6. Settlement Overview

We have appended the entire Settlement to this decision (see Attachment A). Appendix A to the Settlement is a reconciliation exhibit for test years 2004 and 2005. It sets out, in dollars, each party's original position on every major revenue requirement component, the settlement position the parties jointly propose, and the difference between the original and settlement positions. Appendix B to the Settlement consists of a 2003 capital budget for Metropolitan District, which serves as an agreed-upon baseline, and the proposed capital budgets for 2004 and 2005.

In reviewing the settlement of these major issues, we organize our review according to the three major components of cost-based ratemaking (net operating income, rate base, and rate of return on rate base) and then examine miscellaneous additional issues.

6.1 Net Operating Income

Net operating income (sometimes referred to as net operating revenue) is gross operating revenue less operating and maintenance expenses, depreciation, income taxes, and other taxes. The parties' agreement on the net operating income for test years 2004 and 2005, at proposed rates, is set forth in Table 3. More detailed information is provided in Appendix A to the Settlement.

Table 3

Settlement Provisions for Net Operating Income

(Thousands of $)

The Settlement resolves the parties' methodological and computational disagreements regarding forecasts of sales per customer, labor expenses, the various categories of administrative and general expenses, operations and maintenance expenses, taxes, and supply costs. Below, we highlight several additional aspects of this portion of the Settlement.

Labor Overtime. The forecasts for test year labor expenses for Region II include an additional amount ($124,400 in 2004 and $127,900 in 2005) to accommodate the increased overtime that SCWC has experienced as a result of federal security alerts, since these security alerts are not reflected in historical data. In response to the ALJ's question, SCWS stated that its limited experience with such alerts to date does not permit an assessment of whether additional employees could or should be hired in lieu of overtime payments.

Outside Services. For SCWC, outside services include the costs for legal and engineering services. The amounts agreed upon ($508,700 in 2004 and $522,900 in 2005) do not include expenses associated with defending SCWC's water supply in the Central and West Basins. The parties agree that these costs, which are largely uncertain, should be recorded in an interest-bearing memorandum account and should be recoverable annually by advice letter filing after review for reasonableness. The parties propose to cap the memorandum account by the amount equivalent to the differential between SCWC's forecast for outside services during each year of this GRC cycle and the Settlement amount (up to but not to exceed $476,600 in 2004, $490,000 in 2005 and $501,600 in 2006).

The parties agree that two categories of costs may be recorded in the memorandum account. The first are costs attributable to working with public agencies on water supply reliability and rate issues; the second are costs associated with participation in the Conjunctive Use Working Group (CUWG) in settlement negotiations and potential litigation to resolve disputes over long-term storage costs. The Settlement lists examples of expenses appropriate to each category.

Purchased Energy. Southern California Edison Company (Edison) provides electric power to SCWC. The Settlement recognizes that the energy charge component of SCWC's monthly electric bill from Edison will vary in future depending upon the actual mix of Utility Retained Generation (URG) and the cost of power provided by the Department of Water Resources (DWR). The Settlement assumes a monthly mix of 55% URG power and 45% DWR power, but

would permit SCWC to record any difference between this assumed ratio and the actual mix in an existing memorandum account, the Supply Cost Balancing-Type Memorandum Account, for recovery on an annual basis.

Rates Charged for Purchased Water, Purchased Power and Pump Tax. The parties agree to use for both test years the latest available rates prior to developing the tables used to calculate supply expenses for today's decision.

6.2 Rate Base

6.2.1 Capital Additions

Since D.98-12-070 was the last complete GRC review for the customer service areas within Region II, the parties each proposed a 2003 capital budget for use in forecasting the test year capital budgets for this GRC cycle. For 2003, the Settlement relies upon the stipulated sum of $27,217,710 for total capital additions, comprising all plant and other capital investments in the Metropolitan District plant, the Region II headquarters capital budget, a 23.75% overhead rate, and other adjustments. For 2004, the stipulated total capital additions for ratemaking purposes are $44,272,581 in 2004, increasing rate base to $191,849,500 in that test year. For 2005, the stipulated total capital additions are $26,547,350, resulting in a rate base of $216,375,100. The 2004 capital budget includes a number of projects deferred from 2003. It also reflects the reduction attributable to removing SCWC's Charnock Basin Facilities from rate base. Those facilities are no longer used and useful following the sale, approved by the Commission in D.03-05-001, of the associated water rights to the City of Santa Monica.

Capital Projects Deferred to Advice Letter Filings.

Because of required lead-times and the cost uncertainties for four other capital projects, the Settlement moves them out of the GRC capital budget forecasts and proposes cost recovery for them by advice letter (AL) filing. The parties agree that the ALs should include an overhead rate of 23.75% and that recovery should be capped, as follows:

· Perham-relocation of unstable reservoirs, tanks and other infrastructure to new site, including electrical upgrade; $1,697,800 cap; 2004 AL filing.

· Southwest CSA Office-relocation from current location in Carson to a more secure location to protect employee security; $298,100 cap; 2004 AL filing.

· Budlong-demolish existing aging, aerial tanks and replace with two ground level 1.5 million gallon tanks; $1,839,500 cap; 2005 AL filing.

· Central District Office-relocation of current office to increase employee office space and to increase parking; $400,000; 2005 AL filing.

The parties' rationale for advice letter treatment for these capital items has been adequately documented and the recommended approach appears reasonable. Late-filed Ex. 7 estimates that the impact of the two 2004 AL filings would be an increase of about 19 cents on the monthly bill for the typical customer (one who uses 23 Ccf of water each month). The impact of the two 2005 AL filings would be an additional increase of about 26 cents per month for such customers. Thus, over the GRC cycle, the average customer's bill would increase about 45 cents beyond the increases attributable to the utility's general revenue requirement.

6.2.2 Cost of Money and Capital Structure

The parties agree on both the forecasted capital structure (50% debt and 50% equity) and the cost of debt (7.63% in 2004, 7.60% in 2005 and 7.58% in 2006). The Settlement proposes their compromise on the cost of equity, 9.90%. This is the same value the Commission adopted as the authorized rate of return on equity in SCWC's most recent GRC decision, D.04-03-039. Given the nominal change in financial indicia since that time, this compromise figure seems reasonable.

6.3 Rate of Return

The Settlement anticipates an authorized rate of return on rate base of 8.77% in 2004 and 8.75% in 2005. Reference Ex. A lists the rates of return the Commission has authorized in the Class A water utility GRC decisions issued since 1997. The Settlement's proposed rates of return are in step with the general trend of those decisions and particularly, D.04-03-039, SCWC's most recent GRC decision, which authorized a rate of return of 8.79% for a 2003 test year.

6.4 Other Issues

Below we highlight several other provisions of the Settlement.

6.4.1 Water Quality OII Expense Amortization

Three 1998 Commission Resolutions (W-4089, W-4094, and W-4257) authorize establishment of a Water Quality OII Expense Memorandum Account, for the recordation and potential future recovery of expenses related to that OII into drinking water quality and related litigation expenses. The Settlement acknowledges that D.04-03-039 authorizes amortization of the current memorandum account balance over one year. The Settlement provides that the memorandum account shall remain open for recordation of continuing water quality litigation expenses but does not propose any change to the amortization rate at this time.

6.4.2 Water Quality Memorandum Accounts

The Settlement acknowledges that D.04-03-039 authorizes SCWC to establish memorandum accounts to record and potentially recover its compliance costs with new or revised rules by the Federal Environmental Protection Agency and/or State Department of Health Services concerning five specific contaminants. The Settlement provides that SCWC may extend this memorandum account process to other contaminants and other new or changed rules issued by these two agencies. This proposal is reasonable, since SCWC's reasonable compliance costs will be incurred in response to mandates necessary to ensure water quality. At hearing, SCWC was unable to predict what changes may be forthcoming, so it is not possible to predict the associated bill impacts at this time.

6.4.3 Reclaimed Water Rate (ME-3 Tariff)

Ex. 1 provides background on SCWC's reclaimed water rate in the Metropolitan District, which is offered under the ME-3 tariff. This rate was originally set so that the monthly meter service charges were the same as for potable water, offered under the ME-1 tariff, but the quantity rate per hundred cubic feet was 80% of the potable water quantity rate. According to SCWC, this is a standard rate design for reclaimed water within the industry. In 1997, the ME-3 reclaimed water rate was reduced in an effort to attract more customers and thereby create an additional potable water supply, according to SCWC's testimony at hearing. The customer base for reclaimed water (presently 43 customers) has not increased markedly since 1997, and SCWC's application requests Commission authority to return to the original rate design.

The Settlement endorses restructuring of the reclaimed water tariff over six years, resulting in a target commodity rate, in 2009, of 70% of the potable water rate. Because the resulting rate increases beyond this GRC cycle are estimates, the rates for 2007-2009 would be recalculated in SCWC's next Metropolitan District GRC. Section 11.03 of the Settlement states this phase-in proposal is the result of discussions between SCWC and the West Basin and Central Basin Municipal Water Districts. As we note in Section 4 of today's

decision, these Municipal Districts opposed the proposal in SCWC's application but did not intervene in this proceeding-thus, they are not signatories to the Settlement. SCWC and ORA both represent that the Settlement proposal is a reasonable compromise.

Our record on this subject includes testimony from SCWC that the West Basin and Central Basin Municipal Water Districts set the rates for both the reclaimed and potable water supplies that SCWC buys from the Municipal Districts, and that SCWC then passes these costs through to its customers. According to SCWC, the reduced cost of reclaimed water since 1997 has been subsidized at the Municipal District level by increases in the price of potable water to SCWC. No studies have been done to definitively assess the level of the current subsidy or whether one will continue to exist under the Settlement proposal. On this point, Section 11.03 of the Settlement states: "The time required to produce a cost of service study would not be an efficient use of ratepayer money and would still result in controversial assumptions of cost allocation."

On the basis of the record before us, we conclude that the Settlement will mitigate rate shock to existing reclaimed water customers, compared to the proposal in SCWC's application, and also will provide some reduction in the cost of purchased potable water supplies from the Municipal Districts, compared to the cost of those supplies under the current rate structure. SCWC should address this issue again in its next GRC filing for the Metropolitan District. While we will not require a cost of service study per se, we expect a fuller and more transparent discussion of the impact of the revised rate design on the costs of reclaimed and potable water supplied to SCWC by the Municipal Districts and on the resulting rate charged by SCWC to both ME-3 and ME-1 customers.

6.4.4 California Alternative Rate for Water (CARW)

D.00-06-075 approved SCWC's CARW program, which offers a reduced rate to qualifying low-income customers. The decision authorized SCWC to record implementation costs (both discounts and administrative costs) in a balancing account for 18 months following the launch of the program and thereafter to provide the forecasts necessary to include the program costs in base rates. At the PHC, the ALJ inquired whether CARW program costs should be moved into base rates in this GRC, noting that the utility would have more than 18 months of actual data by the time hearings were held in the spring of 2004. The Settlement defers base rate treatment of CARW costs to the next GRC, for two reasons. First, SCWC reports that the program is still too new and that participation is too erratic to provide reliable data. Second, ORA indicates that it is examining whether to propose an industry-wide approach to low-income rate development, and that it requires additional time to complete its assessment. The parties' rationale makes sense, and we agree that the status quo should continue at this time. We will revisit this matter in SCWC's next Region II GRC, and we direct SCWC to address D.00-06-075's directives in that application.

6.5 Compliance with Remaining Settlement Criteria

In Section 5 of today's decision, we determine that the Settlement on its face complies with the first and second all-party settlement criteria. After reviewing the Settlement terms in detail, we find that it complies with the third and fourth criteria. With respect to the third, the parties represent that no term of the Settlement contravenes any statutory provision or Commission decision, and we are aware of no conflict. With respect to the fourth, our review indicates that the Settlement provides the detail necessary to implement its terms during this GRC cycle and to discharge our future regulatory responsibilities. For example, the scope of the deferred capital projects, their estimated costs, and the cost cap on each project are sufficiently described to allow future advice letter review. We conclude, on balance, that the Settlement is reasonable in light of the record developed in this proceeding, that it is in the public interest, and that it should be approved. Thus, the Settlement meets the conditions of Rule 51.1(e).

Attachment B to today's decision consists of Appendices A-G, all prepared by the Commission's Water Division. Attachment B reflects the ratemaking impact of the Settlement. It includes a summary of earnings for both test years, the tariff revisions necessary to implement the new rates, itemization of the adopted quantities, attrition calculations for 2006, comparisons showing the bill increase for an average meter (5/8-inch) at various consumption levels, and the calculation of income taxes for ratemaking purposes.

Previous PageTop Of PageNext PageGo To First Page