5. Litigated Issues

There are a number of litigated issues including six proposed new wells; water capacity for blending sources; "other equipment" forecasts; Office Plant including "special request #5 (special requests are required to be identified in the rate case plan); three new trucks; equipment acquired from the Adcock family or other family businesses; cost of capital; automated metering infrastructure (special request #10); and energy efficient pump upgrades. We defer to a separate decision the question of a proposed advanced metering infrastructure which was not included in the proposed decision for party comment.

For all the disputed capital construction or equipment acquisition approved in this decision we will direct Alco to file advice letters seeking authorization to include in rate base, upon completion or purchase and the plant is used and useful, the actual costs of the plant additions set forth herein and to receive a corresponding rate adjustment for the additional rate base. This is a reasonable outcome for these disputed projects (wells, new trucks, and pumps) because it allows Alco timely recovery if it actually builds the project, or acquires the equipment, and it becomes used and useful, so this outcome therefore protects the ratepayers from paying on projects or equipment which do not materialize on time or ever. We do this because we are mindful of the significant cost impacts on customers of a small water company when a major item (in terms of that operation) is added to rates, and because we are equally mindful of the need to provide safe and reliable water in adequate quantities. For the remaining disputed additions we address the ratemaking in detail as appropriate.

We will not devote a lot of time to authorizing new energy efficient pumps: DRA argues that Alco failed to include the new pumps for energy efficiency upgrades in the disclosure of the rate impact of the application. (DRA Opening Brief at 33.) That is a procedural discrepancy, which should have been corrected shortly after filing, but was not. The additional cost of the pumps is far less than the revenue requirement reduction due to the settlement and the disallowance of one new well, below. We agree with Alco that energy efficient pumps are a reasonable acquisition. We therefore find this does not require additional notice under Rule 13.1(b). We will therefore authorize the installation of the new energy efficient pumps. Alco must file an advice letter to include them in rates only after they are installed and are used and useful.

Alco states that it has older wells that need replacement or augmentation to supply safe water.5 Alco argues that it can currently comply with California Department of Public Health requirements in Title 22, § 64554(b) and (c) (i.e., meet its maximum daily demand with the largest source off line). But, if Alco lost any other source it would be unable to do so until a new 5 million gallon storage tank comes online sometime in 2012. (The tank is included in the settlement.) If Alco were to lose any of its five currently active sources, even its lowest producing well, it would not meet § 64554(a)(1) requirements for peak hourly demand. Therefore Alco requests to add the six additional sources, two of which have already been drilled. (Alco Opening Brief at 5.)

DRA argues that Alco can easily meet demand and argues further that Alco incorrectly applies a water supply requirement that only applies the moment a company first qualifies as a water utility. Section 64554(c)6 requires that Alco must be able to serve customers without its largest source on-line. As illustrated in Table 1, DRA argues:

... the requirement that [maximum daily demand] be met with the largest source off line only governs water utilities applying for an initial permit for a groundwater only system, and is inapposite to existing systems. Since Alco's system is an existing system consisting of five wells which are permitted and certified as active by the [California Department of Public Health], the more stringent standard under Section 64554(c) does not apply to Alco. (DRA Opening Brief at 5.)

Table 1

Alco's Capacity to Meet Maximum Daily Demand (Based on Ex. D-7-R)7

 

Available Capacity for Max. Daily Demand in Gallons per Minute

DRA's Position

Required By

§ 64554(c)

(i)

Existing Five Active Wells

9,180

9,180

(ii)

Largest Well Off-line

N/A

6,803

(iii)

2010 Maximum Daily Demand

5,875

5,875

(iv)

2010 Margin above Maximum

(56%) 3,3058

(16%) 9289

(v)

2011 Maximum Daily Demand

5,990

5,990

(vii)

2011 Margin above Maximum

(53%) 3,190

(13.6%) 813

(viii)

2012 Maximum Daily Demand

6,075

6,075

(ix)

2012 Margin above Maximum

(51%) 3,105

(12%) 728

Use of DRA's interpretation of the applicability of § 64554(c) results in Alco having over 50% in excess capacity to meet maximum daily demands in 2010 - 2012, whereas Alco's interpretation and application of § 64554(c) would result in far lower margins around 12% (2012) and 16% (2010).

We find that DRA's reliance on § 64554(c) is a strained interpretation: DRA would have us accept that because Alco is not seeking an "initial" permit it need not have backup wells. This is not reasonable. Ratepayers need to have a reliable water supply and the requirement makes little sense as applicable only at the time of permitting. The fundamental point of § 64554 is stated in its opening paragraph: "At all times, a public water system's water source(s) shall have the capacity to meet the system's maximum day demand (MDD)." We are not proposing some high level of redundancy to ensure water in every conceivable scenario; only sufficient resources to meet the requirements of § 64554 in normal circumstances.

Alco also argues for its new wells based upon a perceived need to meet a fire flow demand citing to General Order 103-A Section II.B.3.(b). (Alco Opening Brief at 8.) Alco further argues the data in DRA's Ex. D-7-R fails to include 2011 and 2012 fire flow requirements. "If Alco were authorized to construct all the wells and the pumping upgrades at the Santana well that it has requested [it] would have a total water production capacity of 15,003 [gallons per minute] with its two highest capacity wells sources offline." (Alco Opening Brief at 9.) Alco argues it needs one-and-a-half times its maximum daily demand to meet its demand plus fire flow after allowing for its two largest sources to be offline at the time, as summarized in Table 2 below.10

We find Alco more persuasive than DRA on the need for at least some new wells. We will allow Alco to file an advice letter to put the actual cost of the wells in rates, subject to an individual construction cost cap based on the current forecast to complete the wells but only if and when the specific well has been constructed, are operational, and each one is therefore used and useful. We will now turn to the question of how many wells were justified.

Resolution W-4577 already authorizes three unnamed wells,13 which are rated to produce 5,300 gallons per minute (gpm),14 and we will not revisit the authority to construct them here. In Resolution W-4577 the adopted revenue requirement for the three wells was $555,000. (Resolution W-4577 at Appendix E lines 1 and 9.)

There is a significant problem with the cost of the three advice letter wells: Alco has spent, or is expecting to spend far more than the amount initially authorized in Resolution W-4577. As shown in Table 3, below, Alco has spent significant amounts on all three wells and projects final costs in this rate case ranging from $935,505 for Verona to $1,802,235 for East Laurel Heights. If these three wells are not used and useful when Alco files its next general rate case we may decide to examine these costs that are placed in rate base and determine whether these wells should be abandoned and removed from rate base.

Table 3

Costs of Three Advice Letter Wells

 

Name of Wells from W-4577

Authorized by W-4577

Pre-2009 CWIP15

2009 CWIP

Rate Case Forecast

1

Verona

$185,000

$222,97116

$555,93417

$953,505

2

Bardin

$185,000

  

$750,34518

$1,689,130

3

East Laurel Heights

$185,000

  

$57,00019

$1,802,235

   

$555,000

    

$4,444,870

It appears from the record that only two wells, Verona and Bardin are partially built and are not yet in service. Clearly the resolution allowance bears no resemblance to the actual costs to date for the three wells. Based on the record we find that the estimated cost to complete these wells is a reasonable estimate. We must therefore resolve and clarify the cost and ratemaking treatment of the three wells already approved by Resolution W-4577. We will allow Alco to include in rate base the Pre-2009 CWIP ($222,971) already in rates plus the additional 2009 CWIP ($555,934) which is a total of $778,905 for the Verona Well, and the 2009 CWIP ($750,345) for the Bardin Well. These amounts must be recorded in Plant Held for Future Use, a rate base account which will allow Alco to earn a return on the investment. We will also allow Alco to put the $57,000 costs in construction work in progress, through 2009, for the East Laurel Heights Well into Plant Held for Future Use. For all three wells, we will authorize Alco a cost cap set at the rate case forecast of total costs, i.e., we will now place an upper limit or cap on the costs recoverable in rates for these wells. Upon completion of each of these wells Alco must file a Tier 2 Advice Letter in order to recover any additional costs up to the individual caps. Therefore Alco may still recover $174,600 for the Verona Well; $938,785 for the Bardin Well; and $1,745,235 for East Laurel Heights.20

Turning to the additional three rate case wells, we must still decide if Alco needs the three further new wells, to produce an additional 4,500 gpm,21 first requested in this application. There appear to be two reasons we must consider these additional wells. The first is arsenic contamination - Alco's existing wells and stand-by wells all have various levels of arsenic and blending sources is needed to maintain a safe level. The second is whether Alco is correct with both proposed supply adjustments: the "minus-two largest wells" and "1.5 times maximum daily demand" used by Alco to justify an available supply of 15,300 gpm (see Table 2 above).

Alco must blend some of its water and can only carefully use its standby wells because of contamination, primarily arsenic. Thus, with its existing storage and new 5 million gallon storage tank to be in service by 2012, the company can blend a potable supply. The company argues it needs six new wells, three of which were already authorized and three more first proposed here in this proceeding. Alco calculated its current and standby wells produce approximately 2 pounds of arsenic per day.22 (Alco Opening Brief at 11 - 12.) After some fancy math23 this computes to 10.792 parts per billion (ppb) when the standard is 10ppb. (Id.)

Alco derives the maximum it can blend from the standby wells to reduce the arsenic from 10.792 ppb to a more drinker-friendly 7.5 ppb, a 25% factor below the maximum for safe water. Alco makes an assumption that the new wells (because they are still in the Salinas area) will have the weighted average arsenic of its five active wells, which is 4.3 ppb. (Id at 13.)

General Order 103-A, Section II.B addresses service standards for quantity of water. Section B(3)(a) addresses potable water system capacity by saying the utility needs to meet the source capacity requirements defined in the California Waterworks Standards, CCR Title 22, Div. 4, Ch. 16, Article 2, § 64554. In it, § B(3)(b) states:

... if a system provides potable water for fire protection service, new portions of the system shall have supply and storage facilities that are designed to meet [maximum daily demand] plus the required fire flow at the time of design.

In General Order 103-A, § VI addresses average statewide fire flow requirements. For initial construction, extension, or modification of a water system, the facilities shall be designed to be capable of providing, for a minimum of two hours, at a minimum pressure of 20 pounds per square inch, the flows specified in the 2007 California Fire Code, Appendix B. California Waterworks Standards, § 64554(a), states that for systems with 1,000 or more service connections:

... the system shall be able to meet fours hours of peak hourly demand (PHD) with source capacity, storage capacity, and/or emergency source connections.

Furthermore, § 64554(b) states a system shall estimate maximum daily demand and peak hourly demand for the water system as a whole and for each pressure zone within the system. Peak hourly demand is estimated as follows:

"If daily water usage data are available, identify the day with the highest usage during the past 10 years to obtain [maximum daily demand]; determine the average hourly flow during [maximum daily demand] and multiply by a peaking factor of at least 1.5 to obtain the [peak hourly demand]."

Therefore, it appears to us that Alco's use of 1.5 times maximum daily demand is a short-hand characterization of the requirement in the California Waterworks Standards, Section 64554. However, we do not find in either General Order 103-A or the California Waterworks Standards a requirement to include a contingency of minus-two largest wells when calculating existing source capacity.

DRA argues that Alco misrepresents the Maximum Daily Demand as 9,575 gpm before fire flow and that the actual Maximum Daily Demand, as provided by Alco, is 6,075 gpm in 2012 which is 9,575 after fire flow requirements are added. (Ex. D-6.) Applying a 1.5 factor to 6,075 gpm results in a required 9,113 gpm, however the data provided by Alco is 9,575. We will conservatively use this higher figure.24

We accept Alco's asserted need to meet 1.5 times maximum daily demand for fire flow, but we are not persuaded that we must also provide for this standard to be met with Alco's two largest wells offline. In an emergency the customer cannot expect normal full service. We agree there is a need for some margin in the water supply and we calculate in Table 4 (rounding a little) that if either one of the two largest wells is offline there would still be a significant and sufficient supply. We therefore authorize Alco to construct none of the three proposed "rate case wells" in addition to the three wells already authorized by Resolution W-4577.