ALJ/KJB/tcg Mailed 6/22/2007

Decision 07-06-024 June 21, 2007

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

In the Matter of the Application of VALENCIA WATER COMPANY (U-342-W), a Corporation, for an Order Authorizing It to Increase Rates Charged for Water Service in Order to Realize Increased Annual Revenues of $3,470,000 in a Test Year Beginning July 2007, $864,000 in a Test Year Beginning July 2008, and to Make Further Changes and Additions to Its Tariff for Water Service.

Application 06-07-002 (Filed July 3, 2006)

(See Appendix A for List of Appearances.)

OPINION ON APPLICATION FOR GENERAL RATE INCREASE

TABLE OF CONTENTS

Title Page

OPINION ON APPLICATION FOR GENERAL RATE INCREASE 11

I. Summary 22

II. Procedural History 33

III. Joint Stipulation 55

IV. Compliance Filings 66

V. Discussion 77

A. Water Quality Improvement Program 77

B. Valencia's Capital Structure 1616

C. Return on Common Equity (ROE) 2020

D. Payroll Expense 2828

1. 2005 Salary Increases 2929

2. New Position Added in 2005 and 2006 3131

E. Outside Services Expense 3939

F. Interest Deduction 4242

G. BMP Implementation Costs 4242

H. Base Revenue Memorandum Account 4343

I. Escalation Factor Unspecified Test Year Expenses 4444

J. Stipulated Memorandum Account 4646

VI. Categorization and Need for Hearings 4646

VII. Comments on Proposed Decision 4646

A. Typographical Errors and Other Non-substantive Changes 4747

B. Base Revenue Memorandum Account 4747

C. Risk Premium Adjustment 4747

D. Objections to Discounted Cash Flow and Risk Premium
Analysis Methodology 4848

E. Comparison with Gas Utilities 5050

F. Valencia's ROE Based on Corrected Data 5050

VIII. Assignment of Proceeding 5050

Findings of Fact 5050

Conclusions of Law 5353

ORDER 5454

TABLE OF CONTENTS

(Cont'd)

LIST OF APPENDICES

Appendix A - List of Appearances

Appendix B - Summary of Earnings

Appendix C - Adopted Rate Base

Appendix D - Adopted Quantities

Appendix E - Income Taxes

Appendix F - Bill Comparisons

Appendix G - Rate Comparisons

OPINION ON APPLICATION FOR GENERAL RATE INCREASE

I. Summary

We approve a stipulation entered into between Valencia Water Company (Valencia or Applicant) and the Commission's Division of Ratepayer Advocates (DRA) which settled all but ten of the contested issues in this case.

With regard to the contested issues, we approve:

(a) Applicant's request for $1,700,000 to construct a demonstration water softening plant;

(b) rate increases to realize increased annual revenues of $2,815,000 in a test year beginning July 1, 2007; and decreased annual revenues of $620,893 in a test year beginning July 1, 2008;

(c) a capital structure consisting of 69% common equity, 3.05% preferred stock and 27.95% long-term debt;

(d) a rate of return of 10.19% on common equity for the Test Years 2007-2008 and 2008-2009;

(e) all salary increases described in the application whether previously granted or proposed;

(f) all outside service expenses described in the application whether previously incurred or anticipated;

(g) an income tax deduction for interest based on actual rather than imputed interest expense;

(h) an allowance of $103,000 for Test Year 2007-2008 to implement Best Management Practices (BMPs) 1 and 2 of the California Urban Water Conservation Council; and

(i) use of 2006 Energy Branch escalation factors for calculating Test Year expenses that were the subject of the stipulation but for which the parties did not agree on a specific amount.

Valencia is a Class A water corporation serving approximately 28,300 customers and headquartered at 24631 Avenue Rochefeller, Valencia, CA 91355.