X. Assignment of Proceeding
Henry Duque is the Assigned Commissioner and Janet Econome is the assigned ALJ in this proceeding.
1. Under the proposed transaction, RWE will purchase all of the stock of Cal-Am's parent, American, pursuant to the Agreement and Plan of Merger dated September 16, 2001 between American and Thames. Under the agreement, American will merge into a corporate shell entity, the Apollo Acquisition Company, that is a subsidiary of Thames Holdings created solely to accommodate the acquisition of American. After the transaction, American will become the wholly owned subsidiary of Thames USA, which is organized in the United States and is a wholly owned subsidiary of Thames Holdings, which is a wholly owned subsidiary of RWE.
2. Thames Holdings will purchase all outstanding American common stock at $46/share and will assume American's existing debt. The total purchase price is $7.6 billion, consisting of $4.6 billion in cash and the assumption of $3.0 billion in debt. The purchase price includes a $2.8 billion acquisition premium, which is about 2.6 times American's book value of about $1.8 billion.
3. After the proposed transaction is completed, Cal-Am will continue to be the operating public utility providing water utility service under the Commission's jurisdiction in the areas where it is authorized to do so.
4. According to their respective annual reports for 2001, American's total revenues for 2001 were $1,438,887,000, while Cal-Am's were $76,639,907.80. Thus, Cal-Am's total operating revenues are about 5% of American's. Cal-Am's customer base comprises about 6.4% of American's.
5. On July 31, 2002, ORA, applicants, and the Union signed a settlement agreement. San Diego, which had opposed the application, withdrew its opposition and supported the settlement. MSD and Thousand Oaks continue to oppose the application and settlement.
6. 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. This case, in contrast, 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. Also, the Cal-Am/Citizens and CWS/Dominguez mergers both involved recovery of the acquisition premium authorized by Pub. Util. Code § 2720, where in this case applicants are not seeking to increase Cal-Am's rate base.
7. Cal-Am's enhanced access to Thames' additional security protections, although monetarily unquantifiable at this time, is a benefit of this transaction.
8. Cal-Am's use of Thames Water's design/build process is a short-term benefit to ratepayers, because reducing capital costs by about $2.2 million should translate into lower rates than would have occurred if the improved construction methods were not used.
9. Cal-Am's access to Thames Water's R&D is a substantial, albeit an unquantifiable benefit of this transaction, because Thames Water will share its embedded R&D with American at no cost, and Thames Water has had a substantially higher R&D budget than has American.
10. Since 1998, Thames Water has invested in excess of $6 billion to enhance service quality, including constructing an advanced water treatment system and major renovations of water mains and sewage treatment works. This background should be beneficial in enhancing Cal-Am's future service quality.
11. Cal-Am's customers can benefit from Thames Water's technology providing a direct, real-time link between the Customer Service Center and the field technicians by having customer problems ascertained, analyzed, and addressed by field personnel in a more accurate, timely, and efficient manner.
12. Cal-Am ratepayers will benefit from this transaction because Cal-Am will have a lower cost of debt and cost of capital as a result of the transaction. RWE has an A+ credit and bond rating from S&P and an A1 credit rating from Moody's. AWCC's comparable ratings from S&P are A- and BB+, and Baa1 from Moody's. This means that RWE will be able to borrow money at a lower cost than AWCC under the current ratings.
13. Cal-Am's ratepayers have already benefited from RWE's higher credit rating in receiving a lower cost of debt as a result of the pending transaction. The savings, or benefit, to Cal-Am's ratepayers is about $300,000 per year, or about $1.5 million over a five-year period, which is the length of the bond.
14. Condition 19 of the settlement, as clarified, means that for the five-year period described in that condition, Cal-Am will not seek a cost of debt greater than A- for secured debt and Baa1 for senior unsecured debt.
15. We want to guard against the possibility of "rate shock," or a large rate increase occurring at one time.
16. The stay out provision, as conditioned, will benefit ratepayers to the extent the Commission orders a rate increase for Cal-Am. However, we cannot quantify on this record the likelihood of our ordering a rate increase in the future, or the amount of such increase, and therefore cannot quantify the benefits associated with condition 1 at this time.
17. The public purpose programs set out in conditions 23 and 24 should benefit ratepayers if properly implemented.
18. The Affiliate Transaction Rules attached to the settlement should benefit ratepayers because there are currently no standardized, Commission approved affiliate transaction rules that apply to all transactions between Cal-Am and its parent and affiliates.
19. Through condition 20, the applicants are committed to pass through 100% of the future benefits of this transaction to Cal-Am's ratepayers.
20. Because D.01-09-057 approving the Cal-Am/Citizens merger permits future benefits of that merger to largely accrue to shareholders in future rate cases, there exists an incentive for applicants in the future to find savings attributable to the Cal-Am/Citizens merger rather than to this transaction.
21. In settlement conditions 17 and 18, applicants have agreed not to pass on to Cal-Am ratepayers any transaction-related costs, and to forego the step up in rate base they believe is authorized by Pub. Util. Code §§ 2118 - 2120.
22. This acquisition should not adversely affect competition.
23. Condition 2 requires RWE, Thames, and American to provide Cal-Am with all necessary capital to fulfill all of its obligations prescribed by this Commission.
24. The term "capital" as used in condition 2 is broader than just investment in plant and facilities; rather, the definition of "capital" in condition 2 is the same definition of capital used in by the Commission in D.02-01-039, Investigation into Pacific Gas and Electric Company, Southern California Edison Company and San Diego Gas and Electric Company and their respective holding companies, Findings of Fact 5 and 6, 2002 Cal. PUC LEXIS 5 *57.
25. Having Cal-Am's representatives available locally is an important aspect of customer service.
26. Cal-Am should be, at the very least, meeting its own internal service quality targets.
27. Conditions 8, 9, and 10 are binding on RWE, Thames, American and Cal-Am.
28. Applicants have committed that they will not change operational control, nor the management or officers as a result of this transaction. However, no settlement condition addresses the makeup of Cal-Am's board of directors.
29. As mitigated by the settlement and further conditions we impose, this transaction should not adversely affect Cal-Am's service quality.
30. The conditions discussed in Section V.E, as interpreted by the Commission, sufficiently mitigate the transaction's business and financial risk.
31. Because Cal-Am's board of directors sets the policy and direction for Cal-Am, it is important to ensure that the board is responsive to local concerns.
32. For the reasons set forth in Section V.H, the transaction should be fair and reasonable to employees.
33. Because American's shareholders approved the acquisition, we infer that the transaction is fair and reasonable to these shareholders.
34. For the reasons set forth in Section V.J, the transaction should be beneficial to the state and local economies and communities in the area served.
35. The Commission will have access to Cal-Am and its affiliated companies' books and records as necessary in the Commission's judgment to facilitate the Commission's obligation to regulate.
36. 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.
37. Private companies (first Citizens and now Cal-Am) have been unable to solve these problems to date.
38. 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.
39. 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.
1. Pursuant to Rule 51.1(e) 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."
2. 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.
3. Pursuant to § 854, the Commission has broad authority to approve or deny applications for transfers of utility ownership or control. Implicit in this authority is the right to place reasonable conditions upon the transferor or transferee, should the need for conditions arise. The right to impose these conditions carries with it the right to enforce the conditions at the Commission in Commission proceedings.
4. It is reasonable to modify the settlement to guard against the possibility of "rate shock," or a large rate increase occurring at one time.
5. The proposed transaction, with the conditions agreed to in the settlement as further conditioned by this decision, provides ratepayers an equitable share of both quantifiable and unquantifiable short-term and long-term benefits.
6. The Director of the Water Division should immediately designate Commission personnel to participate with applicants in developing the programs set forth in settlement conditions 23 and 24, and Commission personnel and applicants should hold their first meeting on these programs no later than 15 days from the effective date of this decision. The Director of the Water Division should explore whether existing programs comparable to each proposal exist, and whether these monies can be more effectively used directed toward these existing programs. We intend that applicants spend the fully allocated annual sum, and applicants should file annual reports with the Director of the Water Division and ORA no later than January 31 during the five year duration of these programs with an accounting of monies spent on each of these public purpose programs.
7. Rules 1, 7 and 14 of the Affiliate Transaction Rules appended to the settlement mistakenly refer to "affiliate sister companies" instead of "affiliated companies", and we adopt the settlement as so corrected.
8. In future rate cases, applicants have the burden of establishing from which transaction (this transaction or the Cal-Am/Citizens merger) the benefits accrue. If applicants do not meet this burden, the Commission will attribute the benefits to this transaction rather than to the Cal-Am/Citizens merger, to assure ratepayers that they receive 100% of the benefits of this transaction.
9. Applicants are not entitled to recover either the acquisition premium or any transaction-related costs in current or future rates.
10. Although a small part of RWE's business is comprised of riskier ventures, this business and financial risk is mitigated by RWE's diverse portfolio, as well as by certain settlement conditions.
11. To mitigate customer concerns about the potential for Cal-Am's lack of responsiveness due to foreign ownership, reasonable requirements should be imposed on any potential closure of Cal-Am's existing field offices, and reasonable performance targets should be imposed on Cal-Am's customer call center.
12. To ensure that Cal-Am's corporate governance is reasonably responsive to local concerns, reasonable requirements should be imposed regarding the make-up of Cal-Am's board of directors as a condition to approval of this transaction.
13. We adopt the following condition as agreed to by applicants and San Diego. The management of Cal-Am has and will continue to have full authority with regard to any decisions concerning Cal-Am's relationship with the City of San Diego including, but not limited to, any water supply and franchise agreements. This condition is the functional equivalent of condition 9.
14. To ensure applicants are complying with the Affiliate Transaction Rules, and to preserve the Commission's capacity to effectively regulate and audit public utility operations in the State, approval of this transaction should be conditioned on RWE, Thames, American, and Cal-Am being subject to Pub. Util. Code § 797.
15. As mitigated by the settlement and the further conditions we impose, the transaction preserves the Commission's jurisdiction.
16. Under the unique circumstances set forth in this decision, pursuant to § 854(d), approval of this transaction should be conditioned upon Cal-Am's divestiture of the Montara District to MSD or another public agency. Ratepayers should not bear any costs of this divestiture.
17. The requested acquisition and transfer of control is a "project" that qualifies for an exemption from CEQA pursuant to § 15061(b)(3) of the CEQA guidelines.
18. Pub. Util. Code § 704 does not bar this transaction.
19. Appendix B sets forth the settlement as annotated by the Commission's specific understanding of its terms where appropriate, and we approve the settlement based on that understanding and as further described and conditioned in this decision.
20. The settlement agreement, as interpreted by the Commission in this decision and Appendix B, as further conditioned by this decision, is reasonable in light of the whole record, consistent with the law, and in the public interest, and we approve it.
21. The transaction should be approved subject to the conditions imposed by the settlement condition and the additional conditions imposed by this decision.
22. In order to provide certainty to the parties in their business dealings, this decision should be effective immediately.
IT IS ORDERED that:
1. The joint application of California-American Water Company (Cal-Am), RWE Aktiengesellschaft (RWE), Thames Water Aqua Holdings GmbH (Thames Holdings), Thames Water Plc (Thames refers to the Thames entities), and Apollo Acquisition Company (applicants) for authority pursuant to Pub. Util. Code § 854 authorizing Thames Holdings, RWE and Thames Water Aqua U.S. Holdings, Inc. to acquire control of American Water Works (American) is granted, subject to the conditions set forth in the August 1, 2001 settlement agreement and attached Affiliate Transaction Rules, as interpreted by the Commission in Appendix B, which we approve, as well as to the further conditions set forth in the ordering paragraphs that follow.
2. Condition 1 of the settlement shall be modified as set forth in the Commission comment on the attached settlement.
3. During the five years following the completion of this transaction, applicants shall not close any of Cal-Am's existing filed offices for any reason without first receiving this Commission's permission to do so through filing an application.
4. Cal-Am's customer call center shall meet the targets for each of the categories listed in Section V.F of this decision, averaged on a quarterly basis. For five full years following the effective date of this decision, Cal-Am shall make quarterly filings listing the service quality targets, as well as the rates actually achieved. Cal-Am shall file these reports with the Director of the Water Division and the Office of Ratepayer Advocates (ORA) on January 15, April 15, July 15, and October 15, commencing on the first quarter following the effective date of this decision. The reports shall be for the preceding three months (the January filing will be for the October-December, etc.).
5. Cal-Am shall provide the Commission with the notice required by condition 26 no later than 30 days prior to Cal-Am's payment of a dividend or transfer of such funds to its parent. Cal-Am shall provide this notice to the Director of the Water Division, the Commission's Executive Director, and ORA.
6. The management of Cal-Am has and will continue to have full authority with regard to any decisions concerning Cal-Am's relationship with the City of San Diego including, but not limited to, any water supply and franchise agreements.
7. For a minimum of five years from the effective date of this order, a majority of the individuals appointed to serve on the board shall be United States citizens. Additionally, in order to ensure local input, if applicants make any changes to the current composition of Cal-Am's board, we require that in the future, at least 30% of the members of Cal-Am's board be California residents, as well as United States citizens, and further, be persons who are not employees of RWE, Thames, American, Cal-Am, or any RWE affiliated entity. Familiarity with interests and concerns in Cal-Am's service territory also shall be an important consideration in appointing directors to serve on the board.
8. For at least one year from the date of the consummation of the transaction or until March 31, 2004, whichever is later, applicants shall notify the Commission in writing within 10 days of any changes in Cal-Am's board of directors, corporate officers, or management personnel. Such notification shall be sent to the Director of the Water Division, the Commission's Executive Director, and ORA.
9. RWE, Thames, American, and Cal-Am shall be subject to Pub. Util. Code § 797.
10. Approval of this transaction is conditioned on Cal-Am divesting itself of the Montara District to the Montara Sanitary District or another public agency. Ratepayers shall not bear any costs of this divestiture.
11. Applicants shall file annual reports with the Director of the Water Division and ORA no later than January 31 during the five year duration of the public purpose programs set forth in conditions 23 and 24 of the settlement with an accounting of monies spent on each of the public purpose programs.
12. In future Cal-Am rate cases, applicants have the burden of establishing from which transaction (this transaction or the Cal-Am/Citizens merger) the benefits accrue. If applicants do not meet this burden, the Commission will attribute the benefits to this transaction rather than to the Cal-Am/Citizens merger, to assure ratepayers that they receive 100% of the benefits of this transaction.
13. Applicants shall track the (1) savings and increased revenues, and (2) the costs of implementing best practices in separate memorandum accounts.
14. Applicants shall tender the notice required by settlement condition 16 to the Director of the Commission's Water Division, the Commission's Executive Director, and ORA.
15. The Director of the Water Division shall immediately designate Commission personnel to participate with applicants in developing the programs set forth in settlement conditions 23 and 24, and Commission personnel and applicants shall hold their first meeting on these programs no later than 15 days from the effective date of this decision. The Director shall explore whether existing programs comparable to each proposal exist, and whether these monies can more effectively be used directed toward these existing programs.
16. RWE, Thames Holdings, Thames Water Aqua U.S. Holdings, Inc., Apollo Acquisition Company, American, and Cal-Am shall file a written notice with the Commission, served on all parties to this proceeding, of their agreement, evidenced by a resolution of their respective boards of directors duly authenticated by a secretary or assistant secretary of these entities, as the case may be, to the conditions adopted in decision as set forth in the settlement agreement as interpreted by the Commission, as well as the additional conditions adopted in this decision. Failure to file such notice within 60 days of the effective date of this decision shall result in the lapse of authority granted by this decision.
17. This proceeding is closed.
This order is effective today.
Dated , at San Francisco, California.
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(END OF APPENDIX A)
To Be Attached.
Appendix B to Econome Comment Dec.
