IX. Safeguards for Customer Contributions to Utility Plant

DRA argues that CalAm has not addressed what it proposes to do with funds collected if the proposed surcharges are implemented now and the project eventually becomes a publicly owned plant. DRA points out that it is possible that the Commission could approve a regional publicly owned facility through the CEQA process and could even consider PSMCSD's competing desalination project as an alternative project in the EIR evaluation.

Further, DRA takes issue with the fact that CalAm wants to recover costs from ratepayers now and require any public agency that may take over the project to compensate ratepayers for all of the preconstruction or construction costs ratepayers have paid for. According to DRA, the risk associated with the final ownership structure of the Coastal Water Project is a risk that should remain with CalAm's shareholders and not be transferred to ratepayers, given that negotiations will be largely within the purview of CalAm's management.

CalAm responds that the potential for a regional alternative does not create uncertainty about the Coastal Water Project, nor does it justify any delay in implementation of the proposed surcharges. CalAm argues that moving forward with the Coastal Water Project is the prudent and necessary course of action for CalAm. Failure to develop an alternative water supply source for the 10,730 acre-feet of water historically withdrawn from the Carmel River Aquifer would place CalAm and its customers at risk for millions of dollars in fines. Accordingly, CalAm has diligently pressed forward in developing its water supply solution.

CalAm argues that although the development of a regional project remains a possibility, it remains questionable at this point in time. According to CalAm, although Monterey County has expressed some interest in spearheading a regional project, it has not yet moved beyond the preliminary discussion stage. Similarly, PSMCSD has proposed a regional alternative, but has not provided evidence that its proposed project is viable and can meet the objectives and needs of CalAm with its proposed project. CalAm points out that the comparative analysis of the various water supply projects commissioned by MPWMD repeatedly notes the lack of substance and reliability in PSMCSD's proposal.

CalAm says it is open to the possibility of a regional project, but given its unique regulatory mandate to secure a long-term supply solution in its Monterey District, CalAm cannot wait for other parties to finalize their proposals. According to CalAm, it has cooperated with MPWMD, Monterey County and other local government agencies in their exploration of the feasibility of a regional project that could serve the needs of water users other than the Company's customers. CalAm believes there are numerous ways that any such regional project could unfold, ranging from a public/private partnership for a regional project to the subsequent addition of components over time to the Coastal Water Project by participating government agencies to increase capacity to serve other parts of the Monterey area.

CalAm believes that both the proposed Coastal Water Project and the proposed surcharges provide it with the flexibility to adapt to an alternative proposal, including the implementation of one of the alternatives analyzed in CalAm's PEA. According to CalAm, if a regional project ever does come to fruition, future cost sharing could be adjusted to reflect the proper sharing of any costs recovered.

We agree DRA has a valid concern regarding compensation of ratepayers should a private corporation or a public agency take over the project. Also, we do not dispute that the least risky approach from the ratepayer perspective is to wait until the project is built and operational before allowing the cost into rates. But, as we have discussed above, that would be the most expensive approach and will exacerbate rate shock if the total project cost is included in rates at one time. Therefore, we conclude that the magnitude of the project cost, approximately $191 million spread over 38,000 customers, requires some departure from standard ratemaking practice. We have carefully considered DRA's recommendation that the Commission should wait until the CPCN is issued, all permits are obtained and construction has commenced before implementing any surcharge to ameliorate total project costs. While the DRA recommendation is certainly a step in the right direction, we believe another year (or more) should not be allowed to elapse before imposing the surcharge to collect preconstruction costs that have already been incurred and are accruing interest charges. As discussed above, funds for preconstruction costs will be collected in a memorandum account, and there will be timely reasonableness review of costs, thereby affording ratepayers protection against unreasonable expenditures.

Further, DRA proposes that ratepayer contributions to utility plant be subject to the same type of rules and procedures the Commission established in D.06-03-015 for government financed funds, such as grants and loans.

We believe DRA's recommendation is premature. If CalAm decides to transfer ownership of the project, it is required to file an application with the Commission for approval (Public Utilities Code Section 851). That would be the appropriate time to decide how ratepayers should be compensated for their contributions to the project, including the return of funds in the memorandum accounts collected pursuant to Special Request 1 and 2 Surcharges that have not been disbursed to CalAm following a reasonableness determination by the Commission. Accordingly, DRA's proposal is rejected at this time.