ALJ/JCM/tcg DRAFT

Decision PROPOSED DECISION OF ALJ MCVICAR

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

In the Matter of the Application of the California-American Water Company (U210W) for an Order Authorizing it to Increase its Rates for Water Service in its Monterey Division to Increase Revenues by $5,725,300 or 22.47% in the Year 2003; $1,772,100 or 6.94% in the Year 2004; and $996,500 or 3.02% in the Year 2005.

Application 02-04-022 (Filed April 15, 2002)

Lenard G. Weiss, Attorney at Law, Lori Anne Dolqueist, Attorney at Law, and David P. Stephenson, for California-American Water Company, applicant.

Laura Tudisco, Attorney at Law, and Yoke Chan, for the Commission's Office of Ratepayer Advocates, protestant.

David A. McCormick, Attorney at Law, for United States Department of Defense and Federal Executive Agencies; David C. Laredo, Attorney at Law, for Monterey Peninsula Water Management District; Darryl D. Kenyon, for Del Monte Forest Property Owners Association, and Monterey Commercial Property Owners Association; interested parties.

OPINION RESOLVING GENERAL RATE CASE

OPINION RESOLVING GENERAL RATE CASE.............................................2

Summary 2

Background 2

Monterey Division 3

CalAm's Monterey Peninsula Water Supplies 3

CalAm's Application 6

Discussion 7

Summary of Earnings 7

Operating Revenues 7

Operation Expenses 8

Pumping 8

Transmission and Distribution - Meters 8

Transmission and Distribution - Miscellaneous 9

Maintenance Expenses 9

Pumping Equipment 9

Transmission and Distribution Mains 9

Transmission and Distribution - Meters 10

Administrative and General Expenses 10

Office Supplies and Other Expenses 10

Employees' Pensions and Benefits 11

Regulatory Commission Expenses 11

Outside Services 12

Miscellaneous General Expenses 13

Payroll Expense 13

Plant in Service 14

Security Improvements 14

Carmel Valley Filter Plant Clearwell 15

Water Treatment Improvements 15

Ambler Park Improvements 16

Small Main Replacements 16

Middle Canyon Road and Carmel Way Mains 18

Carmel Valley System Improvements 18

Endangered Species Act Expenditures 19

San Clemente Dam Retrofit, and Carmel River Dam Project 19

Other Projects 20

Depreciation Expense and Reserve, and Rate Base 20

Taxes 21

General Office 21

Salaries 21

Legal Services 25

Auditing & Other Services 27

Customer Service & Information Expense 27

Office Rental 29

Dues & Memberships 29

Group Insurance & Pensions 30

Employee Welfare 30

Depreciation Expense and Interest Expense 31

Payroll Taxes 31

Data Processing 31

Rate Base 36

Special Rate Requests 37

Special Rate Request #1 37

Special Rate Request #2 40

Pre-1/1/02 Expenditures 40

Post-1/1/02 Expenditures 41

Special Rate Request #2 Discussion 41

Special Rate Requests #3 and #8 43

Special Rate Request #4 45

Special Rate Request #5 47

Special Rate Request #6 47

Special Rate Request #7 48

Special Rate Request #9 50

Special Rate Request #10 51

Special Rate Request #11 53

Special Rate Request #12 54

Cost of Capital 56

Capital Structure 57

Cost of Debt 57

Cost of Equity 58

ORA's Recommended Return on Equity 59

CalAm's Recommended Return on Equity 61

Return on Equity Discussion 62

Rate of Return 66

Step and Attrition Increases 66

Rate Design 68

Service Quality 71

MPWMD's "Extraordinary" Requests 73

Comments on Proposed Decision 76

Assignment of Proceeding 76

Findings of Fact 76

Conclusions of Law 78

ORDER 78

LIST OF APPENDICES

Appendix A Summary of Earnings

Appendix B Authorized Tariffs and Step Rates

Appendix C Bill Comparison

Appendix D Adopted Quantities

OPINION RESOLVING GENERAL RATE CASE

Summary

California-American Water Company (CalAm) is authorized a $_______(_____%) general rate increase in its Monterey Division for test year 2003, $________ (______%) for test year 2004, and $_______ (____%) for attrition year 2005. We continue Monterey Division's per-capita rate design where it now applies, establish a new four-block rate design to promote conservation in Hidden Hills and Ryan Ranch, and combine Ambler Park and Bishop rates into a single tariff. CalAm is authorized to establish two new conservation and rationing-related memorandum accounts, and to extend its Water Revenue Adjustment Mechanism (WRAM) balancing account and its State Water Resources Control Board (SWRCB) Order WR 95-10 memorandum account. There is insufficient information in the record to determine that the amounts in CalAm's WRAM balancing account, its SWRCB Order WR 95-10 memorandum account, its Endangered Species Act memorandum account, and its expense balancing account, are reasonable and should be recovered from ratepayers.