2. Background

The Application requests an order approving the sale of its Main Office located at 374 West Santa Clara Street, San Jose, for $4 million pursuant to § 851 (Proposed Transaction).⁵ The Application states that SJWC faces the immediate problem of a lack of space in its Main Office, that the Main Office lacks adequate security and infrastructure for modern technology, and that the Main Office does not comply with the Americans with Disabilities Act (ADA). However, according to the Application, the Main Office cannot be sufficiently remodeled or expanded because the Main Office has been designated a historic landmark. Therefore, SJWC seeks Commission approval to sell the Main Office.

The Application requests approval of an increase of $1,870,782 in SJWC's revenue requirement for 2007, which SJWC states would result from implementing its proposed plan to replace the Main Office. This represents an increase of 1.05% above the revenue requirement adopted by Decision (D.) 06-11-015 for SJWC in its most recent general rate case (GRC). SJWC seeks to recover 50% of this additional revenue requirement through the service charge component and the remainder through the quantity rate component of its tariffed rates.

The Application also requests a Commission determination that SJWC's Main Office is no longer necessary or useful, and authorization to reinvest the net proceeds from the sale in infrastructure pursuant to § 790.⁶ According to the Application, the Main Office has reached the end of its useful life.

Notice of the Application appeared on the Commission's Daily Calendar on January 24, 2007. The Division of Ratepayer Advocates (DRA) filed a protest on February 23, 2007. A prehearing conference (PHC) was held on March 16, 2007, where SJWC and DRA were in attendance.⁷

On March 30, 2007, the assigned Commissioner issued a Scoping Memo and Ruling (Scoping Memo), identifying the following issues to be considered in this proceeding:

1. Does D.06-05-041 apply to the sale of SJWC's Main Office, and if so, does the Application satisfy the requirements of that decision?

2. Does the Application (that is, the request for permission to sell the Main Office) require Commission approval pursuant to § 851?

3. Should the Commission find that the Main Office and/or other real property being sold are no longer necessary or useful?

4. May SJWC to use the proceeds from the sale of its Main Office building to acquire a new company headquarter and a walk-in customer service facility in downtown San Jose pursuant to § 790?

5. Should the Commission approve the proposed rate increase resulting from this transaction?

6. Should the Commission approve the proposed rate design for recovering the increased costs resulting from the transaction?

The Scoping Memo directed SJWC to address in its supplemental testimony the applicability of D.06-05-041 (Gain on Sale Decision) to the Proposed Transaction, and whether the Application required Commission approval pursuant to § 851. SJWC requested, and was granted by an Administrative Law Judge (ALJ) ruling on April 30, 2007, an extension of time until May 7, 2007 to submit its supplemental testimony.⁸

On May 7, 2007, SJWC served its supplemental testimony, which indicated that SJWC had reached agreement on the terms of the purchase of a replacement office building located at 110 West Taylor Street, San Jose (Replacement Facility), for $6.7 million.⁹ The supplemental testimony states that, although SJWC will pay $6.7 million for the Replacement Facility, the Application's request for recovery of $3.795 million is not altered or changed.

SJWC requested and was granted two additional extensions of time to submit its brief on the legal issues identified in the Scoping Memo. On June 15, 2007, the ALJ issued a ruling suspending the schedule and stating his intention to recommend dismissal of the Application (Suspension Ruling), after SJWC failed to submit its brief on legal issues by the established deadlines, or explain why it failed to meet those deadlines or to timely ask for additional time.

On June 25, 2007, SJWC filed a Motion for Reconsideration of the Suspension Ruling (Motion for Reconsideration), and, in doing so, responded to the legal issues identified in the Scoping Memo. The Motion for Reconsideration attached a copy of SJWC's brief on legal issues, entitled, "San Jose Water Company's Report on Legal Issues Set Forth in Scoping Memo" (Brief on Legal Issues).

On September 13, 2007, the assigned Commissioner granted, in part, the Motion for Reconsideration (September 13 ACR). The September 13 ACR concluded that the sale of SJWC's Main Office requires Commission approval pursuant to § 851, and that the proceeds from the Proposed Transaction were not eligible for reinvestment pursuant to § 790.

The September 13 ACR lifted the suspension of the proceeding, directed SJWC to indicate whether it wished to proceed with the Application, and, if SJWC stated its interest in moving forward, directed the ALJ to issue a ruling to schedule hearings to address the remaining issues in this proceeding. In response to the September 13 ACR, SJWC informed the Commission that it wished to proceed with the Application.

On October 16, 2007, another PHC was held where SJWC and DRA were in attendance (Second PHC). At the Second PHC, neither SJWC nor DRA recommended changes to the scope of the proceeding. DRA recommended, however, that SJWC be ordered to revise and update the Application because DRA believed the economic and revenue requirement analysis contained in the Application changed as a result of SJWC's purchase of the Replacement Facility for $6.7 million, a price substantially greater than the $3.795 million purchase price SJWC requests for inclusion in rate base. DRA also sought to examine what SJWC intends do in the future with the Replacement Facility's excess space that remains after space has been allocated to public utility service.

SJWC stated that it will own and use the Replacement Facility, and that it has no current plans to allow affiliates or others to use any portion of the Replacement Facility. SJWC also stated that the economic analysis and revenue requirement analysis contained in the Application had not changed because SJWC has not changed its request. That is, although SJWC will pay $6.7 million for the Replacement Facility, its request remains unchanged to include $3.795 million in rate base for the purchase of the Replacement Facility. SJWC stated that, if at some point in the future SJWC can justify using more of the Replacement Facility for public utility service, it will make such a proposal in a future proceeding.

The ALJ ruling of October 30, 2007 (October 30 ALJ Ruling) determined that the scope of the proceeding should not be modified to include the issues of cross subsidization or affiliate transactions, and that it was premature to consider in this proceeding how SJWC will use the excess office space that it did not seek to place in rate base. The October 30 ALJ Ruling established a new proceeding schedule for the filing of testimony and for evidentiary hearings.

DRA's testimony was filed November 16, 2007, and SJWC's rebuttal testimony was filed December 5, 2007. Evidentiary hearings (EHs) were held on December 19 through December 21, 2007.

At the EH, SJWC moved to strike a portion of DRA's testimony which addressed affiliate transaction issues that the October 30 ALJ Ruling determined were beyond the scope of this proceeding, and SJWC's motion was granted. On January 3, 2008, the ALJ issued a ruling proposing to strike a portion of SJWC's testimony which responded to the stricken DRA testimony. No objections were received, and on January 18, 2008, SJWC's testimony responding to DRA's stricken testimony was stricken.

The ALJ Ruling of January 17, 2008, granted SJWC's request for an extension of time until January 25, 2008 to file and serve post-hearing opening briefs and February 4, 2008 to file and serve post-hearing reply briefs. Post-hearing briefs were filed on January 25, 2008. The ALJ Ruling of February 4, 2008, granted SJWC's February 4, 2008 request for an extension of time until February 5, 2008 to file and serve post-hearing reply briefs. Reply briefs were filed February 5, 2008.

No oral argument was held, and the proceeding was submitted upon the filing of reply briefs. By ALJ Ruling on March 19, 2008, submission of this proceeding was set aside to receive additional evidence (March 19 Ruling).

At the time the proceeding was submitted, the Division of Water and Audits (DWA) did not have SJWC's Discounted Cash Flow (DCF) analysis model or experience in working with the model. Thus, DWA was not able to assist the Commission to determine the financial and revenue effects resulting from our decisions on certain issues. Therefore, the March 19 Ruling directed SJWC to compute, among other things, the net present value, revenue requirement, rate effects and the ratepayers' share of proceeds from the sale of the Main Office for several scenarios using various assumptions provided by the ALJ. The March 19 Ruling also directed DRA to review SJWC's analyses to verify that SJWC prepared the information as directed, and for SJWC and DRA to jointly file and serve the requested information.

Additional ALJ rulings were issued on March 27, and April 4, 2008, in response to DRA's March 24 and April 3, 2008 requests for clarification of the March 19 Ruling. However, after concluding that utilizing the parties through formal rulings to conduct the needed analyses would be impractical and inefficient, the ALJ ruled on April 9, 2008 that SJWC must file and serve the information it prepared pursuant to the March 19, 27 and April 4 rulings (April 9 Ruling). The April 9 Ruling also relieved DRA of the responsibility to verify that SJWC prepared the information as directed, or for parties to jointly file and serve that information.

The April 9 Ruling instead directed SJWC to provide DWA an electronic copy of the analytical model SJWC used to prepare its cash flow, revenue requirement, rate and related information. SJWC was also directed to provide instructions and training materials concerning the model and to make SJWC personnel and its consultants available to assist Commission staff understand and operate the model.¹⁰ DWA then used SJWC's model to compute the financial and revenue effects resulting from the resolution of the issues in this proceeding, and the proceeding was again submitted on July 10, 2008.

⁵ § 851 states, in part:

No public utility other than a common carrier by railroad subject to Part I of the Interstate Commerce Act ( 49 U.S.C. Sec. 10101 et seq.) shall sell, lease, assign, mortgage, or otherwise dispose of or encumber the whole or any part of its railroad, street railroad, line, plant, system, or other property necessary or useful in the performance of its duties to the public...without first having either secured an order from the commission authorizing it to do so for qualified transactions valued above five million dollars ($5,000,000), or for qualified transactions valued at five million dollars ($5,000,000) or less, filed an advice letter and obtained a resolution from the commission authorizing it to do so...Nothing in this section shall prevent the sale, lease, encumbrance or other disposition by any public utility of property that is not necessary or useful in the performance of its duties to the public, and any disposition of property by a public utility shall be conclusively presumed to be of property that is not useful or necessary in the performance of its duties to the public...

⁶ § 790 states:

(a) Whenever a water corporation sells any real property that was at any time, but is no longer, necessary or useful in the performance of the water corporation's duties to the public, the water corporation shall invest the net proceeds, if any, including interest at the rate that the commission prescribes for memorandum accounts, from the sale in water system infrastructure, plant, facilities, and properties that are necessary or useful in the performance of its duties to the public. For purposes of tracking the net proceeds and their investment, the water corporation shall maintain records necessary to document the investment of the net proceeds pursuant to this article. The amount of the net proceeds shall be a water corporation's primary source of capital for investment in utility infrastructure, plant, facilities, and properties that are necessary or useful in the performance of the water corporation's duties in providing water utility service to the public.

(b) All water utility infrastructure, plant, facilities, and properties constructed or acquired by, and used and useful to, a water corporation by investment pursuant to subdivision (a) shall be included among the water corporation's other utility property upon which the commission authorizes the water corporation the opportunity to earn a reasonable return.

(c) This article shall apply to the investment of the net proceeds referred to in subdivision (a) for a period of 8 years from the end of the calendar year in which the water corporation receives the net proceeds. The balance of any net proceeds and interest thereon that is not invested after the eight-year period shall be allocated solely to ratepayers.

(d) Upon application by a water corporation with 10,000 or fewer service connections, the commission may, after a hearing, by rule or order, exempt the water corporation from the requirements of this article.

(e) The commission retains continuing authority to determine the used, useful, or necessary status of any and all infrastructure improvements and investments.

⁷ Adrian Hanson, representing himself, was also a party but did not actively participate in the proceeding.

⁸ The April 30 ruling also clarified that SJWC's filing on legal issues should be in the form of a brief.

⁹ Exh. SJWC-2, pp. 2-3.

¹⁰ In response to the April 9 Ruling, DRA sent an electronic mail message asserting its right to seek additional information through data requests, to cross-examine and/or file comments, if any of the information provided to DWA is additional evidence not in the record or requires different analyses from that DRA examined in the proceeding.