Findings of Fact
1. The Commission's goals for this proceeding are that these affiliate transactions and non-tariffed products and services rules should be applied uniformly to all similar water and sewer utilities, that cross-subsidy of affiliates by the utilities should be prevented, and that anti-competitive behaviors of the utilities, if any, should also be prevented.
2. Five Class A water utilities currently operate under affiliate transaction rules adopted in holding company decisions. Additionally, Park Water operates under certain affiliate transaction rules adopted in a non-holding company decision.
3. Currently, there are inconsistent and/or non-existent affiliate transaction and non-tariffed products and services rules for water and sewer utilities.
4. There is no evidence that the current affiliate transaction rules have caused any harm to any water utility, except for restrictions on non-tariffed products and services applicable to some water utilities and not others.
5. Pub. Util. Code § 701 provides that the Commission may supervise and regulate every public utility in the State and may do all things, whether specifically designated in this part or in addition thereto, which are necessary and convenient in the exercise of such power and jurisdiction.
6. There have been a number of documented incidents of problems regarding affiliate transactions in the water industry, which have been detrimental to ratepayers and/or the competitive marketplace.
7. There are significant similarities and significant differences between water and sewer utilities, and energy utilities.
8. The most significant similarity between water and sewer utilities, and energy utilities is that they all provide basic, regulated monopoly services.
9. Both water and sewer utilities and energy utilities have unregulated affiliates, including a significant number of affiliates formed while operating under affiliate transaction rules.
10. Water and sewer utilities are significantly smaller in number of customers and revenue than energy utilities that are subject to affiliate transaction rules. Affiliates of water and sewer utilities tend to be smaller than affiliates of energy utilities. However, some water and sewer utilities have complex affiliate relationships which do not exist in the energy industry.
11. Absent appropriate affiliate transaction rules, water and sewer utilities have the ability to provide unfair competitive advantages to their affiliates, through such means as cross-subsidies, preferential use of ratepayer-funded assets by affiliates, differential treatment of affiliates as compared to other competitive firms, and sharing of non-public and proprietary information with affiliates.
12. Park Water is both a utility and a parent company of a utility, Apple Valley Ranchos Water Company.
13. Cal-Am is served by two not-for-profit affiliates that provide capital and customer service to various water utilities.
14. Cal Water is currently prohibited from offering unregulated services. Golden State Water is constrained in offering unregulated services.
15. The affiliate transaction rules proposed by Commission staff were substantially taken from affiliate transaction rules in place for the energy industry.
16. The parties in workshops agreed upon a number of issues, designated as "bucket 1" issues. A number of issues with minor disagreements in wording were designated as "bucket 2" issues. Some "bucket 2" issues involve issues of substance. Issues designated by parties as "bucket 3" issues involved substantial differences.
17. Class A and B water and sewer utilities are significantly larger than Class C and D water and sewer utilities. The Class A and B utilities have significantly greater ability to transfer market power to their affiliates, absent appropriate affiliate transaction rules.
18. There is sufficient regulatory oversight in general rate cases to scrutinize transactions between regulated entities, consistent with a general rule that regulated utilities and their regulated affiliates should not subsidize one another without explicit Commission authorization.
19. Regulatory consistency would be improved by adopting standard affiliate transaction and non-tariffed utility service rules in a single rulemaking.
20. There are current affiliate transaction rules in Commission holding company decisions that are outside of the boundaries of the rules adopted in this proceeding.
21. Some water and sewer utilities have affiliates with operations entirely outside of California, some of which have few or no transactions with the California utility.
22. The Commission's energy affiliate transaction rules use a 5% ownership threshold for the definition of an affiliate, while the Securities and Exchange Commission uses a 10% threshold for effective control.
23. "Cross-subsidy" is not a defined term in the energy affiliate rules. There are a variety of definitions to be found in economics and accounting references.
24. Centralized support functions provided for regulated entities are beneficial to the regulated entities and their ratepayers due to lower costs and greater efficiencies from this type of entity, as compared to the utility raising its own capital or providing its own customer services.
25. Absent effective non-discrimination rules, the monopoly water or sewer utility and its assets can be used exclusively or in an unfair manner by its affiliates in the marketplace.
26. There is no justification for allowing one utility to subsidize another unless upfront explicit regulatory approval is granted to achieve an identifiable public benefit.
27. It would be impractical for all water and sewer utilities to provide various shared corporate support services in-house. Sharing of centralized functions generates scope economies and as such can increase production efficiency.
28. In the provision of certain goods and services from the utility to an affiliate, there are unidentified cross subsidies which accrue to affiliates from the investments and training funded by ratepayers.
29. There are circumstances where a parent company could either help or hinder the utility's ability to maintain adequate capital to carry out its obligations; for example, a utility could be required to provide dividends to a parent that could harm the utility, or a parent could infuse capital into the utility to assist it.
30. There is no evidence that rules from current water utility holding company decisions restricting water utilities from issuing or guaranteeing debt have caused any problems for water utilities. On the other hand, eliminating such restrictions could lead to increased costs for the utility and its ratepayers.
31. Cost of capital proceedings are the appropriate regulatory mechanism to consider capital structure issues.
32. There are a variety of circumstances which could lead to the bankruptcy of a parent company of a water or sewer utility, ranging from management problems to market conditions to force majeure situations.
33. Bankruptcy or other financial hardship of a parent company of a water or sewer utility could lead to financial pressures on the utility, unless the utility is effectively protected from such hardships.
34. There needs to be effective measures in place to monitor and evaluate compliance with laws and rules impacting affiliate transactions.
35. An audit of the implementation of affiliate transaction rules would ensure the rules are properly followed.
36. Not all Class A and B water utilities are subject to the current NTP&S Rules. Cal Water and Golden State Water are currently limited in providing NTP&S by their holding company decisions.
37. There are appropriate uses of excess capacity or slack resources by water and sewer utilities which can benefit the utility, the marketplace and (if there is revenue sharing and there are appropriate safeguards in place) ratepayers.
38. The rules for NTP&S have been inconsistently applied among different water companies.
39. Currently, it is unclear whether a water utility may provide NTP&S to its affiliate, or under what conditions.
40. If NTP&S were allowed to be offered to affiliates other than under affiliate transaction rules, water and sewer utilities could provide advantages to their affiliates without the ratepayer and market protections provided for in the affiliate transaction rules.
41. Water utilities currently provide a list of NTP&S through annual reports; no other notification or approval is now required. Changes to NTP&S can have significant impacts to ratepayers, such as diversion of utility resources.
42. Allowing available ratepayer-funded capital assets to be used more efficiently necessarily entail some incidental use of utility employees.
