IX. Comments

The Commission mailed the draft decision of the ALJ in this matter to the parties in accordance with § 311(g)(1) and Rule 77.7 of the Rules of Practice and Procedure. Verizon and ORA filed comments and reply comments.

In its comments, ORA reiterates that it does not oppose the sale of the Property, but it asks the Commission to establish a memorandum account to hold any gains from the sale pending the outcome of further proceedings. In the alternative, ORA asks the Commission to allocate a portion of the gain from the Property to ratepayers because they have paid the costs of the building at One Verizon Way since 1985 and will continue to pay those costs in rates after the building is sold.

ORA alleges that the Commission would commit legal error in adopting Verizon's ratemaking proposals because Verizon's rates will be unjust and unreasonable if ratepayers receive no gain and the costs of the buildings on the Property remain in rates. ORA believes it is unlikely that any gain from sale of the land will accrue to ratepayers above the $4 million annual allotment in the NRF settlement. ORA notes that all gains from sale of the building will accrue to shareholders based on Verizon's proposed "salvage accounting" mechanism. ORA contends that salvage accounting is inappropriate for the buildings on the Property because the building is still "used and useful." Rather than adoption of Verizon's proposal, ORA asks the Commission to allocate a portion of gains directly to ratepayers.

Verizon responds that its proposed accounting mechanisms for the gains from this transaction were previously approved by the Commission and are well-established. Verizon asserts that "salvage accounting" should apply to proceeds from the sale of the building because it is an accounting term that applies to proceeds received upon disposition of depreciable property, regardless of whether the buyer continues the existing use of the property or sells it for scrap. Further, Verizon contends that ORA misunderstands NRF regulation and how it severed the link between the recorded cost of an individual asset (such as the Property) and rates. According to Verizon, rates were set in 1989 when NRF was adopted and have not changed despite the many additions or subtractions to rate base since that time. Verizon continues to make capital investments that do not lead to rate adjustments and Verizon's shareholders are fully at risk for the efficient management of these assets. Likewise, rates do not decrease when a particular asset is sold. Verizon contends that ORA is seeking a midstream change to NRF rules and established accounting mechanisms and the Commission should ignore this plea. Finally, Verizon argues that attempts to review the gains from this transaction at a future date constitute retroactive ratemaking and would force Verizon to reevaluate the sale of the Property.

ORA does not convince us that it is legal error to adopt Verizon's ratemaking for the gains from sale of land or buildings on the Property. Verizon's proposal for any gains associated with the land complies with the NRF settlement between ORA (formerly the Division of Ratepayer Advocates) and Verizon (formerly GTE California) as adopted by the Commission in D.93-09-038. With regard to gains from the sale of the building, Verizon's proposal complies with FCC salvage accounting rules that this Commission adopted in D.87-12-063 and which we find apply to this transaction. It is not legal error to apply these salvage accounting rules. While the Commission has the authority to direct an allocation of gains directly to ratepayers, it is not required and it is not legal error to follow previously approved accounting rules and settlements regarding gains. ORA disputes the policy choice that is made in this decision to follow established rules and mechanisms. The proper venue for considering different policy choices with regard to the sharing of gains is in Phase 3 of the NRF review.

Furthermore, we agree with Verizon's description of how NRF severs the link between the costs of individual assets and rates. ORA is correct that Verizon's rates, as initially determined by the 1989 NRF start-up revenue requirement,15 include a component reflecting a return on the depreciated acquisition cost of the building. ORA is also correct that that component will remain built into Verizon's rates after this decision. If we viewed this transaction in isolation, it would appear that Verizon is enjoying a cost decrease without any commensurate rate reduction. However, under NRF, the converse is also true. NRF companies may not increase their rates based on increases to their costs. Although today's decision does not result in a rate decrease, we will apply the NRF principles in an even-handed manner to ensure that, (apart from the narrow range of costs that qualify as limited exogenous costs)16 ratepayers are protected from the risk of rate increases resulting from increased costs. Therefore, we do not agree with ORA's assertion that rates would be unjust and unreasonable unless a gain from the sale of the building is returned to ratepayers. We will not modify the draft in response to ORA's comments.

Findings of Fact

1. On September 14, 2001, Verizon and Baxter entered into an agreement for Purchase and Sale of Verizon's buildings and real estate located at the Property, with a projected closing date of July 1, 2002.

2. The office space in the buildings on the Property is no longer required for utility purposes.

3. Verizon will lease back a portion of the office space and the vehicle maintenance building on the Property for five years after closing of the sale.

4. The sale does not disrupt service to Verizon's customers because Verizon will implement a staged relocation of employees to nearby offices and lease-back a portion of the property.

5. ORA does not oppose the sale of the Property, but requests that the Commission defer ratemaking issues from any gains to either A.99-10-010 or the Commission's NRF Review, R.01-09-001.

6. Verizon will calculate the percentages of the total net book value in the land account and the building account at the time of closing and multiply the
respective percentages by the net sales proceeds to determine the allocation of the proceeds between the land and the building accounts.

7. Verizon will record any proceeds above the net book value of the buildings to an accumulated depreciation account as required by FCC accounting rules.

8. Verizon will calculate any gain on sale of land allocated to ratepayers based on the mechanism adopted in D.93-09-038 and allocate any resulting gain to ratepayers through its annual price cap filing.

9. The sale price of the Property is above fair market value and net book value.

10. The sale of the Property involves a change in ownership of an already developed property that will continue to be used by the buyer for administrative and general purposes.

11. The fuel tank removal on the Property is for the prevention of the release of hazardous materials, will cost less than $1 million, and will be overseen by Ventura County.

Conclusions of Law

1. A public hearing is not necessary.

2. The proposed sale as set forth in the application is not adverse to the public interest and should be approved.

3. The proposed ratemaking for this sale complies with the rules for gains set forth in D.93-09-038 and current NRF policies, and should be approved.

5. Under CEQA, the Commission must consider the environmental consequences of actions subject to its discretionary approval.

6. The sale of the Property contemplates removal of a fuel tank consistent with the CEQA categorical exemption under Guideline Section 15330.

7. This order should be effective today so that the Verizon and Baxter may proceed to close the sale transaction.

ORDER

IT IS ORDERED that:

1. Verizon California Inc. (Verizon) may sell to Baxter Healthcare Corporation, its buildings and real estate located at One Verizon Way in Thousand Oaks, California (the Property) as set forth in Application (A.) 01-09-026, in accordance with the agreement for purchase and sale attached to the application.

2. Within 60 days of the actual transfer, Verizon shall notify the Directors of both the Telecommunications Division and the Office of Ratepayer Advocates in writing of the date on which the transfer was consummated. A true copy of the instrument effecting the sale and transfer shall be attached to the written notification.

3. Upon completion of the sale and transfer authorized by this Commission order, Verizon shall stand relieved of public utility responsibilities for the Property.

4. Verizon shall allocate the net proceeds from the sale of the Property between its land and building accounts as described in its application and shall comply with Decision (D.) 93-09-038 and current New Regulatory Framework policies for any gains resulting from the sale.

5. In its next earnings filing in accordance with D.93-09-038 following closing of the sale of the Property, Verizon shall submit all calculations and supporting workpapers related to the book values, transaction costs, and gains on sale associated with both land and buildings from sale of the Property.

6. The authority granted herein shall expire if not exercised within one year from the date of this order.

This order is effective today.

Dated May 2, 2002, at San Francisco, California.

I abstain.

/s/ Henry M. Duque

Commissioner

15 See D.89-10-048, 34 CPUC 2d 155. 16 See D.98-10-026.

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