Discussion

Purchase Price, Acquisition Adjustment, and the Importance of § 2720

As an incentive to water companies to achieve economies of scale through consolidation, the Legislature has added Section 2720(a) to the Public Utilities Code: "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. This standard shall be used for ratesetting."¹⁷ Historically, at the Commission's discretion, any premium paid by a water company for assets in excess of their book value was borne by shareholders in the form an acquisition adjustment to be recorded below the line for ratemaking purposes. Section 2720 changed that for California's regulated water utilities, in effect requiring ratepayers to include this acquisition adjustment in ratesetting rate base. All else being equal, if the Commission were to approve an acquisition at a price above book value of the assets, adding the acquisition adjustment to rate base would result in higher rates following the transfer. The Legislature anticipated that the Commission would review each proposed regulated water system transfer as it is required to do under Sections 851 et seq. to ensure each is in the public interest before approving it.

In this acquisition Application, American Water Works has agreed to pay Citizens Utilities Company $835 million for all of Citizens Utilities' regulated and unregulated water and wastewater assets, located in California and five other states. They have allocated the total purchase price to the six states involved in proportion to Citizens Utilities' gross water and wastewater plant in each state. California's share (19.32%) is $161.32 million. After taking into account the book value of Citizens' assets and the portion of the premium attributable to unregulated assets, the parties generally agree the acquisition premium for California regulated assets would be $64.553 million. This figure would be adjusted if market value of the non-regulated assets were higher at the time of closing.

Since CalAm proposes an alternative ratemaking method, the Section 2720(b) provision regarding market value in excess of reproduction cost is not at issue.

CalAm maintains that the acquisition and transfer of Citizens' assets would create significant economies of scale, both quantifiable (the synergies savings) and otherwise. It recognizes, however, that if it were to include the full acquisition premium directly in rate base at the time of transfer under Section 2720(a), the revenue requirement for the former Citizens districts would be driven up and rates would follow in the short term. Economies of scale would begin to develop almost immediately, however, and after the early years the synergies savings from consolidation would overcome the effects of including the acquisition adjustment in rate base. Rates could then begin to drop to below what they would have been for the stand-alone operation.

We have previously found that the Commission lacks discretion to condition approval of a water utility merger upon valuation of rate base of the acquired system below fair market value.¹⁸ The same reasoning applies to the acquisition and transfer here. Applicants are acutely aware that should the Commission decide that an acquisition with a short-term, significant increase in rates is not in the public interest despite the promise of longer term ratepayer benefits, it would not be approved. However, if an applicant believes that proposing an alternative ratemaking arrangement that is still compliant with Section 2720(a) would help persuade the Commission that an acquisition is in the public interest, it is free to do so. CalAm made such a proposal in A.00-05-015, and shortly before the close of hearings presented an alternative sharing proposal. Since no party has taken issue with CalAm's claim, with which we agree, that the alternative sharing proposal is more favorable for ratepayers than the Application sharing proposal, we will confine our consideration to the alternative sharing proposal for the remainder of this decision.

Standard of Review

Applicants, ORA and API expended considerable effort before and during evidentiary hearings and on brief disputing what legal standard should properly apply in this proceeding. While we will summarize their positions, we find CalAm's alternative sharing proposal to be in the public interest regardless of which of two standards we might have chosen: "no harm to ratepayers," or "equitable sharing of benefits."

CalAm argues that the Commission has always used a "no harm to ratepayers" standard of review for proposed acquisitions, and that it remains the standard that must be applied today notwithstanding dissenting and concurring opinions to the contrary in several recent decisions.¹⁹ Further, Applicants claim that even if a "positive ratepayer benefits" standard were used, their proposals would meet it. In their reply brief, they state,

Applicants acknowledge that the Commission has broad discretion to review acquisitions to determine whether or not they are in the public interest [under §§ 851 and 854(a)]. It is well established that the overriding principle governing Commission decisions, whether in the context of an acquisition proceeding, or any other type of proceeding, is whether the requested relief is in the public interest. However, CalAm does not agree with Staff's assertion that the Commission has "virtually unlimited discretion" under §§ 851 and 854(a) to approve or deny water utility acquisitions.

ORA on brief discusses the standard to be applied without stating concisely what that standard should be. ORA notes the same dissenting and concurring opinions calling for a "positive ratepayer benefits" standard as does CalAm, coupling those with Section 854(b)(2) and the Commission's reference to that section in D.97-03-067 ²⁰ to infer a standard wherein ratepayers must receive no less than 50% of the economic benefits of the transaction. ORA does acknowledge that Sections 854(b) and 854(c)²¹ do not by their terms apply to water companies, but would still apply them here. In evidentiary hearings, its position was that the Application should be denied because it did not provide "substantial and tangible benefits to the ratepayers immediately and in the long term."

API states its recommendation as:

The standard of review should require at least satisfaction of two criteria: 1) that the proposed acquisition be found to be in the public interest in the sense of providing net social benefits; and 2) that the affected ratepayers reap substantial, immediate and continuing quantifiable net benefits proportional at least to the risks they carry relative to the net benefits and risks carried by affected utility stockholders.

API would recognize the Section 854(b) and (c) criteria as generally very useful for review purposes, but would not embrace the Section 854(b)(2) 50% sharing threshold where the Commission is not statutorily required to do so.

We find that a transaction subject to Section 2720 should offer to ratepayers some equitable share of the benefits the transaction will generate. This is entirely consistent with Sections 2719(c) and (d) in which the Legislature found and declared, "Scale economies are achievable in the operation of public water systems," and "Providing water corporations with an incentive to achieve these scale economies will provide benefits to ratepayers." Reflecting an "equitable sharing of benefits" standard does not speak to whether those benefits should be entirely quantifiable, entirely non-quantifiable, or some combination of both.

Applying Section 2720 places a cost on ratepayers: that of supporting a rate base higher than it would otherwise be because it is set at fair market value. CalAm's Section 2720-compliant alternative sharing proposal similarly places a cost on ratepayers: that of paying through rates a return of and on the acquisition premium. Ratepayers are not only at risk that synergies will not exist or will not be as great as CalAm estimates them today to be, but that even if they do exist they may be eroded in the future, or an imperfect ratesetting process applied over a 40-year period may overestimate their magnitude and thus provide an excessive sharing amount to CalAm at ratepayers' expense. CalAm, however, represents its alternative sharing proposal as providing benefits to ratepayers that more than offset all costs it places on them from whatever source.²² It is that claim that we must weigh here: Does CalAm's alternative sharing proposal provide to ratepayers an equitable share of the anticipated benefits given the costs and risks imposed on them? Only if it does will we find the acquisition to be in the public interest and approve it.

Ratepayer Benefits

Quantifiable Synergies

As part of the application process, CalAm prepared a study to demonstrate the quantifiable economies of scale it expects to bring about should it acquire Citizens and merge with SJW. An updated version was introduced at the first day of hearings, and a further update which also removed the effects of the abandoned CalAm/SJW merger proposal was introduced later. CalAm is confident that the synergies savings shown are minimum amounts to be generated, that the assumptions built into the synergies analysis are conservative, and that with actual experience in operating the combined assets even greater synergies will be realized.

The synergies analysis quantified CalAm's expectations for reductions due to, e.g., duplicated executive, management and operating personnel positions and expenses, avoidable expenses and material costs, use of existing employees and equipment to replace purchased services, cost of capital reductions, and future reductions below historical cost trends. In response to an ALJ request, CalAm presented an exhibit comparing customers' revenue requirement savings over the 40-year amortization period in total dollars and net present value (NPV) for three ratesetting methods, using as discount rates both CalAm's net weighted cost of capital (8.43%) and gross weighted cost of capital (11.95%).²³

Table 1

	Applicants' Alternative Sharing Proposal	§2720 Return On Only	§2720 Return Of and On
Customer Savings through 2041	$569,613,231	$557,859,892	$659,201,253
NPV at 8.43% Discount Rate	$ 83,143,562	$ 67,844,149	$ 72,819,546
NPV at 11.95% Discount Rate	$ 48,124,886	$ 34,689,615	$ 34,164,982

The first column shows CalAm's view of the effect on customers of its alternative sharing proposal; the second the effect on customers if the Commission were to follow Section 2720 directly, by using fair market value as rate base (allowing a return on the acquisition adjustment); and the third again following Section 2720 but allowing both a return of and on the acquisition adjustment.

Although the parties differed on the proper discount rate and other assumptions, each would agree that in the end the choice did not affect their conclusion. Using CalAm's synergies assumptions, following Section 2720 and allowing a return of and on the premium produced the greatest reduction in revenue requirement for customers when measured in total dollars. When the time value of money is recognized, however, CalAm's alternative sharing proposal would be best for ratepayers.

CalAm prepared another exhibit (using slightly different assumptions) to make its point that its alternative sharing proposal would give ratepayers a significant proportion of the total synergies savings:

Table 2

	Total Synergies Benefits (through 2041)	Benefits to Ratepayers	% to Ratepayers
Total $	$853,397,002	$569,613,407	67%
NPV at 8.64% Discount Rate	$147,394,039	$ 80,155,174	54%
NPV at 11.48% Discount Rate	$101,239,045	$ 51,363,429	51%

While ratepayers would receive a benefit equivalent to 67%, 54%, or 51% of the synergies savings in this comparison, the remainder would go not to CalAm, but rather to CalAm and Citizens together, with Citizens getting nearly all. API's final exhibit made this point clear in Table 3 that follows.

ORA initially took issue with much of what was presented in CalAm's synergies analysis. It later came to closure with CalAm on its late-proceeding estimate of achievable synergies, agreeing that estimate is appropriate for the purpose of evaluating the acquisition. Apparently relying largely on CalAm's synergies analysis and its own net present value calculations, ORA estimated that under CalAm's alternative sharing, ratepayers could receive about 43% and Applicants 57% of approximately $101 million in net present value attributable to the acquisition. ORA concluded that the share offered to ratepayers was inequitable and/or not sufficient to overcome the risk that the projected synergies may not materialize, and recommended the Application be denied. ORA did not present a quantitative analysis that addressed what an equitable allocation of the benefits due to the synergies in this case would be. ORA also objected to CalAm's proposal to include and recover as part of the acquisition premium $1.2 million in acquisition-related costs. CalAm responded that, just as its payment of fair market value is necessary to acquiring the assets that generate the shareable synergies, so is incurring the acquisition-related transaction cost. CalAm would be making an investment that will benefit both it and its ratepayers, an investment it should be allowed to recover from the benefits. Were CalAm constructing a new system or making plant additions, the long accepted practice would be to capitalize and recover in rates all of the related costs. The situation here is analogous.

API prepared its own comparison to show the distribution of all quantifiable benefits to be realized through the acquisition under CalAm's alternative sharing proposal, doing so in such a way as to show the effects on all three stakeholders: ratepayers, CalAm and Citizens. After making a series of adjustments to incorporate its own assumptions, including inflation, escalation and discount rates, stayout benefit allocation, cost of capital, and terminal values of benefits beyond 2041, API tallied the range of effects on the three stakeholders it expected depending on the discount rate chosen:

Table 3

	Ratepayers	CalAm	Citizens	Total
NPV of Total Net Benefits	$41,000,000 to $75,000,000	($2,000,000) to $ 0+	$61,000,000	$100,000,000 to $136,000,000
% of Total Benefits	41% to 55%	(2%) to 0%+	45% to 61%	100%

CalAm's near-neutral outcome in this summary is driven by the very large premium over asset value it has agreed to pay to Citizens. During the final days of hearing, CalAm's witness testified that it chose the 90%/10% split of any savings in excess of the annual acquisition premium amortization as being the minimum share that would allow it to break even on its purchase premium over the 40-year period. That is consistent with API's Table 3. With respect to the effect on CalAm and the relative sharing between CalAm and Citizens, we agree with API: "As both Applicants are fond of noting, the deal was negotiated at arm's length between willing parties, each under no compulsion to do it, and thus the Commission need not agonize over the distribution of net benefits and risks between [them], unless it threatens the financial viability of one or the quality of service relative to rate levels, neither of which it does."

API was the most active intervenor in examining CalAm's synergies analyses and distributions of benefits. While still expressing reservations with CalAm's assumptions of growth, inflation, escalation and discount rates, and terminal values, API also in the end agreed that any one of the three sharing scenarios in Table 1 "would involve ratepayers sharing more or less half of the benefits with the stockholders in the Applicants, and they still yield substantial net benefits to ratepayers over continued separate operation."

Thus, CalAm and API, both of whom performed credible, independent analyses of the relative distribution of the benefits, agree that

ratepayers stand to receive roughly half of the net benefits generated by the acquisition.

Stayout Benefits

The largest share of the quantifiable benefits from the Application sharing proposal were said to be about $25 million in stayout benefits, those benefits arising from CalAm's commitment to forego filing general rate case applications for increases effective through 2005. Under the alternative sharing proposal, CalAm would forego filing in 2000 and 2001 only. CalAm would file general rate increase applications for its Monterey Division, its general office, and the new Citizens Division in 2002 for rates effective in 2003, following the filing schedule described earlier. For this, CalAm claims in the alternative sharing proposal as stayout benefits to customers $3.5 million in 2001 and $4.9 million in 2002, almost entirely due to Citizens' not having filed a GRC in 2000 for rates to become effective in 2001.

CalAm states on brief that ORA has stipulated that these stayout benefits are real. While the record shows ORA did not stipulate to them, ORA did describe them as "the only guaranteed ratepayer benefit" offered by Applicants' alternative sharing proposal. On brief, ORA argues that the stayout value CalAm imputes to ratepayers in 2002 is illusory because the time for filing for that increase has passed.

For its part, API recognizes that the stayout amounts claimed for 2001 and 2002 are no longer contingent on our approval of the acquisition, but believes they "can be claimed as an equitable matter as a ratepayer benefit already conferred as a consequence of the Application in good faith by Applicants." API thus recognizes the stayout benefits for analytic purposes.

We do not accept that the stayout benefits CalAm claims should be given weight as quantifiable benefits. The specific amounts estimated are entirely speculative. CalAm offers as ratepayer benefits some amounts which are not dependent on whether the Commission approves or disapproves the transfer, or whether the transfer in fact takes place if it is approved. The remainder of those estimated ratepayer benefits rely entirely on conjecture that the Commission would have approved specified revenue requirement increases in general rate cases which may or may not have been filed absent the Application. CalAm itself states that these conjectured benefits "...include [only] those stay-out benefits that inure to the ratepayers due to delays in GRC's that have already occurred...," and acknowledges that if this Application were denied, the earliest Citizens could file for a general rate increase would be in 2002 for rates effective in 2003. It is not appropriate to consider the specific dollar amounts of those supposedly foregone revenues as ratepayer benefits for purposes of evaluating CalAm's proposal. We remain open, however, to recognizing that ratepayers may already be receiving some value, albeit speculative and not reasonably quantifiable, associated with the Applicants' having filed this Application.

There is approximately $8 million in stayout benefits included in Table 1, in the Applicants' Alternative Sharing Proposal column, whether measured in total dollars or discounted dollars.²⁴ The remaining columns in Table 1 do not anticipate stayout benefits. The Benefit to Ratepayers column in Table 2, and the corresponding percent figures, include similar amounts, while the Total Synergies Benefits column does not. In Table 3, the full $8 million stayout amount is included in the Ratepayers column, partially balanced by the negative of the 2002 portion, about $5 million, in the CalAm column and the negative of the 2001 portion, about $3 million, in the Citizens column. The Total column is unaffected. In each case the stayout adjustments, while significant, do not change the conclusions we reach from those tables. Ratepayers stand to receive a smaller amount if the stayout benefits are disregarded, but still an amount approaching one-half of the net benefits generated by the acquisition.

Rate Effects

In addition to examining likely revenue requirement effects, API presented the only analysis of the data from a different and more revealing perspective: What effect would the different ratemaking methods have on future rates?

As with revenue requirement, API's analysis confirms that after rate spikes during the first two to three years, all three Table 1 ratemaking methods would be superior to the No-Acquisition alternative for the indefinite future. Under one reasonable set of assumptions, rates for the Section 2720 Return On Only and Section 2720 Return Of and On methods would spike the first year after acquisition at 3.5% and 11.6%, respectively, above what they would have been under No-Acquisition. They would then drop steadily to reach a low point at 9% to 11% below No-Acquisition rates in about 2016 through 2019, and thereafter gradually climb back to about 5% below No-Acquisition rates in about 2042.

For CalAm's alternative sharing proposal, rates would remain unchanged from the No-Acquisition rates (or would be lower if one recognized stayout benefits) through 2004, drop by 5% in 2005 when sharing began, and continue downward until they reached a point 11% below the No-Acquisition rates in 2015, then gradually rise to about 5% below No-Acquisition rates in 2039 and after.

These and other analyses done by API demonstrate that, while the absolute levels of customer savings vary widely depending on assumptions of cost escalation rates, method for spreading the savings to the districts, discount rates, etc., the relationships between the various alternatives remain relatively stable. The result is the same in each case: within a reasonable range of assumptions, customers are significantly better off under any of these ratemaking alternatives than they would be without the acquisition.

Non-quantifiable Benefits

In addition to the considerable quantifiable synergies, Applicants list a series of non-quantifiable and non-monetary advantages to be realized through the acquisition. We highlight some of those here:

a. Larger companies can bring more resources to bear in emergency situations and natural disasters, and their geographic diversification spreads the risks in case of natural disaster. The former Citizens districts will receive the greater benefit from their association with CalAm and American, the nation's largest investor-owned water system, but CalAm's divisions will benefit in California as well.

b. The former Citizens districts will benefit from access to CalAm's strong in-house laboratory and water testing capabilities in California, and to American's nationally recognized research laboratory in Illinois.

c. American and CalAm have management and operational expertise and specialized in-house design and engineering capabilities that would otherwise be unavailable to the Citizens districts today except at very high cost. Those capabilities will be available immediately and in the long term to address needs in the Montara service area and each of the other former Citizens districts.

d. The Commission has long welcomed larger water companies' participation in absorbing small, inefficient or troubled systems here in California. Citizens presently has limited capability to contribute; CalAm has historically done so "when such acquisitions made operational sense." With a larger geographic footprint in the state, CalAm predicts it will be increasingly able and inclined to participate in that effort in the future. In addition, CalAm sees for itself an enhanced ability to continue to participate in ongoing industry consolidation, which we interpret to mean large consolidations of the type proposed in this Application and the now-defunct CalAm/SJW merger application.

e. Potential investors should have a better perception of the larger, combined company, leading to improved access to funding for future infrastructure needs.

f. Applicants believe the Citizens and CalAm service areas will benefit from the adoption of the best practices of both companies and the combined efficiencies that will bring. For example, CalAm conducts annual customer satisfaction surveys; Citizens does not. CalAm uses the results as a component in determining incentive compensation awards for officers and top-level managers, a powerful tool for improving performance.

This latter topic is of particular interest to us. In an age when competition in the various utility industries is on the rise, we are particularly sensitive to any indication that the providers we regulate may reduce costs by reducing service. One of the conditions MSD would have us place on our approval of the acquisition is, "CalAm should retain the Citizens office in Montara and staff it with adequate personnel and necessary administrative support to provide safe and reliable water service." API echoes the point by recommending a study be submitted on customer cost versus customer benefit of reducing customer-service functions, as a condition of approval here. Indeed, Applicants do list as a benefit, "a consolidated customer service center that will provide current customers of Citizens with access to their water utility on a 24 hour a day, seven day a week basis, something they do not now enjoy."

During the evidentiary hearings, CalAm touted as one of the prospective benefits of joining the American Water Works system American's initiative now in the works to consolidate customer service centers nationwide into a single location. CalAm currently has a regional call center in Chula Vista, California. Although the record is not entirely clear on the point, it appears that Citizens has walk-in customer service available in some or all of its four operating districts in California. CalAm's witnesses testified at length to the benefits customers will gain through the use of new technologies when local customer contact locations are closed in favor of a single, nationwide center. We have already experienced some of those technologies in operation and heard firsthand customers' reactions in hearings across the state in other proceedings: ACD (automatic call distribution); CTI (computer-telephone integration); and, infamously, IVR (interactive voice response, which when poorly implemented is frequently dubbed "voice mail jail"). It may well be, as CalAm's witnesses testified, that these technologies respond to the needs of "a larger and larger base of our population [who] would prefer self-serve options as opposed to interacting directly with a human voice for [routine transactions]."

American's consolidation to one call center for 23 states may potentially divert the company's attention from the water service problems of individual districts such as Montara. Reducing or eliminating local walk-in locations for bill paying and other one-on-one contacts are not synergies. On the other hand, CalAm's call center would handle customer inquiries 24 hours a day, 7 days a week, whereas the business office in Montara is now open 8 hours a day, 5 days a week. Thus, there are balances to be considered. Rather than draw conclusions at this point, we will simply state that reductions in expenses generated by reducing services are not in themselves synergies and should not be treated as such in any future synergies-determination filings.

Continuing with Applicants' list of non-quantifiable and non-monetary advantages:

g. Being part of the large, nationwide American system brings to the former Citizens districts significant advantages in employee recruiting and retention; and to employees, enhanced employee development and training, professional growth, and career opportunities.

h. American's single-purpose focus on the water and wastewater business means the former Citizens districts will not have to compete in-house for resources with other, potentially more lucrative operations in other industries. Those districts are today part of a Citizens family which has gas distribution and electric distribution businesses and a corporate strategy to position itself as a pure telecommunications service provider in the future.

This brings us to a second sensitive topic. Both Applicants have referred on the record to their expectations for the future of Citizens' water operations and customers in California should this transfer not take place. From Citizens' opening statement in the evidentiary hearings:

[The president of Citizens' national public sector and a witness in this proceeding] describes a strategic decision made by the parent at the corporate level. Citizens is simply concentrating its efforts going forward on its telecommunications businesses. What this means in practical terms is that no matter how hard Citizens tries and no matter how closely it works with this Commission in the future, if it cannot sell its water operations in California, over the long run its customers will experience a level of service lower than it otherwise could. Because of Citizens' strategic decision, it will begin to lose the modest scale economies it now enjoys as Citizens disposes of its water operations in other states. Citizens customers will not receive the benefits that CalAm could offer such as 24-hour customer service call center, a renowned testing facility and other benefits that are described in the testimony of the witnesses. Citizens' customers will not receive the operating synergies described by the witnesses and described by [CalAm counsel] in his opening statement. And finally, Citizens' customers will be receiving service from a less focused service provider. None of this needs to happen.

And Citizens sums up on brief:

If Citizens were to be required to remain in the water business in one or more states, it would be doing so reluctantly and without the kind of commitment necessary to grow the business to achieve the economies of scale that are becoming a requirement.... [I]t would not be sound public policy for this Commission to withhold approval of this transfer. To do so would not only require Citizens to stay in the business in a weakened position, but it would also cause ratepayers to be deprived of the considerable economies provided by a combined Citizens/CalAm entity.

We appreciate Citizens' candor and recognize the real challenges it would face should it succeed in divesting itself of its water operations in other states but not in California. Smaller operators, such as Citizens would be, do have diminished economies of scale. But regardless of its reluctance, should Citizens for whatever reason find itself still a regulated water provider in California in the future, we fully anticipate, and will continue to require, that Citizens have no less than a commitment to provide top quality service at reasonable rates to all of its California water customers.

That said, we do agree that there are many significant non-quantifiable and non-monetary advantages available through this acquisition. We consider them in the aggregate to be a major benefit of Applicants' proposals.

Ratepayer Risks

During the course of the proceeding the opposing parties pointed out various ways the acquisition and CalAm's alternative sharing proposal could expose ratepayers to disadvantage or risk. In this section we review the more significant of those.

Overestimated Synergies

The Application explains that American developed a preliminary analysis of the potential synergies and a discounted cash flow analysis when it decided to proceed with the acquisition in October 1999. It subsequently refined its results and included a summary in the Application. The full study was supplied to the parties as part of the Application workpapers. Both ORA and API evaluated the Application synergies study and found it wanting. ORA's evaluation found "projected savings... significantly lower than those shown in the Application...." In its early direct testimony, API characterized the synergies analysis as "questionable," "simply not credible," and "not... at all realistic," and recommended a guaranteed rate decrease as a condition of approval.²⁵

CalAm has consistently maintained that its synergies estimates are the minimum amounts it will save; it fully expects actual savings to be higher. Under the alternative sharing proposal, realized synergies savings go first to CalAm to amortize the acquisition premium, and second to ratepayers and CalAm in a 90%/10% split. If synergies savings have been wrongly estimated, it is ratepayers who will be first to feel the impact, either positive or negative, through their 90% share. Their risk is limited, however, in that rates under the alternative sharing proposal will not increase as a result of any synergies shortfall below the amortization level. CalAm's risk is greater: it may fail to recoup its acquisition premium.

There are at least three ways synergies savings could be overestimated: errors in predictions of what can or will be achieved through economies of scale in operations and capital structure and/or how much value they will produce; errors in estimating the escalation, inflation and discount methods used to extrapolate future benefits and sum them to a present value; and the possibility of long-term, significant changes that defy prediction today.

During the evidentiary hearings CalAm continued to work with the parties to refine its studies, producing at least two updates including one which eliminated all SJW-generated synergies. ORA later agreed that CalAm's late-proceeding estimate of achievable synergies was appropriate for the purpose of evaluating the acquisition. API continued to take issue with CalAm's inflation, escalation and discount rates to the end, but also acknowledged that the quantifiable benefits were real and sufficient to provide the sharing shown in Table 3. Any differences API still had with CalAm's synergies estimates would not change its relative ranking of the alternatives under consideration, including the No-Acquisition alternative. The possibility of long-term, significant changes that defy prediction today will always be with us no matter which alternative we select, and it provides no reason to choose any of them over another.

Actual sharing amounts would be calculated based on new analyses to be performed in the 2002 and later general rate cases. CalAm's latest synergies study is sufficiently reliable for our purposes in this proceeding.

The foregoing ratepayer risks are associated with the possibility that CalAm may have overestimated future synergies savings in this proceeding. Ratepayers are also exposed to a risk that claims may be made in future proceedings for amounts that are not true synergies savings. To help guide parties in those future proceedings, we state here that only cost savings that clearly could not have been achieved absent consolidation are synergies savings within the meaning of that concept in this proceeding, and only such synergies savings are to be counted in any future synergies-determination GRC filings

Overestimated Stayout Benefits

CalAm estimates ratepayers will receive about $8 million in stayout benefits during 2001 and 2002. We have already explained our conclusion that Applicants' stayout benefits are speculative, not accurately quantifiable, and not dependent on whether or not the acquisition takes place. Because the benefit relates to Applicants' not having filed general rate cases during 2000 and 2001, and therefore not increasing rates, whatever benefits may exist are now guaranteed to ratepayers, and likely so through all of 2002. Ratepayers are thus not at risk for losing those benefits. Also, since we are not giving weight to a quantifiable effect of stayout benefits, any error in their estimation will have no effect on our decision to approve or not approve the acquisition.

Service Degradation

During the proceeding both ORA and API raised the specter of a CalAm so weakened by losses as a result of this acquisition as to be unable to maintain adequate service levels. Alternatively, it might be an otherwise-strong CalAm so pressed to achieve economies sufficient to cover the premium amortization amounts that it sacrifices service quality in the process. While not abandoning that concern, neither did ORA press it in the later stages of the proceeding. After developing the record regarding the synergies study in depth and producing the Table 3 figures, API did move away from that position.

We believe either service degradation scenario is highly unlikely. First, the parties have convinced us that the synergies to be realized through this consolidation are both real and significant; generating enough synergies to cover the annual premium amortization amount should be well within CalAm's grasp. Second, there is a discontinuity in the sharing function at the point where the synergies savings in any year reach the acquisition premium amortization amount. That is, CalAm will be highly motivated to achieve the first dollars of savings because it will retain 100% of them to cover that year's amortization amount, but it will be much less driven to achieve additional savings because it will retain only 10%; the remaining 90% will go to ratepayers. Thus there is little likelihood CalAm will be either weakened or pressed to the point of sacrificing service quality.

We earlier discussed our view of the possibility, raised by API and MSD, that walk-in customer services in the former Citizens districts could suffer in the quest for synergies. That is indeed something that causes us concern, and something we will want parties to keep us informed about during future CalAm ratesetting proceedings.

Ratemaking Complexity

The ratemaking method CalAm proposed in the Application had a ring of simplicity. Using the most recently decided general rate case results, one would determine a stand-alone ("benchmark") cost of service in each district "by trending that last test year, adjusting for inflation and incorporating unusual, extraordinary or anomalous changes to arrive at a year 2005 benchmark," etc. The synergies savings estimates would then be the differences between revenue requirements determined for the various districts in 2005 under consolidated operation and their extrapolated stand-alone costs of service. Many aspects of the suggested procedure were not well-defined, but the concept was reasonably straightforward.

As the evidentiary hearings progressed, CalAm's Application sharing proposal evolved with the addition of more detail and newly proposed procedures and figures, some but not all of which CalAm said would be binding. Applicants introduced a proposed stipulation exhibit, and later revised it to reflect abandonment of the SJW merger proposal and other updates. The proposed stipulation was characterized as "a comprehensive and complete proposal to resolve the issues related to the Synergy Model." ORA agreed to the stipulation proposal; other parties, including API which was much more active than ORA in developing the record on the substance of the proposed stipulation, did not.

With CalAm's alternative sharing proposal came additional changes that were not reflected in the proposed stipulation.

API pointed out the difficulty of estimating after a consolidation what the benchmark cost of service would have been absent consolidation:

Applicants have suggested that it is easy to [estimate costs for the path not chosen], by merely updating or projecting forward costs that were adopted in a past GRC or by using the projections of their cost-factor-savings models they have employed to estimate the synergies amounts here, but such projections/update language hides a number of very real problems such as reflecting changing market conditions and myriad other factors that impinge upon utility management decisions that would have had to be made after the test year of the last rate case. For all these reasons and others, estimation of synergies savings after they are incurred is quite uncertain, unknown and difficult to measure - and much harder still to project reasonably to the future, even though simple mechanisms such as escalators and indices, etc. are available to make the estimates.

And on brief, API notes,

[T]he implementation process could also lead to unrealistically high initial synergies estimates for ratemaking and indexes that would artificially inflate the initial figures increasingly as time goes by. Second, the implementation process for Applicants' proposal is so complex as to almost insure significant and otherwise avoidable error, and likely mischief and endless unproductive advocacy battles.

ORA on brief also notes this complexity and lack of clarity in CalAm's proposal for determining the synergies savings. We consider this particularly troubling in view of the advantage a utility may enjoy by way of being the keeper of the financial and operating records. Without flexibility, depending on what method of carrying synergies forward were chosen, it might be necessary to track volumes of data for decades, and in that our staff and other parties would be at a disadvantage.²⁶

CalAm repeatedly acknowledged that it would have to carry the burden in future proceedings to demonstrate what synergies have been realized. CalAm also acknowledged that the Commission would be free in the future to examine whether synergies initially realized may have for whatever reason declined with the passage of time to below those initially projected. The stipulation proposal, while not permitted to extend to substantive issues which may come before the Commission in other or future proceedings,²⁷ may prove a valuable reference to establish the level of synergies achieved. However, we decline in this proceeding to foreclose parties from proposing and supporting other methods and figures in a future proceeding.

In the end, the record is unclear on just which subset of the many procedures CalAm has described it would have us apply to carry synergies savings estimates into future years; there is no single, consistent source of reference. What is clear is that under the alternative sharing proposal CalAm would carry the burden to 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 rate case standard escalation methods and factors. CalAm would bear 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. We need not attempt to establish or memorialize every detail here. Rather, we have described the framework in this order and will leave it to the parties to advocate and support the details they think work best in the 2002 and/or 2004 general rate cases if the acquisition goes ahead.

This flexible approach will serve to address the opposing parties' cautions regarding the potential for future ratemaking complexity.

Premium Regeneration

Under Section 2720, the Commission must use fair market value when establishing rate base for ratesetting following an acquisition. Here, CalAm has proposed favorable treatment of the acquisition adjustment as the accounting device that boosts the ratesetting base to approximate fair market value. As ratepayers amortize the acquisition adjustment through rates, they in effect repay to CalAm the capital it has used to finance the acquisition premium plus a return on the unamortized balance. During evidentiary hearings, the ALJ invited parties to address what effect a future resale of the same assets, either before or after the acquisition adjustment is fully amortized, might have. Under Section 2720, might rate base once again be raised to fair market value, regenerating the acquisition premium and wiping out whatever progress ratepayers had made toward paying it down?

It does seem clear that there is at least some potential for portions or all of these assets to be resold in the future. A CalAm witness testified that, while American may be large by U.S. water industry standards, consolidation in the industry has taken on an international scope, driven by the need to achieve ever greater economies of scale. He gave several examples of foreign water companies' having acquired very large U.S. water utilities, and cited those as among the reasons American is pressed to continue to grow. By this reasoning, CalAm or American could in the future be a takeover target. It is also possible CalAm or American could seek to sell parts of their system, including the former Citizens assets, to another provider.

If the Citizens assets were to be resold, what benefit would ratepayers receive from having paid down the amortization adjustment? No party had an entirely satisfactory answer. CalAm's response probably came closest: The acquirer would need Commission approval for the purchase or merger, and the Commission would determine at that time whether the transaction being proposed was in the public interest considering all factors including additional achievable synergies and the new purchaser's proposed ratemaking treatment. The Commission would decide whether the transaction was in the public interest despite any loss of amortization, and then accept or reject it under Section 851. That answer, while not very satisfying to Citizens and CalAm ratepayers who may by then have contributed tens or hundreds of millions of dollars through their rates to pay down the acquisition adjustment, is probably the best that can be hoped for so long as Section 2720 remains part of California law.

Better Future Offer

ORA argues that Applicants need no incentive from ratepayers to enter into this transaction. Citizens is already irrevocably committed to divesting all of its U.S. water and wastewater operations, and CalAm is motivated to maintain its competitive position in a rapidly consolidating international market. Although CalAm claims to seek only to be made whole as a result of the transaction, ratepayers should not be asked to pick up the tab. While it recognizes the significant synergies this consolidation would bring, ORA recommends denial. Under necessity to sell, Citizens might then agree to accept a lower purchase premium from CalAm or another purchaser in the future, or the subsequent purchaser might allow ratepayers to retain the synergies savings but not require them to compensate it for any purchase premium.

API also explored this line of reasoning and came to the opposite conclusion. "While rejection here could lead these applicants to make improved proposals, or some other purchaser may come forward with a better deal, there is no certainty of either." Following API's analysis, "If Applicants stick to their stated and reasonable position that CalAm needs to recover its acquisition premium, then some other [sharing] structure may be devised, but it cannot have a better present worth for ratepayers than do either of the current proposals or the rate base and amortization option, because [these current proposals] barely cover CalAm's acquisition cost on an expected-value basis."

We believe API is correct here. Relying on data similar to that in Tables 1 and 2, and its own Table 3, API concludes that the ratepayers' share will be more or less half of the net benefits. Given that there are substantial non-quantifiable and non-monetary benefits as well, the Commission should approve the Application rather than risk losing this deal and its substantial expected benefits without reason to believe that a better deal is forthcoming.

§854(c) Criteria

Public Utilities Code Section 854(c) lists eight criteria the Commission must consider before it authorizes the merger, acquisition or control of large electric, gas or telephone utilities:

Before authorizing the merger, acquisition, or control of any electric, gas, or telephone utility organized and doing business in this state, where any of the entities that are parties to the proposed transaction has gross annual California revenues exceeding five hundred million dollars ($500,000,000), the commission shall consider each of the criteria listed in paragraphs (1) to (8), inclusive, and find, on balance, that the merger, acquisition, or control proposal is in the public interest. [See headings below for paragraphs (1) through (8)].

In D.00-05-047, Commission President Loretta Lynch's dissenting opinion made the following observation in the first major water utility merger proceeding under Section 2720:

It is not necessary in this case to address the extent to which the public interest considerations listed in Sections 854(b) and 854(c) may also weigh in the balance. These sections, which require the commission to make certain explicit findings, do not apply by their terms to water utilities. However, the itemization of issues may inform the commission's deliberations on how to strike the public interest balance, and parties seeking to justify a transfer which involves a rate increase may present how the transfer touches on the itemized issues.

President Lynch and Commissioner Wood made this same observation in their joint concurring opinion in D.00-05-027.

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. We have already evaluated that aspect of the parties' showings in the Quantifiable Synergies section above.

Before evidentiary hearings began, the assigned ALJ issued a ruling requiring Applicants, and inviting others, to prepare an exhibit which addressed each Section 854(c) criterion explicitly and demonstrated how the acquisition proposal is in the public interest with respect to that criterion. In fact, the Application and supporting exhibits already contained considerable information relating to some of those criteria.

Our critical evaluation of the proposed transaction and CalAm's alternative sharing proposal is set forth in the Ratepayer Benefits and Ratepayer Risks sections above. We take the opportunity here to summarize briefly Applicants' and the intervenors' views of how the proposed acquisition relates to each Section 854(c) criterion. Rather than critique each claim, we will simply state that what the parties have presented under the Section 854(c) summary to follow does not lead us to believe the acquisition under CalAm's alternative sharing proposal is not in the public interest, and reserve further judgment for the Conclusions section to follow.

§854(c)(1): Maintain or improve the financial condition of the resulting public utility doing business in the state

CalAm maintains that consolidation will create significant economies of scale and operating efficiencies obtainable in no other fashion. The combined company will be geographically more diverse and therefore more resistant to disasters, weather phenomena and economic changes. The combined company will have access to greater financial resources, and through American's financing subsidiary, on better terms than in the past. This is all the more true now that Citizens has been downgraded by the debt rating agencies.

ORA finds CalAm's new capital structure and financial ratios would be acceptable, but cautions that should any one of the other five states involved deny American recovery of its acquisition premium, American's cost of new long-term debt would be adversely affected, in turn driving the combined company's needed rate of return, and thus its revenue requirements, higher.

Table 3 above demonstrates to API's satisfaction that CalAm will not be materially adversely impacted by CalAm's alternative sharing proposal. Moreover, CalAm's fate is in its own hands in that it can protect and enhance its financial prospects by continuing to seek efficiencies in its current and newly-acquired operating territories.

§854(c)(2): Maintain or improve the quality of service to public utility ratepayers in the state

ORA believes both Applicants are presently providing dependable and adequate water service and good quality water. Customers thus do not need this acquisition to receive and maintain good water service.

CalAm responds that, although both CalAm and Citizens currently provide high quality service, it is inaccurate to say there cannot be improvement. This is particularly true considering Citizens' decision to exit the water and wastewater business. As the challenges of the water industry increase, so does the importance of having a specialized provider with the size, expertise and focus of American. Customers will see service benefits as well through training to keep employees and managers abreast of improved practices and technology changes in the industry.

MSD finds nothing in Applicants' proposal that would guarantee currently inadequate service in the Montara District would be improved, and expresses concern lest the consolidation result in less attention to the needs of individual operating districts. As an example of the latter, MSD points to American's proposed nationwide customer call center. CalAm's supply problems in the Monterey Division are not a good sign for Citizens' Montara customers who have long suffered their own water supply inadequacies. CalAm responds that it has shown many ways in which increased efficiencies and expertise from the consolidation will bring service improvements, and that the Commission has both commended it for its efforts in addressing the Monterey Division's supply problems and largely shifted responsibility for addressing the water supply issues in Monterey to the Monterey Peninsula Water Management District. ²⁸

API finds a close link between CalAm's financial prospects from the Section 854(c)(1) discussion above and this criterion. CalAm's favorable future financial and service prospects are well-supported in the record.

§854(c)(3): Maintain or improve the quality of management of the resulting public utility doing business in the state

CalAm acknowledges that, as with service, even companies with high-quality management should strive to improve. CalAm believes that the American and CalAm pool of management expertise will be particularly important to providing and retaining management talent given Citizens' decision to exit the business. The combined CalAm and Citizens will be able to select the best management practices of both, provide superior management training and experience, and keep up with and apply new developments in technology in the industry.

API supports the view that management of the combined CalAm operation will improve through the opportunity to draw on the best management personnel available in the former Citizens operation. Further, CalAm's intercession will arrest the attrition of quality management personnel that would otherwise occur as Citizens exits the water business in other states.

§854(c)(4): Be fair and reasonable to affected public utility employees, including both union and nonunion employees

CalAm realizes the impact that consolidation can have and has tried to mitigate that impact on both non-represented and union employees. It began very early with an information and education program to inform employees of the effects consolidation might have on them. A tight labor market will mitigate the effects of many if not most terminations, and non-union employees who do not receive retention offers will receive severance packages. Effects on union employees must be handled through collective bargaining; existing union agreements of each company will remain unaffected by the acquisition. Current Citizens employees who transition to CalAm will enjoy improved training and advancement opportunities, and American's nationwide operations will greatly expand employees' opportunities to move to other company operations as their personal and professional needs dictate.

The various union parties who were active in the CalAm/SJW merger side of the proceeding did not participate further after the motions to withdraw A.00-05-016. API takes this as a favorable indication with respect to the proposed acquisition's effect on employees.

ORA finds no evidence to suggest adverse effects relating to this factor from the acquisition.

§854(c)(5): Be fair and reasonable to the majority of all affected public utility shareholders

CalAm points out that the boards of directors of both companies have approved the transaction, that it is not aware of any opposition expressed by shareholders of either Applicant, and that there has been no evidence of shareholder concern expressed anywhere in the record of this proceeding. The Applicants explained the arms-length nature of their negotiations in arriving at a reasonable purchase price that fell within the range of recent, like transactions. Finally, the transaction meets the long-term strategic goals of both companies as explained earlier: American's need to grow the firm, and Citizens' need to exit the water business.

ORA finds no evidence to suggest adverse effects relating to this factor from the acquisition.

As with the Section 854(c)(1) criterion, API believes the figures it developed for Table 3 above show that CalAm's financial health will not suffer and its shareholders will not be materially adversely impacted.

§854(c)(6): Be beneficial on an overall basis to state and local economies, and to the communities in the area served by the resulting public utility

Reliable water service providers are essential for state and local economies to prosper. CalAm believes the benefits on which it has elaborated will result in a larger entity that is more financially, technologically and operationally able to provide reliable service over the long term than could each applicant standing alone. It would not be beneficial to require Citizens, a company which has expressed its desire to exit the water business, to continue to provide a vital public service. And finally, a larger CalAm will be more capable of assisting and/or absorbing small, troubled water utilities in the future as a result of its increased size and geographic diversification.

ORA cites here without further comment a letter it included in the record from the Sonoma County Counsel's office to the assigned Commissioner requesting staff advice to assist a citizens group and the Sonoma County Water Agency in their efforts to evaluate the steps needed to form a public entity to take over Citizens' Larkfield District water system. Neither ORA nor any other party developed the record further on this topic.

MSD expresses its continuing concern with the lack of guarantees that CalAm is willing or able to address Citizens' longstanding water supply problems or mitigate the relatively high current rates in Montara District. Absent commitments by CalAm to cooperate with MSD's own water supply development efforts, and Commission adoption of the acquisition approval conditions MSD advocates, MSD sees little prospect for Montara District's problems to be solved at reasonable cost in the future.

API analyzed the acquisition in a way that demonstrates that there are net societal benefits as well as benefits to ratepayers. That, taken with API's favorable view of the other 854(c) criteria outcomes, assures it that this criterion will be satisfied as well.

§854(c)(7): Preserve the jurisdiction of the commission and the capacity of the commission to effectively regulate and audit public utility operations in the state

Both Citizens and CalAm are currently Commission-regulated water utilities, and CalAm would remain so on behalf of the combined future service territories of the two companies. CalAm believes the Commission's and staff's regulatory workload would decrease because there would be one less company after consolidation, and because CalAm has a reputation for cooperating well with the Commission to solve difficult problems.

ORA finds no evidence to suggest adverse effects relating to this factor from the acquisition.

API echoes CalAm's belief here: CalAm will remain regulated, and the Commission's and staff's regulatory efforts will be more efficient with one company to regulate rather than two.

§854(c)(8): Provide mitigation measures to prevent significant adverse consequences which may result

According to CalAm, there will be no significant adverse consequences other than employee reductions from combining two management staffs into one and the plan to change to a nationwide customer call center. These reductions in force will be mitigated through offers of alternative employment, relocation packages, and severance packages.

ORA finds no evidence other than that presented by the unions to suggest adverse effects relating to this factor from the acquisition.

API points to CalAm's alternative sharing proposal as the strongest mitigation measure: It mitigates potential inter-temporal ratemaking inequities and the near-term rate spikes Section 2720 ratesetting would otherwise introduce, and still produces an equitable sharing of the benefits this transaction would generate.

Montara Sanitary District's Recommendations

MSD does not oppose the acquisition and transfer per se, but would have the Commission put conditions on its approval. MSD's suggested conditions shifted somewhat between the evidentiary hearing and its brief. In the aggregate, those conditions are:

(1) "CalAm should agree to purchase water supplies from MSD, as developed through groundwater supplies and negotiated water transfers."

(2) "CalAm should agree to participate and be a member of the Groundwater Management District that MSD proposes to create."

(3) "Citizens and CalAm should agree to an arrangement in which a connection fee, such as a fire-flow connection fee, would be levied on new connections [...by MSD]."

(4) "Cost savings resulting from the sale and transfer should go to improving water service in the Montara Division."

(5) "CalAm should retain the Citizens office in Montara and staff it with adequate personnel and necessary administrative support to provide safe and reliable water service."

(6) "Citizens should be required to allocate a reasonable portion of the acquisition premium CalAm has agreed to pay to such capital expenditures for the Montara District system improvements the Commission may determine necessary in A.00-10-049."

(7) "CalAm should be required to explore the feasibility and rate impacts of consolidating districts and regionalization of rates across CalAm and Citizens districts in A.00-10-049."

It was noted early in the evidentiary hearings that Citizens, MSD and CalAm were all parties in a separate proceeding, A.00-10-049, in which Citizens seeks approval of its Water System Master Plan Update for Montara District, and that at least some part of what MSD sought in this proceeding was also at issue in that proceeding. Indeed, in December 2000, MSD filed a motion to consolidate the two proceedings, which the assigned ALJs jointly denied. MSD was not foreclosed from participating in this proceeding, however, so long as its presentation appeared arguably relevant to the Applicants' request for authority to acquire and transfer Citizens' assets.

MSD's first three recommendations above are issues, or closely related to issues, in A.00-10-049. CalAm has stated that it is committed to standing in Citizens' shoes with respect to any historic or future obligations the Commission may impose with respect to the former Citizens service territories and customers. CalAm is a party in A.00-10-049 and will assume any obligations the Commission might place on Citizens as a result of the decision in that proceeding.

A.00-10-049 is the proper forum for evaluating Citizens' Water System Master Plan Update and future service improvements associated with Montara District's historic water supply problems. MSD's first three conditions will not be imposed in this Application.

MSD's fourth and sixth recommendations above would have CalAm forego some of its earnings, and Citizens relinquish part of its gain on this sale, for the benefit of Montara District ratepayers in coming years. The seventh recommendation is related in that it suggests future ratemaking treatment for Montara ratepayers' benefit. MSD argues on brief, "If the acquisition and transfer is approved as proposed by Citizens and CalAm, rates in the Montara District are virtually certain to increase further, and most likely substantially so."

MSD did cite evidence of very high current rates in Montara District, and Citizens concedes that rates in Montara are "comparatively high." But this is not a proceeding to set rates; the specific level of rates and quality of service in Montara are not at issue except to the extent that the acquisition itself could have a positive or negative impact on them. Nothing in MSD's presentation or any other part of the record here supports a contention that this acquisition, per se, will drive rates higher or service quality lower than they would otherwise be, and in fact the opposite may well be the case. MSD itself seems to endorse that conclusion on brief: "Citizens implementation of the Master Plan Update would result in a projected rate impact that is somewhat greater than CalAm's implementation of the Master Plan Update, under the acquisition proposal." The record supports that conclusion in that it shows CalAm's costs to provide service to former Citizens ratepayers in all districts including Montara will be lower than Citizens' costs. This is the source of CalAm's projected synergies savings. Ratepayers, including Montara District ratepayers, will share those significant synergies savings if the acquisition is consummated. In fact, the synergies savings will benefit ratepayers in much the same way as would MSD's proposed contribution of a portion of Citizens' purchase premium and CalAm's cost reductions. If the acquisition were disapproved, or if it were approved with conditions so onerous that Applicants decided not to proceed, there would be no synergies savings and ratepayers would be the worse off for it by having lost both the quantifiable benefits and the non-monetary or non-quantifiable benefits the acquisition would provide.

MSD further argues, "If the sale and acquisition is approved, as proposed by Citizens and CalAm, without the conditions recommended by MSD, Citizens will no longer have any responsibility for service to the Montara District and absolutely no responsibility for implementing whatever improvements the Commission may find required after hearings in A.00-10-049." We are aware of no legal principle or precedent that would require us to condition approval of the acquisition on Citizens' being willing to leave behind a portion of its gain on sale for the benefit of Montara ratepayers.²⁹ We are particularly disinclined to do so here, where Applicants have shown CalAm to be willing and equally or more qualified to assume any and all of Citizens' public utility obligations, and the transfer to CalAm would itself generate at least part of the ratepayer benefit MSD seeks.

For the foregoing reasons, we will not impose MSD's fourth and sixth conditions.

MSD's fifth recommendation was, "CalAm should retain the Citizens office in Montara and staff it with adequate personnel and necessary administrative support to provide safe and reliable water service." We have already stated our expectations of CalAm with respect to customer service locations in the Service Degradation section above. In addition, Health and Safety Code Section 116555(a)(3) requires water suppliers to provide a reliable and adequate supply of pure, wholesome, healthful, and potable water. Our General Order 103 similarly imposes service and water quality standards on the providers subject to our jurisdiction. No further order with respect to MSD's fifth condition is required in this proceeding.

MSD's request that CalAm be required to explore the feasibility and rate impacts of consolidating districts and regionalization of rates across CalAm and Citizens districts is outside the scope of this proceeding. To the extent it seeks relief in the order that results from A.00-10-049, its request should be made in that proceeding. We also note that issues such as requests for rate changes and regionalization are more typically addressed in water companies' periodic general rate case proceedings. Thus, MSD's seventh condition will not be imposed here.