7. Comments on Proposed Decision

The proposed decision of the assigned Administrative Law Judge (ALJ) was mailed to the parties in accordance with Pub. Util Code § 311(d) and Rule 77.1 of the Commission's Rules of Practice and Procedure. Comments were filed on December 5, 2005, and reply comments were filed on December 12, 2005.

Substantive comments were submitted by ORA and SCWC. The City of Claremont submitted a comment which did not raise any specific issues. Neither ORA's nor SCWC's comments complied with Rule 77.3 and included a list of proposed changes and proposed findings of fact and conclusions of law. The absence of specific recommended changes impeded the evaluation of comments, as well as any actual changes to the proposed decision.

ORA contended that the proposed decision should be clarified to prevent double-counting of capital projects included in both the 2005 construction work in progress amount as well as the 2005 capital budget. ORA identified no specific projects or amounts that were included in both budgets. Consequently, we are not able to enact any correction to the proposed decision. ORA also requested clarification that SCWC was allowed to include in rate base only actual 2006 construction work in progress, and not a forecasted amount. This proposed clarification is inconsistent our ratemaking methodology, which is based on a forecasted test year, in this case, 2006. All amounts for 2006 are forecasts by definition.

ORA also criticized SCWC for offering new evidence in rebuttal testimony. ORA stated that this "last minute supplemental material" undermines the Commission's requirements for fair notice and due process. We agree. The Rate Case Plan, discussed above, requires the utility to provide complete information early in the process. As noted throughout today's decision, SCWC has failed to comply with this requirement.

SCWC provided several comments on the proposed decision. Each issue is summarized below in italic print and our resolution of the issue follows:

1. Public Participation Hearings

The two minor proposed edits have been incorporated.

2. Capital disallowances where SCWC requests opportunity to reapply

SCWC requested clarification that where its requested capital expenditures³³ have been disallowed for failure to present sufficient documentation, it may seek to justify such amounts in a future application. SCWC may request recovery for these expenditures in a future application, subject to reasonableness review; only prudently incurred capital costs will be allowed into rate base, and if SCWC's showing is no stronger than in this application, the result will again be no recovery.

3. Calipatria Pump Station

SCWC stated that Exhibit 14 contained a "reference" to the items for which no documentation was provided. Review of the cited page, however, shows no bid information, cost estimates, or general work order. The disallowed amounts do not appear on the page. The referenced page provides no basis for altering the proposed decision.

4. In-Line Pump Station

SCWC contended that the disallowed amount, $77,167, was included in the post-application amount that had been disallowed elsewhere in the proposed decision, resulting in a double-counted disallowance. The amount, however, is discussed in ORA report and attributed to the SCWC's application. (See Exhibit 41 at 5-23 to 5-25.) Thus, the record does not support SCWC's assertion that the amount was added after the application such that double-counting would occur.

5. Capital Overheads

In its application, SCWC used a 22.5% adder to recover capital overheads. Because SCWC's capital budget fluctuates, the proposed decision instead adopted a methodology using a set amount (based on 2004 actuals) and allowed the percentage adder to fluctuate to recover the set amount. SCWC commented that this methodology assumed that all projects were opened and closed in a single year, and that the proposed decision failed to adjust the 2005 budget for disallowed capital projects. SCWC did not, however, demonstrate fundamental flows in the basic approach of holding the amount of overhead to be allocated relatively constant through the years. We developed this methodology as an interim measure pending full review of the overhead costs and allocation process in SCWC's next general office GRC, and SCWC has not shown that it is inappropriate for this limited purpose.

SCWC points out that the 2005 amount should be corrected to remove work performed in prior years as these plant accounts have been closed. Our objective is to adopt this interim methodology on a going-forward basis only. Consequently, we have incorporated SCWC's requested correction.

6. Contingency Adder

We have revised this discussion to clarify that we are setting the contingency budget based only on unanticipated projects, with the objective of strongly discouraging reliance on this fund for budget overruns.

7. Urban Water Management Plan

SCWC did not identify any errors in the proposed decision but rather reargued its previously-stated position. Consistent with Rule 77.3, such comments are given no weight.

Since issuing the proposed decision, the Commission adopted the Water Action Plan, which attaches greater importance to the Water Management Plan. In light of this development, the text of the decision has been altered to allow SCWC another opportunity to justify its outside expenses for its Water Management Plan.

8. Labor Expenses

SCWC stated that the $566,117 disallowance was an error because only $68,000 was due to the Morongo Superintendent position. The proposed decision, however, attributes the difference to ORA's and SCWC's vacancy rate forecasts. SCWC assumed a zero vacancy rate and ORA assumed that the 2004 vacancy rate was a reasonable estimate for the future vacancy rate.

SCWC stated that the proposed decision relies on a San Gabriel Valley decision where the Commission initially disallowed vacant positions but then allowed an annual advice letter "for positions filled that year." Rather than the across-the-board update SCWC suggests, Ordering Paragraph 3 of D.05-07-044 excludes specific planned new hires from San Gabriel's revenue requirement pending actual hiring. When these authorized new positions are filled, San Gabriel is then allowed to add the costs to revenue requirement via advice letter. These advice letters do not undermine the basic premise that a zero vacancy rate is an unreasonable assumption.

9. Other Maintenance Expenses

SCWC contended that the proposed decision was "wrong" to adopt ORA's expense estimate because it was based on recorded maintenance expense, in a year where the Commission had reduced the adopted amount in an earlier decision. Because the proposed decision did not discuss the reduced adopted amount when relying on the recorded amount, SCWC concludes that ORA's estimate should not be adopted. Although unstated, presumably SCWC would have the Commission adopt SCWC's forecast. SCWC's forecast was subjective and amounted to a "wish list" rather than a comprehensive analysis, and ORA used actual, recorded maintenance expense, not the reduced adopted amount. SCWC failed to justify its forecasting methodology, and ORA's methodology was reasonable.

10. Calipatria Prison Contract

SCWC identified no factual or legal errors in the proposed decision, but described the result as "unfair." SCWC is responsible for ensuring that it provides reasonable service to the prison. ORA contended that exempting the prison from any costs of the new water treatment plant was unreasonable, and the proposed decision adopted ORA's position. Should SCWC negotiate, and the Commission approve, an alternative tariff rate for the prison, any revenue requirement deficiency must be documented and addressed.

11. Return on Equity

SCWC seeks an award of 10.1% return on equity, consistent with recent Commission decisions for other Class A water utilities. No law or policy requires the Commission to set identical returns on equity for all Class A water utilities. SCWC also objected to the 15 basis point negative adjustment for management shortcomings, and argued that it was unsupported in the record. Today's decision includes numerous specific references supporting the adjustment. We have nevertheless reduced the adjustment to 10 basis points to correspond to the lower end of the range in the cited decisions.

In reply comments, the City of Claremont opposed SCWC's and the proposed decision's reliance on information supplied for the first time in rebuttal testimony and contended that such reliance violated basic notions of due process and the rate case plan. The City of Claremont also objected to allowing SCWC any further opportunities to pursue disallowed items in future rate cases, particularly for any region other than Region III.

ORA replied that SCWC's comments essentially re-argued positions from its testimony and briefs, rather than pointing out errors of fact or law in the proposed decision. ORA also objected to re-litigating issues in future rate cases.

SCWC's reply comments confirmed that no capital projects allowed in 2005 additions were duplicated in the construction work in progress allowance. SCWC also raised a new issue, its low income rate program memorandum account. Raising a new issue in reply comments violates Rule 77.5, and we are in no position to evaluate it at this point in the proceeding.

³³ The specific disallowances for which SCWC sought such clarification are: Calipatria plant water transmission main, Calipatria plant engineering costs, well replacements, and electrical generators.