Background

CalAm provides public utility water service to approximately 106,000 customers in various areas in San Diego, Los Angeles, Ventura and Monterey counties. In early-2002 CalAm acquired the water utility assets of Citizens Utilities Company of California, adding another 60,000 customers in four districts located in Sonoma, Santa Cruz, San Mateo, Sacramento and Placer Counties. This general rate case (GRC) involves only CalAm's Monterey Division. CalAm is a California corporation and a wholly owned subsidiary of American Water Works Company, Inc., which announced in September 2001 that it is being acquired by RWE Aktiengesellschaft, Thames Water Acqua Holdings GmbH. The Commission is currently considering that acquisition in Application (A.) 02-01-036, and its effects were not considered in this proceeding except as specifically noted below.

Monterey Division

CalAm's Monterey Division provides water service to approximately 38,200 customers on the Monterey Peninsula and vicinity, encompassing the cities of Carmel-by-the-Sea, Pacific Grove, Monterey, Sand City, Del Rey Oaks and part of Seaside, much of the Carmel Valley, the Highway 68 corridor, and several other nearby unincorporated areas. The last general rate increase for Monterey Division was authorized by Decision (D.) 00-03-053 as modified by D.01-10-014; there have been various other rate adjustments since that time.

Because the issues in Monterey Division's general rate cases are so intertwined with the area's longstanding critical water supply problems, we provided an overview of the Monterey Peninsula's water supply situation and CalAm's involvement in D.00-03-053. Rather than repeat that background, we give a brief summary and update here.

CalAm's Monterey Peninsula Water Supplies

CalAm supplies approximately 85% of the Monterey Peninsula's water. It develops its supply from Carmel River surface water and wells in the Carmel Valley, Seaside basin, and along the Highway 68 corridor. CalAm has two large storage facilities on the Carmel River, San Clemente Dam and Los Padres Dam. It has been apparent for some time that despite the best efforts of CalAm, the Monterey Peninsula Water Management District (MPWMD), the local community and others, during periods of drought there is simply not sufficient water to satisfy fully both environmental requirements and unrestrained municipal water demands, but various factors prevented construction of any new, major storage facilities in decades past. By 1976, the U.S. Army Corps of Engineers had developed estimates for a proposed New San Clemente Dam, but local opposition left it unfulfilled. The drought of 1976-1977 brought water rationing, increased public concern, and state enactment of the Monterey Peninsula Water Management District Law, followed by local voters' creation of MPWMD in 1978.

MPWMD has taken an active role in each of CalAm's last three Monterey Division GRCs. MPWMD's mission is to "manage, augment, and protect water resources for the benefit of the community and the environment" of the greater Monterey Peninsula area. Its charges include managing and regulating water use, reuse, reclamation and conservation, and financing water public works projects. Almost all of CalAm's Monterey Division water system lies within MPWMD's 170 square mile jurisdiction.

In 1995 the State Water Resources Control Board added a major new legal constraint to the Monterey Peninsula's physical water supply limitations. SWRCB, following hearings begun in 1992, acted on complaints alleging that CalAm's Carmel River water use was without valid rights and adversely impacted environmental and public trust values. In Order WR 95-10, it directed CalAm to cut its Carmel River diversions to 14,106 acre-feet annually and implement conservation measures to bring that figure down by 20% more beginning with the 1997 water year.

In November 1995, voters turned down MPWMD's proposal to improve supplies by financing approximately $116.5 million to construct a 24,000 acre-foot New Los Padres Dam on the Carmel River. To further complicate matters, two Carmel River animal species were later listed as threatened, bringing the possibility of additional water production limits imposed under the federal Endangered Species Act.

CalAm characterizes the SWRCB in Order WR 95-10 as having, in essence, directed it to solve the water supply problem. According to CalAm, to correct the unauthorized diversion, SWRCB directed CalAm to either (1) obtain appropriative permits for water being unlawfully diverted from the Carmel River, (2) obtain water from other sources of supply, and/or (3) contract with another agency having appropriative rights to divert and use water from the Carmel River, i.e., the MPWMD per SWRCB Decision 1632.

In response, CalAm has proposed constructing a new facility, the Carmel River Dam and Reservoir Project, "physically identical to the New Los Padres Project previously proposed by MPWMD, except no water is dedicated for growth." CalAm currently has pending before the Commission A.97-03-052 for the certificate of public convenience and necessity it would need to proceed. In compliance with D.98-08-036 in Applications 98-05-008 through 98-05-011 and a ruling in A.97-03-052, CalAm is also now preparing a proposal for a long-term water supply solution for the Monterey Peninsula should the Carmel River Dam and Reservoir Project not go forward, the so-called "Plan B."

We previously expressed our strong preference that CalAm work cooperatively to develop mandatory conservation and rationing plans consistent with complementary measures to be developed by MPWMD. MPWMD subsequently enacted Ordinance 92 establishing an expanded water conservation and standby rationing plan, and we authorized CalAm to adopt Ordinance 92 as its conservation and standby rationing plan.

Many of CalAm's proposed expenditures considered in this GRC, and in particular a number of its Special Rate Requests, relate to these projects, its water supply constraints, and the company's efforts to address them.

CalAm's Application

CalAm filed the application on April 15, 2002, and the Commission in Resolution ALJ 176-3086 preliminarily determined this to be a ratesetting proceeding expected to go to hearing. Assigned Commissioner Michael Peevey's June 17, 2002 scoping ruling confirmed the category and need for hearing, defined the issues, established a schedule, and designated assigned Administrative Law Judge (ALJ) McVicar as the principal hearing officer and thus the presiding officer.

CalAm's application requests the overall rate increases shown in Table 1 to compensate it for increased expenses and capital investment costs in excess of increased revenues over time. In addition, it seeks Commission approval of twelve so-called Special Rate Requests described in the Discussion section below, some of the rate effects of which are not included in the Table 1 figures.