4. Ratemaking Treatment of Proceeds
Received From the City
The settlement proceeds that the City will pay to SCWC in exchange for the conveyance of SCWC's Charnock Basin water rights are comprised of two components. The first component is the value of 1,050 acre-feet of groundwater rights, estimated to be $3,675,000. The second settlement component is the value of Charnock Basin wellfield facilities (excluding the overlying real property). The parties are to obtain and exchange fair market value appraisals of these facilities and then seek to negotiate a mutually agreeable settlement value, or submit the valuation issue to binding arbitration. SCWC's appraisal of the facilities to be purchased is $2,750,000.
Both the payment for SCWC's water rights and the payment for the Charnock Basin facilities are to be made at the earlier of five years from the settlement date (by March 2007), or within a set time after the City obtains a final judgment or settlement of its contamination lawsuit against the PRPs.1
SCWC states that it will remove the book value of Charnock Basin facilities from rate base. The net book value of approximately 40 line items to be removed from rate base was $523,671 as of March 2003. SCWC expects to deduct the then-current net book value of these assets from the settlement proceeds, resulting in estimated net proceeds from the settlement of $5,901,329.2
4.1 Positions of the Parties
SCWC contends that its Basin water rights and facilities will at the time of sale no longer be necessary or useful because of the MTBE contamination and that, therefore, the estimated $5.9 million in net proceeds that it will receive from the City must be governed by the Water Utility Infrastructure Improvement Act, codified at Pub. Util. Code §§ 789-790.1. In pertinent part, § 790 provides:
790. (a) Whenever a water corporation sells any real property that was at any time, but is no longer, necessary or useful in the performance of the water corporation's duties to the public, the water corporation shall invest the net proceeds, if any, including interest at the rate that the commission prescribes for memorandum accounts, from the sale in water system infrastructure, plant, facilities, and properties that are necessary or useful in the performance of its duties to the public. For purposes of tracking the net proceeds and their investment, the water corporation shall maintain records necessary to document the investment of the net proceeds pursuant to this article. The amount of the net proceeds shall be a water corporation's primary source of capital for investment in utility infrastructure, plant, facilities, and properties that are necessary or useful in the performance of the water corporation's duties in providing water utility service to the public.
(b) All water utility infrastructure, plant, facilities, and properties constructed or acquired by, and used and useful to, a water corporation by investment pursuant to subdivision (a) shall be included among the water corporation's other utility property upon which the commission authorizes the water corporation the opportunity to earn a reasonable return.
(c) This article shall apply to the investment of the net proceeds referred to in subdivision (a) for a period of 8 years from the end of the calendar year in which the water corporation receives the net proceeds. The balance of any net proceeds and interest thereon that is not invested after the eight-year period shall be allocated solely to ratepayers.
SCWC contends that its water rights in the Basin are a form of real property, citing Smith v. Municipal Court (1988) 202 Cal.App.3d 685, 689 ["[w]ater in its natural state is a part of the land, and therefore real property"] and 62 Cal.Jur.3d Water § 1, p. 25 (3d ed. 2000) ["Water in its natural state...is part of the land, to be considered as real property"]. According to SCWC, its water rights in the Charnock Basin are fully vested real property rights, the sale of which triggers the requirements of § 790.
SCWC has submitted a list of 10 infrastructure projects that it intends to finance through the sale proceeds, but it notes that since the amount and timing of the settlement payment from the City is unknown at this time, the list of projects may change when the proceeds are actually received.
ORA's witness testified at hearing that SCWC's Basin facilities are currently in rate base (and thus, by definition, remain necessary or useful in utility operation), and that after cleanup Charnock Basin groundwater could be used in the future as a source of lower cost water. Under this reasoning, § 790 would not apply to all or part of the transaction with the City, and the Commission would be free to find that proceeds of the sale should go to ratepayers as a rebate. On brief, ORA maintains that even if § 790 applies, the Commission may book proceeds of the sale at zero dollars for ratemaking purposes, with any investment of proceeds treated as contributions to capital rather than new shareholder investments.
ORA cites the Commission decision in Re Great Oaks Water Company (1993) 51 CPUC2d 366. There, the Commission approved a settlement between a water company and the Commission advocacy branch in which $3.2 million in contamination settlement funds was booked to a memorandum account for infrastructure improvements, with 50% treated as contributions and 50% added to rate base. The Commission commented at the time that the ratemaking treatment of excess contamination payments was one of first impression, and that no statutory provision at that time governed disposition of such funds.
4.2 Discussion of City Settlement Proceeds
Testimony shows that SCWC has relied solely on purchased water for the Culver City system for several years. In the early 1990s, SCWC began investing in and upgrading its Basin groundwater production facilities. By 1994, SCWC had refurbished its two Basin groundwater wells and constructed a wellhead treatment system to remove impurities from the groundwater and make greater use of that water in SCWC's water mix. Before those facilities could be used in a meaningful way, however, the MTBE contamination was discovered in 1996 and all groundwater production from the Basin was terminated. MTBE is considered a potential human carcinogen when ingested.
SCWC contends §790 is controlling because it believes the Basin water rights and facilities will no longer be necessary and useful due to MTBE contamination. SCWC's water quality expert testified that MTBE is especially problematic because once introduced it is highly water-soluble and spreads rapidly through the water supply. SCWC's expert speculated that eliminating the MTBE and restoring Basin water to potable standards may never occur, and noted that at best, remediation is likely to be many years away.
SCWC's speculation concerning whether the basin water will be sufficiently remediated does not establish that these facilities are and will not be necessary and useful in utility operation. The mere possibility of no future use does not establish that the asset is not necessary and useful. Indeed, the City's willingness to pay for SCWC's water rights and facilities, and the fact that the Basin facilities are currently in rate base establishes a priori, that the assets are necessary and useful. SCWC's additional contention that remediation may be several years off is similarly unpersuasive. In effect, SCWC argues that §790 requires us to ignore the prospective utility of the asset. Neither the text of §790 nor any case cited by SCWC support such a narrow interpretation. To the contrary, in as much as §790 defines "necessary or useful" in the context of "the water corporation's duties to the public," and these duties include ensuring reliable and adequate service, §790 is better read as requiring a broad, forward looking review. Consistent with this interpretation, we find that §790 does not apply to SCWC's transaction with the City.3
1 Newspaper reports on November 22, 2003, indicated that settlement had been reached between the City and three oil companies. The settlement requires court approval. 2 SCWC expects the total proceeds from its settlement with the City to be approximately $6,425,000, with an estimated $3,675,000 from the sale of groundwater rights and an estimated $2,750,000 from the sale of wellfield facilities. The book value of approximately 40 items to be removed from rate base would be $523,671. (See Ex. 9.) Thus, SCWC's current best estimate of the net settlement proceeds that will be available to be reinvested in Region II systems is $5,901,329. 3 ORA contends that the City's payment for assignment of SCWC's cause of action against the PRPs does not qualify for § 790 treatment because a cause of action does not constitute real property. Though we find on this record that the assignment of SCWC's damage claims is part and parcel of the sale of SCWC's water rights, because SCWC cannot transfer its water rights to the City and at the same time retain the ability to recover from the PRPs for damages to those water rights, because we find §790 inapplicable, we need not now address ORA's contention.
