11. Other Issues
DRA alleges SJWC is paying San Jose Water Land Company (SJWLC), its affiliate, unreasonably high prices to rent space at the 1265 South Bascom Avenue facility in San Jose, and recommends that the Commission order SJWC to re-negotiate its lease at rates comparable to market rates. DRA also alleges that SJWC transferred five properties to SJWLC without Commission authorization. According to DRA, if the properties had been sold to third parties the proceeds from those sales could have been used to reduce future revenue requirements and rates charged to consumers. Finally, DRA contends SJWC purchased 1265 South Bascom Avenue before receiving permission to do so, and failed to inform the Commission that it had purchased 1265 South Bascom Avenue in violation of Rule 1.1.113
11.1. Alleged Excessive Lease Payments to Affiliate
DRA asserts that SJWC is paying its affiliate, SJWLC, nearly three times the market rate to rent space at the 1265 South Bascom Avenue facility.114 DRA contends that SJWC pays SJWLC $35.44 per ft.2/year for space at 1265 South Bascom Avenue, while the market rate for similar office space is $13.20 per ft.2/year. DRA contends SJWC's lease payments to SJWLC for the 1265 South Bascom Avenue facility are relevant to this proceeding because, if SJWC renegotiated the lease it would pay a significantly lower rate, and lower lease payments would have a direct impact on rates.115 DRA states that a provision in the lease gives SJWC the right to renegotiate the lease, and DRA recommends that SJWC be required to renegotiate its lease with SJWLC.
SJWC responds that it was authorized to recover the cost of leasing the space on the second floor of 1265 South Bascom Avenue in its current revenue requirement, and this cost was also approved for recovery in SJWC's prior rate case. Therefore, according to SJWC, it is not appropriate to raise in this proceeding issues concerning lease payments for 1265 South Bascom Avenue.116
Discussion
D.06-11-015 approved a settlement between SJWC and DRA on SJWC's most recent GRC, and the lease payments to SJWLC for the 1265 South Bascom Avenue facility were approved as part of the settlement. SJWC's lease payments to SJWLC for the 1265 South Bascom Avenue facility are not relevant to this proceeding because SJWC does not seek approval of those expenses in this Application.
11.2. Alleged Unauthorized Property Transfers
DRA states that SJWC transferred five properties to its affiliates without required Commission approval.117 DRA contends that one or more of which DRA asserts could have been used as SJWC's Main Office. DRA states that the acquisition cost of the five properties transferred to SJWLC without Commission authorization was $91,000 while the current estimated market value is $15.96 million. DRA also contends that, if the properties had been sold to third parties, the proceeds could have been used to reduce future revenue requirements and rates charged to consumers.
DRA asserts that the properties transferred to SJWC's affiliates were included in rate base until the date of transfer and that ratepayers paid the authorized rate of return, maintenance expenses and taxes for the properties, but that ratepayers derived no benefits from the transfers. DRA recommends that SJWC be required to file applications pursuant to § 851 for the properties that it alleges SJWC transferred to SJWLC without authorization.
SJWC responds that the five properties which DRA alleges were improperly transferred to SJWLC without Commission authorization were all properly determined to be no longer necessary or useful, and were removed from utility plant in service as long ago as 1990.118 SJWC contends that none of the properties identified in Exhibit DRA-1 would have been suitable for a new Main Office because they are all zoned residential, and four of the five properties are located outside the City of San Jose.
Discussion
The only issue concerning the transferred properties relevant to or appropriate for consideration in this proceeding is whether one or more of the transferred properties could have provided a less costly new Main Office. However, no evidence has been offered to show this to be the case.
Although DRA contends that using one of the transferred properties for a new Main Office would be less expensive than SJWC's proposed Alternative 2, DRA did not estimate the cost of building an office at any of the properties.119 Thus, DRA's assertion that building a new Main Office at one of the identified properties would be a less expensive alternative is speculative and unsupported by evidence.
DRA is rightly concerned with utilities' compliance with our regulations. However, the determination as to whether SJWC should have filed applications pursuant to § 851 to sell one or more of the five properties which DRA contends were improperly transferred to SJWLC is not within the scope of this proceeding. These issues should be raised in SJWC's GRC or through a formal complaint.
The 2007 RCP already provides a means for considering the appropriateness of transactions like those of concern to DRA. As discussed above, D.07-05-062 adopted MDRs (Minimum Data Requirements) which Class A water utilities are required to complete as part of their GRC and cost of capital testimony in order to reduce discovery during GRC proceedings.
The MDRs require that, to the extent not included in a previous GRC application, the utilities must include a detailed, complete description accounting for all real property that, since January 1, 1996, was at any time, but is no longer, necessary or useful in the performance of the water corporation's duties to the public and explain what, if any, disposition or use has been made of said property since it was determined to no longer by necessary or useful in the performance of utility duties. The disposition of any proceeds must also be explained.120
The RCPs specifically require Class A water utilities to provide information on the disposition of real property that is no longer necessary or useful to, among other things, promote timely processing of GRCs and facilitate comprehensive Commission review of the rates and operations of Class A water utilities.121 Therefore, SJWC's GRC is the appropriate place to raise concerns about SJWC properties which DRA believes were improperly transferred to SJWLC.
Finally, DRA's contention that the proceeds from the sale to third parties of the transferred properties could have been used to reduce future revenue requirements is not within the scope of this proceeding. The sale of the properties in question does not affect the revenue requirement resulting from approval of this Application. Whether and how the proceeds from the sale to third parties of the transferred properties affects SJWC's overall revenue requirement should be considered in a GRC, in a complaint or in another appropriate proceeding.
11.3. Purchase of 1265 South Bascom Avenue
DRA states that SJWC has implemented Alternative 2 without waiting for the Commission's decision on the Application and despite the costs to ratepayers.122 DRA contends that SJWC should have waited for the Commission's decision before it purchased 1265 South Bascom Avenue because authority to purchase the 1265 South Bascom Avenue building is one of the Application's requests. DRA recommends, therefore, that the Commission void SJWC's purchase of 1265 South Bascom Avenue, and order SJWC to lease only 1,130 ft.2 on the first floor of 1265 South Bascom Avenue at a rate of $13.20 per ft.2 per year.
Should the Commission allow SJWC to purchase the 1265 South Bascom Avenue building, DRA recommends that the Commission approve for recovery $2.7 million (i.e., original cost of $3.6 million minus $0.9 million in depreciation). DRA contends that this amount is the book value cost to its affiliate SJWLC, and is consistent with the affiliate transaction rule of "lower of cost or market" that was applied to Cal Water by D.97-12-011.
SJWC states that it does not need the Commission's permission to purchase a building, and did not request in the Application permission to purchase 1265 South Bascom Avenue. SJWC states that it only requested permission to sell the Main Office and to increase rates for the costs associated with implementing Alternative 2.123
Discussion
SJWC has not sought in this Application, and does not require Commission authority, to purchase 1265 South Bascom Avenue. The only question before the Commission in this proceeding with regard to the purchase of 1265 South Bascom Avenue is whether SJWC should be authorized to the recover through rates the costs associated with replacing facilities, including the costs related to the purchase of 1265 South Bascom Avenue.
The Scoping Memo explicitly states that this proceeding will not decide whether SJWC may buy or lease facilities to replace its Main Office, but only whether costs associated with replacing its Main Office should be included in rate base and rates. Therefore, we reject DRA's recommendation to void SJWC's purchase of 1265 South Bascom Avenue, and we will not order SJWC to instead lease space on the first floor of that building.
We also reject DRA's recommendation that the Commission limit the amount approved for recovery to $2.7 million for the purchase of 1265 South Bascom Avenue. DRA's recommendation to apply the "lower of cost or market" affiliate transaction rule that the Commission applied to Cal Water in D.97-12-011 is inappropriate because that requirement has never applied to SJWC.124
DRA asserts that the PD violates Commission policy set forth in D.97-12-011 concerning affiliate transactions.125 D.97-12-011 approved a settlement agreement between Commission's Water Division and Cal Water addressing Cal Water's request to reorganize into a holding company structure.
D.97-12-011 is not Commission policy because the provisions of a settlement agreement may not be used to establish Commission policy.126 DRA's assertion is without merit.
The Commission's SP U-21-W contains affiliate transaction rules applicable to water utilities when the utilities have a holding company and non-regulated affiliates.127 SP U-21-W provides that, unless in conflict with statute or other Commission orders, transfers of tangible or intangible assets from an affiliated sister company or a holding company to a water utility shall be at fair market value.128 Therefore, we will not adopt DRA's recommendation to apply the "lower of cost or market" to the recovery of costs associated with the purchase of 1265 South Bascom Avenue.
11.4. Alleged Rule 1.1 violation
DRA alleges that SJWC misled the Commission in violation of Rule 1.1 by failing to disclose the fact that SJWC purchased 1265 South Bascom Avenue in May 2007.129 DRA states that SJWC had numerous opportunities to disclose this fact to DRA and the Commission but failed to do so during discovery, by amending the Application, or by alerting the Commission during the Second PHC or during DRA's site visit in November 2007.
DRA contends that SJWC's failure to disclose its purchase of 1265 South Bascom Avenue had a substantive effect on DRA's analysis and on what the Commission understood it was addressing in this proceeding. DRA states that SJWC's conduct is misleading, and recommends that penalties be imposed to deter SJWC from engaging in this type of behavior in a future proceeding.
SJWC states that SJWC's testimony contained in Exhibit SJWC-1, Jensen, at page 3 explicitly states that SJWC will purchase 1265 South Bascom Avenue, and that SJWC requests new rates to reflect adding the $4.3 million purchase price into SJWC's rate base.130
SJWC asserts that DRA mistakenly believes that the Application sought the Commission's advice on how to solve its need for space. Rather, SJWC contends, the Application instead seeks approval of the choice SJWC has made, and provides its alternatives analyses to show the process SJWC used to make its choice so that the Commission could review the reasonableness of SJWC's selection.
Discussion
The record in this proceeding shows that SJWC stated its intention to purchase 1265 South Bascom Avenue at least twice. For example, SJWC states,
"To accomplish the most economic outcome, SJWC will take the following actions...Purchase from SJW Land Company the existing 20,000 square foot office building at 1265 South Bascom Avenue that is adjacent to SJWC's South Bascom Avenue campus.131
SJWC similarly states its intention to purchase 1265 South Bascom Avenue at Exhibit SJWC-1, Jensen, page 3. Thus, SJWC has not misled the Commission because the Application clearly states SJWC's intention to purchase 1265 South Bascom Avenue.
Although SJWC did not affirmatively alert the Commission that the purchase had taken place, it was under no obligation to do so because SJWC does not need the Commission's approval to purchase property. If SJWC chooses to purchase property for utility use before the Commission approves recovery of the costs in connection with the purchase, it does so at its own risk. SJWC also testified truthfully when asked about the status of the ownership of 1265 South Bascom Avenue.132
There is no evidence that SJWC made a false statement concerning the purchase of 1265 South Bascom Avenue, or in any other way attempted to mislead the Commission about the purchase of that property. Therefore, SJWC did not violate Rule 1.1, and we reject DRA's recommendation for penalties.
113 Rule 1.1 states: Any person who signs a pleading or brief, enters an appearance, offers testimony at a hearing, or transacts business with the Commission, by such act represents that he or she is authorized to do so and agrees to comply with the laws of this State; to maintain the respect due to the Commission, members of the Commission and its Administrative Law Judges; and never to mislead the Commission or its staff by an artifice or false statement of fact or law.
114 Exh. DRA-1, pp. 15-16. DRA Opening Brief, p. 19.
115 TR 9:4-28.
116 TR 5:10-6:7.
117 Exh. DRA-1, pp.16-17. DRA Opening Brief, pp. 19-21. DRA Reply Brief, pp. 9-10.
118 Exh. SJWC-5, pp. 4-5. SJWC Opening Brief, pp. 15-17. SJWC Reply Brief, pp. 9-10.
119 TR 353:10-354:23
120 D.07-05-062, Appendix A, Attachment 1, Section II.D.8, p. A-27. The 2004 RCP contained this same requirement. (See D.04-06-018, Appendix, p. 10).
121 D.07-05-062, Appendix A, Section I, p. A-2.
122 DRA Opening Brief, pp. 12-14.
123 SJWC Reply Brief, pp. 7-9.
124 The requirement established in D.97-12-011 is no longer applicable to Cal Water. D.02-12-068 now requires transfers of tangible and intangible assets and goods to Cal Water to be priced at fair market value (Appendix B, Rule 14).
125 Opening Comments of DRA on Proposed Decision of ALJ Smith, p. 10.
126 Rule 12.5 provides that adoption of a settlement does not constitute approval of, or precedent regarding, any principle or issue in the proceeding or in any future proceeding.
127 These guidelines were established by D.00-07-018, as modified by D.03-04-028 and D.04-12-023.
128 Rule 21 -Transfers of Tangible and Intangible Assets and Goods to Water Utility, p. 5.
129 DRA Opening Brief, pp. 22-26. DRA Reply Brief, pp. 10-11.
130 SJWC Reply Brief, pp. 8-9.
131 Exh. SJWC-1, Yoo, p. 7.
132 TR 58:7-60:6.
