26. Timing

Because this filing requests rates for test year 2003, this decision should be made effective immediately.

Findings of Fact

1. The Stipulation includes 51 individual capital projects that are subject to advice letter filings and rate adjustment.

2. The filing of as many as 51 advice letters would be an administrative burden on the Commission staff.

3. The implementation of as many as 51 individual rate changes would cause ratepayer confusion and concern.

4. The need for the San Gabriel well has not been substantiated, and it will not be included in plant estimates for this GRC.

5. The appropriate estimated cost of the Lucerne Valley well, the San Dimas well, two Orange County wells, two Claremont wells and two Barstow wells is $3,517,230, or 63.7% of the costs estimated by SCWC. On average, the estimated operational date for the wells is January 1, 2005.

6. The need for the Orange County reservoir has not been substantiated, and it will not be included in plant estimates for this GRC.

7. The appropriate estimated cost of the two Barstow reservoirs is $1,130,000. On average, the estimated operational date for the reservoirs is January 1, 2005.

8. The reasonableness of the conservation capital budget has not been demonstrated, and those projects will not be included in plant estimates for this GRC.

9. Our resolution of the CPP issue results in a maintenance expense estimate that differs from the Stipulation amounts.

10. Affordability is a primary consideration in this proceeding as it was in A.98-09-040 where SCWC requested single tariff pricing for its Region III.

11. Regional rates effectively addresses the problem of affordability for high rate districts in SCWC's Region III.

12. The record in this case does not detail how incremental GO allocations for non-GRC districts would be determined.

13. Incremental GO allocations are not necessary under ORA's GO allocation proposal where the allocation is determined for each rate case.

14. SCWC and ASUS are subsidiaries of American States Water Company.

15. Through the CPP, SCWC customers paid, in part, for BVE purchased energy costs.

16. Through the balancing account procedure for costs incurred in 2001 and 2002, BVE will eventually be made whole for the appropriate and reasonable amount of purchased power costs.

17. On a company-wide basis, for the period in which the CPP was in effect, SCWC's actual O&M spending was $3.6 million below authorized levels.

18. On a company-wide basis, SCWC's actual capital expenditures were $39 million for 2001 and $45 million for 2002; the amounts previously authorized by the Commission were $37 million for 2001 and $42 million for 2002.

19. The Region III recorded maintenance expense is $2,807,800 for 2001 and $3,307,00 for 2002.

20. When compared to amounts previously authorized by the Commission, the level of SCWC's capital spending was largely unaffected by the CPP. Therefore, for purposes of determining the effect of the CPP on SCWC's operations, it is reasonable to assume the majority of the effect relates to O&M expenses.

21. Based on the stipulated 2003 maintenance expense for Region III, reasonable estimates of maintenance expense that should have occurred in 2001 and 2002 are $3,556,100 and $3,616,200 respectively.

22. On an industry-wide basis, the adopted sales per customer are currently used for calculating revenues for the earnings test.

23. ORA's proposal to use weather-adjusted sales for the earnings test that is used to justify step and attrition increases is a change in an industry-wide policy that would affect all large water utilities.

24. Costs related to water quality requirements are difficult to forecast, until the appropriate authority or agency specifies the requirements.

25. SCWC presented its water quality record from March 1998 to December 2002, updating the data previously presented in I.98-03-013. No party disputed that information.

26. Although assigned no itemized value, 32,000 AFY in water rights were included in the purchase of the Natomas Water Company by SCWC in 1964.

27. SCWC's Folsom water system and 22,000 AFY of water rights were transferred to the City of Folsom in 1967.

28. In 1994, SCWC agreed to lease 5,000 AFY of water to the City of Folsom. The lease was indefinite and included no termination rights for SCWC.

29. SCWC has recorded all revenues from the Folsom lease in a non-operating below-the-line account that benefits only shareholders.

30. The entire cost of the Natomas Water Company purchase, which included the right to 32,000 AFY of American River water, was borne by the ratepayers. Shareholders were not separately responsible for the recovery of any of the costs.

31. SCWC has a future need for American River water rights that exceeds 10,000 AFY.

32. An update of DRI forecasts shows new issue coupon rates of 6.63% for 2003 and 8.47% for 2005.

33. For new debt, ORA calculates effective interest rates of 6.76% for 2003 and 8.62% for 2005.

34. Based on more recent information, it is reasonable to adopt the ORA forecast of the average cost of debt of 7.67% in 2003, 7.63% in 2004 and 7.68% in 2005.

35. Past rate of return authorizations for SCWC and authorizations for other Class A water utilities under Commission jurisdiction do not reflect the market to book adjustment proposed by SCWC.

36. SCWC's CAPM analysis includes data related to companies other than regulated water companies.

37. SCWC's Fama-French Three Factor Model, which has never been adopted for use by this Commission, is similar to the CAPM.

38. Since we have previously determined that water companies should not be compared to companies in other industries, we will not incorporate the results of the CAPM or the Fama-French Three Factor Model, as calculated by SCWC.

39. The inclusion of Artesian Resources in ORA's group of comparable companies results in ORA's DCF analysis yielding a return of 8.35% and the RP analysis yielding a return of 10.52%.

40. Based on the DCF and RP model analyses performed by SCWC and ORA (with the inclusion of Artesian Resources in ORA's comparable group), a reasonable ROE range is 9.08% to 10.70%.

41. After considering evidence regarding SCWC's financial, business and regulatory risk, it is reasonable to authorize an equity return that is in the middle of the range. The resulting return of 9.90% and our adopted debt costs equate to a rate of return on rate base of 8.79% for test year 2003, 8.77% for 2004 and 8.79% for attrition year 2005.

42. Regulatory mechanisms such as balancing accounts for purchased water, purchased power and pump taxes; memorandum accounts for catastrophic events; memorandum accounts for SDWA compliance; 50% fixed cost recovery; construction work in progress in rate base and advice letter recovery of certain capital projects are in place and mitigate business risk associated with the capital intensive nature of water utilities and operating leverage concerns where a utility relies on higher than average quantities of purchased water.

43. D.03-06-072, which was issued subsequent to SCWC's application filing, addresses issues related to revised procedures for recovery of under collections and over collections in balancing accounts.

44. D.03-06-072 corrects an imbalance in the risks associated with previous balancing account procedures. Specifically, it eliminates the opportunity for unanticipated windfalls caused by balancing account protection.

45. For the purpose of forecasting commercial sales, past Commission policy statements have encouraged the use of a monthly regression model as opposed to the Modified Bean method.

46. SCWC's monthly regression method for forecasting commercial sales yields statistically significant results.

47. ORA's Modified Bean method for forecasting commercial sales failed the F-statistic and the Durbin-Watson tests of statistical significance.

48. For the Claremont CSA, the recorded information for the years 2000-2002, indicates significantly less pumped water than for the years 1997-1999.

49. For the Claremont CSA, the recorded 2002 groundwater production of 2,328,374 Ccf is higher than the 2001 recorded amount of 2,130,617 Ccf and very close to the 2000 recorded amount of 2,389,100 Ccf.

50. Since the groundwater production in the Claremont CSA has leveled off over the last three recorded years, it is reasonable to use the 2002 recorded amount of 2,328,374 Ccf as the estimated pumped water quantity for this CSA, for both test year 2003 and 2004.

51. SCWC's forecasted supply cost increase for 2004 is unsubstantiated and conflicts with D.03-06-072.

52. A review process for increasing supply costs is set forth in D.03-06-072.

53. For general office labor, the recorded expense for 2002 is $6,002,175.

54. The expense for general office labor, related to 14 vacant positions in 2002, is $740,700.

55. A reasonable test year estimate for general office labor is the recorded 2002 amount increased by the expense related to 14 positions that were vacant in 2002, escalated to 2003 and 2004 by the adopted labor escalation factors.

56. General office overtime levels for 2000 are accounted for in the 2003 and 2004 estimates, specifically by the inclusion of 14 additional positions and implicitly through the use of the 2002 recorded amount, which includes some amount of overtime, as the base for the test year estimates.

57. SCWC proposes a six-year phase-in of its security plan.

58. SCE has not produced any information to confirm or quantify its assertion that the proposed CIS will be less labor intensive and more efficient, thereby producing savings for the ratepayers.

59. The recorded P&B expense for 2002 is $7,101,845.

60. For the test year estimates of P&B expense, the recorded 2002 amount of $7,101,845 should be escalated to 2003 and 2004 amounts. For P&B escalation, an annual medical escalation factor of 13% should be weighted by 40% and an annual general escalation factor of 3% should be weighted by 60%, resulting in annual escalation of 7%. The resultant test year estimates for P&B expense are $7,598,900 for 2003 and $8,130,900 for 2004.

61. The true cost of reconnection during non-working hours has not been substantiated by SCWC.

62. It is reasonable to maintain a 150% differential between the working hour reconnection fee and the non-working hour reconnection fee. The resulting fee for reconnection during non-working hours is $37.50.

Conclusions of Law

1. It is reasonable to allow SCWC to accrue capital costs related to the Calipatria treatment plant project in a memorandum account. SCWC can recover the costs of the project in a separate application or as part of the next GRC for Region III.

2. Other than the Calipatria treatment plant project, capital projects associated with proposed advice letter procedure contained in the Stipulation should be considered for rate recovery on an estimated GRC basis.

3. With the exception of the advice letter procedure for capital projects and the maintenance expense forecast, the Stipulation is reasonable and in the public interest and should be adopted.

4. Since affordability continues to be a problem and regional rates effectively address that problem, regional rates should not be altered at this time.

5. Since there may be viable alternatives to regional rates, parties should have the opportunity to address the subject in SCWC's next Region III GRC.

6. SCWC should continue to provide annual reports on regional rates as ordered and described in D.00-06-075. Reports should be served on all appearances in this proceeding.

7. Since concerns regarding the implementation of SCWC's incremental cost proposal for allocation of GO costs to non-GRC districts are not addressed in the record of this proceeding, the company's request to allocate GO costs determined in this GRC to non-GRC districts should be denied.

8. ORA's proposal to determine GO allocations in each GRC should be adopted, since this methodology has been used in the past and does not require the same incremental determination of step and attrition year rates as does SCWC's proposal.

9. D.98-06-068 specifies policies and guidelines for transactions between SCWC, the holding company and affiliates.

10. The affiliate transaction policies and guidelines specified in D.98-06-068 should be applied to SCWC's dealings with ASUS.

11. For contemplated dealings with ASUS in this GRC, SCWC has not applied the affiliate transaction policies and guidelines specified in D.98-06-068.

12. In lieu of an affiliate cost study for this GRC, it is reasonable to assign $101,300 as affiliate related costs to be deducted from the GO revenue requirement.

13. For the future, SCWC should prepare a cost study and analysis, in order to fairly assign and allocate costs related to its affiliates, in accordance with the policies and guidelines specified in D.98-06-068.

14. SCWC customers should be reimbursed, in some manner, for the cash that was diverted from the water operations, due to the CPP. To do otherwise would result in a windfall for shareholders.

15. For this GRC cycle, shareholders should be responsible for $352,200 of the annual Region III maintenance expense contained in the Stipulation.

16. ORA's proposal to use weather adjusted recorded sales per customer, for calculation of revenues in the earnings test, is a change in an existing industry-wide policy. It would be more appropriate and fair to consider the intent of the earnings test in a proceeding with all affected parties having the opportunity to participate.

17. Due to the manner in which this decision treats the Stipulation's proposed advice letter procedure for capital projects, SCWC's proposal to include the proposed 2003 and 2004 advice letter projects in the determination of the 2005 attrition year increase should be denied.

18. SCWC's request for memorandum account treatment for the costs to comply with MTBE, perchlorate, NDMA, radon and arsenic contamination is reasonable.

19. SCWC's request to amortize the Water Quality OII memorandum account accumulation, over a 12-month period, as a special condition surcharge applied to the quantity rate throughout the company, is unopposed and reasonable.

20. The water rights leased to the City of Folsom beginning in 1994 were "useful", as that term is used in § 851, because they enhanced SCWC's ability to meet future water supply contingencies.

21. SCWC's failure to file a § 851 application has prevented the Commission from assessing whether the lease in perpetuity of the water rights could have an adverse impact on ratepayers by undermining SCWC's ability to respond to water supply contingencies. Had SCWC filed an application, the Commission could have considered imposing conditions on the proposed lease, such as requiring the lease to be for a definite term or requiring that SCWC have termination rights as necessary to protect the interests of ratepayers.

22. SCWC's failure to file a § 851 application prevented the Commission from passing judgment on SCWC's unilateral determination to place the lease revenues in a below-the-line account solely for the benefit of shareholders.

23. By failing to file a § 851 application, SCWC prevented the Commission from considering any environmental impacts associated with the transfer of water rights and whether any whether mitigations needed to be ordered.

24. Since water rights were included in the transaction wherein SCWC acquired the assets of the Natomas Water Company, water rights are an essential element of operating a water company, and the Commission has previously determined that property rights can be "enjoyed" even if they are not immediately exercised, the entire amount of water rights acquired in 1964 was utility property. Since 22,000 AF of the original 32,000 AF entitlement has been transferred to the city of Folsom, SCWC's remaining 10,000 AF of water rights should be considered utility property under the jurisdiction of this Commission.

25. Because SCWC's remaining 10,000 AFY of water rights , including the 5,000 AFY leased to the City of Folsom, were useful in the performance of SCWC's duties to the public, the utility was required to seek Commission authorization under the provisions of § 851 in order to lease that 5,000 AFY to the City of Folsom.

26. SCWC violated § 851 when it failed to gain the Commission's approval prior to effectuating the Folsom lease.

27. Under § 851, as to SCWC, the Folsom lease is void from its inception.

28. Under § 851, the City of Folsom's past use of and payments for the leased water rights are unaffected by the voiding of the lease as to SCWC.

29. The prospective impact of the voiding of the lease on the City of Folsom has not been addressed by the parties.

30. Because ratepayers have borne the cost of obtaining the water rights that were leased to the City of Folsom, it is reasonable to allocate 70% of the benefits of the lease to ratepayers from the inception of the lease until the date of this decision.

31. Under the "continuing violation" language of § 2108, the period of SCWC's violation totals at least 2,190 days.

32. SCWC's violation of § 851 was a severe offense that harmed ratepayers and the regulatory process.

33. Based on the record in this proceeding, the market to book adjustment proposed by SCWC is not necessary at this time.

34. An equity return premium based on the reasons advocated by SCWC would not be reasonable.

35. Since the monthly regression method used by SCWC, to forecast commercial sales, produces results that are statistically more significant than that produced by ORA's Modified Bean method and is consistent with the stated policy of the Water Division and Commission decisions, we should adopt SCWC's estimates for commercial sales per customer.

36. Rather than forecasting supply cost increases, such increases should be authorized through the review process adopted in D.03-06-072.

37. SCWC's request for a 1.5% equity adjustment for general office labor is unsubstantiated and should not be adopted.

38. SCWC's proposal to phase in its security plan over six years is reasonable and should adopted.

39. The security plan should be reevaluated in subsequent GRC filings. Appropriate changes to the plan should be made and reflected in rates on a prospective basis.

40. In order to include the CIS project in rates, justification for the project should address need, costs, allocation of costs to affiliates and savings.

41. Since SCWC has not provided estimated savings related to the CIS project, the reasonableness of the project and the net costs to be included in rates cannot be determined. The costs and the savings related to the CIS project should therefore be excluded from rates determined in this decision.

42. SCWC's proposed fee of $25 for reconnection during working hours is not opposed and should be adopted.

43. Today's order should be made effective immediately.

ORDER

IT IS ORDERED that:

1. Southern California Water Company (SCWC) is authorized to file in accordance with General Order 96-A, and to make effective on not less than five days' notice, the revised tariff schedules for 2003 included as Appendices B and G to this order. The revised tariff schedules shall apply to service rendered on and after their effective date.

2. Advice letters for authorized rate increases for 2004 and 2005 shall be filed in accordance with General Order 96-A, no earlier than November 1 of the preceding year. The filing shall include appropriate work papers. The increase shall be the amount authorized herein, or a proportionate lesser increase if SCWC's rate of return on rate base, adjusted to reflect rates then in effect, normal ratemaking adjustments, and the adopted change to the pro forma test, for the 12 months ending September 30 of the preceding year, exceeds the lower of (a) the rate of return on rate base found reasonable by the Commission for SCWC for the preceding year in the then most recent rate decision, or (b) the return on rate base authorized herein for the preceding year. The advice letters shall be reviewed by the Water Division for conformity with this decision, and shall go into effect upon Water Division's determination of compliance, not earlier than January 1 of the year for which the increase is authorized, or 30 days after filing, whichever is later. The tariffs shall be applicable to service rendered on or after the effective date. The Water Division shall inform the Commission if it finds the proposed increase does not comply with this decision or other Commission requirements.

3. SCWC is authorized to establish a memorandum account to accrue the costs of the Calipatria treatment plant project, with carrying costs computed using the authorized rate of return, without gross-up for taxes. SCWC may seek cost recovery through a separate application or as part of the next Region III GRC.

4. SCWC is authorized to file an advice letter to modify the preliminary statement in its tariffs to describe and to, after the 30 day statutory timeframe, establish a memorandum account to accumulate the costs to comply with MTBE, perchlorate, NDMA, radon and arsenic contamination remediation requirements. Cost recovery shall be net of any previous expenses that were authorized to comply with previous remediation requirements that have been superseded, as well as any reimbursements directly related to the projects and costs being accumulated in the memorandum accounts.

5. SCWC is authorized to establish a special condition surcharge to be applied to the quantity rate throughout SCWC's service territory, to amortize the Water Quality OII memorandum account accumulation. The accumulated amount, at the time of this decision, shall be amortized over a 12-month period.

6. SCWC shall conduct a cost study and analysis that shall be the basis for assigning and allocating costs related to its affiliates. The cost study shall reflect the principles, policies and guidelines in Decision 98-06-068. SCWC shall address each point in the holding company settlement that applies to affiliate transactions and costs, and shall show the effect, on both affiliate and utility costs, of implementing appropriate measures to comply with that settlement. SCWC shall include the study and incorporate the results in its next Region III GRC application. SCWC shall also adopt appropriate management policies and accounting practices to ensure that the terms of the holding company settlement are fully implemented.

7. With respect to the Arden-Cordova CSA, as to SCWC, the 1994 lease of water rights to Folsom is void from its inception pursuant to § 851. However, pursuant to the second paragraph of § 851, Folsom's use of and payments for the leased water rights in the past are unaffected by the voiding of the lease as to SCWC.

8. With respect to the Arden-Cordova CSA, within 30 days of the issuance of this decision, SCWC shall either file an application for prospective approval of a lease of water rights to Folsom or file a pleading stating that it does not wish to lease water rights to Folsom and will not make such rights available to Folsom any longer. If SCWC files an application, it shall comply with all applicable rules of the Commission's Rules of Practice and Procedure.

9. With respect to the Arden-Cordova CSA, within 30 days of the issuance of this decision, SCWC shall file and other parties may file a brief that addresses the rights of Folsom in each of the following circumstances: (1) SCWC seeks and obtains § 851 approval for a prospective lease to Folsom; (2) SCWC chooses not to pursue a prospective lease to Folsom and hence does not file a § 851 application; or (3) SCWC seeks § 851 approval of a prospective lease, but the request is denied. The City of Folsom is specifically invited to brief these issues if it so desires. The assigned administrative law judge shall fix the time for the filing of reply briefs on these issues.

10. With respect to the Arden-Cordova CSA, SCWC shall file an advice letter within 20 days of the issuance of this decision that calculates 70% of the total lease revenues that SCWC has accrued from the Folsom lease from the inception of the lease through the effective date of this decision, plus 7% interest. The advice letter should also propose a method for crediting this total amount on ratepayer bills in an equitable fashion. This advice letter will be subject to protest in accordance with General Order 96-A.

11. A penalty of $1,095,000 is assessed for continuing violations of Public Utilities Code § 851. However, at this time, $915,000 of that penalty amount is suspended. SCWC shall pay $180,000 to the State of California General Fund within ten days of the date of issuance of this decision. Proof of payment shall be filed and served on the service list and shall be provided to the Director of the Water Division within five days of payment.

This order is effective today.

Dated March 16, 2004, at San Francisco, California.

CARL W. WOOD

LORETTA M. LYNCH

GEOFFREY F. BROWN

Commissioners

I dissent.

/s/ MICHAEL R. PEEVEY

President

I reserve the right to file a concurrence.

/s/ GEOFFREY F. BROWN

Commissioner