DISCUSSION

The South Livermore to Fremont system is part of a pipeline system that transports most of the jet fuel to the San Jose International Airport and petroleum products to other parts of Santa Clara County. These products fill a critical need and shipments must continue.

The City of San Francisco and the San Francisco Public Utilities Commission is concerned that a pipeline leak could contaminate the San Antonio Reservoir. With Advice Letter 30-O-A CPL provided a map showing the pipeline route very close to the north shore of the reservoir. CPL's agreement with the City requires investment in environmental mitigation measures, including relocation of the pipeline off of the City's property and away from the Reservoir. To continue shipments through this pipeline, CPL must make investments in mitigation measures, including relocation of the pipeline.

CPL's forecast results of operations includes an investment of $1,100,000 in 2001 and $200,000 in 2002. CPL stated that it could no longer support the costs of mitigation and it must ask for a rate increase.

The Energy Division reviewed CPL's forecast results of operations for 2002 and believes it fairly represents CPL's 2002 reasonable costs and expenses.

CPL split its capital investment into debt and equity components based on ChevronTexaco parent's capital structure. CPL also used the ChevronTexaco cost of debt to develop an estimate of interest expense. CPL's inclusion of interest as an expense double counts its compensation for interest expense. In California, utilities receive compensation for interest through the rate of return, since the rate of return averages the interest into the capital structure. Exclusion of the interest expense from CPL's estimate of revenue requirement results in a rate of return of 8.35%.

CPL's results of operations reflect a 7.32% rate of return at proposed rates. In Resolution O-0041, which adopted a rate increase for Mobil Pacific Pipeline Company, we held that a rate of return of 8.7% rate of return is reasonable based on a comparison with other pipeline companies. Based on the foregoing, and our observation that CPL's proposed rate of return is actually 8.35%, CPL's proposed rate of $.045/bbl. is reasonable.