STATE OF CALIFORNIA ARNOLD SCHWARZENEGGER, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

March 18, 2004 Agenda ID #3348

Ratesetting

TO: PARTIES OF RECORD IN APPLICATION 02-11-044

This is the proposed decision of Administrative Law Judge (ALJ) Patrick, previously designated as the principal hearing officer in this proceeding. It will not appear on the Commission's agenda for at least 30 days after the date it is mailed. This matter was categorized as ratesetting and is subject to Pub. Util. Code § 1701.3(c). Pursuant to Resolution ALJ-180 a Ratesetting Deliberative Meeting to consider this matter may be held upon the request of any Commissioner. If that occurs, the Commission will prepare and mail an agenda for the Ratesetting Deliberative Meeting 10 days before hand, and will advise the parties of this fact, and of the related ex parte communications prohibition period.

The Commission may act at the regular meeting, or it may postpone action until later. If action is postponed, the Commission will announce whether and when there will be a further prohibition on communications.

When the Commission acts on the proposed decision, it may adopt all or part of it as written, amend or modify it, or set it aside and prepare its own decision. Only when the Commission acts does the decision become binding on the parties.

Parties to the proceeding may file comments on the proposed decision as provided in Article 19 of the Commission's "Rules of Practice and Procedure." These rules are accessible on the Commission's website at http://www.cpuc.ca.gov. Pursuant to Rule 77.3 opening comments shall not exceed 15 pages. Finally, comments must be served separately on the ALJ and the assigned Commissioner, and for that purpose I suggest hand delivery, overnight mail, or other expeditious method of service.

/s/ ANGELA K. MINKIN

Angela K. Minkin, Chief

Administrative Law Judge

ANG:sid

ALJ/BDP/sid DRAFT Agenda ID #3348

Ratesetting

Decision PROPOSED DECISION OF ALJ PATRICK (Mailed 3/18/2004)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

In the Matter of the Application of SAN GABRIEL VALLEY WATER COMPANY (U337W) for Authority to Increase Rates Charged for Water Service in its Fontana Water Company Division to increase revenues by $11,573,200 or 39.1% in 2003, $3,078,400 or 7.3% in 2004, $3,078,400 or 6.8% in 2005, and $3,079,900 or 6.4% in 2006.

Application 02-11-044 (Filed November 25, 2002)

Timothy J. Ryan, Attorney at Law, Daniel A.

Dell'Osa, Nossaman, Guthner, Knox & Elliott,
LLP, by Martin A. Mattes, Attorney at Law,
for San Gabriel Valley Water Company, applicant.

Keith Clements, for himself; Dennis R. Poulsen, for

California Steel Industries, Inc.; Marvin T. Sawyer,
General Counsel, and Endeman, Lincoln, Turek &
Heater, LLP, by James C. Allen, for Fontana Unified School District; interested parties.

Best, Best & Krieger, LLP, by Kendall H. MacVey,

Attorney at Law, for the City of Fontana, protestant.

Travis Foss, Attorney at Law, for the Office of Ratepayer

Advocates.

OPINION AUTHORIZING INCREASE IN REVENUE

TABLE OF CONTENTS

Title Page

OPINION AUTHORIZING INCREASE IN REVENUE 2

I. Summary 2

II. Background and Procedural History 3

III. Public Participation Hearing 5

IV. Capital Projects 6

A. Discussion 11

B. The Rate Base Cap 12

V. Water Sales and Operating Revenues 15

A. Service Connections 15

B. Average Use Per Customer 15

C. Miscellaneous and Construction Revenues 16

VI. Operation and Maintenance Expenses 16

A. Supply Cost Expenses 16

1. Unmetered and Unaccounted for Water 16

2. Reclaimed Water 17

3. Water Purchases from Cucamonga County Water District 17

4. Water Costs 18

5. Purchased Power Costs 18

6. Chemicals Expense 18

7. Plant F10 Treatment Plant Reimbursements 19

8. Labor Costs - New O&M Positions 19

B. Other O&M and A&G Expenses 20

1. Materials & Supplies (M&S) Expense 20

2. Transportation Expense 21

3. Outside Services Expense - Other Than Legal Expenses 21

4. Outside Services - Legal Expenses 21

a) Non-Perchlorate-Related Legal Expenses 22

b) Perchlorate-Related Legal Expenses 22

5. Utilities and Rents Expense 23

6. Employee Pensions & Benefits 23

a) Vacation, Holidays, Sick Leave, and Pensions 23

b) Health Insurance 23

c) Dental Insurance 24

d) Business, Property and Umbrella Liability Insurance 25

e) Workers' Compensation Insurance 26

7. Regulatory Commission Expense 26

8. Labor Costs - New A&G Positions 27

VII. General Office 28

A. Officers' Salaries 28

B. Disallowance of Chairman's Salary 30

C. Allocation of Chairman's and President's Salaries 30

D. New Positions in General Office 32

1. Property Manager 32

2. Accountant 32

3. Rate Analyst 33

4. Discussion 33

E. Exclusion of Existing Management Positions 33

1. Director of Tax Accounting 34

2. Financial Analyst 34

3. Senior Engineer 35

4. Vice President 35

VIII. Components of Rate Base 36

A. Plant Additions -- Overview 36

1. Wellhead Treatment Facilities and Surface Water Treatment 36

2. Wells 37

3. Reservoirs 37

4. Booster Stations 38

5. SCADA System 38

6. Security Equipment 39

7. Emergency Generators 39

8. Water Treatment and Distribution Mains 40

9. Vehicles 40

10. Tools & Equipment 40

11. New Building 40

B. Materials & Supplies (M&S) 41

C. Construction Work in Progress (CWIP) 41

D. Contributions in Aid of Construction (CIAC) 42

E. Fontana Union Water Company Stock 42

F. Working Cash 43

G. Plant Sales/Condemnation Proceeds 44

IX. Cost of Capital 47

A. Capital Structure 47

B. Effective Cost of Long-Term Debt 49

C. Equity Cost 50

1. Financial Models 51

a) San Gabriel's Financial Models 52

b) ORA's Financial Models 53

2. Risk Factors 54

3. Discussion 56

X. Revenue Recovery Issues 58

A. Balancing and Memorandum Accounts 58

1. Amortization of Existing Balances 59

2. Continued Need for the Full Cost Balancing Account 59

3. Requested Water Quality Memorandum Account 61

4. Proposed Low Income Rate Program 61

5. Requested Advice Letter Treatment 61

XI. Alleged Rule 1 Violation 62

XII. Comments on Proposed Decision 63

XIII. Assignment of Proceeding 63

Findings of Fact 63

Conclusions of Law 65

ORDER 66

APPENDIX A - Adopted Summary of Earnings

APPENDIX B - Adopted Quantities

APPENDIX C - Comparison of Bills

APPENDIX D - Adopted Rates

OPINION AUTHORIZING INCREASE IN REVENUE

I. Summary

San Gabriel Valley Water Company (San Gabriel), Fontana Water Company Division (Fontana Division), is authorized to increase revenues by:

$7,550,900 (or 23.7%for Test Year 2004¹

$1,712,700 (or 4.6%) for Attrition Year 2005

$1,712,900 (or 4.2) for Attrition Year 2006

We authorize rate of return on rate base of 9.40% for the years 2004, 2005, and 2006. The return on common equity (ROE) authorized by this decision is 10.10%. As a result of the revenue increase granted by this decision, the monthly bill for the average residential customer (23 hundred cubic feet (Ccf) of water with a 5/8 x 3/4-meter) would increase by $9.13 or 25% from $37.11 to $46.24 in the year 2004.

The major topic of inquiry in this proceeding was the adequacy of Fontana Division's current sources of supply and program to increase supply. The evidence shows that Fontana Division was barely able to meet its 2003 summer peak-day demand following four years of reduced rainfall and closure of seven wells due to perchlorate contamination. Fontana Division is also experiencing ongoing customer growth of over 1,000 connections per year. To address this situation, San Gabriel proposed a major construction program for plant additions through 2006.

In this decision, we generally approve San Gabriel's proposed construction program with some reductions to reduce the impact on customer bills. We also impose a rate base cap requiring San Gabriel to limit plant additions so that rate base increases are no more than 10% each year to allow for inflation and customer growth. Within this limitation, San Gabriel will be able to undertake needed replacement and additions of new mains and services, and to construct needed water production wells, booster pumping systems, and water storage reservoirs. The program would also provide for construction of needed wellhead treatment facilities at perchlorate-contaminated wells, and of the first 15 million gallons per day (mgd) increment of a conventional surface water treatment facility in the northwestern portion of the service area (Plant F 52). The proposed construction of a new office, garage, and warehouse is deferred because of the rate impact.