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STATE OF CALIFORNIA EDMUND G. BROWN JR., Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

April 29, 2011 Draft Resolution W-4875

Agenda ID #10371

TO: All Interested Persons

The Division of Water and Audits is re-circulating draft Resolution W-4875 to deny San Jose Water Company's request to amortize its mandatory conservation revenue adjustment memorandum account. At San Jose Water Company's request, the comment period is being extended an additional 30 days. Draft Resolution W-4875 will be on the Commission's June 23, 2011 agenda. The Commission may act then on this resolution or it may postpone action until later.

When the Commission acts on a draft resolution, the Commission may adopt all or part of the draft resolution, as written, or amend or modify the draft resolution; or the Commission may set the draft resolution aside and prepare a different resolution. Only when the Commission acts does the resolution become binding.

Interested persons may submit comments on draft Resolution W-4875. An original of the comments, with a certificate of service, should be submitted to:

Division of Water and Audits, Third Floor

Attention: Terence Shia

California Public Utilities Commission

505 Van Ness Avenue

San Francisco, CA 94102

Interested persons must serve a written or electronic copy of their comments on the utility on the same date that the comments are submitted to the Division of Water and Audits. Interested persons may submit comments on or before June 15, 2011.

Comments should focus on factual, legal, or technical errors or policy issues in the draft resolution.

Persons interested in receiving comments submitted to the Division of Water and Audits may write to Terence Shia, email him at ts2@cpuc.ca.gov, or telephone him at (415) 703-2213.

/s/ RAMI S. KAHLON

Rami S. Kahlon, Director

Division of Water and Audits

Enclosures: Draft Resolution W-4875

Certificate of Service

Service List

WATER/RSK/JB5/TS2/jlj DRAFT AGENDA ITEM #10371

PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

DIVISION OF WATER AND AUDITS RESOLUTION NO. W-4875

Water and Sewer Advisory Branch June 23, 2011

RESOLUTION

(RES. W-4875), SAN JOSE WATER COMPANY (SJWC). ORDER AFFIRMING THE DIVISION OF WATER AND AUDITS' (DWA) DISPOSITION DENYING AUTHORITY TO AMORTIZE SJWC'S MANDATORY CONSERVATION REVENUE ADJUSTMENT MEMORANDUM ACCOUNT (MCRAMA).

SUMMARY

This resolution denies SJWC the authority to recover in rates, as requested by Supplemental Advice Letter (AL) 415-A filed on July 8, 2010, the amount of $5,740,078 by adding a surcharge of $0.0944 per 100 cubic feet to the Quantity Rates in each customer's bill to be recovered over twelve months. The increase requested is to recover lost revenues tracked in SJWC's MCRAMA resulting from reduced water consumption by customers during the period of August 3, 2009 through May 1, 2010. On November 29, 2010, the DWA issued a letter rejecting without prejudice AL 415-A on grounds that the recovery was a matter inappropriate for an advice letter and noting that SJWC should file a petition for modification for Decision (D.) 08-08-030. On December 7, 2010, SJWC requested Commission review of the DWA's rejection of AL 415-A. We affirm the DWA's rejection of AL 415-A.

BACKGROUND

SJWC, a Class A water utility, provides water service to approximately 217,000 residential and industrial customers in parts of Cupertino and San Jose, and in Campbell, Los Gatos, Monte Sereno, and Saratoga -- and in contiguous territory in Santa Clara County.

On May 27, 2009, SJWC filed AL 407 requesting Commission authority to establish the

MCRAMA. The purpose of the MCRAMA was to track extraordinary expenses and revenue shortfalls associated with SJWC's conservation measures that it implemented as a result of the Santa Clara Valley Water District (SCVWD) declaring a water shortage

alert. SCVWD issued a resolution on March 24¸ 2009, that called for 15% "mandatory" conservation on total sales across all customer classes in the Santa Clara Valley but did not impose fines or restrictions on customers that failed to meet this goal. Thus, this conservation request was mandatory in title only without any restrictions. SJWC requested authority to record in the MCRAMA the revenue impact due to these conservation measures and the additional administrative and operating costs not otherwise recoverable through memorandum or balancing accounts, or any other mechanism recognized by the Commission. SJWC would seek recovery of amounts recorded in the MCRAMA in its next general rate case, or other regulatory proceeding as directed by the Commission. This advice letter became effective on August 3, 2009, with Supplement AL 407-D.

SJWC's present rates became effective on January 1, 2010, as authorized by AL 409. The utility filed this advice letter pursuant to Ordering Paragraph #5 from D.09-11-032, which authorized SJWC to file a Tier 1 AL requesting an escalation adjustment for 2011 to be calculated in conformance with the Rate Case Plan adopted in D.07-05-062 and Appendix A.

SJWC seeks to recover the balances booked into its MCRAMA up to May 1, 2010. In AL 407 the utility stated that the MCRAMA would remain in effect until May 1, 2010 or until SCVWD declared the water shortage over and ceased the conservation, whichever happened first.

On June 23, 2010, the Division of Ratepayer Advocates (DRA) requested and received an extension of the protest period for AL 415 to resolve some issues in the filing. DRA's proposed changes include removal from recovery of the portion of SJWC's Monterey-style Water Revenue Adjustment Mechanism (MWRAM) Balancing Account associated with the calculation of the MCRAMA as well as gross up for Local Franchise Tax and Uncollectibles. SJWC filed Supplemental AL 415-A on July 8, 2010, resolving these issues by removing the MWRAM portion from the MCRAMA request and stating that it would request authorization to amortize the MWRAM balance at a later date.

NOTICE AND PROTESTS

SJWC gave public notices of its rate increase request via newspaper notice and customer bill inserts. [See General Order 96-B (GO 96-B), Industry Rule 3.1. and General Rule 4.2.] The public notice in the San Jose Mercury News ran on Saturday June 5, 2010. The bill inserts were provided from June 17, 2010, to August 16, 2010, due to residential customers being on bi-monthly billing. The publication and bill inserts indicate the proposed increases to the applicable rate schedules.

SJWC served copies of the AL 415 and AL 415-A in accordance with GO 96-B, Industry Rule 4.1 and General Rules 4.3 and 7.2. Service was provided to SJWC's Service List. Three protests were filed on SJWC's AL 415.

One protest stated that although the customer continued to conserve water, his bill was higher during the effective period of the MCRAMA compared to the period before the MCRAMA was implemented. Another letter questioned excessive salaries and expenses for SJWC. SJWC's salaries and expenses are routinely audited by the DWA during general rate cases so that SJWC does not burden its customers with inflated figures for expenses. Also, SJWC can not earn more than its authorized revenues approved by the Commission. As such, customers are not penalized for conserving water and only pay up to the authorized level granted by the Commission.

DISCUSSION

We affirm the DWA's determination that SJWC's request to amortize its MCRAMA is a matter inappropriate for an advice letter. GO 96-B, Rule 5.2 states:

D.08-08-030, issued in the Water Conservation OII, approved a contested settlement that adopted tiered conservation rates and a "Monterey-style" Water Revenue Adjustment Mechanism (or MWRAM) for SJWC. SJWC requests in AL 415 to amortize funds booked to the MCRAMA. Recovery under this request would supplement the recovery authorized under the MWRAM and essentially achieve for SJWC a full decoupling Water Revenue Adjustment Mechanism/ Modified Cost Balancing Account (WRAM/MCBA). However, as stated above, the ratemaking treatment the Commission has authorized for SJWC in D.08-08-030 is a MWRAM and not a WRAM/MCBA. Accordingly, since through its request in AL 415-A SJWC is now essentially seeking a full WRAM/MCBA rate-making treatment rather than its currently authorized MWRAM, it needs to seek to modify D.08-08-030 through filing a petition for modification as required by GO 96-B Rule 5.2, and consistent with Rule 16.4 of the Commission's Rules of Practice and Procedure (which addresses petitions for modification).

Alleged Differences:

In its request for review, SJWC argues that allowing SJWC to implement the rate adjustment proposed by AL 415-A would not have the effect of achieving a full WRAM/MCBA. The utility alleges that there are four differences between the MCRAMA and full WRAM/MCBA that show why this effect would not take place.

First, SJWC indicates the MCRAMA is a memorandum account which is not recorded in the utility's accounting books as it represents an off-book accounting record, while the full WRAM/MCBAs employed by other utilities are balancing accounts that are booked on the utilities' financial statements. Although the MCRAMA monies are accounted for in a memorandum account, the manner in which the MCRAMA accounts for lost revenues is similar to that of a full WRAM/MCBA in that the MCRAMA, like the WRAM/MCBA, takes the net difference between adopted water sales revenue to actual water sales revenue against the net difference between adopted variable expenses and actual recorded variable expenses to come up with a net balance. SJWC also fails to recognize that consistent with Public Utilities Code Section 792.5, a utility authorized to collect on a memorandum account must transfer this entire amount to a balancing account for recovery. Thus, the MCRAMA functions similarly to the full WRAM/MCBA and its amortization, in conjunction with the operation of the WMRAM, would have the result of achieving for SWJC a ratemaking mechanism akin to a full WRAM/MCBA.

Second, SJWC states that the Commission allowed SJWC to implement and amortize memorandum accounts relating to conservation, like the MCRAMA, with only a 20-basis point reduction in its authorized return on equity (ROE) in calculating any revenue adjustment to recover the account's balance, while none of the water utilities authorized to implement and amortize full WRAM/MCBAs were required to reduce their authorized ROE when their full WRAM/MCBAs went into effect. However, the water utilities with full WRAM/MCBAs have gone through a thorough ROE analysis in cost of capital proceedings, as required by the ratemaking process the Commission has authorized for these utilities (i.e., the full WRAM/MCBA), and not a short-hand analysis like the 20 basis point reduction analysis that SJWC argues would be applied to it in seeking to amortize its MCRAMA through the advice letter process. For SJWC, the Commission has authorized a "Monterey-style" WRAM in D.08-08-030, and any revenue adjustment for SJWC must be done under this ratemaking process. As discussed above, if SJWC wants a different ratemaking mechanism, it must file with the Commission a petition to modify D.08-08-030.

Third, SJWC states that the MCRAMA has a termination date, unlike full decoupling WRAMs and the "Monterey-style" WRAM authorized for SJWC in D.08-08-030.

SJWC's statement is incorrect because full decoupling WRAMs and "Monterey-style" WRAMs are scrutinized in general rate cases every three years and do not continue for an unlimited duration as SJWC appears to suggests with its statement. In any event, it's not clear what point SJWC is making in trying to distinguish between the MCRAMA and WRAMS and "Monterey-style" WRAMS. The MCRAMA simply provided SJWC a mechanism for tracking conservation related costs and did not authorize or guarantee recovery of these costs or dictate the mechanism the Commission will use in addressing whether these costs should be recovered.

Fourth, SJWC states that the MCRAMA is applied only to the quantity revenue paid by residential customers, while the full WRAM/MCBAs employed by other water utilities cover all quantity revenue derived from all customer groups. This is simply an incorrect statement as California Water Service Company, Park Water Company, and Golden State Water Company with full WRAMs specifically list exclusions to customer groups that will not be tracked by the WRAM. 1 Thus, SJWC has drawn a false comparison.

Thus, for all the reasons discussed above, SJWC's alleged differences between the MCRAMA operating in conjunction with a MWRAM and a full WRAM/MCBA either do not exist or are immaterial to the question of the appropriate ratemaking mechanism for the Commission's review of recovery of monies booked to the MCRAMA.

Alleged Errors of Law:

SJWC also points out what it characterizes as an error of law in DWA's rejection letter by claiming that DWA fails to recognize the procedure SJWC followed in submitting ALs 407-D and 415-A is entirely consistent with established Commission policy and past decisions. Following established procedure for seeking recovery of balances from memorandum accounts through advice letter filings does not mandate the procedure the Commission must follow in determining if recovery in rates for memorandum

account balances should be authorized. DWA's rejection of AL 415-A and suggestion that SJWC seek authority to recover MCRAMA balances in rates through a petition for modification of D.08-08-030 is not legal error as SJWC claims. Rather, the Commission has the authority to establish procedures for processing utility requests that are

appropriate to the circumstances. Here, the nexus between the authorized MWRAM and the MCRAMA is strong enough to suggest that the request for recovery of MCRAMA balances be examined in the context of SJWC's existing MWRAM established in D.08-08-030.

Further, SJWC sought the MCRAMA on the pretext that SCVWD's conservation declaration was mandatory and that SJWC was not protected from any revenue shortfall resulting from SCVWD's conservation measures. SCVWD is responsible for managing the overall water supply in Santa Clara County but has limited authority to mandate water use reductions. SCVWD must rely on the voluntary actions of the water retailers, cities, and county to enact and implement local ordinances, and conservation measures. Although SCVWD labeled its declaration as "mandatory" conservation, in fact it does not have the authority to levy any fines or establish water restrictions on its customers, such as SJWC, who would impose conservation measures that encourage lowered water use with no real penalties. Thus, SCVWD's conservation declaration was not mandatory as SJWC stated, since SCVWD did not have the authority to mandate water restrictions or collect penalties for over-usage.

In order to gain full revenue protection and to remove any utility disincentive for conservation, SJWC requested a memorandum account mechanism in the form of the MCRAMA. The proposed MCRAMA tracked the difference between the revenue collected as a result of the "Monterey-style" WRAM already in place and the authorized sales revenue (quantity rate) allowing SJWC to collect only the revenue associated with its authorized sales quantity. SJWC labels the "Monterey-style" WRAM as a "Rate Adjustment Mechanism" rather than a "Revenue Adjustment Mechanism." SJWC then cites to the Commission's response to a prolonged drought in the 1980s with the issuance of the Drought Order Instituting Investigation (OII). By decisions in the Drought OII, Investigation (I.) 89-03-005, the Commission authorized all water utilities to establish memorandum accounts to track conservation expenses and related revenue fluctuations in order to implement surcharges to recover memorandum account balances, subject to reduction of such account balances to reflect a 20-basis point reduction in their most recently adopted ROEs. 2

In the Drought OII, the Commission did authorize memorandum accounts to track revenue losses due to reduced sales and corresponding changes in water production

costs, but at no time did it authorize the concurrent mechanisms that SJWC is seeking recovery on. Although SJWC labels the "Monterey-style" WRAM as a "Rate

Adjustment Mechanism," it also implemented the MCRAMA as a "Revenue Adjustment Mechanism" in order to gain protection from SCVWD's call for conservation. This unique case of having two concurrent mechanisms in effect was not vetted in the Drought OII or in the recent Conservation I.07-01-022. As such, SJWC should seek to modify D.08-08-030 in order that there is an opportunity for parties in I.07-01-022 to be heard on the concurrent implementation of the MCRAMA with the previously-approved MWRAM.

In addition, SJWC cites to the Commission's approval of Penngrove Water Company's (Penngrove) Mandatory Water Cost Memorandum Account pursuant to Res. W-4825. Penngrove followed a similar procedure to SJWC's MCRAMA to protect its revenues from the effects of 15% mandatory conservation ordered by its water supplier, the Sonoma County Water Agency (SCWA). However, Penngrove did not maintain a concurrent mechanism similar to SJWC's Monterey-style WRAM with its memo account. Also, SCWA defined a strict 15% reduction of water allocation to Penngrove in response to the State Water Resources Control Board Order WR 2007-0021 that set specific diversion requirements from the Russian River. These mandatory requirements are in contrast with the voluntary water use restrictions set by the SCVWD for SJWC that did not set up water restrictions for its customers or set up fines. SJWC's attempted analogy to Penngrove for recovery of its MCRAM through an advice letter is inapposite.

Finally, SJWC argues that its MCRAMA is similar to the revenue adjustment account granted to Golden State Water Company (GSWC) in its Bay Point District. SJWC states that it followed amortization procedures that the Commission authorized to GSWC, but SJWC did not elaborate any further. This analogy to GSWC's mechanism also falls short, as GSWC had this temporary account prior to the Commission authorization of its full WRAM/MCBA; moreover, GSWC terminated this temporary memorandum account once the full WRAM/MCBA was authorized. GSWC did not have two ratemaking mechanisms in effect at any given time as SJWC has requested, so SJWC's argument for comparison to GSWC is not applicable.

For all the reasons we discuss above, we find that SJWC has not established justification for seeking recovery of the MCRAMA through the advice letter process. We also find that rejection of AL 415-A does not prejudice SJWC because the issues underlying the unique situation requested by SJWC can be considered in a petition to modify D.08-08-030. For these reasons, we conclude that DWA correctly rejected SJWC's request.

COMMENTS

Public Utilities Code Section 311(g) (1) generally requires that that resolutions must be served on all parties and be subject to at least 30 days public review and comment prior to a vote of the Commission. Accordingly, the draft resolution was mailed to the utility and protestants for comments on April 28, 2011.

FINDINGS AND CONCLUSIONS

1. On June 3, 2010, San Jose Water Company filed Advice Letter 415 to request amortization of its Mandatory Conservation Revenue Adjustment Memorandum Account. San Jose Water Company requests to recover in rates the amount of $6,011,377 by adding a surcharge of $0.0989 per 100 cubic feet to the Quantity Rates in each customer's bill to be recovered over twelve months

2. On June 23, 2010, the Division of Ratepayer Advocates requested and received an extension of the protest period for Advice Letter 415 to resolve some of their proposed changes to the filing. The proposed changes included removal of the recovery of the portion of SJWC's "Monterey Style" Water Revenue Adjustment Mechanism (MWRAM) Balancing Account associated with the calculation of the Mandatory Conservation Revenue Adjustment Memorandum Account as well as gross up for Local Franchise Tax and Uncollectibles.

3. San Jose Water Company filed supplemental Advice Letter 415-A on July 8, 2010, resolving these issues and stated that it would request authorization to amortize the MWRAM balance at a later date.

4. On November 29, 2010, the Division of Water and Audits issued a letter rejecting without prejudice Advice Letter 415-A on grounds that the recovery was a matter inappropriate for an advice letter and that San Jose Water Company should file a petition for modification of Decision 08-08-030.

5. San Jose Water Company filed a timely request for Commission review of the Division of Water and Audits' disposition of Advice Letter 415-A on December 7, 2010.

6. Advice Letter 415-A cites the Santa Clara Valley Water District's December 8, 2009 Resolution 09-82 that extends the call for 15 percent mandatory water conservation of all water retailers in Santa Clara County until June 30, 2010.

7. The Santa Clara Valley Water District (District) is responsible for managing the overall water supply in Santa Clara County but has limited authority to mandate water use reductions. The District must rely on the voluntary actions of the water retailers, cities, and county to enact and implement local ordinances, and conservation measures.

8. Santa Clara Valley Water District issued its initial request for a 15 percent "mandatory" water conservation of all water retailers in Santa Clara County in Resolution 09-25 issued March 24, 2009.

9. San Jose Water Company is a water retailer in Santa Clara County.

10. In its request for review, San Jose Water Company noted the differences between the Mandatory Conservation Revenue Adjustment Memorandum Account and a full Water Revenue Adjustment Mechanism.

11. Although the Mandatory Conservation Revenue Adjustment Memorandum Account was booked as a memorandum account, its accounting procedure for lost revenues is similar to a full decoupling Water Revenue Adjustment Mechanism in that it takes the net difference between adopted water sales revenue to actual water sales revenue against the net difference between adopted variable expenses and actual recorded variable expenses to come up with a net balance.

12. The water utilities with full decoupling Water Revenue Adjustment Mechanisms have gone through a thorough Return on Equity analysis in Cost of Capital Proceedings, unlike the type of short-hand analysis San Jose Water Company is seeking through the Advice Letter process with its Mandatory Conservation Revenue Adjustment Memorandum Account.

13. The water utilities with full decoupling Water Revenue Adjustment Mechanisms and Monterey-style Water Revenue Adjustment Mechanisms are scrutinized in the three year General Rate Case cycles, and these ratemaking mechanisms do not continue on for an unlimited duration as San Jose Water Company alleges.

14. California Water Service Company, Park Water Company, and Golden State Water Company with full Water Revenue Adjustment Mechanisms specifically list exclusions to customer groups that will not be tracked by the Water Revenue Adjustment Mechanisms.

15. San Jose Water Company's alleged differences between the Mandatory Conservation Revenue Adjustment Memorandum Account in conjunction with a Monterey-style Water Revenue Adjustment Mechanism and a full decoupling Water Revenue Adjustment Mechanism either do not exist or are immaterial to the question of the appropriate procedural vehicle for the Commission's review of monies booked to the Mandatory Conservation Revenue Adjustment Memorandum Account.

16. The Commission has the authority to establish procedures for processing utility requests that are appropriate to the circumstances.

17. The Division of Water and Audits' rejection of Advice Letter 415-A and recommendation that San Jose Water Company seek authority to recover Mandatory Conservation Revenue Adjustment Memorandum Account balances in rates through a petition for modification of Decision 08-08-030 is not legal error.

18. The nexus between the authorized Monterey-style Water Revenue Adjustment Mechanism and the Mandatory Conservation Revenue Adjustment Memorandum Account is strong enough to suggest that the request for recovery of Mandatory Conservation Revenue Adjustment Memorandum Account balances in rates be examined in the context of San Jose Water Company's existing Monterey-style Water Revenue Adjustment Mechanism established in Decision 08-08-030.

19. San Jose Water Company based its establishment of the Mandatory Conservation Revenue Adjustment Memorandum Account on the pretense that Santa Clara Valley Water District's conservation declaration was in fact mandatory.

20. San Jose Water Company claimed that it was not protected from any revenue shortfall resulting from Santa Clara Valley Water District's imposition of "mandatory" conservation.

21. Santa Clara Valley Water District is responsible for managing the overall water supply in Santa Clara County but has limited authority to mandate water use reductions.

22. In the Drought Order Instituting Investigation, Investigation 89-03-005, the Commission authorized memorandum accounts to track revenue losses due to reduced sales and corresponding changes in water production costs, but the Commission did not authorize the concurrent mechanism San Jose Water Company is seeking to use to obtain recovery.

23. Although San Jose Water Company labels the "Monterey-style" Water Revenue Adjustment Mechanism as a "Rate Adjustment Mechanism," it also implemented the Mandatory Conservation Revenue Adjustment Memorandum Account as a "Revenue Adjustment Mechanism" in order to gain protection from Santa Clara Valley Water District's imposition of "mandatory" conservation measures.

24. This unique case of having two concurrent mechanisms in effect was not vetted in the Drought Order Instituting Investigation (OII), or in the recent Conservation OII, Investigation 07-01-022.

25. San Jose Water Company should seek to modify Decision 08-08-030 in order that there is an opportunity for parties in Investigation 07-01-022 to be heard on the concurrent implementation of the Mandatory Conservation Revenue Adjustment Memorandum Account with the previously-approved "Monterey-style" Water Revenue Adjustment Mechanism.

26. Rejection of Advice Letter 415-A does not prejudice San Jose Water Company because the issues underlying the unique situation requested by San Jose Water Company should be reviewed in a petition to modify Decision 08-08-030 pursuant to General Order 96-B, Rule 5.2.

27. This resolution was circulated for public comment pursuant to Public Utilities Code Section 311(g) (1).

THEREFORE IT IS ORDERED THAT:

1. Advice Letter 415-A is rejected.

2. This Resolution is effective today.

I certify that the foregoing resolution was duly introduced, passed, and adopted at a conference of the Public Utilities Commission of the State of California held on June 23, 2011; the following Commissioners voting favorably thereon:

CERTIFICATE OF SERVICE

I certify that I have by mail this day served a true copy of Draft Resolution W-4875 on all parties in this filing or their attorneys as shown on the attached list.

Dated April 29, 2011, at San Francisco, California.

SERVICE LIST

DRAFT RESOLUTION W-4875

Palle Jensen

Director - Regulatory Affairs

San Jose Water Company

110 West Taylor Street

San Jose, CA 95196

palle_jensen@sjwater.com

  

          Mr. and Mrs. Jeff Lou

1230 Clark Way

San Jose, CA 95125

jjflash73@sbcglobal.net

  

    Masoud Akbarzadeh

    3670 Madrid Street

    San Jose, CA. 95132

        
         
         
         
         
         
         

1 1. D.08-02-036, Footnote 24: The WRAMs will exclude revenue from fire service, unmetered service, reclaimed water metered service, and fees (Park) and fire service revenue, unmetered service revenue and other non-general metered service revenue (Cal Water). D.08-08-030, Footnote 17: Fire service, unmetered service, and other non-general metered service revenue are not included in WRAMs (Golden State).

2 2. See, D.90-07-067, at 2; D.90-08-055, Finding of Fact 4, Ordering Paragraph 3; D.91-10-042, Ordering Paragraph 3 and 5.

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