public report on results of operations golden state water

OFFICE OF RATEPAYER ADVOCATESCALIFORNIA PUBLIC UTILITIES COMMISSION

PUBLIC

Report on Results of Operations

Golden State Water Company Test Year 2019 General Rate Case

A.17-07-010

San Francisco, California February 16, 2018

Docket A.17-07-010 Exhibit Number ORA- _____ Commissioner Martha Guzman Aceves Administrative Law Judge Gerald F. Kelly ORA Witness Pat Ma

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Memorandum

This Report on Results of Operations is prepared by Pat Ma under the general supervision of

Richard Smith, Program Manager of the Office of Ratepayer Advocates (ORA) - Water Branch.

Shanna Foley serves as ORA legal counsel, and Pat Ma as project coordinator.

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Report on Results of Operations

Table of Contents

Chapter 1. Executive Summary .................................................................................................... 1

A. Overview .................................................................................................................................. 1

B. Public Participation Hearings .................................................................................................. 3

C. Summary of Recommendations ............................................................................................... 4

1. ORA Report on Results of Operations (Special Requests #3, #5 and #6) ...................... 5

2. ORA Report on Sales, CARW and Conservation ........................................................... 7

3. ORA Report on General Office (GO) Expenses ............................................................. 8

4. ORA Report on Labor and Benefits (Special Requests #1, 2, 4, 8 and 9) ...................... 8

5. ORA Report on Plant – General Issues ......................................................................... 10

6. ORA Report on Plant – Region 1 .................................................................................. 11

7. ORA Report on Plant – Region 2 (Special Request #7) ............................................... 11

8. ORA Report on Plant – Region 3 .................................................................................. 11

9. ORA Report on Plant – General Office ........................................................................ 12

10. ORA Results of Operations Tables Report ................................................................... 12

D. GSWC’s Special Requests ..................................................................................................... 12

1. Summary of GSWC’s Special Requests ....................................................................... 12

2. Special Request #3 – Aerojet Water Litigation Memorandum Account Surcharge ..... 13

3. Special Request #5 – First 5 Sacramento Memorandum Account Extension ............... 13

Chapter 2. Special Request #6: Credit/Debit Card Pilot Program ............................................... 14

A. Introduction ............................................................................................................................ 14

B. Summary of Recommendations ............................................................................................. 14

C. Discussion .............................................................................................................................. 14

1. PUC §§ 755.5 and 915 .................................................................................................. 15

a. PUC § 755.5 .............................................................................................................. 15

b. PUC § 915 ................................................................................................................. 15

2. GSWC’s Proposed Pilot Program ................................................................................. 16

a. General Office (GO) expense estimate ..................................................................... 16

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b. CARW credit ............................................................................................................ 17

c. Pilot evaluation ......................................................................................................... 17

3. ORA’s recommendation ............................................................................................... 18

a. Reporting to the Commission ................................................................................... 18

b. Customer notification ................................................................................................ 18

D. Conclusion ............................................................................................................................. 19

Chapter 3. Customer Growth Factor in O&M Forecasts ............................................................. 20

A. Introduction ............................................................................................................................ 20


C. Discussion .............................................................................................................................. 20

1. GSWC’s methodology .................................................................................................. 20

2. ORA’s analysis ............................................................................................................. 21

D. Conclusion ............................................................................................................................. 22

Chapter 4. Water Loss Audit Expense ......................................................................................... 23

A. Introduction ............................................................................................................................ 23


C. Discussion .............................................................................................................................. 24

1. Regulatory Requirements .............................................................................................. 25

a. Rate Case Plan D.07-05-062, Minimum Data Requirements, Item II.E.3 ................ 25

b. Urban Water Management Plans (UWMPs) ............................................................. 25

c. Title 23 California Code of Regulations (23 CCR) § 700 ........................................ 26

2. GSWC’s request for additional funding in Outside Services ....................................... 27

a. ISOR cost estimates .................................................................................................. 28

b. Validation cost .......................................................................................................... 29

D. Conclusion ............................................................................................................................. 31

Chapter 5. District Operating Expenses ....................................................................................... 32

A. Introduction ............................................................................................................................ 32


C. Forecasting Methodology ...................................................................................................... 32

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1. GSWC’s forecasting methodology ............................................................................... 32

2. ORA’s forecasting methodology .................................................................................. 33

a. Updating escalation factors ....................................................................................... 33

b. ORA’s adjustments ................................................................................................... 33

D. ORA’s Adjustments, by Ratemaking Area ............................................................................ 34

1. Arden Cordova CSA ..................................................................................................... 34

a. Account 788 – Other Maintenance Expenses ........................................................... 34

2. Bay Point CSA .............................................................................................................. 35

a. Account 792 – Office Supplies & Expense .............................................................. 35

3. Clearlake CSA ............................................................................................................... 36

a. Account 781 – Other Operation Expenses ................................................................ 36

b. Account 792 – Office Supplies & Expense .............................................................. 36

4. Los Osos CSA ............................................................................................................... 36

a. Account 798 – Outside Services ............................................................................... 36

5. Santa Maria CSA .......................................................................................................... 37

a. Account 781 – Other Operation Expenses ................................................................ 37

b. Account 788 – Other Maintenance Expenses ........................................................... 38

c. Account 792 – Office Supplies & Expense .............................................................. 38

6. Simi Valley CSA ........................................................................................................... 38


7. Region 2 RMA .............................................................................................................. 38

a. Account 744 – Chemicals ......................................................................................... 38

b. Account 781 – Other Operation Expenses ................................................................ 39

c. Central District Office, Account 792 – Office Supplies & Expense ........................ 40

d. Central District Office, Account 798 – Outside Services ......................................... 40

e. Southwest District Office, Account 792 – Office Supplies & Expense.................... 40

8. Region 3 RMA .............................................................................................................. 41


b. Orange County District Office, Account 798 – Outside Services ............................ 41

E. Conclusion ............................................................................................................................. 41

Chapter 6. Income Taxes ............................................................................................................. 42

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A. Introduction ............................................................................................................................ 42


C. Discussion .............................................................................................................................. 42

1. Use of prior-year CCFT expense .................................................................................. 42

2. Estimate of prior year’s CCFT expense. ....................................................................... 43

a. GSWC’s estimate ...................................................................................................... 44

b. ORA’s estimate ......................................................................................................... 44

D. Conclusion ............................................................................................................................. 45

Chapter 7. Materials and Supplies ............................................................................................... 46

A. Introduction ............................................................................................................................ 46


C. Discussion .............................................................................................................................. 46

1. GSWC’s estimates ........................................................................................................ 46

2. ORA’s discovery ........................................................................................................... 47

3. ORA’s estimates ........................................................................................................... 48

a. Adjusting 2015 and 2016 recorded values for forecasting purposes. ....................... 49

b. Developing estimates based on adjusted recorded values. ....................................... 49

D. Conclusion ............................................................................................................................. 50

Chapter 8. Working Cash ............................................................................................................. 51

A. Introduction ............................................................................................................................ 51


C. Discussion .............................................................................................................................. 52

1. Last adopted vs. GSWC’s requested working cash amounts in this GRC .................... 52

2. GSWC’s estimated revenue lag days ............................................................................ 53

3. ORA’s estimated revenue lag days ............................................................................... 54

4. Last adopted vs. GSWC’s and ORA’s estimated working cash amounts ..................... 55

D. Conclusion ............................................................................................................................. 56

Chapter 9. General Office Allocation .......................................................................................... 57

A. Introduction ............................................................................................................................ 57

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C. Discussion .............................................................................................................................. 58

1. ASUS ............................................................................................................................ 58

2. GO cost center allocation .............................................................................................. 60

a. GO cost centers ......................................................................................................... 60

b. Allocation of cost centers .......................................................................................... 61

3. Four-factor allocation .................................................................................................... 61

4. Utility Plant factor ......................................................................................................... 62

5. Direct Operating Expense factor ................................................................................... 63

6. Number-of-Customers factor ........................................................................................ 64

a. ASUS contracts are not equivalent to customers for allocation purposes. ............... 65

b. ASUS military base contracts are not equivalent to GSWC mobile home park

service. ...................................................................................................................... 67

c. D.12-04-009 and D.13-12-030 provide applicable direction regarding the Number-

of-Customers factor. ................................................................................................. 69

d. GSWC’s cost center accounting supports the removal of the Number-of-Customers

factor. ........................................................................................................................ 70

e. Adjustment to the Number-of-Customers factor calculation. ................................... 71

7. ORA’s adjustments result in a reasonable allocation of Corporate Support costs. ....... 72

8. Reasonableness of ORA-adjusted allocation percentages ............................................ 72

D. Conclusion ............................................................................................................................. 73

Chapter 10. Attrition Filings ........................................................................................................ 74

A. Introduction ............................................................................................................................ 74


C. Discussion .............................................................................................................................. 74

D. Conclusion ............................................................................................................................. 75

Statement of Qualifications – Pat Ma, P.E. .................................................................................. 76

Appendix 6-1: GSWC’s Region 3 Income Tax Calculation

Appendix 9-1: D.07-11-037, Footnote 17

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Appendix 9-2: ASUS Position Description for Utility Technician I, November 18, 2016

Appendix 9-3: ASUS Eglin Air Force Base – Customer Scorecard

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Chapter 1. Executive Summary 1

A. Overview2

On July 19, 2017, Golden State Water Company (GSWC) filed its General Rate Case 3

Application 17-07-010 (GRC A.17-07-010) for the Test Year 2019 and Escalation Years 2020 4

and 2021. The Office of Ratepayer Advocates (ORA) presents the results of its review in ten 5

separate reports, listed in Section C. below. 6

ORA’s forecasts and adjustments result in the following estimated revenue increases (decreases). 7

For the Test Year (TY) 2019, ORA’s adjustments result in a total company revenue increase of 8

$6.7 million or 2.18%, compared to GSWC’s requested $31.3 million or 10.56%. 9

Table 1-1: Comparison of Revenue Increases (Decreases) 10

``11

GSWC 31,329$ 10.56% 10,771$ 3.28% 12,924$ 3.81%Arden Cordova 3,049$ 26.18% 679$ 4.64% 846$ 5.56%Bay Point 726$ 13.59% 79$ 1.30% 121$ 1.95%Clear Lake 136$ 5.70% 131$ 5.19% 140$ 5.25%Los Osos 510$ 12.56% 183$ 4.00% 213$ 4.46%Santa Maria 2,375$ 19.15% 461$ 3.11% 597$ 3.89%Simi Valley 908$ 7.19% 145$ 1.06% 216$ 1.57%Region 2 17,357$ 13.73% 2,842$ 1.97% 4,088$ 2.78%Region 3 6,268$ 5.15% 6,251$ 4.90% 6,704$ 5.02%ORA 6,705$ 2.18% 8,138$ 2.59% 7,943$ 2.46%Arden Cordova 979$ 8.02% 515$ 3.92% 455$ 3.35%Bay Point 336$ 6.10% 102$ 1.74% 92$ 1.53%Clear Lake 55$ 2.26% 134$ 5.40% 139$ 5.27%Los Osos 44$ 1.08% 133$ 3.25% 134$ 3.15%Santa Maria 1,007$ 8.12% 557$ 4.14% 530$ 3.77%Simi Valley 272$ 2.00% 212$ 1.53% 201$ 1.42%Region 2 7,200$ 5.60% 2,051$ 1.51% 1,993$ 1.44%Region 3 (3,187)$ -2.48% 4,433$ 3.54% 4,400$ 3.40%GSWC > ORA 24,624$ 8.38% 2,633$ 0.69% 4,982$ 1.35%Arden Cordova 2,070$ 18.15% 164$ 0.72% 391$ 2.21%Bay Point 391$ 7.49% (23)$ -0.44% 29$ 0.42%Clear Lake 81$ 3.44% (3)$ -0.21% 2$ -0.02%Los Osos 466$ 11.48% 50$ 0.76% 79$ 1.31%Santa Maria 1,368$ 11.03% (97)$ -1.04% 67$ 0.12%Simi Valley 636$ 5.18% (68)$ -0.46% 15$ 0.15%Region 2 10,157$ 8.13% 791$ 0.47% 2,096$ 1.34%Region 3 9,455$ 7.63% 1,819$ 1.36% 2,304$ 1.62%

2021Ratemaking Area ($000)

TY 2019 2020

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ORA’s estimates above are based on the following factors/rates which should be revised when 1

more updated information is available. The California Public Utilities Commission 2

(“Commission” or CPUC) should incorporate these updates when calculating the revenue 3

requirements and revenue changes for adoption in its final decision. 4

(1) Labor and non-labor escalation factors. ORA’s results of operations (RO) calculations 5

use the May 2017 labor and non-labor escalation factors published by ORA1 (i.e., the 6

same as in GSWC’s application). The Commission should use the latest available 7

escalation factors to calculate the Test Year 2019 revenue requirement. 8

(2) Cost of capital. ORA’s RO calculations assume an 8.34% rate of return (the same as in 9

GSWC’s application). GSWC’s Cost of Capital A.17-04-002 proceeding will determine 10

the cost of capital effective in the Test Year.2 The Commission should use the cost of 11

capital adopted in that proceeding to calculate the Test Year 2019 revenue requirement. 12

(3) Tax law changes. ORA’s RO calculations do not reflect the changes resulting from the 13

federal Tax Cuts and Jobs Act signed into law on December 22, 2017 (the same as in 14

GSWC’s application). The Assigned Administrative Law Judge has approved a 15

procedure for GSWC and ORA to update revenue requirement estimates reflecting the 16

TCJA impacts (see this report’s Chapter 6 – Income Taxes for more details). 17

(4) Present rates. ORA’s revenue change calculations use the same “present” rates as in 18

GSWC’s application (i.e., rates in effect as of July 2017). There have been rate changes 19

since July 2017, such as rate increases resulting from the 2018 attrition filings. The final 20

decision should reflect the present rates effective at that time in calculating the revenue 21

increase (decrease) estimates. 22

1 Escalation factors from the May 2017 memoranda published by ORA Energy Cost of Service & Natural Gas Branch: Estimates of Non-labor and Wage Escalation Rates for 2017 through 2021 from the May 2017 IHS Global Insight U.S. Economic Outlook; May 2017 Summary of Compensation Per Hour. 2 The proposed decision was issued on February 6, 2018. A final decision is still pending as of February 16, 2018. GSWC requests a 9.11% rate of return; ORA recommends 7.39%.

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B. Public Participation Hearings 1

ORA staff attended the Public Participation Hearings3 and took note of the concerns raised by 2

GSWC’s customers in their public comments, as well as in their personal comments to ORA’s 3

staff. ORA’s recommendations presented in its ten reports address many of those concerns. For 4

example: 5

Customers raised concerns about excessive executive compensation. ORA shares the 6

same concerns and in its Report on Labor and Benefits recommends adjustments to 7

GSWC executives’ incentive pay. 8

Customers questioned whether GSWC’s requested rate increases are reasonable in light 9

of the thriving business experienced by GSWC’s holding company American States 10

Water Company (“American States”) and its unregulated affiliate American States Utility 11

Services (ASUS). ORA’s recommendations in this report’s Chapter 8 – General Office 12

Allocation ensure that GSWC’s ratepayers do not pay more than their fair share of the 13

common costs (i.e., do not subsidize American States’ unregulated business). 14

Customers asked why the long-term decrease in demand due to their diligent 15

conservation efforts has not resulted in lower water bills. As noted in ORA’s reports on 16

plant, GSWC has not incorporated the reduced demand in its infrastructure capacity 17

planning – i.e., GSWC continues to request new well and storage projects based on 18

demand from as far back as 2006.4 ORA’s recommended disallowance of this type of 19

projects is based on a reasonable and responsible assessment of the needs of GSWC’s 20

water systems; it allows customers to benefit from their conservation efforts. 21

Customers demanded that GSWC be run more efficiently and that the Commission 22

require efficiencies in GSWC’s operations. ORA shares the same expectation and 23

recommends that GSWC look for and elect more cost efficient alternatives in its 24

3 January 29, 2018 in the Arden Cordova Customer Service Area (CSA), January 30, 2018 in the Claremont CSA, February 1, 2018 in Region 2, February 6, 2018 in the Santa Maria CSA, and February 12, 2018 in the Calipatria CSA. 4 For example, see ORA Report on Plant – Region 1, Chapter 2, Section D.1: Arden – Trussel Plant’s Reservoir, Well & Booster Pump (GSWC requests a $5 million capacity addition projects that is based on 2006 demand data and was already rejected by the Commission in the last GRC due to lack of need). Seealso ORA Report on Plant – General Issues, Chapter 2 – Capital Budget Overview.

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infrastructure planning.5 Additionally, in its expense forecasts, ORA recommends 1

adjustments to remove duplicative accounting of expenses, as well as unreasonable 2

expenses that should not be baked into the forecast and borne by ratepayers.63

C. Summary of Recommendations 4

The Commission should adopt the recommendations presented in ORA’s ten reports listed and 5

summarized below. In these reports, ORA presents detailed analysis based on its discovery, field 6

inspections, review of the application’s testimony and workpapers, applicable standards, and 7

other relevant data. ORA’s silence on any issue does not imply its endorsement of GSWC’s 8

estimates, methodologies, or assertions. 9

Many of ORA’s recommended adjustments to GSWC’s forecast are the result of differences in 10

the methods, assumptions or data used. However, ORA also recommends significant reductions 11

in GSWC’s forecasted expenses because they inappropriately include millions of dollars in (1) 12

double-counted expenses,7 and (2) lobbying, acquisition-related and other shareholder expenses 13

inappropriately assigned to regulated operations.814

GSWC’s inclusion of inappropriate costs inflates its forecasted expenses, which, if left 15

uncorrected, will unnecessarily increase rates. To ensure only reasonable and justified expenses 16

and capital investment are reflected in rates, the Commission should demand increased 17

5 For example, see ORA Report on Plant – Region 2, Chapter 7, Special Request #7 – New Office Building (GSWC’s new office building request with unclear scope and costs). 6 For example, see ORA Report on General Office Expenses, Chapter 2, Section E, Account 798 – Outside Services. 7 For example, GSWC includes $483,254 in its forecast for Account 797 while including the same expenses in its forecast for Account 798 (see ORA Report on General Office Expenses, Chapter 2, Section E.1.a.) GSWC also includes $1.7 million in temporary labor expense while at the same time including costs for new positions to perform the work previously performed by temporary employees or consultants (see ORA Report on Labor and benefits, Chapter 2, Section C.5.). 8 For example, GSWC includes $1,213,848 for legal fees pertaining to GSWC’s activities in acquiring or attempting to acquire other water companies (see ORA Report on General Office Expenses, Chapter 2, Section E.2.). GSWC also includes $457,792 in general benefit lobbying expenses and $310,849 paid to investor relations consultants (see ORA Report on General Office Expenses, Chapter 2, Section E.3 and Chapter 3, Section D.3, respectively).

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transparency and consider actions to discourage inaccurate and unclear forecast calculation and 1

presentation.2

ORA offers recommendations for additional reporting that will help prevent duplicative 3

accounting and increase transparency in the future. For example, ORA recommends that 4

GSWC’s application workpapers for expense forecasting provide a more systematic and accurate 5

way to identify and reconcile expenses already tracked in balancing or memorandum accounts.96

The following sections provide an overview of the subject areas covered and recommendations 7

presented in ORA’s ten reports. Four of ORA’s reports contain information marked by GSWC 8

as confidential: Report on Results of Operations, Report on General Office Expenses, Report on 9

Labor and Benefits, and Report on Plant – General Issues. For each of these four reports, ORA 10

issues a confidential version and a public (redacted) version. 11

1. ORA Report on Results of Operations (Special Requests #3, #5 and #6) 12

Chapter 1. Executive Summary 13

ORA does not oppose GSWC’s Special Request #3: Aerojet Water Litigation Memorandum 14

Account recalculation10 and Special Request #5: First 5 Sacramento Memorandum Account 15

extension. See Sections D.2 and D.3 of this chapter for more details. 16

Chapter 2. Special Request #6: Credit/Debit Card Pilot Program 17

ORA does not oppose GSWC’s proposal to establish the Credit/Debit Card pilot to eliminate 18

transaction fees associated with credit/debit card payments and recover the costs through base 19

rates.11 However, ORA recommends additional requirements to improve implementation and 20

facilitate evaluation of the proposed pilot program. 21

9 Appendix 7-1 of ORA Report on Labor and Benefits report shows information that should be included as part of GSWC’s next GRC application. ORA also recommends additional reporting to facilitate evaluation of GSWC’s pipeline replacement program (see ORA Report on Plant – General Issues, Chapter 3, Section C.3), and continuation of the semi-annual reports on measures to improve customer service (see this report’s Chapter 2, Section C.3.a). 10 ORA recommends updating the sales estimates in the recalculation. 11 As allowed by Public Utilities Code § 755.5(a).

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Chapter 3. Customer Growth Factor in O&M Forecasts 1

The Commission should deny GSWC’s application of the customer growth factor in developing 2

Test Year operation and maintenance (O&M) expense estimates because recorded data does not 3

support GSWC’s assumed direct relationship between O&M expenses and number of customers. 4

Chapter 4. Water Loss Audit Expense 5

The Commission should deny GSWC’s request to increase its operating districts’ Outside 6

Services expense forecasts to fund water loss audits. Additional funding is not necessary 7

because GSWC has conducted water audits for many years and has existing personnel resources 8

to perform the required audit and validation functions. 9

Chapter 5. District Operating Expenses. 10

The Commission should adopt ORA’s adjustments in district O&M and administrative and 11

general (A&G) expense forecasts – these adjustments result in more reasonable forecasts of Test 12

Year expenses. 13

Chapter 6. Income Taxes 14

The Commission should use the California Corporate Franchise Tax (CCFT) amounts from 15

GSWC’s adopted 2018 attrition rate adjustments as the prior-year CCFT expense amounts in the 16

Test Year 2019 Federal Income Tax calculations. As mentioned earlier, GSWC and ORA 17

submit income tax estimates that do not take into account the impacts of the federal Tax Cuts and 18

Jobs Act; both parties will provide/revise testimony to present the necessary updates. 19

Chapter 7. Materials and Supplies (M&S) 20

The Commission should adopt ORA’s adjustment of approximately $1 million in the Region 2 21

M&S estimate for the forecast years. ORA’s estimate is reasonable because it (1) removes the 22

double counting of the material costs for two pipeline projects, (2) tempers the impact of the 23

unusually large 2015 pre-purchase of pipeline materials, and (3) is consistent with ORA’s 24

recommended reduction in GSWC’s pipeline replacement request for Region 2. 25

Chapter 8. Working Cash 26

The Commission should use ORA’s estimated revenue lag days in calculating the working cash 27

allowance. GSWC’s proposed inclusion of the 2016 Water Rate Balancing Account/Modified 28

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Cost Balancing Account (WRAM/MCBA) adjustment in its revenue lag day estimates is 1

unreasonable and illogical, and produces working cash estimates that are $20.6 million higher 2

than the last GRC’s adopted amounts; this change alone would increase total company rate base 3

by 6%. ORA’s estimated revenue lag days result in working cash estimates that are more in line 4

with the amounts adopted in the last GRC. 5

Chapter 9. General Office Allocation 6

The Commission should allocate 22.18% of the General Office’s (GO) Corporate Support costs 7

to ASUS, GSWC’s unregulated affiliate. Using GSWC’s proposed 15.34% factor would under-8

allocate costs to ASUS and unfairly shifts the cost burden to GSWC ratepayers. 9

Chapter 10. Attrition Filings 10

For parity and equity across all GSWC’s ratemaking areas, the Commission should require 11

GSWC to implement attrition rate decreases in cases where it is over-earning. 12

2. ORA Report on Sales, CARW and Conservation 13

Chapter 2. Sales 14

The Commission should adopt ORA’s proposed methodology for forecasting sales per customer. 15

ORA’s proposal considers data from more years, and area-specific water usage trends and supply 16

limitations. GSWC’s use of average 2015-2016 data for all areas assumes no bounce back from 17

the required water use reduction in those years, and therefore understates expected sales for 18

many areas. 19

Chapter 3. CARW 20

The Commission should adopt ORA’s recommended discount amounts for the California 21

Alternative Rates for Water (CARW), GSWC’s low-income rate assistance program. ORA’s 22

proposal protects CARW customers by maintaining or slightly increasing current discount levels 23

to keep pace with potential rate increases, mitigating the impact of attrition rate increases that 24

can erode the effective discount, and reducing customer confusion in the event changes being 25

considered by the legislature and/or the Commission are adopted. 26

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Chapter 4. Conservation 1

The Commission should approve GSWC’s conservation budget requests, but subject to 2

conditions including a one-way balancing account, a modification to the School Education 3

Program, specific programs’ spending caps and additional reporting to ensure appropriate 4

conservation spending and compliance. 5

3. ORA Report on General Office (GO) Expenses 6

The Commission should approve ORA’s GO expense adjustments totaling approximately $2.7 7

million (a 12% reduction from GSWC’s request).12 These adjustments include, among other 8

things, removal from the recorded data used for forecasting purposes certain expenses related to 9

lobbying, condemnation and acquisition, and expenses that are duplicative, non-recurring, or 10

already tracked for recovery via balancing or memorandum accounts. 11

4. ORA Report on Labor and Benefits (Special Requests #1, 2, 4, 8 and 9)12

Chapter 2. Payroll Expenses 13

The Commission should remove the customer growth factor from GSWC’s district payroll 14

expense forecast, and the Investor Relations Administrator salary from the GO payroll expense 15

forecast. The Commission should also exclude the 2012-2016 recorded temporary labor and 16

placement fee expenses totaling $1.7 million from the forecasting calculation for GO Outside 17

Services expenses. 18

Chapter 3. Employee Benefits 19

The Commission should deny GSWC’s requested $2,654,000 in Short-Term Incentive Program 20

(STIP) and Long-Term Incentive Program (LTIP) expenses for executive employees in the GO 21

Account 795 – Employee Benefits forecast. This adjustment builds on the Commission findings 22

from the last GRC regarding executive incentive compensation and prevents the widening of the 23

wage gap between executive and non-executive employees. 24

12 Not including adjustments in GO labor and benefits, which are covered in the ORA Report on Labor and Benefits. Amount cited is prior to allocation to ASUS, GSWC and BVES operations.

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Chapter 4. Special Request #2 – Medical Cost Balancing Account 1

The Commission should deny GSWC’s request for a Medical Cost Balancing Account because 2

the balancing account is unnecessary and removes the incentive for GSWC to negotiate for the 3

most affordable insurance coverage option in future policy renewals. 4

Chapter 5. Special Request #4 – Permanent Sales Reconciliation Mechanism 5

The Commission should deny GSWC’s request for a permanent sales reconciliation mechanism 6

(SRM). ORA does not oppose the continuation of the pilot sales adjustment mechanism (SAM) 7

adopted in D.16-12-067, as modified by D.17-03-001. GSWC has not provided evidence 8

justifying the removal, permanent implementation, or modification of the SAM. The 9

Commission should review SAM in GSWC’s next GRC application filing. To facilitate that 10

review, the Commission should direct GSWC to provide information on the program in its next 11

GRC application including but not limited to WRAM/MCBA balances with and without impact 12

of SAM, and customer bill comparisons. 13

Chapter 6. Special Request #8 – Removal of 10 Percent Cap for the Water Rate Adjustment 14

Mechanism (WRAM) 15

The Commission should deny GSWC’s Special Request #8 because (1) GSWC has an SAM to 16

address WRAM balances, (2) the 10 percent cap provides ratepayer protection against rate 17

shock, and (3) the need for additional changes to the WRAM/MCBA mechanism is reduced in 18

light of the end of the recent multi-year drought. 19

Chapter 7. Special Request #1 – Balancing and Memorandum Accounts (BAMAs), and Special 20

Request #9 – New General Ratemaking Area Balancing Account (GRABA) 21

ORA recommends no change to GSWC’s BAMA balances as amended in the company’s 22

October 27, 2017 update, and with one exception does not oppose GSWC’s proposed actions.1323

ORA also does not oppose GSWC’s proposed establishment of the GRABA. However, the 24

Commission should require specific, additional BAMA documentation by GSWC in future GRC 25

filings to promote transparency and facilitate Commission review. 26

13 The exception relates to the continuation of the Los Osos Groundwater Adjudication Memorandum Account. See this report’s Chapter 5, Section D.4 – Los Osos CSA.

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5. ORA Report on Plant – General Issues 1

ORA adjustments to capital budgets and projects are detailed in its five Plant Reports: General 2

Issues, Region 1, Region 2, Region 3 and General Office. The Commission should adopt ORA’s 3

adjustments totaling approximately $115.4 million for 2017-2020 (a 24% reduction from 4

GSWC’s request), as summarized below. 5

Table 1-2. Capital Budgets – Total Company146

7

Chapter 2. Capital Budget Overview 8

This chapter provides a comprehensive evaluation of GSWC’s recorded and requested capital 9

budget spending, and its water systems’ demand trends affecting infrastructure investment needs. 10

Chapter 3. Pipeline Replacement Program 11

The Commission should adopt ORA’s pipeline replacement budget estimates because it (1) is in 12

line with the levels recommended by GSWC’s own KANEW software, (2) takes into 13

consideration system performance such as leak rate, water loss, and infrastructure leakage index, 14

(3) allows GSWC to continue renewing pipelines at a reasonable replacement rate, and (4) 15

14 Capital Testimony and CWIP Testimony refer to GSWC’ testimony on plant budgets/projects.

Description 2017 2018 2019 2020 TOTALCapital Testimony: * GSWC 6,979,260$ 62,524,230$ 118,863,778$ 124,896,690$ 313,263,959$ ORA 6,979,260$ 46,832,031$ 84,760,279$ 80,357,890$ 218,929,459$ GSWC > ORA -$ 15,692,200$ 34,103,500$ 44,538,800$ 94,334,500$ CWIP Testimony: GSWC 104,833,743$ 62,471,098$ 6,148,605$ -$ 173,453,447$ ORA 95,192,839$ 53,705,383$ 3,448,605$ -$ 152,346,828$ GSWC > ORA 9,640,904$ 8,765,715$ 2,700,000$ -$ 21,106,619$ TOTAL: GSWC 111,813,003$ 124,995,328$ 125,012,384$ 124,896,690$ 486,717,406$ ORA 102,172,099$ 100,537,414$ 88,208,884$ 80,357,890$ 371,276,287$ GSWC > ORA 9,640,904$ 24,457,915$ 36,803,500$ 44,538,800$ 115,441,119$ ORA as % of GSWC 91.38% 80.43% 70.56% 64.34% 76.28%* Includes both new and CWIP project amounts from GO.

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prevents the premature and unnecessary replacement of pipelines.15 The Commission should 1

reduce GSWC’s 2018-2020 pipeline replacement budget by 20%. 2

Chapter 4. 2017 Blanket Budget Items 3

The Commission should adopt ORA’s 2017 blanket/routine project estimates because GSWC’s 4

request overestimates the budgets needed to complete projects in this category and exceeds the 5

2017 budgets adopted in the last GRC. 6

6. ORA Report on Plant – Region 1 7

The Commission should adopt ORA’s capital budget and project adjustments totaling 8

approximately $20 million (a 18% reduction from GSWC’s 2017-2020 request) for the two 9

District Offices and six Customer Service Areas (CSAs) in Region 1 (Arden Cordova, Bay Point, 10

Clearlake, Los Osos, Santa Maria, and Simi Valley). 11

7. ORA Report on Plant – Region 2 (Special Request #7) 12

The Commission should adopt ORA’s capital budget and project adjustments totaling 13

approximately $47 million (a 24% reduction from GSWC’s 2017-2020 request) for the two 14

District Offices and four CSAs in Region 2 (Central Basin East, Central Basin West, Culver 15

City, and Southwest). 16

The Commission should deny GSWC’s Special Request #7 for Advice Letter project 17

authorization to purchase an office building because GSWC has not adequately established the 18

need, scope, or cost for this project. 19

8. ORA Report on Plant – Region 3 20

The Commission should adopt ORA’s capital budget adjustments totaling approximately $46 21

million (a 23% reduction from GSWC’s 2017-2020 request) for the three District Offices and 22

nine CSAs in Region 3 (Placentia, Claremont, San Dimas, San Gabriel Valley, Barstow, 23

Calipatria, Morongo Valley, Apple Valley, and Wrightwood). 24

15 From 2015 to 2017, GSWC replaced over 126 miles of pipelines and exceeded its authorized pipeline replacement budget by 55%. GSWC’s pipeline replacement request in this GRC is 40% of its total capital budget request.

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12

9. ORA Report on Plant – General Office 1

The Commission should adopt ORA’s adjustments to six General Office projects totaling 2

approximately $2 million (a 10% reduction from GSWC’s 2017-2020 request). 3

10. ORA Results of Operations Tables Report 4

This report contains Results of Operations Tables incorporating ORA’s forecasts and 5

adjustments presented in its other nine reports. 6

D. GSWC’s Special Requests 7

1. Summary of GSWC’s Special Requests 8

GSWC submitted nine Special Requests in this GRC.16 The table below summarizes ORA’s 9

position on each request. 10

Table 1-1: Summary of GSWC’s Special Requests and ORA’s Position 11

# GSWC’s Special Request ORA’s Position

1 To amortize and continue various existing balancing and memorandum accounts.

With one exception, does not oppose; however, recommends additional reporting requirements. See ORA Report on Labor and Benefits. See Chapter 5 of this report regarding the exception, regarding the Los Osos Groundwater Adjudication Memorandum Account.

2 To receive balancing account treatment for health care related costs by establishing a Balancing Account for Group Medical Insurance Costs.

Opposes.See ORA Report on Labor and Benefits.

3 To recalculate the surcharge to amortize the Aerojet Water Litigation Memorandum Account.

Does not oppose; however, surcharge calculation should reflect number of customers and sales estimates adopted in the final decision of this GRC. See Section D.2. below.

16 GSWC A.17-07-010, pages 20-24.

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# GSWC’s Special Request ORA’s Position

4 To establish a Sales Reconciliation Mechanism to adjust sales forecasts in future escalation years.

Opposes; however, does not oppose continuation of pilot Sales Adjustment Mechanism. See ORA Report on Labor and Benefits.

5 To extend the existing First 5 Sacramento Memorandum Account through the 2019-2021 rate cycle due to project delays.

Does not oppose. See Section D.3. below.

6 To establish a pilot credit card payment option and include its costs in rates.

Does not oppose but recommends additional reporting requirements. See Chapter 2 of this report.

7 To receive advice letter treatment for the purchase of an office building for its Centralized Operations Support operations.

Opposes.See ORA Report on Plant – Region 2.

8 To remove the 10% cap requirement for the amortization of WRAM/MCBA balances.

Opposes.See ORA Report on Labor and Benefits.

9 To establish a new General Ratemaking Area Balancing Account to aggregate small residual dollar amounts and other small dollar amounts for subsequent amortization at the ratemaking area level.

Does not oppose. See ORA Report on Labor and Benefits.

2. Special Request #3 – Aerojet Water Litigation Memorandum Account Surcharge 1

GSWC requests Commission authority to recalculate and update the surcharge to amortize the 2

Aerojet Water Litigation Memorandum Account.17 ORA does not oppose GSWC’s request but 3

recommends that the surcharge calculation18 be updated to reflect the Arden Cordova CSA’s 4

number of customers and sales adopted in this rate case. 5

3. Special Request #5 – First 5 Sacramento Memorandum Account Extension 6

GSWC requests Commission authority to extend the existing First 5 Sacramento Memorandum 7

Account through the 2019-2021 rate cycle due to project delays.19 ORA does not oppose 8

GSWC’s request. 9

[END OF CHAPTER]10

17 GSWC Prepared Testimony of Jenny Darney-Lane, pages 12-14. 18 GSWC Prepared Testimony of Jenny Darney-Lane, Schedule 3 – Annual Amortization and Surcharge. 19 GSWC Prepared Testimony of William C. Gedney, pages 1-6.

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Chapter 2. Special Request #6: Credit/Debit Card Pilot Program 1

A. Introduction 2

This chapter addresses GSWC’s Special Request #6: (1) to implement a pilot program offering 3

credit/debit card payment option for its customers, and (2) to include the pilot’s estimated annual 4

average cost of $654,755 in rates.20 GSWC also proposes to provide a credit to its California 5

Alternative Rates for Water (CARW) customers to offset the pilot program’s cost embedded in 6

base rates.217

GSWC Prepared Testimony of Nanci Tran describes the pilot program and its cost estimates; 8

GSWC Prepared Testimony of Keith Switzer presents GSWC’s proposed CARW credit 9

associated with the pilot program. 10

B. Summary of Recommendations 11

ORA does not oppose GSWC’s request but recommends the following enhancements to 12

GSWC’s proposed pilot program. The Commission should require GSWC: 13

(1) To continue to prepare and submit its semi-annual reports on measures to improve 14

customer service, and to separately track and report customer complaints related to the 15

use of the payment options provided by the pilot program. See details in Section C.3.a. 16

below.17

(2) To notify its customers of the availability of the pilot program and of the fact that the 18

program may not continue, as it is subject to program cost and benefit evaluation. See19

details in Section C.3.b. below. 20

C. Discussion 21

This section describes relevant regulatory requirements, GSWC’s proposed pilot program, and 22

ORA’s recommended enhancements. 23

20 GSWC A.17-07-010, page 23; GSWC Prepared Testimony of Nanci Tran, page 32: $654,755 in General Office expense estimate. 21 GSWC Prepared Testimony of Keith Switzer, page 41.

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1. PUC §§ 755.5 and 915 1

GSWC states that its request is based on Public Utilities Code (PUC) Section 755.5(a).222

Assembly Bill 1180, passed in September 6, 2016, added PUC §§ 755.5 and 915. These code 3

sections specify the provision of credit/debit/prepaid card payment option to water utility 4

customers. 5

a. PUC § 755.5 6

(a) A water corporation with more than 10,000 service connections that seeks to 7operate a pilot program designed to evaluate customer interest in, and utilization 8of, bill payment options, including, but not limited to, credit card, debit card, and 9prepaid card bill payment options, and to assess the cost-effectiveness of, and 10customer interests served by, customer access to those bill payment options, shall 11do so by requesting commission approval through its general rate case 12application. A pilot program adopted pursuant to this subdivision shall be limited 13to the duration of the water corporation's rate case cycle. 14

(b) Notwithstanding Section 755, the commission shall allow a water corporation to 15recover the reasonable expenses incurred by the water corporation in providing to 16its customers bill payment options pursuant to subdivision (a) and shall not 17require the water corporation to impose a transaction fee on its customers. 18

(c) The costs of a pilot program adopted pursuant to subdivision (a) may not be 19recovered from customers participating in the California Alternate Rates for 20Energy (CARE) program established pursuant to Section 739.1or in a water rate 21relief program for low-income ratepayers established pursuant to Section 739.8. 22

(d) The commission shall require a water corporation that is operating a pilot program 23to notify its customers that the water corporation is participating in a pilot 24program and that the pilot program may not continue, pending an assessment of 25the costs and benefits of the pilot program to customers. 26

(e) The commission shall ensure that accepting bill payment options pursuant to 27subdivision (a) neither increases nor decreases the rate of return of the water 28corporation.29

(f) This section shall remain in effect only until January 1, 2022, and as of that date is 30repealed, unless a later enacted statute, that is enacted before January 1, 2022, 31deletes or extends that date. 32

b. PUC § 915 33

(a) By July 1, 2020, the commission, in consultation with the Low-Income Oversight 34Board established pursuant to Section 382, shall submit to the Assembly 35

22 GSWC Prepared Testimony of Nanci Tran, page 29.

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Committee on Utilities and Commerce and the Senate Committee on Energy, 1Utilities and Communications a report on the pilot programs operated by water 2corporations pursuant to Section 755.5 that includes an assessment of the use of 3credit cards by low-income customers to avoid service disconnections, an 4assessment of the impact of the use of credit cards for customer bills on household 5debt burden, and an assessment of data, considered on an aggregated basis, 6regarding customer utilization and the cost-effectiveness of the bill payment 7options. Based on these assessments and an assessment of the customers' 8interests served by providing these bill payment options, the report shall evaluate 9the usefulness of the individual customer transaction fee required by Section 755, 10and include a recommendation regarding individual customer transaction fees for 11credit card, debit card, and prepaid card payments accepted by water corporations. 12

(b) This section shall remain in effect only until January 1, 2024, and as of that date is 13repealed, unless a later enacted statute, that is enacted before January 1, 2024, 14deletes or extends that date. 15

2. GSWC’s Proposed Pilot Program 16

GSWC receives approximately 2,400,000 water bill payments per year.23 Customers pay their 17

bills in a variety of ways: e-Check payments via GSWC’s e-billing program or customers’ online 18

banking services, paper checks by mail, paper checks or cash payments via GSWC’s local 19

offices, etc. GSWC also offers its customers a credit/debit/e-check payment option, via KUBRA 20

EZ-PAY. KUBRA, the company servicing these transactions since 2016, charges GSWC’s 21

customers a fee of $1.45 per transaction.2422

a. General Office (GO) expense estimate 23

Under the pilot, customers using the credit/debit/e-check payment option would no longer pay 24

the $1.45 transaction fee; that cost would be recovered as a GO expense and through base rates.25

The table below shows how GSWC arrives at its estimated number of credit/debit/e-check 26

payment transactions per year and the average annual expense of $654,755 for 2019-2021.2527

23 GSWC Prepared Testimony of Nanci Tran, page 31. 24 GSWC Prepared Testimony of Nanci Tran, page 30. 25 Based on information presented in GSWC Prepared Testimony of Nanci Tran, pages 31-32.

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Table 2-1: GSWC’s estimated expense for proposed pilot 1

2

b. CARW credit 3

Per PUC § 755(c), the pilot program’s expense may not be recovered from water rates charged to 4

GSWC’s customers participating in its low-income assistance program, California Alternative 5

Rates for Water (CARW). Because GSWC requests recovery of the pilot program’s expense 6

forecasts through base rates, it proposes to provide a credit to CARW customers to remove the 7

incremental base rate impact on those customers’ bills.26 GSWC-calculated credit ranges from 8

$0.11/month for Bay Point CSA to $0.10/month for all other ratemaking areas.279

c. Pilot evaluation 10

GSWC proposes to measure and track the impacts of increasing customers’ use of the pilot 11

program’s payment options on the following:2812

Customers’ use of lower cost payment options like e-Check payments via e-Billing 13

program/online banking and mailed-in check payments. 14

Number of payments and volume of customer traffic at GSWC’s CSA offices. 15

Volume of bill payment-related calls to GSWC’s Customer Service Center. 16

Duration and cost of overdue bills. 17

Customer satisfaction with payment services. 18

26 GSWC Prepared Testimony of Keith Switzer, pages 41-42. 27 GSWC Prepared Testimony of Keith Switzer, page 42. 28 GSWC Prepared Testimony of Nanci Tran, page 30.

Year Number of Payments

Expense Estimate @

$1.45

Annual Increase in

Participation 2013 121,477 - -2014 162,434 - 34%2015 176,734 - 9%2016 215,371 - 22%2017 258,445 $374,746 20%2018 310,134 $449,695 20%2019 372,161 $539,634 20%2020 446,593 $647,560 20%2021 535,912 $777,072 20%

$654,7552019-2021 Annual Average

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3. ORA’s recommendation 1

To improve implementation and facilitate evaluation of the pilot, ORA recommends the 2

following enhancements to GSWC’s proposal. 3

a. Reporting to the Commission 4

Pursuant to the settlement agreement approved by D.13 05 011,29 GSWC has been preparing and 5

submitting semi annual reports (due in April and October) on measures to improve customer 6

service. The reports include, among other things, data on and evaluation of customer billing 7

complaints. To facilitate monitoring and evaluation of the pilot, the Commission should require 8

GSWC to continue the semi-annual reports and include the above-specified measures on the pilot 9

program. In addition, the Commission should require GSWC to separately track and include in 10

these semi-annual reports information on customer billing complaints related to the payment 11

options provided by the pilot program. 12

b. Customer notification 13

PUC § 755(d) requires that the utility notify its customers of the pilot program and of the fact 14

that the program “may not continue, pending an assessment of the costs and benefits of the pilot 15

program to customers.” In response to ORA’s inquiry on how GSWC plans to notify its 16

customers, GSWC states: 17

Once the 2017 GRC is approved, GSWC will post an ongoing message after 18customers select the KUBRA EZ-PAY option at gswater.com or via Customer 19Servcice Center automated phone menu option. The message will say: “The fees 20related to the use of this service are currently recovered through rates as part of a 21pilot program authorized by PUC Code 755.5(d). If the pilot is assesed to be of little 22or no benefit to ratepayers, it may be discontinued and a transaction fee will apply 23thereafter.”24

GSWC will also use a “no cost” approach in notifying its customers and will post the 25above message under the Payment Options section of the back of the water bills.3026

29 GSWC 2011 GRC A.11-07-017, D.13-05-011, page 35: “The Settlement requires Golden State to (1) analyze customer contact investigation reports in detail to identify any on-going customer issues, (2) identify measures to improve customer service, and (3) provide progress reports to the Commission every six months.” 30 GSWC Response to ORA Data Request PPM-009, #3. (Emphasis in original.)

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The Commission should require GSWC to implement the above-specified customer-notification 1

steps. 2

D. Conclusion3

To improve program implementation and evaluation, the Commission should adopt ORA’s 4

recommended enhancements to GSWC’s proposed pilot program. 5

[END OF CHAPTER] 6

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Chapter 3. Customer Growth Factor in O&M Forecasts 1

A. Introduction 2

This chapter presents ORA’s analysis and recommendation on GSWC’s use of the customer 3

growth factor in developing Test Year Operation and Maintenance (O&M) expense estimates for 4

its operating districts. GSWC presents these O&M expense estimates in Table 4-H of its Report 5

on Results of Operations for each ratemaking area. 6


The Commission should reject GSWC’s application of the customer growth factor in developing 8

Test Year O&M expense estimates. Recorded data does not support GSWC’s assumed direct 9

relationship between O&M expenses and number of customers. See also discussion in ORA 10

Report on Labor and Benefits (Chapter 2, Section C.2) regarding the application of customer 11

growth factor in Test Year expense forecasting. 12

C. Discussion 13

1. GSWC’s methodology 14

GSWC Prepared Testimony of Jon Pierotti describes GSWC’s forecasting methodology for its 15

operating districts’ O&M expenses.31 Generally, GSWC’s forecasts are based on an inflation-16

adjusted five-year (2012-2016) average of recorded data. GSWC’s calculations use escalation 17

rates published in ORA’s Memoranda on Non-Labor and Wage Escalation and on Compensation 18

Per Hour. GSWC further escalates the inflation-adjusted five-year average expense amount by a 19

recorded five-year average customer growth factor, calculated using recorded customer counts 20

from 2011-2016. The table below provides an example of GSWC’s customer growth factor 21

calculation, using Region 3 data. 22

31 GSWC Prepared Testimony of Jon Pierotti, pages 4-5.

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Table 3-1: GSWC’s customer growth factor calculation – Region 3321

2

In forecasting the O&M expenses for Region 3, for example, GSWC escalates the 2016 O&M 3

amounts by 100.25% per year to account for customer growth.33 To support the application of 4

the customer growth factor in its Test Year O&M expense forecasts, GSWC states simply:345

Operation and maintenance costs are related to both the size and the demand put on 6the system. Customer growth increases both the size of the system and the demand 7on the system resulting in increased operation and maintenance expense. 8

GSWC provides no quantitative analysis to show the correlation between the recorded number of 9

customers and the level of O&M expenses. 10

2. ORA’s analysis 11

GSWC’s assertion that customer growth increases the system size and demand and, therefore, 12

results in increasing O&M expenses may be true in the long-run. However, for the period 13

considered for forecasting purposes in this GRC, GSWC’s customer growth and operating 14

expense levels do not correlate the way GSWC asserts. 15

Again, using Region 3 as an example, the figure below presents GSWC’s 2011-2016 recorded 16

average number of customers and O&M expenses. The recorded O&M expense amounts are 17

32 GSWC Workpaper Spreadsheet “RIII-SOE,” tab “Input.” 33 GSWC also escalates 2016 amounts to account for inflationary increases. 34 GSWC Prepared Testimony of Jon Pierotti, page 5.

Year Average No. of Customers

% Change, Recorded

% Change, 5-Yr Average

Customer Growth Factor

2011 98,644 2012 98,457 -0.19%2013 98,722 0.27%2014 99,110 0.39%2015 99,635 0.53%2016 99,867 0.23%2017 0.25% 100.25%2018 0.25% 100.25%

TY 2019 0.25% 100.25%

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normalized to remove inflationary effects.35 If GSWC’s assertion about the relationship between 1

these two variables is true, one should expect the changes in the number of customers to closely 2

track the changes in recorded O&M expense levels – i.e., the two plotted lines would move in 3

concert with each other. They do not. 4

Figure 3-1: Number of Customers vs. O&M expenses (2011-2016) – Region 3365

6

In fact, none of GSWC’s ratemaking areas show a direct relationship between customer growth 7

and O&M expenses as assumed by GSWC.37 Thus, GSWC’s proposed application of the 8

customer growth factor in the forecast calculation is inappropriate and should be rejected. 9

D. Conclusion10

GSWC’s recorded O&M expense data does not track with its historical number of customers. 11

Thus, it is unreasonable to apply GSWC’s calculated customer growth factor (in addition to other 12

inflationary factors) to recorded expense data for the purposes of forecasting Test Year O&M 13

expenses. The Commission should reject GSWC’s application of customer growth factor in its 14

O&M expense forecasting methodology. 15

[END OF CHAPTER]16

17

35 Adjusted to 2016 dollars. 36 GSWC Workpaper Spreadsheet “RIII-SOE,” tab “Input” and tab “Table 4-H.” 37 The correlation coefficients range from -0.48 to 0.84.

10,500

11,000

11,500

12,000

12,500

13,000

13,500

97,500

98,000

98,500

99,000

99,500

100,000

2011 2012 2013 2014 2015 2016

Region 3

Average number of customers O&M Expense, normalized ($000)

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23

Chapter 4. Water Loss Audit Expense 1

A. Introduction 2

The Commission should deny GSWC’s request for $116,000/year of additional funding in 3

Account 798 – Outside Services expenses to conduct its annual water loss audits (water audits).384

ORA’s review of the relevant regulatory requirements and GSWC’s current practice and 5

estimated costs indicates that GSWC is already being compensated for the cost of performing 6

water audits and additional funding is not needed or appropriate.7


ORA supports GSWC’s efforts to conduct water audits and to perform the associated data 9

validation. Such activities are not only required by various rules and regulations, but also good 10

utility management practice. Results from properly conducted and validated water loss audits 11

can assist GSWC in making prudent operational and infrastructure investment decisions. The 12

only issue here is whether GSWC should be allowed to artificially inflate its Outside Services 13

expense requests. 14

GSWC’s request for additional funding is not justified and should be denied for the following 15

reasons. 16

(1) While new state regulations require utilities to validate and report water loss audit results 17

to the Department of Water Resources (DWR), the regulations specify that this validation 18

can be done by the utility itself, provided certain conditions are met. GSWC can readily 19

meet these conditions; thus, there is no need for added funding in its Outside Services 20

expense forecasts.21

(2) GSWC has already been performing water audits and preparing water audit reports for 22

many years to comply with the Rate Case Plan’s Minimum Data Requirements II.E.3 23

38 GSWC Prepared Testimony by Jon Pierotti, pages 17-19; GSWC’s workpapers to support its expense forecast (e.g., for Region 3, spreadsheet RIII-SOE, tab Table 4-I (798), adjustment line “DWR Water Audit.”)

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(water lost audits) and II.E.16 (water management plans) and the DWR’s Urban Water 1

Management Plan (UWMP) requirements.392

(3) GSWC’s requests in this GRC already include capital funding for the UWMP 3

preparation; ORA does not contest such funding. The Commission authorized similar 4

funding in GSWC’s last GRC. 5

(4) GSWC’s request relies wholly on the DWR’s cost estimates intended to capture costs a 6

utility would incur to conduct the required water audits for the first time. 7

(5) GSWC’s current water audit practice and expense forecasts sufficiently support the 8

activities required by the water audit regulation. 9

The table below summarizes GSWC’s request and ORA’s recommendation regarding additional10

funding for annual water audits.11

Table 4-1. Additional funding for annual water audits 12

Water System(s) Addition to Acct. 798 – Outside Services GSWC40 ORA GSWC > ORA

Bay Point $5,800 $0 $5,800 Cordova $5,800 $0 $5,800 Orcutt $5,800 $0 $5,800 Simi Valley $5,800 $0 $5,800 Region 2 (6 systems) $44,800 $0 $44,800 Region 3 (7 systems) $48,600 $0 $48,600 Total $116,600 $0 $116,600

C. Discussion 13

This section presents the relevant regulatory requirements, GSWC’s existing activities to comply 14

with those requirements, GSWC’s funding request, and why it is not reasonable and should be 15

denied.16

39 The UWMPs due in 2020 and beyond must report annual water loss results for the five years prior. 40 GSWC Prepared Testimony of Jon Pierotti, pages 18-19.

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1. Regulatory Requirements 1

a. Rate Case Plan D.07-05-062, Minimum Data Requirements, Item II.E.3 2

The Commission’s Rate Case Plan D.07-05-062 (“Rate Case Plan”) requires Class A water 3

utilities such as GSWC to submit in GRC application filings a standard set of information, 4

specified in the Minimum Data Requirements (MDR). MDR Item II.E.3 requires the following: 5

Submit the results of a water loss audit performed no more than 60 days in advance of 6the submission of the proposed application. The audit report will be prepared using 7the free Audit Software developed by the American Water Works Association 8(AWWA) and available on the AWWA website. 9

GSWC has conducted water audits to prepare these audit reports (“MDR Audit Reports”) since 10

2007. In the current GRC, GSWC used the latest available version of the AWWA (Free) Water 11

Audit software (version 5.0). 12

b. Urban Water Management Plans (UWMPs) 13

California Water Code §§10610–10656 require urban water suppliers41 to prepare UWMPs every 14

five years to support their long-term resource planning, and to ensure adequate water supplies are 15

available to meet existing and future water demands. 16

GSWC has seventeen water systems42 meeting the urban water supplier criteria and is therefore 17

required to prepare and submit corresponding UWMPs to the DWR. It is also required to submit 18

these plans in GRC application filings to comply with MDR II.E.16 of the Rate Case Plan. 19

GSWC has done so in the current GRC. These 2015 UWMPs are also accessible from the DWR 20

website and GSWC’s own website.4321

41 California Water Code § 10617: "Urban water supplier" means a supplier, either publicly or privately owned, providing water for municipal purposes either directly or indirectly to more than 3,000 customers or supplying more than 3,000 acre-feet of water annually. An urban water supplier includes a supplier or contractor for water, regardless of the basis of right, which distributes or sells for ultimate resale to customers. 42 GSWC’s seventeen urban water systems: Artesia, Barstow, Bay Point, Bell-Bell Gardens, Claremont, Cordova, Culver City, Florence-Graham, Norwalk, Orcutt, Placentia-Yorba Linda, San Dimas, Simi Valley, South Arcadia, South San Gabriel, Southwest, and West Orange. 43 https://wuedata.water.ca.gov/uwmp_plans.asp, accessed on October 19, 2017; http://www.gswater.com/uwmp/, accessed on October 19, 2017. See Section 4.3 Distribution System Water Losses in the Urban Water Management Plans.

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Urban water suppliers must report in the UWMP distribution water system losses based on the 1

AWWA’s Water Audit Software. In 2020, and subsequent UWMP reporting cycles, suppliers 2

will be required to report losses for each of the last five years (e.g., 2016, 2017, 2018, 2019, and 3

2020 for the 2020 UWMP).444

GSWC’s authorized water service rates fund the costs of preparing the UMWPs. For example, 5

in GSWC’s Test Year 2016 GRC, the Commission authorized GSWC $65,00045 for each 6

UMWP or the preparation of the 2015 UMWPs.46 GSWC submits similar capital funding 7

requests in this GRC and ORA does not oppose those requests. 8

c. Title 23 California Code of Regulations (23 CCR) § 700 9

California Senate Bill (SB) 555, passed in October 2015, requires all urban retail water suppliers 10

to submit annually a validated water audit to the DWR. The resulting 23 CCR § 700 requires the 11

DWR to adopt rules for: 12

(1) the conduct of standardized water loss audits by urban retail water suppliers of their 13

potable water systems; 14

(2) the process for validating a water loss audit; 15

(3) the technical qualifications required of a person to engage in validating a water loss audit; 16

(4) the additional requirements for a person selected by an urban retail water supplier to 17

provide validation of its own Report; and18

(5) the method of submitting a report to DWR. 19

The first set of audit reports were due to the DWR on October 1, 2017. GSWC filed the required 20

validated water audit reports (“DWR Audit Reports”) accordingly, and upon ORA’s request, 21

44 DWR’s 2015 Urban Water Management Plans Guidebook for Urban Water Suppliers, Final March 2016: Section 4.3 Distribution System Water Losses, page 4-12 (http://www.water.ca.gov/urbanwatermanagement/docs/2015/UWMP_Guidebook_Mar_2016_FINAL.pdf, accessed on October 19, 2017.) 45 Before escalation and other loading factors. 46 D.16-12-067, pages 48-49.

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provided ORA a copy of those reports.47 GSWC’s DWR Audit Reports were prepared by or 1

under the direction of GSWC’s Operations Engineers in their respective water systems/operating 2

districts; the Water System Organization (WSO)/Cavanaugh consulting team validated the audit 3

results.48 Audit validation is the evaluation of the data quality used in performing the water 4

audits. WSO/Cavanaugh provided the validation service as part of the CA-NV AWWA’s Water 5

Loss Technical Assistance Program (TAP), funded by the U.S. Environmental Project Agency 6

and the California State Water Resource Control Board to provide free technical assistance to 7

water utilities preparing the first round of validated water audit reports to comply with the new 8

regulations.499

2. GSWC’s request for additional funding in Outside Services 10

GSWC’s Account 798 – Outside Services budget requests for its operating districts include 11

Consulting Services, Legal Fees, and Other Outside Services expenses. Its Test Year forecasts 12

for this account are generally based on inflation-adjusted five-year averages of recorded costs 13

(2012-2016). On top of these forecasts, GSWC requests an additional $116,000 for Test Year 14

2019 (total company), and corresponding inflation-adjusted amounts for subsequent years in this 15

rate case, to prepare and submit the annual DWR Audit Reports.50 GSWC developed its cost 16

estimates for each water system using estimates from the DWR’s Initial Statement of Reasons 17

(ISOR) prepared in association with the proposed validated water audit regulation (see GSWC’s 18

estimates in Table 4-1 above).5119

47 GSWC Response to ORA’s Data Request PPM-010 (Water Loss), Item 1. 48 GSWC Response to ORA’s Data Request PPM-010 (Water Loss), Items 3.b. 49 CA-NV AWWA Water Loss TAP webpage (http://ca-nv-awwa.org/canv/CNS/Water_Loss/CNS/Partnership_for_Saving_Water/collaborative.aspx?hkey=3a17ed12-55d4-4488-8907-2490e027786b, accessed on October 21, 2017). 50 GSWC Prepared Testimony by Jon Pierotti, pages 17-19. 51 ISOR for the proposed Title 23 CCR, Division 2, Chapter 7 – Water Audits and Water Loss Control Reporting(http://www.water.ca.gov/wateruseefficiency/docs/2017/Final_Draft_ISOR2_(00013238)_(2).pdf,accessed on October 19, 2017).

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a. ISOR cost estimates 1

The ISOR assesses the potential benefits and cost impacts of the proposed regulation. It provides 2

among other things the cost of performing the audits and preparing/submitting the validated audit 3

reports for typical water systems of varying sizes (measured by population served).52 In 4

describing the development of its cost estimates, the ISOR states:535

Gross versus Net Cost for Urban Retail Water Suppliers 6

Conducting water loss audits in accordance with Chapter 3 of the AWWA Manual of 7Water Supply Practices – M36, Water Audits and Loss Control Programs is a water 8utility best practice endorsed by AWWA. Many urban retail water suppliers in 9California already undertake audits on a regular basis. In such situations, the 10proposed regulation would potentially entail added cost for staff training and 11certification and submission of the water loss audit to the [DWR]. It would not 12impose significant additional cost to complete a standardized water audit, because the 13utility is already undertaking this practice. 14

The economic and fiscal impact analysis of the proposed regulation is based on urban 15retail water suppliers’ gross costs of compliance. It does not make adjustments in the 16cost estimates to account for urban retail water suppliers already completing 17standardized water loss audits as part of their operational best practices. In this 18regard, the analysis provides a conservative statement of the probably magnitude of 19the economic and fiscal impacts of the proposed regulation. 20

In other words, the ISOR estimates the costs for typical utilities to begin conducting and 21

reporting on water loss audits. The ISOR does not adjust down the unit cost estimates to account 22

for urban water suppliers, such as GSWC, who are already performing these audits before the 23

imposition of the proposed regulation. Moreover, while acknowledging the potential added 24

costs, the ISOR concludes that the proposed regulation would not impose significant additional 25

cost because the utility is already undertaking this practice. 26

52 ISOR for the proposed Title 23 CCR, Division 2, Chapter 7 – Water Audits and Water Loss Control Reporting, pages 10-13 (http://www.water.ca.gov/wateruseefficiency/docs/2017/Final_Draft_ISOR2_(00013238)_(2).pdf, accessed on October 19, 2017). 53 ISOR for the proposed Title 23 CCR, Division 2, Chapter 7 – Water Audits and Water Loss Control Reporting, page 10 (http://www.water.ca.gov/wateruseefficiency/docs/2017/Final_Draft_ISOR2_(00013238)_(2).pdf,accessed on October 19, 2017). (Emphasis added.)

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b. Validation cost 1

GSWC has sufficient technical resource and sophistication: its existing personnel are able to 2

perform the required tasks. Title 23 CCR § 700.4(c) allows the utility to conduct the validation 3

for its own water loss audit provided the person performing the validation meets specified 4

requirements. Title 23 CCR § 700.4(a) specifies the following technical qualifications for a 5

water audit validator: 6

(a) For purposes of Reports submitted on or before June 30, 2019, a water audit validator 7

means: 8

(1) a contractor working in the CA-NV AWWA Water Loss Technical Assistance 9

Program (“Water Loss TAP”) performing water loss audit training and conducting 10

audit validations, or 11

(2) a person who can demonstrate having conducted water loss audits in accordance 12

with the AWWA’s Water Audits and Loss Control Programs, Manual M36 (4th 13

edition), and the AWWA Free Water Audit Software, version 5.0, and having 14

conducted a minimum of 10 Level 1 audit validations in accordance with the 15

Water Research Foundation Level 1 Water Audit Validation: Guidance Manual 16

4639A (Water Audit Validation), or 17

(3) an individual certified by the CA-NV AWWA as a water audit validator. 18

Sub-items (2) and (3) allow for utility personnel to perform the validation functions. Prior to the 19

imposition of the DWR’s water audit requirements, GSWC’s Operations Engineering staff has 20

been performing water audits and the associated validation exercise that is an integral part of the 21

AWWA Water Audit software and process.54 Then, in preparing the first set of DWR Audit 22

Reports, submitted in October 2017, GSWC staff has had the benefit of the Water Loss TAP’s 23

54 GSWC’s Response to MDR II.E.4: “Operations Engineers at the District level oversee water loss control activities and annual leak detection surveys, which help to reduce unaccounted for water level. In addition to leak detection surveys, other activities designed to reduce water loss include: (1) system water audits to assess the efficiency of the distribution system; (2) maintenance of accurate records for each system that include leak location, number of leaks, type of leaks, estimated water loss materials used to repair or replace, etc.; (3) provision of data to assist in the planning of main and service replacements; (4) evaluation of meter accuracy data; and (5) regular review and monitoring of water loss reports.” (Emphasis added.)

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assistance and training to advance its proficiency in validating the audits.55 For future audits, 1

GSWC employees can obtain their Water Audit Validator Certificate from the CA-NV 2

AWWA.56 As noted in the ISOR, the regulations would not impose significant additional cost, 3

because the utility is already undertaking this practice. Further, GSWC’s revenue requirement 4

includes budget dollars for staff training and certification needed to operate water utility systems 5

to comply with applicable regulations.57 It is reasonable then for the Commission and ratepayers 6

to expect GSWC to take advantage of the options allowed in the regulations and of its existing 7

personnel and budgets to perform the necessary water audit activities. 8

Lastly, Title 23 CCR § 700.4(d) states that the water audit validator may not conduct a water loss 9

audit validation if he or she participated in compiling the water loss audit. This prohibition does 10

not affect GSWC’s ability to perform the audit validation in-house. GSWC can arrange to have 11

its staff from one region/district to validate the water loss audit compiled by staff in another 12

region/district. This is a benefit – a type of economy of scale – that the Commission and 13

ratepayers can and should expect from the operations of a large, multi-district Class A water 14

utility such as GSWC. 15

55 GSWC Response to ORA Data Request PPM-010, Items 4.a and 4.b. GSWC describes the following regarding the training received (emphasis added):

The 2016 AWWA Water Loss Audit for the Artesia System was prepared by GSWC Central District Operations Engineering staff. This audit was prepared in early 2017 and submitted to ORA in July 2017, prior to staff training and interaction with the CA-NV AWWA’s Water System Organization (WSO)/Cavanaugh consulting team.

GSWC staff performed this audit to the best of their ability, prior to receiving the above mentioned training. Data validity scores were chosen conservatively, based on staff’s reading of the AWWA scoring criteria. Many of these data validity scores were later increased by WSO during the validation process, after review of all of the records supplied to the consultant.

56 Excerpt from the California Water Loss Control Collaborative, Fall 2017 announcement: “Check out the Water Loss Control Collaborative website, hosted by the California-Nevada Section of AWWA. To participate in the Collaborative, or for information about the Water Audit Validator (WAV) Certificate Program, contact...” (http://docs.wixstatic.com/ugd/570726_0a2ce7ba695b4aa4b871614ba82b2d49.pdf,accessed on October 28, 2017). 57 GO Account 795 – Employee Training Costs.

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D. Conclusion1

GSWC has already been performing water audits and associated data validation in its preparation 2

of water audit reports to comply with the Rate Case Plan’s MDR II.E.3 (water lost audits) and 3

II.E.16 (water management plans) and the DWR’s UWMP requirements. GSWC’s request relies 4

wholly on the DWR’s ISOR estimates that are intended to capture costs for a utility to begin 5

undertaking water audits. GSWC’s current practice and funding sufficiently support the 6

activities required by the DWR’s water audit regulations. For all these reasons, the Commission 7

should deny GSWC’s request for additional funding in Account 798 – Outside Services to 8

conduct validated water loss audits. 9

[END OF CHAPTER] 10

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Chapter 5. District Operating Expenses 1

A. Introduction 2

This chapter presents ORA’s recommended adjustments to GSWC’s proposed Test Year 2019 3

district operating expenses – operation and maintenance (O&M) and administrative and general 4

(A&G) expenses in GSWC’s eight ratemaking areas. Recommended adjustments on certain 5

components of district operating expenses such as conservation expenses, labor and benefits 6

expenses, and allocated general office expenses are addressed elsewhere in ORA’s testimony.587


Section D presents ORA’s adjustments to operating expense forecasting that are specific to each 9

ratemaking area. They are too varied and numerous to list here. 10

Additionally, ORA makes two common adjustments in district expense forecasting: 11

Remove the customer growth factor GSWC uses to escalate recorded O&M expenses for 12

forecasting purposes.59 See Chapter 3 – Customer Growth Factor in this report. 13

Remove GSWC-requested additional dollars in Account 798 – Outside Services related 14

to water loss audits. See Chapter 4 – Water Loss Audit Expense of this report. 15

ORA’s Results of Operations Tables report reflects the adjustments presented herein. 16

C. Forecasting Methodology 17

This section provides an overview of GSWC’s and ORA’s approach to forecasting operating 18

expenses for Test Year 2019. 19

1. GSWC’s forecasting methodology 20

In general, GSWC develops its operating expense forecasts based on recorded five-year (2012-21

2016) averages escalated to adjust for inflation, and notes any deviations from this 22

58 ORA Report on Sales, CARW and Conservation; ORA Report on Labor and Benefits; ORA Report on General Office Expenses. 59 Accounts 78000, 78100, 78700 and 78800 in GSWC Reports on Results of Operations, Table 4H, for all ratemaking areas.

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methodology.60 Additionally, GSWC adjusts the recorded expenses or the escalated five-year 1

averages wherever it believes adjustments are necessary to more accurately reflect its operating 2

needs in the forecast years. 3

2. ORA’s forecasting methodology 4

a. Updating escalation factors 5

To escalate the recorded expenses for forecasting purposes, GSWC uses the escalation (inflation) 6

factors from ORA’s May 2017 Memoranda containing estimated rates for Non-Labor and Wage 7

Escalation and Compensation per Hour (“ORA Escalation Memos”). ORA does not object to 8

GSWC’s general approach, and also uses the factors from the same May 2017 memos to 9

facilitate an apple-to-apple comparison between GSWC’s and ORA’s forecasts. However, ORA 10

recommends that escalation factors from the latest available ORA Escalation Memos be used to 11

update the operating expense forecasts to be adopted in this GRC (similar to the updating process 12

used in the last GRC’s decisions, D.16-12-067 as corrected by D.17-03-001). 13

b. ORA’s adjustments 14

In developing operating expense forecasts, ORA’s approach differs from GSWC’s in two general 15

areas:6116

(1) ORA removes unsupported and inappropriate expenditures from recorded data used for 17

forecasting purposes, and one-time expenditures that are unlikely to repeat in this 18

GRC’s forecast period. These adjustments ensure that the forecast amounts are based 19

on expenditure levels that are reasonable and can be expected in the forecast period. 20

(2) ORA removes amounts that GSWC unnecessarily or inappropriately adds to the 21

recorded expenses or the escalated five-year averages. 22

23

60 GSWC Prepared Testimony of Jon Pierotti, pages 4-5. 61 In addition to the adjustments presented in Chapters 3 and 4 on customer growth factor and water audit expense, respectively.

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Section D presents the adjustments described above, by ratemaking area.62 ORA’s silence on 1

any particular expense account or issue does not imply its endorsement of GSWC’s 2

methodologies or assertions. 3

D. ORA’s Adjustments, by Ratemaking Area 4

1. Arden Cordova CSA 5

a. Account 788 – Other Maintenance Expenses6

In estimating Test Year expense for the Arden Cordova CSA’s Sub-Account 7134 – Other 7

Outside Services, ORA recommends using the 2013-2016 average of escalated expenses, instead 8

of 2012-2016. The table below presents the recorded expenses in Sub-Account 7134 (in nominal 9

dollars). 10

Table 5-1: Arden Cordova – Sub-Account 7134, Other Outside Services ($) 11

Description 2011 2012 2013 2014 2015 2016Recorded data 68,180 257,434 93,363 73,236 98,590 96,832

The recorded amount for 2012 is nearly three times the average from 2011 and the 2013-2016 12

average. It includes three extraordinary events – two well rehabilitation projects and one 13

reclassification of expenses originated from an unsuccessful capital project.63 GSWC explains 14

that the frequency of these well rehabilitation projects are unpredictable due to groundwater 15

contamination in the area.64 It is unreasonable to bake into the forecast expenses another 16

unsuccessful capital project; moreover, GWSC typically includes well rehabilitation projects in 17

its capital budget proposals.65 The forecast calculation therefore should exclude the 2012 data. 18

62 This chapter does not repeat discussions in Chapter 3 on ORA’s removal of the customer growth factor or Chapter 2 on water audit expense or address the flow through impact of adjustments in other forecast areas (e.g., increased sales forecast raises purchased power expense estimates). 63 GSWC Response to ORA Data Request WW2-029, Item 2.b.: (1) Emergency Maintenance on Dolecetto Well #6 ($19,535), (2) Emergency Maintenance on Mather Well #18 ($46,024), and (3) Reclassification of expenses on unsuccessful Windsor Well capital project ($94,079). 64 GSWC Response to ORA Data Request WW2-026, Item 2.c. 65 GSWC presents in its Capital Testimony several well improvement projects. For example: Skyline Plant Well Improvements in Los Osos for $180,400, pages 71-72.

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2. Bay Point CSA 1

a. Account 792 – Office Supplies & Expense 2

In forecasting Sub-Account 8315 – Telephone Leased Lines, ORA recommends using the 2015-3

2016 average of escalated expenses for the following: Bay Point, Santa Maria, Simi Valley, 4

Metropolitan (Region 2), Southwest District Office (Region 2), and Central District Office 5

(Region 2). 6

In 2014, GSWC negotiated an agreement with Centurylink and reduced the service provided by 7

Verizon; GSWC’s 2015 and 2016 recorded expenses reflect the savings from this change.668

Thus, the recorded expense level from those two years provides an appropriate basis for the Test 9

Year 2019 forecast; prior years’ amounts are not relevant and should be excluded from the 10

calculation. 11

GSWC confirms that this change in telecommunications vendor took place in Bay Point, Santa 12

Maria, Simi Valley, Metropolitan (Region 2), Southwest District Office (Region 2) and Central 13

District Office (Region 2).67 The table below presents the recorded expenses in Sub-Account 14

8315. For forecasting purposes, ORA recommends using the 2015-2016 average of escalated 15

expenses for all six areas.16

Table 5-2: Sub-Account 8315, Telephone Lease Lines ($) 17

Description 2012 2013 2014 2015 2016Bay Point 16,487 15,849 16,776 11,515 11,472Santa Maria 15,919 17,276 17,566 11,073 9,539Simi Valley 8,435 10,332 10,229 5,629 8,039Metropolitan 58,339 81,630 113,823 66,872 59,337Southwest District Office 46,948 40,789 52,044 42,991 37,701Central District Office 20,713 15,358 18,174 9,921 9,011

66 GSWC Response to ORA Data Request WW2-025, Items 2.b and 2.c. 67 GSWC Response to ORA Data Request WW2-031, Item 1.a.

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3. Clearlake CSA 1

a. Account 781 – Other Operation Expenses 2

Adjustment related to WCMA 3

In discovery, GSWC informed ORA that the Clearlake CSA’s Account 781 – Other Operation 4

Expenses forecast should be adjusted to exclude $827 (2014), $1,211 (2015) and $145 (2016), 5

amounts already tracked in its Water Conservation Memorandum Account (WCMA).68 ORA 6

agrees with these additional adjustments to the recorded data used to forecast this expense 7

account.8

b. Account 792 – Office Supplies & Expense 9

Adjustment related to WCMA 10

Similarly, GSWC informed ORA that the Clearlake CSA’s Account 792 – Office Supplies & 11

Expense forecast should be adjusted to exclude $415 (2016), an amount already tracked in its 12

WCMA.69 ORA agrees with this additional adjustment. 13

4. Los Osos CSA 14

a. Account 798 – Outside Services 15

Adjustment related to LOBMCMA 16

In discovery, GSWC informed ORA that the Los Osos CSA’s Account 798 – Outside Services 17

forecast should be adjusted to exclude a 2016 expense amount of $35,284 that is already tracked 18

in its Los Osos Basin Management Committee Memorandum Account (LOBMCMA).70 ORA 19

agrees with this additional adjustment. 20

Adjustment related to LOAMA 21

GSWC adds $125,068 to this account’s Test Year expense as part of its request to discontinue 22

the Los Osos Groundwater Adjudication Memorandum Account (LOAMA) and switch to 23

68 GSWC Response to ORA Data Request JE6-005, Item 1. 69 GSWC Response to ORA Data Request JE6-005, Item 1. 70 GSWC Response to ORA Data Request WW2-001, Item 1.

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forecasting the expenses in Account 798.71 In support of switching from memorandum account 1

treatment to Test Year forecasting, GSWC states: 2

With the Los Osos Stipulation in place, legal costs associated with this account can be 3forecasted. GSWC forecasted expenses of $125,068 by calculating a five-year 4average based upon the costs recorded within the last five years in the balancing 5account on the balance sheet..., adjusted for inflation.” 6

The Los Osos Stipulation referenced by GSWC was approved in October 2015 ending a lengthy 7

legal proceeding.72 Although GSWC asserts that significant on-going efforts are required to 8

implement the Stipulation,73 it is unreasonable to expect that the Stipulation will require a 9

sustained level of expenses equal to that incurred prior to the Stipulation. Developing a forecast 10

using the 2012-2016 recorded expenses therefore will likely lead to overstating expenses in this 11

GRC cycle. To protect ratepayers from over-compensating GSWC for these expenses in this 12

GRC, GSWC should maintain the LOAMA through this GRC cycle (through 2021), and in the 13

next GRC, develop a forecast based on recorded expenses from multiple years post Stipulation. 14

5. Santa Maria CSA 15

a. Account 781 – Other Operation Expenses 16

Adjustment related to SMSMA 17

In discovery, GSWC informed ORA that the Santa Maria CSA’s Account 781 – Other Operation 18

Expenses should be adjusted to exclude $101,563 (2012) and $50,781 (2013), amounts already 19

71 GSWC Prepared Testimony of Ronald Moore, page 10; GSWC Prepared Testimony of Jon Pierotti, page 20. 72 GSWC Response to ORA WW2-003, Item 2.a.: “On October 14, 2015 the San Luis Obispo County Superior Court approved a final Stipulated Judgment (Los Osos Basin Stipulated Judgement) in Los Osos Community Services District v. Southern California Water Company [Golden State Water Company] et al. (San Luis Obispo County Superior Court Case No. CV 040126)… The Stipulated Judgment is available on the LOBMC website (https://www.slocountywater.org/site/Water%20Resources/Los0sos/pdf/Stipulated%20Judgment%20FINAL%20PDF%2009%2015%2015.pdf).” 73 GSWC Response to ORA Data Request WW2-003, Item 2.a.

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tracked in its Santa Maria Stipulation Memorandum Account (SMSMA).74 ORA agrees with 1

these additional adjustments. 2

b. Account 788 – Other Maintenance Expenses 3

In forecasting the Santa Maria CSA’s Sub-Account 7134 – Other Outside Services, ORA 4

recommends removing $72,058 recorded in 2016. This expense was for “surveying work to 5

verify transmission and distribution mains locations in easements for the Cypress Ridge Water 6

System that was obtained from Rural Water in October 2015.”75 This expense will not recur and 7

should be excluded from the forecast calculation. 8

c. Account 792 – Office Supplies & Expense 9

In forecasting the Santa Maria CSA’s Sub-Account 8315 – Telephone Leased Lines, ORA 10

recommends using the 2015-2016 average of escalated expenses. See the discussion section 11

above for Bay Point CSA for the basis of ORA’s recommendation. 12

6. Simi Valley CSA 13


In forecasting the Simi Valley CSA’s Sub-Account 8315 – Telephone Leased Lines, ORA 15



7. Region 2 RMA 18

a. Account 744 – Chemicals 19

GSWC adds a 4% adjustment to Region 2’s Test Year chemical expense estimate to account “for 20

additional chemical cost at Dace Well #2.”76 This is a new well that GSWC expects to become 21

part of the supply mix in 2019. However, GSWC’s chemical cost expense calculation (chemical 22

expense total = well production volume × average chemical unit cost) uses well production 23

74 GSWC Response to ORA Data Request JE6-005, Item 1. 75 GSWC Response to ORA Data Request WW2-024, Item 4.b.i. 76 GSWC Workpaper spreadsheet MESUPPLY, tab Chemicals, cell E22 (comments).

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volume that already includes Dace Well #2 production,77 making the additional 4% adjustment 1

on top of the calculated chemical expense total redundant. ORA removes the redundant 4% from 2

the estimate, which results in a reduction of the Test Year chemical expense estimate from 3

$678,728 to $652,623.784

b. Account 781 – Other Operation Expenses 5

Sub-Account 7090 – Building Services 6

In forecasting Region 2’s Sub-Account 7090 – Building Services, ORA recommends using 7

escalated expense from 2016, instead of the average 2012-2016 escalated expense. The recorded 8

expense amounts in this account have decreased significantly between 2013 and 2016 (from 9

$138,411 to $58,863, respectively). In response to ORA’s inquiry on the declining expense 10

level, GSWC provides the following explanation. 11

The declining trend is from 2013 to 2016 primarily due to the Southwest termination 12of lease property in 16245 S Broadway St., Carson in 2014. The lease termination 13resulted in substantial savings in building maintenance associated with landscaping 14and security services. Furthermore, in 2015, Central and Southwest switched the 15landscaping company used to plant site maintenance mid-year; this further lowered 16building service costs.7917

Using recorded 2016 data to forecast Test Year expense will better capture savings resulting 18

from the operational changes described above. 19

Sub-Account 7110 – Office/Facility Rent/Lease 20

In forecasting Region 2’s Sub-Account 7110 – Office/Facility Rent/Lease, ORA recommends 21

using the escalated 2015-2016 average. GSWC relocated from “the leased Southwest District 22

Broadway Field Office to the new leased Spring Street Field Office location” in 2013-2014, and 23

the relocation necessitated a “limited overlap of lease payments obligation.”80 The Spring Street 24

office lease payment began in July 2013 and the Broadway office payment did not end until July 25

77 GSWC Workpaper spreadsheet MESUPPLY, tab 5yr History, cell J13 (comments). 78 Both estimates based on GSWC’s sales forecast. 79 GSWC Response to ORA Data Request WW2-026, Item 1.b. 80 GSWC Response to ORA WW2-026, Item 1.c.

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2014, resulting in a temporary increase in 2013-2014 expenses – see table below.81 Including the 1

expenses from the leases’ overlap period would overstate the lease expense in the Test Year.2

Thus, ORA recommends that the forecast for this sub-account be based on the 2015-2016 3

escalated average. 4

Table 5-3: Region 2, Sub-Account 7110 – Office/Facility Rent/Lease ($) 5

Description 2012 2013 2014 2015 2016Recorded 215,992 260,734 327,391 185,744 187,575

c. Central District Office, Account 792 – Office Supplies & Expense 6

In forecasting the Central District Office’s Sub-Account 8315 – Telephone Leased Lines, ORA 7



d. Central District Office, Account 798 – Outside Services 10

Adjustment related to OSMA 11

In discovery, GSWC informed ORA that the Central District Office’s Account 798 – Outside 12

Services should include an adjustment to exclude $2,250 (2012), an amount already tracked in its 13

Outside Services Memorandum Account (OSMA).82 ORA agrees with this additional 14

adjustment. 15

e. Southwest District Office, Account 792 – Office Supplies & Expense 16

In forecasting the Southwest District Office’s Sub-Account 8315 – Telephone Leased Lines, 17

ORA recommends using the 2015-2016 average of escalated expenses. See the discussion 18

section above for Bay Point CSA for the basis of ORA’s recommendation. 19

81 GSWC Response to ORA WW2-026, Item 1.c. 82 GSWC Response to ORA Data Request JE6-005, Item 1.

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8. Region 3 RMA 1


In forecasting Region 3’s Sub-Account 8315 – Telephone Leased Lines, ORA recommends 3

using the 2015-2016 average of escalated expenses. See the discussion section above for Bay 4

Point CSA for the basis of ORA’s recommendation. 5

b. Orange County District Office, Account 798 – Outside Services 6

Adjustment Related to OCBPRLMA 7

In discovery, GSWC informed ORA that the Orange County District Office’s Account 798 – 8

Outside Services forecast should be adjusted to exclude a 2016 expense amount of $174,863 that 9

is already tracked in its Orange County Basin Pumping Rights Litigation Memorandum Account 10

(OCBPRLMA).83 ORA agrees with this additional adjustment. 11

E. Conclusion12

ORA recommends that the Commission adopt ORA’s adjustments to the district operating 13

expense forecasts as presented above.14

[END OF CHAPTER]15

83 GSWC Response to ORA Data Request WW2-001, Item 1.

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Chapter 6. Income Taxes 1

A. Introduction 2

This chapter presents ORA’s recommended changes to GSWC’s federal income tax calculations 3

– specifically regarding the estimation of the prior-year California Corporate Franchise Tax 4

(CCFT) expense as a Federal Income Tax (FIT) deduction. 5

ORA’s recommendations presented in this chapter do not reflect changes resulting from the 6

federal Tax Cuts and Jobs Act (TCJA) signed into law on December 22, 2017. In an email dated 7

January 29, 2018, Assigned Administrative Law Judge Gerald Kelly approved a joint proposal 8

by GSWC and ORA to allow parties to address the TCJA impacts on forecasted revenue 9

requirements in this GRC. The approved schedule is as follows: 10

February 16, 2018 ORA submits its testimony assuming no change to tax law. 11

March 2, 2018 GSWC submits revised testimony and workpapers to reflect tax 12impacts. 13

April 2, 2018 ORA and others submit testimony on GSWC’s March 2, 2018 revised 14testimony. 15

April 27, 2018 GSWC and others submit rebuttal testimony on tax impacts. 16


The Commission should use the CCFT amounts from GSWC’s adopted (2018) attrition rate 18

adjustment filings as the prior-year CCFT expense amounts in the Test Year Federal Income Tax 19

calculations. 20

C. Discussion 21

In this section, ORA presents relevant regulatory guidance regarding the use of CCFT expense as 22

a FIT deduction, GSWC’s calculations, and ORA’s recommended update to GSWC’s 23

calculations. 24

1. Use of prior-year CCFT expense 25

GSWC explains the reason why the prior-year CCFT expense should be used as a deduction in 26

the FIT calculation:27

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CPUC Decision 89-11-058 (issued November 22, 1989) requires that, for ratemaking 1purposes, the prior-year’s state income tax should be used in the calculation of a test 2year’s federal income tax. This procedure reflects the Internal Revenue Service’s 3continuing position that Internal Revenue Code Section 461(d) applies with respect to 4the timing of deducting California income taxes for federal purposes.845

ORA does not contest the use of prior-year CCFT expense as a deduction in the FIT calculation.6

This approach is consistent with the methodology the Commission adopted in D.89-11-05885 and 7

recently affirmed in D.17-06-008.868

2. Estimate of prior year’s CCFT expense. 9

While ORA agrees with GSWC in the use of the prior-year CCFT expense, GSWC and ORA 10

differ in the methodology used to estimate that expense amount. GSWC uses its estimated prior-11

year CCFT expense at present rates, while ORA uses the prior-year CCFT expense adopted in 12

rates. ORA’s method is consistent with D.17-06-008, the Commission’s recent decision for San 13

Gabriel Valley Water Company (“San Gabriel”). D.17-06-008 affirmed ORA’s approach that 14

for ratemaking purposes the CCFT deduction used to calculate a Test Year FIT expense must be 15

the prior year’s CCFT expense amount adopted in rates.87 The Commission should reaffirm this 16

approach here. 17

84 GSWC Prepared Testimony of Wayne McDonald Testimony, page 5. 85 D.89-11-058 (Investigation 86-11-019 related to the 1986 Tax Report Act, and PG&E A.85-12-050). Conclusion of Law No. 1 states: The Commission concludes that ratemaking should reflect the value of the CCFT deduction. Since the prior year’s CCFT ratemaking amount is now readily available from the recent Commission adopted records, flow-through treatment for the CCFT deduction shall be used in setting rates.” (ftp://ftp2.cpuc.ca.gov/LegacyCPUCDecisionsAndResolutions/Decisions/Decisions_D840200_to_D9212077/D8911058_19891122_I8611019.pdf, accessed on October 31, 2017.) 86 San Gabriel Valley Water Company Test Year 2017/2018 GRC D.17-06-008 (A.16-01-002). (http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M190/K658/190658218.pdf, accessed on October 31, 2017.) 87 San Gabriel Valley Water Company Test Year 2017/2018 GRC D.17-06-008 (A.16-01-002), page 41: “For setting future rates, the Commission requires that San Gabriel match its CCFT deduction in the calculation of TY FIT expense to the prior year’s CCFT expense adopted in rates.” (http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M190/K658/190658218.pdf, accessed on October 31, 2017.)

A.17-07-010

44

a. GSWC’s estimate 1

ORA’s discussion uses Region 3 income tax calculations for illustrative purposes; GSWC’s 2

income taxes for other ratemaking areas are similarly calculated. For convenience, Appendix 6-3

1 of this report provides a copy of GSWC’s Table 4-K in its application showing the prior-year 4

CCFT estimate in GSWC’s Region 3 income tax calculation. GSWC uses the “prior-year” 5

CCFT estimate of $1,472,800 as a deduction in its FIT calculation for the Test Year 2019. That 6

amount is based on GSWC’s requested increased expenses and rate base for the Test Year 2019, 7

but revenues at “present rates” – where “present rates” are GSWC’s water service rates effective 8

at the time the company filed its GRC application in July 2017 (i.e., 2017 rates). 9

b. ORA’s estimate 10

ORA’s Test Year 2019 FIT calculation uses the CCFT expense amount from the year prior, 11

which in this case is 2018. Those 2018 CCFT expense amounts are now available from GSWC’s 12

2018 attrition rate adjustment filings.88 ORA’s use of the CCFT amounts from the 2018 attrition 13

adjustments is more up-to-date and consistent with the methodology adopted by the 14

Commission. In Region 3, for example, ORA’s FIT calculation uses the $2,137,600 CCFT 15

expense adopted in GSWC’s 2018 attrition filing for Region 3.8916

This approach is consistent with the Commission’s decision in San Gabriel’s most recent GRC, 17

in which ORA made a similar recommendation. In D.17-06-008 re: the San Gabriel GRC, the 18

Commission states: 19

We adopt the ORA position, affirming that for ratemaking purposes, the CCFT 20deduction used to calculate a [Test Year] FIT expense must be the prior year’s CCFT 21expense amount adopted in rates.9022

Ordering Paragraph 5 of D.17-06-008 (below) references the use of the “most recent ratemaking 23

filings” which in this case would be GSWC’s 2018 attrition filings. 24

88 GSWC 2018 attrition filings: Advice Letter 1724-W for Bay Point, Advice Letter 1725-W for Arden Cordova, Advice Letter 1726-W for Los Osos, Advice Letter 1727-W for Santa Maria, Advice Letter 1728-W for Simi Valley, Advice Letter 1729-W for Region 2 and Advice Letter 1730-W for Region 3. 89 GSWC Advice Letter 1730-W, 2018 attrition filing for Region 3 (workpapers spreadsheet RII-SOE, tab Table 4-K, line item “Total State Tax @ 8.84%”). 90 D.17-06-008, page 38. (Emphasis added.)

A.17-07-010

45

5. The position advocated by the Office of Ratepayer Advocates is hereby adopted 1with respect to the California Corporation Franchise Tax (CCFT) deduction 2amounts used to calculate federal income tax expense for test year 2017 for San 3Gabriel Valley Water Company (San Gabriel). Accordingly, CCFT deduction 4amounts shall equal the 2016 CCFT expense amounts adopted in the San 5Gabriel’s most recent ratemaking filings, namely: $1,067,700 for the Fontana 6Water Company Division and $1,090,900 for the Los Angeles County Water 7Division.918

The above-cited Commission decision supports ORA’s update to the FIT tax calculation to (1) 9

avoid a mismatch between ratemaking expense and corresponding ratemaking deductions, and 10

(2) ensure a fair outcome to ratepayers. The table below presents the CCFT amounts from 11

GSWC’s attrition filings for 2018 that should be used in the FIT tax calculation for Test Year 12

2019.9213

Table 6-1: CCFT from 2018 Attrition Filings 14

15

D. Conclusion16

ORA’s use of CCFT expense amounts from GSWC’s adopted 2018 attrition adjustment filings 17

as prior-year CCFT expenses for FIT calculation is consistent with relevant regulatory 18

requirements, and reflects more up-to-date values. 19

[END OF CHAPTER] 20

21

91 D.17-06-008, pages 45-46. (Emphasis added.) 92 GSWC did not request 2018 attrition increases for Clearlake.

Arden Cordova 263,500$ Bay Point 86,500$ Los Osos 103,200$ Santa Maria 297,700$ Simi Valley 113,700$ Region 2 2,731,500$ Region 3 2,137,600$

Ratemaking Area CCFT

A.17-07-010

46

Chapter 7. Materials and Supplies 1

A. Introduction 2

This chapter presents ORA’s adjustment to GSWC’s estimate for Materials and Supplies (M&S) 3

for the Region 2 (Metropolitan) ratemaking area. 4


For Region 2, the Commission should adopt ORA’s M&S estimate of $733,600 for the forecast 6

years, instead of GSWC’s $1,737,100 estimate. ORA’s estimate is reasonable because: 7

(1) it removes the double counting of the material costs for two pipeline projects;8

(2) it tempers the impact of the unusually large 2015 pre-purchase of pipeline materials; 9

(3) it is also consistent with ORA’s recommended reduction in GSWC’s pipeline 10

replacement request for Region 2. 11

C. Discussion 12

M&S is a component of rate base. GSWC presents its rate base estimates in Table 4-L of its 13

workpapers for various ratemaking areas. ORA presents its Test Year estimates for M&S and 14

other rate base components in its Results of Operations Tables report. This discussion only 15

addresses Region 2 estimates. 16

1. GSWC’s estimates 17

GSWC uses its recorded 2016 M&S amount of $1,737,100 as a proxy for the forecast years’ 18

estimates. However, the amounts for recorded years 2015 and 2016 are significantly higher than 19

prior years – about 300% or more (see Line 7 in the table below). 20

A.17-07-010

47

Table 7-1: Region 2 weighted average depreciated rate base931

2

2. ORA’s discovery 3

In response to ORA’s request for an explanation for the significantly higher level in 2015-2016, 4

GSWC explained:5

The increase was due to the pre-purchase of pipeline material in mid-2015 to 6accommodate several capital improvement projects in the Metropolitan service area 7that were scheduled for construction. GSWC purchased the material from HD Supply 8after soliciting bids from several material suppliers.949

93 GSWC Report on Results of Operations, Table 4-L – Weighted Average Depreciated Rate Base, line “Materials & Supplies” for Region 2. 94 GSWC Response to ORA Data Request PPM-004, Item 2.b.

10/20/17HBW

(a) (b) (c) (d) (e) (f) (g)Recorded Years

WUDF1 No. Description 2011 2012 2013 2014 2015 2016

$ $ $ $ $ $

2 10010 Utility Plant in Service 425,230.7 448,814.7 466,327.4 496,124.2 521,457.9 551,193.33 10030 Utility Plant under Construction 16,980.6 12,932.1 21,032.8 25,751.9 24,200.5 43,203.23a 10050 Acquisition Adjustment (8,321.1) (8,321.1) (8,321.1) (8,321.1) (8,321.1) (8,321.1)

4 Total Utility Plant 433,890.3 453,425.8 479,039.2 513,555.1 537,337.3 586,075.5

5 25000 Depreciation Reserve (110,210.4) (122,689.8) (127,707.9) (138,691.2) (150,123.7) (159,196.8)

6 Net Utility Plant 323,679.9 330,735.9 351,331.3 374,863.9 387,213.5 426,878.7

7 13100 Materials & Supplies 439.6 431.9 443.7 526.0 1,631.5 1,737.18 24100 Advances (9,024.1) (8,175.9) (7,969.1) (7,747.6) (7,618.4) (7,512.5)9 26500 Contributions (27,590.3) (28,312.7) (34,306.6) (39,673.7) (41,479.6) (42,519.9)

10 28000 Rate Base before Adjustments 287,505.1 294,679.3 309,499.3 327,968.6 339,747.0 378,583.4

11 Investment Tax Credit (433.1) (421.6) (409.1) (397.6) (386.0) (374.5)12 Deferred Income Taxes (29,746.1) (36,849.4) (39,331.0) (43,921.7) (58,392.3) (69,456.8)13 Deferred Revenues (1,065.3) (1,171.9) (1,256.3) (1,340.6) (1,457.3) (1,661.5)14 Allowance for Working Cash 206.3 269.5 2,952.1 2,952.1 2,952.1 (2,473.2)15 Common Utility Allocation 19,125.0 19,660.7 11,598.6 13,218.8 11,957.2 12,136.9

16 Weighted Average Rate Base 275,591.8 276,166.5 283,053.6 298,479.6 294,420.7 316,754.3

GOLDEN STATE WATER COMPANY

REGION 2 (Metropolitan)

Weighted Average Depreciated Rate Base(Dollars in Thousands)

A.17-07-010

48

GSWC also provided documents showing purchased unit prices and quantities of ductile iron 1

pipes, gate valves, and fire hydrants,95 and a list of Southwest and Central Basin East pipeline 2

projects requiring the purchased materials96 (see excerpts provided in the following tables). 3

Table 7-2: Region 2 pre-purchased pipeline materials’ unit prices and quantities 4

5

Table 7-3: Region 2 projects supported by pre-purchased pipeline materials 6

7

3. ORA’s estimates 8

Projects with Work Order (WO) Nos. 25031466, 25031474 and 25031475 (highlighted in the 9

Table 7-3 above), although showing proposed construction in 2015 or 2016, also appear in 10

GSWC’s Construction-Work-In-Progress (CWIP) list as incomplete as of end-of-year 2016.9711

GSWC uses the 2016 CWIP balance from that list as a proxy for the forecast years’ CWIP 12

balance. The CWIP balance is also a component of rate base (GSWC’s Table 4-M presents 13

95 GSWC Response to ORA Data Request PPM-004, Item 2.b, pdf file PPM-004 Q.2 CEOReq_061615. 96 GSWC Response to ORA Data Request PPM-004, Item 2.b, Excel file PPM-004 Q.2 PrePurchaseSched_042715. 97 GSWC Workpaper Spreadsheet “CWIP 123116 Asset mngmnt ALL.”

16-INCH 12-INCH 8-INCH 12-INCH 8-INCH 2-Oulet 3-Outlet25031477 112th Area Main Replacements 5,000 6,900 14 47 24 0 design 15/const 1625031387 El Segundo Blvd Area 5,000 2,800 32 23 10 6 design 15/const 1625031466 154th St Area 20,000 75 40 0 const 1525031390 WQ Area 16 9,000 71 18 0 desgin 15/const 1625031467 Spring St Area 7,000 30 14 0 const 1525031469 Larch Ave, Manhattan to Mari 2,500 16 5 0 design 15/const 1625031476 Wilton Pl, 129th to 135th 2,300 13 5 0 const 1525031474 130th St Area Main Replacement 2,600 3,800 12,750 10 53 39 0 const 1525031475 Gardena Blvd Area Main Replacement 6,100 650 27 7 7 design 15/const 1625031385 Broadway, 131st to 135th 550 12 0 2 const 1522811125 Maie Ave Area 3,450 16 7 0 design 15/const 1622811126 Nadeau St Area 2,950 35 0 6 design 15/const 16

DUCTILE IRON PIPE (LF) GATE VALVE (EA) FH (EA) Proposed SchedulePROJECTWork

Order

A.17-07-010

49

CWIP as “Utility Plant Under Construction,” on line 3). Thus, the pipeline material costs for 1

these projects appear in GSWC’s rate base estimate twice: once as part of this M&S estimate, 2

and again embedded in the CWIP balance estimate. 3

To address this double counting in M&S forecasting, ORA first removes the pipeline material 4

costs that appear both in the recorded 2015 or 2016 M&S amounts and in the 2016 CWIP 5

balance amount. ORA then examines the adjusted recorded M&S amounts in 2011-2016 to 6

develop a reasonable estimate for the forecast years. 7

a. Adjusting 2015 and 2016 recorded values for forecasting purposes. 8

For the reason described above, ORA removes $551,092 from the 2015 and 2016 M&S values 9

for the purchased material costs for two of the three projects also appearing in the CWIP list.9810

The following table shows the calculation of that $551,092 adjustment, based on the project and 11

unit price information provided by GSWC. 12

Table 7-4: Region 2 M&S – Adjustment to 2015 & 2016 Data 13

14

b. Developing estimates based on adjusted recorded values. 15

The above adjustment reduces the 2015 and 2016 M&S values by about a third (approximately 16

from $1,700,000 to $1,000,000). The adjusted 2015 and 2016 values however are still twice as 17

much as prior years’ recorded amounts ($432,000-530,000). Setting the forecast years’ M&S 18

estimates equal to the 2016 value, even after the adjustment, ignores the significantly lower 19

M&S levels in prior years and the impact of the unusually large pre-purchase in 2015. 20

To address these concerns, ORA uses the average of 2012-2016 (five-year average) to estimate 21

the forecast years’ M&S amounts – a method frequently used by GSWC in its forecasts. This 22

approach is reasonable because it tempers the impact of the unusually large 2015 pre-purchase, 23

and reduces the variance from prior years (2011-2014). It is also consistent with ORA’s 24

98 The third project WO No. 25031474 appears in the CWIP list but has zero dollars for 2016.

16-INCH 12-INCH 8-INCH 12-INCH 8-INCH 2-Oulet 3-Outlet35.40$ 22.01$ 13.19$ 1,340.70$ 694.33$ $ 997.35 $ 1,329.80

25031466 154th St Area 20,000 75 4025031475 Gardena Blvd Area Main Replacement 6,100 650 27 7 7

Subtotal -$ 134,261$ 272,374$ 36,199$ 52,075$ 46,875$ 9,309$ TOTAL ADJUSTMENT 551,092$

Unit cost (PPM-004 Q.2 CEOREQ_061615)

Work Order PROJECT DUCTILE IRON PIPE (LF) GATE VALVE (EA) FH (EA)

A.17-07-010

50

recommended reduction of GSWC’s pipeline replacement request in Region 2 (see ORA Report 1

on Plant – General Issues). 2

Thus, ORA recommends including $733,600 in M&S for the forecast years. The following table 3

presents a comparison of GSWC’s and ORA’s M&S estimates. 4

Table 7-5: Region 2 M&S Comparison 5

6

D. Conclusion7

ORA’s M&S estimate of $733,600 is reasonable because it removes the double counting of two 8

projects whose costs in part appear in the forecast years’ estimates for M&S as well as for CWIP, 9

and tempers the impact of the unusually large pre-purchase of pipeline materials in 2015. The 10

lower M&S estimate is also consistent with ORA’s recommended reduction in GSWC’s pipeline 11

replacement request for Region 2. This adjustment lowers the Region 2 revenue requirement by 12

approximately $124,000 per year. 13

[END OF CHAPTER]14

15

Description ($000) 2011 2012 2013 2014 2015 2016M&S - GSWC 439.6$ 431.9$ 443.7$ 526.0$ 1,631.5$ 1,737.1$ 1,737.1$ Last recorded yearM&S - ORA 439.6$ 431.9$ 443.7$ 526.0$ 1,080.4$ 1,186.0$ 733.6$ 5-year average

551.1$ 551.1$ 1,003.5$ M&S reduction

Estimate for 2017-2020

Adjustment for forecasting purposes

A.17-07-010

51

Chapter 8. Working Cash 1

A. Introduction 2

This chapter addresses GSWC’s estimated working cash allowance (“working cash”), a 3

component of rate base. Specifically, ORA presents its analysis and recommended changes to 4

GSWC’s calculated revenue lag days in all ratemaking areas except for the Clearlake CSA. 5

The CPUC Standard Practice U-16 provides a guide in determining working cash using the 6

“weighted average or -lead-lag days” method.997


The Commission should use ORA’s recommended revenue lag days to calculate the final 9

working cash allowance, reflective of final adopted expenses and revenues. 10

GSWC’s proposal is: 11

(1) Unfair to ratepayers because it would allow GSWC to be compensated twice on its Water 12

Revenue Adjustment Mechanism/Modified Cost Balancing Account (WRAM/MCBA) 13

balances,14

(2) Unreasonable since it relies on the assumption that in the forecast years 2019-2021 15

GSWC will acquire the same WRAM/MCBA balances and associated amortizations as 16

those in the preceding years, and 17

(3) Unreasonable because the resulting working cash estimates would be significantly out of 18

line with the amounts adopted in rates ($20.6 million more, an equivalent of a 6% 19

increase in rate base). 20

The working cash amounts included in ORA’s Results of Operations Tables report reflect ORA’s 21

recommended revenue lag days presented herein. 22

99 CPUC Standard Practice U-16, Chapter 3 (http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M055/K059/55059235.PDF, accessed on December 6, 2017).

A.17-07-010

52

C. Discussion 1

This section presents the previous GRC’s adopted working cash amounts for comparison 2

purposes, GSWC’s proposal, and ORA’s analysis and recommendation. 3

1. Last adopted vs. GSWC’s requested working cash amounts in this GRC 4

To illustrate the impact of GSWC’s working cash proposal, the following table provides a 5

comparison of GSWC’s working cash estimates in this GRC100 and the amounts adopted in the 6

last GRC D.16-12-067 (corrected by D.17-03-001). GSWC’s working cash estimates exceed the 7

last GRC’s adopted amounts by significant amounts, totaling $20.6 million. This change in 8

working cash alone would increase GSWC’s total rate base by 6%.1019

Table 8-1: Adopted vs. GSWC Request 10

11

100 GSWC Report on Results of Operations, Table 4-L – Weighted Average Depreciated Rate Base, line “Allowance for Working Cash” for respective ratemaking area. 101 6% = $20.6 million change in working cash ÷ $320.4 million in total company rate base. Total company rate base is the sum of ratemaking areas’ “2017 Escalation Year” rate base values provided in GSWC’s A.17-07-010, pages 3-17.

Last GRC: adopted

This GRC: GSWC request

Request > Adopted

[a] [b] [c] = b - aArden Cordova 658,400$ 1,013,800$ 355,400$ Bay Point (10,100)$ 476,100$ 486,200$ Clearlake 34,200$ 26,600$ (7,600)$ Los Osos 149,400$ 579,500$ 430,100$ Santa Maria 45,000$ 1,001,900$ 956,900$ Simi Valley 435,100$ 1,027,700$ 592,600$ Region 2 (2,473,200)$ 15,883,600$ 18,356,800$ Region 3 391,320$ (210,500)$ (601,820)$ TOTAL (769,880)$ 19,798,700$ 20,568,580$

Working CashRatemaking

Area

A.17-07-010

53

2. GSWC’s estimated revenue lag days 1

GSWC’s Prepared Testimony of Jon Pierotti describes the company’s calculated lead-lag day 2

calculation and working cash calculations.102 Most notably, GSWC proposes to include the 3

revenue lag associated with the collection of its net 2016 WRAM/MCBA balance 4

(“WRAM/MCBA adjustment”).1035

The table below presents the impact of including GSWC’s WRAM/MCBA adjustment to the 6

revenue lag day estimates.1047

Table 8-2: GSWC’s estimated revenue lag days1058

9

In the last GRC, GSWC requested to include a similar WRAM/MCBA adjustment; ORA 10

opposed the request.106 The working cash allowance adopted in D.16-12-067 (corrected by 11

D.17-03-001) reflects amounts stipulated by GSWC and ORA (Column [a] of the above table). 12

102 GSWC Prepared Testimony of Jon Pierotti, pages 50-55. Related workpapers are in GSWC’s SOE file (Lead Lag tab) and Revenue Lag file(s) for each ratemaking area. 103 GSWC Prepared Testimony of Jon Pierotti, pages 52-53. 104 Clearlake CSA does not have WRAM/MCBA. 105 GSWC workpaper spreadsheet file(s) “Revenue Lag” for respective ratemaking area. 106 A.14-07-006, Exhibit ORA-1, ORA Company-Wide Report on the Results of Operations, Chapter 6: Working Cash.

Without WRAM/MCBA

WRAM/MCBA Adjustment

With WRAM/MCBA

[a] [b] [c]Arden Cordova 47.5 8.1 55.6Bay Point 30.8 39.2 70.1Clearlake 33.1 - 33.1Los Osos 47.1 56.6 103.6Santa Maria 31.3 29.5 60.8Simi Valley 49.2 5.8 55.0Region 2 33.9 64.1 98.0Region 3 43.7 3.1 46.8

Ratemaking Area

GSWC's Revenue Lag Day Estimate

A.17-07-010

54

3. ORA’s estimated revenue lag days 1

In the last GRC, ORA opposed GSWC’s WRAM/MCBA adjustments because: (1) it is 2

unreasonable for GSWC to be compensated twice on its WRAM/MCBA balances; (2) it is 3

unreasonable to assume that GSWC will acquire the same WRAM/MCBA balances and 4

associated amortizations in the forecast years. 5

(1) With regard to earning both a return and interest, ORA explained: 6

GSWC is allowed to earn interest on WRAM balances at a 90-day commercial paper 7rate. If WRAM balances are also allowed in calculating revenue lead-lag days, the 8forecasted WRAM balance will flow into the rate base through working cash and 9ratepayers will pay an additional return. Under GSWC’s proposal, WRAM balances 10will earn a return twice from ratepayers – once from working cash in rate base, 11equaling the authorized rate of return, and then from the recovery of interest in 12WRAM surcharges. Hence, to correct this situation, ORA removes WRAM balances 13from GSWC’s calculation of revenue lead lag days.10714

The same holds true in this GRC – i.e., GSWC’s proposal is not reasonable because it 15

would allow the company to collect from ratepayers accrued interest as well as a rate of 16

return on WRAM balances. 17

(2) GSWC’s WRAM/MCBA adjustments in its revenue lag day calculations are based on the 18

ratemaking areas’ amortization (revenue collection) of their respective 2016 19

WRAM/MCBA net balances starting in March 2017 and ending in September 2018.10820

In effect, GSWC forecasts the same revenue under-collections and associated 21

amortizations to occur in 2019-2021. There is no basis for that assumption, as ORA 22

explained in the last GRC: 23

Forecasting a persistent revenue under- or over-collection in a GRC defies logic, 24since the purpose of a GRC is to establish rates to meet the authorized revenue 25requirement and avoid a revenue shortfall (as well as revenue over-collection). By 26proposing to include a prior year’s (2013) WRAM balance in the working cash 27forecasts, GSWC suggests essentially that regardless of how low or high rates are set 28in this proceeding for 2016-2018, they will produce the same shortfall (or in some 29cases over-collection) experienced in the prior year’s (2013) WRAM balances. If this 30

107 A.14-07-006, Exhibit ORA-1, ORA Company-Wide Report on the Results of Operations, page 47. 108 GSWC’s revenue lag workpapers for the respective ratemaking areas (e.g., spreadsheet file “AC WRAM 2017” for Arden Cordova CSA).

A.17-07-010

55

suggestion were true, one would be forced to conclude that WRAM is a lopsided 1mechanism that produces consistently unbalanced results.1092

Moreover, the implementation of the sales adjustment mechanism (SAM) pilot adopted in the 3

last GRC110 is intended to help reduce significant under-collections.111 This mechanism did not 4

exist in the period during which the 2016 WRAM/MCBA balances accrued. For this rate cycle, 5

ORA does not oppose the continuation of the pilot, while GSWC requests replacing it with a 6

permanent but similar sales reconciliation mechanism (SRM). Both of these options are intended 7

to help reduce significant under-collections, and do not support GSWC’s assumed persistent 8

under-collection through the forecast years. 9

For the reasons presented above, the Commission should reject GSWC’s WRAM/MCBA 10

adjustments in the revenue lag day calculations, and use the unadjusted revenue lag day 11

estimates (values in Column [a] in Table 8-2 above) to calculate the working cash allowance to 12

be included in rate base. 13

4. Last adopted vs. GSWC’s and ORA’s estimated working cash amounts 14

For illustrative purposes, ORA calculates working cash estimates based on GSWC’s application 15

numbers but with ORA-recommended revenue lag days (without WRAM/MCBA adjustment). 16

As the table below shows, the ORA-recommended number of revenue lag days result in working 17

cash estimates that are more in line with the amounts adopted in rates in the last GRC. Using 18

GSWC’s proposed revenue lag days produces working cash estimates that are $20.6 million 19

higher than amounts adopted in the last GRC (see Column [d] in the table below). 20

109 A.14-07-006, Exhibit ORA-1, ORA Company-Wide Report on the Results of Operations, page 48. 110 D.16-12-067, pages 200-203. 111 For example, GSWC filed Advice Letter 1731 to implement the sales adjustment for the Arden Cordova CSA with rates to be effective January 1, 2018.

A.17-07-010

56

Table 8-3: Last adopted vs. GSWC’s and ORA’s estimates 1

2

D. Conclusion3

GSWC’s proposed inclusion of the 2016 WRAM/MCBA adjustment in its revenue lag day 4

estimates is unreasonable and illogical, and produces working cash estimates that are $20.6 5

million higher than the last GRC’s adopted amounts, translating to a 6% increase in total 6

company rate base. ORA-recommended revenue lag days result in working cash estimates that 7

are more in line with the amounts adopted in rates. The Commission should use ORA’s 8

recommended revenue lag days in calculating the working cash allowance. 9

[END OF CHAPTER] 10

GSWC ORA * GSWC ORA *[a] [b] [c] [d] = b - a [e] = c - a

Arden Cordova 658,400$ 1,013,800$ 751,600$ 355,400$ 93,200$ Bay Point (10,100)$ 476,100$ (50,700)$ 486,200$ (40,600)$ Clear Lake 34,200$ 26,600$ 26,600$ (7,600)$ (7,600)$ Los Osos 149,400$ 579,500$ 86,000$ 430,100$ (63,400)$ Santa Maria 45,000$ 1,001,900$ 127,100$ 956,900$ 82,100$ Simi Valley 435,100$ 1,027,700$ 833,600$ 592,600$ 398,500$ Region 2 (2,473,200)$ 15,883,600$ (3,311,500)$ 18,356,800$ (838,300)$ Region 3 391,320$ (210,500)$ (1,063,800)$ (601,820)$ (1,455,120)$ TOTAL (769,880)$ 19,798,700$ (2,601,100)$ 20,568,580$ (1,831,220)$ * Using GSWC's application numbers, except for revenue lag days.

Change from TY 2016 GRC Adopted

TY 2016 GRC Adopted

Working CashRatemaking Area

TY 2019 GRC Working Cash Estimate

A.17-07-010

57

Chapter 9. General Office Allocation 1

A. Introduction 2

This chapter presents ORA’s analysis and recommendation on GSWC’s proposed allocation of 3

the General Office (GO) costs among the subsidiaries of American States Water Company 4

(“American States” or AWR, its stock symbol), a holding company. AWR subsidiaries consist 5

of two wholly-owned subsidiaries: GSWC and American States Utility Services (ASUS).6

(1) GSWC operates two Commission-regulated utilities: (a) its water operations which are 7

covered in this GRC and herein referred to as GSWC, and (b) its Bear Valley Electric 8

Service (BVES) which provides electricity to over 24,000 customers in California. 9

(2) ASUS and its subsidiaries provide operation and maintenance and construction 10

management services for water and wastewater systems located on military bases through 11

50-year privatization contracts with the U.S. government.112 ASUS is not regulated by 12

the Commission. 13


The Commission should adopt ORA’s recommended percentages to allocate GO expenses and 15

plant investment, presented in the table below. Proper allocation of the GO costs is necessary to 16

ensure that GSWC ratepayers pay no more than their fair share and do not subsidize ASUS 17

operations.18

112 American States Water Company’s website (http://www.aswater.com/about-us/subsidiaries.html,accessed on November 8, 2017).

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Table 9-1: GO Allocation Percentages 1

2

ORA’s recommended allocation percentages are based on the following adjustments to GSWC’s 3

calculations: 4

(1) Updating ASUS’s plant in-service amount used in calculating the Utility Plant factor. 5

(2) Excluding the Number-of-Customers factor when calculating percentages used to allocate 6

Corporate Support costs. 7

(3) Excluding GSWC’s purchased water expense when calculating the Direct Operating 8

Expenses factor. 9

C. Discussion 10

In this section, ORA first describes ASUS operations and the GO cost centers. Next, ORA 11

presents three adjustments to GSWC’s proposed allocation method. 12

1. ASUS 13

Through 50-year privatization contracts with the U.S. government, ASUS and its subsidiaries 14

provide operation and maintenance and construction management services for water and 15

wastewater systems located on military bases.113 These “military base contracts” are serviced by 16

the following ASUS affiliates/subsidiaries: Fort Bliss Water Services Company, Terrapin Utility 17

113 American States Water Company’s website (http://www.aswater.com/about-us/subsidiaries.html,accessed on November 8, 2017).

GSWC BVES ASUS TotalA Corporate Support 76.84% 7.82% 15.34% 100.00%U Utility Support 90.76% 9.24% 0.00% 100.00%COPS Centralized Operations 100.00% 0.00% 0.00% 100.00%ORA-recommendedA Corporate Support 69.15% 8.67% 22.18% 100.00%U Utility Support 88.86% 11.14% 0.00% 100.00%COPS Centralized Operations 100.00% 0.00% 0.00% 100.00%

GSWC-proposed

Allocation %GO Cost Center

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Services, Inc., Old Dominion Utility Services, Inc., Old North Utility Services, Inc. Palmetto 1

States Utility Services, Inc., and Emerald Coast Utility Services, Inc.1142

In its July 2017 GRC application, GSWC states that ASUS has seven military base contracts. 3

ASUS has since added one more, in October 2017.115 ASUS is a fast growing affiliate, as 4

described below by the Chief Executive Officer of American States Robert Sprowls, on 5

November 7, 2017:1166

We're also excited about expanding our service to the U.S. government yet again. 7Our Contracted Services business, American State Utility Services or ASUS had a big 8win during the quarter, when it was awarded a new 50-year contract to provide 9services for the water distribution, waste water collection and treatment facilities at 10Fort Riley, United States Army installation located in Kansas. 11

The initial value of the contract is estimated at approximately $601 million over the 1250-year period and is subject to annual economic price adjustment. Like Eglin Air 13Force Base, on which we commenced operations in June, Fort Riley is also one of the 14largest military installations in the United States, covering over 100,000 acres of land 15and it has a daytime population of 25,000 people. It is currently home to the 1st 16Infantry Division. 17

We expect to assume the water and waste water operations at Fort Riley, following 18the six to 12 months transition period currently underway. With the addition of Fort 19Riley, ASUS will be providing water and/or waste water utility services to 11 military 20bases, including four of the largest military installations in the United States, Fort 21Bragg, Fort Bliss, Eglin Air Force Base and Fort Riley, as well as one of the most 22high-profile bases Andrews Air Force Base. 23

We are currently involved in various stages of the proposal process at a number of 24other bases considering privatization. This is a key focus for us as the U.S. 25government is expected to release additional bases for bidding over the next several 26years. Due to our strong relationship with the U.S. government as well as our 27

114 American States Water Company’s website (http://www.aswater.com/about-us/subsidiaries.html,accessed on November 8, 2017). 115 ASUS News Release, dated October 2, 2017: American States Water Company Announces Privatization Contract Award for Fort Riley, Kansas (https://americanstateswatercompany.gcs-web.com/news-releases/news-release-details/american-states-water-company-announces-privatization-contract-0, accessed on November 8, 2017). 116 American States, 3rd Quarter 2017 Results, Earnings Call Transcript (https://seekingalpha.com/article/4121997-american-states-waters-awr-ceo-robert-sprowls-q3-2017-results-earnings-call-transcript?part=single, accessed on November 8, 2017). (Emphasis added.)

.

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expertise and experience in managing bases, we are well positioned to compete for 1these new contracts. 2

Considering the growth of ASUS, proper allocation of GO costs is as important as ever to ensure 3

GSWC ratepayers do not pay more than their fair share of the GO costs in the forecast years. 4

2. GO cost center allocation 5

In this chapter, ORA presents GO expense amounts to explain cost allocation calculations and 6

adjustments. However, GO plant investment is also subject to the same allocation process and 7

percentages.8

a. GO cost centers 9

GSWC begins its GO allocation process by identifying the extent to which each of its GO 10

departments provide benefits to GSWC, BVES, and ASUS. For example, the Accounting and 11

Finance department serves all three entities, while the CIS Billing and Collections department 12

provides benefits to only GSWC and BVES.13

Next, based on each GO department’s provision of benefits, GSWC places that department’s 14

costs into one of the following three GO cost centers. 15

(1) Corporate Support (also designated by GSWC by the symbol “A”): This cost center 16

captures GO costs that GSWC describes as providing benefits to GSWC, BVES, and 17

ASUS; therefore, a percentage of total Corporate Support expense and plant investment is 18

allocated to each of these three entities. 19

(2) Utility Support Services (“U” or “Utility Support”): This cost center captures GO costs 20

that, according to GSWC, provide benefits to only GSWC and BVES; therefore, Utility 21

Support costs are shared between GSWC and BVES only.22

(3) Centralized Operations Support (“W” or “COPS”): This cost center captures GO costs 23

that GSWC identifies as providing benefits to its water service operations only; therefore, 24

100% of the COPS cost center is allocated to GSWC’s water operations.25

Using the previously cited examples, Accounting and Finance expenses would be captured in the 26

Corporate Support cost center. Similarly, CIS Billing and Collections expenses would be placed 27

in the Utility Support cost center.28

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b. Allocation of cost centers 1

The table below shows GSWC’s proposed Test Year 2019 expense amounts for each cost center, 2

and the three entities’ allocation percentages and allocated dollar amounts.1173

Table 9-2: GSWC’s Proposed Cost Center Expenses and Allocation1184

5

As shown above, GSWC forecasts a total GO expense of $53.1 million for Test Year 2019. The 6

Corporate Support cost center makes up $27.3 million of that total. GSWC proposes to allocate 7

15.34% ($4.2 million of $27.3 million) of its estimated Corporate Support expense total to 8

ASUS, with the remaining balance split between GSWC (76.84% or $20.9 million) and BVES 9

(7.82% or $2.1 million). 10

As explained below, ORA’s analysis supports a 22.18% allocation of Corporate Support costs to 11

ASUS (or approximately $6 million if using GSWC’s GO expense estimate). 12

3. Four-factor allocation 13

To develop the GO allocation percentages, GSWC uses the four-factor method, which considers 14

the respective subsidiaries’ (1) utility plant, (2) number of customers, (3) district operating 15

expense and (4) salary amounts.119 The table below shows GSWC’s four-factor calculation that 16

produces its proposed 15.34% allocation to ASUS – this allocation applies to the GO Corporate 17

Support cost center.18

117 As noted earlier, GO plant investment (rate base) is subject to the same allocation process. 118 Allocation factors from GSWC Workpaper Spreadsheet “ALLOC17.” 119 GSWC Prepared Testimony of Jon Pierotti, pages 38 and 43-50.

Allocation %

Allocated $

Allocation %

Allocated $

Allocation %

Allocated $

A Corporate Support 27,263$ 76.84% 20,949$ 7.82% 2,132$ 15.34% 4,182$U Utility Support 8,097$ 90.76% 7,348$ 9.24% 748$ 0% -$ COPS Centralized Operations 17,724$ 100% 17,724$ 0% -$ 0% -$

53,083$ 46,021$ 2,880$ 4,182$Share of Total GO Expense 100.0% 86.7% 5.4% 7.9%

GSWC-PROSOSED GO Cost Center ($000)

TY 2019 Forecast

by GSWC

GSWC BVES ASUS

Total General Office

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Table 9-3: GSWC’s Four-Factor Allocation Calculation1201

2

ORA does not object to GSWC’s overall approach, but recommends adjustments to the 3

following three areas to improve the accuracy and fairness of the allocation percentages. 4

(1) The Utility Plant amount attributable to ASUS ($565.884 million on ASUS line). 5

(2) The District Operating Expense amount attributable to GSWC and BVES ($176.499 6

million on GSWC & BVES line). 7

(3) The Number of Customers attributable to ASUS (7 customers on ASUS line). 8

Sections 4 to 6 below present ORA’s adjustments in greater details. 9

4. Utility Plant factor 10

The Commission should use ORA’s update of $570.073 million for ASUS Utility Plant balance, 11

instead of GSWC’s estimate of $565.884 million, in calculating the Utility Plant factor. 12

GSWC workpapers present the recorded costs through 2016 used to develop its ASUS Utility 13

Plant balance of $565.884 million.121 In response to ORA’s inquiry, GSWC updated its recorded 14

2013 ASUS “Construction Expense” amount to include the previously-omitted December 2013 15

amount;122 the update increases the Utility Plant balance of $565.884 million to $570.073 million 16

(a $4.2 million increase). This update results in the following Utility Plant allocation 17

percentages – ORA-adjusted 26.41% to ASUS is a slight increase from GSWC’s 26.27%. 18

120 ORA’s replication of GSWC’s table on page 7 of GSWC Prepared Testimony of Jon Pierotti. 121 GSWC Workpaper Spreadsheet ASUS_Plant Info for 2017 GRC_011717, tab ASUS_Plant. 122 GSWC Response to ORA Data Request MC8-002, #3.

($000) % % ($000) % ($000) % [a] [b] [c] [d] [e] [f] [g] [h] [i] [j]

GSWC & BVES 1,588,490$ 73.73% 277,001 100.00% 176,499$ 89.44% 37,315$ 75.49% 338.67% 84.67%ASUS 565,884$ 26.27% 7 0.00% 20,831$ 10.56% 12,114$ 24.51% 61.33% 15.34%TOTAL 2,154,374$ 100% 277,008 100% 197,330$ 100% 49,429$ 100% 400% 100%

SubsidiaryUtility Plant No. of Customers District Op. Exp. Salaries TOTAL 4-Factor

Allocation

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Table 9-4: ORA-adjusted Utility Plant factor 1

2

5. Direct Operating Expense factor 3

The Commission should exclude purchased water supply expenses in calculating the Direct 4

Operating Expense factor. 5

The Commission’s 1956 Memo/SP U-6-W123 describes the Direct Operating Expense factor as 6

follows: “Direct operating expenses, excluding uncollectibles, general expenses, depreciation 7

and taxes.” GSWC’s Direct Operating Expense calculations sums the O&M and A&G 8

(administrative and general) expenses for each ratemaking area, and appropriately excludes the 9

depreciation expense and allocated GO expense. As explained below, GSWC should also 10

exclude purchased water expenses from the calculation of Direct Operating Expense factor. 11

Purchased water expense is a pass-through type of supply cost and appears only in the regulated 12

water operations (i.e., not in BVES or ASUS operations). This cost category consumes a 13

minimal amount of GO resources, while accounting for a disproportionate share of the Direct 14

Operating Expense total. In 2016, GSWC’s purchased water expense of $64.0 million12415

accounts for 36% of the $176.5 million the Direct Operating Expense total used in GSWC’s 16

four-factor calculation. Including purchased water expenses therefore results in an inappropriate 17

shifting of Corporate Support costs to GSWC’s water ratepayers.18

In two prior GSWC GRCs, the Commission removed purchased water expenses when 19

calculating the Direct Operating Expense factor: 20

123 CPUC Standard Practice U-6-W: Allocation of Administrative and General Expenses and Common Utility Plant and the Four-Factor Method (http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M042/K157/42157836.PDF, accessed on November 29, 2017). 124 GSWC Response to ORA Data Request MC8-002, #4.b.

($000) % [a] [b]

GSWC & BVES 1,588,490$ 73.59%ASUS 570,073$ 26.41%TOTAL 2,158,563$ 100%

SubsidiaryUtility Plant

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(1) In D.07-11-037, the Commission removed the purchased water supply expenses entirely 1

in its modified three-factor approach. The Commission reasoned: “It makes sense to 2

exclude supply costs, for example, because all of the parties with which ASUS has 3

contracts are responsible for supplying their own water.”1254

(2) In D.10-11-035, the Commission again removed the purchased water expenses from the 5

Direct Operating Expenses factor when it found that “neither the quantity nor expense 6

related to purchased water materially impacts the amount of general office activity and 7

including the purchased water costs unreasonably skews the allocation results.”1268

The Commission has consistently ruled that removing purchased water expense from the GO 9

allocation calculation is appropriate because ASUS and BVES do not incur that type of expense, 10

and including it unreasonably skews the allocation results. Therefore, the Commission should 11

exclude GSWC’s purchase water expenses from the GO allocation calculation. This adjustment 12

results in the following Direct Operation Expense allocation percentages – ORA’s estimated 13

15.62% allocation to ASUS is almost 50% higher than GSWC’s 10.56%. 14

Table 9-5: ORA-adjusted Direct Operating Expense factor 15

16

6. Number-of-Customers factor 17

The Commission should reject GSWC’s counting of military base contracts as customers, and 18

exclude the Number-of-Customers factor in the allocation of Corporate Support costs. 19

In calculating the Number-of-Customers factor, GSWC uses the number of connections served 20

by GSWC and BVES (277,001 combined). However, for ASUS, GSWC elects to use seven (7), 21

which is the number of military base contracts held by ASUS at the time GSWC filed its GRC 22

125 GSWC GRC A.06-02-023, D.07-11-037, page 39. 126 GSWC GRC A.08-07-010, D.10-11-035, page 21.

($000) % [e] [f]

GSWC & BVES 112,541$ 84.38%ASUS 20,831$ 15.62%TOTAL 133,372$ 100%

SubsidiaryDistrict Op. Exp.

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application. These military base contracts serve nearly 19,000 water and wastewater service 1

connections as of July 31, 2017 – see table below. 2

Table 9-6: ASUS’s Active Services as of July 31, 20171273

4

GSWC’s use of 277,001 as its total number of GSWC/BVES customers compared to seven for 5

ASUS results in the regulated entities bearing a virtual 100% in Number-of-Customers factor.1286

This distorts the four-factor allocation and results in ratepayer subsidization of GSWC’s affiliate 7

ASUS. 8

a. ASUS contracts are not equivalent to customers for allocation purposes. 9

The Commission should dismiss GSWC’s proposal to count the military base contracts as 10

equivalent customers for the purpose of calculating the Number-of-Customers factor. GSWC 11

cites D.10-11-035129 to explain why the ASUS military base contracts should be considered 12

equivalent customers.130 GSWC states that D.10-11-035 adopted the use of the military base 13

contracts as equivalent customers. However, GSWC completely ignores D.11-07-057, which 14

granted ORA131 a rehearing on that issue. 15

127 GSWC Response to ORA Data Request MC8-002, #2 (spreadsheet file MC8-002 Q.2 Service Connections – All Locations). 128 Number-of-Customers calculation: (277,001 ÷ 277,008) = 99.9975%. 129 GSWC GRC A.07-01-014 and A.08-07-010. 130 GSWC Prepared Testimony of Jon Pierotti, page 45. 131 Then the Division of Ratepayer Advocates (DRA).

ASUS SubsidiaryTotal Service

Water Connections

Total Service Wastewater Connections

Fort Bliss Water Services Company 3,895 3,895 Terrapin Utility Services 1,200 1,230 Old Dominion Utility Services 850 1,121 Old Dominion Utility Services - 1,584 Old Dominion Utility Services 263 272 Palmetto State Utility Services 1,090 1,156 Old North Utility Services 8,486 6,871 Emerald Coast Utility Services 2,700 2,700 TOTAL 18,484 18,829

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In D.11-07-057, the Commission found that D.10-11-035 failed to clarify what, if any, 1

differences existed between the military base contracts at issue. D.11-07-057 states: 2

D.10-11-035 agrees that the approach advocated by [ORA] for military bases was in 3compliance with the formula adopted by D.07-11-037, however, it departed from the 4adopted formula with its determination that “ASUS has only six customers,” on the 5rationale that “the total dollar amount of plant in the Golden State military contracts 6and the number of ASUS employees…provide a better means to ensure that the costs 7for general office expense are properly allocated between Golden State and its 8affiliates. ” (D.10-11-035 at pp. 23-24.) D.10-11-035 did not explain how. D.10-11-9035 acknowledged that the Commission has not adopted the single factor 10methodology and should “use of the traditional four-factor methodology, or fewer 11than four factors if it can be shown that one or more of the established four factors are 12inappropriate or would result in distorting the allocation results unreasonably.”13(D.10-11-035 at p. 23.) D.10 11-035 stated “the cost methodology adopted today 14considers four factors ….” However, it failed to clarify what, if any differences 15existed from the contracts to serve military bases at issue in D.07-11-037 that justified 16six connections being a reasonable outcome when over 17,000 connections would 17have been the outcome of the formula adopted by D.07-11-037.13218

Consequently, D.11-07-057 ordered a rehearing on the equivalent customer issue. That issue 19

however was not decided in a subsequent decision because the issue was settled between GSWC 20

and ORA.133 As explained in the above quotation, D.07-011-037 adopted the use of the number 21

of connections served by the military bases, and D.11-07-57 questioned the reasonableness of 22

D.10-11-035 in choosing to use the number of contracts as equivalent customers. Thus, D.10-23

11-035 is not the determinative authority on this issue. 24

D.07-11-037 addressed the calculation of this Number-of-Customers factor in great detail and 25

rejected GSWC’s approach:13426

Among the ASUS contracts, the recent ones with military bases are relatively easy to 27evaluate in terms of the number of “customers”, because all of these agreements – 28which concern Fort Bliss, Texas; Fort Lee, Virginia; Andrews Air Force Base, 29Maryland; and Forts Eustis, Monroe and Story, all of which are also in Maryland – 30essentially call for ASUS to provide full water and wastewater services to these bases.31

132 D.11-07-057, page 25. (Emphasis added.) 133 Joint Motion for Approval of Settlement Agreement (pages 31-33), filed on March 6, 2013 and adopted by D.14-09-009. 134 D.07-11-037, pages 35-36. Footnote 17 in D.07-11-037 provides additional relevant discussion on the equivalent customer issue and is included in Appendix 9-1: D.07-22-37, Footnote 17 of this report.

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It is therefore appropriate to use 100% of the connections at these bases to determine 1the appropriate weighted percentage customer count. Based on the data set forth on 2page 2 of Exhibit 46 (which is GSWC’s response to a DRA data request), the 3combined number of connections for all of these military contracts combined is 412,614.5

b. ASUS military base contracts are not equivalent to GSWC mobile home park service. 6

GSWC also attempts to portray ASUS subsidiaries’ military base contracts as equivalent to water 7

service connections provided by GSWC to mobile home parks. It claims: 8

GSWC, just as ASUS, does not have any direct contact with the residents on the 9military bases. GSWC does not read their meters if they have meters, GSWC does 10not send them water bills, GSWC does not provide them with customer service, and 11they do not call GSWC’s call center for service.13512

The Commission already considered ASUS military base contracts in the GO cost allocation 13

process, considered this argument in great detail and rejected it in D.07-11-037 (see Footnote 17 14

in D.07-11-037; also included in Appendix 9-1 in this report). Those findings are still relevant 15

and applicable. Further, the following more recent information reinforces the Commission’s 16

earlier findings. 17

Job description 18

The job description for ASUS Utility Technician I requires that the employee possesses strong19

customer service skills and specifies “Primary Responsibilities” that contradict GSWC’s above-20

mentioned claims.136 For example, some of the “Primary Responsibilities” are: 21

“Inspects, installs, repairs, replaces, tests, and certifies water mains, water services, water 22

meters, fire hydrants, backflow protection devices and other related water system assets.” 23

“Performs customer support activity. Interacts with the public in a professional manner.” 24

“Notifies customers of scheduled and emergency outages.” 25

“Reads meters manually and/or using automated equipment.” 26

135 GSWC Prepared Testimony of Jon Pierotti, pages 46. (Emphasis added.) 136 See this report’s Appendix 9-2: ASUS Position Description for Utility Technician I, dated November 18, 2016. From GSWC Response to ORA Data Request MC8-002, #3 (pdf file Attachment 3 – Utility Technician I).

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Customer Scorecard 1

ASUS’s direct service to water end-users is further illustrated in its customer survey 2

questionnaire.137 ASUS Eglin Air Force Base’s Customer Scorecard poses questions such as: 3

(1) Please provide the location of the item reported. 4

(2) Did Emerald Coast Utility services resolve the item you reported? 5

(3) How responsive were the Emerald Coast Utility Services representatives?6

(4) How courteous were the Emerald Coast Utility Services representatives? 7

(5) Did Emerald Coast Utility Services leave the worksite in acceptable condition? 8

Contractual obligations 9

Moreover, the military base contracts such as that for the Eglin Air Force Base contract (excerpt 10

below) specify the following relevant contractual obligations:13811

***BEGIN CONFIDENTIAL*** 12

13

141516

t171819

202122232425

26

2728

137 See this report’s Appendix 9-3: ASUS Eglin Air Force Base – Customer Scorecard (http://www.asusinc.com/bases_we_serve/eglin_air_force_base/category/customer-scorecard and https://www.surveymonkey.com/r/_ECUS, accessed on 11/29/2017). In exchange for completing the customer survey, ASUS offered a $5.00 donation to the Special Operations Warrior Foundation. 138 CONFIDENTIAL GSWC Response to ORA Data Request MC8-002, #1 (pdf file CONFIDENTIAL Attachment 1 – Eglin Air Force Base Contract). (Emphasis added.)

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123

4.5

***END CONFIDENTIAL*** 6

All of the above shows that ASUS military base contracts require far more resources than a 7

simple water service connection to a mobile home park. Therefore, the Commission should 8

reject GSWC’s characterization of military base contract services as comparable to its services to 9

mobile home parks. 10

c. D.12-04-009 and D.13-12-030 provide applicable direction regarding the Number-of-11

Customers factor. 12

The Commission has also ruled on this very issue in a recent GRC filing by Suburban Water 13

Systems (“Suburban”). In that proceeding, Suburban also proposed to count its affiliate’s 14

contracts as equivalent customers.139 In D.12-04-009, the Commission resolved that issue as 15

follows: 16

Counting each contract as a single customer, while counting Suburban as over 75,000 17customers, is not credible, therefore it is not fair or reasonable. To the extent that 18Suburban has shown there is no need to include the number of customers in the 19individual contract, we conclude that if the number of customers is irrelevant to the 20services provided to the unaffiliated entities then the number of customers (either 1 or 2175,000) is an irrelevant factor for allocation purposes.14022

Consequently, the Commission removed the Number-of-Customers factor, resulting in an 23

allocation based on the remaining three factors. 24

While Suburban filed an application for a rehearing, the Commission upheld its prior ruling with 25

D.13-12-030:26

The number of the contracts does not equal the number of customers. As record 27shows, the use of the number of contracts instead of the number of customers skews 28

139 A.11-04-009: Application of Suburban Water Systems (U339W) for Authority to Increase Rates Charged for Water Service by $19,234,576 or 35.85% in 2012, by $3,032,827 or 4.18% in 2013, and by $1,973,200 or 2.61% in 2014. 140 Suburban GRC A.11-02-002, D.12-04-009, page 17.

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the allocations. (See DRA Ex. 2-Attachment-I, p. 1, which states Suburban serves 1over 400 contracts and more than 350,000 connections, the number of service 2connections relates to the individual number of customers; see also DRA Ex. 1, pp. 8-343; RT Vol. 2, pp. 169-180.) As such, we explained that in this case, it is reasonable 4to determine that Suburban’s proposed customer count should not be used as a 5relevant factor for allocation purposes.1416

The Commission’s findings on this issue of counting contracts as equivalent customers are 7

unambiguous in the Suburban case, and the same should apply in this proceeding – the use of the 8

number of contracts as number of customers inappropriately skews the allocation. The 9

Commission should follow its findings in D.12-04-009 and D.13-12-030, and exclude the 10

Number-of-Customers factor in the calculation of allocation percentages.11

d. GSWC’s cost center accounting supports the removal of the Number-of-Customers 12

factor. 13

ORA’s recommended exclusion of the Number-of-Customers factor is not only consistent with 14

D.12-04-009 and D.13-12-030, it is also the most appropriate approach to allocate the expenses 15

in the Corporate Support cost center. As explained below, GSWC already directly assigns 16

customer-related expenses to the Utility Support Services and Centralized Operations cost 17

centers, resulting in the Corporate Support cost center containing little or no direct customer-18

related costs. Accordingly, the allocation of the Corporate Support cost center does not need to 19

take into account the number of customers served by each entity.14220

The Centralized Operations cost center, allocated 100% to GSWC water ratepayers, contains 21

expenses for the Customer Support Services Department, which according to GSWC “provides 22

support and/or serves our water customers and stakeholders,” and “consists of the Customer 23

Service Center, Community Education, Water Use Efficiency, Operations Administration, 24

Operations Accounting ...”14325

141 Suburban GRC Rehearing D.13-12-030, page 7. (Emphasis added.) 142 The number of customers is still relevant in the allocation of the other cost centers (between GSWC and BVES).143 GSWC Prepared Testimony of Nanci Tran, page 11.

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Similarly, the Utility Support cost center (allocated only to GSWC and BVES) includes 1

Regulatory Affairs and “the IT Customer Information System ('CIS’), and Utility Specific 2

Applications including the New Customer Care and Billing (‘CC&B’) system, and PowerPlan, 3

the Call Center billing department and the Cash Processing department ...”1444

However, the Corporate Support cost center, the only one allocable to ASUS, contains GO 5

departments whose costs do not appear to vary appreciably with customer counts: “Corporate 6

Executives, Accounting and Finance, Internal Audit, Risk Services, Information Technology 7

(‘IT’), and Human Capital Management (‘HCM’) departments.”145 These GO departments 8

perform functions, such as payroll and financial/tax reporting; their costs therefore are more 9

directly related to the number of employees, financial performance, and other corporate-level 10

activities, rather than to the number of customers. It is neither logical nor reasonable to use the 11

number of customers as a factor to allocate the Corporate Support cost center. 12

e. Adjustment to the Number-of-Customers factor calculation. 13

The Commission should reject GSWC’s proposal to count its military contracts as equivalent 14

customers for the purposes of developing the Number-of-Customers factor for the allocation of 15

the Corporate Support costs. Moreover, in allocating the GO’s Corporate Support cost center, 16

the Commission should remove the Number-of-Customers factor altogether and adopt a three-17

factor method that considers only Utility Plant, Direct Operating Expense and Salaries. Doing so 18

results in the following Number-of-Customers allocation percentages – compared to GSWC’s 19

proposed 100% to “GSWC & BVES” and 0% to ASUS. 20

Table 9-7: ORA-adjusted Number-of-Customers factor for Corporate Support allocation 21

22

144 GSWC Prepared Testimony of Nanci Tran, pages 12-13. 145 GSWC Prepared Testimony of Nanci Tran, page 6.

% [c] [d]

GSWC & BVES - 0.00%ASUS - 0.00%TOTAL - 0%

SubsidiaryNo. of Customers

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7. ORA’s adjustments result in a reasonable allocation of Corporate Support costs. 1

Incorporating ORA’s three adjustments results in the following allocation percentages for 2

Corporate Support costs. 3

Table 9-8: ORA-Adjusted Three-Factor Allocation Calculation 4

5

The corresponding impact of ORA’s recommended adjustments to all cost centers’ allocation 6

percentages are as follows; for comparison purposes, ORA uses GSWC’s Test Year expense 7

forecast for GO cost centers to calculate the allocated expense amounts. 8

Table 9-9: ORA-Adjusted Cost Center Allocation Percentages 9

10

8. Reasonableness of ORA-adjusted allocation percentages 11

ORA’s recommended 22.18% allocation of Corporate Support costs to ASUS is reasonable in 12

light of ASUS’s share of its parent company American States costs and revenues. Based on data 13

from American States’ 2016 Form 10-K filing to the Security Exchange Commission, ASUS 14

operations are responsible for over 20% of the total company’s revenues, expenses and 15

employees:14616

146 American States’ Form 10-K for 2016 (https://americanstateswatercompany.gcs-web.com/static-files/7f4d2b4f-99a2-4f4c-a82b-ee3a576aa33f, accessed on November 29, 2017). Percentages are based on revenue data on page 28, operating expense data on page 24, and employee data on page 4.

($000) % % ($000) % ($000) % [a] [b] [c] [d] [e] [f] [g] [h] [i] [j]

GSWC & BVES 1,588,490$ 73.59% - 0.00% 112,541$ 84.38% 37,315$ 75.49% 233.46% 77.82%ASUS 570,073$ 26.41% - 0.00% 20,831$ 15.62% 12,114$ 24.51% 66.54% 22.18%TOTAL 2,158,563$ 100% - 0% 133,372$ 100% 49,429$ 100% 300% 100%

SubsidiaryUtility Plant No. of Customers District Op. Exp. Salaries TOTAL 3-Factor

Allocation

Allocation %

Allocated $

Allocation %

Allocated $

Allocation %

Allocated $

A Corporate Support 27,263$ 69.15% 18,852$ 8.67% 2,363$ 22.18% 6,047$U Utility Support 8,097$ 88.86% 7,195$ 11.14% 902$ 0% -$ COPS Centralized Operations 17,724$ 100% 17,724$ 0% -$ 0% -$ Total 53,083$ 43,771$ 3,265$ 6,047$Share of Total GO Expense 100.0% 82.5% 6.2% 11.4%

ORA-RECOMMENDED GO Cost Center ($000)

TY 2019 Forecast

by GSWC

GSWC BVES ASUS

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22% of total company revenues, 1

24% of total operating expenses, and2

24% of total company number of employees. 3

GSWC’s proposed allocation would result in only 7.9% of total GO expenses being allocated to 4

ASUS. By comparison, ORA’s adjustments result in 11.4% of total GO expenses being 5

allocated to ASUS; this is reasonable given that ASUS accounts for such a large portion of 6

American States’ total company revenues, expenses and employees. 7

D. Conclusion8

GSWC’s proposed allocation percentages would under-allocate costs to its unregulated 9

operations ASUS and unfairly shifts the GO cost burden to not only GSWC ratepayers. ORA’s 10

recommended adjustments and corresponding GO allocation percentages reflect updated data 11

and are consistent with relevant CPUC decisions. 12

[END OF CHAPTER] 13

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Chapter 10. Attrition Filings 1

A. Introduction 2

This chapter addresses attrition (escalation) filing requirements and associated revenue 3

requirement and rate changes. 4



GSWC to implement attrition rate decreases in cases where it is over-earning. The Commission 7

should include in its final decision language similar to that in D.16-12-067 but with a clear 8

directive requiring GSWC to implement rate decreases when the pro-forma rate of return 9

exceeds the authorized rate of return. This balanced approach ensures rates remain just and 10

reasonable until the Commission adopts a new test year revenue requirement in a subsequent 11

GRC proceeding. 12

C. Discussion 13

Ordering Paragraph 40 of D.16-12-067 (GSWC Test Year 2016 GRC) states: 14

For escalation years 2017 and 2018, Golden State Water Company must file Tier 1 15advice letters in conformance with General Order 96-B proposing new revenue 16requirements and corresponding revised tariff schedules for each district and rate area 17in this proceeding except that the 2017 escalation filing for attrition year 2017 shall 18be filed within 30 days from the effective date of this decision. Golden State Water 19Company’s advice letters must follow the escalation procedures set forth in the 20Revised Rate Case Plan for Class A Water Utilities adopted in Decision 07-05-062 21and must include supporting workpapers. The revised tariff schedules must take 22effect 45 days after the 2017 escalation filing and on January 1, 2018, respectively 23and apply to services rendered on and after their effective dates. The 2017 escalation 24filing shall incorporate and subsume the revision of tariff schedules authorized for 25Test Year 2016. The proposed revised revenue requirements and rates must be 26reviewed by the Commission’s Water Division. The Water Division must inform the 27Commission if it finds that the revised rates do not conform to the Revised Rate Case 28Plan, this decision, or other Commission decisions, and if so, reject the filing. 29

In 2018, GSWC submitted attrition filings for all ratemaking areas – the company requested and 30

received Commission authorization for attrition rate increases in seven of its eight ratemaking 31

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areas.147 For the remaining ratemaking area, GSWC “advises the Water Division that GSWC’s 1

Clearlake CSA does not qualify for an Escalation Year 2018 increase,” and proposes no attrition 2

rate changes.148 GSWC explains, 3

the Pro forma rate of return for the 12-months ending September 30, 2017 exceeds 4GSWC’s Adopted Rate of Return, therefore, based on the calculation procedures set 5forth in the Revised Rate Case Plan for Class A Water Utilities adopted in Decision 607-05-062, Clearlake does not qualify for an Escalation Year 2018 rate increase.1497

GSWC presents the following rate of return values for the Clearlake CSA:1508

9

Customers in GSWC’s seven other under-earning areas are subject to attrition rate increases. 10

Yet, those in Clearlake do not get rate decreases, thereby having to pay water service rates that 11

support the higher than authorized rate of return (pro-forma rate of return of 9.05%). GSWC will 12

likely continue to over-earn if not required to implement attrition rate decreases. 13

D. Conclusion14


GSWC to implement attrition rate decreases in cases where it is over-earning. ORA 16

recommends that the Commission include in its final decision language similar to that in D.16-17

12-067 but with a clear directive requiring GSWC to implement rate decreases when the pro-18

forma rate of return exceeds its authorized rate of return. 19

[END OF CHAPTER] 20

147 GSWC Advice Letter (AL) 1725-W for Arden Cordova, AL 1724-W for Bay Point, AL 1726-W for Los Osos, AL 1727-W for Santa Maria, AL 1728-W for Simi Valley, AL 1729-W for Region 2 and AL 1730-W for Region 3. 148 GSWC Advice Letter 1732-W, page 1 149 GSWC Advice Letter 1732-W, page 2. 150 Excerpt from GSWC Advice Letter 1732-W, page 2.

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Statement of Qualifications – Pat Ma, P.E. 1

Q1. Please state your name, business address, and position with the California Public Utilities 2

Commission (“Commission”). 3

A1. My name is Pat Ma and my business address is 505 Van Ness Avenue, San Francisco, 4

California 94102. I am a Senior Utilities Engineer in the Water Branch of the Office of 5

Ratepayer Advocates. 6

Q2. Please summarize your education background and professional experience. 7

A2. I received a Bachelor of Science Degree in Industrial and Systems Engineering with a 8

concentration in Management from San Jose State University in 1986. I received my 9

Professional Engineer License in Industrial Engineering in the State of California in 1989 10

and a Grade 2 Water Distribution Operator Certification in 2010. 11

I joined the Office of Ratepayer Advocates - Water Branch as a Utilities Engineer in 12

December 2008. My previous professional position was as a Senior Utilities Engineer 13

also at the Commission, where I worked from 1986 to 1999 in transportation, 14

telecommunications, energy, and water areas. I also worked briefly for the U.S. EPA, 15

Region 9 in 1989 as an Environmental Engineer. 16

I have participated in CPUC proceedings in both advisory and advocacy capacity, 17

prepared testimony in a wide range of areas (including expenses, plant, rate base, cost 18

allocation, affordability, and other policy matters), testified in front of the Commission, 19

and provided oversight and coordination of ORA’s teams in Class A water utility GRC 20

proceedings. 21

Q3. What is your responsibility in this proceeding, GSWC GRC A.17-07-010? 22

A3. I am responsible for ORA’s Report on Results of Operations. I also serve as ORA’s 23

project coordinator in this proceeding. 24

Q4. Does this conclude your prepared direct testimony? 25

A4. Yes, it does. 26

[END OF SOQ]27

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Appendix 6-1: GSWC’s Region 3 Income Tax Calculation

[END OF APPENDIX]

Table 4-K

GOLDEN STATE WATER COMPANY

Region 3 Customer Service Areas

COMPUTATION OF TAXES ON INCOME AT PRESENT AND PROPOSED RATES(ESTIMATED YEARS)(In thousand dollars)

(a) (b) (c) (d) (e) (f) (g)DESCRIPTION AT PRESENT RATES AT PROPOSED RATES

2019 2020 2021 2019 2020 2021

1 Operating Revenues 121,663.5 121,981.4 122,294.4 127,928.6 133,860.2 140,246.5

2 Deductions:3 Operating Expenses 89,599.6 91,941.9 94,455.3 89,680.0 92,094.3 94,685.64 Interest 10,306.5 11,308.0 12,309.5 10,306.5 11,308.0 12,309.5

5 Deductions excluding Depreciation 99,906.0 103,249.9 106,764.8 99,986.4 103,402.3 106,995.1

STATE TAX CALCULATION:6 Taxable Income before Tax Depreciation7 and Other Sch. M's 21,757.5 18,731.6 15,529.6 27,942.2 30,458.0 33,251.48 Add (Deduct):9 Tax Depreciation-State (3,428.3) (3,192.8) (2,717.1) (3,428.3) (3,192.8) (2,717.1)10 Other Schedule M Items (1,668.9) (1,846.1) (1,978.8) (1,668.9) (1,846.1) (1,978.8)11 State Taxable Income 16,660.3 13,692.7 10,833.7 22,844.9 25,419.1 28,555.512 Total State Tax @ 8.84% 1,472.8 1,210.4 957.7 2,019.5 2,247.0 2,524.3

FEDERAL TAX CALCULATION:13 Taxable Income before Tax Deprc'n14 and Other Schedule M's 21,757.5 18,731.6 15,529.6 27,942.2 30,458.0 33,251.415 Add (Deduct):16 Excess Tax Depc'n-Flow Through 2,014.5 2,045.6 2,086.7 2,014.5 2,045.6 2,086.717 State Tax (1,472.8) (2,019.5) (2,247.0) (1,472.8) (2,019.5) (2,247.0)18 Other Schedule M Items (2,936.8) (3,114.0) (3,246.7) (2,936.8) (3,114.0) (3,246.7)19 Federal Taxable Income 19,362.4 15,643.7 12,122.5 25,547.1 27,370.1 29,844.320 Federal Tax @ 35.00% 6,776.8 5,475.3 4,242.9 8,941.5 9,579.5 10,445.5

21 Total Federal & State Tax 8,249.6 6,685.7 5,200.6 10,961.0 11,826.6 12,969.8

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Appendix 9-1: D.07-11-037, Footnote 17

17 At pages 4-7 of its August 13, 2007 opening comments, GSWC argues that the PD errs in its discussion of the interim cost allocation methodology insofar as it relates to the number of customers that should be imputed to the ASUS contracts with military bases. With respect to the contract with Fort Bliss, for example, GSWC argues that “the services in the military base are provided by ASUS’s own employees, not GSWC employees,” and that the Fort Bliss contract “does not require any meter reading or billing support, and does not use any GSWC employees to operate the water and wastewater systems.” (GSWC Opening Comments, p. 6.) Based on these assertions, GSWC argues that the allocation factor for the contract “should be reduced from 100 percent to 17.9 percent,” the percentage applied in the PD to A&G services only. (Id.)

Although the record on this issue is thin, it does appear from GSWC’s cost allocation study that at least some of the work at Fort Bliss is being performed by ASUS employees, because GSWC’s cost allocation study (Ex. 6, Switzer Schedule B, p. 2) states that seven of ASUS’s 14 employees “are under a separate benefit program of Ft. Bliss Water Company, a subsidiary of ASUS.”

However, while the work performed by these employees may not consist of all the same services that would be provided to retail water customers, the work is clearly very substantial, based on the contract that GSWC provided with its February 2006 General Office workpapers. That contract states that ASUS is acquiring the Fort Bliss water and wastewater systems pursuant to 10 U.S.C. § 2688, which empowers the Secretary of a military department to convey “a utility system, or part of a utility system” subject to the Secretary’s jurisdiction, to a “municipal, private, regional, district or cooperative utility company or other entity.” ASUS is acquiring the Fort Bliss water and wastewater systems over a 50-year period, and many pages of the contract are devoted to its obligations to undertake various kinds of capital improvements. The preamble to the Ft. Bliss contract (at page II) makes clear that ASUS’s obligations under it are very broad:

ASUS shall assume ownership, operation and maintenance of the utility infrastructure water and wastewater distribution systems at Fort Bliss, Texas. ASUS shall furnish all necessary labor, management, supervision, permits, equipment, supplies, materials, transportation, and any other incidental services for the complete ownership, operation, maintenance, repair, upgrades, and improvements to the utility system.

In view of the fact that ASUS is acquiring the water and wastewater systems of this very large military base and has the obligation to run them, it is not unreasonable to assume for purposes of the interim cost allocation methodology that the number of connections at Fort Bliss should be treated as equivalent to retail customers. The same is true for the other ASUS contracts with military bases, which Table 1 to GSWC’s opening comments (which table was inadvertently omitted from the comments and belatedly served on August 16, 2007) also asserts should have a smaller number of retail customers attributed to them than the number of connections for these contracts.

[END OF APPENDIX]

A.17-07-

Appen

-010

ndix 9-2: AASUS Positioon Descripti

1

ion for Utiliity Techniciian I, Novemmber 18, 20016

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2

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[END O

3

OF APPENDDIX]

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Appendix 9-3: ASSUS Eglin A

1

Air Force Baase – Custommer Scorecard

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2

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[END O

[END

3

OF APPEND

OF REPOR

DIX]

RT]

public report on results of operations golden state water

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