7. Allocation of Gains/Losses
D.06-05-041, as modified by D.06-12-043 spells out our process for allocating gains (and losses) between ratepayers and shareholders when an electric utility (among others) sells depreciable or non-depreciable assets formerly used to serve utility customers and where the asset sale price is less than $50 million and the after-tax gain (or loss) from the sale is $10 million or less.53 The allocation in D.06-05-041 can also apply to losses up to $50 million unless any party requests a different allocation.
D.06-05-041 reaffirms our application of the Redding II Ratepayer Harm Test (Redding II) adopted in D.89-01-016, under a narrow set of circumstances where (1) a public utility sells a distribution system to a governmental entity, (2) the distribution system consists of part or all of the utility operating system located within a geographically defined area, (3) the components of the system are or have been included in the rate base of the utility, and (4) the sale of the system is concurrent with the utility being relieved of, and the governmental entity assuming, the public utility obligations to the customers within the area served by the system. If all of these circumstances are present, then the gains or losses from the sale of the system should be allocated to utility shareholders, provided that ratepayers have not contributed capital to the distribution system and remaining ratepayers are not adversely affected by the transfer of the system.54
In their May 6, 2011 Response to the ALJ Request for Information, MU and KMPUD agree that the four circumstances detailed in the Redding II test are present in this case and therefore gains (or losses) should be allocated to utility shareholders. Furthermore, as stated during the evidentiary hearing, the sale of MU's assets will result in losses, and the Joint Applicants affirm that these losses will be allocated to shareholders.55 Finally, the Joint Applicants state that there will be no remaining MU ratepayers after the transaction; thus, ratepayers will not be harmed by the losses associated with this transaction.
We find that the proposed transaction does meet the four criteria for application of the Redding II test. Losses from the sale of the distribution system should, therefore, be allocated entirely to shareholders. The Redding II test, however, only applies to the sale of the electric distribution system. While Joint Applicants state that, as a result of the powerhouse fire, MU's electric assets consist almost entirely of the electric distribution system, Joint Applicants are silent on the treatment of the gains (or losses) of non-distribution assets (namely the old powerhouse site). Because the sale price of MU's electric assets is below $50 million and the gains (or losses) are below $50 million (and no party has asked for specific allocation of the losses to shareholders), we would ordinarily state that gains and losses should be allocated according to D.06-05-041, as modified by D.06-12-043. However, as Joint Applicants note, upon the close of the transfer and sale, there will be no remaining MU ratepayers to absorb any gains or losses. Therefore, all gains (or in this case, losses) on the sale of any remaining depreciable or non-depreciable assets, including the electric distribution system, shall be allocated entirely to MU shareholders.
53 D.06-05-041 at 15.
54 D.06-05-041 at 32.
55 Tr. at 32.
