IV. Capital Projects

The main issue in this proceeding is San Gabriel's proposed major increase in plant additions through 2006. As discussed below, we generally approve San Gabriel's construction program with some limitations to reduce rate impact.

According to San Gabriel, perchlorate or nitrate contamination above current Action Levels has required it to shut-off seven Fontana wells amounting to a loss of capacity of 14,900 gallons per minute, equal to 30% of average daily production required to meet summer peak-day demand. Therefore, the centerpiece of San Gabriel's construction program is the installation of wellhead treatment plants at the seven contaminated wells to make these wells immediately available to meet summer peak-day and fire protection needs.

In opposing San Gabriel's request, ORA states that the three-year average for normal plant additions for 1998, 1999, and 2001 is approximately $8.0 million and the five-year average from 1998 to 2002 is $10.2 million. Both of these amounts are significantly lower than San Gabriel's request for Test Year 2003 of $18.5 million and $21.7 million for Test Year 2004, plus an additional $8.0 million for percholorate treatment plants at issue in this proceeding. Further, ORA contends that San Gabriel failed to adequately substantiate the need for such extraordinary plant increases, other than discussing the need for the perchlorate treatment plants. ORA opposes construction of the proposed West Side Surface Water Treatment Plant, contending that it is not needed and, if so, it should be funded by developers through advances or contributions. Also, ORA opposes all but one of San Gabriel's proposed six reservoir projects, opposes all but two of the seven proposed booster stations, and opposes all but one of the seven proposed production wells. ORA opposes inclusion of the proposed seven wellhead treatment facilities in rates on the grounds that the parties responsible for the contamination should pay for these facilities. ORA also opposes San Gabriel's proposal for a new office building on the grounds that it is not needed.

City and School District oppose San Gabriel's wellhead treatment proposals on the grounds that San Gabriel was proposing the most expensive approach, and that San Gabriel's proposal for wellhead extraction and treatment could make the problem worse by spreading the groundwater contamination plume further. City witness Vitthal Hosangadi, a consulting engineer, faults San Gabriel for not making a systematic assessment of alternatives available to address the contamination situation and instead directly applying the approach it used in its Los Angeles Division. Hosangadi argues that site conditions and circumstances at Fontana are different; therefore, a site-specific analysis would be prudent. He recommends a "phased approach" in which strategically selected wells are equipped with treatment initially, followed by other wells to minimize "pulling" of the plume in the down-gradient direction. Hosangadi also recommends that San Gabriel obtain other supplies to minimize the amount of water requiring perchlorate treatment. He suggests State Water Project (SWP) water, and recycled or reclaimed water from the City for use by industrial customers who do not need treated water.

San Gabriel witness Mark Wildermuth, a consulting engineer, testified that he considered the alternative "dodge and drill" approach instead of wellhead treatment plants to be not a wise concept under circumstances where there is a significant probability of hitting percholorate in a new well, or of avoiding perchlorate but ending up with high nitrate. He favored the alternative of "going after the contamination in place" rather than pumping at other locations to avoid creating a stress that would cause the contamination to migrate elsewhere.

Responding to ORA's general opposition to San Gabriel's proposed construction plan, Fontana Division Assistant General Manager Gerald J. Black contends that ORA has wrongly focused on annual production when what matters are peak-day and peak-hour water production needs. He stressed that all seven of the perchlorate-contaminated wells are needed to reliably meet customers' requirements and public fire protection demand, especially during the summer months. He calculated total well production capacity of all uncontaminated wells as 56.3 mgd, to which he added 3.6 mgd of surface water from Lytle Creek and the SWP, plus 2.9 mgd available from Cucamonga County Water District's (CCWD) two standby emergency interconnections. Not including the uncertain CCWD interconnections, witness Black estimated Fontana Division's current total daily production capacity at about 59.9 mgd - short of last year's peak day demand of 60.4 mgd and "leaving a possible shortage of production," especially in light of the continuing decline of Lytle Basin well production with continued drought. According to Black, there is absolutely no cushion for the loss of any well for any reason, such as power failure, starter failure, motor failure, vandalism, bacteriological contamination, industrial pollution, and a multitude of other unforeseen failures. He points out that in mid-August 2003, San Gabriel lost over 8.4 mgd of well capacity for most of one day due to two motor starter failures and one bacteriological flare-up.

Further, witness Black discounted ORA's suggestion that the production from the perchlorate contaminated wells can be blended with SWP supplies. He pointed out that the wells are located many miles away from the SWP water source, and the SWP water itself would first have to be fully treated before blending would be feasible. He explained that blending with the production of other wells was not feasible, because, except for Well F4A, there are no uncontaminated wells in their vicinity that can be connected.

While noting San Gabriel's agreement with ORA that the polluters who contaminated the groundwater with perchlorate should bear the full cost of providing and operating wellhead treatment systems, Black stressed that San Gabriel cannot wait for all the polluters to be identified and made to pay, because "San Gabriel urgently needs the lost production restored now." According to Black, that is why San Gabriel has proposed a memorandum account to record all capital costs and related operating and maintenance expenses as well as any reimbursements received from third parties, polluters included.

School District argued during hearing that 78.2 mgd was available from current sources, comprising 56.3 mgd from uncontaminated wells, plus 5.0 mgd of blended Lytle Creek/SWP surface water, 2.9 mgd from CCWD and 14.0 mgd from five of the seven perchlorate contaminated wells.

San Gabriel witness Black rejected School District's 78.2 mgd estimate. Beginning with the 56.3 mgd estimate of the production from Fontana's uncontaminated wells, Black testified that "we have no guarantee that we can produce 56.3 [mgd] day in and day out," noting the example of a recent day on which three wells - totaling 7.5 mgd - went out of production. He concluded that "the 56.3 is not a solid number. It's the maximum number." He would reduce that number to 44 mgd.

Black also considered the CCWD connection to be strictly an emergency connection, not available to meet an extended shortage of supply, and becoming less available in time as Cucamonga's own demand increases. He did not recognize the CCWD connection as providing any reliable source of supply at all. Likewise, Black completely discounted the perchlorate contaminated wells as providing any available supply, based on his expectation that the Department of Health Services (DHS) will soon set a Maximum Contaminant Level (MCL) for perchlorate that will prohibit Fontana Division from delivering water from those wells.² He also testified that another year of low rainfall and snowpack would deprive San Gabriel of at least 7.3 mgd from its Rialto Basin wells, and that Fontana Division was already in peril, due to declining water levels, of losing the use of its six Lytle Basin wells that were still producing at the time of his testimony. Summing up, witness Black found current reliable production capacity of just 46.7 mgd.

A. Discussion

Fontana Division expects to obtain 80% of its water supply from the Chino Basin; therefore, we find that cleanup of the basin is a matter of the highest priority for San Gabriel. The full extent of the perchlorate contamination plume has not yet been fully defined, and the Environmental Protection Agency (EPA) and other responsible agencies have yet to approve a comprehensive cleanup plan for the basin. In addition, DHS has yet to announce its latest drinking water standard or MCL for perchlorate levels. Notwithstanding ORA's arguments based on water supplies in 2001, the record fully supports San Gabriel's position that Fontana Division was barely able to meet peak-day demands in the summer of 2003, following closure of the seven wells in October 2002.³ Furthermore, Fontana Division is adding over 1,000 connections per year.

Given the current situation, we agree with San Gabriel that doing nothing or waiting until some uncertain date for outside funding for perchlorate cleanup, are not realistic or responsible options. Therefore, we find that the current level of plant additions should be maintained, that San Gabriel be given some limited flexibility to deal with events as they unfold, and that San Gabriel be allowed to make its own decisions within that limitation.⁴

In allowing San Gabriel needed flexibility to proceed with its plan for plant additions, we will set an upper limit. As ORA correctly points out, San Gabriel's proposals greatly exceed the $10.2 million per year five-year average for plant additions for the period 1998-2002. We also agree with City and School District that implementing San Gabriel's proposed plan for plant additions will cause undue hardship to ratepayers. Accordingly, we will limit proposed plant additions through the rate base cap discussed below.

B. The Rate Base Cap

Because of the controversy surrounding San Gabriel's proposed major plant addition plans, and the need to take into consideration the rate shock to customers that would result from such an ambitious program, the ALJ introduced an alternate approach, which would entail a Commission-approved cap on total rate base additions during the test years and attrition years. The ALJ suggested that adopting a rate base cap would allow San Gabriel to determine which projects to construct within the constraints of the Commission-approved cap, thereby eliminating a lot of the controversy on the ranking of different plant additions and the timing of the receipt of condemnation proceeds and related project work.

In response to the ALJ's direction, San Gabriel witness LoGuidice prepared and sponsored Exhibit 54, San Gabriel's Project Priority List of plant additions proposed to be implemented over the years 2003 through 2006. San Gabriel's position is that its plant forecasts should be adopted. In the alternative, San Gabriel agrees to a rate base cap which would allow rate base to increase by 10% annually during the test years and attrition years.

ORA argues that a rate base cap would be unnecessary and ill-advised if it allowed San Gabriel "carte blanche" to construct whatever it wants, without Commission review. ORA misconceives the nature of the cap. When the Commission approves a projection of plant additions in setting rates, there is a presumption that the utility's investment in the planned capital projects is reasonable. However, this does not bar staff from challenging the inclusion of such investments in rate base in a later proceeding once the investments have been made. The same rule should apply if the Commission sets a cap on rate base additions instead of approving a specific set of projects.⁵

We note that average rate base for Fontana Division has grown by an average of 10% annually from 1998 through 2002. We believe that given the customer growth being experienced and the perchlorate contamination issue, it is reasonable that the current rate of plant additions be maintained. Therefore, as discussed above, rather than specifying which projects should be undertaken first, we will adopt a rate base cap that will allow rate base to increase by 10% annually during the test years and attrition years. The cap would include all projects filed by advice letter. Such a limitation would permit San Gabriel to make its own decisions about the need for and timing of projects on its Project Priority List (Exhibit 54) and in turn be held accountable for its decisions. To provide more flexibility, we will allow San Gabriel to make changes and substitutions for the projects shown on Exhibit 54. The rate base cap would enable Fontana Division to maintain its current five-year average growth rate of $10.2 million per year for plant additions. The individual projects are discussed later under the heading Rate Base Components.

The recovery of expenditures through rates for water utilities is based on future test year rate of return ratemaking. [Footnote omitted.] This means that rates of Cal-Am are based on estimated rate base and expenditures for a future year. Actual rate base and expenditures can and do change between the time rates are set and the time events occur. There is no requirement of the utility to spend exactly, or only, the projected amount on each rate base or expenditure component used to set rates.... We leave the fine-tuning of a utility's operation to the discretion of its management. Management discretion is exercised in allocating total dollars for capital and expense items to those areas where the capital and expense is most necessary, as dictated by constantly evolving priorities... Re California-American Water Company, D.02-07-011, mimeo., at 6-7.