DATE:	January 12, 2006
TO:	Director, Division of the Commission Clerk & Administrative Services (Bayó)
FROM:	Division of Economic Regulation (Johnson, Rieger, Romig) Office of the General Counsel (Brown)
RE:	Docket No. 050499-WS – Application for authority to transfer majority organizational control of Utilities, Inc. from Nuon Global Solutions USA, B.V. to Hydro Star, LLC.
AGENDA:	1/24/06 – Regular Agenda – Oral Argument requested on Issue 2 – interested persons may participate on other issues
COMMISSIONERS ASSIGNED:		All Commissioners
PREHEARING OFFICER:		Deason
CRITICAL DATES:		None
SPECIAL INSTRUCTIONS:		None
FILE NAME AND LOCATION:		S:\PSC\ECR\WP\050499.RCM.DOC

 

 Case Background

On July 25, 2005, Utilities, Inc. (Utilities, Inc. or company) filed an Application for authority to transfer majority organizational control of the company from Nuon Global Solutions USA, B.V. (Nuon) to Hydro Star, LLC (Hydro Star).  The application proposes the transfer of the issued stock of Utilities, Inc., which in turn controls the stock of 16 utilities that provide water and wastewater service in Florida, from  Nuon to Hydro Star by early 2006, after all regulatory approvals have been obtained.  In all, the transaction involves over 80 subsidiary operating companies of Utilities, Inc. in 17 states.  A list of the Commission-regulated utilities that Utilities, Inc. owns are appended to this recommendation as Attachment A.  Utilities, Inc. asserts that the acquisition of Nuon’s stock by Hydro Star does not entail any change in direct ownership or control of the Florida utilities and will not cause any change in management or loss of operational expertise.   Because of the size and scope of the stock transfer, Utilities, Inc. filed a Petition for variance or waiver of Rules 25-30.037(3)(i), (j) and (k), and 25-30.030(4)(c), (5), (6) and (7), Florida Administrative Code, the Commission’s rules governing transfers. The requested waivers were granted by Order No. PSC-05-1155-PAA-WS, issued November 18, 2005.[1]

Utilities, Inc. provided notice of its stock transfer petition to the customers of its operational utilities on August 1 and 2, 2005.  The Commission received a letter from one customer of Pennbrooke Utilities regarding that utility’s water conservation programs.  The Commission also received an “Objection to Application of Utilities, Inc. for Authority for Transfer of Majority Organizational Control to Hydro Star, LLC and Request for Public Hearing” from Michael J. Duggar, Esq., a customer of Wedgefield Utilities.  The Pennbrooke customer indicated to staff that he did not wish to formally contest the transfer of majority organizational control of the utility holding companies, but would pursue his conservation concerns informally.  Mr. Duggar, however, did confirm to staff that he was requesting an administrative hearing to contest the stock transfer based on his concerns with Wedgefield’s water quality.   

Utilities, Inc. filed a response to Mr. Duggar’s objection on October 24, 2005, and on November 7, 2005, Utilities, Inc. filed a copy of its November 4, 2005, letter to Mr. Duggar.  In both filings, Utilities, Inc. provided a detailed description of the water quality issues at Wedgefield Utilities, Wedgefield’s proposal to the Department of Environmental Protection (DEP) to improve its water quality, and the approximate time and cost to implement the proposal.   On November 9, 2005, Utilities, Inc. filed a Motion to Dismiss or, in the Alternative, for Summary Disposition of Objection, a Motion to Bifurcate Proceeding, and a Request for Oral Argument.  Mr. Duggar did not respond to any of those motions.

This recommendation addresses Utilities, Inc.’s motions in Issues 1 and 2, and the substantive application for transfer of majority organizational control in Issue 3.  If the Commission grants the motion to dismiss, Utilities, Inc.’s alternative motions will be moot, and the Commission can address the substance of Utilities, Inc’s application to transfer the majority organizational control of its parent corporation.  The Commission has jurisdiction over this matter pursuant to section 367.071, Florida Statutes.     

 

Discussion of Issues

ISSUE 1:  Should the Commission grant Utilities, Inc.’s Request for Oral Argument?

RECOMMENDATION:  No.  Oral argument is not necessary for the Commission to decide on the merits of these motions, and Mr. Duggar has not filed any responses to the motions.

STAFF ANALYSIS:    With its motions, Utilities, Inc. also requested that the Commission hear oral argument on them, pursuant to Rule 25-22.058, Florida Administrative Code.  Rule 25-22.058 provides that the Commission may grant oral argument upon the request of any party to a formal proceeding under Section 120.57, Florida Statutes.  The rule requires that the oral argument request be made in a separate document that accompanies the pleading on which argument is requested.  The rule also requires that the request for oral argument state with specificity why argument would aid the Commission in comprehending and evaluating the issues before it.  Utilities, Inc. filed a separate request for oral argument with its motions.  It stated that oral argument would aid the Commission because the issues raised by the motions were unusual in the context of a request for a transfer of majority organizational control of the grandparent companies of operational utilities.  Such requests are rarely protested.   While it is true that the issues raised in the motions are not often raised in this type of proceeding, they are straightforward standing issues with which the Commission is familiar in other contexts.  Also, since Mr. Duggar did not respond in opposition to the motions as Rule 28-106.204(1), Florida Administrative Code provides, staff recommends that oral argument is not necessary in this case, but within the Commission’s discretion to hear, if it chooses.

 

 

 

 

 

 

ISSUE 2:  Should the Commission grant Utilities, Inc.’s Motion to Dismiss?

RECOMMENDATION:  Yes.  The Commission should grant Utilities, Inc.’s Motion to Dismiss.  The objection fails to adequately allege standing to proceed in this matter.  The issues raised are properly addressed by customer complaint or other rate or regulatory proceeding with the regulated operational utility.

STAFF ANALYSIS:  As described in the case background, the subject matter of this proceeding involves the proposed transfer of the issued stock of Utilities, Inc. from its parent company, Nuon, to a new parent company, Hydro Star.  The proceeding does not affect the direct ownership, operational control or regulatory status of any of the 16 Florida water and wastewater companies that Utilities, Inc. itself owns, including Mr. Duggar’s utility, Wedgefield.  The transfer of control between the grandparent companies is two steps removed from the operating utility, and Utilities, Inc. asserts that the transfer will not cause any change in management or operational expertise.  Utilities, Inc.’s motion to dismiss challenges the sufficiency of the facts Mr. Duggar alleges to demonstrate that he has standing to object to this stock transfer. 

The Objection and Request for Administrative Hearing

            In his objection, Mr. Duggar states that the proposed transfer is important to him and other customers of Wedgefield Utilities, because the Department of Environmental Protection (DEP) has indicated that the utility’s water quality exceeds DEP’s present standards for levels of trithalomethane (TTHM), and Wedgefield has not acted promptly and effectively to resolve this water quality matter.  Therefore, the objection argues, since Utilities, Inc.’s stock transfer application asserts that no change will occur in the operational and managerial expertise of the utilities it owns, the application should be denied.   The objection also states that the application should be denied because Hydro Star and its affiliated investment entities do not have experience in operating water and wastewater utilities.  “. . . [c]onsistent with previous management, bottom line will dominate over the best interests of the health safety and welfare of the citizen’s served.” (Objection p. 3.)  The objection also states that the Utilities, Inc. application does not adequately comply with the requirements of Commission Rule 25-30.037(3)(p), Florida Administrative Code, which provides that an application for authority to transfer shall include the following information:

* * *

(p)  A statement from the buyer that after reasonable investigation, the system being acquired appears to be in satisfactory condition and in compliance with all applicable standards set by the Department of Environmental Protection (DEP) or, if the system is in need of repair or improvement, has any outstanding Notice of Violation of any standard set by the DEP or any outstanding consent orders with the DEP, the buyer shall provide a list of the improvements and repairs needed and the approximate cost to make them, a list of the action taken by the utility with regard to the violation, a copy of the Notice of Violation(s), a copy of the consent order and a list of the improvements and repairs consented to and the approximate cost to make them.

The objection contends that the statement that “the relevant Regulated Entities are working with the DEP to formulate compliance plans” contained in Utilities, Inc.’s application does not meet the requirements of the Commission rule.  In his objection, Mr. Duggar requests that the application be rejected due to the lack of operational utility experience of the buyer and its failure to provide concrete safeguards to protect the health safety and well-being of  the citizens it proposes to serve.   The objection states that the Petitioner, Mr. Duggar, would consider acceptance of the application for the stock transfer if the applicant supplemented its application with sufficient information required by subsection (p) of Rule 25-30.037, Florida Administrative Code, and if the applicant was “. . . in full compliance with all standards for one full year prior to the transfer.” (Objection p. 5.) Staff notes that with its response to Mr. Duggar’s objection on October 24, 2005, and its November 4, 2005, letter to Mr. Duggar, Utilities, Inc. has provided more than sufficient detail about Wedgefield’s water quality, actions taken and estimated costs  to meet DEP’s requirements.

Utilities, Inc.’s Motion to Dismiss

            Utilities, Inc.’s Motion to dismiss or in the alternative for summary disposition requests that the Commission either dismiss Mr. Duggar’s objection or summarily dispose of it as moot, without further necessity for hearing.  As grounds for its motion to dismiss, Utilities, Inc. asserts that the facts alleged in the objection fail to demonstrate standing to participate in this administrative proceeding under the two-part test established in Agrico Chemical Co. v. Department of Environmental Regulation, 406 So. 2d 478 (Fla. 2d DCA 1981)  In Agrico, the Court held that to demonstrate a substantial interest entitled to a formal hearing in an administrative proceeding, the petitioner must show both an injury in fact of sufficient immediacy to warrant a hearing, and that the alleged injury is of the type or nature which the proceeding is designed to protect. 

Utilities, Inc. asserts that Mr. Duggar’s objection fails to meet either prong of the Agrico test.  Utilities, Inc. states that the objection does not demonstrate an injury in fact due to elevated levels of TTHMs, because DEP has assured customers of Wedgefield Utilities that their health is not jeopardized, and therefore “the presence of TTHMs in the quantities that exist in Wedgefield’s water do not result in any injury of sufficient immediacy to warrant a public hearing.” (Motion to Dismiss, p. 3)  Utilities, Inc. also asserts that the injury alleged -- noncompliant water quality in the Wedgefield system -- is beyond the scope of this stock transfer proceeding, regulated by the DEP, and therefore not an injury which the proceeding is designed to protect.  Citing Order No. PSC-98-1640-FOF-WS, issued December 7, 1998, in Docket No. 980957-WS, In re: Application for transfer of majority organizational control of Sanlando Utilities Corporation, Utilities, Inc. states that the primary focus of this proceeding is whether the stock transfer is in the public interest, and whether the buyer is willing and able to fulfill the commitments, obligations and representations of the utility.   The approval or disapproval of this transfer will not affect the actions Wedgefield takes to comply with DEP regulations.  While the Commission requires information on the status of compliance with DEP standards, and assurance from the buyers that they will fulfill the commitments of the utility, DEP is the agency with primary jurisdiction of the TTHM issue. 

Although Utilities, Inc. argues that Mr. Duggar’s concerns do not provide standing to protest this stock transfer, Utilities, Inc. suggests that there are other forums before the Commission to address those concerns.    

Analysis         

The standard to be applied in disposing of a motion to dismiss a petition for an administrative hearing is similar to the standard of review for a motion to dismiss in a judicial forum, which is whether, with all factual allegations in the objection taken as true and construed in the light most favorable to the petitioner, the petition states a cause of action upon which relief may be granted.  Varnes v. Dawkins, 624 So. 2d 349, 350 (Fla. 1^st DCA 1993).[2]  Rule 28-106.201(2), Florida Administrative Code, specifies three key requirements for a petition for hearing:

(1)       . . . an explanation of how the petitioner’s substantial interests will be affected by the agency determination;

(2)       a statement of the specific rules or statutes the petitioner contends require a reversal or modification of the agency’s proposed action;

(3)       a statement of the relief sought be the petitioner, stating precisely the action petitioner wishes the agency to take with respect to the agency’s proposed action. 

The threshold question for any request to participate in a formal administrative proceeding is whether the petitioner has a substantial interest that will be affected by the proceeding and thus has standing to participate.  If that threshold is not met, then the petitioner has failed to state a cause of action on which the Commission can grant relief.

Staff agrees that Mr. Duggar has not alleged facts necessary to show that he has a substantial interest in the outcome of this stock transfer proceeding.  Certainly Mr. Duggar and all customers of Wedgefield Utilities have an interest in the quality of Wedgefield’s water, but that interest is not one that will be substantially affected by the outcome of this proceeding either way, whether the Commission approves or disapproves the transfer of Utilities Inc.’s stock from one holding company to another.  Wedgefield will remain the regulated operating utility with primary responsibility to resolve any water quality issues in its system.  For that reason, the objection has not alleged an injury of sufficient immediacy that can be resolved by a hearing in this case, and therefore has not met the first prong of the Agrico test.

The case of Ameristeel v. Clark, 691, So. 2d 473 (Fla. 1997), makes this point well.  In that case, Ameristeel, an industrial customer of Florida Power & Light Company (FPL) in Duval County petitioned to intervene in a proceeding before the Commission to approve a territorial agreement between FPL and the Jacksonville Electric Authority (JEA).  Ameristeel wished to have its plant served by JEA, which at the time had lower rates than FPL.  The Commission denied Ameristeel’s petition to intervene for lack of standing.  Among other reasons, the Commission found that Ameristeel’s plant was located in a part of FPL’s territory that would not be affected by the proposed territorial agreement.  Under the Agrico standard Ameristeel could not demonstrate an injury in fact of sufficient immediacy to warrant participation in the territorial agreement proceeding, because whether or not the agreement was approved, Ameristeel’s plant would remain in FPL’s service territory.  The Florida Supreme Court upheld the Commission’s analysis, saying, at page 478:

Ameristeel has been an FPL customer since it located its plant in FPL’s service territory in 1974 and its position as a customer of FPL remains the same under the new territorial agreement approved by the Commission.  Thus, Ameristeel has failed to meet the first prong of the Agrico test for standing because its corporate interests remain completely unaffected and in no way injured by the JEA-FPL territorial agreement.

See also the Commission’s recent decision in Order No. PSC-06-0033-FOF-TP, issued January 10, 2006,[3] where the Commission dismissed for lack of standing the Communications Workers of America’s request for a hearing on Sprint’s request for approval of a transfer of control.

Mr. Duggar’s objection does not meet the second prong of the Agrico test, either, because, as Utilities, Inc. states in its motion, his stated interest in the proceeding, resolution of Wedgefield’s water quality problems, is not the type of interest this stock transfer proceeding is designed to protect, and the substance of that issue will not be addressed in the proceeding.  The purpose of this proceeding is to ensure that the new corporate owners of Utilities, Inc. have the resources and commitment to the financial and operational viability of Utilities, Inc. and that therefore the transfer serves the public interest.  That investigation only involves Utilities, Inc.’s operating utilities indirectly.  Concerns about Wedgefield’s water quality can and should be addressed by means of a customer complaint against Wedgefield, a utility rate case or other Commission investigatory proceeding, or before DEP.[4]

            For the reasons given above, staff recommends that the Commission grant Utilities, Inc.’s motion to dismiss.  That decision would render moot Utilities, Inc.’s alternative motions for summary disposition or to bifurcate the proceeding to approve the transfer of majority organizational control for all Utilities, Inc.’s operational utilities except Wedgefield.  If the Commission decides to deny the motion to dismiss, staff recommends that the matter be set for hearing and Utilities Inc.’s alternative motions denied.  Utilities Inc. has cited no authority to support those motions.  Utilities, Inc. has not indicated that Mr. Duggar agrees to a summary decision, and staff believes that such a decision on the merits would be premature at this point, before the parties have had the opportunity to conduct discovery.  Staff also believes that bifurcation of the proceeding to remove the Wedgefield system from consideration is inconsistent with the purpose of the proceeding, which is simply to consider the transfer of Utilities, Inc. stock to Hydro Star, and such a stock transfer can not be bifurcated.

 

 

 

 

ISSUE 3: 

 Should the transfer of majority organizational control of Utilities, Inc. from Nuon Global Solutions USA, B.V. to Hydro Star, LLC. be approved?

RECOMMENDATION: 

 Yes, if the Commission approves staff’s recommendation in issue 2, the transfer of majority organizational control of Utilities, Inc. from Nuon Global Solutions USA, B.V. to Hydro Star, LLC. is in the public interest and should be approved effective the date of the Commission’s vote.  Pursuant to Rule 25-9.044(1), Florida Administrative Code, the rates and charges approved for Utilities, Inc.’s Florida utility subsidiaries should be continued until authorized to change by the Commission in a subsequent proceeding.  (Johnson, Rieger, Brown)

STAFF ANALYSIS:  As stated in the case background, on July 25, 2005, Utilities, Inc. filed an application for authority to transfer majority organizational control of Utilities, Inc. from Nuon to Hydro Star.  The application as filed is in compliance with the governing statute, Section 367.071, Florida Statutes, and the requirements of Rule 25-30.037, Florida Administrative Code, pertaining to an application for transfer of majority organizational control.  On May 14, 2005, the parties entered into an agreement for Hydro Star to purchase 100% of the stock in Utilities, Inc. from Nuon.  The closing, which is contingent upon securing multiple regulatory approvals, is anticipated to occur in the first quarter of 2006.

Two objections to the utility’s notice of its intent to transfer its majority organizational control were timely received.  One customer’s objection was resolved.  The second customer’s objection is addressed in issue 2.  If the Commission votes to approve staff’s recommendation to dismiss the objection in issue 2, there are no other objections to the application to address.

The application contained a statement that, after reasonable investigation, the utility systems appear to be in satisfactory condition and in compliance with all applicable standards set by the Florida Department of Environmental Protection (DEP), with the exception of five systems.  Utilities, Inc. has indicated that it is working with the DEP to formulate compliance plans for those systems.  These compliance issues are the result of new rules imposed by DEP. Attachment B is a DEP letter to a customer of Wedgefield stating that the water is safe to drink.  Furthermore, Utilities, Inc has indicated to staff that Wedgefield Utilities installed new water treatment processes for its system in mid December to control TTHMs, with DEP approval.

The application contains a statement describing how the transfer is in the public interest including a summary of the buyer’s experience in water and wastewater operations and a showing of the buyer’s financial ability.  According to the application, the seller no longer wants to be in the utility business and is divesting all of it U.S. assets due to the declining value of the dollar against the Euro.  AIG Highstar Capital II, L.P. (Highstar II), the sole member of Hydro Star, and its affiliates are seeking to make substantial investments in water and wastewater assets as a complement to their existing U.S. energy asset portfolio.  The acquisition of majority control of Utilities, Inc. by Hydro Star will not result in any change in management of Utilities, Inc.  The current Utilities, Inc. management has been providing quality water and wastewater service to all of the Florida systems for approximately 30 years.  By combining Utilities, Inc.’s management approach and regulatory expertise with the financial resources and support of Hydro Star, Utilities, Inc. will continue to have the ability to provide consistent and uninterrupted service to its customers.

With regard to Hydro Star’s financial ability, Highstar II and Hydro Star have access to extensive resources to fund the operations of the regulated entities.  Highstar II and its affiliates will provide funding in the form of inter-company loans to Hydro Star on an as needed basis.  As of March 31, 2005, Highstar II total assets were approximately $102,861,000.

The utility is current on annual reports and regulatory assessment fees (RAFs) through 2004.  Since no changes are taking place at the utility subsidiary level the responsibility for filing all RAFs and annual reports for 2005 and the future will remain the responsibility of Utilities, Inc.

Based on all the above, if the Commission approves staff’s recommendation in issue 2, the transfer of majority organizational control of Utilities, Inc. from Nuon Global Solutions USA, B.V. to Hydro Star, LLC. is in the public interest and should be approved effective the date of the Commission’s vote.  Pursuant to Rule 25-9.044(1), Florida Administrative Code, the rates and charges approved for Utilities, Inc.’s Florida utility subsidiaries should be continued until authorized to change by the Commission in a subsequent proceeding.

 

 

 

 

 

 

 

ISSUE 4:   Should this docket be closed?

RECOMMENDATION:   If  the Commission grants Utilities, Inc’s motion to dismiss and approves the transfer of majority organizational control, this docket should be closed upon issuance of the Commission’s final order.  If the Commission denies the motion to dismiss the Commission should defer decision on the transfer of control and the docket should remain open to address the objection.

STAFF ANALYSIS:  If  the Commission grants Utilities, Inc’s motion to dismiss and approves the transfer of majority organizational control, this docket should be closed upon issuance of the Commission’s final order.  If the Commission denies the motion to dismiss the Commission should defer decision on the transfer of control and the docket should remain open to address the objection.

ATTACHMENT A

 

Utilities, Inc.

List of Subsidiaries – 100% wholly-owned