ALJ/XJV/jva Mailed 7/22/05

Decision 05-07-045 July 21, 2005

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

In the matter of the Application of the SOUTHERN CALIFORNIA WATER COMPANY (U 133 W) for an order authorizing it to increase rates for water service in 2004 in its Region 1 Customer Service Areas by $179,200 or 2.62% in the Arden-Cordova CSA; $93,400 or 1.98% in the Bay Point CSA; and $115,900 or 4.55% in the Ojai CSA; and various other relief.

Application 03-10-057

(Filed October 30, 2003)

O'Melveny & Myers, LLP, by Patricia A. Schmiege,

Attorney at Law, for Southern California Water
Company, applicant, Cleveland Lee, Attorney at Law,
for the Office of Ratepayer Advocates.

OPINION ON PHASE 2 ISSUES

Table of Contents

Title Page

OPINION ON PHASE 2 ISSUES 2 2

1. Summary 2 2

2. Background 3 3

2.1 Memorandum Account - Origin and Prior Amortization 3 3

2.2 Phase 1 Decision 5 5

2.3 Phase 2 -- Procedural History 6 6

3. Public Comment on the Application 7 7

4. Discussion 8 8

4.1 Impact of the Contamination on the Cordova System 8 8

4.2 The Lawsuits 10 10

4.3 The Settlements 11 11

4.4 Memorandum Account Entries and Amortization Proposals 16 16

4.5 The Interplay of Ratemaking and Accounting Issues 21 21

4.6 Authorized Memorandum Account Treatment
and Conditions of Approval 27 27

5. Assignment of Proceeding 31 31

6. Comments on Proposed Decision 31 31

Findings of Fact 34 34

Conclusions of Law 36 36

ORDER 37 37

OPINION ON PHASE 2 ISSUES

1. Summary

After reviewing the settlements that resolve the groundwater contamination lawsuits, we approve amortization of the balance in the Arden-Cordova Litigation Memorandum Account (memorandum account), as shown in Appendix A to this decision. Accordingly, we authorize Southern California Water Company (SCWC) to collect the balance, $21,298,491, through a rate surcharge, which will continue for no longer than 20 years. This balance is $815,971 less than the amount that SCWC requested because we have moved responsibility for carrying charges on $8 million in capital expenditures from ratepayers to shareholders, given the terms of the settlement.

If development of land in and around Rancho Cordova in Sacramento County occurs as presently forecast, that development will fund repayment of much of the memorandum account balance through an assessment on new water connections. Under such circumstances, ratepayers actually will pay as little as 30% of this balance and the repayment obligation will be shortened considerably, perhaps to less than eight years.

The settlements provide customers with a secure and reliable replacement water supply, provide shareholders with out-of-pocket cost recovery for capital expenditures they made to prevent any service lapse, and offer ratepayers a means for potential recovery of a substantial portion of the litigation costs. We authorize amortization of the memorandum account balance to avoid the significant write-off that the record indicates would be likely otherwise.

Table 1 shows the impact of today's decision on the average monthly bill for ratepayers in SCWC's Arden-Cordova customer service area.

Table 1

Summary of Surcharge Impact for Typical Customers

Bill Type

Increase in Typical Bill

% Increase Over Present Rates

Typical Bill with Approved Surcharge

AC-1 (Metered rate, 116 Ccf

average usage)

$13.92

19.15%

$86.60

AC-2 (Flat rate)

$4.72

14.89%

$36.42

We direct SCWC, working with the Commission's Public Advisor, to prepare a bill insert to explain the terms of the settlements that resolve the groundwater contamination lawsuits and the reason for the surcharge. We also require annual status reports to the Director of the Water Division on the progress of development until the memorandum account is fully amortized.