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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1
APPLICATION UNDER SECTION 3(a)(1) OF
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Southern California Water Company
630 East Foothill Boulevard
San Dimas, California 91773
Agent for service:
McClellan Harris III
Southern California Water Company
630 East Foothill Boulevard
San Dimas, California 91773
(909) 394-3600
Copies to:
C. James Levin
Terrence R. Allen
O'Melveny & Myers LLP
400 South Hope Street
Los Angeles, California 90071
(213) 669-6000
Margaret A. Moore
Cynthia L. Ingersoll
Van Ness Feldman, P.C.
1050 Thomas Jefferson Street, N.W.
Washington, D.C. 20007
(202) 298-1800
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ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
I. INTRODUCTION
Southern California Water Company, a California corporation ("SCWC" or
the "Company"), is a State-regulated public utility company principally engaged
in providing water service to consumers in 10 California counties. The Company
also operates a small electric utility distribution business serving consumers
in San Bernardino County, California.
SCWC is planning to reorganize into a holding company structure, in
order to facilitate its plans for future growth while protecting the interests
of its ratepayers. So as to permit the new holding company ("NEWCO")(1) to own
SCWC's small electric business through a subsidiary company, SCWC is seeking an
order from the Securities and Exchange Commission ("Commission") granting an
exemption to NEWCO under section 3(a)(1) of the Public Utility Holding Company
Act of 1935 ("PUHCA" or the "Act"), 15 U.S.C. Section 79c(a)(1) (1994). As
demonstrated below, NEWCO will meet the formal criteria for an exemption under
section 3(a)(1) of the Act, and the requested exemption will not be detrimental
to the public interest or the interest of investors or consumers.
II. BACKGROUND
A. Description of SCWC
SCWC was organized in 1929 as American States Water Service Company of
California for the purpose of consolidating the ownership of 20 small
California water utility companies. In the ensuing years, the Company has
acquired other California water utility companies and a small electric utility
distribution system. Today, SCWC provides water service to approximately
241,000 consumers in 75 California communities and electric service to
approximately 20,500 consumers in one California community. In 1996, SCWC
derived more than 92% of its revenues (about $139.9 million) from water sales
and less than 8% (about $11.5 million) from electric sales. Approximately 7%
of the Company's assets are devoted to its electric business. As described
below, the Company is regulated as a public utility in California.
SCWC has one subsidiary, California Cities Water Company, a California
corporation, which engages in certain unregulated businesses that, in the
aggregate, generated a nominal amount of revenues during the 1996 fiscal year.
SCWC is a registered company under the Securities Exchange Act of 1934 (the
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(1) NEWCO has not yet been incorporated. SCWC will inform the
Commission of NEWCO's corporate name in its Rule 24 certificate.
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"1934 Act"). The Company is listed on the New York Stock Exchange under the
trading symbol "SCW".
B. Bear Valley Electric System
In 1935, SCWC acquired the Bear Valley Utility Company, a combined
water and electric company. The acquired company's water operations were
terminated in 1989; its electric power business is now operated as SCWC's Bear
Valley Electric District ("Bear Valley"). Bear Valley serves a ski resort
community surrounding Big Bear Lake in San Bernardino County. Most of its
consumers are residential users, approximately two-thirds of whom are weekend
or seasonal customers who reside in the Los Angeles and Orange County areas.
Bear Valley is operated with about 31 employees.
Bear Valley has no generating capacity; SCWC purchases all of its
energy and capacity. The Company purchases Bear Valley's capacity primarily
from Southern California Edison Company ("Edison"), and its energy from various
suppliers through the services of ENOVA Energy Management Inc. SCWC owns and
operates 28.7 miles of overhead 34.5 kV transmission lines, 0.6 miles of
underground 34.5 kV transmission, 172.4 pole miles and 38.6 underground cable
miles of 4.16 kV and 2.4 kV distribution lines, and 15 substations with a
combined capacity of approximately 60,754 KVA. Bulk power is delivered to the
Bear Valley distribution system through two radial transmission lines owned by
Edison. The Bear Valley distribution system is not interconnected with any
other transmission facilities.
C. Overview of State Regulation of SCWC
The California Public Utilities Commission ("CPUC") regulates, on a
comprehensive cost-of-service basis, both the water and the electric
distribution business of SCWC. For rate-making purposes, the Company's service
areas are grouped into 16 water districts and one electric district. In
addition to regulating SCWC's rates, accounting practices, purchases and
dispositions of utility properties, and extensions of service, the CPUC has
authority over SCWC's securities issuances and other aspects of its business.
In particular, the CPUC has the authority to review and approve or disapprove
any corporate reorganization proposed by SCWC. Currently, SCWC's utility
business is confined exclusively to California.
D. Purpose of the Reorganization
SCWC is exploring opportunities to expand. These opportunities
include participation in a variety of unregulated businesses that are related
to its current activities as a regulated water utility ("Water Related
Businesses"). These
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businesses will take advantage of the knowledge and skill that SCWC's employees
have developed operating the Company's water systems. In particular, SCWC is
interested in operating and maintaining municipal water systems as a contract
operator. The Company is also interested in pursuing opportunities in the
planning and construction of new water systems, the rebuilding or
rehabilitation of old water systems, and the provision of water treatment,
wastewater collection, and wastewater treatment services in California or
elsewhere. All of these Water Related Businesses will be functionally related
to SCWC's present California water utility operations, in that each of these
endeavors will take advantage of the expertise SCWC has developed in designing,
constructing, renovating, operating, managing, and maintaining water utility
systems.(2) SCWC also anticipates that it may seek to acquire or lease
regulated water utility businesses outside of California ("Other Regulated
Water Utilities").
The Company believes that it will be in the best interests of its
California ratepayers for NEWCO to operate the California utility, the Water
Related Businesses, and the Other Regulated Water Utilities through separate
corporate entities. The Company's preferred approach to accomplishing this
objective is to reorganize the Company into a holding company structure
consisting of NEWCO and two or more wholly-owned subsidiaries. One subsidiary
("Regulated Sub") will engage exclusively in regulated utility businesses in
California, while one or more other subsidiaries will engage only in Water
Related Businesses. One or more subsidiaries also may be formed to acquire and
operate Other Regulated Water Utilities. The Company intends that NEWCO's
business activities will be confined within these parameters.
III. LEGAL ANALYSIS
A. Pertinent Statutory Definitions
Section 2(a)(7) of the Act defines a public-utility holding company as
"any company which directly or indirectly owns, controls, or holds with power
to vote, 10 per centum or more of the outstanding voting securities of a
public-utility company," including an electric utility company. An "electric
utility company" is defined in section 2(a)(3) as any company that owns or
operates facilities used for, among other things, the distribution of electric
energy for sale. Because Regulated Sub will have electric distribution
facilities (albeit small in magnitude relative to its
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(2) NEWCO's Water Related Businesses will be similar to the
technological, operational, and management businesses in which registered
holding companies are permitted to engage. See, e.g., American Electric Power
Company, SEC PUHCA Release No. 22468, 1982 SEC LEXIS 1831 (1982); The Southern
Company, SEC Release No. 22132, 1981 SEC LEXIS 1078 (1981). See also Rule
58(b)(1)(vii), 62 Fed. Reg. 7900 (Feb. 20, 1997).
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water utility facilities), it will be an electric utility company.(3) As the
owner of all of Regulated Sub's voting securities, NEWCO will be a
public-utility holding company.
B. Applicability of Section 3(a)(1) to NEWCO
1. NEWCO Will Meet the Criteria Specified in Section
3(a)(1)
Section 3(a)(1) of the Act authorizes the Commission to grant an
exemption to a holding company where:
such holding company, and every subsidiary company thereof which is a
public-utility company from which such holding company derives,
directly or indirectly, any material part of its income, are
predominantly intrastate in character and carry on their business
substantially in a single State in which such holding company and
every such subsidiary company thereof are organized . . . .
NEWCO and Regulated Sub will be incorporated in California, and Regulated Sub's
utility operations will be confined to California. Thus, NEWCO will, upon
consummation of the contemplated reorganization, satisfy all explicitly
prescribed requirements for an exemption under section 3(a)(1).
2. NEWCO's Exemption Will Pose No Regulatory Concerns
for the Commission
The Company is aware that the Commission has, in rare cases,
questioned the qualifications of a diversified holding company for an exemption
under section 3(a)(1) or 3(a)(2), in light of the "unless and except" clause of
section 3(a).(4) This clause provides that an exemption permitted under one
of the five subparagraphs of section 3 shall be granted "unless and except
insofar as [the Commission] finds the exemption detrimental to the public
interest or the interest of investors or consumers . . . ." Based on this
preamble to section 3(a), the Commission has reserved the right to deny an
exemption to an otherwise qualified holding company, or to terminate an
exemption previously granted under section 3(a)(1) or 3(a)(2), if,
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(3) Regulated Sub's average annual gross sales of electric energy,
while only a fraction of its average annual gross water sales, appears to
prevent Regulated Sub from qualifying for the exclusion from the definition of
"electric utility company" provided by Rule 7(a), 17 C.F.R. Section 250.7(a)
(1996). Regulated Sub's electric sales will be approximately $11.5 million;
and Rule 7(a) applies only to companies with sales of $5 million or less.
(4) See Pacific Lighting Corp., 45 S.E.C. 152 (1973); Lykes Bros.
Inc., 46 S.E.C. 1196 (1978).
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as contemplated by section 3(c), the Commission finds that "circumstances which
gave rise to the issuance of such order [granting exemption] no longer exist."
As discussed below, neither the immediate nor long-range business plans
contemplated for NEWCO will be detrimental to the public interest or the
interest of investors or consumers.
In this regard, the Company notes that NEWCO does not represent the
kind of holding company whose operations Congress intended to burden when
enacting PUHCA. PUHCA was enacted in substantial part because the State
governments were perceived to lack sufficient authority to protect American
investors and consumers from the abusive practices of complex public-utility
holding company systems. Such practices, identified in section 1(b) of the
Act, included the issuance of securities based on fictitious or unsound asset
values, excessive leveraging, cross-subsidization of affiliates, pyramiding of
voting control, and the growth and extension of holding companies bearing no
relation to economic management and operation or the integration and
coordination of related operating properties. The reorganization contemplated
by SCWC does not present the potential for any such practices. SCWC's utility
business is closely regulated by the CPUC, which regulation extends to, among
other things, the Company's issuances of securities, rate setting, and
acquisitions of other utility and nonutility companies. Furthermore, the
Company is subject to the disclosure requirements and accounting standards of
the Securities Act of 1933 and the 1934 Act.
Indeed, the regulatory climate in which the Company operates is vastly
different today than it was when PUHCA was enacted. The authority of the
States to regulate the corporate activities of public-utility holding companies
and their affiliates is now viewed much more broadly than at the time PUHCA was
enacted. Today, State utility commissions such as the CPUC can effectively
shield ratepayers from the consequences of improvident investments by utility
holding companies and prevent improper transactions among affiliates.(5)
NEWCO's corporate structure and its continuing regulation by the CPUC
will assure that NEWCO's formation and intended operations will cause no
regulatory
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(5) Accordingly, there are a number of legislative initiatives under
way to repeal the Act in substantial part and transfer authority to review
corporate books and records to the Federal Energy Regulatory Commission and the
States. Pending congressional action on these repeal initiatives, the
Commission has liberalized its application of the Act. For example, the
Commission has allowed registered systems broader latitude to engage in
unregulated activities outside of their service territories. See Exemption of
Acquisition by Registered Public-Utility Holding Companies of Securities of
Nonutility Companies Engaged in Certain Energy-Related and Gas-Related
Activities; Exemption of Capital Contributions and Advances to Such Companies,
62 Fed. Reg. 7900 (Feb. 20, 1997).
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abuses that would be of concern to the Commission. Each of these mitigating
factors is discussed in turn below.
a. Separation of Corporate Functions
In addition to facilitating, from a purely business perspective, the
Company's expansion into non-public utility areas, SCWC's proposed
reorganization will protect its ratepayers by providing a strict separation of
NEWCO's State-regulated utility operations from its other business activities.
This structure will facilitate State regulation of NEWCO's utility operations
and enhance the CPUC's ability to assure that there is no cross-subsidization
of business costs. It will also help to insulate Regulated Sub from the risks
of other businesses to be operated under the holding company system. Moreover,
as a result of the reorganization, management will be more accountable to
shareholders, in that management will have specific responsibilities for each
business function.
b. Regulation by the California Commission
Comprehensive regulation of SCWC, and then of Regulated Sub's
relations with NEWCO, by the CPUC should ameliorate any concerns that the
Commission may have concerning NEWCO's diversified activities or concerning the
ownership of both water and electric utility operations by Regulated Sub. The
reorganization will have to be reviewed and approved by the CPUC before it can
proceed and, if it is approved, the CPUC will then monitor all of NEWCO's
operations on a continuing basis.
In 1995, the California legislature amended section 854 of the Public
Utilities ("PU") Code to make it clear that the formation of a public-utility
holding company requires the prior approval of the CPUC. In addition, the
legislature set out in section 854 certain findings that the CPUC must make,
and certain criteria it must consider, before permitting a merger, acquisition,
or reorganization that involves an electric, gas, or telephone utility with
gross annual revenues exceeding $500 million.(6) For reorganizations involving
smaller utilities such as SCWC, the CPUC imposes two fundamental requirements:
(1) there must be a valid business purpose for the reorganization, and (2) the
reorganization and future operations must be conducted "pursuant to conditions
that will be adequate to protect the public interest." In re Roseville
Telephone Company, 1996 Cal. PUC LEXIS 811 at *10 (1996). Accordingly, as the
CPUC has itself observed, "[t]he recent history of utility reorganizations into
holding companies has been a history of conditions." In re San Diego Gas &
Electric Company, 1995 Cal. PUC LEXIS 931 at *15 (1995).
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(6) The full text of section 854 is set forth in the attached Exhibit
A, along with other pertinent sections of the PU Code.
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In framing the conditions it imposes upon a reorganization, the CPUC
attempts to "strike the balance that will allow easing our oversight of
competitive and unregulated enterprises of affiliates while retaining our
ability effectively to regulate utility operations." Id. at *16. In so doing,
the CPUC is mindful of "the long history of the holding company form of
organization leading up to the passage of [PUHCA]." Id. at *10. Consequently,
the CPUC has focused heavily on the issue of affiliate transactions, and
normally sets pricing standards for such transactions in its orders approving
the formation of a holding company.(7) The CPUC also requires that the new
holding company give priority to the capital needs of its utility subsidiaries,
and that each utility maintain a balanced capital structure.(8)
The PU Code assures the CPUC access to the books and records of the
affiliates of California utilities, as well as to the books and records of the
utilities themselves, to the extent necessary to monitor affiliate
transactions. Section 314(b) of the PU Code provides that the CPUC may inspect
the accounts, books, papers, and documents of any business that is a subsidiary
or affiliate of an electric, gas, or telephone utility with respect to any
affiliate transaction that "might adversely affect the interests of the
ratepayers" of the utility. In addition, section 587 requires electric, gas,
and telephone utilities to file annual reports on affiliate transactions; and
section 797 requires the CPUC to audit periodically "all significant
transactions" with utility affiliates.(9)
The CPUC has implemented sections 587 and 797 in part by adopting
detailed regulations governing the reporting of affiliate transactions by all
electric, gas, and telephone utilities. See In re Reporting Requirements for
Electric, Gas, and Telephone Utilities Regarding Their Affiliate Transactions,
48 CPUC2d 163 (1993), 1993 Cal. PUC LEXIS 80 ("Affiliate Transactions
Rule").(10) The Affiliate Transactions Rule requires each such utility to file
an annual report that describes its organizational structure, its accounting
procedures and conventions, all affiliate contracts involving the provision of
goods or services valued at more than $5,000, and any internal audits that were
conducted. In addition, the report must include
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(7) In the San Diego order, for example, the CPUC accepted the
utility's proposal that all non-tariffed services provided by the new utility
subsidiary to any affiliate would be priced at the higher of market or fully
loaded costs with a 5% markup. San Diego order at *34-35.
(8) See, e.g., San Diego at *25, 72; Roseville at *47-48.
(9) Full-text copies of sections 314, 587, and 797 are included in
Exhibit A hereto.
(10) A copy of the Affiliate Transactions Rule, as amended in 1993, is
reproduced in Exhibit B hereto.
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data in table format on all affiliate transactions during the reporting period,
other than the provision of tariffed utility services. The utility must also
report the guarantee of any debt obligation of an affiliate and any employee
transfer to an affiliate. Each report must include the quarterly and annual
financial statements of the holding company, including consolidating work
papers of the holding company and its subsidiaries, and must disclose the
utility's proportionate share of the holding company's (1) total assets, (2)
total operating revenues, (3) operating and maintenance expenses, and (4)
number of employees.
The foregoing provisions of State law and the comprehensive regulatory
oversight by the CPUC provide sufficient safeguards to assure that the
contemplated reorganization will not be detrimental to the public interest or
the interests of investors or consumers. As noted above, the reorganization
itself will not proceed unless expressly permitted by the CPUC. Furthermore,
once the reorganization is accomplished, the CPUC will regulate the activities
of Regulated Sub within the holding company system in a comprehensive fashion.
IV. REQUEST FOR RELIEF
For the reasons stated above, the Company requests an order granting
NEWCO an exemption under section 3(a)(1) of the Act, pursuant to which NEWCO
and each of its subsidiaries will be exempt from all provisions of the Act,
except section 9(a)(2).
ITEM 2. FEES, COMMISSIONS, AND EXPENSES
As explained above, the Company is seeking an order granting exemption
under section 3(a)(1) of the Act in connection with a corporate reorganization.
The reorganization itself does not require the approval of the Commission,
because NEWCO will acquire only one subsidiary that is a public-utility
company. Therefore, Item 2 is inapplicable to this filing.
ITEM 3. APPLICABLE STATUTORY PROVISIONS
The applicable statutory provision is section 3(a)(1). The
public-utility company of which NEWCO will become an affiliate will be
Regulated Sub. Regulated Sub will engage in the water and electric utility
businesses currently conducted by SCWC.
ITEM 4. REGULATORY APPROVAL
As discussed under Item 1 above, the reorganization will require the
approval of the CPUC.
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ITEM 5. PROCEDURE
SCWC requests action on this application within 40 days of this
filing. SCWC does not anticipate that a recommendation from a hearing officer
or the Division of Corporate Regulation will be necessary. SCWC does not
believe that there should be a 30 day waiting period between the issuance of
the Commission's order and the date on which it is to become effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENT
The exhibits to this application are:
Exhibit A: Excerpts from the California Public Utilities Code
Exhibit B: California Public Utilities Commission Rules Governing the
Reporting of Transactions by Electric, Gas, and Telephone
Utilities with Their Affiliates
This application does not require Commission action under section 6,
7, 9, 10, or 12 of the Act, because SCWC is not seeking approval of a
transaction. Therefore, there are no financial statements included with this
application.
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
This application is not being filed under section 6, 7, 9, 10, or 12
of the Act. Accordingly, this item does not apply.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned company has duly caused this statement to be signed on
its behalf by the undersigned thereunto duly authorized.
SOUTHERN CALIFORNIA WATER COMPANY
Date: March 6, 1997 By: /s/ McClellan Harris III
McClellan Harris III
Vice President and Treasurer
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Filings Under the Public Utility Holding Company Act of
1935, as amended ("Act")
SECURITIES AND EXCHANGE COMMISSION
Release No. 35-
-------
March , 1997
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Notice is hereby given that the following filing(s) has/have been made
with the Commission pursuant to provisions of the Act and rules promulgated
thereunder. All interested persons are referred to the application(s) and/or
declaration(s) for complete statements of the proposed transaction(s)
summarized below. The application(s) and/or declaration(s) and any amendments
thereto is/are available for public inspection through the Commission's Office
of Public Reference.
Interested persons wishing to comment or request a hearing on the
application(s) and/or declaration(s) should submit their views in writing by
__________ ___, 1997, to the Secretary, Securities and Exchange Commission,
Washington, D.C. 20549, and serve a copy on the relevant applicant(s) and/or
declarant(s) at the address(es) specified below. Proof of service (by
affidavit or, in case of an attorney at law, by certificate) should be filed
with the request. Any request for hearing shall identify specifically the
issues of fact or law that are disputed. A person who so requests will be
notified of any hearing, if ordered, and will receive a copy of any notice or
order issued in the matter. After said date, the application(s) and/or
declaration(s), as filed or as amended, may be granted and/or permitted to
become effective.
Southern California Water Company (__-_____ )
On March 6, 1997, Southern California Water Company ("SCWC"), 630 East
Foothill Boulevard, San Dimas, California 91773, an electric utility company
not currently subject to the Act, filed an application-declaration under
section 3(a)(1) on behalf of its future holding company ("NEWCO"). SCWC
requests an order granting NEWCO and each of its subsidiaries an exemption from
all provisions of the Act, except Section 9(a)(2) thereof.
SCWC is a California company that is engaged in providing both water
utility service and electric utility service to customers exclusively within
California. SCWC provides water service to approximately 241,000 customers in
75 communities and electric service to approximately 20,500 customers in one
community. SCWC has one subsidiary, California Cities Water Company, a
California corporation that engages in certain unregulated businesses.
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SCWC is planning to reorganize into a holding company structure in
order to facilitate its plans for further growth into unregulated businesses
that will take advantage of the knowledge and skill that SCWC's employees have
developed operating its water systems. NEWCO will have only one subsidiary
that will be a public-utility company under the Act; that company will engage
in the water utility and electric utility business currently conducted by SCWC.
The reorganization is subject to the approval of the California Public
Utilities Commission.
SCWC asserts that, following consummation of the restructuring, NEWCO
will be a public-utility holding company entitled to an exemption under section
3(a)(1) of the Act, because NEWCO and its sole public-utility company
subsidiary will be predominantly intrastate in character and will carry on
their public utility business substantially within the State of California.
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EXHIBIT A
EXCERPTS FROM THE CALIFORNIA PUBLIC UTILITIES CODE
SECTION 314.
(a) 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. The commission, each commissioner, and any
officer of the commission or any employee authorized to administer oaths may
examine under oath any officer, agent, or employee of a public utility in
relation to its business and affairs. Any person, other than a commissioner or
an officer of the commission, demanding to make any inspection shall produce,
under the hand and seal of the commission, authorization to make the
inspection. A written record of the testimony or statement so given under oath
shall be made and filed with the commission.
(b) Subdivision (a) also applies to inspections of the accounts, books, papers,
and documents of any business which is a subsidiary or affiliate of, or a
corporation which holds a controlling interest in, an electrical, gas, or
telephone corporation with respect to any transaction between the electrical,
gas, or telephone corporation and the subsidiary, affiliate, or holding
corporation on any matter that might adversely affect the interests of the
ratepayers of the electrical, gas, or telephone corporation.
SECTION 587.
Every electrical, gas, and telephone corporation shall annually prepare and
submit to the commission a report describing all significant transactions, as
specified by the commission, between the corporation and every subsidiary or
affiliate of, or corporation holding a controlling interest in, the electrical,
gas, or telephone corporation. The report shall identify the nature of the
transactions and the terms and conditions applying to them, including, but not
limited to, the basis upon which cost allocations and transfer pricing were
established for the transactions.
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SECTION 797.
The commission shall periodically audit all significant transactions, as
specified by the commission, between an electrical, gas, or telephone
corporation and every subsidiary or affiliate of, or corporation holding a
controlling interest in, that electrical, gas, or telephone corporation. The
commission may, in this connection, utilize the services of an independent
auditor, who shall be selected and supervised by the commission. Nothing in
this section prohibits the commission from auditing any transaction between an
electrical, gas, or telephone corporation and any subsidiary or affiliate of,
or corporation holding a controlling interest in, the electrical, gas, or
telephone corporation, as otherwise permitted or required by law.
SECTION 854.
(a) No person or corporation, whether or not organized under the laws of this
state, shall merge, acquire, or control either directly or indirectly any
public utility organized and doing business in this state without first
securing authorization to do so from the commission. The commission may
establish by order or rule the definitions of what constitute merger,
acquisition, or control activities which are subject to this section. Any
merger, acquisition, or control without that prior authorization shall be void
and of no effect. No public utility organized and doing business under the
laws of this state, and no subsidiary or affiliate of, or corporation holding a
controlling interest in a public utility, shall aid or abet any violation of
this section.
(b) Before authorizing the merger, acquisition, or control of any electric,
gas, or telephone utility organized and doing business in this state, where any
of the utilities that are parties to the proposed transaction has gross annual
California revenues exceeding five hundred million dollars ($500,000,000), the
commission shall find that the proposal does all of the following:
(1) Provides short-term and long-term economic benefits to ratepayers.
(2) Equitably allocates, where the commission has ratemaking
authority, the total short-term and long-term forecasted economic benefits, as
determined by the commission, of the proposed merger,
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acquisition, or control, between shareholders and ratepayers. Ratepayers shall
receive not less than 50 percent of those benefits.
(3) Not adversely affect competition. In making this finding, the
commission shall request an advisory opinion from the Attorney General
regarding whether competition will be adversely affected and what mitigation
measures could be adopted to avoid this result.
(c) Before authorizing the merger, acquisition, or control of any electric,
gas, or telephone utility organized and doing business in this state, where any
of the entities that are parties to the proposed transaction has gross annual
California revenues exceeding five hundred million dollars ($500,000,000), the
commission shall consider each of the criteria listed in paragraphs (1) to (8),
inclusive, and find, on balance, that the merger, acquisition, or control
proposal is in the public interest.
(1) Maintain or improve the financial condition of the resulting
public utility doing business in the state.
(2) Maintain or improve the quality of service to public utility
ratepayers in the state.
(3) Maintain or improve the quality of management of the resulting
public utility doing business in the state.
(4) Be fair and reasonable to affected public utility employees,
including both union and nonunion employees.
(5) Be fair and reasonable to the majority of all affected public
utility shareholders.
(6) Be beneficial on an overall basis to state and local economies,
and to the communities in the area served by the resulting public utility.
(7) Preserve the jurisdiction of the commission and the capacity of
the commission to effectively regulate and audit public utility operations in
the state.
(8) Provide mitigation measures to prevent significant adverse
consequences which may result.
(d) When reviewing a merger, acquisition, or control proposal, the commission
shall consider reasonable options to the proposal
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recommended by other parties, including no new merger, acquisition, or control,
to determine whether comparable short-term and long-term economic savings can
be achieved through other means while avoiding the possible adverse
consequences of the proposal.
(e) The person or corporation seeking acquisition or control of a public
utility organized and doing business in this state shall have, before the
commission, the burden of proving by a preponderance of the evidence that the
requirements of subdivisions (b) and (c) are met.
(f) In determining whether an acquiring utility has gross annual revenues
exceeding the amount specified in subdivisions (b) and (c), the revenues of
that utility's affiliates shall not be considered unless the affiliate was
utilized for the purpose of effecting the merger, acquisition, or control.
(g) Paragraphs (1) and (2) of subdivision (b) shall not apply to the formation
of a holding company.
(h) For purposes of paragraphs (1) and (2) of subdivision (b), the legislature
does not intend to include acquisitions or changes in control that are mandated
by either the commission or the Legislature as a result of, or in response to
any electric industry restructuring. However, the value of an acquisition or
change in control may be used by the commission in determining the costs or
benefits attributable to any electric industry restructuring and for allocating
those costs or benefits for collection in rates.
<PAGE> 17
EXHIBIT B
THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
REPORTING REQUIREMENTS FOR UTILITY-AFFILIATE TRANSACTIONS
RULES GOVERNING THE REPORTING OF TRANSACTIONS BY ELECTRIC, GAS,
AND TELEPHONE UTILITIES WITH THEIR AFFILIATED ENTITIES
Adopted August 11, 1992 Effective August 11, 1992. Amended February 9,
1993. R.92-08-008.
(As downloaded from 1993 Cal. PUC LEXIS 80, beginning at *28.)
I. GENERAL
A. INTENT
The purpose of these reporting requirements is to enable the Commission to
monitor, track, and audit transactions between electrical, gas, and telephone
corporations on the one hand and every subsidiary or affiliate of, or
corporation holding a controlling interest in, the electrical, gas or telephone
corporation on the other. This order also serves to meet the statutory
requirements of Public Utilities Code Sections 587 and 797.
B. APPLICABILITY
This Order applies to all electric, gas, and telephone corporations.
Each corporation subject to this order will hereinafter be referred to
either as a "utility" or as a specific type of utility (e.g. "electric
utility", "gas utility", "telephone utility") as appropriate.
C. REQUIREMENTS
Each utility that has any affiliated entities (as [*29] defined in
Section I-G) must annually file a report with the Commission entitled "Annual
Report on Significant Utility-Affiliate Transactions" (hereinafter referred to
as the annual report).
Each utility that does not have any affiliated entities is not required to
file an annual report but must file an annual statement to the Commission
stating that the utility has no affiliated entities (hereinafter referred to as
the annual statement).
<PAGE> 18
The annual statement must meet the requirements of Sections I-D, I-E, and I-F
with regards to reporting period covered, schedule for filing, and
verification.
The annual report for each utility that is any one of the following:
* an electric utility;
* a gas utility;
* a telephone utility which is a Local Exchange Carrier (LEC);
* a telephone utility which is a dominant Inter-Exchange Carrier (IEC) as
determined by Decision (D.) 84-06-11;
* a telephone utility offering facilities-based cellular telecommunications
services;
shall contain the material required in Sections II A through G of this order as
well as any supporting material and/or documents also required under those
sections. These utilities are classified as "dominant utilities." [*30]
The annual report for each utility that is any one of the following:
* a telephone utility which is a Non-Dominant Inter-Exchange Carrier (NDIEC)
as determined by D.84-06-11;
* a telephone utility that resells cellular telecommunications services;
and,
* a telephone utility that is a radiotelephone corporation;
shall consist of accurately completing, preparing, and filing the material
required in Sections II-A of this order as well as any supporting material
and/or documents also required under that section. These utilities are
classified as "competitive utilities."
Any material that is required that a utility is unable to provide must be
reasonably described and the reasons the data cannot be obtained, as well as
the efforts expanded to obtain the information, must be set forth in the
utility's annual report and verified in accordance with Section I-F.
Any controlling corporation or utility which controls more than one utility
subject to the above reporting requirements may file a single consolidated
report for the utilities covering all of the information required of each of
the utilities in Section II-A, and Section II-B Items #2 and #3. The remaining
information [*31] required of each utility must be filed separately by each
utility. The consolidated report must be verified by the appropriate corporate
officers of each utility for which the report is being filed in accordance with
Section I-F.
<PAGE> 19
D. TIME PERIOD TO BE COVERED IN THE ANNUAL REPORT
Each annual report or annual statement filed by a utility shall cover
the period of one calendar year (January 1 to December 31).
Each utility must file an annual report or annual statement for
calendar year 1989 and every calendar year thereafter, according to the
schedule contained in Section I-E.
E. TIME, PLACE, AND MANNER OF FILING
Each utility must file its annual report or annual statement for
calendar years 1989, 1990, and 1991 by January 29, 1993 if it is an electric or
gas utility and by March 1, 1993 if it is a telephone utility.
Each utility must file its annual report or annual statement for
calendar year 1992, and every year thereafter, on the 1st of May in the
calendar year following the period covered in the annual report or annual
statement.
Each utility shall file an original, two hard copies, and one
electronic copy of either its annual report or annual statement with the
Finance [*32] Branch, Commission Advisory and Compliance Division (CACD). The
electronic copy must be submitted in a form compatible with Commission software
and computer capabilities.
F. VERIFICATION
Each annual report must be signed by a corporate officer of the
utility stating under penalty of perjury under the laws of the State of
California (CCP 2015.5) that the annual report is complete and accurate with no
material omissions.
Each annual statement filed with the Commission by a utility stating
that is has no affiliated entities also must be signed by a corporate officer
of the utility stating under penalty of perjury under the laws of the State of
California (CCP 2015.5) that the statement is accurate and contains no material
omissions.
G. DEFINITIONS
Unless the context otherwise requires, the following definitions
govern the construction of this Order:
Definitions Applicable to Corporate Structure and Organization
<PAGE> 20
(a) "Company" means any corporation or person as defined in Public
Utilities Code Sections 204-206, including but not limited to joint ventures,
limited partnerships, and strategic alliances.
(b) "Affiliated Entity" means any "Controlling Corporation",
"Subsidiary" [*33] (other than a "Regulated Subsidiary") or "Affiliate" as
defined below.
(c) "Controlling Corporation" means any company which holds a
controlling interest in a utility. A controlling interest is defined as
directly or indirectly owning, controlling, or holding the power to vote 10 per
cent or more of the outstanding voting securities of a utility.
(d) "Subsidiary" means any company 10 per cent or more of the
outstanding securities of which are directly or indirectly owned, controlled,
or held with power to vote, by either a utility or a controlling corporation.
(e) "Affiliate" means any company 5 per cent or more of whose
outstanding securities are owned, controlled, or held with power to vote,
directly or indirectly either by a utility or any of its subsidiaries, or by
that utility's controlling corporation and/or any of its subsidiaries as well
as any company in which the utility, its controlling corporation, or any of the
utility's affiliates exert substantial control over the operation of the
company and/or indirectly have substantial financial interests in the company
exercised through means other than ownership.
(f) "Securities" means any note, draft, stock, treasury stock, [*34]
bond, debenture, certificate of interest or participation in any profit-sharing
agreement, any collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-trust
certificate, certificate of deposit for a security, receiver's or trustee's
certificate, or in general any instrument commonly known as a security.
(g) "Regulated Subsidiary" means any subsidiary of a utility the
revenues and expenses of which are subject to regulation by the Commission and
are included by the Commission in establishing rates for the utility. For
purposes of this rulemaking only, the Yellow Pages subsidiary of any telephone
company which is a local exchange carrier (LEC) is a regulated subsidiary if
its net revenues are imputed by the Commission in setting the rates of the LEC.
Definitions Applicable to the Reporting of Transactions
(h) "Allocated Cost" means the cost to provide a good and/or service
that is calculated by first determining the total cost to provide a good or
service, and then assigning to either the affiliated entity (or the utility) a
portion of the total costs based upon the affiliated entity's (or the
utility's) proportional [*35] share of the good or service provided.
Allocated cost should be determined according to the
<PAGE> 21
procedures outlined by each utility in Section II-B of this report and should
include applicable overhead and direct use of utility assets.
(i) "Fair Market Value" means the price offered by a willing purchaser
in an arms-length transaction.
(j) "Intangible Asset" means any asset having no physical existence,
its value being set by the rights and anticipatory benefits that possession
confers upon the owner. This includes intellectual property, licenses,
franchises, marketable emission permits and emission offsets, etc.
(k) "Intellectual Property" means any proprietary market data,
customer lists, marketing or feasibility studies, leads and prospects for
future business opportunities, patents, trade secrets, copyrights, or other
marketable technologies.
(l) "Tariffed Service" means any provision of electric, gas, or
telephone service the price, terms, and conditions of which are set by tariffs
established by the Commission and which are available to all customers meeting
the requirements contained in the tariff.
(m) "Transaction" means the provision of any good, property, service,
privilege, [*36] or act between any two parties for which compensation
normally would be provided if each party was independent of the other and
acting in its best financial interest.
(n) "Transfer Price" means the price that the utility recorded in its
accounting records as either 1) having paid an affiliated entity for the
provision of any good, property, service, privilege, or act or 2) received from
an affiliated entity for providing the affiliated entity with any good,
property, service, privilege, or act. If no payment was either received or
made, then the transfer price is zero ($ 0).
H. APPLICABILITY TO REGULATED SUBSIDIARIES
A regulated subsidiary is considered part of the utility, and therefore any
transactions between a regulated subsidiary and an affiliated entity are
considered the same as a transaction between the utility and an affiliated
entity and must be reported accordingly.
II. REPORTING REQUIREMENTS
A. ORGANIZATIONAL STRUCTURE
1. Each utility shall list and provide the following information for each
affiliated entity and regulated subsidiary that the utility had during the
period covered by the annual report:
<PAGE> 22
* Name;
* Form of organization (e.g. corporation, [*37] partnership, joint
venture, strategic alliance, etc.);
* Brief description of business activities engaged in;
* Relationship to the utility (e.g. controlling corporation, subsidiary,
regulated subsidiary, affiliate);
* Ownership by the utility (including type and percent ownership);
* Voting rights held by the utility and percent
* Corporate officers;
* Any other company besides the utility that owns 5% or more of the
affiliated entity (unless legally precluded from providing the information);
2. The utility shall prepare and submit a corporate organizational chart
showing any and all corporate relationships between the utility and its
affiliated entities and regulated subsidiaries listed in #1 above. The chart
should have the controlling corporation (if any) at the top of the chart; the
utility and any subsidiaries and/or affiliates of the controlling corporation
in the middle levels of the chart and all secondary subsidiaries and affiliates
(e.g. a subsidiary that in turn is owned by another subsidiary or and/or
affiliate) in the lower levels. Any regulated subsidiary should be clearly
noted.
3. For a competitive utility that has individuals who are classified as [*38]
"controlling corporations" of the competitive utility, the utility must only
report under the requirements of #1 and #2 above any affiliated entity that
either 1) is a public utility or 2) transacts any business with the utility
filing the annual report excluding the provision of tariffed services.
B. PROCEDURAL AND ACCOUNTING SAFEGUARDS
1. Each utility shall submit to the Commission a description of the procedures
and controls in effect during the period covered by the annual report, as well
as copies of any guidelines and/or policies in effect during the period covered
by the annual report that relate to any transaction between a utility and any
of its affiliated entities and that are used to:
* Ensure that all transactions between a utility and its affiliated
entities are recorded in the accounting systems of the utility (except for
employee transfers);
<PAGE> 23
* Calculate the "transfer price" for transactions with affiliated
entities;
* Ensure that the utility and its affiliated entities maintain
subsidiary ledgers for recording all inter-company transactions;
* Reconcile subsidiary ledgers with the utility's books;
* Ensure that recordkeeping practices are sufficient to allow [*39]
and facilitate full reporting and documentation by the Commission of all
transactions between the utility and its affiliated entities.
* Ensure that the affiliated entities make timely reimbursement to the
utility for any outstanding balances due;
* Calculate and determine the cost allocations used to apportion the
cost of providing any good or service between the utility and its affiliated
entities;
* Calculate the overhead costs associated with the provision of any
good or service;
* Calculate the facilities cost and use of utility assets associated
with the provision of any good or service;
* Calculate the fair market value of any good, service, or asset;
* Approve any request for goods or services requested from the utility
by an affiliated entity (this description should include the corporate officers
who must approve the request)
* Approve any request for goods or services requested by the utility
from an affiliated entity (this description should include the corporate
officers who must approve the request).
2. Each utility shall submit, in tabular form, a list of all contracts
(including written agreements if not otherwise listed under #1 above) between
the utility [*40] and its affiliated entities that were either signed or in
effect during the period covered by the annual report and that involve the
provision of greater than $ 5,000 in goods and/or services. Contracts covering
the provision of tariffed utility services shall not be reported if offered at
tariffed rates or pursuant to a contract filed with the Commission. This list
shall include the following;
* Parties to the contract;
* Corporate officers of both the utility and the affiliated entity that
signed the contract;
<PAGE> 24
* Date the contract became effective;
* Brief description of the substantive terms and conditions of the
contract;
* Approximate value of the goods, services, or assets provided under
the contract;
* Location of the contract; and,
* Any material or subsequent modifications to the contract, including
any waivers (written or otherwise) to the contract, as well as a brief
description of the reasons for the modifications and/or waiver.
3. Any verbal agreement between a utility and any of its affiliated entities
that involves or will ultimately involve the expenditure by the utility of any
amount over $ 100,000 should be reported, to the extent possible, under #2
above. [*41]
4. Each utility shall annually provide a list of all internal audits conducted
regarding transactions between the utility and any of its affiliated entities,
including in its list the following;
* Dates the audit was conducted;
* Date of final audit report;
* Purpose of audit; and,
* Summary of audit findings and recommendations.
C. UTILITY PROVISION OF GOODS AND SERVICES TO ITS AFFILIATED ENTITIES
1. Using the format of Table II-C-1, each utility shall report any goods
and/or services that the utility provided to any of its affiliated entities
during the period covered by the annual report. All goods and/or services
shall be reported regardless of whether or not the utility was reimbursed.
2. For purposes of this section, and section II-D, "Goods" are defined as any
tangible item having economic value. Examples of "goods" include office
supplies, office computers, and personal automobiles. No item shall qualify as
a good if it has:
(a) a depreciable life, for federal tax purposes, of more than 3-years,
except for cars, personal computers, and office machinery n17, and
<PAGE> 25
[n17 See Section 1240, "Classes of Depreciable Property", 1992 U.S. Master Tax
Guide (Commerce Clearing House) discussing Internal Revenue Code sections 1245
and 1250.] [*42]
(b) a value of greater than $ 20,000.
The transfer of any item of tangible property described in (a) or (b)
above shall be reported under Section E ("Transfer of Tangible Asset").
3. For purposes of this section, "Services" include any activity of economic
value provided by the utility, or a company under contract to the utility, to
any affiliated entity. Examples of "services" include, but are not limited to
the provision of professional expertise (e.g. legal, consulting, engineering),
administrative support (e.g. data and payroll processing, arranging travel,
transportation services, etc.) and general corporate management and support
activities (e.g. time spent by corporate executives and employees on affiliated
entity issues, investor relations, shareholder services, etc.).
4. The cost of each good and/or service that the utility provided to any of
its affiliated entities shall be assigned to an appropriate USOA Account of the
utility.
5. Using the format shown, each utility shall create a table (entitled Table
II-C-1), containing;
* A set of columns by listing horizontally across the top each
affiliated entity of the utility, excluding, however, any affiliated [*43]
entities to which the utility provided no goods and/or services during the
calendar year.
* A set of rows by listing vertically down the left side of Table
II-C-1 each USOA account (listed in ascending order) for which the utility had
incurred a cost (whether or not reimbursed) for providing any good or service
to an affiliated entity.
* The middle portions of Table II-C-1, corresponding to each
horizontal column and vertical row, will be called cells.
6. For each cell in Table II-C-1, the utility shall aggregate all transactions
for goods and/or services it provided to each affiliated entity under;
1) The appropriate column heading for that affiliated entity; and,
2) The row corresponding to the appropriate USOA account category.
7. The following information shall be reported in the corresponding cells of
Table II-C-1;
<PAGE> 26
* The total transfer price assigned to this USOA account for any goods
or services provided by the utility to the affiliated entity;
* The allocated cost, if different from the transfer price, for any
goods or services provided by the utility to the affiliated entity;
* Allocated costs as a percentage of total recorded costs for the USOA
account;
* [*44] The ratio for each USOA account of the actual total recorded
expenses versus total expenses authorized in the utility's most recent General
Rate Case (expressed as a percentage)
8. At the end of each row, briefly list the applicable cost allocation
methodology and transfer pricing method used to determine the corresponding
dollar volumes listed under #7 above.
9. In addition to the information requested in Table II-C-1, each utility
shall provide, as a separate document, a brief narrative description for any
affiliated entity that had over $ 10,000 of transfer price recorded in any USOA
account. This narrative description will describe in greater detail the types
of goods and services provided, as well as the methodologies used to calculate
their transfer price and allocated cost.
10. Electric and gas utilities are not required to report in Table II-C-1 any
tariffed utility services provided to their affiliated entities.
11. Telephone utilities shall not report in Table II-C-1 any tariffed services
(including roamer services) provided to any of their affiliated entities.
Instead, each telephone utility shall separately list for each affiliated
entity the following [*45] information;
* All special contracts under which utility services were bought;
* The dollar amount and volume of services bought under each special
contract;
* The dollar amount of services bought under each special contract as
a percentage of the total dollar amount of services provided by the utility to
all customers receiving service under the special contract.
Telephone utilities shall also report the following:
* Any tariffed rate schedule or option, 10% or more of the revenues
from which are attributable to a utility's affiliated entities.
<PAGE> 27
D. AFFILIATED ENTITIES PROVISION OF GOODS AND SERVICES TO THE UTILITY
1. Section C required each utility to report goods and/or services that it
provided to its affiliated entities. This section (Section D), requires the
reporting of all goods and/or services that the affiliated entities provided to
the utility.
2. Each utility shall report any goods and/or services that were provided to
it by any of its affiliated entities during the period covered by the annual
report. All goods and/or services shall be reported regardless of whether or
not the affiliated entity was reimbursed.
3. For purposes of this section, "Goods" [*46] has the same meaning as used
in Section C above.
4. For purposes of this section, "Services" includes any activity of economic
value provided by the affiliated entity, or any company under contract to the
affiliated entity, to the utility. The examples of the types of services
listed in #3 of Section II-C above are applicable to this section as well.
Purchases of natural gas or electric energy from any affiliated entity should
be reported in this section.
5. The cost of each good and/or service that the affiliated entity provided to
the utility shall be assigned by the utility to an appropriate USOA Account of
the utility.
6. Using the format shown, each utility shall create a table (entitled Table
II-D-1), containing;
* A set of columns by listing horizontally across the top of Table
II-C-1 each affiliated entity listed in Table II-A-1, excluding, however, any
affiliated entities which provided no goods and/or services to the utility
during the calendar year.
* A set of rows by listing vertically down the left side of Table II-C-1
each USOA account (listed in ascending order) for which the utility had
incurred a cost for goods and/or services provided by the affiliated [*47]
entity.
* The middle portions of Table II-C-1, corresponding to each horizontal
column and vertical row, will be called cells.
7. For each cell in Table II-C-1, the utility shall aggregate all transactions
for goods and/or services it provided to each affiliated entity under;
1) The appropriate column heading for that affiliated entity; and,
2) The row corresponding to the appropriate USOA account category.
<PAGE> 28
8. The following information shall be reported in the corresponding cells of
Table II-C-1;
* The total transfer price assigned to this USOA account for any goods
or services provided by the affiliated entity to the utility;
* The allocated cost, if different from the transfer price, as
calculated by the affiliated entity as the cost for any goods or services
provided to the utility;
* The fair market value of the goods and service provided, if
determined;
* Allocated costs as a percentage of total recorded costs for the USOA
account;
9. At the end of each row, each utility shall briefly list the applicable
methodology used to determine allocated cost and transfer price as well as any
calculations and reviews utilized to determine fair market value.
10. In [*48] addition to the information requested in Table II-C-1, each
utility shall provide, as a separate document, a brief narrative description
for any USOA account that had recorded over $ 10,000 in goods and services
provided by an affiliated entity. This narrative description will describe in
greater detail the types of goods and services provided, as well as the
methodologies used to calculate their transfer price and a summary of all
methodologies and calculations used to determine fair market value.
11. For any USOA account classification containing greater than $ 25,000 in
reported transactions, the utility shall provide as an addendum to Table II-D-1
any comparisons performed by the utility of the cost of goods or services
provided by the affiliated entities with other providers not affiliated with
the utility.
E. TRANSFERS OF TANGIBLE ASSETS
1. The utility shall report the sale or transfer of any tangible asset
(including personal property and real property such as land). This includes
sales from the utility to an affiliated entity or vice-versa. The sale or
transfer of goods already reported in sections II-C and II-D need not be
reported again here.
2. The requirements [*49] of this section apply to the transfer of any
tangible asset of the utility regardless of whether or not considered by the
utility to be necessary or useful in the performance of its public utility
obligations.
3. For each tangible asset transferred from the utility to an affiliated
entity (or vice-versa), the utility shall provide the following information;
* Affiliated entities involved in the transfer;
<PAGE> 29
* Description of the asset;
* Price at which the asset was originally purchased;
* Price and terms at which the asset was sold or transferred;
* Methods used to determine the selling price of the asset;
* Copies of all appraisals done to determine the fair market value of
the asset upon sale;
* Results of any competitive bidding or competing offers to purchase
the asset;
4. If the tangible asset is being transferred from the utility to an
affiliated entity, the utility shall also submit the following information in
addition to that required above;
* The length of time the utility has held the asset;
* Utility account in which the asset was held;
* Amount of time, if any, the asset was held in "Plant Held for Future
Use"; and,
* Value at which the asset was carried [*50] on the utility's books.
5. If the tangible asset being transferred is land and/or real property, the
utility, in addition to the above requirements, shall also provide the
following;
* Amount of time, the affiliated entity had either expressed interest
in acquiring the property or had conducted feasibility/marketing studies on the
property's use; and,
* Other properties located within the area that are owned or leased,
or under option to any affiliated entity.
6. Any cumulative transfer of employees, utility assets (including goods) and
property, etc. that collectively results in a transfer of an independent
business entity from the utility to an affiliated entity shall be reported in
this section. For each such cumulative transfer, the utility shall include in
its annual report any valuations of the new business entity. This shall
include any valuations done using as the value of the transfer the market value
of the independent entity as a stand-alone company as well as any valuations
using commonly utilized valuation methods such as price-earning multiples,
comparable sale evaluations, discounted cash-flow analyses, etc.
<PAGE> 30
7. For purposes of section II-E, the lease [*51] of any tangible asset is
considered a transfer and is subject to the reporting requirements of #3-5
above.
F. TRANSFERS OF INTANGIBLE AND INTELLECTUAL PROPERTY
1. For all intangible assets transferred from the utility to any of its
affiliated entities, the utility shall provide the following information;
* Affiliated entities involved in the transaction;
* Description of the asset, including patent/copyright numbers if
applicable;
* The price at which the asset was originally acquired, if purchased; or,
* The estimated cost of development if the asset was developed by the
utility;
* The price and terms at which the asset was sold or transferred to
the affiliated entity;
* The estimated fair market value, if determined, of the intangible
asset to be transferred; and,
* Methods used to determine the selling price.
2. Software purchased from third-parties and transferred between the utility
and its affiliated entity should be reported under Sections II-C and II-D
(Transfer of Goods and/or Services) of the annual report as long as the
software has a purchase price of under $ 20,000.
3. An affiliated entity which has access to any intangible assets or
intellectual [*52] property of the utility such as marketing data, data
bases, customer lists, marketing or feasibility studies, leads and prospects
for future business opportunities, trade secrets, etc. must meet the reporting
requirement of #1 above.
4. All transfers of intangible assets from the utility to an affiliated entity
must be reported in #1 above even if the utility received no compensation for
the transfer.
G. FINANCIAL TRANSACTIONS
1. The utility shall report the guarantee of all notes, debentures, debt
obligations, or other securities of any affiliated entity and also shall cite
the applicable Commission decision, if any, authorizing the guarantee.
<PAGE> 31
2. The requirements of #1 above will apply as well to any guarantee of under
12 months in length not requiring Commission approval as well as any cash
infusion agreements through both loans and/or equity investments.
3. The transfer of funds for investment between the utility and its affiliated
entities under a cash management system are not required to be reported, except
as noted in #4 below. However, any costs of bookkeeping, management fees, etc.
associated with transfers of these funds shall be reported under Sections [*53]
II-C and/or II-D as appropriate.
4. Each utility shall report the length of time and the dollar amount that a
negative cash balance has existed in the intercompany accounts of any
affiliated entity during the period to be reported
5. Each utility shall specify the procedures used to allocate tax liabilities
and responsibilities between the utility and its regulated subsidiaries and
affiliated entities.
6. Each utility shall specify the procedures used to internally transfer funds
between the utility and its affiliated entities to reimburse the utility for
services provided to the affiliated entities. These procedures shall include
the number of days that elapse between when a bill is presented to the
affiliated entity for payment and when the funds are actually transferred to
the utility. The procedures shall also include the applicable carrying charges
and interest rates, if any, that are applied to outstanding balances owed to
the utility by an affiliated entity.
7. Each utility will submit to the Commission the following information:
a. The quarterly and annual financial statements of the utility's
controlling corporation, including consolidating workpapers [*54] of the
controlling corporation and its subsidiaries (both regulated and unregulated);
b. The balance sheets and income statements of the non-consolidated
subsidiaries of the controlling corporation (unless legally precluded from
providing them);
c. All periodic reports filed by the controlling corporation with the
Securities and Exchange Commission; and
d. An annual report of the utility's proportionate share of the
controlling corporation's i) total assets; ii) total operating revenues; iii)
operating and maintenance expense; and iv) number of employees.
If a utility does not have a controlling corporation but instead carries
out non-regulated activities through other subsidiaries or affiliates of the
utility, then
<PAGE> 32
that utility shall be considered as the controlling corporation for complying
with the requirements of #7.
H. TRANSFER OF EMPLOYEES
1. The utility shall report any employee who transferred from the utility to
any of its affiliated entities during the period covered by the annual report.
For calendar years 1989 through 1992 the utility must only report utility
employees who commenced employment for an affiliated entity within six months
after leaving the utility. [*55]
2. The utility shall provide, in tabular form, the following information on
all non-clerical employees who retire, resign, transfer, are reassigned, or
otherwise leaves the utility and subsequently commence employment in any
capacity (including intermittent, part-time or consulting) with any of the
utility's affiliated entities;
* Last title and position held at the utility;
* Last division assigned to within the utility;
* Final salary with the utility;
* Years employed by the utility;
* Affiliated entity at which the employee has commenced employment;
* Job classification and title at the affiliated entity;
* Whether the employee's expected tenure at the affiliate entity is
permanent (six months or longer) or temporary;
* Any pension, benefit, or reinstatement rights that the employee may
retain with the utility; and,
* A brief description of the level and extent of utility efforts to
recruit new employees assigned to the same position within the utility
3. To protect the confidentiality of employees, the utility is not required to
list names but shall assign either a letter (e.g. A,B,C etc.) or number (e.g.
1,2,3) to each employee subject to the reporting requirements [*56] of #2
above.
4. If a Commission decision requires the utility to collect a "fee" for any
employee transferred to an affiliated entity, the utility shall report the
amount of the fee collected for each employee.
<PAGE> 33
III. AUDITING COMPLIANCE
1. Commission staff may investigate and audit all transactions between the
utility and its affiliated entities and between affiliated entities necessary
to ensure compliance with these reporting requirements and PU Code Section 587.
2. Commission staff shall be provided with all information, including but not
limited to records, accounts, corporate books, timesheets, contracts,
workpapers, computer programs, etc. used to create the annual reports.
3. If requested by Commission staff, each utility shall provide the above
information within 15 working days following receipt of a written request from
Commission staff.
4. In carrying out its review of the above items, the Commission may utilize
the services of independent agents not employed by the Commission but retained
by the Commission under contract. The independent agents retained by the
Commission shall have the same rights and privileges as Commission staff.
5. Further, [*57] Commission staff or the Commission's agent may investigate
and audit any transaction of the utility and its affiliated entities either in
the course of its general responsibilities for regulatory oversight or in
connection with formal dockets, and are not restricted in the timing and scope
of such investigations because of the utilities' requirements to file annual
reports under this Order.
