II. DISCUSSION

In its rehearing application, MHCWD contends that the rates approved by Resolution W-4473 did not comply with Commission policies and guidelines and alleges error on the following grounds:

A. Whether recovery of 44% of fixed costs through the service charge is a violation of D.92-03-093

MHCWD contends that 100% of fixed costs should be recovered through the service charge pursuant to D.92-03-093. The rates authorized in Resolution W-4473 will recover 44% of fixed costs through the service charge for metered customers. Contrary to MHCWD's allegation, this is in compliance with D.92-03-093 which states: "Class D water utilities are authorized to file to recover up to 100% of fixed costs in the service charge portion of their rate design." 1992 Cal. PUC Lexis 237, *82, 43 CPUC 2nd 568, 583, emphasis added. Thus, on its face, D.92-03-093 does not require 100% of fixed costs to be recovered via the service charge and MHCWD has failed to establish legal error.

Further, it is the Class D utility itself that is authorized to file to recover up to 100 percent of fixed costs in the service charge. In this case, WWC did not request such recovery. The Commission's purpose in authorizing 100% of fixed costs to be recovered in the service charge was to mitigate the capital investment risk faced by small water companies. Specifically, "[I]ncreased recovery of fixed costs through the service charge can mitigate [capital] risk, thus making small companies more attractive in terms of securing loans for capital improvements and encouraging increased equity investment." Id. at *47-48, 43 CPUC 2d at 583. D.92-03-093 was not meant to assist a class of customers trying to obtain the rate design most favorable to them.

Recovering any more than 44% of fixed costs through the service charge, as requested by MHCWD, will violate the staff's rate design policy that no customer should experience an increase in rates greater than twice the system average increase authorized. Based on the system average increase of 63.0%, the maximum impact would be on a ¾ inch meter customer who uses no water. Under the old rate, such a customer paid $8.20. To comply with the Branch's rate design policy, such a customer's rate should be capped at $18.38 ($18.38 - 8.20 = 10.18. 10.18/8.2 = 124.2% increase, which is double the system average increase of 63%). Thus, to cap this service charge at $18.38, only 44% of the fixed costs can be allowed in service charge.

In recognition of MHCWD's concerns, the resolution includes a provision that allows WWC to file annually an advice letter to add more of its fixed costs to the service charge, which over time will reduce the percentage of fixed costs recovered in the quantity charge. This provision was requested by MHCWD, and in return MHCWD withdrew its protest to WWC's application. Although the new rate design resulted in slightly higher than system average increase in first year to MHCWD (73% versus 63%), as WWC files annual advice letters to add more of its fixed costs to the service charge, over time more of the fixed costs will be included in the service charge.

As noted above, D.92-03-093 authorizes recovery of up to 100% of fixed costs in service charge but does not require recovery of 100% of fixed costs. The rates authorized in W-4473 are anticipated over time to recover 100% of fixed costs via the service charge. However, we note that the Resolution allows but does not require WWC to file annual advice letters to add more fixed costs to the service charge. To ensure that the disparity in this regard between customer classes is in fact eliminated over time, we will modify Resolution W-4473 to require WWC to file this annual advice letter. With this modification, MHCWD's contention that Resolution W-4473 errs is without merit.

B. Whether the service charge for 2-inch meter violates
Commission policy

W-4473 sets the service charge for 2-inch meters at $661.71, which is 36 times the service charge for the 5/8 x 3/4 inch meter. MHCWD contends that this does not comply with staff rate design policy, which sets the service charge for a 2 inch meter at 8 times the rate of 5/8 x 3/4 inch meter.

Setting the service charge at 8 times the rate of a 5/8 x 3/4 inch meter will result in a service charge of $146.80 for a 2 inch meter. Based on a system average increase of 63%, this will reduce the proportion of fixed costs recovered through service charge from the proposed 44% to 37%. This is the same design that MHCWD originally opposed. In fact, as discussed above, MHCWD claims that anything less than recovery of 100% of the fixed costs through the service charge constitutes legal error.

The modified rate design that was adopted in the resolution was prepared by WD to accommodate MHCWD's opposition to the initial rate design, which was based on staff policy in effect since 1991. MHCWD's allegation that the service charge is in excess of recommended staff policy fails to recognize that reducing the service charge will decrease the proportion of fixed costs in service charge from 44% to 37%. MHCWD's requests in its application for rehearing are thus mutually exclusive.

The memo dated January 18, 1991 sets forth a policy guideline. Both the Commission and WD retain the ability to modify the service charge, where necessary, as in this case. MHCWD's contention that Resolution W-4473 errs in setting the service charge is without merit.

Finally, Resolution W-4473 contains an inaccurate statement that should be modified. The resolution states on the bottom of page 3: "The equivalent 2-inch meter charge, using adopted Commission ratios is $661.71". This is incorrect and should read "The 2-inch meter charge is $661.71, which is a deviation from adopted Commission meter ratios".

The resolution should be modified to require WWC to make the annual filings to add more fixed costs to the service charge and to correct the inaccurate statement. Rehearing of the resolution as modified should be denied, because no legal error has been demonstrated.

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