BILL ANALYSIS 1
1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 2838 - Canciamilla Hearing Date:
June 25, 2002 A
As Amended: June 19, 2002 FISCAL B
2
8
3
8
DESCRIPTION
Current law authorizes the California Public Utilities
Commission (CPUC) to regulate the service of investor-owned
water utilities.
This bill requires the CPUC to issue final decisions regarding
water utility rate cases so they are effective on the first day
of the period for which the rate case was filed. If the CPUC
doesn't render a decision in time, then the water corporation
may request, and shall be granted, interim rates sufficient to
recover 75% of the additional revenue it has requested, subject
to true-up based on the CPUC's final decision.
This bill requires the CPUC to review the rates of every water
utility every three years.
BACKGROUND
Investor-owned water utilities provide potable water to 20% of
Californians. They differ from their municipal water utility
cousins (e.g. East Bay Municipal Utility District, Los Angeles
Department of Water and Power) in that they are for-profit
private corporations subject to economic regulation by the CPUC.
The CPUC categorizes the investor-owned water utilities by size.
The largest are the ten Class A water utilities, which serve at
least 10,000 customers. This bill is intended to deal only with
the Class A utilities. To get a perspective on size, the
largest Class A water utility has about $250 million in annual
revenues, compared to the largest electric and
telecommunications utility, each with about $10 billion in
annual revenues.
Water utilities are traditional utilities in that they face
virtually no competition and deliver an essential service. They
are regulated in traditional ways with rates based on the cost
of providing the service, plus a fair return on investment.
In 1990, the CPUC established a Rate Case Plan for the Class A
utilities which established a timeline for the processing of
water utility rate cases. These rate cases are a detailed
showing of the costs and investment necessary to provide
adequate water service, as well as a detailed proposal for water
rates necessary to recoup the allowable revenues. The rate
cases are filed for future years, known as the Test Year.
Once the utility has filed its application to increase water
rates, the Rate Case Plan provides the CPUC with 214-259 days
(depending on the size of the company) to process the case and
issue a final decision. That timeframe is designed to encompass
the filing of the case by the utility, preparation of a
competing case by the CPUC staff, public hearings, testimony and
cross examination, preparation of a written draft opinion by the
CPUC's administrative law judge, and issuance of a final
decision.
The water utilities have complained that the CPUC hasn't acted
in a timely manner when it comes to rate case decisions. They
assert the CPUC routinely takes longer than allowed in the
CPUC's Rate Case Plan, often by hundreds of days. The CPUC
responds that while recent history bears out that the Class A
water utility general rate cases do take much longer than
allowed, that delay is often caused by actions of the water
utilities themselves and the delay generally hasn't delayed the
imposition of the new rates in time for the start of the Test
Year. In other words, while the CPUC's recent decisions may not
have been timely, the inability to stick to the pre-determined
schedule has often been due to the utility and, in any event,
has had no effect on the utility's ability to collect money
which it is due.
COMMENTS
1)Protections For Water Utilities & Ratepayers . This bill
provides water utilities with a bit more certainty that their
applications to raise or lower rates will be dealt with
expeditiously because in the event they aren't, the utility
will be able to raise rates by 75% of their requested amount
(those rate hikes are subject to refund). For ratepayers,
this bill requires the CPUC to examine water utility rates
every three years, thereby assuring that any utilities whose
costs have declined will have their rates reviewed and
possibly lowered.
2)Delays That Aren't The CPUC's Fault . As noted above, while
the CPUC hasn't always acted in a timely fashion, some of its
tardiness has been due to actions of the water utility, not
the CPUC. For example, sometimes utilities ask for time to
negotiate a settlement or are slow to provide answers to the
CPUC's questions. In those instances, it seems unfair to hold
the CPUC to a deadline that was unrealistic to meet due to
actions by the utility which have delayed the processing of
the case. The author and committee may wish to consider
whether the deadline for processing the case should be waived
or extended if a utility's actions are the source of the
delay.
3)Establishing Interim Rates . This bill allows interim rates to
go into effect if the CPUC is unable to resolve the case and
implement new rates commencing with the start of the period
which the CPUC is examining. Under this bill, the interim
rates will be the level necessary to recover 75% of the
requested increase by the utility. Once the CPUC determines
final rates, the over- or under-collection will be made up.
This raises two issues. First, the bill presumes the utility
will only ask for rate increases. It's not unreasonable to
envision that a utility could ask for a rate decrease as well.
The bill does not speak to how interim rates will be set
under that circumstance. Second, is providing the utility
with 75% of its rate request (subject to refund) a reasonable
interim rate? Since July 1, 2000, Class A water utilities
have received anywhere from 24% to 102% of their requested
rate increases, with the average at about 63%. The CPUC
suggests that the interim rates be set at a level to include
all the agreed-to issues in the case, which also helps deal
with the rate decrease circumstance. The purpose of the
interim rate is to prevent a utility from having to operate at
a loss while the CPUC is reviewing its rate increase request,
and that the final rates don't have to be set unnecessarily
high (or low) in order to make up for the lag in setting final
rates after the start of the Test Year.
While the 75% number is an arbitrary one, any figure chosen as
a permissible interim rate would be arbitrary. The water
utilities argue it's highly unlikely that a utility would
"inflate" its overall rate request in order to receive a
higher interim rate under the 75% limitation because the rate
request package submitted to the CPUC must be based on a
specific facts and costs incurred. However, given that the
CPUC has only approved increases averaging 63% over the past
two years, it appears the CPUC hasn't always agreed with the
water utilities version of the facts and/or costs incurred.
An alternative to the "percentage of the rate requested"
approach that's in this bill would be to raise the rate on an
interim basis (subject to refund) by a certain percentage over
the existing rate charged by the utility. Calculating an
interim rate in this fashion would base the increase on rates
that had been previously approved by the CPUC, not based on
what the water utility believes it's entitled to, but it's
probably as arbitrary of a system as the one already
established in the bill.
4)Technically Speaking . As written, this bill applies to all
private water utilities, regardless of size. The author and
committee may wish to consider clarifying the bill to ensure
that it only applies to Class A water utilities.
ASSEMBLY VOTES
Assembly Floor (67-0)
Assembly Appropriations Committee (23-0)
Assembly Utilities and Commerce Committee
(15-0)
Assembly Water, Parks and Wildlife Committee
(18-0)
POSITIONS
Sponsor:
California Water Association
Support:
None on file
Oppose:
California Public Utilities Commission
Randy Chinn
AB 2838 Analysis
Hearing Date: June 25, 2002