2. Consideration of Risk

San Gabriel disputes our analysis of the risk associated with contamination of water resources in considering how to allocate the proceeds from the litigation settlement. We said:

We find in this case, the risk analysis associated with contamination is similar to that of real property and thus believe that a similar allocation of the net proceeds is warranted.

(D.07-04-046, p. 83.) San Gabriel challenges this statement, arguing that the risks in the two contexts are "very different." (SG Reh. App., p. 6.) San Gabriel says the statement "does not make sense," because contamination of groundwater is "a far more serious matter." (SG Reh.App., pp. 7 - 8, citing Opinion Regarding Allocation of Gains on Sale of Utility Asset ("Gain on Sale Decision") [D.06-05-041] (2006) __ Cal.P.U.C.3d __, p. 45 (slip op.) and Order Modifying Decision 06-05-041 and Denying Rehearing of Decision, as Modified ("Order Modifying D.06-05-041") [D.06-12-043] (2006) __ Cal.P.U.C.3d __, p. 19, Ordering Paragraph 1.i (slip op.).)

San Gabriel argues that in the gain on sale decisions we based our allocation of gain on the "ordinary" risks of utilities and declined to consider "extraordinary" risks. San Gabriel claims:

. . . contamination of groundwater resources is just the sort of "extraordinary risk" that the Commission excluded from consideration in the gain on sale decisions.

(SG Reh.App., pp. 7 - 8, emphasis in original.)

In D.06-05-041 we discussed risks related to gain on the sale of utility land and assets. (Gain on Sale Decision [D.06-05-041], supra.)⁷ D.07-04-046 notes that we consider contamination proceeds on a case by case basis. The Decision compares groundwater contamination to real property sales for purposes of analyzing risks and gains and explains that its 67% - 33% allocation "mimics" the gain on sale allocation adopted in D.06-05-041 and D.06-12-043. (D.06-12-043 modified the allocation percentages that had been adopted in D.06-05-041.) Regarding extraordinary risks, we said:

The gain on sale calculus should not take into account extraordinary risks such as the recent California energy crisis or Hurricane Katrina.

(Gain on Sale Decision [D.06-05-041], supra, at p. 87, FOF 9 (slip op.).)

In summary, San Gabriel disputes the Decision's reference to the gain on sale risk analysis in its consideration of the Mid-Valley settlement proceeds. San Gabriel's arguments are founded on its subjective statement that groundwater contamination is a "far more serious matter" and, consequently, that it is an "extraordinary risk." San Gabriel provides no rationale or specific legal grounds to support its assumption that a "far more serious matter" is equivalent, as a matter of regulatory policy, to an extraordinary risk. To the contrary, the examples of extraordinary risk in D.06-05-041 are exceptional and unique events, i.e., the energy crisis and Hurricane Katrina. In contrast, we have found that water contamination litigation is increasingly frequent.

In authorizing the memorandum accounts in March of 1998 we noted that "numerous" complaints had been filed in California and also noted the increasing frequency of such actions. (All Water Utilities. Order Authorizing the Establishment of a Memorandum Account for Water Contamination Litigation Expenses for All Water Utilities, Resolution No. W-4094, p. 2, FOF 1, 3 (March 26, 1998).) In addition, San Gabriel itself reports that water quality litigation has become an ongoing company responsibility. (D.07-04-046, p. 62, see Exhibit (Ex.) 12 (Whitehead/San Gabriel) for an overview of San Gabriel's responsibility in this area.)

San Gabriel notes that these memorandum accounts and advice letter filing procedures for contamination litigation that we adopted in 1998 were not yet in place when San Gabriel became aware of contamination from the Mid-Valley Landfill in 1997. (SG Reh.App., pp. 8 - 9.) San Gabriel argues that, as a result, it bore the cost and the risk related to "pursuing the polluter," and that it "overcame an extraordinary risk." (SG Reh.App., p. 9.) San Gabriel does not establish that groundwater contamination, or managing a contamination claim in the year before the memorandum accounts were authorized, represents an extraordinary risk along the lines of the energy crisis or Hurricane Katrina. The claim is without merit.

San Gabriel also claims that the Decision does not explain why it considers the risk analysis associated with contamination to be similar to that of real property. (SG Reh. App., p. 6.) In fact, the Decision discusses our reasoning in some detail. (D.07-04-046, pp. 82 - 83.) The claim that we did not explain our analysis on this issue is without merit. However, we note that there is no finding of fact regarding our holding that the risk analysis for contamination proceeds is similar to real property and that a similar allocation is warranted in this case. We will modify the Decision to add such a finding.

San Gabriel also argues that the Decision fails to consider that ratepayers were shielded from the capital costs of the treatment plant and from its operation and maintenance costs, which the polluter will pay for many years. (SG Reh. App., pp. 9 - 10.) However, in summarizing the components of the contamination settlement proceeds the Decision includes, "costs to construct Plant F-10 remediation facilities." (D.07-04-046, p. 79.) The Decision notes, "[i]n addition, the County promised to pay San Gabriel for the actual costs to operate and maintain the Plant F-10 facilities after they were completed." (D.07-04-046, p. 80.) The claim that the Decision failed to consider these factors is without merit.

San Gabriel argues that assuming the risk and achieving a settlement that protects the ratepayers "fully justifies" reserving the net proceeds for the benefit of the company and its shareholders. As discussed above, the Decision explains the allocation it adopts, noting that allocation of contamination proceeds must be done on a case by case basis, but also saying that the reasoning articulated in the gain on sale decisions is a useful analysis. (D.07-04-046, pp. 82 - 83.) On the question of risk, the Decision is consistent with previous Commission decisions. San Gabriel reargues the evidence and proposes a different outcome, but its claims of error related to our analysis of risk are without merit.

⁷ We said we were not resolving the issue of contamination-related settlement proceeds in the gain on sale rulemaking because they do not involve sales of real property. (D.06-05-041, p. 70 (slip op.).)