5. Discussion

We have decided to approve the settlement set forth in the Second Amendment because we believe that (1) it satisfies our criteria for approving settlements, (2) it equitably balances the interests of PG&E's customers against those of CWS ratepayers in the Oroville District, and (3) it appears to be a permanent solution to the pricing issues over which PG&E and CWS have been fighting for more than a decade.

In their March 20, 2009 joint motion, PG&E and CWS argue that the Second Amendment is reasonable and should be approved because, among other reasons, it conforms to our rules concerning settlements. The Commission's fundamental standard for evaluating settlements is set forth in Rule 12.1(d), which provides in full:

"The Commission will not approve settlements, whether contested or uncontested, unless the settlement is reasonable in light of the whole record, consistent with law, and in the public interest."

We have no difficulty in concluding that the Second Amendment satisfies the first part of this test; i.e., is reasonable in light of the whole record. As the discussion above demonstrates, CWS has now concluded that the most cost-effective option for obtaining the water needed to serve its Oroville customers is to continue to accept water deliveries from PG&E's Miocene Canal system. In light of this decision, each party has agreed to make a substantial investment to upgrade its system, PG&E by repairing the Coal Canyon penstock, and CWS by repairing and minimizing water losses along the Powers Canal. Although the precise amount of surplus water the parties will have for sale or transfer remains uncertain, CWS and PG&E have agreed to split the first $100,000 of revenue they receive each year from sales or transfers of Conservation Water by dividing these revenues roughly in proportion to the capital investments necessary to repair their respective systems.⁸ CWS will also continue to pay PG&E the so-called First Amendment price for water; i.e., the $152,400 price that is approximately equal to the price that would result from updating the factors used in the parties' 1953 Supplemental Agreement.⁹ Finally, to ensure that future relief will not be needed from the Commission, the parties have agreed to an annual update of the First Amendment price using the CPI-U index.

These provisions clearly represent a careful balancing of the interests of the ratepayers of both PG&E and CWS, and when taken as a whole, we find them to be reasonable and amply supported by the record.

We also believe that the second prong of Rule 12.1(d)'s test for approving settlements is met here. As the March 20 joint motion for approval states, "[t]he parties are aware of no statutory provision or prior Commission decision that would be contravened or compromised by the Second Amendment. The issues resolved in the Second Amendment are within the scope of the proceeding." (Joint Motion, p. 7.) We agree with these assertions.

Finally, we agree with PG&E and CWS that the terms of the Second Amendment will serve the public interest, the third factor in Rule 12.1(d). In addition to noting that approval of the settlement will save the Commission and the parties the time, expense, and uncertainty of litigation, the joint motion argues that the public interest will be served in the following ways:

"[B]oth active parties with an interest in the settled issues, PG&E and [CWS], formulated the Second Amendment after extensive negotiations, including disclosures made through a voluntary mediation process, discovery and investigations into the conditions of the Miocene Canal. The negotiations were accomplished at arm's length over the course of several months. Together these parties fairly represent the affected interests.[¹⁰]

"The interests at stake in the proceeding are primarily those of the customers of the respective companies. In general, increases or decreases in the cost of water bought by [CWS] under the Second Amendment will be passed through to its Oroville District customers through the Oroville Purchased Water Balancing Account, and revenues received from [CWS] and possibly others for purchased water under the Second Amendment will be reflected in reduced rates to PG&E's customers through the UGBA.

"There is also a broader public interest in the renewable energy produced by the Coal Canyon power house. The Second Amendment advances this public interest because, with the repair of the Coal Canyon penstock, it will make it possible to restart an otherwise uneconomic hydroelectric plant that is an important renewable energy resource."
(Id. at 7-8.)

We agree that approving the settlement before us will serve the public interest. It seems clear from the course of this proceeding that CWS and PG&E have effectively represented the interests of their customers, who will benefit directly from implementation of the Second Amendment and from any revenues from Conservation Water that the two companies receive as a result of the settlement. It is also apparent that this has been a vigorous negotiation, with both sides engaging in give-and-take in order to reach the settlement before us. Accordingly, we conclude that the Second Amendment satisfies the tests for approving settlements set forth in Rules 12.1(d), and we will approve it.¹¹

⁸ Further, as noted in the text, the revenues from sales or transfers of Conservation Water will be flowed through to the two companies' ratepayers. In CWS's case, that will occur through the MCBA, and in PG&E's case, through UGBA.

⁹ As we pointed out on page 6 of D.08-09-004, CWS's May 31, 2007 protest had stated that an update of the pricing factors used in the 1953 Supplemental Agreement would result in a price for Miocene Canal water of approximately $150,000:

"While no capital cost charge is justified, if the Commission were to apply the formula used in 1953, and accepting arguendo the numbers supplied by PG&E in it application at Table 3-4, the `demand charge' would be limited to 10% of the `depreciation expense' in Table 3-4, or $26,300 annually. No taxes, franchise fees, or return were included in the 1953 calculation. The annual commodity charge would be 50% of the actual O&M for the project, excluding A&G expense. That would be $125,000. So the total annual fee would be no more than $150,000 under the 1953 formula." (Protest, p. 5.)

¹⁰ The joint motion also notes that the DRA elected not to intervene in this proceeding, presumably because "it concluded that [CWS] and PG&E were effectively representing the interests of their respective customers." (Id. at 8.)

¹¹ In addition to arguing that the Second Amendment meets the standards for settlements set forth in Rule 12.1(d), CWS and PG&E argue that it also meets the tests for approving an all-party settlement. These tests, which were originally set forth in D.92-12-019 (46 CPUC2d 538, 550-551), are as follows:

1. The settlement agreement commands the unanimous sponsorship of all active parties to the proceeding;

2. The sponsoring parties are fairly reflective of the affected interests;

3. No term of the settlement contravenes statutory provisions or prior Commission decisions; and

4. The settlement conveys to the Commission sufficient information to permit it to discharge its future regulatory obligations with respect to the parties and their interests.

As the discussion in the text makes clear, the first three of the all-party settlement tests are met in this case. As to the fourth, we agree with the joint motion that it is also satisfied "because the inclusion of a price adjustment clause will minimize the potential for disputes between the parties regarding pricing under the contract." (Id. at 7.)