4. Discussion

4.1. Public Utilities Code Requirements
for Issuance of Securities

SJWC's request is subject to Pub. Util. Code §§ 816, 817, and 818. The Commission has broad discretion under § 816 et seq. to determine if a utility should be authorized to issue debt. Where necessary and appropriate, the Commission may attach conditions to the issuance of debt and stock to protect and promote the public interest.

Pursuant to Pub. Util. Code § 817, a public utility may only issue and use financing for selected purposes. Those purposes not listed in Pub. Util. Code § 817 may only be paid for with funds from normal utility operations.

Pub. Util. Code § 818 states that no public utility may issue notes or other evidences of indebtedness payable at periods of more than 12 months unless, in addition to the other requirements of law, it shall first have secured from the Commission an order authorizing the issue, stating the amount thereof and the purposes to which the issue or the proceeds thereof are to be applied. Pub. Util. Code § 818 also requires the Commission, in issuing such an order, to find that the money, property, or labor to be procured or paid for with the proceeds of the debt authorized is reasonably required for the purposes specified in the order and, unless expressly permitted in an order authorizing debt, that those purposes are not, in whole or in part, reasonably chargeable to expenses or to income. These purposes are authorized by § 817 and, as required by § 818, are not reasonably chargeable to operating expenses or income. SJWC has substantiated its need for issuance of new Debt and Common Equity and that the proceeds would be used for proper purposes, as discussed in Section 4.2 below. SJWC's request to extend the term of its short-term debt is addressed separately in Section 4.6 below.

Since SJWC's request for issuance of new Debt and Common Equity is in compliance with Pub. Util. Code § 816 et seq., we will grant it authority to issue new Debt and Common Equity for the aforementioned purposes and terms, and for the amounts determined in the order of this decision.

4.2. Forecast of Sources and Uses

Utility applications seeking authority to issue debt or other securities are based, in part, on forecasted sources and uses of funds that illustrate a need for the requested funding. SJWC used a long-term forecast covering the period of 2010-2014 to determine its future financings needs. SJWC's forecast includes uses of funds for construction, payment of short-term debt, and change in cash reserve; and sources of funds such as cash from internal sources and a line of credit. We rely on SJWC's forecast to determine the forecast of Sources and Uses set forth below in Table 1.

Table 1

Sources and Uses Statement for 2010-2014

($000)

SJWC has total estimated existing financing authority of $25 million of Debt.⁵ After deduction of SJWC's existing financing authority from the need of $193.3 million shown in Table 1, a need for funds of $168.3 million remains. SJWC proposes to use $100 million of Debt and $50 million of Common Equity to offset this net need over the period 2010-2014.

Given that the net need for funds exceeds the request, it is reasonable to authorize SJWC to issue $100 million of new Debt and $50 million of new Common Equity. This new financing will allow SJWC to fund its future net financing needs for the period 2010-2014, to the extent authorized by Pub. Util. Code § 817(a), (b), (c), (d), and (h). We find SJWC's request to be reasonable and supported by the record.

Granting of financing authority to a utility does not obligate the Commission to approve any capital projects. This financing authority provides SJWC with sufficient liquid resources to timely finance its upcoming public utility projects and to reimburse its treasury. Review of the reasonableness of capital projects occurs as needed through the regulatory process applicable to each capital project. Therefore, any approval of this financing request would not prejudge any of SJWC's forecasted projects for the period 2010 through 2014.

4.3. Types of Securities to be Issued

SJWC requested authority to issue new Debt Securities, described in Section 3 of this decision, are similar to those types of Debt Securities authorized in D.09-05-008. Therefore, we will authorize SJWC to issue the types of Debt Securities detailed in Section 3 of this decision and enumerated in the order herein.

SJWC also requested authority to issue new Common Equity, described in Section 3 of this decision. We last authorized SJWC to issue new Common Equity in D.93795. ⁶ We will authorize SJWC to issue Common Equity, as detailed in Section 3 of this decision and enumerated in the order herein.

Consistent with § 824, SJWC must maintain records to identify the specific securities issued pursuant to this decision, and demonstrate that proceeds from such securities have been used only for public utility purposes.

4.4. Encumbrance of Utility Property

SJWC also seeks authority to encumber its utility property, as part of the issuance of secured Debt and government Debt. This request to encumber utility property is subject to § 851 which states, in relevant part, that no utility shall encumber any part of its plant, system, or other property necessary or useful in the performance of its duties to the public, or any franchise or permit or right thereunder without first having secured from the Commission an order authorizing it to do so. Consistent with D.09-05-008, we will authorize SJWC to encumber its utility property as part of the issuance of both secured Debt and government Debt. In structured financing such as government Debt, whenever SJWC's facilities qualify for such financing under federal or state law, SJWC is authorized to unconditionally guarantee or otherwise secure the issuer's obligations to its debt holders. As a means of securing the issuer's obligations, SJWC may issue and pledge or deliver bonds in an equal principal amount to the issuer.

4.5. Redemption Provisions

As described in Section 3 of this decision, SJWC proposes that its new Debt may be redeemable, prior to maturity, at a price based upon the principal amount then outstanding plus accrued interest and a premium. We have authorized SJWC a similar redemption process in the past,⁷ and do so again here.

4.6. Short-Term Debt

SJWC requests authorization to amend the terms of its Credit Agreement, which currently has a term of up to 12 months, to allow the use of short-term debt for terms of up to 24 months, in the form of short-term borrowings, loans, credit extensions, and letters of credit. SJWC states that this short-term debt would still be used for short-term purposes including payment of expenses and working cash; and would continue to be accounted for as short-term, and so would not be included in the determination of SJWC's long-term debt or capital structure.

As discussed in Section 4.1 above, Pub. Util. Code § 818 requires that long-term debt (term of greater than 12 months) be used for proper purposes, unless expressly permitted in an order authorizing debt. We have authorized such exceptions in the past for other utilities, when good cause is shown and the purposes of the debt specifically identified.⁸

SJWC's comparison of interest rates and fees for 12-month versus 24-month terms of short-term debt illustrates that both the interest rate and fees for the 24-month term are materially less than for the 12-month term. For instance, the 24-month interest rate is equal to the London Interbank Offered Rate (LIBOR) plus 1.375%, while the 12-month is the LIBOR plus 1.75%; the Unused Commitment Fee is 0.25% for the 24-month and 0.375% for the 12-month; and the Annual Standby line of credit Fee is 1.375% for the 24-month and 1.75% for the 12-month. SJWC also stated that, given the cost of issuance for long-term debt, it is more cost effective to accumulate shorter-term debt in order to eventually issue a larger amount of long-term debt in a given issue.

Pursuant to Pub. Util. Code § 818, and given the materially lower cost of the 24-month term, SJWC's plan to use this 24-month short-term debt for short-term purposes, and SJWC's plan to account for this 24-month debt as short-term is appropriate and therefore, we authorize SJWC to amend the terms of its Credit Agreement and issue short-term debt for short-term purposes for a term of up to 24 months as ordered herein.

4.7. Account 414

SJWC requests authorization to record the pro-rata cost of issuance of common equity through its Parent in Account 414, in total or installments, as capital stock expense incurred in connection with the issuance and sale of capital stock. Pursuant to the Uniform System of Accounts (USOA) for Class A water utilities adopted by this Commission,⁹ the cost of issuing and selling Common Equity is not included in Account 414.¹⁰ Also, SJWC was unable to cite a Commission decision in which a utility was previously authorized to record this cost in Account 414. Therefore, we deny SJWC's request to record the pro-rata cost of issuance of Common Equity through its Parent in Account 414.

4.8. Competitive Bidding Rule

The Competitive Bidding Rule set forth in Resolution F-616, dated October 1, 1986, requires public utilities to publicly invite written sealed bids for the purchase of their securities (with certain exceptions), and to sell their securities at the highest price obtainable. It exempts debt issues of $20 million or less from the competitive bidding requirement. In addition, it exempts all debt issues for which competitive bidding is not viable or available. Also, the Competitive Bidding Rule does not apply to issuances of equity securities.¹¹

SJWC requests an exemption from the competitive bidding requirement for both new Debt and Common Equity offerings. In particular, SJWC requests exemption from the Competitive Bidding Rule for Debt issuances of $20 million or less, and an exemption for those issuances for which competitive bidding is not viable or available.

SJWC states that, since it is a relatively small and infrequent participant in the capital and debt markets, its debt offerings require substantial marketing efforts to potential investors. SJWC states that bidding underwriters would have difficulty obtaining market intelligence on SJWC if a competitive bidding process is used. As a result, underwriters would be forced to bid up their price for debt securities over what would be available through a negotiated offering. SJWC also references a past Southern California Edison Company decision¹² that exempted certain types of debt which do not lend themselves to competitive bidding, such as variable interest rate debt, medium-term notes, and tax-exempt securities. Thus, SJWC also requests an exemption from the Competitive Bidding Rule for its remaining new debt securities including bonds, debentures, privately placed debt, direct loans, variable interest rate debt, medium-term notes, and tax-exempt securities, because competitive bidding is not viable or available for these types of issuances.

SJWC indicates in the Application that it will limit its debt offering of debt securities to $20,000,000 or less per issuance. Since the Competitive Bidding Rule does not apply to issuances of new equity securities, there is no need to grant SJWC its requested exemption in this regard. Since the Competitive Bidding Rule provides for exemption from the competitive bidding requirement for debt issues of $20 million or less, issuances of new Debt by SJWC of $20 million or less are exempt. Under the provisions of Res. F-616, SJWC's proposed debt securities may be exempted from the Commission's Competitive Bidding Rule because no one series will exceed $20,000,000. Nevertheless, in the event that SJWC finds it necessary to go beyond the $20,000,000 threshold, such public offerings of notes or bonds in the principal amount over $20 million must comply with Res. F-616. The Commission has granted SJWC exemptions in the past for issues of debt for which competitive bidding is not viable or available,¹³ and we do so again here.

4.9. Diverse Business Enterprises

In compliance with General Order (GO) 156 and Pub. Util. Code §§ 8281-8286, SJWC has, since 2004, had a Utility Supplier Diversity Program in place, which encourages businesses owned by women, minorities, and disabled veterans to supply SJWC with needed products and services. As reported in its 2009 Annual Report to the Commission, SJWC awarded 13.4% of its procurement expenditures to women-, minority-, and disabled veteran-owned business enterprises.

SJWC commits to use its best efforts to encourage the participation of diverse suppliers in any transaction conducted under the requested authorizations. Where diverse suppliers may be unavailable or unqualified to provide the product or service, SJWC will use its best efforts to encourage the secondary use of diverse suppliers by its chosen suppliers.

⁴ Net change in cash each year from the Statement of Cash Flows.

⁵ Response to Inquiries of Assigned Administrative Law Judge (ALJ) at Response to Question 7a, filed September 7, 2010.

⁶ At the time of that decision, SJWC was known as San Jose Water Works.

⁷ See D.09-05-008.

⁸ See D.10-09-006 and D.01-06-016 at 7-8.

⁹ See D.50185 (June 29, 1954) and modified by D.57578 (November 10, 1958).

¹⁰ See D.50185 (June 29, 1954) and modified by D.57578 (November 10, 1958): Account 414. Miscellaneous Debits to Surplus http://www.cpuc.ca.gov/PUC/Water/Available+Documents/StdPractices/spu38w.htm.

¹¹ See D.75556.

¹² See D.03-06-011.

¹³ See D.09-05-008.