Description of Financing

DWR has advised Hillview that the loan agreement will be DWR's standard form of loan agreement.

Pursuant to its supplemental data to the Application, the annual requirements for debt service for the estimated loan principal of $3,408,447 will be $125,231 for years 1-10 and $113,846 thereafter. The amount of the surcharge to repay the principal and to accumulate the necessary reserve on the loan will be in direct proportion to the capacity of each customer's

meter or service connection. The estimated surcharges for customers of

the Oakhurst district are as follows:

PROPOSED SURCHARGE SCHEDULE

OAKHURST

Metered Service

Quantity Rate : Per 100 cu. ft. . . . .$ 1.29

Service Charge:

Size of Service Per Meter Loan Years Percent Years Percent

Or Meter Per Month Surcharge 1 - 10 Increase 11 - 29 Increase

¾" meter $ 19.41 $ 6.18 $ 7.97 31.1% $ 7.25 28.3%

1" meter 32.35 10.32 13.29 31.1% 12.08 28.3%

1 ½" meter 64.70 20.60 26.57 31.1% 24.16 28.3%

2" meter 103.52 33.02 42.52 31.1% 38.65 28.3%

3" meter 194.10 61.85 79.72 31.1% 72.48 28.3%

4"meter 323.51 103.05 132.87 31.1% 120.79 28.3%

6"meter 641.01 206.05 265.75 31.4% 241.59 28.5%

The monthly bill for a typical ¾" metered customer (Oakhurst) using 700 cubic feet of water would increase from $34.62 to $42.59 or 23.0% for the first ten years and to $41.87 or 20.9% thereafter.

The estimated surcharges for customers of the Sierra Lakes district are as follows:

PROPOSED SURCHARGE SCHEDULE

SIERRA LAKES

The present rate schedule for water service became effective May 6, 1995 in compliance with a consumer price index increase authorized by Decision (D.) 92-03-93:

Metered Service

Quantity Rate : Per 100 cu. ft. . . . .$ 1.29

Service Charge:

Size of Service Per Meter Loan Years Percent Years Percent

Or Meter Per Month Surcharge 1 - 10 Increase 11 - 29 Increase

¾" meter $ 19.41 $ 3.85 $ 7.97 34.3% $ 7.25 31.2%

1" meter 32.35 6.55 13.29 34.2% 12.08 31.1%

1 ½" meter 64.70 12.65 26.57 34.4% 24.16 31.2%

The monthly bill for a typical ¾" metered customer (Sierra Lakes) using 700 cubic feet of water would increase from $32.29 to $40.26 or 24.7% for the first ten years and to $39.54 or 22.5% thereafter.

The DHS, our sister agency and a state agency also responsible for the public health and safety of California residents, is fully equipped to establish and enforce water treatment requirements. To the extent that DHS should issue compliance orders to water utilities under our jurisdiction, as it has in this instance, it is our responsibility to provide the regulated utility the means to comply with such an order.

In this Application, Hillview's proposed plant improvements as required by DHS would be paid through surcharge and the plant would be permanently excluded from rate base. Theoretically the surcharge is a rate increase. But it is not one in the context of a general rate case, step-rate increase, rate base treatment, or in connection with a utility's revenue requirement.

The surcharge will offset Hillview's future loan repayments and not contribute to an increased rate of return. For this reason, the requested surcharge to repay the SDWSRF loan does not have any impact or effect to any assessment that could lead to changes or reduction in Hillview's tariff rates or charges referred to in Ordering Paragraphs 6 and 7 of the OII. In fact, there are conditions unique to a surcharge authorization that ensures proper accounting and handling of this fund. To wit, among others, (1) the surcharge is separately identified on customer's bills; (2) the utility plant financed through the surcharge is permanently excluded from rate base; (3) all rate surcharges collected are deposited with a fiscal agent approved by DWR; and (4) the surcharge rate is adjusted periodically to reflect changes in the number of connections and resulting overages or shortages in the balancing account.

Clearly, with a surcharge authorization, the utility is held responsible for refunding or applying on behalf of the customers any surplus accrued in the balancing account and the utility is directed by the Commission to make a filing whenever a decrease in rate surcharge is warranted.

Because Hillview's request is a SDWSRF financing that compels a simultaneous approval of a source of repayment, we grant Hillview's request pursuant to the provisions of PU Code §§ 816, 817, and 818.

We are aware that Hillview will not be able to obtain the SDWSRF loan until Hillview demonstrates to DWR that it has the source of funds to be used for repayment of the loan and that such dedicated funds are documented in an ordinance or resolution. Without this low-cost funding, Hillview will not be able to comply with the requirements of DHS and provide adequate, safe and potable water. To the extent that the source of funds requirement remains a condition in DWR's loan policy, Hillview's financing Application cannot be processed and granted without a surcharge authorization.

As stated previously, the surcharge serves only to repay the debt, will not generate any revenue to the utility owners, and will facilitate utility compliance with DHS requirements for safe and potable water. This Commission will authorize Hillview's financing request coupled with the proposed surcharge. The surcharge will be governed by the conditions we will set forth in this decision to ensure proper accounting and handling.

Our action in this proceeding does not prevent or prejudice whatever further action the Commission has or may require of Hillview in its investigatory proceeding under the OII. In addition, our action is one of public necessity and failure on our part to adopt a decision before the OII is completed and decided may cause significant harm to public health or welfare.

By D.88973 (Quincy Water Company 84 CPUC 79), in the first of many decisions which considered our regulatory responsibility in water utilities whose systems fail to meet DHS requirements and which could not obtain "conventional financing" for the necessary DHS improvements, we implemented a ratepayer surcharge method in lieu of the traditional rate base method. In that first decision, we also set policy to govern situations in which there is an opportunity to employ publicly furnished capital to provide better service and/or lower rates for customers of privately owned utilities. The policy, among other matters, required that a program should contain checks and balances to ensure that there are no unintended windfalls to the utilities, and that unless there are overriding consumer interests, we should not act in a manner that will diminish the lender's security. In particular, we should avoid a solution that arbitrarily creates substantial cash flow deficiencies to the utility or put public funds in jeopardy. As PU Code Section 816 states, the power of public utilities to borrow against utility assets is a "special privilege" that can be granted only by the Commission and the Commission must exercise this privilege appropriately. With a state-funded and rate surcharge type of recovery, the utility or its owners do not personally benefit from the SDWSRF loan. DWR monitors the work and advances funds to a utility periodically as portions of the work are completed (this addresses customers concerns on improvements and project completion and assures that the system will have adequate water supply and better quality of water meeting the safe drinking standards set forth by DHS). The rate surcharge on customers' water bills will be sufficient only to make the principal and interest and reserve payments on the loan. There will be no profit for the utility owners. The surcharge will last until the loan is repaid.

Clearly, the ratepayers ultimately pay for all water system requirements and improvements, regardless of the manner in which they are financed. If the utility were able to borrow the money to make the water system improvements from regular commercial sources, it would be far more expensive for the ratepayers than the low cost state funded loan (in this case the SDWSRF is zero percent interest). Likewise, if the utility owners invested their own funds to pay for the water system improvements they would be entitled to similar earnings on such funds.

In this Application, Hillview's proposed plant improvements as required by DHS would be paid through surcharge and the plant would be permanently excluded from ratebase. The surcharge will offset Hillview's future loan repayments and not contribute to an increased rate of return.

The Commission has authorized utilities to impose a service fee for new service to vacant and undeveloped lots when such authority is coupled with approval of state funded loan surcharges. The amount of the service fee, subject to a maximum amount of $2,000, would be the accumulated total of the loan rate surcharge from its inception to the time of service connection. Only the monthly surcharge would apply thereafter.

1. To ensure adequate accountability of the loan construction funds advanced by DWR to the utility, Hillview should deposit all such funds into a separate bank account. All disbursements of such DWR loan funds should be made from this bank account.

2. The plant must be complete before loan payments will be due and payable. Accordingly, customer surcharge will be implemented by separate advice letter filing upon verification and certification by DHS that the plant will be completed within 30 days.

3. The loan repayment surcharge should be separately identified on customers' bills. The utility plant financed through the surcharge should be permanently excluded from rate base for ratemaking purposes.

4. Hillview should deposit all rate surcharges collected with a fiscal agent approved by DWR. Such deposits should be made within 30 days after the surcharges are collected from the customers.

5. Hillview should provide the Director of the Water Division semiannual summaries of transactions including all surcharge and service fee billed to customers, amounts collected, amounts deposited with the fiscal agent, interest earned on deposits, loan payments, charges for services, and any monies in the bank account.

6. The fiscal agent should provide the Director of the Water Division an annual summary detailing the amounts of receipts and disbursements during the year, and identifying the sources of receipts and purposes of the disbursements.

7. The surcharge should be adjusted periodically to reflect changes in the number of connections. Such changes in future rates should be accomplished by normal advice letter procedures.

8. The surcharge to repay the loan should last as long as necessary to repay the loan. The surcharge should not be commingled with other utility charges.

9. Hillview should be responsible for refunding or applying on behalf of the customers of the Oakhurst and Sierra Lakes districts any surplus accrued in the bank account when ordered by the Commission.

10. A service fee will be chargeable to customers requesting future services to currently undeveloped lots and will be the accumulated total of the monthly surcharge as applied to the property being furnished water service from the initial effective date of the surcharge to the date of connection. The maximum service fee will be $2,000. The service fee will be due and payable upon connection of water service to the property. Thereafter the customer shall pay the applicable tariff rates plus the monthly surcharge.

11. To the extent that the funds would be used for construction of new facilities, Hillview should comply with any applicable environmental regulations for any capital improvement undertaken relative to this decision.

12. Hillview should acquire approval of the construction project from all local, state, and federal agencies having approval responsibilities.

13. Hillview should send to the Director of the Water Division a copy of any engineering report containing the design, specifications and construction of its proposed improvements.

14. Hillview should submit to the Director of the Water Division a quarterly report indicating the status of the construction, including but not limited to cost.

15. Hillview should inform the Director of the Water Division when construction has been completed.

16. Hillview should maintain, and within thirty days from request provide the Director of the Water Division any documents, bank statements, and information related to the loan and surcharge collection.

17. As a condition of the order granted herein, Commission Staff will conduct an annual audit of Hillview's books and the trust account to ensure that the authorized plant is booked properly and accurately, and all activities are in accordance with Commission's rules and regulations.

It is appropriate to emphasize that the surcharge thus authorized will cover only the cost of the loan incurred to finance the improvements and additions discussed herein. It will not preclude any future rate increase requests to recover rising costs of repair, materials, wages, property taxes, power bills, or other operating expenses that may be incurred in the future.

Pursuant to 853(b) of the PU Code, we will also permit Hillview to encumber its property, as long as it serves to secure the debt we are authorizing in this decision.

Resolution (Res.) ALJ 176-3050 dated November 2, 2000, the Commission preliminarily categorized this Application as ratesetting, and preliminarily determined that hearings were not necessary. Although eleven protest letters were received between December 15 and December 21, 2000, there were no formal protests received after the September 18, 2002 public meeting. Given these developments, a public hearing is not necessary, and there is no need to alter the preliminary determinations made in Res. ALJ 176-3050.

This is an uncontested matter in which the decision pertains solely to a water company. Accordingly, pursuant to PU Code § 311(g)(3), the 30-day period for public review and comment under § 311(g)(1) does not apply.

We approve Hillview's Application in this order.

3 Surcharge authorized by Resolution (Res.) F-632 dated November 22, 1994 to finance plant improvements authorized by Res. F-644 dated March 13, 1996. The surcharge rates shown above are for customers of Oakhurst, Royal Oaks, and Sunnydale. Goldside Hillview, Sierra Lakes, Raymond, and Coarsegold Highlands customers have lesser Co-Bank surcharges. 4 Surcharge authorized by Resolution (Res.) F-632 dated November 22, 1994 to finance plant improvements authorized by Res. F-644 dated March 13, 1996. The Co-Bank surcharge rates shown above are for customers of Sierra Lakes only.

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