2. Investigation on Conservation Issues

We commence this companion investigation to the applications described above to allow the Commission to hear proposals other than those set forth in the individual applications, and to enable the Commission to enter orders on matters for which the utility may not be the proponent. The investigation will be consolidated and heard on a consolidated evidentiary record with A.06-09-006, A.06-10-026, A06-11-009, and A.06-11-010. The investigation will afford parties, and this Commission, an opportunity and forum to provide and consider evidence on similar issues of interest raised by the applications. GSWC, CalWater, Park, and Suburban are hereby placed on notice that the evidence taken in these consolidated proceedings may be the basis for findings and Commission orders. Accordingly, the Commission commences this investigation to study and address overarching conservation policy issues raised by the filed applications, including increasing block rate design, WRAM design, conservation memorandum accounts, and water shortage allocation policy.

Subsequent applications raising similar issues that are filed by other Class A water utilities may also be consolidated with this proceeding. We will examine other issues, discussed below, to promote the WAP's conservation objectives. Initially, we solicit comments from interested parties on conservation issues. After issuing a decision on these broad policy issues, we anticipate (a) authorizing individual companies to file appropriate advice letters to implement authorized conservation measures, including rate design; or (b) scheduling any necessary proceedings (either in this investigation or in the individual applications) to implement in a decision conservation measures, including rate designs, for individual companies. Below we describe the issues we will consider in our initial policy decision and specific questions on which we require input.

2.1. Conservation Rate Design

The WAP found there was an increasing use of conservation rate designs in California. In 2003, approximately half of California's water ratepayers had increasing block rates. However, almost no water utilities regulated by the Commission used this rate design. (WAP, pp. 8-9.) The WAP supported adoption of increasing block rates where feasible and recognized the need to consider the impact of increasing block rates on low-income customers.

The WAP encourages development and implementation of best conservation management practices as promoted by the California Urban Water Conservation Council (Council) and directs Class A and B Water Utilities to participate in the Council. One best management practice is conservation pricing (BMP11). The Council is considering revisions to the existing BMP11.¹ The revised BMP 11 states that conservation pricing provides economic incentives (a price signal) to customers to use water efficiently. Uniform rates, seasonal rates, tiered rates, and allocation-based rates potentially are consistent with that definition of conservation pricing. Unmetered water service is inconsistent with conservation pricing.

In order to implement increasing block rates for Class A Water Utilities, we must determine whether certain conditions must be met prior to adopting increasing block rates, as follows:

· Should the company have a low-income assistance program?

· Should the company provide metered service for a major portion or for all of its customers?

· Should the company provide monthly bills?

We need to determine how we will implement increasing block rates. GSWC, CalWater, Park, and Suburban have filed applications for increasing block rates for their residential customer classes, because conservation rate designs for other customer classes are more complex. The proposals incorporate two- and three- rate tiers and first tier caps also vary. No company has raised the issue of a "baseline" water allowance for the first tier, comparable to the baseline quantities in place for residential gas and electric customers. The gas and electric baseline allowances are those necessary to supply a significant portion or the reasonable energy needs of the average residential customer. (Pub. Util. Code § 739(a).) Energy utilities have seasonal baseline usage allowances. We have the authority, in implementing rate relief and conservation incentives for low-income ratepayers, to take into account water needs caused by geography, climate, and the ability of communities to support these programs. (Pub. Util. Code § 739(8).) To implement increasing block rates we need to consider the following:

· Should there be a uniform number of rate tiers? What percentage increase in rates between tiers would most effectively promote conservation? Should they be seasonal? If cost differences within districts are substantial, should the rate tiers within that district vary? What percentage would constitute a substantial difference?

· What should the usage allowance be for the first tier? Should it be seasonal? Should it be set by geographic area? How should it be established?

· Will seasonal rates (i.e., higher uniform rates during summer months) be adequate in districts or for particular customer classes (e.g., commercial and industrial) where increasing block rates are overly burdensome to administer?

· Should the Commission consider increasing block rates for other customer classes in this investigation after the Commission has adopted increasing block rates for residential customers?

Conservation programs will decrease usage. One means of directly addressing declining consumption is incorporating a price elasticity factor into rate design to address the impact on usage changes resulting from new rate designs and the adoption of other water conservation measures. We will solicit comments, as follows:

· Should elasticity of demand be calculated? If yes, what methodology should be used?

· If elasticity of demand is calculated, should it be used to determine the appropriate tiers for increasing block rates?

2.2. Water Revenue Adjustment Mechanism

The WAP recognizes that current ratesetting mechanisms provide a disincentive to conservation and supports removing those disincentives. Revenues after adoption of increasing block rates can be lower or higher than the utilities' adopted revenue requirement. A WRAM is a balancing account designed to decouple sales from revenues. Adoption of a WRAM will ensure collected revenues are adjusted to match the adopted revenue requirement and may remove one disincentive to conservation. Amortization of the WRAM through surcharges or surcredits will be necessary.

Class A water companies have other ratemaking constraints. They currently recover 50% of fixed costs in a service charge. (Water Division's Standard Practice (SP) U-07-W.) Those fixed costs are obtained by subtracting variable costs from revenue requirement.² Service charges, if set too high, can lessen the impact of increasing block rates.

To remove disincentives to conservation:

· What methodology for a WRAM should be adopted? Should all revenue fall under a WRAM or just some subset?

· Should surcharges/surcredits be amortized in conformance with SP-U-27-W?

· Should the Commission change its policy of permitting recovery of 50% of fixed costs in a service charge?

2.3. Rebates, Customer Education, and Excessive Consumption

Rebates and customer education are proven means to increase conservation. The WAP supports improving customer education on water conservation, including providing more information on the Commission's website. The Family of Southern California Water Agencies, an umbrella organization that comprises water districts which include customers of Class A water utilities, has extensive customer education programs and offers rebates for ultra low flush toilets and water conserving appliances with water utilities and districts. California-American Water Company has achieved substantial water savings in its Monterey district through a number of means, including rebates and customer education. Because water conservation efforts can be most effective initially and can decline over time, we will consider methods other than increasing block rates to encourage conservation, as follows:

· What customer education should utilities provide to encourage conservation?

· Should utilities be required to participate in or provide rebate programs, including ultra low flush toilets and water conserving appliances?

· Should utilities be required to provide conservation kits and landscaping water audits to residential customers?

Despite best efforts to promote conservation, some customers may fail to conserve. In those instances, more drastic measures may be necessary:

· How can excessive consumption be defined? Should it be established in a manner consistent with establishing baseline usage?

· Should customers with excessive water consumption be penalized in some way?

· What measures should utilities take to penalize those customers?

2.4. Conservation Management and Memorandum Accounts

Conservation programs have costs. Another best management practice promoted by the Council is system water audits and leak detection (BMP3). The Council currently is considering revising the existing BMP 3, which is outdated, and shifting to a new water loss audit methodology developed by the American Water Works Association (AWWA) and the International Water Association (IWA).

· Should Class A utilities be required to perform and submit the results of a water loss audit to the Commission, using the free Water Audit Software developed by the AWWA?³

Adoption of best conservation management practices could result in unanticipated costs. Measures adopted in this investigation also may have costs. Most of these costs will not have been included in authorized rates. We will consider authorizing memorandum accounts, as follows:

· Should utilities track costs of best management practices in a conservation memorandum account?

· Should utilities track costs to implement any customer education or rebate programs required by this investigation?

2.5. Rationing

Companies have requested guidance on rationing during droughts. Currently, Water Division's SP U-40-W discusses three levels of action-voluntary rationing, mandatory rationing and a service connection moratorium. Voluntary rationing is addressed in Rule 14.1, which is always in effect. (SP U-40-W, Appendix B.) Mandatory rationing is addressed in a company's Schedule 14.1, which is filed by advice letter as needed. SP U-40-W provides guidance on what can be included in Rule 14.1. We should revisit guidelines on voluntary and mandatory rationing, as follows:

· Should guidelines on voluntary rationing be revised and, if so, how should they be revised?

· Should guidelines for mandatory rationing be established and, if so, what should those guidelines include?

· Should drought rates be established for periods of drought?

2.6. Implementation of Increasing Block Rates and Other Water Conservation Measures

Implementation of increasing block rates presents several issues:

· Should increasing block rates be effective after completion of this proceeding or after the utility's next general rate case (GRC)?

· Should the utilities' required return on equity be adjusted if a WRAM is adopted?

· Should any savings realized on purchased water be tracked in a memorandum account?

· Should the Commission track water conservation (i.e., per capita) achieved by the adoption of increasing block rates and other water conservation measures? If so, what mechanism should be used?

¹ http://www.cuwcc.org/uploads/hotnews/BMP11_Revision_07-011-03.pdf

² Variable costs include purchased power, purchased water, chemicals, income taxes, uncollectibles and other costs that vary with usage.

³ The software is available at: http://www.awwa.org/WaterWiser/waterloss/Docs/03IWA_AWWA_Method.cfm