IV. Monterey District Application
A. Contested Settlement Issues
The Commission normally uses a consolidated capital structure, which includes a consolidated cost of debt and equity, for multi-district Class A water utilities. In its application, Cal-Am presents a consolidated capital structure for Monterey and Felton, followed by separate imputed capital structures and costs of debt and equity for Monterey and Felton.17 DRA in its report uses the consolidated capital structure, but in the settlement agrees to use separate capital structures and separate costs of debt and equity.18 We first examine the proposed settlement's imputed capital structure for Monterey, then the separate cost of debt and equity.
The capital structure proposed by Cal-Am and DRA for Monterey is 56.6% debt and 43.4% equity. This represents a decrease in leverage from the consolidated capital structure of 59.37-60.14% debt for the upcoming three years that is shown in Cal-Am's application and DRA's cost of capital report. This is also a less leveraged capital structure than the 63% debt/37% equity capital structure that Cal-Am and DRA propose for the Felton district. Because Cal-Am's cost of debt is lower than its cost of equity, imputing a less leveraged capital structure for the Monterey district results in Monterey customers being charged a higher cost of capital, and correspondingly higher rates.
Cal-Am first proposed imputing separate capital structures in the last Monterey GRC.19 In Chapter 3 of its application in that proceeding, Cal-Am states that separate capital structures need to be imputed for a "reasonable" period of time after its 2002 acquisition of Citizens Utilities' water properties in order to prove to the Commission and the customers of the former Citizens' districts the value of the merger.20 In the earlier decision approving the acquisition, D.01-09-057, the Commission approved Cal-Am amortizing the acquisition premium it paid to all its California districts, original and former Citizens, provided it proved its claimed synergy savings in its 2002 GRC filings and again in its 2004 GRC filings. Thereafter, the synergy savings would be carried forward using agreed-upon escalation methods and factors. The Commission also ordered in D.01-09-057 that Cal-Am carry the burden of proving that any new or increased GRC expenses (excluding those due to inflation and customer growth) in future years were not erosions of earlier-estimated synergies.21 We designed our review of synergy savings to focus on overall increases in GRC expenses after the initial GRC cycles because we recognized that as each year passes, the modeling assumptions relied on to demonstrate synergy savings are less and less reliable.22
In the settlement, Cal-Am and DRA state that they agree to the use of separate capital structures in order to appropriately calculate the synergy and acquisition premium.23 There are two other capital structures in the record that we can consider for the Monterey district.
First, we can impute the same capital structure proposed by Cal-Am and DRA in the Felton settlement, 63% debt/37% equity. Parties in this proceeding have testified to the extraordinary capital expenditures Monterey district customers have already paid and those they face in this GRC period and beyond. By imputing the same capital structure as Felton for the Monterey district, customers are given the benefit of the less expensive capital structure.24 While we do not have a record to assess the impact this change may have on other districts, our record does contain reference to the proposed sale by RWE of Cal-Am and its parent, American Water Works (AWW), through an initial public offering (IPO). The proposed IPO allows an opportunity for Cal-Am to change its consolidated capital structure in the 2006-2008 period of this GRC, which could mitigate or eliminate any impact on other districts of our imputing the proposed Felton capital structure for Monterey. The specific details of the proposed IPO were not available at the time of hearing.
The other capital structure we can consider is a return to a consolidated capital structure. There is stronger support in the record for this option, with Cal-Am and DRA in agreement that this would be 59.41% debt in 2006, 59.36% debt in 2007, and 59.37% debt in 2008.
We find the time is ripe to consider returning to the use of a consolidated capital structure. It has been almost five years since the acquisition of the Citizens' properties, and pursuant to the requirements of D.01-09-057, we have had the comprehensive initial showing of synergy savings in each district in the 2002 and 2004 GRC filings. In this proceeding, Cal-Am and DRA testify that they agreed in the Sacramento/Larkfield GRC proceeding, A.04-04-040/A.04-04-041, to a permanent acquisition premium allocation; Cal-Am relies on that proceeding for its claim of synergy savings here rather than submitting supporting documentation. Finally, Cal-Am has recently filed an application for another change in corporate ownership, A.06-05-025, and we have approved Cal-Am's request to refinance its capital structure in D.06-07-035.
While there is good cause to return to the use of a consolidated capital structure, we find it best in this proceeding to adopt Cal-Am's and DRA's proposal. First, Cal-Am and DRA have settled on an imputed separate capital structure and no party is contesting the settlement on this issue. The settlement is a product of negotiation and is presented as an integrated agreement. Second, we are now at a point where all the other districts, following the last Monterey GRC, have adopted separate capital structures. We could lead again in Monterey in adopting a change, but prefer to give Cal-Am and parties notice and an opportunity to provide a more comprehensive record.
Therefore, we find that adopting the separate capital structure proposed in the settlement is reasonable, and consistent with the record. We will adopt an imputed capital structure of 56.6% debt and 43.4% equity for the Monterey district for 2006, 2007, and 2008.
Based on our discussion above, we direct Cal-Am to present a comprehensive showing in support of a consolidated capital structure in its scheduled January 2007 GRC filings for the Sacramento, Larkfield, Coronado, and Village districts.25
We turn now to the cost of debt. The settlement proposes 6.98% for Monterey for all three years. This is higher than the consolidated cost of debt shown in Cal-Am's application and originally proposed by DRA, but almost the same as the separate cost of debt originally proposed by Cal-Am.26 The proposed 6.98% is also 61 basis points higher than the 6.37% proposed by Cal-Am and DRA in the Felton settlement.
As we found in our discussion of capital structure, there are strong reasons to consider returning to a consolidated cost of debt. However, for the same reasons stated earlier, we will adopt Cal-Am and DRA's proposal and direct Cal-Am to present a comprehensive showing in support of a consolidated cost of debt in its next GRC filing. In this proceeding, we find the proposed separate cost of debt of 6.98% for the three years of this GRC period reasonable and consistent with the record.
We next address the cost of equity in the capital structure. The settlement proposes a return on equity (ROE) for Monterey of 10.10%. Cal-Am and DRA state that the ROE is reasonable because it falls between the original positions of their served testimony and is the same amount authorized by the Commission in Cal-Am's most recent GRC decision, D.04-12-055 (Coronado & Village Districts) and in the Commission's two most recent decisions for Class A water utilities (D.05-07-044 for San Gabriel Valley Water Company and D.05-07-022 for California Water Service Company).
This portion of the settlement is contested by Felton FLOW, which recommends an ROE of 8.79%. Felton FLOW requests that the Commission look at the June 24, 2005 short and long term bond and stock index yields and year-to-date graphs reported in the Wall Street Journal (WSJ), together with three WSJ articles discussing investors' lowered expectations. Felton Flow concludes that the return on equity required by investors in the upcoming GRC period will be lower than Cal-Am's present authorized ROE of 9.79% by at least 100 basis points.
Our legal standards for selecting a fair and reasonable return on equity have been set in three U.S. Supreme Court cases: Bluefield, Hope, and Duquesne.27 Together, these cases provide that a public utility is entitled to a reasonable opportunity to earn a return on the value of its property employed in serving the public. This return should be commensurate with returns on investments in comparable companies, and should be sufficient to (1) assure confidence in the financial integrity of the company, (2) maintain its credit, and (3) attract necessary capital.
Determining a fair and reasonable ROE that meets our legal standards is a matter of informed judgment. We do not rely solely on the analytical modeling results of any one party or a specific model application but do consider the range of results that two of these models, the Discounted Cash Flow (DCF) and the Risk Premium (RP) provide. We also look to interest rate trends and interest forecasts, but temper our reliance on the predictive value of this evidence as the current market has shown anomalous behavior. In addition, we look at Cal-Am's earning history, the performance of comparable companies, credit rating agencies' creditworthiness ranking of Cal-Am's parent, RWE, and the commitment of RWE to pass through all cost of capital savings to ratepayers.
We turn first to the financial models. The DCF model calculates an investor's expected ROE by looking at the current market price of a share of common stock and the present value of all future dividends that shareholders expect to receive. Cal-Am's and DRA's analysis is done using six comparable water utilities to compensate for any biases introduced by a single company's performance. Cal-Am calculates future dividend yield and then adds this to its calculated dividend growth rate, which results in an ROE of 10.3-10.4%.28 DRA uses a blend of historical and forecasted growth rates to arrive at an average growth rate of 5.16% and adds to that an average current dividend yield of 3.29% to arrive at an ROE of 8.45%.
For the RP model, both Cal-Am and DRA use forecasts of interest rates for the upcoming GRC period, taken from reports published by Data Resources Inc. (DRI). DRI reports are commonly relied on by the Commission in cost of capital proceedings, but in using these forecasts, our consistent practice has been to moderate changes in ROE relative to changes in interest rates in order to increase the stability of ROE over time.29 In its RP model, Cal-Am uses DRI's forecasted interest rates for 2006-2008 of 6.08% for 30-year Treasury and 5.50% for 10-year Treasury, and then adds the 10-year historical risk premium differential for the six comparable companies, using their authorized rather than earned ROE. Cal-Am's model estimates ROE of 10.6-10.8%, for an overall ROE of 10.50, before the addition of a 50-point leverage adjustment. In its RP model, DRA uses DRI's forecasted interest rates for 2005-2008 of 5.69% for 30-year Treasury and 5.25% for 10-year Treasury and adds the 5- and 10-year historical risk premium differential for the six comparable water utilities using the historical differential between earned ROE rather than Cal-Am's authorized ROE. DRA's RP model yields a 10.41-10.59% range, for an RP recommended ROE of 10.53%, and an overall ROE, averaging DCF and RP, of 9.49%.
While we use the DCF and RP models in reaching our decision on ROE, we do not rely on Cal-Am's capital asset pricing model (CAPM). In this model, Cal-Am includes natural gas distribution utilities, an inclusion we find to be inappropriate as the risk characteristics of the two industries differ; in the last GRC decision we stated that we have "consistently and unequivocally rejected this in the past."30
Felton FLOW's testimony shows that there were some anomalies in market conditions at the time of hearing, particularly in the narrow spread between short- and long-interest yields. In addition, it introduces a July 21, 2005 WSJ article that recommends 13 stocks to investors, including RWE, citing RWE's attractive dividend yield and low payout ratio.31 We find this evidence is insufficient to support a finding that an ROE of no more than 8.79% is warranted.32
On the other hand, we also reject Cal-Am's request to add to its ROE a 50-basis point "leverage adjustment" to compensate the utility for its above-average debt ratio. Cal-Am is not a company with more risk than comparable water companies. It has a history of strong earnings. In addition, its shareholders are already rewarded for a lower equity ratio through the amortization of the Citizens acquisition premium and our reliance on projected cost of capital savings in approving the RWE merger. In D.04-05-023, we discussed Cal-Am's long history of overearning its authorized ROE in California.33 Furthermore, as Felton FLOW points out, Cal-Am claimed in the RWE merger proceeding that Commission approval of the merger would provide significant benefits to ratepayers from savings on cost of capital, specifically from increased leverage, and that these benefits would be passed through 100% to ratepayers. Felton FLOW states that the capital structure of 63% debt and 37% equity proposed by Cal-Am in the Felton settlement is within the range RWE then represented would produce net benefits for ratepayers, and is actually slightly less leveraged than the capital structure RWE represented would be used at the time of its acquisition of AWW.34 We also give weight to the fact that Cal-Am's application here shows there have been no net capital cost savings for the Monterey district from Cal-Am's debt cost reduction initiative through 2004, and none are projected for the period 2005-2008.35
Based on the discussion above, we find Cal-Am should receive no additional compensation in its authorized ROE for a "leverage adjustment." The Monterey settlement's proposed ROE is higher than the ROE proposed in the Felton settlement, 10.10% versus 9.95%. The basis of the .15% difference appears to be a downward adjustment to the Felton ROE to give recognition to the methodology used in determining the acquisition premium rather than an upward adjustment for the Monterey district to reflect a leverage adjustment.36
Because Felton's 9.95% ROE reflects considerations beyond Cal-Am's cost of equity for the coming GRC period, we will not apply it to Monterey. However, recognizing that Monterey customers should be given all cost of capital benefits possible due to the extraordinary investment projects they face, we direct Cal-Am in its next GRC filing to address why the Felton district, or any other district, should be authorized a lower ROE and the measures Cal-Am has taken to ensure Monterey customers receive the benefit of the least expensive capital carrying costs.
Finally, we find that adopting the 10.10% ROE proposed in the settlement for Cal-Am is reasonable because it falls in the lower range of the financial analytical models, is consistent with recently authorized ROEs for comparable water utilities, reflects Cal-Am's strong performance history and creditworthiness, and does not include a leverage adjustment. Further, we find that an ROE of 10.10% is fair because this return is commensurate with returns on investments in comparable companies, and this return is sufficient to (1) assure confidence in the financial integrity of the company, (2) maintain its credit, and (3) attract necessary capital. Therefore, we adopt a 10.10% ROE for the Monterey district for the three upcoming GRC years.
We adopt the following cost of capital for the Monterey district for 2006, 2007 and 2008:
Ratio |
Cost |
Weighted Avg. Cost | |
Debt |
56.6% |
6.98% |
3.95% |
Equity |
43.4% |
10.10% |
4.38% |
Total |
100.0% |
8.33% |
Cal-Am and DRA agree, for ratemaking purposes only, to set unaccounted-for water at 8.5% for the main system, 9.0% for the Ambler/Bishop subsystems, and 10.0% for the Hidden Hills/Ryan subsystems.
MPWMD does not object to this portion of the settlement if it is clear that it is for ratemaking purposes only and the Commission recognizes that MPWMD's Expanded Water Conservation and Standby Rationing Plan effective March 1, 1999 (Ordinance 92) sets a standard of no more than 7% unaccounted-for water. In its response, Cal-Am affirms that the settlement percentages are for ratemaking purposes only and then proceeds to caution against using the percentage of unaccounted-for water as an indicator of the efficiency or condition of a water system, citing to industry publications and the testimony of a MPWMD witness for corroboration.37
The settlement figures are clearly stated to be for ratemaking purposes only. We find that the levels set by the proposed settlement are reasonable for ratemaking purposes because the percentages for each system fall between Cal-Am's and DRA's positions and are represented as providing levels that should create some incentive to lower the current five-year averages. Therefore, we adopt the proposed figures for ratemaking purposes.
In the settlement, Cal-Am agrees to lower its three-year expenditures for meter replacements from $185,500 to DRA's proposed $37,200. This change reflects Cal-Am's past five-year history of average annual meter expense of $13,000.
MPWMD objects to this portion of the settlement, stating more rapid replacement of existing meters would assist Cal-Am in meeting its SWRCB production limits. Therefore, it recommends that meter expense be set at $40,000 year, as projected by Cal-Am in its Urban Water Management Plan.38 In its response, Cal-Am states that the Commission should not assume that a more aggressive meter replacement plan will necessarily reduce unaccounted for water as inaccurate meter readings may be a function of the size of the meter, i.e., larger meters supporting residential fire suppression sprinklers, rather than the age of the meter.
MPWMD's recommendation is consistent with Cal-Am's original testimony and also with Cal-Am's Urban Water plan. As a matter of policy, we find MPWMD's position is a reasonable amount in relation to the overall expenditures we are authorizing for compliance with Order 95-10. On rebuttal, Cal-Am questions whether a more aggressive meter replacement plan will directly translate to lower unaccounted-for water; its position, however, is not consistent with its Urban Water Plan.
While we have a policy preference for MPWMD's recommendation, we find the settlement amount is also supported by the record. With a difference between the two proposals of less than $100,000 per year, we do not find this issue sufficient to cause us to reject the settlement as a whole. Therefore, we adopt the settlement's position of $37,200.
We encourage Cal-Am and DRA to give further consideration to MPWMD's recommendation. Cal-Am and DRA have an opportunity to state their agreement to the Commission modifying the proposed settlement in opening comments on the proposed decision. If both parties to the settlement state their agreement, we will adopt a modified settlement approving $120,000 for the three-year GRC cycle in the final decision.
Cal-Am agrees to DRA's slightly lower figure of $4.2 million based on an updated cost review. Cal-Am identifies 9 of 23 miles of Carmel Valley Main segments that need repair: 3 miles have been completed and 3.13 miles are proposed for this GRC cycle.
MPWMD recommends that Cal-Am's replacement program be analyzed by an independent expert hired by DRA to review whether the rate of replacement should be accelerated. MPWMD also expresses concern that the Carmel Valley main dates from the 1930s and many portions suffer from extensive deterioration and produce excessive leakage. In its response, Cal-Am states MPWMD provides no evidence to support its assertion of excessive leakage.
We find the record here supports the settlement's proposed expenditures for Carmel Valley main repairs. However, we agree with MPWMD that Cal-Am customers may be unnecessarily exposed to SWRCB imposed fines if Cal-Am is not replacing sufficient portions of the main. Therefore, we direct Cal-Am, as part of its next GRC filing, to provide a specific analysis of leakage in the Carmel Valley main system.
Cal-Am and DRA agree that improvements to the Bishop subsystem treatment plant built in 2000 are necessary and recommend the costs of the project be recovered through an advice letter filing, capped at $750,000; the advice letter process is used due to the uncertain timing of the project. Cal-Am's filing shows that capital projects for the Bishop subsystem from the last case and this proceeding total $2,240,925.39
MPWMD objects to customers of the Monterey main system being required to pay for capital improvements to the subsystems of Bishop, Ambler, Ryan Ranch and Hidden Hills prior to the Commission analyzing the economic subsidies these customers may be receiving from main system customers and the environmental and financial risks that rapid expansion of the subsystems may be causing by exacerbating the overdraft in the Seaside basin. The main system is interconnected only to Ryan Ranch, and the customers of the four subsystems are not subject to SWRCB fines or to proposed surcharges for the Coastal Water Project. MPWMD points out that subsystem customers pay only 4% of Cal-Am's revenue requirement, yet in this GRC, proposed project expenditures for the four subsystems total $2,150,000.40
In its response, Cal-Am states that the Bishop subsystem repair is necessary to maintain water quality. Further, many of Cal-Am's districts are composed of subsystems that are not interconnected, yet the costs of all system improvements are allocated to all customers in the district as a whole.
We disagree with Cal-Am that the Monterey subsystems should be viewed as similar to other Cal-Am districts. The Monterey district main system customers are facing extraordinary water issues, both in the need to conserve and in the need to develop new water sources. The record shows the Bishop subsystem is a small but rapidly expanding system, with new demand driven by new homes in the Pasadera subdivision that sell for over $2 million on average.41 With main system customers facing proposed surcharges for the Coastal Water Project, it may be appropriate to consider a capital improvement surcharge for the subsystem customers. We direct that Cal-Am provide, in its next GRC filing, a full breakout of all capital improvement projects undertaken in each of the four subsystems since SWRCB Order 95-10, and a breakout of estimated costs for additional capital projects planned over the coming ten years.
While we find a comprehensive analysis should be done on this issue, the record does not support delaying plant investment in this GRC period that Cal-Am represents is necessary to comply with water quality regulations. Therefore, we approve the ratemaking treatment proposed in the settlement for the Bishop treatment plant.42
6. Special Request 4 - Establishment of a Water Revenue Adjustment Mechanism (WRAM) Account to Track Emergency Rate Overcollections
Cal-Am and DRA agree to establish this balancing account to return any overcollected monies to customers consistent with the process adopted in D.05-03-012. MPWMD has two concerns with the use of the funds collected.
First, MPWMD requests the Commission clarify that no SWRCB fines will be paid from this WRAM account. In its application, Cal-Am proposed to use this account to first pay "any fines that are imposed by the SWRCB." DRA also objects to this use of WRAM and language permitting this use is not included in the proposed settlement. Therefore, we clarify, as requested by MPWMD, that funds from this account cannot be used to pay SWRCB fines.43
Second, MPWMD requests that any overcollections from WRAM balancing accounts, be they from this new emergency rate overcollections WRAM or the existing WRAM for the inverted rate design structure, should be applied toward conservation projects rather than being refunded directly to customers. It requests the Commission implement this ratemaking treatment in this GRC, or, in the alternative, establish a policy for the next GRC.
Cal-Am objects to MPWMD's proposal to change the WRAM refund mechanism. Cal-Am urges that the refund method set forth in D.05-03-012 for overcollections from the 2004 emergency rate structure be returned.44 Also, Cal-Am says MPWMD's proposal would unnecessarily complicate the funding of conservation programs by making these programs dependent on a fluctuating balancing account.
We find that using the refund mechanism adopted in D.05-03-012 for this request is reasonable because it allows any overcollection to be quickly returned to customers, rather than waiting for the next GRC. In addition, funding levels for conservation programs should be set based on the district's needs and not fluctuate due to the WRAM balances. We are authorizing over $1 million in conservation funding in this proceeding and these programs should have a stable base. Finally, we find the present refund mechanism directly rewards customers who avoided the high use emergency rates through prudent water usage.45
Therefore, we adopt the proposed settlement's language on Special Request 4, with the clarification that funds from this account cannot be used to pay SWRCB fines.
7. Special Request 5 - Endangered Species Act (ESA) Memorandum Account
Cal-Am and DRA agree on a memorandum account to track compliance with ESA requirements other than ESA compliance associated with the San Clemente Dam retrofit. They do not agree on inclusion of San Clemente Dam compliance costs or whether any fines levied on Cal-Am for ESA violations should also be tracked in this account.
Together with DRA, MPWMD requests we exclude from this memorandum account ESA fines and ESA compliance costs associated with the San Clemente Dam. We will address these two issues in a later section on contested issues. Therefore, we adopt here a memorandum account for ESA compliance costs unrelated to the San Clemente Dam.
Cal-Am and DRA agree to a conservation surcharge not to exceed $300,000 annually from Cal-Am to MPWMD and to special reporting requirements that break out (1) conservation activities Cal-Am undertakes on its own, (2) conservation activities MPWMD undertakes from its own budget, (3) programs MPWMD undertakes under Cal-Am's emergency conservation surcharge (Special Request 6, discussed later), and (4) conservation programs MPWMD undertakes under the surcharge proposed here.
MPWMD requests we add a requirement that Cal-Am enter a formal agreement with MPWMD. That agreement would include a description of reimbursable activities, the rates at which services are reimbursed, the invoicing format, the categorization of services to reflect Commission authorization, the reporting format, the ownership of work product, and the term of the agreement. Cal-Am states this proposal would unnecessarily complicate matters. DRA, in its reply brief, supports MPWMD.
We find conservation activity is critical for the Monterey district and the funds being provided by customers, over $1 million a year, are substantial. Therefore, it is reasonable and in the public interest to have Cal-Am and MPWMD enter a formal agreement for the conservation funds that Cal-Am provides to MPWMD, in addition to the reporting requirements it develops with DRA. Therefore, we adopt Special Request 7 and also require Cal-Am to enter into a formal agreement with MPWMD.
Cal-Am and DRA propose that all current balancing accounts be refunded in accordance with standard Commission policies. MPWMD recommends that the WRAM account for rate design instead be made part of the final revenue requirement in this and future GRCs and used to fund conservation programs. As we discuss earlier under Special Request 4, we do not adopt MPWMD's recommendation as the existing methodology allows for the balancing accounts to be cleared in a more timely manner and for conservation programs to be funded based on actual needs.
B. Uncontested Settlement Issues
The following issues are uncontested. The settlement provides cites to the underlying testimony of Cal-Am and DRA in support of the resolution of each issue. We address these issues by category, in the order presented in the settlement.
Cal-Am and DRA agree on customer counts and the average water use per customer, including an allowance for unaccounted water. MPWMD's concerns regarding unaccounted for water percentages are addressed in the previous section.
For purchased power expense, Cal-Am and DRA agree that the benchmark of kilowatt hours (kwh) per hundred cubic feet will be based on Cal-Am's recorded 2003 and 2004 kwh usage. They also agree to use the latest rates from Pacific Gas and Electric Company (PG&E), and the numbers are subject to update prior to the start of the test period. Finally, Cal-Am and DRA agree that changes in the cost per unit of electricity purchased are to be tracked in the purchased power balancing account.
Based on discussions and explanations by Cal-Am of previously provided information, the parties agree to use the current chemical costs and current usage as the base in estimating chemical costs for the GRC period. For the remaining O&M expenses, Cal-Am and DRA agree to split the minor differences.
The total O&M expense proposed for 2006 is $5,244,200. This figure is less than the 2000-2005 historical figures used by Cal-Am (also shown at Table 1 of DRA's Exhibit 108), but it is significantly higher than the $4,501,000 we adopted for 2003 in D.03-02-030. DRA testifies that it did a "top down" approach whereby it escalated the total O&M cost adopted in D.03-02-030 and separately estimated purchased power based on the forecasted change in PG&E rates. The settlement states the major differences are in purchased power and chemicals, which are explained. Therefore, we find the settlement reasonable on this issue.
The proposed settlement represents a compromise between Cal-Am and DRA that is substantial. For payroll expense, the settlement proposes $4,443,700, a middle ground between Cal-Am's original $4,749,700 and DRA's $3,955,200, and reflects (1) DRA's agreement to use Cal-Am's methodology and (2) Cal-Am's agreement to remove three additional employees from its request, to reduce estimated overtime expenditures, and to remove its request for employee incentive compensation. The settlement amount is significantly higher than the $3,750,000 we adopted for test year 2003 in D.03-02-030. The record is weak on explaining the increases. Cal-Am represents that overtime expenditures are higher due to the need to immediately make repairs to avoid water loss from leaks, and that payroll expense is higher due to offsetting reductions in O&M expense for temporary labor used historically in lieu of full-time employees. We find the settlement compromise acceptable but in the next GRC, we direct Cal-Am to provide in its testimony supporting its application a more comprehensive showing of any changes in payroll expenses that are greater than the rate of inflation.
For A&G items other than payroll, there were also substantial differences. For pension payments, the parties agreed to a separate balancing account, discussed below. In addition, under the proposed settlement, Cal-Am agreed to a substantially lower regulatory expense, and other miscellaneous amounts are not charged to ratepayers. A final difference of approximately $200,000 was split between the parties. The adjusted settlement figure for A&G other than payroll and pension expense is $3,718,000.
We do not have a clear record to evaluate the reasonableness of the proposed settlement on this issue. Cal-Am has reclassified several expense items between A&G and GO. DRA's five-year comparison between total O&M, A&G, and GO in Table 1 of Exhibit 108 shows expenses have increased at a rate greater than inflation, but this table does not separate pension expenses from benefits expenses, and DRA does not provide further analysis. DRA's original position escalated Cal-Am's expenses from those adopted in the last GRC, but this is hard to rely on when Cal-Am has reclassified items. The settlement provides a table of A&G expense categories but the large difference in miscellaneous expense is not explained.
While we find the record is weak on this issue, DRA has performed a full review before reaching settlement, and no party contests this issue. Therefore, we find the settlement is reasonable, with the requirement that in the next GRC filing Cal-Am must present in its direct showing a comprehensive analysis of changes since 2000 in total O&M, A&G, and GO expenses, with pension expenses removed.
Cal-Am's minimum pension payment of $1,052,100 is given separate treatment. Cal-Am and DRA recognize that this expense is based on minimum Employee Retirement Income Security Act (ERISA) funding requirements and can have wide fluctuations. They agree to collect pension expenses via a balancing account funded by a 3% monthly surcharge on customers' bills. We find a separate surcharge treatment of pension costs to be reasonable. We adopt this portion of the settlement and will review the 3% level in the next GRC.
All differences in taxes other than income tax were the result of differences in projected payroll expense and capital investment. The remaining difference is due to the contested issue of the ratemaking treatment for the San Clemente Dam and will be resolved as part of that issue.
For income taxes, the parties agree that interest for tax deduction purposes should be calculated based on total rate base times the projected annual weighted cost of debt. Cal-Am agrees with DRA that differences in revenue requirement because of tax law changes should be tracked in a memorandum account for later determination of distribution. We find these methodologies reasonable.
There are no issues for net-to-gross multiplier.
We discussed and resolved earlier MPWMD's opposition to the settlement on meters, Carmel Valley Main Segment 4, 5, 6, and 10, and the Bishop Treatment Plant.
Cal-Am and DRA also reached agreement on network replacements, network extensions, tools and equipment, process plant, planning study, structural improvements to Forest Lake Tank #2, Forest Lake Tank #3, Segunda Tank, 13th Avenue Main, Segunda Tank #1, distribution improvements in Seaside, Carmel Valley reconfiguration, Carmel Valley system improvements, arsenic treatment, Carmel Valley Main Phase 1, distribution monitoring, and retirements. The rationale for the compromises reached is explained for each plant category, and we find the resolutions reasonable. The agreed amounts are:
Amount Requested | |||
Utility Plant Item |
Cal-Am (000s) |
DRA Position |
Settlement (000s) |
Network Replacements - 2004-2007 |
$654.1 |
$382.0 |
$654.1 |
Network Extensions - 2005-2007 |
277.8 |
99.0 |
225.0 |
Tools and Equipment 2004 change |
230.9 |
30.2 |
30.2 |
Process Plant - 2005-2007 |
1208.6 |
953.6 |
1208.6 |
Planning Study - 2004 Construction Work in Progress |
459.4 |
339.0 |
339.0 |
Structural Improvements to Forest Lake Tank #2 - 2005 |
625.0 |
427.0 |
487.0 |
Forest Lake Tank #3 - 2007 |
5000.0 |
4500.0 AL46 |
4575.0 AL |
Segunda Tank - 2006 |
2150.0 |
2150.0 AL |
2150.0 AL |
13th Avenue Main - 2006-2007 |
350.0 |
306.0 |
320.0 |
Segunda Tank #1 - 2007 |
425.0 |
425.0 AL |
425.0 |
Distribution Improvements in Seaside - 2006-2007 |
750.0 |
00.0 |
00.0 |
Carmel Valley Reconfiguration - 2007 |
654.0 |
00.0 |
00.0 |
Carmel Valley System Improvements - 2006 |
797.0 |
624.0 |
775.0 |
Arsenic Treatment 2006 |
3530.0 |
3530.0 AL |
3530.0 AL |
Carmel Valley Main Phase 1 - 2005 |
1860.0 |
1860.0 AL |
1860.0 |
Distribution Monitoring - 2005 |
1025.0 |
1025.0 AL |
1025.0 |
Retirements - |
|||
2006 |
774.2 |
774.2 |
659.3 |
2007 |
493.8 |
493.8 |
233.2 |
Cal-Am and DRA agree that depreciation expense should be based on the authorized level of plant in service. The remaining difference is related exclusively to the San Clemente Dam retrofit. The parties agree that net salvage estimates should be based on the authorized level of retirements.
Cal-Am accepts DRA's estimate of cash working capital, and the parties agree on deferred taxes exclusive of the unsettled issue of San Clemente Dam retrofit.
The rationale for GO allocation is set forth in the separate GO settlement. We will discuss our concerns and resolution of this issue in our later section on the GO settlement. We note here that Cal-Am and DRA include in this section an explanation of the GO rate base allocation of $1,305,300 for 2006 and $1,219,200 for 2007, but they do not discuss anywhere why the attached rate tables show $3,354,600 each year in GO prorated expenses, which includes $968,590 per year amortization of the Citizens' acquisition premium and a credit of $370,400 in net RWE savings for 2006.
The proposed settlement states there are no issues. Cal-Am's showing on customer service is found in Exhibit 57 at Chapter 12, Section 1. DRA's report, Chapter 11 of Exhibit 88, finds nothing out of the ordinary in data compiled by the Commission's Consumer Affairs Branch (CAB) other than a number of billing related complaints. However, DRA does express concern over the level of customer dissatisfaction with Cal-Am's service expressed by customers at the Monterey and Felton PPHs. DRA testifies:
DRA is aware of a great deal of customer dissatisfaction with Cal-Am's service as evidenced by speakers at the PPHs in Felton and Monterey on May 12 and May 13. A number of complaints were raised in those hearings, on topics ranging from no water service, low water pressure, improper notification of boil orders, billing disputes, meter reading issues, hazardous construction practices, noise, a chemical accident, the inability to get prompt or courteous service from the call center in Illinois, the failure of the call center to resolve emergency issues and the failure of the call center to register complaint calls. (Exhibit 89, Chapter 11, pages 2-3.)
Based on the comments received from customers at the Monterey and Felton PPHs and the discussion of service problems in the last GRC, the ALJ asked Cal-Am for further testimony and documentation on its national call centers.47 In the evidentiary hearings, Felton FLOW also sponsored testimony from nine customers on service problems.
We also examined in hearings the quarterly performance reports on the national call center. As part of the RWE merger proceeding, D.02-12-068 established a quarterly reporting requirement to monitor the performance of AWW's national call center in responding to California customers of Cal-Am. The report measures the percentage of calls answered within 30 seconds, the percentage of calls abandoned after 30 seconds, and the "first call effectiveness."48
In examining the current reporting on the national call center, we discovered concerns. First, the quarterly reports are not California-specific, rather they measure all AWW subsidiaries. Cal-Am's witness stated the reports could be made California specific by mid-2006. Second, questions regarding the call effectiveness measurement elicited the information that AWW records success when the operator refers a customer complaint for a work order, not when the complaint is actually resolved. Lastly, Cal-Am provided a list of complaints kept at the regional office, Exhibit 104, but this list is considerably shorter than the list kept by CAB.
Based on DRA's CAB complaint analysis, we find the level of customer service problems is lower than the last GRC, but still remains a concern for both the Monterey and Felton districts.
Based on our concerns with existing reporting, we direct Cal-Am to develop (1) a new quarterly report that provides California specific statistics, by district, from the national call center and that breaks out type of calls and final disposition of all complaints, and (2) a new quarterly report on all complaints received at district and regional levels and their final disposition. These reports should be developed within 60 days, routinely filed on a quarterly basis with CSID and Water Division, and served on all parties to this proceeding.
In the next GRC, Cal-Am must make a more comprehensive showing on its service quality for the Monterey and Felton districts. This showing must include additional data collected through better monitoring and reporting.
Special Requests 6, 9, 11, 12, 14, and 15 are included in the settlement and are uncontested by MPWMD.49 We briefly review each here.
Special Request 6 provides for establishment of a memorandum account for expanded conservation and rationing costs billed by MPWMD. This memorandum account was authorized in the last GRC, and we continue our authorization under the same terms. (See D.03-02-030, OP 6.)
Special Request 9 is a memorandum account for MPWMD emergency rationing costs. Cal-Am would record here costs incurred under MPWMD's Ordinance 92 in the event that rationing is implemented. This account is a companion to Special Request 6 and we continue our authorization under the same conditions we adopted in last GRC. (See D.03-02-020, OP 5.)
Special Request 11 requests authorization for an emergency rate tariff procedure. Cal-Am's emergency tariff is presented in Exhibit G and would be triggered under the same criteria the Commission adopted in D.05-03-012 at page 6 and implemented under the guidelines outlined in MPWMD Ordinance 119. Cal-Am asks to place this tariff into effect on five days notice pursuant to an advice letter filing. We find this request reasonable and adopt it.
Special Request 12 would increase the after-hours reconnection fee from $15.00 to $50.00. Customers can avoid this charge by agreeing to have the reconnection made when they are not present. Cal-Am agrees not to charge any reconnection fee to low-income customers enrolled in its Program for Alternative Rates (PAR) and to advise all customers who face reconnection because of non-payment about the PAR program at the time the request for reconnection is made. This change should be reflected in Cal-Am's Tariff Rule 11.C.1. We find this request reasonable and adopt it.
In Special Request 14, Cal-Am proposes, as required by Ordering Paragraph 12 of D.02-12-068, to return to ratepayers, with interest, all net savings produced by cost savings measures enacted by its parent, AWW, as a result of a change in control to RWE/Thames. Exhibit 59, Chapter 9, page 7 of 7 shows that through 2004 Cal-Am has returned net RWE savings of $32,000 to Monterey customers and projects to return $69,193 in 2005 and $370,400 in 2006.50
Cal-Am states that D.02-12-068 requires that the memorandum accounts be effective for four years following the close of the RWE transaction. The transaction closed on January 10, 2003, making the last effective date January 10, 2007.51 In this application, Cal-Am states that as each year passes, the tracking of past savings becomes embedded in the normal operations, and accurate comparison to what might have occurred becomes even more difficult. Therefore, it requests authority to discontinue this memorandum account tracking as of the date of this decision.
We expect to issue the final decision in this proceeding in the last quarter of 2006. With only a few months difference to the time specified in D.02-12-068, we find the settlement's proposed granting of Cal-Am's request to be reasonable.
In Special Request 15, Cal-Am requests revision to its Rule 14.1 to comply with proposed changes by MPWMD to Ordinance 92. The revision would be made by advice letter and would cross-reference all changes to Ordinance 92 and the underlying staff report and decision. We find this request reasonable and grant the request.
This section of the settlement addresses the mechanism and authority for Cal-Am to file, by advice letter with supporting workpapers, the escalation year rate increase for 2007 and 2008 authorized in this decision.
The parties agree that the step and attrition increases for Monterey should be based on weather-adjusted recorded earnings for the latest 12 months ending September 30 each year, and that the language and separate capital structures previously adopted for historical Cal-Am properties and former Citizens properties should be used.
In accordance with the Commission's policy for approving step and attrition increases, should Cal-Am's earnings, based on the recorded test above, exceed its authorized return, the requested step or attrition increase should be reduced to offset the earnings in excess of its authorized return in this proceeding.52
C. Action on Proposed Monterey Settlement
Based on our review of the proposed settlement, we find the issues agreed to between Cal-Am and DRA to be reasonable in light of the whole record, consistent with the law, and in the public interest. Therefore, we adopt the Monterey settlement.
In our review, we have also found several areas, particularly regarding tracking and monitoring customer service, justification of expense items, and capital improvements for the four subsystems, where further information must be collected and analyzed prior to the next GRC. We find these tracking and monitoring requirements do not conflict with any provision of the settlement. Therefore, we adopt these requirements in addition to the settlement provisions.
D. Monterey Issues Not Addressed in the Settlement
Cal-Am requests it be allowed to continue to have retrofit costs for the San Clemente Dam given ratebase treatment as construction work in progress (CWIP), and to have interim ratemaking treatment adopted in the last GRC raised from $7,073,000 to $27,854,525 to reflect work it expects to undertake in the upcoming period.53 These costs will be incurred for adding a new layer of concrete to the front of the existing dam to meet seismic safety concerns. The funds will first be spent for planning and environmental studies and later for construction. The estimated total cost of the project, expected to be completed in December 2009, is $47 million.
Cal-Am testifies that the San Clemente Dam is a concrete arch dam constructed in 1921 and operated by Cal-Am since the 1960s. The reservoir has not been dredged and thus excessive amounts of sediment have accumulated, removing over 94% of the storage capacity.54 However, Cal-Am asserts that the dam is used and useful because it provides a point of diversion in the winter months that produces energy savings to customers to the extent that the diverted water replaces well water that must be pumped uphill to serve customers at higher elevations; in addition, water could be diverted in emergency circumstances. Further, Cal-Am in its rebuttal to MPWMD's testimony asserts that it is not illegally diverting the water at the dam because it operates in compliance with the overall requirements of SWRCB Order 95-10, and it does have pending water rights applications. While the dam's usefulness is limited, Cal-Am testifies it is required by regulatory agencies to address seismic safety issues, and therefore its shareholders should be allowed to continue to earn a full rate of return on all costs expended, as authorized in the last GRC.
Cal-Am acknowledges it is actively pursuing other options for the dam. The National Oceanic and Atmospheric Administration (NOAA) Fisheries is one of several environmental agencies recommending the dam be removed. Because Cal-Am needs NOAA Fisheries' approval for the retrofit project, Cal-Am recognizes that the agency could require the dam's removal. Cal-Am testifies it is currently participating in negotiations with governmental agencies and organizations to share in the cost of dam removal; Cal-Am estimates the cost of dam removal to be more than its retrofit estimates.
In addition, Cal-Am recently began considering a new option for the dam, called the River Bypass Option. As part of their environmental impact report (EIR) for the retrofit project, the two EIR lead agencies, the California Division of Safety of Dams (DSOD) and the U.S. Army Corps of Engineers, are requiring Cal-Am to develop a bypass alternative. Cal-Am estimates this alternative would cost somewhere between the cost to retrofit and the cost for dam removal. Cal-Am first presented this alternative in its rebuttal testimony. The cost estimates were not reviewed by DRA.
MPWMD opposes Cal-Am's request to continue to receive ratebase treatment for the project costs. It states that San Clemente Dam retrofit costs are the largest single item in this GRC, Cal-Am has failed to exercise reasonable managerial skill and care in maintaining the dam, and Cal-Am has not met its burden of proof to have costs included in rates. MPWMD testifies that Cal-Am was advised in a 1981 DSOD report to conduct a seismic stability analysis but that it waited until the early 1990s to retain a consultant to perform the study. Further, Cal-Am ignored the reservoir sedimentation problem to the point that the dam is no longer used and useful, and will not be after the retrofit. The reservoir feature of the dam has not been used for 10-15 years and the spillway gates have not been used since 1996.55
In addition, MPWMD testifies that due to a conservation agreement Cal-Am entered with NOAA Fisheries in 2001, it can only use the dam as a diversion point when the river flow is above 21 cubic feet per second, which effectively limits the use to the winter months, when Cal-Am has sufficient water other than in emergency conditions.56 Lastly, MPWMD asserts that for the Commission to continue to allow ratebase treatment for the project violates Section 727.5(e)57 because the retrofit project is not a used and useful investment, it will not maintain the reliability of water service, nor minimize the long-term costs to ratepayers, nor provide equity between present and future ratepayers. MPWMD urges the Commission to thoroughly review the project in a separate proceeding, or in the alternative, adopt DRA's recommendation to place the costs in a memorandum account for later review.
DRA opposes Cal-Am's request because the solution to the San Clemente Dam safety issue is still uncertain and the dam's future usefulness is unclear. DRA finds the project is similar to the Coastal Water Project in that the scope is still uncertain, and the project is years away from completion. The case law on granting CWIP ratebase treatment to water utilities is for short-term projects, as discussed in D.03-09-022. Consistent with the Commission's ratemaking treatment of the Coastal Water Project in that case, the San Clemente Dam retrofit costs should be placed in a memorandum account and accrue interest at the 90-day commercial paper rate. Further, after reviewing the cost estimates, DRA recommends that the costs be capped for this GRC period at $23,997,940, primarily due to excessive management and contingency fee estimates. When Cal-Am completes its environmental review and chooses a final project, it can file a separate application.
Discussion
We agree with MPWMD and DRA that the San Clemente Dam retrofit project is uncertain, and ratepayers should not be required to fund estimated project costs until the Commission has fully reviewed a final project proposal, either in the next GRC or by separate application if Cal-Am is ready to proceed before its next GRC. The funds Cal-Am has and will expend that are associated with this project should be placed in a memorandum account until this review is complete, subject to the cap recommended by DRA.
Our position is consistent with the treatment we authorized Cal-Am's Coastal Water Project in D.03-09-022. In that decision, we found CWIP treatment should only be used for water utilities' construction projects that are of short-term duration, and we directed the costs of a longer term project, especially one with uncertainties as to whether ratepayers would realize benefits, should be booked into a memorandum account.58
The Commission articulated its policy in D.03-09-022 after it had issued D.03-02-030 in Cal-Am's last GRC. We find that D.03-09-022 should guide us here. In D.03-02-030, we proposed an interim ratemaking treatment with the expectation that a final project would be before us in this GRC and, in doing so, we did not find it necessary to fully consider the history and purpose of CWIP treatment for water utilities. The policy articulated in D.03-09-002 is consistent with our policies for energy utilities.
Further, removing the project from ratebase when the dam's usefulness is unclear and placing the balance in a memo account with an allowance for funds used during construction (AFUDC) is consistent with the treatment prescribed in Section 455.5. ESA compliance costs for San Clemente Dam that are already embedded in rates should not be placed in this new memorandum account. In addition, environmental compliance operating expenses should be tracked separately in a subaccount from capital construction costs. Examples provided of operating expenses are the costs of surveys, monitoring, predator detection and removal, personnel training, and fish trap and truck.
We next turn to the issue of an appropriate interest rate for the memo account. When the San Clemente Dam project was authorized AFUDC in D.00-03-053, the order adopted an uncontested settlement that provided for the San Clemente Dam and Carmel River Dam projects to accrue AFUDC at the rate for 90-day commercial paper. DRA proposes we use the same interest rate again and this rate is consistent with the carrying costs authorized for the CWP in D.03-09-022.
However, for energy projects, the Commission generally uses an AFUDC interest rate that also reflects long-term debt and equity. We find this calculation may be more appropriate here as Cal-Am will need to obtain financing over several years for the project.
DRA and MPWMD object in their comments on the proposed decision to the Commission changing its existing practice on AFUDC methodology for water utilities without notice and an opportunity to be heard. Both parties cite to the use of the 90-day commercial paper rate as the existing Commission practice for water utilities. Therefore, we direct Cal-Am to file a separate application within 60 days addressing the AFUDC methodology that should be applied to the San Clemente Dam retrofit memorandum account. We will use the existing AFUDC 90-day commercial paper rate on the San Clemente Dam retrofit account, subject to true-up, until we complete our review of this issue in the upcoming application.
We find the cost cap recommended by DRA for the memorandum account is reasonable. We are allowing Cal-Am carrying charges on this account, and therefore we should remove cost estimates that are excessive. DRA does not adjust for 2004 costs that Cal-Am has already incurred. For 2005 and 2006, DRA lowers to 5% Cal-Am's use of a 10% factor for company administration of consultants. DRA bases its recommendation on R.S. Means 2005 Edition of Construction Cost Estimates for the Western Region (R.S. Means). On the same basis, DRA lowers Cal-Am's 30% factor for project contingencies to 10%. In addition, DRA notes the only key activity will be studies, not construction. For 2007, DRA uses similar R.S. Means estimates to adjust for estimated design fee, administrative costs, construction contingencies, and inspection costs.
In establishing a cap on this account, we are not finding the costs reasonable. All costs booked into a memorandum account are subject to a reasonableness review before being included in ratebase; Cal-Am can make this showing either in a separate application or in a future GRC filing. The cost cap we adopt is $9,379,525 for 2004, $1,321,590 for 2005, $1,863,825 for 2006, and $11,433,000 for 2007; the total cap is $23,997.940.
In Special Request 1, Cal-Am seeks authorization from the Commission to recover all its historic and now stranded costs related to the Carmel River Dam and Reservoir Project (Carmel River Dam). It seeks to recover $3,646,452 through a six-year monthly meter surcharge. Generally, utility shareholders must bear the full costs of abandoned projects.59 The Commission has recognized a limited exception to this principle when it has found that ratepayers may be responsible for some of the costs of an abandoned project during times of dramatic and unanticipated change where the utility can demonstrate that it exercised reasonable managerial skill.60
In the last GRC, pending the Carmel River Dam project either being put into service or abandoned, the Commission allowed Cal-Am to place into rate base as CWIP $2,852,900 in pre-1/1/02 expenditures and $750,000 per year for each of 2003, 2004, and 2005 and earn a rate of return of 8.56% on $5,102,900. In that decision, D.03-02-030, at page 44, we state that this ratemaking treatment was temporary and that when Cal-Am filed its next GRC it should remove from CWIP any amounts that were not spent on the Carmel River Dam and propose a final ratemaking treatment.
In its direct testimony, Cal-Am supports its request.
Prior to selecting the Coastal Water Project as the long-term water supply solution for customers of the Monterey District, Cal-Am focused on securing the permits and rights for the Carmel River Dam project. Environmental studies, however, revealed the Carmel River Dam would have potentially unacceptable impacts, including impacts on endangered species. Political opposition in the local communities added to the likelihood the Carmel River Dam could not proceed. Cal-Am still believes that the Carmel River Dam is the most cost-effective alternative, but also recognizes that obtaining the permits to build it would be impossible. Additionally, unlike the Carmel River Dam, the Coastal Water Project is not prone to water supply limitations in an extended drought.
For projects such as the Carmel River Dam, the Commission requires Cal-Am to investigate and compare the cost of alternatives and to evaluate those alternatives prior to completing significant capital investment projects. In fact the Carmel River Dam will be used as one of the alternatives to the Coastal Water Project in the Coastal Water Project environmental analysis. These Carmel River Dam costs should be recovered from the customers that benefit from the investigation. (Exhibit 1, Stephenson, pages 31 and 32.)
In its report, DRA provides a comprehensive analysis of the six-year Carmel River Dam project and recommends that the Commission disallow the entire $3,636,452 because Cal-Am fails to show that an exception to our used and useful standard should be granted under the criteria we established in D.84-05-100 and later cases. DRA testifies Cal-Am did not undertake this project in a time of extraordinary change or great uncertainty and did not act reasonably in (1) selecting this project rather than pursing other alternatives, (2) properly assessing and regularly reevaluating the risks of community opposition and environmental uncertainties, and (3) continuing to actively pursue the project and incur costs for six years when the legal, regulatory, and political risks that led to abandonment were well known for some time prior to this. According to DRA, Cal-Am fails to document how the risks and uncertainties of the Carmel River Dam project were identified and analyzed, what weight they were given, and why they were dismissed from consideration. DRA testifies no further ratepayer recovery is warranted, especially in light of the fact that, without the Commission finding Cal-Am acted in a reasonable manner, customers have already paid Cal-Am $933,000 on this project.61
DRA also places the Carmel River Dam project in the context of the long history of water supply problems on the Monterey peninsula and the large amount of money that customers have already paid for this and other projects that never materialized. In the early nineties, ratepayers paid $1.5 million plus interest in preliminary costs for Cal-Am's proposed Canada de la Segunda reservoir that was never built. Ratepayers are still paying the $1.25 million plus interest for the Plan B water supply contingency plan required by Assembly Bill 1182 in 1998 and, in a separate proceeding, Cal-Am is requesting ratepayers start paying preconstruction costs on the Coastal Water Project. Potential future costs include the San Clemente Dam retrofit, estimated to be $47 million, and discussed in the previous section. Finally, DRA points out that Cal-Am's Carmel River Dam figures do not include the costs paid by Monterey residents to MPWMD for preliminary work on its proposed New Los Padres Dam. The Carmel River Dam is physically identical to the New Los Padres Dam project sponsored by MPWMD that was earlier defeated by voters; DRA asserts that ratepayers are being asked to cover the costs of a project that they have already paid for once.62
In its rebuttal, Cal-Am asserts it acted reasonably to pursue a project that was already well along in the regulatory review process and could, therefore, be implemented much faster than any other water supply project. Key regulatory agencies such as SWRCB had already extensively reviewed and approved the Los Padres Dam project and were supportive of Cal-Am pursuing the project. In addition, Cal-Am interprets responses to a 1995 voter survey it commissioned after the Los Padres Dam project was defeated to show some public support for Cal-Am, rather than MPWMD, to proceed with a dam project provided it did not have a growth component. On the issue of why it continued to pursue the Carmel River Dam until August 2003, even after MPWMD requested it withdraw the project in January 2002 and Cal-Am itself in February 2003 had applied to the Commission to replace the Carmel River Dam with the Coastal Water Project, Cal-Am testifies that it needed to always have an active project before the SWRCB or it would face substantial fines. Further, it states that DRA should have no objections to Cal-Am recovering costs incurred in the later years because they largely related to Plan B.63
In its brief, Cal-Am asserts it has prudently managed its efforts to identify and implement a long-term replacement water supply, and its efforts meet the standards set by the Commission for recovery of abandoned plant from ratepayers. Further, it states that if the Commission denies its request, we run the risk of discouraging infrastructure investment by utilities.
Discussion
The instances of the Commission granting a utility rate recovery for abandoned plant are rare and only done in extraordinary circumstances. The Commission's general principle is to only allow recovery in rates of the reasonable and prudently incurred costs for investments that are found to be used and useful in providing service to ratepayers. The standard of review cited by both Cal-Am and DRA for a utility's ratepayers to share in the costs of abandoned projects is the criteria set forth in D.84-05-100, and later cited by the Commission in D.89-12-057 and D.96-09-039. In these decisions, the Commission found that in periods of great uncertainty for utility planners, it could be appropriate for ratepayers to bear some of the costs incurred for a project which is ultimately canceled if the utility demonstrates that it has exercised reasonable managerial skill in (1) identifying, assessing, and to the extent possible, quantifying the risks relevant to its ability and obligation to maintain adequate and reasonable service ("identifying relevant risks"), (2) analyzing projects such that the choice of project reflects an overall strategy to minimize costs, consistent with quality and dependability of service ("analyzing particular projects"), and (3) frequently reviewing its project commitments and overall supply strategy ("reevaluations").64 In discussing the exception to our used and useful standard, we stated:
The exception is the product of the period of dramatic and unanticipated change, initiated most notably for utility planners by the oil embargo of 1973, and extending for almost a decade. The period was characterized by great uncertainty in the energy industry, both as to demand growth and availability of supply. During such a period, a reasonable utility management can still reduce risk, but not necessarily to a level at which the shareholder may fairly be expected to absorb all the costs of canceled projects. During such a period, the ratepayer should participate in the increased risk confronting the utility.
But the ratepayer does not become the utility's underwriter in a period of high risk. At all times, the shareholder will bear some of the risks of abandoned projects. The utility should bear a major part of the risk in order to provide proper management incentives. Also, the ratepayer's participation is limited to those abandoned projects, or those portions of projects, for which the utility demonstrates to us that it has exercised reasonable managerial skill. We emphasize that the utility bears the burden of proof of reasonableness, not only with respect to the planning and conduct of a given project, but also regarding the cancellation, which must have occurred promptly when conditions warranted. Finally, a perception merely of generalized and ill-defined risk will not suffice to invoke this exception to the "used and useful" principles. The utility will have to demonstrate that the project which it ultimately abandoned was reasonable throughout the project's duration in light both of the relevant uncertainties that then existed and of the alternatives for meeting the service needs of its customers. (D.84-05-100, 15 CPUC 2d 123, 126.)
We should apply these standards here. We first examine the requirement that a cancelled project is only eligible to be considered for cost recovery from ratepayers if it was planned during a period of dramatic and protracted uncertainty and unusually high risk. Cal-Am has actively pursued projects to obtain additional water supply for the past 15 years, beginning with the proposed Canada de la Segunda reservoir project, amid protracted uncertainties of supply availability and high risk.
We find that the issuance on July 6, 1995 of SWRCB Order 95-10, which found that Cal-Am did not have legal right to approximately 10,730 acre-feet annually of water it was diverting from the Carmel River, followed by the defeat in November 1995 of MPWMD's Los Padres Dam project, constitute a dramatic and unanticipated change. The water Cal-Am was found to be illegally diverting constituted approximately 69% of the water being supplied by Cal-Am to its customers. Order 95-10 required Cal-Am to diligently proceed in accord with a time schedule to obtain the right to additional water supplies or face enforcement action. The order listed three options for Cal-Am to obtain new water supplies, two of which relied on MPWMD's Los Padres Dam project. Cal-Am has operated under Order 95-10 for over ten years, thus meeting the criteria of protracted uncertainty and unusually high risk.
We next examine whether Cal-Am applied reasonable managerial skill to the costs it is seeking to recover for the Carmel River Dam project. Cal-Am is requesting recovery of $3,646,452 it spent for mostly environmental studies and preliminary work to secure project approval. We use the three criteria adopted in D.84-05-100 and used as precedent in D.89-12-057 and D.96-09-039.
1. Identifying Relevant Risks. This criterion requires the utility to show it has identified, assessed, and to the extent possible, quantified the risks relevant to its ability and obligation to maintain adequate and reasonable service. In its rebuttal testimony, Cal-Am states that the Carmel River Dam project was the most cost-effective and environmentally benign water supply project under the facts and circumstances that existed when Cal-Am undertook the project. It was a project that had already completed the environmental review and permitting process and could therefore be put in place in the shortest time possible.65 Cal-Am states there were no other feasible alternatives at the time, and the record supports this. This fact is critical due to the requirement of Order 95-10 that Cal-Am actively pursue additional water supply. Cal-Am did consider the potential listing of steelhead and the redlegged frog as "threatened" under the ESA and relied on the SWRCB's assessment in D.1632 and its own continuing work with MPWMD, California Department of Fish & Game, National Marine Fisheries Service (now known as NOAA Fisheries), the U.S. Fish & Wildlife Service, and U.S. Forest Service.
When environmental concerns grew after MPWMD issued its Draft Supplemental EIR on the Carmel River Dam project, Cal-Am states that due to Order 95-10, it had to continue with the project until it was certain there was a viable alternative. We accept this as reasonable management behavior given that Cal-Am had to work with the SWRCB in order to avoid enforcement action and to work with the Commission to identify other alternatives under the 1999 Plan B requirements of Assembly Bill 1182. We also find persuasive DRA's Table 13-2 "Summary of Carmel River Dam Costs by Category, Vendor, and Year" which shows that while Cal-Am continued the Carmel River Dam project, its cost outlays declined in 2002 and 2003, with the largest category of costs being payments to MPWMD. (Exhibit 88.)
2. Analyzing Particular Projects. This criterion requires that the utility's choice of projects reflect an overall strategy to minimize costs, consistent with quality and dependability of service. Cal-Am asserts that when it proposed the Carmel River Dam project, it was the most cost-effective and environmentally feasible means of meeting the requirements of Order 95-10. This is borne out by the original New Los Padres Dam EIR which was certified in September 1994, and the Carmel River Dam draft EIR issued by MPWMD in November 1998. For the Carmel River Dam EIR, although the Court of Appeals later required a supplemental report on the narrow issue of viticulture, the Court stated the rest of the EIR fully complied with the California Environmental Quality Act.
While several events going forward affected the viability of the project, particularly increased environmental concerns, another feasible project was not clearly established until after the Commission completed the Plan B process and Cal-Am was able to analyze the Plan B report published in August 2002. While DRA is correct that Cal-Am does not provide formal cost studies, it did actively participate and support the Commission's Plan B process. The record supports a finding that Carmel River Dam was the most cost-effective alternative and that another alternative did not clearly emerge until the completion of the Plan B process.
3. Reevaluations. We require that utility management have reviewed at least annually its project commitment and overall supply strategy. While Cal-Am did not document a formal annual review process, it did testify to regular meetings with key agencies and constituents and an on-going reevaluation of the feasibility of the project. A key concern raised by DRA is whether Cal-Am's management properly assessed the political feasibility of the project after the Monterey constituents of MPWMD rejected the Los Padres Dam project by 57%. Cal-Am did not provide the evidence necessary to sustain its claim that its survey showed voters would favor a similar project if it was done by Cal-Am rather than MPWMD and if the "growth" portion of the project were instead dedicated to providing extra water for public trust resources.66
DRA testifies that Cal-Am should have abandoned the Carmel River Dam project earlier than August 2003. Certainly, the issues of environmental and political infeasibility that are cited in Cal-Am's direct testimony were present well before 2003. In response, Cal-Am asserts that due to the requirements of Order 95-10, it did not have the option to withdraw the Carmel River Dam project until it had approval for another alternative.
We find that operating under Order 95-10, and later the additional requirements of the Plan B legislation, has meant Cal-Am's management had less control than a utility normally has over the timing of the Carmel River Dam project. Given these constraints, we find Cal-Am's management has acted in a reasonable manner.
In summary, based on the requirement of Order 95-10 for Cal-Am to always be actively pursuing a water supply project, the initial cost-effectiveness of the project, and the environmental approvals through 1999, we find Cal-Am acted reasonably in pursuing the Carmel River Dam project and then in waiting until it had approval for an alternate project, the Coastal Water Project, to cancel the project.
Therefore, Cal-Am has shown that Carmel River Dam is an abandoned project eligible to be considered for rate recovery because its management acted reasonably, not only with respect to the planning and conduct of the project, but also regarding the cancellation. We see close consideration of the Carmel River Dam project as a necessary step in the road that Cal-Am, Monterey district residents, and state and local governmental agencies are taking to address the drought cycles and shortage of water on the Monterey peninsula. Thus, we find that the costs Cal-Am incurred for the Carmel River Dam project, $3,290,103, are reasonable and should be recovered from ratepayers.
We next turn to consideration of the specific method and timing of that cost recovery. In D.84-05-100, at page 127, we stated that the Commission's policy is to not allow carrying costs, AFUDC, on cancelled projects for which we have granted cost recovery unless peculiar circumstances of the project warrant otherwise. In D.84-05-100 we found one project, the Montezuma project, should be allowed all accumulated AFUDC carrying costs because ratepayers derived substantial benefits from the project in the form of profits from the sale of coal reserves, even though the project never produced electricity.67 For the other abandoned projects found to meet the criteria for ratepayer recovery, the Commission authorized cost recovery, amortized over four years, of direct project costs but not accumulated AFUDC. Both the Montezuma project and the other abandoned projects granted cost recovery were placed in PG&E's ERAM account, which earns interest at the 90-day commercial paper rate.
In D.96-09-039, the Commission granted Southern California Edison Company (SCE) recovery of the direct costs of the Kramer-Victor transmission line, with no recovery for any accumulated AFUDC. We directed the direct costs be amortized over a four-year period. In D.97-01-047, we found that D.96-09-039 did not contain a factual showing that the costs SCE sought to recover were reasonable. On rehearing, in D.00-06-054, we accepted a settlement between SCE and The Utility Reform Network (TURN) whereby SCE would reduce the $10.937 million entry in the memo account by $2.15 million. We transferred the balance to the Transition Cost Balancing Account (TCBA). The TCBA earns interest at the 90-day commercial paper rate.68
Consistent with the case law discussed above, we direct Cal-Am to remove the Carmel River Dam project from CWIP. The amount in CWIP includes AFUDC interest accrued prior to the project being placed in ratebase, which should be removed before the balance is placed in a separate account that shall earn interest at the 90-day commercial rate. The use of a short-term carrying charge for the Carmel River Dam project is appropriate because, unlike the San Clemente Dam project, Cal-Am does not need to obtain additional financing, and as Cal-Am is being given full recovery of its direct costs, there is no investor equity risk to be compensated for in the carrying charges. The electric cases provided for a four-year amortization, while Cal-Am requests six years. We find the shorter, four-year period preferable and adopt it.
Cal-Am proposes to recover the costs through a meter surcharge. Cal-Am's proposal differs from the electric cases, where costs are recovered through commodity rates. Cal-Am's methodology removes any timing risk associated with fluctuating levels of customer usage. No party provided testimony on this point. We find Cal-Am's proposal reasonable, and adopt it.
Cal-Am requests recovery of both ESA compliance costs, to include annual compliance costs for the San Clemente Dam, and any fines imposed for failure to comply with ESA requirements. It states fines would be due to claims related to damage done to the steelhead and red-legged frog in conjunction with Cal-Am's operation of its Monterey water production system.
DRA and MPWMD oppose this request. Both testify that Cal-Am has considerable management control over whether the regulatory agencies enforcing ESA requirements impose fines and that "even entertaining the possibility of passing fines through to ratepayers is extraordinary."69 DRA notes Cal-Am's testimony that it has negotiated an agreement with the US Fish and Wildlife Services covering the redlegged frog (an agreement that has been renewed regularly), and that with respect to the steelhead, NOAA has entered agreements with Cal-Am previously and indicates it is willing to do so again. Cal-Am's issue with NOAA is the level of mitigation Cal-Am is willing to do, and this is again within the utility's control, not the customers.
We agree with DRA and MPWMD that Cal-Am has not shown that we should deviate from our policy of not allowing recovery of fines. The record shows that it is within Cal-Am's management control as to whether Cal-Am incurs ESA fines. We will grant memorandum account treatment only for ESA compliance costs.
On whether annual ESA compliance costs for the San Clemente Dam should be tracked in this memorandum account or in a separate account, we will track ESA compliance costs with other San Clemente costs. MPWMD asserts these costs may not have been reasonably incurred, and DRA states that the nature of the San Clemente ESA activities is distinct from other traditional ESA compliance activities. The record is unclear whether these are operating costs being booked elsewhere already or are capital costs already included in Cal-Am's project cost estimates. Therefore, Cal-Am should book all San Clemente Dam related costs into one memorandum account where the Commission can conduct a comprehensive reasonableness analysis.
Cal-Am seeks authority to establish a memorandum account for SWRCB fines for this GRC period. It seeks first to recover these fines through the WRAM account under Special Request 4, but as discussed earlier, this request should be considered separately, as has been our practice since we established the original criteria for recovery of SWRCB fines in D.98-08-036. Cal-Am states that under MPWMD's Ordinance 92, and the various programs it mandates, Cal-Am and MPWMD have established a plan that, if adhered to by the customers, will assure compliance with Order 95-10. To complement Ordinance 92, Cal-Am also requests here an emergency rate tariff to take effect on short notice. Therefore, Cal-Am argues, if water production limits are exceeded, it is because customers chose not to adhere to the various conservation and rationing programs and they, not Cal-Am should be responsible for fines.
In D.98-08-036, the Commission authorized Cal-Am to establish a memorandum account for fines imposed for exceeding SWRCB Order 95-10 in water years 1997-1998 and 1998-1999. In that decision, the Commission stated that recovery of the fines would be allowed subject to review of Cal-Am's system management (including its implementation of existing conservation programs and minimization of system losses) to ensure that Cal-Am takes all reasonable steps to avoid over-pumping. Further, the Commission stated that Cal-Am's shareholders would have to absorb some portion of the fines, to the extent that Cal-Am reasonably could have avoided the over-pumping. Lastly, D.98-08-036 states that the Commission would consider in the next GRC whether to continue the memorandum account.70 In D.00-03-053 and D.03-02-030, the Commission reviewed Cal-Am's request and renewed authorization for the memorandum account subject to the same conditions originally established in D.98-08-036.71
For the first time, DRA and MPWMD oppose Cal-Am's request. Both parties state that Cal-Am now has all the tools necessary to avoid over-pumping and should be held responsible for operating its water system in a manner to avoid any fines.
DRA states the Commission recognized in D.98-08-036 that even entertaining the possibility of passing fines through to ratepayers is extraordinary, and that decision required Cal-Am management to operate the system as best it can to avoid such fines. The Commission also made clear that allowing the recovery of fines was a temporary measure, expected to be of brief duration, until MPWMD could adopt its rationing plan, Ordinance 92.72 DRA reviews the expanded tools that Cal-Am now has available, comments on those it has not fully utilized, and finds that Cal-Am should be held responsible for fully utilizing these tools and for operating its water supply system to avoid overproduction.
MPWMD details the provisions of Ordinance 92 and the revised Ordinance 119 Expanded Water Conservation and Standby Rationing Plan. MPWMD supports Special Request 15, which would add all provisions of Ordinance 119 to Cal-Am's tariff; however, MPWMD testifies that if the Commission compares the management tools available in 1998 to those now in place, it must conclude that a memorandum account to track SWRCB fines is no longer warranted.
Discussion
Consistent with our findings in D.98-08-036, 81 CPUC 2d at 653, we find here that Cal-Am now has the management tools necessary to operate its Monterey water system and it should "assume full responsibility for managing water supply in compliance with the cutback requirement." The record shows that Cal-Am can, and should, do more to ensure conservation. First, under Stage 1 of Ordinance 92, landscape water audits are supposed to be conducted on all large residential users, large irrigators, and properties with dedicated landscape meters to set water budgets. Ordinance 92 required these audits to be completed within 180 days, or by August 28, 1999, yet after six years only 13% have been done.73 By not having conducted these audits, Cal-Am cannot require these customers to curtail their usage during Stage 2 periods. Second, there are over 1,000 commercial account audits that Cal-Am has not done, as discussed below (Rate Design). As the record reflects, the Commission has approved all of Cal-Am's requests for conservation programs, emergency rate measures, and compliance costs. Cal-Am determines the financial requests it makes in its application and cannot claim that ratepayers should bear the cost of SWRCB fines if it fails to operate its water system in a prudent manner.
Cal-Am has argued that further emergency rate measures are no longer necessary in order for it to be able to comply with SWRCB Order 95-10, and we agree.74 We take notice that MPWMD has the authority to impose a water moratorium if needed, and Ordinance 119 provides the ability to more rapidly respond to a water emergency.75 Therefore, we deny Special Request 8.
The Monterey district has a special per-capita rate design adopted in 2000 to address the unique water supply and operating problems in Monterey. The district is in an area subject to drought on the average of every seven years and is also subject every year to the water production limits set by the SWRCB in Order 95-10. In D.00-03-053, our decision on the test year 2000 GRC, we adopted a normal increasing block design for normal times and a per-capita conservation rate design for periods when Cal-Am was likely to violate its SWRCB water production limit. For residential customers, the per-capita rate design has five sharply ascending blocks; for other categories, there are two ascending blocks. To protect Cal-Am from revenue loss due to conservation, the Commission adopted a WRAM.
Soon after D.00-03-053 was issued, Cal-Am exceeded its production limit and the conservation rate design became effective. Subsequently, the Commission granted Cal-Am's petition for modification of D.00-03-053 and the per-capita rate design became permanent. In D.03-02-030, the last GRC, we reaffirmed this rate design but expressed our intent to consider eliminating the WRAM in the next GRC if revenues were found to be more predictable.76
Because it faced losing the WRAM mechanism, Cal-Am proposed a different rate design in this proceeding, one that is less customer specific and complex but still retains a conservation emphasis. For residential customers, Cal-Am proposes compressing the current 12 categories of customers, based on a water budget formula which considers persons per household, lot size, and the number of large animals, into three categories, and eliminating occupancy consideration after the first block definition. While establishing a water budget for residential customers is relatively simple, Cal-Am testifies it has performed few water audits on its commercial accounts because they are time- and labor-intensive. Therefore it proposes a change to a rate structure based on meter size. If the Commission rejects this recommendation, Cal-Am requests we authorize sufficient staff to complete the existing commercial audit backlog. For its four subsystems, Cal-Am proposes to transition them over the next six years to the same rate design so that there is a regional approach to pricing and ratemaking.
DRA objects to Cal-Am's proposal, recommending instead that the Commission continue the current per-capita rate design and WRAM. It testifies that Cal-Am's proposal negates the advantages of the per-capita rate design, is less logical and intuitive, and provides less conservation incentive for small households. DRA also recommends that the current rate structure be maintained for the subsystems as these systems draw from a different water aquifer and there has not been a need established for change.
MPWMD supports portions of Cal-Am's proposal. It supports eliminating a residential per capita allocation after the first block as this should save water and facilitate compliance with SWRCB Order 95-10. Further, it agrees with Cal-Am that this modification will place less emphasis on occupants and more emphasis on outdoor water use. For these reasons, it supports Cal-Am's residential rate design proposal. For commercial customers, MPWMD states that this proceeding has revealed a significant problem that requires an immediate remedy. Specifically, Cal-Am has not conducted the required audits to prepare water budgets for over 1,000 commercial accounts. These accounts are basically being billed at a flat rate and, therefore, MPWMD supports moving to a rate structure based on meter size. Should the Commission deny this request, monies should be made available to hire auditors to establish water budgets.
MPWMD opposes Cal-Am's proposal to transition Hidden Hills, Ryan Ranch, Bishop, and Amber Park subsystems toward consolidated pricing with the Monterey district because these are small, independent systems with different water sources and production issues. Further, this consolidation would enable Cal-Am to fund subsystem improvements at main system customers' expense, an issue MPWMD has raised in this proceeding.
The DOD supports Cal-Am's rate design proposal because the proposed inverted block commercial rate would enhance conservation, and the revised residential categories would make it harder for individual residential customers to cheat the system.
Discussion
In reviewing residential rate design, we find that Cal-Am has not established good cause to deviate from the existing 12 categories. Testimony shows that the existing rate design has proved effective in reducing consumption in the Monterey district and that there is no evidence of significant customer cheating under the system. As Cal-Am's witness testified, the reasons the Commission gave in D.01-10-014 for retaining per-capita rates are still persuasive today, and this type of rate structure has been successfully implemented in other water-scarce communities as a more equitable way of coping with water shortages while preserving some amount of customer choice.77
However, we should give consideration to Cal-Am's and MPWMD's concern that per capita rate design should not be retained in the higher blocks as these levels involve outdoor rather than personal water use. In D.03-02-030, at page 72, we examined the steep blocks and found that only those customers who are the very lowest users fall exclusively into the first block. Without further analysis to review, we find it would be inequitable to move too quickly away from per capita allocation in the higher blocks. Therefore, we retain the existing residential rate design for Monterey as it has been effective and equitable. We would like to consider refinements to the rate design in order to promote more conservation of outdoor water use, but do not have the analysis in this record to do so.
For commercial customers, we find that the water audits should be completed in a timely manner, before the next summer. The Monterey district has unique water supply constraints that have caused the Commission to authorize over a million dollars a year in conservation programs and to adopt special memorandum accounts and emergency rate measures. In addition, Cal-Am is required under SWRCB Order 95-10 to actively pursue new sources of water supply, a very costly undertaking. It would not be appropriate to place commercial customers on a standard meter size schedule because Cal-Am has failed to perform over 1,000 individual water audits of its commercial customers. Further, it would not be fair for residential customers to continue to bear a disproportionate burden of the conservation rate design. As pointed out in D.03-02-030, at page 72, residential customers pay commodity rates ranging as high as 400% of the standard rate, while non-residential customers' highest rate tops out at 200% of the standard rate.78
Therefore, we direct Cal-Am to undertake water audits for all of its commercial customers in a timely manner. Cal-Am states it would need additional funding to do this. Before we approve additional funding, we need to establish what level of revenues has been provided in rates since 2000 for Cal-Am to do commercial water audits. If further funding is necessary, a memorandum account may be the logical ratemaking vehicle and should be explored. Based on the record here, we direct Cal-Am to file an advice letter within 30 days providing a specific plan to complete all commercial water audits prior to May 1, 2007. This advice letter should identify the revenues provided in customer rates since 2000 for Cal-Am to undertake these audits, the number of audits performed, and, if additional funds are required, propose a mechanism to fund them.
In its comments on the proposed decision, Cal-Am states that it believes many commercial customers will refuse to comply with the audit requirement. Cal-Am should document in writing its efforts with these customers and, if necessary, request an increasing block rate design specifically for noncompliant customers through a petition to modify this decision.
Finally, we address Cal-Am's request to consolidate over a six-year period the rate design of its four subsystems. We agree with DRA and MPWMD that good cause has not been shown for this change. Further, we have directed in an earlier section that Cal-Am present a detailed study in the next GRC of the capital improvements that have been done and are projected to be done over the next ten years. We find that it is premature to consider rate consolidation until the study has been done and reviewed. Therefore, we do not adopt Cal-Am's proposal.
17 See Exhibit 58, Chapter 2, pages 9-11. The consolidated debt/equity for fiscal year 2005 is 60.14%/39.86% for 2005 and is projected for 2006-2008 in the range of 59.4%/40.6% each year.
18 Exhibit 94, pages 1-2.
19 While Cal-Am first proposed the separate capital structures for the purpose of showing synergy savings, it states in its Monterey report that "the proof of the value of this acquisition will be shown in the former Citizens' properties rate case filing, occurring later this year." (Id. at page 3-1.) In this proceeding, Cal-Am has not provided the underlying documents in support of the synergy calculation for either Monterey or Felton districts, as will be discussed under the GO settlement section.
20 See Cal-Am's Report on the Rate of Return for the Monterey District, Chapter 3, page 3-1, prepared April 15, 2002 and submitted in A.02-04-022. This report is also included in Exhibit 33, Volume 1, Appendix 1 of A.06-01-005.
21 See D.01-09-057, mimeo. at pages 67-8 and Ordering Paragraph 3, mimeo. at page 73.
22 The issue is similar to the tracking of cost savings we ordered in D.02-12-068 following the RWE merger. In Special Request 14 of this application, Cal-Am requests the Commission end the separate tracking of RWE merger savings earlier than the four years ordered in D.02-12-068. Cal-Am states that as each year passes, the tracking of past savings becomes embedded in the normal operations, and accurate comparison to what might have occurred becomes even more difficult.
23 We separately consider in this decision Cal-Am's showing for amortization of the acquisition premium in Section VI.D.
24 As we will discuss in later sections, customers in the Monterey district have paid in the past for capital projects that were not used and useful, and customers are being asked in this proceeding to pay for the abandoned Carmel River Dam project and the uncertain San Clemente Dam retrofit project. In addition, in separate proceedings, Cal-Am is asking for approval to begin recovery for the Coastal Water Project, which has estimated project costs of over $160 million in 2004 dollars. (See Exhibit 57, Chapter 13, page 2 of 12.)
25 We also have a record discussing this issue in the pending Los Angeles district GRC.
26 In Exhibit 58, Chapter 2, page 10, Cal-Am proposes for the original Cal-Am districts a cost of debt of 6.92% for 2006, 7.03% for 2007, and 7.00% for 2008.
27 Bluefield Water Works & Improvement Company v. Public Service Commission of the State of Virginia (Bluefield) 262 U.S. 679, 692-93 (1923), The Federal Power Commission v. Hope Natural Gas Company (Hope) 320 U.S. 591, 603 (1944), and Duquesne Light Co. v. Barasch (Duquesne) 488 U.S. 299, 310 (1989).
28 Cal-Am adds a 50 basis point leverage adjustment to this ROE. We separately address the leverage adjustment below.
29 See D.05-12-043, mimeo. at 24.
30 D.03-02-030, mimeo. at 66.
31 See Exhibit 38, "Investors Hunt for Better Returns."
32 On October 25, 2005, Felton FLOW filed a Motion to Strike a sentence on page 22 of Cal-Am's Reply Brief as it referenced interest rates since the time of evidentiary hearings. We deny Felton FLOW's Motion to Strike, and its request to reopen the record to allow Felton FLOW to submit new evidence. Cal-Am's statement is general and we will provide it the appropriate weight. The Commission in the past has taken official notice of changes that occur in the financial markets up to the time of the submittal date. See D.05-12-043, mimeo. at 25.
33 D.04-05-023, mimeo. at 54.
34 September 21, 2005 Comments of Felton FLOW on the Settlement Agreement, page 8.
35 See Exhibit 59, Chapter 9, page 7 of 7.
36 We rely for this finding on the language of the settlement, Section 3.5 of Exhibit 2, and Cal-Am's assertion that the Monterey district ROE settlement does not contain a leverage adjustment.
37 Based on Cal-Am's comments, we recommend that the utility and MPWMD confer on whether a different measurement should be used to meet the objectives of Ordinance 92.
38 See Exhibit 60 at page 33.
39 Exhibit 1, Schneider testimony at Tab G, page 27.
40 Exhibit 76, page 12 cites to Cal-Am's request for $400,000 for treatment plant improvements in Ryan Ranch, $1 million for Ambler Park water tanks, and $750,000 for Bishop iron/manganese removal facilities.
41 7 RT at 876.
42 MPWMD's concerns regarding overdrafting the Seaside basin are being addressed through the complaint Cal-Am filed in Monterey County Superior Court, discussed in Exhibit 76 at pages 14-19; Cal-Am is not requesting authority to recover its litigation costs here.
43 Later, under Special Request 8, we further address treatment of SWRCB fines.
44 The emergency rates would be implemented if Cal-Am is in danger of exceeding the water production limit imposed by SWRCB Order 95-10 and would target high-use customers.
45 The mechanism refunds half of the overcollection directly to the high use customer who paid the emergency rates and distributes the rest of the overcollection among all ratepayers.
46 Cal-Am would be required to file an Advice Letter (AL) at project completion before this plant could be placed in rate base.
47 In the last Monterey GRC, DRA and MPWMD testified that service had deteriorated to an unacceptable level. Cal-Am presented rebuttal testimony attributing many of the customer complaints to start-up problems with its national call center, opened by AWW in mid-January 2002, and testified that complaints would return to more normal levels as startup problems are worked out. In D.03-02-030, we concluded that "while there are indications in the record that all may not be well in Cal-Am's Monterey Division, no party has made a competent showing of what the underlying problems might be, or how they should be corrected."
48 Id., Ordering Paragraph 4.
49 Cal-Am's application contains 16 special requests. Special Requests 2 and 3 were removed from consideration by the scoping memo. Special Request 10 is moot based on D.05-09-004. Special Requests 4, 5, 7, and 16 are discussed earlier as contested settlement issues. Special Requests 1, a portion of 5, 8, and 13 are discussed under issues not included in the settlement.
50 For 2006, $568,602 will already be accounted for in rates and $370,400 will be net additional savings.
51 See Exhibit 1, Stephenson direct at page 48. Exhibit 57, Chapter 13, page 11 of 12 mistakenly uses January 2006, as does DRA in its report.
52 See D.05-07-022, Appendix L, page 44.
53 D.03-02-030 gave CWIP treatment to $4,406,700 of costs incurred before January 1, 2002 and $2,666,300 in costs estimated to be incurred in the coming GRC period.
54 See Exhibit 1 and 7 RT 888. The original design storage capacity of the reservoir was 1,425 acre-feet but was increased to 2,260 acre feet with the spillway bay gates in position. This has been reduced to about 137 acre-feet today.
55 Exhibit 1, Feizollahi and testimony in transcript, 7 RT 888.
56 Exhibit 1 and 7 RT at 890-95.
57 Section 727.5(e): In establishing rates for recovery of the costs of used and useful water plant, the commission may utilize a capital structure and payback methodology that shall maintain the reliability of water service, shall minimize the long-term cost to ratepayers, shall provide equity between present and future ratepayers, and shall afford the utility an opportunity to earn a reasonable return on its used and useful investment, to attract capital for investment on reasonable terms and to ensure the financial integrity of the utility.
58 D.03-09-022, mimeo. at 21 and 22.
59 See Re Pacific Power and Light Company, (1984), 15 CPUC 2d, 118, 119 (D.84-05-097).
60 See Re Pacific Gas and Electric Company, (1984) 15 CPUC 2d 123 (D.84-05-100) and D.89-12-057, Re Pacific Gas and Electric Company (1989) 34 CPUC 2d 199, 269 (D.89-12-057) and Re Southern California Edison Company (1996) 68 CPUC 2d 25, 31 (D.96-09-039, affirmed in D.97-01-047).
61 This has occurred because the CWIP treatment allowed Carmel River Dam costs in the last GRC.
62 DRA testifies the survey Cal-Am conducted of voters in November 1995 on their views of the Los Padres Dam project does not support Cal-Am's conclusion that voters would support the same project if the water proposed for new growth was reallocated to fire protection and increased river flow and the project was funded and managed by a private water utility instead of MPWMD.
63 DRA in its brief states MPWMD did not begin work on its expanded EIR until April 2003. According to DRA, the invoices attached to Cal-Am's rebuttal show that from this point onward, Cal-Am was charged for only 40% of MPWMD's EIR costs because MPWMD had chosen to expand the EIR to cover other alternatives. Therefore, DRA questions whether any of the Carmel River Dam project costs here are associated with reviewing the other alternatives, including those now in the Coastal Water Project.
64 D.84-05-100, 15 CPUC 2d at 123 and 124.
65 In September 1994, the New Los Padres Dam's EIR was certified, and on July 6, 1995, the SWRCB issued D.1632, which summarized the environmental work done and granted MPWMD the water rights to support the diversion to storage required by the project.
66 Cal-Am did not have in its possession the full survey when it made these assertions. It was able to obtain a copy on the last day of hearing. The survey was voluminous and Cal-Am's request to enter it as a late filed exhibit was opposed. By ALJ ruling, a schedule was established that provided DRA an opportunity to review the material, prepare testimony, and cross-examine. Shortly thereafter, Cal-Am withdrew its request.
67 After allowance of PG&E's direct and carrying costs, a balance of approximately $19.3 million remained from the gain on the sale. This balance was allocated entirely to ratepayers. The Commission found that while the allocation of the gain differed from prior decisions, in this proceeding an exception was made because ratepayers were being allocated over $40 million in costs related to the cancelled projects.
68 The TCBA was first adopted in the Preferred Policy Decision, (D.95-12-063), as modified by D.96-01-009, and carried forward in D.96-12-088. In D.98-05-045, we reaffirmed the use of the 90-day commercial paper rate for the TCBA.
69 D.98-08-036, 81 CPUC 2d 648, 653.
70 81 CPUC 2d 648, 652.
71 D.03-02-030, mimeo. at page 51 states: "Our D.98-08-036 was carefully crafted, and we will once again authorize what we did there, but update it to apply to SWRCB fines incurred through the effective date of our order in Cal-Am's next GRC.
72 D.98-08-036, 81 CPUC 2d 648, 653.
73 MPWMD/Pintar, 5 RT 668-669.
74 In D.04-07-035, the Commission directed Cal-Am to file an application within 90 days for a moratorium on new hookups and expansions. In Cal-Am's subsequent application it stated that a moratorium is no longer a necessary step. (See D.05-04-005, mimeo. at page 4.)
75 MPWMD opening brief, page 24.
76 Id. at page 39.
77 Ex. 1, Chestnut, page 3.
78 Id. at 72.
