5. Discussion

The discussion in this section assumes the uncomplicated case where the construction of replacement plant does not begin until after the receipt and application of contamination proceeds. Under circumstances where planning and construction expenditures for replacement plant precede the receipt and application of contamination proceeds, an issue may be posed whether different and segregated accounting treatment needs to be given to the respective parts of replacement plant that precede and follow the receipt and application of those proceeds. In such a circumstance the Commission would need to address and resolve the issue on the basis of the facts before it. In these cases, the IOUs should request authorization through an advice letter filing to establish a memorandum account to record and maintain separate tracking, consistent with the Uniform System of Accounts (USOA), of all expenditures associated with the replacement plant, in addition to the regular USOA treatment of such expenditures.

We conclude that contamination-related local and federal grant proceeds should be treated for accounting and ratemaking purposes in a manner substantially the same as state grant proceeds were treated in D.06-03-015.70 In D.06-03-015 we hued to the principle of preserving the "public interest integrity" of public funds "by ensuring that investor-owned water utilities and their shareholders will not be able to profit in any way through the receipt of public funds."71 Finding no material difference between state grants on the one hand and local and federal grants on the other hand, we conclude that all government grants used to fund replacement plant should be accounted for as CIAC, except that one slight accounting change is in order.

The rules appended to D.06-03-015 designate an account numbered 266, rather than the 265 identified in the Uniform System of Accounts72 for water utilities for booking proceeds as CIAC. During the Workshop, a water utility representative noted that the relevant section of the California State Board of Equalization (BOE) Assessor's Handbook concerning CIAC associates the capitalization of property (utility asset) that has been funded through CIAC by Class A water companies only with Account 265. This has the normal effect of CIAC being assessed locally as having zero value for property tax purposes.73 While both CWA74 and TURN75 state that it is uncertain whether property taxes are charged when costs are recovered through surcharges, we conclude below that where replacement plant is paid by ratepayer funds and the Commission does not allow any return on that investment, the Board of Equalization would have no value placed on that investment, resulting in the replacement plant not being subject to property tax. Because it is unclear, however, how individual local property tax assessors over time might treat CIAC booked in an account bearing a different number (e.g., 266), however functionally equivalent that account might be to Account 265, we are providing that a sub-account number 265.1, entitled "Government Grant Contamination Proceeds," be used for booking contamination related local and federal government grant proceeds. If D.06-03-015 is modified in the future to reconcile its provisions and rules with the decision here, then state grant proceeds may come within the new subaccount number 265.1 as well. The rules set out in Appendix A to this decision reflect minor deviations from the rules adopted to D.06-03-015.

When local and federal contamination related grant proceeds are initially received from the funding source, they should be placed in a dedicated 265.1 sub-account. For implementing rules concerning local and federal government grant proceeds, see Appendix A.

The IOU's believe that some form of compensation should be forthcoming for both the risk an IOU assumes in connection with grant terms and the responsibilities that come with the IOU's ownership, operation and maintenance of a replacement plant that is not in its rate base. We address that issue below in section 5.5.

After considering the Workshop discussion and separate commentary, including the variant hypothetical examples developed by the parties,76 we conclude that government loans used to fund replacement plant should be treated as CIAC with corresponding ratepayer surcharges for loan repayment.

In general, the CIAC (recovery via surcharge) approach can avoid several costs that ratepayers incur if government loan proceeds are rate based. Those costs include depreciation expenses, income taxes, rate of return over the life of the asset, and, normally, property taxes.77 Both CWA78 and TURN79 state that it is uncertain whether property taxes are charged when costs are recovered through surcharges. The only source of uncertainty would appear to lie in the circumstance where a local assessor departs from the clear guidance of the BOE handbook and deviates from normal practice. We conclude that where replacement plant is paid by ratepayer funds through surcharges and the Commission does not allow any return on that investment, no value is normally placed on that investment and as a result the replacement plant is not normally subjected to property tax.

Of the examples and their variants offered by the parties to compare the cost to ratepayers of the rate basing and CIAC approaches, we found the analysis presented by TURN (based on the work of its consultant) to be the most helpful in demonstrating the cost differences.80 Defending the DRA variant, with certain modifications,81 TURN showed the results of introducing a $1 million zero-interest loan-funded property into a $10 million system. TURN then compared the net present value cost to ratepayers of a loan, payable over a 20 year period and recovered through a surcharge, to the net present value cost of rate basing of the asset and depreciating it over 35 years.82 Under that example the rate base approach costs ratepayers $104,000 (net present value) more than the cost for the surcharge approach. Of this amount, a net present value cost saving of $26,000 to the ratepayer (representing 2.6% of the $1 million initial investment and 5.4% of the cost of the surcharge) is attributable to the temporal difference between the shorter loan term and the longer depreciation

schedule.83 Approximately three quarters of the $104,000 net present value cost differential is attributable to property tax savings.

We have reviewed, and find applicable, the four policy objectives84 set out in the Commission's Quincy Water Company decision (D.88973) discussed above and in the Workshop Report. The Quincy decision provided a present value analysis that compared the revenue requirement resulting from the CIAC and rate base approaches.85 On April 20, 2010, the ALJ sought additional information from the parties on the comparative costs to ratepayers of treating government loans as CIAC and placing loan-funded replacement plant in rate base, using the hypothetical example offered by CWA in its June 1, 2009 opening comments. The hypothetical case examples of comparative costs to ratepayers offered by parties in this proceeding have provided a broader basis upon which to assess the objectives announced in Quincy.

We conclude that use of the CIAC approach "[a]llows for the benefits associated with government loans or publicly furnished capital to flow to customers in the most direct fashion possible," the first policy objective. As indicated in the Workshop Report, government loans tend to carry low interest rates and are generally intended to improve water quality in specific areas and communities (such as low income or underprivileged communities) by funding infrastructure at a lower cost for those customers. As indicated by the TURN comparative cost analysis in its reply comments, the net present value cost premium of placing government loan-funded plant in rate base is approximately 10% of the initial principal and 22% of the net present value cost of the surcharge option.86 In TURN's example and analysis the rate base treatment of a $1 million government loan-funded asset has a net present value cost of $585,000 at an 8.28% discount rate (assuming a zero interest loan), compared to the net present cost value of $481,000 for a surcharge of $50,000 per year for 20 years.87 In this example the rate base treatment would cost ratepayers $104,000 (net present value) more than under the CIAC and surcharge approach, reducing or eliminating any cost savings associated with the zero-interest loan.

The CIAC path further "[p]rovides checks and balances to ensure that there are no unintended windfalls to the utilities," the second policy objective and a subject of great concern to the Commission in undertaking this OIR. The surcharge paid by ratepayers under the CIAC approach is intended to go directly to pay the loan with no additional premiums or benefits to the IOUs such as a rate of return on the asset that was funded through the loan.

Addressing the third objective, we conclude that the CIAC approach best "[i]nforms the customer as to the costs and benefits of projects financed by these types of funds to participate intelligently in the decision making process." Ratepayers would know more clearly the portion of their bill that will go towards the projects financed by the loan due to the separate and specific surcharge on customers' water bills. By comparison, when an asset is rate based the costs of an asset financed by a loan would be included in the IOU's overall rates and ratepayers would not be able to discern the portion of the bill that is going towards paying for the asset.

Finally, CIAC treatment "[p]rovides more assurance by avoiding cash flow deficiencies." This fourth objective may be more applicable to the smaller size utilities that can face cash flow deficiencies. By having a designated surcharge, funds are more assured for payment of the loan.

Opening comments by the water utilities on the mailed (ALJ proposed) version of this decision contend that the TURN comparative cost analysis, which that version cited in reaching a determination that replacement plant provided through government loan proceeds should be treated as CIAC and not rate based, is materially flawed88 and, as noted above, that the alleged property tax benefit associated with CIAC treatment is too uncertain to be relied upon.89 The first alleged flaw according to CWA is TURN's conclusion that there is benefit to surcharged ratepayers arising from the difference between the 20 year loan repayment term and the 35 year plant depreciation term. CWA argues that the difference is "fully accounted for by lower returns in earlier years," making for a wash not a benefit. DWA's staff evaluated and confirmed TURN's conclusion that there is a net benefit to the ratepayer. As TURN demonstrated in its cost comparison analysis,90 the cost of rate basing $1 million in utility plant costs ratepayers an additional $104,000 in comparison to CIAC treatment of the utility plant in Net-Present Value (NPV) over the life of the plant. Of this NPV amount, TURN calculated that $78,333 would be to cover the costs associated with property taxes and that the remainder, $26,110, was attributable to rate basing the utility plant over the life of the plant. DWA's staff evaluated TURN's analysis and concurs with the analysis and calculations. TURN's $26,110 calculation is the difference in revenue stream between the two ratemaking approaches, rate basing and CIAC treatment, minus the property taxes in NPV, which can only be attributed to rate basing the asset.

The second and third alleged flaws of which CWA complains pertain to TURN's and DRA's use of an 8.28% discount rate for its cost comparison analysis. CWA states that TURN erroneously uses the utility's "return" of 8.28% for all years without considering the impact of the $1 million interest-free loan, and that the proper discount rate for a zero interest loan is zero. TURN persuasively replies that CWA has confused in its analysis the discount rate with the loan interest rate and the purpose of the discount rate is to assess the impact of various alternative funding sources on ratepayers.91 We concur with TURN's reply and with its cost comparison analysis.

Park and CWA, while acknowledging some benefits to ratepayers from the CIAC treatment of government loans, point to what they consider off-setting considerations, including an issue of "temporal" equity wherein earlier ratepayers during the life of the plant pay more than later ratepayers in the time frame of depreciation.92 We recognize that CIAC treatment of contamination related government loans can pose issues of temporal equity, but we find that such considerations are outweighed by the benefits to ratepayers generally provided by CIAC treatment of government loans, including property tax savings.

The IOUs believe that some form of compensation should be forthcoming for both the risk an IOU assumes in connection with the terms and conditions of government loans as well as the responsibilities that come with the IOU's ownership, operation and maintenance of a replacement plant that is not in its rate base. We address that issue below in section 5.5.

Because we are ordering that replacement plant funding by government grants and loans be recorded as CIAC, the issue of whether new plant funded by government grants and loans should be valued at actual cost or residual book value, as well as related sub-issues, has become moot.93

We are providing that a sub-account number 265.2, entitled "Government Loan Contamination Proceeds," be used for booking contamination related government loan proceeds. When government loan proceeds are initially received from the funding source, they should be placed in a dedicated 265.2 sub-account. For proposed implementing rules concerning government loan proceeds, see Appendix B.

In considering whether this class of contamination proceeds94 should be treated as CIAC rather than the replacement plant being included in rate base, we address the issue of which accounting protocol is advisable separate from the dual issues of whether and what incentive mechanisms should be employed to encourage IOUs to pursue contamination proceeds from third parties.

We conclude that CIAC treatment is appropriate for this class of proceeds because it results in less cost to the ratepayer.95 New plant (replacing contaminated plant) funded through shareholder investment logically would be placed in the rate base. Where the source of the funding, as considered in this rulemaking, is otherwise, however, the proper treatment is CIAC. Treating capital infusion from sources other than investors as CIAC is standard practice under the Uniform System of Accounts.96 We find that no persuasive basis exists for departing from CIAC treatment in connection with proceeds from damage awards.

The CWA argues that damage proceeds become the property of the water utility upon receipt and therefore lose any character of being third-party contributions before investments thereafter are made in new plant (to replace contaminated plant), or expenditures are made in remediation.97 We reject any suggestion that the denial of rate basing treatment for damage proceeds "in essence, would constitute a taking."98 Contamination proceeds received by the water utility (whether derived of government grants and loans or non-governmental damage awards) may be deemed utility "property" but that designation in no way removes those proceeds from the ambit of reasonable and prudent Commission regulation.

DRA's and TURN's comparative analysis of rate basing of plant funded by government loans versus CIAC treatment of the loan proceeds demonstrates that CIAC treatment results in less cost to ratepayers than does rate basing. That analysis holds true irrespective of the source of the funding. Although costs may differ from one proceed type to another in the individual instance, the analysis is applicable as well to damage award funding of replacement plant because of the common property tax savings associated with CIAC.

We have determined that in most instances IOUs experience minimal or no adverse financial impact from the premature retirement of contaminated plant. Under the prevalent accounting practice where the IOU does not take a loss on the retired plant, there is no immediate change in rate base.99

We reject the three ratemaking principles urged by CWA100 in connection with the choice between rate basing and CIAC as to proceeds from damage awards. We recognize, however, that two of those principles101 can suitably serve to inform an allocation of any net proceeds that may remain after appropriate deductions have been made, and we reflect that in the factors set out in Table 2 below.

To the extent, if any, that the Commission allocates to shareholders a share of the net proceeds remaining after appropriate deductions are made (see discussion of net proceeds at section 5.4.1 below) and the IOU elects to invest those net proceeds in new utility plant, those funds should be treated as shareholder funds for the purpose of determining whether the plant should be included in rate base. From a ratemaking perspective this is a direct utility investment because the funds used have been awarded to the shareholders, if the utility investment is determined to be in use and useful.

We are providing that account number 265.3, entitled "Damage Award Contamination Proceeds," be used for booking contamination proceeds derived from damage awards. Account number 265.4, entitled "Settlement Contamination Proceeds," is to be used for booking contamination related settlement proceeds. Account number 265.5.1, entitled "Government Order Contamination Proceeds From Private Funds," is to be used for booking contamination related proceeds deriving from a private funding source via government order and account number 265.5.2, entitled "Government Order Contamination Proceeds From Public Funds," will be for booking contamination related proceeds derived from a public funding source via government order. We are providing that account number 265.6, entitled "Insurance Contamination Proceeds," be used for booking contamination related insurance proceeds.

When contamination proceeds are initially received from any of the foregoing funding sources, they should be placed in an authorized memorandum account, until the need for making expenditures arises, whereupon an approval to transfer the proceeds to the appropriate dedicated 265 sub-account is to be sought, if not in a GRC, by a Tier 3 advice letter filing. For proposed implementing rules to be followed after an approved transfer from a memorandum account to a sub-account, see Appendix C. (See also, section 6 below.)

The competing definitions of "net proceeds" offered by the utilities and ratepayer advocates in this proceeding have helped us frame the issue of sharing excess damage award proceeds. We adopt the following definition of "net proceeds" (a modified form of the DRA definition):

Gross proceeds received minus all (1) reasonable legal expenses related to litigation, (2) costs of remedying plants, facilities, and resources to bring the water supply to a safe and reliable condition in accordance with General Order 103-A standards, and (3) all other reasonable costs and expenses that are the direct result and would not have to be incurred in the absence of such contamination, including all relevant costs already recovered from ratepayers (for which they have been, or will be, repaid or credited).

Any sharing before the completion of remediation or replacement would run the risk of future shortfalls that the IOU would seek to cover through rates. To allow allocations to be made before remediation and replacement is complete would shift the risk of incomplete, unfunded or unnecessarily deferred remediation and replacement to the ratepayer. Further, the potential for associated impacts on service if such contingencies were to occur would not be in the public interest generally.

With this adopted "net proceeds" definition as a starting point for considering sharing, it is possible that no proceeds will be left after deductions are made; in short, in any given instance there might be nothing-no excess-to allocate. As a corollary, of course, the objectives of remediation and replacement may have been well served by not allowing a premature allocation to ratepayers and/or shareholders. While we recognize there could be incentive value to utilities in defining "net proceeds" in the manner urged by CWA, we find it to be outweighed by the risks to the ratepayer and the public. We conclude that only "net proceeds" as defined above should compose the pool subject to allocation between ratepayers and shareholders.

Where net proceeds do result, the Commission should examine, within the context of the particular circumstances of the case before it, the interests, merits, burdens, benefits and equities reflected in the respective positions of the ratepayers and shareholders before determining the allocation of those proceeds. The general inquiry in each case should be: What comparative risk, benefit or burden have ratepayers and shareholders experienced, or can be expected to experience, under the particular circumstances of this case?

While it is not feasible, due to the wide-ranging factual variations between individual cases, to adopt a fixed formula for making allocation decisions, on the basis of the record in this proceeding we can cite an array of non-exclusive factors of risk, benefit and burden that should have selective value as a checklist for such decision making in individual cases. Those factors are aligned but not ranked in Table 2 below (and repeated in Appendix D) and are not to be considered the only factors that the Commission may consider when making an allocation decision pertaining to net proceeds derived from contamination-related damage awards. Any allocation decision, regardless of factors considered, should meet the dual objectives of assuring a fair and reasonable allocation of proceeds between ratepayers and shareholders, and assuring that ratepayers only pay a return on used and useful plant in service funded by shareholders.

Table 2

Factors to Inform the Allocation of Net Proceeds

The Commission will have the discretion to consider and weigh the above factors, and any others appropriate to the case before it, in a selective fashion relative to the particular circumstances of the individual case before it.

The rise in and severity of groundwater contamination in recent decades has had a significant impact on potable water purveyors, publicly owned and investor owned alike, and their ratepayers. While remedies of compensatory, general and, less likely, punitive damages can be available to affected water utilities through toxic tort litigation, that course of action is expensive, protracted, often extraordinarily complex and fraught with uncertainty.102 Are the demands and challenges associated with contamination occurrences--commonly including well closure; securing a replacement supply; and constructing, operating and maintaining treatment facilities - implicit in the water utility's obligation to serve its customers, or not? Can those demands and challenges reach a level that exceeds that obligation or otherwise requires discrete regulatory incentives to ensure that the utility remains viable and the customer properly served?

The Commission acknowledges that contamination occurrences, and the responses they prompt, can significantly disrupt an affected water utility's operations, straining resources and personnel. The Commission also recognizes, however, that contamination events are among the contingencies which a contemporary water utility, particularly one depending on ground water from alluvial valleys in our state, needs to be prepared to confront and manage. Being ready and able to respond to contamination, however arduous and frustrating that task, is now part and parcel of doing business as a water company. In short, it is something that now normally comes within the obligation to serve associated with utility status that also brings the opportunity to gain a reasonable rate of return as granted by the Commission. The obligation to respond to contamination events does not compel a standardized response, however, such as suing the party responsible. Selection of the type of appropriate response, whether it be litigation or another initiative, is a matter of reasonable business judgment.

If a utility can show that it is assuming above normal risk related to contamination litigation, however, the Commission is willing to take that circumstance into account in connection with the cost recovery mechanisms discussed below.

5.5.2.1 Cost of capital proceedings

The IOUs assert that any given contamination lawsuit has the potential, because of factors of exceptional complexity, uncertainty and risk, to challenge the boundaries of a utility's obligation to serve. Cost of capital proceedings provide an appropriate forum in which to consider a Class A water utility's claim that it faces above normal risk in water contamination litigation. Class B, C and D water utilities may seek such compensation via their GRCs. The burden of a strong showing that the risk is above normal must be met, however, before the Commission will provide for the IOU to be compensated for assuming that risk.

It is true that the applicable burden was not met in the 2009 cost of capital proceedings pertaining to the Cal Water, Cal-American Water Company and the Golden State Water Company, where we stated that "utilities here in California and elsewhere in the country are obligated to provide safe drinking water" and the "risks of water quality litigation are not unique" to the applicants in that proceeding.103 The Commission found generally that the applicants were "not persuasive and could not quantify their risk premium proposals."104

We expect IOUs to refrain from seeking such compensation except where above normal risk is apparent. The Commission has stated that California has a robust regulatory environment that is responsive to the IOUs' needs, based on the number of balancing and memorandum accounts and a regular cycle for rate cases, and that no utility is prohibited from filing an application to address new or unusual problems.

5.5.2.2. General Rate Cases

Water contamination related costs may be included in the cost projections made in the GRC, e.g., personnel, outside services, counsel, and experts would be included in Administrative and General Expenses. Such projections can be difficult or not capable of being made, leaving the option of tracking those costs in a memorandum account, discussed next. However, cost recovery of memorandum and balancing account balances existing at the time of the GRC can occur in the GRC for water utilities of all class sizes.

The IOUs assert that, if replacement plant funded by contamination proceeds is not placed in rate base, some compensation should be due the IOU for it having the responsibility of owning, operating and maintaining plant for which it is not receiving any rate of return. Since the IOU gains cost recovery for reasonable and prudent operation and maintenance expenditures in the GRC, it is not easy to visualize circumstances under which the additional compensation urged upon us would be warranted. We do not foreclose the possibility, however, that circumstances could arise in an individual case under which a persuasive argument, with supporting evidence, for such compensation could be made. For the Commission to consider granting such additional compensation in a GRC, a memorandum account, previously established for tracking relevant expenses would be necessary.105

In 1998 the Commission granted all regulated water utilities the authority going forward to establish water contamination memorandum accounts for litigation expenses.106 Class A water utilities were directed to seek cost recovery of reasonable expenses recorded in this account in their subsequent GRC filings. Class B, C, and D water utilities were directed to seek cost recovery of reasonable costs in their subsequent GRC or by advice letter.

In the workshop sessions the IOUs expressed concerns over delays in cost recovery of litigation expenses tracked in memorandum accounts.107 CWA proposed adoption of a rule under which there could be annual adjustments to rates to amortize or recover litigation cost memorandum balances, subject to reasonableness review. DRA offered variant approaches to address that issue: allow either adjustments when a monetary threshold (e.g., 2% of revenue requirement) has been reached or after a time period (e.g., 3 years) has elapsed, or when the first of those events has occurred.108 CWA supports the combined trigger approach, 2% or 3 years "which ever occurs first."109 Park also supports the combined trigger, but wants the time period to be one or two years rather than three years.110

We adopt the combined trigger approach as a default mechanism: which ever of the following occurs first, reaching the monetary threshold of 2% of revenue requirement or the elapsing of three years from the date the memorandum account was established. An IOU may seek by application a different, customized interim cost recovery mechanism. Litigation related expenses recovered from ratepayers, however, would be subject to refund upon the IOU obtaining a damage award.

The policies and rules adopted in this decision apply to all water IOUs. We recognize, however, that because the financial, management and operating conditions of Class B, C and D water utilities can differ significantly from those of Class A water utilities, situations may arise where modifications of or departures from those policies and rules by the Commission  would be appropriate and the Commission will have the discretion to act accordingly. Any such modification or departures, however, must be compatible with the dual objectives of assuring a fair and reasonable allocation of proceeds between ratepayers and shareholders, and assuring that ratepayers only pay a return on used and useful plant in service funded by shareholders.

Different circumstances, assumptions and approaches have resulted in varied results in the contamination proceeds decisions leading up to this rulemaking. Going forward, the accounting treatment and rules adopted in this decision shall govern. We do not intend for the decisions issued in this rulemaking to disturb decisions and settlements reached in prior proceedings that have been closed.

70 Dated March 2, 2006, in proceeding R.04-09-002 (Order Instituting Rulemaking on the Commission's Own Motion to Develop Rules and Procedures to Preserve the Public Interest Integrity of Government Financed Funding, Including Loans and Grants, to Investor-Owned Water and Sewer Utilities). Appendix A to D.06-03-015 contains "Rules for the Accounting of State Funds," the first of which provides that "[n]o return shall be earned by Commission regulated water utilities...on grant-funded plant."

71 D.06-03-015, at 3.

72 For example, for Class A water utilities see Uniform System of Accounts for Water Utilities (Class A), at 35-36.

73 See general discussion of CIAC in BOE Assessors' Handbook, Section 542 (Assessment of Water Companies and Water Rights), at 14-15. The Handbook states, at 14, that "the value of CIAC is generally zero because a prospective purchaser would not pay for property on which he or she is unable to earn a return on or recover the investment."

74 Opening Comments of CWA on Proposed Decision (September 9, 2010), at 21.

75 Reply Comments of TURN to the ALJ's Ruling (May 28, 2010), at 4.

76 The examples developed, enhanced and critiqued by the parties were of considerable assistance to the Commission in this proceeding.

77 Workshop Report, Attachment A, at 4.

78 Opening Comments of CWA on Proposed Decision (September 9, 2010), at 21.

79 Reply Comments of TURN to the ALJ's Ruling (May 28, 2010), at 4.

80 See Reply Comments of TURN to the ALJ's Ruling Inviting Comments, May 28, 2010, at 2-5.

81 CWA had found what it considered errors in DRA's presentation of depreciation and deferred taxes. TURN regarded those to be "minor" and corrected for them. (Id. at 2.)

82 TURN, in its May 28, 2010 Reply Comments, at 3, used the same 8.28% discount rate (assumed weighted cost of capital) as that used in the hypothetical presented by CWA in its June 1, 2009 Opening Comments, at 7.

83 According to TURN:

Reply Comments of TURN to the ALJ's Ruling, May 28, 2010, at 4-5.

84 Workshop Report, at 7-8. The representations of the objectives in quotation marks in the remainder of this section find their source in those pages of the Workshop Report.

85 D.88973, at 4.

86 Reply Comments of TURN to ALJ's Ruling Inviting Comments, at 2.

87 Id. at 4.

88 Comments of CWA on Proposed Decision (September 9, 2010), at 20-23.

89 Id., at 21

90 See summary in Attachment D of TURN's Reply Comments (May 28, 2010).

91 See Reply Comments of TURN on the Proposed Decision, at 4-5: "The purpose of a discount rate is to assess the impact of various alternative funding sources on ratepayers. For this analysis, a single discount rate is selected and uniformly applied to analyze the various funding options." (Emphasis in original.) TURN cites several energy proceedings in which the Commission has utilized a single discount rate reflecting a utility's weighted average cost of capital, e.g. D.82-12-120, D.05-04-051 (at Attachment 3), D.06-11-018. We see no reason why a similar approach should not be applied with respect to water utilities.

92 January 12, 2010 Comments of Park to Workshop Report, at 6-7, cited supportively in February 2, 2010 Reply Comments of CWA, at 9. Park posed the scenario of a 20-year loan funding a plant with an average life of 40 years, under which ratepayers surcharged during the first 20 years could pay twice the amount of principle than would be the case using a loan, rather than a CIAC/surcharge, methodology and ratepayers during the second 20 years would pay no principal.

93 The dominant view of the parties in this rulemaking, in accord with the Uniform System of Accounts for Water Utilities, was that new, replacement plant should be valued at its actual cost, not residual book value, when placed in the rate base. Under the Uniform System of Accounts the book value of the retired plant would not have to be netted against the new replacement plant because the booked cost of the retired plant is credited to the relevant utility plant account and if that plant is depreciable its booked cost is charged to the appropriate depreciation reserve. (See Uniform System of Accounts for Water Utilities, at 49-51.)

94 For ease of description, the term "damage awards" is used in Section 5 of this decision as short hand for damage awards, settlements, government order or insurance, inclusive. Contamination proceeds resulting from government order are uncommon but are included in the rulemaking because one IOU cited an example of such proceeds in a workshop session.

95 As we noted in section 5.2 above, there is an issue of temporal equity posed by CIAC treatment of contamination proceeds generally, i.e. the absence of a revenue stream to avoid a potential for "rate shock" when the replacement plant itself needs ultimately to be replaced, that warrants future consideration.

96 Uniform System of Accounts for Water Utilities (Class A), at 35 (Account 265): "This account shall include donations or contributions in cash, services, or property from states, municipalities or other governmental agencies, individuals and others for construction purposes."

97 See February 2, 2010 CWA Reply Comments on Workshop Report, at 2-3.

98 Ibid.

99 CWA and DRA agree that under the Uniform System of Accounts for Water Utilities a water utility's rate base is not reduced when contaminated plant is retired. (See Attachment A to Workshop Report, at 19.) As DRA characterized it, at ibid.:

100 Workshop Report, at 10-11.

101 See principles nos. 2 and 3, ibid., quoted in section 4.3.1 above.

102 A plaintiff's expense of outside counsel fees in contamination law suits, however, commonly is contingent upon there being a successful outcome in the litigation.

103 D.09-05-019 (issued May 8, 2009), at 28-29.

104 Id. at 44 (Finding of Fact 19).

105 A utility may request such a memorandum account through an advice letter filing if it anticipates requesting compensation in a GRC for costs incurred prior to the GRC. Unless specified otherwise, authorization of a memorandum account does not mean that the Commission has decided that the types of costs to be recorded in the account should be recoverable in addition to rates that have been otherwise authorized. Instead, the utility shall bear the burden when it requests recovery of the recorded costs, to show that these costs are not covered by other authorized rates, separate recovery of the types of costs recorded in the account is appropriate, that the utility acted prudently when it incurred these costs and that the level of costs is reasonable. Only costs incurred after the establishment of an approved memorandum account qualify for cost recovery consideration.

106 Resolution W-4094 (March 26, 1998), at 4. Memorandum accounts for water utilities are described generally in Standard Practice U-27-W, at para. 24-28. Recent decisions discussing the parameters of memorandum accounts include D.10-04-001and D.10-04-031, at 40-50.

107 A 10 year old memorandum account in San Gabriel's Los Angeles County division was cited as an example of delayed recovery. San Gabriel has requested amortization under that account but has not received it because the contamination litigation has not concluded. DRA found that particular instance of delay to be an isolated example.

108 January 12, 2010 Opening Comments on Workshop Report by DRA, at 6. DRA subsequently characterized those approaches as examples, not standardized prescriptions, and suggested that each affected IOU should propose a suitable interim cost recovery approach in an advice letter. May 28, 2010 Reply of DRA to ALJ's Ruling Inviting Comments, at 5.

109 May 12, 2010 Opening Comments of CWA in Response to ALJ's Ruling.

110 May 12, 2010 Comments of Park on ALJ Ruling, at 2.

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