21. Reasonableness Review-Job No. 4870-F7-Plant Drill and Equip Well F7B, Construct Reservoir F7A, Booster Station and Site Improvements

SGV drilled and equipped Well F7B, and installed a water treatment plant, Reservoir F7A and a booster station. The project was placed in service in 2005, 2006 and 2007. SGV estimated the cost (in 2003) at $1,340,000. The recorded cost is $3,407,360.

21.1. Positions of Parties

DRA states that because SGV did not consider lower cost alternatives, costs in excess of SGV's original estimate should be excluded.

COF states that SGV should have known of and evaluated the drainage issues with this site before it acquired the site or proceeded with construction. COF also states that SGV has not shown that it considered alternative and less costly approaches to solving the drainage issue. Thus, COF recommends disallowance of the costs in excess of the original estimate of $1,340,000.

FUSD states that SGV should shoulder the costs due to its failure to seek alternatives such as a location that did not have the drainage issues that resulted in increased costs. Thus, FUSD recommends that all costs above the original estimate of $1,340,000 be removed from ratebase.

SGV states the cost estimate was prepared in 2003 for construction in 2004. Actual construction occurred in 2005-2007. SGV explains that during the design stage, it discovered drainage issues not considered in the cost estimate. SGV determined it was necessary to alter the design to prevent runoff from rain storms or a reservoir overflow from damaging adjacent properties. It built a retaining wall and altered site drainage to alleviate the problem. SGV also states that an enclosed building for the pumps, electrical panel and chlorination equipment was needed for security reasons. This too was not in the original estimate.

In addition to the above, SGV states that substantial increases in the costs of labor and materials between 2003 and 2007 contributed to the cost increases.

SGV states that it obtained competitive bids for the various parts of the work and selected the lowest bids.

21.2. Discussion

SGV obtained competitive bids for the various parts of the work and selected the lowest bids. In addition, the project was constructed between 2005 and 2007 rather than in 2004. As a result, costs for materials and labor increased. However, while building this project SGV discovered that there were drainage issues that were not considered in the original estimate. The drainage issues for this project required the construction of a sizable retaining wall to solve.

It is not reasonable to believe that, when SGV purchased the land to build this project, it did not notice that the land had a substantial slope that would cause drainage issues. The fact that resolution of the drainage issue was not included in the original estimate tends to indicate that SGV was not aware of the issue or chose to ignore it. Either of these alternative explanations indicates imprudent planning. SGV could and should have been aware of the issue. It should have considered alternative locations and, if reasonable alternative locations were not available, alternative ways to address the drainage issue. However, the record does not indicate that SGV did so. That being the case, SGV has had ample opportunity to meet its burden of proof regarding the additional costs of the retaining wall built to address the drainage issues, and has not done so. The cost of the retaining wall ($537,868) is excluded from ratebase.