Discussion

This Commission historically has maintained an active partnership with the state agency best equipped to assess the public health risk inherent in contaminated or polluted water⁹. While protection of the health and safety of Californians with respect to the potability of a public utility's water supply falls within the primary jurisdiction of DHS, this Commission shares the obligation to see that utility operations and services are safe. In our recent investigation into the compliance of water utilities with DHS requirements (Water Quality OII) we have said that federal and state Safe Drinking Water laws and regulations are minimal water quality standards. While RRB is technically correct that the DHS CAP imposes no legally enforceable standard on utilities, this argument misses the mark. The need for and the wisdom of the CAP are clear and this Commission fully supports utility compliance with its treatment optimization goals.

In addition to our obligation to protect the health and safety of those exposed to the water utility enterprise, this Commission alone has the distinct power and obligation to authorize public utility rates that are just and reasonable. Clearly, SCWC has not satisfied our requirement in D.93-06-035 that rate recovery of $1.6 million in plant construction be conditioned on a showing that additional plant capacity is required by an increase in customer growth or demand. Notwithstanding this failure, we have considered whether SCWC's program for satisfying the health goals of the CAP justifies this rate recovery. As explained below, we conclude that it does not. We see no reason to modify what we are convinced is a just and reasonable decision in D.93-06-035

However reasonable it might be for SCWC to abate an unanticipated health risk by using the excess capacity of an existing treatment plant, it does not necessarily follow that the cost of the improvement should be a financial liability for ratepayers. In our Water Quality OII decision, we made this quite clear.

"Just and reasonable ratemaking, as required by Pub. Util. Code §451, is a distinct power and obligation of the Commission, which coexists with the Commission's power and obligation to exercise health and safety authority over water utilities as mandated by Pub. Util. Code §§ 451, 739.8, 761, 768 and 770(b). Rates are not developed in a vacuum. They are tied to identifiable purposes and must incorporate consideration of the varied aspects of the utility enterprise. The ratemaking process is complex and it cannot be limited to one aspect, no matter how important, of utility service.

"The Commission's responsibility to ensure the delivery of safe drinking water at just and reasonable rates does not mean that there is, or should be, a blank check available for the correction or prevention of safe drinking water violations. The requirement that a utility provide certain water quality improvements does not automatically make the cost of those improvements a just and reasonable financial liability for ratepayers.¹⁰

"[R]atemaking authority has been, and continues to be, an effective regulatory tool used by the Commission to promote implementation and enforcement of safe drinking water laws and to prevent violations of those laws. However, Pub. Util. Code §451's requirement that water utility service be "adequate, efficient, just and reasonable" to promote the public's health and safety creates in the Commission a distinct power and obligation, separate and apart from its ratemaking authority. If the cost of correcting or preventing water quality problems cannot justly and reasonably be recovered in a utility's rates, the Commission still must act to insure that water utility service is healthy and safe. In such instances, shareholders have to absorb the expenses and the Commission has the authority to require it." (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 and Denying Rehearing of Decision 99-06-054 (1999) ----CPUC 2d----, D.99-09-073.)

SCWC says that customers benefit from the excellent water quality. Apparently that is true. However, there seems to be an imbalance between the benefit and the alleged price. There is something very disproportionate about a request for additional rate recovery on a $l.6 million mistake, $100,000 more than the $1.5 million plant cost that we found reasonable, to be paid over a period of 30 years by customers who made no mistake and who reside in a financially depressed community with no growth to mitigate the additional cost.

SCWC's CAP for treatment plant optimization includes limiting the rate of flow in the sedimentation basin to 720 gpm or less. The slowed rate flow is the basis for the utility's representation that the plant is fully utilized and serves as SCWC's justification for handing ratepayers a $1.6 million bill. SCWC implemented other CAP changes including changed chemical feed to promote coagulation, different filtering devices and monitoring alarms to signal turbidity problems. The costs of these changes are expense items that already are incorporated in customers' rates (See D.00-12-063, Clearlake District's last general rate case decision).

According to the record, SCWC considered no alternative method to achieve the benefits provided by restricting the plant's rate of flow. The plant was there, and it was not busy. From an operational standpoint, it perhaps was reasonable for SCWC to use an existing treatment plant with excess capacity to achieve optimum water quality. However, once that process is assigned a significant price tag to be recovered in rates, we are obliged to insure that such rate recovery is justified from an economic standpoint. That has been Commission policy since passage of the Public Utilities Act in 1911, which conferred on this Commission broad powers of regulation and control over public utilities, including privately owned water corporations. The policy of economic justification was aptly expressed as early as 1914:

"Held. That though it is the desire of the Commission to encourage utilities to safeguard the purity of water used for domestic purposes, if more than one method may be pursued with equal effectiveness, it is only reasonable to require that the more economical one be followed." (Report of California Railroad Commission July 1, 1913 - June 30, 1914, page 320, Thomas Monahan vs. San Jose Water Company, Decision No. 1534, May 22, 1914.)

In the present case, it is not at all clear that the rate flow limitation used to justify SCWC's rate base request is the only or the most economic means of countering Cryptosporidium. The record suggests that there are other ways to accomplish this. Furthermore, our institutional memory and simple logic support the conclusion that there are alternative ways to implement CAP. SCWC and other water corporations have several districts with surface water sources - all of which are subject to CAP. These districts do not have over-built plants with excess capacity waiting to be called into service. Thus, even though the record does not address this issue, reason tells us that if other districts are complying with CAP, as they should be, they are employing other ways of doing so.

In its application and throughout this proceeding, SCWC euphemistically refers to the CAP compliant treatment plant as fully utilized and contends that the excess plant capacity, which this Commission disallowed for ratemaking purposes, no longer exists. However, that is not the case. The excess capacity is still there. A nineteen-year history of nonexistent customer growth makes it unlikely that Clearlake customers will ever need anything close to the 1500 gpm capacity of this plant. However, if additional demand occurred, this plant could still treat and produce that much water. In that event, it would be appropriate to include the $1.6 million, or some portion thereof, in rate base because then, consistent with our order in D.93-06-035, "Clearlake customers [would] require additional plant capacity." Nothing in the CAP or in this record suggests that if customer demand exceeds the current 720 gpm flow rate restriction, the plant would be discarded, shut down or that water would not be delivered. Instead, under CAP guidelines, various alternative technologies could be employed to achieve the goal of optimizing the plant and thereby continue to minimize the risk of exposure to pathogens including Cryptosporidium in the drinking water delivered to customers. Instead of restricting the flow to 720 gpm, a different optimization method(s) would be used. Similarly, had SCWC actually built the 1050 gpm capacity plant that we authorized and flow rates were insufficient to achieve CAP goals, other optimization methods would be used.

DHS does not require, and we will not order SCWC to continue the CAP that it has chosen. However, we see no reason for SCWC not to do so. Because SCWC has been practicing this CAP since 1997, the expenses associated with achieving CAP goals were forecasted in the Clearlake District general rate case and already are in customers' rates. (See D.00-12-063.) Therefore, by continuing its chosen CAP in Clearlake, SCWC is no worse off than it was in 1993 when the Commission restricted its plant rate base treatment to $1.5 million until customer growth or demand requires additional plant capacity.

Our denial of this application should not be misunderstood. To avoid any confusion, let us make it clear that this Commission strongly encourages and supports CAP and fully expects all public utilities with surface water sources to use their best efforts to achieve CAP goals employing the most economic means to do so.

¹⁰ Footnote 35 to quoted text, "See for example, (one citation omitted) . . . Rehearing Order in Duffy v. Larkfield [D.98-11-070, page (slip opin.)] (1998) ___Cal.P.U.C.2d___ - Utility's ambiguous tariff relieves the individual customer of the expense of the backflow device ordered by DHS. The question of whether ratepayers or shareholders should pay that expense depends on the reasonableness of utility's actions and will be decided in a ratemaking proceeding."( Footnote 35)