5. Analysis and Resolution of Issues

This proceeding commenced with the filing of a complaint. While a complaint filing typically proceeds to an adjudicatory proceeding,63 where the complainant has the burden of proof as noted by Defendants,64 the instant proceeding was categorized for rate setting.65 Both Complainants and Defendants came forward with evidence, and the record was further developed by a staff report, mooting any issue of which party bore what burden relative to making a prima facie case initially, or going forward thereafter, regarding proof.

The decision is made on the basis of the preponderance of evidence against the backdrop of the entire record to which both parties contributed.

Contrary to the contentions of Defendants, § 701.10 of the Pub. Util. Code does not apply to this rate setting, which has proceeded under § 2705.6(b). As Complainants correctly argue, § 701.10 expressly relates to "rates and charges established by the commission for water service provided by water corporations"66 and, by definition, a "mobilehome park that provides water service only to its tenants from water supplies and facilities that it owns, not otherwise dedicated to public service,"67 which is acknowledged by the parties to be the case here, "is not a water corporation."68 The narrow focus of Commission jurisdiction under.

§ 2705.6 is the determination, "based on all the facts and circumstances, whether the rates charged are just and reasonable and whether the service provided is adequate."69

Although the Commission's jurisdiction under § 2705.6 does not extend to septic systems, Sunbird's problems with its septic system70 have some bearing on this water rate setting proceeding. First, those problems motivated Sunbird's adoption of tiered water rates. Second, we must segregate water service expenses and revenues from septic service expenses and revenues (if any).

Defendants point out that the adoption of tiered rates was prompted by the need to reduce residents' water consumption, and thus waste discharges, to avoid, reduce, or mitigate septic system failures. They cite both the Uniform Plumbing Code's 250 g.p.d. per space discharge limit imposed by the Regional Water Quality Control Board71 and the Commission's policy of promoting water conservation through the adoption of increasing-block tiered rates for residential customers.72 Complainants contend that there is no indication that the Commission's water conservation principles apply to mobile home parks, as distinct from water companies, and that the 250 gallon per day (g.p.d.) standard should not govern where an extended family occupies a mobile home space.73

The objective to be served by tiered water rates is a legitimate factor to consider in determining whether those rates are just and reasonable. Further, § 2705.6, while granting only limited jurisdiction to the Commission over mobile home park water service, should not be read so narrowly as to prohibit the promotion of water-use efficiency and conservation. The lack of effective enforcement of rules at Sunbird against individual washing machines and excessive discharges into the septic system suggest that tiered water rates must be carefully constructed if they are to achieve their stated purpose, without unintended consequences.

We adopt a two-tiered rate design (below).

An initial joint position74 that there is combined billing for water service and sewer service at Sunbird dissolved over the course of the proceeding. Complainants came to argue that all of the pre-November 2008 billing evidence reflects water charges alone, not combined water-septic charges, and that the selective billings thereafter containing the "water-septic" language cited by Defendants reveal a late effort to bolster the Defendants' position that there has been combined billing.75 Defendants stand by their position that all water-related billings have been combined water-septic billings.76

This factual issue of whether or not there is combined billing is relevant only to the extent that it bears on the identification and allocation of expenses and revenues in the process of applying (below) the ROM method of rate setting. The preponderance of evidence shows that combined billing was not an operative fact, but more likely a revised characterization arising in the wake of the complaints voiced by Complainant Hernandez. Both the April 2004 and the May 2006 written notices to residents regarding tiered rates bear the subject "water rates," and refer to "water charges" and "water usage" in the context of metered quantities of water.77 The pre-December 2008 water bills introduced in evidence reflect only water service billing, not combined billing.78 Defendants cite bills from December 2008, January 2009, June 2010, August 2010, December 2010 and January 2011 that have the phrase "water/septic" at the head of the column containing meter reading dates.79 Complainants citation of Civil Code § 798.41, however, supports the conclusion that a clear separation of billing for those utility services being charged in addition to rent is required in mobile home parks. Here, any intent on the part of Sunbird to charge for septic services outside the rent and in conjunction with water charges was not communicated in a timely or effective manner. Accordingly, no portion of the itemized revenues related to water service are being allocated to septic service in the application of ROM below.

The septic-related expenses have been segregated from the water-related expenses in the Report. After review, we find the segregation presented in the Report to be reasonable.

The Report properly chose to apply the (ROM methodology set out in D.92-03-093,80 given that insufficient information was supplied by Defendants concerning plant or rate base for the return on rate base method to be used. Under the ROM method, a percentage rate (i.e., rate of margin deemed to provide a reasonable return) is determined annually (by the Division of Water and Audits);81 it is applied to the operating expense; and the resulting figure is added back on to the operating expense to produce the revenue requirement. For example, if the ROM is set at 25% and the operating expense is $10,000, the revenue requirement would be $12,500 for the relevant year. (Total revenues received above or below the requirement would represent overcollections or undercollections, respectively.)

The parties do not dispute that ROM is the appropriate method to apply in these circumstances. As noted earlier, the Defendants disagree with how the Report determines the makeup of operating expenses and of revenues, respectively. Defendants assert that the Report excludes or inadequately considers regulatory expenses, management expenses, water testing, and depreciation. Defendants also assert that only 13.6 percent of the water-related portion of the billing revenue should be ascribed to water service. We resolve these issues below in Sections 5.4.2 through 5.4.9.

At issue is whether Defendants' legal expenses incurred in this proceeding should be included within its recorded (for 2010) or estimated (for 2011 and 2012) operating expenses for purposes of calculating the revenue requirement. Reported and estimated legal expenses constitute Defendants' largest operating expense for each of those years.82 Defendants infer that the inclusion of regulatory expenses as a category in a data request by staff83 may allow "unpredictable regulatory costs," incurred because of the customer complaint provision of § 2705.6, to be part of the operating expenses to which ROM is applied.84 Requests for information, however, carry no determination as to the ultimate eligibility, or lack thereof, of that information for particular accounting treatment. Defendants cite D.03-05-079 (Matthews) for the proposition that legal costs prompted by one mobile home park tenant's complaint are recoverable in the rates applicable to all tenants.85 In Matthews, however, unlike here, there was no evidence that the water rates in question were unjust or unreasonable, raising concerns about the impact on other tenants of groundless claims by a single tenant.86 Here, Sunbird's overcollection from the residents led to a legitimate complaint that prompted a ratemaking proceeding. To allow the ROM to be applied to legal expenses incurred directly in the defense of indefensible rates and water contamination claims would not be just and reasonable as it would reward the act of overcharging.87 The Report correctly excluded them from operating expenses in the calculation of the revenue requirement.

The Report recommends against allowance of management expense for 2010 because the $1,502 claim lacked specifically-tracked time sheets, and expected water-related activities, such as billing, meter reading and water testing, are charged separately.88 Defendants state that the claim was based on a ratio of water expense to total park operating expense, that precise tracking is not practical in "a small, rural, mobilehome park such as Sunbird," and, accordingly, that "Sunbird should not be penalized for being a small operation."89 While the claim is an estimate and lacks documentation expected of a large water companies, some level of water-related management expenses outside those separately charged seems both unavoidable and reasonable. Many of the water management functions are separately expensed (e.g., meter reading, water testing, water billing), however, so we think a reduction in Sunbird's claim is in order and find $600 to be a reasonable allowance for the management expense.

Because Sunbird provides both POU filtered water and water delivered directly to resident's sub-meters, it now has water testing expenses for the unfiltered well water and the POU filtered water. Should both types of water testing expense be included in the operating expenses to which the ROM is applied? The partial settlement agreement expressly states that "Sunbird shall make the filtered water ... available to the tenants, at no additional charge."90 In this context we construe "additional charge" to refer to a separate and distinct fee, not an incremental increase within the general rate structure. Therefore, the expenses incurred to monitor the quality of the water as required by state regulations91 can be included in Sunbird's revenue requirement and in the resulting water rates. Since the testing of the POU filter unit is a requirement once such a filter is installed, that full expense should be allowed, not reduced as recommended in the Report. This allowance results in an annual water testing expense of $3,000 for 2011 and 2012.

The Report allocates 13.6 percent92 of the meter reading expense to water service whereas Defendants seek a 100 percent allocation to water service, observing that the "meters measure water going into each mobilehome, and not wastewater going into the septic system..."93 Defendants' position is undercut by the importance they ascribe elsewhere to the 250 g.p.d. per space limit on discharges of the resulting waste water. The metering of the water inflow appears to be the sole means by which per-space wastewater discharge can be estimated and monitored at Sunbird. The water meters thus serve a dual purpose, allowing for a reasonable degree of proration between water and septic expenses. Under the circumstances, for meter reading expense, we will use the 13.6 percent allocation to water service that is followed generally in this decision as a reasonable basis for the recognition of the dual purpose and a proration of water and septic expenses.

Defendants assert that the Report does not, but should, include non-income taxes in operating expenses. Defendants attempt to quantify such tax liability not by providing documentation of taxes billed and paid but by invoking a now-dated replacement value estimate provided by a licensed contractor.94 We do not include non-income taxes in operating expenses here due to the speculative nature of the claim.

The information provided by Defendants concerning depreciation expense likewise is not sufficient to allow for recognition of this expense in the calculation of operating expense. The sole evidence presented is a licensed contractor's estimate of $200,000 for the aggregate replacement value of the water facilities.95 Lacking reliable evidence as to the value and amortized life of individual assets, the inception and duration dates for amortization purposes, or how those assets were treated for tax purposes, no depreciation expense is allowed in the ratemaking here.96

As resolved above in Section 5.3.2., the segregation of water service and septic service in this decision is based on our finding that water service has been billed as a separate charge whereas septic service has been covered by the rent paid by the residents. Accordingly, the revenue from payment of the water charges is allocated here entirely to water service.

The recommended ROM for Class D utilities for 2010 and 2011 is 23.04 percent97 and 24.89 percent,98 respectively. We extend the 24.89 percent to 2012 for purposes of this decision. The total operating expenses, determined above, to which those percentages apply are $10,709 (2011) and $9,768 (2012). This results in the following revenue requirement determination: $13,374 (2011) and $12,199 (2012). We are allowing for an accounting of 2012 expenses and revenues in a balancing account to support the possibility of an adjustment by request letter.

Under the revenue requirement calculated above, the water revenues due from Sunbird residents are reduced. The issue then becomes, first, how to allocate each year's revenue requirement between a monthly flat service charge (connection charge) and a monthly quantity charge ( for volume of water consumed), and, second, whether and how to subdivide the quantity charge portion into graduated tiers.

The Report recommends that the fixed monthly service charge be set at $7.98 for 2011 and $5.90 for 2012 (in contrast to the $7.36 charge previously in effect and maintained in the May 2010 interim decision). We find, however, that in light of the revenue requirements we are finding appropriate for those years a more balanced and reasonable allocation to this charge for 2011 is $7.25, and for 2012 is $6.00. (See Tables 2 and 3 below.)

We find that Sunbird, in its search for a solution to recurring septic system failures, has overburdened the water rate structure. Neither the third tier in effect from 2002 through mid-2006, nor the third and fourth tiers in effect from mid-2006 until the Commission's interim decision in May 2010, appears to have prevented the unauthorized washing machine use faced by Defendants. Further, the rate differentials between the second and third tiers (1,818 percent) and the third and fourth tiers (200 percent) are excessive and unreasonable. The water rate structure should not bear the weight of deficient enforcement. Two tiers, as the Report recommends, with a 44.44 percent differential between those tiers, when combined with effective enforcement against unauthorized washing machines, should be sufficient in this setting to provide an incentive against waste.

Table 2: Comparative Rate Schedules

The Report revealed that, under the rates set in the interim decision, the average monthly water bill for residents in 2010 based on average number of billed connections was $23.74. Under the rate design and rates ordered in this decision, the average monthly bill per estimated billed connection for 2011 and 2012 is projected to be $13.96 and $12.71, respectively.

The interim decision in this proceeding (D.10-05-020),99 preserved an opportunity for Sunbird to recover revenues not billed as a result of the suspension of Tier 3 and Tier 4 rates in the event there was a later determination that Sunbird collected less than a reasonable level of revenues due to that suspension. We find that, but for the interim decision, Sunbird would have overcollected $7,209 in 2010, which represents a 31.63 percent return rather than the 23.04 percent ROM authorized for 2010.100 This means there is no basis for recovery of unbilled revenues for 2010. We estimate that, but for the interim decision, Sunbird would have overcollected $9,771 in 2011, which would represent a 42.86 percent return rather than the 24.89 percent ROM authorized for 2011.101 For 2010, Sunbird overcollected a total of $1,807 for a return of 11.47 percent rather than a return of 23.04 percent from ratepayers.102 For 2011, Sunbird is expected to undercollect by $1,312, which represents a negative return of 10.93 percent loss rather than the 24.89 percent positive return authorized for that year. The net overcollection for 2010 and 2011 will be $495103 or $6.19 per average billed connection. Under those circumstances, a refund of that dollar amount to ratepayers would be in order. Through balancing accounts, discussed next, adjustments can be made for under or over collections occurring in 2010 through 2012 based on actual operating expenses and revenues.

Sunbird should reconcile the actual operating expenses and revenues for 2011, carrying forward the net amount into 2012. Sunbird should establish balancing accounts for 2012, to record actual operating expenses and revenues.104 Sunbird is directed to file a letter with the Director of the Commission's Division of Water and Audit, at the end of 2012, or upon the completion of the connection to the District, whichever occurs first, requesting an adjustment for over or under collections in accordance with actual operating expenses and revenues.105

Claimant Hernandez' claim for restitution in the amount he alleges was charged in excess of just and reasonable rates, from June 2006 through the end of his tenancy in December 2008, poses the issue of whether § 2705.6 allows for the retroactive remedy of rebating rates. Complainants note that § 2705.6 was read liberally enough in the December 22, 2010 assigned Commissioner's Ruling and Scoping Memo to authorize a Commission award of rebates.106 Duque contains a statement that can be reasonably interpreted as viewing § 2705.6 as lacking such authority.107 Toward the end of the evidentiary hearing the assigned ALJ asked the parties to brief108 the issue of the Commission's ability to make refunds for the time period before the filing of the Complaint. The parties duly briefed the issue109 but only one of the decisions cited in that briefing, Estate of Jessie Henderson v. Bonita Paradise, D.11-02-024 (denying a hearing of D.10-09-002), supports restitution in the context of wrongful billing for utilities in a mobile home park. Denying a claim for damages attributable to non-utility service fees, the Commission in Henderson did order restitution of sums paid for utilities, including water, in the wake of a customer's death.110 The decision in Henderson can have no precedent value here because it was the result of an Expedited Complaint Procedure.111

The narrower reading of § 2705.6 to exclude reparations is more compatible with the Commission practice generally of regulating rates only prospectively, giving both the provider and user of utility services advance notice of the parameters of just and reasonable rates, allowing reparation where the previously authorized and reasonable rates were exceeded.112 The Commission's jurisdiction appears only upon the lodging of a complaint about rates or service. The statutory language gives the Commission more limited jurisdiction over mobile home parks compared to public utilities, also weighs against granting restitution here under the guise of implied authority, notwithstanding language to the contrary in the earlier assigned Commissioner Ruling and Scoping Memo. Due process concerns further weigh against the retroactive application of rates to support an award of restitution.

The Hernandez restitution claim is denied. While retroactive water bill relief for one resident, Hernandez, is not given here, water rate relief for Sunbird residents as a class is being given, where appropriate, for water service received after the December 2009 filing of Hernandez' formal complaint.

The partial settlement agreement, Appendix A to this decision, is "reasonable in light of the whole record, consistent with the law, and in the public interest,"113 so the joint motion for its approval is granted. It provides to Sunbird residents a contract right114 to point-of-use (POU) filtered water without charge pending the planned connection to the public water supply of the District. It furthers the public interest by providing a reasonable framework for resolution of the water quality issues pending connection to a water supply that is in compliance with safe drinking water standards.

Defendants represent that under its agreement with the District115 Sunbird's public water supply permit will be surrendered to Riverside County, the on-site water distribution pipelines will be disconnected from the wellhead and connected to District facilities, and the District's water charges, billed to Sunbird, will be passed through to the sub-metered residents of Sunbird. Should the connection to the District not come to pass for any reason, leaving the local well water system in use, the Commission's jurisdiction over complaints by Sunbird residents under § 2705.6 would continue.

As specified in the partial settlement agreement, Sunbird must continue to provide its residents water that satisfies safe drinking water requirements using the installed point of use filtration system. We also order Sunbird to continue to have bottled water available to residents at cost on the premises. Notice of the availability of filtered water through the filtration system and of bottled water must be posted in a conspicuous area on the premises in English and Spanish. Such notice should also be included in the monthly water bills to Sunbird residents. Finally, Sunbird must take all reasonable precautions to prevent any contamination of the well water by the septic system.

63 In one document, ALJ Weatherford misspoke and referred to the proceeding as an "adjudication," Ruling of February 17, 2010 at 3.

64 Defendants' Opening Brief, at 14, citing Matthews v. Meadows Management Co., D.03-05-079 at 3. Matthews is distinguishable because it was adjudicatory while this proceeding is rate setting.

65 The December 8, 2009, Instructions to Answer served on Defendants stated expressly that the complaint was being categorized as "ratesetting." That categorization was understood by Defendants at the Prehearing Conference, R.T. at 18. The mobile-home-park-wide nature of the water rate issues posed by the complaint was described in the Assigned Commissioner's Ruling and Scoping Ruling that confirmed the rate setting categorization and denied Defendants' motion to dismiss Complainant Hernandez from the proceeding. Assigned Commissioner's Scoping Ruling and Memo at 3, para. 3.

66 § 701.10, emphasis added.

67 § 2705.6(a), emphasis added.

68 Ibid., emphasis added.

69 Ibid.

70 See e.g., Prepared Testimony of James Martin, Defendants' Exh. 201 at 3-4.

71 Defendants' Opening Brief at 1-2.

72 Complainants' Reply Comments, at 3, to Defendants' Comments on Supplemental Report.

73 Complainants' Opening Brief at 12.

74 In the October 29, 2010 Joint Case Management Statement, at 2, the Parties said: "Water and sewer are billed together, i.e. one combined charge representing both services." At the Prehearing Conference on November 4, 2010, Defendants' counsel stressed that the "combined rate ... can't be separated out into two different rates" and Complainants' counsel, noting the Defendants' position, stated that the combined billing language was "left in the joint statement but we still consider it a water rate issue." R.T. at 6-7.

75 Complainants' Opening Brief at 24-27.

76 Defendants' Opening Brief at 19.

77 Report, Appendix E.

78 Complainants' Exhs. 2 (at 14-66), 12 (at 213, 215-220), 32 (at 439), 33 (at 442), 34 (at 445), 35 (at 448-449), 36 (at 452-455); and Defendants' Exh. 204 (at 14, 24, 38 and 44).

79 Defendants' Exh. 207 at 3 and Ex. 1.

80 In D. 92-03-093, effective April 30, 1992, the Commission adopted the operating ratio method of ratemaking as an alternative to the rate of return method on rate base for Class C and D utilities. (See Ordering Paragraph No. 8 of D.92-03-093.) Given the similarity in size between Class D companies (500 service connections or less) and Sunbird (87 service connections), Sunbird's operations can be considered analogous to Class D water utilities' operations for this purpose.

81 The rate of margin includes an allowance for a reserve to be used for replacement of plant and new capital expenditures. (See D.92-03-093.) This benefit designed for Class C and D utilities is being accorded to Sunbird here even though there is no evidence that Sunbird, not being a public utility, has or will set aside a reserve.

82 $27,000.

83 Defendants' Comments on Supplemental Staff Report at 3.

84 Defendants' Opening Brief at 25-26.

85 D.03-05-079 (Matthews v. Meadows Management ) at 4.

86 Id. at 9: "We therefore caution those inclined to file a complaint challenging the rates for a small system such as Meadows' that they should be prepared to make an adequate evidentiary showing, in fairness to other tenants."

87 It is worth noting that complainant mobile home park residents proceeding under § 2705.6 do not qualify under existing law to be reimbursed for advocate's fees and costs within the Commission's Intervenor Compensation Program because no public utility is involved. (See § 1802 limiting compensation to proceedings involving public utility corporations.)

88 Report at 10.

89 Defendants' Opening Brief at 26.

90 Partial Settlement and Mutual Release Agreement at 2, appended here as Appendix A.

91 AB 2515 (Perez), finding that the "arsenic groundwater problem in the southeastern Coachella Valley in Riverside County is largely naturally occurring and is creating barriers to accessing safe drinking water," mandated that the State Department of Public Health develop emergency regulations to, among other things, govern point-of-use (in lieu of centralized) treatment of water in the small, unincorporated communities of that area. § 116380, Health and Safety Code. Those regulations (which went into effect on December 3, 2010, and are to remain in effect until the earlier of January 1, 2014, or the effective date of regulations adopted pursuant to Health and Safety Code § 116380(a)), require at a minimum a point-of-use monitoring protocol (for the first two years) that involves quarterly source water monitoring and, after installation-day sampling, monthly POU effluent monitoring. 22 CCR § 64418.5(a). On February 9, 2011, the County of Riverside Department of Environmental Health issued an amended domestic water supply permit (No. 3301755) to Sunbird, on an interim approval basis and within the framework of those regulations, for a point-of-use arsenic treatment unit. The permit, at condition No. 4 on page 3, requires:

92 The Report at 9, notes:

The Report, however, disagrees with Sunbird's position that the 13.6% factor should be applied to water revenues, as opposed to water expenses.

93 Defendants' Opening Brief at 27.

94 Def. Exh. 208, at 2. See Defendants' Opening Brief at 27-28.

95 Def. Exh. 207 at 4.

96 Depreciation commonly is not a consideration in the application of ROM to small water companies where rate base and the value of assets do not determine the return allowed the provider of services.

97 "Rates of Return and Rates of Margin for Class C and Class D Water Utilities," Memo from Rami Kahlon and Kayode Kajopaiye to the Commission, Dated March 1, 2010.

98 "Rates of Return and Rates of Margin for Class C and Class D Water Utilities," Memo from Rami Kahlon and Kayode Kajopaiye to the Commission, Dated March 1, 2011.

99 At 8-9 and 13-14.

100 See Table 3, Row 32 and 33, Col. c.

101 See Table 3, Rows 32 and 33, Col. d.

102 Sunbird overcollected $2,975 for January 1 through May 7, 2010 and undercollected $1,168 after the suspension of Tiers 3 and 4 rates on May 8, 2010. See Table 3, Lines 32 and 33, Cols. e and f.

103 Net overcollection is $495 based on overcollection of $1,807 for 2010 adjusted for undercollection of $1,312 for 2011.

104 Sunbird is encouraged to consult with the Commission's Division of Water and Audits for guidance in establishing the balancing account. The balancing accounts need not be segregated bank accounts.

105 One balancing account will match for that particular year recorded expenses with authorized expenses as set forth in Table 3. Another will match the authorized revenue (revenue requirement) with actual revenue for that particular year. The review by the Division of Water and Audits of Sunbird's letter requesting an adjustment should include a determination of whether the expenses incurred were reasonable. The balancing account and adjustment process adopted here is designed to meet the circumstances of this particular proceeding and is not intended to have precedent value for other proceedings arising under § 2705.6.

106 Assigned Commissioner's Ruling and Scoping Memo at 9.

107 D.08-01-002 at 3.

108 R.T. at 189-190.

109 Complainant's Opening Brief at 40-41; Complainant's Reply Brief, at 35-39; Defendant's Opening Brief, at 28-30.

110 Restitution of $217.55 for water, gas and electric charges was ordered in D.10-09-002, at 8 and 9, Ordering Paragraph No. 1. In D.11-02-024, at 10, leaving that order in effect, the Commission stated: "It is only within our power to order restitution for improper charges relating to public utility service."

111 "Decisions rendered pursuant to the Expedited Complaint Procedure shall not be considered as precedent or binding on the Commission or the courts of this state." Rule 4.5(i), Rules of Practice and Procedure.

112 See Public Utilities Code Section 734 which applies only to a "public utility."  Because Sunbird is not a public utility, this section is inapplicable. Furthermore, the Commission's authority to grant remedies is limited to "rate relief," and water supply, facility and service improvements by PU Code Section 2705.6(c).

113 Rule 12.1(d).

114 Partial Settlement and Mutual Release Agreement, Paragraph 3 at 2, Appendix A to this decision.

115 See Agreement between Coachella Valley Water District and

James M. Martin and Betty A. Martin, Co-Trustees of the Martin Family Trust, dated

March 16, 2011, affixed to Report as Attachment G.

Previous PageTop Of PageNext PageGo To First Page