XIV. Rate Base

The differences in the rate base category are in utility plant, materials and supplies, working cash, depreciation reserve and miscellaneous items. These differences are summarized in the following table.

(Dollars in Thousands)

YEAR 2003 YEAR 2004

	AVR	ORA	Difference	AVR	ORA	Difference
Utility Plant
Booster Pump Station	$295	($0)	($295)	295	($0)	($295)
New Well	1,000	(0)	(1,000)	1,000	(0)	(1,000)
Mojave Basin Adjudication	2,438	122	(2,316)	2,438	182	(2,256)
Emergency Generators	666	(0)	(666)	666	(0)	(666)
Materials & Supplies	146	135	(11)	147	136	(11)
Working Cash	814	726	(89)	789	764	(25)
Miscellaneous22			373			149
Less: Depreciation Reserve	11,212	11,175	(37)	12,096	12,016	(81)
Net Differences			4,041			4,185

A. Booster Pump Station

AVR and ORA differed on whether a booster pump station should be constructed in the Jess Ranch section of AVR's service territory. AVR recommended the addition of this booster pump station to move water from Jess Ranch into its main pressure zone. ORA opposed the addition of this booster pump station on the basis that AVR did not plan on proceeding with the project.

Subsequently, as part of the joint comparison exhibit, AVR agreed to defer this booster pump station from the current rate case if its request for a new well is approved. The merits of a new well are addressed in the following section. Irrespective of whether a new well is approved in this decision AVR has not demonstrated a need for its proposed Jess Ranch booster pump station. We reject AVR's request to include $295,000 in rate base for a new booster pump station.

B. New Well

AVR and ORA differed on whether a new well is needed. AVR seeks to construct a new well in the summer of 2003 to meet its water supply requirement, as required by the State of California Department of Health Services (DHS) and the Commission's General Order 103 (GO 103). That requirement is to maintain sufficient water supply to meet or exceed the maximum day demand with the largest well out of operation.

AVR testified that events that occurred in late July of 2002 further confirmed its need for a new well. This was because a high demand on the entire water system occurred while two wells were briefly out of commission due to mechanical problems. Southern California Edison Company "power imbalances" forced a couple of its other wells to operate intermittently during the same time period a fair AVR cited as evidence of an additional need to construct a new well.²³

ORA used a recent pump certificate provided by AVR to calculate the current production capability level and maximum day demand requirement to determine whether AVR needs a new well. The results of ORA's calculations showed that AVR's total production capability is 25,988 gpm, and if the largest well is out of service, that figure is reduced to 23,997 gpm. ORA's calculations also showed that AVR's maximum day demand requirement is 19,400 gallons per minute (gpm). This means that AVR's total production capacity currently exceeds its maximum day demand requirement by 6,588 gpm (25,988 - 19,400) and if the largest well is out of service it still exceeds AVR's maximum day demand requirement by 4,597 gpm (23,996 - 19,400).

ORA concluded from its calculations that a new well is not needed for AVR to meet its water supply requirement. Hence, ORA opposed the construction of a new well.

However, a February 6, 2002 DHS letter to AVR showed that AVR's maximum day demand requirement is only 18,930 gpm and that AVR has the ability to produce only 19,087 gpm from its active wells and 17,096 gpm if the largest active well is taken out of service. These calculations, based on pump efficiency tests conducted between September and November of 2001, demonstrate the need for an additional source of water supply. DHS further affirmed in its July 19, 2002 letter to AVR that DHS "has previously concluded in the Annual Inspection report that additional source capacity is needed to reliably meet the maximum day demand ... [and DHS] support the construction of a new well."²⁴

There are two sets of water supply calculations. One set is from ORA demonstrating that AVR has a sufficient source of water to meet its DHS and GO 103 water supply requirement based on its review of a recent pump certificate. The other is a letter from DHS demonstrating that AVR does not have a sufficient source of water to meet its water supply requirement based on pump efficiency tests.

DHS, our sister agency and the state agency best equipped to assess water supply requirements, has found that AVR is not able to meet its maximum day demand water supply requirement. Absent evidence that the assessment of DHS is incorrect, we rely on the expertise of DHS and concur with DHS that a new well is necessary. AVR should be authorized to construct a new well in the summer of 2003.

C. Mojave Basin Adjudication

AVR and ORA differed on whether the $2,400,000 cost AVR incurred in adjudicating its Mojave Basin water rights should be included in rate base.

AVR has accumulated and earned on its adjudication costs as a component of rate base in its construction work in progress (CWIP) account throughout the 10 years this adjudication has taken place. Upon the issuance of a final decision from the Riverside Superior Court by the end of 2002, AVR intends to transfer the entire amount from CWIP into its utility plant in service water rights account. Accordingly, AVR included its Mojave Basin adjudication cost in its test years' rate base estimates.

ORA recommended the entire adjudication cost be removed temporarily from rate base "because the company has benefited by having this construction work in progress for the last 10-year period." ²⁵ ORA also recommended that the entire cost be amortized back into rate base over a 40-year period beginning 2002. However, it has no recommendation on what account the unamortized portion should be transferred to.²⁶

AVR has been authorized rate base treatment for this adjudication cost in prior rate proceedings. For example, it was authorized rate base treatment for approximately $1,600,000 of its accumulated adjudication cost in its 1999 general rate proceeding (D.99-03-032).

Both shareholders and ratepayers have benefited from this adjudication since costs was first incurred. Shareholders benefited because the cost accumulated in CWIP enabled AVR to earn a return on that cost. Ratepayers have benefited because AVR has had the legal right to pump 10,418 acre feet of water annually from the Mojave basin during this adjudication. For example, AVR has been able to avoid paying $729,000²⁷ to acquire a comparable amount of water for its customers annually. At AVR's proposed rate of return, the annual revenue requirement for the accumulated adjudication cost is approximately $453,000.²⁸ This equates to a $276,000 annual savings to ratepayers.²⁹

AVR's rate base treatment of its Mojave Basin Adjudication costs fairly benefits shareholders and ratepayers and is consistent with both the Uniform System of Accounts For Water Utilities adopted by this Commission and prior Commission ratemaking treatment. ORA's proposal to take AVR's adjudication costs out of rate base and amortize them back into rate base over a 40-year period is rejected. The entire Mojave Basin Adjudication costs should continue to be included in rate base.

D. Emergency Generators

AVR and ORA differed on the need for AVR to include eleven diesel backup generators in rate base. AVR purchased these generators to provide reliable and adequate supply of potable water to its consumers during emergency situations. Emergency situations identified by AVR included rolling blackouts, inconsistent power levels due to heavy air conditioning loads, earthquakes, and terrorists' attacks.

AVR acquired six of these generators in 1999 and two in 2001. AVR did not identify when the remaining three generators were acquired. Of these generators, one serves AVR's main office building to keep the building operational, three serve booster pumping stations to pump water from one pressure zone to another pressure zone, three are stationary at specific wells, and four are mobile for use at multiple wells equipped with quick electrical connections.

ORA omitted the eleven backup generators from rate base because they are used only on rare occasions by AVR.

DHS, in response to an AVR inquiry as to the need for backup generators, acknowledged that Section 116555 of the California Health and Safety Code requires each public water system to ensure that their system provides a reliable and adequate supply of potable water to its consumers at all times. DHS also affirmed that providing well sites with standby power generators would ensure a reliable supply of drinking water during interruption of electricity supply. However, it stated that emergency power generators "shall" be determined by the water system itself based on operational needs at each well and adequacy of water supply in each individual pressure zone in case of emergency interruption of electrical power.³⁰

As part of the commitment to provide reliable and adequate supply of potable water, various water districts requested energy rotating outage exemptions so that water services essential to public health, safety and welfare could receive uninterruptible water service during the 2000-2001 power outages in our rulemaking investigation (R.00-10-002) into the reliability of electric power. In making that request, the water districts acknowledged current Commission regulations allowed water utilities to obtain partial or complete exemptions from rotating outages in times of emergency requiring their services such as fire fighting. However, they alleged that if an emergency did occur, the current exception would not guarantee immediate restoration of power.

The water utilities' requested exemption was denied in D.01-04-006 because water utilities already had a limited exemption and reasonably prepared for power interruptions with backup generation and other capacity for the distribution and storage during power interruptions.

By definition, backup generators are used on an irregular basis only to provide uninterruptible power in emergency situations so that customers can receive reliable water service. Having previously recognized the water utilities' ability to use backup generators to provide uninterruptible sources of water without a blanket exemption from energy outages, we are not prepared to exclude AVR's backup generators from its rate base solely because AVR wants to ensure that its system would be able to provide reliable and adequate supply of potable water to its consumers at all times.

Backup generators are a necessary component for water utility operations and should be allowed in rate base to the extent deemed necessary and useful. Although AVR has approximately one back up generator for every two of its wells, there is no basis to disallow all of AVR's backup generators. Even if we concluded that the ratio of AVR's backup generators to its wells should be one for every four wells, the adjustment would reduce the average customers' bill by an immaterial amount, less than $0.35 per month based on AVR's requested return on rate base.³¹

The eleven backup generators should remain in rate base because there is no evidence that AVR has an excessive number of backup generators or that the generators are not useful. However, we will require AVR to provide additional information in its next GRC so that we may revisit this issue. That additional information should include the identity of each generator by horsepower, facility intended to backup, year purchased, rate base amount, actual time placed in service as a backup facility and actual amount of time tested by year since acquired.

E. Tank Coating

AVR requested and ORA concurred that AVR should be allowed to submit an advice letter filing to recover costs deemed reasonable for recoating AVR's Desert Knolls tank after the project is completed. ORA concurred because AVR has deferred recoating this tank even though the Department of Health Services notified AVR in 1995 that the interior finish of this tank was failing.

AVR should be allowed to file an advice letter for the recovery of reasonable costs incurred in recoating its Desert Knolls tank after the project is completed.

F. Materials & Supplies

There is no difference in materials and supplies methodology. The differences in estimates for materials and supplies resulted solely from the use of different estimates for average utility plant in service. AVR and ORA agree that the utility plant in service estimates adopted in this proceeding should be used to calculate materials and supplies for the test years. We concur.

G. Working Cash

There is no difference in working cash methodology. The differences in estimates for working cash resulted solely from differences in operating expenses, rate base and cost capital. AVR and ORA agree that the operating expenses, rate base and cost of capital adopted in this proceeding should be used to calculate working cash for the test years. We concur.

H. Depreciation Reserve

There is no difference in depreciation rates. The differences in estimates for depreciation reserve resulted solely from the use of different estimates for utility plant in service. AVR and ORA agree that the utility plant in service estimates adopted in this proceeding should be used to calculate depreciation reserve for the test years. We concur.