2. Operation and Management of the System by Buyer
2.1. Description of the System
Title to the assets comprising the system is currently in the name of Tahoe Park Water Co., doing business as Lake Forest Water Co. (LFWC).8 Dewante and his wife, Ann P. Dewante, each own 50 percent of the company's stock. LFWC is a Class D water utility, and has been regulated by the Commission under the name, "Lake Forest Water Company" since its first rate increase was approved in 1950.9
Resolution (Res.) No. W-4625, which authorized the most recent general rate increase for the system in December 2006, states that LFWC serves approximately 112 customers consisting of 111 flat rate customers and one metered customer.10 Its service area is in Lake Forest, an area on the shore of Lake Tahoe adjacent to State Highway 28, approximately two miles northeast of the community of Tahoe City.
The existing distribution system has been in place for nearly a century, and much of it is more than 75 years old. Many water mains are located in the backyards of properties, rather than in streets, a design that restricts fire suppression because it limits access to the pipes. Small diameter (two- and three-inch) mains in some parts of the system cause high loss of pressure during periods of peak demand. Comments received from customers at the PPH and sent to the Commission in writing indicate that there are significant areas of substandard or leaky pipes, and other conditions that urgently require repair or renewal. Buyer does not dispute this contention. Replacement and modernization efforts have been limited because the system's small size and revenue level.
For more than 50 years, the primary water source for the system was Aspen Intake, a surface water intake located on Lake Tahoe at the foot of Aspen Street. The sole treatment of the lake water was the addition of chlorine. The United States Environmental Protection Agency adopted the Surface Water Treatment Rule (SWTR), imposing new nationwide filtration requirements on water supplies using surface water, before the system changed ownership in 1996. This rule rendered Aspen Intake noncompliant as a water source, necessitating efforts to bring the source of supply into compliance. DPH also issued a Compliance Order directing LFWC to comply with the SWTR or find a new water source, and the 1996 purchase agreement included language referring to the need to drill a new well or find another water supply.
The distribution system is also inadequate to provide adequate fire suppression capability because of its pressure limitations and pipe size, and because of the number and spacing of fire hydrants. The entire system has only three hydrants, although the proximity of four TCPUD hydrants just outside the LFWC service area mitigates the lack of LFWC facilities to some extent. The recent occurrence of catastrophic fires in the Lake Tahoe area, and the effect of droughts on the nearby forests, has increased the level of concern that the fire suppression capability of LFWC requires immediate improvement.
2.2. Post-sale Improvement Efforts
The Facilities Plan includes a chronology of significant events relating to Buyer's efforts to improve the system's supply after Buyer acquired it in 1996. We quote from the plan at length, because it provides the most detailed and reliable record we have about the efforts Buyer has made to date to improve the system:
Beginning in 1998, and ending in 2002, LFWC planned, designed, secured permits, funded, and completed the construction of a well test hole, called the Aspen well. Alternative water supplies including filtration of lake water, filtration avoidance (alternative treatment, such as ozone), and purchased water from a neighboring water utility, the Tahoe City Public Utility District (TCPUD), were considered and evaluated and results presented in an engineering report. It was concluded in the engineering report that a well would be the least costly alternative. Pumping tests of the Aspen well proved the quantity of water to be adequate; however, water quality tests found high levels of arsenic in Aspen well water. Although arsenic removal is feasible, the high cost of such treatment discouraged further development of Aspen well.
In 2002, LFWC was still dependent on lake water as its primary source. In that year, the lake level had dropped to a point that made it very difficult to maintain continuous pumping from the lake, so LFWC requested an "emergency" water supply connection to TCPUD to supplement the Aspen Intake. The TCPUD approved a 2-inch "temporary" connection and LFWC began purchasing water from TCPUD on an as needed basis in November 2002.
In 2003, LFWC installed a submersible intake pump and extended the intake line approximately 100 ft. farther into the lake at the Aspen Intake. This improvement increased the reliability of the Aspen Intake.
After further engineering study and discussion with [DPH] officials, LFWC adopted a plan presented in the report Evaluation Report for Meeting the Surface Water Treatment Rule, dated October 2004. This plan recommended a permanent connection to TCPUD as a primary water supply for LFWC. The next best alternative would be a new well on Old Mill Road with treatment for removal of arsenic.
Recognizing the high cost of either plan, in November 2004 LFWC submitted two pre-applications for Proposition 50 Grant funding - one for a TCPUD connection, named the "Hillcrest Intertie," and the other for a well with arsenic removal named "Old Mill Well Arsenic Filtration."
In April 2005, LFWC received a decision from the Sewer and Water Committee of TCPUD that its request for a permanent supply connection to TCPUD system was denied. At that time, LFWC was compelled to consider the next best plan identified in the 2004 Evaluation Report, which was presented in Amendment 1 to the Evaluation Report for Meeting the Surface Water Treatment Rule, dated June 2005, recommending a new well on Old Mill Road with treatment for removal of arsenic. The capital cost was estimated at $515,000.
In August 2005, [DPH] informed LFWC that both Hillcrest Intertie and the Old Mill Well Arsenic Filtration projects were eligible for Prop. 50 Grant funding. The combined funding requested for the projects had been $420,000, but [DPH] advised that this was not a limiting amount for a project that would solve the problem. The projects were ranked Nos. 7 and 8 on the statewide list of projects. This was very good ranking, as during 2005, the first year of Prop. 50 Grants, projects through No. 6 ranking were invited to submit full grant applications.
In December 2005, LFWC applied to the [Commission] for a 178.6% increase in water rates for recovery of capital invested over the previous 10 years and for higher O&M expenses that had not been adjusted in 18 years.
In June 2006, with urging from [DPH], the alternative for a connection to TCPUD was re-examined. It was felt at the time that the TCPUD denial had been based on incomplete engineering data. The recommendation of this study as presented in Amendment 2 to the Evaluation Report for Meeting the Surface Water Treatment Rule was again a permanent connection to TCPUD.
The recommendation in Amendment 2, however, relied on a favorable decision from TCPUD for a permanent connection, and for that decision the TCPUD first had to conduct a hydraulic analysis. [It took] a year to complete the analysis.
In August 2006, LFWC retained the services of a geotechnical engineer to study the area surrounding LFWC service area for a possible well site that would be free of arsenic. Field investigation and tests of existing wells indicated that an area near Lake Forest Road and Hwy. 28 appeared to be arsenic-free. Preliminary inquiries to adjacent property owners were encouraging that a well site could be acquired.
In December 2006, LFWC received approval from the [Commission] for a 160.7% increase in water rates.
In January 2007, LFWC submitted an application to [DPH] for a Planning Study to evaluate alternative water supply sources for LFWC. The study would be funded by a State Revolving Fund (SRF) loan of $38,556.
In March 2007, LFWC submitted Amendment 3 to the Evaluation Report for Meeting the Surface Water Treatment Rule. In Amendment 3, an interim plan was proposed to utilize the emergency TCPUD connection as a primary supply, implement water rationing to reduce demand, use the existing Old Mill Well and Aspen Intake to supplement supply if demand could not be met with the TCPUD supply alone, and complete the SRF Planning Study to determine the best water source once TCPUD completed their hydraulic study and finally decided whether or not it would provide a permanent supply to LFWC.
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In June 2007, after TCPUD completed its hydraulic study that concluded it could probably "live with" a permanent connection to LFWC providing certain modifications were made, TCPUD offered only a temporary supply connection (of greater capacity than the existing emergency connection). LFWC later confirmed that although TCPUD had completed the modifications to their distribution system that the hydraulic analysis had identified were necessary to serve LFWC with a permanent supply, they refused to offer a permanent supply connection.
[A] temporary connection would not meet the [DPH] requirement for a compliant water supply.
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In 2007, the two LFWC Prop. 50 Grant projects were ranked Nos. 6 and 7. In a meeting with [DPH] officials, LFWC was assured that their approval of a grant-funded project would ultimately be based on the most cost-effective project that would solve the problem, which didn't have to be either of the two projects proposed in the pre-applications. Specifically, if the best plan were a new well that needed no arsenic removal but was farther from the distribution system and therefore required a pipeline to connect to the system, the well and the pipeline would be grant-eligible.
In August 2007, [DPH] invited LFWC to submit full Prop. 50 Grant applications for the two projects pre-applied for in 2004, and confirmed that they could be consolidated into one project. In November 2007, LFWC submitted a Prop. 50 Grant application for a project comprised of a new well to be located on a site free of arsenic, and a conveyance pipeline from the well through the Lake Forest community (that would also serve as a distribution main) to a connection at the existing storage tank, for a total grant request of $925,000.
As noted above, receipt of the Proposition 50 funds from DPH is now assured, so funding for improvements to supply (and, by extension, water quality) is available. Until Res. No. W-4606 was issued on June 29, 2006, authorizing LFWC's current rates on an interim basis, and Res. No. W-4625 was issued on December 14, 2006, authorizing the first general rate increase since May 29, 1988, LFWC was operating at a loss. These resolutions authorized LFWC to increase its revenues for test year 2006 by $88,115, or 160.7 percent, to enable it to meet its operating expenses.
2.3. Buyer's Proposed Improvement Plan
LFWC's improvement plan proposes specific improvements to both the water supply system and the water distribution system, utilizing revenue sources that are now available for these purposes.
The alternative that LFWC has selected for obtaining new water supply is the plan it proposed in its 2007 Proposition 50 grant application. This plan requires the development of a new well in an area adjacent to the LFWC service area that has been indicated by testing to be free of arsenic. In addition to the well, the project would include a six-inch or eight-inch transmission line (depending upon the finished well capacity) about 1,600 feet long to convey water from the well along the westerly end of Lake Forest Road to the service area boundary at the end of Hillcrest Avenue. Another line, consisting of about 2,150 feet of six-inch, eight-inch, and ten-inch pipes, would convey water to a connection to the existing eight-inch line installed in 1998 on Aspen Street. This line would be located along Hillcrest Avenue from the well transmission line east to Bristlecone Avenue, then south along Bristlecone Avenue to Lake Forest Road, and east along Lake Forest Road to Aspen Street. Along this line approximately 25 double service lines would be installed, as well as five hydrants. To provide fireflow capacity from the existing storage tank, a 2,000-foot ten-inch transmission line would be constructed from Aspen Street to the tank, replacing an existing four-inch line. The estimated cost of the water supply project is $970,000, of which $925,000 is expected to be eligible for Proposition 50 grant funding.
LFWC has developed three alternative proposed improvement plans for replacing the distribution system, and these are each described in considerable detail in the Facilities Plan. The first alternative is to replace the system completely, whereas the other two options respectively involve partial replacements of a greater or lesser extent. The Facilities Plan proposal including provision for public meetings and an advisory vote before any alternative is selected.
LFWC expects the funding for any of these plans to be accomplished by private borrowing, but a zero-interest State Revolving Fund loan might be available through the auspices of DPH. Although it is difficult to gauge the willingness of lenders to provide a loan for this project in the current economic environment, LFWC stated that Plumas Bank had shown interest at the time the report was prepared.
The supply system project, which would be 95 percent funded by a Proposition 50 grant, would require an estimated $7.20 annual customer charge for recovery of administrative costs. LFWC estimates that the three alternative distribution system projects would respectively require a monthly surcharge of $43.35, $27.05, or $13.35 per equivalent single family residence.11
LFWC states that the water supply project would be completed in three years, from 2009 to 2011. The first two alternative plans for the distribution service project would be completed in 2011, with construction starting in 2009 for the complete replacement option, and in 2010 for the alternative involving the greater amount of partial completion. The third, least extensive alternative would be accomplished entirely in 2010. These completion times take into account the fact that the Tahoe Regional Planning Agency generally restricts a "construction year" to the period from May 15 to October 15.
2.4. Response to Buyer's Improvement Plan
TCPUD filed comments in response to the joint ruling, including a detailed description of its own procedure for acquiring and improving the system. This document reflects TCPUD's serious interest in the possibility of annexing the Lake Forest Water Company system to its own, and demonstrates that TCPUD is undertaking active measures toward that end. Its plans appear to be thorough and well formulated. We are persuaded that TCPUD has the will and the ability to accomplish that goal, but its comments do not reflect that it has any right to do so within the parameters of this proceeding.
PWA filed comments in response to the Facilities Plan. PWA is generally critical of Buyer's proposed plans, partly because it is skeptical on the basis of past experience that the plans will be carried out, and expresses a preference for annexing the system to that of TCPUD. PWA asserts that Buyer's plan does not provide for adequate fire storage or enough properly spaced hydrants; is speculative because it assumes that the contemplated groundwater source will be of sufficient capacity and quality, that required rights-of-entry, easements and use permits can be obtained, and that financing will be available; and fails to include right-of-way acquisition costs in its project estimates. PWA also reiterates that Buyer's past performance has resulted in customer dissatisfaction for various reasons.
8 Tahoe Park Water Co. is a California corporation in good standing.
9 Lake Forest Water Company started providing service in 1911 "and does not therefore require a certificate to operate as a public utility ...." (Decision No. 42351, February 1, 1950 at 2.)
10 References in the record to the number of customers vary from 112 to 120, but we use figures from Res. No. W-4625, as they were relied upon in setting LFWC's current rates. For purposes of this decision, any inconsistency between these figures and those found elsewhere is immaterial, and should be disregarded.
11 An equivalent single-family residence, or SFR, is computed by dividing the water company's total annual revenue from water charges by the annual water charge for a single-family service. Because there are multiple families and commercial services in Lake Forest, there are approximately 180 SFR, based upon an estimated 118 customers.
