5. Discussion
The Applicants and the Settlement Parties request that the Commission use its authority under § 853(b) to exempt the proposed transaction from § 854(a), subject to the Commitments in the Settlement Agreement.24 For the reasons set forth below, we decline to exempt the proposed transaction from § 854(a). Instead, we authorize the proposed transaction pursuant to § 854(a), subject to the conditions set forth below.
A. Denial of § 853(b) Exemption
The proposed acquisition of PacifiCorp by MEHC is subject to Commission review and approval pursuant to § 854(a). However, § 853(b) provides the Commission with authority to exempt the transaction from § 854(a). Section 853(b) states, in relevant part, as follows:
§ 853(b): The commission may...by order or rule, and subject to those terms and conditions as may be prescribed therein, exempt any public utility or class of public utility from this article if it finds that the application thereof with respect to the public utility or class of public utility is not necessary in the public interest.
The Applicants request that the Commission determine pursuant to § 853(b) that review and approval of the transaction under § 854(a) "is not necessary in the public interest" because PacifiCorp's California operations are small compared to the rest of its system, because the other states where PacifiCorp operates will review the transaction, and because the Commitments offered by the Applicants ensure the transaction is in the public interest.
We decline to exempt the proposed transaction from § 854(a). The purpose of § 854(a) is to enable the Commission to review a proposed transaction, before it takes place, in order to take such actions as the public interest may require.25 The need for Commission review is especially acute where, as here, the utility is a monopoly provider of electricity and is subject to traditional cost-of-service regulation. The Commission's obligation under § 854(a) to protect PacifiCorp's nearly 44,000 customers in California is not diminished by the fact that these customers represent only a small part of PacifiCorp's operations.
We cannot rely on other states where PacifiCorp operates to fulfill our duty under § 854(a) to protect the public interest in California. There is no assurance that other states have the inclination or the authority to resolve issues of importance to California.26 Ultimately, other states might resolve issues in a way that is detrimental to California. Thus, even if we chose to rely on other states, the appropriate time for making that decision would be after the other states have completed their review, not beforehand as the Applicants request.
We are not persuaded by the Applicants that their many Commitments make it unnecessary to review the transaction under § 854(a). The purpose of the Commitments is to ensure that the transaction provides public benefits and causes no harm. These issues are relevant to whether the transaction should be approved under § 854(a). In essence, the Applicants ask us to decide that it is not necessary to review the transaction under § 854(a) because the transaction satisfies § 854(a). It is pointless to exempt the transaction from § 854(a) if we must first determine if the transaction satisfies § 854(a). Put differently, one of the benefits of exempting transactions from § 854(a) pursuant to § 853(b) is that doing so avoids the need for resource-intensive proceedings under § 854(a). There is no such benefit in this proceeding, since the Applicants' request for an exemption under § 853(b) has consumed as much time and effort as reviewing the transaction under § 854(a).
The Applicants cite D.99-06-049 and D.01-12-013 wherein the Commission used its authority under § 853(b) to exempt from § 854(a) ScottishPower's acquisition of PacifiCorp and PacifiCorp's subsequent restructuring. These decisions relied on public-interest factors that are not present here. Specifically, in D.01-12-013 the Commission noted that the requested § 853(b) exemption was not protested.27 Here, DRA and others oppose the exemption.28 In D.01-12-013, there was no significant dispute between DRA and PacifiCorp. Here, DRA recommends that the proposed transaction be denied. Further, the Commission found in D.01-12-013 that the transaction had been reviewed and approved by other states.29 Thus, the Commission had the benefit of hindsight, based on other states' reviews, to support a § 853(b) exemption. Here, we cannot rely on other states' review of the transaction because their review has not been completed, let alone analyzed by us.
B. Applicability of § 854(a)
We next address the Applicants' contention that § 854(a) does not apply to the proposed transaction. Section 854(a) states, in relevant part, as follows:
No person or corporation, whether or not organized under the laws of this state, shall merge, acquire, or control either directly or indirectly any public utility organized and doing business in this state without first securing authorization to do so from the commission. The commission may establish by order or rule the definitions of what constitute merger, acquisition, or control activities which are subject to this section. Any merger, acquisition, or control without that prior authorization shall be void and of no effect. (Emphasis added.)
The Applicants argue that § 854(a) does not apply unless the utility being acquired is "organized and doing business in the state." The Applicants maintain that because PacifiCorp is incorporated in Oregon, and not California, § 854(a) does not apply.
We disagree with the Applicants' interpretation of § 854(a). The purpose of § 854(a) is to enable the Commission to review a proposed transaction, before it takes place, in order to take such action as the public interest may require.30 Where a utility incorporates has no bearing on the extent to which a proposed transaction might affect California. Further, the purpose of § 854(a) could be easily defeated by incorporating (or reincorporating) in another state. Thus, it makes no sense to have separate regulatory schemes depending on where a public utility is incorporated.
Since the enactment of § 854(a) in 1971, the Commission has interpreted the statute as applying to all public utilities operating in California, regardless of a utility's state of incorporation.31 This is demonstrated by the dozens of Commission decisions that have applied § 854(a) to utilities that operated in California but were incorporated in other states.32 These decisions are consistent with D.99-06-049 and D.01-12-013, which exempted transactions involving PacifiCorp from § 854(a) pursuant to § 853(b). The exemption from § 854(a) would not have been necessary if § 854(a) did not apply to PacifiCorp.
Unlike the Applicants, we do not read the phrase "any public utility organized and doing business in this state" to mean "incorporated in California." The Public Utilities Code does not define the phrase "organized...in this state." A fundamental tenet of statutory construction is that words are to be given their clear and plain meaning.33 The Applicants make an unsupported leap that the phrase "organized...in this state" clearly and plainly means "incorporated in." We disagree. A more reasonable interpretation of "organized...in this state" is "authorized to do business in California." At a minimum, § 854(a) is ambiguous, leaving the Commission with the duty to interpret the phrase "organized...in this state" in a manner that best complies with its constitutional and statutory obligations under the Public Utilities Code.34 Further, § 854(a) authorizes the Commission to "establish by order or rule the definitions of what constitute merger, acquisition, or control activities which are subject to this section." (Emphasis added.) We interpret this provision as providing the Commission with authority to apply § 854(a) to public utilities incorporated in other states, which we have done on many prior occasions.
C. Review of the Proposed Transaction Pursuant to § 854(a)
Having concluded that § 854(a) applies to the proposed transaction, we next consider if the proposed transaction should be approved pursuant to the statute. The Commission has broad discretion to determine if it is in the public interest to authorize a proposed transaction pursuant to § 854(a). Where necessary and appropriate, the Commission may attach conditions to a transaction in order to protect and promote the public interest.35
We will use the following criteria to decide if the proposed acquisition of PacifiCorp by MEHC should be approved:
· Whether the proposed transaction will maintain or improve the financial condition of PacifiCorp.
· Whether the proposed transaction will maintain or improve the quality of service for PacifiCorp's customers.
· Whether the proposed transaction will maintain or improve the quality of PacifiCorp's management.
· Whether the proposed transaction will be fair and reasonable to the affected utility employees.
· Whether the proposed transaction will harm, on an overall basis, California or the local communities served by PacifiCorp.
· Whether the proposed transaction will preserve the jurisdiction of the Commission and its capacity to effectively regulate and audit public utility operations in California.
· Whether the proposed transaction will harm competition.
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.
In the next part of this Decision, we will apply the aforementioned criteria to determine if the proposed transfer of control of PacifiCorp should be authorized and what conditions, if any, should attach to the transaction.
In deciding whether to authorize a proposed transfer of control of a public utility, the Commission may consider if the transaction will maintain or improve the financial condition of the utility. The purpose of this exercise is to ensure that the proposed transfer does not adversely affect the financial ability of the utility to provide safe and reliable service at reasonable rates.36
MEHC has agreed to purchase PacifiCorp for approximately $5.1 billion in cash. MEHC intends to finance the purchase through the sale of $3.4 billion of equity securities to Berkshire Hathaway and the issuance of $1.7 billion of other securities to third parties. PacifiCorp's existing long-term debt and preferred stock, which amounted to approximately $4.3 billion on March 31, 2005, will remain outstanding.
There are several factors relevant to our evaluation of whether the proposed transaction will maintain or improve PacifiCorp's financial condition. First, we must consider how the transaction will affect the financial condition of MEHC, the new owner of PacifiCorp, because such impacts could likely trickle down to PacifiCorp. The Applicants represent that after the announcement of the proposed transaction, the three major credit rating agencies affirmed their ratings for MEHC's debt.37 Based on this information, we conclude that the proposed transaction will not adversely affect the financial condition of MEHC.
Second, PacifiCorp will remain a stand alone financial entity. It will retain its own capital structure, debt, and credit rating. In addition, the Applicants promise to implement ring-fencing protections to isolate PacifiCorp from any credit issues that might arise at MEHC or other MEHC subsidiaries. The ring-fencing protections that the Applicants will implement include:
_ PacifiCorp's immediate parent company, PPW, will have one purpose - to own the common equity of PacifiCorp.
_ PPW will have an independent director from whom assent is required to place PPW or PacifiCorp into bankruptcy.
_ PPW will have a non-recourse structure to preclude the liabilities of MEHC, or its other subsidiaries, from being assessed against PPW or PacifiCorp.
_ PPW and PacifiCorp will be prohibited from (1) using their credit and assets to guarantee or satisfy the obligations of another company, and (2) acquiring the obligations or securities of MEHC or any of its other subsidiaries, except that PacifiCorp may purchase its own obligations.
_ PacifiCorp will maintain separate books, financial records, employees, and assets.
_ The ring-fencing protections may not be amended without (1) the consent of PPW's independent director, and (2) rating agency confirmation that the amendment will not result in a credit downgrade.
We find that the promised ring-fencing protections will help ensure that the proposed transaction does not adversely affect PacifiCorp's financial condition. The Applicants shall notify the Director of the Commission's Energy Division of any changes to the ring-fencing protections within 30 days. Such notice shall include (1) the consent provided by PPW's independent director, and (2) the rating agencies' confirmation that there will be no credit downgrade from the amended ring-fencing protections.
Third, we directed the Applicants to explain how the proposed transaction would affect PacifiCorp's ability to fund operations, maintenance, capital expenditures, and cost of capital. The Applicants' response, provided under seal, shows that PacifiCorp will obtain sufficient cash from its operations, regular infusions of equity capital from MEHC, and steady increases in short-term debt to fund: (1) operations and maintenance; (2) capital expenditures38; (3) interest on debt issued by MEHC to acquire PacifiCorp; (4) interest and dividends on debt and preferred stock issued by PacifiCorp; and (5) a modest dividend on MEHC's steadily increasing equity investment and retained earnings in PacifiCorp.39 Based on the foregoing, we find that PacifiCorp will have sufficient funds after the proposed transaction is complete to provide safe and reliable service.
Fourth, the Applicants represent that PacifiCorp's cost of debt will benefit from the transaction due to MEHC's association with Berkshire Hathaway. We disagree for the reasons stated in the following paragraph.
Finally, there is one factor that indicates the proposed transaction could negatively affect PacifiCorp's financial condition. Specifically, in the immediate aftermath of the transaction announcement, Standard & Poor's (S&P) placed PacifiCorp's credit rating on credit watch with negative implications.40 This action in itself does not indicate that the transaction will have a negative impact on the financial condition of Pacific Corp, but rather is an indication that there could be a negative impact. The Applicants state that if PacifiCorp suffers a one notch downgrade of its credit rating by all three major credit rating agencies, the impact under current market conditions would be approximately 10 to 15 basis points. That could increase financing costs by approximately $26.7 million over the next 10 years, assuming market conditions stay the same. If only S&P downgrades PacifiCorp, the impact of the downgrade would be approximately 5 basis points. The Applicants note, however, that credit markets are constantly changing. For example, during the past 10 years the spread between the yield on BBB+ and A- public utility bonds has ranged from today's relatively tight spread of 10 to 15 basis points to as much as 40 to 60 basis points. Thus, the Applicants admit that the potential cost over the next ten years from a credit downgrade could be much higher than the cost mentioned above.
The Applicants have agreed to take steps to insulate PacifiCorp's ratepayers from the possible adverse effects of a credit downgrade. General Commitment 22 and California Commitments C-15a and 15b provide the following protections to ratepayers:
Commitment 22: MEHC and PacifiCorp will not advocate a higher cost of capital as compared to what PacifiCorp's cost of capita would have been, using Commission standards, absent MEHC's ownership.
Commitment C-15a: In the event of a ratings downgrade by two or more rating agencies of PacifiCorp's senior long-term debt that occurs within 12 months after the Commission approves the Transaction or issues an order adopting acquisition commitments from other PacifiCorp states, whichever, comes later (the "Baseline Date"), and at least one such agency identifies issues related to MEHC's acquisition of PacifiCorp as a cause of the ratings downgrade, the assumed yield for any incremental debt issued by PacifiCorp after the downgrade will be reduced by 10 basis points for each notch that PacifiCorp is downgraded below PacifiCorp's rating on the Baseline Date. Such adjustment will continue until the debt is no longer outstanding. In the case where one rating agency issues a rating downgrade, but not two or more rating agencies, denoted as a split rating, the adjustment shall be 5 basis points for each notch. The adjustment imposed by this commitment will be eliminated for debt issuances following the ratings upgrade of PacifiCorp equal to the rating on the Baseline Date.
Commitment C-15b: In the event that debt issued by PacifiCorp within 12 months after the Baseline Date is recalled and refinanced, PacifiCorp agrees to hold customers harmless, for the term of the debt, as compared to the revenue requirements pursuant to subparagraph a) and its basis point reductions, of the originally financed debt.
The above Commitments ensure that ratepayers will not be harmed by a downgrade of PacifiCorp's credit rating.41 In addition, MEHC pledged during hearings to operate PacifiCorp as an A-rated company, which should reduce the likelihood of a downgrade and minimize the adverse effects in the event a downgrade materializes.42 We expect MEHC to keep its pledge.
In conclusion, we are concerned that the proposed transaction might adversely affect PacifiCorp's credit rating. However, there is no evidence that the transaction will hinder PacifiCorp's ability to fund operations, maintenance, infrastructure investments, and cost of capital. Any potential adverse impact is mitigated by Commitments 22, C-15a, and C-15b, which ensure that ratepayers will not be harmed if the transaction results in a higher cost of capital.
In deciding whether to authorize the transfer of control of a public utility, the Commission may consider if the proposed transfer will maintain or improve the quality of service to California ratepayers.43
The Applicants argue that the transaction will not adversely affect service quality because MEHC intends to operate PacifiCorp in much the same way as it is currently being operated. The Applicants also assert that MEHC, as a long-time provider of electric utility service through MEC, will be able to maintain or improve PacifiCorp's service quality.44 They state that MEC has a strong track record of satisfying its customers. For example, a study conducted by J. D. Power and Associates shows that Midwest electric business customers ranked MEC first for overall customer satisfaction in 2004 and 2005, and that Midwest residential electric customers ranked MEC in a tie for first in 2004.
To ensure the proposed transaction will maintain or improve service quality, the Applicants have offered the following Commitments:
Commitment 2: Penalties for noncompliance with performance standards and customer guarantees shall be paid as designated by the Commission and shall be excluded from results of operations.
Commitment 46: MEHC and PacifiCorp affirm the continuation of existing customer service guarantees and performance standards in each jurisdiction.
There is no evidence that the proposed transaction will harm service quality. To the contrary, the record shows that MEHC's utility subsidiary, MEC, provides good electric service, which bodes well for how PacifiCorp's service quality will fare under the ownership of MEHC. The Applicants have no plans to change PacifiCorp's services, tariffs, operations, and service guarantees and performance standards. Perhaps most important of all, there is no plan to reduce the size of PacifiCorp's experienced and skilled workforce. Based on the foregoing, we conclude that the proposed transaction will maintain or improve PacifiCorp's quality of service.
In deciding whether to authorize a change in ownership of a public utility, the Commission considers if the new owner has adequate technical and managerial competence to continue the kinds and quality of service that customers have experienced in the past. The Commission also considers if the new owner is experienced, financially responsible, and adequately equipped to continue the business sought to be acquired.45
The Applicants state that transaction will not change PacifiCorp's existing management,46 and that the change of ownership will allow PacifiCorp to tap MEHC's significant reservoir of energy-related expertise.
In light of MEHC's extensive experience in managing companies like PacifiCorp, we conclude that the quality of PacifiCorp's management will be maintained or improved after it is acquired by MEHC.47
In deciding whether to authorize a transfer of control of a public utility, the Commission may consider if the proposed transfer is fair and reasonable to the affected utility employees. Among the factors the Commission may consider is how the proposed transfer will affect jobs, pay, and benefits.48
The Applicants state that they have no plans to reduce PacifiCorp's workforce as a result of the transaction, that PacifiCorp will honor existing labor contracts, and that there will be no adverse changes to employee benefit plans for at least one year.
We find that the Applicants have made an adequate showing that MEHC's acquisition of PacifiCorp will be fair and reasonable to PacifiCorp's employees. Although the Utility Workers Union of America, which represents some of PacifiCorp's employees,49 expressed concern about the proposed transaction at the PHC, the Union has not participated in this proceeding since the PHC. Thus, there is no evidence in the record which indicates that PacifiCorp's employees will be harmed by the transaction.
The Commission may consider if a proposed change in ownership of a public utility will be harmful, on an overall basis, to (1) the State and local economies, and (2) the communities served by the public utility. In considering this matter, the Commission focuses on the economic effects of the proposed transaction, but the Commission may consider other factors as well.50
The Applicants assert that the proposed transaction will benefit California and the local communities served by PacifiCorp because PacifiCorp will have better access to capital with which to make needed investments. The Applicants also state that there will be no reduction in corporate philanthropy, community service activities, or other endeavors that benefit local communities.
The Applicants have not shown that the proposed transaction will provide significant economic benefits to either California or the local communities served by PacifiCorp. We agree with DRA that the proposed transaction and the Applicants' associated Commitments do little more than maintain the status quo. At the same time, with the adoption of the Commitments, as modified by today's Decision, we conclude that the proposed transaction will not harm California or the local communities served by PacifiCorp.
In deciding whether to authorize a change in ownership of a public utility, the Commission may consider if the proposed transfer will preserve (1) the jurisdiction of the Commission, and (2) the capacity of the Commission to effectively regulate and audit public utility operations.51
The Applicants assert that the transaction will preserve the jurisdiction of the Commission because PacifiCorp will continue to operate as an electric utility subject to the Commission's regulation.
We find that the proposed transaction will have no adverse effect on our jurisdiction or our capacity to effectively regulate and audit PacifiCorp. After the transaction is complete, the Commission will continue to exercise the same degree of regulatory oversight over PacifiCorp as it does today. The Public Utilities Code and all Commission decisions, rules, and orders will continue to apply to PacifiCorp. In addition, PacifiCorp must continue to provide such information and maintain such books and records as the Commission may require to effectively regulate and audit PacifiCorp.52 PacifiCorp has agreed to comply fully with all of its obligations.
In deciding whether to authorize a transfer of ownership of a public utility, the Commission must consider how the proposed transfer might affect competition. The Commission is not strictly bound by antitrust laws. The Commission can approve transactions that may violate antitrust laws when other economic, social, or political factors are found to be of overriding importance.53 The Commission may also reject transactions that do not affect competition.
MEHC and PacifiCorp both made notification filings pursuant to the federal Hart-Scott-Rodino Antitrust Improvement Act of 1976 (HSR Act). The proposed transaction cannot be consummated until the waiting period prescribed in the HSR Act lapse. The waiting period expired on August 22, 2005.
Based on our review of the record of this proceeding, we conclude that the proposed transaction does not raise any antitrust or anticompetitive issues that warrant our intervention.
D. Approval of the Transaction
As general principle, we will grant authority under § 854(a) to transfer control of electric utilities that are subject to cost-of-service regulation if we find the transaction is, on balance, in the public interest. Under this balancing test, transactions that have negative effects may be approved if serious harm is mitigated and the benefits of the transaction clearly outweigh the detriments.
For the following reasons, we conclude that it is in the public interest to grant authority under § 854(a) for MEHC to acquire PacifiCorp. First, the transaction will not adversely affect ratepayers or the public because there will be no change to PacifiCorp's assets, operations, rates, services, or tariffs. As our previous analysis shows, the transaction will maintain or improve PacifiCorp's service quality and management, and will be fair and reasonable to employees. The transaction will have no effect on the Commission's ability to effectively regulate and audit PacifiCorp, and there are no antitrust or anticompetitive issues that warrant our intervention. In addition, today's Decision adopts numerous conditions to protect PacifiCorp's ratepayers and the public from any potential adverse impacts that the transaction might have, such as a downgrade of PacifiCorp's credit rating.
Second, the transaction will benefit PacifiCorp's ratepayers and the communities served by PacifiCorp. For example, ratepayers will receive a $6 million annual reduction in PacifiCorp's A&G costs on a company-wide basis through 2010, and the Applicants will fund a study of the causes and distribution of toxic algae in the Klamath River system.
Finally, California reaps enormous benefits from the services provided by public utilities. Thus, it is in the public interest to foster a business climate in California that is hospitable to utility investment. Accordingly, transactions that are subject to § 854(a) should be approved absent a compelling reason to the contrary. With the conditions adopted by this Decision, there are no compelling reasons to deny the transaction.
DRA recommends that we deny the transaction because it provides meager benefits to ratepayers. We are not persuaded. 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).
In A.05-07-010, as amended, the Applicants have offered numerous Commitments to ensure that the transaction both benefits ratepayers and causes no harm. We will adopt the Commitments with three exceptions and several modifications and clarifications.
The adopted Commitments, which are listed in Appendix D of today's Decision, supersede the conditions adopted in D.02-04-061, D.01-12-013, D.99-10-059, and D.99-06-049. Those decisions addressed previous changes in ownership of PacifiCorp. The adopted Commitments do not supersede other Commission decisions. To the extent there is a conflict between today's Decision and another Commission decision (other than the four previously identified decisions), the other decision shall control.
The first exception concerns Commitment 1. This Commitment states that current service guarantees and performance standards will terminate on December 31, 2008. However, Commitment 46 states that current service guarantees and standards will continue until modified or terminated by the Commission. In light of Commitment 46, we find that Commitment 1 is confusing and should be eliminated.
The second exception concerns Commitment 17. We decline to adopt Commitment 17 to the extent it allows PacifiCorp to request rate recovery of the acquisition premium under some circumstances. For reasons described in more detail below, we agree with DRA that the Applicants should not be allowed to recover the acquisition premium under any circumstances.
The third exception concerns General Commitments 16, 22, and 23, and California Commitments C-11 through C-15. Commitment 23 provides that PacifiCorp's customers will be held harmless if the transaction results in a higher revenue requirement than if the transaction had not occurred. Commitment C-14 provides a guaranteed reduction in PacifiCorp's A&G expenses on a company-wide basis of $6 million annually through December 31, 2010. The Applicants state that they are willing to offer Commitment 23 or C-14, but not both. According to the Applicants, it is unfair for them to bear the costs and risks for both of these Commitments. They also assert that the general protection from rate increases offered by Commitment 23 is redundant with the protection from rate increases associated with specific types of costs provided by Commitments 16, 22, C-11, C-12, C-13, and C-15.
We will adopt Commitment C-14 because this Commitment provides concrete and quantifiable benefits for PacifiCorp's ratepayers. We decline to adopt Commitment 23, but we caution the Applicants that our rejection of this Commitment does not authorize the recovery of a higher revenue requirement than if the transaction had not occurred. If the transaction does result in a higher revenue requirement that is outside the scope of Commitments 16, 22, C-11, C-12, C-13, and C-15, the Applicants will have the burden of demonstrating why it is reasonable for ratepayers to bear the cost of the higher revenue requirement in the same way they have the burden of demonstrating any costs should be included in the revenue requirement.
We next address modifications and clarifications of the adopted Commitments. Commitment 22 provides that ratepayers will not bear any increase in cost of capital caused the transaction. As noted previously in today's Decision, the transaction might harm PacifiCorp's credit rating, which could lead to a higher cost of capital (including a higher cost than contemplated in Commitments C-15a and C-15b). Any higher costs will be the responsibility of the Applicants, not PacifiCorp's ratepayers.
Commitment 34 provides a process for the Commission to notify the Applicants about violations of the adopted Commitments and to enforce the Commitments. We clarify that the process in Commitment 34 will apply only if the Commission chooses to use it; it will not replace other processes provided by statute, PacifiCorp's tariffs, or elsewhere. There will be no need for the Commission or its staff to notify the Applicants before deviating from Commitment 34.
Commitments 35, 36, and 45 require the Applicants to spend more than $1.3 billion for transmission and distribution infrastructure, emissions reductions, and DSM. Other Commitments, including 36, 37, 40, 41, 42, 43, and 52-54, require the Applicants to take certain actions regarding transmission and generation. Although we acknowledge these Commitments, today's Decision does not authorize or require any of the expenditures or actions set forth in the previously identified Commitments.54 These Commitments will be addressed, as appropriate, in future proceedings.
DRA's comments on the Draft Decision express concern that Commitment 51 prejudges pension issues in PacifiCorp's current GRC proceeding. Commitment 51 states:
PacifiCorp will maintain its current pension funding policy, as described in the 2005 Actuarial Report, for a period of two years following the close of the transaction.
As noted in the Applicants' reply comments on the Draft Decision, none of the Commitments, including Commitment 51, bind the Commission in any respect or mandate any particular result in rate cases. Accordingly, our adoption of Commitment 51 does not prejudge any pension issue in a GRC proceeding.
Finally, today's Decision adopts, on a most-favored-nation basis, the conditions adopted in other states that offer additional benefits or protections. The Commitments adopted by today's Decision (and set forth in Appendix D) reflect the most-favored-nation commitments contained in settlement agreements that have been submitted by the Applicants in Idaho, Oregon, and Utah.
As noted by the Applicants, the settlements in the other states have not yet been approved by those states. Consequently, there might be additions or revisions to the most-favored-nation Commitments adopted by today's Decision. Once the other states have completed their review, the Applicants have agreed to provide a list of all Commitments in their final form. To ensure that the final list of all Commitments is reviewed and approved by the Commission, we will require the Applicants to submit the final list by filing a petition to modify today's Decision.
DRA requests that we (1) prohibit recovery of the acquisition premium from ratepayers, and (2) delay PacifiCorp's next GRC rate increase by one year to January 1, 2008, to ensure measurable benefits for ratepayers.
We will adopt DRA's proposal to prohibit the Applicants' recovery of the acquisition premium, as DRA's proposal is consistent with long-standing Commission precedent.55 The reasons for the Commission's policy are perhaps best summarized in D.69490, which states as follows:
If a regulated utility purchasing dedicated property were allowed to pass on to its customers a price higher than original cost, the parties to the transaction would be in a position to frustrate the application of the original cost standard by arranging a transfer of ownership at a premium. The seller would receive, at the expense of future ratepayers, more than his original cost and yet the willingness of the purchaser to pay such a premium would have little significance since he himself would not bear the burden. (D.69490 (1965) 64 CPUC 1st, 558, 564 (quoting D.68841).)
Because today's Decision does not authorize the recovery of the acquisition premium under any circumstances, any benefits associated with the premium shall accrue exclusively to MEHC. Further, any benefits of the transaction that occur solely at the holding company level, such as tax benefits to MEHC, should not be imputed to the results of the utility for ratemaking purposes.
We decline to delay current PacifiCorp's GRC by one year.56 The Applicants assert that PacifiCorp is not earning its authorized rate of return. If true, delaying PacifiCorp's GRC could prolong PacifiCorp's poor financial performance. Such an outcome could precipitate ratings downgrades and thereby lead to higher financing costs and, ultimately, higher rates. A better approach is to use any synergies and other cost savings from the transaction to offset the proposed rate increase in PacifiCorp's current GRC.57
In the Settlement Agreement submitted on October 21, 2005, as amended on January 5, 2006, the Applicants agree to perform all the Commitments listed in Appendix D of today's Decision, including several Commitments that apply only to California.58 The other Settlement Parties agree to support the Applicants' request to exempt the transaction from § 854(a) pursuant to § 853(b).
In order to adopt a settlement, the Commission must find the settlement is reasonable in light of the whole record, consistent with law, and in the public interest.59 We conclude that the Settlement Agreement satisfies these criteria to the extent the Settlement is consistent with our decision herein to authorize MEHC's acquisition of PacifiCorp pursuant to § 854(a). In particular, the California-specific Commitments in the Settlement Agreement address significant, California-specific issues that were raised by several parties. For example, Commitment C-4 requires PacifiCorp to address the extension of electric service to unserved portions of Indian communities in PacifiCorp's service area in California, and Commitment C-5 requires PacifiCorp to fund a study of the presence and possible causes of toxic algae in the Klamath River. In addition, the California Commitments, as amended,60 extend to California on a most-favored-nation basis the benefits and protections that the Applicants have agreed to provide in other states.61 Therefore, for the preceding reasons, we will adopt the Settlement Agreement to the extent it is consistent with all facets of our decision herein to authorize MEHC's acquisition of PacifiCorp pursuant to § 854(a), including the revisions and clarifications to the Settlement's Commitments that are adopted herein.
In situations involving the sale of an entire utility, as is the case here, we have always allocated to shareholders the gain or loss from the sale.62 Therefore, consistent with our precedent, we will allocate to ScottishPower's shareholders the gain or loss from the sale of PacifiCorp.63
The Commission's practice for allocating gain-on-sale should not be confused with the allocation of other benefits from a transaction. With respect to certain transactions (not including this one), § 854(b)(2) requires that ratepayers receive an equitable allocation of the transaction's benefits. Even in transactions not explicitly covered by § 854(b)(2) the Commission has sometimes allocated a portion of the transaction benefits to ratepayers. Those cases did not involve an allocation of any gain on sale. They involved a quantification of economic benefits of a transaction and an allocation of an equitable share of those benefits to ratepayers. Because PacifiCorp is a cost-of-service utility, the Commission will be able to pass the economic benefits of the transaction, if any, to ratepayers through normal ratemaking processes. Thus, there is no need at this time to identify and allocate the transaction benefits.
We note that we may impose conditions on the sale of a public utility pursuant to our authority under 854(a) to ensure that the sale is in the public interest. Therefore, when necessary, we may allocate some or all of the gain from the sale of a public utility to fund measures that are intended to mitigate the adverse impacts that a sale might have on the public interest.64 In the case before us here, it is not necessary to use the gain-on-sale, if any, to fund such measures.
24 The current list of Commitments was filed by the Applicants on Jan. 5, 2006.
25 D.01-06-007, 2001 Cal. PUC LEXIS 390, *24.
26 In fact, the record indicates that the Applicants have sought to prevent other states from considering California-related issues. (See the Yurok Tribe protest, p. 5, and the protest filed by the Pacific Coast Federation of Fishermen's Associations, et al., p. 9).
27 D.01-12-013, FOF 6.
28 The protests of the other parties were resolved by the Settlement Agreement.
29 D.01-12-013, FOF 2.
30 D.01-06-007, 2001 Cal. PUC LEXIS 390, *24.
31 The Applicants admit that they "have found no cases in which the Commission has...held that it has no jurisdiction under § 854(a) to review the acquisition of a utility operating in California but incorporated in another state." (Applicants' brief filed on Sept. 2, 2005, at p. 3.)
32 Attachment B of DRA's Exhibit 100 lists some of those transactions. See, for example, D.05-06-059 (application to transfer control of a Delaware corporation); D.05-04-012 (application to transfer control of a Minnesota corporation); D.05-03-010 (Washington corporation); D.05-02-044 (Delaware corporation); D.04-04-016 (Delaware corporation); D.03-12-033 (Massachusetts corporation), and D.03-06-069 (Delaware corporation).
33 Witkin, Summary of California Law, 2004 Supplement, Volume 7, Constitutional Law §94; Halbert's Lumber, Inc. v. Lucky Stores, Inc, (1992) 6 CA 4th 1233, 1238-39.
34 Yamaha Corp. of America v. State Bd. of Equalization, 19 Cal. 4th 1, 11 (1998) (agency interpretations of statutes within its jurisdiction are given deference due to agency's special familiarity and presumed expertise with the applicable legal and regulatory issues).
35 D.01-06-007, 2001 Cal. PUC LEXIS 390, *24.
36 D.01-06-007, 2001 Cal. PUC LEXIS 390, *30.
37 Fitch affirmed MEHC's senior unsecured debt at BBB, with a stable outlook. Standard & Poor's placed MEHC's corporate rating and senior unsecured debt rating of BBB- on CreditWatch-Positive. Moody's affirmed MEHC's senior unsecured debt rating of Baa3 while noting a positive rating outlook for MEHC.
38 The Applicants project that PacifiCorp will spend at least $1 billion annually for capital expenditures over the next five years. The projected capital expenditures are substantially higher than PacifiCorp's capital expenditures during the years ending March 31, 2003, 2004, and 2005 of $550 million, $690 million, and $852 million, respectively.
39 The Applicants do not expect PacifiCorp to pay any dividends to its parent company for the next three to four years. (Supplement filed October 14, 2005, response to Question 4.)
40 PacifiCorp SEC 10Q for the period ending September 30, 2005, p. 30.
41 We interpret Commitment 22 as providing for additional ratemaking adjustments to PacifiCorp's cost of debt if the actual cost of a credit downgrade exceeds the parameters set forth in Commitments C-15a and 15b.
42 RT 1, p. 12, Lines 9 - 21.
43 D.01-06-007, 2001 Cal. PUC LEXIS 390, *56.
44 See, generally, Applicants' brief filed Nov. 21, 2005, pp. 7 and 10.
45 D.01-06-007, 2001 Cal. PUC LEXIS 390, *100.
46 PacifiCorp's CEO & President recently announced her intention to leave PacifiCorp after the transaction closes.
47 Today's Decision does not affect the Applicants' prerogative to change PacifiCorp's management personnel and responsibilities.
48 D.01-06-007, 2001 Cal. PUC LEXIS 390, *104.
49 The Applicants state in their comments on the Draft Decision that the employees represented are not located in California.
50 D.01-06-007, 2001 Cal. PUC LEXIS 390, *113.
51 D.01-06-007, 2001 Cal. PUC LEXIS 390, *119.
52 §§ 581 et seq., 701, and 791 et seq.
53 D.01-06-007, 2001 Cal. PUC LEXIS 390, *122.
54 The Applicants acknowledge that they are obligated to fulfill all Commitments and that the Commission may enforce all Commitments even though today's Decision does not authorize the expenditures and actions in many of the Commitments. (RT 1, pp. 21 - 22.)
55 See, for example, D.05-03-010, mimeo, FOF 9; D.91-09-068, 41 CPUC 2d 385, FOF 11 and OP 1(a); and D.01-06-007, mimeo, p. 24, fn. 57, and FOF 78.
56 PacifiCorp filed a GRC application in November 2005.
57 PacifiCorp should identify in its current GRC proceeding the economic benefits of the transaction, if any, so that the benefits may be flowed through to ratepayers.
58 The Applicants filed an errata on January 10, 2006.
59 Rule 51(e) of the Commission's Rules of Practice and Procedures.
60 On January 5, 2006, the Applicants filed an amendment to the Settlement Agreement that revised the California Commitments to include, on a most-favored-nation basis, 17 additional Commitments adopted in other states. Many of these additional Commitments provide added benefits or protections. The Applicants filed an erratum to the most-favored nation Commitments on January 10, 2006.
61 The California Commitments do not predetermine the following: (i) Whether PacifiCorp may recover in rates any costs associated with the Klamath River hydroelectric project; (ii) whether electric service will be provided to unserved Indian communities; and (iii) the type, location, costs, benefits, reasonableness, and recoverability of capital investments and DSM. PacifiCorp will have to obtain the Commission's approval before including in rates any costs associated with the California Commitments.
62 D.01-06-007, 2001 Cal. PUC LEXIS 390, *154.
63 There is no record in this proceeding regarding the amount of the shareholders' gain or loss. The public might receive a portion of the gain or loss to the extent the gain or loss affects the taxes paid by the owners of PacifiCorp.
64 D.89-07-016, 32 CPUC 2d 233, 235.
