Discussion
In D.07-08-030, the Commission expressed a policy preference for a revenue adjustment mechanism that focused solely on cost under- and over-recovery caused by conservation policies, rather than a broader WRAM mechanism. Cal-Am and DRA in their comments on the proposed decision stated that they did not have the data necessary to develop the proposed conservation-focused mechanism.
Since the issuance of D.07-08-030, the parties have again requested the Commission consider, as part of a Pilot Program scheduled to be in place for approximately two years, the WRAM and MCBA mechanisms. Therefore, we assess the specifics of these mechanisms for the Los Angeles district Pilot Program.
The conservation rate design being proposed is expected to have a measurable but not substantial impact on sales during the Pilot Program. This is seen in our earlier discussion of the structure of the conservation rate design and is also apparent in the proposed balancing account recovery and refund procedures, which have an annual review, with a 2.5% annual revenue requirement threshold.
As a safeguard, the parties have also provided a provision in the settlement that would allow for a review and midcourse correction if the impacts of the WRAM and MCBA mechanisms go well beyond conservation impacts and instead produce a disparate impact on ratepayers or shareholders. This provision is found in Section III.3., and it would cause the parties to meet and discuss adjustments. We find that following this discussion, the parties should individually or jointly file a petition to modify this decision.
One disparate impact that could occur in the Pilot Program period would be a severe economic downturn in one or more of the Los Angeles service areas that causes a significant decrease in revenues. This could occur from a high rate of home foreclosures and/or business slowdowns or shutdowns. We find this would clearly be a disparate impact as the WRAM mechanism would shield shareholders from all financial consequences of the economic downturn while requiring ratepayers to bear the full cost. Since Cal-Am will be tracking sales levels by customer class and service area, any disparate impact can be quickly seen and addressed.
Given the expected modest balancing account impacts, the safeguards discussed above, and the limited time period of the Pilot Program, we find it reasonable to adopt the proposed WRAM and MCBA mechanisms. We expect that the usage information collected and evaluated during the Pilot Program will allow a conservation focused mechanism to be given consideration in the next GRC filing.
In Phase 1 of this proceeding, the Commission examined the issue of whether a downward adjustment to Cal-Am's Los Angeles district return on equity should be made if a WRAM mechanism was adopted in Phase 2. The initial proposed decision recommended a 50 basis point downward adjustment be adopted. The Commission removed consideration of both the WRAM and a return on equity adjustment from this proceeding in D.07-08-030, stating these issues should be examined in a generic proceeding for all water utilities (I.07-01-022). Subsequently, the parties filed a petition to modify D.07-08-030 that requested the WRAM be considered here, but did not address the related return on equity adjustment issue. In the settlement filed on March 25, 2008, the parties provide a procedural process for consideration of a return on equity adjustment for the WRAM in this settlement.
Section XIV of the settlement provides that if the Commission adopts in Phase 1B of I.07-01-022 a generic basis point adjustment to return on equity for water utilities that have WRAM/MCBA mechanisms that are similar to those approved for California Water Service Company and Park Water Company in D.08-02-036, then the same generic return on equity adjustment should be applied to the WRAM/MCBA adopted here. Further, the return on equity adjustment should be applied here when conservation rates are implemented. If the return on equity adjustment decision is made in I.07-01-022 after a WRAM/MCBA is implemented for the Los Angeles district, then the balancing accounts would be subject to true-up to the date of implementation.
The settlement also provides that if the Commission issues a decision regarding a return on equity adjustment in I.07-01-022 that is not consistent with the generic adjustment described in the settlement, the parties will meet to discuss how that decision should affect this Pilot Program.
We find that I.07-01-022 is a procedural forum with an evidentiary record appropriate to deciding the return on equity adjustment issue for the WRAM/MCBA before us here. However, further specificity is needed on the procedural process if a Commission decision in I.07-01-022 does not resolve the matter for the Los Angeles district. Therefore, we direct that if the generic return on equity adjustment described in the settlement is not adopted in I.07-01-022, parties should meet and confer within 30 days and then file a petition to modify this decision within 15 days after the meeting, either jointly or separately, proposing a procedural forum and process to address a return on equity adjustment. The WRAM/MCBA balancing accounts adopted here will be subject to true-up to the date a final decision on a return on equity adjustment is made.
At the request of the City of Duarte, which has concerns that ratepayers in the Duarte service area are being asked to subsidize plant additions for the other two Los Angeles district service areas, the settlement includes Section XIII. This section requires that Cal-Am provide, upon request, drafts of its Comprehensive Planning Study (CPS) and Condition-Based Assessment of Buried Infrastructure (CBA) to any city with residents who are customers of Cal-Am's Los Angeles District by July 15, 2008.
Upon request, Cal-Am also agrees to meet with any city with residents who are customers of its Los Angeles District to discuss the draft CPS and/or draft CBA. The settlement provides that the city or cities shall have 30 days to review and provide comment on the CPS and CBA in writing before Cal-Am finalizes these reports and submits them to the Commission as part of its 2009 GRC application. The intent of these reports is to determine the need for system capital improvement and the replacement of aging infrastructure, address compliance with local applicable and industry standards, and to prioritize and schedule these improvements.
We find the provisions of this section reasonable.
Section XII of the settlement provides that Cal-Am will track data, such as billing and usage data by meter size, by month, and by class of customer, for use in analyzing customer response to the proposed conservation rates so that it is readily available to the Commission and the parties to evaluate the results of this Pilot Program. In our review of the conservation rate design, we have also directed that the usage of the top 100 residential customers in each service area be tracked and analyzed, in the same manner as Cal-Am did when it introduced conservation rate design in its Monterey district in 1997.
To ensure an effective Pilot Program, we also direct Cal-Am to schedule a meeting every four to six months with all parties to discuss the customer response data it is tracking and whether there should be any changes in its conservation outreach programs in response to the results.
With our specification of the high user tracking report discussed in the conservation rate design section, and the addition of a regular meeting requirement, we find the monitoring and data collection proposed by the parties to be reasonable.
3.3. Action on Proposed Settlement
Based on our review of the terms of the proposed settlement, we find each section to be reasonable in light of the whole record. In reviewing specific terms, we have added clarification to the settlement language and further direction to the parties for the review of this Pilot Program in the next GRC filing. We find that with these refinements, the settlement is reasonable in light of the whole record, consistent with the law, and in the public interest. Therefore, we should adopt the settlement.
