B. Background

In Resolution (Res.) W-4356, October 24, 2002, the Commission granted PAWW a $70,137 or 56.9% rate increase, subject to refund. About a year earlier, the Commission had also granted PAWW a $47,677 or 62.3% rate increase, also subject to refund, based on a finding that such an increase was necessary to provide sufficient funds to meet PAWW's cash operating expenses with no depreciation or rate of return on rate base. The Commission noted that PAWW's last rate case was in 1991, and that PAWW operated at a loss of $56,687 in 2000. As part of its review leading up to Res. W-4356, the staff conducted two public meetings in Point Arena and prepared an extensive staff report with accompanying audit of the utility's 2000 books of account.

The City objected to the rate increases requested by PAWW and disagreed with staff's review. At the staff's recommendation, the Commission converted this advice letter rate case to a formal proceeding in Resolution W-4356.

PAWW, staff, and the City also differed regarding the proper ratemaking treatment of an income tax refund to PAWW from the early 1990's. The staff auditor concluded from PAWW's records that (1) the tax refund had been obtained by PAWW at its own expense, and (2) the money had been used to meet operation and maintenance expenses that utility revenue failed to cover. Accordingly, the auditor recommended the tax refund not be used to lower prospective rates. The City disagreed. In Res. W-4356, the Commission included this issue in the formal proceeding.

On March 20, 2003, the assigned Administrative Law Judge (ALJ) convened a prehearing conference (PHC). The tax refund was among the matters discussed at the PHC, and the ALJ set a briefing schedule regarding the refund. The ALJ also set a procedural schedule for the remainder of this proceeding. As noted above, the rate increase proposals at issue here have been through an extensive informal review process with our staff, including an audit and a staff report. PAWW and our staff indicated at the PHC that they would rely extensively on these previously prepared analyses to make the required showing.

On April 8, 2004, the City and PAWW filed a stipulation that resolved all issues in the 2002 test year rate case, with one exception. The stipulation provided that the one remaining issue, namely, refunds of certain overcharges, would be submitted to the assigned ALJ after briefing by the parties. PAWW filed its opening brief on April 22, 2004, the City followed with its brief on April 29, 2004, and PAWW submitted its responsive brief on May 13, 2004.

1. Description of the Stipulation

The stipulation provides that, with specified exceptions, the parties will agree to and not challenge the conclusions and recommendations for PAWW's test year 2002 general rate case set forth in Water Division staff's report dated April 2003, with change pages dated April 25, 2004. We discuss these exceptions below.

Regarding the tax refund issue, the City and PAWW agreed to reduce PAWW's rate base by $34,405, which corresponds to the parties' estimates for tax refund amounts that could have been used for plant additions in year 1996 through 1999.

The parties also stipulated that should the Commission authorize rate recovery of any of the amounts recorded in the memorandum account for rate case expenses, such recovery would be over six years. Legal counsel costs after January 7, 2004, would be excluded from the memorandum account.

PAWW further agreed to submit an advice letter requesting Commission authorization to extend its service territory boundaries to include the Hay Industrial Park and adjoining property. PAWW will also notify potential customers that they have the option to contract with service providers other than PAWW for connection work, subject to inspection by PAWW. The parties also agreed that properties listed as "Inactive Meters Not In Service But In Place 1 Jan 03" shall not be charged facilities fees unless additional services or increases in connection size are requested by the property owners.

The parties did not reach agreement on the issue of refunds for overcharges to 5/8 x 3/4 inch meter customers. The parties did, however, agree to an expedited process for the Commission to resolve the issue. The parties stated that the overcharges occurred over an approximately 10-year period and that PAWW has refunded all overcharges for the last three calendar years (1999, 2000, and 2001) preceding this application. PAWW believes that it has discharged its legal obligation to make refunds, and the City believes that all improperly collected funds should be refunded. The parties agreed that should any further refunds be required, they should be used as an offset to the memorandum account discussed above. The parties agreed to brief the issue and that they "will not attempt to otherwise influence the Commission's decision." We resolve the overcharge issue below.