2. Background
On December 15, 2005, the Commission adopted a Water Action Plan to be used as a roadmap for water polices and priorities in response to increasing statewide concerns about water quality and supply and the Commission's desire to implement innovative solutions to water problems. Innovative solutions include adoption or modification of quality and supply approaches being implemented in the energy and telecommunications sectors as well as strategies being used by water agencies and entities not subject to Commission jurisdiction. The 2005 Water Action Plan identified four key principles: (1) safe, high quality water, (2) highly reliable water supplies, (3) efficient use of water, and (4) reasonable rates and viable utilities.
Building off of these principles, the Commission developed six objectives, each with a series of actions that the Commission may consider to advance each objective. These objectives are to: (1) maintain highest standards of water quality, (2) strengthen water conservation programs to a level comparable to those of energy utilities, (3) promote water infrastructure investment, (4) assist low income ratepayers, (5) streamline Commission regulatory decision-making, and (6) set rates that balance investment, conservation, and affordability.
By initiating this OIR, we focus on this sixth objective of setting rates that balance investment, conservation, and affordability, with a focus on multi-district water utilities. We recognize that, while a core principle of establishing rates is to maintain rates that are "just and reasonable," the application of this core principle (and the sixth objective of the Water Action Plan) can be challenging.
The following table shows, by utility, the number of districts with separate revenue requirements and tariffs that currently exist.2
Multi-District Water Utilities |
Districts |
California-American Water Company |
6 |
California Water Service Company |
23 |
Del Oro Water Company |
173 |
Golden State Water Company |
9 |
San Gabriel Water Company |
2 |
Among the actions listed to advance this objective is to consider the development of policies to subsidize high cost areas, either through some variation of a "High-Cost" fund or through consolidation of districts and rates. The Commission recognized that there can be a significant difference in the cost of providing safe, reliable, and adequate water in different geographical areas. In some areas, charging the full cost of providing water service could result in either rates that are unaffordable to many customers in the region or in rate shock where the price increases by a large amount.
In the past, the Commission occasionally has implicitly subsidized customers in higher cost areas by keeping their rates relatively low while raising the rates to customers in lower cost areas. This practice is called "regionalization" or "consolidation of rates." In the Water Action Plan, the Commission stated that it would determine whether and when cross-subsidization between customers is justified. It suggested that, generally, cross-subsidization may be justified when the benefits, including lower rates for customers in high cost areas, exceed the costs, such as higher rates for customers in lower cost areas and less-efficient management of water resources). The Commission stated that any subsidies should be explicit, so that customers are aware of the Commission's policy and the impact of that policy on rates.4
As part of advancing the sixth objective in the Water Action Plan, the Commission will consider mechanisms such as a "High-Cost" fund or consolidating districts and rates within the multi-district water utilities. In this proceeding, the Commission will consider these mechanisms on a general policy basis and will not consider the application of the mechanisms to a specific multi-district utility. To the extent this Rulemaking results in the adoption of new mechanisms, utilities can include requests to utilize these mechanisms in their respective general rate cases or other appropriate rate-setting applications.
2 Except for Del Oro Water Company, each of the multi-district water utilities also allocates common general office investments and expenses to their various districts.
3 Fourteen of Del Oro's districts are identified in Resolution No. W-4804 dated November 2, 2009, Del Oro's acquisition of another three water systems was approved by the Commission in D.11-03-016.
4 Water Action Plan of December 15, 2005, p. 21. The Commission approved an updated Water Action Plan in October 2010. The 2010 Water Action Plan retained the same principles and objectives identified in the 2005 plan.
