ALJ/JET/tcg Mailed 7/21/2006

Decision 06-07-034 July 20, 2006

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Application of Union Pacific Railroad Company, Keene Water System (0434W), for Authorization to Increase Rates and for Interim Rate Relief.

Application 04-11-004
(Filed November 4, 2004)

(See Attachment A for List of Appearances.)

TABLE OF CONTENTS

Title Page

OPINION AUTHORIZING INITIAL RATES 2 2

I. Background 2 2

II. Commission Proceedings 3 3

III. System Description 5 5

IV. Questions Presented 7 7

V. Ratesetting 7 7

A. Net Operating Income 7 7

B. Rate Base 11 11

C. Rate of Return 15 15

VI. Rate Design 16 16

VII. Discontinuance of the Tehachapi-Keene Pipeline 17 17

A. Commission Jurisdiction 17 17

B. Reasonableness & Prudence of 1994 Project 18 18

VIII. Metering and Billing 21 21

A. Existing Customers 21 21

B. Facilities Downstream of Master Meters 22 22

IX. General Order 103 25 25

A. Water Quantity 25 25

B. Water Quality 27 27

X. Other Issues 30 30

XI. Comments on Proposed Decision 30 30

XII. Assignment of Proceeding 35 35

Findings of Fact 36 36

Conclusions of Law 41 41

ORDER 43 43

Attachment A - List of Appearances

Appendices A-D

OPINION AUTHORIZING INITIAL RATES

In this decision, the Commission authorizes initial rates for Union Pacific Railroad (Union Pacific) on behalf of its Keene Water System (Keene), a Class D water utility with 37 customers. The Commission also orders certain steps to bring Keene into compliance with General Order (GO) 103. Keene is a Class D water utility serving the communities of Keene and Woodford in Kern County, southeast of Bakersfield. Most of the provisions of the ordering paragraphs of this opinion are stayed for 180 days to allow the parties to negotiate a more mutually beneficial outcome for this proceeding.

I. Background

The Keene Water System was constructed over 100 years ago by the Southern Pacific Railroad (predecessor of Union Pacific) to transport water from wells in the City of Tehachapi to the communities of Keene and Caliente that had grown up around the railway. The water was used for steam locomotives and by residents. Eventually, the railroad's water use declined but Southern Pacific continued to provide water for the Keene and Caliente residents. Water service to Caliente was discontinued in the 1980s. (Application of Union Pacific Company, Keene Water System 3-4 (Nov. 4, 2004).)

Water originally was pumped from wells in Tehachapi and transported to Keene by a gravity-flow pipeline. The pipeline originally ran through the railroad's tunnel between Tehachapi and Keene. In 1994, Southern Pacific expanded the tunnel bore to accommodate "double-stack" freight containers on rail cars. This construction resulted in discontinuance of the water pipeline. To provide water to Keene and Woodford, Southern Pacific drilled new wells in its right-of-way near the two communities and connected those wells to the existing water distribution system.

In 1996, Union Pacific merged with SP Transportation Company, the successor in interest to the Southern Pacific Railroad, which thereby became the owner of the Keene Water System.