Cost Recovery

ORA requests that actual costs be capped at the construction estimates herein authorized. Citizens argues this proposal is unfair and is likely to deprive it of the opportunity to earn its authorized rate of return. We agree that there is likely to be a substantial lag between the completion of any project that exceeds ORA's estimate and an order in the next applicable general rate case.

Cal-Am strenuously opposes ORA's proposed cap because it would likely result in denial of Citizens' (or Cal-Am's) opportunity to earn its authorized rate of return. Even though ORA recommends that the company could recover some unrecovered construction costs after three years, Cal-Am claims ORA's proposal is unfair because it results in a very lengthy period during which the company could not recover its reasonable capital expenditures on projects approved by the Commission.

We are sensitive to costs above those herein estimated and ORA's desire to have ample time to investigate any overruns. Therefore, we will allow actual costs less than or equal to those herein authorized to be recovered by annual advice letter. Costs above those herein authorized may be recovered in an application or the next available rate case proceeding. This procedure will allow ORA or interested parties to review and possibly challenge any recovery above that herein authorized.

For Citizens to meet the Commission's requirements for lifting the moratorium and all of the requirements of General Order 103 will be costly under any scenario. MSD characterizes the resulting rates after improvements to be excessive. We disagree. The absolute level of a rate under the law does not make it either reasonable or unreasonable. The reasonableness of a rate depends upon whether it will provide the utility with a reasonable opportunity to recover all of its prudent costs and to earn a reasonable return, and at the same time provide the customer with reasonable service. We herein conclude, based on the record, that the modified Master Plan and corresponding revised estimated costs are reasonable. In the future when Citizens requests to place projects into rate base, it must demonstrate that its implementation of the plan was reasonable and must justify any cost overruns. The Commission will establish rates only after the completion of the Master Plan projects, at which time MSD, ORA, and others may challenge allowance in rates of overruns or other costs incurred imprudently.

ORA's recommendation that Citizens file an annual progress report on authorized improvements is reasonable. However, Citizens may include this report in annual advice letter cost recovery filings. Citizens must indicate when requesting actual cost recovery whether the improvements were completed on time, and if not, describe why not and whether the cost of such delay added to the cost of a project.