10. Assignment of Proceeding
Dian M. Grueneich is the assigned Commissioner and Regina DeAngelis is the assigned Administrative Law Judge in this proceeding.
1. Golden State filed seven applications on January 5, 2007, A.07-01-009, A.07-01-010, A.07-01-011, A.07-01-012, A.07-01-013, A.07-01-014 and A.07-01-015, seeking rate increases in the customer service areas of Arden Cordova, Bay Point, Clearlake, Los Osos, Ojai, Santa Maria, and Simi Valley. Together, these customer service areas are referred to as Region I of Golden State's service area.
2. The ALJ consolidated these proceedings on February 26, 2007.
3. This consolidated proceeding was submitted on October 4, 2007.
4. During this course of this proceeding, the Commission received valuable input from the public at the PPHs and through letters and electronic mail sent to the Public Advisor's Office.
5. Overall, the communities served by Golden State in all seven districts stressed the following points: (1) the magnitude of the rate increases is unreasonable; (2) service quality is not reliable; and (3) water quality, in a general sense, requires improvement.
6. In some service areas, the community raised more specific concerns. In Bay Point, fluoridation was raised by the Director of Public Health, Contra Costa Health Services. In Ojai, the issue of service reliability was raised by the City Manager of the City of Ojai.
7. At each of the PPHs, Golden State responded to the public's concerns. Representatives from DRA also attended each PPH and advised the communities that DRA planned to closely analyze Golden State's request to increase rates and, consistent with its statutory obligation, would advocate on behalf of the ratepayers.
8. DRA and Golden State filed a motion requesting that the Commission adopt a Stipulation on August 17, 2007. The motion stated that DRA and Golden State convened a settlement conference between June 15 - 20, 2007 and, prior to meeting, provided formal notice to all parties to the proceeding of the upcoming meeting. Only DRA and Golden State attended the meeting. The August 17, 2007 motion requested the Commission to adopt the Stipulation in its entirety.
9. The Stipulation is not opposed by any party although the City of Ojai and Kathy Staples did not participate in the publicly noticed settlement meetings.
10. The Stipulation describes the agreement reached for each issue. The reconciliation exhibits prepared by Golden State and DRA indicate each party's initial and final positions on each line item of the summary of earnings for each district.
11. We have evaluated DRA's and Golden State's exhibits and testimony as they relate to the stipulated items, reviewed in detail their initial positions and compared them with the Stipulation and accompanying explanations.
12. One of Golden State's O&M accounts, referred to as the common customer account, includes several accounts which are allocated from the Golden State's general office located in San Dimas, California. This general office provides support services to all three of Golden State's Regions.
13. 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, approved by the Commission on October 18, 2007 in D.07-11-037.
14. 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%, and American States Utility Services 5.6%. In D.07-11-037, 19.60% was allocated to Region I.
15. The increase need for staffing has been felt throughout the company and is driven by the ever-increasing demands of cost effective operations, maintenance, water conservation, water quality and infrastructure replacement. More specifically, additional staff is needed to ensure compliance with more stringent water quality regulation, additional data gathering requirement, and increased filing requirements with DHS. We have noted that water quality is an issue of the highest importance in our Water Action Plan 2005. Additional staff is also needed to address increased oversight by financial regulators required by Sarbanes-Oxley and to better safeguard the water supply.
16. Golden State seeks an additional position, referred to as the Northern District Water Conservation Coordinator, to promote water conservation throughout Region I.
17. Water conservation is critical in California to extend limited resources as far as possible to allow for future growth. Cost-efficient water conservation is the least expensive source of water.
18. Golden State seeks an additional position, referred to as the Coastal District Engineering Technician III position, because Golden State has been relying on untrained employees from the seven CSAs to perform the work of an engineering technician. 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.
19. Golden State seeks two other additional positions, referred to as the Los Osos Water Supply Operator II and the Simi Valley Water Supply Operator II. With the addition of these two positions, Golden State will be able to always have a licensed, qualified water supply operator available. 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.
20. 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.
21. 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.
22. Golden State's proposal to rely on the expertise of an outside consulting firm CH2MHILL is reasonable but we find that the possibilities for conflicts of interest exist.
23. 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.
24. 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. A critical management function includes accurately budgeting and pursuing cost containment.
25. 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 1. Based on the adopted cost of capital and capital structure, we will determine and adopt the appropriate rate of return on Golden State's regulated business, also referred to as its rate base.
26. Golden State has proposed a low-income program in this proceeding and already has low-income assistance programs in Region II and Region III service areas. These programs are referred to as (CARW).
27. Golden State proposes a number of capital projects for each CSA.
28. We raised the issue of the whether or not Golden State should fluoridate water in Bay Point in an ALJ ruling dated August 24, 2007. The ALJ ruling sought to include additional evidence in the record, specifically a letter addressed to the ALJ from Dr. Brunner, Director of Public Health, Contra Costa Health Service, (Ex. A) and a position statement by the American Dental Association (Ex. B).
29. In a subsequent ALJ ruling, we agreed that certain portions of Exhibit A should not be included in evidence because those portions were irrelevant to the issue of fluoridation.
30. Golden State stated it had no objection to being directed to fluoridate the water it delivers to customers provided that the Commission determines fluoridation is in the best interest of customers and that Golden State is authorized to fully recover the related capital costs and operating expenses.
31. In Clearlake, Golden State forecasted Water Loss to be 47.48% in 2008 and DRA estimated this figure to be 35.35%. These figures are significantly above the Water Loss experienced in the other CSAs and significantly above the 7% target we adopted in D.07-05-062.
32. The City of Ojai expressed concern that rate increases in Ojai would not be accompanied by an increase in customer service and water quality. We expect to see improvements in water quality and service reliability as a result of the projects approved herein.
33. Golden State's application included 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 districts.
1. This decision approves various general rate increases for the years 2008, 2009, and 2010 for seven Golden State CSAs. These seven CSAs are Arden Cordova, Bay Point, Clearlake, Los Osos, Ojai, Santa Maria, and Simi Valley. Together these CSAs are referred to as Region I of Golden State's service area.
2. While the rates for year 2008, the test year, are set by this decision, the rate adjustments for the second and third years, 2009 and 2010, will be specifically determined when advice letters for those two years are filed prior to years 2009 and 2010.
3. The evidentiary record supports concerns raised by the public and today's decision seeks to address these matters.
4. Prior to adopting any settlement, such as the Stipulation presented by DRA and Golden State, the Commission must review the settlements to ensure that the agreement is "reasonable in light of the record, consistent with the law, and in the public interest," as required by Article 12 of the Commission's Rules of Practice and Procedure.
5. We also take into consideration that the Commission has long favored the settlement of disputes. This policy supports many worthwhile goals, including reducing the expense of litigation, conserving scarce Commission resources, and allowing parties to reduce the risk that litigation will produce unacceptable results.
6. The Commission's policy is that contested settlements or settlements entered into by some, but not all, of the parties should be subject to more scrutiny compared to an all-party settlement.
7. For these reasons, we will review the Stipulation's resolution of every contested issue, considering each issue raised by the City of Ojai and Kathy Staples.
8. DRA is charged with upholding the ratepayers' long-term economic best interests.
9. The Stipulation represents a compromise between DRA and Golden State arrived at through extensive negotiations in the interest of avoiding the expense and uncertainty inherent in litigation.
10. In each case, the results are supportable within the range of possible outcomes based on the whole record.
11. We conclude that the sponsoring parties of the Stipulation are fairly representative of the affected interests.
12. The Stipulation is reasonable in light of the whole record consistent with applicable law, and in the public interest.
13. The principal public interest affected by this proceeding is the delivery of safe, reliable water service at reasonable rates. The Stipulation advances that interest.
14. There is a strong public policy in favor of settling disputes to avoid costly and protracted litigation. The Stipulation promotes that policy as well.
15. Throughout this decision, each provision of the Stipulation is separately analyzed to ensure consistency with the reasonableness standard set forth in Article 12 of the Commission's Rules of Practice and Procedure.
16. We conclude that the Stipulation is in the public interest and should be approved.
17. In D.07-11-037, the Commission determined the percentage of the San Dimas general office costs to be allocated to Region I.
18. In future rate cases, we direct Golden State to present its labor expense projections consistent with our finding in D.05-07-044.
19. We approve of Golden State's request to add a Northern District Water Conservation Coordinator position based on our priority to pursue water conservation efforts.
20. We approve of the additional position referred to as the Coastal District Engineering Technician III position because relying on untrained employees from the seven CSA to perform the work of an engineering technician is not best way to use the company's resources.
21. We approve of the addition of a Water Supply Operator II in Los Osos and in Simi Valley to help Golden State maintain the highest standards of water quality, as encouraged by the Water Action 2005.
22. Because of the high level of skill needed to create Master Plans, we approve of Golden State's request to contract with CH2MHILL to complete the Master Plans.
23. We will require competitive bidding on all jobs proposed by a Master Plan designed by CH2MHILL on which CH2MHILL seeks to perform any type of work.
24. 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%.
25. Regarding the overhead allocation rate, we find Golden State's proposal is not adequately supported by the record. We also find that DRA's analysis fails to take into account several important factors. Accordingly, based on our recent findings in D.07-11-037, we adopt overhead rates of 26.12% (2007), 26.37% (2008), and 26.37% (2009).
26. We will permit Golden State to continue to zero out the overhead pool account by charging the balance to various capital projects. However, we are concerned with ongoing over-allocation to the overhead pool account. We advise Golden State that it must improve the allocation process so that there is less of an annual discrepancy. Therefore, 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.
27. We have supported a 5% contingency rate for Golden State in a prior decision resolving a Golden State's GRC.
28. 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.
29. We find the proposal for CARW for Region I reasonable under Rule 12.1.
30. With the exception of the addition of low income rates, we make no modifications to rate design.
31. Golden State requests minor modifications to its existing tariff maps. These requests are reasonable.
32. As indicated herein, we approve of the capital projects requested by Golden State with the exception of the request for costs associated with installation of services in the Ojai CSA.
33. We find that fluoridation in Bay Point is in the public interest.
34. We expect Golden State to make progress on reducing its Water Loss in Clearlake and to seek any additional Commission approvals necessary to accomplish this goal.
35. Golden State's water quality presentation for the seven districts in this proceeding meets the requirements set forth in GO 103. 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.
IT IS ORDERED that:
1. The Joint Motion of Golden State Water Company (Golden State) and Division of Ratepayer Advocates (DRA) to Adopt Stipulation filed on August 17, 2007 is granted. The Stipulation, attached to that motion is approved.
2. Golden State is authorized to file in accordance with General Order (GO) 96-B and make effective on not less than five days' notice revised tariff schedules via a Tier 2 advice letter for each district and rate area in this proceeding, reflecting the adopted rates for test year 2008 included as Attachment C to this order. The revised tariff schedules shall apply to service rendered on and after the date this decision is mailed and no sooner than January 1, 2008.
3. For escalation years 2009 and 2010, Golden State shall file advice letters in conformance with GO 96-B proposing new revenue requirements and corresponding revised tariff schedules for each district and rate area in this proceeding. Golden State's advice letters shall follow the escalation procedures set forth in the Commission's Rate Case Plan for Class A Water Utilities set forth in D.07-05-062 and shall include appropriate supporting workpapers. The revised tariff schedules shall take effect on January 1, 2009 and January 1, 2010, respectively and shall apply to service rendered on and after their effective dates. The proposed, revised revenue requirements and rates shall be reviewed by the Commission's Water Division. Water Division shall inform the Commission if it finds that the revised rates do not conform to the Rate Case Plan, this order, or other Commission decisions, and if so, reject the filing.
4. The capital structure, cost of debt, rate of return on equity, and rate of return on rate base shown in the Stipulation are adopted for the 2008, 2009, and 2010 General Rate Case (GRC) cycle.
5. In all future rate cases, we direct Golden State to present its labor expense 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.
6. We direct Golden State to implement its California Alternative Rates for Water (CARW) program for Region I as soon as possible within 90 days of the issuance of this decision.
7. We find that fluoridation in Bay Point is in the public interest. Accordingly, we direct Golden State to file an advice letter within 180 days proposing to fluoridate the water in Bay Point. The advice letter must describe the costs associated with fluoridation and propose a cost recovery mechanism. This advice letter will be a Tier 3 advice letter and must be served on the service list of this proceeding. After review of the advice letter, if we find the costs associated with fluoridation reasonable, we will issue a resolution to direct Golden State to proceed.
8. By July 1, 2008, as part of Golden State's scheduled GRC, Golden State must present an improved overhead allocation process or risk a Commission audit.
9. We expect Golden State to make progress on reducing its Water Loss in Clearlake and to seek any additional Commission approvals necessary to accomplish this goal. Toward this end, Golden State must file an advice letter within 120 days of the date of this decision with a proposal to reduce Water Loss in the Clearlake CSA. Upon reviewing this advice letter and finding the proposal reasonable, Water Division shall issue a resolution either approving of the advice letter or requiring further improvement on the situation.
10. We direct Golden State to meet with the City of Ojai, at the City's invitation, to discuss matters related to water quality and service reliability. Furthermore, we direct the City of Ojai to contact the Commission with any unresolved concerns regarding water quality and service reliability at the conclusion of these meetings. Then, the Director of the Water Division shall recommend a procedure to the Commission for investigating this matter further.
11. The summaries of earnings are presented herein at Attachment B, the adopted rate bases at Attachment F herein, and the quantities and income tax calculations are included at Attachments D and G to this order. A comparison of present rates and adopted rates for 2008 is attached hereto as Attachment E.
12. In the future, Golden State must conform its practices in Region I to the requirements set forth in D.07-05-062.
13. Golden State's requests in Application (A.) 07-01-009 through A.07-01-015 are granted as set forth above, and in all other respects are denied.
14. A.07-01-009, A.07-01-010, A.07-01-011, A.07-01-012, A.07-01-013, A.07-01-014 and A.07-01-015 are closed.
This order is effective today.
Dated January 31, 2008, at San Francisco, California.
MICHAEL R. PEEVEY
President
DIAN M. GRUENEICH
JOHN A. BOHN
RACHELLE B. CHONG
TIMOTHY ALAN SIMON
Commissioners
