X. Revenue Recovery Issues

A. Balancing and Memorandum Accounts

San Gabriel requests amortization of its balancing and memorandum accounts, the continued availability of existing supply cost balancing accounts, and the addition of a new water quality memorandum account.

1. Amortization of Existing Balances

San Gabriel requests that balances in the water production, purchased power, DHS/EPA, and water quality litigation accounts be amortized through a surcharge or a surcredit, as of the date the Commission issues its decision in this proceeding. The updated undercollected balances for which amortization is requested are as follows:

Balancing and Memorandum Account	Balance	Date of Balance	$/Ccf
Water Production	($1,329,744)	December 2002	($0.0678)
Purchased Power	$2,990,913	December 2002	$0.1526
WQ Litigation	$1,027,047	July 2003	$0.1722
DOHS/EPA	$ 32,413	December 2001	$0.0017
Total	$2,720,629		$0.2587

The requested surcharge/surcredit rates are calculated using Test Year 2004 sales, with interest on the balances continuing to accrue at the 90-day commercial paper rate. San Gabriel meets the earnings test required by D.03-06-072.

We agree that as set forth above, San Gabriel should be authorized a surcharge of $0.2587/Ccf for 12 months to amortize the balances in these four accounts.

2. Continued Need for the Full Cost Balancing Account

San Gabriel maintains a water production balancing account and a purchased power balancing account. Both of these are "full cost" rather than "incremental" balancing accounts, as differences in actual costs versus amounts collected through rates are recorded dollar-for-dollar in these accounts. An incremental balancing account only records expense differences caused by supplier unit price changes but ignores any differences caused by changes in supply mix.

San Gabriel states that the extreme volatility of Fontana Division's supply mix and the large difference in cost among the different sources of supply require retaining the full cost balancing accounts the Commission has approved in previous Fontana Division rate cases. Further, San Gabriel states that a full cost balancing account protects both customers and San Gabriel from significant deviations from GRC forecasts of these expenses and from any supply cost or mix changes that cannot be forecasted before the rates have been determined. Because of these full cost balancing accounts, San Gabriel was able to refund approximately $5 million to its Fontana Division customers through a surcredit that was effective from 1994 through 2000 (Advice Letters 281 and 297). In addition, the $1.3 million overcollection in the water production balancing account shown above is the direct result of savings achieved when a change in the supply mix allowed Fontana Division to use lower cost supplies that could not be forecast in the GRC. According to San Gabriel, without the full cost balancing account, these savings would not flow to the customers.

We note that for Fontana Division, both water production and power supply costs are subject to wide variations, and the supply mix is determined by hydrological conditions that are beyond San Gabriel's ability to predict or control. The full cost balancing account mitigates the risk of inaccurate forecasting and changed hydrological conditions, and ensures that customers only pay the actual cost of service. There is no opposition to Fontana Division's continued use of full cost balancing accounts. Therefore, we grant San Gabriel's request.

3. Requested Water Quality Memorandum Account

San Gabriel requests a water quality memorandum account to record all costs incurred and proceeds received for the capital and operating costs of treatment of contaminated groundwater not yet reflected in rates. Consistent with the Commission-approved practice in the Los Angeles Division (D.02-10-058), San Gabriel proposes in this proceeding to record in the water quality memorandum account any reimbursement from polluters or government funding proceeds ultimately received, so these proceeds can be used to reduce rates. We grant San Gabriel's request for a water quality memorandum account since this proposal is identical to that approved by the Commission for the Los Angeles Division.

4. Proposed Low Income Rate Program

In this application, San Gabriel proposed a low-income rate for qualifying customers. Subsequent to this filing, the Commission declined to approve a similar request in the Los Angeles Division GRC and ordered San Gabriel to file a different proposal that addressed specified matters. (D.02-11-058, Ordering Paragraph 12.) San Gabriel filed A.03-04-025 in compliance with that order. When a decision is issued by the Commission in that proceeding, it should apply to Fontana Division also.

5. Requested Advice Letter Treatment

San Gabriel requests advice letter treatment for six of the seven planned wellhead treatment facilities (the first one was constructed during Test Year 2003) and for the portions of the planned new Westside Treatment Plant (Plant F52) that are not scheduled to be constructed by the end of Test Year 2004. San Gabriel made a similar request with regard to the upgrades to the existing Sandhill Treatment Plant and to the CCWD Interconnnection. San Gabriel's request for separate advice letter treatment of the capital costs for these projects is denied. All capital costs for these projects must be within the rate base cap discussed above. However, after each project is completed and placed into service, San Gabriel may file an advice letter requesting that the operating costs be added to rates if not already included. San Gabriel must supply detailed supporting cost information with its advice letters. Any costs San Gabriel is able to recover from third parties would reduce the amounts San Gabriel proposes to recover from customers. Such advice letter filings will be allowed only once each year.