17. Supply Cost Increases

SCWC forecasted its supply costs - cost of purchased power, cost of purchased water, and pump taxes - for the test years 2003 and 2004. SCWC used the most current rates for each of the purveyors to forecast its supply costs for 2003. SCWC and ORA have agreed that all purveyor rates utilized in calculating purchased water and purchased power costs should reflect current purveyor rates when the final decision appendices are compiled.

For the second test year, SCWC inflated the purchased water and purchased power costs to cover the anticipated increase in purveyors' rates. SCWC states that inflating first test year costs to derive second test year costs is commonly done for many expense items in the general rate case. ORA, on the other hand, held the supply costs at the 2003 levels when projecting 2004 costs. We will follow ORA, as discussed below.

17.1. Discussion

We will not adopt SCWC's proposal for two reasons. First, the record does not include a detailed basis for the proposal. The company's testimony indicates only that the rates are inflated to cover anticipated increases. Without a detailed description, we cannot determine whether SCWC's estimating methodology is reasonable and balanced in considering possible decreases as well as increases. For instance, it is not clear whether, in estimating purchased power rates, the company considered the recent decrease in Southern California Edison's electric rates (D.03-07-029). The effect of that decrease can be incorporated in the decision for this GRC for 2003, as agreed to by both ORA and SCWC, but how the rate for 2004 should be adjusted is unclear.

Second, the issue of balancing account recovery for water utilities was the subject of R.01-12-009. In D.03-06-072, the Commission determined that increases related to balancing account recovery should be granted only to the extent that the utility's rate of return does not exceed authorized levels. Forecasting future water supply rate increases in this GRC would subvert the review process set forth in D.03-06-072. That process uses an earnings test to determine whether or not any such increase, or any portion of the increase, should be reflected in rates. SCWC can use the processes adopted in D.03-06-072 to mitigate the effects of 2004 increases, if any.