4. Proposed Transfer of Wild Goose
4.1 Description of the Transfer
Joint Applicants ask this Commission to approve the transfer of indirect control over Wild Goose from EnCana to Carlyle/Riverstone Funds through the sale by Alenco of all issued and outstanding shares of Wild Goose to Niska Gas Storage, the acquisition vehicle controlled by Niska GS Holdings I, L.P. As discussed previously, Niska GS Holdings I, L.P. is owned 80% by Carlyle/Riverstone Funds and 20% by SemGroup.
The Wild Goose Purchase and Sale Agreement dated March 6, 2006 and included with the Application as Exhibit M6, memorializes the terms of the Wild Goose transfer.7 This transfer is part of a larger transfer to the Carlyle/Riverstone joint venture of virtually all of the natural gas storage assets owned by EnCana and its affiliates. The transfer includes the following: the AECO Hub, a 125 Bcf facility in Alberta, Canada; Salt Plains, a 15 Bcf facility in Oklahoma; Starks, a 27 Bcf facility under development in Louisiana; and Coastal Plains, a potential gas storage development in Texas.
The Application explains the rationale for the transfer as follows:
EnCana has decided to sell the majority of its gas storage assets in order to focus on other business opportunities. While EnCana is seeking to divest gas storage assets to pursue other opportunities, the Carlyle/Riverstone joint venture is seeking to invest in such assets and to focus on growth opportunities in natural gas storage. The joint venture has entered into agreements to acquire EnCana's gas storage assets, including Wild Goose, in order to take advantage of these opportunities. The joint venture believes that its acquisition of Wild Goose, as well as EnCana's other gas storage assets, provides a unique opportunity to enhance the value of these assets, both to the market and to the Carlyle/Riverstone Funds' investors, through strategic use of The Carlyle Group's financial strength and access to private equity and Riverstone Holdings LLC's background and experience successfully managing energy industry investments. (Application, p. 13.)
The Application also states that Carlyle/Riverstone Funds intend to invest in the completion of Wild Goose's expansion project by adding the 5 Bcf of capacity authorized by D.02-07-036 but not yet built. SemGroup shares Carlyle/Riverstone's assessments and objectives, according to the Amended Application.
Joint Applicants stress that they have structured the larger transaction by means of several separate agreements, in order to ensure that no direct or indirect transfer of control of Wild Goose occurs prior to Commission approval. To that end, they have negotiated separate Purchase and Sale Agreements for EnCana's Canadian assets, for EnCana's U.S. assets other than Wild Goose, and for Wild Goose. The sales of all assets other than Wild Goose closed on May 12, 2006.
During the transitional period between execution of the Wild Goose Purchase and Sale Agreement and this Commission's action on the Application, Joint Applicant's have made certain provisions to ensure the uninterrupted management and operation of Wild Goose. The application states that EnCana has retained as employees all of the operational staff employed at Wild Goose's Butte County storage facility, as well as two employees and one consultant based in Calgary (a lead engineer, a production manager, and a gas controller), and that the officers of Wild Goose will remain the same until the transaction closes. Certain corporate and management services provided to all gas storage operations are continuing to be provided via a Transitional Service Agreement, Exhibit N to the Application.8
4.2 Protests
Roseville Land Development Association (Roseville Land) and Lodi Gas Storage, L.L.C. (Lodi) filed Protests to the Application, to which Joint Applicants replied. Roseville Land also filed a Protest to the Amendment to Application, to which Joint Applicants replied.
Roseville Land, a California corporation, owns about 500 acres of farmland near the Wild Goose project, including one mile of right-of-way condemned in connection with the original construction. The approved but as yet unbuilt portion of the expansion project includes an additional pipeline across Roseville Land's property. In connection with the expansion, Wild Goose filed a condemnation action against Roseville Land in 2002 but that proceeding apparently was abandoned before trial.
Roseville Land's two Protests assert a number of objections to the amended Application and seek hearings. The primary objection is that the change of control will cause the expansion project to resume and will lead to another condemnation action, to the financial detriment of Roseville Land. The issues which arise from such a scenario fall outside this proceeding; however, since they are not relevant to the merits of the proposed change of control or the requested financing authority.
Other objections raised by Roseville Land include: the change of control will increase Wild Goose's costs, leading to an increase in rates for its customers; the proceeds of the sale should be shared by Wild Goose's customers; the capital the purchasers have proposed to commit to the project is less than half of the current owner's retained earnings for 2005; the Application fails to show that the transfer will not further exacerbate price volatility in the California natural gas market; and the Commission should seek the advice of the California Attorney General before issuing any decision. As we discuss further in Sections 4.3 and 4.4, below, these objections are largely irrelevant in the context of this Application and, furthermore, do not require us to hold hearings.
Lodi's Protest neither opposes the transfer of control nor seeks hearings but points out, lest the Application create some misunderstanding on this point, that Wild Goose continues to be the largest independent gas storage owner/operator in the California market. Lodi's Protest also suggests that to the extent the Application seeks to remove restrictions on storage or hub services transactions between independent gas storage providers and their affiliates, Lodi desires the same relief. Lodi refers to conditions the Commission imposed on previous changes of control for Wild Goose (in D.02-07-036) and Lodi
(D.03-02-071, D.05-12-007). In addition, Lodi suggests that statements in the Application raise the specter of ongoing affiliate transactions violations by Wild Goose.
Joint Applicants' Reply does not disavow Wild Goose's position in the California market and states, unequivocally, that the Application does not seek to be relieved from any requirements or conditions ordered by prior Commission decisions. The Assigned Commissioner's scoping memo9 bars such issues from consideration here, stating:
Wild Goose correctly points out, however, that if Lodi wishes the Commission to reexamine affiliate transaction restrictions on independent gas storage providers, other, more appropriate avenues are available (e.g., petition for rulemaking).10 We will not expand the scope of this proceeding to include such a reexamination. (Scoping memo, pp.4-5.)
4.3 Standard of Review
It is now well-settled that the Commission intends to exercise its regulatory authority to review and approve proposals for a change in control of California's independent gas storage providers. The Commission recently reiterated:
We think it prudent public policy to review and approve changes in the ownership and control of certificated natural gas storage utilities, whether those changes occur directly, or indirectly through corporate intermediaries. Such review should help to ensure the continued economic viability of such utilities and to prevent market manipulations that may affect not only their own customers but also larger ratepayer groups. D.05-12-005 mimeo., p. 7, 2005 Cal PUC LEXIS 527 quoting D.03-02-071, mimeo., pp. 11-12, 2003 CalPUC LEXIS 133.
The applicable law is § 854 and the body of decisions interpreting it. Section 854(a) requires Commission authorization before a company may "merge, acquire, or control either directly or indirectly any public utility organized and doing business in this state..." The purpose of this and related sections is to enable the Commission, before any transfer of public utility authority is consummated, to review the situation and to take such action, as a condition of the transfer, as the public interest may require.11 Absent prior Commission approval, § 854(a) provides that the transaction is "void and of no effect." Section 854(b) and (c) do not expressly apply to the instant transaction because, according to Joint Applicants, neither Wild Goose nor the other parties to the proposed transfer of control have gross annual California revenues exceeding US $500 million. When California revenues reach this threshold, § 854(b)(3) requires the Commission to seek an opinion on competitive impacts from the California Attorney General. Below this threshold there is no such requirement. We therefore need not pursue Roseville Land's request for an opinion from the Attorney General.
The standard generally applied by the Commission to determine if a transaction should be approved under § 854(a) is whether the transaction will be "adverse to the public interest."12 While on occasion the Commission has also inquired whether a transfer will provide positive ratepayer benefits, this additional assessment cannot be applied readily to an entity like Wild Goose, which is not a traditional investor-owned public utility with captive ratepayers. In fact, the Commission has not considered "ratepayer benefits" in its review of other change of control applications by independent gas storage providers. Roseville Land's request for such review fails.
4.4 Discussion
Joint Applicants state that the proposed change of control will have no adverse effect upon the public interest and should be approved under § 854(a). The net effect of the change of control is that Wild Goose's operations will continue unchanged, subject to all conditions previously ordered by the Commission and Wild Goose will continue "to have the financial and management strength necessary to meet the growing needs of California for well designed, environmentally sensitive and efficiently managed competitive natural gas storage services." (Application, p. 15.)
Joint Applicants' showing on the public interest impacts of the change of control goes on to discuss compliance with most of the public interest criteria enumerated in § 854(c). Wild Goose employed the same useful strategy when it sought authority for the change of control occasioned by the EnCana merger and the Commission noted that "consideration of these criteria ensures assessment of a broad spectrum of important public interest concerns and provides a good gauge of the public interest under § 854(a)." (D.03-06-069 mimeo., p. 10-11, 2002 CalPUC LEXIS 975 16.)
For example, with respect to the competitive implications of the change of control, the Application and Amendment to Application affirmatively assert that the new ownership, including Carlyle/Riverstone Funds and SemGroup and its subsidiaries, have no natural gas or gas transportation assets, products, or services in California or in any location that could affect the California market. The Amendment to Application makes the same representation about KMI and its subsidiaries or affiliates. For this reason, and because other developments in the California natural gas storage market have reduced Wild Goose's market share since the Commission approved the expansion project, 13 Joint Applicants suggest that any Commission concerns about the potential for market manipulation should be lessened under the new ownership. Nor should financial viability prove a problem, given the assets and revenues of Carlyle/Riverstone Funds and SemGroup. Both service quality and management quality should be unaffected or even improved, Joint Applicants state. That assessment appears highly credible considering the caliber of the proposed new ownership and given the plan to continue to employ all of the current Wild Goose workforce in Butte County as well as many of those serving in key operational and management positions elsewhere.
Furthermore, as required by the scoping memo, Wild Goose has put forward evidence (the declaration of Kim Joslin, Vice President of EnCana's Canadian Gas Marketing) that Wild Goose has complied with the prohibition on affiliate and storage services transactions ordered by prior Commission decisions. Lodi's suggestion to the contrary appears to be unfounded.
Roseville Land's financial and economic concerns are largely misplaced. As the scoping memo concludes, "Roseville Land's concerns suggest a general misunderstanding of the regulatory regime in California governing independent gas storage facilities, which unlike incumbent public utilities, have no captive customers, offer market-based rates, and bear full risk for cost recovery of facility development, operation, and management." (Scoping memo, p. 3.) While the financial status of the buyers is clearly relevant, as the scoping memo observes: "Roseville Land's protest confuses things by focusing on measures (i.e., capital commitment of buyer vs. retained earnings of seller) that do not advance the necessary inquiry." (Id. at 4.) In fact the scoping memo goes on to direct Joint Applicants to amend their financial showing to better explain the derivation of the total capital ratio for Wild Goose post-transfer, and Joint Applicants have complied.
Joint Applicants have made a persuasive showing that the change of control should be free from any negative impacts - and may have positive impacts - on the completion of the Wild Goose expansion and on Wild Goose's service quality and management. As noted above, Wild Goose does not seek to be released from any of the reporting conditions the Commission has imposed upon it in prior decisions and we have no reason at this time to cancel those requirements. We reiterate that unless and until modified, all terms and conditions of D.97-06-091 and D.02-07-036 will continue to apply to Wild Goose. Likewise, Wild Goose must continue to operate in conformance with its filed tariff and with any subsequent amendments of that tariff.
However, given the significant global investments in the energy and power industries that Carlyle/Riverstone Funds, SemGroup, and their subsidiaries and affiliates have made and report they will continue to make, and the rapidity with which some assets appear to change hands, the Commission must ensure that it has sufficient information to monitor important developments in the energy markets with the potential to affect California most directly. D.02-07-036, Ordering Paragraph 3(c) requires Wild Goose to report the following:
Wild Goose shall promptly advise the California Public Utilities Commission (Commission) of the following changes in status that reflect a departure from the characteristics the Commission has relied upon in approving market-based pricing: (i) Wild Goose's own purchase of natural gas facilities, transmission facilities, or substitutes for natural gas, like liquefied natural gas facilities; (ii) an increase in the storage capacity or in the interstate or intrastate transmission capacity held by affiliates of its parent, Alberta Energy Company Ltd. (Alberta Energy, or a successor); or (iii) merger or other acquisition involving affiliates of Alberta Energy or a successor and another entity that owns gas storage or transmission facilities or facilities that use natural gas as an input, such as electric generation.
Given the number and breadth of the energy and power industry businesses in which Carlyle/Riverstone Funds, SemGroup, and their subsidiaries and affiliates are involved, we will need a more complete picture, going forward, than compliance with D.02-07-036, Ordering Paragraph 3(c), will provide. Therefore, as a condition of the change of control, we also will require Wild Goose to advise the Commission semi-annually of its affiliates' direct or indirect acquisition of or investment resulting in a controlling interest or effective control, whether direct or indirect, in any entities in California or elsewhere in Western North America that produce natural gas or provide natural gas storage, transportation, or distribution services, to the extent such transactions are not already captured by D.02-07-036, Ordering Paragraph 3(c). We also will require Wild Goose to semi-annually advise the Commission of its affiliates' similar acquisition of or investment in any entities in California or elsewhere in Western North America that generate electricity, or provide electric transmission or distribution services. For the purposes of today's order, we define "Western North America" to mean, in addition to California, the states of Oregon, Washington, Arizona, New Mexico, Texas, Nevada, Colorado, Wyoming and Utah, as well as the provinces of British Columbia and Alberta in Canada and the State of Baja California Norte in Mexico. Our intent is to receive timely notice of acquisitions and investments other than those for which Commission approval must be sought under § 852 (governing acquisition of a stock in another California utility) or § 854 (governing merger and control another California utility). Reports should include the identity of the affiliate; the nature of the acquisition or investment; and the amount of the investment.
4.5 CEQA
Under the California Environmental Quality Act (CEQA), we must consider the environmental consequences of projects that are subject to our discretionary approval. (Pub. Resources Code § 21080.) It is possible that a change of ownership and/or control may alter an approved project, result in new projects, or change facility operations, etc. in ways that have an environmental impact.
Joint Applicants affirmatively state (and reiterate in the Amendment to Application) that this proposed transaction:
involves only a change of control of Wild Goose. It will not result in any change in the operation of Wild Goose's natural gas storage facilities or in any additional construction that has not been previously reviewed and approved the Commission in full compliance with CEQA. (Application, p. 26.)
We concur, for a number of reasons. The Wild Goose gas storage facilities will continue to be developed and operated as previously authorized by this Commission, all environmental mitigation measures contained in the certified Environmental Impact Reports (EIRs) will continue to apply, and all monitoring requirements and restrictions imposed in D.97-06-091 and D.02-07-036, which certified these EIRs, will continue. Therefore, the proposed project qualifies for an exemption from CEQA pursuant to § 15061(b)(3)(1) of the CEQA guidelines and the Commission need perform no further environmental review. (See CEQA Guidelines § 15061(b)(3)(1).)
6 Portions of Exhibit M have been filed under seal by ALJ Ruling dated October 5, 2006.
7 The agreement is entitled "US (WGSI) Purchase and Sale Agreement."
8 Portions of Exhibit N have been filed under seal by ALJ Ruling dated October 5, 2006.
9 Assigned Commissioner's Scoping Memo and Joint Ruling with Administrative Law Judge Granting Motion to Intervene, Addressing Protests, Requiring Amendment to Motion for Leave to File Under Seal, and Establishing Initial Service List, July 27, 2006.
10 The Commission's Affiliate Transaction Rules, first adopted by D.97-12-088, do not apply to independent gas storage providers. (footnote in original)
11 See San Jose Water Co. (1916) 10 CRC 56.
12 See, for example, Quest Communications Corp., D.00-06-079, 2000 Cal. PUC LEXIS 645, *18. This is also the standard applied by D.03-06-069 (2002 CalPUC LEXIS 975), in which the Commission authorized the transfer of control to EnCana, and most recently by D.05-12-007 (2005 CalPUC LEXIS 527), which authorized the transfer of a 50% interest in the parent of Lodi Gas Storage, L.L.C.
13 Wild Goose still continues to hold the largest share in the California market.
