CALIFORNIA PUBLIC UTILITIES COMMISSION

Water Division

TRANSFER OF A WATER SYSTEM OR SEWER

SYSTEM AND SALE OF UTILITY PROPERTY UNDER

PUBLIC UTILITIES CODE SECTION 851

Standard Practice U-24-W

San Francisco, California

October 2006

A- PURPOSE AND SCOPE

1. The purpose of this document is to aid an acquiring entity in the preparation and processing of a formal application or advice letter for approval of the sale or transfer of a water or sewer system and to notify the Commission of the sale of used and useful or non-used and useful utility property (facilities and land).

2. It also discusses the procedure to follow when a small water system is purchased by a municipality, district or a mutual water company.

3. It includes the procedures that must be filed when a utility sells utility property but not the whole system.

4. It addresses the process of changing the ownership of a small water or sewer system due to probate.

B- DEFINITIONS AND ACRONYMS

5. Non-Commission regulated water systems (NCRWS)

6. Inadequately operated and maintained small water systems (IOMSWS). An IOMSWS is any water system serving less than 2,000 customers that is subject to an outstanding compliance order or citation from the California Department of Health Services (Ref. A, p. 2)

C- TRANSFER OF AN ENTIRE SYSTEM

7. Section 855 of the Public Utilities Code requires that the Commission approve any merger, acquisition of change of control of any public utility. An application is required to transfer a Commission regulated water or sewer system to another owner, including a city or county, unless the sales price is $5,000,000 or less in which case the parties can request approval by Tier 3 advice letter.¹ The filing fee for the application is $75 if the transfer is to another Commission-regulated utility. No fee is required if the sale is to a district, municipality or a mutual water company.²

8. Within 30 days after transfer of ownership due to probate from a decedent to member of the decedent's family of a water system serving less than 10,000 connections, the new owner shall file an advice letter containing:

a. A new tariff cover sheet that includes the new owner's mailing address and contact information.

b. A copy of the legal instrument that conveys ownership of the regulated entity.

9. Within five working days from the date of the signing an agreement to acquire a Non-Commission Regulated Water or Sewer System (NCRWS) or Inadequately Operated and Maintained Water or Sewer System (IOMSWS,) the utility shall file an "information only" filing with the Water Division, describing the system and the details of the proposed acquisition. (Ref. B, p. 1)

D- ADVICE LETTER SUBMITTAL AND CONTENTS

10. Within 30 days after the date of execution of the agreement to acquire a NCRWS, and, for all service area extensions, not less than 30 days prior to providing service in the territory, the utility shall file an advice letter delineating the new service area on an existing service area map or as a new service area map.^{3, 4} The map shall be of such detail that it can be determined if a single piece of property is inside or outside the service area. If the map uses a street as the border of the service area, the utility is allowed to serve property on either side of the street.⁵ The new area shall be highlighted or crosshatched. The advice letter shall contain the following information:

a. If the advice letter is for a service area extension, it should generally follow the format of the advice letter outline in Appendix A and must include the following attachments (Ref B. p. 5):

(1) A completed Water Supply Questionnaire (if a letter to the Department of Real Estate is required) or other document demonstrating water availability per Standard Practice U-18.

(2) A copy of the developer's application for service or a statement that all owners of parcels of land in the extension area have been served a copy of the advice letter.

(3) Documentation showing that the project for which the service area is being extended has sought approval from the local permitting agency and is making reasonable progress toward project completion. The showing of reasonable progress may include demonstration of a comprehensive development plan, site ownership or control, completion of engineering and architectural plans, achievement of financing milestones, or other information that indicates a reasonable likelihood of project completion.

(4) A letter from the local fire protection agency or other documentation that shows that the fire protection agency is satisfied with the fire flow capability of the system planned for the new area.

(5) A system map with supporting computations showing that the system in the new territory is in compliance with the minimum design and water supply standards of G.O. 103.

b. If the advice letter is for a service area extension that requests permission to provide service outside the service area or at less than G.O. 103 standards, it should resemble Appendix B and must address the following (Ref. C.):

(1) A showing that the customer cannot be served at G.O. 103 standards at reasonable cost.

(2) A showing that the customer is willing to be served at less than G. O. 103 standards.

(3) A copy of the title to the property showing that the limitation of service is shown as a deed restriction on the property.

(4) An assertion that the area to be served is one in which additional customer growth is unlikely.

(5) An assertion that the final installation, including all customer-provided facilities, meets all local permit requirements.

(6) Contain a copy of the special contract providing service at less than G.O. 103 standards and delineating the limitations listed above, and a appropriate modification to the utility's tariff sheet listing Contracts and Deviations.

c. If the advice letter is for an acquisition, it should resemble Appendix C and must include the following attachments (Ref. B, p. 3):

(1) A copy of the executed purchase agreement.

(2) A copy of the notice sent to all affected customers comparing the rates before and for the first year after the acquisition and identifying any costs not fully reflected in the first year's rates. (Ref. A, para.4.03)

(3) A copy of the appraisal with all supporting materials and workpapers. (Ref. A, para 2.05)

(4) All necessary tariff sheets, including a tariff sheet showing rates.

For an NCRWS acquisition, the utility may use:

(a) existing NCRWS rates, or

(b) rates for its nearest service territory (with cost justification adequate to show that it is reasonable to apply them to the newly acquired system), or

For an IOMSWS acquisition the utility may request new rates that:

(a) collect 100% of fixed costs in the service charge, and

(b) receive revenues based on the rate of return permitted a Class C or a Class D water utility. This return may also be earned on 50 percent of the difference between book value and the price paid, and

(5) A detailed description of the acquired water system including a list of facilities such as wells, storage, and structures, and a distribution system map showing pipe sizes, fire flow and pressure areas.

(6) A list of planned water system improvements, including estimated costs and the rate impact on the acquired and existing customers.

(7) An estimated Summary of Earnings before and after the acquisition with and without the estimated costs of improvements in (5) above for the first and fifth year following acquisition.

(8) The names and addresses of all utilities, corporations, persons or other entities, either public or private, with which the acquired system is likely to compete, and all cities and counties within which service will be rendered.

(9) A list of the franchises and health and safety permits obtained or required to operate the system, including the status of the Technical, Managerial and Financial Capacity certification required from the Department of Health Services.

(10) An accounting of the original cost (or estimated original cost) of all acquired plant and depreciation reserve.

11. For a water system the new owner must also obtain the necessary permits from the State Department of Public Health (DPH) or County Departments of Health. The water system must comply with the applicable agencies' requirements and must meet acceptable engineering practices.

12. The Commission does not necessarily hold a hearing on an application for a water system sale, but may issue its decision on an ex parte basis. Hearings may not be required where the application is relatively complete and where there are no parties protesting, or likely to protest, the granting of the application.

13. One important issue with respect to the sale is the sales price. Appendix B contains Commission policy with respect to sales of small (Class D) water systems.

C-SALE OF PART OF A SYSTEM

14. Water companies shall notice the Director of the Water Division and the Director of the Division of Ratepayer Advocates 30 days' in advance by written notice whenever they plan to sell land, buildings, water rights, or all or part of a water system, including facilities or land that is no longer used and useful.⁷ Staff will review the notice to assess whether companies are selling off key portions of their asset base. Providing notice will not preclude later review of such sales in a water company's GRC or other proceeding. The notice shall include the following heading in at least 16 point bold type: "Notice under Rulemaking 05-06-040. Commission staff must respond within 30 days." The notice must include the name, address, phone and email address of the potential purchaser(s). If the Commission staff objects to the proposed sale, it may send an objection in any form to the seller and proposed purchaser(s). Mailing of such an objection shall prevent the proposed purchaser from claiming it is a bona fide purchaser of the property at issue until the issues raised in the objection are resolved.

15. Additionally, when utility property that was at any time included in rate base is sold, it must be tracked and the sales records must be kept, even if it is sold to an affiliate. At the same time the water or sewer service company must establish a memorandum account to record the net proceeds from the investment. The proceeds booked to this account can only be used to invest in new utility plan or used and useful land. Any proceeds that are not invested within eight years of the sale, must be returned to ratepayers.⁸

16. Gains and losses on sales of depreciable property shall accrue 100% to ratepayers. Gains and losses on used and useful land shall accrue 67% to ratepayers and 33% to stockholders.⁹ If the asset sold is real property that is no longer used and useful the proceeds shall be reinvested in accordance with the Infrastructure Act (Section 790 of the Public Utilities Code).

17. When property is never in rate base, all gains and losses will accrue to shareholders.¹⁰ However if property or assets are in rate base part of the time, the allocation of gains should be proportional to the amount of time that the asset was rate based divided by the life of the asset when sold (that percentage accrues to ratepayers.) The utility may assert a different allocation, and always has the burden of proving the amount of time the asset was not in rate base.

18. If a water or sewer system sells part of a system that include facilities actively serving customers, to a governmental entity that then serves those customers, all gains or losses accrue to stockholders.¹¹

D-NAME CHANGE

19. A utility may change its name by filing a new Cover Sheet for its tariff book. No resolution is required.¹²

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Application of ____________________)

___________________________________)

doing business as _________________) Application No.

___________________________________)

to sell and _______________________) _________________________

___________________________________) (For Commission use only)

to buy the water system in ________)

____________________________ County)

)

APPLICATION

This application of _______________________________________

(seller(s))

whose address and telephone number is __________________________

_________________________________, (_____)______________ owner(s)

of the water system known as ___________________________________

___________________________ and ________________________________

(buyer(s))

whose address and telephone number is __________________________ ________________________________, (____)___________ respectfully shows:

That communications in regard to this application are to be addressed to ______________________________________whose address

(person)

is ____________________________________________________________,

(zip code)

telephone number (____)_________________.

That the application is made pursuant to Sections 851 through 854 of the California Public Utilities Code and Rules 1 through 7, 15 through 17, 35, 36, 45 through 48 and 88 of the Commission's Rules of Practice and Procedure for authority to transfer the water system operating in the area described as ________________________________________________________________

_______________________________________ in or near the community

of __________________________________, serving _________________

(city) (number)

customers.

III

The seller(s) was/were granted a Certificate of Public Convenience and Necessity by Decision (D.)______________________, dated _____________, in Application (A.)________________________, filed _________________________.

Authority to acquire the system was granted to sellers by

D.________________, dated _________________, in A.______________, filed ________________________. The water system operates under a franchise granted by _________________________________________.

(if applicable)

The water system consists of (brief description):

Land: __________________________________________________________

Wells Number: __________________, Diameter: ____________________ Depth: ______________ Other Source of Supply: _________________ ________________________________________________________________

Pumping Equipment: Number: ________ HP: _________ capacity--GPM: ______________ Water Treatment Equipment: ______________________

________________________________________________________________

Reservoirs and Tanks: Number: ___________ Capacity:_____________

(gallons)

Water Mains: _______________ feet. Services: __________________

(number)

Meters: _________ installed, _______ available for installation: _______________ Fire hydrants: ______________ Buildings: _______

(number)

__________________ Office furniture and equipment: ____________

________________________________________________________________

Transportation equipment: ______________________________________

Other equipment: _______________________________________________

The original cost of property being transferred is $_______, and the depreciation reserve as of _____________________________

(date)

is $_______, resulting in a net book cost of $_______. The selling price is $____________ with these terms for payment: _______________________________________________________________.

A copy of the transfer agreement is attached hereto as Exhibit A.

A copy of the proposed deed to real property is attached hereto as Exhibit B.

Seller(s) desire(s) to dispose of the system because ______

_______________________________________________________________,

and buyer(s) desire(s) to acquire the system because ___________

_______________________________________________________________.

Buyer(s) has/have had the following experience which qualifies him/them to operate the system: ________________________________

________________________________________________________________

_______________________________________________________________.

VII

Seller's(s') most recent annual report, for year ending ________, is attached hereto as Exhibit C.

Buyer's(s') financial net worth statement is attached hereto as Exhibit D.

Buyer's(s') occupation is ______________________________ and present employment is _____________________________. Buyer's(s') employment address and telephone number is _____________________

________________________________, (____)___________. Buyer's(s') residential address and telephone number is ____________________

________________________________, (____)___________.

VIII

Buyer(s) propose(s) to adopt the presently filed tariffs of the seller(s), a copy of which sellers) has available to furnish to buyer(s). Buyer(s) agree(s) to be bound by any outstanding Commission decisions and/or directives involving the water system being transferred. Buyer(s) will be furnished the utility's copies of the following or informed of their availability at the Commission's headquarters, 505 Van Ness Avenue, San Francisco, California 94102:

(a) General Order 96-A, Filing and Posting of

Tariff Schedules

(b) General Order 103, Rules Governing Water

Service, Including Minimum Standards for Design

and Construction

(d) Rules of Practice and Procedure

(e) Public Utilities Code of the State of California

Seller(s) and buyer(s) warrant that:

(a) There are no customer deposits to establish credit.

Buyers will refund customer deposits when due.

(b) There are no main extension advances

All refunds due on main extension advances have been

paid on a current basis and none are overdue.

future, buyer(s) agree(s) to pay the refunds when due.

(d) The condition of the system is good.

The system needs modification and repair to bring it up

to the standards of General Order No. 103 at an

estimated cost of $ _________________. These funds

(are) (are not) available. The work will be performed

by the (seller(s)) (buyer(s)). Source of Funds is

____________________________________________________.

Seller(s) and buyer(s) accept joint responsibility for informing the community of customers about this application after filing.

WHEREFORE, applicants request an ex parte order authorizing seller(s) to transfer and buyer(s) to acquire the water system described and under conditions stated herein and that seller(s), upon compliance with such an order, be relieved of any public utility responsibilities related to the system being transferred.

I and each one of us whose names are shown as application seller(s) and buyer(s) in the above-entitled matter hereby declare and say:

That I and each one of us have read the foregoing application and know the contents thereof; that the statements are true of my own knowledge, except as to the matters which are stated on information or belief, and as to those matters which I believe them to be true.

I and each one of us declare under penalty of perjury that the foregoing is true and correct. This has been executed at the place and on the date shown on the signature line. (Each named applicant must sign.)

Signatures City and State Date

Seller: ___________________ _____________________ ___________

Buyer: ___________________ _____________________ ___________

///

NOTE:

The following exhibits must be attached to all applications for transfer:

Exhibit A - Copy of the sale agreement. If there is no

written agreement, it should be so stated in

the application and other documentation of

sale attached, such as bill of sale, escrow

agreement or note.

Exhibit B - Copy of the proposed deed to the real property

transferred.

Exhibit C - Copy of the last annual report of seller(s)

or a copy of the latest available balance

sheet and income statement of seller(s).

Exhibit D - Copy of buyer's(s') financial net worth

statement, or, if operating as a utility,

the latest available balance sheet and

income statement.

If the purchase price is more than the net book cost, the following statement must be included in the application, preferably as a letter exhibit signed by the purchaser.

Purchaser is paying $________________ more than the

original cost of net depreciation and contributions.

He understands that rates will be based upon the

depreciated original cost of the plant, excluding

contributed plant, and not on the purchase price.

A check for $75 must accompany the applications for transfer of the Certificate of Public Convenience and Necessity, when sold to an individual, as contrasted to a public entity.

Following review of the application by Commission staff the applicant will be notified regarding the adequacy of the information contained in application. The applicant will be provided the text of a notification to be sent each customer. Customers will be given 30 days to make any objections to the Commission, at 505 Van Ness Avenue, San Francisco, CA 94102.

Scoping Memo Information for (New) Applications

(Rule 7.1)

A. Category ¹³ (Check the category that is most appropriate)

__Adjudicatory - "Adjudicatory" proceedings are: (1) enforcement

Investigations into possible violations of any provision of statutory law or order or rule of the Commission; and (2) complaints against regulated entities, including those complaints that challenge the accuracy of a bill, but excluding those complaints that challenge the reasonableness of rates or charges, past, present, or future.

__Ratesetting - "Ratesetting" proceedings are proceedings in which the Commission sets or investigates rates for a specifically named utility (or utilities), or establishes a mechanism that in turn sets the rates for a specifically named utility (or utilities). "Ratesetting" proceedings include complaints that challenge the reasonableness of rates or charges, past, present, or future. Other proceedings may also be categorized as ratesetting when they do not clearly fit into one category.

__Quasi-Legislative - "Quasi-Legislative" proceedings are proceedings that establish policy or rules (including generic ratemaking policy or rules) affecting a class of regulated entities, including those proceedings in which the Commission investigates rates or practices for an entire regulated industry or class of entities within the industry.

B. Are Hearings Necessary? __Yes __No

If "yes," identify the material disputed factual issues on which hearings should be held, and the general nature of the evidence to be introduced.

______________________________________________________________________________________________________________________________________________________________________________________________________

__________________________________________________________________

Are Public Witness Hearings Necessary? __Yes _No

Public witness hearings are set up for the purpose of getting input from the general public and any entity that will not be a party to the proceeding. Such input usually involves presenting written or oral statements to the presiding officer, not sworn testimony. Public witness statements are not subject to cross-examination.

C. Issues-List here the specific issues that need to be addressed in the proceeding.

_________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

D. Schedule (Even if you checked "No" in B., above) Should the Commission decide to hold hearings, indicate here the proposed schedule for completing the proceeding within 12 months (if categorized as "Adjudicatory") or 18 months (if categorized as "Ratesetting" or "Quasi-Legislative").

The schedule should include proposed dates for the following events as needed:

Prehearing Conference

_______ Hearings

_______ Briefs due

_______ Submission

_______ Proposed decision (90 days after submission

_______ Final decision (60 days after proposed decision is mailed)

Docket Office Note: The above information should be set forth either in the text of the application or, if this form is used, it should be inserted into the application packet after the signature(s) of the filer, but immediately prior to the commencement of any exhibits.

I. End of Scoping Memo Information for (New) Applications

II. Doc 280540 Rev. June 2007

Decision 00-01-018 January 6, 2000

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Application of Gerald V. Wedel and Linda J. Wedel, doing business as Pine Mountain Water Company (U-258-W) for Authority to Sell and Del Oro Water, Co., Inc. (U-61-W) for Authority to Buy the Pine Mountain Water System in Tulare County.

Application 99-07-016
(Filed July 13, 1999)

Application of Pine Flat Water Company , a California Corporation (U-257-W) for Authority to Sell and Del Oro Water, Co., Inc. (U-61-W) for Authority to Buy the Pine Flat Water Company Water System in Tulare County.

Application 99-07-017
(Filed July 13, 1999)

O P I N I O N

III. Statement of Facts

1. Pine Mountain Water Company

Pine Mountain Water Company (Pine Mt.) was granted a Certificate of Public Convenience and Necessity (CPCN) by Decision (D.) 70198 issued January 11, 1966 to operate a public utility water system to serve Pine Mountain, a mountain area approximately 45 miles from the Town of Porterville in Tulare County. By D.89266 issued August 22, 1978, the system's sale to Gerald V. Wedel was authorized. Today Pine Mt. serves 84 unmetered customers through 11,800 feet of four-and six-inch transite mains. Pine Mt. also sells water on a metered basis to adjacent Pine Flat Water Company (Pine Flat). Pine Mt. operates from four wells and a 64,000-gallon reservoir.

Commission Resolution W-4037 issued April 9, 1997 authorized Pine Mt. to file an advice letter incorporating the Summary of Earnings, $21,079 Rate Base, and 13.25% Rate of Return set forth in the Resolution. Pine Mt. filed its Advice Letter (AL) No. 12 thereafter, and its last general rate increase became effective April 19, 1997.

2. Pine Flat Water Company

About 1911, the Meyers Land Company, as part of its land sales operations, constructed a water system at Pine Flat, an area approximately 45 miles southeast of the Town of Porterville in Tulare County. The intention, not implemented, was to eventually form a mutual. Meyer's daughter, Helen M. Curtis, by 1936 the owner of the system, donated it to the Pine Flat utility organized by K.H. Morse. In 1949, the company obtained a CPCN from the Commission by D.42920. In the 1970 period, Gerald V. Wedel, part owner, became president. Today, Pine Flat serves 206 metered customers through 27,200 feet of two-inch standard screw mains, obtaining its water from three wells, five springs, and purchases from Pine Mt. It has five steel storage tanks with a total capacity of 84,374 gallons.

Commission Resolution W-4039 issued May 21, 1997 authorized Pine Flat to file an advice letter incorporating the Summary of Earnings (set forth in that Resolution) and rate schedules (also set forth in the Resolution). While not explicitly so stated in the Resolution's Ordering Paragraphs, the latter schedules were derived from use of an Operating Ratio Method of Return adopted in view of the small $2,116 rate base (the result of depreciating the aging plant). The "margin" (or rate of return) was set at a very generous 20% of the total expenses listed in the Summary of Earnings. Pine Flat subsequently filed AL No. 14, and its last general rate increase became effective December 24, 1997.

3. Del Oro Water Co., Inc.

Del Oro Water Co., Inc. (Del Oro), a California corporation since 1963, has provided public utility water services under the regulatory jurisdiction of the Commission, and presently directly serves approximately 5,000 customers in Butte County, and through wholly-owned subsidiaries serves another 1,300 customers in Shasta and Humboldt Counties.

IV. The Present Situation

The Wedels desire to sell their two water systems because they want to discontinue doing business as regulated public utilities.

Del Oro is interested in acquisition of the Pine Mt. and Pine Flat systems because it believes they can be profitably and efficiently consolidated with the regulated systems Del Oro already owns and operates.

Accordingly, the captioned applications have been filed to effectuate a sale and transfer of both Pine Mt. And Pine Flat to Del Oro. The selling price for Pine Mt. is $37,500. The original cost is stated as being $54,833 with a depreciation reserve of $34,205, resulting in a net book cost of $20,628. The selling price for Pine Flat is $27,500, with the original cost being $67,439 with a depreciation reserve of $65,858, resulting in a net book of $1,581. In both proposed acquisitions Del Oro agrees to refund all customer deposits when due. No refundable main extension advances are overdue, and those falling due in the future will be paid. While both applications state that the condition of the systems is good, we note that in the instance of Pine Flat, the Commission's 1997 Resolution W-4039 found that the existing mains were over 70 years old and the Resolution provided that Pine Flat should replace 3,500 feet of 2-inch mains with 6-inch mains. This has not been done.

Pursuant to Rule 6.1(a) of the Commission's Rules of Practice and Procedure, by ALJ Resolution 176-3020 issued July 22, 1999, the Commission preliminarily determined that the captioned applications are ratesetting matters that do not require a hearing.

On August 4, 1999, each application was timely protested by the Ratepayers Representation Branch of the Water Division (RRB), merely stating RRB's belief that a hearing might be necessary.

A duly noticed prehearing conference (PHC) was held on October 22, 1999 before assigned Commissioner Henry M. Duque and Administrative Law Judge (ALJ) John B. Weiss in San Francisco. The assigned Commissioner and the ALJ considered the applications, the RRB protests, and the response of Del Oro at the PHC. Noting Del Oro's past demonstrated capabilities in managing, operating, and maintaining the diverse water public utilities serving over 6,000 customers in various parts of California, the assigned Commissioner and the ALJ concluded no hearing was required regarding Del Oro's capabilities.

Applying the proposed purchase prices reflecting premiums to rate base as required pursuant to Pub. Util. Code § 2718 et seq., and substituting these in the respective Summaries of Earnings applied to Pine Mt. And Pine Flat in each's latest rate proceeding, the Commissioner and ALJ concluded that prospective resulting rate impacts were neither unfair nor unreasonable in view of the Legislature's intentions in promulgating Pub. Util. Code § 2718 et seq., and did not warrant further investment of Commission resources as would be necessitated by a hearing. By the Joint Ruling of the assigned Commissioner and the ALJ issued October 29, 1999, RRB's request for hearing was denied.

V. Discussion

With exceptions not relevant here, historically the Commission has applied the concept of original cost less depreciation in the determination of rate base value to be used in ratemaking. But by the provisions of the Public Water Systems Investment and Consolidation Act of 1997 (Pub. Util. Code §§ 2718 et seq.), the Legislature has provided that henceforth the Commission "shall" use the standard of fair market value (as set forth in § 1263.320 of the Code of Civil Procedure¹⁴) when establishing the rate base value for the distribution system of an acquired water corporation.

In promulgating the 1997 Act, the Legislature clearly was well aware that incentives, both financial and operational, would be necessary to induce larger, well established water corporations to take over smaller, less well-established water corporations facing needs to replace or upgrade their systems to meet the increasingly stringent state and federal safe drinking water laws and regulations governing fire flow standards. These incentives must ultimately be reflected in rates. The benefits of well run, well-financed water utilities to ratepayers do not come without cost. And unless the potentially resulting rate impact is clearly unfair and unreasonable, the intention under Pub. Util. Code §§ 2718, et seq. was that the Commission "shall" approve the proposed acquisitions. But if the resulting potential rate impact was unfair and unreasonable, the Legislature left the Commission authority under Pub. Util. Code §§ 851 and 852 to deny the applications. The Commission lacks discretion to condition approval of an acquisition upon valuation, below fair market value, of the resulting rate base of the distribution systems of an acquired system (see Interim Opinion Regarding Applicability of Pub. Util. Code § 2718 et seq. to the proposed merger (D.99-09-030 issued September 2, 1999) in the Joint Application of Cal-Water Service Co. and Domingues Water Company et al. in Application (A.) 99-02-004).

When the prospective rate impact indicated from application of "fair market" value purchase price as the new rate base is not so great as to be clearly unfair or unreasonable to the ratepayers, considering the future benefits they will receive by virtue of being served by larger, well-managed utilities better able to meet the present and future requirements of federal and state laws and regulations, we see no reason to expend the Commission's limited resources on preparation of staff reports and hearings. To do so and thereby delay and increase the cost of desirable acquisitions for form's sake would only serve to discourage would be acquisitions, and ignore the clear intention of the Legislature when it enacted Pub. Util Code §§ 2718 et seq.

In these applications the proposed purchase prices in each instance meet the fair market value definition of Civil Procedure Code § 116275 for their designation as the new rate base value for prospective ratemaking in each proceeding. These purchase prices (or "fair market" values) clearly do not approach, much less exceed, the reproduction costs (as defined in Evidence Code § 820) for even that portion of each utility's distribution system represented by their existing water distribution pipes (as set forth in each utility's 1998 Annual Reports). This obviates any need to consider Pub. Util. Code § 2720(2)(b) issues.

After concluding that the agreed-upon sales price is the fair market value of the companies, we must now determine if the substitution of the fair market value rate base instead of the current book value results in estimated rate increases that might be considered unfair or unreasonable. In the Pine Mt. instance, application of the "fair market" value purchase price as the new rate base in the 1977 Summary of Earnings set forth in Resolution W-4037, the utility's most recent rate proceeding, would produce an earnings requirement (using the same 13.25% rate of return) only $2,176 higher, so that the rates authorized by Pine Mt.'s AL No. 12 would increase approximately 13%. We find nothing inherently unfair or unreasonable in that.

Pine Flat, on the other hand, operates on the Operating Ratio Method of Return. Assuming it were to continue under that method, the proposed purchase price would have no impact at all on prospective rates. If the operator received Commission authorization to move back to the Rate Base Method of Return, the proposed purchase price would then become the new rate base. The effect of applying that new rate base to the 1997 Summary of Earnings set forth in Resolution W-4039, the utility's most recent rate proceeding, would produce an earnings requirement less than that under the Operating Ratio Method. Thus, the resulting rates would be slightly less than those authorized under Resolution W-4039 and AL No. 14 for Pine Flat.

Upon payment to the Commission of the Public Utilities Reimbursement Fees collected to the date of the consummated sales and transfers, the Wedels and Pine Flat can be relieved of further public utility obligations with regard to the Pine Mt. and Pine Flat systems.

Finally, pursuant to provisions of California Health and Safety Code (CH&S) § 116525(a), any person or entity operating a public water system must have a permit to operate that system from the Department of Health Services (DHS), and a change in ownership of a public health system requires the prospective new owner to apply to and satisfy DHS' requirement that the new owner "possesses adequate financial, managerial, and technical capability to assure the delivery of pure, wholesome, and potable drinking water" (CH&S Code § 116540). Accordingly, apart from authorization from the Commission for Del Oro acquisition of Pine Mt. and Pine Flat, Del Oro must also apply to DHS for reissuance of the existing permits of Pine Mt. and Pine Flat.

Findings of Fact

1. Both Pine Mt. and Pine Flat are private investor-owned water public utilities as defined in Pub. Util. Code § 241, and have been subject to the jurisdiction and regulation of the Commission since certification.

2. Del Oro is a private investor-owned water public utility as defined in Pub. Util. Code § 241, subject to the jurisdiction and regulation of the Commission since 1963, and today Del Oro successfully itself or through wholly-owned subsidiaries serves over 6,000 customers in various counties in California.

3. By the captioned applications, Del Oro seeks authorization from the Commission to acquire Pine Mt. and Pine Flat, and the Wedels and Pine Flat seek authorization to sell the systems..

4. Del Oro is a willing buyer; the Wedels' and Pine Flat are willing sellers, and none of the parties are under any necessity to buy or sell.

5. The agreed upon purchase prices for Pine Mt. and Pine Flat each include a premium over the selling entities' rate bases as determined in each sellers' last general rate proceeding in 1997.

6. Given the extensive distribution mains of both the Pine Mt. and Pine Flat systems, the purchase prices, reflecting as they do the respective fair market values, do not exceed reproduction costs as determined in accordance with Evidence Code § 820, and there are therefore no additional purchase price amounts to be considered pursuant to Pub. Util. Code § 2720(b).

7. Application of the fair market value purchase prices as rate bases, and substituting these for the rate bases determined in the Summaries of Earnings for the last general rate proceedings of Pine Mt. and Pine Flat, could result in rate impacts of approximately 13% for Pine Mountain and probably no increase for Pine Flat.

8. Despite the fact that by ALJ Resolution 176-3020 the Commission had preliminarily determined that no hearing was required for either captioned application, the Assigned Commissioner and the ALJ conducted a PHC to consider RRB's protest and Del Oro's response.

9. By a Joint ruling of the Assigned Commissioner and the ALJ issued after the PHC and consideration of the applications, protests, and response of Del Oro, RRB's request of hearings on the applications was denied; the Commissioner and the ALJ having concluded that as Del Oro by past performance had demonstrated its capability to manage, operate, and maintain the two systems, and as no unjust or unreasonable effect on the existing customers of the contracting parties would result from the acquisition, there was no necessity for a hearing.

10. Before Del Oro can operate the Pine Mt. and Pine Flat systems it is required to comply with CH&S § 116540.

11. Payment to the Commission of the Public Utilities Reimbursement Fees due to the date of closing and transfer must be made by the Wedels and Pine Flat before they can be relieved of their public utility obligations with regard to the respective water systems having sold.

12. Transfer of ownership of Pine Mt. and Pine Flat to Del Oro would be in the public interest.

Conclusions of Law

1. In promulgating Pub. Util. Code §§ 2718 et seq., the Legislature recognized the necessity for incentives to induce larger, well-established water corporations to acquire small, less well organized water corporations; one of these incentives is implicit in the legislative language that states that the Commission "shall" use the standard of fair market value to value the rate base of the distribution system of an acquired public water system and that this standard "shall" be used for ratesetting, even though the result may be higher rates.

2. Nothing in Pub. Util Code §§ 2718 et seq. suggests that the Legislature intended discretionary, rather than mandatory, application of the fair market rate base valuation standard.

3. Pub. Util. Code §§ 2718 et seq. does not undermine or otherwise conflict with the Commission's obligation to review a water utility sale within our jurisdiction and to authorize that sale only if the Commission concludes authorization is in the public interest.

4. Were the Commission to conclude that application of Pub. Util. Code §§ 2718 et seq. would result in unfair or unreasonable increase in rates, while the Commission cannot require a lower rate base valuation or discriminatory rate of return as a condition of its approval, the Commission's authority to deny the sale remains undiminished.

5. Application of fair market value purchase prices as rate bases and substituting these for the Summary of Earnings rate base used in the last general rate proceeding for each utility does not result in impacts that are unfair or unreasonable.

6. Public hearing is not necessary.

7. The applications for sale and transfer of Pine Mt. and Pine Flat Water Systems to Del Oro should be authorized as set forth in the order that follows.

8. Upon consummation of the sales and transfers, and payment to the Commission of the Public Utilities Reimbursement Fees collected to the date of the sales and transfers, the Wedels and Pine Flat should be relieved of their public utility obligations with regard to the systems.

9. Before undertaking actual operation of either water system after the sales and transfers, Del Oro should obtain permits to operate the system from the DHS pursuant to the requirements of CH&S § 11650(a)

10. These proceedings should be closed.

ORDER

IT IS ORDERED that:

1. Within six months after the effective date of this order, Gerald V. Wedel and Linda J. Wedel (the Wedels), doing business as Pine Mountain Water Company (Pine Mt.), and the Pine Flat Water Company (Pine Flat), are authorized to sell, and Del Oro Water Co., Inc. (Del Oro) is authorized to buy the Pine Mt. and the Pine Flat water systems in Tulare County.

2. Within ten days of the actual sales and transfers of the systems, Del Oro shall notify the Commission in writing of the date on which each sale and transfer was consummated, and shall attach on each written notification a true copy of the instrument effecting the sales and transfer.

3. The Wedels and Pine Flat shall make remittance to the Commission of the Public Utilities Reimbursement Fees collected to the date that each sale and transfer is consummated. Upon completion of the sales and transfers, and remittance of the reimbursement fees, the Wedels and Pine Flat shall stand relieved of their public utility water obligations with respect to the Pine Mt. and Pine Flat water systems.

4. Application (A.) 99-07-016 and A.99-07-017 are closed.

This order becomes effective 30 days from today.

Dated January 6, 2000, at San Francisco, California.

RICHARD A. BILAS

President

HENRY M. DUQUE

JOSIAH L. NEEPER

CARL W. WOOD

Commissioners

I abstain.

/s/ LORETTA M. LYNCH

Commissioner

¹ Public Utilities Code Section 851. ""No public utility... shall sell...without first having secured an order of the commission authorizing it to do so...or for qualified transactions valued at five million dollars ($5,000,000) or less, filed an advice letter and obtained a resolution from the commission..." Effective January 1, 2006.

² Resolution No. W-4029, February 19, 1997, "Lucerne Vista Water Company (LVWC), Order Authorizing LVWC to be Exempted form Commission Jurisdiction" involved the sale to the Lucerne Vista Mutual Water Company.

³ General order (GO) 96-B, Section 8.5.4

⁴ Public Utilities Code Sections 1001, 852 and 854 do not require that the utility receive Commission approval before a water utility extends its line plant or service into a contiguous area that is not being served by a utility of like character (ref. D.94-01-046, January 19, 1994, Ordering Paragraph 5). The utility may provide service at tariffed rates or by contract in the contiguous area.

⁵ Letter from Fred Curry to all Water and Sewer Service Utilities, September 26, 2000.

⁶ For example, the Commission has long held that the basis upon which rates should be set is the original depreciated cost or the purchase price, whichever is lower (D.83676, November 6, 1974)

⁷ D.06-05-041 O. P. 19

⁸ D.06-05-041, O. P. 17

⁹ D.06-12-043 at 21, change q

¹⁰ D.06-05-041 at 82

¹¹ D.06-05-041, O. P. 10

¹² Memorandum from Edmund J. Texiera, Deputy Director to Distribution List, March 3, 1983, Subject: Water Management Meeting of March 3, 1983: Percell, Reader/Rosenthal and Texiera, Doc. Mgmt. #342040

¹³ See, California Public Utilities Commission Rules of Practice and Procedure, Article 7, especially Rule 7.1.

( http://www.cpuc.ca.gov/PUBLISHED/RULES_PRAC_PROC/66013.htm)

Doc 280540 Rev. June 2007

¹⁴ The relevant portion of Section 1263.320 states:

(a) The fair market value of the property taken is the highest price on the date of valuation that would be agreed to be a seller, being willing to sell but under no particular or urgent necessity for so doing, nor obliged to sell, and a buyer, being ready, willing, and able to buy but under no particular necessity for so doing, each dealing with the other with full knowledge of all the uses and purposes for which the property is reasonably adaptable and available.