Procedural Matters

Pursuant to Rule 6(a)(1), Cal-Am requested that this matter be classified as a ratesetting proceeding and that hearings not be held, asserting that all necessary information to issue a decision has been included in its application or been incorporated by reference. By Resolution ALJ 176-3084, dated March 21, 2002, the Commission preliminarily determined that this was a ratesetting proceeding and that no hearings were expected.

Notice of this application appeared in the Commission's Daily Calendar of March 20, 2002. Although a protest was filed by ORA, we find no reason to hold a public hearing and no reason to change the preliminary determinations made in Resolution ALJ 176-3084. The preliminary ratesetting categorization set forth in Resolution ALJ 176-3084 is affirmed.

The scope of this proceeding is set forth in the application. Our order today confirms that Administrative Law Judge Galvin is the presiding officer.

Comments on Draft Decision

The assigned Administrative Law Judge's (ALJ) draft decision in this matter was filed with the Docket Office and mailed to all parties of record in accordance with Section 311(g)(1) of the Public Utilities Code and Rule 77.7 of the Commission's Rule of Practice and Procedure (Rules).

Rule 77.3 specifically requires comments to focus on factual, legal, or technical errors in the draft decision, and when citing such errors, requires the party to make specific references to the record. Rule 77.4 further requires that comments including the proposal of specific changes to the draft decision also include suggested Findings of Fact and Conclusions of Law that are believed to comport with those changes. Finally, Rule 77.2 requires parties that file comments on a proposed decision to serve a copy on all parties, and to serve separately the assigned Commissioner and ALJ.

ORA timely filed and served a copy of its comments on the proposed decision. Although Cal-Am timely filed its comments, it did not serve a copy on the assigned ALJ. As evidenced by its certificate of service, Cal-Am also did not serve ORA. Irrespective of Cal-Am's improper service of comments; the comments filed by both Cal-Am and ORA were carefully reviewed and considered. Other than correction of a typographical error, no changes have been made to the proposed decision.

Findings of Fact

1. Cal-Am seeks to include in the Security Memorandum Account approximately $821,000 of the $2,068,000 estimated additional security expenditures it has incurred or expects to incur since the September 11, 2001 terrorist attacks and in response to government recommendations and mandates. The additional security expenditures were not included in prior rate case filings, existing rate case orders, or tariffs now in effect.

2. The prohibition of retroactive ratemaking precludes Cal-Am from recovering through future rates its additional security expenditures incurred from September 11, 2001 to the effective date of this order.

3. Cal-Am utilizes the memorandum account threshold requirements set forth in Resolution W-4267 to justify establishing the Security Memorandum Account.

4. The FBI statement relied on by Cal-Am finds that it is not probable for a water supply to be contaminated with a biological agent that causes illness or death of victims. The FBI statement also finds that the contamination of a water reservoir with a biological agent would likely not produce a large risk to public health.

5. The Presidential Executive Order relied on by Cal-Am lists the functions of the newly created Office of Homeland Security.

6. The FERC Statement of Policy relied on by Cal-Am assures energy companies that the FERC will approve the recovery of prudently incurred costs necessitated by security measures.

7. The additional security expenditures represent less than 2.0% of total operating expenses and impact the average customer's monthly bill by less than $0.40.

8. The recovery of expenditures through rates for Commission-regulated water utilities is based on future test year rate of return ratemaking.

9. There is no requirement that a utility to spend exactly, or only, the projected amount on each rate base or expenditure component used to set rates.

10. If a utility fails to earn its authorized rate of return, ratepayers are not assessed the shortfall, and if the utility earns more than authorized, it does not rebate the excess to ratepayers.

11. Management discretion is exercised in allocating total dollars for capital and expense items to those areas where the capital and expense is most necessary, and in attaining the utility's authorized rate of return.

12. Today's order should be made effective immediately, so that Cal-Am's ratemaking issues can be clarified.

Conclusion of Law

Cal-Am has not substantiated the need to establish the Security Memorandum Account.

O R D E R

IT IS ORDERED that:

1. California-American Water Company's request to establish the Security Costs Memorandum Account is denied.

2. Application 02-03-019 is closed.

This order is effective today.

Dated July 17, 2002, at San Francisco, California.

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