2. Background

CWS is a Class A water company with service areas throughout the state. The CWS Redwood Valley District provides water service to approximately 1,300 customers in its Lucerne service area. The Lucerne system was acquired by CWS in the year 2000 as part of its merger with the Dominguez Water Company, as authorized in D.00-05-047.

CWS previously received a blanket authorization for debt in D.02-03-017. This authorization expired on December 31, 2005. Since that time, CWS received a blanket authorization for debt in D.04-09-002.

The California Public Utilities Commission (Commission), in D.04-09-002, authorized CWS to offer securities consisting of common shares, preferred shares, or debt securities, not to exceed a total aggregate amount of $250,000,000. Pursuant to D.04-09-002, CWS may use the proceeds from the securities authorized in D.04-09-002 for: discharging the then existing short-term debt; acquiring property; construction, completion, extension, or improvement of CWS' facilities; refunding existing long-term debt; and projected cash requirements.¹ This authorization expires December 31, 2010. As of May 20, 2008, CWS has issued $20,000,000 of long-term debt and $82,687,500 of equity, resulting in unused authority of $147,312,500.²

CWS currently has five other pending applications with the Commission, including: 1) Application (A.) #06-10-026, which addresses water conservation issues; 2) A.07-04-010, which requests authorization to extend CWS' territory to serve the City of Salinas within selected boundaries; 3) A.07-07-001, which requests authorization to increase rates in its Chico, East Los Angeles, Livermore, Los Altos-Suburban, Mid-Peninsula, Salinas, and Stockton Districts; 4) A.08-05-002, which requests Commission approval of a cost of capital to be used for ratemaking purposes from January 1, 2009 through December 31, 2011; and 5) A.08-05-019, which concerns CWS' discontinuance of the Extended Service Protection program and certain accounting matters related to CWS' dealing with its affiliate CWS Utility Services.

2.1 Financial Information

CWS' Balance Sheet and information from its Income Statement are as shown in its 2007 Annual Report to the Commission. For the year 2007, CWS reported total regulated operating revenues of $345,718,935 and net income of $28,708,788, as shown in its Schedule B - Income Account. Retained earnings, as of December 31, 2007 was $163,246,724.

CWS' Consolidated Balance Sheet, as of December 31, 2007, is summarized as follows:

2.2 California Department of Public Health Compliance Order

On June 5, 2002, CDPH sent a letter to CWS detailing deficiencies in the Lucerne Treatment Plant and directing that CWS correct these deficiencies. By letter dated June 4, 2002, CDPH invited CWS to apply for a SDWSRF loan to upgrade the Lucerne water treatment plant (DWR Project Number 1710005-002).

The SDWSRF loans are low or no interest loans provided, in part, from the Federal Capitalization Grant for the Drinking Water State Revolving Fund. In California, CDPH is responsible for enforcing water quality standards, and DWR is responsible for assessing a utility's financial need to meet the standards. DWR also acts as the lending agency and fiscal administrator for SDWSRF loans, and assesses the utility's ability to meet the loan obligations.

2.3 CDPH Loan Process

CWS submitted a Loan Pre-Application to CDPH, on August 29, 2002, requesting a SDWSRF loan for the construction of a new treatment plant, filed its intent to submit an application to CDPH on May 23, 2003, and submitted a loan application to CDPH, on December 22, 2005, in the amount of $4,500,000.

On September 7, 2006, the CDPH issued Compliance Order #02-03-06CO-001 to CWS, regarding CWS' failure to comply with the California Health and Safety Code and the California Waterworks Standards, specifically for failure to provide sufficient source capacity from approved, permitted sources and failure to comply with regulations concerning surface water treatment. Pursuant to California Health and Safety Code Section 116650(e), failure to comply with a CDPH order may result in a $200 per day penalty for each day CWS is in violation of CDPH's order.

Subsequent to submitting its original loan application to CDPH, CWS increased its proposed loan request to $5,676,277 due to changes in the design plans, associated revisions to cost estimates, and the need for foundation improvements at the plant site. By letter dated September 28, 2006, CDPH advised CWS that its loan application for this revised amount had been accepted, and that loan approval would be conditioned upon, among other items, authorization by the Commission for the loan and surcharge. CDPH stated that CWS would be able to change the requested amount of SDWSRF funds "any number of times" before the Notice of Application Acceptance (NOAA) is issued, but that after CWS enters into an executive contract, CWS would have only one more opportunity to change the requested loan amount.³

When an applicant requests a change to the requested loan amount, it provides CDPH with documentation that supports the requested change. CDPH staff then reviews the change and associated documentation, requesting more detailed information as necessary. After its review is complete, CDPH informs the applicant whether the change has been accepted or not. Even if a change to the requested amount is accepted, the CDPH must still review all invoices submitted before the loan is partially or fully-funded.

Subsequent to the NOAA being issued on September 28, 2006, and signed by CWS on December 8, 2006, CWS requested a final change to the requested amount to $7,442,700, because of increases in construction costs.

¹ See D.04-09-002, page 6 and Ordering Paragraph 2.

² As shown in CWS' data response, dated May 20, 2008.

³ E-mail dated April 5, 2006, from Wendy Jo Kroll of CDPH to CWS and CDPH staff.