5. Comments on Proposed Decision

The proposed decision of the Administrative Law Judge in this matter was mailed to the parties in accordance with Section 311 of the Public Utilities Code and Rule 14.3 of the Commission's Rule of Practice and Procedure. Comments were filed by DRA and Cal Am on March 3, 2008, and reply comments were filed by DRA on March 10, 2008.

DRA's comments support the proposed decision and identify two typographical errors.

Cal Am`s comments focus on the ROE. Cal Am feels the 10.15% ROE is too low and the lack of a leverage adjustment fails to acknowledge its increased financial risk.

The development of an ROE requires that many factors be taken into consideration. The financial model is only one of those factors. There is no "correct" financial model. Rather, there are many models whose results are different based on the proxies used. Our analysis of the parties' positions and development of the ROE took all factors into consideration.

Our discussion of the ROE acknowledges the increased risk in Cal Am's high debt to equity ratio. However, our discussion also notes that the debt to equity ratio is wholly within Cal Am's control since its parent company issues Cal Am's debt securities. Cal Am fails to demonstrate that it has been unable to attract investors due to its higher debt to equity ratio.

We deleted a section of the ROE discussion dealing with over-earning by Cal Am, but it does not change our adopted ROE. We made other minor changes to the proposed decision based on DRA's comments.