VII. Assignment of Proceeding
Michael R. Peevey is the Assigned Commissioner and Janet A. Econome is the assigned ALJ in this proceeding.
1. Bakman is a Class C water utility that provides water service to about 1830 customers in Southeast Fresno, California.
2. In 1989, the Department of Health Services determined that a number of Bakman's water wells were contaminated and required Bakman to remedy them. Bakman applied for and received a SDWBA loan of $615,300 to cover associated repair and remediation costs.
3. In order to pay off the SDWBA loan, the Commission authorized Bakman to collect a monthly surcharge from its customers beginning March 31, 1991. The monthly surcharge includes both the principal and interest on the principal at 3.41% for 15 years. As of the end of December 2002, the balance remaining on the loan was $218,435.
4. Soon after obtaining the SDWBA loan, Bakman filed two lawsuits against the polluters who caused the water contamination. First, Bakman filed a lawsuit against Gallo in September 1992. In February 1993, the case settled and Bakman received a gross settlement award of $300,000 and incurred $68,212 in legal fees. On June 25, 1993, after the Gallo lawsuit settled, Bakman filed a lawsuit against Shell Oil and others, resulting in a net settlement of $757,400. This case was filed by Bakman's attorneys on a contingent fee basis.
5. The Commission, in Resolution W-3785 (June 23, 1993), allowed Bakman a $75,000 credit for legal fees and credited the remaining Gallo lawsuit proceeds of $225,000 to CIAC, thereby reducing the rate base by that amount. This outcome was a result of a compromise, which involved give-and-take in all matters in the resolution.
6. Both Bakman's shareholders and ratepayers faced several risks because of the water contamination lawsuits. Bakman has been made whole for the risks assumed through receipt of the SDWBA loan and settlement proceeds, whereas the ratepayers have not been made whole for the risks that they have faced.
7. Bakman has the incentive to pursue water contamination lawsuits even if shareholders cannot obtain 100% recovery of the proceeds from these lawsuits. As a regulated utility, Bakman is required by law to provide safe and reliable water service to its ratepayers. Bakman also had a strong incentive to recover damages from polluters rather than bearing the sole responsibility for repairing or replacing the contaminated wells.
8. We have a strong preference to consider prospectively the options for evaluating revenue. Our ratemaking is based on forecasts of future test years. Retrospective allocation of funds after the passage of many years adds substantial complexities, especially when the monies in question have already been spent.
9. We determine the appropriate allocation of the Shell Oil lawsuit proceeds by weighing the equities of allocating these proceeds while considering the ongoing needs of the utility.
1. Because we approved a compromise in Resolution W-3785 in 1993, we do not revisit that outcome today.
2. The entire $225,000 net proceeds from the Gallo lawsuit should continue to be credited to CIAC as required by Resolution W-3785.
3. Because in this case the lawsuit proceeds exceed the remediation costs, we determine the appropriate ratemaking treatment of the proceeds based on the specific facts of this case, including an assessment of the risks and rewards of shareholders and ratepayers.
4. If, in the future, Bakman receives any additional lawsuit procees (from any type of lawsuit filed), it should place the money in a memorandum account and file an advice letter seeking Commission guidance on the appropriate accounting of that revenue.
5. The appropriate allocation of the Shell Oil lawsuit proceeds, if they were allocated prospectively, would have been to make ratepayers and shareholders whole for the costs of remediation each assumed, and to equally divide the excess amount if any.
6. At the effective date of the tariffs authorized by this decision, Bakman should bear the sole responsibility for the remaining balance of the SDWBA loan, and should assume the semi-annual payments as it is currently doing in accordance with the Department of Water Resource's loan repayment schedule. The money to pay off the remaining loan balance (principal and interest) should be paid by shareholders and not by ratepayers. The monthly surcharge imposed on ratepayers to pay for this loan should be terminated on the date the tariffs authorized by this decision become effective.
7. Bakman should file an advice letter within 30 days after the effective date of this decision with a plan for refunding to ratepayers all of the monies in the SDWBA loan reserve account. This advice letter will be effective upon Commission approval.
8. A portion of the Shell Oil lawsuit proceeds should be credited to CIAC. The amount credited to CIAC should be computed as follows: (1) the net Shell Oil lawsuit proceeds, rounded ($757,400); (2) minus the taxes Bakman paid on these proceeds; (3) minus the SDWBA balance as of the date Bakman's tariffs become effective pursuant to Ordering Paragraph 1; (4) divided by two. Bakman should file a revised summary of earnings with the Commission reflecting these revisions no later than 90 days after the effective date of this decision.
9. The CIAC credits for the Gallo and Shell Oil lawsuit proceeds may be amortized over the useful life of the plant in service if the utility plant in service was constructed or acquired with CIAC funds. The remaining balance of the settlement proceeds in CIAC should not be amortized until such time when these funds are used for new plant additions or improvements.
10. Rates should be set under the operating ratio method at a 10% rate of margin.
11. The following recommendation from the Water Division audit should also be adopted:
_ Bakman's rate base shall not include $710,872 of capital improvements for contaminated wells that were financed by SDWBA funds and lawsuit proceeds.
_ Bakman shall maintain better and more detailed financial records for its expenditures.
_ Bakman shall maintain detailed records of any and all transactions it enters into with other businesses, including businesses owned by Bakman family members.
_ Bakman shall develop continuing property records for capital plant expenditures funded by SDWBA loan funds.
12. Bakman should correct its entries in its accounting books and should submit all accounting entries to the Commission's Water Division for approval no later than 90 days after the effective date of this decision.
13. Bakman should submit its next GRC no later than three years from the effective date of this decision.
14. CWA's petition to intervene in this application to file its comments to the proposed decision should be granted.
15. Bakman's petition to set aside submission to receive into the record the September 10, 2003 letter attached to its petition should be granted
16. Because we wish these rates to take effect as soon as possible, this decision should be effective immediately.
IT IS ORDERED that:
1. Bakman Water Company (Bakman) shall implement revised rates by advice letter filed within 30 days after the effective date of this decision, which rates shall be effective five days after the date of filing. The revised rates shall be consistent with the summary of earnings and the revised schedules attached to this decision as Appendix B, and shall concurrently cancel Bakman's presently effective date schedules: (1) General Metered Service; (2) General Flat Rate Service; (4) Private Fire Protection Service; and (5) Public Fire Protection Service. This filing shall comply with General Order 96-A.
2. At the effective date of the tariffs authorized by this decision, Bakman shall bear the sole responsibility for the remaining balance of the Safe Drinking Water Bond Act (SDWBA) loan, and shall assume the semi-annual payments as it is currently doing in accordance with the Department of Water Resource's loan repayment schedule. The money to pay off the remaining loan balance (principal and interest) shall be paid by shareholders and not by ratepayers. The monthly surcharge imposed on ratepayers to pay for this loan shall be terminated on the date the tariffs authorized by this decision become effective.
3. Bakman shall file an advice letter within 30 days after the effective date of this decision with a plan for refunding to ratepayers all of the monies in the SDWBA loan reserve account. This advice letter shall be effective upon Commission approval
4. The entire $225,000 net proceeds from the E & J Gallo (Gallo) lawsuit shall continue to be credited to contributions in aid of construction (CIAC) as required by Resolution W-3785 (June 23, 1993).
5. A portion of the Shell Oil Company (Shell Oil) lawsuit proceeds shall be credited to CIAC. The amount credited to CIAC shall be computed as follows: (1) the net Shell Oil lawsuit proceeds, rounded ($757,400); (2) minus the taxes Bakman paid on these proceeds; (3) minus the SDWBA balance as of the date Bakman's tariffs become effective pursuant to Ordering Paragraph 1; (4) divided by two. Bakman shall file a revised summary of earnings with the Commission reflecting these revisions no later than 90 days after the effective date of this decision.
6. The CIAC credits for the Gallo and Shell Oil lawsuit proceeds may be amortized over the useful life of the plant in service if the utility plant in service was constructed or acquired with CIAC funds. The remaining balance of the settlement proceeds in CIAC shall not be amortized until such time when these funds are used for new plant additions or improvements.
7. Rates shall be set under the operating ratio method at a 10% rate of margin.
8. The following recommendation from the Water Division audit are adopted:
_ Bakman's rate base shall not include $710,872 of capital improvements for contaminated wells that were financed by SDWBA funds and lawsuit proceeds.
_ Bakman shall maintain better and more detailed financial records for its expenditures.
_ Bakman shall maintain detailed records of any and all transactions it enters into with other businesses, including businesses owned by Bakman family members.
_ Bakman shall develop continuing property records for capital plant expenditures funded by SDWBA loan funds.
9. No later than 90 days after the effective date of this decision, Bakman shall correct its entries in its accounting books and shall submit all accounting entries to the Commission's Water Division for its approval.
10. Bakman shall submit its next general rate case no later than three years from the effective date of this decision.
11. The California Water Association's petition to intervene in this application to file its comments to the proposed decision is granted.
12. Bakman's petition to set aside submission to receive into the record the September 10, 2003 letter attached to its petition is granted.
13. This proceeding is closed.
This order is effective today.
Dated October 2, 2003, at San Francisco, California.
MICHAEL R. PEEVEY
President
CARL W. WOOD
LORETTA M. LYNCH
GEOFFREY F. BROWN
Commissioners
Commissioner Susan P. Kennedy, being necessarily absent, did not participate.
A.02-0-7-025 ALJ/JJJ/jva
APPENDIX A
************ APPEARANCES ************ |
Sindy J. Yun Martin A. Mattes Nossman, Guthner, Knox & Eliott, LP 50 California Street, 34th Floor San Francisco, CA 94111-4799 For: California Water Association |
