5. Issues Not Included in the Settlement Agreement
5.1. Reclaimed Water Rates for Westlake District
North Ranch is a Cal Water customer in the Westlake district taking service under Cal Water's reclaimed and potable water tariffs. It testifies that Cal Water's existing rate for reclaimed water is not just and reasonable because (1) it is not cost-based, and (2) our conservation objectives encourage water utilities to convert golf course irrigation usage from potable water to reclaimed water.35
North Ranch recognizes that rates may include factors other than cost, but it does not find that Cal Water has met its burden of proof in this proceeding to justify reclaimed water service revenues increasing by 8.5% to 9.4% when other district revenues are projected to increase by 2.8% to 3.6%. North Ranch requests the Commission (1) freeze the existing monthly service charge at $260 for a six-inch meter; (2) roll back the existing consumption charge from $1.5989 to $1.41 per 100 cubic feet, thereby eliminating one-half of the differential between what Cal Water pays and what it charges for reclaimed water; and (3) direct Cal Water to submit a comprehensive cost allocation study in its next rate proceeding so that the Commission and interested parties can readily identify the cost of furnishing reclaimed water service.36
Cal Water`s position is that the rate design methodology for reclaimed water adopted by settlement in the last GRC proceeding should be maintained, and that this methodology is the same as first adopted in D.93-06-090.37 This methodology is described by Cal Water as follows: the quantity rate for reclaimed water is set to include the wholesale cost differential and all other costs are set at 80% of potable cost levels.38
Cal Water asserts that the existing rate methodology should be maintained because North Ranch has not set forth a sufficient basis to justify altering the rate methodology in this proceeding.39
DRA does not directly address this issue in testimony or brief.40
The reclaimed water sold to North Ranch is purchased from the Calleguas Municipal Water District (Calleguas) at wholesale rates; a portion of Cal Water's potable water is also purchased from Calleguas. Cal Water incurs no treatment or pumping costs for the reclaimed water. It incurs virtually no operating costs; and its facility investment is approximately $14,480, less depreciation.41
In D.93-06-090, we first set a reclaimed water rate. In this decision, we find that having North Ranch's golf course use reclaimed water rather than potable water is beneficial to all customers as it makes available additional potable water for the system. We find that every effort should be made to induce the use of reclaimed water and that lower rates for reclaimed water would promote this objective.42 Further, we find that it would not be reasonable to set North Ranch's rate based solely on cost of service ratemaking because this will not capture any of the revenues North Ranch has been contributing to the overall costs of the system when it uses potable water for its golf course, nor will it capture the benefits of fire protection that North Ranch will continue to receive.
For these reasons, we chose in D.93-06-090 to treat reclaimed water as an additional water source rather than a separate and distinct service for ratemaking purposes. We recognize that certain municipal water districts provide a 25% rate differential between potable water and reclaimed water service, but if Cal Water's reclaimed water rates were set at a level 25% below its potable water rates, the rates would be non-compensatory and would require potable water customers to subsidize the service. Therefore, we conclude the rates for reclaimed water should be the same as the rate for potable water except for a differential in quantity rates based on the wholesale rate difference to purchase reclaimed and potable water. This results in an overall rate differential of 13%.43
In adopting this rate design in D.93-06-090, we emphasized that reclaimed water service is relatively new and our ratemaking treatment should not be considered as a precedent for future ratemaking for reclaimed water.44
In D.03-09-021, the last GRC proceeding for Westlake, the Commission found that the record established Cal Water's existing rate for reclaimed water provided for a 33% markup over wholesale costs. North Ranch's expert testified that this markup was excessive.
The Commission in D.03-09-021 adopted a non-precedential Joint Recommendation on Reclaimed Water Rates reached by Cal Water, DRA, North Ranch and the consumer group Aglet. In the Joint Recommendation, the parties agreed to reduce the reclaimed water rate (both the service charge and volumetric components) proposed by Cal Water in its application by 20%, but only so far as the resulting rate would not be lower than the previously applicable rate. If the rate resulting from applying the discount was lower than the previously applicable rate, then the previously applicable rate would remain in effect. We found this a reasonable compromise between the parties.45
Based on our discussion above, we find there is no precedential policy established for reclaimed water ratemaking in the Westlake district. This is clearly stated in both D.93-06-090 and D.03-09-021. North Ranch is correct that it is Cal Water's burden of proof to support a ratemaking treatment here. We find Cal Water's showing is weak.
We find that while the ratemaking methodology first adopted in D.93-06-090 did not carry directly through to D.03-09-021, there are some general policies that the Commission has followed over the past 14 years. First, we have consistently established reclaimed water rates in the context of the entire system's costs, based on the finding that fire protection service is provided to reclaimed water users and that there are some facility investments and some cost responsibility for administrative and general expenses. Our ratemaking also recognizes the differential that exists in the wholesale purchase costs of reclaimed and potable water.
In D.93-06-090, we set the rates the same for reclaimed and potable water except for the differential in wholesale commodity rates. Ten years later, in D.03-09-021, we found it reasonable to lower the service charge and volumetric rate proposed by Cal Water by 20%, but only so far as the resulting rate would not be lower than the previously applicable rate.
Based on the discussion above, we find it reasonable to maintain North Ranch's and other reclaimed water customers' existing water rates, both service charge and volumetric rate. This adopts North Ranch's request in regard to its fixed customer charge, and for the commodity rate it provides a benefit to reclaimed water customers because potable water customers will receive an immediate volumetric rate increase under the proposed settlement in 2007 and 2008. Reclaimed water customers should be refunded the interim rate surcharge and they are not subject to the rate true-up. Reclaimed water customers will continue to be subject to AL filings in the coming GRC period, both to reflect changes in wholesale purchased costs for reclaimed water and for any facilities additions authorized that are deemed used and useful in the provision of fire protection service. It will also be subject to the 2009-2010 attrition adjustment.
We direct Cal Water to provide a detailed proposal for reclaimed water rates in the next GRC filing. We do not require that this proposal be based on a comprehensive cost allocation study.
5.2. Vehicle Replacement Policy
DRA recommends the Commission adopt the vehicle replacement criteria of the Department of General Services (DGS) for Cal Water because DGS' policy reflects a more contemporary perspective than the policy DRA and Cal Water developed in a 1996 settlement. Further, the Commission adopted DRA's recommendation to use the DGS criteria for Southern California Water Company (SCWC) in D.06-01-025, and this criteria should be consistently used for all water utilities.46
In its Bakersfield report, DRA mistakenly testifies that the DGS policy is to allow a vehicle to be replaced when the age of vehicle is eight years old or the miles driven have reached 150,000.47 In its briefs, DRA corrects the DGS mileage standard to 120,000 and recognizes that DGS guidelines also allow that vehicles can be replaced earlier with an appropriate supporting report. DRA does not find the additional reporting required to replace a vehicle early would be burdensome for a water utility, stating that instead it is good management to generate such inspection reports to justify when vehicles should be replaced.48
Cal Water argues that it has used its current policy since the 1996 settlement agreement with DRA adopted in D.96-06-034, and therefore should be allowed to continue to use the policy. Its existing policy calls for replacement of vehicles that are (1) six years old and have 100,000 miles; or (2) are eight years old (regardless of mileage); or (3) have 125,000 miles (regardless of age). Further, it states DGS' policy would make budgeting for the three-year rate case plan more expensive and difficult due to the prescribed cost-effectiveness review that would be required to replace vehicles with less than eight years or 120,000 miles.49
Cal Water does not support its position with any fleet management study or data on its own history of vehicle repair and maintenance expenses. Cal Water references in its cross-examination a new study being prepared by the Department of Transportation but does not provide any detail.50
The dispute here is only on the first of Cal Water's three criteria: six years or 100,000 miles. We find the DGS policy is reasonable as it is based on more current vehicle information than was used in the 1996 settlement and the policy is currently applied to a wide range of state vehicles. In addition, we have already adopted this policy for another Class A water utility, Southern California Water Company. Therefore, we adopt the DGS criteria for Cal Water's vehicle replacement policy.51
5.3. Conservation Expenses
Cal Water requests the Commission include in each district's rate base an amount equal to 1.5% of revenues, totaling $1.06 million for the eight districts, to be used for water conservation expenses. Cal Water seeks to dramatically increase its water conservation spending in order to strengthen its water conservation programs to a level comparable to those of energy utilities. Cal Water chose the amount of 1.5% based on a conservation agreement it signed with two other water utilities and several environmental groups; DRA was not a party to this agreement.
Recognizing that it has underspent authorized conservation funds in the past, Cal Water proposes to use balancing accounts for each district to track its expenditures and to then divert money not spent to other programs or return the money to ratepayers in the next GRC.52
As an alternative proposal, Cal Water introduces DRA's recommendation in another proceeding, Cal-Am's Los Angeles district, that a memorandum account be used to track conservation expenditures.53
DRA objects to Cal Water's original proposal because it would be detrimental to ratepayers to allow Cal Water such a substantial increase in ratepayer provided funds without Cal Water providing any real evidence to the Commission of its ability to utilize these funds efficiently or in full. DRA testifies that historically Cal Water has significantly underspent its authorized conservation funds.54 DRA is supportive of conservation but does not support the Commission relying on an arbitrary factor of 1.5% of revenues as the appropriate level of expenditures. DRA also questions Cal Water's proposal to divert authorized but unspent conservation funds to unspecified "other programs." DRA's proposal is to use existing levels of authorization as the basis for Cal Water's conservation funding in the coming GRC period.
We commend Cal Water for its willingness to make a greater commitment to conservation programs than it has in the past. However, we share DRA's concern that there is little evidence that 1.5% of revenues is an attainable level for expenditures in the coming three years, and even if attainable, that the conservation programs will be effective when implemented so quickly and without detailed measurement and evaluation procedures.
We do not share Cal Water's view that DRA does not support the Commission's conservation goals. Rather, Exhibit 67 shows that DRA has exercised leadership in water conservation programs and supports our Water Action Plan objective to strengthen effective conservation efforts by the water utilities.
We find the DRA memorandum account proposal for conservation expenses in A.06-01-005, Exhibit 67, introduced by Cal Water in this proceeding is a preferable alternative to either party's proposal. Specifically, the mechanism in Exhibit 67 would authorize a memorandum account to track conservation program costs, up to certain annual dollar amounts, and allow recovery from ratepayers after the costs have been confirmed to be prudent. The exhibit also recommends the utility submit an annual conservation report detailing efforts and results.
A memorandum rather than a balancing account ensures Cal Water only receives funds for its actual expenditures and removes the need for Cal Water to divert funds to "other programs" or to reimburse ratepayers in the next GRC. It also allows the Commission to carefully review actual expenditures prior to ratepayer recovery. Exhibit 67 also discusses Cal-Am's plans to implement its conservation program in coordination with the area's three wholesale water agencies and to use grant assistance provided by these agencies to help fund its increased conservation efforts. Cal Water could follow the same policy and also plan for gradual expansion of various water conservation program aspects to match anticipated customer interest, participation levels, and efforts to identify customers with the highest water savings potential.
We find Exhibit 67's requirement for an annual conservation report detailing the utility's efforts and results is critical to achieving our conservation objective. Cal Water and DRA could consult with the California Urban Water Conservation Council (CUWCC) in developing this. The CUWCC coordinates statewide urban water conservation, has adopted 14 BMPs, which we reference in our Water Action Plan, and can provide guidance in designing comprehensive measurement and evaluation procedures.
In conclusion, we find our Water Action Plan conservation objective is best met by adoption of a memorandum account to track expenditures that are made, and measured, based on detailed annual reports. We encourage Cal Water and DRA to work collaboratively to develop specific plans for each district. Their efforts should include coordinating with the existing conservation programs of all wholesale water agencies in each district and identifying any available grant funding. Cal Water should file a conservation budget and measurement and evaluation proposal for each district within 90 days of this decision and then make ongoing reports and budget proposals on at least an annual basis.
We should establish funding caps for Cal Water's conservation expenses and these caps should be consistent with the record here and our conservation objectives. We find DRA's proposal to authorize only existing levels of conservation expense would provide insufficient funding to meet our Water Action Plan conservation objective. Cal Water proposes we authorize 1.5% of revenues but does not adequately support that this is an appropriate level of expenditure. In its opening brief, Cal Water does cite to D.06-08-011, mimeo. at 43, to establish that in its 2005 GRC proceeding for eight other districts, it reached agreement with DRA on a water conservation budget that was equivalent to approximately .54% of revenues; Cal Water asserts that this was a substantial increase from prior years.55 We also note that in Exhibit 67, DRA recommends a conservation expense level cap for California-American Water Company's (Cal-Am) Los Angeles district that computes to approximately 1% of revenues for Cal-Am's district.
The Commission is currently considering conservation policies, to include appropriate funding levels, for other Cal Water districts and for other Class A water utilities in its water conservation proceeding, I.07-01-022. Therefore, the level of conservation funding we authorize here is limited to the specific districts and GRC period of this proceeding and should not be construed as a precedent or statement of policy. Given this limitation, and recognizing we are adopting a memorandum account mechanism and reporting requirements, we should set a 1.0% of revenue cap for the 2007/2008 test year, and raise this to a 1.5% revenue cap for the following two years.
5.4. Working Capital
The contested issue here is the number of lead/lag days that should be reflected for state and federal income taxes. Cal Water proposes to include in rates a 45-day lead/lag figure for state and federal income taxes based on a new lead/lag study it completed in 2006. It states its study was performed consistent with the Commission's Standard Practice U-16 guidelines and the overall study was found by DRA to be "comprehensive" and "well-documented"; therefore, the specific tax calculations contained in the study should be adopted. Cal Water objects to DRA's proposal that Cal Water continue to use a 93-day lead/lag time for taxes as the 93 days was originally adopted in D.03-09-021 as part of a settlement, and Commission policy holds that a settlement should not be used as precedent in future proceedings.
DRA testifies that since the methods for paying state corporation franchise and federal income taxes have not changed since Cal Water's last Bakersfield GRC proceeding, the same methods should continue to apply. It testifies that despite Cal Water's best efforts to explain its new position, it has not provided a comprehensible justification for using a lead/lag figure that is approximately half that previously found to be appropriate. DRA states the methodology used to establish the 93 days is a weighted average calculation that recognizes that tax payments are not made on a uniform quarterly basis but that instead Cal Water's taxes are paid predominately toward the end of the year.56 Further, it states its method is consistent with the purpose of establishing a working cash figure in rate base, which is for ratepayers to compensate investors for any funds that they permanently commit to the business for the purpose of paying operating expenses in advance of receipt of offsetting revenues from customers and in order to maintain minimum bank balances.57 In its opening brief, DRA also uses data submitted in this proceeding as Exhibits 109, 110, and 111 to perform a current analysis resulting in 137.2 days for federal income tax and 110.9 for state corporation franchise tax; Cal Water objects in its reply brief to DRA submitting further analysis at the briefing stage.
In considering this issue, we weigh whether Cal Water has met its burden of proof to show the reasonableness of a 45-day lead/lag for state and federal income taxes. Cal Water supports its proposal with a 2006 comprehensive study but does not clearly refute DRA's concerns that the tax analysis contained in the study's Table 17, entered as Exhibit 109, may be based on faulty premises or possible double-counting. While DRA's 93-day recommendation was originally adopted as part of a settlement in D.03-09-021, it has been used since in five subsequent Cal Water GRC proceedings, as reflected in D.05-07-022, D.04-09-038, D.04-04-041, D.04-03-040, and D.03-10-005. To suddenly reduce the existing lead/lag level for taxes by over half requires a detailed explanation; it is not sufficient to simply state that the overall study conforms to Standard Practice U-16.
In addition, the Commission uses the Standard Practice U-16 methodology for other utility industries and has previously found it appropriate to compare the tax day calculations for nonwater utilities in establishing a reasonable level for a water utility. In a San Gabriel Valley Water Company (SGVWC) case, D.83-10-002, the Commission adopted a staff proposed 86.2-day lag time for California Corporation Franchise Tax (CCFT), stating:
Staff's estimate is in line with previous Commission decisions. In SGVWC's application for a rate increase for its Fontana Division, we adopted a working cash allowance that used 82.2 lag-days for payment of CCFT. In a recent General Telephone Company of California rate case, staff estimated the CCFT lag-days at 96.3 and General estimated the lag days to be 75.8. In the current Pacific Gas and Electric Company's general rate case application, staff has estimated the lag-days for payment of CCFT to be 82.6 days and the utility has agreed with staff's calculations. Comparable CCFT lag-day estimates have been used for other utilities.58
We note that both energy and water utilities have their highest customer usage in the summer months, and so both would be collecting revenues and paying taxes toward the mid to latter part of the year, consistent with DRA's testimony. A more recent PG&E case, D.94-02-042, found that using Standard Practice U-16 methodology resulted in average lag-days of 121.70 for federal income tax and 83.41 for CCFT; these figures are again closer to DRA's 93 lag-day recommendation than Cal Water's 45 lag-day proposal.59
The record on the issue is somewhat confusing and this issue would benefit from further analysis in future Cal Water GRC proceedings. Based on the evidence before us, we find that Cal Water did not meet its burden of proof to show that 45 lag-days is reasonable. We find that DRA's recommendation of 93 days is supported by Cal Water's existing authorized levels and the cases discussed here. Further, DRA's contention that the working capital calculation should reflect that actual tax payments are not uniform each quarter is supported by a previous Commission decision that held the utility's working cash needs for federal income tax and CCFT should be based "on the most beneficial (to ratepayers) payment date for FIT and CCFT."60
Based on the above discussion, we adopt a 93 average lag-day calculation for federal income taxes and CCFT.
5.5. Extended Service Protection (ESP) Service
We review here the ESP service being marketed to Cal Water customers. Cal Water's unregulated affiliate CWS Utility Services (CWSUS) offers the ESP service, a $4.95/month protection plan that guarantees the company will quickly repair or replace a customer's water line if it breaks between Cal Water's meter, generally located at the street curb, and the customer's house. CWSUS uses utility personnel, equipment, and marketing to provide the ESP service and reimburses Cal Water the incremental expenses incurred by the utility in making its employees and equipment available and also credits ratepayers an amount equal to 10% of the ESP service's gross revenues.
CWSUS advertises to Cal Water customers that if their water line breaks due to an earthquake, tree root, or cold spell, they will need to hire a contractor to excavate the broken pipe and then get a plumber to come out and fix or repair the line, at a cost of $1,000 or more, or they can sign up for ESP service and with one call to the water professionals they know and trust, their service line will be repaired or replaced at no charge, usually within 24 hours. A copy of the ESP service marketing brochure CWSUS sends to Cal Water customers is attached.61
Cal Water did not submit the ESP service to the Commission for review prior to entering an Inter-Company Services Agreement with CWSUS and it asserts a claim of confidentiality for all cost data and market projections.62 The ESP service was first introduced by CWSUS in 2005 in the South San Francisco district and extended to Dixon, King City, Oroville, Selma, Westlake, and Willows districts in 2006. CWSUS now offers the service in all of Cal Water's California districts.63
The ESP service raises important questions as to the criteria and process under which monopoly water utilities and their affiliate companies may engage in providing competitive services, how the Commission measures the relevant market and degree of competition, and the regulatory oversight the Commission provides to prevent cross-subsidization and anti-competitive practices. In addressing these issues, we consider applicable statutes, the Commission's rules for water utilities, similar programs offered by other utilities or their affiliates, prior Commission decisions, and case law.
In our review of the ESP service, we will determine whether CWSUS is properly offering the service as an affiliate by purporting to act under our excess capacity rules. If we find that the ESP service may not be offered by an unregulated affiliate under our excess capacity rules, we will then consider Cal Water's request that we allow the ESP service to be offered directly by Cal Water under our excess capacity rules. We will also examine the option for CWSUS to offer the service under Cal Water's affiliate transaction rules by terms of its 1997 holding company decision, D.97-12-011. Lastly, we will evaluate whether Cal Water has complied with Public Utilities Code section 453, which prohibits a utility from providing a preference to its affiliate.
It is to be expected that an entrepreneurial entity such as CWSUS, Cal Water's unregulated affiliate, would search for opportunities to serve market niches such as this one. Our review of the ESP service is designed not to prevent the service from being offered, but to assure that the manner in which it is offered is consistent with the law, and that it does not rely on resources taken inappropriately from Cal Water's captive customers.
In 1997, the Commission issued R.97-10-049, a rulemaking "to provide rules and appropriate guidelines for regulated water utilities and staff governing the proper accounting and ratemaking for privatization and the use of underutilized and excess capacity." In D.00-07-018, the Commission adopted excess capacity rules for water utilities. The purpose of the excess capacity rules is to provide for the use of water utilities' underutilized and excess capacity in a manner that is beneficial to ratepayers and shareholders, without violating any law, regulation, or Commission policy regarding anti-competitive practices.
The excess capacity rules include a methodology for water utilities to allocate revenue from non-tariffed projects between ratepayers and shareholders.64 (D.00-07-018, p. 20, Ordering Paragraph 2; 2000 Cal. PUC LEXIS 571, *27.) This methodology created a distinction between "active" and "passive" non-tariffed offerings by the utility. D.00-07-018 adopted Appendix A ("Appendix A"),65 designating many potential non-tariffed offerings as either active or passive, and stating that any non-tariffed offerings by the utility not present on the list would be designated as active if the shareholders incurred incremental investments costs of $125,000 or more. For active projects, the water utility shareholders would receive 90% of the revenue, and for passive projects, 70%. Ratepayers would receive the remaining 10% and 30%, respectively.66
The excess capacity rules generally require water utilities to seek advice letter approval for active, non-tariffed investments. All passive investments and active investments as are described in Appendix A of D.00-07-018 were specifically excluded from the advice letter filing requirement. The advice letter must contain detailed information regarding the proposed service.67 In order to ensure that ratepayers are not subsidizing new competitive ventures, the excess capacity rules also require the water utility make a showing in its advice letter filing that:
a. The involved portion of utility assets or capacity has been acquired for the purpose of and is necessary and useful in providing tariffed utility services,
b. The involved portion of such asset or capacity may be used in offering the non-tariffed product or service without affecting the cost, quality, or reliability of the tariffed products,
c. The non-tariffed product or service will be marketed with minimal or no ratepayer capital, minimal or no new forms of liability or business risk, and no undue diversion of utility management attention,
d. The non-tariffed product or service does not violate any law, regulation, or Commission policy regarding anti-competitive practices.
(D.00-07-018, p. 19, Conclusion of Law 8; 2000 Cal. PUC LEXIS 571, *26-27; see also Ordering Paragraph 4, pp. 20-21, 2000 Cal. PUC LEXIS 571, *29.)
The key issue we review here is whether CWSUS may offer its ESP service, a monthly protection plan for "customer-owned pipe service," under the excess capacity rules. If CWSUS may not offer the ESP service under the excess capacity rules, then we will examine whether Cal Water itself may offer this service pursuant to the excess capacity rules.
Cal Water asserts it is authorized under the Commission's excess capacity rules to provide its current ESP service through its unregulated affiliate, CWSUS. Specifically, Cal Water states that the ESP service meets the definition of a "Customer Ancillary Service" under Appendix A to D.00-07-018.68 Cal Water testifies that as a utility, it is prohibited from directly offering a competitive service by its affiliate transaction rules. Therefore, if the Commission had not intended the excess capacity mechanism to apply to services offered by unregulated water affiliates, Cal Water and most other Class A water utilities would not be eligible to offer competitive services under the excess capacity rules.
Further, by offering a competitive service through an affiliate rather than the utility itself, Cal Water argues that there are fewer potential cross-subsidy issues. Cal Water also states that the Commission has a policy preference to offer non-tariffed services through an affiliate rather than the utility itself, citing to In re Southern California Water Company, D.04-03-039, mailed on March 3, 2004, mimeo. at page 28.69 Should the Commission find that Cal Water is prohibited from offering affiliate services under the excess capacity rules, Cal Water states that to the extent that the Commission will allow the ESP program to be offered through the regulated water utility itself, and authorizes Cal Water to do so, the company is willing and prepared to transfer the program to the regulated utility.70 Finally, Cal Water asserts that as a utility it can provide exclusive services to its affiliate provided the services are non-tariffed and readily available to customers from competitors.
On the issue of what requirements govern the ESP service, DRA contends that Cal Water's affiliate transaction rules, not the excess capacity rules, govern the provision of competitive services by non-regulated affiliates.
We first address whether an affiliate may offer a service pursuant to the excess capacity rules. Cal Water currently offers the ESP service through its affiliate, CWSUS. The excess capacity rules adopted in D.00-07-018 were never meant to be used by an affiliate. In the decision opening up the Commission's rulemaking on excess capacity rules for water utilities, D.97-10-049, the Commission clearly stated that any rules promulgated in the proceeding were for water utilities, not their affiliates.71 In D.00-07-018, we repeatedly stated that "water utilities" will provide the non-tariffed services under the excess capacity rules.72 Moreover, in Cal Water's 2003 GRC proceeding, we again cited to the excess capacity rules applying to water utilities and discussed the different treatment that should be followed.73 In a 2004 SCWC decision, we rejected SCWC's argument that the excess capacity rules could be applied to affiliate transactions.74
In addition, our excess capacity rules for water utilities are modeled on energy utility rules, specifically the revenue sharing mechanism for "other operating revenues" adopted in the Southern California Edison Company(Edison)/DRA settlement in D.99-09-070. Edison's revenue sharing mechanism, as well as the generic rules for energy utility non-tariffed services, Rule VII, Utility Products and Services, apply only to utility non-tariffed services.75
Clearly, Cal Water's claim that it may offer the ESP service through its affiliate under the excess capacity rules lacks merit.
Cal Water asserts that its affiliate transaction rules prohibit it from directly offering an unregulated service. We have reviewed the relevant sections of Cal Water's affiliate transaction rules, and find that Cal Water is correct. Cal Water's affiliate transaction rules state that unregulated operations and employees whose primary responsibilities are to conduct unregulated operations should be transferred from the utility to the affiliate.76 Thus, under its affiliate transaction rules, Cal Water may not offer an unregulated service; only its affiliate may offer an unregulated service. We recognize that this limits the type of services Cal Water may offer. However, this proceeding is not the appropriate forum to address the merits of Cal Water's holding company decision. If Cal Water wishes to offer unregulated services under our excess capacity rules, then we suggest that it file a petition to modify this provision of its holding company decision, D.97-12-011.
In its filings, Cal Water stated that should the Commission find that CWSUS is prohibited from offering the ESP service under the excess capacity rules, then to the extent that the Commission will allow the ESP program to be offered through the regulated water utility itself, and authorizes Cal Water to do so, the company is willing and prepared to transfer the program to the regulated utility. In considering the applicability of the excess capacity rules to an ESP service offered by Cal Water, we first address whether offering the ESP service allows Cal Water to better utilize excess capacity in a manner that increases overall efficiency.
To provide the ESP service, Cal Water needs skilled workers to repair and replace water lines, an inventory of water pipe, and heavy equipment for trenching. Cal Water uses utility personnel and assets on an "as-needed" basis, paying a short-term incremental rate. In some of its smaller districts, Cal Water has only one or two employees able to perform this work, and they are employees vital to the provision of utility service. The equipment and inventory needed for ESP service is also basic to water utility service and in this proceeding, as in most GRC proceedings, Cal Water is asking for additional equipment, vehicles, water pipe, and technical personnel - the same assets it uses to provide ESP service. Cal Water makes no showing that its utility personnel, equipment, and inventory are underutilized, and perhaps, therefore, redundant. Thus, Cal Water has not demonstrated that the ESP service is using excess capacity.
Furthermore, the type of assets used in the ESP offering is not similar to the offerings of energy utilities under their excess capacity rules, upon which the water utility excess capacity rules are based. The energy utilities have used their excess capacity rules for temporarily available capacity in buildings and compatible secondary uses such as leasing land under transmission lines to nurseries and leasing "dark fiber" capacity.77 Similar to what the Commission has allowed for energy utilities, this Commission has authorized water utilities to lease temporarily available capacity in buildings under its excess capacity rules. An example of this is Apple Valley Ranchos Water Company's inclusion of non-tariff lease revenue, using D.00-07-018 methodology in its 2003 GRC proceeding.78
In sum, we find that the ESP service does not meet the definition of excess capacity we have used for energy utilities because the ESP service uses personnel and operating inventory, which have been justified as essential to the provision of utility services, not fixed assets. An ESP service is not the type of service the Commission envisioned being offered under the excess capacity rules.
Although we have determined that the ESP service is not using Cal Water's underutilized excess capacity, we will review whether the ESP service complies with other aspects of our excess capacity rules in order to provide some guidance to Cal Water for future service offerings under these rules.
We next turn to Cal Water's claim that the ESP service is an active service that is therefore exempt from the advice letter requirements of the excess capacity rules under Appendix A. Cal Water states that it thought the category "Customer Ancillary Services" which is described as "Customer Facility Related Services, Including Maintenance Contracts," authorized an ESP-type service.
We recognize that the record evidence in the excess capacity proceeding, R.97-10-049, is insufficient to support Cal Water's conclusion that the category "Customer Ancillary Services" in Appendix A, which is described as "Customer Facility Related Services, Including Maintenance Contracts," authorized an ESP-type service. As previously mentioned, Appendix A is not discussed in D.00-07-018 and it was inadvertently omitted when D.00-07-018 was issued.79 In the absence of guidance in D.00-07-018, we review the "Customer Ancillary Services" exemption here in light of our reading of the excess capacity decision.
We disagree with Cal Water's assertion that the ESP service is a "maintenance contract." The common definition of maintenance is the upkeep, repair, and preservation of existing facilities.80 The excavation and replacement of a water service line goes well beyond this definition. (See Attachment 2, an advertisement of the ESP service, which includes water service line replacement.) When Cal Water's service personnel replace water lines in the utility's system, Cal Water capitalizes any new pipe that is installed. In Exhibit 3, Chapter 5, Cal Water defines maintenance expenses as "the cost of repairing and maintaining the water system in good operating condition."81
We view the ESP service more analogous to an insurance-type product, similar to buying insurance for damage to one's home.82 While local plumbers and contractors commonly perform one time repair or replacement services, they may not be in the same competitive market as the ESP service if they do not also offer an insurance program. For example, if a home is damaged by fire, the homeowner will call his insurance company for repairs. He will not consider calling a contractor and paying the full cost of all necessary repairs as a competitive option. In fact, he has paid a regular insurance premium to avoid that option.
Because Cal Water believed CWSUS was exempt from filing an advice letter under Appendix A, it did not file an advice letter that complies with our excess capacity rules. Nevertheless, we will examine whether Cal Water may directly offer the ESP service as an active service under our excess capacity rules.
The excess capacity rules require a utility showing that ratepayers are not subsidizing new competitive ventures or being charged excessive prices for a non-tariffed service.83 In order to make this showing, Cal Water cited to inside wiring service offered by local telephone companies as a utility-provided service that is similar to the ESP service. Inside wire was historically installed, owned, and maintained by the local telephone utility for its customers and was part of a customer's basic telephone rate. It was only in 1982 with the break-up of the AT&T system that telephone customers were given the option of using a different company to install/maintain the inside wire or to self-provision. Federal and state regulatory agencies found it in the public interest for local telephone companies to continue to maintain the wire for customers who did not want to seek a competitive alternative. Therefore, inside wire service, called "WirePro" by Pacific Bell, became a separate "below the line" service provided by local phone companies using fully allocated cost accounting and subject to audit and review by regulators. For local service telephone utilities, the Commission founded a "New Regulatory Framework" in D.89-10-031, which established three levels of regulatory oversight of utility provided services, based on whether the service was a basic monopoly service (Category I), a discretionary and partially competitive service (Category II), or a fully competitive service (Category III). Pacific Bell's WirePro was initially classified as a Category II service, and thus given only limited competitive pricing discretion.84
Ten years later, in D.99-06-053,85 the Commission granted Pacific Bell's request for a Category III service designation. In making this reclassification, we found that Pacific Bell had demonstrated that it had "insignificant market power" and we authorized increased pricing flexibility. (D.99-06-053, Conclusion of Law 15, Ordering Paragraphs 6, 7, 1999 Cal. PUC LEXIS 309, *111, *113.) Within two years of D.99-06-053, the monthly price for WirePro had risen from $.60 to $2.99. On June 11, 2001, DRA filed a Petition for Modification of D.99-06-053 requesting the Commission recategorize the WirePro service back to Category II due to the excessive price increases, which DRA asserted demonstrated Pacific Bell's continuing dominant market power in the inside wire services market. In D.02-12-062, we denied DRA's requested relief but did adopt a "provisional cap" on the price of WirePro. (D.02-12-062, pp. 17-18, Ordering Paragraph 2; 2002 Cal. PUC LEXIS 925, *25.) This cap was later removed when the Commission lessened its regulatory oversight of local telephone utilities. The price for WirePro today is $5.00 per month.
Inside wire was historically installed, owned, and maintained by the local telephone utility for its customers and was part of their basic telephone rate. This is distinct from the ESP service where the water customer's water line from the utility meter to the residence has never been installed, owned, or repaired by Cal Water. For these reasons, we find that the inside wire service, as discussed in the Pacific Bell Wirepro cases,86 is different from Cal Water's ESP service. We also determine that Cal Water's reliance on the inside wiring services decisions does not meet the excess capacity rules requirement that it make a showing that ratepayers are not subsidizing new competitive ventures or being charged excessive prices for a non-tariffed service.
There is a similarity between inside wire service and ESP service in that the Commission needs to ensure that anticompetitive behavior does not occur with regard to both services. However, unlike local telephone service, the Commission has not reviewed the supporting costs and pricing data for the ESP service to determine if the price being charged utility customers is just and reasonable. Nor has the Commission analyzed the level of competition for the ESP service in the districts served by Cal Water to determine the level of market power Cal Water holds for the ESP service. Moreover, while the Commission has provided a lengthy regulatory path for the local service telephone utilities to move to a competitive framework, we have not provided a regulatory framework that sets forth different types of regulatory oversight for water utilities to enter potential and fully developed competitive markets.
For the aforementioned reasons, Cal Water has failed to demonstrate that the ESP service complies with the law, regulation, or Commission policy regarding anti-competitive practices. Short-term incremental cost raises concerns of cross-subsidization unless the assets are truly excess capacity or have secondary compatible uses. DRA also provided evidence that shared services are not being compensated by the non-regulated operation. In the case of the ESP service, Cal Water's proposal to use excess capacity rules would not allow the Commission to protect ratepayers against cross-subsidization or market power abuses. We also find that the ESP service failed to meet the excess capacity requirements adopted by the Commission in D.00-07-018 because Cal Water did not make the required showing that the service does not violate any law, regulation, or Commission policy regarding anti-competitive practices.87
In summary, we find that the ESP service does not qualify as a utility non-tariffed service under the excess capacity rules adopted in D.00-07-018, as modified by D.03-04-028 and D.04-12-023. If Cal Water is able to demonstrate that the assets it uses to provide its ESP service are excess capacity, and that it does not violate any law, regulation, or Commission policy regarding anti-competitive practices, then we will re-examine whether Cal Water may offer the ESP service under the excess capacity rules. However, based on the record evidence available in this proceeding, we are doubtful that an ESP-type service could ever satisfy the requirements of our excess capacity rules.
We recognize that there may be some confusion among water utilities concerning what type of services can be offered under the excess capacity rules. While we do not revisit the 1997 rulemaking which culminated in D.00-07-018 adopting the excess capacity rules, we believe that some guidance on this issue would be useful to water utilities and their affiliates.
As previously discussed, the excess capacity rules were modeled from the energy affiliate transaction rules as set forth in D.97-12-088 and the revenue sharing mechanism for "other operating revenues" adopted in the Edison/DRA settlement in D.99-09-070. In adopting excess capacity rules for water utilities in D.00-07-018, the Commission made modifications to the energy utilities affiliate transaction rules and the Edison/DRA settlement so that they would be better suited to water utilities.
The primary objective of the excess capacity rules is to allow water utilities to use temporarily underutilized assets in rate base in a manner that gives additional revenue for the benefit of ratepayers and shareholders, providing it can do so without violating any law, regulation, or Commission policy regarding anti-competitive practices. The ESP service uses personnel and operating inventory, not fixed assets, and these personnel and inventory are dedicated to providing basic utility service. Here, we have determined that utility personnel and equipment are generally not likely to be the type of assets that we envision being "excess capacity." We intended for excess capacity to include things such as billing services, space in buildings owned or leased by utilities, and extra capacity in dark fiber capacity.
Because we find, for different reasons, that neither CWSUS nor Cal Water may offer the ESP service under our excess capacity rules, we will examine whether this service maybe offered through an affiliate pursuant to Cal Water's affiliate transaction rules.
In 1996, Cal Water filed an application asking the Commission for authorization to form a holding company structure. In D.97-12-011, the Commission approved Cal Water's holding company structure subject to several conditions.88 These conditions are commonly referred to as Cal Water's affiliate transaction rules. The major provisions of the settlement agreement adopting the affiliate transaction rules for Cal Water are as follows:
1. Cal Water will provide the Commission access to its directors, officers, and employees for Commission inquiry into utility operations. Cal Water will also provide the Commission access to its books and records. In addition, Cal Water will file an annual report summarizing all transactions between the regulated and unregulated portions of the holding company.
2. Cal Water will maintain a capital structure, including dividend policy, that is consistent with Commission decisions. The regulated utility shall issue only its own debt and shall not guarantee any debt of the unregulated companies.
3. Common costs shall be allocated in a manner consistent with Commission decisions.
4. Assets and goods transferred from the utility to any affiliate shall be priced at cost or fair market value, whichever is higher. Assets and goods transferred to the utility from an affiliate shall be at the lower of cost or market.
(D.97-12-011, 77 CPUC2d 53, 1997 Cal. PUC LEXIS 1212, *2-3.)
For purposes of our review of the ESP service, the key affiliate transaction rule is the fourth rule. According to Cal Water's affiliate transaction rules, CWSUS must pay Cal Water the cost or fair market value (whichever is higher) of any assets or goods used by CWSUS or transferred from Cal Water to CWSUS.
Another important provision of Cal Water's affiliate transaction rules is regarding the transfer of assets and goods from the utility. Pursuant to D.97-12-011, "[a]ll transfers of assets and goods from the Utility to any affiliate shall be in compliance with the applicable provisions of the Public Utilities Code and Commission policies." (D.97-12-011, 1997 Cal. PUC LEXIS 1212, *15, Section XIII of the Settlement Agreement.)
Cal Water contends that its affiliate, CWSUS, is currently offering the ESP service in conformance with its affiliate transaction rules. DRA asserts, on the other hand, that the evidence here shows that Cal Water's ratepayers are not being fully compensated for ESP services under the affiliate transaction rules. DRA recommends the Commission direct Cal Water to file an application for the ESP service that fully complies with its affiliate transaction rules, and that the Commission use its own auditors to perform an audit of all non-tariffed activities by Cal Water and any expenses found to have been improperly borne by ratepayers should be refunded. Further, DRA recommends that the Commission adopt broader rules governing the standard of conduct between water utilities and their affiliates and cites to the energy utilities' affiliate transaction rules as a helpful model.
CWSUS may offer the ESP service so long as its offering meets the requirements set forth in Cal Water's affiliate transaction rules. Specifically, in order to offer the ESP service, CWSUS must pay Cal Water cost or fair market value, whichever is higher, of the goods and services it uses from Cal Water. Based on the record before us, it is clear that the ESP service currently does not comply with Cal Water's affiliate transaction rules. CWSUS uses utility personnel, equipment and marketing to provide the ESP service, but only reimburses Cal Water the incremental expenses incurred by Cal Water in making its employees and equipment available and also credits ratepayers an amount equal to 10% of the ESP service's gross revenues. In order to comply with its affiliate transaction rules, CWSUS must reimburse Cal Water the cost or fair market value (whichever is higher), not the incremental cost, for its use of Cal Water's goods and services in providing the ESP service. Fair market value is the price that would be paid under an arms-length transaction.
Moreover, the ESP service must also comply with Section 453(a) in order for CWSUS to be able to offer this service under Cal Water's affiliate transaction rules, as discussed in the following section.
We do not at this time adopt DRA's recommendation that the Commission use the energy affiliate rules as a model to adopt standards of conduct and rules to protect consumer interests and foster competition in the non-utility markets. This is a matter the Commission may choose to pursue in a rulemaking. For the ESP service before us here, we find that existing statutes, rules and case law are sufficient. Should further issues arise demonstrating a need for additional rules, DRA should pursue the procedural process that is appropriate to the circumstances.
Both the excess capacity rules and Cal Water's affiliate transaction rules require Cal Water to comply with applicable law or Commission policies.89 One of the applicable provisions of the Public Utilities Code that Cal Water must comply with in regard to both the excess capacity rules and any affiliate transaction is Public Utilities Code section 453(a) ("Section 453(a)"). Section 453(a) provides:
No public utility shall, as to rates, charges, service, facilities, or in any other respect, make or grant any preference or advantage to any corporation or person or subject any corporation or person to any prejudice or disadvantage.
(Pub. Util. Code, § 453(a).) Thus, Section 453(a) prohibits a utility from providing a preference to its affiliate. For energy utilities, transactions between the utility and its affiliates is limited to tariffed products and services, the sale or purchase of goods, property, products or services made generally available by the utility or affiliate to all market participants through an open, competitive bidding process, or as provided for in rules on joint purchases and corporate support.90 The question we face here is whether Cal Water's offering of its services exclusively to CWSUS for the ESP service is in compliance with Section 453(a).
Cal Water asserts that as a utility, it may offer exclusive services to its affiliate as long as the services are non-tariffed and readily available by competitors to customers from other sources. Cal Water states that the support services and products it provides to CWSUS are all available from different sources, and its competitors can readily obtain from other sources billing services, maintenance and repair personnel, etc. Because Cal Water is not providing monopoly services, it contends that there is no evidence of disadvantage to any competitor of CWSUS. Cal Water asserts that the preference prohibited by Section 453(a) is limited to a preference in a tariffed service.
DRA, on the other hand, contends that Cal Water has violated Section 453(a) by granting an undue preference to its affiliate.
In reviewing whether the ESP service complies with Section 453(a), we will first examine relevant case law. In California Portland Cement Company v. Union Pacific Railroad Company (1955) 54 CPUC 539, the Commission held that for a preference or prejudice under Section 453(a) to be unlawful, "the preference or prejudice must be unjust or undue. To be undue, the preference or prejudice must be shown to be a source of advantage to the parties or traffic allegedly favored and a detriment to the other parties or traffic." (Id. at 542.) Thus, pursuant to California Portland Cement, a utility offering may not violate Section 453(a) if it is not a source of advantage to the party offering the service or if it does not favor the party offering the service, to the detriment of other parties.
In a later case, Gay Law Students Association et al. v. Pacific Telephone and Telegraph Company (1979) 24 Cal.3d 458, the California Supreme Court applied a similar standard broadly to all aspects of utility operations, including discrimination in employment. The Court stated:
Having, by force of law, specifically guaranteed the public utility's monopoly status, the Legislature was not oblivious to the need to guard against the misuse of monopoly power. Drawing upon the well-established common law doctrine that a monopoly is not free to exercise its power arbitrarily, the Legislature enacted a specific and comprehensive statutory provision to prohibit discrimination by any public utility.
(Id. at 10.)
In a recent case where a telecommunications utility was providing a preference to its unregulated affiliate, the Commission found a violation of Section 453(a). (See D.05-05-049, Raw Bandwidth Communications, Inc. v. SBC California Inc., Order Modifying D.05-01-034 and D.04-05-006, Denying Rehearing of Decision, as Modified ("Raw Bandwidth").) In Raw Bandwidth, the Commission held that SBC's favorable treatment of 611 calls regarding DSL service that came from its own affiliate's customers did not comply with Section 453(a). (D.05-05-049, p. 5.)
The ESP service we are considering here may be similar to the problem in Raw Bandwidth because both situations involve the utility giving a possibly unfair competitive preference to its affiliate when a customer calls for repair service of an unregulated product that connects to the utility's facilities. Specifically, the ESP service is advertised as "it only takes one call to the water professionals you know and trust to have your water service line repaired or replaced." In Raw Bandwidth, customers who subscribed to a SBC-affiliate internet service provider (ISP) only made one call to obtain repairs, whereas subscribers to non-affiliated ISPs had to make multiple calls. (D.05-05-049, p. 6; 2005 Cal. PUC LEXIS 202, *10.) In Raw Bandwidth we found:
Pub. Util. Code Section 453 prohibits SBC California's
practice of requiring on 611 calls for digital subscriber line
repair service, the subscribers of unaffiliated ISPs to hang
up and call their service department while subscribers of
its affiliates are not required to take that extra step.
(D.05-05-049, p. 22, Conclusion of Law 2; 2005 Cal. PUC LEXIS 202, *39.) Thus, under Raw Bandwidth, the ESP service appears to not be in compliance with Section 453(a).
We recognize that the question of the the ESP service's failure to comply with Section 453(a) is not limited to the one-call repair issue, nor is this issue necessarily the most egregious of the preferences. We discuss one-call repair because in Raw Bandwidth, the Commission found that one-call repair preference by itself was sufficient for a finding that the utility violated Section 453(a).
One preference that rises to the level of a barrier to entry for competitors is the physical connection to the Cal Water system. Cal Water states the homeowner must first call Cal Water to turn off the water to the property before it can call a contractor or plumber. Cal Water's requirement that it be called to shut off the water to the property is shown in the ad it sends customers.91 The ability to directly contact utility water customers is another preference that competitors cannot provide, as is the "simple" sign-up for service application attached to the brochure for the homeowner to fill out, and the ability to pay for ESP on the customer's monthly water bill. Cal Water has testified that these services are provided only to CWSUS. These preferences, however, may rise to the level of being "unjust" or "undue."
We next turn to whether Cal Water is improperly using its monopolistic power to offer the ESP service. Cal Water and DRA agree that the ESP service is a competitive service, although they disagree on the nature of the market. Cal Water testified that the market includes local plumbers providing one-time repair service as well as other companies that may offer maintenance contracts with terms and conditions similar to the ESP service or companies that offer a service protection plan for water service lines as well as other home needs such as in-house plumbing or electrical repairs. Cal Water cites to a program similar to the ESP service offered by Suburban Water Company to its customers.92 DRA views the ESP service as a voluntary water service line maintenance program offered for a monthly fee.93
As previously discussed, we reject Cal Water's assertion that the ESP service is a "maintenance contract." Rather, we view the ESP service more as an insurance product, similar to buying insurance for damage to your home. We question whether there is a viable competitive market for the ESP service in the districts served by Cal Water. No evidence is presented to support Cal Water's claim. For here, it is sufficient to find that the ESP service is at least a potentially competitive service.
Cal Water provides utility repair personnel, equipment, and pipe, as well as billing and marketing services, and its utility service representatives to answer ESP calls and schedule repairs. In testimony and briefs, Cal Water asserted that it can provide these utility resources on an exclusive basis to its affiliate without violation the provisions of Section 453(a). Cal Water and DRA agree that for a preference or advantage to be prohibited by Section 453(a), it must rise to a level of being "unjust or undue." We concur.94 For the public utilities we regulate today, water utilities retain the most monopolistic power and thus the Commission should be most vigilant in ensuring that customers are protected from the utility affording any person or corporation unjust or undue preference.
In offering the ESP service, Cal Water uses utility personnel, equipment, and inventory on an as-needed basis and reimburses utility ratepayers for direct costs at a short-term incremental rate, plus 10% of gross revenues. A competitive company offering an insurance program or a one-time repair service may not have access to these extensive resources on an on-call basis at Cal Water's incremental cost structure.95 In addition, a competitor would not have the advantage of the utility's name, reputation, size, and monopoly customer base to market the service.
We find that, in this case, Cal Water is using its monopoly power to contact its utility customers in an effort to sell them a non-tariffed service that is not essential to its utility function. If we allow this, it may open the door to Cal Water also using its utility personnel and assets to offer sewer repair protection and in-home plumbing protection services similar to those now offered through American Water's utility affiliates, and any other business ventures it finds could be profitable. Our conclusion here is consistent with our holding in Raw Bandwidth where we found that SBC gave an unfair competitive preference to its affiliate regarding customer calls for repair service of an unregulated product that connects to the utility's facilities.96
As the ESP service is currently being offered, we find that Cal Water may not be in compliance with Section 453(a) because it is granting undue and unjust preferences to CWSUS for the ESP service. Cal Water has given CWSUS exclusive access to its utility customers for the ESP service. Cal Water also has considerable resources and the goodwill of its reputation, all paid for by the utility customers. Further, DRA's evidence points to possible undue and unjust preference in the price Cal Water sells its utility services, on an exclusive basis, to CWSUS. Cal Water's affiliate transaction rules state that "all transfers of assets and goods from the Utility to any affiliate shall be in compliance with the applicable provisions of the Public Utilities Code and Commission policies." A violation of Section 453(a) would also be a violation of Cal Water's affiliate transaction rules.
We think that CWSUS could, under Cal Water's affiliate transaction rules, offer an ESP-type service that clearly complies with Section 453(a). However, Cal Water will have to ensure that any preference given to an affiliate is not "unjust" or "undue." One way to demonstrate that a preference to an affiliate is not unjust or undue would be for CWSUS to hire independent contractors, instead of using Cal Water's employees, to provide the ESP service.97 If CWSUS chooses not to employ independent contractors to offer the ESP service, then Cal Water must demonstrate that any preference provided CWSUS is not unjust or undue by demonstrating that it is offering its affiliate access to its assets and personnel at cost or fair market value. Cal Water can also readily address compliance with Section 453(a) by ensuring that all goods and services provided by the utility to CWSUS for the ESP service are made generally available by the utility to all interested non-affiliated companies through tariffed offerings or an open, competitive bidding process. This would conform to energy utilities' requirements.
Because DRA did not request monetary penalties or sanctions against Cal Water for violating Section 453(a) and we are not making a finding as to whether Cal Water violated Section 453(a) here, we do not find it appropriate to impose penalties under the specific facts presented here. The Commission undertook a full review of the ESP service on its own initiative and Cal Water cooperated by providing additional information and testimony. We find that Cal Water acted in good faith in its reliance that the ESP service had been authorized under D.00-07-018 and that this is an issue of first impression as to whether this type of service is authorized under the excess capacity rules.98
In this decision, we conclude that the excess capacity rules adopted in D.00-07-018 are not applicable to affiliates. We also find that the ESP service does not qualify as a non-tariffed utility service under the excess capacity rules. Lastly, we determine that the ESP service as currently offered, may not comply with Section 453(a).
If Cal Water chooses to continue to provide the ESP service to its utility customers, it may do so in one of two ways. First, the utility itself can provide ESP as a regulated tariffed service. Using a tariffed service would remove concerns that ratepayers were subsidizing a shareholder competitive venture, and would provide additional utility revenues to offset the cost of utility service. A tariffed service would be priced under the utility's cost of service methodology, thereby ensuring the prices paid by Cal Water's customers for ESP service are "just and reasonable" under the standards of Public Utilities Code Section 451.
The second alternative is for the ESP service to continue to be provided by CWSUS, an unregulated affiliate, under terms and conditions that conform to its affiliate transaction rules and applicable statutes, if Cal Water is able to offer this service under the other provisions of its affiliate transaction rules. This would require that Cal Water not give CWSUS any undue or unjust preference. Also, any utility services provided must be fully compensated under the arms-length standard. Cal Water should make this showing under its affiliate transaction rules and the applicable laws we have discussed here.
We acknowledge that there may be a third option for Cal Water here. Cal Water could potentially file an application to offer ESP as an unregulated utility service pursuant to terms and conditions different that that established under the excess capacity revenue sharing mechanism. If that is done, Cal Water would need to show in its proposal:
· Cal Water service personnel and assets are available to provide this service without affecting the cost, quality, or reliability of basic utility service to customers;
· The non-tariffed service will be marketed with minimal or no incremental ratepayer capital, minimal or no new forms of liability or business risk, and no undue diversion of utility management attention;
· Using Cal Water's monopoly utility power to provide the ESP service would not interfere with the development of a competitive market for the service;
· Ratepayers would not be subsidizing a shareholder competitive venture; and
· Ratepayers would be paying a price for the service that is just and reasonable.
We do not judge here the merits of a potential application for such an offering, but we acknowledge that this may be another avenue that Cal Water may elect to pursue.
If Cal Water chooses to offer the ESP service under one of these options, it should file an application within 30 days of the effective date of this decision that sets forth the terms and conditions of service, consistent with the findings of this decision. Cal Water should also establish a memorandum account to track all costs and revenue of the ESP service until the Commission issues a decision determining how the costs and revenue of the ESP service should be allocated. Cal Water and CWSUS should also cease to advertise the ESP service until its application is approved.
If Cal Water chooses instead to not conform its ESP service to our rules and statutes, it should file within 30 days of the effective date of this decision a compliance filing that contains a timetable for notifying its customers that the ESP service is being discontinued.
DRA also contends that Cal Water has violated the reporting requirements of Section 2.62 of the Settlement Agreement to A.04-09-028. DRA claims that Cal Water may have failed to comply with its agreement in A.04-09-028 to provide detailed information on unregulated affiliates in all future GRC filings. We have addressed the ESP offering here and we can examine other affiliate programs in future GRC proceedings. DRA can also raise the issue of a full audit of all Cal Water's non-regulated activities in future proceedings.
We recognize that Cal Water's affiliate transaction rules currently do not allow it to directly offer any unregulated services, and therefore, Cal Water may not be able to offer services under our excess capacity rules. If Cal Water chooses, it may file a petition to modify its holding company decision, D.97-12-011, to amend its affiliate transaction rules so that it will be able to offer unregulated services under our excess capacity rules.99
35 North Ranch testifies the issues it raises are applicable to all reclaimed water customers in the Westlake District.
36 Exhibit 113 at page 10.
37 See Tr. Vol. 12 at 461, Exhibit 61, and Reply Brief at 14.
38 Tr. Vol. 12 at 461-2.
39 Opening Brief at 27.
40 In response to an ALJ question, its attorney states on the record that DRA intends to stick with the current rate design structure. Tr. Vol. 12 at 466.
41 D.03-09-021 at 81.
42 D.93-09-021, 1993 Cal. PUC LEXIS 347, pages 4 and 5.
43 Id. at 4 and 5.
44 Id. at 4.
45 D.03-09-021 at 82.
46 See D.06-01-025 discussion, mimeo., at pages 44-45, and Conclusion of Law 24, mimeo., at page 82.
47 Exhibit 100, page 7-19.
48 Opening Brief at 5 and Reply Brief at 3.
49 Opening Brief at 20-21.
50 Tr. at 261.
51 As discussed, DGS's vehicle replacement policy is properly stated in DRA's briefs.
52 Cal Water also committed to spending its conservation funds, outside of educational projects, on programs that have been found to be cost-effective using the Best Management Practices (BMP) set by the California Urban Water Conservation Council and to providing regular reports to the Commission staff, so that expenditures are continually monitored.
53 This is entered as Exhibit 67 in this proceeding.
54 For the largest district, Bakersfield, see Exhibit 100 and Tr. Vol. 11, pages 329-341. Specifically, DRA cites to testimony that for 2004 in Bakersfield, the Commission authorized $103,000 and Cal Water spent only $5,480, just 5% of the funds provided by customers. In this proceeding, Cal Water is requesting $714,122 for Bakersfield and DRA testifies that as of July 2006 the company had spent only $17,945 for the first half of the year. Cal Water later updated its Bakersfield figures to show total 2006 expenditures of $135,000. See DRA Opening Brief at page 6.
55 Opening Brief at 24.
56 Tr. Vol. 11, at pages 317-20.
57 DRA bases its definition on CPUC Standard Practice SP U-16-W, Determination of Working Cash Allowance, issued May 16, 2002, paragraph D.5.
58 See 1983 Cal. PUC LEXIS 1007; 12 CPUC2d 718, mimeo. at page 9.
59 See 1994 Cal. PUC LEXIS 82; 53 CPUC2d 215, mimeo. at pages 12 and 39. Note that the Commission, for ratemaking purposes, inserted the values of zero for current and deferred income taxes due to large tax advantages PG&E would realize in the test period.
60 See Southern California Edison, D.84-12-068, 1984 Cal. PUC LEXIS 1050; 16 CPUC2d 721, mimeo. at page 53.
61 See Attachment 2, Material from Cal Water October 2, 2006 filing "Response to Request for Information."
62 In its GRC applications, Cal Water references the ESP program, which led to the ALJ requesting further information be filed and briefed. The Inter-Company Service Agreement is entered into evidence as Exhibit 82.
63 DRA Opening Brief at 18.
64 The excess capacity rules for water utilities are modeled on energy utility rules. See D.97-12-088, 77 CPUC2d 422, 1997 Cal. PUC LEXIS 1139.
65 We note that Appendix A was referenced, but not attached, to D.00-07-018. Appendix A was later published by Executive Director decision in D.01-01-026. D.03-04-028 made some modifications to D.00-07-018 to purportedly correct an unintended exemption for certain projects from the advice letter filing requirement of the decision and to clarify the Commission's methodology. Finding of Fact 3 in D.03-04-028 states that "D.00-07-018 contains no discussion or justification for an exemption of listed active non-tariffed offerings from the advice letter-filing requirements" as listed in Appendix A. (D.03-04-028, pp. 4, 8, Finding of Fact 3.) D.03-04-028 also required all non-tariffed offerings from water utilities to be subject to prior Commission review and approval. (D.03-04-028, pp. 4, 8, Finding of Fact 2.) In D.04-12-023, the Commission reversed many of the modifications that D.03-04-028 made to D.00-07-018, including the requirement that all non-tariffed offerings be subject to prior Commission review and approval. In D.04-12-023 the Commission reinstated the requirement set forth in D.00-07-018 that water utilities only have to seek advice letter approval for active, non-tariffed investments under the excess capacity rules. (D.04-12-023, p. 3.) The Commission determined that "[a]ll passive investments, and active investments as described in Attachment A of D.00-07-018, were specifically excluded from the advice letter filing requirement." (Id.) While D.04-12-023 made a finding stating that "[t]he record in this proceeding requires water utilities to seek advice letter approval for only active investments not listed in Attachment A of D.00-07-018," Finding of Fact 3 in D.03-04-028 was not removed. (D.04-12-023, p. 6, Finding of Fact 4.) In sum, D.00-07-018 remains mostly unchanged, with a few minor clarifications made in D.03-04-028 and D.04-12-023.
66 See D.04-12-023, pp. 1-3.
67 Some of the information a utility must provide in the advice letter includes: an accounting mechanism to allocate costs of assets in rate base and expenses in rate between tariffed an non-tariffed services; a detailed description of proposed accounting for transaction costs and revenues; a complete identification of all regulated assets that will be used in the proposed transaction; and a complete list of all employees that will participate in fulfilling the terms of the transaction, with an estimate of the amount of time each will spend. (D.00-07-018, Ordering Paragraph 3, pp. 20-21; 2000 Cal. PUC LEXIS 571, *28-29.)
68 The category "Customer Ancillary Services" that Cal Water cites to is described as "Customer Facility Related Services, Including Maintenance Contracts." This category is designated as an "active" service and has a gross revenue sharing mechanism of 10% to ratepayers and 90% to shareholders, after incremental costs are reimbursed to the ratepayers.
69 See also Tr. Vol. 13 at 562-3.
70 Opening Brief at 13.
71 Specifically, in D.97-10-049, the Commission stated: "We believe that this OIR is the correct forum to provide rules and appropriate guidelines for regulated water utilities and staff governing the proper accounting and ratemaking for privatization and the use of underutilized excess capacity." (D.97-10-049, 1997 Cal. PUC LEXIS 1062, *4 (emphasis added).)
72 For example, in D.00-07-018, we made the following statements: (1) "We will require subject utilities to file an Advice Letter before providing new non-tariffed products and services (D.00-07-018, p. 15 (emphasis added)); (2) "Therefore, the water utility proposing the new service or product should show that there is or will be investment above $125,000 . . ." (D.00-07-018, p. 14 (emphasis added)); and (3) "The public interest requires that the water utilities have a means of obtaining Commission review and approval prior to entering into a new active non-tariffed endeavor." (D.00-07-018, Conclusion of Law 5, p. 19 (emphasis added).)
73 See D.03-09-021, mailed September 5, 2003, mimeo. at 24-25.
74 See D.04-03-039, mailed March 18, 2004, mimeo. at 28-29. In response to SCWC's decision to allow its affiliate, ASUS, to offer services under the excess capacity rules rather than SCWC's affiliate transaction rules, the Commission stated: "SCWC has misinterpreted the intent of that decision [D.00-07-018]. The revenue sharing mechanism is intended to apply to a water utility (1) providing non-tariffed services, (2) sharing the gross revenues with ratepayers, and (3) absorbing all incremental costs. It does not apply to non-regulated affiliates of the water utility." (D.04-03-039, p. 29.) We reiterate our holding in D.04-03-039 that only a utility may offer a service pursuant to the excess capacity rules.
75 Rule VII was adopted in D.97-12-088, as modified by D.98-09-035.
76 Cal Water cites to D.97-12-011, Appendix A, XII. This section of the settlement agreement adopted by Cal Water's holding company decision states, in relevant part: "A. Unregulated operations, including all pertinent contracts, that are performed by the Utility shall be transferred to the appropriate affiliate as soon as the requisite consents are obtained . . . C. The utility shall endeavor to transfer to its affiliates employees whose primary responsibility is to conduct unregulated operations. The timing of such transfer will take into consideration the Utility's employment obligations to such employees, its obligations under its Union contracts and the cost of providing comparable terms of employment." (D.97-12-011, 1997 Cal. PUC LEXIS 1212, *14-15.)
77 See D.97-12-088 mimeo. at 75, 77 CPUC2d 422, 1997 Cal. PUC LEXIS 1139, and Tr. Vol. 13 at 574.
78 See D.03-08-069, mailed August 25, 2003, mimeo. at page 10 and Finding of Fact 13 at page 48.
79 D.00-07-018 does not provide any discussion on the exceptions listed in Appendix A. Rather, the decision merely states: "CWA provided a designation of various potential non-tariffed activities, divided into passive and active investments (Exhibit A, CWA Comments on the Administrative Law Judge's Ruling dated September 14, 1999). We will adopt this designation (See Appendix A.)" (D.00-07-018, 2000 Cal PUC LEXIS 571, *19.) We find that while Cal Water may have thought a non-tariffed service like ESP was included in Appendix A, the record is insufficient to establish this. We also note that D.00-07-018, including Appendix A, concerns new offerings by a water utility. There is no discussion or authorization for an existing affiliate service, categorized as competitive, to be brought under these rules.
80 Webster's New World Dictionary, Third College Edition, pages 815-16.
81 See Exhibit 3, page 33.
82 By using an insurance analogy, we do not imply that the ESP service is an insurance product under the regulatory oversight of the Insurance Commission. Section 22 of the Insurance Code states: "Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event." (West's Annotated California Codes, Volume 42, published 2006, p. 14.)
83 See D.00-07-018, Conclusion of Law 8, p. 19, 2000 Cal. PUC LEXIS 571, *26-27; see also D.00-07-018, Ordering Paragraph 4, pp. 20-21, 2000 Cal. PUC LEXIS 571, *29.
84 In Re Alternative Regulatory Frameworks for Local Exchange Carriers, D.89-10-031, 33 CPUC 2d 43.
85 D.99-06-053, 1999 Cal. PUC LEXIS 309, was modified by D.99-09-036, 1999 Cal. PUC LEXIS 603. D.99-09-036 modified D.99-06-053 to include findings related to the relevant residential inside wire repair market, to modify certain holdings, to modify Ordering Paragraph 8, and to correct other minor errors. (1999 Cal. PUC LEXIS 603, *26.)
86 See D.89-10-031; D.99-06-053; D.99-09-036; D.02-12-062.
87 Specifically: (1) we have no record to determine whether the manner in which the ESP service is being offered interferes with the development of a competitive market for the service; (2) we do not have a record to determine whether ratepayers are subsidizing a shareholder competitive venture; and (3) we do not have a record to determine whether ratepayers are paying a price for the service that is not just and reasonable.
88 D.97-12-011 adopted a settlement agreement between the Commission's Water Division and Cal Water. The California Water Utility Council also supported the settlement.
89 See D.00-07-018, Ordering Paragraph 4, 2000 Cal. PUC LEXIS 571, *29; D.97-12-011, 1997 Cal. PUC LEXIS 1212, *15, Section XIII of the Settlement Agreement. We note that because we have already determined the ESP service may not be offered pursuant to the excess capacity rules, we will only make this inquiry with respect to Cal Water's affiliate transaction rules.
90 See Affiliate Transaction Rules, Section III. Nondiscrimination, attached to D.98-08-035.
91 See Attachment 2. This ad may be incorrect. Cal Water should address whether plumbers and other water professionals not employed by Cal Water or its affiliates will be given direct access to the valve in any future filings regarding ESP service.
92 In D.06-08-017, the Commission adopted a non-precedential settlement that includes a utility service designated as "customers houseline maintenance services" being provided under the provisions of D.00-07-018. This program is not mentioned in the decision itself and no further information is provided in the settlement. See D.06-08-017, mailed August 25, 2006, mimeo. at Section 3.6 of Appendix A, page 6.
93 Opening Brief at 7.
94 Both California Portland Cement Company v. Union Pacific Railroad Company (1955) 54 CPUC 539 and Gay Law Students Association et al. v. Pacific Telephone and Telegraph Company (1979) 24 Cal.3d 458 determined that for a preference or advantage to be prohibited by Section 453(a), it must rise to a level of being "unjust or undue."
95 Under Cal Water's affiliate transaction rules, CWSUS would be required to reimburse Cal Water at the greater of cost or fair market value. Fair market value is defined in Public Utilities Code Section 2720, and is in general terms the price that is established under an arms-length transaction.
96 D.05-05-049, p. 22, Conclusion of Law 2, 4; 2005 Cal. PUC LEXIS 202,*39-40.
97 An example of an energy affiliate providing a service similar to the ESP service is the "Customer Premises Electrical Repair Service" provided by Edison's unregulated affiliate Edison Select between 1996 to 2000. This service used independent electrical contractors, chosen through a competitive bidding process, to provide minor types of electrical repair service in a customer's home. The service was provided under rules applicable to energy affiliates, not under Edison's revenue sharing mechanism or the provisions of Rule VII.
98 If Cal Water does not timely comply with changing or withdrawing the ESP service based on the findings and directives of this decision, the Commission could consider possible fines for noncompliance in a subsequent proceeding.
99 We recognize that under our Rule 16.4 of our Rules of Practice & Procedure, Cal Water will need to explain why the petition could not have been presented within one year of the effective date of the decision. Given the facts raised in this proceeding, we believe that Cal Water should be able to make this showing.
