12. Region I Issues
12.1. La Serena Plant Improvements Project
The La Serena Plant Improvements Project (La Serena) included construction of a 0.5 million gallon storage tank, telemetry, new motor control center, seismic upgrades to the existing storage tank, upgrade of backwash pond and backwash water disposal system, new pressure filter controls and control valves, new booster, landscaping and the construction of a new driveway and perimeter fencing/wall. In D.08-04-013, the Commission approved $107,000 for landscaping/screening and paving at the La Serena plant. In the decision, the Commission stated that the $107,000 appeared to be part of a larger project not before it in that application. Golden State's tariffs implementing the rates approved in D.08-04-013 included the $3.7 million La Serena project costs. DRA filed a petition for rehearing of D.08-04-013. In D.08-08-031, the Commission granted a rehearing to determine if it was reasonable to include $3.7 million associated with the La Serena project in Golden State's Region I rates.
Golden State states that the La Serena improvements were necessary due to a long-standing supply and storage deficiency identified in the 1998/1999 Master Plans for the Nipomo System. Golden State asserts that the water supply and storage deficiency were exacerbated when the San Simeon earthquake damaged the Vista Plant. Golden State asserts that within this same timeframe, a 41-lot development, two 12-unit developments, and a 650-student elementary school were built and Golden State decided it was time to address the water supply and storage problem in the Nipomo System. (Golden State Ex. 70 at 3.)
Golden State estimated the cost of the 500,000 gallon tank at $400,000 and special facilities fees were based on the supply requirements of the new developments and the school. Golden State calculated the school's special facility fee as $130,000 and the 41-lot development's fee as $157,000, for a total of $287,000. Golden State did not collect special facilities fees from the 12-unit developments because "... the demand of a 12-unit subdivision would be about 12 gallons a minute which is equivalent to the amount of water you could get out of a hose bib." (RT at 537.)
Golden State states that the construction of the storage tank was to address the needs of the system as a whole and therefore the $3.7 million is correctly included in rate base.
DRA asserts that developers should pay the costs of the whole project as it was undertaken to serve new development, not existing customers. DRA claims that the 1998/1999 Master Plan may have identified a small future need, but Golden State made no move to address it in any GRC filed subsequent to the 1998/1999 Master Plan. DRA contends that Golden State waited until after new development occurred to add additional storage and since the needs of the new development are over 50% of the capacity of the new facility, the costs should be charged to the developer.
In support of its position, DRA refers to Golden State's Tariff 15 which states:
If special facilities consisting of items not covered by Section C.1. are required for the service requested and, when such facilities to be installed will supply both the main extension and other parts of the utility's system, at least 50 percent of the design capacity (in gallons, gpm, or other appropriate units) is required to supply the main extension, the cost of such special facilities may be included in the advance, subject to refunds as hereinafter provided along with refund of the advance of the cost of the extension facilities described in Section C.1.a. above.
DRA states that Rule 15 clearly warrants that the full project costs be treated as special facilities fees and collected from the developers. DRA also cites D.05-12-020 as recognition that the costs of all necessary facilities should be recovered in special facilities fees, not rate base. D.05-12-020 states:
Construing all the provisions of Apple Valley's Rule 15, we conclude that the cost of all necessary facilities to serve new customers, including well, tanks and treatment facilities, when clearly attributable to new customers, should be recovered in facilities charge, and not imposed on the existing customer base. (DRA Ex. 110 at 1-12.)
DRA asserts that Golden State's calculation of the new developments' requirements is faulty. DRA calculates the storage capacity requirements of the new developments and the school to determine the percentage of the new tank's capacity needed by the new development. DRA calculated that the school required storage capacity of 180,000 gallons to meet fire flow requirements, and the 41-lot development required 120,000 gallons to meet fire flow requirements and 53,300 gallons to meet MDD. DRA calculated total storage capacity for the 41-lot development and the school as 353,000 gallons which is 70.66% of the 500,000 gallon storage tank. Based on this estimate, DRA recommends that the Commission remove $3,519,00020 from rate base and refund customers $1,112,275 for revenue collected in rates since January 2008.
Golden State's claims that the La Serena plant improvements were undertaken to address deficiencies in the Nipomo System are persuasive. However, while the improvements were necessary to address water supply and storage deficiency for existing customers, Golden State's testimony also demonstrates that the well size was increased to meet demand associated new development. Consequently, the costs associated with the La Serena plant improvements should be allocated between existing customers and new development.
Golden State's initial estimate for the cost of the La Serena 500,000 gallon storage tank was grossly underestimated. The original estimate was $400,000 and based on construction at a site in which there were no constraints or problems. Golden State's witness Gisler testified:
The estimate for the tank on the special facilities fee calculation, the $400,000 for a 500,000 gallon tank, is a good estimate for what it would cost to purchase steel, pour a concrete footing, erect the steel and coat the steel on a given flat site where the property was already available and no other site constraints or problems were required to be addressed with. (RT at 625:3-10.)
The estimate included no contingencies for the possibility that the site would not be perfect, even though the site was owned by Golden State at the time of the estimate. The site required significant modifications and the final tank cost of $1,102,256 was more than double the initial estimate. An additional $2,603,971 was spent on site construction and other improvements.21 Golden State's witness Gisler went on to testify:
Well, on the work order showing the estimate on here, the $985,000, that was based on constructing that tank on the La Serena site. And the La Serena site is a large piece of property, but it has a pretty large slope across the property, and there's existing reservoir on the east side of the site which is a higher elevated station. And then adjacent to that tank was a backwash pond, so an earthen pond, that we used to backwash water in from a filter. And then we had a lot of vacant land to the west of the site, but this land was 10 to 20 feet lower than the-where the existing tank was.
So what we had to do is to build a second tank because we need the second tank to be the same elevation that the floor of both tanks and the tops of both tanks are the same so that they could fill and drain together.
So to accommodate that, we had to construct a new backwash pond on the west side of the property. We had to go in and over excavate and muck out all of the sludge and sloppy material in the backwash pond and over excavate that, import engineered fill for the soils report by a geotech and build a new ground base, and then pour the concrete footings and then construct the steel tank on top of that.
So, in essence, we built a $400,000 tank on top of a bunch of other sub surface that was required. (RT at 625-626.)
Not only did Golden State never contact the developers and revise the special facilities fees based on the updated cost estimates, Golden State did not collect from all the developers in the first place. Golden State collected fees for only the 41-unit development and the school, but not the two 12-unit developments.
Additional facility improvements increased the cost to $3.7 million.
In its supplemental testimony Golden State contends that it was not necessary to collect the special facilities fees from the two 12-unit developments because the amounts it had already collected from developers resulted in an over-collection of fees. We find it impossible to follow the logic that results in an over-collection of fees when two 12-unit developments paid nothing toward the improvements, yet millions of dollars in construction costs remain that existing ratepayers are expected to absorb. Even if we were to accept Golden State's assertions, any over-collection should benefit existing ratepayers, not provide an excuse for collecting nothing at all from the developers.
It is undisputed that Golden State grossly under-estimated the cost of the La Serena project, and grossly under-collected fees from developers. We find it patently unfair to require ratepayers to shoulder cost overruns due to decisions made by Golden State's field office on "ad hoc basis prior to the implementation of the La Serena plant improvements and without full knowledge of all the events and circumstances associated with the new developments and La Serena project."22 Golden State's management failed in their duty to ensure that cost estimates were properly prepared and to require developers to pay their fair share of the La Serena project. In its supplemental testimony DRA states that the objective of Special Facilities Fees is to obtain the fair share of the costs of the new developments that ought to be paid by the developers. (DRA Ex. 132 at 19.) We agree. Consequently, Golden State should seek to recover from the new developments their proportionate share of the cost overruns. More importantly, Golden State should seek to collect Special Facilities Fees from those new developers who had not paid any fees. Should these efforts prove to be unsuccessful, Golden State's shareholders shall be responsible for these costs.
Because we find that the La Serena project was undertaken for the benefit of both existing customers and new development, the cost overruns should be borne by both categories of customers as well. Based on the testimony and briefs filed by Golden State and DRA on this single issue, it is clear that there are multiple methods to calculate the amount of La Serena costs that should be allocated to each of the customer categories. Golden State has presented arguments that new development should be responsible for anywhere between 0% and 27% of total costs, while DRA has concluded, based on the same information, that new development should be responsible for 44% to 70% of total costs. We do not find any of the approaches proposed by Golden State or DRA to appropriately reflect the fair share of the cost of the new developments that ought to be paid by the developers.
In setting a fair allocation, we look to Golden State's sheet used to calculate the special facilities fees for guidance. This sheet shows that in calculating the special facilities fees, the elementary school's amount was based on required fire storage of 180,000 gallons. Fees for each of the three residential developments were based on required fire storage of 120,000 gallons and the development's maximum daily demand (MDD). We agree with Golden State's assertions that it would be unreasonable to require separate fire storage for each new residential development. Instead, we believe the MDD reasonably reflects the amount required for the new residential developments. Additionally, we conclude that the entire 180,000 gallons associated with fire storage for the elementary school should be included in determining the allocation of costs.
Based on the above, it would be reasonable to assume that 261,900 gallons was for new development.23 This would mean that 52.4% of the new reservoirs' total storage capacity of 500,000 gallons is used to serve new developments. We find that this percentage serves as a reasonable proxy for the allocation of costs between existing and new customers, and allocate 52.4% ($1,843,956) of the La Serena project costs to new customers and 47.6% ($1,675,044) of the costs to existing customers. Golden State should remove $1,843,956 from rate base. Additionally, Golden State's Region I ratepayers should be given a one-time credit of $582,83224 to offset the fact that Golden State previously included the La Serena costs in rate base.
20 D.00-12-063 approved $181,000 in upgrades: $3,700,000 - 181,000 = $3,519,000.
21 Tree removal $22,504; Civil/Earthwork $1,103,342; Mechanical $414,232; Electrical $380,839; I&C/MCC $402, 941; SCADA $9,750; Landscaping and Erosion Control $36,439; and Paving $35,925.
22 GSWC Supplemental Opening Brief at 35.
23 261,900 gallons = 180,000 gallons (elementary school) + 53,300 gallons (41-lot residential tract) + 14,300 gallons (11-lot residential tract) + 14,300 gallons (11-lot residential tract).
24 $785,934 = 2[$2,486,525 x 0.0887 (Rate of Return) x 1.78172 (Net-to-Gross Multiplier)].
