7. Common Issues for All Seven Districts
We will first address issues common to all districts. Then, we will address matters specific to the individual districts.
7.1. Water Usage/Consumption
To provide the Commission with estimated Operating Revenues for each of the seven CSAs at present and proposed rates, Golden State submitted estimates of the number of customers and usage/consumption for 2008, 2009, and 2010 for each CSA. DRA performed its own analysis to determine estimated number of customers and usage/consumption. DRA presented its analysis in its May 14, 2007 Reports. Both methodologies are discussed below.
For all customer classes, except for the class of customers designated by Golden State as "Commercial/Residential," DRA and Golden State relied upon the five-year average of the change in the number of customers to estimate water usage/consumption. To determine average usage for the Commercial/Residential customers, Golden State relied upon the so-called "New Committee Method,"6 prescribed in the RCP attached to D.04-06-018. Golden State did not rely on the "New Committee Method" for the Arden Cordova CSA. In Arden Cordova, Golden State's estimated average usage for the Commercial/Residential class was based on last recorded data because Golden State claimed that the five or 10-year data did not accurately reflect future trends in Arden Cordova. (Ex. GSW(ALL)-6.)
DRA's May 14, 2007 Reports agreed with Golden State's estimates for the Bay Point, Los Osos and Ojai CSAs and differed with Golden State's estimates for Arden Cordova, Clearlake, Santa Maria, and Simi Valley CSAs. This data is set forth in Section 3.02 of the Stipulation, attached hereto as Attachment A.
Notably, DRA's and Golden State's estimates were not far apart and, after DRA and Golden State engaged in settlement discussions, the parties agreed to certain estimates. The parties submitted these estimates to the Commission for review at Section 3.02 of the Stipulation.
We have analyzed the data in the record on estimated water usage per customer in each of the CSAs and we accept the figures agreed upon by DRA and Golden State as reasonable.
7.2. Water Loss and Unaccounted for Water
DRA and Golden State both analyzed Water Loss and Unaccounted for Water in calculating average usage. Water Loss and Unaccounted for Water are amounts of water lost through general operations, leakage or other events that decrease the amount of total potable water available for sale. DRA and Golden State relied upon the same methodology, the most recent five-year average recorded data percentage multiplied by the total forecasted sales volume, to determine Water Loss and Unaccounted for Water. With the exception of Clearlake, DRA's May 14, 2007 Reports agreed with Golden State's proposed figures for Water Loss and Unaccounted for Water for the CSAs.
After the settlement discussions, DRA and Golden State compromised on the figures for Clearlake, as presented in their Stipulation.
We have reviewed the Stipulation based on all the evidence provided in this proceeding and we agree that the stipulated amounts for Water Loss and Unaccounted for Water for all seven districts, including Clearlake, are reasonable. (Section 3.03, Stipulation, attached hereto as Attachment A). However, we will discuss the issue of Water Loss in the Clearlake CSA further when we address topics specific to Clearlake.
7.3. Number of Customers
DRA's May 14, 2007 Reports agreed with the estimated number of customers provided by Golden State for years 2008, 2009 and 2010. These estimates were provided by Golden State in Exhibit GSW(ALL)-6. The parties requested that the Commission find these estimates reasonable in Section 3.01 of their Stipulation. We have reviewed these estimates and the testimony of all parties on this matter and we find these estimates reasonable under Rule 12.1.
7.4. Operating Revenues
Based on estimated usage/consumption and customer growth in all seven districts for 2007, Golden State estimated operating revenues for 2008, 2009, and 2010 under its current rates and also estimated sales revenues for 2008, 2009, and 2010 under its proposed rates. DRA presented similar data. We reviewed these amounts to determine the extent to which present rates and proposed rates meet Golden State's forecasted revenue requirements for the seven CSAs. Under present rates, Golden State will not achieve its requested revenue requirements for each of the seven CSAs. DRA's May 14, 2007 Reports presented slightly different estimates based on DRA's different estimates of customers and consumption. DRA and Golden State engaged in settlement discussions on this topic and stipulated to operating revenues for each CSA at proposed rates and at present rates. These operating revenues are attached as Appendix A of the Stipulation.
As indicated by the below analysis, we find these amounts reasonable based on our review of Golden State's requested revenue requirement below.7 We start the revenue requirement analysis by reviewing Golden State's proposed expenses including operation and maintenance (O&M) expenses and administrative and general (A&G) expenses. Then, we will review Golden State's proposed depreciation and amortization expenses, taxes, rate of return and rate base.
7.5. Administrative and General Expenses
A&G expenses8 include Office Supplies and Expenses, Property Insurance, Injuries and Damages, Pensions and Benefits, Business Meals, Rate Case Expenses, Outside Services, Miscellaneous, Allocated A&G, Other Maintenance of General Plant, Rent, A&G Capitalized, and A&G Labor. (Ex. GSW(ALL)-5 & Ex. GSW(ALL)-3.) Golden State provided some detail as to what type of expenses fall into each of these accounts and provided historical and estimated costs for each of these expense accounts in Exhibit GSW(ALL)-5.
DRA's May 14, 2007 Reports offered an independent analysis of the amounts for each CSA provided by Golden State. In many areas, DRA agreed with Golden State's estimates. However, DRA disagreed with Golden State on the appropriate level of expenses for certain accounts. In part, these disagreements stemmed from DRA and Golden State relying on a number of different methodologies for forecasting expenses. These methodologies are noted in Section 5.00 of the Stipulation.
DRA and Golden State engaged in settlement discussion and, in large part, resolved their disputes. The reconciliation exhibits to the Stipulation indicate the initial position of DRA and Golden State on each A&G account for each CSA and, then, the reconciliation exhibits also indicate the amount each party compromised. Specifically, Sections 5.00 (Administrative and General Expenses) and, in part, 4.00 (Labor) of the Stipulation address each A&G account. As indicated by the Stipulation, some outstanding areas of disagreement continue to exist. The remaining disagreements are driven by the outstanding disagreements on capital budget items which ultimately impact A&G expenses. These outstanding capital budget disagreements will be discussed in greater detail below.
We note, however, that we have reviewed the accounts subject to the Stipulation in Section 5.00 and the pertinent parts of Section 4.00 and find these A&G amounts reasonable under Rule 12.1. We do, however, remind Golden State to only seek recovery of business meals and membership dues when those expenses directly concern the provision of water services. (Ex. GSW(ALL)-5.)
7.6. Operation and Maintenance Expenses
The accounts that compromised O&M expenses include Operating Expenses, which includes purchased water, purchased power, pump tax, chemicals, common customer account, allocated expense, uncollectibles, operation labor, and other operation expenses including water conservation expenses and Maintenance Expenses, which includes maintenance labor and other maintenance expense. (Ex. GSW(ALL)-5, GSW(ALL)-3, and GSW(ALL)-6.)
One particular account requires additional explanation, the common customer account. This account includes several accounts which are allocated from the Golden State's general office, which is located in San Dimas, California and provides support services to all three of Golden State's California Regions.9
Even though general office expenses associated with San Dimas are included in the revenue requirement and rate calculation approved in this consolidated proceeding, the Commission does not review general office expenses in this consolidated proceeding. Instead, under the RCP for Class A water utilities set forth in D.04-06-018, general office expenses are reviewed and allocated to the various CSAs and Regions by the Commission in a separate proceeding. This review and allocation most recently occurred in A.06-02-023, recently approved by the Commission on October 18, 2007 in D.07-11-037.
In D.07-11-037, the Commission determined that the San Dimas general office costs should be allocated as follows: Golden State 92.5%, Chaparral City Water Company 2.8%, American States Utility Services 5.6%. In D.07-11-037, 19.60% was allocated to Region I.
Regarding the remaining O&M accounts, DRA's May 14, 2007 Reports offered its independent analysis of each O&M account for the seven CSAs provided by Golden State. In many areas, DRA agreed with Golden State's estimates. DRA did disagree with Golden State on the appropriate level of O&M expenses for certain accounts. In part, these disagreements stemmed from DRA and Golden State relying on a number of different methodologies for forecasting expenses. These methodologies are noted in Section 6.00 (Operations and Maintenance), Section 8.00 (Supply) and, in part, Section 4.00 (Labor) of the Stipulation.
DRA and Golden State engaged in settlement discussions and, in large part, resolved their disputes. The reconciliation exhibits included as part of the Stipulation, attached hereto as Attachment A, indicate the initial position of DRA and Golden State on each O&M account for each CSA. The reconciliation exhibits also indicate the amount each party compromised. As indicated by the Stipulation, some outstanding areas of disagreement continue to exist. The remaining disagreements are driven by the outstanding disagreements on capital budget items which ultimately impact O&M expenses. These capital budget disagreements will be discussed in greater detail below.
We note, however, that we have reviewed the accounts referred to in Section 6.00, Section 8.00 and the pertinent part of Section 4.00 of the Stipulation and find these amounts for O&M expenses reasonable under Rule 12.1.
7.7. Labor Expenses
Golden State provided forecasted labor expenses, consisting of O&M Labor, Maintenance Labor and A&G Labor, in the Results of Operation for each CSA at Tables 4-B, lines 13, 16, 34, 29, 30, and 34. (Ex. GSW(ALL)-3.) Some labor expenses are allocated to affiliates when a percentage of any position performs work for an affiliate. (Ex. GSW(ALL)-3.) This allocation percentage for labor positions to affiliates is set forth in Exhibit GSW(ALL)-3.
Golden State and DRA resolved the majority of their disagreements regarding Golden State's request for new positions and labor expenses. Section 4.00 of the Stipulation and the reconciliation exhibits indicate the original position of Golden State and DRA. Then, the exhibits indicate the labor expenses agreed to by the parties for each CSA, with the exception the four remaining disputed positions. The disputed positions include the Northern District Water Conservation Coordinator, Coastal District Engineering Technician III, Los Osos Water Supply Operator II and Simi Valley Water Supply Operator II. We will address the need for these additional positions below. Regarding Section 4.00 of the Stipulation, we have reviewed the accounts subject to stipulation and find these amounts for labor expenses reasonable under Rule 12.1.
DRA claims that Golden State projected its labor expenses by starting with actual and vacant position in certain CSAs. (DRA Opening Brief, pp. 44 & 78.) In comments on the proposed decision filed on January 7, 2008, Golden State indicated that the parties adjusted the labor expenses agreed upon in Section 4.00 of the Stipulation to refect the resolution of this issue. Acordingly, we find no further adjustments are needed on this topic. However, in all future rate cases we direct Golden State to present its projections consistent with our finding in D.05-07-044. In that decision, we found that San Gabriel's proposed estimating method for labor expenses included expenses for vacant positions. We decided there, absent a showing of extraordinary circumstances, that to the extent there were vacancies in the recorded year, we should assume there would also be comparable vacancy savings in the test and escalation years.10
Generally, Golden State submits that the increase need for staffing has been felt throughout the company and is driven by the increasing demands of cost-effective operations, maintenance, water conservation, water quality and infrastructure replacement. (Ex. GSW(ALL)-7.) More specifically, Golden State states that additional staff is needed to ensure compliance with more stringent water quality regulation, additional data gathering requirements, and increased filing requirements with Department of Heath Services (DHS). We have noted that water quality is an issue of the highest importance in our Water Action Plan 2005. Golden State also points to increased oversight by financial regulators required by Sarbanes-Oxley and its efforts to better safeguard the water supply. Regarding the positions in dispute, DRA does not agree that such positions are needed.
Regarding this position, DRA claims that, until we adopt a comprehensive program in Investigation (I.) 07-01-022, Golden State is acting prematurely by seeking to hire a water conservation coordinator. In response, Golden State points out that water conservation in California is nothing new and the time is right to start putting more resources in this important area. We agree. As we stated in the Water Action Plan 2005, "Water conservation is critical in California to extend limited resources as far as possible to allow for future growth. Indeed, cost efficient water conservation is the least expensive source of water."11 Accordingly, we approve of this position with the expectation that in the near future we will see improvements in water conservation from Golden State.
Regarding the Coastal District Engineering Technician III position, DRA claimed that Golden State failed to carry its burden of proving the need for the addition of the Coastal District Engineering Technician III and that ratepayers would be better off not paying for this position in their rates. (DRA Opening Brief, pp. 81-82.) According to DRA, the current District Engineer is able to handle the existing workload by continuing to rely on supervisors from each of the CSAs to assist with the workload. (Ex. DRA(ALL)-1.) In response, Golden State pointed out that DRA unjustly minimized Golden State's need for this additional position by failing to address the workload associated with ten projects and other maintenance responsibilities. (Ex. GSW(ALL)-19.) Moreover, Golden State states that the work exists now and taking CSA employees off their assignments to do the work of an engineering technician is not a proper solution. We agree. Relying on untrained employees from the seven CSAs to perform the work of an engineering technician is not best way to use the company's resources. The work clearly exists for this new position and, therefore, we approve it.
7.7.5. Los Osos Water Supply Operator II & Simi Valley Water Supply Operator II
DRA opposed the addition of a Water Supply Operator II in Los Osos and in Simi Valley. DRA claimed that Golden State's request for these positions was made outside the present GRC cycle and, therefore, should be denied. (DRA Opening Brief, p. 47.) DRA also claimed that approval of these positions will result in double recovery of the labor expenses. (DRA Opening Brief, p. 48.)
In response, Golden State pointed out that DRA seems to misunderstand Golden State's request for these two positions and that Golden State is not asking for retroactive ratemaking or recovery of any expenses that it may have incurred in connection with these positions in 2007. Instead, Golden State explained, it is seeking to include these two positions for rate recovery in 2008.
We agree that Golden State is not seeking double rate recovery. Golden State filled these positions in 2007 but does not seek rate recovery here for the expenses it incurred in 2007. Furthermore, Golden State has justified the addition of these two positions. (Ex. GSW(ALL)-7 & GSW(ALL)-19.) With the addition of these two positions, Golden State will be able to always have a licensed, qualified water supply operator available. The water supply operator performs all the frontline activities associated with operations and maintenance of the sources of supply for the water system, including disinfection, operation of pumping facilities, recording of production figures and water quality assurance. All these functions, which will help Golden State maintain the highest standards of water quality, are encouraged by the Water Action 2005. Accordingly, we approve the addition of these two positions in the Simi Valley and Los Osos CSAs.
At Section 4.02 of the Stipulation, the parties agree to a merit increase of 1.28% based on performance. As stated by Golden State,
[I]t is important for GSWC to retain its proficient and productive employees. When an employee's performance is above and beyond the expectations of their position, it is the Company's practice to reward them with a salary increase above the general rate of inflation. With that incentive, the best employees are less likely to search for employment outside of the Company, and the Company and ratepayers, in turn, benefit from the retention of qualified, and high performing employees. (Ex. GSW(ALL)-13.)
We agree. Accordingly, we find Section 4.02 of the Stipulation reasonable under Rule 12.1 and adopt it today.
7.8. General Office Allocation A.06-02-023
Section 8.04 of the Stipulation agrees on the allocated costs related to General Office in San Dimas that the Commission adopted in D.07-11-037. As noted above, this amount is 19.60% of the amount allocated to Golden State. We find Section 8.04 of the Stipulation reasonable under Rule 12.1 and adopt it today.
7.9. Master Plans
A Master Plan is a document based on a detailed analysis of a water system that provides a 10-year forecast to address water supply reliability, distribution, storage, and water quality as they relate to existing and anticipated demands within the system. (Ex. GSW(ALL)-8.) Golden Gate proposes that the expense associated with Master Plans be included as part of the capital budget. (Id.)
DRA objected to Golden State's proposal to rely on the expertise of an outside consulting firm, CH2MHILL, to prepare Master Plans for each CSA. (Ex. DRA(CL)-1.) Moreover, DRA claimed that a conflict of interest exists in those instances where CH2MHILL prepares Master Plans and then is hired to construct a project identified as needed in a Master Plan. (DRA Opening Brief, pp. 83-87.) DRA also suggested that Golden State's own staff is more familiar with the company than CH2MHILL and, accordingly, could prepare Master Plans more efficiently and economically. (Ex. DRA (CL)-1.)
In response, Golden State pointed out that, unlike CH2MHILL, its existing staff is not properly trained to prepare Master Plans and does not have spare time to devote to developing Master Plans. (Ex. GSW(ALL)-22.) Golden State denied the existence of any conflict of interest. (Id.) Golden State also explained that extensive benefits exist that justify the use of a specialized consulting firm to prepare Master Plans. (Id.) According to Golden State, it takes a team of engineers to prepare and complete Master Plans for large water systems like those operated by Golden State. The skills needed to create Master Plans include knowledge regarding population projection, water use projection, hydraulic modeling, geographical information systems application, assessment of water supply and conveyance facilities, construction cost estimating, cost-benefit analysis, water system operation optimization, regulations compliance, application of design standards, asset management, and water rate and fee impacts. (Id.)
We agree that Golden State should engage CH2MHILL to prepare Master Plans. In D. 07-05-062, our decision adopting a revised RCP, we expressed our preference for Master Plans by imposing the requirement that future GRC applications contain a long-term 6-10 year Water Supply and Facilities Master Plan as part of the Minimum Data Requirements.12 While Golden State could divert its existing staff to the development of Master Plans, its existing staff would be unable to perform current duties and simultaneously take on a project of such magnitude. In addition, Golden State's staff does not have the highly specialized knowledge required to develop Master Plans. Accordingly, Golden State's request to rely on CH2MHILL is approved.
However, we will require competitive bidding on all jobs proposed by a Master Plan prepared by CH2MHILL on which CH2MHILL seeks to perform any type of work.
Moreover, because the useful life of these Master Plans will extend beyond the current rate cycle and to reduce the rate impact of the costs associated with these Master Plans, we accept Golden State's proposal to amortize the costs of these Master Plans in accordance with the composite rate for each district, which on average means 10.15%.
For all the reasons noted above, we approve of the costs associated with the Master Plan for Arden Cordova referred to in footnote 1 of the Stipulation.
7.10. Property, Payroll and Local Taxes
Golden State set forth its proposed property taxes, 13 payroll taxes, and local taxes for year 2008 and, in response, DRA submitted its own estimates. After engaging in settlement discussions, DRA and Golden State found many areas of agreement. In addition, DRA and Golden State agreed to specific property tax rates for each individual CSA. These amounts are noted in Section 7.01 of the Stipulation. DRA and Golden State also agreed to a payroll tax of 8.06% to be applied to all labor expenses at Section 7.02 of the Stipulation. For local taxes, DRA and Golden State agreed to rates for 2008 for each CSA, as noted in Section 7.03 of the Stipulation. For additional details, DRA's and Golden State's initial positions and the areas where the parties found agreement are noted in Appendix A of the Stipulation. We have reviewed the areas subject to the Stipulation in Section 7.00 and the Appendix of the Stipulation and find these amounts reasonable under Rule 12.1.
7.11. Income Taxes
Golden State provided forecasts of state and federal income tax expenses. For each CSA, Golden State provided forecasts at Table 4-K of each separate Report of Operations, which includes Exhibits GSW(AC)-1, GSW(BP)-1, GSW(CL)-1, GSW(LO)-1, GSW(OJ)-1, GSW(SM)-1,GSW(SV)-1, and GSW(ALL)-4. Golden State also provided forecasts for the deferred federal income tax adjustments to the rate base. A forecast for each CSA can be found at Table 4-L of the above-noted exhibits. In response, DRA performed an analysis of Golden State's estimates and, for each CSA, DRA disagreed with Golden State's estimates. DRA's analysis is found in its May 14, 2007 Reports for each of the seven CSAs.
DRA's and Golden State's briefs do not address income tax. Instead, the parties rely on the information submitted as Appendix A to the Stipulation, i.e., seven reconciliation exhibits on the issue of income tax, one for each of the seven CSAs.
Golden State and DRA identified the areas of their agreement and disagreement in the Income Tax reconciliation exhibits for each district. Notably, the remaining disagreements are driven by the outstanding disagreements on capital budget items, which ultimately impact the tax calculation. This decision adopts all items of agreement in the Income Tax reconciliation exhibits, computes the income tax allowance based on those agreed items, and then relies on our resolution of the disputed capital budget issues as discussed elsewhere in this decision.
7.12. Plant
In this proceeding, we review the utility's rate base, which generally consists of the net investment in facilities, equipment, and other property that a utility has constructed or purchased to provide utility service to its customers. We will first review utility plant. As indicated by Section 2.01 of the Stipulation, Golden State and DRA agreed on most components of rate base. We reviewed the components of rate base subject to stipulation in Section 2.01 of the Stipulation and find these amounts for the components of rate base/plant reasonable under Rule 12.1.
In Section 2.02 of the Stipulation, DRA and Golden State agree that three additional projects should be approved, provided certain conditions are first met, but that only two of these projects should be included in rate base for the agreed upon year. DRA and Golden State agree that the third project should be expensed.
These three projects include the (1) Arden Cordova Coloma Reservoir (replace roof support system and recoat interior), (2) the purchase of Hill Street property in the Bay Point CSA (to accommodate additional water treatment), and (3) participation in the Brineline Study (a regional study to determine the efficacy of extending Brineline route14 to Simi Valley). We have reviewed this proposal and find Section 2.02 of the Stipulation reasonable under Rule. 12.1.
We address the remaining differences regarding plant below when we address topics specific to each CSA.
7.13. Depreciation and Amortization
Golden State presents its requests for deprecation accrual rates in Table 4-P, a separate Table 4-P is provided for each CSA's Report of Operations. (Ex. GSW(AC)-1, GSW(BP)-1, GSW(CL)-1, GSW(LO)-1, GSW(OJ)-1, GSW(SM)-1, and GSW(SV)-1.) Golden State more fully addresses this topic in its prepared testimony. (Ex. GSW(ALL)-1.)
DRA's analysis resulted in different figures for depreciation. This difference, in large part, resulted from the differences in Golden State and DRA's estimates of plant in service during the test years. DRA's analysis is found in its May 14, 2007 Reports for each of the seven CSAs. The parties did rely on the same methodology to forecast plant depreciation.
Accordingly, DRA and Golden State were able to stipulate to the methodology to determine deprecation and composite deprecation rates for each CSA. These rates are set forth at Section 2.04 of the Stipulation.
We have reviewed the depreciation rates subject to stipulation in Section 2.04 of the Stipulation and find these amounts reasonable under Rule 12.1.
7.14. Construction Work in Progress
Golden State presented its recorded and forecasted Construction Work in Progress (CWIP). (Ex. GSW(ALL)-8.) After analyzing Golden State's proposal, DRA concluded that it would not recommend different amounts. DRA's analysis is found in its May 14, 2007 Reports for each of the seven CSAs. Furthermore, at Section 2.03 of the Stipulation, DRA and Golden State agreed to the forecasted CWIP for 2007 for all the CSAs, except for Arden Cordova. Arden Cordova was not resolved because Golden State included the 2007 Master Plan for Arden Cordova in CWIP and parties did not stipulate to the amounts associated with work performed in 2007 on the Master Plans. The stipulated amounts for CWIP for each CSA, except Arden Cordova, are set forth at Section 2.03.
We have reviewed the stipulated forecasted CWIP at Section 2.03 of the Stipulation and find these amounts reasonable under Rule 12.1. We addressed this issue with respect to Arden Cordora above when we discussed the issue of Master Plans.
While this issue of CWIP was not heavily contested during this proceeding, DRA did take issue with Golden State's general treatment of CWIP. DRA urged the Commission to determine whether Golden State has been using its CWIP account in the appropriate manner.
According to DRA, Golden State does not complete its CWIP in a timely fashion and, accordingly, these amounts are prematurely treated as "used and useful" and the costs are passed through to ratepayers. DRA's analysis is found in its May 14, 2007 Reports for each of the seven CSAs. DRA suggests that the Commission solve this problem by treating projects which Golden State cannot complete within one year not as CWIP but, instead, allow these amounts to earn Allowance for Funds Used during Construction (AFUDC). In this manner, DRA states Golden State will only be allowed to earn interest on the funds while the project is pending completion without earning a rate of return.
Golden State responded to DRA's findings and stated that DRA's claims lacked merit. (Ex. GSW(ALL)-22.) Nevertheless, at Section 2.03 of the Stipulation, Golden State agreed to an audit of Golden State's CWIP account to be performed by a third-party firm.
We have reviewed this proposal in Section 2.04 of the Stipulation and find it reasonable under Rule 12.1.
7.15. Capital Budget Overhead
Golden State submitted its Overhead Rate Study as part of its workpapers. (Ex. GSW(ALL)-1.) Golden State's Study, which is based on a methodology agreed upon by the parties in another proceeding, A.06-02-023 (Region II & General Office GRC), recommended the appropriate rate to allocate Golden State's indirect capitalized costs to its capital projects. The total allocated costs are included as rate base in the ratemaking process. (Golden State Opening Brief, p. 8; Ex. GSW(ALL)-18.) Golden State's proposed overhead allocation rate for 2007 is 20.75%. For 2008 and 2009, Golden State proposes to rely on overhead allocation rates of 26.81% and 33.14%. (Ex. GSW(ALL)-1; GSW(ALL)-18.)
DRA proposed different overhead allocation rates, 6.61% for 2007, 17.74% for 2008, and 20.82% for 2010. (Ex. DRA(LO)-1.) DRA also proposed that the Commission adopt a specific amount of the capitalized expenses for overhead rather than a percentage approach. (DRA Opening Brief, pp. 73-79.)
In response to DRA's arguments, Golden State argued that DRA's recommendations contain mathematical errors that, if corrected, bring DRA's proposal more inline with Golden State's request. (Golden State Opening Brief, pp. 8-10.)
Regarding the overhead allocation rate, we find Golden State's proposal is not adequately supported by the record. (DRA Opening Brief, pp. 75-77.) We also find that DRA's analysis fails to take into account several important factors. (Golden State Opening Brief, p. 9.) Likewise, Golden State's argument that the rates in Region II (A.06-02-023) should be adopted here is not persuasive because the Commission has adopted them in D.07-11-037.
However, this decision is guided by the Commission's recent decision on overhead allocation rate for Region II, in D.07-11-037. In D.07-11-037, the Commission adopted an overhead rate of 26.12% for 2007 and 26.37% for 2008. D.07-11-037 also adopted a rate for 2006 but 2006 is not under consideration here. Similarly, D.07-11-037 did not adopt a 2009 rate, which is needed for Region I because 2009 was not under consideration in the Region II GRC. Accordingly, for 2009, we adopt a rate of 26.37%, the same rate adopted by D.07-11-037 for year 2008. We make this decision because the record in this proceeding fails to establish the reasonableness of either DRA's or Golden State's proposals. In this instance, we find that the more reliable and current information on this issue is set forth in D.07-11-037. Accordingly, we rely upon it here.
7.16. Overhead Pool Account
Golden State relies upon a methodology of zeroing out an account referred to as the overhead pool account at the end of the year by charging any remaining balance (positive or negative) included as part of the overhead rate to various capital projects on a company-wide basis. (Golden State Opening Brief, p. 9; Ex. GSW(ALL)-18.)
Golden State claims that DRA's methodology for determining the overhead pool account is flawed because it would result in Golden State writing off these unallocated expenses each year. (Golden State Opening Brief, p. 9.)
In response, DRA explains Golden State capitalizes its O&M and A&G expenses either directly to a specific capital project or, if the expenses cannot be assigned to any particular capital project, to the overhead pool account. (Ex. DRA(CL)-1.) According to DRA, this overhead pool account consists of capitalized expenses from Region I, Region II, Region III, and Bear Valley Electric Division, and Golden State's General Office, collectively forecasted to be between approximately $13 million in each year, 2007, 2008, and 2009. (DRA Opening Brief, p. 74.) DRA points out that other larger Class A water utilities book much less to indirect costs. Lastly, DRA cites to the Uniform System of Accounts to support its argument that Golden State's indirect costs should not be lumped together in one company-wide account that is then allocated to all operating functions of the company. (Ex. DRA(LO)-1; DRA Opening Brief, pp. 74-78.)
We agree that the methodology proposed by Golden State is fair and provides a straightforward means of addressing the over-allocation issue. Accordingly, we will permit Golden State to continue to zero out the overhead pool account by charging the balance to various capital projects.
Nevertheless, we share some of DRA's concerns. Specifically, we are concerned with ongoing over-allocation to the overhead pool account. In D.06-01-025, we directed Golden State to address this issue. We reiterate our directive and advise Golden State that it must improve the allocation process so that there is less of an annual discrepancy. By July 1, 2008, as part of Golden State's GRC for Region II, Region III and General Office, Golden State must present a better more robust allocation process or risk a Commission audit.
7.17. Capital Budget Contingency Rate
The contingency rate is expressed as a percentage of the capital budget and it is used for funding unexpected capital expenditures or to fund unforeseen cost overruns of budgeted projects. (Ex. GSW(ALL)-8.) Golden State has requested a contingency rate of 10% of its capital budget. (Id.) DRA disagrees with Golden State's request, claims that a contingency rate is indicative of poor management, and recommends a contingency rate of 5%. (Ex. DRA(AC)-1, DRA(BP)-1, DRA(CL)-1, DRA(LO)-1, DRA(OJ)-1, DRA (SM)-1, and DRA(SV)-1.)
We find DRA's analysis convincing, especially DRA's argument that a critical management function includes accurately budgeting and pursuing cost containment. Under Golden State's proposal, budget overruns are indirectly sanctioned. We have supported a 5% contingency rate for Golden State in decisions resolving prior Golden State GRCs. For instance, in D.06-01-025, we adopted a contingency rate of 5% for Region III. Accordingly, we adopt a 5% contingency rate in this proceeding.
7.18. Rate of Return
We next adopt a capital structure for Golden State to establish a fair rate of return. A rate of return can be defined as a judgmentally determined percentage that, when multiplied by an established rate base amount, provides a return that is intended to allow a utility to (1) meet its obligation to present capital investors and (2) compete on reasonable terms in the financial markets for future capital requirements. Before we discuss the components of Golden State's rate of return, we will briefly review the legal standard that governs our determination of a fair rate of return.
We have many times over the years cited the well-established legal standard for determining a fair rate of return. In Bluefield Water Works,15 the Supreme Court stated that a public utility is "entitled" to earn a return on the value of its property employed for the convenience of the public and set forth parameters to assess a reasonable return. That return should be "reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economic management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties."
The Supreme Court also noted in Bluefield Water Works that a utility has no constitutional right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures. In 1944, the Court again considered the rate of return issue in the Hope Natural Gas, stating, "[T]he return to the equity owner should be commensurate with returns on investments in other enterprises sharing corresponding risks. That return, moreover, should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital."16
The Court went on to affirm the important principle that, in establishing a just and reasonable rate of return, consideration must be given to the interests of both consumers and investors. In sum, while we have an obligation to set a fair rate of return, we must balance this obligation with our duty to protect customers from unjust prices.
7.19. Cost of Capital & Capital Structure
To establish a fair rate of return, we must adopt a capital structure and cost of capital for each of Golden State's seven CSAs within Region I. Based on the adopted cost of capital and capital structure, we determine and adopt the appropriate rate of return on Golden State's regulated business, also referred to as its rate base. Golden State's capital structure includes two components, debt and equity. In adopting values for the various components of this formula, we take into consideration many factors in an effort to strike a balance between the interests of the ratepayers and the interests of the investor community that provide financial support to Golden State. As set forth in the legal standard discussed above, a rate of return must be high enough to cover a utility's cost of capital so that the utility can maintain its credit rating and attract additional investors but not so high as to be unfair to ratepayers. Furthermore, while we adopt a specific rate of return in this decision, Golden State is not guaranteed this rate of return. Golden State must earn this rate of return to the best of its abilities within the changing conditions of the financial markets including interest rate fluctuations and internal business practices, such as cost-control efforts.
For each CSA for 2008, Golden State proposed an 11.25% return on equity,17 a 7.49% cost of debt18 and a capital structure of 51.5% equity and 48.5% debt. Golden State estimated these amounts would produce a rate of return on rate base of 9.4% for 2008, 9.41% for 2009, and 9.40% for 2010. (Ex. GSW(ALL)-9.)
DRA proposed 10.09% return on equity,19 a 7.49% cost of debt20 and the same capital structure as proposed by Golden State of 51.5% equity and 48.5% debt which it estimated would produce a rate of return on rate base of 8.92% for 2008, 8.91% for 2009, and 8.90% for 2010. (Ex. DRA(ALL)-2.) No other parties commented on this issue.
At Section 10.00 of the Stipulation, DRA and Golden State recommend for years 2008, 2009, and 2010 a 10.2% return on equity, a 7.46% cost of debt and a capital structure of 51.5% equity and 48.5% debt which they estimated would produce a rate of return on rate base of 8.87%.
We have reviewed the stipulated cost of capital, capital structure and rate of return at Section 10.00 of the Stipulation and find the amounts to be consistent with overall trends in the industry and appropriate for Golden State's specific situation. Accordingly, we find these amounts reasonable under Rule 12.1.
As set forth below, we adopt the following capital structure, cost of debt and equity, and rate of return on rate base:
Cost of Capital and Rate of Return
Years 2008, 2009 & 2010 | |||
Capital Structure |
Cost |
Weighted | |
Debt |
48.5% |
7.46% |
3.62% |
Common Equity |
51.5% |
10.2% |
5.25% |
Total |
100.00 % |
Rate of Return | |
7.20. Low-Income Rates for Region I
At the request of the ALJ, Golden State submitted supplementary testimony proposing a low income ratepayer assistance program for Region I customers. (Ex. GSW(ALL)-10.) Golden State already has low income assistance programs in Region II and Region III service areas. These programs are referred to as California Alternative Rates for Water (CARW). DRA and Golden State offered a proposal for CARW in their Stipulation. At Section 11.00, the parties agree that a CARW program should be implemented for Region I.
The proposed monthly CARW credits for qualifying customers are based on a fixed 15% discount on a bill for 15 hundred cubic feet (Ccf) for each CSA. The discounts range from $3.45 to $18.75 and are set forth in Section 11.01 of the Stipulation. Certain other customers will be entitled to a flat rate discount. Golden State will establish a Region I CARW Balancing Account to track the costs and discounts for all seven ratemaking districts in Region I and will recover these costs and discounts though a volumetric surcharge of approximately $0.04 per Ccf. Any overcollection or undercollection will be either refunded or recovered in Golden State's next Region I rate case. In the Stipulation, DRA and Golden State estimate that this program will cost approximately $720,000 in 2008.
We find the proposal for a CARW for Region I reasonable under Rule 12.1 and we direct Golden State to implement this program as soon as possible and within 90 days of the issuance of this decision.
7.21. Rate Design
As established in D.86-05-064, Golden State's rate design consists of allocating approximately 50% of fixed costs to the service charge and the remaining costs are recovered through a single block commodity charge. With the exception of the addition of low income rates, we make no modifications to this rate design. We do note, however, that we are addressing the topic of conservation rate design for water utilities in a separate proceeding, I.07-01-022. Golden State should modify its Region I rate design consistent with the final order in that proceeding.
7.22. Escalation Year 2009 and Escalation Year 2010
The RCP in D.07-05-062 provides for one test year and two escalation years for establishing revenue and expense components in GRCs, and two test years plus an extrapolated third year for rate base components. Golden State and DRA agreed at Section 9.01 of the Stipulation to use the most currently available inflation factors provided by DRA's Energy Cost of Service Branch. This methodology was adopted in D.07-05-062 and we find this recommendation reasonable under Rule 12.1.
7.23. Tariff Map Modifications
Golden State requests minor modifications to its existing tariff maps. (Ex. GSW(ALL)-8.) These requests are reasonable and we authorize these changes.
7.24. Water Quality
Under the RCP, in each GRC the Commission examines the utility's district-by-district compliance with water quality standards. Golden State addressed the topic. DRA did so peripherally.
While we have adopted new rules related to our water quality oversight in D.07-05-062, our requirement for utility compliance with water quality standards under D.04-06-018 is expressed in General Order (GO) 103, which states, in pertinent part, as follows:
Any utility serving water for human consumption or for domestic uses shall provide water that is wholesome, potable, in no way harmful or dangerous to health and, insofar as practicable, free from objectionable odors, taste, color and turbidity. Any utility supplying water for human consumption shall hold or make application for a permit as provided by the Health and Safety Code of the State of California, and shall comply with the laws and regulations of the state or local Department of Health Services. (GO 103(II)(1)(a).)
The Commission exercises concurrent jurisdiction with the DHS over the quality of drinking water provided by regulated water utilities and has used DHS standards in its regulatory proceedings as an integral part of its program of regulating water utilities for many years.
Golden State included sufficient information on its water quality compliance in each CSA. All of this information was admitted into evidence without cross-examination or objection. The company's presentation was based on existing data and provided descriptions of water sources, treatment methods, problem areas and future corrective measures, where applicable, for all seven CSAs.
DRA did not address the water quality issue directly and, instead, DRA included a statement in its Report for each CSA, similar to the following statement in reference to the Clearlake CSA:
DRA performed a review of GSWC's water supply and quality documents. DRA also contacted DHS to obtain the compliance history of GSWC's water systems from 2004-2006...As informed by DHS, the Clearlake water system generally was in compliance with drinking water standards between 2004-2006.
DRA did, however, make many observations relating to water quality in the course of addressing various expenses, plant, and affordability issues. Those observations typically involved the challenges Golden State faces in its smaller systems and were broadly consistent with Golden State's water quality documents.
Golden State's water quality presentation for the seven CSAs in this proceeding meets the standard set forth in GO 103(II)(1)(a). Importantly, Golden State has made and continues to make substantial progress in improving water quality. We, in turn, will continue to monitor Golden State's water quality with the expectation that we will see results.
6 The "New Committee Method," which employs a number of variables, such as temperature and rain together with 10 years of monthly data, is more fully described in Ex. GSW(ALL)-6 and the RCP attached to D.04-06-018.
7 A utility's revenue requirement is derived using the following general ratemaking formula: revenue requirement = expenses + depreciation + taxes + (rate of return x rate base). Expenses means operating expense and taxes other than income taxes and taxes mean income taxes. A utility's revenue requirement is the total amount of money a utility must collect from customers to pay all operating and capital costs, including a fair return of investment.
8 A&G Expenses are expenses that a utility incurs as normal part of its utility operations that cannot be attributed to a specific function in the operation of water production or delivery. A&G Expenses are operating expense and are included among the expenses used to determine a utility's revenue requirement and rates.
9 D.07-11-037, mimeo., p. 1.
10 D.05-07-044, mimeo., p. 10.
11 Water Action Plan 2005, p. 4.
12 D.07-05-062, mimeo., p. A-24.
13 Property taxes are also referred to as ad valorem taxes.
14 This project is comprised of a pipeline system to collect, transport and distribute treated wastewater and brine concentrates from groundwater desalting operations.
15 Bluefield Water Works & Improvement Company v. Public Service Commission of the State of Virginia (1923) 262 U.S. 679.
16 Federal Power Commission v. Hope Natural Gas Company (1944) 320 U.S. 591, 603.
17 Golden State recommended a 11.25% return on equity for 2008, 2009, 2010.
18 Golden State recommended a cost of debt for 2008 of 7.49%, 2009 of 7.46% and 2010 of 7.44%.
19 DRA recommended a 10.09% return on equity for years 2008, 2009, and 2010.
20 DRA recommended a cost of debt for 2008 of 7.49%, 2009 of 7.46% and 2010 of 7.44%.
