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HomeMy WebLinkAbout13 Donner Lake condemnation Agenda Item # 1 3 A�'go=, 1W �! �'� O To: Board of Directors From: Peter Holzmeister Date: November 14, 2003 Subject: CLOSED SESSION ITEM — Donner Lake condemnation CONFIDENTIAL Why this matter is before the board: This matter is an update on the condemnation of the Donner Lake water system. The entire Donner Lake project is a big dollar item that has repercussions for the entire District. History: You already know that the arbitrator is the condemnation case has issued an opinion on the value of the system. A copy of his opinion is attached. The water rights question has come up at various times, so I have included in this package an opinion prepared by Paul Simmons describing water rights held by Del Oro or Donner Lake Water Company. New information: Our attorneys and the Del Oro attorneys are jointly preparing to submit an agreement to Nevada County Superior Court. The agreement will confirm the decision of the arbitrator and will describe how to deal with details such as netting out the payment of $750,000 the prepayments by Donner Lake customers to Del Oro, and the matter of interest. Recommendation: I suggest the board engage in a discussion of these issues to make sure we are in agreement with what is happening. S O M A C I-Ii� SIMMONS & D U N N A PROFESSIONAL CORPORATION PAUL S. SIMMONS ADMITTED IN CAUFORNIA, ATTORNEYS AT LAW NEW YORK AND OREGON s-maiL osimmona(�lawssd.com August 18, 2000 ATTORNEY-CLIENT PRIVILEGE PRIVILEGED AND CONFIDENTIAL VIA FACSIMILE Peter L. Holzmeister General Manager Truckee-Donner Public Utility District P.O. Box 309 11570 Donner Pass Road Truckee, CA 95734 Re: Del Oro Water Company Dear Peter: This responds to your request that we analyze the water rights held by Del Oro Water company to provide service in the Donner Lake ar a eVhave reviewed records from the State Water Resources Control Board (SWRCB) and certain agreements described below. This analysis allows certain conclusions regarding the apparent rights of Del Oro. I hope this will be sufficient to allow Truckee-Donner Public Utility District (TDPUD) to take the next steps in planning. However, as described below, there are several questions requiring answers before we can reach definitive conclusions. Also, we would benefit from a better understanding of the physical circumstances, and anticipate that you may be able to provide much of that understanding. In general, Del Oro likely has the right to up to 990 acre-feet annually (afa) of water from Donner Lake for use within a part of its certificated service area. For use in the remainder of its service area, it must rely on sources other than this right, which may include groundwater or certain other surface water diversions. This is discussed in more detail below. For purposes of this letter, I have assumed that Del Oro has succeeded to all rights and interests in the water rights discussed below. This will, of course, ultimately have to be confirmed. But for the sake of simplicity, Del Oro and its predecessors in interest are all referred to as "Water Company." 400 CAPITOL MALL, SUITE 1900 SACRAMENTO, CA 95814-4407 • TELEPHONE (916) 446-7979 • FACSIMILE (916) 446-8199 Peter L. Holzmeister August 18, 2000 Page 2 WATER RIGHTS GENERALLY As you likely know, California law recognizes both "pre-1914" and"post-1914" appropriative rights' to the use of surface water. Before 1914, water rights were initiated under customs prevailing at the time. In some cases, there was a requirement to post notice or take other procedural steps. But in general, the right was acquired primarily by initiating the diversion of water. Pre-1914 rights are valid rights. The difficulty is that they are not conclusively established or quantified unless there has been an adjudication of the source (in this case, there has not). Thus, any claim of pre-1914 water rights brings questions of fact and law related to the initiation of the right, whether the works were diligently completed to make beneficial use of the water, and other issues. To "prove" a pre-1914 right or to obtain a high deg righ ree of comfort that such a t exists, typically requires extensive historical research. After 1914, rights to surface water could only be obtained by making application to the SWRCB or its predecessor agency. The SWRCB issues a permit to divert water for a specified use. Once the water has been used, the permittee may obtain a license evidencing perfection of the right. A right to surface water may be a right to the "natural flow" of a stream, or a right to the use of water that has been previously diverted to storage. Natural flow and stored water are considered distinct sources of water, as to either of which one may have a right of use. Finally, all surface water rights have the following elements in common: an authorized point of diversion from the source; an authorized rate or diversion or quantity; a place of use; a purpose of use; and a temporal priority. One can change the point of diversion or purpose or place of use of a pre-1914 right so long as there is no injury to other lawful users. To change the point of diversion or purpose or place of use of a post-1914 right(i.e., a permitted or licensed right)requires approval of the SWRCB. The above is, of course, a very general description of water rights law, but provides context for the discussion following. DEL ORO PRE-1914 WATER RIGHTS There is substantial reason to believe that Water Company holds a pre-1914 water right to the use of up to 990 afa of water from Donner within a specific area. Riparian water rights are also recognized,but are not relevant to this discussion. ATTORNEY-CLIENT PRIVILEGE PRIVILEGED AND CONFIDENTIAL Peter L. Holzmeister August 18. 2000 Page 3 The original dam on Donner Lake apparently was constructed in the 1870s, and subsequently replaced. Records we have obtained indicate that Water Company asserts a pre-1914 right to the use of water from Donner Lake, and further that this right is regarded as valid by other parties with interests in the Truckee Basin. Again, however, to develop firm conclusions about this right, its scope, and its priority, historical research would be needed. It further appears that, prior to 1943, Water Company claimed the right to substantially all of the water in Donner Lake. In 1943, Water Company conveyed its rights to much of this water to Truckee-Carson Irrigation District(TCID) and Sierra Pacific Power Company (Sierra Pacific). In the 1943 "Indenture," among other things, Water Company conveyed to TCID and Siena Pacific: 1. All of Water Company's rights to water of Donner Lake, and its tributaries, subject to the use by Water Company of water as necessary for domestic use in connection with land and a resort (resort lands) owned by Donner Lake Land Company (the right retained is referred to hereafter as the "reserved right"); 2. The right to use Donner Lake as a storage reservoir in perpetuity, subject to certain limitations related to the elevation of the lake. In subsequent years, Water Company used water on some of the resort lands under this right, but also apparently used water on lands not originally within the resort lands. In 1998, the Water Company, TCID and Sierra Pacific entered a new agreement. The 1998 Agreement specified exactly where water reserved under the 1943 Indenture could and could not be used by specifically defining what would be considered the resort lands. It also limited the quantity that could be used. It also specified the sources of water that Water Company would use to serve areas within its PUC certificated area but outside the reserved right area.' Thus, the 1998 Agreement provides, among other things, that: 1. Water Company may use water under the right reserved in the 1943 Indenture within the area shown on Exhibit A attached, not to exceed 990 afa; 2. If some party other than the Water Company establishes that it is the successor in interest to Donner Lake Company with respect to the reserved right, the 990 acre-foot figure is reduced accordingly; The 1998 Agreement also provided that the Water Company's reserved right to use water for "domestic"purpose also includes commercial use. ATTORNEY-CLIENT PRIVILEGE PRIVILEGED AND CONFIDENTIAL Peter L. Holzmeister August 18, 2000 Page 4 3. As to lands outside the area shown in Exhibit A which are nonetheless within the Water Company's PUC certificated service area Water Company may provide service to such lands, but "only from the following sources and in the priority indicated": a) first, from existing or new wells designed to minimize surface water impacts; b) second, from the Water Company's four post-1914 rights discussed below; c) third, diversions from the Water Company's existing Donner Lake intake during November 15 through April, under certain conditions; d) fourth, from new water rights acquired by Water Company. 4. All diversions by Water Company for commercial irrigated agriculture are junior to all uses of water in Nevada. In summary, with respect to the pre-1914 right, there is agreement at least as among the parties to the 1943 Indenture and 1998 Agreements that such a right exists, and it is limited to 990 afa in a defined area. Outside the area, Water Company must use other sources, in the priority described. POST-1914 WATER RIGHTS Water Company also holds four licensed rights for diversion of surface water. These rights have a priority of 1957. The points of diversion all appear to be within an area known as Green Point Springs. These licenses in total authorize the diversion of 304,000 gallons per year. This is, of course, approximately one acre-foot per year.` The permitted places of use are specified in the licenses, but we have not attempted to locate them on a map. SETTLEMENT ACT AND TROA Neither the Truckee-Carson-Pyramid Lake Water Rights Settlement Act(Pub. Law 101-618, title 11) (Settlement Act) nor the current Draft Truckee River Operating Agreement (TROA) would diminish or significantly modify or condition the rights discussed above. 1 Our copy of the 1998 Agreement did not have"Exhibit B"which should be a map of the area approved for service by the PUC. ' It appears that Water Company acquired these rights after four individuals filed water right applications and Water Company protested the applications. It is reasonable to infer that the four individuals sought to provide service to one area and that Water Company took over this service when it acquired the rights. ATTORNEY-CLIENT PRIVILEGE PRIVILEGED AND CONFIDENTIAL Peter L. Holzmeister August 18, 2000 Page 5 As you know, section 204(c) of the Settlement Act allocates 10,000 afa of surface water for use in the Truckee River Basin, California. Water Company's rights presumably are within that amount.' As I understand it, current surface water diversions within the Truckee River Basin in California are well below 10,000 afa. If some third party subsequently applied for a water right, Water Company would be able to object on the basis of its senior rights, or would have priority over any new rights granted, assuming, again, that the pre-1914 right to Donner Lake water is valid. The most recent draft of the TROA would not fundamentally alter any of the rights discussed above. It specifies that Donner Lake is to be operated in accordance with the 1943 Indenture and 1998 Agreement among the Water Company, Power Company and TCID. It also specifies that diversions of water from Donner Lake or its watershed by the Water Company, up to 990 afa, will be governed by the 1998 Agreement. It also authorizes additional future diversion of up to 40 afa from the Donner Lake watershed under new appropriations and state permits. Finally, it would define conditions that must be imposed when there is a change of point of diversion under certain conditions. This limitation likely would not apply, however, to changes in the point of diversion for Water Company's 990 afa right.' DISCUSSION There is good reason to believe that Water Company holds a pre-1914 right, actual priority uncertain, to the use of 990 afa of water from Donner Lake, for use in the area shown as Exhibit A. As emphasized previously, to draw firm conclusions in this respect would require further investigation and historical research. In this regard, there are notes in the SWRCB's files which call into question the validity of this right (without drawing any conclusions).' The recognition of the right in the 1943 Indenture and 1998 Agreement supports the existence of the right, but those agreements are not binding on other parties. The Draft TROA actually bolsters the Water Company's claim as to this right. In fact, if approved in its present form, the Draft TROA arguably strengthens the 5 The Settlement Act states that the California t0,000 afa Truckee River Basin diversion surface water allocation is junior to certain rights of the Pyramid Partite Lake Tribe described in claims in the Orr Ditch Decree. Those rights may be irrigation rights. We will need to check. One other factor that could affect the security of the 990 afa right is that it is at least theoretically possible that there are other,unexercised pre-1914 rights that are senior to the 990 afa right. This seems very unlikely,but is worth noting here. ' This is true for two reasons. First,the provision which would require the condition applies only to changes in applications, permits or licenses approved by the SWRCB. Since the 990 afa right is an unadjudicated pre-1914 right, there is no application,permit, or license associated with the right. Change of point of diversion of a pre-1914 right does not require SWRCB approval. Second,the Draft TROA itself states that Water Company's use of water under the 1998 Agreement is not subject to the conditions regarding a changed point of diversion. ' This may have been a factor leading to the 1998 Agreement. In other words, it is possible that questions about the nature and scope of Water Company's right led to an agreement as to what the right would be,at least as between the parties to the 1998 Agreement. ATTORNEY-CLIENT PRIVILEGE PRIVILEGED AND CONFIDENTIAL Peter L. Holzmeister August 18, 2000 Page 6 claim to the right as against all parties to the TROA. It states that diversion of water by the Water Company "shall be governed" by the 1998 Agreement and thus arguably acknowledges the right. Were I advising the Water Company, I would seek to strengthen this language slightly, so that there could be no doubt that the parties to the TROA concur that it is a valid right. TDPUD could acquire the described water right, subject to its area of use limitations, by purchase or eminent domain. TDPUD could also change the point of diversion of the water without limitation so Long as there is no injury to junior rightholders. (There could also, of course, be environmental or property rights issues associated with a change in point of diversion.) Water Company also holds other rights to surface water which are for all practical purposes inconsequential. The quantity (less than 1 afa) is small, and under the 1998 Agreement and the Draft TROA, Water Company would be required to use groundwater for service to areas outside the boundary in Exhibit A before utilizing these surface water rights. New wells would be subject to limitations in the Settlement Act, specifically the 32,000 afa gross diversion allocation to the Truckee Basin in California and the requirement to minimize short-term reductions in surface flow. Were TDPUD to take over water service within Water Company's service area, it could elect to use groundwater in lieu of some or all of the 990 afa pre-1914 right. That circumstance seemingly would make the 990 afa right unusable, since its allowed place of use has been limited by agreement. Should TDPUD want to consider that option, it would be worth investigating whether the 990 afa right has any value at all in absence of the right to serve the area. A few other questions would also require further investigation. I have assumed here that Del Oro is indeed the successor in interest under the described water rights. The 1998 Agreement implies that some other party may assert a right to some or all of the 990 afa, and we do not have the documents that would show chains of title from predecessors in interest of Del Oro. Finally, there are a few other loose ends. First, the 1998 Agreement states that, after groundwater supplies and post-1914 supplies, Water Company may use "its existing intake on Donner Lake" to serve areas that are within its service area but outside the boundary shown in Exhibit A. It is not clear what this refers to, but it implies that there is at least potential to exercise some diversion right in excess of 990 afa under the pre-1914 right. Second, we found a document in the SWRCB files that states the following: "The 1943 deed [presumably, the Indenture discussed above] conveyed to Sierra Pacific Power Company, et al., the very same water rights which it conveyed to Truckee-Donner Public ATTORNEY-CLIENT PRIVILEGE PRIVILEGED AND CONFIDENTIAL Peter L. Holzmeister August 18, 2000 Page 7 Utility District by their agreement of February 26, 1970." Do you know anything about this 1970 Agreement? The quoted document was part of a protest filed by Water Company to a water right application which apparently had been filed by TDPUD itself. We are also uncertain what came of that application filed by TDPUD. CONCLUSION I would like to discuss these matters after you have had a chance to review this letter. Also, it would be helpful to talk, if possible, with someone knowledgeable about the agreements discussed above. Cordially, Paul S. Simmons Attorney PSS/jlp ATTORNEY-CLIENT PRIVILEGE PRIVILEGED AND CONFIDENTIAL c r.� cam ._•c..i iui VL � 171D'+" 061JJi G'+O IYV.vCG t'Gl•'�G1`ti 775 834 4229 .!' a7!1'3!':0DO 1": 1,9 775-934-4229 SPPCO PAGE 13 vo i yV� wrrrwn w✓+nrwea i v + ! � nl t • N m 1 j �.,...� MIS 1 4IK ® j W m z' ,pL + i t OCT-31-2W) FRI01 ,31 PM MONTAGI IF V IGI.IONF FAX NO. W R 979 A967 P. 0</2 1 I SUPERIOR COURT OF THE STATE OF CA7IFORNIA CCUNTY OF NEVADA in Arbitration TRUCKEE DONNER, PUBLIC UTILITY DISTRICT, No. T01/061" Plaintiff, ) ) V. ) DECISION AND AWARD OF ARBITRATOR DONNER LAKE WATER COMPANY, ) a California Corporation, ; et al . , ) ) Defendants, ) I ) I . INTRODUCTION. This is a binding arbitration of an eminent domain ac*ion brought by plaintiff Truckee Donner Publiu U_ility District iTDPUD) to condemn the ;water system of defendant Donne= Lake Water Company (DLWC) . The property condemned is dPRrr!hed in Exhibit A of the Compla_nt in EninenC Domdlr, filed on May 10, 2001 . The parties stipulated that the date of valuation is May lB, 2001. The tria commenced on August 1R, 2CO3, and lasted six days, conclud-ny u;i, AuyuSL 26th. Dennis L. Vig'ionc of Montague & V_glione appeared or. behalf on TDPUD and Frederick G. OCT-31-2003 FRI 01 :31 PM MONTAGUE VIGLIONE FAX NO, 916 929 8967 P. 03f31 Girard of Kronick, Moskovitz, Tiedemann & Girard appeared on behalf. of DLWC. Five witnesses were called on behalf of DLWC and TDPUD called eight witnesses. During the course of trial 150 exhibits were introduced. Following the completion of testimony the matter was submitted for decision pending the filing of opening and closing briefs . Those briefs have been timely filed and this decision follows. The two issues in dispute relate to the water rights and to valuation. Those issues are addressed and resolved in that order. II . WATER RIGHTS. The central question is whether the DLWC' s water rights could be sold apart from the water system as a whole . DLWC contends that they could be sold separately and its expert valued those rights at $2, 970, 000 . (.xh. 140 . ) TDPUD retorts that those rights cannot be sold and consequently DLWC cannot recover separate and additional compensation for them. For the reasons that follow, I conclude TDPUD has the more persuasive arguments and that those water rights cannot be sold separately. In its final argument, TDPUD contends, as it did in its in limine motion, that " [u] nder California law a water utility may not sell or convey its water rights if doing so will impair its ability to serve its customers . Property owned by a public utility is owned in trust for the benefit of those members of 2 007-31-POOI FRi 01 :31 PM MQNTAGIIF VIGI iONF FAX N0, 916 9P9 AM7 P. 04/11 the public whu are its custcmcrc , California law does rn- permit a requlated utility to sell its properties that are dedicated to utility servir.a. " (TDPUD Final Argument, p. 1; see also, TD?UU Mctiur., P. Thus, under California law, a regulated utility may transfer suen property only wi'_ii the consent of the Public ❑r.i.lity Commission (PUC) . (Pub. 07_1. Code, § 851; South Bay Irr. Dist. v. California-pnerican Water Co. (1976) 61 Cal .App. 3d 944, �b6. ) I,: follows, TDFUD argues, that ,the pDC wrnald never authorize the sale by a water company of water rights needed to cunply its customers with water. " (TDPUD Final Argument, p, 2; 'PUrUD t\locion, p. 7 • ) In its rPgpcnse to the in iimine motion, DLWC prcperly aukiiowledged "that the DLWC water right is `dedicated to F,uhlic service' and that it could not be sold or transferred without [purl approval and that the PUC would never approve a sale, `waich would leave the customers without water . ' Concedediy, DLWC' s pre-1011-4 appropriative waLcr ri.gl.t to 0 arse feet of water per calendar year from Donner Lake has been mpressed with a public use. That public use is the providing of water service to the owners of the land; adjacent to and in the vicinity of Donner Lace. Consequently, it could not be sold and trancfcrrcd to other lands unless it was determined to be surplus, I .e. , that iL in ..c longer needed for that purpose, " (DLWC Opp, Motion,, p. ,g . citation and emphasis omitLed. ) This 3 OCT-31-2003 FRI 01 :31 PM MONTAGUE VIGLIONE FAX NO. 916 929 8967 P. 05/31 is again conceded in its closing brief . "Admittedly, the DLWC' s water right could not be sold if Donner Lake water is needed to serve the customers at Donner Lake. " (DLWC Closing Brief, P. 2 . ) But DLWC renews its contention that the water rights could be sold and the place of use changed if the water is no longer needed at Donner Lake, which it claims is the case . TDPUD counters that the water rights are restricted to serving customers at Donner Lake and this restriction precludes a sale and change in place of use even if the water were no longer needed for customers at Donner Lake. Moreover, it further argues, the water in fact is not surplus . The question then is whether the water is surplus and otherwise available for sale. The answer requires an examination of the nature of the water right and its history . A. NATURE AND HISTORY OF WATER RIGHT. The Parties agree that the water right in dispute is the right to divert up to 990-acre feet of water per calendar yea,- from Donner Lake for domestic and commercial uses as may be necessary for specific lands that are adjacent to, or situate in the vicinity of, Donner Lake. The evidence established that the use of the waters of Donner Lake was initiated by DLWC' s predecessors as early as 1877 . As noted in its opposition to the in limine motion, th4s consequently is a pre-1914 appropriative water right "which was acquired by [the 4 MT-31 PIM FRT 11 ;31 PM MONTAGIIE VICT11ONE 71X NO, 9l8 A?9 AH17 prPriaCP.Ssor' S] diversion and continued use of water winccut a:_y five-year interruptior. since prier Tn recember 8, 1913, the effactive date of calafernid's water Ccmmis3_on Act, " (-)T,WC ppp, MoLJuu, pp. 2-3. ) Becauoc the right was iririatPd prior to 1014, there is no governmenr issued do wa*; flt that de=initiveiy establishes !Ls existence or amount. Nevertheless, there are various sources that recognize this right an woll as testimony to that P`fect.• Uespire. the lack of dut;L'MelLs issued by governmental dpef.cies, DLWC' s right to draw water trom Donner Take is embodied in two agrAements, tha 1943 SndeaLu e a.-id the ' 958 AgreemenL. By LLe 1943 Indenture, DLW-^' o predecessor, the Donner Lake Company, conveyed to Sierra Pacific L?cwer company and the Truckee-Carson Tr-igatinn District " ialil of [its] right, Lit e dad interest in and to all waters" of Donner Lakc, "subject to the right of rYe [predecessor' W divert and ._tse .such Arrnnnt of said wdLei as shall be neces3nrV for UtnesLi use upon or in connection with the lands and Rcocrt now owned by ( Donner Lake Company; , its succedduLa, grantees and assigns, adjacent to or in the v'_cinity of Donner Lake." (Exh. 54, pp. 1 2. ; The ccnveyed water right is now referred to as the "Deeded Donner T.RCP. war.er RighL" dud the rliverston water rig�tL as the "Reserved Donner Luke Water Right. " The amount of water that couid be d.itrPrrrr,ti by Donner 5 OCT-31-2003 FRI 01 :31 PM MONTAGUE VIGLIONE FAX NO, 916 929 8967 P. 07/31 Lake Company under this reservation was neither quantified nor limited in the 1943 Indenture. In April 1998 , the three entities owning rights to use the water of Donner Lake, namely, the Donner Lake Water Company, Sierra Pacific Power Company and the Truckee-Carson. Irrigation District, entered into an agreement "to settle and dispose of all differences between them with respect to the manner and extent in which the Reserved Donner Lake Water Right will be exercised in relation to the Deeded Donner Lake Water Right and thereby to establish the priority between them for all purposes . " (Exh. 55, p. 2 . ) The 1998 Agreement did four important things . First, it fixed the boundary of the water service area of DLWC to a de'_ineated area around Donner Lake. Second, it provided that commercial use was included within the terms of "domestic use" as used in the 1943 Indenture. Third, it limited DLWC' s right to divert lake water up to 99o-acre feet per calendar year. Fourth, it established the priority of water right ownership between the ,parties for all purposes . In Recital E of this agreement, the parties recited that " [t] he Deeded Donner Lake Water Right was conveyed with the express limitation that it was subject to the right of the [the predecessor, its successors and assigns, to divert and use such amount of said waters as shall be necessary for 6 OCT-31-2003 FRI 01 :31 PM MONTAGUE VIGLIONE FAX NO. 916 929 8967 P, 08/31 domestic use upon and in connection with the lands and the Resort now owned by [predecessor] , its successors, grantees and assigns, adjacent to or in the vicinity of Donner Lake . "' (Exh. 55, p. 2 . ) As TDPUD correctly observes, under these agreements "DLWC may divert water from Donner Lake only for the purpose of serving customers located in a well-defined, relatively small., geographic area in the immediate vicinity of Donner Lake. " (TDPUD Final 'Argument, p. 4 . ) These two agreements provide the fulcrum on which the opposing parties' arguments rest. As DLWC interprets these documents, it "retained in the 1943 Indenture its pre-i914 appropriative water right, which was quantified and limited by the 1996 Agreement to no more than 990 acre feet in any calendar year. [1] While the 1943 Indenture states, and the 1998 Agreement restates, the place of use of DLWC' s `Reserved Donner Lake Water Right, ' they do not preclude a change in the place of use of that Reserved Donner Lake Water Right' under California law. " (DLWC 0pn. Srief, pp. 11-12; emphasis deleted. ) It then contends that, if the water is surplus, the place of its use may be changed under the authority of Water Code section 1706 . The lynchpin of this argument is that DLWC' s predecessor somehow withheld from the conveyance most its pre-1914 water rights in the Reserved Donner Lake Water Right. Implicit in the 7 OCT-31-2003 FRI 01 :31 PM MONTAGE VIGLIONE FAX NO. 916 929 8967 P. 09/31 argument is the claim that underneath the limited right to divert and use water granted by the agreements subsists its pre- 1914 water rights . In essence, DLWC claims that its right to divert and use the water derives from its original water rights and not from the agreements. The claim must be rejected on several grounds. First of all, by the 1943 Indenture, DLWCIS predecessor sold all of its right, title and interest to the waters of Donner Lake. By its inclusive terms (" [a] 11 of the right, title and interest") , that sale included all of the predecessor' s water rights in Donner Lake however and whenever acquired, including the pre-1914 rights. As has been noted, this comprehensive grant was only "subject to the right [of the predecessor] , its successors and assigns, to divert and use such amount of said water as shall be necessary for domestic use upon or in connection with the lands and the Resort now owned by (the predecessor; , its successors, grantees and assigns, adjacent to or in the vicinity of Donner Lake; " (Exh. 54, p. 2 . ) After this all encompassing conveyance had been made, the orly interest the predecessor had in the water of Donner Lake was a restricted contractual right to use that water according to the terms of the conveyance. This reading was confirmed in the 1998 Agreement that reiterated that the comprehensive grant was "conveyed with the express limitation" of DLWc' s predecessor to 9 OCT-31-2003 FRI 01 :31 PM MONTAGUE VIGLIONE FAX NO. 916 929 8967 P. 10/31 divert and use water for domestic use in connection with the '_ands and resort of the predecessor in the vicinity of Donner Lake. (Exh. 55, p. 2 . ) In short, the predecessor conveyed all of its interest subject only a limited contractual right to divert and use the water on the restricted terms stated. It is no doubt true that the limited reserved water right DLWC' s predecessor received under the agreements had its genesis in pre-1914 water rights . This is because that was the only water right the predecessor had. As DLWC correctly notes that the "1943 indenture and the 1998 Agreement did not and could not create a water right . " (DLWC Opn. Brief, P . 10 . ) But =he agreements could clearly extinguish a water right by sale. Thus, nothing prevented DLWC' s predecessor from selling and conveying all of its pre-1914 water rights and obtaining only a limited, restricted contractual right to divert and use Donner Lake water for the purposes and uses recited in the agreements. This interpretation is consistent with the views of Lori Williams, the general manager of Truckee Meadow Water Authority (TMWA) . TMWA is the successor to Sierra Pacific Power Company, one of the parties to the 1998 Agreement . Ms . Williams was the director of water for that company at the time of the agreement and testified that the reserved water right of DLWC' s predecessor was limited as to the amount of use, the place of use and the type of use. If the predecessor or its successor 9 OCT-31-2003 FRI 01 ;32 PM MONTAGUE VIGLIONE FAX N0, 916 929 8967 P. 11/31 did not use the water according to those restrictions, then TMWA and the Truckee-Carson Irrigation District owned the water in question. That interpretation of the contract by one of the principal employees of a contracting party, which is wholly consistent with the terms of the agreement, is persuasive. By its terms, the 1998 Agreement fixed the priority of rights between the contracting parties such that DLWC' s predecessor had only the defined and limited right of diversion and use and the other two contracting parties had all the remaining rights. DLWC' s reliance on section 17C6 is misplaced. That section provides : "The person entitled to the use of water by virtue of an appropriation other than under the Water Commission Act or this code may change the point of diversion, place of use, or purpose of use if others are not injured by such change, and may extend the ditch, flume, pipe, or aqueduct by which the diversion is made to places beyond that were the first use was made. " In the first place, DLWC was not entitled to use the water in question by virtue of an appropriation. However the predecessor originally acquired its water right, appropriative or not, it conveyed away all of its interest in Donner Lake water subject only to a contractual right to use that water on the limited terms specified in the agreements. Consequently, it was entitled to use the water by virtue of an agreement between contracting parties fixing their priority, and no longer by I CI OCT-31-2003 FRI 01 :32 PM MONTAGUE VIGLIONE FAX NO, 916 929 8967 P, 12/31 virtue of an appropriation. The second and even more compelling reason is that nothing in this statute purports to impair the contractual water rights of the parties to an agreement . To the contrary, it expressly states that any change can be made only "if others are not injured by such change. " Thus, even if the right could be construed as appropriative, this statutory limitation would apply. Clearly, both TMWA and the Truckee- Carson Irrigation District would be injured by a change that would diminish their contractual water rights and expand those of DLWC . For these reasons I agree with TDPUD' s conclusion that "DLWC could not sell the right to use the water from Donner Lake for any other purpose or at any other location., because DLWC itself did not own such a right. " (TDPUD Final Argument, p. 4 . ) But that is not the only fatal defect in the DLWC' s argument . Its argument is predicated on the contention that the water in question is not needed for the customers at Donner Lake and hence could be classified as surplus . The evidence does not support the claim. To beg_n with, it is undisputed that on the date of valuation, May 18, 2001, the water in question was in fact being used by the customers of DLWC, was necessary for them and was the principal source of water . Thus, for example, William Gustayson, a consultant for DLWC, testified that on May 18, 11 OCT-31-2003 FRI 01 :32 PM MONTAGUE VIGLIONE FAX NO, 916 929 8967 P. 13/31 2001, DLWC needed water from Donner Lake to provide water to its customers and without it DLWC could not have met those needs . Indeed, at the time of trial, some Iwo years and three months later, it was still the major source of water and was still being used by the customers . Conseauently, on the date of valuation the disputed water was not surplus and hence for that reason alone could not have been sold by DLWC. It is true that TDPUD. intends temporar- to stop using water from Donner Lake in the near future and switch to wells because the existing water system is defective and is subject to corrective orders by the state . But as Peter Holtzmeister, the general manager of TDPUD, testified, it will still need Donner Lake water in the foreseeable future. With increasing demand and ever higher governmental standards imposed on water extracted from wells, TDPUD will again need to turn to Donner Lake water sooner rather than later. In his opinion, TDPUD will need Donner Lake water before 10 years have elapsed. If one chooses a date other than the stipulated valuation date, this evidence refutes any claim that the water in quest-on can later be classified as surplus in the future . Moreover, even if these two fatal defects were not enough, no knowledgeable buyer would pay a substantial amount, much less than nearly $3 million, for a claimed water right that is unadjudicated, is inconsistent with the language of the 12 OCT-31-2003 FRI 01 :32 PM MONTAGUE VIGLIONE FAX NO. 916 929 8967 P. 14/31 governing contracts, and whose acquisition and purported sale would inevitably result in the filing of a lawsuit by a major public utility agency. As Ms . Williams testified, if DLWC had tried to sell its claimed water rights, this would cause litigation. "We would certainly be seeing them in some type of legal proceeding to protect our interest in this 1998 agreement, because under this agreement [DLWC and its ,successors) do not have the right to sell that water, only to use it to deliver to customers in the prescribed area for their purposes . (TDPUD Final Argument, tab Lori Williams . ) For all of these reasons, I conclude that the DLWC has no water rights separate from the water system as a whole and is consequently not entitled to any additional compensation for them.. III. VALUATION. TDPUD' s expert, Harold Morgan, placed the total fair market value of the condemned system as of May 18, 2001, at $500, 000 . In contrast, DLWC' s expert, Richard Rhodes, opined that the value was $7, 628, 513 . (Fxh. 140 . ) Mr. Rhodes divided that sum into four components : The utility system $2, 678 , 000 The water rights $2, 970, 000 Loss of surcharge income $1, 779, 500 Loss of recoverable costs $ 201, 013 Total : $7, 628 , 513 13 OGT-31-9003 FR1 01 :32 PM MONTAGIIF VIUIONF FAX NO. 916 929 R967 P. 7n the preceding section, DLWC' s claim fnr $i, 970, 000 for water rights separate and apart from the utility system as a whole was rejected. In addition to that reduction, in its opening brief, DLWC abandoned its claim of $7 , 779, 5n0 for loss of surcharge income. T:i "light of the fact that on the valuation date of May 18, 20C1, [DLWC s] application for a $15, 514, 400 low interest Safe Drinking Water S (t] ate Revolving Fund loan . . . hdo not been approved by the Department of Wator Resources, the DLWC claim of 01, 779, 500 for the loss of the 1% surcharge i.ncnma will rnt he pursued. " (DLWC Cpn. Brief, p. 2. ) Consequently, DLWC' S remaining claims for compensation total $2, 679, 013 for the utility system and the recoverable (-nst.s _ T nex* review and determine the value of those two components . A. UTILITY SYSTEM. Mr. Rhodes used the market comparison approach to value as the beat indicator of fair market valua of the utility system in this case. 'raking a net rate base at the time of the taking of $1, 071, 237, he applied a premium multiplier of 2 . 5 to arrive at S2, 678, 092 . 5C, which he then rounded to $2, 678, 0CC. The rate base used by Mr. Rhodes was calculated for DLWC by Mr. Leonard Danna, CPA, an audit partner of the accounting firm of Vavrinek, Trine, Day i Co. (See Rxhs . 100; 131 . ) Mr. Danna has worked for DLWC and its parent since 1985 dad hda bden ac'nively engaged 14 OCT-31-2003 FRI 01 :32 PM MONTAGUE VIGLIONE FAX NO. 916 929 8967 P. 16/31 in the rate increase applications to the PUC on their behalf. Thus, he is intimately acquainted with the PUC procedure and is cognizant of the types of expenses allowed in rate base calculations . Mr. N.organ, on the other hand, had never handled a case where the rate base was determined by the PUC. Consequently, on issues concerning rate base determination I have generally favored Mr. Danna' s testimony. Mr. Morgan testified that he calculated the rate base at $450, 000, which he increased by a factor of slightly over 10% ($50, 000; which a buyer might offer to be the successful. bidder, to reach his total value of $500, 000 . He did not use a multiplier. These differences require an examination and determination of the proper rate base and of a multiplier. 1 . RATE BASE. The net book value or rate base of a utility is set by the PUC. In general, it consists of the cost of the total physical plant and related rights, less depreciation, and is augmented by expenses incurred for that system provided that the PUC determines those expenses would benefit the ratepayers and were made in good faith. The PUC prefers that applications for rate increases not be submitted annually so that the fixed rate base necessarily lags behind the proper rate at any given point in time. Once the rate base has been determined, the PUC then 7q OCT-31-2003 FRI 01 :32 PM MONTAGUE VIGLIONE FAX N0, 916 929 8967 P. 17/31 fixes a rate of return. Once fixed, a water company like DLWC is permitted to recover from the ratepayers only that rate of return on the rate base . As of December 31, 1991, the rate base of DLWC' s predecessor, Donner Lake Utility Company, was $456, 100 . (Exh. 8, p . 5, fn. 5 . ) DLWC' S parent, Del Oro Water Ccmpanv, purchased that company on September 21, 1993, for $539, 000 , (Exh. 12. } This purchase price included everything, including the water rights and represented a premium over rate base of $82, 900 or 18 . 2% . The last PUC approved rate base for DLWC was established in June of 1999 and was fixed at $822, 569 . (Exh. 130, appen A. ) The rate of return on this base was set at 9 . 73% . (Exh . 130 . ) This was the rate base and rate of return in effect on the date of valuation (May 18, 2001) but included the Knott Property, valued at $275, 000, which was not condemned by TDPUD. Thus, $275, 000 must be deducted from that amount . However, as Mr. Danna explained, $90, 000 must be added back for the Initial plant site that was deleted from rate base when the Knott Property was added to it. In short, then, on the date of valuation the effective rate base approved by the PUC was $637, 569 ($822, 569 - $275, 000 + $90, 000) . When a water utility system is taken by eminent domain, a new rate base for purposes of value must be calculated as of the 16 OCT-31-2003 FRI 01 :32 PM MONTAGUE VIGLIONE FAX NO, 916 929 8967 P. 18/31 date of valuation or as near to it as practicable . In essence, the rate base must be updated prospectively. This is because the rate base directly affects the fair market value. Thus, both the rate base calculated by Mr. Morgan on the one hand and that by Mr. Rhodes and Mr. Danna on the other, are necessarily hypothetical rates which, both sides argue: would have been adopted by the PUC had a sale been made to a regulated buyer rather than being condemned by a public agency. For the reasons that follow, I conclude that the rate base adopted by Messrs . Rhodes and Danna is the more persuasive one. First, the base rate adopted by Mr. Morgan is some $137 , 569 less than the effective rate base actually approved by the PUC nearly two years earlier. Not only does he not account for that fact, he makes no allowance for the expenses incurred by DLWC since the last rate increase in June 1999. Second, Mr. Morgan started his prospective rate base by beginning with $1, 355, 234 as the value for the total water plant in service . (Exh. 148 . ) That figure was taken from the 2000 Annual Report Balance as of December 31, 2000 . In Mr. Danna' s view, the use of that figure from the annual report is inappropriate because some costs were incurred but not yet paid and depreciation might be faster than what the PUC would allow. In contrast, Mr. Danna used the balances actually shown on the financial records of DLWC as of June 30, 2001, the nearest feasible date to the date of 1 7 OCT-31-2003 FRI 01 :32 PM NONTAGUE VIGLIONE FAX NO. 916 929 8967 P. 19/31 valuation. In the General Ledger Rate Base Reconciliation, the ledger began with the ending balance on December 31, 1998, (the date used for the PUC on the last rate base application) of $1, 516, 579. 11 . (Exh. 129. ) According to Janice Hanna, the director of corporate accounting at DLWC, the accounts listed in the general ledger had been approved by the PUC . When bills are paid, the costs are assigned to the appropriate account . The accounts are comorised of a "Plant" account and a "Construction Work in Progress" account . (Exh. 129 . ) The Plant account represents expenditures for the physical system while the Construction Work in Progress account represents various costs for services relating to the system. When brought forward to June 30, 2001, the ending balance on the general ledger was $2, 293, 925 . (Exh. 129 . ) Mr. Danna began his calculation of the prospective rate base with that figure. From that amount, he deducted accumulated depreciation, contributions and advances to reach a net figure of $1, 536, 279. (Exh. 131. ) He then made various reconciliations and adjustments, including those for items unrelated to rate base calculations, to arrive at the figure of $1, 346, 237 . From this figure, he further deducted $275, 000 for the Knott property, to arrive at his net rate base of $1, 071, 237 . 1R OCT-31-2003 FRI 01 :32 PM MONTAGE VIGLIONE FAX NO, 916 929 8967 P, 20/31 The chief difference between the calculations of the rate base by the two sides is that Mr. Morgan did not include any amount for construction costs . Those costs, after subtracting the plant expenditures, total some $707, 903 . (See Exh. 129. ) But as Mr. Danna testified, the earlier rate base granted by the PUC in June 1999 in fact included similar construction costs . He further testified that he was confident that the PUC would agree with the rate base he proposed. Moreover, it is undisputed that DLWC actually incurred all the construction expenses at issue. Indeed, they were incurred under compulsion of edicts of the Department of Health Services, the governing state regulatory agency. There was no evidence that these expenses were not made in good faith and for the benefit of the ratepayers . To the contrary, both Mr . Robert Fortino, the president of Del Oro Water Company, and Mr. William Gustayson, a consultant with the engineering firm of Ludhorff & Scalmanini, affirmed they were so made . TDPUD nevertheless counters that Mr. Danna' s projected rate base is overstated. In Mr. Morgan' s view, the PUC would not allow those expenditures into the rate base because a low interest from the Safe Drinking Water State Revolving Fund (SRF) was available . In part that argument is refuted by the fact that similar construction costs were allowed by the PUC in the last rate base determination. In any event, on the date of valuation the construction work in Iq OCT-31-2003 FRI 01 :33 PM MONTAGUE VIGLIONE FAX NO. 916 929 8967 P, 21l31 progress had not qualified for SRF funding. DLWC is entitled tc have a rate base which reflects its actual expenditures to enhance and upgrade the water system. Accordingly, I find the proper rate base to be $1, 071, 237 . 2 . MULTIPLIER. As noted, Mr. Rhodes used a multiplier of 2 . 5 on the rate base in determining fair market value of the DLWC' s water system. That multiplier was derived by taking the sales price of companies claimed to be comparable and dividing it by the rate base. Thus, for example, in the sale from Armstrong Valley Water Company to Dominguez Water Company, the sales price was $336, 164, and the rate base was $16C, 476, resulting in a multiplier of 2 . 09 . In sales selected by Mr. Rhodes made after January 1, 1998, to public agencies, the multiplier ran from a high of 2 . 97 to a low of 1 . 59 . In sales between investor owned utilities, the range was a high of 2 . 56 and a low of 1 .72 . (Exh. 135 . ) As Mr. Rhodes explained it, "i didn' t go for the highest and I didn' t go for the lowest but under the definition of market value for condemnation is supposed to be the highest price that, in terms of money that the property would bring. [11] And I felt that it has to be slightly - can' t just be average, it' s got to be nudged a little bit to the high side to meet that definition and that' s where I came with the 2 . 5 . We had two sales that were over that amount and I thought that . 20 OCT-31-2003 FRI 01 :33 PM MONTAGUE VIGLIONE FAX NO, 916 929 8967 P, 22/31 2 . 5 was a reasonable selection and it' s a matter of opinion. There is no magic formula or there is no way you can look it up in a book. you have to just look it all over and have an opinion and pull the trigger and say, this is what I think it is. " (TDPUD Final Argument, tab Richard Rhodes, p. 155 . ) Mr. Morgan, TDPUD' s expert, did not disagree with this arithmetical methodology. Where he parted company with Mr. Rhodes was in the selection of comparable sales . In Mr. Morgan' s view, the principal factor in selecting a sale to compare is to look for one of comparable size to that of DLWC. In making that determination of size, the rate base is the primary figure . Mr. Rhodes divided his comparable sales into two groups : (1) sales of investor-owned utilities to public agencies (Exh. 133) , and (2) sales between investor-owned utilities (Exh. 134 ) . I consider these sales, along with Mr. Morgan' s critique of them, in that order. As will be seen, I reject many of these sales on the ground that they do not meet the criteria of comparable sales. The first sale in the first group was from Gerber Water Works, Inc. to Gerber-Las Flores community Services District . The sales price was $195, 000 and the rate base was S65, 683, resulting in a multiplier of 2 . 97 . In Mr. Morgan' s view, that sale is too small to use as a comparable . Wlien a utility has a 21 OCT-31-2003 FRI 01 :33 PM MONTAGUE VIGLIONE FAX N0. 916 929 8967 P. 23/31 rate base of under $100, 000, it generally lacks the expertise to make a truly fair market value sale. Moreover, the sale here was made under threat of condemnation. In such a case, the buyer will often pay a premium to avoid an eminent domain action. Evidence Code section 816 requires a comparable sale to have been "freely made. " A sale under threat of condemnation is obviously not freely made. Thus, I reject this sale for those two reasons . The second sale was from Jensen Water Co. to Riverside/Cabazon County Water District . The sales price was $400, 000 and the rate base $266, 214, resulting in a multiplier of 1. 5 . According to the research done by Mr. Morgan, the buyer was not trying to reach fair market value and so paid a premium. For this reason, I reject this sale as well. The third sale was from Bidwell Water Co. to Indian Valley Community Services District. The price (excluding assumption of debt) was $230, 000, the rate base $90, 589, and the multiplier 2 . 54 . This sale is rejected as having too small a rate base . The fourth sale was between Ponderosa Water Co. and Tuolumne Utilities District . The price was $90C, 000, rate base was $567, 264 and the multiplier was 1. 59 . This sale is comparable and in fact was also used by Mr . Morgan. The fifth sale was from Gibbs Ranch Water Co. to Tuolumne Regional Water District . The price was $930, 000, the rate base 22 OCT-31-2003 FRI 01 :33 PM MONTAGUE VIGLIONE FAX N0. 916 929 8967 P. 24/31 667 , 000 and the multiplier 1. . 39. This sale is also comparable was similarly used by Mr. Morgan. The sixth sale was from Madera Rancho Water Co. to County of Madera. The price was $350, 000, the rate $262, 667 and the multiplier 1. 33. This sale, however, was made under threat of condemnation and hence must be rejected. The seventh sale was from Dunsmuir Water Corp. to City of Dunsmuir. The price was $863, 500, the rate $298, 910 and the multiplier 2 . 89 . This sale was also made under threat of condemnation and thus is disqualified. The eighth sale involved California-American Water Co, and Mortara Sanitary District. The listed price was $11, 000, 000, the rate base was $6, 800, 000 and the multiplier 1 . 62 . However, this was not a negotiated sale at all, much less between a willing buyer and seller. It was an arbitration award. Thus, this sale must be rejected as well . The ninth and final sale in this group was from Citizens Utility Co. to Sweetwater Springs Water District. The price was $6, 500, 000, the rate $3, 365, 000 and the multiplier 1. 93 . This sale was also made under threat of condemnation and 'hence is disqualified. The first sale in the second group was from Armstrong Valley Water Company to Dominguez Water Company. Mr . Rhodes stated the price was $336, 164 and the rate was $160, 476, 23 OCT-31-2003 FRI 01 :33 PM MONTAGUE VIGLrrIONE FAX N0, 916 929 8967 P. 26/31 I resulting in a multiplier of 2 . 09. According to Mr. Morgan, although this sale was comparable the figures were incorrect . The correct multiplier, he stated, was 1 . 25 . The second sale waq from Citizens Utilities Company to California-American Water Co . The price was an enormous sum of $161, 320, 000 and the rate was $93, 957, 000, for a multiplier of 1 . 72. Such a price is on( its face, in the words of Mr . Morgan, "way too big" to be cor}sidered comparable and hence must be rejected. The last sale was from California-American Water Co. to REW Aktiengesellschaft . The price was $4 . 6 billion, the rate $1. 8 billion and the multiplier was 2 . 56. This was a national sale and was the largest in history. This is facially not comparable and must also be rejected; Mr. Morgan used eight sales as comparables . Four of those sales occurred before 1995 when the buyer had to retain the pre- existing rate base. In i998, sections 2719 and 272C were added to the Public Utilities ;ode . As DWLC noted in its in limine motion, under these amendments, "the rate base to be used for ratesetting for a ?UC regulated purchaser of a oublic water system after January 1, 1998, is the fair market value of the water system facilities acquired and not the existing rate base of those water system facilities . " (DLWC Motion, p. 4 . ) Thus, after 1998 buyers were ;generally willing to pay fair market i. 24 OCT-31-2003 FRI 01 :33 PM MONTAGUE VIGLIONE FAX N0, 916 929 8967 P. 26/31 value and not just the rate base . As a result, pre-1998 sales are of limited value . With that admonition in mind, I turn to Mr. Morgan' s list of comparable sales . Fe too divided those sales into two groups, (1) sales to regulated buyers, and (2) sales to non- regulated buyers . (Exh. 146. ) The first sale in the regulated buyers group was from Donner Lake Utility Company to DLWC' s parent, Del Oro Water Company in 1993 involving the very system in question. The price was $539, 000, the rate base was $456, 000 and the multiplier was 1 . 8. The second sale in this group was from Francis Land and Water Company to Del Oro Water Company in 1995. The price was $1, 200, 000, the rate base was $1, 200, 000 and the multiplier was 1 . The third sale was from Borrego Springs Water Company to Del Oro Water Company in 1996 . The price was $1, 460, 000, the base rate $1, 383, 000 and the multiplier 1 . 06 . The fourth sale in this group was from Lucerne Water Company to Dominguez Water Co. in 1998 . The purchase price was $730, 000, the rate base $470, 000 and the multiplier was 1 . 55 . The fifth and final sale was in 1999 between Mineral City Water System to Del Oro Water Company. The purchase price was $211, 000, the rate base $211, 000 and the multiplier was 1 . 25 OCT-31-2003 FRI 01 :33 PM MONTAGUE VIGLIONE FAX NO. 916 929 8967 P. 27/31 The first sale in the second group, involving non-regulated buyers, was from Gibbs Ranch Water system in 1996 to Tuolumne Regional Water District . Tye price was $930, C00, the rate was $670, 000 and the multiplier was 1 . 39 . The second sale was in �998 from Ponderosa Water Company to Tuolumne Regional Water District. The price was $788, 000, the rate $455, 000 and the multiplier 1 . 73. The third and final sale was in 2002 from Mineral City Water System to Mineral Coujnty Water District . The price was $50, 000, the rate $145, 000 and the multiplier was . 34 . In summary, none of properly comparable sales used by either side involved a multiplier anywhere near the 2 . 5 premium used by Mr. Rhodes . From the range of these comparable sales Mr. Morgan could properly conclude, as he did, that a multiplier should not exceed 1, which in effect results in no premium at all. In addition to his conclusion based on these comparable sales, Mr. Morgan also considered several other factors in concluding that no premium could be paid over the rate base by a knowledgeable buyer. First given the acrimonious relationship between DLWC and its customers, the ratepayers were hostile and suspicious. In the past jthey have opposed DLWC' s plans to refurbish the system because of their deep suspicions . A buyer would take that customer hlostility into cons ide rat_on. Next, 26 OCT-31-2003 FRI 01 :33 PM MONTAGUE VIGLIONE FAX NO. 916 929 8967 P. 28/31 the utility is relatively small in size and hence would attract fewer buyers. Finally, by all accounts, even those of DLWC, the water system itself was in deplorable condi:icn . As a TDPUD employee aptly described it, nearly everything in the system, except the Wolf Estate portion, was "scrap. " Consequently, a huge investment would be needed to upgrade the system. The multipliers in the cases of accepted comparable sales ranged from a high of 1 . 73 to a low of less than 1 (or no premium) . Indeed, when DLWC' s parent purchased the Mineral City Water System in 1999 it paid no premium. Furthermore, Mr. Morgan' s opinion of no premium was predicated on his rate base of $500, 000 . It follows a fortiori that in his view no premium would be paid when the rate base was found to be $1, 071, 237, more than twice that used by Mr. Morgan. Mr. Morgan has a wealth of experience in appraising water systems in California, Arizona, New Mexico, Texas, Nevada, New York and other states . He has appraised some 65 water systems and has reviewed some 500 sales from the late 1960s to the present. His extensive experience and qualifications are recounted in his resume. (Exh. 91 . ) On the other hand, Mr. Rhodes' expertise is in real estate appraisals . He has no special training or education concerning the valuation of water utilities . Given the differences in training and experience, as well as the persuasive force of their testimony, I conclude that 27 OCT-31-2003 FRI 01 :33 PM MONTAGUE VIGLIONE FAX NO. 916 929 8967 P. 29/31 Mr. Morgan' s opinion on comparable sales and a multiplier should be adopted. Accordingly, I find that no premium would be paid over and above the found rate base. Hence, I conclude that the value of the utility system on the date of valuation was $1, 071, 237 . B. RECOVERABLE COSTS . Finally, DLWC seeks compensation for what it styles as "recoverable costs. " These one-time costs were compiled by Mr. Danna from the financial records of DWLC. They total $201, 013 . (Exh. 131 . ) They include such items as $71, 974 for legal fees easement condemnation, $27, 956 for leak repair, various amounts for other fees and the like . As Mr. Danna explained the legal fees, the utility need not prevail in a condemnation action to recover them. if those costs were prudently made and were for the benefit of the ratepayers, they would be recoverable. As Mr. Danna further explained it, these one time costs are not added to the rate base . Rather, when approved by the PUC they can be recovered directly from the customers over and above the ordinary rate. TDPUD concedes that " [iln fairness, DLWC should be able to recover costs which benefited the ratepayers, which were incurred prudently, which would have been allowed as reimbursable items by the PUC, and which went unrecovered through no delay or other fault of DLWC . " (DLWC Final Argument, 28 OCT-31-2003 FRI 01 :33 PM MONTAGUE VIGLIONE FAX NO. 916 929 8967 P. 30/31 p. 29 . ) It admits that the $27, 956 leak repair is proper but claims the other costs resulted in no benefit whatsoever to the ratepayers. But this view is taken only from hindsight, after the productive use of these expenditures was terminated by this condemnation action. I agree with DLWC that "Mr. Danna testified that each of those DLWC expenditures met the PUC criteria for reimbursement . He testified they were incurred in good faith and for the benefit of the ratepayers and that based on his experience in handling rate cases, they would have, but for the condemnation, been approved by the PUC. " (DLWC Closing Brief, p. 24 . ) I conclude therefore that DLWC is entitled to recover $201, 013 for its recoverable costs . IV. AWARD. Based on the foregoing determinations, I award DLWC the sum of $1, 272, 250 for the taking of its property and rights by TDPUD in.. this eminent domain action. According to the Stipulation and Order for Binding Arbitration, "DLWC may be entitled to interest on the arbitrator' s award, commencing on May 21, 2001, to be computed as per CCP § 1268 . 310, et sea. , and DLWC is entitled to recover its statutory costs as per CCP § 1268 , 710 . Interest, if applicable, and costs are to be included in the condemnation 29 OCT-31-2003 FRI 01 :33 PM MONTAGUE VIGLIONE FAX NO, 916 929 8967 P. 31/31 judgment, which will be entered by the court following the arbitration. " Accordingly, I have not considered those issues. Dated this 29th day of October, 2003 . ix /0 Keith F. Sparks Arbitrator 30 Peter Hoizmeister From: Jack &Emilie Kashtan [EKashtan@prodigy.net] Sent: Wednesday, November 05, 2003 8:41 AM To: Peter Holzmeister Subject: Final Arbitration Peter, Hope that you are well. I received the final arbitration....what we expected but disappointed with the judge. I have to take off my rose colored glasses and clean them. 1. 1 need to know some information. What was the amount that we initially paid Fortino, $750,000? 2. Fortino transferred $372,036 out of Donner Lake Water Company and into Del Oro and another$77,000 to Safor Corp, according to the 12/31/99 tax statement Schedule A-4. It was never transferred back. that is our money he laundered. Can we get that back or included in the final bill? 3. Are the legal fees in the final "recoverable costs"from the Knott v. Donner Lake Village and/or having legal council at the CPUC in trying to get money for the filtration plant after the public wanted him out? 4. Do we have to go to court for the interest on the arbitrator's award? I am writing an article and want my facts straight. I will run a draft by you for accuracy of fact prior to anything going out. If you could get back to me ASAP I would greatly appreciate it. Em Peter Holzmelster , From: Jack& Emilie Kashtan [EKashtan@prodigy.net) Sent: Thursday, November 06, 2003 6:15 PM To: Peter Holzmeister Cc: Michelle Barrett Subject: Re: Final Arbitration Peter, #3. In the final decision, the Judge mentioned that some of that Fortino was allowed about $200,000 in"recoverable costs". The Judge stated that these included repairs and some legal costs. Do you know what legal fees he is getting back? 4. If Fortino gets interest on his award, do we get interest on the money that he kept from customers? I will copy in Michelle Barrett, Dennis V. assistant. Em ----- Original Message ----- From: Peter Holzmeister <mailto:PeterHolzmeister(d_)TDPUD.ORG> To: 'Jack & Emilie Kashtan' <mailto:EKashtan(a).prodigv.net> Sent: Thursday, November 06, 2003 10:32 AM Subject: RE: Final Arbitration He Emily 1. The amount initially paid to Del Oro was $750,000 2. It is my understanding that we have no opportunity to get that money back, although I will not pretend to know the details. We may want to get a response from Dennis or Dennis 3. 1 am not sure what your question is. If you asking if the customers can get back money that Fortino paid to try to condemn the land of Donner Lake Village I do not know the answer. Again, we should ask Dennis and Dennis to respond. 4. It is my understanding that Fortino gets interest on the arbitrator's award. If the final payment to him is in the range of$370,000 after deducting prepayments made by the Donner Lake customers for the first half of the year 2000, then he is entitled to interest on the $370,000 from May 21, 2001 to the date payment is made to him. We should check these matters with Dennis and Dennis so we get the facts straight. Peter -----Original Message----- From: Jack& Emilie Kashtan fSMTP:EKashtan(a)prodigy.netl Sent: Wednesday, November 05, 2003 8:41 AM To: Peter Holzmeister Subject: Final Arbitration Peter, Hope that you are well. I received the final arbitration...what we expected but disappointed with the judge. I have to take off my rose colored glasses and clean them. 1. 1 need to know some information. What was the amount that we initially paid Fortino, $750,000? 2. Fortino transferred $372,036 out of Donner Lake Water Company and into Del Oro and another$77,000 to Safor Corp, according to the 12/31/99 tax statement Schedule A-4. It was never transferred back. that is our money he laundered. Can we get that back or included in the final bill? 3. Are the legal fees in the final "recoverable costs"from the Knott v. Donner Lake Village and/or having legal council at the CPUC in trying to get money for the filtration plant after the public wanted him out? 4. Do we have to go to court for the interest on the arbitrator's award? I am writing an article and want my facts straight. I will run a draft by you for accuracy of fact prior to anything going out. If you could get back to me ASAP I would greatly appreciate it. Em NOV-IP-POO, WF6 0,,4, PM MONTAGIT VIGI IONF FAX NO. 918 9P9 U67 P. O1/04 MONTAGUE & VIGLIONE 1500 River Park Drive, Suite 110 Sacramento, California 95815 Telephone: (916)929-5018 Facsimile: (916) 929-8967 FACSIMILE COVER SHEET EDATF: November 12,2003 FROM: Dennis L. Viglione, Esq. __. -- Peter Holzmeister FAX NO.: 530-587-I 189: Dennis W. DeCuir,Esq. Fax NO.: 916-788-1023 V. DLWC PAGES: 4(including cover) NHE ot Follow: ollow Via: XX ............................................ CONFIDFNTIAL T DELIVERY.................. COURIER .......................... ...... COMMUNICATION ................................ Deturis aafd Pctcc: This just came in from Fred Girard. I haven't had a chance to check his numbers. Dennis Viglione —warning to Rcclplor-- The information contained in this facsimile message is confidential information and may be subject to the arnw, .client rrivypge, It is intended for the use of die individual or entity named above. If the reader of this message is not the intended recipient,you arc hereby notified that any dissemination,distribution or copying of this communication is strictly prohibited and may result in civil and/or criminal liabilities.If you have mcoircd this cauuwmwtiuu in enur, please notify us by telephone and mtum the original Communication m us ache above, z is the US.Postal Service.Thank you, i x i NOV-1P-P003 WF0 043 PM MONTAGIIF ViGI.iONF FAX NO. 91A 999 P967 P. V104 Nav-ti-08 03;1TPa Fraa- T-626 P.002AU F•445 MOSKOVITZ IEDEMANN �I rAaooeux�.Omnan November11.2003 VIA FACKIMLIC AND REGULARMAM Dennis L.Niglione Montague& Viglione 1500 River Park Drive,Suite 110 Sacramento,CA 95915 Re: Truckee Donner Public Utility District v.Donner Luke Water Company, er at.;Nevada County Superior Court, Came No.T01/0617C Dear Dennis: Enclosed is a copy of Jim Boy&t interest computations with the attaohod Surplus Money Invostmear Fuud Apportionment Yield Rate,which,pursuant to CCP§1268.350,is to bo used in computing mtcost for each six-month period. 113e total luterest is$51,718.91. Jiro Boyd computed the intucsi on the$52,2,250 through November 30,2003. It totaled$48,783.17. If The judgment is not paid by November 30,2003,the interest on the S522,250 would be running at$28.86 per day until the judgment is paid(assuming it is paid this year). I assume you will be filing a motion to have the arbitration award confirmed by the court,and when that is done,a judgrneat should be entered In that regard,that judgment should reflect the S1,272,250 arbitration award,the prior withdrawal of$750,000 on June 12, 2001,the deduction of$155,761 for customer deposits as per the agreement,plus the interest of SS 1.71 R_91 and costs of$182(filing fee). The balance due would be S418,889.91,if paid on November 30,2003. It would be appreciated ifyou would give me a call and hopefltlly we can accomplish the confirmation of the arbitration award and the entry of the judgment by stipulation. Very duly yours, KRONIC&MOSKOVTT2;TIEDEMANN&(IRRARD A Professional Corporation 1 erjrk G Girard PGGJcd Enclosure 75.MMI 4"C. aLMn 2t^FL*= $ApW„p,?p.CAUI�M"93 11 "Ib TLI MQSR(010 3214500 1."(010)331.015 NOV-12-2003 WED 03:43 PM MONTAGUE VIGLIONE FAX K 916 929 8967 P. 03/04 Nov-11-03 08:17pm From- T-628 P.003/004 F-441 11/11/03 14:21 FAIL 918 448 4018 BaTIIS'WICZ, SWIM,.& ^ 1�002 DONNER LAKE WATER COMPANY AMOLMt From To Ei9Re itlletest Date Dale S52y,030.00 21-May-al 90Jun pl 6_493% 53.7103 $5m956.13 30Jun-Ot 31•L7oo-a1 37-31% 1 ,6071.56 S6A1.037.89 31 Dun-01 30.tun-02 2.863% 7,671.92 S581711.51 31-DOC-02 3D.Jun-03 Z46M 6,9p8.64 §559,711.50 31-Dmfr02 5688,81m.34 30Jun43 30-Nov0 1858°ti 8 87 Daly Rabe $28.86 S78o,000.o0 21-May-01 12.lun"ol 6 49994 $2,W5.19 Coh}Identbl 11/11I2003 Faye 1 NOV-12-2003 WED 03.43 PM MONTAGUE VIGLIONE FAX NO. 916 929 8967 P, 04/04 Now11-09 08,1Ppm Pray T-628 P,004/004 f-445 STATE CONTROLLER'S OFFICE Division of Accounting and Reporting Surplus Money Investment Fund Apportionment Yield Rate Period Endin Rate Period EnOn Rate Period Ending Rate 12/31/64 3.777% 12/31/77 6,182% 12/31/90 8.339% 6130/65 3.968% 6/30178 7.174% 6/30191 7.674% 12131/65 4.184% 12/31/78 8.096% 12/31/91 6.761% 6/30/66 4.538% 6/30/79 8.979% 6/30/92 5.649% 12/31/66 5.057% 12/31f79 9.671% 12/31/92 4.821% 6130167 4.815% 6130/80 11.376% 6130/93 4.605% 12/31/67 4.744% 12/31/80 TO.257% 12/31/93 4,390% 6130/68 5.333% 6/30/81 11.488% 6/30/94 4,354% 12/31168 5.540% 12/31/81 12,188% 12/31/94 5.153% 6/30/69 6.520% 6130/82 11.931% 6/30/95 5.871% 12/31169 6,389% 12/31/82 11.262% 12/31/95 5.827% 6130170 7.072% 6/30/83 9.849% 6/30196 5.560% 12/31/70 7,696% 12/31/83 10.120% 12/31/96 5.572% 6/30f71 5,154% 6/30/84 10.605% 6130197 5.594% 12/3lf71 5.580% 12/31/64 T1.475% 12/31/97 5.690% 6/30172 4.477% 6130/85 10.191% 6/30/98 5,674% 12/31f72 4.977% 12/31/85 9.497% 12/31/98 5.553% 6130/73 6.023% 6/30186 8-701% 6/30/99 5.134% 12/31173 8.717% 12/31/86 7.655% 12/31/99 5.341% 6/30f74 9.222% 6130/87 7,220% 6130/00 5.98G% 12/31/74 10.315% 12/31/87 7,772% 12/31/00 6.493% 6130/75 7.089% 6/30188 7,946% 6/30/01 5.731% 12/31/75 6.791% 12/31188 8.336% 12/31/01 3.993% 6/30/76 6.048% 6/30/89 8.956% 6130/02 2.853% 12/31/76 6.021% 12131/89 8.784% 12/31/02 2.468% 6/30/77 5.788% 6130/90 8,520% 6130/03 1.B59%