II. Bakman's Application

Bakman is a Class C water utility that provides water service to about 1830 customers in southeast Fresno. In Resolution W-4310, approved January 9, 2002, the Commission decided contested issues in Bakman's test year 2000 GRC. Among those issues was the ratemaking treatment of proceeds from two lawsuits regarding contamination of Bakman's wells. The Commission adopted the Water Division's recommendation to reduce Bakman's rate base to zero by recording the lawsuit proceeds as contributions in aid of construction (CIAC), which reduces utility rate base. However, the Commission authorized Bakman to file an application in support of its adjustments to CIAC and the rate base. Bakman timely filed the instant application on July 9, 2002.

The principal issue in this case is the appropriate disposition, as between ratepayers and shareholders, of the lawsuit proceeds. Bakman believes that the company is entitled to the net settlement proceeds, after paying for remediation. Therefore, Bakman requests the Commission order the company to: (1) remove from CIAC $907,495 in proceeds from two lawsuits; (2) increase rate base by the same amount; and (3) recover in rates associated revenue requirements, determined as the higher of amounts calculated under conventional cost-of-service ratemaking or a 20% rate of margin under the operating ratio method.

The Commission's Water Division opposes this request, and believes, as a general principle, that ratepayers are entitled to the net settlement less remediation costs. In applying this principle to this case, Water Division recommends that Bakman return $640,000 plus interest to ratepayers by paying off the outstanding Safe Drinking Water Bond Act (SDWBA) loan (about $218,000 at the time the parties briefed this matter) and leaving the remaining funds in CIAC for ratepayer benefit. The Water Division also recommends that Bakman's rate base should not include the capital improvements for contaminated wells that were financed by the SDWBA loan or the lawsuit settlement proceeds. If the rates are set under the operating ratio method, Water Division recommends they be set on a 10% rate of margin.

This case also raises several other ratemaking issues which are addressed at the conclusion of this decision.