5. Competitive Bidding Rule

The Commission has a long history of exempting many forms of borrowing from its general rule (Resolution F-616) which requires competitive bidding. Generally, competitive bidding ensures that the transactions are at arms length with the bidders and are open to the widest possible market to attract as favorable a rate and terms as possible. The Commission exempts financing from this rule when the applicant persuades us that the type or size of the transaction is likely to be more cost effective when there are direct negotiations with potential lenders.

In this instance, California American proposes to borrow through its affiliate, Capital Corp., which would require an exemption from the competitive bidding rule. We granted a prior exemption for borrowings through Capital Corp. (D.06-07-035, pp. 6-7.) The Commission has not examined the need for and justification of the competitive bidding rule in many years. We will not do an ad hoc review here. In D.06-07-035, we noted that California American has no independent bond credit rating (p. 6). Additionally, California American asserts that it would continue to apply procedures for (1) prompt and fair compensation or reimbursement for financing transactions between the applicant California American, its parent company American Water Works Company, Inc., and its affiliate, Capital Corp.; and (2) reasonable assurance so that California American Water maintains its financial strength to meet its public utility obligations and permit the Commission to fulfill its regulatory responsibilities. (Application, p. 8.) The Commission adopted a settlement agreement which placed certain conditions upon the transfer of control of California-American in D.02-12-068. As a part of that approval the Commission adopted specific affiliate transaction rules (alluded to in the business procedures above) and in particular those rules included item 16, "Pricing of Service from Affiliated Companies to Cal-Am":

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. (Settlement Agreement, Appendix A.)

Under paragraph 16 of the California American settlement's affiliate transaction rules, California American may only deal with an affiliate if the conditions are arms length and competitive.

We find that California American has good reason to be exempted from competitive bidding for this authority, but California American may still elect to competitively bid any financial transaction.

We note that this decision does not find the costs of borrowing by California American to be reasonable and prudent; that review will occur in a subsequent cost of capital proceeding. California American's current cost of capital application, A.08-08-003, does not adopt a reasonable cost for the new debt authorized pursuant to this decision even though the 2009 base year cost of capital includes a forecast for this debt. We will review the reasonableness of this new debt in a subsequent cost of capital proceeding.