5. Discussion

Proposed water utility transfers are reviewed on the basis of Pub. Util. Code § 851-854 and Pub. Util. Code §§ 2718-2720 (the Public Water System Investment and Consolidation Act of 1997). Sections 851-854 prohibit the sale or transfer of control of a public utility without the advance approval of this Commission. Sections 2718-2720 encourage the acquisition of small water companies by larger, more financially secure utilities.

Applicants here have shown that Mesa Crest needs substantial capital improvements, and that Cal-Mich and MCWC, Inc., have the financial resources to accomplish this work. Applicants also have shown that Cal-Mich, because of its experience with a larger Class B water utility, will be able to operate Mesa Crest efficiently, with the possibility of economies of scale that otherwise would not be available. No increase in rates is contemplated as a result of the acquisition, and terms and conditions of service will remain unchanged.

Under the terms and conditions of the sale, Mesa Crest will warrant that all assets of the company are unencumbered, except for a loan and a facility lease. It also will warrant that the company has filed all required federal and state income and franchise tax returns and estimated tax statements and has paid all taxes that are due on or prior to the closing date of the Purchase Agreement. The proposed agreement requires the approval of the Commission and of Los Angeles County. Approval by the California Department of Health Services (DHS) will also be required.

MCWC, Inc., proposes to adopt the filed tariffs of Mesa Crest and agrees to be bound by any outstanding Commission decisions or directives involving the water system being transferred.

The proposed transfer will provide a number of benefits for ratepayers, particularly in ensuring greater financial resources for capital improvement of the system. The current owners of Mesa Crest are in their 70s and desire to pass the responsibilities of operating the system and arranging financing to other qualified operators. The new owners will retain the contractual services of two of Mesa Crest's managers (the sons of the current owners) to ensure a smooth transition. Rates and terms of service to ratepayers are unaffected by the sale and transfer of control. The applicants have demonstrated that the transfer is in the public interest.

As shown at hearing, the efforts of some ratepayers to explore formation of a special district or other public ownership of the water utility can be pursued regardless of the ownership of Mesa Crest. A public entity can negotiate for the purchase of the water system or, if necessary, it can proceed by way of eminent domain to acquire the system. It is premature in this case to address the possibility of increased rates that may result from any substantial capital improvement project. As part of a general rate case, such a project and its effect on rates would have to be approved by this Commission, and both ratepayers and the Commission's Office of Ratepayer Advocates will have the opportunity to examine and oppose some or all of the utility's capital improvements if and when a general rate case is filed. Rate of return on new capital investments by Mesa Crest also is subject to review and approval in the general rate case.

We conclude that the proposed sale and transfer of control of Mesa Crest is reasonable, is in the public interest, and will provide tangible benefits to ratepayers. We will approve the application and dismiss the formal protests without prejudice to renewal of those protests at the time any rate proceeding is filed by Mesa Crest.