10. Capital Additions

Apple Valley forecast an increase in plant in service for 2006 and 2007 of approximately $6.7 million and $5.7 million, respectively.25 Included in this total are three wells forecast to cost $2.285 million in 2005 (for inclusion in the beginning balance to determine test year 2006), $0.7 million in 2006, and $0.7 million in 2007, for a total cost of $3.485 million.26 This was one of the largest and most contentious issues in the proceeding.

ORA objects to the proposed inclusion in rate base of these three wells, arguing in its initial testimony that they will primarily serve new customers, and do not benefit current customers. ORA believes that a single well will serve 1,090 new customers, therefore, ORA proposes a connection fee of $1,000 based on a cost of $1.2 million per new well.27 ORA describes the proposed connection fee in several conflicting ways: as a facility fee to be paid by "each new customer of a vacant lot;" as a "contribution" for individual lot owners; and as "advances subject to refund for developers" (P. 12-3). These three descriptions are not synonyms. A "fee" is a general term for a fixed charge for a service. A contribution is essentially a donation of cash or goods or services by a customer as a condition of service, but an "advance" is more likely to be refunded if certain conditions are met.

V. Extension of Service

2.a. Ownership of Service

(1) Charge for Service Connections. Except as noted in 2a(1)(A) or 2a(1)(B) below, the utility shall make no charge to a customer for making a service connection ...

Apple Valley cannot assess a service charge without a deviation from the provisions of GO 103. ORA cites three such deviations, most recently in D.03-09-021 that authorized California Water Service to collect water supply special facility fees for five of its districts.29 That deviation allows California Water Service to charge a fee on a per lot basis rather than on a sub-division or project development basis, as otherwise allowed in its Rule 15, Main Extensions.

Apple Valley also has a Commission-approved Rule 15 in its tariffs. Included in that rule, pursuant to GO 103, are the various terms and conditions where Apple Valley can charge a new customer or a commercial developer to extend service to their location. An extension under Rule 15.C.1.a does not encompass a charge for new wells: its language deals solely with in-ground extensions of pipelines, valves, etc., but not meters. "The costs of the extension shall include necessary service stubs or service pipes, fittings, gates and housing therefor, and meter boxes, but shall not include meters."30

ORA would extend the concept to include the wells that produce the water.

Another portion of the tariff's main extension rule, Rule 15.C.1.b,31 also allows Apple Valley to charge developers an advance to pay for other additional equipment necessary to serve new customers:

If special facilities consisting of items not covered by Section C.1.a. are required for the service requested and, when such facilities to be installed will supply both the main extension and other parts of the utility's system, at least 50 percent of the design capacity (in gallons, gpm, or other appropriate units) is required to supply the main extension, the cost of such special facilities may be included in the advance, subject to refund ...

ORA would have the Commission direct Apple Valley to charge a fee on a per lot basis that is not necessarily charged in total to the initial developer, and the fee would explicitly include the cost of the wells as "special facilities." Thus, Apple Valley could charge a fee under Rule 15.C.1.b for necessary equipment not included in the charges under Rule 15.C.1.a.

Existing customers should be treated equitably when compared to new customers. Equitable treatment would justify including new wells in a special facilities charge to new customers if the effect of otherwise including the wells in rate base would result in existing customers paying higher rates that subsidize the cost of connecting new customers. This is the justification for Apple Valley's Rule 15.C.1.d:32

If, in the opinion of the utility it appears that a proposed main extension will not, within a reasonable period, develop sufficient revenue to make the extension self-supporting, or if for some other reason it appears to the utility that a main extension contract would place an excessive burden on customers, the utility may require nonrefundable contributions of plant facilities from developers in lieu of a main extension contract. (Emphasis added.)

Construing all the provisions of Apple Valley's Rule 15, we conclude that the cost of all necessary facilities to serve new customers, including wells, tanks and treatment facilities, when clearly attributable to new customers, should be recovered in the facilities charge, and not imposed on the existing customer base. We will adopt a stipulation discussed below to exclude 75% of $3.5 million in capital additions from rate base for 2006 and 2007; grant Apple Valley the necessary deviation from GO 103; and clarify that Rule 15 advances and contributions include such necessary facilities as wells, tanks or treatment facilities necessary to serve new customers.

During the evidentiary hearings, Apple Valley and ORA stipulated to a change in the fee structure that would allocate a large portion of the new wells' costs to new connections, larger than five connections per request. Apple Valley agreed to a 75-25 split, so that a connection fee would cover 75% of the forecast and only 25% would be included in rate base. A connection fee of $1,000 would be imposed on developments of more than five houses and exclude single non-developer connections.33 In comments on the proposed decision, Apple Valley produces a new description of the stipulation which we must disregard as untimely and outside the record in the proceeding. This new description would include 100% of new well costs in rate base to be perhaps offset as advances are paid.34 If this were implemented, ratepayers would pay 100% of the revenue requirement until rates are adjusted in the future for any advances. This is unreasonable, especially since we find ORA's original premise persuasive, that the new wells only partially benefit existing customers.

We will modify the stipulation so that only 25% of the proposed new wells will be added to the rate base for test year 2006 and for 2007 additions. Apple Valley is at risk for any shortfall. Apple Valley will modify its Rule 15, as necessary; charge a connection fee,35 and may exclude single connections and developments under five units. To avoid gaming, we will add a provision that all connections by a single individual, or corporation or other entity, over a period of 18 months should be counted against the five-unit exclusion. This will avoid piecemeal connection requests to evade the fees. For example, if there are five or more connections within 18 months Apple Valley must assess five-times the single fee on the fifth connection and thereafter impose the correct connection fee on all subsequent connections by that individual or entity. For 5/8 inch connections, these fees would be assessed at $669 each. Apple Valley must track every exemption and make those records available to ORA in the next general rate case.

Apple Valley expressed concern that there was a notice deficiency that could delay implementation of the stipulation. We disagree. As long ago as D.88-01-050,36 the Commission held "no additional notice was required when ... the commission staff proposed a rate spread not contemplated by a local exchange carrier, which had properly notified its customers of its application for a rate increase." Allocating certain costs to a connection fee rather than rate base is nothing more than a different rate spread. No further notice is required and there will be no delay to implementation.

ORA initially disputed Apple Valley's proposal for replacement of water standpipes (public access connections for fighting fires). The testimony showed that Apple Valley had a reasonable need to up-grade its system to ensure system reliability. Parties stipulated to an average of eighty (80) standpipes per year but to include the company forecasts of $170,000, $150,000 and $175,000 for 2005 through 2007, respectively.37 The average cost is $2,050 per standpipe.

We approve this stipulation, but we require Apple Valley to refund the revenue requirement of any shortfall in the three-year 240 standpipe replacement total in its next general rate case. It is reasonable to impose this refund obligation to ensure that Apple Valley vigorously implements the replacement program. ORA initially questioned the timing and need for these up-graded facilities. This program is within the control of Apple Valley, and it should be prepared to carryout improvements seen as necessary to ensure system reliability. We will fund 240 standpipes, Apple Valley shall make any refund as a reduction to the revenue requirement in the next general rate case for Test Year 2008, and we expect either 240 installed standpipes or a refund.

25 Calculated from data in Ex. 1, Table VIII-A.

26 Ex. ORA-1, pp. 8-6 and 8-7, citing the response to Data request JXM-1.

27 Ex. ORA-1, p. 12-3. ($1,200,000/well ÷ 1,090 customers = $1,100 per customer.)

28 Rules Governing Water Service Including Minimum Standards, adopted June 12, 1956; Effective July 1, 1956, in D.53204, Case No. 5662; and subsequently modified most recently in D.94-02-043.

29 See D.03-09-021, Attachment B, p. 9, Section 5.09 which is the "Joint Recommendations of the Office of Ratepayer Advocates and California Water Service Company." These fees are not otherwise discussed in the decision.

30 Revised Cal. P.U.C. Sheet No. 393-W. For Apple Valley's tariffs, See: http://www.avrwater.com/pdf/avrtariffs/TOC.pdf.

31 Portion of Rule 15.C.1.b. Revised Cal. P.U.C. Sheet No. 393-W.

32 Revised Cal. P.U.C. Sheet No. 394-W.

33 Ex. 7, Attachment 2 shows the development of the 75% split to new connections and Attachment 4 showed the effect of a $1,000 fee. See also Transcript, pp. 309 - 310.

34 Apple Valley comments, pp. 9 - 10.

35 See Ex. 7, Attachment 2, where Apple Valley calculated $669 fee for a 5/8 inch meter - rising as diameter size increase - but the stipulation uses a $1,000 fee per lot to estimate the overall revenue requirement impact.

36 D. 88-01-050 in Case 84-06-049, Richard L. Farrington et al. v. Citizens Utilities Company of California. (27 CPUC 2d, 308.)

37 Ex. 20, p. 5 (incorrectly cites 90 standpipes), and Transcript, p. 208. Parties confirmed the agreement to be 80 standpipes on July 12, 2005.

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