Opposition of Cities

The three cities who protested the application also filed comments opposing the settlement agreement as unreasonable, unlawful and not in the public interest.

City of Bellflower

Three witnesses, Michael J. Egan, City Administrator, Dan Koops, President of Bellflower Somerset, and M. Kabirr Faal, a consultant employed by Kane, Ballmer & Berkman, testified for the City of Bellflower (Bellflower). (Exh. 10, 17, and 20.) In general, these three witnesses say the Bellflower City Council unanimously opposes the proposed merger because Bellflower considers the request to adversely affect its residents by increasing rates, decreasing customer service, causing unnecessary and unreasonable capital expenditures and creating the potential for the taking of private property to build wells.²

Egan makes diverse contentions: that the merger creates no specific operational efficiencies, and the cost savings are speculative and insubstantial; that SCWC has no office in Bellflower and does not propose one, whereas Peerless has an office there; that connecting service to Bellflower Somerset would eliminate the need for new wells; and that the size of SCWC's proposed wells is excessive. Egan testified that Bellflower has succeeded in reducing water purveyors in the city from 20 to 5, in furtherance of its Master Water Plan. (Exh. 14.) Egan indicated SCWC has made overtures to operate a consolidated water system with Bellflower. Thus, he believes SCWC seeks to expand its territory regardless of the effect on customers or the community, while Bellflower seeks to remove redundant service costs.

Egan notes that Bellflower is currently selling its water system to Bellflower Somerset and has authorized the use of city property for a well site because the city is built out. However, Bellflower will not do the same for SCWC, and Egan contends SCWC will need to acquire private property for well sites which may not meet CEQA.

Egan points out that Bellflower Somerset is the largest water purveyor in the city and has the most cost effective service. It has merged with smaller water companies over the years and succeeded in improving service while keeping costs low, contrary to SCWC's proposal. Bellflower Somerset's rates are 60% lower than SCWC's and 40% lower than those of Peerless. Thus, Bellflower Somerset's acquisition of Peerless is better for the community.

Koops rebuts Zastrow's testimony. He contends Zastrow's testimony, viz., that Peerless was formed in 1941 after Bellflower Somerset had denied service to certain houses, is not accurate, as Bellflower Somerset was not in existence at that time. Koops believes Zastrow intended to state that one of the predecessors to Bellflower Somerset, either Somerset Mutual Water Company or Bellflower Mutual Water Company, which merged in 1988 was the entity which purportedly denied service to the referenced homes. Second, Koops contends Zastrow misunderstands the structure of a mutual water company such as Bellflower Somerset. Peerless' customers would become shareholders in Bellflower Somerset should the mutual purchase Peerless. Customers would then each have a voice in the operation of Bellflower Somerset and in the election of its directors. Lastly, Koops contends that contrary to Zastrow's testimony, the operating and capital costs associated with needed improvements to Peerless' distribution system ultimately will be passed on to Peerless' customers through significantly increased rates proposed in this proceeding, and not borne by SCWC's investors.

Koops refutes Zastrow's statement is true that Bellflower Somerset would rely on serving new Peerless customers through water purchased from member agencies of the MWD. Koops states that any required infrastructure improvements would be financed by payments by Peerless' present customers at their existing rates, as a result of the significant spread that exists between Peerless' rates and the rates charged by Bellflower Somerset to its existing customers. In addition, Peerless' customers would continue to be served in large part by groundwater produced by Bellflower Somerset's wells. In contrast, the proposed merger with SCWC would necessitate the costly refurbishment of Peerless' existing wells solely because SCWC does not operate a system contiguous to Peerless' system and, therefore, Peerless' existing customers could not be integrated into SCWC's existing system. Over one-half of the projected capital improvement costs relate solely to the refurbishment of those wells or installation of treatment facilities. According to Koops, much of those costs could be avoided if those customers received water from Bellflower Somerset and its existing wells and treatment facilities.

Koops contends that Bellflower Somerset has not experienced the adverse impacts of the purported toxic plume and related water quality issues to the extent Peerless has for two reasons. First, Bellflower Somerset's wells are deeper than those of Peerless and therefore produce higher quality water. Secondly, and most telling, Bellflower Somerset's distribution system is very well-maintained, as profits are used for maintenance of existing facilities and necessary capital improvements, rather than being distributed to shareholders. Because its distribution system is well maintained. Bellflower Somerset's water does not exhibit the secondary problems of discoloration and odor that Peerless has experienced, which in part results from the accumulation over time of material in Peerless' mains.

Koops explained that Bellflower Somerset has planned to install a new connection with MWD. However, outside funding for the cost of that connection has been received, and those costs will not in any manner whatsoever be passed onto any Bellflower Somerset shareholder or existing Peerless customer.

Koops testified that Bellflower Somerset remains willing and financially able to acquire Peerless at the $4 million price promised by SCWC. (Exh. 22.) Four of the eight Peerless "islands" of non-contiguous service territory are contiguous to Bellflower Somerset. No new wells would be needed, and the replacement of mains could be accomplished without increasing rates. In fact, rates would drop for 20 ccf bi-monthly from the current $43.73 to $29.50 after acquisition and improvement costs are paid. Koops contends the use of Peerless pumping rights by SCWC's Metropolitan District customers will increase import and other costs, and thus increase the rates of Peerless customers. Currently, Park Water Company leases 496 AF of these rights partly to serve Bellflower residents. Therefore, the water rights benefit local customers, who will lose this benefit after the proposed merger, and the water rights are used for SCWC's Metropolitan District.

Faal contends the proposed merger will result in significant rate risks, which would be unfair and unreasonable to impose on ratepayers. He argues that the benefits of consolidation and potential cost savings are both exaggerated and outweighed by the ultimate burdens and risks for Peerless' ratepayers. He contends that Peerless' capital and operating requirements can be fulfilled with less burdensome ratepayer impacts. Faal sees the primary, if not sole, beneficiaries of the proposed merger as the shareholders of each company, Peerless and SCWC. Therefore, Faal concludes the proposed merger should not be approved because it is not in the public interest and is, in fact, harmful to the ratepayers.

Faal notes that, currently, Peerless' rates are 18% lower than rates in SCWC's Metropolitan District, but are 48% higher than those of Bellflower Somerset, 61% higher than those of Paramount and 69% higher than those of Lakewood. Under the settlement, Peerless rates would remain unchanged until January 2002, then they would rise 10% annually until 2005, then they would increase an additional 28.6%³ when the former Peerless service area is consolidated with SCWC's Metropolitan District. These increases total over 80% in four years. Faal forecasts that by 2005, the rates would be 66% higher than Bellflower-Somerset, 89% higher than Paramount and 97% higher than Lakewood.

Faal says that by including roughly $3 million for the purchase of water rights in rate base, SCWC is severing and "monetizing" water rights dedicated for public use. Faal believes this treatment of water rights is economically harmful. Faal presents a chart of recent Commission acquisition cases to support his contention that this price is an unprecedented increase in rate base resulting from a utility merger. (Exh. 18.) Faal interprets the Public Water System Investment and Consolidation Act (Pub. Util. Code §§ 2718-2720) as prohibiting mechanisms to allow shareholders of merging companies to generate unreasonable profits and earnings by merely changing corporate control or ownership. Faal describes the intent of that statute to improve water system reliability, and to achieve efficiencies and economies of scale not otherwise available, not to increase the net book value by nearly 1,000%.

Faal challenges the alleged cost savings and contends that SCWC should guarantee these savings to immunize the ratepayer from ramifications of overly optimistic projections. Further, he believes the proposed improvements are unnecessary. He says the improvement plan fails to consider viable, less costly alternatives.

City of Paramount

The City of Paramount (Paramount) sponsored testimony by Harry L. Babbitt, its Director of Public Works, and William C. Pagett, its City Engineer. Paramount serves 7,256 water customers. Babbitt testified regarding alternatives to this merger which would better serve those 98 Paramount residents who are served by Peerless. Pagett testified to inconsistencies in the applicants' analysis of merger benefits.

Paramount believes the merger does not serve the public interest because it will, ultimately if not immediately, increase the bi-monthly average bill for all SCWC customers, and will not clearly improve the quality of service to customers, since it may take longer for the Peerless system to be upgraded.

Paramount does not believe SCWC's ownership will necessarily improve the quality of service to Peerless customers. SCWC serves 300 accounts in Paramount, which receives complaints from these SCWC customers about water outages, dirty water, low flows and service issues when customers do not receive a response from SCWC's technicians.

Paramount estimates that upgrading the Peerless system will take longer than SCWC contends. The facilities serving each city are isolated. Paramount is served by only one well that produces low quality water and low pressure at peak hour demand. Should this sole source of water fail, Peerless customers would be without service until Paramount turns on Peerless' emergency connection to the Paramount water system. SCWC's system within Paramount also needs upgrade to increase water pressure and fire protection flow. Interconnecting with Paramount's system can immediately increase water pressure and volume, and provide higher quality water to the 98 Peerless customers.

Paramount contends it can serve Peerless customers within five minutes of a transfer to Peerless' system. Compared to SCWC, Paramount contends it provides better quality water, and increased water pressure and volume. Connecting to Paramount will reduce the average bi-monthly costs to Peerless customers from $73.51 as of June 30, 2000, to $45.77, and Paramount can upgrade the portion of the system in its city limits within approximately one year, but no more than three years, without having to increase its water rates. In contrast, Peerless customers' bi-monthly bill would increase to $84.01, if the merger is approved.

Paramount also has a positive track record for operations, as evidenced by the outcome of its acquisitions of the Paramount County Water District, Park Water District, Van Diest Water Company, Century Center Mutual Water Association, Community Water Service, County Water Company, Century City Mutual Water Company, and Midway Gardens Mutual Water Company. Pagett managed the transition in the last four acquisitions, and in all of those cases Paramount was able to complete all necessary capital improvements for the newly integrated systems within one to three years.

Paramount contends it can provide better service to Peerless customers within the city because, unlike Peerless' system, the city's system is completely interconnected into a loop monitored by computer. Paramount maintains this state-of-the-art system by regular maintenance and upgrades. It also meets or exceeds standards for fire flow, and it would install more fire hydrants in the former Peerless service area. Paramount has multiple sources of water available to ensure constant and immediate water flow. In addition, the City has two wells, two Central Basin Municipal Water District connections, and emergency ties to the City of Long Beach system.

Paramount contends the alleged benefit of additional pumping rights will not accrue to Peerless customers, since it will be used to supply SCWC's Metropolitan District. Paramount contends this dispersion of Peerless' water rights will minimize any cost savings claimed to result from the merger.

City of Lakewood

Peerless currently serves 105 accounts in the City of Lakewood. Lakewood itself provides water service to 20,112 customers. Lakewood sponsored James B. Glancy, its Director of Water Resources.

Glancy testified that the application proposes significant improvements to the portion of Peerless' system in Lakewood, and that the existing Peerless customers would pay for these improvements. He contends there are alternatives to the merger that are more beneficial to Peerless customers. Lakewood currently provides water service to its residents, and could serve those Peerless customers in its service territory with little or no effort through the transfer of the Peerless system to the city. Lakewood contends it provides better quality water, and increased water pressure and volume at lower cost. Specifically, it will reduce the average bi-monthly water costs to those Peerless customers from $63.40 to $37.60. Lakewood can make the necessary connections to the Peerless system without a need to increase the water rates.

Lakewood estimates that the transition of the 105 Peerless customers to the city's water system could be accomplished in a matter of a few weeks. The transition would be paid from Lakewood's Capital Improvement Program funds. Lakewood does not believe there is a need to perform any immediate capital improvements after the 105 customers are transferred to its system. Based upon an inspection of the Peerless customers' service area, Lakewood concluded there are sufficient fire hydrants, however, some lines may need to be replaced. Lakewood estimates it would spend $350,000 after several years to replace all pipelines and all service lines up to and including the meter, and provide new fire hydrants. These costs would be part of Lakewood's budgeted capital improvements program.

In addition, Glancy, believes SCWC's estimated $11 million cost of Peerless improvements is extremely high, due in part to an unreasonable number of new wells.⁴

Lakewood recommends that Lakewood and Paramount acquire the portions of Peerless within their cities. Each city has its own water system capable of serving the respective areas Peerless now serves. These cities could provide this service at lower cost than what is being paid now. The acquisition costs would not be borne by the Peerless customers, and unless there were some extraordinary expenses for improvements, they would be completed at no additional cost to the customer. Lakewood has sufficient well capacity, having completed drilling two new wells in the past five years.