Findings of Fact

1. Receipt of state grant funds by Commission-regulated water utilities will allow the utilities and their customers to benefit by providing cost-free funds for needed investments in water supply, treatment, and security.

2. The rules we adopt here are designed to preserve the public interest integrity of state grant funds by ensuring that investor-owned water utilities and their shareholders will not be able to profit in any way through the receipt of public funds, and that the public retains the benefit of public funding.

3. DHS criteria and guidelines require matching funds for Proposition 50 grants that are not for disadvantaged communities or small water systems.

4. Utilities must apply to the Commission, either in a general rate case or by separate filing, for authority to collect from their customers for the non-grant-funded investment and for approval of the financing it proposes for this investment.

5. Our existing account for CIAC differs from state grant-funded projects because CIAC is used to fund a utility plant project in its entirety, while state grant projects can be jointly funded by grant funds and utility-provided funds. It is important to separately track state grant funds.

6. There is a need for a clear audit trail between the utilities' fixed asset accounting system and the general ledger. Utilities should modify, as necessary, their work order tracking systems so that grant-funded projects can be reviewed and audited.

7. We should establish a new account, Account 266, titled "Publicly Funded Grant Plant" and limit its use to government grants. Account 266 should follow the existing format for Account 265 as it pertains to not being eligible for rate base recovery, records and depreciation.

8. When state grant funds are initially received from the funding agency, the water utility shall place these funds in a dedicated account.

9. Operating expenses, administrative and general expenses, and taxes associated with grant-funded plant, but not funded with grant funds, shall be allowed in the determination of rates, if determined to be reasonable by the Commission.

10. Any indirect benefits resulting from grant-funded plant such as reductions in operating expenses resulting from infrastructure improvements, must be projected as cost savings and imputed into the utilities' present base margin revenue requirement.

11. Unless the utility has received authorization from DHS or the funding agency, grant funds should not be spent on expenses. Grant funds that are expended for expenses authorized by DHS or another funding agency, must not be included in the determination of the Results of Operations and the forecast of future expenses in a general rate case. Once grant funds are no longer available and the utility is required to pay for these expenses out of its own funds, then these expenses shall be included in the Results of Operations and the forecast of future expenses in a general rate case.

12. Depreciation on grant-funded plant must be calculated using the existing methodology detailed in the Commission's Standard Practice U-4. Grant funds used to acquire land or other non-depreciable property such as water rights, may not be amortized or included in this category.

13. The utilities must deduct depreciation expenses for income tax purposes and flow through to their customers any benefits derived from the tax deduction in the most direct fashion possible.

14. In the event construction or study completion time limits are not established by the funding agency, then the following provisions are reasonable and should apply:

15. Because they share the same shareholders, neither utilities nor their parent and affiliate companies should be allowed to earn a profit on grant-funded projects. Therefore, parent and affiliate companies should not participate in construction of grant-funded plant.

16. Water utilities should use a competitive bidding process specified by the funding agency when awarding contracts for the construction of grant-funded projects.

17. In the event construction or study completion time limits are not established by the funding agency, then the following provisions are reasonable and should apply:

18. Water utilities may not use grant funds for work done prior to the execution of the grant funding agreement unless the funding agency has authorized this use. At the time of the utility's next general rate case, the Commission will review and determine the appropriate ratemaking treatment for the work performed prior to grant funding that was not authorized by the funding agency.

19. In order to ensure that the Commission has prior review and approval over all grant-funded plant transactions, water utilities shall notify the Director of the Water Division and the Director of the Division of Ratepayer Advocates 30 days prior to the disposition and encumbrance of grant-funded plant.

20. The rules we adopt here should apply to all tangible property funded with state grants. In determining the proceeds in each of the following types of sales, the cost of disposal shall be deducted from the amount received in arriving at the final amount received. In cases of intangible property, such as the intellectual property of a study, the Commission should individually review the matter in the utility's general rate case or, if requested, by separate application.

21. The following rule should apply to the transfer of an asset district, or total utility to another Commission-regulated water utility. If the asset to be transferred has been paid for with grant funds in whole or part, the transferring utility may not receive compensation for the portion of the asset that has been funded with grant funds, and the purchasing utility shall record a non-ratebase asset in Account 266. The non-grant portion of the asset, if any, should transfer at fair market value pursuant to Section 2720.

22. When grant-funded plant is sold to a public water provider that will deploy the asset to provide water service to the public, the public interest integrity of the grant is preserved, and the rules governing the transaction from the selling utility's position would be the same as if the sale were to a Commission-regulated utility.

23. When grant-funded assets are sold to an entity other than a utility or public water provider, such as private unregulated companies, or cities or counties exercising eminent domain powers for purposes other than acquiring a municipal water system, the public interest integrity of the grant is not preserved. In these instances, the appropriate treatment is for the buyer to pay fair market value and for the selling utility to remit all proceeds received from the sale to the original funding agency, or another designated state agency.

24. For plant wholly funded by a grant, as well as for the partially funded portion of a plant, the utility must notify the Director of the Water Division when the utility signs a letter of commitment with the state agency administering the fund and again upon completing the funding agreement execution with the funding agency. For any portion of plant that is paid for by non-grant funds, the utility must obtain Commission approval in its general rate case or through separate application.

25. Each utility that receives state grant funds should so state in its Annual Report to the Commission, with detail of the type, dollar value, and location of the plant constructed.

26. We should direct the Water Division to incorporate the development of draft rules governing government-funded loans in its next rulemaking regarding the regulation of privately-held water utilities.

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