SJWC

Testifying for SJWC was Fred Meyer, Vice-President. Meyer explained the effect of the Tax Reform Act of 1986 (TRA) and the related history of IDC during construction, and his belief that staff was fully informed and aware of SJWC's treatment of IDC on CWIP. Additionally, he believed that the treatment was revenue neutral.

Prior to the TRA, water companies were allowed to deduct interest expense in its entirety. TRA required them to capitalize as an asset interest accrued during construction. The Commission conducted an investigation into the impacts of the TRA, and SJWC participated in that proceeding. D.88-01-061 in that proceeding allowed SJWC to record IDC into the bases of constructed assets for both ratemaking and income tax purposes. However, an Allowance for Funds Used During Construction (AFUDC) rate was not allowed.

The decision acknowledged that the result was not revenue neutral because it resulted in added interest during construction which resulted in added revenue requirement, but the decision concluded that the effect of CWIP for water companies, which traditionally do not have long-term construction projects, was de minimis and that any consequences of IDC would also be de minimis. Thus allowing water companies to capitalize IDC using the tax rate would not impose a burden on ratepayers. Nothing in the decision required revenue neutrality to be achieved, and no offset to rate base was required if the company added IDC.

In the initial period of 1987, SJWC estimated the amount of interest at about $79,000. Then the earthquake in 1989 changed things significantly, since for the first time SJWC was faced with a long term construction project. Prior to that time, construction projects were short term, typically four or five months' duration. In its next general rate case, SJWC included the reconstruction of its dam in its forecasted rate base. Because of the uncertainty of the cost involved in the reconstruction, SJWC and staff agreed that it be given a rate base offset. When it was completed, SJWC filed an Advice Letter for a rate base offset for the dam which included IDC.

SJWC elected to reduce its rate of return by subtracting the net-of-tax interest from the cost of debt, intended to achieve revenue neutrality. SJWC stated that it was not interested in double-collecting even though the decision would allow that. SJWC later found through modeling that the result was not entirely revenue neutral, and that it should have reduced the rate of return by subtracting the gross-of-tax interest. Thus, the effect of the adjustment was less than intended, and it did not make ratepayers entirely neutral .

In correspondence with Doug Long, then Chief of the Accounting and Finance branch of Commission Advisory and Compliance Division (CACD), SJWC was told that it was correct that 100% of capitalized IDC is included in rate base. There was no indication from Long about revenue neutrality. Also in meetings with Donald McCrea of the Water Division and Gilbert C. Infante of the Office of Ratepayer Advocates dealing with capitalization of interest regarding Advice Letter (AL) 264, the issue of revenue neutrality was not brought up, and AL264 was subsequently approved by the Commission.

In SJWC's opinion, the Commission's desire in this matter was to not make onerous bookkeeping requirements for the company. Otherwise, complex additional records would need to be kept to reconcile ratemaking accounting with tax accounting records.