13. Cal-Am Facilities
The Settlement Agreement provides a description of the Cal-Am facilities, the construction schedule for those facilities, and the estimated costs of the facilities. The Cal-Am facilities consist of three large diameter conveyance pipelines (the Transfer Pipeline, the Seaside Pipeline, and the Monterey Pipeline, which also includes the Valley Greens Pump Station), two distribution storage reservoirs (the Terminal Reservoirs), and aquifer storage and recovery facilities. The hoped-for construction schedule envisions land and right-of-way acquisition, permitting, and design beginning in the fourth quarter of 2010 and completed by mid-2012. Actual construction is anticipated to begin in late 2011 and would be completed by summer of 2014.
The Settling Parties have developed three scenarios for the Cal-Am facilities: the low scenario estimates costs at $82.6 million; the median scenario estimates costs at $95 million; and the high scenario estimates costs at $118.75 million. The low scenario is 15% below the median scenario and the high scenario is estimated at 25% above the median scenario. For purposes of setting a capital cost cap, the Settling Parties have agreed to use the mid-point of the median and high scenarios, i.e., $106,875,000.147
The Settling Parties have agreed to establish cost containment and project management measures, including establishing measurable goals and objectives, setting design criteria to meet those goals and objectives, freezing the project size and configuration as early as possible, utilizing a transparent system of review, and utilizing value engineering in order to reduce costs.
The proposed Cal-Am facilities include the following:
Facilities |
Low Scenario |
Median Scenario |
High Scenario |
$ 9,565,000 |
$11,000,000 |
$13,750,000 | |
Seaside Pipeline |
$13,044,000 |
$15,000,000 |
$18,750,000 |
Monterey Pipeline (includes Valley Greens Pump Station) |
$21,740,000 |
$25,000,000 |
$31,250,000 |
Terminal Reservoirs |
$14,783,000 |
$17,000,000 |
$21,250,000 |
Aquifer Storage and Recovery Facilities |
$23,478,000 |
$27,000,000 |
$33,750,000 |
Total |
$82,610,000 |
$95,000,000 |
$118,750,000 |
DRA recommends that the Commission adopt a capital cost cap for the Cal-Am only facilities based on the most probable cost estimate presented in the Settlement Agreement.148 DRA recommends three adjustments to Cal-Am's most probable cost estimate of $95 million: reduce the ASR project cost estimate by $3.25 million; reduce the Terminal Reservoir Project cost by $4 million; and eliminate the 25% contingency on right-of-way easement and land acquisition costs thus reducing costs by $850,000.
DRA recommends that the actual unit costs incurred by MPWMD in Phase 1 of the ASR project are a better estimate of Cal-Am's Phase 2 future costs than the conceptual cost estimates presented in this record. DRA escalated these costs to the mid-point of 2012, when the construction is anticipated to begin. DRA argues that this approach provides the proper incentive to Cal-Am to pursue cost reductions in this project.
DRA also contends that constructing the Terminal Reservoir above ground will reduce the base construction costs by $2.2 million and would result in a final adjustment of $4 million, after adjusting implementation costs, escalation, contingency, and the range of accuracy assessments. DRA recognizes that the City of Seaside prefers an underground reservoir, but does not believe that Cal-Am ratepayers should be responsible for the additional costs incurred by this approach.
Finally, DRA asserts that the 25% contingency adder that Cal-Am included on certain right-of-way easement and land acquisition adjustments should be removed. DRA contends that real estate transactions are not subject to such contingencies, because such transactions are based on comparable sales and transactions.
DRA also recommends that the project cost contingency percentage be updated as the project evolves and component costs become more certain. DRA does not disagree with the current contingency estimate (based on a Class 4 estimate according to the Association for the Advancement of Cost Engineering), but recommends that this estimate be refined to ensure that costs are appropriately constrained. DRA also asks the Commission to ensure that Cal-Am update both DRA and DWA on the evolving design and cost estimate of the Cal-Am only facilities. DRA maintains that the Settlement Agreement should be modified to include this requirement, which will help ensure that Cal-Am "identifies, explains, and justifies the project costs, and will assist in future reviews for prudency."149
13.1. Discussion: Cal-Am
Only Facilities
The Settling Parties assert that the capital cost cap proposed for the Cal-Am-owned facilities should be set at $106.875 million, an amount midway between the most probable cost estimate and the high-cost scenario. DRA recommends that the Commission adopt a capital cost cap based on the most probable cost estimate. Based on the Settling Parties' most probable cost estimate of $95 million, DRA proposes potential cost reductions and ultimately recommends a cost cap of $86.6 million, a reduction of $8.4 million.
As both Cal-Am and DRA agree, the estimated capital costs are just that - estimates. To the extent that actual costs are lower than the cost cap adopted by the Commission, the lower amount will be reflected in rate base. Similarly, if Cal-Am's actual costs are greater than the proposed cost cap, and the Commission approves these higher amounts, these amounts will be recorded in rate base. At this point, it is reasonable to adopt the cost estimate for the Cal-Am facilities proposed by Settling Parties - $106.875 million. This is an amount midway between the most probable cost estimate and the high-cost scenario and it is reasonable to adopt a capital cost ceiling now to provide certainty for ratepayers and investors.
We do not agree that DRA's proposed reductions of $3.25 million to the ASR facilities should be based on MPWMD's actual costs to establish the Phase 1 ASR facilities. As Cal-Am points out, there are differences in the depths of the proposed ASR wells and the design criteria are significantly different than for the existing ASR wells.150 In fact, the BOR Report states:
There is still much uncertainty regarding the ASR system which won't be resolved until permits are issued.
Cal Am Data Response #50 provides justification for increasing the ASR well estimate $3,000,000 from the 2005 estimate. This cost increase appears reasonable considering design changes and additional technical data that has become available since the 2005 estimate was prepared. Currently, Cal Am is in the process of obtaining the necessary permits in order to access the proposed ASR sites. Once Cal-Am obtains site access and drills the proposed monitoring well, it will be possible to further refine the ASR cost estimates.151
Similarly, we do not agree that the cost of the Terminal Reservoirs should be reduced by $4 million. Again, we wish to ensure that the Regional Project can move forward in as timely a manner as possible. While DRA contends that Cal-Am ratepayers should not pay for below ground facilities, Cal-Am contends that it is not likely that the City of Seaside would permit an above-ground reservoir. It is certainly not clear whether, and if so, what additional mitigation costs would be required to offset the above-ground approach.152 Attachment 3 to the Settlement Agreement includes a discussion of the twin, 3 million gallon concrete tanks that will be constructed in the City of Seaside and notes that "all tank options (i.e., at grade, partially-buried, or completely buried) will be investigated for technical feasibility, practicality, economic viability and appearance."153
We must consider overall feasibility of the project, including the Cal-Am facilities, in our assessment of the Regional Project. A project of this magnitude will require substantial time for permitting and review by local authorities. Given the exigencies of the Cease and Desist Order, it is not reasonable to place additional permitting constraints on the Cal-Am facilities. We agree with the observations of the Monterey Peninsula Cities:
If the Peninsula were not in jeopardy of draconian water reductions imposed by the CDO, some elements of the phased and conditional approval advocated by DRA might be warranted. However the Peninsula cannot afford a significant Project delay given the time constraints arising from the CDO. Financing must be procured and construction must commence as soon as possible.154
The Settling Parties appear to agree with DRA that contingencies should be adjusted as the Project becomes more certain. Cal-Am testifies that this approach is standard practice and explains that this practice is provided for in § 6.4(j) of the WPA. According to Cal-Am, the updated construction budget for the Regional Project would include revised and updated contingency factors and would be included in the status update reports that the Settling Parties have agreed to provide.155 We concur that this is a reasonable approach, and one that does not require modification of the Settlement Agreement.
DRA also suggests that the 25% contingency factor included for land acquisition and right-of-way easements be eliminated, because a contingency factor is not generally applied to such transactions. Here, too, we find that the Settlement Agreement and Water Purchase Agreement provides for this adjustment. No modification is required. As land is acquired and the Project is developed, such transactions will inform the cost estimates and the contingency factors. The contingency factor for these costs should be updated and included in the status reports.
On balance, we find that it is reasonable to approve a capital cost cap of $106.875 million for the Cal-Am-owned facilities. As we did with the Regional facilities, Cal-Am may only seek recovery from ratepayers of costs exceeding $106.875 million under extraordinary circumstances.
The Settling Parties propose that, for ratemaking purposes, certain of the Cal-Am facilities should be treated as used and useful as soon as they are constructed, even if the full Regional Project is delayed for some reason. Cal-Am explains that this approach is valid because certain facilities were designed to resolve two operational limitations of Cal-Am's existing distribution system, i.e., the ability to maintain adequate water levels in the Forest Lake tanks during maximum day demand conditions (usually several hot summer days in a row) and the inability to transport water from the Seaside area to the rest of the Monterey Peninsula. This approach would not be applied to the Transfer Pipeline, which will be designed to transport water from the Cal-Am meter point to its service territory.156
As set forth in § 9 of the Settlement Agreement, other than the Transfer Pipeline discussed above, Cal-Am will record the total cost of the Cal-Am facilities, subject to the capital cost cap and AFUDC calculation, that are completed and used to provide service to customers in its Utility Plant In Service Account. The total cost of the projects that are not providing service to customers will be recorded in the Construction Work in Progress (CWIP) Account. Rate base for the Cal-Am facilities will be calculated by determining the sum of Utility Plant in Service and CWIP, less any grant funds and less any accumulated depreciation.
The Settling Parties propose that the Commission authorize Cal-Am to file a Tier 2 advice letter on a semi-annual basis to include all prudently expended costs related to construction of the Cal-Am facilities into rate base as either CWIP or UPIS. The semi-annual filings are to occur on May 15 and November 15 each year to allow all project expenditures through April 30 and October 31 into rate base and base rates as of July 1 (May 15 filing) and January 1 (November 15 filing). Until allowed in rate base, all project costs are to earn AFUDC. Cal-Am expects the Commission staff to process the advice letters in 45 days, subject to true-up, if the staff review is not completed. In the year all projects are completed, Cal-Am expects to file the final advice letter as soon as possible after the facilities are completed, and expects staff to process the advice letter within 60 days. As stated in the Settlement Agreement, the "final advice letter will place the full return on and the recovery of all plant investment, including prudently incurred costs over the Cap, into rate base and base revenue requirement and rates."157
The parties recognize that cost allocation and rate design will be done in a separate phase of this proceeding. The Settling Parties also recommend that the Commission discontinue the Special Request 2 surcharge as defined in D.06-12-040. The Settling Parties recommend this change, because the facilities for the desalination plant and the wells will be built by the Public Agencies, the associated costs of the product water (i.e., associated with the debt service and O&M costs of the facilities) will be recovered through the Modified Cost Balancing Account, and the advice letter procedure described for the Cal-Am facilities is designed to take the place of this surcharge.
For purposes of this project, Cal-Am will calculate its non rate base investment as the difference between the total costs of the project and the sum of the costs included in rate base. As set forth in the Settlement Agreement, Cal-Am will impute a capital ratio of 50% debt and 50% equity. Cal-Am plans to calculate its cost for debt based on the weighted average embedded interest rate of Cal-Am's actual debt issuances issued to fund its facilities, including financing costs and to calculate the cost of issuing equity by using its authorized return on equity rate (currently set at 10.20%).
On a monthly basis, Cal-Am will calculate the AFUDC, or the carrying costs for the project), by applying the actual costs of the borrowed funds and the post-tax return on equity. Cal-Am is seeking authority to record AFUDC at its pre-tax cost of capital, but will charge the after-tax cost of capital to the Cal-Am facilities. The difference between the pre-tax and after-tax cost of capital would then be booked to a regulatory asset to offset the deferred tax liability that would occur with the use of the pre-tax cost of capital. As set forth in Exhibit 113, Cal-Am has proposed an AFUDC rate of 8.40%, but Cal-Am also explains that the numbers used are for illustrative purposes. Cal-Am is seeking the actual cost of capital for this project as the rate to be applied to the AFUDC account.
According to Cal-Am, this accounting treatment is required to establish a regulatory asset to comply with financial reporting and its ability to comply with Financial Accounting Standard 109.158 As set forth in the Section 9 of the Settlement Agreement (and corrected in Exhibit 103), Cal-Am will apply its then current cost of capital to the accrued charges for the project and a pre-tax cost of capital for the total AFUDC accrual, with the difference between the pre-tax cost of capital and the after-tax cost of capital being accrued to a regulatory asset and deferred tax liability.159 Section 9.2 of the Settlement Agreement describes the revenue requirement calculation.160
DRA opposes Cal-Am's proposed approach to ratemaking, and argues that Cal-Am's proposal is an unacceptable hybrid of the Tier 2 Advice Letter requirements of General Order 96-B with the Distribution System Infrastructure Charge Advice Letters adopted in D.07-08-030. DRA recommends that Cal-Am file either annual Tier 3 advice letters or an application that allows DRA sufficient time to review the prudency of the facility costs. DRA is particularly concerned that the Settlement Agreement's proposed approach to reviewing prudently incurred costs: as testified to by Cal-Am witness Stephenson, it appears that DWA would review these costs and would merely ensure that the costs are validated, i.e., DWA would ensure that various costs are applicable to the various projects.161 DRA maintains that a review for accuracy of invoices and expenses, while equivalent to the rate base offset approach established in Resolution W-4749 cannot be considered a true prudency review, which requires judgment and expert analysis. DRA argues that Commission scrutiny and judgment are required and it is not appropriate to substitute ministerial procedures for this expert approach.
DRA also opposes Cal-Am's proposal to apply the weighted cost of capital to compensate investors for the carrying costs of funds tied up in during the period between incurring project costs and placing revenue requirements into rates for recovery. DRA asserts that these short-term capital expenditures should receive a risk-adjusted two-year corporate borrowing rate of 2.46% (based on the published rating of Cal-Am's parent company, American Water Works and the two-year borrowing cost of BBB-rated issuances). DRA does not dispute Cal-Am's proposed approach to placing costs in rates before project completion, but asserts that this departure from the usual ratemaking approach should not also be rewarded by applying the weighted average cost of capital to AFUDC.
Under the WPA, the cost of the desalinated water will have two components: the debt service associated with financing the capitalized costs of the MCWD and MCWRA-owned facilities (including design, permitting, construction, and pre-effective date costs) and the costs of operating and maintaining the facilities. Pursuant to the Settlement Agreement, these costs would be recovered through the Modified Cost Balancing Account - essentially a balancing account already established to record and recover in rates the costs of purchased water.
Parties do not oppose the general concept underlying this methodology, although there is disagreement about determining the reasonableness of these costs. Here, we find that the Commission must retain its authority to ensure that Cal-Am ratepayers are paying cost-based rates related to the Regional Project, and we must have the discretion to verify that these costs are appropriate, are project-based, and do not include any costs that would otherwise be paid by the Public Agencies in the normal course of business. At the same time, we recognize the need to ensure that Cal-Am is able to recover these costs in a timely manner.
We find that the proposed approach is reasonable. The modified Tier 2 Advice Letter filing contained in the Settlement Agreement and Water Purchase Agreement will provide Cal-Am timely recovery of expended costs. Since this amount shall be subject to true-up upon completion of staff review, the Commission retains the ability to ensure that the costs are appropriate, project-based and should be included in rates.
Accordingly, we do not find any need to modify the Settlement Agreement and Water Purchase Agreement.
As for the Cal-Am facilities, DRA and MPWMD do not strongly object to the Settling Parties' proposal to treat the facilities as used and useful on an ongoing basis, rather than waiting until the entire project is complete. Although unusual, we see no reason to alter this aspect of the Settlement Agreement. DRA and MPWMD do oppose certain other aspects of the ratemaking approach proposed in the Settlement Agreement for the Cal-Am facilities, particularly the interest rate to be applied to the AFUDC for this project, as well as the proposed approach to advice letters. We turn first to the AFUDC issue.
13.2.4.1. AFUDC for Cal-Am Facilities
The Settlement Agreement provides that Cal-Am will earn interest on the carrying costs tied up during construction (the AFUDC account) at its actual cost of capital for this particular project. DRA recommends that the rate of return allowed on AFUDC should be set at the current 2-year yield on BBB-rated corporate debt, or 2.46%.
Cal-Am contends that this approach would violate the Uniform System of Accounts, which explains that the definition of Interest During Construction "includes the cost of borrowed funds used for construction and a reasonable rate upon the utilities' own funds when so used."162 Based on this language, Cal-Am contends that the actual costs of the borrowed funds must be charged as interest during construction, not an assumed rate. Cal-Am also explains that it must issue long-term debt and use equity to finance its facilities. Cal-Am explains that it currently has a line of credit of up to $33 million and explains that this funding source is used to fund its various memorandum and balancing accounts. Under the WPA, Cal-Am is obligated to obtain a $12 million line of credit as an interim financing source for the Regional Project, as a whole. Based on the language of the Uniform System of Accounts and because of these obligations, Cal-Am asserts that the rate applied to AFUDC for this project must reflect the actual cost of debt and the authorized return on equity and should be applied to an imputed 50-50 debt and equity capital structure.163
Cal-Am relies on the provisions of D.08-05-036, which addressed the issue of proper rate of return on AFUDC for Cal-Am's investment in the San Clemente Dam, and we look to this decision for guidance. D.08-05-036 authorized Cal-Am to accrue interest on the San Clemente Dam memorandum account at the authorized rate of return. The Commission explained that "due to the certainty of the project as expressed in the final EIR and the policy objective of matching the regulatory costs with actual costs, the interest on the San Clemente Dam memorandum account should accrue at the authorized rate of return. Authorizing a carrying cost less than that would not reflect the risks or actual project costs."164
The Commission also explained that "[p]rotection is given to the ratepayers in the form a reasonableness review when the dollars are transferred out of the memorandum account into ratebase. If it can be shown that actual carrying costs are less than the authorized rate of return (i.e., closer to the cost of debt), we can make adjustments in the relevant general rate case proceeding."165 The Commission determined that "in a case that deals with the accrual of AFUDC and significant capital costs, not merely the unanticipated expenses or the unknown expenses of typical memorandum accounts, the Commission should decide the interest rate treatment based upon the circumstances at hand and the type of financing being used to fund the project."166 Finally, the Commission concluded:
In today's case, we are considering a project that must move forward. The seismic risk of the San Clemente Dam must be remedied. There is no uncertainty in that. We have found that where there are regulatory compliance requirements and long-term capital outlays for a project are a foregone conclusion, it is reasonable to authorize the use of the authorized ROR [rate of return] as the AFUDC rate, and it is appropriate to undertake a reasonableness review at the completion of the project.167
While D.08-05-036 did not set policy regarding AFUDC for all long-term water projects, it is reasonable to rely on these previous determinations based upon the particular circumstances at hand and the type of financing being used to fund the project.168 It is clear that applying the authorized rate of return was determined to be the correct approach in this type of capital project, but it is also clear that ratepayers would be protected by a reasonableness review when the project was completed.
Here, Cal-Am is asking for both recovery of its authorized rate of return on the AFUDC account for Cal-Am facilities, and no reasonableness review. We cannot find that it is reasonable for Cal-Am to accrue both its authorized rate of return on AFUDC and recover capital costs up to $95 million without further reasonableness review. Assuming Cal-Am does not exceed the initial cost cap we have established today, we do not require reasonableness review of the Cal-Am facility costs before they are transferred into ratebase, and Cal-Am is essentially guaranteed recovery of these costs.
As DRA observes, "Already a significant departure from the long-standing regulatory concept of `used & useful,' Cal-Am's proposed new category of advice letters for placing project costs into rates prior to project completion would significantly mitigate almost all uncertainty and risk associated with recovery of spending on Cal Am facilities."169 We concur. Although the costs incurred will be tied up for some period of time, the ratemaking approach proposed by the Settling Parties allows the costs to be folded into rates semi-annually, as the project moves forward. This is a fair and equitable approach. Further, we find that Cal-Am should only charge and collect actual carrying costs. Under the current economic environment, we believe that the proposed AFUDC rates on the record would likely result in an under- or over-collection. Therefore, we believe that it is more appropriate to adopt an initial AFUDC rate that is more representative of current rates, and allow this rate to be trued-up to reflect actual carrying costs. Thus, we set the initial AFUDC rate at 4.00%. We direct the Settling Parties to comply with this modification and to revise the Settlement Agreement accordingly. We recognize that this is a significant modification to the Settlement Agreement, but we must ensure that ratepayers as well as shareholders are protected.
The Settlement Agreement provides that Cal-Am will file a Tier 2 advice letter twice a year to recover the costs of the Cal-Am only facilities.170 As envisioned by the Settling Parties, Commission staff would have 45 days to review the advice letter for "prudency" and the rates would go into effect, subject to true-up if the review could not be completed during that timeframe. DRA objects to the semi-annual filing, the description of what is entailed in the prudency review, and the true-up provision. Because we have established a capital cost cap on costs that can be recovered from ratepayers, we do not require the more extensive review on each filing.
We agree with Cal-Am and the Settling Parties that it is reasonable to allow semi-annual advice letter filings and that a true-up process is reasonable. This approach will provide some certainty as to cash flow, and can be adjusted during the prudency review process. Cal-Am has stated that it will provide a summary of costs and detail the expenditures made in the prior quarter.171 Cal-Am should also file a progress report and timeline that provides a detailed report on the permitting, construction, budget, timeline and progress report on each component of the Cal-Am facilities. As with the Regional facilities, we also require Cal-Am to update DRA and DWA on the design and refined cost estimates of the Cal-Am only facilities. Cal-Am should meet with DRA and DWA on a quarterly basis.
We agree with the Settling Parties that the ratemaking approach we authorize today eliminates the need for the Special Request 2 Surcharge authorized in D.06-12-040. No party objects to this change. As conceived by the Settling Parties, moving the Cal-Am facilities into rates as they are constructed will allow rates to "ramp up" prior to the revenue requirements that will ensue with the delivery of the product water. We note that Cal-Am has filed a petition to modify Special Request 1 Surcharge. We will address that petition for modification in a separate decision.
13.3. Additional Ratepayer Protections
if the Regional Project is Not Approved
At the request of the ALJ, DRA has proposed several additional protections for ratepayers if the Regional Project is unable to be permitted and constructed.172 First, DRA notes that under the Water Purchase Agreement, Cal-Am is responsible for reimbursement of MCWD's and MCWRA's costs and expenses incurred for the Regional Project, even if the Project is not ultimately built. In this case, DRA maintains that the $14 million in pre-effective date costs (identified in Exhibit 301, Exhibit D, and capped at $14 million in Exhibit C) should not be the responsibility of Cal-Am ratepayers. DRA suggests that if MCWRA or MCWD reject Commission modifications to the Settlement or the Water Purchase Agreement, then Cal-Am will incur additional expenses as Cal-Am develops a replacement project. If this occurs, DRA contends that it would be unreasonable for the Public Agencies to recover costs incurred to date, and indeed, disallowing recovery of these costs would provide the correct incentives to these agencies to adopt any modifications proposed by the Commission.
MPWMD goes further and suggests that certain pre-effective date costs should not be recoverable in any case. Both DRA and MPWMD recommend that the costs of MCWD's previously-planned stand-alone desalination plant, abandoned in pursuit of the Regional Project, should not be recoverable. MPWMD also argues that all pre-effective date costs should be properly documented and properly reviewed to demonstrate linkage to the Regional Project and should not include any attorneys' fees or costs for participating in Commission proceedings.173
DRA also proposes that Cal-Am shareholders should bear some responsibility to implement either the Moss Landing Project or the North Marina Project, if the Regional Project is not built. DRA compares this proposal to the 90/10 split between ratepayers and shareholders adopted in D.06-07-027, in which ratepayers and shareholders shared responsibility for cost overruns up to $100 million to implement PG&E's Smart Meter project. In DRA's view, such an approach would provide additional protection to ratepayers and would give Cal-Am an incentive to reduce required additional costs.
DRA also recognizes that Monterey County Code Chapter 10.72.030(B) prohibits desalination facilities from being owned by private entities. This ordinance was enacted in 1989. Because Cal-Am's 2004 application proposed that it own the desalination facilities, Cal-Am has both recognized the risk involved and also stated in Phase 1 that they did not view it as a problem.174 Hence, DRA concludes that any required efforts to overcome legal challenges to private ownership of the desalination facilities must rest with Cal-Am's shareholders.
Finally, while making it clear that DRA fully supports the development of a fair and equitable Regional Project, DRA has also responded to the ALJ's directive to brief the issue of alternatives the Commission should consider if the Settling Parties decline to accept modifications proposed by the Commission. In this case, DRA suggests that the judge allow up to 90 days for parties to develop "alternative arrangements" for a Regional Project.175 This approach would allow time for the Commission to convene workshops to discuss the modifications and allow parties to explore other possible approaches, such as the plant being owned by a Joint Powers Authority of the Monterey Peninsula Cities. If consensus cannot be developed after 90 days, DRA suggests that a CPCN be issued for the North Marina alternative.
This has been a long and contentious proceeding. We have provided many opportunities for the parties to attempt to work out their differences by convening two sets of facilitated cost workshops and by requiring that all parties participate in formal ADR sessions. While parties clearly have not resolved their differences, it is also clear that these opportunities have resulted in increased understanding about the definitions of terms and more precise and collaborative approaches to modeling and cost development. Despite many collaborative approaches, the parties appear to be bitterly divided over certain issues in this proceeding. The Public Agencies' recovery of pre-effective date costs is one such issue. Here, we must separate the facts from the rhetoric to render our determination.
The Public Agencies, in effect, contend that they have stepped into the shoes of Cal-Am, in order to fulfill the requirements of this public-private partnership to provide water on the Monterey Peninsula. No party disagrees that the Regional Project is the preferred approach, and no party disagrees that MCWD and MCWRA are required participants in the Regional Project.
While DRA and MPWMD contend that prior costs associated with MCWD's stand-alone desalination plant should be disallowed, MCWD asserts that this previously-planned plant was an important catalyst to the Regional Project. MCWD asserts that the Commission required its participation in this proceeding, and explains that its participation in the Regional Project dates back to the initial REPOG process. As MCWD sees it:
When a public agency undertakes a water project, it customarily recovers all of its reasonable, project-related development costs when it bonds or otherwise finances the project, with those costs ultimately being borne by ratepayers. That is just and reasonable because the costs recovered by the agency are part of the costs of the water supply project and hence the costs of providing the water. Notably, such project development costs do not normally include the costs of legal representation in a proceeding before the Commission, nor do they include the necessity of countless meetings and negotiations with other parties, including DRA, because public agencies are not normally required to appear before the Commission in proceedings like this one. MCWD and MCWRA should not be punished because they have partnered with CAW, a Commission-regulated water company, in developing the Regional Desalination Project and participating before the Commission in this proceeding.176
We stated in D.10-08-008 that we would make a final determination on the recovery of legal costs at issue in the Reimbursement Agreement discussed in A.09-04-015.177 DRA and MPWMD object to Cal-Am ratepayers funding the litigation costs of the Public Agencies. DRA contends that if the Regional Project is not permitted or constructed, Cal-Am ratepayers should not be required to fund any of the Public Agencies' pre-effective date costs. MPWMD contends that ratepayers should not be responsible for any of these costs, in any case.
As we noted in D.10-08-008, Cal-Am explains that the Commission has previously approved co-funding of projects with public agencies.178 For example, in D.06-11-050, we approved a special conservation surcharge to fund activities undertaken by MPWMD. The Commission has also authorized administrative costs of water utilities to be paid for by electric utility ratepayers.179 Although the amounts involved were much smaller, Cal-Am argues that just as the energy efficiency programs authorized for energy and water utilities ultimately benefited electric ratepayers, so too do the Public Agencies' administrative and legal costs benefit Cal-Am ratepayers because these costs are required to allow the development of the Regional Project.
We find that the Public Agencies' participation in the Regional Project is vital to the success of this project, and therefore, the pre-effective date costs incurred to date, including the legal costs, should be recoverable. The pre-effective date costs are included as a line item in the calculation of the most probable estimated cost included in Exhibit C to the Settlement Agreement, and are not expected to exceed $14 million, with approximately half of those costs incurred though year-end 2009 (Exhibit D to the Settlement Agreement). We cannot anticipate every contingency, but at this point, we would be reluctant to authorize recovery of pre-effective date costs greater than $14 million.
MCWD must provide detailed workpapers to demonstrate that all costs associated with its desalination plant project were reasonably incurred and are relevant to the Regional Project. These should be provided in the Status Reports. We expect that all costs included in the Reimbursement Agreement approved in D.10-08-008 will be repaid by the Public Agencies, as provided for in the Reimbursement Agreement. We will carefully review such requests if Cal-Am files an application for additional capital cost recovery and will expect thorough documentation and detailed workpapers to be provided.
We need not address the other proposals from DRA at this time. We are hopeful that with our approval today, the Regional Project can go forward without delay.
147 Exhibit 363, § 8 at 10; Attachments 3 and 4 to the Settlement Agreement filed on April 7, 2010.
148 As defined, the most probable capital cost with contingency includes base construction cost + post-effective date implementation costs + right-of-way land acquisition and easement costs + costs of environmental mitigation measures + project contingency of 25%. (DRA Opening Brief at 40.)
149 DRA Opening Brief at 47.
150 Cal-Am Reply Brief at 24, citing Exhibit 105 at 16-17.
151 Exhibit 204 at 20.
152 Exhibit 105 at 10.
153 Motion to Approve Settlement Agreement, filed April 7, 2010, Attachment 3 at 6.
154 Opening Brief of Cities of Seaside, Sand City, Monterey, Carmel-By-The-Sea, and Pacific Grove at 3.
155 Cal-Am Reply Brief at 26-27.
156 Exhibit 363., § 8.1.4 at 10.
157 Exhibit 363, § 9.4.3 at 14.
158 Exhibit 103 at 19.
159 Exhibit 103 at 4.
160 Note that Exhibit 103 at 4, Footnote 1 provides a correction to Section 9.1.2 of the Settlement Agreement.
161 DRA Opening Brief at 49, citing 12 RT at 1092.
162 Exhibit 103 at 17, citing Uniform System of Accounts for Water Utilities, Class A http://docs.cpuc.ca.gov/published/Graphics/83011.PDF.
163 The authorized return on equity for Cal-Am is currently set at 10.2%. For illustrative purposes, Cal-Am calculates the AFUDC for the Cal-Am facilities at 8.40%.
164 D.08-05-036 at 9.
165 Id.
166 Id. at 11.
167 Id. at 13.
168 D.08-10-019, denying rehearing of D.08-05-036, at 8.
169 DRA Opening Brief at 51.
170 General Order 96-B sets forth 3 categories of advice letters. Tier 1 advice letters are effective upon filing; Tier 2 advice letters are effective after staff review and approval; and Tier 3 advice letters are not effective unless the Commission issues a resolution so finding.
172 RT at 1767.
173 MPWMD Opening Brief at 30.
174 DRA Opening Brief at 55, citing 2 RT 71.
175 DRA Opening Brief at 55.
176 MCWD Opening Brief at 53.
177 An application for rehearing of D.10-08-008 is pending. Our determinations today in no way prejudge our adjudication of that application for rehearing.
178 D.10-08-008 at 17.
179 D.10-04-030 at 12.
