Background

In Decision (D.) 04-01-051, the Commission approved the transfer of indirect control of Valencia from Newhall Land and Farming Company to Lennar Corporation and LNR. The Commission imposed a series of conditions on its approval of the transaction which required, among other things, that Valencia ratepayers be insulated from any financial effects of the transaction and that Valencia maintain its high standard of customer service and community involvement.

LNR, and its indirect 50% ownership of Valencia, is the subject of the instant application.¹ On December 16, 2004, LNR Property Holdings Ltd. f/k/a Riley Property Holdings, LLC, Riley Mezzanine Corp., CB Riley Investor L.L.C., Cerberus Partners, L.P., Cerberus Associates LLC, LNR, and Valencia filed this application seeking Commission authorization for Riley Mezzanine Corporation to acquire LNR. The other entities are upstream owners of Riley Mezzanine Corporation.

Protests to the application were filed by Public Citizen, Water for All (Public Citizen), The Friends of the Santa Clara River (Friends), and the Angeles Chapter of the Sierra Club (Sierra Club). Public Citizen stated that it is a national consumer rights organization and requested that the Commission hold evidentiary hearings on how the proposed merger would benefit Valencia's ratepayers. Public Citizen also stated that Valencia has a "poor track record of weak public accountability and environmental mismanagement."

Friends urged "a careful review of all aspects of this matter" by the Commission, particularly whether Valencia was in compliance with the
D.04-01-051 conditions. Friends stated their belief that Valencia is not complying with condition 8, which requires that Valencia maintain or improve practices and policies for addressing the ammonium perchlorate pollution problem. Friends also expressed concern that preferential treatment for new service extensions may be granted to real estate development projects owned by the parent companies. The Sierra Club echoed these concerns, as well as noting concerns with out-of-state ownership.

The applicants replied to the protests. They contended that the protests failed to raise any substantive issues regarding Riley Mezzanine's acquisition of LNR and indirect control of Valencia.

On February 17, 2005, the Assigned Commissioner and Administrative Law Judge issued a ruling requiring the protestants and applicants to submit additional information. The ruling's questions are reproduced in italic below, followed by the response.

Questions to Protestants

1. Please articulate any specific effect on ratepayers from the proposed transaction, and describe proposed evidence that will demonstrate this effect. Specifically identify any disputed issues of material fact that require evidentiary hearings.

Public Citizen responded that the acquisition of California-American Water Company by RWE/Thames Water resulted in substantial rate increases for some customers, and that the benefits of the acquisition had not been passed on to ratepayers. Public Citizen also stated that Valencia "is not moving towards environmentally responsible water management practices." Public Citizen contended that the proposed acquisition by a "highly speculative, investor-driven land development company" would undermine stability and accountability at Valencia.

Friends and the Sierra Club responded jointly that two disputed issues of material fact require evidentiary hearings: (1) the possibility that a change of control had occurred prior to Commission approval, and (2) the possibility that the proposed change of control would impact ratepayers. Friends and Sierra Club stated that copies of operating agreements between the applicants would be essential to resolve these issues.

2. Please state any new conditions required by the unique facts of this proposed transaction.

Public Citizen stated that conditions should be imposed requiring applicants to disclose the identity of all investors, improve conservation and reclamation practices, and document that the development of the Newhall Ranch project will not adversely impact ratepayers. Friends and the Sierra Club stated that it was not possible to propose new conditions until the operating agreements are released.

Questions to Applicants

1. Page 2 of the application states that NWHL Investment LLC "was merged" with LandSource Communities Development LLC (LandSource) effective November 30, 2004. Please state whether Pub. Util. Code § 854 applied to this transaction and, if so, whether applicants complied with it.

Applicants responded that no change of control in NWHL Investment, or Valencia, occurred because LandSource was merged into NWHL Investment. NWHL was the surviving corporate entity, which remained under the ownership of Lennar and LNR. Similarly, no change of control occurred when NWHL Investment changed its name to LandSource.

2. Please explain how the interim agreement under which LNR relinquishes to Lennar its 50% indirect control over Valencia will not compromise compliance with the conditions set out in D.04-01-051.

Applicants stated that pursuant to the interim agreement, LNR transferred its voting authority over LandSource (and thus, Valencia) to Lennar, the other Commission-approved indirect owner of Valencia. Accordingly, indirect control of Valencia is and has remained at all times with the entities approved by the Commission. Applicants stated that they remain committed to full and complete compliance with the conditions set in D.04-01-051.

On May 10, 2005, the applicants filed an amendment to the application that changed the intermediate entities in the post-transaction line of control. Ultimate ownership and control will remain in Cerberus, but seven new or reorganized partnerships or corporations will replace three of the original intermediate entities. The specific changes are set out in Attachment A to today's decision. A Cayman Islands limited partnership and a Bermuda exempted company are among the new intermediate entities.

The original and additional applicants all agreed to comply fully with the conditions imposed by the Commission in approving the Lennar transaction in D.04-01-051.

On June 9, 2005, Sierra Club protested the amendment and stated that it wanted to "ensure that community water resource needs will remain important to a corporation that headquartered in Miami, Florida, incorporated in Delaware, registered off-shore and is now 75% owned by a company registered in the Cayman Islands." Sierra Club also reiterated issues raised in its first protest.

Friends also protested the amendment and raised a similar concern about entities registered off-shore having no incentive to "ensure a sustainable water supply for current and future ratepayers." The Santa Clarita Organization for Planning and the Environment also protested the amendment and incorporated all of the Sierra Club's arguments without raising any new issues.

On June 23, 2005, replying to the new protests, the applicants stated that the substitution of different transactional intermediaries will have no practical effect on Valencia's provision of water service.