2. Background

From 2003-2006, the amounts associated with the San Clemente Dam Seismic Safety Project were recorded in construction work in progress (CWIP) receiving the authorized rate of return.

In Ordering Paragraph 19 of Decision (D.) 06-11-050, the Commission directed Cal-Am to remove the San Clemente Dam retrofit project costs from rate base and place the amount in a memorandum account for later reasonableness review. When it became clear that this was no longer a short term project, the applicability of CWIP accounting became moot and therefore we removed the dollars from rate base, transferred them to a memorandum account, and authorized the application of an Allowance for Funds Used During Construction (AFUDC) rate as the carrying cost. We did not define the appropriate AFUDC rate at that time and sought this instant application. As an interim measure, the Commission authorized the account to accrue interest at the 90-day commercial paper rate (cpr), but allowed Cal-Am the opportunity to request, by subsequent application, a different carrying cost:

The San Clemente Dam retrofit project costs shall be removed from rate base and placed in a memorandum account for later reasonableness review. The account shall accrue AFUDC [Allowance for Funds Used During Construction] at the 90-day commercial paper rate, subject to true-up, until the Commission completes a review of the appropriate AFUDC rate for this project. Cal-Am is directed to file within 60 days an application addressing the AFUDC methodology that should be applied to the San Clemente Dam retrofit memorandum account.

On February 20, 2007, Cal-Am filed and served this application seeking Commission approval of a higher interest rate, 8.33%, which is its currently authorized cost of capital. In addition, Cal-Am asked that the memorandum account balance, with accrued interest, be moved "into rate base when the Project becomes more certain." Cal-Am offered three alternatives for the "more certain" milestone: Certification of the environmental work, obtaining final permits, or finalization of construction contracts.

The Division of Ratepayer Advocates (DRA) and the Monterey Peninsula Water Management District (MPWMD) protested this application contending that Cal-Am had not justified an interest rate higher than the 90-day cpr, and that the request for rate base treatment was beyond the scope of the application authorized by Ordering Paragraph 19. On April 16, 2007, DRA and MPWMD filed a joint motion to strike all Cal-Am testimony referencing the proposal to move project costs to rate base.

On May 11, 2007, the assigned Administrative Law Judge (ALJ) convened a prehearing conference. The applicant provided a status report on the environmental review process, and stated that the final environmental document was expected in June 2007. The applicant indicated its intent to rely on its presentation in A.05-02-012, which was prepared in late 2004, in support of its request to include the cost of CWIP in rate base. The applicant also did not have a specific proposal for an appropriate milestone at which to include the costs in rate base.

The ALJ and the parties addressed the need for evidentiary hearings. No party articulated a disputed issue of material fact requiring evidentiary hearings, but all agreed that numerous legal and policy issues were in dispute among the parties. A schedule for discovery and briefs, with supporting factual declarations was discussed, as well as a contingency plan for a second prehearing conference, should factual disputes emerge.

On May 18, 2007, the assigned Commissioner and ALJ issued their scoping memo and ruling for this proceeding, holding that the scope of this proceeding shall be to determine the carrying cost that should be applied to the San Clemente Dam Project memorandum account, as directed by the Commission in D.06-11-050. The scoping memo also directed that the proceeding would not include placing CWIP in rate base because the applicant had not yet completed its decision-making process on the appropriate alternative to pursue, and the proposed supporting data was out-of-date.

The scoping memo found that there are no identified issues of material facts in dispute among the parties and, consequently, that scheduling evidentiary hearings was not necessary. A schedule providing for briefs addressing legal and policy issues, with factual assertions supported by a sworn declarations attached to the briefs, was adopted, and the assigned ALJ was designated the principal hearing officer in this proceeding.