Discussion

Responses to the Application

In recognition of the urgency Monterey District's water situation presents, the usual 30-day period allowed for protests to the application was shortened to four days, and CalAm's reply period shortened from ten days to one day.⁴ Three replies were received in lieu of protests, from the Commission's Office of Ratepayer Advocates (ORA), from Independent Reclaimed Water Users Group (IRWUG), and from Pebble Beach Company.⁵ The Commission received additional input through two Public Participation Hearing sessions held in Monterey on July 2, and from the public and others in the form of telephone calls, letters and e-mail.

Each of the three formal responders to this application characterized its document as a response rather than a protest, but only under conditions each set forth if the changes are authorized. ORA states that it does not oppose the application, subject to three conditions: (1) that CalAm file an application for authority to implement a moratorium on new hookups and expansions; (2) that the Commission provide an opportunity for public comment; and (3) that CalAm implement a two-tiered rate structure for golf course and public authority customers. CalAm agrees to those conditions in its reply. Both the Pebble Beach Company and the IRWUG support CalAm's changes with two conditions: (1) that the Commission establish a two-tiered rate structure for golf courses; and (2) the Commission state in its decision that the increased rates should not affect the price of reclaimed water. CalAm agrees to the first condition and requests the second as well, recognizing that the rates for reclaimed water are not within CalAm's or the Commission's control. We group the respondents' conditions for discussion next.

New Connection Moratorium

To address ORA's first condition, CalAm is in the process of preparing a Commission application seeking a moratorium on all new or expanded water service connections in Monterey District. Pursuant to California Water Code §§ 350 et seq., before CalAm may impose a moratorium it must conduct a public hearing on the water shortage emergency and the Board of Directors must pass a resolution declaring the existence of a water shortage emergency. CalAm is in the process of complying with those conditions and commits to filing shortly the application ORA seeks. While we withhold judgment today on whether such a moratorium is justified, we agree that it is an appropriate measure to consider. We will order the application be filed.

Public Participation Hearings

ORA's response to the application recommended the Commission provide an immediate opportunity for public comment. On the day CalAm held its informal meeting with ORA, CalAm made such a request to the Commission's Administrative Law Judge Division, and the ALJ Division the following day calendared a formal, two-session Public Participation Hearing to be held in Monterey on July 2. ORA's response acknowledges and supports that outcome.

Public Authority Rates

ORA's response also raised the issue of a two-tiered rate structure for public authority customers. CalAm's application notes that it limited its proposed increases to the upper blocks in an effort to induce conservation in outdoor water usage. Rates for the lower blocks were left unchanged so as to permit continued, normal indoor usage levels without penalty. In meetings with ORA, CalAm discussed the fact that public authority customers purchase water for both indoor and outdoor uses. So as not to unfairly penalize public authority customers for their necessary indoor water use, CalAm agrees that a two-tiered rate structure should be established. In its reply, CalAm includes such a rate structure based on average monthly winter use for public authority customers as a group. This should allow public authority customers to continue most of their existing usage at the present lower block rate. We agree that this is a reasonable adjustment to the original proposal and will require its adoption.

Golf Course Rates

ORA, Pebble Beach Company and IRWUG all raised the issue of a two-tiered rate structure for golf courses. As the Pebble Beach Company and the IRWUG discuss in their comments, they are participants in the Monterey Reclamation Project. As such, they have voluntarily agreed to accept reclaimed (recycled) water from MPWMD in lieu of potable water previously supplied by CalAm. Their contracts with MPWMD provide that to the extent reclaimed water is insufficient in either quality or quantity, it will be supplemented by potable water from CalAm. High salinity in reclaimed water results in salt concentration buildup which, if not flushed, can severely damage or even destroy golf course greens. To prevent that damage, the golf courses flush with potable water over a five-day period once a month during the March through November irrigation season.

In its reply, CalAm agrees with ORA, Pebble Beach Company and IRWUG that golf courses should not be charged the proposed higher conservation rates for water used to flush accumulated salts from reclaimed water use. Golf courses not using reclaimed water should be similarly treated. CalAm therefore proposed in its reply a two-tiered rate structure for all golf courses under which it would establish a monthly allotment (first tier) sufficient to allow for monthly flushing, and as of the date its reply was filed had already begun to determine those allotments. The existing rate for all golf courses would remain unchanged for usage up to the allotment and only additional usage would be at the increased, second-tier rate. Again, we agree that this is a reasonable outcome - it balances the need for conservation with the need to minimize the adverse impact on a golf course industry that is one of the major drivers in the Monterey Peninsula's economy.

Reclaimed Water Rates

As Pebble Beach Company and IRWUG explain, the price MPWMD charges for reclaimed water under the Monterey Reclamation Project is tied by their contracts to CalAm's rate for potable water. Their responses to the application ask the Commission to order a separate tariff rate for their golf courses (which we have agreed above to do for all golf courses), make a finding that golf courses using potable water for flushing are not similarly situated to other potable water users, and make clear that the increased rate for the second-tier water use is an extraordinary charge and therefore not appropriately considered a driver for the price of reclaimed water.

As all parties implicitly agree, only MPWMD, not the Commission, has the ability to interpret or modify the contracts to include or exclude as reclaimed water price drivers the extraordinary conservation rate increments we approve in this application. Given that caveat, CalAm and we do agree with Pebble Beach Company and IRWUG's position. Substitution of reclaimed water for potable water in golf course irrigation has been a major factor in holding down potable water usage in CalAm's system over the past decade. The second-tier golf course rates we establish today are indeed extraordinary, temporary, and intended only for purposes of promoting much needed conservation. We will make our finding to that effect.

MPWMD's Conditions

MPWMD did not file a formal protest or response to the application. It did, however, through a June 23, 2004 letter inform the Commission that it had implemented Stage 3 conservation effective immediately and make its views on the application known. Lacking a formal filing, CalAm did not comment on MPWMD's views in its formal reply. We nonetheless note MPWMD's views here because it is a key participant in the issues involved.

MPWMD's mission is to "manage, augment, and protect water resources for the benefit of the community and the environment" of the greater Monterey Peninsula area, and MPWMD has taken an active role in each of CalAm's last three Monterey District GRCs and in other Commission proceedings, particularly in the areas of water supply, rate design and conservation. MPWMD's charges include managing and regulating water use, reuse, reclamation and conservation, and financing water public works projects. Almost all of CalAm's Monterey District water system lies within MPWMD's 170 square mile jurisdiction.⁶ We previously expressed our strong preference that CalAm work cooperatively to develop mandatory conservation and rationing plans consistent with complementary measures to be developed by MPWMD. MPWMD enacted Ordinance 92 establishing an expanded water conservation and standby rationing plan, and we authorized CalAm to adopt Ordinance 92 as its conservation and standby rationing plan.

MPWMD's letter describes CalAm's obligations under its Ordinance 92 Expanded Water Conservation and Standby Rationing Plan, and offers conditional support for CalAm's proposed conservation rates. MPWMD asks the Commission to require Cal Am to reduce its unaccounted for water use by a date certain, and to facilitate that goal, to require CalAm to devise and implement an expedited main replacement program. MPWMD also expresses its willingness to work with CalAm to complete landscape water audits required under Ordinance 92 and to monitor water budgets for users, but requires funding assistance to complete those tasks. MPWMD also notes that CalAm has not provided water use records or budgets to it on request.

We appreciate MPWMD's input and offer of cooperation. CalAm will be filing its next GRC for Monterey District in February 2005 for test year 2006, and it is in such GRCs that we typically examine water utilities' unaccounted for water usage levels and main replacement programs. Because those considerations are major drivers in establishing water utilities' revenue requirements and setting rates, we intend to continue that practice in CalAm's case. Accordingly, we urge CalAm and MPWMD to coordinate their efforts to the extent they can do so and present and support their position(s) in CalAm's GRC proceeding next year.