VI. General Office Rate Case

Cal-Am's corporate GO expenses are typically presented for our examination every three years with its Monterey GRC. The settlement sets the total dollars (including costs of the Western Region General Office of AWW and costs associated with the corporate office of Cal-Am) and allocation factors for Cal-Am's seven California districts over this GRC period.⁹⁷ The settlement also includes the synergy savings analysis for amortization of the Citizens' acquisition premium and the calculation of RWE savings. A major change in this proceeding is to include outside services, previously billed separately to each district, in GO expenses.

Felton FLOW contests this settlement, opposing any increase in GO corporate expenses and any amortization of the Citizens' acquisition premium on the grounds that RWE, AWW and Cal-Am have not met the cost savings commitments they made when they sought approval of the Citizens acquisition and RWE merger. Specifically, Felton FLOW cites to the increase of overall expenses at a rate greater than general inflation, the inclusion of lobbying expenses, the lack of substantial RWE net benefits, and the "impenetrable model" that Cal-Am and DRA claim demonstrates synergy savings from the Citizens' acquisition.

A. Salaries and Employee Expense, and Other GO Expenses

Cal-Am refers to its Western Region Service Company, headquartered in Chula Vista, California, as "Service Company" or "General Office". The GO expense items in Sections 5.2(a) through (t) of the proposed settlement include costs for nonregulated activities as well as regional costs for the other western states. In the settlement, and the underlying testimony of Cal-Am and DRA, California district costs are not specifically shown for each item. Rather, the eighteen categories of western regional expenses are totaled, capitalized expenses subtracted, and an allocation of 53.6% made to Cal-Am's seven California districts. The settlement proposes the California districts be allocated $3,265,300 for 2006, a reduction of $350,100 from Cal-Am's original request.⁹⁸

The largest categories of expense are salaries and employee expenses. The settlement states that Cal-Am demonstrated to DRA's satisfaction that the increased salaries and employee expenses in its application are related to capitalized and non-regulated activities, and that these increased costs have been properly removed from the regulated charges. In addition, Cal-Am has agreed to remove two requested positions from its current request.

It is difficult to assess the reasonableness of the settlement because the California portion of individual expenses items are not available and comparison to prior years is difficult due to the 2004 reorganization. Cal-Am testifies that its restructuring occurred for two important reasons: (1) to ensure that all employees performing duties for more than one operating company (i.e., in Arizona, California, Hawaii, New Mexico, or Texas) are considered part of the General Office, and (2) to insure that there are no employees on the district level who are performing work for non-regulated entities.⁹⁹ As part of the settlement, Cal-Am agrees to a comprehensive audit of its GO allocations and methods in connection with its 2009 GO GRC.

We find that while Cal-Am's reorganization has created confusion in analyzing expenses in this proceeding, on a going-forward basis our review will be simplified by the restructuring. Further, DRA is a party representing ratepayer interests and it has reached agreement with Cal-Am on GO expenses only after extensive discovery and analysis, as shown in its underlying testimony. Relying on the informed consent of DRA, combined with the agreement for a comprehensive outside audit in connection with the 2009 GO GRC, we find that it is reasonable to accept the overall level of GO expenses allocated by the settlement to the California districts.

We direct Cal-Am as part of its 2009 GRC filing to show the California regulated amount for each expense category and to provide a comprehensive direct showing in support of any expense item that has increased at a rate greater than inflation and customer growth.

B. Outside Services and California Corporate Expenses

In the proposed settlement, Cal-Am and DRA agree to $8,031,500 in outside services and California corporate expenses to be allocated to the seven California districts in 2006.¹⁰⁰ This comprises $2,499,000 in corporate costs and $5,532,600 in outside services.

The settlement adopts the amount originally proposed by DRA for outside services. DRA's report reflects that it made adjustments to amounts originally booked by Cal-Am in each district's A&G expenses and adjusted these expenses downward to reflect an inflation-based increase for the years 2001 to 2006.¹⁰¹ For corporate costs, the settlement reflects a reduction of $130,000 in the amount initially requested by Cal-Am.

Relying on the informed consent of DRA, combined with the agreement for a comprehensive outside audit in connection with the 2009 GO GRC, we find that it is reasonable to accept the California corporate and outside service expenses proposed in the settlement.

We direct Cal-Am as part of its 2009 GRC filing to show the California regulated amount for each expense category in California corporate and outside services and to provide a comprehensive direct showing in support of any expense item that has increased at a rate greater than inflation and customer growth.

C. Amortization of Citizens' Acquisition Premium

Cal-Am requests recovery of the Citizens' acquisition premium in its Monterey application at $968,600 per year and in its Felton application at $57,200 per year. This is based on a total 2006 premium amortization of $5,319,000, allocated 18.21% to Monterey and 1.07% to Felton. Cal-Am supports its request with only this statement:

Decision 01-09-057 approved Cal-Am's purchase of Citizens assets and authorized the recovery of the acquisition premium. The portion of the acquisition premium included for the Monterey/Felton District was based on the determination of the amount and allocation derived in Applications 04-04-040 and 04-04-041 for the Sacramento and Larkfield District's general rate case filings, respectively.¹⁰²

In its report, DRA recommends that Cal-Am's request for recovery of the acquisition premium be disallowed as savings resulting from synergies of the Cal-Am/Citizens merger have not been proven. DRA bases this recommendation on its analysis of forecasted GO expenses, which it asserts have gone up at a rate greater than inflation on a per customer basis since the acquisition.¹⁰³

On July 12, 2005, DRA served an errata report that deleted its earlier recommendation. DRA stated that determination of the amount to be recovered was part of its settlement in A.04-04-040/041 and that DRA accepts Cal-Am's estimate subject to revision if necessary upon the Commission's approval of the settlement.¹⁰⁴

In the recent Sacramento/Larkfield GRCs, A.04-04-040/041, Cal-Am did present a table of synergy savings and DRA reviewed these and issued its report. The report proposed some adjustments, which the parties later resolved in a proposed settlement. In underlying testimony, both Cal-Am and DRA agreed that the premium for each year should be allocated to each district based on total customers, making the historic Cal-Am districts responsible for approximately 50% and the former Citizens districts 50%.

In D.05-09-020, the Commission adopted the proposed settlement, attached as Appendix A to that decision. In both the underlying settlement and the decision, the language clearly states that the agreement should not be construed as a precedent or statement of policy for current or future proceedings. The settlement also required that in future proceedings for the Sacramento and Larkfield districts, (1) Cal-Am will provide DRA a table similar to the one attached as Exhibit B to the settlement that shows material changes are not occurring in the revenue requirement of and on the premium or in the total synergies, and (2) Cal-Am will file this table together with any additional requested information.

We find that Cal-Am's reliance on the last GRC proceeding to support its showing here is weak. In addition, Cal-Am does not include the table referenced in D.05-09-020 or any other supporting documentation in its current filing. We direct Cal-Am within five days of our final decision to file, by compliance filing for Water Division's review, supporting documentation for the Monterey and Felton premium amortizations.

Of additional concern, Cal-Am does not address here the requirement of D.01-09-057 to show that any new or increased GRC expenses are not erosions of earlier estimated synergies. We have, in our review of O&M, A&G, and GO expenses, looked at this requirement and made adjustments where Cal-Am did not meet its burden of proof.

Based on the above discussion, we find the amounts allocated to the Monterey and Felton districts to be reasonable. While the GO settlement contains 2006 allocations for each district in the attached tables, we clarify that pursuant to Ordering Paragraph 3 of D.01-09-057, Cal-Am must present documentation supporting its synergy savings calculation in each district GRC application, as well as a comprehensive GRC expense analysis.

D. RWE Savings

The settlement accepts Cal-Am's estimate of RWE expense savings of $1,023,204 for 2006. For Monterey, an allocation factor of 36.20% is proposed, and for Felton an allocation factor of 1.74%.¹⁰⁵ The underlying testimony of Cal-Am and DRA supports this resolution. Therefore, we find it reasonable

E. Utility Plant in Service

Cal-Am and DRA reach a compromise in this section. Cal-Am agrees that it did not properly support its request for "ITS and Other Costs" related to infrastructure additions, and, therefore, these amounts should be excluded from consideration at this time. DRA agrees with Cal-Am that the STEP platform capital expenditures should be included in plant additions since no other cost savings can be developed without the base platform plant.

We find the above proposal is reasonable and adopt for 2005 $2,277,200 in plant additions, $1,537,000 for 2006 plant additions, and $1,633,800 for 2007 plant additions. The settlement also states that Cal-Am and DRA have no disagreement on depreciation reserves.

F. Action on Proposed GO Settlement

Based on our review of the 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 GO rate case settlement.

In our review, we have also found several areas where we direct Cal-Am to make a more comprehensive showing in the 2009 GO GRC for GO expenses and in district GRCs for support for the amortization of the Citizens' acquisition premium.

⁹⁷ The western region includes Arizona, California, Hawaii, New Mexico, and Texas. Costs are allocated on the percentage of customers in each district. The California districts represent 53.6% of the total.

⁹⁸ Monterey is allocated 24.4% of the total costs allocated to the seven California districts and Felton is allocated 0.80%. For 2006, $796,700 is proposed for Monterey and $26,100 for Felton.

⁹⁹ Exhibit 87, page 3.

¹⁰⁰ The proposed allocation for these costs to Monterey is $1,959,700 and $64,300 to Felton, using the same allocation factors as those proposed for GO expenses.

¹⁰¹ Exhibit 92, page 2-13.

¹⁰² For Monterey, see Exhibit 57 Chapter 6 and for Felton, see Exhibit 63, Chapter 6.

¹⁰³ Exhibit 92, page 1-2.

¹⁰⁴ Exhibit 93, page 1-2.

¹⁰⁵ Cal-Am's exhibits cited in the settlement show for Monterey $370,400 in 2006, $555,299 in 2007, and $626,454 in 2008. For Felton, the figures are $17,400 for 2006, $20,852 for 2007, and $22,170 for 2008.