VI. Review of Reasonable Alternative Options

Pursuant to § 854(d), the Commission shall consider reasonable alternative options to the proposed transaction which are recommended by other parties, including no acquisition, to determine whether comparable short-term or long-term economic savings can be achieved through other means while avoiding the possible adverse consequences of the proposal.

MSD believes that public acquisition of its district is a superior alternative to this transaction because of the unique nature of the MSD. Cal-Am's Montara District has had serious water service deficiencies for over 25 years, and since 1981, there has been a moratorium on new connections in the district. According to the revised 2000 Master Plan approved in D.01-09-055, Montara needs significant capital investment over the next few years for system improvements.

MSD argues that because of these factors, rates are high and are certain to escalate in the future. According to MSD, the four factors driving rates higher are (1) the cost of capital improvements authorized in D.01-09-055, which are expected to cost between $4.5 to $5.5 million and would more than double the current rate base in the Montara District within the next seven years;²⁶ (2) the cost of additional capital improvements, such as redrilling a recently failed well, which are not included in the master plan; (3) the potential significant rate increase from Cal-Am's expected general rate case; and (4) the fact that Cal-Am has failed to take advantage of opportunities to obtain grants and low-cost tax-exempt financing, such as could be obtained through joint participation with MSD in capital improvements.

MSD argues that the causes of the problems of the Montara District are many, but in part result from long-time neglect from Citizens Utilities' management, which has not improved under Cal-Am's purview. MSD argues that the settlement does nothing to address Montara District's unique problems, which MSD believes it can alleviate by increased responsiveness and its access to low-cost tax-exempt financing. MSD submitted evidence showing that if it refinanced 100% of its rate base using tax-exempt financing, the benefits for the Montara District are 165 times greater than the estimated benefits from the instant transaction. Because of this, MSD argues that if other equally qualified, financially capable, and willing alternative providers are capable of serving the Montara District's customers, and can provide ratepayer benefits superior to those that can be provided by the proposed acquiring entity, the Commission should condition approval of the transaction on Cal-Am's divestiture of the Montara District to the alternative provider.

Applicants and ORA disagree, arguing that Montara District's water problems are not related to this transaction, and that the Commission is addressing them through other means, such as by the Master Plan discussed above. Applicants also point out that MSD has filed a condemnation case, and that MSD will be able to acquire the district after a jury verdict in that action.

The Montara District is in a unique position vis-a-vis other Cal-Am districts, because the Montara District has had, and continues to have, persistent critical water problems as to quality, service, capacity, and rates. Furthermore, for a number of reasons, water development in and around the Montara area has historically been very difficult. As we found in D.01-09-055, "[w]ater resources are limited, water development can be competitive, and anti-growth sentiment is significant." (2001 Cal. PUC LEXIX 777 *11.)

Private companies (first Citizens and now Cal-Am) have been unable to solve these problems to date. However, in November 2001, over 80% of the Montara District voters approved a bond measure for the acquisition of Cal-Am's Montara District facilities by MSD. As a result of this vote, the MSD has recently filed a condemnation action in Superior Court.

While our record does not permit us to make a finding that the Montara District will be better off under public management than under Cal-Am's, we can find that they will not be worse off. MSD demonstrated that if it acquires the Montara District, it can obtain access to lower cost financing for its entire rate base, and local control and accountability, which is quite critical to resolve the Montara District's problems, will be enhanced. We are also influenced by the Montara District voters overwhelming selection of the MSD to operate the water district. Under these circumstances, pursuant to § 854(d), we condition this transaction upon Cal-Am's divestiture of the Montara District to MSD or another public agency. Ratepayers shall not bear any costs of this divestiture. (See e.g., Re Pacific Enterprises, Enova Corp. et al. (D.98-03-073, 79 CPUC2d 343, 394-396.) We do not anticipate that this divestiture should be difficult to accomplish, since MSD has a condemnation action pending, and the only issue between the parties is the amount of just compensation.

Thousand Oaks also argues against this transaction, in part, because public acquisition would be superior for its district. We believe the transaction, as conditioned by this decision, is in the public interest for the balance of Cal-Am's districts. Thousand Oak's arguments were of a general nature, and did not set forth the specificity that MSD did. For instance, Thousand Oaks at one point argues that the majority of its district does not need immediate capital improvements. The Montara District's water persistent water problems are unique and are not common to Cal-Am's other districts. We therefore limit this divestiture condition to the Montara District.