COM/JB2/jt2 Date of Issuance 10/19/2010

Decision 10-10-019 October 14, 2010

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking on the Commission's Own Motion to Develop Standard Rules and Procedures for Regulated Water and Sewer Utilities Governing Affiliate Transactions and the Use of Regulated Assets for Non-Tariffed Utility Services (formerly called Excess Capacity).

Rulemaking 09-04-012 (Filed April 16, 2009)

DECISION ADOPTING STANDARD RULES AND PROCEDURES
FOR CLASS A AND B WATER AND SEWER UTILITIES
GOVERNING AFFILIATE TRANSACTIONS AND THE USE
OF REGULATED ASSETS FOR NON-TARIFFED UTILITY SERVICES

Table of Contents

Title Page

DECISION ADOPTING STANDARD RULES AND PROCEDURES FOR
CLASS A AND B WATER AND SEWER UTILITIES GOVERNING THE USE
OF REGULATED ASSETS FOR NON-TARIFFED UTILITY SERVICES 22

1. Summary 22

2. Background 33

3. Procedural Activities 1414

4. Overview 1717

4.1. Context of Proceeding from the OIR 1717

4.2. Overview of Party Positions on Affiliate Transaction Rules 1818

5. Discussion 2323

5.1. Objectives for Adopting Rules 2323

5.2. Commission Authority With Regard to Utility Affiliates 3030

5.3. Rule I -- Applicability of Rules 3434

5.3.1. Rule I.A -- Applicability to Different Utility Classes 3434

5.3.2. Rules I.B -- Applicability to Regulated Affiliates 3636

5.3.3. Rules I.D and I.E -- Relationship to Existing Rules 3737

5.3.4. Rule I.G and Rule I.H -- Applicability of Rules to Operations Outside of California 3939

5.4. Rule II -- Definitions 4040

5.4.1. Rule II.E - Definition of Affiliate 4141

5.4.2. Rule II.L - Definition of Cross-Subsidy 4242

5.5. Rule III -- Utility Operations and Service Quality 4343

5.5.1. Staff Proposed Rule III.B - Prohibitions on Specific Utility Interactions With Affiliates 4545

5.5.2. Rules III.C and III.D - Non-Discrimination 4848

5.6. Rule IV -- Separation 5252

5.6.1. Rule IV.B - Cost Allocation 5252

5.7. Rule V - Shared Corporate Support 5353

5.8. Rule VI -- Pricing of Goods and Services Between the Utility and its Affiliate(s) 5656

5.8.1. Rule VI.D - Sales on the Open Market 5656

5.8.2. Rule VI.E - Transfers from Utilities to Affiliates 5757

5.9. Rule VII -- Financial Health of the Utility 5959

5.9.1. Rule VII.A - Capital Obligation of Parent 6060

5.9.2. Proposed Rules on Dividends and Debt 6161

5.9.3. Proposed Rule - Capital Structure 6363

5.9.4. Rule VII.E -- Ring-Fencing (Financial Separation) 6565

5.10. Rule VIII -- Regulatory Oversight 6868

5.10.1. Rule VIII.A - Requirement to Testify 6868

5.10.2. Rule VIII.B - Access to Books and Records 7070

5.10.3. Rule VIII.C - Compliance Plan 7373

5.10.4. Rule VIII.D - New Affiliates 7474

5.10.5. Rule VIII.E - Independent Audit 7676

5.11. Rule IX -- Confidentiality 7777

6. Rule X -- Non-Tariffed Products and Services 7777

6.1. Background 7777

6.2. Positions of Parties 7979

6.3. Discussion 8080

6.3.1. Commission Approval for NTP&S 8585

6.3.2. Rule X.B.3 - Utility Employees 8686

7. Motion of Cal Water to File Documents Under Seal 8888

8. Comments on Proposed Decision 8888

9. Assignment and Categorization of Proceeding 9090

Findings of Fact 9090

Conclusions of Law 9595

Order.......... 91

Appendix A - Rules for Water and Sewer Utilities Regarding Affiliate Transactions and the Use of Regulated Assets for Non-Tariffed Utility Services

DECISION ADOPTING STANDARD RULES AND PROCEDURES
FOR CLASS A AND B WATER AND SEWER UTILITIES
GOVERNING AFFILIATE TRANSACTIONS AND THE USE
OF REGULATED ASSETS FOR NON-TARIFFED UTILITY SERVICES

1. Summary

This decision adopts standard rules for all Class A and B water and sewer utilities¹ regarding affiliate transactions and the use of regulated assets and personnel for non-tariffed utility products and services. The adopted rules are attached as Appendix A.

Until now, some water utilities have operated under affiliate transaction rules adopted in Commission decisions approving applications to form holding companies. In those cases, the rules have differed from case to case. Other water utilities have had few or no affiliate transaction rules in place. The affiliate transaction rules adopted today will provide consistent and understandable rules for all subject water and sewer utilities.

Our newly adopted rules address our goals of protecting ratepayers, ensuring the financial health of the utility, and preventing anti-competitive behavior in the competitive marketplace. We have identified specific concerns in the water industry regarding affiliate transactions which require detailed rules. The rules we adopt today stem from a combination of existing water utility holding company rules and affiliate transaction rules adopted for the energy industry. Our adopted rules take into account the smaller size of water and sewer utilities and smaller scope of their affiliate relationships, using the results of parties' efforts to narrow issues through the workshop process.

The adopted rules also provide flexibility to account for unique circumstances of certain utilities. For example, we provide exceptions to rules governing non-profit affiliates which provide financing and other services to the utilities (see Rule III.B.8); this will alleviate concerns raised by California-American Water Company. To address concerns raised by Park Water Company, we allow cost allocation issues among regulated utility affiliates to be considered in general rate cases instead of through standard rules (see Rule II.E)..

As part of the rules adopted today, Rule X governs the provision of non-tariffed products and services within water and sewer utilities. Non-tariffed products and services have been governed under Decision 00-07-018. The adopted rule largely continues current rules, with necessary updates. Because there is a strong relationship between non-tariffed products and services and affiliate transactions, we integrate both sets of rules to ensure consistency. The adopted rules also remove an anomaly which prevented certain companies from offering any non-tariffed products and services.

In order to give the water and sewer utilities sufficient time to adapt to the rules adopted today, the rules will become effective in 90 days.

¹ All water and sewer utilities with 2,001 or more service connections.