D0708030 Adopting the Revenue Requirement for California American Water Company (Los Angeles District) Attachments 1-3

COM/MP1/llj/jt2 Mailed 8/24/2007

Decision 07-08-030 August 23, 2007

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

In the Matter of the Application of California-American Water Company (U 210 W) for an Order Authorizing it to Increase its Rates for Water Service in its Los Angeles District to Increase Revenues by $2,020,466 or 10.88% in the Year 2007; $634,659 or 3.08% in the Year 2008; and $666,422 or 3.14% in the Year 2009.

Application 06-01-005
(Filed January 9, 2006)

OPINION ADOPTING THE REVENUE REQUIREMENT FOR
CALIFORNIA-AMERICAN WATER COMPANY (LOS ANGELES DISTRICT)

TABLE OF CONTENTS

Title Page

OPINION ADOPTING THE REVENUE REQUIREMENT
FOR CALIFORNIA-AMERICAN WATER COMPANY
(LOS ANGELES DISTRICT) 2

I. Summary 2

II. Background 5

III. Water Quality for the Los Angeles District 9

IV. Partial Settlement Agreement Between Cal-Am and DRA 11

A. Duarte's Objection to the Settlement 12

B. Terms of the Settlement 14

1. Cost of Capital 14

2. Customer Sales and Revenues 17

3. Operations and Maintenance Expenses 17

4. Administration and General Expenses 19

5. Utility Plant in Service 20

6. Depreciation Expense and Reserves 21

7. Rate Base 22

8. Customer Service and Conservation 22

9. Rate Design 22

10. Special Requests 22

11. Step Rate Increases 23

C. Action on the Proposed Settlement 24

V. Issues Not Included in the Settlement Agreement 24

A. Return on Equity 24

B. Cal-Am's Proposed WRAM and MCBA 32

1. Position of the Parties 32

2. Discussion 34

C. Commission's Preference for a Conservation Loss Adjustment Mechanism for Los Angeles District 35

D. Request for Infrastructure System Replacement Surcharge 37

1. Position of the Parties 37

2. Discussion 40

E. Violations of Rule 3.2(b) 53

VI. Motions for Party Status 59

VII. Comments on the Proposed Alternate Decision 60

VIII. Assignment of Proceeding 61

Findings of Fact 61

Conclusions of Law 64

ORDER 67

Attachment 1 - Summary of Capital Projects

Attachment 2 - Amended Partial Settlement Agreement

Attachment 3 - LA Revenue Requirement Tables

OPINION ADOPTING THE REVENUE REQUIREMENT FOR
CALIFORNIA-AMERICAN WATER COMPANY (LOS ANGELES DISTRICT)

I. Summary

This decision resolves the revenue requirement phase (Phase 1) of the general rate case (GRC) application of California-American Water Company (Cal-Am) for its Los Angeles District test year 2007 and attrition years 2008 and 2009. For 2007, we adopt a rate decrease of -0.46% which is effective from January 1, 2007.¹ The rate design portion of this GRC will be decided in Phase 2 of this proceeding.

In arriving at today's decision, we adopt the partial settlement filed by Cal-Am and the Division of Ratepayer Advocates (DRA).² We find the settlement is reasonable in light of the whole record, consistent with law, and in the public interest; the issue raised by the City of Duarte (Duarte) in its protest to the settlement is properly considered in Phase 2 of this proceeding rather than here.

We adopt here a return on equity (ROE) for Cal-Am's Los Angeles District of 10.0% for the three-year GRC period. We also reject Cal-Am's proposed Water Revenue Adjustment Mechanism (WRAM) and Modified Cost Balancing Account (MCBA). We find that a discussion of a WRAM, MCBA, and other possible tools to encourage conservation should happen in an industry-wide proceeding. We similarly find that any discussion of an ROE reduction is also best suited for an industry-wide proceeding. We do not wish to prejudge this issue in a specific company's GRC.

Cal-Am and DRA are encouraged to modify their pending settlement which currently includes the proposed WRAM with a more narrow conservation loss adjustment mechanism. Such a mechanism should ensure Cal-Am does not undercollect its authorized fixed costs due to conservation rate design and new conservation programs and ensure ratepayers are protected from any over-recovery of authorized costs that are due to the conservation rate design. This more narrow and focused mechanism is the Commission's policy preference for Cal-Am's Los Angeles District pilot conservation program and would result in no modification to ROE. We reserve judgment on whether wider adjustment mechanisms would need an ROE adjustment.

We also adopt on a pilot basis a Distribution System Infrastructure Charge (DSIC). The adoption of a pilot DSIC for routine infrastructure investment is a strong signal to water utilities and the communities they serve that based on our Water Action Plan the Commission is undertaking for Cal-Am's Los Angeles District a significant change in water utility regulation. We are strengthening long term capital asset planning for a water utility, with a specific emphasis on ensuring an adequate ongoing level of new investment for the routine replacement and upgrades that are necessary to maintain adequate water service. Customers will not be charged for new capital projects until after these projects are completed and the Commission approves surcharge collection. The DSIC surcharge on the bill will provide customers with direct information on what portion of the rates they are paying supports new infrastructure projects. Finally, by providing a separately identified revenue stream, the DSIC is a strong signal to the investment community of the Commission's commitment to supporting new infrastructure investment.

In adopting the pilot DSIC, we also adopt the necessary safeguards to ensure the Commission will continue to maintain effective regulatory oversight of capital investments. We have carefully reviewed Cal-Am's capital investment plan and the underlying supporting cost documentation, and set a cap commensurate with this review. We also require Cal-Am to follow advice letter procedures that provide notice to all interested parties, a full protest period, and adoption of surcharge amounts by formal Commission resolution. We have strengthened Cal-Am's capital asset planning requirements and will fully review its planning and the results of this pilot program in the next GRC proceeding.

In reviewing water quality, the record reflects the Baldwin Hills subsystem has exceeded the Lead Action Level since 2001. While Cal-Am appears to be taking appropriate steps to bring its subsystem into compliance with drinking water standards for lead, the Commission needs additional verification that the Baldwin Hills subsystem does not now exceed the Action Level for Lead or, if it does, that Cal-Am is in compliance with all testing requirements and treatment techniques required by California and federal law for community water systems. We direct Cal-Am to address this in a compliance filing. This filing will be reviewed in Phase 2.

Finally, we fine Cal-Am $11,000 for failure to provide notice of its rate increase applications for 20 years to the City of Inglewood and for 10 years to the County of Los Angeles. Notice is required under Rule 3.2(b) of the Commission's Rules of Practice and Procedure. In this proceeding, the City of Inglewood has made evident its interest in participating in our proceedings and its concern about lost opportunities in the past to participate. We find that while Cal-Am's error is a serious violation that continued for a lengthy period, the error was not intentional. We direct Cal-Am to take specific actions in the future to ensure proper notice and, pursuant to Section 2107, we adopt a fine in the lower range of the amount prescribed by statute.

¹ On December 15, 2006, pursuant to Section 455.2 of the Public Utilities Code, we granted interim rate relief effective January 1, 2007 based on the rate of inflation. (Subsequent statutory sections cited are also in the Public Utilities Code unless otherwise noted.) This interim relief is subject to refund, and will be adjusted upward or downward based on the final rates adopted by the Commission in the next phase of this proceeding. (See Decision (D.) 06-12-012.)

² On February 15, 2007, Cal-Am filed a motion requesting the Commission reopen the record to accept an amended settlement agreement that corrects errors in the August 16, 2006 settlement and also includes Cal-Am's most recent financing. On February 27, 2007, at the behest of the assigned Administrative Law Judge (ALJ), Cal-Am filed additional information supporting its motion. DRA responded on March 7, 2007.