III. Discussion

We have four tasks in evaluating Sierra's application. First, we must determine whether the sale is lawful given the general ban on sale by utilities of electric generation assets. Second, we must evaluate whether the sale is in the public interest pursuant to Pub. Util. Code § 851. Third, we must determine whether the project will have an adverse environmental impact. Finally, we must determine whether Sierra's proposed ratemaking treatment for the sale proceeds is appropriate. We analyze each issue below.

A. May Sierra Sell Generation Assets?

There is no controversy over Sierra's ability to sell the plants, since there is a statute specifically exempting the four plants at issue from the general Pub. Util. Code § 377 ban on utility sale of generation assets. Thus, Sierra may legally sell the Farad, Verdi, Fleish and Washoe plants pursuant to Pub. Util. Code § 377.1.

B. Is the Sale in the Public Interest?

Sierra seeks an exemption from the requirements of § 851 "based on the fact that the transfer of the hydroelectric plants is in the public interest."⁹ As we found in D.03-02-022,¹⁰ involving the sale of the other plant subject to § 377.1, § 851 applies to this case, so an exemption is not appropriate. Sierra's sale must satisfy the requirements of § 851 in order to be approved.

Section 851 states in part that no public utility "shall sell, lease, . . . or otherwise dispose of or encumber the whole or any part of . . . property necessary or useful in the performance of its duties to the public, . . . without first having secured from the Commission an order authorizing it to do so." As an integral part of the Commission's decision-making process in reviewing a § 851 application the Commission may "take such action, as a condition to the transfer, as the public interest may require."

In D.03-02-022, we found that prior to allowing a sale of electric generating plants, we must find that "the . . . facility[y] is no longer used and useful as defined in § 851."¹¹ In that case, we found this criterion was met: "The prepared testimony in this proceeding shows that the . . . facility is not critical to system reliability. This is an old plant, its output is small and it is run-of-the-river, which means that it can only generate power when there is sufficient water flow."¹²

Here, Sierra claims the sale is in the public interest for two reasons. First, it states that it has sufficient resources to continue serving the electricity needs of its California customers without the output from the four plants, which all date from the turn of the 20^th century. Indeed, according to Sierra, since the plants "presumably will continue operation," there will be no impact of the sale of the plants on system reliability.¹³ However, Sierra's testimony also states that, "entry into effect [sic] of the TROA will reduce the amount of power generated by these hydroelectric facilities."¹⁴

Nonetheless, we have no evidence to counter Sierra Pacific's assertion that it will retain sufficient electric capacity to serve the needs of its customers. Further, we agree with Sierra that the electricity the four run-of-the-river plants generate is de minimis and that loss or diminution of this output will not have an adverse impact on Sierra's ability to serve the public. Thus, this factor militates in favor of granting the application.

Second, Sierra asserts that the sale is part of a much larger, and essential, reorganization of the water resources in the Lake Tahoe and Truckee River areas that ultimately will preserve the resources while protecting the rights of all involved:

Sierra believes that the public interest is necessitated [sic] by the operational interrelationship of the water rights for municipal supply and the water rights for hydroelectric generation as well as the need to settle all outstanding issues between the United States, the Pyramid Lake Tribe, California, Nevada and the purveyor of water in the Truckee Meadows relating to the operation of the Truckee River reservoirs known at [sic] the Negotiated Settlement and the Truckee River Operating Agreement (TROA). . . .¹⁵

We do not have an adequate record before us to determine whether the sale Sierra proposes is integral to the TROA, or whether the TROA itself is in the public interest. Sierra cites many obstacles to ultimate adoption of the TROA in its testimony. In our view, we are not equipped to determine whether overall resolution of water disputes in the Tahoe and Truckee River areas, as embodied in the TROA, is in the public interest or supports granting this application.

Thus, we have one ground on which to grant this application - the evidence that the sale will not impair Sierra's ability to provide electricity to its customers and therefore that the plants are not critical to system reliability. While the evidence could be stronger, based on the record before us, we find that the sale of the plants is in the public interest and therefore satisfies the requirements of Pub. Util. Code § 851.

We also required in D.03-02-022 that the applicant demonstrate that it had permission from other regulators with jurisdiction over the plants. Here, three of the plants are located in Nevada. According to Sierra, "the Public Utilities Commission of Nevada (PUCN) approved the sale of Sierra's water business assets to TMWA including the hydroelectric plants and associated water rights, on April 27, 2001, in Docket No. [01-1044.]"¹⁶ We have examined the PUCN's April 27, 2001, decision and agree with Sierra that the PUCN has approved the Nevada aspects of this transaction.¹⁷

Thus, the sale satisfies the requirement of § 851.

C. Will the Sale Cause Adverse Environmental Impact?

On June 9, 2004, the Commission issued a Notice of Intent to Adopt a Negative Declaration pursuant to the California Environmental Quality Act (CEQA), and invited public comment on the accompanying Initial Study and Negative Declaration (ISND). Under CEQA, the Commission must prepare an Initial Study for discretionary projects such as Sierra's proposed plant sale to determine whether the project may have significant adverse effect on the environment. If the Initial Study does not reveal substantial evidence of such an effect, or if the potential effect can be reduced to a level of insignificance thorough project revisions, the Commission may adopt a Negative Declaration.

No party objected to adoption of the Negative Declaration. On July 19, 2004, the State Office of Planning and Research (OPR), which acts as a clearinghouse for CEQA documents, notified us that the Commission had complied with clearinghouse requirements and that no state agencies submitted comments on the ISND.

Thus, on August 6, 2004, the Commission issued a Final Negative Declaration finding that Sierra's project would have no impacts in the areas CEQA requires be analyzed: aesthetics, agricultural resources, air quality, biological resources, cultural resources, geology and soils, hazards and hazardous materials, hydrology and water quality, land use planning, mineral resources, noise, population and housing, recreation, transportation and traffic, or utilities and service systems.

In accordance with the Final Negative Declaration, we find that sale of the plants will not cause adverse environmental impact.

D. Is Sierra's Ratemaking Treatment Appropriate?

The final issue in this proceeding relates to how Sierra should account for the proceeds from the sale. As noted, the sales price is $8 million. Sierra states that as a result of the sale, Sierra's California customers will receive a decrease in revenue requirement of $12,000, or 0.02%. According to Sierra, this decrease will occur because of the removal of the plants and associated depreciation from rate base; removal of the hydro related expenses; increase in fuel and purchased power costs; and amortization of the gain associated with the sale over three years.

Sierra does not adequately detail its proposed allocation of the gain on sale. We have just opened a Rulemaking to address the appropriate allocation of gains on sale of utility property, R.04-09-003. In light of the new Rulemaking, we defer a decision on this topic until Sierra has properly documented the allocation and we have a resolution in R.04-09-003 of the appropriate treatment of gains on sale.

We will close Sierra's application at this time. Sierra should hold the gain on sale in a memorandum account for the time being. When we issue a decision in R.04-09-003, Sierra shall file an Advice Letter, and serve it on the service list for R.04-09-003, setting forth its proposed allocation in detail, and proposing an allocation consistent with the decision.