18. Assignment of Proceeding
Timothy Alan Simon is the assigned Commissioner and Michael J. Galvin is the assigned ALJ in this proceeding.
1. On January 25, 2008, SGV and DRA filed a partial settlement agreement, Appendix A to this decision.
2. The burden of proof in GRC applications, such as this proceeding, rests upon SGV to demonstrate the reasonableness of its request.
3. A Valencia GRC decision (D.07-06-024) found that in the absence of evidence that a utility is manipulating its capital structure in order to achieve an artificially high rate of return, basing a rate of return calculation on its actual capital structure is consistent with a goal of ratemaking to approximate the economic returns that a regulated company would achieve in a competitive environment.
4. SGV seeks adoption of its projected actual capital structure for the test and escalation years.
5. Test year long-term debt ratio and costs of that debt were based on year end 2007 and year end 2008 data.
6. The March 2007 Global Insight 5.27% interest rate forecast used by SGV for calculating its long-term debt cost dropped 36 basis points to 4.91% in the September 2007 forecast.
7. An equity return is set at a level of return commensurate with market rates on investments having corresponding risks, and adequate to enable a utility to attract investors to finance the replacement and expansion of a utility's facilities to fulfill its public utility obligation.
8. Rate design is not in dispute.
9. SGV and DRA used DCF and RPM financial models to support their respective equity return recommendations.
10. SGV and DRA used a same proxy group of six Class A water utilities, two of which were California water utilities.
11. Quantitative financial models are commonly used as a starting point to estimate a fair equity return.
12. An important component of the Hope and Bluefield decisions is that a utility has the ability to attract capital to raise money for the proper discharge of its public utility duties.
13. Financial models are dependent on subjective inputs.
14. SGV and DRA used different time periods in their respective financial models' forecasts.
15. Financial risk is tied to a utility's capital structure.
16. Business risk pertains to uncertainties resulting from competition and the economy.
17. Regulatory risk pertains to new risks that investors may face from future regulatory actions that we, and other regulatory agencies, might take.
18. SGV used March 2007 ECSB inflation rates for its July 2007 application and updated October 2007 ECSB inflation rates for its November 2007 rebuttal testimony.
19. DRA used June 2007 ECSB inflation rates.
20. SGV and DRA concurred that they would not object to the use of the latest ECBS inflation rates used by SGV or DRA, or a more current version.
21. October 2007 ECSB inflation factors are the most recent inflation factors in this record.
22. SGV forecasted water sales losses due to enhanced conservation programs by multiplying a stated amount of water savings for individual water efficient plumbing fixtures and appliances times the number of plumbing fixtures and appliances to be installed in the test and escalation years. The per unit water savings were based on the California Urban Water Conservation Council's computation formula.
23. SGV forecasted payroll, pension, and benefits based on April 2007 actual salary levels for all existing position in the LA, Fontana, and General Divisions plus step increases with all new positions assumed to be filled at the beginning of the test year.
24. DRA forecasted payroll separate from pension and benefits. DRA used 2006 recorded payroll data for individual employees of the LA Division and excluded vacant positions, step increases, a currently filled position, and new positions that it opposed being filled.
25. SGV has filled several of its vacant positions since the filing of its GRC but has had six new terminations during that same time period.
26. SGV provided justification for its prior hiring and filling of two Water Treatment Operator positions as part of its response to DRA's Master Data request.
27. SGV requested approval of adding a Customer Serviceman/Conservation Specialist position and a Water Treatment Operator III position in the LA Division.
28. The new Customer Serviceman/Conservation Specialists will be responsible for making approximately 40 customer contacts and 3 actual residential survey and audits per workday.
29. The new Water Treatment Operator III position will be responsible for additional monitoring and maintenance due to the approval of two new wells, three new booster stations, four new reservoirs, and six emergency generators in the GRC proceeding.
30. SGV negotiated a single umbrella insurance policy covering SGV and its affiliates with each entity being billed separately for their actual share of insurance.
31. SGV used a 10% overhead rate to forecast its test year recovery of overhead costs associated with the services SGV provides to its affiliates.
32. SGV did not explain how the 10% overhead rate applied to services it provides to its affiliates was developed.
33. SGV included General Division expenses and rate base investments in this proceeding to be reflected in test year rates for both the LA Division and Fontana Division, pursuant to D.07-05-062.
34. The Chairman of the Board of Directors is paid directly by SGV and directly by AWC for the time he devotes to those companies based on daily time records in conformance with the affiliated transaction rules (D.04-07-034 and D.93-09-036) adopted by the Commission.
35. SGV added and filled a Junior Draftsman position in the General Division due to increased workload.
36. SGV testified that the new Regulatory Analyst and Conservation Coordinator positions would be filled by the beginning of the test year.
37. The General Division established a Regulatory Compliance Coordinator position to transfer all non-core functions to a position where the incumbent can be expert in all non-core regulatory compliance issues and can identify, understand, and comply with increasingly complex and stringent regulations.
38. The latest El Monte office building expansion occurred in 1965.
39. The number of employees located at the El Monte office building has increased by 46 to 146 from 100 since 1965.
40. SGV initially requested authority to recover approximately $12.6 million of capital costs for either refurbishing or replacing the El Monte building.
41. SGV revised its El Monte building capital improvement request with a request to include $164,000 in General Division's rate base, of which $108,000 would be used to refurbish the El Monte building and $56,000 to undertake a space study at that building site.
42. SGV included $2.9 million, or 30%, of its $9.6 million forecasted cost for a new Fontana office building expected to be completed in December 2008.
43. SGV's Fontana Division was previously authorized to include only $4.9 million of a forecasted $6.0 million cost for a new Fontana office building subject to justification of whether the entire new building would be used and useful.
44. Common General Division costs and rate base investments are allocated between the LA and Fontana Divisions via a four-factor method.
45. LA Division does not have any customers receiving irrigation service under its Tariff Schedule No. LA-3l.
46. SGV provided a plan for satisfying the Commission's WAP for its LA Division that assessed the many separate elements of its water production, storage, distribution, and treatment facilities and operations. The plan also provided a road map for future utility plant additions to production, storage, distribution and water treatment facilities.
47. SGV did not comply with Rule 13.1 which requires water utilities to give notice of a hearing, not less than five nor more than 30 days before the date of a hearing, to entities or persons who may be affected thereby, by posting notice in public places and by publishing notice in a newspaper or newspapers of general circulation in the area or areas concerned, of the time, date, and place of hearing.
1. The partial settlement agreement submitted by the parties is reasonable in light of the whole record, consistent with the law, and in the public interest.
2. The adoption of the partial settlement agreement does not constitute approval of, or create precedent regarding, any principle or issue in this proceeding or in any further proceeding.
3. SGV's method of forecasting its test year long-term debt component of its capital structure was inconsistent with its test year time period and its test year forecasts of the common equity component of its capital structure and rate base.
4. Our review of the Valencia capital structure decision (D.07-06-024) found more dissimilarities than similarities between Valencia and GRC.
5. The Valencia capital structure decision was applicable only to Valencia and based on the facts presented in that proceeding, as such it cannot be considered precedent-setting for SGV.
6. There should be no reliance placed on a 1975 academic study used by SGV to support its projected actual capital structure because the study pertains only to unregulated entities.
7. A strengthening of shareholders' equity stake does not necessarily result in a strengthening of ratepayers interests.
8. Official notice is taken of Global Insight's September 2007 interest rate forecasts.
9. SGV has a duty to substantiate that its capital structure balances the interest of both shareholders and ratepayers.
10. A 37.0% long-term debt and 63.0% common equity capital structure, which is approximately midway between the average equity ratio of the comparable water utilities used by the parties in this proceeding and SGV's projected actual capital structure, should be adopted.
11. A 7.70% long-term debt cost for the test year is appropriate due to a decline in forecasted interest rates and lack of justification for use of a 246 basis point premium above long-term Treasury rates.
12. A subjective equity return range deemed fair and reasonable for the test and escalation years is 10.5% to 11.0%.
13. Additional financial, business, and regulatory risks justify the adoption of an equity return toward the upper end of the equity range found reasonable in this proceeding. We find a 10.5% equity return fair and reasonable for the test and escalation years.
14. October 2007 ECSB inflation rates of 3.2% for labor and 3.0% for non-labor should be used for forecasting test year costs.
15. SGV provided no evidence on whether customers participating in the enhanced conservation programs would result in water sales losses to SGV.
16. Appropriate methods to forecast water sales losses are a policy issue that should be resolved on an industrywide basis.
17. SGV should seek appropriate recovery for loss of water sales due to its enhanced conservation programs in the conservation investigation (I.07-01-022) along with the other Class A water utilities.
18. DRA's water sales forecast should be adopted.
19. SGV's base payroll forecast of April 2007 actual salary levels, annualized and adjusted to reflect adopted ECSB inflation factors for the escalation years, should be adopted.
20. The 12 vacant positions included in SGV's base payroll calculation should be removed from the payroll forecast.
21. Although SGV identified specific employees eligible for step increases, it failed to include offsetting adjustments for the possible effects of departures and retirements of higher paid senior employees. Step increases should be excluded from the payroll forecast.
22. The two Water Treatment Operator positions previously filled should be included in the payroll forecast.
23. A new Customer Serviceman/Conservation Specialist position and a Water Treatment Operator III position should be included in the payroll forecast.
24. SGV's forecasted umbrella insurance costs should be adopted.
25. SGV's 10% overhead rate which is applied to direct services being provided by SGV for its affiliated companies should be adopted for this proceeding only.
26. SGV should be required to prepare and complete a study prior to its next General Division GRC that justifies an overhead rate to be applied for recovery of its overhead costs associated with its direct services being provided to its affiliated companies.
27. There should be no adjustment to the Chairman's salary because his time is based on daily time records in conformance with the Commission's affiliated transaction rules.
28. General Division's Junior Draftsman position added and filled by SGV should be included in its test year payroll, pension, and benefits.
29. General Division test year expenses should include the payroll, pensions, and benefits for a new Regulatory Analysts, Conservation Coordinator, and Regulatory Compliance Coordinator.
30. SGV's revised El Monte building request should not be considered a new or additional item, as set forth in the RCP, because SGV identified in its application a request to either refurbish or replace its El Monte building.
31. General Division test year rate base should be increased by $108,000 to cover the costs of El Monte building renovations.
32. SGV's $56,000 request to undertake a space study at its El Monte building is denied because it violates the RCP 45-day update rule.
33. The appropriate proceeding to resolve any allocation of a new El Monte building costs or space would be in the Fontana Division's next GRC.
34. SGV has substantiated the existence of an overcrowded space situation at the El Monte building.
35. General Division rate base should include $2.9 million for construction of a new Fontana building. That amount should be allocated $1.5 million to the LA Division and $1.4 million to Fontana Division, based on the adopted four-factor rate.
36. The LA Division's $1.5 million share of the new Fontana building should be made subject to refund, pending a review of building costs in the upcoming Fontana Division GRC.
37. Fontana Division's $1.4 million share of the new Fontana Division building should not be included in rates until the building costs have been reviewed for use and usefulness. Should the final amount of the new facility placed into Fontana Division rates by D.07-04-046 exceed the amount for which CWIP was allowed, the balance plus an allowance for funds used during construction should be placed into Fontana Division's rate base.
38. Test year common General Division costs being adopted in this proceeding should be allocated between LA Division and Fontana Division based the agreed upon four-factor rates.
39. The LA Division's adopted test year costs should include $652,000 for enhanced conservation programs. That amount should also be included in each of the LA Division's escalation years.
40. A one-way conservation balancing account for enhanced conservation programs should not be adopted.
41. The LA Division's Irrigation Schedule No. LA-3L should be cancelled.
42. SGV should file an advice letter with the Water Division for authority to amortize the remaining balance in its defense-related component within its WQLMA. Further costs recorded in the WQLMA should be recovered through the advice letter process as agreed to by SGV and DRA.
43. SGV has complied with all DHS water quality standards and regulations since its prior GRC.
44. Fontana Division's share of increased or decreased General Division costs should be recovered via a surcharge or surcredit.
45. SGV should be subject to the monetary penalties set forth in Section 2107 of the Public Utilities Code for its violation of Rule 13.1.
46. The criteria set forth in D.98-12-075 for assessing a fine to the facts in this application indicates that SGV should be assessed a fine totaling $1,000.
IT IS ORDERED that:
1. The San Gabriel Valley Water Company (SGV) and the Division of Ratepayer Advocates partial settlement agreement attached to this decision as Appendix A is adopted.
2. The rate tables and tariff sheets in Appendix B are adopted.
3. SGV is authorized to file in accordance with General Order (GO) 96-B, and to make effective on filing, tariffs containing the 2008/2009 test year increase for its Los Angeles County Division (LA Division) as provided in Appendix B. The revised rates shall apply to service rendered on and after June 30, 2008 or the tariff's effective date, whichever occurs later.
4. On or after May 1, 2009, SGV is authorized to file in accordance with GO 96-B, a Tier 1 advice letter, with appropriate supporting workpapers, requesting an escalation adjustment for its LA Division to be calculated in conformance with the Rate Case Plan (RCP) and Appendix B. The advice letter shall be reviewed by the Commission's Water Division for conformity with this decision, including the applicable provisions of the settlement, and shall go into effect upon five days notice, not earlier than July 1, 2009. The tariffs shall be applicable to service rendered on or after the effective date.
5. On or after May 1, 2010, SGV is authorized to file in accordance with GO 96-B, a Tier 1 advice letter, with appropriate supporting workpapers, requesting an escalation adjustment for its LA Division to be calculated in conformance with the RCP and Appendix B. The advice letter shall be reviewed by the Commission's Water Division for conformity with this decision including the applicable provisions of the settlement and shall go into effect upon five days notice, not earlier than July 1, 2010. The tariffs shall be applicable to service rendered on or after the effective date.
6. SGV shall prepare and complete a study for inclusion in its next LA and General Division general rate case (GRC) that justifies an overhead rate to be applied for recovery of its overhead costs associated with its direct services being provided to its affiliated companies.
7. The LA Division's $1.5 million share of General Division's costs associated with a new Fontana Building that is included in test year rates shall be subject to refund pending a determination of use and usefulness in the upcoming Fontana Water Company Division (Fontana Division) GRC.
8. Fontana Division's $1.4 million share of General Division's costs associated with a new Fontana Building shall not be included in rates until the building costs have been reviewed for use and usefulness in Fontana Division's next GRC. Consistent with Decision (D.) 07-04-046, if the final amount of the new Fontana building placed into rates by D.07-04-046 exceeds the amount for which construction work in progress was allowed, the balance plus an allowance for funds used during construction shall be placed into Fontana Division's rate base.
9. SGV is authorized to file in accordance with GO 96-B, and to make effective on filing tariffs containing the 2008/2009 test year increase for its Fontana Division surcredit applicable to reduced General Division costs as provided in Appendix B. The revised rates shall apply to service rendered on and after June 30, 2008 or the tariff's effective date, whichever occurs later.
10. SGV shall cancel its LA Division Tariff Schedule No. LA-3L.
11. SGV shall file in accordance with GO 96-B, a Tier 1 advice letter, with appropriate supporting workpapers, for authority to amortize the remaining balance in its defense-related component within its Water Quality Litigation Memorandum Account (WQLMA). Future costs recorded in the WQLMA shall be recovered through the advice letter process.
12. SGV shall track its actual conservation expenditures associated with its yearly conservation budget approved by this decision and shall report the results as part of its next Los Angeles Division general rate application.
13. SGV shall file a conservation rate design application, including a Water Revenue Adjustment Mechanism, modified cost balancing account and conservation memorandum account proposals, for its LA and Fontana Divisions with 90 days of issuance of this decision. That application shall be coordinated with its Fontana Division's July 2008 GRC application and may be consolidated with Investigation 07-01-022.
14. SGV shall pay a $1,000 fine for violating Rule 13.1 of the Commission's Rules of Practice and Procedure within 20 days from the effective date of this order. SGV shall tender to the Fiscal Office of the California Public Utilities Commission a check in the amount of $1,000 made payable to the State of California General Fund. SGV shall also file, as a compliance filing in this proceeding, proof of payment with the Commission's Docket Office within 10 days of payment.
15. Application 07-07-003 is closed.
This order is effective today.
Dated June 12, 2008, at San Francisco, California.
MICHAEL R. PEEVEY
President
DIAN M. GRUENEICH
JOHN A. BOHN
RACHELLE B. CHONG
TIMOTHY ALAN SIMON
Commissioners
