VI. Other Issues

A. Oroville Water Supply

The Oroville District purchases some of its water from a nearby PG&E hydroelectric facility. A physical breach in PG&E's canal, however, has resulted in the district having to convey the water through natural streams and other ditches. It is uncertain whether PG&E will repair the conveyance. Over the short-term, ratepayers benefit from the district continuing to accept the low-cost PG&E water; but, if PG&E does not repair the conveyance, the district will need to secure an alternative supply for environmental and reliability reasons. Water may be available under a State Water Project contract held by Butte County, but the cost will be more. A traditional balancing account would not allow CWS to recover the additional cost of acquiring water from a different source. If CWS purchases water from Butte County, CWS and ORA agree that the company should be allowed to file an expense offset rate increase if and when the annual cost of acquiring water increases by at least $10,000.

B. Synergies

The Commission approved the merger of CWS and Dominguez Services Corporation in D.00-05-047 (May 18, 2000). Dominguez Services Corporation was the holding company for the Dominguez, Kern River, and Antelope districts. The Dominguez District, at that time, was composed of the South Bay (Los Angeles County) and Redwood (northern California) divisions. The South Bay Division is now known as CWS's Dominguez District, one of the districts in this proceeding.

Pursuant to Pub. Util. Code § 2720(a), CWS was authorized to "write up" (by way of an acquisition adjustment) the rate base of the acquired systems based on their fair market value. The Commission determined the value of the acquired Dominguez Division to be $53.7 million. See D.00-05-047, Ordering Paragraph 3. In exchange for this write up, CWS promised equivalent savings or "synergies" in operational expenses. The Commission ordered that, for ratemaking purposes, CWS be credited for the first $ 3 million in annual net merger-related cost savings. Any cost savings above $ 3 million per year would be split 90% to the company and 10% to ratepayers. Id., Ordering Paragraph 2(f).

For the purpose of this rate case, CWS and ORA agreed on the savings or synergies to be applied to the Dominguez District and general office expenses, and those amounts are reflected in the settlement. The parties also agreed that the merged entity had a lower cost of capital, a topic discussed in more detail in Part V(C).

Another issue in this proceeding, resulting from the merger, was whether Dominguez should be credited with an avoided rate base of $1.2 million for not renovating its offices and not replacing an elevated tank. The parties agreed that this issue would be deferred until the 2005 rate case filing.

Another question resulting from the merger was the present value of future financial synergies for the period of 2000 to 2030. The parties also agreed to defer this issue until the 2005 rate case filing to allow the company, based on experience, to better demonstrate the resulting synergies and the necessary acquisition adjustment to the rate base. For the test years calculated in this proceeding, the parties agree that the appropriate synergy credit has been applied to the rate base.

C. Dominguez Water Supply

Proposed new wells and wellhead treatment equipment in the Dominguez District will change the mix of water to an increased reliance on groundwater pumped from the district's own wells. This, in turn, will result in increased pumping costs, decreased cost of purchasing water, and decreased revenues from the lease of water rights.

Due to delay and uncertainty about when these capital improvements will be completed, the parties agreed that the production mix should remain the same in 2003 and 2004. When any of these capital improvements are completed, the parties agree that CWS will file an advice letter adjusting rates to reflect the different costs and revenue resulting from the changed water mix.

D. Water Quality

CWS asked the Commission to determine that its water service meets all applicable water quality standards in all four districts. ORA concurs that CWS meets those standards. The prepared testimony introduced into evidence during the evidentiary hearing on the proposed settlement indicates that all four districts satisfied applicable federal and state water quality standards at the time ofthe tests or inspections reported in the evidence. See Prepared Testimony (and attachments) of Chet W. Auckly, CWS's Director of Water Quality and Environmental Affairs, Hearing Exhibit No. 11 at Tabs M & N (Oroville); Prepared Testimony (and attachments) of Auckly, Hearing Exhibit No. 14 at Tabs M & N (Palos Verdes); Prepared Testimony (and attachments) of Auckly, Hearing Exhibit No.17 at Tabs M & N (Selma); and Prepared Testimony (and attachments) of Auckly, Hearing Exhibit No. 17 at Tabs M & N (Palos Verdes). The Commission makes no finding as to current compliance with applicable water quality standards.