3. Proposed Settlement

Pursuant to Article 12 of the Commission's Rules of Practice and Procedure, Cal Am and DRA submitted a motion for review and approval of proposed settlements to the Commission. On June 27, 2008, the parties filed a motion for adoption of the settlement agreement for the Coronado and Village districts and to require that initial comments be filed within seven days and reply comments five days following initial comments. On June 30, 2008, the parties filed a motion for adoption of the settlement for the Larkfield district and to waive the comment period.

3.1. Standard of Review for Settlements

We review the settlement under the requirements set forth in Rule 12.1(d). This rule provides that, prior to approval, the Commission must find a settlement "reasonable in light of the whole record, consistent with the law, and in the public interest."

In addition, Rule 12.5 states that, unless the Commission expressly provides otherwise, Commission adoption of a settlement does not constitute approval of, or precedent regarding, any principle or issue in the proceeding, or in any future proceeding.

3.2. Terms of the Settlement

The proposed settlements are attached as Appendices A and B to this decision.⁴ The parties state that the settlement proposes conservation-oriented increasing block rates and related WRAM and MCBA ratemaking mechanisms for ensuring full recovery of all authorized fixed costs and actual variable costs. The conservation rate design and related ratemaking mechanisms constitute a Pilot Program to become effective within 90 days after a Commission decision adopting the proposed settlement.⁵ The Pilot Program will be reviewed in the next GRC proceeding for each district pursuant to D.07-05-062, the decision revising the RCP.

In their motion for adoption of the settlement, the settling parties state that they represent all active parties in Phase II of this proceeding and are fairly representative of affected interests; DRA represents the interests of customers in general; Mark West Community Services Committee represents the interests of a portion of the Larkfield district customers; and Cal Am represents the interest of the utility.

The settlement is presented as an integrated package, such that parties are agreeing to the settlement as a whole, as opposed to agreeing to specific elements of the settlement. The parties state that approval of the proposed settlement by the Commission should not be construed as precedent or statement of policy of any kind in any current or future proceeding.

We review the specific provisions of the proposed settlements next.

3.2.1. Conservation Rate Design

The settlement proposes a conservation rate design with the objective of providing all classes of customers with greater financial incentive to conserve water. This meets the Commission's Water Action Plan objective of setting rates that encourage conservation.

The tariff sheets for each of the three districts include customer categories of General Metered Service, Measured Irrigation Service, and Private Fire Protection Service. All of the residential, commercial, industrial, public authority, irrigation and "other" customers in the three districts have metered service connections.⁶ Current rates for each customer class include a service (or meter) charge and a single quantity charge (or volumetric rate) per hundred cubic feet. Customers in the Coronado and Larkfield districts are billed on a bimonthly basis. Customers in the Village district are billed on a monthly basis.

The proposed conservation rate design for all customer classes except private fire service is as follows:

· Residential customers will have an increasing quantity three tier (or block) rate design;

· Commercial, industrial, and public authority will have single quantity rates;

· For both residential and non residential customers, Cal Am will move an additional portion of fixed costs from the meter charge into the quantity charge; and

· The overall revenue requirement for each district and customer class will remain the same under conservation rates as they are under the current rate structure and will follow the cost allocation adopted by the Commission.

In determining the proposed rates, the consumption blocks, and the amount of fixed cost that should be moved from the service charge to the quantity charge, the parties reviewed meter readings from calendar year 2007 in each district. The parties conducted several customer consumption analyses and tested various assumptions. The parties balanced the goals of encouraging conservation, preventing rate shock and maintaining revenue neutrality within both the residential and non-residential customer class.

Conservation Rates for Residential Customers

For residential customers, the parties propose an aggressive rate design implementing three different rate tiers depending on consumption to replace the single quantity charge and reducing the meter charge by 50%.⁷ To determine the break points in consumption blocks, the parties considered ratepayer impact and revenue neutrality, and followed the guidelines in the California Urban Water Conservation Council Handbook and the American Water Works Association, Principles of Water Rates, Fees, and Charges. The resulting consumption blocks and quantity rate tiers are shown in the tables below:

Under this rate design, residential customers will receive more accurate price signals. For large users in particular, some explanation of the new rate design is warranted to avoid confusion and explain why bills going forward may be higher. As residential customers consume more, their average cost per unit will increase. For this reason we suggest that Cal Am work with the Commission's Public Advisor's Office to develop a suitable consumer information message.

Conservation Rates for Non-Residential Customers

For the commercial, industrial, public authority, gravity irrigation, and pressure irrigation customer classes, the parties propose a conservation rate design consisting of a reduced service charge and a single (uniform) quantity charge for each customer class. The service charge will be reduced by approximately 50% with corresponding increases in the quantity rate to achieve revenue recovery neutrality.

The parties state that developing increasing block rates for non-residential customers is currently not feasible as it would likely require reclassification of these customers based on customer and consumption data that is currently unavailable.⁸

The parties propose that the Pilot Program, consisting of the conservation rate design and the related WRAM and MCBA mechanisms, become effective within 90 days after a Commission decision adopting the proposed settlement. The 90 days will allow Cal Am to modify its billing system and to distribute information regarding the new rate design to customers.

Discussion

The underlying goal of the settlement's conservation rate design proposal is to reduce consumption by all major customer groups in a reasonable manner, without sudden rate shock. The proposal targets reductions in discretionary use, and does this by developing tier break points based on residential consumption usage patterns in each district that avoid dramatic increases between rate tiers.

The parties state that during this Pilot Program they will closely monitor residential and commercial consumption data, and measure the demand response that takes place within each customer class and service area. The parties expect to propose further refinements to the conservation rate design in the next GRC period based on the measurement and evaluation of this Pilot Program.

We find the proposed rate design gives clear price signals to customers to reduce their usage. Important conservation features included in the proposed rate design are (1) shifting 50% of the current fixed cost recovery from the service charge to the quantity rate; and (2) introducing increasing tiered rates for all customers billed under volumetric rates. These features are consistent with the Water Action Plan goals and the conservation principles being developed in our Conservation OII, Investigation (I.) 07-01-022.

We appreciate the careful usage and billing analysis performed by Cal Am and DRA in determining the break points for the residential tiers. We find the degree of rate increase for each tier in each district to be appropriate for a Pilot Program.

As with the proposed settlement for Cal Am's Los Angeles district, adopted with modifications in D.08-06-002, we have two concerns about the parties' proposal. First, there is no plan to move Coronado and Larkfield to monthly billing cycles even though monthly customer billing provides customers with timely conservation price signals. We encourage the parties to investigate the most cost-effective way to move customers from bi-monthly to monthly billing cycles in these districts. Cal Am should present a proposal in its next GRC filing. The proposal can contain separate timelines for customer classes or service areas, and a mixture of meter reading personnel and investment in new metering technology.

The second weakness is that the proposal for non-residential customer groups is narrower than the proposal for residential customers. Since there were no evidentiary hearings, the record does not contain sufficient evidence to evaluate additional measures for non-residential customers. In the settlement, the parties state that an increasing block rate design for non-residential customers is "currently not feasible" because the necessary data is unavailable. Once again, Cal Am should investigate ways to more fully involve non-residential customers in a conservation rate design and present a proposal in its next GRC.

On the whole, we find the settlements' proposals represent real progress toward implementing conservation rate design and the settlement should be adopted. The two areas of concern we identified should be revisited by Cal Am in the next GRC proceeding.

Given the importance of conservation rates, Cal Am should make every effort to implement the proposed conservation rate design as soon as possible after the Commission issues a final decision in this proceeding. The settlement is unopposed and the proposed decision recommends it be adopted. Therefore, Cal Am can begin the process of customer notification and billing system modifications when the proposed decision is first issued, and it should give priority to quickly accomplishing these tasks.

3.2.2. WRAM and MCBA Mechanisms

The rate design encourages conservation, while ensuring the revenue requirement is met. In addition to the conservation rate design, the parties also propose as part of the Pilot Program, two related decoupling mechanisms. In Section VI of the settlements, the stated goals of the decoupling mechanisms are to (1) remove any disincentive for Cal Am to implement conservation rates and programs, (2) ensure any cost savings resulting from conservation are passed on to ratepayers, and (3) reduce overall water consumption. The settling parties propose adopting a WRAM and MCBA in the Pilot Program as the decoupling mechanisms.

Working together the WRAM and MCBA⁹ will generally ensure the company's recovery of all fixed costs authorized through the quantity charge and the recovery of actual variable costs. The WRAM account tracks the differences between adopted and actual revenues recovered through the quantity charge, while the MCBA account will track the actual costs for purchased water and purchased power, as well as pump tax where applicable. The fixed costs not included in these accounts will be recovered through the service charge, which is a monthly charge that customers pay regardless of consumption levels.

Cal Am stipulates that it will exercise due diligence in ensuring the least-cost mix of its water sources and will make a showing in the next GRC filing demonstrating that it has exercised due diligence and that any significant change in water purchases was reasonable.¹⁰

Each district will have its own WRAM balancing account, with separate reporting by customer class. ¹¹ Larkfield will replace its existing Incremental Cost Balancing Account (ICBA) with an MCBA. Coronado and Village will retain their ICBA. The ICBA tracks cost changes attributable to changes in unit price, but not changes in the amount of consumption. The MCBA tracks changes in price and quantity and will capture both cost savings and cost increases. The accounts for each district will always be considered together, i.e., netted, when determining the need for additional revenue recovery from, or for refunds to, ratepayers in that service area. The WRAM and MCBA accounts will accrue interest at the 90-day commercial paper rate.

The settlement provides that by March 31 of each year, Cal Am will provide the Water Division (with a copy to DRA) a written report on the status of the WRAM and MCBA balances. If the report shows the net balance exceeds 2.5% of a district's total recorded revenue requirement for the prior calendar year, Cal Am will file an advice letter within 30 days that amortizes the balance through a volumetric surcharge if it is an under-collection, or a volumetric surcredit if it is an over-collection. If the 2.5% threshold is not met, these balancing accounts will be amortized in the next GRC.

⁴ Appendix A contains the parties' settlement for the Coronado and Village districts and Appendix B contains the parties' settlement for the Larkfield district.

⁵ The MCBA is proposed for the Larkfield district only.

⁶ The only flat-rate customers are privately owned fire protection service. Fire protection is a fixed charge, much like a meter service charge.

⁷ For the Larkfield district, parties propose consideration of a 5-tier increasing block rate structure in the next GRC. In the interim, Cal Am agrees to collect data on the number of apartment units and water consumption.

⁸ See Motion for Adoption of Settlement Agreement, p. 5.

⁹ According to the settlement, the Coronado and Village districts currently have Incremental Cost Balancing Accounts rather than MCBAs, but Cal Am will consider MCBAs in the future.

¹⁰ Significant changes in water purchases are defined for each district in Section IX.D and will be tracked for later reasonableness review.

¹¹ While Cal Am will track revenues in the WRAM account in each service area by customer class for analysis purposes, implementation of a surcharge or surcredit will be calculated using the WRAM balance for all customer classes in each district.