11. Rate Base

11.1. Utility Plant in Service

We adopt Park's estimates of Utility Plant in Service of $2,585,300 for Test Year 2004 and $2,208,100 for Test Year 2005. This is in contrast to ORA's estimates of $2,156,300 for Test Year 2004 and $1,430,100 for Test Year 2005. The differences are due to additions to Utility Plant in Service of company-funded transmission and distribution main projects. Park's estimate of main projects was $1,074,000 in Test Year 2004 and $808,000 in Test Year 2005, while ORA disallowed numerous main repairs and extensions to arrive at estimates of $645,000 for Test Year 2004 and $30,000 in Test Year 2005.

ORA's witness testified that Park had failed to justify many of the main repairs and extensions, stating that a simple notation in Park's workpapers that a project would increase fire flow or would improve water quality was insufficient to support ratepayer funding of the projects. In rebuttal testimony, however, Park's witness described in detail the expected benefits of each of the main repairs or extensions, noting in some cases that replacement of deteriorating pipelines would correct serious leaks and, in other cases, the replacement of four-inch pipelines with eight-inch mains would improve fire flow capacity to permit opening of new businesses in commercial areas. While ORA criticized the late explanations provided by Park, it did not challenge the company's assessment of the value and necessity for the pipeline work.

We agree with ORA that an earlier and more complete explanation of some of these transmission and distribution projects should have been provided. With complete information before it, ORA would have been in a better position to judge whether some projects could be deferred or altered in order to reduce ratepayer funding. Nevertheless, the task of the Commission is to evaluate the entire record in a general rate case, including the rebuttal testimony, and make a judgment on whether the company has met its burden of justifying proposed expenditures. In this case, we conclude that Park has shown the need for its planned transmission and distribution improvements in the test years, and we adopt Park's estimates for additions to Utility Plant in Service.

11.2. Proposed New Well

Park requests $79,000 in Test Year 2004 for design of a new well and $483,000 in Year 2005 for the start of drilling of the well. ORA disallowed these costs as premature, stating that the well will not be needed until 2006 or later.

Park's director of engineering testified that the new well would serve the Bellflower/Norwalk system and would supplement three purchased water connections and eight wells. The wells are old ones, averaging 52 years, and are used primarily as an alternate source for the purchased water. He noted that the DHS in a letter dated August 13, 2003, agreed with Park's plans to drill for a more efficient and better producing new well to replace one or more of the older wells.

ORA has made the more persuasive showing that adding these costs to rate base is not warranted at this time. There is no immediate need for a new source of water for the Bellflower/Norwalk area, particularly in view of Park's intention to limit the amount of well water it will produce. The area has eight producing wells, and four of those are little used and are simply held in reserve. The age of these wells justifies replacement, but we are not convinced that ratepayers should bear initial costs of replacement as part of this rate case. While DHS agrees that a new well should be drilled, it has not set a required date for construction. We must balance the need for the well at this time against the burden of high water rates borne by Park's ratepayers. The estimated costs for the new well in 2004 and 2005 are disallowed.

11.3. Construction Work in Progress

The differences between Park and ORA's estimates result solely from ORA's exclusion of a new well proposed by Park. Since we agree with ORA that the need for a new well at this time has not been shown, we adopt ORA's estimates as follows:

Construction Work in Progress (in 000s)

11.4. Working Cash Allowance

Under the Water Division's Standard Practice U-16-W, the purpose of the Working Cash Allowance is to compensate investors for defined funds provided by them to pay certain operating expenses in advance of receipt of offsetting revenues. The issues in Working Cash Allowance involve adjustments to Park's calculations recommended by ORA. ORA's recommendations fell into three basic categories: elimination of certain balance sheet accounts included by Park as additions in determining its Operational Cash Requirement; inclusion of certain balance sheet accounts not included by Park as reductions to the Operational Cash Requirement; and revisions to the revenue lag and average expense lag in the lead-lag study. There is also an issue with respect to the manner in which ORA calculated its proposed reductions. A number of these issues have now been resolved based on discussions between the parties both during and after the evidentiary hearing.

In rebuttal testimony, Park agreed to eliminate any balance sheet account additions associated with Main Office Notes Receivable and Main Office Accounts Receivable, and to include balance sheet account reductions based on average monthly balances of accounts dealing with accounting fees, city water tax and work order deposits. Park also revised its positions with respect to Central Basin Accounts Receivable, Main Office Miscellaneous Deferred Debits, and Revenue Lag. ORA agreed to remove any reductions associated with its account dealing with grants from the Replenishment District. ORA and Park also reached agreement on the inclusion of a reduction based on average monthly balances of accrued pensions, along with the use of zero lag days for that expense in the lead-lag study.

The parties have no issues on the calculation of expense lag days for specific items except where adjustments based on monthly balances are used for items that have expenses included in the lead-lag study. In those cases, the parties agreed that the lag day included in the lead-lag study should be zero. The average expense lag for each party is also different due to the differences in other estimates and their effect on the dollar-weighting of lag days.

For the few remaining issues in which the parties have not reached agreement, we have carefully considered the testimony of the accounting witnesses for Park and for ORA and the extensive briefing on this subject submitted by both parties. We conclude that Park has made the more persuasive case on the remaining disputes, including those involving accounts receivable, balance sheet accounts, pension disclosures and regulatory liability. We adopt Park's estimates of Central Basin Division Working Cash, as follows:

Working Cash (in 000s)

Fixed Portion 2004 2005

Account Receivables Misc. 5.7 5.8

Misc. Deferred Debits 84.2 60.5

Accrued Payroll 0.0 0.0

Accrued Payroll Tax 4.3 4.4

Advances, Discontinued Operation 0.0 0.0

Group Pension Disclosure 0.0 0.0

Regulatory Liabilities 0.0 0.0

Rate Case Cost 123.4 82.3

Non-issues (264.4) (277.5)

Variable Portion

Lead-Lag Study

Total 1,033.9 1,089.1

Total Working Cash 987.3 964.8

11.5. Depreciation Reserve

The parties differ slightly in estimates of Depreciation Reserve. The differences result from the differing estimates of Utility Plant in Service, and the appropriate adjustment has been made in the attached appendices.

11.6. Deferred Tax Reserve

Both parties have revised their estimates of Deferred Taxes to reflect bonus depreciation. The difference between Park and ORA's estimates result from different estimates of Utility Plant in Service, and the appropriate adjustment has been made in the attached appendices.

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