Background

B & W has been owned and operated since 1965 by Nelson E. Bartoo and Winifred M. Bartoo. B&W provides water to an area known as B&W Riverview Estates, which is located in an unincorporated area on the east bank of the Sacramento River, approximately three miles north of Los Molinos, Tehama County.

The water system serves approximately 10 flat rate customers. The system consists of a single well, adjacent to a 5,000-gallon steel pressure/storage tank and distribution mains. The water mains consist of mainly four-inch standard steel pipes installed nearly forty years ago.

On October 28, 2003, The Nelson E. & Winifred M. Bartoo Trust entered into a purchase agreement with Mr. Andreini. Both parties subsequently filed a transfer application with the Commission on November 10, 2003, seeking authorization of the sale and transfer. Mr. Andreini assumed all operating responsibilities for the water system in 2003 and has been operating the water system ever since-including bill collection, water testing, and system maintenance. The Andreini place of business in Red Bluff, Tehama County, is less than 30 minutes away from the water system. Angelo Andreini has prior experience in water and wastewater plant operation and currently is self-employed. His current occupation is property management. Mr. Andreini holds a Grade 1 water treatment facility operator's license, and also holds a BS degree in Soils and Irrigation.

The original owners of record passed away and the charitable trust is not in a position to perform the functions of running a water company, so Mr. Andreini is providing interim management and operating the water system until the transfer of ownership is approved by the Commission.

Sales Agreement

The sales agreement calls for a purchase price of $1,000. The purchase price has been paid in cash on close of escrow. B&W indicates the net book value of the total plant in service is $1,000. The Water Division examined available records of the water system including recent balance sheets, income statements, the sales agreement, and other pertinent records. Mr. Andreini has the financial net worth and sufficient liquid assets to own and operate B&W. We have determined that Mr. Andreini can assume the ownership without incurring financial trouble, or raising the rates of its customers beyond what the rates ordinarily would be. While the original owners operated at a loss and had to subsidize its cost of operation with personal funds, Mr. Andreini plans to more effectively control costs and bill the customers at appropriate rates as permitted by the Commission.

After examining Mr. Andreini's financial statements, the Water Division believes that he has the financial net worth and sufficient liquid assets

to own and operate B&W and to make anticipated and unanticipated capital repairs and keep the water systems in good working order. Although there is a projected small net loss for 2004, the Water Division believes that the customers of B&W will be better served under the new owner.

Ratepayer Indifference

The Commission requires a test of ratepayer indifference when evaluating the sale of a public utility. The ratepayer indifference concept states that any sale of a public utility should not have any net consequences that cause the ratepayer to prefer the seller to the buyer. For example, the ratepayer should not be subject to increased rates or reduced service as the result purely of a change of ownership. In more recent years, the Commission has further required the buyer to demonstrate that the buyer's acquisition of the public utility yields a tangible benefit to the ratepayer.

Using the ratepayer indifference test to assess the sale of the water system from the Trust to Mr. Andreini, the Water Division evaluated several key metrics including: (1) the impact of purchase price on ratebase; (2) service quality; and (3) continuity of service.

Purchase Price

The proposed purchase price of $1,000 is approximately the book value arrived at by adding the fixed assets of the water system and subtracting out accumulated depreciation and adding working cash. The Water Division reviewed the calculations contained in the application and confirmed them with Commission-adopted resolutions and annual reports filed with the Commission.

PU Code § 2720 requires the Commission to use fair market value in establishing the rate base for an acquired water system.

PUC § 2720:

"(a) The commission shall use the standard of fair market value

when establishing the rate base value for the distribution system of

a public water system acquired by a water corporation. This

standard shall be used for ratesetting.

(1) For purposes of this section, "public water system" shall have

the same meaning as set forth in Section 116275 of the Health and

Safety Code.

(2) For purposes of this section, "fair market value" shall have

the same meaning as set forth in Section 1263.320 of the Code of

Civil Procedure.

(b) If the fair market value exceeds reproduction cost, as

determined in accordance with Section 820 of the Evidence Code, the

commission may include the difference in the rate base for

ratesetting purposes if it finds that the additional amounts are fair

and reasonable. In determining whether the additional amounts are

fair and reasonable the commission shall consider whether the

acquisition of the public water system will improve water system

reliability, whether the ability of the water system to comply with

health and safety regulations is improved, whether the water

corporation by acquiring the public water system can achieve

efficiencies and economies of scale that would not otherwise be

available, and whether the effect on existing customers of the water

corporation and the acquired public water system is fair and

reasonable.

(c) The provisions of subdivisions (a) and (b) shall also be

applicable to the acquisition of a sewer system by any sewer system

corporation or water corporation.

(d) Consistent with the provisions of this section, the commission

shall retain all powers and responsibilities granted pursuant to

Sections 851 and 852. "

The Water Division believes that the purchase price of $1,000 meets fair market value as it represents close to the depreciated assets of the water system. The price is also what a willing buyer wants to pay and a willing seller wants to accept.

Service Quality

The buyer has been providing interim management of the operations of B&W, and will continue to do so until the transfer of ownership is approved by the Commission. Mr. Andreini has a license, has been certified as a water company operator, and has been able to provide operational and maintenance services, including monitoring of the pumps, routine maintenance of the equipment, and making the necessary repairs, collecting water samples as required by Department of Health Services, responding to emergencies, and assisting in the preparation of the reports to government agencies regarding the operation of the water system.

There were no complaints received. We find that it is advantageous to the customers of B&W water system to have the transfer go into effect.

Service Continuity

Mr. Andreini wishes to acquire B&W because he owns real estate in the area and his place of business in Red Bluff, Tehama County, is less than 30 minutes away from the water system. The sale agreement ensures an orderly water system ownership transition and thereby (1) offers continued water service by a responsible and experienced new owner, and (2) greatly reduces the chance of the water system being abandoned.