6. Allocation of GO and Other Costs to Unregulated Operations

American States Water Company, the parent holding company for SCWC, provides services on an unregulated basis to third parties through its American States Utility Service Company (ASUS) subsidiary. According to SCWC's proposal, a portion of the revenues from the non-regulated operations of ASUS are shared with SCWC's ratepayers as "other revenues" to the utility operation. In its estimate of other operating revenues for Test Year 2003, SCWC includes $63,400, which represents the ratepayer share of revenues from non-regulated services provided by ASUS. SCWC states that its allocation of revenues from non-regulated services between ASUS and SCWC conforms to the methodology adopted by the Commission in D.00-07-018.⁹

ORA argues that D.00-07-018 does not apply to what SCWC and its unregulated affiliate are doing. In ORA's opinion, if ASUS bears its full share of overhead and common costs as determined by an impartial cost study, nothing more is needed. ORA requests that the Commission order a study to determine the full costs, both expense and capital, incurred by SCWC on behalf of ASUS, presently and in the future. Once completed, SCWC should develop either allocation factors for accounting transfers to the books and records of ASUS or a set of charges to be billed to ASUS and reimbursed to SCWC. Until the study is completed, ORA requests that the Commission suspend the affiliate revenue sharing procedure proposed by SCWC and has included an increase of $101,300 in GO revenues to reflect the suspension.

This decision concludes that SCWC should follow the policies and guidelines adopted in SCWC's holding company decision, D.98-06-068, regarding affiliate transactions. In order to reflect the principles, policies and guidelines outlined in D.98-06-068, SCWC is ordered to conduct a cost study and analysis that will be the basis for assigning and allocating future costs related to its affiliates. Until then, we will impute a revenue adjustment of $101,300.

6.1. Discussion

SCWC and ASUS are both subsidiaries of American States Water Company. In dealing with its affiliates, SCWC should be following the procedures and reporting requirements adopted in D.98-06-068, the Commission decision that authorized SCWC to form a holding company structure. In justifying the formation of the holding company, the company stated:

"SoCalWater foresees a variety of opportunities in unregulated businesses including, for example, public/private partnerships with municipalities and other local governmental agencies that could involve long-term lease concessions of water systems, operation and maintenance contracts, and billing and other customer service functions. It may provide such services to other Commission-regulated utilities as well. A holding company structure would separate the regulated utility and thus help insulate customers from these competitive and unregulated business activities without compromising the Commission's oversight and regulatory responsibilities. There would be fewer potential cross-subsidization issues, and SoCalWater would be better able to tailor its finances and organization to both roles. SoCalWater would continue to make appropriate allocations where, as now occurs from time to time, its personnel engage in both regulated and non-regulated activities, and those allocations would continue to be subject to Commission review to protect ratepayers."¹⁰

The decision adopted specific policies and guidelines for the various transactions conducted between SCWC, the holding company and affiliates. The overriding theme is that ratepayers should not subsidize affiliate operations. The justification for allowing SCWC to establish the holding company structure and the implementation principles are directly applicable to the issue of allocating costs to unregulated operations in this GRC. SCWC should follow the policies and guidelines adopted in D.98-06-068.

Rather than following the principles and guidelines of the holding company settlement, SCWC has instead used the principles established in D.00-07-018, which established an Other Operating Revenue (OOR) sharing mechanism applicable to water utilities that intend to offer non-tariffed services. SCWC has misinterpreted the intent of that decision. The revenue sharing mechanism is intended to apply to a water utility (1) providing non-tariffed services, (2) sharing the gross revenues with ratepayers, and (3) absorbing all incremental costs. It does not apply to non-regulated affiliates of the water utility. While we regulate water utilities, we have no direct authority over non-regulated affiliates. Rather than imposing a sharing mechanism on the revenues of non-regulated affiliates, we instead attempt to ensure that utility and affiliate costs are properly separated and common costs are fairly allocated. In that way, sharing of non-regulated affiliate revenues with ratepayers is unnecessary.

Since SCWC is relying on the revenue sharing mechanism adopted by D.00-07-018 to reflect the proper cost reimbursement by ASUS to SCWC, ASUS is only charged on an incremental cost basis. It is therefore apparent that a cost study and analysis, as recommended by ORA, is required in order to fairly assign and allocate costs related to SCWC's affiliates, in accordance with the principles, policies and guidelines outlined in D.98-06-068. We will order such a study to be completed by SCWC and included in its next Region III GRC application. The company must address each point in the holding company decision that applies to affiliate transactions and costs and must show the effect, on both affiliate and utility costs, of implementing the appropriate measures to comply with the terms of that decision. SCWC also must adopt appropriate management policies and accounting practices to ensure that the terms of the holding company decision are fully implemented.

ORA requests that the Commission suspend the affiliate revenue sharing procedure proposed by SCWC, until the cost study is implemented. ORA's adjustment amounts to an increase of $101,300 in GO revenues. We adopt ORA's adjustment but characterize it as a proxy for potential adjustments that might result from the cost study. Under the circumstances here, where the utility has apparently not been following procedures adopted in its holding company decision, the adjustment is reasonable.