STATE OF CALIFORNIA Arnold Schwarzenegger, Governor
PUBLIC UTILITIES COMMISSION
505 VAN NESS AVENUE
SAN FRANCISCO, CA 94102-3298
May 30, 2006
TO: ALL PARTIES OF RECORD IN RULEMAKING 04-09-003.
Decision 06-05-041 is being mailed without the joint Dissent of President Michael Peevey and Commissioner Dian Grueneich. The Dissent will be mailed separately.
Very truly yours,
/s/ ANGELA K. MINKIN
Angela K. Minkin, Chief
Administrative Law Judge
ANG/eam
COM/GFB/eam Mailed 5/30/2006
Decision 06-05-041 May 25, 2006
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
Order Instituting Rulemaking on the Commission's own motion for the purpose of considering policies and guidelines regarding the allocation of gains from sales of energy, telecommunications, and water utility assets. |
Rulemaking 04-09-003 (Filed September 2, 2004) |
OPINION REGARDING ALLOCATION OF
GAINS ON SALE OF UTILITY ASSETS
TABLE OF CONTENTS
Title Page
OPINION REGARDING ALLOCATION OF 2
GAINS ON SALE OF UTILITY ASSETS 2
I. Summary 2
II. Dismissal of Certain Telecommunications Carriers and Gas Storage Providers from Proceeding 5
III. Definition of Gain on Sale 8
IV. Questions Posed in the OIR 9
V. Rule Applicable to Both Gains and Losses 14
VI. Allocation Dependent on Risk 16
A. OIR Proposals - Risk 16
1. Risk as Primary Determinant of Gain/Loss Allocation 16
2. Other Tests 17
a) Redding II Ratepayer Harm Test 18
b) Southern California Gas Headquarters Sale - Ratepayer Indifference Test 18
B. Comments - Risk as Primary Determinant of Gain/Loss Allocation 20
1. Differing Views of Who Bears Risk 20
2. Renter Analogy 23
3. Other Tests 24
C. Discussion - Risk Analysis 26
1. Summary 26
2. Risk Analysis Based on Economics of Utility Regulation 27
3. The Energy Crisis, Natural Disasters and Other Extraordinary Losses 28
4. Forecasts 29
5. Renter Analogy 30
6. Other Tests 32
VII. Depreciable vs. Non-Depreciable Assets 33
VIII. Uniform System of Accounts Not Determinative of Proper Allocation of Gain on Sale 39
IX. Allocation as Incentive for Prudent Asset Management 42
X. Only After-Tax Gains Considered 46
XI. Notice of Utility Assets Taken Out of Service - Pub. Util. Code § 455.5 50
XII. Other Issues 54
A. FERC Jurisdictional Property 54
1. Comments - FERC Jurisdictional Property 54
2. Discussion - FERC Jurisdictional Property 54
B. Gains/Losses on Non-Utility Assets 56
1. Comments - Non-Utility Assets 56
2. Discussion - Non-Utility Assets 57
C. Section 851 Issues 58
1. Comments - Section 851 58
2. Discussion - Section 851 59
D. Abandoned Plant 60
1. Comments - Abandoned Plant 60
2. Discussion - Abandoned Plant 61
XIII. Water Specific Issues - Water Utility Infrastructure Improvement Act of 1995, Public Utilities Code § 789 et seq. 61
A. OIR Questions - Water 61
B. General Interpretation of Infrastructure Act, Pub. Util. Code § 789 et seq. 62
1. Comments - General Interpretation of Infrastructure Act 62
2. Discussion - General Interpretation of Infrastructure Act 63
C. Shareholder-Purchased Assets vs. Other Assets 67
1. Government Funding 67
2. Developer Contributions in Aid of Construction 68
a) Comments - Developer Contributions in Aid of Construction 68
b) Discussion - Developer Contributions in Aid of Construction 69
3. Contamination Proceeds 70
D. Churning 71
1. Comments - Churning 71
2. Discussion - Churning 72
E. Reconciliation of § 851 and § 790 75
1. Comments - § 851 and § 790 75
2. Discussion - § 851 and § 790 76
F. Condemnations/Involuntary Conversions 77
1. Comments - Condemnations/Involuntary Conversions 77
2. Discussion - Condemnations/Involuntary Conversions 78
G. Small Water Companies (Class B, C and D) 79
1. Comments - Small Water Companies 79
2. Discussion - Small Water Companies 79
XIV. Assignment of Proceeding 80
XV. Comments on Draft Decision 80
Findings of Fact 86
Conclusions of Law 91
ORDER 96
APPENDIX A - List of cases in which gain on sale issues deferred
APPENDIX B - Summary (outline) of decision
OPINION REGARDING ALLOCATION OF
GAINS ON SALE OF UTILITY ASSETS
I. Summary1
This decision adopts a process for allocating gains (and losses) on sale received by certain electric, gas, telecommunications and water utilities when they sell utility land, assets such as buildings, or other tangible or intangible assets formerly used to serve utility customers. In most cases, utility ratepayers should receive 100% of the gain from depreciable property such as buildings. Ratepayers have traditionally received all the gains for the normal retirement of depreciable property through normal depreciation accounting. This decision does not alter the existing mechanism.
Ratepayers and shareholders, however, will split the gain from non-depreciable property such as land and water rights. Though ratepayers bear most of the risk associated with such property, a 50% - 50% allocation is a fair and reasonable outcome, partly to compensate for some financial risk borne by the utility, and partly as an incentive to utility management to manage its assets wisely.
This rule of thumb will apply to routine asset sales where the sale price is $50 million or less and the after-tax gain or loss from the sale is $10 million or less. Most ordinary asset sales that come before this Commission for approval should meet these criteria. This decision does not apply to routine retirements of minor utility assets that are no longer used and useful, such as utility poles, transformers, and vehicles, which are governed by Commission depreciation rules and schedules.
The rule we develop here will not apply where the asset sale price exceeds $50 million or the after-tax gain or loss exceeds $10 million. The rule also does not apply to utility sales of assets of extraordinary character; sales of nuclear power plants; where a party alleges the utility engaged in highly risky and non-utility-related ventures; or where a party alleges the utility grossly mismanaged the assets at issue. We cannot predict in advance every extraordinary circumstance to which our general rule will not apply. However, most of our decisions allowing asset sales over the last several years have involved fairly routine utility assets that do not meet the foregoing thresholds.
We have deferred allocation of the gain in many past cases (see Appendix A). The parties bound by this decision shall file Advice Letters within 60 days of this decision's mailing indicating how they plan to comply with the rules set forth herein for each of those past sales (if deferred) and any other sales for which the decision was deferred. We add language indicating that, "Any party objecting to the proposed treatment of any deferred gain on sale determination may file an Advice Letter protest within the normal Advice Letter protest period."
Where a utility or other party believes asset values exceed the foregoing dollar thresholds; are extraordinary in character; or where losses result where there are allegations of highly risky, non-utility-related ventures or gross utility mismanagement, the utility or other party may ask us to except the transaction from our general rule. The Commission will determine how to evaluate cases where a utility or party requests an exception. If the Commission so rules, then it may evaluate how to allocate gains or losses without applying the general rule. We do not expect many cases to fall into this "exception" category, and urge parties to be judicious in their invocation of the exception.
Pursuant to Pub. Util. Code § 455.5,2 this decision also requires electric, gas, and water utilities to report annually to this Commission whenever any portion of an "electric, gas, heat, or water generation or production facility" is out of service, and immediately when a portion of such facility has been out of service for nine consecutive months. This reporting requirement applies only to major electric, gas, heat, or water generation or production facilities. We believe the threshold for defining a "major facility" should vary with the size of the utility, but do not have an adequate record to define such facilities across utilities. We prescribe next steps to develop such a record.
This decision does not change the circumstances under which utilities must file applications seeking Commission approval of such asset sales. Those circumstances are governed by § 851, and any procedures the Commission adopts to implement § 851's mandates. Therefore, we do not now act on the proposal in our initial order instituting this proceeding to prohibit any public utility from selling any capital asset for which it has not filed an Advice Letter and to render void any sale not complying with this rule. A determination of the process a utility must file to obtain our permission to sell assets is beyond the scope of our inquiry into how to account for gains on sale. The Commission has recently adopted a pilot program (Resolution ALJ-186) designed to streamline its review of certain § 851 transactions, and has indicated that it will take additional steps to review how it handles § 851 generally. We need not duplicate those efforts here.
Finally, we provide interpretation of the Water Utility Infrastructure Act of 1995, § 789 et seq. We find the Legislature intended the Act to give water companies certainty on how to allocate gains on sale, and to limit Commission flexibility in allocating such gains. However, the statute does not limit our ability to impose record keeping requirements on the water companies to ensure they give notice of planned sales and invest proceeds from the sale of formerly used and useful utility property in new infrastructure, and we impose such requirements here. We also discuss the treatment of proceeds attributable to property purchased with funds that did not come from the water company, such as developer funds and contamination litigation proceeds.
1 A summary of this decision in outline form appears in Appendix B to this decision.
2 All statutory references cite the Pub. Util. Code, unless otherwise noted.
