8. Discounted Cash Flow (DCF) and Revenue Requirement Analyses of Alternatives

The Application presents three options that SJWC considered to address its need for adequate facilities, comparing the capital outlay and NPV (net present value) of each to show the process SJWC used to select Alternative 2.

The three options analyzed include the Base Case (renovating the Main Office), Alternative 1 (sell the Main Office, relocate to a newly leased office and to existing facilities on South Bascom Avenue, and renovate and additional space at 1265 South Bascom Avenue), and Alternative 2 (identical to Alternative 1, except that a new office in downtown San Jose will be purchased instead of leased, and 1265 South Bascom Avenue will be purchased instead of leased).

DRA contends that SJWC's DCF and revenue requirement analyses of these alternatives are flawed because:

1. The analyses fail to include cash flows from revenues collected from ratepayers, and the analyses compute the revenue requirement for each alternative for the first year rate increase only but should compute the NPV of revenue requirements over the life of each alternative;

2. The DCF analysis of Alternative 2 inappropriately assumes that shareholders will get the proceeds from the sale of the Replacement Facility at the end of its useful life, thereby understating the actual cost of Alternative 2;

3. The DCF analysis of Alternative 2 should be based on the $6.7 million purchase price of the Replacement Facility and not the portion of the purchase price ($3.795 million) that SJWC seeks to recover in this Application;

4. The DCF analysis of Alternative 2 should not include income that SJWC assumes it will receive from leasing excess space in the Replacement Facility that will not be dedicated to public utility service;

5. The revenue requirement analysis applies the incorrect net-to-gross (NTG) multiplier, thereby artificially increasing the requested revenue requirement;

6. The revenue requirement analysis should calculate depreciation based on gross plant but erroneously calculates depreciation based on net plant;

7. The DCF analysis of Alternative 2 fails to escalate the lease payments for a new downtown Main Office building and 1265 South Bascom Avenue building after the 10th year;

8. The analyses fail to reflect the deferral of taxes allowed under the Internal Revenue Code resulting from the exchange of property.

8.1. Computation of the NPV of Revenue Requirements for each Alternative

DRA states that the DCF analyses of the alternatives are flawed because they fail to include cash flows from revenues collected from ratepayers.⁷⁷ DRA contends that the failure to consider the revenues collected from ratepayers for each alternative during the life of the project invalidates the DCF analyses.

DRA also states that SJWC should have compared the NPV of revenue requirements for each scenario over the life of the project, then select the alternative resulting in the lowest revenue requirement. Instead, according to DRA, SJWC inappropriately computed the revenue requirements for the first year rate increase only.

SJWC responds that its DCF analysis is intended to evaluate the financial feasibility of each option, and, therefore, is limited to the capital costs, one-time costs, and recurring costs associated with the three options.⁷⁸ According to SJWC, although revenues from ratepayers were excluded from the DCF analyses, they were included in the revenue requirement calculations for Alternative 2. SJWC states that the DCF, not revenue requirement, analysis is the proper and accepted method to evaluate the financial feasibility of each option.⁷⁹ Therefore, SJWC contends, its DCF analyses are appropriate.

Discussion

The Application was filed, in part, for Commission approval to impose the costs of this project on SJWC's ratepayers through an increase in SJWC's revenue requirement. The DCF analyses should, therefore, include the effects on ratepayers of each option during the life of the project so that a meaningful comparison can be made of the cost to ratepayers of the different options.

Specifically, the DCF analyses should include the costs to ratepayers for the return on capital investments paid to SJWC's shareholders. Excluding these costs from the DCF analyses artificially understates the true costs of the different options, each of which includes capital investments and returns on those investments, which will ultimately be paid by SJWC's ratepayers.

Although the Base Case and Alternative 1 include capital costs, the lion's share of capital costs are in Alternative 2 for the purchase of the Replacement Facility and the purchase of 1265 South Bascom Avenue. For example, SJWC asserts that the capital outlay of the Base Case, Alternative 1 and Alternative 2 are $4,757,325, $575,745, and $9,121,591, respectively.⁸⁰ Thus, even according to SJWC's analyses, the capital cost of Alternative 2 is almost double that of the Base Case and almost sixteen times that of Alternative 1.

Omitting return on investment costs from the DCF analyses understates the true NPV of all of the options, but this omission disproportionately understates the NPV of Alternative 2 because of the larger capital costs associated with the purchases of the Replacement Facility and 1265 South Bascom Avenue.

Excluding return on investment costs from the DCF analyses contributes significantly to making Alternative 2 appear to be the lower-cost option. Hence, Alternative 2 became the preferred, and only, option for which SJWC computed a revenue requirement,⁸¹ where the cost of capital is then accounted for. This inappropriately removes Alternative 1 from consideration as a low cost option for which a revenue requirement should be computed.

Therefore, the DCF analyses should be revised for Alternative 1 and Alternative 2 to include the costs of to ratepayers, including return on investment costs paid to SJWC's shareholders for the capital associated with each of those options. As discussed above, we have determined that the Main Office cannot be sufficiently renovated to provide adequate facilities. Therefore, it is unnecessary to estimate the costs for the Base Case because it is unreasonable to implement an option that does not provide adequate facilities.

8.2. Proceeds from the Eventual Sale of Facilities

DRA states that SJWC's DCF analysis of Alternative 2 inappropriately assumes that shareholders will get 100% of the proceeds from the sale of the Replacement Facility at the end of 35 years.⁸² DRA contends that, when revised to remove this assumption, the Base Case is the least cost option.

SJWC responds that its analysis assumes at the end of the useful life of the Replacement Facility, the building will be abandoned, declared no longer necessary and useful for utility purposes, and then sold. SJWC asserts that any net proceeds from this future transaction could then be reinvested in utility plant to the benefit of all SJWC's customers. SJWC contends that inclusion of this assumption is consistent with § 790 and the September 13 ACR.⁸³

Discussion

The DCF analysis for Alternative 2 should not include $14.98 million in estimated proceeds from the future sale of the Replacement Facility, which the analysis assumes will accrue 100% to shareholders.⁸⁴ In the same way this Application considers SJWC's request to sell the Main Office, the scenario the SJWC assumes in its analysis concerning the future disposition of the Replacement Facility should be considered in a future application for authority to sell that facility and to reinvest the net proceeds from that sale in utility property.

The inappropriateness of including estimated proceeds from the eventual sale of the Replacement Property is apparent because, although SJWC asserts that any net proceeds from the future sale of the Replacement Facility can be reinvested in utility plant, the DCF analysis does not include any costs related to replacing the Replacement Facility. Thus, by including estimated proceeds from the sale of the Replacement Property, but not the costs of replacing that facility, SJWC implicitly assumes that it will either replace the Replacement Facility at no cost, or that the Replacement Facility will not be replaced at all. Neither of these implicit assumptions is reasonable. If there are going to be proceeds from the sale of the Replacement Facility, there are also going to be costs associated with replacing that facility after it has been sold.

Consideration of any proceeds from the sale of the Replacement Facility belongs in the "next iteration," when SJWC files an application for approval to sell the Replacement Facility and to reinvest the proceeds from the sale in utility property. At that time, the Commission will be able to consider, among other things, the need and usefulness of the Replacement Facility, whether the estimated sales price is reasonable, whether the proceeds from that future sale will be eligible for reinvestment in utility property, and the reasonableness of the costs associated with replacing the Replacement Facility.

The Application does not seek approval to sell the Replacement Facility or to reinvest the proceeds from the sale of that facility in utility property. It is, therefore, beyond the scope of this proceeding to make assumptions about the need and usefulness of the Replacement Facility 35 years from now (or whenever SJWC determines that it should sell the Replacement Facility), the reasonableness of the estimated sales price, or whether the disposition of the proceeds from that future sale should be reinvested in utility property or distributed to ratepayers and shareholders. Including estimated proceeds from the future sale of the Replacement Facility in the DCF analysis of Alternative 2 assumes that the Commission will rule favorably to SJWC on all of these issues.

If, and when, SJWC seeks to dispose of the Replacement Facility, issues concerning the value and disposition of proceeds from the sale of that facility will be considered, based on the facts extant when the request comes before the Commission. Only then should a cost analysis consider the economic effects related to the disposition of the Replacement Facility. Therefore, estimated revenues from the sale of the Replacement Facility should not be included in the DCF analysis related to this Application.

Although DRA did not raise the same concern with respect to the future sale of 1265 South Bascom Avenue, the DCF analysis for Alternative 2 includes an estimated $16.97 million in proceeds from the sale of 1265 South Bascom Avenue at the end of 35 years, which SJWC also assumes will be credited 100% to shareholders.⁸⁵ For the same reasons that we will not include estimated revenues from the sale of the Replacement Facility in the DCF analysis, estimated revenues from the future sale of 1265 South Bascom Avenue will not be included in the DCF analysis of Alternative 2.

8.3. Purchase Price of the Replacement Facility

The DCF analysis assumes a $3.795 million cost for a new Main Office. However, because SJWC subsequently informed the Commission that it will pay $6.7 million for the Replacement Facility, DRA asserts that the DCF analysis should be based on the total purchase price of $6.7 million. DRA contends that SJWC will soon seek authority to recover the remainder of the purchase price. Therefore, according to DRA, the Commission should assume that SJWC is seeking recovery of the full purchase price now. DRA contends that a DCF analysis that assumes a $6.7 million purchase price for the Replacement Facility results in the Base Case being the most cost effective alternative.

SJWC responds that its request for $3.795 million for cost of the Replacement Facility is not altered or changed, even though it paid $6.7 million for the Replacement Facility, and it would be inappropriate to include a $6.7 million cost for the Replacement Facility in the DCF analysis.

Discussion

DRA's recommendation that the Commission assume a purchase price of $6.7 million for the Replacement Facility is inappropriate because SJWC is not seeking recovery of the full purchase price of the Replacement Facility in this Application. The Commission should not consider recovery of the full purchase price now, in anticipation of a yet-to-be-filed application. The Scoping Memo limits our consideration to the requested rate increase and to the proposed rate design for recovering the increased costs resulting from approval of the Application.

The Commission has before it SJWC's request to recover $3.795 million of the purchase price for the Replacement Facility, and that is the cost for the purchase of a Main Office replacement facility that will be considered in this proceeding. Issues concerning the recovery of any remaining cost of the Replacement Facility will be addressed if, and when, SJWC seeks to include those costs in rate base and to recover the costs from ratepayers. Therefore, we reject DRA's recommendation for the Commission to assume a purchase price of $6.7 million for a new office facility.

8.4. Income from Leasing Excess Space in the Replacement Facility

SJWC states that, in May 2007, it updated its DCF analysis for Alternative 2 to revise assumptions concerning downtown office rents and rents for temporary office space to reflect current market conditions, and to reflect the anticipated purchase price of the Replacement Facility.⁸⁶ The revised analysis assumes that a portion of the Replacement Facility will not be needed in the short term and can be leased to a third party. As a result, SJWC includes rental income it estimates it will receive from leasing excess space in the Replacement Facility.

SJWC states that the Replacement Facility contains 12,000 ft.² more than the Base Case and Alternative 1, against which it was being compared. In order to make the three options comparable, SJWC's revised analysis assumes the excess space would be leased, and treats the lease income as an offset to the purchase price of the Replacement Facility.⁸⁷ According to SJWC, DRA requested SJWC to remove from the revised analysis the rental income derived from the excess space, but doing this makes a side-by-side comparison of the alternatives inappropriate.

SJWC contends that excluding the income from leasing the excess space makes comparisons among the alternatives misleading because the total floor space in Alternative 2 is larger than the other options, and, according to SJWC, this inappropriately increases the total cost of Alternative 2. SJWC contends, however, that on a per square foot basis, Alternative 2 continues to be the least cost option.

Discussion

The DCF analysis for Alternative 2 should not include income that SJWC assumes it will receive from leasing the excess space in the Replacement Facility because SJWC is not dedicating that additional space to public utility service nor seeking recovery of the cost for that excess space in utility rates. As discussed above, because we do not assume in the DCF analysis of Alternative 2 the full purchase price of $6.7 million for the entire Replacement Facility (including the excess space), it is also is appropriate to exclude from the DCF analysis income from leasing the excess space in the Replacement Facility that will not be dedicated to public utility service.

8.5. Net-to-Gross (NTG) Multiplier

DRA states that SJWC applied the incorrect NTG multiplier, thereby inappropriately increasing the estimated revenue requirement for Alternative 2. DRA contends that SJWC's NTG multiplier is applicable only to changes in expense or changes in the overall rate of return but not to changes in rate base.⁸⁸ After accounting for the tax deductibility of interest expenses, DRA contends that the correct NTG multiplier is 1.4173. According to DRA, this is because rate base increases for SJWC are funded through approximately 47.53% debt and 52.47% equity, and the interest payments on debt are tax deductible.

SJWC responds that the NTG multiplier of 1.6955 was adopted in D.06-11-015 in SJWC's most recent GRC, and complies with Commission directives contained in the Water Division Memorandum "Net-to-Gross Multiplier Calculation and Summary of Earnings Comparison", dated May 4, 1990, and with SP U-3-SM.⁸⁹

Discussion

The NTG multiplier is a factor that is used in the ratemaking process to determine the unit change in gross revenues required to produce a unit change in net revenues, to calculate the additional revenue required to pay taxes, to consider the effect of uncollectibles, and to achieve a given revenue requirement after taxes. The NTG multiplier is determined by taking the reciprocal of one minus the sum of the uncollectibles rate, franchise tax rate, and state and federal income tax rates. It depends largely on the tax rates applicable to the cost components included in the analysis. The value of the NTG multiplier will be different if the costs analyzed include capital costs, which are taxed at a different rate than other cost components.

After reasonable expenses and depreciation are determined, the return on investment is calculated by multiplying the rate of return by the rate base. The revenue requirement can then be determined by multiplying the dollar return by the NTG multiplier, and adding expenses and depreciation to that result. To determine the revenue requirement for a particular scenario, the appropriate NTG multiplier must be applied to the NPV costs for that scenario.

Because the tax effect on debt is different from that for equity, the NTG multipliers for each are different. The replacement of the Main Office requires a combination of debt and equity capital costs that are taxed at different rates, and the NTG multiplier for each of these components must be weighted according to SJWC's authorized capital structure to determine the appropriate rate base NTG multiplier. SJWC's NTG multiplier does not do this.

The NTG multiplier authorized in D.06-11-015 is appropriate only for determining the revenue requirement resulting from changes in the return on equity or changes in the overall rate of return. Without adjustment, this NTG multiplier will overstate the effect of taxes resulting from the purchase of the Replacement Facility because it does not account for the tax deductibility of debt interest. Because we don't know the exact amount of debt and equity used to finance the purchase of the Replacement Facility, we assume that this capital expenditure is spread in the same ratio as SJWC's authorized capital structure (47.53% long-term debt and 52.47% common equity).

SJWC's reliance on the Water Division Memorandum "Net-to-Gross Multiplier Calculation and Summary of earnings Comparison", dated May 4, 1990 (1990 Water Division Memorandum) is misplaced. The 1990 Water Division Memorandum applies to changes in expense, but does not address changes capital costs.⁹⁰ An NTG multiplier based on the 1990 Water Division Memorandum will overstate the effect of taxes resulting from the purchase of a new Main Office because it does not account for the tax deductibility of debt interest.

SJWC's reliance on SP U-3-SM is also misplaced. SP U-3-SM applies to small (Class B, C, and D) water utilities, and provides guidance to Commission staff preparing Staff Reports comprising the Results of Operation for Class B, C and D water company or sewer company GRCs.⁹¹ The provisions of SP U-3-SM are applicable to Class A water utilities such as SJWC only when specifically authorized by the Commission.⁹² SJWC has not been authorized to apply the provisions of SP U-3-SM, so SP U-3-SM does not apply to this Application.

Because no taxes are paid on the interest applied to debt, the NTG multiplier applied to the weighted cost of long-term debt is lower than that applied to the weighted cost of common equity. Only the uncollectible rate and franchise taxes are included in the long-term debt NTG multiplier. Because taxes are paid on the return on common equity, the NTG multiplier applied to that component includes both state and federal income taxes as well as the uncollectible rate and franchise taxes. This rate base NTG multiplier is then applied to the rate base increase, and the result is multiplied by the authorized rate of return to determine the effect on gross revenues resulting from the additional costs.

To determine the appropriate rate base NTG multiplier, the grossed up weighted cost of capital is divided by the weighted cost of capital. As shown in Table 3, this results in a rate base NTG multiplier of 1.4173.

Table 3 Computation of Rate Base NTG Multiplier
Description	Capital Ratio	Cost	Weighted Cost	Net to Gross	Gross Weighted Cost
Long-Term Debt	47.53%	7.54%	3.58%	1.00466	3.60%
Common Equity	52.47%	10.13%	5.32%	1.69550	9.01%
Total	100.00%		8.90%		12.61%
Rate Base Change Net to Gross = 12.61%/8.90%					1.4173
Source: D.06-11-015, Attachment B (Joint Comparison Exhibit), Section J (Return on Equity and Return on Rate Base), p. 9.

Therefore, 1.4173 is the NTG multiplier that should be used to calculate the revenue requirement resulting from the replacement of the Main Office.

8.6. Calculating Depreciation on Plant

DRA contends that SJWC erroneously calculated depreciation on net plant when depreciation should have instead been based on gross plant.⁹³ SWJC agrees that depreciation should be based on gross plant.⁹⁴

Discussion

Depreciation expense should be based on gross plant. Applying depreciation to the gross plant in the Exhibit SJWC-1 analysis results in depreciation expense of $57,302 for Alternative 1 and $270,948 for Alternative 2.⁹⁵

8.7. Escalation of Lease Payments

DRA contends that SJWC's DCF analysis of Alternative 1 fails to escalate the payments to account for inflation for leasing a new downtown Main Office building and the 1265 South Bascom Avenue building after the 10^th year.⁹⁶ DRA asserts that SJWC admitted this error during hearings. DRA recommends that the Commission reject SJWC's analysis because of this error and other flaws in the DCF analyses.

SJWC states that it inadvertently failed to escalate the payments for leasing a new downtown Main Office building and the 1265 South Bascom Avenue building after the 10th year in its original spreadsheet model.⁹⁷

Discussion

The DCF analyses presented in Exhibit SJWC-1 assumes lease costs under the Base Case and Alternative 1 will increase 3% per year for all years analyzed, except that rental costs for 1265 South Bascom Avenue will increase 3.5% per year during the first four years.⁹⁸ Because Alternative 2 assumes the purchase of a new office and 1265 South Bascom Avenue, lease costs do not apply to that alternative.

DRA includes in its testimony what it describes as a corrected SJWC DCF analysis.⁹⁹ DRA also submitted into evidence DRA-10, SJWC's response to DRA Data Request RK-2 containing spreadsheets responsive to DRA's request for, among other things, the escalation of the lease payments.¹⁰⁰

A review of DRA-1 and DRA-10 shows that the DCF analysis for the Base Case does not include any lease costs for 1265 South Bascom Avenue. This omission makes the Base Case appear less costly than it actually is. However, we have already determined above that the Base Case is not a reasonable option, so the omission is inconsequential.

A review of Alternative 1 in SJWC-1, DRA-1, and DRA-10 shows that they all escalate lease payments at 3% per year, except that rental costs for 1265 South Bascom Avenue increase 3.5% per year during the first four years.¹⁰¹ Thus, there is no error in the analysis of Alternative 1 for escalating lease payments for the Replacement Facility and the 1265 South Bascom Avenue building after the 10th year. DRA's allegation that the analysis of Alternative 1 failed to escalate lease payments lacks merit.

DRA asserts the PD errs in finding that DRA's allegation that the analysis of Alternative 1 failed to escalate lease payments lacks merit because, according to DRA, the error it alleges is contained in SJWC's response to DRA data request RK-1. DRA states that the response was corrected by SJWC in subsequent responses.

The error that DRA alleges SJWC made is in SJWC's response to DRA data request RK-1, which is not part of the record. The alleged error is not reflected in any pleading or exhibit that SJWC has submitted into the record of this proceeding. Therefore, the PD correctly finds that DRA's allegation lacks merit.

We note, however, that although the analysis of Alternative 1 escalates estimated parking fees in year 2, it fails to escalate estimated parking fees after year 2.¹⁰² Therefore, the DCF analysis of Alternative 1 should be revised to escalate estimated parking fees for all years at 3% per year.

We also note that the analysis of Alternative 1 does not include operations and maintenance (O&M) costs for Year 1 and incorrectly escalates O&M costs in subsequent years. However, because O&M costs for SJWC's office facilities are already included in its current revenue requirement, it is appropriate to exclude these costs from the analyses. Therefore, the DCF analysis of Alternative 1 should be revised to exclude O&M costs.

8.8. Deferral of Taxes

The Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment. ¹⁰³ This Internal Revenue Code provision is referred to as a "Section 1031 property exchange," and requires a property exchange be completed not more than 180 days after transfer of exchanged property.

DRA states that SJWC erred by failing to reflect in the proposed revenue requirement analysis the deferral of taxes allowed for a Section 1031 property exchange when replacing the Main Office with a new office.¹⁰⁴ DRA contends that deferred capital gains tax resulting from a Section 1031 property exchange should be deducted from rate base.

SJWC states that the omission from its analysis of the deferred taxes resulting from a Section 1031 property exchange is not an error but is instead a difference in assumptions as to when the close of the purchase of the new facility would occur.¹⁰⁵ SJWC states that its purchase of the Replacement Facility closed on November 14, 2007, and if the sale of the Main Office is authorized by the Commission and closed by May 14, 2008 (i.e., within 180 days of the close of the purchase of the new facility), the transaction can be treated as a Section 1031 property exchange.¹⁰⁶

Discussion

The Internal Revenue Code requires that a Section 1031 property exchange be completed not more than 180 days after transfer of exchanged property. Because SJWC closed its purchase of the Replacement Facility (110 Taylor Street, San Jose) on November 14, 2007, the sale of the Main Office must be authorized by the Commission and closed by May 14, 2008, a date that has already passed, in order to be treated as a Section 1031 property exchange. Thus, the purchase of the Replacement Facility is not eligible for tax deferral under Internal Revenue Code Section 1031, and, therefore, the revenue requirement analysis for Alternative 2 should not reflect the deferral of taxes allowed under the Internal Revenue Code.

8.9. Summary of Revisions to the DCF Analyses and Resulting Revenue Requirements

As discussed above, the revenue effects on ratepayers should be included in the DCF analyses of Alternatives 1 and 2 to reflect the true costs to ratepayers so that the NPVs and revenue requirements for these alternatives may be compared on an "apples-to-apples" basis.¹⁰⁷ In particular, the DCF analysis should include return on investment costs paid to SJWC's shareholders by SJWC's ratepayers because excluding these costs related to the purchases of the Replacement Facility and 1265 South Bascom Avenue understates the actual costs of the different options, and particularly Alternative 2.

The estimated proceeds from the future sale of the Replacement Facility and 1265 South Bascom Avenue should not be included in DCF analysis of Alternative 2 because the reasonableness of the assumed sale prices, or the eligibility of the sales proceeds for reinvestment in utility property are beyond the scope of this proceeding.

The DCF analysis of Alternative 2 should not include the full $6.7 million purchase price for the Replacement Facility because it is not requested in the Application, and it is beyond the scope of this proceeding to anticipate a future application that SJWC may file to seek recovery of the remainder of the purchase price, or to consider in this proceeding issues appropriate for that yet-to-be-filed application.

The DCF analysis of Alternative 2 should not include income derived from leasing excess space in the Replacement Facility because that excess space is not property necessary or useful in the performance of SJWC's duties to the public and will not be included in rate base.

The DCF analyses should use 1.4173 as the NTG multiplier, and calculate depreciation expenses based on gross plant.

Although we have determined that the DCF analysis of Alternative 1 appropriately escalates lease payments for a new downtown Main Office building and 1265 South Bascom Avenue building after the 10th year, the analysis of Alternative 1 does not escalate costs for parking after Year 2. Therefore, the DCF analysis of Alternative 1 should be revised to escalate estimated parking fees at 3% per year for all years analyzed. The DCF analysis of Alternative 1 should also be revised to exclude O&M costs.

The analyses of Alternative 2 should not be revised to reflect the deferral of taxes allowed under the Internal Revenue Code because the purchase of the Replacement Facility is not eligible for tax deferral.

The revised DCF analyses show that leasing facilities under Alternative 1 is less expensive than purchasing them under Alternative 2 (NPV of $25,598,558 versus $32,674,284), and the revenue requirement for Alternative 1 is $1,133,520, while the revenue requirement for Alternative 2 is $1,477,800 (a revenue increase of 0.61%). Appendix A compares the capital outlay and NPV for the alternatives, and Appendices B and C summarize the revised DCF and revenue requirement analyses.

DRA states that the calculations in Appendix A of the PD of the NPVs for Alternatives 1 and 2 are incorrect.¹⁰⁸ DRA asserts that the correct NPV for Alternative 1 is $12,530,954 and for Alternative 2 is $13,802,759. DRA recommends that changes be made to the PD pursuant to spreadsheets included as Attachment A to its comments. However, DRA does not explain why the PD's computation of the NPVs for Alternatives 1 and 2 are in error or why DRA's calculations are correct, and the spreadsheets in Attachment A to DRA's comments are insufficient to determine the correctness of DRA's computations.

⁷⁷ Exh. DRA-1, p. 13. DRA Opening Brief, p. 6.

⁷⁸ Exh. SJWC-4, p. 3.

⁷⁹ SJWC Opening Brief, p. 13.

⁸⁰ Exh. SJWC-1, Stein, p. 8.

⁸¹ TR 219:25 - 220:8.

⁸² DRA Opening Brief, pp. 6-7.

⁸³ Exh. SJWC-5, p. 3.

⁸⁴ See Exh. SJWC-1, Stein Exhibit 12, p. 36.

⁸⁵ See Exh. SJWC-1, Stein Exhibit 10B, p. 30.

⁸⁶ Exh. SJWC-4, pp. 1-2.

⁸⁷ TR 198:8 - 199:19.

⁸⁸ TR 375:2-9. DRA Opening Brief, pp. 7-9.

⁸⁹ Exh. SJWC-5, pp. 1-2.

⁹⁰ See Exh. SJWC-8, Net-to-Gross Multiplier Calculation (p. 2), and Example - Calculation of Net-to-Gross Multiplier (p. 4).

⁹¹ SP U-3-SM, Section A.1, p. 1.

⁹² For example, Res. W-4556 authorized Great Oaks Water Company (Great Oaks) to file its GRC by advice letter pursuant to U-3-SM as an experiment. Other Class A water companies must seek a waiver for similar authority. (Res. W-4556, p. 6.)

⁹³ DRA Opening Brief, p. 9.

⁹⁴ TR 247:19-24.

⁹⁵ SJWC April 15, 2008 Response to ALJ Rulings, SJWC Rate Impact 10 Scenarios, Scenario 9 Alternative 2 Tab, Cell F51.

⁹⁶ DRA Opening Brief, p. 10.

⁹⁷ TR 246:10-11; 248:10-15.

⁹⁸ Exh. SJWC-1, Stein Exhibit 2, pp. 3, 4, 16. Stein Exhibits 6 and 7, pp. 13-18. Exh. SJWC-1, Stein Exhibit 10A, pp. 25-27. Exh. SJWC-1, Stein Exhibit 11, pp. 31-33.

⁹⁹ Exh. DRA-1, Attachment A.

¹⁰⁰ Exh. DRA-10, Attachment E.

¹⁰¹ Exh. DRA-1, and Exh. DRA-10 do not include lease payments for the Base Case.

¹⁰² Exh. SJWC-1, Stein, pp. 31-33.

¹⁰³ Internal Revenue Code Title 26, Subtitle A, Chapter 1, Subchapter O, Part III, § 1031 (Exchange of property held for productive use or investment).

¹⁰⁴ DRA Opening Brief, pp. 9-10.

¹⁰⁵ TR 244:11-246:4.

¹⁰⁶ Exh. SJWC-5, p. 4. TR 245:19-246:4.

¹⁰⁷ Although Alternative 1 includes capital costs for improvements to SJWC facilities located at 1221, 1251 and 1265 South Bascom Avenue, the capital costs and the returns on the investment for the purchase of the Replacement Facility and the purchase of 1265 South Bascom Avenue are not present in Alternative 1, which assumes that facilities will be leased.

¹⁰⁸ Opening Comments of DRA on Proposed Decision of ALJ Smith, p. 9.