3. Discussion
This application requires the Commission to answer the question whether the proposed transaction should be authorized, based upon whether or not approval would be adverse to the public interest. It does not require us to choose between Buyer and TCPUD as the owner or operator from this point forward.
Ordinarily, the central issue in this type of proceeding requires the Commission to examine the technical and financial qualifications of the prospective buyer and assess any impact that the transaction would have on rates and service. In this instance, however, the inquiry is complicated by the fact that Buyer has actually owned and managed the system for more than 12 years, and that Seller is no longer legally in existence. Buyer has operated and maintained the system to a basic standard during this period, but has been slow to address service quality issues and fire suppression concerns. This has resulted in a strong desire on the part of many customers for TCPUD to acquire and operate LFWC as part of its contiguous water system, raising the collateral issue of Buyer's fitness to continue owning and operating LFWC, and the possibility of denying approval to restore the 1996 status quo.
Buyer purchased a system that, by all accounts, was inadequate and poorly maintained at the time of the transfer of ownership.12 Moreover, the recently adopted SWTR had imposed a costly new compliance requirement on Buyer that Seller did not address before the sale, which was acknowledged in the original contract of sale. Although Buyer has been slow to make major improvements since the 1996 transfer, the chronology of events following the transaction indicates that for at least the past ten years Buyer claims to have been exerting reasonable efforts to address the supply problem with available resources, maintain the system to a basic level of operability, and seek public funds to make the major changes that are needed. The principal obstacle to progress was the size of the system and the limited revenue that it produced, according to Buyer.
In recent months, Buyer has received a commitment from DPH for Proposition 50 grant funds that will pay for improvements to the supply system, and has obtained authority from the Commission to increase rates to a level that covers the cost of operating and maintaining the system. Its Facilities Plan describes specific plans for distribution system improvements, and also identifies funding sources and a method for proposing the three alternatives to customers to seek their input.13 These events are indications that substantial progress is being made toward achieving an adequate level of service under Buyer's current ownership.
Although the protestants' criticisms of the Facilities Plan may have some merit, we do not believe they indicate that the plan is invalid. For example, although Buyer's plans for developing a new groundwater source do not guarantee that the well will produce the quantity and quality of supply that are hoped for, Buyer has retained the services of a geotechnical engineer to locate a promising site, obtained preliminary assurances that the site can be acquired, and developed an approximate cost for each alternative to improve the distribution system. These are reasonable steps toward achieving appropriate improvements to eliminate the system's current inadequacies.
PWA and TCPUD contend that section 854, subdivision (d), requires us to consider reasonable options proposed by other parties, including denial of approval in order to facilitate acquisition of the system by TCPUD. But we are not confronted with this choice. If we disapprove the 12-year-old transfer, the transaction would remain void as a matter of law, and the system logically would have to be returned to an entity that is no longer in legal existence. Resolving the conundrum in this manner would serve nobody's interest.
Even if we were somehow empowered to elect between two competing proposals for addressing the system's deficiencies, there is no perfected plan before us for acquisition and improvement of the system by any other entity that we have any power to impose, so we need not reach that question. The only choice before us is whether to deny approval and try to unravel a sale that occurred more than twelve years ago, or to grant approval in order to dispel the cloud over the current status of ownership of the system. We conclude that the latter is by far the preferable course.
Although we do not condone the conduct of either party to this application that resulted in the unauthorized sale of the system and its operation for many years by an owner that was not approved by the Commission, clearing title to the system now is paramount to ensure that DPH will fulfill its Proposition 50 grant funding commitment, that financing will be available for improving the distribution system, and that the system may be acquired by any future owner (including TCPUD) without undue difficulty. Granting our approval today will
not in any way adversely affect future plans to transfer the system.14
The comments we have received from customers overwhelmingly indicate that Buyer has not been sufficiently responsive to customer complaints or maintenance problems during his tenure, and this suggests a need to exercise greater oversight until the planned system improvements are completed. As we recently held in a water company acquisition decision,15
Pursuant to [section] 854, the Commission has broad authority to approve and 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 [them]....
With planned improvements now underway, we believe that the inclusion of a periodic progress reporting requirement in our order, coupled with the availability of our enforcement powers, will provide the necessary level of discipline and oversight to ensure timely completion of the improvements.16 Accordingly, our order includes this reporting requirement to make Buyer accountable for carrying out the facilities improvement plans it has furnished to us in support of this application. If Buyer fails to comply with the reporting requirements, or to perform the actions necessary to accomplish its plans, the Commission can take corrective action under its regular procedures for
instituting investigations and issuing orders to show cause.17 (See e.g., Rule 5.1.)
3.1. Ratepayer Indifference
The Commission has historically required the sale of a small water company to satisfy a standard of ratepayer indifference. Under this standard, the sale of the utility should not have any net consequences that cause the ratepayer to prefer the seller to a buyer. For example, ratepayers should not be subject to increased rates or reduced service as a result of a change of ownership.
This application presents us with an unusual situation, because the sale actually occurred many years ago. Ratepayers cannot prefer Seller to Buyer, because Seller is no longer in existence. Service under the auspices of Buyer shows every indication that it will improve from this date forward, and the Commission recently adopted new rates that will be unaffected by our approval. Because approval will not result in increased rates or reduced service, we deem this transaction to be a matter of indifference to ratepayers.
12 For example, one long-time customer commented that the previous owner would plug a leak in a water main with a redwood dowel. (Tr. PPH, p. 50, lines 12-18.)
13 Fire suppression capacity would be improved to varying degrees under the three alternative plans. As previously mentioned, the situation is eased somewhat by the fact that LFWC's territory is completely surrounded by that of TCPUC, which has hydrants located around the periphery of LFWC's territory, providing some fire suppression capacity. Some additional coordination between LFWC, TCPUD, and local firefighting agencies may be required to integrate these facilities.
14 We note that LFWC already has a temporary interconnection with the TCPUD system, and TCPUD has already conducted a hydraulic analysis to determine that LFWC could be incorporated into it by establishing a permanent connection. We do not perceive that approving the long-past transfer will hinder potential efforts for TCPUD to integrate LFWC or acquire it in a subsequent transaction.
15 In the Matter of the Joint Application of California-American Water Company, etc., for an order Authorizing Apollo Acquisition Company to merge with and into American Water Works Company, Inc. resulting in a change of control for California-American Water Company, and for such related relief as may be necessary to effectuate such a transaction (2002) D.02-12-068, pages 11 - 12.
16 Our order provides that Buyer serve a copy of each progress report on every other party this proceeding, including DRA.
17 In extreme cases the Commission can cause a receiver to be appointed to operate a noncompliant system. Section 855 provides in part,
Whenever the commission determines, after notice and hearing, that any water ... system corporation is unable or unwilling to adequately serve its ratepayers ..., or is unresponsive to the rules and orders of the commission, the commission may petition the superior court for the county within which the corporation has its principal office or place of business for the appointment of a receiver to assume possession of its property and to operate the system upon such terms and conditions as the court shall prescribe.
