3. Competing Proposals of Parties
3.1. Conservation Rate Designs
The proposals of San Gabriel and DRA described in this section are abstracted on Table A in the Attachment.
San Gabriel proposes to reduce the FWC service charge from $16.85 to $16.69 and the LAC service charge from $20.04 to $18.36. This was expected to produce a revenue ratio of service charge to quantity charge of 38:62 in FWC and 34:66 in LAC, in both instances short of the minimum standard of 30:70 promoted by the CUWCC,37 and which the company seeks to meet in steps. Rate increases since the filing of the application in this proceeding appear to be altering the ratios for the better.38
DRA proposes a service charge of $12.25 for FWC and of $13.03 for LAC that would result in ratios of 26:74 and 27:73, respectively.39 DRA promotes the application of the 30:70 minimum standard to residential customer class revenue, not just to revenue of all customer classes in the aggregate which is the CUWCC formula.40
To allocate quantity charges among residential customers, San Gabriel seeks a two-tier increasing block structure. The first tier would cover consumption from 0 to 20 ccf41 and bear a rate42 of $1.92 per ccf in FWC, and $1.89 per ccf in LAC. The second tier would apply to all consumption of 21 ccf and above at a rate of $2.11 per ccf in FWC, and $2.08 per ccf in LAC.43 The rate differential between the first and second tier would be 10% in each of the divisions.
When pressed to conceive of a possible three-tier alternative,44 San Gabriel fashioned a structure for FWC and LAC in which the first tier covered consumption through 15 ccf, the second tier included 16 ccf through 30 ccf, and the third captured consumption 31 ccf and above. For FWC, the rates would be $1.93, $1.99, and $2.13 per ccf, with a 3% differential between tier 1 and tier 2, and 7% between tiers 2 and 3. Going up the tiers, the rates for LAC would be $1.90, $1.94, and $2.09 per ccf, with a 2% differential between tier 1 and tier 2, and 7% between tiers 2 and 3.45
As the proceedings progressed, San Gabriel, citing recent Commission-approved increases in quantity rates, came to take the position that the Commission should not adopt specific rates but instead adopt a rate calculation methodology.46
DRA countered San Gabriel's preferred two-tier design with a three-tier design with different breaking points between tiers for FWC and LAC. The first tier for FWC would cover 0 through 16 ccf of consumption; the second would include 17 through 30 ccf; and the third would capture consumption 31 ccf and above. The rates for those tiers would be $1.68, $1.85, and $2.40 per ccf, respectively, with a differential of 12% between tiers 1 and 2, and a differential of 30% between tiers 2 and 3. The first tier for LAC would cover 0 through 13 ccf of consumption; the second would include 14 through 21 ccf; and the third would capture consumption of 22 ccf and above. The rates for those tiers would be $1.56, $2.03, and $2.97 per ccf, respectively, with a differential of 29% between tiers 1 and 2, and a differential of 46% between tiers 2 and 3.47
When pressed to conceive of a possible two-tier alternative, DRA crafted a seasonal rate structure48 for FWC and LAC in which different rates applied in the winter and the summer. For FWC, the first tier would cover 0 through 16 ccf of consumption and the second tier would catch all consumption of 17 ccf and above. For the first tier the winter and summer rate would be the same, $1.65 per ccf. For the second tier the winter rate would be $1.85 per ccf and the summer rate would be $2.22 per ccf. The differentials between the two tiers would be 12% in the winter and 35% in the summer. For LAC, the first tier would cover 0 through 13 ccf of consumption, and the second tier would catch all consumption of 14 ccf and above. For the first tier the winter and summer rate would be the same, $1.76 per ccf. For the second tier the winter rate would be $2.03 per ccf and the summer rate would be $2.53 per ccf. The differentials between the two tiers would be 15% in the winter and 43% in the summer.
During the course of this proceeding, San Gabriel has been in the process of reviewing its residential customer lists in its divisions in order to identify customers misclassified as residential who should be reclassified as non-residential. During the evidentiary hearings, San Gabriel reported on the then current results of that ongoing effort,49 revealing that some customers had been misclassified. Correction by reclassification under these circumstances creates a variance between adopted residential quantity-rate revenue and the counterpart revenue that would actually be forthcoming under San Gabriel's proposed rate design. The expected resulting change in the proportional contribution of residential and non-residential sales, respectively, to the total revenue from quantity rates poses the issue of whether San Gabriel's proposal, as affected by customer reclassification, is revenue neutral. San Gabriel addressed this issue by adjusting the adopted quantity-rate residential sales figure downward, using a ratio (comparing before-reclassification to after-reclassification data) based on 5-year average annual residential sales to adjust for customer reclassification.50 DRA contends that the application of the foregoing methodology by San Gabriel does not achieve revenue neutrality.51
DRA's rate design for FWC was based on long-run marginal cost pricing52 using an average incremental cost (AIC) methodology.53 DRA sees expansion of capacity, such as the addition of a well, to be the likely response of a California water utility to increased water scarcity. If current prices are set equal to long run marginal cost in advance of the expansion project, DRA argues, customers will conserve in a manner that could "possibly put off into the future or prevent the necessity of implementing that project, thus lowering costs for ratepayers."54
The AIC was not used by DRA to calibrate the third tier in its design for LAC, but rather the second tier, because it turned out that the estimated average incremental cost for that division was the same as the new single quantity rate.55
CFC thinks that San Gabriel's application should be dismissed, primarily arguing that a "cost of service study to determine the cost of serving each customer class" should precede any rate design.56 CFC believes the setting of conservation rates for only one class of customers, in this instance the residential class, is discriminatory in violation of Pub. Util. Code § 453(c) and § 701.10(b) and (f).57 Neither San Gabriel nor DRA supports those arguments.
San Gabriel has given assurances, in response to customer concerns voiced at the public participation hearings held in Fontana and El Monte, that tiered conservation rates would not be applied to multiple-dwelling units, such as apartments and trailer parks, where high quantity use is aggregated and displayed at a single meter.58 As to the issue of any unfair impact of tiered rates on the customer bill of a household occupied by a large or extended family, or by multiple families, San Gabriel indicated that it currently lacks the data that would be needed to define and address the issue.59
In the context of its own three-tier proposal, DRA saw little prospect of an unfair impact based on household size, employing the state standard of 55 to 75 gallons usage per day per person in support of its position.60
3.2. Water Revenue Adjustment Mechanism61
San Gabriel seeks authority to set up a "Monterey-styled" WRAM in each division to track the differences between revenues for actual metered sales at the block volumetric rate and at the uniform single quantity rate calculated to yield the authorized revenue requirement.62 This type of WRAM has been authorized for Suburban Water Systems and San Jose Water Company in the consolidated water conservation Order Instituting Investigation (OII).63 DRA supports the creation of Monterey-styled WRAMs for the divisions.64
To address the contingency that the Commission might adopt a rate design like the one proposed by DRA, which arguably would involve a greater risk of sales fluctuations and revenue losses, San Gabriel presented the fallback alternative of a full WRAM65 in a post-hearing brief.66 DRA opposes that alternative.67
3.3. Balancing Account
San Gabriel currently has full cost balancing accounts68 for FWC and incremental cost balancing accounts69 for LAC. The LAC accounts track changes in the actual price for pumped water, purchased water and purchased power. The company finds full cost balancing accounts to be superior.70
DRA proposes that both divisions have incremental cost balancing accounts, to provide an incentive to reduce purchases of water from the more expensive sources.71
3.4. Conservation Memorandum Account
San Gabriel seeks a conservation memorandum account to record the costs of "extraordinary water conservation programs and activities not expressly identified in a prior general rate case."72
DRA, while recognizing that the Commission ordered San Gabriel to include a request for such an account in its application,73 argues that the account is "not necessary or warranted." DRA cites balances in the conservation budgets in both divisions that allegedly are sufficient "to cover unanticipated conservation needs that arise as well as expanded public outreach and education programs," and argues that the account request fails to meet a four-prong test for memorandum accounts.74
3.5. Public Outreach and Education
San Gabriel proposes75 to gather relevant ideas from other southern California agencies and to implement the programs described in its WAP conservation applications approved by the Commission in 2008.76 It does not now expect to expand those programs, but if it were to do so it would want to track the related costs in a memorandum account.77
DRA urges the Commission not to authorize any additional funding for any expansion of the foregoing programs, arguing that the unspent balances in the pertinent GRC budgets can cover the costs of the programs and any expansion.78 DRA asserts that there are no-cost or low-cost opportunities for educating customers through website links and telephone numbers of which San Gabriel should avail itself.79
3.6. Low-Income Features
San Gabriel's divisions offer California Alternative Rates for Water (CARW) to low-income households. CARW households receive a 50% reduction in their service charges. While that same fractional benefit would apply under the San Gabriel's proposed conservation rate design, it would be 50% of a reduced service charge.
Recognizing that its own proposal to reduce service charges would lessen the benefits to CARW households, DRA proposes that there be a flat dollar monthly service charge discount for them, amounting to about $8.29 in FWC and about $10.02 in LAC.80 San Gabriel agrees in principle but has not proposed figures.81
3.7. Reporting Requirements
San Gabriel sees no need to add to its existing reporting requirements. It points out that its annual report includes customer and sales data by customer class as well as balancing and memorandum account information. It argues for evaluating "usage trends over a period of several years, rather than spot changes during any isolated year because of the multiple independent factors that influence the volume of sales."82 San Gabriel testified that:
Water usage by San Gabriel's customers is affected by a great many factors such as population, temperature, rainfall, economics, commercial and industrial needs, technology, consumer preferences, and water conservation programs of other entities as well as our own conservation programs. There are no reliable ways to isolate the water usage of each factor.83
DRA wants the company to "collect data on billing and usage per customer or per service connection by meter size, by month, and by class of customer, for use in analyzing customer response" to the conservation rate and WRAM pilot project.84
3.8. Effective Date
Both San Gabriel and DRA want the conservation rate design and associated features to become effective July 1, 2010.
37 See BMP 1.4 referenced at supra, note 3.
38 RT 168:21-169:5.
39 DRA Exhibit 101 at 13: line 23-line 24.
40 Id. at 13:line 16-line 23.
41 San Gabriel borrowed the 20 ccf break point from Suburban Water Systems rather than looking to the indigenous data of FWC and LAC.
42 Unless otherwise indicated, rate figures shown in this decision have been rounded to the closest cent.
43 See SG Exhibit 6, Attachment 2 (Updated Table E) at 1.
44 In a July 23, 2009 Ruling, ALJ Weatherford asked San Gabriel and DRA to be ready to have their respective witnesses at the evidentiary hearing move off of their preferred positions temporarily and posit an alternative tier structure, i.e. two tiers for DRA and three tiers for San Gabriel. Subsequently, both parties submitted exhibits in response. See SG Exhibit 6 and DRA Exhibit 108.
45 See SG Exhibit 6, Attachment 2 (Updated Three-tier Option Table E) at 1.
46 Reply Brief of San Gabriel Valley Water Company at 6-7. San Gabriel applied the suggested methodology in its updated Table E in SG Exhibit 6, Attachment 1.
47 See DRA Exhibit 102, Appendix D (Conservation Rate Design) at 16 and 19.
48 See DRA Exhibit 108.
49 SG Exhibit 5 at 4:line 19-5:line 2.
50 See RT 263:26-266:26; also, Updated Table E attached to SG Exhibit 6.
51 Reply Brief of the DRA at 5-6:
In order to verify whether a rate design is revenue neutral, it is necessary to calculate the revenues that [sic] specific rate design will collect for both residential and non-residential customers and compare those with what would have been collected with a uniform quantity rate. San Gabriel still has not done this calculation to verify that its proposal is revenue neutral.
52 In DRA Exhibit 101 at 16-17, DRA argues:
Setting prices such that they reflect the marginal cost of production communicates to customers the cost of increasing production by one additional unit. Setting the highest block rate design to the marginal cost tells customers consuming in that block the cost of increasing their consumption by one unit. This is an important message to send to the customers with the highest usage; customers can then "choose" between maintaining their present consumption and paying for additional production.
Recognizing that the calculation of the AIC for FWC was a "ballpark estimate," DRA refrained from setting the third tier rate at the AIC for an additional well. Rather, it selected a rate that was 50% higher than the current quantity rate in the belief that it approximated the long run marginal cost. Id. at 20-21.
53 Id. at 18-19. DRA cites Thomas W. Chestnutt, et al., Designing, Evaluating, and Implementing Conservation Rate Structures, CUWCC (July 1997), as authority for the use of marginal cost and average incremental cost pricing in increasing-block water conservation rate setting.
54 Id. at 18.
55 Id. at 21-22.
56 Opening Brief of the CFC at 3.
57 § 453(c) provides: "No public utility shall establish or maintain any unreasonable difference as to rates, charges, service, facilities, or in any other respect either as between localities or as between classes of service." § 701.10, in part, declares state policy to be that water rates and charges established by the Commission shall:
***
(b) Minimize the long-term cost of reliable water service to water customers.
(c) Provide appropriate incentives to water utilities and customers for conservation of water resources.
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(f) Be based on the cost of providing the water service including, to the extent consistent with the above policies, appropriate coverage of fixed costs with fixed revenues.
58 Public Participation Hearing, June 24, 2009, Fontana, CA, RT 39:25-40:31.
59 Public Participation Hearing, June 25, 2009, El Monte, CA, RT 129:4-21.
60 See California Code of Regulations, Title 23, Section 697, Chapter 2, Article 5, cited in DRA Exhibit 106 at 12:line14-14:line 13.
61 Without an accounting mechanism, water conservation programs can reduce sales to a point where costs cannot be recovered, impacting the finances of the water utility. A WRAM allows positive and negative variances to be later collected from or refunded to ratepayers.
62 SG Exhibit 1 Revised at 5:line 26-6:line 15.
63 See D.08-02-036 at 25 (Suburban), and D.08-08-030 at 22 (San Jose).
64 DRA Exhibit 101 at 35:line 1-36:line 3. DRA adds conditions at 38:line 1-40:line 7.
65 Unlike a Monterey-styled WRAM, a full WRAM adjusts for all variances from an adopted sales forecast, without regard to whether the variances are due to conservation efforts. Full WRAMs were adopted for three Class A water companies (California Water Service Company, Park Water Company, and Golden State Water Company) in Phase 1 of the Water Conservation OII. In its Direct Testimony at 6:line 1-line 15, San Gabriel criticized full WRAMs for their alleged tendency to cause "artificial rate swings in future years," an outcome that it claims "muddles any intended price signals and conflicts with the conservation objective."
66 Reply Brief of San Gabriel at 24-25.
67 Reply Brief of DRA at 6. DRA earlier had indicated, however, that a WRAM/Modified Cost Balancing Account mechanism should be considered as an alternative in the event there was any move toward combining a limited WRAM with a revenue shortfall tracking account. See DRA Exhibit 101 at 36:line 14-37:line 7.
68 Full cost balancing accounts track all cost variances. They track the monthly difference between actual cost x actual quantity and the authorized cost x forecasted quantity of purchased water, purchased power or pump taxes.
69 Incremental balancing accounts track variances in costs due to supplier price changes but not variances resulting from the water supply mix. They track the monthly difference between the actual cost x actual quantity and the forecasted cost x forecasted quantity of water sold.
70 SG Exhibit 1 Revised at 6:line 27-8:line 2.
71 DRA Exhibit 101 at 40:line 9-43:line 3.
72 SG Exhibit 1 Revised at 8:line 13-line19.
73 Ordering Paragraph 13 of D.08-06-022 at 73.
74 DRA Exhibit 101 at 44:line 8-line 21.
75 SG Exhibit 1 Revised at 9:line 11-line 19.
76 A.07-08-017 (D.08-08-018) for FWC and A.07-07-003 (D.08-06-022) for LAC.
77 DRA Exhibit 103 at 3.
78 DRA Exhibit 101 at 50:line 21-53:line 15.
79 Id. at 53:line 16-55:line 17.
80 DRA Exhibit 101 at 57:line 5-line 13.
81 RT 194:28.
82 SG Exhibit 1 Revised at 9:line 29-10:line 2.
83 Id. at 4:line15-line 19.
84 DRA Exhibit 101 at 58:line 9-line 12, asking for the data to be presented at the next GRC for each division in a specific format (at 58:line 16-59:line 14).
