STATE OF CALIFORNIA GRAY DAVIS, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

November 15, 2002 Agenda ID #1380

TO: PARTIES OF RECORD IN APPLICATION 02-01-036

This is the proposed decision of Administrative Law Judge (ALJ) Econome, previously designated as the principal hearing officer in this proceeding. It will not appear on the Commission's agenda for at least 30 days after the date it is mailed. This matter was categorized as ratesetting and is subject to Pub. Util. Code § 1701.3(c). Pursuant to Resolution ALJ-180 a Ratesetting Deliberative Meeting to consider this matter may be held upon the request of any Commissioner. If that occurs, the Commission will prepare and mail an agenda for the Ratesetting Deliberative Meeting 10 days before hand, and will advise the parties of this fact, and of the related ex parte communications prohibition period.

The Commission may act at the regular meeting, or it may postpone action until later. If action is postponed, the Commission will announce whether and when there will be a further prohibition on communications.

When the Commission acts on the proposed decision, it may adopt all or part of it as written, amend or modify it, or set it aside and prepare its own decision. Only when the Commission acts does the decision become binding on the parties.

Parties to the proceeding may file comments on the proposed decision as provided in Article 19 of the Commission's "Rules of Practice and Procedure." These rules are accessible on the Commission's website at http://www.cpuc.ca.gov. Pursuant to Rule 77.3 opening comments shall not exceed 15 pages. Finally, comments must be served separately on the ALJ and the assigned Commissioner, and for that purpose I suggest hand delivery, overnight mail, or other expeditious method of service.

/s/ CAROL A. BROWN by LTC

Carol A. Brown, Interim Chief

Administrative Law Judge

CAB:hkr

ALJ/JJJ/hkr DRAFT Agenda ID #1380

Ratesetting

Decision PROPOSED DECISION OF ALJ ECONOME (Mailed 11/15/2002)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

In the Matter of the Joint Application of California-American Water Company (U-210-W), a California corporation, RWE Aktiengesellschaft, a corporation organized under the laws of the Federal Republic of Germany, Thames Water Aqua Holdings GmbH, a corporation organized under the laws of the Federal Republic of Germany, Thames Water Plc, a corporation organized under the laws of the United Kingdom and Wales, and Apollo Acquisition Company, a Delaware Corporation, for an order Authorizing Apollo Acquisition Company to merge with and into American Water Works Company, Inc. resulting in a change of control of California-American Water Company, and for such related relief as may be necessary to effectuate such transaction.

Application 02-01-036

(Filed January 28, 2002)

(See Appendix A for list of appearances.)

OPINION CONDITIONALLY APPROVING APPLICATION

TABLE OF CONTENTS

Title Page

OPINION CONDITIONALLY APPROVING APPLICATION 2 2

I. Summary 2 2

II. The Proposed Acquisition 2 2

A. The Companies Involved 2 2

B. Overview of the Proposed Transaction 3 3

III. Procedural Background 4 4

IV. Standards of Review 6 6

A. Standard of Review for Settlements 6 6

B. Standard of Review for This Acquisition 6 6

C. § 854(b) and (c) 9 9

V. The Conditions in the Settlement, Discussed According to the Requirements of Pub. Util. Code § 854(b) and (c) 11 11

A. The Settlement 11 11

B. § 854(b)(1)-Provides Short-Term and Long-Term Economic
Benefits to Ratepayers 12 12

1. Summary 12 12

2. Sharing Best Practices 13 13

a) Security 13 13

b) Design and Build 14 14

c) Research and Development (R&D) 15 15

d) Service Standards 16 16

e) Customer Service 16 16

3. Lowering Cal-Am's Cost of Debt 16 16

4. Deferring a Rate Increase 19 19

5. Public Assistance Programs 21 21

6. Affiliate Transaction Rules 22 22

7. Discussion Regarding Benefits 23 23

C. § 854(b)(2)-Equitable Allocation of Benefits 26 26

D. § 854(b)(3)-Not Adversely Affect Competition 28 28

E. § 854(c)(1)-Maintain or Improve Financial Condition 29 29

F. § 854(c)(2)-Maintain or Improve the Quality of Service 33 33

G. § 854(c)(3)-Maintain or Improve the Quality of Management 35 35

H. § 854(c)(4)-Be Fair and Reasonable to Employees 38 38

I. § 854(c)(5)-Be Fair and Reasonable to Shareholders 39 39

J. § 854(c)(6)-Be Beneficial to State and Local Economies
and Communities in the Area Served 40 40

K. § 854(c)(7)-Preserve the Commission's Jurisdiction
and the Commission's Capacity to Effectively Regulate
and Audit Public Utility Operations in the State 40 40

L. § 854(c)(8) - Provide Mitigation Measures to
Prevent Significant Adverse Consequences 42 42

VI. Review of Reasonable Alternative Options 43 43

VII. Other Matters 46 46

A. Environmental Review 46 46

B. Pub. Util. Code § 704 Does Not Bar This Transaction 46 46

VIII. Conclusion 48 48

IX. Comments on the Proposed Decision 49 49

X. Assignment of Proceeding 49 49

Findings of Fact 49 49

Conclusions of Law 54 54

ORDER 57 57

APPENDIX A Appearances

APPENDIX A Settlement Agreement With Conditions

OPINION CONDITIONALLY APPROVING APPLICATION

I. Summary

In this decision, we conditionally approve a settlement agreement which places certain conditions upon the transfer of control of California-American Water Company (Cal-Am). As a result, we approve an indirect transfer of control of Cal-Am, where RWE Aktiengesellschaft (RWE) would purchase the stock of Cal-Am's parent, American Water Works Company (American).