2. Background

Since 1928 and until 1996, SCWC relied on groundwater pumped from the Charnock Basin for a portion of its water supply for its customer service area in Culver City, located in western Los Angeles County. In 1996, the Basin's groundwater was found to be contaminated with MTBE, a gasoline additive. The City, which had pumped a far greater water supply from the Basin, and SCWC filed lawsuits against oil companies and gasoline station owners and operators (Potentially Responsible Parties, or PRPs). In an interim settlement agreement, the PRPs in 1998 agreed to make payments to the City and to SCWC for the loss of Basin water. In 1999, the PRPs disavowed the agreement but in the same year were ordered by the Environmental Protection Agency (EPA) and the Regional Water Quality Control Board to continue making payments on a lesser scale. Meanwhile, SCWC and the City disputed each other's rights to pump groundwater from the Basin and eventually sued each other over those rights.

Under the settlement between SCWC and the City approved by the Commission in D.03-05-001, SCWC (1) will exchange its claim to groundwater rights in the Basin for a payment equal to the fair market value of 1,050 acre-feet of groundwater rights, and (2) will receive payment equal to the fair market value of its wells and most of its other water production facilities in the Basin. In addition, the City assumes all liability for any claims the PRPs have against SCWC for overpayments made under their interim settlement agreement, and SCWC assigns to the City its rights under the SCWC contamination lawsuit against the PRPs. SCWC expects to receive approximately $5.9 million in net settlement proceeds from the City. SCWC also avoids the costs and risks of its lawsuits against the PRPs and the City.

SCWC argues that the net settlement proceeds from the City's payment are governed by Pub. Util. Code § 790, which requires that money from the sale of unneeded water company assets be invested in the utility's infrastructure and that the infrastructure improvements then be added to rate base. SCWC argues that net proceeds of some $5 million being paid by the PRPs directly to SCWC should accrue to shareholders because the payments are for damage to the utility's water rights, which are a shareholder asset to which ratepayers have contributed nothing.

These proposals are opposed by the Office of Ratepayer Advocates (ORA). ORA argues that Pub. Util. Code § 790 does not apply to the City's purchase of various rights and causes of action transferred by SCWC, and all or at least a substantial part of the net proceeds should be booked in a manner that benefits ratepayers. As to the $5 million in payments made by the PRPs, ORA argues that this is money that SCWC already has recovered in rates for the higher cost of water purchased from the Metropolitan Water District (MWD) to replace the contaminated Basin water. Accordingly, ORA would book this money to the utility's purchased water balancing account for a refund to ratepayers when the balancing account is zeroed out in March of each year.

3. Procedural Background

As directed by D.03-05-001, SCWC on June 6, 2003, filed a report on its proposed treatment of the net settlement proceeds from the City. SCWC states that the approximately $5.9 million in net proceeds will be invested in the 10 most critical capital projects facing the utility, including substantial water main replacement, construction of a new reservoir, and construction of new wells, and that these facilities will be added to rate base when they are put into service.

ORA on June 17, 2003, responded to SCWC's report, arguing that net proceeds from the settlement with the City should be invested in infrastructure but booked as contributions to capital. Contributions are not eligible for addition to rate base and are not eligible for a rate of return. ORA also repeated its call to have net proceeds received from the PRPs debited to SCWC's purchased water balancing account for later refund to ratepayers.

Following these filings, a Prehearing Conference was conducted on October 29, 2003, attended by SCWC and ORA, the only active parties in this phase of the proceeding. (The City is not taking part in the ratemaking phase of this application.) SCWC and ORA agreed that this phase would deal only with the ratemaking aspects of monies that SCWC is or will be receiving from the City and from the PRPs. The parties also agreed that no further hearings were necessary because they had presented their evidence on ratemaking at the evidentiary hearing on March 4, 2003, and because both SCWC and ORA had extensively briefed these issues.

ORA introduced two documents - the interim SCWC settlement with PRPs and the EPA order requiring continued payments - and these documents were received into evidence without objection. SCWC asked for and was granted the opportunity to reply to ORA's June 17 filing. The date for SCWC's reply was November 26, 2003, at which time this phase of the proceeding was deemed submitted for decision.