Background

SCE seeks Commission authorization under Pub. Util. Code § 851 to lease to Commerce Club a 22.2-acre site located on a portion of SCE's Laguna Bell-Mesa transmission right of way in City of Commerce. The right of way is part of the Laguna Bell-Mesa 220 kilovolt system and includes Commission-jurisdictional facilities.

Portions of the site have been licensed under three separate license agreements to Commerce Club since 1987 for vehicle parking, horticultural use, and a landscape and beautification area in support of Commerce Club's casino and restaurant. Commerce Club recently expanded its gaming and restaurant area and constructed a 200-room hotel on nearby property it owns, and now seeks the security of a long-term lease for the parking lot on SCE's site. SCE would continue to own and operate its transmission and distribution facilities, and would retain unobstructed access to the site. Revenue from the lease would be shared with SCE's ratepayers as described in the Revenue Treatment section below.

On June 22, 2001 SCE and Commerce Club executed an option agreement fully defining the terms of the proposed lease and giving Commerce Club 30 days after the Commission's approval to either accept or reject the lease together with any conditions the Commission may impose.

A. Lease Terms

The initial term of the lease is five years commencing on the date of Commerce Club's acceptance, and Commerce Club may renew it for up to nine additional five-year terms. The base rent is $336,000 for the first year and $352,800 for each of the next four years. The base rent is to be increased by 5% on the first day of each five-year renewal and stays at that level for the remainder of that five year renewal term. If Commerce Club's use of the site changes, the base rent may be adjusted upward, but not downward, to reflect the new fair rent value for that use. Commerce Club is to pay all real property taxes, personal property taxes, general and special assessments and other charges assessed against the property and improvements, other than those assessed against SCE-owned equipment or improvements.

Terms of the lease provide that Commerce Club's activities must not interfere with SCE's operations or facilities on the site, it may not allow any hazardous substances on the site, and it must maintain minimum specified vertical and horizontal clearances from SCE's towers, poles, pole anchors, and overhead conductors. Commerce Club would be required to maintain workers' compensation and insurance of various types at specified levels for itself and its contractors and subcontractors, and to defend and indemnify SCE against all liability and damage claims except those caused by SCE's own negligence or willful misconduct. Commerce Club will be responsible for obtaining any permits or zoning changes that might be required for its intended use of the property, and SCE retains the right to approve any future construction. Commerce Club represents that its use will continue in a manner consistent with the site's present uses, and that it does not contemplate changes after the lease is approved. SCE retains the right to enter the property for purposes of operating, maintaining, constructing or reconstructing its facilities; the right to condemnation of all or part of the leasehold through its exercise of eminent domain should that become necessary; and additional rights in case of emergencies.

B. Determination of Best Secondary Use

The primary use of facilities located on the site is the transmission and distribution of electricity in and around City of Commerce. SCE's above- and underground lines on and crossing the site, and their associated restrictions and height clearances, limit the potential secondary uses. SCE states that its objective has been to select secondary uses for its property that provide the highest revenue consistent with its utility safety and reliability obligations, and that it has determined that the Commerce Club project offers that highest potential revenue. To evaluate the rental value of this particular site, SCE analyzed the rent paid for comparable facilities in each of the three different land use categories involved: vehicle parking, horticulture, and landscaping. SCE believes that the rent it will receive falls within the acceptable market range and is in line with revenues it receives in numerous other, similar Commission-approved transactions.

C. Lessee Selection

SCE states that it selected Commerce Club because of Commerce Club's financial position, the background of its executive officers, and its ability to pay the highest rental rate for the site. According to SCE, Commerce Club has been in operation since 1982 and is presently the largest card club in the state. It occupies a 141,000 square foot facility with over 200 card tables, three restaurants, a bar, a gift shop, valet parking, and two banquet/tournament/ special event ballrooms, and operates 24 hours a day, 365 days a year. Its recent expansion included construction of the 200-room Commerce Club Crowne Plaza Hotel. The application does not describe the background of Commerce Club's executive officers or explain how it related to SCE's selection of Commerce Club as the lessee.

D. CEQA Considerations

In reviewing the application, we note that construction of the vehicle parking lot, horticultural nursery and landscaped beautification area took place under three license agreements Commerce Club entered into with SCE in 1987. SCE contends that converting the licenses to a lease does not require the Commission to review the proposed transaction for compliance with the California Environmental Quality Act (CEQA, Public Resources Code Section 21000 et seq.) because the current use was and is permitted by right under City of Commerce's Zoning Ordinance and no new construction is contemplated. As additional support, SCE filed two supplements to the application. The first supplement confirmed City of Commerce's position that it has no discretionary authority in this matter and therefore no CEQA action on its part would be required. The second supplement provided Commerce Club's confirmation that it will continue its present uses of the site and contemplates no additional changes to the property should the Commission authorize the lease.

First, the fact that a local authority has no discretionary approval and CEQA review for an activity does not eliminate the Commission's responsibility to consider CEQA when, as here, there is a discretionary approval required by this agency.

Second, we have cautioned applicants in recent Commission decisions seeking approval of license to lease conversions that General Order (GO) 69-C cannot reasonably be read to allow utilities to bifurcate their transactions so that they would perform construction under an agreement not subject to Commission review by virtue of GO 69-C, and then, after the facilities are installed, seek approval of the lease arrangements for those facilities. GO 69-C allows utilities to enter agreements without Commission approval only for "limited uses." We have specifically noted that we will deny applications to convert GO 69-C agreements to lease agreements where the structure of those transactions was designed to circumvent the advance approval requirements of Pub. Util. Code § 851 and the associated CEQA review requirement.¹ In this instance, however, the fact that these three license agreements have been in effect since 1987 leads us to believe that this particular application and lease agreement were not part of a design to circumvent the advance approval requirements of § 851 and CEQA review.

SCE's and Commerce Club's representations in the application and its two supplements make clear that neither construction nor any change to the current use of the lease site is contemplated as a result of our approval here. Under the facts SCE and Commerce Club have presented, it can be seen with certainty that no significant effect on the environment could result from our granting the authorization. Accordingly, the proposed transaction qualifies for an exemption from CEQA pursuant to Section 15061(b)(3) of the CEQA guidelines. We conclude, therefore, that no environmental review by the Commission is required.

E. Revenue Treatment

All revenues from the proposed lease will be treated as Other Operating Revenue (OOR). In D.99-09-070, the Commission adopted a gross revenue sharing mechanism for certain of SCE's operating revenues. The sharing mechanism applies to OOR, except for revenues that (1) derive from tariffs, fees or charges established by the Commission or by the Federal Energy Regulatory Commission; (2) are subject to other established ratemaking procedures or mechanisms; or (3) are subject to the Demand-Side Management Balancing Account.

Under the sharing mechanism, applicable gross revenues recorded from non-tariffed products and services like the proposed lease here are to be split between shareholders and ratepayers after the Commission-adopted annual threshold level of OOR has been met. For those non-tariffed products and services deemed "passive" by the Commission, the revenues in excess of the annual threshold are split between shareholders and ratepayers on a 70/30 basis. The lease proposed here is "passive" for sharing purposes.²