7. Assignment of Proceeding

Timothy Alan Simon is the assigned Commissioner for this proceeding, and A. Kirk McKenzie is the assigned ALJ.

1. Under the contract that PG&E entered into with CWS in 1927, PG&E agreed to deliver water without charge to CWS via the Miocene Canal for 25 years, in consideration of CWS's assumption of PG&E's obligation to serve the residents and other water customers in the City of Oroville.

2. Under Paragraph 7 of the 1927 contract between PG&E and CWS, the deliveries of water by PG&E to CWS after May 1952 were to be made at such price "as may from time to time be established therefor" by the Commission.

3. Under the Supplemental Agreement that PG&E and CWS entered into in 1953, which agreement was approved by the Commission in 1954 in D.50839, the price for the water delivered by PG&E to CWS via the Miocene Canal was set at $32,400 per year, with no provision for escalation.

4. PG&E contends in its application that the costs of delivering water to CWS via the Miocene Canal have increased so much since 1954 that an annual price for the water of $670,000 is now justified.

5. In its protest, CWS contends that the new water price sought by PG&E would inequitably shift costs from PG&E's approximately five million ratepayers to the customers in CWS's Oroville District, who number approximately 3,600.

6. On April 23, 2008, following a mediation process the parties had agreed to at the October 2007 PHC, PG&E and CWS submitted for Commission approval a proposed First Amendment to their 1927 contract and 1953 Supplemental Agreement.

7. Under the terms of the First Amendment, CWS agreed to pay PG&E, for the period from April 1, 2008 to March 31, 2009, an annual charge of $152,400 for deliveries of water from the Miocene Canal.

8. The First Amendment also provided that once its terms went into effect, PG&E would pay for an engineering study of water flows through CWS's Powers Canal, the object of the study being to determine whether sales of surplus water could help finance repair of the Coal Canyon penstock and contribute to the maintenance costs associated with the Miocene Canal.

9. The First Amendment also provided that after receipt and evaluation of the engineering study, either PG&E or CWS could choose to terminate the First Amendment and cease further negotiations, in which case the price for the water delivered by PG&E to CWS would revert to the $32,400 annual price set forth in the 1953 Supplemental Agreement.

10. The Commission approved the First Amendment in D.08-09-004.

11. The engineering study called for by the First Amendment was performed in the Fall of 2008.

12. Based on the engineering study, it appears that the difference between the amount of water delivered by PG&E to CWS and the amount of water metered at the Oroville Treatment Plant at the end of the Powers Canal is approximately 7000 acre feet per year.

13. Although further engineering studies will be necessary to determine the exact amount, it appears that some portion of the 7000 acre feet of water per year that leaves the system along the Powers Canal will be available for sale or transfer to third parties. Such water available for sale or transfer is referred to in the Second Amendment as Conservation Water.

14. On March 20, 2009, PG&E and CWS submitted a joint motion for approval of the Second Amendment.

15. If approved, the Second Amendment would represent a complete settlement of the issues raised by the instant application.

16. Among other things, the Second Amendment provides that PG&E will assume the costs of repairing the Coal Canyon penstock, and that CWS will assume the costs of repairing the Powers Canal.

17. In addition to repairing the Powers Canal, CWS agrees under the Second Amendment to take reasonable steps to ensure that the amount of Conservation Water available along the entire length of the Powers Canal can be determined.

18. Under the Second Amendment, the repairs of the Coal Canyon penstock and the Powers Canal are to be completed by December 31, 2010, unless CWS and PG&E mutually agree upon an extension of time.

19. The Second Amendment provides that revenues from sales or transfers of Conservation Water up to $100,000 per year will be split in the ratio of 70% to PG&E and 30% to CWS, and that revenues from such sales or transfers in excess of $100,000 per year will be split equally between the two companies.

20. The Second Amendment provides that beginning on April 1, 2009, CWS shall pay to PG&E the First Amendment price of $152,400 per year for the water that PG&E delivers to CWS from the Miocene Canal.

21. The Second Amendment provides that on March 31, 2010, and thereafter on March 31 of each year or the first business day of such year after March 31, the First Amendment price, including any prior price adjustments, shall be adjusted upward or downward by the annual change in the CPI-U index.

22. In the joint motion for approval of the Second Amendment, the parties request that CWS be authorized to recover the costs of Miocene Canal water that CWS purchases from PG&E through the Oroville Purchased Water Balancing Account (now known as the MCBA), and that revenues received by CWS from sales or transfers of Conservation Water be treated as an offset to this balancing account.

23. In the joint motion for approval of the Second Amendment, the parties request that PG&E be authorized to book revenues received from CWS for Miocene Canal water, as well as revenues received from sales or transfers of Conservation Water, to UGBA.

24. CWS intends to include the repair costs for the Powers Canal as part of the proposed capital additions for the Oroville District in CWS's next GRC, which is scheduled to be filed on July 1, 2009.

25. PG&E intends to include the repair costs for the Coal Canyon penstock as part of the proposed capital additions to its system in PG&E's next GRC, which is scheduled to be filed in 2011.

1. The proposed settlement set forth in the Second Amendment is reasonable in light of the whole record.

2. The proposed settlement set forth in the Second Amendment is consistent with law.

3. The proposed settlement set forth in the Second Amendment is consistent with the public interest.

4. The proposed settlement set forth in the Second Amendment satisfies the tests for an all-party settlement set forth in D.92-12-019.

5. The proposed settlement set forth in the Second Amendment, which is attached to this decision as Appendix A, should be approved.

6. The ratemaking treatment proposed by the parties for PG&E's sales of Miocene Canal water to CWS, and for the handling by CWS and PG&E of revenues received by them from sales or transfers of Conservation Water, as described in Findings of Fact (FOF) 22-23, is reasonable and should be approved.

7. CWS's plan to include the repair costs for the Powers Canal as part of the proposed plant additions for the Oroville District in CWS's next GRC, as described in FOF 24, is reasonable.

8. PG&E's plan to include the repair costs for the Coal Canyon penstock as part of the proposed plant additions to PG&E's system in the company's next GRC, as described in FOF 25, is reasonable.

9. This order should be made effective immediately.

ORDER

IT IS ORDERED that:

1. The Second Amendment to Contract and Supplemental Agreement for Water Supplied from the Miocene Canal, which is set forth in Appendix A to this decision, is hereby approved.

2. California Water Service Company is authorized to book amounts it pays to Pacific Gas and Electric Company for water deliveries from the Miocene Canal, pursuant to the Second Amendment to Contract and Supplemental Agreement for Water Supplied from the Miocene Canal approved in this decision, to the Modified Cost Balancing Account established pursuant to California Water Service Company Advice Letter 1863-A, as authorized by Decision 08-02-036.

3. California Water Service Company is authorized to book amounts it receives from sales or transfers of Conservation Water, as defined in Paragraph 4 of the Second Amendment to Contract and Supplemental Agreement for Water Supplied from the Miocene Canal approved in this decision, as an offset to the Modified Cost Balancing Account established pursuant to California Water Service Company Advice Letter 1863-A.

4. Pacific Gas and Electric Company is authorized to book amounts it receives from California Water Service Company for deliveries of Miocene Canal water, pursuant to the Second Amendment to Contract and Supplemental Agreement for Water Supplied from the Miocene Canal approved in this decision, to the Utility Generation Balancing Account authorized by Decision 07-03-044.

5. Pacific Gas and Electric Company is authorized to book amounts it receives from sales or transfers of Conservation Water, as defined in Paragraph 4 of the Second Amendment to Contract and Supplemental Agreement for Water Supplied from the Miocene Canal approved in this decision, to the Utility Generation Balancing Account authorized by Decision 07-03-044.

6. Application 07-04-022 is closed.

This order is effective today.

Dated June 18, 2009, at San Francisco, California.

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