XVI. Ex Parte Communications
This proceeding is subject to Rule 7, which specifies standards for engaging in ex parte communications and the reporting of such communications. Pursuant to Rules 7(a)(4) and 7(d), ex parte communications will be allowed in this proceeding without any restrictions or reporting requirements until the assigned Commissioner makes an appealable determination of category as provided for in Rules 6(c)(2) and 6.4. Following the Commissioner's determination, the applicable ex parte communication and reporting requirements shall depend on such determination unless and until the Commission modifies the determination pursuant to Rule 6.4 or 6.5.
1. The Commission needs clear guidelines for the allocation of the gain from the sale of a utility asset between ratepayers and shareholders.
2. The Commission has often, in the past, allocated these gains on an ad hoc basis.
3. This Rulemaking will consider assets sold by electric and gas utilities, certain telecommunications carriers, and water utilities.
4. Utilities should have guidelines related to gain on sale of public utility property that are easy to follow, and provide incentives for prudent investment in and continued ownership of property necessary for service to utility customers.
5. Utilities should not have incentives that lead to unnecessary and speculative investment in the asset markets.
6. Utilities should have guidelines that provide them with necessary incentives to dispose of properties that have been rendered unnecessary by change of circumstances.
7. Utilities should notify this Commission when a property ceases to be necessary and useful for utility service pursuant to P.U. Code 455.5, and the Commission should promulgate rules to enforce this section.
8. The utilities should invest generally in real estate and plant only to the extent that it is needed to serve their customers.
9. If utility shareholders receive an unnecessarily large share of the gain on sale, they may have an incentive to add properties that are not really needed for service to customers but have the potential to bring them high profit at some later date when sold.
10. Proper gain on sale guidelines should result in the right kind and level of investment and divestiture.
11. Utilities should have specific guidelines for specific types of sales, so that the determination of the proper gain on sale for a specific sale is easy and clear-cut. Only where the sale is unusual or especially complex should the guideline be more open-ended.
12. To date, most of our determinations of how to allocate gains on sale have been conducted on a case-by-case basis. This case-by-case analysis is cumbersome for the Commission and for parties, and often does not provide clear guidance on how to allocate gains.
13. We deferred determination of the correct allocation of the gain in several recent cases because the guidelines for how to allocate the gain were difficult to follow. The guidelines we develop in this proceeding will also provide direction for how to allocate the gains - currently held by the utilities in memorandum accounts or otherwise in suspense - in those cases.
14. We identify the cases in which we deferred the gain on sale allocation determination in Appendix B to this decision. The utilities named as Respondents should supplement the list in Appendix B if they are aware of other cases - whether or not they affect that Respondent - in which we deferred the question.
15. The allocation should be applied to after-tax gains only.
16. These guidelines should apply to the allocation of both gains and losses upon the sale of the asset.
17. The allocation should vary directly, holding everything else constant, with the assumption of the financial risk of the investment.
18. For most cases, ratepayers have borne most of this financial risk and have paid for the asset.
19. While the initial capital is provided by shareholders, that investment is repaid in rates by ratepayers through depreciation. Ratepayers also pay for maintenance, taxes, insurance, fees and other carrying costs of the asset. In addition, a rate of return is provided in rates on the undepreciated value of the asset. Further, shareholders are allowed to retain the proceeds of a sale up to the book value of the asset. Finally, an opportunity to achieve a fair rate of return is guaranteed in rates on the undepreciated value of the asset. All of this should be considered whenever the gain is allocated between ratepayer and shareholder.
20. There should be no difference in the treatment of depreciable and nondepreciable assets (land) for the purpose of allocating the gain. If land that has been taken out of ratebase is sold, an allocation of the gain or loss should be assessed consistent with the risk that has been shared between the ratepayer and shareholder.
21. While it is important to ensure that ratepayers are not harmed by the sale of the asset, or that they are compensated if they are, it is equally important to recognize who bore the financial risk of the investment.
22. The Uniform System Of Accounts is useful for the accounting and recording of a transaction, but is not useful in the determination of how the gain is to be allocated.
23. Shareholders should have an incentive for prudent investment in and continued ownership of property that is necessary for utility service, but they should not be given incentives for unnecessary and speculative investment. They should also be given the appropriate incentive to dispose of properties that have been rendered unnecessary by change of circumstances, and management should be encouraged to obtain a reasonably high price for the sale.
24. A share of the gain will provide shareholders an incentive sufficient to achieve these goals, whereas a too-high or too-low share would promote inefficiency in this decision process. Shareholders should also be compensated for the small risk they bear of disallowance of utility purchases by the Commission.
25. Under monopoly regulation, the regulatory compact minimizes the risk posed by competitive entry for the utility.
26. Under regulation, asset costs are calculated in rates paid by the ratepayers, including a return of the investment through depreciation. Other costs such as maintenance, insurance, taxes, licenses, fees, and interest payments are also put into rates.
27. If the asset is retired before it is fully depreciated, the undepreciated amount, if not covered through sale of the asset, is usually paid for by the ratepayers. Once again, there is no risk borne by the shareholders from the sale of the asset.
28. Land is not depreciated, so the shareholder receives no depreciation payments in rates. However, the entire cost of the land is put into ratebase and the shareholder receives a return on that amount for as long as the land is in ratebase.
29. The carrying costs for the land, such as maintenance, insurance, taxes, fees, and interest payments, are still paid in rates. Further, in the unlikely event that the land is sold at a loss, the ratepayer usually must cover the loss in rates. Once again, there is no financial risk borne by the shareholder.
30. In the case of monopoly regulation, it is often argued that if the gain from the sale of an asset is not given to the shareholder, this will suppress future investment. This conclusion is not supported by microeconomic theory. Because investment is not influenced by fixed costs, it is also not limited by the potential to shareholders of one-time benefits. Rather investment is influenced by the opportunity to earn profit on an ongoing basis.
31. Just as fixed costs do not affect investment, fixed benefits are equally irrelevant to the investment decision of the firm.
32. Fixed benefits such as the gain from the sale of an asset are also not part of the investment decision process. The magnitude of the gain is determined exogenously, by the dynamics of the asset market governing the sale.
33. Profit maximizing utility management is not considering the potential gain in value of the asset twenty years hence, but is looking at the increase in output and/or decrease in average cost represented by this new asset, in line with the utility's underlying requirement to provide service.
34. As the shareholders have not shouldered most of the risk of the investment, shareholders should be allowed to retain no more than 50%, but no less than 5% of the entire gain when the asset is sold.
35. The majority of public service commissions in other states treat gains on the sale of utility assets on a case-by-case basis.
36. The most common rationales cited by other states for allocating the gain were whether the asset had been in ratebase, the existence of judicial or commission precedent, and who bore the financial risk of the investment.
37. The relative burden of financial risk has been often used by this Commission when deciding the appropriate allocation of the gain from sale.
38. In D.85-11-018, we pointed to Democratic Central Committee etc. v. Washington Metropolitan Area Transit Commission, 485 F.2d 786 (D.C. Cir., 1973) as a leading case using the risk theory of allocations.
39. 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.
Therefore, IT IS ORDERED that:
1. A rulemaking is instituted on the Commission's own motion to set policies applicable to gains on sale for electric, gas, telecommunications and water utilities.
2. Respondents are all investor owned gas and electric utilities and incumbent local exchange carriers with at least $100 million in annual revenues. Respondents also include all Class A water utilities. All other investor owned gas and electric utilities, incumbent local exchange carriers and Class B, C and D water utilities, in addition to the named respondents, will be bound by the rules we adopt in this proceeding regardless of whether they are named respondents. Thus, if these non-respondent utilities wish to affect the outcome of this proceeding, they should participate in the proceeding regardless of whether they are named as respondents.
3. The Executive Director shall cause the Order Instituting Rulemaking (OIR) to be served on Respondents, and the parties to the following existing Commission proceedings: Rulemaking (R.) 01-10-024, Application (A.) 00-11-038, R.01-09-001/Investigation (I.) 01-09-002, I.98-03-013, R.04-01-025.
4. Any person or representative of an entity interested in monitoring or participating in the rulemaking shall send a request to the Commission's Process Office, 505 Van Ness Avenue, San Francisco, 94102 or e-mail ALJ_Process@cpuc.ca.gov., asking that his or her name be placed on the service list, or appear at a prehearing conference and fill out a yellow appearance form.
5. The category of this rulemaking is preliminarily determined to be "quasi-legislative" as that term is defined in Rule 5(d) of the Commission's Rules of Practice and Procedure.
6. Any person filing a response to the OIR shall state in the response any objections to the Order regarding the category, need for hearing, and preliminary scoping memo. At or after the prehearing conference if one is held, the assigned Commissioner will rule on the category, need for hearing and scoping memo.
7. Respondents shall and interested parties may file and serve comments on the issues identified in this OIR no later than 30 days from the effective date of this Order.
8. We delegate authority to the Assigned Commissioner and Administrative Law Judge to set a prehearing conference, or more than one, as approprieate in this proceeding.
9. Respondents and interested parties may file and serve reply comments no later than 15 days after the filing of comments.
10. All parties shall abide by the electronic service protocols attached as Appendix A hereto.
11. This order is effective today.
Dated September 2, 2004, at San Francisco, California.
MICHAEL R. PEEVEY
President
CARL W. WOOD
LORETTA M. LYNCH
GEOFFREY F. BROWN
SUSAN P. KENNEDY
Commissioners
I reserve the right to file a concurrence
/s/ SUSAN P. KENNEDY
Commissioner
APPENDIX A
ELECTRONIC SERVICE PROTOCOLS
(Page 1)
Party Status in Commission Proceedings
These electronic service protocols are applicable to all "appearances." In accordance with Commission practice, by entering an appearance at a prehearing conference or by other appropriate means, an interested party or protestant gains "party" status. A party to a Commission proceeding has certain rights that non-parties (those in "state service" and "information only" service categories) do not have. For example, a party has the right to participate in evidentiary hearings, file comments on a proposed decision, and appeal a final decision. A party also has the ability to consent to waive or reduce a comment period, and to challenge the assignment of an Administrative Law Judge (ALJ). Non-parties do not have these rights, even though they are included on the service list for the proceeding and receive copies of some or all documents.
Service of Documents by Electronic Mail
For the purposes of this proceeding, all appearances shall serve documents by electronic mail, and in turn, shall accept service by electronic mail.
Usual Commission practice requires appearances to serve documents not only on all other appearances but also on all non-parties in the state service category of the service list. For the purposes of this proceeding, appearances shall serve the information only category as well since electronic service minimizes the financial burden that broader service might otherwise entail.
If a document, including attachments, exceeds 75 pages, parties may serve a Notice of Availability in lieu of all or part of the document, in accordance with Rule 2.3(c) of the Commission's Rules of Practice and Procedure.
Filing of Documents
These electronic service protocols govern service of documents only, and do not change the rules regarding the tendering of documents for filing. Documents for filing must be tendered in paper form, as described in Rule 2, et seq., of the Commission's Rules of Practice and Procedure. Moreover, all filings shall be served in hard copy (as well as e-mail) on the assigned ALJ.
Attachment A
ELECTRONIC SERVICE PROTOCOLS
(Page 2)
As an aid to review of documents served electronically, appearances should follow these procedures:
1. Merge into a single electronic file the entire document to be served (e.g. title page, table of contents, text, attachments, service list).
2. Attach the document file to an electronic note.
3. In the subject line of the note, identify the proceeding number; the party sending the document; and the abbreviated title of the document.
4. Within the body of the note, identify the word processing program used to create the document. (Commission experience indicates that most recipients can open readily documents sent in Microsoft Word or PDF formats.
If the electronic mail is returned to the sender, or the recipient informs the sender of an inability to open the document, the sender shall immediately arrange for alternative service (paper mail shall be the default, unless another means is mutually agreed upon).
Obtaining Up-to-Date Electronic Mail Addresses
The current service lists for active proceedings are available on the Commission's web page, www.cpuc.ca.gov. To obtain an up-to-date service list of e-mail addresses:
1. Choose "Proceedings" then "Service Lists."
· Scroll through the "Index of Service Lists" to the number for this proceeding.
Attachment A
ELECTRONIC SERVICE PROTOCOLS
(Page 3)
· To view and copy the electronic addresses for a service list, download the comma-delimited file, and copy the column containing the electronic addresses.
The Commission's Process Office periodically updates service lists to correct errors or to make changes at the request of parties and non-parties on the list. Appearances should copy the current service list from the web page (or obtain paper copy from the Process Office) before serving a document.
Pagination Discrepancies in Documents Served Electronically
Differences among word-processing software can cause pagination differences between documents served electronically and print outs of the original. (If documents are served electronically in PDF format, these differences do not occur.) For the purposes of reference and/or citation in cross-examination and briefing, all parties should use the pagination found in the original document.
(END OF APPENDIX A)
APPENDIX B
List of Cases in Which Gain on Sale Question
Deferred to This Proceeding
D.03-12-056
D.03-03-008
D.02-10-022
D.02-09-024
D.02-09-027
D.02-07-027
D.02-07-026
D.02-04-005
(END OF APPENDIX B)
