II. Background

A. The Parties

SCE is an electric public utility organized under the laws of the State of California, which engages in the business of electric generation, transmission, and distribution. As a public utility, SCE is subject to Commission regulation.

RHC is a real estate investment firm based in Tustin, California. According to the application, RHC has become one of the largest owners and operators of manufactured housing communities in this state. RHC also owns and operates apartment communities.

B. The Project

SCE proposes to lease to RHC 5.84 acres on a portion of SCE's Eagle Rock ROW property in Los Angeles, California. SCE owns and operates transmission lines that cross the site. The Eagle Rock ROW is part of SCE's 220 kilovolt (kV) system.

If the lease is approved, RHC may construct and operate a self-storage facility on the site. RHC has obtained a conditional use permit, a variance, and mitigated negative declarations from the City, which approved the proposed use of part of the property for a self-storage facility. The site is currently not utilized for any secondary purpose.

SCE represents that the proposed lease will not interfere with its operation of its transmission lines and other facilities on the property or with its service to customers.

C. The Proposed Agreement between SCE and RHC

Under the option agreement signed by SCE and RHC on January 5, 2005 (agreement), RHC may exercise its option to lease the site upon Commission approval of this application, so long as RHC has met certain conditions. The agreement includes the proposed lease terms.

The agreement permits RHC to use the property for the construction and operation of a self-storage facility, vehicle and boat storage, and retail facilities, or for any other use permitted by law consistent with SCE's use of the site for its power lines and equipment. However, SCE must give prior consent to RHC's use of the site for any purpose other than self-storage, boat and vehicle storage, or retail facilities. The agreement does not require Commission approval of any change in use of the site.

The initial term of the proposed lease is 65 years. The lease would generate a base rent of $15,000 in the first year, $48,000 in the second year, $109,000 in the third year, and would increase to $181,000 in the fourth year. The base rent will also be adjusted annually based on a percentage equal to the percentage change in the Consumer Price Index for the Los Angeles-Long Beach-Riverside area, not to exceed a 3% increase. The base rent cannot be reduced based on a decrease in the Consumer Price Index to an amount lower than the base rent for the immediately preceding year. If RHC uses the site for any purpose other than a self-storage facility, boat and vehicle storage, or retail facilities, SCE may adjust the base rent to reflect the fair market value of the site for such use.

RHC must also pay SCE 20% of its gross revenues derived from use of the property during the preceding year as additional rent. If RHC subleases the site, SCE may increase the rent to reflect the current fair market value of the property.

SCE is responsible for all real property taxes assessed against the site by the State Board of Equalization. RHC has agreed to pay all personal property taxes, general and special assessments, and other charges levied or assessed against the site, RHC's improvements on the site, or RHC's personal property. However, RHC is not responsible for payment of any taxes assessed against SCE's equipment or improvements on the site.

RHC acknowledges that SCE has the power of eminent domain and may at any time condemn the property if it is needed for utility purposes.

Under the agreement, RHC must use the property in a manner that does not interfere with SCE's use of its power lines and equipment and that complies with legal and regulatory requirements. SCE has reserved the right to enter the property as necessary to inspect the property, to maintain and clean its electrical facilities, or to protect the electrical facilities in an emergency.

SCE has also reserved the right to license portions of the property to third parties for cell sites and the placement of billboards.

Under the agreement, SCE must approve the plans and specifications for any improvements that RHC wishes to construct on the site. RHC shall own any improvements that it constructs on the property during the lease term.

RHC must maintain the property and improvements in good condition and use the property safely.

RHC may not utilize the area directly under SCE's towers without SCE's written consent. The agreement requires RHC to maintain clearances of at least 18 feet between equipment it uses on the site and SCE's overhead electrical conductors that are less than 500 kV and at least 29 feet from all 500 kV overhead electrical conductors. Unless SCE agrees otherwise in writing, RHC must also maintain clearances of at least 50 feet from all tower legs and 10 feet from all steel poles, wood poles, and anchors on the site. SCE may require RHC to construct and maintain access roads that are at least 16 feet wide and are capable of supporting a gross load of 40 tons on a three-axle vehicle.

RHC also may not use, permit, create, store or allow hazardous substances on the property. Under the agreement, RHC is responsible for the entire cost of removal of any hazardous substances placed on the site during the lease term, but not for any hazardous materials placed on the site before the lease term.

SCE represents in the agreement that except as otherwise disclosed to RHC, SCE does not know, or have reasonable cause to believe, that any release of hazardous substances exists on or beneath the site. Under the agreement, RHC has the right to inspect the property, review relevant SCE documents, and analyze the soil and ground water to determine if hazardous materials exist on the site before exercising its option to lease. If RHC enters into the lease, RHC is deemed to have determined that the property will safely support the type of improvements that RHC wishes to construct and is fit for these types of uses, and to have accepted all associated risks.

RHC may not use or store gasoline or petroleum products (except for fuel stored in the tank of an operable vehicle) or flammable materials on the property.

In the agreement, RHC acknowledges that any structures it constructs on the property will be in close proximity to one or more high voltage (66 kilowatt or higher) electric transmission lines or substation facilities. RHC's structures may therefore be susceptible to induced voltages, static voltages or related electric fault conditions (induced voltages) that create a health and safety risk, unless appropriate grounding or other mitigation measures are incorporated into the structures. RHC has agreed to assume responsibility for identifying and implementing appropriate mitigation measures to reduce this risk at its own expense.

In addition, RHC shall indemnify and defend SCE from any claims or liability connected with or arising from any cause in, on or about the site, except for claims which are caused by SCE's negligence or willful misconduct or which arise from SCE's entry onto the property in connection with the use and operation of SCE facilities. RHC has also specifically agreed to indemnify and defend SCE from any claims arising from or connected to induced voltages on the site. In order to further protect SCE from liability, RHC is required to provide SCE with evidence of adequate insurance coverage before executing the agreement or entering the property.

By entering into the lease and occupying the site, RHC is deemed to have acknowledged that the site is in good and leasable condition and to have accepted the property on an "as is" basis.

The agreement would permit RHC to assign, transfer, sublease or mortgage the lease, without the prior consent of the Commission, but with SCE's approval.

Any disputes between the parties that cannot be resolved through good faith negotiations will be subject to arbitration.

D. Environmental Review

California Environmental Quality Act (CEQA)3 applies to discretionary projects to be carried out or approved by public agencies. A basic purpose of CEQA is to "inform governmental decision-makers and the public about the potential, significant environmental effects of the proposed activities."4 Because the Commission must act on SCE's Section 851 application and issue a discretionary decision without which the project cannot proceed, the Commission must act as either a Lead Agency or Responsible Agency under CEQA.

The City of Los Angeles is the Lead Agency for CEQA review of the application of Southern California Edison Company (U 338-E) for authority to lease available land on the Eagle Rock ROW to RHC Communities, LLC (also referred to as the Site). The Site is approximately 5.84 acres located on a portion of SCE's Eagle Rock ROW in the City. The Site is bounded on the west by a mobile home park; on the south by the 210 freeway; on the east by vacant property; and on the north by the Los Angeles Flood Control Channel and residential development. The Site will be used for the development and operation of a self-storage and vehicle and boat storage facility. The use of the Site for a self-storage and vehicle and boat storage facility is compatible with its primary use as a right-of-way for above ground transmission lines.

The Commission is a Responsible Agency for the project. CEQA requires the Commission to consider the Lead Agency's environmental documents and findings before acting upon or approving the project.5

SCE's application includes the following environmental documents prepared by the Lead Agency for the RHC LLC project:

· Mitigated Negative Declaration No. ENV 2004-5052 MND dated November 3, 2004.

· Letter from City of Los Angeles Zoning Administrator Case No. ZA 2004-5051 (ZV) (YV) (ZAA) (SPR) approving a Variance, Zoning Adjustments, and Site Plan Review for the RHC development dated February 11, 2005.

We have reviewed the City's environmental document and find it to be adequate for our decision-making purposes.

In reviewing the environmental effects of granting Zoning Administrator Case No. ZA 2004-5051 (ZV) (YV) (ZAA) (SPR), the City's Mitigated Negative Declaration (MND) concluded that potential environmental impacts in the following areas were less than significant or had no impact: agricultural resources, biological resources, cultural resources, land use/planning, mineral resources, population/housing, recreation, utilities/service systems, and mandatory findings of significance.

The MND concluded that potentially significant impacts that could be mitigated to less than significant levels in the following areas: aesthetics, air quality, geology/soils, hazards & hazardous materials, hydrology/water quality, noise, public services, and transportation/traffic. The significant aesthetic impacts include vacant land to be replaced by a self-storage facility with 41 parking spaces and spillover light onto adjacent residences; however aesthetic impacts will be reduced to less-than-significant levels through the incorporation of landscaping, surface parking and anti-graffiti mitigation measures and by the incorporation of shielded lighting. The significant air quality impacts are construction activities may increase existing basin-wide air quality violations, however, these impacts will be reduced to less-than-significant level through construction mitigation measures.

According to the Zone Information & Map Access System (ZIMAS), a database maintained by the City of Los Angeles Department of Planning, the significant geology/soils impacts is that the project is located within a fault zone. With adherence to applicable regulatory requirements, implementation of the proposed project would not expose people or structures to substantial adverse effects associated with fault rupture. Also, site grading will result in a loss of topsoil with 1000 cubic yards of dirt to be removed. However, this impact will be reduced to less-than-significant level by the incorporation of construction and haul route mitigation measures.

The significant hazards/hazardous materials impact is the location of the project in a Methane Buffer zone according to ZIMAS. The reason for the ZIMAS designation of the location as a Methane Buffer Zone is because Lopez Canyon Sanitary Landfill is just north of the SCE property. Methane gas mitigation measures are necessary to reduce impact to less-than-significant level. The significant hydrology/water quality impact is that the project will be required to control runoff using stormwater best management practices and pollution control measures for commercial facilities, parking lots, and for projects adjacent to environmentally sensitive areas (L.A. Flood Control Channel). After implementation of mitigation measures, the impact will be less-than-significant.

The significant noise impacts are noise impacts on adjacent residents that may result from automobile traffic and operational noise from the self-storage facility. A landscape buffer shall be planted adjacent to residential uses to mitigate noise impacts and the applicant will be required to comply with the City's Noise Ordinance and construction noise mitigation measures to reduce impacts to less-than-significant levels. The significant public services impact is the location of the project within a fire buffer zone, according to ZIMAS. The City of Los Angeles Fire Department will review and approve a plan to ensure adequate fire prevention measures are incorporated in the project design.

The significant transportation/circulation impacts of the project were reviewed by the City of Los Angeles Department of Transportation (LADOT). LADOT recommended that certain mitigation measures be incorporated into the project design to minimize potential traffic-related impacts, and a project traffic circulation and street access plan should be approved by LADOT to ensure adequate safety measures were incorporated into the plan.

The City mailed a Notice of Completion to the California State Clearinghouse on December 12, 2004. The MND was approved on February 11, 2005.

We have reviewed the City's MND and find it adequate for our decision-making purposes. We also find that the City has adopted feasible mitigations to potentially significant environmental impacts and has reasonably concluded that the specified mitigation measures will either eliminate or substantially reduce the impacts to less than significant levels. Accordingly, we adopt the City's MND for purposes of our approval of the project.

E. Ratemaking Considerations

SCE proposes to treat revenue from the proposed lease as other operating revenue (OOR). This treatment of lease revenues easement is unopposed.

On January 30, 1998, SCE filed Advice Letter 1286-E, which sets forth categories of non-tariffed products and services offered for sale by SCE and describes the products and services within each category. This advice filing was made pursuant to Rule VII.F of the Affiliate Transaction Rules contained in Appendix A of Decision (D.) 97-12-088. Attachment B to Advice Letter 1286-E identified the Secondary Use of Transmission Right of Ways and Land and the Secondary Use of Distribution Right of Ways, Land, Facilities and Substations as categories of existing non-tariffed products and services.

In D.99-09-070, the Commission adopted a gross revenue sharing mechanism for certain of SCE's other operating revenues. The adopted gross revenue sharing mechanism applies to OOR, except for revenues that: (1) derive from tariffs, fees or charges established by the Commission or Federal Energy Regulatory Commission, (2) are subject to other established ratemaking procedures or mechanisms, or (3) are subject to the Demand-Side Management Balancing Account. Under the gross revenue sharing mechanism, all applicable gross revenues recorded from non-tariffed products and services subject to the mechanism will be split between shareholders and ratepayers after the Commission-adopted annual threshold level of OOR has been set. For those non-tariffed products and services deemed "active" by the Commission, revenues in excess of the annual threshold will be split between shareholders and ratepayers on a 90%/10% basis. For those non-tariffed products and services deemed "passive" by the Commission, the revenues in excess of the annual threshold will be split between shareholders and ratepayers on a 70%/30% basis.6

SCE products or services offered under the Secondary Use of Transmission Right of Ways and Land and the Secondary Use of Distribution Right of Ways, Land, Facilities and Substations have been deemed "passive" for revenue sharing purposes. Therefore, here, the proposed lease with RHC would be treated as "passive," so that any lease revenues which exceed the annual threshold would be allocated between shareholders and ratepayers on a 70%/30% basis.

3 Public Resources Code Section 21000, et seq.

4 Title 14 of the California Code of Regulations (hereafter, CEQA Guidelines), Section 15002.

5 CEQA Guidelines Section 15050(b). The specific activities that must be conducted by a Responsible Agency are contained in CEQA Guidelines Section 15096.

6 Under the settlement approved in D.99-09-070, an existing product or service is classified as "active" if it involves a total incremental shareholder investment of $225,000 or more, either on a one-time basis or within a 12-month period. An existing product or service is classified as "passive" if it involves a total incremental shareholder investment of less than $225,000. "Incremental shareholder investment" includes capital-related costs and expenses. Capital-related costs, labor and other expenses properly charged to the utility shall not be included in calculating the $225,000 threshold.

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