VI. Proponents' Explanation of Why the Elements of the Stipulation are Reasonable

To illustrate the reasonableness of the stipulation, Applicant and ORA offered the following explanations of how the most notable elements of the stipulation, in terms of the impact on the "bottom line", were reached.

A. Cost of Capital

Applicant requested a return on common equity of 10.75%, while ORA recommended 9.39%. After discussions concerning returns authorized for various water companies, they agreed to a return on common equity of 9.80%. Applicant and ORA also agreed to ORA's weighted cost of debt reflecting updated financial data.

B. Customers, Sales, and Revenues

Applicant accepted ORA's estimated customers, sales, and revenues, except for industrial sales and revenue in the Bakersfield District, and other sales and revenue in the Palos Verdes and South San Francisco Districts. ORA accepted Applicant's estimates for industrial sales and revenue for the Bakersfield District. For the Palos Verdes and South San Francisco Districts, they adopted an average of their two estimates of other sales and revenues because recent data indicated a decline in other sales and revenues.

C. Water Treatment Plant in the Bakersfield District

Applicant proposes to build a water treatment plant in the Bakersfield District capable of treating 20 million gallons of surface water per day. The plant will be built to accommodate future growth and to respond to new standards of the United States Environmental Protection Agency (EPA).

Applicant and ORA agree that the plant will benefit customers in several ways. Applicant's customers will receive water that meets the EPA standards, less water will be pumped from wells, and overdrafts of ground water will be reduced.

Due to uncertainties in the ultimate cost of the plant, Applicant and ORA agreed that Applicant will be allowed to file advice letters in 2002, 2003, and when the plant goes into service. The advice letter filings will reflect the revenue requirements associated with the costs actually incurred; however, they are limited to total capital costs of $31 million, not including interest during construction.