XII. Other Issues
A. FERC Jurisdictional Property
PG&E asks us to exclude electric transmission assets from this rulemaking on the ground FERC has exclusive ratemaking authority over such assets. We have found in certain asset sale decisions that the gain on sale policy applicable to electric transmission assets is subject to FERC jurisdiction for ratemaking purposes.75
However, ORA/TURN correctly note that we recently deferred to this OIR the issue of whether we may apply our gain on sale policy to electric transmission assets. In D.04-02-025, PG&E sought Commission approval to sell land underneath transmission lines while retaining an easement to maintain the lines. PG&E argued that the land was transmission related and subject to FERC jurisdiction. ORA argued that the land was no longer transmission related since what PG&E was selling was only the non-transmission related asset. It was retaining the sole asset related to transmission: an easement for access to the transmission lines.
Without commenting on broader issues of FERC jurisdiction over transmission, we find in this context that the utilities should allocate gains on sale of transmission property according to FERC rules. We have considered ORA/TURN's point that once the utility sells property and retains a right-of-way to service the transmission, it has divided the use of the property. Nonetheless, we have rejected attempts in the past to parse the gain on sale analysis in this way. We deem the ORA/TURN approach too procedurally burdensome to adopt.
In D.90-11-031, the Southern California Gas headquarters building sale case, the Gas Company asked us to apply one gain on sale test to the sale of the building and another to the sale of the land. ORA's predecessor, the Division of Ratepayer Advocates (DRA) opposed such an allocation, asking instead for us to apply a consistent test to the entire property: "DRA contends that the headquarters sale represented a consolidated sale of both the headquarters land and the headquarters buildings, and that it is neither possible nor appropriate to allocate one portion of the gain to the land and another to the buildings."76 We rejected SoCalGas' approach and decided to consider the sales proceeds on a consolidated basis.77
We acknowledge that the issue of whether to allocate gains on sale according to CPUC rules or FERC rules is a somewhat different question, since it involves the jurisdictional question as well as application of different gain on sale rules to the same property. We find nonetheless that it would burden the Commission and parties to have to examine the transaction this closely to determine which gain on sale rules to apply. It is far simpler to allocate sales of all transmission property according to FERC's rules, regardless of whether the utility maintains an easement after the sale. We find that this is the appropriate result here, especially since our goal is to develop consistent, easy-to-apply rules applicable to most situations.
As we understand the process, the utilities post all gains/losses from FERC-jurisdictional transmission property to a single account, which FERC addresses in the context of the utilities' periodic transmission cost recovery filings. The utilities should continue to account for FERC jurisdictional transmission in this way.
Nothing in this decision should be construed as an opinion on the FERC's general jurisdiction over transmission lines. This Commission engages in many activities regarding such lines, including siting of new lines. We do not intend to change our current process with this decision.
B. Gains/Losses on Non-Utility Assets
PG&E and SDG&E/SoCalGas urge us to make clear that the gain on sale rules we develop here apply only to utility assets. According to PG&E, shareholders should receive 100% of the gain from assets that are recorded 100% as non-utility property, 75% of the gain from assets recorded 75% as non-utility property, and so on.78
SDG&E/SoCalGas note that in the past they have held real estate outside rate base with the knowledge of the Commission for extended periods without the Commission ever telling them this course was prohibited. SDG&E/SoCalGas oppose any limit on their ability to hold property out of rate base, asserting that Pub. Util. Code § 851 only requires Commission intervention when a utility proposes action with regard to property that is necessary and useful to serve utility customers.
Aglet generally agrees with utility arguments that gains or losses that accrue during periods when plant is out of rate base should go to shareholders. Aglet notes, however, that such calculations may be difficult because land values do not escalate uniformly over time. Conceding that any calculation that attempts to link gains to asset appreciation at a particular point in time would be difficult and inexact, Aglet proposes that the Commission create a rebuttable presumption that allocation of gains and losses can be determined based of length of time that individual assets are in or out of rate base.
We agree that it is appropriate in most cases to allocate gains or losses on property held out of rate base to shareholders. Thus, where property is never in rate base, all gains or losses should accrue to shareholders. This includes property used for speculative or unregulated activities funded entirely by shareholders. Gains or losses from property that is partially in rate base and partially out of rate base should be allocated proportionately to the percentages in and out of rate base as PG&E proposes.
However, if assets move in and out of rate base over time, we agree with Aglet that it is best that we adopt a rebuttable presumption for such property. An applicant (or other party) may assume that the gain allocable to shareholders directly mirrors the time the asset was out of rate base. Thus, for example, if the property is in rate base for 20 years and out of rate base for 20 years, shareholders should receive 50% of the gain/loss, and the remainder should be allocated according to the 100%-0% and 50%-50% rules applicable to property in rate base. However, if there is evidence that demonstrates that most of the property's appreciation (or depreciation) occurred while the property was in (or out of) rate base, evidence of such variance may be submitted to rebut the presumption.
In all cases, utilities bear the burden of proving the time property was out of rate base in the case of a gain and in rate base in the case of a loss.
C. Section 851 Issues
ORA/TURN recommend a process for the Commission to use in evaluating utility § 851 applications. They ask the Commission to require utilities to include a standard list of consistently-formatted information in all such applications. SCE states that such a process is beyond the scope of this proceeding, noting that § 851 is applied and invoked in numerous transactions wholly unrelated to the sales transactions contemplated in the OIR.
The parties also engage in debate about the meaning of § 851. The utilities, on the one hand, state they need not seek Commission approval to sell property that is no longer used or useful for utility service. ORA/TURN contend to the contrary that the Commission must validate at the threshold a utility's claim that property is no longer used or useful.
Section 851 prohibits public utilities from selling or encumbering utility property that is necessary or useful in the performance of their utility duties to the public without Commission permission. While the parties make several interesting comments and proposals regarding our § 851 process, those matters are beyond the scope of this rulemaking. This OIR is designed primarily to develop rules for allocating monetary gains and losses, rather than refining our process for allowing sales in the first instances.
We have recently asked utilities and other interested parties to weigh in on a proposed pilot program governing our § 851 process79; the Commission approved the pilot program in Resolution ALJ-186 dated August 25, 2005, and also described the next steps it would take in its ongoing review of § 851 policies. This Rulemaking is not the place to consider generic § 851 issues, which may have application to parties other than those who commented, and for which we have an inadequate record. We decline to decide in this forum the § 851 issues the parties raise.
By the same token, our discussion of the Water Utility Infrastructure Act of 1995, Pub. Util. Code § 789 et seq. (Infrastructure Act) relates peripherally to § 851. In connection with comments on the Infrastructure Act, some of the water companies claim they need not apply to the Commission for approval to sell utility assets that they claim are no longer used and useful in utility service. As we discuss in detail below, we believe notice to the Commission is required. Since the Infrastructure Act may create an incentive on water companies to sell assets that are still used and/or useful, we should impose tracking and application requirements on such utilities so we can ensure only obsolete property is sold. In addition, we will require water utilities to give the Commission notice, as described more fully below, when they wish to sell assets covered by the Infrastructure Act.
D. Abandoned Plant
Aglet asks that we broaden the scope of the OIR to consider gain on sale treatment for "abandoned plant," which it characterizes as the undepreciated asset value of plant that is retired early. Aglet proposes that any losses on early-retired plant be borne by shareholders, but that gains associated with early retirement go to ratepayers.80
Calling Aglet's proposal a "heads-I-win-tails-you-lose" proposal, SCE suggests that the Commission itself may err in setting the rate of depreciation, and that shareholders should not bear the brunt of such error. SCE also notes that it depreciates certain assets (poles, transformers, meters and PCs) en masse, and that under this group accounting procedure, the process of setting asset lives and depreciation rates is done on an average basis. Some assets are retired early and some last beyond their expected retirement age. According to SCE, Aglet's proposal would be both unworkable and unfair: all components that retire earlier than the group's average service life would result in a loss to be borne by shareholders.
We do not believe a special rule for "abandoned plant" (as defined by Aglet) is warranted. We have already provided for case-by-case consideration of extraordinary losses, such as those attributable to nuclear power plants. We are not convinced that the term "abandoned plant" is universally understood. Finally, in ordinary cases not set aside for case-by-case review, the risk principle we adopt here will result in proper allocation of losses in our view. Thus, we decline to adopt the special rule Aglet advocates.
75 See, e.g., D.02-01-058, 2002 Cal. PUC LEXIS 11, at *11 (approving the grant of an easement over electric transmission property and holding that it was "appropriate for revenues from the easement to be credited according to applicable FERC orders and requirements"); D.03-04-032, mimeo., p. 1, 2003 Cal. PUC LEXIS 234, at *1 (ordering that gain on sale of transmission facilities be allocated "according to applicable FERC authority.").
76 1990 Cal. PUC LEXIS 200, at *25.
77 1990 Cal. PUC LEXIS 200, at *30. We did not alter this conclusion on rehearing. See D.90-11-031, 1990 Cal. PUC LEXIS 1015, at *47.
78 PG&E cites D.98-02-031 (PG&E shareholders permitted to retain 75% of gain from sale of property recorded 25% as plant in (utility) service, 75% as non-utility property); D.98-02-032 (PG&E shareholders permitted to retain 100% of gain from sale of property recorded 100% as non-utility property) and other cases with consistent holdings.
79 See Chief ALJ Minkin's Management Report Concerning Section 851 Pilot Program, dated March 17, 2005, available on the Commission's website at http://www.cpuc.ca.gov/Published/Report/44537.htm.
80 Aglet notes that this issue is now reserved for hearing in PG&E's next general rate case.
