3. Standards of Review
In this proceeding, there are two relevant standards of review. The primary standard concerns the requested relief. Applicants bear the burden of proof to show that the regulatory relief they request is just and reasonable. In order to authorize the proposed transfer of control over Park and Ranchos the Commission must find that the transaction satisfies the standard of review applicable to transfers, which we describe in section 3.1 below.
The second standard of review, which we describe in section 3.2 below, concerns the settlement between Applicants and DRA. In general, a settlement should help the Commission to determine whether the requested relief is justified. Thus, a settlement may propose responses intended to satisfy objections to the requested relief. Here, the settlement provides various conditions and commitments to which Applicants agree, and which attempt to address objections raised in protests by DRA, Town, and others. In essence, the Commission will find that the settlement should be approved to the extent we are satisfied it fairly resolves those objections.
3.1. Standard of Review for a Transfer of
Control by Acquisition
We begin our analysis by summarizing the statutes with most direct bearing on whether this merger and transfer of control is consistent with the law and in the public interest. Pub. Util. Code § 851, in relevant part, requires Commission approval before a public utility may sell the whole or any part of its system and § 852 requires a public utility to secure Commission authority before acquiring any capital stock of any other public utility; § 854(a) requires Commission authorization before any person or corporation may acquire or merge with any public utility. These two sections apply if the acquiring entity is already a utility and are therefore relevant to other comparable recent examples of transfers of control discussed below. However, clearly applicable here as well as in the recent comparable transfers, § 854(d) requires the Commission to consider reasonable "options" to the applicants' proposal recommended by other parties, in order to determine whether comparable short-term and long-term economic savings can be achieved through other means while avoiding the possible adverse consequences of the proposal. The Commission has long interpreted the above code sections to prohibit acquisitions, mergers, and transfers of control unless the Commission finds the proposed transaction to be in the public interest.
In order to determine whether the proposed transaction is in the public interest, we note that the Commission has used both the "ratepayer indifference standard" (i.e., a showing that no negative effects result from the change of control), and a net benefit standard (i.e., a showing that the transaction offers ratepayers some equitable share of the benefits the transaction will generate). (Compare D.00-05-047, 2000 Cal.PUC LEXIS 314, concerning California Water Services Company's purchase of Dominguez Water Company, et al. (CWS/Dominguez) with D.01-09-057, 2001 Cal. PUC LEXIS 826, concerning California American Water Company's acquisition of the water utility operations of Citizens Utilities (CalAm/Citizens).)
In D.00-05-047, the Commission approved the purchase under the ratepayer indifference standard.2 The dissent stated that approvals for transfers of utility property under § 851 et seq. should include a finding of ratepayer benefit. (See D.00-05-047, 2000 Cal. PUC LEXIS 314 **60-61.) The dissent also stated that while it was not necessary to address the public interest considerations listed in Pub. Util. Code § 854(b) and § 854(c), since these sections do not apply by their terms to water utilities, this itemization of issues may inform the Commission's deliberations on how to strike the public interest balance. (Id. at note 2.)
In the Cal-Am/Citizens matter, the Commission concluded that, for an acquisition subject to § 27203 to be in the public interest under § 851 and § 854(a), it must offer ratepayers an equitable share of the benefits the transaction will generate. (See D.01-09-057, 2001 Cal. PUC LEXIS 826, * 107, Conclusion of Law 8). The Commission also concluded that while § 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. (Id. at Conclusion of Law 9.) Section 2720 does not apply to the proposed transfer of control because Carlyle is not a water corporation. Accordingly, here we will apply the ratepayer indifference standard.
Both Cal-Am/Citizens and CWS/Dominguez differ from this proceeding in one important respect. The Cal-Am/Citizens and CWS/Dominguez transactions involved the merger of California water utilities, and the applicants in those proceedings projected operational and administrative synergies from the merger of the affected entities. In this proceeding, applicants are not merging California water utilities; rather, this transaction involves an acquisition at a holding company level by Carlyle. For that reason, applicants cannot demonstrate that the transaction will eliminate redundancies; rather, they project Park and Ranchos will operate in a business-as-usual fashion and current senior management remains in place. The primary benefit of this transfer is to provide a new stable ownership group to replace the principal owner, a person over 80 years old who wishes to relinquish control of the utilities.
Pub. Util. Code § 854(b) and (c) are applicable to certain mergers, acquisitions, or changes in control involving electric, gas or telephone utilities and are not by their terms applicable to this proceeding involving a water utility. However, as stated above, the Commission occasionally considers factors mentioned in those statutes even when, strictly speaking, the statutes do not apply, to determine if a proposed transaction is in the public interest. Accordingly, Applicants were directed by the Judge at the prehearing conference to demonstrate whether this transaction could satisfy the public interest test of § 854(c).
Applicants filed Supplementary Information on March 11, 2011 (Supplement 1) responding to the applicability of eight criteria enumerated in § 854(c).
(1) Maintain or improve the financial condition of the resulting public utility doing business in the state.
(2) Maintain or improve the quality of service to public utility ratepayers in the state.
(3) Maintain or improve the quality of management of the resulting public utility doing business in the states.
Applicants' response is persuasive that an orderly transfer from Henry Wheeler to Carlyle, and retaining existing managers and staff, will provide stability, expertise, and access to the capital markets, so that Park and Ranchos should remain financially healthy and provide reliable service. (Supplement 1 at 3 - 5.) Therefore we find no adverse consequences under these provisions of § 854.
(4) Be fair and reasonable to affected public utility employees, including both union and nonunion employees.
Applicants argue persuasively that the non-union employees all remain employed as before and executives are to be retained so that no jobs will be lost and the stable ownership allows employees to expect secure employment. (Supplement 1 at 5.) Therefore we find no adverse consequences under this provision of § 854.
(5) Be fair and reasonable to the majority of all affected public utility shareholders.
Henry Wheeler's family is the beneficial owner4 of all but a small minority of the stock held by the University of California. No one objected to the proposed transfer and all shares will receive the same price. The current stock is otherwise illiquid, with no market for the stock to trade. Therefore applicants are persuasive that the proposed transfer is reasonable to current shareholders. (Supplement 1 at 6.) Therefore we find no adverse consequences under this provision of § 854.
(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.
Applicants argue persuasively that the local community will be well served by the continued operation of Park and Ranchos by the same managers and employees. The new owners bring a strong financial basis to the operation and the utilities will therefore continue to serve the local communities. (Supplement 1 at 6-7.) Therefore we find no adverse consequences under this provision of § 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.
Applicants argue that there will be no change and we agree: nothing about this approval in any way alters, limits, or changes the Commission's authority to regulate Park and Ranchos. As noted elsewhere in this decision, nothing in the settlement conditions proposed by Applicants and DRA can in anyway be construed in the future to have limited or preapproved any action by the Commission. Therefore we find no adverse consequences under this provision of § 854(c).
(8) Provide mitigation measures to prevent significant adverse consequences which may result.
No one has identified any adverse consequences except for Town's concern over the integrity of water rights held by Ranchos. As we find elsewhere, those water rights are unharmed by the transfer and the new owner of Ranchos, Carlyle, is not able to alter, transfer, or encumber those rights without Commission authority. Therefore we find no adverse consequences under this provision of § 854(c).
3.2. Standard of Review for a Proposed Settlement
The Commission's Rules of Practice and Procedure (Rules) specifically address the requirements for adoption of proposed settlements. The relevant rules are Rule 12.1 Proposal of Settlemnts, and Rule 12.5 Adoption Binding, Not Precedential.5 Specifically, Rule 12.1 states in part:
(a) Parties may, by written motion any time after the first prehearing conference and within 30 days after the last day of hearing, propose settlements on the resolution of any material issue of law or fact or on a mutually agreeable outcome to the proceeding. Settlements need not be joined by all parties; however, settlements in applications must be signed by the applicant and, in complaints, by the complainant and defendant.
The motion shall contain a statement of the factual and legal considerations adequate to advise the Commission of the scope of the settlement and of the grounds on which adoption is urged. Resolution shall be limited to the issues in that proceeding and shall not extend to substantive issues which may come before the Commission in other or future proceedings.
When a settlement pertains to a proceeding under a Rate Case Plan or other proceeding in which a comparison exhibit would ordinarily be filed, the motion must be supported by a comparison exhibit indicating the impact of the settlement in relation to the utility's application and, if the participating staff supports the settlement, in relation to the issues staff contested, or would have contested, in a hearing.
(d) The Commission will not approve settlements, whether contested or uncontested, unless the settlement is reasonable in light of the whole record, consistent with law, and in the public interest.
Rule 12.5 limits the future applicability of a settlement:
Commission adoption of a settlement is binding on all parties to the proceeding in which the settlement is proposed. Unless the Commission expressly provides otherwise, such adoption does not constitute approval of, or precedent regarding, any principle or issue in the proceeding or in any future proceeding.
Based upon the record of this proceeding we find the settling parties complied with Rule 12.1(a) by making the appropriate filings and noticing a settlement conference. Based upon our review of the settlement documents we find that they contain a statement of the factual and legal considerations adequate to advise the Commission of the scope of the settlement and of the grounds for its adoption; that the settlement was limited to the issues in this proceeding; therefore we are able to find that the settlement complies with Rule 12.1(a), and is reasonable in light of the whole record, consistent with law, and in the public interest.
Based upon our review of the settlement document we find, pursuant to Rule 12.5, that the proposed settlement would not unreasonably bind or otherwise impose a precedent in this or any future proceeding. We wish to emphasize that none of the conditions agreed to by applicants as a part of the settlement prejudge or limit the Commission's discretion in the future regulation of Park or Ranchos.
We do adopt an additional requirement that Carlyle Infrastructure Partners L.P., a limited life entity, must file an application with a specific plan for the future disposition of Park and Ranchos no later than 18 months before Western Water Holdings LLC is dissolved, or otherwise terminated, or modified. This application also applies to any transfer of Western Water Holdings LLC assets to any other Carlyle entity. With this additional requirement we find that we may adopt the terms and conditions of the proposed settlement and grant the transfer of control.
2 Decision (D.) 00-09-042, which denied rehearing of D.00-05-047, concluded that D.00-05-047, although expressly relying only on ratepayer indifference, also satisfied the more stringent ratepayer benefit standard by finding definite, quantifiable benefits flowing from the purchase.
3 Section 2720 is part of the Public Water Systems Investment and Consolidation Act of 1997 (Pub. Util. Code § 2718 et seq.), which sets out a procedure for establishing rates at fair market value following the completion and approval of an acquisition of a public water system by a regulated water utility.
4 Application at 2.
5 http://docs.cpuc.ca.gov/published/RULES_PRAC_PROC/105138-11.htm#P623_143939.
