XII. Rate Design

A. Facilities Fee

The City proposes that the Commission require San Gabriel to impose a facilities fee for new development receiving water service from the Fontana Division. Growth is forecasted to be approximately 1,350 new connections each year. Other water purveyors in the region charge between $5,000 and $7,000 per new home connected to the system and use those funds to pay for additional capacity needed to serve new customers. The City provided Exhibit 54, a "Capital Development Fee Survey," which calculates an average cost of development fees and the range of such fees for various meter sizes as such fees are assessed by a set of nine public water districts or cities in general proximity to the City of Fontana. DRA takes the position that to the extent any addition to plant is growth related, the cost of the added facilities to serve such growth should be contributed by the developer.

A witness for the City testified that all his current public agency clients assess facility charges in the range of $5,000 to $7,000 on developers to pay for upgrades to accommodate future growth. San Gabriel's witness agreed that this was a common practice for public entities financing infrastructure to serve new developments, and considered this an advantage for public water districts or cities in contrast to Commission-regulated water companies.

A major consideration with respect to potential facilities fees, development fees, connection fees, and the like, was whether the proceeds would be subject to federal income tax. It is important to describe such a fee in a manner to avoid the payment of taxes. San Gabriel's expert explained that Section 118 of the Internal Revenue Code (IRC) makes advances for construction and CIAC non-taxable for water utilities, while defining CIAC to exclude "amounts paid as service charges for starting or stopping services." He concluded that it would be feasible to implement a non-taxable facilities fee in compliance with a Commission tariff requiring developers or customers to pay for utility plant other than costs to install service connections. Pending the collection of facilities fees, he recommended that the Commission authorize San Gabriel either to include construction costs in rate base as CWIP or to add AFUDC or IDC to the cost of those facilities, which ultimately would be offset in ratemaking by the collection of the facilities fees that could be recorded as CIAC. By connecting the facilities fee to specific projects required for growth, it would be clear that such a fee is not tied to the cost of installing a service line or a charge for connecting to the system or starting service. He did not estimate the amount of the facilities fee or the amount of rate base reduction that could result.

San Gabriel and DRA each submitted late-filed exhibits presenting calculations of the effects of a facilities fee of $5,000 per new connection on San Gabriel's rate base and revenue requirement. San Gabriel recommends that facilities fee receipts through September of each year be recognized as deductions from rate base in conjunction with annual advice letter filings phasing Sandhill upgrade and headquarter complex investments into rates effective January 1 of the following year. Thus, if 1,350 new connections actually are added per year and a $5,000 fee per connection charged during this three-year rate case cycle, over $20 million of facilities fees would be collected from developers resulting in an eventual $4 million per year ratepayer revenue savings.

DRA presented an exhibit with somewhat different calculations of the impacts of $5,000 facilities fee, with estimated ratepayer savings up to $3.20 million per year.

San Gabriel does not oppose adoption of a facilities fee payable by developers or new customers, but San Gabriel is concerned about a number of key issues, which include:

· Given the uncertainty and volatility of real estate development, the revenue that a facilities fee would generate is highly uncertain both in amount and timing. In order to avoid burdening San Gabriel with a new and incremental source of financial risk, it is essential that facilities fee revenues only be taken into account for ratemaking purposes once they have been received, through an advice letter.

· Given the intention of treating facilities fee revenues as CIAC, offsetting additions to utility plant and thereby avoiding increases in rate base, it is important to identify capital projects that are needed, in whole or in part, to serve new customers rather than existing system requirements.

· While it appears to have been assumed that "developers" would be responsible for paying the facilities fee, the existing evidentiary record does not provide a working definition of that term and does not provide a basis for determining what percentage of new service connections are for properties constructed by a "developer," however that term may be defined, or for determining whether a facilities fee would apply with respect to new service connections not involving a "developer."

DRA, the City, and the District all recommend a more direct application of the facilities fee. They point out that San Gabriel has presented the facilities fees as offsets to its proposed future advice letters for the Sandhill plant and the office complex, and not as a CIAC offset to rate base. DRA asserts that the impact, if the facilities fees are adopted, should be shown as an offset to rate base in the test year and each of the escalation years, and not as offsets to proposed future advice letters. DRA disagrees with San Gabriel's proposed advice letter treatment for both the Sandhill plant upgrade and office complex. As shown on Joint Exhibit 62a, DRA's proposal would reduce San Gabriel's revenue requirement by $637,815 in TY 2006-2007; $1,902,612 in escalation year 2007-2008 and $3,137,472 in escalation year 2008-2009.

A facilities fee of a maximum $5,000 for a 5/8" x 3/4" meter is reasonable and will be authorized. San Gabriel has presented persuasive evidence that its customer base is growing by about 2 ½% per year with concomitant growth in water usage. It proposes upgrades to its Sandhill plant, new wells, new reservoirs, and equipment to meet this growth. It is not unreasonable to require developers, builders, and new customers to assist in paying for these new facilities through a facilities fee paid prior to connection. The City strongly supports this fee and has submitted a resolution of the City Council affirming its support. The water systems closest to San Gabriel have imposed facilities fees in varying amounts depending on meter size.

Table 1
Water Purveyor	Meter Size/Fee
	3/4"	1"
City of Chino	$5,809	$5,809
City of Ontario	$5,147	$5,147
City of Rialto	$5,100	$8,500
West Valley Water District	$5,080	$8,635
City of San Bernardino	$6,375	$8,445
City of Upland	$ 600	N/A
Cucamonga Valley Water District	$2,864	$4,783
City of Colton	N/A	$2,900
Monte Vista Water Company	$3,429	$5,486
Average Cost	$4,300	$6,213

Based on charges of similarly situated water purveyors we find a facilities fee of $5000 per new service connection up to 3/4" meter size to pay for the cost of new infrastructure is reasonable. Higher meter sizes will pay according to the following ratios, as proposed by the Commission's Water Division:

Table 2
Facilities Fee Allocation By Meter Size
Meter Size	Ratio
5/8" x 3/4" or 3/4"	1.0
1"	1.33
1- 1/2"	2.0
2"	2.67
3"	4.0
4"	5.33
6"	8.0
8"	10.67
10"	13.33
12"	16.0
14"	18.67

We agree with San Gabriel that the revenue the facilities fee will generate is highly uncertain in both amount and timing, given the uncertainty and volatility of real estate development. Therefore, we adopt the following procedure:

1. All fees collected must be recorded in a memorandum account. They shall be credited to CIAC at the time the fees are spent for additional plant.

2. The utility shall show the balances in its annual report to the Commission. Fund balances should be listed as debits to Account 121-3, miscellaneous special deposits, and as credits to Account 242, other deferred credits.

3. Interest should also be debited to Account 121-3, miscellaneous special deposits, and credited to Account 265, CIAC.

4. When plant is replaced using funds from these fees, a debit should be made to the appropriate plant account, a credit made to Account 121-3, miscellaneous special deposits, a debit made to Account 242, other deferred credits, and a credit made to Account 265, CIAC.

5. The fee is applicable to all applicants for installation of service connections by the utility in the territory served for premises not previously connected to its distribution mains, for additional service connections to existing premises, and for increases in size of service connections to existing premises at the customer's request.

6. An estimate of the Facilities Fees shall be included in any deposit required of the applicant under Rules 15 and 16, or otherwise. The tariff sheet in effect at the time the statement of actual construction costs is provided to the applicant under Rules 15 and 16, or otherwise, shall determine the applicable amount of the Facilities Fees.

See Appendix D for a form of tariff.

The proceeds of the facilities fees should be first used to offset the increase in ratebase resulting from the Sandhill treatment facility and then if sufficient, to offset other ratebase increases subject to the 10% ratebase cap. This offset is performed after the calculation of the ratebase cap so that the effect of the offset is not to create more room for investment under the ratebase cap. In 2007 and 2008 San Gabriel shall file an advice letter, concurrent with any advice letter to reflect the addition of the Sandhill facility to rate base in rates, to reflect the revenue requirement reductions caused by the increase in CIAC resulting from the proceeds of the facilities fees. These advice letters shall be filed by November 15, to be effective the January 1 of the following year.

B. Monthly Service Charges

Since the mid-1980s, a City ordinance has mandated fire sprinklers in all new residential construction. One-inch water meters are required in conjunction with such sprinkler systems and, therefore, owners of newer homes in Fontana consequently pay higher monthly service fees than other residential customers. The City proposes to equalize the service charge for a 3/4" meter and a 1" meter. San Gabriel's witness opposed this proposal and explained that the higher service charge for a one-inch meter follows Commission guidelines established by D.86-05-064; imposing additional charges on other Fontana Division customers would subsidize new home owners who are subject to the City's fire sprinkler ordinance. To modify the service charge to equalize it for new residences would be a change which would benefit occupants of recently constructed homes at the expense of customers with older residences. Such a rate design change would run directly counter to the City's other rate design proposal, a facilities fee.

DRA has reviewed San Gabriel's monthly service charge and finds that it is in compliance with the Commission's Water Rate Design Policy set forth in D.86-05-064. This method is based on 50% of fixed costs being included in the service charge, with remaining costs recovered through a single block commodity charge. DRA takes no issue with the methodology used by the Company. It is adopted.

C. California Alternative Rates for Water (CARW)

In San Gabriel's last rate case, D.04-07-034, the Commission required San Gabriel to implement a low income rate program. Under CARW qualifying customers receive a 50% reduction to their monthly service charge. Within the rate design calculations presented by San Gabriel, the Company assumed that 30.7% of the Fontana Division's residential customers served through a 1-inch or smaller meter will qualify for the CARW program. By a subsequent advice letter filing, San Gabriel revised rates to reflect a 15% participation rate. That impact is spread over all remaining service calculations. DRA takes no issue with the Company's assumptions and calculations regarding this program. It is adopted.

Further, San Gabriel shall continue to record the costs of its CARW in its memorandum account. San Gabriel shall also report to the Director of the Water Division annually the amount of annual costs of the CARW program and its impact on rates.

San Gabriel, may file by advice letter for authority to recover the costs of the CARW through a surcharge and removing the costs from rates. Such an advice letter should be filed 90 days prior to the desired effective date.