Conclusions of Law
1. Pursuant to Article XII, Section 6 of the California Constitution, the Public Utilities Code statutes, and our own adopted rules and regulations, the Commission prescribes all accounting and ratemaking practices for investor-owned utilities.
2. We should adopt rules that govern the accounting and ratemaking treatment for state grant-funded plant that ensure that utilities and their shareholders will not be able to profit in any way through the receipt of public funds.
3. The rules described in the foregoing Opinion and Findings of Fact, and set forth in Appendix A, should be adopted.
4. This proceeding should be closed.
IT IS ORDERED:
1. The rules attached in Appendix A are adopted.
2. Rulemaking 04-09-002 is closed.
This order is effective today.
Dated March 2, 2006, at San Francisco, California.
MICHAEL R. PEEVEY
President
GEOFFREY F. BROWN
DIAN M. GRUENEICH
JOHN A. BOHN
RACHELLE B. CHONG
Commissioners
RULES FOR THE ACCOUNTING OF STATE GRANT FUNDS
These rules shall apply to all transactions involving state grant funds.
1. No return shall be earned by Commission-regulated water utilities (Utilities) on grant-funded plant.
2. No gain shall be recovered by utilities on the disposition of Proposition 50 grant-funded plant.
3. When government-provided Grant Funds are received from the funding agency, the utility must place these funds in a separate account that is restricted to government grant funds only. On the books of the company, it shall record the funds as a Debit to Account 121-3 - Cash-Miscellaneous Special Deposits and a Credit to Account 266 - Publicly Funded Grant Plant. As the grant funded plant is being constructed, the utility shall record those dollars expended as a Debit to Account 100-3 - Construction Work in Progress (CWIP) and a Credit to Account 121-3 - Cash-Miscellaneous Special Deposits. When the authorized plant (authorized by the California Department of Health Services (DHS), the Department of Water Resources (DWR) or another funding agency) has been constructed, a second set of entries shall be recorded as a Debit to Account 100-1 - Utility Plant in Service and a Credit to Account 121-3 - Cash-Miscellaneous Special Deposits. Account 266 shall follow the following rules:
3.1 This account shall include only publicly funded grants.
3.2 The records supporting the entries to this account must be so kept that the utility can furnish information as to the purpose of each grant, and shall be segregated between depreciable and non-depreciable property.
3.3 Depreciation accrued on the depreciable portion of properties included in this account shall be charged to this account rather than to Account 503, Depreciation, the charges to this account to continue until such time as the balance in this account applicable to such properties has been completely amortized. (See Utility Plant Instruction 3.F.23) The balance in the account applicable to non-depreciable property shall remain unchanged until such time as the property is sold or otherwise retired. At time of retirement of non-depreciable property, which was acquired by grant funds, the costs thereof shall be credited to the appropriate plant account and charged to this account in order to eliminate any credit balance in the grant account applicable thereto.
3.4 It is intended under the provisions contained in the preceding paragraph that the credit balance in the account will be written off over a period equal to the actual service life of the property involved. The net salvage realized on the retirement of grant-funded property shall be recorded as a credit to Account 250, Reserve for Depreciation of Utility Plant.
4. Operating Expenses, Administrative and General Expenses, and Taxes associated with grant-funded plant, but not funded with grant funds, shall be allowed, if determined to be reasonable by this Commission. The reasonableness of these costs shall be determined in the general rate case that addresses the results of operations for the district these expenses occur in.
5. 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' revenue requirement.
6. 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.
7. 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 should not be amortized or included in this category as well as other non-depreciable property such as water rights.
8. 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.
9. 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:
- Construction of the project must start within one year after execution of the funding agreement;
- The project shall conclude within three years after execution of the funding agreement;
- 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
- Extension requests may be submitted by advice letter to the Commission's Water Division Director for processing as a Commission resolution.
10. Because they share the same shareholders, neither utilities nor their affiliate companies and their shareholders should be allowed to engineer or install the facilities for grant-funded projects.
11. Water utilities should use a competitive bidding process specified by the funding agency when awarding contracts for the construction of grant-funded projects.
12. 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:
- 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 must seek by advice letter filing a Commission resolution granting a waiver for sole source contracts;
- Affiliate companies are not allowed to participate.
13. 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.
14. These rules 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.
15. 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.
16. 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.24
17. When grant-funded plant is sold to a publicly-owned 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 utility.
18. 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 of the grant-funded asset to the original funding agency, or another designated state agency.
19. 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 responsible agency. For any portion of plant that is paid for by non-grant grant funds, the utility must obtain Commission approval in its general rate case or through separate application.
20. All utilities that receive state grant funds must provide the following information regarding its grant-funded plant in its Annual Report to the Commission: (1) Amount of grant funds received, (2) Amount of grant funds spent in the year covered by the Annual Report, and (3) Description of plant constructed with grant funds.
21. When the "fair market value" valuation of a district or total utility is difficult or impossible to perform without the grant-funded plant, the grant-funded plant must be deducted from the "fair market value" of the total utility that has been determined by the valuation. Since the value of the grant-funded plant in the valuation has most likely been inflated, the selling utility should inflate the depreciated book value of the grant-funded plant using the Handy Whitman index. This inflated value of grant-funded plant should be deducted from the "fair market value" of the utility. This "Adjusted Fair market Value" would then be used to determine the reasonable purchase price of the utility.
APPENDIX B
Summary of Prop 50 Grant Programs Open to Regulated Utilities
Funds Available for Each Chapter
Chapter 3 - Water Security, Approximately (Approx.) $50,000,000 Total (Ttl)
Grants range from $50,000 - $10,000,000
Chapter 4a1 - Small Community Water System Facilities, Approx. $14,000,000 Ttl
Grants range from $5,000 - $2,000,000
Chapter 4a2 - Contaminant Treatment & Removal, Approx. $14,000,000 Ttl
Grants range from $50,000 - $2,000,000
Chapter 4a3 - Community Water System Monitoring Facilities, Approx. $14,000,000 Ttl
Grants range from $5,000 - $2,000,000
Chapter 4a4 - Drinking Water Source Protection, Approx. $14,000,000 Ttl
Grants range from $50,000 - $2,000,000
Chapter 4a5 - Disinfection Byproduct Treatment Facilities,
Approx. $14,000,000 Ttl
Grants range from $50,000 - $2,000,000
Chapter 4b - Southern California Projects to Reduce Demand on Colorado River,
Approx. $260,000,000 Ttl
Grants range from $50,000 - $20,000,000
Chapter 6b - Contaminant Removal, Approx. $25,000,000 Ttl
Grants range from $50,000 - $5,000,000
Chapter 6c - UV & Ozone Disinfection, Approx. $25,000,000 Ttl
Grants range from $50,000 - $5,000,000
SOURCE: Prop 50 Pre-Application Instructions, Attachment A, Summary Table of Prop 50 Grant Programs, Department of Health Services
23 Utility Plant Instruction 3.F. "Utility plant contributed to the utility or constructed by it from contributions to it of cash or its equivalent shall be charged to the utility plant accounts at cost of construction. There shall be credited to the depreciation and amortization reserve accounts the estimated amount of depreciation and amortization applicable to the property at the time of this contribution to the utility. The difference between the amounts included in the utility plant account and the reserve accounts shall be credited to Account 265, Contributions in Aid of Construction."
24 For example, Utility A decides to sell one of its three districts (call it District X) to Utility B. District X includes Proposition 50 grant-funded plant with a depreciated value of $50,000. Valuation of the district shall not include the Proposition 50 grant-funded plant. Therefore, not only does Utility A not receive payment for the depreciated book value of the Proposition 50 grant-funded plant, it receives no gain on its disposition, either. Utility B must record the Proposition 50 grant-funded plant at the depreciated book value of the seller ($50,000) in Account 100-1 and Account 266. Since the selling utility did not receive payment for the Proposition 50 plant, it receives no gain or reimbursement for the book value of the Proposition 50 plant. Since Utility B records the Proposition 50 plant it has acquired in Account 266 at its depreciated book value, no return is earned by it.
