3. Settlement Agreement Between Cal Am and DRA
Article 12 of the Commission's Rules of Practice and Procedure govern settlement agreements. According to Rule 12.1(d), prior to approval, the Commission must find the settlement, whether contested or uncontested, "reasonable in light of the whole record, consistent with law, and in the public interest." Cal Am and DRA state that they have entered into the settlement agreement on the basis that the Commission's adoption not be construed as an admission or concession by any party regarding any fact or matter of law in dispute in this proceeding. They also intend that the Commission's adoption of the settlement not be construed as any statement of precedent or policy of any kind against them in any current or future proceedings. Furthermore, the settlement is an integrated agreement, so that if the Commission rejects any portion of the settlement, each party has the right to withdraw.8
Prior to filing the settlement, an all-party settlement conference was held on May 25, 2007, and representatives of Cal Am, DRA, and Mark West participated. Other meetings were held both in person and telephonically. Mark West declined to enter into the settlement agreement and therefore the settlement addresses disputed issues between DRA and Cal Am.9
On July 20, 2007, Mark West filed comments on the settlement agreement claiming it was systematically excluded from substantive negotiations on subjects in which it had an interest and requesting that negotiations be reopened on specific subjects. Mark West objects to three sections of the settlement regarding the Larkfield District: the Faught Road Well, the water treatment plant expansion, and the inclusion of conservation plan costs in rate base.10
As to the Faught Road Well, Mark West claims the well is unnecessary and that inflated customer base estimates were used to justify it. Mark West similarly claims the water treatment plant expansion is based on inflated needs estimates. Mark West's position is that the existing two filters are adequate since individually they are capable of treating up to 600 gallons per minute (gpm) for a total of 1,200 gpm. Mark West contends the existing treatment capacity is adequate since even with the extra 401 gpm from the addition of the Faught Road Well, only 901 gpm of capacity are required. Finally, Mark West characterizes the inclusion of conservation program costs in rates as "hiding the costs."11 Mark West feels customers would be better served by seeing a surcharge on their bill every month as a reminder to take advantage of the conservation programs paid for in their rates. Mark West also objects to the lack of a requirement that the conservation program provide results and believes the effects of conservation should be reflected in the Water Needs Analysis.
Both DRA and Cal Am object to Mark West's claims of being excluded from the settlement negotiations. Cal Am and DRA refer to three all-party meetings in which Mark West was a participant. Cal Am goes on to explain that Mark West's participation in all the meetings was not discouraged. Rather Mark West's complaints reflect the limited issues of concern to it outside the Larkfield District and its lack of interest in compromise positions. DRA characterizes Mark West's contention that it should have been included in all settlement discussions as unreasonable and impractical. DRA cites the Commission's policy of encouraging settlements as intended to promote efficiency in its proceedings. DRA contends that including Mark West in all the meetings would have been contrary to that policy since Mark West's interest was limited to the Larkfield District.
We agree and find that DRA and Cal Am complied with the Rule 12.1 requirement that at least one conference be held with notice and opportunity to participate provided to all parties. Mark West participated in three conferences, providing it ample opportunity to express its views and negotiate settlement terms on the items of interest to it. A non-signatory's general unhappiness with the terms is insufficient grounds to reject a settlement agreement, in part or in whole.
The expense amounts in dispute differed from district to district. A full comparison of the parties' original and settled positions for each section is included as Attachment 1.
The parties were able to reach agreement on the majority of issues in dispute in multiple ways. One reason for the disparate positions was the use of different inflation factors. If the difference between the two positions was nominal, Cal Am either agreed to adopt the lower DRA estimate or a compromise figure. Another reason for dissimilar original estimates was DRA's concern with high expense years being included in the calculation and Cal Am's belief that high expense year figures were legitimate and should be included. When this occurred, the parties usually adopted a mid-point compromise amount for the settlement. Parties also reached a mid-point compromise on other issues, with the parties taking into account the actual historical expenses incurred as well as the variable nature of those expenses.
In some areas, the difference in position was due to calculation or accounting errors. Once the errors were identified and corrected, the parties agreed on the final figure or were able to adopt a settled amount. The following discussion deals with specific areas in which settlement was achieved in a manner other than those described above.
Cal Am and DRA agree on the districts' capital structure for the test year and both escalation years. They agree to a ratio of 58.16% debt to 41.84% equity for Test Year 2008, 58.32% debt to 41.68% equity for Escalation Year 2009, and 58.83% debt to 41.17% equity for Escalation Year 2010. The settlement uses Cal Am's projected 2007 capital structure, believing it is essentially equivalent and representative for all three years. DRA accepted Cal Am's cost of debt for 2008, 2009 and 2010, as 6.20%, 6.25% and 6.29%, respectively. We find the capital structure reasonable and in compliance with D.06-11-050, which required a return to the use of a consolidated capital structure in Cal Am's next GRC. We also find the parties' agreed upon cost of debt reasonable.
Section 3.2 of the settlement for each district addresses Customer Sales and Revenue. The parties' initial positions essentially agreed on the customer counts, average water use, and an allowance for unaccounted-for water for each of the districts. Therefore, we find this section reasonable.
The description of the settlement for Operations and Maintenance Expenses (O&M) appears in Section 3.3 of the settlement for each district. The specific items discussed below are O&M expense elements for the various districts that were not settled in the manner previously described.
The settlement figure for this expense item reflects clarification of vendor labeling and inclusion of certain 2002 expenses.
The parties agreed to include Hazardous Materials charges for Oscar Larson Associates in 2003 and 2004 which had been removed, and recalculate the five-year average using DRA escalation numbers.
The original difference between the parties' figures was due to an accounting error on Cal Am's part. Once corrected, there was no difference in the parties' figures.
Parties agreed that correcting the unaccounted for water figure altered the production numbers, which necessitated updating the purchased water and power costs for the district.
We find the manner in which compromise was achieved and the final settlement positions in this section reasonable.
Administration and General Expenses (A&G) are addressed in Section 3.4 of the settlement for each district. By far, the largest expenses in this section and the one in which the parties' positions are most disparate, is employee pensions and benefits and regulatory expenses. All other elements of A&G were either agreed upon initially or settled in the course of negotiations. Employee pensions and benefits, including employee awards are not a part of the settlement and are discussed in another section of this decision. Regulatory expenses are also excluded from the settlement and discussed later.
For all of the districts except Sacramento, the parties reached settlement on miscellaneous general expenses by removing charitable contributions, conservation expenses and community relations/outreach expenses. For the Sacramento District, Cal Am adopted DRA's estimate, adjusted by an inflation factor.
We find the settled items in this section reasonable.
Utility Plant in Service is discussed in Section 3.5 of the settlement for each district. Following extensive exchanges of information and negotiations on the rationale for each requested plant item, Cal Am and DRA agree as set forth in Tables 1 and 2 and in the following discussion:
TABLE 1:
LARKFIELD DISTRICT UTILITY PLANT IN SERVICE (000s)
|
|
|
|
Meters Replacement |
$ 310.00 |
$195.00 |
$ 257.00 over 3 years |
Treatment Replacement |
150.00 |
0.00 |
150.00 over 2 years |
Faught Road Well Larkfield Treatment Plant |
1,550.00 600.00 |
0.00 0.00 |
$2,048.75 (Combined) |
Lower Wikiup Main |
$ 311.00 |
$286.00 |
$ 286.00 |
The Faught Road Well and the Larkfield Treatment Plant were controversial issues both for the settling parties and Mark West. Mark West's testimony, Opening and Reply Briefs, and Comments on the Settlement continually questioned the need for either of these projects. Mark West cites a DHS report that found Cal Am's existing capacity met the needs of its current customer base, but that Cal Am should continue efforts to acquire additional sources of supply in anticipation of new developments under construction.12
Cal Am provided several versions of water supply analysis, pursuant to General Order 103, for 2005, 2010 and 2015. All scenarios used a low growth factor and purchased water supply in both the high and low ranges. Even using figures representing low growth factors, all versions indicate a deficit in water supply except for the two 2005 versions using the high range of purchased water.13
Ultimately, DRA accepted Cal Am's position that the new well is needed to meet the current deficit in water supply for the district. The expanded treatment facility capacity will provide reliability and redundancy for the system, especially needed when the Faught Road Well is completed. Cal Am agreed to reduce the contingency factor for the Faught Road Well by 15% and for the Larkfield Well Treatment Plant by 10%.
TABLE 2:
SACRAMENTO DISTRICT UTILITY PLANT IN SERVICE (000s)
Project |
Cal Am |
DRA |
Settlement |
Network Replacement |
$ 962.6 |
$ 240.0 |
$ 240.0 over 3 years |
Services Replacement |
1,869.0 |
570.0 |
1,200.0 over 3 years |
Meter Replacement |
461.0 |
55.5 |
258.0 over 3 years |
Meters New |
330.7 |
66.0 |
66.0 over 3 years |
CPS 2007 |
355.0 |
299.0 |
299.0 |
CPS 2008 |
626.9 |
515.0 |
515.0 |
CPS 2009 |
813.0 |
132.0 |
132.0 |
Suburban Distr. and Supply Improvements |
15,000.0 |
5650.0 (AL14) |
1,4450.0 |
Distribution Monitoring System Improvement |
750.0/year |
750.0 (AL) |
750.0/year |
Roseville Road Booster Station |
2,463.0 |
1954.2 |
2,347.2 |
Parkway Purch.Water |
3,300.0 |
1,300.0 (AL) |
3,395.5 |
Cook Riolo Tank and Booster Station |
3,993.0 |
3,993.0 (AL) |
3,993(annual AL) |
Arsenic Treatment Walnut Grove |
2,602.4 |
1,908.7 |
2,540.9 |
Arsenic Treatment Isleton |
3,601.7 |
2,901.7 |
3,550.2 |
Jackson Well, Booster Station |
5,160.0 |
4,862 (AL) |
5,014 (annual AL) |
Fluoride in Suburban |
2,435.9 |
2,264.0 |
2,264.0 |
Fluoride in Arden |
905.0 |
822.0 |
822.0 |
Convert Flat to Metered |
7,657.0 |
7,657.0 (AL) |
7,657.0 |
Rehab Wells 2008 & 2009 |
2,203.8 |
1420.0 |
1,697.0 |
Fite Well |
1,718.5 |
0.0 |
1,718.5 (AL) |
Water Treatment Imprvt. |
2,857.0 |
2,250.0 |
2,250.0 |
Small Main Replacement Program 2007-2009 |
4,610.0 |
4,610.0 |
4,610.0 |
Walnut Grove Well Rehab and Raw Water Main |
710.0 |
710.0 (AL) |
710 (AL) |
Based on the explanations provided for each project, we find this portion of the settlement reasonable.
Depreciation Expense and Reserves are discussed in Section 3.6 of the settlement for each district. Both Cal Am's and DRA's original depreciation calculations contained errors which were corrected in the settlement. Ultimately, DRA agreed with Cal Am's position that depreciation accruals for forecasted years 2007 through 2009 should be calculated using rates approved by the Commission in prior rate cases. We find this section of the settlement reasonable.
The Special Requests are addressed in Section 3.7 of the settlement for each district. Because the special request numbering varied by district, this section will refer to the subject of the special request rather than the special request number.
These requests involve the Low-income Program Tariff. Cal Am agrees to provide Low-income Rate Assistance credit to non-profit group living facilities and migrant farm worker housing centers deemed qualified using the same criteria as that used for the California Alternative Rates for Energy program for gas and electric. Cal Am may require post-enrollment verification.
The Conservation Program funding is an element of the Conservation Balancing Account sought by Larkfield and Sacramento.
The parties agree that the conservation budget will be in rates for the three-year rate case period at the maximum level allowed for Cal Am. Cal Am and DRA agree that budget estimates will not be escalated in attrition years. Parties agree that the balancing account is subject to refund, Cal Am has the ability to move funds between Best Management Practices (BMP) as necessary, and Cal Am will provide all required California Urban Water Conservation Council reports to the Commission and DRA. The parties reached settlement on all the BMP expenses.
As previously discussed, Mark West, approves of the conservation programs, but believes the program costs should appear on customers' monthly bills rather than hidden in rates. If the surcharge appeared on bills every month, it would serve as a reminder to customers to utilize the program. Mark West also believes the conservation program should be required to provide results and the effects of conservation should be reflected in the Water Needs analysis. This is a rate design issue and will be considered in Phase II.
The parties agree that when the actual deduction amount has been determined, Cal Am will provide DRA with the figure.
The parties do not dispute these issues as they will be recovered according to Commission rules.
Based on our review of the settlement and weighing it as an integrated document, we find it is reasonable in light of the whole record, consistent with the law, and in the public interest. Therefore, we grant Cal Am's and DRA's Motion, and adopt the settlement.
8 See July 6, 2007, Motion of California American Water Company and the Division of Ratepayer Advocates for Adoption of Settlement Agreement as to Certain Issues on the Revenue Requirements, p. 4.
9 Id., p. 2, fn. 2.
10 The Faught Road well and the water treatment plant expansion are included in the Utility Plant in Service category and the Conservation Balancing Account is Special Request No. 6.
11 Mark West Area Community Service Committee's Comments on the Settlement Agreement, p. 7.
12 Exhibit 32, p. 11.
13 Exhibit 17, Glover Rebuttal Testimony, pp. 18-22.
14 Advice Letter.
