BACKGROUND

Southern California Edison requested authority under Section VI of General Order 96-A and Section 454 of the Public Utilities Code to increase water revenue for Catalina Island Water System (Catalina Island), a Class C water utility, by 248% or $3,220,390 over 2005 revenues, for a 9.07% return on rate base for Test Year (TY) 2006. The purpose of the rate increase was to

recover increased operating expenses and to provide an adequate rate of return on plant investment. Catalina Island's present rates became effective on January 1, 1985, per Decision (D.) 83-10-045. There had been no other rate change since the 1983 general rate case.

In order to promote conservation, Catalina Island also proposed changing its current 2-tier increasing block rate structure to a 3-tier increasing block rate structure. To mitigate the impact of the rate increase, the lowest rate (tier 1) was to be slightly expanded from 2,000 gallons to 2,500 gallons per month. Tier 3, at the highest rate, was to be created to send appropriate economic signals to encourage Catalina Island's heaviest-usage water customers to conserve water.

With a surface area of 75 square miles, Santa Catalina Island is situated approximately 30 miles southwest of Huntington Beach in southern California. The primary industry on Catalina Island is tourism. Avalon, located on the east end of the island, is the only city and major population center on the island. Figures from the 2000 census show that the city of Avalon had a population of 3,127, with another 195 in the areas surrounding the city limits. The total permanent population on Catalina Island is now estimated at over 3,500. During holidays, weekends, and the summer months, the population can swell to over 10,000. The island's summer temperature averages 75 degrees, while in winter the temperature averages 65 degrees. Catalina Island has a semi-arid climate. On average the sun shines 267 days a year and the average rainfall is 14 inches per year. Historical rainfall data show that on average the annual rainfall varies from the norm by approximately 50% in either direction.

As an isolated water system in a semi-arid climate with no economically feasible means to import large quantities of water from outside the island, Catalina Island is highly susceptible to the effects of prolonged low rainfall. For example, rainfall in 2002 fell short of the historical average by 53% and in 2003 the total rainfall fell short of the average by 13%, triggering phase one (the mildest stage) water rationing beginning on January 8, 2004 and ending on January 25, 2005. Following a number of years of inactivity beginning in 1992 and again in 1995, the desalination plant in Avalon was reactivated in 2003 as a way to ensure a reliable long-term water supply during prolonged low rainfall or drought years.

As of December 31, 2005, Catalina Island had 1,934 metered service connections and no flat rate connections. Catalina Island derives its primary water supply (totaling 512 acre-feet in 2005) from a system of wells, springs, and reservoirs. According to Southern California Edison the desalination plant was designed to produce an additional 85 acre-feet annually, but in times of emergency can produce more by reducing scheduled maintenance. Excluding water production from the desalination plant, Catalina Island has a Commission-approved safe annual yield of 515 acre-feet.