VIII. Discussion

In D.03-07-005, ¹² we granted SCWC a CPCN to construct the generating facility, and directed SCWC to file an application prior to including any generation facility costs in rates. We could begin a reasonableness review of generating facility costs at this time. However, capital-related and O&M costs have yet to be finalized, and any ensuing rate increase would be delayed. Such a delay would have a negative effect on SCWC. Delay is likely to result in an under-collection of generation facility costs and SCWC will experience further erosion of net income as demonstrated by the substantial difference between the revenue requirement for the generating facility ($2.26 million) and 2003 BVES net income ($0.5 million).¹³ We also note that conducting a reasonableness review at this time involves the use of Commission staff, and that staff will also be involved in a future general rate proceeding involving similar issues. Dedicating staff at this time, and then later again on the same matters is inefficient. We conclude that delaying a rate increase to a later date is not in the interest of either ratepayers or SCWC, and is not an efficient use of Commission staff resources.

We next turn to SCWC's Application for addressing the three generating facility cost components, capital-related, O&M and fuel costs. As noted by SCWC, we have previously provided a ratemaking mechanism by which the capital-related costs for a major utility addition may be recovered. SCWC estimates that capital-related costs are approximately $13 million, equivalent to a revenue requirement of approximately $2.26 million. The estimated $13 million in capital-related costs is the same estimate included in SCWC's A.02-04-001 requesting the CPCN for the generation facility. ORA states that it has been reviewing the progress of SCWC on the Application and does not disagree with the amounts estimated by SCWC. We note that the capital-related revenue requirement is based on our last adopted rate of return,¹⁴ and depreciation amounts reflect the expected 23-year life of the facility.¹⁵ No party disputes these estimated amounts, and therefore we will adopt the estimates as reasonable for the purposes of this interim rate increase.

We also agree with SCWC and ORA that recording the fuel costs associated with the generating facility in the BVES PPAC is a reasonable approach for fuel cost recovery. As explained by SCWC, electricity generated by the facility will replace an equal amount of electricity that would otherwise be recorded in the BVES PPAC. Therefore, fuel costs should be recorded in the
same account that records energy costs, or purchased power costs, which is the BVES PPAC.

As recommended by both SCWC and ORA we will authorize SCWC to establish the two one-way memorandum accounts to track capital-related costs, and O&M costs. These two accounts provide SCWC time to finalize capital-related and O&M costs for the generating facility, and allow SCWC to begin collecting needed revenue to offset generation facility costs. The two one-way memorandum accounts also protect ratepayers' interests by providing a mechanism for reasonableness review, and restrict the final memorandum account amounts by SCWC's proposed caps on the accounts.

Our authorization for a rate increase of approximately $2.7 million, or about 10% above annual BVES revenues, requires that we also adopt an appropriate cost allocation and rate design for BVES customers. SCWC has provided a study and analysis of the customer classes that contribute to the peak load demands, and thus the need for the capital-related, generation facility costs. The study, included in Exhibit 3 (Workpapers), indicates the contributions of different customer classes to the winter peak load, and forms the basis for allocation of capital-related costs. ORA states that it not only reviewed the cost allocation study, but participated in discussions with BVES during the formulation of the cost allocation process.¹⁶ ORA also agrees with SCWC's four rate design principles stated above. After reviewing SCWC's cost allocation process, the proposed rate design, and the application of the rate design principles, we concur with SCWC's proposed rate design, and will adopt it for purposes of this interim rate increase.