8. Region II and Region III
8.1. Tax Calculations
Golden State and DRA disagree over how to calculate the amount of California Corporate Franchise Tax (CCFT) to deduct when estimating Golden State's Federal Income Tax (FIT) expense for 2010.
In order to estimate FIT expense, Golden State calculated its anticipated revenues by multiplying its forecasted 2010 water sales by then-current, 2008 tariff rates. Golden State cites to several Commission decisions in support of its calculation method. Using its method, Golden State estimates its CCFT for 2009 as $630,400.
DRA asserts that Golden State's calculation misinterprets the Commission's decisions on the matter and results in a too-low CCFT expense forecast. DRA states that the CCFT is a deduction from the FIT, so that using a number that is too low results in a higher FIT expense forecast and a higher revenue requirement request. DRA contends that because the actual CCFT expense is available, it should be used in the calculation of the FIT. DRA contends that $2,571,900 should be used as this is the figure Golden State used for State Income Tax expense to support Advice Letter 1302-W.
The issue is whether the test year's CCFT deduction (i.e., for year 2010) should be the prior year's actual CCFT expense (2009) as DRA claims, or be approximated in 2010 as asserted by Golden State.
In D.84-05-036 the Commission stated:
The state income tax deduction for federal tax purposes is the amount of tax paid in the prior year. The state tax deduction computed for ratemaking purposes is the amount of tax paid in the prior year. The state tax deduction computed for ratemaking purposes has been based on the current
test-year.... Although several alternative methods of making these calculations are discussed, neither staff nor any other party recommends a change from the present practice since they believe that the present yields a reasonable result over time.[15 CPUC2d at 54.]
At the time when D.84-05-036 was written, the test year calculation was reasonable because there was no other information available or better method to calculate a proxy.
In D.89-05-011 the Commission stated:
... we adopt the DRA/San Diego position that the test year CCFT number used is really an approximation for the prior year. Our conclusion is based on an understanding of what it takes to prepare a results of operations for a test year. The preparation of a results of operations for one test year is a major undertaking. The preparation of an additional results of operations for the year prior to the test year is likewise no small task. To do the work required to prepare the additional results of operations, solely for the purpose of deriving one number, arguably a more accurate CCFT number, for the test year federal income tax calculation, does not make sense if the test year CCFT number is available and it is a reasonable approximation.
Golden State mistakenly cites this section as support for using a test year calculation. This language is actually reciting the reason the test year calculation became a proxy for the CCFT in the first place. The Commission realized that preparing a results of operations for the prior year was too burdensome merely to develop a CCFT figure, especially if over time the test year calculation yielded a reasonable result.
D.89-011-058 also states:
... since the prior year's CCFT number is now available from Commission adopted records, the Commission finds that a change in method to flow-through for the treatment of the CCFT deduction would alleviate the utilities' concerns over the timing of the benefit of the CCFT deduction. Therefore, the prior year CCFT number should be used in future income tax expense.
Conclusion of Law
1. The Commission concludes that ratemaking should reflect the value of the CCFT deduction. Since the prior year's CCFT ratemaking amount is now readily available from the recent Commission adopted records, flow-through treatment for the CCFT deduction shall be used in setting rates.
Ordering Paragraph
4. In the future, all results of operations for all utilities shall reflect the flow-through treatment for the CCFT deduction in computing federal income tax expense.
Ultimately the heart of the issue here is the availability of accurate information. There is no reasonable basis for using an approximation when actual costs are readily accessible. Although a partial estimate for each tax year is still required, the current timing of CCFT payments has made accurate partial information available earlier in the process. An estimate using some actual expense figures is more accurate than a total approximation and therefore we find merit in DRA's position. However, because this proceeding involves only two of Golden State's regions, any changes to the current tax calculation methodology would result in inconsistent treatment among the regions. For that reason we adopt Golden State's Region II CCFT figure of $630,400 for 2010, and negative $210,000 for Region III, but require that this issue be explored in Golden State's upcoming statewide GRC due to be filed in 2011.
8.2. Regulatory Commission Expenses
for Regions II and III
Golden State requests $200,000 for Region II and $250,000 for Region III Regulatory Expense.
Golden State is requesting $450,000 for consulting fees associated with developing the three-year GRC capital budget. Golden State had also initially sought recovery of consultant fees of $15,100 and $14,900, for Regions II and III respectively, related to the development of the Distribution System Improvement Charges (DSIC). Golden State has agreed to remove those charges since the DSIC issue was removed from the GRC. Golden State also requested $35,500 and $34,800, for Regions II and III respectively, for mailing costs to Region I customers. Golden State agreed to remove the mailing costs as well.
DRA contends that the consulting fees sought are for consulting activities that go beyond what is normal for a GRC, i.e., a long-term pipeline replacement program, the prioritization of capital improvement projects and the Asset Management program. DRA also contends that due to their nature, these are non-recurring fees and that absent Commission authority, cannot be booked to Account 146 and later transferred to Account 797.
Golden State asserts that the consulting fees are for GRC preparation and therefore not a one-time expense. Golden State claims that it has incurred consulting fees in the past and expects to do so in the future. It argues that, even though the exact nature of the consulting activities may change, there are normally consulting fees associated with GRC preparation and they should be allowed here.
In its supplemental testimony and during oral arguments, Golden State takes issue with the characterization of the regulatory expenses as forecasts. Golden State contends that it has always recovered its regulatory expenses for the current GRC in the test and escalation years covered by the GRC. Golden State asserts that this position is a departure from past Commission action.
Golden State provides language from its 1967, 1969, 1976, and 1982 GRC Results of Operations Reports that each refer to the regulatory expense as a projection or an estimate. (Golden State Ex. 214 at 5-6.) However, Golden State cites the language as proof of the Commission's previous practice of allowing Golden State to recover regulatory expenses incurred in the current rate case in the years following the rate case.
Although regulatory expense may appear to be a forecast of future regulatory expenses, that is not the case. The Uniform System of accounts for Class A Water Utilities adopted by this Commission provides for current regulatory expenses found reasonable by the Commission to be charged to Account 146, Other Deferred Debts, and amortized (recoverable) to Account 797, Regulatory Commission Expenses, over a future time period. For all practical purposes, Account 146 is treated as a memorandum account to accumulate regulatory commission costs for which recovery has yet to occur. This has been a long-standing practice of the Commission. Since the rate case cycle covers a three-year time period, the amount of current regulatory commission expense deemed reasonable and placed in Account 146 should be amortized and recovered over the three year rate case cycle.
The activities engaged in by Golden State's consultant CH2MHILL, described as a long-term pipeline and main replacement program, prioritization of capital improvement projects and the Asset Management program may appear to be outside the normal rate case preparation; however, the Water Action Plan specifically encourages companies to include infrastructure improvement and replacement plans as part of their long-term planning.
In our Water Action Plan at 12-13, we discuss the need for water utilities to address their infrastructure requirements by undertaking comprehensive
long-term planning to provide all capital investments necessary to upgrade or replace their existing infrastructure. Because the activities of CH2MHILL or similar activities comport with recommendations in the Water Action Plan, Golden State's regulatory expense is reasonable. Therefore, Golden State's request for $200,000 for Region II and $250,000 for Region III Regulatory Expense in 2010 is granted.
