Feburary 18, 2016 / Monterey Bay Partisan
Cal Am Wants Customers to Pay for Its Mistakes — Plus a Profit Margin — Plus Interest
By Royal Calkins
It was mostly California American Water’s own fault that it failed to scoop up every dollar it was entitled to collect from Monterey Peninsula customers in recent drought years, according to state consumer protection officials who also found that some customers contributed somewhat to the under-collection by overstating the number of people in their homes.
Under Cal Am’s current rate structure, the per-gallon price of water declines as the number of people in a household increases. For water billing purposes, a state watchdog agency calculated that the number of residents claimed by Peninsula customers is some 15,000 greater than the actual population. The Office of Ratepayer Advocates, an arm of the California Public Utilities Commission, concluded that Cal Am could have and should have spotted the inflated numbers but cannot even reconstruct its own numbers from as recently as 2013.
The Office of Ratepayer Advocates recommends that Cal Am be allowed roughly half the rate increase it is currently seeking but only if it makes several procedural changes and equalizes rates between residential and non-residential customers on the Peninsula.
Cal Am’s rate application is a complicated affair, seeking several modifications to the way rates are calculated, but the heart of the application is Cal Am’s hope to raise rates about 43 percent for residential customers to make up for some $44.2 million that the company was entitled to but missed out on because of conservation measures. (The company has said publicly that the figure was $40.6 million but state officials say their calculations put the figure at $44.2 million.)
“One customer was billed on the basis of having 999 full-time residents in the home while another was recorded as having 900 residents.“
Cal Am and water agencies throughout the state are arguing that they have unfairly watched their revenue decline as water use declined. The natural response from customers, of course, is that they should not have to pay for water they didn’t use.
In a deeply detailed report completed this week, the Office of Ratepayer Advocates recommends that Cal Am absorb $17.4 million of the requested $40.6 million “as this portion of the current balance is reasonably attributable to lack of adequate management oversight” over the company’s water allotment system.
Cal Am proposes to collect the $40.6 million over the next 20 years, at 8.4 percent interest. The Office of Ratepayer Advocates recommends instead that Cal Am collect $23 million of that over the next five years with no interest.
Allowing Cal Am to stretch the collections out over 20 years at the stated interest rate would require Monterey district customers to pay roughly $91.3 million in total surcharges, including $47.2 million in interest alone, ORA calculated.
If Cal Am’s request is granted, the Public Utilities Commission would be allowing it to charge interest on an amount that already includes the company’s guaranteed rate of return. In other words, the company would be calculating the total amount of uncollected revenue, adding its profit margin to that number and adding 8.4 percent interest on top of that, creating a double recovery.
Cal Am may have created the impression that the uncollected revenue is a debt that must be paid back. ORA says that there’s no truth to that — it is simply money over and above the amount of revenue that Cal Am collected during a period of healthy profit-taking.
The ORA report also focuses on discrepancies in Cal Am’s rate structures for residential and non-residential customers. While Cal Am was angling for the business community’s support for its desalination project, it created a rate structure that provides discounts for businesses that claim to be following sound conservation practices, a structure that does not include the type of tiered pricing that punishes residential customers who use large amounts of water.
ORA found that the disparity between residential and non-residential rates is slight at the moment but will grow rapidly when Cal Am starts collecting millions in uncollected revenue from residential customers. For 2014, ORA calculated that residential customers used 65.3 percent of the available water and provided 66.2 percent of Cal Am’s local revenue.
To help cure the looming disparity, ORA proposes to shift about 8 percent of the residential customers’ current burden, about $3 million annually, to Cal Am’s commercial customers.
ORA faulted Cal Am for not maintaining accurate records of household sizes, an important consideration because under the company’s longstanding approach to setting rates, larger households have paid less per gallon of water.
The watchdog agency used a simple approach, comparing Cal Am’s records to census data. The numbers didn’t come close. In 2014, for instance, Cal Am’s records indicated there were 115,148 full-time residents in the core of its Monterey district while the census put the number at 99,396.
(The ORA report mentioned in passing that Cal Am can’t find population data from before 2014 because of a change in its record-keeping system.)
Some of the improperly rewarded discounts are likely to have contributed to the uncollected income that Cal Am seeks to recover in the future, ORA reported.
In some cases, Cal Am calculated the fee structure for homes based on wildly inaccurate numbers. One customer was billed on the basis of having 999 full-time residents in the home while another was recorded as having 900 residents. In four other cases, Cal Am apparently took the homeowners’ words for it and set prices as though more than 50 people lived at each residence. From the report, it appears that those discrepancies were discovered by ORA. ORA also reported that an unusual number of customers reported that their lots had grown significantly, apparently in another effort to receive discounted rates.
“ORA agrees with Cal Am that the current rate design is overly complex, susceptible to abuse and can present challenges for the stable collection of authorized revenues,” the report sayd. The agency said it therefore supports a system with standardized block rates and one that strongly rewards conservation while promoting revenue stability.
January 27, 2016 / Monterey Bay Partisan
Some of the Numbers Elude Cal Am Officials at PUC Hearing on Rate Increase
By Royal Calkins
EDITOR’S NOTE: Testimony at Wednesday’s PUC public hearing on Cal Am request for 40 percent rate increase indicates the company wants to charge its customers 8.4 percent interest to reimburse the company for loans that cost it 5.4 percent. See story below and additional information from Jane Haines in comment section below. Also, for a different take on the numbers, look for Ron Weitzman’s comments below Jane’s.
Public hearings on utility rate increases usually are as predictable as Sandra Bullock movies. Alarmed residents stand up to complain that their rates are too high already and the hearing officer maintains a blank expression throughout.
The Wednesday afternoon hearing on Cal Am Water’s latest increase proved the exception when the hearing officer, a Public Utilities Commission judge, asked Cal Am officials a basic question they couldn’t answer.
Cal Am proposes to raise residential water rates on the Monterey Peninsula by 40 percent to make up for money it lost out on over the past five years because its customers did such a good job conserving water. Its view is that its costs remained the same even as usage went down so it is essentially being punished for promoting conservation. Cal Am argues that it was authorized by state regulators to collect $40.6 million more than it actually collected and it wants to start collecting that money now. It proposes to have its customers pay that off over the next 20 years, plus 8.4 percent interest, for a total of $80 million or so.
Speaking in between a long lineup of angry customers, Cal Am officials on Wednesday told PUC Administrative Law Judge W. Anthony Colbert that the company had been required to borrow money to finance its operations over the past five years because it had not collected the entirety of its “revenue entitlements.”
That’s when Colbert lost the blank expression. He had some questions. He presided over Cal Am’s last general rate case and he indicated that he was somewhat confused by the current request. First addressing Eric Sabolsice, Cal Am’s local operations manager. Colbert wanted to know what the interest rate was on the borrowed money. In a long and winding answer, Sabolsice suggested it was 6.6 percent, but he allowed that he wasn’t entirely sure.
He was quickly replaced at the podium by Jeff Linam, Cal Am’s director of rates. He, too, had a lot to say but none of it included the interest rate.
Colbert repeatedly asked Linam if he knew what the rate was. Linam, hemming and hawing more than a little, finally said he did not.
“We have another hearing at 7 o’clock tonight,” Colbert directed. “Make some calls.” It was not a suggestion.
(The Partisan wasn’t able to attend the evening session but attorney Jane Haines provides detail on the interest rate in comment section below.)
Other than that, the afternoon session was a model of a public hearing on a utility rate except that the speakers were an unusually well informed group, conversant on the ratemaking process and many of the other water-related issues that have dominated public debate on the Peninsula for the last several years.
Charles Cech is the retired engineer who discovered a severe conflict of interest that forced Cal Am to postpone important testing related to its proposed desalination plant. He told the hearing officer that he had gone back through Cal Am’s filings with the PUC and determined that it had enjoyed a profit margin of roughly 30 percent over the past five years, a total of some $100 million.
Among those able to put the current rate issue in perspective was Melodie Chrislock. She lives on an acre in the Carmel Valley, and, therefore, is a relatively heavy water user. Cal Am’s rate structure is meant to promote conservation by charging significantly higher rates for heavy users. Cal Am says the average residential customer will see the monthly bill go from $45 to $63 if the request is granted in full. Chrislock is above average.
She said her highest bill in the summer of 2008 was $184. This past summer, she used considerably less water but was billed $784. Now, she faces a retroactive charge for the water she didn’t use.
Defenders of Cal Am have noted repeatedly that other water agencies throughout California are raising rates for the same reason but they fail to acknowledge that the rates in those other places are generally much lower. They are mostly silent, too, on whether the other agencies propose, as Cal Am does, to simultaneously reduce rates for commercial customers at the expense of residential customers.
MONTEREY BAY PARTISAN
July 22, 2015 / Monterey Bay Partisan
Why Cal Am’s Rate Request Must Be Stopped
By George Riley, Managing Director, Public Water Now
Bills for Some Homes Would Jump 43 Percent
Public Water Now is launching a protest to Cal Am’s recent request for a rate increase. Although Cal Am may feel under-funded, we ratepayers are under-represented and under-appreciated.
Public Water Now has settled into the role of watchdog, but now feels the need to pursue action with a stronger and stronger voice. Because we were relentless in seeking a review of the water rate structure, Cal Am recently acquiesced. Our main interest was to compare and understand the significant differences between residential and commercial rates. We are not convinced that things are fair. And so far, neither Cal Am, nor the commercial interests, has been able to explain how the stark differences are fair.
We did get a meeting with Cal Am officials a few weeks ago on the new rate design. We were told to expect 1) removal of the allotment system, 2) a compressed rate structure, and 3) a shift of costs to the fixed meter charge and away from volume and usage charges. The community’s success at conservation has Cal Am in a tizzy. When the Herald carried the news of the specifics, I was stunned because only days earlier Cal Am had not shared with us the size of the increase (averaging 29% for residential), nor the commercial decrease (averaging 14%), nor the short time period for protest, ending on Aug. 12.
I remember a California Public Utilities Commission workshop in 2012 where Cal Am proudly announced its research showed that higher rates would not cause reduced use. The Peninsula was different, Cal Am said. Cal Am’s view of price elasticity was the opposite of other research Cal Am shared that was unanimous in concluding that the higher the price, the lower the demand. I remember calling Cal Am out on this, in front of about 25 interested and mainly local parties, about its counter-intuitive statement. I was criticized by Cal Am for doing so. It seemed wrong then, and it surely has proven that Cal Am’s research expert was totally wrong.
Cal Am has a serious under-collection of revenue because it misjudged the elasticity of demand. For a protected utility without competition, it has no experience in the business of economic dynamics. Why so many seemingly savvy local business people support Cal Am is mysterious. It boggles the mind to witness such corporate incompetence.
Cal Am’s current rate request is on this link.
My conclusions and the points of protest are these.
Cal Am is using conservation, and the cease-and-desist order and drought crises, to piggyback its under-collection performance. The underlying pitch is to shore up its revenue stream. Guaranteed revenue is the point. This is an inappropriate rationale, timing and method to restructure Cal Am’s entire revenue picture.
The proposed protest period is excessively short, ending Aug. 12
Cal Am has called for workshops, but none has been scheduled by Cal Am or the water management district. This shortcoming undermines the deadline.
The residential rate for Tier 1 users goes up 43%, far exceeding the reported average of 29%. This is where the main water conservers have ended up, so now Cal Am will get its piece of gold from them. It is also where most voters will begin to feel the heat of Cal Am costs. The more we conserve in the public interest, the more we serve the corporate interest.
The commercial rate decrease is not explained, which calls into question if the commercial rates still create an incentive for conservation as advertised.
The fact of under-collections proves Cal Am has not had a rational revenue structure, or it proves Cal Am is inefficient in its management. Both should be evaluated.
Cal Am revenue reports, contained in its application (link) shows plenty of income after expenses. Where and how is Cal Am under-financed?
Cal Am claims, but does not explain, how it is less costly to have these new rates.
Protests can be filed by email (below). In correspondent to the PUC and the Office of Ratepayer Advocates, you should refer to the case number A.15-07-019.
Public Utilities Commission: email@example.com
Office of Ratepayer Advocates: firstname.lastname@example.org
Monterey Peninsula Water Management District: email@example.com
Monterey Herald: firstname.lastname@example.org
Monterey County Weekly: email@example.com
Monterey Bay Partisan: firstname.lastname@example.org
MONTEREY BAY PARTISAN