5. Competitive Bidding Rule
Resolution F-616 requires utilities to issue debt using competitive bids. The purpose of this requirement, known as the Competitive Bidding Rule, is to reduce the cost of debt issued by utilities. The Resolution also provides for utilities to seek an exemption from the Competitive Bidding Rule for debt issues when competitive bidding is not viable or available.
Cal Am seeks an exemption from the Competitive Bidding Rule with respect to issuing long-term Debt Securities, both directly as well as through Capital Corp. Cal Am also has no bond rating. Given its lack of a bond rating as well as issuance of Debt Securities through Capital Corp., Cal Am states that it would not be "viable, practical, or feasible" to issue and sell long-term notes through the competitive bid process.
In regards to those issuances made through Capital Corp., Cal Am is bound by the Affiliate Transaction Rules authorized in D.02-12-068, which require, in part, that Cal Am may only deal with an affiliate if the conditions are arms length and competitive.6 The Affiliate Transaction Rules provide protection against Cal Am and its ratepayers being charged a higher than market rate on the debt it issues through Capital Corp.
Item 6 of Resolution F-616 allows for exemption from the Competitive Bidding Rule for utilities with a bond rating lower than "A." As stated above, Cal Am does not have a bond rating of its own; therefore, by default, it qualifies for an exemption under this criterion as well.
Cal Am's request for an exemption from the Competitive Bidding Rule is granted on the basis that: the request is consistent with the terms of Resolution F-616; the Commission has routinely granted Cal Am a similar exemption in the past with no discernable adverse impacts on the utilities, their customers, or the public at large;7 the cost of debt issued through Capital Corp. is governed by the affiliate transaction rules authorized in D.02-12-068; and, Cal Am has represented that granting the exemption will enable it to take prompt advantage of pricing opportunities in the debt market.
However, we make no finding regarding the reasonableness of the rates, terms, and conditions of debt issued by Cal Am pursuant to the exemption granted herein. The reasonableness of the resultant interest rate and cost of money to the utility is subject to scrutiny in Cal Am's cost of capital proceedings.
6 See D.02-12-068, Appendix B, Affiliated Transaction Rules, No. 16: "Except for common costs allocated in the manner described in Paragraph 7, the cost of services provided by an affiliated company to Cal-Am shall be considered reasonable if it is at or below the lowest of (a) the cost which would have been incurred by Cal-Am if it provided such services on comparable terms, (b) the rate which would have been charged to Cal-Am by an unaffiliated party for the provision of comparable services on comparable terms, or (c) the rate which would have been charged by the affiliated company to an unaffiliated party for the provision of comparable services on comparable terms."
7 See D.08-11-025 at OP 2 and D.06-07-035 at OP 4.
