A.15-11-009 ALJ/PVA/ek4
ALJ/PVA/ek4 Date of Issuance 10/3/2017
Decision 17-09-022 September 28, 2017
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
Application of Liberty Utilities (CalPeco Electric) LLC (U933E) for Exemption from the Affiliate Transaction Rules for Its Transactions with Liberty Utilities Service Corp., or, in the Alternative, for a Waiver from Affiliate Transaction Rules V.C., V.G.1., and V.G.2.c. / Application 15-11-009DECISION ORDERING RETURN OF UTILITY EMPLOYEES
Summary
The regulated California utility Liberty Utilities (CalPeco Electric) LLC and its parent company Liberty Utilities Co. are ordered to return to the utility the utility’s employees, all of whom were transferred to an unregulated affiliate without Commission approval. This proceeding is closed.
1. Background
Liberty Utilities Co. owns 23 regulated electric, natural gas, water and sewer utilities operating in the United States. One of those is a regulated California electric utility: Liberty Utilities (CalPeco Electric) LLC (Liberty CalPeco). (Application at 1.) In addition to its regulated utilities, Liberty Utilities Co. also has an unregulated subsidiary: Liberty Utilities Service Corp. (Service Corp), a Delaware corporation. (Id. at 2.)
In October 2014, Liberty Utilities Co. transferred all of the employees of Liberty CalPeco to Service Corp. (Id.) Liberty CalPeco did not seek or receive Commission approval prior to transferring all of its employees to an unregulated affiliate. [1] Accordingly, at the time this application was filed in November, 2015, the California regulated utility Liberty CalPeco had no employees. All utility services provided by Liberty CalPeco were (and are) being provided by employees of Service Corp, an unregulated affiliate.
Liberty CalPeco’s November, 2015 application requests an after-the-fact exemption from the Commission’s Affiliate Transaction Rules for its transactions with its affiliate Service Corp, or, in the alternative, for a waiver from specific Affiliate Transaction Rules for those transactions. (Application at 1.) A Scoping Ruling was issued in May, 2016, a Prehearing Conference (PHC) was held in
September 2016, and an amended Scoping Ruling was issued in October, 2016.
In November, 2016, Liberty CalPeco and Service Corp entered into a
five-page “Affiliate Services Agreement.” Prior to that date there was no written contract or agreement between Liberty CalPeco and Service Corp.
(December 6, 2016 Response of Liberty Utilities, Attachments A and B.)
2. Discussion
Liberty CalPeco is a California public utility, subject to the jurisdiction, control and regulation of this Commission and the provisions of the California Public Utilities Code. (Public Utilities Code Section 216(b).) The Commission and the Public Utilities Code regularly address issues relating to public utility employees. (See, e.g. Decision (D.) 16-12-024 at 26; Public Utilities Code
Sections 314 and 451.) Liberty CalPeco’s unilateral action – transferring all of its employees out of the regulated utility – is inconsistent with the scope of the Commission’s authority. Liberty CalPeco’s focus on the Commission’s affiliate transaction rules is misdirected, and fails to adequately address the more fundamental questions presented by its action.
Liberty CalPeco’s application focuses on the question of whether the transfer of utility employees to an unregulated affiliate should fall under the purview of the Commission’s affiliate transaction rules. The primary argument raised by Liberty CalPeco in its application is that the Commission’s affiliate transaction rules should not be applied to the relationship between Liberty CalPeco and Service Corp because that relationship is not the kind of relationship that the Commission’s affiliate transaction rules were intended to address. (Application at 6-9.) Specifically, Liberty CalPeco argues that since Service Corp is not engaged in the provision of electricity-related products and/or services, its transactions with Liberty CalPeco are not intended to be encompassed by the Commission’s affiliate transaction rules. (Id. at 6.)
It is true that when the Commission was drafting and implementing its affiliate transaction rules, it had in mind a different situation than the type of relationship presented by Liberty CalPeco and Service Corp. As a result, the affiliate transaction rules - which were primarily focused on preventing utility cross-subsidization of unregulated affiliates engaged in energy-related businesses - do not precisely fit the present situation. But even if the affiliate transaction rules do not apply, that does not resolve the issues presented here.
Rather than torturing the rules (or the facts) in order to apply them to a set of facts the rules were not intended or designed to cover, it is more appropriate to look first at the larger question presented here: Is it appropriate for a utility to transfer all of its employees to an unregulated affiliate without Commission approval?
Because the factual situation here is unique, one starting point for answering that question is to look at existing practices and structures to see if there is anything similar or analogous. The closest one is a “shared services” structure. As Liberty CalPeco points out, it is common for regulated utilities to utilize a shared services structure:
[I]n which an entity owning multiple companies establishes a separate Shared Services entity to provide centralized services
(i.e., human resources, insurance, finance, treasury, corporate governance, and legal to name a few) to other companies within the organization. (Liberty CalPeco December 15, 2016 Response at 13-14.)
Liberty CalPeco presents their new structure as “[A] modest and natural refinement” to the recognized shared services structure. (Id. at 14.) Looking more closely at what Liberty CalPeco has done, and comparing it to the conventional shared services structure, the differences appear to be far more significant than a “modest and natural refinement.”
Liberty CalPeco describes the conventional use of this structure:
The use of such a shared services entity is common in the utility industry and designed to achieve cost and process efficiencies that benefit customers. Under a Shared Services Structure, a corporate entity with multiple and often geographically dispersed affiliates establishes a separate entity to provide integrated business services across the entire organization. […] The Shared Services entity is able to reduce the overall cost of providing corporate services by realizing economies of scale through the aggregation, standardization, and centralization of common “back-office” corporate functions such as finance, human resources, insurance, pension management, and payroll. (Id.)
This general approach of sharing common functions makes sense from an efficiency and cost standpoint - instead of having 23 separate payroll or insurance departments, it is generally cheaper and simpler to have one shared department provide services to 23 entities.
What Liberty CalPeco has done here, however, is different. In addition to putting together the “back office” functions that can be shared by the separate entities, they have also put together into Service Corp functions that are not shared. Liberty CalPeco describes their current structure:
Each former Liberty CalPeco employee currently employed by Service Corp is a Liberty CalPeco Dedicated Employee and accordingly remains dedicated exclusively to performing the functions enabling Liberty CalPeco to provide safe, reliable and cost-effective service. The transfer in October 2014 of former Liberty CalPeco employees to Service Corp did not have any impact on the employee’s title, compensation, professional responsibilities and training, reporting relationships, or day-to-day or longer term activities. (December 15, 2016 Response at 5-6, footnotes omitted.)
In short, linemen or customer service representatives who worked for Liberty CalPeco now work for Service Corp, but are doing the same work and doing it only for Liberty CalPeco, not for any other affiliates.
It is not clear how putting non-shared employees under one affiliate saves money. It is not hard to see how going from 23 payroll departments to one payroll department could save money, but it is harder to see the savings from a change in structure that ostensibly keeps the same number of employees in the same locations doing the same work for the same customers.
While Liberty CalPeco claims cost savings to be a benefit of its new structure, Liberty CalPeco fails to provide evidence of any actual cost savings. Liberty CalPeco has not identified any costs it saved from implementing the new structure, and in fact it only states that the structure will “likely” generate cost savings. (Id. at 78.)[2]
In its most recent General Rate Case (GRC), where Liberty CalPeco would be expected to show the cost savings from its new structure, Liberty CalPeco did not even disclose its new structure, much less identify any cost savings (or costs) associated with it. Liberty CalPeco states that in its 2016 GRC
(Application 15-05-008):
Throughout the proceeding, Liberty CalPeco did not have employees; employees of Service Corp had the responsibility to perform the public utility service functions for which Liberty CalPeco was seeking rate recovery.
Liberty CalPeco presented testimony and responded to data requests as if the individuals were employees of Liberty CalPeco and without regard to Service Corp being the employer. For example, in response to an ORA request for a list of all “employees” and their compensation levels, Liberty CalPeco identified the Liberty CalPeco Dedicated Employees. (December 15, 2016 Response at 48.)
This appears to be a violation of Commission Rule of Practice and Procedure 1.1, as Liberty CalPeco stated that it was seeking rate recovery for the costs of Liberty CalPeco employees when it knew there were in fact no such employees, as they had been transferred to Service Corp.[3] Not only did Liberty CalPeco fail to seek Commission approval for its new structure, Liberty CalPeco also failed to disclose to the Commission its new structure, effectively hiding that new structure from the Commission.
Nevertheless, Liberty CalPeco now attempts to reassure the Commission:
[H]aving Service Corp serve as the centralized employer for these individuals, in and of itself, particularly when accompanied by all the necessary customer protections, should not be a cause for alarm. Rather, assuming the innovation provides benefit, and the utility demonstrates the necessary safeguards are in place, the Commission should encourage utilities to undertake such “creative”
service-enhancing cost-saving initiatives. (December 15, 2016 Response at 16.)
This Commission cannot “assume” that the new structure provides benefits. The record of this proceeding (which has provided Liberty CalPeco multiple opportunities to make its case) fails to support any finding of benefit, and does not show that any services have been enhanced or that any costs have been saved. Liberty CalPeco acknowledges that under its new structure consumer protections and safeguards are necessary, so we must also consider the adequacy of those customer protections and safeguards.
Many customer protections and safeguards are set forth in statutes, and a number of the most important of those address utility employees. For example, Public Utilities Code Section 451 reads in part:
Every public utility shall furnish and maintain such adequate, efficient, just, and reasonable service, instrumentalities, equipment, and facilities, including telephone facilities […] as are necessary to promote the safety, health, comfort, and convenience of its patrons, employees, and the public. (Emphasis added.) Similarly, Public Utilities Code Section 314(a) reads in part:
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. (Emphasis added.)
These are important provisions of California law, and the Commission cannot abdicate its responsibility to ensure Liberty CalPeco’s compliance with these and other laws.
Liberty CalPeco argues that its new structure does not limit the Commission’s authority over Liberty CalPeco pursuant to the Public Utilities Code, and accordingly the Commission should not be concerned, as Liberty CalPeco remains subject to the Commission’s jurisdiction and the requirements of the Public Utilities Code. But Liberty CalPeco is much vaguer when it comes to the Commission’s authority over Service Corp and its employees, who are now providing all utility services to Liberty CalPeco’s customers.
In support of its argument that the Commission’s authority remains intact, Liberty CalPeco cites to several provisions of the Services Agreement between Liberty CalPeco and Service Corp. (December 15, 2016 Response at 55, 56, 57.) For example, Liberty CalPeco argues that the language of the Services Agreement shows that: “Liberty CalPeco has not and will not delegate any of its public utility responsibilities to provide safe, cost-effective, and reliable public utility services.” (Id. at 55.)
Liberty CalPeco similarly argues that:
Section 4.2 of the Services Agreement directly addresses, and is intended to ensure, the continued ability of this Commission to obtain access to documents and other information related to Liberty CalPeco’s performance of, and the costs incurred to provide, its public utility functions:
Requests by the CPUC. Liberty CalPeco is subject to rate and financing regulation by the CPUC and as such is obligated to respond to various requests for information by representatives of the CPUC. [Service Corp] and Liberty CalPeco agree and recognize that Liberty CalPeco is responsible for responding fully and timely to any such requests for information from the CPUC relating to Liberty CalPeco and [Service Corp] and [Service Corp], and Liberty CalPeco shall accordingly ensure that [Service Corp] shall provide information responding to such [reasonable] requests. (Id. at 56, quoting Services Agreement.)
In other words, the contractual provisions in the Services Agreement between CalPeco and Service Corp are part of the “customer protections” and “necessary safeguards” that CalPeco cites as a basis for arguing that the Commission should not be alarmed by the new structure. But the provisions in the Services Agreement are worth very little.
The Services Agreement is a contract between CalPeco and Service Corp that the Commission did not negotiate and is not a party to. More significantly, the Services Agreement itself includes the following provision: “Section 5.4 Supremacy. In the event of a conflict or inconsistency between the terms of this Agreement and the CAM, the CAM shall prevail.” The CAM is the Algonquin Power & Utilities Corporation Cost Allocation Manual.[4]
In other words, any customer protections and necessary safeguards provided by the Services Agreement can disappear whenever Liberty CalPeco’s parent wants them to disappear. Accordingly, the Services Agreement provides no real customer protections or safeguards. It would be an abdication of this Commission’s duty to trade its statutory customer protection authority for an empty contractual promise.