III. Discussion

A. Changes Necessary to Implement the Three-Year Rate Case Cycle Created by § 455.2

Fundamental changes are needed to enable the Commission to comply with the three-year GRC cycle required by § 455.2. The cycle drastically diminishes the Commission's flexibility in conducting its review of GRC applications. We no longer have the option of rescheduling an application to a future date, because all future dates and available staff are fully booked pursuant to the three-year cycle. Similarly, we cannot stretch out a procedural schedule for a particular GRC because other GRC applications (involving the same staff and sometimes other districts⁴ of the same utility) will be filed before the GRC is resolved. In the workshops and comments, this interdependence is referred to as the "domino effect."

To avoid the domino effect, each GRC must be filed and processed in accord with the RCP. When the Legislature enacted § 455.2, the Commission explained that it required additional resources to process a GRC for each Class A water utility in the three-year cycle. These additional resource needs are detailed in the Senate Appropriations Committee's analysis of Assembly Bill 2838. Due to budget limitations, these additional resources have not been forthcoming. Consequently, to comply with the three-year requirement with existing resources, we must accelerate our review of GRC applications. Our new RCP accomplishes this goal by making more productive use of the early stages of the proceeding by requiring that utility file all necessary information with the application, and replacing the second test year, with its account-by-account revenue requirement review, with an inflation-based escalation formula. As stated by the Office of Ratepayer Advocates (ORA): "The revised Proposed RCP makes certain essential changes to current practice that offer the only practical means for the Commission and ORA to meet this increased workload."

One benefit of the mandatory three-year cycle is that it should nearly obviate the need to rely on interim rates for delayed GRC decisions. The unrelenting cycle will require that each GRC is timely processed.

In the draft RCP attached to the OIR, our staff identified several opportunities for simplification and made proposals. These proposals, and alternatives proposed by the utilities, were discussed in the workshops and comments, and some issues were resolved. Several major issues, however, remain, and we address most of these issues below. Certain issues require additional time for development and consideration. These specific issues will be deferred to a second phase of this proceeding.

B. Components of The New Three-Year Rate Case Cycle

The current RCP provides for two consecutive test years, followed by one attrition year for January filers and two attrition years for July filers. A "test year" is a 12-month period over which projected costs and revenue are evaluated to determine if a rate change is required. This evaluation includes specific review of all projected costs and forecasts of consumer use. In contrast, an "attrition year" provides for rate increases based on an adopted formula.

In the draft RCP that accompanied the OIR, staff proposed eliminating the second test year and attrition year(s) and replacing them with two "escalation" years. Staff's ultimate proposal for the two escalation years provided for escalating labor and non-labor costs based on indices published by ORA, and for routine capital investment to be projected based on a five-year average; major capital projects would require specific approval outside the escalation process.

Eliminating the second test year is the cornerstone of staff's simplification proposal. Going from two test years to one significantly diminishes the staff review needed for a GRC. By building off the test year data, the rates for the final two years in the three-year cycle can be determined within the time constraints of the RCP.

Many of the components of the new three-year rate case cycle were addressed and resolved in the workshops. The definition of "test year" in § 455.2, with its implications for interim rates, the escalation process, particularly for capital additions, and general office allocations, however, require further work. We resolve these issues in the next sections.

1. "Test Year" as Used in § 455.2

Standard ratemaking practice uses "test year" to refer to the period over which the cost of service and proposed rates will be evaluated. Two types of test years are used: historical and forecasted (or future) test years. The Commission's current practice for water utilities is to use two forecasted test years. Using a forecast allows the utility to project expected costs and determine the revenue required to recover those costs, and the Commission to tailor the rate changes to match anticipated cost changes.

The Legislature's use of "test year" in § 455.2 requires interpretation because it does not define "test year" and has no clear relation to the Commission's current practice. In adopting § 455.2, the Legislature directed the Commission to "issue its final decision on a general rate case application . . . in a manner that ensures that the commission's decision becomes effective on the first day of the first test year . . . ." The first day of the first test year, however, does not always coincide with the expected effective date of rates sought in the GRC application. Test years are selected based on data availability and utility budgeting schedules, and often, but not always, correspond to calendar years. Under the Commission's current RCP, utilities that file in January use the next calendar year as the test year. Since rates are expected to be effective on January 1 of that next year, the expected effective date corresponds to the first day of the first test year. In contrast, however, utilities that file in July also use the next calendar year as the first test year but the expected effective date is not January 1, the first day of the first test year. The expected effective date is July 1. Thus, as used in § 455.2, "the first day of the first test year" seemingly requires different treatment of January and July filers, but no such intent appears in the statute; indeed, for one utility to have a faster GRC than another utility merely on the basis of the filing date seems inconsistent with the legislative intent. We, therefore, will interpret "test year" so as to enable us to even-handedly apply this statute.

One solution would be to schedule all GRC filings for January, using the following year as the test year. That "solution" would create insuperable workflow and workload issues, and, again, there is nothing in § 455.2 to suggest the Legislature intended to make the RCP harder to implement. Another solution that is easily manageable for both the Commission and the utilities would be to interpret "first day of the first test year" in § 455.2 to mean the expected effective date of new rates, as provided in the RCP. This interpretation accords the same treatment to January and July filers. It is also consistent with § 455.2 taken as a whole, and with the clear statutory objective of getting rates in place in accordance with the RCP schedule. We, therefore, will adopt it.

2. Test Year for Forecasting

Defining the test year for forecasting purposes also plays a role in the effective date. We adopt a calendar year test year for January filers, which will be simpler for the utilities to prepare and ORA to review than a non-calendar year test year. For July-filers, we adopt a fiscal year, July 1 to June 30, test year.

Some Workshop participants proposed delaying filing of January applications until March to allow the utilities to gather a full calendar year of historical data to use as a base for test year forecasting. While the March application filing date allowed the utilities to collect the calendar full year of historical data, it resulted in a three-month delay in the effective date of revised rates, i.e., the following March. A non-calendar test year (March 1 to February 28) was proposed to synchronize the application filing date with the effective date for rates. In this way, the first day of the test year would correspond to the expected effective date of rates.

ORA opposes the non-calendar test year due to the additional workload created by analyzing test year estimates that span two calendar years. Park Water Company (Park) also believes that the use of a calendar test year will be much simpler for the utilities to prepare and for ORA to review, than a non-calendar test year. Park and ORA are persuasive in their opposition to a non-calendar year test year. We will, therefore, retain the calendar year test year for January filers.

Retaining the calendar year test year, however, creates a data availability problem for January filers. The January filing date precludes a full calendar year of data to use as the base from which test year forecasts are made.⁵ Park wants to use actual end-of-year amounts for rate base and for expense forecasts. Park contends that this information can be conveniently supplied in a February update to its January applications. Similarly, ORA seeks the right to use updated amounts in its reports, which follow the utility's application by a few months. We address updates in the next section.

For July filers, the effective date requirement in § 455.2 necessitates a test year that begins on July 1. We are aware of the workload implications of using portions of two calendar years as the test year, and we encourage the utilities and ORA to establish standardized protocols for fiscal test years.

Therefore, we will adopt a calendar year test year for January filers and a fiscal year test year for July filers as set out in the Appendix, Part II.

3. Updates

The temptation to wait for additional historical data, i.e., updates, upon which to base a forecasted test year cannot be indulged when we face a statutory requirement for getting rates in place by a specific date. Any rate case plan requires a data collection termination date; otherwise, no rate case with a forecasted test year would ever be completed. For this reason, our Rate Case Plans have always included a limitation on updates. In this RCP, we have set the general limitation date as the filing of the application for all parties. We will allow two exceptions to this limitation: (1) updates of recorded data, and (2) with the approval of the Principal Hearing Officer based on standards set out in the Appendix.

4. Escalation of Labor and Non-Labor Expenses, Rate Base Additions

The utilities generally did not oppose eliminating the second test year but objected to some aspects of the proposed escalation methodology. Staff's initial proposal for escalation years only provided for wage escalation. At the conclusion of the workshops, staff accepted the utilities' recommendation to escalate non-labor costs as well. We approve escalation year rate adjustments for both wage and non-labor costs, using an advice letter process to do so. We will also grant the utilities' request to include customer growth in the escalation calculation. We deny, however, the utilities' request to derive item-specific escalation rates in each GRC. Adding the derivation of escalation rates to each GRC is contrary to our goal of simplifying and streamlining the GRC process.

California Water Association (Cal Water Association) proposes to include customer growth, i.e., increases in the number of customers, in the escalation calculation but provides no specific methodology to do so. The Commission has found that customer growth plus inflation is a reasonable means to estimate administrative and general costs. (See D.03-09-021.) ORA opposes including customer growth because increased expenses are not necessarily directly proportional to increased numbers of customers, and determining a customer growth factor for the escalation years will be a contentious issue in the rate case. ORA also contends that estimating customer growth will be a contentious issue.

Cal Water Association argues that many costs, such as postage, water treatment chemicals, additional customer service clerks to process bills, increase with an increase in the number of customers, and, consequently, the escalation methodology should include increases in customers. Cal Water Association also points out that the escalation methodology provides for additional revenue from the additional customers, so the additional costs should also be reflected.

We agree with ORA that utility work requirements and expenses do not necessarily increase in direct and exact proportion to customer growth, and that productivity improvements should be able to address many increases. Cal Water Association, however, makes an equally valid point that the cost increases caused by additional customers will almost certainly not be zero. On balance, we find it reasonable to allow the utilities to include customer growth in the escalation methodology. A simple, five-year average percentage change in number of customers should minimize contentiousness. We grant this request with the understanding that including customer growth in the escalation methodology will tend to overcompensate the utility for increased costs. We believe that this outcome will offset any issues where we make simplifying assumptions for escalation purposes that may not fully encompass all possible future cost increases. For example, our treatment of General Office allocations, discussed below, may tend to undercompensate multi-district utilities under certain circumstances.

ORA also recommends that test year estimates should be adjusted to remove any "highly unusual or significant one time expenses" prior to applying the escalation methodology. Park opposes the ORA recommendation because ORA does not define "highly unusual or significant one time expense" and Park believes that ORA will impose too stringent of a standard. Park is concerned that GRCs will be overrun with "minutiae" as parties debate whether minor expenses meet ORA's standard. Park also states that ORA's proposal reflects an unreasonable assumption that no highly unusual or significant one-time expenses will occur in the escalation years.

In escalating recorded amounts for forecasting purposes, the Commission has a practice of excluding nonrecurring items. (See, e.g., Southern California Edison, 64 CPUC 2d 241, 316 (D.96-01-011).) Thus, ORA's proposal to exclude nonrecurring items, a term we prefer to ORA's "unusual," is consistent with our practice and we will adopt it. Park's request, however, for a minimum level of expense is reasonable and furthers our goal of streamlining the GRC process. We will therefore adopt a requirement that the nonrecurring items also represent a significant portion of the test year revenue requirement. As a general guideline, we will define "significant" as representing more than 1% of test year gross revenue. The particular facts of a GRC may support a different definition. Thus, we will require that test year items that are nonrecurring and significant be excluded from the revenue requirement amount used to calculate the escalation year revenue requirement. This two-pronged requirement will have the effect of providing the utilities with a reasonable level of non-recurring expenses in the escalation years.

To implement the escalation increase, no less than 45 days before the start of the escalation year, the utility may file an advice letter setting out its calculations and supporting analysis for the escalation year rates. The most recent "Estimates of Non-labor and Wage Escalation Rates" and "Summary of Compensation Per Hour" as published by ORA, Energy Cost of Service Branch (ECSB) shall be used as the escalation rates. Items not covered by the ECSB rates shall be escalated by the most recently available, recorded, 12-month-ending change in the U.S. Cities CPI-U as published by ECSB. The test year adopted quantity for the following Summary of Earnings line items shall be increased by the applicable rate as follows:

LINE ITEM	ESCALATION RATE
Purchased Chemicals	Non-Labor 60%/Compensation per hour 40%
Payroll	Labor
Pensions and Benefits	Labor
Other O&M and A&G	Non-Labor 60%/Compensation per hour 40%
Payroll Taxes	Labor
Other Taxes (excluding income)	Non-Labor 60%/Compensation per hour 40%
Loans, Insurance, Contracted Services, Rents	CPI-U (previous 12 months)

For utilities organized with a general office structure, the prorated comparable general office items may also be escalated by the applicable escalation rate. No other amounts may be escalated.

The utility shall also include with its advice letter all data and calculations necessary to show the Weather Normalized Pro-Forma Rate of Return on Recorded Operations, as specified in the next phase of this proceeding. The escalation year increase shall be decreased to the extent the pro-forma rate of return exceeds the authorized rate of return for the 12 months ending in September for January filers and in April for July filers prior to the escalation year.

Escalating rate base and providing for capital additions was a major issue in the comments and oral argument. All proposals garnered significant criticism, and San Gabriel states that "the current system of two Test years and one attrition year has worked well . . . and should not be hastily discarded." In reply comments, ORA recommended retaining the current system of two test years and one attrition year.⁶ We will adopt ORA's recommendation.

The utilities need to provide for rate base additions in years two and three of the GRC cycle. The parties raised serious issues with the various proposals, and the responses, in some instances, led to further questions. The primary issues were distinguishing between major and routine plant additions, developing a water plant escalation index, and filing additional advice letters. ORA, in its reply comments, surveyed the existing proposals and determined that the Commission's current approach to capital additions, two test years and an attrition year, was simpler and, thus, preferable to all currently proposed options.

We now agree with ORA. As the utilities and our staff gain experience with the new RCP, perhaps additional simplifying procedures can be proposed and implemented for capital additions. At this point, however, we agree with ORA that the current methodology for capital additions should be retained.

We remind the parties that GRC proposals for major capital projects presented in the application⁷ must include need analysis, cost comparison and evaluation, conceptual designs, and overall budget. Subsequent GRC applications shall be based on actual plant in service, and shall include a report comparing actual capital additions to the authorized amounts included in each of the three years of the previous GRC cycle. The Commission may use this comparison as the basis for adjusting future capital addition estimates for the escalation years.

5. General Office Allocations

Some water utilities are organized into districts, with certain services and management provided by a centralized administrative department. We refer to the department as "General Office" and it often includes such services as engineering and senior management. Allocating the costs of this department, which serves no customers directly, among the other districts of the company is known as "General Office Allocation." Our schedule set out in the Appendix schedules General Office as if it were a district; that is, a GRC is scheduled once every three years. Approximately one third of the water utility's districts will simultaneously file GRCs. The new General Office amounts can be immediately allocated to and incorporated in the rates of these districts. The issue for this RCP, however, is when to implement the General Office rate changes in districts not included with the General Office GRC filing.

Some utilities propose to implement the General Office rate change immediately in all districts. ORA opposes this proposal because it changes rates to accommodate changes in only one item, "single-issue ratemaking." ORA also states that the proposed General Office rate change for the districts not filing a concurrent GRC will require notices to customers. These customers, having just gone through a GRC, may be confused by the multiple rate increases.

The utilities' proposal does not further our interests in streamlining processing of GRC applications because it requires additional filings to implement, and would increase the frequency of rate changes, with the untoward results listed by ORA. We will, therefore, require multi-district utilities to file their General Office on the three-year cycle. Changes in General Office allocations will be implemented immediately with the districts then pending, and implemented in turn when the other districts file GRCs. We note that in the subsequent years, those other districts will implement the escalation year General Office amounts, not the amount adopted for test year (the "stale" amounts). Thus, in the first General Office escalation year, two thirds of the districts will be charging the same General Office amounts, the districts that filed that year and the previous year. In the second escalation year, all of the districts will be using the same second escalation year amounts. In this way, the utilities will implement the new General Office allocations on a schedule that provides for updated or at least escalated amounts in all districts for every year, minimizing the effect of sequential implementation of the new allocations.

C. Access to Utility Information

Making the new RCP process work requires that the Commission and its staff have early access to complete information supporting the requested rate increase. In the following sections, we discuss obligations of utilities and other parties to respond to requests for information. We have divided our discussion into three sections based on the stage of the GRC cycle.

1. While No Application or Proposed Application Is Pending

Pursuant to the Public Utilities Code, the Commission has virtually unlimited access to public utility information at any time. For example, § 314 authorizes the Commission to inspect the "accounts, books, papers, and documents of any public utility." The Commission is required to audit each public utility with more than 1,000 customers at least once every three years by § 314.5.

ORA has similarly far-reaching authority. As provided in § 309.5(e), ORA "may compel the production or disclosure of any information it deems necessary to perform its duties from entities regulated by the commission . . . ." Thus, ORA may at any time compel a public water utility to produce any information ORA deems necessary.⁸

Unlike Commission and ORA staffs, prospective intervenors have little basis under the Public Utilities Code for requiring a water utility to disclose information outside of a formal proceeding. However, we encourage utilities to comply with prospective intervenors' reasonable requests for information.⁹

2. While ORA Is Reviewing the Proposed Application

The purpose of ORA's review of the proposed application (PA) is to ensure that all information and analysis needed by the Commission to evaluate the rate request is fully presented in the application. To the extent ORA determines that the information in the PA does not meet the applicable standards, ORA will issue a deficiency letter and allow the utility to cure the defects within 15 days.

Thus, during this stage of the process, the utility has the affirmative burden of providing information to ORA. To the extent the utility fails to meet this burden, ORA can issue a deficiency letter. Should the utility disagree with the deficiency letter, the utility may appeal the letter through to the Executive Director.¹⁰

3. After the Application Is Filed

The formal process begins with the utility filing its application. During the pendency of the GRC application itself, information access is generally subject to the usual rules and procedures governing discovery in Commission proceedings.

Keeping the rate case process on track requires a well-explained and supported GRC application that includes complete workpapers with tables, analysis, calculations, and back-up detail.¹¹ This information is necessary for the parties to begin their evaluation of the rate request, and inclusion of this information will limit the need for discovery.

To the extent additional information is required, parties can continue to rely on the current system for making discovery requests and resolving discovery disputes through the Commission's Rules of Practice and Procedure (Rules) and our Law and Motion process. We will, however, require a meet and confer process. Specifically, to the extent a party contends that information sought by a data request is not subject to discovery, the party must:

(a) Meet and confer with the requesting party within five days of receiving the request.

(b) Explain the basis for the objection and offer other means to provide the requested information.

(c) If the party asserts that information is privileged, the party shall maintain a privilege log showing exactly which documents exist, what portions of documents are alleged to be privileged, and the specific basis for each claim of privilege.

(d) If the parties are unable to resolve the matter, the requesting party may file a motion to compel, and any response to the motion shall be filed and served, with facsimile or electronic mail courtesy copy, no later than five days after the motion is filed.

D. Common Forecasting Methodology

ORA proposed that the final RCP adopt a common forecasting methodology for the number of customers and per customer usage for residential and small commercial customer classes. In its reply comments, ORA proposed modifications to its proposal as a result of continuing discussions with the utilities. We adopt these proposals, as modified.

California American Water Company (Cal-Am) did not oppose adopting common forecasting methodologies, so long as the utility may also propose alternatives. Cal-Am did, however, propose a refinement for treating drought years. Cal-Am noted that ORA proposed to exclude all drought years from the forecast of average consumption per customer. Cal-Am stated that excluding all drought years would tend to result in lower consumption. Cal-Am recommended that the RCP only exclude drought years where the Commission had authorized the utility to recover the lost revenues due to lower consumption though a memorandum account.

Suburban Water Systems (Suburban) opposed ORA's initial proposal to use a simple five-year average for sales forecasting. Suburban stated that such a forecasting methodology would be major departure from current practice and would result in significant revenue changes for many utilities. Suburban explained that a statistically-sound forecasting methodology based on annual amounts, as ORA proposed, would require 45 to 74 years of annual data to provide sufficient data for a reliable regression analysis. As such data are not available, Suburban concluded that the two methods based on annual data "fall far short." Suburban recommended using a particular forecasting methodology with 20 years of monthly data (240 periods) and limiting independent variables to rainfall and temperature.

In reply comments, ORA changed its proposal to the "New Committee Method," which relies on a multiple regression methodology based on Standard Practice No. U-2 and Supplement to Standard Practice No. U-25. ORA also included several improvements, including using a five-year average for customer growth, basing temperature and rain on a 30-year average, and removing recognized drought periods, but supplementing with additional historical data to obtain 10 years of monthly data.

ORA's proposal limited rate case participants to using this forecasting method for the first two years of the first three-year rate case cycle. ORA would then require that the Water Division conduct workshops and report to the Commission on whether to change or retain this forecasting methodology.

ORA stated that the modified proposal resulted from its "continuing discussions with the utilities." The modified proposal addresses Suburban's and Cal-Am's most significant concerns. We will, therefore, adopt ORA's proposal, including the experimental period followed by a recommendation from the Water Division.

E. Interim Rate Relief

Section 455.2 permits a utility that is subject to the RCP to request interim rate relief if the Commission has not resolved the utility's GRC by the "first day of the first test year." Here, we discuss the implementation issues raised by interim rate relief.

Before turning to § 455.2, we note that § 454 requires that all rate increases be "justified" through a showing to the Commission. Consequently, any request for interim rate relief must demonstrate that the utility has made a substantial showing in the application supporting a rate increase at least equal to the rate of inflation.

Earlier in today's decision, we interpreted the statutory deadline to refer to the expected effective date of new rates for that filer, as set in the RCP. Another predicate to the award of interim rate relief is that the Commission determine whether interim relief is "in the public interest." A further consideration is the cause for the delay in issuing the final decision. That delay should not be "due to actions by the water corporation."

To request that the Commission make these determinations and award interim relief as appropriate, the utility may file a motion in the proceeding. As provided in our Rules, other parties will have an opportunity to respond to the request. The Presiding Officer will then prepare a decision for the Commission's consideration.

The presiding officer's decision shall address whether the delay in completing the GRC proceeding is "due to actions by the water corporation." Section 455.2(b) authorizes the presiding officer or the Commission to set a different effective date for interim or final rates where the water utility caused the delay. The presiding officer's decision shall specify the utility's actions that caused the delay and shall include a proposed effective date for interim or final rates.

The assigned Administrative Law Judge and the assigned Commissioner set the GRC procedural schedule. The adopted schedule should be consistent with the timeline adopted in today's decision but may be tailored to the particular facts of a GRC. The assigned ALJ and Commissioner will be working closely with the parties in all stages of the proceeding, and it will become apparent well in advance of the expected effective date that the decision may not be timely. Consequently, the ALJ or Commissioner could set a date for filing a motion for interim rates, or the utility could file such a motion pursuant to Rule 45(c).¹²

Finally, we note that implementing a rate increase that has not met the requirements of the Public Utilities Code, e.g., without the "just and reasonable" showing required by § 451 and prior to hearings required by § 454, is not normal rate case procedure. Section 455.2 requires that this Commission make a finding of the "public interest." The Commission has a long history of considering requests for interim rates, and has established standards for granting such increases. Moreover, the surcharge (credit) necessary to implement Cal Water Association's asserted right to adjust interim rates "either upward or downward" based on the final decision, creates practical problems as well as conceptual issues. The purpose of the surcharge is to recover revenue requirement associated with service provided after the effective date of interim rates and before the final rate increase decision. Such temporal shifts in revenue requirement are disfavored because current customers are paying costs associated with past service. Such shifts are also contrary to cost-based water ratemaking policy adopted by the Legislature in § 701.10. Therefore, we expect any requests for interim rate increases to demonstrate that the increase is in the public interest.

Where we decide that interim rate relief is appropriate, § 455.2 directs the use of the rate of inflation as a cap in increasing the existing rate. To implement this directive, the parties agree that the rate of inflation should be the most recent 12-month-ending change in the U.S. Cities CPI-U published by the U.S. Bureau of Labor Statistics. This percentage should be applied to all revenue requirement components except those items included in balancing accounts.

F. "Companion" Order Instituting Investigation

ORA requests that the Commission issue an Order Instituting Investigation (OII) for each GRC application to enable the Commission to "hear proposals other than the applicants', and to enable the Commission to enter orders on matters regarding revenue requirements, rates, service, practices, maintenance and facilities." Cal-Am opposes this request. It contends that an OII would only confuse and fragment the rate case process.

We conclude that an OII need not be routinely issued for all GRC applications. The Commission has extensive authority to make appropriate orders in furtherance of the public interest. As provided in Rule 6.3, the Assigned Commissioner determines the scope of a particular GRC proceeding. The Assigned Commissioner will determine, based on the pleadings and specific facts of the proceeding, which issues will be addressed. All the issues listed by ORA, among other parties, are among the issues the Assigned Commissioner may consider for inclusion in a particular proceeding. Thus, a routine OII is unnecessary.

In extraordinary circumstances, such as the circumstances discussed in the next section, however, an OII may be appropriate. In those circumstances, we will issue an OII, and take other procedural actions as, in our discretion, seem useful or necessary in the exercise of our duties.

G. Changes to GRC Filing Schedule

A specific schedule setting out the filing date for each utility, and each district of the multi-district utilities, is included in the RCP (see Appendix, Part V). Section 455.2(c) allows the GRC filing requirement to be waived by mutual agreement of the Commission and the utility. Thus, where the Commission staff and the water utility agree that a GRC filing as provided in the RCP is not needed, the agreement should be presented to the Commission for approval via the advice letter process. The advice letter request for approval must be made on or before the date for filing the PA, and must contain a thorough analysis of current and projected revenue requirements and earnings. Any waiver agreement must also address rescheduling the GRC filing.

Due to the delay in implementing the revised RCP schedule, some utilities' rates may fall below just and reasonable levels absent action. For example, Southern California Water Company (SoCal Water) states that its Region I GRC will be delayed for several years under the new RCP, and it requests permission to immediately file a GRC for that region. ORA states that it cannot process a GRC now without seriously impacting the proposed schedule, but that it is willing to work with SoCal Water. We direct ORA and SoCal Water to devise and implement a mutually agreeable proposal to transition Region I to the new RCP schedule within 60 days of the effective date of this decision.

Similarly, California Water Service Company (Cal Water) states that transitioning its 24 districts to the 8 per year schedule adopted in today's decision will require additional attrition year increases in several districts. ORA does not oppose Cal Water's proposal. We will authorize Cal Water to file additional attrition year increases as necessary to close any gap in time between a currently authorized attrition year and the next test year. All advice letters seeking such attrition year increases shall follow the attrition requirements, including earnings test and amount of increase, set in the last GRC for that district.

Park Water seeks permission to change the district with which it files its General Office. Park states that it has two districts, Apple Valley and Central Basin, which it files in consecutive years, followed by a year in which it files no GRCs. The current schedule provides for Park to file its General Office with the Central Basin district in the second filing year, which is then followed by the "off" year. Consequently, Park Water cannot implement the General Office increase in Apple Valley until the next Apple Valley GRC, two years later. Park proposes to transition to filing General Office with Apple Valley, which would allow implementation in the following year for the Central Basin district.¹³ We will grant Park Water's request. The filing schedule in the Appendix has been modified to have General Office filed with the Apple Valley district.

H. Memorandum Accounts

Park and other utilities sought Commission authorization to file advice letters, rather than applications, to create memorandum accounts for unforeseen water quality capital investments, as well as to make the advice letter effective upon filing. ORA opposed these changes and advocated for retaining the current system. We agree that the utilities have not provided a persuasive rationale for changing our current system.

In D.02-08-054, the Commission stated that memorandum accounts are appropriate when the following conditions exist:

(1) The expense is caused by an event of an exceptional nature that is not under the utility's control;




(2) The expense cannot have been reasonably foreseen in the utility's last GRC and will occur before the utility's next scheduled rate case;




(3) The expense is of a substantial nature in the amount of money involved; and




(4) The ratepayers will benefit by the memorandum account treatment.

Determining whether to create a memorandum account under these standards may well require complex factual findings and legal conclusions. The advice letter process is not well suited for such issues. The advice letter process is for ministerial actions implementing previously approved Commission policy.

Moreover, nothing in § 455.2 requires that we review and revise our current process for considering memorandum account requests.

Cal Water Association also seeks to establish memorandum accounts for water quality and new supply projects "even before an advice letter has been approved." We reject this proposal, as we have rejected similar proposals in the past. For example, in the Southern California Water Company Headquarters case, Decision 92-03-094 (March 31, 1992) 43 Cal. P.U.C. 2d 600, we stated that memorandum account tracking could only occur prospectively:

"It is a well established tenet of the Commission that ratemaking is done on a prospective basis. The Commission's practice is not to authorize increased utility rates to account for previously incurred expenses, unless, before the utility incurs those expenses, the Commission has authorized the utility to book those expenses into a memorandum account or balancing account for possible future recovery in rates. This practice is consistent with the rule against retroactive ratemaking."

We see no reason to change this "well-established tenet."

I. Phase II Issues

The workshop report included a list of issues that the parties recommended should be addressed in a subsequent phase of this proceeding. We note that during the next phase, some utilities will be filing GRCs under this new RCP. To the extent additional RCP implementation issues arise, Phase II will provide a ready means to resolve the issues. We will address each issue listed in the workshop report in turn below.

Two issues, revision of the earnings test and review of ORA's master data request, are matters related to this proceeding, and many other proceedings and Commission filings. These issues relate to Commission practices that have been adopted with varying levels of formality. Consequently, a Commission decision is not necessary, or perhaps even desirable, to memorialize a change. Should facts arise indicating that a particular practice is inappropriate, modifying a less formal practice is far simpler than seeking a modification to a Commission decision. For this reason, we encourage the parties and the Water Division to work cooperatively to resolve these issues in a mutually agreeable manner, and use carefully selected means to memorialize the agreement.

Park Water requests that the timing issue for filing motions for interim rates be considered in the next phase. The parties also should devise a specific methodology for calculating the interim rate increase. Park Water recommends applying the inflation rate to existing commodity rates and service charges. Such a proposal, however, would have the effect of escalating costs to be recovered via balancing accounts. As these amounts are recovered on a dollar-for-dollar basis, plus interest, there is no need to include these costs in any interim rate increase. In Phase II, the parties should develop a specific methodology for applying the inflation rate selected above to the remaining revenue requirement items for an interim rate increase, as well as the timing of motions for interim rate relief.

Cost of capital is a complex and often contentious issue. ORA proposed a number of changes to simplify and streamline the issue. At oral argument, the parties indicated that they are hopeful that they can develop a simple approach to cost of capital in the next phase of this proceeding, and that they have a workable interim plan for the GRC filings due soon.

The parties are also discussing a consistent table for determining and displaying summary of earnings. The parties state that they would like our Water Division to take the lead on this issue. Until a new table is adopted, the utilities will retain their utility-specific methods of determining and displaying this summary.

Other issues related to escalating rate base also were listed as requiring further resolution: treatment of advances and contributions to rate base, and depreciation. To the extent these issues are not resolved by retaining the existing capital additions method, they will be addressed in Phase II.

The effective date for escalation year advice letters is also an issue for later resolution. Generally, the parties agreed that escalation year advice letters should be effective one year later than the expected effective date of the initial rate increase. The Commission's decision on a particular GRC, however, may set different dates for this and other events for a specific utility.

The parties are also willing to discuss further issues related to penalties and the deficiency review process. To the extent such discussions require memorializing in a Commission decision, we can do so in the Phase II decision.

To ensure the timely completion of this Phase II, the parties shall file and serve a status report, including recommended next procedural steps, no later than 120 days after the effective date of this order.