IX. Comments on Proposed Decision

On July 18, 2001, the principal hearing officer's proposed decision was filed with the Commission and served on the parties in accordance with Section 311(d) of the Public Utilities Code and Rule 77.1 of the Commission's Rules of Practice and Procedure. Comments were filed by Applicant and ORA. For the most part, the comments repeated previous arguments that have already been considered, and need not be further addressed.

Applicant says that D.00-10-027 authorized a rate increase for the South Bay Division of the Domiguez Water Company, which was merged into the combined district in the merger decision, after the merger decision was issued. Therefore, Applicant says the Commission has "previously interpreted the merger decision as allowing rate applications for Palos Verdes and Dominguez South Bay if such applications are appropriate under the Commission's Rate Case Processing Plan." Applicant says that the proposed decision's denial of the rate increase for the Palos Verdes District is inconsistent with D.00-10-027, and that the proposed rate increase for the Palos Verdes District should be approved. Applicant is incorrect. The application that led to D.00-10-027 was not precluded by the merger decision because it was filed approximately a year before the merger decision was issued. However, A.00-09-009 for the Palos Verdes District was filed after the merger decision, and is, therefore, precluded as discussed previously.

ORA and Applicant ask that the decision be revised to provide that the authorized increases for 2002, 2003, and 2004 go into effect subject to the pro forma test referred to, but not specified, in the stipulation. The request is unopposed. Accordingly, we have revised the ordering paragraph to specify the pro forma test.

Findings of Fact

1. Applicant has entered into a stipulation with ORA that resolves every issue between Applicant and ORA in this proceeding except the Special Facilities Fee for the Bakersfield District.

2. The stipulation is unopposed.

3. The parties are fairly reflective of the affected interests in this proceeding.

4. The stipulation provides for an outcome that is less than Applicant's request and greater than ORA's recommendation.

5. No term of the stipulation contravenes statutory provisions or prior Commission decisions except the rate increase requests for the Palos Verdes District.

6. The stipulation conveys sufficient information to permit the Commission to discharge its future regulatory obligations with respect to the parties and their interests.

7. D.00-05-047 (the merger decision) authorized the combination of the former South Bay, Hermosa-Redondo and Palos Verdes Districts into a single combined district.

8. The merger decision created a new regulatory framework for the combined district.

9. The merger decision allowed the filing of general rate cases for the combined district in 2001 and 2004 for rates effective beginning in 2002 and 2005, respectively.

10. The merger decision provided for the assessment of the synergies resulting from the combination of the former South Bay, Hermosa-Redondo and Palos Verdes Districts in the combined general rate increase applications to be filed in 2001 and 2004.

11. The merger decision did not authorize the filing in 2000 of a separate general rate increase application for the former Palos Verdes District for 2001, 2002, 2003 or 2004.

12. Applicant's general rate increase application for the former Palos Verdes District for 2001, 2002, 2003 or 2004 does not address the merger synergies resulting from the combination of the former South Bay, Hermosa-Redondo and Palos Verdes Districts.

13. The motion by Applicant and ORA requesting adoption of the stipulation states that in the event the stipulation is modified for the former Palos Verdes District, the stipulation should be adopted without modification for the other districts.

Conclusions of Law

1. The stipulation is an uncontested stipulation as defined in Rule 51(f).

2. The stipulation is reasonable in light of the whole record, consistent with law, and in the public interest except for the rate increase for the former Palos Verdes District.

3. The stipulation should be adopted except as regards the rate increase for the former Palos Verdes District.

4. Applicant's general rate increase application for the former Palos Verdes District for 2001, 2002, 2003 or 2004 is precluded by the merger decision, and should be denied.

5. This decision should be made effective immediately to enable Applicant to implement the stipulation without delay.

INTERIM ORDER

IT IS ORDERED that:

1. The joint motion for adoption of the stipulation (stipulation) between California Water Service Company (Applicant) and the Water Branch of the Commission's Office of Ratepayer Advocates is granted with the following exception. The stipulation is included with this decision as Attachment A.

2. Applicant's request for rate increases, and all matters related to the rate increases, for the Palos Verdes District is denied.

3. Except as specifically provided for in the stipulation and described herein, the applications are denied.

4. Applicant is authorized to file in accordance with General Order 96-A, and to make effective on not less than five days' notice, tariffs containing the test year 2001 increases for its Bakersfield and South San Francisco Districts as provided in the stipulation. The revised rates shall apply to service rendered on and after the tariffs' effective date.

5. Advice letters for authorized rate increases for 2002, 2003, and 2004 may be filed in accordance with General Order 96-A no earlier than November 1st of the preceding year. The filing shall include appropriate work papers. The increase shall be the amount authorized herein, or a proportionate lesser increase if Applicant's rate of return on rate base, adjusted to reflect rates then in effect, normal ratemaking adjustments, and the adopted change to this pro forma test, for the 12 months ending September 30th of the preceding year, exceeds the lower of (a) the rate of return on rate base found reasonable by the Commission for Applicant for the preceding year in the then most recent rate decision, or (b) the return on ratebase authorized herein for the preceding year. The advice letters shall be reviewed by the Commission's Water Division (WD) for conformity with this decision, and shall go into effect upon WD's determination of compliance, not earlier than January 1st of the year for which the increase is authorized, or 30 days after filing, whichever is later. The tariffs shall be applicable to service rendered on or after the effective date. WD shall inform the Commission if it finds the proposed increase does not comply with this decision or other Commission requirements.

6. Applicant is authorized to file advice letters seeking to recover in rates the reasonable costs of the capital additions specified in the stipulation for the Bakersfield and South San Francisco Districts.

7. Applications (A.) 00-09-009, A.00-09-011 and A.00-09-012 are closed.

8. A.00-09-010 remains open to consider the Special Facilities Fee and the amendment filed on January 5, 2001.

9. This order is effective today.

This order is effective today.

Dated August 23, 2001, at San Francisco, California.

LORETTA M. LYNCH

President

HENRY M. DUQUE

RICHARD A. BILAS

CARL W. WOOD

GEOFFREY F. BROWN

Commissioners

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

In the Matter of the Application of California Water Service Company (U 60 W), a Corporation, for an Order Authorizing it to Increase Rates Charged for Water Service in the Palos Verdes District and Establishing the "Base Year 2000" Revenue Requirements.

Application 00-09-009

And Related Matters.

Application 00-09-010

Application 00-09-011

Application 00-09-012

STIPULATION

1.00 GENERAL

1.01 The parties to this Stipulation before the California Public Utilities Commission ("Commission") are California Water Service Company ("CWS") and the Water Branch of the Office of Ratepayer Advocates ("ORA") -- collectively, "the Parties". The Parties, desiring to avoid the expense, inconvenience, and uncertainty attendant to litigation of the matters in dispute between them have agreed on this Stipulation which they now submit for approval.

1.02 In addition, since this Stipulation represents a compromise by them, the Parties have entered into each stipulation on the basis that its approval by the Commission not be construed as an admission or concession by any Party regarding any fact or matter or law in dispute in this proceeding. Furthermore, the Parties intend that the approval of this Stipulation by the Commission not be construed as a precedent or statement of policy of any kind except as it relates to the current and future proceedings addressed in the Stipulation.

1.03 The Parties agree that no signatory to this Stipulation nor any member of ORA assumes any personal liability as a result of their agreement. The Parties agree that no legal action may be brought by any Party in any state or federal court, or any other forum, against any individual signatory representing the interests of ORA, attorneys representing ORA, or the ORA itself related to this Stipulation. All rights and remedies of the Parities are limited to those available before the Commission.

1.04 No Party to this Stipulation will provide, either privately or publicly, before this Commission any rationale or strategy for support of any compromise reached herein beyond that stated herein unless otherwise agreed to by the Parties.

1.05 All issues between the Parties have been resolved. The Stipulation between the Parties would result in an increase in gross revenues for the Bakersfield District of $2,153,500, or 8.3%, in 2001; $1,405,600, or 5.0%, in 2002; $1,408,500, or 4.8%, in 2003, and $1,430,500, or 4.6%, in 2004; for the Palos Verdes District of $351,100, or 1.6%, in 2001; $258,900, or 1.2%, in 2002; $255,600, or 1.1%, in 2003, and $264,600, or 1.1%, in 2004; for the South San Francisco District of $736,900, or 8.7 %, in 2001; $320,000, or 3.5%, in 2002; $287,500, or 3.0%, in 2003, and $293,400, or 3.0%, in 2004. As a result,

· The average bill for a metered residential customer in the Bakersfield District using 27 Ccf per month would increase from $25.87 to $28.18, or 8.9% and for a flat rate customer from $26.49 to $28.65, or 8.2% in 2001;

· The average bill for a residential customer in the Palos Verdes District using 26 Ccf per month would increase from $64.62 to $65.49, or 0.9% in 2001; and

· The average bill for a residential customer in the South San Francisco District using 9 Ccf per month would increase from $21.95 to $24.41, or 11.2% in 2001.

1.06 On January 9, 2001, ORA issued reports on the Results of Operations for CWS's Bakersfield, Hermosa-Redondo, Palos Verdes, and South San Francisco Districts. Also, on that date, ORA issued reports on CWS's general office, cost of capital, and proposed treatment plant in Bakersfield. These reports contain substantive recommendations with respect to CWS's request for a general increase in rates for the Bakersfield, Palos Verdes, and South San Francisco Districts and "Base Cases" for CWS's general office and the Palos Verdes and Hermosa-Redondo Districts. In accordance with Decision (D.) 00-05-047, CWS filed Base Cases to establish benchmarks for measuring synergies resulting from its merger with Dominguez Water Company.

1.07 The Parties convened at the Commission's offices in San Francisco on January 16 and 17, 2001, to discuss Stipulation. Representatives of ORA and CWS, the only parties of record at the time, met and discussed the merits of their respective positions. While general agreement was reached on most issues at these meetings, numerous discussions concerning disputed matters, final agreements, tables, and tariff schedules necessitated six additional weeks to complete. As in the case of any large company, the operating complexities and extensive financial data involved in negotiations often require additional data and clarification. Accordingly, in discussing ORA's reports and recommendations, the Parties exchanged updated and additional information during and after January 16 and 17.

1.08 Agreement was reached on all disputed matters, including the following principal items:

· Postal rates;

· Updated inflation factors provided by ORA's Monopoly Regulation Branch;

· Overheads;

· Invoices and bids for budgetary items;

· Recently recorded sales and expenditures;

· Descriptions for new and existing positions;

· Corrections to ORA's and CWS's calculations; and

· The timing and cost for the Bakersfield District's treatment plant, treatment at wells in the Bakersfield District, and reliability and operational improvements in the Palos Verdes District.

1.09 Since these items have a significant impact on ORA's and CWS's original estimates, the Parties agree a Stipulation reflecting these facts would avoid the time, expense, inconvenience, and uncertainty attendant to litigation. Accordingly, the Parties fashioned a Stipulation that they believe produces an overall result that is fair and reasonable in light of the entire record.

1.10 Below is an explanation of each element of the Stipulation. Attached are tariffs reflecting the Stipulation and tables that show the original position of the Parties and the stipulated position.

2.00 COST OF CAPITAL

In its Application, CWS requested a return on common equity (ROE) of 10.75%, while ORA in its Report on Cost of Capital recommends 9.39%. After discussion concerning comparable returns authorized for various water companies (including CWS) and current interest rates, the Parties agreed to a ROE of 9.8%. Additionally, CWS agrees to ORA's weighted cost of debt that reflects updated financial data. Attached as Appendix I is a table that shows the stipulated capital structure and overall returns for Test Years 2001 and 2002 and Attrition Years 2003 and 2004.

3.00 CUSTOMERS, SALES, AND REVENUE

3.01 CWS accepts the adjustments to its customers, sales, and revenue as shown in ORA's reports, except for Industrial Sales and Revenue in the Bakersfield District and Other Sales and Revenue in the Palos Verdes and South San Francisco Districts. CWS estimated Other Sales using an average of 1997-1999, while ORA's estimates were developed using an average of 1998 and 1999. As a result of recent data, which shows a decline, the Parties agree that an average of their respective estimates for 2001 and 2002 should be used for Other Sales and that CWS's estimate should be used for Industrial Sales and Revenue in the Bakersfield District.

3.02 The Parties also agree that ORA's Operating Revenue in the Hermosa-Redondo District should be corrected to include $103,500 of revenue from the sale of recycled water. In addition to providing potable water service in the Hermosa-Redondo District, CWS serves 21 customers recycled water purchased from the West Basin Municipal Water District. The revenues from this source were inadvertently excluded from ORA's original estimate.

4.00 EXPENSES FOR THE DISTRICTS

4.01 Except for the items listed below, CWS agrees with the expenses for the Base Cases and the Test Years as shown in ORA's Reports on the Results of Operations for each district.

4.02 The Parties agree to use the factors for inflation provided by ORA's Monopoly Regulation Branch. ORA's memorandum containing these factors is attached.

4.03 Consistent with the treatment afforded in D.99-05-018, the Parties agree that 60% of the expenditures for painting tanks should be capitalized and 40% expensed.

4.04 Recently, the Commission authorized CWS's providers of electric service a temporary surcharge of 1 cent per kilowatt-hour. Since it would be effective for only 90 days and additional increases are anticipated, the Parties have not reflected this surcharge in the expenses shown in the attached tables. The Parties agree that any increase due to purchased power should be filed in these districts, if appropriate, after greater certainty is achieved with respect to future electric rates.

4.05 The Parties agree that CWS's postage expenses should be revised to reflect the increase recently implemented by the United States Postal Service.

4.06 The Parties agree that ORA's estimated costs of producing water should be adjusted to reflect stipulated sales discussed in Section 3.01. Additionally, ORA agrees that these expenses should be revised to reflect CWS's operations in the Bakersfield and South San Francisco Districts. In the Bakersfield District, the Kern County Water Agency treats surplus water as pumped water and, in the South San Francisco District, surplus purchased water is the incremental source of supply.

4.07 ORA based its recommendation on the invoices for purchased chemicals, but now agrees that its estimates of purchased chemicals for the Bakersfield District should be revised to include consideration of CWS's Olcese Treatment Plant.

4.08 ORA's estimate of rent for the Hermosa-Redondo District was developed using an average of recorded expenses. Recorded expenses do not, however, fully reflect CWS's current rental agreement for the Customer Service Center. After reviewing the agreement, ORA agrees that CWS's estimate of rent should be used to reflect the amounts shown in that agreement.

4.09 ORA's estimate of rent in the South San Francisco District was developed using an average of recorded expenses. The recorded amounts are based on a percentage of revenues generated from a water main in the City of Colma. Since revenues have increased recently, CWS's rent has increased. ORA therefore agrees that CWS's estimates more closely approximate recent increases and should be used for setting rates.

4.10 As a result of specific information concerning growth in customers and the Bakersfield District's proposed water treatment plant, ORA agrees that its estimates of payroll should reflect the following additional employees:

4.11 ORA agrees that its estimates of payroll in the Hermosa-Redondo District should be increased by $11,500 to reflect the annualized amount for personnel added in 1999.

5.00 ADDITIONS TO PLANT FOR THE DISTRICTS

5.01 Except for the items listed below, CWS agrees with the additions for the Base Cases and the Test Years as shown in ORA's Reports on the Results of Operations.

5.02 The Bakersfield District's additions associated with the proposed water treatment plant and wellhead treatment are addressed below in Sections 7.00 and 9.00.

5.03 As discussed in Section 4.03 above, ORA and CWS agree that capitalized expenditures for painting tanks should be reduced by the following amounts:

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