A. The Commission did not fail to provide a procedure for review of projects constructed after 2002.
Joint Parties allege procedural errors related to review of San Gabriel's post 2002 construction projects. They argue that we failed to provide an opportunity to review projects that San Gabriel constructed "pursuant to the rate base cap" adopted in the previous GRC and that the alleged failure violates the "constitutional demand of due process." (Joint Reh. App., pp. 4, 6, 7.) Joint Parties claim that we provided "no direction" regarding review of the reasonableness of San Gabriel's post 2002 construction projects, that Joint Parties did not know when to submit an analysis of the projects in light of the limited rehearing of issues from the previous GRC and that when they learned the instant GRC was the correct place for this review, the hearings had concluded months earlier. Joint Parties (acting individually) then sought to reopen the proceeding, asserting then as now that they had not reviewed San Gabriel's post 2002 construction and that we had not provided "direction" about such review. (Joint Reh. App., pp. 4 - 7.)
Joint Parties base the above arguments on their apparent assumption that the outcome of the limited rehearing of D.04-07-034 from San Gabriel's last GRC, A.02-11-044, was a prerequisite to reasonableness review of construction projects in the instant GRC. The specific issue to be considered on rehearing was whether San Gabriel's proposed construction projects, approved subject to a 10% rate base cap for rate making purposes, were needed, reasonable and justified. (Order Modifying and Granting Limited Rehearing of Decision 04-07-034 ("Rehearing Order") [D.05-08-041] (2005) __ Cal.P.U.C.3d __, pp. 10, 14, Ordering Paragraph 2 (slip op.).) Joint Parties describe the post 2002 construction projects as, "constructed pursuant to the rate base cap," and they refer to the review of the projects constructed after 2002 as a "critical issue in the rehearing." (Joint Reh. App., pp. 4, 6.)
However, subsequent projects would not be constructed "pursuant to" the cap. Rather, the utility would exercise its discretion about construction projects and would not be required to limit its actual construction to 10%. The 10% cap was a limit on the estimate of plant additions for the purpose of setting rates. The construction projects would then be subjected to review in a subsequent proceeding.
We reviewed the relationship of these two different GRC functions in D.04-07-034, which became the subject of limited rehearing. DRA objected that the cap would be ill-advised if it allowed San Gabriel "carte blanche" to construct whatever it wanted without Commission review. (D.04-07-034, p. 14.) We explained:
[DRA] misconceives the nature of the cap. When the Commission approves a projection of plant additions in setting rates there is a presumption that the utility's investment in the planned capital projects is reasonable. However, this does not bar staff from challenging the inclusion of such investments in rate base in a later proceeding once the investments have been made. The same rule should apply if the Commission sets a cap on rate base additions instead of approving a specific set of projects.
(Opinion Authorizing Increase in Revenue ("Test Year (TY) 2004 Decision") [D.04-07-034] (2004) __ Cal.P.U.C.3d __, p. 14 (slip op.), emphasis added.) We intended the phrase "in rate base in a later proceeding," to be a reference to a later GRC proceeding because that is the established venue for determining rate base. There was no substantive or procedural need to delay the review of the actual construction projects simply because the earlier ratemaking estimate had become the subject of a limited rehearing, nor did we provide for any procedural delay. Managing the limited rehearing and the next GRC in a consolidated docket did not require additional or exceptional procedures. Therefore, we proceeded with the two parallel matters.
Joint Parties claim the scoping memo did not give direction that there would be a review of the construction projects in the GRC. (Joint Reh. App., p. 4.) However, that scoping memo included the following issues:
1. What revenue requirements, rate design, and rates should be ordered for San Gabriel's Fontana Water Company Division for Test Year 2006/2007 and Escalation Years 2007/2008 and 2008/2009?
2. What figures should the Commission adopt for the standard components underlying its adopted revenue requirement and rate design . . .?
(Scoping Memo and Ruling of Assigned Commissioner ("Scoping Memo") of October 20, 2005, p. 2.) Because rate base is a major component underlying revenue requirement and because analyzing whether prior construction is necessary and useful is a factor in determining rate base, parties should have understood that review of post 2002 construction projects necessarily would be included in the TY 2006 - 2007 GRC. There was no substantive or procedural reason to wait for the outcome of the limited rehearing because, as mentioned above, completing the review of the 10% rate base cap adopted for ratemaking purposes in the previous GRC had no bearing on the reasonableness review of the construction projects in the TY 2006 - 2007 GRC. The scoping memo did not state that any issue would be deferred because of the rehearing.
Further, at the prehearing conference on the consolidated proceeding, that included the limited rehearing of the TY 2003 Decision and the TY 2006 - 2007 GRC, the Administrative Law Judge ("ALJ") notified the parties that they should not wait for the outcome of the rehearing before proceeding with the new GRC. He said:
If you believe that there's going to be a decision on the rehearing in time for it to affect this case in any material - the new rate case in any material way, I don't think that is a reasonable assumption. And I don't work on that assumption.
I am going to have this on two tracks, one of which is the rehearing track, the briefs, and I will get a decision out. And I will do it I think reasonably promptly, but I can't speak for the Commission. And we just can't wait for the Commission to decide the rehearing issues before we get into the new rate case.
(R.T., vol. PHC 2, p. 62.) However, DRA's prepared testimony revealed that it expected the results of the rehearing to have an impact on the GRC issues. It said:
Potential impacts of the rehearing have not been reflected in SGVWC's filing, or in this report, as the outcome of the rehearing is unknown at this time. Depending on the outcome of the rehearing, many areas of the general rate case calculations may be impacted. At this time, any estimates of the outcome of the rehearing would be speculative.
(Ex. 45, p. 1 - 2 (Schultz/DeRonne/DRA).)
Joint Parties cite a passage from D.06-06-036, the opinion resolving the rehearing issues related to D.04-07-034:
We need not authorize specific projects. The construction budget, and rate base, will get a third review in the current GRC, A.05-08-021. In that third review, we will have the opportunity to determine the reasonableness of what actually has been constructed since 2002. To the extent that construction was unneeded, it will be found to be unjustified and therefore unreasonable. Because current rates are subject to refund, any finding in A.05-08-021 will have the same effect and finding in this rehearing. The difference is palpable: rather than forecasting that a project is or is not necessary, we have the benefit of hindsight to review whether the project was, in fact, needed. This is the lesson of all rate cases which are based on a forecast year.
(Opinion on Limited Rehearing of Decision 04-07-034 [D.06-06-036], supra, at p. 20 (slip op.).)
We went on to explain:
Issues regarding rate base are always subject to being raised in a general rate case. When a party suspects a plant in rate base is not used and useful, or is not accurately recorded on the company's books, those issues should be raised as early as possible. Rate base issues were left open in D.04-07-034 to be resolved in A.05-08-021. We are reviewing D.04-07-034 based solely on its record. We are not reviewing A.05-08-021 and the issues raised, or which might be raised, in that proceeding. DRA's request is premature and, therefore, denied.
(Id. p.28 (slip op.) emphasis added.) These passages describe the matters to be considered in each of the two concurrent proceedings with regard to the post 2002 construction projects. Joint Parties apparently interpreted the language as a promise of an additional separate proceeding in which to conduct a review. The evidentiary hearings in A.05-08-021 were completed by the time D.06-06-036 issued, and Joint Parties say they had not been aware the reasonableness of the post 2002 construction projects were within the scope of the A.05-08-021 GRC proceeding. (Joint Reh. App., p. 7.)
Although both the Commission and the ALJ provided contemporaneous explanations as referenced above, the parties' confusion persisted. We accept Joint Parties' claims of procedural confusion at face value. However, in light of the explanations and the routine nature of the involved proceedings, claims that we violated Joint Parties due process rights by failing to provide a procedural forum for review of San Gabriel's post 2002 construction projects or that we failed to provide notice that the issue would be included in the GRC proceeding do not identify an infirmity in our procedures and are without merit.
We caution parties that they have a responsibility to specify any significant omissions from their underlying analysis, if those omitted topics may appear to have been reviewed and accepted without issue. Failure to explicitly inform the ALJ that they were deferring review of some post 2002 construction projects until a later time created the appearance that a review had been done and, thus, failed to trigger a clarifying explanation from the ALJ or the Assigned Commissioner. An inquiry or a clear disclaimer would have elicited immediate clarification about the scope of the instant proceeding and would have prevented any lingering confusion about where and when the issues should be addressed. Whatever its intent, the qualifying statement, quoted above, from DRA's report was too vague to provide useful information about the scope of the DRA review.
Joint Parties also allege legal error based on the claim that there are no findings of fact regarding post 2002 construction projects. (Joint Reh. App., p. 7.) This claim is incorrect. Findings of Fact ("FOF") 38, 39, 41 and 42 address the Sandhill plant and the upgrade project. (D.07-04-046, pp. 117 - 118, FOF 38, 39, 41, 42, 43.) The Decision also includes findings of fact related to land that San Gabriel purchased from an affiliate company for construction of a new office/warehouse. (D.07-04-046, pp. 118 - 119, FOF 48 - 51.) The claim that the Decision has no findings of fact regarding post 2002 construction projects is without merit.
Although Joint Parties' claims do not reveal legal error, they have now asserted that they (including DRA) "did not address whether projects constructed since 2002 were justified." (Joint Reh. App., p. 5.) The assertion that these parties did not review certain construction projects constructed "pursuant to the 10% rate base cap" raises questions about the adequacy of the underlying review.
Based on the foregoing, we will permit parties in the next GRC to address the reasonableness of post 2002 construction projects that are not addressed in D.07-04-046. Parties may not address issues that are resolved in the Decision.
B. Sandhill Project
San Gabriel's construction budgets included an upgrade to the Sandhill plant to allow it to treat State Water Project (SWP) water and to enhance its capacity to treat water from Lytle Creek. We discussed the purpose and need for the project, found the project to be needed and reasonable and held that it "should be completed." (D.07-04-046, pp. 39, 40.)
We had previously adopted the approach of limiting San Gabriel's rate base growth to 10% per year, referred to as a "rate base cap." (TY 2004 Decision [D.04-07-034], supra, at pp. 14 - 15 (slip op.) D.07-04-046 allows rate base treatment of the year 2005 Sandhill project investments and allows succeeding years' investments to be added to rate base by advice letter filings. We capped the costs of the Sandhill project at $35 million and exempted it from the rate base cap.12 (D.07-04-046, p. 41.)
12 We said we would reevaluate the rate base cap in the next GRC to determine whether it "is an effective ratemaking tool." (D.07-04-046, p. 34.)