Issues Raised by Protestants

1. Technical Capability

Pursuant to the proposed transaction, Lennar and its affiliates will acquire Newhall, the company that owns all capital stock in Valencia. The applicants state that Valencia's entire management team will remain in place, as well as most of Newhall's. The Commission recently conducted a general rate case for Valencia and found no issues of management incompetence or service quality. (See D.03-05-030.) Because this management team will remain in place after Newhall is acquired, there is no dispute that after the proposed transaction Valencia will possess the technical competence to own and operate a Commission-regulated water utility. Also in the rate case proceeding, Valencia showed that Newhall had no substantive role in Valencia's day-to-day operations, and only minimal management-level oversight. Newhall's management team will remain largely in place, and the application does not indicate that the parties intend to change this practice.

Condition 5 specifies that the transaction will have no effect on, among other things, Valencia's operations, maintenance, or any other matter affecting the public interest. Condition 9 also prohibits Valencia from changing operational control as a result of the proposed transaction. These conditions, and others, will ensure that Valencia retains the technical competence to operate a public utility water service.

2. Financial Resources

The record in Valencia's recent general rate case shows that Valencia is capable of raising sufficient capital to meet the needs of its customers. In addition, Lennar Corporation had net earnings of over $500 million in 2002.

The applicants have represented that "this change of control at the parent company level will have no negative effects on the financial standing, costs of operation, or revenue requirements of Valencia." This representation underlies Conditions 3 (Valencia must be provided sufficient capital), 13 (no adverse changes in debt or liabilities), and 14 (Valencia shall not bear any of the costs of the acquisitions). These conditions provide sufficient assurance that Valencia will have sufficient financial resources to continue to provide high quality public utility water service.

3. Service Extension Favoring
Real Estate Development Affiliate

Protestants expressed concern that Valencia would be required by Newhall to make service area extensions favoring future Newhall or Lennar developments. The Commission considered similar allegations in the recent rate case and found insufficient evidence to support the allegations. The Commission, however, has and will retain complete authority over any and all Valencia service territory expansions. The protestants have participated in these proceedings in the past, and could raise any issues of favoritism in future proceedings. (See e.g., D.01-11-048.)²

The Commission has previously adopted a set of affiliate transactions rules to govern the relationship between a Commission-regulated water utility and its corporate affiliates. These rules ensure that the utility and its ratepayers are not subsidizing the affiliated operations. (See D.02-12-068 (Appendix A to Settlement Agreement, which is Appendix B to the decision).) A similar set of rules, tailored to this acquisition, is included as Condition 18. Condition 17 directly prohibits any form of favoritism for affiliated real estate developers.

SCOPE briefed this issue, and contended that the Lennar and LNR "hierarchy" would be tempted to skew drought and water shortage decision making against Valencia's customers and in favor of the real estate development affiliates. Such decisions, however, are subject to Commission oversight. Pursuant to § 451, Valencia must provide just and reasonable service as is necessary to promote the safety, health, comfort and convenience of its customers and the public. The Commission has ample enforcement power to ensure that Valencia adheres to this requirement, as well as Condition 17.

4. Out-of-State Ownership

The protestants also expressed concern about out-of-state ownership of Valencia leading to "financial or ethical decisions that are not in the best interests of the ratepayers or the community." The Commission, however, retains complete authority over Valencia's public utility operations, including its rates, as well as substantial power to "do all things . . . which are necessary and convenient in the exercise of [its] jurisdiction." (See § 701.) Thus, while the owners may be out-of-state, the Commission has final authority over any public utility effects in California.

In addition, conditions of approval require Valencia to: (1) maintain and store its books and records in California, (2) maintain offices in its service territory, and (3) retain Valencia's high level of customer service and community involvement.

SCOPE seeks greater assurances that Valencia's decision-making will be focused on local issues. SCOPE proposed additional conditions requiring that all Valencia board members and officers reside in Valencia's service territory, and that Valencia's General Manager and three other highly-compensated individuals be given renewable five-year employment contracts, with termination only for causes unrelated to financial performance. In addition, SCOPE recommends that Valencia's officers and General Manager have exclusive control over well closure, water quality, and litigation decision-making.

While the Commission has sufficient jurisdiction to impose the type of conditions SCOPE seeks, SCOPE has not presented a sufficient rationale to support these unprecedented intrusions into utility management. The Public Utility Code and this Commission's precedents do not favor micromanaging a utility but rather focus on ensuring compliance with legal and policy objectives. SCOPE's recommendations address corporate governance issues that have no direct effect on ratepayers. To the extent Valencia makes decisions that affect ratepayers either through rates, water quality, or otherwise, the Commission has comprehensive authority to impose whatever protections it deems necessary.

We are satisfied that the conditions imposed on Valencia are sufficient to protect Valencia's ratepayers. See particularly Conditions 5 (no adverse changes in Valencia policies), 9 (no changes in existing Valencia management, and 16 (no actions that would impair Valencia's ability to fulfill its public utility function).

5. Documents and Loans

The applicants provided the Newhall proxy statement for the proposed transaction with Lennar. They stated that there is only one merger document, and that a fully executed copy was attached to the application. They also stated that there are no outstanding loans between Newhall and Valencia, and that the loan between Newhall and Valencia discussed in the recent rate case has been repaid in full. Thus, all required documents are in the record, and no loans exist.

The Sierra Club and Friends of the Santa Clara River sought conditions requiring disclosure of additional documents.³ Applicants contend that these requests are "fishing expeditions irrelevant to the present proceeding and aimed only to advance the interest of litigants in other venues." While we agree that these documents are not relevant to this proceeding, we strongly caution applicants that should any costs or water quality issues related to these documents arise in future Valencia rates cases or other proceedings, we may require full review of the related documents.

The Commission has broad authority to examine the books and records of all public utilities. (See, e.g., § 314 ("The commission, each commissioner, and each officer and person employed by the commission may, at any time, inspect the accounts, books, papers, and documents of any public utility").) Conditions 4 and 7 require that Valencia maintain its headquarters and books in this state. These requirements, and others, give us ample access to all necessary documents.

6. Ill-feeling and Mistrust

Sierra Club and the Friends of the Santa Clara River refer to the "ill-feeling and mistrust" between the protestants and the applicants. These feelings appear to be at the core of many of the issues raised by the protestants. Building trust and creating positive relationships are difficult objectives to attain. Commission mandates to do so are unlikely to be successful. Nevertheless, we encourage the parties to make trust building a goal. Valencia and the protestants have a long history of advocating different perspectives on issues important to Valencia and its customers. A positive, respectful relationship will be advantageous to all parties in both the long and short run.