5. Motion for Memorandum Account
5.1. Arguments of San Gabriel and DRA
San Gabriel has moved for authorization to open a memorandum account "to track and potentially recover in a future general rate case [costs] limited to the outside attorneys' fees, costs of providing public notices, travel costs, and other `out-of-pocket' costs that would not have been incurred had San Gabriel not been required to pursue this water conservation rate design application."118
San Gabriel cites as precedent the allowance of memorandum accounts in D.08-02-036 at 46, for all Class A water companies to cover the costs of participation in the Investigation to Consider Policies to Achieve the Commission's Conservation Objectives for Class A Water Utilities, I.07-01-022 (Water Conservation OII).119 Included in San Gabriel's request are "costs of preparing and filing [the A.08-09-008 Application], or at least to the extent of costs incurred since that application was filed in [sic] September 10, 2008."120 San Gabriel argues that its request meets five conditions established previously for memorandum accounts.121
In response, DRA argues that San Gabriel's "late stage" request should have been made earlier in the context of the regulatory expense budget at a GRC; that it comes too late to be the subject of discovery and evidentiary hearings; that it does not meet the conditions for memorandum accounts described in Resolution W-4276, D.02-08-054, and D.04-06-018; that it is distinguishable from the circumstances underlying the memorandum accounts authorized in the Water Conservation OII; and that it runs counter to the prohibition against retroactive ratemaking (Pub. Util. Code § 728).122
5.2. Analysis and Discussion
There has been pending before this Commission a proposed decision123 that would affirm, after rehearing, D.08-02-036's approval of a memorandum account for all Class A water utilities to track legal and related expenses incurred in the Water Conservation OII proceeding. We find that the approval of memorandum accounts in the OII proceeding is not controlling here as there are material differences on the merits between that situation and this.
San Gabriel did request that its application be consolidated with the pending OII,124 something that the Commission itself had earlier posed as a possibility.125 That request was not granted. Had it been, San Gabriel would have gained the advantage of the Commission's generic authorization in the OII of memorandum accounts for all the Class A water utilities incurring costs of participation in the OII.126 Reasonable bases existed for the Commission choosing not to consolidate the instant proceeding into the OII. Phase 1B of the OII, involving five settlements, went to hearings and resulted in D.08-08-030 issued on August 25, 2008. San Gabriel filed its application on September 10, 2008, placing it out of sync with the progression of the OII that was moving on into Phase 2, a quasi-legislative stage of the proceedings dealing with non-rate-design conservation measures. Unlike the instant proceeding, Phase 1 of the OII involved an accession of multiple parties, including five consumer groups, considerable controversy, and extensive settlement negotiations that extended the proceedings. Also, the authorization of a memorandum account there extended only to expenses related to settlement negotiations and litigation of the consolidated applications after the issuance of the OII, unlike the application preparation expenses sought by San Gabriel here.
San Gabriel waited eleven months after filing its application, and until two weeks before the evidentiary hearing, before filing its motion for a memorandum account. 127 We have considered the equities surrounding San Gabriel having lost the memorandum-account benefit that consolidation would have brought the company. After taking into account the timing of San Gabriel's application and its motion, and of differences between the OII proceeding and the instant one, we conclude that the equities, on balance, weigh against San Gabriel gaining the advantage of the approval of memorandum accounts in the OII proceeding.
5.2.2. Motion in this Proceeding
5.2.2.1. Purposes of Memorandum Accounts and Conditions for Their Authorization
A memorandum account allows a utility to track costs arising from events that were not reasonably foreseen in the utility's last GRC. By tracking these costs in a memorandum account, a utility preserves the opportunity to seek recovery of these costs at a later date without raising retroactive ratemaking issues. However, when the Commission authorizes a memorandum account, it has not yet determined whether recovery of booked costs is appropriate, unless so specified.
We have not applied a fixed set of factors in determining whether to establish memorandum accounts for water utilities. Some of the factors we have considered were articulated in Resolution No. W-4276, D.02-08-054, and D.04-06-018, as DRA notes. In Standard Practice U-27 W, paragraphs 25 and 44 contain similar lists of factors. Even when the Commission has applied these factors, it has not always applied all of them or required that they all be met before authorizing a memorandum account. Thus, at different times, the Commission has considered all these factors, considered only some of these factors, or relied on other public policy considerations in determining whether to authorize a memorandum account. Regardless of the specific factors considered, the question presented to the Commission in all instances is whether a utility should be permitted to seek recovery of these costs at a later date without encountering retroactive ratemaking issues.
We find the factors identified first in Resolution No. W-4276 (also in D.02-08-054 and D.04-06-018) useful in considering San Gabriel's request. In that resolution, the Commission described that memorandum accounts are appropriate when the following conditions exist:
· The expense is caused by an event of an exceptional nature that is not under the utility's control;
· The expense cannot have been reasonably foreseen in the utility's last GRC and will occur before the utility's next scheduled rate case;
· The expense is of a substantial nature in the amount of money involved; and
· The ratepayers will benefit by the memorandum account treatment.
As explained below, we find that San Gabriel's request is not consistent with these factors. We therefore deny San Gabriel's memorandum account motion.
5.2.2.2. First Factor: "Caused by an event of an exceptional nature that is not under the utility's control"
San Gabriel rightly asserts that the filing of the instant application was mandated by the Commission.128 To that extent this proceeding certainly is "not under the utility's control." But are the doings of this compulsory proceeding "events of an exceptional nature"? San Gabriel believes so, arguing in part that "[r]ate design is normally addressed in periodic general rates [sic] cases, as specified in the Rate Case Plan (D.07-05-062)."129 DRA counters that compulsory filings are not exceptional at the Commission, particularly when compared to something like the "rolling blackouts of 2001."130
By mid-2008 there had been numerous actions by the Commission reflecting our policy of promoting water conservation among the Class A water IOUs.131 Increasing block rates were among the mechanisms identified in the Commission's WAP in late 2005. The January 2007 Water Conservation OII sought comments on increasing block rates. In August 2007 San Gabriel applied for authority to implement WAP features in its FWC division, prevailing in a Commission decision in August 2008. Against this backdrop, we find that a compulsory proceeding to authorize a conservation rate design and related accounts is not an event of an "exceptional nature."
5.2.2.3. Second Factor: "Cannot have been reasonably foreseen in the utility's last general rate case and will occur before the utility's next scheduled rate case"
San Gabriel contends that nothing in the record of the 2007 LAC and General Office GRC, nor in the later 2009-2010 FWC Test Year proceeding, made the prospect or expense of a conservation rate design proceeding reasonably foreseeable.132 DRA disagrees, stating that San Gabriel should have anticipated the expense as a regulatory expense either in the FWC GRC application filed on July 1, 2008, 17 days after the June 13, 2008 Commission order requiring the filing of a conservation rate design application, or within the 45-day period allowed for updating the GRC.133 DRA argues that the costs San Gabriel seeks to track in a memorandum account may have been covered by the regulatory expenses authorized by the Commission, which would make them "incremental to costs already included in rates."134
Unquestionably, San Gabriel's out-of-pocket expenses for participation in this proceeding will occur before the July 2010 LAC GRC and the July 2011 FWC GRC, satisfying the latter element of this second factor. As noted in the discussion above of the first factor, the 2005 Water Action Plan and 2007 Water Conservation OII provided notice of the Commission's intention to implement water conservation policies.
The issue is whether that notice made the prospect or expense of a conservation rate design proceeding reasonably foreseeable as of the July 2007 LAC GRC and/or the July 2008 FWC GRC (or within the 45 days after those dates that is allowed for updating). Specifically, would it have been reasonably foreseeable at those times that such an expense would be required before the end of the relevant triennial GRC cycle, i.e., before July 2010 as to LAC and before July 2011 as to FWC?
We conclude that such an expense was not reasonably foreseeable at the juncture of the July 2007 LAC GRC. The trajectory and timing of the Commission's commitment to conservation rate designs was not as clear then as it was a year later in July 2008 when, in our judgment, such an expense was reasonably foreseeable.
Thus, this second factor is met in relationship to LAC but not in relationship to FWC.
5.2.2.4. Third Factor: "Expense is of a substantial nature as to the amount of money involved"
San Gabriel revised its out-of-pocket cost estimate for the instant proceeding from $150,000 to $200,000, having concluded that either figure qualifies as "substantial' and far exceeds the "less than $15,000 per year" that it contends are reflected in rates for "non-GRC regulatory expense."135 Applying a "significant expense" standard of "equal to or greater than 1% of test year gross revenues," DRA calculated that the initial cost estimate of $150,000 fell short because it represented only 0.14% of San Gabriel's total revenue requirement.136 Using the standard proposed by DRA (that an expenditure less than 1% of the total revenue requirement is insubstantial for purposes of this factor), the $200,000 estimate would fall short as well.
The Commission has considered a substantiality threshold of 2% of the estimated operating costs in a previous proceeding.137 Under that standard, the $200,000 estimate would be only 0.7% of the estimated operating costs in FWC and 0.6% in LAC, and would not be a substantial amount.
We do not need to choose between particular quantitative percentage standards for substantiality in this instance. With the 1% of revenue requirement and 2% of estimated operating costs measures as informative reference points against which to test our judgment, we find, apart from those reference points, that in the context of San Gabriel's total operations the expense sought to be tracked and ultimately recovered is not of a substantial nature.
5.2.2.5. Fourth Factor: "Ratepayers will benefit by memo account treatment"
San Gabriel sees a benefit for the ratepayer in the fact that the expenses tracked in a memorandum account are actual costs and that those costs are recoverable from ratepayers only after a reasonableness finding, compared to forecasted costs under which the ratepayers generally pay earlier and "may either pay more or less than what the utility incurred."138 DRA repeats its position that San Gabriel fails to show that the expenses are not already recoverable in current rates within already-GRC-approved regulatory expense budgets; further, it cites conduct of San Gabriel in the instant proceeding that it alleges has not benefited ratepayers.139
We are not persuaded by San Gabriel's arguments. Reasonableness review is a safeguard140 that must precede cost recovery in connection with memorandum accounts. As an implicit ratepayer benefit, such review cannot be used as a bootstrap to satisfy the fourth factor which is designed to test the merits of each proposed memorandum account on a case-by-case basis. San Gabriel's further argument that ratepayers can benefit under memorandum account cost recovery, compared to forecasted cost recovery, by paying less and by paying later is speculative in part and does not take into account that within the forecasted-to-actual cost timeline some ratepayers may benefit and others may not from deferred payment.
San Gabriel has not established that its requested memorandum account would benefit ratepayers.
As described above, San Gabriel's request for a memorandum account is consistent with only a portion of the second of four factors that we use to assess the request. The prospect or expense of this conservation rate design proceeding was not reasonably foreseeable at the time of the July 2007 LAC GRC. However, we find that the proceeding is not an event of an exceptional nature, and that the expense is not of a substantial nature. Further, San Gabriel has not established that ratepayers would benefit by the requested memorandum account treatment. For these reasons, we deny San Gabriel's request.
Although we deny the motion for a memorandum account, we do want to express our belief that a clear, itemized, record needs to be developed in water company rate cases concerning forecasted expenses that may also be proposed for recovery later by a memorandum account. In the face of a request for a memorandum account, the claims and counterclaims over whether an expense is or is not covered by existing rates adopted in a previous rate case are difficult to resolve if relevant facts either are lacking in a record or reside in a settlement which did not fully define the allocated revenue requirement. Going forward, we will be expecting as well developed a record in water company rate cases as practicable in this regard.
118 Motion of San Gabriel Valley Water Company for Authority to Open a Memorandum Account, filed August 14, 2009 at 1. See, also, Comments of San Gabriel Valley Water Company in Support of Motion for Authorization to Open a Memorandum Account, filed September 25, 2009.
119 Id. at 1-4.
120 Id. at 9.
121 San Gabriel's Motion for Authority to Open a Memorandum Account at 5, cites and quotes five factors enumerated in para. 25 of Standard Practice U-27-W.
122 The Division of Ratepayer Advocates' Response to the Motion of San Gabriel Valley Water Company for Authority to Open a Memorandum Account, filed August 31, 2009. See, also, Reply Comments of the Division of Ratepayer Advocates Opposing San Gabriel Valley Water Company's Motion for Authorization to Open a Memorandum Account, filed October 27, 2009.
123 See Proposed Decision of ALJ Janice Grau, mailed January 26, 2010.
124 Application at 5, para. 12.
125 D.08-06-022 at 73, Ordering Paragraph 13, indicating that the conservation rate design application that it was ordering San Gabriel to file "may be consolidated with Investigation 07-01-022."
126 D.08-02-036 at 45-47 and 56-57 (Ordering Paragraph 5).
127 San Gabriel could have filed an advice letter under Standard Practice U-27-W shortly after it filed its application in this proceeding.
128 Ordering Paragraph 13 of D.08-06-022.
129 Comments of San Gabriel Valley Water Company in Support of Motion for Authorization to Open a Memorandum Account at 3.
130 The DRA's Response to the Motion of San Gabriel Valley Water Company for Authority to Open a Memorandum Account at 5, fn. 7.
131 See discussion at in Section 2.1 above.
132 See Motion of San Gabriel Valley Water Company for Authority to Open a Memorandum Account at 7-8, and Comments of San Gabriel Valley Water Company in Support of Motion to Authorization to Open a Memorandum Account at 4-7.
133 See The Division of Ratepayer Advocates' Response to the Motion of San Gabriel Valley Water Company for Authority to Open a Memorandum Account at 5.
134 Id. at 5-6.
135 See Motion of San Gabriel Valley Water Company for Authority to Open a Memorandum Account at 8, and Comments of San Gabriel Valley Water Company in Support of Motion for Authorization to Open a Memorandum Account at 8.
136 The Division of Ratepayer Advocates' Response to the Motion of San Gabriel Valley Water Company for Authority to Open a Memorandum Account at 6, fn. 12, quoting the Rate Case Plan, authorized in D.07-05-062, that states: "A significant expense is equal to or greater than 1% of test year gross revenues," at A-22, Section II.A.1., fn. 3. We note, for context, that cite requires a water utility to submit GRC testimony explaining "significant changes between last adopted figures and recorded amounts."
137 In D.02-07-011, involving a request for a security memorandum account at 7, the Commission stated:
Here, we find that the additional expenditures are not clearly required (at least on the bases cited by Cal-Am) and constitute less than 2% of the projected operating costs. Our ratemaking assumes that utility management can and will reassess its priorities to deal with developments of this magnitude. Specifically, Cal-Am may utilize management discretion to allocate funds for capital and expense items to those areas where the expenditure is most necessary, and also to attain its authorized rate of return.
San Gabriel's 2008 annual report revealed a combined operating expense for the two divisions of $58.8 million. San Gabriel's expense estimate of $200,000 is far less than 1% of that combined operating figure.
138 Comments of San Gabriel Valley Water Company in Support of Motion for Authorization to Open a Memorandum Account at 8.
139 The Division of Ratepayer Advocates' Response to the Motion of San Gabriel Valley Water Company for Authority to Open a Memorandum Account at 7-8.
140 See General Order 96-B, Water Industry Rule 1.8; also, Standard Practice U-27-W (Revised May, 2008) at para. 28: "Advice letter memo account recovery requests require an earnings test and proof of reasonableness."
