ALJ/CMW/jt2 Date of Issuance 12/21/2007

Decision 07-12-055 December 20, 2007

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

In the Matter of the Application of California Water Service Company (U60W), a corporation, for an order authorizing it to increase rates charged for water service in the Bakersfield district by $11,220,000 or 22.81% in fiscal year 2007-2008, by $1,979,900 or 3.30% in fiscal year 2008-2009, and $1,979,900 or 3.17% in fiscal year 2009-2010.	Application 06-07-017 (Filed July 26, 2006)
And Related Matters.	Application 06-07-018 Application 06-07-019 Application 06-07-020 Application 06-07-021 Application 06-07-022 Application 06-07-023 Application 06-07-024 (Filed July 26, 2006)

(See Attachment 4 for List of Appearances)

OPINION RESOLVING GENERAL RATE CASES

Table of Contents

Title Page

OPINION RESOLVING GENERAL RATE CASES 11

1. Summary 22

2. Background 55

3. Water Quality 77

4. Partial Settlement Agreement 99

4.1. Standard of Review 99

4.2. Terms of the Settlement 1010

4.2.1. Rate Base Items 1111

4.2.1.1. Status of Cal Water's Capital Asset Management Planning 1111

4.2.1.2. Status of Advanced Metering Deployment 1414

4.2.1.3. Bakersfield District 1818

4.2.1.4. Dixon District 1818

4.2.1.5. King City District 1818

4.2.1.6. Oroville District 1818

4.2.1.7. Selma Plant 1919

4.2.1.8. South San Francisco Plant 1919

4.2.1.9. Westlake Plant 1919

4.2.1.10. Willow Plant 2020

4.2.1.11. Summary of Rate Base Section 2020

4.2.2. Sales and Services 2020

4.2.3. Expense Items 2020

4.2.4. Special Facilities Fees 2121

4.2.5. Rate of Return 2222

4.3. Action on the Proposed Settlement 2424

5. Issues Not Included in the Settlement Agreement 2424

5.1. Reclaimed Water Rates for Westlake District 2424

5.1.1. Discussion 2626

5.1.2. Conclusion 2929

5.2. Vehicle Replacement Policy 2929

5.3. Conservation Expenses 3131

5.4. Working Capital 3535

5.5. Extended Service Protection (ESP) Service 3939

5.5.1. Excess Capacity Rules 4141

5.5.1.1. Positions of the Parties 4444

5.5.1.2. May an Affiliate Offer a Service under the Excess Capacity Rules? 4545

5.5.1.3. Is the ESP Service Utilizing Cal Water's Excess Capacity? 4848

5.5.1.4. Is the ESP Service Exempt from Advice Letter
Filing Requirements Pursuant to Appendix A? 5050

5.5.1.5. May Cal Water Offer the ESP Service under the Advice Letter Filing Requirements of the Excess Capacity Rules? 5252

5.5.1.6. When May a Utility Offer an Unregulated Service Under Our Excess Capacity Rules? 5555

5.5.2. Cal Water's Affiliate Transaction Rules 5757

5.5.2.1. Positions of the Parties 5858

5.5.2.2. Discussion 5959

5.5.3. Public Utilities Code Section 453(a) 6060

5.5.3.1. Positions of the Parties 6161

5.5.3.2. Discussion 6161

5.5.4. Next Steps for the ESP Service 6868

6. True-Up of Interim Rates Adopted in D.07-06-028 7171

7. Comments on Proposed Decision 7272

8. Assignment of Proceeding 7272

Findings of Fact 7272

Conclusions of Law 7575

ORDER 7878

Attachment 1 - Settlement

Attachment 2 - ESP Service Advertisement

Attachment 3 - Ratesetting Tables

Attachment 4 - List of Appearances

OPINION RESOLVING GENERAL RATE CASES

1. Summary

Pursuant to Article XII of the California constitution, legislative statutes, and our agency's own rules and regulations, the California Public Utilities Commission (Commission) regulates the rates, operations, and terms and conditions of service of California Water Service Company (Cal Water), an investor-owned Class A water utility serving customers in 24 districts in California.¹

In this decision, we resolve the general rate case (GRC) applications for eight of Cal Water's districts for a three-year period beginning July 1, 2007.² The revenue requirement we adopt will be implemented under each district's existing rate design. We are separately addressing a conservation rate design for Cal Water in our conservation proceeding, Investigation (I.) 07-01-022.

For the coming GRC period, this decision adopts the following rate increases:

System Revenue Requirement Percentage Increases For First Year

For the 2008/2009 escalation year Cal Water is also authorized to file a request for a step rate increase and for the 2009/2010 year is authorized to request an attrition adjustment. The methodology for these adjustments is set forth in D.04-06-018 and discussed in the Division of Ratepayer Advocates' (DRA) testimony, Exhibits 100-107.

In addition to the rate increases listed above, we also authorize Cal Water a number of additional new capital projects that can be brought into rates over the coming GRC period through advice letter (AL) filings.⁴ The additional rate increases that could be requested under the AL filings, if submitted and approved, are substantial for each district except Dixon. Table 1 to the Settlement at Attachment 1 lists these projects and the cost caps we adopt.

In arriving at today's decision, we adopt the partial settlement filed by Cal Water and DRA on February 26, 2007. In our consideration of the settlement, we direct that further refinement be done on capital asset management planning, deployment of advanced metering, and customer notice of the dollar and percentage amount of AL authorizations we have granted and the estimated year each AL would be effective.

In addition to adopting the settlement, we also resolve all disputed issues. These issues include the mechanism and funding levels for conservation programs, the allowable level of working capital, the components of a vehicle replacement policy, and a rate design issue for the Westlake district.

This decision also addresses the Extended Service Protection (ESP) service currently offered to Cal Water customers by the utility's unregulated affiliate. The Commission finds the current terms and conditions of the ESP service may violate Section 453(a) of the Public Utilities Code. We also find that the ESP service cannot be offered directly by the utility itself under the terms and conditions of the excess capacity rules adopted in D.00-07-018. We provide Cal Water guidance as to how it can properly offer the ESP service through the utility or its affiliate, and direct that it submit by application the new terms and conditions of service if it chooses to continue the ESP service. We also provide Cal Water with some guidance on an apparent discrepancy between its affiliate transaction rules and our excess capacity rules.

¹ Class A utilities are investor-owned water utilities with greater than 10,000 service connections. State statutes include the California Public Utilities Code and the California Water Code.

² Pursuant to Section 455.2, in Decision (D.) 07-06-028 we authorized an interim rate increase effective July 1, 2007. This interim rate increase is based on the rate of inflation as compared to existing rates for each district, is subject to refund, and will be adjusted upward or downward, back to July 1, 2007, based on the final rates adopted by the Commission in this decision.

³ Section 5.1 of the Cal Water/DRA settlement contains a 5.9% rate increase cap for the Selma district for the first year and provides that in the following year, Cal Water is allowed to file for the remaining increase that would allow it to earn its authorized rate of return in that year.

⁴ We find it reasonable to use the AL process for these projects because at the time of the AL filing there will be certainty about the project completion date and what the final costs will be. The timing and costs of these projects is uncertain now.