6. Discussion of the Settled Issues Not Approved by this Decision
6.1. Special Request #15 - Reporting Non-Revenue Water as Volumes Rather Than Percentages
The settlement requests permission to report non-revenue water in a volumetric amount rather than as a percentage as has been the practice in the past. We have no objection to including volumetric representation so long as the traditional percentage is also reported. We find that both the volumetric and percentage measures provide meaningful information and context for the overall non-revenue water picture. We further require that both components of non-revenue water, apparent losses and real losses, be reported. Apparent losses include billing and metering errors, which are critical to improving overall non-revenue water performance.
Therefore, the provision of the settlement regarding a switch from presenting non-revenue water as a percentage to presenting it as a volume is not in the public interest. We require continued reporting of the non-revenue water as a percentage as well as the requested volumetric measure.
6.2. Regulatory Expenses
In its application, Cal-Am sought to defer the $4,180,177 projected costs of this rate case and cost of capital case and recover the costs over the three year rate case cycle. Cal-Am also sought to recover the projected $4,215,000 for the next general rate case and cost of capital case during the effective period of this case.
In the settlement, the parties agree to defer $3,364,185 of regulatory expense related to this proceeding and amortize $1,121,395 annually over the three-year period of this rate case cycle. Similarly, the parties agree to defer the rate case expenses of $4,215,000 for the 2015-2017 rate case and amortize the expense over the three-year rate case cycle of 2015 -2017.
We do not adopt this portion of the settlement. Deferring the current rate case expense and recovering it in future rates constitutes retroactive ratemaking. Although Cal-Am has been allowed to defer rate case expense in the past, the Commission's longstanding practice is to set rates based on forecasted expenses and recover them during the rate case cycle in which they occur. Allowing Cal-Am to defer rate case expense is not consistent with the law.
Therefore, we adopt $3,364,185, the settled amount of regulatory expenses for this rate case cycle, which is 80% of Cal-Am's original request. We will use the settlement's calculation and adopt $3,372,000, 80% of Cal-Am's forecasted general rate case expense for 2015 to 2017. These reductions are supported by Cal-Am's hiring of in-house counsel, which reduces its legal fees for hiring outside counsel. The reductions also take into account the $1,050,000 in regulatory expenses that Cal-Am received in D.08-01-027 for the Monterey County District for 2009, 2010 and 2011. The total regulatory expense of $6,736,185 will be amortized over the three year rate case cycle in this proceeding. This will move Cal-Am from recovering regulatory expenses on a deferred basis to a fully forecasted recovery basis.
6.3. Special Request #31 - Walerga Special Facilities Fees
The settlement proposes to replace the current Walerga Special Facilities Fee of $750 per dwelling unit with a new $6000 per dwelling unit fee. On September 14, 2011, Towne Development of Sacramento, Inc. (Towne) filed a motion to become a party to the proceeding stating that it did not learn of the increase to the special facilities fees until August 23, 2011. On the same day Towne filed a separate motion seeking to reopen the comment period on the settlement.
In the December 12, 2011 revised scoping memo, Towne's motion for party status was granted and the motion to reopen the comment period was denied. Rather than reopen the comment period, the scoping memo has scheduled a review of the Walerga Special Facilities Fee in Phase 2 of this proceeding, providing Towne an opportunity to participate in the review and analysis of this issue. Therefore, the section of the settlement on the Walerga Special Facilities Fees is not approved, as it will be considered in Phase 2.
6.4. Background on the Unique Supply Challenges in the Monterey County District and the Commission's Treatment of Non-Revenue Water
In D.09-07-021, the Commission addressed Cal-Am's particularly acute need to reduce its non-revenue water7 in the Monterey County District. The Commission noted that non-revenue water is a measure of operational efficiency used by this Commission and others to assess utility operations. The Commission rejected Cal-Am's first proposal to use a historical level of non-revenue water during the rate period, because Cal-Am was then and continues to suffer from dramatic supply limitations in its Monterey County District. The water supply situation in the district is desperate and requires continuous reductions in water waste on both the company and customer sides of the meter.
In D.09-07-021, the Commission concluded that supply constraints and conservation rate design in the Monterey District require the highest quality program to reduce non-revenue water and on that basis found that it was in the public interest to develop an appropriate financial incentive for Cal-Am to improve its non-revenue water performance. The Commission noted that Cal-Am's WRAM ensured that Cal-Am will recover all its fixed and variable costs regardless of the amount of water billed, which also fully insulated Cal-Am from any financial consequences of non-revenue water. The Commission created a non-revenue water penalty/reward program to be calculated based on a 9% on-revenue water target. If Cal-Am reduced its non-revenue water below the 9% mark, Cal-Am would earn a financial reward and should Cal-Am fail to achieve that standard, Cal-Am would incur a financial penalty. The per-acre-foot amount of $1,820.30 was adopted for use in calculating the financial penalty/reward.
6.5. Settlement on Non-Revenue Water Amounts for Ratemaking Purposes in the Monterey County District
The settlements on non-revenue water for ratemaking purposes in the Monterey County District provide inconsistent totals and are also inconsistent in the manner of calculating the totals. One settlement provides non-revenue water volumes based on compromise between the parties.8 The non-revenue water amounts are given in hundred cubic feet (ccf), but when converted to acre-feet, the totals do not agree with the acre-feet non-revenue totals adopted in the other settlement.9
One settlement is internally inconsistent. It provides the adopted non-revenue water volumes for the Monterey County District for years 2012 through 2014 in a table. The table shows that the adopted non-revenue water amount for the years 2012 through 2014 for each subsystem is based on Cal-Am's actual non-revenue water for 2009.10 However, on the very next page, the settlement states:
The parties agree that using the last recorded year of water production data as the forecast for ratemaking purposes in this General Rate Case ("GRC") for its Monterey County District is inappropriate, given the significance of water loss reduction programs in Monterey County. Parties agree that it is appropriate for California-American Water to use the results of the AWWA Water Loss Audit Report for each of its sub-systems in its Monterey County District, including trends in water loss efficiency metrics, volumetric quantities, and the known feasible cost-effective methods available to reduce non-revenue water.11 (Emphasis added.)
Further complicating matters, the parties propose to use different non-revenue water targets for the penalty/reward mechanism discussed below.12 The parties acknowledge that different methods and resulting amounts are used to calculate non-revenue water for ratemaking purposes and non-revenue water for the penalty/reward mechanism.13
The parties give no reason and we find no support in the record for having one non-revenue water amount for ratemaking purposes and another for the penalty/reward mechanism. The amount of non-revenue water impacts the calculations for purchased water, purchased power and chemicals and the results of those calculations affect the revenue requirement for ratepayers. It is not in the public interest to adopt a non-revenue water amount for ratemaking purposes that does not provide an incentive for Cal-Am to minimize non-revenue water and ensure its production estimates are as accurate as possible. Therefore, we do not approve this portion of the settlement.
6.6. Adopted Non-Revenue Water for Ratemaking Purposes and the Penalty/Reward Mechanism in the Monterey County District
The water supply situation in the Monterey County District is dire and requires continuous, vigilant efforts to reduce the amount of non-revenue water. We find no reason why one non-revenue water figure is used for ratemaking purposes and another is used for the penalty/reward mechanism. Most of the non-revenue water target percentages adopted in D.09-07-021, and converted to volumetric measures as requested in this application, will be maintained. However, the total non-revenue water targets will be calculated using Cal-Am's 2012 water production estimates presented in this general rate case application rather than the 2009 adopted water production estimate proposed by the settlement.
In addition, D.09-07-021 adopted a mid-point percentage for the Ambler, Hidden Hills, and Ralph Lane subsystems, whose percentages varied from 16.16% to 21%, since a drop to the industry average of 10% would have been too steep.14 The amounts adopted in D.09-07-021 for Ambler, Hidden Hills, and Ralph Lane were 13.5%, 13.8% and 15.5% respectively. In this decision we take the next step and adopt 10% non-revenue water targets for Hidden Hills and Ambler and 11% for Ralph Lane.
Although the Ryan Ranch and Toro subsystems were not part of the non-revenue water penalty/reward program in the last rate case cycle, we adopt non-revenue water target amounts for those districts here.
The table below represents the non-revenue water percentages adopted by D.09-07-021, the 2009 and 2010 actual percentages, the settlement's 2012 proposed volumes, and our 2012 adopted percentages and volumes.
Table 5
2009 Adopted % |
2009 Actual % |
2010 Actual % |
2012 |
2012 Adopted % |
2012 Adopted Volume (Ac-Ft) | |
Ambler Park |
13.5% |
5.7% |
9.1% |
29.0 |
10% |
19.0 |
Bishop |
9% |
1.5% |
3.4% |
29.0 |
9% |
16.7 |
Chualar |
9% |
-30.5% |
2.7% |
19.0 |
9% |
10.5 |
Hidden Hills |
13.8% |
13.3% |
9.7% |
12.0 |
10% |
16.3 |
Monterey |
9% |
9.9% |
12% |
1,187 |
9% |
1025.1 |
Ralph Lane |
15.5% |
11.6% |
11.2% |
1.4 |
10% |
1.0 |
Ryan Ranch |
13.3% |
19.2% |
8 |
14.6% |
9.6 | |
Toro |
57.1% |
8.1% |
25% |
10% |
26.6 |
We believe the non-revenue water target should be based on the forward-looking production estimates contained in the application rather than historical amounts that do not anticipate or encourage a reduction in non-revenue water.
The settlement sets the non-revenue water target at 1,187 acre-feet for 2012 through 2014. We have calculated the non-revenue water target volumes for the Monterey Main system by applying the percentage targets to Cal-Am's estimated 2012 production.15 These figures should be used for both ratemaking purposes and the non-revenue water penalty/reward program discussed below.
The settlement as proposed on the penalty/reward mechanism for non-revenue water is not in the public interest. Therefore we do not approve the settlement's proposed calculation of non-revenue water for use in the penalty/reward mechanism.
6.7. Settlement on the Monterey District Penalty/Reward Program
According to the settlement, the parties propose that the amount used to calculate the penalty/reward be reduced from the current $1,820.30 per acre foot, to $275 per acre-foot.16 The parties intentionally selected a marginal cost of water production from a "higher production cost facility" such as the Ord Grove Plant because the resulting reward or penalty is more reasonable. 17 Parties state that they are intentionally not using the system average marginal cost of production and intentionally not using the marginal cost of the Regional Desalination Plant, which is not currently in use.
In A.10-04-019, Cal-Am seeks Commission authorization to include in Monterey County District's revenue requirement the costs of water produced at the Sand City Desalination Plant. Cal-Am's most recent ratemaking proposal would result in a cost to ratepayers of $2,599 per acre-foot. The current price of water reflected in the penalty/reward mechanism of $1,820.30 per acre-foot, is below Cal-Am's own proposed current marginal water production costs at the Sand City Plant. The current amounts reflected in the mechanism appear to be realistic and in line with other unrelated metrics. Therefore, we fail to see how reducing the penalty mechanism from $1,820.30 per acre foot to $275 per acre foot, would result in a greater reduction in non-revenue water. Consequently, we give no weight to Cal-Am's assertion that the marginal cost of water in the Monterey County District is $275 per acre-foot.
The parties offer no rationale for Cal-Am's failure to reduce its non-revenue water in the Monterey County District during the three years since the mechanism was adopted. The parties merely state that the penalty incurred by Cal-Am is "unrealistic and resulting in excessively high penalties."18
Monterey Peninsula has set 7% as the non-revenue water target amount; the Commission adopted 9% as the non-revenue water target amount for the Monterey Main system, however, the actual non-revenue water continues to approach 12%.
Cal-Am incurred penalties because it did not meet the target reductions to non-revenue water that were established in D.09-07-021. Reducing the penalty to $275 per acre-foot will not have the desired result of reducing non-revenue water in the Monterey County District. We conclude that parties have not demonstrated that the proposed revision of the penalty/reward mechanism will reduce the amount of non-revenue water. Therefore this provision of the settlement is not in the public interest and is not approved.
6.8. Adopted Revision to the Monterey County District Penalty/Reward Program
Although we do not approve the revision to the penalty/reward program amount proposed by the settlement, we recognize that non-revenue water amounts can be affected by a variety of factors. Therefore, we revise the existing penalty/reward program here. The non-revenue water target amount will be based on the percentage of Cal-Am's 2012 estimated production discussed earlier, rather than the 2009 targets. However, a 5% one-way dead band19 will provide a cushion between the reduced non-revenue water targets and the triggering of the penalty/reward mechanism. For example, the Monterey system's non-revenue water target volume is 1,025 acre feet. However, no penalty would be imposed unless non-revenue water exceeds 1,076 acre feet, which is 1,025 acre feet plus the 5% dead band. If Cal-Am's non-revenue water amount is below 1,025 acre feet, the reward will accrue.
We believe this revision to the program more adequately promotes the Commission's goal of reducing non-revenue water, but allows for some leeway in triggering the penalty/reward mechanism. The Monterey County District non-revenue water penalty/reward mechanism will be changed as described above for this rate case cycle, but the issue will be further examined in the next rate case.
The table below illustrates the settlement's 2012 proposed non-revenue water targets by percentage and volume, our adopted non-revenue water targets by percentage and volume and the adopted amounts by volume that will trigger a penalty for each sub-system.
Table 6
2012 Proposed % |
2012 Proposed Volumes (Ac-Ft) |
2012 Adopted % |
2012 Adopted Volumes (Ac-Ft) |
Adopted Penalty Triggers (Ac-Ft) | |
Ambler Park |
13.5% |
29.0 |
10% |
19.0 |
20.0 |
Bishop |
9% |
29.0 |
9% |
16.7 |
18.0 |
Chualar |
9% |
19.0 |
9% |
10.5 |
11.0 |
Hidden Hills |
13.8% |
12.0 |
10% |
16.3 |
17.0 |
Monterey |
9% |
1,187 |
9% |
1,025.1 |
1,076.0 |
Ralph Lane |
15.5% |
1.4 |
10% |
1.0 |
1.1 |
Ryan Ranch |
n/a |
14.6% |
9.6 |
10.1 | |
Toro |
n/a |
10% |
26.6 |
28.0 |
6.9. Irrigation Rates, Billing Format, Advanced Metering Infrastructure and Volumetric Rate Structure for Wastewater
There is no evidentiary record to support the irrigation rates, billing format, advanced metering infrastructure, and volumetric rate structure for wastewater proposals in the settlement. Cal-Am's initial request for irrigation rates is very different. Similarly, no party filed persuasive testimony on the settlement's irrigation rates, billing format, advanced metering infrastructure or wastewater volumetric rate proposals. In addition, and more importantly, the settlement does not include an adequate estimate of costs, a detailed cost benefit analysis or a sufficiently descriptive explanation of how the costs associated with implementing these proposals will be recovered.
DRA responded to the settlement between Cal-Am and NRDC and is opposed to the settlement on these items. DRA argues that the record does not support sections of the settlement and that the settlement is silent on the cost and ratepayer impact of the settled issues.
We do not address the merits of these proposals here, but as submitted, the proposals are not supported by the record. On that basis, we do not approve the settlement's proposed provisions for irrigation rates, billing format, advanced metering infrastructure and volumetric rate structure for wastewater.
6.10. Increase Low-Income Surcredit
Cal-Am and NRDC recommend that the low-income surcredit for the Larkfield, Los Angeles County, Sacramento, San Diego County and Ventura County Districts and the Ambler Park, Ralph Lane and Toro service areas of the Monterey County District be increased from 15% to 20% of the average residential bill. Additionally, the parties recommend that, with the exception of the Monterey County District (other than Ambler Park, Ralph Lane and Toro service areas) and Monterey Wastewater District, Cal-Am administer and recover the net costs of the low-income assistance program on a statewide basis via a meter surcharge on all non-low-income customers. Customers in the Monterey County District (except the Ambler Park, Ralph Lane and Toro service areas) and the Monterey Wastewater District would not be subject to the non-low-income meter surcharge. Parties believe this measure will avoid the problem of disproportionately burdening customers in districts with a high percentage of customers receiving low-income assistance.
We do not adopt the settlement here because the proposal lacks an analysis of the rate impact on customers. However, we believe this issue is appropriately moved to Phase 2 of the proceeding, where parties can provide additional analysis of the proposal in the context of rate design. An ALJ ruling will establish the timeline for filing supplemental testimony on the increased low-income surcredit.
6.11. Special Request #5 - Establish a WRAM/MCBA for the Sacramento District
The settlement between Cal-Am and NRDC allows Cal-Am to establish a WRAM/MCBA in its Sacramento District. The parties state that a key action to increase water conservation is to remove the financial disincentive for water utilities to encourage customers to save water. The parties agree that the implementation of tiered rates is not the only means to influence customers' water consumption levels. The parties assert that metering also significantly reduces consumption and therefore, Cal-Am should be authorized to implement a WRAM/MCBA in the Sacramento District. The parties further assert that a WRAM/MCBA will provide water companies and customers with revenue neutrality regarding conservation and is consistent with the Commission's revenue decoupling mechanisms for gas and electric utilities.
In its testimony and comments on the settlement between Cal-Am and the NRDC, DRA opposes Cal-Am's special request and the settlement's terms for implementing a WRAM/MCBA in the Sacramento District. DRA states that the purpose of the WRAM/MCBA is not simply to make utilities whole in the event that water consumption goes down, but also serves to remove disincentives to implementing conservation programs and rates, and to pass savings on to customers and reduce overall water consumption. DRA contends that converting from flat to metered rates is not the same as implementing tiered conservation rates.
DRA also opposes establishing a WRAM/MCBA account in Sacramento on the basis that WRAMs and MCBAs were first approved when the Commission had very little information about the impact of tiered rates. DRA claims that the same cannot be said about flat-rate-to-meter conversions in which the Commission has a lot of experience. DRA goes on to describe instances where Cal-Am could double collect due to the lag time in billing after a meter is installed.
Mark West also commented on the Cal-Am and NRDC settlement on Special Request #5 to establish a WRAM/MCBA in the Sacramento District. Mark West's comment's echoed the comments of DRA opposing the proposal.
We find that establishing a WRAM/MCBA in the Sacramento District prior to full metering and implementation of tiered rates is not warranted. The conditions that merit a WRAM/MCBA are not present. More importantly, we are conducting a full review of the WRAM/MCBA mechanisms in Phase 2 of this proceeding and it would be premature to establish one in the Sacramento District prior to the full review. Therefore, we do not approve the settlement on Special Request #5, but refer the issue to Phase 2 of this proceeding. An ALJ ruling will establish the timeline for filing supplemental testimony on Special Request #5.
6.12. Conclusion
Should the parties decline to accept the modifications to the settlement set forth in this decision, then the assigned Commissioner shall issue a revised scoping memo to set the matters for hearing.
7 In the 2009 decision, the term "unaccounted for" rather than "non-revenue" water was used. The more modern term is used throughout this decision.
8 Cal-Am, DRA, and TURN Settlement on Revenue Requirement Issues, at 8 and 9.
9 Cal-Am, DRA, and NRDC Settlement on Non-Revenue Issues, at 4, Table 2.
10 The text on page 4 of the Cal-Am, DRA and NRDC settlement states that the 2009 non-revenue water for the Monterey Main System is 1241. However, the table shows 1261 acre-feet for 2009, 1252 acre-feet for 2012, and 1251 acre-feet for 2013 and 2014.
11 Cal-Am, DRA and NRDC Settlement on Non-revenue Issues, Section 3.1.2 and Table 2 at 4, and Section 3.1.4 at 5.
12 For the penalty/reward mechanism, the settlement converts the percentage goals adopted in D.09-07-021 to volumetric amounts using 2009 actual water production.
13 Cal-Am, DRA and NRDC settlement on non-revenue issues at 7.
14 D.09-07-021 at 53-54.
15 (10,365 acre-feet/0.91) * 0.90 = 1,025 acre-feet where 10,365 represents the Monterey Main system water consumption from Section 2.1.3 and 2.3.3 of the Settlement.
16 Cal-Am, DRA and NRDC non-revenue settlement at 8-10.
17 Id. at 10.
18 Id. at 9.
19 The dead band allows Cal-Am to exceed the non-revenue target amounts by 5% before incurring a penalty.
