10. Water Quality Memorandum Accounts

SCWC seeks memorandum account treatment for costs to comply with five specific water contaminants. The five contaminants are MTBE,¹⁷ perchlorate, NDMA¹⁸, radon, and arsenic. The water industry has seen a tremendous expansion in the number of water contaminants over the last 20 years, many of which have had a significant negative impact upon water supplies throughout California. The expense associated with building new treatment facilities to comply with maximum contaminant levels (MCLs) adopted for emerging contaminants is high and can involve complex treatment methodologies and significant lead time (design, bidding, construction) prior to completion. SCWC states that, in the past, it has included costs associated with anticipated MCLs, but when these costs are included in capital and O&M budgets in applications, they have been rejected by ORA, because the MCLs are not final, or have a long compliance period and/or are subject to change.

ORA argues that SCWC's request for Water Quality Memorandum Account should be denied because SCWC is requesting blanket memorandum account, before specific rules become effective. Absent such rules, there would be uncertainty about which costs would be charged to the memorandum account. ORA recommends instead that SCWC be allowed to file an advice letter when such water quality rules become effective.

SCWC notes that when the Commission authorizes creation of a memorandum account, it only allows for the recordation of certain costs in that account. Before a utility can recover in rates the costs recorded in the account, the utility must demonstrate the reasonableness of the costs. SCWC indicates that its request is no different - it seeks only the creation of various water quality memorandum accounts, so that it may book, or record, its costs in those accounts. When SCWC seeks to recover the costs, it will apply to the Commission to do so, and will demonstrate the reasonableness of those costs.

We grant SCWC's request for memorandum account treatment for costs to comply with requirements related to the five specified contaminants.

10.1. Discussion

Costs to mitigate water contamination are difficult to forecast until the appropriate regulator specifies the associated requirements. The requirements determine both the magnitude and the timing of expenditures. Establishing such requirements is out of the utility's control, and a memorandum account procedure is a reasonable way to deal with the problem. We also agree with SCWC's characterization of the memorandum account procedure. We therefore authorize the account as requested by SCWC.

The related utility expenditures would include capital costs, O&M costs, monitoring costs, legal costs and consultant costs associated with activities to mitigate the effects of the five specified contaminants. The costs booked to the memorandum account must be the incremental capital costs and expenses. We emphasize incremental. The utility must be able to demonstrate that existing rates do not directly or indirectly already include consideration for the recovery of these costs. If they do, the utility must be able to show that appropriate consideration of those costs was given in determining what the incremental costs in the memorandum account should be. For instance, for arsenic, the MCL may be substantially reduced in the future. There may then be increased costs related to the tougher MCL requirements. Before the costs of any new program are recovered in rates through the memorandum account, the utility must demonstrate that the requested costs are truly incremental. They should be net of any previously recovered costs related to the old MCL activities replaced or augmented by the new MCL activities. The utility should clearly describe in its preliminary statement which costs it plans to book.

We intend that ongoing costs eventually be reflected through the GRC process, at which time the accumulated balance and proposed recovery can be examined. Until then, the memorandum account would accumulate the associated costs.