6. CalWater, Suburban, and Park Conservation Rate Design Proposals
The conservation rate design settlements are trial programs, which will be reviewed in the utilities' next GRCs. The purpose of the trial programs is to initiate conservation rates; the rate design will change over time. We will examine the settlements' trial programs in light of our settlement objectives. CFC objects to various aspects of the settlements' rate designs and WRAMs. The other parties either support or do not oppose the settlements.16 We discuss CFC's objections below.
6.1. CalWater Amended Settlement
The CalWater amended settlement has different rate designs for residential and non-residential customers by district. Most residential customers will have tiered quantity charges; some districts will have two tiers and others will have three. The same methodology was used to set the tiers; the tiers are based on consumption patterns and seasonality of each district and a proxy for indoor water consumption was used. Three tiers are used if consumption patterns show significant seasonal differences in which the average summer use is more than twice the average winter use. Some residential customers will have lower meter charges. Other customers with high single quantity charges and low usage will keep the single quantity charge. Rates for three-tier districts are set by discounting rates for the first tier relative to the single quantity rate, by adjusting the single quantity rate upwards or downwards to achieve revenue neutrality for the second tier, and by setting the third tier approximately 20% above the second tier rate. Rates for two-tier districts are set by discounting rates for the first tier relative to the single quantity rate and by setting rates for the second tier 18%-20% higher than the first tier. Customers without meters are not included in the conservation rates, but the impact on customers transitioning to meters is considered in the proposed rate design.
The amended settlement proposes to reduce service charges approximately 10% to 25% for non-residential customers, retain a single quantity charge, and increase the single quantity rate to achieve revenue neutrality.17 Its Stockton district is an exception, since it already has a two tier rate structure, which will not change. There are two non-residential groups; the first group has a higher single quantity rate and more than 70% of revenue comes from the quantity rate, and the second group has a lower quantity rate and less than 70% of revenue derives from the single quantity rate. In general customers with meters 6" and below are in one rate group and customers with meter sizes 8" and above are in a second rate group. The proposed rate design for non-residential customers is consistent with California Urban Water Conservation Council's (CUWCC) definition of conservation pricing and with CUWCC's requirement that at least 70% of revenues are recovered through the quantity charge. CalWater states higher usage will result in increased charges.
CFC has a number of objections to the proposed conservation rate design, which we will address in turn. CFC objects that there are no increasing block rates for commercial and industrial customers.18 As discussed above, we permitted the parties to move forward with the applications' proposals for increasing block rates for residential customers only. However, we will examine whether CalWater, DRA and TURN's proposed conservation rate design for non-residential customers meets our standards for settlements. 19
CalWater's existing non-residential rate design mostly is consistent with CUWCC's requirements. As noted by CalWater, DRA and TURN, in most districts the non-residential quantity charge already captures more than 70% of revenues, consistent with CUWCC's requirement. The districts where quantity rates do not recover more than 70% of revenues are few. To meet CUWCC's requirements for each district would require a modified rate design for five districts, Chico, Marysville, Willows, Dixon, and King City. In proposing modifications to the rate designs in the remaining 17 districts, CalWater, DRA and TURN do not explain how adopting a lower service charge and higher quantity charge for those districts, including two sub-districts, meets the Commission's conservation goals. They do not address the specific impact of increasing the quantity charge and decreasing the meter charge for the 17 districts. Thus, we are unclear whether there were any additional conservation goals incorporated in the proposal.
The settlement partially addresses the impact of these proposed changes in attached worksheets. Non-residential customers have varying meter sizes, rates were set depending on meter size, and the bill impact analyses show a resulting bill. However, average consumption for non-residential customers results in increases or decreases in monthly bills, depending on meter size. Some of that impact results from the decision to adopt a single quantity rate by meter size with a lower quantity rate for 8" meters and up. However, that lower rate results in higher bills for smaller meter sizes, for which no explanation is given. For example, average consumption in the Los Altos district increases with meter size but the monthly bill for average consumption for a 10" meter remains the same while the monthly bill for a 6" meter increases 2.2%, even though consumption is approximately 700 cubic feet (Ccf) lower. This result occurs because the 25% meter charge reduction for 10" meters is greater and the quantity charge has increased less for 10" meter customers. Similarly, in the Bakersfield district, customers with 8" meters receive no bill increase for average consumption while customers with 6" meters receive a 3.8% bill increase even though average consumption for 8" meters is twice average consumption for 6" meters.20 In the Oroville district, the 8" meter customer receives no increase while 6" meter customers with only 20% of the monthly consumption of the 8" meter customer receive a 6.7% increase. CalWater, DRA, and TURN do not explain in the settlement why average consumption results in increases for some non-residential customers but no or smaller increases for others with higher monthly consumption.
In comments on the proposed decision, CalWater and DRA explain that the anomaly in rate changes in districts with two non-residential quantity rates occurs due to the small number of these customers (.25% of total non-residential customers), the need to achieve revenue neutrality, and the need for more tailored conservation approaches of these "outliers" in the distribution of non-residential meters. Finally, customers with 8" meters are more likely to have multiple water connections in various sizes for different purposes and will experience different conservation signals. Since the number of non-residential customers with higher consumption in a single district who will receive smaller or no increases for average consumption is minuscule, adoption of the non-residential rate design for CalWater generally results in bill increases for higher usage and conforms all districts to CUWCC's requirement.
We are not persuaded by CFC's other criticisms of the amended settlement. CFC states a conservation rate design should be limited to the eight districts for which we ordered CalWater to propose block rates in D.06-08-011, because customer confusion might result if conservation rates are implemented pending disposition of applications to increase rates in the remaining districts. CalWater expanded its original proposal in its earlier GRC to conform with our WAP and an agreement it reached with environmental groups. Although we agree with CFC that coordinating proposed rate increases in pending GRCs with the conservation rate design proposal before us is not simple, we have not precluded Class A water utilities from doing so.21 In addition, adopting conservation rates for almost all of CalWater's districts is consistent with the WAP and furthers our conservation goals.
CFC states the amended settlement does not address the needs of low-income customers whose usage would fall in the second or third tier. CalWater, DRA and TURN state they have proposed increasing block rates that account for low-income customers.22 The proposed tiered rate design establishes tiers based on the consumption patterns of each district. The first tier is set using a proxy of indoor water use based on seasonal indicators and is priced at approximately 5% less than the single quantity rate that would be adopted under standard rate design. The second tier is also based on seasonality and extends from the top of Tier 1 to the midpoint between the weather adjusted annual monthly and summer averages. Tier 2 is priced to be approximately the single quantity rate that would be adopted under standard rate design. The breakpoints and pricing of Tiers 1 and 2 ensure that average and low-use customers see slight decreases or no changes to their bills; they also take low-income affordability into account in that they decrease the likelihood that larger households will enter the higher tiers too soon. We are satisfied that these safeguards account for the interests of low-income customers and are sufficient for a utility that has a low-income program in place.
CFC objects that the amended settlement does not include a seasonal rate. CalWater, DRA, and TURN state the proposed conservation rates provide customers with a greater financial incentive to conserve water; the tier breakpoints are based on seasonal indicators of consumption patterns specific to each district, so bills will increase in summer months, because of higher consumption that is largely attributable to outdoor use. Since the proposed rate structure discourages use beyond indoor use, customers will have an economic incentive to reduce their outdoor use. Tiers designed to reduce summer consumption sufficiently capture "seasonality" in rates.
CFC opposes setting the first tier break point at consumption below the statewide average for the South San Francisco district. The settling parties applied the same methodology to South San Francisco, using that district's average consumption, as they did to the other residential districts. South San Francisco's average consumption is below statewide consumption in both winter and summer months. Customers with average consumption will not see a rate increase; only higher users will have larger monthly bills. At this time, we find no reason to exempt districts with low average consumption from increasing block rates. The impact of increasing block rates on South San Francisco will be monitored and its impact will be assessed in CalWater's next GRC for that district.
6.2. Suburban Settlement
The Suburban settlement has a two-block rate design, because the difference between summer and winter usage is not significant enough to require a third block. The parties considered seasonality in the calculation of the usage breakpoints for the various meter sizes. The two-tier structure with breakpoints by meter size minimizes the impact on large households, especially for larger meters that serve multi-unit residential buildings. The Block I price provides a 2%-2.5% discount from the authorized single quantity rate. The rates for Block II are set at 8%-14% over Block I. Rate differentials are maintained across zones. Service charges, reset in October 2006, do not change; Suburban's quantity rate recovers more than 70% of revenues, consistent with CUWCC's requirements. Pursuant to D.06-08-017, Suburban will propose a conservation rate design for non-residential customers in its next GRC.
CFC objects to Suburban and DRA's methodology for setting the settlement's tiers. CFC notes that municipalities have chosen to increase rates from the first to second tiers at a lower level of consumption than Suburban's 20 Ccf. The settling parties explain that Suburban's various elevations result in average consumption that is greater than other utilities' customers' average consumption. In the settlement, the upper level of Block I was set at the midpoint between average monthly (annual) consumption and average summer consumption to ensure that customers with low and average levels of use remain within Block I. Customers with consumption greater than the summer average would fall in Block II. Suburban and DRA used this methodology due to concerns about the impact of conservation rates on low-income customers, both in single and multi-family units, and a desire for simplicity in setting rates for Suburban's districts with three elevation zones and multiple meter sizes.
The upper level of Block I is higher than the breakpoints in the other settlements. The settling parties have explained that the higher breakpoint is necessary for Suburban, because its customers' average consumption is higher. The breakpoint was set around average consumption to ensure that customers with lower usage receive lower rates and to mitigate the impact of conservation rates on low-income customers. These circumstances sufficiently justify why the 20 Ccf breakpoint was chosen. The impact of this choice will be reviewed in Suburban's next GRC.
CFC states a third tier should be added in the San Jose Hills district, because summer usage is more than twice winter usage and that seasonal rates should be used. CFC used three months in calculating summer usage but the settlement uses four months, June through September. Suburban and DRA tracked demand characteristics, particularly from June through September, to see how they compared to the total year, and determined that four months best reflected summer and the highest usage months. They also focused on Zone 1, where slightly more than half of the San Jose Hills customers are located, rather than equally considering all zones. The settling parties have adequately explained the rationale for setting summer consumption and for incorporating seasonality in the proposed rate design. We find no reason to overturn the parties' determination that summer usage best approximates four months rather than three. Although that choice deviates from the definition of summer usage in the other settlements, the choice to use four months will be reviewed in Suburban's next GRC.
CFC further argues Suburban's multi-family customers should be treated like commercial customers, so it would not be necessary to deviate from the general principle that winter usage should be used as a proxy for indoor use. Suburban's categorization of multi-family units is consistent with our Uniform System of Accounts for Water Utilities. We decline to require a change in categorization.
CFC commends the parties for efforts undertaken to identify usage patterns by customers at different meter sizes and notes that further analysis should be undertaken in order to develop seasonal rates. We concur with CFC that usage patterns should continue to be assessed. We express no preference for seasonal rates over incorporating seasonality in rates. Whether incorporating seasonality in rates provides the appropriate conservation signal will be reviewed in Suburban's next GRC.
6.3. Park Settlement
Park's settlement reduces service charges by approximately 18%, with a corresponding increase of approximately 8% in the single quantity rate. Service charges are the same for residential and non-residential customers. Quantity rates for Blocks 1 and 2 have a 10% differential so that the average effective quantity charge for residential customers is equal to the single quantity charge for non-residential customers. The Block 1 rate is approximately 96.5% of what the single quantity rate under a single-tier rate design would be with the same reduced service charge.
CFC objects that Park's non-residential customers do not have increasing block rates. The settlement rate design results in 75% of revenue coming from the quantity charge and moves Park in compliance with CUWCC's directive that more than 70% of revenues originates from the quantity charge. Rates for non-residential and residential customers are designed to achieve the same quantity charge for average residential usage. Park's non-residential rate design results in overall bill increases for higher usage, consistent with Park's residential rate design. Non-residential customer classes in Park's service territory do not exhibit homogeneous usage patterns so developing increasing block rates for those classes will be more time-consuming. (See 2 RT 177:1-14.) Park has examined usage data for those classes and would be prepared to propose increasing block rates for non-residential customers in its next GRC. Park's non-residential rate design implements conservation rates consistent with CUWCC's requirements.
CFC states only 35% of Park's residential customers will see slight increases in rates for usage above 10 Ccf; 65% of its residential customers will see reduced charges. The settlement increases rates for all residential customers above the current single tier commodity rate of $2.42 Ccf. The Tier 1 commodity rate is $2.53 Ccf, and the Tier 2 rate is $2.78 Ccf. Sixty five percent of Park's sales would fall into Tier 1 and customers whose bi-monthly usage falls within Tier 1 will not receive rate increases. The settlement considered the impact of the proposed rates on low-income customers by setting the first tier using a proxy of indoor water use and by ensuring that larger households do not enter the higher tier too soon. Consideration of the impact of conservation rates on low-income customers is consistent with our directives.23 Since increasing block rates for residential customers are greater than the existing single quantity rate and service charges are lower, the settlement promotes conservation.
CFC notes there is a lower differential between tiers in the settlements than in the application. The settling parties state the rates in the settlement are higher than the application rates, because the service charges were reduced. The Tier 2 rates also are higher than most of the municipal utilities' highest tier rates. The settling parties determined the rates in the application did not best promote conservation for Park and propose higher rates, lower service charges, and a smaller differential between tiers. Focusing on one aspect of this change from the application, the differential between tiers, does not adequately reflect the overall rate design. We decline to review one aspect of the change in rate design. The differential between tiers will be one aspect of the review of conservation rates in Park's next GRC.
16 We received input from CalWater's, Park's and Suburban's customers on the rate design settlements by letters and e-mails.
17 CalWater supplies water to approximately 450,000 residential, commercial and industrial customers in 24 districts throughout the state. The systems are not integrated with each other. In 15 districts all of the residential customers have metered service connections. In the other nine districts, there also are residential customers with flat-rate service connections.
18 Cal-Am also supports increasing block rates for non-residential customers but states implementation is more time consuming, since nonresidential customers have less homogeneous usage patterns.
19 Although the amended settlement agreement was submitted by CalWater, DRA, and TURN, the Administrative Law Judge (ALJ) did not require TURN to submit testimony on the settlement agreement. TURN's contribution to the amended settlement did not include changes to non-residential conservation rates.
20 See also Palos Verdes, where there is no increase for average consumption for 8" meters at 1,793 Ccf, and Salinas, where average consumption for a 10" meter receives a 1.3% increase and average consumption for 4" and 6" meters receive 5.1% and 4.2% increases even though average consumption for a 10" meter is six (4") and four (6") times higher.
21 We resolved CalWater's application for rate increases in eight districts in D.07-12-055. The application for the remaining eight districts is pending.
22 CalWater has a low-income assistance program.
23 Park has a low-income assistance program.
