23. Comments on Proposed Decision

The proposed decision (PD) was mailed to the parties in accordance with § 311(d) and Rule 77.1. Comments were filed by SCWC, ORA and the City of Claremont on December 12, 2003, and reply comments were filed by SCWC and ORA on December 17, 2003.

23.1. SCWC Comments

SCWC addressed the PD's rejection of portions of the Settlement, rejection of the company's proposal to allocate general office costs to non-GRC districts in this proceeding, treatment of costs imposed by affiliates, reduction to O&M expenses due to the CPP, allocation of revenues from the Folsom lease, recommended return on equity, determination of the supply mix in the Claremont CSA, and adopted level of pensions and benefits expense.

Regarding the rejection of the Settlement's proposed advice letter process for capital recovery, SCWC states that its intent was that there would only be 10 or so advice letter filings associated with the 51 projects. However, whether there would be up to 51 advice letter filings, resulting in a burden on the Commission staff and customer confusion, was only one problem associated with the Settlement proposal. The more general and overriding concern is whether the advice letter procedures are appropriate when considered in the context of test year ratemaking. As the PD states, the proposed advice letter proposal results in after-the-fact cost recovery for capital projects on a recorded cost basis, which conflicts with the idea of test year ratemaking where reasoned estimates are the basis for rate recovery and where, at least for the rate case period, certain shareholder/ratepayer risks are associated with potential over-spending or under-spending of adopted test year amounts. From this standpoint it is not appropriate to include normal projects that should be handled on an estimated test year basis, through advice letter filings. We see no reason to change the PD's rejection of this process.

The PD also rejected the advice letter process for the Calipatria treatment plant, since the ultimate cost of this large project is unknown. The PD preferred to handle the project through a separate application or in the next GRC, where the reasonableness of the costs can be examined. The PD authorized SCWC to establish a memorandum account with carrying costs equal to the rate of return without gross up for taxes. We do not accept SCWC's comments that the carrying costs should be equal to the pre tax rate of return (grossed up for taxes). When construction work in progress is recovered in rate base on an estimated basis, it would be recovered at the pre tax rate of return. This is appropriate since there is associated revenue, on part of which taxes must be paid. However, accumulating the carrying costs in the memorandum account is similar to an allowance for funds used during construction (AFUDC). AFUDC is not grossed up for taxes, since there is no associated revenue at the time it is incurred. The costs are recovered through depreciation expense and the rate of return on rate base, once the plant is in service. The allowance for taxes on equity funding is made at that time. Similarly, when rates are established for the Calipatria plant, the disposition of the accumulated carrying costs will be determined. This should include the effect of taxes associated with equity funding.

SCWC also objects to the PD's use of alternative estimates for water supply and conservation projects. SCWC states that the PD discounts SCWC's evidence of the costs of each project simply because SCWC did not submit rebuttal testimony in response to ORA's evidence on each project. SCWC claims it did not submit rebuttal because it had reached a stipulated outcome with ORA before rebuttal was due, and it urges that its estimates should be used for these projects. We disagree. The utility must justify its proposed capital budgets. This should be done in its direct testimony. Additional support can be contained in workpapers, but there should be sufficient information on the record for the Commission to determine need, reasonableness of costs and timing. While the record justifies very little of SCWC's proposed capital budget, we have, for this case, assumed ORA's review of the other projects to which it did not object is sufficient. There are however concerns regarding ORA's adjustments in its direct testimony. Whether or not rebuttal testimony is filed is the company's decision. SCWC did not file rebuttal and, in light of ORA's direct testimony, the record does not support the company's estimates. There is no basis to change the PD on this issue.

Regarding reservoirs, SCWC also questions the PD's timing for two Barstow reservoirs, claiming one should be authorized for 2004 and one for 2005. The PD assumed that those projects would go into service, on average, at the beginning of 2005 (or the end of 2004), the midpoint of the remaining two years in this GRC cycle. This is the same as putting one well into service in mid-2004 and one in mid-2005, which should satisfy SCWC's stated needs.

Regarding the company's proposal to allocate GO costs to non-GRC districts, the PD stated we could not determine the accuracy of the incremental proposal. There is a concern regarding the embedded attrition year amounts for expense and capital in the non-GRC districts. SCWC's direct testimony did not describe how the embedded GO amounts for expense and capital for the non-GRC districts would be determined. Information contained in workpapers, if any, was not made part of the record. In rebuttal testimony, SCWC stated that GO costs are incorporated into their rates reflecting the previously adopted GO costs (from the most recent GRC) adjusted for inflation. However in cross-examination, the witness indicated that the statement might be too general considering the nature of capital budgets as well as specific test year expense adjustments. Whether the embedded attrition year GO expense and capital related costs for the non-GRC districts have been, or can be, appropriately determined has not been demonstrated and we will not change the PD on this issue. We do not preclude future rate case decisions from allocating GO costs to all districts. We only require that any proposed procedure be fully described and documented on the record so that the reasonableness can be determined.

Regarding reimbursement by ASUS for costs incurred by SCWC for services it provides to ASUS, SCWC provides information that shows certain direct labor and overhead charges are already shared by ASUS.⁵⁶ However, SCWC states that with respect to other costs, ASUS reimburses SCWC by sharing a percentage of the revenues it receives from the contract with SCWC. SCWC further states that, in that way, revenue sharing acts as a proxy calculation for the costs SCWC incurs in providing services to SCWC. It is these other costs that should be directly charged or allocated to ASUS, since the PD concludes that the sharing mechanism is not the appropriate means for ASUS to reimburse SCWC. The cost study ordered by this decision should therefore address the charges or allocations to ASUS for these other costs. The PD's imputed revenue of $101,300 is not a duplicative adjustment. It is a proxy for the amount that should be charged or allocated to ASUS in lieu of the reimbursement by ASUS through the sharing mechanism and amounts to $37,900 more than the estimated $63,400 of sharing revenues proposed by SCWC.

Regarding the PD's CPP adjustment, SCWC's comments maintain that projects deferred in 2001/2002 have been completed in 2003 and no adjustment should be made. SCWC offers to make 2003 recorded information available. However, the record in this proceeding is closed, and an analysis of 2003 recorded information for consideration in this decision is not appropriate without reopening the proceeding. An analysis would have to be done to determine what the deferred costs are and whether any are built into the 2003/2004 estimates for this rate case. The PD addressed the problem of potential recovery of deferred maintenance in future rate case cycles. The problem of potential windfalls due to balancing account treatment for the BVE costs still remains. In its comments, SCWC suggests that if the PD's proposed adjustment is adopted, the BVE customers should reimburse SCWC for the funds. However, the PD's point is that it was the shareholders, not the electric customers, who benefited from the water utility (as well as certain electric utility) deferrals. No change to the PD's CPP adjustment is warranted.

Regarding the Folsom Lease issue, SCWC reargues its points regarding the PD's classification of the lease as utility property. We see no error⁵⁷ in the PD's conclusion that water rights are an essential element of operating a water utility; those rights can be "enjoyed" even if they are not immediately exercised, the original water rights were therefore utility property and the remaining water rights continue to be utility property under the jurisdiction of this Commission.

Regarding return on equity, we find no reason to change the conclusions reached in the PD. SCWC's comments reargue its position on risk associated with the balancing account rulemaking. Based on the principles contained in D.03-06-072, those arguments were considered and rejected by the PD. There is no need to address them again. New information attached to SCWC's comments is untested by cross-examination, inconclusive and will not be considered in this decision. Regarding regulatory risk, SCWC is correct in pointing out that the PD's reference to the acceptance of the advice letter process for the 51 capital projects is wrong and should not be reflected in the related discussion. That reference will be corrected.

Regarding the supply mix in the Claremont CSA, we see no reason to lower the amount of pumped water supply below what was achieved in 2002. SCWC's comments point out that the PD acknowledges that the two new wells, planned in 2003 and 2004 would replace and not provide additional water supply, but defers the two new wells into 2005. SCWC states that to correct this discrepancy, either the wells should be put into service in 2003 and 2004 as requested or SCWC's lower pumping amount should be adopted. We do not consider this to be a discrepancy. The importance of the assumption that the two new wells would be used to replace rather than supplement the pumped water supply was that it justified not increasing the amount of pumped water beyond that already achieved by SCWC in 2002. For the well and reservoir projects that would be recovered directly in rates by this decision rather than through the advice letter process, the PD assumed that those projects would go into service, on average, at the beginning of 2005 (or the end of 2004), the midpoint of the remaining two years in this GRC cycle. Exactly when the Claremont CSA wells go into service is entirely at the discretion of SCWC, and we assume that will occur when the wells are needed.

Regarding P&B expenses, SCWC states that the PD excludes $269,133 for 2003 and $303,388 for 2004 to provide for medical and dental expenses for 14 now-filled GO positions. However, in determining the composite 7% annual P&B escalation rate over 2003 recorded amounts, the PD incorporated the approximate 13% per year increase beyond the recorded 2002 amounts for medical and dental that was advocated by SCWC and used in determining its updated medical and dental estimates. In essence, the PD adopted SCWC's medical and dental expense request, and it is assumed that any employee growth estimated by the SCWC is included in those amounts.

SCWC indicated that certain corrections should be made to the appendices of the PD. Those items were reviewed and appropriate changes have been incorporated in this decision.

23.2. ORA Comments

ORA requests that the PD be modified to clarify that SCWC should offset the water quality memorandum accounts with any payment by the polluters for the water contamination. The purpose of these accounts is to accumulate the net costs of meeting potential new water quality requirements for five specific contaminants. To the extent that there are reimbursements by other entities directly related to the projects and costs being accumulated in the memorandum accounts, it is reasonable to include those reimbursements as offsets to the compliance costs. The ordering paragraph will be modified to reflect this.

ORA pointed out a technical error that has been incorporated in this decision.

23.3. City of Claremont Comments

The City of Claremont addressed the issue of regional rates by recommending that the PD be put aside until the validity of regional rates is resolved. This recommendation will not be adopted, since the PD resolved the validity in concluding that regional rates should be continued.