The Parties' Positions

Arrowhead and RRB made comprehensive revenue requirement showings in the evidentiary hearings. Their figures are compared in settlement Appendix A, Summary of Earnings, Attachment A to this decision. The positions they took before reaching settlement, and those of the other three parties, are further described below.

Arrowhead's Initial Position

Arrowhead believes that since its current owner acquired the utility in 1988 it has been, and continues to be, challenged by the regulatory process. Much of the system was constructed more than 60 years ago. Over the decades its mains have deteriorated badly to the point where there are frequent leaks and breaks. Repairs have become extraordinarily difficult because system records are inadequate and valves are buried or frozen from age. Dirt roads above the lines

are constantly being regraded, lessening the cover over mains and making them more susceptible to traffic loading and wintertime freezing. Despite demanding maintenance conditions, the company has had only two general rate increases since 1979, and the more recent in 1994 did not provide sufficient rate relief. Nonetheless, Arrowhead maintains, it has done everything it could to keep water flowing. Arrowhead acknowledges in years past it has had to forego payments on its SDWBA loan to make ends meet. In Arrowhead's eyes, the rate relief it hoped for has been under consideration for an unconscionably long time.

In A.99-10-027, Arrowhead requests a general rate increase of $203,266 (131.2%) based on Test Year 2000. The summary of earnings and workpapers that form A.99-10-027 derive directly from those assembled by Water Division's auditor working with Arrowhead's owner from June through September, 1999. In addition to justifying those figures with testimony and exhibits in the hearings, Arrowhead sought to establish that the figures supporting the application were in no small part estimates actually prepared by Water Division's own auditor who was now testifying for RRB. RRB, Arrowhead maintained, was now presenting different figures leading to a much lower increase.

RRB's Initial Position

RRB's auditor testified that the application figures Arrowhead attributed to him had in fact been expense estimates made by Arrowhead's owner during the 1999 audit. RRB advocated a $108,626 general rate increase. Of that amount, the Commission had already authorized $91,342 through Resolution W-4167 as an interim increase for purchased water. RRB's considerably lower expense estimates accounted for over half of its difference with Arrowhead, and the remainder was RRB's elimination of depreciation expense and net return. Depreciation and return should be disallowed completely, RRB argued, because

Arrowhead had since 1995 failed to deposit into the SDWBA trust account surcharge revenues collected from customers, and had failed to keep up its SDWBA loan payments. RRB's recommended increase was intended to be just sufficient to cover Arrowhead's cash outlays and provide adequate service pending the Commission's later disposition of the investigatory phase issues.

RRB also made other operational, financial and accounting-related recommendations, most of which have been deferred to the forthcoming investigatory phase of the proceeding.

Peters' Initial Position

William J. Peters appeared for himself and spoke for a group of 75 neighbors informally called Cedar Glen Water Improvement Task Force. Peters recommended the rate increase request be totally denied. Although he analyzed most of Arrowhead's revenues and expenses, he paid greatest attention to its largest expense item, purchased water, which he would have cut severely. According to Peters, the system has been allowed to deteriorate so much that any rate increase would have little beneficial effect, going instead to temporary, superficial repairs. Peters cited numerous violations of Department of Health Services requirements, financial weakness, and SDWBA fund diversion in calling for a thorough Commission investigation into Arrowhead's performance, hopefully leading to Arrowhead's removal. In the meantime, Arrowhead's current owner is simply in a holding pattern waiting for somebody to acquire the system. No private buyer would be interested, Peters believes, so the only solution would be to bring in a public agency as quickly as possible. Any rate increase granted in the meantime would simply enable and encourage Arrowhead to continue its unacceptable practices.

Pretzinger's Initial Position

Richard Thomas Pretzinger, Jr. testified that he was appearing on behalf of approximately 150 Arrowhead customers who are full time residents and property owners. Pretzinger recognizes that Arrowhead is severely challenged in running the company. He does not believe the answer is for a large, private water company to step in, nor would he favor turning the system over to Crestline Lake Arrowhead Water Agency, Arrowhead's wholesale water supplier. His preferred solution is for local residents to form a water district to take over the system, and he has begun to work with others toward that end. In the meantime, he would have the Commission take whatever steps are necessary to keep Arrowhead in business and water flowing, including granting any rate increase that may be necessary. Pretzinger took no position on how large an increase is needed. He did, however, request the Commission attach strings to any increase it grants. First, the Commission should act as an intermediary, establishing and administering an account into which increased revenues would flow and from which Arrowhead's bills would be paid. Second, any increase granted should be temporary, perhaps for one year, with monthly reports from Pretzinger's committee on what progress was being made toward forming a district and acquiring the system. Third, Arrowhead and Pretzinger's committee must have in place within one year a plan to operate Arrowhead efficiently and in compliance with legal requirements.

Wanser's Position

Kathy Wanser set forth her position in a statement on the record during the first day of evidentiary hearing, and later that day submitted her appearance at the prehearing conference for the proceeding's investigatory phase. Wanser is primarily interested in the allegation that Arrowhead has commingled SDWBA and operating funds, an issue to be taken up later. She is also concerned about

rust in the water and opposes any rate increase. Beyond her unsworn statement and her appearance, Wanser did not participate in the rate case phase of the consolidated proceeding.

The Settlement

The Arrowhead, RRB, Peters and Pretzinger settlement is Attachment A to this decision. Table 1 compares the settling parties' initial positions with what they propose in the settlement.

Table 1

Revenue Requirement Increases

The Commission has already granted Arrowhead an interim $91,342 (57.5%) increase subject to refund in Resolution W-4167. That increase would be applied toward these amounts.

The settlement indicates each area of difference among the parties' initial positions and summarizes how those differences were resolved. In addition, the settling parties agree to the following three special provisions:

Memorandum Accounts The parties agree that any increase in rates authorized as a result of this settlement should be conditioned on Arrowhead maintaining a memorandum account for purchased water and another for Contract Work - Repairs. The purpose of this accounting is to assure that expenditures made in repairing and replacing water mains are tracked along with any resulting change in the expense of Purchased Water. Any variance in actual expenditures charged to these accounts from the estimates the

parties have agreed to in this settlement should be reconciled by a surcharge or surcredit to rates every six months by filing an appropriate advice letter with the Commission.

Future Earnings The parties agree that the Commission should not authorize any net revenue in this settlement, but it should defer consideration of setting rates to provide earnings on the basis of a return on rate base, or on the basis of an operating ratio, until there is a decision on the outcome of I.00-03-016.

Notices of Completion of Repairs Resolution W-4167 requires Arrowhead to mail a quarterly notice to each customer identifying repairs that it has made and the corresponding quantity of water each repair has saved. The parties agree that posting such a notice at Arrowhead's office in Cedar Glen would accomplish the same purpose; therefore, the parties have not included any estimate for the expense of individual mailings in this settlement and request that the Commission modify the requirement of Resolution W-4167 accordingly.