6. Discussion
The sole issue for today's decision is to determine the appropriate carrying cost for the accrued amounts in the San Clemente Dam memorandum account. We determine that due to the certainty of the project as expressed in the final EIR, and the policy objective of matching of the regulatory costs with actual costs, the interest on the San Clemente Dam memorandum account should accrue at the authorized rate of return. Authorizing a carrying cost less than that would not reflect the risks or actual project costs. Protection is given to the ratepayers in the form of a reasonableness review when the dollars are transferred out of the memorandum account into ratebase. If it can be shown that actual carrying costs are less than the authorized rate of return, (i.e., closer to the cost of debt), we can make adjustments in the relevant general rate case proceeding.
While the dollars associated with the San Clemente Dam Seismic Safety Project have been given a variety of accounting treatments over time, it is most useful to examine the ratemaking treatment while the current EIR has been underway. For most of that time, the dollars associated with the project have been recorded in CWIP, receiving a carrying cost equal to the authorized rate of return. The arguments being made for extending the temporary carrying cost at the 90-day cpr are not persuasive.
As demonstrated in the final EIR7, a project is needed. In 1992, the Department of Water Resources Division of Safety of Dams (DSOD) required Cal-Am to upgrade the San Clemente Dam, so that it would comply with current seismic safety standards. Since that time, it has become more certain that a project will be needed to bring the dam into seismic compliance. In January 2008, the final EIR was issued. That document made clear that a "do nothing" action would not comply with current standards. We conclude that there is no question whether a project will ensue. There will be a project entailing significant capital investment on the part of Cal-Am. While the specific alternative has not yet been selected, it is clear that a project will take place and that we should review the final project costs.
This conclusion is consistent with our recent past actions. From 2003 to 2006, all costs associated with the San Clemente Dam retrofit project were booked to CWIP, earning the authorized rate of return. In D.06-11-050, the Commission removed the project amounts from the CWIP not because it doubted any project was necessary, but because the eventual project could no longer be viewed as a short term project.
The Commission concluded that project costs would be allowed to accrue AFUDC treatment consistent with the long-term nature of the investment analysis and plan. The Commission assigned a cost factor equal to the 90-day cpr as a temporary measure, with a specific order that a review of the appropriateness of cost factor be undertaken. The result is the current case. At the same time, the Commission also authorized Cal-Am to record up to about $24 million in expenditures for the project in a memorandum account for later reasonableness review. In doing so, the Commission denied Cal-Am current full recovery of the costs pending its review of the final project. Given the growing magnitude of expected capital costs, it is appropriate to hold those costs in a memorandum account where they can be reviewed for reasonableness.
Memorandum accounts are typically used to record expenses that are not anticipated or readily quantifiable at that time. Typical expenses are litigation or water quality costs. The cost factor applied to balances in such memorandum accounts is the 90 day cpr, as they finance only expenses occurring in the course of doing business, not capital projects that are usually financed by a combination of equity and debt.
However, in a case that deals with the accrual of AFUDC and significant capital costs, not merely the unanticipated expenses or the unknown expenses of typical memorandum accounts, the Commission should decide the interest rate treatment based upon the circumstances at hand and the type of financing being used to fund the project.
The Commission has faced this question before. It has previously determined that memorandum accounts for a water utility project of long duration could accrue interest at either the 90-day cpr or the authorized rate of return. The 90-day cpr has been found to be appropriate for the Coastal Water Project for Cal-Am, whereas the authorized rate of return has been used for a project like the Calipatria treatment plant for Golden State.
In the case of the Coastal Water Project (CWP),8 the Commission determined that due to the uncertain nature of the project, in particular whether construction would occur at all, that a 90-day cpr was the appropriate cost factor to apply to the memorandum account balance.9 The Commission stated "It remains unclear at this time when (or whether) any plant construction will commence. Therefore, allowing these preliminary costs to earn the utility's authorized rate of return now carries with it significant risk that the ratepayers may never receive the benefits of these expenditures."10 Furthermore, the EIR for the CWP had not yet been scoped at the time of that decision, let alone finalized. The use of a 90-day cpr in the case of the CWP was reiterated in D.06-12-040, in which the Commission determined that the outcome of the project remained uncertain.11 In this same decision, we also stated that we would consider modifying the ratemaking treatment if the proposed project becomes more certain. A final EIR, which sheds light on the actual final project, is certainly an appropriate time to revisit the ratemaking treatment. While it is no guarantee of receiving a higher return, it is reasonable to revisit the treatment at that time. The CWP was very different from the current seismic dam safety case. At the time of the decision, the Company had not yet begun physical construction, the environmental review process had not begun, and there were questions regarding whether the project would ever be undertaken. We do not find its results applicable here.
We find more guidance in another case: The Commission granted the authorized ROR to Southern California Water (now Golden State Water) for its AFUDC memorandum accounts in D.00-06-074 and D.04-03-039. Those decisions refer to expenditures and projects that are more similar to the San Clemente Dam situation. Both decisions relate to the construction of the Calipatria treatment plant project. While the initial decision adopted a settlement, the second decision affirmed the settlement results in the context of a general rate case proceeding. This would have been the time to argue for a different ratemaking treatment. Like the seismic dam safety project, the Calipatria treatment plant's specific form was not certain, but the fact that it was a required project was quite certain, and it was going to require substantial investment. The authorized rate of return was deemed to be the appropriate carrying cost. The Commission concluded appropriately that the authorized rate of return was the appropriate AFUDC cost factor to apply to the project costs.
In today's case, we are considering a project that must move forward. The seismic risk of the San Clemente Dam must be remedied. There is no uncertainty in that. We have found that where there are regulatory compliance requirements and long-term capital outlays for a project are a foregone conclusion, it is reasonable to authorize the use of the authorized ROR as the AFUDC rate, and it is appropriate to undertake a reasonableness review at the completion of the project.
While several different methods are being considered for compliance, the fundamental points are that the San Clemente project must go forward in some form, and whatever form the project takes will not be a matter of expenses, it will be a matter of substantial investment, relying on equity and debt.
Therefore, we conclude that the amounts properly recorded in the San Clemente Dam memorandum account should accrue carrying costs at the authorized rate of return.
7 We take official notice of the January 2008 Final EIR/EIS for the San Clemente Dam Seismic Safety Project prepared for the California Department of Water Resources & the US Army Corp of Engineers Chapter 3.6.1 Alternative 4, SCH 1 #997042007.
8 D.03-09-022, p. 22 and 30.
9 D.03-09-022, p. 22 and 30.
10 D.03-09-022, p. 22.
11 D.06-12-040, Conclusion of Law 8 "Cal Am's request to be allowed to earn its authorized rate of return on preconstruction costs booked in its memorandum account should be denied for the reason that it remains unclear at this time when (or whether) any plant construction will commence. All preconstruction costs should be booked in an interest bearing memorandum account and accrue interest at the 90-day short term commercial rate."
