5.00 Other Joint Recommendations

5.01 ORA and Cal Water agree that this proceeding should remain open to address the disposition of under-collections in Cal Water's offset expense balancing and memorandum accounts pending the outcome of R.01-12-009.

5.02 After discussions with the Director of the Commission's Water Division, Cal Water and ORA agree that Cal Water should be authorized to recover Commission ordered intervenor funding in step and/or attrition advice letter filings.

5.03 Cal Water agrees with ORA's recommendation that the Commission should establish a temporary balancing account to track revenues and expenses of the low-income rate assistance program. In its district reports ORA supports the proposed low-income rate assistance program as shown in Cal Water's application for each district.

5.04 ORA and Cal Water agree that Cal Water should conduct a six month time keeping study to evaluate the proper allocation of management time to non-regulated CPUC activities which are not subject to Decision 00-07-018. ORA agrees that this study addresses the recommendation in its General Office report.

5.05 Following considerable discussion concerning the cost of capital ORA and Cal Water agree that the Commission should adopt an 8.90% overall return on rate base. This agreement takes into consideration several factors including correcting certain calculations in ORA's report and adjusting American Water Company's stock price to remove the impact of the announced sale of the company. Additionally, ORA and Cal Water agree that the Commission should use a weighted cost of debt of 8.09%, a cost of 4.19% for preferred stock, and a return on equity of 9.70%. Finally, ORA and Cal Water agree that the Commission should apply these costs to the following capital structure: equity 51.5%, preferred 0.5%, and debt 48.0%.

5.06 ORA in its district reports recommended that the Commission use recorded sales data unadjusted for weather in calculating proforma earnings for approving Cal Water's step and attrition filings for districts in this proceeding. This recommendation was made in response to Cal Water's proposed language affecting the application of the Commission's current earnings test. After considering the merits of each party's position ORA and Cal Water agree that the Commission should authorize step and attrition increases for Cal Water's districts in this proceeding based on recorded earnings for the latest 12 months ending September 30 each year. Additionally, the recorded earnings test should be adjusted to exclude expenses subject to balancing or memorandum account recovery. Moreover, the sales and sales related expenses in the recorded earnings test should be adjusted to reflect normalized weather and exclude revenues credited to balancing and memorandum accounts. While ORA and Cal Water are in agreement with the methodology to adjust recorded sales to reflect normalized weather, additional time is necessary to develop a table of weather coefficients by district for each affected class of customers. ORA and Cal Water will jointly submit the table of coefficients within 30 days of the filing of this Joint Agreement. In accordance with the Commission's policy for approving step and attrition increases, should Cal Water's earnings, based on the recorded test above, exceed its authorized return, the requested step or attrition increase should be reduced to offset the earnings in excess of its authorized return in this proceeding or in any other future Cal Water proceeding, whichever is lower. Furthermore, Cal Water and ORA agree that any earnings adjustment to the step and attrition increases for the districts in this proceeding should not double count any portion of an earnings adjustment in another Cal Water proceeding or filing with the Commission. This Joint Recommendation is intended to resolve the issue of the appropriate earnings test for approving step and attrition increases and should not be considered binding in other proceedings, including R.01-12-009.

5.07 After further discussions and a review of recent recorded sales data ORA and Cal Water agree that the midpoint between ORA's and Cal Water's original sales forecasts for the residential and business classes should be used to estimate sales for 2002 and 2003. The agreed upon estimates are shown on the attached tables.

Additionally, ORA and Cal Water agree that, after reviewing recent recorded sales data, 17,000 KCcf, should be used for 2002 and 2003 as the total estimated sales in all districts for the multifamily, industrial, public authority, other, irrigation, and reclaimed water classes. This agreement represents the midpoint between average recorded sales and ORA's sales forecast. The attached Appendices B and C detail the joint recommendation by customer class for each district.

Furthermore, Cal Water agrees to file future general rate applications using the regression analysis referred to in Standard Practice U-25 and the supplement to U-25 (U-25). As set forth in U-25 the regression analysis uses annual temperature and rainfall (limited to 4-inches per month) and time as variables. Up to 13 years of recorded sales data (additional years may be added to eliminate years of drought data) should be used in the modeling process. Regression output statistics such as the Inverse McSee (standard error divided by the mean) and statistics that measure the regression models success should be used to evaluate and select the most appropriate sales forecasting models. Additionally, Cal Water may use other appropriate commercially available regression analysis programs.

5.08 After several meetings between ORA and Cal Water which included presentations by Cal Water's engineering personnel and Basin Water, a company that provides water treatment services for nitrates and other contaminants, ORA and Cal Water agree that the Salinas District faces an immediate and critical need for treatment facilities at four well sites. Additional information concerning the need for water treatment facilities in the Salinas District was provided in oral testimony by ORA and Cal Water and is contained in Cal Water's motion to establish a memorandum account filed May 10, 2002. Accordingly, ORA and Cal Water agree that the Commission should authorize Cal Water to establish a well-head treatment memorandum account for the Salinas District that will track the revenue requirement associated with water treatment for four wells. Additionally, ORA and Cal Water recommend that:

1. The well-head treatment memorandum account track the revenue requirement associated with treatment costs until the Commission issues a decision in Cal Water's next general rate application (subsequent to A. 01-09-071) for the Salinas District, and

2. Cal Water file annually by advice letter or application for recovery of the revenue requirement tracked in the wellhead treatment memorandum account.

Finally, in reaching this joint recommendation ORA and Cal Water recognize that Cal Water has not demonstrated a critical need for a similar memorandum account in its other 14 districts in this proceeding. Therefore, ORA and Cal Water agree that the Commission should not authorize Cal Water to establish the water quality memorandum accounts requested in its applications for these districts.

5.09 As set forth in its Results of Operation reports for the Dixon, King City, Marysville, Salinas, and Willows Districts ORA is in agreement with Cal Water's proposed water supply special facilities fees. Moreover, ORA and Cal Water agree that these fees should apply prospectively to all qualifying developments for which water supply special facilities costs have not been previously paid.