3. Applicability of § 851 and the Gain on Sale Decision to the Proposed Transaction
Although the Application was filed pursuant to § 851, the Application also states that the Main Office building is no longer useful for utility operations, and requests that the Commission find that the Main Office building is no longer necessary or useful. The Application appeared contradictory in seeking approval to sell necessary or useful utility property pursuant to § 851, while concurrently seeking Commission findings that the property is not necessary or useful and that the net proceeds from the sale are eligible for reinvestment in infrastructure pursuant to § 790. Thus, a threshold issue in the proceeding is whether an § 851 application is required if the Applicant has determined that the property in question is not necessary or useful utility property.
The Scoping Memo sought to clarify this apparent inconsistency by asking if the Application requires Commission approval pursuant to § 851, and whether D.06-05-041 (the Gain on Sale Decision), applies to the sale of SJWC's Main Office. The Suspension Ruling was issued after SJWC failed to respond to these questions in the Scoping Memo.
The Gain on Sale Decision addresses, among other things, the sale of assets which water utilities believe are no longer necessary or useful, and the reinvestment of those sales proceeds pursuant to § 790. The Suspension Ruling concluded that, because SJWC believed that the Main Office was no longer necessary or useful, the Gain on Sale Decision applied to the Proposed Transaction. The Suspension Ruling also found that the Application did not comply with the Gain on Sale Decision, and stated that a proposed decision would be prepared to dismiss the Application.
The Motion for Reconsideration asserts that the Gain on Sale Decision does not change SJWC's obligation to file a § 851 application before selling property that is still in use as required by § 851 and Commission precedent. The Motion for Reconsideration states that the Suspension Ruling confuses the protocol for determining whether property dedicated to the public good can be sold in the first instance with the protocol for determining how to allocate any gain resulting from the sale of such property.11
The Brief on Legal Issues contends that the Gain on Sale Decision is not applicable to the Application because the scope of Rulemaking (R.) 04-09-003, leading to D.06-05-041, is limited to the allocation of gains from the sale of utility assets but not to the sale of that property.12 The Brief on Legal Issues asserts that D.04-03-039, as modified by D.04-09-028, established that water utilities must file a § 851 application to obtain permission to sell real property. The Brief on Legal Issues also states that the scope of the Gain on Sale Decision is further narrowed in that it deals only with formerly useful utility property, and because the Main Office is still being used for public utility service SJWC is required to file an application pursuant to § 851.
Discussion
Rulemaking (R.) 04-09-003, in general, addressed the allocation of gains on sale of utility assets. However, because § 790 predetermines the allocation of gains from the sale of no longer necessary or useful water utility real property, R.04-09-003 also addressed the implications of § 790 for water utilities, and the relationship of § 790 to § 851. R.04-09-003 states:
"In order to reconcile § 790 and 851, at what point do we require the utility to file an application? If the utility files a § 851 application at the time of the sale and the Commission approves the sale, what must the utility file at the end of the eight years, if anything, to reconcile the net proceeds?"13
"Further interpretation of Water Utility Infrastructure Improvement Act of 1995, P.U. Code §§ 789, et seq., is merited. This Commission has not previously considered how to reconcile this statute with our statutory obligations pursuant to Public Utilities Code § 451 and 851."14
Thus, R.04-09-003 included in its scope the issue of whether and when a water utility should file a § 851 application to sell utility property.
In prior cases concerning the sale of water utility assets, the Commission has found that either Commission authorization was necessary to sell assets the Commission determined were necessary or useful utility property15, or that the assets at issue were not necessary or useful utility property and did not require Commission authority to sell.16
In particular, D.04-09-028 addresses Southern California Water Company's (SCWC's) application for rehearing of D.04-03-039. D.04-03-039 found that SCWC violated § 851 when in November 1994, without seeking Commission approval, SCWC entered into a lease agreement with the City of Folsom allowing the City of Folsom in perpetuity to lease 5,000 acre-feet per year (AFY) of water rights from SCWC's 10,000 AFY allocation of water from the American River. D.04-03-039 concluded that the lease was void, imposed a fine on SCWC, and ordered 70% of the revenues received under the lease to be credited to SCWC's ratepayers.
D.04-03-039 found that SCWC should have filed a § 851 application even if it believed the assets in question are no longer necessary or useful for utility service, and concluded that SCWC violated § 851 when it failed to gain the Commission's approval prior to effectuating the Folsom lease.17 Upon rehearing, D.04-09-028 affirmed D.04-03-039's determination that SCWC violated § 851.
In A.01-09-062 et al., the Commission did not have sufficient information to determine whether the properties included in the California Water Service Company's (Cal Water's) real estate liquidation program required § 851 approval, and D.03-09-021 ordered Cal Water, among other things, to file an application explaining its real estate program and justify removing real property in that program from rate base. Cal Water was also ordered to seek authority to establish an Infrastructure Memorandum Account pursuant to § 790, and to file an application for authority to replace its Chico operations and customer centers. D.05-12-002 subsequently determined that Cal Water's old operations and customer centers were no longer necessary or useful property, and their sale was not subject to § 851.18
Thus, prior to the adoption of the Gain on Sale Decision, the Commission required, or at least encouraged, water utilities to seek Commission approval before disposing of utility property the water utilities believed was no longer necessary or useful. However, in light of the requirement of § 790 that the full gain on reinvested asset sales of no longer necessary or useful utility property be included in rate base, and considering the experience with the Cal Water application described above, the Commission was concerned about the sale of useful assets by water utility management and reinvestment of the net proceeds from those sales in new assets (churning) as a way to increase rate base and profits.19
Although the Gain on Sale Decision did not change the requirement of § 851 for utilities to obtain Commission approval before selling necessary or useful property, it established an additional notification procedure to ensure that water utilities which did not file a § 851 application would, at minimum, notify the Commission of their intention to sell property. Among other things, the Gain on Sale Decision requires water utilities to provide 30 days' advance written notice to the Director of the Commission's Water Division (now DWA), as well as to the Director of the Office of Ratepayer Advocates (now DRA) when water utilities intend to sell land, water rights, buildings, or all or a portion of a water system that they determine are no longer necessary or useful. This was to give the Commission the opportunity to respond to the proposed sale and prevent sales of property without Commission approval that is obviously necessary and useful.20
Thus, the Commission retains discretion to review applications for the sale of utility property pursuant to § 851, including sales of assets that water utilities contend are not necessary or useful. Although SJWC asserts the Main Office is no longer useful utility property, the Commission will nonetheless consider the Application pursuant to § 851 in order to determine whether the sale requires Commission authorization.21
The Motion for Reconsideration states that the Main Office is still in rate base and generating a revenue requirement, is currently occupied and used to provide service to SJWC's customers, and therefore, SJWC must file a § 851 application before selling property that is still in use.22 The Brief on Legal Issues states that, since the property is clearly being used, there can be no doubt that SJWC needs prior Commission approval pursuant to Section 851 to sell that property.23
The Application states that all corporate functions are located at the Main Office, which also serves as a walk-in center and where customers may pay bills and obtain personal assistance from customer service representatives.24 The SJWC Report on Facilities Consolidation and Main Office Relocation states that an active groundwater well, water-pumping facilities, equipment, and piping associated with the groundwater well located on the Main Office property are used to provide water to the City of San Jose (City).25 The Agreement of Purchase and Sale between SJWC and Adobe Systems, Inc., the purchaser of the Main Office, provides for a license to SJWC which, for a period of time after completion of the sale, permits SJWC to lease the Main Office and to park in the portions of the property.26
The Application, Exhibits, Motion for Reconsideration and Brief on Legal Issues all demonstrate that the Main Office continues to be necessary and useful utility property, not only at the time of sale, but also for a period of time after the sale. Therefore, the Proposed Transaction requires Commission approval pursuant to § 851, and the Application is an appropriate means for SJWC to seek Commission approval to sell the Main Office.27
11 Motion, pp. 2-3. Emphasis in original.
12 Brief on Legal Issues, p. 1.
13 R.04-09-003, p. 29.
14 R.04-09-003, Finding of Fact 39, p. 49.
15 See, for example, D.97-08-021, D.03-09-021, D.04-03-039 (modified by D.04-04-069 and D.04-09-028), D.04-07-034, D.05-12-002.
16 See, for example, D.88-04-068, D.92-12-059, D.05-12-002.
17 See D.04-03-039, p.51, Conclusions of Law 26 and 32.
18 See A.03-12-008, A.04-08-017.
19 D.06-05-041, pp. 62, 71-74.
20 D.06-05-041, pp. 83-85.
21 The notification procedure established by the Gain on Sale Decision does not apply to the Proposed Transaction because SJWC has filed this Application with the Commission pursuant to § 851.
22 Motion, pp. 2-3, 5.
23 Page 2.
24 Application, p. 2.
25 Exh. SJWC-1, YOO, Attachment B, Agreement of Purchase and Sale, Paragraph B, p. 1. Emphasis added.
26 Exh. SJWC-1, YOO, Attachment B, Agreement of Purchase and Sale, Paragraphs J and K, p. 2.
27 The Proposed Transaction might also be eligible for filing as an advice letter under the § 851 Pilot Program adopted August 25, 2005 by Resolution ALJ-186, as modified by Resolution ALJ-202, adopted August 23, 2007.
