Before the Public Utilities Commission of the State of California s73

A.16-07-005 ALJ/UNC/avs

ALJ/UNC/avs Date of Issuance 3/29/2017

Decision 17-03-019 March 23, 2017

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

DECISION AUTHORIZING DEL ORO WATER COMPANY, INC. TO ACQUIRE LARKSPUR MEADOWS WATER COMPANY AND CONDITIONALLY AUTHORIZING DEL ORO WATER COMPANY TO OPERATE AND ESTABLISH RATES OF SERVICE

Summary

Pursuant to Public Utilities Code Sections 851-854 and 2718-2720, this decision grants authority for Larkspur Meadows Water Company to sell and DelOro Water Company, Inc. to purchase Larkspur Meadows Water Company for a price of $83,000. Larkspur Meadows Water Company serves 37 unmetered residential connections. As a condition of authority to operate, Del Oro Water Company must receive a permit to operate the Larkspur Meadows Water Company from the State Water Resources Control Board, Division of Drinking Water and file a copy of the permit to operate in this docket within 30 days of receipt of such authority. Until it has received the required permit to operate, Del Oro Water Company, Inc. must not take possession of the Larkspur Meadows Water Company nor collect tariffed rates from Larkspur Meadows Water Company customers. Customers of Larkspur Meadows will continue to be billed under the existing Larkspur Meadows Water Company tariff structure until Del Oro Water Company, Inc. has obtained the necessary operating permit.

This decision also grants the request for a revenue increase of $5,935, or 24.54 percent, which will result in a rate increase for Larkspur Meadows’ customers from $55.98 per month to $69.72.

This proceeding is closed.

1. Background

On July 11, 2016, Del Oro Water Company, Inc. (Del Oro) and Larkspur Meadows Water Company (Larkspur Meadows)[1] jointly filed Application (A.)16-07-005 requesting authority under Sections (§§) 851 and 854 of the Public Utilities (Pub. Util.) Code[2] for Larkspur Meadows to sell and Del Oro to purchase the assets of Larkspur Meadows and to establish rates for service. Resolution ALJ 176-3382, dated August 18, 2016, preliminarily designated this proceeding as ratesetting and preliminarily determined that hearings would be necessary. On October 4, 2016, Applicants jointly provided notice of the proposed acquisition and resulting rate increase to all of Larkspur Meadows’ customers pursuant to Rule 3.2 of the Commission’s Rules of Practice and Procedure. No protests or responses to A.16-07-005 were filed; therefore no hearings were held.

Among other exhibits attached to A.16-07-005 are Larkspur Meadows’ service area map, water supply permit, facilities map, water quality test results, and the Agreement of Purchase and Sale of Assets (Sales Agreement). Estimated operating results and requested rates were also attached as exhibits. In response to the Assigned Commissioner and Administrative Law Judge’s October 6, 2016 Joint Scoping Memo and Ruling’s request for supplemental information, Applicants timely filed a response, including an Amended Exhibit J and proof of notice of the acquisition and rate increase to customers of Larkspur Meadows. Applicants’ response also included explanations of expenditures and how customers benefit from the acquisition of Larkspur Meadows despite the requested rate increase. Finally, the response included a revised estimate of the proposed rate increase as a result of the sale, based upon a 0.7 percent rate increase on current rates approved by the Commission in Advice Letter 20-W, effective April 27, 2016.

2. Description of Larkspur Meadows

Larkspur Meadows is a California Corporation serving 37 unmetered residential water service connections in a rural residential area of Tehama County. The Larkspur Meadows water system is within four miles of the City of Red Bluff Water Department. Larkspur Meadows’ Certificate of Public Convenience and Necessity, issued by the Public Utilities Commission through approval of Application # 40325, became effective on November 30, 1958.

The Larkspur Meadows water system consists of one active well approximately 359 feet deep with water level of 102 feet.[3] The pump, set at 252feet below ground, has an approximate pumping capacity of 225 gallons per minute. In June 2012, new 4-inch schedule 40 polyvinyl chloride water mains with ¾-inch services were installed 1360 feet along Sacramento Avenue and 600feet along Rawson Road. Also in June 2012, the 16 service connections along Sacramento Ave., not including 21750 and 21770 Sacramento Avenue, which have their own separate mainlines, were replaced with new backflow valves and steel backflow enclosures, along with a new 3-inch angle valve fire hydrant.

All Larkspur Meadows’ customers are charged a monthly flat rate for water service. The Larkspur Meadows water system assets consist of land, a well, pumping equipment, water mains and service lines.

The last general rate increase for Larkspur Meadows was authorized pursuant to Resolution W-5004, dated September 11, 2014. Resolution W-5004 granted an increase in gross annual revenues of $5,894, or 32.5 percent and increased monthly flat rates from $41.94 to $55.59.

Pursuant to Decision (D.) 92-03-039 and Resolution W-4493, authorizing Class C and D water utilities to file a request for a Consumer Price Index increase once a year by advice letter, Larkspur Meadows filed Advice Letter No. 20-W seeking a revenue increase of 0.7 percent. The Advice Letter filing, effective April 27, 2016, resulted in a revenue increase of $146, raising monthly flat rates from $55.59 to $55.98, the current tariffed rates for Larkspur Meadows customers.

3. The Request

Larkspur Water desires to dispose of the water system because it no longer wants to operate as a regulated water utility. Del Oro wants to acquire Larkspur Meadows because it can profitably and efficiently run this system when it is consolidated with the regulated water systems already owned and operated by Del Oro.

Del Oro is a Class B[4] multi-district water utility providing water service to 18 districts throughout California since 1963 under the jurisdiction of the Commission. Del Oro’s main office is located in Chico, California, approximately 40 miles from the Larkspur Meadows system. Del Oro presently serves customers (connections) in nine counties including: 5,679 in Butte County; 458 in Shasta County; 775 in Humboldt County; 398 in Tuolumne County; 90 in Kern County; 135 in Colusa County; 1,135 in Tulare County; 29 in Fresno County; and, 85 in Glenn County.

Del Oro proposes to operate Larkspur Meadows as a separate district under the supervision of a Regional Superintendent stationed near Chico. All field personnel who will operate the Larkspur Meadows system are appropriately licensed. In addition, Larkspur Meadows customers will have access to Del Oro’s 24-hour Call Center.

If approved, the requested transfer and sale results in a revenue increase of $5,935 or 24.54 percent, increasing Larkspur Meadows customers’ monthly flat rate service from $55.98 to $69.72.

4. Standard of Review

Proposed water utility ownership changes are reviewed under Pub. Util. Code §§ 851-854 and 2718-2720. Pub. Util. Code §§851-854 prohibit the sale or transfer of control of a public utility without the advance approval of this Commission. Pub. Util. Code §§ 2718-2720 encourage the acquisition of small water companies by larger, more financially secure entities and require that the Commission use the fair market value when determining the rate base for an acquired water system.

The Commission requires a test of ratepayer indifference when evaluating the sale of a public utility,[5] and also requires the buyer to demonstrate that the buyer’s acquisition of the public utility yields a tangible benefit to the ratepayer.[6] Using the ratepayer indifference test to assess the sale of Larkspur Meadows to Del Oro, the Commission should evaluate several key metrics including: (1)service quality; (2) continuity of service; and (3) the impact of the purchase price on rate base.

When assessing whether a water utility should be transferred, we also assess whether the transaction is in compliance with California Environmental Quality Act (CEQA) requirements and whether all required approvals of other agencies are received. Additionally, we evaluate whether Del Oro should be required to file an informal general rate case for the Larkspur Meadows water system and whether there are any safety considerations pursuant to Pub. Util. Code § 451.

We evaluate the proposed sale and purchase under these standards, as discussed below. On that basis, we determine that Del Oro can assume ownership without incurring financial difficulty and can effectively control costs. Based on Del Oro’s history as a water utility and its financial capability, the customers of the system will be well served by the change to Del Oro’s ownership.

5. How Will the Proposed Sale Affect Service Quality?

Del Oro can provide management of the operations of Larkspur Meadows when the Commission approves the transfer of ownership. Del Oro has extensive experience in the provision of water services in the State of California. Since 1963, Del Oro has operated under the regulatory jurisdiction of the Commission, and at the time of the application provided water service to over 8,700 customers. Del Oro will provide operational and maintenance services, collect water samples as required by the California State Water Resources Control Board, Division of Drinking Water (SWRCB DDW), respond to emergencies, and prepare reports to governmental agencies regarding the operation of the water system. As a result, Del Oro’s acquisition of the Larkspur Meadows water system will help to ensure the health and safety of Larkspur Meadows customers. We find that service quality will continue at the current level or be improved, and it is advantageous to Larkspur Meadows’ customers for the transfer to be approved.

6. How Will the Proposed Sale Affect Service Continuity?

Del Oro proposes to acquire Larkspur Meadows stating that it can profitably and efficiently consolidate Larkspur Meadows with the other regulated water systems that Del Oro owns and operates. The sale relieves Larkspur Meadows from its duty to provide public utility water service. The Sales Agreement ensures an orderly water system ownership transition, and thereby (1) offers continued water service by a responsible and experienced new owner, and (2) provides improved financial stability for future improvements to the water system.

7. Is the Purchase Price Reasonable?

The Sales Agreement dated February 8, 2016, calls for a purchase price of $83,000 for the Larkspur Meadows water system plus any other assets added from the time of this agreement until the closing. The $83,000 purchase price is an increase of $19,224 over the current rate base of $63,776. The Applicants indicate the net book value of the total plant in service as of December 31, 2015 is $104,773. The net book value includes recent infrastructure investments made by Larkspur Meadows valued at $21,084, including insulation, 4-inch meter flow, and lowering the pump from a depth of 147 feet to 252 feet below ground in order to meet system demands due to declining water levels.

Because the sale of Larkspur Meadows was already pending, no filings were made regarding the $21,084 investment. Instead, the investment was included as part of the net book value of the system. Depreciation of plant in service totaling $4,198, amortization of the Safe Drinking Water Bond Act loan of $16,912 and an adjustment in the purchase price of $663 were deducted from the $104,773 plant in service figure to arrive at the purchase price of $83,000.

The requested transfer and sale results in a revenue increase of $5,935 or 24.54 percent, increasing Larkspur Meadows customers’ monthly flat rate service from $55.98 to $69.72. This increase occurs as a result of the rate of return on the rate base increase resulting from new infrastructure investments ($1909) combined with plant operating expenses ($2,499), increased state and federal taxes as a result of the infrastructure investments ($887) and depreciation ($640).

The Commission examined available records of Applicants including DelOro financial statements (Exhibit B), Larkspur Meadows net book value of the total plant in service (Exhibit I), which is described above, the calculation of the new rates based on the purchase price (Amended Exhibit J), the Sales Agreement (Exhibit L), and determined that the inputs are accurate.

We find that the infrastructure investments made by Larkspur Meadows were reasonable and necessary to ensure the smooth operation of the Larkspur Meadows water facilities. It is appropriate to include the $21,084 investment as part of the sale, rather than filing a separate advice letter or application at the Commission seeking approval prior to the sale.

As the purchase price is equivalent to the net book value, including reasonable recent infrastructure investments, we find that the purchase price is reasonable. Furthermore, we note that Del Oro’s economies of scale in operating numerous districts, as well as the stronger financial position of Del Oro relative to Larkspur Meadows, provides greater financial support for future necessary Larkspur Meadows water system improvements.

In regards to rates, we find that the proposed revenue increase of $5,935, resulting in a 24.54 percent rate increase, is reasonable and accurately accounts for Larkspur Meadows’ recent infrastructure investment. Although ratepayers will see a significant increase in monthly rates from $55.98 to $69.72, this increase results from the infrastructure investment and is not a result of the purchase of Larkspur Meadows by Del Oro.

Finally, we find that Del Oro has the financial net worth and sufficient liquid assets to own and operate the Larkspur Meadows water system.

In consideration of the sale price, proposed rate structure and the financial health of Del Oro, we find that the proposed sale meets the ratepayer indifference test; ratepayers will be see no net consequences that will cause preference between seller and buyer.

8. Is a CEQA Review Required by the Proposed Sale?

We have reviewed the application to determine whether CEQA applies to this proposed sale and transfer. CEQA applies to a “project or action which has a potential for resulting in either a direct physical change in the environment, or a reasonably foreseeable indirect physical change…[and involves] the issuance to a person of a lease, permit, license, certificate, or entitlement for use by one or more public agencies.”[7] If an application does involve a project under CEQA, the Commission’s Rule 2.4 imposes other procedures and requirements on the applicant.