3. Settlement Agreement Between Cal Am and DRA
Article 12 of the Commission's Rules of Practice and Procedure govern settlement agreements. According to Rule 12.1(d), prior to approval the Commission must find the settlement, whether contested or uncontested, "reasonable in light of the whole record, consistent with law, and in the public interest." Cal Am and DRA state that they have entered into the settlement agreement on the basis that the Commission's adoption not be construed as an admission or concession by any party regarding any fact or matter of law in dispute in this proceeding. They also intend that the Commission's adoption of the settlement not be construed as any statement of precedent or policy of any kind against them in any current or future proceedings. Furthermore, the settlement is an integrated agreement, so that if the Commission rejects any portion of the settlement, each party has the right to withdraw.6
Prior to filing the settlement, an all-party settlement conference was held on May 25, 2007, and representatives of Cal Am, DRA and Mark West participated. Other meetings were held both in person and telephonically. Mark West declined to enter into the settlement agreement and therefore the settlement addresses disputed issues between DRA and Cal Am.7
3.1. Mark West Comments on the Settlement Agreement
On July 20, 2007, Mark West filed comments on the settlement agreement, but Mark West's comments were related to issues involving only the Larkfield and Sacramento districts and are therefore not included here.
3.2. Terms of the Settlement
The expense amounts in dispute differed from district to district. A full comparison of the parties' original and settled positions for each section is included as Attachment A.
The parties were able to reach agreement on the majority of issues in dispute in multiple ways. One reason for the disparate positions was the use of different inflation factors. If the difference between the two positions was nominal, Cal Am either agreed to adopt the lower DRA estimate or a compromise figure. Another reason for dissimilar original estimates was DRA's concern with high expense years being included in the calculation and Cal Am's belief that high expense year figures were legitimate and should be included. When this occurred, the parties usually adopted a mid-point compromise amount for the settlement. Parties also reached a mid-point compromise on other issues, with the parties taking into account the actual historical expenses incurred as well as the variable nature of those expenses.
In some areas, the difference in position was due to calculation or accounting errors. Once the errors were identified and corrected, the parties agreed on the final figure or were able to adopt a settled amount. The following discussion deals with specific areas in which settlement was achieved in a manner other than those described above.
Cal Am and DRA agree on the four districts' capital structure for the test year and both escalation years. They agree to a ratio of 58.16% debt to 41.84% equity for Test Year 2008, 58.32% debt to 41.68% equity for Escalation Year 2009, and 58.83% debt to 41.17% equity for Escalation Year 2010. The settlement uses Cal Am's projected 2007 capital structure, believing it is essentially equivalent and representative for all three years. DRA accepted Cal Am's cost of debt for 2008, 2009 and 2010, as 6.20%, 6.25% and 6.29%, respectively. We find the capital structure reasonable and in compliance with D.06-11-050, which required a return to the use of a consolidated capital structure in Cal Am's next GRC. We also find the parties' agreed upon cost of debt reasonable.
Section 3.2 of the settlement for each district addresses Customer Sales and Revenue. The parties' initial positions essentially agreed on the customer counts, average water use, and an allowance for unaccounted-for water for each of the four districts. However, the Village District's Unaccounted for Water calculations were corrected by DRA and the resulting figures were agreed upon by the parties. Therefore, we find this section reasonable.
The description of the settlement for Operations and Maintenance Expenses (O & M) appears in Section 3.3 of the settlement for each district. The specific items discussed below are O & M expense elements for the various districts that were not settled in the manner previously described.
Cal Am's original filing showed six months of actual and six months of forecasted data for 2006 without including an approved purchased water rate increase.8 DRA initially accepted the original proposal. Parties subsequently decided that updated purchased water costs reflecting the increase should be used. Parties agreed on the updated figures.
Department of Health Services9 fees for 2005 were originally classified to the wrong account. The parties agreed to a five-year average in order to mitigate the misclassification.
3.2.3.3. Village District Transmission and Distribution - Miscellaneous
To achieve settlement, Cal Am agreed to DRA's figure reflecting a decreasing trend.
Parties agreed that correcting the unaccounted for water figure altered the production numbers, which necessitated updating the purchased water and power costs for the district.
We find the manner in which compromise was achieved and the final settlement positions in this section reasonable.
Administration and General Expenses (A&G) are addressed in Section 3.4 of the settlement for each district. By far the largest expenses in this section and the one in which the parties' positions are most disparate is employee pensions and benefits and regulatory expenses. All other elements of A&G were either agreed upon initially or settled in the course of negotiations. Employee pensions and benefits, including employee awards are not a part of the settlement and are discussed in another section of this decision. Regulatory expenses are also excluded from the settlement and discussed later.
The parties reached settlement on miscellaneous general expenses by removing charitable contributions, conservation expenses and community relations/outreach expenses.
Based on the above discussion, we find the settled items in this section reasonable.
Utility Plant in Service is discussed in Section 3.5 of the settlement for each district. Following extensive exchanges of information and negotiations on the rationale for each requested plant item, Cal Am and DRA agree as set forth in Tables 1 and 2 below:
TABLE 1: CORONADO DISTRICT UTILITY PLANT IN SERVICE (000s)
Project |
Cal Am |
DRA |
Settlement |
Services Replacement |
$ 705.8 |
$510.0 |
$ 600.0 over 3 years |
Meters Replacement |
291.1 |
195.0 |
279.0 over 3 years |
Hollister Street Main |
1,580.0 |
1,459.0 (AL10) |
1,459.0 over 3 years |
Small Main Program |
890.0 |
822.6 (AL) |
809.0 |
Replace PRVs11 |
140.0 |
128.8 |
128.8 |
Distribution Map Automation12 |
102.2 |
TABLE 2: VILLAGE DISTRICT UTILITY PLANT IN SERVICE (000s)
Project |
DRA |
||
Services Replacement |
$ 2400.0 |
$1591.5 |
$ 1995.8 over 3 yrs |
Process Plant Replacement |
360.0 |
210.0 |
210.0 over 3 yrs |
Process Plant Additions |
190.0 |
0.0 |
90.0 over 3 yrs |
Lawrence Drive Facility Relocation |
817.0 |
817.0 |
817.0 |
Shopping Center Reservoir Rehabilitation |
1617.0 |
1617.0 |
1617.0 |
Reservoir Improvements |
4036.0 |
2222.0 |
2827.013 |
Based on the explanations provided for each project, we find this portion of the settlement reasonable.
Depreciation Expense and Reserves are discussed in Section 3.6 of the settlement for each district. Both Cal Am's and DRA's original depreciation calculations contained errors which were corrected for the settlement. Ultimately, DRA agreed with Cal Am's position that depreciation accruals for forecasted years 2007 through 2009 should be calculated using rates approved by the Commission in prior rate cases. We find this section of the settlement reasonable.
The Special Requests are addressed in Section 3.7 of the settlement for each district. Because the special request numbering varied by district, this section will refer to the subject of the special request rather than the special request number.
The parties were unable to reach agreement on this issue. It is discussed later.
This has been removed to Phase II of this proceeding.
These requests involve the Low-Income Program Tariff. Cal Am agrees to provide Low-Income Rate Assistance credit to non-profit group living facilities and migrant farm worker housing centers deemed qualified using the same criteria as that used for the California Alternative Rates for Energy program for gas and electric. Cal Am may require post-enrollment verification.
This issue will be addressed in Phase II of the proceeding.
3.2.7.5. Conservation Balancing Account and Surcharge and Program Funding
The Conservation Program funding is an element of the Conservation Balancing Account sought for the Village District. Coronado is only seeking conservation program funding.
The parties agree the conservation budget will be included in rates for the three-year rate case period at the maximum level allowed for Cal Am. Cal Am and DRA agree that budget estimates will not be escalated in attrition years. Parties agree the balancing account is subject to refund, Cal Am has the ability to move funds between Best Management Practices (BMP) as necessary, and Cal Am will provide all required California Urban Water Conservation Council reports to the Commission and DRA. The parties reached settlement on all the BMP expenses.
The parties agree that when the actual deduction amount has been determined, Cal Am will provide DRA with the figure.
The parties do not dispute these balances as they will be recovered according to Commission rules.
3.3. Cal Am's and DRA's Motion to Adopt the Settlement
Based on our review of the settlement and weighing it as an integrated document, we find it reasonable in light of the whole record, consistent with the law, and in the public interest. Therefore, we grant Cal Am's and DRA's Motion, and adopt the settlement.
6 See July 6, 2007, Motion of California American Water Company and the Division of Ratepayer Advocates for Adoption of Settlement Agreement as to Certain Issues on the Revenue Requirements, p. 4.
7 Id., p. 2, fn. 2.
8 The purchased water rate increase was approved in Advice Letter 649.
9 The Department of Health Services was renamed Department of Public Health on July 1, 2007.
10 Advice Letter.
11 Pressure Release Valves.
12 The Distribution Map Automation was not properly accounted for in the Coronado rate case. A formula error omitted it from plant in service. The project was included in the direst testimony of Schubert. Exhibit 13, pp. 19-21.
13 This figure represents improvements to the Village District's 15 reservoirs; Moorpark, Industrial Tank I, Industrial Tank II, Las Posas Tank I, Wildwood Tank, Potrero I, Los Robles I, Los Robles II, Green Ridge, Las Posas Reservoir II, Orbis, Janns, Deer Ridge, White Stallion and Pace Reservoirs.
