8. Assignment of Proceeding

Dian M. Grueneich is the Assigned Commissioner and Maribeth A. Bushey is the assigned ALJ.

1. SCWC failed to comply timely with the Rate Case Plan decision's requirements to submit a complete application with supporting documentation and analysis.

2. The parties submitted a stipulation which resolved the general office allocation for purposes of Region III and this rate case. The stipulation did not resolve the issue of rescheduling SCWC's general office general rate case.

3. On September 16, 2005, ORA and SCWC jointly filed an stipulation resolving numerous issues in this proceeding and providing for a $770,000 increase in 2006 test year revenue requirement, with issues accounting for $10.7 million in revenue requirement remaining in dispute.

4. With its current return on equity of 9.9%, SCWC is able to attract capital and maintain its credit rating.

5. ORA's studies show a range of equity returns between 7.63% and 9.89% would be reasonable, and are based only on the Commission's accepted methodologies. This range is well below the most recent return on equity amounts the Commission had adopted for other Class A water utilities.

6. SCWC's projected cost of the Calipatria Niland Upgrade project increased by 7.3% between the time it filed its application and its rebuttal testimony.

7. The Rate Case Plan decision precludes updates to general rate case applications, with two exceptions.

8. SCWC provided no documentation to support its request for $500,000 (with overheads) for grading, paving, and SCADA.

9. SCWC provided two inconsistent bid evaluating sheets to support its request for electrical, instrumentation, and chemical feeding equipment, but explained the inconsistencies on cross-examination.

10. SCWC provided no documentation to support its request for $198,839 for electrical gear and finished water pumps at the Calipatria pump station.

11. SCWC provided documentation to support its request for $117,918 of change orders on the two 1.1 MG reservoirs at Calipatria, bringing the total for this item to $1,103,236.

12. SCWC provided no support for $77,167 of the $555,102 it sought for an in-line pump station to serve the prison. The remaining amount, $477,935 comprised of a vendor bid for $426,100 and $51,835 in SCWC direct services, was supported by a SCWC General Work Order.

13. SCWC awarded the contract for the Calipatria Niland transmission main to Roland Construction, the second lowest bidder in the second round, but included no general work order implementing this contract, and Roland Construction's second bid was 17% higher than its first.

14. ORA's recommendation to use Roland Construction's initial bid and excluding any SCWC direct costs is too punitive.

15. SCWC provided no record references to documentation to justify its request of $1,405,000 for engineering and consulting costs.

16. On the Commission's own initiative, review of the record showed evidence supporting $1,177,600 out of the requested $1,405,000 for engineers and consultants.

17. SCWC sequentially used two contractors, both on a time and materials basis, to build the office/lab/electric building for a total of $491,429. SCWC provided general work orders supporting both contracts but ORA opposed allowing the second due to inadequate explanation for the two-contractor process.

18. SCWC's unsigned and invalid general work order for Backwash Sludge Basins for $269,194 does not justify its request for $200,000 for backwash decant basins.

19. SCWC has not justified its request for the following components of its Calipatria Niland Upgrade project:

20. The Calipatria Niland Upgrade project total allowed costs are $11,859,954.

21. Using an overhead pool and a fixed allocation factor methodology to distribute indirect capital overheads is inappropriate where annual capital budgets or annual total indirect costs materially vary.

22. SCWC's 2005, 2006, and 2007 capital budgets are anomalously high, and an allocation factor should be calculated for those years, pending a comprehensive analysis of this issue in the next general office rate case.

23. The following overhead allocation factors are supported by the record and should be adopted:

24. SCWC has not justified using its contingency budget for project cost overruns but has justified using the fund for unanticipated projects. A 5% adder is reasonable for unanticipated projects.

25. SCWC's application forecast closing an extraordinary amount construction work in progress to a plant accounts in 2005. This issue was not identified or explained as required by the Rate Case Plan.

26. Due to extraordinary circumstances, SCWC's recorded 2005 construction work in progress should be updated to the amount shown as recorded in its rebuttal testimony, $7,425,600. The disallowed portion should be included in 2006.

27. On the Commission's own initiative, analysis of record evidence supports the requested wells in the Apple Valley North system ($356,700) and Morongo del Sur system ($433,300).

28. SCWC did not justify its request for $225,000 for outside consultants to prepare the 2005 Urban Water Management Plan.

29. The Department of General Services 2003 vehicle replacement guidelines are more recent than ORA's 1995 vehicle replacement policy, and ORA supports the Department's guidelines.

30. SCWC's rebuttal testimony adequately supported its request for main replacements in Barstow, Morongo Valley, San Dimas, and Wrightwood Customer Service Areas.

31. SCWC justified including the cost of six well demolitions in revenue requirement.

32. SCWC has not demonstrated that permanent stand-by electric generators are needed at Via Blanca or Jefferies.

33. Worker safety and traffic convenience justify relocating the pressure regulating valve in San Dimas.

34. SCWC's rebuttal testimony calculated outside services and other operation expense for the Orange County customer service area based on recorded amounts for 2000 to 2004, which is a reasonable approach.

35. SCWC has not shown that the tool clearing account is allocating the cost of small tools.

36. SCWC did not use zero-based budgeting to forecast non-work order or work order maintenance.

37. ORA's forecast of other maintenance expense is based on best available historical information and is reasonable.

1. SCWC filed this Region III general rate case pursuant to the new three year GRC cycle requirements for Class A water utilities set forth in § 455.2 and implemented by the Commission under its new Rate Case Plan in D.04-06-018, which provided for an 11-month expedited schedule for January 2005 filings.

2. The Commission should consider requiring all Class A water companies to prepare and publish comparative rate and efficiency metrics.

3. SCWC bears the burden of proving that its proposed rate increases are "justified," with testimony, including supporting analysis and documentation, describing the components of its proposed increase. All significant changes from the last adopted and record amounts must be explained, and all forecasted amounts must include an explanation of the forecasting method.

4. SCWC has not met its burden of proving that its return on equity must be increased.

5. ORA has not justified changing SCWC's current 9.9% ROE.

6. The Commission has previously made negative adjustments to a public utility's return on equity in response to management actions.

7. SCWC's return on equity should be adjusted downward by 10 basis points for management's inattention to efficiency improvements and cost cutting, poor planning and budgeting of and failure to seek outside funding for the Calipatria Niland Upgrade project, and mishandling of the Department of Corrections contract.

8. The following capital structure and return should be adopted for SCWC:

9. Updates to general rate case applications are only allowed within 45 days of filing for additional recorded data, or in extraordinary circumstances. SCWC's request to update its total for the Calipatria Niland Upgrade project meets neither standard for updating, and should be denied.

10. SCWC has failed to justify its request for $500,000 for grading, paving, and SCADA equipment at the Calipatria Niland Upgrade project.

11. SCWC's cost estimates for electrical, instrumentation, and chemical feeding equipment are justified in the record.

12. SCWC did not meet its burden of justifying $198,839 for electrical gear and finished water pumps at the Calipatria pump station.

13. SCWC justified including $1,103,236 in rate base for two 1.1 MG reservoirs at Calipatria.

14. SCWC should be authorized to include in the costs for the Calipatria Water Treatment Plant an in-line pump station in the amount of $477,935, reflecting a disallowance of $77,167 to SCWC's request.

15. The lowest bid for the Calipatria Niland transmission main, plus SCWC's direct costs, is a reasonable estimate for the cost of this transmission main, and should be adopted.

16. SCWC's request for the cost of engineering and consulting services for the Calipatria Niland Upgrade project, less the unsupported $227,400 contract, should be adopted.

17. SCWC's two general work orders for its office/lab/electrical building support allowance of $491,429 for this item.

18. SCWC's request for $200,000 for backwash decant basins is unjustified and should be denied.

19. SCWC should be allowed a 5% adder to its annual capital budgets for unanticipated projects.

20. Pursuant to the Rate Case Plan, extraordinary circumstances support allowing SCWC to update its recorded 2005 construction work in progress to the amount shown as recorded in its rebuttal testimony, $7,425,600.

21. SCWC should be authorized to include in rate base new wells in the Apple Valley North and Morongo del Sur Systems.

22. SCWC provided no justification for its 10% adder for design of water supply and distribution plant, and the request should be denied.

23. SCWC's request for $225,000 for outside consultants to prepare the Urban Water Management Plan should be denied, but SCWC should be allowed to justify these costs as provided in Appendix J.

24. SCWC should be allowed to recover the costs of replacing vehicles consistent with the Department of General Services vehicle replacement guidelines.

25. SCWC has not shown that the water supply standard found in General Order 103 should be modified; however, ORA should investigate the Department of Health Services alternative proposal and make such recommendations as are necessary.

26. SCWC request for main replacements in Barstow, Morongo Valley, San Dimas, and Wrightwood Customer Service Areas should be granted.

27. The cost of six well demolitions should be included in revenue requirement.

28. SCWC has not justified the need for permanent stand-by electric generators are needed at Via Blanca or Jefferies.

29. SCWC's revenue requirement should include the costs of relocating the pressure regulating valve in San Dimas.

30. We should adopt $41,976 for outside services for the Orange County customer service area, and $43,470 for other operation expense.

31. The 1.8% small tool clearing account allocation on Region III headquarters labor should be disallowed, pending a thorough review of this account in the next general office rate case.

32. Consistent with Commission precedent, when used for forecasting labor costs, historic payroll amounts should not be altered to remove temporary vacancies.

33. ORA's forecast of other maintenance expense should be adopted.

34. Consistent with Standard Practice U-16-W, SCWC should include depreciation and uncollectibles in the working cash calculation.

35. SCWC should use the advice letter process if it wishes to suspend its special contract with the Department of Corrections and Rehabilitation.

36. SCWC's 2006, 2007, and 2008 revenue requirement should reflect service to the prison at the Region III tariff rate.

37. The General Office and Overall Stipulations are reasonable in light of the record, consistent with the law, and in the public interest. Both Stipulations should be approved.

ORDER

IT IS ORDERED that:

1. Southern California Water Company (SCWC) is authorized to file in accordance with General Order 96-A, or successor general order, and to make effective on not less than five days' notice, the revised tariff schedules for 2006 included as Appendix E to this order. The revised tariff schedules shall apply to service rendered on and after their effective date.

2. Advice letters for escalation year rate increases for 2007 and 2008 shall be filed in accordance with General Order 96-A, or successor general order, no later than 45 days prior to the first day of the escalation year. The filing shall include appropriate work papers. The increase shall be reduced if SCWC's rate of return on rate base, adjusted to reflect rates then in effect, normal ratemaking adjustments, and the adopted change to the pro forma test, for the 12 months ending September 30 of the preceding year, exceeds the amount authorized in this decision. The advice letters shall be reviewed by the Water Division for conformity with this decision, the Rate Case Plan decision (D.04-06-018), and shall go into effect upon Water Division's determination of compliance, not earlier than the first day of the escalation year, or 30 days after filing, whichever is later. The tariffs shall be applicable to service rendered on or after the effective date. The Water Division may allow the tariffs to go into effect but require that all amounts so collected be subject to refund. Water Division may reject or suspend the advice letter if it finds that the proposed increase does not comply with this decision or other Commission requirements.

3. The General Office Stipulation, attached hereto as Appendix B, is approved and adopted. The parties shall comply with the terms of the Stipulation.

4. SCWC shall file its next general office general rate case with its Region II filing in January 2006. SCWC shall comply with Ordering Paragraph 6 of Decision 04-03-039, regarding a thorough cost study and analysis of SCWC's corporate affiliates. SCWC shall also prepare a comprehensive study of the costs it assigns to the capital overhead pool. The study shall include, but not be limited to, justification of the level of expenses in relation to SCWC's historic overhead rate (12% in 1991) as well as to comparable water purveyors, including regulated and publicly owned water utilities. SCWC shall also prepare a comprehensive study of its tool clearing account, focusing on costs assigned for recovery through the account. For both the overhead and tool clearing accounts, SCWC shall assess whether alternative ratemaking methodologies would be better suited for addressing these costs. Further scheduling of SCWC's general office filings shall also be resolved in that proceeding.

5. The Overall Stipulation, attached hereto as Appendix C, is approved and adopted. The parties shall comply with the terms of the Stipulation.

6. SCWC is authorized to seek recovery of outside costs necessary to prepare its Urban Water Management Plan as set forth in Appendix J.

7. The Water Division shall consider developing rate and efficiency metrics to compare Class A water utilities to other water purveyors in California.

8. Application 05-02-004 is closed.

This order is effective today.

Dated January 12, 2006, at San Francisco, California.

I reserve the right to file a concurrence.

/s/ JOHN A. BOHN

APPENDIX A - LIST OF APPEARANCES

Kendall h. Macvey

ATTORNEY AT LAW

BEST, BEST & KRIEGER, LLP

3750 UNIVERSITY AVENUE

RIVERSIDE, CA 92506

(951) 686-1450

Kendall.MacVey@BBKlaw.com

For: City of Claremont

Chrisman L. Swanberg

ATTORNEY AT LAW

CA DEPART OF CORRECTIONS & REHABILITATION

1515 S STREET, Suite 314S

SACRAMENTO CA 95283

(916) 322-4433

Chris.swanberg@corr.ca.gov

For: California Department of Corrections &

Rehabilitation

Cleveland Lee

Legal Division

RM. 5122

505 VAN NESS AVE

San Francisco CA 94102

(415) 703-1792

cwl&cpuc.ca.gov

Patricia A. Schmiege, Esq.

ATTORNEY AT LAW

O'MELVENY 7 MYERS LLP

275 battery street, 26th floor

San Francisco ca 94111

(415) 984-8715

pschmiege&omm.com

For: Southern California Water Company

Keith Switzer

SOUTHERN CALIFORNIA WATER COMPANY

630 EAST FOOTHILL BOULEVARD

SAN DIMAS CA 91773

(909) 394-6000 - 759

kswitzer&scwater.com

For: Southern California Water Company

Kenneth J. Duran

THE CITY OF SAN DIMAS

245 EAST BONITA AVENUE

SAN DIMAS CA 91773

(909) 394-6200

(END OF APPENDIX A)

A.05-02-004

D.06-01-025

Concurring and dissenting in part of Commissioner Bohn
of Southern California Water Company.

I concur in the results of this decision but disagree with some of the reasoning imposing a downward adjustment to the cost of capital because of management shortcomings. Though finding that 9.8% is within the bounds of reasonableness, changing Southern California Water Company's rate of return when the decision finds that neither Southern California Water Company nor the Commission's Office of Ratepayer Advocates had justified a change from the current level of 9.9%. Such penalty adjustment confuses a very real need to insist on an effective management, with the Public need to assure access to adequate capita;

By lowering the rate of return we allow Southern California Water Company to earn we have, in effect, imposed a penalty for poor management quality. I am not against taking punitive action if we believe that a utilities behavior warrants sanctions. I am particularly concerned that sufficient notice was not given to Southern California Water Company that a penalty for poor management was under consideration and that the Southern California Water Company was not able to respond to specific claims of poor quality management.

In my experience, poor management has its own penalty. This is aptly demonstrated in the decision where many of Southern California Water Company's requests are denied because the company was unable to provide sufficient documentation and justification for the requested items. Companies must sustain their burden or justify expenditures before we will allow them to be recovered in rates.

There are several key areas of this decision that, in light of the Commission's recently adopted Water Action Plan, merit additional comment. One of the four key principles in our Water Action Plan was "Highly Reliable Water Supplies."34 To further this key principle, this decision contains a detailed analysis of reliability that takes a more sophisticated look at water reliability by looking at what the supply situation would be should a utility lose its largest source of water in a particular area. The analysis contained in this decision begins to address the issue of how much capacity above and beyond that needed to meet the minimum reliability standards outline in our General Order 103 is appropriate. Applying this analysis, we find that additional investment in new water sources in two areas is warranted. This additional infrastructure investment will better ensure the reliability of water supply to consumers.

The Water Action Plan envisions a new and expanded role for a Water Management Program that is filed with each rate case. The Commission is seeking to use this Water Management Program as a basis for pre-approval of major water supply projects and to evaluate current infrastructure investments.

Included within the Water Management Program should be a long-term procurement plan, including appropriate water conservation and efficiency estimates, to enable more efficient planning for future investment needs. As part of the long term procurement section, alternative financing techniques (e.g., loans, subsidies, project financing) could be evaluated. The long term procurement plan should include planning for major investments required to upgrade or replace existing water utility infrastructure, accelerate cost-effective conservation investments, fund installation of water meters capable of measuring water use by individual users, and where appropriate the installation of Advanced Metering technologies. Plans should take into consideration the impact that water development has on land use, and facilitate coordination between water IOUs and local governments. CPUC Water Action Plan (page 12)35

With our new emphasis that the Water Management Program will play in our regulatory process and in our evaluation of the reasonableness of additional capital investment in infrastructure, we anticipate a corresponding increase in the amount of effort that each utility expends in developing this plan. This decision allows Southern California Water Company to seek recovery of these costs up to $112,500 per year for the hiring of outside expertise necessary to prepare a Water Management Program that is robust enough for its new, more central role, in our regulatory process.

In sum I support the results of this decision. However, I cannot support the rationale for reducing the return on equity by 10 basis points to 9.8% because of poor management. Given that the cost of capital is set at a level to attract the funds it takes a utility to service its customers and run its business, a separate penalty would be more appropriate in these types of cases.

/s/ John A. Bohn

Commissioner

  

D0601025 Appendices B-K

34 California Public Utilities Commission, Water Action Plan: Adopted: December 15, 2005, page 3.

35 Ibid; page 12.

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