James Hunter

Tuesday, August 5, 2014

SJWC Rate Increase, "Follow the money"

In the current GRC (A1201003) how can we as non-attorneys (ratepayers) begin to understand the motivations behind the requests and positions of of parties. Keep in mind, in reality, they're arguing over, "Our Money!". There is no question SJWC will get an increase, but the real question is how much, of our money will SJWC (SJW Corp.) get. 

Where is the GRC process at? SJWC, CPUC and ORA/DRA are in the final stages, of the GRC (A1201003) process, leading up to a decision, by the CPUC Commissioners. The earliest CPUC can consider and vote is their meeting on 14 August, 2014. Both SJWC and ORA/DRA submitted
ORA/DRA agrees in general with the Proposed Decision and addresses items that can improve the accuracy of the Proposed Decision, especially that can impact the base rate and rate of return. In particular addressing the implied rate of return, of 12%, as well as SJWC increasing capital spending.

Bloggers Comments: SJWC may see the possibility of a loss in the GRC (A1201003). I've done a lot of negotiations and found that a strategy commonly used by the losing negotiator is to "make it more complicated", challenge everything and run the other negotiator out of time/resources, ask for "so many things" you'll get something. I've read both "Opening Comments" and the response from SJWC seems to me to be anticipating and trying to provide the CPUC commissioners, with opportunities to offer compromises. I think SJWC is creating excuses for CPUC to approve higher rates than the ALJ's Proposed Decision

In contrast SJWC challenged 19 points, of disagreement, that the Proposed Decision will reduce the SJWC revenue or provide revenue protections, to SJWC and was 37 pages long with Appendices. How can I make that statement? Simple a class A water utility revenue is determined by a standard formula and a financial statement.based on the following definition:
Rate base: The value of property upon which a utility is permitted to earn a specified rate of return as established by a regulatory authority. The rate base generally represents the value of property used by the utility in providing service and may be calculated by any one or a combination of the following accounting methods: fair value, prudent investment, reproduction cost, or original cost. Depending on which method is used, the rate base includes cash, working capital, materials and supplies, deductions for accumulated provisions for depreciation, contributions in aid of construction, customer advances for construction, accumulated deferred income taxes, and accumulated deferred investment tax credits.
The actual SJWC revenue is based effectively on a percentage of the Rate base and is called:
Rate of return: The ratio of net operating income earned by a utility is calculated as a percentage of its rate base.
Rate of return on rate base: The ratio of net operating income earned by a utility, calculated as a percentage of its rate base.
The current SJWC ROR (Rate of return) is 9.43%.  We're getting closer to the simple explanation that's driving the GRC process.

Now we look at what we as ratepayers pay to SJWC for our water. It's the sum of the costs, purchasing water, well tax, and processing the water. Plus the cost of funds for loans by SJWC, the calculated Base Rate, which includes building, vehicles, pipelines, pumps, wells, water processing facilities - minus depreciation. Then we have the salaries and benefits for staff and management, etc. Plus the 9.43% ROR which is the CPUC established "Rate of return on rate base" and which includes the shareholders dividends.

The simplified formula, shown below, shows how SJWC can increase their revenue:
R = O + (V - D)r
The elements of the traditional rate formula are defined as:
  • R is the utility's total revenue requirement or rate level. This is the total amount of money a regulator allows a utility to earn.
  • O is the utility's operating expenses.
  • V is the gross value of the utility's tangible and intangible property.
  • D is the utility's accrued depreciation. Combined (V - D) constitute the utility's rate base, also known as its capital investment
  • is the rate of return a utility is allowed to earn on its capital investment or on its rate base.
The elements in the formula should be considered as parameters that are changed in the General Rate Case, every three years. This is what SJWC and ORA (DRA) argue before the ALJ, then the ALJ submits a Proposed Decision (PD) to the CPUC Commissioners.  CPUC can approve the PD or change the PD and then approve.
With this understanding it becomes apparent that Class A California water utilities want, including SJWC argue for every three years:
  • R - SJWC wants to increase rates
  • O - SJWC claims it's mostly fixed costs and in any case ratepayers will always pay for this, includes cost of water. ORA (DRA) effectively argues for the lowest rate and limits to the growth of fixed costs, within the bounds of reliable clean water service.
  • V - SJWC tangible and intangible property (pipelines, water plants, wells) wants to increase, by     replacing and building new infrastructure.As well it includes shareholders investment, retained operating funds, etc.
  • D - SJWC wants to increase the amount of depreciation, to match the tangible and intangible property, so maximize the return on the tangible and intangible property, by building or replacing pipelines, wells, etc., so the depreciation clock is reset, at a higher interest rate, but potentially over a longer period of time.

    Note: the SJWC goal is that (V-D) increases over time to effectively increase R
  • r - SJWC wants to increase the ROR (CPUC Rate of Return).
Look at the above formula and what each element represents then look at the OPENING COMMENTS submitted by SJWC and ORA/DRA, to the ALJ and what they want to change.

We can see that SJWC is continuing to make every effort to de-couple sales from revenues. In fact it's apparently so important to SJWC, that it's almost all the first two pages of SJWC Comments, Introduction, page 2 and part of page 3.
"Specifically, the Proposed Decision would reject SJWC’s proposal to implement a full Water Revenue Adjustment Mechanism/Modified Cost Balancing Account (“WRAM/MCBA”) intended to decouple the Company’s revenues from its water sales while requiring implementation of a three-tier rate design that was premised on approval of the WRAM/MCBA, would disallow most of the Water Conservation programs budget proposed by SJWC, and would severely limit the authorized investment in Recycled Water delivery systems and in SJWC’s ongoing Pipeline Replacement Program." 
Blogger Comment: From my perspective a public company should not have taxpayers "guarantee it's profits" (Note 1) or to phrase it in Utility Talk, "SJWC wants it's ratepayers to guarantee its revenues, dividends to shareholders and the rather large salaries and benefits of it's management. Independent of its operations and how much water they sell. Where is their motivation to operate as efficiently as possible and control rate increases? It should also be noted that SJWC and ORA are in an "adversarial" relationship, as shown in the Comments of the parties to the Proposed Decision. (Bloggers simplification of an argument), I especially appreciate what appears to be a claim by SJWC in the Comments that, "John and Dave have a full WRAM, so SJWC should have it as well. If they don't we'll "sulk" and my conservation efforts will suffer and I won't be able to build more pipelines, water tanks, etc., which just happens to increase "tangible and intangible property", in the formula and surprise ratepayers bills increase."

Please read the Comments from both SJWC and ORA (DRA), see if you see a difference, in the "tone" and content of the Comments submitted. Based on the formula shown above you may be able to see the motivations for the positions SJWC has taken.

We the ratepayers pay for the entire negotiation process, every three years, it's part of the fixed costs under "O" operating expenses, in the formula. Indirectly we also pay for CPUC and ORA (DRA).In fact I've identified over a million dollars, of SJWC expenses, not including legal fees per year to argue and manage the Regulatory issues and the GRC.

Please send email, make your opinion heard!

 If you are concerned about these issues, send email to CPUC at: District 5 United eForm eMail  Simply click on the "eForm eMail" and you will get a page to fill out the information and specify the reason for your opposition to the SJWC Rate Increase and continuing requests to de-couple their revenue from the requirement to do business efficiently and your concern about their lack of openness and transparency. 

You can also send an email to CPUC Public Advisopublic.advisor@cpuc.ca.gov  The Public Adviser will insure your email will be sent to all the appropriate CPUC staff members.

Other people to drop an email (note) and express your opinion are:
  • Scott Herhold, San Jose Mercury News, sherhold@mercurynews.com
  • Julie Putnam, NBC Channel 5, julie.putnam@nbcuni.com

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