6. Issues Not Settled

Cal Water and DRA did not reach settlement on the issues in the list below.

Young's issues also were not settled; they are listed below:

Finally, Mangold raised the following issue not addressed in the Cal Water/DRA settlement:39

We discuss each of these issues in turn below.

6.1. Per-Lot Special Facilities Fees (Cal Water/DRA)

In its application, Cal Water proposed changes to the water supply special facilities fees for new connections in its Chico, Salinas and Visalia districts. Cal Water requests per-lot special facilities fees for Chico, Salinas and Visalia of $1,000, $1,200, and $1,100, respectively, per equivalent 1-inch service. The existing fees are $500 for each district.40

According to Cal Water, the intent of per-lot fees is to ensure that existing customers do not subsidize growth, while ensuring an orderly development process. The fees are authorized in Cal Water's Tariff Rules 15 and 16. Cal Water periodically reviews the cost of water supply special facilities associated with serving growth and proposes changes in its per-lot special facilities fees when necessary. Cal Water states that the change is warranted by increases in the cost of well construction since the last time the charges in these three districts were reviewed by the Commission.41

DRA objects that Cal Water's current method for developing per-lot fees and recovering infrastructure charges under Rules 15 and 16 does not place new and existing customers on an equal footing with regard to investment in facilities to provide service. Therefore, DRA proposes a new method of developing per-lot fees that requires new connections to pay the difference between the historic and current costs up front in a per-lot special facilities fee for all connections two inches and under in size in the Eight Districts participating in this GRC.

DRA developed its recommended per-lot special connection fees for the Eight Districts by calculating the difference between: (1) the cost of equal facilities for a new customer, and (2) the average embedded cost of facilities for an existing customer. Using its proposed methodology, DRA seeks to implement a comprehensive facilities fee in all Eight Districts ranging from a low of $5,624 per service connection in Stockton to a high of $11,271 in Livermore.

DRA also recommends that its proposed per-lot special connection fees be treated as contributions in aid of construction (CIAC) rather than advances. Such treatment will ensure that new and existing customers are placed on an equal footing with an identical cost basis and assigned capacity. Treating the per-lot fees as CIAC is beneficial to ratepayers because the money does not need to be repaid. If the per-lot fees are treated as advances, then the balance must be repaid over a term of years, with both new and existing customers responsible for repayment of the advance. Therefore, if any portion of the per-lot special connection fees are treated as advances, according to DRA, existing customers will be subsidizing new customers.

Cal Water objects to DRA's proposed methodology principally on procedural grounds. Cal Water asserts that DRA's proposal represents a fundamental change in water Tariff Rules 15 and 16 as well as General Order (GO) 103.42 Cal Water states that such a change must take place in the context of a rulemaking applicable to the entire water industry, rather than a GRC. It also notes that we are in the midst of re-examining GO 103 in just such a Rulemaking (R.) 07-12-015. Cal Water also raises several objections to how DRA calculated its fees.

Cal Water also proposes a modification to its Tariff Rule 15 to unitize the costs of installing transmission backbone (12" mains) in the Visalia District.43 Cal Water states it designed this change to improve administrative efficiency in developer transactions in the rapidly-growing Visalia district. Cal Water states it will incorporate language in its tariff that limits the applicability of the unitized transmission fee to new development within a half-mile of the existing system.44

DRA does not directly challenge this 12" main fee, except to the extent that it believes all fees should be set using its recommended new methodology.

We start from the principle that those who cause a cost should pay for it. If new service connections cause new costs to Cal Water's system, they should be assessed fees that adequately recoup those costs. Existing customers should not subsidize new development. Thus, on principle, we agree with both Cal Water and DRA that if costs to serve new customers have increased, those customers should fund them.

By the same token, DRA's proposal seeks to obtain a fundamental rewrite of Tariff Rules 15 and 16. Each Class A water company has such a tariff, and we are reluctant to formulate new policy without the input of other large water utilities and affected groups such as those representing communities, homeowners or developers that are not party to this application. While we disagree with Cal Water's blanket statement that we never make policy in connection with individual applications, it is our preference to have all interested parties involved when we propose a major policy change.

A rulemaking is the best venue for the changes DRA proposes, so that other interested parties have the chance to weigh in. Indeed, the Commission has not authorized water supply special facilities fees in any of the Eight Districts other than Chico, Salinas and Visalia, so adding those fees now without the participation of those districts or notice to them of a possible new charge might prove problematic. Our GO 103 proceeding, R.07-12-015, may be such a venue since one of the changes appended to R.07-12-015 is a proposal to eliminate all reference to Tariff Rule 15 from the General Order.

We make no decision regarding the appropriateness of DRA's proposal, but simply find that it would be better considered as part of a broader proceeding applicable to all affected companies and districts.45 DRA may seek to have this issue added to the scope of R.07-12-015, although discretion to do so lies with the assigned Commissioner and ALJ for that proceeding.

As for Cal Water's proposal, we assume DRA has no objection to higher per-lot fees in the Chico, Salinas and Visalia districts, since it actually proposes increases that are higher than those Cal Water proposes.46 It follows a fortiori, therefore, that DRA can live with the fees Cal Water proposes. DRA's witness Bumgardner acknowledged that "DRA did not take exception with the methodology used by Cal Water but we did use a different approach in calculating our number."47

We agree with Cal Water that the per-lot fees it requests for Chico, Salinas and Visalia should be increased to $1,000, $1,200, and $1,100. Cal Water has established that its costs of well construction warrant such an increase, and we agree that new customers should bear the costs they case. Thus, we find in Cal Water's favor on this issue. We also approve the standard 12" main fee for Visalia within a half-mile of the existing system. We agree that it is administratively efficient to charge a uniform fee in this case where the utility has a grid layout and development is occurring rapidly.

6.2. Health Care Escalation (Cal Water/DRA)

Cal Water proposes a new method for allocating the cost of employee health care in future years. DRA recommends that the Commission continue to use the methodology adopted in 2004 rate case plan decision, D.04-06-018.

Cal Water asserts that the Global Insight Employment Cost Index for Health Insurance (ECIHI) shows that health care costs are escalating at a rate higher than the escalation factor used in the D.04-06-018 rate case plan, and that we should therefore rely on the ECIHI index to estimate future cost increases. Cal Water states that the ECIHI index was used without controversy in an energy utility's case as the basis for post-test year ratemaking estimates of health care costs by all parties in A.05-12-002 (PG&E General Rate Case).48 Cal Water also notes that DRA uses other Global Insight data in developing its inflation factors.

Cal Water reasons that it is well known that health care costs have been increasing at rates that exceed the rate of inflation. Cal Water asserts that adoption of the D.04-06-018 methodology would result in a nearly $1 million under-recovery of health care costs in the first escalation year, with the under-recovery compounded to almost $2 million in the second escalation year.49

DRA objects to Cal Water's proposal on the ground that the Commission's most recent rate case plan decision, D.07-05-062, mandated DRA's proposed methodology. In that decision, the Commission required that water utilities estimate escalation year labor expenses by the most recent labor inflation factors. DRA asserts that health care expenses are labor expenses, and recommends the use of the most recently adopted labor inflation factor, in accordance with D.07-05-062.50

DRA also asserts that the ECIHI is used for energy utilities and is inappropriate for use here.51 It notes that Cal Water advocated for a similar change in the methodology for escalating health care costs in both R.06-12-016/D.07-05-062 and the previous rate case plan proceeding, and that the Commission found that the existing methodology, which utilized DRA's labor inflation factor, was the appropriate method to continue using in class A water utility GRCs. Therefore, DRA asserts, the Commission should reject Cal Water's proposal for the use of a higher escalation factor and adopt DRA's recommendation for health care escalation factor.52

Cal Water does not rebut DRA's assertions in its Reply Brief.53

We are not persuaded to change the methodology we adopted only a year ago in our latest rate case plan. As we note in the previous section related to the per-lot fee issue, it is more appropriate to examine an issue with broad application in the context of a rulemaking than in a single application. Cal Water's lack of rebuttal to DRA's arguments also makes it difficult for us to assess the merits of Cal Water's assertions.

We therefore adopt DRA's position on this issue, and retain the existing methodology for escalating health care costs.

6.3. Allocation of General Office Expense to Coast Springs Area of the Redwood Valley District (Cal Water/Young)

We turn to a discussion of Young's disputed issues. In its application, and in accordance with the D.07-05-062 rate case plan, Cal Water seeks review of General Office expenses for all 24 of its districts (in addition to seeking review of the Eight Districts' specific costs).54

Young contends that the Coast Springs area of the Redwood Valley district should not be allocated the General Office expenses based on the four-factor methodology traditionally applied by the Commission to allocate General Office costs to individual water districts. Young objects to use of the four-factor allocation method because using it will cause the rates for Coast Springs to increase by over 25%.

It seemed that something must be amiss if by just increasing the [General Office], the total rate for [Coast Springs] would increase by such a large amount. This is significantly more than the increases for the other 15 districts which range from 7.3% to 18.7%.55

Young cites D.87468, in which we stated that a two-factor method provided a "more equitable estimate."56

The four-factor method relates to the allocation of common office expenses incurred at the corporate level for the benefit of all of a water company's districts. Cal Water allocates these costs to its individual districts based on a four-factor allocation method (direct operating expenses, gross plant, number of customers, and number of employees/payroll). Young suggests that we allocate three of these elements to the Coast Springs district but exclude the fourth factor - number of employees/payroll.

The costs at issue relate primarily to two new programs Cal Water plans to initiate - its unidirectional flushing program and its cross connection/backflow prevention program. In the unidirectional flushing program, Cal Water will perform maintenance on all valves and flush all water mains in the system. Cal Water maintains the program is necessary to safeguard water quality in its distribution system. It began a pilot program in September 2006 in its Los Altos, Bayshore and South San Francisco locations, and now proposes to expand the program statewide.57

The cross connection/backflow prevention program is aimed at testing existing devices annually and repairing and replacing them where necessary.58 A cross connection is an unprotected actual or potential connection between a potable water system (water that is safe for drinking) and any source or system containing water or other substance that is not safe, wholesome and fit for human consumption. In the two years prior to submitting its application, Cal Water was cited twice by the California Department of Health Services (DHS) for cross connection/backflow problems.

Cal Water opposes Young's three-factor proposal, noting that Cal Water has used and the Commission has approved the four-factor method for 50 years. Cal Water asserts that the flushing and cross connection programs will benefit Coast Springs just as they will benefit the other districts, and therefore personnel costs related to the program should be allocated to Coast Springs just as they will be to other districts.59

In addition, Cal Water notes that the Coast Springs operation is expensive for other reasons:

[T]his small service area, and indeed the entire Redwood Valley region, is under a great deal of supervision by general office staff. It is under a service connection moratorium and has water supply problems. It has been the subject of several independent proceedings at the Commission, requiring the time of regulatory, engineering, and water quality staff. Dollar cost increases spread over fewer customers and gallons give the appearance of a disproportionate increase, but in fact merely reflect the actual cost of service in the district. Such impacts do not demonstrate that the four factor allocation method produces "unfair" results but rather that it is more expensive to serve Coast Springs than other districts.60

We reject Young's proposal. It is true that small districts with few customers over whom to spread increases can experience higher rate increases than districts with many customers. However, Young has not shown that Coast Springs will not benefit from the flushing or cross connection programs or that it should not bear a proportional amount of the personnel costs from the new programs, or from General Office operations as a whole. We note that the DRA-Cal Water settlement will result in lower General Office employee hiring for both programs, so the increases will be lower than proposed in Cal Water's application.61

We are sympathetic to Young's concerns, but he has not presented us with a principled way of distinguishing Coast Springs from other small districts. While we have occasionally used an allocation method other than the four-factor method (see D.87468, cited above), those instances are rare. Without a justification that goes beyond the assertion that the district is small, we do not find a basis to do as Young requests.

6.4. Other General Office Allocation Issues (Cal Water/Young)

Young contends that Cal Water is improperly seeking rate increases in all 24 districts related to General Office allocations. He asserts that Cal Water may only obtain such increases via individual advice letters, and that this GRC is not the proper forum for the increases. He also asserts that customers in the 24 districts did not receive notice of proposed rate increases attributable to allocation of the General Office expenses, so such increases may not be ordered here.

Cal Water explains that it is not seeking rate increases attributable to the allocation of General Office expenses in this GRC. Cal Water explains that it instead seeks Commission permission to file advice letters to incorporate the allocated General Office revenue requirement into rates in its 16 other operating districts.62 Cal Water states that the rate case plan adopted in D.07-05-062 allows this request: "We anticipate that a utility may seek changes related to General Office in districts not undergoing a GRC review. In such instances, the utility may file an advice letter to implement any Commission-approved rate changes."63

Thus, Cal Water acknowledges that it must next file advice letters to implement the approved rate changes. While this may appear to be a distinction without a difference, we agree with Cal Water that the method it has used is proper. Further, D.07-05-062 did not specify which Tier (Tier 1, 2 or 3) a water utility should use to file the referenced advice letters. Therefore, Cal Water has discretion to file under whichever Tier it deems appropriate. We note that all filings under Tiers 1 and 2 of GO 96-B, the General Order governing advice letters, are subject to refund until approval by the Division of Water and Audits, a point Cal Water concedes in its comments on the proposed decision.64.

However, Cal Water requests that the rate increases attributable to General Office go into effect on July 1, 2008. Since this decision does not relate to the advice letters, we decline to grant this request. The effective date of the increases will depend upon the advice letter process Cal Water follows.

Young asserts that the interim rates attributable to General Office allocations should not go into effect for Coast Springs (and, by extension, the other 16 districts that are distinct from the Eight Districts) until July 2009. He cites testimony of Cal Water's witness, Tom Smegal, in support of his position:

The decision 07-05-062, which is the rate case plan decision, allows that the [Cal Water] districts ... which would be delayed beyond the general three-year rate-case cycle would be allowed to put into effect interim rates at the date that they would have received a rate change on the three-year rate-case cycle."65

However, the cited language is ambiguous. It could either mean that all 16 districts should have rate increases reflecting General Office allocations with this GRC, or that each General Office allocation should occur when its district is considered individually. The rate case plan decision itself is more instructive on this point; it states:

During our transition to the new [rate case plan], we will review all [General Office expenses] for (1) California Water Service Company with its July 1, 2007 GRC..... We anticipate that a utility may seek rate changes related to [General Office expenses] in districts not undergoing a GRC review. In such instances, the utility may file an advice letter to implement any Commission approved rate changes. D.07-05-062, mimeo., pp. 11-12 (emphasis added).

This passage - especially the highlighted portion - indicates the Commission intended to allow water companies to seek General Office expense allocation with its first GRC filed after D.07-05-062 was effective. Thus, it is proper for Cal Water to seek such increases in this GRC, as long as it noticed customers of the potential increase. Notices for all 24 districts appear as part of Exhibit 44, the Application in this case.

Having the rate increases effective on advice letter filing or approval rather than in the future does not put ratepayers in a worse position than they would be if the increases were effective next year. Indeed, allowing them now will prevent rate shock when increases for a greater period are implemented all at once, rather than over a longer period. Thus, we find no impediment to Cal Water seeking to implement the GO increases via advice letter at this time, and we allow Cal Water to file those advice letters forthwith.

6.5. Proposed Wells in Mid-Peninsula District (Cal Water/Mangold)

Mangold opposes Cal Water's plan - incorporated into the settlement agreement66 - to construct three new wells in the Mid-Peninsula district. The district currently receives all its water from the San Francisco Public Utilities Commission's (SFPUC) Hetch Hetchy system, so the wells would add a second water source.

Mangold believes that Cal Water did not show a need for the proposed wells. He also objects to the means of rate recovery for the proposed wells. He is concerned that a determination of whether the wells are used and useful is being delegated to staff as part of an advice letter process. He believes the used/useful determination is for the Commission alone.

DRA responds that Mangold misunderstands the process of approving the wells. DRA states that it has already conducted a reasonableness review, is recommending in the settlement that that wells be constructed, and asking the Commission to approve that recommendation. Thus, the Commission retains the authority to approve the wells.67 The advice letter treatment will simply ensure that the well project costs are capped and not put into rates until the well projects are put in service.

Cal Water states that Mangold's objection to Commission approval of the wells is undercut by his own discussion of the district's other source of water, the SFPUC. Mangold characterizes that source as "severely strained" and "subject to mandatory cutbacks" in dry years.68 Cal Water points out that local wells can help relieve that strain and provide a cushion in times of any mandatory cutback.

We believe Cal Water should begin to explore ways of diversifying its water sources in the Mid-Peninsula district. By its own account, the SFPUC-Hetch Hetchy system is not limitless in its capacity, and it is important that Cal Water engage in long term water supply planning so that it is prepared if it needs to turn to new sources of water.

We are not persuaded by Mangold's objections to the need for the new wells or the process for placing them in rate base. The Tier 3 advice letter review process contemplated for the wells by the settlement agreement requires Commission approval of the advice letters by Resolution. See GO 96-B, Water Industry Rule 5 (A Tier 3 advice letter is subject to disposition under General Rule 7.6.2, which provides that Resolutions must be placed on the Commission agenda for action, and that the Commission may modify it in whole or part).69 Thus, the Commission retains authority to review, modify and approve the advice letters.

39 We discuss Mangold's objections to the settlement provisions regarding water quality and water conservation in the Section entitled "Analysis of Key Settlement Provisions" above, and do not repeat that discussion here. This section discusses issues where the only dispute is between Mangold and Cal Water.

40 Ex. 8, p. 9 (Chico); Ex. 24, p. 9 (Salinas); Ex. 29, p. 10 (Visalia). We note that the Commission has not set per-lot fees for any of the other Eight Districts, so Cal Water does not propose an increase in those districts.

41 Opening Brief of California Water Service Company on Unsettled Issues in Application 07-07-001, March 7, 2008 (Cal Water Opening Brief), p. 4, citing A.04-09-028 (Chico), A.04-09-029 (Visalia) and A.04-09-032 (Salinas).

42 For a general description of Rules 15 and 16 and GO 103, see Re Revision of GO 103 and Water Tariff Rules 15 and 16, D.91-04-068, 39 CPUC2d 594 (1991).

43 Cal Water Opening Brief at 4 (citations omitted).

44 Cal Water/Smegal, 9 Reporter's Transcript (RT) 286:15-287:8. This condition was not contained in Cal Water's initial proposal, but we condition our approval of the new charge on this limitation. See Cal Water Opening Brief, p. 5, n.2.

45 Because we do not adopt DRA's proposal, we also do not decide the merits of Cal Water's challenges to DRA's fee calculation.

46 In its brief, DRA estimates the underfunded portion of new facilities to be $6,464 in Chico, $11,506 in Salinas and $6,528 in Visalia. Opening Brief of the Division of Ratepayer Advocates, filed March 7, 2008 (DRA Opening Brief), Table 1, p. 5.

47 10 RT 322:16-22.

48 D.07-03-044, p. 161-64.

49 Cal Water Opening Brief, p. 12.

50 Ex. 209, pp. 1-4 to 1-6.

51 Ex. 1, tab 17, p. 55.

52 DRA Opening Brief, pp. 8-9.

53 The Reply Brief of California Water Service Company on Contested Issues, filed March 14, 2008, makes no mention of the health care escalation issue.

54 D.07-05-062 states that "During our transition to the new [rate case plan], we will review all [General Office expenses] for (1) California Water Service Company with its July 1, 2007 GRC . . . ."

55 Opening Brief of Intervenor Jeffrey Young, filed March 7, 2008 (Young Brief), p. 1 (citations omitted).

56 "'PG&E argues that its utilization of the four-factor method to allocate common expenses is fair and reasonable. PG&E utilized the established four-factor method to allocate certain administrative and general expenses.' The document goes on to say staff recommends a two factor allocation because: 'the four-factor allocation produced distorted results for the Tuolumne Water System of $10.11 per customer as opposed to a $5.39 cost per customer for PG&E overall. The staff two-factor allocation resulted in a charge of $6.09 per customer, a more equitable estimate.'" D.87468, 81 CPUC 800, 803-04 (1977).

57 Ex. 7, p. WP5-B2ae (General Office report).

58 Id., p. WP5-B2au.

59 DRA did not brief the Young issues.

60 Cal Water Reply Brief, p. 11 (citations omitted).

61 The settlement provides for hiring of eight cross-connection inspectors or flushing foremen in 2008 and 11 in 2009, for a total of 19 new employees. Settlement § 3.2.3.2, Table 1. The original application proposed 26 new employees for the cross-connection control program and 15 new employees for the unidirectional flushing program, or 41 new employees. Cal Water Response to ALJ Thomas' September 11, 2007 Ruling, filed Oct. 11, 2007, p. 17. Thus, the settlement halves the employee additions for these programs.

62 Ex. 44, p. 19 (Application).

63 D.07-05-062, mimeo., p. 11-12.

64 Comments of California Water Service Company on Proposed Decision of ALJ Thomas, filed June 30, 2008, p. 13.

65 Young Brief, p. 8, citing 9 RT 255:13-20.

66 Settlement Agreement § 4.5.6.3.2.

67 Joint Reply of California Water Service Company and the Division of Ratepayer Advocates to the Comments of Arthur A. Mangold, filed April 24, 2008 (Joint Reply), § II.

68 Cal Water Reply Brief, p. 9.

69 General Order 96-B is available online at http://162.15.7.24/PUBLISHED/GENERAL_ORDER/64590.htm#P452_57862.

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