3. Procedural Background

As explained in D.08-09-004, PG&E's application in this matter was originally filed in early 2007. In the application, PG&E argued that its customers were suffering serious inequities as a result of the fixed price being paid by CWS for water supplied from the Miocene Canal. PG&E noted that while the $32,400 annual charge for water that had been approved in 1954 "has not changed in over fifty years, PG&E's costs of owning and operating the Miocene Canal System have increased significantly over this period." (Application, p. 2.)
As a result, PG&E sought the following relief:

· An increase in the annual commodity charge for the water delivered by PG&E from $24,000 to $212,000, allegedly to reflect not only increases in the cost of water, but also in Administrative and General (A&G) and Operations and Maintenance (O&M) expense;

· An increase in the percentage of Miocene Canal capital costs borne by CWS from the 10% approved in 1954 to 50% for 2007 (for a total of $458,000);

· An order directing CWS to pay an advance in aid of construction of $914,000, 50% of the estimated costs of repairing the Coal Canyon penstock; and

· Commission approval of a formula for updating the water charge annually, without the need for subsequent applications.

On May 31, 2007, CWS filed a protest to the application. In its protest, CWS made the following arguments:

· If the Commission adopted PG&E's proposals, they would result in an unjustified shift of costs from PG&E's five million ratepayers to the ratepayers in CWS's Oroville district, who number only about 3,600;

· It would be unreasonable to require the Oroville district ratepayers to pay 50% of the A&G, O&M, and tax and depreciation expense for the Miocene Canal system, since these ratepayers benefit only from a portion of the O&M costs incurred to operate the Miocene system;

· The requested relief should be denied because PG&E was in breach of its contractual obligation to deliver water at the Coal Canyon penstock, and had refused to negotiate in good faith on this issue; and

· CWS should not be required to pay half of the capital costs of repairing the penstock, because this facility "is uniquely required to produce power, not to deliver water."

A prehearing conference (PHC) was held on October 5, 2007. At the PHC, the assigned Administrative Law Judge (ALJ) noted that CWS had suggested that the parties might benefit from mediation of their dispute, and he urged PG&E to consider mediation as an alternative to litigation. On October 9, 2007, PG&E informed the ALJ and CWS that it was willing to engage in a mediation if the process could begin promptly. ALJ John Thorson was promptly assigned to the proceeding as a mediator.

ALJ Thorson held mediated discussions with the parties on December 5, 2007 and January 16 and February 20, 2008. As a result of these sessions, PG&E and CWS agreed upon the terms of the First Amendment, which was filed along with a joint motion seeking its approval on April 23, 2008. In D.08-09-004, the Commission approved the First Amendment without condition, and set October 23, 2009, as the resolution date for this proceeding.

During the Fall of 2008, the engineering study that the parties had agreed upon was undertaken. In a series of e-mails, PG&E and CWS informed the ALJ that the initial results of the study conducted by MBK Engineers had been presented to them in early November. Both parties had questions based on these initial results, which necessitated clarification and further research by the engineers. In mid-December 2008, the parties reported the following to the ALJ:

"The MBK report indicates that a substantial amount of water is lost from the system during transit into and within the Powers Canal . . . The losses are due to a combination of factors, including leakage. Losses in excess of delivery commitments along the Powers canal are in the neighborhood of 7000 acre-feet per year.

"The parties understand that if the losses can be remedied, then the water so saved should be a resource marketable locally or through the State Water Project system.

"The next steps in the process are to estimate the cost of improvements to the Powers canal that would be needed to limit the transportation losses and determine whether a buyer can be found to take the available water. [CWS] will undertake during the month of January to prepare an estimate of repair costs to minimize leakage from the [Powers] canal."

In the same e-mail message, the parties proposed a schedule under which January 30, 2009 was set as the date for CWS's completion of its repair estimates, February 20 was established as the date for completing negotiations with prospective third-party water purchasers to the point where "PG&E and CWS feel they have sufficient information to attempt finally to resolve their pricing dispute," and March 13, 2009 was set as the date for presenting a new rate and/or revenue allocation scheme to the Commission. The ALJ accepted this schedule.

On February 23, 2008, counsel for CWS sent the ALJ an e-mail in which he stated that "our clients have reached an agreement in principle for a settlement of this application. The settlement in principle includes an annual adjustment that we hope will avoid any need to bring this issue to the Commission again." Counsel also proposed to file a motion for approval of the settlement on March 20, 2009. After a further exchange of e-mails, it was agreed that any necessary hearing on the proposed settlement would be held on April 8, 2009.

A joint motion for approval of the Second Amendment was filed by PG&E and CWS on March 20, 2009. On March 27, 2009, the ALJ sent the parties an e-mail setting forth questions he wanted them to address at the April 8 hearing. These questions concerned what the costs of repairing the Powers Canal would be, how CWS and PG&E proposed to account for the capital costs of repairing their respective canals, the basis of the formula for splitting the proceeds from sales of Conservation Water, and how much volatility in the water prices for Oroville customers could be expected from use of the CPI-U index.