D0611050 Walwyn Attachment 1
D0611050 Walwyn Attachment 2
D0611050 Walwyn Attachment 3

ALJ/CMW/jt2 Mailed 12/1/2006

Decision 06-11-050 November 30, 2006

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

In the Matter of the Application of California-American Water Company (U 210 W) for an order authorizing it to increase its rates for water service in its Monterey District to increase revenues by $9,456,100 or 32.88% in the year 2006; $1,894,100 or 4.95% in the year 2007; and $1,574,600 or 3.92% in the year 2008; and for an order authorizing sixteen Special Requests with revenue requirements of $3,815,900 in the year 2006, $5,622,300 in the year 2007, and $8,720,500 in the year 2008; the total increase in rates for water service combined with the sixteen Special Requests could increase revenues by $13,272,000 or 46.16% in the year 2006; $7,516,400 or 17.86% in the year 2007; and $10,295,100 or 20.73% in the year 2008.

Application 05-02-012
(Filed February 16, 2005)

In the Matter of the Application of California-American Water Company (U 210 W) for Authorization to Increase its Rates for Water Service in its Felton District to increase revenues by $796,400 or 105.2% in the year 2006; $53,600 or 3.44% in the year 2007; and $16,600 or 1.03% in the year 2008; and for an order authorizing two Special Requests.

Application 05-02-013
(Filed February 16, 2005)

OPINION RESOLVING GENERAL RATE CASES

TABLE OF CONTENTS

Title Page

OPINION RESOLVING GENERAL RATE CASE 2 2

I. Summary 2 2

II. Background 3 3

III. Issues Included in the Settlement Agreements
Between Cal-Am and DRA 8 8

IV. Monterey District Application 9 9

A. Contested Settlement Issues 9 9

1. Cost of Capital 9 9

2. Unaccounted-for Water Percentages 20 20

3. Meter Replacements 21 21

4. Carmel Valley Main Segments 4, 5, 6, and 10 22 22

5. Bishop Treatment Plant 23 23

6. Special Request 4 - Establishment of a Water Revenue Adjustment Mechanism (WRAM) Account to Track
Emergency Rate Overcollections 25 25

7. Special Request 5 - Endangered Species Act (ESA)
Memorandum Account 26 26

8. Special Request 7 - MPWMD Special Conservation
Surcharge 27 27

9. Special Request 16 - Balancing Accounts 28 28

B. Uncontested Settlement Issues 28 28

1. Customer Sales and Revenues 28 28

2. Operations and Maintenance (O&M) Expenses 28 28

3. Administrative and General (A&G) Expenses 29 29

4. Taxes and Net-to-Gross Multiplier 31 31

5. Utility Plant in Service 31 31

6. Depreciation Expense and Reserves 34 34

7. Ratebase Including GO Allocation 34 34

8. Customer Service and Conservation 34 34

9. Uncontested Special Requests 36 36

10. Step Rate Increases 39 39

C. Action on Proposed Monterey Settlement 39 39

D. Monterey Issues Not Addressed in the Settlement 40 40

1. Recovery of Costs Associated With San Clemente Dam 40 40

2. Special Request 1: Carmel River Dam 46 46

3. Inclusion of ESA Fines in Special Request 5 58 58

4. Special Request 8 - Memorandum Account for
SWRCB Fines 59 59

5. Special Request 13 - Rate Design 62 62

V. Felton District Application 67 67

A. Contested Settlement Issues 67 67

1. Cost of Capital 67 67

2. O&M Expenses, A&G Expenses, and GO Allocation 70 70

3. Taxes Other Than Income 76 76

4. Income Taxes 77 77

5. Utility Plant in Service 77 77

6. Depreciation Expense and Reserve 80 80

7. Rate Base 80 80

8. Customer Service and Conservation 80 80

B. Action on Proposed Felton District Settlement 82 82

C. Issues Not Addressed in Proposed Settlement 82 82

1. Rate Design 82 82

2. Low-Income Program 84 84

3. On-going Municipalization Efforts 85 85

4. Rate Shock 87 87

VI. General Office Rate Case 89 89

A. Salaries and Employee Expense, and Other GO Expenses 90 90

B. Outside Services and California Corporate Expenses 92 92

C. Amortization of Citizens' Acquisition Premium 93 93

D. RWE Savings 95 95

E. Utility Plant in Service 95 95

F. Action on Proposed GO Settlement 96 96

VII. True-Up of Interim Rates Adopted in D.05-12-024 96 96

VIII. Comments on Proposed Decision 97 97

IX. Assignment of Proceeding 98 98

Findings of Fact 98 98

Conclusions of Law 106 106

ORDER 107 107

ATTACHMENT 1 - Cal-Am Water Company - Monterey

ATTACHMENT 2 - Cal-Am Water Company - Felton

ATTACHMENT 3 - Cal-Am Water Company - General Office Expenses

OPINION RESOLVING GENERAL RATE CASE

I. Summary

This decision resolves the general rate case (GRC) applications of California-American Water Company (Cal-Am) for the Monterey and Felton districts and adopts rates for test year 2006 and attrition years 2007 and 2008. For the Monterey District for 2006, we adopt a rate increase of 10.29%, together with a three year 3% surcharge for pension costs and a four year surcharge for recovery of Carmel River Dam costs; the total 2006 increase is 17.03%. For the Felton District for 2006, we adopt a rate increase of 20.87%, which includes a pension cost surcharge.¹

Pursuant to Decision (D.) 05-12-024, the two districts have been on interim rates since January 1, 2006. With our adoption of final rates today, these interim rates will be trued-up and a surcharge amount established to collect the balance over the coming 12 months.

Partial settlements for the Monterey and Felton districts and corporate General Office (GO) rate case were filed by Cal-Am and the Division of Ratepayer Advocates (DRA). The settlements were contested by the Monterey Peninsula Water Management District (MPWMD) and the Felton Friends of Locally Owned Water (Felton FLOW). We approve both the Monterey and GO settlements but not the Felton settlement. We also find for both Monterey and Felton that there are several areas, particularly regarding tracking and monitoring customer service and justification for expense items, where further information must be collected and analyzed prior to the next GRC.

For the Felton proposed settlement, we do not find reasonable the amount proposed for the Highway 9 project and general and administrative expenses; we also adopt an adjustment for lobbying activities by employees.

For Monterey district issues outside the proposed settlement, we allow recovery of Carmel River Dam expenses over a four-year period. We move all San Clemente Dam retrofit costs to a memorandum account and give notice of our intent to consider carrying costs that reflect Cal-Am's long-term debt and equity costs for this account in a subsequent proceeding. We adopt memorandum accounts for compliance costs but not for fines, and we retain the existing rate design structure.

For Felton district issues outside the proposed settlement, we retain the existing rate design, adopt DRA's proposal for a low-income program, and adopt a rate increase cap of 50% for the next 12 months.² We recognize that a formal process for public acquisition of the district has started with the passage in July 2006 of Measure W. We commit to vigilantly overseeing future plant investment in the Felton district as the acquisition goes forward and we encourage Cal-Am and Santa Cruz County to use our alternative dispute resolution program, either as a substitute for or in tandem with court litigation.

¹ For 2007 and 2008, the revenue requirement will be escalated according to the standards set forth in the Commission's Rate Case Plan, which provides for escalating labor and non-labor costs based on indices published by the Division of Ratepayer Advocates and for routine capital investments to be projected based on a five-year average; major capital investments, including advice letter filings, for 2007 are shown in Section IV.B.5 of this decision for Monterey and Section V.A.7 for Felton.

² The cap will be calculated to include the rate increase and balancing account amortization authorized in D.05-09-044.