5. Issues
DRA alleges that Cal Water violated OPs 1, 2, and 4 of D.92-12-015 and the Settlement Agreement adopted by D.93-08-033. Based on these allegations, DRA recommends that the Commission deny A.06-12-025 and fine Cal Water $3 million. Cal Water denies the allegations.
For the reasons set forth below, we conclude that DRA's allegations have no merit and that Cal Water's application to recover its PBOP regulatory asset should be granted.
5.1. Compliance with OP 1 of D.92-12-015
DRA alleges that Cal Water failed to comply with OP 1 of D.92-12-015, which required utilities to use FAS 106 for ratemaking purposes. OP 1 states:
1. [FAS 106] shall be adopted...for regulatory accounting and ratemaking purposes...effective January 1, 1993.
DRA contends that OP 1 required Cal Water to fund its FAS 106 costs, to the maximum extent possible, through tax-deductible contributions to independent PBOP trusts. Cal Water did not comply with OP 1 because it used a single 401(h) account. The statutory limits on contributions to the 401(h) account caused Cal Water to fund only 55% of its FAS 106 costs since 1993. DRA submits that Cal Water could have funded all of its FAS 106 costs if it had established one or more VEBA trusts in 1993.
DRA asserts that because Cal Water failed to fully fund its FAS 106 expense as required by OP 1, much of its FAS 106 expense was deferred as a regulatory asset to future years. DRA believes it is unfair to require future ratepayers to pay for the cost-of-service provided to prior generations of ratepayers, as this would contravene the cardinal principle that only those ratepayers who benefit from an expense should pay for its recovery.
Cal Water responds that D.92-12-015 does not require utilities to fully fund their FAS 106 costs. This is evident in OP 4, which authorizes utilities to record a regulatory asset for the FAS 106 costs they cannot fund due to limitations on tax-deductible contributions. Cal Water states that it acted reasonably in 1993 when it elected to use a 401(h) account as its sole funding vehicle. Cal Water's actuary testified that he believed in 1993 that a 401(h) account would allow Cal Water to fully fund its FAS 106 costs over time. For example, Dominguez Water Corporation, which was acquired by Cal Water in 2000, was able to fund all of its FAS 106 costs with a 401(h) account.
Finally, Cal Water maintains that it notified the Commission in AL 1341 that it intended to use a 401(h) account and record a regulatory asset. Cal Water contends that CACD's acceptance of the Advice Letter demonstrates that Cal Water's actions were approved by the Commission.
We agree with DRA that it was the Commission's intent in D.92-12-015 that utilities should fully fund their FAS 106 costs, to the maximum extent possible, through tax-deductible contributions to independent PBOP trusts. However, the requirement to fully fund FAS 106 costs was not absolute. D.92-12-015 provided utilities with some discretion in determining the amount of funding. This is evident from the following statements in D.92-12-015 that emphasized the need for flexibility in determining the amount of PBOP funding:
We used four specific criteria to assess and evaluate various cost recovery mechanisms: assurance, cost, flexibility, and equity. Although the criteria were established in 1983, nothing convinces us that the criteria are outdated. Rather than re-inventing the wheel, we will use the same criteria in this investigation. (46 CPUC 2d 499, 512. Emphasis added.)
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[W]e deem it very important that the financing mechanism adopted in this order be adaptable. Consistent with this position, the funding mechanism and payments should be evaluated in each operating utility's GRC or other rate proceeding. (46 CPUC 2d 499, 513. Emphasis added.)
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