IV. Standards of Review

A. Standard of Review for Settlements

We review this contested settlement pursuant to Rule 51.1(e) of the Commission's Rules of Practice and Procedure (Rules), which provides that, prior to approval, the Commission must find a settlement "reasonable in light of the whole record, consistent with the law, and in the public interest." If the Commission determines that a settlement fails any one of these requirements, the Commission must reject it, or approve it subject to conditions sufficient to meet the requirements of Rule 51.1(e).

B. Standard of Review for This Acquisition

We begin our analysis by summarizing the statutes with most direct bearing on whether this merger is consistent with the law and in the public interest.

Pub. Util. Code § 851, in relevant part, requires Commission approval before a public utility may sell the whole or any part of its system; § 852 requires a public utility to secure Commission authority before acquiring any capital stock of any other public utility; § 854(a) requires Commission authorization before any person or corporation may acquire or merge with any public utility; and § 854(d) requires the Commission to consider reasonable "options" to the applicants' proposal recommended by other parties, in order to determine whether comparable short-term and long-term economic savings can be achieved through other means while avoiding the possible adverse consequences of the proposal. The Commission has long interpreted the above code sections to prohibit acquisitions, mergers, and transfers of control unless the Commission finds the proposed transaction to be in the public interest.

In order to determine whether the proposed transaction is in the public interest, the parties differ on whether the Commission should apply the "ratepayer indifference standard" (i.e., a showing that no negative effects result from the change of control), or whether the Commission should require that the transaction offer ratepayers some equitable share of the benefits the transaction will generate. (See D.00-05-047, 2000 Cal.PUC LEXIS 314, concerning California Water Services Company's purchase of Dominguez Water Company, et al. (CWS/Dominguez merger) and D.01-09-057, 2001 Cal. PUC LEXIS 826, concerning the Cal-Am/Citizens merger.)

In D.00-05-047, the Commission approved the merger under the ratepayer indifference standard.³ The dissent stated that approvals for transfers of utility property under § 851 et seq. should include a finding of ratepayer benefit. (See D.00-05-047, 2000 Cal. PUC LEXIS 314 **60-61.) The dissent also stated that while it is not necessary to address the public interest considerations listed in Pub. Util. Code § 854(b) and § 854(c), since these sections do not apply by their terms to water utilities, this itemization of issues may inform the Commission's deliberations on how to strike the public interest balance. (Id. at note 2.)

In the Cal-Am/Citizens merger, the Commission concluded that, for an acquisition subject to § 2720⁴ to be in the public interest under § 851 and § 854(a), it must offer ratepayers an equitable share of the benefits the transaction will generate. (See D.01-09-057, 2001 Cal. PUC LEXIS 826, * 107, Conclusion of Law 8). The Commission also concluded that while § 854(b) and § 854(c) do not by their terms apply to water utilities, the Commission may, but need not, consider the extent to which the factors set forth in those sections bear on the public interest. (Id. at Conclusion of Law 9.)

Both the Cal-Am/Citizens merger and the CWS/Dominguez merger differ from this transaction in two respects. First, the Cal-Am/Citizens and CWS/Dominguez transactions involved the merger of California water utilities, and applicants in those proceedings projected operational and administrative synergies from the merger of the affected entities. In this case, applicants are not merging California water utilities; rather, this transaction involves an acquisition at the holding company level. For that reason, applicants do not demonstrate that the transaction will eliminate redundancies; rather, they project that Cal-Am will operate its business as usual, and will achieve benefits from operating practices, etc., over time.

Second, unlike this transaction, the CWS/Dominguez and the Cal-Am/Citizens mergers both involved recovery of the acquisition premium authorized by Pub. Util. Code § 2720, where in this case applicants state that they are not seeking to increase Cal-Am's rate base, as they believe they have a right to do under § 2720, and thus are not placing these associated costs on ratepayers.⁵

Although this acquisition differs significantly from the CWS/Dominguez and Cal-Am/Citizens mergers, the Commission does not have to determine whether some other standard should apply because we find the settlement, as modified by the conditions we impose in today's decision, meets the higher standard adopted in D.01-09-057 that ratepayers receive an equitable share of the benefits of the transaction. In order to examine this equitable sharing, as well as other aspects of this settlement that may inform the Commission how to strike the public interest balance, we review the settlement pursuant to the criteria set forth in § 854(b) and (c), even though these sections are not by their terms applicable to this transaction.

C. § 854(b) and (c)

Pub. Util. Code § 854(b) and (c) are applicable to certain mergers, acquisitions, or changes in control involving electric, gas or telephone utilities and are not by their terms applicable to this transaction. However, as stated above, in other mergers and acquisitions where § 854(b) and (c) do not apply, the Commission can consider these factors in determining if the transaction is in the public interest.

Because the bulk of this decision is structured around the elements of § 854(b) and (c), we set forth those provisions here. Pub. Util. Code § 854(b) provides that before authorizing the merger, acquisition, or control of any California electric, gas, or telephone utility, where any of the utilities that are parties to the proposed transaction has gross annual California revenues exceeding five hundred million dollars, the Commission shall find that the proposal does all of the following:

(1) Provides short-term and long-term economic benefits to ratepayers.

(2) Equitably allocates, where the commission has ratemaking authority, the total short-term and long-term forecasted economic benefits, as determined by the commission, of the proposed merger, acquisition, or control, between shareholders and ratepayers. Ratepayers shall receive not less than 50 percent of those benefits.

(3) Not adversely affect competition.⁶

Pub. Util. Code §854(c) provides that before authorizing the merger, acquisition, or control of any California electric, gas or telephone utility where any of the entities that are parties to the proposed transaction has gross annual California revenues exceeding 500 million dollars, the Commission shall consider each of the criteria listed below and find, on balance, that the transaction is in the public interest.

(1) Maintain or improve the financial condition of the resulting public utility doing business in the state.

(2) Maintain or improve the quality of service to public utility ratepayers in the state.

(3) Maintain or improve the quality of management of the resulting public utility doing business in the states.

(4) Be fair and reasonable to affected public utility employees, including both union and nonunion employees.

(5) Be fair and reasonable to the majority of all affected public utility shareholders.

(6) Be beneficial on an overall basis to state and local economies, and to the communities in the area served by the resulting public utility.

(7) Preserve the jurisdiction of the commission and the capacity of the commission to effectively regulate and audit public utility operations in the state.

(8) Provide mitigation measures to prevent significant adverse consequences which may result.

³ D.00-09-042, which denied rehearing of D.00-05-047 on various grounds, including the standard of review, stated that the issue of the appropriate standard of review of mergers under § 851 et seq. (i.e., ratepayer indifference vs. ratepayer benefit) is very much alive in Commission proceedings, but declined to address the issue further. D.00-09-042 denied rehearing on the standard of review because it found that D.00-05-047, although expressly relying only on ratepayer indifference, actually satisfied the more stringent ratepayer benefit standard by finding definite, quantifiable benefits flowing from the merger. ⁴ Section 2720 is part of the Public Water Systems Investment and Consolidation Act of 1997 (Pub. Util. Code § 2718 et seq.), which sets out a procedure for establishing rates at fair market value following the completion and approval of an acquisition of a public water system by a regulated water utility. ⁵ We question whether applicants would have the right to increase Cal-Am's ratebase pursuant to § 2720 for this type of transaction, but need not reach that issue here because applicants do not seek to do so. ⁶ Section 854(b)(3) requires the Commission to request an advisory opinion from the Attorney General regarding whether competition will be adversely affected and what mitigation measures could be adopted to avoid this result.