5. Discussion of the Settled Issues Approved by This Decision
All parties to the proceeding received notice of the settlement conference. Cal-Am, DRA, TURN, NRDC, the Monterey Peninsula Water Management District (Monterey Peninsula), Mark West and the City of Bradbury participated in the all-party settlement conferences. However, only Cal-Am, DRA, NRDC, and TURN are signatories to the various partial settlement agreements.
5.1. Customers, Non-Revenue Water, and Operating Revenues
The table below represents the settlement between the parties for the total number of customers of all types, non-revenue water,2 and operating revenue for all districts for test year 2012.
Table 1
Test Year 2012 |
Customers |
Non-revenue Water (ccf) |
Operating Revenues |
Larkfield |
2,428 |
28,717 |
$2,491,281 |
Los Angeles |
27,900 |
598,083 |
$23,071,877 |
Monterey |
43,389 |
580,219 |
$45,344,403 |
Sacramento |
57,373 |
1,841,304 |
$38,926,558 |
San Diego |
20,887 |
130,600 |
$16,658,521 |
Ventura |
20,834 |
416,193 |
$25,874,642 |
Average consumption per customer is included in this portion of the settlement. However, because each district has various types of customers, the aggregate amounts for each district are not meaningful and therefore are not included in the table.
The settlements do not provide for any assumed level of improvement in non-revenue water for the duration of this rate case cycle and the totals are based on Cal-Am's 2009 actual non-revenue water. However, as discussed in section 6.7., the parties have agreed to develop non-revenue water action plans to reduce non-revenue water in all Cal-Am's districts. Those plans will be presented in Cal-Am's next general rate case. For that reason we find the settlements' non-revenue water for the districts other than Monterey are in the public interest. The non-revenue water amounts for the Monterey County District are discussed in more detail in section 7.6.
The settlement on the consumption figures requires that Cal-Am, NRDC, TURN, and DRA must agree to a rate design for each district. In the event no rate design agreement is reached, DRA reserves the right to withdraw from the forecasted consumption agreement and has agreed not to oppose the original forecast requested by Cal-Am in its application.
5.2. Operations and Maintenance
Of the 34 operations and maintenance accounts contained in the settlement, the parties found Cal-Am's initial estimates for 29 of the accounts reasonable. For the other five accounts (purchased water, purchased power, transmission and distribution maintenance, meter reading and uncollectible expense), the parties adopted a compromise.
In its comments on the settlement regarding operations and maintenance Account 711 (Source of Supply - Wells), Mark West recommends that more current data be used to evaluate the need for the Faught Road Well in the Larkfield District. Mark West suggests that any supply deficit be addressed by first seeking additional supply from the Sonoma County Water Agency and that Cal-Am seek a service connection moratorium in compliance with General Order 103-A.
In the settlement, Cal-Am agrees to actively pursue purchasing additional water from the Sonoma County Water Agency rather than constructing the Faught Road Well. Additionally, Cal-Am filed A.11-09-016 on September 23, 2011 seeking a service connection moratorium in the Larkfield district. The December 12, 2011, revised scoping memo established a Phase 2 in the proceeding and A.11-09-016 was consolidated with the proceeding. Cal-Am's requested service connection moratorium in the Larkfield District will be addressed in Phase 2.
5.3. Adjustments to the General Office Revenue Requirement
DRA recommended 16 adjustments to Cal-Am's initial general office expense estimates, which in turn reduced the general office revenue requirement to be recovered from ratepayers. The table below summarizes the settlement on 12 of the recommended adjustments. The other four adjustments to the general office revenue requirement remain in dispute.
Table 2
Test Year 2012 |
Cal-Am |
DRA |
Settlement |
Incentive Compensation Recovery |
$1,333,640 |
$532,435 |
$666,820 |
Business Development Expense |
$138,670 |
$0 |
$0 |
Charitable Contributions |
$62,988 |
$0 |
$0 |
Legislative and Political Influence |
$12,670 |
$0 |
$0 |
Administrative Expense |
$84,624 |
$0 |
$22,066 |
Sales & Marketing |
$81,232 |
$0 |
$0 |
Post-Retirement Benefits Other than Pensions |
$1,194,988 |
$741,652 |
$800,327 |
Employee Savings Plan |
$409,578 |
$366,088 |
$409,578 |
Employee Expense |
$274,747 |
$167,952 |
$221,249 |
Insurance |
$2,510,301 |
$1,755368 |
$1,755,368 |
Software & ITS Depreciation |
$1,551,018 |
$1,384,761 |
$1,551,018 |
5.4. Conservation
The table below summarizes the settlement on a 3-year conservation budget for Cal-Am's Monterey County District and Monterey Peninsula.
Table 3
District |
Cal-Am |
DRA |
Settlement |
Monterey County District |
$4,285,495 |
$3,020,627 |
$3,055,375 |
Monterey Peninsula |
$1,660,200 |
$1,112,200 |
$1,135,2003 |
Parties also agreed to continue the Cal-Am -Monterey Peninsula joint conservation report and the water conservation program annual summary report for each district indicating water savings per year, per measure and lifetime measure of savings for each program. Parties also agree to include 10 random audits per year for each program in the annual report.
The table below summarizes the annual conservation budget for Cal-Am's districts other than Monterey.
Table 4
Test Year 2012 |
Cal-Am |
DRA |
Settlement |
Larkfield |
$53,321 |
$29,386 |
$29,386 |
Los Angeles |
$374,922 |
$138,877 |
$173,877 |
Sacramento |
$800,243 |
$318,310 |
$455,200 |
San Diego |
$282,654 |
$139,277 |
$153,277 |
Ventura |
$524,446 |
$215,122 |
$234,122 |
The conservation budgets for Larkfield, Los Angeles, Sacramento, San Diego, and Ventura will be increased by a combined labor/non-labor weighted escalation rate for inflation of 1.0266 for years 2013 and 2014.
The parties agree to continue tracking conservation expenses in a capped, one-way balancing account and refund to ratepayers any unspent funds on December 31, 2014.
5.5. Utility Plant in Service
This section of the settlement resolves, among other issues, escalation rates, overhead, recurring projects, in-progress projects, new investment projects, advice letter projects, and memorandum accounts. The resolution of each issue was achieved by one party accepting the position of another or by a compromise between the two positions.
In its comments on the settlement, Mark West fundamentally agrees with the settlement on the issue of a special facilities fee or connection fee for the Larkfield District, but suggests that certain conditions be added. Mark West recommends that the Special Facilities Fee be implemented as soon as possible and that new customers pay for constructing the Faught Road Well since Mark West believes the Faught Road Well is unnecessary.
In the settlement, the parties agree that a connection fee should be implemented as soon as possible and that the monies collected would be directed at funding new capital projects.
5.6. Special Requests
The settlement resolves 29 of Cal-Am's 36 special requests; 24 were settled, three were withdrawn, one has been moved to Phase 2 of this proceeding and one is no longer in dispute as the issue was settled in another proceeding.4 Some examples of the settled special requests are described below.
The parties agree that the Los Angeles County, Sacramento and San Diego County Districts change from bi-monthly to monthly metering reading, adding five meter reader positions and including all payroll and benefit expenses. Cal-Am agrees not to include the cost for mailing service, bill forms and bank service charges in the revenue requirement for this proceeding.
In its comments on the settlement between Cal-Am and NRDC, DRA initially opposed the settlement on Special Request #1. However, during settlement talks Cal-Am provided sufficient analysis to satisfy DRA that the benefit was near or equal to the cost. DRA ultimately incorporated this provision into the later settlement it reached with Cal-Am and NRDC. DRA also ultimately incorporated the section regarding Non-Revenue Water Action Plans into the settlement it reached with Cal-Am and NRDC.
This issue was included in the partial settlement agreement between Cal-Am and NRDC. DRA initially recommended rejection of the issue, but in the more comprehensive settlement between Cal-Am, DRA and NRDC, the issue was settled.
5.6.2. Special Request #6 - Continue WRAM/Modified Cost Balancing Account (MCBA)
The parties agree that Cal-Am shall continue all WRAMs and MCBAs under the terms of the previously authorized pilot programs. The parties agree to abide by any decision in Application (A.)10-09-017, the currently open proceeding to determine the amortization of WRAM-related accounts. The parties further agree that Cal-Am shall close the Incremental Cost Balancing Accounts in the San Diego County and Ventura County Districts and shall establish MCBAs in these districts to be netted with any WRAM balances prior to amortization in the same manner as the WRAM/MCBAs in the Los Angeles and Larkfield districts.
The settlement on this issue was developed prior to Cal-Am filing a motion to withdraw from A.10-09-017. On December 12, 2011, a revised scoping memo was issued establishing Phase 2 of this proceeding that will include a review of Cal-Am's WRAM/MBCA mechanisms. On April 30, 2012, the Commission issued D. 12-04-048 which, among other things, granted Cal-Am's motion to withdraw from A.10-09-017. Therefore, the settlement on this issue is moot and a decision in Phase 2 of this proceeding may revise Cal-Am's WRAM/MCBA program.
The settlement proposes that $223,000 in main fixtures and appurtenances costs be allowed for recovery in rate base in utility plant in service. The settlement states that 90% of the costs will be booked now with 10% booked once Cal-Am agrees to pursue a good faith effort to resolve the potential litigation to recover expenses from responsible third parties. The documentation of Cal-Am's good faith effort is to be included in a Tier 3 advice letter to recover the expenses for the hillside repair and clean-up. The expenses will be amortized over three years.
5.6.4. Special Request #9 - Eliminate Distribution System Improvement Charge (DSIC) in the Los Angeles District
The parties agree to eliminate the DSIC in the Los Angeles District. DRA recommends that the Commission require Cal-Am to report and make available to the Commission the results of the American Water Works Company currently ongoing research project regarding predicting main failures. The parties also agree to support and advocate for methods to improve Cal-Am's data collection methods to utilize failure prediction models already commercially available.
5.6.5. Special Request #10 - Duarte Irrigation System Water Use Restriction
The parties agree that day and time of use restrictions will become effective upon Cal-Am filing a Tier 1 advice letter and that for Test Year 2012, Cal-Am shall only issue warnings to customers who violate the day and time of use restrictions. In 2013 Cal-Am may impose penalties if peak use in 2012 continues to necessitate supplementation of the system with potable water.
The parties agree to Cal-Am's request to eliminate the Public Fire Hydrant Tariff for the Toro service area as there are currently no customers on this tariff. Parties agree that the elimination of the Public Fire Hydrant tariff will become effective five days after Cal-Am files a Tier 1 advice letter following a final decision in this phase of the general rate case.
5.6.7. Special Request #13 - File Plans on All Items Required for General Order 103-A Compliance
Cal-Am states that it is generally in compliance with General Order 103-A except for the following areas:
· Some water supply is not coming from a permitted source in the Monterey County District;
· The Larkfield District and the Duarte subsystem in the Los Angeles District do not meet the Potable Water System Capacity;
· The required system maps do not include:
o All mains;
o Type of material for all mains;
o Location and size of valves;
o Location of hydrants; and
· Current records do not include:
o Location, size and material of each service line;
o A schematic drawing of all pumping stations, water or wastewater plants to show the size and location of all major equipment, pipelines, connections, valves and other equipment; and
o Construction date of all plant.
Cal-Am states that it is in the process of developing an Operations and Maintenance plan that will address the areas in which it is out of compliance with General Order 103-A. The parties agree that Cal-Am shall provide one quarterly status update on the Operations and Maintenance plan development before September 30, 2011, and file plans on all areas in which it is out of compliance with General Order 103-A by December 31, 2011.
5.6.8. Special Request #14 - Recover all Balancing and Memorandum Accounts
The parties agree to global terms of recovery for the majority of Cal-Am's 37 memorandum and balancing accounts. Cal-Am's proposals for about half of the accounts are unopposed and 12 balancing or memorandum accounts are eliminated. Cal-Am's request for recovery of memorandum and balancing accounts for the Monterey County District is not part of the settlement. Interest on all settled accounts will accrue at the 90-day commercial paper rate.
5.6.9. Special Request #16 - Memorandum Account for Chromium 6
The parties agree that Cal-Am shall recover a total of $164,208 in base rates amortized over three years for well testing and data collection expenses and to study Chromium 6 treatment technologies. Based on this agreement to recover expenses, Cal-Am withdraws Special Request #16 from the general rate case.
5.6.10. Special Request #20 - Amortization of Depreciation Study
The parties agree that the amortization of depreciation study was reasonable and that Cal-Am shall recover $60,000 amortized over six years beginning in 2012.
5.6.11. Special Request #21 - Recover All American Water Service Company (Service Company)5 Costs
If the Commission orders an audit of Cal-Am, the parties agree that Cal-Am will file a Tier 1 advice letter to establish a customer surcharge to recover the costs of the Division of Water and Audits (DWA) Contract 10PS5881.
5.6.12. Special Request #23 - Retire the Bradbury Irrigation System
The parties agree that Cal-Am shall retire the Bradbury irrigation system and transfer the customers to the potable system during the years 2015 to 2017.
The parties agree to charge fire flow test fees to the specific customers causing the expense rather than distributing it among all customers. The parties agree that $500 is a reasonable fee covering all expenses and that it will not be increased for three years (2012-2014). The $500 fire flow test fee will become effective 5 days after Cal-Am files a Tier 1 advice letter. The tariffs for this fee are attached to the revenue requirement settlement at Appendix 3-5.
5.6.14. Special Request #26 - Finalize Citizens Acquisition Premium
The parties agree on a revenue requirement schedule for the recovery of and return on the Citizens Acquisition Premium through 2041. The allocations will be 59% to the legacy Cal-Am water districts (San Diego, Ventura, Monterey, and Los Angeles) and 41% to the legacy Citizen's districts (Sacramento and Larkfield). Among the two legacy groups, amounts will be allocated to the individual districts based on customer counts.
The parties agree to a specific calculation of the annual accruals to the depreciation reserve. Cal-Am shall review and submit the results to DWA annually with a request to implement the results for book depreciation purposes. Cal-Am is to submit the results annually on July 1 based on prior year December 31 balances.
The parties agree not to implement inclining block rates for the Duarte irrigation system. Instead, the irrigation sector rates will be increased proportionately by the same percentage as that authorized by the Commission for the overall revenue requirement increase for the Duarte system. The irrigation system will be retired in the next general rate case and the customers shifted to the potable water tariff. Cal-Am will make any requests regarding tariffs and rate design during the next general rate case.
5.6.17. Special Request #33 - Allow Rate of Return on Advice Letter Projects
The parties agreed to conditions on interest accrual and a methodology for calculating the weighted average cost of debt for advice letter projects.
5.6.18. Special Request #36 - Low-Income Ratepayer Assistance Program (LIRAP)
The parties agree to establish a LIRAP memorandum account in the Monterey County District consistent with the LIRAP accounts currently established in Cal-Am's other districts. The memorandum account will become effective upon Cal-Am's filing a Tier 2 advice letter. The draft tariff is attached to the revenue requirement settlement as Appendix 3-6.
5.7. Low-Income Tariff Consolidation
The parties recommend that Cal-Am be allowed to file a single company-wide tariff for low-income water customers and a single tariff for low-income wastewater customers. Cal-Am states that it currently has nine separate tariffs for low-income water and all nine tariffs have the same parameters and conditions. Cal-Am asserts that consolidation will make the tariffs much easier to administer for both Cal-Am and the Commission.
Cal-Am's consolidated low-income tariffs will become effective five days after Cal-Am files a Tier 1 advice letter.6
5.8. Non-Revenue Water Action Plans
The settlement requires Cal-Am to initiate studies and perform analysis to develop fully justified water loss reduction plans. The plans will be based on a cost/benefit analysis that will assist Cal-Am in ensuring that priorities are set for further water loss reduction projects in all of its districts. Some of the information to be collected and reported is a database of repair crew leak reports, a census of all customer service meters by customer class, size, type, year installed and manufacturers' warranted accuracy when new, and an engineering and financial evaluation of measures to reduce non-revenue water in each district.
In its comments on the settlement between Cal-Am and NRDC, DRA initially opposed the settlement on developing Non-Revenue Water Action Plans. However, the Non-Revenue Water Action Plans were ultimately incorporated into the settlement DRA reached with Cal-Am and NRDC.
The settlement originally included no costs associated with the development of the plans. The parties state that any expense related to the Non-Revenue Water Action Plan development, in excess of that included in the revenue requirement request for this rate case cycle, should be recovered in the next general rate case.
In response to a February 13, 2012, ruling by the Administrative Law Judge, the parties have clarified their position and recommend that Cal-Am be authorized to establish a memorandum account to track the costs of engineering and financial evaluations and studies of measures to reduce non-revenue water in each district. The parties assert that the memorandum account meets the four-prong test in that:
1. The expense is caused by an event of an exceptional nature;
2. The expense could not have been reasonably foreseen in the utility's last general rate case and will occur before the utility's next scheduled rate case;
3. The expense is of a substantial nature; and
4. Ratepayers will benefit from the memorandum account.
We agree that plans to reduce non-revenue water in all Cal-Am's districts are reasonable, especially in light of the record of high non-revenue water in the Monterey County District and the need to reduce non-revenue water in all of Cal-Am's districts. Developing plans to reduce non-revenue water is in the public interest as it may also reduce costs to ratepayers and it should not be put off until the next general rate case. We also find the proposal to develop and institute water loss reduction plans is consistent with the law.
Therefore, Cal-Am is authorized to file a Tier 1 advice letter with the Commission's DWA to establish a memorandum account. The memorandum account will track the costs of engineering and financial evaluations and studies of measures to reduce non-revenue water in each district. The amounts tracked in the memorandum account should be off the books and not reflected on Cal-Am's financial statement as regulatory assets.
Cal-Am will seek recovery of the costs in the memorandum account in its next general rate case. In addition to the expenses tracked in the memorandum account, Cal-Am's next general rate case application should identify the expenses that were covered by the revenue requirement adopted in this proceeding.
5.9. Conclusion
Based upon the record of this proceeding we find the parties complied with Rule 12.1(a) by making the appropriate filings and noticing settlement conferences. Based upon our review of the settlement documents we find that the settlement contains a statement of the factual and legal considerations adequate to advise the Commission of the scope of the settlement and of the grounds for its adoption; that the settlement, with the exceptions listed below, was limited to the issues in this proceeding; and that the settlement included comparisons indicating the impact of the settlement in relation to the utility's application and issues the other parties contested in their prepared testimony, or would have contested in a hearing. We conclude, pursuant to Rule 12.1(d) that the settlement, with the exceptions outlined below, is reasonable in light of the whole record, consistent with the law and in the public interest.
2 Non-revenue water is the difference between the amount of water produced by Cal-Am and the amount of water billed to customers.
3 In its comments on the proposed decision, Monterey Peninsula pointed out an inconsistency in the settlement regarding the Monterey Peninsula conservation budget. Two different numbers are given in the settlement. Monterey Peninsula cites to text in the settlement supporting the accuracy of one of the numbers and we make the correction here.
4 Special Request #31 - Walerga Special Facilities Fees was moved to Phase 2 and Special Request #18 - Contamination Proceeds, was resolved by Decision (D.)10-10-018 and D.10-12-058.
5 American Water Service Company provides services to all American Water Works Inc., subsidiaries and its costs are allocated among the various subsidiaries.
6 NRDC's opening comments on the proposed decision pointed out that treatment of this issue had been omitted from the proposed decision.
