V. Felton District Application
A. Contested Settlement Issues
Cal-Am and DRA propose a capital structure of 63% debt/37% equity and an ROE of 9.95% for the three GRC years. They state the ROE is 10 basis points higher than the settled amount for the recent Sacramento/Larkfield districts to recognize subsequent and forecasted increases in interest rates. Further, they state the ROE is 15 basis points lower than the ROE proposed in this proceeding for the Monterey district.
Felton FLOW contests the ROE portion of this section, recommending instead an ROE of 8.79% for both Monterey and Felton districts based on current financial market conditions, with an adjustment of 50 basis points for poor service and widespread customer dissatisfaction in Felton; this would reduce the ROE for Felton to 8.29%. We have assessed Felton FLOW's cost of capital evidence under the Monterey district settlement and there adopted an ROE of 10.10%. Cal-Am and DRA propose a 15 basis point downward adjustment from Monterey's 10.10% ROE for Felton, to give recognition to the methodology used to determine synergy savings and amortization of the acquisition premium for the former Citizens' districts. Based on this, we find an ROE of 9.95% for the district is reasonable.
We turn now to Felton FLOW's request to lower the authorized ROE due to poor service. In support of this adjustment, it cites customer witnesses in the evidentiary hearings and at the PPH who provide specific examples of Cal-Am's poor response to customer concerns and complaints, the evidence presented of Cal-Am's imprudent management of construction projects, and the overwhelming support of the local community for the public acquisition of the Felton district. Further, Felton FLOW asserts that in the past the Commission has reduced the authorized ROE of utilities that have failed to provide adequate service.79
In cases where the Commission has reduced a utility's ROE, we have found offenses or actions contrary to statute, order, rule, instruction, or express policy, as explained in re Southern California Edison Company (1991) 42 CPUC 2d 645, 738, D.91-12-076. For a water utility, we applied this standard in D.04-07-033 to reduce California Water Service Company's ROE by 50 basis points for its pattern of violating statutory and decisional requirements by acquiring three water systems without authorization, and in two of the water systems charging unapproved rates.80
We do not find that the evidence presented here establishes statutory or rule violations, or a pattern of behavior contrary to stated Commission policy. While the record establishes a need to more closely monitor Cal-Am's customer service quality, it does not support a finding of poor service quality. Therefore, we do not find that a reduced ROE is warranted.81
As discussed under the Monterey settlement, Cal-Am's proposed capital structure for the Felton district is reasonable and provides benefits to Felton customers. Likewise, the 6.37% cost of debt proposed for the three GRC years is reasonable and supported in the record.
We adopt the following cost of capital for the Felton district for 2006, 2007, and 2008:
Ratio |
Cost |
Weighted Avg. Cost | |
Debt |
63.0% |
6.37% |
4.01% |
Equity |
37.0% |
9.95% |
3.68% |
Total |
100.0% |
7.69% |
Felton FLOW requests the Commission disallow any increase in Cal-Am's combined O&M, A&G, and GO expenses due to the fact that DRA's analysis in Exhibit 109 shows these combined expenses for test year 2006 under the proposed settlement are 73.34% higher than the recorded expenses for these accounts in 2000. Felton FLOW states that the escalation in these accounts far exceeds the rate of inflation, and RWE, AWW, and Cal-Am should be required to meet the commitments they made at the time of the merger proceeding to implement efficiencies and economies of scale that would reduce these costs.
Felton FLOW also urges us to disallow 5% of the employee-related costs included in the proposed settlement for O&M, A&G, and GO for Felton because of political activities included in these accounts.82 Felton FLOW introduced evidence showing Cal-Am's president Paul Townsley, its Monterey/Felton district manager Steve Leonard, AWW's director of external affairs Kevin Tilden, and various other employees at the senior executive level as well as the Felton district level participated in meetings and a wide range of political initiatives intended to undermine the efforts of Felton FLOW, Public Citizen, and public agencies and officials to facilitate the public acquisition of the Felton district.83
We will first address Felton FLOW's proposal to allow no expense increases and then address its proposal for a 5% reduction. In recommending no increase in O&M, A&G, and GO expenses, Felton FLOW bases its recommendation on DRA's Exhibit 109, Table 1. This table contains discrepancies, two major ones being that it does not reflect the proposed settlement figures, which substantially lower A&G expenses for 2006, or the correct figure for GO expenses, which is substantially higher than shown even after excluding amortization of the Citizens' acquisition premium. In addition, the table shows the large percentage increases taking place in the years 2002-2004, the last GRC period, not 2005 and the upcoming test period. This table is not sufficient to support Felton FLOW's recommendation, therefore, we do not adopt it.
We turn now to Felton FLOW's proposal for a 5% reduction in each expense category to reflect Cal-Am's inclusion of political and lobbying activities by its employees. In its rebuttal, Cal-Am states that the consulting firm Moriah Group and Felton district's community relations manager, Evan Jacobs, were paid entirely from shareholder funds and that Kevin Tilden's time spent drafting proposed condemnation legislative changes related to the Felton district was less than 10% of his total time, and therefore not reportable under state lobbying laws. In addition, Cal-Am asserts that while a small amount of Leonard's and Tilden's time is spent on Felton condemnation issues, often even that small amount of time is primarily spent providing a service to ratepayers by responding to information requests.84
Based on Cal-Am's statements and the evidence of record, we find that Cal-Am did not separately record as shareholder expense all political activity and lobbying efforts by its employees. While the majority of Cal-Am's extensive campaign against Measure W is excluded from its rate request, Felton FLOW has established that Cal-Am has included in its request the time district and corporate personnel spent attending meetings on the Measure W campaign and Tilden spent drafting legislation. Therefore, an adjustment should be made, as Commission policy is clear that political and lobbying activity should not be included in customer rates.
Because Cal-Am and AWW employees did not separately track this activity, we must estimate the dollar adjustment. Felton FLOW's proposed 5% reduction is reasonable and should be adopted for O&M expenses, A&G expenses, and the Felton district allocation of GO expenses.
We turn now to evaluation of Cal-Am's and DRA's proposed settlement for these expense categories.
a) O&M Expenses
In its report, DRA states it has reviewed the O&M accounts for accuracy and tracked costs moving between accounts; in addition, DRA reviewed various invoices, and adjustments and believes that Cal-Am has properly removed duplicative, inappropriate and non-recurring charges from historical O&M information. DRA's estimated total for O&M expenses is $171,400. Cal-Am's original total exceeds this estimate by $1,600, with the difference attributable to the purchased power cost, which in turn relates to differing estimates on total water production.85 In the settlement, the parties state there are no outstanding issues and agree to use the latest purchase power rates by PG&E. The attached tables reflect $172,800 for this category. We should adopt the proposed settlement's O&M expense amount less a 5% deduction to employee-related costs. Cal-Am must provide a table showing this adjustment in its compliance filing of rate tables.
b) Payroll and A&G Expenses
Section 4.5 contains the proposed settlement reached between Cal-Am and DRA for payroll and A&G expenses. For payroll expense, DRA agrees with Cal-Am that a fifth employee, the local customer service person, is necessary and an amount of $281,100 for 2006 payroll is proposed. In D.04-05-023, $235,300 was adopted for test year 2003. Felton FLOW does not directly address the need for a local customer service person but based on the level of consumer complaints, we find the proposed settlement reasonable on this issue.
The settlement proposes to separately collect the minimum ERISA pension payment of $64,100 through a 3% monthly surcharge on customer bills, reconciled with an annual advice letter filing for a surcredit or surcharge, depending on the balance in the balancing account. This is the same treatment proposed for Monterey and due to the wide swings in yearly ERISA minimums Cal-Am has experienced, we find this treatment reasonable.
For A&G expenses other than payroll and pensions, Cal-Am and DRA settle on $175,900 per year based on:
Cal-Am's original A&G $306,700
Cal-Am's revised A&G 264,700
DRA's Original A&G 91,300
DRA's Revised A&G 142,500
In supporting the proposed settlement, Cal-Am and DRA refer to changes in expense categorization between A&G and GO. These changes do not explain the significant differences between the original and revised A&G expenses since the agreed-upon GO expense allocation is an increase of only $4,000 from DRA's original recommendation and $40,000 from Cal-Am's position.
While we place considerable weight on DRA's review and recommendation on this issue, the explanation provided by Cal-Am and DRA in the proposed settlement is inadequate because it does not address the substantial increase in this category from the amount authorized for test year 2003 in D.04-05-023.86 In its report, DRA states that D.04-05-023 did not adopt a specific figure for Outside Services and that it was not able to fully analyze increases because of Cal-Am's transfer of expenses from GO and its transfer of many other expenses among A&G accounts, making analysis of historic expenses infeasible in the time allotted.87
Cal-Am's comparison to present rates, Exhibit 63, Chapter 4, page 3 of 5, reflects that other A&G and Outside Services expenses in 2002 through 2004 were considerably higher than those adopted in D.04-05-023 for the same years. Reviewing the rates adopted in D.04-05-023, DRA's report, and the proposed settlement, we find that DRA's original A&G recommendation of $91,300, rather than the proposed $175,900 is supportable and reasonable. Therefore, we adopt this figure for other A&G.
As we discuss in the Monterey district section of this decision, we are concerned with the escalation of A&G and GO expenses, especially in light of RWE's plans to sell AWW and its Cal-Am subsidiary. Cal-Am presents testimony of projected savings that should come from RWE's Standardized Technology Enabled Process (STEP). Although projected savings from STEP over the next ten years are revised downward by its witness, Cal-Am explains that the RWE transaction was only completed in 2003 and a project the size and scope of the STEP program will take time to develop and implement.88
We intend to focus closely on the issue of A&G and GO expenses in the next GRC and we require Cal-Am to work cooperatively with DRA in providing the information necessary to fully analyze all A&G accounts. In the separate GO settlement, Cal-Am agrees that in connection with the 2009 GRC, DRA will retain an outside audit firm to review the GO operations and its cost allocations to the various ratemaking districts. Cal-Am will reimburse the Commission for the cost of the audit and it may seek recovery for the audit costs through rates in its 2009 GRC proceeding.89
Cal-Am and DRA agreed to GO expenses of $129,700, which include $57,179 in amortization of the Citizens' premium and $17,804 in a credit from RWE savings, in the Felton settlement. These expenses will be discussed later as part of the GO settlement and the amount approved for Felton should be reduced 5%.
In summary, we adopt $172,800 for O&M, $281,100 for payroll expenses and $91,300 for other A&G expenses, with a 5% reduction made to each to remove political and lobbying activity. In addition, we find reasonable and adopt the proposed 3% surcharge for minimum ERISA pension payments, together with the proposed balancing account mechanism.
Cal-Am and DRA state that all differences in this account were the result of differences in projected payroll expense and capital investment. Based on the settlement of other issues, new estimates are provided for Ad Valorem tax and payroll taxes. Due to other changes we make in the Felton settlement, we do not adopt these specific figures. Cal-Am should separately calculate the amounts based on the final decision and provide all interested parties and the Commission rate tables reflecting our adjustments, as discussed later in this decision.
Cal-Am agrees with DRA that (1) interest for tax deduction purposes should be calculated based on total rate base times the projected annual weighted cost of debt and (2) differences in the revenue requirement because of tax law changes should be tracked in a memorandum account for later determination of distribution. These policies are reasonable and should be adopted.
As discussed earlier, the specific amount of income taxes set forth in the proposed settlement cannot be adopted due to other changes proposed in the settlement. Cal-Am should separately calculate the amounts based on the final decision and provide all interested parties and the Commission rate tables reflecting our adjustments, as discussed later in this decision.
a) Tools and Equipment
Cal-Am originally proposed $118,700 and DRA $42,000. The two parties settled on $77,000 for the 2005-2007 period based on using five-year averages except for 2005, when DRA agreed that Cal-Am needed a new generator. We find this amount reasonable.
b) Process Plant
Cal-Am originally proposed $110,000 but agreed in the settlement to use DRA's proposed $35,000, which is based on a five-year average for 2005. We find this amount reasonable.
c) Distribution Monitoring
Cal-Am agrees to defer its $300,000 request to a later rate case, as requested by DRA and Felton FLOW. We find this resolution reasonable.
d) Highway 9 Main
Cal-Am and DRA agree to $107,500 in rate base in 2005, the estimated final cost of this project. Cal-Am originally estimated $150,000 and DRA recommended $86,000. In support of its $86,000 recommendation, DRA testifies that a review of prior years' detailed cost records show that the Commission's approval of an existing $300,000 in rate base is too high and should be adjusted for this final phase.
Felton FLOW contests this portion of the settlement and recommends a 20% overall adjustment and then a $50,000 deduction in remaining costs due to Cal-Am's mismanagement of the construction project. Specifically, Felton FLOW testifies that (1) Cal-Am should not have started the project in the winter season and a 20% reduction should be made for the additional costs incurred as a result of this decision, and (2) ratepayers should not have to compensate the utility for the $50,000 in additional costs stemming from the California Department of Transportation (CalTrans) finding that Cal-Am needed to have an independent resident engineer on-site at all times during construction due to problems.
On the decision to begin construction in the winter season, Cal-Am testifies that it was ready to start in the summer but delayed to the winter because it thought traffic would be lighter. Felton FLOW provides evidence that contrary to Cal-Am's assumptions, traffic is relatively constant on Highway 9 throughout the year, but peak period flows are actually slightly heavier during the winter than the summer.90 Further, by scheduling the project to start later, anyone familiar with the Santa Cruz Mountains could reliably predict that severe winter weather would adversely impact the project and very likely result in construction difficulties, inconvenience to the public, potential safety hazards, delays in completing construction, and higher costs than during the summer. Felton FLOW presented testimony on the inconveniences experienced by customers, and the construction problems encountered.
In its rebuttal testimony, Cal-Am testifies that while CalTrans did require an on-site project engineer be placed at the project due to construction problems, the $50,000 cost was off-set by savings in other areas, such as construction expenses; therefore, these costs fell within the original bid amount submitted by the contractor. Cal-Am did pay $75,990 in change order costs above the original bid, but these costs were largely attributable to the cost of working at night instead of during the day, and Cal-Am characterizes the costs as "generally unavoidable".
Based on the evidence presented, we find a $50,000 adjustment should be made to the Highway 9 project to reflect the higher costs of construction caused by Cal-Am's decision to begin construction in the winter season and some of the change order costs that may have also been incurred due to scheduling and construction problems. While Cal-Am used the lowest bid contractor, Felton FLOW presents a credible argument that the construction bids would have been lower if the project had been scheduled to begin in the summer.
The evidence regarding problems with the main replacement project on Hillcrest Drive, particularly the road resurfacing and the two inch vertical pipe shows that the Santa Cruz Department of Public Works has regularly inspected and advised Cal-Am. The county has not issued any deficiency notices and we do not find cause to take additional actions here. Based on Cal-Am's testimony, we find its handling of a chemical accident at the Felton Water Treatment Plant was reasonable.
e) Main at Bull Creek
On this request for $193,000 in addition to 2005 utility plant, Cal-Am agreed to the request of Felton FLOW supported by DRA, that if Measure W passed, it would defer any further work on this project until a final resolution to the pending condemnation of the Felton water system. The parties agree that the currently expended amounts of $30,000 should be allowed in rate base.
Cal-Am and DRA agree that depreciation expense should be based on authorized level of plant in service. Cal-Am should adjust the figures used in the proposed settlement for changes made in this decision.
Cal-Am and DRA address working capital, deferred taxes, and GO allocation. Cal-Am accepts DRA's estimate of working cash for 2006 and 2007, the parties agree that deferred taxes should be based on authorized level of plant, and the level of GO allocation is based on the GO settlement.
We find the level of working capital reasonable, note that deferred taxes should be adjusted to reflect the changes to plant we adopt, and find that GO allocation should be based on the amount we authorize in our review of the GO settlement, later in this decision.
Cal-Am and DRA have no issues in this category.
Felton FLOW objects, stating that the proposed settlement takes no account of the widespread customer dissatisfaction with the poor service provided by Cal-Am in the Felton district. It asserts that the numerous customer witnesses that testified regarding specific examples of Cal-Am's imprudent management of construction projects and poor response to customer concerns and complaints provide sufficient grounds for the Commission to reduce Cal-Am's return on equity. It specifically cites to the testimony found in Exhibits 26, 29, 31, and 32. Cal-Am cites to its response in rebuttal testimony to the testimony of ten Felton FLOW witnesses as support that it does not have service quality problems, and also it asserts that the complaint data provided by the national call center and the regional office do not show an unusual amount of complaint activity.
We recognize the widespread customer dissatisfaction brought before the Commission at the PPHs and in the evidentiary hearings. In addition to specific service quality complaints, customers are also very angry at Cal-Am's aggressive efforts to fight Measure W; the utility in its testimony recognizes the extremely strained relationship it has with the Felton community.
In reviewing the evidence presented by Felton FLOW and Cal-Am, we find cause exists to examine further if the national call center and regional offices are promptly answering and correctly handling customer calls.
In the next GRC, Cal-Am should make a more comprehensive showing on its service quality for the Felton district. This showing should include additional data collected through better monitoring and reporting. Therefore, 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 and filed on a quarterly basis with CSID and Water Division, and served on all parties.
We do not find the evidence supports a finding of overall poor service quality or an adjustment to Cal-Am's ROE. As the Felton community and Cal-Am proceed with negotiations for a municipal water system, Cal-Am should be extra vigilant in monitoring its Felton customer service quality and taking affirmative steps to establish better working relations with the community.
B. Action on Proposed Felton District Settlement
We do not find the proposed settlement as a whole reasonable in light of the whole record, consistent with the law, and in the public interest. Specifically, we find changes should be made to the allowed Highway 9 costs and other A&G expenses, and an adjustment made for lobbying activity to O&M, payroll, other A&G and authorized GO expenses. In addition, we require additional tracking and reporting of customer complaints at both the national call center and the regional offices. These issues are substantial and cause us to reject the settlement as a whole. Because the settlement was contested, we have a sufficient record to adopt different outcomes than those proposed in the settlement.
On all other issues except those specified above, we find that the resolution proposed by Cal-Am and DRA is reasonable and supported by the record; we individually adopt these proposals.
C. Issues Not Addressed in Proposed Settlement
In Special Request 1, Cal-Am proposes to eliminate the existing conservation discount program because it is difficult to administer and instead adopt a new rate design with an increasing three-block structure. Cal-Am testifies that the current rate structure is unusual and was likely chosen for computational convenience but needs to be replaced because it delivers inconsistent and often wrong price signals. Although the Felton district does not face the same water supply issues as the Monterey district, adopting a rate design that better promotes conservation is desirable.
DRA opposes Cal-Am's proposal, testifying that the current rate design better provides customers with incentives to curb usage and penalizes high usage customers. The current rate design provides Felton customers the following conservation discounts:
Bimonthly usage Discount (applied to total bill)
10 units or less 20%
Up to 20 units 15%
Up to 30 units 10%91
DRA shows that under Cal-Am's proposal, the average customer could double its usage and not be penalized with higher rates. In seeking to adopt a rate design that would penalize high usage customers, Cal-Am is eliminating the current incentive for the average customers to conserve water. In addition, DRA cites Cal-Am's testimony to establish that the existing rate design does penalize higher use customers.92 In a district that is experiencing very high rate increases, the existing conservation discount provides customers with a tool to help manage their water usage.
Felton FLOW does not take a position on this issue. At the PPHs, customers who testified on rate design strongly opposed Cal-Am's proposal, citing complexity and the loss of a conservation discount.
We find Cal-Am has not shown that its rate design proposal would be equitable and better promote conservation. The current rate design is accepted by the community and has an incentive for conservation by the average customer. Therefore, we do not adopt Special Request 1.
In its Special Request 2, Cal-Am requests that a low-income tariff be adopted in the Felton district and proposes a program that would provide customers whose household income is at or below 175% of the federal poverty level, an elimination of the monthly service fee or $7.50, whichever is lower. Cal-Am asserts that this proposal would provide approximately the same benefit as its PAR program in Monterey which eliminates the service fee.
DRA testifies it supports establishing a low-income program for Felton, especially in light of the large rate increases customers are experiencing, but opposes Cal-Am's proposal because it is insufficient. Instead, DRA recommends the Commission adopt a low-income program for Felton that is similar to the program we recently adopted for San Gabriel Water Company's Los Angeles district in D.05-05-015. This program provides customers with a 50% discount on the monthly service charge and does not limit the benefit to any specific amount. DRA's proposal is presented in Exhibit 90, Chapter 13.
DRA states that the monthly service charge in Felton at the time it issued its report was $16.40. Since then, the Commission in D.05-09-004 ordered the rate increase adopted but deferred in D.04-05-023 to be implemented. This raised the monthly service charge to $28.16. If the Commission adopts the proposed settlement in this proceeding, the monthly service charge will rise to approximately $39.00. Felton customers also pay an $11.50 surcharge for their filter plant, financed through SDWBA bonds, and will pay a monthly fee to amortize the accumulated balance in the deferred rate balancing account ordered in D.04-05-023. Therefore, Felton customers will be paying over $50 a month before even using any water, and low-income customers under Cal-Am's proposal would be paying over $42.50 a month.
In assessing the revenue impact of adopting its proposal, DRA testifies that Cal-Am provided an initial estimate that 11% of Felton district customers would be eligible for a low-income program based on 2000 census data. However, Cal-Am noted that this number may not be completely accurate because 2000 census data is now five years old and the area defined as Felton in the census is much wider than Cal-Am's actual service territory. Cal-Am also reports that only 1.2% of the Monterey district customers are enrolled in its low income program. DRA calculates that if the Felton program enrolled as many as 75 customers (5.6% of total customers - nearly five times the Monterey rate), the cost would be under $1 per month for the other Felton customers.93
We find that DRA's low income program proposal is preferable to Cal-Am's proposal because it is modeled on the San Gabriel program we earlier adopted and it provides a more meaningful level of relief for customers. Therefore, we deny Cal-Am's Special Request 2 and adopt DRA's proposal. All parties are advised that the Commission may open a generic rulemaking prior to the next GRC. If the Commission adopts a different low income program for Felton customers in a rulemaking proceeding, the new program would be immediately effective on a going-forward basis.
In its opening brief, Felton FLOW requests the Commission acknowledge the overwhelming support of the local community for the public acquisition of the Felton district and facilitate an expeditious transition to public ownership. It cites to the 74.8% of voters who approved Measure W and urges the Commission to facilitate a fair, equitable, orderly, and efficient transition to public ownership of the water facilities serving Felton. Specifically, it urges the Commission to either issue an order similar to the order requiring Cal-Am to divest the Felton district to a public agency with access to lower cost tax exempt financing, as it did in D.02-12-068 for Montara district, or in the alternative, to continue this proceeding for further consideration of alternatives for addressing the concerns of Felton district residents regarding rate shock, service, and future ownership of the Felton district facilities.
In its reply brief, Cal-Am asserts that it would be highly improper for the Commission to become involved in the municipalization efforts. It sees the process as still early and moving to future condemnation. Further, it states the Commission does not have the authority to approve the actual condemnation of public utility property. Finally, it distinguishes the situation of the Montara district divestiture ordered in D.02-12-068 because the Commission found that: (1) the Montara District had unique and persistent problems with water quality, service, capacity, and rates; (2) the Montara Sanitary District was in a position to obtain low-cost tax-exempt financing to make long-overdue capital improvements; (3) Montara District voters approved a bond measure to acquire the Montara District facilities over 12 months before D.02-12-068 was issued; and (4) the Montara Sanitary District had filed a condemnation action in Superior Court. Cal-Am asserts that none of these facts applies to the Felton District. (D.02-12-068, supra, 2002 Cal. PUC LEXIS 909, *69-*71.)
We recognize the customer dissatisfaction that exists in the Felton district and in this proceeding we have directly addressed cost of service, service quality, and rate shock. In considering Felton FLOW's request that the Commission facilitate negotiations between the parties on municipalization, we do not find a record here sufficient to order Cal-Am to divest the district. However, the Commission's policy is to strongly encourage parties to pursue alternative dispute resolution (ADR), either as a substitute or in tandem with formal litigation, and we encourage the parties to do so here. The Commission has trained ALJs and they are available, if both Cal-Am and Santa Cruz County request our assistance. Our ADR program is set forth in ALJ Resolution 185, issued August 25, 2005.
As part of the partial settlement, Cal-Am, at the request of DRA and Felton FLOW, agreed not to pursue any further work on the main at Bull Creek if Measure W passed. Felton FLOW has asked that we also prohibit Cal-Am from undertaking any additional projects that are not essential. Cal-Am responds that the Commission should not hamstring it from exercising its best judgment on how to maintain and operate its water system.
While Cal-Am asserts that public acquisition may never materialize or be long delayed, we nevertheless recognize the process has started with passage of Measure W. In formal condemnation proceedings, a public utility is often paid more than the cost of its rate base facilities. Therefore, we should be vigilant in overseeing future plant investment in the Felton district. We direct that Cal-Am file by advice letter for review and approval of any additional projects.
Felton FLOW requests the Commission recognize the significant rate shock that would result in Felton if the proposed settlement is adopted and authorize measures to mitigate rate shock. In D.05-09-004, we authorized implementation of the rate increase adopted but deferred in D.04-05-023 but we directed that the undercollection in the balancing account related to D.04-05-023 be amortized over six years. We also said that we would consider in this proceeding "any proposals the parties may have advanced for tempering the effects of whatever rate increase is approved there."94 Felton FLOW asserts that not only would a large rate increase here compound the recent large rate increase of D.05-09-004, but these increases are on top of already high rates in Felton. Therefore, the Commission should take significant remedial action. The specific measures Felton FLOW recommends are for the Commission to adopt its proposed rate adjustments in this proceeding and to order Cal-Am to divest the Felton district to a public entity.
Cal-Am states that the rate increase for the Felton district contained in the proposed settlement is approximately 32%, as shown on page 6 of the settlement. It states that this increase is reasonable in light of the costs of providing service in Felton, and there is no need for the Commission to make any further special provisions to address alleged rate shock. Further, while D.05-09-004 results in a large additional recent rate increase, this is caused in large part by long intervals between authorized increases, not by wildly excessive rate awards.95 In support of its position, Cal-Am cites to a 62.8% increase authorized by the Commission for Apple Valley Ranchos Water Company in D.90-02-045.
DRA joins Felton FLOW in requesting the Commission address rate shock and recommends that the Commission not implement the full rate increase here immediately. Instead, it recommends we apply our established policy of limiting rate increases to 50% of present rates in the first year after a decision increasing rates.96
We have adopted several of Felton FLOW's adjustments, but the rate increase for this GRC is still substantial. Combined with the recent increase from D.05-09-044, we are concerned with rate shock and impose a limit of 50% in the first 12 months. This limit should be calculated to include the rate increase effect of amortization of D.05-09-004's balancing account and also the deferred balance in this case from interim rates, and carry the same interest rate until recovered.
79 Felton FLOW cites to Re G.T.E. of California, (1980), 4 CPUC 2d 428 (D.92366), Re Washington Water and Light Company, (1972), 73 CPUC 2d 284, 301-302, (D.79919), and Re Citizens Utilities Company of California, (1995) 62 CPUC 2d 244, 265, (D.95-11-024).
80 In D.04-07-033, we also imposed a $75,000 fine for the violations. We found the fine and the reduced ROE serve distinct purposes. "The fine punishes five distinct violations and deters other utilities from similar misconduct. The reduced ROE mitigates the harm done to Salinas District customers, but more importantly provides an incentive for Cal Water's management to better coordinate its business objectives with its obligations as a public utility." (Mimeo. at 18.)
81 We address customer service concerns again in Section V.A.8.
82 Felton FLOW also recommends a similar 5% reduction to GO expense for the Monterey district.
83 See Exhibits 6-12.
84 Exhibit 14, page 7.
85 Exhibit 90, Chapter 3.
86 In D.04-05-023, Appendix A, the Commission adopted $54,700 for test year 2003 in pensions, benefits, and other A&G. D.04-05-023 also adopted GO expenses of $91,300.
87 Exhibit 90, page 4-4. In the proposed settlement, the parties agree to present all items of expense that are directly attributable to the Felton district in the A&G expenses and to present the American Water Service Company management expenses in the GO allocated expenses. Felton FLOW requests we disallow the cost of the compliance audit required in this case. Cal-Am states that the cost is not included and the record supports Cal-Am on this issue.
88 See Exhibit 86.
89 The GO settlement further states in Section 5.6: "Administrative and General expenses that were previously part of GO allocations will also be audited. In addition, a review of Cal-Am's compliance with the Commission's affiliate transaction rules will be covered as part of the audit scope. This audit will allow the Commission to determine if Cal-Am's affiliate transactions and cost allocations are in the public interest and consistent with Commission decisions, rules, and policies."
90 Exhibit 28.
91 Transcript at 175 and 176. Cal-Am also testifies that the average Felton customer uses between 16 and 18 units on a bimonthly basis and thus, on average, receives a 15% discount.
92 Transcript at 179.
93 Exhibit 90, page 13-14.
94 Id., mimeo. at 33-34.
95 See D.05-09-004, mimeo. at 31.
96 See Re Thomas H. and Peggy A. Porter dba Grizzly Park Water Company, 18 CPUC 2d 21.
