4. The April 8, 2009 Hearing

Much of the testimony at the April 8, 2009 hearing concerned the ratemaking treatment for both CWS and PG&E that would flow from implementation of the Second Amendment, which is itself silent on ratemaking issues. The parties' March 20 joint motion for approval of the Second Amendment also did not shed much light on these issues, saying little more than that CWS and PG&E sought a determination from the Commission that "amounts paid under the Second Amendment are appropriately passed to [CWS's] Oroville customers through the Oroville Purchased Water Balancing Account, and appropriately reflected in PG&E's customer rates, net of amounts assumed in PG&E's 2007 General Rate Case" through its UGBA.
(Joint Motion, pp. 1-2; footnote omitted.)²

The first of the ALJ's questions addressed at the hearing concerned the repair costs for the Powers Canal. In his e-mail, the ALJ had noted that while the application contained an estimate of repair costs for the Miocene Canal ($1.827 million), the record was silent about the repair costs for the Powers Canal. In response, CWS's witness, Thomas Smegal, presented a repair estimate for the Powers Canal of $1,060,050. (Ex. 1.) He noted that this was a "rough engineering estimate" of repair costs and represented the opinion of CWS's licensed engineer, but it had not been reviewed by anyone else. (Tr. at 9, 18-19.) Smegal also pointed out that $850,000 of the estimate represented the cost of repairing two flumes,³ that these flumes "are a part of the structure of the canal system," and that their eventual repair would be necessary even in the absence of a settlement with PG&E "in order to continue to operate the system." (Id. at 9-10.) Smegal also noted that repair costs for one of the flumes had been in CWS's capital budgets since 2003. (Id. at 19-20.)⁴ However, it was not until recently that CWS decided that continuing to take water from PG&E pursuant to the proposed settlement represented the least costly water supply option for the Oroville District, and thus that the repairs should now be undertaken. (Id. at 21.)⁵

Smegal's testimony also made clear that CWS was proposing to account only for water acquisition and sale costs through the Oroville Purchased Water Balancing Account (now known as the Modified Cost Balancing Account, or MCBA),⁶ and that the costs of repairing the Powers Canal would be handled in the usual manner through capital accounts as additions to ratebase:

"What I would say is that these [Powers Canal] capital costs would follow the normal course of the rate proceedings that we have with the Commission.

"[CWS] has a general rate case filing where all its districts will be made on July 1st of this year, and it will include the Oroville district and include these costs as capital items to be included in rate base along with other capital costs that we are planning to construct facilities. And the Division of Ratepayer Advocates is an active participant in [CWS's] rate proceedings, and certainly they will review these costs both for reasonableness of the cost estimate and the necessity of doing improvement as part of the normal cost-based rate making that we have." (Id. at 19.)

Smegal also pointed out that it is an open question how much revenue CWS and PG&E can expect from sales or transfers of Conservation Water. This is because the current situation on the Powers Canal makes it difficult to determine the amount of water that is available for sale or transfer:

"One of the major conclusions of the first MBK report was that it was extremely difficult to determine the amount of water leaving the system . . . at various points along the [Powers Canal] because two of the measuring devices that [CWS] was using were not . . . necessarily accurate and . . . and it was over a nine-mile stretch. We essentially had only three data points, and two of them - one was suspicious and one didn't register, so it was very difficult to determine where the problem was.

"The second part of [the problem], which I think PG&E recognizes, is that the first stretch of the Powers Canal is not in water. It's dewatered right now due to the penstock outage. And the difficulty there is it's obviously very difficult to determine what water might leave the canal system in what way when there's no water in the canal.

"And so . . . there is a joint effort involved in PG&E reintroducing water to the top of the canal and [CWS] measuring that water at various points to determine where and in what amounts that water is leaving the canal."
(Id. at 23.)

Thus, the 7000 acre feet of water per year referred to in the e-mail from CWS's counsel referred not to the amount of water that is now being wasted, but to the difference between PG&E's measured deliveries at the top of the Powers Canal and what CWS's "Oroville Treatment Plant metered at the end of the Powers Canal." (Id. at 24.) A second engineering study that determines not only how much water is leaving the system, but also at what points, will be necessary before the amount of Conservation Water available for sale or transfer can be determined. (Id. at 29.)⁷

As to the 70-30 split the parties agreed upon for dividing the first $100,000 in revenue from sales or transfers of Conservation Water, it was based partly on capital costs and partly on PG&E's operating costs. PG&E's witness, Joseph O'Flanagan, explained the matter as follows:

"Our original intent in asking for that split, we had asked for a hundred percent up to the first . . . hundred thousand dollars
. . . was to get up to 50 percent of our estimated cost of maintaining the Live Saddle Coal Canyon water conveyances that we had estimated at $250,000.

"So given the revenues we had under the [F]irst [A]mendment [i.e., $152,400] plus the hundred thousand dollars, that would be equal to 50 percent of our cost of basically delivering water to the [P]owers [C]anal . . . And then we negotiated down from that." (Id. at 28-29.)

The final point discussed at the hearing was the CPI-U index. In his March 27, 2009 e-mail message, the ALJ had asked how much this index had increased for each of the last 10 years. PG&E provided this data in Exhibit 3, which shows that annual increases in the CPI-U index between 1999 to 2008 ranged from 1.6% in 2002 to 3.8% in 2008. O'Flanagan noted, however, that these increases were less than those for the hydro O&M index that PG&E had originally proposed. (Id. at 31.)

² The only other reference to ratemaking in the March 20, 2009 joint motion for approval is the following statement on page 8:

"In general, increases or decreases in the cost of water bought by [CWS] under the Second Amendment will be passed through to its Oroville District customers through the Oroville Purchased Water Balancing Account, and revenues received from [CWS] and possibly others for purchased water under the Second Amendment will be reflected in reduced rates to PG&E's customers through the UGBA."

³ Webster's Third International Dictionary (1961) defines a flume as "an inclined channel for conveying water usu[ally] from a distance for various uses (as power production, transportation, or irrigation)." Wikipedia's more recent definition reads as follows:

"A flume is an open artificial water channel, in the form of a gravity chute, that leads water from a diversion dam or weir completely aside a natural flow. Often, the flume is an elevated box structure (typically wood) that follows the natural contours of the land."

⁴ Funds for one of the two flumes at issue, Flume F, had also been included in CWS's 2006 rate case for the Oroville District. CWS's dispute with the Division of Ratepayer Advocates over these funds was part of the settlement approved in D.07-12-055 and is discussed at page 18 of that decision.

⁵ Smegal also pointed out that if CWS had chosen to pursue another source of water for the Oroville District besides PG&E, the estimated cost of abandoning the Powers Canal would have been about $2.3 million, without taking into consideration the cost of dismantling the flumes. (Id. at 10; note to Ex. 2.)

⁶ Although balancing accounts for the Oroville District for purchased water, purchased power, and pump taxes had been phased out in the late 1990s pursuant to a settlement approved in D.98-07-090 (81 CPUC2d 200, 326-328), such balancing accounts were reauthorized in 2004 pursuant to the discussion at pp. 23-24 and Ordering Paragraph 9 of D.04-04-041. (See also Attachment A, ¶ 5.2 of D.04-04-041.)

The MCBA, which is the current version of this balancing account, was established pursuant to CWS Advice Letter (AL) 1863-A, which was filed on August 12, 2008 pursuant to D.08-02-036. (Tr. at 11-14.) A complete copy of AL 1863-A was admitted into the record as Exhibit 2 at the April 8 hearing.

D.08-02-036 approved a settlement between the Division of Ratepayer Advocates (DRA), The Utility Reform Network, and CWS establishing the MCBA in conjunction with the Water Revenue Adjustment Mechanism (WRAM) that has been in place for CWS since 1996. D.08-02-036 states (at pages 25-26) that the purpose of the WRAM and MCBA "are to sever the relationship between sales and revenue and to remove the disincentive to implement conservation rates and conservation programs, to ensure cost savings are passed on to ratepayers, and to reduce overall water consumption." The decision also notes that the MCBA "will replace existing cost balancing accounts for purchased water, purchased power, and pump tax." (Id. at 26.)

In his testimony at the April 8 hearing, Smegal emphasized that any revenues received by CWS from sales or transfers of Conservation Water will be treated as an offset to purchased water costs under the MCBA. (Tr. at 11.)

⁷ When asked about the possible causes of water loss along the Powers Canal, and why a second engineering study was needed to determine them, Smegal explained:

"[T]here are customers on that canal who are using water for irrigation or for stock watering and that sort of thing, and it may be in part going to them. And it may be seeping to the ground. It may be going into rivers and streams along the course. We . . . just didn't know where the water is leaving the system. And it is important to know where it's leaving the system because that will help determine what the benefit is as far as water that could be used in another place.

"[Further,] if the water's leaving the system and going directly back into the Sacramento River, it is essentially of no value from a legal standpoint because the State Water Project which controls the Sacramento River . . . they are getting it already. Why would they let us sell it again [?]"
(Id. at 25.)