Discussion - General Rate Case Phase

This is our second decision in the rate case phase of this proceeding. Before this A.99-10-027 general rate case was filed we issued Resolution W-4167 granting Arrowhead a 57.5% interim increase for purchased water costs. D.00-07-036 approved a settlement agreement among the parties and granted an additional 30.1% to cover the remainder of Arrowhead's operating expenses. Today's decision grants Arrowhead a final $ 47,815 (16.8%) general rate increase and completes our consideration of the GRC issues. Table 1 in the Background section above summarizes all of the test year 2000 increases.

We also address here whether to continue the purchased water and contract repair work memorandum accounts D.00-07-036 ordered be established.

D.00-07-036 resolved all issues related to Arrowhead's GRC except the appropriate net revenue allowance. The Commission's policy for determining a fair return for Class C and Class D water utilities is to compare the result using the operating ratio method with that using a return on rate base, and to select the one producing the higher net revenue allowance. This is intended to prevent the artificially low rates that otherwise result when a utility has a very low rate base.²⁶ When the last evidentiary hearing was held in January 2002, the most recent recommended return range for Class C water utilities was 12.75% to 13.75% on rate base. The standard operating ratio is 20%. Because the great bulk of Arrowhead's plant is SDWBA-financed and thus not included in rate base and the remainder of its plant is highly depreciated, it has a very low rate base. For Arrowhead, the operating ratio method will be used because it produces the higher net revenue allowance.

We adopt Water Division's suggestion that Arrowhead's return be reduced because of its service and SDWBA problems, to 15% from our otherwise-standard 20%. We do not reduce the return further or eliminate it entirely for two reasons. First, SDWBA surcharge revenues aside, it is clear that the company has suffered grave losses in its operations in recent years. Water Division's own figures²⁷ showed Arrowhead losing an estimated $106,000 in test year 2000. This is extraordinary for a small water utility with only $78,000 in rate base. Arrowhead claims to have suffered a string of operating losses in years past as well, a claim no party tested and one we find credible. Second, as described in the section to follow, we intend to deal separately with Arrowhead's well documented service and SDWBA problems. It would thwart our efforts there to deny a reasonable net revenue allowance in the GRC.

The adopted Summary of Earnings for test year 2000 is Attachment B to this decision. Attachments C, D and E are the new tariff sheets, a comparison showing how typical customers' bills will be affected by the new rates, and the adopted quantities to be used for future ratemaking purposes.

We will also require Arrowhead to continue until further order using the memorandum accounts for purchased water and contract repair work we ordered established in D.00-07-036. The purchased water memorandum account remains advisable from the standpoints of both the company and its ratepayers because it requires Arrowhead to come in every six months to true up the accumulated under or overcollections.²⁸ That allows the Commission to catch problems more quickly, and more timely trues up Arrowhead's purchased water cash flow. We retain the contract repair work expense memorandum account because the record shows it has given Arrowhead the incentive and ability to pursue critical leak repairs quickly, which improves service and should save ratepayers money in the longer term. It also serves as a safety net against unexpected major repairs for Arrowhead today and an attractive feature for any prospective system receiver or buyer tomorrow.