3. Scope of Rulemaking

R.03-09-006, which initiated this proceeding, stated the Commission's broad interest in this rulemaking. The Commission stated its interest in "understanding of the construction contracting processes of the electric, natural gas, telecommunication and water utilities - the criteria by which utilities' contract awards are based, the overall magnitude of the utilities' annual construction contracts granted, the processes used by utilities to solicit and award construction contracts, and their policies regarding the execution of primary contracts and subcontractor agreements." The Commission also stated it would consider whether to adopt rules "to ensure that utility construction contracting practices are consistent with rules governing state and federal public works contracting practices."

The Commission currently does not impose specific requirements on jurisdictional utilities regarding their solicitation and awarding of bids for construction of utility facilities. However, state law imposes certain requirements on state entities bidding out public works projects, as well as on the prime and subcontractor bidders of such projects. The purpose of these requirements is to avoid the practice known as "bid shopping" or "bid peddling", which occurs when prime contractors ask, require or otherwise influence subcontractors to lower bids for subcontract work after the low bidder becomes known or the prime contract is awarded. In such situations, the government entity is, essentially, not getting what it paid for. To prevent such actions, California Public Contract Code Section 4100 requires that prime contractors provide detailed information to the public contracting entity, subject to a specific threshold subcontracting amount, about "any subcontractor who will perform work or labor or render service to the prime contractor" in connection with a public improvement project. It also prohibits successful prime contractors from substituting a person as a subcontractor in place of the subcontractor listed in the original bid, with certain exceptions. The Legislature noted in adopting these requirements that

"...the practices of bid shopping and bid peddling in connection with the construction, alteration, and repair of public improvements often results in poor quality of material and workmanship to the detriment of the public, deprive the public of the full benefits of fair competition among prime contractors and subcontractors, and lead to insolvencies, loss of wages to employees, and other evils." (California Public Contract Code Section 4101.)

R.03-09-006 also stated a concern with bidding processes known as "reverse auctions. Reverse auctions permit buying goods and services over the internet by contractors who submit continuing anonymous bids against one-another in real time in an effort to win the contract by bidding the lowest price.

R.03-09-006, which initiated this proceeding, stated a concern that "bid shopping and reverse auction processes may create a disparity between a project's costs and its value if costs are cut below the cost to the contractor during the bidding process, or if the primary contractor reduces project materials, labor or quality after a contract is awarded. In such situations, bid shopping can result in increased change orders, higher maintenance costs, and lower overall value to the project beneficiary. On the other hand, a reverse auction process also may provide certain benefits in the form of driving down prices for certain types of commercial commodities, and providing owners or contracting entities with an innovative means of soliciting bids." The impacts of reverse auctions and bid shopping by a utility may be to keep costs low and thereby benefit the utility's ratepayers. R.03-09-006 stated our concern, however that the impacts on "worker safety, product safety, product quality and timeliness of project completion all must be considered as well."

We therefore initiated this rulemaking to better understand bid shopping practices and gather information about our jurisdictional utilities' construction contracting practices. We directed jurisdictional utilities to provide certain information with the objective of determining whether to adopt new rules to ensure utility construction contracting processes provide the best outcome for California's utility customers. Specifically, we directed each utility respondent to file a report that answered the following questions.

1. What are the utility's construction contracting practices currently? Identify the processes used to solicit, consider and award construction contracts.

2. Do the utility's construction contracting practices include any form of bid shopping as described above? If so, please articulate the methods used.

3. Identify all construction contract awards by project and contract award amount for the last five years.

4. Explain the criteria by which the utility's contract awards are based.

5. Should the potential rules considered in this rulemaking apply to utilities that meet a certain threshold, such as utility size, or construction budget? If so, how should that threshold be defined, and at what level?

On the basis of these reports, the parties' comments and the testimony or declarations of several parties, we address each issue below¹.

As a threshold matter, we consider the argument of the utilities that SCDCL's proposals to adopt rules requiring PLAs and/or prevailing wages are outside the scope of the proceeding and untimely. We find the utilities' arguments unpersuasive for several reasons. First, the scope of this proceeding, as stated in R.03-09-006 is to "ensure that utility construction contracting practices are consistent with rules governing state and federal public works contracting practices." PLAs and prevailing wages are among those "state and federal public works contracting practices" that apply to construction projects. No party suggests otherwise. While the scoping memo in this proceeding referred specifically to "reverse auctions" and "bid shopping," it did not exclude from the scope of the proceeding any other practices that might promote contracting safety and efficiency or counsel the adoption of state and federal contracting practices for public works projects. Indeed, the scoping memo issued in this proceeding affirms the scope of the proceeding as including the issues identified in R.03-09-006 and provides that the assigned Commissioner may "modify the scope of issues following receipt and evaluation of additional information and testimony."

The parties in this proceeding filed opening comments in December 2003 and testimony thereafter in February 2004. In October 2004, SCDCL filed its proposal for the Commission to require PLAs and prevailing wages. The parties had two opportunities following that filing to respond to it, and many parties took advantage of the opportunity. Section 1708 provides that the Commission may take action "at any time, upon notice to the parties, and with opportunity to be heard..." Parties to this proceeding received due process by having both notice and opportunity to be heard. In this case, we believe the two rounds of comments comprise an adequate record. We do not perceive any need for hearings because no party disputes a significant factual matter related to the issues presented. The case-based evidence in this proceeding involves the submission of data and arguments regarding the potential effect of PLAs and prevailing wages on utility costs and services, or project completion and integrity. The evidence presented includes those studies submitted by SCDCL concerning the impacts of PLAs and prevailing wages in public works projects and for private projects where the use of PLAs was voluntary. No party has questioned the relevance of those studies or their veracity as a foundation for policy-making.

We do not agree with the utilities that SCDCL's comments are untimely. Those comments were served with the permission of the ALJ, who has discretion to accept any pleadings as long as doing so does not compromise the rights of other parties or otherwise prejudice the proceeding. Neither circumstance is present here. The Commission has discretion to manage its proceedings as it sees fit and we concur with the ALJ that acceptance of the SCDCL comments was appropriate in this case.

For all of the foregoing reasons, we find that the scope of this proceeding does not preclude us from considering whether to adopt rules governing PLAs and prevailing wages. No party disputes that reverse auctions and bid shopping are within the scope of this proceeding.