Discussion

1. Treatment of Utilities in the Rent Control Record

The evidence establishes that Novato authorized individualized rent adjustments at Los Robles which resulted in the rent increases assessed in 1997 (for the 1996 petition year), 1998 (for the 1997 petition year), and 1999 (for the 1998 petition year) of $33.27, $42.46, and $54.32 per space per month, respectively. Hillsboro's 1999 petition for a rent increase in 2000 is pending but no decision has issued. In order to better grasp the parties' positions on the two issues remaining for resolution, we recount how utility income and expenses have been treated in Novato's rent control record. Though the underlying facts are undisputed, the parties differ over their significance.

We start by identifying the utility components and calculation of the 1995 base year NOI established for Los Robles, since that NOI multiplied by an inflation figure is the basis for rent adjustments in subsequent years. Hillsboro filed the income and expense data required to establish a base year NOI as part of its 1996 petition.⁶ Base year utility income exceeded utility expenses by $28,211. Therefore, this utility differential or "gap" of approximately $28,000 became the fair return yardstick in Hillsboro's 1996 and subsequent petitions.

As approved by Novato, Hillsboro's base year calculations included as utility income the income from all utility services except water, i.e. sewer, trash, and submetered gas and electricity. Water was excluded because it is provided with the rent, unlike sewer service and trash collection, which are billed to tenants on a pro rata basis as a separate line item on the rent bill. Hillsboro bills tenants for submetered gas and electricity in accordance with PG&E's applicable mobilehome park tariffs, GT and ET. The approved utility expenses for the base year included Hillsboro's costs for water, sewer, trash, and the master-meter gas and electricity bill.

Hillsboro's witness Wagner, whom it employs as the offsite property manager for Los Robles, testified that PG&E submits to Hillsboro, on a monthly basis, a single master-meter bill for all gas and electric usage at the mobilehome park. In other words, the tenants' individual usage and the common area usage (which includes streetlighting, the pool, and the clubhouse) is not differentiated or broken out in any way at the master-meter. Though it is not calculated on the bill, the volumetric difference, on a kilowatt-hour (kWh) basis, between the master-meter bill and the total of the submeter bills represents the common area usage. Hillsboro does not bill tenants directly for common area usage, however, but recovers these costs through the rent control process. Hillsboro does bill tenants for their submetered usage and, according to Wagner, each month Hillsboro's receipts from the submeter charges exceed the master-meter bill for total usage. This is not at all surprising, since in accordance with § 739.5, the tariffed master-meter rate provides the master-meter operator with a discount for operating and maintaining the submeter system.

What is the cause of the approximately $28,000 "gap" between base year utility income and expenses? Because the sewer and trash charges simply "pass through" to each tenant a pro rata share of the total amount the service providers bill Hillsboro, these items have no net effect on the NOI calculation. Hillsboro and Hambly agree that the remainder necessarily is attributable to either water costs or common area gas and electric costs, or both, but the rent petition lacks the detail required to determine the cause. Apparently, Hillsboro has not retained the records necessary to reconstruct the individual components of its utility expense total and was unable to obtain copies of its master-meter bill for that time period from PG&E. While Hillsboro challenges the tenants' estimate that the expense of common area usage is approximately 10% of the master-meter bill, Hillsboro has provided no alternative proxy for common area usage.

As described by Hambly's expert Baar, an urban planner, lawyer, and rent control consultant to cities and other rent control proponents, Novato's rent control ordinance operates as "... a preservation of prior net operating income levels with some kind of adjustment to them for inflation, et cetera". (Tr. 207.) Hillsboro has been authorized rent increases in the petition years because its NOI in each of those years has been less than the inflation-adjusted base year NOI. The rent control record indicates that rent increases have been partially attributable to reduced net utility income in the petition years (on average about $2,750 each year) compared to $28,000, approximately, of net utility income in the base year.

2. Problems with the NOI Formula

At evidentiary hearing, the issue of "whether" operation of the NOI formula in Novato's rent control ordinance is problematical became the issue of "how." Hillsboro's expert St. John, an economist and rent control consultant to owners, conceded that operation of the NOI formula adds an inflation figure to the master meter discount.⁷ The resulting excess in rents, according to St. John's calculations, are $1.34 per space per month for the 1996 petition year, $1.96 per space per month for 1997, and $2.82 per space per month for 1998.⁸ As a permanent solution, St. John proposed that the ordinance be amended to remove the discount from base year and petition year NOI calculations.

In his prepared rebuttal testimony, Baar commented:

When Dr. St. John's approach is used in applying Novato's fair return standard, the differential between the income and expenses in the base year is built into the fair net operating income that is defined as necessary for a fair return in all current years. If base year gas and electricity expenses are included in computing base year net operating income, as proposed by Dr. St. John, in the current year the parkowner would have a right to maintain all of the net operating income that was yielded by gas and electricity in the base year. (Ex. 24)

On cross-examination, Baar agreed that St. John's proposed solution would neutralize the effect of inflating the discount. But absent proof of the charges for the master-meter gas and electricity bill, he could not assess whether St. John's proposed adjustment would be adequate to achieve compliance with § 739.5.

Baar's point of view is shared by Hambly's witness Kirste, an actuary who assisted the Los Robles tenants, on a pro bono basis, at the rent control hearings on the 1998 petition year and is representing them on a subcommittee convened by the Novato city council to consider revisions of the rent control ordinance. Kirste prepared a series of calculations, referred to in the record as "sensitivity analyses", which purport to illustrate the impact on base year and petition year NOIs - and the resulting petition year rent adjustments -- of including utility income and expenses, or excluding them. Kirste admits that his calculations are not based on the inputs or final figures that the Novato rent control hearing officer approved, but rather on Hillsboro's unadjusted petitions. Moreover, some of the calculations include an allowance for common area gas and electricity usage (which Hambly concedes Hillsboro is entitled to recover), based on the tenants' assumptions that the volume of that usage is approximately 10% of the park total. While Kirste's calculations do not attempt to compute the refund owed the Los Robles tenants, what they show, as logic would expect, is that Los Robles rents would be lower if utility income and expenses were removed entirely from the NOI calculations. We have already seen that only sewer and trash are passed through to tenants on a pro rata basis and that submetered gas and electric usage is directly billed. Water, on the other hand, is included with rent; thus, any increase in water expenses in petition years is recovered through the NOI formula. This is the same way Hillsboro has recovered common area gas and electric charges, or, in Baar's words "usage that the residents are not billed for". (Tr. 213.)

Though their expose of the admittedly complex interaction of these two disparate regulatory regimes could be clearer, Hambly's witnesses have a point that the NOI formula, as it has been applied by Novato, yields a problematic measure of the gas and electric components of net utility income. Essentially, Novato has recognized submetered receipts as an allowed income item and subtracted, as an allowed expense item, the master-meter bill. As we have already seen, these two items do not cancel one another as do trash and sewer. On the other hand, their difference, on a dollar basis, does not provide an accurate measure of gas and electric common area usage, which is the only gas and electric usage expense not otherwise reimbursed. This is because the income component -- the submeter receipts -- represents only part of the total park usage and is a function of the volume of that usage x PG&E's tariffed residential rate. The expense component -- Hillsboro's master-meter bill - consists of total park usage, that is, both tenant and common area usage, all of which is charged on the master-meter bill at the lower, mobilehome master-meter discount rate. Pursuant to § 739.5(a), the master-meter discount provides the "differential to cover the reasonable average cost to master-meter customers of providing submeter service".

As noted previously, Rates, Charges, and Practices, which focuses on the submeter charges to tenants, clearly states that the master-meter discount is the park owner's only source for recovery of the costs of operation and maintenance of the submeter system. We are unable to determine on this record whether St. John's proposal (i.e., removing the value of inflation on the master-meter discount from past rent increases) is adequate to ensure fidelity to § 739.5. As Hambly's witnesses note, the master-meter discount is not an input in the NOI - rather, St. John's proposal calculates the value of the discount separately, and then backs it out of the authorized rent increases. Given proof that operation of Novato's rent control ordinance has resulted in no other prohibited increases in gas and electric utility costs, we think the expedient approach would be to order rent adjustments based on St. John's methodology, revised to include the correct, master-meter discount rate applicable in each year at issue. However, we lack that proof. Hillsboro argues, unpersuasively, that the failure of proof is Hambly's and requires dismissal of the compliant. Hillsboro confuses the burden of proof with the burden of production. Where the evidence necessary to establish a fact essential to a claim lies peculiarly within the knowledge and competence of one of the parties, that party has the burden of going forward with the evidence on the issue although it is not the party asserting the claim. (See Morris v. Williams (1967) 67 C. 2d 733, 760.) Hillsboro, the party which should have knowledge of the common area usage, has not produced the evidence necessary to substantiate St. John's theory, or a proxy for that evidence.

We conclude that rent refunds are warranted and will require that they be based on the same methodology we urge Novato to adopt going forward in order to disentangle CPUC utility rate setting jurisdiction and its own rent control jurisdiction, as it must. Submetered gas and utility receipts should be excluded as an item of gross income from both the base year and each petition year NOI. Likewise, operating expenses in all NOI calculations should be adjusted to exclude the total master-meter bill but include the amount that represents all common area usage, measured in kWhs and then multiplied by PG&E's master-meter rate. We think it inappropriate to assign any other rate to the common area usage since Hillsboro is billed at the discounted rate at present. Recalculation of PG&E's master-meter discount or its line extension allowances, which we discuss below, would require us to revisit this assessment. For those years in which Hillsboro is unable to document the master-meter bill charges necessary to calculate the volume of common area usage, we will accept the tenants' estimate of 10% as a proxy.

3. Questioned Expense Items

Hambly contests Novato's allowance of two kinds of utility expenses in specific petition years. The first kind, allowed in Hillsboro's 1996 petition, are $3,251 in expenses associated with overhead street lighting in the park. These common area expenses consist of conduit and the trenching necessary to lay it. The second kind, disallowed in the 1997 petition but allowed in 1998, are $23,884 in expenses related to repair and replacement of the electric pedestals that support the service panels through which a mobilehome is connected to the electricity supply.⁹

3.1 Common Area Expenses: Conduits & Trenching

Common area expenses, such as the challenged conduit and trenching expenses, are those incurred in the course of operation, maintenance, and repair of park common areas, including the pool, clubhouse, and streetlighting system. Hillsboro distinguishes the common areas from the submeter system which provides energy to each of the 213 mobilehome sites at Los Robles. Hillsboro does so because while it directly bill tenants for submetered usage, it does not bill them for common area usage. However, as we have already seen, Hillsboro receives a master-meter bill, at PG&E's mobilehome master-meter discount rate, for all the gas and electricity the park uses. In this way, common area usage is subsidized by those PG&E residential ratepayers who pay higher energy rates for comparable amenities and services.

Park owners have yet to raise, in a generic proceeding before the Commission, the question of whether common area plant is intended to be included within the master-meter discount, and incidentally, whether it qualifies for the master-meter discount rate. That is what the Commission directed them to do in D.95-08-056, when it denied rehearing of Rates, Charges, and Practices. In response to the park owners' rehearing charge that the master-meter discount did not yield them adequate recovery, the Commission stated:

Thus, if the costs involving the Line and Service Extension Rules of the utilities, and the installation, repair, upgrade or replacement of any common area electrical facilities are required to be considered in calculation of the discount, then the mobile home park owners are barred from recovery of these costs through a rent increase. This is also the case for nonrecovery due to rate limiters.




However, if such costs are not statutorily required to be considered in the discount, and directly metered tenants pay for such costs in rents, then submetered tenants should be charged accordingly. The key is that submetered customers are to be treated the same as directly metered customers. As previously discussed, this is the intent of the enactment of Public Utilities Code Section 739.5.




Therefore, the mobile home parks may be permitted to recover costs that are not in any way reimbursed, fully or partially, in the discount, but such recovery should not result in treating the submetered customers differently from the directly metered customers. As to which costs are covered by the statute, the mobile home park owners should raise these particular costs in the next GRCs, so that all parties have an opportunity to litigate the matter in hearings. The record in the instant case is not sufficient to resolve this issue. (D.95-08-056, 61 CPUC2d at 231, emphasis added.)

John Harnett, a Senior Rates Analyst with PG&E, whom Hillsboro subpoenaed to testify in this proceeding, stated that PG&E does not include the cost of serving common area facilities, like a pool, clubhouse, and streetlighting in calculation of the master-meter discount. Harnett was PG&E's witness in the Rates, Charges, and Practices proceeding and has sponsored prepared testimony and/or workpapers on the master-meter discount for the utility's recent Phase II GRCs.¹⁰

As Harnett accurately explained, PG&E's mobilehome discount is addressed in Phase II of the utility's GRC proceedings. The cost PG&E avoids when a park is submetered has been calculated based on the average cost to PG&E to directly meter, on a per space basis, a random sample of mobilehome parks within its service territory. In other words, the master-meter discount calculation applies to the facilities which would be the utility's responsibility if the system were not submetered and excludes the facilities that are the customer's responsibility. By comparison, were PG&E to directly meter a mobilehome site, it would establish service to each mobilehome space like any other single-family, residential connection. Under such a scenario, "since it's not residential, [the common area] would be entirely different service, and it would be paid for just like any other service", Harnett stated in response to questioning. (Tr. 161.)

Harnett testified that in recent Phase II GRCs, the only disputes about the master-meter discount have focussed on issues such as whether the line loss expense allocation was appropriate or whether depreciation amounts were reasonable - not on how to account for common area costs. Harnett's testimony about PG&E's current computational practice, together with the respective contentions of the parties, point to the relationship between the master-meter discount and line extension allowances. The record in this proceeding is not only substantively inadequate to revise either formula, but also underscores the importance of a broader, generic review. There is no dispute that Hillsboro has incurred expenses for electrical conduit and trenching, but it has done so at its peril, having determined to ignore D.95-08-056. In light of the foregoing, we conclude that the $3,251 in Hillsboro's 1996 petition for conduit and the trenching necessary to lay it, must be disallowed as an item of NOI expense.

3.2 Electric Pedestals

The rent control hearing officer allowed electric pedestal expenses in the 1998 petition because Hillsboro supported this claim with a letter to its counsel from PG&E's Harnett. The letter, dated July 28, 1999, states, in relevant part:

I have been asked to identify PG&E policy relative to electric pedestals in mobilehome parks where PG&E directly services the customers (mobilehome park residents).




After researching the matter, I have determined that in directly served mobilehome parks, it is the responsibility of the builder of the mobilehome park to install the electric service panel including the pedestals which support the electric service panels ... After construction, the electric service panels and the associated pedestals continue to be owned by the mobilehome park owner and are not part of the PG&E electric distribution system. As such, the mobilehome park owner is responsible to repair, maintain, and replace the electric pedestals.




Since the park owner is responsible to maintain the electric pedestals in a directly served mobilehome park, maintenance of such pedestals is not included within the calculation of the electric submetering discount allocated to master metered mobilehome parks. (Ex. 100.)

Harnett stated that the letter was intended to be a factual response to the narrow question posed by Hillsboro's counsel and was not an opinion as to whether mobilehome park tenants should be paying for pedestal expenses in rent. According to Harnett, in recent Phase II GRCs PG&E has never included the expenses for electric pedestals as an avoided cost (similar to the treatment of common area expenses) and no party has questioned whether or not they should be included.

We see no material difference between the issues associated with treatment of electric pedestal expenses and those associated with expenses for common areas. Even if electric pedestals properly are not components of the master-meter discount, they nonetheless implicate line extension allowances. Again, Hillsboro has ignored the direction of D.95-08-056. In the context of this proceeding, we conclude that the 1998 petition expenses of $23,884 for repair and replacement of the electric pedestals, must be disallowed as an item of NOI expense.

4. Reparations

In summary, the excess rents Hillsboro must refund, on a pro rata basis to the Los Robles tenants who paid them, is the difference between the rents actually charged and the rents which should have been charged. We direct Hillsboro, within 60 days of the effective date of this decision, to apply to Novato for an adjustment of prior authorized rent increases. In order to avoid violating § 739.5, the rents which should have been charged are to be calculated by:

· Adjusting the utility income and expense inputs to base year and petition year NOIs as described in Section 2, above;




· Removing $3,251 in utility expenses (electrical conduit; trenching) from the 1996 petition; and




· Removing $23,884 in utility expenses (electric pedestals) from the 1998 petition.

Reimbursements are due for any excess rents for the period beginning January 13, 1997, which is three years before the date Hambly filed this complaint at the Commission. (See § 736.). All reimbursements shall include interest at the prime three-month commercial paper rate, compounded monthly, until the date of refund. Though Novato's reply brief argues that we can oversee these calculations as readily as it can, we disagree. We believe that Novato is the appropriate entity to ensure the accuracy of the NOI calculations, and in particular the base year NOI, which under its rent control ordinance is the yardstick for measuring all subsequent rent increase petitions.

Once the refunds are quantified, Hillsboro shall reimburse its current tenants and shall make a good faith effort to identify and reimburse any former tenants or their heirs for excess rents paid since January 13, 1997, including interest as calculated above. All refunds not collected within 12 months of the date quantification is approved by Novato shall revert to the General Fund of the State of California.

At the end of the 12 month period, Hillsboro shall inform current tenants, by letter with a copy to the Director of the Commission's Consumer Services Division, of the status of its refund program and inform the tenants of the steps it has taken to turn over any uncollected refunds to the General Fund.