VI. Reasonableness of the Settlement

The Settlement resolves a number of issues raised by RRB primarily on the basis of review of more recent or additional information and prior Commission decisions. Some of the more important issues are discussed below.

A. Sales and Revenues

The issue in this area involves the number of customers and consumption per customer in the Resale category. The Settlement uses the consumption per customer amounts proposed by RRB but assumes only one customer in the Resale-71 customer category rather than three customers as originally proposed by Park. This resolution is based upon a review of recent events involving neighboring utilities which are the customers served under the Resale category.

B. Payroll

The issues involved in the payroll expense fall into two categories, methodology and workforce. RRB used recorded 1999 payroll expense, allocated portions to capital and clearing accounts based on five-year averages of the payroll allocated to those categories, and escalated to the test years. Park estimates are based on its 2000 budget escalated to the test years and incorporate salary increases for merit. Park also assumed an additional employee.

The issue of the incorporation of salary increases for merit was resolved by reference to prior Commission decisions where the issue had been litigated and these increases had been adopted by the Commission. The issue of the allocation of portions of the payroll to capital and clearing accounts was resolved on the basis that the allocation percentages included in Park's 2000 budget are more consistent with projected projects than percentages based on five-year averages.

RRB took issue with the additional employee proposed by Park, an Assistant Valve Operator, on the basis that Park had not provided justification for the request. RRB believed that since Park was no longer operating the system of the City of Bell Gardens under contract, that workforce should be available to handle any additional workload.

Park's rebuttal testimony states that recent review of its procedures had revealed that Park had not been meeting the American Water Works Association (AWWA) recommendations for frequency of inspecting valves and hydrants and that, while Park had increased the frequency by use of an outside contractor, an additional employee was necessary to accomplish the workload. Park states that, subsequent to the discontinuance of its operating contract with the City of Bell Gardens, it reduced its workforce by the employee equivalents required to operate that system and therefore cannot absorb the additional workload. Park also states that, during negotiations, it discovered that its 2000 budget allocated insufficient payroll to its subsidiaries associated with the centralized remittance processing performed at Park thereby overstating Park's payroll expense by $26,000. The correction of this allocation in the settlement offsets the majority of the cost of the additional employee.

C. Other Expenses

RRB based its estimates for Other Expenses on five-year averages while Park's estimates were based on its 2000 operating budget. During negotiations the Parties discovered that Park had provided RRB with recorded amounts which mischaracterized a portion of the expenses which are generally included as a part of Other Expenses. RRB had calculated its estimates using those amounts and the substantial difference between the Parties was due primarily to that mischaracterization. When five-year averages were calculated using the correct recorded expenses, Park's estimates were lower for the total of all categories of Other Expenses. The Settlement uses Park's original budgeted numbers employing ORA's July 2000 escalation factors.

D. Regulatory Commission Expense

RRB's estimate of $47,740 is based on attorney fees of $37,440 and miscellaneous expenses of $10,300. Park sought a total of $155,000 for Regulatory Expense based on the recorded cost for Regulatory Expense in its last contested rate case, the 1992-93 Santa Paula Water Works, Ltd. escalated to the year 2000. Park submitted rebuttal testimony on this issue stating that RRB's estimate made no provision for Park's use of outside consultants, and that due to the small size of its regulatory department Park was forced to use outside consultants for much of its technical analysis. Park points out that in D.99-03-032, Apple Valley's Test Year 1999-2000 GRC, the Commission upheld Park's practice of using outside consultants and adopted attorney fees greater than RRB's estimate in this proceeding. The Settlement uses an amount of $90,000 for Regulatory Expense, which is approximately midway between the Parties' original estimates and appears reasonable based on the record.

E. Central Basin Capital Projects

There are five issues in this area which generated substantial difference between the Parties. (1) The new well proposed by Park was found to be necessary based on further review of the hydraulic capabilities of the system and the corroborating recommendation of the Department of Health Services. (2) RRB proposed the use of plant additions to the Mains and Services accounts based on six-year averages resulting in additions considerably lower than those proposed by Park. The Parties agreed to use Park's proposed additions for Mains and Services estimates since Park's proposed total plant additions are consistent with the six-year average of total plant additions. (3) At the Public Participation Hearings, there were comments from customers regarding meters located in backyards. There are substantial portions of Park's system where the distribution mains are in backyard easements. When Park replaces these mains they are moved into the streets thereby resolving the backyard meter problem. Allowing Park's proposed plant additions for Mains will help to address the concerns of these customers. (4) RRB proposed to remove a reservoir coating project from this proceeding on the grounds that the costs and schedule were uncertain, recommending that Park file an advice letter after completion of the project. This issue was resolved on the basis of later information including firm bids from contractors and a completion schedule. (5) RRB took issue with the proposed replacement of the roof and air-conditioning system at Park's office on the basis that savings from these projects had not been quantified. Park provided that quantification and the settlement reflects the savings in O&M costs. RRB also took issue with Park's proposal to repave its parking lot on the basis that Park had not provided sufficient justification of savings resulting from replacing asphalt with concrete. Park agreed to exclude this project from the proceeding.

F. Main Office Payroll

RRB proposed a reduction to Park's Main Office payroll, specifically a 29% reduction to the salaries of all Main Office employees whose salary exceeds $60,000, on the basis of a study of aggregate payroll, for employees whose salary exceeds that amount, per customer. The Settlement accepts Park's actual salaries but reduces the Main Office payroll to reflect the full retirement of one of Park's executives which Park had proposed would continue to work part-time. Park filed rebuttal testimony on this issue pointing out a number of factors which were not taken into account by RRB's study. Park proposes adjustments to the study to take these factors into account and concludes that, after adjustments are made, the ratio of aggregate payroll per customer and employees per customer associated with the employees paid over $60,000 is actually lower for Park than for the average of other comparable multi-district companies. Park also provided evidence from a recent salary survey performed by outside consultants to show that, for all Park's employees paid over $60,000, the aggregate total compensation provided by Park is less than the market average for comparable positions. Some of the rebuttal testimony introduced by Park is subject to debate, however; there is sufficient evidence in the record to warrant a determination that the Settlement is reasonable.

G. Main Office Capital Projects

RRB's estimates of Main Office plant additions are considerably lower than Park's due to RRB's recommendation of exclusion of a number of Park's proposed Main Office capital projects on the basis of insufficient justification. After review of additional information provided by Park, the Parties agreed to a figure $200,000 lower in aggregate than those proposed by Park. Park's rebuttal testimony sets out efficiencies, avoided costs or cost savings that would result from these projects.

H. Cost of Capital

Both Parties submitted substantial testimony on cost of capital covering issues related to the methodology of the financial models, risks specific to Park, and increases in interest rates since the Commission last determined the appropriate cost of capital for Park or one of its subsidiaries. In the settlement the Parties agree to incorporate the effect of bonds issued by Park in 2000 and further agree to use a return on rate base of 9.65% for 2001 and 9.64% for 2002 and 2003 without specifying the capital structure or capital components.

The settlement return on rate base is approximately midway between the 10.61% requested by Park and the 8.87% recommended by RRB. In addition, it is very close to the 9.60% return on rate base adopted by the Commission for 2001 for Park's subsidiary, Apple Valley Ranchos Water Company in D.99-03-032, a proceeding in which the cost of capital was not subject to settlement but was litigated. On balance, even though the settlement does not specify the capital structure and components, the settlement cost of capital appears to be reasonable.