7. Family Transactions
The Commission recently adopted D.10-10-019 that established affiliate transaction rules for Class B water companies one of which is Alco.30 These new rules focus primarily on inter-company transactions where those companies are financially related. The Commission rulemaking that led to these rules identified four goals:
1. Ensure ratepayers pay reasonable rates and receive high service water quality;
2. Ensure water and sewer utilities have the opportunity to earn reasonable profits so as to provide a high quality of service;
3. Prevent utilities from assisting their affiliates to unfairly compete against other firms; and
4. Avoid imposing rules which would cause excessive burdens on utilities, as compared to public interest benefits.
These rules may not sufficiently or clearly enough address commercial transactions involving Alco and the owners and/or senior employees related to the owners, where there is little or no structural or corporate separation in the form of affiliated companies. The affiliate rules in Rule II-E, for example, define an affiliate in terms of a corporate entity and the degree of ownership.31 The adopted industry-wide rules do not prohibit related transactions; they impose reporting and disclosure requirements.32
Alco has a long history of "leasing" and "buying" equipment directly from the family who own and operate the regulated utility or other companies owned by the family. We find, as discussed below, these transactions are problematic and the cleanest course of action is to prohibit all future family commercial self-dealings and to closely examine any recent family transactions. Because the principal owner is the president's surviving parent there are absolutely no viable internal controls to preclude "sweetheart" self-dealing. Internal controls are processes designed to ensure reliable financial reporting, effective and efficient operations, and compliance with applicable laws and regulations. Internal controls in this instance are critical for safeguarding the utility's assets against theft and unauthorized use. Proper acquisition or disposal of assets is also a part of internal controls. As noted elsewhere, Alco has an independent certified public accountant for complete audits of the company on an ongoing basis. An integral part of such audits is an examination of the existing internal controls (or the lack thereof) which directly affects the accuracy and reliability of Alco's financial statements. We expect Alco to direct its auditor to carefully examine its internal controls to ensure that ratepayers are only burdened with fair and reasonable costs.
Alco is operated by the second generation of the Adcock family, with Thomas Adcock in the role of president whose mother controls the common stock of the company. In this proceeding one issue of dispute between Alco and DRA was the acquisition of equipment directly from Thomas Adcock personally, and another issue was the usage and acquisition of equipment leased from another company controlled by his mother, Mrs. Adcock. Possession of a public utility franchise, which entails an exclusive right to serve, also entails an obligation to provide safe and reliable service at the lowest reasonable cost. The existence of transactions involving the utility business and the individuals who own or operate the utility is problematic: are the prices paid for goods and services fair? Are the goods and services the best available or most suited? We should not have to address or search for the independence of the persons involved in every transaction.
Although the Commission imposes general affiliate transaction rules applicable to Class B companies in D.10-10-019, we hereby impose on Alco an additional clear and simple ban on any commercial transactions in the future between Alco and all Adcock family members and family-related persons.33 We also understand that an absolute ban could in some unforeseeable circumstance also be unreasonable. Therefore we will allow that Alco may file a Tier 3 advice letter, for pre-approval by Commission Resolution, of any transaction with a related person, for good cause, when Alco can clearly demonstrate that the transaction is the most reasonable outcome for the ratepayers. There are, for example, numerous commercial equipment leasing companies, and we would therefore expect that Alco would not seek a waiver when there are viable independent options.
We further emphasize that this ban on family transactions does not apply to investment of equity capital where a ban would dilute the Adcock family ownership interest if the present owner(s) could not have the first chance to maintain their equity investment. Also, any member of the Adcock family with appropriate skills and qualifications may work for the company for reasonable compensation for the work that person performs.34 Thus this ban applies to the acquisition of goods and services from related persons when there are independent provider options and does not prevent the Adcock family from investing any needed equity capital into the company. Alco must continue to comply with all requirements of the affiliate rules as adopted in D.10-10-019.
30 "Our newly adopted rules address our goals of protecting ratepayers, ensuring the financial health of the utility, and preventing anti-competitive behavior in the competitive marketplace." (D.10-10-019 at 2.) The detailed goals as discussed in D.10-10-019 (at 23), did not directly consider family relationships because the primary focus in the rulemaking was on corporate relationships and competitive behavior where those companies are related.
31 Rule II-E: "Affiliate" means any entity whose outstanding voting securities are more than 10 percent owned, controlled, directly or indirectly, by a utility, by its parent company, or by any subsidiary of either that exerts substantial operational control." (2010 Cal. PUC LEXIS 400.) This definition doe not necessarily clearly encompass the person or persons who own the utility's stock and their family. Here, Mrs. Adcock owns the company stock and Thomas Adcock, her son, is the President of the company.
32 Nothing in this brief discussion and description of the affiliate transaction rules should be viewed as modifying or expanding the application of those rules except for the specific commercial transaction ban solely applicable to Alco and the Adcock family adopted herein.
33 In modern California we respect all lifestyles - our concern is with any close personal relationship unreasonably crossing over to the regulated utility and unfairly burdening ratepayers with transactions that are not independent and market cost based.
34 We note again that Thomas Adcock is the president of the company and this ban does not limit his ability or any other qualified family member from being paid a reasonable compensation for necessary work performed as a part of operating Alco.
