10. Comments on Proposed Decision

The proposed decision of the Administrative Law Judge in this matter was mailed to the parties in accordance with Section 311 of the Public Utilities Code and comments were allowed under Rule 14.3 of the Commission's Rules of Practice and Procedure. Comments were filed on May 27, 2009, by the Cal-Am, DRA, the Independent Reclaimed Water Users, and the Hidden Hills Subunit Ratepayers Association. Reply comments were filed on June 1, 2009, by Cal-Am and DRA.

Cal-Am contended that plant additions should include three of the four Lower Carmel River Valley replacement wells it requested as these wells are necessary to provide reliable service and have been completed. As set forth elsewhere in today's decision, we have revised the proposed decision to include two of these three wells at the updated cost of $833,000.

Cal-Am explained that the delay in placing its Lower Rancho Fiesta tank into service will result in $200,000 of capital cost being written off. We will allow these costs to remain in construction work in progress during this rate cycle, pending completion of this project.

Cal-Am disputed the 30/70 split between capital and expense for the amount allowed for well rehabilitations. We adopted this split for prospective ratemaking purposes only. The actual accounting treatment of the costs of each well rehabilitation should be based on actual activities performed, consistent with our accounting rules, and will therefore vary based on the actual work performed.

Cal-Am requested that the number of advice letters for capital projects be reduced or that that amount allowed to be recovered include an allowance for funds used during construction. Advice letters for rate base additions provide a convenient means to synchronize rate increases with actual in service dates for significant plant additions. To the extent such projects exceed one year in construction, we will allow Cal-Am to include an allowance for funds used during construction in the total costs.

Cal-Am sought permission to include new updated information about the Sand City Desalinization Plant lease in a subsequent application. Accordingly, we will deny the current request for ratemaking approval without prejudice so that Cal-Am can make a comprehensive presentation justifying the San City costs.

Cal-Am reiterated its arguments on regulatory expense and tank painting.

On general office issues, Cal-Am focused on the proxy used in the Proposed Decision to allocate costs to non-regulated operations. Cal-Am contended that its multiple tier allocation methodology, used for its non-regulated subsidiary, American Water Enterprises, Inc., was a superior approach. Cal-Am, however, continues to ignore the point made first by DRA and then in the Proposed Decision: all non-regulated operations are not included in the allocation methodology because certain non-regulated operations are conducted by corporate affiliates other than American Water Enterprises, Inc. These omitted non-regulated operations are not subject to the multiple tier allocation methodology and are effectively allocated no costs in Cal-Am's General Office application. Consequently, these costs are allocated instead to regulated operations. In its rebuttal testimony, Cal-Am did not comprehensively disclose all non-regulated operations that are in any way served by employees or assets included in revenue requirement and show that all such operations are carefully subjected to the multiple tier cost allocation methodology. Absent such a demonstration, we are left with only the Securities and Exchange Commission data on which to allocate costs to the undisclosed non-regulated operations.

1. We will, however, allow Cal-Am another opportunity to demonstrate the cost allocation that would occur if the multiple tier allocation methodology were applied comprehensively to all non-regulated operations. No later than 90 days after the effective date of this order. Cal-Am is authorized to file a petition for modification of today's decision that fully discloses all non-regulated operations which use any assets or employees included in revenue requirement, specifying the following:

1. Identification of all such goods and services provided to non-regulated operations,

2. Identification of all personnel positions and assets included in revenue requirement and used to provide the non-regulated goods and services,

3. Statement of revenue received for such goods and services,

4. Demonstration that all identifiable costs are direct billed to non-regulated accounts and that all indirect costs are allocated consistent with the multiple tier methodology.

Cal-Am next disputes the Proposed Decision's adjustment to call center costs to remove 5.8% of excess costs associated with the nation-wide consolidated call center. Cal-Am claims that increased call volume and services justify the additional costs, but offers no explanation for cost reductions that should have occurred due to economies of scale, new technology, and productivity improvements. Similarly, Cal-Am objects to escalating general office labor from May 31, 2008, actual employee levels.

Finally, Cal-Am declined to accept the modification to the rate design settlement.

In its comments on the Proposed Decision, DRA argued that the Santa Margarita Aquifer Storage and Recovery well should be added to the summer supply capacity. In reply, Cal-Am disputed this assertion so we have not included this well.

DRA recommended that the Proposed Decision specifically require Cal-Am to improve its pipeline break data collection to comply with industry best practices and to include break type and cause of pipe failure. We will adopt these requirements.

DRA reiterated its support for an unaccounted for water target of 8.5% in the current case, and adopting the Monterey Peninsula Water Management District's 7% as the target for the next rate case cycle. Due to the critical importance of decreasing unaccounted for water, we have adjusted the Proposed Decision to adopt a 9% standard for the Monterey system.

DRA opposed including the Sand City Desalinization Plant in revenue requirement because alternative projects would produce more water savings at a lower cost. As mentioned above, we are deferring resolution of this issue.

DRA also opposed the proposed modifications to the Rate Design Settlement. As both parties to the Rate Design Settlement Agreement declined to accept the proposed modifications, we have considered the Agreement as filed by the parties and approved it. We have, however, adopted other measures to decrease the use of potable water for irrigation.

The Hidden Hills Subunit Ratepayers Association proposed that pipeline be replaced in its subsystem rather than constructing an interconnection to the main system. Cal-Am agreed and today's decision has been modified to include this alternative. The Hidden Hills Subunit Ratepayers Association also reiterated its position that customers of this subsystem should not bear costs of the Seaside Basin adjudication.

The Independent Reclaimed Water User Group recommended modifications to rates charged for potable water use by golf courses. Cal-Am opposed these recommendations as unnecessary and unwarranted, and we have not adopted the recommendations.