Other Matters
Environmental Review
Applicants in A.00-05-015 acknowledge that the transfer of control proposed in the Application may constitute a project under the California Environmental Quality Act (CEQA), Public Resources Code Section 21000 et seq. However, since it can be seen with certainty that no significant effect on the environment could result from our granting the authorization, the proposed transaction qualifies for an exemption from CEQA pursuant to Section 15061(b)(3) of the CEQA guidelines. Therefore, no further environmental review by the Commission is required.
Health and Safety Code Compliance
Health and Safety Code Section 116525(a) requires the prospective operator of a public water system to submit an application to the California Department of Health Services and receive a permit before operating the system:
No person shall operate a public water system unless he or she first submits an application to the department and receives a permit as provided in this chapter. A change in ownership of a public water system shall require the submission of a new application. [Emphasis added.]
The ensuing Health and Safety Code sections establish the application and review processes.
CalAm acknowledges in A.00-05-015 that it must comply with Health and Safety Code Section 116525 et seq. when it acquires Citizens' water system assets. It has indicated it will do so.
Comments on the Proposed Decision
The principal hearing officer's proposed decision in this proceeding was filed with the Commission and served on the parties in accordance with Section 311(d) and the Commission's Rules of Practice and Procedure, Rule 77.1.
CalAm, Citizens, ORA and MSD filed comments; CalAm, Citizens, and MSD filed replies. Applicants CalAm and Citizens support the proposed decision and urge the Commission to adopt it in time for them to complete the transaction before their agreement expires on September 30, 2001. Intervenors ORA and MSD primarily reargued positions taken earlier on the record. API served notice that it found the proposed decision to be in the public interest and was waiving its opportunity to comment.
We have made no substantive changes in response to the comments and replies. We have, however, made minor changes in response to CalAm's and Citizens' comments: to update the decision to reflect developments since the proposed decision was filed; to correct a minor error in the description of American's current customer base in other states; and to clarify ORA's position on stay-out benefits.
1. American and Citizens' parent company have agreed to a pay $835 million for Citizens' water and wastewater assets in six states. The six-state purchase was the result of arms-length negotiations and resulted in a purchase price that represents fair market value for those assets.
2. American and Citizens' parent company have allocated 19.32% of the six-state purchase price to California assets, based on the proportion of Citizens' gross water and wastewater plant in California. This method of allocating the purchase price to California is reasonable, and the resulting $161.32 million price allocated to California assets represents fair market value for those assets.
3. The net book value of the California assets being purchased is $93.957 million. The excess of purchase price over net book value of the California assets is $67.363 million. Of that excess, an estimated $2.810 million represents the excess of fair market value over net book value for non-regulated assets, leaving an estimated $64.553 million as the acquisition premium for the California regulated assets. The acquisition premium includes approximately $1.2 million in transaction costs.
4. The $2.810 million estimated excess of market value over net book value for California non-regulated assets, and thus the estimated acquisition premium, will be adjusted if market value of the non-regulated assets is higher at the time of closing.
5. Consolidating Citizens' water assets into CalAm will permit very significantly increased economies of scale related to Citizens' current water service areas, and more modest but still significantly increased economies of scale in CalAm's current operating divisions.
6. CalAm presented and revised a synergies study that quantifies the savings associated with the increased economies of scale it expects to achieve by consolidating Citizens' service areas into its own operations. CalAm's synergies study is sufficiently reliable for our purposes in evaluating the proposed acquisition.
7. CalAm has proposed for the future two ratesetting methods (the Application sharing proposal, and the alternative sharing proposal) that involve sharing with ratepayers the quantifiable synergies savings it is able to achieve by consolidating Citizens' service areas into its own operations. Each of those methods would involve ratemaking treatment of an acquisition adjustment equal to the acquisition premium, in a way that meets the requirement of Section 2720.
8. CalAm's alternative sharing proposal is more favorable for ratepayers than its Application sharing proposal.
9. CalAm's alternative sharing proposal includes the following major elements:
a. CalAm would book the acquisition premium for California regulated assets as an acquisition adjustment to be amortized mortgage-style over 40 years beginning in 2002. This mortgage-style amortization represents the return of and on the acquisition adjustment.
b. CalAm would recover in rates all proven synergies savings in 2002, 2003, and 2004.
c. Beginning in 2005, CalAm would recover in rates the proven synergies savings up to the amortization amount, plus 10% of any proven synergies savings in excess of the amortization amount, the other 90% to remain with ratepayers.
d. If proven synergies savings were insufficient to recover the full amortization amount in any year beginning in 2002, CalAm would suffer the shortfall and no part of the shortfall would be carried forward to a subsequent year.
e. Ratepayers would receive all synergies savings after the acquisition adjustment has been amortized; i.e., beginning in 2042 rates would return to being based on cost of service.
f. There would be no general rate case stayout period going forward.
g. 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.
h. 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 CalAm had achieved and maintained them. 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.
i. Liability for historic advances would remain with Citizens and CalAm would not record 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.
10. The proposed stipulation entered into by Applicants and ORA is reasonable for the purpose of demonstrating the level of synergies savings CalAm is likely to achieve through the acquisition.
11. The stipulation entered into by Applicants and ORA, while not permitted to predetermine the outcome of substantive issues which may come before the Commission in future proceedings, may prove a valuable reference in future proceedings to establish the level of synergies achieved.
12. 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.
13. Only cost savings that clearly could not have been achieved absent consolidation are synergies savings within the meaning of that concept in this proceeding. Only such synergies savings are to be counted in any future synergies-determination GRC filings.
14. The figures in Tables 1, 2 and 3 and API's estimates of the likely rate effects under various ratesetting methods in the body of this decision are sufficiently reliable and conclusive for our purposes in evaluating the proposed acquisition and CalAm's alternative sharing proposal.
15. Of the three Section 2720-compliant ratesetting methods considered, CalAm's alternative sharing proposal is the only one which does not increase rates in the very near term, yet it provides rate decreases comparable with those of the other methods for the indefinite future.
16. When the time value of money is recognized, CalAm's alternative sharing proposal is more favorable for ratepayers than either of the other two Section 2720-compliant ratesetting methods considered (as shown in Table 1).
17. The stayout benefits CalAm imputes to ratepayers as a result of this transaction should not be given weight as quantifiable benefits in evaluating the acquisition. Ratepayers may be receiving some value, albeit speculative, not reasonably quantifiable, and not dependent on whether the acquisition is or is not completed, associated with Applicants' having filed the Application.
18. The acquisition is likely to generate in excess of $100 million in net present value benefits to all participants in the aggregate.
19. Under CalAm's alternative sharing proposal, ratepayers are likely to receive roughly one-half of the net present value of the quantifiable benefits generated by the acquisition (as shown in Tables 2 and 3, after disregarding stayout benefits).
20. The non-quantifiable and non-monetary advantages Applicants claim ratepayers would realize from the acquisition are valid and significant benefits.
21. Citizens, MSD and CalAm are 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.
22. Contrary to MSD's assertions, under the terms of CalAm's alternative sharing proposal this acquisition would not drive rates higher or service quality lower than they would otherwise be, and in fact the opposite is likely to be the case.
23. Good cause has not been shown to require a portion of the cost savings resulting from the sale and transfer go specifically to improving water service in the Montara District as MSD requests.
24. CalAm is fully qualified to assume the public utility responsibilities now borne by Citizens in providing water service to the current Citizens serving areas.
25. CalAm's alternative sharing proposal provides to ratepayers an equitable share of the anticipated benefits of the acquisition, given the costs and risks imposed on them.
1. A.00-10-049 is a more proper forum than this proceeding for evaluating Citizens' Water System Master Plan Update and ordering any needed future service improvements associated with Montara District's historic water supply problems.
2. 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 in A.00-10-049 is misplaced and outside the scope of this proceeding.
3. As a party in A.00-10-049, and as a successor to Citizens' public utility obligations should the transfer be completed, CalAm will assume any obligations the Commission might place on Citizens as a result of the decision in that proceeding.
4. MSD's request that Citizens be required to allocate a portion of its gain on sale in this transaction to pay for future capital expenditures in the Montara system should be denied.
5. It is not necessary to make an order in this proceeding directing CalAm to do what the law and our rules already require, i.e., to provide safe and reliable water service in Montara District.
6. The stipulation entered into by Applicants and ORA should be accepted for the purpose of demonstrating the level of synergies savings CalAm is likely to achieve through the acquisition.
7. The Commission should not in this proceeding foreclose parties in future proceedings from proposing and supporting methods and figures for quantifying actual synergies savings achieved.
8. In order for an acquisition subject to Section 2720 to be in the public interest under Sections 851 and 854(a), it must offer to ratepayers an equitable share of the benefits the transaction will generate.
9. Sections 854(b) and 854(c) do not by their terms apply to water utilities. The Commission may, but need not, consider the extent to which the factors set forth in those sections bear on the public interest in this proceeding.
10. CalAm's alternative sharing proposal complies with Section 2720.
11. CalAm's alternative sharing proposal as described in the Findings of Fact of this order should be adopted.
12. CalAm's acquisition of Citizens' water utility assets is in the public interest.
13. The acquisition should be approved, subject to the conditions set forth in this order.
14. The sale, acquisition and transfer of control proposed in A.00-05-015 is a project that qualifies for an exemption from CEQA pursuant to Section 15061(b)(3) of the CEQA guidelines.
15. Pursuant to California Health and Safety Code Section 116525(a), CalAm must submit an application to the California Department of Health Services and receive a permit before operating the public water systems it acquires from Citizens.
16. California-American Water Company's and SJW Acquisition Corp.'s motion to dismiss A.00-05-016, and SJW Corp.'s and San Jose Water Company's motion to dismiss A.00-05-016, were unopposed and should be granted.
17. This order should be made effective immediately to allow the parties to complete the transaction before the September 30, 2001 expiration of the Asset Purchase Agreement.
IT IS ORDERED that:
1. Citizens Utilities Company of California (Citizens) is authorized to sell and transfer, and California-American Water Company (CalAm) is authorized to acquire, all of Citizens' California water utility assets upon the terms and conditions set forth in the Asset Purchase Agreement in Application (A.) 00-05-015. This authority is granted subject to the conditions set forth in the Ordering Paragraphs that follow.
2. As a condition of the authority granted in this order, CalAm shall assume Citizens' existing Safe Drinking Water Bond Act Loan long term secured indebtedness to the California Department of Water Resources.
3. As a condition of the authority granted in this order, the Commission adopts for future ratesetting purposes CalAm's alternative sharing proposal, the major elements of which are summarized in the Findings of Fact of this order.
4. The acquisition adjustment to be used for future ratesetting for CalAm is estimated to be $64.553 million, derived as described in the Findings of Fact in this order. That amount shall be adjusted if, and to the extent that, at the time of closing the fair market value of the non-regulated assets exceeds their net book value by more than the $2.810 million estimate used to derive the estimated acquisition adjustment.
5. Upon completion of the transfer, CalAm shall assume all of Citizens' public utility obligations, including responsibility for compliance with all outstanding Commission orders in effect as of the date of transfer, relating to water service in the former Citizens serving areas, and Citizens is relieved of those water public utility obligations.
6. Montara Sanitary District's requests for relief are denied.
7. CalAm's and SJW Acquisition Corp.'s motion to dismiss A.00-05-016, and SJW Corp.'s and San Jose Water Company's motion to dismiss A.00-05-016, are granted. A.00-05-016 is dismissed.
8. A.00-05-015 and A.00-05-016 are closed.
This order is effective today.
Dated September 20, 2001, at San Francisco, California.
LORETTA M. LYNCH
President
HENRY M. DUQUE
RICHARD A. BILAS
CARL W. WOOD
GEOFFREY F. BROWN
Commissioners
APPENDIX A
(List of Appearances)
E. Garth Black, Attorney at Law, for Citizens Utilities Company of California, applicant.
Lenard G. Weiss, Attorney at Law, for California-American Water Company, SJW Acquisition Corp., SJW Corp., and San Jose Water Company, applicants.
John S. Barker, Dave Stephenson, and Paul G. Foran, for California-American Water Company, applicant.
Palle Jensen, for San Jose Water Company, applicant.
Peter G. Fairchild, Attorney at Law, and Raymond A. Charvez, for Office of Ratepayer Advocates, Water Utilities Branch, interested party.
Ron Knecht, for Advocates for the Public Interest, interested party.
Bernardo R. Garcia, for Utility Workers Union of America, AFL-CIO, interested party.
Drucilla M. Redwine, David Guardino, and Chris Method, for Utility Workers Union of America - Local 259, interested party.
Tina Haynes, for Utility Workers Union of America - Local 511, interested party.
Edward W. O'Neill, Attorney at Law, Jane Whang, George Irving, and Reed V. Schmidt, for Montara Sanitary District, interested party.
Gerard Orme, for Operating Engineers Local Union No.3 of the International Union of Operating Engineers, AFL-CIO, interested party.
Patrick J. Power, Attorney at Law, Anthony C. Bennetti, Attorney at Law, and Keith Whitman, for Santa Clara Valley Water District, interested party.
(END OF APPENDIX A)
