2. Affording advice letter treatment for the Sandhill Project is not arbitrary or capricious.

Joint Parties challenge the advice letter treatment for costs related to the Sandhill project. They claim that advice letter treatment is inappropriate for "large controversial projects" and should be applied only to ministerial matters. (Joint Reh. App., p. 14, citing (D.98-12-048; Order Denying Rehearing of Resolution W-4556 and Ordering an OIR ("Rehearing Order re R. W-4556") [D.05-12-048] (2005) __ Cal. P.U.C.3d __.)

The argument mischaracterizes our approach. The Decision directs staff to review the advice letter for conformance with "the Rate Case Plan, this order, [and] other Commission decisions. (D.07-04-046, p. 128 - 9, Ordering Paragraph 3.) We have already found that it is reasonable to construct the Sandhill upgrade. (D.07-04-046, p. 118, FOF 42.) Therefore, the staff's review of the advice letter filings will not require staff to decide a "controversial" matter - which would require the exercise of the Commission's discretion. Rather, staff will review the advice letter filings for compliance with the terms of Commission decisions.

Rehearing Order re R. W-4556 [D.05-12-048], cited by Joint Parties, considered whether it was appropriate to permit a Class A water utility to file its GRC by advice letter on an experimental basis. (Id. at p. 5 (slip op.).) We held that we should open an order instituting rulemaking to decide the question. In considering the question, we cited with approval an earlier decision, which held that the advice letter process is not well suited for deciding complex factual findings and legal conclusions, holding instead:

The advice letter process is for ministerial actions implementing previously approved Commission policy.

(Id., , citing Order Instituting Rulemaking on the Commission's Own Motion to Evaluate Existing Practices and Policies for Processing General Rate Cases and to Revise the General Rate Case Plan for Class A Water Companies [D.04-06-018 (2004) __ Cal.P.U.C. 3d __, pp. 14 - 15 (slip op.).) In the instant matter, the staff will be implementing previously approved Commission policy, thus, it is an appropriate use of the advice letter procedure. The claim of arbitrariness is without merit.

Joint Parties further claim that San Gabriel requires "heightened - not reduced - scrutiny," and argue that the advice letter procedure amounts to less scrutiny. This argument also mischaracterizes the procedures that we have adopted. Again, we have decided the policy issues related to the Sandhill project. The reasonableness of the construction costs will be determined in a subsequent proceeding. Staff's role in reviewing the advice letters will be to implement previously approved Commission policy, not to make policy or rule on questions of reasonableness. The claim of arbitrariness is without merit.

Joint Parties assert without further explanation or comment, that granting advice letter treatment to the Sandhill project is not supported by substantial evidence. (Joint Reh. App., p.14.) This argument is misplaced. As discussed above, there is evidence in the record to support our finding that it is reasonable to construct the project. The determination to allow advice letter treatment for Sandhill project costs, with guidance to staff regarding the nature of the review, is a procedural decision and is within the expertise and discretion of the Commission.

C. The record supports Findings of Fact 80 and 82.

Joint parties argue that the record does not support findings of fact 80 and 82, regarding San Gabriel's record keeping of proceeds from property transactions and contamination settlements, and also assert that the record contradicts the findings. (Joint Reh. App., pp. 15 - 18.) These findings state:

San Gabriel has maintained detailed records necessary to document its investment in utility plant of the net proceeds of property sales, contamination recovery, and involuntary conversion.

(D.07-04-046, p. 125, FOF 80) and:

The records San Gabriel kept were adequate to show the receipt of funds and the expenditure of funds. However, we will require a memorandum account to record all transactions that result in gains from sale of real property, or gains from condemnations, service duplication, or contamination claims.

(D.07-04-046, p. 125, FOF 82.)

Joint Parties dispute these findings on policy grounds and clearly disagree with the Decision's outcome. However, the record is extensive on these record-keeping questions¹⁷ and the Decision discusses the disputed issues at length. Because the issues were strenuously contested, there is evidence that contradicts the parties' competing positions and, of course, evidence that contradicts our final resolution of the issues. It is our responsibility to consider and resolve contradictory positions by weighing the evidence in light of the entire record. The existence of contradictory evidence does not identify an error in the Decision. Further, Joint Parties claim that the record is insufficient on these issues has no merit.

Joint Parties state that their principal concern, other than lack of record support, is:

the Commission is putting its stamp of approval on improper record keeping . . .

(Joint Reh. App., pp. 15 - 16.) Joint Parties take issue with the Decision's statement:

We agree with DRA that San Gabriel could only pay $40.9 million in dividends by using the gain proceeds. But San Gabriel's dividend did not affect its ability to serve. No harm was done. . . . to the extent that Section 790 applies to this case, we have found that San Gabriel's records meet the test of Section 790. DRA's recommendation is denied.

(D.07-04-046, pp. 92-93.) Parties argue:

It would be unfortunate to imply, as the decision inadvertently does, that it is permissible to use gains from such transactions to help pay dividends.

(Joint Reh. App., p. 16.) Joint Parties address this and other examples of practices that "cannot be reconciled with finding proper record keeping." (Joint Reh. App., pp. 17 - 18.)

These policy arguments about "proper record keeping" do not constitute grounds for finding error in the Decision. Joint Parties want us to provide additional specific guidance for future application to record keeping issues. This is a policy recommendation and does not provide grounds for granting rehearing of the decision.

D. Deferring the issue of service duplication proceeds to the gain on sales proceedings does not constitute legal error.

Joint Parties challenge our decision to defer to the gain on sale rulemaking proceeding treatment of $2,314,538 received by San Gabriel in an inverse condemnation service duplication case. Joint Parties argue that we "need not await these proceedings." (Joint Reh. App., p. 18.)

The Decision addresses the issue of the $2,314,538 resulting from a service duplication claim and recounts the opposing positions of the parties. This sum is included with other proceeds San Gabriel received "from various transactions during the years 1996 to 2004," totaling $27,811,312. (D.07-04-046, p. 72.) The Decision explains that the regulatory treatment of these items is being considered in another proceeding. The Decision says:

In Phase II of Rulemaking (R.) 04-09-003, we are examining the regulatory treatment of gains that result from the disposition of property as a result of condemnation, sales under threat of condemnation, and proceeds from inverse condemnations. We will defer judgment on the regulatory treatment and the application of Section 789-790 to these proceeds to that proceeding.

(D.07-04-046, p. 73.) In specifically addressing the service duplication category the Decision holds:

This issue is before us in R.04-09-003 and we will defer judgment on how to deal with these types of condemnations to that proceeding.

(D.07-04-046, p. 79.)

Joint Parties say San Gabriel believes "legal expenses associated with service duplication litigation should be shifted to ratepayers." (Ibid., citing D.07-04-046, pp. 12 - 13.) Joint Parties argue the record does not reveal that San Gabriel made "any effort to request a downward adjustment in rate base," related to these expenses and they assert further:

San Gabriel has taken the position it can use ratepayer resources to pay legal fees to recover $2.3 million in service duplication damages that presumably damage rate base without making any downward adjustment to rate base. The ratepayers take the risks - San Gabriel takes the benefits.

(Joint Reh. App., p. 19.) Joint Parties argue that San Gabriel's position is inconsistent with the risk compensation approach applied previously by the Commission. Joint Parties claim that, although the gain on sale proceeding will address the "general and abstract question" of how to allocate service duplication awards, the issue regarding this particular service duplication situation is not abstract and should be treated as independent from those policy considerations.

In fact, Joint Parties' assert the arguments they would make if the matter were being litigated in this proceeding, saying that the benefits "must be allocated to ratepayers." (Joint Reh. App., p.19.) These claims related to risk assessment and equity do not address our decision to defer these issues to the rulemaking.

Deferring an issue to a rulemaking proceeding that has been designated as the forum to address such issues is a reasonable approach. The statement that we "need not await" the gain on sale proceeding does not constitute grounds for granting rehearing. Joint Parties do not identify a basis for finding the deferral constitutes legal error and their objection to deferring the issue is without merit.

¹⁷ The record relating to record keeping issues includes all or portions of the following exhibits: (Ex. 6 (Batt/SG); Ex. 14 (Batt/SG); Ex. 15 (Dell'Osa/SG); Ex. 16 (Snow/SG); Ex. 17 (Whitehead/SG); (Ex. 26) Batt/SG); Ex. 27 (Dell'Osa/SG); EX. 28 (Snow/SG); Ex. 29 (Whitehead/SG); Ex. 63 (Loo/DRA) Ex. 64; (Loo/DRA); Ex. 78 (Macvey/City).