7. Cash Preservation Plan

The Cash Preservation Plan (CPP), implemented by SCWC in early 2001, was designed to limit cash expenditures on capital projects and O&M for its electric and water operations during the energy crisis. SCWC argues that both its capital and O&M budgets now need to reflect on-going operations, not artificially depressed levels attributable to extraordinary circumstances. SCWC states that the budgets in this application reflect return to normal operations.

ORA recommends that SCWC's revenue requirement be reduced by $3.6 million for O&M expenses not spent and $3.2 million for the carrying charge of the capital projects deferred during 2001 and 2002 over the next two years, since SCWC ratepayers were denied the benefit of funds that the Commission approved for those purposes. ORA does not argue that the CPP was unreasonable or unjustified but does oppose customers paying twice for the same O&M expenses and projects.

This decision imposes a reduction to Region III maintenance expenses in the amount of $352,000 for both test year 2003 and 2004. Without such an adjustment, shareholders will receive a windfall due to deferral of expenditures and recovery of electric energy costs through balancing account treatment.

7.1. Background

The CPP was implemented in response to a deterioration in SCWC's cash flow due to escalation in energy prices in California beginning in 2000. While the price of electric energy escalated dramatically, rates to SCWC's electric customers remained unchanged. As a result, SCWC substantially under-collected those costs through revenue and accrued those under-collected costs in a balancing account. Between December 1999 and June 2002, SCWC paid out over $25 million more in electric power costs than was recovered in customer rates.

SCWC consciously made the decision to preserve cash intended for water operations in order to pay the electric bills of its Bear Valley Electric District (BVE). BVE customers, SCWC water customers and shareholders provided the cash for that purpose. Since the energy-related revenue shortfalls were afforded balancing account treatment, recovery of appropriate energy costs for BVE will be addressed in BVE proceedings and BVE customers will eventually pay for the 2001 and 2002 energy revenue shortfalls through whatever mechanism is adopted in the energy company proceedings.

The CPP included measures such as a hiring freeze, reductions in operating expenses, and elimination or deferral of all capital projects except for those projects that were considered essential either to meet public safety and health requirements or to provide continued service.¹¹

7.2. Discussion

BVE purchased energy costs were in part paid by SCWC water customers. Through the balancing account procedure for costs incurred in 2001 and 2002, BVE will eventually be made whole for the reasonable amount of purchased power costs. Water customers should therefore be reimbursed, in some manner, for the cash that was diverted from the water operations for those years. To do otherwise would result in a windfall for shareholders. This is explained below.

The BVE purchased energy costs were paid to energy providers during 2001 and 2002. The balancing account then tracked the money that would eventually be repaid to whoever put the money up at that time. As revenues are collected to offset the balancing account expenses, they will not be used to actually pay the purchased energy costs but to reimburse those who put up the money in 2001 and 2002. The cash to pay for the energy purchases in 2001 and 2002 came from three sources. First, cash was available from the BVE ratepayers, through electric rates at that time. Second, cash derived by deferring expenses and capital projects related to the water operations was used to offset a portion of the revenue shortfall. Third, cash to offset any remaining shortfall would have come from shareholder funds. Therefore, while the water operations and shareholders funded a portion of the revenue shortfall,¹² unless specific provisions are made, as money accrues to the balancing account to offset that portion of the shortfall, all of those revenues will accrue to shareholders. It is reasonable to return an appropriate amount as offsets to costs of the water operations.

Since this GRC addresses rates for Region III only, we will only consider the effects of the CPP on Region III in this decision. Affected expenditures, as indicated by SCWC, include maintenance expenses, operating expenses, A&G expenses and capital related costs. Regarding capital costs, SCWC indicates that its general policy is to hold capital spending within Commission-adopted amounts, and that, based on its internal budgets, it deferred a substantial amount of capital expenditures in 2001 and 2002. Nevertheless, the recorded additions for those years are slightly higher than authorized in the previous GRC decision;¹³ thus, it appears that, in this GRC, ratepayers are not paying for capital projects that were deferred from the last GRC.

This does not appear to be the case for O&M. The long-term effects of deferred spending, especially in the area of maintenance, are hard to quantify, but deferrals of necessary expenditures jeopardize the efficient operation of the utility's system and may result in higher long-term costs. For instance, the testimony of SCWC's District Managers indicates that over time the company has under spent for maintenance even though it generally spends what the Commission authorizes for such purposes,¹⁴ that the deferral of maintenance expenditures could have certain long-term effects on the operation of the system, and that the proposed GRC maintenance expense amounts include items deferred from previous years.¹⁵

In considering reimbursement for Region III, we will assume that the amount that should eventually flow back to those water ratepayers is the difference between what should have been spent for maintenance for 2001 and 2002 and what was actually recorded for those years. We could have based the adjustment on the difference between what was previously authorized and what was spent, but the record does not establish previously authorized amounts and we have some concern regarding deferred maintenance as discussed above. Recorded maintenance costs for Region III are listed below.

Region III Recorded Maintenance Expense

To determine what should have been spent in 2001 and 2002 on maintenance, we assume the 2003 maintenance expense forecast of $3,689,000 that is included in the Stipulation is reasonable. We also assume that 2001 and 2002 were not normal spending years due to the energy situation and that the amounts not spent in 2001 and 2002 were used to offset increased energy procurement costs for BVE customers. We also assume that a reasonable estimate of what would normally have been spent in 2001 (absent the energy crisis) is the 2003 stipulated amount deescalated to 2001 dollars, or $3,556,100. Similarly, a reasonable estimate for 2002 is the 2003 stipulated amount deescalated to 2002 dollars, or $3,616,200. When compared to recorded amounts, the difference is $748,300 for 2001 and $308,400 for 2002 or $1,056,600 in total. We will amortize that amount over this GRC cycle at $352,200 per year as a reduction to the ratepayers' obligation to fund maintenance expenses. The stipulated maintenance expenses will be funded partially by shareholders who will be receiving money to do so through the BVE balancing account recovery mechanisms. We will not make further adjustments for the apparent deferral of expenses related to operating expenses and A&G expenses. Of the three expense categories, maintenance has the largest deferral amount. Our adopted adjustment is not precise and we will assume that the result also covers operating and A&G deferrals.

SCWC claims that all deferred O&M expense projects will have been completed by the end of the current rate case cycle. However, if the "current rate case cycle" is the currently authorized 2000-2002 cycle, the record does not support that statement. Based on its own testimony, SCWC underspent in both 2001 and 2002. If the "current rate case cycle" is the 2003-2005 cycle being considered in this proceeding, we would have concerns about recovery of deferred maintenance in subsequent rate cases, as expressed in D.82-12-085 regarding a Southern California Edison Company GRC.¹⁶ In that decision, the Commission disallowed deferred maintenance costs for ratemaking purposes but did not relieve the company of its responsibility to maintain the operating efficiency of its utility plant in a timely manner. SCWC's claim regarding completion of deferred projects is not persuasive.