NARUCSUMMER COMMITTEE MEETINGS

Committee on Water Agenda

California Regulatory Initiatives

Case History – California American Water

B. Kent Turner – President California American Water

July 16, 2007

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Background

California PUC’s Water Action Plan approved in December 2005. Adopts four key water principles:

Safe, high quality water

Highly reliable water supplies

Efficient use of water

Reasonable rates and viable utilities

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California American Water Had Several Pre-Existing Programs

Some conservation programs in all districts

Low Income proposals made in a number of cases

Consolidated tariffs in some service areas

Active intense conservation program in Monterey

Inclining block rate structure in Monterey - based on individual customer needs

Active low income program in Monterey

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California American Water Proposals in Los Angeles District Rate Case – Filed January 2006

Implementation of an Infrastructure System Replacement Surcharge (ISRS) (DSIC-like program)

– All utility plant replacements part of proposed ISRS.

– Can’t be revenue generating or expense reducing.

– ISRS adjusted quarterly, based on completed plant additions.

– Implementation would be ministerial, approved in 15 days.

– All ISRS-related capital expenditures subject to prior review and full examination prior to being recovered in base rates.

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L.A. District GRC Proposals (continued)

Variation from current CPUC tariff

– Place more fixed cost recovery in quantity rate

– Tiered rates for residential customers

– Approve a Water Revenue Adjustment Mechanism to track lost revenues and implement revenue/sales decoupling

– Approve only with other requests in the case are approved

Full integration of rate tariffs in Los Angeles

– Remove current rate differential between service areas due to purchased water and power rates

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L.A. District GRC Proposals(continued)

Implement a Low Income Rate Assistance Tariff

Implement Full-Cost Purchased Water and Power Balancing Accounts

– In conjunction with proposed rate design, conservation programs

– Keeps customers and company whole

Implement Conservation Program, Memorandum Account

– Provide incentives to promote conservation

– Allocate funding to comply with Best Management Practices

– Memorandum account facilitates recovery of prudently incurred expenditures

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Intra-Case Rulings and Agreements

Case Bifurcated into Two Phases

– Phase 1: development of revenue requirement

– Phase 2: determination of rate design, related items

Phase 2 Includes:

– All rate design issues

– WRAM Account determination

– Changes in purchased water and power balancing accounts

Agreement Reached on Most Revenue Requirement Issues

Settlement Reached on LIRA proposal - Allows monthly fixed fee rebate to qualified individuals

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Intra-Case Rulings and Agreements (continued)

Settlement Reached on Conservation Program

– Allows increased spending, memorandum account to track all incurred costs

– Allowance for additional water auditing resources

Agreement that California American Water would not seek full consolidated rates

Conceptual Settlement Reached on All Phase 2 issues

– Service charges reduced to 25% of fixed cost recovery

– Three-tier residential rate design with a winter/summer component – rate blocks would be fairly large and compressed

– Single-tier commercial rate design with winter/summer component

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Intra-Case Rulings and Agreements (continued)

Water Revenue Adjustment Mechanism

– Will track all variances in fixed cost recovery from the adopted amount in a rate case

– Revenue decoupling mechanism

Implement Modified Cost Balancing Account

– Tracks variations in purchased water and power costs due to production changes

– Approved mechanism would use decision-adopted source production requirements based on usage

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Items Related to WAP that Remain Open

No Agreement on WRAM and ROE Adjustment

– DRA initially requested a 300 basis point reduction in authorized ROE (against the existing authorized ROE, not requested ROE)

– DRA subsequently modified its request to a range of 150 to 300 bp reduction

No Agreement on ISRS Implementation

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ALJ’s Initial Proposed Decision

Requires a 50 bp Reduction in Authorized ROE

– Per implementation of WRAM account and Modified Cost Balancing Accounts

– Decision to reduce ROE by 50 bp based on limited hearing input

– Decision to reduce the ROE misapplies energy utility experience – CPUC, considered, but never specified a reduction in authorized ROE

– Would set precedent for other water companies

– Does not consider all “risk impacts”

Authorizes an ISRS, but much more restrictive than company proposal

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ALJ’s Initial Proposed Decision(continued)

Requires Full Review of All ISRS Additions Before Approval of the Surcharge

All Differences in Costs Between Projects Proposed and Which Actually Occur Have to be Fully Explained

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Current Proceeding Status

Initial PD Modified Twice Due to Comments of Parties

50 bp ROE reduction will be removed if a Conservation Loss Adjustment Mechanism replaces the WRAM

– CLAM only tracks effects of estimated revenue variances due to conservation programs and rate designs

– WRAM decouples sales from revenues; tracks variances in fixed cost recoveries

Phase 1 Decision Held until August for Possible Issuance of an Alternate Decision Addressing the ROE Adjustment Issue

Proposed Decision in Phase 2 Can’t be Issued until Phase 1 is Resolved and a Hearing on Phase 2 Issues is Held