ALJ/BDP/sid Mailed 7/14/2004

Decision 04-07-034 July 8, 2004

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

In the Matter of the Application of SAN GABRIEL VALLEY WATER COMPANY (U337W) for Authority to Increase Rates Charged for Water Service in its Fontana Water Company Division to increase revenues by $11,573,200 or 39.1% in 2003, $3,078,400 or 7.3% in 2004, $3,078,400 or 6.8% in 2005, and $3,079,900 or 6.4% in 2006.

Application 02-11-044 (Filed November 25, 2002)

Timothy J. Ryan, Attorney at Law, Daniel A.

Dell'Osa, Nossaman, Guthner, Knox & Elliott,
LLP, by Martin A. Mattes, Attorney at Law,
for San Gabriel Valley Water Company, applicant.

Keith Clements, for himself; Dennis R. Poulsen, for

California Steel Industries, Inc.; Marvin T. Sawyer,
General Counsel, and Endeman, Lincoln, Turek &
Heater, LLP, by James C. Allen, for Fontana Unified School District; interested parties.

Best, Best & Krieger, LLP, by Kendall H. MacVey,

Attorney at Law, for the City of Fontana, protestant.

Travis Foss, Attorney at Law, for the Office of Ratepayer

Advocates.

OPINION AUTHORIZING INCREASE IN REVENUE

TABLE OF CONTENTS

Title Page

OPINION AUTHORIZING INCREASE IN REVENUE 2

I. Summary 2

II. Background and Procedural History 3

III. Public Participation Hearing 5

IV. Capital Projects 7

A. Discussion 11

B. The Rate Base Cap 13

V. Water Sales and Operating Revenues 15

A. Service Connections 15

B. Average Use Per Customer 16

C. Miscellaneous and Construction Revenues 16

VI. Operation and Maintenance Expenses 17

A. Supply Cost Expenses 17

1. Unmetered and Unaccounted for Water 17

2. Reclaimed Water 17

3. Water Purchases from Cucamonga County Water District 18

4. Water Costs 18

5. Purchased Power Costs 18

6. Chemicals Expense 19

7. Plant F10 Treatment Plant Reimbursements 19

8. Labor Costs - New O&M Positions 20

B. Other O&M and A&G Expenses 21

1. Materials & Supplies (M&S) Expense 21

2. Transportation Expense 21

3. Outside Services Expense - Other Than Legal Expenses 21

4. Outside Services - Legal Expenses 22

a) Non-Perchlorate-Related Legal Expenses 22

b) Perchlorate-Related Legal Expenses 22

5. Utilities and Rents Expense 23

6. Employee Pensions & Benefits 23

a) Vacation, Holidays, Sick Leave, and Pensions 24

b) Health Insurance 24

c) Dental Insurance 24

d) Business, Property and Umbrella Liability Insurance 25

e) Workers' Compensation Insurance 26

7. Regulatory Commission Expense 26

8. Labor Costs - New A&G Positions 27

VII. General Office 28

A. Officers' Salaries 28

B. Disallowance of Chairman's Salary 30

C. Allocation of Chairman's and President's Salaries 30

D. New Positions in General Office 32

1. Property Manager 32

2. Accountant 32

3. Rate Analyst 33

4. Discussion 33

E. Exclusion of Existing Management Positions 33

1. Director of Tax Accounting 34

2. Financial Analyst 34

3. Senior Engineer 35

4. Vice President 35

VIII. Components of Rate Base 36

A. Plant Additions -- Overview 36

1. Wellhead Treatment Facilities and Surface Water Treatment 36

2. Wells 37

3. Reservoirs 37

4. Booster Stations 38

5. SCADA System 38

6. Security Equipment 39

7. Emergency Generators 39

8. Water Treatment and Distribution Mains 40

9. Vehicles 40

10. Tools & Equipment 40

11. New Building 40

B. Materials & Supplies (M&S) 41

C. Construction Work in Progress (CWIP) 42

D. Contributions in Aid of Construction (CIAC) 42

E. Fontana Union Water Company Stock 42

F. Working Cash 43

G. Plant Sales/Condemnation Proceeds 43

H. Plant F-10 49

I. Water Management/Engineering Report 50

IX. Cost of Capital 51

A. Capital Structure 51

B. Effective Cost of Long-Term Debt 53

C. Equity Cost 54

1. Financial Models 55

a) San Gabriel's Financial Models 56

b) ORA's Financial Models 57

2. Risk Factors 58

3. Discussion 60

X. Revenue Recovery Issues 62

A. Balancing and Memorandum Accounts 62

1. Amortization of Existing Balances 62

2. Continued Need for the Full Cost Balancing Account 63

3. Requested Water Quality Memorandum Account 64

4. Proposed Low Income Rate Program 64

5. Requested Advice Letter Treatment 65

XI. Alleged Rule 1 Violation 65

XII. Comments on Proposed Decision 66

XIII. Assignment of Proceeding 67

Findings of Fact 67

Conclusions of Law 70

ORDER 71

APPENDIX A - Adopted Summary of Earnings

APPENDIX B - Adopted Quantities

APPENDIX C - Comparison of Bills

APPENDIX D - Adopted Rates

OPINION AUTHORIZING INCREASE IN REVENUE

I. Summary

San Gabriel Valley Water Company (San Gabriel), Fontana Water Company Division (Fontana Division), is authorized to increase revenues by:

$7,157,700 (or 22.4%for Test Year 2004¹

$1,674,400 (or 4.3%) for Attrition Year 2005

$1,675,000 (or 4.1%) for Attrition Year 2006

We authorize rate of return on rate base of 9.40% for the years 2004, 2005, and 2006. The return on common equity (ROE) authorized by this decision is 10.10%. As a result of the revenue increase granted by this decision, the monthly bill for the average residential customer (23 hundred cubic feet (Ccf) of water with a 5/8 x 3/4-meter) would increase by $8.65 or 23.3% from $37.11 to $45.76 in the year 2004.

The major topic of inquiry in this proceeding was the adequacy of Fontana Division's current sources of supply and program to increase supply. The evidence shows that Fontana Division was barely able to meet its 2003 summer peak-day demand following four years of reduced rainfall and closure of seven wells due to perchlorate contamination. Fontana Division is also experiencing ongoing customer growth of over 1,000 connections per year. To address this situation, San Gabriel proposed a major construction program for plant additions through 2006.

In this decision, we generally approve San Gabriel's proposed construction program with some reductions to reduce the impact on customer bills. We also impose a rate base cap requiring San Gabriel to limit plant additions so that rate base increases are no more than 10% each year to allow for inflation and customer growth. Within this limitation, San Gabriel will be able to undertake needed replacement and additions of new mains and services, and to construct needed water production wells, booster pumping systems, and water storage reservoirs. The program would also provide for construction of needed wellhead treatment facilities at perchlorate-contaminated wells, and of the first 15 million gallons per day (mgd) increment of a conventional surface water treatment facility in the northwestern portion of the service area (Plant F 52). The proposed construction of a new office, garage, and warehouse is deferred because of the rate impact.

We also reduce ratebase by $2.6 million to reflect the reimbursement by the County of San Bernardino (County) for the cost of the F-10 Treatment Plant built to restore production lost from certain wells due to pollution originating from a landfill operated by the County.