13. Lease of Water Rights to the City of Folsom

In November 1994, SCWC signed a contract to lease, to the City of Folsom (Folsom), 5,000 acre-feet per year (AFY) of water rights to the American River and has included all associated revenues in a non-operating revenue account. The lease is for an indefinite period, and SCWC has no rights to terminate the lease. Staff asserts that SCWC was imprudent in signing the lease and was negligent in not filing an application under § 851 for Commission approval of the lease. Staff recommends the lease be voided, SCWC be fined $180,000, SCWC's rate of return be reduced by 50 basis points, lease proceeds be booked to an operating revenue account, all recorded lease proceeds from 1996 - 2003, plus interest, be credited to ratepayers and SCWC be ordered to file certain water supply and demand information. This decision finds that SCWC violated § 851 in failing to obtain Commission approval for the lease, voids the lease as to SCWC, and fines SCWC $1,095,000, of which $915,000 is suspended, for a net fine of $180,000. This decision further assigns all lease proceeds from the year 2004 forward to an operating revenue account and directs a credit to future rates equal to the total of prior lease revenues, plus interest. These changes will be used in the determination of the revenue requirement for the Arden-Cordova CSA.

13.1. Procedural Background

Issues related to the 1994 lease were raised by ORA in the test year 2001 GRC (A.00-03-064) for SCWC's Region I, which includes the Arden-Cordova CSA. In that proceeding, the Ratepayer Representation Branch (RRB) contended that SCWC violated § 851 when it entered into its 1994 agreement with the City of Folsom. Staff recommended that the Commission order SCWC to return all revenue collected from the leasing of water rights since 1994 to the customers and order SCWC to file an application requesting Commission authorization of the contract.¹⁹ Subsequently, SCWC issued rebuttal testimony on this issue. RRB and SCWC eventually settled the GRC; and, as part of the settlement, the parties agreed to defer the lease issue to a proceeding in early 2001.²⁰ That proceeding was to be the GRC for Region II. The Region II GRC was not filed as anticipated at the time of the settlement. Instead, the next GRC filed by SCWC is the current Region III GRC. Therefore, ORA, the staff advocacy successor to RRB, has raised the lease issue in this proceeding, and SCWC has again rebutted the related staff testimony.

13.2. Factual Background

The facts contained in the following background discussion are not in dispute.

In June 1964, SCWC purchased the Natomas Water Company. With the purchase, SCWC obtained 32,000 acre-feet per year (AFY) of water rights to the American River. Subsequently, by D.71889 issued January 24, 1967, the Commission authorized SCWC to transfer the Folsom water system and 22,000 AFY to the City of Folsom

From 1966 to 1970, SCWC used approximately 500 AFY of raw, untreated water from the American River for irrigation customers in Rancho Cordova. SCWC had no facility to treat surface water after the City of Folsom acquired the Folsom Treatment Plant.

SCWC constructed the Coloma Treatment Plant (operational in 1973) to treat surface water. The plant and system that was recorded in SCWC's rate base could treat and distribute only 5,000 AFY of SCWC's entitlement to American River water. Attached as Exhibit B to Exhibit 38 is a chart detailing SCWC's actual surface water production from the American River from 1973 through 2002. The chart shows that SCWC's use of surface water from the American River was as low as 678 AF in 1973, gradually increasing to 3,451 AFY by 1990.

In November 1994 SCWC signed the lease with the City of Folsom. At that time, SCWC had never used more than 3,451 AFY of surface water from the American River to serve its customers. Lease revenues received by SCWC have been booked in PUC Account 526, Miscellaneous Non-Operating Revenues. Since this is a below-the-line account, all revenues have benefited shareholders.

In 1994, groundwater was plentiful and it was cheaper for customers to be supplied by groundwater than by American River surface water, which had to be treated at the Coloma Treatment Plant before it could be delivered to customers. At that time, it cost approximately $56.73 per acre-foot to deliver potable water from the Coloma Treatment Plant (American River surface water), compared to only $37.10 per acre-foot to deliver potable water from SCWC's groundwater wells in its Cordova system. The total power and chemical cost for the two sources of water is virtually identical, but the labor cost associated with operating the Coloma Treatment Plant made using surface water more expensive.

Also in the 1994 timeframe, while a few wells had begun to show traces of TCE²¹ contamination, SCWC had successfully installed granulated activated carbon filters on the wells to remove TCEs. SCWC did not discover that there were detectable levels of perchlorate in its groundwater wells until 1997, and did not discover the presence of NDMA in its wells until 1998. All of SCWC's groundwater wells were fully operational until 1997, when the utility discovered the perchlorate contamination. Since 1997, SCWC has taken out of service 11 wells due to the contamination.

To address water supply problems, SCWC has placed into operation several new groundwater wells that were drilled in locations away from the contamination and has constructed new treatment capacity at its Coloma Treatment Plant. In the short term, SCWC plans on using 10,000 AFY of untreated water obtained in a "take or pay", five-year contract with the Sacramento Municipal Utilities District (SMUD). The contract became effective July 29, 2002.

13.3. Discussion

We address two important issues related to the lease. The first is whether SCWC should have filed an application, under § 851, to request Commission approval of the lease of 5,000 AFY of water rights to the City of Folsom, beginning in 1995. The second concerns the proper ratemaking treatment for revenues received from the lease of the water rights.²²

A. Did SCWC Violate § 851?

SCWC did not seek Commission approval under § 851 for what amounts to a lease in perpetuity of its right to 5,000 AFY of American River water. Section 851 provides in relevant part:

No public utility . . . shall sell, lease, assign, mortgage, or otherwise dispose of or encumber the whole or any part of its railroad, street railroad, line, plant, system, or other property necessary or useful in the performance of its duties to the public . . . without first having secured from the commission an order authorizing it so to do. Every such sale, lease, assignment, mortgage, disposition, encumbrance, merger, or consolidation made other than in accordance with the order of the commission authorizing it is void. . . .

Nothing in this section shall prevent the sale, lease, encumbrance or other disposition by any public utility of property which is not necessary or useful in the performance of its duties to the public, and any disposition of property by a public utility shall be conclusively presumed to be of property which is not useful or necessary in the performance of its duties to the public, as to any purchaser, lessee or encumbrancer dealing with such property in good faith for value . . ..

SCWC contends that it was not required to seek § 851 approval for the lease because the portion of surface water rights that it leased was not "necessary or useful in the performance of its duties to the public". SCWC notes that, at the time it entered into the lease, it had never used more than 3,451 AFY of its total 10,000 AFY entitlement, had the capacity to treat only 5,000 AFY and did not anticipate a future need for the 5,000 AFY leased to Folsom. In support of its position that it was not required to file a § 851 application, SCWC relies on, among other decisions, D.82-12-021, in which the Commission declined to exercise § 851 jurisdiction over PG&E's sale of coal mine property,

We cannot agree with SCWC that it was free to bypass the § 851 review process for the lease in perpetuity of 50% of its rights to surface water that could potentially be used to serve its customers. Our conclusion is driven by the plain words of the statute, the purposes served by the § 851 approval process, and Commission decisions.

The plain words of § 851 do not support SCWC's position. The exclusion from Commission review set forth in the first sentence of the second paragraph only applies to property that is not necessary or useful in the performance of the utility's duties to the public. The word "useful" manifests clear legislative intent for the statute to apply not just to transactions involving property that is necessary for utility service, but for a broader category of transactions involving property that is capable of being used to serve customers. While it is debatable whether at the time of the time of the lease, the portion of the water rights that were the subject of the 1994 lease were necessary for current or future needs, those water rights were certainly useful in providing a guaranteed source of supply in the event that other water supply sources became unavailable. In this sense, the water rights that were leased to Folsom were equivalent to an insurance policy that helped to guarantee that the utility would have the water supply necessary to meet its duties to the public. Even if claims are not paid on an insurance policy, the insurance is still useful in providing security for the ability to weather unforeseen and unfortunate events. Likewise, in the context of water rights, the Commission has noted that "[p]roperty rights can be `enjoyed' even if they are not immediately exercised." They are "like money in the bank, enjoyable and useful even if not immediately spent."²³ Because the leased water rights were at least useful in enhancing SCWC's ability to meet future water supply contingencies, SCWC was not justified in relying upon the "not necessary or useful" clause in § 851.

Moreover, in failing to file a § 851 application, SCWC frustrated the important purposes served by § 851 review. The basic task of the Commission in reviewing § 851 applications is to determine whether the transaction serves the public interest.²⁴ The Commission is free to take such action, as a condition to the transfer of property rights, as the public interest may require.²⁵ In making this public interest determination, the Commission typically considers at least three factors. First, the Commission assesses whether the proposed transaction will impair the utility's ability to provide service to the public.²⁶ When a utility is proposing to lease what it considers to be excess capacity, this factor includes an analysis of whether the transaction truly involves excess capacity and whether the proposed lease will adversely affect service to customers.²⁷ Second, the Commission typically considers the ratemaking and accounting treatment of the proceeds of the proposed transaction. This factor often involves a determination of the proper allocation of the transaction proceeds between ratepayers and shareholders. ²⁸ Third, consistent with its obligations under the California Environmental Quality Act (CEQA), the Commission considers the environmental impacts of the proposed transaction and whether any conditions to mitigate environmental harm should be imposed.²⁹

SCWC's failure to file a § 851 application has prevented the Commission from considering any of these important factors necessary to ensure that the lease of water rights was in the public interest. First, the Commission was deprived of an opportunity to assess whether the lease in perpetuity of the water rights could have an adverse impact on ratepayers by undermining SCWC's ability to respond to water supply contingencies. Had SCWC filed an application, the Commission could have considered imposing conditions on the proposed lease, such as requiring the lease to be for a definite term or requiring that SCWC have termination rights as necessary to protect the interests of ratepayers. Second, SCWC arrogated to itself the decision regarding accounting and ratemaking treatment of the lease proceeds. SCWC unilaterally chose to place the revenues in a below-the-line account solely for the benefit of shareholders. The failure to file a § 851 application prevented the Commission from passing judgment on SCWC's self-serving action. We find below that SCWC's choice was incorrect. By failing to file the required § 851 application in a timely fashion, SCWC has created the unfortunate issue of how to remedy eight years of improper ratemaking and accounting treatment of the lease proceeds. Third, SCWC prevented the Commission from considering any environmental impacts associated with the transfer of water rights and whether any mitigations needed to be ordered. As the use or non-use of water rights to ecologically important water sources such as the American River can have significant environmental effects, it is not difficult to imagine that there were environmental impacts that needed Commission analysis.

Finally, Commission decisions show that SCWC should have filed a § 851 application. Prior to the 1994 lease, the Commission had issued decisions regarding similar dispositions of property showing that a § 851 application was required and served important purposes. In D.92-07-007, issued just two years before SCWC entered into the Folsom lease, the Commission rejected PG&E's argument that § 851 review was not necessary for PG&E's lease of assertedly unused property. PG&E claimed that its then unused fiber optic communications capacity was not necessary or useful within the meaning of § 851. The Commission disagreed, finding that PG&E was drawing "too fine a distinction" between portions of its assets that were used and portions that were unused.³⁰ The Commission found that § 851 requires that when an asset is devoted to service to customers, parts of that asset may not be disposed of without the Commission's approval.³¹

SCWC's lease of a portion of its water rights is equivalent to PG&E's lease of a portion of its fiber optic capacity. Below, we find that the water rights were utility property acquired from Natomas Water Co. andhad previously been used to serve customers. It was improper for SCWC to treat a portion of this water rights asset as useful while declaring a currently unused portion not useful. This was precisely the type of excessively fine distinction that the Commission held would not warrant an exemption from § 851.

In D. 89517 (1978),³² which also involved facts similar to the Folsom lease, the Commission engaged in a thorough § 851 review. There, Southern California Gas (SoCal Gas) proposed to remove a portion of its pipeline transmission facilities from utility service and lease it to a third party. SoCal Gas claimed that the facilities in question would soon become excess capacity and would no longer be needed to serve its gas customers. The Commission: (1) reviewed the proposed lease under § 851 and conducted a thorough analysis of forecasted gas transmission needs to determine whether current or future natural gas supplies would likely need to make use of the facilities; (2) addressed competing proposals for the accounting and ratemaking treatment of the lease proceeds; and (3) reviewed the environmental impacts of the proposed lease. As shown above, this exact same three-pronged analysis was warranted for SCWC's Folsom lease.

In recent decisions, this Commission has confirmed that utilities must file § 851 applications even when they believe the assets in question are no longer necessary or useful for utility service. In D.03-03-022, the Commission denied a requested exemption from § 851 for the sale of water rights and hydroelectric facilities claimed to be no longer used or useful, finding that the purpose of the § 851 process was for the Commission to make that determination.³³ The Commission reached a similar conclusion on a nearly identical set of facts in D.03-04-043.³⁴

SCWC's reliance on D.82-12-121 is misplaced. There, the Commission declined to exercise § 851 jurisdiction over coal mine property PG&E had purchased in Utah in anticipation of construction of a plant that was later cancelled. With the cancellation of the plant and the absence of any cost-effective transportation of the coal resources, there was no evident utility purpose for the coal mine property, which had never been placed into utility service. In reasoning that § 851 approval for the sale of the assets was not necessary, the Commission found that, should PG&E need to replace the coal facilities at some future time, shareholders would bear the risk and cost of the replacement property.³⁵

D.82-12-121 is inapposite for three reasons. First, PG&E's coal mine facilities were never devoted to utility service. Here, as we find below, the water rights asset was utility property and had been used to serve customers. Second, PG&E disposed of the entirety of its coal mine assets. PG&E's sale of the coal mine assets did not involve the excessively fine distinctions between portions of an asset that the Commission rejected in its 1992 PG&E decision. In contrast, SCWC leased only a portion of an asset that was useful in serving customers, exactly the type of fine distinction that the 1992 decision held does not excuse § 851 review. Third, unlike the PG&E shareholders, SCWC shareholders have not accepted the risk of any replacement water rights that the utility needs to acquire in order to make up for the portion of water rights that have been transferred to Folsom. Consequently, a key rationale for the 1982 PG&E decision simply does not apply here.

Similarly, D.88-04-068³⁶ does not support SCWC's position. There, the Commission determined that timber rights on watershed land were not necessary or useful for water utility service. However, timber rights are far removed from the actual water rights used to serve customers.³⁷ Here, SCWC has leased those water rights themselves, and those water rights are directly useful in the provision of water service.

Our analysis above has not relied on the circumstances that have occurred since SCWC entered into the lease in 1994. However, it bears noting that the ground water contamination problems SCWC has since encountered and the increased need for surface water only underscore why § 851 review was necessary. By granting a lease in perpetuity of half of its surface water rights, now, less than ten years later, SCWC has placed its ratepayers at risk of paying significantly higher costs for its water supply. We note that the replacement contract with SMUD is only for five years and that it is on a "take or pay" basis, meaning that SCWC must pay for the full 10,000 AFY, whether or not SCWC needs that entire amount. The result is that, if water supply costs have not already exceeded the levels that would obtain in the absence of the Folsom lease, there is a real threat that this will occur in the not distant future. SCWC's failure to seek § 851 approval prevented the Commission from assessing the wisdom of what amounts to a transfer in perpetuity of water rights.

In conclusion, for the foregoing reasons, we conclude that SCWC violated § 851 when it failed to gain the Commission's approval prior to effectuating the Folsom lease. We must now consider the appropriate remedies for this violation.

The first remedy is dictated by § 851, which provides that any lease "made other than in accordance with the order of the commission authorizing it is void." As SCWC did not seek or obtain an order authorizing the lease, we must void the lease from its inception as to SCWC.

However, § 851 dictates a different result as to Folsom. The second paragraph of § 851 states that, as to any lessee "dealing with such property in good faith for value", there is a conclusive presumption that the property was not necessary or useful for the utility's performance of its duties. The Commission has interpreted this language to "protect innocent purchasers from having their transactions invalidated solely on the ground that the utility's action in transferring the property was beyond its authority."³⁸ Accordingly, we conclude that Folsom's use of and payments for the leased water rights in the past are unaffected by the voiding of the lease as to SCWC.

Going forward, if SCWC wishes to have a valid lease with Folsom, it must seek our approval under § 851 forthwith. The prospective impact of the voiding of the lease on Folsom is less clear and has not been addressed by the parties. Accordingly, upon the issuance of this decision, we will invite briefing by the parties regarding the rights of Folsom in each of the following potential circumstances: (1) SCWC seeks and obtains § 851 approval for a prospective lease to Folsom; (2) SCWC chooses not to pursue a prospective lease to Folsom and hence does not file a § 851 application; or (3) SCWC seeks § 851 approval of a prospective lease, but the request is denied. The rights of, and impacts upon, Folsom are important because these issues will affect whether an available option is for SCWC to regain the use of the water rights it attempted to lease to Folsom.

Within 30 days of the issuance of this decision, we will require SCWC to either file an application for prospective approval of a lease with Folsom or to indicate that it does not wish to have a valid lease with Folsom and does not intend to make water rights available any longer. Whichever course SCWC elects, it must brief all three of the issues set forth in the previous paragraph.

In a subsequent section, we will consider ORA's recommendation to fine SCWC for its violation of § 851.

B. Ratemaking Treatment for Lease Revenues

We now turn to the ratemaking issue. SCWC argues that the water rights were never in rate base, are non-utility/non-regulated property of SCWC and therefore the lease proceeds should accrue only to shareholders.

We do not accept that proposition. When SCWC purchased the Natomas Water Company in 1964, the transfer of water rights was included in the transaction. As even SCWC admits, certain amounts of those rights were exercised previously by the Natomas Water Company and subsequently by SCWC. The entire cost of the Natomas Water Company purchase, which included 32,000 AFY was borne by the ratepayers. Shareholders were not separately responsible for recovery of any of the costs. We see no reason to assign the benefit of the water rights to shareholders merely due to the fact that as SCWC states, "At that time - 1963 - it was common practice to attach no monetary value to water rights and therefore SCWC acquired these water rights for free."³⁹ The fact that the parties may not have assigned a particular line item value to the water rights does not mean those rights were free, especially since Natomas had obtained a benefit from the exercise of some of those water rights. Notwithstanding the lack of a separate itemization of the value of the acquired water rights, it is clear that the value of those property rights was included in the overall purchase price paid by SCWC. We determine that the entire amount of water rights was utility property at the time of the purchase. After the 1967 sale to Folsom, the entire remaining 10,000 AFY, which includes the 5,000 AFY being leased to Folsom, continued to be utility property.

Based on the fact that ratepayers, not shareholders, have borne the cost of obtaining the water rights at issue as part of the purchase price of Natomas, it is reasonable to allocate all of the benefits of the lease to the ratepayers from the inception of the lease. SCWC's failure to seek § 851 review for the lease creates an unfortunate issue of how to enable ratepayers to gain the benefit of revenues that SCWC previously has unilaterally assigned for the benefit of shareholders. We agree with ORA that the best approach is to require SCWC to calculate the total value of all lease proceeds from inception through the end of 2003, plus interest, and credit customer bills by that amount. Although a strong argument could be made that the interest rate should be fixed at SCWC's authorized rate of return for the Arden-Cordova district - that representing the return that SCWC's shareholders can be expected to have achieved on the lease revenues - we will adopt ORA's lower proposed interest rate of 7%.

We will direct SCWC to file an advice letter within 20 days that calculates the total lease revenues, plus 7% interest, that should be credited to ratepayers and proposes a method for ensuring that this full amount is equitably credited on ratepayer bills. SCWC's advice letter will be subject to protest in accordance with General Order 96-A.

Any lease revenues that may be received in 2004 and future years should be booked to an operating revenue account.⁴⁰ Those revenues should be used to offset water production costs for the Arden-Cordova CSA.

B. Fine for Violation of § 851

The remaining issue is whether and, if so, how much SCWC should be fined for its failure to gain § 851 approval for the Folsom lease prior to allowing the lease to go into effect. ORA seeks a total fine of $180,000, representing a $20,000 fine for the violation of § 851 and an additional $20,000 fine for each year that SCWC improperly recorded the lease revenues in a below-the-line account that benefited only shareholders.

We begin our analysis by noting that the Public Utilities Code and Commission precedent would permit a potential fine significantly higher than the fine that ORA has requested. Section 2107 authorizes the Commission to levy a fine of between $500 and $20,000 for each offense. Section 2108 provides, in relevant part, that "in case of a continuing violation each day's continuance thereof shall be a separate and distinct offense." Consistent with these two provisions, we have previously held that the fine for a utility's violation of § 854 - a statute similar in content, structure and purpose to § 851 - should be based on a per offense fine amount multiplied by the number of days between the effectuation of the transfer for which Commission approval was required and the date the application was finally filed.⁴¹ Here, even if we just count the time between the effectuation of the lease and the initial airing of this issue in SCWC's 2001 general rate case, the period of violation amounts to six years or 2,190 days. In light of the range of penalties authorized by Section 2107, the potential range for a penalty amount could extend between $1,095,000 and $43,800,000.

In determining the size of the penalty, where one is levied, the Commission has held that the size of the fine should be proportionate to the severity of the offense and has applied the criteria adopted in D.98-12-075, which issued in the Affiliate Enforcement Rulemaking. These criteria include: (1) the severity of the offense; (2) the conduct of the utility (before, during and after the offense); (3) the financial resources of the utility; (4) the totality of the circumstances related to the violation; and (5) the role of precedent.

Severity of the offense includes a consideration of the physical or economic harm caused to the victims or to the integrity of the regulatory process, unlawful benefits gained by the utility, and the number of violations. The conduct of the utility includes the utility's actions to prevent the violation, detect the violation, and disclose and rectify the violation. With respect to the financial resources of the utility, the Commission considers both the need for deterrence and constitutional limitations on excessive fines. Consideration of the totality of the circumstances requires the Commission to look at the unique facts of each case, which may mitigate or exacerbate the degree of wrongdoing, in the furtherance of the public interest.

When we apply these criteria to the facts presented by this Application, we reach the following assessment. As we explain above, we do not find convincing SCWC's argument that the lease of water rights did not involve property that was necessary or useful to utility service. We have noted Commission decisions prior to the 1994 lease agreement that show that § 851 review was required that are far more apposite than the decisions on which SCWC relies. At best, SCWC took a considerable risk when it determined that it did not need Commission authority for the lease. SCWC should have known that Commission approval would be necessary, particularly in light of the fact that the lease essentially involves a permanent transfer of useful water rights, that the lease proceeds would need to be allocated between ratepayers and shareholders, and that the environmental impacts of the lease needed to be considered. The offense, failure to comply with § 851, is serious-so serious that the statute itself provides that a transaction pursued without prior Commission authorization is void and of no effect. SCWC's violation has caused actual harm to customers in that they have been deprived of the benefits of the lease revenues in setting rates and threatens to cause additional harm in that the lease may soon, if it has not already, drive up water supply costs that may be borne by ratepayers. On the flip side, SCWC shareholders have improperly benefited from the utility's unilateral decision to have the lease revenues benefit only shareholders. In sum, SCWC's violation is a highly severe offense, one that harmed ratepayers and undermined the regulatory process mandated by the legislature. Accordingly, the severity of the offense factors argues strongly in favor of an elevated fine amount.

SCWC's conduct has been characterized by a repeated denial that it was required to file a § 851 application both when ORA raised this issue in the 2001 rate case and in this proceeding. In light of the authorities reviewed above that show that § 851 approval was required, this view was unjustified. SCWC's denial of any wrongdoing militates in favor of a higher fine amount.

As a large class A water company, SCWC has substantial financial resources and steady profits. This factor also argues for an enhanced penalty amount.

With respect to precedent, the most germane recent decision is the Wild Goose decision,⁴² in which the utility failed to obtain the required Commission approval under Section 854. The Commission settled on a fine of $51,000 based on the statutory minimum fine per offense of $500 and a violation period of 103 days. However, there are important differences that justify a significantly higher fine in this case. Here, the violation period is almost 20 times longer than in Wild Goose. In addition, there were mitigating factors in Wild Goose, such as the lack of harm to ratepayers, that are not present here.

In light of the foregoing analysis, we would be justified in imposing a fine of at least the $1,095,000 statutory minimum. However, ORA has limited its fine request to $180,000. Balancing these two considerations, we will levy a fine of $1,095,000, but will suspend $915,000 of that amount and require SCWC to pay at this time a fine of only $180,000. We place SCWC on notice that, should it fail to comply with any of the requirements of this decision, it will be subject to imposition of the entire fine amount. In addition, we give notice that SCWC is subject to additional fines for each day it continues to allow Folsom to lease water rights without having requested § 851 approval. The fine period would begin after the 30-day period we describe above for SCWC to either seek § 851 approval or to indicate that it is somehow terminating the lease. In other words, putting aside the suspended fine amount, there would be no additional fine if within 30 days, SCWC seeks § 851 approval or indicates that it is terminating the lease. SCWC would be subject to an additional fine amount, however, if SCWC does not seek § 851 approval but continues to allow Folsom to use the water rights.

The penalty shall be paid to the General Fund as detailed in the ordering paragraphs.

COST OF SERVICE ISSUES