VIII. Interest on Memorandum Account

CalAm requests that the Commission allow it to earn its authorized rate of return on preconstruction costs rather than interest at the 90-day commercial paper rate, as ordered by the Commission in D.03-09-022. CalAm states that the 90-day commercial paper rate represents only a fraction of its actual carrying costs and is impairing cash flow and increasing perceived risk on the part of investors because it is currently borrowing funds to pay for the interest on the project. CalAm contends that the difference also impacts financial statements because it is not recovered in rates, and this reduces earnings below the Commission-authorized level, which also creates perceived risk for investors. According to CalAm that increased perceived risk by investors leads to increased difficulty attracting capital and thus increased capital costs, which are ultimately borne by ratepayers. And, while ratepayers would benefit from reduced carrying costs, CalAm is foregoing the opportunity for future earnings on these investments.

CalAm's request is opposed by DRA and intervenors. DRA argues that in denying CalAm's request previously, the Commission stated:

Because the Coastal Water Project will clearly require a significant period of time for construction, distinguishing it from typical water utility construction projects, we conclude that it is not entitled to specialized CWIP ratemaking treatment offered to short duration water projects. In addition, the costs at issue here are predecessor cost to construction costs, in other words, construction work is not underway on the project and thus they are not funds used during construction. It remains unclear at this time when (or whether) any plant construction will commence. Therefore, allowing these preliminary costs to earn the utility's authorized rate of return now carries with it significant risk that the ratepayers may never receive the benefits of these expenditures. (D.03-09-022, pp. 21-22.)

We conclude that, as ordered in D.03-09-022, CalAm should continue to book preconstruction costs in an interest bearing memorandum account, which will accrue interest at the 90-day short-term commercial paper rate. As the status of the proposed project becomes more certain (for example, if a CPCN is granted or construction is underway), we will consider modifying this ratemaking treatment upon request by CalAm. In the meantime, we deny CalAm's request for the reasons stated in D.03-09-022.