VII. Assignment of Proceeding

Susan P. Kennedy is the Assigned Commissioner. John E. Thorson is the assigned ALJ and principal hearing officer in this proceeding.

Findings of Fact

1. CWS has entered into a settlement with ORA for the company's applications for the South San Francisco and Bakersfield districts. The settlement resolves every issue between the applicant and ORA in this proceeding.

2. The proposed settlement is supported by all of the active parties eligible to participate in this proceeding.

3. The active parties are fairly reflective of the affected interests in this proceeding.

4. No term of the proposed settlement contravenes statutory provisions or prior Commission decisions.

5. The settlement conveys sufficient information to permit the Commission to discharge its future regulatory obligations with respect to the parties and their interests.

6. No party opposes approving the proposed settlement.

7. The summaries of earnings presented in Attachment C: Appendix A; the quantities and calculations presented in Attachment C: Appendices B & C, all based on the parties' settlement, are reasonable, justified, and sufficient for ratemaking purposes.

8. At the time of the evidence presented to the Commission, CWS's service in the South San Francisco and Bakersfield districts met all applicable federal and state water quality standards and the provisions of GO 103, except as indicated as follows. CWS's possible violation of the GO 103, based on a violation of the reporting requirements of state law, is still before the Commission as the result of D.04-05-060 (May 27, 2004).

Conclusions of Law

1. The proposed settlement is an uncontested agreement as defined in Rule 51(f) and an all-party settlement under San Diego Gas & Electric, 46 CPUC 2d 538 (1992). The proposed settlement satisfies the requirements of Rule 51(f) and San Diego Gas & Electric.

2. The proposed settlement is reasonable in consideration of the whole record, consistent with law, and in the public interest.

3. The proposed settlement should be adopted.

4. The revised rates, step increases, and tariff rule revisions set forth in Attachment C: Appendix D, based on the parties' settlement, are justified.

5. This decision should be made effective immediately to enable applicant to implement the settlement without delay.

6. CWS's service in South San Francisco and Bakersfield districts, at the time of the evidence presented to the Commission, complied with all applicable federal and state water quality standards. Except to the extent set forth in D.04-05-060 (May 27, 2004), CWS complied with the provisions of GO 103 as they pertain to these two districts.

ORDER

IT IS ORDERED that:

1. The joint Motion for Adoption of Settlement between California Water Service Company (CWS) and the Office of Ratepayer Advocates (ORA) is granted. The settlement (set forth in Attachments A and B) is adopted.

2. CWS is authorized to file in accordance with General Order (GO) 96-A, and to make effective, on not less than five days' notice, tariffs containing the Test Year (TY) 2004 increases for its districts as provided in the attachments to this decision. The revised rates shall apply to service rendered on and after the tariff's effective date.

3. Subject to pro forma tests after the 2004 increases are effective, CWS also is authorized to file in accordance with GO 96-A, and to make effective, on not less than five days' notice, tariffs containing the TY 2005 increases for its districts as provided in this decision and the attachments to this decision. The revised rates shall apply to service rendered on and after the tariff's effective date.

4. Advice letters for authorized rate increases for 2006 and 2007 may be filed in accordance with GO 96-A no earlier than November 1st 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 CWS's rate of return on rate base, adjusted to reflect rates then in effect, normal ratemaking adjustments, and the adopted change to this pro forma test, for the twelve months ending September 30th of the preceding year, exceeds 8.6%. The advice letters shall be reviewed by the Commission's Water Division for conformity with this decision including the applicable provisions of the settlement (Attachment A), and the Joint Comparison Exhibit (Hearing Exhibit No. 66), and shall go into effect upon the Water Division's determination of compliance, not earlier than January 1st 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.

5. CWS is authorized to file advice letters to recover or refund the difference between the interim rates allowed by the Administrative Law Judge Ruling on California Water Service Company's Motion for Intern Rate Increase (March 2, 2004) and those authorized in this decision over no less than one year. The advice letter filings shall include all supporting data and calculations. The Water Division shall inform the Commission if it finds the proposed increase does not comply with this decision or other Commission requirements.

6. CWS is authorized to establish a memorandum account to track expenses associated with the North Garden Water Supply Enhancement Project as described in the settlement. CWS will have the opportunity to recover the amounts recorded in the memorandum account during the next general rate case filing for CWS's Bakersfield District.

7. This proceeding remains open.

This order is effective today.

Dated September 23, 2004, at San Francisco, California.

LIST OF ATTACHMENTS

A-Settlement (April 19, 2004)

B-Revised Tables to Settlement (Ex. No. 66, May 11, 2004) (Selected Table)

C-Ratesetting Appendices

Appendix A: Summary of Earnings and Rates of Return

Appendix B: South San Francisco District

Appendix C: Bakersfield District

Appendix D: Tariffs

Appendix E: Bill Comparisons (Present v. Adopted)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Application of California Water Service Company
(U 60 W) for an Order Authorizing it to increase Rates for Water Service in its Bakersfield District.

Application 03-10-017

(Filed October 1, 2003)

Application of California Water Service Company
(U 60 W) for an Order Authorizing it to Increase Rates for Water Service in its South San Francisco District.

Application 03-10-021

(Filed October 1, 2003)

SETTLEMENT

1.00 GENERAL

2.0 SETTLEMENT TERMS

2.1 Rate Base

2.11 2003 Plant Additions

Parties agree that using the most updated data for plant additions through the end of the last recorded year is appropriate. Therefore, Cal Water and ORA agree to use $175,645,400 for the ending balance of plant in 2003 in Bakersfield and to use $30,113,700 for the ending balance of contributed and advanced plant in 2003 in Bakersfield. In South San Francisco, the parties agree to the recorded end-of-year plant in service of $35,938,100 and the recorded end-of-year contributed and advanced plant of $9,708,000.

2.12 Non-Specifics

ORA originally recommended against the Commission allowing non-specific mains budgets in Bakersfield and South San Francisco. Cal Water provided additional information in settlement discussion about the need for such a budget category, including projects related to street resurfacing projects, broken valves, and severely leaking mains. Further, ORA reviewed the expenditures in this category in 2003 and developed a revised ten-year average using the same methodology as Cal Water had proposed in its Application. The parties agree to the use of these new figures, which are projected capital improvements of $162,921 in 2004 and $165, 527 in 2005 in Bakersfield, and proposed capital improvements of $72,954 in 2004 and $74,121 in South San Francisco.

Both parties agree to ORA's recommendation on the non-specific land category. Cal Water reviewed its recorded expenses in this category and agreed they were intermittent in Bakersfield and therefore inappropriate for averaging.

2.13 2004 and 2005 plant additions

After reviewing the data on 2003 capital investment described above, ORA and Cal Water agreed that the amount of remaining 2003 budget that was not spent in 2003 is $4,488,234 in Bakersfield and $957,101 in South San Francisco. Furthermore, after reviewing the deferred projects, ORA and Cal Water agree that some projects are critical for water quality and water supply and should be completed in addition to the approved 2004 and 2005 budgets. Therefore the parties agree that Cal Water should be allowed an additional $887,500 in each of TY 2004 and TY 2005 for critical projects in Bakersfield and an additional $118,800 in 2004 in South San Francisco.

2.14 Bakersfield North Garden Project

ORA reviewed the report provided with Cal Water's rebuttal testimony on the North Garden water supply project. ORA agreed with Cal Water's position that some water supply project needs to be constructed to provide continued reliable service to this currently isolated area. Cal Water's draft study indicated the possibility of expanding existing surface water treatment facilities owned by Cal Water, building a new surface water treatment facility in cooperation with the City of Bakersfield, or purchasing water from an expanded treatment facility owned by Kern County Water Agency. However, due to the uncertainty over which alternative will provide the most benefit to North Garden customers at the lowest cost, ORA did not approve of adding this project to the approved capital budget for 2004 and 2005. Cal Water had requested $2.1 million in each year's capital budget. As an alternative, since there is agreement in principal that a project must be initiated within the rate case cycle, ORA proposes that the Commission allow Cal Water to open a memorandum account to track the costs associated with this project. Because Cal Water would be capitalizing the project, the entries in the memorandum account would be limited to interest during construction (IDC) on the capital investment entered. No recovery would be authorized for IDC on capital investment over $4.2 million, the amount proposed in the Application. Cal Water would file a detailed summary of the entries in the memorandum account and request recovery with its next Bakersfield rate case. Cal Water understands that both the capital investment booked in CWIP, which is limited to $4.2 million, and the IDC booked in this memorandum account are subject to prudence review in its next rate case. Cal Water agrees to this approach.

2.2 Expenses

2.21 Kern Delta water agreement

ORA reviewed the additional information provided with Cal Water's rebuttal and agreed this item was overlooked in its report. Cal Water and ORA agree to include $250,000 in 2004 and 2005 for this expense.

2.22 Sludge disposal

ORA reviewed the additional information provided with Cal Water's rebuttal, as well as the information provided in response to earlier data requests. ORA agrees to allow Cal Water's requested amount for sludge disposal, $60,000 in each test year.

2.23 Conservation

Cal Water and ORA originally disagreed about public information and school education programs, toilet rebates in Bakersfield, and high-efficiency washing machine rebates in South San Francisco. After reviewing Cal Water's rebuttal testimony, ORA agrees that public information and education should be allowed without a strict cost-benefit analysis. ORA reviewed the cost-effectiveness calculation for toilet rebates in Bakersfield and agreed that after correcting an error, the program is cost effective. Cal Water agrees that the washing machine rebate program in South San Francisco is not cost-effective even at the lower rebate threshold under ORA's cost effectiveness guidelines.

2.24 Postage

Cal Water agrees to ORA's position for postage.

2.25 General Office health care expenses

In its previous filings before the Commission, and in this filing, Cal Water estimated its employee health insurance costs as a percentage of recorded gross payroll for the recorded years, then estimated test year health care expenses using that data and a projected total company payroll. All health care expenses for the districts are paid centrally in the general office. In previous filings, Cal Water has estimated the test year health care expense/ payroll ratio using an average of the last five recorded years (That value would be 10.415% in this case). However, in this filing, Cal Water expressed in its testimony that the prior estimating method was not accurately predicting test year health care expenses. Therefore, Cal Water proposed using the last recorded year ratio or 11.144%. In settlement, ORA and Cal Water reviewed the 2003 recorded figure and agreed to use a four year average from 2000-2003 of 10.81% of payroll for both test years. The resulting values applied to general office are $5,634,650 for 2004 and 5,936,840 for 2005. Bakersfield and South San Francisco allocations of these figures are 13.28% and 3.33%, respectively.

2.3 Taxes

2.31 Franchise tax calculations

Cal Water agrees to use ORA's franchise tax calculation in Bakersfield. There is an inconsistency in the methods Cal Water and ORA use to determine franchise tax rates. In future rate cases, Cal Water will use ORA's method to conform to general industry practice.

2.4 Water Sales

Cal Water and ORA used multiple regression modeling based upon the modified bean method to determine water sales in their respective reports. Differences arise in the treatment of data during the "drought period" in the late 1980's and early 1990's. ORA's approach used a dummy variable to correct for the drought effect. Cal Water's approach eliminated years in which a drought effect was noted. Both analyses had good statistical bases, and the parties agreed there was merit in both positions. Much of the discussion in the settlement conferences centered on the "reality check" called for in step 7 of the Commission's standard practice U-25.

2.41 Residential use per customer in SSF

Both Cal Water and ORA had statistically significant model outputs for the South San Francisco residential class use per customer. The parties reviewed the results in comparison to recent recorded values, including 2003 data that was not available until settlement. The parties agreed to use Cal Water's 2005 estimate of 120.1 ccf per customer per year as the settled estimate for both 2004 and 2005.

2.42 Residential use per customer in BK

Both Cal Water and ORA had statistically significant model outputs for the Bakersfield residential class use per customer. The parties reviewed the recent sales data in this category and determined that a three-year average of recorded sales per customer, 336.3 ccf per year, would best predict future water sales in this category.

2.43 Business use per customer in BK

Both Cal Water and ORA had statistically significant model outputs for the Bakersfield business class use per customer. As a means of settling this issue, the parties agreed to use the average of the results of their two models, 900.7 ccf per year.

2.5 Attrition earnings test

2.51 ORA originally proposed an attrition earnings test mechanism using the existing 1985 procedure, but with a modification to use recorded water sales in all classes. The existing 1985 procedure, uses adopted sales with a weather adjustment. During settlement, the parties agreed to use the method adopted in their joint recommendations in D.03-09-021 (Paragraph 5.06 of the joint recommendations). Thus, the parties agree the Commission should authorize step and attrition increases for Cal Water's districts in this proceeding based on recorded earnings for the latest 12 months ending September 30 each year. Additionally, the recorded earnings test should be adjusted to exclude expenses subject to balancing or memorandum account recovery. Moreover, the sales and sales related expenses in the recorded earnings test should be adjusted to exclude revenues credited to balancing and memorandum accounts. The table of weather coefficients is attached. In accordance with the Commission's policy for approving step and attrition increases, should Cal Water's earnings, based on the recorded test above, exceed its authorized return, the requested step or attrition increase should be reduced to offset the earnings in excess of its authorized return in this proceeding or in any other future Cal Water proceeding, whichever is lower.

3.0 EXECUTION OF THE AGREEMENT

3.1 The Parties agree, without further consideration, to execute and/or cause to be executed, any other documents and to take any other action as may be necessary, to effectively consummate this Settlement Agreement. The Parties shall take no action in opposition to this Settlement.

3.2 The Parties agree that no signatory to this Settlement or any member of ORA assumes any personal liability as a result of their agreement. The Parties agree that no legal action may be brought by any Party in any state or federal court, or any other forum, against any individual signatory representing the interests of ORA, attorneys representing ORA, or the ORA itself related to this Settlement. All rights and remedies of the Parities are limited to those available before the Commission.

3.3 This Settlement Agreement may be executed in any number of counterparts and by different Parties in separate counterparts, with the same effect as if all the Parties had signed one and the same document. All such counterparts shall be deemed to be an original and shall together constitute one and the same Agreement.

3.4 The undersigned acknowledge that they have been duly authorized to execute this Agreement on behalf of their respective principals and that such execution is made within the course and scope of their respective agency and/or employment.

4.0 GOVERNING LAW

4.1 The Parties acknowledge that unless expressly and specifically stated otherwise herein, the California Public Utilities Code, Commission regulations, orders, rulings, and/or decisions shall govern the interpretation and enforcement of this Agreement.

5.0 VERIFICATION

5.1 The signatories to this Settlement personally and independently verify that all elements of it are true, correct, complete, and internally consistent.

OFFICE OF RATEPAYER ADVOCATES
CALIFORNIA WATER SERVICE COMPANY

By: By:

Ting-Pong Yuen Thomas F. Smegal

California Public Utilities Commission California Water Service Company

505 Van Ness Avenue 1720 N. First Street

San Francisco, CA 94102 San Jose, CA 95112

(415) 703- 2913 (408) 367-8225

April 19, 2004

(END OF ATTACHMENT A)

ATTACHMENT B

JOINT COMPARISON EXHIBIT (EX. No. 66)

Page 1 of 1

Table F - Weather Adjustment Coefficients for Attrition Earnings Test

Bakersfield 65.4 degrees 6.47 inches

Residential 3.72 -4.26

Business 7.88 -5.36

Multi Family 23.07 -24.35

Public Authority 100.19 -52.74

South San Francisco 57.6 degrees 15.96 inches

Residential 1.31 -0.61

Business 2.13 -0.94

Multi Family none -9.2

Public Authority none -0.98

(END OF ATTACHMENT B)

APPENDIX A

Summary of Earnings and Rates of Return

Page 1 of 2

APPENDIX A

Summary of Earnings and Rates of Return

Page 2 of 2

(END OF APPENDIX A)

APPENDIX B

Page 1 of 5

APPENDIX B

Page 2 of 5

APPENDIX B

Page 3 of 5

APPENDIX B

Page 4 of 5

APPENDIX B

Page 5 of 5

(END OF APPENDIX B)

APPENDIX C

Page 1 of 5

APPENDIX C

Page 2 of 5

APPENDIX C

Page 3 of 5

APPENDIX C

Page 4 of 5

APPENDIX C

Page 5 of 5

(END OF APPENDIX C)

APPENDIX D

Page 1 of 6

Schedule No. SS-1

South San Francisco Tariff Area

GENERAL METERED SERVICE

APPLICABILITY

TERRITORY

RATES

SPECIAL CONDITIONS

1. To recover $46,063 or 0.7% for the General Office capital budget carryover amortization, a
surcharge of $0.05 per service connection is to be applied to each bill for 60 months from
August 16, 1999, the effective date of Advice Letter No. 1472-A.

2. Due to an under-collection in the balancing account, a surcharge of $0.0718 per 100 cu. ft. of
water used is to be applied to the quantity rates for 24 months from the effective date of Advice

Letter No. 1636.

3. All bills are subject to the reimbursement fees set forth on Schedule Nos. UF and DHS-1.

APPENDIX D

Page 2 of 6

APPENDIX D

Page 3 of 6

Schedule No. BK-1

Bakersfield Tariff Area

GENERAL METERED SERVICE

APPLICABILITY

TERRITORY

RATES

SPECIAL CONDITIONS

1. To recover $163,045 or 0.7% for the General Office capital budget carryover amortization, a
surcharge of $0.05 per service connection is to be applied to each bill for 60 months from
August 16, 1999, the effective date of Advice Letter 1472-A.

2. Due to an under-collection in the balancing account, a surcharge of $0.0376 per 100 cu. ft. of water used
is to be applied to the quantity rates for 12 months from the effective date of Advice Letter No. 1618-A.

3. All bills are subject to the reimbursement fees set forth on Schedule Nos. UF and DHS-1.

APPENDIX D

Page 4 of 6

Schedule No. BK-2R

Bakersfield Tariff Area

RESIDENTIAL FLAT RATE SERVICE

APPLICABILITY

Applicable to all flat rate residential water service.

TERRITORY

Bakersfield and vicinity, Kern County.

RATES

For a single-family residential unit, including premises Per Service Connection

having the following areas: per Month

6,000 sq. ft., or less ..................................................................... $ 44.38 ( I )

6,001 to 10,000 sq. ft. ................................................................. 51.11 |

10,001 to 16,000 sq. ft. ............................................................... 63.75 |

16,001 to 25,000 sq. ft. ............................................................... 80.81 |

For each additional single-family residential unit on the same premises

and served from the same service connection ........................................... 31.23 ( I )

SPECIAL CONDITIONS

1. To recover $163,045 or 0.7% for the General Office capital budget carryover amortization, a surcharge of $0.05 per service connection is to be applied to each bill for 60 months from August 16, 1999, the effective date of Advice Letter 1472-A.

2. The above flat rates apply to service connections not larger than one inch in diameter.

3. All service not covered by the above classifications shall be furnished only on a metered basis.

4. For service covered by the above classifications, if the utility or the customer so elects, a meter
shall be installed and service provided under Schedule No. BK-1, General Metered Service.

5. This Schedule is closed to all new connections as of May 8, 1991, the effective date of
Tariff Sheet No. 4133-W.

6. Due to an under-collection in the balancing account, the following surcharges are to be applied to each bill for 12 months from the effective date of Advice Letter No. 1618-A.

6,000 sq. ft., or less ..................................................................... $ 1.20

6,001 to 10,000 sq. ft. ................................................................. 1.38

10,001 to 16,000 sq. ft. ............................................................... 1.72

16,001 to 25,000 sq. ft. ............................................................... 2.18

Additional Unit ........................................................................... 0.84

7. All bills are subject to the reimbursement fees set forth on Schedule Nos. UF and DHS-1.

APPENDIX D

Page 5 of 6

Schedule No. BK-4

Bakersfield Tariff Area

SERVICE TO PRIVATELY OWNED FIRE PROTECTION SYSTEMS

APPLICABILITY

TERRITORY

RATES

SPECIAL CONDITIONS

1. The facilities for service to a privately owned fire protection system will be installed by the Utility
at the cost of the applicant. Such cost shall not be subject to refund.

2. If a distribution main of adequate size to serve a private fire protection system in addition to all
other normal service does not exist in the street or alley adjacent to the premises to be served, then
a service main from the nearest existing main of adequate capacity will be installed by the Utility atthe cost of the applicant. Such cost shall not be subject to refund

3. Service hereunder is for private fire protection systems to which no connections for other than fire
protection purposes are allowed and which are regularly inspected by the underwriters having
jurisdiction, are installed according to specifications of the utility, and are maintained to the
satisfaction of the Utility. The Utility may require the installation of a detector check valve with
meter for protection against theft, leakage, or waste of water.

4. For water delivered for other than service to privately owned fire protection systems, charges
will be made therefor under Schedule No. BK-1, General Metered Service.

5. The Utility will supply only such water at such pressure as may be available from time to time
as a result of normal operation of Uitlity's system.

6. All bills are subject to the reimbursement fee set forth on Schedule No. UF.

APPENDIX D

Page 6 of 6

(END OF APPENDIX D)

APPENDIX E

Bill Comparisons (Present v. Adopted)

Page 1 of 2

APPENDIX E

Bill Comparisons (Present v. Adopted)

Page 2 of 2

(END OF APPENDIX E)

(END OF ATTACHMENT C)

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