D0605041 Opinion Regarding Allocation of Gains on Sale of Utility Assets

https://personal-accounting.org/lords, by contrast, operate in a competitive market. The parties’ comments are divided on the OIR’s assumption that risk should drive the outcome of gain on sale decisions, and that we should cease relying on ratepayer harm or indifference to allocate the gain. This decision does not apply to routine retirements of minor utility assets that are no longer used and useful such as utility poles, transformers, and vehicles, which are governed by other Commission depreciation rules and schedules. The rules we develop here shall apply to after-tax gains and losses. The Commission will determine how to evaluate cases where a utility or party requests an exception. Depreciable assets for purposes of this decision include, but are not limited to, buildings, equipment, machinery, materials and vehicles, except that this decision does not apply to routine retirements of minor utility assets that are no longer used or useful. The rules we develop here should apply to after-tax gains and losses.

• However, Commission silence in response to the notice should not be interpreted as consent to the sale.
• Whatever the reasons for the energy crisis – an imperfect market structure, market manipulation, regulatory and competitive failures – it is clear that the crisis did not arise because of electric utilities’ ownership of land, buildings or other assets.
• The utilities’ shareholders shall receive the remaining 50% of gains or losses on sale of non-depreciable assets.
• In contrast, the electric and water utilities point to risks they contend the OIR did not consider, and disagree with the OIR’s conclusions about the risks it did mention.
• The Commission has exclusive authority to determine the used, useful, or necessary status of any and all water utility infrastructure improvements and investments.
• All parties agree with our conclusion that the time in and out of rate base should affect who receives the gain on sale.

Landlords operate in a competitive market. In such markets, customers are not captive to the monopoly and may move away. The market, not the regulator, determines rental prices. The apartment owner is at risk of losing his investment, or at least not covering his full costs, due to loss of customers or falling rental prices, which are both beyond his control. A landlord’s property may remain vacant in times of slack demand, so the property owner has no guaranteed stream of revenue. The whims of the market control the value of a landlord’s investment.

A. OIR Proposals – Risk

Allocating too much of the gain to shareholders would therefore cause inefficiency. The gain on sale calculus should not take into account extraordinary risks such as the recent California energy crisis or Hurricane Katrina.

However, D0605041 Opinion Regarding Allocation Of Gains On Sale Of Utility Assetss in California have always been based on the historical cost of land, and if utilities oppose such ratemaking practices, their avenue is to challenge how we set rates. The gain on sale test is not the place to address this ratemaking matter. O No allocation of gain to ratepayers or payment to shareholders.

B. Comments – Risk as Primary Determinant of Gain/Loss Allocation

Further, the utilities assert that the Redding customers paid in rates their portion of the system sold to Redding. They question why the ratepayers left after sale of the distribution system should receive the gain on sale, since they may not have been responsible for the costs of the assets that are left. Several utilities analogize ratepayers’ relationship to utility property to the role of a renter occupying private rental property. For example, SDG&E/SoCalGas assert that renters do not obtain any interest in the building simply because they pay rent. SDG&E/SoCalGas conclude that ratepayers should not recover profits from the sale of utility assets for the same reason that renters do not profit when a landlord sells his building. In routine sales of depreciable assets, ratepayers should receive 100% of the gain.