STATE OF CALIFORNIA ARNOLD SCHWARZENEGGER, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

June 13, 2006 Agenda ID # 5736

Ratesetting

TO: PARTIES OF RECORD IN APPLICATION 04-11-004

This is the proposed decision of Administrative Law Judge (ALJ) Thorson, 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). Upon the request of any Commissioner, a Ratesetting Deliberative Meeting (RDM) may be held. If that occurs, the Commission will prepare and publish an agenda for the RDM 10 days beforehand. When an RDM is held, there is a related ex parte communications prohibition period. (See Rule 7(c)(4).)

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," accessible on the Commission's website at www.cpuc.ca.gov. Pursuant to Rule 77.3 opening comments shall not exceed 15 pages.

Comments must be filed with the Commission's Docket Office. Comments should be served on parties to this proceeding in accordance with Rules 2.3 and 2.3.1. Electronic copies of comments should be sent to ALJ Thorson at jet@cpuc.ca.gov. All parties must serve hard copies on the ALJ and the assigned Commissioner, and for that purpose I suggest hand delivery, overnight mail or

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other expeditious methods of service. The current service list for this proceeding is available on the Commission's web site, www.cpuc.ca.gov.

/s/ ANGELA K. MINKIN

Angela K. Minkin, Chief

Administrative Law Judge

ANG:tcg

Attachment

ALJ/JET/tcg DRAFT Agenda ID #5736

Ratesetting

Decision PROPOSED DECISION OF ALJ THORSON (Mailed 6/13/2006)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Application of Union Pacific Railroad Company, Keene Water System (0434W), for Authorization to Increase Rates and for Interim Rate Relief.

Application 04-11-004
(Filed November 4, 2004)

(See Attachment A for List of Appearances.)

TABLE OF CONTENTS

Title Page

OPINION AUTHORIZING INITIAL RATES 2 2

I. Background 2 2

II. Commission Proceedings 3 3

III. System Description 5 5

IV. Questions Presented 7 7

V. Ratesetting 7 7

A. Net Operating Income 7 7

B. Rate Base 11 11

C. Rate of Return 15 15

VI. Rate Design 16 16

VII. Discontinuance of the Tehachapi-Keene Pipeline 17 17

A. Commission Jurisdiction 17 17

B. Reasonableness & Prudence of 1994 Project 18 18

VIII. Metering and Billing 21 21

A. Existing Customers 21 21

B. Facilities Downstream of Master Meters 22 22

IX. General Order 103 25 25

A. Water Quantity 25 25

B. Water Quality 27 27

X. Other Issues 30 30

XI. Comments on Proposed Decision 30 30

XII. Assignment of Proceeding 30 30

Findings of Fact 30 30

Conclusions of Law 36 36

ORDER 37 37

Attachment A - List of Appearances

Appendices A-D

OPINION AUTHORIZING INITIAL RATES

In this decision, the Commission authorizes initial rates for Union Pacific Railroad (Union Pacific) on behalf of its Keene Water System (Keene). The Commission also orders certain steps to bring Keene into compliance with General Order (GO) 103. Keene is a Class D water utility serving the communities of Keene and Woodford in Kern County, southeast of Bakersfield.

I. Background

The Keene Water System was constructed over 100 years ago by the Southern Pacific Railroad (predecessor of Union Pacific) to transport water from wells in the City of Tehachapi to the communities of Keene and Caliente that had grown up around the railway. The water was used for steam locomotives and by residents. Eventually, the railroad's water use declined but Southern Pacific continued to provide water for the Keene and Caliente residents. Water service to Caliente was discontinued in the 1980s. (Application of Union Pacific Company, Keene Water System 3-4 (Nov. 4, 2004).)

Water originally was pumped from wells in Tehachapi and transported to Keene by a gravity-flow pipeline. The pipeline originally ran through the railroad's tunnel between Tehachapi and Keene. In 1994, Southern Pacific expanded the tunnel bore to accommodate "double-stack" freight containers on rail cars. This construction resulted in discontinuance of the water pipeline. To provide water to Keene and Woodford, Southern Pacific drilled new wells in its right-of-way near the two communities and connected those wells to the existing water distribution system.

In 1996, Union Pacific merged with SP Transportation Company, the successor in interest to the Southern Pacific Railroad, which thereby became the owner of the Keene Water System.