XI. Comments on Proposed Decision
On June 6, 2006, the principal hearing officer's proposed decision was filed with the Commission and served on the parties in accordance with Section 311(d) of the Public Utilities Code and Rule 77.1 of the Rules of Practice and Procedure.
Opening and reply comments were submitted by Union Pacific, the Water Division, and Beard on the proposed decision.
Union Pacific Comments
Union Pacific comments that the proposed decision used an incorrect number of customers to calculate the rate design for test year 2004. Union Pacific is correct. The proposed decision used an older figure of 47 customers, rather than the results of a community survey conducted during 2005 that identified 37 customers. The rate design has been modified based on this smaller customer base. Other issues concerning the customer base are discussed in response to Beard's comments, below.
Union Pacific questions the basis upon which the proposed decision concluded that the company, in its operation of Keene, operated as a public utility "[a]s of 1994, if not before . . . ." (Conclusion of Law 1.) The company complains that this determination is not supported by any facts or by the record. The comment misses the underlying point made by the proposed decision. In D.02-08-075, the Commission previously determined, as a matter of fact and law, that Union Pacific was holding itself out as a public utility at least as early as 1994. The decision based its conclusion on numerous factors that all occurred in 1994 or earlier: since the 1960s, water was sold primarily for the community and not the railroad; Keene had been declared a public water system in 1972; the company acquiesced and continued to provide service in the face of litigation pending in 1989; and, in 1994, the Tehachapi pipeline "was removed and replaced with a primary benefit of the community, and not the railroad." (D.02-08-05, at 5-7.) Even before discussing the 1996 franchise agreement, the Commission in D.02-08-075 concludes, "Here, the focus is on the owner's activities, which support the Decision's finding that by its conduct, Union Pacific dedicated the Keene Water System to public use." (Id. at 7-8.) Almost as an afterthought, the Commission discusses the 1996 agreement as "additional evidence that Union Pacific assumed the role of a public utility." (Id. at 8.) We have no need now to revisit the determination of public utility status that we made in D.02-08-075.
The company also challenges the conclusion that it failed to exercise reasonable and prudent care when it sought to secure an alternative water supply after removing the pipeline from Tehachapi. The company argues that it retained an experienced well driller, the initial wells produced almost twice the current annual consumption, and the company was limited in the locations where it could drill. The company adds that, at the time, it was unclear even to the Commission itself whether the company was a public utility with eminent domain powers.
During the evidentiary hearing, Union Pacific produced very little information about the qualifications of the well driller or the research that went into the determining where to drill in a complex, geologically fractured landscape. We have already discussed Union Pacific's separate comment questioning the basis for concluding that it had made an implied dedication of its system to public use in 1994, if not before. Suffice it to say, it is improbable that a sophisticated railroad, regularly engaged in real estate transactions in numerous states, would need to conclude that its well drilling locations were limited to its own right-of-way.
Union Pacific argues that the decision overstates the severity of the water quality and supply problem, yet the company agrees with the proposed order: to prepare at its expense a comprehensive hydrologic and engineering assessment of possible measures to improve water supply reliability and quality. Part IX of this decision enumerates the Keene's numerous deficiencies in meeting the water quantity and quality requirements of GO 103. These problems need not be repeated here. The preponderance of the evidence, as evaluated by the assigned ALJ, contradicts Union Pacific's minimization of the problems. The Commission is encouraged, however, by the company's expressed willingness to understand the studies necessary to address these problems.
Union Pacific comments that its rate of return on Commission-ordered improvements to the distribution system downstream of the master meters (see Ordering Paragraphs 5-9) should be that of other Class D companies, rather than the 2.39% set forth in the proposed decision. Earlier in the proceeding, the company proposed the rate of 2.39% because it recognized that customers would be paying much more for their water. That result is certainly has come true, as indicated in the rate design set forth in Appendix C. Until the operation of this water system is improved in the manner contemplated in this decision, there is no reason to vary the rate of return on these improvements.
Finally, Union Pacific requests clarification of whether the 180-day stay in effectiveness of the ordering paragraphs also applies to the required hydrologic and engineering assessment, which is due within 180 days of the decision (Ordering Paragraph 11). We intend that the assessment begin immediately because the results of that assessment are likely to inform the parties in their negotiations during the stay period. While the assessment is underway, we expect Union Pacific to regularly share the information produced by the assessment with the other parties.
Union Pacific's suggested specific modifications to the findings of fact, conclusions of law, and ordering paragraphs are adopted or rejected as indicated in those respective sections of this decision.
Water Division Comments
The Water Division argues that the selection of an alternative water supply to the 1994 pipelines removal was imprudent (see Beard comments, below), supports the conclusions about metering and billings, supports the steps outlined to water safety and reliability, and pledges to play a constructive role in attempting to achieve a mutually beneficial resolution during the stay period.
The Water Division argues, however, that the inclusion of the 1997 pipeline replacement and relocation project violates the prohibition against retroactive ratemaking. The facts and law do not support such a conclusion. Any recovery of rates based on this net asset is prospective from the 2004 test year. This decision does not authorize the recovery of any rate payments, between 1997 and 2004, based on the pipeline project.
D.05-06-011 and D.03-05-076, cited by the Water Division, are also not supportive of its argument. The discussion of retroactivity in D.05-06-011 is dicta since the dispute concerned the pass-through of reimbursements for customer-initiated tree-removal and not general rates. The decision also concluded that retroactive ratemaking did not incur since the utility would actually incur the tree-removal reimbursement costs after Commission authorization of a Catastrophic Event Memorandum Account. Similarly, D.03-05-076 discusses retroactive ratemaking only in the context of establishing a memorandum account allowing the utility "to record debits or credits only prospectively from the date the account is authorized. In that way, if recorded costs are subsequently approved for recovery in rates, there will be no confusion or entanglement of issues regarding retroactive ratemaking."2 This decision is faithful to that principle in that rate recovery is authorized prospectively from the 2004 test year based on the depreciated value of the asset.
The Water Division also argues that the 1997 project was imprudent because pipeline replacement would not have been necessary if proper maintenance had occurred over the century it had been in operation. Part V(B) of this decision addresses the Water Division's conjecture, which appears to be an argument that capital assets can have perpetual utility.
Beard Comments
Beard, a water user, argues that the evidence of water quality violations for the last 12 years should have been admitted into evidence. The assigned ALJ properly limited the evidence of water quality violations to those occurring after April 2002, when the Commission adopted D.02-04-017 culminating an order instituting an investigation (OII) proceeding into whether Keene was a public utility. During hearings in February 2001 in the OII, the Commission considered evidence of water quality violations. To probe extensively into pre-2002 water quality violations in this proceeding would be repetitively of the earlier proceeding.
Beard also argues that the 1994 discontinuance of the pipeline from Tehachapi was imprudent and that the cost of replacing only portions of the existing pipe in the railroad tunnel would have been less. Predominate among the factors supporting the railroad's discontinuance of the existing pipeline are the Interstate Commerce Commission's requirement that the tunnel be widened for larger freight shipments and the problems associated with servicing and maintaining a pipeline in an active railroad corridor located in a tunnel.
Beard comments that the decision erroneously concludes that no aquifer exists in the area and points to evidence of an aquifer. Groundwater certainly is present in the area as water is withdrawn from local wells. Union Pacific is being ordered to undertake a hydrologic and engineering assessment to determine, among other things, whether groundwater pumping may be relied upon for water supply reliability and quality and, if so, at what location.
Beard also questions what customer list is being used to determine existing customers. This decision, including the rate design, is based on late-filed Exhibit No. 6 (as submitted by Union Pacific on August 5, 2005)-not on any document provided later by the Water Division. The decision has been modified to correct the date of the exhibit.
2 D.03-05-076, *9, n 5, citing In re Southern California Edison Co., D.99-11-057 (Nov. 18, 1999), 1999 Cal. PUC LEXIS 769.
