2. Background

This proceeding involved both an evidentiary phase, including formal hearings and briefs, and public participation hearings. Although the comments received during the public participation hearings are not technically evidence, we find that the themes raised in those hearings are revealing, as shown by our resolution of this disputed issues in today's decision. We also appreciate the participation of various cities on behalf of their residents and businesses.

2.1. Procedural History

SCWC seeks rate increases for its Region III service area based on increased costs for, among other things, plant investment, capital, operation and maintenance, and administrative and general. SCWC states that absent a change in rates, its return on rate base would be 4.62% for 2006, which it asserts would be an unjust and unreasonable return. SCWC also requested authorization for escalation increases, based on the escalation year methodology adopted in Decision (D.) 04-06-018. ORA protested SCWC's application as unreasonable or insufficiently justified.

The Assigned Commissioner and Administrative Law Judge (ALJ) convened a prehearing conference on April 26, 2005. Prior to the prehearing conference, the ALJ noted by ruling that the Commission had previously found deficiencies in SCWC's cost allocation to unregulated operations and had ordered SCWC to conduct a cost study and analysis to demonstrate compliance with SCWC's holding company decision.2 The Commission had further directed SCWC to address capital costs and management polices and accounting practices for unregulated operations. The ALJ noted that SCWC's testimony on unregulated operations relied on a cost allocation methodology previously rejected by the Commission, and that it did not address capital costs or management policies and accounting practices.

At the prehearing conference, the Assigned Commissioner, ALJ, and the parties discussed the following:

1. The state of the record on the issue of unregulated operations;

2. Whether a reasonableness review was needed for the Calipatria Niland Upgrade project in this proceeding;

3. Using the Construction Work in Progress Account to add projects to rate base; and

4. The accuracy of SCWC's lists of primary cost increases and contentious issues in the application.

Based on the prehearing conference discussion, SCWC filed and served supplemental information on May 11, 2005. SCWC substantially revised its list of primary cost increases and contentious issues. The revised primary cost increases are:

With this new information, SCWC also modified its list of contentious issues to include its proposed return on equity of 11.65%, which is an increase from the previously authorized rate of 9.90%.

Also in its May 11 filing, SCWC explained that it had reviewed the Commission's treatment of the Calipatria Niland Upgrade project in D.04-03-039 and determined that the Commission had not found that the plant was a prudent investment. SCWC stated that it was reviewing its direct testimony for compliance with the Commission's directive in that decision to justify the recorded expenditures and consider project alternatives in SCWC's subsequent prudence showing.

The ALJ convened a second prehearing conference on May 31, 2005, where the City of Claremont appeared as a party. ORA and SCWC stated that they had reached an agreement in principle to reschedule consideration of SCWC's general office from this GRC to the Region II filing, expected next year. On August 3, 2005, ORA and SCWC filed a stipulation which defers full review of general office to SCWC's 2006 Region II general rate case and sets specific amounts for general office capital and expenses for this rate case. The stipulation is Appendix B to today's decision.

SCWC stated that it wished to offer additional testimony on the Calipatria Niland Upgrade project, and that all the information in the proposed additional testimony had been provided to ORA in a data response in April. A schedule was set for distributing the testimony, and for ORA to set forth any objections.

At the second prehearing conference, the parties also discussed SCWC's increase in rate base, including the comparison report of authorized versus actual investment and the nearly $60 million of construction work in progress forecasted to be closed and booked to plant in service in 2005. SCWC stated that it would file and serve supplemental information on these topics as well.

Evidentiary hearings were held on August 10, 11, 12, and 15. SCWC, ORA, and the City of Claremont cross examined witnesses. Apart from the evidentiary hearings, the ALJ also held three public participation hearings; these are discussed in the next section.

During the hearing process, ORA and SCWC were able to resolve some issues, which they memorialized in an overall stipulation. On September 16, 2005, ORA and SCWC jointly filed this stipulation, with supporting comparison exhibit, and a second comparison exhibit setting out all the issues that remained in dispute. The overall stipulation is Appendix C to today's decision.

The overall stipulation showed ORA's agreement to $770,000 increase in 2006 test year revenue requirement, but the issues with the greatest revenue impact, accounting for $10.7 million of the requested increase, remained in dispute. Agreed-upon and not disputed plant comprises the most significant component of the stipulation. The stipulation also contains agreed-upon forecasts for average commercial and residential customer sales for test years 2006 and 2007 in each of the customer service areas in Region III. The parties were also able to resolve most administrative and general cost forecasts, typically settling on an amount between the two initial recommendations. The stipulation includes agreed-upon sources of water supply, i.e., wells and purchases, for each customer service area. The prices for purchased water supply and energy shall be updated to the latest available at the time the decision tables are prepared.

As noted above, the second comparison exhibit sets out the remaining disputed issues. These are the issues we resolve in today's decision.

The parties filed initial briefs on September 19, 2005, and participated in oral argument before the assigned Commissioner and ALJ on September 20, 2005. Final briefs were scheduled to be filed on September 28, 2005, but due to the illness of SCWC's counsel were rescheduled to October 17, 2005, which became the submission date. ORA's briefs included a comprehensive discussion of the issues with its recommendations. SCWC limited its brief to a discussion of the Calipatria Niland Upgrade project and return on equity.

2.2. Public Participation Hearings and Written Comment Submitted to the Commission

Public Participation Hearings were held in Apple Valley (July 11), San Dimas (July 14), and Placentia (July 13), with day and evening hearings at each location. The Commission received 156 written communications, via postal and electronic mail. Residents of Claremont submitted the largest number of written comments, 48, with San Dimas residents adding 27.

The Cities of Acacia, Walnut, and San Dimas all submitted written comments on behalf of their residents, with representatives of several cities also offering testimony at the hearings. The City of Claremont formally appeared and actively participated in the evidentiary hearings.

The message from the comments was straightforward: SCWC's requested rate increase was too high, and SCWC had not done enough to control its costs. As shown in other parts of today's decision, we find that the evidentiary record bears out many of these comments.

Monthly service fee increases, including those for multifamily housing and businesses, drew many objections. One speaker prepared an analysis of his home bills from the last seven years, and calculated that SCWC's service fee had increased by 89%, from $113 to $214.60 for each two month period. An apartment owner reported that the fixed charges for her apartment building have gone up 70% in seven years. Conservation also suffers because the very high monthly service fee offers no incentive to conserve.

Several speakers criticized SCWC for seeking such a large rate increase when its per share corporate earnings had increased 175% from 2004 to 2005.

The need for cost cutting and efficiency improvements was a theme of several comments. Cost reduction, as well as efficiency and effectiveness improvements must precede any rate increase. Executive compensation was challenged; one speaker suggested that SCWC should "cut some of their fat," and he nominated a "couple of vice presidents" as a good place to start.

SCWC's requested increase in its rate of return was also criticized. One speaker contended that monopoly companies face little if any market risk, which SCWC says justifies its requested rate of return.

Business leaders opposed the rate increase proposal because it would dramatically decrease the revenue of all business members either directly or indirectly, and was "unconscionable" at a time when the cost of doing business in California was soaring.

SCWC's practice of making exorbitant rate increase proposals and then "accepting" a small fraction was called a "trap" that the Commission should avoid. SCWC was accused of making "high-ball" requests, based on "gamed" cost estimates, fully expecting substantial "reductions" and knowing that this result will be acceptable.

2 See D.04-03-039, SCWC's last Region III general rate case.

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