12 Purchase of Maple Water Rights

As part of the Maple acquisition, Suburban's parent company (Southwest) purchased Maple's 118.5 acre feet of prescriptive pumping rights in the Main San Gabriel Basin for $330,889. Suburban has leased those rights as needed at the prevailing market rate. ORA contends that Suburban should be ordered to acquire these rights directly because, in the long run, that would be less costly to ratepayers than leasing the rights. Suburban's witness testified that it was prudent to lease instead of to buy the pumping rights, since the rights are not needed every year. Indeed, no lease costs for these pumping rights are included in this rate case. According to Suburban's testimony, had Suburban bought the pumping rights in addition to the other Maple assets, the cost of the transaction would have gone from about $1,000 per new customer to about $4,000, an amount that Suburban argues is unreasonable and would likely have been disapproved by the Commission.

In Joint Application of Southern California Water Company and Peerless Water Co. (2002) D.01-11-064, we denied a proposed merger in part because the price of pumping rights in the transaction would have meant a significant increase in ratebase and rates. We believe the same principle applies here. Had Suburban acquired pumping rights as well as other Maple assets, the purchase price would have gone from $189,000 to about $520,000, with a concomitant increase in Suburban's ratebase and rates. By leasing the rights as needed, Suburban avoids so substantial an increase in ratebase, and its ratepayers benefit. In the absence of a showing by ORA that long-term savings would have accrued, we decline to direct Suburban to acquire the prescriptive pumping rights from its parent company.

RATE BASE

12.1 Capital Expenditures

Suburban testified that its proposed capital additions are primarily for replacement of facilities that are at the end of their useful life. It argues that its estimates are conservative, and it presented evidence to show that since 1996 its actual capital expenditures and depreciation expense have exceeded the amount authorized by the Commission.

ORA conducted a field investigation of Suburban's water system, and it recommends postponement to later years of certain capital expenditures.

a. Plant 235 Booster Pump Station

ORA recommends deferral of an additional booster pump station at Plant 235 and a reduction of the proposed expenditure from $600,000 to $237,991. Suburban's witness testified that in the past three years, the existing pump station (built in 1966) has shown signs of increased deterioration. The new pump station will include three vertical turbine pumps, each capable of delivering 1,500 gallons per minute. Two pumps will operate to meet maximum-day demands in an adjacent pressure zone, and the third pump will be a standby pump to be used if one of the other pumps is taken out of service. Suburban presented uncontradicted evidence to show that the difference in cost estimates by Suburban and ORA is attributable to use of some of the funds budgeted for this project to deal with higher priority capital repairs. We will adopt Suburban's actual expenditures for Plant 235 for 2002 ($74,948) and its estimate of additional funds for completion of the project in test year 2003 ($145,085).

b. PVC Pipe Additions

Suburban requested $270,000 for installation of 8-inch PVC pipe between Maplegrove and Lark Ellen for 2002. ORA recommends allowing only the amount that Suburban budgeted, or $220,000. The installation has been completed and put into service at an actual construction cost of $229,049. That is the amount that we will adopt.

ORA recommended $416,858 for test year 2003 for installation of 12-inch PVC pipe between Carmenita and Laurel. Suburban requested $660,000 for inclusion in the year 2002. By the time of hearing, Suburban showed that the work had been completed at a cost of $555,919. We will authorize that amount for the year 2002.

c. Transmission and Distribution Mains

ORA proposed $400,000 for miscellaneous transmission and distribution mains in 2002, as compared to Suburban's proposed $588,000. ORA testified that its recommendation was based on the last five years of Suburban's recorded information. We will adopt ORA's estimate.

d. Service Lines

ORA proposed $250,000 per year for 2002, 2003 and 2004 for service line replacement based on average expenses over a three-year period. Suburban requests $370,000 for 2002 and $350,000 per year for 2003 and 2004. Suburban testified that after the acquisition of the West Covina service area, it discovered that many of the service lines were polybuylene plastic that had to be replaced because of numerous failures. Cost of replacement to date has been $371,501. We will adopt Suburban's 2002 actual expenditures and its proposed budget for test years 2003 and 2004.

e. New Well

Suburban requested $1,000,000 in test year 2004 for construction of a new well in the Plant 201 Bartolo well field. ORA presented evidence to show that approvals of various government and court agencies will take 12 to 18 months before construction can begin. It recommends that the requested amount for 2004 be excluded. Suburban's witness testified that it began the approval process in late 2002 and anticipates completion in late 2003 or early 2004, with construction of the well to be completed in 2004. ORA does not contest the necessity for the new well. We will adopt Suburban's estimate.

12.2 Advice Letter Filings for Major Projects

Suburban has requested more than $4 million for four major projects, each of them estimated to cost more than $1 million. The projects include:

· San Jose Hills Service Area. Replacement of existing 2-million gallon concrete tank at Plant 121 at a cost of $1.352 million.

· Whittier/La Mirada Service Area. Replacement of the existing pump station at Plant 235 at a cost of $1.045 million.

· Plant 410. Construction of an iron and manganese removal treatment facility at a cost of $1.4 million.

· Plant 235. Replacement of an existing steel tank at a cost of $1.014 million.

Because of the uncertainties of the costs in projects this substantial, ORA recommends that Suburban file advice letters and supporting work papers to recover actual costs once each project is completed and placed into service. Suburban argues that it must have the flexibility to manage its portfolio of construction projects, and that the advice letter process limits that flexibility.

We are reluctant to authorize recovery at this time of more than $4 million in costs that are likely to be less (or more) than estimated. We agree with ORA that the advice letter process provides accuracy in accounting for these major expenditures and does not burden ratepayers unnecessarily. We will disallow these costs in this rate case and direct Suburban to proceed by way of advice letter filings. Our order authorizes the filing of advice letters for each of these four capital projects at costs not to exceed Suburban's estimates.