II. Background

Grand Oaks is a Class D (500 or fewer service connections) water utility serving Grand Oaks Estates near Tehachapi. It is small even by Class D standards, currently with only 43 connections and a moratorium on new connections. It was also, at the time these consolidated proceedings began, in violation of orders of the California Department of Health Services, and water pressure in the system was so low that several customers were unable to flush their toilets.

Consequently, the Commission issued an emergency order (D.97-08-067) authorizing Dominguez to operate Grand Oaks under contract, as Dominguez had agreed to do upon the grant of such authority.¹ The Commission also noted in D.97-08-067 that the owners were willing to sell Grand Oaks to Dominguez and that Dominguez was willing to buy it. In discussing this possibility, the Commission said:

"We believe that customers' best interest will be served if Dominguez eventually buys the system from Grand Oaks. Accordingly, we direct the owners of Grand Oaks and Dominguez to file an application for the transfer of ownership of Grand Oaks within 90 day[s] of the effective date of this order." (Id., mimeo., p. 4.)

D.97-08-067 was the last formal action taken in these proceedings, however, Dominguez did not file an application, as anticipated in D.97-08-067, nor has CWS done so since it merged with Dominguez. CWS did tell our Water Division staff, in a letter dated June 12, 2004, that CWS was trying to contact the owner's estate to complete transfer of the transfer of the water system. But formally, Grand Oaks' owners of record, whom we had found to be "either unwilling or unable to operate the system," are still in charge. That anomalous situation will continue until we receive and approve an application for transfer of ownership.

Having received no application or other formal filing, we required a "status report" from CWS. (See Administrative Law Judge's (ALJ) Ruling issued March 28, 2005, and served on all parties to these proceeding and representatives of CWS). Our stated intent was "to spur efforts to put a long-term solution in place and to resolve these very old proceedings."

Prior to CWS' status report, the Commission received a letter dated April 1, 2005, from Brit O. Smith, who our records show was one of the two owners (along with Phillip L. Shirley) when Dominguez assumed operation of Grand Oaks.² Smith says, among other things, that he has "no knowledge regarding any water company," that he personally has "not been involved" in a water company, that Phillip Shirley died about five years ago, and that "Shirley had Dominquez [sic] take over his water company because, as with all of his projects, he never took responsibility for managing any business properly."

CWS' status report acknowledges that before the Dominguez merger with CWS in 2000, "Dominguez was willing to acquire Grand Oaks and to operate the water system under contract, pending the acquisition. Additionally, one of the Grand Oaks co-owners testified that he and the other owner were, in fact, willing to sell the system to Dominguez. As we know now, Dominguez acquisition of Grand Oaks was never consummated." However, CWS "is not interested in acquiring Grand Oaks or its water system." CWS cites three reasons for its current disinterest:

· CWS' acquisitions "typically" have been in close proximity to an existing CWS system, which Grand Oaks is not.

· After the Commission fined CWS for irregularities in certain small water system acquisitions (see D.04-07-033), CWS has "soured" on its "Good Samaritan" approach to such acquisitions.

· The incentives the Commission has provided (see D.99-10-064) for large (Class A) water utilities to acquire small, troubled Commission regulated water utilities are inadequate.

The status report concludes on a more positive note by proposing (as an alternative to the incentives in D.99-10-064) a different regulatory mechanism that would allay CWS' concerns about the acquisition. Upon Commission approval of this mechanism, CWS "will take all necessary and reasonable measures to acquire the Grand Oaks water system."