6. Rule X -- Non-Tariffed Products and Services
6.1. Background
The Commission has adopted rules that govern the water utilities' ability to provide non-tariffed products and services (NTP&S) through the use of regulated assets and personnel (formerly called excess capacity rules). The primary NTP&S decision is D.00-07-018, adopted in R.97-10-049. Two subsequent decisions in that proceeding made corrections, and a third approved in part a petition to modify D.00-07-018.93 However, the basic substance of D.00-07-018 remained in place.
D.00-07-018 distinguished the types of non-tariffed utility offerings as either active or passive. The decision adopted an Appendix A, which designated many potential non-tariffed offerings as either active or passive, and stated that any non-tariffed utility offerings not present on the list would be designated as active if the shareholders incurred incremental investments costs of $125,000 or more.94 D.00-07-018 required water utilities to file advice letters for the provision of certain types of active services, and required that the utilities provide certain information regarding each active service and each passive service in their annual reports. The rules include a methodology for water utilities to allocate revenue from non-tariffed utility services between ratepayers and shareholders depending upon whether the service is active or passive. The NTP&S rules adopted in D.00-07-018 do not apply to sewer utilities.
The rules governing the water utilities' use of regulated assets and personnel for non-tariffed services are particularly distinguishable from comparable rules for the energy industry in two ways: (1) the list of products and services for water utilities contained two additional categories, "Operation and Maintenance Contracts" and "Customer Ancillary Services;" and (2) water utilities were given authority to offer new non-tariffed services under these two broad categories without first filing an advice letter with the Commission.95 These two distinctions have provided flexibility to the water utilities, but they have also created confusion. Pursuant to the direction of the OIR in this proceeding, the water utilities provided a list of NTP&S currently in existence.
6.2. Positions of Parties
CWA would keep the NTP&S rules that were first adopted for the water utilities in 2000 in D.00-07-018 (with subsequent modifications), contending that no problems have arisen that would warrant a change in the existing rules. CWA points out that the rules adopted in D.00-07-018 were modeled after rules adopted for SCE in 1999, and that SCE has continued to operate under these rules with virtually no changes since then. In addition, CWA provides specific comments on the Staff Proposed Rules for NTP&S and the Workshop Report.
TURN generally opposes the revisions made by CWA, preferring the language in the Staff Proposed Rules, with certain changes from the workshops. CFC objects to the entire idea of multiple uses of ratepayer assets. DRA notes that both the regulated water companies and their affiliates provide non-tariffed services to their own customers, such as Suburban's Residential Houseline Program96 (repair and replacement of water service lines).97 DRA also cites the case of Golden State Water whose affiliate, American State Utility Services provides non-regulated utility services via contracts with various cities, while Golden State Water's employees provide the day-to-day utility services under these contracts. In Golden State Water's GRC A.02-11-007, it requested that related cost allocations pertaining to serving these contracts should be dealt under the cost and revenue sharing mechanism as provided in the Excess Capacity Decision (D.00-07-018), rather than the cost allocation guidelines in Golden State Water's affiliate transaction rules (pursuant to D.98-06-068). In D.04-03-039, the Commission concluded that Golden State Water should follow the policies and guidelines adopted in Golden State Water's holding company decision, D.98-06-068, regarding affiliate transactions.98
TURN, DRA and CWA all agree that if excess capacity is used by affiliates to provide NTP&S, or if the utility provides such services to its affiliate, those activities should be subject to the affiliate transaction rules.99 However, CWA would grandfather in pre-existing contracts and transactions where NTP&S are provided from utilities to their affiliates, as these arrangements were made pursuant to D.00-07-018.
Cal Water argues that, going forward, affiliate rules should specifically allow the use of excess capacity accounting where a good or service is being provided to an affiliate consistent with the proposed rules. In Cal Water's view, the prices of non-tariffed items sold by a utility should be considered "regulated by a state agency" within the meaning of this provision, regardless of the identity of the buyer. Cal Water contends there is no economic basis for charging a different price when such goods or services are sold to an affiliate from the price at which they are sold to a third party.
6.3. Discussion
In the OIR that began this proceeding, we discussed the need to develop new NTP&S rules. We noted that the current rules on non-tariffed water utility services adopted in R.97-10-049 have been considered in several dockets.100 The combination of the four decisions in R.97-10-049 has made it somewhat confusing to determine the exact rules in effect. In several recent proceedings, the Commission has found considerable confusion regarding how each water utility is interpreting and operating under the non-tariffed utility service rules.
We stated in the OIR that more guidance is necessary, in particular when the service offering involves the use of utility personnel and the assets used to provide basic utility service. Furthermore, the current non-tariffed utility service rules do not address the issues of: (1) providing either active or passive services to affiliates; (2) allowing an affiliate to use a regulated utility's personnel or facilities to provide its unregulated services; (3) the lag in time before the Commission is notified of those non-tariffed services that, pursuant to the rules adopted in R.97-04-011, do not require approval through an advice letter; and (4) possible confusion/crossover with affiliate transaction rules.
In addition, we are aware that Cal Water and Golden State Water are currently limited in providing NTP&S by their holding company decisions (D.97-12-011 and D.98-06-068, respectively). D.07-12-055 (regarding Cal Water rate cases) at 45-46 discusses a prohibition for Cal Water:
Cal Water asserts that its affiliate transaction rules prohibit it from directly offering an unregulated service. We have reviewed the relevant sections of Cal Water's affiliate transaction rules, and find that Cal Water is correct. Cal Water's affiliate transaction rules state that unregulated operations and employees whose primary responsibilities are to conduct unregulated operations should be transferred from the utility to the affiliate.101 Thus, under its affiliate transaction rules, Cal Water may not offer an unregulated service; only its affiliate may offer an unregulated service. We recognize that this limits the type of services Cal Water may offer.
Golden State Water is constrained, but not prohibited, from offering NTP&S. D.98-06-068 (regarding the holding company application of Southern California Water, which changed its name to Golden State Water) included the following rule:
Unregulated Operations & Transfer of Employees. A. Unregulated operations, if any, including all pertinent contracts, that are performed by Utility shall be transferred to appropriate affiliate as soon as all requisite consent is obtained. B. Utility shall avoid a diversion of management that would adversely affect Utility. C. Utility shall not use its directors and employees, including officers, to conduct unregulated operations if such use would adversely affect the utility or its ratepayers. D. Utility shall endeavor to transfer to its affiliates any employee whose primary responsibility is to conduct unregulated operations, taking into consideration the Utility's obligations to any such employee, its obligations under any contract with its unions or other, and the cost of providing terms of employment.
We do not agree with CFC that there should be no NTP&S allowed; there are appropriate uses of excess capacity or slack resources which can benefit the utility, the marketplace and (if there is revenue sharing and there are appropriate safeguards in place) ratepayers. Allowing more efficient use of resources under a reasonable set of rules will not prevent us from scrutinizing utility operations in general rate cases to ferret out attempts to pad payrolls to allow provision of NTP&S. We also will not tolerate any loss of focus by the utility on the core utility services it provides.
We also do not agree with CWA that the NTP&S rules in place since 2000 should be left in place, unchanged. Now is the time to look at updates and changes to the rules. Rule X of the rules in Appendix A will supersede the rules regarding NTP&S from D.00-07-018 (and as later modified). Similarly, notwithstanding settlement provisions approved by D.07-12-011 for Cal Water and by D.98-06-028 for Golden State Water, these two utilities will be allowed to offer non-tariffed products and services consistent with the rules we adopt today.
Overall, the current NTP&S rules are a good starting point. We find no specific concerns which require a complete overhaul of the current NTP&S rules, but acknowledge that some clarifications and updates are required. We use the Staff Proposed Rules and the comments as the vehicle. As discussed in the OIR, the biggest problem stemming from these rules has been inconsistent applicability among different water companies. There is no good reason why some water utilities in the same class should be subject to different rules for NTP&S than others, or why the rules should not apply equally to sewer utilities. We will modify the rules so that they apply equally to all covered water and sewer utilities.
A second issue is the relationship between NTP&S rules and affiliate transactions rules. Currently, it is unclear whether a water utility may provide NTP&S to its affiliate, or under what conditions. For example, Cal Water has provided billing and marketing for Extended Service Protection (ESP) to its affiliate, CWS Utility Services. The affiliate has contracted with an unrelated entity, Home Emergency Insurance Solutions, for the actual ESP service. After the Commission issued D.07-12-055, Cal Water gave its utility customers notice that they were being switched from CWS Utility Services to Home Services for the ESP service unless they opted out within a set time. In A.08-05-019, Cal Water seeks a Commission order confirming the action above complies with D.07-12-055 and approving the accounting. In a related application, A.08-07-004, Cal Water requests to modify its holding company decision (D.97-12-011) to allow it to directly offer the non-tariffed billing and marketing service to Home Emergency Insurance Solutions under the Commission's excess capacity rules.
We will not allow the provision of NTP&S from a water or sewer utility to its affiliates other than under the provisions of the affiliate transaction rules, in particular Rules III.C, VI.A and VI.C in addition to Rule X, ,adopted herein. These are inherently affiliate transactions and must be considered as part of the rules we adopt today. If we were to do otherwise, water and sewer utilities could sidestep the other affiliate transaction rules and provide advantages to their affiliates without the ratepayer and market protections provided for in the affiliate transaction rules. We will not adopt CWA's suggestion to grandfather in any existing arrangements to provide NTP&S between utilities and their affiliates. This exception would provide a loophole which could undercut the effectiveness of our rules.
We also do not adopt Cal Water's view that the prices of non-tariffed items sold by a utility should be considered "regulated by a state agency" within the meaning of this provision, regardless of the identity of the buyer. By definition, non-tariffed products and services do not have rates, prices or tariffs regulated by this Commission. As discussed above, we do not allow provision of NTP&S to an affiliate except under the adopted affiliate transaction and NTP&S rules. Rule VI.D forbids discrimination among affiliated and non-affiliated entities for good and services offered on the open market, thus preventing a utility from charging different prices to an affiliate and a third party.
We adopt the NTP&S rules in Rule X of Appendix A consistent with the discussion in this decision. We note that certain issues in Rule X are parallel to those in the other rules in Appendix A (e.g., use of terms such as "excess or unused capacity" in Rule X.A.C.1); in these cases, we follow the same outcomes throughout the rules.
Water utilities currently do not have to seek approval from the Commission to offer NTP&S. At one point, such review was required. D.03-04-028, Ordering Paragraph 2, stated:
Any water utility which proposes to engage in a sale of non-tariffed goods or services provided, in whole or in part, by assets or employees reflected in the utility's revenue requirement, which would be proposed to be classified as active as described herein, shall file an advice letter seeking Commission approval, except for those activities designated as active in attachment A.
Later, D.04-12-023, Ordering Paragraph 3, deleted this requirement and modified D.03-04-028 to provide that:
Water utilities that have made non-tariffed offerings of products and services, provided in whole or in part, by assets or employees reflected in the utility's revenue requirement, shall submit, as part of their annual report, a list describing each active and passive investment, and aggregate revenues derived from its non-tariffed offerings.
As the OIR indicated, we were not certain exactly what NTP&S were provided by water utilities at the time. While the water utilities have now provided such as list as part of this proceeding, we otherwise do not find out about changes or additions to NTP&S except through annual reports, as there is no other notification or approval now required. Changes to NTP&S can have significant impacts to ratepayers, such as diversion of utility resources. While most changes are likely to be benign, it is important for there to be transparency and a method for review of NTP&S offerings. We will require the water and sewer utilities to file an advice letter for any new NTP&S, defined as (a) an NTP&S not currently designated in Appendix A; (b) a significant extension of a current NTP&S (e.g., billing systems currently offered to utilities, now offered to other customers); or (c) a change from "passive" to "active" designation (or vice-versa), along with a rationale for this change.
DRA generally opposes the use of utility employees for NTP&S, because allowing such use would imply an "acceptable" level of inefficiency ultimately borne by ratepayers. DRA contends that, as the utility grows, any excess capacity102 should diminish, and therefore any NTP&S business based on this excess capacity would be unsustainable.103 TURN offers that excess capacity should refer to assets that are carried on a utility's books (i.e., capital-related, and not employees).
CWA counters that there is no evidence that any water utility has designed its operations to include undue resource capacity (including employee levels) or to be capable of only handling current demand. CWA contends that utility employees are capable of handling additional assignments in non-peak operating periods, without harming ratepayers.104
The current NTP&S rules allow assets or employees reflected in the utility's revenue requirement to be involved in the provision of NTP&S. It is impractical to fully exclude the use of employees in the provision of NTP&S, as the use of capital assets to provide NTP&S could not be achieved without some incidental use of employees. However, we do not intend that the utility hire and put into rates additional labor costs which are not necessary for the provision of regulated utility service. Therefore, we will adopt the Staff Proposed Rule in this respect.
6.3.3. Rule X.D - Cost Allocation
In response to comments by CWA and other utilities on the Proposed Decision, we delete language which would have required non-incremental investments and costs incurred for labor and capital joint used for non-tariffed and tariffed products and services to be fully allocated between ratepayers and shareholders. This language was ambiguous, as it could have been read to either require a change to revenue requirement or simply a tracking of costs. As CWA and others point out, it would be improper to reduce the utility revenue requirement for NTP&S costs while at the same time providing for sharing of gross revenues between shareholders and ratepayers. We do not believe there is a clear benefit to tracking such costs, thus we delete the language.
93 The later decisions are D.01-01-026, D.03-04-028, and D.04-12-023.
94 D.01-01-026 published that Appendix A.
95 See Re Southern California Edison Co. (1999) 1 CPUC3d 579, 596.
96 Cal Water at one time provided a similar service to its own customers.
97 DRA Reply Comments at 2-4.
98 DRA Prehearing Conference Statement at 6.
99 TURN Comments at 19; DRA Comments at 21; CWA Comments at 26.
100 See, D.03-09-021 in A.01-09-062 et al., D.04-03-039 in A.02-11-007, D.07-11-037 in A.06-02-023, D.07-12-055 in A.06-07-017 et al., and D.09-03-007 and D.10-04-053 in A.08-01-004. Related issues are being considered in A.08-05-019 and A.08-07-004, which are still open.
101 Footnote 76 from D.07-12-055: Cal Water cites to D.97-12-011, Appendix A, XII. This section of the settlement agreement adopted by Cal Water's holding company decision states, in relevant part: "A. Unregulated operations, including all pertinent contracts, that are performed by the Utility shall be transferred to the appropriate affiliate as soon as the requisite consents are obtained . . . C. The utility shall endeavor to transfer to its affiliates employees whose primary responsibility is to conduct unregulated operations. The timing of such transfer will take into consideration the Utility's employment obligations to such employees, its obligations under its Union contracts and the cost of providing comparable terms of employment." (D.97-12-011, 1997 Cal. PUC LEXIS 1212, *14-15.)
102 While CWA would prefer not to use the term "excess capacity," there was no agreement on a better term for these purposes. This term is not intended to imply that utility systems contain unnecessary capacity or were intentionally designed or built too large in order to benefit shareholders.
103 DRA Comments at 21.
104 CWA Reply Comments at 21 - 22.
