2. Background

2.1. The Commission's Water Conservation Rate Design Initiative

In its 2005 Water Action Plan (WAP), the Commission included among its objectives the strengthening of conservation programs among the investor-owned water utilities to a level comparable to the conservation plans of the energy utilities.¹ In part, this called for "the elimination of flat-rate and un-metered water service" and the encouragement of "increasing conservation and efficiency rate designs (such as increasing block rates) where feasible to promote greater conservation."² The Commission announced that it would direct the Class A and Class B water utilities to participate in the California Urban Water Conservation Council (CUWCC) and follow the cost-effective Best Management Practices of the CUWCC.³

On January 16, 2007, the Commission ordered an investigation of water conservation policies, Investigation (I.) 07-01-022 (Water Conservation OII), relative to Class A water utilities. That proceeding, which led to the settlement of several consolidated water conservation rate design matters,⁴ is now in its second phase. When the Commission adopted a revised rate case plan for Class A water utilities in 2007, it set out a list of conservation and efficiency directives, including a mandate to submit a plan for reducing average customer water use 5% during the three-year general rate case (GRC) cycle.⁵

San Gabriel Valley Water Company (San Gabriel) filed an application for its FWC on August 10, 2007 seeking, in part, authority to fund and implement the Commission's WAP objectives and to establish a Conservation Memorandum Account to record costs of water conservation activities for potential subsequent recovery in rates.⁶ In a decision adopting a settlement between San Gabriel and the Commission's Division of Ratepayer Advocates (DRA), the FWC was authorized to establish an interim surcharge consisting of three components (conservation programs, conservation specialists, and additional payroll-related expenses) to fund the conservation programs and activities authorized by the decision.⁷

In early 2008 Governor Schwarzenegger set a goal of 20% statewide per capita urban water use reduction by 2020.⁸ In February of 2008 the Commission announced an intention to meet a goal ranging, "at a minimum, from a 3%-6% reduction in per customer or service connection consumption every three years once a full conservation program, with price and non-price components, is in place."⁹

Of late, in November 2009, new state legislation was enacted that mandates the 20% urban-use reduction by the end of 2020, with an interim incremental reduction of 10% by the end of 2015 and the development of standardized water use reporting.¹⁰ Each urban retail water supplier of sufficient size, whether publicly or privately owned,¹¹ must select and adopt a method among several alternatives given for arriving at its urban water use target.¹² Those suppliers are to include in their 2010 Urban Water Management Plans "baseline daily per capita water use," conservation targets and references to supporting data.¹³

Against the foregoing 2005-2009 backdrop, it is noteworthy that the instant proceeding on San Gabriel's application is the only water conservation rate design matter that has both gone through full evidentiary hearing and not settled. Also noteworthy is the fact that San Gabriel has been reclassifying some large-use customers from the residential to the non-residential class. Late in the instant proceedings San Gabriel finished compiling data on five years of residential customer water usage in each of its divisions. The results show residential usage reductions from 329 ccf to 311 ccf, or 5.5% in the FWC division and from 273 ccf to 235 ccf, or 14% in the LAC division.¹⁴ In terms of overall water production¹⁵ not disaggregated by customer class, the July 2008 through June 2009 drop for FWC was 5.1% and for LAC was 6.1%; the month of June 2009 showed a drop of 16% compared to June 2008 for FWC and 16.2% for LAC.¹⁶ These usage, reclassification and production data are subject to differing interpretations,¹⁷ leaving unclear the extent, if any, to which San Gabriel, without tiered conservation pricing, has been approaching or meeting the Commission's water conservation goals in terms of the rate of annual improvement in reduced residential water use.¹⁸

2.2. Procedural History of the Application

On September 10, 2008, San Gabriel filed this application, requesting that the Commission authorize (1) a conservation rate design and rates, (2) revenue decoupling mechanisms, and (3) conservation memorandum accounts to capture program costs for San Gabriel's LAC and FWC divisions. The application was filed in response to Ordering Paragraph 13 of the Commission's Decision (D.) 08-06-022.¹⁹ Protests to the application were timely filed by the Consumer Federation of California (CFC)²⁰ and the City of Fontana (City).²¹ Commissioner John Bohn and Administrative Law Judge (ALJ) Jonathan Lakritz were assigned to the proceeding. DRA was authorized to file its protest²² late through an October 17, 2008 e-mail from ALJ Lakritz. On October 27, 2008, San Gabriel filed a response to the protests.

At the November 10, 2008 prehearing conference (PHC), ALJ Lakritz, on behalf of the assigned Commissioner, expressed concerns that San Gabriel's proposal for a unitary water conservation rate, plus surcharge, as opposed to a tiered increasing block design, was not satisfactory and suggested that San Gabriel submit supplemental testimony to propose a multi-tier water conservation rate design more consistent with those the Commission has adopted for other Class A water companies. In its December 1, 2008 response, San Gabriel determined that it would be appropriate and beneficial to supplement its testimony previously served in this proceeding by submitting an alternative rate design proposal that employed multiple tiers. San Gabriel also indicated that it might include revisions to its proposal for a form of water revenue adjustment mechanism (WRAM).

After being granted a week's extension by ALJ Gary Weatherford, to whom the proceeding had been assigned in mid-January 2009, San Gabriel served Supplemental Direct Testimony on February 25 that proposed, for each division, a two-tier residential customer class alternative conservation rate design and a WRAM to track variances in revenues between recorded sales at tiered quantity rates and at uniform single-block rates. On March 27, 2009, DRA moved for a clarification of San Gabriel's proposals.²³ On March 30, 2009, ALJ Weatherford ordered the parties to consult and confer for the purpose of trying to reconcile conflicts between San Gabriel's Application and its Supplemental Testimony. San Gabriel and DRA reported to ALJ Weatherford on April 3, 2009, that such reconciliation had been achieved. San Gabriel then served revised direct testimony reflecting the reconciliation, providing a basis for DRA to prepare and, after having been granted an extension by ALJ Weatherford, serve its report.²⁴ DRA served revisions to its report²⁵ on June 3, 2009.

Public participation hearings were conducted by ALJ Weatherford in Fontana and El Monte on June 24 and 25, 2009, respectively.²⁶ Transcripts of those hearings are part of this record. Among the concerns expressed by speakers in Fontana were water bill impacts upon customers with outdoor vegetation and fruit trees, and upon multi-family customers on the same meter; effects of pipeline breakage and leakage; and customer confusion due to multiple notices of proposed changes in rates and cost of capital. In El Monte, the concerns included the following subjects: water utility spending and earnings; impacts on gardens, large-lot ("light agriculture") owners, orchard owners, neighborhood appearance and dust control, horse owners, swimming pools, multi-dwelling parcels and extended-family or multi-family residences; wholesale water charges, if any; the impact of new and proposed development on local water supplies; the compatibility, or not, between the company's conservation goals and policies of local governments; qualifications for the low-income alternative rate program; and possible misclassification of customers.

Rebuttal testimony by San Gabriel to DRA's Report was served on July 10, 2009. On July 23, ALJ Weatherford requested supplemental testimony of San Gabriel and DRA bearing on marginal cost rate setting, water consumption data, indoor and outdoor water use, and the prospect of tier crossing by extended family households.²⁷ San Gabriel, DRA, and CFC engaged in Alternate Dispute Resolution in late July that failed to result in any settlement.

The ALJ-requested supplemental testimony by San Gabriel and DRA was served on August 14, 2009.²⁸ Included in San Gabriel's supplemental testimony was a three-tier increasing block option.²⁹ August 14 was also the date on which San Gabriel moved for authority to establish a memorandum account to track the legal and related costs of participating in the instant proceeding.³⁰ DRA opposed the motion on August 31.³¹

At the outset of the evidentiary hearing on August 19, San Gabriel presented more prepared testimony.³² That testimony reported on San Gabriel's customer reclassification results as well as on figures showing significant reductions in water consumption during recent years. DRA requested and was granted an extension to analyze this new information. Resumption of the evidentiary hearing was set for September 29, 2009. On August 26, San Gabriel served testimony that updated the three-tier conservation rate design on the basis of refined data.³³ DRA served a proposed exhibit on September 16 showing the results of its review of San Gabriel's reclassification of customers.³⁴ Following that, DRA served a proposed exhibit setting out a two-tier conservation rate design.³⁵

At the September 15, 2009, PHC that focused on the process for resolving San Gabriel's then-pending motion seeking authority to set up a memorandum account, ALJ Weatherford informed the parties of his intention to apply the Commission's four-pronged test³⁶ in ruling on the motion and gave the parties leave to supplement the related factual record by making comments. Comments by San Gabriel were filed on September 25, followed by DRA's on October 27.

Evidentiary hearings both resumed and were concluded on September 29, 2009. Common-outline opening briefs were filed by San Gabriel and CFC on October 27 and by DRA on October 28, followed on November 10 by reply briefs from those parties.

¹ WAP, California Public Utilities Commission (December 15, 2005) at 7.

² Id. at 7-8. Increasing block rate designs charge a higher price for higher levels of consumption. The WAP at 9, cautioned "Before instituting increasing block rates, however, the Commission will carefully consider the impact on low income customers and may develop specific low income water rates, similar to its approach for low income energy ratepayers."

³ Id. at 8-9, 24-27 (Appendix A). One of the Best Management Practices (BMPs) of the CUWCC, BMP No. 1.4 (formerly No. 11), calls for using a price signal as an economic incentive for the customer to conserve. The BMPs are available in Exhibit 1 of the Memorandum of Understanding Regarding Urban Water Conservation in California, available at:
http://www.cuwcc.org/uploadedFiles/Resource_Center/MOU/MOU-08-12-10.pdf

⁴ The applications and water utilities involved with the settlements were Application (A.) 06-09-006 (Golden State Water Company), A.06-10-026 (California Water Service Company), A.06-11-009 (Park Water Company), A.06-11-009 (Suburban Water Systems), and A.07-03-019 (San Jose Water Company). While San Gabriel is a party to the investigation proceeding, its application, the subject of the instant proceeding, was not consolidated with, and remains outside, the investigation proceeding.

⁵ Decision (D.) 07-05-062 at A-29 and A-30.

⁶ A.07-08-017, filed August 10, 2007, In the Matter of the Application of San Gabriel Valley Water Company (U337W) for approval of Implementation by its Fontana Water Company Division of the Commission's Water Action Plan objectives, including a request to utilize existing Facilities Fees revenues, for such purposes or in the alternative, for authority to increase rates not to exceed $882,200 or 2%.

⁷ D.08-08-018.

⁸ A multi-agency undertaking to develop a "20x2020 Water Conservation Plan" has been evolving since then.

⁹ D.08-02-036 (Phase 1A decision in the water conservation OII) at 11.

¹⁰ Senate Bill 7 (7^th Ex. Sess.), adding new Part 2.55 (Sustainable Water Use and Demand Reduction) in Division 6 of the California Water Code, §§ 10608-10853. San Gabriel attached a copy of Part 2.55 to its Reply Brief.

¹¹ The definition includes a water supplier "that directly provides potable municipal water to more than 3,000 end users or that supplies more than 3,000 acre-feet of potable water annually at retail for municipal purposes," California Water Code § 10608.12(p).

¹² Water Code § 10608.20(b).

¹³ Water Code §10608.20(e).

¹⁴ SG Exhibit 5, Additional Supplemental Testimony of Daniel A. Dell'Osa at 5:line 13-line 14, line 25-line 26.

¹⁵ While water production, the amount of water introduced to a utility's system, is not equivalent, due to system losses, to customer water use, reductions in production translate into reductions in use.

¹⁶ Id. at Attachment 3.

¹⁷ The Division of Ratepayer Advocates attributes the reductions to the reclassification of large-use customers from the residential class to the non-residential class. See Comments of the DRA on the Proposed Decision of Administrative Law Judge Weatherford, January 21, 2010 at 3. San Gabriel reaches the opposite conclusion in its Reply Comments, January 26, 2010 at 1-2.

¹⁸ D.08-02-036 at 11, fn. 14, stated: "Until we finalize a targeted reduction in consumption, Class A water utilities shall comply with D.07-05-062's required water conservation plan by stating how price and non-price programs will achieve reductions of 1% to 2% annually during the GRC cycle." The Commission expects to finalize the targeted reductions in Phase 2 of the Water Conservation OII, Investigation (I.) 07-01-022.

¹⁹ San Gabriel Valley Water District "shall file a conservation rate design application, including a Water Revenue Adjustment Mechanism, modified cost balancing account and conservation memorandum account proposals for its Divisions with[in] 90 days of issuance of this decision. That application shall be coordinated with its Fontana Division's July 2008 GRC application and may be consolidated with Investigation 07-01-022." D.08-06-022 at 73, Ordering Paragraph 13, in A.07-07-003.

²⁰ CFC contended that the proposed rates would result in excess revenue, discriminated by sparing classes of customers a conservation surcharge, lacked conservation incentives and were not grounded on cost of service as required by Pub. Util. Code § 701.10.

²¹ City asserted its interest in having ratepayer classes treated fairly and conservation fostered without unduly burdening ratepayers.

²² DRA, among other things, criticized the single quantity rate/surcharge approach, contrasting it with the increasing block designs adopted by other Class A investor owned water utilities, and argued that revenue neutrality was lacking.

23 Motion of DRA for Clarification of Proposals Set Forth in A.08-09-008 and Supplemental Testimony and Motion to Shorten Response Period.

²⁴ DRA Exhibit 101, Report on the Application of San Gabriel Valley Water Company for Authority to Establish Conservation Rate Designs, Water Revenue Adjustment Mechanisms, and Conservation Memorandum Accounts (served on May 29, 2009).

²⁵ DRA Exhibit 102, Errata to Report on the Application of San Gabriel Valley Water Company for Authority to Establish Conservation Rate Designs, Water Revenue Adjustment Mechanisms, and Conservation Memorandum Accounts.

²⁶ Communities served by the FWC division include portions of Fontana, Rancho Cucamonga, Rialto and vicinity in San Bernardino County. Communities served by the LAC division include portions of Arcadia, Baldwin Park, El Monte, City of Industry, Irwindale, La Puente, Montebello, Monterey Park, Pico Rivera, Rosemead, San Gabriel, Santa Fe Springs, South El Monte, West Covina, Whittier and vicinity in Los Angeles County.

²⁷ ALJ Ruling Regarding Supplemental Testimony, Requirements for Settlement, Time Estimates for Evidentiary Hearing and the Scheduling of a Telephonic Prehearing Consultation.

²⁸ Exhibit SG 4, Supplemental Testimony of Daniel A. Dell'Osa (San Gabriel) and DRA Exhibit 6, Supplemental Testimony on the Application (DRA).

²⁹ In an August 10, 2009, e-mail ALJ Weatherford asked the parties to be prepared on cross examination to step away from their preferred tiered rate design and suggest a next-best design. San Gabriel was asked to consider a three-tier design and DRA was asked to consider a two-tier design.

³⁰ Motion of San Gabriel Valley Water Company for Authority to Open a Memorandum Account.

³¹ The DRA's Response to the Motion of San Gabriel Valley Water Company for Authority to Open a Memorandum Account.

³² SG Exhibit 5, Additional Supplemental Testimony of Daniel A. Dell'Osa. By e-mail on August 10, 2009, ALJ Weatherford had given leave to each party to respond in writing on August 19 to any other party's August 14 submission.

³³ SG Exhibit 6, Three-Tier Option Testimony of Daniel A. Dell'Osa.

³⁴ DRA Exhibit 107, Significance Test for Customer Reclassification.

³⁵ DRA Exhibit 108, Response to ALJ Weatherford's Question, served on September 24, 2009.

³⁶ See e.g., Resolution No. W-4276 (July 12, 2001).