II. Background and Procedural History

San Gabriel is a Class A water utility providing public utility water service to approximately 88,000 customers in Los Angeles and San Bernardino Counties. The company's Fontana Water Company Division (Fontana Division) serves approximately 43,000 customers in a service area that includes most of the City of Fontana, portions of the cities of Rancho Cucamonga and Rialto, and adjacent unincorporated areas of western San Bernardino County. The region is characterized by population growth and significant water quality problems.

San Gabriel's last GRC application for the Fontana Division, A.02-11-044, resulted in D.04-07-034, which increased rates effective July 17, 2004. Those rates were set, subject to refund, pending further review and consideration of the appropriate ratemaking treatment of the proceeds of certain sales and involuntary conversions of Fontana Division properties that was considered but not finally resolved in the course of that proceeding. D.04-07-034 directed the Water Division to conduct an audit of those proceeds and directed San Gabriel to make a further showing with respect to them in its next GRC. In August 2005, the Commission responded to applications for rehearing of D.04-07-034 by issuing D.05-08-041, granting rehearing of D.04-07-034 for certain issues, and specifying that currently authorized rates for the Fontana Division are subject to refund. An OII was issued March 2, 2006. The order in D.04-07-034 was affirmed in D.06-06-036.

San Gabriel tendered on June 6, 2005, its proposed application for a general rate increase for TYs 2006-2007 and escalation years 2007-2008 and 2008-2009. After review by the Division of Ratepayers Advocates (DRA), San Gabriel corrected deficiencies and with DRA's approval filed its GRC application (A.05-08-021) on August 5, 2005, seeking an increase in rates of $5.7 million (13.1%) for TY 2006-2007, $3.1 million (6.3%) for escalation year 2007-2008, and $2.2 million (4.2%) for escalation year 2008-2009. Protests were filed by the City of Fontana (City), the Fontana Unified School District (District), and DRA. On September 19, 2005, Water Division issued its audit report on the results of its examination of San Gabriel's property sales and condemnations.

Public participation hearings were held on November 17, 2005. Beginning on January 9, 2006, seven days of evidentiary hearings were held. The record was submitted on April 14, 2006, after receipt of late-filed exhibits and opening and reply briefs.