VII. Discontinuance of the Tehachapi-Keene Pipeline

Both Stonybrook and Beard strenuously argue that the discontinuance of the Tehachapi-Keene pipeline (approximately 12 miles in length) in 1994, while it may have financially benefited the railroad, was imprudent as to the customers of the water system. They also maintain that the opportunity to enlarge the tunnel, through which the pipe ran, to accommodate "double-stack" container freight cars was the real reason for this discontinuation-not the poor condition of the pipe itself. They argue that they replacement sources of water have proved to be inadequate.

A. Commission Jurisdiction

A preliminary issue is whether the Commission has jurisdiction to examine the reasonableness and prudence of discontinuing the pipeline and forcing the community to rely on new sources that have proven to be inadequate. At first look, the pipeline was discontinued in 1994 and the Commission's decision finding Keene to be dedicated to public use (D.02-04-017) was issued on April 8, 2002-suggesting that the Commission might not have jurisdiction to reach back eight years. Upon closer examination, D.02-04-017 does not decide the specific date upon which the company was dedicated to public use. The decision lists three facts supportive of the Commission's finding of an implied dedication to public use: predominately community use of the water since the 1960s, the drilling of a replacement well in 1994 for the primary benefit of the community, and the company's application in 1996 for a franchise to construct a pipeline on a county roadway to furnish water. (D.02-04-017, at 10.)

The Commission's decision denying rehearing also does not specifically determine the date upon which Keene was dedicated to public use, but the rehearing decision does consider the 1994 project to have been a critical demonstration that, at least as early as 1994, Keene was a public utility. (D.02-08-075, at 7-8 (the owners' activities concerning the 1994 project "support the Decision's finding that by its conduct, Union Pacific dedicated the Keene Water System to public use").) Further, the decision specifically indicates that "whether Union Pacific's capital expenditures for this project were necessary or reasonable[,] that issue will be addressed in the rate case." (Id.) In D.02-08-075, the Commission assumed that the railroad's prudence in undertaking the 1994 project would not escape scrutiny but would be examined here. Keene is properly considered to have been a public utility water system, at least as early as 1994, under Public Utilities Code Section 2701. The Commission has jurisdiction to determine the prudence of the 1994 project and does so as part of this proceeding.

B. Reasonableness & Prudence of 1994 Project

The 1994 project actually consists of two activities, both of which are subject to prudence review. The first is Keene's decision to discontinue the pipeline from Tehachapi. The second is Keene's decision on replacement sources of water.

The Water Division and other objectors believe Keene was imprudent in discontinuing the pipeline. They rely on evidence that pipeline water was of good quality and supply, especially when compared to existing sources. However, two considerations support the conclusion that discontinuance was reasonable and prudent. First, the pipeline was a century old and in great need of repair. (RT 132:2-11 (Lyon).) The Water Division argues that the pipeline would have been in better condition if it had been properly maintained over the years. The pipeline, however, was built to supply water for steam locomotives and, especially in the early years, likely was not maintained in the same manner as a pipeline conveying potable water. Second, the Interstate Commerce Commission-ordered tunnel enlargement largely destroyed the existing system. (RT 132:17-28 (Lyon).) Because pipeline repairs in a busy railway tunnel had always been problematic, Keene was justified to consider alterative methods of supplying water. If the system had continued to obtain its water from Tehachapi, however, the conveyance would have followed an entirely different route. Even Stonybrook's 1999 report calculates the replacement cost at a minimum of $4 million. (RT 312:17-18 (Huerta).) The Water Division's estimate of $523,000 is based on a 6.2 mile pipeline to a location no longer available for water supply. (Exhibit No. 309.) Keene reasonably pursued other options to replacing the Tehachapi pipeline.

The railroad's actual selection of an alternative water supply for the community does not demonstrate the same reasonableness or prudence, especially when the basic drinking and household water needs of Keene residents were at stake. The company indicates that it hired a local well driller to advise it as to potential well locations, leading to the drilling of three wells. Keene provided no information as to the qualifications of this individual. (RT 141 (Lyon).) Given the impending shift in the community's sole water source, Keene would have been prudent to have retained an experienced hydro-geologic consulting firm before deciding to rely on local wells. There is no evidence that company engaged this level of expertise.

The result has been unreliable water supplies of inferior quality. Keene suggests that, due to the deteriorating pipeline, it had little time to make the transition. Also, Keene argues that it did not have eminent domain powers to acquire more promising well sites. The pipe was in poor condition, but there is no evidence that it was in danger of imminent collapse. If Keene lacked the necessary powers to effectively provide water to the community, it should have recognized, as the Commission later did for it, that it was a public utility. Upon securing a certificate of public convenience and necessity, Keene could have exercised eminent domain powers to obtain the land or water needed.

Pursuant to Public Utilities Code Sections 761 and 2701, the Commission determines as follows: In 1994 and thereafter, during which Keene held itself out as a public utility, the company failed to exercise reasonable and prudent care in efforts to secure substitute water supplies of sufficient quantity and quality.

Finding unreasonableness and imprudence, the Commission has the authority to order curative measures. (Pub. Util. Code § 761.) Since the consequences of this unreasonable and imprudent decision manifest themselves in poor water quantity and quality, as documented in a subsequent discussion (see Part IX), the Commission relies on GO 103's requirements to fashion the appropriate remedial measures for this unreasonable and imprudent decision. In its briefing, the Water Division urges that the Commission order Keene to fund a new solution, such as a new well, after diligent research. We order, at Keene's expense, a more comprehensive hydrologic and engineering assessment of possible measures to improve water supply reliability and quality. Because the nature and cost of the remedial measures cannot be known until this assessment is complete, we reserve the ratesetting implications concerning these measures until another proceeding.