7. Assignment of Proceeding

Raminder Kahlon is the assigned Examiner in this proceeding.

Findings of Fact

1. In its Lucerne service area, CWS provides water service to approximately 1,300 customers.

2. On June 4, 2002, CDPH invited CWS to apply for a SDWSRF loan to upgrade CWS' Lucerne water treatment plant.

3. On June 5, 2002, CDPH sent a letter to CWS detailing deficiencies in the Lucerne Treatment Plant and directing that CWS correct these deficiencies.

4. CWS completed a CDPH Loan Pre-Application, on August 29, 2002, requesting a SDWSRF loan for the construction of the new treatment plant.

5. CWS filed an intent to submit an application to CDPH on May 23, 2003.

6. CWS submitted the loan application to CDPH on December 22, 2005, for a loan amount of $4,500,000.

7. On February 3, 2006, CWS filed A.06-02-003 with the Commission, requesting authorization for a SDWSRF loan of $4,500,000 and associated surcharge and service fee.

8. 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.

9. CWS' failure to comply with the California Health and Safety Code and the California Waterworks Standards could result in fines of up to $200 per day.

10. Subsequent to submitting its original application to CDPH, CWS requested a revised loan amount from $4,500,000 to $5,676,277.

11. On September 28, 2006, CDPH advised CWS that its loan application had been accepted in the amount of $5,676,277, and that loan approval was conditioned upon, among other items, authorization by the Commission for the loan and surcharge.

12. On December 8, 2006, CWS signed a Notice of Acceptance from CDPH. In part, this document indicates that privately owned water systems can only use in-house construction labor for a minor portion ($20,000) of the construction.

13. On December 12, 2006, A.06-02-003, which requested a loan amount of $4,500,000, was amended to request the higher loan amount of $5,676,277.

14. On November 1, 2007, the Commission authorized the withdrawal of A.06-02-003, at the request of CWS.

15. On November 20, 2007, CWS filed, with the Commission, the current application for the same SDWSRF loan at a higher amount, $7,442,700, along with a corresponding increase in the surcharge and service fee.

16. CDPH requires a written request and compliance with certain criteria, in order for an applicant to receive authorization for use of SDWSRF funds prior to final funding.

17. By letters dated May 9 and 31, June 19, October 25 and November 5, 2007, and February 8, 2008, CDPH advised CWS that it was authorized to begin and complete work on selected parts of the project prior to final funding.

18. CWS plans to temporarily fund project expenditures, incurred prior to final loan funding, from a combination of operational income, debt, and equity.

19. In its letter dated December 7, 2007, CDPH states that privately-owned water utilities may only charge up to $20,000 of in-house construction labor for projects. CDPH also states, in this letter, as well as a March 19, 2008 letter, that accrued interest (AFUDC) is an ineligible cost under the SRF program. According to CDPH, in-house labor in excess of $20,000 and accrued interest are not recoverable through the SDWSRF loan.

20. CWS claims to have incurred both in-house labor and AFUDC on this project.

21. A reasonableness review of construction costs is normally performed during a GRC.

22. CWS requested, among other relief, to use proceeds from the SDWSRF loan to reimburse its treasury for funds expended prior to signing the SDWSRF loan contract, and to add the authority granted herein to the authority granted in D.04-09-002.

23. Use of SDWSRF loan proceeds to reimburse CWS' treasury for funds expended for the construction, completion, extension or improvement of utility facilities is a proper use of the SDWSRF funds, based on our criteria and regulations.

24. Pursuant to D.04-09-002, the authority granted therein does not permit the use of funds procured with that authority to reimburse expenditures made with CWS' treasury funds

25. CWS has not requested to modify D.04-09-002 to permit the use of the proceeds authorized by that decision for reimbursing its treasury.

26. If CDPH does not permit the use of the loan proceeds to reimburse CWS' treasury for certain funds expended for the construction, completion, extension or improvement of utility facilities, based on its regulations, CWS may still need to issue common shares, preferred stock, or debt securities to meet its cash requirements.

27. The services of a fiscal agent are required by DWR to administer repayment of the loan.

28. CWS' SDWSRF loan is exempt from the Commission's Competitive Bidding Rule.

29. Requiring CWS to file an advice letter within 30 days of signing the final loan agreement to set the surcharge and service fee and to establish a balancing account will allow staff to determine if they are being correctly implemented.

30. Requiring CWS to annually file an advice letter to adjust the surcharge to reflect changes in the number of connections and balancing account status will ensure the surcharge is adequate but not excessive.

31. CDPH was the lead agency under CEQA for the construction of the Lucerne Treatment Plant. CDPH prepared a Mitigated Negative Declaration and found that the Lucerne Treatment Plant project would not result in any significant environmental impacts.

32. There are no filed protests to this application.

Conclusions of Law

1. Approving CWS' request to enter into a SDWSRF loan agreement for a water treatment plant in the Lucerne service area for $7,442,700, to implement a customer surcharge and service fee to repay the loan, to encumber CWS' assets in connection with this loan, and to establish a balancing account to record transactions related to the SDWSRF loan, is in the public interest and is otherwise proper pursuant to applicable provisions of the Public Utilities Code.

2. CWS should only reimburse its treasury with SDWSRF funds if it has received authorization from CDPH to do so and the expenditures are in compliance with all applicable state rules and regulations.

3. It is reasonable and appropriate to modify D.04-09-002 to permit the use of proceeds from the issuance of common shares, preferred stock, or debt securities, issued pursuant to D.04-09-002, to reimburse CWS' treasury for funds expended for the construction, completion, extension or improvement of the Lucerne Treatment Plant that are not reasonably chargeable to operating expenses or income and are not permitted by CDPH to fund with SDWSRF loan proceeds.

4. Authorizing the utility to encumber its properties as security for the SDWSRF loan is not adverse to the public interest.

5. A permissible purpose for a loan under §§817 and 818 of the Pub. Util. Code is for the reimbursement of money actually expended from the treasury that is not secured by other forms of financing and is for proper purposes.

6. CWS should retain invoices for the work completed and maintain adequate records to enable an audit to be conducted on the Lucerne Treatment Plant construction expenditures, on the surcharge and the service charge, on the revenues collected through the surcharge and interest earned on the trust account, and on payments related to the loan and the fiscal agent.

7. CWS should be required to file an advice letter within 30 days of signing the final loan agreement for authority to impose a surcharge and service fee and establish a balancing account, subject to the conditions set out in the body of this decision and in these findings and conclusions.

8. CWS should be required to file an advice letter, not more than once a year, to adjust the surcharge to reflect changes in the number of connections and to adjust for any over or under collections in the balancing account.

9. CWS should exclude the surcharge and service fees from regulated operating revenue, and should exclude the plant financed through the surcharge from rate base, for ratemaking purposes.

10. This filing for financing approval does not require environmental review by the CPUC, because the financing of a completed construction project has no potential to result in a physical change in the environment.

11. It is CWS' responsibility to abide by and comply with all applicable environmental regulations for all capital improvements undertaken with funds obtained under this debt authorization.

12. CWS should pay the fees determined in accordance with Pub. Util. Code §1904(b).

13. Today's order should be made effective immediately.

14. This proceeding should be closed.

ORDER

IT IS ORDERED that:

1. California Water Service Company (CWS) is authorized, pursuant to §816, et seq. of the Public Utilities Code (Pub. Util. Code), to enter into a Safe Drinking Water State Revolving Fund (SDWSRF) loan contract with the California Department of Public Health (CDPH) and the Department of Water Resources (DWR), in an amount not to exceed $7,442,700, and to grant a security interest in its Lucerne Water Treatment Project for those capital expenditures within its Lucerne service area.

2. CWS shall file a copy of the promissory note and loan contract agreement with the Division of Water and Audits (DWA) within 30 days after execution.

3. CWS may reimburse its treasury with SDWSRF loan proceeds for amounts expended prior to final funding that have been explicitly authorized by CDPH and are in compliance with all applicable state rules and regulations.

4. The loan authority granted herein today increases the total aggregate amount of debt financing approved by the Commission for CWS in Decision (D.) 04-09-002.

5. Ordering Paragraph 2 of D.04-09-002 is modified to read as follows:

Cal Water shall apply the proceeds of the New Securities authorized for the purposes specified in their Application and discussed in this Decision, as well as to reimburse Cal Water's treasury for funds expended for the construction, completion, extension or improvement of the Lucerne Treatment Plant, that are not reasonably chargeable to operating expenses or income and are not permitted by California Department of Public Health to fund with Safe Drinking Water State Revolving Fund loan proceeds.

6. In all other respects, D.04-09-002, remains unchanged and in full force and effect.

7. CWS shall utilize the services of a fiscal agent to administer repayment of the loan, as required by DWR.

8. CWS shall retain all invoices and maintain adequate records related to the Lucerne water treatment plant project so that Commission staff may confirm the loan was properly used for the stated purpose and reimbursable through a customer surcharge.

9. Within 30 days of the signing of the final loan agreement and in accordance with General Order 96-B or its successor, CWS shall file a Tier 1 advice letter imposing a surcharge and a service fee on its Lucerne customers, subject to the conditions set out in this decision, to repay the indebtedness authorized in this order. These conditions include a $2,000 cap on the total service fee for each new customer, ability for CWS or the Commission to request a change in the surcharge and service fee with a change in the number of customers or change in the loan amount received, and the retention of adequate records. If the final loan agreement is for the exact amount authorized today, CWS shall request imposition of the tariff rates in Appendix B to this decision. If the final loan agreement is for an amount less than that requested in this decision, CWS shall request imposition of tariff rates that are less than those in Appendix B.

10. This order does not authorize any capital expenditures or construction projects.

11. Within 30 days of the issuance of this decision and in accordance with General Order 96-B or its successor, CWS shall file a Tier 1 advice letter establishing a balancing account, in which it shall record surcharge and service fee revenues as well as SDWSRF loan payments and interest earned on funds deposited with the fiscal agent.

12. On or before January 1, 2009, and annually thereafter, for as long as the surcharge and service fees are imposed, CWS shall send reports to the DWA stating the changes in the number of connections by type of customer and by size of connection, the amount of surcharge collected, the amount of repayment made, the outstanding balance of the loan, and the overages and shortages in the CWS balancing account. CWS shall indicate in the report if an advice letter will be forthcoming to reflect any changes in the surcharge.

13. The authority granted by this order shall become effective when CWS pays a fee of $8,442.70, as required by Pub. Util. Code §1904(b).

14. CWS shall exclude the surcharge and service fees from regulated operating revenue, and shall exclude plant financed through the surcharge from rate base, for ratemaking purposes.

15. CWS shall obtain all necessary regulatory authorizations for the Lucerne Treatment Plant project (including but not limited to planning, construction, and operation). Such authorizations are not given here.

16. The utility plant financed by the SDWSRF loan, and paid for with surcharge and service fee revenue, is permanently excluded from rate base for ratemaking purposes.

17. Application 07-11-020 is closed.

This order is effective today.

Dated September 4, 2008, at San Francisco, California.

MICHAEL R. PEEVEY

President

DIAN M. GRUENEICH

JOHN A. BOHN

RACHELLE B. CHONG

TIMOTHY ALAN SIMON

Commissioners

Appendix A - Acronyms

Appendix B - Surcharge Schedule

Safe Drinking Water State Revolving Fund (SDWSRF)

Monthly Surcharge

Lucerne Division