Rate Design Discussion

While the rate designs we are asked to consider are complex, the parties' arguments surrounding the unsettled issue of adding higher blocks to the current rate design are straightforward. CalAm, supported by MPWMD and DOD/FEA, would add higher blocks to dissuade customers from excessive use and thus minimize the possibility of once again running afoul of SWRCB's Carmel River extraction limits and the attendant fines. RRB, however, points out that CalAm's proposal varies in several ways from our standard rate design policy set forth in D.86-05-064, and argues that it produces anomalies when applied to some customers' situations, has not been sufficiently developed or supported, and would be fundamentally unfair.

While CalAm would prefer its initial, Application-proposed rate design, it agreed in the Settlement to keep the current design in place with certain modifications and to move to a new, per capita design only when triggered by excessive water usage. CalAm feels strongly, however, that there must be some move in the shorter term to continue pressuring its customers to curb excessive use. To do otherwise, it argues, would send an erroneous, overly optimistic signal to its ratepayers and significantly increase the chances of incurring future SWRCB fines when a dryer weather cycle occurs. Toward that end, it proposes to add an additional tail block to the current design for all users. RRB disagrees, and the active parties have agreed to submit that proposal to the Commission for decision.

The high rates in the proposed tail blocks are aimed at what CalAm characterizes as a "water abusing minority." Each year CalAm renders about 480 monthly residential statements showing water use above 32 ccf. Citing generally the results of its Commission-ordered rate design effectiveness study, CalAm estimates that approximately one-half of these customers would respond to the new price signals, resulting in cutbacks in the range of 25% to 30% of the 800 acre-feet used annually in this block by residential customers. Considering that CalAm's Carmel River excess production in water year 1996-1997 when SWRCB fined it $168,000 was 1,500 acre-feet, the reduction this measure could produce is significant. There would be additional conservation produced by adding the second block for commercial customers, but no party attempted to quantify those savings.

RRB points out that CalAm's proposed design would run counter to our standard water rate design policy which states that we do not expect a customer's total water bill to be increased substantially more than the total system increase; a customer's total water bill should not be reduced except under circumstances where the utility's revenue requirement is reduced; and the number of commodity blocks should be limited to no more than three. For residential customers, CalAm's addition would be a fourth block, and for commercial customers, a second. CalAm acknowledges that some low-usage multi-residential customers may actually see their bills decrease as their group is merged with residential, and that the very highest users in all categories would see increases substantially in excess of the first year 3.9% system average increase. It characterizes the decreases as an incentive to those low users to continue to conserve, while the highest users are motivated to reduce the excessive consumption that put them in those new, higher blocks.

We agree with CalAm. In Monterey Division CalAm faces extraordinary water supply challenges and needs tools to address them beyond those we ordinarily would support. What RRB regards as rate shock, MPWMD correctly characterizes as "...an abrupt imposition for high water users to create an awareness of their conduct [and] not intended to soften consumer reaction." With an inverted block structure, customers have strong incentives to conserve, and those who respond appropriately need not be disadvantaged.

Under the CalAm proposal we are adopting, commercial customers will see a second quantity block that begins when they have exceeded their assigned allotment. CalAm will set customers' allotments using MPWMD-developed criteria that take into account the needs of each type of commercial customer. CalAm and MPWMD assert that no commercial customer need exceed an allocation and be thrown into the second block. A commercial customer who consumes more than the allocated amount may request a best management practices audit, and if the audit shows they are using the best water management practices applicable to them, their allocation will be adjusted accordingly. A customer will be able to appeal to CalAm and MPWMD if they disagree with their allocation, and, if still dissatisfied, to the Commission.

We have summarized in Appendix A-1 the 2000 rates we are adopting in this decision for immediate implementation, and the accompanying 2001 and 2002 step rate increases. Appendix B shows the effects these increases will have on typical customers' bills. Appendix A-2 summarizes the agreed-upon per capita rate design to be implemented during water shortages. For future ratemaking reference, we also adopt the standard quantities and calculations set forth in Appendix C which form the bases for the adopted summaries of earnings.