4. Discussion

4.1. Public Utilities Code Requirements for Issuance of Securities

Cal Am's request is subject to Pub. Util. Code §§ 816, 817, and 818.² The Commission has broad discretion under §§ 816 et seq. to determine if a utility should be authorized to issue debt. Where necessary and appropriate, the Commission may attach conditions to the issuance of debt and stock to protect and promote the public interest.

Pursuant to § 817, a public utility may only issue and use financing for selected purposes.³ Those purposes not listed in § 817 may only be paid with funds from normal utility operations. Cal Am has substantiated that the issuance of new Debt Securities is necessary for the acquisition of property, construction, completion, extension, or improvement of Cal Am facilities, retirement/refinancing of previously issued debt, and/or reimbursement of Cal Am for money expended from income or its treasury funds. These purposes are authorized by § 817 and, as required by § 818, are not reasonably chargeable to operating expenses or income.

Consistent with § 824, Cal Am shall maintain records to identify the specific long-term debt issued pursuant to this decision, and demonstrate that proceeds from such debt have been used only for public utility purposes.

Therefore, we will grant Cal Am authority under §§ 816 et seq. to issue new Debt Securities for the aforementioned purposes, and for the amounts determined in Section 4.2 of this decision.

4.2. Forecast of Sources and Uses

Utility applications seeking authority to issue debt or other securities are based, in part, on forecasted sources and uses of funds that illustrate the requested need for funding. Cal Am used a long-term forecast covering the three-year period of 2010-2012 to determine its future financings needs. Cal Am's forecast includes uses of funds such as capital expenditures and payment of maturing debt obligations. Cal Am stated that it may reimburse its treasury as well, but forecast no specific amount for this item. Cal Am's forecast also includes sources of funds, such as cash flow from operations, issuance of short-term debt, and contributed capital from AWWC. Cal Am's request is supported by Exhibit E, Schedule E-1 to this application, which provides a summary of its forecasted capital expenditures for 2010-2012; Schedule E-2, which provides its forecasted sources and uses for 2010-2012; and Exhibit A to its Response, which provides a sources and uses statement in the format requested by the ALJ. In its Response, Cal Am also stated that it has no outstanding financing authority. We rely on these documents to determine the forecast of Sources and Uses set forth below in Table 1.

Table 1

Sources and Uses Statement for 2010-2012

Based on the results from Table 1, we will authorize $85 million of new Debt Securities. This new financing will allow Cal Am to fund its capital expenditure plans for the period 2010 through 2012, retire/refinance existing securities, and reimburse Cal Am for money expended from income or treasury funds. We find Cal Am's request to be reasonable and supported by the record.

A granting of financing authority to a utility does not obligate the Commission to approve any capital projects. This financing authority provides Cal Am with sufficiently liquid resources to timely finance its upcoming public utility projects, to refund maturing debt, and to reimburse its treasury. Review of the reasonableness of capital projects occurs as needed through the regulatory process applicable to each capital project. Therefore, approval of this financing request does not prejudge any of Cal Am's forecasted projects for the period 2010 through 2012.

4.3. Tax-Exempt Financing and Encumbrance of Assets

Cal Am seeks authority to finance capital projects, if available and cost effective, through tax-exempt government securities, issued either through Capital Corp. or directly from a government entity. Both of these types of tax-exempt bonds may be issued on either a secured or an unsecured basis. If issued on a secured basis, the tax-exempt financing would be secured by the assets of Cal Am. When Cal Am qualifies for tax-exempt financing under federal or state law, and these tax-exempt securities result in a lower overall cost when compared with similar taxed securities, we find it reasonable for Cal Am to utilize tax-exempt long-term financing.

For the tax-exempt Debt Securities issued on a secured basis through Capital Corp. as well as directly with a government entity, Cal Am seeks authority to sell, lease, assign, mortgage, or otherwise dispose of or encumber its utility property. This request to encumber utility property is subject to § 851, which states, in relevant part, that no utility shall encumber any part of its plant, system, or other property necessary or useful in the performance of its duties to the public, or any franchise or permit or right there under without first having secured from the Commission an order authorizing it to do so. In those cases where secured tax-exempt financing is issued through Capital Corp., § 701.5 also applies. This code section requires that Commission authorization be received before a utility pledges its assets on behalf of an affiliate that engages in financing arrangements for the utility.

It is reasonable for Cal Am to encumber its utility assets in order to issue tax-exempt securities, as discussed earlier in this section, which are governed by federal or state law and result in a lower cost to the ratepayer.

4.4. Financial Services Agreement

Cal Am seeks authority to issue Debt Securities through Capital Corp., pursuant to the Agreement. We have granted Cal Am this authority for the same Agreement in the past, and do so again here.⁵

² Unless specified otherwise, all subsequent code section references are to the Public Utilities Code.

³ 817. A public utility may issue stocks and stock certificates or other evidence of interest or ownership, and bonds, notes, and other evidences of indebtedness payable at periods of more than 12 months after the date thereof, for any one or more of the following purposes and no others:

(a) For the acquisition of property.

(b) For the construction, completion, extension, or improvement of its facilities.

(c) For the improvement or maintenance of its service.

(d) For the discharge or lawful refunding of its obligations.

(e) For the financing of the acquisition and installation of electrical and plumbing appliances and agricultural equipment which are sold by other than a public utility, for use within the service area of the public utility.

(f) For the reorganization or readjustment of its indebtedness or capitalization upon a merger, consolidation, or other reorganization.

(g) For the retirement of or in exchange for one or more outstanding stocks or stock certificates or other evidence of interest or ownership of such public utility, or bonds, notes, or other evidence of indebtedness of such public utility, with or without the payment of cash.

(h) For the reimbursement of moneys actually expended from income or from any other money in the treasury of the public utility not secured by or obtained from the issue of stocks or stock certificates or other evidence of interest or ownership, or bonds, notes, or other evidences of indebtedness of the public utility, for any of the aforesaid purposes except maintenance of service and replacements, in cases where the applicant has kept its accounts and vouchers for such expenditures in such manner as to enable the commission to ascertain the amount of money so expended and the purposes for which such expenditure was made.

⁴ Surplus (deficit) equals total financial requirements (uses of funds) less total source of funds.

⁵ See Decision (D.) 08-11-025 at 1 and D.06-07-035 at 4, 7, and Ordering Paragraph (OP) 4.