Background

Application (A.) 04-08-012 has its roots in the Commission's D.04-05-023 issued in CalAm's last general rate case for Felton District. In that decision, the Commission found reasonable a 34.6% increase for test year 2003 and a further 7.1% for 2004,¹ but deferred imposing the higher rates immediately out of concern for their possible rate shock effect on Felton customers. Instead, CalAm was required to continue charging its then-current Felton rates, to accumulate the shortfall in a balancing account, and to file a new application proposing district consolidation and a method to amortize the accumulated balancing account shortfall.

CalAm's Request

CalAm serves about 1,300 customers in its Felton District, and about 39,000 in Monterey District. In this application, it proposes: (a) the revenue requirement for Felton be combined for ratemaking purposes with that for Monterey; (b) consolidated rates be developed based on the combined revenue requirement of the districts; (c) consolidated rates be implemented immediately in Felton;² (d) development of the combined revenue requirement not include source of supply, water production and water treatment costs; (e) Felton rates not be affected either by Monterey's current inverted rate structure or by any past or future costs associated with efforts to develop one or more water supply projects in Monterey designed to comply with California State Water Resources Control Board orders; and (f) the Felton District not be affected by Monterey's past, present and future costs associated with efforts to strengthen or decommission any of the current dams in Monterey District.³ New consolidated rates determined by this method would take effect when revised rates are implemented in CalAm's two recently filed general rate cases, A.05-02-012 (Monterey) and A.05-02-013 (Felton). In the meantime, Felton's rates would shift with this decision to those of the Monterey standard rate design currently approved but not in actual use,⁴ resulting in a modest increase over today's rates, but still less than approved for Felton in D.04-05-023.

CalAm further proposes to recover the Felton revenue balancing account shortfall accumulated up to the date of this decision from Felton District customers over five years by a rate surcharge. Once this decision is issued, a new, second balancing account would begin accumulating the shortfall resulting from the difference between rates approved in D.04-05-023 and the consolidated rates resulting from this decision, and the balance in that account would later be recovered from all Felton and Monterey District customers as a surcharge to the quantity rate eventually approved in A.05-02-012, the Monterey general rate case.

Four parties protested the application and followed through by participating in the evidentiary hearing and briefing: the Commission's Office of Ratepayer Advocates (ORA); Felton FLOW; County of Santa Cruz; and Monterey Peninsula Water Management District (MPWMD).

ORA's Position

ORA recommends the Commission deny CalAm's proposal. According to ORA, approval would be based on unreliable data, violate the Commission's rate consolidation guidelines,⁵ leave Felton ratepayers at risk for large future rate increases, require Monterey ratepayers to subsidize Felton ratepayers, deviate from cost-based rates, move the Commission towards untested statewide water rates, and allow water utilities to increase costs while decreasing service. ORA urges the Commission to instead adopt ORA's proposal to phase in Felton's increases and incorporate low-income and conservation programs in the rate design.

FLOW's Position

FLOW maintains CalAm's consolidation proposal is not in the short-term or long-term best interests of customers in either Monterey District or Felton District. In the short term, Monterey would be required to subsidize Felton at a time when Monterey ratepayers are facing enormous increases in their own rates as a result of CalAm's costly proposals to address water shortages on the Monterey Peninsula. Felton customers have made considerable progress toward forming a public agency and acquiring CalAm's Felton District facilities, and any consolidation the Commission were to approve in the interim could tend to obscure the cost and effect on rates that CalAm's continued ownership and operation of the Felton District would have. FLOW asks the Commission to hold further consideration of rate shock mitigation proposals in Felton District in abeyance, including FLOW's own alternative proposal to consolidate Felton, Larkfield and Sacramento Districts for ratemaking, until Felton voters have expressed their preferences in the upcoming district formation and bond measure election.

Santa Cruz's Position

Santa Cruz favors public acquisition and urges the Commission to deny CalAm's consolidation proposal. Having undertaken the process of forming a Mello-Roos Community Facilities District to finance acquisition of the Felton water system, Santa Cruz is concerned that consolidating the Felton and Monterey revenue requirements will financially entangle or obfuscate Felton District's costs and mislead and confuse the public. Santa Cruz believes consolidation for ratemaking purposes may be one appropriate method of addressing Felton rate shock, but faults CalAm for not having addressed the primary intent of the Commission's earlier order by examining other, better alternatives, including consolidation with CalAm's Sacramento District.

MPWMD's Position

MPWMD joins ORA, FLOW and Santa Cruz in opposing consolidation. MPWMD points to the unfairness of requiring Monterey, a district that CalAm's own figures show faces massive water supply challenges that will double its stand-alone rates by 2008 and more than triple them by 2010, to subsidize Felton, a district with higher average and median household incomes. MPWMD sees as better any one of the three alternatives the other parties propose: rate increase phase-in, public takeover, or Felton's consolidation with Larkfield and Sacramento Districts. If the Commission does order a consolidation, MPWMD urges it be structured such that all ratepayers of both districts share equally all financial burdens. There should be no exclusions for source of supply, water production and water treatment costs, or for capital expenditures necessary to address Monterey's water problems.

The Proceeding

Administrative Law Judge (ALJ) McVicar held a prehearing conference in San Francisco on September 20, 2004. Assigned Commissioner Susan Kennedy issued her Scoping Memo on September 30, confirming this as a ratesetting proceeding needing an evidentiary hearing and establishing the issues and timetable. The Scoping Memo called for public participation hearings in Monterey and Felton on December 6 and 7, 2004 and evidentiary hearings in San Francisco on January 4, 2005. The public participation hearings are described below in the Customer Preferences section of this decision.

At the January 4 evidentiary hearing, it was determined that there were errors in the application figures. In addition, CalAm's rebuttal testimony had presented new material and issues the opposing parties would need time to assess. CalAm had also recently tendered notices of intent for general rate cases in Felton and Monterey Districts, and the very high increases being requested would have significant effects on the potential rates and subsidies in this proceeding. The ALJ granted the opposing parties' motion for a continuance and allowed the intervenors to submit new responsive testimony and CalAm to submit new rebuttal. After three days of evidentiary hearing February 28 through March 2, 2005, the proceeding was submitted on receipt of closing briefs April 29, 2005.