6. KMI Stock Acquisition
6.1 Description
As explained in Section 3 of this decision, KMI controls SFPP and CALNEV, parts of which are regulated as California pipeline utilities. Because Carlyle/Riverstone III intends to participate in the agreement to take private KMI, and thereby to indirectly transfer control of KMEP's regulated pipeline subsidiaries, that transaction will require Commission approval under § 854, which Joint Applicants recognize. The matter before the Commission at this time, however, is whether the Commission must authorize the initial investment in KMI and the related companies by Carlyle/Riverstone III under § 852. Carlyle/Riverstone will become subject to § 852 immediately upon the closing of the sale of Wild Goose from EnCana to Carlyle/Riverstone Funds.
Before attempting to answer this question, it is necessary to have a more detailed understanding of the KMI transaction. According to the Amendment to Application, the KMI transaction became public on August 28, 2006, several months after the Application was filed, when "KMI announced that it had agreed to a buyout offer from investors led by the company's chairman and co-founder, Richard D. Kinder and including Goldman Sachs Capital Partners and certain of its affiliates, as well as affiliates of American International Group, Inc., The Carlyle Group and Riverstone Holdings LLC ...". (Amendment to Application, pp. 3-4.) This explains why there is no mention of the KMI transaction in the Application.
Joint Applicants describe the status of the transaction as follows. The KMI Investor Group has offered to buy all outstanding shares of KMI at $107.50 share, or about US $15 billion. The Amendment to Application reports that the offer represents a 27% premium over the closing price of KMI shares as of May 26, 2006, the last trading day before the proposal was announced. The Carlyle Group is participating though Carlyle Partners IV, L.P. (Carlyle Partners IV) and Carlyle/Riverstone III; Riverstone Holdings LLC is participating through Carlyle/Riverstone III. Upon approval by KMI's shareholders, and once all regulatory approvals have been obtained, Carlyle/Riverstone III and Carlyle Partners IV would each acquire a minority equity interest in KMI of about 12.5%. Richard D. Kinder, others in KMI management, and other equity investors would own the rest. The result would be the transfer of KMI from public to private ownership and the transfer of direct and indirect control of all of KMI's subsidiaries and business interests.
6.2 Authority
Section 852 prohibits a company with a controlling interest in a California jurisdictional public utility from investing in another California jurisdictional utility without prior approval from the Commission.17 Section 853(b) permits the Commission to exempt a public utility from § 852 if the Commission finds that application of § 852 is "not necessary in the public interest."18
6.3 Discussion
Joint Applicants argue that we should exempt Carlyle/Riverstone III (and its affiliate, Carlyle Partners IV, and their other unnamed affiliates19) from § 852, since their respective minority acquisitions constitute no more than a 12.5% interest in KMI by each (or 25%, combined), which translates into a much smaller indirect interest in SFPP and CALNEV.20
As Joint Applicants observe, D.00-05-023 provides a precedent for such an exemption in somewhat similar circumstances.21 In that decision the Commission exempted from § 852 the indirect transfer of a 19% minority interest in Time Warner Telecom of California, LP (TWT-California) in the course of the transfer of MediaOne Group, Inc. (MediaOne) to AT&T Corp under § 854.
TWT-California, which provided facility-based communications services in the San Diego area, was a subsidiary of MediaOne. The Commission determined that the transfer would have no effect on the control or operations of
TWT-California and exempted the transaction on that basis. We conclude, similarly, that the KMI investment by Carlyle/Riverstone III (and Carlyle Partners IV) is too small to give them or their affiliates indirect control over SFPP or CALNEV. Neither does this investment appear to have any competitive ramifications for Wild Goose, which provides no refined petroleum products or services in California. The larger KMI agreement will come before us as part of a § 854 application in the future and we express no opinion on its merits in this decision. Our assessment to grant an exemption from § 853(b) here, should not be interpreted more broadly than the limited terms of that grant.
17 Section 852 provides in relevant part:
No public utility, and no subsidiary or affiliate of, or corporation holding a controlling interest in, a public utility, shall purchase or acquire, take or hold, any part of the capital stock of any other public utility, organized or existing under or by virtue of the laws of this state, without having been first authorized to do so by the commission; provided, however, that the commission may establish by order or rule categories of stock acquisitions which it determines will not be harmful to the public interest, and purchases within those categories are exempt from this section ...
18 Section 853(b) provides in relevant part:
The commission may from time to time by order or rule, and subject to those terms and conditions as may be prescribed therein, exempt any public utility or class of public utility from this article if it finds that the application thereof with respect to the public utility or class of public utility is not necessary in the public interest. The commission may establish rules or impose requirements deemed necessary to protect the interest of the customers or subscribers of the public utility or class of public utility exempted under this subdivision. These rules or requirements may include, but are not limited to, notification of a proposed sale or transfer of assets or stock and provision for refunds or credits to customers or subscribers.
19 Joint Applicants express some uncertainty as to whether § 852 and § 853(b) even apply to Carlyle Partners IV. Since post-transfer of Wild Goose to Niska Gas Storage, Carlyle Partners IV will become an affiliate of the entity (i.e., Carlyle/Riverstone Funds) holding an 80% interest in and indirect control of Wild Goose, we believe it is quite clear that these statutes extend to Carlyle Partners IV.
20 Carlyle/Riverstone III will have an interest of approximately 1.9% in each of SFPP and CALNEV. This investment appears to be far too small to provide indirect control over either pipeline utility.
21 See Application of AT&T Corp. Meteor Acquistion Inc., and MediaOne Group for Change of Control, D.00-05-023, 2000 Cal. PUC LEXIS 355.
