4. Evidence Presented at Hearing

At hearing, Donner sought to justify its application through the testimony of its president and its consulting engineer. ORA through its witness presented a proposed settlement between it and the company. The settlement is opposed by customer protestants, who presented five witnesses and numerous exhibits intended to show that Donner's managers are incapable of correcting the faulty water system.

4.1 Donner's Evidence

Fortino, who is president and chief operating officer of both Donner and its parent company, Del Oro, testified that Donner has two principal sources for its water supply - water diverted through an intake system from Donner Lake and water derived from springs known as Greenpoint Springs. At the time Del Oro acquired Donner in 1993, the water company was subject to a DHS compliance order requiring additional filtration and disinfection of surface water.

Fortino retained consulting engineers who recommended that Donner construct a water filtration and treatment plant with capacity to treat 1.5 million gallons of water each day. Fortino testified that construction of the plant has been delayed for years, first in finding and buying a suitable site and then in acquiring necessary permits and an easement. The company was involved in at least two lawsuits with the city and nearby property owners dealing with an environmental report and an eminent domain easement for installation of a pipeline.

Meanwhile, Fortino said, the 50-year-old water system was besieged with problems. Numerous leaks in pipelines and storage tanks caused a major outage in 1999, leaving many customers with little or no water for days or weeks at a time. In March 1999, Donner applied for a state loan of $3.7 million to replace a portion of the distribution lines and to construct the treatment plant. That application was eventually withdrawn because of the pending lawsuit on an easement for the treatment plant.

Additional outages in June 2000 led to two more DHS letters of deficiencies and a citation. Concerned about the possibility of backflow contamination caused by low water pressure, the DHS this time imposed the boil-water order. It also issued an order stating in detail the steps required in years 2000 and 2001 to correct leakage, storage and lake intake for the water system. This application to the Commission followed, seeking authority to borrow up to $15.5 million for short-term and long-term repairs required by DHS.

Engineer Joseph C. Scalmanini testified that his firm conducted the studies and drew up plans for the proposed water treatment plant. In response to DHS directives in the year 2000, his firm recommended a five-year capital improvement plan that, in addition to the treatment plant, would replace 70,000 linear feet of pipelines, replace existing storage tanks, install meters on all residential services, and construct a new lake intake system. He estimated that the cost of system improvements during the year 2001 will be $4.2 million. A detailed breakdown of the construction cost, the majority of it for replacement of pipelines, service connections and storage tanks, is set forth in Exhibit 1 of the amended application. Scalmanini stated:

"Based on discussions with DHS staff, my understanding is that, with the interim improvements already in place, and with the combination of main line replacement, new temporary lake intake, and South Side tank replacement, the system will be sufficiently improved for the notice to boil water to be withdrawn." (Exhibit 46, at 10.)

Both Fortino and Scalmanini in their testimony stressed the need for prompt action, stating that because of weather, the construction season in the Truckee area extends only from late April through October.

4.2 ORA's Proposed Settlement

ORA Project Manager Daniel R. Paige testified that he had confirmed with DHS that funds have been approved and are available for renovation of Donner's water system under the Safe Drinking Water State Revolving Fund, which is administered by the Department of Water Resources. Interest on such a loan would be 2.8%. Paige said that it is his understanding that a state loan would be available by June 2001.

Paige testified that ORA's primary concern is that the repairs required by DHS be carried out promptly in order that water system integrity can be restored and the boil-water order can be lifted. He stated that DHS-ordered repairs in the year 2001 will be required regardless of whether Donner continues to be owned by Del Oro or whether Donner is acquired by the Utility District. Both Donner and the Utility District are subject to DHS requirements.

In view of these factors, ORA presented a motion for adoption of a settlement in which the Commission would approve the application subject to a number of conditions. The proposed settlement agreement, a copy of which is Attachment A to this decision, includes the following terms:

· Donner would be authorized to secure temporary financing in the form of a loan not exceeding $4.5 million (including the previously authorized $1.3 million) at an interest rate of not more than 10%. The loan would require periodic payment of interest, with full principal payable on or before December 31, 2001 (through use of the low-interest state loan).

· Spending from the loan would be made incrementally as elements of the work in 2001 are completed. Checks would be countersigned by Donner and by a representative of the Commission's Water Division. The Water Division would consult with DHS to confirm that work has been completed properly.

· Donner would be authorized to impose a surcharge of $27 per month per account to make payments on the $4.5 million loan. Funds would be placed in an account at a bank approved by DHS and the Department of Water Resources.

· Donner would be authorized to enter into an agreement for a State Revolving Fund loan in an amount not to exceed $15,514,400 (including the $1.3 million already authorized in D.01-03-060), of which not more than $4.5 million would be used to retire outstanding interim financing. Donner would be authorized to establish a new surcharge reflecting terms of the State Revolving Fund loan.

Paige testified that if the Utility District succeeds in taking over the water company, DHS has advised that the state loan could be transferred in whole or in part to the Utility District. He added that under the settlement agreement, all work would be approved in advance of payment by DHS and the Department of Water Resources.

The settlement agreement has been accepted by Donner but is opposed by customer intervenors, who argue against authorization of any additional funding for the current management of the water system.

4.3 Customer Intervenors' Evidence

Customer intervenors cross-examined Fortino at length, presented 45 exhibits, and offered the testimony of five witnesses, including a certified public accountant and the general manager of the Utility District.

The certified public accountant, Dau Luc, testified that he was retained to examine Donner's balance sheets and income statement summaries filed with the Commission between 1993 and 1999. He stated that he found that Donner had transferred some $372,000 to its parent company during that period, and had booked some $60,000 for deferred taxes, and he found these and other accounting practices questionable. He disagreed with a Commission staff audit report dated December 21, 2000 (Exhibit 3). The staff audit concluded that Donner's financial statements "were fairly stated" and that there had been no cross-subsidization of Del Oro's operating expenses. On cross-examination, Luc acknowledged that his examination was a limited one and that he had not conducted independent inquiry into the company's practices. He stated that his recommendation was that the staff revisit its audit report in view of the questions he has raised in his review.

In the cross-examination of Fortino, customer intervenors showed that Donner was slow to correct deficiencies noted by DHS in compliance letters issued in 1993, 1996, and 1999, and that it had not at the time of hearing begun construction required in a DHS citation issued in June 2000. On redirect examination, Fortino stated that the company had completed all preliminary steps required by DHS until start of the construction season. He stated that the company had expected the treatment plant to solve many of the DHS concerns, and that the company had not anticipated the community objections to the plant and the delays caused by those objections.

Fortino admitted that the company had failed for several years to install an automatic shutoff device for chlorine monitoring of lake intake water, but he stated that frequent manual testing was in place at all times. He admitted that a Grade II Water Treatment Operator Certificate is required for an employee to perform chlorine treatment and sampling, and that Donner had permitted a Grade I operator to do this work. In uncontradicted testimony, however, he stated that DHS had permitted the Grade I employee to perform chlorine functions while he was working on qualifying for his Grade II operator permit.

Fortino also was questioned about Donner's delays in repairing a lake intake pipe, storage tanks, and distribution lines. On redirect examination, he offered a detailed "timeline" (Exhibit 45) of repairs, replacement of equipment, acquisition of water rights, and negotiations for the treatment plant that had taken place between 1993 and the present.

Customer intervenors presented the prepared testimony of William R. Kirkpatrick, engineering manager at East Bay Municipal Utility District, and of Jess Morehouse, senior sanitary engineer at DHS. Kirkpatrick testified that, based on the information available to him, a comprehensive maintenance plan and funding should have been in place at Donner years ago. Morehouse testified that DHS had encountered numerous deficiencies in the Donner system that the company was slow to correct.

Juanita J. Schneider, a retired businesswoman, testified that she was a customer of Donner, that water quality has often been poor, that the chlorine level was uncomfortably high, and that the company has often been remiss in sending her required statements of water quality.

4.4 Utility District Evidence

Peter Holzmeister, general manager of the Utility District since 1984, testified that the district became involved with Donner water issues in August 2000. That was when a number of Donner Lake property owners petitioned the Utility District board to acquire and operate the Donner system.

Holzmeister said that the district evaluated the acquisition, completed an environmental assessment, and in April 2001 made an offer to purchase the Donner system for $500,000, which Holzmeister said was its appraised value. The Utility District also conducted balloting for formation of a special assessment district to purchase and renovate the Donner water system. Of 1,130 ballots received, 977 or 87% of voting owners favored a Utility District takeover. Holzmeister estimated that the total cost of buying the system and completing repairs would be $13.6 million, which would be paid through a State Revolving Fund loan and assessments on property owners.

Holzmeister stated that if the Utility District acquires the Donner system soon, the district would make the repairs required by DHS in the year 2001 and operate the system for about a year using its current water sources. After that, he said, the Utility District contemplates adding pipelines and serving Donner customers through the same system of wells that now serve the Utility District's customers.

On cross-examination, Holzmeister acknowledged that he did not know how long it would take to acquire the Donner system if the Utility District is compelled to seek acquisition through its eminent domain authority. He also was unfamiliar with the amount of time it would take for regulatory approval of a friendly takeover.