21. Assignment of Proceeding

John A. Bohn is the assigned Commissioner and Douglas M. Long is the assigned ALJ in this proceeding.

Findings of Fact

1. Applicants are public utilities subject to the jurisdiction of this Commission.

2. The applications were consolidated pursuant to Rule 7.4.

3. The financial markets and the economy in general have been in a recession from 2008 to present and the continued recovery appears to be slow.

4. The federal government has taken unusual and extensive steps to restore the economy.

5. The utility industry generally, and water utilities specifically, have outperformed the overall equity market.

6. Applicants and DRA used similar proxy groups to model the water industry. Subjective as well as objective factors were used to select the different proxy groups resulting in different modeling outcomes.

7. The natural gas proxy group is not a reasonable proxy for the water industry.

8. The Applicants' selection of modeling input may tend to bias the results of the Discounted Cash Flow model upwards. Applicants did not use identical inputs and thus derived different recommended returns on equity from similar models.

9. DRA's selection of modeling input may tend to bias the results of the Discounted Cash Flow model downwards.

10. Pennichuck Corporation has been the subject of eminent domain proceedings. We can consider the inclusion of Pennichuck Corporation in a water proxy group because eminent domain is always a risk for any non-governmental, private utility.

11. The Capital Asset Pricing Model is dependent upon the population used to measure beta (risk).

12. The Capital Asset Pricing Model uses a subject "Risk Premium."

13. The Applicants' 2010 forecast of the cost of new debt is the most reasonable evidence.

14. DRA imputed a capital structure as a part of its recommendations.

15. High equity ratios can be more costly to ratepayers because the income tax revenue requirement attached to equity returns may outweigh any higher issuance costs associated with debt for smaller companies.

16. None of the Applicants accurately or reliably quantified an excess risk which would warrant a premium over a general return on equity for Class A water utilities.

17. DRA's 25 basis point risk adjustment up or down for Valencia and Suburban, respectively, is subjective and not verifiable.

18. The Commission has authorized a wide array of balancing and memorandum accounts which reduce the risk of recovering reasonable costs prudently incurred.

19. The parties cannot calculate an accurate impact on the required return for smaller Class A water companies compared to the larger Class A companies.

20. The parties cannot calculate an accurate impact on the required return for those companies which have a Water Revenue Adjustment Mechanism and a Modified Cost Balancing Account and those which do not.

21. The Commission has allowed utilities to recover prudently incurred water treatment costs and other costs associated with contamination abatement.

22. San Gabriel did not accurately quantify its risk premium request for contamination risks.

23. Park/Apple did not accurately calculate its risk premium based upon its small size compared to other Class A water companies.

24. San Jose is substantially similar in size to the multi-district Class A companies, including Golden State Water Company, California-American Water Company, and California Water Service Company.

25. Requiring San Jose to file its next cost of capital application in 2011 for a base year 2012 with the three multi-district companies would tend to balance the size of the proceedings and group San Jose with other larger, publicly traded, Class A water utilities.

26. A Water Cost of Capital Adjustment Mechanism will allow for an accurate adjustment based on the market interest rates between base year proceedings, rather than an inaccurate adjustment based on out-of-date forecasts of debt costs.

27. Adjusting the boundaries of the dead band may avoid unintended adjustments caused by recent poor market performance.

28. Adjusting the base period to October 1, 2009 to September 31, 2010 will offset prior market anomalies.

29. San Jose has a Moody's bond rating of A which should be used for the Water Cost of Capital Adjustment Mechanism.

30. Valencia, Park/Apple, San Gabriel, and Suburban have the equivalent of a Moody's bond rating of Baa which should be used for the Water Cost of Capital Adjustment Mechanism.

31. Valencia issued substantial debt totaling $12 million, doubling its debt ratio for 2011.

Conclusions of Law

1. The consolidation of these applications does not imply that a uniform return on equity should automatically be applied to each of the utilities; however a uniform return may be applied if it is consistent with the record.

2. The legal standard for setting the fair return on equity has been established by the United States Supreme Court in the Bluefield and Hope cases. (Federal Power Commission v. Hope Natural Gas Company, 320 U.S. 591 (1944) and Bluefield Water Works & Improvement Company v. Public Service Commission of the State of Virginia, 262 U.S. 679 1923).)

3. The proxy companies in financial models must be a reasonable approximation of Applicants.

4. Financial models are dependent on subjective inputs; therefore, it is reasonable to apply informed judgment when considering financial modeling results.

5. The Commission should recognize the continuing financial dislocation in setting the return on equity to set a return that provides stability and attracts capital in times of economic uncertainty.

6. This decision reasonably relies on the entire record of the proceeding and accords weight based upon the evidence's relevance and the persuasiveness of the parties' arguments.

7. It is reasonable to set aside submission and use Valencia's latest financial information which materially affects 2011.

8. It is reasonable to consider the inclusion of Pennichuck Corporation in the water proxy groups because eminent domain is always a risk for any non-governmental, private utility.

9. It is reasonable to adopt a return on equity within the ranges proposed by Applicants and DRA because the financial modeling results are susceptible to subjective input selections.

10. It is reasonable to require the utilities to justify in detail their specific capital structures in their next cost of capital proceeding.

11. A Water Cost of Capital Adjustment Mechanism based on changes in actual interest rates is superior to using out-of-date forecasts of debt costs.

12. This decision should be effective today.

13. These proceedings should be closed.

ORDER

IT IS ORDERED that:

1. San Jose Water Company's cost of capital for its base year 2010 operations is as follows:

2. San Jose Water Company must file a Tier 1 advice letter to implement the rate changes to reflect the change in the 2010 cost of capital of 8.55%.

3. San Jose Water Company must file its next cost of capital application on or before May 1, 2011 for a new 2012 base year.

4. Valencia Water Company's cost of capital for its base year 2010 operations is as follows:

5. Valencia Water Company's cost of capital for attrition year 2011 operations is as follows:

6. Valencia Water Company must file a Tier 1 advice letter to implement the rate changes to reflect the change in the 2010 cost of capital of 9.54% and 2011 cost of capital of 8.28%.

7. Valencia Water Company must file its next cost of capital application concurrent, but separately, with its next general rate case application.

8. Valencia Water Company must justify in detail its proposed capital structure in its next cost of capital application.

9. Park Water Company and Apple Valley Ranchos Water Company's cost of capital for their base year 2010 operations is as follows:

10. Park Water Company and Apple Valley Ranchos Water Company must file a Tier 1 advice letter to implement the rate changes to reflect the change in the 2010 cost of capital of 9.42%.

11. Park Water Company and Apple Valley Ranchos Water Company must file a new cost of capital application on or before May 1, 2012 for a new 2013 base year.

12. San Gabriel Water Company's cost of capital for its base year 2010 operations is as follows:

13. San Gabriel Water Company must file a Tier 1 advice letter to implement the rate changes to reflect the change in the 2010 cost of capital of 9.25%.

14. San Gabriel Water Company must file a new cost of capital application on or before May 1, 2012 for a new 2013 base year.

15. Suburban Water Systems' cost of capital for its base year 2010 operations is as follows:

16. Suburban Water Systems must file a Tier 1 advice letter to implement the rate changes to reflect the change in the 2010 cost of capital of 8.83%.

17. Suburban Water Systems must file a new cost of capital application on or before May 1, 2012 for a new 2013 base year.

18. All advice letters required to implement the 2010 base year rate of return adopted in this decision must be filed within 30 days of the date of this order. The rate changes to reflect the change in the cost of capital shall be effective on January 1, 2010, as authorized by Decision 09-12-019, subject to the individual determination by the Commission's Division of Water and Audits that the advice letters are in compliance with this decision.

19. Application (A.) 09-05-001, A.09-05-002, A.09-05-003, A.09-05-004, and A.09-05-005 are closed.

This order is effective today.

Dated October 28, 2010, at San Francisco, California.

MICHAEL R. PEEVEY

President

JOHN A. BOHN

TIMOTHY ALAN SIMON

NANCY E. RYAN

Commissioners

Commissioner Dian M. Grueneich, being necessarily absent, did not participate.