Comments on Proposed Decision
The proposed decision of Administrative Law Judge Bennett in this matter was mailed to the parties in accordance with Pub. Util. Code § 311(d) and Rule 77.1 of the Rules of Practice and Procedure. Comments were filed on ______ and reply comments were filed on ________.
1. SCWC requests authority to acquire control and ownership of Peerless by a tax-exempt stock exchange for $4,039,851, which includes water rights, land, and infrastructure, less any amount of debt owed by Peerless to the owner, J. William Zastrow, on the closing date.
2. The water rights, valued in the merger agreement at $2,958,000, consist of 986 AF of allocated water pumping rights in the Central Basin in Los Angeles County, pursuant to the Judgment of Los Angeles Superior Court (Case No. 786656, dated October 11, 1965). These water rights are not currently in rate base.
3. The water rights are appraised for $2,700 per AF, an amount that exceeds RCNLD.
4. The land being sold is six parcels of real property, on which are located active wells. The total appraised value of these well sites is $226,380. The market value of this land exceeds RCNLD.
5. The remaining assets include 13 wells, 83,670 linear feet of cement and welded steel mains, approximately 2,000 meters, and service connections. They had a net book value of $285,029 at year-end 1999 and a market value that exceeds RCNLD of $855,470. In addition, goodwill is appraised at $190,607.
6. Other major terms of the merger agreement are: $115,000 annual consultant fees to William Zastrow, Peerless' owner, for transition services, plus $75 per hour for any other work; purchase land personally owned by Zastrow for $104,000 not to be used in utility service; within five years perform specified improvements estimated at $11 million, with rates increased 10% per year to pay the return on rate base for these improvements; place Peerless on the higher tariff of Metropolitan District upon merger approval.
7. The Cities of Bellflower, Paramount and Lakewood filed protests to the application. They are ready, willing and able to provide service to the Peerless customers in their cities at rates higher than existing and proposed rates, including needed improvements.
8. The overwhelming majority of Peerless customers oppose the proposed merger.
9. ORA and applicants entered into a settlement agreement and filed a motion to approve it. The settlement agreement modifies the terms of the merger agreement to exclude goodwill, and to record water rights as intangible assets amortized over 40 years. They also agree that: Peerless' rates should be frozen at their current level through 2001; SCWC guarantees it will make specified improvements to Peerless' system over the next five years; SCWC should be allowed to request an increase in Peerless' rates for a maximum of 10% annually, provided scheduled improvements are completed; and Peerless customers will join SCWC's Metropolitan District in 2005, provided the specified improvements have been completed.
10. Bellflower, Paramount and Lakewood oppose the settlement agreement for the same reasons they protested the application.
11. The increase in rate base that would result from the proposed merger is 857%, which is significantly greater than the increases authorized in recent water merger cases.
12. The proposed merger would effectively place Peerless customers in the position of subsidizing water supply to SCWC's Metropolitan District for the years until Peerless is consolidated with the district.
13. Lakewood, Paramount, and Bellflower have demonstrated that the size of the proposed wells is inflated by at least 50%.
14. Peerless received reports from DHS in 1994 and 1999 that the system meets all state requirements for water supply and quality. Therefore, Peerless is not a system intended to qualify for special incentives to acquire.
1. The fair market value of land, facilities, and water rights proposed by applicants exceeds reproduction cost new less depreciation. Including the excess in rate base is not fair and reasonable.
2. The proposed merger as proposed and as revised by the settlement agreement is unreasonable, not in the public interest, and contrary to existing law.
3. The proposed merger is injurious to Peerless customers.
4. The motion to approve the settlement agreement between applicants and ORA, which authorizes the proposed merger, should be denied.
5. This order should be made effective immediately, so that Peerless can promptly begin discussions regarding the ultimate disposition of its water system.
IT IS ORDERED that:
1. The motion to approve a settlement agreement is denied.
2. The request to approve the proposed merger is denied.
3. This proceeding is closed.
This order is effective today.
Dated , at San Francisco, California.
