CALIFORNIA PUBLIC UTILITIES COMMISSION BALANCED RATES RULEMAKING R California Water Association’s Restatement of Goals and Objectives for the Redesign/Realignment of Water Utility Regulation Water Rate Design Goals Discussion Panel October 14, 2015, 9:30-10:30 A.M.

GOALS AND OBJECTIVES FOR THE REDESIGN/REALIGNMENT OF WATER UTILITY REGULATION 1.Facilitate safe and reliable water supply and delivery at just and reasonable rates. This is a key statutory objective. 2.Promote economically and socially efficient use of water. Efficient use requires that rates be set on the basis of the cost of service. Programs aiming to serve Commission policy goals should be applied in that context.

GOALS AND OBJECTIVES FOR THE REDESIGN/REALIGNMENT OF WATER UTILITY REGULATION 3.Simplify rate design, customer notices, and customer bills. Simplifying rate design is a good goal. It should extend to customer notices and customer billing statements. 4.Quantity rates based on Consider marginal costs among other relevant factors in establishing quantity rates. pricing. Marginal cost pricing makes conceptual sense, but marginal cost varies substantially from company to company and among water systems. The relevant cost is the cost of marginal supply for the particular water system.

GOALS AND OBJECTIVES FOR THE REDESIGN/REALIGNMENT OF WATER UTILITY REGULATION 5.Align cost recovery with revenue requirement in balance with the Commission’s public policy goals. in rates with cost occurrence – rates based on cost- causation principles. This principle is appropriate to the extent it supports recovering a moderately increased percentage of fixed costs through fixed monthly charges. Reduced rates for low-income customers is an exception to strict application of cost-causation principles.

GOALS AND OBJECTIVES FOR THE REDESIGN/REALIGNMENT OF WATER UTILITY REGULATION 6.Maintain and improve Provide protections for low- income customers consistent with the Commission’s policies. Present rate subsidies for low-income customers meet statutory requirements and do not need to be “improved.” Varying rates by household size is impractical, because water utilities are unable to validate and maintain accurate records of customers’ household size.

GOALS AND OBJECTIVES FOR THE REDESIGN/REALIGNMENT OF WATER UTILITY REGULATION 7.Maintain and improve Provide conservation incentives consistent with the Commission’s policies. 8.Provide a positive reward mechanism for exceptional conservation by residential customers. Present rate structures and programs provide appropriate conservation incentives. The straw proposal’s massive shift of cost recovery to fixed monthly charges would diminish conservation incentives. Its promise to “reward” low use customers with a share of excess revenues (when available) would be a complicated and unreliable attempt to counter that effect. Any “reward mechanism” would present serious fairness issues.

GOALS AND OBJECTIVES FOR THE REDESIGN/REALIGNMENT OF WATER UTILITY REGULATION 9.Provide opportunity for timely utility recovery of its revenue requirement. This is another key statutory – and constitutional – objective. Timely recovery of revenue requirement requires : – Expeditious completion of rate cases. – Amortization of balancing accounts within 12 months.

GOALS AND OBJECTIVES FOR THE REDESIGN/REALIGNMENT OF WATER UTILITY REGULATION 10.Align utility risk and reward return in a way that accurately reflects the cost of capital. Authorized rate of return should reflect the range of risks understood by the financial market, to attract investment needed for a utility to provide good service currently and in the future. Rates of return should be set in cost of capital proceedings pursuant to the Rate Case Plan.

GOALS AND OBJECTIVES FOR THE REDESIGN/REALIGNMENT OF WATER UTILITY REGULATION 11.Reduce or Eeliminate the causes of high need for a WRAM/MCBA mechanism surcharges and extended recovery periods. The Commission’s decoupling policy must benefit both utilities and their customers. The problem is not the WRAM/MCBA. It is the inaccuracy of sales forecasts, including projected allocation of sales within rate tiers. The solution for WRAM companies is not to eliminate the WRAM, but rather to set realistic sales forecasts and allow for adjustments as often as necessary.

GOALS AND OBJECTIVES FOR THE REDESIGN/REALIGNMENT OF WATER UTILITY REGULATION 12.Eliminate the need for Improve sales forecasting methodology. and sales adjustment mechanisms in setting rates. In setting rates for a future test year, a sales forecast is necessary. Sales forecasts should be aimed to minimize the risk of overestimating sales. Procedures should prevent accumulation of large WRAM/MCBA balances by allowing adjustment of sales forecasts when necessary.

GOALS AND OBJECTIVES FOR THE REDESIGN/REALIGNMENT OF WATER UTILITY REGULATION 13.Optimally balance investment, conservation, and affordability. This is the central purpose of the rulemaking.

GOALS AND OBJECTIVES FOR THE REDESIGN/REALIGNMENT OF WATER UTILITY REGULATION 14.Optimally amortize current reasonably incurred balances in WRAM/MCBA and drought-related revenue shortfall mechanisms during the transition. This is not a transitional goal – it is an ongoing concern. Improvements are needed: – Remove the cap on total WRAM surcharges (now set at 10% of last authorized revenues). – Apply the utility’s authorized cost of capital as the carrying charge on account balances to be amortized. – Adopt the Sales Reconciliation Mechanism/Demand Attrition Model as a permanent feature for WRAM companies.