Conclusions of Law

1. There is no statute which directly addresses Commission jurisdiction over water and sewer utility affiliate transactions.

2. It is reasonable to adopt as goals for affiliate transactions rules that the rules should be applied uniformly to all similar water and sewer utilities, cross-subsidy of affiliates by the utilities should be prevented, and anti-competitive behaviors of the utilities, if any, should be prevented.

3. Affiliate transaction rules should not provide an undue burden on water and sewer utilities.

4. It is timely and appropriate to consolidate, clarify, standardize and update the current rules in order to provide standard rules applicable to regulated water and sewer utilities, their provision of non-tariffed services, and their transactions with affiliated companies.

5. The Commission has authority under Pub. Util. Code §§ 851-854 to regulate changes of ownership which pertain to water and sewer utilities.

6. The Commission has authority under Pub. Util. Code § 701 to regulate affiliate transactions of water and sewer utilities as long as such an interpretation does not disregard express regulatory directives and the authority is "cognate and germane" to utility regulation.

7. Ensuring reasonable rates requires that the relationship between the utility and its affiliates be transparent, and that the regulated revenue requirement is not the source of funding for competitive or unregulated ventures.

8. It is in the public interest to ensure that water and sewer utilities do not promote or provide unfair competitive advantages for their affiliates in competitive markets.

9. It is necessary to develop or revise affiliate transaction rules for water and sewer utilities to protect ratepayers and prevent unfair competitive activities by utility affiliates stemming from ratepayer funds, while ensuring the opportunity for water and sewer utilities to earn a reasonable profit.

10. Affiliate transaction rules in the water and energy industries have not been shown to be a barrier against formation of affiliates in either industry.

11. Water and sewer utility affiliate transaction rules should not be the same as energy utility affiliate transaction rules.

12. It is reasonable to use energy utility affiliate transaction rules as the starting point to develop water and sewer utility affiliate transaction rules, as long as appropriate modifications are made to take into account the unique characteristics of the water and sewer industry and individual water and sewer utilities.

13. The affiliate transaction and NTP&S rules designated by parties as "bucket 1" issues should be adopted consistent with parties' proposals and the discussion in this decision, as laid out in Appendix A. The affiliate transaction and NTP&S rules designated by parties as "bucket 2" issues which were not substantial issues should be adopted as consistent with the principles and discussion of this decision, as laid out in Appendix A.

14. Affiliate transaction and NTP&S rules should be applicable to Class A and B water and sewer utilities.

15. Affiliate transactions rules should not apply to transactions between regulated entities, except for the rule that regulated utilities and their regulated affiliates should not subsidize one another without explicit Commission authorization.

16. The affiliate transaction and NTP&S rules adopted in this decision should supersede existing rules where there is a conflict.

17. Financial rules developed in holding company decisions which are not specifically addressed in the affiliate transaction rules in this decision should not be superseded.

18. There should be a rebuttable presumption that the affiliate transaction rules adopted in this decision apply, so that only older rules clearly outside of the bounds of the new rules will not be superseded.

19. Water and sewer utilities should be allowed to seek exemptions from affiliate transaction rules for affiliates with wholly out-of-state operations and with little or no contact with the California utility if such out-of-state operations do not affect the utility's operations and the operating costs inside California.

20. A 10% ownership threshold as the definition of substantial operational control of a water or sewer utility affiliate is reasonable to ensure that any affiliate with a significant relationship to a water or sewer utility is covered by the rules.

21. There is a need to define the term "cross-subsidy" for the purposes of these rules. A reasonable definition which captures both ratepayer protection and competitive concerns would be: "The unauthorized over-allocation of costs to captive ratepayers resulting in under-allocation of costs to a utility affiliate."

22. While it is reasonable to allow water and sewer utilities to provide certain benefits to their affiliates, in accordance with established rules, utilities generally should not provide non-public and proprietary information to their affiliates. However, it is reasonable to allow a water or sewer utility to provide non-public and proprietary information to a not-for-profit affiliate whose sole purpose is to serve regulated utility, not-for-profit and governmental functions.

23. It is reasonable to allow water and sewer utilities to share non-public or proprietary information with their affiliates for the limited purposes of shared corporate services, as long as there are sufficient limits on other sharing of non-public or proprietary information.

24. With limited exceptions, a monopoly water or sewer utility should not be permitted to provide exclusive or discriminatory access to utility information, services, and unused capacity or supply to its affiliates in the marketplace.

25. A 5% adder to fully loaded costs to the price paid by an affiliate to a water or sewer utility for goods and services not provided on the open market is a reasonable percentage to account for unidentified cross-subsidies which accrue to affiliates from the investments and training funded by ratepayers.

26. Financial rules adopted in water utility holding company decisions should not inadvertently be superseded by these affiliate transaction rules, if existing holding company rules are not specifically addressed in these rules.

27. The parent companies of water and sewer utilities should be required to ensure that water and sewer utilities have adequate capital or adequate access to capital. This requirement ensures that parents of water and sewer utilities cannot extract dividends from the utility in a way which would harm the financial health of the utility.

28. Ensuring reasonable rates requires that water and sewer utilities not issue or guarantee or secure debt for their affiliates.

29. It is reasonable to allow water and sewer utilities which have parent companies to propose individual methods to ensure core water and sewer utility functions are protected from significant financial problems which may befall the parent of the utility.

30. Officers and employees of utility affiliates can be required to testify in Commission proceedings if there is a nexus between the regulation of the utility and its affiliate, and the testimony is cognate and germane to the regulation of the utility.

31. The required audit in § 314.5 would not ensure that affiliate transactions would be specifically reviewed. A separate audit specifically focused on affiliate transactions is necessary.

32. All Class A and B water and sewer utilities should be subject to uniform Non-Tariffed Products and Services Rules.

33. It is reasonable to use the NTP&S Rules developed in D.00-07-018 (as modified by D.01-01-026, D.03-04-028 and D.04-12-023) as the starting point for new rules, using the Workshop Report as a means to accomplish this.

34. NTP&S rules should apply equally to all covered water and sewer utilities.

35. NTP&S should not be provided from a water or sewer utility to its affiliate other than under the provisions of the affiliate transaction rules, because these are inherently affiliate transactions.

36. In order to provide transparency and a method for review of NTP&S offerings, water and sewer utilities should be required to file an advice letter for any new NTP&S.

37. It is not reasonable to allow a water or sewer utility to carry extra employees or put into rates additional labor costs which are not necessary for the provision of regulated utility service, in order to provide NTP&S.

ORDER

1. The rules for affiliate transactions and the provision of non-tariffed products and services for water and sewer utilities in Appendix A of this order are adopted for all Class A and Class B water and sewer utilities.

2. The affiliate transaction rules I through IX in Appendix A supersede affiliate transaction rules adopted in Decision 85-06-023, Decision 97-12-011, Decision 98-06-068, Decision 02-12-068, Decision 04-01-051 and Decision 10-09-012, consistent with Rules I.D, I.E and VII.G in Appendix A of this order.

3. Rule X in Appendix A, regarding non-tariffed products and services, supersedes non-tariffed products and services rules adopted in Ordering Paragraph 1 of Decision 00-07-018, as modified by Decision 01-01-026, Decision 03-04-028 and Decision 04-12-023.

4. Notwithstanding Section XII of the Settlement Agreement approved by Decision 97-12-011 and attached thereto, California Water Service Company may offer non-tariffed products and services consistent with the rules in Appendix A.

5. Notwithstanding Paragraph 20 of the Settlement adopted by Decision 98-06-068 and attached thereto, Golden State Water Company may offer non-tariffed products and services consistent with the rules in Appendix A.

6. The July 16, 2009 Motion of California Water Service Company to file documents under seal is granted.

7. The October 10, 2010 Motion of California American Water for Oral Argument Before the Commission is denied.

8. The rules adopted in Appendix A are effective 90 days from the effective date of this decision.

9. This proceeding is closed.

Dated October 14, 2010, in San Francisco, California.

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