4. Standard of Review
No party disputes that we should apply § 854, which generally governs mergers and similar transfers of control, rather than § 851, which typically governs sales of assets. In fact, Joint Applicants explain that they have structured the transaction as a sale of all California-jurisdictional assets, rather than a merger or sale of stock, simply because the California Utility is not organized, legally, as a separate entity from Sierra. Review under § 854 is consistent with the Commission's procedural approach in Decision (D.) 05-03-010, where the Commission approved the sale of Avista Corporation's South Lake Tahoe gas facilities (the California portions of Avista's multi-state utility operations) to Southwest Gas Corporation.
Consistent with the scoping memo, our review of the transfer under § 854 focuses on § 854(a), which we quote in relevant part in Section 2.3, above. Thus, to approve the proposed transfer of control, the Commission must find that the proposal meets the public interest standard that prior Commission decisions define for § 854(a). Typically the Commission has required an applicant to show that a proposed transfer is "not adverse to the public interest" though occasionally the Commission has articulated the standard as requiring a showing that a transfer is "in the public interest."11 The scoping memo directed the parties to brief these alternative terms, if they contend that the distinction is material.
The parties' witness testimony and briefs recast this nuanced disagreement as a much more fundamental one centered on whether the public interest requires a showing of "no harm to ratepayers" (Joint Applicants' contention) or "positive benefits to ratepayers and the community" (DRA's contention). DRA argues that the Commission should require showings on at least some of the criteria that §§ 854(b) and (c) specify for inquiry when one or more parties to a proposed transfer has gross California revenues of more than $500 million, and moreover, that these showings should establish that the transfer yields net benefits to ratepayers compared to the status quo.12 DRA does not dispute that Sierra's 2008 annual California revenues were approximately $72 million or that CalPeco had no California revenues. DRA relies on two prior Commission decisions: D.01-09-057, which authorized California-American Water Company (CalAm) to acquire Citizens Utilities Company of California and D.06-02-033, which authorized PacifiCorp's acquisition by MidAmerican Energy Holdings Company (MidAmerican). Neither decision establishes a positive benefits test for transactions such as the proposed Sierra/CalPeco transfer.
The first decision DRA cites, D.01-09-057, concerns the acquisition of one water utility by another under § 854(a) and the Public Water System Investment and Consolidation Act of 1997, consisting of §§ 2718-2720 (the Act). The Act authorizes the post-acquisition rate base of a transferred water distribution system to be set at fair market value, which in some instances may be higher than the historical value, and which therefore places an additional cost on ratepayers. Before approving such a rate base increase the Commission must find that the transaction proposed improves the health and stability of the water system in several enumerated ways, thereby benefiting ratepayers. The Office of Ratepayer Advocates, the predecessor of DRA, argued that the Commission could - and should -- look to the criteria listed in § 854(b) and (c) in assessing ratepayer value. CalAm argued that the Commission's long-term standard requires a showing of no harm to ratepayers and that its proposal clearly met that test, but also would meet a positive ratepayer benefits standard. Regarding the appropriate standard, Conclusion of Law 9 in D.01-09-057 merely states:
Sections 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 in this proceeding.
Furthermore, while D.01-09-057 summarizes information the applicants had put forward on some § 854(c) criteria, the decision does not tie its public interest findings or approval to § 854(c).
The second decision DRA cites, D.06-02-033, concerns a transfer at the holding company level by which MidAmerican acquired indirect ownership and control of PacifiCorp, an energy utility, from Scottish Power PLC. The decision observes that no entity to the transaction has sufficient California revenues to trigger application of § 854(b) and (c) and it does not discuss either subsection further. The decision's public interest assessment begins by setting out seven criteria to be considered given the facts of the transfer at issue, however, and simple comparison of these criteria with those in § 854(b) and (c) shows an overlap. D.06-02-033 focuses on the proposed transaction's impact on: the financial condition of the utility, service quality, management quality, affected utility employees, the state of California and local communities, Commission jurisdiction, and competition. D.06-02-033 states:
Although we are not obligated to use the above criteria to evaluate the proposed transaction, these criteria provide a useful framework for analyzing the transaction. Our use of the above criteria is completely discretionary, and we may choose to use none, some, or all of these criteria in future proceedings.13
After assessing the evidence put forward, D.06-02-033 concludes that the transaction should be approved and rejects DRA's contention that the benefits are "meager" or insufficient:
The transaction provides modest but concrete benefits to ratepayers and the communities served by PacifiCorp, and there will be no harm to ratepayers or others with the conditions adopted by today's Decision. This is enough for the proposed transaction to garner our approval under § 854(a).14
Though we address Joint Applicants' showing in Section 5, we observe here that the transfer application, as filed, addresses each of the criteria examined in D.06-02-033.
Similarly, in D.00-06-079, which issued more than a decade ago, the Commission observed "... our decisions over the years have laid out a number of factors that should be considered in making the determination of whether a transaction will be adverse to the public interest."15 D.00-06-079 mentions several factors -- antitrust considerations, economic and financial feasibility, purchase price, value of consideration exchanged, efficiencies, operating costs savings - and there are others. Clearly, not every one of them is relevant to every review under § 854(a).
The parties' dispute about the standard of review applicable to the transfer application suggests confusion about several distinct concepts and so, based on the foregoing review of precedent, we provide the following guidance.
First, to ensure that a proposed transfer is not adverse to the public interest under § 854(a), the Commission must be able to evaluate evidence on the important impacts of that transfer - whatever they might be - and find no harm to ratepayers. Second, some of the criteria enumerated in §§ 854(b) and (c) mirror criteria identified by past Commission decisions as relevant to a public interest assessment under § 854(a), and depending upon the nature of the transfer at issue, may well be relevant and even necessary to the specific public interest assessment required. Third, only where §§ 854(b) and (c) expressly apply, must the Commission make all of the findings those subsections require.
Next, we turn to § 854(d), which in relevant part, requires the Commission to "consider reasonable options to the proposal recommended by other parties." Initially PSREC challenged the proposed transfer and argued that it should be allowed to purchase the Loyalton/Portola portion of Sierra's California service territory. However, following a meeting held in the Loyalton/Portola area pursuant to the scoping memo's direction, PSREC and Joint Applications settled their differences.16 PSREC, which withdrew its opposition to the transfer application before evidentiary hearings and without having put forward prepared testimony on its alternative proposal, now urges us to authorize the transfer. No other party has introduced facts to describe any alternative for us to consider under 854(d). Though DRA opposes the transfer and urges us to reject it, we have that authority already under § 854(a). Specifically, were we to determine that Joint Applicants have failed to show that the transfer is not adverse to the public interest, we would be obliged to deny it, unless conditions could be imposed to cure the identified defect(s). Given the procedural status of the transfer application, § 854(d) is no longer pertinent to our review.
Section 816 and § 818, which concern issuance of stocks, bonds, etc., and § 851, which as relevant here concerns the encumbrance of utility assets, provide the statutory basis for the financing authority sought. No dispute exists here.
Finally, we address application of Public Resources Code § 21080 et seq., known as of the California Environmental Quality Act (CEQA). Joint Applicants' assert and no party contests that the transfer of control of the California Utility from Sierra to CalPeco "will not result in any change in the operation of the public utility serving these California customers ... [and] does not request any new construction, or changes in the use of existing assets and facilities."17 We find no evidence that operational change will result and no new facilities are proposed. Pursuant to § 15061(b)(3) of the CEQA guidelines, inasmuch as it can be seen with certainty that the project will have no significant impact upon the environment, the transfer application qualifies for an exemption from CEQA and the Commission need not perform any further environmental review.
Joint Applicants have the burden of proof to establish that the Commission should approve the transfer application and the ancillary agreements.
11 See for example, D.07-05-031, which approved the transfer of control over California-American Water Company (CalAm) at the holding company level:
The primary standard used by the commission to determine if a transaction should be authorized under § 854(a) is whether the transaction will adversely affect the public interest. (D.07-05-031 at 3, citing D.00-06-079 at 13.)
12 Section 854(b) requires the Commission to find short-term and long-term benefits for ratepayers, an equitable allocation of such benefits between shareholders and ratepayers, and no adverse impact upon competition. Section 854(c) requires that the public interest assessment result in express findings on eight criteria (impact on the financial condition of the resulting utility, on service quality, on management quality, on utility employees, on shareholders, on state and local economies, on the Commission's jurisdiction, and on whether any proposed mitigations avoid adverse consequences). For a proposed transaction to gain approval, review of the first three criteria must result in findings that the transfer will "maintain or improve" the status quo; review of the second three criteria must result in findings that the transfer is "fair and reasonable."
13 D.06-02-033 at 23.
14 D.06-02-033 at 36.
15 D.00-06-079 at 14.
16 The PSREC Settlement Agreement is Exhibit Q to Exhibit 1.
17 Transfer Application at 72.
