Conclusion

In D.00-06-075, the Southern California Water decision CalAm cites as precedent for this proceeding, we stated, "...[I]n the future, we will continue to consider proposals for cost averaging on a case-by-case basis, with the burden on proponents of such plans to show substantial benefits in the public interest." That remains our view today. While there may be water district consolidations that offer substantial benefits and are in the public interest, the record here shows that consolidating Felton with Monterey is not one of them. It meets only one of the four guidelines criteria (operational similarity). The intermediate and long-term rates that would result from the consolidation are impossible to quantify with even a modest degree of confidence, and consolidation could widen, rather than narrow, the rate disparity between the districts after the first few years. Consolidation would not lead to net operating efficiencies or service improvements, but would generate additional regulatory costs and burdens for CalAm, ORA, other parties, and the Commission. And consolidation is almost universally opposed by ratepayers in both districts who are its supposed beneficiaries, and by the parties representing their interests in this proceeding (ORA, Santa Cruz, FLOW and MPWMD). Even CalAm has acknowledged that Monterey District's problems are such that it should be separated from Felton District (and other California districts) for ratemaking in the longer term. Consolidation is not in the public interest.

There remains the challenge of how to bring Felton District's rates into conformance with the stand-alone revenue requirement we found justified in D.04-05-023. According to CalAm, Felton customers have not had an increase in their approved billed tariff rates since 1998.⁴⁵ That being the case, the 44.2% approved in 2004 would represent an average increase of 6.3% per year over the six-year period. While that is higher than the general rate of inflation over the same period, it is not shockingly so. Even if CalAm were to receive the full relief it seeks in A.05-02-013, it would amount to an average annual increase of 9.2% per year between 2004 and 2008. If the Commission were to cut CalAm's 105.2% request by one-third, that result would drop to an average 4.2% annual increase over the four-year period. ⁴⁶

These figures demonstrate that the "rate shock" problem has been caused in large part by long intervals between authorized increases, not by wildly excessive rate awards, and argue for an approach along the lines of ORA's proposal: smaller increases phased in over time. ORA suggests immediately increasing quantity charges to the level authorized but suspended in D.04-05-023, and increasing service charges in four equal steps six months apart, the first step to be implemented immediately. Raising the quantity charge first would have the benefit of allowing cost-sensitive customers to limit their increases by reducing water usage. Considering the seven-year hiatus since the last increase in 1998, the rate at which the balancing account shortfall is growing,⁴⁷ and the possibility of an additional increase to come from the 2006 test year general rate case, it would be reasonable to implement the greater portion of the suspended rates sooner rather than later. If we were to raise Felton rates by 30%, that would achieve about two-thirds of the 44.2% suspended increase, leaving the remaining 14.2% to be phased in later as part of the rate design that emerges from the pending test year 2006 general rate case proceeding. A 30% increase would be reasonable and justified considering the circumstances here.⁴⁸ We will consider in the general rate case any proposals for low-income rates, and amortizing the accumulated shortfall in the balancing account.