VII. Assignment of Proceeding

Geoffrey F. Brown is the Assigned Commissioner and Maribeth Bushey is the assigned Administrative Law Judge in this proceeding.

Findings of Fact

1. As set forth in the Settlement Agreement between ORA and Valencia and accompanying tables, attached hereto as Appendix A, Valencia and ORA resolved all outstanding issues in this proceeding.

2. The Settlement Agreement sets forth a rate increase that is substantially less than Valencia's initial proposal.

3. Sierra Club opposed the Settlement Agreement on six issues.

4. Sierra Club's opposition to the Settlement Agreement on cost of capital and rate of return is based on an erroneous reading of the Settlement Agreement, which adopts ORA's recommendations on these points.

5. Sierra Club's issues relating to Westridge Golf Course consumption have been resolved by Valencia's further explanation of its forecasting assumptions.

6. Sierra Club's concerns that Valencia may be providing preferential treatment for its corporate affiliate, a land development company, are not supported by record evidence.

7. Any intervenor fee awards from Valencia will be handled consistent with Commission policy and precedent.

8. Sierra Club did not present sufficient evidence to require modifications to Valencia's service territory map.

9. The Settlement Agreement ends the irrigation discount and relies on non-potable sources to meet irrigation needs.

10. The Settlement Agreement was the result of negotiation and compromise between the parties after all testimony had been filed.

11. Valencia did not present sufficient evidence to enable the Commission to fulfill its responsibilities under Pub. Util. Code § 739.8 to consider rate relief for low income ratepayers.

12. Valencia's low-income water rate proposal did not fully and completely addresses the matters discussed in this Order and contained in Pub. Util. Code § 739.8 including but not limited to: availability of the program to all low income families served with water directly or indirectly by Valencia; costs of the program; conservation effects of the program; and ratemaking treatment of program costs.

13. The Commission opened R.01-12-009 to evaluate existing practices and policies for processing offset rate increases and balancing accounts for Class A water utilities and has addressed existing account balances in D.02-12-055.

14. The Settlement Agreement provides for $110,000, approximately half of forecasted annual costs, to be included in Valencia's revenue requirement for percholorate litigation costs, and that this amount is subject to refund and subsequent reasonableness review. Allowing this amount in revenue requirement, subject to refund, will reduce litigation financing costs for the utility while retaining full protection for ratepayers.

15. In D.01-11-048, the Commission conducted a CEQA review of Valencia's WMP and found that the "WMP provides a sound basis for concluding that Valencia's current and planned water supplies are sufficient to meet present and future customer needs," and that it was reasonable to anticipate that water purveyors in the Santa Clarita Valley will effectively remediate the perchlorate pollution in the Saugus aquifer. Valencia providing service to its customers from sources identified in its WMP and including the costs in its revenue requirement is consistent with the WMP.

16. Sierra Club presented no new evidence to suggest that the Commission's conclusions regarding the adequacy of water supplies available to Valencia or the effects of the ammonium perchlorate pollution should be reviewed again.

17. The rate proposal will have no reasonably foreseeable impact on the environment that has not been already considered in D.01-11-048.

18. Valencia is providing satisfactory water service, and the water furnished meets current state drinking water standards.

Conclusions of Law

1. With the exception of the LIRA proposal, the Settlement Agreement is reasonable in light of the record, consistent with the law, and in the public interest.

2. The revenue changes reflected in the Settlement Agreement will result in just and reasonable rates for Valencia.

3. The revenue changes reflected in the Settlement Agreement should be approved for Valencia.

4. Valencia did not present sufficient evidence to enable the Commission to fulfill its responsibilities under Pub. Util. Code § 739.8 to consider rate relief for low income ratepayers and Valencia's LIRA proposal should be rejected.

5. Within 180 days of the effective date of this order and in consultation with the Commission's Water Division and ORA, Valencia should file an application with a low-income water rate proposal that fully and completely addresses the matters discussed in this Order and contained in Pub. Util. Code § 739.8 including but not limited to: availability of the program to all low income families served with water directly or indirectly by Valencia; costs of the program; conservation effects of the program; and ratemaking treatment of program costs.

6. In light of the safeguards for ratepayers and the need for this arrangement, we should approve the addition to revenue requirement, subject to refund and subsequent reasonableness review, of $110,000 for perchlorate litigation costs, and Valencia should track this amount on a per customer basis in the memorandum account for perchlorate litigation costs.

7. No new evidence supports review of the Commission's conclusions regarding the adequacy of water supplies available to Valencia or the effects of the ammonium perchlorate pollution.

8. Additional CEQA review would serve no purpose and no further environmental review is required.

ORDER

IT IS ORDERED that:

1. Excluding the Low Income Ratepayer Assistance (LIRA) proposal, the Settlement Agreement between Valencia Water Company (Valencia) and the Office of Ratepayer Advocates (ORA) is adopted.

2. Valencia is authorized to implement the following:

3. Valencia is authorized to file in accordance with General Order (GO) 96-A, and to make effective on not less than five days' notice, tariffs eliminating Schedule No. 3-ML and containing the test year 2003 increase as provided in the revenue requirement tables in Appendix  B through E to this decision and the revised tariff pages in Appendix F to this decision. The revised rates shall apply to service rendered on and after the tariffs' effective date.

4. Valencia is authorized to include $110,000 per year in revenue requirement, subject to refund and subsequent reasonableness review, to be tracked on a per customer basis in the memorandum account for perchlorate litigation.

5. On or after November 5, 2003, but no later than March 5, 2004, Valencia is authorized to file an advice letter, with appropriate supporting workpapers, requesting the step rate decreases for 2004 included in Appendix F, Schedule 1; or requesting a proportionate lesser decrease, if the rate of return on rate base, including normal ratemaking adjustments for the 12 months ending September 30, 2003, falls short of the rate of return found reasonable in this case. This filing shall comply with GO 96-A. The requested step rates shall be reviewed by the Commission's Water Division (Division) to determine their conformity. The Division shall inform the Commission if it finds that the proposed rates are not in accord with this decision. The effective date of the revised tariff schedule shall be no earlier than January 1, 2004, or 40 days after filing, whichever is later. The revised schedules shall apply to service rendered on and after their effective date.

5. On or after November 5, 2004, but no later than March 5, 2005, Valencia shall be authorized to file an advice letter, with appropriate supporting workpapers, requesting the attrition rate decreases for 2005 included in Appendix F, Schedule 1; or requesting a proportionate lesser decrease, if the rate of return on rate base, including normal ratemaking adjustments for the 12 months ending September 30, 2004, falls short of the rate of return found reasonable in this case. This filing should comply with GO 96-A. The requested attrition rate increase shall be reviewed by the Division to determine their conformity. The Division shall inform the Commission if it finds that the proposed rates are not in accord with this decision. The effective date of the revised tariff schedule shall be no earlier than January 1, 2005, or 40 days after filing, whichever is later. The revised schedule shall apply to service rendered on and after their effective date.

6. Valencia's proposed LIRA tariff is rejected. Within 180 days of the effective date of this order and in consultation with the Division and ORA, Valencia shall file an application with a low-income water rate proposal that fully and completely addresses the matters discussed in this Order and contained in Pub. Util. Code § 739.8 including but not limited to: availability of the program to all low income families served with water directly or indirectly by Valencia; costs of the program; conservation effects of the program; and ratemaking treatment of program costs.

7. Exhibits 18 through 22, which were presented and identified at the hearing, and Exhibit 23, the ORA and Valencia Comparison Exhibit, are received into the evidentiary record.

8. This proceeding is closed.

This order is effective today.

Dated May 8, 2003, at San Francisco, California.

APPENDIX A

Settlement

1. The parties to the Settlement ("Parties") are the Office of Ratepayer Advocates ("ORA") and the Valencia Water Company ("VWC").

2. The Parties agree to fully support this Settlement inasmuch as their negotiations have resulted in the resolution of all contested issues raised in A.02-05-013 and in ORA's two reports relating to the cost of capital and the results of operation.7

3. This Settlement would have the following revenue effect for the Test Years 2003 and 2004 and the Attrition Year 2005.

4. For each of the disputed issues, the paragraphs that follow describe the request of VWC, the analysis of ORA and the basis on which the Parties agree. The paragraph numbers correspond to paragraphs in ORA's Report on A.02-05-013.

Cost of Capital and Return on Equity (ORA's Report on Cost of Capital)

Upon review of current market conditions, VWC accepts ORA's recommended return on equity of 9.72% which would result in a return on ratebase of 9.20% for the Test Years.

Customer Growth (Paragraph 2.3)

Upon review of recent growth experienced in its service area, VWC accepts ORA's projections.

Consumption (Paragraph 2.5 to 2.8)

The Parties agree that no mathematical model would likely accurately predict the amount of water each customer would use in the Test Years; however the Parties agree that the values obtained by ORA's method, which is termed the Committee or Bean Method, should be weighted 75% and the values obtained by VWC's method should be weighted 25%. Such weighting would recognize an overall trend of decreasing consumption that is evident in VWC's service area, as well as the litigation risk of either Party's preferred method being adopted by the CPUC in this proceeding. The Parties agree that, prior to filing its next application for a general increase in rates, VWC will consult with ORA regarding the appropriate method for estimating consumption.

Loss of Water (Paragraph 2.9)

The Parties' proposed estimates of percentage of water that will be lost during the Test Years varied due to analyses of different historical time periods. The Parties agree that a loss of water factor of 5% is consistent with the normal trend of the last three years.

      New Employees (Paragraph 4.4)

As indicated in the discussion about Customer Growth (Paragraph 2.3), the Parties agree to ORA's estimates of a steady increase in customers. The Parties have reviewed more recent data that shows a likely increase in VWC's workload as a result of the additional customers. The Parties thus agree that, even with the automation of certain processes, one additional Customer Service Representative would be required to handle the increase in the number of customers it will serve in the Test Years.

      Overtime (Paragraph 4.5)

ORA has reviewed information that was not included in the Application regarding the overtime charges recorded in 2001 and 2002 for personnel paid on an hourly basis. ORA agrees that VWC's estimate is appropriate for the Test Years.

Capitalized Payroll (Paragraph 4.6)

ORA's initial estimates were based on five years of historical data, while VWC's initial estimates were based on future projections. The Parties have reviewed recent data relating to the involvement of VWC's administrative staff in construction and replacement of plant and agree that estimates based on three years of most current data appropriately reflect future trends.

Mixture of Groundwater and Purchased Water (Paragraph 4.7)

ORA has reviewed new regulations of the Castaic Lake Water Agency that require VWC to purchase a set amount of water each year. By purchasing 50% of its total supply, VWC would meet those requirements.

Purchased Power (Paragraph 4.8)

The Parties' initial estimates for Purchased Power were based on differing assumptions for number of customers, consumption, loss of water, and mixture of groundwater and purchased water. The Parties now agree to Purchased Power estimates that reflect the agreements on those factors reached elsewhere in this Settlement, and on an average expense of $0.105 per kilowatt-hour for electric energy as determined by current billing of VWC by Southern California Edison Company.

Source of Supply (Paragraph 4.9)

ORA initially estimated ordinary maintenance expenses for the Test Years based on expenditures recorded as Source of Supply expenses. ORA initially excluded expenses of $21,300 per year for a new program for testing and inspecting wells. The Parties now agree on ordinary maintenance expenses that are lower than those originally proposed by both ORA and VWC. However, after reviewing additional data in support of the new program, ORA also agrees that the new program is desirable because it provides useful data, otherwise unavailable, that is needed to conduct efficient operations.

Expense of Pumping (Paragraph 4.10)

ORA's method for calculating its initial estimates excluded certain expenses that were not specifically identified in the Expense of Pumping account. After clearly identifying and reviewing expenses in the account, the Parties agree to decrease estimations for certain expenses, but to retain a $27,000 a year expense for a new program that tests and repairs booster meters for maximum accuracy.

Water Quality (Paragraph 4.11)

VWC has examined current expenses for Water Quality and agrees that the pattern of recent expenditures estimated by ORA would be reasonable for the Test Years.

Expense of Transmission and Distribution (Paragraph 4.12)

The Parties agree to use ORA's estimates for five of the eight categories in this account. For repairing leaks, the Parties also agree to base the estimate on expenditures occurring in 2002. After reviewing additional data, the Parties also agree that a $70,000 program for testing and replacing defective meters is reasonable. For the Parties' agreement on the category of storage facilities, see the discussion relating to the repainting of tanks in Paragraph 4.13, below.

Amortization of the Expense of Painting Tanks (Paragraph 4.13)

Amortization expense:

Rate base additions:

The expense of painting tanks normally is treated separately from other plant additions for rate setting purpose. In the present case, as part of the Expense of Transmission and Distribution, above, VWC proposes to repaint eight tanks over a period of ten years at a total cost of $2,200,000. This equates to $220,000 being added to rate base each year and $11,000 in related amortization (over a 20-year life) being added to recoverable expense each year for rate setting purposes. ORA has reviewed VWC's schedule for repainting its tanks. The Parties agree that an appropriate approach for accounting for tank repainting in Test Years 2003 and 2004 is to assume, for ratemaking purposes, that the tank repainting program began in 2002 and that it will proceed at a steady pace over ten years, with the costs to be amortized over 20 years. Thus, for ratemaking purposes, the Parties agree that amortization equal to two years' average tank repainting costs in Test Year 2003, and three years' average tank repainting costs in Test Year 2004, is appropriate. This will result in total amortization expense of $22,000 and $33,000, respectively, with annual rate base additions of $220,000 beginning this year.

Customer Accounts (Paragraph 4.14)

Upon review of recent additional charges imposed by VWC's outside billing service, the Parties agree on revised estimates of expense for Customer Accounts.

Office Expenses (Paragraph 5.3)

The Parties agree to adopt ORA's estimates of Office Expenses, which are based on an average of recent charges to the account, plus $12,000 per year for customary bank fees that were not included in ORA's initial estimates.

Outside Services (Paragraph 5.4)

As indicated in ORA's Report, ORA's initial estimates were based on a limited set of data. VWC has provided extensive historical data that provides additional support for VWC's proposed Outside Services expenses. Based on this new data, ORA increased its estimates to calculate reasonable expenditures for general legal and consulting activities. The Parties agree that a reasonable average expenditure for general legal and consulting activities is $150,000 per year. The Parties also agree that the program that monitors the condition of aquifers from which VWC obtains one half of its supply should be continued, and that an expense of $50,000 per year is reasonable for the program. Finally, the Parties agree to exclude from this account expenses relating to the Water Management Program approved in D.01-11-048.

Regulatory Expense (Paragraph 5.6)

ORA's initial estimates were based on historical data relating to the regulatory expenses VWC incurred as a result of its previous rate case. Unlike in its last rate case, however, VWC is using outside expert consultants for this rate case, and additional intervening parties are participating. Taking these additional expenses into account, the Parties now agree that VWC's original estimate appears reasonable.

Intervenor Fees (Paragraph 5.7)

As of the date of this Settlement, the Commission has not awarded any intervenor fees that are subject to payment by VWC. The Parties agree that if such fees are awarded prior to the submission of this proceeding, the expense should be included in this proceeding as an additional one-time Regulatory Expense.

Miscellaneous Expense (Paragraph 5.8)

Parties agree to accept ORA's proposed estimates for most subaccounts comprising Miscellaneous Expenses. The most significant discrepancy between the Parties' initial estimates relate to a conservation program that VWC has committed to offer as part of the Water Management Program approved by D.0-11-048. ORA now agrees that the program is beneficial and that estimated costs of $55,825 for 2003 and $56,942 for 2004 are reasonable.

Balancing Account for Purchased Water (Paragraphs 6.2 to 6.6)

For the reasons stated in ORA's report , the Parties agree that the under-collection of approximately $1,900,000 shown in a balancing account for purchased water should not be subject to collection.

Balancing Account for Purchased Power and other Memorandum Accounts (Paragraphs 6.7 to 6.12)

The Parties agree that the disposition of the Purchased Power Balancing Account and four memorandum accounts should be deferred until the outcome of Rulemaking 01-12-009 relating to processing offset increases in rates and balancing accounts inasmuch as the order of the Commission could affect the amount of any recovery. The Parties also agree that the net over-collection that existed in these accounts as of March 31, 2002 is less than 2% of VWC's revenue and would not be subject to amortization under the standard practices of the Commission's Water Division.

Memorandum Account for Litigation Against Parties Responsible for Contamination (Paragraph 6.12)

As noted above, the Parties agree that VWC's memorandum accounts should not be amortized until the Commission acts on R. 01-12-009. The Memorandum Account for Litigation Against Parties Responsible for Contamination, however, shows an under-collection of $366,000 as of March 31, 2002 and the additional expense of litigation is increasing the under-collection at a rate exceeding $110,000 during each Test Year. The Parties agree, therefore, that VWC should be authorized to include $110,000 per year in rates, subject to refund, to be tracked on a per customer basis in its memorandum account established for this litigation. The Parties further agree that VWC should be authorized to file for settlement of this account, in a manner consistent with Resolution W-4094, prior to filing its next application for a general increase in rates.

Hillcrest Tank (Paragraph 7.2)

A developer in the area served by the Hillcrest Tanks contributed $239,000 to the tanks' installation. ORA's initial estimate was based on the analysis that additional contributions could be obtained from developers. ORA has further reviewed the conditions surrounding the construction of the Hillcrest Tank. ORA now agrees that VWC obtained the maximum contribution from the developer that was possible under the provisions of Rule 15 covering Main Extensions, and that the lack of land now available for development precludes the possibility of contributions by additional developers. The Parties agree, therefore, that the amount booked should remain in Plant.

Copperhill Bridge (Paragraph 7.3)

The Parties agree that, because the pipeline placed on the Copperhill Bridge is not completely used and useful at this time, the amount should be removed from Plant until such time as development occurs and the full capacity of the line is in use.

Valencia Boulevard Bridge (Paragraph 7.4)

ORA has further reviewed the relocation of the pipeline caused by construction of the bridge. ORA agrees that the bridge provides a regional benefit to traffic circulation and that VWC was required to relocate those facilities in accordance with its franchise agreements with the County of Los Angeles and the City of Santa Clarita. The Parties agree, therefore, that the amount booked should remain in Plant.

Pipeline along Valencia Boulevard (Paragraph 7.5)

The Parties agree that the pipeline placed along Valencia Boulevard is not completely used and useful at this time. This amount should therefore be removed from Plant until such time as development occurs and the full capacity of the line is in use.

Pipeline along The Old Road (Paragraph 7.5)

The Parties agree that the pipeline placed along The Old Road is not completely used and useful at this time. This amount should therefore be removed from Plant until such time as development occurs and the full capacity of the line is in use.

Pipeline along State Route 126 (Paragraph 7.6)

ORA has further reviewed the relocation of the pipeline caused by widening State Route 126 and agrees that the line serves existing customers and would only incidentally serve new development. The Parties agree, therefore, that the amount booked should remain in Plant.

Additions to Plant (Paragraphs 7.7 and 7.8)

The Parties agree to estimate Additions to Plant on the basis of the average additions over a period of five years because such a method would form a reasonable estimate of VWC's actual practice of replacing mains, wells, and other facilities. The Parties further agree that this estimate would not limit the calculation of ratebase in VWC's next filing of an application for a general increase in rates.

Re-filing Service Area Map (Paragraph 10.5)

The Parties agree that re-filing VWC's Service Area Map would serve no useful purpose at this time because of a change in policy of the Commission's Water Division that now requires the filing of an Advice Letter when a company submits a water supply questionnaire for a subdivision.

Irrigation Service (Paragraph 11.6)

VWC has offered interruptible service rates for evening hours at approximately 50% of the rate for General Metered Service. Due to the availability of untreated and recycled water, the Parties now agree that VWC should withdraw its tariff covering discounted irrigation service.

Recycled Water (Paragraph 11.7 and 11.8)

VWC proposes to serve the Westridge golf course with recycled water supplied through a separate distribution system. VWC's rate design for General Metered Service allows 50% of VWC's fixed costs to be recovered through a monthly service charge, with the balance recovered through the commodity charge. VWC initially proposed a service charge equal to that for General Metered Service, and a commodity charge equal to VWC's purchase price for the recycled water. The Parties now agree, however, that the commodity charge for recycled water should be increased to recover those fixed costs not recovered through the service charge.

Thus, the Parties agree that VWC should file a tariff for recycled water and untreated water, with the service charge set at the same level as the service charge for General Metered Service, and with the commodity charge set at a level 5% above the wholesale price VWC pays for recycled water. The Parties believe that such a design would not create a burden on general ratepayers and would offer sufficiently low rates to attract potential customers.

VALENCIA WATER COMPANY

By _____________________________

Dated __________________________

OFFICE OF RATEPAYER ADVOCATES

By ______________________________

San Francisco, CA 94102

(415) 703-1622

Dated __________________________

(END OF APPENDIX A)

D0305030 Appendixes B-G

7 Report on the Application for a General Increase in Rates of Valencia Water Company, Water and Natural Gas Branch, Office of Ratepayer Advocates (September 6, 2002) ("ORA's Report on A.02-05-013" or "ORA's Report"); Water and Natural Gas Branch's Report on the Cost of Capital for Valencia Water Company (September 2002) ("ORA's Report on Cost of Capital").

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