IX. Assignment of Proceeding

John A. Bohn is the assigned Commissioner and Christine M. Walwyn is the assigned ALJ in this proceeding.

Findings of Fact

1. This decision resolves Cal-Am's GRC applications for the Monterey and Felton districts and the corporate GO rate case.

2. On October 21, 2005, Cal-Am and DRA filed partial settlements for the Monterey district, the Felton district, and corporate GO expenses. MPWMD filed a timely protest to the Monterey settlement and Felton FLOW filed a timely protest to all three settlements.

3. The testimony and hearing record provide a comprehensive record for consideration of the settlements.

Monterey District

4. A capital structure of 56.6% debt/43.4% equity for the Monterey district in 2006-2008 is reasonable.

5. A cost of debt of 6.98% for the Monterey district in 2006-2008 is reasonable.

6. There is good cause to return to the use of a consolidated capital structure. Cal-Am should present a comprehensive showing in support of a consolidated cost of capital, to include a consolidated cost of debt, in its next district GRC filing.

7. A leverage adjustment for Cal-Am's return on equity is not warranted.

8. A return on equity of 10.10% for Monterey for the GRC period is reasonable based on the record and is fair because the return is commensurate with returns on investments in comparable companies and is sufficient to (a) assure confidence in the financial integrity of Cal-Am, (b) maintain its credit, and (c) attract necessary capital.

9. For ratemaking purposes only, unaccounted for water percentages of 8.5% for the main system, 9.0% for the Ambler/Bishop subsystems, and 10.0% for the Hidden Hills/Ryan subsystems are reasonable.

10. An amount of $37,200 for meter replacements over the GRC period is reasonable and should be adopted unless Cal-Am and DRA state the Commission may modify the proposed settlement to provide $120,000 over the GRC period, as recommended by Monterey Peninsula Water Management District.

11. An amount of $4.2 million for repair and replacement of Carmel Valley main segments 4, 5, 6, and 10 is reasonable.

12. Cal-Am should provide in its next Monterey GRC application a specific analysis of leakage in the Carmel Valley main system.

13. An expenditure of $750,000 is reasonable for improvements to the Bishop subsystem treatment plant as the improvements are necessary to maintain water quality. The advice letter process should be used due to the uncertain timing of the project.

14. We should direct Cal-Am to provide in its next GRC filing a full breakout of (a) all capital improvement projects undertaken in each of the four Monterey district subsystems since SWRCB Order 95-10, and (b) a breakout of estimated costs for additional capital projects planned over the coming ten years.

15. The establishment of a WRAM account to track emergency rate overcollections is reasonable provided that no SWRCB fines are paid from this account. The refund mechanism adopted in D.05-03-012 is reasonable because it allows overcollections to be quickly returned and directly rewards customers who avoid the emergency rates through prudent water usage.

16. Establishment of a memorandum account to track compliance with ESA requirements is reasonable. ESA compliance costs associated with the San Clemente Dam retrofit but not already embedded in rates should be tracked in a separate memorandum account with all other San Clemente Dam retrofit costs.

17. A special conservation surcharge not to exceed $300,000 from Cal-Am to MPWMD, with special reporting requirements, is reasonable. Cal-Am should enter into a formal agreement with MPWMD, as detailed in this decision.

18. All current balancing accounts should be refunded in accordance with standard Commission policies.

19. Cal-Am should provide in its next Monterey GRC application a comprehensive showing of any changes in O&M expenses, payroll expenses, other A&G expenses, and allocated GO expenses that are greater than the rate of inflation.

20. To address customer service concerns in the Monterey district, Cal-Am should develop (a) 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 (b) 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 of this decision and routinely filed on a quarterly basis with the Commission's Consumer Service and Information Division and Water Division, with service on all parties to this proceeding.

21. Cal-Am's request to discontinue the RWE savings memorandum account at the time of a final decision in this proceeding is reasonable.

22. The step rate increases for Monterey should be based on the methodology proposed by Cal-Am and DRA.

23. We find the proposed Monterey settlement to be reasonable in light of the whole record and in the public interest.

24. The San Clemente Dam retrofit is a lengthy and uncertain project. All costs related to the project, including ESA compliance costs not already embedded in rates, should be tracked in a memorandum account until the Commission has the opportunity to fully review the completed project for reasonableness. Routine operating expenses should be tracked separately in a subaccount. The memorandum account should have a cost cap of $9,379,525 for 2004, $1,321,590 for 2005, $1,863,825 for 2006, and $11,433,000 for 2007.

25. We find that it may be more appropriate for Cal-Am to accrue AFUDC for the San Clemente Dam retrofit project at the energy AFUDC rate rather than the water AFUDC 90-day commercial paper rate as the energy rate reflects long-term debt and equity. Therefore, we should use the water AFUDC rate here, subject to true-up, until we have an opportunity to complete a review of the issue in a subsequent application.

26. The Carmel River Dam project was planned during a period of dramatic and protracted uncertainty and unusually high risk for Cal-Am.

27. 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.

28. 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 initially pursuing the Carmel River Dam project and then in waiting until it had approval for an alternative project, the Coastal Water Project, to cancel the project.

29. We should not authorize Cal-Am to book ESA fines into a memorandum account as allowing recovery of fines generally is contrary to Commission policy, and the record shows Cal-Am's management has reasonable means to avoid ESA fines.

30. We should not authorize Cal-Am to book SWRCB fines into a memorandum account. The record shows that Cal-Am now has the conservation programs, emergency rate measures, and environmental compliance programs to operate its water supply system in a manner to avoid fines. Our earlier decisions to allow recovery of SWRCB fines were a deviation from one general policy on recovery of fines, and were a temporary measure, expected to be of brief duration, until effective rationing plans could be implemented by Cal-Am and MPWMD.

31. We should retain the existing 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.

32. Cal-Am should complete all Monterey district commercial water audits before next summer.

Felton District

33. A capital structure of 63% debt/ 37% equity, a cost of debt of 6.37% and a return on equity of 9.95% for the Felton district for the three year GRC period is reasonable.

34. The record does not support lowering Cal-Am's return on equity due to poor service quality.

35. To address customer service concerns in the Felton district, Cal-Am should develop (a) 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 (b) 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 of this decision and routinely filed on a quarterly basis with the Commission's Consumer Service and Information Division and Water Division, and served on all parties to this proceeding.

36. The record establishes that Cal-Am's filing includes some political and lobbying activities by its employees. It reasonable to make a 5% reduction to employee costs included in operating and maintenance expenses, general and administrative expenses and allocated GO expenses to adjust for the inclusion of this activity in customer rates.

37. DRA's initial recommendation of $91,300 for administrative and general expenses other than payroll and pensions is reasonable.

38. A $50,000 reduction to Highway 9 project costs is reasonable in order to reflect the probably higher construction bid costs of Cal-Am's decision to begin construction in the winter season rather than the summer and some of the change order costs that may have also been incurred due to scheduling and construction problems.

39. We do not find reasonable the Felton proposed settlement's treatment of Highway 9 project costs, administrative and general expenses, allocated GO expenses, and inclusion of political and lobbying activities by employees. In addition, we find additional tracking and reporting of customer complaints and a comprehensive showing of any changes greater than the rate of inflation for O&M expenses, payroll expenses, and other A&G expenses is required. We find the outcomes for all other issues covered in the settlement to be individually reasonable and based on the record.

40. We should retain the existing rate design for Felton.

41. DRA's proposed low-income program is reasonable and should be adopted. 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.

42. We should address the issue of rate shock for Felton customers by applying our policy of limiting rate increases to 50% of present rates in the first year after a decision increasing rates. We should calculate this to include the rate increase effects of D.05-09-044.

43. Cal-Am should provide in its next Felton GRC application a comprehensive showing of any changes in O&M expenses, payroll expenses other than pension payments, other A&G expenses, and allocated GO expenses that are greater than the rate of inflation.

GO Rate Case

44. While Cal-Am's 2004 reorganization has created confusion in analyzing expenses in this proceeding, on a going-forward basis our review will be simplified.

45. We find that the record support for the GO rate case settlement is sufficient for a finding of reasonableness.

46. We direct Cal-Am as part of its direct showing in its 2009 General Office GRC filing to show the requested regulated expenses for each individual GO expense category and to provide a comprehensive showing in support of any items that have increased since 2006 at a rate greater than inflation and customer growth.

47. Cal-Am should file the supporting documentation for the Monterey and Felton districts' amortization of its acquisition premium.

48. In upcoming GRCs for California districts prior to 2009, Cal-Am should make a showing to support its request to amortize the Citizens' acquisition premium.

49. We find the outcomes for all issues covered in the settlement, such as GO rate base allocation and RWE net savings, individually reasonable and supported in the record.

50. The surcharge to true-up the interim rates authorized in D.05-12-024 for the Monterey and Felton districts should be based on the actual loss or gain in Monterey's revenue since January 1, 2006, determined by applying the rate differential to the actual quantities of water sales and the actual number of customers. For the Monterey district, the interim rate surcharge should be recovered over the following 12 months. For the Felton district, Cal-Am should recover the surcharge over a period consistent with the 50% rate cap adopted here. For both districts, Cal-Am should earn interest at the 90-day commercial paper rate on the surcharge balance.

Conclusions of Law

1. The standard of review for the settlements is set forth in Rule 12.1(d) of our Rules of Practice and Procedure. This rule provides, in general, that, prior to approval, the Commission must find a settlement "reasonable in light of the whole record, consistent with the law, and in the public interest."

2. The partial settlement for the Monterey district filed by Cal-Am and DRA meets our standard of review and should be adopted. The additional tracking and monitoring requirements we find reasonable do not conflict with any provision of the settlement and should also be adopted.

3. Consistent with the treatment we authorized for Cal-Am's Coastal Water Project in D.03-09-022, the San Clemente Dam retrofit project costs should be removed from ratebase and placed in a memorandum account for later reasonableness review.

4. Cal-Am has shown that the Carmel River Dam is an abandoned project eligible to be considered for rate recovery under the standards established in D.84-05-100, and later cited by the Commission in D.89-12-057 and D.96-09-039.

5. Cal-Am should remove the Carmel River Dam project from ratebase, remove all AFUDC interest accrued prior to the project being placed in ratebase, and place the balance in a separate account that should earn interest at the 90-day commercial paper rate and be amortized over four years as a meter surcharge.

6. The partial settlement for the Felton district should be rejected because it does not meet our standard of review. However, parts of the settlement are reasonable and supported by the record, and should be adopted as set forth in the foregoing opinion and findings.

7. The settlement for the General Office rate case filed by Cal-Am and DRA meets our standard of review and should be adopted.

8. We should adopt the rate tables and tariff sheets attached in the appendices to this decision for the Monterey and Felton districts and the GO rate case.

9. Today's decision should be made effective immediately.

ORDER

IT IS ORDERED that:

1. The Monterey district partial settlement is adopted and the Monterey district rate tables attached as Attachment 1 to this decision are adopted.

2. The Felton district rate tables attached as Attachment 2 are adopted.

3. The General Office settlement is adopted and the general office rate tables attached as Attachment 3 are adopted.

4. Cal-Am is authorized to file in accordance with General Order 96, and to make effective on not less than five days' notice, the revised tariff schedules for Monterey and Felton that are attached as appendices to this order. The revised tariff schedules shall include all special requests adopted in this decision. The revised tariff schedules shall apply to service rendered on and after their effective date.

5. Cal-Am is authorized to file advice letters seeking Commission authorization for rate offsets in the Monterey district for the following capital projects when each has been completed and placed in service, no earlier than the year indicated and at costs not to exceed those indicated:

6. Consistent with the step rate increase language adopted for the Monterey and Felton districts, Cal-Am is authorized on or after the dates specified to file advice letters in conformance with General Order 96, with appropriate supporting workpapers, requesting the step rate increases. In accordance with the Commission's policy for approving step and attrition increases, if Cal-Am's earnings, based on the recorded test specified in the appendices, exceed its authorized return, the requested step or attrition increase shall be reduced to offset the earnings in excess of the authorized return in this proceeding.

7. Cal-Am shall present a comprehensive showing in support of a consolidated cost of capital, to include a consolidated cost of debt, in its next district general rate case (GRC) filing.

8. Cal-Am shall remove the Carmel River Dam project from ratebase, remove all allowance for funds used during construction (AFUDC) interest accrued prior to the project being placed in ratebase, and place the balance in a separate account that shall earn interest at the 90-day commercial paper rate and be amortized over four years as a meter surcharge.

9. Cal-Am shall develop (a) 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 (b) a new quarterly report on all complaints received at district and regional levels and their final disposition. These reports shall be developed within 60 days of this decision and routinely filed on a quarterly basis with the Commission's Consumer Service and Information Division (CSID), and Water Division, and served on all parties to this proceeding.

10. Cal-Am shall file by advice letter within 30 days a specific plan to complete all Monterey district commercial water audits prior to May 1, 2007 and, if additional funding is required, a proposed funding mechanism. The advice letter shall identify the revenues provided in customer rates since 2000 for Cal-Am to undertake these audits, and the number of audits performed each year.

11. Cal-Am shall separately collect the minimum Employee Retirement Income Security Act (ERISA) pension payment for the Monterey and Felton districts through a 3% monthly surcharge on customer bills, separately reconciled for each district with an annual advice letter filing for a surcredit or surcharge, depending on the balance in the balancing account.

12. In the next Monterey and Felton GRC applications, Cal-Am shall include in its application a comprehensive showing of any changes that are greater than the rate of inflation in operation and maintenance (O&M) expenses, payroll expenses other than pension payments, other A&G expenses, and allocated GO expenses.

13. Cal-Am shall file by advice letter for any additional capital projects in the Felton district.

14. Cal-Am shall limit rate increases for the Felton district to 50% of rates prior to Decision (D.) 05-09-044 in the first year of this decision. This limit shall be calculated to include (a) the rate increase effect of amortization of the balancing account authorized D.05-09-044, and (b) the deferred balance in this case from interim rates.

15. The surcharge to true-up the interim rates authorized in D.05-12-024 for the Monterey and Felton districts shall be based on the actual loss or gain in Monterey's and Felton's revenue since January 1, 2006, determined by applying the rate differential to the actual quantities of water sales and the actual number of customers. For the Monterey district, the interim rate surcharge shall be recovered over the following 12 months. For the Felton district, Cal-Am shall recover the surcharge over a period consistent with the 50% rate cap adopted here. For both districts, Cal-Am shall earn interest at the 90-day commercial paper rate on the surcharge balance. Cal-Am shall file by advice letter within 10 days a compliance filing implementing the surcharges.

16. Cal-Am shall include in its next Monterey GRC application:

17. Cal-Am shall include as part of its direct showing in its 2009 General Office GRC filing the requested regulated expenses for each individual GO expense category and provide a comprehensive showing in support of any items that have increased since 2006 at a rate greater than inflation and customer growth.

18. Cal-Am shall file by compliance filing within five business days for review by the Water Division the supporting documentation for the amortization amount of the acquisition premium allocated to the Monterey and Felton district.

19. The San Clemente Dam retrofit project costs shall be removed from rate base and placed in a memorandum account for later reasonableness review. The account shall accrue AFUDC at the 90-day commercial paper rate, subject to true-up, until the Commission completes a review of the appropriate AFUDC rate for this project. Cal-Am is directed to file within 60 days an application addressing the AFUDC methodology that should be applied to the San Clemente Dam retrofit memorandum account.

20. Exhibits 107 through 115 are entered into evidence.

21. Application (A.) 05-02-012 and A.05-02-013 are closed.

This order is effective today.

Dated November 30, 2006, at San Francisco, California

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