2. Background

Alco is a Class B water company that serves almost 9,000 customers in the eastern portion of the City of Salinas. On October 12, 2007, Alco filed Application (A.) 07-10-012 to request authority under Pub. Util. Code § 816 et seq., and § 851¹ to issue $8 million of long-term secured debt for the purposes set forth in Table 1, below. Notice of A.07-10-012 appeared in the Daily Calendar on October 16, 2007. The Division of Ratepayers Advocates (DRA) filed a protest on November 15, 2007. There were no other protests or responses.

A prehearing conference was held on March 14, 2008, and an evidentiary hearing was held on June 3, 2008. Opening and reply briefs were filed on June 13 and June 20, 2008, respectively. The case was submitted on June 20, 2008.

DRA raised four main issues during the proceeding. First, DRA expressed concern about how Alco intended to use the proceeds of the requested debt. Alco was able to demonstrate to DRA's satisfaction that Alco intended to use the debt for proper purposes.

Second, Alco's capital structure at the end of 2007 consisted of 91% long-term debt and 9% equity, a ratio of more than 10-to-1. DRA expressed concern that authorizing Alco to issue an additional $8 million of long-term debt would increase the debt-to-equity ratio even further. To address DRA's concern, Alco agreed to revise its request. Instead of issuing $8 million of long-term debt, Alco would issue $6 million of long-term debt, $2 million of preferred stock, and $0.33 million of common equity. Alco also agreed to reduce the long-term debt in its capital structure from 91% to 75% over a three-year period.

Third, preferred stock may be considered as either debt or equity, depending on its characteristics. In view of Alco's already high debt-to-equity ratio, DRA insisted that the preferred stock issued by Alco have the characteristics of equity, which are described below. Alco agreed.

Finally, DRA recommended that the Commission order Alco to file a general rate case (GRC) application. Alco opposes DRA's recommendation.

¹ All statutory references are to the Public Utilities Code unless otherwise stated.