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COM/JB2/tcg Date of Issuance 8/25/2008

Decision 08-08-030 August 21, 2008

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Investigation to Consider Policies to Achieve the Commission's Conservation Objectives for Class A Water Utilities.

Investigation 07-01-022

(Filed January 11, 2007)

In the Matter of the Application of Golden State Water Company (U 133 E) for Authority to Implement Changes in Ratesetting Mechanisms and Reallocation of Rates.

Application 06-09-006

(Filed September 6, 2006)

Application of California Water Service Company (U 60 W), a California Corporation, requesting an order from the California Public Utilities Commission Authorizing Applicant to Establish a Water Revenue Balancing Account, a Conservation Memorandum Account, and Implement Increasing Block Rates.

Application 06-10-026

(Filed October 23, 2006)

Application of Park Water Company (U 314 W) for Authority to Implement a Water Revenue Adjustment Mechanism, Increasing Block Rate Design and a Conservation Memorandum Account.

Application 06-11-009

(Filed November 20, 2006)

Application of Suburban Water Systems (U 339 W) for Authorization to Implement a Low Income Assistance Program, an Increasing Block Rate Design, and a Water Revenue Adjustment Mechanism.

Application 06-11-010

(Filed November 22, 2006)

Application of San Jose Water Company (U 168 W) for an Order Approving its Proposal to Implement the Objectives of the Water Action Plan.

Application 07-03-019

(Filed March 19, 2007)

DECISION RESOLVING PHASE 1B SETTLEMENT
AGREEMENTS AND RETURN ON EQUITY ADJUSTMENT

TABLE OF CONTENTS

DECISION RESOLVING PHASE 1B SETTLEMENT
AGREEMENTS AND RETURN ON EQUITY ADJUSTMENT

In today's decision, the second of two Phase 1 decisions, we adopt two settlement agreements for Golden State Water Company (GSWC) on conservation rates, a revenue adjustment mechanism and a modified cost balancing account, and customer education and outreach, and data collection and reporting. We also adopt a settlement expanding a conservation memorandum account for California Water Service Company (CalWater). We adopt two settlement agreements for San Jose Water Company (San Jose) on conservation rates and a pricing adjustment mechanism, customer education and outreach and data collection and reporting. Adoption of these settlements concludes our implementation of conservation rate objectives advanced in the Commission's Water Action Plan (WAP) for the five Class A water utilities whose conservation rate design applications were consolidated with this investigation.

We also reject the Division of Ratepayer Advocates' (DRA) proposal to adjust the return on equity (ROE) in association with the adoption of decoupling water revenue adjustment mechanisms (WRAM) and modified cost balancing accounts (MCBA) in trial conservation rate design programs.

1. Background and Summary

The Commission opened this investigation to address policies to achieve its conservation objectives for Class A water utilities and ordered the consolidation of four pending conservation rate design applications - Application (A.) 06-09-006 GSWC), A.06-10-026 (CalWater), A.06-11-009 (Park Water Company (Park)), and A.06-11-010 (Suburban Water Systems (Suburban)).1 Those objectives included adoption of conservation rate designs and revenue adjustment mechanisms that decouple sales from revenues. A prehearing conference (PHC) was held on February 7, 2007. A second PHC was held on July 11, 2007. The first phase of this proceeding addressed rate-related conservation measures, including the parties' increasing block rate and WRAM proposals and ROE adjustment.

The Phase 1 scoping memo issued on March 8, 2007. The Scoping Memo defined Phase 1 to include rate-related conservation measures, WRAMs, and Suburban's proposed low-income assistance program. A May 29, 2007 ruling established Phases 1A and 1B, consolidated San Jose's conservation rate design application, and set hearings in Phase 1B on whether the consolidated applicants' ROE should be adjusted if a WRAM was adopted.2 The ruling asked the parties to address ten issues in their testimony on the ROE adjustment.3 The Commission held five days of hearings on the ROE adjustment issue and one day of hearings on CalWater's conservation memorandum account in November 2007. In hearings, the administrative law judge (ALJ) requested that DRA provide an implementation witness to address how its proposal would be implemented. DRA and TURN sponsored one witness. DRA presented one implementation witness. CalWater, California American Water (CalAm), Park, and California Water Association (CWA) sponsored six witnesses.4 Opening and reply briefs were filed on January 16 and February 6, 2008, respectively.

In D.08-02-036, the Phase 1A decision, the Commission adopted eight settlement agreements affecting CalWater, Park and Suburban on conservation rates, revenue adjustment mechanisms, MCBA, ROE adjustment, a low-income assistance program, customer education and outreach, and data collection and reporting. In an April 25, 2008 ruling, submission of Phase 1B was set aside to consider the GSWC and Joint Consumer settlement and the proceeding was resubmitted on May 2, 2008. GSWC and DRA filed a motion for an extension of time from April 30 to July 15, 2008 to file the Region I conservation rate design application referenced in the settlement agreement. In a June 20, 2008 ruling, the motion was granted. In that ruling, submission was set aside until June 30, 2008 to consider the San Jose and Joint Consumer settlement.

The joint motions and settlement agreements addressed in this decision were filed before and after the Phase 1B hearings as follows:5

· GSWC/ DRA on conservation rate design trial program on October 19, 2007 and amendment to settlement on March 21, 2008;

· GSWC/Joint Consumers6 on data collection and reporting, customer outreach and education initiatives on March 21, 2008;

· San Jose/DRA on conservation rate design and pricing adjustment mechanism trial program on November 14, 2007;

· San Jose/Joint Consumers on customer education and outreach and data collection and reporting initiatives on June 12, 2008; and

· CalWater/DRA on conservation memorandum account on December 21, 2007.7

The Consumer Federation of California's (CFC) request for hearings on the GSWC/DRA and San Jose/DRA settlement agreements was denied by October 30, 2007 and March 7, 2008 rulings, respectively.

1 A January 16, 2007 ruling affirmed consolidation of the applications with the OII.

2 The parties' Phase 1A filed settlements on conservation rate designs, WRAMs and MCBAs did not resolve the return on equity adjustment issue. CalWater/DRA/TURN stated in the amended settlement that the impact of the trial program on ROE is not a part of the settlement and deferred to the Commission's decision on any impact on ROE. Park and DRA stated that they had failed to agree on the impact the WRAM and rate design would have on return on equity and could address that issue by submitting testimony in this proceeding.

3 Specifically, the ruling asked 1) what measures of risk should be considered in setting a return on equity and in determining whether these risks have been altered when a WRAM is applied? 2) What impact(s) could adopting a return on equity adjustment have on the Commission's conservation objectives for Class A water utilities? 3) Should any return on equity adjustment be made if the adopted WRAM recovers all fixed costs affected by the proposed conservation rate design? 4) Should the adoption of a modified cost balancing account affect whether a return on equity adjustment is adopted? 5) Should company-specific factors be considered in weighing whether a return on equity adjustment should be adopted? What methods (e.g., Discounted Cash Flow (DCF); Capital Asset Pricing Model (CAPM); Risk Premium; Multiple Regression; other) for estimating any potential impact of a WRAM on the required return on equity should be utilized prior to instituting the WRAM? 6) What methods (e.g., DCF; CAPM; Risk Premium; Multiple Regression; other) for estimating any potential impact of a WRAM on the required, and achieved, return on equity should be utilized after instituting the WRAM? 7) How much historical data (e.g., 1 year? 3 years? 5 years?) would be required for an accurate estimate of this potential impact? 8) Should publicly-traded companies with similar operating, financial, and business risks be utilized for these calculations? 9) Is the experience of non-water utilities germane? 10) Should any return on equity adjustment be interim subject to reconsideration in the separate cost of capital proceeding?

4 Suburban also sponsored a witness to address its pending settlement on ROE; D.08-02-036 adopted that settlement. San Jose offered a witness and withdrew it after San Jose and DRA's settlement, including an agreement on the ROE adjustment, was filed.

5 The settlement agreements were e-filed with the Commission. The provisions of the settlements are summarized infra. The settlements can be obtained on the Commission's website under the index of currently opened proceedings.

6 The Joint Consumers are The Utility Reform Network (TURN), the National Consumer Law Center (NCLC), Disability Rights Advocates (DisabRA), and Latino Issues Forum (LIF).

7 Hearings were held on CalWater's conservation memorandum account proposal. The parties settled after hearings had concluded.

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