The Commission has accepted the utility's proposal in Advice Letter No. 1341 for recovery of expenses related to the Post Retirement Benefits other than Pensions (PBOP) in accordance with Decision Nos. 92-12-015 and 93-08-033. (A.06-12-025, attached Exhibit 2. Emphasis added.)
CACD had everything it needed to make an informed decision on whether Cal Water's proposed accounting, funding, and recovery of FAS 106 costs were reasonable and complied with D.92-12-015 and D.93-08-038. We decline to second guess, 14 years after the fact, CACD's decision to approve AL 1341.
DRA received a copy of AL 1341 but did not protest the Advice Letter. Furthermore, D.92-12-015 encouraged DRA "to continue monitoring and reviewing the reasonableness of the utilities' PBOP cost activities.9" Since then, DRA has had an opportunity in several GRCs to contest whether Cal Water's funding of FAS 106 costs complied with D.92-12-015, but DRA never did so. It is simply too late for DRA to undo its inaction in prior years.
For the preceding reasons, we conclude that CACD acted properly when it approved AL 1341 and, therefore, that Cal Water did not violate OP 1.
In its comments on the proposed decision, DRA argues that CACD had no authority under General Order (GO) 96 to approve rate increases unless they were minor in nature. DRA contends that the rate increase requested in AL 1341 was not minor and, therefore, could not be approved by CACD.
We disagree. AL 1341 requested a rate increase of $214,700. Cal Water's gross operating revenue at the time was $127 million.10 Thus, the rate increase requested by AL 1341 amounted to 0.17% of Cal Water's operating revenue. We consider this to be minor and within CACD's authority to approve under GO 96.
5.2. Compliance with OP 2 of D.92-12-015
DRA alleges that Cal Water did not comply with OPs 2.a and 2.d of D.92-12-015, which state as follows:
2. Regulated utilities under traditional cost-of-service ratemaking...shall be authorized to recover their PBOP costs associated with the adoption of the Statement and actually paid to independent trusts to the extent that the utilities:
a. Establish and use independent trusts for the receipt, investment, administration, and disposition of PBOP.
d. Incur PBOP costs that the Commission finds are reasonable and necessary to meet funding requirements based on fair actuarial assumptions, contributions, and investments.
Cal Water has used a 401(h) account as its sole PBOP funding vehicle since 1993. The account is part of a pension plan, and its maximum funding limit is a fixed percentage of the pension funding. DRA argues that because a 401(h) account is not a stand-alone PBOP trust, Cal Water did not comply with the requirement in OP 2.a to "use independent trusts for the receipt, investment, administration, and disposition of PBOP."
DRA also argues that Cal Water's has not complied with OP 2.d, which limits the recovery of FAS 106 costs to those "that the Commission finds are reasonable and necessary to meet funding requirements." DRA contends that the Commission never found that Cal Water's FAS 106 costs are reasonable and necessary, which is why Cal Water had to file A.06-12-025.
Cal Water responds that the Commission was aware of the characteristics of 401(h) accounts, as they are mentioned repeatedly in D.91-07-006 and D.92-12-015. If the Commission did not want utilities to use a 401(h) account, the Commission would have said so in D.92-12-015.
Cal Water also disputes DRA's claim that the Commission never found Cal Water's FAS 106 costs to be reasonable and necessary. Cal Water states that the Commission made this exact finding when CACD accepted AL 1341.
There is no merit to DRA's assertion that Cal Water's 401(h) account is not allowed by OP 2.a. In D.91-07-006, the Commission explicitly authorized utilities to use 401(h) accounts as a funding vehicle for PBOP costs.11 In D.92-12-015, the Commission held that utilities should continue to use the funding vehicles authorized by D.91-07-006, which included 401(h) accounts.12
As DRA knows, a 401(h) account is part of a qualified pension trust. IRC Sections 401(a)(1) and (2) require the assets of a qualified pension plan to be held in an independent trust. The 401(h) account is used to segregate assets held in the trust for PBOP purposes from the assets held for pension purposes. Thus, a 401(h) account is equivalent to an independent trust and complies with OP 2.a.
We also disagree with DRA's assertion that the Commission never found Cal Water's FAS 106 costs to be reasonable and necessary as required by OP 2.d. Cal Water requested authorization to recover its FAS 106 costs in AL 1341, which was approved by CACD. Since then, there have been several GRCs in which the Commission authorized Cal Water to (1) recover its FAS 106 costs based on its tax-deductible contributions to its 401(h) account, and (2) record a regulatory asset for the FAS 106 costs in excess of contributions. These actions by CACD and the Commission constitute, at the very least, an implicit acknowledgement by the Commission that Cal Water's FAS 106 costs were reasonable and necessary.13 The prior Commission decisions approving Cal Water's accounting, funding, and recovery of FAS 106 costs are presumptively reasonable.14 DRA has provided no credible evidence that the Commission's decisions were flawed.
5.3. Compliance with OP 4 of D.92-12-015
DRA contends that Cal Water did not comply with OP 4 of D.92-12-015, which states as follows:
4. The utilities shall establish and maintain a regulatory asset pursuant to [FAS 71] and as discussed in this order. The recovery of such regulatory asset in future rates shall begin during the year when tax-deductible limits exceed PBOP costs and shall continue until the regulatory asset has reached a zero balance.
FAS 71 authorizes utilities to record past and current expenses as a regulatory asset if they have "regulatory assurance" that the expenses will be recovered in future rates. DRA maintains that this proceeding would be moot if Cal Water had complied with OP 4, as there would be no need for Cal Water to have filed A.06-12-025 to request authority to recover its PBOP regulatory asset.
DRA argues that Cal Water failed to comply with the requirement in OP 1 to fully fund its FAS 106 costs with tax-deductible contributions. Those costs that Cal Water failed to recover were recorded as a regulatory asset. DRA reasons that because the regulatory asset consists of costs that Cal Water failed to recover in violation of OP 1, the regulatory asset also violates OP 4. If Cal Water had complied with OP 4, DRA believes that Cal Water's auditors would not have expressed concern about Cal Water's flawed accounting practices for the regulatory asset that led Cal Water to file A.06-12-025.
Cal Water responds that it has fully complied with OP 4. As intended by OP 4, Cal Water has recorded a regulatory asset equal to the cumulative difference between its FAS 106 costs and its tax-deductible contributions.
Cal Water takes strong exception to DRA's argument that Cal Water should be barred from recovering its regulatory asset because Cal Water has not funded enough of its FAS 106 costs. Cal Water states that in the several GRCs since D.92-12-015, it would typically request PBOP costs equal to the maximum tax-deducible contributions allowed by its 401(h) account. DRA would usually recommend less than what Cal Water had requested. Most GRCs were settled by DRA and Cal Water, and the FAS 106 costs included in rates was a compromise amount. Cal Water submits that it is disingenuous for DRA to now argue that Cal Water should have requested higher FAS 106 costs in prior GRCs when DRA sought to reduce the costs that Cal Water requested at the time.
Finally, Cal Water notes that its PBOP regulatory asset is less than what it was allowed to record pursuant to OP 4, which directed utilities to record a regulatory asset equal to the difference between their FAS 106 expense accrual and the amount of FAS 106 costs collected in rates. Cal Water was unable to track the amount of FAS 106 costs recovered in rates for the reasons stated previously in this opinion, and instead recorded a regulatory asset equal to the difference between its FAS 106 expense and its tax-deductible contributions to its 401(h) account. The regulatory asset recorded by Cal Water is less than what it would have recorded had Cal Water used the formula specified in OP 4.
DRA argues that the Commission should deny Cal Water's request to recover its regulatory asset because Cal Water never had authority to record the regulatory asset. We disagree. Cal Water requested authority in AL 1341, which was approved by CACD. Since then, Cal Water has recorded a regulatory asset for the difference between its funding of FAS 106 costs and its FAS 106 expense accrual. We find that Cal Water's actions comply with the intent of OP 4.
Cal Water's Application is not an admission, as DRA asserts, that Cal Water did not comply with D.92-12-015.15 To the contrary, A.06-12-025 requests recovery of the regulatory asset in accordance with OP 2.d of D.92-12-015, which requires utilities to obtain Commission authorization to recover FAS 106 costs in rates.
Although Cal Water complied with the intent of OP 4, Cal Water and DRA agree that Cal Water did not use the correct formula for calculating its PBOP regulatory asset. DRA and Cal Water agree that the PBOP regulatory asset recorded by Cal Water is less than what it would have been had Cal Water used the formula specified in OP 4.16 Cal Water does not request recovery of this undercollection. It light of these circumstances, we conclude that no purpose is served by finding that Cal Water has violated OP 4 when it has used a method for recording its regulatory asset that benefits ratepayers.
5.4. Compliance with D.93-08-033
The Settlement Agreement approved by D.93-08-033 authorized Cal Water to recover its FAS 106 expenses in accordance with D.92-12-015, but only after six conditions ("Conditions") were satisfied. The six Conditions were:
9 D.92-12-015, 46 CPUC 2d 499, 515.
10 D.93-08-033, 50 CPUC 2d 526, at 528.
11 D.91-07-006, OP 4.a., 40 CPUC 2d 638, 664.
12 D.92-12-015, 46 CPUC 2d 499, 516.
13 Section 454 provides that a utility cannot increase its rates except upon a showing by the utility and a finding by the Commission that the higher rates are justified.
14 The FAS 106 costs adopted by the Commission in prior GRC proceedings were often embedded in Cal Water's GRC applications and DRA's settlement agreements with Cal Water. DRA's repudiation of its settlement agreements is inconsistent with Rule 12.5, which states that the Commission's "adoption of a settlement is binding on all parties to the proceeding in which the settlement is proposed."
15 Cal Water's auditors, KPMG, never accused Cal Water of using "flawed accounting practices" as suggested by DRA. (DRA Exhibit 100, p. 13.) KPMG agreed with Cal Water's accounting, as demonstrated by KPMG's unqualified opinions of California Water Service Group's financial statements for the years 1993 - 2006.
16 DRA roughly estimates that Cal Water's PBOP regulatory asset was understated by $1 million through December 31, 2006.
