Filed 6/13/13 SFPP v. Public Util. Com. CA4/3 

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for 

publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication 

or ordered published for purposes of rule 8.1115. 

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA 

FOURTH APPELLATE DISTRICT 

DIVISION THREE 

SFPP, L.P., 

 Petitioner, 

 v. 

PUBLIC UTILITIES COMMISSION, 

 Respondent; 

CHEVRON PRODUCTS COMPANY 

et al., 

 Real Parties in Interest. 

 G046669 

 (Cal.P.U.C. Dec. Nos. 11-05-045, 

 12-03-026) 

 O P I N I O N 

 Original proceedings; petition for a writ of review of decisions of the 

California Public Utilities Commission. Petition denied. 
2

 Mayer Brown, Donald M. Falk, Neil M. Soltman and Eileen Penner for 

Petitioner. 

 Frank R. Lindh, Helen W. Yee and Pamela Nataloni for Respondent. 

 Baker Botts, Thomas J. Eastment, Gregory S. Wagner; Ropers, Majeski, 

Kohn & Bentley and Susan H. Handelman for Real Parties in Interest BP West Coast 

Products and ExxonMobil Oil Corporation. 

 Weber & Associates, George L. Weber; Orrick, Herrington & Sutcliffe and 

Joseph M. Malkin for Real Party in Interest Chevron Products Company. 

 Dorsey & Whitney, Martha C. Luemers and Marcus W. Sisk, Jr., for Real 

Party in Interest Phillips 66 Company. 

 Venable, Steven A. Adducci, Richard E. Powers, Jr., and Douglas C. 

Emhoff for Real Parties in Interest Southwest Airlines Co., Ultramar Inc., and Valero 

Marketing and Supply Company. 

 McGuireWoods and A. Brooks Gresham for Real Party in Interest Tesoro 

Refining and Marketing Company. 

I 

INTRODUCTION 

 Petitioner SFPP, L.P. (SFPP) is a Delaware limited partnership that 

operates both intrastate and interstate oil pipelines. SFPP’s upstream owners are Kinder 

Morgan Energy Partners, L.P., a publicly traded partnership, which, through one of its 

operating partnerships, Kinder Morgan Operating L.P. “D” (which itself is partly owned 

by Kinder Morgan, Inc.) owns 99.5 percent of SFPP. The other .5 percent is owned by 

Santa Fe Pacific Pipelines, Inc., a wholly owned, indirect subsidiary of Burlington 

Northern Santa Fe Corporation. 

 Respondent Public Utilities Commission of the State of California (the 

PUC) is the agency charged with regulating public utilities pursuant to Article XII of the 
3

California Constitution and the Public Utilities Act,1 and accordingly, it regulates SFPP’s 

intrastate pipelines. 

 Real parties in interest Chevron Products Company, Phillips 66 Company, 

BP West Coast Products LLC, ExxonMobil Oil Corporation, Southwest Airlines Co., 

Tesoro Refining and Marketing Company, Ultramar Inc., and Valero Marketing and 

Supply Company (collectively the Shippers) are oil companies and an airline operator 

that use and pay for SFPP’s services on its pipeline facilities. 

 SFPP petitions for a writ of review of two of the PUC’s ratesetting orders, 

specifically ARCO Prods. Co. v. Santa Fe Pacific Pipeline, L.P. (2011) Dec. No. 11-05-

045 [2011 Cal.P.U.C. Lexis 299] (SFPP I or the Final Decision), and the order on 

rehearing, ARCO Prods. Co. v. Santa Fe Pacific Pipeline, L.P. (2012) Dec. No.12-03-026 

[2012 Cal.P.U.C. Lexis 135] (SFPP II or the Rehearing Decision) (collectively the 

Decisions). SFPP II granted limited rehearing, modified SFPP I in part, and denied 

rehearing as to all other issues. (SFPP II, supra, 2012 Cal.P.U.C. Lexis 135 at p. *4.) 

 “The PUC is not an ordinary administrative agency, but a constitutional 

body with far-reaching powers, duties and functions. [Citations.] The Constitution 

confers broad authority on the PUC to regulate utilities, including the power to fix rates, 

establish rules, hold various types of hearings, award reparations, and establish its own 

procedures. [Citation.]” (Utility Consumers’ Action Network v. Public Utilities Com.

(2004) 120 Cal.App.4th 644, 654.) 

 The PUC’s jurisdiction “includes the authority to determine and fix ‘just, 

reasonable [and] sufficient rates’ [citation] to be charged by the utilities.” (Southern 

California Edison Co. v. Peevey (2003) 31 Cal.4th 781, 792.) The California Supreme 

Court “has endorsed the commission’s position: ‘“The basic principle [of ratemaking] is 

to establish a rate which will permit the utility to recover its cost and expenses plus a 

 

1 Subsequent statutory references are to the Public Utilities Code unless otherwise noted. 
4

reasonable return on the value of property devoted to public use.” [Citation.]’” 

(Southern Cal. Gas Co. v. Public Utilities Com. (1979) 23 Cal.3d 470, 476.) 

 SFPP argues the PUC’s Decisions made two errors in its ratesetting orders. 

First, SFPP2 argues the PUC erroneously denied it a federal income tax allowance 

because it is a limited partnership instead of a corporation. SFPP strains mightily to 

frame the PUC’s decision as one based on incorrect legal interpretations. It also argues 

the Decisions are contrary to the PUC’s own factual findings, are an abuse of discretion, 

and are in violation of due process. None of these arguments are supported by the record 

and the relevant law. In essence, the PUC’s decision regarding the treatment of 

partnerships for tax purposes is a policy question, and thus, not subject to reversal by this 

court. 

 Second, SFPP claims the PUC set an unreasonably low return on equity, 

arguing the PUC used a flawed methodology and failed to use a valid proxy group in its 

rate calculations. We reject SFPP’s arguments on this point as unsupported by the 

evidence and the Decisions, and conclude the PUC did not abuse its discretion in its 

calculation of an appropriate return on equity. 

II 

RELEVANT FACTS AND PROCEDURAL BACKGROUND 

 The Decisions before us involve numerous consolidated proceedings dating 

back to 1997. (SFPP I, supra, 2011 Cal.P.U.C. Lexis 299 at p. *2.) In the interests of 

brevity, we do not detail the entire history of the proceedings, but only those parts 

relevant to the issues before us. 

 

2 SFPP was previously named Santa Fe Pacific Pipeline, L.P., and is referred to as such in 

many places in the record. (SFPP I, supra, 2011 Cal.P.U.C. Lexis 299 at p. *2.) 
5

 In 1991, SFPP sought a rate increase from the PUC for the first time since 

1985. It was uncontested, and in 1992, the PUC granted SFPP a 9 percent increase. (In 

re SFPP (1992) 44 Cal.P.U.C.2d 200 [1992 Cal.P.U.C. Lexis 499].) 

 In 1997, the Shippers filed a complaint with the PUC contesting SFPP’s 

rates. (See ARCO Prods. Company v. SFPP, LP (1998) 81 Cal.P.U.C.2d 573 [1998 

Cal.P.U.C. Lexis 593] (ARCO Prods. Company).) The Shippers asserted that because 

SFPP was a limited partnership, it does not incur federal income tax liability and its net 

income after taxes was identical to its net income before taxes. (Ibid.) SFPP conceded 

“that it is a publicly traded partnership which itself incurs and pays no income tax and 

that its affiliated corporate unitholders may incur no federal income tax liability on 

income generated by defendant because of the availability of interest payment offsets 

under a consolidated income tax return. However, defendant argues, the taxable income 

that is generated by it as a partnership does not escape taxation: It is taken into income 

by its partners.” (Ibid.) 

 Thus, initially, the PUC rejected the Shippers’ challenge, noting, with 

respect to the tax allowance, that the 1992 rate setting was adopted “in full recognition 

that defendant was organized as a limited partnership.” ARCO Prods. Company v. SFPP, 

LP, supra, 1998 Cal.P.U.C. Lexis 593 at page 45. In 1999, however, the PUC granted 

rehearing. (ARCO Prods. Company v. SFPP, LP (1999) 1 Cal.P.U.C.3d 418 [1999 

Cal.P.U.C. Lexis 442] (ARCO Prods. Company Rehearing).) 

ARCO Prods. Company Rehearing stated: “The Decision held that SFPP 

should be allowed to include the $ 5.4 million ‘tax allowance’ in its expenses for 

ratemaking purposes to prevent this result. This ‘tax allowance’ was calculated using the 

corporate tax rate. Although there is logic to this approach, the Decision improperly 

concludes that this approach must be adopted in order to comply with an established ‘tax 

allowance policy.’ The Decision incorrectly reads Application of SFPP, L.P. (Increased 

Transportation Rates) [D.92-05-018], supra, to establish such a policy. When we 
6

approved SFPP’s 9% rate increase in 1992, we accepted a rate of return calculation that 

included an expense item for taxes in the amount of $ 6,281,000. At the time, SFPP was 

a master limited partnership that owned SFPP’s two predecessor pipelines. However, 

Application of SFPP, L.P. (Increased Transportation Rates), [D.92-05-018], supra, was 

decided on an ex parte basis and contains no discussion of tax questions. Thus, no 

conclusion can be drawn from its determination that the total expense amount was 

reasonable. We generally do not scrutinize applications that are not contested, and have 

stated this policy explicitly in Re: Commission’s Rules of Practice and Procedure [D.95-

01-015] (1995) 58 Cal.P.U.C.2d. 480.” (ARCO Prods. Company Rehearing, supra, 1999 

Cal.P.U.C. Lexis 442, at pp. *12-13.) 

 Thus, although the PUC believed “the use of a tax allowance is likely to be 

permissible” the justification set forth in the 1998 case did not withstand scrutiny. 

(ARCO Prods. Company Rehearing, supra, 1999 Cal.P.U.C. Lexis 442 at p. *13) 

Rehearing was granted to consider tax issues and other matters. (Ibid.) Evidentiary 

hearings were held in October 2000, but the PUC then left the matter undecided until 

SFPP I. (SFPP I, supra, 2011 Cal.P.U.C. Lexis 299 at p. *1 [noting the Decision closes 

C.97-04-025, the Shippers’ 1997 complaint].) 

 In 2001, SFPP proposed a surcharge to offset increases in power costs. The 

request was approved, but the PUC directed SFPP to file an application to justify its 

current rates. The Decisions at issue here address both the income tax allowance issue 

raised by the Shippers’ 1997 complaint and the general rate application that SFPP filed at 

the PUC’s direction. 

 The PUC issued SFPP I in May 2011. (SFPP I, supra, 2011 Cal.P.U.C. 

Lexis 299 at p. 1.) As relevant here, the PUC decided that because SFPP is a partnership 

that pays no income taxes, it is not entitled to an offset for income tax expenses. (SFPP 

I, supra, 2011 Cal.P.U.C. Lexis 299 at pp. *18-37.) It also approved a return on rate base 

of 10.40 percent, which included a return on equity of 12.61 percent. (Id., 2011 
7

Cal.P.U.C. Lexis 299 at p. *48.) With respect to these issues, SFPP II denied SFPP’s 

request for rehearing, although it was granted as to certain other issues not pertinent here. 

(SFPP II, supra, 2012 Cal.P.U.C. Lexis 135 at p. *4.) 

III 

DISCUSSION 

A. Review of PUC Decisions 

 “‘[A]ny aggrieved party [to a decision of the Commission] may petition for 

a writ of review in the court of appeal . . . .’ [Citation.] As here, when ‘writ review is the 

exclusive means of appellate review of a final order or judgment, an appellate court may 

not deny an apparently meritorious writ petition, timely presented in a formally and 

procedurally sufficient manner, merely because, for example, the petition presents no 

important issue of law because the court considers the case less worthy of its attention 

than other matters.’ [Citation.] We are not, however, ‘compelled to issue the writ if the 

[Commission] did not err . . . . [Citation.]” (Pacific Bell Wireless, LLC v. Public Utilities 

Com. (2006) 140 Cal.App.4th 718, 728-729 (Pacific Bell Wireless).) 

 The limited grounds and standards for our review are set forth in section 

1757, subdivision (a). “No new or additional evidence shall be introduced upon review 

by the court. In a complaint or enforcement proceeding, or in a ratemaking or licensing 

decision of specific application that is addressed to particular parties, the review by the 

court shall not extend further than to determine, on the basis of the entire record which 

shall be certified by the commission, whether any of the following occurred: [¶] (1) The 

commission acted without, or in excess of, its powers or jurisdiction. (2) The 

commission has not proceeded in the manner required by law. (3) The decision of the 

commission is not supported by the findings. (4) The findings in the decision of the 

commission are not supported by substantial evidence in light of the whole record. (5) 

The order or decision of the commission was procured by fraud or was an abuse of 

discretion. (6) The order or decision of the commission violates any right of the 
8

petitioner under the Constitution of the United States or the California Constitution.” 

Further, we cannot “hold a trial de novo, to take evidence other than as specified by the 

California Rules of Court, or to exercise [our] independent judgment on the evidence.” 

(§ 1757, subd. (b).) 

 “There is a strong presumption favoring the validity of a Commission 

decision. [Citations.]” (Toward Utility Rate Normalization v. Public Utilities Com.

(1978) 22 Cal.3d 529, 537; see also City and County of San Francisco v. Public Utilities 

Com. (1985) 39 Cal.3d 523, 530.) “Generally, we give presumptive value to a public 

agency’s interpretation of a statute within its administrative jurisdiction because the 

agency may have ‘special familiarity with satellite legal and regulatory issues,’ leading to 

expertise expressed in its interpretation of the statute. [Citation.] Therefore, ‘the PUC’s 

“interpretation of the Public Utilities Code should not be disturbed unless it fails to bear a 

reasonable relation to statutory purposes and language. . . .” [Citation.] However . . . the 

interpretation of statutes is a question of law subject to independent judicial review. 

[Citation.]’ [Citation.]” (Pacific Bell Wireless, supra, 140 Cal.App.4th at p. 729.) 

 To the extent section 1757, subdivision (a)(4) is at issue, we use familiar 

principles to review for substantial evidence. When an administrative agency’s 

evidentiary findings are at issue, “The court must consider all relevant evidence in the 

record, but ‘“[i]t is for the agency to weigh the preponderance of conflicting evidence 

[citation]. Courts may reverse an agency’s decision only if, based on the evidence before 

the agency, a reasonable person could not reach the conclusion reached by the agency.”’ 

[Citation.]” (Eden Hospital Dist. v. Belshé (1998) 65 Cal.App.4th 908, 915.) 

 When constitutional issues are raised, we exercise independent judgment on 

the law and facts. (§ 1760.) Nonetheless, we may not substitute our own judgment “as to 

the weight to be accorded evidence before the Commission or the purely factual findings 

made by it. [Citations.]” (Goldin v. Public Utilities Commission (1979) 23 Cal.3d 638, 

653.) 
9

B. Income Tax Allowance 

 SFPP asserts the PUC “violated applicable law, abused its discretion, and 

deprived SFPP of due process” by denying it an allowance for income taxes. SFPP 

therefore claims the PUC’s decision on this point is subject to review under section 1757, 

subdivision (a)(2)-(5). The PUC responds by pointing out that SFPP is a limited 

partnership, and as such, pays no income taxes. Therefore, SFPP is not entitled to an 

allowance for taxes it does not pay. 

 We briefly review the underlying basis for this dispute. The Internal 

Revenue Code (IRC) treats corporations3 and partnerships differently for tax purposes. 

Generally, corporations must pay tax “for each taxable year on the taxable income” of the 

corporation. (26 U.S.C. § 11(a).) In addition to the income tax paid by a corporation, 

taxes are also typically paid by shareholders who receive earnings distributions or 

dividends from corporate income. (26 U.S.C. § 301,(a), (c); see SFPP I, supra, 2011 

Cal.P.U.C. Lexis 299 at p. *20.) Partnerships, however, “shall not be subject to the 

income tax imposed by this chapter. Persons carrying on business as partners shall be 

liable for income tax only in their separate or individual capacities.” (26 U.S.C. § 701.) 

For tax purposes, a partnership is “merely an agent or conduit through which the income 

passed.” (United States v. Basye (1973) 410 U.S. 441, 448, fn. omitted.) 

 Thus, SFPP, as a partnership, does not pay income taxes. One of its 

witnesses testified on this point before the PUC. Rather, its upstream partners (various 

Kinder Morgan entities, for the most part) are allocated SFPP’s income and treated as if 

they had generated it directly. 

 

3 Unless otherwise noted, the term “corporations” refers to “C” corporations rather than 

“S” corporations. 
10

 The PUC’s practice is to calculate income tax allowances on a stand-alone 

basis, without reference to corporate relationships such as holding companies, affiliates, 

or subsidiaries. (SFPP I, supra, 2011 Cal.P.U.C. Lexis 299 at p. *22.) This policy 

developed due to the increasing structural complexity of regulated utility entities and the 

expansion of non-utility activities by subsidiaries. (Id., 2011 Cal.P.U.C. Lexis 299 at pp. 

*22-23.) “Without the stand-alone treatment of the regulated entity, the non-utility 

activities could result in a tax expense or savings unrelated to the costs of providing 

utility service.” (Id., 2011 Cal.P.U.C. Lexis 299 at p. *24.) Thus, the PUC looks to the 

tax liability of the utility alone in calculating any allowance. 

 As the PUC readily admits, utilities established as corporations, which pay 

taxes, are entitled to receive an appropriate allowance to cover the tax expense. The 

Final Decision stated: “SFPP should receive an appropriate allowance for income tax 

expense, if it is liable for income tax. . . . SFPP has failed to demonstrate that there is a 

corporate tax liability that should be recovered in rates. [¶] We only provide an 

allowance where the utility expects to incur an expense. If, for example, SFPP were 

suddenly able to conduct business entirely without paper, solely using electronic 

communications, there would no longer be a need to purchase paper, ink, pens, postage, 

storage boxes, file cabinets, etc. No one would reasonably argue that SFPP should still 

have a theoretical allowance for paper and pens, and related items included in its expense 

forecast. If there is no likely expense, there should be no expense forecast in rates. [¶] 

[I]f there is no taxation on earnings while the earnings are still within the operating 

control of SFPP, there is no income tax obligation to recognize as a utility operating 

expense in rates.” (SFPP I, supra, 2011 Cal.P.U.C. Lexis 299 at pp. *27-28, fn. omitted.) 

 At its essence, SFPP’s argument boils down to its claim that an income tax 

allowance is required as a matter of law, while the PUC and the Shippers assert that it 
11

was a policy choice made after an appropriate process. We address the components of 

this argument below.4 

 1. The PUC’s prior decision 

 SFPP asserts the PUC’s “own established income tax doctrine” requires it 

to grant partnerships an income tax allowance. SFPP relies heavily on a decision 

involving it that we mentioned earlier, ARCO Prods. Company, supra, 1998 Cal.P.U.C. 

Lexis 593 at page *45. In that case, the PUC rejected the Shippers’ complaint that an 

income tax allowance was inappropriate for a limited partnership, noting the ex parte 

ratesetting in 1992 was adopted “in full recognition that defendant was organized as a 

limited partnership.” (Ibid.) SFPP claims the Decisions represent an “about-face” 

without adequate justification. SFPP completely ignores the 1999 decision on rehearing, 

ARCO Prods. Company Rehearing, supra, 1999 Cal.P.U.C. Lexis 442 at page *12. 

 The 1999 rehearing decision concluded that while there was logic in the 

approach the PUC had taken in ARCO Prods. Company, the justification did not 

withstand scrutiny. (ARCO Prods. Company Rehearing, supra, 1999 Cal.P.U.C. Lexis 

442 at pp. *12-13.) Further, the PUC stated it needed “to consider the issue more 

carefully” because it had no established policy in this area. (Ibid.) Rehearing prevented 

the original decision from ever becoming final. (City of Los Angeles v. Public Utilities 

Com. (1975) 15 Cal.3d 680, 707.) Thus, the Decisions do not represent a sudden 

departure from over a decade of precedent, as SFPP suggests. The PUC had already 

rejected its 1998 rationale in 1999. 

 

4 While SFPP’s writ petition asserts seven different reasons the PUC erred on this point, 

many of these arguments overlap and duplicate each other. Further, in its reply, it often 

claims to be replying to arguments it claims the PUC made without citing to the PUC’s 

brief. In the interests of convenience and avoiding repetition, we shall group similar 

arguments together. 
12

 2. Competing authorities 

 SFPP correctly states that the Federal Energy Regulatory Commission 

(FERC) and some state jurisdictions grant partnerships an income tax allowance on the 

grounds that the tax paid by the partners is an operating cost. (See Policy Statement on 

Income Tax Allowances (2005) 111 F.E.R.C. P61,139, 2005 FERC Lexis 1129; Suburban 

Utility Corp. v. Public Utility Com. (Tex. 1983) 652 S.W.2d 358; Moyston v. New Mexico 

Pub. Serv. Comm’n. (N.M. 1966) 412 P.2d 840; Home Tel. Co. v. State Corp. Comm’n.

(2003) 31 Kan.App.2d 1002; Washington Utilities & Transp. Com’n. v. Rainier View 

Water Co. (July 12, 2002) 2002 Wash. UTC Lexis 323; In re Detroit Thermal, LLC 

(Sept. 8, 2005) 2005 Mich. PSC Lexis 293; In the Matter of the Commission’s Generic 

Evaluation of the Regulatory Impacts from the Use of Non-Traditional Financing 

Arrangements by Water Utilities and Their Affiliates (Feb. 21, 2013) 2013 Ariz. P.U.C. 

Lexis 58.) 

 We note, however, that a number of other jurisdictions have not permitted 

income tax allowances for pass-through entities in the recent past. (See South Haven 

Waterworks, Div. v. Office of Utility Consumer Counselor (Ind.Ct.App. 1993) 621 

N.E.2d 653;5 Monarch Gas Co. v. Illinois. Commerce Com. (51 Ill.App.3d 1977) 366 

N.E.2d 945; Penn. Public Utility Com. v. Jackson Sewer Corp. (Sept. 28, 2001) 2001 Pa. 

P.U.C. Lexis 53; Farmton Water Resources LLC (Oct. 8, 2004) 2004 Fla. P.U.C. Lexis 

 

5 SFPP claims this decision is “no longer good law,” but that is at best unclear. SFPP 

cites to Petition of Hamilton Southeast Utilities, Inc. (Aug. 18, 2010) 2010 Ind. P.U.C. 

Lexis 282. SFPP argues this opinion states “the South Haven decisions were explicity 

predicated on an evidentiary failure, so that any legal holdings on the point were 

therefore ‘dicta.’” First, we are unaware that a public utilities commission in any state 

has the ability to declare that an appellate court decision is “no longer good law.” 

Second, the commission only stated its own statements were “dicta,” not the court’s. (Id., 

2010 Ind. P.U.C. Lexis 282 at p. *62.) While the Indiana commission may have changed 

its position, it would be equally supported by the law if it wished to deny an income tax 

allowance. 
13

863; Ridgelea Inv., Inc. (Oct. 14, 2008) 2008 Ky. P.U.C. Lexis 1259; Concord Steam 

Corp. (Nov. 16, 1986, Order No. 18,484) 71 N.H. P.U.C. 667.) 

 We need not delve into the competing rationales at play here. Our only 

concern is whether the PUC’s decision violated the law in some way which requires this 

court to step in. (§ 1757.) Our review of these cases demonstrate competing policy

interpretations, but not, in contrast to SFPP’s argument, a legally compelled result in any 

particular direction. Indeed, upon review of FERC’s decision to permit income tax 

allowances to partnerships, the D.C. Circuit described the decision as including 

“troubling elements,” yet deferred to FERC as a matter of policy. (ExxonMobil Oil Corp. 

v. F.E.R.C. (D.C. Cir. 2007) 487 F.3d 945, 948.) “[P]olicy choices about ratemaking are 

the responsibility of the Commission—not this Court. [Citation.]” (Id. at p. 953.) 

 Further, the fact that some states made their decisions before FERC’s 

policy statement is not of particular import, as SFPP does not argue federal preemption. 

While SFPP’s side of this argument may have more jurisdictions behind it at this point in 

time, that is not particularly relevant, as policy decisions left to individual states are not 

subject to a popularity contest. 

 SFPP has not demonstrated the law requires the PUC to grant partnerships 

an income tax allowance, nor do we agree that the SFPP “arbitrarily” failed to address 

FERC’s reasoning. The Decisions reflect the PUC was clearly aware of FERC’s different 

policy choice on this point, and thus, the record does not support SFPP’s claim the PUC 

arbitrarily and capriciously refused to consider FERC’s reasoning. Given that SFPP 

vehemently disagrees, its remedy is with the legislature, and not, given our limited scope 

of review, with this court. 

 3. The PUC’s understanding of the relevant law 

 SFPP argues the PUC’s decision was based on an erroneous view of the 

law, lacked substantial evidence, and should therefore be vacated pursuant to section 
14

1757. SFPP claims the decision “rests entirely on findings that are wrong as a matter of 

governing federal tax law.” SFPP claims the PUC incorrectly concluded that the partners 

incurred a personal income tax obligation only after the partnership distribution, which it 

argues is untrue. Further, any income tax obligation accrues while the income is still in 

control of the partnership. 

 Contrary to SFPP’s claims, the Final Decision reflects the PUC was aware 

of the relevant income tax obligations. “SFPP itself does not directly pay tax on the 

income it generates because SFPP is organized as a limited partnership. However, this 

does not mean that income generated by SFPP is necessarily tax-free. SFPP’s income 

could be eventually taxable in the hands of SFPP’s upstream owners, regardless of the 

amount of cash SFPP actually distributes to them. The amount of tax paid on income 

SFPP generates depends on the tax situation of each of its owners—including the 

possibility that the tax obligation may be passed on to a further, indirect owner of SFPP.” 

(SFPP I, supra, 2011 Cal.P.U.C. Lexis 299 at p. *19.) In the Rehearing Decision, the 

PUC repeated: “The Decision clearly shows that we did understand that SFPP’s partners 

are responsible for any tax on its earnings.” (SFPP II, supra, 2012 Cal.P.U.C. Lexis 135

at p. *7.) Rather, the PUC rejected SFPP’s preferred method of treating the partnership 

as the tax-paying entity for purposes of setting rates. (Ibid.) 

 SFPP also argues that the stand alone doctrine, which, as we previously 

noted, treats utilities as separate from any affiliates for ratemaking purposes, compels the 

PUC to grant partnerships an income tax allowance. Arguing that the PUC has granted 

allowances to corporations even if their parent pays taxes as part of a consolidated return, 

SFPP argues this is no different from the tax a partner pays on SFPP’s income. As the 

PUC accurately explains, however, this ignores that a corporate utility and its parent each 

have a separate income tax liability. Thus, while a parent may pay the tax on a 

consolidated return, the utility is still responsible for the tax separately. That is not true 
15

of a partnership. We therefore disagree that the stand alone doctrine requires partnership 

income tax allowances. 

 SFPP has not established that the PUC used “legally erroneous principles,” 

in denying an income tax allowance; it would simply prefer a different policy.6 Indeed, 

the Decisions show the PUC fully understood the relevant principles of federal tax law, 

and applied two long-standing policies. First, as noted above, the PUC calculates income 

tax allowances on a stand-alone basis, without regard to other related entities. (SFPP I,

supra, 2011 Cal.P.U.C. Lexis 299 at p. *22.) Second, to protect ratepayers, only 

legitimate, actual expenses incurred by the utility are recognized as part of the ratemaking 

process. (City and County of San Francisco v. Public Utilities Com. (1971) 6 Cal.3d 119, 

129.) The PUC applied both of these principles in reaching its decision. 

 Similarly, we reject SFPP’s argument that the PUC abused its discretion 

and based its decision on a misunderstanding of the economic consequences of denying 

an income tax allowance to partnerships. To the extent SFPP’s argument on this point is 

not conclusory, no “misunderstanding” is supported by the record. 

4. Due Process 

 SFPP also contends it was denied a reasonable opportunity to develop an 

evidentiary record on its actual or potential liability, and was therefore denied due 

process. Specifically, it claims the PUC predicated its decision on an evidentiary 

standard that did not exist until the Final Decision. This standard, also known as the 

“FERC test,” refers to FERC’s requirement, established in its 2005 Policy Statement on 

Income Tax Allowances, requiring partnerships to provide evidence of evidence of actual 

 

6 We also reject SFPP’s argument that the PUC’s ruling conflicts with its own findings of 

fact. This is another way of saying the PUC did not understand the law. 
16

or potential taxes in order to calculate an income tax allowance, rather than relying on the 

corporate tax rate. 

 While SFPP claims the PUC “endorse[d]” the FERC test, this is a 

confusing assertion, given the PUC explicitly rejected the underlying policy that made 

the FERC test relevant. As far as the PUC is concerned, the only “actual or potential” tax 

liability that matters is federal income tax liability at the organizational level, of which 

SFPP, as a partnership, has none. (26 U.S.C. § 701.) SFPP appears to be engaging in an 

out-of-context reading of the Decisions to support this argument. For example, the Final 

Decision mentions that “SFPP would fail the current FERC test on the record in this 

proceeding,” (SFPP I, supra, 2011 Cal.P.U.C. Lexis 299 at p. *35) but that was not the 

basis for the PUC’s decision. Rather, the Final Decision explicitly rejected the adoption 

of FERC’s rule with regard to tax allowances for partnerships, noting: “In this instance, 

we do not need our ratemaking determinations to match with FERC’s ratemaking, 

because this Commission must also act within the scope of its discretion, and act 

reasonably on its record.” (Id., 2011 Cal.P.U.C. Lexis 299 at p. *37.) Instead, it 

concluded: “We find that SFPP does not have ‘an actual or potential income tax 

obligation on the entity’s public utility income’ in addition to the personal tax obligation 

of the partners after the partnership distribution.” (Ibid.) 

 On rehearing, the PUC made clear that policy, not a lack of evidence, 

compelled its decision: “Because SFPP pays no income tax itself, the Decision found it 

was not entitled to an income tax allowance for ratemaking purposes.” (SFPP II, supra, 

2012 Cal.P.U.C. Lexis 135 at p. *6, fn. omitted.) “The Decision clearly shows that we 

did understand that SFPP’s partners are responsible for any tax on its earnings. What we 

rejected was SFPP’s suggestion that SFPP and its partners are one and the same. 

Partnerships are viewed as ‘independently recognizable entities apart from the aggregate 

of their partners’ for income tax purposes.” (Id., 2012 Cal.P.U.C. Lexis 135 at p. *7, fns. 
17

omitted.) Thus, given the PUC rejected the policy on which SFPP’s claimed assertion for 

new evidence is based, its due process claim lacks merit.7

C. Return on Equity 

 SFPP next argues the PUC abused its discretion by setting an unreasonably 

low rate of return on equity based on incorrect legal standards. While SFPP wanted a 

return on equity of 15.86 percent, the PUC adopted a rate of 12.61 percent. The Shippers 

recommended a rate of 12.28 percent. (SFPP II, supra, 2012 Cal.P.U.C. Lexis 135 at p. 

*18.) 

 We begin by reviewing the relevant ratemaking principles. It is well-settled 

that a utility is entitled to a reasonable return on its rate base, that is, “the value of the 

property which it employs for the convenience of the public . . . .” (Bluefield Water 

Works & Improvement Co. v. Public Serv. Comm’n. (1923) 262 U.S. 679, 692.) A 

reasonable return is one which is “generally being made at the same time and in the same 

general part of the country on investments in other business undertakings which are 

attended by corresponding risks and uncertainties; but [the utility] has no constitutional 

right to profits such as are realized or anticipated in highly profitable enterprises or 

speculative ventures.” (Id. at pp. 692-693.) While the return on equity “should be 

sufficient to provide a margin of safety for payment of interest and preferred dividends, 

to pay a reasonable common dividend, and to allow for some money to be kept in the 

business as retained earnings,” the PUC “must set the ROE at the lowest level that meets 

the test of reasonableness.” (Application of Pacific Gas and Electric Company

(Cal.P.U.C. Nov. 7, 2002) 221 P.U.R.4th 501, 510 [2002 Cal.P.U.C. Lexis 718 at p. *27] 

 

7 Moreover, as the Rehearing Decision notes, SFPP had the opportunity after FERC 

issued its policy statement to present additional evidence to the administrative law judge, 

but chose not to do so. (SFPP II, supra, 2012 Cal.P.U.C. Lexis 135 at p. *10.) 
18

(PG&E); see also In Re Application of Pacific Gas and Electric Company (Cal.P.U.C. 

Nov. 23, 1992) 46 Cal.P.U.C.2d 798 [1992 Cal.P.U.C. Lexis 798 at p. *161].) 

 “The Commission examines several cost components in calculating a utility 

company’s revenue requirement. The Commission begins by determining the value of 

the assets that the company has invested in to provide utility service . . . . This figure is 

known as the ‘rate base.’” (The Ponderosa Telephone Co. v. Public Utilities Com. (2011) 

197 Cal.App.4th 48, 51 (Ponderosa).) “To invest in rate base assets, a utility company 

raises funds by either issuing debt or selling equity. Costs are associated with each 

method. The company either has to pay interest to creditors on borrowed funds or pay a 

portion of profits or dividends to equity investors, i.e., shareholders. This cost is known 

as the cost of capital. The cost of capital, also known as the rate of return, multiplied by 

the rate base is one component of the utility company’s revenue requirement.” (Ibid.) In 

most instances, a mix of debt financing and equity is used. (Ibid.) 

 “The Commission determines a utility company’s cost of capital in a threestep process. The Commission first adopts a reasonable capital structure, i.e., the 

proportion of debt to equity that a utility company should use to finance its capital needs. 

Next, the Commission calculates the company’s cost of debt, based on the actual cost of 

the company’s outstanding debt during the most recent period. Third, the Commission 

determines the appropriate return on the equity component of the utility company’s 

capital by examining returns for businesses with comparable risks. Applying the 

resulting figures to the adopted capital structure produces the weighted cost of capital. 

This weighted cost of capital becomes the utility company’s authorized rate of return on 

rate base.” (Ponderosa, supra, 197 Cal.App.4th at pp. 51-52.) Finally, “the Commission 

determines the utility company’s rate base and multiplies that number by the authorized 

rate of return. This figure is then added to the company’s operating expenses and tax 

costs. The sum is the company’s revenue requirement, i.e., the amount needed to cover 

the company’s costs and provide a reasonable return on its investments.” (Id. at p. 52.) 
19

 In order to determine the numbers that go into the PUC’s analysis, several 

financial models are used as a starting point. One of these is the discounted cash flow 

(DCF) analysis. (PG&E, supra, 2002 Cal.P.U.C. Lexis 718 at pp. *24-25.) Although the 

models themselves are subjective, the results depend on subjective inputs, which result in 

a wide range of recommend returns. (Ibid; see also Application of California Water 

Service Company (Cal.P.U.C. 2009) 272 P.U.R.4th 512, 524 [2009 Cal.P.U.C. Lexis 233 

at p. *36].) “In the final analysis, it is the application of informed judgment, not the 

precision of financial models, which is the key to selecting a specific ROE estimate. [A]s 

we have routinely stated in past decisions, the models should not be used rigidly or as 

definitive proxies for the determination of the investor-required return on equity. 

Consistent with that skepticism, we find no reason to adopt the financial modeling of any 

one party. The models are only helpful as rough gauges of the range of reasonable 

outcomes.” (Ibid.) 

 According to SFPP I, the PUC adopted SFPP’s proposed capital structure 

of 60 percent equity and 40 percent debt. (SFPP I, supra, 2011 Cal.P.U.C. Lexis 299 at 

p. *48.) It also determined the cost of debt was 7.08 percent. (Ibid.) The PUC 

concluded that “it is within our discretion, and within the recommended range, to adopt a 

return of 12.61% on equity, which yields a weighted cost of capital for test year 2003 of 

10.40%. The equity return is significantly higher than the rate adopted for the major 

energy distribution utilities, and is slightly higher than the recommendation of 

intervenors. When viewed with the 60% equity ratio, this return should be a sufficient to 

compensate investors for the operating and financial risks associated with SFPP’s 

operations.” (Id., 2011 Cal.P.U.C. Lexis 299 at pp. *48-49.) 

 The Final Decision also reflects that the return on investment recommended 

by SFPP and the Shippers differed significantly, based on the financial model used. 

(SFPP I, supra, 2011 Cal.P.U.C. Lexis 299 at p. *47.) The PUC noted the 

recommendations with approved returns on equity for four non-pipeline utilities, using 
20

2003 as a test period. (Id., 2011 P.U.C. Lexis 299 at pp. *42-49.) The compared returns 

on equity ranged from 10.9 percent to 11.6 percent, returns lower than either SFPP or the 

Shippers recommended. (Id., 2011 Cal.P.U.C. Lexis 299 at pp. *46-48.) The Final 

Decision noted significant differences between SFPP, underscoring “the need to evaluate 

rate of return on a case-by-case basis.” (Id., 2011 Cal.P.U.C. Lexis 299 at p. 47.) Using 

the parties’ models as a “starting point” (SFPP II, supra, 2012 Cal.P.U.C. Lexis 135 at p. 

*19), the PUC then “exercised our discretion to make pragmatic adjustments to the 

recommended outcomes . . . .” (Ibid.) 

 Essentially, SFPP complains that the PUC did not use validly calculated 

recommended returns on equity based on a valid proxy group with comparable risks. 

First, it claims the PUC “erred in endorsing the Shippers’ proposed ROE as a valid lower 

reference point, then closely adhering to that figure.” According to SFPP, the Shippers’ 

proposal was based on “discounted income” rather than “discounted cash flow.” 

 There is no evidence, however, that the PUC endorsed any specific 

recommendation. As the Rehearing Decision stated: “DCF analyses are merely one tool 

the Commission uses as a starting point to estimate a fair ROE. And all financial models 

have certain flaws. For that reason, they are not rigidly applied or viewed as definitive 

proxies to determine ROE. They are merely used to provide a rough gauge of the range 

of reasonable outcomes.” (SFPP II, supra, 2012 Cal.P.U.C. Lexis 135 at pp. *18-19, fn. 

omitted.) The fact that the return on equity the PUC ultimately adopted was closer to the 

Shippers’ recommendation than SFPP’s proves nothing. 

 Nor do we accept SFPP’s implication that there is only one acceptable DCF 

methodology. As the PUC points out, even SFPP’s analysis used multiple variations. 

Further, the law does not “‘bind rate-making bodies to the service of any single formula 

or combination of formulas. Agencies to whom this legislative power has been delegated 

are free, within the ambit of their statutory authority, to make the pragmatic adjustments 

which may be called for by particular circumstances. . . .’ [Citations.]” (City of Los 
21

Angeles v. Public Utilities Com., supra, 15 Cal.3d at p. 698.) We must therefore reject 

SFPP’s argument on this point. 

 Second, with respect to the appropriateness of the proxy group, SFPP 

contends the PUC either used an inappropriate group or none at all. As noted above, 

utilities are usually entitled to earn a return similar to those of other companies having 

similar business risks. (Bluefield Water Works & Improvement Co. v. Public Serv. 

Comm’n., supra, 262 U.S. at pp. 690, 692.) Companies used for such comparisons are 

referred to as proxy groups. SFPP argues the PUC either considered an inappropriate 

proxy group or none at all. 

 The record does not support this conclusion. With respect to the claim the 

PUC used an inappropriate comparison group of non-pipeline utilities, the Rehearing 

Decision clarifies that is not what occurred. “SFPP is wrong that the Decision relied on a 

proxy group of energy utilities for purposes of the ROE analysis. We did generally note 

the authorized ROEs for Pacific Gas and Electric Company, Southern California Edison 

Company, San Diego Gas & Electric Company, and Sierra Pacific Power Company 

during the same 2003 time frame. However, we specifically stated that the differences 

between SFPP and energy utilities required that we evaluate authorized returns on a caseby-case basis.” (SFPP II, supra, 2012 Cal.P.U.C. Lexis 135 at p. *16, fns. omitted.) 

Thus, SFPP’s argument that these companies were used as a proxy group is incorrect. 

 If that is not the case, SFPP claims, then the PUC used no proxy group at 

all, which is equally problematic. But this, too, is unsupported by the record. Both SFPP 

and the Shippers agree they used the same proxy group of five publicly traded oil 

pipelines in their own DCF analyses. As the Rehearing Decision noted, the PUC 

“reviewed the DCF analyses presented by both parties . . . .” (SFPP II, supra, 2012 

Cal.P.U.C. Lexis 135 at p. *19.) Thus, the Shippers argue, and we agree, the PUC 

necessarily considered this group “to provide a rough gauge of the range of reasonable 

outcomes.” (Ibid., fn. omitted.) We must therefore reject SFPP’s contention that the 
22

PUC relied on no proxy group at all. The fact that the PUC did not discuss the proxy 

groups at length is not evidence it did not consider them. 

 Further, as the PUC stated, “It is also relevant to note that this Commission 

regulates very few oil pipeline companies that we can look to for comparison purposes.” 

(SFPP II, supra, 2012 Cal.P.U.C. Lexis 135 at p. *16.) While SFPP criticizes this 

statement and urges the PUC to draw from “public information” about other pipelines in 

what it considers to be a valid proxy group, there is no legal requirement for the PUC to 

do so. As the PUC points out, “Nothing in the record provided a meaningful factual 

comparison or analysis of the relative risks and uncertainties of those entities.” 

 Finally, a proxy group is just one element of many the PUC considers in 

setting rates. There is no support in the record that the PUC abused its discretion in doing 

so here. 

IV 

DISPOSITION

 The petition for writ of review is denied. Respondent and real parties in 

interest are entitled to their costs on appeal. 

 

 MOORE, ACTING P. J. 

WE CONCUR: 

ARONSON, J. 

THOMPSON, J.