4. The Settlement

On January 27, 2011, San Gabriel and DRA (the settling parties) filed a joint motion for adoption of a settlement agreement addressing most issues in the proceeding. The settlement describes in detail the parties' initial positions, areas of disagreement, and the final resolution of each item. Settlement was achieved in a number of ways: parties agreed on one party's original position for some issues; in other cases new or corrected information was provided altering one party's initial position; or a compromise position was agreed upon by the parties. The settlement resolves all but three disputed issues, two of which relate to the treatment of specific legal costs incurred by San Gabriel. The final disputed issue is San Gabriel's request for balancing account treatment of employee health and dental expenses. Those issues are addressed later in this decision.

Though the settlement is not an all-party settlement (because the cities of El Monte and Fontana chose not to become signatories), the motion for approval of the settlement agreement notes that the settling parties understood that no parties would oppose the settlement. Consistent with this assertion, no parties filed comments on the settlement during the 30-day comment period allowed in Rule 12.2.² The following section summarizes the final settlement; the final settlement itself, as adopted in this decision, is contained in Appendix E to this decision.

4.1. Los Angeles District: Settlement of
Issues Affecting Revenues

4.1.1. Customer Forecasts

In testimony, San Gabriel and DRA disagreed on the forecasted number of customers in the "Residential - Single Family" and "Residential - Multi-Family" customer classes within the Los Angeles district for the period covered in this general rate case, but agreed on estimates for the other eight customer classes. San Gabriel estimated that the number of customers in these two residential classes would not change during this rate case cycle, whereas DRA estimated that the number of customers in these two classes would grow or shrink at their 5-year recorded average rates. The absolute difference between the two estimates was small, and the settlement agrees to use the San Gabriel estimates for the two disputed categories. The following tables show the projected customer estimates, by customer class, agreed on in the settlement:

Customer Class	Number of Customers
	Test Year 2011-2012	2012-2013	2013-2014
Residential - Single Family	38,122	38,122	38,122
Residential - Multi-Family (Small)	3,086	3,086	3,086
Residential - Multi-Family (Large)	155	155	155
Commercial (Small)	4,705	4,705	4,705
Commercial (Large)	237	237	237
Industrial (Small)	14	14	14
Industrial (Large)	24	24	24
Public Authority (Small)	298	298	298
Public Authority (Large)	97	97	97
Recycled Water	28	30	31
Total	46,766	46,768	46,769

4.1.2. Forecast Sales per Customer

San Gabriel and DRA disagreed on the forecast sales per customer for all customer classes for both the test year and the escalation years. San Gabriel estimated that the number of customers in these two residential classes using the generally accepted New Committee Method, but made annual downward adjustments to reflect expected water conservation. In contrast, DRA initially argued that conservation adjustments were not allowed under the Commission's Rate Case Plan for certain customer classes. The absolute difference between the parties' estimates for most customer classes was small. Under the settlement agreement, parties accepted San Gabriel's forecast for all customer classes other than the Industrial (Small) class, and the DRA forecast was accepted for that one class. Parties also accepted the tier allocation (Tier 1 - 55%/Tier 2 - 45%) adopted in D.10-04-031. The following table shows the projected sales estimates, by customer class, agreed on in the settlement:

Customer Class	Per Customer Sales (in hundreds of cubic feet)
	Test Year 2011-2012	2012-2013	2013-2014
Residential - Single Family	187.84	186.2	186.2
Residential - Multi-Family (Small)	582	572	572
Residential - Multi-Family (Large)	5,011	4,953	4,953
Commercial (Small)	292	286	286
Commercial (Large)	7,536	7,412	7,412
Industrial (Small)	1,308	1,308	1,308
Industrial (Large)	32,764	32,181	32,181
Public Authority (Small)	523	510	510
Public Authority (Large)	7,847	7,618	7,618

4.1.3. Projected Water Loss

In testimony, San Gabriel projected a water loss percentage from water production based on the trend from 2007-2009, whereas DRA projected water loss based on a 5-year average. The settlement agreement uses the DRA projected water loss percentage of 5.6%, in conjunction with the settlement estimate on the number of customers and per-customer water usage described above.

4.1.4. Other Operating Revenue

In testimony, San Gabriel did not include future reimbursements from polluters under settlements related to San Gabriel Plants 4 and 8 as part of other operating revenues in Account 614; DRA's testimony assumed that San Gabriel would continue to receive such reimbursements. As a part of the settlement agreement, DRA accepted San Gabriel's Test Year forecast, and in turn, San Gabriel agreed to record future reimbursements associated with Plants 4 and 8 in the Water Quality Memorandum Account.

4.2. Los Angeles District: Settlement of Issues
Affecting Expenses

4.2.1. Forecasting Methodology
and Escalation Factors

Despite using consistent inflation factors developed by the Commission, San Gabriel and DRA used different forecasting methodologies to develop the test year expense dollars. The settlement agreement notes that DRA identified errors in the inflation adjustments, which San Gabriel corrected in its rebuttal testimony, and the corrected numbers are reflected in the expense estimates used in the settlement. Parties agreed on escalation factors provided by DRA.

4.2.2. Operations and Maintenance
Expenses

The Operations and Maintenance (O&M) expenses contained in the settlement agreement reflect parties' agreements on expenses in many areas. For some categories, the settlement adopts the position originally advocated by either San Gabriel or DRA, and in other instances, the parties developed a compromise position through negotiation. In a few cases, the parties used the same methodology and agreement on customer or sales estimates described above to resolve the conflict. The O&M expense amounts contained in the settlement are as follows:

O&M Expense Category	Settlement Amount
Purchased Power	$3,740,547
Purchased Water and Assessments	$14,056,000
Chemicals	$3,121,494
Transportation - Operation	$391,881
Transportation - Maintenance	$313,505
Materials and Supplies - Operation	$349,222
Materials and Supplies - Maintenance	$458,222
Miscellaneous - Operation	$586,549
Miscellaneous - Maintenance	$208,514
Outside Service - Operation	$1,460,248
Uncollectibles rate	0.1530 %

4.2.3. Administrative and General Expenses

The Administrative and General (A&G) expenses contained in the settlement agreement reflect parties' agreements on expenses in many areas. As in the case of the O&M expenses, in some cases the settlement adopts the position originally advocated by either San Gabriel or DRA, and in other instances, the parties developed a compromise position through negotiation. The A&G expense amounts contained in the settlement are as follows:

A&G Expense Category	Settlement Amount
Payroll expenses (Maintenance Man A)	$0
Regulatory Commission Expense (for GRC)	$161,667
Outside Legal Expense (Acct. 798) *	$205,074
Miscellaneous Expenses - Office Supplies and Other Expenses (Acct. 792)	$5,604
Administrative Expense Capitalized (Acct. 812)	($460,805) (credit)

* Partial settlement, excludes $166,000 for disputed contract litigation. See Section 8.3, below, for resolution of that disputed amount.

4.2.4. Pensions and Benefits

The Pensions and Benefits (P&B) expenses contained in the settlement agreement reflect parties agreements on expenses in many areas. As in the case of the O&M expenses, in some cases the settlement adopts the position originally advocated by either San Gabriel or DRA, and in other instances, the parties developed a compromise position through negotiation. The P&B expense amounts contained in the settlement for the Los Angeles district are as follows:

P&B amounts related to the General Division are discussed in Section 4.4.1, below.

4.2.5. Conservation Program

Conservation program issues resolved in the settlement include the conservation program budgets, a one-way balancing account for conservation expense, annual conservation reporting requirements, and a Web-site link for rebate programs. Under the settlement agreement, San Gabriel would receive a conservation program budget of $382,600, which represents a compromise between the San Gabriel and DRA litigation positions. Within the settlement agreement, San Gabriel agreed to the DRA proposal that authorized conservation expenses should be tracked in a one-way balancing account, agreed to implement the DRA recommendation that the main page of San Gabriel's Web site include a link to rebate programs, and agreed to conservation reporting requirements developed by the parties and set forth in the settlement agreement and its attachments.

4.2.6. Administration of Regulatory Accounts

In its application, San Gabriel requested authority to amortize in rates the balance in its supply cost balancing account; this treatment departed from an earlier San Gabriel plan to file an advice letter with the Commission's Division of Water and Audits seeking to amortize one or more of its regulatory accounts. After consultation with the Division of Water and Audits, parties agreed in the settlement that San Gabriel should be allowed to amortize over 12 months the October 2010 balance of $2,253,932 in its Purchased Power Balancing Account, using a surcharge of $0.1531/Ccf (per 100 cubic feet). The settlement agreement, and therefore this decision, does not address balances in any other San Gabriel Supply Cost Balancing Accounts.

4.3. Los Angeles District:
Capital Projects

In its application, San Gabriel proposed a 4-year capital budget of $61,023,000 for 43 capital projects during calendar years 2010 through 2013. The settlement agreement reduces this amount, recommending approval of 38 projects, with a capital budget for this period of not more than $48,936,000. Of this total amount, $39,908,000 would be included in rate base on a forecasted basis, with up to the remaining $9,028,000 to be added by advice letter on a recorded basis after the projects are completed, are used and useful, and are placed into service. The funding difference between San Gabriel's original request and the settlement agreement reflects the parties' agreement to scale back certain projects and the fact that San Gabriel withdrew its request for funding of 5 projects from this GRC.

4.3.1. Projects in Ratebase on a
Forecasted Basis

Under the settlement agreement, the parties would allow the following amounts into ratebase on a forecasted basis for the following capital projects:

4.3.2. Projects Requiring Future Advice Letter
for Inclusion in Ratebase

The settlement agreement allows amounts for six capital projects to be entered into ratebase on a recorded basis through an advice letter process, with costs not to exceed the estimated per project amount included in the following table:

The settlement provides that San Gabriel may file advice letters to enter the actual costs associated with these projects into ratebase, not to exceed the estimated amounts agreed upon in the settlement, after the project has been completed, is used and useful, and is placed into service. Under the provisions of the settlement, San Gabriel may file up to two advice letters related to these capital projects per fiscal year (July 1 - June 30), and costs for multiple completed projects may be included in a single advice letter.

4.4. General Division

General Division issues raised in this application include various costs for operating San Gabriel's central office serving both the Los Angeles and Fontana districts, as well as capital projects associated with the General Division. The settlement agreement defers several of the specific proposals related to General Division capital projects to the next San Gabriel Fontana District GRC, which was filed in July 2011.

DRA and San Gabriel recommend a specific rate adjustment of $0.0455/Ccf to the Fontana Water Company division rate to recover the Fontana Division's portion of the General Division expenses contained in the settlement. Because the settlement defers a decision on additional issues that could affect the Fontana Division (such as General Division capital expenditures), this is the only effect on the Fontana Division's rates from this GRC. The General Division issues that are not deferred are resolved in the settlement agreement as described in the following subsections.

4.4.1. General Division Expenses

General Division expenses include costs for payroll expenses (including new positions and executive salaries), General Division O&M, A&G, P&B expenses, and other expenses. The table for P&B expenses includes only those expenses related to the General Division district; the P&B expenses related to the Los Angeles District are described in Section 4.2.4 above. The settlement agreement provides the following amounts for each General Division expense category:

4.4.2 General Division Capital Projects

In this application, San Gabriel Valley Water made several requests for funding of capital projects within its General Division. These requests include four items related to San Gabriel's new Fontana Office Complex, and funding to renovate the company's office building in El Monte. In addition, San Gabriel requested funding for replacement of standard meters, and funding to begin deployment of meters equipped for automated meter reading. Finally, San Gabriel requested capital funding for office and transportation equipment.

In the settlement, DRA and San Gabriel agreed to defer all issues related to the Fontana Office Complex to San Gabriel's Fontana Division GRC, in order to avoid a potential conflict with the findings in a previous Commission decision, D.09-06-027, in San Gabriel's last Fontana Division GRC. Pending the resolution of these issues in the future Fontana Division GRC, the settlement contains amounts for requested Fontana Office Complex expenses that rely on the findings in D.09-06-027.

The settlement agreement contains the following agreements on expenses for other capital projects in San Gabriel's General Division:

4.5. Uncontested Issues and Other

San Gabriel's application contains several requests that were essentially uncontested by other parties in this case. As noted in the settlement agreement, DRA accepted San Gabriel's recommended numbers or methods for calculating the following elements of San Gabriel's GRC: federal and state income tax expenses, other tax expenses, franchise fees, working cash, Net-to-Gross multiplier, and depreciation rates used to forecast depreciation expense and depreciation reserve. To the extent that the parties' positions on these issues differed in testimony, those differences were due to differences in forecast revenues, expenses, and/or capital investments. In the settlement, parties agree to apply San Gabriel's proposed calculation methods to the settlement amounts for revenues, expenses, and/or capital investments to determine final forecasts for these categories.

Similarly, parties agree that San Gabriel's rates should be based on the application of the conservation rate design previously authorized in D.10-04-031 to the revenue requirement developed through the settlement agreement. This rate design is reflected in the tables in Appendix C and D to this decision. In addition, San Gabriel requests a Commission finding that its Los Angeles Division has been operating in compliance with state water quality standards since its last GRC, consistent with the finding of the Commission's Division of Water and Audits in a report submitted as part of this proceeding.³

² All references to rules are to the Commission's Rules of Practice and Procedures, unless otherwise specified. These rules are available on the Commission's Web site at: http://www.cpuc.ca.gov/word_pdf/RULES_PRAC_PROC/63835.doc.

³ Exhibit DWA-1.