report on special requests (srs): sr1, sr2, sr3, sr4, sr5

Docket

Exhibit Number

Commissioner

Administrative Law Judges

Cal Advocates Witness

:

:

:

:

:

A.18-07-001

Cal Advocates - ____

Liane Randolph

Eric Wildgrube,

Charles Ferguson

Danilo Sanchez

PUBLIC ADVOCATES OFFICE

CALIFORNIA PUBLIC UTILITIES COMMISSION

REPORT ON SPECIAL REQUESTS (SRs):

SR1, SR2, SR3, SR4, SR5, SR6, SR7, SR10, AND SR16

California Water Service Company

Test Year 2020 General Rate Case

A.18-07-001

San Francisco, California

February 2019

i

MEMORANDUM 1

This Report on Special Requests (SRs): SR1, SR2, SR3, SR4, SR5, SR6, SR7, SR10, and SR16 2

for California Water Service Company GRC A.18-07-001 is prepared by Danilo Sanchez of the 3

Public Advocates Office (Cal Advocates) - Water Branch, and under the general supervision of 4

Program & Project Supervisor Hani Moussa. Mr. Brian Yu is the Public Advocates Office’s 5

project coordinator for the proceeding. Mr. Sanchez’s Statement of Qualifications is in Chapter 6

12 of Public Advocates Office’s Company-Wide Report on Results of Operations. Tovah 7

Trimming and Vanessa Young serve as the Public Advocates Office’s legal counsel. 8

Chapter Subject Area (SRs)

1 SR#1 – Enhancing Affordability Through Consolidation

SR#2 – Modifying Rate Support Fund (RSF)

2 SR#3 – Adjusting Sales Reconciliation Mechanism (“SRM”)

SR#4 – Eliminating 10% Cap on WRAM Recovery

3 SR#5 – Extending Sunset for Advice Letters

4 SR#6 – Incorporating Subsequent Rates Changes into Final Rates

SR#7 – Additional Processes for PD Tables and Tariffs (Cal Water withdrew)

5 SR#10 – Renaming Monterey Region

6 SR#16 – Restructuring Los Angeles County Region Tariffs

9

ii

TABLE OF CONTENTS 1

Chapter 1: EXECUTIVE SUMMARY .......................................................................................... 1 2

A. INTRODUCTION .............................................................................................................. 1 3

B. KEY RECOMMENDATIONS ........................................................................................... 1 4

CHAPTER 2: Special Request 1 – Dixon and Stockton Districts Consolidation and Special 5

Request 2 – Rate Support Fund ...................................................................................................... 4 6

A. INTRODUCTION .............................................................................................................. 4 7

B. SUMMARY OF RECOMMENDATIONS ........................................................................ 4 8

C. DISCUSSION ..................................................................................................................... 6 9

1. Existing Consolidation Framework ................................................................................ 9 10

2. Limited Analysis Provided in Cal Water’s Consolidation Proposal ............................. 12 11

3. Other Public Interest Factors ........................................................................................ 20 12

a. Balancing Investment................................................................................................ 21 13

b. Conservation ............................................................................................................. 27 14

c. High Cost and Affordability ..................................................................................... 32 15

4. Need for a Comprehensive Consolidation Study .......................................................... 43 16

5. Modifications to Rate Support Fund (RSF) .................................................................. 44 17

D. CONCLUSION ................................................................................................................. 47 18

CHAPTER 3: SPECIAL REQUEST 3 – ADJUSTING THE SALES RECONCILLIATION 19

MECHANISM (SRM) AND SPECIAL REQUEST 4 – ELIMINATING 10% CAP ON Water 20

Revenue Adjustment Mechanism (WRAM) RECOVERY .......................................................... 49 21

A. INTRODUCTION ............................................................................................................ 49 22

B. SUMMARY OF RECOMMENDATIONS ...................................................................... 49 23

C. DISCUSSION ................................................................................................................... 50 24

1. WRAM/MCBA doses not fairly balance the revenue risk between ratepayers and 25

shareholders. ......................................................................................................................... 53 26

2. WRAM/MCBA changed the risk-reward balance without compensating ratepayers for 27

assuming all the risk.............................................................................................................. 55 28

iii

3. The Commission should eliminate the WRAM/MCBA to protect ratepayers interests.1

58 2

4. Full decoupling is not a prerequisite to encourage conservation. ................................. 60 3

5. Cal Water can easily transition to M-WRAM/ICBA .................................................... 69 4

6. The Commission should maintain the 10% revenue requirement cap on net 5

WRAM/MCBA balances and limit SRM adjustments if it does not eliminate the 6

WRAM/MCBA mechanism.................................................................................................. 70 7

a. Cal Water’s request to eliminate the 10% on net WRAM/MCBA surcharges should 8

be denied. .......................................................................................................................... 71 9

The 10% cap is not arbitrary and should remain in place. .................................... 72 i.10

Customers Not Receiving the Right Price Signal ................................................. 74 ii.11

Delay recovery causes inter-generational equity ................................................ 75 iii.12

Negatively impact financial strength of company ................................................ 75 iv.13

b. Cal Water’s proposed modifications for the Sales Reconciliation Mechanism should 14

be denied. .......................................................................................................................... 77 15

c. SRM provides no incentive for improving inaccurate forecast. ............................... 79 16

D. CONCLUSION ................................................................................................................. 83 17

CHAPTER 4: Special Request 5 – Extending Sunset for Advice Letters ................................... 85 18

A. INTRODUCTION ............................................................................................................ 85 19

B. SUMMARY OF RECOMMENDATION ........................................................................ 85 20

C. DISCUSSION ................................................................................................................... 85 21

D. CONCLUSION ................................................................................................................. 86 22

Chapter 5: Special Request 6 – Incorporating Subsequent Rate Changes Into Final Rates ........ 87 23

A. INTRODUCTION ............................................................................................................ 87 24


C. DISCUSSION ................................................................................................................... 87 26

D. CONCLUSION ................................................................................................................. 88 27

Chapter 6: Special Request 10 – Renaming Monterey Region.................................................... 89 28

A. INTRODUCTION ............................................................................................................ 89 29

iv


C. DISCUSSION ................................................................................................................... 89 2

D. CONCLUSION ................................................................................................................. 90 3

Chapter 7: Restructuring Los Angeles County Region Tariffs – Special Request 16 ................. 91 4

A. INTRODUCTION ............................................................................................................ 91 5


C. DISCUSSION ................................................................................................................... 92 7

1. The Public Advocates Office’s Analysis of Cal Water’s Request ................................ 94 8

2. Regional Consolidation of Antelope Valley and Palos Verdes .................................... 94 9

3. Tariff Restructuring ...................................................................................................... 95 10

a. RO Model Revenue Requirement Analysis .............................................................. 95 11

b. RO Model Rate Design Analysis .............................................................................. 98 12

c. Potential Implications of Un-consolidating Costs .................................................. 105 13

4. Water Revenue Adjustment Mechanism (WRAM) / Modified Cost Balancing Account 14

(MCBA) .............................................................................................................................. 108 15

D. CONCLUSION ............................................................................................................... 109 16

APPENDIX 2-A.............................................................................................................................. 1 17

APPENDIX 2-A – Table 1 ......................................................................................................... 2 18

APPENDIX 2-A – Table 2 ......................................................................................................... 3 19

20

1

CHAPTER 1: EXECUTIVE SUMMARY 1

A. INTRODUCTION 2

This report presents the Public Advocates Office (Cal Advocates) analysis and recommendations 3

for certain Special Requests (SRs) in General Rate Case Application (A.) 18-07-001 filed by 4

California Water Service Company (Cal Water or CWS). 5

B. KEY RECOMMENDATIONS 6

Cal Water’s application includes a total of 17 Special Requests. This report addresses the 7

Public Advocates Office’s recommendations for following nine Special Requests. 8

# Cal Water Special Request Cal Advocates

Recommendation

Cal Advocates

Witness

1 Enhancing Affordability Through Consolidation Disallow Danilo Sanchez

2 Modifying Rate Support Fund (RSF) Allow Danilo Sanchez

3 Adjusting Sales Reconciliation Mechanism (“SRM”) Disallow Danilo Sanchez

4 Eliminating 10% Cap on WRAM Recovery Disallow Danilo Sanchez

5 Extending Sunset for Advice Letters Disallow Danilo Sanchez

6 Incorporating Subsequent Rates Changes into Final

Rates Allow Danilo Sanchez

7 Additional Processes for PD Tables and Tariffs Withdrawn by Cal Water Danilo Sanchez

10 Renaming Monterey Region Allow Danilo Sanchez

16 Applying PV Pipeline Costs to Palos Verdes

Customers Allow Danilo Sanchez

Special Request #1 - Enhancing Affordability Through Consolidation 9

The Commission should deny Cal Water’s consolidation request because it is not in the public 10

interest. The Commission should require Cal Water to explore, via a formal study, other 11

consolidation options rather than just looking at consolidation proposals via a single district 12

piecemeal approach. Cal Water’s study should be submitted 12 months before Cal Water’s next 13

GRC and, at a minimum, the consolidation study should address the following scenarios: (a) 14

consolidating the revenue requirement on a company wide basis; (b) consolidating the revenue 15

2

requirement into two regional areas (e.g., Northern California and Southern California); and (c) 1

consolidating districts into four regional areas (e.g., Northern, Bay Area, Central, and Southern). 2

Special Request #2 - Modifying Rate Support Fund (RSF) 3

The Commission should approve Cal Water’s request to remove the Redwood Valley transitional 4

subsidy of $993,015 from the RSF program. The Dixon district should be added to the RSF 5

program and that its revenue requirement is reduced by $600,000 annually. The RSF Index Rate 6

and RSF monthly surcharge should be updated based on the adopted estimates for service rates 7

and revenue requirement. 8

Special Request #3 - Adjusting Sales Reconciliation Mechanism (SRM) 9

The Commission should deny Cal Water’s request to continue the Sales Reconciliation 10

Mechanism because it is not in the public interest. 11

Special Request #4 - Eliminating 10% Cap on WRAM Recovery 12

The Commission should deny Cal Water’s request to eliminate the current annual cap of 10% on 13

WRAM recovery. Instead, replace Cal Water’s WRAM/MCBA with a Water Conservation 14

Mechanism (WCM) and an Incremental Cost Balancing Account (ICBA). 15

Special Request #5 - Extending Sunset for Advice Letters 16

The Commission should deny Cal Water’s blanket request to extend into the 2020-2022 rate case 17

cycle the deadline for uncompleted advice letters projects because the Commission must review 18

each advice letter project individually to determine whether authorization for completion and 19

recovery should be extending through the 2018 GRC cycle. 20

Special Request #6 - Incorporating Subsequent Rates Changes into Final Rates 21

The Commission should approve Cal Water’s request to include the results of other proceedings 22

and subsequent cost offsets approved by the Commission in base rates before the start of the new 23

Test Year of January 1, 2020. After the Commission issues a GRC decision, Cal Water should 24

be required to notify customers of the resulting rate increase and explain the reasons for the 25

increase. 26

3

Special Request #7 - Additional Processes for PD Tables and Tariffs 1

Cal Water withdrew this request. 2

Special Request #10 - Renaming Monterey Region 3

The Commission should approve Cal Water’s request to change the name of its Monterey 4

Region to the Salinas Valley Region. The name change will eliminate any confusion with 5

the California American Water’s Monterey district, and no costs incurred with the name 6

change will be included in the 2020 Test Year forecast. 7

Special Request #16 - Applying PV Pipeline Project Costs to Palos Verdes Customers 8

The Commission should approve Cal Water’s request to restructure (bifurcate) the LA-Region

service tariffs so that costs related to the PV Pipeline Project currently under construction are

borne by Palos Verdes customers, and not Antelope Valley customers.

[END OF CHAPTER]

4

CHAPTER 2: SPECIAL REQUEST 1 – DIXON AND STOCKTON 1

DISTRICTS CONSOLIDATION AND SPECIAL REQUEST 2 – RATE 2

SUPPORT FUND 3

A. INTRODUCTION 4

This chapter addresses California Water Service Company’s (Cal Water) Special Request (SR) 5

#1 and #2. In SR#1 Cal Water requests to consolidate its Dixon and Stockton districts into one 6

region for ratemaking purposes. The new consolidated region will be named the “Central 7

Region.” Under Cal Water’s proposed consolidated structure, Dixon ratepayers will be required 8

to offset a portion of the Dixon district’s cost associated with the removal of Chromium-6 from 9

its groundwater. Dixon ratepayers will be required to pay a fixed monthly charge of $16.00 per 10

service connection to fund its Chromium-6 treatment cost. Cal Water also seeks to provide a 11

transitional annual subsidy of $1.2 million from the Rate Support Fund (RSF) to offset part of 12

Dixon’s revenue requirement when consolidated with Stockton. The company also seeks in 13

SR#2 to eliminate $993,015 in transitional subsidy applied to the Redwood Valley areas 14

consolidated with the Bayshore Region. 15

Cal Water states that is not seeking to make any changes to the design of its RSF. However, Cal 16

Water is requesting to remove certain ratemaking districts from and include other ratemaking 17

districts in its RSF program.1 Specifically, Cal Water will be including the Dixon district and 18

removing the Redwood Valley district from the RSF program. The only other RSF modification 19

being requested by Cal Water as part of SR#2 is to update the RSF Index Rate and the company-20

wide RSF surcharge used to fund the RSF program. 21

B. SUMMARY OF RECOMMENDATIONS 22

1. The Commission should deny Cal Water’s request to consolidated Dixon with Stockton 23

because it is not in the public interest. Consolidating Dixon with Stockton is not 24

1 In SR#2 Cal Water was requesting to add to the RSF the unrecovered cost from the Erskine Fire in its

Kern River Valley district. At the prehearing conference on October 12, 2018, Cal Water withdrew the

request to recover from the RSF amounts tracked in the Catastrophic Event Memo Account associated

with Kern River Valley’s 2016 Erskine Fire because Cal Water has received monies to offset the tracked

costs from its insurance company.

5

equitable and is unreasonable for Stockton’s customers to cross-subsidize Dixon 1

customers. 2

2. To alleviate the rate shock to Dixon customers due to the new Chromium-6 treatment 3

costs, the Public Advocates Office recommends that the Dixon district’s revenue 4

requirement be reduced by $600,000 annually using the rate support fund for one rate 5

cycle only.2 6

3. The Commission should require Cal Water to submit to the Commission and the Public 7

Advocates Office, at least twelve months before the utility files its next GRC application, 8

a study that analyzes the rate and bill impacts of consolidating the revenue requirement of 9

one or more districts. At a minimum, the consolidation study should address the 10

following scenarios: 11

a. Consolidating the revenue requirement on a company wide basis. 12

b. Consolidating the revenue requirement into two regional areas (e.g., Northern 13

California and Southern California). 14

c. Consolidating districts into four regional areas (e.g., Northern, Bay Area, Central, 15

and Southern). 16

4. Cal Water’s consolidation study should include an analysis of alternative revenue 17

allocation and rate design scenarios including, but not limited to: 18

a. A single tariff (or uniform) rates, 19

b. Tariff rates by consolidated region, 20

c. Tariff rates by geographical location. 21

5. Cal Water’s consolidation study for the revenue allocation and rate design for each of the 22

consolidation scenarios should at a minimum show how the resulting rates strike a 23

balance between the following principles: 24

a. Economic efficiency considerations (i.e. cost-causation, economies of scale and 25

scope), and policy and equity considerations (i.e. the human right to safe drinking 26

water, affordability, subsidies for low-income customers, and cost-effective 27

conservation). 28

b. Simplicity and transparency. 29

2 The RSF subsidy amount is based on the Public Advocates Office recommend revenue requirement for

the 2020 test year.

6

c. Rate stability. 1

d. Fairness - provides the utility with a reasonable opportunity to achieve authorized 2

revenue requirements. 3

6. The Commission should approve Cal Water’s request to remove the Redwood Valley 4

transitional subsidy of $993,015 that was part of the consolidation with the Bayshore 5

Region. 6

7. The Commission should require Cal Water to include a message in the Dixon customers’ 7

monthly bill that its customers are receiving a subsidy from the RSF program embedded 8

in their rates. The customer message in the bills should continue for the duration of this 9

GRC cycle. 10

8. The Commission should require Cal Water to disclose in its RSF tariff that the RSF is 11

subsidizing the Dixon District. 12

9. The RSF Index Rate and RSF monthly surcharge should be updated based on the final 13

sales forecast and revenue requirement estimates adopted. 14

C. DISCUSSION 15

Cal Water’s consolidation request for Dixon and Stockton is part of its overall goal to continue 16

consolidating its numerous district service areas into larger ratemaking regions over time.3 Cal 17

Water identified the Dixon district as a high cost district that would benefit from consolidation 18

with its larger Stockton district. The Dixon district has naturally occurring hexavalent chromium 19

(Cr-6), and significant investments were made in treatment facilities starting in 2016 to treat 20

Dixon’s groundwater supply. The capital cost for the Cr-6 treatment is approximately $7.7 21

million and represents about a 72% increase over the last adopted rate base of $10.7 million. On 22

a standalone basis, Dixon’s 2020 revenue requirement will increase by $1,879,545 million or 23

57% above it last adopted revenue requirement of $3,299,900 million.4 24

3 Cal Water Additional Testimony, Chapter 1, p. 1, July 2018.

4 Cal Water, Report on Results of Operations-Dixon, Attachment A, p. 2.

7

In its consolidation proposal, Cal Water addresses the 1992 consolidation guidelines (1992 1

Guidelines) as previously required by Decision (D.) 14-10-047.5 The 1992 Guidelines address 2

four broad categories: 3

1. Proximity: The districts must be within close proximity to each other. It would not be 4

a requirement that the districts be contiguous as it is recognized that present rate-making 5

districts consist of separate systems which are not connected. It was suggested that 6

districts within 10 miles of each other would meet the location criteria. 7

2. Rate Comparability: Present and projected future rates should be relatively close with 8

rates of one district no more than 25% greater than rates in the other district or districts. 9

To lessen the rate impact of combining districts it may be necessary to phase in the new 10

rates over several years. 11

3. Water Supply: Sources of supply should be similar. If one district is virtually 12

dependent upon purchased water, while another district has its own source of supply, 13

future costs could change by a greater percent for one district versus the other. This 14

could result in significantly different rates in the future even if present rates were quite 15

similar. 16

4. Operation: The districts should be operated in a similar manner. For example, if a 17

single district manager presently operates two or more districts and the billing system is 18

common to the same districts, such an operation would support the combination of the 19

districts. 20

Cal Water claims that even though two of the four guidelines do not necessarily point towards 21

consolidation other public interest factors such as balancing investment, conservation, water 22

quality, and affordability support consolidating Dixon with Stockton.6 According to Cal Water, 23

the Commission will benefit from dealing with fewer districts during GRCs, and consolidation 24

will mute the effect of year-to-year cost variations, particularly for smaller districts.7 From 25

Dixon’s customers’ perspective, the costs and investment will be spread over a wider customer 26

base and could moderate potential rate shock.8 27

5 In 1992, the Public Advocates Office

(formerly known as “the Division of Ratepayer Advocates) and the

Class A water utilities developed and presented the 1992 Guidelines in document titled, “1992 Guidelines

for Combining Water Utility Districts for Ratemaking and Public Utilities Commission Reporting

Purposes.”

6 Cal Water Additional Testimony, Chapter 1, pp. 5-6.

7 Cal Water Additional Testimony, Chapter 1, p. 7.


8

Cal Water acknowledges that the RSF has been an effective tool in lowering bills for customers 1

in RSF districts, while the cost of the program is spread across all customers company-wide.9 2

However, Cal Water prefers using RSF as a transitional mechanism to consolidate the Dixon 3

district with Stockton instead of using the RSF subsidy to alleviate the rate impact to Dixon 4

customers. Cal Water alleges that regional consolidation is preferable to using the RSF alone 5

because it: 6

1) Allows affordability to be addressed regionally instead of company-wide; 7

2) Consolidation allows for convergence of rates intra-region, reducing the RSF burden, 8

3) There would be moderate increases under consolidation than would be experienced 9

under RSF, 10

4) It can facilitate necessary capital improvements; and 11

5) It would reduce administrative burden of regulatory filings. 12

Notwithstanding Cal Water’s reasons for supporting regional consolidation, RSF is still a 13

significant component of Cal Water’s proposal to consolidate the Dixon and Stockton districts to 14

create the Central Region service area. To alleviate the subsidy burden on Stockton customers 15

Cal Water is seeking to reduce Dixon’s revenue requirement by applying $1.2 million annually 16

RSF subsidy. This subsidy amount will be applied only during this rate cycle and will be 17

eliminated in Cal Water’s next GRC. 18

The company also seeks for Dixon customers to pay for a portion of the Cr-6 treatment cost by 19

applying a $16 per month surcharge on Dixon customers’ bill. Based on the 2,893 service 20

connections forecasted for 2020, Cal Water will be collecting annually approximately $555,456 21

from Dixon customers. With the transition period ending for the Bayshore Region consolidation, 22

the RSF funding of $993,015 provided to the Redwood Valley districts will be removed and the 23

Bayshore Region will now capture this portion of Redwood Valley subsidy in the Bayshore 24

Region revenue requirement for the 2020 test year. Thus, the effect of providing the RSF 25

subsidy to Dixon will result in an incremental increase of $206,985 in RSF funds that will need 26

to be paid by Cal Water customers company-wide. 27


9

In the following sections, the Public Advocates Office provides its findings, conclusions, and 1

recommendations regarding Cal Water’s request to consolidate the Dixon and Stockton districts 2

into the Central Region. The focus of the review is based on the impacts to both Dixon and 3

Stockton customers, and whether the proposed consolidation is in the public interest. The Public 4

Advocates Office notes that for purposes of its analysis it relies on Cal Water’s RO Model as a 5

baseline, and it does not reflect adjustments being recommended to Dixon’s and Stockton’s 6

revenue requirement and rate design. In the final section of this chapter, the Public Advocates 7

Office addresses Cal Waters SR#1 and SR#2 proposed changes and updates to the RSF. 8

1. Existing Consolidation Framework 9

On November 10, 2011 the Commission issued an Order Instituting a Rulemaking (R.11-11-008) 10

to consider adopting new or revised guidelines for consolidation of districts, some variation of a 11

high cost fund within multi-district water utilities, and another mechanism or a combination of 12

them as a means to advance the Commission's Water Action Plan objective of setting rates that 13

balance investment, conservation, and affordability.10

On October 16, 2014, the Commission 14

adopted D.14-10-047, which found that there was no single prescriptive approach to deal with 15

multi-utility water districts that have high cost and affordability.11

It also found that the record in 16

the proceeding did not compel a choice between use of a cross-subsidy mechanism within multi-17

district water utilities and authorizing further consolidation. 18

The Commission was not persuaded that it needed to develop or maintain a prescriptive set of 19

guidelines similar to the 1992 Guidelines.12

Although the Commission no longer uses the 1992 20

Guidelines to determine whether consolidation is appropriate or not, the Commission still 21

requires water utilities to address the four broad categories: 1) proximity, (2) rate comparability, 22

(3) water supply, and (4) operation. 23

In addition to addressing the four categories, parties proposing to consolidate districts can also 24

argue that consolidation is in the public interest. Other “public interest” factors may include but 25

are not limited to balancing investment, conservation, water quality and affordability, and 26

10 D.14-10-047, p. 4.

11 D.14-10-047, p. 7

12 D.14-10-047, p. 8

10

whether any subsidies resulting from consolidation would be short, medium, or long-term. 1

Consolidation requests continue to be addressed on a case-by-case basis, and the Commission 2

retains discretion and authority to determine whether the proposed consolidation is in the public 3

interest, with or without adherence to the 1992 Guidelines.13

4

D.14-10-047 directed the multi-district utilities to conduct a review of their districts with high 5

cost and affordability issues. If high-cost and affordability problems exist in one or more 6

districts, the water utility should propose a solution or solutions, together with a specific 7

implementation plan, in its next GRC application or in appropriate district-based Tier 3 advice 8

letters (ALs).14

The Commission did not urge or endorse a specific approach for addressing 9

districts that have high cost and affordability issues, but instead allows flexibility to parties to 10

propose one or more intra-utility solutions and strategies.15

These strategies include but are not 11

limited to: 12

RSF or similar cross–subsidy fund 13

reduction in high costs 14

consolidation in some form, such as: 15

o rate consolidation; 16

o cost consolidation; 17

o rate base consolidation; and 18

o operational consolidation 19

intra-company grant/loan funding; 20

rate design (affordability through the first rate tier); and 21

budget plans 22

One of the tools available for screening and determining whether districts have high-cost and 23

affordability issues is the High-Cost and Affordability Screening Framework developed by the 24

Commission’s Division of Water and Audits. (See Figure 2-1.) The Commission clarifies that 25

13 D.14-10-047, p. 14.

14 The Public Advocates Office notes that Cal Water made this showing in its last GRC, and Dixon was

not identified as district that faced high cost and affordability problems.

15 D.14-10-047, pp. 9-10.

11

the use of this screening tool was discretionary, not mandatory.16

The Commission also states 1

that utilities may use alternate approaches to screening districts. Noting that there can be 2

districts with high costs that may not have affordability issues, D.14-10-047 clarifies that utilities 3

must propose one or more intra-utility solutions only when both high-cost and affordability 4

problems exist or when an affordability problem exists.17

5

The screening framework applies various screening thresholds to determine whether a district is 6

high cost and its service is unaffordable. For a district to be designated as high cost the average 7

revenue requirement (RR) per customer must exceed 150% of the utility’s system-wide average. 8

The primary affordability screening is based on the average bill set at the Essential Indoor Use 9

(EIU) quantity and whether the average EIU bill exceeds 2.5% of the average household income. 10

Although other parties proposed using a 1.5% threshold, D.14-10-047 states: 11

The affordability screening framework in the staff report relies upon the 2.5% 12

threshold recommended by the California Department of Public Health. To the extent 13

that parties use that framework, which is a discretionary tool, they should use the 14

2.5% threshold. (D.14-10-047, p. 12) 15

16 D.14-10-047, p. 15.

17 D.14-10-047, p. 15.

12

Figure 2-1: High-Cost and Affordability Screening Framework (D.14-10-047) 1

2

2. Limited Analysis Provided in Cal Water’s Consolidation Proposal 3

As previously required by D.14-10-047, Cal Water addresses the 1992 Guidelines and how they 4

apply to its proposed consolidation of the Dixon and Stockton districts. Cal Water provides 5

general support in the analysis of the guidelines and argues that other public interest factors 6

outweigh the 1992 Guideline factors in support of consolidating the two districts.18

Although the 7

applicability of the High-Cost and Affordability Screening Framework is discretionary, Cal 8

Water does not address it in its consolidation proposal. Cal Water’s proposal also lacks any 9

factual data on whether Dixon is considered both a high cost district and has affordability issues. 10

18 Cal Water Additional Testimony, Paul Townsley, pp. 5-6.

13

Cal Water’s showing also lacks any demographic/economic data to support why Dixon and 1

Stockton should be consolidated. 2

The following discussion evaluates Cal Water’s Stockton/Dixon consolidation proposal vis-à-vis 3

the 1992 Guidelines. The first guideline (Proximity) states that the districts must be within close 4

proximity to each other. However, the districts are not required to be contiguous because present 5

rate-making districts may consist of separate systems that are not connected. The 1992 6

Guidelines suggest that districts to be consolidated should be within 10 miles of each other. 7

The request to consolidate the Stockton and Dixon districts does not meet the proximity 8

guideline because the districts are approximately 50 miles apart. However, in the last GRC,19

9

Cal Water was authorized to consolidate its Redwood Valley districts with its Bayshore shore 10

districts which includes South San Francisco, San Mateo, and San Carlos. One of the Redwood 11

Valley districts, Lucerne is the northern most portion of the Redwood Valley district 12

consolidated with Bayshore and is located approximately 142 miles North of the South San 13

Francisco District. Figure 2-2 shows the Cal Water districts and systems that are near the Dixon 14

and Stockton districts. 15

19 A.15-07-015, see also D.16-12-042, p. 20.

14

Figure 2-2: California Water Service Company District System Map Location Dixon and 1

Stockton Districts 2

3

Outside of the Bay Area Region, besides Stockton and Dixon, there are two other districts (Los 4

Altos and Livermore) that are stand-alone systems and 69 to 100 miles from Dixon. Cal Water 5

believes that although these districts are more than 50 miles apart, they can be grouped and 6

managed as a single district. The Public Advocates Office finds that with today’s 7

communications technology and Cal Water’s centralized operations, the proximity guideline may 8

be less relevant than in the past. 9

The second guideline (Rate Comparability) states: “Present and projected future rates should be 10

relatively close with rates of one district no more than 25% greater than rates in the other district 11

or districts. To lessen the rate impact of combining districts it may be necessary to phase in the 12

new rates over several years.” Under this guideline, present and projected future rates should be 13

relatively close to the rates of one district and no more than 25% greater than rates of the other 14

district or districts. 15

15

This guideline is intended to lessen the rate impact of combining districts, so it may be necessary 1

to phase in the new rates over several years. The service rate disparities between districts is an 2

important factor to consider because it will result in one district subsidizing the other(s). The 3

consolidation should be equitable and not result in an unreasonable burden to the subsidizing 4

district. 5

As shown in Table 2-1 below, there is a 25% difference between Dixon’s and Stockton’s service 6

rates. 7

Table 2-1: Monthly Service Charge and Quantity Rates Differential Present and Proposed 8

Rates20

9

10

11

At present rates, the monthly service charge for Dixon is 35% higher than Stockton’s, and under 12

proposed rates the difference increases to over 80%. At present rates, there is a 27.5% difference 13

in quantity rates, which increases to over 67% at proposed rates. Cal Water argues that other 14

public interest factors outweigh this rate differential in the case of Dixon and Stockton.21

It’s 15

clear that, without the $1.2 million transitional RSF subsidy, and with Dixon paying a $16.00 16

monthly surcharge towards the Cr-6 water treatment costs, Stockton customers would cross-17

subsidize a significant portion of Dixon’s revenue requirement. Yet 39.1% of Stockton’s 18

customers are low-income compared to Dixon at 26%. The Public Advocates Office addresses 19

Cal Water’s other public interest factors in Section C.c. and why these factors fail to adequately 20

justify consolidation. 21

20 Standalone proposed rates for Dixon and Stockton are based on Cal Water’s RO Model rate design

module results.

21 Cal Water Additional Testimony, Chapter 1, Consolidation (SR#1), p. 5.

Present Rates Proposed Rates

5/8" Monthly

Service Charge

Percent

Difference

5/8" Monthly

Service

Percent

Difference

Stockton 17.99$ 24.44$

Dixon 24.37$ 35.5% 44.17$ 80.7%

Present Rates Proposed Rates

Quantity Rates (ccf) Stockton Dixon

Percent

Difference Stockton Dixon

Percent

Difference

Tier I 3.235$ 4.188$ 29.5% 2.993$ 5.017$ 67.6%

Tier II 3.506$ 4.700$ 34.1% 3.740$ 6.260$ 67.4%

Tier III 3.978$ 5.072$ 27.5% 5.608$ 9.365$ 67.0%

16

The third guideline (Water Supply) states that sources of supply should be similar. If one district 1

is virtually dependent upon purchased water, while another district has its own source of supply, 2

future costs could change by a greater percent for one district versus the other. This could result 3

in significantly different rates in the future even if present rates were quite similar. Although 4

present rates are much higher for the Dixon district, there’s a significant disparity in the supply 5

cost between the Dixon and Stockton districts. Dixon’s primary source of water is from 6

groundwater wells, while Stockton’s water supply is a combination of wells and purchased water 7

from the Stockton East Water District.22

8

Stockton’s water supply mix is forecasted to be over 80% purchased water and this proportion 9

has been increasing over time. During the Public Advocates Office visit to the Stockton district, 10

the Cal Water operations staff indicated that the purchased water was now close to 95% of its 11

water mix.23

It’s clear that over time Stockton will be relying primarily on purchased water from 12

the Stockton East Water District than from its existing wells.24

13

As shown in Chart 2-1 below, the Stockton water supply cost per service connection has been 14

increasing overtime with a higher reliance on purchased water, with the district’s 2020 annual 15

cost per service connection expected to exceed $400. Chart 2-1 also shows that, in contrast to 16

Stockton’s water supply, Dixon’s annual water supply cost has historically (2012-2017) averaged 17

about $53 per service connection, and it is forecasted to increase to $65 per service connection in 18

2020. 19

22 The groundwater supply source for both districts are from groundwater basins that are not adjudicated

or have supply restrictions. (Cal Water Response to DES 003, Q. 2 and 3, September 7, 2018.)

23 Cal Water Stockton District Tour, September 27, 2018.

24 Stockton district’s purchased agreement with Stockton East is a take-or-pay contract. The amount of

payment is set at the beginning of each year and is paid monthly for the year regardless of the quantity

taken. (Cal Water Response to DES-003, Question 5, September 7, 2018.)

17

Chart 2-1 1

2

Dixon customers’ water supply cost is significantly lower because it does not incur any cost for 3

pump taxes and does not rely on purchased water, which usually has a higher cost when 4

compared to that of groundwater. With Stockton’s water supply cost exceeding Dixon’s by over 5

500% consolidating the districts would cause Dixon’s customers to cross-subsidize Stockton’s 6

customers. Although this cross-subsidy is offset by Stockton customers picking up a significant 7

portion of Dixon’s rate base through consolidation, the differences in the water supply mix 8

between districts and a high reliance on purchased water by Stockton may result in higher rates 9

to Dixon customers in the future. 10

In the recent Cal Am GRC, the Commission denied Cal Am’s requests to consolidate three 11

Southern California districts to create a Southern Division.25

Although, the circumstances may 12

not be similar to the proposed Dixon and Stockton consolidation26

, the Commission found that 13

given the differences in water supply, future costs for each district could vary significantly 14

resulting in a district significantly subsidizing another district. For example, Dixon customers 15

may experience unforeseen rate changes when considering the annual pass-through surcharges 16

for Stockton’s purchased water. As previously mentioned, Dixon customers have relatively low 17

water supply cost, and once the district’s water supply costs are combined with that of Stockton, 18

25 D.18-12-021, p. 35.

26 For example, the Cal Am districts proposed for consolidation were relatively large size districts with

over 18,000 customers for each district.

18

Dixon customers may experience significantly higher annual water supply pass-through 1

surcharges. 2

The fourth guideline (Operations) states that the districts should be operated in a similar manner. 3

For example, if a single district manager presently operates two or more districts and the billing 4

system is common to the same districts, such an operation would support the combination of the 5

districts. An additional example includes whether the districts have a history of sharing staff 6

resources and have systems that are common to the districts such as billing. 7

In addressing this guideline, Cal Water states that Dixon and Stockton have similar customer 8

expectations for service and water quality and share similar climates. Cal Water states that there 9

is a history of sharing staff between the districts and identifies several shared activities such as 10

addressing distribution and water quality issues, expertise and support for construction projects, 11

emergency response, and leak detection services.27

Cal Water identifies the activities but 12

provides no information on the hours spent by each of the districts in sharing these activities. 13

Also, Cal Water does not identify any cost synergies that would be achieved by combining the 14

Stockton and Dixon districts. 15

The Public Advocates Offices requested information on the sharing and support provided 16

between the districts broken down by number of staff, hours, and activities Cal Water identifies 17

in its testimony. Cal Water responded that it did not have the data broken down by the activities 18

it referred to in its testimony.28

Based on Cal Water’s response, it is reasonable to conclude that 19

Dixon employees provide minimal assistance to Stockton since no detail sharing and support 20

data is available. 21

27 Cal Water Additional Testimony, Chapter 1, p. 6, July 2018.

28 Cal Water response to DES-001, Q. 10a, 10b, 10c. and 10d, August 24, 2018.

19

Table 2-2 provides the hours spent by the various districts providing support for Dixon from 1

2012 to 2014. 2

Table 2-2: Hours Charged by District to Support Dixon29

3

4

Livermore spent 818 hours in 2013 on the Dixon district, but Stockton provided the majority 5

hours to support Dixon from 2014 to 2017. Cal Water States: 6

Historically Stockton provides support to Dixon on Mondays and Fridays when 7

Dixon has only one field employee. Stockton has also supported Dixon by sending 8

Operations and Customer Service Center employees to cover and assist Dixon 9

employees when out on vacation, illnesses or are otherwise occupied with trainings, 10

meetings, and projects such as subdivision and main replacements.30

11

Table 2-3 shows the hours per year by job description for the areas Stockton has aided the Dixon 12

District. 13

Table 2-3: Stockton Resources Provided to Dixon By 14

Job Description and Hours Per Year (2013-2014) 15

16

29 Total Adjusted Hours* reflects the Public Advocate Office’s reductions to the hours reported in 2016

and 2017, due to questionable data on the hours reported.

30 Cal Water response to Public Advocates Office’s DR DES-001, Q. 10a, 10b, 10c. and 10d, August 24,

2018.

District 2012 2013 2014 2015 2016 2017

Livermore 84 818

Chico 24

Salinas 24

Stockton 421 431 242 1,939 3,320

Total Ajusted Hours 84 1,239 431 242 1,939 3,368

Equivalent Person Years 0.04 0.60 0.21 0.12 0.93 1.62

Job Description 2013 2014 2015 2016 2017

Customer Service 108 142 11 233 676

Interim Cust Service Partner 278 12

Foreman Construction and Oprations 49 284 773

Foreman-Flushing & Valve Maint Total 851

Foreman Leak Truck 194 373 748

Foreman-Leak Truck Acting 319

Inspector 241

Local Inspectar 11

Operations Clerk 8 102

Superintendent 207

Traveling Meter Mechanic 168 431

Utility Worker 7 31 32

UW/Relief Certified Pump Opera 22 10

Pump Operator 12

Total Hours Per Year 406 431 234 1,939 3,320

20

Based on the data provided there is no description of the activities performed, but one can derive 1

from the job description whether the activity is related to operations or maintenance. Since 2015 2

there has been a significant increase in the number of hours (from 234 in 2015 to 1,939 hours in 3

2016, and 3,320 hours in 2017). Customer service, leak activity, flushing-valve maintenance, 4

construction and operations, and meters account for most of the 2016-2017 increase. It’s 5

difficult to estimate to what extent these activities would increase or decrease after consolidation. 6

Cal Water has presented no information whether any efficiencies or labor savings would be 7

achieved as a result of consolidating the districts. The services provided to Dixon by Stockton or 8

other districts most likely will continue with or without consolidation because it may be less 9

costly than having dedicated employees to staff these operating activities in the Dixon district. 10

As shown in the Table 2-3 above, the hours spent by the various employees is less than a full-11

time equivalent and would not justify hiring a full-time position in the Dixon district for any of 12

the listed activities. 13

Cal Water states that from an infrastructure perspective, both Dixon and Stockton systems have 14

comparable operating requirements, main replacement programs, meter types, valve spacing, 15

control systems, and use the same master contractor. Cal Water does not provide any specific 16

metrics or data to support its claim on the similarities between the districts’ infrastructure. 17

Regulated water utilities must follow standards and rules regarding governing of water systems, 18

such as those required by the Commission’s General Order 103-A, and State Water Resources 19

Control Board’s Department of Drinking Water. These rules require water utilities to follow 20

minimum standards, so water systems may tend to have many similarities in system design, 21

pressure ranges, fire flow, and storage. Also, multi-district water utilities can be expected to 22

standardize operations to achieve operating efficiencies and cost savings on a district wide basis 23

by having similar meter types, main replacement programs, and control systems. Therefore, the 24

Commission should give little weight to the comparability of the systems when evaluating Cal 25

Water’s consolidation request. 26

3. Other Public Interest Factors 27

As stated above, the Commission determined that proponents of consolidation may include other 28

factors that affect the public interest, including but not limited to balancing investment, 29

conservation, water quality, and affordability, and whether any subsidies resulting from 30

21

consolidation would be short, medium or long-term.31

In addressing these public interest factors, 1

Cal Water makes general assertions without providing adequate factual support concerning the 2

specific effects of the proposed consolidation on both Dixon and Stockton customers. Cal Water 3

argues Dixon is a high cost district, and that the large Cr-6 investment to treat its ground water 4

will have a large impact on the community and create a financial hardship. Cal Water claims 5

that the preferred strategy to reduce Dixon’s capital investment cost is by spreading its cost to a 6

larger customer base through consolidation with a large district such as Stockton. 7

Cal Water also argues that for smaller districts the rate impacts of proposed capital investment 8

severely limit what the company can install and that over time it impacts service quality, leakage 9

rates, and/or system reliability. Cal Water fails to provide any specific examples where this was 10

the case for the Dixon district and simply concludes without much support that consolidation 11

solves these challenges. In addressing whether the subsidies resulting from consolidation are 12

short, medium, or long-term, Cal Water claims that its proposed approach requiring Dixon to pay 13

for a portion of the Cr-6 investment and the interim RSF subsidy will minimize the impact of the 14

intra-district subsidies. Cal Water fails to present any data regarding the intra-district subsidies, 15

specifically whether Stockton’s cross-subsidization of Dixon would be short, medium or long-16

term. 17

a. Balancing Investment 18

Cal Water claims that the rate impact on smaller districts severely limits what the company can 19

install and consolidation facilitates capital investment in the smaller districts by spreading cost 20

over a larger customer base.32

However, Cal Water could not specifically identify which capital 21

projects may have been included or not included in a district had it not been consolidated.33

22

Based on the 2018 GRC capital budgets submitted for smaller districts, Cal Water assumes that 23

under consolidation capital budgets are probably higher than they otherwise would have been if 24

the district remained a standalone district.34

This response is speculative since Cal Water neither 25

31 D.14-10-047, p. 8.

32 Cal Water Additional Testimony, Chapter 1, pp. 6-7, July 2018.

33 Cal Water Response to DES-001, Q.5a and 5b, August 24, 2018.

34 Cal Water Response to DES-001, Q.5a and 5b, August 24, 2018

22

provides any past history of capital expenditures made in the smaller districts nor identifies 1

whether capital improvements were not made due to concerns about rate impacts. 2

Dixon is considered a small district with 2,945 service connections forecasted for 2021 and an 3

average annual growth rate of approximately 0.4%. Table 2-4 below shows the recorded net 4

plant additions from 2009 through 2018 and the amounts forecasted for 2018 through 2021. 5

Table 2-4: Dixon Plant Net Plant Additions 2009-2022 6

7

For comparison purposes, the Cr-6 treatment cost incurred in 2016 was removed since it presents 8

a significant expenditure caused by a change in water quality requirements. This helps to better 9

assess Cal Water’s normal capital expenditures for Dixon. Over the 2009-2018 time period, 10

there is no evidence that Cal Water has postponed or has not met the necessary capital 11

investment needs of the Dixon district. 12

Table 2-5 shows the Dixon district gross rate base and rate base per service connection from 13

2009 through 2021. In fact, Table 2-5 column F below shows that, from 2010 to 2012, there was 14

an accelerated increase in Dixon’s rate base, increasing from $1,450 per service connection in 15

2009 to $3,118 in 2012. 16

Year

EOY Recorded

Gross Plant % Change

Net Plant

Additions

2009 7,215,884$

2010 7,930,352$ 10% 714,468$

2011 10,002,830$ 26% 2,072,478$

2012 12,411,219$ 24% 2,360,795$

2013 14,617,000$ 18% 2,205,781$

2014 15,099,146$ 3% 482,146$

2015 15,906,593$ 5% 807,448$

2016* 16,478,729$ 4% 572,136$

2017 16,727,884$ 2% 249,155$

2018 18,533,201$ 11% 1,805,317$

2019 19,877,734$ 7% 1,344,533$

2020 20,487,439$ 3% 609,705$

2021 21,397,128$ 4% 909,689$

2022 22,400,272$ 5% 1,003,144$

* Excludes Cr-6 cost of $7,585,292

Recorded

Forecasted

23

Table 2-5: Dixon District Gross Rate Base and Rate Base Per Service Connection 2009-1

202135

2

3

4

After 2012, the percent change in rate base averaged less than 10% per year until 2016. The 5

significant increase in rate base during 2016-2017 was due to capital investments made by Cal 6

Water to comply with State Water Resources Control Board State Water Resources’ new 7

Minimum Contaminant Level for Cr-6.36

The Cr-6 investments totaled $7.58 million and were 8

recorded in the Water Quality Memorandum Account. Once final rates are adopted in the 9

current GRC, Cal Water will file an advice letter in 2020 seeking to recover the earned revenues 10

and operating expenses tracked in the memo account up to date when the Cr-6 plant is authorized 11

for recovery in base rates. As shown in Table 2-5, had Dixon not incurred the Cr-6 treatment 12

investment, its rate base would have increased at a moderate rate of approximately 3.2% per year 13

(2018-2022). With the Cr-6 investment fully captured in 2017, the rate base per service 14

35 Source: 2009-2011 Dixon Annual Reports filed with CPUC. 2012-2022 Cal Water RO Model, CH07_

RO_RB, Tab Wght RB w. WC (CWIP) WS-14.

36 On May 31, 2017, the Superior Court of Sacramento County issued a judgment invalidating the

hexavalent chromium maximum contaminant level (MCL) of 10 parts/billion for drinking water. The

court ordered the State Water Resources Control Board (State Water Board or Board) to take the

necessary actions to delete the hexavalent chromium MCL from the California Code of Regulations. As

of September 11, 2017, the MCL for hexavalent chromium is no longer in effect, and the previous MCL

of 50 parts/billion remains in effect.

Year

Dixon Service

Connections

Percent

Change

Weighted

Avg. Rate

Base w Cr-6

Investment

Percent

Change

Rate Base

Per Service

Connection

w/Cr-6

Percent

Change

Weighted

Avg. Rate

Base w/o Cr-6

Investment

Percent

Change

Rate Base

Per Service

Connection

wo/Cr-6

Percent

Change

A B C D E F G H I J K

2009 2,799 4,101,708$ 1,465$ 4,101,708$ 1,465$

2010 2,840 1.5% 5,330,971$ 30.0% 1,877$ 28.1% 5,330,971$ 30.0% 1,877$ 28.1%

2011 2,840 0.0% 7,432,038$ 39.4% 2,617$ 39.4% 7,432,038$ 39.4% 2,617$ 39.4%

2012 2,875 1.2% 8,964,429$ 20.6% 3,118$ 19.2% 8,964,429$ 20.6% 3,118$ 19.2%

2013 2,879 0.1% 10,122,313$ 12.9% 3,516$ 12.8% 10,122,313$ 12.9% 3,516$ 12.8%

2014 2,883 0.1% 10,522,143$ 3.9% 3,650$ 3.8% 10,522,143$ 3.9% 3,650$ 3.8%

2015 2,889 0.2% 10,763,725$ 2.3% 3,726$ 2.1% 10,763,725$ 2.3% 3,726$ 2.1%

2016 2,893 0.1% 14,238,877$ 32.3% 4,922$ 32.1% 10,989,951$ 2.1% 3,799$ 2.0%

2017 2,936 1.5% 18,854,195$ 32.4% 6,422$ 30.5% 11,268,903$ 2.5% 3,838$ 1.0%

2018 2,934 -0.1% 19,716,226$ 4.6% 6,720$ 4.6% 12,187,735$ 8.2% 4,154$ 8.2%

2019 2,938 0.1% 20,165,670$ 2.3% 6,865$ 2.2% 12,813,683$ 5.1% 4,362$ 5.0%

2020 2,941 0.1% 19,855,838$ -1.5% 6,751$ -1.7% 12,640,711$ -1.3% 4,298$ -1.5%

2021 2,945 0.1% 19,987,012$ 0.7% 6,787$ 0.5% 12,927,666$ 2.3% 4,390$ 2.1%

2022 2,948 0.1% 20,118,186$ 0.7% 6,824$ 0.5% 13,214,621$ 2.2% 4,482$ 2.1%

24

connection would have increased to $6,422, a 69.5% increase above the 2016 per service 1

connection of $3,799. 2

As show in Table 2-5 column F, Dixon’s rate base per service connection is expected to reach 3

$6,751 by test year 2020. At this level, Dixon will exceed Cal Water’s 2020 system-wide 4

average rate base of $3,502 per service connection by 193%. (See Table 2-6, column E, line 27) 5

Table 2-6: Weighted Average Rate Base Per Service Connection2020 Test Year 6

7

Although the level of rate base per service connection is not a screening measure in the 8

Affordability Screening Framework, the Dixon district would be considered a high cost district. 9

For example, at 150% of the system-wide average rate base per service connection of $5,253 10

(Table 2-6, column E, Ln. 28) Dixon would still exceed this higher threshold by 129% (Table 2-11

District

Weighted Average

Rate Base 2020

2020 Avg.

Service

Connections

Weighted

Average Rate

Base Per Avg.

Service

Connection

As % of Avg.

Rate Base Per

Avg. Service

Connection

At 150% of Avg.

Rate Base Per

Serv. Connection Consolidated Y/N

A B D E=(B/D) F=(E/E-LN27) G=(E/E-LN28) H

1 Bear Gulch 162,620,020$ 18,989 8,564$ 245% 163% N

2 Antelop Valley 11,128,693$ 1,384 8,041$ 230% 153% Y-Palos Verde

3 Coast Springs 1,893,979$ 249 7,614$ 217% 145% Y-Bayshore

4 Unified Area 3,041,623$ 429 7,090$ 202% 135% Y-Bayshore

5 Dixon 19,856,149$ 2,939 6,755$ 193% 129% N

6 Palos Verde 137,289,684$ 24,171 5,680$ 162% 108% Y-Antelop Valley

7 Lucerne 6,594,251$ 1,219 5,412$ 155% 103% Y-Bayshore

8 King City 14,464,861$ 2,728 5,303$ 151% 101% Y-Salinas

9 Kern River Valley 20,693,358$ 3,968 5,215$ 149% 99% N

10 Los Altos 82,634,468$ 19,040 4,340$ 124% 83% N

11 Dominguez 142,624,942$ 34,220 4,168$ 119% 79% N

12 East LA 106,998,319$ 26,824 3,989$ 114% 76% N

13 Salinas 113,333,363$ 28,771 3,939$ 112% 75% Y-King City

14 Oroville 13,352,499$ 3,632 3,676$ 105% 70% N

15 Bayshore 189,226,668$ 53,876 3,512$ 100% 67% Y-Coast Springs/Unified Area/Lucern

16 Stockton 152,490,886$ 44,339 3,439$ 98% 65% N

17 Westlake 23,690,032$ 7,097 3,338$ 95% 64% N

18 Willows 8,044,104$ 2,430 3,310$ 95% 63% N

19 Marysville 11,712,453$ 3,760 3,115$ 89% 59% N

20 Livermore 51,485,876$ 18,841 2,733$ 78% 52% N

21 Bakersfield 194,094,553$ 72,648 2,672$ 76% 51% N

22 Selma 15,476,267$ 6,556 2,361$ 67% 45% N

23 Chico 72,058,169$ 30,580 2,356$ 67% 45% N

24 Hermoso Redondo 62,342,915$ 27,012 2,308$ 66% 44% N

25 Visalia 71,371,683$ 46,498 1,535$ 44% 29% N

26 Total 1,688,519,815$ 482,199

27 Systemwide Avg. Rate Base Per Service Connection 3,502$

28 At 150% of Avg. Rate Base Per Service Connection 5,253$

25

6, column G, Ln. 5). However, a water system having a large rate base does not necessarily 1

mean that the district has affordability issues. 2

Table 2-7 column F shows Stockton’s rate base per service connection from 2009 through 2022. 3

Table 2-7: Stockton Rate Base Per Service Connection 2009-2022 4

5

Cal Water proposes consolidating the Dixon district with the Stockton district in conjunction 6

with using RSF funds and a surcharge paid by Dixon’s customers to soften the impact on 7

Stockton customers. As shown in Table 2-7, Stockton’s 2020 rate base per service connection of 8

$3,439 will be at 98% of the system average and is expected to exceed the system average by 9

2020 when its rate base per service connection is forecasted to reach $4,378 or 125% of the 10

system average. 11

Year

Wieghted Avg.

Rate Base

Stockton

Percent

Change

Stockton

Service

Connecti

ons

Percent

Change

Stockton

Rate

Base Per

Service

Connecti

on

Percent

Change

A B C D E F=(B/D) G

2009 50,420,132$ 41,649 1,211$

2010 53,984,695$ 7.1% 41,978 0.8% 1,286$ 6.2%

2011 56,105,257$ 3.9% 41,970 0.0% 1,337$ 3.9%

2012 55,830,757$ -0.5% 42,320 0.8% 1,319$ -1.3%

2013 60,504,840$ 8.4% 42,928 1.4% 1,409$ 6.8%

2014 64,797,770$ 7.1% 43,149 0.5% 1,502$ 6.5%

2015 66,702,403$ 2.9% 43,440 0.7% 1,536$ 2.2%

2016 77,311,286$ 15.9% 43,672 0.5% 1,770$ 15.3%

2017 94,982,713$ 22.9% 43,893 0.5% 2,164$ 22.2%

2018 118,133,831$ 24.4% 44,045 0.3% 2,682$ 23.9%

2019 141,479,719$ 19.8% 44,167 0.3% 3,203$ 19.4%

2020 152,490,866$ 7.8% 44,339 0.4% 3,439$ 7.4%

2021 174,008,455$ 14.1% 44,500 0.4% 3,910$ 13.7%

2022 195,526,044$ 12.4% 44,660 0.4% 4,378$ 12.0%

26

Chart 2-2 shows Dixon’s and Stockton’s rate base per service connection for the period 2009 1

through 2020. 2

Chart 2-2 3

4

As shown in Chart 2-2, the Stockton district is expected to have a much higher growth in rate 5

base over the forecasted period of 2018-2022 at 15% per year when compared to Dixon’s at less 6

than 1% per year over the same period. If this trend continues, by 2026 Stockton’s rate base per 7

service connection may exceed Dixon’s, which means that Dixon customer’s may be subsidizing 8

Stockton customers. This diminishes the benefits of consolidating with the Stockton district, and 9

increases inequities between the consolidated districts. 10

There are also negative impacts on Stockton districts in future years. After 2022, the transitional 11

RSF subsidy of $1.2 million ends, and Stockton’s customers will pay for this shortfall in water 12

rates. Thus, after the transitional period, Stockton’s level of cross-subsidy to Dixon customers 13

will increase. 14

In conclusion, there is no evidence to indicate that the level of investments necessary to maintain 15

Dixon’s water service and quality would benefit from consolidating with the Stockton district. 16

There is also the risk that consolidating Dixon with Stockton may encourage over investment in 17

Dixon’s water system since Stockton’s ratepayers will be sharing the cost. As stated above, 18

Stockton’s water supply relies primarily on purchased water and is much higher per service 19

connection than Dixon’s, this variance may widen significantly in futures years resulting in a 20

greater cost burden for Dixon customers after service rates are equalized. 21

27

b. Conservation 1

Consolidation is one of several cross-subsidy mechanisms available to districts that facing high 2

cost and unaffordable water service. However, consolidating districts breaks the connection 3

between cost and rates for the cross-subsidized district. Consolidating Dixon with Stockton may 4

undermine Dixon’s water use and achieved conservation savings due to weakening of price 5

signals (lower bills) that may result under the consolidated rate design. Dixon residential 6

customers have reduced their water consumption from an annual high of approximately 225 7

hundred cubic feet (CCF) to a low of 117 CCF in 2016. (See Chart 2-3 and 2-4) 8

Chart 2-3: Dixon Single Family Consumption Forecast 2015 GRC CCF/Meter 9

10

A 48% reduction when compared to 2004 consumption levels. As shown in Chart 2-4 Cal Water 11

expects a bounce back in consumption from the 2015-2016 to 141 CCF or approximately 17% 12

above the 2016 consumption level. However, Dixon’s 2020 residential annual consumption 13

level is still expected to be significantly below its 2004-2008 levels that were above 200 CCF. 14

28

Chart 2-4: Dixon Single Family Consumption Forecast 2018 GRC CCF/Meter 1

2

Table 2-8 shows the various rate design scenarios based on whether Dixon is consolidated or not 3

consolidated. 4

Table 2-8: Dixon Rate Design Scenarios – 2020 Test Year 5

6

The rate design scenarios also capture the inclusion or exclusion of RSF and Cal Water’s 7

proposed $16 monthly surcharge. Table 2-8 shows both Cal Water’s proposed rate design for 8

Dixon, and the Public Advocates Office recommendation. The level of RSF subsidy is adjusted 9

by the Public Advocates Office based on its recommendation for Dixon’s revenue requirement 10

increase for the 2020 test year. 11

No

Consolidation

No $1.2M RSF/

$16 Surcharge

$1.2M RSF and

No $16

Surcharge

CWS

Proposal

$1.2M

RSF/$16

Surcharge

Public Advocated

Office

Recommendation

No Consolidation

w/ $600k SRF

Quantaty Rate

1-8 CCF 5.0174$ 3.1938$ 3.1318$ 3.1032$ 4.3713$

9-16 CCF 6.2595$ 3.9907$ 3.9133$ 3.8775$ 5.4519$

>16 CCF 9.3648$ 5.9832$ 5.8670$ 5.8132$ 8.1534$

Monthly Service Charge 44.17$ 24.02$ 23.55$ 23.33$ 27.15$

29

Table 2-9 provides a clear picture how Dixon’s residential customers’ bills are impacted at the 1

various consumption levels using the rate designs in Table 2-8. 2

Table 2-9: Dixon Residential 5/8-3/4 Meter Size Typical Monthly Bill at Various CCF 3

Consumption Levels - 2020 Test Year 4

5

As shown in Table 2-9, without consolidation, Dixon customers would see bill increases between 6

43% and 60% based on the level of consumption. For example, customers that consume at 5 7

CCF will see their monthly bill increase to $69.26 or 53% above the present monthly bill of 8

$45.31. Under the consolidation scenarios the average bill will result in significant lower bills 9

when compared to the stand-alone scenario. The amount of the discount under consolidation 10

varies depending on whether the RSF subsidy is included or excluded and whether Dixon 11

customers pay Cal Water’s proposed $16 monthly surcharge to cover the CR-6 plant costs. 12

For example, if no RSF subsidy is used to offset Dixon’s revenue requirement when consolidated 13

with Stockton, and Dixon customers pay the $16 monthly surcharge, the discount will be lower 14

from the stand-alone rates by 19% for a customer using 5 CCF, and 31% lower for a customer 15

using 25 CCF. When compared to Cal Water’s proposal, the discounts are slightly higher (from 16

20.8% to 31.1%) since it includes $1.2 million in RSF funding in addition to the monthly 17

USAGE CCF 5 10 15 20 25

Dixon Present Rates 45.31$ 66.25$ 89.75$ 113.25$ 136.75$

Scenarios

No Consolidation (Stand Alone) 69.26$ 96.83$ 128.13$ 171.84$ 218.67$

% Change From Present Rates 53% 46% 43% 52% 60%

Cal. Advocates Recommended Non Consolidation w/ $600k RSF 49.01$ 73.02$ 100.28$ 138.35$ 179.12$

% Change From Present Rates 8.2% 10% 12% 22% 31%

% Change From Stand Alone Rates -29% -25% -22% -19% -18%

Consolidation No $1.2 million RSF and No $16.00 Surcharge 39.99$ 57.55$ 77.51$ 105.43$ 135.34$

% Change From Present Rates -12% -13% -14% -7% -1%


Consolidation No $1.2 million RSF and $16.00 Surcharge 55.99$ 73.55$ 93.51$ 121.43$ 151.34$

% Change From Present Rates 24% 11% 4% 7% 11%


Consolidation RSF $1.2 Million and No $16 Surcharge 39.21$ 56.43$ 76.00$ 103.38$ 132.71$

% Change From Present Rates -13% -15% -15% -9% -3%


CWS- Request Consolidation w/RSF $1.2 Million and $16 Surcharge 54.85$ 71.91$ 91.30$ 118.43$ 151.31$

% Change From Present Rates 21.0% 8.5% 1.7% 4.6% 10.7%

% Change From Stand Alone Rates -20.8% -25.7% -28.7% -31.1% -30.8%

30

surcharge. Under both these scenarios Dixon residential customers will be paying higher bills 1

when compared to present rates, but the increase will be less than half the average increase of 2

51% when standing alone. 3

When excluding the proposed RSF subsidy and monthly surcharge to be paid by Dixon 4

customers, Stockton ratepayers would absorb this subsidy in service rates resulting in an increase 5

of about 3% in Stockton’s residential monthly bill across the various consumption levels. (See 6

Table 2-10.) 7

Table 2-10: Stockton Residential 5/8-3/4 Meter Size Typical Monthly Bill at Various CCF 8

Consumption Levels - 2020 Test Year 9

10

Under Cal Water’s proposal, the $1.2 million RSF annual subsidy only applies as a transition 11

mechanism to soften the impact on Stockton customers for one rate cycle, and in the next rate 12

case Stockton customers would absorb this shortfall in rates. For example, if Stockton is 13

consolidated with Dixon without applying RSF and the $16 monthly surcharge, Stockton 14

customers consuming 5 CCF will see an additional 1.7% resulting in an overall increase of 15

17.1% over present rates. Although the impact on Stockton customers may appear small, there 16

are other factors that the Commission should consider such as Stockton’s and Dixon’s economic 17

metrics that do not justify Stockton customers’ cross-subsidizing Dixon customers. The Public 18

Advocates Office discusses these factors in the following section. 19

The Public Advocates Office concludes that Cal Water’s proposed rate design under 20

consolidation for Dixon may not lead to efficient water use and may instead lead to higher water 21

consumption undermining prior conservation efforts. As shown in Table 2-9, Cal Water’s 22

proposed rate design results in a higher rate for those customers that have reduced consumption 23

than for those consuming higher quantities. As shown in Table 2-9 customers consuming 5 CCF 24

of water will see an increase of 21% over present rates, yet those customers consuming 15 CCF 25

USAGE CCF 5 10 15 20 25

1 Stockton Present Rates 34.16$ 50.61$ 68.14$ 85.67$ 105.56$

2 Stockton No Consolidation 39.41$ 55.87$ 74.57$ 102.61$ 130.65$

3 % Change From Present Rates 15.3% 10.4% 9.4% 19.8% 23.8%

4 Stockton Consolidated Rates No RSF and No Surcharge 39.99$ 57.55$ 77.51$ 105.43$ 135.34$


6 Stockton Consolidated Rates under CWS Proposal 38.85$ 55.91$ 75.30$ 102.43$ 134.48$


8 Difference (ln3 - ln4) 3.3% 3.2% 3.2% 3.5% 0.8%

31

of water will only see only a 1.7% increase in their bill. Even at much higher consumption levels 1

those consuming 25 CCF will only see a 15.6% increase in their bill. 2

Cal Water’s proposal to apply a $16 monthly surcharge to Dixon customers to partially offset the 3

cost of three Cr-6 treatment plants installed in 2016 and 2017 to treat Dixon’s groundwater has 4

several flaws. First, Dixon customers won’t fully understand the bill increase because the 5

customer notice fails to show the effect of the $16 Cr-6 monthly surcharge relatively to the 6

typical monthly service bill (quantity rates and monthly service charge).37

Customers reviewing 7

the notice won’t be able to make an informed decision about their typical water bill since the Cr-8

6 monthly surcharge is combined with the total bill change. 9

Second, Cal Water’s proposed $16 monthly surcharge is arbitrary because it is not based on any 10

calculations to recover a specific portion of the Cr-6 costs. Instead, Cal Water based the 11

surcharge on the belief that Dixon customers should not have a rate decrease as a result of the 12

consolidation, and that Dixon customers should have a similar rate increase as Stockton 13

customers.38

14

Finally, because it’s a fixed monthly charge, it’s not equitable because it penalizes those 15

customers that use less water and rewards those that consume more water. With a fixed monthly 16

surcharge, all customers pay the same surcharge regardless of the amount of water used. Under 17

normal ratemaking principles, the revenue requirement for plant is recovered through both 18

quantity rates and monthly service charge. Thus, if customers lower their consumption, they can 19

achieve a lower bill because a portion of the cost is recovered through quantity rates, while those 20

that consume higher quantities would pay a higher bill and provide a higher contribution towards 21

infrastructure costs. In Table 2-9 above, the Public Advocates Office presents its rate design for 22

the Dixon district based on its recommendation not to consolidate Dixon at this time with 23

Stockton district, and instead apply an annual RSF subsidy of $600,000 for this rate cycle. The 24

recommended rate design results in a more equitable rates for Dixon using lower quantities of 25

water and sends the appropriate conservation pricing signal to those that consume 20 CCF or 26

more per month. Dixon customers that consume 5 to 10 CCF would experience a moderate bill 27

increase of 8% to 10% above present rates, and those consuming 20 to 25 CCF would see 28

37 Cal Water Dixon final customer notice.

38 Cal Water response to the Public Advocates Office Data Request DES-001, Q.18.b, August 24, 2018.

32

increases of 22% to 31%. The Public Advocates Office rate design removes the reliance and 1

complexity of applying a $16 monthly surcharge for Cr-6 costs and eliminates the inequities that 2

result from its application. 3

c. High Cost and Affordability 4

In assessing high cost and affordability as a public interest factor, the Commission should (at a 5

minimum) consider evaluating Dixon using the Affordability Screening Framework (AFS) tool 6

addressed in D.14-10-047. Although the Commission concluded that use of AFS is 7

discretionary,39

it does not foreclose the Commission from considering the results of AFS to 8

evaluate the consolidation of utility districts. The AFS can be used to determine if Dixon is both 9

a high cost district and has affordability issues. 10

Besides applying AFS, other factors can be considered to determine whether it’s equitable and 11

reasonable to combine Dixon with Stockton. These factors should include metrics such as the 12

unemployment rates, number of low-income customers, residential home values, household per 13

capita income, and poverty rates. 14

As previously discussed, Cal Water’s proposal lacks any hard data to support its arguments for 15

consolidating Dixon with Stockton. Instead, many of its statements are general such as implying 16

that Dixon is a high-cost district and that the large increase will create financial hardship on the 17

community. There is no analysis of data on high-cost or affordability in Cal Water’s showing. 18

Applying the AFS, the first measure is to screen whether a district is high-cost. This is 19

determined by calculating each district’s annual revenue requirement divided by the number of 20

service connections. A system-wide average is calculated and grossed up by 150% of the 21

system-wide average value. If a district exceeds 150% of the system average, then the district is 22

considered high cost. However, not all high cost areas have affordability issues. The second 23

screening determines whether a district may face affordability issues if a residential customers’ 24

bill based the essential indoor use (EIU) exceeds 2.5% of median household income. 25

Table 2-11 shows the results based on the high cost screening using Cal Water’s 2020 test year 26

revenue requirement. 27

39 D.14-10-047, p. 13.

33

Table 2-11: High Cost Screening Annual Revenue Requirement (RR) Per Service 1

Connection Threshold RR/Service Connection >150% of Utility Average 2

3

At a $147 revenue requirement per service connection (RR/Service Connection), Dixon would 4

not be considered a high cost district as its RR/Service Connection is below 150% of the system-5

wide RR/Service Connection of $184. At $174 RR/Service Connection, Dixon is at 80% of the 6

system-wide threshold of $184. 7

The Public Advocates Office refined the analysis by also looking at the residential annual 8

revenue requirement because approximately 78.6% of the revenue requirement is derived from 9

residential customers. Based on this measure, Dixon’s residential RR/service connection is 10

$126, and is at 99% of the threshold of the $128 system-wide residential RR/Service Connection. 11

(See Table 2-11, column F.) Under this refined measure, Dixon could be considered being a 12

high cost district. As shown in Table 2-11, there are other districts which exceed the RR/Service 13

Connection threshold, but except for Kern River Valley, the remaining districts such as Los 14

District

Annual RR/Service

Connection

Monthly

RR/Service

Connection

% of

Treshold

Annual

RR/Residential

Connection

Monthly

RR/Residential

Connection

% Exceeds

Treshold Consolidated Y/N

A B C D E F G H

Bear Gulch 3,119$ 260$ 141% 2,943$ 245$ 192% N

Westlake 2,917$ 243$ 132% 2,294$ 191$ 149% N

Palos Verde 2,059$ 172$ 93% 1,755$ 146$ 114% Y-Antelop Valley

Kern River Valley 1,839$ 153$ 83% 1,697$ 141$ 111% N

Los Altos 2,147$ 179$ 97% 1,669$ 139$ 109% N

Dixon 1,762$ 147$ 80% 1,517$ 126$ 99% N

Antelop Valley 2,350$ 196$ 106% 1,357$ 113$ 88% Y-Palos Verde

Livermore 1,328$ 111$ 60% 1,071$ 89$ 70% N

Bayshore 1,681$ 140$ 76% 1,047$ 87$ 68% Y-Cst Sprngs/Uni. Area/Lucern

Willows 1,339$ 112$ 61% 1,023$ 85$ 67% N

East LA 1,501$ 125$ 68% 910$ 76$ 59% N

Oroville 1,558$ 130$ 70% 892$ 74$ 58% N

Unified Area 3,077$ 256$ 139% 845$ 70$ 55% Y-Bayshore

Bakersfield 1,145$ 95$ 52% 843$ 70$ 55% N

Stockton 1,284$ 107$ 58% 839$ 70$ 55% N

Hermoso Redondo 1,223$ 102$ 55% 817$ 68$ 53% N

King City 1,415$ 118$ 64% 802$ 67$ 52% Y-Salinas

Marysville 1,140$ 95$ 52% 759$ 63$ 49% N

Salinas 1,221$ 102$ 55% 759$ 63$ 49% Y-King City

Selma 932$ 78$ 42% 756$ 63$ 49% N

Dominguez 2,159$ 180$ 98% 723$ 60$ 47% N

Lucern 2,550$ 213$ 115% 717$ 60$ 47% Y-Bayshore

Chico 888$ 74$ 40% 642$ 53$ 42% N

Visalia 668$ 56$ 30% 498$ 42$ 32% N

Coast Springs 2,868$ 239$ 130% 456$ 38$ 30% Y-Bayshore

Utility Average 1,474 123$ 1,023$ 85$

RR/Customer > 150% of Utility Average 184$ 128$

34

Altos, Palos Verde, and Bear Gulch may not have affordability issues. Stockton would not be 1

considered a high cost district since it’s at 58% below the $184 threshold of the system-wide 2

RR/service connection. Also, Stockton’s cost measure for residential RR/Service Connection is 3

at 55% of threshold of $128 RR/Service Connection. Although Stockton may not be a high-cost 4

district, it does not mean that its customers may not be facing affordability issues due to 5

economic conditions in the region when compared to areas such as Los Altos and Palos Verde. 6

The Public Advocates Office also looked at the level of weighted average rate base per service 7

connection to access Dixon’s level relative to the system-wide average, and at 150% of the 8

system-wide average. As shown in Table 2-12, Dixon rate base per service connection is $6,755, 9

based on Cal Water’s 2020 Test Year estimates. 10

35

Table 2-12: 2020 Test Year Weighted Average Rate Base/Service Connection and 150% of 1

Utility Average Weighted Rate Base/Service Connection 2

3

Dixon’s level of rate base per service connection exceeds both the system-wide average of 4

$3,502/service connection and $5,253/service connection at 150% of the system-wide average. 5

This measure also implies that Dixon can be considered a high-cost district when compared to 6

the level of rate base relative to other districts and the system-wide average. Stockton’s rate base 7

per service connection of $3,439 is at 65% of 150% of the system-wide average rate base per 8

service connection. 9

District

Weighted Average

Rate Base 2020

2020 Avg.

Service

Connections

Weighted

Average Rate

Base Per Avg.

Service

Connection

At 150% of Avg.

Rate Base Per

Serv. Connection Consolidated Y/N

Bear Gulch 162,620,020$ 18,989 8,564$ 163% N

Antelop Valley 11,128,693$ 1,384 8,041$ 153% Y-Palos Verde

Coast Springs 1,893,979$ 249 7,614$ 145% Y-Bayshore

Unified Area 3,041,623$ 429 7,090$ 135% Y-Bayshore

Dixon 19,856,149$ 2,939 6,755$ 129% N

Palos Verde 137,289,684$ 24,171 5,680$ 108% Y-Antelop Valley

Lucern 6,594,251$ 1,219 5,412$ 103% Y-Bayshore

King City 14,464,861$ 2,728 5,303$ 101% Y-Salinas

Kern River Valley 20,693,358$ 3,968 5,215$ 99% N

Los Altos 82,634,468$ 19,040 4,340$ 83% N

Dominguez 142,624,942$ 34,220 4,168$ 79% N

East LA 106,998,319$ 26,824 3,989$ 76% N

Salinas 113,333,363$ 28,771 3,939$ 75% Y-King City

Oroville 13,352,499$ 3,632 3,676$ 70% N

Bayshore 189,226,668$ 53,876 3,512$ 67% Y-Coast Springs/Unified Area/Lucern

Stockton 152,490,886$ 44,339 3,439$ 65% N

Westlake 23,690,032$ 7,097 3,338$ 64% N

Willows 8,044,104$ 2,430 3,310$ 63% N

Marysville 11,712,453$ 3,760 3,115$ 59% N

Livermore 51,485,876$ 18,841 2,733$ 52% N

Bakersfield 194,094,553$ 72,648 2,672$ 51% N

Selma 15,476,267$ 6,556 2,361$ 45% N

Chico 72,058,169$ 30,580 2,356$ 45% N

Hermoso Redondo 62,342,915$ 27,012 2,308$ 44% N

Visalia 71,371,683$ 46,498 1,535$ 29% N

Total 1,688,519,815$ 482,199

Systemwide Avg. Rate Base Per Service Connection 3,502$

At 150% of Avg. Rate Base Per Service Connection 5,253$

36

However, as shown in Chart 2-5 below, Stockton’s rate base is expected to increase at an 1

accelerated rate through 2022, exceeding the system-wide average of $3,502 and reaching 83% 2

of 150% of the system-wide average. At the current rate of growth in capital investment, the 3

Stockton district may exceed 150% of the system-wide average in the near future and could be 4

considered a high-cost district. 5

Chart 2-5: Stockton District Weighted Average Rate Base Per Service Connection 6

(2009-2022) 7

8

The second component of the AFS measures a residential customer’s capacity to pay its monthly 9

bill and whether water service affordability could be an issue. This measure applies the 10

California Department of Public Health’s recommended 2.5% of the median household income. 11

For example, if a customer’s water bill exceeds 2.5% of the median household income, that 12

customer’s waster service is deemed unaffordable. The water bill is calculated by using the 13

quantity based on the Essential Indoor Usage (EIU). In most cases this is equivalent to a 14

residential customer’s average water usage during the winter period. 15

Cal Water’s rate design consultants (M-Cubed) set the first quantity tier at the mean winter 16

consumption level, which the Public Advocates Office believes is similar to EIU. Therefore, in 17

calculating the average service bill at the EIU consumption, the Public Advocates Office used 18

the Tier I quantity consumption for the Dixon and Stockton districts. This results in a Tier I 19

consumption of 8 CCF for both districts. For Dixon’s and Stockton’s median household income 20

37

(MHI) the Public Advocates Office used the latest information available from the U.S. Census 1

Bureau’s data. 2

Table 2-13 shows the results of applying the affordability screening of 2.5% of MHI to the 3

Dixon and Stockton water bills based on equivalent EIU consumption. 4

Table 2-13: Affordability Screening 2.5% of Median Household Income 5

6

The results show that, although Dixon would be considered a high cost district, it does not meet 7

the affordability screening because its average water bill at the EIU is 1.35% of its MHI or 54% 8

of the recommended 2.5% threshold. Stockton also does not meet the affordability thresholds 9

with a 1.27% of its MHI, or 50.7% of the 2.5% threshold. 10

Table 2-13 also shows how consolidation would impact the annual water bill as a percent of MHI 11

for both Dixon and Stockton. Dixon will see a significant decrease as a percent of MHI at 1.03% 12

from 1.35, while Stockton’s will remain relatively unchanged. This also raises a fairness issue 13

regarding Stockton customers, because Stockton’s MHI of $45,829 is nearly 39% lower than 14

Dixon’s MHI of $74,990. Although the temporary use of RSF subsidy helps stabilize Dixon’s 15

high cost and limits Stockton’s cross -subsidization of Dixon, Stockton customers over time may 16

be providing a significant cross-subsidy to Dixon customers once the transition period for RSF 17

ends. 18

District

Median

Household

Income

Affordability

Treshold as

% of MHI

Annual Water

Service Bill

Based on 2.5%

of MHI

EIU

Consumption

CCF (1)

Monthly

Water Bill

(2)

Annual

Water Bill

As % of

MHI

As a % of

Affordability

Treshold

Dixon 74,990$ 2.5% 1,875$ 8 84.31$ 1,012$ 1.35% 54.0%

Sotckton 45,829$ 2.5% 1,146$ 8 48.39$ 581$ 1.27% 50.7%

Consolidated (1)

Dixon 64.16 770 1.03% 41.1%

Sotckton 48.16 578 1.26% 50.4%

1) Cal Water's Proposed Consolidated quantity rates and monthly service charge. Includes $16 monthly Cr-6 service charge for Dixon.

1) Tier I consumption break.

2) Based 2020 Test Year proposed quantity rates and monthly service charge as stand alone districts.

Median Household Income (MHI)

38

As shown in Table 2-14 below, without applying the RSF subsidy to lower Dixon’s revenue 1

requirement, Stockton customers would have to absorb, on average, over $35 per service 2

connection under consolidation. This cross-subsidy provided by Stockton customers would 3

represent, on average, over 43% of Dixon’s revenue requirement during the period of 2020 4

through 2022. 5

Table 2-14: Stockton’s District Cross-Subsidy Flow In Consolidation with The Dixon 6

District 7

8

The Commission should also consider other metrics to determine whether the consolidation is 9

equitable and reasonableness to Stockton customers. As discussed above, Stockton’s 2017 MHI 10

is nearly 39% lower than Dixon’s, and is 36.2% below California’s MHI of $71,805. (See Chart 11

2-6) Yet Dixon has an MHI of $74,990 and exceeds the California MHI by 4.4%. 12

Dixon Revenue

Requirement (No

Consolidation)

Dixon Revenue

Requirement

w/Consolidation (1)

Revenue

Requirement

Difference RSF Subsidy

Net Revenue

Difference

absorbed by

Stockton

Customers

Stockton #

of

Customers

Annual Cost to

Stockton

Customers/Service

Connection

Stockton

Revenue

Requirement

Percent of

Stockton's

Revenue

Requirement

Percent of

Dixon's

Revenue

Requirement

2020 5,178,316$ 3,505,561$ 1,672,755$ 1,200,000$ 472,755$ 43,501 10.87$ 57,051,619$ 0.8% 13.5%

2021 5,239,962$ 3,679,395$ 1,560,567$ 1,200,000$ 360,567$ 43,662 8.26$ 60,045,060$ 0.6% 9.8%

2022 5,317,807$ 3,844,135$ 1,473,672$ 1,200,000$ 273,672$ 43,822 6.25$ 63,207,308$ 0.4% 7.1%

Without RSF Subsidy

2020 1,672,755$ 38.45$ 2.9% 47.7%

2021 1,560,567$ 35.74$ 2.6% 42.4%

2022 1,473,672$ 33.63$ 2.3% 38.3%

Average 35.94$ 42.8%

39

Chart 2-6: 2017 Median Household Income California/Stockton/Dixon40

1

2

Chart 2-7 shows the unemployment rate for Dixon and Stockton when compared with the 3

California statewide rate from 2013 through November 2018. 4

Chart 2-7: Unemployment Rate Dixon/Stockton/California 2013 – Nov. 201841

5

6

Dixon’s unemployment rate has been consistently below the statewide rate and now stands at 7

3.1%. In comparison, Stockton’s level of unemployment has remained relatively high compared 8

40 Source: U.S Census Bureau 2017 American Community Survey

41 Source: California Employment Development Department

40

to the statewide rate and, as of November 2018, the rate is 6.4% (more than double Dixon’s rate) 1

and is 164% of the statewide rate of 3.9%. 2

In addition to Stockton’s higher level of unemployment compared to Dixon, Chart 2-8 provides a 3

more telling story in terms of the economic conditions faced by Stockton district customers. The 4

percent of Stockton’s population that lives in poverty according to the U.S. Census Bureau 5

official measure is nearly 23%. This is 171% of California’s poverty rate of 13.3%. By 6

comparison, Dixon’s poverty rate is 12.2%, as measured by the U.S. Census Bureau. With 7

anticipated future increases in water rates, Stockton’s customers’ ability to afford to pay for 8

water may be impacted. 9

Chart 2-8: Poverty Rate Stockton/Dixon/California 201742

10

11

12 13

42 Source: U.S Census Bureau 2017 American Community Survey

41

For example, Chart 2-9 shows that over 39% of Stockton customers participate in Cal Water’s 1

low-income rate assistance (LIRA) program (171% of Cal Water’s companywide average of 2

21%). The level of Dixon customers eligible for LIRA is approximately 26%, or about 5% 3

higher than Cal Water’s statewide average. 4

Chart 2-9: Percent of Low-Income Rate Assistance Customers 5

Dixon/Stockton/Companywide 2018 6

7

The macroeconomic indicators for MHI, unemployment and poverty rates provide a barometer 8

of the economic conditions in both the Dixon and Stockton districts. Home prices typically 9

move in tandem with earnings and unemployment rates,43

and these drivers influence the 10

disparity in median home values (MHV) between the Dixon and Stockton districts. As shown in 11

Chart 2-10, the 2018 MHV in Stockton of $297,500 is about 46% lower than Dixon’s MHV of 12

$433,200. Also, Stockton’s MHV is 53.6% of the California MHV of $544,760, while Dixon’s 13

MHV is 78.1%. 14

43 Ratcliffe, A. (2012) Wealth effects or economic barometer: why do house prices matter for

psychological health? Working Paper. Department of Economics, University of Sheffield, p. 4.

42

Chart 2-10: Median Home Value Dixon/Stockton/California 201844

1

2

Based on the AFS analysis and other metrics for evaluating the economic condition of the Dixon 3

and Stockton districts, the Public Advocates Office concludes that consolidating these districts 4

with each other is not in the public interest. Dixon is considered a high cost district, but it does 5

not exhibit affordability issues based on the AFS and other macroeconomic measures. Stockton 6

customers also are in weaker economic circumstances than Dixon customers, and it would not be 7

equitable and reasonable for Stockton customers to cross-subsidize Dixon customers. As 8

previously discussed, Stockton continues to have a high unemployment rate, the MHI is well 9

below Dixon’s, and the district has a high poverty rate. 10

In addition, Cal Water fails to address whether the subsidies resulting from the consolidation 11

would be short, medium or long-term. Cal Water simply states that its consolidation approach 12

minimizes the impact of intra-district subsidies. As shown in Table 2-14, the RSF subsidy is 13

only a transitional mechanism, which means that in the next rate case cycle Stockton customers 14

would have to absorb the costs that are no longer offset by the RSF subsidy. This could be as 15

much as 16

44 Source: www.zillow.com

http://www.zillow.com/

43

$35.94 annually per service connection. Considering Stockton’s weaker economic condition, it 1

is unreasonable to place this burden on Stockton ratepayers. Therefore, Commission should 2

deny Cal Water’s proposal for consolidating Dixon and Stockton. 3

4. Need for a Comprehensive Consolidation Study 4

The Public Advocates Office concludes that Cal Water’s piecemeal approach to the 5

consolidation of districts raises questions on whether there are better consolidation options 6

available that should be considered. However, such an assessment isn’t possible without a more 7

comprehensive study. Although consolidating Dixon with Stockton is not in the public interest, 8

there could be other options available, such as consolidating Dixon with other districts or 9

creating a wider regional consolidation of more than three districts. Therefore, the Commission 10

should require Cal Water to submit to the Commission and the Public Advocates Office, at least 11

twelve months before it files its next GRC application, a study that analyzes the rate and bill 12

impacts of consolidating the revenue requirement of districts. At a minimum, the consolidation 13

study should address the following scenarios: 14

1. Consolidating the revenue requirement on a company wide basis. 15

2. Consolidating the revenue requirement into two regional areas. 16

3. Consolidating districts into four regional areas. 17

4. Other consolidation options that considers the shortcomings identified in the proposed 18

Dixon/Stockton consolidation. 19

Cal Water’s consolidation study should include an analysis of alternative revenue allocation and 20

rate design scenarios, including but not limited to: 21

1. A single tariff (or uniform) rates, 22

2. Tariff rates by consolidated region 23

3. Tariff rates by geographical location 24

Cal Water’s consolidation study for the revenue allocation and rate design for each of the 25

consolidation scenarios should, at a minimum, show how the resulting rates strike a balance 26

between the following principles: 27

1. Economic efficiency considerations (i.e. cost-causation, economies of scale and 28

scope), and policy and equity considerations (i.e. the human right to safe drinking 29

44

water, affordability, subsidies for low-income customers, and cost-effective 1

conservation). 2

2. Simplicity and transparency. 3

3. Rate stability. 4

4. Fairness - provides the utility with a reasonable opportunity to achieve authorized 5

revenue requirements. 6

5. Modifications to Rate Support Fund (RSF) 7

Cal Water seeks to provide a transitional annual subsidy of $1.2 million from the Rate Support 8

Fund (RSF) to offset part of Dixon’s revenue requirement when consolidated with Stockton. Cal 9

Water also seeks to eliminate $993,015 in transitional subsidy applied to the Redwood Valley 10

district consolidated with the Bayshore district. Cal Water states that it is not requesting any 11

changes to the design of its RSF. However, as requested in SR#2, Cal Water is requesting to 12

remove and include certain ratemaking districts from its RSF program.45

Cal Water proposes to 13

include the Dixon district in the RSF program and to remove the Redwood Valley district. The 14

only other RSF modification requested by Cal Water in SR#2 is to update the RSF Index Rate 15

and the company-wide RSF surcharge used to fund the RSF program. 16

In D.16-12-042, the Commission approved consolidating the Redwood Valley district with the 17

Bayshore district into the Bay Area Region. One of the conditions of the approved settlement 18

was to allow a transitional annual RSF subsidy of $993,015 to reduce Redwood Valley’s revenue 19

requirement when consolidated with the Bayshore district. The transitional subsidy would only 20

apply for one rate case cycle. The Public Advocates Office estimates that removing the subsidy 21

will have less than a 1% revenue requirement impact on the consolidated service rates for the 22

Bay Area Region. Consistent with the settlement agreement, the Commission should approve 23

Cal Water’s request to remove Redwood Valley’s transitional RSF subsidy. 24

The Public Advocates Office does not oppose Cal Water request to update the RSF Index Rate 25

and the company wide surcharge used to fund the RSF program. Appendix 2-A (Table 2) 26

45 In SR#2 Cal Water was requesting to add to the RSF the unrecovered cost from the Erksine Fire in its

Kern River Valley district. At the prehearing conference on October 12, 2018, Cal Water withdrew the

request to recover from the RSF amounts tracked in the Catastrophic Event Memo Account associated

with Kern River Valley’s 2016 Erskine Fire because Cal Water has received monies to offset the tracked

costs from its insurance company.

45

provides calculated RSF Index Rate and company side RSF surcharge based on the Public 1

Advocates recommended 2020 test year revenue requirement for the various ratemaking districts. 2

However, the final updates to the index and surcharge should reflect the adopted revenue 3

requirement and service rates. 4

The current authorized RSF surcharge is 0.42% and this surcharge is applied to the total bill 5

(quantity rates and monthly service charge). Based on the changes proposed by Cal Water, the 6

2020 test year surcharge would be approximately 0.408%. Kern River Valley is the only 7

remaining district receiving an explicit subsidy to customers’ quantity rates. Cal Water’s 8

consolidation proposal for Dixon would subsidize and reduce Dixon’s revenue requirement by 9

$1.2 million. That is, when Dixon customers pay their water bills, they will not be aware that 10

they are benefiting from the RSF subsidy. 11

As previously discussed, the Public Advocates Office concludes that Cal Water’s request to 12

consolidate Dixon with Stockton is not in the public interest and, therefore, the Commission 13

should deny Cal Water’s request. The Public Advocates Office recognizes that, on a stand-alone 14

basis, Dixon’s revenue requirement will increase by 57% resulting in customer bill increases of 15

between 43% to 60%, depending on the level of consumption. (See Table 2-9.) The increase in 16

the revenue requirement is primarily driven by the new Cr-6 water treatment infrastructure costs. 17

Based on the AFS analysis, Dixon is a high cost district even though it may not have 18

affordability issues. One option to mitigate the impact of a large increase on Dixon’s customers 19

and alleviate any rate shock is to apply the Commission’s adopted policy to cap the level of the 20

increase and allow Cal Water to spread the increase over three years.46

For example, the 21

Commission could cap the revenue requirement increase in the test year at 19% and allow 22

recovery of the deferred revenues over the 2021-2022 attrition years. However, using this 23

deferral procedure would result in even higher rates for Dixon customers because Cal Water may 24

earn its authorized rate of return on the deferred portion of the revenues. Therefore, the recovery 25

of the deferred revenue in the subsequent years would be higher due to earned return including 26

46 CPUC CAPS Standard Procedures, Memorandum, February 22, 1983. This memorandum provides the

standardized procedures to implement the Commission’s adopted policy on CAPS (deferral of a portion

of a general rate increase) for water utilities.

46

federal and state income taxes. For this reason, the Commission should not apply the caps policy 1

to the Dixon district. 2

The Public Advocates Office supports further studies to explore other potential consolidation 3

options for the Dixon district and, as discussed above, Cal Water should be required to complete 4

and submit a study before the next GRC. During the interim, the Public Advocates Office 5

recommends that RSF funds be used to partially offset Dixon’s revenue requirement increase. 6

Dixon is a high cost district and its stand-alone uniform quantity rate of $6.36 per CCF exceeds 7

the RSF Index rate of $6.05 per CCF. The RSF Index is set at 150% of Cal Water’s system-wide 8

uniform rate of $4.03 per CCF. The Public Advocates Office analysis shows that Stockton is not 9

the right district to consolidate with Dixon, considering Stockton’s weaker economic standing 10

and the unfairness of placing this burden on Stockton customers. Cal Water’s RSF is funded by 11

all customers except LIRA customers in RSF districts, and the monthly surcharge currently 12

stands at 0.425%, which is about $0.32 per month on the average residential bill. 13

Based on Cal Water’s consolidation proposal, Dixon’s revenue requirement would be offset by 14

$1.2 million in RSF funds, and the monthly RSF surcharge would be approximately 0.408%. 15

Under this proposal, Stockton customers will be unfairly burdened by cross-subsidizing Dixon 16

customers (assuming the annual net-revenue difference of $11 per service connection) and will 17

also be paying the RSF surcharge that funds the $1.2 million. The Commission should instead 18

apply the RSF subsidy without consolidation because it is fairer to Stockton’s customers and has 19

a minimal impact on the monthly RSF surcharge. 20

The Commission should partially offset Dixon’s revenue requirement with $600,000 in RSF 21

funds. To determine a reasonable amount of the RSF subsidy to offset Dixon’s revenue 22

requirement, the Public Advocates Office first calculates Dixon’s recommended 2020 test year 23

estimated revenue requirement at proposed rates. This results in a revenue requirement increase 24

of $1,291,016 or 21% at proposed rates. Under Cal Water’s consolidation proposal Dixon 25

customers would be required to pay a $16 monthly Cr-6 surcharge. Cal Water would collect 26

approximately $570,000 annually from the Cr-6 surcharge. Next, the Public Advocates Office 27

uses the estimated surcharge amount of $570,000 as a baseline and increased this amount slightly 28

to $600,000 to set Dixon’s RSF subsidy amount. The $600,000 RSF subsidy amount is then 29

deducted from Dixon’s revenue requirement of $4,579,335 at proposed rates. The reduction 30

47

results in an adjusted 2020 test year revenue requirement increase of $691,016 or 21%. 1

Reducing Dixon’s revenue requirement by the the RSF subsidy would result in an average 2

residential water bill increase of approximately 10.2%. Also, residential customers that consume 3

5 CCF per month will incur an 8.2% increase, in comparison to 21% under Cal Water’s 4

consolidation proposal. 5

Dixon’s annual RSF subsidy of $600,000 does not result in a significant change to the RFS 6

monthly surcharge. Based on the Public Advocates Office estimated 2020 test year proposed 7

quantity and service revenues results in an RSF monthly surcharge 0.3726%. (See Appendix 2-8

A, Table 1.) The recalculated RSF surcharge is 0.047% less than the 2018 adopted surcharge of 9

0.42% and does not pose a significant cost burden on Cal Waters customers. For example, on 10

average Cal Water customers will be paying less $0.22 per month to fund the RSF subsidy 11

received by Dixon and Kern River Valley customers. 12

Dixon customers should be informed that the district’s revenue requirement has been reduced by 13

applying the RSF funds and that they are receiving this subsidy. Therefore, the Commission 14

should require Cal Water to include a message in the Dixon monthly bill that its customers are 15

receiving a subsidy from the RSF program embedded in their rates. The customer message in 16

the bills should continue for the duration of this GRC cycle. In addition, the Commission should 17

require Cal Water to disclose in its RSF tariff that the RSF is subsidizing the Dixon district. 18

D. CONCLUSION 19

Consolidating the Dixon and Stockton districts is not fair or equitable because it is unreasonable 20

for Stockton customers to cross-subsidize Dixon customers. Therefore, the Commission should 21

deny Cal Water’s consolidation request because it is not in the public interest. The Commission 22

should require Cal Water to explore, via a formal study, other consolidation options rather than 23

just looking at consolidation proposals via a single district piecemeal approach. Cal Water’s 24

study should be submitted twelve months before Cal Water’s next GRC and, at a minimum, 25

should address the scenarios in discussed in section C.d. of this testimony, including analyzing 26

alternative revenue allocation and rate designs, and showing how resulting rates balance 27

ratemaking principles. 28

Under the AFS analysis Dixon is considered a high cost district, although it may not have 29

affordability issues. To alleviate the potential rate shock to Dixon customers, its revenue 30

48

requirement increase should be offset by applying $600,000 in RSF funding. RSF offset funding 1

will reduce Dixon’s revenue requirement increase for the 2020 test year to $691,016 or 21% 2

above present rates, and result in an average water bill increase of 10%. Dixon customers should 3

be informed about receiving RSF funding. Therefore, the Commission should require a message 4

in Dixon’s monthly bill that customers are receiving a subsidy from the RSF program embedded 5

in service rates. Cal Water’s RSF tariff should also list Dixon as a recipient of RSF funds. 6

These requirements should remain in place during this rate cycle or until modified. 7

The Public Advocates Office does not oppose Cal Water’s request to remove the Redwood 8

Valley transitional subsidy of $993,015. The RSF Index Rate and RSF monthly surcharge 9

should be updated based on the adopted estimates for service rates and revenue requirement. 10

49

CHAPTER 3: SPECIAL REQUEST 3 – ADJUSTING THE SALES 1

RECONCILLIATION MECHANISM (SRM) AND SPECIAL REQUEST 4 – 2

ELIMINATING 10% CAP ON WATER REVENUE ADJUSTMENT 3

MECHANISM (WRAM) RECOVERY 4

A. INTRODUCTION 5

This chapter presents the Public Advocates Office analysis and recommendations on Cal Water’s 6

Special Request (SR) #3 and SR#4. For SR#3, Cal Water requests to make the Sales 7

Reconciliation Mechanism (SRM) permanent and to increase the SRM’s current sales adjustment 8

from 50% to 100% of the difference between adopted and actual sales when they exceed plus or 9

minus 5%. 10

In SR#4, Cal Water seeks to eliminate the cap on net Water Revenue Adjustment Mechanism 11

(WRAM) and Modified Cost Balancing Account (MCBA) balances recovered through 12

surcharges to 10% of the last authorized revenue requirement for each district. In addition to 13

eliminating the 10% cap, Cal Water requests that the Commission to keep the existing 14

amortization scheduled for recovering the net WRAM/MCBA under-collected balances. 15

B. SUMMARY OF RECOMMENDATIONS 16

The Commission should make the following changes to Cal Water’s WRAM/MCBA: 17

1) Deny SR#3 and eliminate the SRM; 18

2) Deny SR#4 and eliminate Cal Water’s WRAM/MCBA mechanisms; 19

3) Replace Cal Water’s WRAM/MCBA with a Monterey-Water Revenue Adjustment 20

Mechanism (M-WRAM) and an Incremental Cost Balancing Account (ICBA). 21

Should the Commission decide to retain the WRAM/MCBA and SRM (which it should not), the 22

Commission should adopt the following recommendations to ensure that WRAM/MCBA 23

surcharges and SRM rate adjustments do not result in either rate shock or unreasonably high 24

rates for Cal Water’s ratepayers: 25

1) Retain the cap that limits net WRAM/MCBA surcharges to 10% of the latest authorized 26

revenue requirement; 27

50

2) Require Cal Water to undergo an earnings test when seeking recovery of WRAM/MCBA 1

net balances; 2

3) Deny Cal Water’s request to make the SRM permanent and continue the SRM as a pilot. 3

4) Deny Cal Water’s request to change the sales adjustment from 50% to 100%, keeping the 4

SRM as currently designed; and 5

5) Only allow triggering of the SRM during periods of mandatory conservation. 6

C. DISCUSSION 7

The following sections address Cal Water’s SR#3 and SR#4 to modify the SRM and 8

WRAM/MCBA mechanisms. The Public Advocates Office addresses these requests jointly 9

because these mechanisms are interrelated and impact customers’ billed water service. 10

Cal Water’s SR#3 and SR #4 would weaken the safeguards built into these mechanisms and 11

unfairly benefit Cal Water’s shareholders by shifting practically all quantity revenue recovery 12

risk to ratepayers and accelerating the recovery of net WRAM/MCBA under-collections. Not 13

only would Cal Water’s proposed changes cause a higher level of rate instability, they may result 14

in excessive rate impacts on Cal Water’s ratepayers. 15

It has been nearly a decade since the adoption and implementation of the tiered rate design, non-16

price conservation programs, and the WRAM/MCBA balancing accounts. During this period, 17

Cal Water’s net balances have continued to increase over time and the surcharges now represent 18

a significant portion of customers’ monthly water bill. Table 3-1 shows the percent of the 19

WRAM/MCBA surcharges as a percent of billed quantity and total monthly bill based on the 20

average consumption for each Cal Water service district. Even after excluding the outlier 21

Marysville, Lucerne and Coast Springs districts, monthly WRAM surcharges average about 15% 22

of the billed quantity, and 9.7% of the total bill. 23

51

Table 3-1, Surcharges for Recovery of 2016 and 2017 Net WRAM/MCBA Balances 1

As A Percent of Average Quantity Usage and Monthly Water Bill47

2

3

Chart 3-1 shows Cal Water’s annual net WRAM/MCBA balances as reported in its SCE 10-K 4

and 10-Q filings. Net WRAM/MCBA under-collections have continued to increase over time 5

with the total cumulative under collection of over $438 million to be paid by Cal Water 6

customers through surcharges. In 2017 the net WRAM/MCBA under-collections hit a record 7

$71.6 million. In addition, the last reported net balance as of the 3rd

quarter of 2018 reached 8

nearly $60 million, making it likely that the end 2018 balance will exceed the 2017 balance. 9

47 Source: https://www.calwater.com/rates/rates-and-tariffs/, October 2018. Surcharges for recovery of

the 2016 net balances expire on October 2018.

Average

Monthly

Usage

Combined

Surcharge

2016-2017 Monthly Annual Usage

% of

Usage

Usage+

Meter

Charge

% of

Total Bill

Marysville 10 0.0108$ 0.10$ 1.23$ 27.10$ 0.38% 50.84$ 0.0%

Bayshore 8 0.2723$ 2.18$ 26.14$ 52.42$ 4.16% 68.53$ 3.2%

East LA 12 0.2582$ 3.10$ 37.18$ 47.87$ 6.47% 65.37$ 4.7%

Westlake 25 0.3312$ 8.28$ 99.36$ 123.14$ 6.72% 149.50$ 5.5%

Los Altos 16 0.3766$ 5.87$ 70.50$ 85.89$ 6.84% 103.86$ 5.7%

Bear Gulch 19 0.5514$ 10.48$ 125.72$ 138.45$ 7.57% 158.63$ 6.6%

Palo Verdes 21 0.3705$ 7.71$ 92.57$ 99.36$ 7.76% 120.28$ 6.4%

Hermosa-Redondo 9 0.3943$ 3.55$ 42.58$ 39.90$ 8.89% 51.79$ 6.9%

Salinas 10 0.2954$ 2.99$ 35.84$ 32.53$ 9.18% 50.76$ 5.9%

Visalia 16 0.1420$ 2.27$ 27.26$ 24.52$ 9.27% 34.52$ 6.6%

Bakersfield 18 0.2354$ 4.24$ 50.85$ 35.87$ 11.81% 51.66$ 8.2%

Oroville 10 0.4301$ 4.30$ 51.61$ 29.38$ 14.64% 60.01$ 7.2%

King City 12 0.5586$ 6.45$ 77.35$ 39.24$ 16.43% 57.47$ 11.2%

Dominguez 10 0.5659$ 5.66$ 67.91$ 34.17$ 16.56% 51.11$ 11.1%

Dixon 10 0.7352$ 7.35$ 88.22$ 41.88$ 17.56% 66.25$ 11.1%

Chico 16 0.3176$ 5.08$ 60.98$ 28.27$ 17.97% 41.83$ 12.1%

Antelope Valley-Fremont 6 0.8952$ 5.15$ 61.77$ 27.90$ 18.45% 48.82$ 10.5%

Antelope Valley-Leona Valley 12 0.8952$ 10.59$ 127.12$ 55.80$ 18.98% 76.72$ 13.8%

Livermore 12 0.7587$ 9.10$ 109.25$ 46.07$ 19.76% 64.69$ 14.1%

Stockton 10 0.6473$ 6.47$ 77.68$ 32.62$ 19.84% 50.61$ 12.8%

Antelope Valley-Lancaster 20 0.8952$ 18.00$ 216.04$ 89.49$ 20.12% 110.41$ 16.3%

Willows 12 0.4964$ 5.96$ 71.48$ 26.39$ 22.57% 64.94$ 9.2%

Selma 15 0.4214$ 6.32$ 75.85$ 26.95$ 23.45% 48.40$ 13.1%

RWV-Unified 5 1.6234$ 7.66$ 91.95$ 32.45$ 23.61% 48.56$ 15.8%

Ken River Valley 5 2.5722$ 12.86$ 154.33$ 39.54$ 32.53% 90.93$ 14.1%

RWV-Lucerne 4 3.4292$ 14.09$ 169.13$ 27.95$ 50.42% 44.06$ 32.0%

RWV-Coast Springs 2 5.4708$ 10.94$ 131.30$ 12.98$ 84.30% 29.09$ 37.6%

https://www.calwater.com/rates/rates-and-tariffs/

52

Chart 3-1, Net WRAM/MCBA Balances48

($000) 1

2

Cal Water argues that the high balances are due to the difficulty of accurately forecasting sales 3

and that the general rate case (GRC) adopted forecasts become obsolete because they rely on 4

past periods.49

Cal Water also claims that because of the long lead times in GRCs other 5

significant impacts can occur between the recorded period and the 2020 test year.50

6

While Cal Water blames the historical large net WRAM/MCBA balances on inaccurate 7

forecasting and regulatory lag, these reasons deflect attention from considering the serious flaws 8

with the WRAM/MCBA. For example, when the Commission adopted the WRAM/MCBA 9

balancing accounts, the expectation was that these mechanisms would balance the interest 10

between the utility and ratepayers and ensure that neither was harmed or benefited from the 11

adoption of conservation rates. As discussed in the following sections, the Public Advocates 12

Office shows that this has not been the case and that Cal Water’s ratepayers have been 13

disproportionally affected as a result of the WRAM/MCBA. 14

48 Cal Water Security and Exchange Commission (SEC) 10-K and 10-Q filings.

49 Cal Water Additional Testimony, Greg Milleman, p. 19

50 Cal Water Additional Testimony, Greg Milleman, pp. 19-20.

53

1. WRAM/MCBA doses not fairly balance the revenue risk between ratepayers and 1

shareholders. 2

The WRAM and MCBA decouple sales from revenues to incentivize the utility to implement 3

conservation rate design and encourage non-price conservation programs. The WRAM 4

balancing account captures the difference between the adopted quantity revenues collected from 5

estimated water consumption and the actual quantity revenues collected based on recorded sales 6

quantities. The MCBA captures the difference in the variable water supply cost and the adopted 7

amounts and actual amounts incurred. Any under- or over-collections in the WRAM and MCBA 8

are netted, and the difference is collected from customers through a quantity surcharge or 9

customers may receive a sur-credit if there’s an over-collection. 10

The WRAM goes beyond just capturing any reduction in sales as a result of implementing 11

conservation rate design or changes in water usage behavior associated with conservation 12

programs. By decoupling sales from earnings, the WRAM eliminates virtually all variation in a 13

utility’s earnings due to sales fluctuations regardless of the source for the sales variance.51

The 14

WRAM also captures revenue shortfalls due to weather, population changes, errors in 15

forecasting, and economic cycles that are not directly associated with the levels of conservation. 16

The Commission has found that the WRAM and MCBA have reduced the revenue recovery risk 17

for utilities.52

The Commission also acknowledges that the WRAM has not and cannot 18

completely segregate the effect of conservation on revenue from all other forecast risks or 19

variances between forecast and actual sales that would have happened regardless of 20

conservation.53

Without the ability to even quantify the lost revenues associated with 21

conservation efforts, it places the entire risk of sales variability on Cal Water’s ratepayers while 22

assuring Cal Water shareholders revenue stability. 23

Prior to decoupling, Cal Water’s shareholders had to bear the risk of test year revenues and sales 24

differences during the rate case cycle. With this business risk in mind, in past rate cases, Cal 25

Water was responsible to propose a normal year sales forecast for rate-making purposes.54

It was 26

51 D.08-08-030, FOF 14 and 16, D.09-05-019 at p. 34.

52 D.08-08-030, FOF 19 and COL 3.

53 D.09-05-019 at p. 34.

54 Normal year forecast is usually based on assumptions that may exclude wet years or drought periods to reflect a

normal water year as a predictor for future consumption and setting rates.

54

not in Cal Water’s interest to propose a test year that was unsupportive of what its management 1

projections were to require recovering its costs and earning its allowed return. Also, Cal Water’s 2

authorized rate of return was presumed to include some premium for the business risk typical of 3

the industry it operates.55

4

The regulatory lag between rate cases and the business risk associated with utilities earning their 5

authorized revenues (e.g., demand and cost uncertainties) created strong incentives for efficiency 6

to control costs and avoid overcapitalization. However, with full decoupling, these incentives 7

are diminished because of guaranteed recovery of revenues shortfalls for reasons other than those 8

related to demand reductions due to conservation rates and programs. For example, if a 9

recession or economic slowdown occurs, Cal Water will be made whole for loss revenues 10

associated with a business closing or lower consumer demand due to reduction or loss of income. 11

In fact, the following disclosure is made in Cal Water’s financial filings to its shareholders and 12

shows how important the protection of loss sales is to the company: 13

Approximately $161.7 million or 24.3% of our 2017 water utilities revenues was 14

derived from business or industrial customers. However, if any of our large business 15

or industrial customers in California reduce or cease its consumption of our water, the 16

impact to net operating income would be minimal to our operations due to the 17

WRAM/MCBA...56

18

It’s clear that the WRAM/MCBA does not fairly balance the lost revenue risk between 19

ratepayers and shareholders. As structured, it also harms residential ratepayers because the 20

WRAM/MCBA is not reconciled on a per customer class basis, but instead it’s reconciled on an 21

aggregate basis. This can result in outcomes where one customer class is subsidizing the revenue 22

losses of another. As currently structured, Cal Water customers pay a uniform surcharge for net 23

WRAM/MCBA under-collections. For example, if one of Cal Water’s large industrial customers 24

shuts down its operations due to an economic downturn, residential and other customer classes 25

will be required to make Cal Water whole for the change in the industrial customer revenues. 26

Thus, residential and other customers will be paying surcharges to make Cal Water whole for a 27

decrease in sales unrelated to conservation rate design and programs. 28

55 D.09-05-019 at p. 35.

56 Cal Water SEC 10K 2017.

55

Although the Commission has found that the WRAM/MCBA decoupling mechanism shifted the 1

financial risk of revenue recovery in between rate cycles from shareholders to ratepayers, it has 2

never adjusted a utility’s return on equity (ROE) to reflect this lower risk.57

For example, in two 3

separate cases the Public Advocates Office recommended ROEs for water utilities with full 4

decupling be reduced by between 25 to 100 basis points to reflect the reduction in earnings 5

volatility.58

Yet in both these cases the Commission did not many any adjustments to utilities’ 6

ROE. 7

2. WRAM/MCBA changed the risk-reward balance without compensating ratepayers for 8

assuming all the risk. 9

Balancing accounts relieve utilities of the risk of variability in their revenues and/or expenses by 10

shifting the risk to ratepayers. Without the balancing account protection, utilities are at risk for 11

variations in their estimates while customers can expect to have rate stability by paying known 12

amounts for their water service. The Commission has found that once a balancing account is 13

introduced, utility customers assume some of the risk from the utility.59

14

In Phase 1b of the Conservation OII (Investigation (I.) 07-01-022), the Commission addressed 15

the Public Advocates Office proposal to adjust the utilities’ Return on Equity (ROE) with full 16

decoupling mechanisms. The Commission found that WRAMs decoupling of sales from 17

revenues eliminate almost all variations in earnings due to sales fluctuations, while the MCBAs 18

ensure predictable cost recovery.60

The Commission concluded that implementation of these 19

mechanisms may also reduce shareholder risk relative to ratepayers risk.61

However, the 20

Commission did not consider making any adjustment in the current proceeding and, instead, 21

decided that an ROE adjustment should be considered in the utilities’ next cost of capital 22

proceeding.62

23

57 See D.08-08-030 and D.09-05-019.

58 D.08-08-030 FOF 17, and D.09-05-019 at p. 35.

59 D.06-08-011, mimeo, at 18-19.

60 D.08-08-030, FOF 13.

61 D.08-08-030, COL 3.

62 D.08-08-030, COL 4.

56

In the 2008 cost of capital proceeding for Cal Water, California American Water, and Golden 1

State Water Company,63

the Commission affirmed the Phase 1b findings in Decision (D.) 08-08-2

030 that WRAM/MCBA reduce utilities’ revenue recovery risk.64

In I.07-01-022, the Public 3

Advocates Office recommended a 25-basis point reduction to each of the utilities’ ROE. 4

However, D.09-05-019 did not make an adjustment for the WRAM/MCBA finding that it could 5

not quantify the risk reduction with sufficient precision as an adjustment to the ROE that would 6

be otherwise reasonable but for this reduction in risk.65

A decade after D.09-05-019, the 7

Commission has not completed any in-depth evaluation and reexamination about whether 8

ratepayers should be compensated for assuming the revenue recovery risk as a result of granting 9

utilities a WRAM/MCBA mechanism. 10

The WRAM/MCBA as currently structured does not result in any benefit to ratepayers and may 11

in fact harm ratepayers by creating greater rate instability. Cal Water ratepayers may be paying 12

higher surcharges than necessary because, in addition to paying for loss revenues caused by 13

conservation rates and programs, ratepayers must also compensate Cal Water for revenue 14

shortfalls due to non-conservation related factors such as weather and economic changes. 15

In addition, there’s the potential harm of cross-subsidies between customer classes when net 16

WRAM/MCBA balances are recovered through a uniform surcharge instead of by customer 17

class-specific surcharges. There is also no evidence that full decoupling has produced any 18

ratepayer benefits. To the contrary ratepayers have neither received any pre-defined benefits for 19

assuming the revenue recovery risk associated with the WRAM/MCBA decoupling, nor have 20

they been insulated from the potential negative outcomes that may arise from a revenue 21

decoupling mechanism. 22

The Commission’s adopted 10% rate cap on the recovery of net WRAM/MCBA under 23

collections provides some protection from excessive rate increases to cap the escalating 24

surcharges.66

The SRM is just another mechanism to accelerate the recovery for net 25

WRAM/MCBA by increasing quantity rates to reflect the lower demand. The additional 26

63 All three large utilities in the 2008 cost of capital proceeding had in place full decoupling mechanisms.

64 D.09-05-019, p. 34.

65 D.09-5-019, FOF 25.

66 D.12-04-048 at pp. 41-42.

57

quantity revenues collected through volumetric rates are tracked in the WRAM balancing 1

account as an offset to reduce the balance going forward. The changes of the SRM are limited to 2

50% of the difference between the adopted and actual quantities when they exceed +/- 5%. 3

Cal Water’s proposal to eliminate the WRAM/MCBA cap and SRM limit would lead to frequent 4

rate changes and excessive rates. These changes provide no benefit to ratepayers and result in 5

further rate instability. Cal Water’s proposal would also further tilt the balance of the decupling 6

mechanism to the benefit of Cal Water’s shareholders. 7

Chart 3-2 shows Cal Water’s common stock average monthly price at the market closing from 8

January 2000 through December 2018. 9

Chart 3-2, Cal Water Common Stock Average Monthly Close Price per Share 2000-2018 10

11

As shown in Chart 3-2, Cal Water’s common stock has performed extremely well since the 12

implementation of decoupling. Considering that the WRAM caps Cal Water’s quantity revenues 13

at adopted levels, and any revenues above adopted are returned to ratepayers, excluding paid 14

dividends the company stock has returned investors over 10.5% per year since December 2008. 15

Clearly, any short-term impacts on cash-flows due to recovery of WRAM/MCBA balances and 16

Commission established amortization periods has had no detrimental effect on Cal Water’s 17

financial performance. 18

58

Chart 3-3 shows Cal Waters authorized ROE and its earned ROE since the adoptions of full 1

decoupling. The chart shows that in the 10-year period since the adoption of WRAM/MCBA 2

Cal Water has exceeded its authorized ROE for the years 2008, 2012, 2014, and 2017. Also, the 3

WRAM/MCBA has not affected Cal Water’s ability to attract financing over same time period, 4

issuing $350 million in debt financing on favorable terms. 5

Chart 3-3, ROE on Average Regulated Common Equity vs. Authorized ROE 6

7

3. The Commission should eliminate the WRAM/MCBA to protect ratepayers interests. 8

In order to address the shortcomings of the WRAM/MCBA and to better balance the revenue 9

variability risk between ratepayers and shareholders, the Commission should eliminate Cal 10

Water’s WRAM/MCBA starting in the 2020 test year. This mechanism should be replaced with 11

a Monterey-style Water Revenue Adjustment Mechanism (M-WRAM), and an Incremental Cost 12

Balancing Account (ICBA). 13

In Cal Water’s 2015 GRC, the Commission left Cal Water’s WRAM in place through the GRC 14

cycle.67

However, the mechanism is not permanent and is subject to reconsideration in 15

subsequent rate cases. In fact, D.12-04-048 requires a more vigorous review of WRAM/MCBA 16

67 D.16-05-041, FOF 13.

59

mechanism and alternatives to the mechanism in a utility’s GRC.68

Some of the alternatives to 1

the mechanism could include: 2

1. Adopting an M-WRAM rather than the existing full WRAM; 3

2. Adopting a mechanism that bands the level of recovery, or refund, of net 4

WRAM/MCBA account balances based on the relative size of the account balance, 5

and; 6

3. Eliminating the WRAM. 7

The M-WRAM is a price-based revenue adjustment mechanism that does not fully decouple the 8

utility’s sales from revenues. Instead, it adjusts only for revenue changes resulting from the 9

adoption of conservation rate designs and does not adjust for sales differences. The price-based 10

adjustment mechanism compares the sales revenues received by the utility under the new rates to 11

the sales revenue it would have received under a non-tiered rate structure using the quantities of 12

water actually consumed. Thus, it does not (and should not) account for all of the variance 13

between forecasted and actual quantity revenues. Instead, it only tracks the revenue difference 14

likely attributable to conservation rate design. 15

Under the M-WRAM, Cal Water would only be allowed to track lost revenues associated with 16

reduced sales in a Lost Revenues Memorandum Account (LRMA) when activating either 17

voluntary conservation under Rule 14.1 or mandatory rationing under Schedule 14.1 in 18

conjunction with a drought declaration.69

When seeking recovery of the LRMA, utilities under 19

M-WRAM must subtract from the LRMA balance a revenue requirement amount equal to a 20 20

basis point reduction in the utility’s recently-adopted ROE.70

The utility must further reduce the 21

amount to be recovered to a level sufficient to ensure that such recovery does not cause the 22

utility to exceed its authorized rate of return (ROR) for the period. This means that, in addition 23

to lowering the ROE by 20 basis points when seeking recovery, utilities under M-WRAM must 24

undergo an earnings test to assure they are not exceeding their ROR. Thus, switching Cal Water 25

to M-WRAM would change the existing risk-reward balance under full decoupling by shifting 26

significantly less risk to ratepayers. 27

68 D.12-04-048, OP 4.

69 CPUC, Division of Water and Audits, Standard Practice U-40-W, p. 12

70 CPUC, Division of Water and Audits, Standard Practice ,U-40-W, I.36, p. 12.

60

There is also a quantifiable benefit for ratepayers under M-WRAM because, when Cal Water 1

seeks recovery of loss revenues in its LRMA, the balance is reduced by the ROE reduction. It 2

also protects ratepayers from the utility’s excess earnings because Cal Water would be required 3

to reduce the amount to be recovered if it results in excess earnings. 4

By switching Cal Water to an M-WRAM/ICBA, there is no need to make a specific adjustment 5

to its ROE. The Public Advocates Office notes that San Jose Water Company (SJWC) does not 6

have a full decoupling mechanism and instead has a M-WRAM.71

In the most recent litigated 7

cost of capital proceeding, the Commission authorized SJWC an ROE of 8.90%, which was 30 8

basis points lower than Cal Water’s ROE of 9.20%. This suggests that Cal Water’s authorized 9

ROE may be too high when considering that ratepayers are assuming virtually all the revenue 10

variability risk regardless of the cause of sales fluctuations. 11

4. Full decoupling is not a prerequisite to encourage conservation. 12

Chart 3-4 shows the average monthly water consumption in CCF per service connection and 13

Chart 3-5 shows the annual percent change in the consumption data in Chart 3-4. These charts 14

plot the consumption data and percent change from 2008 through 2017 for Class A water 15

utilities72

and the East Bay Municipal Utility District (EBMUD)73

to provide a comparison 16

between utilities with varying level of protection against sales fluctuations. 17

71 Other water utilities with M-WRAM are San Gabriel Water Company, Suburban Water Company, and

Great Oaks Water Company.

72 The Commission classifies Class A water utilities as those with more than 10,000 service connections.

There are a total of 8 Class A water utilities – California Water Service, California American Water,

Golden State Water Company, San Jose Water Company, San Gabriel Water, Liberty – Park/ Apple

Valley Ranchos, Suburban, and Great Oaks Water.

73 EBMUD has 383,284 as of 2017 and is slightly smaller in size to Cal Water.

61

Chart 3-4: Average Monthly Consumption (ccf/service connection) Comparison – Class 1

A/B Utilities vs. EBMUD, 2008-2017 2

3

Chart 3-5: Annual % Change in Consumption per Service Connection - Class A/B Utilities 4

and EBMUD, 2009-2017 5

6

62

The water consumption trends from 2008 through 2017 show that Class A water utilities under 1

M-WRAM/ICBA mechanisms have achieved similar rates of decrease in consumption since 2

2008 when compared to utilities with full decoupling. EBMUD is included in the trend analysis 3

because it shows other variations in how a non-Commission regulated water utility can achieve 4

similar conservation savings without a full decoupling mechanism. Although EBMUD does not 5

have a full decoupling mechanism, it has other mechanisms to address revenue shortfalls during 6

drought periods. For example, during declared droughts EBMUD implements drought rates and 7

assesses additional rate increases during drought recovery to address lower consumption. 8

All Class A water utilities and EBMUD have implemented conservation rate designs such as 9

inclining block quantity rates for residential customers. Non-residential rates are not based on 10

inclining block rates and use a uniform rate. In the design of conservation rates, most Class A 11

water utilities and EBMUD are targeting towards the conservation principal of recovering 70% 12

of revenues through quantity rates, and 30% through fixed monthly service charged.74

13

Phase II of Order Instituting Rulemaking (R.)11-11-008 evaluated the effectiveness of the 14

Commission’s water rates, forecasts, and charge and recovery mechanisms in achieving the 15

statutory objective of safe, reliable water service at just and reasonable rates, and in promoting 16

water conservation. The primary focus in the proceeding was on new mechanisms (e.g., SRM), 17

improvements to forecasting, and changes to conservation rate design to reduce WRAM balances 18

and surcharges. Regarding rate design, the Commission reevaluated the 70/30 revenue recovery 19

split and allowed utilities with WRAM mechanisms to propose a gradual shift in revenue 20

recovery by increasing fixed rate charges from the current 30% to 40%.75

This change was 21

intended to lower the portion of a utility’s fixed costs recovered through volumetric rates with 22

the expectation that this would reduce large WRAM balances. 23

Increasing the portion of fixed costs recovered from quantity to service charges could have a 24

negative impact on conservation price signals and undermine customers’ conservation efforts. 25

At the time, the Commission determined that no party presented conclusive evidence that the 26

70/30 split was key motivator for customers to conserve, and no party presented analysis to 27

74 This 30 percent/70 percent rule was developed in D.10-04-031, adopted April 14, 2010, from Best

Management Practices of the California Urban Water Conservation Council.

75 D.16-12-026, p. 57.

63

distinguish the effect of the recovery split from other conservation signals.76

However, this did 1

not preclude parties from assessing whether the change in the rate design sends the right price 2

signal to customers, encourages conservation, and aligns with California’s conservation goals 3

and mandates. 4

As discussed in more detail in the Public Advocates Office Rate Design testimony, Cal Water’s 5

consultant M-Cubed used sophisticated modelling to evaluate changes to Cal Water’s rate design 6

components, such as revenue allocation, tier breaks, and tier pricing differentials. Specifically, 7

revenue allocation changes can be isolated through this model and their effects on estimated 8

consumption. M-Cubed’s modeling results show that shifting incrementally to a 60/40 revenue 9

allocation would increase Cal Water’s residential water use by over 7.7 million CCF per year or 10

about a 2.1% relative to 2011-2015 average total sales.77

11

If Cal Water were to make a complete shift to a 60/40 split, residential water consumption would 12

increase by 13.6 million CCF per year, or about a 3.9% relative to Cal Water’s 2011-2015 13

average total sales.78

Cal Water’s stated intent is to induce sales to improve revenue stability by 14

shifting to a 60/40 revenue allocation. The Commission should deny Cal Water’s revenue 15

allocation proposal because it would undermine the state’s conservation and environmental 16

goals.79

17

The Commission should require Cal Water to continue targeting 70/30 revenue allocation to 18

encourage decreased consumption, consistent with the state’s conservation goals.80

Also, with 19

lower reductions in water usage Cal Water’s ratepayers may finally begin to see the long-term 20

76 D.16-12-026, p. 57.

77 Public Advocates Office, Sales and Rate Design Report, p. 25.

78 M-Cubes Task 3.1, TM#2 – Results of SFR Rate Scenario 1: Recalibrated Tiers and 60/40

commodity/service revenue split, Table 7 (Simulated 2011-15 Five-Year Cumulative Single-Family

Metered Water Use), p. 9.

79 Public Advocates Office, Sales and Rate Design Report, pp. 20-23.

80 The state legislature passed two key pieces of legislation related to water conservation – Senate Bill 606

(Hertzberg) and Assembly Bill 1668 (Friedman). These bills implement Executive Order B-37-16

recommendations as part of the state’s “Making Water Conservation a California Way of Life” initiative.

64

benefits of their conservation efforts because lower demand should reduce the need for 1

additional treatment and supply capacity.81

2

Cal Water’s forecast for this rate case cycle already captures the significant reductions in 3

consumption due to its recalibrated tiered rates and conservation programs.82

Cal Water’s 4

consultant M-Cubed states that its model adjusts the sales forecast for rising water costs and 5

ongoing conservation.83

The annual trends in consumption are the results of expected sales after 6

capturing the effects of weather, price, income, employment, drought, and account 7

reclassification. Based on the results of its modeling, M-Cubed concludes that the magnitude of 8

the residential sales trend is in line with expectations.84

9

Chart 3-6 shows the difference between Cal Water’s adopted company-wide sales and the actual 10

sales since the implementation of full decoupling. As the chart shows, Cal Water’s forecasting 11

variance between adopted and actual sales are significant, and in most years were in double 12

digits with 2016 hitting a variance record of 21.3%. 13

81 Public Advocates Office, Report on Sales and Rate Design, p. 20.

82 Cal Water response to Public Advocates Office data request DES-010, Q.4, October 4, 2018.

83 Cal Water Response to Public Advocates Office data request DES -010, M-Cubed response to Q.4,

October 4, 2018.

84 Cal Water Response to Public Advocates Office data request DES -010, M-Cubed response to Q.4,

October 4, 2018.

65

Chart 3-6: Cal Water Adopted vs. Actual Sales in CCF, 2008-201785

1

2

No utility can perfectly predict how much quantity revenues it will make in a given month, 3

quarter or year. Forecasting involves many variables that may not be captured in a sales forecast. 4

However, the goal of a good forecast is to get close enough to the actual outcome to make good 5

decisions. 6

Part of the shortcomings in past years’ water sales forecasting could have been caused by 7

modeling approaches previously adopted by the Commission such as the “Modified Bean 8

Method” and the New Committee Method. These forecasting methods are basically regression 9

models that consider precipitation and temperature as independent variables to predict future 10

water consumption levels in a normal rate case cycle. The models were also adjusted to remove 11

data from periods when water use restrictions (e.g., droughts or rationing) were imposed. 12

D.16-02-06 found that these models had serious shortcomings and could be contributing to large 13

WRAM balances because the recent drought conservation effects were not adequately captured 14

by these forecasting methods.86

To address the models’ shortcomings, the Commission found it 15

reasonable to consider new forecasting methods that increase accuracy and reduce the 16

85 Source: Cal Water WRAM/MCBA submitted advice letters (2008-2017) The 2014-2017 period

reflects only 9 months (Apr-Dec) of adopted v actual sales comparison. Cal Water did not include the

company wide sales totals after 2013 in its WRAM/MCBA advice letters.

86 D.16-12-026 at p. 30.

66

WRAM/MCBA balances.87

For example, in the current GRC Cal Water is now using a 1

sophisticated econometric model that incorporates multiple variables to develop their demand 2

forecast for this GRC. 3

As previously discussed, the WRAM/MCBA and SRM shifts all the revenue variability risk to 4

ratepayers, insulating Cal Water from revenue shortfalls that are unrelated to conservation 5

efforts. In some cases, parties might be inclined to address potentially large rate increases by 6

over-forecasting sales, which would in turn would increase forecasted revenues at present rates 7

and reduce rate increases. However, because the same amount of revenue is still needed, 8

customers would not receive effective price signals and would ultimately pay for the under-9

collections with interest either through WRAM/MCBA surcharges or in rate increases through 10

the SRM. 11

As shown in Chart 3-7 below, the net WRAM/MCBA under-collections are a percent of total 12

operating revenues and metered quantity revenues. Except for four out of ten years, the net 13

WRAM/MCBA balances have remained above 4% of Metered Water Revenues, and in 2017 14

balances reached an all-time high of over 9%. 15

87 D.16-12-026, FOF 15.

67

Chart 3-7: Cal Water Net WRAM/MCBA Under Collections As % of Total Revenues 1

Operating Revenues and Metered Revenues, 2008-2017 2

3

The primary cause for the high 2017 net WRAM/MCBA balances was gross forecasting error. 4

On April 1, 2015, the Governor issued Executive Order B-29-2015 requiring cities and towns 5

across California to reduce water usage by 25%.88

While these mandatory reductions where 6

implemented for 2015-2016, the forecasted sales estimates to develop the revenue requirements 7

for the 2017 test year and 2018-2019 attrition years were not adjusted to reflect the potential 8

effect of the mandatory reductions. This resulted in significant variances in 2017, and these 9

variances will likely continue into the 2018-2019 attrition years. Although the adopted sales for 10

2015 and 2016 did not reflect the effects of mandatory conservation, the net WRAM/MCBA 11

balances were offset by the drought surcharges collected of $36.9 million in 2015, and $25.9 12

million in 2016. 13

As shown in Chart 3-7 above, in 2015 the actual consumption levels were more than 18% less 14

than those adopted. However, due to the drought surcharges, the net WRAM/MCBA under-15

collections remained at a modest 3% of quantity revenues. In addition, on a companywide basis 16

in 2014 reductions in consumption did not result in any cost savings in the MCBA, because the 17

88 https://www.waterboards.ca.gov/water_issues/programs/conservation_portal/executive_orders.html

https://www.waterboards.ca.gov/water_issues/programs/conservation_portal/executive_orders.html

68

rising cost of water supply exceeded the savings resulting from lower consumption. Also, the 1

full protection provided by the MCBA reduces Cal Water’s incentive to manage water supply 2

costs in the most cost-efficient way. 3

With the continuation of the WRAM/MCBA, there appears to be no end for continued under 4

collections. WRAM/MCBA surcharges and SRM quantity rate adjustments continue to be a 5

difficult mechanism to understand. Indeed, the Commission highlighted the fact that customers 6

have expressed strong concerns regarding the WRAM/MCBA and are frustrated by mechanisms 7

to collect authorized revenues regardless of conservation.89

When called upon to cut back during 8

the 2015-2016 drought, Cal Water customers achieved significant reductions in water use. 9

While customers may be more sympathetic to compensate Cal Water for variances in revenues 10

due to impacts associated with droughts and conservation mandates, it’s unreasonable and unfair 11

to require customers to pay surcharges and SRM rate adjustments in non-drought periods or 12

when there are no requirements for voluntary or mandatory conservation. Therefore, in order to 13

remedy this imbalance, the Commission should discontinue Cal Water’s WRAM/MCBA and 14

replace it with an M-WRAM/ICBA. 15

As discussed above, the M-Cubed sales forecast in this GRC already captures the effects of 16

conservation pricing, active and passive conservation, and other economic factors. It is not 17

appropriate to give Cal Water 100% risk protection for the variability of its revenues. The M-18

WRAM is a more appropriate mechanism and results in a fairer balance of risk between 19

ratepayers and Cal Water’s shareholders because it tracks only the difference that is most likely 20

attributable to conservation rate design. 21

The M-WRAM could also alleviate exceptionally large net WRAM/MCBA balances because it 22

limits the adjustment of variability in quantity revenues to only the difference between the actual 23

quantity revenues collected under tiered rates and what Cal Water would have collected under 24

uniform rates. During periods of declared droughts requiring voluntary or mandatory water 25

consumption reductions, Cal Water will be made whole for the revenue losses under the Loss 26

Revenues Memorandum Account (LRMA). Unlike the WRAM/MCBA, the M-WRAM/ICBA in 27

combination with the LRMA mechanism provides ratepayer safeguards. For example, when the 28

LRMA is activated and the utility seeks recovery of the account balance, it must reduce the lost 29

89 D.16-12-026, pp. 36-17.

69

revenue balance by a 20-basis point ROE revenue adjustment. There is also a test for potential 1

over-earnings, which is not required when Cal Water seeks recovery of net WRAM/MCBA 2

balances. 3

5. Cal Water can easily transition to M-WRAM/ICBA 4

The surcharges currently authorized for Cal Water’s service districts are recovering net-5

WRAM/MCBA under-collections for the 2016-2017 period. For most districts, the 2016 6

surcharges recovered the balances over 18 months and expired in October 2018. For the Kern 7

River Valley district, the surcharge expired on January 2019. 8

There may be some residual balances from 2016 to be carried over in 2019 if the surcharge did 9

not collect enough due to variances between adopted and actual billed quantities. Cal Water will 10

file for recovery of the 2018 net WRAM/MCBA under-collections in 2019 and, in 2020, it will 11

seek recovery for 2019. The net under-collections for these periods could be similar in size to 12

that in 2017 due to the significant variation between the adopted quantity revenues forecast and 13

actual quantity sales revenues. 14

As discussed in the Public Advocates Office Income Taxes report, Cal Water must return to 15

customers net excess re-measured Deferred Tax Liability (DTL) balances as a result of the Tax 16

Cuts and Jobs Act (TCJA) reduction in the federal corporate tax rate from 35% to 21%. The 17

unprotected re-measured DTL balances must be returned to ratepayers over a much shorter 18

period than protected DTL balances. The company-wide total unprotected DTL balance is 19

approximately $86.5 million. 20

Cal Water proposes that, as an alternative to refunding the unprotected DTL, some or all it be 21

applied to existing WRAM/MCBA balances to offset balances owed by Cal Water’s customers.90

22

If the Commission, decides to transition Cal Water to an M-WRAM/ICBA, the entire amount of 23

the re-measured DTL balance should be applied to offset the existing net WRAM/MCBA under-24

collections. Offsetting the existing net WRAM/MCBA balance this way will significantly 25

reduce customers surcharges and facilitate elimination of Cal Water’s WRAM/MCBA to start 26

with a clean slate under an M-WRAM/ICBA. 27

90 Cal Water Additional Testimony, Chapter 15, New Federal tax Law, p. 55.

70

Chart 3-8 below shows the amount of deferred WRAM revenues from 2013 through 2017 when 1

recovery of balances exceeds 24 months. The graph also shows the deferred revenues as a 2

percent of Cal Water’s total regulated operating revenues. The data shows deferred WRAM 3

revenues is no longer an issue for Cal Water, and the amounts deferred as a percentage of 4

regulated operating revenues have remained relatively low averaging less than 0.5% over the 5

2013-2017 period. 6

Chart 3-8: WRAM Deferred Revenues as % of Total Operating Revenues, 2013-2017 7

8

Applying the unprotected DTL to the WRAM/MCBA balance will significantly shorten the 9

recovery period for the net-WRAM/MCBA (2017-2019) balances and reduce the surcharges to 10

customers, easing Cal Water’s transition to an M-WRAM/ICBA mechanism in the 2020 rate 11

case cycle. 12

6. The Commission should maintain the 10% revenue requirement cap on net 13

WRAM/MCBA balances and limit SRM adjustments if it does not eliminate the 14

WRAM/MCBA mechanism. 15

The Commission should eliminate Cal Water’s WRAM/MCBA and replace it with an M-16

WRAM/ICBA mechanism. The M-WRAM/ICBA would better balance the revenue variability 17

risk between ratepayers and Cal Water. However, should the Commission retain the 18

WRAM/MCBA mechanism (which it should not), the Commission should maintain the 10% 19

71

revenue requirement cap on net WRAM/MCBA balances and not modify the amortization 1

periods under Standard Practice U-27 for the recovery of net WRAM/MCBA balances. The 2

Commission should also require Cal Water to undergo an earnings test when seeking recovery of 3

net WRAM/MCBA balances. 4

The Commission should deny Cal Water requests to make the SRM permanent and its request to 5

increase the SRM’s current sales adjustment from 50% to 100% of the difference between 6

adopted and actual sales when they exceed plus or minus 5%. The SRM should continue as a 7

pilot with the only modification that the mechanisms be applied during declared drought periods. 8

The adjustment to adopted sales should remain unchanged at 50% to calculate the revenue 9

requirement to reflect the adjusted consumption. 10

The Commission’s rational for establishing Cal Water’s SRM was to address the impact of 11

drought conditions on the sales forecast.91

On April 7, 2017, the Governor rescinded the 12

emergency drought declaration and most drought-related executive orders issued during the peak 13

of the 2015 drought.92 Therefore, the drought SRM mechanism should only be applied only 14

during declared drought periods requiring voluntary or mandatory conservation and remain 15

inactive during non-drought periods. 16

a. Cal Water’s request to eliminate the 10% on net WRAM/MCBA surcharges should be 17

denied. 18

The Commission should deny Cal Water’s request to eliminate the 10% cap on the recovery of 19

net WRAM/MCBA surcharges. The Commission should also Cal Water to undergo an earnings 20

test in order to recover WRAM/MCBA balances. This test would determine whether the 21

requested recovery of net WRAM/MCBA under collected balances cause the utility to exceed its 22

authorized rate of return. To the extent a utility is earning above its authorized rate of return, 23

recovery of the net WRAM/MCBA under collection balance would be reduced by the amount of 24

the over earning. Requiring an earnings test would ensure that significant net WRAM/MCBA 25

91 D.01-08-011, page 11.

92 Executive Order B-40-17 lifted the drought emergency in all California counties except Fresno, Kings,

Tulare and Tuolumne, where emergency drinking water projects will continue to help address diminished

groundwater supplies.

https://www.gov.ca.gov/docs/4.7.17_Exec_Order_B-40-17.pdfl

72

under-collected balances do not result in an over-earnings windfall to Cal Water and will protect 1

its ratepayers from paying excessive surcharges. 2

Cal Water proposes to eliminate the 10% cap on surcharges applied to the recovery of net 3

WRAM/MCBA balances. The company does not propose any changes to the current 4

amortization periods for recovery of uncollected balances. Cal Water raises similar arguments in 5

this GRC to support eliminating the 10% cap as it did in its last GRC. These arguments are 6

based on the following premises:93

7

The 10% cap is arbitrary; 8

Customers don’t receive the right price signal; 9

Delayed recovery causes inter-generational equity; 10

The 10% cap negatively affects Cal Water’s financial strength; and 11

The 10% cap delays Cal Water’s recovery of accumulated balances. 12

The 10% cap is not arbitrary and should remain in place. i.13

Cal Water’s incorrectly claim that the 10% cap is arbitrary. In A.10-09-017, the Commission 14

examined the large WRAM/MCBA balances. The scope of that proceeding included an 15

“examination of whether the high volatility experiences in some districts comports with the 16

Commission’s expectations in adopting the mechanisms [WRAM/MCBA]…”94

Cal Water and 17

four other Class A water utilities with full decoupling mechanisms requested modification to the 18

amortization schedule to allow for faster recovery of WRAM/MCBA balances. At that time, the 19

utilities argued accelerated recovery was warranted to mitigate the need for financial 20

restatements, which they claimed could trigger a chain reaction of lowered credibility and 21

confidence, lower credit ratings and higher borrowing cost, resulting in potentially less viable 22

utilities.95

23

93 Cal Water Additional Testimony, Greg Milleman, Chapter 4, pp. 19-23.

94 June 8, 2011 Assigned Commissioner and Administrative Law Judge’s Ruling and Scoping Memo.

95 A.10-09-017 “Regarding the Amortizations of WRAM-Related Accounts” filed September 20, 2010,

pp. 8-9.

73

D.12-04-048 modified the existing amortization schedule under SP U-27-W.96

Table 3-2 shows 1

modified amortization periods for recovery of net WRAM-MCBA under-collected balances. 2

Table 3-2: Standard Practice U-27-W as modified per D.12-04-048 Amortization Period 3

for net WRMA/MCBA Under Collections 4

5

*Net WRAM/MCBA surcharges capped at 10% of the last authorized revenue requirement 6

The Commission did not shorten the amortization schedule for balances between 5% and 30%, 7

recognizing the potential for large WRAM/MCBA surcharges.97

The Commission also limited 8

the annual cumulative WRAM/MCBA surcharges increases to 10% of the utilities’ authorized 9

revenue requirement.98

The Commission stated: 10

Applicants’ proposals to shorten the amortization period for net WRAM/MCBA 11

under-collections could expose customers to substantial rate increases without any 12

notice or opportunity to be heard. For example, under these proposals, the 13

WRAM/MCBA amortization period could in some circumstances double the 14

associated surcharge on a customer’s bill.99

15

The Commission concluded, “It is unreasonable to accelerate amortization of 2010 16

WRAM/MCBA balances. Such amortization would result in excessive impacts in many districts 17

in 2012.”100

The Commission further concluded that it was reasonable to limit the level of 18

WRAM/MCBA surcharges passed through on customers’ bills by Tier 1 advice letters to 10% of 19

the last authorized revenue requirement.101

The Commission adopted the 10% cap as a safeguard 20

96 D.12-04-048, OP #3, at 41.

97 Balances greater than 30% would be amortized over 36 months and be subject to the 10% cap on total

net WRAM/MCBA surcharges.

98 D.12-04-048, OP#3, at 40.

99 D.12-04-048 FOF#11 at p.36.

100 D.12-04-048, Conclusion of Law No. 13.

101 D.12-04-048, Conclusion of Law No. 3.

74

to ensure that ratepayers would not experience excessive rates. Thus, Cal Water erroneously 1

claims that the 10% WRAM/MCBA recovery cap is arbitrary. 2

Further, Cal Water fails to provide any evidence that eliminating the 10% cap would not result in 3

excessive rates. As shown in Table 3-2 above, WRAM/MCBA surcharges for many of Cal 4

Water districts already exceed 10% of customers’ bill and eliminating the cap would lead to 5

substantial rate increases. Therefore, the Commission should deny Cal Water’s request and 6

maintain the 10% cap to safeguard ratepayers from excessive surcharge increases. 7

Customers Not Receiving the Right Price Signal ii.8

Cal Water fails to provide any evidence that 10% cap prevents customers from receiving the 9

correct price signal during times of declining usage or how alleged price distortion is counter to 10

the State’s water conservation goals.102

To the contrary, despite the 10% cap, the current 11

conservation rate design and programs, have been successful in changing customers’ behavior on 12

water consumption. For example, between 2008 and 2017, Cal Water’s consumption per service 13

connection dropped more than 29%. Also, during this time period the net WRAM/MCBA 14

surcharges may have influenced customers water demand. Customers continue to conserve 15

water and Cal Water provides no evidence that the 10% cap has distorted customers’ price signal 16

that would lead to higher water consumption. 17

Furthermore, Cal Water’s sales forecast in this GRC already captures reductions due to changes 18

in its conservation rate design and impacts from its conservation programs, which is adjusted for 19

other non-conservation variables such as weather, price, drought, income, and employment. The 20

rates adopted in this GRC should continue to send the right conservation price signals.103

21

Therefore, it’s highly unlikely that net WRAM/MCBA under-collections in the current rate cycle 22

will exceed 30% in any given year. 23

The problem raised by Cal Water about the “pancaking” of future amortizations is very limited, 24

and it represents a small portion of Cal Water’s total operating revenues. For example, Cal 25

Water is recovery 2017 net WRAM/MCBA balances in a period of between 12-18 months for all 26

102 Cal Water, Additional Testimony, Greg Milleman, p. 2

103 The Public Advocates Office recommends that the Commission to continue a gradual shift to

recovering 70% of revenues in quantity rates, and 30% in the monthly service.

75

its districts, and any overlap from the 2016 surcharges extended only about 6 months into the 1

2017 surcharge period. This shows that keeping the 10% cap does not cause Cal Water any 2

excessive delay in recovery of its net WRAM/MCBA balances. Therefore, elimination of the 3

10% cap safeguard should be denied. 4

Delay recovery causes inter-generational equity iii.5

Cal Water argues there may be intergenerational issues if the 10% cap is not lifted.104

6

Intergenerational issues are not unique to the WRAM/MCBA and apply to any regulatory 7

balancing or memo account. As discussed above, the current mechanisms allow Cal Water to 8

recover its 2017 WRAM/MCBA under-collections in 12-18 months. Therefore, any effect on 9

intergenerational equity associated with the WRAM/MCBA recovery periods are not material. 10

The issue here is not that intergenerational issues are caused by the recovery cap, because this 11

can occur with any balancing account. Intergenerational equity could be an issue for Cal Water 12

because of the relatively large accumulated balances in the WRAM/MCBA accounts. The 10% 13

recovery cap would not delay recovery of under-collected balances if the under-collected 14

balances were a smaller amount. While the 10% recovery cap may temporarily alleviate issues 15

associated with large under-collected balances in the short-term, it will not address the reasons 16

large balances accumulated in the first place. Thus, rather than eliminating a ratepayer 17

protection, the underlying issues which cause large balances should be addressed. In the earlier 18

sections of this report, the Public Advocates Office analyzes the underlying issues with the 19

WRAM/MCBA and discusses why it should be eliminated. 20

Negatively impact financial strength of company iv.21

Cal Water argues that the 10% cap delays recovery of WRAM/MCBA balances and the timely 22

recovery could become a large financial risk to the company. Cal Water’s financial data shows 23

that the cap has not negatively affected the financial condition of the company nor has it resulted 24

in higher financial costs to ratepayers. In fact, Cal Water’s common stock is trading near an all-25

time high, closing at $49.47 on February 5, 2019. The company’s common stock has more than 26

doubled since the implementation of the WRAM/MCBA mechanism. Additionally, since the 27

adoption of the WRAM/MCBA, Cal Water has not had problems accessing the debt market and 28

104 Cal Water Additional Testimony, Chapter 4, Greg Milleman, p. 20.

76

is getting favorable rates. Since 2009, Cal Water issued over $350 million in debt at an average 1

weighted debt cost of less than 5%. In fact, in 2018 Cal Water sought to purchase San Jose 2

Water Group with a tender offer of $70 per share or an offer of nearly $2.0 billion.105

Cal Water 3

is not experiencing financial problems due to the 10% cap. On the other hand, the cap protects 4

ratepayers from excessive surcharges. 5

Chart 3-9 below shows the actual rate of return (ROR) earned by Cal Water compared to its 6

authorized ROR. 7

Chart 3-9: Cal Water Actual vs. Authorized Rate of Return, 2008-2017 8

9

Since full decoupling was implemented, Cal Water has exceeded its authorized ROR for most 10

years, except 2016. It is unreasonable to permit Cal Water to pass through to ratepayers the 11

dollar-for-dollar accumulated net WRAM/MCBA under-collections when the company is 12

earning more than its authorized rate of return, particularly when Cal Water ratepayers are 13

experiencing large surcharges in their monthly water bills. To continue permitting such recovery 14

without any ratepayer safeguard gives Cal Water an undeserved windfall at ratepayer expense. 15

Therefore, the Commission should require Cal Water to undergo an earnings test when seeking 16

recovery of its net WRAM/MCBA balances. Subjecting the recovery of net WRAM/MCBA 17

105 On August 17, 2018, Cal Water withdrew its offer to purchase San Jose Water.

https://www.businesswire.com/news/home/20180817005329/en/California-Water-Withdraws-70.00-

Share-Proposal-Acquire

https://www.businesswire.com/news/home/20180817005329/en/California-Water-Withdraws-70.00-Share-Proposal-Acquire

https://www.businesswire.com/news/home/20180817005329/en/California-Water-Withdraws-70.00-Share-Proposal-Acquire

77

balances to an earnings test will provide additional protection to ratepayers by limiting the 1

magnitude of the WRAM/MCBA surcharges when Cal Water exceeds its authorized ROR and 2

will help ensure water affordability, especially for low-income customers. 3

b. Cal Water’s proposed modifications for the Sales Reconciliation Mechanism should be 4

denied. 5

Cal Water requests to make the Sales Reconciliation Mechanism (SRM) permanent and to 6

increase the mechanism’s current adjustment to adopted sales from 50% to 100%.106

Cal Water 7

is not proposing to eliminate the 5% sales difference trigger.107

On August 14, 2014, the 8

Commission adopted the drought SRM as a pilot program applicable to the second and third 9

years of the 2014-2017 rate case cycle.108

Cal Water made a similar request in its 2015 GRC to 10

modify the drought SRM. The Public Advocates Office opposed Cal Water proposal but during 11

settlement negotiations both parties agreed to withdraw their proposals. The SRM remained as 12

adopted in D.04-08-011–a pilot with the 50% sales adjustment limit. 13

Cal Water is allowed to submit SRM rate adjustments via an escalation year increase advice 14

letter if the mechanism is triggered at that time. Due to the timing of the escalation filings, a full 15

year of recorded sales is not available. Thus, the consumption calculation is based on sales from 16

October of the previous year to September of the current year. The actual sales from October to 17

September are then compared to the adopted sales for the same period. If the actual sales deviate 18

from the adopted sales by more than plus or minus 5%, 50% of the deviation is used in the SRM 19

calculation to determine rates for the year of the attrition filing. As structured, the SRM could 20

result either in a rate increase or decrease and the magnetite of the change is driven by the 21

amount of the variance in sales from adopted levels. 22

Cal Water claims that in the first four months of 2018, the SRM helped reduce the 23

WRAM/MCBA balance on a company-wide basis by approximately $5.0 million. Cal Water 24

claims without the SRM the net WRAM/MCBA company-wide balance would have increased to 25

106 Cal Water, Additional Testimony, Special Request #3, Greg Milleman, p. 11, July 2018.

107 The Public Advocates notes that in Cal Water’s 201 GRC (A.15-07-015) Special Request #9, the

company was requesting to the SRM permanent, eliminate the 5% trigger, and adjust adopted sales by

100% of the change.

108 D.14-08-011, at page 19.

78

about $13.8 million. However, Cal Water does not provide any district specific analysis showing 1

the SRM impacts per district. For example, the SRM on each district can be evaluated by 2

showing the billings with SRM and the WRAM balance with SRM, compared to billings without 3

SRM and WRAM balances without SRM. The effectiveness of the drought SRM should be 4

measured by its ability to reduce the gap between authorized quantity revenues and quantity 5

revenues through rates, the actual and adopted costs tracked through the MCBA, and the overall 6

impact to the WRAM/MCBA balances. As previously shown in the 2015 GRC, the drought 7

SRM is prone to uncertainties of water sales forecasting and, therefore, it is important to access 8

the SRM pilot data on districts’ revenue requirement.109

9

Cal Water’s proposal to change the adopted sales adjustment from 50% to 100% of the variance 10

between adopted and actual sales could lead to larger WRAM balances due to the decrease in 11

revenue billings as a result of SRM adjusted quantity rates. Table 3-3 shows the 2015 change in 12

the Livermore district’s quantity rates when making the SRM adjustment under the current 13

adopted 50% adjustment cap. With a 50% adjustment the quantity rates increase by 2.8%. The 14

overall increase in 2015 with the attrition increase and SRM is nearly 4%. Allowing Cal Water 15

to adjust for 100% of variance difference would result in an overall rate increase of 7.8% from 16

the adopted step increase, or 9.1% increase from present quantity rates. 17

Table 3-3: 2015 SRM Adjustments Livermore District With 50% and 100% Sales 18

Adjustment 19

20

Under Cal Water’s proposal, ratepayers would be faced with much higher increases in quantity 21

rates, especially in districts with high WRAM balances. These high SRM rate changes could 22

exacerbate the demand situations that give rise to the WRAM balances in the first place. 23

109 Public Advocates Office, Report in A.15-07-015, Chapter 4, p. 44, March 2016.

With 50% of Quantity Sales Adjustment

Livermore

Residential

Adopted

Quantities

Present

Rates

Present

Quantity

Revenues

Step

Increase

2015 Rev

Requirement

2015 Step

Rates Step Increase

Adjusted

SRM

Quantities

Adjusted

Present

Quantity

Revenues SRM Revenues

Step w/SRM

Revenues

Adjusted

Rates for

SRM

SRM Increase in

Rates

Tier 1 1,459,874 $2.86793 $4,186,823 $49,420 $4,236,243 $2.9018 1.18% 1,371,051 $3,978,496 $113,269 $4,091,765 $2.9844 2.8%

Tier 2 1,021,817 $3.05099 $3,117,548 $36,799 $3,154,346 $3.0870 1.18% 959,646 $2,962,426 $84,341 $3,046,767 $3.1749 2.8%

Tier 3 582,316 $3.66102 $2,131,872 $25,164 $2,157,036 $3.7042 1.18% 546,886 $2,025,795 $57,675 $2,083,470 $3.8097 2.8%

Total 3,064,007 $3.080 $9,436,243 $111,382 $9,547,625 $3.1161 1.18% 2,877,582 $8,966,716 $255,286 $9,222,002 $3.2048

($580,909.12) $255,285.73 ($325,623.39)

-6.08% -21.97% -3.41%

With 100% of Quantity Sales Adjustment $2.9018 1.18% 1,282,227 $3,720,749 $291,495 $4,012,243 $3.1291 7.8%

$3.0870 1.18% 897,475 $2,770,505 $217,050 $2,987,554 $3.3288 7.8%

$3.7042 1.18% 511,456 $1,894,553 $148,425 $2,042,978 $3.9944 7.8%

$9,547,625 $3.1161 1.18% 2,691,158 $8,385,807 $656,969 $9,042,776

($1,161,818.24) $656,969.50 ($504,848.74)

-12.17% -56.55% -5.29%

79

Specifically, the SRM could inflate WRAM balances by sending price signals that reduce 1

demand in situations of under-recovery and that increase demand in response to an over-2

recovery. The resulting price changes from adjusting for 100% of the sales variance would 3

magnify the suppression or stimulation of customer demand.110

This could also lead to a 4

perverse effect of the WRAM itself, further penalizing customers for conserving with 5

immediately higher prices and rewarding customers for consuming more than forecasted with an 6

immediate price cut. 7

c. SRM provides no incentive for improving inaccurate forecast. 8

As discussed in section C.4 of this report, D.16-12-026 acknowledges the short-comings of 9

previously Commission approved forecasting methodologies. In particular, the Commission 10

found that the forecasting models did not adequately capture the recent drought conservation 11

effects. To alleviate the shortcomings, the Commission found that it was reasonable to consider 12

new forecasting methods to increase accuracy and to reduce the WRAM/MCBA balances.111

13

The Public Advocates Office also notes that in Cal Water’s last rate case the sales forecast did 14

not capture the effects of mandatory conservation during the 2015-2016 declared drought. This 15

has caused significant variances between the adopted forecasted for 2017. Table 3-4 below 16

provides a comparison between the 2017 and 2018 WRAM balances. The data used for the 17

comparison is from January through August because the full year for 2018 was not available. 18

110 For example, in the case of a revenue over-recovery, the SRM results in lower prices, and could

encourage customers to use even more water resulting in further increasing the amount of the WRAM

credit balance owed as refunds to customers. This type of adjustment would be sending the wrong

conservation signal to customers.

111 D.16-12-026, FOF 15.

80

Table 3-4: WRAM Balances 2017 and 2018 (Jan-Aug) 1

2

For 2018, it appears that the WRAM under collections decreased significantly compared to 2017 3

rate cycle, and as a percent of 2018 adopted quantity revenues represents about 11%. Although, 4

the 2017 SRM may have contributed to the reduction, most of the reduction is likely due to a 5

post-drought bounce back. Thus, the expected variance between adopted and actual sales 6

appears to be narrowing. 7

Table 3-5 below shows the 2018 net WRAM/MCBA from January through August and 8

compares this balance as a percent of the adopted quantity revenues. As of August, the net 9

WRAM/MCBA balances are less than 4% of the total company adopted quantity revenues, and a 10

few districts already show net over collections. 11

Ratemaking District

WRAM 2017

Jan-Aug

WRAM 2018

Jan-Aug Difference

%

Difference

Adopted

Quantity

Revenues

2018 WRAM

Balance as % of

Adopted

Revenues

A B C=(B-A) D=(C/A) E F=(B/E)

Bakersfield 6,388,206$ 3,807,305$ (2,580,901)$ -40.40% 30,584,468$ 12.45%

Bear Gulch 7,327,267$ 4,089,717$ (3,237,551)$ -44.18% 28,192,981$ 14.51%

Dixon 334,486$ 147,021$ (187,464)$ -56.05% 1,422,983$ 10.33%

East LA 2,706,865$ 1,623,043$ (1,083,821)$ -40.04% 18,380,954$ 8.83%

Hermoso Redondo 2,044,990$ 716,023$ (1,328,967)$ -64.99% 15,033,897$ 4.76%

Livermore 3,405,179$ 2,400,230$ (1,004,949)$ -29.51% 11,785,778$ 20.37%

Los Altos 5,085,256$ 2,821,083$ (2,264,173)$ -44.52% 20,452,824$ 13.79%

Marysville 99,913$ 112,341$ 12,428$ 12.44% 1,474,116$ 7.62%

Oroville 461,935$ 165,342$ (296,593)$ -64.21% 2,062,032$ 8.02%

Selma 536,344$ 185,672$ (350,672)$ -65.38% 2,081,288$ 8.92%

Stockton 5,480,226$ 4,776,915$ (703,311)$ -12.83% 25,761,252$ 18.54%

Visalia 2,649,225$ 790,699$ (1,858,526)$ -70.15% 13,450,624$ 5.88%

Willows 112,774$ 26,619$ (86,155)$ -76.40% 725,001$ 3.67%

Westlake 1,946,829$ 822,319$ (1,124,510)$ -57.76% 10,348,926$ 7.95%

Bay Region 8,485,206$ 5,233,883$ (3,251,323)$ -38.32% 44,818,928$ 11.68%

Chico 2,431,365$ 1,492,956$ (938,409)$ -38.60% 10,821,688$ 13.80%

Dominguez 6,214,151$ 4,044,815$ (2,169,336)$ -34.91% 39,511,413$ 10.24%

Kern River Valley 817,876$ 507,093$ (310,782)$ -38.00% 2,650,024$ 19.14%

LA Region 5,247,125$ 1,047,648$ (4,199,476)$ -80.03% 26,176,416$ 4.00%

Monterey Region 2,511,535$ 745,052$ (1,766,483)$ -70.33% 16,801,516$ 4.43%

Companywide 64,286,750$ 35,555,775$ (28,730,975)$ -44.69% 322,537,110$ 11.02%

81

Table 3-5: Net WRAM/MCBA Balances, 2017 and 2018 (Jan-Aug) 1

2

Cal Water speculates that “customers are not receiving the correct price signals in regards to the 3

cost of delivering water during periods of drought and declining usage.”112

Although 4

conservation is now a way of life, even during non-drought periods, applying the SRM to the 5

final 2018 sales variance could cause rate decreases, sending the wrong conservation price signal 6

to customers. 7

Even during the drought periods, Cal Water reasoning is counter intuitive because: 8

[a] sales adjustment mechanism would increase rates when triggered by reduce usage 9

and decrease rates when triggered by usage greater than forecasted. In other words, in 10

instances of droughts mandates levels are not met and customers are using too much 11

water, this type of sales adjustment mechanism would decrease rates through 12

increasing sales forecast.113

13

112

Cal Water Additional Testimony, Chapter 3, Sales Reconciliation Mechanism, (SR#3), p. 14.

113 COMMENTS OF THE OFFICE OF RAPAERS ADVOCATES ON THE WORKSHOP REPEORT”

Phase II of Proceeding R.11-11-008, submitted November 16, 2015.

Ratemaking District

WRAM 2018

Jan-Aug

MCBA 2018

Jan-Aug

2018 Net

WRAM/MCBA

Adopted

Quantity

Revenues

% of Quantity

Revenues Net

WRAM/MCBA

A B C=(A+C) D E=(C/D)

Bakersfield 3,807,305$ (2,102,940)$ 1,704,365$ 30,584,468$ 5.57%

Bear Gulch 4,089,717$ (3,004,465)$ 1,085,251$ 28,192,981$ 3.85%

Dixon 147,021$ 31,406$ 178,428$ 1,422,983$ 12.54%

East LA 1,623,043$ (918,472)$ 704,571$ 18,380,954$ 3.83%

Hermoso Redondo 716,023$ 419,603$ 1,135,626$ 15,033,897$ 7.55%

Livermore 2,400,230$ (2,354,250)$ 45,980$ 11,785,778$ 0.39%

Los Altos 2,821,083$ (2,448,411)$ 372,672$ 20,452,824$ 1.82%

Marysville 112,341$ (16,396)$ 95,945$ 1,474,116$ 6.51%

Oroville 165,342$ 30,087$ 195,428$ 2,062,032$ 9.48%

Selma 185,672$ 15,374$ 201,045$ 2,081,288$ 9.66%

Stockton 4,776,915$ (4,424,940)$ 351,975$ 25,761,252$ 1.37%

Visalia 790,699$ (407,067)$ 383,632$ 13,450,624$ 2.85%

Willows 26,619$ (16,196)$ 10,422$ 725,001$ 1.44%

Westlake 822,319$ (598,413)$ 223,906$ 10,348,926$ 2.16%

Bay Region 5,233,883$ (5,486,080)$ (252,197)$ 44,818,928$ -0.56%

Chico 1,492,956$ (25,570)$ 1,467,386$ 10,821,688$ 13.56%

Dominguez 4,044,815$ (716,964)$ 3,327,851$ 39,511,413$ 8.42%

Kern River Valley 507,093$ (76,471)$ 430,622$ 2,650,024$ 16.25%

LA Region 1,047,648$ (1,537,854)$ (490,205)$ 26,176,416$ -1.87%

Monterey Region 745,052$ (224,539)$ 520,513$ 16,801,516$ 3.10%

Companywide 35,555,775$ (23,862,559)$ 11,693,216$ 322,537,110$ 3.63%

82

Cal Water’s sales forecast in the 2020-2022 rate case cycle already includes improvements in the 1

forecasting methodology. As addressed in section C.4, the company’s forecast captures expected 2

reductions in consumption due to its new tiered rates and ongoing conservation programs. For 3

example, Cal Water’s consultant M-Cubed found that the magnitude of the residential sales trend 4

is in line with expectations. The SRM is not going to improve forecast accuracy, and relies on 5

the assumption that the sales in the future will trend towards sales in the prior year. Thus, the 6

lower sales in the present year do not always indicate that sales will continue to be low in 7

subsequent years. For example, based on the quantity revenue variances tracked in the 2018 8

WRAM, the resulting lower balances indicate that for the first eight months of 2018 the actual 9

sales are not following the 2017 adjusted downward trend. Changing the percent of the sales 10

adjustment from 50% to 100% could magnify these effects and lead to unintended consequences 11

for water use behavior. 12

The Commission should deny Cal Water’s request to modify the SRM. The SRM is still a 13

relatively new mechanism that has been used in less than two rate case cycles beginning with 14

2014. The Commission should continue the SRM as a pilot program to obtain further data to 15

complete a comprehensive analysis of its operation and effect on net WRAM/MCBA balances 16

and ratepayers. The Commission should require Cal Water to provide detailed analysis of the 17

SRM mechanism in its next GRC. The analysis should include the following for each ratemaking 18

district regardless of whether the district met the 5% salves variance trigger: 19

1. WRAM/MCBA balances compared to baseline balances; 20

2. Customer bill comparisons; 21

3. Consumption comparisons including by customer type; 22

4. Adopted and Actual sales; 23

5. Adjusted and sales; 24

6. Adopted revenues; 25

7. Drought SRM revenues; 26

8. Adopted and Actual customers; and 27

9. Adjusted Customers (based on escalation filings). 28

83

D.14-08-011 adopted the drought SRM as a pilot to address the current drought conditions.114

1

The drought SRM was only authorized for current rate case period and may be reconsidered in 2

Cal Water’s next GRC. In the 2017 GRC, pursuant to the settlement between Public Advocates 3

Office and Cal Water, the SRM was left unchanged and continued as a pilot. In April 2017, 4

Governor Brown lifted the State of Emergency drought declaration for most of California in 5

April 2017 with the issuance of Executive Order B-40-17.115

The basis for allowing Cal Water 6

SRM was tied to the drought. Because the drought declaration was lifted in 2017, the drought 7

SRM should be frozen starting in 2020 until a declared activates the mechanism. 8

D. CONCLUSION 9

Cal Water’s ratepayers have been disproportionally affected as a result of the WRAM/MCBA, 10

and it does not fairly balance the lost revenue risk between ratepayers and shareholders. As 11

currently structured, it does not result in any benefit to ratepayers and may in fact harm 12

ratepayers by creating greater rate instability. There is also no evidence that full decoupling has 13

produced any ratepayer benefits. To the contrary ratepayers have neither received any pre-14

defined benefits for assuming the revenue recovery risk associated with the WRAM/MCBA 15

decoupling, nor have they been insulated from the potential negative outcomes that may arise 16

from a revenue decoupling mechanism. In order to address the shortcomings of the 17

WRAM/MCBA and to better balance the revenue variability risk between ratepayers and 18

shareholders, the Commission should eliminate Cal Water’s WRAM/MCBA and SRM starting 19

in the 2020 test year. This mechanism should be replaced with a Monterey-style Water Revenue 20

Adjustment Mechanism (M-WRAM), and an Incremental Cost Balancing Account (ICBA). 21

Should the Commission decide to retain the WRAM/MCBA and SRM (which it should not), the 22

Commission should adopt the following recommendations to ensure that WRAM/MCBA 23

surcharges and SRM rate adjustments do not result in either rate shock or unreasonably high 24

rates for Cal Water’s ratepayers: 25

1) Retain the cap that limits net WRAM/MCBA surcharges to 10% of the latest authorized 26

revenue requirement; 27

114 D.14-08-011, OP # 43.

115 Department of Water Resources - Drought Information

(http://www.water.ca.gov/waterconditions/declaration.cfm, accessed on January 2, 2018).

http://www.water.ca.gov/waterconditions/declaration.cfm

84

2) Require Cal Water to undergo an earnings test when seeking recovery of WRAM/MCBA 1

net balances; 2

3) Deny Cal Water’s request to make the SRM permanent and continue the SRM as a pilot. 3

4) Deny Cal Water’s request to change the sales adjustment from 50% to 100%, keeping the 4

SRM as currently designed; and 5

5) Only allow triggering of the SRM during periods of mandatory conservation. 6

[END OF CHAPTER] 7

85

CHAPTER 4: SPECIAL REQUEST 5 – EXTENDING SUNSET FOR 1

ADVICE LETTERS 2

A. INTRODUCTION 3

This chapter addresses California Water Service Company’s (Cal Water’s) special request to 4

extend the completion dateline for advice letter capital projects authorized in its last General 5

Rate Case (GRC) that have not been completed. 6

B. SUMMARY OF RECOMMENDATION 7

The Commission should deny because the justification, scope, and estimated cost for 8

uncompleted advice letter projects may have changed from what was previously authorized in 9

Cal Water’s last rate case and must be reviewed again for reasonableness. Cal Water’s blanket 10

request to extend the deadline for previously authorized AL capital projects not completed within 11

the 2015 GRC cycle. The Public Advocates Office’s engineering witnesses specifically 12

addresses the review and recommendations for the 2015 GRC advice letter capital projects for 13

which Cal Water is seeking and extension. 14

C. DISCUSSION 15

In Cal Water’s 2015 GRC the Commission authorized 76 Cal Water advice letter capital projects 16

with a total estimated capped cost of approximately $197.1 million.116

The authority for Cal 17

Water to recover the costs for these advice letter capital projects expires at the end of the three-18

year rate case cycle (2016-2019). Since its last rate case, Cal Water submitted advice letters for 19

$69.9 million in completed capital projects. Of this total, approximately $45.9 was included in 20

rates for recovery. This amount represents the authorized cap set on costs for the capital projects 21

granted advice letter treatment. 22

Any difference above the project’s capped cost must be addressed in the 2018 GRC and would 23

be subject to a reasonableness review. Cal Water has identified previously authorized advice 24

letter projects that it does not expect to complete by the end of 2019.117

For these projects, Cal 25

116 Cal Water’s response to the Public Advocates Office’s data request DES-009, Question 1, October 2,

2018.

117 General Report Book, Attachment A.

86

Water seeks to extend the deadline to complete these projects into the next GRC cycle running 1

from 2020-2022. 2

Advice letter capital projects not completed during the rate case cycle for which they were 3

approved raise at least three concerns. First, many of the advice letter projects Cal Water seeks 4

to extend have revised estimates for costs. Second, the scope of the project may have changed 5

and may differ from what was previously authorized. Any change in project justification, scope, 6

or estimated costs for uncompleted advice letter projects must be reviewed again for 7

reasonableness. For these reasons, the Commission should deny Cal Water’s request to extend 8

sunset period into the 2020-2022 rate case cycle for previously authorized advice letters. The 9

Public Advocates Office address the merits of the advice letter projects for which an extension is 10

requested in the specific District Plant reports. 11

D. CONCLUSION 12

The Commission should deny Cal Water’s blanket request to extend into the 2020-2022 rate case 13

cycle the deadline for uncompleted advice letters projects because the Commission must review 14

each advice letter project individually to determine whether authorization for completion and 15

recovery should be extending through the 2018 GRC cycle. 16

87

CHAPTER 5: SPECIAL REQUEST 6 – INCORPORATING SUBSEQUENT 1

RATE CHANGES INTO FINAL RATES 2

A. INTRODUCTION 3

This chapter addresses California Water Service Company’s (Cal Water) request to include any 4

changes to base rates after filing its General Rate Case Application 18-07-001, and before the 5

start of the new test year of January 1, 2020. 6


The Public Advocates Office does not oppose Cal Water’s request to include the results of other 8

proceedings and subsequent cost offsets approved by the Commission in base rates before the 9

start of the new test year of January 1, 2020. After the Commission issues a rate case decision, 10

Cal Water should be required to notify customers of the resulting rate increase and explain the 11

reasons for the increase. 12

C. DISCUSSION 13

Cal Water states that other changes to base rates can take place outside the rate case process, 14

which are not captured as part of its 2020 test year rate case filing.118

These include filings for 15

its 2019 escalation increase, offsets for purchase water price increases, and advice letters for rate 16

base offsets for previously authorized capital projects. Cal Water cites other proceedings such as 17

cost of capital, Tax Cuts and Jobs Act, and its Los Altos Building application as examples of 18

potential proceedings that can result in subsequent rate changes. 19

Capturing base rate changes that are outside of Cal Water’s GRC may have unintended 20

consequents when included in this proceeding. As required by the GRC process, Cal Water has 21

notified its customers of the requested revenue requirement increase and its impact on 22

customers’ average monthly bill. By including other rate changes, it creates the perception that 23

Cal Water was granted a higher revenue requirement than the amount requested in its 2020 test 24

year GRC filing. 25

118 California Water Service, Additional Testimony, July 2018, p. 25.

88

The Commission should approve Cal Water’s request to reflect any subsequent authorized base 1

rate changes resulting from other proceedings and offset filings in the revenue requirement and 2

final service rates adopted for the 2020 test year. This will likely reduce customer confusion, 3

reduce workload for both the Commission and Cal Water staff, and streamline the regulatory 4

process. As a condition of approval of this request, Cal Water should provide customer notices 5

explaining the resulting rate increase and the reasons for increase to mitigate the risk of customer 6

confusion about the final rates adopted. 7

D. CONCLUSION 8

The Commission should approve Cal Water’s Special Request 6 on the condition that Cal Water 9

provides customer notice of and explanation about the rate increase. Customer notices will help 10

alleviate any perceptions or confusion about why the adopted rates exceed the company’s GRC 11

request noticed to customers. 12

[END OF CHAPTER] 13

89

CHAPTER 6: SPECIAL REQUEST 10 – RENAMING MONTEREY 1

REGION 2

A. INTRODUCTION 3

This chapter addresses California Water Service Company’s (Cal Water) request to change its 4

Monterey Region name to the Salinas Region. 5


The Commission should approve Cal Water’s request to change its Monterey Region name to the 7

Salinas Region. 8

C. DISCUSSION 9

In the last GRC, the Commission approved Cal Water’s request to consolidate Salinas and King 10

City operating districts into a single ratemaking area called Monterey Region. Cal Water claims 11

that since the consolidation there has been frequent confusion at the Commission between Cal 12

Water’s Monterey region and California American Water’s (CalAm) Monterey District.119

Cal 13

Water has not tracked the instances when the Commission has confused its filings with those of 14

CalAm, and notes the errors are usually quickly corrected once Cal Water communicates with 15

Commission staff.120

16

Cal Water does not anticipate that it will incur any significant cost with the name change because 17

it only affects the name for the ratemaking area on documents related to its Rate Department’s 18

documents, workpapers and tariffs.121

All signage for the operating districts within the 19

consolidated regions will remain unchanged. Cal Water is not proposing to include any potential 20

costs associated with the name change in the 2020 test year revenue requirement.122

21

119 California Water Service, Additional Testimony, July 2018, p. 32.

120 Response to data request CalPA-DES-006, Question 1, September 17, 2018.

121 Response, CalPA-DES-006, Question 2.

122 Response, CalPA-DES-006, Question 3.

90

D. CONCLUSION 1

The Public Advocates Office does not oppose Cal Water’s request to change the name of its 2

Monterey Region to the Salinas Valley Region. The name will eliminate any confusion with the 3

CalAm Monterrey district, and no costs incurred with the name change will be included in the 4

2020 test year forecast. 5

[END OF CHAPTER] 6

91

CHAPTER 7: RESTRUCTURING LOS ANGELES COUNTY REGION 1

TARIFFS – SPECIAL REQUEST 16 2

A. INTRODUCTION 3

This chapter addresses California Water Service Company’s (Cal Water or CWS) request to 4

restructure the consolidated service tariff in its Los Angeles Region (LA Region)123

to exclude 5

cost related to the Palos Verdes Peninsula Water Reliability Project (PV Pipeline) from Antelope 6

Valley District (Antelope Valley) customers’ rates. Under Cal Water’s restructured LA Region 7

tariffs, only Palos Verdes District (Palos Verdes) customers will bear the cost of the PV Pipeline. 8


Cal Water Special Request #16 proposes to restructure (bifurcate) the LA-Region service tariffs 10

so that costs related to the PV Pipeline currently under construction are borne by Palos Verdes 11

customers, and not Antelope Valley customers. The Public Advocates Office does not oppose 12

Cal Water’ request but makes the following recommendations ensure that no PV Pipeline project 13

costs are shifted to Antelope Valley’s ratepayers. The Public Advocates Office proposed Result 14

of Operations model modification assures that the PV Pipeline revenue requirement is 15

appropriate allocated to only Palos Verdes customers. 16

In developing the bifurcated tariff rates for Antelope Valley, the Commission should require Cal 17

Water to run the results of operations and rate design models using a consolidated rate design 18

that excludes the incremental124

cost of the PV Pipeline, and which does not cap Antelope 19

Valley’s revenue requirement at 3.5% of Palos Verde’s revenue requirement. 20

For future request to un-consolidate costs, Cal Water should be required, at a minimum, to 21

provide the following information: 22

Rate increase threshold applied in determining why the subsidized district should not 23

pay for the specific excluded costs. 24

123 The Commission Decision on Cal Water’s 2015 GRC (D.16-12-042) authorized Cal Water consolidate

the Antelope Valley District and the Palos Verdes District into the LA Region.

124 The incremental costs that the Public Advocates Office refers to are the additional PV Pipeline project

costs included in the 2020 test year that is not part of the previously authorized rate base offset advice

letter PV Pipeline (PID82326 and PID82328).

92

Revenue requirement and rate design impacts of including vs. excluding the costs on all 1

districts that make up the consolidated region. 2

Detailed analysis of the current level of cross-subsidies being provided to the subsidized 3

districts, and the effects on the existing subsidies of including vs. excluding specific 4

costs. 5

Customer bill impacts and analysis for the districts being subsidized and those providing 6

the cross-subsidy, including analysis showing the effects of including and excluding the 7

specific cost. 8

In order to continue monitoring the subsidy levels provided by Palos Verdes to Antelope Valley 9

ratepayers and assuring that no PV Pipeline project costs are shifted to Antelope Valley 10

ratepayers, Cal Water should be required to continue providing the following information in its 11

future general rate cases (GRCs): 12

Antelope Valley’s and Palos Verdes’ stand-alone revenue requirements; 13

LA Region’s Revenue Requirement with and without the PV Pipeline Project; 14

Forecast sales separately for each district (and for ratemaking areas) within the combined 15

region; and 16

Separate rate design modules for each of the above revenue requirements. 17

The Commission should require Cal Water to maintain separate Water Revenue Adjustment 18

Mechanism (WRAM) for Antelope Valley and Palos Verdes to assure that Antelope Valley 19

customers do not pay for the fixed cost portion of the PV Pipeline included in quantity rates. 20

C. DISCUSSION 21

Cal Water requests in Special Request #16 to restructure the consolidated water service tariff 22

rates for its LA Region. Cal Water seeks to restructure its LA Region tariff to alleviate the 23

Antelope Valley customers from having to pay for the PV Pipeline project. According to Cal 24

Water, the purpose of the consolidation between Palos Verdes and Antelope Valley was to 25

facility rate affordability for Antelope Valley customers.125

Antelope Valley is comprised of 26

125 A.18-07-001, Cal Water Additional Testimony, Chapter 24, p. 203.

93

smaller individual water systems which have high infrastructure cost and have service 1

affordability issues. 2

In Cal Water’ last general rate case (GRC), D.16-12-047 authorized the PV Pipeline project as 3

two advice letter projects for a total of $57 million. The projects consist of the Crenshaw Ridge 4

Supply Pipeline (PID 98326) and the D-500 Pipeline (PID 98328). Cal Water estimates these 5

projects to be completed by the end of 2019. In the current GRC, Cal Water includes in its 6

estimate year 2019 an additional $40.6 million of direct capital cost, including construction 7

overhead and Allowance for Funds Used During Construction (AFUDC) for the PV Pipeline. 8

These additional costs were not included as part of the prior authorized advice letter projects but 9

are included in the Results of Operations (RO) Model used to calculate 2020 test year revenue 10

requirement and rate design for its LA Region. 11

Although Cal Water estimates the completion of the PV Pipeline by the end of 2019, the $57 12

million authorized in the advice letter projects are not part of the current GRC.126

The advice 13

letter projects were approved as rate base offsets and will sunset at the end of 2019. Therefore, 14

the PV Pipeline costs approved in the advice letters will not be included in the LA Region’s 15

revenue requirement until the projects are completed and Cal Water submits a Tier 2 advice 16

letter for the rate base offsets recovery.127

As a result, Cal Water’ request for restructuring its 17

LA Region tariffs only shows a partial impact of the costs, and not the full impact of the PV 18

Pipeline project cost that will have on PV customers without the tariff restructuring. 19

Cal Water’ tariff restructuring would create two separate tariffs for its LA Region by un-20

consolidating the existing single rate structure of the LA Region. One set of tariffs would reflect 21

the consolidated revenue requirement excluding the cost for the PV Pipeline and be applicable 22

only to Antelope Valley customers. The other set of tariffs would be applicable only to PV 23

customers and would include the revenue requirement for the additional PV Pipeline cost of 24

$40.6 million. Cal Water will also seek similar treatment for the $57 million of the authorized 25

PV Pipeline projects (PID98326 and PID98328) when it submits the advice letters for recovery. 26

126 Cal Water Response to data request CalPA-DES-005, Response No. 2, September 19, 2018.

127 Cal Water expects to file the Tier 2 advice letter before the end of 2019. See Cal Water Response to

CalPA-DES-005, Response No. 4.

94

Cal Water applies a multi-step process using it’s RO Model to develop the separate tariffs rates 1

for Palos Verdes and Antelope Valley.128

First, Cal Water ran the RO Model excluding the 2

additional $40.6 million to calculate the LA Region revenue requirement and set the Antelope 3

Valley customer rates as AV1. Next, Cal Water included the $40.6 million for recalculating the 4

revenue requirement for the LA Region, and used the AV1 rates and customer counts to calculate 5

the Antelope Valley’s revenue requirement at 3.5% of the consolidated revenue requirement. 6

The Antelope Valley revenue requirement was then subtracted from the LA Region revenue 7

requirement that includes the additional cost ($40.6 million) to derive the Palos Verdes revenue 8

requirement for its standalone tariff rates. 9

1. The Public Advocates Office’s Analysis of Cal Water’s Request 10

The Public Advocates Office’s approach to evaluating Cal Water’s special request for 11

restructuring of the LA Region’s tariff was based on the analysis and assumptions made in the 12

RO Model, affordability impacts on Antelope Valley customers, and potential implications of 13

un-consolidating costs. The review of the special request does not address whether Cal Water’s 14

estimates for the additional PV Pipeline project are reasonable, and whether they should be 15

included in the 2020 test year revenue requirement. The analysis and recommendations for the 16

PV Pipeline Project are presented in the Public Advocates Office Plant Report – Palos Verdes 17

District. 18

To evaluate the water service rate impacts on Palos Verdes and Antelope Valley from 19

restructuring the LA Region tariff, the Public Advocates Office uses Cal Water’s RO Model 20

results from the rate design module as a baseline. The Public Advocates Office’ analysis of Cal 21

Water’s tariff restructuring does not reflect the changes proposed by the Public Advocates Office 22

to sales and customer forecasts, revenue allocation, and rate design. The analysis and 23

recommendations for these areas are addressed by the Public Advocates Office’s Report on Sales 24

and Rate Design. 25

2. Regional Consolidation of Antelope Valley and Palos Verdes 26

In Cal Water’s last GRC, the Commission adopted a settlement approving the regional 27

consolidation of Antelope Valley with Palos Verdes (D.16-12-042). The LA Region’s Antelope 28

128 A.18-07-001, Cal Water Additional Testimony, Chapter 24, p. 204.

95

Valley district is comprised of Lancaster, Fremont Valley/Lake Hughes, and Leona Valley water 1

systems.129

For purposes of setting rates, the revenue requirements for Palos Verdes and 2

Antelope Valley were consolidated and a consolidated single set of tariff rates based on Palos 3

Verdes’ rate design were implemented.130

As a result of the consolidation, the Rate Support Fund 4

subsidies provided to the Antelope Valley districts were eliminated. 5

The adopted settlement approving the PV Pipeline does not address the ratemaking treatment of 6

the PV Pipeline (i.e., whether PV customers would be solely responsible for the cost the project 7

or whether all customers of the LA Region would contribute to the cost recovery through 8

regionalized rates). The LA Region consolidation was not a partial or transitional consolidation, 9

but full consolidation of both Palos Verdes’ and Antelope Valley’s revenue requirement, 10

including adopting one set of tariff rates for the region. Therefore, it appears that during the time 11

of the settlement, the cost of the PV Pipeline would be borne by all customers in the LA Region 12

and not exclude Antelope Valley customers. 13

3. Tariff Restructuring 14

a. RO Model Revenue Requirement Analysis 15

This section addresses the Public Advocates Office analysis and findings of Cal Water’s revenue 16

requirement impacts of the Pipeline costs on Antelope Valley and Palo Verdes ratepayers. Cal 17

Water’s RO Model reflects only the additional incremental cost associated with the PV Pipeline 18

project. For forecasted plant additions in 2019, the company expects to spend an additional 19

$40.6 million above the amounts authorized for PID 98326 and PID 98328 ($57 million). Thus, 20

the RO Model does not reflect the full effect of the PV Pipeline project cost on the LA Region 21

revenue requirement and tariff rates. The total PV Pipeline project is now expected to cost 22

approximately $97.6 million, which is over 70% above the original estimates of $57 million. 23

The Public Advocates Office review on the reasonableness of the PV Pipeline project can be 24

found in the Public Advocates Office Plant Report – Palos Verdes. 25

Cal Water estimates that it will complete the PV Pipeline project by October 2019. The 26

company also expects to submit a Tier 2 advice letter for PIDs 98326 and 98328 before the end 27

129 Prior to consolidation, these individual water systems were treated as separate ratemaking areas.

130 D.16-12-042, p. 21.

96

of 2019. If the project completion estimates are met, the entire PV Pipeline project would be in 1

service before the end of 2019. Also, if the Commission approves the Tier 2 advice letter before 2

a final decision is issued in this proceeding, Cal Water will be able to include the revenue 3

requirement of the rate base offset in the adopted 2020 test year rates. 4

The Public Advocates Office requested Cal Water’s calculations if the entire PV Pipeline cost 5

was included in the 2020 test year revenue requirement and the consolidated tariff rates.131

In its 6

response, Cal Water alleges that its RO Model has limitations, and that creating a scenario 7

including the full cost of the PV Pipeline is not feasible.132

8

Cal Water’s response should not be given any weight for several reasons. First, the response is 9

inconsistent with claims it has made about the capabilities of the RO Model. During numerous 10

meetings with Cal Water to review the RO Model, the company promoted the robustness of the 11

model and the ease for the Public Advocates Office to make adjustments to it. 12

Second, the RO Model contains information that Cal Water could have used and updated to 13

develop the requested calculations. The Public Advocates Office reviewed the RO Model files 14

and found that it contains the $40.6 million in additional PV plant additions, clearly identifying 15

the costs for PIDs 98326 and 98328 and its cost breakdown by the categories of plant. Cal Water 16

could have updated these estimates to include the advice letter costs to reflect the total cost of the 17

PV Pipeline project. Instead, Cal Water provided the Public Advocates Office a high-level 18

impact based on the methodology used to submit advice letters for rate base offsets. The 19

company basically took 2020 consolidated proposed revenue requirement, which includes the 20

$40.6 million in additional PV Pipeline cost, and then added the calculated revenue requirement 21

for the $56.9 million authorized in PIDs 98326 and 98328. The additional annual revenue 22

requirement for the $56.9 million calculated using the advice letter methodology is $7.3 23

million.133

By adding the $7.3 million incremental revenue requirement amount to the 2020 24

131 Public Advocates Office Data Request DES-005, Q.5, September 12, 2018.

132 Cal Water response to Data Request DES-005, R.5, September 19, 2018.

133 Updating the RO Model estimates results in a revenue requirement impact of the full PV Pipeline cost

of $62,556,051, which is $1,978,452 (3.2%) less than Cal Water’s high-level calculation using the advice

letter methodology. The difference is primarily caused by RO Model’s 2019 numbers that has lower

overhead allocation and AFUDC.

97

Proposed Revenue Requirement of $57.3 million, the LA Region’s consolidated revenue 1

requirement would increase to $64.5 million, or 12.7% for the 2020 test year. 2

Table 7-1 below shows the various scenarios for the PV Pipeline project and its changes to LA 3

Region’s 2020 Test Year revenue requirement. The 2020 revenue requirement changes are 4

compared to Cal Water’s last adopted revenue requirement. To test the sensitivity of the PV 5

Pipeline project’s impact on the revenue requirement results, the Public Advocates Office first 6

ran the RO Model by excluding the additional $40.6 in incremental project cost to get a baseline 7

for the LA Region. The RO Model results shows that by excluding the PV Pipeline project, the 8

LA Region’s revenue requirement would increase by a modest 2.1% over the latest adopted 9

revenue requirement. 10

Table 7-1: Changes in LA Region Revenue Requirement - PV Pipeline Project 11

12

Cal Water’s RO Model shows that including only the incremental $40.6 million in the PV 13

Pipeline project will result in a revenue requirement increase of $5.3 million, or 10.3%. Based 14

on Cal Water’s advice letter methodology, including the full project will more than double the 15

LA Region’s revenue requirement by $12.6 million, an increase of over 24%. The Public 16

Advocates Office made changes to the RO Model to include the full cost of $56.9 million for 17

PIDs 98326 and 98328, the RO Model results show an increase of over $10.6 or 20.4% in the 18

2020 test year revenue requirement. Although, the RO Model results are lower than Cal Water’s 19

advice letter methodology, the increase is still significant for the LA Region, particularly for 20

Antelope Valley customers. 21

Based on Cal Water’s RO Model, if Antelope Valley were to be unconsolidated, its 2020 test 22

year revenue requirement would increase by over $1.5 million or 87.7%. The Antelope Valley 23

District is forecasted to have a total of 1,384 service connections in 2020. This represents only 24

Scenarios LA Region Consolidated

Last Adopted

Revenue

Requirement

2020 @

Proposed

Revenue

Requirement

Increase Over

Last Adopted

Revenue

Requirement

%

Inclrease

51,954,100$

No PV Pipeline 53,028,911$ 1,074,811$ 2.1%

PV Pipeline Incremental Only 57,282,548$ 5,328,448$ 10.3%

PV Pipeline Full Cost (Cal Advocates RO Model Run) 62,556,051$ 10,601,951$ 20.4%

PV Pipeline Full Cost (Cal Water Advice Letter Methodology) 64,534,503$ 12,580,403$ 24.2%

98

5.4% of the LA Region’s total service connections when compared to PV’s forecasted service 1

connections of 24,171. At 2020 proposed rates, Antelope Valley’s monthly average revenue per 2

service connection would be $196 per month compared to $173 per month when consolidated 3

with PV revenue requirement excluding the PV Pipeline costs. Without consolidation the 4

Antelope Valley districts would continue to face high cost of service and make service less 5

affordable for customers. Table 7-2 below shows these scenarios. 6

Table 7-2: Revenues per Service Connection 2020 7

8

Requiring Antelope Valley to pay for the cost of the PV Pipeline would significantly diminish 9

any benefit of the consolidation to reduce Antelope Valley’s high cost and decrease the 10

affordability of water service. Requiring Antelope Valley customers to pay for the PV Pipeline 11

would significantly increase Antelope Valley’s cost burden to over $210/month or 24.2% above 12

Antelope Valley’s monthly revenue per service connection of $173/month in the consolidated 13

LA Region without the project.134

Also, the LA Region’s revenues per service connection of 14

$210/month with the full cost of the pipeline would be higher than Antelope Valley’s stand-alone 15

average revenues per service connection of $196 per month. 16

b. RO Model Rate Design Analysis 17

This section presents the Public Advocates Office analysis and findings of Cal Water’s rate 18

design model to bifurcate the LA Region tariffs. It also presents the Public Advocates Office 19

recommended changes to the rate design model to develop the LA Region’s bifurcated rates. 20

The Public Advocates Office requested information from Cal Water on its analysis of the rate 21

design and bill impacts on Antelope Valley customers regarding the inclusion or exclusion of the 22

134 $210 ÷ $173 = 1.21 = 121.4% Thus, $210/month is 21.4% over $173/month.

Antelope

(Unconsolidated)

Revenue

Requirement

LA Region

Consolidated

(Excluding the PV

Pipeline Project)

LA Region

Consolidated (Full

Cost of PV

Pipeline Project)

Revenue Requirement @ Proposed Rates 3,250,467$ 53,028,911$ 64,534,503$

Increase/(Decrease) 1,518,900$ 1,074,811$ 12,580,403$

Percent Change 87.7% 2.1% 24.2%

2020 Average Service Connections 1,384 25,555 25,555

Monthly Revenue Per Service Connection 195.72$ 172.92$ 210.44$

99

PV Pipeline under regionalized rates. Cal Water provided draft bill impacts analyzing the 1

various scenarios before making its decision to exclude the PV pipeline from consolidated 2

rates.135

However, Cal Water stated that the preliminary bill impact analysis provided in its 3

response may differ from its GRC application filing because it does not reflect the actual present 4

rates that went into effect on July 1, 2018. 136

Also, the bill impact results reflect using versions 5

of its model at different points in time during a period when inputs into its model continued to 6

change. 7

Considering the variability in Cal Water outdated bill impact and rate design results, the Public 8

Advocates Office instead uses the RO Model rate design module to evaluate various scenarios 9

and impacts on Antelope Valley’s service rates. These scenarios show the bill impact on 10

Antelope Valley customers regardless of whether the cost recovery of PV Pipeline Project is 11

included or excluded. The RO Model’s results for the revenue requirement and rate design 12

appear to best reflect the most current information filed in the Application. Cal Water’s 13

description of how it made the calculations to bifurcate the revenue requirements and generating 14

the separate tariffs for Antelope Valley and Palos Verdes appears to be inconsistent with the 15

calculations in the RO Model.137

The company describes its approach as first calculating the LA 16

Region revenue requirement without the incremental PV Pipeline cost, and set this as AV1 to 17

determine Antelope Valley customer rates. Next, it recalculates the LA Region revenue 18

requirement including the PV Pipeline, and uses AV1 rates to calculate Antelope Valley’s 19

revenue requirement portion. The Antelope Valley revenue requirement is deducted from the 20

LA Region revenue requirement to yield PV’s revenue requirement, which in turn is used to 21

generate PV’s service rates.138

22

The Public Advocates Office found the RO Model submitted in the GRC does not follow Cal 23

Water’s above described approach. The RO Model instead calculates the LA Region revenue 24

requirement with the $40.6 million incremental PV Pipeline cost, and then applies a 3.5% factor 25

to the consolidated revenue requirement to determine Antelope Valley’s portion of the revenues. 26

135 Public Advocates Office data request DES-005, Response No. 2, September 19, 2018.

136 Public Advocates Office data request DES-005, Response No. 2, September 19, 2018.

137 Cal Water Additional Testimony, Greg Milleman, ll. 13-22, p. 204

138 Cal Water Additional Testimony, Greg Milleman, ll. 13-22, p. 204

100

Although the RO Model does not show how the 3.5% was determined, it seems that it’s based on 1

the historical proportion of Antelope Valley’s revenue requirement to Palos Verdes’ prior to 2

including the PV Pipeline project. 3

Cal Water’s RO Model approach is problematic for at least two reasons. First, by applying a 4

fixed 3.5% rate to the LA Region’s revenue requirement, Antelope Valley customers may be 5

indirectly picking up some portion of the cost associated with PV Pipeline project. Second, by 6

using a 3.5% cap to fix Antelope Valley’s revenue requirement, it may unfairly increase the 7

amount PV customers subsidize Antelope Valley customers, especially when Palos Verdes 8

customers are facing a significant infrastructure cost of nearly $100 million. 9

These problems can be alleviated if: (1) Cal Water runs the RO Model to bifurcate the LA 10

Region’s tariff rates as described in its testimony; and (2) does not apply the approach used in 11

the RO Model of capping Antelope Valley’s revenue requirement as a percent of the LA Region 12

with the inclusion of the incremental pipeline cost. 13

Table 7-3 shows various residential rate design results based on the 2020 revenue requirement 14

with the incremental cost of PV Pipeline project, removing the incremental cost, and with the full 15

estimated cost of the PV Pipeline. 16

101

Table 7-3: Comparison of Antelope Valley Revenue Requirement on Various Scenarios 1

2

Cal Water proposes other changes separate from the bifurcation proposal that influence the 3

outcome of proposed rates, including revising the revenue requirement allocation between fixed 4

charges and quantity rates and modifying the tier rates quantity breaks. As previously stated, the 5

Public Advocates Office did not make any changes to Cal Water’s rate design proposal as part of 6

its analysis of Cal Water’s proposal to bifurcate the LA Region tariffs. The Public Advocates 7

Office rate design recommendations are presented in its Report on Sales and Rate Design. 8

The Base Line RO Model shows Cal Water’s Antelope Valley residential rate design based on 9

applying 3.5% ratio to the LA Region consolidated revenue requirement, which includes the 10

incremental PV Pipeline project cost (Table 7-3, Scenario 1). If the LA Region tariff rate is not 11

bifurcated and Antelope Valley customers share in the cost for the PV Pipeline project, Antelope 12

102

Valley monthly service rates will increase about 1.9% for the Monthly Service charge and 9.7% 1

for quantity rates (Table 7-3, Scenario 2). 2

Scenario 3 excludes the incremental PV Pipeline cost and bifurcates the rates by applying the 3

3.5% ratio used in the RO Model to the LA Region consolidated revenue requirement. This 4

approach results in a Monthly Service charge that is 4.7% less than the Base Line RO Model, 5

and a quantity rate that is 2.3% higher than the Base Line RO Model. 6

Scenario 4 is the approach described by Cal Water in its testimony and the methodology that the 7

Public Advocates Office recommends for bifurcating the LA Region tariff. This methodology 8

calculates the LA Region’s revenue requirement by excluding the incremental PV Pipeline 9

project cost, and runs the results through the rate design model to get the rates for Antelope 10

Valley. The revenue requirement for Antelope Valley is calculated by taking the LA Region’s 11

rate and applying the Antelope Valley specific number of customers and consumption. The 12

significant difference in this approach and Scenario 3 is the removal of the 3.5% cap on Antelope 13

Valley’s revenue requirement. Scenario 4 also results in a slightly lower Monthly Service charge 14

for Antelope Valley customers compared to Scenario 3. Thus, eliminating the 3.5% cap results 15

in a more equitable level of subsidy provided by Palos Verdes customers to Antelope Valley and 16

assures that Antelope Valley customers are not paying for the PV Pipeline project. 17

Scenario 5 shows the impact on Antelope Valley customers’ rates if the entire PV Pipeline 18

project is included in the 2020 revenue requirement and the LA Region tariff remains 19

consolidated. The increase in residential service rates above those proposed in the Application 20

would be 12.9% for the Monthly Service charge, and 19.8% for the quantity rates. 21

Chart 7-1 illustrates the bill impacts on Antelope Valley residential customers at various levels of 22

consumption based on present service rates and proposed service rates including or excluding the 23

cost for the PV Pipeline project. The chart also shows the average consumption levels for each 24

of the three systems that make up the Antelope Valley service area. 25

103

Chart 7-1: Antelope Valley Residential Bill Impacts 1

2

As shown in Chart 7-1, when comparing the Public Advocates Office’s recommended approach 3

for bifurcating Antelope Valley (AV in the chart) rates to Cal Water’s proposed rates under the 4

RO Model, Cal Water’s rates result in a slightly higher average bill at the lower consumption 5

levels, and a lower bill impact at the higher consumption levels. Applying the 3.5% to the LA 6

Region with the incremental PV Project pipeline may account for this variance since the other 7

parameters (such as revenue allocation between fixed charges and quantities) are not changed. 8

Table 7-4 shows the average bill impact under the various scenarios with the estimated 2020 9

average consumption for each of the water systems (Fremont, Lancaster, and Lake 10

Hughes/Leona Valley) that make up the Antelope Valley district. 11

104

Table 7-4: Antelope Valley Districts Average Bill Impacts by Revenue Requirement 1

Scenarios2

3

The Public Advocates Office’s recommended approach for developing the revenue requirement 4

and bifurcating the LA Region tariffs results in: 5

A lower average bill for AV-Fremont (-5%) and AV-Leona Valley (-0.6%) than 6

under the RO Model proposed rates. 7

At 21 CCF average consumption, AV-Lancaster has a slight increase of 0.4% 8

compared to the RO Model rate design. 9

However, under Scenario 5 (if the Commission does not approve bifurcating rates for the LA 10

Region), the increase in Antelope Valley’s average monthly customer bill ranges from 15.7% for 11

AV-Fremont to 22.3% for AV- Lancaster. Under Cal Water’s proposed rate design, the average 12

bill impact will be much higher when compared to present rates, with increases ranging from 13

20.8% for AV-Fremont to 18.2% AV-Leona Valley, based on the average consumption for each 14

of the Antelope Valley water systems. 15

AV-Fremont AV-Lancaster AV-Leona Valley

Cal Water 2020 Forecasted Avg/Month/Ccf 6 21 12

Average Bill for AV Customers

Base Line RO Model (A.18-07-001) - Present Rates 50.70$ 120.25$ 77.28$

Scenarios

1. Base Line RO Model (A.18-07-001) - Proposed Rates 52.94$ 115.61$ 75.43$

% Difference Present Rates vs Proposed Rates 4.4% -3.9% -2.4%

2. Consolidated Rates w/Incremental Piepline PV Cost 56.21$ 125.60$ 81.11$

% Differece Cal Water AV vs AV w/Incremental PV Cost 6.2% 8.6% 7.5%

3. Bifurcated Rate Design w/o Incremental PV Pipeline Cost 3.5% cap 52.29$ 116.39$ 75.78$

% Difference Bifurcated vs Base Line RO Model Proposed Rates -1.2% 0.7% 0.5%

4. Consolidated Rate Design w/o Incremental PV Pipeline Cost 50.30$ 116.07$ 74.96$

% Duifference Consolidated RD w/o PV Pipeline vs Base Line RO Model Proposed Rates -5.0% 0.4% -0.6%

% Consolidate Rate Design w/o Incremental PV Pipeline Cost vs Present Rates -0.8% -3.5% -3.0%

5. Consolidated Rate Design w/o Full Cost of PV Pipeline 61.27$ 141.42$ 91.33$

% Differnce Consolidated w/Full Cost of PV Pipeline vs Present Rates 20.8% 17.6% 18.2%% Differnce Consolidated w/Full Cost of PV Pipeline vs Cal Water Proposed Rates 15.7% 22.3% 21.1%

105

c. Potential Implications of Un-consolidating Costs 1

Rulemaking (R.) 11-11-008 addressed the Commission’s Water Action Plan objective of setting 2

rates that balance investment, conservation, and affordability for the multi-district water utilities. 3

The primary focus of the rulemaking was to identify the strategies available for addressing high 4

cost and affordability issues, and whether a prescriptive approach or solution should be adopted. 5

In D.14-10-047, the Commission found that multi–district water utilities remain too variable to 6

adopt specific guidelines on Rate Support Fund (RSF) or other cross–subsidy mechanism.139

It 7

also found that the record in R.11-11-008 did not compel a choice between authorizing cross-8

subsidy mechanisms within multi–district water utilities and authorizing further consolidation.140

9

Although it did not adopt any specific guidelines or rules, the Commission ordered the multi-10

district water utilities, through their GRCs or in Tier 3 advice letters, to do the following: (1) 11

access and identify districts with high cost and affordability issues that could benefit from RSF 12

type mechanism; (2) evaluate whether further consolidation of districts would achieve rates that 13

more effectively balance investment, conservation and affordability.141

The Commission did not 14

foreclose the multi-districts utilities from proposing other variations on the type of consolidation 15

or other cross-subsidy mechanisms. 16

In the last GRC, Cal Water identified the Antelope Valley rate making areas of Leona 17

Valley/Lake Hughes, Fremont, and Lancaster as high service cost areas facing affordability 18

issues. At the time of the GRC application, only Leona Valley/Lake Hughes and Fremont 19

qualified to receive RSF subsidies to keep their rates affordable. Lancaster had high service 20

costs but did not meet the criteria to qualify for RSF funding. 21

The Public Advocates Office settled with Cal Water for a full consolidation Antelope Valley 22

with Palos Verdes, which resulted in combining the revenue requirements and having a single 23

regional tariff for the consolidated districts.142

As part of the consolidation, Antelope Valley 24

service rates were not frozen, and Antelope Valley customers immediately benefited from the 25

139 D.14-10-047, p. 7.

140 D.14-10-047, p. 7.

141 D.14-10-047, p. 9.

142 D.14-10-047, p. 21.

106

consolidation through lower average residential water bills. For example, Lancaster’s average 1

residential bill was nearly 32% lower after consolidation.143

The adopted settlement does not 2

include specific language about the ratemaking treatment of the PV Pipeline project, so those 3

costs would have been included in the consolidated revenue requirement and rates. 4

Once districts are fully integrated through consolidation, unless specifically noted that it’s a 5

partial or variant type of consolidation, it should be a binding arrangement that requires all 6

customers to share cost burdens borne by any district jointly. Un-consolidating specific costs 7

introduces new complexities to the ratemaking process (e.g., calculating the appropriate revenue 8

requirement, tracking segregated costs, and assuring service rates are equitably distributed 9

among customers benefiting from consolidated rates and customers assuming additional costs). 10

Without any Commission guidance or rules on deconsolidating costs can lead to significant shift 11

in costs between consolidated districts. For example, allowing water utilities at their discretion 12

to select costs that are included or excluded from districts benefiting from cross subsidies may 13

lead to inequitable results for the districts that are cross-subsidizing high cost districts. The 14

Commission did not anticipate or address this issue in D.14-10-047. Thus, there are no 15

guidelines or criteria for analyzing these types of situations to assess whether deconsolidating 16

costs is a reasonable alternative for achieving affordability goals. Indeed, Cal Water admits that 17

it did not apply any formal criteria to determine whether Antelope Valley customers should or 18

should not be paying for the PV Pipeline project costs.144

The company’s decision was simply 19

based on the belief that requiring Antelope Valley customers pay for the PV Pipeline project 20

would defeat the purpose of mitigating affordability concerns for the smaller districts.145

21

To address this lack of guidance and risk to ratepayers, Cal Water’s future requests to segregate 22

specific costs from consolidated/regionalized rates should, at a minimum, include the following 23

information: 24

The rate increase threshold used to determine when the subsidized district should not 25

pay for the specific excluded costs. 26

143 Cal Water Additional Testimony, Chapter 1: Consolidation (SR#1), p. 4

144 Cal Water response to Cal Advocates DES-005, Response 1.

145 Cal Water response to Cal Advocates DES-005, Response 1..

107

The revenue requirement and rate design impacts of including vs. excluding in rates 1

the particular cost for all districts that make up the consolidated region. 2

A detailed analysis of the current level of cross-subsidies being provided to the 3

subsidized districts, and effects of including vs. excluding a specific cost. 4

Customer bill impacts and analysis for the districts being subsidized and those 5

providing the cross-subsidy, including the effects on the existing subsidies of 6

including vs. excluding the specific cost. 7

Table 7-5 provides some insight into the level of cross-subsidy being provided by PV customers 8

to keep rates affordable for Antelope Valley customers. These estimates are based on the RO 9

Model results that exclude the $40.6 million incremental PV Pipeline project costs. 10

Table 7-5: 2020 Proposed Revenue Requirement AV, PV, and LA Region Consolidated 11

Excludes PV Pipeline Project Cost 12

13

Table 7-5 shows that the bulk of the subsidy flowing to Antelope Valley customers comes from 14

consolidation the rate base of both districts. By consolidating the districts, Antelope Valley’s 15

forecasted stand-alone 2020 rate base per service connection drops from $8,045 to $2,990, a 63% 16

reduction. Although Antelope Valley does not benefit from consolidating its operating expenses 17

with Palos Verdes, the benefit of consolidated Antelope Valley’s rate base with Palos Verdes 18

more than offsets the slight increase in operating expenses to Antelope Valley. 19

The benefits to Antelope Valley from consolidation will diminish significantly if Antelope 20

Valley customers were required to pay for the PV Pipeline project. With the full PV Pipeline 21

project cost included, the consolidated LA Region’s estimated 2020 weighted average rate base 22

would increase to $165,589,307 or $6,480 per service connection.146

To Antelope Valley, this 23

146 The estimated weighted average rate base was provided by Cal Water’s in response to Cal Advocates

data request DES-005, Response No. 5.

AV 2020

Per Service

Connection PV 2020

Per Service

Connection

LA Region

Consolidated

2020

Per Service

Connection

Estimated

Annual

Subsidy

Estimated Service Connections 2020 1,384 24,171 25,555

Total Operating Expenses 2,419,328$ 1,749$ 44,901,491$ 1,858$ 47,317,592$ 1,852$ 103$

Net Operating Revenue 832,640$ 602$ 4,884,597$ 202$ 5,714,357$ 223.61$ (378)$

Wieghted Average Rate Base 11,131,549$ 8,045$ 65,302,103$ 2,702$ 76,395,144$ 2,989.45$ (5,056)$

Revenue Requirement 3,251,967.67$ 2,350$ 49,786,088.11$ 2,060$ 53,031,949$ 2,075.21$ (275)$

108

would represent an increase of approximately 117% from the LA Region weighted average rate 1

base of $2,990 when excluding Antelope Valley from the PV Pipeline project. 2

Therefore, it’s reasonable to continue the existing level of cross-subsidy and to exclude the PV 3

Pipeline cost from Antelope Valley service rates. In order to continue monitoring the PV 4

subsidies to Antelope Valley and to assure that no PV Pipeline project costs are shifted to 5

Antelope Valley ratepayers, Cal Water should be required to continue providing the following 6

information in its GRCs: 7


LA Region’s Revenue Requirement with and without the PV Pipeline project costs; 9

Sales forecasts for each district (and for ratemaking areas) within the LA Regions; 10

Separate rate design modules for each of the above revenue requirements. 11

4. Water Revenue Adjustment Mechanism (WRAM) / Modified Cost Balancing Account 12

(MCBA) 13

The Commission should require Cal Water to track the Antelope Valley and Palos Verdes 14

WRAM quantity revenues in separate balancing accounts to ensure Antelope Valley customers 15

do not pay any costs associated with PV Pipeline project. 16

Under the settlement agreement adopted in D.16-12-042, Cal Water and the Public Advocates 17

Office agreed to a full consolidation of Palos Verdes and Antelope Valley into the LA Region. 18

As part of this agreement, Cal Water and the Public Advocates Office agreed to combine the 19

balances of the individual areas within each of the consolidated regions for all new 20

WRAM/MCBA charges effective January 1, 2017. This resulted in 2017 WRAM/MCBA 21

balances being consolidated and recovered through a regionalized surcharge. However, 22

WRAM/MCBA net balances incurred prior to January 1, 2017 would continue to be assessed on 23

the original service areas and recovered through separate surcharges. 24

If Cal Water maintains the regionalized WRAM/MCBA balancing accounts after bifurcating 25

service rates for the LA Region, the consolidated quantity revenues tracked will include the cost 26

of the PV Pipeline project. Therefore, any surcharges or surcredits that result from the 27

WRAM/MCBA net balances would shift the recovery of revenues for the PV Pipeline project to 28

Antelope Valley customers. The only way to prevent this from happening is to separately track 29

109

the WRAM quantity revenues for Antelope Valley and Palos Verdes. There is no need to 1

separate the MCBA balance because it only tracks the consolidated water supply cost. 2

Accordingly, the Commission should require Cal Water to track the Antelope Valley and Palos 3

Verdes WRAM quantity revenues in separate balancing accounts. This will assure that Antelope 4

Valley customers do not pay any costs associated with PV Pipeline project. 5

The Commission should also eliminate the WRAM/MCBA balancing accounts and replace them 6

with a Monterey Style WRAM (M-WRAM) and Incremental Cost Balancing Account. The 7

Public Advocates Office addresses this recommendation in its Report on Special Request #3 and 8

#4. The Commission should require Cal Water to maintain separate M-WRAM balancing 9

accounts for Antelope Valley and Palos Verdes as a condition for bifurcating the LA Region’s 10

tariff service rates. 11

D. CONCLUSION 12

The Public Advocates Office does not oppose Cal Water’s special request to restructure the LA-13

Region service tariffs. Requiring Antelope Valley ratepayers to pay for the PV Pipeline project 14

will diminish the benefits of the initial consolidation and make rates less affordable. In 15

developing the bifurcated tariff rates for Antelope Valley, Cal Water should run the results of 16

operations and rate design models using a consolidated rate design that excludes the incremental 17

cost of the PV Pipeline project and excludes capping Antelope Valley’s revenue requirement at 18

3.5% of Palos Verdes’ revenue requirement. For future requests to un-consolidate costs, the 19

Commission should require Cal Water to, at a minimum: 20

Indicate the rate increase threshold used to determine when the subsidized district 21

should not pay for a particular cost. 22

23

Show the revenue requirements for and rate design impacts for each district in the 24

consolidated region resulting from including vs. excluding a particular cost. 25

Provide a detailed analysis of the current level cross-subsidies to the subsidized 26

districts, and the effects on the existing subsidies resulting from including vs. 27

excluding a particular cost. 28

29

Provide customer bill impacts for the subsidized and subsidizing districts that show 30

the effects of including vs. excluding a particular cost. 31

110

The Commission should require Cal Water to continue providing the following information in its 1

future GRC applications so that the Commission can assure that no PV Pipeline project costs are 2

shifted to Antelope Valley ratepayers: 3

Provide separate rate design modules for each of the above revenue requirements; 4


LA Region’s revenue requirement with and without the PV Pipeline project costs; 6

Forecast sales separately for each district (and for ratemaking areas) within the LA 7

Region. 8

The Commission should also eliminate the WRAM/MCBA balancing accounts and replace them 9

with a Monterey Style WRAM (M-WRAM) and Incremental Cost Balancing Account. As a 10

condition for bifurcating the LA Region’s tariff service rates, the Commission should also 11

require Cal Water to track the Antelope Valley and PV WRAM quantity revenues in separate 12

balancing accounts to ensure that Antelope Valley customers do not pay for the fixed cost 13

portion of the PV Pipeline project included in quantity rates. 14

[END OF CHAPTER] 15

App-1

APPENDIX 2-A

Table-1 RSF Surcharge Calculation

Table-2 RSF Index Rate Calculation

App-2

APPENDIX 2-A – Table 1

RSF Surcharge Calculation

($Millions)

2017

(2015 GRC

Settlement)

2018 (AL 2283

Adpopted

Rate)

2020

Proposed Rates

Cost of Dixon component of RSF Program (M$) $0.99 $0.99 $0.60Cost of RSF Program (M$) $1.26 $1.58 $1.72

Forecasted Balance of 2017 RSF Program (M$) $0.06 $0.00Cost of RSF Program (M$) $2.25 $2.63 $2.32

Qty and Svc Revenue except LIRA customers in RSF Districts (M$) $635.61 $625.43 $623.53RSF Surcharge Based on Public Advocates Office Estimates 0.354% 0.420% 0.3726%

Calculation: LIRA SVC (RSF only, $)* $410,022.00 RSF Discount QTY ($) $1,723,406

2020 Proposed Data

AGGREGATION SUBTOTALS 101,673 $10,968,750 $172,031,401 $456,565,004 $8,031,217

2020 NUMBER OF Meter

Services

NUMBER OF LIRA

CUSTOMERS Est.

2020

2020 Non LIRA

CUSTOMERS

2020 TIER 1 QTY

RATE ($ - only RSF

Districts)

2020 TIER 1 QTY

RATE MINUS RSF

INDEX ($ - only

RSF Districts)

2020 SERVICE

CHARGE 5/8"

METER ($)

2020 LIRA

DISCOUNT RATE ($

PER METER PER

MONTH )

2020 LIRA TOTAL

DISCOUNT ($)

2020 SVC

REVENUE ($)

2020 QTY REVENUE

($)

2020 FLAT REVENUE

($)

ESTIMATED RSF

SUBSIDIZED

UNITS (KCCF)

Antelope Valley 1373 249 1,124 $23.03 $11.52 $34,407 $405,608 $1,532,629

Bakersfield 65551 24059 41,492 $16.20 $8.10 $2,338,535 $20,432,857 $46,144,413 $6,367,983

Bayshore 52308 4312 47,996 $18.99 $9.50 $491,309 $20,195,133 $61,477,965

Bear Gulch 18624 760 17,864 $25.92 $12.96 $118,195 $12,862,345 $40,088,623

Chico 30071 3999 26,072 $13.34 $6.67 $320,080 $7,132,354 $15,947,925

Dixon 2898 706 2,192 $27.15 $13.58 $115,007 $1,280,459 $2,711,242

Dominguez 33046 7876 25,170 $21.05 $10.53 $994,739 $14,930,060 $52,480,787

East Los Angeles 26126 10463 15,663 $19.87 $9.94 $1,247,399 $9,990,782 $25,584,676

Hermosa Redondo 26630 1081 25,549 $14.14 $7.07 $91,712 $8,164,091 $22,544,341

Kern River Valley 3963 1350 2,613 $14.5660 $9.12 $50.62 $25.31 $410,022 $2,513,902 $4,277,407 189

King City 2677 1013 1,664 $16.23 $8.12 $98,646 $870,410 $2,173,300

Livermore 18434 1320 17,114 $20.84 $10.42 $165,053 $6,207,888 $15,464,564

Los Altos 18620 381 18,239 $21.80 $10.90 $49,835 $8,517,383 $29,323,843

Marysville 3694 1165 2,529 $21.89 $10.95 $153,011 $1,383,056 $2,387,271

Oroville 3526 1091 2,435 $27.60 $13.80 $180,670 $1,761,801 $3,420,813

Palos Verdes 23989 725 23,264 $25.66 $12.83 $111,621 $12,635,060 $36,352,230

Salinas 28020 6338 21,682 $16.23 $8.12 $617,194 $9,585,203 $21,037,073

Selma 6449 3117 3,332 $19.52 $9.76 $365,063 $2,181,636 $3,298,784 $328

Stockton 43501 15991 27,510 $21.35 $10.68 $2,048,447 $15,612,847 $35,095,031

Visalia 45721 14062 31,659 $8.77 $4.39 $739,942 $8,209,127 $17,816,529

Westlake 6948 355 6,593 $30.54 $15.27 $65,050 $5,388,060 $14,955,218

Willows 2395 730 1,665 $34.80 $17.40 $152,424 $1,324,242 $1,612,548

Customer Support Services 0 0 - $0 $0

Coast Springs 249 10 239 $18.99 $9.50 $1,139 $58,184 $47,699

Lucerne 1214 451 763 $18.99 $9.50 $51,387 $287,964 $568,754

Unified Area 429 69 360 $18.99 $9.50 $7,862 $100,949 $221,339

Travis AFB 0 0 - $0.00 $0 $1,662,906

* LIRA customers in the KRV Distrcit do not pay RSF surcharges, their total service revenue is withdrawn from the base calculation. As the LIRA's remaining quantity revenues other than the RSF subsized revenue are so

minimal, it was not included in the calculation.

App-3

APPENDIX 2-A – Table 2

RSF Index Rate Calculation

2017

(2015 GRC

Settlement)

2020

(Proposed)

System-wide Average (Residential Usage Revenue in $/Residental Sales CCF) $3.52 $3.63

150% of System-wide Average (Residential Usage Revenue in $/Residental Sales CCF) $5.28 $5.45

Index Rate (CCF)

A B C=(A/B)

Total $259,565,110.7 71,473,387 3.63 RESIDENTIAL USAGE

REVENUE @ 2020 RATES

($)

2020 RESIDENTIAL

SALES (CCF)

2020 UNIFORM

RESIDENTIAL RATES

(CCF)

Antelope Valley $1,402,449.8 253,844 5.52$

Bakersfield $28,309,422.8 13,764,254 2.06$

Bayshore $29,445,099.4 4,474,749 6.58$

Bear Gulch $33,796,134.9 4,329,007 7.81$

Chico $9,396,804.6 5,360,548 1.75$

Dixon $2,103,207.7 379,409 5.54$

Dominguez $12,084,540.7 3,606,772 3.35$

East Los Angeles $11,727,623.4 2,960,067 3.96$

Hermosa Redondo $11,800,289.5 2,512,201 4.70$

Kern River Valley $3,685,559.3 253,025 14.57$

King City $1,054,561.7 318,936 3.31$

Livermore $10,904,724.3 2,899,944 3.76$

Los Altos $19,953,498.9 3,676,034 5.43$

Marysville $1,205,832.8 400,874 3.01$

Oroville $1,122,457.9 370,069 3.03$

Palos Verdes $28,174,863.1 5,573,587 5.06$

Salinas $9,719,707.9 3,013,827 3.23$

Selma $2,246,645.5 1,205,054 1.86$

Stockton $18,157,461.6 5,347,066 3.40$

Visalia $11,482,275.2 8,300,919 1.38$

Westlake $10,067,833.1 2,040,957 4.93$

Willows $1,025,537.0 332,876 3.08$

Coast Springs $42,618.6 6,861 6.21$

Lucerne $460,626.2 65,387 7.04$

Unified Area $195,334.7 27,120 7.20$

2020 Proposed

report on special requests (srs): sr1, sr2, sr3, sr4, sr5

Documents