6. Questions Presented
6.1 Should Cal-Am's CPCN be Expanded to Allow it to Provide Wastewater Service?
Cal-Am's application (Tab A) describes the experience its parent corporation, American Water Works Company, Inc. (American), has operating wastewater systems throughout the United States. Exhibit 1, Cal-Am's application supplement, includes additional information regarding Cal-Am's planned operation of the County assets it proposes to acquire. Under interim service agreements with the County, Cal-Am is now operating the districts (see Exhibit 1, Tab A). The Cal-Am personnel who presently and in the future will operate the facilities are described (see Exhibit 1, Tab B). Clearly, Cal-Am has the corporate expertise to successfully manage, operate, and maintain wastewater systems. Specifically, Cal-Am has hired experienced and qualified personnel for the County operations that demonstrate it is well qualified to provide wastewater services to the public. Cal-Am's CPCN should be expanded to include provision of wastewater service to the public.
6.2 Is it in the Public Interest for Cal-Am to Acquire the County Wastewater Districts?
It is clear from the record that the County has experienced significant difficulty operating the wastewater districts within planned budgets and collected revenues. (See, for example, Reference Item B.) The County significantly raised rates for customers of Las Palmas Ranch in 2001 and Laguna Seca Ranch in 1997. Carmel Valley County Sanitation District also has seen increases recently. According to the County materials distributed to the public, the County expects to raise rates again if it is unable to sell the districts to Cal-Am. (See Application, Tab D.) The members of the public who attended the public participation hearing (PPH) held by Administrative Law Judge (ALJ) Cooke and Commissioner Duque made clear the extreme distrust of the wastewater customers towards the County and its operation of the wastewater facilities. Given these facts, and the fact that Cal-Am's proposal will result in a rate decrease from current rates for 95% of the customers in the districts, it is difficult to conclude the public interest would be served by continued County ownership of the three wastewater districts.
However, numerous citizens in Las Palmas Ranch spoke at the PPH in opposition to Cal-Am's acquisition of the Las Palmas Ranch wastewater facilities. After reviewing the specific concerns raised at the PPH, we have distilled them into three areas: (1) displeasure with the County's actions, (2) lack of local control if Cal-Am acquires the wastewater assets at Las Palmas Ranch, and (3) concern over rates.
Las Palmas Ranch customers are incredibly displeased with the County's management and operations of the wastewater system at Las Palmas Ranch. They feel that the County has mismanaged the system, withheld information, and disregarded their input about ways to solve the problems associated with the wastewater system. In addition, Las Palmas Ranch customers feel that the County should have conducted an election to decide whether to sell County assets to a private company, rather than the decision being made by the Board of Supervisors.
While we understand the dissatisfaction and frustration of Las Palmas Ranch customers with the County, this is not germane to whether it is in the public interest for Cal-Am to acquire the assets. We do not have jurisdiction over the County's management, operation, or decision-making process.
Las Palmas Ranch customers are likewise concerned that if Cal-Am acquires the wastewater facilities, they will lose the ability to exercise any local control. Several speakers at the PPH expressed the view that homeowners were interested in forming a community services district to operate the wastewater system and were disregarded by the County.
Again, although we understand the concern, there is little we can do to change the County's process. We have no jurisdiction to direct the County to allow the formation of a community services district by the homeowners. While it is true that acquisition of the wastewater system by Cal-Am would remove it from local control, it does not mean that citizens will not be able to participate or work to influence the outcome of decisions that affect the operations of the facilities through PPHs, comments on applications, or sending letters to the Commission expressing their opinions about relevant issues.
Regarding the proposed rates, Las Palmas Ranch customers expressed serious concerns that the rates charged by Cal-Am should not be based on the County's operation of costs, because of their belief that the County mismanaged the wastewater system. They argue that a prudent operator could significantly lower costs and that rates for Las Palmas Ranch customers should decrease considerably. In addition, they object to the proposed single tariff across all three districts. We will address the specific rates in the next section, but we note that Cal-Am's proposed rates result in a decrease from current rates for 95% of the customers in the three districts, including all customers in Las Palmas Ranch. The County has stated that it plans a significant increase in rates for all three districts if it retains control of the wastewater systems. (Application, Tab D.) Therefore, we find that it is in the public interest for Cal-Am to acquire the three wastewater districts from the County, create a Monterey Wastewater Division, and provide service to the wastewater customers in all three districts.
6.3 What Rates Should Cal-Am be Allowed to Charge for Wastewater Service?
Cal-Am proposes to charge rates as follows:
Current Rates |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 | |
Laguna Seca |
$76.17 |
$51.25 |
$52.53 |
$53.84 |
$55.19 |
$56.57 |
Las Palmas |
$57.25 |
$51.25 |
$52.53 |
$53.84 |
$55.19 |
$56.57 |
Carmel Valley |
$55.00 |
$51.25 |
$52.53 |
$53.84 |
$55.19 |
$56.57 |
Village Green |
$39.00 |
$43.05 |
$47.10 |
$51.14 |
$55.19 |
$56.57 |
White Oaks |
$24.00 |
$33.00 |
$40.40 |
$47.49 |
$55.19 |
$56.57 |
In its Application (Tab K), Cal-Am's proposed tariffs show that Year 2 through 5 correspond to 2003 through 2006. However, elsewhere in the Application (p. 5), Cal-Am describes these rates as being applicable through 2007. For purposes of our review, we consider Year 1 to be 2003, resulting in a Cal-Cam proposal of rates over a five-year period.
First, we review Cal-Am's estimated expenses to operate each of the wastewater districts it seeks to acquire. Cal-Am, as part of its due diligence process, reviewed the costs and operations of the County but did not rely on the County's historical costs to develop its forecast of operating expenses. Instead, it developed a budget that incorporates cost savings from capital improvements and more efficient operating practices. Cal-Am identified particular costs, for example, sludge disposal, for reduction based on replacement of and improvements to existing equipment.
Cal-Am forecast its fuel and power expenses utilizing a very high per kilowatt-hour (kWh) price for electricity. Hyland, in Exhibit 101, identified this cost estimate as overstated. Cal-Am reviewed its calculation and agrees that the price/kWh is likely to be lower than its estimate. However, Cal-Am has since received actual usage data from the County which shows that Cal-Am underestimated its electricity usage. Using the more accurate usage data, along with a more reasonable price/kWh, Cal-Am states that the result is that it now expects its fuel and power costs to slightly exceed the forecast it used to derive its $51.25/month rate.
Hyland takes issues with various Las Palmas Ranch cost categories in Exhibit 101, for example, labor, capital improvements, depreciation, and labor overheads. We have reviewed Cal-Am's application, testimony and briefs. We found Cal-Am's Operations Superintendent to be credible and able to explain how Cal-Am intended to operate the three wastewater districts differently from the County, how the planned capital improvements affected expected operating expenses, and the expected labor costs. Cal-Am's Director of Business Development reasonably explained how the costs estimates were developed and calculated. Hyland's witness did not adequately explain why he modified certain costs for Las Palmas Ranch, but not others. In addition, he did not thoroughly explain how he derived his cost estimates. We find that Cal-Am has reasonably justified the consolidated operating expenses, labor costs and overheads, and general overhead costs that it utilized to develop its rate proposal to the County.
We must determine if it makes sense for Cal-Am to be allowed to combine the three districts for ratemaking purposes to charge a single tariff. Cal-Am states that the three districts are within a six-mile radius, employ similar treatment processes, and can use the same personnel to manage, operate, and maintain the systems. Cal-Am states that its rate proposal phases-in higher rates for the 5% of customers who will see a rate increase, and results in immediate decreases for 95% of the customers.
Hyland and customers at the PPH oppose combining the three districts, arguing that the Las Palmas Ranch customers will be subsidizing the rates of the other two districts. In his testimony, Exhibit 100, Hyland provides his calculation of a proper rate for Las Palmas Ranch customers by utilizing Cal-Am's figures from Exhibit 2 (Tab A) and allocating certain costs to districts in a manner different from Cal-Am.
Hyland relies on the same operating expenses in Exhibit 100, but allocates overheads equally among the three districts being acquired, despite the differences in numbers of customers, plant and expected revenues between the districts.3 On brief, Cal-Am states that it calculated the overhead components on a consolidated basis for all three districts, not on a district standalone basis. Cal-Am states that if the overhead expenses were to be calculated on a standalone basis "not all costs would be allocated on a strict one-third basis." (Cal-Am's Brief, p. 24.) Specifically, Cal-Am notes that the entire "Management Fees" line item would be allocated to the Las Palmas Ranch customers because the customers in the other two districts already receive water service from Cal-Am, and thus already have management fees allocated to them. Similarly, general taxes, uncollectibles, interest, depreciation, and income taxes are affected by the plant associated with each district, the expected revenues from customers in each district, and future capital additions. Thus, each of these overhead categories would differ significantly between the three districts being acquired.
Although Cal-Am did calculate operating expenses by district, it never allocated overheads to each district based on revenues, plant, and other characteristics unique to each district. To approximate an appropriate allocation to each district, we have calculated each district's percentage of the total non-labor operating expenses forecast.4 The percentage breakdown of non-labor operating expenses forecast for year one is summarized below:
Non-Labor Operating Expense |
Customers (Year 1) |
Customers (Full Build-Out) | |
Las Palmas Ranch |
48.69% |
59.23% |
53.63% |
Laguna Seca Ranch |
21.06% |
5.86% |
16.81% |
Carmel Valley (all zones) |
30.24% |
34.91% |
29.56% |
As demonstrated by the above table, Las Palmas Ranch constitutes 59.23% of the total customers Cal-Am seeks to serve under this application but the forecast cost to serve the same customers represents only 48.69% of the total forecast non-labor operating expenses. Thus, Hyland is correct that the proposed rate that Las Palmas Ranch and Carmel Valley customers would pay in Year 1 does include a subsidy of customers in another district, in this case, Laguna Seca Ranch customers. However, as Laguna Seca Ranch expands to reach its full build out capacity of 300 homes, compared to the current 78 residential customers, the percentage of customers in each district is much closer aligned with the percentage of non-labor operating expenses.
Adoption of a single tariff in this case provides stability for rates in all three districts by allowing the costs of capital additions to be spread over a larger ratepayer body. The proposed single tariff does not result in an unreasonable rate, because we found Cal-Am's cost estimates to provide service to be reasonable. The proposed single tariff results in more equitable pricing among neighboring customers and thus does not result in undue discrimination. Finally, all customers in Las Palmas Ranch will receive a decrease from current rates under Cal-Am's single tariff. Therefore, although some subsidy is occurring between districts, on balance, we find that adoption of a single tariff for the three districts being acquired, best serves the public interest.
Cal-Am will file a general rate case for its Monterey Wastewater Division for Test Year 2008. We expect that Cal-Am will incorporate cost savings it accrues into future rates.
6.4 What Gray Water Obligations Must Cal-Am Uphold as a Result of its Acquisition of the Wastewater Districts?
The purchase agreements entered into by Cal-Am and the County obligate Cal-Am to assume all of the County's obligations to supply reclaimed water (gray water) to the three districts being acquired. It is unclear from the existing reclaimed water agreement between the County and Las Palmas Ranch whether the agreement covers common areas in both phases of the Las Palmas Ranch development. At the evidentiary hearing, Cal-Am agreed to enter into additional agreements to clarify that it will provide reclaimed water from the Las Palmas treatment plant to the common areas of Las Palmas Ranch, at no cost, for as long as the treatment plant operates. (RT 130:3-7, Alario.) We find that it is appropriate for Cal-Am to clarify this obligation through entering into a contract with Las Palmas Ranch to specify that the obligation to supply reclaimed water at no cost applies to the common areas of both phases of the Las Palmas Ranch development. In addition, Cal-Am should assume all other obligations to supply reclaimed group water in the three districts, consistent with the County's current obligations.
