9. Ratemaking Treatment of Sale Proceeds
PG&E initially proposed that any gain or loss resulting from the sale should flow through the Transition Cost Balancing Account (TCBA). PG&E's application (A.00-05-035) was filed in May 2000, when the TCBA was the operative transition cost recovery mechanism governed by the rate controls mandated by Assembly Bill (AB) 1890. Because the TCBA no longer exits, PG&E proposes14 that the ratemaking treatment of the sale proceeds specified in A.00-05-035 should be altered as follows: net proceeds received from the sale of depreciable assets, not considered as an operating system, should be credited to the depreciation reserve, and any gain (or loss) on the sale of land (nondepreciable property) be recorded in a below-the-line account.15
PG&E initially proposed that any decommissioning accrual in excess of the actual decommissioning cost for the project would be credited to the TCBA. PG&E now proposes that with the elimination of the TCBA, any decommissioning accrual in excess of the recorded decommissioning cost should remain in the accumulated provision for depreciation, which reduces rate base and decommissioning accrual in future rate cases.
The Commission currently allocates gain on sale of a utility asset on a case-by-case basis. The Commission has relied on such factors as how long the asset was in ratebase, who bore the actual financial risk of the investment, how different allocations might affect various management and investor incentives, whether the asset is depreciable or nondepreciable, the type of asset sold, the circumstances leading to its sale, and judicial or Commission precedent.
In allocating gain on sale proceeds between the utilities and ratepayers, we should take into consideration that under the implicit compact enforced by this Commission, regulated utilities face few financial risks, and ratepayers cover almost all costs associated with the assets acquired by the utility. The corollary of limited shareholder risk is limited shareholder profit. The Public Utilities Code entitles a utility to charge its customers rates that cover its costs and are otherwise considered just and reasonable. Once the company prudently purchases an asset that is deemed needed for provision of the service, the shareholders' outlay is added to the utility's ratebase, and shareholders have the opportunity to earn a reasonable rate of return on that asset. All reasonable costs the utility bears are covered by the ratepayers, including a return of the investment through depreciation, maintenance, insurance, taxes, fees, administrative costs, and interest expense, and all other costs associated with that asset (often collectively called "carrying costs"). Furthermore, if the asset is taken out of service before it is fully depreciated, the undepreciated amount, if not covered by the asset sale price, is usually paid for by the ratepayers. Once again, there is little risk borne by shareholders from the sale of the asset when all costs related to the property are paid for by ratepayers.
Essentially, PG&E proposes that the $16.7 million sale proceeds be allocated $3.25 million to ratepayers and $13.45 million to shareholders. PG&E, apparently, justifies this allocation on the basis that the Uniform System of Accounts (USOA) treats depreciable and nondepreciable property differently. We are not persuaded that these accounting rules should determine the allocation of the gain on sale in this instance.16 Furthermore, we believe PG&E's proposal is inequitable to ratepayers who have borne much of the risks and all the costs associated with these assets since 1975. Since PG&E is selling the pipeline and land as a package (not divided into depreciable and nondepreciable property), there is no reason why the $16.7 million should not likewise be treated as a lump sum for the package. On balance, after weighing all the equities, we conclude that a reasonable allocation of the $16.7 million gain on the sale is a 50/50 split between ratepayers and shareholders, with the ratepayer portion applied as a permanent reduction to current rate base. However, today's decision is based on the specific facts of this case and should not be viewed as setting a precedent for the future treatment of gain on sale that is being considered in Order Instituting Rulemaking (R.) 04-09-003.
14 See First Amendment to A.00-05-035 and A.00-12-008 filed on May 6, 2004. 15 The purchase price payable by SPBPC to PG&E is $16.7 million pursuant to Section 2.5 of the Purchase Agreement, of which $13.45 million is allocated to Pump Station Assets and $3.25 million to Pipeline Assets. 16 For example see, Re. California Water Service Company, D.94-09-032, 56 CPUC2d 4, at 14, where the Commission, in allocating the gain on sale on 29 parcels of land on a 50/50 basis between ratepayers and shareholders, stated:- "Moreover, there is a good reason not to blindly follow the USOA accounting
rule for allocating proceeds of the sale of nondepreciable property. Notwithstanding the specificity with which the USOA governs the accounting practices of a water company, we stress that the purpose of a system of accounts is to predict the bookkeeping entries but not the ratemaking impact of a sale. The purpose of the
USOA is not to provide a methodology for allocating the gain on sale for the purpose of setting rates but to properly track the Commission-imposed allocation.
The Commission is not bound by accounting convention; it is free to pursue its
legislative duty to balance the interests of shareholders and consumers."
