III. Memorandum and Balancing Accounts

In its application, Valencia sought Commission authorization to amortize the accrued balance in seven balancing and memorandum accounts.⁴ In Rulemaking (R.) 01-12-009, the Commission evaluated existing practices and policies for processing offset rate increases and balancing accounts for Class A water utilities. Since issuing the OIR, the Commission has not authorized amortization of balancing accounts due to the expectation that new rules for amortization would be issued in the OIR. In Decision (D.) 02-12-055, the Commission addressed collections prior to November 29, 2001, and provided that utilities seeking recovery of balancing accounts for balances existing prior to November 29, 2001 should file, within 90 days from the effective date of the decision, advice letters requesting recovery pursuant to the existing balancing account procedures.

The settlement agreement allows Valencia to follow the process set out in D.02-12-055 and also finds that purchased water balancing and memorandum accounts are not subject to collection. The settlement agreement does, however, allow Valencia to include in its revenue requirement, subject to refund,

perchlorate litigation costs⁵ that would otherwise be included in the memorandum account. The parties stated that the purpose of this revenue requirement amount is to allow Valencia to collect one-half the forecasted costs of the litigation, subject to refund, due to the substantial amount of the costs and the financial burden on Valencia. Ratepayers benefit as well by not paying interest on the costs as they would if the costs were recorded in a memorandum account and then the Commission authorized recovery.

The settlement agreement provides that all funds so collected are subject to being refunded to customers. Valencia has acknowledged that the litigation costs are subject to a reasonableness review by the Commission, which may result in some or all of the costs being disallowed. ORA has urged the subject-to-refund requirement to ensure that Valencia aggressively pursues those entities responsible for the contamination. In addition to allowing $110,000 in revenue requirement, the parties also agreed that Valencia could seek amortization of the accrued amounts after the completion of R.01-12-009, but before Valencia's next general rate case.

We are concerned that in allowing this amount to be included in revenue requirement, we may foster an expectation in Valencia that it will be able to retain these funds. The settlement agreement, and its detailed Comparison Exhibit, however, clearly establish the fact that the amounts are subject to a subsequent reasonableness review, as well as the outcome of R.01-12-009, and that the Commission may order the amounts refunded to customers. We are also aware of the financing burden that expensive litigation can impose on a public utility.

In light of the safeguards for ratepayers and the need for this arrangement, we will approve the addition to revenue requirement, subject to refund, of $110,000 for perchlorate litigation costs. We will also approve the settlement agreement provision allowing Valencia to seek amortization of the balance prior to its next rate case but after the resolution of R.01-12-009.