BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Transcription

1 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Application of SAN JOSE WATER COMPANY (U168W) for an Order authorizing it to increase rates charged for water service by $34,288,100 or 9.76% in 2019, by $14,231,800 or 3.70% in 2020, and by $20,581,700 or 5.17% in Application (Filed January 4, 2018) REPLY BRIEF OF SAN JOSE WATER COMPANY John B. Tang, P.E. Vice President of Regulatory Affairs & Government Relations San Jose Water Company 110 West Taylor Street San Jose, CA (408) Martin A. Mattes Lori Anne Dolqueist Nossaman LLP 50 California Street, 34 th Floor San Francisco, CA (415) Attorneys for Applicant, San Jose Water Company September 25, 2018

2 TABLE OF CONTENTS... Page (s) I. Introduction and Summary...1 II. The Commission should authorize SJWC to implement the WRAM/MCBA and SRM...2 A. Cal PA incorrectly claims that SJWC does not need the WRAM/MCBA to achieve Commission and State water conservation policy goals...2 B. Cal PA trivializes the industry s experience with WRAM/MCBAs and ignores the Commission s policy directive to continue to use and improve such mechanisms...4 C. Cal PA s arguments against implementing an SRM are contrary to Commission policy and improperly overlook the real challenges of water consumption forecasting...6 D. WRATES proposal to institute an earnings test in the context of the SRM is unwarranted and has been recently rejected by the Commission....7 III. The Commission should allow SJWC to recover its RD&D project costs....9 A. Cal PA s recommendation opposing recovery of the RD&D project costs is contrary to Resolution W B. WRATES fails to rebut SJWC s showing that it prudently administered the RD&D project IV. The Commission should reject WRATES allegation that public notice of the potentail rate impacts was insufficient V. The Commission should find that WRATES recommendation for a comprehensive facilities master plan has been satisfied and that further procedures are unwarranted VI. The Commission should reject WRATES criticisms of SJWC s proposed rate design...17 A. SJWC s proposed rate design will not result in double recovery B. SJWC s proposed rate design encourages conservation C. The benefits of 40% revenue recovery through readiness to serve charges outweigh any disadvantages...19 D. WRATES incorrectly interpret Standard Practice U-7-W E. SJWC s tiered rate design promotes conservation while maintaining flexibility i

3 VII. Conclusion...21 ii

4 TABLE OF AUTHORITIES Page(s) California Public Utilities Commission Decisions D , Order Instituting Rulemaking on the Commission s Own Motion to Evaluate Existing Practices and Policies for Processing Offset Rate Increases and Balancing Accounts in the Water Industry to Decide Whether New Processes are Needed, Final Decision Revising the Procedures for Recovery of Balancing-Type Memorandum Accounts Existing On or After November 29, D , Order Instituting Rulemaking on the Commission s Own Motion to Evaluate Existing Practices and Policies for Processing General Rate Cases and to Revise the General Rate Case Plan for Class A Water Companies, Interim Order Adopting Rate Case Plan...8 D , Order Instituting Rulemaking on the Commission s Own Motion to Evaluate Existing Practices and Policies for Processing Offset Rate Increases and Balancing Accounts in the Water Industry to Decide Whether New Processes are Needed, Opinion Granting Petition for Modification of Decision (D.) D , Order Instituting Rulemaking to Consider Revisions to the General Rate Case Plan For Class A Water Companies, Opinion Adopting Revised Rate Case Plan for Class A Water Utilities...8, 16 D , Order Instituting Investigation to Consider Policies to Achieve the Commission s Conservation Objectives for Class A Water Utilities, Opinion resolving Phase 1A Settlement Agreements and Contested Issues...5 D , In the Matter of the Application of California-American Water Company (U210W) for an order authorizing it to increase its rates for Water Service in its Los Angeles District to increase revenues by $2,020,466 or 10.88% in the year 2007; by $634,659 or 3.08% in the year 2008; and by $666,422 or 3.14% in the year 2009, Decision Adopting a Conservation Rate Design Settlement...5 D , In the Matter of the Application of Apple Valley Ranchos Water Company (U346W) for Authority to Increase Rates Charged for Water Service by $3,767,000 or 22.73% in 2009, $186,510 or 0.90% in 2010, and $280,000 or 1.32% in 2011, Decision Adopting Test Year 2009 Revenue Requirement for Apple Valley Ranchos Water Company...5 iii

5 Page(s) California Public Utilities Commission Decisions (continued) D , Application of Golden State Water Company (U133W) for Authority to Implement Changes in Ratesetting Mechanisms and Reallocation of Rates for its Region I Service Area., Decision Approving Settlement Agreement and Authorizing Changes in Rate Design and Ratesetting Mechanisms...5 D , Application of California-American Water Company (U210W), California Water Service Company (U60W), Golden State Water Company (U133W), Park Water Company (U314W) and Apple Valley Ranchos Water Company (U346W) to Modify D , D , D , D , D , D , D , and D regarding the Amortization of WRAM-related Accounts, Decision Addressing Amortization of Water Revenue Adjustment Mechanism Related Accounts and Granting in Part Modification to Decision (D.) , D , D , and D D , In the Matter of the Application of San Jose Water Company (U168W) for an Order authorizing it to increase rates charged for water service by $47,394,000 or 21.51% in 2013, by $12,963,000 or 4.87% in 2014, and by $34,797,000 or 12.59% in 2015, Decision Resolving General Rate Case of San Jose Water Company...16, 21 D , In the Matter of the Application of California Water Service Company (U60W), a California corporation, for an order 1) authorizing it to increase rates for water service by $92,765,000 or 19.4% in test year 2014, 2) authorizing it to increase rates on January 1, 2015 by $17,240,000 or 3.0%, and on January 1, 2016 by $16,950,000 or 2.9% in accordance with the Rate Case Plan, and 3) adopting other related rulings and relief necessary to implement the Commission's ratemaking policies, Decision Granting Joint Motion to Adopt the Proposed Settlement Agreement Authorizing California Water Service Company s General Rate Increases for 2014, 2015, and D , In the Matter of the Application of Apple Valley Ranchos Water Company (U346W) for Authority to Increase Rates Charged for Water Service by $3,127,463 or 14.88% in 2015, $2,056,455 or 8.48% in 2016, and $2,160,731 or 8.19% in 2017, Decision Approving Final Settlement Agreement, Resolving Disputed Issues, and Adopting the 2015, 2016, and 2017 Revenue Requirement for Apple Valley Ranchos Water Company...5 D , Order Instituting Rulemaking on the Commission s Own Motion into Addressing the Commission s Water Action Plan Objective of Setting Rates that Balance Investment, Conservation, and Affordability for Class A and Class B Water Utilities, Decision Providing Guidance on Water Rate Structure and Tiered Rates... passim iv

6 Page(s) California Public Utilities Commission Decisions (continued) D , In the matter of the Application of the Golden State Water Company (U133W) for an order authorizing it to decrease rates for water service by $1,615,400 or -0.50% in 2016, to increase by $10,280,800 or 3.21% in 2017; and increase by $10,303,200 or 3.12% in 2018, Decision Addressing the General Rate Case Application of Golden State Water Company and the Proposed Settlement...5 D , In the matter of the Application of the Golden State Water Company (U133W) for an order authorizing it to decrease rates for water service by $1,615,400 or -0.50% in 2016, to increase by $10,280,800 or 3.21% in 2017; and increase by $10,303,200 or 3.12% in 2018, Decision Addressing the General Rate Case Application of Golden State Water Company and the Proposed Settlement...21 California Public Utilities Commission Resolutions Resolution W-4791, Lukins Brothers Water Company (Lukins), Order Authorizing an Interim General Rate Increase Producing Additional Annual Revenues of $126,460 or 36.03% in 2009 (October 15, 2009)...20 Resolution W-4854, This Resolution Authorizes San Jose Water Company, California Water Service Company, California American Water Company, And Golden State Water Company to Establish New And Separate Memorandum Accounts to Track the Costs Associated with the Research, Development & Demonstration of Six Pressure-Reducing Valve Modernization Projects (December 2, 2010)...9, 11, 12, 13 Resolution W-5000, Resolution Ordering Water Utility Compliance with the State Water Resources Control Board s Resolution No Adopting an Emergency Regulation for Statewide Urban Water Conservation as Codified in the California Code of Regulations, Title 23, Article 22.5, Sections 863, 864, and 865 (August 14, 2014)....3 Resolution W-5034, Resolution Ordering Water Utility Compliance with the State Water Resources Control Board s Resolution No Adopting a new 2015 Emergency Regulation for Statewide Urban Water Conservation and Re-Adopting the 2014 Emergency Regulation as Codified in the California Code of Regulations, Title 23, Sections 863, 864, and 865 (April 9, 2015)...3 Resolution W-5041, Resolution Ordering Water Utility Compliance with the Restrictions Set Forth Herein to Achieve a 25 Percent Reduction in Potable Urban Water Use Consistent with Restrictions Imposed by the State Water Resources Control Board s Resolution No , Adopted May 5, 2015 (May 7, 2015)...3 v

7 Page(s) California Public Utilities Commission Resolutions (continued) Resolution W-5103, Resolution Ordering Water Utility Compliance with the State Water Resources Control Board s Resolution No , Adopted May 18, 2016 Allowing Self-Certification Based on Each Water Utility s Available Water Supplies, Drought Conditions, and Projected Demand (June 23, 2016)...3 Statutes Public Utilities Code Section California Public Utilities Commission Rules and Rulings Rules and Practice and Procedure, Rule Rules and Practice and Procedure, Rule California Public Utilities Commission Standard Practices Standard Practice U-7-W, Rate Design for Water and Sewer System Utilities Including Master Metered Facilities (July 2006)...15, 20, 21 Standard Practice U-27-W, Standard Practice for Processing Rate Offsets and Establishing and Amortizing Memorandum Accounts (April 16, 2014)...12, 13 vi

8 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Application of SAN JOSE WATER COMPANY (U168W) for an Order authorizing it to increase rates charged for water service by $34,288,100 or 9.76% in 2019, by $14,231,800 or 3.70% in 2020, and by $20,581,700 or 5.17% in Application (Filed January 4, 2018) REPLY BRIEF OF SAN JOSE WATER COMPANY I. INTRODUCTION AND SUMMARY Pursuant to Rule of the Rules of Practice and Procedure of the California Public Utilities Commission ( Commission ) and as authorized via by assigned Administrative Law Judge ( ALJ ) Karl J. Bemesderfer on July 25, 2018, applicant San Jose Water Company ( SJWC ) files its reply brief in this proceeding responding to arguments made in the opening briefs. The Public Advocates Office at the Commission ( Cal PA, formerly the Office of Ratepayer Advocates), 1 the City of San Jose ( City ), 2 and Water Rate Advocates for Transparency, Equity and Sustainability ( WRATES ), 3 all filed briefs on September 10, Opening Brief of the Public Advocates Office (September 10, 2018) ( Cal PA Opening Brief ). 2 City of San Jose s Opening Brief (September 10, 2018) ( City Opening Brief ). 3 Opening Brief Regarding WRATES Response to Application (September 10, 2018) ( WRATES Opening Brief ). 4 Several of the issues addressed in the WRATES Opening Brief overlap considerably with the discussion their concurrently filed Comments on Partial Settlement Agreement Between the Office of Ratepayer Advocates and San Jose Water Company on Issues Presented In the General Rate Case Application (September 10, 2018) ( WRATES Settlement Comments ). To the extent that issues remain disputed and not already addressed by the proposed partial settlement agreement in this proceeding filed on August 10, 2018, SJWC intends to address those issues in this reply brief. Issues that have been effectively resolved between SJWC and Cal PA under that proposed partial settlement agreement will be addressed separately in SJWC s reply comments on proposed partial settlement agreement. 1

9 As discussed in more detail below and as explained in SJWC s opening brief, 5 the Commission should enable SJWC to align its business incentives with its conservation goals by implementing a Water Revenue Adjustment Mechanism ( WRAM ) with an associated Modified Cost Balancing Account ( MCBA ), in order to decouple utility revenue recovery from water sales, and should ensure efficient and equitable implementation of these mechanisms by also adopting a Sales Reconciliation Mechanism ( SRM ). The Commission should also grant SJWC s request to recover $1,243,362 in costs tracked in the Pressure-Reducing Valve Modernization and Energy Recovery Memorandum Account ( PRVMA ) related to a prudently managed research, development and demonstration ( RD&D ) project undertaken at the behest of the Commission. Furthermore, contrary to the claims made by WRATES, SJWC complied with all Commission and statutory requirements for customer notices and the information it provided regarding capital projects fully complies with the Commission s Rate Case Plan. Similarly, SJWC s proposed rate design complies with Commission directives and furthers State and Commission conservation goals. The Commission should reject the critiques and proposals of WRATES on these issues. II. THE COMMISSION SHOULD AUTHORIZE SJWC TO IMPLEMENT THE WRAM/MCBA AND SRM A. Cal PA incorrectly claims that SJWC does not need the WRAM/MCBA to achieve Commission and State water conservation policy goals Cal PA s recommendation against SJWC s request to implement a full WRAM/MCBA is based upon the faulty premise that the full WRAM/MCBA is not necessary simply because SJWC and its customers have been able to achieve impressive levels of conservation during the recent drought without full decoupling mechanisms. This notion is not only inaccurate, but also misguided. As indicated in SJWC s opening brief, the conservation achievements observed by 5 Opening Brief of San Jose Water Company (September 10, 2018) ( SJWC Opening Brief ). 2

10 SJWC are at least in part attributable to several temporary mechanisms authorized by the Commission. 6 More importantly, Cal PA s premise that the Commission must discover some sort of causal link between WRAM/MCBAs and water conservation before allowing utilities to implement them misunderstands the purpose of such WRAM/MCBAs and sets forth a requirement with no basis. This premise ignores the revenue balancing purpose of WRAM/MCBAs that motivate utilities to implement strong conservation measures that may drastically influence consumption and therefore influence revenue. WRAM/MCBAs are not designed to encourage customers to conserve water directly, but rather to align policy incentives to allow utilities to promote both conservation and financial soundness without the exclusion of the other. The Commission has recognized that the decoupling of revenue from consumption is a critical step for utilities to responsibly administer the water conservation mandates and measures resulting from the recent historic drought. 7 Moreover, the Governor and the Santa Clara Valley Water District have fully embraced a conservation as a way of life objective in their conservation policies and directives going forward. 8 If anything, SJWC s experience during the recent drought in achieving low water use consumption, coupled with the conservation 6 See, e.g., Res. W-5000 (August 14, 2014) (Adopting drought procedures for water utilities to introduce voluntary conservation measures under Tariff Rule 14.1); Res. W-5034 (April 9, 2015) (ordering water utilities to comply mandatory emergency water conservation regulations); Res. W-5041 (May 8, 2015) (ordering water utilities to comply with mandatory emergency water use restrictions to achieve a 25 percent reduction in potable urban water use); Res. W-5103 (June 23, 2016) (directing all water utilities under Commission jurisdiction to comply with the Drought Emergency Water Conservation regulation for statewide urban water conservation adopted by the State Water Resources Control Board). 7 D , p. 41 ( We conclude that, at this time, the WRAM mechanism should be maintained. There is a continuing need to provide an opportunity to collect the revenue requirement impacted by forecast uncertainty, the continued requirement for conservation, and potential for rationing or moratoria on new connections in some districts. These effects will render uncertainty in revenue collection and support the need for the WRAM mechanism to support sustainability and attract investment to California water IOUs during this drought period and beyond. ). 8 See Santa Clara Valley Water District, Water board continues water reduction target (January 25, 2017) (voting to continue its call for water use reductions of 20 percent compared to 2013 water use), available at As discussed in SJWC s opening brief, the Commission was one of the five state agencies that worked to develop the plan to implement the Governor s directive to make conservation a way of life. SJWC Opening Brief, p. 6. 3

11 objectives of the State and local water authority going forward, have highlighted the need to mitigate the disruptive revenue impacts of such beneficial and necessary water conservation. Cal PA s demand for a direct linkage between implementation of a WRAM/MCBA and quantifiable drops in water consumption has no basis and should be disregarded. B. Cal PA trivializes the industry s experience with WRAM/MCBAs and ignores the Commission s policy directive to continue to use and improve such mechanisms Cal PA s recommendation against fully decoupling consumption and sales revenue is contrary to the Commission and State policy goals of encouraging efficient water use and water conservation. In its opening brief, Cal PA incorrectly attempts to characterize WRAM/MCBA mechanisms as unproven and novel. 9 This is both inaccurate and misguided. As explained in SJWC s opening brief, the use of WRAM/MCBAs by other Commission-regulated water utilities is nothing new. The Commission has considerable experience overseeing such programs and, over time, has gleaned important lessons based on the issues faced by these companies. Regarding D in particular, Cal PA ignores the Commission s relevant policy discussion in that decision. The Commission clearly indicates its general support for WRAM/MCBA mechanisms as a means to stabilize revenue given forecast uncertainty in order to properly implement conservation initiatives and goals. 10 Instead, Cal PA tries to use the discussion of the challenges that utilities had historically faced in utilizing the WRAM/MCBA in D as a means to discredit the viability of these mechanisms. For Cal PA, the discussion of previous challenges has subsumed the solutions identified in D and the usefulness of the WRAM/MCBA mechanism with those improvements. Read properly, D is an in-depth and nuanced evaluation of WRAM/MCBA mechanisms with a directive to 9 Cal PA Opening Brief, pp D , p. 41 ( We conclude that, at this time, the WRAM mechanism should be maintained. There is a continuing need to provide an opportunity to collect the revenue requirement impacted by forecast uncertainty, the continued requirement for conservation, and potential for rationing or moratoria on new connections in some districts. These effects will render uncertainty in revenue collection and support the need for the WRAM mechanism to support sustainability and attract investment to California water IOUs during this drought period and beyond. ). 4

12 utilities to continue to implement them with the various tweaks identified, not the limited decision that Cal PA claims. Nor is there a requirement, as Cal PA suggests, that the Commission must first conduct an industry-wide evaluation of the efficacy of WRAM/MCBA prior to allowing one more utility to implement one. The Commission has evaluated and approved the proposals of several utilities for full WRAM/MCBAs in a manner that acknowledges that such implementation is an on-going and evolving effort. 11 The consideration of changes to the WRAM that Cal PA demands occur in an industry-wide proceeding, citing D , 12 has already occurred in the broad evaluation of several such changes in D Cal PA appears to have conflated the Commission s suggestion to evaluate changes with a redundant wholesale evaluation of the WRAM. The Commission has already made the determination that water utilities should continue to utilize the WRAM/MCBA to achieve their water conservation goals and has focused on ways to improve those ratemaking tools. 13 Meanwhile, Cal PA is stuck re-litigating the policy debates of years past as to whether to use WRAM/MCBAs at all. The Commission should disregard the recommendation of Cal PA and instead grant SJWC s request to implement a full WRAM/MCBA mechanism. 11 The Commission authorized several water utilities to use WRAM/MCBA mechanisms on a utility-byutility basis. See, e.g., D , pp (for California Water Service Company and Park Water Company); D , pp (for California American Water Company); D , p. 12 (for Apple Valley Ranchos Water Company); D , p. 19 (for Golden State Water Company). The Commission has continually revisited these authorized mechanisms to improve them. See, e.g., D , pp (evaluating the WRAM/MCBA mechanism for Apple Valley Ranchos Water Company); D , pp (authorizing Golden State Water Company to temporarily lift the 10% cap for its WRAM/MCBA mechanism). The Commission has also continued to make more general policy adjustments to the WRAM/MCBA mechanism as well. See, e.g., D (recommending generally applicable changes to WRAM/MCBA mechanisms); D (same). 12 Cal PA Opening Brief, p. 8 fn. 29, citing D D , p

13 C. Cal PA s arguments against implementing an SRM are contrary to Commission policy and improperly overlook the real challenges of water consumption forecasting Cal PA opposes SJWC s request for an SRM to adjust annual sales forecasts between rate cases, under certain conditions, when actual sales diverge from those adopted. 14 This opposition is based in part on SJWC s current lack of a full WRAM, which Cal PA opposes. In particular, Cal PA relies heavily on the recent rejection of the SRM requested in SJWC s Advice Letter 501 due to lack of a full WRAM. 15 As outlined above, however, SJWC s request for a full WRAM/MCBA is reasonable and warranted and therefore should be granted. Consequently, the Commission should also authorize SJWC to utilize an SRM, which has been highlighted as a means for mitigating excessive WRAM/MCBA balances due to deviations from sales forecasts. Cal PA also opposes SJWC s request for an SRM on the basis that it is one of numerous ratemaking mechanisms that result in unnoticed rate increases to occur outside of GRCs, thus hampering transparency for customers. 16 However, the opposite is true: the SRM improves transparency, because it ensures that rates are based on the most accurate consumption data available. As the Commission itself has explained, the SRM reduces WRAM balances and surcharges, increasing immediately the accuracy of price signals, and providing more transparency to the customer about the cost of water service. 17 The Commission has addressed and rejected Cal PA s same arguments previously, when raised by its predecessor Office of Ratepayer Advocates in the R proceeding. 18 The Commission has found that the SRM is in the public interest, as it would limit the revenue disparity that is tracked by the WRAM by changing rates, as opposed to applying surcharges and/or surcredits after the fact, when a disparity between adopted and actual sales will contribute 14 Cal PA Opening Brief, pp Id., p Id., p Id., p. 28 (emphasis added). 18 D , pp

14 to the WRAM balance at the end of the year. 19 Cal PA s reluctance to embrace new information regarding consumption as it becomes available via the SRM does not encourage transparency, but rather hampers it by continuing to ignore such data and rely on forecasts that may have been proven incorrect. Having weighed the benefits and challenges of the SRM, the Commission specifically directed Class A and B water utilities to consider filing for an SRM in their GRCs, 20 as SJWC has done here. Cal PA presents no persuasive reason why the Commission should come to a different policy conclusion now. The Commission has already considered and weighed the arguments for and against the SRM in proceeding R It unequivocally found that the SRM is a useful tool in mitigating the effects of unexpected deviations from consumption forecasts on WRAMs and thus should be granted here to achieve that purpose. SJWC respectfully requests that the Commission authorize it to implement a full WRAM/MCBA and SRM as requested. D. WRATES proposal to institute an earnings test in the context of the SRM is unwarranted and has been recently rejected by the Commission. In its opening brief, WRATES indicates that it supports the Cal PA position against SJWC s request to institute the WRAM/MCBA and SRM. 21 WRATES further argues for reinstatement of the now defunct Earnings Test as it applies to Class A Water Utilities. 22 It is unclear from the WRATES opening brief what exactly it is proposing and the vague introduction of the earnings test concept at this late stage long after the full evidentiary record has been submitted is prejudicial to the other parties. 23 The rationale behind the earnings test was in part to address concerns that some utilities had been able to avoid the scrutiny applied in the general rate case process by declining to file 19 Id., p. 27, citing D , pp Id., pp , Ordering Paragraph WRATES Opening Brief, p Id., p WRATES references D in its review of the history of the earnings test procedure for recovery from balancing accounts, which required Class A companies to apply such a test for recovery of balancing account costs. 7

15 general rate case applications regularly. 24 However, as noted by WRATES, this requirement was reversed in D In that decision, the Commission noted that the earnings test was no longer necessary due to the adoption of the Rate Case Plan for Class A Water Utilities by D (subsequently revised in D ), which holds utilities to a three-year rate case cycle. Additionally, the Commission noted that the implementation of the earnings test undermines Public Utilities Code Section 456, which allows a water company to retain profit that it achieves through efficient operation between rate cases. 26 As SJWC continues to submit a general rate case application every three years pursuant to the Rate Case Plan, the earnings test remains superfluous for the same reasons as were stated in D More recently, the Office of Ratepayer Advocates, the predecessor to Cal PA, had argued for re-imposing an earnings test mechanism prior to authorizing WRAM/MCBA recovery in proceeding R The Commission summarized these same arguments for and against the earning test proposal, but ultimately chose in D not to adopt the earnings test 28 WRATES has not presented any persuasive evidence regarding the earnings test proposal to warrant a different outcome here. Therefore, the Commission should ignore WRATES arguments for an earnings test requirement for WRAM/MCBA recovery. 24 D , p Id., p Id. 27 R , Comments of the Office of Ratepayer Advocates on Issues in the Assigned Commissioner s Third Amended Scoping Memo and Ruling Establishing Phase II (June 11, 2015), pp. 3-8 (describing proposal for an earnings test. 28 D , p. 42 ( We will not adopt the alternative mechanism of using the [Water Conservation Memorandum Account] methodology proposed by ORA. ); see also R , Reply Comments of California Water Association Responding to Third Amended Scoping Memo (June 30, 2015), pp. 5-8 (explaining how the imposition of the earnings test would defeat the purpose of an adjustment mechanism). 8

16 III. THE COMMISSION SHOULD ALLOW SJWC TO RECOVER ITS RD&D PROJECT COSTS. A. Cal PA s recommendation opposing recovery of the RD&D project costs is contrary to Resolution W In its opening brief, Cal PA opposes SJWC s request to recover costs tracked in the PRVMA related to an RD&D project undertaken by SJWC at the Commission s direction. 29 Cal PA argues that the Commission should deny recovery on the basis that no portion of the project ever provided utility service nor result in any used and useful assets. 30 This opposition is contrary to the Commission s specific authorization in Resolution W-4854 for SJWC to recover such RD&D project costs. 31 As outlined in SJWC s opening brief, this is a project that the Commission specifically directed SJWC to undertake with the understanding that SJWC and the other water companies would be able to recover such costs if such projects were prudently administered. 32 Nowhere in Cal PA s opening brief does it suggest that SJWC did not administer this project prudently. Moreover, the Commission recognized the experimental nature of these projects and the possibility that they might not end up as used and useful facilities, but nonetheless found that there was adequate value in pursuing them. 33 Lastly, Cal PA s discussion of the concept of risk as justification for authorization 34 is misplaced and ignores the Commission s condition that utilities may only recover costs on projects if prudently administered. Thus, the Commission has already made a determination that such RD&D project costs would be recoverable so long as the project was prudently administered. 29 Cal PA Opening Brief, pp Id., p Res. W-4854 (December 13, 2010), p. 18, Ordering Paragraph 2 ( The Water Utilities are authorized to recover the costs of these Research, Development and Demonstration, electrical regeneration FCV projects from their ratepayers through a Tier 3 Advice letter filing, subject to their prudent administration of the projects. ). 32 SJWC Opening Brief, pp Res. W-4854, p Cal PA Opening Brief, p

17 SJWC respectfully requests that the Commissions reject Cal PA s recommendation and authorize SJWC to capitalize project costs of $1,243,363 in rate base and close the PRVMA or, in the alternative, to recover the project cost as expenses by amortizing the $1,243,363 balance over the three-year rate case period ($414,454 per year). 35 B. WRATES fails to rebut SJWC s showing that it prudently administered the RD&D project. WRATES similarly recommends that the Commission deny recovery of costs in the PRVMA, but instead alleges as a basis for denial that SJWC had failed to administer the RD&D project in a prudent manner. 36 WRATES alleges seven bullet points to support its claim that the RD&D project was imprudently administered. 37 As explained below, none of these arguments rebuts SJWC s showing that it prudently administered the RD&D project. First, WRATES argues that SJWC acted imprudently in its selection of the Difgen PRV. 38 SJWC retained well-known engineering firm Black & Veatch as the potential designbuilder and worked in continuous consultation with the Commission s Water Division to identify the project supplier making equipment suitable for PRV modernization. 39 The Commission supported the use of the Difgen PRV from Zeropex as it was the only technology available that could recover significant energy being lost in PRV s while also controlling downstream water pressure. 40 WRATES fails to present any evidence suggesting that any aspect of this rigorous selection process was imprudent. Second, WRATES argues that SJWC acted imprudently by failing to take prudent actions when it discovered the project was not feasible or economically viable. 41 To the contrary, SJWC 35 Exh. SJW-5, ch. 17, p. 17-5; Exh. SJW-2, p WRATES Opening Brief, pp Id., p Id. ( 1) In selecting the Difgen PRV ). 39 SJWC Opening Brief, p. 13, citing Exh. SJW-5, ch. 17, p. 17-4; RT 207:27-208:13 (Jensen/SJWC). 40 Exh. SJW-5, ch. 17, p WRATES Opening Brief, p. 10 ( 2) In failing to take action when it was realized that the project was not feasible or economically viable ). 10

18 engaged in consultation with the Water Division and explored alternative uses for the hydroturbines to salvage the project costs, ultimately being unable to identify any such alternative uses. 42 SJWC sought and received a Black and Veatch report in September 2016 that was a third-party verification that the project was unsuccessful and should be abandoned. 43 WRATES allegation that SJWC failed to take prudent action is unfounded. Third, WRATES argues that SJWC acted imprudently in accepting the Commission s request to lead an RD&D project without having previously participated in an RD&D project. 44 This allegation overlooks SJWC s extensive experience in operating a large scale water supply system and the Commission s specific direction in Resolution W-4854 requesting that SJWC engage in such a RD&D project. Moreover, WRATES fails to identify how prior participation in an RD&D project is a prerequisite for prudent administration of the RD&D project. It is not. The circumstances confirm that SJWC acted prudently in agreeing to participate in the Commission s request. Fourth, WRATES argues that SJWC acted imprudently in failing to conduct adequate preliminary research of equipment specifics. 45 This allegation oversimplifies the technological complexity of the RD&D project and ignores the prudent efforts of not only SJWC, but its consultants and the Commission in selecting the equipment. This was not a simple instance where one orders equipment only to find out the specifications were not compliant with regulatory codes, as WRATES implies. Instead, as explained in SJWC s testimony, unknown issues and challenges were only discovered in the process of implementing the RD&D project and possible solutions to those issues considered were found to be inconsistent with regulatory codes or cost prohibitive. Identification of such issues and challenges was one of the key 42 Exh. SJW-5, ch. 17, p Id., p WRATES Opening Brief, p. 10 ( 3) In accepting to lead a RD&D project without even prior participation in a RD&D project ). 45 Id. ( 4) In failing to conduct adequate preliminary research of equipment specifications under proposed conditions at the designated sites, to meet codes and regulations prior to purchase ). 11

19 purpose of the RD&D projects. WRATES allegation of imprudent administration in examining specifics ignores the circumstances SJWC and Commission actually experienced in attempting to administer the RD&D project. Fifth, WRATES argues that SJWC acted imprudently by failing to seek Research and Development tax credits/deductions and the [American Recovery and Reinvestment Act of 2009 ( ARRA )] grant. 46 As SJWC witness Palle Jensen explained, the RD&D project cost has not been handled as eligible for treatment as a tax deduction because the project cost sits in an open cost order. 47 Because SJWC may not unilaterally close the project cost to utility plant in service without Commission authorization, it is not allowed to be recognized for financial purposes. 48 With respect to the possibility of a tax credit, the ARRA provides a 30% grant for taxpayers that develop renewable energy projects so long as the projects begin construction before the end of 2010 and are placed in service by January 1, Since the Commission did not issue its resolution approving the project until December 2010, it is unlikely that SJWC would have been able to meet the December 31, 2010 deadline to commence construction and qualify for the ARRA grant. Additionally, ARRA grants were limited to projects placed into service by January 2014 and the RD&D project was not. Therefore, an ARRA grant was unavailable here. WRATES allegations with respect to tax implications and the ARRA are unsupported and fail to rebut the showing that SJWC administered the RD&D project prudently. Sixth, WRATES argues that SJWC acted imprudently by delaying closure of the project, resulting in interest accumulation beyond that allowed by the Commission in Standard Practice U-27-W. 50 As explained above, SJWC acted prudently in executing the project, including its 46 Id. ( 5) In failing to seek Research and Development tax credits/deductions and the ARRP grant ). 47 RT 210:18-27 (Jensen/SJWC). 48 Id. 49 Res. W-4854, p. 7 (emphasis added). 50 WRATES Opening Brief, p. 10 ( In delaying closure of the project resulting in interest accumulation well beyond the non-financial commercial rate allowed by Standard Practice U-27-W. Revised April 16, 2014, E. filing procedures, p. #41 ). 12

20 ultimate closure. It is unclear how, as WRATES alleges, if at all, SJWC s administration of the PRVMA violated Standard Practice U-27-W or any other staff advice or Commission order. The project costs, including capitalized interests were accurately recorded in the PRVMA pursuant to the Commission s directions in Resolution W-4854 and Standard Practice U-27-W. Seventh and finally, WRATES argues that SJWC acted imprudently by falling well below a standard of prudent administration as achieved by the actions of the 3 other Class Water Utilities. 51 Specifically, WRATES refers to the actions of California Water Service, Golden State Water Company and California-American Water Company in response to directions of the Commission in Resolution W However, these other companies undertook their own exploration of the RD&D projects in different circumstances than SJWC. The different projects approved by the Commission in Resolution W-4854 addressed different needs and challenges. It is unfair to compare SJWC s actions on its own specific project, with its unique circumstances, with those of the other companies. More importantly, WRATES fails to demonstrate how SJWC s actions were imprudent at the time they were made and under the specific circumstances the company faced. As explained above, each and every step of the RD&D project that SJWC undertook was carefully vetted by industry experts and the Commission. All of WRATES arguments that SJWC failed to prudently administer the RD&D share a common thread. With the benefit of hindsight, WRATES argues that the administration was imprudent simply because the RD&D ultimately did not succeed. This is an unfair evaluation. In authorizing the project and permitting recovery of costs, the Commission was well aware of the distinct possibility that the project might simply not work out, but nonetheless deemed it worthwhile for the experience gained. The Commission observed: 52 A basic idea underlying RD&D is that new technologies may be tested on a small scale in order to evaluate whether implementing them on a larger scale would be beneficial. Thus, as RD&D 51 WRATES Opening Brief, p. 10 ( In falling well below a standard of prudent administration as achieved by actions of the 3 other Class A Water Utilities for ratepayers, shareholders and the CPUC. ). 52 Res. W-4854, p

21 projects, it would be unreasonable to require Water Utilities to provide a guarantee that the electrical regenerative FCV projects will be successful. It would be unreasonable to judge each of SJWC s actions simply by the ultimate outcome. Instead, as explained above, the Commission should consider each of SJWC s actions within the relevant context and circumstances. Upon proper examination of the facts, it will find that SJWC prudently administered the RD&D project. SJWC respectfully requests that the Commission reject the arguments made by WRATES that the administration of the RD&D project was imprudent and, instead, authorize SJWC to recover the project costs as proposed. IV. THE COMMISSION SHOULD REJECT WRATES ALLEGATION THAT PUBLIC NOTICE OF THE POTENTAIL RATE IMPACTS WAS INSUFFICIENT. WRATES argues that inadequate information was provided to the SJWC customer base in advance of the Public Participation Hearing concerning the large amounts and percentages of increase that low water quantity users would pay through the proposed rate design. 53 As explained in SJWC s testimony, SJWC has complied with all of the Commission s requirements for public notification of its General Rate Case and the Public Participation Hearing ( PPH ), including Rule 3.2(d) of the Commission s Rules of Practice and Procedure. 54 Moreover, SJWC s PPH notice in this proceeding was approved by the Commission s Public Advisor s Office and delivered to customers within 10 days of the event. It was also published in the San Jose Mercury News as directed by Ordering Paragraph No. 4 in the Administrative Law Judge s Ruling Noticing Public Participation Hearings, dated April 25, WRATES cites Rule 3.2(d), which directs utilities to provide notice of the amount of the proposed rate change for each customer classification. 55 SJWC has done that in its notice WRATES Opening Brief, p Exh. SJW-1, p WRATES Opening Brief, p See San Jose Water Company Rule 3.2 Compliance Filing (April 11, 2018). 14

22 WRATES appears to confuse the term customer classification (i.e., metered service, flat rate service, irrigation service, etc.) with customer usage blocks. 57 With respect to the information contained in SJWC s workpapers and its 45-day update, WRATES points to no Commission requirement to issue public notices regarding that sort of information. The Commission has balanced the need for public engagement in its proceedings with the goal of minimizing confusion for customers and stakeholders. This balance is found in its existing rules and requirements, with which SJWC has fully complied in this proceeding. Lastly, WRATES recommendation that SJWC be required to send a notice to customers four weeks before comments are due on a proposed decision goes beyond the procedures that apply in any sort of Commission proceeding. Therefore, SJWC respectfully requests that the Commission find that it has satisfied all of the applicable requirements for public notice in this proceeding and that further public notice is not necessary. V. THE COMMISSION SHOULD FIND THAT WRATES RECOMMENDATION FOR A COMPREHENSIVE FACILITIES MASTER PLAN HAS BEEN SATISFIED AND THAT FURTHER PROCEDURES ARE UNWARRANTED. WRATES recommends the implementation of a comprehensive facilities master plan or an asset management plan to be overseen an annual basis between Cal PA and SJWC on a trial basis for the remaining two years of the General Rate Case cycle. 58 SJWC submitted infrastructure study plans included as attachments to its extensive General Rate Case Application Exhibit G Capital Budget Project Justifications. 59 SJWC also submitted the 2015 Urban Water Management Plan ( UWMP ) as Exhibit H accompanying its General Rate Case Application, 57 See Standard Practice U-7-W, Appendix A, p. 10 (listing different examples of class of service to include 1. Metered service. 2. Flat rate service. 3. Irrigation service. 4. Private fire protection service. 5. Public fire hydrant service. 6. Resale service. 7. Service to governmental agencies. 8. Interdepartmental service. 9. Other water service (such as construction service). 10. Service to company employees. ). 58 WRATES Opening Brief, pp Exh. SJW-7. 15

23 providing a comprehensive plan for the management of its water system. 60 Collectively, these two planning documents already satisfy the purpose of the comprehensive facilities master plan that WRATES recommends. WRATES recommendation that a comprehensive facilities master plan be evaluated by Cal PA each year for the two remaining years of the General Rate Case cycle is excessive and is contrary to the oversight regime already being implemented under the Commission s Rate Case Plan. 61 That plan provides for each Class A water utility to file a General Rate Case application every three years. 62 Through that process, the Commission conducts an evaluation of the utility s operations, including all capital projects and utility plant in service. 63 The Commission has recognized the discretion left to utilities to implement capital project plans in a prudent manner: 64 The Commission s adoption of a plant estimate using estimated capital budget amounts does not imply that SJWC must necessarily proceed with those projects which it presented for inclusion in rate base. The Commission adopts a reasonable amount of plant based on the best estimates of plant necessary to provide safe and reliable service to its customers. While the Commission addresses disputed plant projects as discussed below, this discussion does not determine whether a particular plant project should be constructed but rather whether it represents a reasonable amount for plant, and therefore rate base. The Commission expects that SJWC will apply the adopted capital budget in a prudent manner to assure safe operation of the system. Thus, WRATES recommendation for a comprehensive facilities master plan has already been satisfied and its further recommendations going beyond the Rate Case Plan are unwarranted. 60 Exh. SJW D , Appendix A. 62 Id., p. A-2 ( Under the RCP, each Class A water utility is scheduled to file a GRC once every three years, with certain exceptions, as specified herein. ). 63 Id., p. A-26 to A D , pp

24 VI. THE COMMISSION SHOULD REJECT WRATES CRITICISMS OF SJWC S PROPOSED RATE DESIGN WRATES raises several arguments in opposition to SJWC s proposed rate design in its brief, and also reveals some confusion as to whether rate design is incorporated into the settlement agreement between SJWC and Cal PA. 65 To clarify, the proposed Settlement provides for the resolution of uncontested issues. 66 SJWC proposed its rate design as part of its initial application. 67 Cal PA indicated that it does not oppose SJWC s requests: (1) to increase the percentage of metered revenues recovered in service charges from 30 percent to 40 percent; (2) to steepen the ratios between SJWC s residential tiered rates. 68 Therefore, as these issues were expressly proposed by SJWC and unopposed by Cal PA, these aspects SJWC s proposed rate design are considered uncontested issues for the purpose of the Settlement. WRATES also contends that the proposed rate design fails to comply with various aspects of D To the contrary, the proposed rate design is entirely consistent with that Commission decision. WRATES misinterprets the Commission s findings of fact, conclusions of law, and ordering paragraphs of D In D , the Commission took an industry-wide look at water rate structure and tiered rates, focusing on certain solutions and rate mechanisms to improve its water rate policies and methods in the midst of a historic drought. 69 In recognition of the fact that each water utility faces its own unique circumstances, the Commission does not simply order all utilities to implement all of the rate policies and methods discussed. Instead, the Commission covers a range of rate policies and methods, orders utilities 65 WRATES Opening Brief, pp Settlement, p. 3. Upon review, it appears that rate design was inadvertently omitted from the list of uncontested issues in the joint comparison exhibit of the Settlement. 67 Exh. SJW-5, ch. 15, p. 15-3, Attachment Exh. ORA-1, pp D , p. 2 ( In light of California s ongoing commitment to water conservation and the changed water landscape spurred by this historic period of drought, we adopt goals and objectives articulated in Attachment A to this Decision that update the water rate case plan, along with policies and methods to promote accuracy and transparency in water rates, and water service sustainability, quality, and affordability. ). 17

25 to implement some mandatory changes, and only directs utilities to explore and apply other changes where applicable and appropriate. SJWC carefully evaluated the policy mechanisms analyzed in D and identified those that would be applicable and appropriate for its customers. These were properly considered and those that SJWC believed were appropriate were incorporated into its general rate case application here as directed by D Moreover, WRATES raises many issues in its briefing and comments for the very first time in this proceeding. Providing no testimony with respect to these issues and waiting until briefing and comments on a proposed settlement is highly prejudicial and unfair to the other parties. For example, WRATES recommendation regarding a broad proposal for SJWC to incorporate Advanced Metering Infrastructure was never previously raised in this proceeding. 70 This and other claims that have been belatedly raised should be rejected. A. SJWC s proposed rate design will not result in double recovery. WRATES alleges that under the proposed rate design, SJWC would collect more than double the approved recovery. 71 WRATES cites to its calculations in its testimony as the basis for this statement 72 and contends that [n]o substantive disagreement was presented by SJWC. 73 This is incorrect. Rebuttal testimony by SJWC witness Paul Herbert disputes this allegation. Mr. Herbert notes several errors with the calculations presented by WRATES. 74 There is no support for WRATES s conclusion that the proposed rate design would result in more than double the approved recovery. As stated in SJWC s workpapers, this rate design is intended to be revenue neutral WRATES Opening Brief, p WRATES Settlement Comments, p. 6; see also WRATES Opening Brief, p WRATES Opening Brief, p. 23 fn.81, citing WRATES 01, pp WRATES Settlement Comments, p Exh. SJW-1, pp. 6-7, Attachments D & E. 75 Exh. SJW-5, ch. 15, p