VII. Reasonableness Review of Preconstruction Costs Through 2005
CalAm seeks recovery of $8,663,334 in preconstruction costs through 2005. Of this, $5,670,073 is for engineering and environmental costs; $1,353,831 is for public outreach; and, $1,639,429 is for project management, legal, administrative, and other costs.
DRA recommends that the Commission should: (1) set aside the $5,670,073 in engineering and environmental costs and track it separately until DRA's consultant is able to evaluate these costs for potential duplication and reasonableness; (2) disallow $1,193,831 of the requested $1,353,831 in public outreach costs as unreasonable and find the remaining $160,000 of public outreach costs reasonable; (3) approve recovery of $1,639,419 in other costs; and, (4) allow recovery of these costs only after the Coastal Water Project, or alternative project, is certified by the Commission. DRA's recommendations are discussed below.
A. Reasonableness Review of Engineering and Environmental Costs
CalAm seeks recovery of $5,670,073 in engineering and environmental costs incurred through 2005. DRA recommends that the Commission defer approval so that DRA can hire a consultant under a reimbursable contract to assist DRA in its review of these costs. As discussed below, we grant DRA's request and defer reasonableness review of this item to 2007.
DRA states that the bulk of engineering and environmental costs was paid to RBF Consulting (RBF), the firm CalAm hired to develop the Coastal Water Project and to prepare the required PEA. The work RBF did for CalAm includes such tasks as preliminary design and permitting of the pilot plant facility, horizontal directional drilling feedwater supply investigation, water hydrodynamic modeling, marine biological resources assessment, hydrogeologic analysis associated with the ASR projects, evaluation of membrane cleaning solutions, geology and soils investigations, and much more.
DRA argues that if PSMCSD's plant is the final project that is built, CalAm ratepayers could potentially have to pay for pilot plant costs twice and pay for other duplicative costs because the PSMCSD desalination plant would be a regional plant that would provide wholesale water to CalAm to meet its water supply needs. DRA contends an expert in the area of desalination and ASR is needed to review the reasonableness of CalAm's preconstruction costs, and also determine whether the costs were duplicative and could have reasonably been avoided. According to DRA, it does not have the required expertise on staff to perform this review.
DRA says it has retained a consultant to assist with its Phase II review of the Coastal Water Project or alternative long-term supply solution. The consultant has confirmed that if the contract with DRA is amended, or a separate contract is established, his team can do a reasonableness review of preliminary engineering and environmental costs through 2005, and 2006, assess the reasonableness of the costs, and determine to what extent, if any, duplication of studies has occurred. According to DRA, the review is estimated to cost $30,000 to $50,000, and could be concluded by mid-2007.
DRA also recommends that the Commission order CalAm to file a separate application in early 2008 for approval of 2007 costs. DRA says that the cost for a consultant to assist in the review of 2007 costs would be approximately $25,000, and the review could be completed by mid-2008.
CalAm opposes any delay in Commission approval of its preconstruction costs through 2005. CalAm argues that it did provide a complete showing to support its request for recovery. The activities CalAm undertook through 2005 include: (1) performing preliminary engineering studies and preliminary design for the entire project; (2) preparing and submitting the PEA, including evaluation of alternatives in the PEA; (3) obtaining necessary permits and performing necessary analyses for the Pilot Project to come on-line; and, (4) implementing an extensive public outreach program to educate Monterey District customers and other affected parties about the Coastal Water Project. CalAm points out that DRA's own audit report confirms that the preconstruction costs requested are of the type the Commission normally allows utilities to recover, were properly accounted for and adequately supported by invoices, and included interviews of CalAm personnel by DRA to obtain information from the Company regarding its internal accounting processes, data collection, and analysis.
We agree that CalAm has provided the required showing to support its request. However, DRA has a valid concern and we grant DRA's request for an outside consultant to assist in the reasonableness review of these particular costs. As a condition to granting DRA's request, we require DRA's report on the reasonableness of preliminary engineering and environmental costs through 2005, and preconstruction costs for 2006, to be issued no later than June 30, 2007. The assigned ALJ should convene a prehearing conference shortly thereafter to schedule hearings so that the Commission may issue its decision on the reasonableness of these costs before year-end 2007. At the same time, any needed adjustment to the surcharges may be addressed.
Also, we direct CalAm to file a new application for reasonableness review of 2007 preconstruction costs no later than March 31, 2008. Also, we authorize DRA to extend its contract so that the consultant can assist DRA in the review of 2007 preconstruction costs. DRA should issue its report no later than June 30, 2008. The assigned ALJ should convene a prehearing conference shortly thereafter and schedule hearings so that the Commission may issue its decision on the reasonableness of 2007 preconstruction costs before year-end 2008. Any needed adjustment to the surcharges may be addressed at the same time.
B. Reasonableness Review of Public Outreach Costs
CalAm seeks recovery of $1,135,028 for public outreach costs and $226,553 for administrative costs incurred by Nossaman, Gunther, Knox, and Elliot (Nossaman), a lobbying firm CalAm retained to conduct community outreach and education to the business community, agencies, legislators, and stakeholder groups and to provide project management related to public awareness of the Coastal Water Project. Taken together, CalAm spent a total of $1.36 million through 2005 on public outreach.4
CalAm states that it provided hundreds of pages of monthly legal invoices documenting the legal services that were provided in connection with the Coastal Water Project. These invoices contain detailed billing entries for the legal fees incurred by CalAm through 2005 for specialized legal services rendered for water supply rights issues with appropriate redactions to protect confidential information protected by the attorney-client privilege, the entitlement process and environmental review of the project, as well as Commission approval of the project. Also, CalAm removed $521,245 from its request to avoid any dispute that these costs included lobbying expenses, which the Commission typically disallows.
CalAm contends that the total cost of the program amounts to roughly 0.5% of the estimated $191 million project cost. CalAm argues that the public outreach costs incurred through 2005 amount to $10 per year per customer and are entirely consistent with the Commission's prior recovery of public education costs. CalAm submits that it has a responsibility to both its customers and other parties affected by the Coastal Water Project to provide the necessary information for them to be able to evaluate the proposed project. According to CalAm, it prudently developed and executed an extensive public outreach program, which included approximately 70 town hall and community meetings, mailings to customers and stakeholders, newspaper advertisements, and a web site dedicated to the Coastal Water Project.
DRA argues that CalAm's spending was unreasonable, excessive, and unnecessary. DRA contends that CalAm also spent significant amounts on educating Monterey residents about desalination technology and the permitting process through community meetings, an expensive process that reached an unknown number of people. Also, according to DRA, CalAm spent a disproportionate percentage of its public outreach campaign trying to educate ratepayers about the all too familiar water supply problems and details of desalination technology, in comparison to educating customers about the most important aspect of the project - how it would affect their water rates and monthly water bill.
DRA recommends that the Commission allow CalAm to recover only $160,000 for public outreach, which is approximately $4.25 per customer. According to DRA, it appears that CalAm allowed carte blanche spending on public outreach. DRA contends there is little, if any evidence that CalAm made attempts to keep costs to a minimum. Detailed budgets were not produced, contracts were not followed, and CalAm paid for multiple consultants to attend the informational meetings. And, according to DRA, CalAm made little or no attempt to measure the success of its outreach program to justify its extravagant expenditures.
Further, DRA argues that CalAm's public outreach costs amount to more than $35 per customer, far exceeding comparable campaigns of other water agencies. According to DRA, the San Diego County Water Agency spent $435,855 on the public outreach campaign for its desalination project. Spread over the approximately one million customers in the county, the total cost per customer is $0.44, substantially less than the $35 per customer CalAm spent. Also, DRA points out that Orange County Water District spent about $3.0 million over a six-year period on their outreach program to convince customers to overcome their aversion to drinking water reclaimed from waste water, a very high hurdle to overcome. Spread over approximately 767,000 customers, the cost per customer is $3.91, again significantly less than the $35 per customer spent by CalAm.
CalAm responds that contrary to DRA's contentions with regard to the services rendered by Armanasco Public Relations (Armanasco), Energy Resources International (ERI), and Nossaman, CalAm followed routine business practices where it is not uncommon for a vendor to provide services on an hourly basis without explicitly spelling out the specific tasks to be provided by these vendors. CalAm believes it has already sufficiently documented the cost of the services by providing the underlying invoices for all services it seeks recovery, which have been audited. According to Kevin Tilden, CalAm's Director of External Affairs, Armanasco "had a schedule of hourly fees, and they would check with us on scope of work before they began and we would usually sign to start work on, for instance, town hall meetings or other things."
CalAm argues that DRA's claim that ERI and Armanasco did not complete certain tasks that were included in the original contracts is meaningless. As CalAm witness Tilden explained, the vendor's proposal was certainly not the final word and CalAm exercised discretion in determining which tasks the vendor should complete.
Further, CalAm disputes DRA's recommendation that CalAm should not be able to recover its public outreach costs unless it has demonstrated that the public outreach has successfully persuaded the public or special interest groups to accept the project. According to CalAm, the purpose of its public outreach program was to provide information to its customers and other affected parties so that they could evaluate the proposed project, not to advocate the project. CalAm contends that it effectively reached out to customers through its public outreach program. CalAm believes this is wholly evident by the customers' statements at the Public Participation Hearings that customers recognized the need for a long-term water supply solution. According to CalAm, it is obvious that the public is now fully aware of this need and it is doubtful that customers would be as informed without the public education that CalAm provided. Given that the purpose of the program was education, not advocacy, CalAm submits that recovery of public outreach costs should not be dependent upon the public's acceptance of the project.
Addressing DRA's argument that a budget was not followed, CalAm responds that from the outset, it designed its public outreach program to be flexible to address the needs of the public affected by the Coastal Water Project. CalAm contends that, as the record shows, in addition to having a semi-annual budget in place, CalAm's Coastal Water Project team met regularly to discuss what action was needed for public outreach.
We conclude that CalAm's request for a total of $1.36 million for public outreach costs through 2005 and administrative costs should be approved. The public outreach costs of other projects, or the cost per customer,5 while useful information, cannot serve as the yardstick for determining the reasonableness of CalAm's outreach costs. Each project and the constituency the outreach program is designed to reach, is different. Two previous attempts to solve the Monterey District water supply problem have failed. In order for the project to have a chance at success it was essential that CalAm conduct extensive and early outreach. CalAm had to decide what was necessary to get the job done. While DRA may disagree with CalAm's approach, we are not persuaded that CalAm simply threw money at the project, or wasted ratepayer funds. We believe that a project of this controversial nature and impact on the community justifies an aggressive outreach program, especially given the numerous stakeholders and the need to meet with interest groups not only within CalAm's Monterey District but with communities impacted by the project. Accordingly, CalAm is authorized to recover its public outreach costs through 2005 of $1,135,028, and administrative costs of $226,553 by Nossaman.
In its comments on the proposed decision, DRA claims that the Commission has not evaluated the public outreach costs. We believe that the proposed decision is based upon a full and complete evidentiary record, including thousands of pages of supporting documentation as well as transcripts from several days of evidentiary hearing focused exclusively on public outreach costs, which demonstrates that CalAm's public outreach costs were reasonable and prudent. DRA's own audit report demonstrates that the preconstruction costs are the type the Commission normally allows utilities to recover, were properly accounted for and were adequately supported by invoices or for labor, by hours spent. Therefore, we give no weight to DRA's claims that the public outreach costs were not fully evaluated. Also, we give no weight to DRA's claim that CalAm had deficient business practices. Accordingly, DRA's claims are rejected.
C. Reasonableness Review of Other Costs
CalAm requests recovery of $1,639,419 for project management, legal, administrative and other costs through 2005. DRA reviewed these costs and recommends approval. However, DRA recommends recovery of this amount only after the Coastal Water Project, or alternative project, is certified by the Commission. DRA's request to delay recovery is denied because ratepayers should not be required to pay unnecessary interest charges on costs that have been approved. Such delay is not in the public interest. We authorize CalAm to recover these costs booked in the memorandum account through the Special Request 1 Surcharge.
D. Recovery of Approved Preconstruction Costs
DRA recommends that CalAm should not be authorized to begin recovery of approved 2005 preconstruction costs until a CPCN is issued. DRA argues that should the Commission not grant a CPCN to CalAm for the Coastal Water Project, the Commission should reconsider recovery of these costs under the guidelines for recovery of costs for abandoned projects.
We are not persuaded by DRA's recommendation. When the Commission approves any preconstruction cost item in this proceeding, it is implicit that the cost was reasonably and properly incurred in the pursuit of a long-term water supply solution. Therefore, even if the project is abandoned, CalAm should be allowed to recover such costs. Furthermore, approving the cost and then allowing interest charges to accrue on the approved cost, makes little sense. Accordingly, DRA's recommendation is rejected.
Also, DRA recommends that recovery of approved costs be limited to 50% to limit ratepayer risk of the project being abandoned. We are not persuaded that this is necessary because $8.7 million in preconstruction costs have already been incurred through 2005, additional costs have been incurred through 2006, and even if the Special Request 1 Surcharge is implemented on January 1, 2007, the memorandum account will be undercollected and accruing interest charges for a long time. Therefore, we reject DRA's recommendation.
In their comments on the proposed decision, DRA and MPWMD argue that it is legal error to depart from applicable Commission precedent regarding abandoned plant without evidence supporting the change. DRA and MPWMP reargue their position that recovery of such preconstruction costs should not begin until there is more certainty that this project will not be abandoned.
We find that authorizing CalAm to implement the proposed decision surcharges is wholly consistent with prior Commission case law that there are valid exceptions to the general rule limiting recovery of capital project expenditures to projects that are used and useful. The proposed decision properly finds that CalAm's "need to comply with the SWRCB Order 95-10 and the estimated $191 million cost of a project to comply with that order creates special circumstances warranting a departure from standard rate making practice, which allows project costs to be included in rates only after the project is found to be `used and useful.'" (Proposed Decision, p. 32, Conclusion of Law 1.)
Also, the Commission has authorized water utilities to recover costs related to a capital project through a surcharge prior to the completion or construction of capital project when (1) the costs were reasonably incurred; (2) the project was undertaken pursuant to an order of the Commission or a sister state agency; and (3) unusual or exigent circumstances surrounding the plant's construction warranted recovery or interim relief.6 Here, the evidentiary record demonstrates that the proposed surcharges meet these three criteria. First, CalAm's preconstruction costs, which include environmental studies, permitting, public outreach and engineering services, are necessary to determine whether the Coastal Water Project was feasible and to comply with the Commission's environmental review requirements. The proposed decision finds that "CalAm did provide the Commission with a complete showing to support its request for interim rate relief." Second, the purpose of the Coastal Water Project is to satisfy a state order, in this case, SWRCB Order 95-10. Third, the proposed decision recognizes the unique and exigent circumstances existing with the Coastal Water Project which would justify interim recovery of costs. Also, the proposed decision explains that (a) CalAm is subject to SWRCB Order 95-10 and subject to major fines if there is no action toward compliance, and (b) The Commission has a responsibility to enable CalAm to comply with SWRCB Order 95-10 and the Endangered Species Act.
Assuming for the purposes of discussion that the proposed decision departs from Commission precedent, which it does not, it is not legal error for the Commission to deviate from prior Commission decisions because the Commission is not bound by its own precedent. (In re Pacific Gas & Electric Co. (1988) 30 CPUC2d 189, 223-225). The California Supreme Court explained this long-held principle as follows:
The departure by the Commission from its own precedent or its failure to observe a rule ordinarily respected by it is made the subject of criticism, but our reply is that this is not a matter under the control of this court. We do not perceive that such a matter either tends to show that the Commission had not regularly pursued its authority, or that said departure violated any right of the petitioner guaranteed by the state or federal constitution. Circumstances peculiar to a given situation may justify such a departure. (Postal Telegraph-Cable Company v. Railroad Commission of the State of California (1925) 197 Cal., pp. 426, 436-437.)
Furthermore, the Commission has afforded itself a measure of flexibility in its authority to grant interim rates. "There is no single established formula for granting interim rate relief."7 Here, the proposed surcharges are in the public interest because they protect ratepayers from rate shock and provide the significant customer benefits enumerated above. Therefore, we reject DRA's and MPWMD's claims that the proposed decision is not supported by Commission Law and amounts to legal error.
4 CalAm's outreach program includes: 1) formal and informal briefings with elected officials, public agencies, and citizen boards; 2) formal presentations in the affected communities in CalAm's service territory and neighboring communities; 3) formal briefings, presentations, and discussions with individual stakeholders and non-governmental organizations; 4) public information provided through the print and, broadcast media; 5) easy public access to all project information through a web page; 6) easy local public access to a project library and permit coordination center facility; and 7) continued focus on water conservation.
5 CalAm's figure of $10 per customer per year cannot be directly compared to DRA's $35 cost per customer.
6 E.g., Application of California-American Water Company (U 120 W) for an order authorizing it to increase its rates for water service in its Monterey District, D.90-10-036(1990) 38 CPUC 2d 15, 1990 Cal.PUC LEXIS 912 (hereinafter "D.90-10-036"); Application of Hillview Water Company, Inc. (U-194-W), for Authority to Issue Evidence of Indebtedness (Promissory Note and Loan Agreement) and to Grant Security Interest in Its Assets, D.02-11-015 (2002) 2002 Cal. PUC LEXIS 722 (hereinafter "D.02-11-015").
7 D.86-04-080, 1986 Cal. PUC LEXIS 276, *6.
