D0505025 SCWC Request to Increase Rates in Region I

3. The Rate Adjustment Plan

The SCWC/ORA rate adjustment plan (plan) to adjust rates for Region I is included as Exhibit C to SCWC's application. The plan increases rates for each of the Region ICSAs, as summarized in the table below.²

CSA

2005

2006

2007

Arden-Cordova

$ 677,900

9.7%

$ 176,700

2.3%

$ 186,200

2.4%

Bay Point

227,300

4.7%

126,100

2.5%

136,200

2.6%

Clearlake

136,200

10.4%

45,800

3.2%

47,900

3.2%

Los Osos

183,500

9.4%

89,700

4.2%

95,300

4.3%

Ojai

214,500

8.1%

154,600

5.4%

160,900

5.3%

Santa Maria

644,900

10.6%

314,400

4.7%

331,100

4.7%

Simi Valley

575,100

7.2%

120,700

1.4%

192,900

2.2%

Total Region I

$2,659,400

8.6 %

$1,028,000

3.4%

$1,150,500

3.5%

For each CSA, the plan determined a summary of earnings for 2005, 2006 and 2007 by estimating changes (increases and decreases) to the last adopted summary of earnings. Depending on the CSA, the last adopted summary of earnings was for 2001, 2002, 2003 or 2004. The estimated changes reflect annual expense inflation, annual routine plant additions, current authorized general office costs, and current authorized rates of return. The resultant revenue requirements for 2005, 2006, and 2007 are spread over the last adopted customers and sales to determine rates for 2005, 2006, and 2007.

In general, SCWC's request is consistent with the directive of D.04-06-018 to implement a plan, in lieu of a normal GRC, to transition the Region I CSAs to the new rate case plan schedule. The plan uses and manipulates data adopted in previous GRC decisions to estimate revenue requirements and to calculate the increased rates. While some manipulations are irregular and would be inappropriate to use in a normal GRC, when viewed as a whole, SCWC and ORA maintain that the results provide a reasonable basis for increasing rates for this interim period.

As discussed below, based on the testimony, supplemental testimony, and other matter of record, we find the plan provides a reasonable basis for determining incremental costs and the resultant summaries of earnings and revenue requirements for 2005, 2006, and 2007.³ The plan will therefore be used as the basis for determining the rate increases. However, due to the nature of the analysis and manipulation of data, we find it necessary to consider recorded information and rates of return for 2004 in determining the necessity for, and reasonable levels of, the rate increases for each of the CSAs. As a result, the plan's proposed increases for the Bay Point and Los Osos CSAs are adjusted by this decision to offset a likelihood that SCWC would otherwise over earn in those CSAs.

3.1. The Starting Point

The starting point for projecting the requested increases for each CSA is the adopted summary of earnings that is currently reflected in rates.⁴ In the Clearlake CSA, that summary of earnings is for 2001, the first test year adopted in D.00-12-063, which resolved SCWC's Region I GRC for test years 2001 and 2002. In the Simi Valley CSA, it is for 2002, the second test year adopted in D.00-12-063. In the Santa Maria and Los Osos CSAs, it is for 2003, the attrition year adopted in D.00-12-063. In the Arden-Cordova, Bay Point, and Ojai CSAs, the adopted summary of earnings currently reflected in rates is for 2004, as adopted by D.04-08-052 in Application (A.) 03-10-057. That proceeding was an abbreviated GRC that developed a 2004 escalated test year based on summaries of earnings adopted in D.00-12-063.

Given the circumstances of this filing and the limited time for analysis, the use of the summary of earnings currently reflected in rates is a reasonable starting point for determining the projected summaries of earnings and revenue requirement levels for each of the CSAs. We recognize that adopted quantities, as reflected in the currently authorized summaries of earnings, are estimates and may not be representative of what is actually recorded or necessary. Potential problems in this regard are addressed in the discussion of the rate increases.

3.2. Inflation Increase

The plan includes increased non-general office expenses under the category of inflation increase. Expenses in the starting point summaries of earnings are escalated to 2005, 2006, and 2007 levels by applying inflation factors that are based on the July 2004 inflation forecast provided by ORA. For these expenses, there are no specific adjustments to reflect increased activity (customer growth or otherwise) over the starting point expense authorizations; on the other hand, increased revenues related to increased customers and sales over those adopted for the starting point test year are also not reflected in the plan. For the purposes of this proceeding, we find the plan's method for forecasting these expenses to be reasonable.

3.3. Routine Plant Additions

The plan includes the cost of routine, non-general office plant additions. Annual additions were determined by the use of a 5-year average (1999-2003) of capital additions funded by SCWC, excluding any dollars associated with the general office, reservoirs and tanks. SCWC included the forecast of such routine plant additions for the years 2005, 2006, and 2007 in calculating capital related revenue requirement increases for those years. SCWC did not include routine plant additions for any other years (e.g., there are no specifically calculated routine plant addition increases for 2002, 2003, and 2004 over the Clearlake CSA starting point, which was 2001). During evidentiary hearing, when questioned on this as well as on irregular manipulations to the capital related revenue requirements (escalating the starting point depreciation expense and not reflecting certain accumulated depreciation through 2004 as deductions to rate base), the SCWC witness stated the net effect gave a reasonable estimate of rate base on which to go forward for 2005, 2006, and 2007.⁵ We also note that the absence of a rate base true up to 2004 is offset to a degree by the absence of a true up for increased customers and the associated increased revenues. The reasonableness of how these factors interact to replicate incremental capital revenue requirements is difficult to determine without substantial additional analysis; however, ORA has reviewed and agrees with the principles of the plan. Therefore, for the purposes of this proceeding, we find the depreciation expense escalation as well as the increased revenue requirement associated with routine, non-general office plant additions, as reflected in the plan, to be reasonable.

3.4. Incremental General Office Costs

The plan includes the costs of incremental allocated general office expenses and rate base. These incremental costs are the difference between the allocated general office costs developed from SCWC's Region III GRC for test years 2003 and 2004,⁶ escalated to 2005, 2006, and 2007, and those general office costs adopted in SCWC's Region I GRC for test years 2001 and 2002 and embedded in the starting point summaries of earnings.

In R.03-09-005, it was determined that multi-district utilities would file their general office on a three-year cycle. Changes in general office allocations would be implemented immediately with the districts then pending, and implemented in turn when the other districts file GRCs. It was also noted that, in the subsequent years, those other districts would implement escalated general office amounts, not the amounts adopted for the test year.⁷ The plan's proposal to reflect incremental general office allocations based on those costs adopted in D.04-03-039 and escalated to 2005, 2006, and 2007 is consistent with the Commission's determinations in R.03-09-005.

Details on how the general office costs were determined, escalated, and allocated are contained in Exhibit 12. At the time Exhibit 12 was provided, SCWC noted an error in its previous escalation calculations and revised its request to reflect the corrected amounts. The corrections reduce SCWC's request for the years 2005, 2006, and 2007 by a total of $248,000 and will be reflected in the revenue requirement levels adopted by this decision.

SCWC states that the general office expenses and rate base were inflated by the inflation factors set forth in D.04-06-018. Although D.04-06-018 did provide a methodology for escalating various expenses, which the plan appears to follow, D.04-06-018 did not provide an escalation methodology for rate base. For plant additions, the continued use of two test years and an attrition year was adopted instead. However, the adopted 2004 general office rate base of $22,358,200 is 16.6% higher than the adopted 2003 general office rate base. The associated attrition for 2005 would likely be of a similar magnitude. In contrast, the plan escalated the adopted 2004 general office rate base by a factor based on weighting non-labor escalation by 60% and compensation per hour escalation by 40%, resulting in a 2.76% increase in general office rate base for 2005. Increases of 1.80% for 2006 and 2.46% for 2007 were calculated similarly. When compared to what might have resulted from an attrition year analysis, the plan's general office rate base escalation is moderate and will be adopted for this proceeding, along with the general office expense escalation as modified by Exhibit 12.

3.5. Rate of Return

The starting point summaries of earnings reflect the previously adopted rates of return for SCWC of 8.94% for 2001, 2002, and 2003 and 8.77% for 2004. The plan appropriately includes adjustments to reduce revenue requirements for each of the CSAs to reflect SCWC's current authorized rates of return of 8.75% for 2005 and 8.74% for 2006 and 2007.⁸

3.6. Rate Increases

As discussed earlier, for each CSA, the plan determined a summary of earnings for 2005, 2006, and 2007 by estimating changes to the last adopted summary of earnings. The resultant revenue requirements were spread over the last adopted customers and sales to determine rates for 2005, 2006, and 2007. We have two concerns with this proposal and find it necessary to consider additional information.

The first concern is that the plan does not clearly establish the need for, and extent of, the rate increases.⁹ This is normally done by considering a present rate revenue analysis where, for instance, the 2005 proposed revenue
requirement would be compared to the revenues generated by applying current rates to the forecasted customers and sales for 2005 (present rate revenue for 2005). If the proposed revenue requirement for 2005 were greater than the present rate revenue for 2005, a rate increase would be justified. The difference between the two would determine the necessary revenue increase for 2005. That amount, when spread over the forecasted customers and sales for 2005, would determine the rate increase. Normally, increased revenues from forecasted increased customers and sales would offset a portion of the revenue requirement. The necessary revenue increase would also be spread over the forecasted customers and sales, which are generally higher than previously adopted amounts as used in the plan. Because of the tradeoffs implicit in the plan, forecasts of sales, customers, and present rate revenues for 2005, 2006, and 2007 were not prepared or considered. While we have adopted the plan's forecasted revenue requirements, it is not clear that the tradeoffs negate the need for a present rate revenue analysis, or some alternative, to determine the need for, and extent of, the rate increases.

The second concern with the plan's determination of the rate increase is the potential effects of discrepancies between the adopted revenues and costs embedded in the starting point summaries of earnings and recorded data. For example, the adopted 2003 starting point rate base for Los Osos is $6,172,100 and the proposed amount for 2005 is $6,660,500. However, the recorded amount for 2003 was $5,799,200, and the amount recorded for the 12-month period ending September 30, 2004 was $5,396,000. In such instances, while the increases over the starting point revenue requirements may be reasonable, the starting point revenue requirements, and ultimately the existing rates, may be set too high and increases on top of that will result in the company over earning in the forecast years.

Conducting a complete GRC analysis to reconcile these concerns would be contrary to the intent of developing an alternate plan to transition Region I to the new rate case schedule. Therefore, we will instead compare recorded rates of return for each of the CSAs to SCWC's authorized rate of return to establish the need for the increases and a method to adjust the proposed increases, if necessary. We recognize that reliance on such analysis may not be totally appropriate due to abnormal conditions possibly affecting recorded earnings. The intent is not to develop an alternate method for calculating the rate increases, but rather to provide a means for determining whether factors such as those expressed in our concerns will likely result in SCWC over earning, if the proposed increases are authorized. It is only if there is a likelihood that over earning will occur that the recorded rate of return is specifically used to determine the extent of the rate increase. This threshold test is reasonable when considering the circumstances of this proceeding and the uncertainties created by the plan's simplified analyses. Based on the record, a better alternative to address our concerns is not evident.¹⁰

We do not find it necessary to provide increases above amounts proposed by the plan, if recorded 2004 information plus the plan' proposed increases indicate rates of return in 2005, 2006 or 2007 may be below authorized levels. As discussed earlier, sales and customer growth over the starting point year are not reflected when calculating the rates. If such growth occurs, it will tend to provide SCWC with more realized revenue than the amounts calculated by the plan's summary of earnings analysis. Furthermore, providing increases beyond the plan's proposal could jeopardize the ORA and SCWC agreement on the plan. SCWC itself stated, "The rate increases that ORA and SCWC have agreed to provides SCWC the opportunity to earn the currently authorized rate of return."¹¹

Therefore, as detailed below, the plan's proposed revenue increases are implemented as long as the recorded 2004 summaries of earnings plus the plan's proposed increases for 2005, 2006 or 2007 do not result in SCWC exceeding the authorized rate of return for 2005, 2006 or 2007. The proposed increases are only adjusted when analysis shows that the recorded 2004 summaries of earnings plus the plan's proposed increases would result in SCWC exceeding authorized rate of return levels for 2005, 2006 or 2007.

The following table shows recorded rates of return for the 12-month period ending September 30, 2004. It also shows the incremental revenue necessary to bring the recorded rate of return (ROR) to the 2004 authorized level of 8.77% and the requested increases for 2005, 2006 and 2007, as revised by Exhibit 12.¹²


CSA	Recorded 2004 ROR	Incremental Revenue Necessary to Bring to 2004 Authorized Level of 8.77% ROR	SCWC's Revised Request
			2005	2006	2007
Arden - Cordova	5.95%	$ 731,500	$677,900	$147,900	$166,300
Bay Point	9.52%	( 136,100)	227,300	124,800	131,700
Clearlake	6.45%	172,300	131,100	143,700	46,400
Los Osos	10.84%	( 199,400)	180,000	87,600	92,500
Ojai	6.13%	424,400	214,500	153,600	158,300
Santa Maria	6.35%	862,800	627,700	305,600	329,000
Simi Valley	6.54%	399,200	524,200	110,100	119,700

For the Arden Cordova, Clearlake, Ojai, and Santa Maria CSAs, the requested increases for 2005 are less than the amounts necessary to bring the 2004 recorded rates of return to the authorized level. This sufficiently supports the need for a 2005 rate increase for these CSAs. It also indicates that the requested increases for these CSAs will not result in over earning in 2005. These proposed increases for 2005 appear reasonable and will be authorized. Also, as long as there is no indication of over earning in 2005, we feel comfortable in authorizing the 2006 and 2007 proposed increases and will do so for these four CSAs.

For Simi Valley, since $399,200 of the requested $524,200 is necessary to bring recorded 2004 rate of return to the authorized level, the remaining $125,000 would be available to offset increased costs for 2005 and maintain the rate of return at the authorized level. This is less than the necessary amount of $174,700 implicit in the plan¹³ and indicates that the requested increase will not result in over earning in 2005. Consistent with our previous discussion, we will therefore authorize the 2005, 2006, and 2007 increases as proposed in the plan for Simi Valley.

For Bay Point, a reduction of $136,100 would bring the 2004 recorded rate of return down to the authorized level. The plan indicates that an amount of $227,300 is necessary to maintain the 2005 return at the authorized level.¹⁴ A reasonable increase for 2005 is the net of these two amounts, or $91,200, which will be the amount authorized. Having made this adjustment, it is reasonable to authorize the proposed increases for 2006 and 2007 to provide the opportunity for SCWC to maintain its authorized rate of return for those years.

For Los Osos, a reduction of $199,400 is necessary to bring the 2004 recorded rate of return down to the authorized level. The plan, as revised, indicates that an amount of $90,000 is necessary to maintain the 2005 return at the authorized level.¹⁵ The plan also proposes increases of $87,600 for 2006 and $92,500 for 2007. The net of the reduction to bring the 2004 rate of return to the authorized level and the plan's increases for 2005, 2006, and 2007 is $70,700. This analysis indicates rate increases for both 2005 and 2006 are unnecessary. We cannot justify increasing rates for those years and will not do so. With no increases for 2005 and 2006, it would then be reasonable to authorize a $70,700 increase for 2007.

The adopted summaries of earnings for each of the CSAs are included in Appendix A. The adjustments for Bay Point and Los Osos are calculated on an overall revenue requirement basis, and are therefore shown as adjustments to revenue rather than to specific line items within the summaries of earnings.¹⁶

3.7. Implementation

Authorized rates for 2005, 2006, and 2007 are shown in Appendix B. Under the plan, SCWC will file for the 2006 and 2007 increases prior to the beginning of the year by advice letter accompanied by the usual calculations of its pro-forma rate of return. This is consistent with current procedures for second and third year rate increases and will be adopted.

² SCWC's revised requested increases, per Exhibit 12, are shown in Section 3.6 of this decision. ³ The adopted summaries of earnings are included in Appendix A to this decision. ⁴ The starting points also include adjustments for Y2K costs which were not included in the adopted summaries of earnings, but which were subsequently allowed in rates. ⁵ SCWC/Switzer, RT 23. ⁶ See D.04-03-039. ⁷ See D.04-06-018, mimeo., pages 16 and 17. ⁸ The current rates of return were authorized by D.04-08-053. ⁹ In its application, SCWC requested a finding that present rates are unjust and unreasonable. While the plan proposed a methodology for increasing rates, it did not provide any information or basis for making any finding regarding the reasonableness of present rates. This was specifically discussed at the November 16, 2004 prehearing conference. To give some indication of the reasonableness of present rates, the company agreed to the administrative law judge's (ALJ's) request to provide recorded summaries of earnings for the Region I CSAs. SCWC provided that information in testimony that was distributed on December 14, 2004. ¹⁰ As part of its response to the ALJ's concern regarding the need for the rate increases, SCWC provided testimony that accompanied its January 2004 NOI. Included were forecasts for 2005 and 2006, which support the need for rate increases in all seven CSA's. However, these forecasts are untested, because the NOI was never accepted for filing. In a normal GRC, the difference between rate increases requested and authorized can be substantial. Also, it is not clear how the 2004 rate increases for the Arden-Cordova, Bay Point, and Ojai CSAs, which were authorized subsequent to the NOI, impact the NOI analysis. Therefore, we cannot rely on the NOI testimony to establish the need for, or extent of, the rate increases in this proceeding. ¹¹ SCWC, Exhibit 2, page 3. ¹² Recorded rates of return were provided by SCWC in supplemental testimony contained in Exhibit 2. For purposes of this discussion, we assume that the recorded rates of return are reflective of those for the full 2004 calendar year. Changes to the 8.77% rate of return are based on recorded rate base information provided in Exhibit 12 and net to gross multipliers provided in Exhibit 3. Change to 8.77% Rate of Return = (8.77% minus recorded rate of return) x (recorded rate base) x (net to gross multiplier). ¹³ Since the Simi Valley starting point year is 2002, the $524,200 increase is actually for three years (2003, 2004 and 2005). A reasonable approximation is that one-third of the requested $524,200 increase, or $174,700, is for 2005. ¹⁴ Since the Bay Point starting point year is 2004, the entire $227,300 increase is for 2005. ¹⁵ Since the Los Osos starting point year is 2003, the $180,000 increase is actually for two years (2004 and 2005). A reasonable approximation is that one-half of the requested $180,000 increase, or $90,000, is for 2005. ¹⁶ The adopted revenue levels for these two CSAs are derived numbers based on 2004 recorded information, incremental costs as determined by the plan, and consideration of the adopted rates of return for 2005, 2006 and 2007. The revenue levels, on which rates are designed, would be the same whether the adopted summary of earnings reflects adjustments on a total revenue basis or on a line item basis.