4. Settlement Agreement
4.1. Terms
The proposed Settlement, included as Attachment A of this decision, contains the following provisions:
1. Parties have agreed that the purchase price of $408,000 represents the fair market value of Toro. CalAm Water will not increase the rate base of the Monterey District to reflect the purchase price nor seek recovery of this amount at this time. Rather, it will do so as part of its 2008 general rate case (GRC) application for the Monterey District.
2. CalAm Water will construct and have a fully operational arsenic treatment facility within ninety (90) days after acquiring legal title and possession of Toro at a cost of $685,000.
3. CalAm Water shall implement new rates for Toro customers as proposed in Attachment 1 of the Setlement. The proposed rates represent an increase of $109,377 over the present revenue requirement. CalAm Water requests Commission authority to implement these proposed rates through the advice letter process once CalAm Water has acquired legal title and possession of Toro.
4. The new rates for Toro customers shall remain in effect until they are replaced by rates authorized by the Commission in the 2008 GRC application for the Monterey District or thereafter.
5. If CalAm Water does not meet the 90-day deadline for a fully operational arsenic treatment facility, it shall track the difference between the new rates and the current Toro rates until the arsenic treatment facility is fully operational and this difference shall be refunded to Toro customers as part of CalAm Water's 2008 GRC application for the Monterey District. After an arsenic treatment facility is operational, any refunded amounts shall be recovered in rates as part of a subsequent GRC application for the Monterey District.
6. CalAm Water will proceed with wellhead improvements, which are estimated at $40,000. CalAm Water will seek recovery of these costs as part of its 2008 GRC application for the Monterey District. CalAm Water, therefore, requests that the Commission authorize it to establish a memorandum account to record the depreciation, carrying costs, and earned interests associated with these improvements, not to exceed $40,000. CalAm Water shall seek recovery of the balance of the memorandum account as part of its 2008 GRC application for the Monterey District.
7. CalAm Water will withdraw the request for authorization of all other capital projects described in its application which are not specifically identified in the settlement agreement. After it obtains ownership of Toro, CalAm Water will determine what other improvements are needed and seek Commission authorization as necessary.
4.2. Discussion
The Commission has long favored the settlement of disputes. However, we do not automatically approve a settlement, even if uncontested. Rather, pursuant to Rule 12.1(d) of the Commission's Rules of Practice and Procedure, we consider whether the settlement is reasonable in light of the whole record, consistent with law, and in the public interest.
4.2.1. Settlement is reasonable in light of the whole record.
Recent water quality testing results have shown that the concentration of arsenic in the Toro wells currently exceeds both the federal and state maximum contaminant levels. The Settlement requires CalAm Water to remediate the arsenic in the water system in an expeditious manner once it acquires legal title of Toro. The Settlement also contains provisions to ensure that ratepayers will not be harmed if CalAm Water does not have a fully operational arsenic treatment facility within ninety days after acquiring legal title and possession of the Toro system. CalAm Water stated during the October 10th PHC that the Commission will be able to determine whether CalAm Water has met the 90-day deadline based on whether CalAm Water has submitted a compliance filing. The compliance filing will be made after CalAm Water has received sign-off from the California Department of Public Health (formerly Department of Health Services) that the arsenic treatment facility is fully operational.
The Settlement protects existing Toro ratepayers. The capital expenditures for the arsenic treatment facility proposed in the Settlement are less than what had been initially proposed. Furthermore, recovery of the wellhead improvements, as well as other necessary capital expenditures for Toro, will be included as part of CalAm Water's 2008 GRC application for the Monterey District. This will not only provide the Commission an opportunity to consider these expenditures in a more comprehensive manner, but will also permit a more efficient use of DRA's and CalAm Water's resources.
Based on these considerations, we find the Settlement reasonable in light of the whole record.
4.2.2. Settlement is consistent with the law.
Pursuant to D.99-10-064, Class A water corporations, such as CalAm Water, are encouraged to acquire smaller water systems that need infrastructure improvements but are unable to finance such developments. As indicated in CalAm Water's application, capital expenditures are necessary to bring the Toro system into compliance with the Environmental Protection Agency's (EPA) arsenic rule. Moreover, DRA and CalAm Water note that D.07-01-024 permits water utilities to seek a rate increase by means of an advice letter upon Commission authorization.
The Settlement provides CalAm Water reasonable incentives for acquiring Toro, including recovery of the purchase price in rate base and the capital necessary to make improvements to the Toro system. These provisions are consistent with Pub. Util. Code §§ 2718 - 2728. Further, CalAm Water and DRA submit that the sale and transfer of Toro comply with Pub. Util. Code §§ 851 and 854.
Based on these considerations, we find that the Settlement is consistent with the law.
4.2.3. Settlement is in the public interest.
The Settlement expedites the Commission's review and approval of the sale and purchase of Toro. Further, it results in a lower rate increase than originally requested by CalAm Water and provides Toro ratepayers with an operational arsenic treatment facility and other system infrastructure improvements in an expeditious manner.
