California Water Revenue Decoupling Pilot Programs

1. California Water Revenue Decoupling Pilot Programs Lisa M. Bilir, Senior Policy Analyst, Division of Ratepayer Advocates NASUCA 2010 Mid-Year Meeting

2. Outline • Background • Prior to California pilot programs regarding revenue decoupling and conservation rate design • Pilot programs • Description of pilot programs regarding revenue decoupling and conservation rate design (2008 - present) • Preliminary observations • Future directions

3. Background • Commission “standard” rate design • Uniform rate design • 50% of fixed costs recovered through the service charge • Conservation rates (increasing block rates) were for times of drought or water shortage • No revenue adjustment mechanism • Incremental cost balancing accounts • Minimal emphasis on water conservation

4. Background 2005 Water Action Plan Emphasis on conservation programs and conservation rate design Industry-wide Conservation Proceeding Consolidated several conservation rate design applications Pilot programs adopted through settlements with Division of Ratepayer Advocates 4

5. Pilot Programs: Conservation rate design Revenue decoupling Conservation programs 5

6. Pilot Programs: Conservation Rate Design • Residential conservation rate design • increasing block rates with 2 or 3 tiers; price per unit increases as usage increases • shift of revenue from the service charge to the quantity charge • Non-residential conservation rate design • shift of revenue from the service charge to the quantity charge

7. Pilot Programs: Price Adjustment WRAM • A “Price adjustment WRAM,” or “Monterey-style WRAM”: • Prevents utility from gaining or losing as a result of implementing conservation rate design • Corrects for the difference between revenue under conservation rates and revenue that would have been collected under uniform rates • Utility is at risk for lost revenues from decreased sales, and conversely, the utility keeps excess revenues from increased sales

8. Revenue Decoupling The Goal: Sever the relationship between sales and revenues 8

9. Pilot Programs: Revenue Decoupling “WRAM/MCBA” • Revenue Decoupling Mechanisms: Water Revenue Adjustment Mechanism and Modified Cost Balancing Account (“WRAM/MCBA”) • WRAM and MCBA balancing accounts decouple sales from revenues by ensuring the utility will recover adopted fixed costs and actual variable costs WRAM: corrects for the difference between adopted and actual quantity charge revenues MCBA: corrects for the difference between adopted and actual variable costs

10. Preliminary Observations • Too soon to tell if revenue adjustment mechanisms achieve objectives • Not yet enough data to evaluate effectiveness • First pilot programs implemented mid-2008 • For example, California Water Service Company had less than one year of available data at the time it filed General Rate Case in July 2009 • 2008 & 2009 - drought and recession years

11. Preliminary Observations Revenue decoupling WRAM/MCBAs adjust for all water consumption reductions, not just consumption reductions due to conservation Complex and difficult to parse out consumption declines due to utility sponsored conservation programs and rate designs, as well as other factors such as weather, drought, economy, prices, foreclosures, inaccurate sales forecast, etc. WRAM/MCBA goes further than taking away a utility’s disincentive to promote conservation 11

12. Preliminary Observations: significant under-collections • WRAM/MCBA over and under-collections can be significant (4% - 11% in 2009, on a company basis) • Widespread under-collections in 2009 • Resulting in significant customer surcharges • Unintended consequence of WRAM/MCBA is to shield companies from the impact of the economic downturn • Variable costs do not necessarily decrease even when sales decrease

13. Issues and Challenges in Implementation • Steep learning curve for Commission, DRA, and Utilities • Complex, customized annual reporting • Review and provide recommendations on new, complex reports • Additional review and workload outside of the General Rate Case, until we gain more experience with revenue decoupling • Importance of sales forecast accuracy for customer bill impacts and timely revenue recovery

14. Future Directions • Evaluate data on changing consumption and revenue patterns to analyze key questions such as: • Have conservation rate designs and programs changed customer consumption patterns? • Is the WRAM/MCBA allowing cross-subsidies among customer classes to occur? • Focus on enhancing sales forecast methods to improve accuracy • Is there a way to remove conservation disincentives without removing risks properly borne by shareholders • The Commission has dealt with this issue and DRA argued for a reduction in return on equity