Discussion
Standard of Review - Settlement Agreement
In this application, Cal-Am bears the burden of proof to show its requests are just and reasonable and the related ratemaking mechanisms are fair. In order for the Commission to approve any proposed settlement, the Commission must be convinced that the parties have a sound and thorough understanding of the application, the underlying assumptions, and the data included in the record. This level of understanding of the application and development of an adequate record is necessary to meet our requirements for considering any settlement.16 These requirements are set forth in Rule 12.1 of the Commission's Rules of Practice and Procedure, which states, in pertinent part:
The Commission will not approve settlements, whether contested or uncontested, unless the settlement is reasonable in light of the whole record, consistent with law, and in the public interest.
For the reasons stated below, we are unable to find that the provisions of the settlement agreement are consistent with Rule 12.1.
Reasonable in Light of the Record as a Whole
The record consists of Cal-Am's application with supporting testimony.
In its application, Cal-Am seeks Commission authorization for "the device of a user fee" that will be "collected at rates set by the District's Board of Directors" for the Management District to fund any endeavor that the Management District determines will confer "benefit and/or service" to
Cal-Am's customers. Cal-Am justifies this request as "an appropriate means to fund projects, (i.e., the Aquifer Storage and Recovery Program and Mitigation Program) currently performed by the District but properly or ultimately the responsibility of the Company."17
As described above, however, Cal-Am's user fee proposal is not based on the costs of these two programs and includes no ratemaking or programmatic limitations. Consequently, the record in this proceeding is not sufficient for settling parties to meet their burden of justifying the Commission's ratemaking approval of the settlement agreement.
Specifically, the record shows that the Management District's presentation on the Aquifer Storage and Recovery Project includes this Project in both the Mitigation Program for which it seeks an assessment of 7.125%, and as a separate component for another 1.2%. The Management District's Chief Financial Officer stated that the Management District Board has decided to fund this project on a "pay-as-you-go" basis rather than incurring debt. While the Management District's decision has the advantage of avoiding debt costs, such a decision results in current customers paying the full costs of a project that is expected to provide service for many years. This is not consistent with the Commission's ratemaking standards.
Turning to the Carmel River Mitigation Program, Cal-Am's presentation does little to respond to the issues identified by the Commission in D.09-07-021. Cal-Am continues to seek a percentage assessment but offers no cost-justification for the proposed 88% increase in annual collections since 2006. The Management District's own report shows that annual costs were stable at $1.3 to $1.7 million for "many years" but in recent years have more than doubled that, without explanation. The exception to the stable cost levels was in 2000 when the Management District used nearly a million dollars of Mitigation Program revenues to fund half its new office building.
Cal-Am's application raises several issues, most notably several instances where duplication in effort and accounting may occur. In addition to the apparent double-counting of the Aquifer Storage and Recovery Project as both a part of the user fee Mitigation Program costs and also to substantiate a stand-alone additional component of the user fee, "water supply augmentation" is a major cost component of the Management District's Mitigation Program which largely focuses on the Coastal Water Project. Cal-Am, however, is actively involved in the Coastal Water Project, such that the Management District need not act on Cal-Am's behalf. The Management District's Mitigation Program report also indicates that it does not include the "rebate program, salaries for the Conservation Office Staff or project expenditures for `ordinance enforcement'" even though such costs are "booked as part of the Mitigation Program." The Commission, however, has approved and separately funded a joint conservation program with the Management District which would appear to include at least some conservation costs. Finally, Cal-Am asserts that National Oceanic and Atmospheric Administration (NOAA) steelhead mitigation activities18 focus on impacts to steelhead, and that these activities have no "overlap" with the Management District's activities which also focus on the steelhead fishery but the record shows no analytical explanation for how endangered species costs for steelhead are divided between the two agencies or any evidence that Cal-Am is in any way managing these costs for ratepayers. With the total costs for the two programs approaching $5 million a year, Cal-Am must demonstrate necessity and cost-effectiveness of both components before the Commission can approve a joint program of the kind we requested Cal-Am to propose to use in D.09-07-021. Our goals are to ensure cost control by these two agencies.
To find a settlement agreement reasonable in light of the record, the Commission must conclude that the parties used their collective experience to produce appropriate, well-founded recommendations. As set forth above, the record contains insufficient cost justification, several instances of apparent double-counting, and ratemaking treatment at odds with our standards. Accordingly, we are unable to conclude that the settlement agreement is reasonable in light of the record.
Consistent With Law and Prior Commission Decisions
The parties assert that the Mitigation Program component of the User Fee is consistent with applicable law because "the Mitigation Program . . . is required by the California Environmental Quality Act."19 The parties offered no justification for the other components of the proposed user fee.
The Commission is charged with the responsibility of ensuring settlement agreements are consistent with other applicable law and prior Commission decisions. The Public Utilities Code requires that all rates received by a public utility be just and reasonable: "no public utility shall change any rate . . . except upon a showing before the Commission, and a finding by the Commission that the new rate is justified."20
In D.09-07-021, the Commission indicated its willingness to include in the Monterey District revenue requirement all costs of the Carmel River Mitigation Program and Aquifer Storage and Recovery Project that are properly Cal-Am's responsibility. The Commission required, however, that such costs must be shown to be necessary and cost-effectively performed by the Management District. As presented in the application and carried forward in the settlement agreement, Cal-Am's justification for assessing these costs to its ratepayers does not demonstrate that the Management District's user fee meets the Commission's standards.
As set forth above, the Commission explained its concerns regarding the Management District's proposed "percent of revenue" basis for its user fee. Nevertheless, Cal-Am has presented an application which persists with such a proposal and offers no compelling justification. Cal-Am's contention that the Management District's "transparent" budgetary process somehow obviates the Commission's concerns with a non-cost-based user fee is not persuasive.
Therefore, we conclude that the settling parties have failed to demonstrate that the settlement agreement is consistent with D.09-07-021.
For the reasons set forth above, we find that the user fee proposal as described in the application and settlement agreement is not in the public interest. The settling parties' motion for approval of the settlement agreement should, therefore, be denied.
16 In the Matter of the Application of Park Water Company for Authority to Increase Rates Charged for Water Service by $1,479,580 or 5.99% in 2010, $503,371 or 1.91% in 2011, and $643,923 or 2.40% in 2012, D.09-12-001, mimeo at 19 -20.
17 Application at 5.
18 In Resolution W-4836, Cal-Am obtained Commission authorization to recover from customers $3.5 million paid to the NOAA for "Endangered Species Act mitigation activities on the Carmel River."
19 Joint Motion to Approve Settlement Agreement at 6.
20 Pub. Util. Code §§ 451 and 454.
