D0704046 Reducihg Test Year Raets and Imposing a Penalty

D0704046 Reducing Test Year Rates and Imposing a Penalty Appendices A-E
D0704046 Reducing Test Year Rates and Imposing a Penalty Appendix F

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COM/JB1/jt2 Mailed 4/16/2007

Decision 07-04-046 April 12, 2007

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

In the Matter of the Application of SAN GABRIEL VALLEY WATER COMPANY (U337W) for Authority to Increase Rates Charged for Water Service in its Fontana Water Company Division by $5,662,900 or 13.1% in July 2006; $3,072,500 or 6.3% in July 2007; and by $2,196,000 or 4.2% in July 2008.

Application 05-08-021

(Filed August 5, 2005)

Order Instituting Investigation on the Commission's Own Motion into the Rates, Operations, Practices, Service, and Facilities of San Gabriel Valley Water Company (Utilities 337 W).

Investigation 06-03-001

(Filed March 2, 2006)

(See Appendix F for List of Appearances.)

DECISION REDUCING TEST YEAR RATES
AND IMPOSING A PENALTY

Table of Contents

Title Page

DECISION REDUCING TEST YEAR RATES
AND IMPOSING A PENALTY 2 2

I. Summary 2 2

II. Background and Procedural History 3 3

III. Water Sales and Operating Revenues 4 4

IV. Service Connections 4 4

V. Annual Use by Customer Class 4 4

A. Average Use per Customer 4 4

B. Sales to Cemex and California Steel Industries 5 5

C. Miscellaneous and Construction Revenues 6 6

VI. Operating and Administrative Expenses 7 7

A. Supply Costs 7 7

1. Unmetered and Unaccounted for Water 7 7

2. Recycled Water 7 7

3. Water Costs 8 8

4. Purchased Power Costs 9 9

5. Chemical Expense 9 9

B. Other Expenses 10 10

1. Escalation Factors 10 10

2. Materials and Supplies Expense 11 11

3. Transportation Expense 11 11

4. Postage 11 11

5. Outside Services Expense - Other than Legal Expenses 11 11

6. Outside Services - Legal Expenses 12 12

a) Non-Perchlorate- Related Legal Expenses 12 12

b) Perchlorate-related Legal Expenses 14 14

7. Utilities and Rents Expense 14 14

8. Labor Costs 15 15

a) Existing Positions 16 16

b) New Positions 16 16

c) Employee Step Increases 19 19

d) Escalation Factors 19 19

9. Employee Pensions and Benefits 19 19

a) Vacation, Holidays and Sick Leave 19 19

b) 401(k) Costs 19 19

c) Health and Dental Insurance 20 20

10. Injuries and Damages 20 20

a) Business Property and Umbrella Liability Insurance 20 20

b) Workers' Compensation Insurance 21 21

11. Regulatory Commission Expense 22 22

12. Uncollectibles and Franchise Fees 22 22

VII. General Office Allocation 23 23

VIII. Taxes 23 23

A. Income Taxes 23 23

B. Other Taxes 25 25

IX. Components of Rate Base 26 26

A. Current Water Supply System 26 26

1. Overview 26 26

2. Water System Master Plan 27 27

B. Plant Additions 33 33

1. Sandhill Surface Water Treatment Plant 34 34

a) History and Description of the Sandhill Project 35 35

b) Evaluation of Need and Cost Effectiveness 37 37

c) Discussion 38 38

2. Wells 41 41

3. Wellhead Treatment Facilities 43 43

4. Reservoirs 44 44

5. Other Facilities 46 46

6. Cucamonga Connection 46 46

7. New Office and Operations Center 47 47

a) Purchase of Land from Affiliate 47 47

b) Construction Expense 49 49

c) Construction Work in Progress (CWIP) 51 51

d) Materials and Supplies 52 52

C. Contributions and Advances 53 53

1. Advances for Construction 53 53

2. Contributions in Aid of Construction 53 53

D. Working Cash 54 54

E. Depreciation 56 56

X. Cost of Capital 56 56

A. Capital Structure 56 56

B. Effective Cost of Long-Term Debt 57 57

C. Cost of Equity 57 57

XI. Revenue Recovery Issues 59 59

A. Advice Letter Treatment 59 59

B. Memorandum Accounts 61 61

1. Water Quality Litigation Memorandum Account 61 61

2. Water Quality Memorandum Account 62 62

C. Net-to-Gross Multiplier 63 63

D. Calculation of Escalation Year Rates 63 63

XII. Rate Design 64 64

A. Facilities Fee 64 64

B. Monthly Service Charges 70 70

C. California Alternative Rates for Water (CARW) 70 70

XIII. Water Division Audit Report 71 71

A. Background 71 71

1. Application of Sections 789-790 73 73

2. Applicability of Gain on Sale Rulemaking D.06-05-041
in R.04-09-003 74 74

3. Sale to Private Parties 77 77

4. Condemnations and Sales Under Threat of Condemnation 77 77

5. Compensation for Service Duplication Claims 78 78

6. Proceeds from Contamination Settlement 79 79

a) Section 790 Applicability 82 82

b) Application of Section 851 83 83

B. Record Keeping 85 85

1. Sales to Private Parties 85 85

2. Condemnation Proceeds 85 85

3. Proceeds of Service Duplication 86 86

4. Proceeds from Contamination Settlement 87 87

5. Discussion 87 87

C. Accounting Classifications 88 88

1. Tracking 89 89

2. Payment of Dividends 90 90

D. Allocation of Proceeds 93 93

1. Calculation of Net Gain - Legal Fees 93 93

2. Income Taxes 95 95

3. Calculating Net Proceeds 97 97

4. Allocation of Net Gain 98 98

E. Ratemaking Effects 100 100

F. Los Angeles County Division 100 100

XIV. Customer Service 101 101

A. Water Quality 101 101

B. Billing Inquiries 101 101

XV. Penalties 102 102

XVI. Comments on Proposed Decision 109 109

XVII. Assignment of Proceeding 112 112

Findings of Fact 112 112

Conclusions of Law 127 127

ORDER 127 127

Appendix A - San Gabriel Valley Water Company, Fontana Water Company Division Summary of Earnings

Appendix B - San Gabriel Valley Water Company, Fontana Water Company Division Quantities

Appendix C - San Gabriel Valley Water Company, Fontana Water Company Division Comparison of Bills

Appendix D - San Gabriel Valley Water Company, Fontana Water Company Division Adopted Rates

Appendix E - Effect on Revenue Requirement of After-Tax Allocation of Gains on Sale of Property For The Period 7/17/04 to 7/1/06

Appendix F - Service List - A0508021

DECISION REDUCING TEST YEAR RATES
AND IMPOSING A PENALTY

I. Summary

San Gabriel Valley Water Company (San Gabriel) Fontana Division is authorized and ordered:

1. For Test Year (TY) 2006-2007, to reduce rates by $1,948,900 (Appendix A, p. 1);

2. To reduce rate base as of July 17, 2004 by $2,994,582 (Appendix E, p. 2);

3. To refund to ratepayers overcharges since July 17, 2004 in the amount of $522,200 annually (Appendix E, p. 2); and

4. To pay a fine of $60,000 for violation of Rule 1 of the Commission's Rules of Practice and Procedure.

In Decision (D.) 04-07-034, San Gabriel was authorized to increase rates subject to refund depending on our decision in its next general rate case (GRC) (Application (A.) 05-08-021) regarding the allocation between ratepayers and shareholders of the gains from sales of property, condemnation awards, contamination awards, and inverse condemnation awards. The order in D.04-07-034 was reaffirmed in our Order Instituting Investigation (OII) 06-03-001 and confirmed on rehearing in D.06-06-036. This case finds that San Gabriel misapplied Public Utilities Code Section 790 with respect to the proceeds it received related to compensation for contamination and as a consequence appropriated $1,570,421 of money which should have been allocated to ratepayers. To rectify this misappropriation we have reduced rate base by $1,570,421 relating back to D.04-07-034. Rates were recomputed from July 17, 2004 resulting in a refund of $719,100.