9. Assignment of Proceeding
Michael R. Peevey is the assigned Commissioner and Jean Vieth is the presiding officer and assigned ALJ in this proceeding.
1. The jurisdictional portions of SFPP and Calnev are public utility pipelines which serve as common carriers of refined petroleum products, such as gasoline, diesel fuel, and jet fuel.
2. The Section 854 Application requests Commission approval of a transfer of control over Calnev from KMI to Knight Holdco; KMI, not KMEP, is the applicant.
3. There is no evidence that the A.00-12-004 proponents intended to mislead the Commission about the relationship between KMI and KMEP nor that any harm has befallen the public interest as a result of the failure to expressly seek authorization in A.00-12-004 for the transfer of Calnev to KMI, as well as to KMEP.
4. KMI owns a minority equity interest, approximately 15.2%, in KMEP and in addition, the general partner interest of KMEP. KMI exercises control over KMEP, however, through its ownership of the general partner interest and through its ownership of all of the voting shares of KMR, to which KMEP's general partner, KMGPI, has delegated the authority to manage the business and affairs of KMEP (subject to certain approval rights of KMGPI). Because the general partner of KMEP and its delegate are controlled by KMI, KMI effectively maintains indirect control of SFPP and Calnev through its indirect control of KMEP.
5. Knight Holdco is a private limited liability company formed under Delaware law. Upon the closing of the proposed management buy-out of KMI, Knight Holdco will be owned by the investors: KMI Management Group - 36.63%; Goldman Sachs -25.14%; AIG - 16.02%; Carlyle Partners IV - 11.11%; and Carlyle/Riverstone III - 11.11%.
6. Goldman Sachs, AIG, Carlyle Partners IV and Carlyle/Riverstone III are investment banks, diversified financial services providers, or private equity funds engaged in a broad range of financial activities that may involve acquiring securities in the ordinary course of their business.
7. Carlyle/Riverstone III, together with an affiliate, Carlyle/Riverstone II, and SemGroup (in which they have an interest), have an 80% ownership interest and control over Wild Goose Storage. Carlyle Partners IV has no ownership interest in Wild Goose Storage.
8. The proposed acquisition of KMI would result in the transfer of KMI from public to private ownership and the transfer of direct and indirect control to Knight Holdco, of all of KMI's subsidiaries and business interests, including SFPP and Calnev.
9. Ex. 11, the December 11, 2006 commitment letter by which Goldman Sachs and other lenders (Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Wachovia Capital Markets, LLC and Merrill Lynch Capital Corporation) agree to provide $17.2 billion of the necessary financing for the management buy out, includes a statement of the rationale for the transaction.
10. Knight Holdco will have an 11-member Board of Managers. Richard Kinder will be entitled to designate four members and the four financial institutions will be entitled to six, with Knight Holdco's Chief Executive Officer (Kinder) serving as the eleventh member. Thus, Kinder will control five of the eleven members of the Board of Managers, at least initially. The "expected allocation" of the other six seats is: Goldman Sachs - 2, AIG - 2, Carlyle Partners IV - 1, and Carlyle/Riverstone III - 1.
11. Richard Kinder will not only be Knight Holdco's CEO, but also Chief Manager of the Board of Managers. He can be removed as Chief Manager for cause or for failure to meet the business plan's financial performance targets by at least 90%. The targets for each of the five years from 2006 (approximately $1.1 billion) to 2010 (approximately $2.0 billion), increase by roughly $200 million from year-to-year, nearly doubling from 2006 to 2010.
12. The boards of directors of KMEP, KMGPI and KMR are identical -- each board consists of the same five individuals; Kinder needs the vote of only one of the "outside" directors for a majority.
13. KMI projections of pipeline revenue increases of 4% to 4½% per year cannot be obtained through an increase in volumes alone.
14. If shippers do not agree in advance to a KMEP-specified rate increase on the proposed expansion between Colton and Las Vegas as a condition of construction, KMEP may oppose building it.
15. KMEP's partnership agreement requires that it distribute 100% of "Available Cash," as defined in the partnership agreement, to its partners within 45 days following the end of each calendar quarter in accordance with their respective percentage interests.
16. KMEP pays out more cash than it earns in income, partially funding distributions by "regularly" borrowing money; no actual reserves have been established for potential pipeline rate refunds. The cash flow from SFPP and Calnev (about $250 million annually) constitutes a substantial portion of the cash distributed to KMEP. KMI received approximately 42% of all quarterly cash distributions in 2005 in its role as general partner and 9% in its role as a limited partner, for a total of 51%.
17. Both Standard & Poor's and Fitch have downgraded KMI's ratings to B+ and KMEP's ratings to BBB. Moody's has announced it also is likely to issue downgrades.
18. In response to the credit agencies' concern about increased bankruptcy risk, KMEP plans to create an independent investor in KMGPI (that is, an investor with no interest in Knight Holdco). The sole power of this new general partner interest will be to hold veto power over any determination to place KMEP and its subsidiaries, including SFPP and Calnev, into bankruptcy. The position has not been established yet, nor has it been determined what percentage of the general partner interest will be sold, nor what the price will be, though the "expectation" is that the interest will sell for "$100 million." Joint Applicants represent that both the KMGPI Articles of Incorporation and the Bylaws will be amended to create this new general partner interest.
19. The record does not establish that Knight Holdco and its investors cannot influence the management and operations of KMEP's subsidiaries, including the bankrupting of them. The notion that KMI would wish to force the pipeline utilities into bankruptcy to escape rate refund liability and therefore forgo $250 million or more in annual revenues does not appear logical, but unanticipated future liabilities, such as those attributable to environmental disasters, could make recourse to bankruptcy a preferred economic option.
20. Joint Applicants have not explained persuasively how a new minority interest in KMGPI will effectively prevent the bankruptcy of SFPP or Calnev.
21. The Knight Holdco Limited Liability Company Agreement is an unexecuted document that will not be executed until the transaction has been fully approved.
22. SFPP and Calnev are the primary common carriers of refined petroleum products in California. Several private pipelines also exist, and transportation by ship/barge along the coast and by truck elsewhere provides some limited competition for SFPP and Calnev.
23. The KMI business organization is complex and not wholly transparent; these problems will increase post-transaction, with a private Knight Holdco at the head.
24. The KMI business organization is heavily debt laden at present and will carry increased debt post-transaction.
25. The record is unclear about the respective, legally binding powers of KMGPI and KMR, among others.
26. Because of the high reliance upon regular cash infusions from the pipeline utilities, impetus exists at every level within the KMI organization to maximize the distributions from SFPP and Calnev and send them upward. Post-transaction no change is contemplated.
27. SFPP and Calnev should each file a general rate application for test year 2009 to ensure realization of Section 854 Applicants' commitment not to pass any costs associated with the proposed transaction into future rates on SFPP or Calnev. Beginning with the filing by SFPP and Calnev of every FERC Form 6 filed after the effective date of today's decision, the utilities should submit to this Commission and make part of every rate change application filed here, a public document that discloses, in a format substantively equivalent to Page 700 of FERC Form 6, cost of service, volume, and revenue data for the California intrastate market.
28. Section 854 Applicants concede the Commission's jurisdiction to demand the production of such documents that we consider cognate and germane to our regulation of the pipelines, whether these documents are held at the pipeline or holding company level and our jurisdiction to order production to shippers.
29. The Commission also requires access to the books and records of Kinder Morgan Pipeline, OLP-D, KMEP, KMGPI, KMR, Kinder Morgan (Delaware), and KMI - entities which now hold - and will continue to hold - various degrees of authority over either the management and operation of the pipelines or the dispersal upward in the organization of the substantial revenues they generate. The Commission also requires access to officers and employees of Kinder Morgan Pipeline, OLP-D, KMEP, KMGPI, KMR, Kinder Morgan (Delaware), KMI, and Knight Holdco to testify concerning SFPP or Calnev, whether in Commission proceedings or otherwise.
30. Section 854 Applicants have not fully rebutted Shipper's claims that SFPP's borrowing capacity will be insufficient to enable it to discharge all near-term liability, including intrastate and interstate rate refunds.
31. Funding past overcharges by a credit on future rates is not a sound method for paying rate refunds, if any are ordered. Not only might such refunds fail to reach those Shippers due them, but use of this method potentially could reduce the monies available for ongoing maintenance and safety.
32. In order to ensure compliance with a future Commission order in C.97-04-024 et al. for intrastate rate refunds, if any, SFPP and its owners should obtain a letter of credit for $100 million from a national bank. The letter of credit should be designed, in form and in substance, to convey the direct obligation of the bank to any Shippers entitled to refunds, notwithstanding the insolvency or credit risk of the entity or entities legally responsible for repayment of the letter of credit. No costs associated with the letter of credit should be recovered in future rates charged to pipeline customers.
33. It is reasonable to require the Knight Holdco Board of Managers and the Boards of Directors or the equivalent authority of KMI, Kinder Morgan (Delaware), KMGPI, KMR, KMEP, OLP-D, and Kinder Morgan Pipeline to acknowledge the conditions upon our authorization of the transfer of control. The transaction by which KMI will be taken private is significant and warrants this formality.
34. The conditions we impose on the transfer of control are designed to ensure the Commission's ongoing ability to discharge its jurisdictional obligations to monitor the continued ability of SFPP and Calnev to meet their obligation to serve through reasonable rates, terms and conditions of service and to operate in an environmentally safe manner in this state. Absent these conditions, we cannot find that the proposed transfer of control is not adverse to the public interest.
35. The Barstow extension is not a reasonably foreseeable impact of approval of the Section 854 Application, but at this time remains a speculative future undertaking. All review required under CEQA will occur in conjunction with future applications for all permits necessary to undertake the intrastate portion of such construction.
36. It can be seen with reasonable certainty that the change of indirect control over SFPP and Calnev will not have a significant effect on the environment. This is the independent judgment of the Commission.
37. In developing Attachment 4 to today's decision, DRA and Section 852 Applicants have worked to fashion a workable means of permitting 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.
38. We should reexamine the need to correct or clarify Finding 17 and associated text in D.06-11-019 when we address the pending petition to modify that decision.
39. 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.
40. As the petitions to modify D.02-07-036 and D.06-11-019 were not served on the service list for A.06-09-016 et al. and the Section 852 Application was not served on the service lists for the petitions, notice is defective.
1. D.01-03-074, the last change of control decision concerning Calnev, authorizes only KMEP to acquire Calnev.
2. Under the circumstances here, Joint Applicants should file a petition to modify D.01-03-074, to request clarification and correction of D.01-03-074 to extend the transfer of control of Calnev to KMI, in addition to KMEP.
3. The Commission has broad general and remedial regulatory authority under Sections 701 and 761 to do all things cognate and germane to its regulation of the public utilities subject to its jurisdiction. The conditions ordered in today's decision fall within that mandate.
4. Sections 816 et seq. (Article 5 "Stocks and Security Transactions) and in some instances, Section 851, prohibit a utility from incurring any indebtedness for utility purposes except as authorized therein.
5. If conditioned as described herein, the change of control over SFPP and Calnev may be approved under Section 854(a).
6. An exemption from the requirements of Section 852, limited by the terms of Attachment 4 to today's decision, should be granted to Goldman Sachs and AIG.
7. Section 1708 requires notice and opportunity to be heard before the Commission may modify a prior decision.
8. Determination of whether to grant any Section 852 exemption to Carlyle/Riverstone III and Carlyle Partners IV should be deferred.
9. The Section 854 Application is not a project pursuant to Pub. Resources Code § 21065, and furthermore, assuming arguendo that the proposed project is a project under CEQA, the proposed project qualifies for an exemption from CEQA pursuant to § 15061(b)(3) of the CEQA guidelines.
10. Before any further, future transfer of control of SFPP or Calnev may occur, the Commission must review and approve the transfer proposal under Section 854.
11. The following motions are moot and should be denied: January 30, 2007 Motion to the Commission for Immediate Issuance of Interim Order Authorizing Transfer of Control and Related Section 852 Exemption (filed by Joint Applicants); February 2, 2007 Conditional Motion to Grant Transfer by KMI on or Before March 1, 2007 with Appropriate Conditions Accepted by Applicants, Owners and All Affiliates (filed by Indicated Shippers); February 22, 2007 Motion of the Consumer Federation of California to Dismiss the Application of the Goldman Sachs Group, Inc., American International Group, Inc., Carlyle Partners IV, L.P., and Carlyle/Riverstone Global Energy and Power Fund III; and May 18, 2007 Motion of Indicated Shippers to Reopen the Record.
12. The following motions should be granted: Motion of the Goldman Sachs Group, Inc., American International Group, Inc., Carlyle Partners IV, L.P., Carlyle/Riverstone Global Energy and Power Fund III, L.P. to Place Knight HoldCo Ownership Information into the Record and for the Commission to take Judicial Notice of the SEC Filing Containing this Information, filed February 20, 2007; and Motion of Indicated Shippers to Reopen the Record, filed April 17, 2007.
13. This order should be effective immediately so that Joint Applicants may determine whether to proceed with the transaction.
IT IS ORDERED that:
1. The transfer of control over SFPP, L.P (SFPP) and Calnev Pipe Line LLC (Calnev) under Public Utilities Code Section 854 from Kinder Morgan Inc. (KMI) to Knight Holdco, LLC (Knight Holdco) is approved, subject to full compliance with the conditions contained in Ordering Paragraphs 2-15, inclusive. Conditions contained in Ordering Paragraphs 2, 10, 12, 14, and 15 must be satisfied prior to consummating the transfer of control.
2. KMI and Kinder Morgan Energy Partners, L.P. (KMEP) shall file, within 45 days of the effective date of this decision, a petition to modify Decision (D.) 01-03-074 that requests clarification and correction of D.01-03-074 to extend the transfer of control over Calnev to not only KMEP, as ordered therein, but also to KMI.
3. Within 12 months of the effective date of today's decision, SFPP and Calnev shall each file a test year 2009 general rate application with this Commission. The rate case applications shall request no recovery in utility rates for any cost (including any increase in the cost of KMEP's debt) associated with the transfer of control from KMI to Knight Holdco and shall document that no pass through has occurred or will occur in the future. Concurrently with the filing by SFPP and Calnev of every Federal Energy Regulatory Commission (FERC) Form 6 filed after the effective date of today's decision, SFPP and Calnev shall submit to the Director of the Commission's Energy Division a public document that discloses, in a format equivalent to Page 700 of FERC Form 6, cost of service, volume, and revenue data for the California intrastate market. The most current version of this document shall be included as a part of any rate change application filed with this Commission thereafter.
4. SFPP and Calnev each shall maintain books and records in accordance with the Uniform System of Accounts and Generally Accepted Accounting Principles.
5. Knight Holdco, KMI, Kinder Morgan (Delaware), Inc. (Kinder Morgan (Delaware)), Kinder Morgan G.P., Inc. (KMGPI), Kinder Morgan Management, LLC (KMR), KMEP, Operating L.P. "D" (OLP-D), and Kinder Morgan Pipeline LLC (Kinder Morgan Pipeline), including the successor of any of them, and any other intermediate entity, each shall maintain separate books and records.
6. Neither SFPP nor Calnev shall incur any indebtedness for utility purposes except as authorized by and in full compliance with Sections 816 et seq. (Article 5 "Stocks and Security Transactions) and as required, Section 851. Neither SFPP nor Calnev shall guarantee the notes, debentures or other obligations of any other entity (whether in the Knight Holdco business enterprise or otherwise) by pledge of assets or any other means, without first having obtained Commission authorization to do so.
7. If at some time post-acquisition by Knight Holdco, KMI (or any successor) no longer holds any publicly traded debt and therefore ceases to file 10-Q and 10-K reports with the United States Securities and Exchange Commission, Knight HoldCo (or any successor) shall submit annually to the Director of the Commission's Energy Division a report which provides a comprehensive overview of KMI (or any successor) for the past year and constitutes the substantive equivalent of Item 7 (Management's Discussion and Analysis of Financial Conditions and Results of Operations) and Item 8 (Financial Statements and Supplementary Data) of the 10-K report filed by KMI for the fiscal year ending December 31, 2006. The report shall be submitted within 90 days of the close of each calendar year in which no 10-K is filed. The report may be submitted under Public Utilities Code Section 583.
8. Knight Holdco (or any successor) shall submit a report to the Director of the Commission's Energy Division if the proportion of ownership in Knight Holdco (or its successor) held by the following investors (or their successors) changes from the proportion reported to the Commission in this proceeding: Goldman Sachs - 25.14%; AIG - 16.02%; Carlyle/Riverstone III - 11.11%; and Carlyle Partners IV - 11.11%. If any additional persons or entities obtain ownership interests in Knight Holdco (or any successor), the report also shall include the name of each, the proportional interest acquired, and identifying information (e.g., business form, address of principal place of business; other contact information, description of business purpose and other holdings.) The report shall be submitted within 10 calendar days of the effective date of the change in ownership.
9. Knight Holdco (or any successor) shall submit to the Director of the Commission's Energy Division true and correct copies of the following documents within 10 calendar days of their execution or other authorization: (a) the final, post-transfer version of the Knight Holdco Limited Liability Company Agreement; and (b) the final, post-transfer version of KMGPI's Articles of Incorporation and Bylaws and the final, post-transfer version of any partnership agreement, limited liability agreement, or other document that constitutes a governing agreement, which provides for creation of a new interest in KMGPI, the general partner of KMEP, with power to veto placing KMEP and its subsidiaries, including SFPP and Calnev, into bankruptcy.
10. Knight Holdco shall submit to the Director of the Commission's Energy Division a report identifying and describing the auditable procedures put in place which effectively establish a firewall between SFPP and Calnev and any of the financial institution investors in Knight Holdco, including affiliates of the financial institutions, for the purpose of preventing affiliate abuses involving crude and refined product commodity trading operations. The report shall be submitted within 90 days of the effective date of today's decision and shall be supplemented upon revision of the auditable procedures.
11. The capital requirements of SFPP and Calnev, as determined by the Commission to be necessary and prudent to meet the obligation to serve or to operate each utility in a prudent and efficient manner, shall be given first priority by Kinder Morgan Pipeline, OLP-D, KMEP, KMGPI, KMR, Kinder Morgan (Delaware), KMI, Knight Holdco, and any successors of any of them, as well as any other intermediate entity, and by any Boards of Directors or other persons or entities now empowered or empowered after the effective date of this decision to own or exercise effective control over any of them.
12. Within 90 days of the effective date of today's decision, SFPP and Calnev shall obtain and submit to the Director of the Commission's Energy Division a non-consolidation opinion that demonstrates that the ring-fencing around SFPP and Calnev is sufficient to prevent either utility, at the time the non-consolidation opinion issues, from being pulled into the bankruptcy of Knight Holdco, KMI, Kinder Morgan (Delaware), KMGPI, KMR, KMEP, OLP-D, or Kinder Morgan Pipeline, or the successor of any of them, or any other intermediate entity. Concurrently with the effective date of any structural change in business form and organization above the utility tier, SFPP and Calnev shall obtain and submit to the Director of the Commission's Energy Division a further non-consolidation opinion that demonstrates that the ring fencing around SFPP and Calnev is sufficient to prevent either utility from being pulled into the bankruptcy of any entity above them in the business organization.
13. The books and records of Knight Holdco, KMI, Kinder Morgan (Delaware), KMGPI, KMR, KMEP, OLP-D, and Kinder Morgan Pipeline (including the successor of any of them), and any other intermediate entity, shall be made available to the Commission within the State of California upon request by the Commission, its employees or its agents. Requests for production made by the Commission's employees or agents shall be deemed presumptively valid, material and relevant. Any objections to such requests shall be timely raised before the administrative law judge or assigned commissioner to the proceeding in which such objections arise or before another administrative law judge or commissioner if the request is made outside of any pending proceeding. The party making such an objection shall demonstrate that the request is neither reasonably related to any issue within the Commission's jurisdiction nor reasonably calculated to result in the discovery of such material. The officers and employees of Knight Holdco, KMI, Kinder Morgan (Delaware), KMGPI, KMR, KMEP, OLP-D, and Kinder Morgan Pipeline (including the successor of any of them), and any other intermediate entity, shall be available to appear and testify in Commission proceedings concerning SFPP or Calnev as necessary or required.
14. Within 60 days of the effective date of today's decision, SFPP shall submit to the Director of the Commission's Energy Division and shall file as a "late-filed exhibit" in C.97-04-024 et al. a letter of credit from a national bank sufficient to pay potential California jurisdictional rate refunds of $100 million. The letter of credit shall be designed, in form and in substance, to convey the direct obligation of the bank to any Shippers entitled to refunds, notwithstanding the insolvency or credit risk of the entity or entities legally responsible for repayment of the letter of credit. No costs associated with the letter of credit shall be recovered in future rates charged to pipeline customers.
15. Knight Holdco, KMI, Kinder Morgan (Delaware), KMGPI, KMR, KMEP, OLP-D, Kinder Morgan Pipeline, and any other currently existing intermediate entity whereby KMI exercises effective control over SFPP and/or Calnev, shall each submit a written notice to the Director of the Commission's Energy Division of their agreement, evidenced by a duly authenticated resolution of their respective Boards of Directors, Board of Managers, or the equivalent authority, to the conditions in Ordering Paragraphs 2 through 14, inclusive.
16. The Commission need perform no further environmental review under the California Environmental Act (CEQA) and CEQA Guidelines § 1506(b)(3).
17. The following motions are moot and should be denied: January 30, 2007 Motion to the Commission for Immediate Issuance of Interim Order Authorizing Transfer of Control and Related Section 852 Exemption (filed by Joint Applicants); February 2, 2007 Conditional Motion to Grant Transfer by KMI on or Before March 1, 2007 with Appropriate Conditions Accepted by Applicants, Owners and All Affiliate (filed by Indicated Shippers); February 22, 2007 Motion of the Consumer Federation of California to Dismiss the Application of the Goldman Sachs Group, Inc., American International Group, Inc., Carlyle Partners IV, L.P., and Carlyle/Riverstone Global Energy and Power Fund III; and May 18, 2007 Motion of Indicated Shippers to Reopen the Record.
18. The following motions are granted: Motion of the Goldman Sachs Group, Inc., American International Group, Inc., Carlyle Partners IV, L.P., Carlyle/Riverstone Global Energy and Power Fund III, L.P. to Place Knight HoldCo Ownership Information into the Record and for the Commission to take Judicial Notice of the SEC Filing Containing this Information, filed February 20, 2007; and Motion of Indicated Shippers to Reopen the Record, filed April 17, 2007.
19. Application 06-09-021 is granted, in part, to authorize an exemption from Public Utilities Code Section 852 for Goldman Sachs and American International Group, Inc., subject to all the conditions specified in the agreement entitled "Section 852 Exemptions" appended to this decision as Attachment 4.
20. No transfer of control of SFPP or Calnev or any other California public utility subject to the regulatory jurisdiction of the California Public Utilities Commission shall occur without approval of the Commission under Public Utilities Code Section 854.
21. Determination of whether to extend any exemption from Public Utilities Code Section 852 to Carlyle Partners IV and Carlyle/Riverstone Global Energy and Power Fund III is deferred to a subsequent decision.
22. The authority granted by Ordering Paragraph 1 shall continue for one year from the effective date and if not exercised by that time, shall expire.
This order is effective today.
Dated May 24, 2007, at San Francisco, California.
MICHAEL R. PEEVEY
President
DIAN M. GRUENEICH
JOHN A. BOHN
RACHELLE B. CHONG
TIMOTHY ALAN SIMON
Commissioners
I will file a concurrence.
/s/ JOHN A. BOHN
Commissioner
Concurrence of Commissioner Bohn on
SFPP & Calnev Change of Control
The standard traditionally applied under Section 854(a), requires that the Commission find that the transaction proposed is not "adverse to the public interest." Applicants, therefore, have the burden of proof to show that the proposed transaction does not adversely affect the public interest. The Commission in its deliberations then weighs the evidence and comes to a determination. I am not convinced that applicants in this case met their required burden of proof. The lack of transparency on the part of applicants in this proceeding is troubling and I expect this to be rectified in future proceedings. However, I concur in this decision because of the conditions imposed on the applicants.
The assigned administrative law judge, Jean Vieth, has written the most responsible decision that she could, given the scope of this proceeding, the record evidence presented, and prior Commission decisions approving transfers of ownership of the two public utilities at issue here. I feel obliged, however, to add some cautionary comments relative to this Commission's responsibility to assure that utilities under our jurisdiction are managed in the public interest. Both the direct customers of these utilities and the broader public have an interest in the sound operation of the subject utilities.
I am concerned that this Commission has not met its obligation to ensure that SFPP and Calnev remain viable utilities and is not adequately monitoring the operating and financial upkeep of these pipelines. Our monitoring of these utilities has been minimal. We cannot tell from the record of this proceeding the state of the infrastructure, whether services have been reduced below acceptable standards, or whether these utilities have charged too much for the level of service provided. The existence of extensive refund claims in another proceeding is some evidence that there are, at least, service issues.
The Commission's seeming indifference to its regulation of SFPP and Calnev dates back to at least 1998. In D.98-01-0047, issued in January of 1998, the Commission approved Kinder Morgan Energy Partners' (KMEP) application pursuant to Public Utilities Code section 854 to acquire control of SFPP. In that decision the Commission performed what I perceive to be a cursory review of the application and approved it without conditions. The following year, in D.99-10-015, the Commission approved an application by KN Energy to acquire control of SFPP, again with little or no analysis as to how the transfer of ownership or the management thereof might affect the operations of the utility.
KMEP's acquisition of Calnev Pipeline Company was treated in the same cursory manner. In D.01-03-074 issued in March of 2001, the Commission approved Calnev's and KMEP's applications pursuant to sections 851 and 854 of the Public Utilities Code to change the ultimate corporate ownership of Calnev without examining whether the Commission should impose conditions to the transfer and how the transfer of ownership would affect the operations of Calnev.
This Commission is charged with the responsibility of fixing rates and terms of service for the intrastate portion of SFPP and Calnev. Therefore, we must be both cognizant of and sensitive to the way in which the operations of these utilities are conducted. Change of ownership, including taking the parent companies of the utilities private does not alter the duty of the owners and operators to serve the public, nor does it change this Commission's duty to regulate in the public interest. If there are insufficient earnings to provide for adequate safety, maintenance, or service at a reasonable price, or to remediate past inadequate performance, it is to this Commission that the utilities must come for permission to raise rates. Even though under the current structure, these utilities can raise rates within limits on their own motion, it should be clear to all parties that any such action remains subject to post facto reasonableness review.
For reasons shrouded in history, direct oversight of safety and maintenance of the intrastate aspects of oil pipelines has been assigned to the State Fire Marshall. Nevertheless, if there is a need for additional funding to meet maintenance or other operating requirements above that which is available from revenues, it is to this Commission that application must be made for relief. The Commission's concerns clearly extend to the financial integrity of SFPP and Calnev. If too much cash is upstreamed pursuant to contractual arrangements, then provision of adequate service at reasonable rates can negatively impacted. In the present case, we know that under current operations typically more cash is upstreamed from the utilities to the parent company than is earned from utility revenues, and that the difference between upstream obligations and revenues is made up from borrowing. It is reasonable to inquire if continuation of such a practice is in the public interest. We also know that the credit ratings of the parent companies of SFPP and Calnev have been downgraded as a result of this proposed transaction.
This decision leaves uncomfortable loopholes which may put SFPP and Calnev at risk. There is $7.3 billion in new debt to be incurred as a result of this transaction, in part, one might suspect, in reliance of the regularity of utility returns. There is almost $400 million in inter company debt on the books of SFPP, the nature of which is not clear from the record of this proceeding. Nor do we yet have final documents setting forth the agreements contemplated to effect this transaction, and we must rely on the assurances of the parties as to what they will contain. Again and again, the bland representation was made by applicants that no changes in operations will occur as a result of this change of ownership. Yet there are admittedly new and aggressive articulated requirements for growth on earnings that must come from somewhere, and even a question whether an additional investment alluded to in the record will be made.
In order to assure ourselves that we have exercised our responsibility to make certain that these utilities are operated in the public interest, we need to verify that this Commission can reach the parties responsible for the operations of these utilities. Though there may be tax, management, financing or other reasons for the complex management structure set forth here, we must not shy away from ensuring that the responsibility for operations of these utilities is fixed clearly on the appropriate parties who benefit from their operation and can responsibly respond to our regulation. Whether that obligation be direct or indirect, it must be clearly established that parties in charge of the operation and who benefit from its operations stand behind the utilities' duty to the public that they serve. Corporate convenience should not obscure regulatory responsibility.
After today's decision, we have, as Attachment 3 demonstrates, two regulated utilities with no employees. For Calnev, one has to travel up six layers of corporate structure to find an entity with any employees. For SFPP, there are a mere five layers of corporate structure between the utility and a holding company with any employees. And there are two additional layers of corporate structure before one reaches the parent company, Knight Holdco, LLC. Knight Holdco, in turn, is subject to the control of five groups of investors, Carlyle, AIG, Goldman Sachs, Carlyle/Riverstone and KMI Rollover Investors, some of whom buy and sell utility stock in the ordinary course of business. At the end of the day, however, it is clear that the complex ownership structure fixes control and direction of these utilities in the ownership group, Knight Holdco.
As a practical matter, I am concerned about how one regulates an entity with no employees and with the complex corporate structure that exists in this case. Who are we, the Commission, supposed to talk to in order to discuss issues regarding the operations and soundness of SFPP and Calnev? If "all available" cash generated by SFPP and Calnev flows upstream as directed by the parent entity, how do we ensure that the public interest in the integrity and sound operation, as well as safety and other public concerns, are met? How do we prevent the parent company from using the cash capabilities of the utility to finance its debt needs or the utilities overborrowing to meet contractual needs? It is this Commission's responsibility to monitor and examine closely these issues. We need to ensure that the pipelines are not corroding, that appropriate safety standards are being met, and that the assets of the utilities are not hollowed-out, and the utilities, perhaps, ultimately driven into bankruptcy.
We have addressed some of these issues in today's decision. Others will be addressed in the ongoing consolidated rate refund cases pending before this Commission. The 2009 test year general rate case application that SFPP and Calnev are ordered to file within one year of the issuance of today's decision should permit us to effectively examine the operations of these utilities and make additional regulatory adjustments, as necessary.
Pursuant to Public Utilities Code section 761, we have the authority to order remedial action. We have a duty to ensure that SFPP and Calnev remain viable public utilities, provide adequate services, and are not at risk of being driven into bankruptcy, either as a result of future actions or as a result of past neglect. The fact that direct oversight of safety and maintenance may rest, for whatever reason, with the State Fire Marshall should not obscure the fact that remedial action, if required, comes at a cost to the ratepayers and only as a result of this Commission's authority. For that reason we have an obligation to assure ourselves that we can ensure reasonable rates, terms, and environmentally sensitive conditions of service by these utilities.
Dated May 24, 2007, in San Francisco, California.
/s/ JOHN A. BOHN
Commissioner
