X. Assignment of Proceeding
John A. Bohn is the assigned Commissioner and Michael J. Galvin is the assigned ALJ in this proceeding.
1. Applicants seek to transfer indirect control of Cal-Am through the sale of up to 100% of the shares of common stock of American Water through an IPO to be listed on the New York Stock Exchange by American Water's parent company, Thames GmbH.
2. The primary standard used by the Commission to determine if a transaction should be authorized under § 854(a) is the ratepayer indifference standard.
3. Section 854(b) and (c) are applicable to electric, gas, and telephone utilities organized and doing business in this state having gross annual California revenues exceeding $500,000.
4. Section 854(d) requires the Commission to consider reasonable options to the proposal recommended by other parties 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.
5. There was no proposal put forth by any party to consider short-term and long-term economic savings for the seven districts of Cal-Am as a whole in comparison to the indirect change of control before us.
6. Official notice is taken of Case Number CISCV156413 filed in the Superior Court of Santa Cruz County by the San Lorenzo Valley Water District, an action to condemn the Felton District.
7. The parties differ on whether the ratepayer indifference standard or a ratepayer benefit standard should apply to this application.
8. Applicants assert that the proposed transaction will produce benefits for the ratepayers of Cal-Am.
9. Cal-Am serves approximately 170,000 customers in portions of the counties of Los Angeles, Ventura, San Diego, Monterey, Sacramento, Placer, Santa Cruz, and Sonoma.
10. Cal-Am is a wholly owned subsidiary of American Water, consisting of less than 5% of American Water's regulated operations.
11. American Water is a wholly owned subsidiary of Thames GmbH which, in turn, is wholly owned by RWE, a Republic of Germany corporation.
12. RWE obtained Commission authority to acquire control of American Water and, in turn, Cal-Am in 2002 so that it might expand its water and wastewater services in the United States, pursuant to a settlement agreement with its affiliate Apollo Acquisition Company, DRA, the Utility Workers Union of America, and the AFL-CIO which incorporated several conditions to benefit ratepayers.
13. RWE seeks to transfer its indirect control of Cal-Am because it has refocused its core business on the rapidly changing European energy market and has made a business decision to withdraw from the water business.
14. This proposed transaction involves only a change of control at the holding company level and will not change the relationship between Cal-Am and American Water, nor will the proposed transaction change the day-to-day operations of Cal-Am.
15. To the extent that all of the shares of American Water are not sold as part of the IPO, the remainder of the shares will be sold in a subsequent offering or offerings as soon as reasonably practicable following the IPO.
16. The IPO and any subsequent offerings will be conducted according to the rules for underwritten public offerings mandated by the SEC.
17. Ratepayer benefits identified by applicants include a solid capital structure, ability to raise capital on a going forward basis, becoming a United States publicly traded company, local control, enhancement of employee relations, and transparency to Cal-Am ratepayers.
18. DRA finds it not in the public interest to require a foreign entity that does not wish to have ownership in American Water to continue to have a controlling interest in Cal-Am.
19. DRA recommends that 17 conditions be imposed upon Cal-Am and American Water to ensure that ratepayers of Cal-Am are unharmed by the proposed transaction.
20. Applicants do not object to the imposition of conditions as part of approving the proposed transaction to the extent those conditions provide additional assurances that the proposed transaction will not harm ratepayers.
21. Applicants concur with Condition Numbers 1 through 7, and 12, with minor modifications to Condition Numbers 4, 7, and 12.
22. DRA concurs with applicants' modifications to Condition Numbers 4 and 7.
23. Although DRA did not define what constitutes a controlling interest in American Water as it pertains to Condition Number 12, DRA and applicants have defined a controlling interest to be a 10% or more ownership.
24. Applicants do not seek recovery of the costs of the proposed transaction.
25. Although American Water may pay costs attributed to the proposed transaction, such costs will be repaid to American Water when RWE capitalizes American Water prior to the IPO.
26. If Cal-Am is authorized to recover ongoing costs of being a publicly traded company, the bills of ratepayers are estimated to increase approximately four cents per month during the first year and two cents per month thereafter.
27. Ratepayers benefit from a publicly traded company through public disclosure of the operations and practices of American Water and Cal-Am.
28. S&P lowered the credit rating of American Water by one step to an A- from an A and placed American Water on a negative credit watch upon the announcement that RWE was divesting itself of American Water.
29. S&P placed American Water on a negative credit watch pending a review of American Water's business plan, an understanding of the refinancing of debt that is to occur, and an understanding of what conditions will be placed on the proposed transaction by the various regulatory agencies.
30. Debt ratings can change anytime because of factors not under the control of a company such as regulatory environment, market structure, competition, environmental conditions, litigation, geographic location, and customer demographics.
31. The proposed transaction is expected to be completed within two years of the date the SEC declares the Registration Statement effective.
32. DRA's recommended capital structure, with a fixed equity of 50%, and applicants' proposed capital structure, with an equity range of 45% to 55% and an intent to infuse equity as needed, are comparable with other water utilities.
33. Ongoing reviews and approval of capital budgets for each of the seven districts of Cal-Am are undertaken through general rate proceedings.
34. Applicants are committed to providing Cal-Am with adequate capital to fulfill all of its service obligations and to ensure that the quality of customer service, water quality, and reliability of service do not deteriorate as a result of this transaction.
35. RWE should continue to comply with the conditions set forth in D.02-12-068 until RWE no longer holds a controlling interest in American Water.
36. DRA defines a controlling interest in American Water to exist until RWE has less than a 10% interest in American Water.
37. FASB Opinion 57 also defines a controlling interest to be more than 10% of the voting interest in an entity.
38. DRA's Condition Number 15 deferral of rate increases may result in rate shock to Cal-Am's ratepayers when the requested delays go into effect and adversely affect the ability of Cal-Am to continue paying its operating costs.
39. Cal-Am expects to lose $26.8 million of authorized revenue, approximately 24% of its 2011 projected revenues, and more than eliminate its authorized earnings for one entire year if Condition Number 15 is adopted.
40. The Bluefield decision states that a public utility is entitled to earn a return upon its property employed for the convenience of the public and sets forth parameters to assess a reasonable return.
41. The Hope decision reinforces the Bluefield decision and emphasizes that such returns should be sufficient to cover operating expenses and capital costs of the business.
42. Cal-Am currently provides low-income assistance funding pursuant to § 739.7 and is allowed to recover prudently incurred low-income assistance program costs from ratepayers.
43. DRA concurs that Cal-Am would not be allowed to recover the $100,000 annually for a five-year period applicable to low-income ratepayers if its Condition Number 16 is adopted.
44. DRA has not substantiated that Cal-Am's ratepayers will receive any benefit from the condition of requiring American Water to provide and Cal-Am to not seek ratepayer recovery of shareholder funds of $100,000 annually for a five-year period to assist small troubled water systems.
1. The ratepayer indifference standard should be used to determine whether the proposed transaction should be approved.
2. Pursuant to § 854, the Commission has broad authority to approve or deny applications for transfers of utility ownership or control. Implicit in this authority is the right to place reasonable conditions upon the transferor or transferee, should the need for conditions arise. The right to impose these conditions carries with it the right to enforce the conditions in Commission proceedings.
3. Section 854(b) and (c) are not applicable in this proceeding because they pertain only to electric, gas, and telephone utilities.
4. Section 854(d) is not applicable in this proceeding because no party offered any alternative option which could provide short-term and long-term economic savings for the seven districts of Cal-Am as a whole in comparison to the indirect change of control before us.
5. Condition Numbers 1 through 7 should be adopted as modified by applicants.
6. Condition Number 12 should be adopted with a definition of a controlling interest to be 10% or more.
7. Condition Number 8 should be adopted as modified by applicants because ratepayers will benefit from public disclosure and openness of the operations of American Water and Cal-Am.
8. Condition Number 9 should not be adopted because the freezing of the cost of debt for at least five years into the future can only harm Cal-Am and its ratepayers through a disparity between regulatory and actual earnings and ignores qualitative and quantitative factors not under the control of American Water and Cal-Am.
9. Applicants' proposed modification to Condition Number 10 should be adopted because it provides American Water and Cal-Am the flexibility to take advantage of market conditions at the time of the IPO. The reasonableness of the capital structure of Cal-Am should be addressed in the next general rate or cost of capital proceeding.
10. Condition Number 11 is addressed as part of Condition Number 8.
11. Condition Number 13 is unnecessary and should not be adopted because the review and approval process undertaken in general rate proceedings, along with Condition Numbers 1, 2, and 3 being adopted in this order, provides sufficient assurance that Cal-Am will have adequate capital to fulfill its capital improvement obligations in each of its seven districts.
12. Condition Number 14 as proposed by DRA should be adopted. If at a future time, applicants and their affiliates cumulatively have more than 10%, but less than 50% interest in American Water and find themselves in a minority position and unable to comply with any of the conditions set forth in Appendix C to this order, Cal-Am should file an application seeking an exemption from the condition(s).
13. Condition Number 15 should not be adopted because it will unfairly preclude Cal-Am from earning a reasonable return on its investment.
14. Condition Number 16 should not be adopted because it will preclude Cal-Am from recovering prudently incurred costs of doing business.
15. Condition Number 17 should not be adopted because it benefits neither the shareholders nor ratepayers of Cal-Am.
16. The requested acquisition and transfer of control are a "project" that qualifies for an exemption from CEQA pursuant to § 15061(b)(3) of the CEQA Guidelines.
17. The proposed transaction should be approved subject to the conditions imposed by this order, as set forth in Appendix A.
18. The proposed transaction is in the public interest.
19. Ratepayers of Cal-Am will benefit from the replacement of ownership no longer interested in providing service to them; from a transparency of the proposed change in ownership which will not change the name of the companies, management, terms of condition of service, or employees; and from the ability of Cal-Am and American Water to obtain new capital without competing against the capital needs of RWE's core companies.
20. All sealed information should remain sealed for a period of two years.
21. Public convenience and necessity require the granting of this application be effective on the date signed.
22. The application should be granted to the extent provided in the following order.
IT IS ORDERED that:
1. Joint applicants California-American Water Company (Cal-Am), American Water Works Company, Inc. (American Water), Thames Water Aqua Holdings GmbH (Thames GmbH), and RWE Aktiengesellschaft (RWE) are authorized pursuant to Pub. Util. Code § 854 to transfer indirect control of Cal-Am, wholly owned by American Water. This is to be accomplished through the sale of up to 100% of the shares of common stock of American Water through an Initial Public Offering and subsequent public offerings to be listed on the New York Stock Exchange by American Water's parent company, Thames GmbH. Joint applicants are also authorized to merge Thames Water Aqua U.S. Holdings, Inc. (TWAUSHI), the intermediate holding company for all of RWE's water and wastewater businesses in the United States and a wholly owned subsidiary of Thames GmbH, with and into American Water.
2. The authority granted by Ordering Paragraph 1 is subject to complying with the 11 conditions set forth in Appendix A to this order.
3. None of the acquisition conditions from Decision 02-12-068 should be removed until RWE (or its subsidiaries or affiliates) has sold more than 90% of its interest in American Water. If RWE or its affiliates cumulatively have more than a 10%, but less than 50% interest in American Water and find themselves in a minority position and unable to comply with any of the conditions set forth in Appendix C, Cal-Am should file an application explaining why RWE or its subsidiaries cannot comply with the condition(s) and request an exemption from the condition(s).
4. Joint applicants shall notify the Director of the Commission's Water Division in writing of the transfer of control, as authorized herein, within 10 days of the date of consummation of such transfer.
5. The corporate identification number U-210-W assigned to Cal-Am shall continue to be used by Cal-Am and shall be included in all original filings with the Commission and in the titles and other pleadings filed in existing cases.
6. All sealed information shall remain sealed for a period of two years after the effective date of this order. After two years, all such information shall be made public. If applicants believe that further protection of sealed information is needed beyond two years, applicants may file a motion stating the justification for further withholding of the sealed information from public inspection. This motion shall be filed no later than 30 days before the expiration of the two-year period granted by this order.
7. The application is granted as set forth above and the authority granted shall expire if not exercised within two years from the date the Securities and Exchange Commission Registration Statement becomes effective.
8. Application 06-05-025 is closed.
This order is effective today.
Dated May 3, 2007, at San Francisco, California.
MICHAEL R. PEEVEY
President
DIAN M. GRUENEICH
JOHN A. BOHN
RACHELLE B. CHONG
TIMOTHY ALAN SIMON
Commissioners
APPENDIX A
ADOPTED
CALIFORNIA-AMERICAN WATER COMPANY
CONDITIONS ON TRANSFER OF INDIRECT CONTROL
1. California-American Water Company (Cal-Am) will be provided with adequate capital from American Water Works Company, Inc. (American Water) to fulfill all of its service obligations prescribed by the Commission and Cal-Am.
2. American Water and Cal-Am shall ensure the transaction will not result in any adverse changes in Cal-Am policies with respect to service to customers, employees, operations, financing, accounting, capitalization, rates, depreciation, maintenance, or other matters affecting the public interest of utility operations.
3. American Water and Cal-Am will ensure that there is no adverse impact on the quality of customer service, water quality, and reliability as a result of the transaction.
4. Cal-Am will continue to maintain its business headquarters in California together with field offices as appropriate to maintain the quality of service. Cal-Am will not close any of its local offices as a result of his transaction. However, Cal-Am is not precluded from making local operational changes in connection with integrating water and wastewater systems acquired in other transactions or which would have occurred absent the transaction.
5. The transaction will have no adverse impact on Cal-Am employees and there will be no changes in any existing union agreements as a result of the transaction. All collective bargaining agreements will continue to be honored.
6. Cal-Am will not allow the transaction to diminish staffing that would result in service degradation. However, Cal-Am may make local staffing and other operating changes which would have occurred absent the transaction.
7. American Water and American Water Capital Corporation (AWCC) will notify the Commission in writing within 30 days of public notification to American Water or AWCC of any downgrading to the bonds of American Water or AWCC and will include with such notice the complete report from the issuing bonding rating agency.
8. American Water will make no attempt to recover through Cal-Am's rates any of the transaction costs arising from the divestiture by RWE Aktiengesellschaft (RWE) and Thames Water Aqua Holdings GmbH (Thames GmbH) of American Water, including the Securities and Exchange registration fee, the National Association of Securities Dealer filing fee, the stock exchange listing fee, legal fees and costs of the proposed transaction, accounting fees and expenses of the proposed transaction, printing and engraving fees and expenses for the registration statement, Blue Sky fees and expenses, transfer agent fees and expenses, legal fees for the state regulatory approval process, and the costs of implementing the initial process and controls for compliance with the Sarbanes-Oxley Act of 2002. Cal-Am will not at any time seek to recover from its ratepayers costs directly incurred as a result of the proposed transaction from ratepayers of Cal-Am; however, Cal-Am may seek recovery of legitimate ongoing, non-startup costs of being a publicly traded company in future general rate proceedings.
9. RWE will provide an equity investment to American Water at the time of the proposed initial public offering to ensure that American Water has a capital structure in the range of 45% to 55%, with a minimum of 45% common equity.
10. All affiliated interest agreements approved by the Commission to which Cal-Am is a party will remain in effect. Additionally, the Affiliate Transaction Rules that were agreed to as part of the Settlement Conditions in Decision (D.) 02-12-068 will continue. The references to RWE and RWE Group will be removed once RWE no longer has a 10% controlling interest in American Water.
11. None of the acquisition conditions from D.02-12-068 should be removed until RWE (or its subsidiaries or affiliates) has sold more than 90% of its interest in American Water. Where RWE and its affiliates cumulatively have more than 10% but less than 50% interest in American Water and find themselves in a minority position and unable to comply with any of the conditions set forth in Appendix C, Cal-Am should file an application explaining why RWE or its subsidiaries cannot comply with the condition and request an exemption from the condition.
(END OF APPENDIX A)
