6. Operating Expense

The $11,340,000 difference in test year operating expenses between SJWC and DRA was in: (1) Purchased Power; (2) Recycled Water Retrofit; (3) Uncollectible Revenue; (4) Non-Tariff Services; (5) Other Operating & Maintenance; (6) Rent; (7) Other Administrative & General; (8) Taxes, Other Than Income; (9) Depreciation; and, (10) Income Taxes, as shown in the following table.

 

Dollars in Thousands

Category

SJWC

DRA

SJWC > DRA

OPERATING EXPENSES

      

(1) Purchased Power

$7,676

$7,712

$ -36

(2) Recycled Water Retrofit

1,099

0

1,099

(3) Uncollectible Revenue

518

483

35

(4) Non-Tariff Services

-432

-456

24

(5) Other Operating & Maintenance

29,256

29,283

-27

(6) Rent

529

862

-333

(7) Other Administration & General

7,014

7,035

-21

(8) Taxes, Other Than Income

6,973

6,733

241

(9) Depreciation

26,934

21,570

5,364

(10) Income Taxes

13,591

8,596

4,996

TOTAL OPERATING EXPENSES

$93,158

81,818

$11,340

The $36,000 test year difference in purchased power expenses between SJWC and DRA resulted from DRA imputing a five-year power costs previously incurred at the Columbine Station as an ongoing expense to be recovered from ratepayers. DRA imputed this additional purchased power costs as a result of its recommendation that the completed Columbine Station solar project be excluded from rate base. DRA's imputed purchased power adjustment is not reasonable and should not be adopted for the reasons addressed in a subsequent rate base Columbine pilot solar project discussion.

The $1,099,000 test year difference in recycled water expenses between SJWC and DRA resulted from SJWC including and DRA excluding conservation expenses for retrofitting recycled water landscape irrigation services. This cost is reasonable and should be adopted as a necessary cost to the proposed recycled water retrofit capital improvement projects being adopted in this decision, as addressed in a subsequent rate base recycled water mains discussion.

The $35,000 test year difference in uncollectible revenue between SJWC and DRA resulted from SJWC and DRA applying the same uncollectible rate to different operating revenue estimates. SJWC and DRA both used a 0.002321% rate to calculate their individual uncollectible estimates. The 0.002321% uncollectible rate is reasonable and should be applied to operating revenue estimates being adopted in this proceeding.

The $24,000 test year difference in non-tariff services between SJWC and DRA resulted from the use of different forecasting methods for revenues received from non-tariff activities. SJWC used an inflation adjusted five-year historical average of revenues from non-tariff activities in forecasting ratepayers' test year revenue share of non-tariff activities at $432,000. DRA used $456,000, based on non-tariff contract revenues expected to be received in the test year. DRA's $456,000 forecast reasonably reflects the ratepayers' test year share of non-tariff revenues and should be adopted.

The $27,000 test year difference in Other Operating and Maintenance services between SJWC and DRA resulted from differences in applying the same overhead rates to their respective direct operating and maintenance expense forecasts. The overhead rates used by SJWC and DRA are reasonable and should be applied to the direct operating and maintenance expenses being adopted in this decision.

The $333,000 test year difference in Rent between SJWC and DRA resulted from DRA imputing rent for SJWC's headquarters building in lieu of allowing that building in rate base. SJWC's lower $529,000 rent forecast is reasonable and should be adopted because the headquarters building has been included in rate base and no longer considered leased, as addressed in a subsequent Facilities Plan and Consolidation section of this decision. That rent expense should be increased by an additional $329,000 to reflect the cost of leasing the Bascom building as addressed in Section 7.8.2 of the Facilities Plan and Consolidation section, which was not reflected in the SJWC/DRA joint comparison exhibit.

The $21,000 test year difference in Other Administrative & General expenses between SJWC and DRA resulted from differences in applying the same overhead rates to their respective direct Administrative & General expense forecasts. The overhead rates used by SJWC and DRA are reasonable and should be applied to the direct Administrative & General expenses being adopted in this decision.

The $241,000 test year difference in Taxes, Other Than Income between SJWC and DRA resulted from applying the same .0118 property tax rate on different plant estimates as addressed in a subsequent rate base discussion.

The $5,364,000 test year difference in Depreciation expense between SJWC and DRA resulted from the use of different composite depreciation rates and different rate base estimates. SJWC used a 3.51% composite depreciation rate and DRA a 3.05% rate.3

SJWC used the Commission Division of Water and Audits' "Standard Practice for Determination of Straight-Line Remaining Life Depreciation Accruals," Standard Practice U-4, methodology for calculating its composite depreciation rate. SJWC, consistent with Standard Practice U-4, estimated its transmission and distribution (T&D) mains net salvage value from historical values, engineering judgment and forecasted future market conditions.4 Specifically, SJWC derived a negative 80.8% net salvage rate based on 20 years of actual net removal costs, the current economic environment, and applied judgment.5 In future proceedings, engineering studies that discuss the long depreciation timelines would be welcome.

Although DRA concurred with SJWC's use of Standard Practice U-4, DRA deviated from that standard practice in determining a net salvage value for SJWC's T&D mains because it was not convinced that SJWC's estimate was based on sufficient engineering judgment or future market conditions.6 DRA applied a negative 40.0% net salvage rate proxy to arrive at its recommended composite depreciation rate. DRA obtained that proxy from a 2006 Depreciation Study of California Water Service Company, a water company providing water service in the same geographical areas as SJWC.7

DRA's net salvage value proxy for SJWC's T&D mains was based on a three-year-old depreciation study of a different water company having a large service territory made up of several small water systems with newer T&D mains substantially smaller than SJWC's T&D mains. SJWC, in comparison, provides water service to a large number of uses in a condensed area with mains up to 36 inches, some of which are in excess of 100 years old.8 DRA's net salvage value proxy also ignored specific SJWC factors that DRA asserted were needed in determining when SJWC's mains should be replaced. These factors that impact salvage value include climate conditions, pipe material, soil corrosivity and soil stability.9

The Commission Division of Water and Audits' Standard Practice U-4, culled from direction and guidance given in Commission decisions, resolutions, and workshops, applies a uniform methodology to calculate depreciation reserves and expenses. Therefore, the results of a depreciation study using Standard Practice U-4 should be adopted absent evidence that the result from that uniform methodology is skewed.

SJWC's 3.51% composite depreciation rate was based on that methodology, the same method used in its last rate proceeding.10 DRA deviated from that uniform methodology by using one single component of another utility's depreciation study without substantiating that one component of another utility's depreciation study was a reasonable proxy for SJWC's T&D mains salvage rate. There is no evidence that the other utility's T&D mains are of comparable size, type, age, terrain, or depth as the T&D mains of SJWC. SJWC's 3.51% composite depreciation rate is reasonable and should be adopted.

The $4,996,000 test year difference in Income Taxes between SJWC and DRA resulted from differences in forecasts of revenues, expenses, and rate base, with remaining differences from DRA's correcting an SJWC California Corporate Franchise Tax deduction to reflect changes in the California Revenue and Taxation Code effective for taxable years beginning on or after January 1, 2000.

Both SJWC and DRA used an 8.84% California Corporate Franchise Tax and a 35.00% Federal Income Tax rate to calculate their respective income tax estimates. The 8.84% California Corporate Franchise Tax and 35.00% Federal Income Tax rates are reasonable and should be applied to the operating revenues, operating expenses, and rate base estimates being adopted in this proceeding. The changes in the California Revenue and Taxation Code should be reflected, as DRA pointed out.

3 DRA revised a 3.01% composite depreciation rate it recommended in Exhibit 9 and testified to at hearing to 3.05% as detailed in Exhibit 25.

4 Net salvage value for T&D mains is negative because those mains are typically abandoned in place and filled with concrete slurry. Reporter's Transcript Vol. 2, p. 172.

5 Exhibit 5 at 4-1 and Reporters Transcript Vol. 2, pp. 168 and 169.

6 Reporter's Transcript Vol. 4, p. 407.

7 Exhibit 9 at 9-3.

8 Reporter's Transcript Vol. 2, pp. 164 and 165.

9 Exhibit 9 at 8-51.

10 Reporter's Transcript Vol. 2, p. 169 and Reporter's Transcript Vol. 4, p. 433.

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