3. Suburban's Application

Suburban's initial request for overall rate increases is shown in Table 1, along with the utility's revised request following hearings and consultation with ORA. Also shown are ORA's initial recommendations and revised recommendations. The differences between Suburban and ORA estimates are dramatic, but they are due in large part to ORA's recommendations to defer (but not eliminate) major construction and maintenance projects to later years. Table 1 shows the adopted rate increases authorized by this decision.

The Commission is also asked to resolve a dispute involving the acquisition of Maple's water system, and we are asked to rule on issues that include recovery of 1996-2001 Department of Health Services (DHS) fees; uniform rates for the utility's two service areas; special provisions for low-income customers; a memorandum account for increased security costs; the method for accounting for reimbursement of contamination expenses; and whether to permit three test years instead of two for ratemaking purposes.

Table 1

Revenue Requirement Increases

	2003		2004		2005
	$ (000)	%	$ (000)	%	$ (000)	%
Suburban
Application Request	9,919.0	27.2	1,447.7	3.1	1,597.0	3.3
Revised Request	9,032.8	24.7	1,476.7	3.2	825.4	2.8
ORA
Initial Recommendation	(895.9)	(2.4)	631.1	1.7	(357.8)	(1.5)
Revised Recommendation	(1,060.9)	(2.9)	626.2	1.7	(578.3)	(3.0)
Adopted	6,345.20	17.34	752.80	1.75	737.30	1.68

Suburban prepared its request using a 12% return on common equity, which resulted in a 10.27% rate of return in 2003; a 10.24% rate of return in 2004, and a 10.21% rate of return in 2005. ORA's recommendations used a 9.04% return on common equity. On that basis, ORA calculated a rate of return of 8.65% in 2003; 8.53% in 2004, and 8.45% in 2005. This decision adopts a 9.84% return on common equity, with rate of return set at 9.10% in 2003; 8.98% in 2004, and 8.89% in 2005.

In the discussion that follows, we will first address issues raised in the Assigned Commissioner's Scoping Memo. We then will deal with unresolved issues. Finally, we will turn to the parties' differences in calculating an appropriate return on equity.

SCOPING MEMO ISSUES

4.1 General Rates in 2003, 2004 and 2005

Through its testimony at hearing, Suburban maintains that the increases sought in this General Rate Case are intended to recover operating expenses as well as to provide a fair return on rate base. Suburban and ORA agree that Suburban's water system facilities are in good condition, and service complaints are few. Capital expenditures planned through 2005 consist largely of replacements in kind to maintain the condition of the water system and ensure water quality. The parties agree that Suburban faces water contamination problems in its San Jose Hills service area that are severe, and that the utility has managed to provide reliable water service while protecting ratepayers from most of the costs attributable to contamination. Suburban has submitted its current Urban Water Management Plan as part of this proceeding.

4.2 Department of Health Services Fees

ORA opposes recovery of certain of Suburban's DHS fees until resolution of Rulemaking (R.) 01-12-009, which deals with balancing account recovery. Suburban seeks recovery of DHS fees that it already has paid and will pay in test years 2003 and 2004. Suburban argues that historically it has booked DHS fees to a memorandum account for subsequent recovery through surcharges. It contends, however, that Resolution W-4327, dated March 6, 2002, authorized such memorandum accounts only for Class B, C, and D water utilities, urging that the larger Class A utilities (like Suburban) recover DHS fees in rates as part of their general rate cases.

We take official notice that the Commission in D.02-12-055, issued on December 17, 2002, adopted an interim decision in R.01-12-009 that leaves procedures in place for the recovery of balancing account costs existing prior to November 29, 2001. (Interim Decision Addressing the Procedures for Recovery of Balancing Accounts Existing Prior to November 29, 2001 (2002) D.02-12-055.) A final decision in the case presumably will deal with costs booked on and after November 30, 2001.

Generally speaking, balancing accounts authorized by Pub. Util. Code § 792.5 track unforeseen increases or decreases in purchased power and purchased water. Upon Commission approval, increases are passed on to ratepayers through surcharges, while decreases are returned to ratepayers through credits. Memorandum accounts are authorized by the Commission to track particular expenses likely to occur, and these costs cannot be recovered until they are reviewed and approved by the Commission via an advice letter filing. Since the DHS fees have in the past been tracked in memorandum accounts (rather than balancing accounts), and since Resolution W-4327 encourages Class A water companies to recover DHS fees in rates rather than in memorandum accounts, we see no conflict in permitting recovery of DHS fees in rates in this proceeding.

ORA has confirmed the accuracy of Suburban's actual and estimated costs for DHS fees. We adopt Suburban's estimated costs for these fees.

4.3 Tariff Related to Fire Flow Meters

In September 2002, the Commission denied a complaint against Suburban by B.H. Properties, LLC (BH Properties) but directed Suburban to propose a new tariff for FMCT meters in this general rate case.¹ Suburban was told that it could either support or oppose the new tariff. (B. H. Properties, LLC v. Suburban Water Systems (2000) D.02-09-046.)

BH Properties owns Grand Creek Plaza, a mixed-use development of shops, offices and restaurants located on five acres in West Covina. In its complaint, it alleged that it was unfair for it to pay $525 per month for each of two FMCT 8-inch meters serving the property when it rarely exceeded the use of the FMCT's 2-inch meter connection. Monthly charge for each 2-inch meter would be $53.

The Commission found that Suburban was correctly applying its tariffs, but it agreed that BH Properties faced a Hobson's choice of paying a meter charge far higher than justified by use or of making a costly reconfiguration of water lines serving Grand Creek Plaza.

The new FMCT tariff provided by Suburban tracks the rationale of the Commission's decision, substituting a "peak monthly use" tariff for the fixed meter service charge that now prevails. BH Properties would save approximately $14,200 per year, but that amount would be recovered by a slight increase in the rates of Suburban's 74,000 other customers.

Suburban argues that BH Properties would be the only customer to benefit from the change, since it is the only customer with two FMCT meters. It states that the change would involve a major departure from the Commission's rate design policy for water utilities established in Re Water Rate Design Policy (1986) D.86-05-064, since it would rely on historical usage instead of meter size. Suburban states that would inject uncertainty in the monthly use calculation. It notes, as did the Commission in D.86-05-064, that BH Properties has benefited from its FMCT meter installation because it avoided the cost of separate onsite fire/domestic water systems.

ORA took no position at hearing on whether Suburban should change its fixed meter service charge, and no other party has come forward to address the issue. ORA changed its position in its brief, urging adoption of the proposed new tariff to remedy what it called an inequitable rate design. Its assertion in its brief, however, was untested by cross-examination. The evidence shows that BH Properties is the only customer that would benefit from the proposed change, and all other ratepayers would incur additional charges. Moreover, BH Properties does have the alternative, albeit a costly one, of reconfiguring its water lines to isolate fire service from domestic service. We conclude that a change in the FMCT tariff is not warranted.

4.4 Three Test Years

Suburban urges the Commission to establish adopted results of operations for three test years instead of two test years in this proceeding. ORA argues that for an early-year filer like Suburban, the Commission, with few exceptions, has established two test years and an attrition year for Class A water utilities. (Rulemaking for Processing Rate Case Applications (1990) D.90-08-045.) ORA's project manager testified that adding a third test year would mean an increase in rates relying, presumably, on more speculative cost estimates for the third year. We are not persuaded by Suburban's justification for a change in the normal attrition-year formula, and we adopt ORA's recommendation.

4.5 Memorandum Account for Security Costs

Suburban requests authorization to establish a memorandum account to track costs associated with any federal or state legislation requiring security measures to prevent acts of terrorism. ORA opposes the request at this time because Suburban has failed to provide any estimate of expenses.

ORA concedes that the purpose of a memorandum account is to be able to record expenses that are not predictable, and that recovery of those expenses cannot be made without subsequent Commission review and approval. Suburban concedes that there is uncertainty as to the costs that may be associated with federal or state legislation dealing with security.

We take official notice that, since Suburban filed this application, Congress has passed the Public Health Security and Bioterrorism Preparedness and Response Act of 2002. (Public Law 107-108 [H.R. 3448].) This legislation requires water utilities to undertake security risk analyses and make investments for improving security, especially in source water and distribution systems.

We believe (as does ORA) that utility expenses for security are inevitable. We will authorize establishment of the memorandum account.

4.6 Amortization of Balancing Accounts

Suburban sought amortization of an undercollection of $2.3 million in balancing accounts, including expense for pumped water and purchased water. ORA urged that this request be held in abeyance until the outcome of the pending balancing account proceeding, R.01-12-009. Suburban has now withdrawn its request for amortization because of the recent decision (D.02-12-055) in which the Commission ordered water utilities to recover certain of such accounts through advice letter filings. Suburban states that it will comply with the procedure set forth in that decision.

UNRESOLVED ISSUES