Background

CalAm's Monterey District

CalAm provides public utility water service to approximately 170,000 customers in various areas in San Diego, Los Angeles, Ventura, San Mateo, Santa Cruz, Sonoma, Sacramento, Placer and Monterey counties.¹ CalAm is a California corporation and a wholly owned subsidiary of American Water Works Company, Inc., which was recently acquired by RWE Aktiengesellschaft, Thames Water Acqua Holdings GmbH.

CalAm's Monterey District provides water service to approximately 38,200 customers on the Monterey Peninsula and vicinity, encompassing the of Carmel-by-the-Sea, Pacific Grove, Monterey, Sand City, Del Rey Oaks and part of Seaside, much of the Carmel Valley, the Highway 68 corridor, and several other nearby unincorporated areas.

CalAm supplies about 85% of the Monterey Peninsula's water. It develops its supply from Carmel River surface water and wells in the Carmel Valley, Seaside basin, and along the Highway 68 corridor. It has been apparent for some time that during periods of drought there is not sufficient water to satisfy fully both environmental requirements and unrestrained municipal water demands, but various factors have prevented any permanent solution to date.

In 1995, the State Water Resources Control Board added a major new legal constraint to the Monterey Peninsula's physical water supply limitations. SWRCB, following hearings begun in 1992, acted on complaints alleging that CalAm's Carmel River water use was without valid rights and adversely impacted environmental and public trust values. In Order WR 95-10, it directed CalAm to cut its Carmel River diversions to 14,106 acre-feet annually and implement conservation measures to bring that figure down by 20% more beginning with the 1997 water year. CalAm met the SWRCB-mandated cutback during the first water year ending September 30, 1996 following Order WR 95-10. It exceeded the limit in the second year, however, and the SWRCB levied a $168,000 fine on CalAm for the violation.² With the aid of Commission-authorized rate structures designed to provide very strong conservation incentives, CalAm has been able to meet SWRCB's limits each year thereafter.

Monterey's Current Supply Situation

CalAm continues to operate Monterey District under the terms of SWRCB Order WR-95-10 as modified by Order WR 98-04. CalAm works with Monterey Peninsula Water Management District (MPWMD) to create quarterly water production budgets and sets monthly targets that, if met, should at the end of the water year be within the SWRCB annual limit. Through April 2004, CalAm had managed to stay within its cumulative water production target for the current October through September water year. However, in mid-May 2004, CalAm recognized that May deliveries were consistently exceeding the daily targets and that the early, dry and hot weather conditions were continuing with no relief in sight. That pattern continued into June and unless immediate action is taken CalAm believes it is virtually certain that it will exceed the SWRCB limit for this water year. CalAm estimates that, depending on how SWRCB counts the number of violations, the fines SWRCB may assess for failing to meet the Order WR 95-10 water production limits for the current water year could run as high as $3 million to $4 million. If fines are assessed, they will be booked in CalAm's previously authorized memorandum account and CalAm will seek Commission authorization to recover them from its Monterey District customers.

CalAm reports that it has already attempted to persuade customers to conserve voluntarily. In mid-May, the district manager began a telephone campaign to contact local golf course operators in person, and recorded a telephone message that was delivered to over 30,000 district customers. CalAm also made two postcard mailings with conservation messages to all Monterey District customers in May, and on June 1, the company began a series of television, cable and radio spot announcements to complement extensive coverage the issue has received in the local press. Despite those efforts, water consumption continued to rise through May. Even if usage should return to normal now, to avoid SWRCB fines CalAm will have to make up the earlier overusage amounts during the remaining three months of the water year, July, August and September.

Pursuant to earlier Commission orders, CalAm has long had a Water Conservation Plan, Rule 14.1, in its tariffs. Rule 14.1 is modeled on and conforms to MPWMD's Ordinance 92. Both establish a phased plan to deal with shortages. Stage One of Ordinance 92 consists of numerous water conservation activities, has been in effect since 1999, and was in effect at the time this application was filed. Largely as a result of the Stage One program, per capita consumption in Monterey District remains among the lowest in California. Stage Two is directed at landscape water usage. Stage Three, subject to Commission authorization, allows for enforcement (through fines, etc.) by MPWMD to obtain compliance with Stages One and Two, and discusses implementing increased rates as an additional conservation mechanism. According to the application, CalAm's current request is consistent with Ordinance 92, and all further Stage 3 action to discourage excessive usage is MPWMD's responsibility. On June 23, MPWMD wrote to the Commission to convey its conditional support for CalAm's application and to report that it had implemented Stage 3, "effective immediately." We discuss MPWMD's conditional support in a section to follow.

CalAm's Application

CalAm's application seeks ex parte authorization to impose an immediate, temporary increase in its upper quantity block rates for all water service connections (Tariff MO-1) in the affected area.³ Those increases would expire on November 1, 2004, to be replaced by the winter rates approved in CalAm's last Monterey District GRC. The increases CalAm proposes are aimed primarily at decreasing excessive outdoor water usage, and water waste. Users of normal amounts of water indoors and those who do not waste water would be largely unaffected.

Under ratemaking provisions already in effect, the increased revenues would flow automatically to CalAm's existing Water Revenue Adjustment Mechanism balancing account and eventually be applied to customers' benefit.

CalAm states that it has commissioned a cost of service study and rate design analysis for its next Monterey District GRC application to be filed February 1, 2005. In that GRC, CalAm will propose a revised rate design intended to avoid the need to file future applications such as this one.