16. Assignment of Proceeding

John A. Bohn is the assigned Commissioner and Douglas M. Long is the assigned Administrative Law Judge in this proceeding.

1. Applicant is a Class A water company and a public utility subject to the jurisdiction of this Commission.

2. Great Oaks is twice the minimum size for a Class A water company and 2.7 times the size of the largest Class B water company.

3. There is a framework of regulatory proceedings to set rates necessary for Great Oaks to provide safe and reliable service.

4. Great Oaks proposed a return on margin methodology the Commission has to date only applied to Class C and Class D utilities.

5. Great Oaks' rate base has both risen and declined in recent years.

6. The Commission has not quantified any specific risk reduction impact of a Water Revenue Adjustment Mechanism for a company with such a mechanism compared to the risk of a company without such a mechanism.

7. DRA proposed a return on equity based on the application of expert judgment to the results of two costs of capital models.

8. DRA's analysis would support a return on equity of 9.75% for a capital structure of 34% debt and 66% equity.

9. An imputed capital structure with long term debt would be less expensive for ratepayers than the actual 100% equity structure of Great Oaks.

10. Debt is generally reported as available to borrow at rates under 7.5%.

11. The Commission has previously considered the results of expert analysis of a Discounted Cash Flow Model and a Capital Asset Pricing Model.

12. The Commission has consistently included actual long term debt costs in cost of capital and has imputed long term debt when utilities do not have long term debt.

13. It is reasonable to use a Cost of Capital Adjustment Mechanism using an interest rate index and a Moody's Baa bond rating to adjust the return on equity and update the cost of capital for the two years 2011 and 2012 to reflect changes in the financial markets.

14. Great Oaks does not have its financial statements audited by an independent CPA.

15. Audited financial statements would provide greater assurance that Great Oaks' reported earnings and financial condition are accurate and complete.

16. A memorandum account would allow Great Oaks to recover the reasonable and prudent costs of engaging an independent CPA.

17. Pre-approval of the selection and cost of an independent CPA would help ensure ratepayers are protected from unreasonable costs.

1. The existing framework of regulatory proceedings sets just and reasonable rates for Great Oaks to provide safe and reliable service pursuant to Pub. Util. Code § 107.10.

2. Great Oaks is properly classified and treated as a Class A water utility subject to the Commission's jurisdiction.

3. The legal standard for setting the fair rate of return has been established by the United States Supreme Court in the Bluefield and Hope cases. (Bluefield Water Works & Improvement Company v. Public Service Commission of the State of Virginia, 262 U.S. 679 (1923) and Federal Power Commission v. Hope Natural Gas Company, 320 U.S. 591 (1944).)

4. Financial models are dependent on subjective inputs; therefore, it is reasonable to apply informed judgment when considering financial modeling results.

5. This decision reasonably relies on the entire record of the proceeding and accords weight based upon the evidence's relevance and the persuasiveness of the parties' arguments.

6. The Commission may impute long term debt in a capital structure to derive a fair and reasonable cost of capital.

7. On technical matters the Commission should accord greater weight to a credible expert opinion compared to the weight accorded a lay opinion on that same technical matter.

8. The Commission may adopt a Cost of Capital Adjustment Mechanism to ensure rates are just and reasonable in between cost of capital proceedings.

9. The Commission has the authority to order Great Oaks to engage an independent CPA to perform annual audits.

10. All rulings by the assigned judge were lawful and should be affirmed.

11. This decision should be effective today.

12. These proceedings should be closed.

ORDER

IT IS ORDERED that:

1. Great Oaks Water Company's cost of capital for its base year 2010 operations is as follows:

Great Oaks Water Company

Adopted 2010 Cost of Capital

Long Term Debt

30%

7.50%

2.25%

Preferred Stock

3%

6.00%

0.18%

Equity

67%

10.20%

6.83%

Total

    

9.26%

2. Great Oaks Water Company must file a Tier 1 advice letter to implement the rate changes to reflect the change in the 2010 cost of capital within 30 days of the effective date of this order. The rate changes to reflect the change in the cost of capital shall be effective on January 1, 2010, subject to a determination by the Commission's Division of Water and Audits that the advice letter is in compliance with this decision.

3. Great Oaks Water Company must file a new cost of capital application on or before May 1, 2012 for a new 2013 base year.

4. Great Oaks Water Company must file a Tier 1 advice letter to implement a Cost of Capital Adjustment Mechanism which uses an interest rate index and a Moody's Baa bond rating to adjust the return on equity and update the cost of capital for the two years 2011 and 2012.

5. Great Oaks Water Company must engage an independent Certified Public Accountant, with utility client experience, to perform a full and complete audit of the company beginning with all transactions as of January 1, 2009. Great Oaks Water Company must continue to have annual audits unless this requirement is rescinded by a future Commission decision.

6. Great Oaks Water Company must comply with the following minimum requirements in choosing a Certified Public Accountant for an annual audit required by the preceding Ordering Paragraph:

These documents shall all be confidential pursuant to General Order 66-C.

7. Great Oaks Water Company must file a Tier 2 advice letter for preapproval of its selection process for engaging its selected Certified Public Accountant. Great Oaks Water Company may solicit and retain a Certified Public Accountant for multiple annual audits; the required preapproval sought by advice letter may cover that multi-year period. The advice letter must include the following information:

These documents shall all be confidential pursuant to General Order 66-C.

8. Great Oaks Water Company must submit all annual audited financial statements, the related disclosures and the attest opinion of the Certified Public Accountant to the Division of Water and Audits (or successor organization) annually on or before March 31 of the subsequent year beginning on March 31, 2012 for calendar year 2011. The 2009 and 2010 audited financial statements must be completed and submitted on or before October 31, 2011. The audited financial statements must be filed concurrent with filing the Annual Report required by General Order 104-A.

9. Great Oaks Water Company may file a Tier 1 advice letter to establish a Certified Public Accountant Audit Cost Memorandum Account which shall accrue interest using 1/12 of the most recent month's interest rate on Commercial Paper (prime, three months), published in the Federal Reserve Statistical Release, G.13.

10. Great Oaks Water Company may file a Tier 3 advice letter to amortize reasonable costs recorded in the Certified Public Accountant Audit Cost Memorandum Account concurrent with other balancing accounts' or memorandum accounts' recovery on an annual basis.

11. All rulings by the assigned judge were lawful and are affirmed.

12. Application 09-05-007 is closed.

This order is effective today.

Dated December 16, 2010, at San Francisco, California.

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