V. Settlement Overview

The parties' proposed settlement is set forth in Attachment A to this decision. This document, as well as the Joint Comparison Exhibit, Hearing Exhibit No. 66, sets forth the original areas of major disagreement and the resolution of these issues. In reviewing the settlement of these major issues, we organize our discussion according to the three major components of cost-based ratemaking: net operating income, rate base, and rate of return.

A. Net Operating Income

Net operating income is gross operating revenue less operating and maintenance expenses, depreciation, income taxes, and other operating taxes. For each of the districts, the parties agreed on the net operating income for TYs 2004 and 2005, as set forth in Table 2. More detailed information is provided in Attachment C: Appendix A (Summary of Earnings & Rates of Return). The following were the disputed major issues in calculating net operating income.

Table 2
Settlement Provisions for Net Operating Income
(Thousands of $)

1. Water Sales

CWS and ORA both used multiple regression methodology to forecast water sales. They differed on how to account for water sales during the drought years of the late 1980s to early 1990s. After referring to the "reality check" procedure set forth in the Commission's Standard Practice U-25, the parties reached agreement on residential and business water sales during their settlement discussions. See Attachment C: Appendices B & C (Adopted Quantities).

2. Operating, Maintenance, Administrative & General Expenses

The parties had relatively few disagreements about district expenses. After reviewing additional company information, ORA agreed to include payments under the Kern Delta water agreement as an allowable Bakersfield expense. This contract calls for CWS to reimburse the Kern Delta Water District for groundwater that is made available through seepage from the district's surface canals. The parties also agreed to allow sludge disposal expenses from the Bakersfield water treatment plant. The parties also resolved their disagreements about the cost-effectiveness of CWS' water conservation programs. Toilet rebate programs are cost-beneficial and will be continued in both districts. Educational programs will be continued although their cost-effectiveness is difficult to ascertain. The South San Francisco District washing machine rebate program is not cost-beneficial and will be discontinued.

Finally, the parties agreed to use ORA's franchise tax calculation for Bakersfield. In the future, CWS will use ORA's methodology to conform to general industry practice.

3. General Office Expenses

The Commission's recent decision (D.03-09-021) addressed CWS's general office expenses and related issues. In this settlement, the parties agreed on how to determine and assign employee health care expenses, which are paid centrally by the general office. CWS desired to increase its estimate of health care expenses from 10.415% to 11.144% of projected payroll. The parties agreed to use a four-year average (2000-2003) of 10.81% for both test years, resulting in a company-wide health care estimates of $5,634,650 (2004) and $5,936,840 (2005). Under the previously determined allocation formula, 13.44% of the total health care expenses is assigned to Bakersfield and 3.33% to South San Francisco.

B. Rate Base

1. Plant Additions (2003)

The parties stipulated to end-of-year (2003) plant balances of $35,938,100 for South San Francisco and $175,645,400 for Bakersfield. The parties also stipulated to end-of-year (2003) balances of contributed and advanced plant of $9,708.000 for South San Francisco and $30,113,700 for Bakersfield.

2. Water Main Expenditures (2004 and 2005)

CWS had initially offered a generic projection of needed water main-related capital expenditures. After CWS provided ORA additional information, the parties agreed on a more specific main-related capital budget for TYs 2004 and 2005. As a result, capital improvements of $72,954 (2004) and $74,121 (2005) have been agreed upon for South San Francisco. The amounts of $162,921 (2004) and $165,527 (2005) have been agreed upon for Bakersfield. This money will be used for mains with severe leaks and broken values, as well as main improvements related to street resurfacing projects.

3. Additional Plant Expenditures (2004 and 2005)

The parties stipulated that CWS had not spent its entire 2003 capital budget in either district. The amount of unspent capital funds was $957,101 in South San Francisco and $4,488,234 in Bakersfield. Because of important capital improvement needs for water supply and quality purposes, the parties agreed that CWS would be allowed an additional $887,500 in each TY 2004 and 2005 for critical capital projects in fast-growing Bakersfield. The parties also agreed that CWS would be allowed an additional $118,800 for 2004 for similar projects in South San Francisco.

4. Bakersfield North Garden Project

The North Garden area of the Bakersfield District, located in the northwestern part of the metropolitan area, has relatively poor and declining water quality; and future compliance with state water quality standards will be difficult. Some residents in this area receive their water from the City of Bakersfield. CWS has explored a range of capital improvement options, including the possibility of enlarging CWS's new water treatment facility in northeastern Bakersfield, construction of a new micro-filtration membrane plant, participating in the expansion of Kern County Water Agency's treatment facility, or the construction of new production wells.

While ORA agrees with the need for improvement measures, it argues that the comparative costs and benefits of these proposals are not yet known. The parties, therefore, agreed that CWS may open a memorandum account to record the costs associated with the resulting project. The recorded costs will be limited to the interest expense of CWS's anticipated $4.2 million investment. The interest booked during construction will be subject to a prudence review by the Commission during CWS's next general rate case for the Bakersfield District. By authorizing the establishment of a memorandum account for this purpose, the Commission does not waive any other construction-related obligations, including California Environmental Quality Act (CEQA) review, that may be required by law.

C. Rate of Return

In its applications, CWS asked for rates of return of 9.54% (2004), 9.52% (2005), 9.52% (2006), and 9.54% (2007) for both districts. After adjustment, ORA recommended rates of 8.60% for both TYs 2004 and 2005. The parties agreed on 8.60% for all years 2004 through 2007. The parties' agreed rate of return is reasonable based on recent Commission experience.

D. Revenue Requirement

Table 3 compares applicant's and ORA's initial positions on revenue requirement increases for TYs 2004 and 2005 and AYs 2006 and 2007 with what they propose in the settlements.

Table 3
Revenue Requirement Increases
($ thousands)

District/Year

Utility Requested

Settlement/

Adopted

ORA

Recommended

 

$

%

$

%

$

%

South San Francisco:

      2004

1,084.7

10.83

-1,155.0

-9.98

-1,424.2

-12.23

      2005

200.7

1.78

210.4

1.99

120.9

1.16

      2006 AY

176.8

1.5

209.0

1.9

n/c

n/c

      2007 AY

176.8

1.5

209.0

1.9

n/c

n/c

Bakersfield :

      2004

8,569.5

21.78

1,543.4

3.61

202.9

0.47

      2005

1,176.6

2.43

1,598.7

3.57

1,415.1

3.24

      2006 AY

1,279.9

2.6

1,385.6

3.0

n/c

n/c

      2007 AY

1,279.9

2.5

1,385.6

2.9

n/c

n/c

AY=Attrition year; n/c=Not calculated

Applicant and ORA propose that the Commission adopt their agreement on each of the district's revenue requirements based on the calculations set forth in their Joint Comparison Exhibit, Hearing Exhibit No. 66: Tables A-1 to A-5. See also Attachment C: Appendix A (Summary of Earnings & Rates of Return).

E. Attrition

The parties agreed that the Commission should authorize step and attrition increases for the four districts in this proceeding using a "recorded earnings" methodology set forth in paragraph 2.5 of their Settlement, Attachment A. The parties agreed that the Commission should make these attrition adjustments based on recorded earnings for the latest 12-month period ending September 30th of each year. The recorded earnings test will be adjusted to exclude expenses subject to balancing or memorandum account recovery; and the sales and sales-related expenses in the recorded earnings test will be adjusted to exclude revenues credited to any balancing and memorandum accounts. A table of weather coefficients, used in the attrition calculations, is set forth as Attachment B: Table F.

The parties further agreed that, in accordance with Commission policy, should CWS's earnings, based on the "recorded earnings" methodology, exceed its authorized return, the requested step or attrition increase will be reduced to offset the earnings in excess of CWS's authorized return in this proceeding or in any other future CWS proceeding, whichever is lower.

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