7. Rate Base

The $46,026,000 test year difference in rate base between SJWC and DRA resulted from the use of different capital forecasts of SJWC's (1) Solar Photovoltaic (Solar) Projects; (2) Hydro-Turbine Projects; (3) Montevina Station Project; (4) Recycled Water Mains Project; (5) Pipeline Replacement Program; (6) Meter Replacement Program; (7) Service Replacement; (8) Taylor Building; (9) Bascom Building; and (10) Depreciation Reserve. The differences between SJWC and DRA by rate base category and projects are summarized in the following table. A discussion of each difference follows the table.

SJWC > DRA

(Thousands of Dollars)

 

2010 Test Year

Weighted Average11

Plant In Service

    

(1) Solar

$17,382

$

(2) Hydro-Turbine

647

  

(3) Montevina

4,768

  

(4) Recycled Water Mains

8,444

  

(5) Pipeline Replacement

18,775

  

(6) Meter Replacement

1,026

  

(7) Service Replacement

922

  

(8) Taylor Building

9,289

  

(9) Bascom Building

4,457

  

Total Plant in Service Difference

$65,710

$53,495

(10) Depreciation Reserve

  

- 7,469

TOTAL Rate Base Difference

  

$46,026

SJWC proposed to construct and integrate into its operating system three solar projects at a total cost of $24,819,000 over this GRC cycle to complement its 2007 Columbine pilot solar project. DRA recommended that the $837,900 Columbine pilot solar project completed in 2007 be removed from rate base and that associated purchased power be imputed for that project. DRA also recommended that the three new solar projects not be approved. The test year 2010 difference was $17,382,000, for the Columbine plus 2009 and 2010 projects.

SJWC undertook its $838,000 Columbine pilot solar project for two reasons: (1) to evaluate the feasibility of large-scale solar systems and (2) the year 2007 was the final opportunity to apply and receive $191,000 in rebates from the Pacific Gas and Electric Company Self Generation Incentive Program.12 This November 2007 solar pilot project is monitored by a third party for the first five years of solar operations, as required by Pacific Gas and Electric Company (PG&E).13

A 2008 field test by SJWC's contractor found that the project performed at a level that would produce 121,377 kilowatt-hours (kWh) annually, 8,586 kWh above the 112,791 kWh designed production.14 However the actual 2008 performance of this solar project was 10% below designed production. SJWC attributed this performance deficiency to: (1) more cloudy days in 2008 than average; (2) a learning curve on how often the solar panel arrays needed to be cleaned; and, (3) failure of two inverters which caused several days of down-time.15

SJWC did not provide sufficient information to substantiate that the "pilot" designation of this project should be reclassified to an efficient ongoing project. Although SJWC obtained a working knowledge of this project during its first year's operation regarding weather, panel arrays, and failure of inverters, there is insufficient information in the record to assess the project's operational performance as a result of SJWC's actions to overcome these obstacles. For example, SJWC predicted that it should clean the solar panels two times during the year to keep the efficiency up.16 However, the result of that prediction has yet to be placed into evidence. This project should continue as a pilot project in rate base so that SJWC can gather operational performance data to determine whether the pilot project matches expectations and benefits ratepayers.

The first new solar project involves a 600 kW photovoltaic (PV) solar system at Williams Station #1 costing $8,150,000. The second solar project, also a 600 kW PV system, would be at Williams Station #2 costing $8,394,000, and the third solar project, an 800 kW PV system would be at Twelfth Street Station costing $8,275,000.17

SJWC proposed these solar projects to increase its operational efficiency and flexibility, to promote environmental stewardship and to be responsive to California's goal to significantly reduce greenhouse gas (primarily carbon dioxide) emissions. It explained that these projects have a 30-year life expectancy with limited need for maintenance, contribute toward stabilizing the electric grid on high-demand days, and provide SJWC operational flexibility for running well and booster pumps during summer on-peak hours when reserves are low on the state's electric power grid.18

SJWC also identified numerous direct and indirect benefits from its solar (green energy) projects to its ratepayers who are also ratepayers of PG&E. For example, renewable energy would: (1) feed directly into the urban electric grid without transmission; (2) bolster reliability and reduce stress on the electrical grid by generation during on-peak hours; (3) lower PG&E's production cost when SJWC generates energy; and, (4) offset the need for PG&E to construct new power stations and peaking generators.19

To further bolster support for these projects, SJWC also referenced the Governor's Executive Order S-14-08, which mandates that 33% of all electricity consumed in the state be generated from renewable energy sources by 2020, and the state's renewable portfolio standard (RPS) to reduce greenhouse gases to levels measured in 1990 by the year 2020. SJWC also noted the commitment of Mayor Chuck Reed and the San Jose City Council to generate 100% of all power consumed within the city from renewable sources by 2022.

SJWC provided net present value (NPV) calculations for the three solar projects indicating that the projects would provide positive net benefits by the fourth year of operation for the Twelfth Street Station project and by the tenth year for the Williams projects.

DRA also provided NPV calculations for the three solar projects. Contrary to SJWC's positive results, DRA's results showed that none of the three solar projects would attain a positive NPV during their 30-year life span. According to DRA, the Twelfth Street Station project would have a negative $1.3 million NPV at the end of a 30-year period, Williams Road #1 a negative $3.4 million, and Williams Road #2 a negative $1.4 million.20

The largest difference between the company's NPV analysis and that of DRA lies with whether or not the ratepayer perspective ought to be considered.21 Other differences between SJWC and DRA were in the amount of energy production that would be sold back to PG&E, the escalation of energy prices, the value of Renewable Energy Credits, and the benefits that would flow to SJWC's ratepayers. DRA was generally opposed to allowing the regulated water utilities to develop renewable energy projects and opined that public agencies are in a better position to construct economically viable projects.

Although SJWC compared types of solar projects such as roof mounted solar projects, it did not undertake a least-cost energy efficiency comparison.22 Before the Commission endorses such a large capital investment in solar projects, this and other analysis ought to take place.

Not only that, the presumed energy performance of the three proposed solar projects was based on extrapolating designed performance from the Columbine pilot solar project. Added to those results were improvements in the solar technology since the Columbine solar project became operational.23 However, SJWC has yet to substantiate that the Columbine pilot project can meet or exceed its designed performance. For such a large investment and because solar development is still in the nascent stage for our regulated water companies, we need more time with the pilot project currently in operation and more time than is allowed in this proceeding to vet the pros and cons of these proposals. Perhaps a joint application with PG&E or another joint venture partner or partners could be made. Conceivably, a "procurement review group" type gathering might be helpful in looking at alternatives and assumptions. If other water utilities wish to embrace renewable projects on a large scale, an industry-wide approach might also be considered.

SJWC is correct to ask the Commission to make a policy decision with regard to the development of renewable energy projects for water companies. The nexus between water and energy is of great interest to the Commission and the state of California. We have affirmed this in our support of pilot programs. But there is still much to learn from pilots before we approve such large capital projects with yet to-be-proven benefits.

The large differences in the NPV calculations between SJWC and DRA do not add confidence for these projects, or the expected performance of these projects. SJWC should be commended for taking the initiative in proposing solar projects. However, there is insufficient reliable data available to assess benefits that would flow to SJWC's ratepayers during this current economic environment or whether the projects would improve SJWC's ability to provide quality and reliable water service. The solar projects proposed for this test year cycle should not be adopted at this time. As such, we give greater weight to capital investments in water supply and reliability for this GRC cycle.

SJWC also proposed to construct and integrate into its operating system three hydro-turbine projects, one each year, at a total cost of $2,016,000.24 The first project involves a 72 kW system at Cox Avenue Station (Cox) costing $701,400. SJWC proposed to run the Cox project as a pilot project because it currently has no hydro-turbines in service.25 The second project involves a 67 kW system at Alum Rock Turnout #1 (Alum Rock) costing $647,000 and the third project involves a 100 kW project at Morrill and Hostetter Turnout #2 (Hostetter) costing $667,000. DRA concurred with SJWC that the Cox project should be undertaken as a pilot project but recommended that the Alum Rock and Hostetter projects not be allowed.

SJWC described similar benefits for its hydro-turbine projects as identified in the prior solar projects discussion. Although the benefits to be derived from these projects are of smaller scale in terms of capacity and cost, SJWC represented the benefits will last longer because they each have a 40-year life expectancy. SJWC also provided NPV calculations to show that positive net benefits would be provided by the Cox project after three years, Hostetter after five years, and Alum Rock after seven years.

DRA also provided NPV calculations for each of the hydro-turbine projects. However, DRA concluded from its calculations that the Cox and Hostetter projects would not show a positive NPV until after 30 years of operations while the Alum Rock project would continue to show a negative NPV.26 DRA was not able to obtain any operational performance data from SJWC to verify the reasonableness of SJWC's annual power production forecasts.

DRA concurred with SJWC that the Cox project should be approved as a pilot project, but recommended the pilot project cover a two-year period in order to determine if the performance of the unit matches expectations due to an uncertainty of the pilot project's field performance and lack of any operational performance data.27 DRA recommended that funding for the remaining two hydro-turbine projects should be denied.

Cox has a number of pumps with time of use metering systems that enable SJWC to participate in a net energy metering price for power produced by a hydro-turbine installed system at that location. This hydro-turbine project would directly benefit SJWC and its ratepayers by enabling SJWC to use its own produced energy to run its Cox facilities. The project will also assist SJWC in providing reliable water service to its ratepayers during peak purchased power demands, curtailments and revolving outages, while reducing its purchased power needs.

Although SJWC intends to conduct a detailed analysis of hydro-turbine performance prior to ordering the equipment, it did not substantiate that actual performance would match performance expectations.28 This approach does not give enough assurance. Therefore, consistent with DRA's proposal, the Cox hydro-turbine project should be undertaken as a two-year pilot project.

Unlike the Cox project, the Alum Rock and Hostetter projects would not provide a direct benefit to SJWC and its ratepayers. Neither Alum Rock nor Hostetter has wells or pumps at their locations. Therefore, any power generated at these locations must be sold back to PG&E under a power purchase agreement.29 Indirect benefits would result because these projects would improve PG&E's energy reliability during peak demand times, reduce SJWC's carbon footprint, and reduce SJWC's operating expenses with any revenues received from selling power generated from these projects. These kinds of projects ought to be considered in a joint application with PG&E or another joint venture partner or partners.

SJWC is in the business of providing quality and reliable water service to its ratepayers and not in the business producing and marketing power. Therefore, hydro-turbine projects that directly benefit SJWC and its ratepayers in providing quality and reliable water service while reducing its purchased power consumption should be given priority over hydro-turbine projects that do not. The Alum Rock and Hostetter hydro-turbine projects should not be approved at this time. SJWC is encouraged to propose additional hydro-turbine projects that meet this criterion in its next GRC.

The $4,768,000 test year difference in Montevina Station project costs between SJWC and DRA resulted from a difference on need for this four-year project to meet new water quality standards. This difference consists of $206,000 applicable to a 2009 facilities plan study and $4,562,000 for test year environmental, pilot testing, and detailed design and specifications. SJWC forecasted an additional $7,648,000 in 2011 to implement a water treatment process to meet water quality regulations.

SJWC proposed this project to upgrade its Montevina Station water treatment facility that treats surface water flows from the Los Gatos Creek watershed for delivery into SJWC's distribution system. The upgraded project was proposed to comply with new water quality standards. Effective January 2008, stricter standards on individual filter effluent turbidity were imposed as part of the Interim Enhanced Surface Water Treatment Rule (IESWTR). Effective April 2012, water sample points are expected to change to comply with an updated State 2 Disinfectants and Disinfection Byproducts Rule (DBP2).

Most of SJWC's surface water comes from the Montevina Station during the winter months, which takes water from intakes on the Los Gatos Creek and its tributaries. However, this water has been subject to rapid changes in turbidity, making it difficult to comply with current and new water quality filtration rules in treating high turbidity water. For example, SJWC was cited by the California Department of Public Health in January and February of 2008 for exceeding IESWTR operating criteria at the Montevina Station. Corrective action to comply with IESWTR required SJWC to reduce the amount of raw water that could be treated at Montevina Station to 15 Nephelometric Turbidity Units, resulting in decreased production of 1,243 acre feet in an average rain year due to turbidity.30 That reduction in filtering surface water limited SJWC's surface water production and had a potential effect of reducing SJWC's water rights at these intakes.31

The DBP2 rule would regulate disinfection byproduct concentrations at specific locations in the distribution system rather than at a system wide average. SJWC's preliminary results indicate that Montevina Station effluent would not comply with these standards for total Trihalomethane.32

SJWC has shown that it has lost surface water supplies from the Los Gatos Creek and its tributaries due to high turbidity and that it could suffer additional surface water losses due to its potential inability to satisfy new water quality standards. Although this loss of surface water could be made up from the purchase of additional water from other sources, such as the Santa Clara Valley Water District, there is no assurance that replacement water sources would be available, or at what cost.33

SJWC has substantiated a need to plan for a Montevina Station upgrade project to maintain water quality and to maintain, if not increase, local senior water rights and supply through surface water treatment.34 To the extent that SJWC is able to increase its water supply at Montevina Station, which uses less energy than pumping groundwater from the valley below, SJWC would be in a better position to meet the Commission's Water Action Plan's mandate that Class A water utilities reduce their energy consumption by 10 percent over a three-year period.35

As of its January GRC filing date, SJWC was preparing a contract for the planning study with a selected consultant to evaluate and recommend a technology to satisfy future regulatory compliance and to consider technologies for treating waters of various turbidity levels at Montevina Station.36

The $209,000 forecasted facilities plan study is reasonable and should be approved. With the Montevina Station project being at an early stage of planning, the remaining project costs should not be approved until a facilities plan study has been completed and a specific project design has been established. SJWC should file a separate application outside of this GRC seeking approval of its project costs and recovery for upgrading its Montevina Station to maintain water quality and to increase its capacity to treat surface water upon completion of a facilities plan study and specific project design.

The $8,444,000 test year difference in recycled water mains expenses between SJWC and DRA resulted from a difference in how recycled water mains projects should be funded. SJWC proposed using ratepayer funding. DRA concurred with SJWC on a need to expand its recycled water facilities. However, DRA opposed any funding for these projects because SJWC had not done enough to pursue partners or public financing for these capital projects.37 DRA recommended that SJWC establish partnerships with other public agencies, such as the City of San Jose, in seeking and applying for public grants and tax exempt funding before requesting rate recovery for unfunded portions of these recycled water projects.

By way of background, SJWC purchases recycled water through a South Bay Water Recycling Program (SBWR), which currently delivers approximately 10,000 acre-feet/year (AFY) of its 50,000 AFY capacity to San Jose and other South Bay cities. SJWC has proposed three recycled water projects, one for each year of its GRC cycle. These projects were designed to serve identified users of recycled water for irrigation purposes and, in the long-term, groundwater recharging.

The first year project undertaken in 2009 would cover approximately 7,600 feet of mains in partnership with a developer. The developer would pay approximately $900,000 for an 8-inch pipeline and SJWC approximately $1,665,000 to increase that pipeline to 24 inches. The second year project would involve 21,000 feet of mains at a cost of $6,779,000 and the third year project 10,300 feet of mains at $6,979,000.38 The latter two projects would be funded entirely by ratepayers.

Recycled water has become a viable and reliable alternative to offset potable water demands for irrigation and industrial use as well as for stream flow augmentation, including groundwater recharge. As noted by DRA, SJWC is but one of many Santa Clara Valley recycled water partners participating in SBWR. SJWC's proposed recycled water projects would benefit not only its ratepayers but each of the Santa Clara Valley recycled water partners by SJWC contributing to maintain and extend existing potable water supplies in the entire Santa Clara Valley Region. Therefore, it is reasonable to expect SJWC to enter into partnerships for these and other recycled water projects.

SJWC had sought out partners for these projects prior to filing its GRC with limited success; one developer agreed to share in the cost of the first of three projects. However, SJWC has continued to seek cost sharing partners.39

We concur with DRA that SJWC should have been more pro-active in seeking partners and external funding sources for these projects. However, we recognize that it is difficult to pursue such partners and funding without an approved shovel ready project. For example, SJWC must substantiate that it has matching funds to cover at least half of project costs to obtain funding from the U.S. Bureau of Reclamation or from the State Clean Water State Revolving Fund.40 Further, completion of a funding application would not assure funding, let alone immediate receipt of any approved funding. Also, the U.S. Bureau of Reclamation funding process takes up to three years.41

The recycled water projects are reasonable and should be approved. However, SJWC should not be relieved of seeking partners to share in its reclaimed water projects or of seeking public grants and funding. While we considered the benefit of approving half of the dollar amounts as an incentive for pursuing partnerships, we weighed that against the true value of adding recycled water infrastructure in the state. Any partnership, public grant, and funding that SJWC receives for its water recycled projects should be credited to ratepayers as Contribution in Aid of Construction upon receipt. SJWC is on notice that as part of its next GRC application it should substantiate the process and results of the process it undertook to obtain partners to share in the costs and to obtain and receive public grant and tax exempt funding for its reclaimed water projects. We expect SJWC to make all efforts big and small to mitigate the costs.

The $18,775,000 test year difference in the Pipeline Replacement Program between SJWC and DRA resulted from SJWC seeking to increase its 0.5% baseline replacement rate of 13 miles per year by 4 miles per year with a goal of achieving a 1.0% replacement rate per year by 2011. SJWC proposed to spend $110,222,500 to attain its goal of replacing 1.0% of its 2,380 miles of pipe annually by the end of this GRC cycle.42 DRA recommended $66,278,500 over the same period based on its review of individual projects proposed by SJWC.43 SJWC's 1.0% annual pipeline replacement goal of its 2,380 miles of pipe results in an average pipe life expectancy of 100 years while DRA's recommendation of approximately 0.5% per year equates to an average pipe life expectancy of 200 years.

SJWC based its increased replacement goal on three pipeline infrastructure studies completed in 2003, 2004, and 2008.44 The 2003 study employed a "KANEW" model, a pipe replacement model distributed by the American Water Works Association Research Foundation. This program used survivor curves based on actual pipe failure and replacement data of the particular utility using the program. This model predicts a replacement rate based on the material of pipe in the system, age of pipelines, estimated average age at failure, estimated minimum age of rehabilitation or replacement, and estimated high age of failure.45 The 2004 study undertook a more micro level KANEW look at which pipes should be replaced including an estimated order of priority based on pipes with: (1) numerous leaks; (2) less than 10 years of remaining life; (3) any leaks; and, (4) inadequate fire flow. The 2008 study built on the prior two studies employed a point system to prioritize the top 500 pipes needing replacement. That study also found that SJWC was falling behind in its replacement program by 15 miles of pipe annually over the last four years and that it needed to ramp up the number of replacement miles annually.

DRA rejected SJWC's 1.0% replacement goal that was based on the KANEW model. This is because the KANEW model does not reflect that pipelines' life can be extended through regular maintenance and repair, it is difficult to verify model results, and the model fails to focus on major factors that influence the aging process such as material, joints, diameter, bedding, environmental conditions, soil corrosivity, stray electrical currents, and soil stability.46

Irrespective of DRA's misgivings of relying on the KANEW model results, DRA used the 2008 Study's top 500 replacement list as a base for its forecast. DRA compared each of the 244 projects that made up SJWC's GRC forecast to the list and excluded all projects that: (1) were not on that replacement list; (2) had no leaks in the last 10 years; or, (3) were upsized projects to meet additional fire flow of more than 1000 gallons per minute at a residential pressure of 20 pounds per square inch.47

SJWC does not dispute DRA's contention that repairing leaks is less expensive than replacing piping. However, SJWC's water system, dating back to 1866, has piping up to 140 years old. Due to the many types of piping in SJWC's water system, some of the most common steel and cast iron pipe types are nearing or exceeding their useful lives at the same time. SJWC has approximately 230 miles of cast iron pipe with an average age of 75 years, of which 50 miles are over 100 years old. It also has 1,150 miles of steel pipe at an average age of 50 years, of which 20 miles are over 80 years old. The old cast iron pipe up to 130 years old has an average life expectancy of approximately 110 years and the younger thin walled steel pipe has an average life expectancy in the 80 to 85-year range.48 The pipes listed in the 2008 Study's top 500 list, some of which are more than 120 years old, averaged 64.4 years in comparison to SJWC's total system average of 36.8 years.49

SJWC has managed its aging pipe system well and the ratepayers have benefitted through lower rates. All leaks since 2003 cost $6,600,000; business damages since 2002 were approximately $96,999; and the leaks resulted in no reportable injuries, contamination or environmental impacts over the past 10 years.50 This is a remarkable track record and ought to be commended. But there is a limited amount of maintenance and repair that can be done on aging pipe to extend its life. It would be imprudent for SJWC to defer pipe replacement in favor of waiting for leaks to occur in its aging pipe system. And it is unreasonable for DRA to place a bet on pipeline failure. The reactive approach has historically kept rates low, but the analysis does not capture the negative future effect of catastrophic failures of neglected pipe. The time has come for us to become more proactive about infrastructure, and in particular, avoiding pipeline failures. We are encouraged by and cautious about SJWC ambitious schedule.

To ensure that SJWC's ratepayers continue to receive reliable and quality water service and given the current age of SJWC's pipes, it is reasonable and appropriate to adopt SJWC's Pipeline Replacement Program for this test year cycle. While SJWC's proposal is aggressive, it is not obscene. We expect a full accounting of the findings and success of the accelerated replacement program as part of its next GRC.

The $1,026,000 test year difference in the meter replacement program between SJWC and DRA resulted from a difference regarding whether SJWC had a surplus of 1" and smaller meters in inventory. SJWC forecasted $948,000 for 2009, $1,007,000 in the test year, and $1,127,000 in the subsequent year. DRA forecasted $464,000 for each of the three years, based on a simple average of SJWC's actual 1" and smaller meters purchased and installed in the five-year period from 2004 to 2008.

SJWC's forecast consisted of two components. The primary component of its forecast is to replace meters that have reached the end of their useful life. A minor component of the program is to meet a modest system growth. SJWC contended that its meter replacement program was based on the guidelines set forth in the Commission's General Order 103.51

SJWC's actual 1" and smaller meter replacement program in 2007 and 2008 did not meet its budgeted meter replacement goal because its personnel assigned to routinely replace those smaller meters were redirected to implement an Automated Meter Reading Program that involved the retrofit of 5,200 large size meters during that time period. As a result of this redirection, SJWC fell behind replacing its small meters. SJWC contended that its personnel are now back on track to complete both the meters scheduled for replacement in 2009, as well as its backlog from previous years.52 However, SJWC provided no information on how long the meters budgeted for replacement but not replaced in 2007 and 2008 and forecasted to be replaced during this GRC cycle have been in service.

General Order 103 sets forth rules, not guidelines as apparently interpreted by SJWC in establishing its meter replacement program, prescribing minimum standards for water utilities to follow. Section VI.6 of that General Order, which does not establish specific periods to test the accuracy of small meters, precludes SJWC from keeping meters smaller than 1" in service for more than 20 years and 1" meters in service for more than 15 years without being pulled, tested, or replaced.53

DRA's meter forecast based on an average of actual meter replacements is reasonable and should be adopted. SJWC should provide a written report to the Director of the Division of Water and Audits explaining its 2007 and 2008 small meter backlog and whether that backlog resulted in a General Order 103 violation. SJWC should also address in its written meter report whether our adoption of DRA's meter replacement forecast will preclude SJWC from complying with General Order 103-A. If SJWC was in violation of General Order 103 or will be in violation of General Order 103-A, SJWC should file a new application separate from this proceeding explaining the circumstances of its possible violation or violations and proposing a solution to bring it into conformance.

SJWC forecasted $3,236,000 for service replacements for the year 2009, $4,117,000 in the test year, and $5,047,000 in the second year of the GRC cycle. DRA forecasted $3,200,000 for the year 2009, $3,231,000 in the test year, and $3,305,000 in the second year of the GRC cycle. These service replacements are directly related to pipeline replacements.

The $922,000 test year difference in the service replacement project between SJWC and DRA mainly resulted from a difference in their assumptions regarding how much pipeline would be approved for replacement in this proceeding. The forecasted service replacement program of SJWC is consistent with the pipeline replacement program being adopted in this proceeding and should be adopted.

In 2006, SJWC updated its 1998 Strategic Facilities Plan that, among other matters, evaluated a consolidation of operational functions and alternatives to mitigate inefficiencies at its Main Office building, a historical landmark. A consultant was retained by SJWC to analyze alternative space scenarios and to compare the capital outlay and NPV of each scenario to identify the most economically efficient alternative. The consultant issued a 2006 report that identified three most viable alternatives for consolidation of SJWC's operations and staff.

A base case scenario that involved remodeling the Main Office Building was deemed not feasible because of the historical designation of the Main Office building.54 The first alternative scenario proposed to sell the Main Office, relocate employees to a non-designated downtown San Jose building under a lease, and lease an additional 10,000 square feet of first floor space at 1265 South Bascom Avenue (Bascom building), where it already leases the 10,800 square foot second floor.55 Two other existing buildings were to undergo remodeling. The second alternative differed from the first only to the extent that a new office in downtown San Jose and the Bascom building would be purchased instead of being leased.

On January 22, 2007, SJWC filed an application for approval to sell the Main Office under Section 851 of the Public Utilities Code and for authorization of the investment of sale proceeds under Section 790. SJWC included the consultant's analysis of alternatives to show the process it used to make a choice so that the Commission could review the reasonableness of SJWC's Alternative 2 selection as being most economical. Between the dates SJWC filed its application to sell the Main Office and a decision on that proceeding was issued, SJWC purchased two replacement buildings.

SJWC was authorized by D.08-10-018 to sell its prior headquarters building. SJWC was also authorized a rate increase based on an expected costs of leasing replacement buildings under the first alternative. Because the application did not seek authority to purchase replacement buildings, SJWC was authorized to track costs of owning and renovating a new Main Office at 110 West Taylor Street (Taylor building) and the Bascom building in a memorandum account for possible rate base recovery in this GRC.56

SJWC purchased the Taylor building in November of 2007, 10 months after SJWC filed its application for authority to sell its Main Office, at a cost of $6.9 million. Renovations totaling $5.3 million were made to that facility. DRA opposed SJWC's request to include any of the $6.9 million purchase price and $2.4 million of the $5.3 million renovation costs in rate base because a lease option was the least cost alternative to purchasing a new Main Office building and the 28,000 square foot Taylor building substantially exceeded the 15,180 square foot space requirement included in the consultant study for a new main office building.57

SJWC searched for an appropriate Main Office replacement building to be leased or purchased between mid-2006 and mid-2007, starting approximately six months prior to filing its application to sell the Main Office building and concluding six months after the application was filed. The criteria used by SJWC required that the building must, at a minimum, (1) be a free-standing building between 15,000 and 20,000 square feet; (2) have adequate, safe, secure and well-lit off-street parking; (3) be in a central location within its service area; (4) be in close proximity to public transportation; and, (5) satisfy American Disabilities Act accessibility requirements.58

That search found only eight buildings that met at least some of its minimum criteria for replacement buildings in the downtown San Jose area. Six buildings were available for purchase and two for lease. However, only the Taylor property available for purchase met all of the minimum search criteria.59 Therefore, SJWC purchased the Taylor building for its new Main Office.

The only flaw in the Taylor building was that it had 28,000 square feet of floor space, 12,200 square feet in excess of the 15,800 square feet needed to replace the old Main Office, as identified in SJWC's consultant study.60 In regards to excess space, SJWC explained that the consultant's study excluded square footage allowance for stairwells or elevators for a multi-level stand-alone building such as the Taylor building, which has 2,100 square feet dedicated for these elements.61 DRA acknowledged that these areas were not addressed in the consultant's study.62 SJWC subsequently allocated additional square footage of that excess space for storage, mail handling, customer and visitor reception, and a training facility. The employee break room and board room areas were also expanded beyond the consultant study to save on remodeling costs by keeping rather than moving some existing walls in the Taylor building.63

SJWC purchased the Taylor building knowing that it offered more space than needed based on the consultant's study. The lease alternative adopted by D.08-10-018 for a new Main Office was based on square footage needed to replicate and upgrade the old Main Office space based on average market values in the San Jose area at that time, not based on actual replacement buildings available at that time.

SJWC's decision to purchase the Taylor building must be evaluated for reasonableness at the time the purchase was made. SJWC had the benefit of a consultant study for its needs. However, that study was more than a year old and not based on any specific buildings available to replace the Main Office. SJWC applied the results of that study to its criterion for evaluating a specific Main Office replacement, whether lease or purchase. Unfortunately, only the Taylor building met all of its basic criteria for relocating its Main Office. DRA was not aware of whether a comparable Main Office building was available for lease at the time.64

Floor space should not be the sole criterion for determining whether SJWC should lease instead of purchasing a building. Factors such as building location, safety, security, access for disabled persons, and ability to upgrade the building's systems and infrastructure are necessary attributes to ensure adequate facilities. The process SJWC used to locate a Main Office replacement included all of the above factors and was appropriate and reasonable. SJWC's purchase of the Taylor building and all of its related remodeling costs were reasonable and should be included in rate base.

SJWC purchased the Bascom building in May of 2007 for $4.5 million and invested $1.5 million to remodel portions of the 21,800 square foot building for utility use. Remodeled portions of the building were placed into service on December 26, 2007. DRA opposed SJWC's request to include the Bascom building purchase price in rate base because D.08-10-018 found that a lease option was the least cost alternative to purchasing the building. DRA concurred with SJWC that the costs to remodel the Bascom building were reasonable and should be included in rate base.

The Bascom building is a two-story building. The first floor has 10,000 square feet of space and the second floor 11,800 square feet. SJWC's Engineer and Construction Department has occupied the entire second floor under a lease agreement since 1999.65 Upon purchase of the Bascom building, SJWC relocated some of its employees to the Bascom building's 10,000 square foot first floor. Its construction department located on the second floor moved to the first floor. The Human Resources Department, Customer Service Call Center, and some Information Technology support positions were relocated to the first floor from the old Main Office.66 Now, the entire building is occupied by SJWC personnel.

In the decision that authorized SJWC to sell its Main Office building, we recognized that SJWC had already purchased the Bascom building and that SJWC does not need Commission approval to purchase property. However, to the extent that SJWC chooses to purchase property for public utility use before recovery of the costs in connection with the purchase is approved by the Commission, it does so at its own risk. In the case of the Bascom building, we approved a revenue requirement based on leasing the building because the cost of leasing the Bascom building was less than the cost of purchasing that specific building.67

SJWC asserted that, at this time, the total building is necessary and useful for utility operations and should be included in rate base. DRA did not dispute the building's necessity and usefulness. DRA disputed the placing of a building into rate base that has been partially leased for the past 10 years by SJWC and based on D.08-10-018's least cost analysis that showed leasing the additional 10,000 square feet of first floor space was the least cost alternative to ratepayers in comparison to purchasing the same building.

There is no evidence in this record to support or justify changing D.08-10-018's conclusion that the least cost benefit to SJWC ratepayers was for SJWC to lease, not purchase, the Bascom building. Therefore, the Bascom building purchase price should be excluded from rate base. Only the remodeling costs should be included in rate base. However, SJWC should be allowed the cost of leasing the Bascom building as an operating expense, as calculated by DRA.

The test year difference in depreciation reserve between SJWC and DRA resulted from their use of different test year plant additions and different net salvage value for T&D mains. Plant estimates and depreciation rates adopted in this order should be used to derive the test year depreciation reserve.

11 Weighted average is determined by adding to a beginning of year balance additions and retirements that would occur during the year based on a point in time when those additions and retirements would occur.

12 Exhibit 5 at 3-18.

13 Exhibit 13.

14 Reporter's Transcript Vol. 2, p. 131 and p. 137.

15 Exhibit 5 at 3-18.

16 Reporter's Transcript Vol. 2, p. 138.

17 Project costs were adjusted to reflect agreed upon inflation factors.

18 Exhibit 3.

19 Exhibit 5 at 3-19.

20 Exhibit 9 at 8-10.

21 DRA treats the annual earning for each renewable energy project as a penalty in the NPV model. DRA included a 10.13% return on equity as the cost of money. DRA uses a net-to-gross multiplier in the NPV calculation.

22 Reporter's Transcript Vol. 2, p. 158.

23 Reporter's Transcript Vol. 2, p. 159.

24 Hydro-turbines are impellers that generate electrical energy due to the hydraulic flow within a main.

25 Exhibit 3, SJWC CIP Index #3701.

26 Exhibit 9 at 8-12.

27 Id. at 8-13 and 8-14.

28 Exhibit 5 at 3-20.

29 Exhibit 9 at 8-12 and 8-13.

30 Nephelometric Turbidity Unit (NTU) is a unit measurement of a lack of clarity of water. Water containing one milligram of finely divided silica per liter has a turbidity of one NTU.

31 Exhibit 2 at 16-7 through 16-9 and Exhibit 5 at 3-24.

32 Id. at 16-8.

33 Exhibit 5 at 3-25 and 3-26.

34 Exhibit 2 at 16-8 and 16-9.

35 Reporter's Transcript Vol. 4, p. 323 and Exhibit 5 at 3-13.

36 Exhibit 2 at 16-8 and 16-9.

37 Exhibit 9 at 8-31.

38 Id. at 8-27 and Exhibit 20, 2009 at p. 6, 2010 at p. 4, and 2011 at p. 3. Project costs were adjusted to reflect 3.0% agreed upon escalation factor.

39 Exhibit 5 at 3-34 to 3-38.

40 Id. at 3-35 and 3-36.

41 Id. at 3-38.

42 Exhibit 7, 2008 Study at 3. Project costs are prior to adjustment for 3.0% agreed upon escalation factor.

43 Exhibit 9 at 8-68. Project costs are prior to adjustment for 3.0% agreed upon escalation factor.

44 Exhibit 7.

45 Id., 2003 Study at 1.

46 Exhibit 9 at 8-51.

47 Id. at 8-57.

48 Exhibit 5 at 3-39 to 3-42 and Exhibit 7, 2003 Study, Appendix D.

49 Exhibit 7, 2008 Study at 18 and Appendix A.

50 Exhibit 9 at 8-49.

51 Exhibit 5 at 3-5 and 3-6.

52 Exhibit 5 at 3-6.

53 Although General Order 103-A superseded General Order 103 pursuant to D.09-09-004 and the Section pertaining to the test of water meters was moved to Section IV.6 from Section VI.6, the maximum time period for keeping meters in service without testing remained the same.

54 D.08-10-018 (2008), mimeo. at 65.

55 An allowance for remodeling each building was included in each scenario.

56 D.08-10-018 (2008), mimeo. at 84 and 85.

57 DRA allowed $2.9 million, or 54%, of Taylor building remodeling costs based on a percentage difference between 15,169 square feet of main office replacement space and the total 28,000 square feet of Taylor building space.

58 Exhibit 2 at 21-2.

59 Exhibit 5 at 3-54.

60 Exhibit 2 at 21-4.

61 Id.

62 Exhibit 9 at 8-81.

63 Exhibit 5 at 3-56.

64 Reporter's Transcript Vol. 4, p. 419.

65 Exhibit 2 at 21-5.

66 Reporter's Transcript Vol. 3, p. 301.

67 D.08-10-018 (2008), mimeo. at 66.

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