Discussion

We will allow Golden State to recover its undepreciated investment in Hill Street and allow as a reasonable carrying cost the company's incremental cost of debt. We will also allow Golden State to amortize the prepayment of the capacity charge in the water purchase agreement and allow the same carrying cost. Golden State is not entitled to earn an equity return on either transaction.

We reject Golden State's rate base proposal for both Hill Street and the Contra Costa agreement because it is unreasonable to burden ratepayers with a rate base treatment for two facilities performing or intended to perform the same function. Hill Street must be abandoned, and while it is reasonable to return the undepreciated balance, it is not reasonable for ratepayers to pay a return on equity as if Hill Street were still used and useful or capable of providing adequate service. Hill Street is neither.

Golden State's characterization of the Contra Costa agreement as an "intangible" asset, i.e., not a physical or tangible asset such as a truck or building, is not accurate either as accounting or as ratemaking. Golden State will have prepaid the whole cost for the capacity of a multi-year agreement, and thus Contra Costa owes Golden State water service in the future. Accountants call that a deferred asset for Golden State. As noted in the comments, the proposed decision did not distinguish that Golden State will annually pay commodity charges for the actual volumes of water delivered by Contra Costa. At issue in this decision is only the prepayment of capacity charges. Volumetric charges will be recovered as an expense when incurred.

Golden State makes a weak argument that the accounting practice is to "write-off" Hill Street's balance to the depreciation reserve, which for ratemaking treatment would result in the company being compensated as if nothing had happened and the plant were still working. "Write-off" is more appropriate (and frequently applied) to multi-unit assets like trucks or pumps, where some units fail early and others function longer, so the ratemaking treatment simply adjusts depreciation to correct for the difference between the forecast lives and the actual service lives of numerous like assets. "Write-off" is not suited to large single unit transactions. Moreover, the Commission treats abandoned plant differently from adjustments to the forecasts of depreciable lives.

In A. 09-08-004 Golden State used a 20-year life for its comparison of modifying Hill Street or entering into the water purchase agreement. (D.09-06-031 at 8.) Any attempt to forecast the hypothetical remaining useful life of Hill Street is pointless for our needs. We need to avoid the rate shock to rate payers if Golden State recovered its costs immediately and the burden to Golden State of an overly-long amortization. We will compromise on six years; it is not as long as any arbitrary forecast of useful life for a modified Hill Street plant, and it eases the immediate impact on rates.

It is equally inappropriate to place the prepaid costs of the Contra Costa replacement water agreement in rate base. Golden State has no operational control over the facility, has made no investment, and does not acquire any ownership interest under the agreement with Contra Costa. Golden State is simply buying water, and water purchases are usually recovered in a purchased water balancing account. Golden State has negotiated with Contra Costa to prepay $4.7 million, but prepayments are not entitled to rate base treatment simply by virtue of being paid upfront.

Not only is Golden State's proposed treatment of its water purchase costs at odds with Commission precedent, it would also result in rate shock to Bay Point customers who are faced with amortizing Hill Street as well as prepaying Contra Costa for many years' worth of water. Golden State proposes to place the cost in rate base (including a significant portion classified as a non-amortizing water right) and to recover the full amount as well as earn a return on the balance at its full cost of capital, as if the purchase agreement were a productive asset. This rate base treatment would greatly increase the amount to be collected from Bay Point customers. Further increasing the cost to ratepayers, Golden State has indicated that it would select an option offered by Contra Costa to pay the amount in full rather than elect a four year installment option.

In short, Golden State has elected at every turn to select the option most beneficial to itself in the face of abandoning its Hill Street plant and limited options to replace the lost potable water needed to serve Bay Point.

Consistent with law and Commission policy, we will allow Golden State a reasonable interest cost to reflect the prompt write-off of the purchase agreement's capacity costs. We will allow Golden State to recover this cost over a six year timeframe, which is longer than the time that Golden State could have used to pay Contra Costa under the initial terms of the agreement. We add these two years to ease the rate shock to ratepayers. There will be no allowance for a return on equity. We will instead amortize the cost over six years using Golden State's 2011 incremental embedded cost of debt in the Temporary Interest Rate Balancing Account from its last cost of capital proceeding. (D.09-05-019, at Ordering Paragraph (OP) 3.) This is a compromise between the full 13.06% cost of capital proposed by Golden State and DRA's proposal to treat the payments as an operating expense.

Golden State has consistently mischaracterized the Contra Costa agreement in numerous ways, and by its ratemaking proposals has endeavored to unfairly enrich itself even in the face of the water quality violations of its Hill Street plant. The agreement is a long-term water purchase agreement. The proposed decision required Golden State to delete section 4.2.1 of the agreement because impinged on the Commission's discretion and would have appeared to impose a specific ratemaking treatment. On August 8, 2011 Golden State filed a motion to reopen the record to admit the second amendment to the agreement. That amendment replaced section 4.2.1 and we grant the motion for that limited purpose which eliminates the need for a further revision.