5. Construction of State Grant-Funded Plant

Projects funded by state grants may involve extensive planning and require several years to complete. We expect funding agencies will adopt timing rules specific to the grants they administer.¹⁴ However, in the event construction or study completion time limits are not established by the funding agency, then the following provisions are reasonable and shall apply: (1) construction of the project must start within one year after execution of the funding agreement; (2) the project shall conclude within three years after execution of the funding agreement; (3) utilities must seek Commission approval for extensions of time limits at least two months prior to the expiration of those limits or risk loss of undelivered funding; and (4) extension requests may be submitted by advice letter to the Commission's Water Division Director, who shall prepare a resolution for the Commission's consideration.

All parties generally agree that construction of plant using grant funds should be put out for bid, with some flexibility allowed on the minimum number of bids, the criteria for awarding bids, and the possibility of sole source contracts under special circumstances. Parties also recommend that affiliate companies be allowed to bid if the process is in compliance with the Commission's affiliate rules. While our affiliate transaction rules are sufficient for other transactions, the situation here is unique. Affiliate companies by definition share the same shareholders with the utility and, therefore, under the objectives we have set in this OIR, cannot earn a profit from state grant funds. We do not expect a utility affiliate to bid on a contract if it is precluded from earning a profit; therefore, we shall exclude affiliate transactions on projects involving state grant funds.

In summary, we adopt a rule requiring utilities to utilize a competitive bidding process when awarding contracts for the construction of state grant-funded projects, with the following criteria:

- A minimum of three competitive bids shall be required unless justification is provided showing why the minimum could not be met;

- If the utility does not choose the lowest bid, it must provide a detailed justification explaining why it chose not to accept the lowest bid;

- Utilities should be allowed to enter sole source contracts under special circumstances. Utilities need to seek by advice letter filing a Commission resolution granting a waiver for sole source contracts;

- Affiliate companies are not allowed to participate.

Next, we address the OIR's proposed rule that utilities may not use grant funds for work done prior to the execution of the funding agreement. CWA urges the Commission not to adopt the proposed rule because it may conflict with rules adopted by the funding agencies. ORA urges the Commission to retain the rule in order to avoid a potential windfall to the utility based on the lag time between a general rate case effective date and when the Proposition 50 funds are finally approved. Based on these comments, we find it reasonable to adopt a rule that utilities may not use grant funds for work done prior to the execution of the funding agreement unless the funding agency has authorized this use and the Commission has reviewed and approved the ratemaking treatment.

¹⁴ DHS has adopted specific rules for Proposition 50 grants.