ORA's Recommendations

After review of Citizens' estimates, ORA recommends several adjustments and project delays which decrease the revenue requirement by roughly one half of that proposed by Citizens. Under ORA's recommended improvement plan and estimated costs, rates would increase roughly 42.8% for the seven-year period.

First, ORA contends that Citizens used the rate of return authorized in the improvement applications in 1993, 9.80%. However, ORA recommends using the more recent 8.81% rate of return authorized in D.98-10-056 for other Citizens' districts to better reflect the current conditions in capital markets.

Regarding pipeline replacement, ORA agrees that pipes constructed in the 1940's should be replaced since they are at the end of their useful life. The pipes are undersized and have leaks. However, ORA believes the replacement should be done in the first few years instead of the first and fourth years in order to provide an immediate benefit to the ratepayers who have expressed concerns about low pressure, fire flow and poor water quality related to old pipes. This re-prioritizing of pipeline replacement also restructures the rate impact.

ORA challenges Citizens' construction cost factors used to estimate the cost of the pipe replacement program. Citizens uses factors of 25% for the contingency factor (presently unknown expenses), 15% for the engineering factor and 10% for the administrative factor. ORA contends these percentages are excessive based upon industry cost estimator guidelines by R.S. Means. According to Means' Construction Cost Data for 2000, the contingency factor on routine construction projects, such as pipeline replacement, should be no higher than 10%. This percentage is similar to other such water company projects recently reviewed by ORA. The Means tables also recommend a range of 4-10% for engineering. ORA considers a 5% factor for estimating engineering costs to be reasonable due to the simplicity of pipeline construction. For the administration factor, Means recommends a range of 4.5 - 7.5%. Similarly, ORA believes the low end of this range, or 5%, is reasonable given the relative simplicity of this project. Thus, ORA estimates total costs for pipeline replacement of $1,097,000 compared to Citizens' estimate of $1,387,000.

Regarding source of supply, ORA disagrees with Citizens' proposed well construction. Contrary to Citizens' proposal to cease operation, ORA proposes to operate the Park and Portola II wells, which increases the total water supply. ORA also recalculates the average consumption, which has decreased since 1991. Thus, based upon a reassessment of forecasted daily demand, ORA recommends that the new Wagner Valley Well and second McNee Ranch Well are not needed and should be deferred. ORA prefers the McNee Ranch Well over the Wagner Valley Well because the Wagner Valley Well is upstream of existing wells and may reduce water supply from them. Due to its proposed location, the new McNee Ranch Well will not affect any other existing well.

ORA uses lower factors than Citizens for well construction, yet higher than those ORA used for pipeline construction because it considers well projects more exploratory than the routine pipeline replacement projects. Thus, ORA considers reasonable the following factors: engineering 10%, administration 5% and contingencies 15%. ORA also used these factors for pipeline associated with the McNee Ranch Well for the same reasons.

ORA applies its lower factors for construction estimates for the Airport Well #4 and the one McNee Ranch Well it allows. Thus, it estimates costs of $280,000 and $255,000 for the wells, compared with Citizens' estimates of $370,000 and $300,000. Based upon its recommendation of two new wells instead of four wells, ORA also lowers the water monitoring cost estimate from $10,000 to $6,000.

In summary, ORA estimates $1,289,000 for the construction of two wells, compared with Citizens' estimate of $2,750,000 for four wells. The difference is due to the deletion of the Wagner Valley Well and its associated costs, the deletion of the second McNee Ranch Well, the removal of the pipeline between the two McNee Ranch Wells, the use of different percentages for contingency, engineering and administration factors, and reduction of related expenses.

Regarding storage, ORA uses a re-calculated maximum day demand to estimate required storage to be 1,267,000 gallons. Current water storage (662,000 gallons) plus the new Portola tank (100,000 gallons) provides 762,000 gallons of storage. Subtracting new storage from daily demand, ORA calculates the additional storage needed as 505,000 gallons (1,267,000-762,000 gallons). Therefore, ORA recommends construction of only one of the 650,000 gallon tanks at the Schoolhouse site, rather than two as Citizens' proposes. ORA reduces the estimated costs for the Schoolhouse Tank storage accordingly. Regarding other related costs, ORA again uses lower cost factors. ORA reduces Citizens' estimate of land surveying, and land allowance for the new Portola Tank, resulting in a total estimate of $270,000 compared with Citizens' estimate of $380,000.

Thus, ORA estimates for storage and pumping projects $2,171,000 compared with Citizens' estimate of $3,265,000.

Regarding office structures, ORA adjusts the costs of a new Operations Building. Citizens uses a cost factor resulting in $150 per square foot for the building. ORA finds more reasonable a cost factor of 1.25, resulting in a unit price of $120 per square foot, based upon Means Construction Cost Data for 2000 for an office building. ORA also recommends delaying construction of the building until Years 4-5 to balance the costs throughout the seven-year period, and adds a 5% inflation factor to compensate for the delay. Also to spread the rate impact, ORA recommends deferring the construction of two fire pumps, a standby power system, and related electrical instrumentation from Years 2-3 to Years 4-5. ORA adds a 5% inflation factor to these delayed projects, but again reduces Citizens' construction factors as discussed above.

Overall, ORA `s estimate for total capital improvements, including pipeline replacement, source of supply, and storage and pumping facilities is $4,557,000, compared with Citizens' projection of $7,402,000. ORA recommends placing a cap of this amount on the total improvement plan recovery, with Citizens being required to request approval of any amount in excess of this cap in a future rate proceeding, which will allow a prudency review of claimed expenditures. ORA recommends that Citizens be allowed to file three advice letters over the next three years to recover costs. In addition, ORA recommends that in 2003 Citizens would file an application seeking authorization to complete the second phase of improvements with any cost overruns. Lastly, ORA requests that Citizens be ordered to file annual compliance reports indicating that it has timely completed the annual Commission-ordered plant improvements.

In an effort to minimize rate impact and conserve supply, ORA recommends that Citizens expand its conservation program in this district to include an Ultra Low-Flush Toilet rebate of $50 to customers who purchase and install this plumbing. ORA recommends that Citizens be authorized to set up a memorandum account for rebate programs to recover this cost later. However, ORA recommends that this account include only the actual rebate paid to customers.

Regarding rate design, ORA notes that Citizens' service charge is not in accordance with Commission policy. D. 86-50-064 requires service charges be set to allow recovery of 50% of fixed costs, orders the phasing out of any universal lifeline rates, and instructs water utilities to set a maximum of three commodity blocks. Also in 1981, the Commission Water Division recommended service charge allocation by meter size based on the approximate flow rates of each size of meters. These ratios range from 1.0 for the 5/8 x ¾ inch (residential) meter to 225.0 for the 15-inch commercial meter. Therefore, ORA recommends that Citizens gradually increase the service charges to larger meters to move closer to these recommended ratios in the Montara District.