Background

SCWC requests cost recovery of energy costs through the PPAC for BVECSA. SCWC states that it does not generate any energy, but purchases all of its power through third-party providers. Purchased power costs are recovered through the PPAC. The PPAC has two components, the Energy Charge and the Power System Delivery Charge. PPAC revenues and costs are tracked on a monthly basis in the PPAC balancing account. PPAC balancing account overcollections are refunded to customers, and undercollections are collected from customers through an amortization surcharge. The surcharge is revised through periodic advice letter filings. SCWC states that over the past 18 months a substantial undercollection accumulated in the PPAC balancing account due to the spiraling costs of wholesale power during the California energy crisis, and as a result of two long-term power purchase contracts.³ SCWC states that the undercollection was $16.8 million as of June 2001 and was estimated to increase to $23 million by December 2001. SCWC argues that although the amortization surcharge has been increased through two advice letter filings in 2001,⁴ these increases offset only about $11.1 million of the current undercollection. Consequently, SCWC applied to the Commission for authorization to increase rates sufficiently to offset both current balancing account undercollections and future energy costs. Future energy costs are expected to result primarily from the Mirant and Pinnacle energy contracts, although SCWC indicates it will continue to make purchases on the energy spot market.

SCWC contends that these energy cost increases have had a profound negative effect on its cash flow and financial condition. SCWC argues that it cannot fund capital improvements and has resorted to diverting cash from its water utility operations to purchase power and fund electric operations in BVECSA. Although SCWC states that such diversions of cash from water utility operations have not impacted public safety and health requirements, SCWC believes these cash diversions will negatively impact water service in the future. SCWC states that without a timely increase in BVECSA rates, its ability to access reasonable funding for capital improvements is unlikely. Furthermore, SCWC believes that as its financial health deteriorates, the cost of capital funding will ultimately increase, impacting water and electric customers with higher costs.

As an interim measure, SCWC filed a motion August 17, 2001 to request approval for an immediate increase in rates subject to refund. SCWC argued that interim rate relief would allow recovery of actual costs of purchasing and securing delivery of power. SCWC also filed a motion requesting that the Commission address its application on an expedited schedule because its PPAC costs are exceeding revenues by approximately $800,000 per month leading to significant increases in the balancing account undercollection.

SCWC also proposes changes in the revenue requirement allocation to SCWC customer classes, and in its customer rate design. SCWC's rate design proposal is intended: (1) to recover the overall revenue requirement, (2) to maintain the same base rate revenue requirement, (3) to minimize the rate increase impact on permanent residential customers, (4) to begin a transition of commercial customers from a single schedule to three schedules, and (5) to establish rates for interruptible customers that are closer to market-based rates. SCWC also proposes minimum monthly bills for the three primary domestic rate schedules and the smallest commercial schedule. SCWC states that establishing minimum monthly bills is intended to reflect marginal customer costs, and to stabilize revenues because customers reduce usage due to rate increases and its proposed $20 minimum monthly bill is based on a study prepared in its last general rate case.⁵ SCWC residential rate design freezes rates for customers using 130% or less of baseline allowance, consistent with Assembly Bill 1X (AB 1X, Stats. 2001, First Ex. Session, Ch. 4). However, SCWC argues that customers using the Domestic Other (DO) schedule are not entitled to a baseline allowance.⁶ SCWC proposes an increase in the System Availability charge for Power Rate customers⁷ to reflect the cost of facilities dedicated to serving these customers. SCWC argues that its proposed rate design more accurately tracks costs and potential reductions in expenses given the increase in PPAC revenues from 46% of total revenues to 66% of total revenues.

On August 30, 2001, Bear Mountain opposed SCWC's motion for an expedited schedule. Bear Mountain argued, among other issues, that an expedited schedule provided insufficient time for parties to review SCWC's revenue requirement and rate design proposals. Bear Mountain also joined in the ORA arguments against interim rate relief and contended that SCWC's proposed rate design was inconsistent with prior rate allocations in Resolutions E-3704 and E-3735.

On September 13, 2001, ORA opposed SCWC's motions, arguing that interim rate relief is not justified since there is no financial emergency as defined in D.86-11-079,⁸ or demonstration that SCWC's credit rating would be downgraded. ORA asserted that the request for interim rate relief is not due either to "undisputedly reasonable" investment-related costs or to permit operation of a major new generating plant.⁹ ORA opposed the expedited schedule proposed by SCWC, contended that hearings were necessary, and provided an alternative schedule recommending submittal of briefs in December 2001.

On October 1, 2001, a prehearing conference was held with assigned Commissioner Geoffrey Brown in attendance. At the prehearing conference both of the SCWC motions were denied, and a tentative schedule set for future hearings including a public participation hearing (PPH) in the city of Big Bear Lake. On October 4, 2001, an Assigned Commissioner's Ruling established a procedural schedule and confirmed that the proceeding was categorized as ratesetting.

At the PPH in Big Bear Lake on October 17, 2001, 13 customers provided comments on SCWC's proposed rate increase and rate design. Comments generally focused on the amount of the increase, ability of customers to pay high electric rates, effect of electric costs on local businesses and the subsidization of permanent customers by recreational home customers. In addition, approximately 117 customer letters have been sent to the Commission's Public Advisor's office generally commenting on similar issues.

On November 20, SCWC served a report compiled by KPMG, LLP concerning its evaluation of the PPAC for BVECSA as required by Resolution E-3704.¹⁰ This report audits the PPAC from December 1995 through December 2000 and is intended to verify all of the expenses, income, refunds and line losses consistent with Commission approved rates and methodology.

On November 21, the Big Bear Area Regional Wastewater Agency (BBARWA) filed a motion to intervene later granted by ALJ ruling. Following a request by ORA and agreement among parties, a December 12, 2001 ALJ ruling revised the procedural schedule and established evidentiary hearings beginning January 22, 2002.

On December 20, 2001 ORA, Bear Mountain, and BBARWA submitted opening testimony. ORA focuses on the reasonableness of the Mirant and Pinnacle contracts and opposes minimum monthly bills for domestic customers. ORA contends that SCWC did not develop a risk management strategy for power purchases and that less expensive options were available for procuring power prior to the execution of the Mirant and Pinnacle contracts. ORA calculates projected power costs of eight comparable utilities and averages costs for six of the eight comparable utilities¹¹ over the period May 2001 through 2004 to derive a recommended purchased power cost of 6.1 cents per kilowatt-hour (kWh). ORA applied this rate to projected average annual customer usage resulting in its recommended annual disallowance of $3,835,146.

ORA contends that the minimum monthly bills proposed by SCWC are inconsistent with AB 1X since this results in an electric increase for residential customers using less than 130% of baseline allowance. ORA does not oppose charging DO Schedule customers higher rates than other domestic customers, and does not propose any other changes to SCWC's rate design. ORA provides recommendations regarding line loss issues including a plan to upgrade SCWC's transmission line or consider local generation in response to a SCWC line loss study.¹²

Bear Mountain argues that the SCWC annual revenue requirement is excessive and should be reduced by approximately $3.573 million due to unreasonable procurement practices. Bear Mountain calculates its proposed disallowance through a comparison with purchasing power on a "year ahead" basis. Bear Mountain contends that SCWC's market-based rates for interruptible customers are discriminatory since these apply to a single class of customers who have no other rate options. Bear Mountain proposes that the PPAC revenue requirement be allocated to customers based on seasonal patterns, and either to eliminate the minimum charge for power rate customers or to include the system availability charge when determining a minimum charge.

SCWC submitted its rebuttal testimony on January 11, 2002. SCWC contends that ORA incorrectly compares SCWC and municipal utility energy rates when calculating a recommended PPAC disallowance and that such a comparison is unreasonable because municipal utility energy costs may not include labor, debt and transmission costs. Furthermore, SCWC argues that ORA omitted the energy procurement cost from its calculations,¹³ and that the addition of this cost to the ORA analysis results in reducing ORA's recommended disallowance from $3,835,146 to $1,085,366.

SCWC asserts that signing the Mirant contract was a reasonable decision. In support of this position, SCWC cites its energy alternatives, the volatility in the energy market in March 2001, and the high wholesale energy prices that in March 2001 were projected to persist for the next few years. SCWC contends that Bear Mountain's proposals incorrectly develop rate design for the Power Class customers and unreasonably delay energy rate increases by increasing the amortization period for the PPAC by five years.

ORA and SCWC requested using the evidentiary hearing time to attempt to resolve all issues and develop an all-party settlement. ORA and SCWC stated that after discussing the issue of the revenue requirement they would then meet with Bear Mountain and BBARWA to discuss rate design. The assigned ALJ granted this request. On January 23, 2002 parties stated they had reached settlement addressing all outstanding issues. A settlement conference was timely noticed and held on February 6, 2002, and the Joint Motion was filed February 8, 2002. On February 13, 2002 BBARWA filed a motion to withdraw from the proceeding.¹⁴

On February 20, 2002, the ALJ convened a hearing on all aspects of the settlement. A panel of five witnesses, representing all of the Settling Parties, answered the ALJ's questions on the Settlement Agreement. Issues addressed by the panel included: (1) the price cap for energy purchases ($77.00 per MWh), (2) the change in the demand charge component of energy cost, (3) the PPAC balancing account and surcharge rate, (4) rate design policy and effects of the Settlement Agreement on various customer classes, (5) reasons why SCWC included a $600,000 attrition amount for SCWC water customers in the Settlement Agreement, and (6) how the Settlement Agreement fulfills Rule 51 and why it is in the public interest. During this hearing ORA withdrew its line loss testimony. All prepared testimony was identified and received into evidence.