6. Comments on Proposed Decision

The proposed decision of ALJ Vieth in this matter was mailed to the parties in accordance with Pub. Util. Code § 311(d) and Rule 77.1 of the Commission's Rules of Practice and Procedure. Comments were filed on July 13, 2005 and replies were filed on July 18, 2005.

SCWC's comments state that it "accepts the holdings of the Proposed Decision" but suggests that the Commission make four changes to the Ordering Paragraphs and text. (SCWC comments, p.1.) ORA continues to challenge the propriety of amortizing most of the memorandum account balance.

With respect to SCWC's concerns, first, we conclude Ordering Paragraph 2 is complete and we decline to revise it. Ordering Paragraph 2, by reference to Appendices A, B, C and Ordering Paragraph 1, clearly explains the amount to be amortized and the amortization term. We think SCWC's request that we repeat the amount and the term free of these qualifications could lead to misunderstanding in the future. Second, we agree with SCWC that the proposed decision's Ordering Paragraph 6 should be revised and the memorandum account should remain open until fully amortized. However, no new costs should be entered into memorandum account. Third, the capital expenditures for plant referred to in footnote 1 of Appendix A should be moved to a separate deferred account, as the proposed decision provides. We do not intend for customers to pay any portion of the plant-related carrying costs or interest on carrying costs after December 31, 2003; the text of the proposed decision explains our rationale. Fourth, we have added an ordering paragraph that authorizes SCWC to restore $1.1 million (the depreciation removed from the memorandum account pursuant to ORA's recommendation) to the proper plant accounts. This is the amount SCWC recorded as depreciation on capital projects it initially funded and which Aerojet later reimbursed. Without the adjustment, SCWC's books will reflect a negative net ratebase--$18.9 million net plant ($20 million investment less $1.1 million accumulated depreciation) being offset by the $20 million contribution from Aerojet. The adjustment is revenue neutral and requires no change to Appendices A, B, and C; however, the plant account entries should be reviewed for accuracy in Arden-Cordova's next general rate case.

ORA raises three concerns that fail to persuade us and makes two suggestions that we adopt. First, ORA argues that the proposed decision errs by giving any weight to FAS 5 and FAS 71. ORA cites language in D.88-12-094, which declined to rely on FAS 71 to set a lower than requested equity level in the capital structure of San Diego Gas & Electric Company and suggested (though there are no findings or conclusions on this point) that accounting standards need have little bearing on ratemaking decisions. ORA does not mention the earlier D.87-12-063, in which the Commission examined numerous GAAP principles embedded in federal telecommunications regulations and specifically adopted some of them for use in California. Nor does ORA mention the much more recent D.04-09-061, in which, among other things, the Commission examined whether Pacific Bell had correctly interpreted and applied FAS 71 and related accounting standards. Reflecting upon GAAP, the Commission stated:


GAAP provides useful guidance and consistency with it [sic] is appropriate in almost all circumstances. In particular, the Commission has adopted GAAP, with limited exceptions, as the system of accounting rules that Pacific must follow. [citation omitted]


In an era in which accounting frauds have plagued major corporations, GAAP provides a reliable, rational, non-controversial framework for accountants and regulators to keep books and records. This system recognizes that "corrections" occur routinely in the normal course of business. GAAP requires that the books accurately reflect the financial condition of the company based on the best information available at the time, and it does not "re-open" prior period financial reports to update estimates unless the corrections are significant and material as determined in GAAP. (D.04-09-061, slip op. p. 10.)

ORA also challenges SCWC's evidence on the impact of a write-off as well as the proposed decision's conclusion to allow amortization of approximately $21 million. ORA's arguments merely repeat its positions on these topics and do not warrant further discussion. However, we agree that the status report required by the proposed decision's Ordering Paragraph 4 should include appropriate supporting documents to permit verification of the information reported. Copies of both the status report and the supporting documents, as well as any advice letters filed pursuant to Ordering Paragraph 5, should be provided to ORA.

Findings of Fact

1. Recovery of litigation costs at trial is uncertain in lawsuits such as the Cordova system groundwater contamination complaints that SCWC filed against the State and Aerojet.

2. SCWC's research shows that Aerojet typically has been disinclined to settle, since it has received reimbursement from the Department of Defense of 88% of its legal costs in litigation such as the Cordova system groundwater contamination lawsuit.

3. If the contamination plumes move, SCWC may be forced to take additional wells out of service. The Aerojet settlement provides for recovery of 100% of SCWC's costs in this event.

4. The various supply agreements which implement the Aerojet settlement will enable SCWC to satisfy the 20,200 acre-feet of demand at build-out for its existing service area, as projected in the applicable Water Supply Assessment.

5. The melded costs per acre-foot of groundwater supplies treated at SCWC's Coloma Treatment Plant will be less expensive than production of groundwater through new wells financed by SCWC.

6. A "self-cure" solution to the groundwater contamination (i.e., deciding to avoid litigation and focusing on developing alternative, surface water supplies) would have cost SCWC ratepayers about $274 million (2004).

7. By litigating to the end, SCWC would have faced increased litigation costs and uncertainty; a judgment might have provided money but no guarantee of replacement water supplies.

8. There is no dispute between SCWC and ORA about the debits and credits to the "Capital Projects" portion of the memorandum account.

9. Aerojet has reimbursed SCWC for all but about $8 million in capital expenditures and has guaranteed reimbursement of that $8 million, plus interest at 5% compounded monthly, in five roughly equal installments between 2009 and 2013. Any WAF monies collected prior to each installment date will be applied toward that installment, and Aerojet will make up any shortfall.

10. Carrying costs on unreimbursed capital expenditures should be allowed as a debit in the "Costs" section of the memorandum account through December 31, 2003, but should be removed from January 1, 2004 forward, together with interest on those unreimbursed capital costs.

11. The Aerojet settlement provides potential reimbursement toward litigation expenses of $17.5 million, plus interest at the three-month commercial paper rate, depending upon the pace of development of Aerojet's property West of Hazel and the rate of collection of WAF monies.

12. Because the $17.5 million is a contingent payment, the memorandum account should be credited as WAF monies are received.

13. Under the applicable Financial Accounting Standards (FAS 5 and FAS 71), absent authorization to amortize at least $15 million of the memorandum account balance, and to collect that amount in its customers' rates, SCWC faces a significant likelihood of having to write-off at least $11 million.

14. The memorandum account balance shown in Appendix A to this decision should be amortized in customers' rates over 20 years.

15. If SCWC receives WAF monies at a rapid rate, ratepayers' amortization obligations should be minimized by reducing ratepayer' monthly bills more quickly than once-in-three years.

16. SCWC should restore to the appropriate plant accounts the $1.1 million removed from the memorandum account as depreciation, in order to avoid a negative net ratebase.

Conclusions of Law

1. The Commission has no jurisdictional need to approve SCWC's settlements with the State and with Aerojet.

2. As shown in Appendix A to this decision, which limits the debits for carrying costs on capital expenditures and associated interest to the period ending December 31, 2003, the debits and credits to the memorandum account are reasonable.

3. As utility management agreed to the deferred reimbursement the Aerojet settlement provides, it is reasonable for shareholders to bear the financial costs associated with delayed recovery of the approximately $8 million in capital costs.

4. If SCWC receives WAF monies at a rapid rate, it is reasonable to minimize ratepayers' amortization obligations by reducing ratepayer' monthly bills more quickly than once-in-three years.

5. It is reasonable to require SCWC to explain to ratepayers in the Arden-Cordova customer service area the terms of the groundwater contamination settlements and the reason for the surcharge.

6. Given the uncertain nature of the proposed Aerojet development and the size of the memorandum account balance, it is reasonable to require SCWC to provide the Director of the Water Division with an annual status report, as detailed in this decision.

7. The revised rates, and tariff rule revisions set forth in Appendices B and C, are reasonable.

8. This decision should be made effective immediately to enable SCWC to implement the surcharge without delay.

ORDER

IT IS ORDERED that:

1. Carrying costs on $8 million in capital projects, and interest on those carrying costs, shall not be entered as a cost element in the Arden-Cordova Litigation Memorandum Account from January 1, 2004 forward.

2. Southern California Water Company (SCWC) is authorized to impose a surcharge in the Arden-Cordova customer service area to amortize the balance in the Arden-Cordova Litigation Memorandum Account adjusted consistent with Ordering Paragraph 1 to provide the results shown in Appendices A, B, and C.

3. In the first billing cycle that collects the new surcharge, SCWC shall include, as a bill insert, a letter to customers that explains the terms of the settlements reviewed herein and the reason for the surcharge. SCWC shall work with the Commission's Public Advisor to prepare the letter.

4. Until the Arden-Cordova Litigation Memorandum Account is fully amortized, SCWC shall submit by letter to the Director of the Water Division and to the Director of the Office of Ratepayer Advocates (ORA), within 45 days of the end of each calendar year, a status report for the Aerojet development associated with the WAF reimbursements of $8 million and $17.5 million. The status report shall summarize the current timeline for Aerojet development milestones; the number of equivalent dwelling units permitted in the prior year and the number anticipated to be permitted in the ensuing five years; and the amount of WAF monies received in the prior year and amount anticipated to be received in the ensuing five years. The status report shall include supporting documentation to permit verification of the information reported.

5. In any year that receipt of Water Availability Fee (WAF) monies will permit a reduction in the Tariff Schedule AC-2 monthly bill of $ 0.50 or more, SCWC shall file an advice letter for adjustment of both Tariff Schedule AC-1 and AC-2, concurrent with any annual attrition-year or step-increase filing. A copy of any advice letters shall be provided to the Director of ORA.

6. The memorandum account shall remain open until full amortized. However, no costs shall be added to the memorandum account, other than cumulative interest charges approved by this decision.

7. SCWC shall restore to the appropriate plant accounts the $1.1 million removed from the Arden-Cordova Memorandum Account as depreciation and these plant will be reviewed for accuracy in the next general rate case for the Arden-Cordova service territory.

8. Application 03-10-057 is closed.

Dated July 21, 2005, at San Francisco, California.

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