Background

Overview

The CalAm/Citizens Application

In A. 00-05-015 (Application), CalAm and Citizens (jointly, Applicants) seek authority for the transfer of all of Citizens' water utility assets and related assets in California to CalAm under terms and conditions set forth in an asset purchase agreement between the companies. Citizens' four water utility operating districts in California would become a CalAm division. CalAm would assume responsibility for providing regulated water utility service to former Citizens customers, and Citizens would be relieved of its water public utility obligations. The purchase price is $161.32 million, subject to certain adjustments upon closing.¹ CalAm would assume Citizens' Safe Drinking Water Bond Act indebtedness to the California Department of Water Resources and would pay the loan balance in cash. Because Citizens has historically done all of its debt financing through its parent company, Citizens has no other indebtedness for CalAm to assume.

To secure Commission approval, Applicants set forth a complex proposal for setting future rates that varies from the method that would otherwise be followed under California's Public Water System Investment and Consolidation Act of 1997, Public Utilities Code Sections 2718 through 2720.² That proposal, modifications made to it during the course of the proceeding, and an alternative proposal Applicants presented near the conclusion of the proceeding are described in a section to follow.

The CalAm/San Jose Water Application

At the same time the CalAm/Citizens Application was filed, CalAm, San Jose Water and various of their affiliates filed A.00-05-016 for Commission approval of a series of acquisition and merger transactions that would have resulted in merger of San Jose Water into CalAm with CalAm being the surviving entity. The applicants in A.00-05-016 proposed future ratemaking provisions largely identical to and integrated with those of the CalAm/Citizens acquisition. A.00-05-015 and A.00-05-016 were subsequently consolidated.

On March 8, 2001, following 20 days of evidentiary hearings, CalAm and San Jose Water filed separate motions to withdraw A.00-05-016 without

prejudice. CalAm stated that delays in the proceeding had made it impossible for the Commission to render a favorable decision by the April 28, 2001 termination date in the CalAm/SJW merger agreement, and that it would be impractical for the parties to extend the agreement. San Jose Water gave no reason for its motion. Intervenor Advocates for the Public Interest (API) supported dismissal, but urged the Commission to state that the delays and problems encountered were of the applicants' own making.

Since no party opposes dismissal, the applicants' motions to dismiss A.00-05-016 will be granted. The remainder of this decision pertains primarily to A.00-05-015 except where noted.

The Parties and Their Positions

California-American Water Company

CalAm is the fourth largest investor-owned water utility in California. It provides domestic water service to 112,000 customers through separate systems in Coronado and a portion of the City of San Diego, six cities and certain unincorporated areas of the Monterey Peninsula in Monterey County, portions of several cities and unincorporated areas of Los Angeles County, and the City of Thousand Oaks in Ventura County. CalAm is a wholly-owned subsidiary of American Water Works Company, Inc., a Delaware corporation listed on the New York Stock Exchange. American is the largest investor-owned water utility in the United States, serving 10,000,000 people in 23 states.

CalAm's purchase of Citizens' California water assets is part of American's larger purchase of all of Citizens' parent company's water and wastewater assets in the U.S. According to CalAm, the U.S. water industry faces significant challenges over the coming decades because of the need to replace aging infrastructure to meet more rigorous regulatory standards. The federal Safe Drinking Water Act and the federal Clean Water Act are two primary examples of those standards. These challenges are part of a driving force behind consolidation in the industry. While companies such as CalAm and American are large by U.S. water industry standards, consolidation has taken on an international scope, and U.S. companies are not large when compared to either their foreign counterparts or to domestic energy and telecommunications utilities. Foreign water companies have made inroads in the U.S. market, and for many U.S. water companies, survival depends on building enough financial bulk and operating capability to compete with them. Because the opportunities for expansion in the water industry have been constrained by relatively flat growth in demand and customers, U.S. companies, including American, are looking to acquisitions such as this one to enhance shareholder value.

CalAm believes that consolidation of these two sizable water companies would lead to greater economies of scale and rates lower than they would have been absent consolidation. In support of its position, it prepared a study of the very considerable synergies it expects to generate, and proposes to share the resulting savings with ratepayers as an inducement to obtain Commission approval of the Application. CalAm's initial sharing proposal was set forth in the Application (the "Application sharing proposal"). The Application sharing proposal later evolved considerably through changes introduced during the course of evidentiary hearings, the addition of detail not defined in the Application, and an update to reflect withdrawal of the companion CalAm/SJW merger application. In the final days of hearings, CalAm³ tendered a final offer (the "alternative sharing proposal") incorporating much of the same implementation detail but offering future ratepayers a considerably enhanced share (90% to ratepayers) of the synergies savings remaining in any year after CalAm earns a return of and on⁴ the acquisition premium. Its Application sharing proposal would have given just 5% to ratepayers. CalAm has crafted each of its proposals so as to ensure that future ratepayers would never experience an acquisition premium-driven rate increase that exceeds the annual synergies savings generated from the acquisition. Each proposal is further described below.

In addition to the quantifiable ratepayer benefits, CalAm sees a host of non-quantifiable and non-monetary advantages for Citizens' ratepayers through the acquisition. Among those, it lists: enhanced ability to respond to emergencies and natural disasters; access to in-house laboratory and research capabilities in California and nationally; annual customer satisfaction surveys and incentive compensation tied to customer service; specialized in-house design and engineering capabilities; enhanced employee career growth and training opportunities; participation in an Environmental Protection Agency partnership program designed to enhance water quality; greater ability to acquire and upgrade small, troubled water companies in California; and CalAm's single industry focus in contrast to Citizens' multi-industry diversification. And, perhaps most importantly, both CalAm and Citizens stress that Citizens is divesting itself of all of its other water and wastewater operations nationwide. Unless it can sell its California facilities to a larger water utility, Citizens' California water operations will lose many of their current economies of scale, it will be more difficult to attract and maintain qualified personnel, and today's rate and service levels will be put at risk.

Citizens

Citizens serves approximately 66,000 water service connections in four California districts: Larkfield in Sonoma County; Felton in Santa Cruz County; Montara in San Mateo County; and scattered locations in Sacramento and Placer Counties. The Sacramento and Placer County service areas include the City of Isleton and vicinity, the City of Citrus Heights, and a large number of smaller, unincorporated areas. Citizens Utilities Company of California is a wholly-owned subsidiary of Citizens Utilities Company, a Delaware corporation listed on the New York Stock Exchange. In 1999, Citizens' parent announced it would divest its water distribution, wastewater treatment, gas distribution and electric distribution businesses as part of a corporate strategy to position itself as a pure telecommunications service provider. Shortly after, in October, 1999, American agreed to acquire all of its water and wastewater assets, located in California and five other states. In comments on the ALJ's Proposed Decision, Citizens reports that all five other states have now issued final decisions approving the transaction.

Citizens' position closely parallels that of CalAm: This acquisition will transfer Citizens' California regulated water assets and customers into the hands of an exceptionally well-qualified operator. The purchase price was the result of arms-length negotiation and represents fair market value. Ratepayers will reap very substantial quantifiable and non-quantifiable benefits that would not be available otherwise.

Advocates for the Public Interest

Advocates for the Public Interest is an unincorporated nonprofit association found eligible for intervenor compensation as a customer of the third type, i.e., a group or organization authorized by its bylaws or articles of incorporation to represent the interests of residential customers.⁵ API intervened early in both applications and took an initially critical view of the value to ratepayers of the Citizens acquisition (and the now-defunct San Jose Water merger) and of CalAm's synergies savings assumptions. CalAm's proposal to pay a large premium over book value and then attempt to recover that premium from savings it hoped to generate represented, in API's view, a significant risk to ratepayers. Among the three stakeholders, Citizens would benefit immediately and depart the transaction with a large reward and little or no risk; CalAm would have first claim to apply any synergies savings against its purchase premium and would receive 95% of any remaining synergies; and ratepayers would be in line for the remaining 5%. Should the acquisition not produce the projected level of synergies, ratepayers would receive no quantifiable benefits and could actually be harmed if CalAm's financial position and ability to provide adequate service were weakened. API urged the Commission to strike a better balance between ratepayers' risks and rewards and those of CalAm. API's initial recommendation was for the Commission to mandate actual rate decreases (1% annually for 20 years) if it decided to approve the acquisition.

As the proceeding progressed, API did extensive financial and policy analysis in support of its position, concluding that under most reasonable scenarios CalAm would suffer substantial, albeit declining, losses under the Application sharing proposal in the near and mid-term. Those losses, due largely to CalAm's proposal to forego general rate increases through 2005 (the so-called "stayout benefits"), might or might not be overcome by the substantial and increasing benefits CalAm would reap in the much longer term. That would subject ratepayers to a double risk: a financially-weakened CalAm possibly less able to maintain adequate service levels; and a CalAm with "a huge incentive to work the Commission hard for the highest synergies savings estimates possible," upon which future rates would be based. API thereupon shifted to suggesting as a solution, "[T]he Commission should consider restructured deals here that include greatly reduced acquisition premia," and that the acquisition as proposed should be rejected.⁶

During the evidentiary hearings, API devoted considerable time and effort to drawing out of CalAm the details and assumptions underlying the synergies analysis and Application sharing proposal. Surfacing those details and assumptions, which had not been developed elsewhere in the record in a consistent and understandable way, proved critical in analyzing whether the acquisition and sharing proposal should be approved.

After CalAm presented the alternative sharing proposal very late in the proceeding, API did more analysis that led it to lend its qualified support, and at the same time to suggest a counterproposal. According to API, "[R]atepayers will get substantial value in any event from the [alternative sharing proposal], albeit only about half of what they would receive under traditional [i.e., non-Sections 2718 through 2720 ratemaking] treatment." API continued, "[R]atepayers and CalAm carry substantial risks here, while Citizens does not." Nonetheless, "While this fact makes the deal still unbalanced, the fact that ratepayers now get comparable benefits [to Citizens] and CalAm does not expect a material loss from it may make it an acceptable deal." And on brief, API concluded, "The acquisition proposed here satisfies the criteria of §§854(b) and (c)...", and, "The acquisition proposal is in the public interest, considering all relevant factors."

No party supported API's counterproposal which we will describe below but not entertain further. CalAm on brief did find merit in one element of API's counterproposal, however. CalAm agreed that it may be possible to determine and finalize a synergies savings amount in the 2004 general rate case and use it to fix the future acquisition-related revenue requirements and sharing amounts without need for reconsidering them in each ratesetting proceeding over the 40-year amortization period.

Office of Ratepayer Advocates

The Commission's Office of Ratepayer Advocates (ORA) recommends the Commission deny Applicants the authority to transfer Citizens' assets.

ORA would have the Commission apply the requirements of Section 854(b) and (c) to this acquisition. Among other things, Section 854(b) calls for ratepayers to receive not less than 50% of the short-term and long-term forecasted economic benefits of the proposed acquisition.⁷ ORA also advocates a standard that any merger or acquisition must deliver "substantial and tangible benefits to ratepayers immediately and over the long term."

In this case, much of the quantifiable benefit to ratepayers takes the form of so-called "stayout benefits," which CalAm estimates arise from its offer to forego general rate increases through either 2005 (in the Application sharing proposal) or 2002 (in the alternative sharing proposal). ORA discounts stayout benefits entirely or almost entirely for the alternative sharing proposal on the grounds that they are "illusory": the time to file for those increases has passed, and there is no evidence that even if CalAm had filed it would have received the rate increases upon which the assumption of stayout benefits rests. Further, ORA discounts in large part any non-quantifiable benefits the acquisition might produce. Thus, ORA believes CalAm's proposal would essentially guarantee it recovery of its acquisition premium while ratepayers would receive far less than 50% of the benefits and would be at risk of getting no benefits whatsoever.

According to ORA, the Commission should not depart here from its longstanding practice that shareholders be held exclusively responsible for any premium paid above book value. CalAm and its corporate parent, American, are motivated to make the acquisition to maintain American's competitive position in a rapidly consolidating international market, and Citizens' parent has already irrevocably decided to sell its various water companies to concentrate its efforts in the telecommunications industry. The Commission should determine that neither participant needs a sharing incentive to complete the transaction.

Further, ORA objects to Applicants' proposal to include and recover as part of the acquisition premium their $1.2 million in acquisition-related costs.

Montara Sanitary District

Montara Sanitary District (MSD) focused entirely on Citizens' Montara District on the San Mateo County coast. MSD does not oppose the acquisition and transfer per se, but opposes approval on the terms and conditions Citizens and CalAm have proposed. According to MSD, Montara residents have endured service deficiencies for years despite numerous Commission decisions ordering Citizens to increase its water supply, develop new wells, and rehabilitate its system. The approach the Commission has taken to these problems to date has not worked and will not work for the future. Further, CalAm and Citizens have failed to demonstrate that the acquisition will result in just and reasonable rates for Montara District ratepayers.

MSD would have the Commission condition approval on the following: (1) Citizens should allocate a reasonable portion of the acquisition premium to paying for such capital expenditures as the Commission may determine necessary in A.00-10-049; ⁸ (2) CalAm should explore the feasibility and rate impacts of consolidating districts and regionalizing rates across CalAm and Citizens districts in A.00-10-049; (3) CalAm should explore with MSD cost-effective and reasonable means for increasing Montara District's water supply, including joint participation with MSD in water transfers and wholesale water supply purchases; and (4) CalAm should join as a member and participate in any groundwater management district that may be established, and include the Montara District geographic area.⁹

If the transfer is approved without the conditions MSD recommends, Citizens will depart with its sizable acquisition premium, leaving Montara ratepayers no recourse against Citizens. Citizens will no longer have any responsibility for Montara District and no responsibility for implementing whatever improvements the Commission may find required after hearings in A.00-10-049.

Other Parties

Several other parties entered appearances in the proceeding and participated to varying degrees.

San Jose Water and its holding company, SJW Corp., are applicants in A.00-05-016 and co-represented by the same counsel representing CalAm. They participated fully in evidentiary hearings until early-March when

motions were filed to withdraw the application. Although technically parties in the consolidated proceeding to the end, they did not file briefs or participate in any way in A.00-05-015 after filing their motion.

Three employee unions appeared and participated actively in opposition to A.00-05-016, the CalAm/San Jose Water merger application, until early-March when those applicants filed to withdraw. Utility Workers Union of America, Local 259; Utility Workers Union of America, Local 511; and Utility Workers Union of America, AFL-CIO (the national union) were jointly represented by the Region 5 Director of Utility Workers Union of America, AFL-CIO, and in his absence by the President of Local 259. The unions stated no position on the CalAm/Citizens acquisition Application, and did not participate after the motions to withdraw A.00-05-016.

Operating Engineers Local Union No. 3 of the International Union of Operating Engineers, AFL-CIO, which represents certain employees of San Jose Water, filed a Petition to Intervene in A.00-05-016 and was granted party status on August 17, 2000. It did not participate further in the proceeding.

Representatives of Santa Clara Valley Water District made an appearance at the prehearing conference in A.00-05-016 but did not subsequently participate.

The Proceeding

Both applications were filed on May 16, 2000. The Commission preliminarily determined both to be ratesetting proceedings expected to require evidentiary hearing. Separate prehearing conferences were held in San Francisco on June 22, 2000. Assigned Commissioner Carl Wood issued his scoping rulings on August 2, 2000, confirming the category and need for hearing, and designating assigned ALJ James McVicar as the principal hearing officer and thus the presiding officer in both applications.

On August 17, 2000, ALJ McVicar issued two rulings requiring both sets of applicants to prepare exhibits demonstrating how the applications were in the public interest with respect to each Section 854(c) criterion; granting ORA motions for additional time to serve testimony; modifying (but not extending) the schedules; and granting applicant motions for protective orders.

The ALJ held public participation hearings on September 12, 2000 in San Jose for A.00-05-016, and in Felton, Montara, Santa Rosa and Citrus Heights on successive evenings between September 18 and September 21, 2000 for A.00-05-015.

Thirteen days of evidentiary hearing were held in November and December, 2000, with the applications being consolidated by ALJ ruling on November 20, 2000 after the first week of hearing in A.00-05-015.

On January 5, 2001, ALJ McVicar and the assigned ALJ in A.00-10-049 issued a joint ruling denying MSD's motion to consolidate A.00-05-015 and A.00-10-049.

Thirteen days of further evidentiary hearing were held January 8 through April 10, 2001. On February 20, 2001, the assigned Commissioner and assigned ALJ issued a joint ruling revising the schedule. The proceeding was submitted on receipt of reply briefs due May 14, 2001. During the briefing period, ORA filed a Request for Final Oral Argument before the Commission, and later formally withdrew it.

The Proposals

The Application Sharing Proposal

Section 2720(a) provides, "The commission shall use the standard of fair market value when establishing the rate base value for the distribution system of a public water system acquired by a water corporation." However, under Section 2720(d), "Consistent with the provisions of this section, the commission shall retain all powers and responsibilities granted pursuant to Sections 851 and 852." Section 851 requires Commission approval before a public utility may sell any part of its plant, system or other property necessary or useful in providing utility service. Thus, the Commission retains its authority to review a proposed sale and acquisition such as CalAm and Citizens propose in A.00-05-015, and to deny Applicants the authority they seek if the application of Section 2720(a) were to render the proposal not in the public interest.

The Commission has previously observed¹⁰ that "...[N]either [§2720(a)] nor any other portion of the [Public Water System Investment and Consolidation Act of 1997] expressly requires an applicant to request such a rate base valuation or prohibits an applicant from seeking a lower rate base valuation in its application or as a product of settlement with other parties." If an applicant believes that proposing an alternative ratemaking arrangement to Section 2720(a) would help convince the Commission that an acquisition is in the public interest, it is free to do so. Applicants have made an alternative proposal to implement Section 2720 in A.00-05-015.

The Application sharing proposal is set forth in the body of the Application, and in Exhibit 16 attached to the Application which lists some 36 related requests in six categories. The requests in the Application and Exhibit 16 are frequently repetitive and sometimes contradictory, but shorn of detail and simplified, the major elements essential to understanding the ratemaking implications are distilled and listed below:

a. CalAm would book the purchase price premium over net book value of the assets as an acquisition adjustment to be allowed for ratemaking along with rate base, thus meeting the requirement of Section 2720(a).

b. CalAm would amortize the acquisition premium, estimated at $64.553 million, on a mortgage-style basis (i.e., equal annual amounts covering principal and a return on the unamortized balance) over 40 years beginning when the acquisition is consummated. The premium would be spread company-wide "to all CalAm post-consolidation Divisions based on the lower overall revenue requirement as a percentage of the total pre-consolidation revenue requirement" [sic].

c. CalAm's Los Angeles Division general rate case (GRC) then getting underway (rates to be effective January, 2001) would be processed with no consideration of the proposed Citizens acquisition.

d. CalAm would defer filing a further GRC for any division, including Citizens Division, until January 2005, at which time it would file a company-wide GRC for rates to be effective January 1, 2006. This is the so-called stayout period.

e. These GRC deferrals notwithstanding, CalAm would still file for limited rate relief during the pre-2006 stayout period for a wide variety of expense, rate base and cost of capital items as set forth in the Application.

f. CalAm would retain all synergies savings produced until the 2006 company-wide GRC rates took effect.¹¹ To the extent those pre-2006 savings were less than needed to cover the acquisition premium amortization amount, CalAm would suffer the loss; to the extent they exceeded that amount, CalAm would realize the gain.

g. In the 2005 company-wide GRC, the Commission would determine the synergies savings from the acquisition using the 2005 operating results compared to corresponding pre-consolidation baseline figures projected to 2005. The pre-consolidation projections would be extrapolated from the Commission's earlier determinations of the cost of service for the most recent test year in each CalAm division (including Citizens Division).

h. Beginning in 2006, rates for all divisions would be set to recover CalAm's actual post-consolidation revenue requirements (not including the acquisition premium amortization), plus an adder representing the Commission-determined synergies savings escalated to that year. Depending on whether the adder would be less than or greater than the amount CalAm requires to cover the acquisition premium amortization amount for that year, CalAm would suffer 100% of the shortfall or give a 5% share of any excess to ratepayers.¹² Amortization shortfalls would not be carried forward to be recovered in future years. The Application is ambiguous as to whether the synergies adder would expire when the acquisition premium was fully amortized after 40 years or continue to flow 95% to CalAm in perpetuity, but it is likely the intent was for the adder to expire and ratepayers to receive 100% of the synergies benefits thereafter.

Modifications During Hearings

The Application sharing proposal evolved during the course of evidentiary hearings through CalAm's rebuttal and cross-examination testimony and exhibits. While most of the basic concepts of the Application sharing proposal listed above endured, CalAm greatly expanded the level of detail underlying those concepts and declared that some of those previously unrevealed details would be considered essential and binding should the Application sharing proposal be implemented. Here are some of the highlights:

a. CalAm produced for the first time a list of categories for grouping synergies items, and suggested calculation methods, for determining the synergies adder in 2005 and after. The latter included, e.g., a fixed method for calculating savings due to cost of capital synergies.

b. It began to suggest for the first time that the Commission would necessarily quantify in this proceeding once and for all some of the pivotal figures for calculating the actual synergies adders over the 40-year amortization period. As presented earlier in the Application, all actual quantification would take place in the 2005 company-wide GRC.

c. It presented a stipulation proposal related to the synergies model, interim rate filings and other issues. That proposal adjusted the interim rate case filing schedules from what they had been in the Application; stated a simplified and possibly somewhat different version of what items would qualify for such interim rate increases; introduced a standard schedule to be followed in processing the interim increase rate cases; and introduced for the first time a series of figures, methodologies and procedures which it would consider binding on the parties and Commission in future years once accepted. CalAm later added yet additional detail to the proposed synergies calculation methods in the proposed stipulation. The stipulation proposal at this point still reflected cross-synergies generated by the pending CalAm/SJW merger.

d. The stipulation proposal was subsequently revised to account for abandonment of the CalAm/SJW merger application. Transaction costs for the CalAm/Citizens merger to be included in the acquisition premium were said to be $1.2 million.

e. CalAm clarified that it did not intend to allocate to ratepayers 5% of the synergies savings in excess of the annual amortization amounts during the pre-2006 period.

f. CalAm revealed that because it would be acquiring Citizens' assets, liability for historic advances would remain with Citizens¹³ and CalAm would not be recording historic advances and contributions on its books. To ease the transitional effect on rates, CalAm would initially treat those advances and contributions as a rate base deduction for ratemaking purposes in the Citizens Division, to be ratably restored over 20 years.

g. CalAm suggested for the first time that the synergies determined in the 2005 company-wide GRC and escalated to future years could be subject to challenge and revision should circumstances change, with the challenging party having the burden to prove that synergies escalated from earlier years were not still valid.

The Alternative Sharing Proposal

At the March 30th evidentiary hearing, with the intervenors unswerving in their opposition and API having produced much critical analysis of the Application sharing proposal as modified, CalAm introduced an alternative sharing proposal.¹⁴ Many of the elements remained the same as in the Application sharing proposal and the modified sharing proposal. Highlights of the changes are listed below:

a. Mortgage-style amortization of the acquisition premium would begin in 2002 and run for 40 years.

b. The general rate case stayout period would be eliminated going forward.¹⁵

c. Since there would no stayout obligation going forward, the list of interim rate filing exceptions to the stayout provision would no longer be needed.

d. The GRC filing schedule would be:

(1) Citizens Division GRC filed in January, 2002 for rates effective for test years 2003 and 2004.

(2) Citizens Division GRC filed in January, 2004 for rates effective 2005.

(3) Monterey Division and General Office GRCs filed in January, 2002 for test years 2003 and 2004 and attrition year 2005.

(4) Los Angeles and Village Division GRCs filed in January, 2003 for rates effective 2004.

(5) Coronado Division GRC filed in January, 2004 for rates effective in 2005.¹⁶

e. CalAm would prove its claimed synergies savings in the 2002 GRC filing, and the Commission would review them again in the 2004 GRC filing to ensure they still existed. Thereafter, they would be carried forward using agreed-upon escalation methods and factors. CalAm would carry the burden of proving that any new or increased GRC expenses (excluding those due to inflation and customer growth) in future years were not erosions of earlier-estimated synergies.

f. CalAm would retain all synergies savings produced through 2004.

g. CalAm would begin sharing the synergies savings in 2005 and running until the 40-year amortization period ends. As in the Application sharing proposal, synergies savings would first go to CalAm to the extent needed to cover that year's acquisition premium amortization amount. Again depending on whether the synergies savings adder would be less than or greater than the amount CalAm required to cover the acquisition premium amortization amount for a given year, CalAm would suffer 100% of the shortfall or give ratepayers a 90% share of any excess (up from 5% in the Application sharing proposal). Amortization shortfalls would not be carried forward to be recovered in future years. At the end of the 40-year amortization period, all subsequent synergies savings would go to ratepayers.

h. Historic advances and contributions would continue to be treated as described above for the Application sharing proposal as modified.

Under this alternative sharing proposal, CalAm projected that ratepayers would receive $569 million in benefits over the 40-year amortization period, representing 91% of all benefits in excess of CalAm's return of and on the acquisition premium. Depending on the discount rate, CalAm equated this to between $51 million and $80 million in net present value.

The API Counterproposal

On the next to last day of hearing, API introduced a sharing counterproposal of its own. In very brief testimony describing it, API characterized the counterproposal as being built on CalAm's alternative sharing proposal and assumptions. Little else is known of it beyond a spreadsheet column showing the annual figures it would produce as the acquisition amortization amounts over the 40-year period. API did not further define and support its counterproposal in the evidentiary record because hearings were drawing to a close.

Although API's counterproposal is incomplete and was not supported by any other party, CalAm did find in it some redeeming elements. We repeat here CalAm's observations of it on brief on the chance that the parties may find merit in developing those elements in a future sharing proceeding should the acquisition be consummated:

[API's counterproposal] contains certain constructive elements, designed to facilitate administrative efficiency and ratemaking certainty....

* * *




As CalAm understands the API proposal, it would fix the allowable revenue requirement associated with the acquisition premium and sharing of the synergies savings (based on API's schedule) during the 40-year period in this proceeding. It would not require CalAm to prove or the staff or Commission to review whether the synergies levels determined in that manner continue to exist in rate proceedings throughout the 40-year life of the proposal.

API's counterproposal was insufficiently developed on the record to be considered further here.