Issue 3: What measures are appropriate to ensure ratepayers are not adversely affected by the lease of water rights to Folsom?

ORA recommended that the Commission "order whatever measures will make the ratepayers whole," and specifically suggested that SCWC replace the 5,000 AFY sold to Folsom with like-kind water rights. SCWC offered no recommendations.

Discussion

The record shows that ratepayers have not suffered any diminution in service or extra expense due to the sale of water rights to Folsom. In fact, ratepayers have benefited from their portion of the revenue being used to offset other expenses.

As a certificated public utility, SCWC is obligated to "furnish and maintain such adequate, efficient, just, and reasonable service ... as are necessary to promote the safety, health, comfort, and convenience of its patrons." § 451. Meeting this obligation requires that SCWC prudently acquire such water resources as are necessary to meet the needs of its customers. SCWC has demonstrated that it currently has sufficient water supplies to meet the present and future needs of its customers. SCWC has secured replacement water for the 5,000 AFY of water leased to Folsom.

By treating lease revenues under § 789/ § 790, SCWC will have to invest lease proceeds in utility infrastructure and plant. If SCWC does not invest the lease proceeds within an eight year period, ratepayers will be allocated these proceeds, plus interest. The risk of losing lease proceeds, combined with not earning a return on plant additions, will provide SCWC incentive enough to make timely investments in its water system. And ratepayers will benefit in either case. Thus, no additional measures to protect ratepayers are needed.

We reject ORA's recommendation that we order SCWC to acquire similar resources at shareholder expense, and to also allocate the full revenue from the permanent lease to ratepayers. Ratepayers are not entitled to have the 5,000 AFY and the revenue from the sale of the same resource.

We find that this resolution is reasonable and in the public interest.

Should the permanent lease of 5,000 AFY be approved pursuant to § 851?

We recognize that we are evaluating an after-the-fact transaction that was consummated in November 1994, nearly twelve years ago. While our past issued decisions on this matter have dealt with retroactive issues, we are called upon to evaluate the transaction on a prospective basis.

Pursuant to § 851, no public utility shall "sell, lease, assign, mortgage, or otherwise dispose of or encumber the whole or part of any of its ... property necessary or useful in its performance of its duties to the public ... without having secured from the Commission an order authorizing it to do so." Every sale made without "an order of the Commission authorizing it is void." The statute exempts good faith purchasers for value from its requirements.

The purpose of § 851 is to enable the Commission to review a proposed encumbrance of utility property useful in the performance of its duties before it takes place, in order to take such action as the public interest may require. Thus, we must determine whether to grant approval of the water lease on a prospective basis. Granting approval on a retroactive basis would thwart the purpose of § 851.

In D.04-03-039, we determined that § 851 applied to the transaction with Folsom, and that SCWC had failed to file the required application. Consequently, we determined that the transaction was void, and fined SCWC for its failure to file the agreement. We subsequently modified that decision with D.04-04-069 to clarify that Folsom met the requirements for the exception to §851, and that § 851 protects Folsom acquired interest in the water rights.

In D.04-03-039, we stated that in § 851 reviews "...the Commission typically considers at least three factors...whether the proposed transaction will impair the utility's ability to provide service to the public...the ratemaking and accounting treatment of the proceeds of the proposed transaction...," and "...the environmental impacts of the proposed transaction..."

We find that SCWC has demonstrated that it currently has sufficient water supplies to meet the present and future needs of its customers. We conclude that the 5,000 acre feet of water leased to Folsom in perpetuity is no longer useful in the provision of water utility service, given that SCWC has secured replacement water supplies that exceed its anticipated needs at system build-out. Thus, SCWC's ability to continue to provide public utility service is not impaired.

We have addressed the appropriate ratemaking and accounting treatment of the Folsom water lease earlier in this decision. Since the water rights leased to Folsom are no longer necessary or useful in the provision of water utility service, § 789 and § 790 are applicable. § 790 requires that SCWC invest the proceeds from its Folsom water lease into water system infrastructure that are necessary or useful in the performance of its duties to the public. § 790 (c) further requires that proceeds not invested be returned to ratepayers.

With respect to CEQA, we note that because the water lease transaction took place twelve years ago, any activity which may have warranted our timely environmental review has long since occurred. Consequently, for practical purposes meaningful CEQA review at this time would have no effect because we are unable to conduct review prior to the consummation of the transaction. In its application, SCWC states that its Reallocation Agreement with Folsom transferring the water rights contained a provision that the "City (Folsom) shall have complied with the California Environmental Quality Act (CEQA) and national Environmental Policy Act (NEPA) to the extent required." SCWC states that Folsom did comply with this provision of the agreement in 1994.

We approve the transaction pursuant to § 851.