7. Rate Design Settlement

On November 24, 2008, Cal-Am and DRA filed their Settlement Agreement as to Rate Design Issues, which is Attachment A to today's decision. Comments opposing certain components of the settlement were filed by the Water Management District, Independent Reclaimed Water Users Group, and Hidden Hills Subunit Ratepayers Association.

The rate design settlement applies to the Monterey main system and the Ambler Park, Bishop, Hidden Hills, Ryan Ranch, Chualar, and Ralph Lane systems. Customers in the Monterey Main System, Ryan Ranch, Hidden Hills, and Bishop will be on the same rates and rate design, after a three-year transition period for Hidden Hills and a six-year transition period for Bishop. The settlement agreement provides that rates and rate design for customers in Ralph Lane will not change as a result of this proceeding, and the rate increase for Chualar shall be limited to an escalation rate, set at 9.17%. Ambler Park will have a separately calculated water sales adjustment mechanism.

The rate design changes are generally directed at creating financial incentives for customers to improve the efficiency of their water use by allowing customers an allotment of low-priced water, with prices steeply increasing for use above the Block 1 allotment. For residential customers, the Block 1 allotment is set based on the number of people residing at the service address as well as large animals. For non-residential customers, the Block 1 allotment is based on historical water use and best management practices.

Specifically, the number of people and large animals residing at the residential service address determine the amount of water in each of the five blocks of increasing price, as indicated in the table below. Each person is allocated 1.5 ccf or about 37.5 gallons/day and large animals get 0.5 ccf or 12.5 gallons/day in each block. In addition, during summer months, the higher blocks, three (200% of base rate), four (400% of base rate), and five (700% of base rate) include landscaping irrigation allowances based on lot size that range from 1 ccf or 25 gallons/day to 3 ccf or 75 gallons per day. The base rate will be calculated using the final adopted revenue requirement. For purposes of the settlement agreement, the parties assumed that the Commission granted Cal-Am one-half its requested increase.

Residential Block Rates

For non-residential customers,260 the Settlement Agreement adopts a three-level increasing block rate structure. Each customer's monthly allotment, i.e., service to be provided in the lowest-priced block, will be based on audits using best management practices for that type of business. To the extent the non-residential customer exceeds the total amount on an annual basis, the service will be billed at a higher block. All outdoor water use that is "not essential to the business function" will be billed at the higher block 2 or 3 rates.

The Hidden Hills Subunit Ratepayers Association generally supported the conservation encouraging rate design, but opposed being included in the same tariff as Ryan Ranch. Hidden Hills contended that its subunit was largely residential, while Ryan Ranch was commercial.261

The Management District opposed the transition periods for Bishop and Hidden Hills, arguing that such periods diminish the effectiveness of conservation ratemaking. The Management District also advocated for periodic verification of claims of medical need for extra water allotment in Block 1.262

The Independent Reclaimed Water Users Group strongly supported Cal-Am's goal of using rate design to encourage water conservation, but contested the settlement agreement's continuance of the status quo for golf courses using potable water for irrigation. The Independent Reclaimed Water Users Group recommended that golf course use of potable water in Block 1 be set at 85% of historical usage to create a strong financial incentive to reduce such usage.263 The Independent Reclaimed Water Users Group also sought below-base, lower rates for Block 1, to mimic residential rate blocks, and "revenue positive" upper Blocks to fund water supply alternatives.264

In reply, Cal-Am explained the combining the Hidden Hills and Ryan Ranch tariffs is done for administratively efficiency and has no substantive effect. Cal-Am also stated that the record offers no support for the Management District's contention that rate design changes should be implemented simultaneously for all subsystems, or that customers abuse the medical needs adjustment.

Cal-Am's reply to the Independent Reclaimed Water Users Group first argues that neither it nor this "Commission have an obligation to provide an incentive to transition golf courses from the use of potable water to reclaimed water for irrigation purposes."265 Similarly, Cal-Am states that it "makes absolutely no sense" to set a customer's Block 1 allotment below what is required to meet its business needs and that the Commission should recognize a "higher principle that rate design should not penalize customers who are using water in compliance with best management practices."266

We are unable to approve two components of the Rate Design Settlement Agreement which address the use of potable water for outdoor landscape irrigation. The continued offering of discounted summer rates for residential use of potable water for landscape irrigation and golf course irrigation with potable water are unreasonable and fundamentally at odds with resource limitations confronting Cal-Am in the Monterey district.

As stated by Cal-Am and DRA in their motion for approval of the settlement agreement, the conservation rate design meets the Commission's objective of "setting rates that encourage conservation" by providing a "greater financial incentive to conserve water."267 We cannot agree that a discount for outdoor landscape irrigation and acquiescing to continued use of potable water for golf course irrigation comply with our established policies.

Since Cal-Am is under orders from the State Water Resources Board to reduce its summer diversions from the Carmel River due to fish die-off, we are dismayed that the parties propose to continue a discount for using drinking water for residential landscape irrigation and to accept as "best practices" the use of over 200 acre-foot/year of drinking water for golf course irrigation. We will first address the discount and then the golf courses.

Cal-Am offered four reasons for its proposed residential landscape irrigation discount, none of which are persuasive. That "certain customers" would pay more absent the discount, the discount is long-standing, or microclimate variation might entice some customers to irrigate more268 do not in any way justify a discounted price for this use of potable water. Cal-Am's final assertion that "in some instances, it is absolutely necessary for customers to do outside watering" is a conclusion without any factual support in the record. Therefore, we conclude that the record contains no factual or policy support for this discount.

We find that in the Monterey district potable water conservation is essential, and that a discount for use of potable water for landscape irrigation is inconsistent with our conservation goals. As set out below, we find that this component of the settlement agreement is contrary to the public interest and our precedents, and not supported by the record.

Turning to the golf courses, Cal-Am forecasts that during the rate case period the golf courses will use 234 acre-foot/year of potable water.269 This amount greatly exceeds the 92 acre-foot/year to be reliably available from the Sand City Desalinization plant, discussed above, and approaches the total 300 acre-foot/year output for which Cal-Am is willing to pay over $1.2 million year.

Cal-Am states that the golf courses "have no viable alternatives" to using potable water and that neither it nor this Commission has an obligation to transition the golf courses from potable to non-potable water for irrigation purposes.270

As discussed above, American Water's corporate directives, with which we agree, state that "innovative solutions" particularly for large irrigation users are appropriate where, as here, existing water supply capacity is limited. The record shows that the City of Pacific Grove is analyzing, apparently without Cal-Am's support, a stormwater recovery project to serve the Pacific Grove golf courses.271 The record suggests that other options may be available as well.272

So long as Cal-Am's rate design presumes that the "best practice" is to continue to use potable water for landscape irrigation on these golf courses, the course owners will have no incentive to actively seek out alternatives.

The Independent Reclaimed Water Users Group recommends that we reject the settlement agreement's allowance of 100% of historical use in the lowest-priced rate tier, and instead require that 15% be moved to a higher-priced tier to provide the potable-water irrigators a financial incentive to reduce potable water consumption. The Independent Reclaimed Water Users Group also supports funding alternative water supply projects, such as small-scale brackish water desalinization, storm water recovery, and wastewater recycling. The Group also points out that funding alternative projects will have lasting benefits to the Monterey district customers, as opposed to the "fleeting, ephemeral benefits" to be realized from the Cal-Am's conservation advertising and outreach projects.273

We agree. As Cal-Am has repeatedly stated and demonstrated throughout this proceeding, the Monterey district is confronting severe supply limitations. Transitioning users of potable water for landscape irrigation to non-potable alternatives is one way to alleviate a portion of the demand, and is thus an obligation of Cal-Am. While rate design can and must provide financial incentives to make this change, Cal-Am has an important role in providing alternative supply options. As pointed out by the Independent Reclaimed Water Users Group, such alternative projects could have lasting benefits to the district's customers in contrast to conservation advertising.

Demonstration projects, feasibility studies, and other means to develop and evaluate the innovative solutions called for by the American Water directives require funding. We find that these types of projects are a necessary companion effort to adopting a rate design that provides financial incentives to transition from potable to non-potable water use for irrigation. Cal-Am did not anticipate this outcome and has not sought such funding in this proceeding. We are persuaded by the Independent Reclaimed Water Users Group that such projects offer more value to ratepayers than the conservation advertising we recently approved. Therefore, to provide Cal-Am an immediate source of funds for alternative supply projects for irrigation, we will authorize Cal-Am to use up to one half of the funds approved for advertising in D._________ for alternative irrigation supply options.274 This is an interim measure designed to get Cal-Am started on innovative projects. To the extent prudent larger scale projects are developed, Cal-Am should file a separate application and should plan on making a more comprehensive program proposal in its next general rate case.

Therefore, we find that the components of the rate design settlement between Cal-Am and DRA that (1) establish an allowance for lot size in setting rate block widths and, (2) accept historical potable water use by the golf courses, tempered by best management practices, as Block 1, are not reasonable and, consequently, cannot be approved.

We propose that the agreement be modified in two respects: first, that the residential lot size allowance be removed from all tariffs; second, that potable water use by golf courses for irrigation included in rate Block 1 be decreased. We will allow Cal-Am and the golf courses one year to develop and implement innovative measures to reduce potable water use for irrigation by 10%. If such usage reduction has not occurred, then we will move 10% of each golf course's potable water landscape irrigation use from Block 1 to Block 2. This will give the golf courses, working with Cal-Am, some time to adjust to rate changes and to develop and implement water conserving or supply augmenting measures. As so modified, the settlement agreement would meet our requirements for approval. If the parties accept these modifications, they should so indicate in their comments on the Proposed Decision.

Rule 12.1(d) requires that in order for a settlement to be approved by the Commission, the settlement must be: (1) reasonable in light of the whole record, (2) consistent with the law, and (3) in the public interest. Except as discussed above with regard to the two irrigation issues, we find that each element is present here.

The parties contend the Settlement Agreement is reasonable in light of the whole record because it takes into account the principles of conservation rate design and the unique features of the Monterey district. The parties have compromised their differences over the specific ratemaking approaches to achieve the conservation goal.

We agree that the settlement is reasonable in light of the record, except as regards the two landscape irrigation issues discussed above.

The proposed settlement is consistent with the law. The parties explain that the proposed rate design is just and reasonable as required by Pub. Util. Code § 451. With the exception of the two irrigation issues discussed above, we find that the settlement is consistent with the law.

Finally, we find that the settlement is in the public interest with the exception of the two irrigation issues. The proposed settlement agreement provides for more aggressive conservation rate design, while allowing for sufficient lower-priced water for essential usage. The public interest would also be served by approval of the modified settlement agreement as an efficient means to resolve this application.

For the foregoing reasons, the Commission finds that the rate design settlement excluding the two irrigation issues discussed above is reasonable in light of the whole record, is consistent with the law, and is in the public interest. If modified as discussed above, we find that the modified settlement agreement, in light of the whole record, is consistent with the law and is in the public interest.

260 Non-residential customers are commercial, industrial, public authority, golf courses (potable), golf courses (non-potable, Visciano tank), and dedicated irrigation customers. See Settlement Agreement Section "V."

261 Opening Brief of Hidden Hills Subunit Ratepayers Association at p. 2.

262 Comments of the Water Management District at p. 7.

263 Comments of the Independent Reclaimed Water Users Group at p. 20.

264 Id., at p. 22.

265 Cal-Am Reply Comments to Settlement Agreement Comments at p. 22.

266 Id., at p. 23.

267 Motion at p. 4.

268 Hearing Exh. 73 at p. 6.

269 Application Exhibit A, Chapter 5, Section 2, Table 2C (102,020 ccf/435.60 = 234.2).

270 Cal-Am Reply Comments to Settlement Comments at pp. 22-23.

271 Hearing Exh. 77 at p. 8.

272 See generally Hearing Exh. 77.

273 Independent Reclaimed Water Users Group Comments on Settlement Agreement at p. 23.

274 These alternative landscape irrigation supply options could be used for both large-scale golf course sized options and residential size as well. Both types of customers should be receptive to such opportunities with the significant increases adopted in today's decision.

Previous PageTop Of PageNext PageGo To First Page