VI. Settlement

The following table compares the initial revenue requirement changes recommended by CWS and ORA with that being proposed in the all-party settlement agreement.⁶

	CWS Requested		ORA Recommended		ALL-PARTY Settlement
	$	%	$	%	$	%
Antelope Valley
2003	60,300	5.8	(345,300)	(30.8)	(151.8)	(14.05)
2004	130,600	11.8	157,400	20.2	95.3	10.27
2005	126,900	10.2	157,500	16.8	68.8	6.72
2006	127,500	9.3	7,700	0.7	68.8	6.30
Kern River Valley
2003	913,200	46.9	119,300	(5.3)	183.1	9.36
2004	148,800	5.3	52,400	2.3	230.1	10.76
2005	137,500	4.6	116,700	4.9	131.6	5.56
2006	139,000	4.4	53,300	2.2	131.6	5.26

The major differences between CWS and ORA were in synergies, common office expenses, and rate of return (ROR). The major difference of CGA and LVTC with CWS was in synergies.

A. Synergies

Synergies accounted for test year 2003 revenue differences of $44,072 in the Antelope Valley District and $147,627 in the Kern River Valley District. In both instances, CWS' revenue estimate was lower than that of ORA. CGA and LVTC argued for imputed revenue to account for synergies. However, neither party recommended a specific adjustment.

This issue resulted from the merger of Dominguez Water Company (Dominguez), Antelope Valley Water Company, and Kern River Valley Water Company into CWS pursuant to Decision (D.) 00-05-047, dated May 18, 2000. By that merger, the Antelope Valley District book-value component of rate base was increased 12% to $2,631,213 from $2,346,079 and the Kern River District book-value component of rate base was increased 15% to $4,843,881 from $4,211,209. Approval of the merger was conditioned upon specific mitigating measures set forth in Ordering Paragraph 1 of that decision, including neutrality of rates as a result of the merger.

Although CWS did not initially impute any merger related savings, ORA did. ORA imputed $63,800 of revenue per year for the Antelope Valley District and $141,627 for Kern River Valley District. ORA's estimates were based on a ratio of the individual district's rate base write-up to total rate base write-up and a $4.48 million revenue requirement impact of the merger.

The parties subsequently agreed that a revenue requirement adjustment is necessary to maintain rate neutrality from the merger. However, the parties could not agree on a methodology for imputing the revenue. Accordingly, the parties agreed to impute $44,072 of additional revenue for Antelope Valley District based on the actual merger rate base write-up applied to the agreed upon cost of capital in this proceeding, a 1.4% gross-up factor for taxes, and a 3% for amortization derived by CWS. The parties also agreed to impute $141,627 of additional revenue for Kern River Valley District based on ORA's method.

B. Common Office Expenses

Common office expenses accounted for test year 2003 expense differences of $79,900 in the Antelope Valley District and $214,000 in the Kern River Valley District. In both instances, CWS' estimate was higher than that of ORA. Common office expenses consist of costs incurred at the corporate level for the benefit of all its districts. These common costs are allocated to the individual districts of CWS based on a four-factor allocation method (direct operating expenses, gross plant, number of employees, and number of customers) of the individual districts to the total of all districts.

CWS' estimates were based on a four-factor allocation calculated prior to the filing of its November 8, 2002 applications. Based on that dated allocation, CWS estimated that $128,200 of its common office expenses should be allocated to the Antelope Valley District for the 2003 test year and $320,500 to the Kern River Valley District.

ORA, using a more current four-factor allocation, estimated that only $48,300 ($79,900 lower than the estimate of CWS) of common office expenses should be allocated to the Antelope Valley District for test year 2003 and only $106,500 ($214,00 lower than the estimate of CWS) should be allocated to the Kern River Valley District for that same test year. ORA's four-factor allocation is the same four-factor allocation proposed in a pending general rate case (GRC) decision for several other CWS districts, A.01-09-062 et al.

The parties subsequently agreed to use ORA's more recent four-factor allocation in this proceeding.

C. Return on Rate Base

Return on rate base accounted for test year 2003 operating revenue differences of $24,913 (CWS' $1,107,500 estimate versus ORA's $1,082,587⁷) in the Antelope Valley District based on present rates, and $90,696 (CWS $2,858,300 estimate versus ORA's $2,767,604⁸) in the Kern River Valley District. In both instances, test year 2003 ROR and ROE estimates of CWS resulted in a higher revenue requirement than that of ORA.

As part of its applications, CWS requested a 9.61% ROR and an 11.50% ROE. ORA advocated an interim 8.90% ROR and a 9.70% ROE (the same ROR and ROE recommended by the assigned ALJ in the A.01-09-062 CWS application under Commission consideration at the time the EH for this proceeding took place).

ORA further advocated that the authorized ROR and ROE be changed 30 days after the Commission issues a decision in the A.03-01-034 application of CWS to conform to the ROR and ROE adopted in that application. ORA did not recommend litigating ROR and ROE in this proceeding because they were most recently litigated in A.01-09-032 and are currently being litigated in A.03-01-034.

CWS and ORA subsequently agreed that it was in the ratepayers' and shareholders' best interest to use ORA's ROR and ROE approach. CGA and LVTC took a neutral position on the appropriate ROR and ROE. All parties concurred that CGA and LVTC could participate in the A.03-01-034 EH that began on September 29, 2003, for the limited purpose of litigating ROR and ROE for the Antelope Valley District.