7. Applicable Legal Standards
7.1 Burden of Proof
As the applicant, Cal Water bears the burden of proving that the proposed rates are just and reasonable. No party disputes this assignment of the burden of proof.
In its opening brief, Cal Water acknowledges that § 4542 requires that Cal Water prove that its proposed rate increase is "justified." As the party bearing the burden of proving that the proposed rate increase is "justified," Cal Water must present a prima facie showing that meets this burden. Simply put, Cal Water's evidence presented on the record must justify the rate increase.
As a general matter, Cal Water's reports in this proceeding do not meet this standard. Cal Water's reports consist of boilerplate descriptions of various tables of historical data and future projections. Specific increases are not identified, much less explained. No analysis of specific data is included. No explanations of the forecasting methods are presented. For example, these applications request 40 additional employees for Cal Water. The requested employee positions were neither listed, described, nor explained on the record. Similarly, Cal Water's tables showed over $6 million in capital additions to general office. These projects were not listed or explained in the record. The most extreme example is Cal Water's proposed low-income tariff, where it presented no record evidence whatsoever.
Identification of the significant issues underlying the requested rate increase has fallen on ORA. Apparently through the use of discovery and workpapers, all of which are outside the record, ORA was the party responsible for recognizing and articulating the major changes leading to the requested increase. ORA's reports contain the first and, in some instances, the only descriptions of Cal Water's positions on many issues. More troubling are the issues that ORA identifies and resolves with Cal Water completely outside the record, for example, the adjustment to rate base for non-regulated operations discussed below. This significant reduction to general office rate base, 7%, was completely unexplained and unsupported in the record prior to the ALJ ordering that such an explanation be provided.
To the extent ORA raises issues in its testimony, Cal Water then has the opportunity to present rebuttal testimony. As a result, Cal Water makes its case only on the issues that ORA raises and that Cal Water is unable to resolve through discovery or off-the-record negotiations. The resulting record, however, is far from ideal.
The tank painting issues illustrate this scenario well. For example, in the Hermosa-Redondo district, Cal Water's rate base table 8-B shows net plant additions of slightly more than $2 million for each test year. The projects that make up this amount are neither listed, explained, nor justified. In ORA's report, we find a listing of the disputed projects, including certain proposed tank painting, which totals about $1 million. Cal Water's rebuttal testimony then addresses some but not all of ORA's disputed issues, from which we infer that Cal Water has accepted ORA's disallowances for the projects not addressed. Thus, for a large share of the proposed additions, the record contains no evidence, other than ORA's acquiescence to Cal Water's proposal or Cal Water's acquiescence to ORA's disallowances.
For today's decision, we have been able to satisfy ourselves that the record is sufficient to support this decision. To accomplish this, however, the record was supplemented twice at the direction of the ALJ. Aglet provided copies of significant portions of Cal Water's workpapers as part of its evidence for the record, and ORA presented much of Cal Water's analysis of issues in ORA's testimony. These means of completing the record, while sufficient for now, are not acceptable on an on-going basis.
Procedurally, we believe that use of a motion to dismiss the entire application, or parts of the application, for failure to present a prima facie case is a useful device for identifying evidentiary deficiencies early on in the process. Such motions will alert the applicant to potential deficiencies, and allow the applicant to seek the opportunity to cure the deficiencies.
We are also concerned about the use of "updated tables" for certain portions of the initial showing. These tables are provided without explanation for the record. Changes are not identified, thus making it extremely difficult to evaluate the propriety of the updates.
For guidance on preparing its next applications, we note the following requirements:
1. NOI. -The Rate Case Plan requires that the major changes that led to the requested rate increase be identified and quantified. Each issue should include explanations and justifications for the requested change, with cross-references to evidentiary support. Specifically, the Rate Case Plan3 requires that the NOI contain "a brief statement of the amount and percent of the increases sought and the reasons for the proposed increases. Documentation constituting the utility's proposed showing in support of the results of operations and rate of return, including draft prepared testimony and draft exhibits with complete explanations and summaries, shall be annexed to the NOI."
2. Application. The Rate Case Plan carries through the NOI requirements by specifying that the application "include all exhibits, prepared testimony, and other evidence constituting applicant's showing, and shall also include a comparison exhibit showing any differences between the NOI and the showing submitted with the application and explaining the differences." Compliance with this rule would obviate the need for project justifications for the first time in rebuttal testimony. The Rate Case Plan requires summaries, explanations, and comparisons because unexplained data have little value in assessing whether a utility has met its burden. Comparison of current projections to historical information, as well as a description of the forecasting method used is necessary. Where available, references to external, objective support for the forecasts should be provided. Where relied on, professional judgment should be acknowledged.
3. Amending the Application. Rule 23 of the Commission's Rules of Practice and Procedure (Rules) sets out the requirements for rate increase applications. Rule 23(k) also requires that if the applicant desires to "revise the level of rates shown in its original application before hearing on the same, the applicant shall file an Amendment to Application in accordance with Rule 2.6." Thus, all changes to the original rate increase request4 must be made with a filing pursuant to Rule 2.6.
7.2 Standard of Proof
With the burden of proof placed on Cal Water, we must next determine the degree of certainty to which Cal Water must demonstrate that its rates are just and reasonable. California law provides for three common levels of certainty, and refers to these differing levels as standards of proof. In descending order of certainty, the three are: beyond a reasonable doubt, clear and convincing, and preponderance of the evidence.
Aglet stated that the applicable standard of proof is clear and convincing, and that the preponderance of the evidence is "not good enough." Aglet cited several Commission decisions adopting the clear and convincing standard for electric and gas rate cases, and stated that there was no legitimate reason to treat the energy and water industries differently.
Cal Water argued that the Commission has not explicitly applied the clear and convincing standard to an entire water utility rate case but only to selected issues. Cal Water did not affirmatively suggest that an alternative standard applied, but concluded that "its strong evidentiary showing justifies the rate relief that the company has sought in this proceeding under any standard."
In evaluating a request for a rate increase, the Commission's ultimate objective is to ensure that all rates charged are "just and reasonable" as required by § 451. The Commission is also bound by § 454 to determine whether a rate increase is "justified." These statutes, and the Commission's decisions interpreting them, require Cal Water to convince the Commission, with clear evidence, that its rate increase is justified. As we demonstrate throughout today's decision, we apply this standard exactingly to each issue and determine that in some cases Cal Water has met its burden and in some cases it has not. As so modified, we find that the resulting rates meet the statutory standard of being just and reasonable.
7.3 Standard for Evaluating Joint Recommendations
As noted above, two joint recommendations have been presented in this proceeding. All parties support the Reclaimed Water Joint Recommendation. Aglet supports some, opposes other, and takes no position on the remainder of proposals in the Joint Recommendation presented by ORA and Cal Water (Joint Recommendation).
The Commission reviews all Joint Recommendations pursuant to the standards also applicable to settlements. Both these types of agreements must be reasonable in light of the record, consistent with the law, and in the public interest. Rule 51.1(e); D.00-02-048. Despite our reliance on the same standards of review, we recognize that joint recommendations are not indivisible. The Commission is not restricted to acceptance or rejection joint recommendations as a whole. Instead, we can review the elements of a joint recommendation individually. This additional flexibility, compared to review of settlements, is reasonable because joint recommendations are not subject to Commission settlement rules regarding notice, timing and opportunity for comment.
