any structure, railways, mains, pipes, conduits, wires, cables, or poles of any public utility which is required to be moved to a new location."

The code is therefore specific as to VTA's eminent domain rights. Without such specificity as to the applicability of the franchise requirement for relocation cost responsibility, and without the benefit of any supporting Commission or Court decisions on the subject, we cannot conclude that VTA has the right, similar to that for municipalities under § 6297, for utility relocations to be provided at no cost to the district.

The second scenario presented by VTA is where a public agency does not have a franchise agreement with the utility and a benefit test is employed to determine cost responsibility. D.01-07-010 states, "In other words, where a franchise is not determinative, a court may look to the primary beneficiary to absorb the costs of a public works improvement." (Mimeo., p. 13.) Consistent with this principle, the January 29, 2004 ALJ Ruling determined that VTA's request, as it relates to benefit analysis, would be considered in the GRC.

While ORA and VTA agree that the benefit test adopted by D.01-07-010 should be applied in this case, ORA argues that, even by VTA's own analysis, VTA is the "primary beneficiary" and as such should absorb all costs. ORA correctly points out that D.01-07-010, as well as related decisions, determined a primary beneficiary and assigned all costs to that party. There were no allocations between the utilities and public agencies. However, strict interpretation of D.01-07-010 appears harsh, since VTA has submitted testimony and analysis that support its claim that the relocations provide a ratepayer benefit amounting to 37.4% of the project costs. For discussion purposes, we are willing to consider VTA's benefit analysis along with SJWC's related rebuttal testimony.

c. Discussion - Ratepayer Benefits

From the evidence provided in this case, it appears that the vast majority of VTA's quantified benefits, as well as SJWC's adjustments, are related to the extended life of the relocated mains. SJWC asserts that the benefits of the extended life of the pipe do not occur until the current life of the existing pipe is completed. Since this benefit is a future benefit, the value of this benefit must be brought to the present using a present worth calculation that accounts for the time value of money. SJWC used what it called a "conservative" investment rate of return of 6% and subtracted an assumed annual inflation rate of 3%, yielding a net discount rate of 3%. There is a strong theoretical basis for SJWC's adjustment and we will include it in evaluating the benefit analyses.

While VTA does not dispute the time value of money theory or the specific factors used by SJWC, it does argue that the newer replaced mains provide enhanced reliability over that of the replaced pipes. Since those benefits can be immediate, VTA concludes that there is no reason to discount any of the benefits by SJWC's time value of money adjustment. We find this logic unconvincing. There is no evidence that quantifies the reliability benefit or shows it to be immediately significant when compared to the time value of money adjustment. SJWC believes that the reliability benefit is very small and is more than offset by the added costs required by the nature of VTA's project, such as additional installation and maintenance costs. If the reliability adjustment were significant, both in value and timing, that proposition should have been included in VTA's analysis with supporting information. Without such evidence, tested by cross-examination, we cannot reject or reduce SJWC's time value of money adjustment.

Our use of SJWC's time value of money adjustment significantly reduces the ratepayer benefits related to the water main relocation projects. According to SJWC's witness this adjustment had by far the largest effect in reducing VTA's estimated benefit from 39% to 4.7%. The second largest effect was the result of SJWC's adjustment to account for its agreement to fund a portion of the Vasona project costs. In agreeing that the Vasona adjustment was appropriate, VTA reduced its estimated benefits from 39% to 37.4%.

SJWC also included adjustments that reflect (1) a zero value for new fire hydrants, based on reasoning that new hydrants are a requirement of the City of San Jose Fire Department specifically for VTA's projects, and (2) removal of parallel main benefits in excess of the original main crossing, since the new mains were installed as a cost saving benefit to VTA to minimize the number of costlier crossings beneath the new light rail lines and are not an added benefit to ratepayers. There is merit to these adjustments, the inclusion of which would further reduce the estimated ratepayer benefits. Although the dollar effect of each adjustment it is not clear, it appears they are comparatively minor to that of the time value of money or Vasona adjustments.

SJWC also mentions but does not quantify in its analysis the effects of additional costs specific to VTA projects, decreased lifespan due to stray current, increased liability, higher future piping replacement costs and an overstatement of the value of hydrant heads. On the other hand, VTA asserts that its analysis is conservative, specifically citing the use of a 1.0 pipe factor when, in a number of instances, higher numbers might have been justified.

While the evidence in this proceeding does not provide sufficient detail to precisely quantify the ratepayer benefit, we do find that the ratepayer benefit, associated with the water main relocations at issue, is much closer to the 4.7% estimated by SJWC than to the 37.4% now estimated by VTA. A rough estimate would be within the range of 0% to 10%, depending on what is assumed regarding non-quantified benefits or adjustments. Therefore, we find that VTA is the primary beneficiary of the water main relocation projects at issue and conclude that all related costs in dispute should be assigned to VTA.