ALJ/KLK/hkr Date of Issuance 3/13/2009

Decision 09-03-007 March 12, 2009

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Application of Suburban Water Systems (U339W) for Authority to Increase Rates Charged for Water Service by $6,820,539 or 13.57% in 2009, $1,698,004 or 2.97% in 2010, and $1,250,644 or 2.12% in 2011.

Application 08-01-004
(Filed January 2, 2008)

(See Attachment A for List of Appearances.)

DECISION AUTHORIZING GENERAL RATE INCREASES
FOR SUBURBAN WATER SYSTEMS
AND APPROVING A RELATED SETTLEMENT AGREEMENT
WITH THE DIVISION OF RATEPAYER ADVOCATES

TABLE OF CONTENTS

Title Page

DECISION AUTHORIZING GENERAL RATE INCREASES FOR SUBURBAN WATER SYSTEMS AND APPROVING A RELATED SETTLEMENT AGREEMENT WITH THE DIVISION OF RATEPAYER ADVOCATES 2 2

1. Summary 2 2

2. Background 4 4

3. Procedural Matters 7 7

3.1. Motions 8 8

4. DRA Protest 8 8

5. Settlement Agreement 9 9

5.1. Issues Settled 9 9

5.2. Reasonable, Consistent with the Law, and in the Public Interest 11 11

6. Disputed Issues 13 13

7. Evidentiary Hearing 14 14

8. Discussion 15 15

8.1. Southwest (Parent Company) Issues 16 16

8.1.1. Affiliate Transaction Rules 16 16

8.1.2. Four Factor Method 18 18

8.1.3. Domestic Production Activities Deduction 19 19

8.1.4. Southwest and Utility Group Expenses 20 20

8.2. Suburban Issues 25 25

8.2.1. Project Cornerstone 25 25

8.2.2. New Positions 27 27

8.2.3. Other Issues 30 30

8.2.4. Residential Houseline Program 31 31

8.2.5. Rate Base-Working Cash 33 33

9. Water Action Plan Checklist 33 33

9.1. Activities Reported in Application 34 34

9.1.1. Water Quality 34 34

9.1.2. Water Conservation 34 34

9.1.3. Infrastructure Investment 35 35

9.1.4. Low-Income Ratepayer Assistance 35 35

9.2. Report on 2008 and 2009 Activities 35 35

10. Conclusion / Authorized Rates 36 36

11. Categorization 37 37

12. Comments on Proposed Decision 37 37

13. Assignment of Proceeding 38 38

Findings of Fact 38 38

Conclusions of Law 40 40

ORDER 40 40

Attachment A - List of Appearances

Attachment B - Settlement Agreement

Attachment C - Rate Tables

Attachment D - Service List

DECISION AUTHORIZING GENERAL RATE INCREASES
FOR SUBURBAN WATER SYSTEMS
AND APPROVING A RELATED SETTLEMENT AGREEMENT
WITH THE DIVISION OF RATEPAYER ADVOCATES

1. Summary

This decision authorizes Suburban Water Systems (Suburban) to increase rates for the three-year period 2009-2011, adopts a related settlement agreement between Suburban and the Commission's Division of Ratepayer Advocates (DRA), and addresses Suburban's relationship with its parent company, Southwest Water Company (Southwest), and other matters.

The authorized rate increases are set forth below:

Year	% Increase	Amount Increase
2009	11.01%	$5,535,650
2010	2.69%	$1,506,221
2011	2.19%	$1,262,780

Increases for the test year 2009 are shown above. The increases for the escalation years 2010 and 2011 are estimates as rates for these years will be determined through the Advice Letter process, reflecting current escalation data, filed prior to each year. Suburban also shall include as an attachment to these Advice Letters (to be filed in 2009 and 2010) updates on its activities related to the implementation of the Commission's Water Action Plan policy objectives.

Today's decision also approves a related settlement agreement between Suburban and DRA, the protestant in this proceeding. The settlement resolves most, but not all, of the protested issues. As a result of the settlement, the rate increases authorized herein for test year 2009 are approximately 19% less than the increases initially requested.

Two issues arose in this proceeding that generally impact all regulated water utilities in California: transactions between parent companies and their subsidiaries (affiliate transactions); and, the use of regulated assets for both tariffed and non-tariffed utility operations (termed as "excess capacity" in the subject application). Although we have issued decisions on both of these issues, we find it is necessary and timely to address these two issues on an industry-wide basis. This decision anticipates that a rulemaking for setting industry-wide rules for affiliate transactions and the use of regulated assets for non-tariffed operations will be issued shortly.

Therefore, with respect to affiliate transactions, we do not make any disallowances regarding rates with respect to any transactions between Suburban and its parent Southwest, and we also do not direct Suburban to institute affiliate transaction rules at this time. We do, however, direct Suburban to submit a formal application to request authority to establish a holding company, and related matters.

Suburban also requested in its application authority to file an Advice Letter at a later date to recover the costs of a future project to upgrade its information systems with that of Southwest (Project Cornerstone). We find that addressing the information systems upgrade now is premature, and therefore do not authorize the filing of an Advice Letter at this time.

Lastly, Suburban asks that its optional maintenance program (Residential Houseline Program) for service and repairs on the customer property-side of the water meter continue to be treated as "excess capacity." We make no adjustments to the program at this time, but we note that these operations will be reconsidered in the rulemaking discussed above. Suburban shall maintain a memorandum account to track this program until further notice from the Commission.

This proceeding is closed.