5. Expanding the OIR's Scope and the Need for Hearings
Parties have made four recommendations for either expanding the proceeding's scope or holding hearings. First, several parties recommend including the issue of whether any of the proposed revisions would affect the utilities' risk and rate of return, and some parties believe hearings are necessary on this issue. For example, the California Water Association set forth specific issues it believes should be included within the OIR's scope.
"What effects will adoption of any of the changes in the ratesetting system proposed in the OIR or in the course of this proceeding have on the business risks experienced by the several classes of Commission-regulated water utilities?
"If it is determined that business risks are increased as a result of these changes, is the level of increased business risk consistent in all situations or may the level of business risk vary significantly depending on company-specific situations?
"By what amount should authorized rates of return on equity for the several classes of water utilities be adjusted in response to such changes in business risks?
"Should appropriate benchmark adjustments in authorized rates of return be determined in this proceeding, subject to implementation by advice letter?
"If not, what procedures should be followed to make appropriate adjustments in authorized rates of return and to effect rate changes reflecting such adjustments?
"Will the increase in business risk brought about by the proposed changes in the ratesetting system cause increases in costs of service and higher rates for utilities that outweigh any benefits of limiting the use of offset procedures?
"Is the denial of offset cost recovery an appropriate ratemaking method for dealing with alleged over earning? Put another way, is there a reasonable nexus between the use of offset procedures and over earning?" (January 18, 2002 Comments of the California Water Association, pp. 9-10.)
Re-adjusting a utility's specific rate of return is not within the scope of this industry-wide proceeding. The appropriate rate of return is an issue for the utilities' general rate cases. Furthermore, the question of how various risks affect a utility's rate of return involves an inquiry into all relevant circumstances, not just one specific factor.2 Again, the appropriate forum for such inquiry is a utility's general rate case, or other appropriate proceeding the Commission may designate in the future. We therefore do not modify the preliminary scoping memo set forth in the OIR.
Second, San Gabriel Water Company states that the scoping memo should include the calculation of expenses in the weather adjusted pro forma return or other earnings test. San Gabriel explains that there is a "pending controversy regarding the adjustment of expenses in calculating the weather-normalized pro forma rate of return following implementation of attrition rate increases. Under the Commission's Rate Case Plan, San Gabriel files its general rate cases in July with two attrition year step increases." San Gabriel explains that it would be adversely affected if the pro forma earnings test does not match revenues and expenses related to attrition increases. (1/4/02 Comments at p. 3.)
With respect to the pro forma test, the proper calculation of the expense component of the means test is a narrow issue which may be applicable not only to San Gabriel but also to other utilities. This narrow issue is within the existing scope of this proceeding. Because addressing this narrow element of the calculation is quite technical in nature, it is best accomplished in a workshop setting. We therefore schedule a workshop on this narrow issue to be conducted by the Commission's Water Division on Wednesday, March 27, 2002, from 11:00 a.m. to 1:00 p.m. The workshop will be held at the California Public Utilities Commission, State Office Building, 505 Van Ness Avenue, Room 3105, San Francisco, CA. We direct the Water Division to file a workshop report summarizing the workshop and making recommendations on the issue addressed no later than April 5, 2002.
Third, San Jose Water Company believes hearings are necessary because consideration of water company earnings data during a selected five-year period is contrary to the Commission's ratemaking methodologies employed to set water rates in the first place. However, the fact that the OIR sought information on earnings over a five-year period does not mean the Commission will employ any particular methodology or time period to establish eligibility for recovery of balancing accounts. Moreover, San Jose has not stated specific disputed issues of material fact for which hearings would be necessary. Therefore, hearings are not necessary on this issue.
Finally, California Water Service states that hearings and workshops are necessary to explore the causes of over-earnings, and that the over-earning is not caused by the balancing accounts. The cause of over-earnings is not relevant to the OIR because the OIR does not maintain balancing accounts cause over earning. Rather, the OIR asks whether recovery of the balancing accounts should be eliminated or reduced in certain circumstances when the utility is over-earning. Furthermore, under the proposals, earnings above the authorized rate of return that are not attributable to balancing account recovery would be kept by the utility.
Parties recommending hearings believe they are necessary to address some aspect of the issues set forth above. Because of our conclusions set forth above, we confirm the preliminary determination made in the OIR that hearings are not necessary.
2 In fact, the filings in this case demonstrate that companies are not consistent on how they maintain their balancing accounts. For example, some utilities book their balancing accounts as deferred debits or credits, such that they record undercollections or overcollections on the company's balance sheet. Some utilities do not book their balancing accounts at all, but simply track the bills and offset rate collections, thereby maintaining them in the same way they would maintain a memorandum account.
