2. Background
2.1 Memorandum Account - Origin and
Prior Amortization
Commission Resolution W-4181, dated February 3, 2000, authorized SCWC to establish the memorandum account to record certain costs associated with two water contamination lawsuits. SCWC, together with its parent, American States Water Company, filed the lawsuits in October 1999 on behalf of the Arden-Cordova customer service area after high levels of two rocket fuel additives, perchlorate and n-Nitrosodimethylamine (NDMA), were found in several wells serving the Cordova system, which has approximately 12,000 connections.1
Resolution W-4181 permits memorandum account entry of litigation expenses and costs related to the development of alternative sources of water supply (e.g., financial carrying costs of capital projects and increased operation and maintenance expenses), but expressly prohibits recovery of public relations costs. Consistent with standard regulatory policy, the resolution does not guarantee rate recovery of any of the recorded costs, but conditions recovery upon future reasonableness review. Finding and Conclusion 4 provides: "SCWC should be required to justify the reasonableness of all expenses associated with the memorandum account, offset by insurance proceeds and/or proceeds from the polluters, before it is granted relief." (Res. W-4181 p. 4.)
The resolution's Discussion section explains that SCWC "proposes to pass on all money received from defendants to its ratepayers, including punitive damages, as long as ratepayers pay for all the litigation expenses." (Id. p. 3.) It then states: "Water Division agrees and notes this is consistent with the long established Commission policy, which was reconfirmed in Bakman Water Company's Resolution No. W-3785 dated June 23, 1993." (Ibid.) Ordering Paragraph (OP) 7 of Resolution W-4181 directs the utility to follow through, requiring it to "promptly credit its memorandum account herein by all amounts, including punitive damages, it receives from defendants." (Id. p. 7.)
The Commission's conceptual support for a strong litigation stance is evident in the Resolution. In the Discussion section, the Commission states its expectation that SCWC will "aggressively pursue the two legal actions for compensation from the polluters." (Ibid.) The resolution's OP 5 urges SCWC to "use every means possible to maximize its insurance proceeds and to seek restitution from the polluters of the basin so as to lessen any possible regulatory burden on its customers." (Id. p. 5.) In February 2001, by Advice Letter 1086-W-A, SCWC sought to amortize $1,792,000, the balance in the memorandum account as of August 31, 2000. Though the litigation was still pending, Resolution W-4257, dated April 19, 2001, approved the amortization. The resolution's Discussion section states that "the Commission should approve the recovery subject to refund as a message of support for the utility." (Resolution W-4257, p. 3.)
2.2 Phase 1 Decision
The Phase 1 decision in this proceeding, Decision (D.) 04-08-052, approved the parties' Stipulation. D.04-08-052 thereby resolved all general rate case issues and deferred SCWC's request for authority to amortize the balance in the memorandum account to a second phase.2 Paragraph 3.02 of the Stipulation describes the deferred issues as follows:
These issues include, but are not necessarily limited to: the treatment of a potential shortfall in recovery from Aerojet by Southern California Water Company of all expenses booked into the memorandum account; the accounting treatment of the funds in the account, which could include the potential amortization of the account; and a determination as to whether the ratepayers or shareholders should bear the responsibility of helping Southern California Water Company recover the expenses recorded in the memorandum account. (D.04-080-052, Attachment A.)
D.04-08-052 also extended the expiration date of the memorandum account by one year, until January 1, 2006, in order to permit sufficient time for resolution of Phase 2.
2.3 Phase 2 -- Procedural History
On September 16, 2004, the assigned administrative law judge (ALJ) commenced Phase 2 with a prehearing conference (PHC) and thereafter, as Pub. Util. Code § 1701.1(b) requires, the Assigned Commissioner issued a Scoping Memo.3 The September 21, 2004 scoping memo confirmed the scoping and scheduling agreements reached at the PHC and also extended the Commission's Phase 1 categorization determinations (ratesetting; hearings) to Phase 2. The scope included the issues in Paragraph 3.02 of the Stipulation and all other matters material to resolution of those issues.
On December 14, 2004, SCWC filed a motion seeking an additional amortization of $6 million, part of the balance then existing in the memorandum account, prior to the Phase 2 hearings. By joint ruling on January 26, 2005, the Assigned Commissioner and ALJ denied SCWC's request, noting, among other things, that hearings on the merits would be held in less than two months.
Hearings were held on March 14 and 15, 2005. The parties filed concurrent opening briefs on April 20 and concurrent reply briefs on May 5. The ALJ submitted Phase 2 for decision on May 6, 2005.
1 The Arden-Cordova customer service area is a single ratemaking district with two, physically separate water systems. The smaller Arden system, which has approximately 2,000 connections, is not affected by the groundwater contamination at issue in this litigation. In a single ratemaking district, capital and operational costs are treated as common costs, however, in order to spread cost recovery across a broader base and minimize rate shock and other financial problems that can befall small water systems with few customers. 2 The Stipulation was filed June 4, 2004 as an attachment to the parties' Joint Motion to Adopt Stipulation and For an Order of an Additional Phase to This Application.3 Unless otherwise indicated, all subsequent citations to sections refer to the Public Utilities Code and all subsequent citations to rules refer to the Commission's Rules of Practice and Procedure, which are codified at Chapter 1, Division 1 of Title 20 of the California Code of Regulations.
