5. Request for Section 852 Exemption
5.1. Description of Proposed Exemption
Section 852 Applicants, Goldman Sachs, AIG, Carlyle Partners IV, and Carlyle/Riverstone III, seek an exemption from Section 852 for themselves and all of their affiliates, concurrent with approval of the Section 854 Application.27 These entities concede that "[r]ead literally, Section 852 requires entities affiliated with California public utilities to seek approval from the Commission before purchasing any stock of another California public utility. (Section 852 Application at 3.) However, they state that imposing this pre-approval requirement on them for subsequent acquisitions that do not result in a controlling interest of a California public utility would be burdensome and contrary to statutory intent, and would "compromise the ability of California public utilities to access the capital markets by limiting the ability of significant "market makers" to acquire their shares." (Id. at 2-3.) Section 852 Applicant's opening brief expands upon their concern:
As part of their normal course of business, these companies regularly acquire capital stock in a multitude of companies, including some California public utilities. If they are required to obtain prior Commission approval for such routine, non-controlling stock acquisition, their operations and the marketplace for buying and selling shares of California public utilities will both be disrupted to no public benefit. (Joint Applicants' Opening Brief at 24.)
For the purposes of the exemption they seek, Section 852 Applicants define "affiliates" to mean "entities controlled by or under common control" with Goldman Sachs, AIG, TC Group (which indirectly owns and controls the general partner of Carlyle Partners IV and indirectly holds a joint venture interest in the general partner of Carlyle/Riverstone III), and Riverstone Holdings (which is affiliated with the general partner that controls Carlyle/Riverstone III). (Id. at 7.) Joint Applicants do not seek an exemption from Section 854, acknowledging "that any future acquisition of shares of a California utility that constitutes a change of control in such utility would require the prior approval of the Commission ..." (Ibid.)
5.2. Discussion
The Scoping Memo identifies the following issues as central to determination of the Section 852 Application:
· If the Commission were to grant the Section 852 exemption, how might it define "control" for purposes of future transactions, given the lack of a bright line definition in prior Commission decisions? Should an exemption be conditioned upon some kind of notice or report to the Commission if exempted transactions occur?
· Should a Section 852 exemption be granted to a financial institution which already holds a controlling interest in another California utility or which is an affiliate of an entity with a controlling interest?
As Section 852 Applicants concede, the Commission has not adopted a definition of control for the purposes of Section 852 (or for Section 854, which uses identical language - "holding a controlling interest in"), but has relied upon a fact specific, case-by-case analysis. While many Commission decisions focus upon whether an entity, directly or indirectly, possesses the power to direct or cause the direction of the management and policies of a corporation, or has the ability to exercise control, other cases focus on evidence of working or actual control.28
Joint Application of San Jose Water and SJW Corp. (see footnote 28) evidences the Commission's awareness and concern that repeated purchases of non-controlling acquisitions of stock, made under authority of Section 852, over time may give rise to a controlling interest. The Commission conditioned its Section 852 approval in that decision as follows:
While we accept SJW Corp.'s statement that should its ownership interest in CWS ever approach control, it will abide by PU Code § 854 before acquiring additional shares, we believe it prudent to limit our present authorization to SJW Corp. to participate in the CWS Dividend Reinvestment Plan to a period of five years, after which we would consider, after opportunity to review the CWS shareholder makeup and the "control" issue at that time, an extension. (1994 Cal PUC LEXIS 43 *8.)
Prior to the 1989 amendment that gave rise to existing law, Section 852 applied only to stock acquisitions by a public utility -- not its holding company, subsidiaries or affiliates. Though no party discusses the legislative history, our own research reveals that existing law arose out of events underlying the then-pending merger of SDG&E and Southern California Edison Company (SCE). SCE's holding company parent, known at that time as SCE Corp., and certain officers of the holding company had acquired stock in SDG&E in order to launch a proxy fight over the previously announced merger of SDG&E and Tucson Electric Company. SCE Corp. and its officers claimed that no Commission approval was needed, since none of them were public utilities. The Commission's Enrolled Bill Report urges the governor to sign Senate Bill (SB) 53, which the Legislature passed in 1989 in order to amend Section 852. The Enrolled Bill Reports states:
It is obviously important, given recent experiences for the PUC to have the statutory ability to deal with non-utility purchases of a public utility's stock which seek to endanger that utility's financial health or quality of service. SB 53 expands the reach of Sec. 852 of the Pubic Utilities Code to cover any capital stock acquisition by a public utility's subsidiary, affiliate or holding company. Not only is this a desirable revision for protecting against predatory behavior by these affiliate entities, but it also imposes a prohibition against stock purchases which may be entirely benign - such as long-term purchase of public utility stock for the pension fund of the holding company of a different public utility.
....
In response to the concern, the author amended the bill to allow the PUC to establish categories of minor stock acquisitions which would be exempted from the PUC approval requirement. (Enrolled Bill Report, August 29, 1989, Wes Franklin to Governor's Office, emphasis in original.)
Working with DRA, Section 852 Applicants have moved away from their initial request for an absolute, unconditioned exemption from Section 852. These parties have attempted to fashion a workable means of permitting at least some of the financial institutions and their affiliates to continue to make benign, passive stock acquisitions and still provide the Commission with a means to monitor potentially significant changes in market ownership. Their proposal is not complete, since it only covers Goldman Sachs and AIG; they were unable to reach agreement as to Carlyle/Riverstone III and Carlyle Partners IV. As summarized above at footnote 8, Carlyle/Riverstone III and its affiliated fund, Carlyle/Riverstone II, own 80% of Wild Goose by authority of D.06-11-019. Their affiliate Carlyle Partners IV has no ownership in Wild Goose.
Before addressing whether an exemption should extend to the Carlyle entities, we first examine the components of the agreement, entitled "Section 852 Exemption Terms," presented to us by Section 852 Applicants and DRA and made Attachment 4 to today's decision. The agreement provides for an exemption for all "Covered Entities." The parties agree that this term should be defined to mean Goldman Sachs and AIG (Section 852 Applicants argue the definition also should include Carlyle/Riverstone III and Carlyle Partners IV) and to all entities: (1) these financial institutions control; (2) which control them; (3) which together they control; and (4) those with which they are under joint control. The agreement requires a list of all Covered Entities to be produced to the Commission, requires the list to be updated semi-annually, requires an officer to verify accuracy, and recognizes the authority of the Commission (including DRA) to conduct discovery to verify the list. The agreement also provides for a semi-annual report to the Commission's Energy Division and to DRA of "Reportable Holdings," defined to mean those which "include a 5% or greater voting stake in any California public utility or its holding company in the Energy Sector, and, if reportable, must specify the percentage and name of the California utility or its holding company." Finally, the agreement recognizes the right of the Commission to modify the exemption after notice and an opportunity for hearing.
This final provision and some of the discovery provisions essentially restate existing law or established Commission practice. Given the sophistication of the parties involved, we interpret these statements as acknowledgment of the same and do not interpret them to suggest that new territory has been charted. The other provisions, however, indicate a thoughtful effort to resolve a difficult subject in a way that reasonably balances private and public interests by means of carefully-fashioned regulatory safeguards.
In particular, we note that "Reportable Interests" for each financial institution and its applicable affiliates must be disclosed both as an aggregate amount and as the separate contributions of each Covered Entity toward the aggregate. Likewise, the 5% voting stake threshold appears to be set low enough to capture potentially meaningful participation levels.29 We are mindful that creative use of business organization forms (such as master limited partnerships and limited liability companies) can maximize voting power to place effective control in the hands of those with comparatively small stock holdings. As we have seen already, KMI has effective control over SFPP and Calnev though its equity ownership is only 15%.
This issue obliges us to comment on the reliance Joint Applicants' reply brief places upon language in D.06-11-019, the recent Wild Goose decision, that discusses the Section 852 exemption requested and authorized in that proceeding. Aware that Carlyle/Riverstone III and Carlyle Partners IV intended to participate in the Section 854 Application at issue here, the Wild Goose Joint Applicants recognized that if the Commission authorized Carlyle/Riverstone II and Carlyle/Riverstone III to acquire Wild Goose, then Carlyle/Riverstone III and Carlyle Partners IV immediately would become subject to Section 852. Therefore, the Wild Goose Joint Applicants asked for a narrow, transaction-specific exemption under Section 852 so that these entities would not have to seek approval to participate in the Knight Holdco deal. In referring to Carlyle/Riverstone III and Carlyle Partners IV, D.06-11-019 states:
... 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
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. (D.06-11-019 at 24-25 and footnote 20.)30
The related Finding 17, in relevant part states: "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. (Id. at 31.)
We now question this finding. While it may be technically accurate, it appears to rely upon a simplistic and perhaps inaccurate assessment of the means by which control actually is exercised over the pipeline utilities. As the record in this consolidated docket clearly shows, KMI's effective control at present is attributable to its general partner interest (KMGPI), not its equity ownership. Thus, D.06-11-019's focus on further apportioning the proportional equity interests of Carlyle/Riverstone III and Carlyle Partners IV in Knight Holdco/KMI into the resulting equity interests in SFPP and Calnev appears to be misplaced. We will have an opportunity to examine whether we should correct this finding when we decide the pending Petition to Modify D.06-11-019 filed March 2, 2007 by the Wild Goose Joint Applicants, which asks us to revise reporting conditions ordered in that decision. In a companion filing on the same date, Petition to Modify D.02-07-036, the Wild Goose Joint Applicants seek revision of reporting conditions ordered in the decision authorizing Wild Goose to expand its storage facilities.
Because some of the reporting requirements ordered by D.02-07-036 and D.06-11-019 affect Carlyle/Riverstone III and Carlyle Partners IV and their affiliates, the petitions to modify these decisions also overlap substantively with the Section 852 Application's exemption request. Specifically, to the extent that the reporting requirements ordered by D.02-07-036 and D.06-11-019 encompass non-controlling stock acquisitions by Carlyle/Riverstone III and Carlyle Partners IV (and their affiliates) in California utilities, granting them a Section 852 exemption in whole or in part would effectively modify D.02-07-036 and D.06-11-019. For example, as one of the reasons they seek modification of D.02-07-036, Wild Goose Joint Applicants argue that the decision's Ordering Paragraph 3 "could be interpreted to mean that its reporting requirements extend to non-controlling, passive investments ..." (March 2, 2007 Petition at 8.) D.06-11-019 requires the continued application of the reporting requirements ordered by D.02-07-036, and orders some additional ones.
Since the petitions were not served on the service list for A.06-09-016 et al. and since the Section 852 Application was not served on the service lists for the petitions, notice is defective. Section 1708 requires notice and opportunity to be heard before the Commission may modify a prior decision.31 DRA makes this point in its reply brief.
The procedural deficiency leaves us with two courses of action now. We could delay the issuance of today's decision, take action to accomplish effective notice, and then resolve the Section 852 and related reporting issues for the Carlyle entities in this docket, ideally with concurrent resolution of the two petitions in a separate decision or decisions. However, we are mindful that Joint Applicants repeatedly have asked us to resolve this consolidated docket (A.06-09-016 et al.) as quickly as practicable so as to end market uncertainty about the transfer of control. Therefore, we think the preferable course, which we follow today, is to issue an interim decision in A.06-09-016 et al. on all issues except the request for a Section 852 exemption for Carlyle/Riverstone III, Carlyle Partners IV and associated Carlyle entities. We defer this issue to a subsequent decision, which we expect to issue concurrently with a decision or decisions on the petitions. Since the same ALJ is assigned to all, coordination is assured.
With respect to Goldman Sachs and AIG, however, we find that the agreement between Section 852 Applicants and DRA provides reasonable terms for an exemption from Section 852, and thus, is not adverse to the public interest. We grant the exemption as set forth in the Ordering Paragraphs. Section 852 Applicants state that they are aware that no exemption can alter their statutory obligation to gain the Commission's approval under Section 854 before acquiring direct or indirect control of a California utility. We expect Goldman Sachs and AIG to comply. We emphasize that concerted action between Goldman Sachs and AIG, between either of them and Carlye/Riverstone III, or between either of them and Carlyle Partners IV, that effectively results in a change of control over SFPP, Calnev or any other California public utility not only risks this Section 852 exemption but is void under Section 854.
27 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 ... (Section 852, Emphasis added.)
28 See respectively, Gale v. Teel, D.87478, 81 CPUC 817, 1977 Cal. PUC LEXIS 152 [definition of control in Corp. Code 160(a) instructive for purposes of Section 854 and given facts, warranted voiding acquisition of 50% of stock in a public utility organized as a closely-held corporation by purchaser who failed to obtain Commission approval prior to purchase - power to cause direction of management and policies evidenced by purchaser's actions in ceasing utility operations, placing utility in receivership, and seeking dissolution]; Application of Wild Goose Storage, D.03-06-069, 1994 Cal. PUC LEXIS 43 [Commission fined EnCana for acquiring Wild Goose at the holding company level without first seeking Commission authority, finding that EnCana had the ability to control Wild Goose and intermediaries in the corporate structure and rejecting Wild Goose's contention that absent a change of intermediary management, no change of control had occurred]; Joint Application of San Jose Water and SJW Corp., D.94-01-025, 1994 Cal. PUC LEXIS 43, [actual or working control determinative and thus San Jose Water's holding company parent, SJW, which already owned a 9.75% interest in California Water Service (CWS), authorized to purchase additional shares to avoid dilution of that non-controlling ownership interest, but authorization limited to five years to ensure no change of control under Section 854.]
29 Five percent is the threshold for the definition of "affiliate" in the most recent Affiliate Transaction Rules, referenced in section 3 of today's decision, and in the earlier version (still applicable to smaller California electric and natural gas utilities) adopted by D.97-12-088, 1997 Cal. PUC LEXIS 1139, as modified by D.98-08-035, 1998 Cal. PUC LEXIS 594. Though the transactional and reporting Rules do not apply to SFPP or Calnev, the definition there merits mention since the objective of both frameworks is a common one - meaningful compliance.
30 According to the evidence before us in A.06-09-016 et al., the interests of Carlyle/Riverstone III and Carlyle Partners IV in Knight Holdco has been reduced from 12.5% each to 11.11% each.
31 Section 1708 provides in relevant part: "The commission may at any time, upon notice to the parties, and with opportunity to be heard as provided in the case of complaints, rescind, alter, or amend any order or decision made by it."
