4. Analysis and Resolution
4.1. Conservation Rate Design
The conservation rate design adopted in this decision is a procedural methodology in which the parameters of service charge-to-quantity charge ratios, number of pricing tiers and the rate differentials between tiers are determined, but specific rates are not. Specific rates are not calculated because they are dependent on revenue requirements that have been changing during the course of the proceeding and are expected to change further before the conservation rate design takes effect on July 1, 2010. The methodology, composed of nine sequential steps, is set out in Figure 1: Conservation Rate Design Procedure.
Figure 1: Conservation Rate Design Procedure
1. First, calculate division-wide rates by traditional rate design procedures (Standard Practice U-07-W, para. 11) to obtain uniform rates, using GRC-adopted customers and sales quantities and GRC-adopted revenue amounts (as adjusted by subsequently effective advice letters) for the time period during which the proposed rates will be charged. 2. Convert the resulting low-income discount (50% of the service charge according to the CARW customer's meter size) into the dollar amount to apply 3. Calculate the amount of any required BMP 1.4 revenue shift from the monthly Service Charges to the Quantity Rates, based on the Commission-adopted targets. [This decision sets these targets as at least 64.6% of the adopted revenue requirement collected from the quantity revenues for the LAC division and at least 72.03% of the adopted revenue requirement collected from the quantity revenues for the FWC division.] 4. Add the dollar amount of the required BMP 1.4 revenue shift determined under Step No. 3 to the adopted Residential Quantity Rate Revenue used in Step No. 1. 5. Calculate the Single (uniform) Quantity Rate to be used in the Water Revenue Adjustment Mechanism calculation for residential customers by dividing the dollar amount developed in Step No. 4 by the Adopted Annual Residential ccf Sales used in Step No. 1. 6. Segregate the Adopted Annual Residential ccf Sales between the two rate tiers using the adopted percentages. [This decision finds that 55% of the adopted ccf sales quantities will be in the 1-13 ccf/mo. first tier for the LAC division and that 57% of the adopted ccf sales quantities will be in the 0-16 ccf/mo. first tier for the FWC division.] 7. Using the adopted tier 1/tier 2 rate differential, develop tier 1 and tier 2 Quantity Rates for residential customers that are designed to produce the exact same revenues as those produced by the uniform quantity rate determined in Step No. 5. [This decision sets the tier 1/tier 2 rate differential at 15%] 8. Subtract the dollar amount of the required BMP 1.4 revenue shift determined under Step No. 3 from the adopted revenue requirement collected from the service charge for Residential customers. 9. Develop monthly service charges by meter sizes for residential customers by dividing the service charge revenue calculated in Step No. 8 by the adopted number of residential services. (This monthly service charge will be calculated by taking the service charge derived from the Adopted Residential Revenue Requirement multiplied by one minus the required BMP 1.4 percentage revenue shift and multiplying this product by Commission-adopted meter ratios to develop service charge rates for each meter size.) |
We find San Gabriel's proposed steps toward the minimum CUWCC revenue ratio of 30:70 (service charge: quantity charge) to be too modest and DRA's proposed realignment of service85 and quantity charges to be excessive.
The reduced monthly service charge figures86 will be calculated to result in a service-charge-to-quantity-charge ratio87 of 28:72 in FWC, exceeding the BMP 1.4 minimum standard (30:70), and of 35:65 in LAC,88 moving toward but not reaching that standard. The movement from a 38:62 ratio to 28:72, slightly surpassing the CUWCC 30:70 threshold, is reasonably achievable in one step and will further the water conservation objectives of the Commission. The shortfall for LAC is justifiable in this pilot conservation rate design due to the considerable distance, from 46:54 to 30:70, that the LAC rate design has to travel. The incremental step authorized here for LAC is reasonable in light of that gap. We will expect, however, to see San Gabriel reach, if not exceed, the 30:70 ratio in its 2010 GRC rate plan for the LAC division. While we are only changing the rate design for residential customers, that change causes a change in the overall ratio that comprehends all customers, residential and non-residential.
As discussed above, San Gabriel prefers a two-tier, and DRA a three-tier, rate design. The percentage difference in rates between the two tiers in San Gabriel's proposal is 10. Rather than relying on customer usage data from within its own divisions, San Gabriel borrowed its breaking points, 20 ccf for each division, from the rate design of Suburban Water Systems,89 an approach that DRA criticized and that we discourage.
In DRA's proposal for FWC, the percentage difference between tiers 1 and 2 is 12, and between tiers 2 and 3 is 30; for LAC the percentage difference between tiers 1 and 2 is 29, and between tiers 2 and 3 is 46. We find the DRA proposal to be imbalanced. DRA's proposal would reduce a larger number of residential bills by placing an extraordinarily higher burden on the highest tier, benefitting to an unreasonable extent those customers situated exclusively in tier 1. We do not find an adequate record to resolve the issue, posed by DRA's proposal, whether tier 1 customers whose bills would be less than before would have an incentive to use less or more water.90
In lieu of adopting any of the two rate designs preferred by San Gabriel and DRA, respectively, or any of the two alternate tiers designs posed by them in response to the ALJ's request, we adopt a two-tier conservation rate design without seasonal rates, with a 15% differential between tiers for each division, with different water-usage breaking points approximating median winter water use91 between tiers 1 and 2, for FWC and LAC. A differential of 15% lies within the percentage used in the conservation rate designs adopted by the Commission for Class A water companies to date92 and strikes a reasonable balance between a differential that would provide too little and one that would provide too aggressive an incentive for reducing consumption. The specific rates for each tier in each division are to be calculated using the Conservation Rate Design Procedure provided in Figure 1. In developing the illustrative examples of tiered rates in Table A of the Attachment, we utilized data from DRA worksheets.93
In FWC, the quantity rates will be calculated for tiers 1 and 2, respectively, with the breaking point between the tiers at 16 ccf. Approximately 57% of the sales for residential bills are expected to come from tier 1 and 43% from tier 2.94
In LAC, the quantity rates will be calculated for tiers 1 and 2, respectively, with the breaking point between the tiers at 13 ccf.95 Approximately 55% of the sales for residential bills are expected to come from tier 1 and 45% from tier 2.96
We adopt this particular increasing block design for several reasons. It is founded on median winter water use which is a rough measure in residential settings of indoor water use that, in turn, tends to be less discretionary than outdoor water use. This means that usage within tier 2 has a greater potential than tier 1 for reduction in response to a higher price signal. We conclude that a pilot two-tier increasing block residential conservation rate design is superior to a three-tier design for the FWC division and the LAC division due to its comparative simplicity, ease of implementation and capacity to capture conservation potential without unduly burdening a small segment of customers.
Following the Conservation Rate Design Procedure set out in Figure 1 should assure revenue neutrality in the conservation rate design. The proposed rate design is revenue neutral in that the revenue derived through the tiered rate design equals the revenue derived through a uniform rate design. Also, when the Commission's most recent adopted revenue requirement is used as an input to this rate design model, the model will calculate the proper increasing block rates and will be revenue neutral.
In addition to its immediate proposal, DRA is also urging that AIC should become "a guideline in future rate designs" concerning San Gabriel.97 DRA may be viewing this proceeding as a suitable vehicle to begin a Commission initiative applying long-run marginal cost pricing to Investor-Owned Utility (IOU) water rate setting similar to what has been done for some years in IOU energy rate setting. Long-run marginal cost has not been an overt factor in the conservation rate designs adopted within the aegis of the Water Conservation OII.
We do not utilize marginal cost pricing, short- or long-run, in the rate design adopted in this decision for two reasons. First, we do not find the estimation of capital expansion offered in this proceeding to be persuasive. There was not sufficient evidence that the estimation of capital expansion -- the bringing on line of a new well in each of the divisions -- was based on a realistic projection of supply and demand forecasting or a comparative analysis of either potential capital projects or potential non-capital projects. Second, we think that the application of marginal cost pricing, using the AIC methodology, to IOU water ratesetting raises a host of technical and policy issues best addressed in either a rulemaking proceeding or a larger Class A GRC.98 To embark on a new departure of the magnitude sought by DRA, without extensive study and deliberation, simply would not be prudent.
CFC contends that "[c]harging conservation rates to only one class is discriminatory" and that it is "also discriminatory to fix rates without any evidence of the cost of serving each class."99 Since application of the Conservation Rate Design Procedure (Figure 1) will assure revenue neutrality, meaning that the revenue generated by each class of customers will not change under this decision, there is no sound basis for CFC's discrimination argument.100 CFC's efforts, based on Pub. Util. Code § 701.10(f),101 to postpone water conservation rate implementation until cost of service studies are conducted were rejected by the Commission in Phase 1 of the Water Conservation OII.102 The proper juncture and forum for consideration of cost of service is the GRC, where all the costs of utility operation, as well as the allocation of those costs among customer classes, are considered. For that reason we deny CFC's request to postpone action on a conservation rate design.
To avoid the inequity that would occur from applying tiered conservation rates to apartments and trailer parks, we agree with the promise already offered by San Gabriel that those rates should not be so applied. San Gabriel must vigilantly maintain customer classification and reclassification records so that those types of customers are properly identified and fairly charged.
An unfair impact upon large, extended or multi-family households does not appear likely under the adopted two-tier rate design. Using the lower figure of gallons-per-day (gpd) reasonable domestic use (55 gpd per person), a household of seven in FWC and of five in LAC would not cross over into the second tier. At the higher usage figure (75 gpd) that defines the end of the upper range of reasonable domestic usage, a household of five in FWC and of four in LAC would not cross over into tier 2.103 Under both examples, of course, greater than median winter use, as occurs with landscape irrigation, could move households of any size into tier 2. At the mid-2010 (LAC) and mid-2011(FWC) GRCs, San Gabriel should summarize incidences, if any, of apparent unfair impact upon large, extended or multi-family households due to the two-tier rate design. In the interim, the Commission plans to address the subjects of "household size and other socio-economic characteristics of customer household composition," among others, in a workshop in Phase 2 of the Water Conservation OII.104
4.2. Water Revenue Adjustment Mechanism
The rate designs adopted in this decision for FWC and LAC have a limited, "Monterey-style" WRAM such as authorized for Suburban Water Company and San Jose Water Company.105 We authorize that style of WRAM here for San Gabriel's divisions, following the primary proposals of both San Gabriel and DRA in that regard.106 This revenue adjustment mechanism will track the difference between revenue San Gabriel receives for actual metered sales through the tiered volumetric rate and the revenue San Gabriel would have received for the same amount of water if it were sold under uniform, single quantity rates.107 This ensures that San Gabriel will have no change in revenue per unit of water sold as a result of adopting conservation rates compared to revenues it would have had under a uniform rate design.
Commencing in 2011, San Gabriel shall include in its annual report to the Division of Water and Audits a report on the revenue over- or under-collected relative to water sales at single quantity rates in each of the two ratemaking divisions during the preceding calendar year by March 31 of the following year. That difference will accrue interest at the 90-day commercial rate. If the WRAM over- or under-collection for any ratemaking area exceeds 2% of that area's total authorized revenue requirement for the preceding calendar year, a tier 1 advice letter108 is to be filed within thirty days by San Gabriel that requests amortization of the balance in the account, which relates only to the residential class of customers. If the percentage is 2 or less, the account balance is to be amortized in the next GRC.
4.3. Balancing Accounts
There is a sound basis for retaining full cost balancing accounts in the FWC division and incremental cost balancing accounts in the LAC division, and we do so here. The Commission approved full cost balancing accounts for the FWC division in 2004 because "both water production and power supply costs are subject to wide variations and the supply mix is determined by hydrological conditions that are beyond San Gabriel's ability to predict or control."109 Those conditions do not appear to have changed for the better. Drought conditions continue to highlight the supply uncertainties and variabilities inherent in FWC's lower cost source, Lytle Creek surface water. Tracking all cost variances, including those prompted by actual quantities, of purchased water, purchased power and pump taxes, is therefore warranted for that division.
While San Gabriel has expressed an interest in also having full cost balancing accounts for its LAC division,110 which relies on a changeable operating safe yield of groundwater from the Main San Gabriel Basin, an adequate record was not established here for such a change. Incremental cost balancing accounts, tracking variances in cost due to supplier price changes, will be retained for the LAC division.
4.4. Conservation Memorandum Accounts
San Gabriel followed the Commission's earlier order when it requested conservation memorandum accounts in its September 2008 application that commenced this proceeding.111 We do not find a compelling basis in the record, however, for such accounts. San Gabriel has had running balances in the conservation budgets in both divisions112 that appear sufficient to support expected and unexpected expenses for the public outreach and education programs. Given the relatively low rate of spending and the unspent balances, no indication of any planned expansion in the public outreach and education programs,113 and our sense of the scale of implementation costs associated with the pilot conservation measures in this decision, San Gabriel has not established that the expenditures that would be tracked in the memorandum accounts requested would be of a substantial nature. The request for conservation memorandum accounts is denied.
4.5. Public Outreach and Education
San Gabriel is not asking for authority to expand the public outreach and education programs described in its WAP conservation applications approved by the Commission in 2008. We support San Gabriel's stated intent to gather relevant water conservation ideas from other southern California water agencies and to further implement its existing water conservation programs. We believe that the unspent balances in the GRC conservation budgets can cover the costs of the programs going into the next GRC cycles.
During this proceeding, San Gabriel agreed to DRA's suggestions114 and began to pursue a number of no-cost or low-cost opportunities for educating customers that DRA has suggested.115 We encourage San Gabriel to continue those efforts.
4.6. Low-Income Features
In D.05-05-015, the Commission authorized San Gabriel to implement a rate relief program for the low-income ratepayers in its FWC and LAC divisions. This CARW program currently provides a discount of 50% of the service charge for qualifying customers. For example, this equates to a current dollar discount of $8.43116 per month for qualifying customers in the FWC division, and $10.02117 per month for qualifying customers in the LAC division, based on the unique service charges currently authorized for each division for a residential customer with a 5/8" x ¾" meter.
With the Commission's reduction of the service charge as part of its implementation of water conservation rate design, unless some alternative form of the authorized CARW discount is determined, qualifying customers in the FWC and LAC divisions would receive a lower discount than has previously been authorized. In order to maintain the same dollar discount currently authorized for qualifying San Gabriel customers with 5/8" x ¾", ¾", and 1" meters, we authorize in each division a CARW discount equivalent to 50% of the residential service charge under traditional rate design. This avoids any loss of benefit that would result from applying the existing percentage discount. In the next GRC, San Gabriel shall propose a new method for determining CARW discounts that results in a discount comparable to that which qualifying customers received in the last GRC for that division, independent of the amount of the authorized service charge.
4.7. Reporting Requirements
San Gabriel has highlighted the apparent fact that multiple and largely unquantifiable factors, not solely price signals, underlie any pattern of reduced residential water consumption. Data currently either do not exist, or are not in a usable format, for either San Gabriel or the Commission to quantify and weigh the influence of factors such as the weather, evapo-transpiration, household size, outdoor plant mix, landscape footprint, customer income and conservation education. The time and cost of designing and implementing a long-term pilot to gain a better handle on factors that may influence consumption would be prohibitive at this juncture. While this uncertainty prevents a reliable determination of the relative contribution made by price signals to reduced consumption, it should not prevent an effort to collect the most accessible data on water usage as is practicable at this time.
San Gabriel shall provide the following information in the GRC filing in July 2011 for FWC and July 2013 for LAC:
· Monthly per customer or service connection changes in consumption (compared to the same month in the previous year) by ratemaking division, separated by meter size and customer class, following the implementation of the conservation rate design pilot program;
· Surcredits and surcharges by ratemaking division and customer class implemented in amortizing WRAMs;
· Meter-reading errors, by division, that cause an unjustified crossing of tiers or retention within tiers;
· Number of low-income program participants disconnected for nonpayment by ratemaking division for two years before adoption of conservation rate design and for each year after that adoption;
· Number of residential disconnections for nonpayment by ratemaking divisions for two years before adoption of conservation rate design and for each year after that adoption; and
· Any other ratemaking division-specific factor that might contribute to consumption changes and an estimation of its impact.
As discussed above in Section 4.2 San Gabriel is to make WRAM-related reports within its annual reports.
San Gabriel shall track significant changes in the cost of purchased water and make a showing in its 2011 GRC for FWC and 2013 GRC for LAC that it has exercised due diligence in ensuring the least-cost mix for its water sources and that any significant change in water purchases was reasonable.
4.8. Effective Date
The effective date for the conservation rate design and associated features shall be July 1, 2010, as recommended by San Gabriel and DRA.
85 In this proceeding DRA has sought to apply the 30:70 ratio using customer class quantity revenue, not total quantity revenue (residential and non-residential) as provided in BMP 1.4. We find that approach to be too aggressive for this pilot conservation rate design.
86 Table B of the Attachment provides illustrative examples, based on recent but now inapplicable revenue requirement data, of monthly service charges for all residential meter sizes.
87 Unless otherwise indicated, the components of ratios shown in this decision are rounded to the closest two digits.
88 Not rounded, those respective ratios are 27.97:72.03 for FWC and 35.40:64.60 for LAC. See Table 1.
89 SG Exhibit 2 at 13:line 1-line 5.
90 See, e.g., Opening Brief of the DRA at 14.
91 Reliance is placed here on the median winter water usage calculations done by DRA, explained in its Exhibit 101 at 27:line 7-line 23, and embodied in the break points between tiers 1 and 2 of its preferred three-tier proposal and alternative two-tier seasonal proposal (see Table A in Attachment to this decision).
92 See SG Exhibit 2, at Table D, Summary of Adopted Conservation Rates.
93 Worksheets 1 and 2 for FWC and LAC, respectively, in Appendix D of DRA Exhibit 101 as revised by DRA Exhibit 102.
94 Using 2003-2008 as a base period and applying the 16 ccf break point, the respective percentages are 56.75% and 43.25%.
95 Over the years 2003-2008 the average monthly residential use was 25 ccf for the FWC division, and 20 ccf for the LAC division. DRA Exhibit 101 at 14, Table 1, and 15, Table 2.
96 Using 2003-2008 as a base period and applying the 13 ccf break point, the respective percentages are 55.08% and 44.92%.
97 DRA Exhibit 101 at 22:line21. DRA specifically calls for San Gabriel to be required to provide an AIC estimate in the next GRC: "The sources for potential capacity expansion should all be considered, and those which have the highest expected costs should be used to estimate the AIC." Id. at 23:line15-line18. Because the Commission has not embarked on a Class-A-wide policy of promoting marginal cost pricing, no such requirement is imposed here.
98 Our refusal to adopt marginal cost pricing here does not mean that it is without merit or should be irrelevant in the Commission's future setting of water rates. Marginal cost pricing employing the AIC methodology has been promoted by the CUWCC, a recognized authority cited by DRA and relied upon by the Commission in the formulation of its WAP and by the Legislature in its most recent enactment on water conservation, e.g., § 10608.43, California Water Code.
99 Opening Brief of the Consumer Federation of California at 5.
100 CFC does not find comfort in "single point in time" revenue neutrality, arguing that the response of residential customers to price signals will result in a lessening of the cost of serving them, with the cost of serving other customers remaining the same. This concern goes to the allocation of the revenue requirement among customer classes, a proper subject at a triennial GRC where customer classes are considered in the course of adopting an overall rate design for the water company. The Monterey Style WRAM corrects for the difference between revenue collected under conservation rates and revenue that would have been collected for the same amount of water if it were sold under uniform rate design. Similar to the Commission standard rate design, the utility is at risk for lost revenues from decreased sales (no guarantee the utility will recover adopted fixed cost). Conversely, the utility keeps excess revenues from increased sales.
101 "The policy of the State of California is that rates and charges established by the commission for water service provided by water corporations shall ...
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(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."
102 See D.08-02-036 at 6-7 and 12-13. The Commission at 12, did indicate that the "reductions in consumption we finalize at the conclusion of Phase 2 shall apply to all customer classes." See, also, following an application for rehearing, D.09-06-053 at 12-16.
103 See California Code of Regulations, Title 23, Section 697, Chapter 2, Article 5, as cited in DRA Exhibit 106 at 12:line14-14:line 13, for source of the 55 to 75 gpd range. Section 697 is cautionary, however: "Allowances for domestic use are variable, depending upon the character of the place of use, method of use, character of use and availability of water." The household sizes provided in the text above were calculated by multiplying either the 55 or 75 gpd figure x 30 days, dividing 748 gallons (1 ccf) into that product and dividing that outcome into the break point between tiers 1 and 2 for each division.
104 Assigned Commissioner's and Administrative Law Judge's Ruling Setting Comments Pursuant to Decision 09-06-053 (Phase 1) and Second Amended Phase 2 Scoping Memo at 2.
105 See D.08-08-030 (San Jose Water Company), at 22-23, and D.08-02-036 (Suburban Water Systems) at 25.
106 Neither of the contingencies has occurred under which San Gabriel or DRA would favor, reluctantly as a fall back position, authorization of a full WRAM. See discussion at Section 3.2 above. We have not adopted a rate design that would likely cause revenue variability warranting consideration of a full WRAM.
107 The WRAM will track the actual water amount sold in a month and apply the single quantity rate to result in an adjusted revenue amount for that month. The difference between the adjusted revenue and the actual revenue will be reflected in the balancing account. The account will not track revenues recovered through the service charge. The single quantity rate that will serve as a baseline for the limited WRAM will be set effective July 1, 2010, based on the conservation rate design procedure adopted herein. For an example of the determination of single quantity rates, see the Motion of the Division of Ratepayer Advocates and San Jose Water Company to Approve Settlement Agreement from A.07-03-019, where a discussion on the single quantity rate occurs at 12-13, with a calculation at 14.
108 General Order 96-B (updated as of April 21, 2009), Water Industry Rule 7.3.3.
109 D.04-07-034 at 62, quoted in testimony of Dell'Osa at RT 200:24-201:13.
110 SG Exhibit 3 at 17:line 18-18:line10.
111 Ordering Paragraph 13 of D.08-06-022 at 73.
112 As of March 31, 2009, the unspent funds from the conservation budgets of FWC and LAC totaled a half million dollars. DRA Exhibit 101at 44: line 12-line 17. San Gabriel is in the process of refunding approximately 67% of the authorized conservation budget in the FWC division. RT 178:5-9; also, 192:20-22.
113 Rebuttal Testimony, SG Exhibit 3 at 20:line 1-line 8.
114 Rebuttal Testimony, Exhibit 3 at 20:line15-line 20:
DRA recommends several things, including: (1) adding the customer class to the monthly bill, with a call-in telephone number for questions and concerns, (2) including a website and telephone number to the monthly bills for requesting conservation information, and (3) adding links to the company's websites for wholesaler's information. San Gabriel agrees and has already begun to implement these recommendations.
See, also, Hearing Transcript at 171:line25-172:line 10.
115 Report, Exhibit 101 at 53:line 19-55:line 17.
116 Service Charge for 5/8" x ¾" meter of $16.85/2 = $8.425; Tariff Sheet 1903-W, D.09-06-027.
117 Service Charge for 5/8" x ¾" meter of $20.04/2 = $10.02; Tariff Sheet 1839-W, D.08-06-022.
