14. Assignment of Proceeding
John A. Bohn is the assigned Commissioner and Douglas M. Long is the assigned Administrative Law Judge in this proceeding.
Record
1. There is a full and complete record composed of testimony, work papers, examination of witnesses, as well as full and complete opening and reply briefs.
Settlements - Generally
2. The parties to the settlement adopted in this decision had a sound and thorough understanding of the application, and all of the underlying assumptions and data included in the record and could make informed decisions in the settlement process.
3. The adopted settlement is between competent and well-prepared parties who were able to make informed choices in the settlement process.
Test Year Settlement
4. The intervening party, DRA, which settled with Alco, represents a broad range of customers.
5. The test year revenue requirement settlement for Alco is a balance of the positions advocated by the applicant and DRA.
Unresolved Issues
6. The test year settlement's revenue requirement is unaffected by resolving open disputes between applicant and the primary intervenor, DRA.
7. The unresolved issues include issues litigated by Alco and DRA outside the test year revenue requirement settlement.
Wells & Pumps
8. Alco needs new energy efficient pumps as a part of meeting its water supply requirements.
9. Three new wells are already authorized by Resolution W-4577 and the Verona and Bardon Wells are partially completed. The East Laurel Well has only minor expenditures.
10. The total forecast cost for the three wells are $953,505 for the Verona Well which includes $778,905 of construction work in progress incurred through 2009; $1,689,130 for the Bardin Well which includes $750,345 of construction work in progress incurred through 2009; and $1,802,235 for East Laurel Heights which includes $57,000 of construction work in progress incurred through 2009.
11. Based on the record the estimated cost to complete the Verona, Bardon, and East Laurel Heights wells is reasonable.
12. Alco can meet its water demand for safe water with its largest one well off-line.
13. Public Health Code requirements in § 64554(c) apply continuously and Alco must be able to meet its water demand with the largest source off line.
14. Alco needs none of the three new wells proposed in the rate case to have sufficient supply to meet maximum daily demand after including three previously approved new wells and the new pump for an existing well.
15. Alco needs only three new wells already authorized by Resolution W-4577 as a part of its supply to meet its fire flow requirement pursuant to Public Health Code § 64554(a).
16. Alco needs 9,575 gpm which includes 1.5 times its maximum daily demand to meet its fire flow requirement.
17. Alco need only have an adequate fire flow supply with its single largest water supply offline.
18. Alco will have sufficient margin to meet its maximum daily demand, plus a fire flow allowance, even with one of its largest wells offline.
19. Alco must blend water sources and needs 5 new wells to meet arsenic contamination limits.
Audit
20. Alco does have its financial statements audited by an independent Certified Public Accountant.
Family Transactions
21. The Commission's water affiliate transaction rules adopted in D.10-10-019 do not clearly address family transactions; they are focused on related company dealings and anti-competitive behavior.
22. Prohibiting transactions involving Alco and the family that owns the company, one of whom is the president of the company, will avoid the risk of unfair transactions.
23. Alco has had commercial transactions between the regulated utility and the family members that control the ownership of Alco's common stock.
24. Alco purchased equipment from a company, G&L Leasing controlled by a shareholder, Mrs. Adcock, who is also the mother of the utility's president.
25. Alco purchased equipment from T.R. Adcock who is the president and whose family controls the ownership of Alco's common stock.
26. The equipment acquired from G&L Leasing is fairly valued for ratemaking purposes at remaining book value.
27. The assets acquired from T.R. Adcock are fairly valued for ratemaking purposes at remaining book value.
New Equipment Purchases
28. Alco should defer purchase of equipment intended to comply with California Air Resources Board Rules until Alco can demonstrate the California Air Resources Board will enforce new emission standards. Reopening the record would be efficient and timely.
29. Alco needs an infrastructure mapping system.
30. Alco needs new office systems including computers, operating systems, customer service software, and telephone equipment.
31. Alco needs three new large service trucks.
Advice Letters for New Equipment and Wells
32. Deferring rate recovery until new equipment or new wells are built and used and useful, protects customers from paying in rates for items not actually built or acquired.
33. Advice letters can enable Alco to recover in rates the revenue requirements of new equipment and wells after the wells or equipment are actually built or acquired and are used and useful.
Cost of Capital
34. Alco and DRA agree to use a 70% debt and 30% equity capital structure.
35. Alco forecasts debt cost at 9.5% to 10.5% by adding a 200 basis points to its last debt cost because the cost of bonds has risen by 200 points between 2007 and 2010 on corporate bonds yielded rated at Baa.
36. 200 points above current rates reported in the Federal Reserve's Statistical Release H.15 on corporate bonds yields rated at Baa results in a forecast of 7.70% to 8.00%.
37. DRA recommends 400 points adder to the 10-year Treasury Bond which would be a forecast of 6.60% to 7.00%.
38. The most reasonable forecast cost of debt for Alco is 8.0%.
39. The Commission has recently authorized 10.20% on equity for Class A water companies.
40. Alco is much smaller than the smallest Class A companies.
41. Alco does not justify its 200 basis point adder for greater risk and smaller size compared to the Class A water companies. It used an out-of-date bond yield curve.
42. DRA could not demonstrate how it derived an estimate of 10.96% from Resolution W-4760 which was Del Oro Water Company's recent general rate case.
43. We believe that 50 basis points is a sufficient allowance for Alco's smaller size and the less rigorous regulatory oversight of Class B water companies.
Other
44. Alco is a sophisticated operation. DRA found many issues to litigate in this proceeding.
45. A rate case application is usually more thoroughly examined than an advice letter rate case.
1. 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.
Settlements Generally
2. The existing framework of regulatory proceedings sets just and reasonable rates for Alco to provide safe and reliable service pursuant to Pub. Util. Code § 107.10.
3. Applicant alone bears the burden of proof to show that its forecasts are reasonable.
Test Year Settlement
4. The Test Year revenue requirements settlement is reasonable because it fairly balances intervenor interests and provides sufficient revenue to safely provide reliable service.
5. The Commission has the discretion and authority to resolve open disputes which were not addressed in the settlement and were part of the litigated positions of parties.
6. The adopted settlement provides sufficient information for the Commission to discharge its future regulatory obligations.
Unresolved Issues
7. The Commission has the discretion and authority to craft a regulatory solution which differs from the applicant's proposal and the intervenor's recommendations in order to adopt just and reasonable rates which allow the applicant a reasonable opportunity to recover its costs to provide safe and reliable service.
8. Public Health Code requirements in § 64554(c) apply to Alco on an ongoing basis.
9. Public Health Code § 64554(a) for fire flow requires Alco to have a supply of 1.5 times its maximum daily demand.
10. Equipment purchased from G&L Leasing should be included in rate base at its net book value at the time of transfer.
11. Equipment purchased from T.R. Adock should be included in rate base at net book value at the time of transfer.
12. The Pre-2009 CWIP and 2009 CWIP which totals $778,905 for the Verona Well should be included in rate base as Plant Held for Future Use.
13. The 2009 CWIP of $750,345 for the Bardin Well should be included in rate base as Plant Held for Future Use.
14. The construction work in progress balance of $57,000 should be included in rate base as plant held for future use.
15. It is reasonable to cap the cost to complete the Verona, Bardon and East Laurel Heights wells at the current forecast.
16. Alco must file Tier 2 Advice Letters to recover any additional costs of the three wells up to the individual cost caps.
Family Transactions
17. The Commission's adopted affiliate transaction rules in D.10.10-019 apply to Alco. These rules do not prohibit family transactions with the regulated utility.
18. The Commission has the authority to apply additional or more specific restrictions on Alco prohibiting specific types of transactions with members of the ownership family.
Advice Letters
19. Advice letter rate recovery when new wells and other equipment acquisitions actually occur, and are used and useful, is reasonable to protect ratepayers from paying for major forecast expenditures which do not occur.
Cost of Capital
20. 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. (Bluefield Water Works & Improvement Company v. Public Service Commission of the State of Virginia, 262 U.S. 679 (1923) and Federal Power Commission v. Hope Natural Gas Company, 320 U.S. 591 (1944).)
21. It is reasonable to impute a cost of debt based on the historical interest rate spread above the return on corporate bonds rated at Baa.
22. It is reasonable to allow an additional 50 basis points to the cost of equity to compensate for the smaller size of a Class B water company compared to a Class A.
Other
23. The Commission has the authority to order Alco to file its next general rate case by application no sooner than a 2013 test year to increase base rates beyond the 2012 attrition rates.
24. All rulings by the assigned judge were lawful and are affirmed.
25. Application 10-02-006 should remain open to address the proposed advanced metering infrastructure proposal.
IT IS ORDERED that:
1. The September 15, 2010 Joint Motion of Alisal Water Corporation, dba Alco Water Service and the Division of Ratepayer Advocates to Approve a Settlement in Application 10-02-006 is granted and the settlement is approved. (The settlement is available at http://docs.cpuc.ca.gov/efile/MOTION/123510.pdf ).
2. The disputed issues regarding construction of six wells in Application 10-02-006, which are not included in the proposed settlement between Alisal Water Corporation, dba Alco Water Service (Alco) and the Division of Ratepayer Advocates, are resolved as follows:
a. Alco may record $778,905 in construction work in progress for the Verona Well in rate base as Plant held for Future Use.
b. Alco may record $750,345 in construction work in progress for the Bardin Well in rate base as Plant held for Future Use.
c. Alco may record the $57,000 in construction work in progress for the East Laurel Heights Well in rate base as Plant held for Future Use.
d. Upon completion and becoming used and useful Alco must file a Tier 2 Advice Letter to recover actual cost up to a cost cap total of $953,505 for the Verona Well which includes the amount of $778,905 recorded in Plant Held for Future Use.
e. Upon completion and becoming used and useful Alco must file a Tier 2 Advice Letter to recover actual cost up to a cost cap total of $1,689,130 for the Bardin Well which includes the amount of $750,345 recorded in Plant Held for Future Use.
f. Upon completion and becoming used and useful Alco must file a Tier 2 Advice Letter to recover actual cost up to a cost cap total of $1,802,235 for the East Laurel Heights Well which includes the amount of $57,000 recorded in Plant Held for Future Use.
g. Alco may not construct any of the three wells proposed in this application.
3. The disputed installation of new energy efficient pumps is approved and Alisal Water Corporation, dba Alco Water Service is authorized to file a Tier 2 Advice Letter upon installation and the pumps becoming used and useful.
4. The disputed purchase of an infrastructure mapping system is resolved as follows: Alisal Water Corporation, dba Alco Water Service (Alco) may purchase the office equipment at a capped cost of $100,000. Alco must file a Tier 2 Advice Letter to put the actual costs of the infrastructure mapping system in rate base and recover the revenue requirement but only if and when the system is purchased and becomes used and useful.
5. The disputed purchase of office equipment is resolved as follows: Alisal Water Corporation, dba Alco Water Service (Alco) may purchase the office equipment at a capped cost of $618,700. Alco must file a Tier 2 Advice Letter to put the actual costs of the office equipment in rate base and recover the revenue requirement but only if and when the office equipment is purchased and becomes used and useful.
6. The disputed purchase of three new service trucks is resolved as follows: Alisal Water Corporation, dba Alco Water Service (Alco) may purchase the three trucks at a capped cost of $177,464. Alco must file a Tier 2 Advice Letter to put the actual costs of the trucks in rate base and recover the revenue requirement but only if and when the trucks are purchased and become used and useful.
7. The equipment acquired from G&L Leasing is valued at $33,350 for inclusion in rate base.
8. The equipment acquired from T.R. Adcock is valued at $109,540 for inclusion in rate base.
9. Alisal Water Corporation dba Alco Water Service must cease all commercial transactions between the utility and any member of the Adcock family. The Adcock family may continue to invest equity capital as needed pursuant to a Commission decision authorizing the company to issue common stock. Qualified members of the Adcock family may work for Alco and be paid reasonable compensation for the necessary work they perform to operate the utility.
10. Alisal Water Corporation dba Alco Water Service (Alco) may file a Tier 3 Advice Letter for a waiver of the ban on commercial transactions with related parties. Alco must fully justify why the transaction would be reasonable and in the ratepayer's interest.
11. Alisal Water Corporation dba Alco Water Service must continue to have annual independent audits by a Certified Public Accountant.
12. Alisal Water Corporation dba Alco Water Service must submit its annual audited financial statements, the related disclosures and the attest opinion of the Certified Public Accountant to the Division of Water and Audits (or successor organization) within 90-days of filing the Annual Report required by General Order 104-A.
13. Within 30 days of today's date, Alisal Water Corporation, dba Alco Water Service must file a Tier 1 Advice Letter with tariff changes and new rates in the attached Tables. The tariffs shall become effective on January 1, 2011, subject to the Division of Water and Audits' determination that they are in compliance with this decision.
14. Alisal Water Corporation dba Alco Water Service (Alco) must file its next general rate case by application and not by advice letter for no earlier than a test year 2013. Until Alco files this rate application the 2102 attrition allowance will be the last adjustment to base rates.
15. Application 10-02-006 remains open.
This order is effective today.
Dated March 10, 2011, at San Francisco, California.
MICHAEL R. PEEVEY
President
TIMOTHY ALAN SIMON
MICHEL PETER FLORIO
CATHERINE J.K. SANDOVAL
Commissioners
ATTACHMENTS
D1103005/A1002006 Attachments Long
