Background

A. The Treatment Plant's Ratemaking History

Because it was essential that a new source of water with improved water quality be supplied to its 2154 Clearlake customers, SCWC requested Commission authorization to construct a new treatment plant. As previously noted, in D.89-11-017, the Commission authorized the plant construction with a capacity of 1050 gpm at a cost of $1,275,000. The decision ordered SCWC to make monthly progress reports on plant construction and authorized rate base treatment to commence promptly. Clearlake customers began paying for the plant in 1990 as the utility was allowed to rate base 75% of the plant cost in 1990 and 1991, $478,000 respectively each year. Rate recovery of the remaining 25% could be obtained pursuant to advice letter filing once the project was complete and in service.

Even though the number of customers and the maximum day demand had not changed since the Commission authorized the project, SCWC abandoned the original plant design and elected to build a plant with greater capacity (1500 gpm). In 1992, the plant became operational. After obtaining the balance of the authorized $1.25 million plant cost, SCWC filed an application seeking rate base treatment for the entire cost of plant construction - $3.1 million. As noted above, in D.93-06-035, the Commission concluded that the additional plant capacity far exceeded customer demand, that ratepayers should be responsible for only $1.5 million of the plant cost and that "SCWC should not be authorized to include the balance of $1,600,000 in rate base until such time as its Clearlake customers require additional plant capacity." (Re:Southern California Water Company, supra, 49 CPUC 2d 511, 534, 537). The Commission decision liberally quotes the testimony of the Division of Ratepayer Advocates (DRA) and comments that "this testimony presents a prima facie case that the Sonoma Treatment Plant was over-built by an excess capacity of approximately one third, and the burden of proof that the costs incurred above those contemplated in D.89-11-017 falls upon SCWC." (Id. At 519)

At the outset, DRA noted that the 1989 authorization of the proposed construction with a capacity of 1050 gpm (or 1.5 MGD - million gallons a day) far exceeded the recorded maximum day demand of 0.9 MGD estimated by DHS for the 2154 Clearlake customers. Further, says DRA, there has been very little growth in the Clearlake district over the past ten years. The following quotations of DRA testimony from D.93-06-035 demonstrate why the Commission limited rate recovery of the plant cost. They provide useful background as we consider SCWC's renewed request for rate base treatment of the $1.6 million balance of plant construction costs.

"DRA's research has determined that the first design plan for a 1050 gpm . . . treatment plant could have been built meeting all the state and federal requirements, for approximately $1,275,000. As discussed in paragraph 8.9, SoCal failed to inform the CPUC that they elected not to proceed with their original conceptual design plan. Although D.89-11-017 ordered SoCal to submit monthly progress reports during the construction phase of the project, SoCal simply submitted constructed schedules with no indications of any design or capacity changes.

. . .

"The Clearlake District borders both Highlands and Kinocti County Municipal Water Districts. SoCal negotiated with Kinocti County Water District (KCWD) to proceed in a joint ownership of the new treatment facility. In the proposed agreement, KCWD was to `buy-in' and own 1/3 of this facility (500 gpm or 0.7 MGD). For various reasons, in addition to inadequate funding, KCWD decided it was best not to proceed with the proposed contract. Approximately three weeks after KCWD informed SoCal of this matter, SoCal informed the CPUC of the 3.1 million total cost of the treatment facility." (Re Southern California Water Company (1993) 49 CPUC2d 511, 518.)

The DRA staff testimony addressed SCWC's claims that new health and environmental regulations contributed to and justify the increased cost of the plant.

"SoCal has claimed that since they filed with the CPUC nearly three years ago, new health regulations and environmental requirements from state and federal agencies have required a number of significant design changes and explained that not much could be done about all the factors which combined to drive up the cost of the facility from its original estimate of $1.3 million to a final cost of nearly $3.1 million. DRA has determined that both the plant SoCal elected to build and the original design of 1050 gpm (1.5MGD) both satisfactorily met all state and federal requirements." (Ibid.)

Unconvinced by SCWC's health and environmental regulation defense, the Commission found the DRA testimony persuasive and, for the most part, followed the DRA recommendation below:

"[T]he utility's investment may prove prudent in the future should Highlands Mutual or KCWD become dependent upon SoCal for an adequate supply of treated water. However, until this future demand is attained by either developmental growth or wholesale distribution, DRA strongly believes it would be inappropriate for the Clearlake customers to bear the entire cost of this treatment plant facility." (Ibid.)

In evaluating SCWC's renewed request to rate base the remaining $1.6 million of plant construction cost, it is appropriate to consider the ratemaking history of the Sonoma Treatment Plant. That history prompts this question: - Has the restriction of plant flow rate to 720 gpm, (which is less than the original plant design of 1050 gpm²), really rendered the plant fully utilized or has that restriction simply eliminated or reduced SCWC's opportunity to wholesale water or otherwise use the excess capacity? Today, a nineteen-year history of virtually no customer growth in Clearlake tells us that it is unlikely that customer demand would ever have required the plant's excess capacity.

B. DHS Cryptosporidium Action Plan

The source of raw water for the system is Clearlake. Watershed activities include agriculture, raising of livestock, gravel mining, and recreation. Clearlake is subject to extensive recreational use and there is substantial development along the lakeshore. The lake is subject to sewage hazards such as septic tank overflows and accidental discharges of treated or untreated wastewater from regional sewer systems. Large algae blooms, which occur during two major periods of the year, interfere with coagulation and clog filters at the treatment plant. Raw water quality changes continually, requiring close monitoring and frequent adjustment of chemicals for treatment.

In 1992, when the treatment plant became operational, the Surface Water Treatment Rule³ required that finished water supplied by a treatment plant not exceed a 0.5 Nephelometric Turbidity Unit (NTU) turbidity standard. The Sonoma Treatment Plant complied with that rule.

In 1995, DHS issued its CAP, a program for optimization of the treatment processes presently employed by public water systems to minimize or reduce the risk of waterborne illness outbreaks. Although DHS staff has focused its attention, as required by the Legislature in 1996⁴, on comprehensively implementing CAP at large water systems with at least 1000 service connections, all public water systems using surface water are subject to CAP. The 1996 legislation also requires DHS to devise and implement strategies for protecting customers of smaller water systems from Cryptosporidium exposure. SCWC has five surface water treatment facilities and there are numerous other large and small water utilities, subject to CPUC jurisdiction, that use surface water. The record in this proceeding is silent on how SCWC or other CPUC regulated utilities with surface water treatment facilities achieve CAP goals.

The CAP is distinguishable from federal and state Safe Drinking Water laws and attendant regulations (See Health and Safety Code, §116270 et.seq.). Those are performance mandates with which public water systems must comply or risk serious penalties imposed either by DHS, this Commission or both.⁵ Even though water systems are already complying with existing laws and regulations, the CAP is designed to urge those systems to be even more effective in their treatment of surface water. As DHS states in the Introduction to its CAP:

"The following Cryptosporidium Action Plan is intended to facilitate comprehensive compliance with the State's existing Surface Water Treatment Rule (SWTR). The plan does not contain any requirements beyond the scope or intent of current regulation, rather it clarifies exiting requirements to support drinking water utilities in optimizing the treatment process and reducing the risk of a waterborne illness outbreak." (DHS Cryptosporidium Action Plan, Burton, Ex. 1 at B, p.2.)

Because the intestinal parasite, Cryptosporidium, is amebic in size, difficult to remove during conventional treatment and can be found in water sources that comply with all existing state and federal laws, minimizing, if not eradicating, its presence in drinking water necessarily is the CAP goal. The CAP quantifies that water quality goal as follows:

"The Department agrees with and endorses the AWWA surface water treatment plant effluent turbidity goal of 0.1 NTU. The Department recommends that all water suppliers using a surface water source adopt a philosophy of always optimizing their surface water treatment plant operations in a manner designed to achieve the maximum turbidity removal. The Department believes that water systems which strive to achieve the AWWA goal and are optimizing their plant will be minimizing the risk to exposure of pathogens, including Cryptosporidium, in the drinking water delivered to their customers." (Id.at p. 4.)

In 1997, DHS sent a letter to SCWC reiterating the requirements of its CAP. The letter states:

"These goals are not legally enforceable performance standards as those contained in the SWFDTR. A water system is not in violation of any existing water quality standard if it does not achieve these goals. However, if a treatment facility is not achieving these goals the Department will expect the utility to take actions, and incorporate those actions into its operations plan, to improve the performance of its treatment facility." (DHS letter dated July 9, 1997, emphasis in original Ex. 1 at B, p. 2.)

In 1997, following an inspection of the treatment plant, DHS noted in its report the fact that since 1996, SCWC has been a participant in the U.S. Environment Protection Agency Partnership for Safe Water and had implemented most of DHS' CAP, including the settled water and finished water turbidity goals. In a letter dated January 21, 1998, DHS commended SCWC on its efforts to produce the highest quality treated water for delivery to its customers.

During the 1997 inspection DHS also evaluated the treatment plant's ability to meet the CAP goals with respect to its design parameters. DHS concluded that the major operating design constraint of the plant was the sedimentation basin. DHS recommended that the sedimentation basin be limited to a rate of 720 gpm because the basin is only eight feet deep. The 720 gpm capacity of the sedimentation basin determines overall plant capacity because the various treatment processes cannot be operated at different flow rates. Therefore, SCWC now claims that the treatment plant no longer has excess capacity.

A review of the CAP and the testimony of DHS representative Bruce Burton reveal the significant relationship between maximum day demand and plant flow rates if the treatment process is to be optimized. For example, CAP provides:

"Operating unit treatment processes at hydraulic loading rates that will enable meeting optimization goals. Operating at the loading rates needed to meet peak summer demands is not recommended when the system demand is reduced. This is especially important when turbidity and coliform data indicate recent runoff may have increased the pathogen concentrations in the water source."DHS Cryptosporidium Action Plan, Burton, Ex. 1 at B, pp.4-5.)

If SCWC is complying with this optimization principle, then it is not running the sedimentation flow rate at or near 720 gpm and may not need to do so in the near future. The maximum day demand at Clearlake in 1998 was 580 gpm, the average of all recorded maximum day demands from 1992 through 1999 is 677 gpm and the highest maximum day demands ever recorded were 876 gpm in 1993 and 836 gpm in 1995. Since maximum day demand is the highest recorded demand on any day in a given year, this means that, since 1995, the plant never should have been run as high as 720 gpm. It also means that most of the year (outside peak months) Clearlake demand is lower, probably much lower than the maximum day demand. Therefore, to optimize water treatment, the flow rates should be considerably less than the maximum day demand most of the year.

Burton testified on this point:

"It's the department's position that we would like the utility to operate its treatment plant at the minimum rate possible no matter what the pathogen loading is because of the unknowns. And that's what this plan indicates, that they should operate the plant to maximize plant run time, to minimize plant production rate to minimize loading rate on its unit processes." (Tr. June 19, 2000 - Transcript (TR.) Vol. 2, p.120, Burton/DHS)

"Again, the department's position is, regardless of pathogen load, the plant should be operated at the lowest rate possible to minimize any chance that the pathogens could break through." (Id. at p. 122)

In 1997, when DHS recommended that the treatment plant flow rate not exceed 720 gpm, the rate of flow during the year (July 1, 1996 - June 30, 1997) had been in the range of "350 to 550 gpm, give or take 50 gallons a month on either end." The flow rate had never been close to 720 gpm and the finished water turbidity was "definitely well below .1," the turbidity goal outlined in the CAP. (Id.at pp.124-125.)

Burton testified that DHS does not make CAP proposals for the utilities. It is up to the utilities to propose how they intend to satisfy CAP and if treatment optimization is achieved, DHS is satisfied. Burton also testified that DHS does not concern itself with the cost of water quality improvements.⁶ With respect to SCWC's CAP, DHS has been well satisfied as the Sonoma Treatment Plant regularly outperforms the 0.1 NTU turbidity goal.

In response to questions from the Ratepayer Representation Branch (RRB), Burton explained that SCWC's CAP is not the only way of achieving CAP goals. Other utilities use different methods to optimize the treatment processes. It is common practice to increase disinfection by changing chemicals or increasing ozone, use of different coagulants and different flow regimes. Some utilities have effectively increased the capacity of the sedimentation basin by tube settlers while others have employed ultraviolet radiation which research shows is effective in rendering the Cryptosporidium parasite non infectious by eradicating the pathogen's reproductive capability. Burton stated he was unaware of the cost of any of these different methodologies.

"In exercising its authority to administer the safe drinking water laws, DHS deals directly with the subject public water systems. With limited exceptions, DHS enforces the law without regard for how the system finances its compliance with DHS orders. DHS has no ratemaking authority. It cannot require a regulated utility to include the cost of safe drinking water compliance in rates; nor can it require this Commission to do so. Moreover, unlike other California public water systems, a regulated water utility cannot, on its own, institute rate relief for compliance expenses. Commission authorization is a prerequisite." (Interim Opinion, Drinking Water Investigation (1999) __CPUC 2d__ (D.99-06-054 as corrected by Slip Opin. D.99-07-004 at pp. 36-37, as modified by Order Modifying Decision and Denying Rehearing of D 99-06-054 (1999) ----CPUC 2d----, D.99-09-073.)