F. Consolidation of Rates

1. Cal-Am's Proposal and Justification

Cal-Am filed its rate consolidation proposal in response to the Commission's directive in D.04-05-023. In that decision, the Commission considered an earlier Cal-Am rate consolidation proposal and found the record was insufficient to make a finding that the advantages of district consolidation outweighed the disadvantages; the Commission further found that the public interest would be served by Cal-Am filing a more complete proposal within 90 days.¹¹ On August 11, 2004, Cal-Am filed its new proposal in A.04-08-013 and at the August 16, 2004 PHC in A.04-04-040/A.04-04-041, the assigned ALJ consolidated A.04-08-013 with Cal-Am's GRC applications.¹²

Cal-Am's new proposal would:

· combine the revenue requirement of its Sacramento district for ratemaking purposes with the revenue requirement of its Larkfield district;

· develop consolidated rates for metered service based on the combined revenue requirement of the districts;¹³

· implement the rate consolidation over a six-year period to minimize the effects of rate consolidation; and

· exclude from the combined revenue requirement the cost of purchased water, purchased power, and chemical costs.

In support, Cal-Am testifies that the proposal would provide significant rate relief to customers in the Larkfield district, while having a minimal impact on customers in the Sacramento district. In addition, this rate consolidation proposal is part of a larger, long-term Cal-Am goal of achieving rate equalization for all of its customers through statewide rate consolidation of all Cal-Am districts. Cal-Am testifies that the cost of treating and supplying water has increased dramatically in recent years due to stricter health and environmental regulations, and small operating entities must have rate consolidation to remain economically viable. Further, water utilities across California face the need to replace and/or upgrade aging infrastructure, and customers in smaller districts suffer from these fixed costs being spread over a smaller customer base.

Cal-Am acknowledges that its proposal does not meet the "Guidelines for Combining Water Utility Districts for Ratemaking and Public Utilities Commission Reporting Purposes" developed by representatives of Class A water utilities and Commission staff in 1992. While these guidelines have been used to assess all water rate consolidation proposals since 1992, Cal-Am argues that the guidelines are not Commission precedent and should not be strictly applied.

The Commission precedent that Cal-Am cites in support of its proposal is D.00-06-075. There, we granted rate consolidation for eight Southern California Water Company (SCWC) districts that were not interconnected, had varied water sources, and ranged from 5 to 163 miles from each other. Nonetheless, the Commission found that given the need for rate relief in some SCWC districts and the demonstrated minimal impact of consolidated rates in the other districts, the public interest would be served by consolidated rates. Cal-Am also cites to several other cases where we approved consolidated rates for water companies, but Cal-Am acknowledges that these cases cannot be used as precedent because in those cases the consolidation was presented to us as part of a settlement.

2. Discussion

Cal-Am has not demonstrated that its proposal for rate consolidation of the Sacramento and Larkfield districts is in the public interest. Customers at both the Sacramento and Larkfield PPHs spoke against the proposal, and all active interested parties in the proceeding, including the Larkfield citizens group LWWDAC, oppose Cal-Am's request. Further, Cal-Am's rate consolidation proposal is not comparable with the SCWC consolidation approved in D.00-06-075. By its own acknowledgement, the proposal does not meet the guidelines that we have used to assess rate consolidations since 1992. Even apart from the guidelines, the record here tilts heavily against Cal-Am's proposal.

Cal-Am's reliance on the SCWC consolidation is misplaced. In D.00-06-075, the Commission approved single tariff pricing, to include water supply and treatment, based on a finding that there was a compelling need for rate relief for some of the smaller, more impoverished districts, and that providing relief constituted substantial benefits in the public interest. The Commission said that a consolidation proposal not consistent with the guidelines could be considered but would require a full record to be developed in support of the proposal. ORA is correct in stating that if an applicant does not meet the guidelines, the burden of proof is on the applicant to prove the advantages outweigh the disadvantages, and to make this showing based on clear and convincing evidence.

Cal-Am has not met its burden of proof. The primary justification Cal-Am provides for its proposal is that customers in the Larkfield district pay higher rates than customers in the Sacramento district for the same distribution service. It does not make a showing that Larkfield is an impoverished district or that customers cannot afford to pay stand-alone rates.

In the evidentiary hearings, Cal-Am testified that the highest costs for a water district are purchased water, purchased power and chemical costs. (Tr. at 183.) These are the costs that Cal-Am does not propose to consolidate for Sacramento and Larkfield.¹⁴ To allow the Commission to assess the impacts of rate consolidation, Cal-Am was required in D.04-05-023 to prepare a 15 year rate forecast. However, LWWDAC, on cross-examination, elicited from Cal-Am that in its 15 year forecast it did not forecast any cost increases for purchased water, purchased power, and chemicals because these costs would be rate offsets; further, Cal-Am made no commitments on future rates based on its 15 year forecast. (Tr. at 187.)

The County of Santa Cruz references Cal-Am's other rate consolidation application, A.04-08-012, and draws from that record to show that the Commission should not make a major policy change here by adopting Cal-Am's goal of a statewide infrastructure rate based on the limited record in this proceeding. We agree.

We note, finally, that Cal-Am's proposal does not even remotely comport with the rate consolidation guidelines. It fails the proximity standard as the districts are 120 miles apart. It fails the rate comparability standard as the difference in rates between the two districts is 93%, based on revenue per customer. It fails the water supply standard as Larkfield purchases approximately 33% of its supply whereas Sacramento purchases only 3%.

In short, Cal-Am's consolidation proposal is poorly supported, generally opposed, and inconsistent with both our guidelines and our rationale underpinning approval of consolidation in the SCWC case.