REPORT ON THE RESULTS OF OPERATIONS LIBERTY UTILITIES …... · 7/20/2018 · PUBLIC VERSION . REPORT ON THE . RESULTS OF OPERATIONS . LIBERTY UTILITIES . PARK WATER COMPANY . Test

218290718

Docket: Exhibit Number Commissioner Admin. Law Judge ORA Proj. Coordinator

: : : : :

A.18-01-003 Carla J. Peterman Dan Burcham Victor Chan

OFFICE OF RATEPAYER ADVOCATES CALIFORNIA PUBLIC UTILITIES COMMISSION

PUBLIC VERSION

REPORT ON THE RESULTS OF OPERATIONS

LIBERTY UTILITIES

PARK WATER COMPANY Test Year 2019 and

Escalation Years 2020 and 2021 Application 18-01-003

For authority to increase water rates located in the

Los Angeles Service Areas

San Francisco, California

July 20, 2018

i

TABLE OF CONTENTS

Page MEMORANDUM ................................................................................................... 1

EXECUTIVE SUMMARY ..................................................................................... 2

CHAPTER 1: INTRODUCTION AND SUMMARY ...................................... 1-1

INTRODUCTION ..................................................................................................... 1-1 A. DISCUSSION ............................................................................................................. 1-1 B.

1) 2019 Revenue Requirement ........................................................................ 1-2

CONCLUSION .......................................................................................................... 1-2 C.

CHAPTER 2: WATER CONSUMPTION AND OPERATINGREVENUES ..................................................................... 2-1

INTRODUCTION ..................................................................................................... 2-1 A. SUMMARY OF RECOMMENDATIONS .............................................................. 2-1 B. DISCUSSION ............................................................................................................ 2-1 C.

1) Average number of Customers................................................................... 2-2

2) Water Sales per Customer .......................................................................... 2-3

a) Residential Bi-Monthly....................................................................... 2-4

b) Business Monthly, Business Bi-Monthly, Industrial Monthly, Public Authority Monthly and Public Authority Bi-Monthly ......................................................................... 2-6

3) Total Water Supply/Unaccounted for Water ........................................... 2-7

4) Miscellaneous Revenues .............................................................................. 2-7

5) Revenues at Present Rates .......................................................................... 2-8

CONCLUSION .......................................................................................................... 2-8 D.

CHAPTER 3: OPERATIONS AND MAINTENANCE, ADMINISTRATIVE AND GENERALEXPENSES ............................. 3-1


1) Operations & Maintenance Expenses ........................................................ 3-4

a) O&M Payroll ....................................................................................... 3-4

b) Conservation........................................................................................ 3-4

c) Temporary Labor ............................................................................... 3-8

ii

d) Meter Expense ..................................................................................... 3-9

e) Water Treatment Miscellaneous ..................................................... 3-10

f) Purchased Water and Replenishment............................................. 3-11

g) Customer Service Information Expense ......................................... 3-11

h) Miscellaneous General – Drought Related ..................................... 3-12

i) General Plant Painting ..................................................................... 3-14

j) Other Pump Maintenance ................................................................ 3-14

2) Administrative & General Expenses ....................................................... 3-15

a) A&G Payroll ...................................................................................... 3-16

b) Employee Bonus/Incentives ............................................................. 3-16

c) Medical Insurance Premiums .......................................................... 3-17

CONCLUSION ........................................................................................................ 3-19 D.

CHAPTER 4: PAYROLL................................................................................... 4-1


1) Company Restructuring ............................................................................. 4-1

2) Payroll Expense Estimates .......................................................................... 4-3

CONCLUSION .......................................................................................................... 4-5 D.

CHAPTER 5: UTILITY PLANT IN SERVICE .............................................. 5-1


1) Escalation ..................................................................................................... 5-3

2) Transmission and Distribution Budget ..................................................... 5-5

a) New Main ............................................................................................. 5-6

b) Main Replacements............................................................................. 5-7

c) New Hydrants and Hydrant Replacements ...................................... 5-7

d) Water System Valves .......................................................................... 5-7

e) Meters .................................................................................................. 5-9

3) Source of Supply – Production ................................................................... 5-9

a) Production Misc. ............................................................................... 5-10

iii

b) Production – Land ............................................................................ 5-13

4) Cost of Removals ....................................................................................... 5-14

5) Status of Park’s Office Building Remodel .............................................. 5-14

CONCLUSION ........................................................................................................ 5-15 D.

CHAPTER 6: MAIN REPLACEMENT ........................................................... 6-1


1) Proposed Mains Replacement Program .................................................... 6-2

2) Composition of Park’s Water Pipeline System ......................................... 6-2

3) Basis of Park’s Proposed Main Replacement Program ........................... 6-4

a) Asset Management Studies for Main ................................................ 6-4

b) Problem with Target Rate of .15 Leaks per Mile............................. 6-5

c) Exponential Increase in Leak Rate ................................................... 6-6

d) Shorter Average Service Life ............................................................. 6-8

4) ORA’s Analysis and Recommendations on Main Replacement Projects ................................................................................ 6-10

a) Historical Expenditures and Leak Rates ........................................ 6-10

b) ORA’s Recommendations on Park’s Proposed Projects .............................................................................................. 6-13

5) 2018 Main Replacement Projects ............................................................. 6-14

a) 2018-MR01. Carlin - Olanda: $1,241,400 ....................................... 6-14

b) Consultant Engineering – Mains: $100,000 .................................... 6-14

6) 2019 Water Main Replacements .............................................................. 6-14

a) 2019-MR01. Shoemaker: $289,000 .................................................. 6-14

b) 2019-MR02. Stockwell/136th/137th/Wilmington: $1,536,600 .......................................................................................... 6-15

c) 2019-MR04. Jersey-Rosecrans-Liggett: $1,329,900 ....................... 6-15

d) 2019-MR11. Liggett & Rosecrans: $839,400 .................................. 6-16

e) 2019-MR07. McKinley 131st to 134th: $631,600 ........................... 6-16

f) 2019-MR10. Clark – Rosecrans to Faywood: $742,100 ................. 6-16

g) 2019-MR03. Rosecrans - Bradfield: $300,000 ................................ 6-17

h) Consultant Engineering – Mains: $100,000 .................................... 6-17

iv

7) 2020 Water Main Replacements .............................................................. 6-18

a) 2019-MR03. Rosecrans - Bradfield: $789,100 ................................ 6-18

b) 2020-MR01. Excelsior - Crossdale to Gridley: $541,000 ............................................................................................. 6-18

c) 2020-MR06. Harris and Locust: $1,345,200 ................................... 6-18

d) 2020-MR02. Clymar & Caswell: $1,889,000 .................................. 6-18

e) 2020-MR05. Gridley-Lindale-McLaren-Potter: $1,641,400 .......................................................................................... 6-19

f) Consultant Engineering – Mains: $100,000 .................................... 6-19

CONCLUSION ........................................................................................................ 6-20 D.

CHAPTER 7: ADVANCED METERING INFRASTRUCTURE (AMI) ..................... 7-1


1) Park’s Present AMR system ....................................................................... 7-2

2) Cost Benefit Analysis ................................................................................... 7-4

a) Cash Flow Analysis ............................................................................. 7-4

b) Revenue Requirement Analysis ......................................................... 7-7

3) Meter Replacement ..................................................................................... 7-8

CONCLUSION ........................................................................................................ 7-10 D.

CHAPTER 8: DEPRECIATION RESERVE AND DEPRECIATION EXPENSE ................................................................. 8-1

INTRODUCTION ..................................................................................................... 8-1 A. SUMMARY OF RECOMMENDATION ................................................................ 8-1 B. DISCUSSION ............................................................................................................ 8-1 C. CONCLUSION .......................................................................................................... 8-3 D.

CHAPTER 9: RATEBASE................................................................................. 9-1


1) Materials and Supplies ................................................................................ 9-1

2) Deferred Income Taxes ............................................................................... 9-1

3) Interest Expense .......................................................................................... 9-1

v

CONCLUSION .......................................................................................................... 9-2 D.

CHAPTER 10: TAXES OTHER THAN INCOME ....................................... 10-1

INTRODUCTION ................................................................................................... 10-1 A. SUMMARY OF RECOMMENDATIONS ............................................................ 10-1 B. DISCUSSION .......................................................................................................... 10-2 C.

1) Payroll Taxes .............................................................................................. 10-2

2) Ad Valorem Taxes ..................................................................................... 10-2

CONCLUSION ........................................................................................................ 10-3 D.

CHAPTER 11: INCOME TAXES ................................................................... 11-1


1) Basis for Regulated Tax Expense ............................................................. 11-3

2) FIT Deduction for Prior Year’s CCFT ................................................... 11-4

3) Tax Normalization ..................................................................................... 11-5

4) Tax Depreciation ....................................................................................... 11-6

5) Tax Cuts and Jobs Act of 2017 ................................................................. 11-6

6) Deferred Income Taxes and Excess Deferred Income Taxes ................ 11-7

7) Interest Expense ........................................................................................ 11-8

8) Investment Tax Credit (“ITC”) ............................................................... 11-9

CONCLUSION ........................................................................................................ 11-9 D.

CHAPTER 12: GENERAL OFFICE ALLOCATION .................................. 12-1


1) Affiliates’ Indirect Allocable Costs for General Office .......................... 12-5

a) Unreasonable increase in APUC’s indirect allocable costs .................................................................................................... 12-5

b) Unreasonable increase in LUC’s indirect allocable costs .................................................................................................... 12-7

c) Unreasonable increase in LABS’ indirect allocable costs .................................................................................................... 12-8

d) Unsupported LABS-US’ indirect allocable costs ........................... 12-8

vi

e) Unsupported Liberty Corp. US’ indirect allocable costs .................................................................................................. 12-10

2) Affiliates’ Direct Costs for General Office:........................................... 12-11

3) Allocations Rates per CAM .................................................................... 12-12

a) Allocation Rates for APUC’s Indirect Costs ................................ 12-12

a) Allocation Rates for LUC’s Indirect Costs ................................... 12-13

b) Allocation Rates for LABS-Business & Corporate Services ............................................................................................ 12-14

4) General Office’s Allocable Costs ............................................................ 12-16

5) Medical Insurance and Workers’ Compensation ................................. 12-17

6) Adjustments for Vacancy Savings ......................................................... 12-19

7) New Positions ........................................................................................... 12-20

a) President-West Region ................................................................... 12-20

b) Vice President- Customer Experience and Director-Customer Care ................................................................................ 12-20

c) Director-Government Relations .................................................... 12-21

d) Director-Financial Planning & Analysis ...................................... 12-23

8) Executive Incentives ................................................................................ 12-24

CONCLUSION ...................................................................................................... 12-29 D.

CHAPTER 13: BALANCING AND MEMORANDUM ACCOUNTS REVIEW ........................................................................ 13-30

INTRODUCTION ................................................................................................. 13-30 A. SUMMARY OF RECOMMENDATIONS .......................................................... 13-30 B.

1) ORA’s General Recommendations Regarding Balancing and Memorandum Accounts .................................................................. 13-30

2) ORA’s Recommendations Regarding Specific Balancing and Memorandum Accounts ("WRAM/MCBA") ............................... 13-31

a) WRAM/Modified Production Cost Balancing Account (“MCBA”)........................................................................................ 13-31

b) California Alternative Rates for Water Revenue Reallocation Balancing Account (“CARW”) ............................... 13-31

c) Pension Expense Balancing Account (“PEBA”) .......................... 13-31

d) Conservation Expense One-Way Balancing Account (“CEOWBA”).................................................................................. 13-31

e) Incremental Cost Balancing Account (“ICBA”) .......................... 13-32

vii

f) Consolidated Expense Balancing Account (“CEBA”) ................. 13-32

g) Office Remodel Balancing Account............................................... 13-32

h) 2013 Interim Rates Memorandum Account (“2013 IRMA”) ............................................................................................ 13-32

i) 2016 Interim Rates Memorandum Account (“2016 IRMA”) ............................................................................................ 13-32

j) 2014 Water Conservation Memorandum Account (“WCMA”) ...................................................................................... 13-33

k) Tangible Property Regulations Consequences Memorandum Account ("TPRC MA) .......................................... 13-33

l) School Lead Testing Memorandum Account ............................... 13-33

DISCUSSION ........................................................................................................ 13-36 C.1) ORA’s General Recommendations Regarding Balancing

and Memorandum Accounts .................................................................. 13-36

2) Background on Memorandum and Balancing Accounts ..................... 13-36

a) Memorandum Accounts ................................................................. 13-36

b) Balancing Accounts......................................................................... 13-38

3) Analysis and Recommendations on Balancing and Memorandum Accounts In Park’s Application ................................... 13-42

a) Balancing Accounts......................................................................... 13-42

(i) Water Revenue Adjustment Mechanism/Modified Production Cost Balancing Account (“WRAM/MCBA”) ................................................................... 13-42

(ii) CARW Revenue Reallocation Balancing Account (“CARW BA”) ........................................................................... 13-44

(iii)Pension Expense Balancing Account (“PEBA”) .................... 13-45

(iv) Conservation Expense One-Way Balancing Account (“CEOWBA”) ............................................................ 13-45

(v) Consolidated Expense Balancing Account (“CEBA”) ................................................................................... 13-46

(vi) Recycled Water Incremental Cost Balancing Account (“ICBA”) ..................................................................... 13-47

b) Memorandum Accounts ................................................................. 13-48

(i) Tangible Property Regulations Consequences Memorandum Account (“TPRC MA”) .................................. 13-48

(ii) 2014 Water Conservation Memorandum Account (“WCMA”) ................................................................................ 13-49

viii

(iii)2013 Interim Rates Memorandum Account (“2013 IRMA”) ...................................................................................... 13-50

(iv) 2016 Interim Rates Memorandum Account (“2016 IRMA”) ...................................................................................... 13-51

(v) School Lead Testing Memorandum Account ......................... 13-51

CONCLUSION ...................................................................................................... 13-52 D.

CHAPTER 14: SPECIAL REQUESTS........................................................... 14-1


1) Park’s request for an SRM ....................................................................... 14-1

a) Summary of Recommendations ....................................................... 14-1

b) Pros and Cons of a Sales Reconciliation Mechanism .................... 14-1

c) Advances in Econometric Forecasting ............................................ 14-3

d) ORA’s Proposed Alternative to an SRM: Improved Accuracy in Forecasting ................................................................... 14-4

e) Conclusion ......................................................................................... 14-4

2) Park’s Request for a Healthcare Balancing Account (“HCBA”) ................................................................................................... 14-5

a) Introduction ....................................................................................... 14-5

b) Summary of Recommendations ....................................................... 14-5

c) Discussion .......................................................................................... 14-5

d) Cost Control Incentives .................................................................... 14-5

e) Conclusion ......................................................................................... 14-6

3) Request to Include Subsequent Offsets in the Final GRC Decision ....................................................................................................... 14-6

a) Introduction ....................................................................................... 14-6

b) Summary of Recommendations ....................................................... 14-6

c) Discussion .......................................................................................... 14-7

d) Conclusion ......................................................................................... 14-7

CONCLUSION ........................................................................................................ 14-7 D.

CHAPTER 15: CUSTOMER SERVICES ...................................................... 15-1

INTRODUCTION ................................................................................................... 15-1 A. SUMMARY OF RECOMMENDATIONS ............................................................ 15-1 B.

ix

DISCUSSION .......................................................................................................... 15-1 C.1) Customer Contacts Received by CAB ..................................................... 15-1

a) Customer Contact by Type .............................................................. 15-1

2) General Order 103-A (“GO”) Compliance ............................................. 15-2

a) Customer Complaints Received by Park ........................................ 15-2

3) Other GO 103-A Standards ...................................................................... 15-4

4) Customer Complaints Sent Directly to Park by its Customers ................................................................................................... 15-4

5) Measures to Reduce Customer Complaints ............................................ 15-5

6) Safety .......................................................................................................... 15-6

CONCLUSION ........................................................................................................ 15-7 D.

CHAPTER 16: WATER QUALITY ............................................................... 16-1


1) Service Area Operations ........................................................................... 16-1

a) Water System Description................................................................ 16-1

b) Water Supply..................................................................................... 16-2

c) Water Treatment .............................................................................. 16-3

2) DDW Drinking Water Enforcement Actions .......................................... 16-3

3) Water Quality Reports .............................................................................. 16-3

a) DDW Sanitary Survey Report ......................................................... 16-3

b) Consumer Confidence Reports (CCR) ........................................... 16-4

(i) 1,4 Dioxane................................................................................... 16-5

4) Future Water Quality Regulations .......................................................... 16-5

a) 1,2,3-Trichloropropane .................................................................... 16-5

b) Perchlorate ........................................................................................ 16-6

c) VOCs .................................................................................................. 16-6

CONCLUSION ........................................................................................................ 16-6 D.

CHAPTER 17: RATE DESIGN ....................................................................... 17-7


x

1) Residential Customers .............................................................................. 17-8

2) Non-Residential Rate Design .................................................................... 17-9

3) Other Rates and Fees ................................................................................ 17-9

4) California Alternative Rates for Water ................................................... 17-9

5) Phase-In of Test Year Increase .............................................................. 17-10

CONCLUSION ...................................................................................................... 17-12 D.

CHAPTER 18: ESCALATION YEAR INCREASES .................................... 18-1


APPENDIX A – QUALIFICATIONS

1

MEMORANDUM 1 This Report is prepared by the Office of Ratepayer Advocates (ORA) – Water 2

Branch. Victor Chan serves as Project Coordinator, under the supervision of Program 3

and Project Supervisors Ting-Pong Yuen and Hani Moussa and Program Manager 4

Richard Smith. Candace Choe serves as ORA legal counsel in this general rate case. The 5

list of ORA witnesses and their contributions to this report are listed in Executive 6

Summary. Appendix A of this report contains the Qualifications and Prepared Testimony 7

of ORA witnesses. 8

9

2

EXECUTIVE SUMMARY 1

In its Application 18-01-003, filed on January 2, 2018, Liberty Utilities Park 2

Water (Park) requests a revenue requirement increase of $1,110,000 or 3.21% in Test 3

Year 2019, $1,776,769 or 4.98% in Escalation Year 2020, and $1,944,452 or 5.24% in 4

Escalation Year 2021. ORA recommends revenue requirement decrease of $3,552,887 or 5

10.22% in the Test Year 2019, and an estimated revenue decrease of $715,648 or 2.17% 6

in Escalation Year 2020 and estimated revenue decrease of $1,627,935 or 4.70% in 2021. 7

ORA’s recommendation is consistent with the provision of safe, reliable, and affordable 8

utility service. 9

ORA’s Key Recommendations 10

The Commission should adopt ORA’s results of operations for Park, which are 11

based on lower estimates for Operations and Maintenance (“O&M”) expenses, 12

Administrative and General (“A&G”) expenses, plant additions and ratebase, and higher 13

sales estimates. The Commission should also: 14

Forecast higher water sales due to continued improvement of the 15 economy and Governor’s lifting of the drought restriction by Executive 16 Order B-40-17. (See Chapter 2.) 17

Forecast lower O&M and A&G Expenses due to ORA’s use of different 18 forecasting methodologies and escalation factors. (See Chapter 3) 19

Forecast lower General Office allocable expenses, both direct and 20 indirect, from Liberty’s parent company and other affiliated 21 subsidiaries. (See Chapter 12.) 22

Reduce company funded capital expenditure by 46% in Test Years 2019 23 and 2020. (See Chapter 5.) 24

Forecast lower depreciation reserve and expenses due to reduction in 25 capital expenditures. (See Chapter 8.) 26

Forecast lower rate base due to reduction in capital investment, working 27 cash and deferred taxes. (See Chapter 9.) 28

Forecast lower income taxes due to statutory change in federal income 29 tax rate from 35% to 21%. (See Chapter 11.) 30

3

Continue two-tier conservation rate structure for residential customers 1 and modify the first tier from 9 hundred cubic feet ("Ccf") to 8 Ccf 2 water usage due to lower water consumption. (See Chapter 17.) 3

Deny Park’s request for an Employee Health and Dental Balance 4 Account because health and dental expenses should be forecasted in 5 rates. (See Chapter 14.) 6

Deny Park’s request for a Sales Reconciliation Mechanism (“SRM”) 7 because 1) it results in perverse price signals that exacerbate the demand 8 situations giving rise to the Water Revenue Adjustment Mechanism 9 (“WRAM”) balances, and 2) using recent historical consumption data, 10 in lieu of the New Committee Method, to forecast water sales will be 11 more accurate. (See Chapter 14.) 12

Include subsequent rate offsets which results in either rate increase or 13 decrease, in a final general rate case (“GRC”) decision (to the extent 14 they are reasonable). The subsequent rate offsets are limited to those 15 that the Commission can process by the date of issuance of the final 16 decision. (See Chapter 14.) 17

Deny Park’s request to phase-in Park’s proposed rate increase because 18 Park’s proposed 3.21% revenue requirement increase in Test Year 2019 19 does not meet Commission’s requirement for phase-in rates. (See 20 Chapter 17.) 21

Require Park to refund to customers approximately $2.4 million net 22 over-collection from various memorandum and balance accounts. (See 23 Chapter 13.) 24

Decrease surcharge from $6.14 to $2.01 to balance costs and revenues 25 for the California Alternative Rates for Water (CARW) program. (See 26 Chapter 13.) 27

Increase (or decrease) both the CARW subsidy and CARW surcharge 28 by the same percentage as the final revenue requirement increase (or 29 decrease) adopted in this proceeding. (See Chapter 17.) 30

ORA agrees with Park’s rate of return of 7.41%, which is lower than the 31

rate of return of 9.07% that was adopted in Decision 13-05-037, to reflect Park’s 32

current cost of debt, for this proceeding. 33

The 2017 customer satisfaction survey performed by J.D. Power ranks Park 34

below the average of its industry peers in the western region in overall customer 35

4

satisfaction with a score of 561 vs. an average score of 702 for western water 1

utilities.1 The overall customer satisfaction score is based on six factors: delivery, 2

price, billing & payment, communications, conservation, and customer service. 3

Of the six factors, Park’s performance in “price” is the lowest, with a score of 4.28 4

for total cost of water service and 4.17 for fairness of pricing as compared to an 5

average score of 6.36 and 6.32, respectively, for western water utilities. The J.D. 6

Power’s survey concludes that Park generally scored well in the categories of 7

“reliability of water service” and “phone and field service,” while areas that 8

require more attention are “conservation,” “price,” and “communication.” ORA’s 9

recommendation of an overall revenue requirement decrease of $3.552 million 10

(-10.22%) in Test Year 2019 is consistent with the findings of the J.D. Power 11

survey and helps to address affordability. 12

13

14

1 Customer Satisfaction Results (Park Water, Wave 1-4 Mar-Dec 2017).

5

ORGANIZATION OF REPORT 1 Chapter Description ORA Witness

1 Introduction and Summary Victor Chan

2 Water Consumption and Operating Revenues

Herbert Merida

3 Operations & Maintenance and Administrative & General Expenses

Jeff Roberts

4 Payroll and New Positions Jeff Roberts

5 Utility Plant In Service Pat Esule

6 Main Replacement Sung Han

7 Advanced Meter Infrastructure (AMI) Sung Han

8 Depreciation Reserve and Depreciation Expense

Sung Han

9 Rate Base Sung Han

10 Taxes Other than Income Jose Cabrera

11 Income Taxes Jose Cabrera

12 General Office Mehboob Aslam

13 Memorandum/Balancing Accounts James Simmons

14 Special Requests James Simmons

15 Customer Services Kyle Graff

16 Water Quality Kyle Graff

17 Rate Design Herbert Merida

18 Escalation Year Increases Victor Chan

Appendix A Qualifications All

1-1

INTRODUCTION AND SUMMARY CHAPTER 1:1

INTRODUCTION A.2 On January 2, 2018, Liberty Utilities (Park Water) Corp. (“Park”) filed A.18-01-3

003 requesting authority to increase rates charged for its domestic water service by 4

$1,110,000 or 3.21% in Test Year 2019, by $1,776,769 or 4.98% in Escalation Year 5

2020, and by $1,944,452 or 5.24% in Escalation Year 2021. 6

Park estimates that its proposed increases will produce revenues providing a rate 7

of return on equity (“ROE”) of 3.16% and a rate of return on ratebase (“ROR”) of 7.41%. 8

These rates of return are lower than 7% ROE and 9.07% ROR as authorized by the 9

Commission in D.13-05-027, and reflect Park’s current lower cost of debt. 10

Park is fiscal year filer and its Fiscal Test Year 2019 covers the time period from 11

July 1, 2019 to June 30, 2020. Park’s Fiscal Test Year 2019 request is calculated based 12

on the average of the Calendar Year 2019 and 2020. However, Park’s Fiscal Test Year 13

2019 is stated as “Test Year 2019” throughout its testimony. ORA adopts the same 14

designation throughout its report for easy comparison and to avoid confusion. ORA’s 15

methodology for calculating the fiscal test year numbers are the same as Park’s. 16

This report sets forth ORA’s analysis and recommendations on Park’s general rate 17

case requests. Tables 1-2 at the end of this chapter compare Park’s and ORA’s Summary 18

of Earnings for the Domestic System for the Test Year 2019. 19

DISCUSSION B.20 Park operates three separate water systems in southeastern Los Angeles County 21

that includes Cities of Compton, Lynwood, Downey, Bellflower and Norwalk. Park’s 22

water sources of supply include imported water, groundwater, and recycled water. Park 23

operates ten wells, with three on standby status as emergency backup supply. Park’s 24

domestic system generates about $34 million in annual revenues and has 27,000+ 25

customers. 26

1-2

1) 2019 Revenue Requirement 1 Table 1-1 below provides a comparison of Park’s and ORA’s estimated changes in 2

revenue requirement for Test Year 2019 based on a 7.41% ROR. The differences 3

between ORA’s and Park’s revenue requirement estimates are due to ORA’s adjustments 4

as summarized in the Executive Summary of this report. 5

Table 1-1 6 Test Year 2019 Revenue Requirement Increase 7 Amount of Increase Percent Increase

Park $1,110,000* 3.21% ORA ($3,552,887)* (10.22%) Difference $4,662,887 13.43%

*Amount of increase is the difference between present rate revenue and proposed rate 8 revenue shown in Table 1-2. 9

CONCLUSION C.10 The Commission should adopt ORA’s Test Year 2019 results of operations, 11

presented in Tables 1-2 at the end of this chapter and authorize a revenue decrease of 12

$3,552,887 (-10.22%) for Park’s domestic water system. 13

1-3

1

2-1

WATER CONSUMPTION AND OPERATINGREVENUES CHAPTER 2:1

INTRODUCTION A.2 This chapter presents ORA’s analysis and recommendations on Park’s average 3

number of customers, water sales per customer, unaccounted for water, and operating 4

revenues for Test Year 2019. ORA reviewed Park’s Revenue Requirement Report, 5

supporting workpapers, data request responses, and methods of estimating water 6

consumption and operating revenues. ORA’s recommendations and Park’s estimates for 7

the average number of customers, water consumption, and operating revenues are 8

presented in tables at the end of this chapter. 9

SUMMARY OF RECOMMENDATIONS B.10 Tables 2-5 through 2-8, at the end of this chapter, show Park’s and ORA’s 11

estimates for the average number of customers, water consumption, operating revenues, 12

and ORA’s recommendations. 13

For the Test Year 2019, the total number of customers estimated by Park and ORA 14

are 27,482 and 27,485, respectively. Park’s estimated total water supply is 4,257,061 Ccf, 15

while ORA’s estimate is 4,283,581Ccf. ORA agrees with Park’s estimated unaccounted-16

for-water percentage of 3.65% for Test Year 2019. 17

Using the present rates, ORA’s calculation of total operating revenues for the Test 18

Year 2019 are $34,750,420 while Park’s estimates are $34,576,605 for the Test Year. The 19

differences in estimated customers, consumption, unaccounted-for-water and operating 20

revenues are due to a difference in methodology as discussed below. 21

DISCUSSION C.22 According to the Revised Rate Case Plan for Class A Water Utilities adopted in 23

Decision 07-05-062, utilities must forecast customer growth using a five-year average of 24

the change in the number of customers by customer class. A utility may make an 25

adjustment to the five-year average if an unusual event occurs, or is expected to occur, 26

such as the implementation or removal of a limitation on the number of customers. 27

Further, the applicant utility and ORA must calculate consumption by using a multiple 28

2-2

regression to forecast per-customer usage for the residential and commercial customer 1

classes in general rate cases, based on the New Committee Method. This method relies 2

on Standard Practice No. U-2 and “Supplement to Standard Practice No. U-25” with the 3

following improvements: 4

• Use monthly data for 10 years, if available; 5 • Use 30-year average for forecast values for temperature and rain; 6

and 7 • Remove periods from the historical data in which sales restrictions 8

were imposed or the Commission provided the utility with sales 9 adjustment compensation, but replace with additional historical data 10 to obtain 10 years of monthly data, if available.2 11

Since customers and unit consumption are the basis for all revenue forecasts, a 12

subsequent comparison of revenue will reflect the changes made in these projections. 13

The water supply estimates then reflect any changes in estimated customers, unit 14

consumption, and unaccounted for water. 15

1) Average number of Customers 16 Park’s service areas consist of residential, commercial, and industrial properties. 17

Residential customers comprise over 90% of Park’s total customers. ORA reviewed 18

Park’s estimates for the number of customers for all classes. ORA recommends 19

including 2017 recorded data for this analysis as it is the most recent and best available 20

data. 21

ORA and Park calculated the customer growth rate by finding the yearly average 22

across the five years of previously recorded data. This method produced an ORA Test 23

Year 2019 forecast of 27,485 total customers as opposed to the Park Test Year 2019 24

forecast of 27,482 total customers in Park’s application. The difference in the forecasted 25

total customers is because ORA used recorded 2017 data. 26

27

2 D.07-05-062, Appendix, p. A-23, Footnote 4.

2-3

Table 2-1 2019 Projected Average Number of Customers 1

Customer Class Park ORA

Residential 25,300 25,301 Business Monthly 50 50 Business Bi-Monthly 1,673 1,674 Industrial Monthly 5 5 Public Authority Monthly 62 62 Public Authority Bi-Monthly 140 140 Private Fire Monthly 177 177 Private Fire Bi-Monthly 24 25 Fire Hydrant 11 11 Temp 14 14

2) Water Sales per Customer 2 Park performed a regression analysis using the software program Stata as required 3

by the Revised Rate Case Plan for all customer classes. Park included temperature, 4

precipitation, time, a dummy variable for each month, and a dummy variable for 5

conservation. Park provided the results from the New Committee Method, but it is not 6

recommending the use of that output for this rate case. This is because customer unit 7

consumption has been somewhat unstable in recent years. This may be due to several 8

factors such as an unstable economy as a result of the recent recession and its effects, 9

local encouragement of conservation, rate increases, the implementation of a 10

conservation rate design that provides an incentive to save water, the recent drought, 11

and/or recent statewide legislation encouraging water conservation. Instead, Park 12

proposes an alternative for the customer usage forecasts for all classes except for the 13

Reclaimed class where the New Committee Method is acceptable to Park. Park believes 14

that the authorized methodology in the Revised Rate Case Plan does not provide 15

reasonable, reachable, or desired results except for the Reclaimed class. 16

ORA agrees Park is justified in deviating from a multiple regression, the preferred 17

forecast tool for customer consumption projections within the Revised Rate Case Plan, 18

because of the current state of the economy due to the recent recession and the recent 19

2-4

droughts, which are unusual events. As the economy continues to remain strong3, 1

consumption behavior is likely to increase. It is appropriate to use more refined tools or 2

complex modifications to the New Committee Method to accurately forecast 3

consumption during transition periods between droughts and major changes in the 4

economic landscape. ORA recommends that if the Commission makes any changes to 5

the New Committee Method it should do so in an industry-wide proceeding such as a 6

rulemaking, and not on a case-by-case basis. Therefore, ORA does not agree with Park’s 7

modifications to the New Committee Method. ORA concurs with Park’s forecast 8

methodology in this GRC because of the unusual events as mentioned previously, but 9

Park should use the recorded 2017 data instead of the forecast amount for the average 10

water usage for all customer classes except for the Residential, Business, Public 11

Authority and Industrial classes. ORA’s forecast for these customer classes more 12

accurately reflect the current trend. 13

Residential Bi-Monthly a)14 Park’s regression analysis for the residential class resulted in good R- Squared 15

values of 0.85 which generally means that the model fits the data. Nevertheless, Park 16

rejects the econometric method for the residential class because the forecast overstates 17

the effects of the drastic drop in unit consumption that occurred between 2013 and 2015 18

due to drought restrictions. Now that the State has lifted drought restrictions, Park 19

believes that conservation from the residential class will plateau rather than continue to 20

decline. Park based its proposal on 12 months of actual recorded rates (105.69 Ccf per 21

customer) ending November 2017. 22

ORA agrees that given that ratepayers have already made substantial decreases in 23

consumption, it is not reasonable to expect a continued downward trajectory at this level. 24

However, ORA disagrees that the unit cost will plateau. ORA sees consumption 25

increasing for the Park service area as a result of California lifting drought restrictions on 26 3 The Mercury News, How California regained title of world’s 5th largest economy, https://www.mercurynews.com/2018/05/10/how-california-regained-title-of-worlds-5th-largest-economy/, 6/27/18.

2-5

April 7, 2017 in Executive Order B-40-174 and because of the improvement of the 1

economy.5 Behavior has changed as reflected in increased rates of water usage post-2

drought.6 7 This is evident in the fact that the Estimated Monthly Residential Gallons Per 3

Capita Day (“R-GPCD”) for Park by the California Water Boards shows a general 4

bounce back in usage from 2017 to 2018 and an almost comparable level of usage 5

between 2016 to 2018 for the first four months of the year:8 9 10 11 6

4 Edmund G. Brown Jr., Executive Order B-40-17, https://www.gov.ca.gov/wp-content/uploads/2017/09/4.7.17_Exec_Order_B-40-17.pdf, 6/27/18. 5 The Mercury News, How California regained title of world’s 5th largest economy, https://www.mercurynews.com/2018/05/10/how-california-regained-title-of-worlds-5th-largest-economy/, 6/27/18. 6 NBC Los Angeles, Californians' Water Use Rises Despite Returning Drought, https://www.nbclosangeles.com/news/local/Increased-Water-Usage-Prompts-Possible-Return-of-Drought--474387873.html, 6/27/18. 7 The Mercury News, California water use back to pre-drought levels as conservation wanes, https://www.mercurynews.com/2018/03/10/california-water-use-continues-to-increase-as-conservation-declines/, 6/27/18. 8 The State Water Resources Control Board, January 2018 Supplier Conservation, https://www.waterboards.ca.gov/water_issues/programs/conservation_portal/docs/2018mar/supplierconservation_030618.pdf, 6/27/18. 9 The State Water Resources Control Board, February 2018 Supplier Conservation https://www.waterboards.ca.gov/water_issues/programs/conservation_portal/docs/2018apr/supplierconservation_040318.pdf, 6/27/18. 10 The State Water Resources Control Board, March 2018 Supplier Conservation https://www.waterboards.ca.gov/water_issues/programs/conservation_portal/docs/2018may/supplierconservation_050118.pdf, 6/27/18. 11 The State Water Resources Control Board, April 2018 Supplier Conservation https://www.waterboards.ca.gov/water_issues/programs/conservation_portal/docs/2018jun/supplierconservation_060518.pdf, 6/27/18.

2-6

1

Table 2-2 PARK R-GPCD 2

Month 2016 (R-GPCD)

% Change 2017 (R-GPCD)

% Change 2018 (R-GPCD)

January 28 29% 36 11% 40

February 44 -16% 37 19% 44

March 39 0% 39 -3% 38

April 57 -5% 54 7% 58

These usage rates indicate a bounce back that the Commission should consider, 3

especially since residential customers comprise over 90% of Park’s total customers. 4

Therefore, ORA recommends a unit consumption forecast of 106.58 Ccf based on a 5

three-year (2015-2017) average, which is more reflective of the current trends and uses 6

the recorded 2017 usage rates provided in Park’s updated workpapers. 7

Business Monthly, Business Bi-Monthly, Industrial b)8 Monthly, Public Authority Monthly and Public 9 Authority Bi-Monthly 10

Park used 12 months of recorded actual data ending November 2017, which is 11

similar to how it calculated the residential sales forecast for Test Year 2019 for the 12

Business Monthly, Business Bi-monthly, Industrial Monthly, Public Authority Monthly 13

and Public Authority Bi-Monthly customer classes. 14

ORA used the recorded 2017 data to calculate the Test Year 2019 amount. Again, 15

ORA believes that using the recorded 2017 data gives a more accurate indication of 16

current trends. The table below summarizes the proposed amounts by Park and ORA 17

with the respective methodology used: 18

2-7

1

Table 2-3 Park and ORA Unit Consumption TY 2019 2

Customer Class

Park TY 2019

(Ccf)

Method ORA TY 2019

(Ccf)

Method

Business Monthly

4,879.66 12 mths until 11/17 4,854.36 3 year avg using recorded 2017

Business Bi-Monthly

449.39 12 mths until 11/17 454.51 3 year avg using recorded 2017

Industrial Monthly


Public Authority Monthly


Public Authority Bi-Monthly

280.03 12 mths until 11/17 279.36 4 year avg using recorded 2017

3) Total Water Supply/Unaccounted for Water 3 The total water supply represents the sum of water sales and unaccounted-for 4

water. For Test Year 2019, ORA’s estimate for total water supply is 4,283,581 Ccf, and 5

Park’s estimate is 4,257,061 Ccf. 6

Unaccounted-for-water is the amount of water used in operations for flushing the 7

system and water lost due to leakage—this is calculated as the difference between the 8

total amount of water produced and the total amount of water recorded for sales. 9

Park’s forecasted unaccounted-for-water losses are 3.65%, which is the two year 10

running average. ORA finds the past two-year average and the estimate going-forward 11

reasonable. ORA accepts Park’s unaccounted-for-water estimates. 12

4) Miscellaneous Revenues 13 For miscellaneous revenues Park included in revenue at present and proposed rates 14

an estimate of $309,074 per year of miscellaneous revenue from reconnection fees and 15

late fees. This estimate includes $171,837 for Fire Flow/Reconnect Fees and $137,237 16

for Late Fees, based on a five-year average up to the recorded 2016 amounts. Park also 17

2-8

calculated $36,967 for Excess Capacity revenue. Therefore, Park proposes an estimate 1

for total miscellaneous revenues for the test period, 2019-2021, of $346,041 per year. 2

ORA used a four-year average, based on the recorded 2017 amount, which more 3

accurately reflects the current trend for miscellaneous revenue from reconnection fees 4

and late fees. Thus, ORA estimates $163,403 for Fire Flow/Reconnect Fees and 5

$147,165 for Late Fees. ORA concurs with Park’s Excess Capacity revenue estimate of 6

$36,967. Therefore, ORA recommends an estimate for total miscellaneous revenues for 7

the test period, 2019-2021, of $347,534 per year. 8

Table 2-4 Park and ORA Misc. Revenue TY 2019 9

Description Park TY 2019

ORA TY 2019

Difference ORA>Park

Misc. Service Revenues $171,837 $163,403 $(8,434) Late Fees $137,237 $147,165 $9,928 Excess Capacity $36,967 $36,967 $0

TOTAL $346,041 $347,534 $1,493

5) Revenues at Present Rates 10 Operating revenue is calculated by multiplying the number of customers by their 11

applicable water use and applying the current tariff rates for the present revenues. 12

For Test Year 2019, the total operating revenues calculated by ORA are 13

$34,750,420 at present rates, while Park calculates $34,576,605 for the Test Year at 14

present rates. The differences are due to differences in methodology between ORA and 15

Park in estimated customers, consumption, unaccounted-for-water and operating 16

revenues. 17

CONCLUSION D.18 After investigation and analysis, ORA finds that Park’s estimates for the average 19

number of customers are reasonable, provided they are updated with the recorded 2017 20

updates. For the Residential, Business, Industrial, and Public Authority customer classes’ 21

consumption, ORA recommends that the Commission adopt ORA’s forecast and 22

resulting estimated revenues as more reasonable. For all other customer class categories, 23

2-9

ORA finds Park’s consumption and revenue methodology reasonable using the recorded 1

2017 data. 2

Item ORA ParkAmount Percent

(A) (B) C (D)

Water Service Revenue: Residential 23,174.4 23,040.4 (133.9) -0.58% Business Bi-Monthly 5,982.9 5,926.7 (56.2) -0.9% Business Monthly 1,800.1 1,804.7 4.6 0.26% Industrial Bi-Monthly 0.0 0.0 0.0 0.00% Industrial Monthly 284.6 286.1 1.5 0.52% Public Authority- bi monthly 418.1 418.7 0.6 0.14% Public Authority- monthly 1,549.3 1,542.8 (6.5) -0.42% Private Fire Service Bi-Monthly 16.2 15.0 (1.2) -7.53% Private Fire Service Monthly 225.2 220.6 (4.6) -2.05% Fire Hydrant Bi-Monthly 8.8 8.8 0.0 0.00% Temporary 231.6 212.5 (19.2) -8.28% Reclaimed 711.7 754.4 42.7 6.00%

Total 34,402.9 34,230.6 (172.3) -0.50%

Other Water Revenue

Miscellaneous Revenues 347.5 346.0 (1.5) -0.43%

Total Other Water Revenue 347.5 346.0 (1.5) -0.43%

Total Operating Rev. 34,750.4 34,576.6 (173.8) -0.50%

Park Exceeded ORA

(Dollars in Thousands)

TABLE 2-5

Liberty UtilityPark Central Basin

OPERATING REVENUESTest Year 2019

(at Present Rates)

3 4

5

2-10

1

2-11

ORA Park

Item Analysis Estimated Amount Percent

(A) (B) C (D)

Average Consumption by Customer Class

Residential 106.6 105.7 (0.9) -0.83%

Business Bi-Monthly 454.5 449.4 (5.1) -1.13%

Business Monthly 4,854.4 4,879.7 25.3 0.52%

Industrial Bi-Monthly 0.0 0.0 0.0 0.00%

Industrial Monthly 8,559.3 8,608.2 48.9 0.57%

Public Authority- bi monthly 279.4 280.0 0.7 0.24%

Public Authority- monthly 3,245.7 3,235.4 (10.3) -0.32%

Private Fire Service Bi-Monthly 2.3 2.4 0.1 4.03%

Private Fire Service Monthly 35.1 30.9 (4.3) 0.00%

Fire Hydrant Bi-Monthly 0.0 0.0 0.0 0.00%

Temporary 1,943.2 1,744.3 (198.9) -10.24%

Reclaimed 4,463.5 4,789.1 325.6 7.29%

TABLE 2-7

Liberty Utility

Park Central Basin

Average consumption (Ccf) per customer

Park Exceeded ORA

1 2

3

2-12

Consumption by Customer Class ORA Park

Amount Percent

(A) (B) C (D)

Residential 2,696,488 2,674,040 (22,448) -0.83%

Business Bi-Monthly 760,856 751,831 (9,025) -1.19%

Business Monthly 242,718 243,983 1,265 0.52%

Industrial Bi-Monthly 0 0 0 0.00%

Industrial Monthly 42,797 43,041 245 0.57%

Public Authority- bi monthly 39,110 39,204 94 0.24%

Public Authority- monthly 201,233 200,594 (639) -0.32%

Private Fire Service Bi-Monthly 58 58 (0) -0.13%

Private Fire Service Monthly 6,220 5,462 (758) 0.00%

Fire Hydrant Bi-Monthly 0 0 0 0.00%

Temporary 27,205 24,421 (2,785) -10.24%

Reclaimed 116,052 124,518 8,465 7.29%

Total Consumption 4,132,737 4,107,150 (25,586) -0.62%

Unacctounted For Water 150,845 149,911 (934) -0.62%

Park- 3.65%

ORA- 3.65%

Total Supply Forecast 4,283,581 4,257,061 (26,520) -0.62%

Park Exceeded ORA

TABLE 2-8

Liberty Utility

Park Central Basin

TOTAL CONSUMPTION AND SUPPLY

(Ccf per year - Test Year 2019)

1 2

3

3-1

OPERATIONS AND MAINTENANCE, ADMINISTRATIVE CHAPTER 3:1 AND GENERALEXPENSES 2

INTRODUCTION A.3 This chapter presents ORA’s analysis and recommendations for Administrative 4

and General (“A&G”) and Operations and Maintenance (“O&M”) expenses for Park. In 5

developing its recommendations, ORA reviewed Park’s Revenue Requirements Report, 6

direct testimonies, and electronic workpapers filed in its 2018 general rate case (“GRC”) 7

application. Below is a summary of ORA’s final recommendations with a general 8

discussion of differences between Park’s and ORA’s forecast. The discussion portion of 9

this chapter provides more detailed commentary on ORA’s recommendations and 10

methods of analysis. 11

SUMMARY OF RECOMMENDATIONS B.12 ORA estimates total expenses of $18,188,615 for Test Year 2019 while Park 13

estimates total expenses of $20,887,729. Park’s estimate exceeds ORA’s estimate by 14

$2,699,115 (13%). The differences are mainly due to ORA’s higher sales forecast, 15

differences in forecasting methodology, modifications to inflation factors, and ORA’s 16

expense adjustments to individual subsidiary accounts. Table 3-1 details the differences 17

between ORA and Park. 18

19

3-2

Table 3-1 Total Expense Summary 1

Park ORA Difference PAYROLL-OPERATIONS $1,359,509 $1,354,816 $4,693 0% OPERATIONS-OTHER $289,223 $227,314 $61,909 21% PURCH WATER-POTABLE $5,330,947 $5,270,966 $59,981 1% PURCH WATER-RECLM'D $213,900 $213,900 $0 0% PURCHASED POWER $307,315 $307,315 $0 0% LEASED WATER RIGHTS $663,157 $663,157 $0 0% REPLENISHMENT $1,586,452 $1,586,452 $0 0% CHEMICALS $54,872 $54,075 $797 1% PAYROLL-CUSTOMERS $782,881 $780,179 $2,702 0% CUSTOMERS-OTHER $733,918 $572,617 $161,302 22% UNCOLLECTIBLES $134,508 $135,527 -$1,019 -1% PAYROLL-MAINTENANCE $222,599 $221,830 $769 0% MAINTENANCE-OTHER $627,883 $602,362 $25,521 4% PAYROLL-CLEARINGS $96,121 $95,789 $332 0% DEPRECIATION-CLEARINGS $183,854 $183,854 $0 0% CLEARINGS-OTHER $260,800 $257,791 $3,009 1%

SUB-TOTAL O & M $12,847,937 $12,527,943 $319,994 2%

A & G PAYROLL $1,872,250 $1,516,797 $355,453 19% EMPLOYEE BENEFITS $1,075,418 $768,950 $306,468 28% INSURANCE $388,796 $383,933 $4,864 1% UNINSURED PROP DAMAGE $815 $793 $22 3% REG. COMM. EXPENSE $168,510 $168,510 $0 0% FRANCHISE REQ’S $134,508 $135,527 -$1,019 -1% OUTSIDE SERVICES $273,412 $269,984 $3,428 1% A & G - OTHER $444,459 $433,733 $10,727 2% A & G TRANSFER’D CREDIT -$624,626 -$344,234 -$280,392 45% RENTS $0 $0 $0 ALLOCATIONS $4,306,252 $2,326,681 $1,979,571 46%

SUB-TOTAL A & G $8,039,792 $5,660,672 $2,379,121 30% GRAND TOTAL $20,887,729 $18,188,615 $2,699,115 13%

2

3-3

DISCUSSION C.1 Park bases its O&M and A&G expense forecasts primarily on a five-year (2013-2

2017) historical average normalized to 2017 with September 2017 Energy Cost of 3

Service memorandum(“ECOS Memo”) inflation rates. Park then escalates this with a 4

three percent inflation rate in 2018, 2019, and 2020 to derive the Test Year estimate. 5

Park states that the three percent inflation rate is based on the company’s opinion.12 6

ORA agrees with Park’s use of a five-year average but recommends the 7

Commission use the escalation factors from the most recently-published ECOS Memo. 8

This memo is compiled with robust forecasting methods and is therefore more 9

representative of inflation for the Test Year. This recommendation is consistent with 10

Commission precedent.13 The ECOS factors that ORA used in this proceeding are 11

presented in Table 3.2. ORA further recommends that these factors should be updated 12

and presented in the final comparison exhibits prior to the final decision in this 13

proceeding. 14

Table 3-2 ECOS Inflation Factors 15

Non labor Labor Composite* 2012 1.007 1.031 1.0146 2013 1.004 1.021 1.0072 2014 1.009 1.015 1.017 2015 0.973 1.016 0.9962 2016 0.989 1.001 0.9978 2017 1.034 1.013 1.0272 2018 1.011 1.02 1.0202 2019 1.016 1.016 1.026 2020 1.018 1.023 1.0276 2021 1.014 1.028 1.0248 2022 1.014 1.028 1.0248

*Composite comprised of (60% non labor/40% labor)

12 Exhibit B – Revenue Requirement Report at p. 47. 13 See Decision (D.) 04-06-018 Escalation of Labor and Non-Labor Expenses, Rate Base Additions at pp. 10-12.

3-4

1) Operations & Maintenance Expenses 1 In general, the company used the five-year average with three percent inflation to 2

forecast its O&M expenses. However, the company used different methods to forecast 3

payroll, water quality lab testing, conservation, supply costs, replenishment, and 4

purchased power. This section details the differences between Park’s and ORA’s 5

forecasts for O&M expenses. 6

O&M Payroll a)7 ORA recommends a more accurate payroll expense forecast for Test Year 2019. 8

This recommendation modifies the O&M expense forecast reflected in this section. 9

Please see Chapter 4 for a more thorough discussion of ORA’s payroll forecast. 10

Conservation b)11 The Commission should approve a Test Year conservation budget of $336,264. 12

Park requests a conservation budget in the Test Year of $472,325. The company arrived 13

at this amount by using the previously authorized settlement agreement amount of 14

$425,000 escalated forward with an inflation rate of three percent.14 This amount is 15

approximately 45% higher than the average of the most recent five year historical data as 16

shown in Table 3-3. 17

Table 3-3 Park’s Conservation Expenses 18

Recorded Projected 2013 2014 2015 2016 2017 2018-Est 2019 Test Year

278,730 362,154 394,001 272,885 310,620 451,333 472,325

45.30% Increase 2017-2018

In support of its request, Park provides an overview of the programs offered to the 19

local community of residential ratepayers: 20

Public Awareness: bill inserts promoting conservation, brochures, 21 community speakers, pamphlets, brochures detailing conservation 22 gardening techniques, and school partnerships. 23

14 D.16-01-009 Resolving Park Water Company’s 2015 General Rate Case at p. 25.

3-5

Water Use Efficiency Devices: providing bathroom and kitchen 1 aerators, leak detection tablets, shut-off nozzles, shower timers, and 2 moisture sensors. 3

Special Events: conservation celebration showcasing low-4 maintenance, water-wise gardening. 5

CBWMD WaterSmart Rebates: ratepayers eligible for $200 rebates 6 for High-Efficiency Clothes Washer, $2 per landscaping nozzle, 7 rebates for irrigation controllers, soil moisture sensors and cisterns. 8

Toilet Direct Program: in partnership with CBMWD, encourages 9 low-income ratepayers to replace inefficient toilets with high 10 efficiency toilets. 11

For commercial and industrial ratepayers the company provides the following 12

conservation programs: 13

Enhanced SoCal Water Smart Rebate Program: offers enhanced 14 rebates for water saving devices. 15

Water Use Audits: Survey of the water system to detect leaks, 16 and provide guidance to increase water conservation. 17

With a few exceptions discussed later in this chapter, ORA agrees with 18

maintaining the existing conservation programs. Therefore, ORA will focus on the 19

company’s forecast and use of the budget. To put this program’s costs in perspective, 20

Table 3.3 displays the prior five years recorded expenses for these projects, and shows 21

that Park’s recent spending on conservation is far below the amount requested. To 22

determine how these funds were spent over the recorded years, ORA sampled the 23

conservation expenses tracked in the general accounting ledger. In the ledger comprising 24

the 2016 total expense, ORA found many customer gifts that do not have a direct or 25

measurable link to conservation efforts. Table 3.4 shows a summary of the almost 26

$10,000 in customer gifts that Park purchased. 27

28

3-6

Table 3-4 2016 General Ledger Conservation Expense Excerpt 1

***BEGIN CONFIDENTIAL*** 2

Item Description Amount

***END CONFIDENTIAL*** 3

While these promotional gifts may be fun and entertaining for Park customers, 4

they are not consistent with the purpose of the conservation budget and there is no clear 5

conservation benefit of giving away items such as flip flops, gloves, and hands-free 6

phone holders. 7

These were not the only questionable expenses found in the conservation expense 8

general ledger for that year. ORA asked in a data request: 9

Please provide invoice and explanation for expense item 10 “dropcountr, Inc” “2016 Dropctr Implemtation Fee” for 11 $30,000. 12

Park responded: 13

“Liberty Park Water used the Dropcountr service to 14 communicate water usage and message its customers through 15 the Dropcountr platform. This service has been discontinued. 16 https://www.dropcountr.com. The original contract and 2016 17 invoice are attached.”15 18

The company paid for a state of the art communication and messaging technology 19

service to inform customers of their water usage. This same expense was also found in 20

15 Response Park Data Request No. ORA-A.18-01-003 JR6-003 Q #1C.

3-7

2015, bringing the total ratepayer cost to $60,000, not including the additional thousands 1

spent on the mailers and other promotional methods to advertise this service to 2

customers. More importantly, ORA reviewed Park’s conservation testimony from its 3

prior GRC (A.15-01-001) and found no mention of its intent to implement such an 4

expensive program. Thus, Park never provided the Commission a cost benefit analysis 5

describing the delivered results and benefits to ratepayers associated with this program. 6

In the prior GRC settlement agreements, ORA and Park agreed on $425,000 as the 7

forecast for the 2017-2018 Test Year. Park used this figure and then escalated forward 8

with three percent inflation to derive the Test Year 2019 forecast. As shown below, the 9

company underspent this amount by a considerable margin. Not only did it underspend, 10

but it also included expenditures in this account with only a tenuous relation to 11

conservation. Therefore, the Commission should use a five-year average of expenses as a 12

basis for the forecast after removing the cost of promotional gifts and expensive 13

messaging service from the recorded years. This recommendation is presented in Table 14

3-5 below. 15

Table 3-5 ORA Conservation Budget Forecast 16


289,043 369,397 373,457 240,282 310,620 322,954 336,264 17 In addition to this budget, ORA notes Park’s success with conservation. The 18

company states that from 2014-2016, customers consistently exceeded the State mandate 19

requiring an 8% water reduction.16 Specifically, Park has had great success with its high 20

efficiency toilet program and the low-income high efficiency washer program. These 21

programs are both a quantifiable and robust means to increase conservation. The 22

Commission should require Park to continue these programs and provide a report in the 23

next GRC outlining the successes and drawbacks of these programs with specific 24

commentary on overall customer demand for and saturation of the program. 25

16 Exhibit B – Revenue Requirements Report at p. 18.

3-8

Temporary Labor c)1

For account “OPERATIONS-OTHER 6500.665 Temp Labor-T&D Misc 2

Expense,” relating to temporary labor expenses, Park forecasts $50,725, whereas ORA 3

recommends $0 because of unsubstantiated expenses. 4

Table 3-6 Park Temporary Labor Expense Forecast 5


0 0 0 60,131 173,538 48,470 50,725

ORA asked in a data request: 6

“..Park recorded expenses of $60,131 in 2016 and $173,538 7 in 2017. Please explain what these expenses were and why 8 there are no other recorded expenses for years 2012-2015.” 9

Park responded: 10

“A full-time temporary employee from our contractor W.A. 11 Rasic, was used to fill in for temporary staffing needs in 12 Operations. He filled in for a number of regular employees 13 out on medical leave, on vacation, and for special projects. 14 With the temporary employee worked full-time from 2016 15 through early 2018.”17 16

17

Essentially, the company hired a temporary employee and recorded that expense in 18

this subsidiary account. This expense is very large, a total of $173,000, for a single 19

temporary employee. Additionally, this same employee terminated his service with the 20

company in early 2018. Park neither justifies this high one-year expense amount nor 21

gives any indication that this employee, or a similar type of employee, will return to work 22

for the company in the future. Therefore, ORA recommends that the Commission 23

remove this expense from the calculation of the Test Year forecast. The difference 24

between Park and ORA is outlined in Table 3-7 below. 25

26

17 Response Park Data Request No ORA-A 18-01-003 JR6-004 CB19 SME 1 Q#1.

3-9

Table 3-7 Temporary Labor T&D Misc. 1

Park Test Year 2019

ORA Test Year 2019

Dollar Difference

Percent Difference

$50,725 $0 $50,725 100.00% 2

Meter Expense d)3 For account “OPERATIONS-OTHER 7717.663 Oth-T&D Op Meter Exp,” related 4

to meter replacement expenses in 2019, Park forecasts $6,797 whereas ORA recommends 5

$0. Park’s forecast lacks justification. 6

Table 3-8 Park Meter Replacement Expense Forecast 7


0 0 0 0 31,528 6,495 6,797 8 In a data request ORA asked: 9

“..Park records an expense of $31,528 in 2017 but no 10 expenses from 2012 to 2016. Please explain what this 11 expense is and why the company only recently incurs 12 expenses in this account.” 13

Park responded: 14

“In the prior years, Liberty Park Water used internal labor for 15 the replacement of meters… However, starting in 2017 we 16 have been using outside contractors to replace meters...” 18 17

For meter expense, Park states that since they will use outside contract labor rather 18

than internal labor, it will record this expense in the Test Year. However, the company 19

fails to provide justification for changing the kind of labor it will use in the first place. 20

Park neither explains the cost versus the benefit of this change nor does it provides a 21

calculation of the reciprocal reduction in expenses to labor costs for meter replacement. 22

Because the company provided neither, ORA recommends removing this expense from 23

the calculation of the Test Year forecast. The difference between Park and ORA is 24

outlined in Table 3-9 below. 25


3-10

Table 3-9 Meter Replacement Expenses 1

Park Test Year 2019

ORA Test Year 2019

Dollar Difference

Percent Difference

$6,797 $0 $6,797 100.00% Water Treatment Miscellaneous e)2

For account “OPERATIONS-OTHER 7762.643 Suppl/Parts-Wtr Tr Misc Exp,” 3

related to water treatment miscellaneous expense, Park forecasts $4,832 with a five-year 4

average. ORA recommends $2,092 after adjusting to a two-year average. 5

Table 3-10 Park Water Treatment Misc Expense Forecast 6

Recorded Projected 2013 2014 2015 2016 2017 2018-Est 2019 Test Year 2,885 8,756 6,398 2,146 1,735 4,617 4,832

7 In a data request ORA asked: 8

“..Park records significantly higher expenses in 2014. Since 9 these higher expenses are used in the average to forecast the 10 Test Year, please explain what these expenses are and why 11 this is representative of the Test Year experience.” 12

Park responded: 13

“These were costs related to bringing Well 9D Treatment 14 Plant on-line in 2014and 2015.” 19 15

The company explains that its expense level was elevated because of a specific 16

“Well 9D Treatment Plant” coming on line in 2014 and 2015. Since this specific event is 17

a one-time event and not likely to occur in the Test Year, ORA recommends adjusting the 18

forecast to reflect this. Instead of including the years in which this elevated expense 19

occurred, ORA instead recommends using the average of the most recent two years as the 20

basis for the Test Year forecast. The difference between Park and ORA is outlined in 21

Table 3-11 below. 22

23


3-11

Table 3-11 Water Treatment Misc. 1

Park Test Year 2019

ORA Test Year 2019

Dollar Difference

Percent Difference

$4,832 $2,092 $2,741 56.72% Purchased Water and Replenishment f)2

Park forecasted it’s purchased water cost in its workpapers by modelling the unit 3

costs charged for water by the expected amount of consumption. In Chapter 2 of this 4

report, ORA’s sales witness Herbert Merida forecasts higher consumption in the Test 5

Year. This higher forecast reciprocally raises the level of expenses for purchased water 6

and replenishment. This modification is reflected in the O&M expenses. For a more in-7

depth discussion on the sales forecast, see Chapter 2. 8

Customer Service Information Expense g)9 For account “CUSTOMERS-OTHER 7717.907 Oth-Cust Serv/Info Expense,” 10

related to customer service information expense, Park forecasts $18,432 with a five-year 11

average. ORA recommends $5,094 after adjusting to a two-year average. 12

Table 3-12 Park’s Customer Service Information Expense 13


33,633 35,281 4,927 5,191 4,260 17,613 18,432 14 ORA asked in a data request: 15

“..Park records significantly higher expenses in 2013 and 16 2014. Since these higher expenses are used in the average to 17 forecast the Test Year, please explain what these expenses are 18 and why this is representative of the Test Year experience.” 19

Park responded: 20

“In 2013 and 2014, Liberty Park Water made an effort to 21 broadcast to customers new methods of payment such as 22 PayNearMe and EasyPay. This was done with brochures, 23 posters, give-aways of tumblers/mugs for those customers 24 that signed up for these services. Additionally in 2014, a 25 Welcome Booklet was compiled and distributed to new 26 customers. Liberty Park Water plans to continue to promote 27

3-12

these different methods of payments to new and existing 1 customers.”20 2

3 The company states that this elevated expense level for 2013 and 2014 was due to 4

the costs of promoting new payment methods, PayNearMe and EasyPay, and that it will 5

continue to promote these methods. ORA disagrees with this assessment. The expense 6

tracked in those two years are significantly higher than any other year; roughly $29,000 7

higher. Logically, if these expenses were to continue into the future, they should also 8

have been reflected, at the same level, in recorded years 2015, 2016 and 2017. However, 9

this is not the case. Without justification, it is unreasonable for the Commission to use 10

these expenses as a basis for the Test Year forecast. The Commission should instead use 11

the average of the most recent 2016 and 2017 recorded years as a basis for the Test Year 12

forecast. The difference between Park’s and ORA’s forecast is outlined in Table 3-13 13

below. 14

Table 3-13 Customer Service Information Expense 15

Park Test Year 2019

ORA Test Year 2019

Dollar Difference

Percent Difference

$18,432 $5,094 $13,339 72.37% 16

Miscellaneous General – Drought Related h)17 For account “CUSTOMERS-OTHER 7717.9302 Oth-Misc General Exp,” Park 18

forecasts $9,222 with a five-year average, whereas ORA recommends $718 after 19

adjusting to a two-year average. 20

Table 3-14 Park’s Miscellaneous General Drought Related Expenses 21

Recorded Projected 2013 2014 2015 2016 2017 2018-Est 2019 Test Year 615 615 39,221 629 704 8,812 9,222

ORA asked: 22


3-13

“..Park records $39,221 in 2015 yet roughly $700 in all other 1 recorded years. Please explain what these expenses are and 2 why there was such a significant spike in 2015.” 3

4 Park responded: 5

“The increase in 2015 was due to the literature that was sent 6 to all customers and otherwise communicated regarding the 7 mandatory water use restrictions issued by the State of 8 California and the implementation of the Commission 9 mandated Schedule 14.1 mandatory water restrictions.”21 10

The company essentially states these expenses are directly attributable to the 11

implementation of the Commissions’ Schedule 14.1 mandatory water restrictions. This is 12

not the correct way to recover these expenses. In 2014, Park was authorized by advice 13

letter to track expenses in a memorandum account in 2014 for this specific purpose.22 14

The preliminary statement for Liberty Park Water reads: 15

“The purpose of the 2014 Water Conservation Memorandum 16 Account (“2014WCMA”) is to track incremental expenses 17 incurred by Park to activate Rule 14.1 voluntary conservation, 18 Schedule 14.1 mandatory rationing efforts…”23 19

Because Park should recover these expenses in a memorandum account, it is 20

unreasonable to again include them as basis for a Test Year forecast. Allowing Park to 21

include such expenses in determining its historical costs would result in double-recovery; 22

first, in Test Year 2019 rates and second, when Park requests amortization of the 2014 23

WCMA. The Commission should use the most recent two recorded years to more 24

accurately forecast the Test Year. The difference in expenses between Park and ORA is 25

outlined in Table 3.15 below. 26

Table 3-15 Misc. General Drought Related Expenses 27

Park Test Year 2019

ORA Test Year 2019

Dollar Difference

Percent Difference

$9,222 $718 $8,504 92.22% 21 Response Park Data Request No ORA-A 18-01-003 JR6-004 CB19 SME 1 Q#11. 22 Advice Letter 254-W effective February 27, 2014. 23 Park Water Company Preliminary Statement Section W at p. 21.

https://california.libertyutilities.com/uploads/Park_Rates/Liberty%20Park%20Water%20Preliminary%20Statement.pdf

3-14

General Plant Painting i)1 For account “MAINTENANCE-OTHER 7716.932 Paint/Coat-General Plant,” 2

Park forecasts $10,632. ORA recommends $0 due to miscategorized expenses in the 3

forecast. 4

Table 3-16 Park’s General Office Painting Expense 5


35,411 10,420 1,300 620 0 10,159 10,632


“Park records significant expenses in 2013 but minimal 7 expenses in other years and none in 2017. Please explain what 8 these expenses are and why there are no recorded expenses in 9 recent years.” 10

Park responded: 11

“$12,500 of the charges in 2013 were due to painting Well 12 19B. This was miscoded here. It should have been recorded 13 to account 7716.617. This account should be used for 14 painting of the Downey office location. There has been no 15 painting due to the building remodeling in progress.”24 16

These miscategorized expenses should not be used as basis to forecast this 17

account. Therefore, ORA recommends adjusting the Test Year forecast for this sub 18

account to zero. The difference between Park and ORA is outlined in Table 3.17 below. 19

Table 3-17 Painting General Office 20

Park Test Year 2019

ORA Test Year 2019

Dollar Difference

Percent Difference

$10,632 $0 $10,632 100.00% 21

Other Pump Maintenance j)22 For account “MAINTENANCE-OTHER 7717.631 Oth-Pump Mt Struc/Imp,” 23

Park forecasts $14,657. ORA recommends $8,873 due to non-recurring expenses in the 24

forecast. 25


3-15

Table 3-18 Park’s Other Pump Maintenance Expense 1


33,080 5,796 17,678 2,701 6,897 14,006 14,657


“Park records an expense of $33,080 in 2013 but much lower 3 amounts in all other recorded years. Please explain what 4 these expenses are and why there was a large spike in 2013.” 5

Park responded: 6

“In 2013, while constructing the Well 19C pump house and 7 installing the associated equipment, Liberty Park Water hired 8 a contractor to repair the seepage pits at the well site. It was 9 determined that the costs for this repair could not be 10 capitalized.”25 11

12 The company states expenses in 2013 were higher because of a specific 13

construction project at a well site; without mentioning the likelihood of a similar expense 14

occurring in the Test Year. Additionally, the company did not provide any commentary 15

or justification to support its assertion that it could not capitalize these specific costs. 16

Because the company did not provide support for its decision, ORA recommends 17

removing this expense to reflect a more accurate Test Year. The difference between Park 18

and ORA is outlined in Table 3-19 below. 19

Table 3-19 Other Pump Maintenance 20

Park Test Year 2019

ORA Test Year 2019

Dollar Difference

Percent Difference

$14,657 $8,873 $5,785 39.47% 21 2) Administrative & General Expenses 22 In general, the company uses the five-year averaging methodology with a three 23

percent inflation rate discussed in the beginning of this section. However, the company 24

uses different methods to forecast payroll, employee benefits, insurance, and general 25


3-16

office allocations. This section details the differences between Park’s and ORA’s 1

forecasts for A&G. 2

A&G Payroll a)3 ORA recommends a more accurate payroll expense forecast for Test Year 2019. 4

This recommendation modifies the A&G expense forecast reflected in this section. 5

Please see Chapter 4 for a more thorough discussion of ORA’s payroll forecast. 6

Employee Bonus/Incentives b)7 The Commission should approve $102,504 for employee bonus and incentives for 8

Test Year 2019. Park forecasts employee bonus and incentives in the amount of 9

$242,015 for Test Year 2019. 10

By comparison, the preceding five years employee bonus and incentives expense 11

averaged $18,000; this is a substantial increase. The company provides a short paragraph 12

in testimony to support this large increase in employee incentives: 13

“In addition to salary compensation, the Company offers 14 incentive programs based on position. These incentive 15 programs include the Short Term Incentive Plan (“STIP”), the 16 Long Term Incentive Plan (“LTIP”), and the Shared Bonus 17 Pool (“SBP”). These incentive programs are designed (a) to 18 encourage and motivate participants, (b) to be market-19 competitive, to attract and retain talented employees, and to 20 align employees’ interests with the long-term interests of the 21 Company and its customers. Detailed calculations are 22 contained in Section 4 of the Revenue Requirement 23 workpapers.”26 24

***BEGIN CONFIDENTIAL*** 25 27***END CONFIDENTIAL*** 26

Additionally, employees with the highest salary are forecasted with the highest 27

percentage bonus. For example, ***BEGIN CONFIDENTIAL*** 28

29

26 Exhibit B-Revenue Requirements Report at p. 51. 27 Revenue Requirements Report Workpapers at p. 4-133.

3-17

1


The incentive pay for employees of Park is calculated similarly to employees in 3

General Office. ORA’s General Office witness Mehboob Aslam discusses this in 4

Chapter 12 of this report. In that chapter, ORA reviewed the specific methodologies and 5

calculations for the company’s percentages used to derive the employee bonuses. 6

Consistent with the recommendations set forth in that chapter, the Commission should 7

require Park to reduce its bonus estimates by 15% as a result of the comparison survey, 8

then by an additional 50% to represent the shareholder/ratepayer sharing ratio.28 The 9

results of this modification and a comparison between Park and ORA forecasts are 10

presented in table 3-20 below. 11

Table 3-20 ORA Incentive Pay Forecast 12

Park Test Year 2019

ORA Test Year 2019

Dollar Difference

Percent Difference

$242,015 $102,504 $139,511 57.65% 13

Medical Insurance Premiums c)14 Park forecasts medical insurance expenses of $836,970 in the Test Year citing 15

double digit increases expected over the next few years. ORA instead recommends 16

$532,584 based on a more accurate escalation methodology. Park supports its medical 17

and dental insurance forecast in the Revenue Requirements Report: 18

“Medical and Dental insurance premiums are charged on a 19 dollar per employee basis. The 2018 estimated costs for 20 medical and dental insurance are calculated based on the rates 21 expected to be in effect on January 1, 2018, and consistent 22 with the expected staffing level for 2018. Medical rates are 23 expected to increase 10.5% annually in 2018 and in 2019.”29 24

25

28 Chapter 12: General Office. 29 Exhibit B-Revenue Requirements Report at p. 52.

3-18

The company did not cite to documentation nor did it provide a calculation 1

showing how it reached this percentage. 2

The company also models this calculation in the workpapers in a way that inflates 3

this expense further. In Excel workpapers filed in the application, the company lists each 4

employee, details the plan type, extent of coverage, and then forecasts each employee’s 5

yearly expense using a fixed dollar amount plan cost.30 This calculation then flows into 6

the expense workpapers to dramatically inflate the forecast. Table 3-21 is compiled from 7

filed workpapers and shows both the medical insurance expense for the prior five 8

recorded years and the three forecasted years after. The table clearly shows a dramatic 9

one-year expense increase of over 43% from 2017 to 2018. 10

Table 3-21 Medical Insurance Expenses 11


522,154 545,496 467,708 431,902 521,016 745,911 836,970

43.16% Increase 2017 to 2018

Park’s methodology severely overestimates the medical insurance expense in the 12

Test Year. 13

To derive a more accurate forecast, ORA relies on an alternative inflation 14

methodology. For medical and dental expenses ORA used IHS Global Insights’ medical 15

insurance expense forecast to model the increase in the Test Year. IHS Global Insight 16

has been an industry leader in economic and financial forecasting and is consistently 17

recognized as the most accurate forecasting company in the world.31 The relevant 18

excerpt from their report on medical insurance is displayed in Table 3-22 below. 19

Table 3-22 IHS Global Insights Health Insurance Expense Increase 20

2018 2019 2020 2.19% 3.43% 3.72%

21

30 CB19 Payroll 2018 CONFIDENTIAL tab ‘Input.’ 31 IHS Global Insight. About us https://globalsso.ihs.com/KeystoneSTS/SSOLogin/Login.aspx?theme=IGI Accessed: June 4, 2018.

https://globalsso.ihs.com/KeystoneSTS/SSOLogin/Login.aspx?theme=IGI

3-19

This medical insurance forecast is compiled with sophisticated statistical analysis 1

and many data points; and therefore, more accurately reflects insurance trends than 2

Park’s estimate. Park’s proposed methodology forecasts an unreasonable one-year 3

increase of over 43%. The Commission should use the five-year average as the basis for 4

the Test Year forecast and use 2.19%, 3.43%, and 3.72% to estimate Park’s insurance 5

expense in 2018, 2019. The result is shown in Table 3-23 below. 6

Table 3-23 ORA Health Insurance Forecast 7

Avg. 2013-2017 2018-Est 2019-TY 2020-TY $497,655 $508,554 $525,997 $545,564

2.19% 3.43% 3.72%

CONCLUSION D.8 The Commission should adopt ORA’s lower estimates of expenses as 9

recommended herein. ORA’s recommendations reflect consistent usage of five-year 10

average data, appropriate corrections, lower sales, specific subsidiary account 11

adjustments, lower bonuses, Global Insight forecasts for benefits and group pensions, and 12

more moderate conservation expenses. Additionally, the Commission should use the 13

most current ECOS Memo escalation factors. 14

.15

4-1

PAYROLL CHAPTER 4:1

INTRODUCTION A.2 This chapter presents ORA’s analysis and recommendations for payroll 3

expenses for Park. In developing its recommendations, ORA reviewed Park’s 4

Revenue Requirements Report, direct testimonies, and electronic workpapers filed 5

in its 2018 general rate case (“GRC”) application. Below is a summary detailing 6

ORA’s final recommendations with a general discussion of difference between 7

Park and ORA’s forecast. Further, the discussion portion of this chapter provides 8

more detailed commentary into ORA’s recommendations and methods of analysis. 9

SUMMARY OF RECOMMENDATIONS B.10 ORA estimates total payroll expenses of $3,969,411 for Test Year 2019 11

while Park estimates total payroll expenses of $4,333,358. Park’s estimate exceeds 12

ORA’s estimate by $363,948 (9.17%). The difference is mainly due to the 13

incorporation of a vacancy rate into the payroll forecast. 14

DISCUSSION C.15 1) Company Restructuring 16 Park discusses the payroll forecast in chapter four of its Revenue 17

Requirements Report filed in the GRC application. In 2014, Liberty Utilities 18

purchased Park. Due to this ownership change, Park has undergone a large 19

corporate restructuring. Specific to payroll, Park underwent a Job Standardization 20

Initiative in 2016 to standardize naming conventions with the Liberty Utilities 21

parent company. Table 4-1 summarizes these changes showing the previous and 22

new job titles. 23

24

4-2

Table 4-1 Job Standardization Initiative Summary 1

Previous Title New Title Sr. Vice President/General Manager Director of Operations Manager of Financial Services Manager, Finance Staff Accountant I Senior Accountant Engineer Technician III Engineering Assistant Division Chief Engineer Senior Manager, Engineering Civil Engineer II Senior Engineer Manager of Safety Services Manager, EHS (Environment, Health & Safety) Customer Support Supervisor Manger, Customer Care Lead Customer Service Rep Billing Analyst Customer Service Rep Representative/Specialist, Customer Service Assistant VP/Division Superintendent Supervisor of Operations, Distribution Production Foreperson Operations, Team Lead Production Supervisor Operations Supervisor, Production Transp. Equipment Foreperson Supervisor, Transportation Equipment General Plant Lead Supervisor, Building Services Utility Service Supervisor Operations Supervisor, Field Services Communications Center Foreperson Supervisor, Dispatch Utility Serviceperson Operator Production Technician Operator Meter Reader Operator Communications Center Operator Dispatch Senior Public Affairs Specialist Program Manager, Comm. & Media Relations

2

ORA reviewed the revised job descriptions outlined in testimony. For the 3

most part, the job duties and descriptions were not substantially different from the 4

previous job classifications. However, ORA makes one note regarding the 5

reclassification of the company’s safety employee. In the application, Park 6

modifies the position of “Manager of Safety Services” to “Manger of 7

Environment, Health, & Safety.” In testimony, the company states this change will 8

not entail changes to either duties or responsibilities.32 However, the job title 9

changes from a position solely related to safety, to now include safety, health, and 10

the environment. ORA does not necessarily disagree with Park’s assertion 11 32 Exhibit B – Revenue Requirement Report Chapter IV p. 44.

4-3

regarding changing duties/responsibilities, however both ORA and the 1

Commission consistently stress safety as their top priority. Because of this, ORA 2

recommends that Park carefully review the duties and responsibilities of this 3

specific position to ensure they are 100% related to safety. This recommendation 4

does not affect the Test Year forecast. 5

Also, Park states that due to this restructuring, the company was able to 6

reduce its headcount by three employees. This was achieved by eliminating the 7

positions of General Plant Assistant, Auto Mechanic, and Water Quality 8

Operations Engineer. ORA does not contest this reduction, however the 9

Commission should consider this in the next GRC to ensure the elimination of the 10

Water Quality Operations Engineer position does not have a negative effect on 11

water quality. 12

2) Payroll Expense Estimates 13 To derive the estimated payroll cost in the Test Year, Park multiplied the 14

employee’s hourly rate by 2,088 hours to arrive at an annual position cost for each 15

employee. These position costs were assigned to their relative cost centers and 16

allocated to Operations and Maintenance (“O&M”) and Administrative and 17

General (“A&G”) expenses. Table 4-2 shows Park’s total payroll consisting of 18

Operations, Customers, Maintenance, Clearings, and A&G. 19

Table 4-2 Park Estimated Total Payroll (Dollars) Recorded Projected

2013 2014 2015 2016 2017 2018-Est 2019-TY 2020-EY 4,294,956 4,081,487 4,309,143 3,966,051 3,924,707 4,152,099 4,264,991 4,392,341

20 As shown above, the company is requesting a payroll increase in the Test 21

Year of approximately $340,000 from the most recent 2017 recorded amount. 22

The core issue with Park’s payroll forecast is the assumption of full 23

employment. Park’s methodology assumes that each position will be filled for the 24

entire year. This is not a business reality because it is normal for a company to 25

experience turnover and vacant positions. As a function of total payroll, this 26

4-4

situation is known as the “vacancy rate.” This occurs most commonly when an 1

employee leaves and a position remains vacant until a replacement is hired. Since 2

Park does not account for any vacancies, its payroll forecast is overstated. 3

Therefore, the Commission cannot rely on Park’s Test Year forecast. 4

ORA sought to determine the effect Park’s vacancy rate on its total payroll 5

in the recorded years. In a data request, ORA asked: 6

“For recorded years 2015-2017, please provide a list of 7 all positions that were vacant during that time period 8 with the following information; employee name, 9 employee ID, position title, number of days vacant, 10 and salary.” 11

Park responded with a list of employee vacancies from 2015-2017 with job 12

title, dates of absence, yearly hours affected, and total vacancy salary. Table 4-3 13

shows the total salary savings attributed to vacancies for each recorded year. 14

***BEGIN CONFIDENTIAL*** 15

Table 4-3 Salary Savings Due to Vacancies by Year 16


This table shows that in each of the preceding three years, the company 18

had significant salary savings as a direct result of employee vacancies. This 19

further demonstrates that the company’s forecasting methodology of 100% 20

employment is unreasonable. A more accurate forecast must take vacancy rate 21

into account. 22

To develop its forecast, ORA used Park’s original model of hourly rate 23

multiplied by 2,088 hours, but then reduced the total payroll forecast by $210,316; 24

the average of the vacancy savings from the previous three years. This is a more 25

4-5

reasonable forecasting methodology because it accounts for vacancies. The 1

difference between Park’s and ORA’s forecast is detailed in Table 4-4 below. 2

Table 4-4 Test Year 2019-2020 Total Payroll Forecast 3 4

Park Test Year ORA Test Year Dollar

Difference Percent

Difference $4,333,358 $3,969,411 $363,948 9.17%

CONCLUSION D.5 The Commission should adopt ORA’s estimate of payroll expenses because 6

it accounts for vacancies in the Test Year. The Commission should also review 7

the elimination of the Water Quality Operations Engineer position in the next 8

GRC to ensure the elimination of this position does not have a negative effect on 9

water quality. 10

11

5-1

UTILITY PLANT IN SERVICE CHAPTER 5:1

INTRODUCTION A.2 This report presents ORA’s review and analyses of proposed plant additions in 3

Park’s south Los Angeles service areas including the following water systems; 4

Bellflower-Norwalk, Compton East, and Compton West. 5

Major investment in capital projects include Park’s request for (1) authorization of 6

its main replacement program (2) authorization to replace the existing Automatic Meter 7

Reading(“AMR”) platform with Advanced Metering Infrastructure (“AMI”), (3) 8

authorization to purchase additional water rights, and (4) authorization to purchase land. 9

Park proposes additional capital investment including various general or routine plant 10

infrastructure projects or replacement of aged infrastructure and equipment. 11

Two witnesses conducted ORA’s review of capital investment for the Park service 12

areas. ORA’s witness Sung Han reviewed Park’s request for its main replacement 13

program and its request for AMI. His testimony is provided in Chapters 6 and 7. ORA’s 14

witness Patricia Esule reviewed Park’s request for all other capital projects except main 15

replacements and AMI, as noted above. 16

SUMMARY OF RECOMMENDATIONS B.17 The Commission should deny Park’s request to purchase additional water rights 18

and land, and Park’s request to replace AMR with AMI metering. The Commission 19

should also reduce the amount requested for Park’s main replacement program. 20

The Commission should require Park to update its escalation rate and 21

methodology to inflate historical and test year costs using the most recent memorandum 22

published by ORA’s Energy Cost of Service and Natural Gas Branch (“ECOS”). The 23

Commission should also require Liberty Utilities to use consistent escalation 24

methodologies for Park and AVR in future GRCs. 25

Park provides safe and reliable water service in its Los Angeles service area. 26

Sufficient water supply to meet demand is available due to recent increases in 27

groundwater pumping. Park proposes to replace various infrastructure related to 28

5-2

production and delivery of water including; pumps, wells, water treatment, and to 1

purchase additional water rights and land. The company proposes to transition its 2

metering infrastructure from AMR to AMI, and to continue an aggressive pipeline 3

replacement program. 4

The following table compares Park’s requested capital budget with ORA’s 5

recommended capital budget. 6

Table 5-1 Park Water Request versus ORA Recommended Capital Budget 7 PARK WATER - RATEPAYER FUNDED CAPITAL BUDGET

2018 2019 2020 2021

Transmission & Distribution $8,682,300 $8,497,300 $8,756,800 $7,390,100Source of Supply-Production $3,551,400 $3,290,500 $3,125,900 $5,515,900General Plant $282,600 $811,200 $618,200 $67,700Cost of Removal $132,300 $318,800 $515,600 $630,400Total $12,648,600 $12,917,800 $13,016,500 $13,604,100

ORA RECOMMENDED RATEPAYER FUNDED CAPITAL BUDGET2018 2019 2020 2021

Transmission & Distribution $7,351,810 $4,589,425 $5,191,910 $6,023,610Source of Supply-Production $2,051,400 $1,790,500 $1,625,900 $2,894,000General Plant $282,600 $324,500 $131,500 $67,700Cost of Removal $132,300 $278,700 $225,400 $630,400Total $9,818,110 $6,983,125 $7,174,710 $9,615,710

Park exceeds ORA Budget $2,830,490 $5,934,675 $5,841,790 $3,988,390 8

DISCUSSION C.9 The discussion below presents differences in Park’s proposed capital investment in 10

plant and ORA’s recommended capital investment. Projects that ORA agrees with are 11

not included in this report. In May 2018, Park provided ORA with updated workpapers. 12

Corrections to Park’s requested project budgets, and revisions to recorded or historical 13

costs resulted in changes to the original Capital Budget included in A.18-01-003. For the 14

purposes of this report, ORA uses Park’s updated Capital Budget amounts. 15

5-3

1) Escalation 1 Park includes in its workpapers a worksheet showing inflation/escalation 2

calculations derived from the memorandum published by ORA’s ECOS Branch, dated 3

September 29, 2017.33 The data used is derived from the IHS Global Insight U.S. 4

Economic Outlook. Use of ORA’s memorandum is an ORA policy that has been adopted 5

in the water rate case plan.34 6

According to ORA’s memo, 7

“The numbers are to be used in conjunction with the non-labor factors 8 provided in ORA’s monthly escalation memorandum to bring historic 9 dollars to base year dollars and to inflate recorded dollars to test year 10 levels. The annual change in Compensation per hour is applicable to 11 contracted services, while the non-labor factor is related to material and 12 supply purchases.” 13

14 In 1991, the California Water Association (“CWA”) and the Commission’s Water 15

Division (Water Division) agreed to a composite inflation rate calculation using the 16

monthly non-labor rate weighted by 60% and the Compensation per Hour Index weighted 17

by 40%. ORA has adopted this methodology for water GRC’s. 18

While Park’s workpapers include a worksheet that appeared to follow the 19

agreement between CWA and the Water Division to calculate a composite inflation rate, 20

Park did not apply the calculated composite inflation rates for the future test years and 21

attrition year. Park’s escalation workpaper shows a flat 3% composite inflation factor for 22

years 2017 – 2021 (without providing any support for the 3%). Yet for installations of 23

general plant items in the Park’s south Los Angeles service area, the company added 24

2.76% inflation per year. According to its workpaper, the 2.76% is “a current 25

approximation.” Park also indicates that 2.76% is the five-year average (2012-2016) 26

using end of year 2016 data.35 Park’s testimony and workpapers, however, neglected to 27

33 A.18-07-003 Liberty Park workpaper, “Escalation Factors Sep 2017.” 34 D.04-06-018, Section 4, Escalation of Labor and Non-Labor Expenses, Rate Base Additions, pp 10-15. 35 Liberty Park workpaper, “2018-2022 Historical-Escalation Data 11-28-17.”

5-4

provide the source for this data from which it develops the 2.76% five-year average 1

inflation rate or any support for deviating from the agreed-upon composite formula. 2

When reviewing the escalation methodology used for the Apple Valley Ranchos 3

(“AVR”) district, AVR used the Construction Cost Index (“CCI”) from the Engineering 4

News Record, a publication covering engineering and construction news, analysis and 5

commentary. AVR used a 20-cities average rate from this source. ORA discusses both 6

Park and AVR here to illustrate the fact that one company (Liberty Utilities, the parent of 7

Park and AVR) has chosen two different sources and methodologies to calculate and 8

apply inflation to develop similar test year capital budgets. Workpapers for AVR and 9

Park show different escalation methodologies and different escalation rate source 10

material. However, neither company (Park or AVR) provided support or justification for 11

the methodology it used or why Park and AVR used methodologies and sources that 12

differed. 13

Additionally, Park and AVR provided ORA with models showing capital 14

expenditures that were vastly different between the two districts. While Park’s 15

workpapers were concise and limited, the AVR workpapers were more detailed but 16

included errors. Neither model linked specific or individual project budgets to the 17

escalation workpaper to enable ORA or the Commission to easily make changes to or 18

comparisons between the escalation rates that Park and AVR used. ORA appreciates 19

Park’s efforts to provide updates and corrections to many of the issues ORA found. 20

However, the Commission should require Liberty Utilities to use consistent 21

methodologies for Park and AVR. Park and AVR are both located in Southern California 22

within 100 miles distance and share the same general office and executive management. 23

There is no reason that the two districts should use different escalation methodologies 24

and sources in its GRC filings. 25

For this report on Park, except for the correction of errors, ORA used capital 26

investment amounts that include the escalation rates presented by Park for simplicity and 27

ease of comparison. However, ORA does not agree with either the escalation rate or the 28

methodology used by Park. The Commission should adopt the latest ECOS 29

5-5

Memorandum Composite rates publicized at the time the Commission renders its 1

decision in this case, and in future GRC filings require Park and AVR to use the same 2

methodology or provide justification for not doing so. Park’s and AVR’s use of different 3

methodologies without justification adds confusion and additional discovery to the 4

proceeding, and produces inconsistent, unreasonable results. 5

2) Transmission and Distribution Budget 6

The Transmission and Distribution Budget includes the following items: 7

8 Table 5-2 Park Water Updated Transmission and Distribution Budget versus ORA 9

Recommended Budget 10 11

Park Transmission and Distribution BudgetItem 2018 2019 2020 2021T&D Reservoirs $4,446,600 $0 $0 $0Main New $550,800 $360,000 $0 $0Main Replacements $1,347,800 $5,777,800 $6,318,100 $4,941,300Replacement Valves $97,600 $100,300 $103,000 $105,900New Valves $230,200 $236,600 $243,100 $249,900Replacement Hydrants $376,400 $386,800 $397,500 $408,500New Hydrants $38,400 $39,400 $40,500 $41,600Replacement Services $212,600 $218,400 $224,500 $230,700New Services $81,600 $83,900 $86,200 $88,600Air and Vacuum Stations $0 $0 $0 $0Pressure Regulating Facilities $0 $0 $0 $0T&D Misc Appurtenaneces $26,800 $27,500 $28,200 $29,100Meters $1,273,500 $1,266,600 $1,315,700 $1,294,500T&D Land $0 $0 $0 $0Total Transmission & Distribution $8,682,300 $8,497,300 $8,756,800 $7,390,100

ORA Recommended Transmission and Distribution BudgetItem 2018 2019 2020 2021T&D Reservoirs $4,446,600 $0 $0 $0Main New $550,800 $0 $0 $0Main Replacements $1,297,800 $3,514,700 $4,085,700 $4,891,300Replacement Valves $97,600 $100,300 $103,000 $105,900New Valves $54,800 $56,300 $57,900 $59,500Replacement Hydrants $376,400 $386,800 $397,500 $408,500New Hydrants $38,400 $39,400 $40,500 $41,600Replacement Services $212,600 $218,400 $224,500 $230,700New Services $81,600 $83,900 $86,200 $88,600Air and Vacuum Stations $0 $0 $0 $0Pressure Regulating Facilities $0 $0 $0 $0T&D Misc Appurtenaneces $26,800 $27,500 $28,200 $29,100Meters $168,410 $162,125 $168,410 $168,410T&D Land $0 $0 $0 $0Total Transmission & Distribution $7,351,810 $4,589,425 $5,191,910 $6,023,610

Park exceeds ORA Budget $1,330,490 $3,907,875 $3,564,890 $1,366,490 12 13

5-6

ORA recommends adjustments to the Transmission and Distribution budget for 1

New Mains, Main Replacements, New Valves, and Meters. 2

New Main a)3 Park proposes to construct a new main (Area 41 & Target) in Test Year 2019 at a 4

cost of $360,000. According to Park, the Commission previously authorized the Area 41 5

& Target Main project in the last GRC as a 2017 plant addition. The new main is 6

intended to provide a secondary source of supply to a commercial center housing an 7

Office Depot and a Target department store.36 The project requires crossing a railroad 8

easement and construction access onto property owned by Target Corporation. The 9

Commission authorized funds in rates in the last GRC for completion in 2017. 10

The Commission should disallow funding for this project in rates for Test Year 11

2019. Project uncertainties that existed in 2017 are still an issue. Park failed to complete 12

this project in 2017 due to the complexity of obtaining access to the railroad easement 13

and an easement from the Target Corporation for the pipeline. Park provides no 14

information that indicates it has secured the necessary easements to assure the 15

Commission that it will be able to complete the project in 2019. In response to ORA 16

PXS 007, Park admits that its consultant has only made tentative phone inquiries with the 17

railroad and has not yet begun to negotiate the construction easement. Park’s consultant 18

has also had little success obtaining information concerning the responsible party to 19

discuss the matter with Target Corporation.37 Park also has made no progress on 20

designing, permitting, or bidding for this project.38 Due to project uncertainties, the 21

Commission should disallow funding at this time. 22

Although ORA agrees that the project would be beneficial, completion of the 23

project in a timely manner remains uncertain. Park has made little progress toward 24

obtaining the necessary easements, let alone breaking ground. Because there has been no 25

36 A.18-01-003, Revenue Requirements Report at p. 84. 37 Liberty Park’s response to ORA PXS 007, Q. 1. 38 Id. at Q.3.

5-7

progress on this main project, the Commission should protect ratepayers against 1

increased rates while the project remains uncertain, especially if the project continues to 2

be delayed due to circumstances beyond Park’s control. 3

Main Replacements b)4 ORA’s analyses and recommendation for main replacements is found in ORA’s 5

witness Sung Han’s Chapter 6. 6

New Hydrants and Hydrant Replacements c)7 In Test Year 2019, Park estimates it will need $386,800 to replace 50 fire hydrants 8

per year. The unit cost of $7,737 per hydrant is based on the weighted average recorded 9

cost from 2012-2017. Park has 1,889 fire hydrants in its water systems and has 10

historically replaced only 17 hydrants per year. Of the existing hydrant inventory, 339 11

are 4-inch, wharf head hydrants. ORA agrees with Park’s proposal to replace 50 hydrants 12

per year. These replacements are necessary because wharf head hydrants do not have 13

isolation valves that allow them to be shut down without shutting down service to a larger 14

area. 15

For new fire hydrant installations, Park proposes to install three new fire hydrants 16

per year for $39,400. The unit cost of $13,146 per fire hydrant installation is based on 17

the historical weighted average for 2012-2017. 18

ORA agrees with this increased investment to replace existing and install new fire 19

hydrants is necessary to ensure available, reliable, fire hydrants. These investments 20

should also impact the number of new valves the Commission should allow Park to 21

install, as discussed below. 22

Water System Valves d)23 Park proposes to replace 14 valves per year (2018 – 2021) in accordance with its 24

historical average rate of replacement. The unit cost for replacement valves is $7,162 and 25

is based on the weighted average recorded cost for years 2012 – 2017. ORA agrees with 26

Park’s replacement valve program. 27

ORA disagrees with Park’s proposal to increase new valve installations. For new 28

valve installations, Park proposes to increase its program to 42 new valves per year from 29

5-8

2018 through 2021. Park proposes to spend $239,850 in the 2019-2020 Test Year. The 1

unit cost of $5,634 per new valve installation is based on the weighted average recorded 2

cost incurred for years 2012 – 2017. Historically, Park has installed an average of only 3

nine new valves per year.39 Now, Park claims that it must increase its installations by 4

366% per year. 5

According to Park’s Revenue Requirements Report, the increase in new valve 6

installations is driven by its need to install isolation valves in 339 4-inch, wharf head 7

type, fire hydrants in the system. (ORA discussed replacement of these fire hydrants in c) 8

above).40 Park claims that if one of these fire hydrants leaks or is struck by a vehicle, it 9

may need to shut down multiple area water mains during the replacement of the damaged 10

hydrant. 11

Park’s proposal to increase the new valve installations to 42 per year includes 12

adding isolation valves to 33 of the 339 4-inch wharf head type fire hydrants per year. 13

The Commission should authorize the installation of 10 new valves per year, consistent 14

with Park’s historical activity in this area. Since Park is also requesting to replace fire 15

hydrants at the rate of 50 per year and the fire hydrant replacements will address the 16

wharf head type fire hydrants, there is less urgency to increase the installation of new 17

valves. 18

In response to ORA data request PXS 009, Park admits that the 339 4-inch wharf 19

head type fire hydrants will be targeted in the hydrant replacement program. In response 20

to ORA’s question; 21

Q.3 - “How many of the proposed 50 fire hydrant replacements per year 22 include those 4-inch wharf head type fire hydrants?” Park responded, “All 23 50 of the proposed fire hydrant replacements per year include the 4-inch, 24 wharf head type fire hydrants.” 25 Additionally, Park admits that in the five-year period 2012 through 2016, there 26

have been only 11 damaged, leaking, or sheared 4-inch fire hydrants. That is an average 27

39 Liberty Park application, A. 18-01-003, Revenue Requirement Report at p. 72. 40 See item c) New Hydrants and Hydrant Replacements.

5-9

of approximately 2 per year. ORA concludes that ORA’s recommended increase in the 1

fire hydrant replacement program will address Park’s concerns regarding the 4-inch 2

dwarf head fire hydrants. The Commission should adopt ORA’s recommendation of 10 3

new valve installations per year. 4

Meters e)5 ORA’s analyses and recommendation for meters is found in ORA’s witness Sung 6

Han’s Chapter 7. 7

3) Source of Supply – Production 8

Source of Supply includes Park’s proposed investment in pumping, site and 9

structure improvement, water treatment, supervisory control and data acquisition 10

(“SCADA”)/Security, water supply and land. The following table presents Park’s 11

proposed and ORA’s recommended investment in Source of Supply. 12

13

5-10

Table 5-3 Park Source of Supply – Production 1

Park Source of Supply Production BudgetItem 2018 2019 2020 2021Pumping Equipment $156,100 $160,400 $164,800 $169,300Site & Structure Improvement $1,747,200 $1,477,900 $1,304,600 $2,563,800Water Treatment $98,100 $100,800 $103,600 $106,500SCADA & Security $50,000 $51,400 $52,900 $54,400Production MISC $1,500,000 $1,500,000 $1,500,000 $1,500,000Production Land $0 $0 $0 $1,121,900Total Source of Supply Budget $3,551,400 $3,290,500 $3,125,900 $5,515,900

ORA Recommended Source of Supply Production BudgetItem 2018 2019 2020 2021Pumping Equipment $156,100 $160,400 $164,800 $169,300Site & Structure Improvement $1,747,200 $1,477,900 $1,304,600 $2,563,800Water Treatment $98,100 $100,800 $103,600 $106,500SCADA & Security $50,000 $51,400 $52,900 $54,400Production MISC $0 $0 $0 $0Production Land $0 $0 $0 $0Total Source of Supply Budget $2,051,400 $1,790,500 $1,625,900 $2,894,000

Park exceeds ORA Budget $1,500,000 $1,500,000 $1,500,000 $2,621,900 2 3

ORA’s recommended investment in Source of Supply – Production includes 4

adjustments in Production Misc., and Production Land. 5

Production Misc. a)6 The budget category “Production Misc.” includes Park’s request for $1,500,000 7

per year for years 2018 through 2021, to purchase additional water rights, should they 8

become available. The Commission should deny Park’s request to increase its 9

acquisition of water rights beyond the 822.3 acre feet (“AF”) it currently owns. 10

Park justifies its request to increase the water rights it owns by stating that the cost 11

of non-interruptible Tier 1 rates for treated water from Central Basin Municipal Water 12

District (“CBMWD”) has increased an average of 13% per year for the last seven years. 13

However, Park’s cost per AF does not include the cost to construct new wells. 14

5-11

Park compares the cost of purchased water to the perceived lower cost of pumping 1

groundwater. According to Park’s response to ORA PXS 011, the total cost to pump one 2

AF in 2017 was $567.09, while the cost to purchase one AF was $1,097.50. Park states 3

that, “As the cost to pump groundwater has not risen at the same pace as the cost of 4

imported water, the cost savings from pumping groundwater versus purchasing imported 5

water has increased.”41 While it is true that the cost per AF to purchase water has risen 6

significantly in recent years, the cost to pump groundwater includes more than just the 7

cost to operate existing wells. The true cost of groundwater as a reliable potable water 8

supply will ultimately include the hard costs to construct new or replacement wells, 9

pumps, boosters, storage, and the cost of treating groundwater, if required. 10

Park’s cost per AF comparison does not include additional costs such as the cost to 11

construct new wells, which can easily exceed $3 million dollars, or the cost to treat 12

groundwater, should contamination be an issue. For example, construction of Well 28D 13

in 2019 is estimated to cost approximately $3,197.358, Well CE proposed in Compton 14

East in 2021 is estimated to cost approximately $3,649,600. The construction of new 15

wells plus the un-depreciable cost to purchase water rights that are not essential or 16

necessary will require rate increases that Park’s customer base cannot afford. Park’s low-17

income customers are approximately 35% of its entire customer base. The median 18

household income in 2016 for the communities Park serves was an average of $54,000, 19

while the statewide median household income was $67,739.42 20

21

41 A.18-01-003, Park Revenue Requirement Report at p. 79. 42 Advameg, Inc., Income, earnings, and wages data in the US, City-Data.Com/income, accessed June 29, 2018.

5-12

Figure 1 – Incomes Communities served by Park Water 1 2

Community

2016 Median

Household

Income

Compton, CA $49,125

Bellflower, CA $49,750

Norwalk, CA $63,143

3

ORA is opposed to Park’s proposal to increase its acquisition of water rights 4

beyond the 822.3. AF it currently owns. Prior to 2013, Park owned just 2.3 AF in water 5

rights but was able to purchase 100 AF in 2013, 600 AF in 2014, and 120 AF in 2015. 6

The purchase of 820 AF in water rights from 2013 through 2015 totals $10,479,988 (an 7

average of $12,780/AF) in an un-depreciable asset, meaning that ratepayers will pay a 8

rate of return on this investment in perpetuity. 9

Park claims that the purchase of new water rights will cost about $14,000 per 10

AF.43 In its updated workpaper showing Leased Water Rights, Park shows a line entry 11

for purchase of new water rights totaling 38.5 AF each year beginning in 2019. Since 12

Park proposes to spend $1.5 million per year, the cost per AF would be estimated at 13

$38,961 per AF ($1,500,000/38.5 AF=$38,961). This is an exceedingly high price as 14

Park’s claim that new water rights will cost $14,000 per AF. Park is either grossly 15

overestimating the potential cost of water rights or hopes that if the Commission 16

authorizes the purchase of additional water rights now, whatever price it eventually pays 17

will be acceptable to the Commission. 18

43 A.18-01-003, Revenue Requirement Report at p. 80.

5-13

In 2012, Park purchased 74.7% of its total water supply, and produced 25.2% of 1

its total supply from groundwater.44 From 2012 to 2017, total water production 2

decreased by approximately 17% due to drought related conservation measures enacted 3

beginning in 2013. In 2017, Park’s water mix was approximately 53% groundwater and 4

47% purchased water. Currently, Park can secure more than half of its supply through a 5

combination of leased water rights, estimated to exceed 4,000 AF per year, and the 822.3 6

AF of water rights it owns. Leased water rights are estimated to cost approximately $160 7

per AF. Park has historically been able to secure sufficient leased water rights to meet its 8

supply needs. In fact, in 2017 Park was able to secure 7,200 AF in leased water rights but 9

only required between 4,000 and 4,200 AF to meet its groundwater supply needs. 10

The Commission should deny Park’s request to purchase additional water rights 11

because Park has presented no evidence that it will be unable to meet its supply needs 12

without this additional investment in water rights. 13

Park has access to leased water rights that have enabled Park to increase its 14

groundwater pumping since 2013. This has benefited Park’s ratepayers by reducing the 15

amount of supply Park must purchase from CBMWD. Park’s service area is not 16

experiencing significant growth in population. The area is built out and has a growth rate 17

of less than 1%. Park’s need for increased water supply has been limited by minimal 18

growth in population and the benefits of conservation rates and practices. Furthermore, 19

this service area is populated by a mostly working-class population that cannot afford the 20

rate impact of the costly purchase of water rights that will earn a rate of return in ratebase 21

in perpetuity. The Commission should disallow the purchase of additional water rights. 22

Production – Land b)23 Park requests $1,121,900 in 2021 to purchase land for a new well. Park has not 24

submitted a request or supporting information to construct this new well for which funds 25

to purchase the land is requested. Park’s request to purchase land for a new well is 26

44 Park Workpaper CB19 Unaccounted Water.

5-14

therefore premature. The Commission should disallow this investment since there is no 1

evidence that Park needs a new well at this time. 2

4) Cost of Removals 3 Cost of Removals is directly related to the removal of mains associated with the 4

main replacement program discussed in ORA’s report by Sung Han. Park requests 5

$313,300 and $515,600 for years 2019 and 2020, respectively. Because ORA 6

recommended fewer main replacements for those years, ORA reduces its corresponding 7

recommendation for Cost of Removals to $278,700 for 2019, and $225,400 for year 8

2020. 9

5) Status of Park’s Office Building Remodel 10 In D.15-01-001, the Commission authorized $2,657,000 to remodel Park’s 11

Downey office building. The estimated closing cost for the remodel is $3,882,600, 12

approximately 46% higher than the authorized costs. Park reports that the original 13

estimate for design and construction (completed in 2014/2015) did not include numerous 14

areas that were later found in need of major revamping, increasing the costs and delaying 15

completion of the project. Park indicates that after relocating staff into trailers to begin 16

demolition, asbestos was found in the drywall and drywall mud requiring remediation of 17

the entire space. Also, the City of Downey required additional fees for permit issuance 18

and public art. In its last construction estimate, Park assumed that it could reuse the 19

existing HVAC units. However, Park found that it needed to replace the existing HVAC 20

units because the existing units were improperly sized or were in the wrong area after 21

walls and venting were relocated. Park also found that it needed to upgrade the electrical 22

panels to meet current building codes. During the field tour of the office building, ORA 23

walked through the building prior to the full completion of construction and found that 24

the interior was totally remodeled, which included the removal of existing walls and 25

rebuilding of entire sections. As Park will shortly occupy what is essentially a new 26

building, it should not require any significant construction or additions. 27

In addition to the building remodel, Park purchased new furnishings and office 28

equipment. Included in this expense was new gym equipment (elliptical equipment, 29

5-15

treadmills, and weight stations) for employees to use on their own time. Park does not 1

receive any discount on its health insurance costs in exchange for providing gym 2

equipment for its employees at no cost. Since there is no compensation or discount in its 3

health premiums or identifiable benefits to the ratepayers, ORA finds that this is a benefit 4

that shareholders, not ratepayers, should support. ORA removed the purchase of gym 5

equipment, estimated at approximately $23,699, from the office furniture and equipment 6

closing costs recorded in 2017. This adjustment affects the beginning of year plant 7

balance for 2018. 8

CONCLUSION D.9 In future rate cases, the Commission should require Park to submit workpapers 10

that follow a consistent methodology for applying inflation factors to estimate 11

construction costs. The Commission should disallow unnecessary and excessive 12

investment in projects that are not yet ready for construction, such as the Area 41 & 13

Target main, and disallow further investment in water rights. 14

The following table compares Park Water and ORA recommended Utility Plant in 15

Service for calendar years 2018 through 2021. 16

17

5-16

Table 5-4 Park Water Utility Plant in Service versus ORA recommended 1 Utility Plant in Service 2

Park Central Basin PLANT IN SERVICE

Estimated Year 2018, Test Years 2019 and 2020

ORA Utility ORA Utility ORA Utility Item EY 2018 TY 2019 TY 2020

(A) (B) (C) (D) (E) (F)(Dollars in Thousands)

Plant in Service Beginning of Year $110,999,219 $110,209,141 $127,358,542 $120,510,181 $135,716,142 $134,301,422

Utility Plant Additions During Year $18,675,690 $11,059,900 $9,187,548 $14,989,800 $6,313,228 $11,768,800

Less Retirement -$2,316,367 -$758,860 -$829,948 -$1,198,559 -$332,977 -$655,711

Net Plant-in-Service End of Year $127,358,542 $120,510,181 $135,716,142 $134,301,422 $141,696,394 $145,414,511

Weighting factor 50% 50% 50% 50% 50% 50%Wtd. Avg. Plant in $119,178,880 $115,359,661 $131,537,342 $127,405,801 $138,706,268 $139,857,9663 4

6-1

MAIN REPLACEMENT CHAPTER 6:1

INTRODUCTION A.2 This Chapter sets forth ORA’s analyses and recommendations for Park’s main 3

replacement requests. ORA reviewed and analyzed Park’s testimony, Minimum Data 4

Requirements, workpapers, capital project details, and several technical reports pertaining 5

to main replacement. ORA also conducted a field investigation of the proposed main 6

replacement projects before making its own independent estimates. 7

Section B below provides a summary of ORA’s recommendations on Park’s main 8

replacement requests, presented in Chapter VI of Park’s Revenue Requirement Report.45 9

Section C discusses ORA’s recommended adjustments to Park’s request. Section D of 10

this report presents ORA’s conclusions. 11

SUMMARY OF RECOMMENDATIONS B.12 The Commission should adopt ORA’s recommended main replacement estimates 13

as shown in the table below. 14

Table 6-1 Park’s and ORA’s Main Replacement Estimates 15

2018 2019 2020

ORA $1,291,400 $3,505,500 $4,073,300 Park $1,341,400 $5,768,600 $6,305,700 Park > ORA $50,000 $2,263,100 $2,232,400 % Park exceeds ORA 3.87% 64.56% 54.81%

Park has 252 miles of mains. Park had an aggressive main replacement program in 16

recent years to replace most of its leak prone steel pipes. At the end of 2017 Park has 17

eliminated most of its steel mains. This has resulted in a substantial reduction in its leak 18

rate. 19

Park had 15 leaks in 2016 (0.06 leaks per mile per year) and 22 leaks (0.09 leaks 20

per mile per year) in 2017. Because of this low leak rate, Park can reduce its main 21

replacement program from a three year average (2018 to 2020) rate of 1.1% per year 22

45 See Chapter VI of Park’s Revenue Requirement Report for detail.

6-2

(2.76 miles) to around 0.6% over the three-year period (2018-2020). ORA recommends 1

that Park should reduce its replacement rate closer to the average U.S. water utilities’ 2

replacement rate (0.5%) over the same three year period. (See Table 6-5.) 3

DISCUSSION C.4 1) Proposed Mains Replacement Program 5

Table 6-2 Park’s Proposed Mains Replacement Budget 6

2018 Proposed

Budget

2019 Proposed

Budget

2020 Proposed

Budget

Budgeted Mains Replacement

Cost (million)

$1.341 $5.769 $6.306

Miles to be replaced 0.82 3.39 3.36

Percent of Total Mains (252 mi)

Replaced Each Year

.33% 1.34% 1.33%

Total Capital Budget (million) $12.642 $12.909 $13.004

Percent of Total Budget 9.8% 44.68% 48.49%

7 In reviewing main replacement need, we need to examine various factors, 8

including number of leak, flow requirement and reliability improvement, type, age, soil 9

condition and weather in deciding how much mains should be replaced and which main 10

should be replaced. However the single most important variable is number of leaks. 11

2) Composition of Park’s Water Pipeline System 12

Park’s system is composed of a variety of mains, including cast iron (CI), asbestos 13

cement (AC), steel, ductile iron pipe (DIP), and polyvinyl chloride (PVC). Table 6-3 14

below summarizes Park’s water mains material. Park hired outside consultants to assess 15

its main replacement needs in 2014 (2014 Asset management Study).46 According to 16

46 Park’s workpaper tab 14.

6-3

Park’s 2014 Asset Management Study, Park has approximately 252 miles of pipelines in 1

its system with the following characteristics: 2

3

Table 6-3 Composition of Park’s Mains 4

5 Source: Park’s Revenue Requirement Report at p.66. 6

In general, steel pipelines develop more leaks and have shorter life compare to the 7

other types of pipe materials. Table 6-4 shows the number of leaks by materials in Park’s 8

Bellflower, Compton East, Compton West, and Norwalk water systems. The table also 9

shows that steel pipes have 803 leaks, the highest among all materials. For Park, most of 10

its steel pipelines have been replaced and the remaining pipes are mostly CI and AC 11

pipes. CI and AC pipes are expected to last more than 100 years. 12

13

6-4

Table 6-4 Number of Leaks by Materials in Park’s Water Systems 1

Source: Park’s 2014 Asset Management Study at p. 30. 2 CI pipes make up 62% of the system pipes and the majority of CI pipe was 3

installed in the 1940s and 1950s. These CI mains are considered to be relatively young 4

for CI and have very few leaks. The average service life of CI and AC pipes range from 5

100 to 130 years.47 Given most of the mains in Park’s water system are CI and AC 6

materials while less than 1% are steel mains as shown in Table 6-4, ORA’s 7

recommendation for lower replacement rate is therefore reasonable. 8

3) Basis of Park’s Proposed Main Replacement Program 9 Asset Management Studies for Main a)10

Park’s proposed main replacement program relies on its Asset Management 11

Studies for Mains. To review the current and long-term replacement needs for its water 12

mains, Park performed two studies on its pipeline system. The first study entitled “Asset 13

Management for Water Mains” was prepared by Park’s Corporate Engineering on 14

December 2011, and the other report entitled “InfraPLAN” was prepared by an outside 15

consultant, Annie Vanrenterghem in December 2014. 16

These reports used the KANEW computer program that uses statistical analyses of 17

leak data and estimated service lives of pipes to calculate the pipeline replacement needs. 18

The KANEW model develops replacement scenarios and recommends replacement rates 19

for each type of pipe to control the long-term leak rate. 20

47 See Chart B.

6-5

An earlier KANEW report (prepared in December 2011) recommended a 1

replacement rate of about six miles per year for the next few years, followed by a 2

replacement rate that tapered down to about just less than four miles per year over the 3

long term. The 2014 KANEW Study (prepared in December 2014) recognized the 4

relatively low leak rate in the three years preceding the study (2012-2013) and 5

recommended an initial replacement rate of just under six miles per year tapering down to 6

about 3.75 miles per year over the long run. Park proposes to replace 3.39 miles in 2019 7

and 3.36 miles in 2020. 8

Park claims that these reports point out that, due to the extremely large volume of 9

mains in Park’s water systems nearing the end of their expected useful life, Park needs to 10

maintain an aggressive main replacement program to avoid an accumulation of 11

replacement needs that will result in a lower level of service and higher replacement costs 12

in the future. 13

Park also claims that main replacement would help to increase the pipe size to 14

meet the GO 103 main size to meet the minimum pressure and fire requirements. 15

However, the GO 103 requirements apply only to new or replacement mains that are 16

scheduled to be replaced and it does not require the existing mains with remaining useful 17

life to be replaced just to meet the new requirements. Flaws of Park’s KANEW Model. 18

Like all models, the quality of the model output is determined by the validity of 19

the inputs and assumptions used for the studies. The studies assumed 1) a target leak rate 20

of 0.15 leaks per mile per year without any justification, 2) exponential48 increase in leak 21

rate for Park, and 3) shorter physical life of pipes relative to actual experience49 22

Problem with Target Rate of .15 Leaks per Mile b)23 The number of leaks is the single most important criteria in evaluating main 24

replacement need. Park used 0.15 leaks per mile per year or 15 leaks per 100 miles per 25

48 Exponential increase means a compounded increase. For example with 2% compound rate would be (1+.02)*(1+0.02) over 2 years would 1.0404 or 4%. 49 See Pessimistic Views of Average Service Life Section of this report.

6-6

year as the target goal for replacement. Park assumed that, by the time the leak rate reach 1

0.15 leaks per mile per year, 50% of its pipes would be retired. The 0.15 leaks per mile 2

per year is based on the AWWA recommendation for a desirable leak rate for a well 3

maintained and well managed water system based on a system with very reliable system 4

with Cast Iron (CI) or Asbestos Cement (AC) pipes. 5

However, this 0.15 leaks per mile per year is an arbitrary goal without a rational 6

cost-benefit analysis. Consider the following example where actual direct costs for 7

replacement and repair are compared. Assuming an average replacement costs is 8

approximately $1 million/mile for 6-inch diameter main,50 for a one mile main, total 9

replacement costs would be approximately $1 million. If the utility expects to recover 10

that investment, the annualized revenue requirement for $1 million investment cost would 11

be $130,000 to $140,000, depending on financing cost or economic regulation (investor-12

owned utilities). Main repair costs per leak are approximately $4,000 per break. The 13

repair cost for a leak rate of 0.15 leaks per mile per year would be only $600 per year.51 14

Consequently, in order to justify replacing that pipe purely from a cost standpoint, the 15

one mile main must experience 34 breaks per mile per year.52 ORA does not recommend 16

waiting for such extreme condition. However, this illustrates how conservative the 0.15 17

leaks per mile per year is from an economics stand point. In fact most of the mains 18

replaced recently had approximately nine leaks before they were replaced.53 19

Exponential Increase in Leak Rate c)20 Park’s KANEW studies assumed that leaks will increase exponentially,54 but data 21

indicates more flat or constant rate of leak for CI and AC pipes.55 Because CI and AC 22

50 Park’s average pipe replacement costs vary from $1.5 to $1.9 million per mile for 2018 to 2020. (See Table 6-2.) 51 $4000 *.15 = $600. 52 $135,000/$4000=34. 53 2014 Asset Management Study at p.36. 54 See footnote 4. 55 2014 Asset Management Study, p.44 shows decline in leak rate over time for CI.

6-7

pipes have long service life (over 100 years), retirement of long lived pipes are usually 1

caused by other reasons, such as redevelopment or early retirement to improve fire flows 2

instead of leaks or physical deterioration of pipes. Exponential increase in leaks occurs 3

when the pipes are physically deteriorating due to rusting. Therefore, the leaks will 4

accelerate exponentially is wrong assumption for long lived pipes. Park’s 2014 report 5

noticed the flatness of the retirement rate. The 2014 Asset Management report states that 6

“The leak rate has not grown with age”.56 However, the study did not make the changes 7

in the exponential leak rate increase assumption.57 Most retirement of CI pipes was not 8

due to leaks, but for improvement of fire flow and redevelopment. The average yearly 9

leak rate of retired mains for Compton East Section is .012 leak rate, and Compton West 10

is .082 leak rate.58 The following Chart A shows age and yearly leak rate for cast iron 11

pipe for Park’s Compton East Section. Chart A shows 40-year-old pipes have five to six 12

times the leak rate than 60 years old pipes. 13

14

56 2014 Asset Management Study at p.56. 57 Ibid. 58 Id. at p.36.

6-8

Chart A Compton East Cast Iron Age and Yearly Leak Rate 1

Source: 2014 Asset Management Study at p.46. 2 Shorter Average Service Life d)3

Park’s 2014 study assumes that the physical service life of its pipes would be 4

similar to that of the Los Angeles Department of Water and Power (LADWP) because of 5

its proximity to LADWP. However, Park should not use LADWP’s pipes as a proxy to 6

Park because LA system is a unique system with its own problems and comparability 7

between the two systems is not verified. Liberty Apple Valley Water Company (AVR), 8

its sister company, used the average service lives developed by Buried No Longer (BNL) 9

report for its service life assumption.59 10

Municipal water agencies such as LAWLP can issue municipal bonds that are 11

much more favorable than regulated water utilities’ cost of capital. Therefore, LAWLP 12

has lower cost of capital. Additionally, it does not have to pay income and property 13

taxes. Thus financially LAWLP operates under much more favorable financial 14

59 AVR Asset Management Study for Water Mains, August 2013 at p.13.

6-9

environment and it can afford to spend on main replacements without worrying too much 1

about the rate impact of main replacement. 2

LAWLP is much large water agency. Larger utilities tend to replace mains much 3

faster than the smaller water utilities. Chart B shows that the average service life for CI 4

mains for smaller utilities are longer that the larger water utilities. For example, the 5

average service life for the West Large water utilities is 115 years verse 130 years for 6

West Small water utilities. 7

Park should have used the average service lives developed by Buried No Longer 8

(BNL) report for small West Region.60 The BNL average service life table is shown 9

below. These average service lives for West Small water utilities are much longer than 10

the lives that Park used for its 2014 Study. For example, Park used 90 to 100 years for 11

the average service life for CI mains for its 2014 Asset Management Study while the 12

Chart B shows an average service life of 105 years for CI mains for West Small water 13

utilities. If BNL lives be used, it would show much lower replacement need. 14

15

60 See AVR’s 2013 Asset Management Study at p.13.

6-10

Chart B 1

2 4) ORA’s Analysis and Recommendations on Main 3

Replacement Projects 4 Historical Expenditures and Leak Rates a)5

Table 6-5 below shows the main replacement expenditure and leak rates for Park’s 6

water system. 7

Table 6-5 Liberty Utilities (Park Water) Corp.’s Water Main Installation by Year61 8 9

Year of Percent No. of Leaks Installation Dollar Miles of Total Leaks Per Mile 2012 $2,884,993 3.26 0.70% 58 .23 2013 $3,230,700 4.29 0.92% 26 .10 2014 $5,473,945 5.49 1.17% 19 .08 2015 $4,808,209 5.64 1.20% 12 .05 2016 $922,080 0.81 0.17% 15 .06 2017 $3,723,864 4.32 .092% 22 .09 Totals $21,043,791 23.81 5.04% 152 .61 6 Yr. Avg $3,507,298 3.97 0.84% 25 .1

61 Responses to Question 1 of ORA’s Data Request SBH-007 (Main Replacement).

6-11

As shown in Table 6-4, Park has spent substantial amounts but less than that 1

required to achieve the replacement rates recommended in the KANEW Study. 2

However, the leak rate has declined substantially from 2012 to 2017. Park’s most recent 3

five-year expenditures in main replacements range between $0.9 to $5.5 million with an 4

annual average of $3.5 million. During the same period, the leak rate was reduced from 5

58 leaks (0.23 leaks per year) in 2012 to 22 leaks (.087 leaks per mile), a reduction of 6

62% by 2017. 7

Park’s leak rate per mile per year has been 0.1 leaks per mile per year in the last 8

six years,62 compared to AWWA’s goal of 0.15 leaks per mile per year. This is 9

considered an excellent leak rate.63 Park credited its success in reducing the number of 10

leaks in recent years to its main replacement program and plans to increase its main 11

replacement program.64 However most of the leak reductions are attributable to the 12

replacement of almost all its leak prone steel mains.65 While ORA agrees that the recent 13

replacement of almost all steel pipes has reduced the leak rate considerably, ORA 14

believes that the additional increase in the CI and AC pipeline replacements would have 15

little effect on the leak rate because all the leak prone steel mains have been replaced and 16

the remaining CI an AC pipes seldom leak. Park’s 2014 Asset Mangement Study cited 17

that “For example, close to half the CI mains that have been abandoned in the past had 18

never leaked---“66 Doing so would be waste of money and provide little benfit to 19

ratepayers. Park already has a very low leak rate relative to the AWWA’s goal of 0.15 20

leaks per mile per year and it is not necessary for the company to continue to accelerate 21

its main replacement program. Park should reduce its replacement program in response 22

to the reduction in leaks in recent years. 23

62 See Table 6-D. 63 AWWA goal is to achieve 0.015 leaks per year per mile. Park exceeded this goal for the last six years. 64 Id. at p. 65. 65 Id. at p. 25. 66 Id. at p. 10.

6-12

Park’s pipeline system is considered to be a relatively young water system for CI 1

and AC pipe system. The average age of Park’s mains is 60 years.67 The average service 2

life of CI pipes are 100 to 130 years. According to the US EPA,68 there are still many CI 3

mains in the US, which were installed in the 1800’s and continue to “provide adequate 4

and reliable service.”69 5

Additionally, Park’s system water loss is 3.65%,70 which is much lower than the 6

national average of 10%.71 A fact sheet produced by the National Drinking Water 7

Clearinghouse at West Virginia University states that a system loss of 10% to 20% is 8

normal.72 Furthermore, the dry weather and soil conditions in Southern California 9

provide a more ideal environment for pipelines compared to those on the other areas, 10

which has more extreme weather and typically more acidic and wetter soil conditions.73 11

Park proposes to replace 3.39 miles or 1.34% and 4.07 miles or 1.62% of pipelines 12

per year for 2019 and 2020. The national average pipe replacement rate for water utilities 13

is approximately 0.5%.74 National average provides some bench mark as to the amount 14

of main replacement that would provide a balance between the rate impact and service 15

quality. In spite of the fact that Park’s leak rate is very low, the age of Park’s pipelines is 16

relative young compared to the national average, and water loss rate are below the 17

national average, Park is proposing a replacement rate three times that of the national 18

average. Considering low number of leaks per mile per year and the relatively young age 19

67 AM Study at p. 28. 68 See Chart B. 69 US EPA’s Deteriorating Infrastructure Management and Challenges and Strategies at p. 29. 70 MDR, E-2. 71 National average - US EPA’s Distribution System Inventory, Integrity, and Water Quality, January 2007, Table 2, Statistics of US Distribution Systems. 72 Technical Brief, Leak Detection and Water Loss Control, Page 1. 73 See Chart B footnotes. 74http://books.google.com/books?id=5IsudRtjBZwC&pg=PA2&dq=pipeline+replacement+rate&hl=en&sa=X&ei=kg02U9PFJOGqyAG2l4GYBw&ved=0CFYQ6AEwBA#v=onepage&q=pipeline%20replacement%20rate&f=false.

6-13

of Park’s system, Park should replace its pipelines at a rate lower than that the national 1

average. Park should reduce its main replacement rate to be consistent with the national 2

average replacement rate (0.5%). ORA recommends main replacement rates of 0.3% 3

(0.82 miles) in 2018, 0.99% (2.15 miles) in 2019 and 1.01% (2.55 miles) in 2020 4

ORA’s Recommendations on Park’s Proposed b)5 Projects 6

The following table summarizes ORA’s recommendation on main replacement for 7

Park. 8

Table 6-6 Comparison of Park and ORA Capital Expenditures 9

10

Comparison of Park and ORA Capital Expenditures

Park mi ORA mi Park ORA Park > ORAYear 20182018-MR01 Carlin - Olanda 0.82 0.82 1,241,400$ 1,241,400$ -$

34300 Consultant Engineering - Mains 100,000$ 50,000$ 50,000$ Total 2018 0.82 1,341,400$ 1,291,400$ 50,000$

0.82

Year 20192019-MR01 Shoemaker 0.18 0.18 289,000$ 289,000$ -$ 2019-MR02 Stockwell/136th/137th/Wilmington 1.12 1.12 1,536,600$ 1,536,600$ -$ 2019-MR03 Rosecrans-Bradfield 300,000$ 300,000$ -$ 2019-MR04 Jersey-Rosecrans-Liggett 0.85 0.85 1,329,900$ 1,329,900$ -$ 2019-MR11 Ligget & Rosecrans 0.53 839,400$ -$ 839,400$ 2020-MR10 Clark - Rosecrans to Faywood 0.44 742,100$ -$ 742,100$ 2020-MR07 McKinley - 131st to 134th 0.27 631,600$ -$ 631,600$

34300 Consultant Engineering - Mains 100,000$ 50,000$ 50,000$ Total 2019 5,768,600$ 3,505,500$ 2,263,100$

3.39 2.15Year 20202019-MR03 Rosecrans-Bradfield 0.71 0.71 789,100$ 789,100$ -$ 2020-MR01 Excelsior Crossdale to Gridley 0.38 541,000$ -$ 541,000$ 2020-MR05 Gridley/Lindale/McLaren/Potter 1.13 1,641,400$ -$ 1,641,400$ 2020-MR06 Harris & Locust 0.76 0.76 1,345,200$ 1,345,200$ -$ 2020-MR02 Clymar & Caswell 1.08 1.08 1,889,000$ 1,889,000$ -$

34300 Consultant Engineering - Mains 100,000$ 50,000$ 50,000$ Total 2020 6,305,700$ 4,073,300$ 2,232,400$

4.07 2.553 yr. Total 8.28 4.713 Yr. Avg Miles 2.76 1.57% of Total (252 Mile) 1.1% 0.6%

6-14

5) 2018 Main Replacement Projects 1 2018-MR01. Carlin - Olanda: $1,241,400 a)2

The Commission should approve this project to improve fire flow in this area. 3

This project in Park’s Compton East Water System involves the installation of 4,345 4

linear feet of 8-inch ductile iron water main, 93 x 1-inch water services, and 10 fire 5

hydrants. This project will replace 4-inch and 6-inch cast iron water mains that were 6

installed in inaccessible back yard easements in 1947. The replacement water main, 7

which will be installed in the public street right-of-way, will bring fire flow capacities 8

and fire hydrant spacing up to current standards. To reconnect each customer previously 9

served from a back-yard meter, a new “houseline” will need to be installed from the new 10

meter location to the customer’s home. The cost for these “houselines” is included in the 11

removal portion of the budget. 12

Park states that its hydraulic model shows that this proposed improvement would 13

increase the fire flow capacity by 160%. The cost for this project is estimated at 14

$1,241,400. The foregoing project has been identified as a priority for replacement of 15

existing aged and undersized water mains. For 2018, the cost for this replacement main 16

project is estimated at $1,241,400 for 0.82 miles of pipeline. 17

Consultant Engineering – Mains: $100,000 b)18 The Commission should approve $50,000 for consulting engineering services in 19

2018, consistent with ORA’s recommended reductions in Park’s main replacement 20

program. Park requests $100,000 in 2018 for consulting services for design and 21

engineering services on various capital improvement projects. This budget item outside 22

consulting services such as surveying and project approval from multi-jurisdictional areas 23

to support pipeline projects 24

6) 2019 Water Main Replacements 25 2019-MR01. Shoemaker: $289,000 a)26

The Commission should approve this project to improve fire flow capacity. This 27

project in Park’s Bellflower-Norwalk Water System will install 955 linear feet of 12-inch 28

ductile iron water main, 16 x 1-inch water services, and two fire hydrants. This project 29

6-15

will connect two dead-end 12-inch diameter water mains and will be installed in the 1

public street right-of-way. To reconnect each customer previously served from a 2

backyard meter, a new “houseline” will need to be installed from the new meter location 3

to the customer’s home. Park states that it will improve circulation bringing fire flow 4

capacities and fire hydrant spacing up to current standards. The cost for these 5

“houselines” is included in the cost of removal portion of the budget. Park states that its 6

hydraulic model shows an increase of about 77% in fire flow capacity with this proposed 7

improvement projects. The cost for this project is estimated at $289,000. 8

2019-MR02. Stockwell/136th/137th/Wilmington: b)9 $1,536,600 10

The Commission should approve this project to improve fire flow capacity. This 11

project in Park’s Compton West Water System will install 5,935 linear feet of 8-inch 12

ductile iron water main, 124 x 1-inch water services, and fifteen fire hydrants. This 13

project will replace 4-inch and 6-inch cast iron water mains that were installed in 14

inaccessible back yard easements in 1948. The replacement water main, which will be 15

installed in the public street right-of-way, will bring fire flow capacities and fire hydrant 16

spacing up to current standards, and increase the fire flow capacity by 468%. To 17

reconnect each customer previously served from a backyard meter, a new “houseline” 18

will need to be installed from the new meter location to the customer’s home. The cost 19

for these “houselines” is included in the cost of removal portion of the budget. Park states 20

that its hydraulic model shows an increase of about 468% in fire flow capacity with this 21

proposed improvement projects. The cost for this project is estimated at $1,536,600. 22

2019-MR04. Jersey-Rosecrans-Liggett: $1,329,900 c)23 The Commission should approve this project to increase the fire flow capacity to 24

meet the current standard. This project in Park’s Bellflower-Norwalk Water System will 25

install 2,940 linear feet of 12-inch ductile iron water main, 1,540 linear feet of 8-inch 26

water main, 89 x 1-inch water services, and ten fire hydrants. This project will replace 4-27

inch cast iron water mains that were installed in inaccessible back yard easements in 1947 28

and recently resulted in a water main leak. The replacement water main, which will be 29

6-16

installed in the public street right-of-way, will bring fire flow capacities and fire hydrant 1

spacing up to current standards. To reconnect each customer previously served from a 2

backyard meter, a new “houseline” will need to be installed from the new meter location 3

to the customer’s home. The cost for these “houselines” is included in the cost of 4

removal portion of the budget. The cost for this project is estimated at $1,329,900. 5

2019-MR11. Liggett & Rosecrans: $839,400 d)6 The Commission should deny Park’s request for this project because Park 7

experienced only one leak on this line during the last 10 years, and the project will not 8

appreciably improve fire flow. This project in Park’s Bellflower-Norwalk Water System 9

will install 2,817 linear feet of 12-inch ductile iron water main, 8 x 1-inch water services, 10

and seven fire hydrants. This project will replace a 6-inch cast iron water main that was 11

installed in an alley in 1948 and recently resulted in a water main leak. The replacement 12

water main, which will be installed in the public street right-of-way, will bring fire flow 13

capacities and fire hydrant spacing up to current standards. The cost for this project is 14

estimated at $839,400. 15

2019-MR07. McKinley 131st to 134th: $631,600 e)16 The Commission should deny Park’s request for this project because Park 17

experienced only one leak on this line during the last 10 years, and the project will not 18

substantially improve fire flow. This project in Park’s Compton West Water System will 19

install 1,408 linear feet of 12-inch ductile iron water main, 79 1-inch water services, and 20

four fire hydrants. This project will replace undersized and aging cast iron mains located 21

in inaccessible backyard easements. These 4 and 6 inch diameter CI mains were installed 22

in 1946. The replacement mains will be installed in the street right-of-way so there will 23

be an associated cost of removal expenditure for the installation of houselines. This 24

project is estimated at $631,600. 25

2019-MR10. Clark – Rosecrans to Faywood: f)26 $742,100 27

The Commission should deny Park’s request for this project because Park 28

experienced only one leak on this line during the last 10 years, and the project will 29

6-17

provide minimal benefits. This project in Park’s Bellflower-Norwalk Water System will 1

install 2,300 linear feet of 12-inch ductile iron water main and 5 fire hydrants. This 2

project will continue the installation of a north-south water transmission main. This 3

project will bring fire flow capacities and fire hydrant spacing up to current standards. 4

This project is estimated at $742,100. 5

2019-MR03. Rosecrans - Bradfield: $300,000 g)6 The Commission should approve this project to improve fire flow. This project in 7

Park’s Compton East Water System will install 3,740 linear feet of 8

8-inch ductile iron water main, 66 x 1-inch water services, and ten fire hydrants. This 9

project will begin in 2019 and will be completed in 2020. The 2019 portion is estimated 10

at $300,000. This project will replace 4-inch and 6-inch diameter mains were installed in 11

1947 and 1953. Running Park’s hydraulic model indicated an increase of about 109% in 12

fire flow capacity with this proposed improvement. The replacement mains will be 13

installed in the street right-of-way so there will be an associated cost of removal 14

expenditure for the installation of houselines in 2020 when the project finishes. 15

Consultant Engineering – Mains: $100,000 h)16 The Commission should approve $50,000 for consulting engineering services in 17


program. Park is requesting $100,000 in 2019 for consulting services on various capital 19

improvement projects. With the complex nature of regulatory planning and the lack of 20

internal resources to complete these designs in a timely manner, it is more cost efficient 21

to utilize design specialists who have experience working in a multi-jurisdictional area. 22

These consultants have worked with the various cities and agencies in Park’s service area 23

and are able to guide the project designs to timely approval. With this task being worked 24

on by others, the Park staff can focus on its area of expertise, namely, project planning 25

and management and meeting approved capital budgets. 26

6-18

7) 2020 Water Main Replacements 1

2019-MR03. Rosecrans - Bradfield: $789,100 a)2 The Commission should approve this project to improve fire flow. This project 3

will begin in 2019 in Park’s Compton East Water System and will be completed in 2020 4

at an estimated cost of $789,100 in 2020. This project is discussed above in the section 5

for Year 2019. 6

2020-MR01. Excelsior - Crossdale to Gridley: b)7 $541,000 8

The Commission should deny Park’s request for this project because the project 9

will provide minimal benefits. This project in Park’s Bellflower-Norwalk Water System 10

will install 2,010 linear feet of 12-inch ductile iron water main. This project will 11

continue an east-west water transmission main that will improve pressure and fire flow 12

capability in the local area. Running Park’s hydraulic model with this proposed 13

improvement showed an increase of about 6% in fire flow capacity. This work is 14

estimated at $541,000. 15

2020-MR06. Harris and Locust: $1,345,200 c)16 The Commission should approve this project to improve fire flow. This project in 17

Park’s Compton East Water System will install 1,650 linear feet of 12-inch diameter 18

water main, 2,480 linear feet of 8-inch diameter water main, 92 services, and eight fire 19

hydrants. This project will replace undersized and aging cast iron mains located in 20

backyard easements. The 4-inch diameter mains were installed in 1947 and there has 21

been a recent leak in this area. The replacement mains will be installed in the street right-22

of-way incurring an associated removal cost for the installation of houselines. Running 23

Park’s hydraulic model with this proposed improvement showed an increase of about 24

58% in fire flow capacity. This work is estimated to cost $1,345,200. 25

2020-MR02. Clymar & Caswell: $1,889,000 d)26 The Commission should approve this project to improve fire flow. This project in 27

Park’s Compton West Water System will install 2,470 linear feet of 12-inch diameter 28

water main, 3,235 linear feet of 8-inch diameter water main, 148 services, four fire 29

6-19

hydrants, and eight fire hydrant reconnections. This project will replace aging 6-inch and 1

8-inch diameter cast iron mains that were installed in 1952 and which have recently had 2

fifteen leaks. Running Park’s hydraulic model with this proposed improvement showed 3

an increase of about 43% in fire flow capacity. This work is estimated to cost 4

$1,889,000. 5

2020-MR05. Gridley-Lindale-McLaren-Potter: e)6 $1,641,400 7

The Commission should deny Park’s request for this project because the project 8

will provide minimal benefits. This project in Park’s Bellflower/Norwalk Water System 9

will install 5,980 linear feet of 8-inch ductile iron water main, 162 1-inch water services, 10

and twelve fire hydrants. This project will replace undersized and aging cast iron mains 11

located in backyard easements. These 4-inch diameter mains were installed in 1947 and 12

there have been two recent leaks in this area. Running Park’s hydraulic model with this 13

proposed improvement showed an increase of about 4% in fire flow capacity. The small 14

number of leaks and the small improvement in fire flow capacity do not warrant this 15

project. 16

Consultant Engineering – Mains: $100,000 f)17 The Commission should approve $50,000 for consulting engineering services in 18


program. Park is requesting $100,000 in 2020 for consulting services on various capital 20

improvement projects. With the complex nature of regulatory planning and the lack of 21

internal resources to complete these designs in a timely manner, it is more cost efficient 22

to utilize design specialists who have experience working in a multi-jurisdictional area. 23

These consultants have worked with the various cities and agencies in Park’s service area 24

and are able to guide the project designs to timely approval. With this task being worked 25

on by others, Park’s staff can focus on project planning and management and meeting 26

approved capital budgets. 27

6-20

CONCLUSION D.1 ORA has shown that the conditions of Park’s pipeline system such as low leak 2

rate, age, and low water loss rate do not warrant a replacement rate that is above the 3

national average. Therefore, ORA recommends that the Commission adopt ORA 4

recommended pipeline replacement projects in this chapter, which is somewhat less than 5

recent year’s replacement rate and more in line with normal replacement rate for average 6

water utilities. 7

7-1

ADVANCED METERING INFRASTRUCTURE (AMI) CHAPTER 7:1

INTRODUCTION A.2 Park proposes to convert its current Automatic Meter Reading (“AMR”) system to 3

Advanced Metering Infrastructure (“AMI”). This Chapter sets forth ORA’s analyses and 4

recommendations for Park’s proposed AMI. ORA reviewed and analyzed Park’s testimony, 5

Minimum Data Requirements, workpapers, capital project details, several technical reports 6

pertaining to AMI. ORA also conducted a field investigation of the proposed AMI to replace 7

the current AMR system before making its own independent estimates. 8

Section B below provides a summary of ORA’s recommendations on Park’s AMI 9

requests. Section C of this report presents a detailed discussion of ORA’s recommended 10

adjustments to Park’s requested AMI project. Section D of this report presents ORA’s 11

conclusions. 12

SUMMARY OF RECOMMENDATIONS B.13 The Commission should deny Park’s request for its AMI project because the project is 14

not cost effective. The AMI project would increase Park’s revenue requirement by an 15

additional $8.2 million over a 20-year period. This $8.2 million increase in revenue 16

requirement does not include the company’s overhead costs and the possible increase in cost 17

due to the possible premature battery failure of the AMI meters.75 If these costs are included 18

in the study, the revenue requirement increase would be much higher than $8.2 million. 19

Table 7-1 presents Park’s and ORA’s AMI infrastructure estimates for 2018-2020. 20

21

75 The battery life of AMI meters would be similar to AMR meters, and is likely to fail after approximately ten years. See Meter Replacement Section of this chapter.

7-2

Table 7-1 Park’s and ORA’s AMI Infrastructure Estimates 1

2018 2019 2020

ORA $0 $0 $0 Park $0 $486,700 $486,700 Park > ORA $0 $486,700 $486,700 % Park exceed ORA 0% 100% 100%

Park is experiencing a high rate of battery failure in the meter register of its AMR 2

meters. The Commission should require Park to replace meter registers in its existing AMR 3

meters instead of replacing the entire meter. This would cost significantly less than 4

replacing the entire meter. 5

Table 7-2 presents Park’s and ORA’s meter replacement estimates for 2018-2020. 6

Park’s request for 2018, 2019, and 2020 are approximately 656%, 681%, and 681% higher 7

than ORA’s recommendations. 8

Table 7-2 Park’s and ORA’s Meter Replacement Estimates 9

2018 2019 2020

ORA $168,410 $162,125 $168,410 Park $1,273,500 $1,266,600 $1,315,700 Park > ORA $1,105,090 $1,104,475 $1,147,290 % Park > ORA 656% 681% 681%

DISCUSSION C.10 1) Park’s Present AMR system 11 Park began installing its AMR system in 2004 and replaced most of its meters with 12

AMR meters by the end of 2017. The Commission reviewed and approved this AMR project 13

in Park’s previous GRC proceedings.76 AMR allows remote meter reading from a drive-by 14

utility truck. This eliminates time consuming visual meter reading that often requires an 15

access to backyard meters. 16

17

76 D.06-01-004, D.09-01-001, D.13-09-005, and D.16-01-009.

7-3

AMI Projects 1 Decision (D.)16-12-026 (Rulemaking (R.)11-11-008) among other things, ordered 2

Class A and B water utilities to provide an analysis that would allow the Commission to 3

evaluate the effectiveness of AMI system. 4

AMI supports daily collection of customer usage data via a communications system 5

and a meter data management (“MDM”) system. Meter reading data is automatically 6

collected through a communication infrastructure which communicates between the meter 7

and district office and used for billing and usage analysis. This eliminates the need for meter 8

readers to either manually read meters or drive around to collect AMR reads from their 9

trucks. AMI also provides a customer portal for timely and current usage rates on an hourly, 10

daily or monthly basis. AMI can also provide alerts when leakage is detected. This timely 11

leakage information facilitates repairs and adjustments in water usage to mitigate water 12

waste and unexpected bills increases. 13

Park states that, given the ongoing rate of AMR equipped meter replacement arising 14

from age, battery failures, and other causes, it is reasonable to replace its AMR system with 15

AMI in the near-term. Park asserts that by proactively planning for the implementation of an 16

AMI system, it can realize the efficiencies and benefits gained from the AMI system 17

implementation at a more rapid pace. 18

However, such capabilities come with substantial additional costs for the 19

communication infrastructure that ratepayers will have to pay for through rates. Park 20

estimates that the total AMI project cost, including the network and information technology 21

costs, in General Plant would be $16.1 million over a twenty year period. Park requests 22

$486,700 in 2019 and $486,700 in 2020 for AMI infrastructure. The forecast is based on 23

detailed information from Park’s consultant and outlined in the consultant’s report. 24

Park seeks an AMI budget of approximately $1.274 million, $1.753 million and 25

$1.851 million for 2018, 2019 and 2020, respectively, as shown in the table below: 26

27

7-4

Table 7-3 Park’s AMI Budget 1 (Thousands of Dollars) 2

3 2018 Proposed

Budget

2019 Proposed

Budget

2020 Proposed

Budget

AMI Infrastructure Costs $0 $486.7 $486.7

AMR/AMI Meter Replacement

Cost

$1,273.5 $1,266.6 $1,315.7

Total Budget $1,273.5 $1,753.3 $1,851.4

2) Cost Benefit Analysis 4 Cash Flow Analysis a)5

In compliance with D.16-12-026, Park hired West Monroe to analyze implementing 6

AMI in Park’s water system and if warranted, to provide recommendations on how to do so. 7

West Monroe’s analysis is a cash flow analysis from the company’s point of view 8

excluding overhead costs. The study analyzes the net cash flows from the implementation of 9

the AMI project. 10

The following table shows the conclusions of West Monroe’s cash flow analysis. 11

12

7-5

Figure 1 West Monroe’s Cash Flow Analysis 1

2 The study shows a negative cash flow of $1.7 million over a 20-year period for the 3

implementation of AMI. In other words, the costs exceed the benefits by $1.7 million, 4

showing that the AMI project is not cost effective on a cash flow basis from the company’s 5

point of view. 6

Nevertheless, Park illogically concludes that AMI technology has matured to the point 7

where an AMI system can cost effectively provide customer benefits and claims that West 8

7-6

Monroe’s study indicates that the benefits justify implementing AMI.77 Park requests to 1

implement AMI beginning in Test Year 2019. 2

The negative $1.7 million savings estimate includes $11.2 million of avoided AMR 3

costs. The Avoided AMR Baseline represents the cost savings of not replacing the AMR 4

meters. Without this avoided cost the accumulated AMR cash flow would be a negative 12.9 5

million over the 20-year period. The avoided AMR cost could be included as an avoided 6

cost if the AMI meters were replacing fully depreciated AMR meters. However, this is not 7

the case. 8

Park replaced all meters with AMR meters between 2004 and 2017. (See Table 7-4 9

below). Table 7-4 shows that most meters are less than ten years old and have more than 10

50% of its life remaining. Therefore, removing these meters prematurely actually costs Park 11

substantially more because it would have to write off the undepreciated meter values as 12

retired assets when they are replaced with new AMI meters, increasing depreciation expense. 13

The cost of premature retirement must be included in calculating the Avoided AMR Baseline 14

which reduces that baseline by 50%. Thus, this would reduce the Avoided AMR Baseline of 15

$11.2 million to $5.6 million, assuming one half of the asset value is wasted through 16

premature retirement. This would increase the net negative cash flows to $7.3 million.78 17

18

77 Park’s Revenue Requirement Report at p.75. 78 $5.6 million + $1.7 million = $7.3 million.

7-7

Table 7-4 Park’s AMR Meter Installations 1 2

Installation Year

Qty of Meter Installed Cost

2004 26 $3,370 2005 152 $19,970 2006 1,115 $146,871 2007 1,215 $184,022 2008 2,124 $343,327 2009 1,885 $304,486 2010 642 $112,511 2011 690 $115,029 2012 3,035 $539,704 2013 5,081 $914,536 2014 3,871 $712,784 2015 3,353 $651,326 2016 1,634 $179,791 2017 1,583 $67,787

Revenue Requirement Analysis b)3

Park’s consultant West Monroe’s analysis is misleading and understates the cost to 4

the ratepayers because it only considers the cash flows of the AMI project and its effects on 5

Park but not the effects of the project on rates. Analyzing the rate impact on ratepayers 6

requires a revenue requirement analysis because, ultimately, it is the ratepayers who would 7

bear the costs of the AMI project through rates. The revenue requirement would always be 8

much higher than the cash flows because ratepayers pay, not only for the cost of the capital 9

expenditures through depreciation, but also for the return on the investment, income taxes 10

associated with the return, and the property taxes on the capital investments. 11

ORA requested in ORA Data Request SBH- 002 that Park perform a revenue 12

requirement analysis to examine the true cost to the ratepayers; however, the response 13

contained some errors. ORA corrected the errors and Attachment 1 shows the corrected 14

detailed revenue requirement analysis.79 15

79 Park’s response included adjustments to revenue requirements for interest and depreciation expenses for income taxes, but interest and depreciation are tax deductible expense items and have no tax effect except for deferred taxes related to the differences between book and tax depreciations.

7-8

The revenue requirement study shows that, before deducting the avoided cost of AMR 1

meter replacement, ratepayers would have to pay $13.8 million more over a 20-year period. 2

Even if the study were to account for one half of the avoided AMR project cost, the project 3

would increase the revenue requirement for ratepayers by $8.2 million.80 This $8.2 million 4

increase in revenue requirement does not include overhead costs and any possible increase in 5

costs if premature battery failures also occur in AMI meters.81 If the study had included 6

these costs, the revenue requirement increase would be much higher than $8.2 million. If 7

Park’s overhead cost is added, the project cost will increase by $1.4 million.82 Replacement 8

of meter register after ten years for failed batteries would add another 30% to 50 % ($2.4 9

million to $4.1 million) in Field Operations.83 Field Operation cost represents AMI meter 10

installation cost. 11

Therefore, the Commission should deny the AMI project because it is not cost 12

effective. 13

3) Meter Replacement 14 The Commission should require Park to replace AMR meter registers with failed 15

batteries with new registers rather than replacing them with new meters. 16

The batteries in Park’s AMR meters were expected to last 20 years. However, 17

recently, the batteries of the AMR meters that were installed from 2004 to 2017 began to fail 18

at a rapid rate. (See Table 7-E below.) Due to aging meters and ongoing battery failures, 19

Park must replace meters at an aggressive rate. Park’s total estimated meter replacement 20

expenditures are $1,273,500 in 2018, $1,266,600 in 2019, and $1,315,700 in 2020. 21

However, the manufacturer provides a full replacement warranty on the meter register 22

for the first ten years and then offers a prorated warranty for up to 20 years, as shown in 23

Attachment 2 at the end of this chapter. Park does not track or book the compensated 24

80 $13.8 - $5.6 = $8.2 million. 81 See Meter Replacement Section of this chapter. 82 $16.1 million Field operation cost *9% over head rate equals $1.4 million. 83 Field Operation cost $8.2 million times 30% or 50% equals $2.4 million and 4.1 million.

7-9

material costs for free replacement registers because the manufacturer supplies them for free. 1

When Park installs replacement registers, they are simply shown as the repair of a 2

component of an existing asset. When Park replaces meters and the associated registers, it 3

retires the old meter and the new meter is booked as a new asset. 4

The following table provides the historical failed meter data: 5

Table 7-5 Park’s AMR Meter Failures 6

Year Number of Battery Failures

Average Age of Failed Registers

Expected Life

Remaining Life

2012 208 9.6 20 10.4 2013 117 9.2 20 10.8 2014 454 8.8 20 11.2 2015 1075 10.6 20 9.4 2016 863 11.0 20 9.0 2017 825 10.9 20 9.1 Total 3602

Source: Park’s responses to ORA Data Request SBH-006 (AMI), Question 3. 7 For the most part, Park fixed meter failures that occurred between 2012 and 2016 by 8

replacing a free, manufacturer-provided register. Park estimates that about 2,500 register 9

failures will occur each year for 2018 and 2019. For 2020, Park expects approximately 3,600 10

failures. These estimates are based on meter age. 11

The warranty on registers covers Park’s costs when registers fail prior to 10 years, 12

with the exception of the labor expense to change the registers. If the register fails after ten 13

years, the manufacture provides a new one with a prorated discount. (See Attachment 2 for 14

the manufacturer’s warranty) 15

The average age of the meter with battery failure is approximately10 years. The 16

manufacturer provides a full replacement warranty on the meter register for the first ten years 17

and thereafter offers a prorated warranty for up to 20 years. Thus, Park can replace 18

approximately half of the meters that have failed batteries without any cost to Park. It could 19

replace the remaining half of the failed registers at 35% of the cost of a new register, 20

assuming the remaining half of the registers fail at an average age of 12. According to the 21

7-10

vendor’s quote in 2017, a new register cost $176.47 and a new 5/8 inch meter cost $213.69. 1

ORA estimates that Park could replace half of the registers with failed batteries with free 2

registers and the remaining half for $61.76 each,84 assuming that the average age at the time 3

of the failure is less than 12 years. The cost of replacing the whole meter with new one is 4

$213.69. Thus, replacing the register only instead of replacing whole meter would save 5

approximately 87% of the cost of replacing the meters. 6

Therefore, the Commission should require Park to replace AMR meters registers with 7

failed batteries with new registers rather than replacing them with new meters. This would 8

reduce Park’s meter replacement expenditures by 87%. 9

CONCLUSION D.10 The Commission should deny Park’s request for its AMI project because the project is 11

not cost effective. The AMI project would increase Park’s revenue requirements by an 12

additional $8.2 million over the 20-year period. The $8.2 million increase in revenue 13

requirement would be even higher if the company’s overhead costs and cost to replace 14

possible premature battery failures were added to the revenue requirements. 15

The Commission should require Park to replace AMR meter registers with failed 16

batteries with new registers rather than replacing them with new meters. This would reduce 17

the meter replacement expenditures by 87%. 18

19

84 $176.47*35%=$61.76.

7-11

1

2

3

ATTACHMENT 1 4

5

6

Revenue Requirement Analysis 7

8

7-12

1

7-13

1

7-14

1

7-15

1

7-16

1

2

ATTACHMENT 2 3

4

5

Meter Warranty 6

7

7-17

1

2

8-1

DEPRECIATION RESERVE AND DEPRECIATION EXPENSE CHAPTER 8:1

INTRODUCTION A.2 This Chapter sets forth ORA’s analyses and recommendations regarding 3

depreciation reserve and depreciation expense for Park. Table 8-2 at the end of this 4

chapter provide ORA’s and Park’s estimates for depreciation reserve and depreciation 5

expense for Test Year 2019 and 2020. 6

SUMMARY OF RECOMMENDATION B.7 ORA reviewed and agrees with the methods Park used to calculate depreciation 8

reserve and depreciation expense for Test Year 2019 and 2020. The differences between 9

Park and ORA’s calculations are attributable to the differences in plant estimates and 10

ORA’s use of updated data from year-end 2017. 11

DISCUSSION C.12 ORA used Park’s recorded year-end 2017 depreciation reserve balances to 13

determine beginning of year depreciation reserves for 2018. Park’s proposed 14

depreciation rates in this application are based on its new remaining life study. Park’s 15

proposed rates were calculated in accordance with a straight-line remaining life curve 16

using Standard Practice U-4. Park determined depreciation accruals for Test Year 2019 17

and 2020 by applying proposed depreciation rates to the average estimated annual plant 18

balances for Test Year 2019 and 2020. 19

Table 8-1 shows the depreciation rates for Test Year 2019 and 2020. 20

21

8-2

Table 8-1 Park Present and proposed Depreciation Rates 1

2

LIBERTY UTILITIES (PARK WATER) CORP.TOTAL DEPRECIATION ACCRUALS/EXPENSEESTIMATED 2018 THRU 2021 2019-2021 2018 TOT DEP DEPRECIATIONDEPRECIATION SALVAGE

CPUC NARUC RATE RATE RATE

ORGANIZATION COSTS 30100 30100 0.00% 0.00% 0.00%FRANCHISE & CONSENTS 30200 30200 0.00% 0.00% 0.00%MISC. INTANGIBLE PLANT 30300 30300 0.00% 0.00% 0.00%LAND & LAND RIGHTS 30600 30600 0.00% 0.00% 0.00%(CONTRIBUTED) LAND & LAND RIGHTS 30601 30601 0.00% 0.00% 0.00%LAND & LAND RIGHTS-MAIN OFFICE 30602 30602 0.00% 0.00% 0.00%LAND & LAND RIGHTS-PRODUCTION 31000 31000 0.00% 0.00% 0.00%WELLS & SPRINGS 31400 31400 2.37% 2.23% -5.00%OTHER SOURCE OF SUPPLY 31700 31700 1.97% 2.13% 0.00%(CONTRIBUTED) OTHER SOURCE OF SUPPLY 31701 31701 1.97% 2.13% 0.00%STRUCTURES & IMPROVEMENTS 32100 32100 3.98% 3.82% 0.00%(CONTRIBUTED) STRUCTURES & IMPROVEMENTS 32101 32101 3.98% 3.82% 0.00%ELECTRIC PUMPING EQUIPMENT 32500 32500 4.38% 4.13% 10.00%(CONTRIBUTED) ELECTRIC PUMPING EQUIPMENT 32501 32501 4.38% 4.13% 10.00%WATER TREATMENT EQUIPMENT 33200 33200 5.43% 5.12% 0.00%(CONTRIBUTED) WATER TREATMENT EQUIPMENT 33201 33201 5.43% 5.12% 0.00%RESERVOIR & STANDPIPES 34200 34200 1.55% 2.09% 0.00%(CONTRIBUTED) RESERVOIR & STANDPIPES 34201 34201 1.55% 2.09% 0.00%MAINS 34300 34300 1.72% 1.91% -1.61%(CONTRIBUTED) MAINS 34301 34301 1.72% 1.91% -1.61%SERVICES 34500 34500 2.60% 2.56% 0.00%(CONTRIBUTED) SERVICES 34501 34501 2.60% 2.56% 0.00%METERS 34600 34600 3.34% 3.09% 10.00%(CONTRIBUTED) METERS 34601 34601 3.34% 3.09% 10.00%AMR EQUIPMENT 34620 34620 3.34% 3.09% 10.00%HYDRANTS 34800 34800 2.32% 2.25% 10.00%(CONTRIBUTED) HYDRANTS 34801 34801 2.32% 2.25% 10.00%STRUCTURES AND IMPROVEMENTS 39000 39000 2.27% 1.94% 0.00%OFFICE FURNITURE & EQUIPMENT 39100 39100 8.68% 6.54% 0.00%OFFICE MACHINERY 39110 39110 8.68% 6.54% 0.00%TRANSPORTATION EQUIPMENT 39200 39200 5.24% 2.12% 5.00%TRANSPORTATION EQUIPMENT (CAPPED) 39210 39210 5.24% 2.12% 5.00%STORES EQUIPMENT 39300 39300 3.16% 3.55% 5.00%TOOLS & WORK EQUIPMENT 39400 39400 4.47% 4.97% 5.00%LABORATORY EQUIPMENT 39500 39500 0.00% 6.78% 0.00%POWER OPERATED EQUIPMENT 39600 39600 9.07% 8.35% 10.00%COMMUNICATIONS EQUIPMENT 39700 39700 11.64% 7.56% 0.00%TELEMETRY EQUIPMENT 39710 39710 11.64% 7.56% 0.00%(CONTRIBUTIONS) TELEMETRY EQUIPMENT 39711 39711 9.78% 7.56% 0.00%COMPUTER EQUIPMENT-PCs 39830 39830 17.83% 10.95% 0.00%COMPUTER EQUIPMENT-MIS/SOFTWARE 39840 39840 13.24% 9.55% 0.00%COMPUTER EQUIPMENT-CADD 39850 39850 13.24% 9.55% 0.00%COMPUTER EQUIPMENT-CADD 39860 39860 0.90% 0.54% 0.00%OTHER TANGIBLE PROPERTY 39900 39900 4.42% 4.00% 0.00%

8-3

CONCLUSION D.1 ORA reviewed and agrees with Park’s methodology and depreciation rates. The 2

differences between ORA and Park’s proposed depreciation reserves and accruals are due 3

to differences in plant additions and ORA’s use of recorded year-end 2017 depreciation 4

reserve balances rather than Park’s estimated 2017 depreciation reserve balances. 5

6

8-4

1

2 . 3

9-1

RATEBASE CHAPTER 9:1

INTRODUCTION A.2 This Chapter sets forth ORA’s analysis and recommendations for Park and 3

allocated General Office rate base. 4

SUMMARY OF RECOMMENDATIONS B.5 The Commission should adopt ORA’s rate base estimates. The differences 6

between ORA and Park’s rate base forecasts are mainly due to differences in Park’s 7

requested capital investment in plant and ORA’s recommended level of capital 8

investment. 9

Table 9-1 provide summaries of ORA’s and Park’s weighted average depreciated 10

rate base and allocated General Office, respectively. 11

DISCUSSION C.12 Average Plant in Service and Depreciation Reserve are discussed in Chapters 5 13

and 8 of this this report. 14

1) Materials and Supplies 15

Park’s estimated materials and supplies (“M&S”) for Test Years 2019 and 2020 16

are based on a percentage applied to the average number of customers in the Test Year. 17

This percentage is based on a five-year average of M&S recorded amounts divided by the 18

number of customers per year (2012 – 2016). ORA agrees with this methodology. 19

2) Deferred Income Taxes 20

The difference between ORA’s and Park’s estimate of Deferred Income Taxes is 21

attributable to differences in plant estimates. 22

3) Interest Expense 23

The difference between ORA’s and Park’s estimate of Interest Expense is also 24

attributable to differences in Rate Base estimates. 25

9-2

CONCLUSION D.1 ORA has thoroughly evaluated Park’s plant, depreciation and other rate base item 2

estimates and made appropriate adjustments to Park’s request and the Commission 3

should adopt ORA’s rate base estimates. 4

5 . 6

10-1

TAXES OTHER THAN INCOME CHAPTER 10:1

INTRODUCTION A.2 This chapter presents ORA’s analysis and recommendations relating to regulated 3

taxes other than income. ORA examined Park’s methodologies, testimony, supporting 4

workpapers as well as responses to data requests. 5

SUMMARY OF RECOMMENDATIONS B.6 The Commission should compute test year taxes other than income using the 7

following parameters and assumptions:85 8

a. Except for the FICA wage base, effective payroll tax rates and 9 other wage bases used by Park should be applied in estimating 10 payroll tax expense. However, Park’s FICA wage base is not 11 reasonable. Therefore, the Commission should use a FICA wage 12 base of $131,400 for the 2019 test year. This differs from Park’s 13 forecast of $135,900. Any other differences between ORA and 14 Park are due to differences in the test year estimate for labor 15 expense. 16

b. Park’s Ad Valorem tax expense methodologies were reasonable 17 and should be applied in estimating property taxes. Any 18 differences between ORA and Park are due to differences in the 19 test year’s estimated plant levels. The Commission should 20 require Park to provide updated workpapers that reflect the TCJA 21 are provided, including updated ad valorem taxes to reflect the 22 revalued or updated deferred income taxes. 23

c. All federal and state tax timing differences should be flowed 24 through to the ratepayer to the extent allowed by Commission 25 policy, and federal and state tax laws. 26

d. Any changes in federal and state tax laws86 made before the close 27 of the record in this proceeding be incorporated into the tax 28 estimates for the test year, after review of the new law(s) by 29 ORA. 30

Table 10-1 at the end of this chapter provides a comparison of estimated taxes 31

other than income, between ORA and Park for Test Year 2019. 32 85 These parameters and assumptions should also be applied to the escalation years 2020 and 2021. 86 Including any amendments to the 2017 Tax Cuts and Jobs Act.

10-2

DISCUSSION C.1 1) Payroll Taxes 2

Payroll taxes are a direct function of estimated labor costs. Like operating 3

expenses, payroll taxes are both directly recoverable in rates, plus serve as tax deductions 4

to lower income taxes themselves. This is distinguished from Federal income taxes 5

which are not deductible to arrive at net taxable income. However, state income taxes are 6

deductible to arrive at Federal taxable income, as well as recoverable in rates. Payroll 7

taxes are comprised of Federal Insurance Contribution Act (FICA), Federal 8

Unemployment Tax (FUTA), and State Unemployment Tax (SUTA). Each of these 9

payroll taxes are subject to certain compensation limits, and the utility must also forecast 10

them. The FICA wage base, as set by the Social Security Administration, usually 11

changes every year, while the other wage bases typically are static over the long term. In 12

some instances, the FICA wage base does not change at all as was the case in 2016 when 13

the wage base remained at the 2015 level. 14

Except for the forecast of the FICA wage base, ORA and Park generally do not 15

differ on any methodologies employed to forecast Payroll Taxes. Other differences in 16

total estimated payroll taxes are largely due to differences in forecasted payroll amounts. 17

Park forecasted a FICA wage base of $135,900 or an increase of $7,500 over the 18

2018 base of $128,400. However, ORA recommends a wage base of $131,400 or an 19

increase of $3,000 over the 2018 limit. ORA’s estimate is based on the actual average 20

change in the FICA wage base for the years 2013-2018. 21

2) Ad Valorem Taxes 22 Park’s estimate of ad valorem or property taxes is based upon historical County 23

Assessor’s valuations and underlying methodologies using tax rates currently in effect. 24

Total ad valorem taxes are based on forecasted plant investment. 25

ORA analyzed Park’s method of estimating ad valorem taxes for the test year and 26

found its methodology rational and reasonable. Any differences in forecasted ad valorem 27

taxes are solely due to differences in estimated net plant additions. 28

10-3

The ad valorem tax calculation includes a component (reduction) for deferred 1

income taxes. This amount will change when Park provides ORA with updated 2

workpapers that fully reflect the effects of the TCJA. ORA expects the deferred income 3

tax component to reflect a revaluation based on the lower FIT rate of 21%. 4

CONCLUSION D.5 The Commission should adopt ORA’s estimates of taxes other than income. Park 6

should continue to flow through all tax benefits to the ratepayer to the extent possible 7

under the IRS and CPUC’s tax policies. Except for the estimate in the FICA wage base, 8

there are no methodological differences between ORA and Park for computing regulated 9

taxes other than income. 10

10-4

Payroll TaxesORA Park Park Exceeded ORA

1Central Basin Amount Percent FICA 305,504 306,062 558 0.18% FUTA 1,932 1,932 0 0.00% SUI 13,846 13,846 0 0.00% P/R Taxes Adjustment -21,699 -21,699 0 0.00%

299,583 300,141 558 0.19%

2General Office Allocated 78,632 91,574 12,942 16.46%

Total Payroll Taxes 378,215 391,715 13,500 3.57%

Ad Valorem Tax 3Central Basin 1,027,582 885,209 -142,373 -13.86% 2G.O. Allocated 28,547 31,867 3,320 11.63%

Total Ad Valorem Tax 1,056,129 917,076 -139,053 -13.17%

Total Taxes Other Than Income 1,434,343 1,308,791 -125,553 -8.75%

Table 10-1 LIBERTY PARK WATER - CENTRAL BASINTAXES OTHER THAN INCOME

Test Year 2019

1

11-1

INCOME TAXES CHAPTER 11:1

INTRODUCTION A.2 This chapter presents ORA’s analysis and recommendations relating to regulated 3

income tax expense. Regulated income tax expense is comprised of the following items: 4

(1) federal income taxes (“FIT”), and (2) California Corporate Franchise Taxes 5

(“CCFT”). ORA examined Park’s methodologies, testimony, supporting workpapers as 6

well as responses to data requests. 7

ORA and Park generally do not differ on any methodologies employed to forecast 8

regulated tax expense. The only substantive difference is attributable to ORA including a 9

number of the effects stemming from the 2017 Tax Cuts and Jobs Act (“TCJA”) while 10

Park’s initial and updated filing does not yet reflect these changes. ORA expects to 11

receive updated workpapers from Park that fully incorporate the effects of the TCJA, and 12

at that time, will update the Results of Operations accordingly.87 13

Except for the effects of the TCJA, differences in total estimated taxes are largely 14

due to differences in related inputs. 15

SUMMARY OF RECOMMENDATIONS B.16 The Commission should compute test year income tax expense using the 17

following parameters and assumptions:88 18

a. For federal income tax purposes, the corporate tax rate of 21% 19 should be used to compute FIT. This rate should also be used for 20 the net-to gross multiplier. Park used the repealed rate of 35% 21 for both FIT and the net-to-gross multiplier. 22

b. The FIT rate of 21% should be used to revalue accumulated 23 deferred income taxes (“ADIT”) to be deducted from ratebase. 24 Park has not yet included this change in its filing. ORA did not 25 make this adjustment pending receipt of updated workpapers 26 from Park. 27

87 ORA requested Park to provide updated workpapers that fully reflect the TCJA in ORA Data Request JRC-001, Q.1. To date, these updated workpapers have not been provided. 88 These parameters and assumptions should also be applied to the escalation years 2020 and 2021.

11-2

c. Excess Deferred Income Taxes (“EDIT”) resulting from the reduction in 1 the FIT rate from 35% to 21% should be recognized and accounted for in 2 this general rate case as a reduction to ratebase, and flowed back to utility 3 customers. The accounting of EDIT should be consistent with the 4 normalization requirements of the Tax Cuts and Jobs Act of 2017, using 5 either the Average Rate Assumption Method or an Alternative Method. 6 Park has not yet included this change in its filing. ORA did not make this 7 adjustment pending receipt of updated workpapers from Park. 8

d. Bonus Depreciation should be removed from the tax 9 computations because the TCJA repealed Bonus Depreciation. 10

e. Qualified Production Activities Deduction (“QPAD”) should be 11 removed from the tax computations because the TCJA repealed 12 QPAD. Also, the QPAD percentage factor of 9% should be 13 removed from the net-to-gross multiplier. Park included the 14 QPAD deduction its filing as well as the 9% factor in the net-to-15 gross multiplier. 16

f. For state income tax purposes, the corporate tax rate of 8.84% 17 should be used to compute CCFT. This rate should also be used 18 for the net-to-gross multiplier. Park used the same rate for both 19 CCFT and the net-to-gross multiplier. 20

g. The “last adopted” CCFT number of $698,230 from 2018 should 21 be used as a test year FIT tax deduction. Park used the test year 22 CCFT estimate as a FIT deduction in 2019. 23

h. All federal and state tax timing differences should be flowed 24 through to the ratepayer to the extent allowed by Commission 25 policy, and federal and state tax laws. 26

i. Any changes in federal and state tax laws89 made before the close 27 of the record in this proceeding be incorporated into the tax 28 estimates for the test year, after review of the new law(s) by 29 ORA. 30

Table 11-1 end of this chapter provides a comparison of estimated regulated 31

income tax expense between ORA and Park for Test Year 2019. 32

89 Including any amendments to the 2017 Tax Cuts and Jobs Act.

11-3

DISCUSSION C.1 The following section provides a brief background of regulated income tax 2

expense and a discussion of certain specific tax deductions, credits and other tax policy 3

issues applied in determining taxable income for ratemaking purposes. Unless otherwise 4

noted, all discussions apply equally to both federal and state tax expense. 5

Income tax expense is similar to any other expense category in a general rate case 6

filing in that it is a cost of service. However, it is unique in that estimating income tax 7

expense is not merely a matter of reviewing historical payments and then applying 8

objective projection criteria in order to estimate test year expense. Income tax expense is 9

the composite of projected taxable income streams, booked expenses, special tax 10

deductions, and tax credits, calculated within the combined contexts of “real world” tax 11

law and “regulatory world” tax policy. Tax expense also includes taxes which are a 12

function of the payment of employee compensation, (payroll taxes), and the ownership of 13

plant and property (ad valorem taxes). 14

1) Basis for Regulated Tax Expense 15

While the mathematical model used to calculate tax expense is seemingly 16

unequivocal, the underlying accounting conventions, applicable tax rates, and the 17

determination of what constitutes allowable deductions are necessarily a function of 18

current FIT and CCFT tax laws, including new laws expected to affect the test year. In 19

addition, forecasted tax expense is based on adopted regulatory tax policy as determined 20

by numerous Commission decisions, and ORA recommended tax policies. Therefore, 21

ORA must consider these decisions and policies in reviewing Park’s tax expense. Much 22

of existing Commission tax policy was established in Order Instituting Investigation 24 23

(“OII 24”), Decision (D.) 84-05-036, 15 CPUC 2d 42 (1984). Numerous subsequent 24

decisions adopted a variety of changes in ratemaking tax policy in order to comply with 25

changes in federal and state tax laws, as discussed below. 26

Examples of pertinent CPUC decisions affecting tax policy are: 27

1. D.84-05-036 adopted ratemaking policy for a variety of tax issues 28 raised and discussed in OII 24. 29

11-4

2. D.87-09-026 authorized various ratemaking methods that which 1 utilities may adopt to recover the federal tax imposed upon CIAC 2 pursuant to TRA 86. 3

3. D.88-01-061 adopted ratemaking policies for a variety of tax issues 4 raised and discussed in OII 86-11-019. 5

4. D.89-11-058 adopted the policy of using the “last adopted” CCFT 6 number as a current tax deduction for regulated FIT purposes. 7

5. D.17-06-008 reaffirmed the CCFT deduction policy established in 8 D.89-11-058. 9

ORA’s goal is to obtain the lowest possible rate for service consistent with reliable 10

and safe service levels (Public Utilities Code §309.5). As this applies to taxes, ORA’s 11

goal is to minimize regulated tax expense to the extent possible, which in turn minimizes 12

revenue requirements for taxes. Another way to articulate ORA’s goal is that the test 13

year’s income tax expense estimate should reflect, to the extent possible, the current (test 14

year) deduction of expenses in which there is a book/tax timing difference. In D.84-05-15

036, the Commission stated, “[f]or the present, we will continue our current policy 16

regarding flow-through treatment of timing differences consistent with applicable tax 17

law.”90 The Commission should continue to adopt policies which result in the test year 18

tax estimate reflecting, to the extent possible, the flow-through of forecasted 19

expenditures.91 It is important to note that, in most cases, it is the regulated utility’s 20

parent corporation which pays the income taxes of the regulated utility as part of a 21

consolidated or combined income tax return. 22

2) FIT Deduction for Prior Year’s CCFT 23

The amount of CCFT allowed as a deduction for FIT purposes by the Internal 24

Revenue Service (“IRS”) is not the current year’s CCFT. The amount allowed on the FIT 25

90 See D.84-05-036, discussion at Section I, pp. 32-33a. The Commission refused to adopt additional normalization requirements beyond those required for depreciation. 91 ORA’s ability to flow-through certain tax deductions and benefits is limited by Income Tax Normalization requirements of the Internal Revenue Code, as well as tax policy established in D.84-05-036.

11-5

return is the prior year’s CCFT liability. This creates a timing difference between when 1

the payment of the CCFT is made and when it is allowed as a tax deduction. 2

This issue was addressed in Phase II of a PG&E general rates case; 3

A.85-12-050 (I.86-11-019). D.89-11-058, issued on November 22, 1989, requires that 4

for ratemaking purposes, the prior year Commission adopted CCFT number be used as 5

the deduction for CCFT taxes in arriving at FIT taxable income in the test year. 6

However, in some cases, the current or test year estimated CCFT number may be used as 7

a test year FIT deduction. This is particularly true when there is no firm prior year’s 8

payment information or the prior year’s amount is merely an estimate based on 9

progressive annual estimates or when there is simply no “last adopted” CCFT number. 10

Park used the present (test year) estimate CCFT number as a 2019 deduction for 11

FIT purposes. Further, it calculates this estimate based on 2019 present rates.92 12

However, ORA used the “last adopted” CCFT number of $698,230 from 2018.93 For 13

each subsequent year, ORA applied the previous year’s CCFT estimate as the current 14

years FIT deduction in conformance with D.89-11-058. 15

3) Tax Normalization 16

Normalization is a ratemaking concept which aims to adjust a utility’s operating 17

expenses in the test year by eliminating abnormal, non-annual events that are known and 18

certain to change in a regularly recurring manner. For example, accelerated depreciation 19

is a tax expense which is normalized over the life of an asset when computing ratemaking 20

tax expense. It is known and certain that toward the end of the life of an asset, straight-21

line (book) depreciation will exceed accelerated tax depreciation. However, at the 22

conclusion of the asset’s life, the total depreciation charges under both book and tax 23

methods will be equivalent. 24

Income tax normalization permits a utility to include in its current ratemaking 25

expense, an amount of income tax expense that is higher than what the utility will 26

92 Park Water’s response to ORA Data Request JRC-002, Q.7. 93 Park’s Response to ORA Data Request JRC-003, Q. 1.

11-6

actually pay. This is based on the theory that the taxes saved by the accelerated 1

depreciation (taken on the real world tax returns) are merely deferred. Utilities generally 2

use accelerated methods of depreciation on their real world tax returns, while using the 3

straight-line method for book purposes. IRS rules require that utilities use book 4

depreciation rates on all plant purchased or constructed after 1980 when computing 5

regulated tax expense. To mitigate the effect of normalization, the tax effect of the 6

differences between accelerated and straight-line depreciation is booked to a deferred tax 7

reserve. The deferred taxes are used to reduce rate base. 8

4) Tax Depreciation 9

For FIT purposes, tax depreciation for all post-1980 plant has been normalized 10

using book lives and rates. For 1980 and prior years’ plant, the appropriate accelerated 11

depreciation has been flowed through. For CCFT purposes, tax depreciation has been 12

flowed-through in estimating CCFT taxable income. 13

5) Tax Cuts and Jobs Act of 2017 14

On December 20, 2017, Congress passed the TCJA (Public Law 115-97). On 15

December 22, 2017, President Trump signed the bill into law, and it represents the most 16

significant overhaul of the Internal Revenue Code (“IRC”) in more than 30 years. 17

For regulated water utilities the pertinent changes are: 18

1. A reduction in the Corporate FIT rate from 35% to 21%. 19 2. The repeal of the IRC Section 199 deduction for Qualified 20

Production Activities. 21 3. The repeal of Bonus Depreciation. 22 4. The recognition of EDIT. 23 5. The reduction in the FIT rate from 35% to 21% created EDIT, which 24

is that portion of deferred income taxes which ratepayers funded in 25 rates, prior to the reduction in the FIT. This requires utilities to 26 revalue current deferred income taxes (“DIT”) at the 21% rate 27 because the lower rate decreases the utilities federal tax liabilities in 28 the future. Therefore, as a result, deferred tax reserves are not more 29 than the utility’s federal tax liabilities thus creating “excess” DIT. 30 The utility must recognize this previously funded DIT and account 31 for it. 32

11-7

6) Deferred Income Taxes and Excess Deferred Income 1 Taxes 2

IRS rules require that, when computing regulated tax expense, utilities use book 3

depreciation rates on all plant purchased or constructed after 1980. Therefore, utilities 4

are required to adopt normalization for depreciation on assets placed in service after 5

1980. To mitigate the effect of normalization, utilities book the tax effect of the 6

differences between accelerated and straight-line depreciation to a deferred tax reserve. 7

The deferred taxes are then used to reduce rate base, that is, they appear as a line item 8

reduction with other rate base items such as advances. Because deferred income taxes 9

lower rate base on which a cost of capital/rate of return is applied, they also lower the 10

revenue requirement, thus mitigating income taxes subject to recovery in rates. The 11

deferred income tax reserve mitigates the tax effect of having to “normalize” depreciation 12

expense and is permitted by the IRS rules. 13

As defined in the Section 13001(d)(3)(A) of the TCJA, the EDIT is the difference 14

between the recorded accumulated deferred federal income tax (“ADFIT”) and the 15

revalued amount of the ADFIT after the federal income tax rate change. Section 16

13001(d)(3)(A) of the TCJA defines excess tax reserve as follows: 17

“(A) EXCESS TAX RESERVE.—the term ‘‘excess tax reserve’’ 18 means the excess of— 19 (i) the reserve for deferred taxes (as described in section 20 168(i)(9)(A)(ii) of the Internal Revenue Code of 1986) as of the day 21 before the corporate rate reductions provided in the amendments 22 made by this section take effect, over (ii) the amount which would be 23 the balance in such reserve if the amount of such reserve were 24 determined by assuming that the corporate rate reductions provided 25 in this Act were in effect for all prior periods.” 26 The ADFIT before re-evaluation represents the amount Park already collected 27

from ratepayers in prior years to pay future federal income taxes. In accordance with 28

Accounting Standard Codification Topic 740 (US GAAP) and the provision of newly 29

enacted tax law, Park should revalue its ADFIT amount in order to reflect the new 21% 30

FIT tax rate. For ratemaking purposes and to ensure that excess reserves are returned to 31

customers, Park should recognize and account for EDIT as a regulatory liability to be 32

11-8

deducted from rate base and amortized as a refund to ratepayers over the remaining book 1

lives of the underlying assets (normalized). 2

The EDIT reflects amounts that were collected from ratepayers in anticipation of 3

future tax expenses which no longer exist; therefore, Park should record it as a regulatory 4

liability and continue to deduct it from ratebase until such time that it has been 5

completely refunded to ratepayers on a normalized basis. 6

For this rate case, ORA did not revalue DIT at the new FIT rate of 21%, nor did 7

ORA estimate a value for EDIT. Instead, Park should provide ORA updated workpapers 8

reflecting the revalued DIT and EDIT. The Commission should incorporate these 9

updated DIT and EDIT into the final Results of Operations for this general rate case as 10

amounts Park should deduct from ratebase and return to ratepayers through normalization 11

starting in 2018. 12

7) Interest Expense 13

For FIT purposes, ORA and Park estimated interest expense by applying the 14

weighted average cost of long term debt from Park’s capital structure to total ratebase. 15

Differences in the total amount of interest expense deductible for regulated income tax 16

purposes are, therefore, the result of differing rate base estimates between Park and 17

ORA.94 The unamortized deferred investment tax credit (ITC, discussed below) balance 18

was deducted from rate base for this calculation because Park is an Option One 19

company.95 The method of “interest synchronization” which normally results in a higher 20

interest deduction, and therefore, a lower regulated FIT expense, does not apply to Park 21

because of how Park treats its larger amount of unamortized Investment Tax Credit under 22

Option One.96 For CCFT purposes, ORA and Park also deducted the unamortized ITC 23

94 In some cases, the differences in computed interest expense would also stem from differences in the computed weighted average cost of debt if this issue were included in the rate case. 95 There are two methods of applying ITC. Under Option One, ITC is deducted from rate base, thus lowering the base subject to the rate of return (similar to deferred income tax reserve). Under Option Two, ITC is deducted from computed income taxes dollar for dollar. 96With Interest Synchronization, deferred ITC is not deducted from ratebase resulting in a larger tax deduction for interest expense. This is because the cost of debt factor is applied to a larger sum, resulting

(continued on next page)

11-9

from rate base before applying the same debt cost factor. For CCFT purposes, it does not 1

matter whether Park is an Option One or Option Two company because there is no ITC 2

available for CCFT purposes. 3

8) Investment Tax Credit (“ITC”) 4

Public utility corporations have two normalization methods to choose from when 5

electing a method to amortize ITC for regulated tax purposes. Under Option One, the tax 6

benefits of ITC are flowed through to ratepayers by deducting deferred ITC from rate 7

base; as each year passes, the deferred ITC balance decreases, thereby ratably restoring 8

rate base over the book life of the plant which generated it. Under Option Two, the tax 9

benefits of ITC are ratably flowed through as a direct reduction to estimated FIT. Park 10

uses Option One as well as a smaller ITC amount under Option Two. The ITC associated 11

with the Central Basin is being normalized as a ratable reduction to the cost of service 12

(FIT expense) over the average life of the underlying plant. The larger ITC amount 13

associated with the former Uehling service portion of the Central Basin Division is being 14

amortized through a ratebase reduction. ORA is precluded from diverting from these 15

methods of ITC amortization and does not have a policy preference on which method is 16

used. This is because ORA must follow the method first elected by a utility in order for 17

ORA and the utility to comply with the tax law. 18

Therefore, except for the smaller ITC associated with the Central Basin, FIT 19

expense was not reduced directly by the annual amortization of ITC. Instead, amortized 20

ITC reduced ratebase. Under current federal tax law, ITC must be amortized over the life 21

of the underlying plant when estimating regulated federal income tax expense. 22

Generally, this method of normalizing ITC applies to plant placed in service after 1980. 23

CONCLUSION D.24 Park should continue to flow through all tax benefits to the ratepayer to the extent 25

possible under the IRS and CPUC’s tax policies. There are no methodological 26 (continued from previous page) in a larger deduction.

11-10

differences between ORA and Park for computing regulated taxes except for 1

incorporating the full effects of the TCJA. The Commission should adopt ORA’s 2

estimates of tax expense. 3

11-11

1

ORA Park Amount Percent ORA Park Amount Percent

OPERATING REVENUES 34,750,420 34,576,606 -173,815 -0.50% 31,197,534 35,686,606 4,489,072 14.39%

EXPENSESOPERATIONS & MAINTENANCE 12,392,417 12,704,402 311,985 2.52% 12,392,417 12,704,402 311,985 2.52%UNCOLLECTIBLES 135,527 134,849 -678 -0.50% 121,670 139,178 17,507 14.39%ADMINISTRATIVE & GENERAL 5,427,329 7,948,718 2,521,390 46.46% 5,427,329 7,948,718 2,521,390 46.46%FRANCHISE REQUIREMENTS 135,527 134,849 -678 -0.50% 121,670 139,178 17,507 14.39%PROPERTY TAXES 1,097,867 962,710 -135,157 -12.31% 1,097,867 962,710 -135,157 -12.31%TAXES-OTHER 64,617 59,046 -5,571 -8.62% 64,617 59,046 -5,571 -8.62%PAYROLL TAXES 383,031 397,932 14,901 3.89% 383,031 397,932 14,901 3.89%

3 MEALS ADJUSTMENT -6,739 -8,298 -1,559 23.14% -6,739 -8,298 -1,559 23.14%TOTAL 19,629,575 22,334,207 2,704,632 13.78% 19,601,862 22,342,865 2,741,003 13.98%

INCOME BEFORE TAXES 15,120,845 12,242,398 -2,878,447 -19.04% 11,595,671 13,343,740 1,748,069 15.08%

CA CORP-FRANCHISE TAX (CCFT)4 CA TAX DEPRECIATION 5,914,023 5,467,772 -446,251 -7.55% 5,914,023 5,467,772 -446,251 -7.55%5 INTEREST 1,636,837 1,623,555 -13,282 -0.81% 1,636,837 1,623,555 -13,282 -0.81%

TOTAL 7,550,860 7,091,327 -459,533 -6.09% 7,550,860 7,091,327 -459,533 -6.09%

TAXABLE INCOME FOR CCFT 7,569,985 5,151,071 -2,418,914 -31.95% 4,044,811 6,252,413 2,207,602 54.58%CCFT RATE 8.84% 8.84% 8.84% 8.84%

CALIFORNIA INCOME TAX 669,187 455,355 -213,832 -31.95% 357,561 552,713 195,152 54.58%

FEDERAL INCOME TAX4 FED. TAX DEPRECIATION 3,138,977 3,000,171 -138,805 -4.42% 3,138,977 3,000,171 -138,805 -4.42%

CA TAX 669,187 455,355 -213,832 -31.95% 698,230 455,355 -242,875 -34.78%5 INTEREST 1,636,837 1,623,555 -13,282 -0.81% 1,636,837 1,623,555 -13,282 -0.81%6 QUALIFIED PROD. DEDUCTION 0 116,433 116,433 0 134,334 134,334

TOTAL 5,445,001 5,195,514 -249,487 -4.58% 5,474,044 5,213,415 -260,629 -4.76%

FIT TAXABLE INCOME 9,675,845 7,046,884 -2,628,960 -27.17% 6,121,627 8,130,325 2,008,698 32.81%FIT RATE 21% 35% 21% 35%FEDERAL INCOME TAX 2,031,927 2,466,409 434,482 21.38% 1,285,542 2,845,614 1,560,072 121.36%

INVESTMENT TAX CREDIT 7,032 7,032 0 0.00% 7,032 7,032 0 0.00%

NET FEDERAL INCOME TAX 2,024,895 2,459,377 434,482 21.46% 1,278,510 2,838,582 1,560,072 122.02%

INCOME TAX CACULATIONSLIBERTY UTILITIES (PARK WATER) CORP.

TABLE 11-1

Present ProposedPark Exceeded ORA Park Exceeded ORA

12-1

GENERAL OFFICE ALLOCATION CHAPTER 12:1

INTRODUCTION A.2 In developing its recommendations for the General Office (“G.O.”) allocation, 3

ORA reviewed and analyzed Liberty’s testimony, application, work papers, allocations 4

details, emails, and various responses to ORA data requests. ORA also conducted several 5

field investigations of Liberty’s G.O. and interviewed various personnel such as the 6

Director of Human Resources, Manager of Information Technology Infrastructure, and 7

Regulatory Affairs. During the field investigation, ORA noticed that Liberty’s 8

management team and staff were both knowledgeable and willing to discuss current 9

operations and future plans for infrastructure improvement. 10

ORA found that Liberty’s methodology in determining allocations, in some cases, 11

is justified; however, the requested increase in the allocations is based on increased level 12

of both allocable and direct expenses at various affiliates that are not fully justified. For 13

example, its parent company, Algonquin Power & Utilities Corporation’s (“APUC”) 14

indirect allocable operating and administration cost increased approximately 51% over 15

the period of 2016-2017. Liberty then used these significantly increased costs as the 16

base-year costs to estimate indirect allocable costs for the Test Year 2019. In addition, 17

these allocated expenses also include estimates for items such as new positions, estimates 18

for medical insurance, and payroll incentives. ORA closely evaluated all estimates and 19

makes recommendations to allow only those costs that the Liberty has reasonably 20

supported and justified in this GRC application. 21

SUMMARY OF RECOMMENDATIONS B.22 The following table summarizes ORA’s various recommendations for the Test 23

Year 2019: 24

25

12-2

Table-12-1 Summary of ORA’s Recommendations 1

2

Liberty requests a total of $1,972,84997 indirect allocated costs in Test Year 2019 3

from its various affiliates including its parent company, APUC to the General Office. In 4

addition, Liberty requests a total of $1,472,62898 of direct allocable charges to General 5

Office. ORA reduced these estimates due to lack of support and justification, and instead 6

recommends $876,964 in indirect allocable costs and no direct allocable costs from the 7

affiliates to the General Office. 8

97 Liberty’s Workpapers File: GO19 Expenses, Tab: ExpbyBUbyObj, Cell: P1738. 98 Liberty’s Workpapers, File: GO19 Expenses, Tab: HeadOffice.

Items Liberty's Request ORA Recommendation $-Difference %- DifferenceAPUC's Indirect Allocable Costs 507,587$ 294,842$ (212,745)$ -41.91%LABS-Business Service Indirect Allocable Costs 466,206 232,239 (233,967) -50.19%LABS-Corp. Service Indirect Allocable Costs 266,550 101,867 (164,683) -61.78%LUC's Indirect Allocable Costs 632,438 341,316 (291,122) -46.03%LABS-US's Indirect Allocable Costs 97,740 0 (97,740) -100.00%Liberty Corp. US's Indirect Allocable Costs 2,328 0 (2,328) -100.00%Direct Allocable Costs from Affiliates 1,472,628 0 (1,472,628) -100.00%General Office's Allocated Costs (Few selected Accounts) 337,602 305,953 (31,649) -9.37%General Office's Vacancy Payroll Adjustment 0 140,939 140,939 100.00%*** BIGIN CONFIDENTIAL***New Position of Director-Government Relations****END CONFIDETIAL***

***BEGIN CONFIDENTIAL***186354***END CONFIDENTIAL***

0

***BEGIN CONFIDENTIAL***(186,354)***END CONFIDENTIAL ***

-100.00%

***BEGIN CONFIDENTIAL***New Position of Director-Financial Planning & Administration****END CONFIDENTIAL***

***BEGIN CONFIDENTIAL***252088***END CONFIDENTIAL*** 0

***BEGIN CONFIDENTIAL***(252,088)***END CONFIDENTIAL*** -100.00%

Executive/Managerial Allocable Incentives 10,756,489 3,546,145 (7,210,344) -67.03%LUC's Allocation Rate for General Office 7.85% 5.21% - -33.63%LABS's Average Allocation Rate for LUC 84.60% 82.90% - -2.01%Park Water Company' Allocation Rate from G.O. 55.85% 51.68% - -7.47%Apple Valley Water's Allocation Rate from G.O. 43.35% 47.47% - 9.50%Jess Ranch's Allocation Rate from G.O. 0.17% 0.07% - -58.82%Yermo's Allocation Rates from G.O. 0.60% 0.79% - 31.67%Medical Health Insurance Rate 10.50% 3.43% - -67.33%Dental Health Insurance Rate 4.00% 3.43% - -14.25%Vision Insurance Rate 5.00% 3.43% - -31.40%

12-3

In addition, Liberty requests several costs that are generated within its General 1

Office. However, ORA recommends reducing some of these costs, from $337,60299 in 2

Test Year 2019 to $305,953. For General Office plant additions, Liberty requests capital 3

budget of $402,145 and $441,970100 for the years 2019 and 2020, respectively. ORA 4

finds the requested capital expenditure reasonable as it is consistent with Liberty’s 5

historic average capital expenditures. 6

More specifically, ORA recommends reducing the indirect allocable costs of 7

Liberty’s various affiliates as follows: 8

Liberty requests its parent company, Algonquin Power & Utilities 9 Corporation (“APUC”) indirect costs in the amount of $507,587, 10 while ORA recommends $294,842. 11

Liberty Algonquin Business Services (“LABS”)-Business Services 12 in the amount of $466,206, while ORA recommends $232,239. 13

Liberty requests the indirect allocable costs of its affiliate, Liberty 14 Algonquin Business Services (“LABS”)-Corp. Services in the 15 amount of $266,550, while ORA recommends $101,867. 16

Liberty requests the indirect allocable costs of its affiliate, Liberty 17 Utilities-Canada (“LUC”) in the amount of $632,438, while ORA 18 recommends $341,316. 19

Liberty requests the indirect allocable costs of its affiliate, Liberty 20 Algonquin Business Services (“LABS”)-US in the amount of 21 $97,740, while ORA recommends $0. 22

Liberty requests the indirect allocable costs of its affiliate, Liberty 23 Corp.-US in the amount of $2,328, while ORA recommends $0. 24

25 In addition, based on its Cost Allocation Manual (“CAM”), Liberty requests 26

various cost allocation rates for its different affiliates. However, ORA found a few errors 27

and therefore, adjusts these allocation rates. For example, Liberty requests an allocation 28

rate of 7.85% for the allocable costs from LUC to the General Office while ORA 29

recommends an allocation rate of 5.21%. Similarly; Liberty requests allocation rates of 30

99 Liberty’s Workpapers, File: GO19 Expenses, Tab: ExpbyBUbyObj (various accounts). 100 Liberty’s Workpapers, File: GO19 Capital Budget V1 2018-2022 with Details.

12-4

55.85% and 43.35% for the General Office cost allocation to Park Water (“Liberty- 1

Park”) and Apple Valley Water (“Liberty Apple Valley ”), respectively while ORA 2

recommends allocation of rates of 51.6% and 47.47%. 3

Liberty’s requested allocable costs include several embedded operational costs 4

such as salaries of new positions, executive incentive payroll, and medial health 5

insurance costs. ORA has also recommended several adjustments to these costs. For 6

example, Liberty requests seven new positions whose salary expenses would be allocated 7

to the ratepayers: 1) President-West Region, 2) Vice President-Customer Experience, 3) 8

Director-Customer Care, 4) Director-Government Relations, 5) Diversity Coordinator, 6) 9

Director- Financial Planning & Analysis, and 7) Engineering Technician-1. The 10

Commission should deny the request for the three new positions of Vice President-11

Customer Experience,101 Director-Government Relations, and Director- Financial 12

Planning & Analysis. 13

Similarly, Liberty requests year-to-year premium rates of 10.5%, 4% and 5% for 14

its medical health, dental, and vision insurance respectively while ORA recommend rates 15

of 2.19%, 3.43% and 3.72% for the years 2018, 2019 and 2020, respectively. In addition, 16

Liberty does not include any adjustments for vacancy rates while ORA recommends 17

including $140,939 in inflation-adjusted vacancy savings. 18

Finally, Liberty requests various incentive pay rates ranging from 4% to 45% that 19

are applicable to the base salaries of its various managers and executives. However, ORA 20

recommends first, reducing these rates by 10% so that they are consistent with the 21

industry average and then, reducing these rates by half as these incentives are not in 22

captive ratepayers’ interests, rather they are focused on creating value for shareholders. 23

DISCUSSION C.24 This section presents ORA’s analysis of those areas where ORA is recommending 25

substantial changes. 26

101 During discovery, Liberty itself withdrew this new position of VP-Customer Experience.

12-5

1) Affiliates’ Indirect Allocable Costs for General Office 1 Liberty-Park was formerly known as “Park Water Company”, but in 2016 it was 2

acquired by a Canadian utility company, Algonquin Power & Utilities Corporation 3

(“APUC”). APUC, through its subsidiary, Liberty Utilities Company (“LUCo”), owns 4

electric, gas, water and sewer distribution utilities in thirteen states. APUC is also the 5

parent company of Algonquin Power Company (“APCO”) which owns renewable 6

generation facilities both in Canada and United States. APUC owns a Commissioned-7

regulated electric subsidiary, Liberty Utilities (“CalPeco Electric”). In early 2017, APUC 8

initiated restructuring efforts and established three regions: West, Central and East under 9

separate regional management teams. Liberty Park (Central Basin) and Liberty Apple 10

Valley are part of the West Region. APUC provides shared services to all of its various 11

subsidiaries and also established several administrative units such as Liberty Algonquin 12

Business Services (“LABS”)-Business Services, and Corporate Services, Liberty 13

Utilities-Canada (“LUC”), LABS US, and Liberty Corp. US., that provide direct and 14

indirect shared services to APUC’s various subsidiaries including Liberty Park, Liberty 15

Apple Valley, and General Office. 16

In addition, APUC continues to acquire additional utilities since acquiring Liberty-17

Park. For example, in 2017, APUC acquired Empire Utility that generates approximately 18

42% of the APUC’s annual revenues.102 APUC claims to use a systematic cost allocation 19

methodology per its Cost Allocation Manual (“CAM”) for the purpose of allocating 20

various indirect costs to its regulated and unregulated subsidiaries103. 21

Unreasonable increase in APUC’s indirect allocable a)22 costs 23

In order to prepare its allocable cost estimates, Liberty uses 2017 cost data as the 24

base year and escalates these costs to the Test Year 2019/2020. However, the base year 25

2017 cost over the previous year, 2016, are unreasonably high. For example, APUC’s 26

102 Per Liberty’s Workpapers: File: Expenses APUC, Tab: 2017 APUC CAM. 103 See Liberty’s General Office Report at p. 3.

12-6

indirect allocable costs have increased from $6,964,330 in 2016 to $10,514,330 in 2017; 1

an enormous 51% year-to-year increase. 2

However, during discovery, Liberty informed ORA that due to a booking error, 3

APUC’s indirect allocable costs in 2017 were actually $9,326,740 which equates to an 4

approximate 34% year-to-year increase.104 However, 34% is still an unreasonable 5

increase. A closer look at these increased indirect allocable costs also revealed that for a 6

few categories such as, Office Administration, Executive Salary, Travel, Audit, and 7

Directors Fee & Insurance, costs have increased by 962%, 91%, 67%, 44%, and 38%, 8

respectively.105 9

2016-2017 is the period during which APUC acquired its biggest regulated 10

subsidiary, Empire Utility. A close evaluation of Liberty’s CAM shows that based on 11

pertinent allocation factors such as Employee Count, Operation & Maintenance Expense, 12

Revenue, and Net Plant, the Empire on average presents of 37.96% of APUC’s 13

subsidiaries. Therefore, APUC’s acquisition of Empire Utility must be a direct cause 14

behind these cost increases and, therefore, according to the basic principle of cost 15

causation, these costs increases should first be directly allocated to Empire Utility before 16

the general allocations. 17

In addition, according to the Commission’s Affiliate Transaction Rules, adopted in 18

D.12-01-042, which provides framework of cost allocations for the water utilities, the 19

“Fully-loaded Costs, or “Fully-allocated Costs” are made up of three distinct costs: 1) 20

“Direct Costs,” 2) “Direct Overhead Costs,” and 3) “Indirect Overhead Costs.” Direct 21

costs are those costs that are identifiably linked to specific projects or activities because 22

the utility has dedicated the resource in question, or some measurable portion of that 23

resource, to the project or activity. The Direct Overhead Costs are common costs and the 24

utility allocate them based on activity-based factors using the “cost causation’ as one of 25

104 Per Liberty’ response to ORA’s data request, AMX-02, Q-1. 105 Pet Liberty’s response to ORA’s data request, AMX-01 Follow up, Q-1 (a).

12-7

the principles in their design. The “Indirect Overhead Costs” affect the entire 1

organization and the utility must allocate them to the ongoing projects and activities.106 2

Liberty identified the APUC’s Direct Costs for Empire Utility and for its other 3

Subsidiaries such as Liberty Park and Liberty Apple Valley; however, these direct costs 4

are nowhere close to the share of Empire Utility’s operations which are approximately 5

37.96% of the entire APUC’s subsidiaries and which has caused APUC to increase its 6

operation expense to 34% over the base year 2016 as described above. For example, 7

APUC’s operating expenses of $9,326,740 in 2017 are $2,362,410 or 34% more of 8

APUC’s operating expenses of $6,964,330 in 2016, but Liberty only directly charged 9

$1,626,888107 to Empire Utility. ORA points out that this increase of $2,362,410 is 10

directly caused by the acquisition of Empire Utility and, hence must be charged directly 11

to the Empire Utility under the cost causation principle. By not doing so, Liberty has 12

caused “cross-subsidization” which is defined as unauthorized over-allocation of costs to 13

captive ratepayers resulting in under-allocation to a utility affiliate.108 14

To rectify the utility’s failure to apply the principle of cost causation and the cross-15

subsidization, the Commission should use APUC’s pre-acquisition costs as of 2016 as the 16

base year and escalate these allocable costs through the use of traditional inflation rates to 17

determine the APUC’s indirect allocable costs for the Test Year 2019/2020. Once these 18

allocable costs are determined they should be allocated to Liberty-Park and Liberty-19

Apple Valley based on Liberty’s CAM methodology as revised by ORA. 20

Unreasonable increase in LUC’s indirect allocable b)21 costs 22

Similarly, LUC’s indirect allocable costs show an increase of 42.4% that Liberty 23

later corrected to 15.6% through its updated workpapers. This cost increase also 24

coincides with the acquisition of Empire Utility. Once again, Liberty failed to first 25

106 D.12-01-042, Appendix A, Rule II.F. “Cost.” 107 Liberty’s response to ORA’s Data Request, AMX-09, Q. 1(b). 108 D.12-01-042, Appendix A, Rule II.L. “Cross-Subsidy.”

12-8

directly charge fair share of the increased cost to the Empire Utility under cost causation 1

principle. Therefore, the Commission should use LUC’s pre-acquisition costs as of 2016 2

as the base year and escalate these allocable costs for the Test Year 2019/2020. Once 3

these allocable costs are determined in this manner, they should be allocated to Liberty-4

Park and Liberty-Apple Valley based on Liberty’s CAM methodology as revised by 5

ORA. 6

Unreasonable increase in LABS’ indirect allocable c)7 costs 8

As discussed above LABS is comprised of two sections: LABS-Business Services 9

and LABS-Corporate Services. Over the period of 2016-2017 LABS-Business Services’ 10

allocable costs increased by 14.3% and LABS-Corporate Services' allocable costs have 11

increased by 18.8%. However, Liberty later revised these costs, which resulted in a cost 12

increase of 17% for LABS-Business Services and 41% for LABS-Corporate Services 13

over the period of 2016-2017. 14

However, these cost increases also coincide with the acquisition of Empire Utility. 15

Once again, Liberty failed to first directly charge fair share of the increased cost to the 16

Empire Utility under cost causation principle. Therefore, the Commission should use 17

LABS’ pre-acquisition costs as of 2016 as the base year and escalate these allocable costs 18

for the Test Year 2019/2020. Once these allocable costs are determined they should be 19

allocated to Liberty-Park and Liberty-Apple Valley based on Liberty’s CAM 20

methodology as revised by ORA. 21

Unsupported LABS-US’ indirect allocable costs d)22 Liberty provides no support for its estimates for LABS-US’ indirect allocable 23

costs. In its initial filing, Liberty estimated allocable cost of $195,479 for the Test Year 24

2019. This estimate was based on six-month of 2017 annualized, recorded costs of 25

$184,258. Later, Liberty revised its 2017 costs to $92,129 and 2019 cost estimates to 26

$97,740, indicating that the amounts reflected the updated recorded 2017 amount. When 27

ORA requested support for the recorded cost data, Liberty responded that these allocated 28

costs were allocated from the Empire Utility for shared support services and provided a 29

12-9

copy of its 2017 General Ledger Transactions Details. However, these documents 1

revealed that these costs are not allocated, but, in fact, are directly charged by yet another 2

affiliate called Liberty Utilities Central Shared Services Co.109 On ORA’s further 3

inquiry, Liberty explained that even though these costs are allocated from Empire Utility 4

through the use of CAM, Liberty would still generate inter-party invoices because 5

Liberty-Park is on a separate financial system from Liberty Utilities Service Corp. thus, 6

it may appear that the costs are directly charged but, in fact, these costs are allocated 7

costs.110 8

However, Liberty once again revised its estimates for 2019 from $97,740 to 9

$52,759 citing an error in its CAM calculations.111 This demonstrates that Liberty lacks 10

efficient internal controls for its various shared service pools. Liberty not only has 11

centralized shared services pools at its headquarters in Canada (APUC, LUC, LABS-12

Business Services and LABS-Corporate Services), it also has non-legal entities within its 13

other affiliates such as one of Empire Utility’s administrative units, LABS-US, which 14

also provides additional shared services to various affiliates. However, the internal 15

controls are quite weak as evidenced by the erroneous 2017 recorded cost data for LABS-16

US. 17

Liberty claims that it has adequate procedures and mechanisms under its Affiliate 18

Transaction Rules Compliance Plan and cites the successful completion of an 19

independent third-party audit of these rules.112 However, a close examination of the audit 20

report reveals that the third-party auditor relied on ORA’s review of these cost allocations 21

procedures. Specifically, in the 2015-2016 Liberty Utilities (Apple Valley Ranchos 22

Water) Corp. compliance audit report, in regards to Rule IV: Separation and Rule V: 23

Shared Corporate Support, it states: 24

109 Liberty’s response to ORA data request, AMX-02, Q-5(a). 110 Liberty’s response to ORA data request, AMX-06, Q-1 (a). 111 Id. at Q-1(d). 112 Id at Q-1(b).

12-10

“In addition, the Office of Ratepayer Advocates routinely 1 reviews AVR’s allocation of common costs in each of AVR’s 2 general rate cases and that of Park. The relevant accounting 3 procedures and mechanisms which impact the allocation of 4 costs for the shared corporate services are consistent with 5 Commission by the Office of Ratepayers Advocates in each 6 general rate case proceeding.”113 7

Therefore, the audit report’s findings rely, in part on ORA’s review to determine 8

the adequacy of Liberty’s accounting procedures regarding shared services cost 9

allocations. ORA believes that Liberty’s accounting procedures are inadequate because 10

recorded allocated costs are billed based on erroneous cost allocations factors. In 11

addition, Liberty lacks robust internal controls to ensure that the shared services provided 12

by non-legal entities do not duplicate the shared services provided by APUC, LUC, 13

LABS-Business Services, and LABS-Corporate Services. 14

For example, Liberty lists various shared services such as strategic management, 15

environmental, health, safety and security, customer experience, internal audit, 16

information technology, human resources, legal services, procurement, and financial 17

planning that are provided by multiple affiliates. Therefore, it is unclear what type of 18

services it utilizes and whether Liberty needs this volume of shared services. In addition, 19

Liberty-Park and Liberty-Apple Valley are also directly charged for similar services by 20

multiple affiliates. 21

Based on foregoing discussion, the Commission should remove all of LABS-US’s 22

indirect allocable costs. 23

Unsupported Liberty Corp. US’ indirect allocable e)24 costs 25

Liberty also estimates a cost allocation in the amount of $2,328 for year 2019 from 26

yet another affiliate, Liberty Corp. US. However, Liberty failed to provide any 27

information in response to ORA’s request for a schedule comparing and contrasting the 28

various services provided by Liberty Corp. US to its various clients and their respective 29 113 Liberty Utilities, 2015-2016 Liberty Utilities (Apple Valley Ranchos Water) Corp. Compliance Audit Report at pp. 16-18. Emphasis added.

12-11

total costs and allocable costs estimates.114 The Commission should remove these costs 1

because these cost estimates are unsupported. 2

2) Affiliates’ Direct Costs for General Office: 3 In addition to indirect cost allocations in the amount of $1,972,849 from its 4

various affiliates such as APUC, LUC, LABS-Business Services, and LABS-Corporate 5

Services, Liberty also estimates direct cost charges in the amount of $1,427,628 for 6

2019.115 These direct cost charges increase the allocable costs of Liberty’s General 7

Office. Most of these costs are Administration & General payroll and Outside Services. 8

The shared services should decrease General Office allocable costs because the 9

General Office is now increasingly relying on shared services from its own affiliates, and 10

should benefit from the efficiencies and built-in economies of scale. However, this is not 11

the case here. For example, the total pre-merger allocable costs for General Office were 12

$6,518,125 in 2015; however, these costs increased to $8,628,390 in 2016 and after 13

acquiring Empire Utility, the allocable costs of General Office climbed to $9,953,165 in 14

2018. This is a significant increase of 52.7% since 2015, the pre-merger year.116 This is 15

an unreasonable increase in General Office costs. It demonstrates that Liberty’s cost 16

structure has become top heavy after the merger and expansion of its parent company, 17

APUC. 18

Liberty’s General Office costs should decreased as the result of in-house 19

(affiliates) expertise and economies of the scale, but instead, the General Office costs 20

have increased significantly. Therefore, the Commission should remove these direct 21

expenses of $1,427,628 as a way of imputing operational efficiencies and economies of 22

scales. It should be noted that even with this adjustment and other ORA recommended 23

114 Liberty’s response to ORA data request, AMX-06, Q-1(g). 115 Liberty’s Workpapers, File: GO 19 Expenses Tab: HeadOffice. 116 Id., Tab: Actual_ESTbySMEB4Alloc.

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adjustments, Liberty’s General Office allocable costs still increase by 11.87% in 2019 1

over 2015117. 2

3) Allocations Rates per CAM 3 Liberty presents various allocation rates for its different affiliates such as APUC, 4

LUC, LABS, and LABS-US. 5

Allocation Rates for APUC’s Indirect Costs a)6 APUC’s indirect costs are first allocated between non-regulated operations of 7

APCO and regulated utilities under LUC. This allocation is based on four factors: 8

Employee Headcount, Operation & Maintenance Expense, Revenues, and Net Plant. 9

Then the costs are allocated between APCO and LUC among various accounts such as, 10

Legal Costs, Tax Services, Audit, Office Administration, Director Fee and Insurance etc. 11

Generally, three out of four factors are used to allocate costs to a particular account. For 12

example, for Legal Costs account, Liberty used three factors; Employee Headcount, 13

Operation & Maintenance Expense, and Net Plant. Based on this method, on average, 14

20.5% of APUC costs are allocated to APCO and 79.5% to LUC.118 15

The 79.5% of APUC costs allocated to LUC are then allocated to the various 16

regulated affiliates, including Liberty Park’s General Office, based on yet another four 17

factors: Customer Count, Labor Expense, Non-Labor Expense, and Net Plant. However, 18

unlike with APUC’s allocations to APCO and LUC allocations, Liberty does not give 19

equal weight to these factors, rather Liberty uses a 40% weighting factor for Customer 20

Count and the remaining three factors are assigned weights of 20% respectively. Liberty 21

later explained during discovery that these apparently arbitrary weighting factors are used 22

because larger utilities require more time and management attention and incur greater 23

117 11.87% = ($7,292,081 - $6,518,125) / ($6,518,125). 2015 GO cost = $6,518,125. 2018 GO cost = $8,288, 216. 118 Liberty’ workpapers, File: HO19 Expenses APUC, Tab: 2017 APUC CAM.

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costs than smaller utilities.119 However, ORA’s analysis shows that this arbitrary 1

assignment of higher weights actually shifts costs from the larger affiliates, such as 2

Empire Utility, to relatively smaller affiliates, such as Liberty-Park (General Office). 3

For example, using the 40% weighting factor for Customer Count, Liberty assigns 4

41.06% of the costs to Empire Utility and 7.85% of the costs to Liberty-Park.120 If 5

Liberty were to assign each of the four factors an equal weight of 25%, the cost allocation 6

for Empire Utility would increase to 43.5% and the cost allocation for Liberty-Park 7

would decrease to 7.55%. Therefore, the Commission should remove this arbitrary 8

weighting factor of 40% that Liberty assigns to Customer Count. 9

Once these costs are allocated to General Office from LUC, these costs are then 10

allocated to the various Liberty water utilities within California specifically, Liberty-11

Park, Liberty-Apple Valley Parkwater Jess Ranch and Parkwater Yermo. These 12

allocations are also made using the same four factors that were used to allocate LUC’s 13

costs but without any use of arbitrary weighting factors. ORA notes that Liberty revised 14

the amounts of these allocation factors in order to correct recorded data for Liberty-Park 15

and Liberty-Apple Valley. ORA agrees with these corrections. The following table 16

shows the allocation rates before and after the Liberty’s correction. 17

Table 12-2 California Water Allocation Rates 18

19

Allocation Rates for LUC’s Indirect Costs a)20

As discussed above, Liberty allocates LUC’s indirect costs among various 21

affiliates including Liberty-Park (General Office) based on four factors: Customer Count, 22

119 Liberty’s response to ORA data request, AMX-01, Q-1. 120 Liberty’s workpapers, File: File: HO19 Expenses APUC, Tab: 2017 APUC CAM.

Before Correction After Correction Parkwater - C. Basin 55.88% 51.68%Parkwater - Apple Valley 43.35% 47.47%Parkwater - Jess Ranch 0.17% 0.07%Parkwater - Yermo 0.60% 0.79%

100.0% 100.0%

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Labor Expense, Non-Labor Expense, and Net Plant. However, the Customer Count 1

factor is arbitrary weighed 40%. As stated above, it is unreasonable to use an arbitrary 2

weighting factor. 3

In addition, once Liberty-Park’s recorded cost data is corrected by Liberty, the 4

overall LUC allocation rate for Liberty-Park decreases from 7.85% to 5.21%. The 5

following table shows the comparison of allocations rates after correcting the recorded 6

cost data and removing the arbitrary 40% weight: 7

Table 12-3 Liberty Utilities Corp. (LUC) Allocation Rates 8

9

Allocation Rates for LABS-Business & Corporate Services b)10

LABS’ indirect costs are first allocated among non-regulated operations of APCO 11

and the regulated utilities under LUC. This allocation is based on five factors: Employee 12

Headcount, Operation & Maintenance Expense, Revenues, Net Plant, and Capital 13

Expenditure. LABS’ indirect costs are spread over various accounts such as Information 14

Technology, Human Resources, Insurance, Treasury, and Finance, etc. between APCO 15

and LUC. Generally, three out of five factors are used to allocate costs to an account. For 16

example, for the Legal Costs account, the Liberty used the three factors of Employee 17

Headcount, Operation & Maintenance Expense, and Net Plant. For the Information 18

Technology account, Liberty only used two factors: Employee Headcount and Operation 19

Affiliates Liberty's Request ORA's Recommendation DifferenceLiberty Water 7.18% 6.55% -0.63%Calpeco 6.02% 6.12% 0.10%Granite State 5.41% 5.46% 0.05%Energy North 10.62% 10.65% 0.03%Midstates Gas 7.26% 6.60% -0.67%Midstates Water 0.33% 0.35% 0.02%Arkansas 1.71% 1.57% -0.13%Woodson-Hensley 0.04% 0.03% -0.01%Georgia 5.71% 5.20% -0.50%New England Gas 6.43% 6.45% 0.02%Whitehall - Water 0.19% 0.18% -0.01%Whitehall - Sewer 0.19% 0.18% -0.01%Parkwater 7.85% 5.21% -2.64%Empire 41.06% 45.45% 4.38%

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& Maintenance Expense. Using these allocation factors, on average, 15.4% LABS costs 1

are allocated to APCO and 84.6% to LUC.121 2

Liberty also uses various arbitrary weighting factors to allocate theses costs among 3

various accounts. For example, for the Information Technology account Liberty not only 4

used two allocation factors, Employee Headcount and Operation & Maintenance 5

Expense, but it also used an arbitrary weighting factor of 90% for the Employee 6

Headcount factor and 10% for the Operation & Maintenance factor. Similarly, for the 7

Purchasing account, Liberty assigned an arbitrary weighting factor of 50% to Operation 8

& Maintenance Expense and 50% to Capital Expenditure. For the Treasury account, 9

Liberty assigned an arbitrary weighting factor of 50% to the Operation & Maintenance 10

Expense factor, 25% to the Net Plant, and 25% to the Capital Expenditure. Finally, for 11

the Internal Audit account, Liberty assigns an arbitrary weighting factor of 75% to the 12

Operation & Maintenance Expense and 25% to the Net Plant. 13

Assigning arbitrary weighting factors to allocation factors is unreasonable and is 14

an attempt to shift allocable costs from the non-regulated operations of APCO to the 15

regulated entities served by LUC. When these arbitrary weighting factors are removed 16

and the pertinent allocation factors are given equal weight, the average cost allocated to 17

non-regulated APCO increases from 15.4% to 16.1%.122 Therefore, the Commission 18

should reject these arbitrary weight assignments. 19

In addition, ORA objects to the arbitrary selection of cost allocation factors as 20

well. For example, for the Information Technology account, Liberty used only two 21

factors, Employee Headcount and Operation & Maintenance Expense. However, the Net 22

Plant is equally relevant to determining the scope of Information Technology costs as the 23

Operation & Maintenance Expenses. Therefore, the Commission should use factor of the 24

Net Plant for Purchasing account, and the Revenue for Internal Audit account. These 25

121 Liberty’ workpapers, File: HO19 Expenses LABS, Tab: 2017 LABS CAM. 122 This rate is based on ORA’s adjustments only for the assigned weights and not due to the different combination of allocation factors used by ORA.

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adjustments would reduce LABS’ average cost allocation rate for LUC from 84.6% to 1

82.9%. The table below provides a comparison of the LABS’ rates, as requested by 2

Liberty and ORA’s recommendations: 3

Table 12-4 LABS Allocation Rates 4

5

4) General Office’s Allocable Costs 6 Apart from indirect allocable and direct costs from its various affiliates, Liberty’s 7

General Office costs include a sizable amount of costs that are generated by the General 8

Office itself.123 A closer review of these costs reveals that, in most instances, Liberty’s 9

estimates are based on the past two-years of recorded data124. ORA reviewed Liberty’s 10

estimates and found that, in a few instances, the estimates based on the past two-years of 11

recorded data are unreasonable when compared to the estimates based on the past five-12

years of recorded data as the past two-year data is higher than the past five-year average. 13

Therefore, the Commission should use the average of the past five-years of recorded data, 14

instead of the past two-years of recorded data for the purpose of these cost estimations. 15

123 $8,571,008 per Liberty’s workpapers, File: GO19 Expenses, Tab: Actual_EstbySMEB4Alloc. 124 Liberty’s workpapers present estimates based on the past five-years of recorded data, but these estimates are included only for informational purposes as required by the Minimum Data Requirement.

APCO LU APCO LUCBusiness ServicesBusiness IT (9801) 7.5% 92.5% 17.5% 82.5%HR (9810) 6.9% 93.1% 6.9% 93.1%Total Rewards (9811) 6.9% 93.1% 6.9% 93.1%L&D (9812) 6.9% 93.1% 6.9% 93.1%SHE&S (9815) 6.9% 93.1% 6.9% 93.1%Insurance Services (9821) 21.1% 78.9% 21.1% 78.9%Legal (9823) 17.5% 82.5% 17.5% 82.5%Purchasing (9825) 20.3% 79.7% 24.3% 75.7%Facilities (9826) 29.0% 71.0% 29.0% 71.0%FP&A (9827) 21.1% 78.9% 21.1% 78.9%Executive (9860) 21.1% 78.9% 21.1% 78.9%Corporate ServicesCorporate IT (9800) 7.5% 92.5% 17.5% 82.5%Finance (9820) 21.1% 78.9% 21.1% 78.9%Treasury (9822) 21.5% 78.5% 24.3% 75.7%Internal Audit (9824) 18.0% 82.0% 21.1% 78.9%Compliance (9828) 21.1% 78.9% 21.1% 78.9%Communications (9870) 6.9% 93.1% 6.9% 93.1%Average 15.4% 84.6% 17.1% 82.9%

Liberty' Request ORA's Recommendations

12-17

For example, Liberty estimates $253,681 for 2019 for the Other-Maintenance 1

General Plant account based on the past two-years of recorded data while Liberty’s 2

estimate based on the past five-years of recorded data is $250,871. Similarly, for 3

Travel/Lodging and Miscellaneous account, Liberty estimates $15,958 for 2019 based on 4

the past two-years of recorded data while Liberty’s estimate based on past five-years is 5

$7,883. The following table shows ORA’s projections for the Test Year using five-years 6

of recorded data to develop estimates for the Test Year for the selected accounts: 7

Table 12-5 ORA’s Adjustments to General Office Costs125 8

9

5) Medical Insurance and Workers’ Compensation 10 Liberty’s General Office expenses include cost estimates for various insurances 11

such as medical, dental, and vision. For its medical insurance, Liberty uses its actual 12

recorded cost in 2017 and escalates these costs by an annual escalation factor of 10.5% 13

for both 2018 and 2019126. However, Liberty did not provide any support for such high 14

125 ORA estimates are also based on different annual escalation rates per September-2017 Memo of the Commission based on Global Insight Economic Outlook whereas Liberty used 3% annual escalation rates which it failed to support. 126 Liberty used a 4% escalation rate for its dental insurance plan and a 5% increase for its vision


Accounts 2013 2014 2015 2016 2017 2018-Est 2019-TY 2018-Est 2019-TY 2018-Est 2019-TY 2018-Est 2019-TYEquip Mt-General Plant 35,795$ 36,635$ 36,081$ 34,048$ 48,438$ 42,954$ 44,243$ 38,990$ 40,003$ (3,964)$ (4,240)$ -9.23% -9.58%Oth-Mt General Plant 208,037 232,124 245,715 231,316 240,675 246,292 253,681 236,607 242,759 (9,685) (10,922) -3.93% -4.31%Express Mail 365 269 604 2,177 946 1,638 1,687 891 914 (747) (773) -45.60% -45.82%Travel, Lodging & Misc. 398 1,334 561 2,249 884 1,645 1,694 1,109 1,138 (536) (556) -32.58% -32.82%Business Meals 99 480 28 521 1,195 891 918 470 483 (421) (435) -47.21% -47.39%Express Mail 31 38 - 631 1,568 1,142 1,176 457 469 (685) (707) -59.94% -60.12%Cellular 808 686 980 979 1,251 1,162 1,197 960 985 (202) (212) -17.39% -17.71%Travel, Lodging & Misc. 904 333 13 1,000 1,379 1,239 1,276 739 759 (500) (517) -40.32% -40.52%Business Meals 133 97 33 1,171 402 827 852 375 385 (452) (467) -54.62% -54.81%Travel, Lodging & Misc. 4,049 2,237 3,107 4,281 2,349 3,474 3,578 3,283 3,369 (191) (209) -5.48% -5.84%Travel, Lodging & Misc. 874 2,831 3,198 4,790 25,163 15,493 15,958 7,432 7,625 (8,061) (8,333) -52.03% -52.22%Business Meals 355 437 795 915 2,538 1,791 1,845 1,022 1,048 (769) (797) -42.96% -43.20%Travel, Lodging & Misc. 70 2,086 1,376 2,194 1,440 1,902 1,959 1,461 1,499 (441) (460) -23.16% -23.48%Business Meals 916 712 191 842 406 655 675 629 645 (26) (30) -4.00% -4.44%Office Supplies 2,345 1,510 1,908 7,856 4,870 6,663 6,863 3,774 3,872 (2,889) (2,991) -43.36% -43.58%Total 255,179$ 281,809$ 294,592$ 294,972$ 333,505$ 327,768$ 337,602$ 298,200$ 305,953$ (29,568)$ (31,649)$ -9.02% -9.37%

Recorded Data Projected-ORAProjected-Liberty $- Difference %-Difference

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year-to-year escalation rates. For example, in its General Office Report, Liberty merely 1

mentioned these escalation rates and failed to provide any justification. On April 9, 2

2018, during one of ORA’s site visits to Liberty’s General Office, Liberty informed ORA 3

that its brokerage firm had recommended these rates. However, when ORA later 4

requested the copies of these recommendations, Liberty responded that it developed these 5

rates based on past increases and that the broker’s recommendation was currently not 6

available.127 7

ORA then requested the medical cost increase data over the period of 2016-2017. 8

Liberty responded that 2016 data was not representative as Liberty had a different 9

medical insurance plan in 2016 than in 2017. Nevertheless, Liberty provided actual cost 10

increase data over fiscal years 2017 - 2018.128 This cost data revealed that the 11

employer’s portion of various medical plans only increased by 3.6% instead of 10.5%. 12

Similarly, there were no cost increases for dental and vision insurance plans. 13

In the case of workers’ compensation, Liberty uses a year-to-year rate of 5% to 14

escalate its costs from the base year 2017 to 2018 and 2019. However, Liberty failed to 15

provide justification for the 5% year-to-year rate increase. 16

Based on foregoing discussion, the Commission should reject the escalation rates 17

Liberty used for its medical insurance and instead use the escalation rates produced by 18

Global Insight, which are commonly relied by the Commission. 19

The following table shows the projected health insurance escalation rates 20

according to Global Insight: 21

(continued from previous page) insurance plan. 127 Liberty’s response to ORA’s data request, AMX-03, Q-1. 128 Liberty’s response to ORA’s data request, AMX-03 Follow up, Q-1 (a).

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Table 12-6 Projected Health Insurance Rates per Global Insight 1

2

6) Adjustments for Vacancy Savings 3 The Commission should include $140,939 in inflation-adjusted vacancy saving 4

because that is the average of vacancy savings during the past three years in General 5

Office. 6

Liberty’s General Office expense estimates include payroll expenses for its 7

employees; however, while Liberty includes provisions for merit increase, overtime, and 8

double overtime, it ignores naturally occurring vacancy savings. Upon ORA’s inquiry, 9

Liberty provided the vacancy data for the past three years which showed that there were 10

$44,030, $294,156, and $80,192 in savings due to vacant positions for the years 2015, 11

2016, and 2017, respectively.129 However, Liberty claims that these vacancy savings are 12

not normal because it was going through acquisition and restructuring during these years. 13

The process of expansion through new acquisitions is a part of normal business 14

operations. For example, just during the last year Liberty’s parent company, APUC 15

acquired one of its largest subsidiaries, Empire Utility that has electric, gas and water 16

operations in multiple states. In addition, unemployment, such as cyclical unemployment 17

and structural unemployment are beyond the control of Liberty as these are caused by 18

larger economic forces. Similarly, both employees and employers are constantly exposed 19

to frictional unemployment risk that is based on the desire to create a good fit between 20

employees’ skill and tasks, and the corporate culture of the organization. Therefore, there 21

will always be a certain level of vacancies at Liberty and thus, vacancy savings are 22

expected. Therefore, the Commission should include $140,939 vacancy savings based on 23

the average of vacancy savings during the past three years. 24

129 Liberty’s response to ORA’s data request, AMX-03-Follow Up, Q-3 (c).

Years 2018 2019 2020 2021Projected Health Insurance Rates 2.19% 3.43% 3.72% 3.83%

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7) New Positions 1 Liberty requests seven new positions that would impact allocable costs from its 2

West Region and the General Office costs: 1) President-West Region, 2) Vice President-3

Customer Experience, 3) Director-Customer Care, 4) Director-Government Relations, 5) 4

Diversity Coordinator, 6) Director- Financial Planning & Analysis, and 7) Engineering 5

Technician-1. However, Liberty does not justify its need for these new positions with 6

any quantitative analysis that is based on workload and current time allocation data. 7

Instead, Liberty provides minimal qualitative or narrative support for its request. For the 8

two positions: Director-Financial Planning & Analysis and EngineeringTechnician-1, 9

Liberty did not include any support in its application and only provided support in 10

response to one of ORA’s data requests.130 However, that response is mainly focused on 11

Liberty’s restructuring efforts after it was acquired by APUC in 2016 which, according to 12

Liberty, warranted these new positions. 13

President-West Region a)14 The Commission should approve the new President-West Region position. The 15

new position of President-West Region was created in connection with Liberty’s 16

reorganization initiative in 2017. The position would add an annual base salary and 17

benefits cost of ***BEGIN CONFIDNTIAL*** ***END 18

CONFIDENTIAL*** .131 This position will have overall responsibility for the 19

performance of the regulated utilities in California, Arizona, and Texas. 20

Vice President- Customer Experience and Director-Customer Care b)21

The Commission should approve the new Director - Customer Care position. 22

Liberty created the new position of Vice President-Customer Experience (West Region) 23

in connection with its reorganization initiative in 2017. The position would add a base 24

salary and benefits costs of ***BEGIN CONFIDENTIAL*** ***END 25

130 Ibid. 131 Liberty’s Workpapers, File: GO19 Payroll 2019 CONFIDENTIAL, Tab: DlrsbyBUbyEE.

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CONFIDENTIAL*** in 2019.132 This position will be responsible for the Customer 1

Care functions in the West Region. However, Liberty also requests a new position of 2

Director-Customer Care that would also oversee similar activities as the newly requested 3

position of Vice President-Customer Experience. The new position of Director-Customer 4

Care would add an annual base salary and benefits cost of ***BEGIN 5

CONFIDENTIAL*** ***END CONFIDENTIAL*** in 2019.133 6

The fact that Liberty is asking for two top executives who would perform 7

essentially the same responsibilities exemplifies the top-heavy executive structure that 8

has contributed toward its significant allocable costs, as discussed under Section-1 of this 9

chapter. Through discovery ORA learned that Liberty would remove its request for its 10

new Vice President-Customer Experience position.134 11

Based on the foregoing discussion, since Liberty has removed its request for the 12

new Vice President-Customer Experience, the Commission should approve the new 13

position of Direct-Customer Care. 14

Director-Government Relations c)15 The Commission should deny Liberty’s request for the new position of Director-16

Governmental Relations because the Senior Director-Governmental, President-West 17

Region, and President-California should perform the governmental policy and strategy 18

functions identified for the Director-Governmental Relations position. 19

According to Liberty, it created the new position of Director-Government 20

Relations to lead the development of governmental policy and strategy for the West 21

Region. The position will direct municipal, provincial, state, and federal governmental 22

affairs projects and collaborate with other company personnel to meet strategic plan 23

objectives for governmental relations. The position would add a base salary and benefits 24

132 Ibid. 133 Ibid. 134 Liberty response to ORA’s data request, AMX-03, Q-6.

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costs of ***BEGIN CONFIDENTIAL*** ***END CONFIDENTIAL*** in 1

2019.135 2

According to Liberty, the new position of Director- Governmental Relations 3

reports directly to a Senior Director- Governmental Relations and indirectly to the 4

President-West Region.136 In addition, Liberty also has a position of President-5

California. Therefore, it appears that Liberty already has a top-heavy executive 6

organizational structure. In particular for these three top executives: Senior Director-7

Governmental, President-West Region, and President-California, Liberty is paying 8

approximately ***BEGIN CONFIDENTIAL*** ***END 9

CONFIDENTIAL*** in 2019.137 Therefore, adding yet another position for Director-10

Governmental Relations would increase the top executives’ salaries and benefits to near 11

***BEGIN CONFIDENTIAL*** ***END CONFIDENTIAL*** in 2019. 12

The existing top executive positions of Senior Director-Governmental, President-13

West Region, and President-California should engage with government officials to 14

safeguard the interests of both customers and the shareholders. In fact, Liberty cannot 15

effectively safeguard customers’ interest without the local executive heads, such as 16

President-West Region, and President-California, actively participating in the potential 17

negotiations and presentations with the governmental agencies. 18

In addition, Liberty does not offer any quantitative work load studies to 19

demonstrate that these top executives are currently too busy to perform these duties. 20

Additionally, these executives are more suited for the responsibilities cited for the new 21

position of the Director-Government Relations because they have a holistic picture of 22

operations and a deep understanding of the corporate strategic outlook, which is essential 23

to safeguarding customers’ and shareholders’ interests in regard to government policies. 24

135 Liberty’s Workpapers, File: GO19 Payroll 2019 CONFIDENTIAL, Tab: DlrsbyBUbyEE. 136 Liberty’s response to ORA’s data request, AMX-10. 137 ORA assumes that base salary and benefits of the Senior Director matched that of the President-West Region.

12-23

These are tasks that a middle level manager, such as Director- Governmental Relations, 1

cannot perform effectively. 2

Director-Financial Planning & Analysis d)3 As mentioned earlier, Liberty did not include any support for this new position 4

within its application; however, through discovery, Liberty provided a very brief 5

narration of about four lines.138 In that data request response, Liberty stated that the new 6

position of the Director-Financial Planning & Analysis is responsible for management 7

reporting, budgeting, forecasting, and financial analysis functions in the West Region. 8

The position would add a base salary and benefits cost of ***BEGIN 9

CONFIDENTIAL*** ***END CONFIDENTIAL*** in 2019.139 10

Liberty has a robust finance department which includes three top executives: Vice 11

President Finance & Administration, Director-Finance, and Director -Tax. There are 12

several Managers, Senior Accountants, and Staff Accountant who report directly to the 13

Director-Finance. In addition, there is one Manager-Tax who directly reports to the 14

Director-Tax. There is one Senior Financial Analysts and one Financial Analyst who 15

would be reporting to this new positon of Director-Financial Planning and Analysis. 16

Excluding this new position, there are currently 31 personnel performing finance, 17

accounting, tax, and analysis functions. 18

In addition, it appears that Liberty desires to separate the Finance Planning and 19

Analysis function from the existing organizational structure to focus on management 20

reporting, budgeting, forecasting, and financial analysis functions. Liberty would require 21

the existing Senior Financial Analyst and Financial Analyst to report to this new position 22

instead to the existing Director-Finance position. The financial reporting and analysis 23

functions should not be separated in this manner because the personnel developing and 24

recording the financial data are well-suited to perform management reporting, budgeting, 25

forecasting, and financial analysis functions as well. Generally, financial experts are 26

138 Liberty’s response to ORA’s data request, AMX-03 Follow Up. 139 Liberty’s Workpapers, File: GO19 Payroll 2019 CONFIDENTIAL, Tab: DlrsbyBUbyEE.

12-24

trained in both the financial reporting and financial analysis functions. The personnel 1

involved with financial reporting have the needed expertise and possess valuable insight 2

into the company’s transactional data, and are able to perform better financial analysis. 3

Liberty fails to present reasonable support for the need to separate its existing 4

financial reporting and financial analysis functions. The new position of Director- 5

Financial Planning and Analysis will add another unjustified top executive layer that is 6

not needed to perform financial analysis. Based on the foregoing discussion, the 7

Commission should disallow the new position of Director-Financial Planning & 8

Analysis. 9

8) Executive Incentives 10 The Commission should reduce Liberty’s estimates for executive incentives by 11

10% to bring them in par with the median value of industry. The Commission should 12

further reduce Liberty’s estimates for executive incentives by an additional 50% because 13

these incentives do not benefit ratepayers but are instead focused on creating value for the 14

company’s shareholders. 15

Short Term Incentive Plan (“STIP”), Long Term Incentive Plan (“LTIP”), and 16

Shared Bonus Plan (“SBP”) contribute substantially to Liberty’s payroll expenses for its 17

personnel at its General Office and at other affiliates whose costs are allocated to the 18

ratepayers. These incentives range from 4% of base salaries to the 45% of base salaries 19

for the managers and the top executives. In General Office alone, Liberty is requesting 20

approximately $1million for these incentives.140 21

However, Liberty does not adequately justify these incentives. For example, in its 22

General Office report, the incentives are described in a mere six lines of text, and 23

Liberty’s work papers do not explain or justify the various incentives rates. Liberty does 24

not explain its compensation philosophy, benchmarks, performance measures, or any 25

consideration it may give to the regulated nature of its operations vis-à-vis the industry. 26

Liberty only provides a generic statement that incentive programs are designed to 27 140 Liberty’s workpapers, File: GO19 Payroll CONFIDENTIAL, Tab: Incentives.

12-25

encourage and motivate performance, to be competitive with other companies, to attract 1

and retain talent, and to align the interests of employees with the long-term interests of 2

the utility and its customers. 3

Liberty fails to explain how its incentive program encourages performance or what 4

criteria are used to measure performance. Similarly, Liberty fails to explain how 5

performance is measured vis-à-vis other companies or to identify or describe those other 6

companies. Finally, Liberty fails to explain how its incentive program aligns the interest 7

of employees with the long term interests of customers. 8

Liberty finally addressed few of these issues in its response to ORA’s data 9

request.141 However, the information provided by Liberty, again fails to provide 10

adequate explanation. For example, Liberty provided the copies of two competitive 11

compensation surveys prepared by outside consultants (Mercers and Willis Towers 12

Watson), which Liberty used to develop its incentives. However, these compensation 13

surveys are unreliable because they are not utility-industry specific and include 14

participants from all sorts of industries, including corporations that are many times larger 15

than Liberty and its parent company APUC. 16

Liberty states that it has two sets of compensation assessments: one for the top 17

corporate executives whose salary and incentives are assessed by a Compensation 18

Committee and approved by the Board of Directors, and another for the middle level 19

executives and managers whose salary and incentives are based on generic compensation 20

surveys.142 In addition, Liberty states that it generally aligns the base and total 21

compensation with the market median of the Comparator Group. However, it also sets 22

compensation in some circumstances above or below the market median, depending on 23

various factors including experience, performance, succession, and retention 24

considerations.143 25

141 Liberty’s response to ORA data request, AMX-03 Follow Up dated June 4, 2018. 142 Liberty’s Director Total Reward, during the telephonic conference held on May 23, 2018. 143 Liberty’s response to ORA data request, AMX-03 Follow Up dated June 4, 2018.

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However, in supporting the compensation of its corporate executives, Liberty 1

failed to provide the information regarding the Comparator Group and did not comply 2

with ORA’s repeated requests for the meeting minutes of the Compensation Committee. 3

Liberty simply responds that the meeting minutes of the Compensation Committee were 4

not available and instead provided two-page generic descriptions of the process that the 5

Compensation Committee ought to follow without any supporting documentation.144 6

Failure to keep meeting minutes or refusing to provide meeting minutes to Commission 7

staff is unacceptable. Liberty has the burden of proving its requests are justified but has 8

failed to meet this burden. 9

Similarly, Liberty’s partial reliance on the generic compensation surveys to set 10

compensation for its middle-level executives is not reasonable because generic 11

compensation surveys include all sorts of industries and organization sizes that are not 12

comparable to Liberty. 13

In addition, Liberty’s Pay-for-Performance philosophy where deviations from the 14

market median are allowed based on individual performance does not adequately justify 15

its requested compensation rates. 16

For example, Liberty provided a sample assessment of incentives based on the 17

third-party market compensation surveys for five personnel. However, the incentives for 18

all of the executives were in higher than the market average. 19

The following table shows how the Liberty’s incentives rates for its executives 20

exceed the market average: 21

22

144 Ibid.

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Table 12-7 Liberty’s Executive Incentive Rates vs. Market Average 1

***BEGIN CONFIDENTIAL 2

3

***END CONFIDENTIAL 4

The above table shows that Liberty’s incentive rates for its top executives are 12% 5

higher than the corresponding average market incentive rate. Liberty’s incentive rates, 6

which are particularly higher for its top executives, are unjustified and unreasonable. 7

Liberty states that Compensation Committee approves the Corporate Scorecard 8

and Business Unit Scorecards, which set out a series of objectives against which 9

performance is measured and results are used to calculate the bonuses for the executive 10

officers of the company.145 However, these scorecard objectives reveal that these 11

objectives are mostly geared toward safeguarding shareholders’ interest and increasing 12

their value, and do not adequately focus on customer satisfaction or other objectives that 13

would benefit ratepayers. 14

For example, there are four major objective categories: Customer & Communities, 15

People & Team, Processes, and Efficiencies. However, only one category, Customer & 16

Communities is directly focused to deliver the satisfactory customer experience. It is 17

unreasonable for ratepayers to pay for incentives that reward executives for achieving 18

145 Id. at p. 2.

PositionPer Towers

SurveyPer Mercer

SurveyAverage

1/Liberty's Request

Liberty Exceed Makt. Average

Manager, Tax 12% 12% 10% -2%

Rate Analyst, Rates and Regulatory Affairs 10% 10% 4% -6%1/: Used single value in case of non-availability of data from both sources

12-28

objective that solely or primarily benefit shareholders, such as completing target Capital 1

Investment, Profitability, and Net Profit. 2

It is possible that objectives such as Capital Investment, Profitability and Net 3

Profits could indirectly benefit customers in the form of a financially viable utility. 4

However, objectives that are directly focused on safeguarding customers’ interests also 5

provide indirect benefits for the shareholders in the form of increased customer 6

satisfaction that can help avoid costly eminent domain proceedings. Thus, a balanced 7

approach is needed when it comes to setting executives’ performance objectives and the 8

cost to ratepayers for achieving those objectives. 9

Liberty is not doing so well on various aspects of customer satisfaction, especially 10

with regard to affordability. Thus rewarding its executives for the current level of poor 11

performance on customer satisfaction and affordability is unreasonable. 12

For example, Liberty shared with ORA the results of its most recent customer 13

satisfaction survey performed in 2017 by an outside consulting firm, J.D. Power.146 14

According to the survey results, Liberty is ranked below the average of its industry peers 15

in the western region. Liberty’s performance in the terms of factor of “price” is the 16

lowest for both Liberty-Apple Valley and Liberty-Park. 17

The surveys measured the customer satisfaction across six factors: Delivery, Price, 18

Billing & Payments, Conservation, Communications, and Customer Service. The 19

customers’ responses are used to develop the indices for each factor for the company, 20

comparable industry (west water utilities average), and industry’s top performers. 21

Liberty-Apple Valley’s overall customer satisfaction index was 476, compared to the 22

industry average of 702 and the 744 rating for the industry’s top performers. Similarly, 23

Liberty-Apple Valley’s customers satisfaction in terms of affordability or price was the 24

lowest among all other factors with the value of 295, compared to the industry average of 25

642 and top industry performers with the index of 677.147 26

146 Liberty provide the copies of these third-party customer surveys against ORA’s data request, AMX-03. 147 Per Customer Satisfaction Results-Apple Valley Water at p. 5.

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The customer satisfaction results for Liberty-Park’s operations were no better. 1

Liberty-Park’s overall customer satisfaction index was 561, compared to the industry 2

average of 702 and the 744 rating for industry’s top performers. Liberty-Park’s 3

customers satisfaction in terms of affordability or price was the lowest among all other 4

factors with the value of 439, compare to the industry average of 642 and top industry 5

performers with the index of 677.148 6

According to the survey the top three most important factors for the customers 7

were Delivery, Price, and Billing & Payment with the Factor Weighting-Relative Impact 8

of 26%, 21% and 15% respectively. In other words, the factor of price or affordability 9

was weighed among the top three most important factors, and poor results in this area 10

have caused the overall customer satisfaction results to fall dramatically. 11

CONCLUSION D.12 The Commission should approve an overall allocable cost of $876,964. The 13

Commission should disallow all direct costs of $1,472,628 of Liberty’s various affiliates 14

due to lack of justifications. 15

The Commission should reduce from 7.85% to 5.21% Liberty’s requested 16

allocation rate for the allocable costs from LUC to the General Office. Similarly, the 17

Commission should reduce to 51.6% Liberty’s requested allocation rate for the General 18

Office cost allocation to Liberty-Park. The Commission should reduce to 47.47% 19

Liberty’s requested allocation rate for the General Office cost allocation to Liberty-Apple 20

Valley. 21

The Commission should disallow three new positons: Vice President-Customer 22

Experience, Director-Government Relations, and Director- Financial Planning 23

&Analysis. The Commission should reduce the allocable amount of executive and 24

managerial payroll incentives from $10,756,489 to $3,546,145 because these incentives 25

are primarily focused on creating value for shareholders. 26

148 Per Customer Satisfaction Results-Apple Valley Water at p. 5.

13-30

BALANCING AND MEMORANDUM ACCOUNTS REVIEW CHAPTER 13:1

INTRODUCTION A.2 This chapter presents ORA’s review of Park’s Balancing and Memorandum 3

Accounts as of December 31, 2017. The balances identified by ORA as of this date do 4

not constitute ORA's recommendation for amortization or recovery by Park because, for 5

most accounts, recovery may be dependent on specific future actions, such as completion 6

of projects, future reconciliations, calculations and reasonableness reviews. 7

SUMMARY OF RECOMMENDATIONS B.8 1) ORA’s General Recommendations Regarding Balancing and 9

Memorandum Accounts 10 The Commission should require Park to modify its accounting methods to be 11

consistent with Standard Practice (SP) U-27-W. 149 Park should not track costs and the 12

recovery of costs in the same account; Park should not record memorandum accounts on 13

the balance sheet until the Commission authorizes cost recovery; and Park should exclude 14

expenses recorded in its Water Conservation Memorandum Account (“WCMA”) from its 15

historical operating expenses used for ratemaking because they are non-recurring costs 16

resulting from the Governor’s drought declaration. Including these costs in its Test Year 17

forecast costs that are also recorded in a memorandum account results in double recovery. 18

Unless noted herein otherwise, the Commission should require Park to make all 19

filings relating to the memorandum accounts discussed in this Chapter by Tier 3 advice 20

letters or to address them in its next GRC. This will give Commission staff the 21

opportunity to verify and confirm the appropriateness and accuracy of Park’s requested 22

rate adjustments. 23

149 SP U-27-W, http://docs.cpuc.ca.gov/word_pdf/REPORT/94758.pdf.

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2) ORA’s Recommendations Regarding Specific Balancing 1 and Memorandum Accounts ("WRAM/MCBA") 2

WRAM/Modified Production Cost Balancing Account a)3 (“MCBA”) 4

ORA reviewed and tested Park’s WRAM/MCBAs for the period of 2014-2017 5

and found Park’s accounting of its surcharge revenue and interest expense accruals to be 6

reasonable. The Commission should deny Park’s request to remove the 10% cap on 7

WRAM surcharges. This cap protects ratepayers by limiting the magnitude of the 8

WRAM surcharge to help preserve water affordability, especially for low-income 9

customers. 10

California Alternative Rates for Water Revenue Reallocation b)11 Balancing Account (“CARW”) 12

ORA reviewed and tested Park’s accounting of surcharges and surcredits to the 13

CARW and found no significant differences between expected and actual balances. The 14

Commission should adopt an updated monthly surcharge of $2.01.150 15

Pension Expense Balancing Account (“PEBA”) c)16 The Commission should approve Park’s request for authority to refund the PEBA 17

over-collection balance of $1,706,828.60 as of December 31, 2017. The Commission 18

should require Park to refund this over-collection via a 12-month surcredit, and to 19

continue this account. ORA reviewed the calculations supporting the entries to this 20

account and verified compliance with available, authorized, and reported Pension 21

Expense data. December 31, 2017 22

Conservation Expense One-Way Balancing Account d)23 (“CEOWBA”) 24

Park’s CEOWBA shows an over-collection balance of $304,299.47 as of 25

December 31, 2017. The account is capped at approximately $1,317,409 (depending on 26

escalation) and covers the current three-year rate case cycle (2016-2018). ORA will 27

conduct its audit of the account after the completion of the 2016-2018 rate case cycle 28

150 To be further adjusted for the impact of any revenue requirement change resulting from this GRC.

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when Park files for resolution of the account authorized for that period. Park anticipates 1

that this will occur during the first quarter of 2019. Thereafter, Park should close this 2

account. 3

Incremental Cost Balancing Account (“ICBA”) e)4 ORA reviewed the ICBA and finds the balance of $965.36 to be reasonable. The 5

Commission should authorize Park to transfer this balance to the CEBA for amortization 6

and recovery. 7

Consolidated Expense Balancing Account f)8 (“CEBA”) 9

The Commission should approve this account to aggregate and collect residual 10

balances resulting from other authorized surcharges and surcredits. 11

Office Remodel Balancing Account g)12 The Commission should approve Park’s request to close this account because it 13

has already completed this remodel and the account is no longer needed. 14

2013 Interim Rates Memorandum Account (“2013 h)15 IRMA”) 16

ORA verified the $327,348 balance in this account as of December 31, 2017. The 17

Commission should approve recovery of this amount. However, Park should file for an 18

explicit surcharge to recover this amount over a 12-month period and should not 19

consolidate it into the CEBA because it is large enough to be recovered on its own.151 20

2016 Interim Rates Memorandum Account (“2016 i)21 IRMA”) 22

The surcharge for this account expired on June 26, 2017. This account has an 23

unrecovered balance of $14,886.24 as of December 31, 2017. The Commission should 24

authorize Park to transfer the residual balance to the CEBA and close this memorandum 25

account. 26

151 The $327,348 balance as of 12/31/2017 exceeds $232,921, the amount needed to result in a surcharge of $0.005/Ccf or more, based on Park’s 2017 total potable water sales.

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2014 Water Conservation Memorandum Account j)1 (“WCMA”) 2

Park’s WCMA has a balance of $105,414 as of December 31, 2017. ORA 3

reviewed the expenses charged to this account. The Commission should approve this 4

balance for recovery. If the Commission approves recovery, the Commission should 5

require Park to transfer the current balance to the CEBA and close this memorandum 6

account. 7

Tangible Property Regulations Consequences Memorandum k)8 Account ("TPRC MA) 9

ORA reviewed the entries to this account and the method Park uses to calculate 10

the revenue requirements of the tax law changes and finds them to be reasonable. Park 11

reports an over-collections balance of $374,410 in this account as of December 31, 2017). 12

After Park completes its reconciliation of this account (expected in September 2018), it 13

should file an advice letter for Commission approval to refund the over-collection 14

balance. Upon Commission approval, Park should transfer the balance to a balancing 15

account for refunding through a 12-month surcredit. Thereafter, the Commission should 16

require Park to close this memorandum account. 17

School Lead Testing Memorandum Account l)18 The purpose of the School Lead Testing Memorandum Account is to track the 19

incremental expenses directly associated with complying and implementing the School 20

Lead Testing Program. There is currently no balance recorded in the account. Park 21

requests Commission authorization to keep this account open. The Commission should 22

approve Park’s request to keep this account open because the memorandum account is 23

needed to track costs in connection with a newly mandated 2017 testing requirement. 24

Table 13-1 below provides a summary of ORA’s recommendations on Park’s 25

balancing and memorandum accounts. 26

27

13-34

Table 13-1 Park Water Company Balancing and Memorandum 1 Account Summary Table 2

3

Abbreviation Regulatory Account ORA's Recommendation

AVR Balance as of

12/31/2017 Over (Under-) Collection ($)

Percent of Total

ORA-Recomm.

Balance as of 12/31/2017 ($)

Difference ORA > (<) PWC ($)

2015 WRAM/MCBA

2015 Water Revenue Adj. Mech./Modified Cost Bal. Acct

Amortize and keep open; ongoing (842,603) 17% (842,603)0

2016 WRAM/MCBA

2016 Water Revenue Adj. Mech./Modified Cost Bal. Acct Amortize and keep open; ongoing (3,237,755) 67% (3,237,755)

0

2017 WRAM/MCBA

Water Revenue Adj. Mech./Modified Cost Bal. Acct Amortize and keep open; ongoing (3,497,275) 72% (3,497,275)

0

ICBA Recycled Water-Incremental Cost BA

After approval, amortize & transfer residual balances to the CEBA; keep open; ongoing; only applicable to Recycled Water

(965) 0% (965)

0

CARW BACalifornia Alternative Rates for Water

Revenue Reallocation BA

Amortize and keep open, ongoing; reduce surcharge to $2.01; update surcharges and surcredits to reflect new revenue req.

809,072 -17% 809,072

0

CEOWBA Conservation Expense One-Way BAKeep open through 12/31/2018; close after reasonbleness review in early 2019 304,299 -6% 304,299

0

PEBA Group Pension Expense BAAfter approval,, refund balance over 12 months; keep open; ongoing 1,706,829 -35% 1,706,829

0

CEBAConsolidated Expense Balancing

AccountKeep open for consolidation and recovery of insignificant residual balances (18,642) 0% (18,642)

0

2013 IRMA Interim Rates Memorandum Account - TY 2013

After approval, transfer to a Balancing Account, amortize, and close account

(327,348) 7% (327,348)0

2016 IRMAInterim Rates Memorandum Account -

TY 2016After approval, transfer to the CEBA, amortize, and close account (14,886) 0% (14,886)

0

WCMA2014 Water Conservation

Memorandum AccountAfter approval, transfer to the CEBA, amortize, and close account (106,414) 2% (106,414)

0

TPRC MATangible Property Regulations

Consequences ("TPRC") Memorandum Account

AVR will file AL after reconciliation; upon approval, transfer to a Balancing Account, refund balance over 12 months, and close account

374,410 -8% 374,410

0

SLT MASchool Lead Testing Memorandum

Account Keep open - 0% - 0

TOTAL: (4,851,277) 100% (4,851,277) 0

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DISCUSSION C.1 This chapter presents ORA’s analyses and recommendations on Park’s balancing 2

and memorandum accounts. 3

1) ORA’s General Recommendations Regarding Balancing 4 and Memorandum Accounts 5

The Commission should require Park to conform its accounting methods with 6

Standard Practice (SP) U-27-W.152 Park should not track costs and the recovery of costs 7

in the same account and Park should not record memorandum accounts on the balance 8

sheet until the Commission authorizes cost recovery; and Park should exclude expenses 9

recorded in its Water Conservation Memorandum Account (“WCMA”) from its historical 10

operating expenses used for ratemaking because they are non-recurring costs resulting 11

from the Governor’s drought declaration. Including these costs in its Test Year forecast 12

costs that are also recorded in a memorandum account results in double recovery. 13

Unless otherwise noted herein, the Commission should require Park to make all 14

filings relating to the memorandum accounts discussed in this Chapter by Tier 3 advice 15

letters or address them in its next GRC. This would give Commission staff the 16

opportunity to verify and confirm the appropriateness and accuracy of Park’s requested 17

rate adjustments. 18

2) Background on Memorandum and Balancing Accounts 19 Memorandum Accounts a)20

As described in the Water Division’s Standard Practice U-27-W, (SP U-27-W).153 21

“A memo account is not recorded in the utility’s accounting books; it represents an off- 22

book accounting record.154 Thus, memorandum account expenses are intended to be “off 23

152 SP U-27-W, http://docs.cpuc.ca.gov/word_pdf/REPORT/94758.pdf 153 Ibid. 154 SP U-27-W further states: “Trackable costs are recorded in the memo account, and they are also recorded in the accounting records normally, in accordance with the Uniform System of Accounts. For example, costs normally expensed would continue to be expensed in the accounting records even though a


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book,” i.e. Park should not record them in its books of account and their purpose is to 1

allow Park to record costs that it is not recovering through its currently authorized rates 2

or revenue requirement. Memorandum accounts are not used to track ongoing normal 3

business expenses, such as maintenance and other categories of operating expenses. 4

ORA’s primary focus and concern in its review is to ensure that normal operating costs 5

are excluded from Park’s memorandum accounts to avoid double recovery of expenses 6

because the Commission has already allowed the expenses associated with such expenses 7

in revenue requirements and this would otherwise result in double recovery. Similarly, 8

Park should not record unusual or one-time expenses that the Commission has not 9

already included in revenue requirements in its books of account used for ratemaking; 10

rather it should record these unusual expenses in a memorandum account. 11

Memorandum accounts are used to track costs whose recoveries are not assured, in 12

whole or in part, because Park cannot estimate them in advance. Memorandum accounts 13

are subject to reasonableness reviews prior to the Commission’s authorization of 14

ratemaking recovery. In some cases, which costs are to be tracked has not yet been fully 15

explored, known, or understood, and therefore, its regulatory treatment is uncertain. Yet, 16

it is necessary to provide for potential future rate recovery in a manner that avoids 17

retroactive ratemaking. Therefore, when the Commission cannot adopt a reasonable 18

estimate of costs related to specific events, a memorandum account leaves the issue open 19

for eventual resolution by providing an opportunity to track associated costs for possible 20

future rate recovery. If Park requests a memorandum account, however, it must justify 21

that the account is necessary “due to events of an exceptional nature” that: 22

(1) Are not under Park’s control, 23

(2) Could not have been reasonably foreseen in the last GRC, 24

(3) Will occur before the next scheduled rate case, 25

(continued from previous page) memo account is set up to track these costs for potential future recovery.” Commission Standard Practice (SP) U-27 at 6.

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(4) Are of a substantial nature in that the amount of money involved is worth the effort of 1

processing a memo account, and 2

(5) Have ratepayer benefits.155 3

Balancing Accounts b)4 Similarly, balancing accounts track the incurrence of expenditures against the 5

surcharge/surcredit recovery of expenditures and are generally considered pre-approved 6

and authorized for recovery against their associated surcharges. Nevertheless, both types 7

of accounts are subject to periodic regulatory review156 and, if found necessary, the 8

Commission may make subsequent adjustments to the balances it authorizes for recovery 9

without violating the ban on retroactive ratemaking. 10

Both balancing and memorandum accounts are used to record costs for tracking 11

purposes and give the utility an opportunity to meet its burden of proof for the recovery 12

of the recorded costs. Recovery of the accumulated costs is not automatic, and the 13

Commission must find recovery to be just and reasonable. 14

Park Fails to Distinguish between Memorandum and Balancing Accounts 15

Park treats its balancing and memorandum accounts the same with no distinction 16

between the two types of accounts. As explained above, balancing accounts are kept on 17

the balance sheet, used to track recovery or amortize amounts authorized by the 18

Commission, and include amounts that were tracked in a memorandum or reserve 19

account and authorized for recovery.157 Memorandum accounts, on the other hand, are 20

not assured recovery, are kept off the books, and should only be used to track costs for 21

subsequent reasonableness review by the Commission.158 In D.12-09-004, The 22

Commission clarified the distinction between the two types of accounts as follows: 23

155 SP U-27-W at p. 6. 156 The Water Division refers to Balancing Accounts as “memorandum accounts with balancing account characteristics,” emphasizing that these accounts are equally subject to reasonableness reviews. See Decision (D.) 03-06-072. 157 SP U-27-W at p.6, No. 31. 158 SP U-27-W at p.4, No.24-25.

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There is an important regulatory distinction between a 1 balancing account and a memorandum account: the 2 Commission has clearly established that a balancing account 3 is used where recovery is essentially assured, subject to 4 determining the reasonableness of the amounts incurred, so 5 that ratepayers as well as shareholders are protected from 6 forecast error. A memorandum account on the other hand has 7 no assurance of recovery until the underlying program or 8 project is subsequently deemed reasonable … The purpose of 9 a balancing account is simply to protect against over- or 10 under-collections, unlike a memorandum account where we 11 have yet to determine that the expense category is eligible for 12 recovery from ratepayers. … There is another distinction as 13 well: a balancing account usually has a revenue stream 14 attached to it so that the cost is tracked against the initial 15 amount of revenue provided in rates. A memorandum 16 account by contrast usually only records the expenses which 17 will be considered for recovery later.159 18

It is clear from the foregoing that the purposes of balancing and memorandum 19

accounts are different. It is also clear that the accounting treatment for these accounts 20

must be distinct. Park however, does not make any distinction between the two types of 21

accounts. 22

This raises two important concerns with Park’s current practices: (1) treating a 23

memorandum account like a balancing account may allow it to recover account balances 24

without Commission review; and (2) Park may use the fact that it records memorandum 25

accounts on the balance sheet as justification for Commission approval of cost recovery. 26

Each concern is addressed in the following paragraphs. 27

Park Books Surcharge Revenue Recovery to Memorandum Accounts 28

Park treats its memorandum accounts like its balancing accounts, with no 29

distinction between the two. This means that when a memorandum account is authorized 30

for recovery, Park books the revenue from the associated surcharge in the same account 31

as an offset to under-collected balances of that account. This is not in accordance with 32

159 D.12-09-004 at p. 13-14.

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SP U-27-W, which requires that, once a cost tracked in a memorandum account is 1

authorized for recovery, the authorized amount is moved to a balancing account for 2

recovery.160 The memorandum account should be zeroed out and the Commission should 3

review any further costs tracked in the memorandum account for recovery at a later date. 4

This method prevents newly tracked costs from being comingled with amounts that are 5

currently being recovered but have not yet been fully recovered. Since Park does not use 6

this method for its memorandum accounts, it raises concerns that costs tracked in 7

memorandum accounts may not be subject to a reasonableness review and Park could 8

potentially recover costs without Commission review. 9

Treating a memorandum account as a balancing account could cause Park to 10

recover account balances that the Commission has not reviewed for reasonableness. The 11

amount of the surcharge that is applied to a customer bill to recover an under-collected 12

balance is forecasted based upon estimates of customers and consumption. If the actual 13

number of customers or consumption is greater than the forecast used to develop the 14

surcharge, the amount collected from the surcharge will be more than the initial balance. 15

Since Park comingles the collection from surcharges with the recording of costs, the same 16

memorandum account continues to track new costs. If the amount collected from higher-17

than-anticipated surcharge revenue is netted against newly tracked costs, as Park does, 18

the Commission may never review newly tracked costs since they would appear as if 19

Park had already recovered them. The Commission should not allow Park to recover any 20

amounts that are not approved by the Commission. To prevent this from occurring, once 21

memorandum account balances are approved for recovery, consistent with SP U-27-W, 22

Park should request authority to move them to a balancing account for recovery and 23

amortization. 24

160 “When a balance in a reserve account or memo account is approved for recovery, that reserve or memo account balance is moved to a balancing account. If the Commission disallows recovery of all or part of a reserve or memo account, the unrecovered amount is amortized below-the-line.” SP U-27-W at p. 8.

13-41

Park Records its Memorandum Accounts on the Balance Sheet 1

Park books its memorandum accounts on the balance sheet as either a regulatory 2

asset or regulatory liability and not in accordance with practices required by SP U-27-W. 3

Recording it as a regulatory asset violates the accounting concept of conservatism 4

because the offsetting credit entry is to a revenue account. Park should not report any 5

contingency gains on its financial statements until amounts are realized, or at least until 6

the Commission authorizes their recovery. ORA is concerned that Park’s premature 7

recording of its memorandum accounts on the balance sheet may require the Commission 8

to authorize recovery solely to avoid the implications of an asset write-down. In 9

D.05-07-045, Southern California Water Company ("SCWC") used the same accounting 10

treatment of its memorandum accounts regarding litigation costs. SCWC had booked its 11

litigation memorandum accounts on the balance sheet, citing that Statement of Financial 12

Accounting Standards (SFAS) No. 71161 allowed it to do so when costs had a high 13

probability for recovery. SCWC argued that if it could not recover the amounts recorded 14

on its balance sheet, the company would suffer undue financial hardship from the effects 15

of writing down the regulatory asset on the balance sheet. Financial hardships could 16

include cost of restating past financial statements, violation of loan terms, loss of credit 17

availability, loss of investors, and unfavorable financing rates. The Commission agreed 18

SCWC would suffer financial hardship and so the Commission reluctantly authorized 19

recovery.162 20

The Commission should not allow Park to create the same situation. The company 21

can choose its accounting methods. However, Park’s current practice permits Park to 22

recover its memorandum account balances, even if the Commission does not find those 23

amounts reasonable. The Commission should order Park to comply with SP U-27-W to 24

161 Statement of Financial Accounting Standards 71 is available at: https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220127481&acceptedDisclaimer=true 162 D.05-07-045 Sections 4.5 and 4.6.

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avoid recording memorandum accounts on the balance sheet until the Commission 1

approves those amounts for recovery. 2

Park Records Non-Recurring Memorandum Account Expenses as Operating Expenses 3

Used for Ratemaking 4

Park recorded all the costs associated with the WCMA as operating expenses in its 5

books of account. This means that, if Park recovers costs from its WCMA, it will also 6

recover them through future rates to the extent that the forecast that the Commission 7

adopts for ratemaking is based on the historical data that include WCMA costs. Park 8

claims that it excludes non-recurring expenses when preparing its GRC forecast, yet 9

includes the WCMA costs in its historical data.163 Park supports this practice by saying 10

that it is not aware of any Commission’s rules or practices mandating that costs trackable 11

in the memorandum accounts should not be used for forecasting expenses before the 12

Commission approves for recovery.164 WCMA costs to be non-recurring because 13

approval of the WCMA requires the extraordinary condition of a Governor-declared 14

drought. Park should, therefore, not include them in the five-year historical data used to 15

forecast the GRC Test Year expenses. To include them in the GRC forecast of Test Year 16

expenses and to also request their recovery through the Memorandum Account will result 17

in Park’s double recovery of unusual, non-recurring expenses. 18

3) Analysis and Recommendations on Balancing and 19 Memorandum Accounts in Park’s Application165 20

Balancing Accounts a)21 (i) Water Revenue Adjustment Mechanism/Modified 22

Production Cost Balancing Account (“WRAM/MCBA”) 23

163 Park’s 6/11/2018 Response to Data Request PWC-JJS-009 Balancing and Memorandum Accounts at pp. 2-3. 164 Ibid. 165 Unless noted otherwise, the source of these account descriptions is Park’s Exhibit B Revenue Requirement Report. As noted below, due to the uncertainty surrounding the ultimate disposition of most of these accounts, and pending Park’s reconciliation and finalization thereof, as noted herein, some of these accounts may be subject to further review.

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The Commission should approve Park’s request to continue its WRAM and 1

MCBA.166 The Commission should deny Park’s requests to temporarily lift the 10% cap 2

on WRAM recovery for current GRC cycle of 2019-2021 because the cap helps preserve 3

water affordability by limiting the magnitude of the WRAM surcharge. 4

The purpose of the WRAM is to remove the financial disincentives to water 5

conservation by decoupling water sales from revenues. Park's WRAM tracks the full 6

difference between actual and adopted commodity rate revenue, in conjunction with the 7

MCBA. 8

Park’s MCBA captures variations in production costs (purchased power, leased 9

water rights and pump tax or replenishment assessments) due to either changes in unit 10

price or changes in consumption. The MCBA serves to refund all production cost 11

savings due to lower than adopted sales, or whenever actual production costs are lower 12

than the forecasted costs included in rates, back to customers. The MCBA also passes 13

through to customers all increases in production costs, regardless of the reason for the 14

increases. 15

The Commission requires Park to annually file a report with the Water Division no 16

later than November 30th (for the nine months ending September 30th) to identify any 17

over-collections or under-collections in the combined WRAM/MCBA balancing 18

accounts. Park must then file by March 31st an advice letter to amortize the balance 19

accumulated during the previous calendar year. Pursuant to D.12-04-048, Park filed an 20

advice letter on April 2, 2018 to amortize the combined WRAM/MCBA balance recorded 21

in calendar year 2017 in the amount of $3,720,000, or 9.45% of Park’s revenues.167 ORA 22

reviewed and tested Park’s WRAM/MCBAs for the period of 2014-2017 and found 23

Park’s accounting of its WRAM surcharge revenue to be reasonable. 24

166 The Commission approved these decoupling mechanisms in D.08-02-036, and re-approved in D.09-12-001, D.13-09-005, and D.16-01-009. 167 Advice Letter 282. A part of the revenue increase requested in this advice letter includes residual WRAM balances from prior years, with the total amount capped at 10% of Park’s last total authorized revenue requirement. Accordingly, the 2015-2016 WRAM/MCBA balances shown in Table 13-1 are partially duplicative of Park’s 2017 WRAM balance.

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While D.12-04-048 authorizes Park to amortize its WRAM/MCBA account 1

balances annually, it changed the amortization period for the WRAM. The decision 2

implemented a cap on the combined WRAM/MCBA surcharges of 10% of the last 3

authorized revenue requirement. Park must defer recovery of the amount exceeding the 4

10% WRAM cap to a future date. 5

(ii) CARW Revenue Reallocation Balancing Account 6 (“CARW BA”) 7

Park requests that the Commission review its CARW BA for approval and 8

amortization through a surcharge to customers (excluding those customers enrolled in the 9

CARW program). The purpose of the CARW BA is to track the recorded discounts 10

provided through Schedule No. CARW and the recordable surcharge collected through 11

Schedule No. CARW-SC. The Commission authorized this account in D.06-10-036. 12

The recorded balance as of December 31, 2017 is an over-collection of $809,072.27. 13

Park requests the continuation of the CARW Revenue Reallocation Balancing Account 14

for this rate case cycle168 15

ORA reviewed and tested Park’s accounting of surcharges and surcredits in the 16

CARW BA and found no significant differences between expected and actual balances. 17

The Commission should adopt an updated monthly surcharge of $2.01, effective July 1, 18

2017, to adequately fund the program. This is a decrease from the current $6.14 19

surcharge. The recommended $2.01 surcharge includes the CARW BA’s current (as of 20

December 31, 2017) and anticipated over-collections through June 30, 2019. 21

This recommended surcharge does not consider changes in funding needs related 22

to changes in the revenue requirement of this GRC. Therefore, when the revenue 23

requirement resulting from this GRC is known, the Commission should adjust the CARW 24

surcredit (service charge reduction benefit) and surcharge to take into account changes in 25

the revenue requirement. 26

27

168 Park Exhibit B-Revenue Requirements Report at p. 142.

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(iii) Pension Expense Balancing Account (“PEBA”) 1 The Commission should approve Park’s request for authority to refund the over-2

collection balance of the PEBA through December 31, 2017 via a 12-month surcredit and 3

to continue this account. 4

Park requests that the Commission review its PEBA and approve a refund to 5

customers through a surcredit of the recorded over-collection December 31, 2017 balance 6

of $1,706,828.60. Park further requests the Commission authorize the continuation of the 7

PEBA to track differences between authorized pension contributions included in rates in 8

this proceeding and the costs actually incurred.169 Park justifies its request due to the 9

large size and volatility of the expense, and due to factors, that are outside of Park's 10

control, such as market performance of the Pension asset investments and the discount 11

rate used to calculate the Pension liability. Actual asset returns and discount factors that 12

deviate from what are assumed in the actuarial study result in gains and losses that are 13

factored into the next actuarial study. The balancing account helps ensure that both 14

customers and the utility are insulated from the impact of changing market conditions. 15

The PEBA calculates the difference between the Statement of Financial Accounting 16

Standards (SFAS) 87 expense, as determined by Park’s outside actuary, and the level of 17

Pension Expenses that the Commission approves for recovery in setting Park’s revenue 18

requirement and rates. 19

ORA has reviewed the calculations supporting the entries to this account and 20

verified compliance with available authorized and reported Pension Expense data. 21

(iv) Conservation Expense One-Way Balancing 22 Account (“CEOWBA”) 23

The CEOWBA tracks the difference between actual and authorized conservation 24

program expenses. The Commission authorized this account in D.16-01-009. 170 The 25

recorded balance as of December 31, 2017 is an over-collection of $304,299.47. The 26

169 Park Exhibit B-Revenue Requirements Report at p. 143. 170 Park Exhibit B-Revenue Requirements Report at p. 143.

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account is capped at approximately $1,317,409 (depending on escalation) and covers the 1

current three-year rate case cycle (2016-2018).171 At the end of the three-year rate cycle 2

(December 31, 2018), if the cumulative balance in the account is positive (meaning the 3

actual conservation expenses did not exceed the authorized conservation expenses), Park 4

would refund the net balance to its customers. Conversely, if the amount in the 5

cumulative balance is negative at the end of 2018, then that balance may not be recovered 6

from customers. 7

Park states that, because the CEOWBA covers the entire rate case cycle, an audit 8

of the account is premature. ORA agrees. ORA will conduct its audit of the account 9

after the completion of the 2016-2018 rate case cycle when Park files for resolution of the 10

account authorized for that period. Park anticipates that this will occur during the first 11

quarter of 2019. Thereafter, Park should close this account. 12

(v) Consolidated Expense Balancing Account 13 (“CEBA”) 14

The Commission should approve Park’s request to continue this account for the 15

purpose of aggregating and collecting residual balances resulting from other authorized 16

surcharges and surcredits. 17

Park requests that the Commission review its CEBA. The purpose of the CEBA is 18

to consolidate the amortization of Commission approved balancing account and 19

memorandum account balances for refund or recovery. This account is also needed to 20

accumulate residual balances that exist after Commission-approved surcharges or 21

surcredits expire. This account was approved for Park in Advice Letter 266-W-A, 22

effective May 25, 2016.172 Park shows an under-collection balance of $18,641.59 as of 23

December 31, 2017. 24

ORA recommends approving Park’s request to continue this account. However, 25

Park should seek recovery of a balance that is of sufficient magnitude to be recovered on 26

its own through a separate surcharge and should record its amortization and recovery in a 27 171 Ibid. 172 Park Exhibit B-Revenue Requirements Report at p. 144.

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discrete balancing account.173 In this case, Park should not consolidate its surcharge with 1

other surcharges. This is because General Order (G.O.) 96-B requires each charge on a 2

bill to be separately stated and supported by cost data.174 However, for practical reasons, 3

balances that are too small to be recovered on their own may be aggregated and 4

recovered by transferring them to the CEBA for amortization and recovery. 5

(vi) Recycled Water Incremental Cost Balancing 6 Account (“ICBA”) 7

Park requests that the Commission review its Recycled Water ICBA and 8

approve the residual balance recorded in the account. The purpose of the ICBA is to 9

track incremental changes to the production costs of purchased power and pump taxes 10

for the reclaimed water, which is not subject to the MCBA. The Commission 11

authorized this account for recovery in Advice Letter 230-W-A, effective May 1, 12

2012.175 The temporary surcharge authorized in this advice letter has expired and the 13

residual balance as of December 31, 2017 is an under-collection of $965.36. Park 14

requests that this balance be transferred to the CEBA. 15

ORA has reviewed Park’s calculations for this account and finds them to be 16

reasonable. The Commission should authorize recovery of the remaining balance of 17

$965.36. After transfer of this balance to the CEBA, Park should keep this account 18

open because it is needed to track the actual vs. authorized production costs of 19

Reclaimed Water, which is not subject to the WRAM/MCBA. 20

174 G.O. 96-B, Section 8.5.5, Tariff Contents - Rate Schedules, states the following: ““Each utility's tariffs shall set forth all of its rate schedules, including for each schedule the schedule number or other designation, the schedule title (e.g., general, residential, "life-line," low-income), the requirements to obtain service, the rates and charges (in tables if possible), and any special conditions, limitations, qualifications, or restrictions specific to the service or rates under the schedule. Amounts subject to refund, contingent charges, and offset surcharges are examples of such special conditions.” As such, a surcharge or surcredit is tied to a specific project, for a specific time period, and shall cease when the full amount is reimbursed. G.O. 96-B link: http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M023/K381/23381302.PDF. 175 Park Exhibit B-Revenue Requirements Report, at p. 144.

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Memorandum Accounts b)1 (i) Tangible Property Regulations Consequences 2

Memorandum Account (“TPRC MA”) 3 Park requests that the Commission approve its TPRC MA and allow it to refund 4

the balance to customers through a surcredit. This account covers the three-year rate 5

case cycle from 2016-2018. The recorded balance as of December 31, 2017 is an 6

over-collection of $374,410.40. The TPRC MA records the revenue requirement of 7

the tax effects resulting from implementing the Internal Revenue Service (“IRS”) 8

guidelines for the water industry which dictate which costs for maintaining, replacing, 9

or improving property may be expensed and which costs must be capitalized. The 10

guidelines are often referenced as the “Repair Regulations.” The Commission 11

authorized this account in Advice Letter No. 187-W-A, effective January 1, 2014.176 12

The memorandum account tracks permanent and flow-through tax effects on other tax 13

calculations resulting from implementing the Repair Regulations that may increase or 14

decrease Federal or State income taxes in years prior to 2016, including but not limited 15

to, changes to the Domestic Production Activities Deduction, CCFT, and audit defense 16

costs directly associated with the implementation of the Repair Regulations. 17

ORA reviewed the entries to this account and the method Park uses to calculate 18

the revenue requirements of the tax law changes and finds them to be reasonable. Park 19

will finalize its 2017 accounting entries after it files its 2017 income tax returns in 20

September 2018. 21

Effective January 1, 2018, the 2018 Tax Cuts and Jobs Act (“TCJA”) was 22

passed, which supplants the prior tax code. Park filed for a new memorandum account 23

to track the revenue requirement effects of the TCJA and will therefore, no longer use 24

this account. Accordingly, upon its final reconciliation of this account in 2018, Park 25

should file an advice letter for Commission approval to refund the final reconciled 26

176 Park Exhibit B-Revenue Requirements Report at pp. 144-145.

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balance. Upon approval, Park should transfer the balance to a balancing account for 1

refunding through a 12-month surcredit and close this memorandum account. 2

(ii) 2014 Water Conservation Memorandum Account 3 (“WCMA”) 4

Park requests that the Commission approve its 2014 WCMA and amortization 5

through a surcharge to customers. The balance recorded in this account through 6

December 31, 2017 is an under-collection of $106,414.16. The Commission 7

authorized this account in Resolution W-4976, effective February 27, 2014.177 The 8

2014 WCMA tracks the incremental expense incurred by Park to determine whether to 9

activate Rule 14.1 voluntary conservation, Schedule 14.1 mandatory rationing efforts, 10

and other activities associated with the Governor’s Drought Emergency Declaration 11

dated January 17, 2014 and Executive Order dated April 25, 2014, as well as other 12

drought procedures that the Commission orders for water conservation. 13

Park argues that, without significant increases in precipitation during the 14

upcoming winter and spring, the State will likely require and implement mandatory 15

rationing throughout California. Park requests Commission authorization to continue 16

this account. This memorandum account would track the costs associated with 17

mandatory rationing in the event it is required in Park’s service area. 18

ORA reviewed the expenses charged to this account and recommends that the 19

Commission approve them for recovery. With the Commission’s approval, Park 20

should transfer its balance to the CEBA, and should close the WCMA. Its initial 21

authorization was predicated on the Governor’s having declared a Drought State of 22

Emergency, a condition that that no longer exists. ORA will support Park’s request to 23

open a new WCMA in the event of a future declared drought emergency. In the 24

interim, the WCMA is not needed and Park should close it. 25

26


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(iii) 2013 Interim Rates Memorandum Account (“2013 1 IRMA”) 2

The Commission should approve Park’s request to recover the balance in the 3

2013 IRMA via a separate surcharge. 4

This memorandum account is composed of two components: the 2013 Cost of 5

Capital and the 2013 Interim Rates Memorandum Account. The Cost of Capital 6

Memorandum Account tracks the difference between the rates in effect at the start of 7

Test Year 2013 and the final water rates established by the Commission in D.13-05-8

027 in Park’s Test Year 2013 cost of capital proceeding. The Interim Rates 9

Memorandum Account tracks the difference between the rates established in the Test 10

Year 2013 cost of capital proceeding and the final water rates established by D.13-09-11

005 in Park’s Test Year 2013 general rate case proceeding. 12

The Commission approved Advice Letter 250-W, effective May 22, 2014, 13

authorizing a 19-month surcharge to recover the net balance recorded in these two 14

accounts.178 The surcharge expired and the residual balance as of December 31, 2017 15

is an under-collection of $327,347.51. Park proposes that the Commission authorize 16

the transfer of the residual balance to the CEBA for recovery and amortization through 17

a 12-month surcharge to customers and close this account. 18

ORA verified the balance in this account and recommends its approval for 19

recovery. However, Park should file for an explicit surcharge to recover this amount 20

and should not consolidate it into the CEBA because its balance of $327,347.51 is 21

large enough to be recovered on its own as a discrete surcharge. Accordingly, upon 22

Commission approval, Park should transfer the balance of this memorandum account 23

to a new balancing account and close the IRMA. Park should not use the 24

memorandum account to record recovery of surcharge revenue. Rather, Park should 25

use a balancing account to track recovery of surcharge revenue according to the 26

procedures required by SP U-27-W. 27

178 Park Exhibit B-Revenue Requirements Report, pp. 145-146.

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(iv) 2016 Interim Rates Memorandum Account (“2016 1 IRMA”) 2

The Commission should authorize Park to transfer the residual balance to the 3

CEBA and close the 2016 IRMA. 4

Park requests that the Commission review its 2016 IRMA for approval and 5

amortization through a 12-month surcharge to customers. The residual balance 6

recorded in this account as of December 31, 2017 is an under-collection of $14,886.24. 7

The purpose of the 2016 Interim Rates Memorandum Account is to track the 8

difference between the interim rates and the final rates that the Commission adopted in 9

D. 16-01-009 (A.15-01-001). The authority to establish this account was granted in 10

the Administrative Law Judge’s ruling dated October 27, 2015, in Application 15-01-11

001.179 The surcharge for this account expired on June 26, 2017, leaving a residual 12

balance of $14,886.24. 13

ORA examined this account and verified the reasonableness of Park’s 14

accounting of the surcharge revenue and interest expense accruals associated with this 15

memorandum account. According to the procedures described in SP U-27-W, Park 16

should not use the memorandum account to record recovery of surcharge revenue. 17

Park should use a balancing account to track recovery of surcharge revenue. 18

(v) School Lead Testing Memorandum Account 19 The Commission should approve Park’s request to keep the School Lead 20

Testing Memorandum Account open because it is needed to track the cost of a newly 21

mandated 2017 testing requirement. 22

The purpose of the School Lead Testing Memorandum Account is to track the 23

incremental expenses (not already reflected in authorized rates) for customer outreach, 24

and other incremental operations costs including, but not limited to Legal, Operations 25

and Maintenance, and Administrative and General expenses that are unforeseen, 26

unexpected, and directly associated with complying and implementing the School 27


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Lead Testing Program. The School Lead Testing Memorandum Account was 1

established pursuant to the Amendment to the Domestic Water Supply permits issued 2

by the State Water Resource Control Board’s Division of Drinking Water to Park on 3

January 17, 2017.180 There is currently no balance recorded in the account. Park 4

requests Commission authorization for this account to remain open. 5

CONCLUSION D.6 ORA recommends that the Commission adopt ORA’s recommendations regarding 7

Park’s balancing and memorandum accounts as described in this Chapter. 8


14-1

SPECIAL REQUESTS CHAPTER 14:1

INTRODUCTION A.2 This chapter addresses Park’s Special Requests included in its general rate case 3

(“GRC”) Application. 4

SUMMARY OF RECOMMENDATIONS B.5 The Commission should: 6

1. Deny Park’s request for a sales reconciliation mechanism (“SRM”) 7 because it is not in the public interest. Instead, the Commission should 8 observe Park’s Water Revenue Adjustment Mechanism (“WRAM”) 9 balance for a full three-year GRC cycle to determine whether 10 forecasting improvements result in the desired WRAM balance 11 reductions. 12 13

2. Deny Park’s request to suspend the 10% cap on the WRAM surcharge 14 recovery 15 16

3. Deny Park’s request for an Employee and Retiree Healthcare Balancing 17 Account (“HCBA”). The Commission should instead adopt ORA’s 18 reasonable estimate of Park’s Test Year Healthcare Expenses. 19 20

4. Authorize subsequent rate offsets in a final GRC decision (to the extent 21 they are reasonable), limited to those that the Commission can process 22 by the date of issuance of the final decision. 23

DISCUSSION C.24 1) Park’s request for an SRM 25

Summary of Recommendations a)26 The Commission should deny Park’s requests for an SRM because it is not in the 27

public interest. 28

Pros and Cons of a Sales Reconciliation Mechanism b)29 As Park points out in its testimony, in the case of an under collection of volumetric 30

revenue, an SRM offers Park the opportunity to collect its authorized revenues in more 31

timely by adjusting the sales forecast. A variance between actual and forecasted sales 32

that exceeds 5% triggers the SRM, allowing Park to adjust its adopted forecast in the next 33

14-2

attrition filing to reflect a sales level that more closely matches its recent historical sales. 1

Over time, this would help reduce Park’s WRAM balances by speeding up the collection 2

of revenue via rates that are higher than they would be in the absence of the SRM. ORA 3

opposes Park’s request for an SRM because an SRM will result in higher prices for 4

ratepayers. 5

The SRM tries to compensate for an inaccurate forecast by adjusting the forecast 6

for the observed error, resulting in a retrospective, patchwork approach to correcting 7

WRAM balances. The Commission has authorized the SRM for a limited number of 8

Commission-regulated utilities on a trial basis, subject to review of its effectiveness. The 9

Commission has also recently provided guidance that should result in more accurate 10

forecasts that will reduce WRAM balances.181 Before approving Park’s request for an 11

SRM, the Commission should first compare the results of the SRM trials to results using 12

forecasts consistent with the Commission’s recent guidance to determine which approach 13

is more effective at minimizing WRAM balances. 14

Rate changes that result from implementing an SRM exacerbate the demand 15

situations giving rise to the WRAM balances in the first place. Specifically, the SRM can 16

inflate WRAM balances by sending price signals that reduce demand in situations of 17

under-recovery and that increase demand in response to an over-recovery. The resulting 18

price changes intensify the suppression or stimulation of customer demand. Park’s 19

WRAM has consistently recorded significant under-recovery of volumetric revenue. 20

Therefore, the adoption of an SRM for Park will result in consistently higher prices for 21

ratepayers. 22

In the case of a revenue over-recovery, the SRM results in lower prices, 23

encouraging customers to use even more water, and further increasing the amount of the 24

WRAM credit balance owed as refunds to customers. The net result of these two factors 25

is a loss of economic efficiency as customers’ demand is artificially repressed or 26

stimulated through the operation of the SRM. The SRM intensifies the perverse 27 181 D.16-12-026.

14-3

reward/punishment effect of the WRAM itself, further penalizing customers for 1

conserving with immediately higher prices and rewarding customers for consuming more 2

than forecasted with an immediate price cut. 3

Although a utility may collect its full WRAM balance upon the Commission’s 4

approval, the WRAM recovery is capped at 10% of the utility’s last approved revenue 5

requirement, deferring recovery of the remaining balance to a future advice letter or GRC 6

request. Park requests that the Commission suspend this cap. As explained in the 7

Chapter 13, the Commission should deny Park’s request to suspend the 10% cap on the 8

WRAM recovery because the cap helps ensure affordable water rates. 9

Advances in Econometric Forecasting c)10 D.16-12-026 strongly criticizes the New Committee Method’s use of long term 11

data and concludes: “The New Committee Method’s use of the past 10 years of water 12

consumption as the basis to forecast future water sales is incongruous with conservation 13

goals adopted during the drought, and does not reflect the success and the hard work of 14

Californians to escalate conservation.”182 D.16-12-026 also notes that the New 15

Committee Method removes periods from historical data in which the state imposed sales 16

restrictions (e.g. rationing).183 17

Thus, in contrast to the data used by the New Committee Method, D.16-12-026 18

favors the use of more recent data that better reflects declining water usage level trends 19

observed in more recent years because of drought and conservation. ORA adapted its 20

own forecasting method to include the impact of more recent data that the New 21

Committee Method omits due to its use of longer study periods and its exclusion of usage 22

data from mandatory water rationing periods. 23

182 R. 11-11-008, 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, D.16-12-026, at p. 20. 183 Id., D.16-12-026, at p. 20.

14-4

ORA’s Proposed Alternative to an SRM: Improved Accuracy in d)1 Forecasting 2

The problem of excessive WRAM balances is best addressed at its root cause. 3

That is, by correcting the traditional errors that occur when parties rely on outdated 4

and/or obsolete data in their forecasts.184 Therefore, in lieu of adopting an SRM, the 5

Commission should wait until it evaluates the extent to which improved forecasting 6

methods, as suggested in D.16-12-026, reduce WRAM balances. The Commission 7

should monitor WRAM balances for at least one three-year GRC cycle. The Commission 8

should then evaluate the effectiveness of improved forecasting methods in reducing 9

WRAM balances compared to the SRM. 10

Conclusion e)11 The Commission should deny Park’s proposed SRM. The Commission should 12

instead adopt a forecast in this GRC that sets rates reflecting the Commission’s 13

preference for data that reflects more recent consumption trends as expressed in 14

D.16-12-026. Rather than using the reverse patchwork of the SRM, ORA believes that 15

focusing on adopting more accurate forecasts will most effectively address the problem 16

of excessively large WRAM balances at its source. 17

The Commission should monitor Park’s WRAM balances over the next three 18

years and evaluate in Park’s next GRC the extent to which the Commission’s improved 19

forecasting methods have reduced or eliminated these balances. The Commission can 20

then compare these results to those of the utilities for which it has authorized the SRM 21

mechanism to determine which method is preferable. It is likely the Commission will 22

find that improved forecasting provides greater benefits than the SRM because it corrects 23

the problem at its source rather than using the reverse patchwork approach of the SRM, 24

which can aggravate the problem. 25

184 Traditionally, the Commission has not considered the effects of price elasticity on water consumption in its forecasts. Including data from periods of drought will help to compensate for this omission but this approach may overstate the effects of drought and conservation if customers significantly respond to increasing water supplies and price decreases with elasticity-driven demand increases. Additionally, improving economic conditions can stimulate consumption.

14-5

2) Park’s Request for a Healthcare Balancing Account 1 (“HCBA”) 2

Introduction a)3

Park requests that the Commission authorize a new Employee and Retiree HCBA. 4

Summary of Recommendations b)5 The Commission should deny Park’s request for an HCBA. The Commission 6

should adopt ORA’s reasonable estimate of Park’s Test Year Healthcare Expenses. 7

Discussion c)8 Park requests that the Commission authorize a new HCBA to track the difference 9

between authorized and actual employee and retiree healthcare expense included in rates. 10

Park argues that the magnitude and volatility of the expense are impacted by 11

circumstances outside of its control.185 12

ORA disagrees with Park’s assertion that health care expenses are beyond Park’s 13

control. Park can significantly influence the magnitude of these expenses by prudently 14

selecting and managing its health care plans. Additionally, Park’s health care expenses 15

are directly affected by the amount of employee cost sharing that management achieves 16

through negotiation of health benefits with its employees, and Park’s prudent purchase of 17

the most economical plans. 18

Cost Control Incentives d)19 Under the Commission’s traditional forward-looking ratemaking method, after the 20

Commission adopts a reasonable estimate of a utility’s Health Care Expenses, the utility 21

has an incentive to manage expenses in the most economical manner. This is so because, 22

if the utility spends more than its authorized amount, it will suffer a loss since rates are 23

only designed to generate sufficient revenue to recover the utility’s approved amounts of 24

revenue requirements. On the other hand, if a utility has an HCBA, it will have less of an 25

incentive to control expenses because it is aware that the level of spending will be 26

ultimately borne by ratepayers. 27

185 Park Application at p. 11.

14-6

At the outset of the Affordable Care Act (ACA) there was uncertainty about the 1

financial impact that the new health care law would have on Health Care Expenses. 2

However, more than eight years have passed since enactment of the ACA186 and its 3

effects are now well known. Accordingly, the Commission can reasonably estimate 4

Park’s Health Care Expenses. Therefore, the Commission should deny Park’s request for 5

an HCBA. 6

Conclusion e)7 More than eight years have passed since enactment of the ACA, which has been 8

sufficient time to give Park adequate experience under the new law to know its financial 9

impacts. ORA’s estimate of Health Care Expenses is reasonable and the Commission 10

should adopt it. If the Commission adopts ORA’s reasonable estimate for Health Care 11

Expenses, Park will have an incentive and fair opportunity to recover its reasonable 12

health care costs and will not need an HCBA. The Commission’s traditional ratemaking 13

regime will give Park better incentives to control its Health Care Expenses than it will 14

have if the Commission grants Park’s request for a new HCBA. Accordingly, the 15

Commission should deny Park’s request for an HCBA. 16

3) Request to Include Subsequent Offsets in the Final GRC 17 Decision 18

Introduction a)19 Park requests permission to recognize any subsequent offsets prior to the issuance 20

of a final decision in this GRC.187 21

Summary of Recommendations b)22 The Commission should approve Park’s request, to the extent the requested offsets 23

are reasonable. However, the Commission should limit the offsets to those that it can 24

process by the date it issues a final decision in this proceeding. 25

186 The Patient Protection and Affordable Care Act was signed into law by President Obama on March 23, 2010. It is more commonly known as the Affordable Care Act (or ACA). 187 Park Application at pp. 13-14.

14-7

Discussion c)1 Park explains that a final decision in this proceeding should reflect the change in 2

revenue requirement caused by any expense offset advice letters because offsettable 3

expense price changes are not forecast in a GRC. According to Park, this proposal would 4

alleviate potential customer confusion from repeated customer notices and would reduce 5

workload for Commission and Park staff who would otherwise have to file and process 6

multiple advice letter filings to implement the expense offset increases. 7

Conclusion d)8 The Commission should approve Park’s request to include in this GRC any offsets 9

occurring prior to the issuance of a final decision, to the extent the requested offsets are 10

reasonable. The Commission should limit the offsets to those that it can process by the 11

date it issues a final decision in this proceeding. 12

CONCLUSION D.13 ORA recommends that the Commission adopt ORA’s recommendations regarding 14

Park’s Special Requests as described in this Chapter. 15

15-1

CUSTOMER SERVICES CHAPTER 15:1

INTRODUCTION A.2 This chapter presents ORA’s analysis and recommendations regarding Park’s 3

customer service. 4

SUMMARY OF RECOMMENDATIONS B.5 ORA reviewed Park’s GRC application and responses to data requests, as well as 6

data obtained on customer contacts from the Commission’s Consumer Affairs Branch 7

(“CAB”) to evaluate Park’s customer service. Based on this review, the Commission 8

should find Park’s customer service efforts to be satisfactory. 9

DISCUSSION C.10 1) Customer Contacts Received by CAB 11

Customer Contact by Type a)12 CAB is responsible for assisting consumers in answering questions and informally 13

resolving disputes with their utility providers.188 ORA examined CAB’s data on 14

customer contacts that it received from Park customers for the past five years (2013-15

2017). CAB categorizes customer contacts into the following types.189 16

1) Complaints - Denote written consumer contacts in which the 17 consumer is protesting or expressing dissatisfaction with an action or 18 practice of the CPUC [California Public Utilities Commission], or a 19 regulated or non-regulated utility. These include issues that may be 20 outside the purview of CAB to investigate or outside the regulatory 21 authority of the Commission. These issues are not forwarded to the 22 utility company for resolution but handled as a referral to the 23 appropriate utility, CPUC division, entity, or closed outright with the 24 appropriate letter of explanation. 25

188 CPUC website, Consumer Affairs Branch. Consumer Contacts Statistics. (http://www.cpuc.ca.gov/ccd/. Date accessed: June 6, 2018). 189 CPUC website, Consumer Service and Information Division RESOLUTION CSID-003, Consumer Affairs Branch December 16, 2010. (http://docs.cpuc.ca.gov/published/final_resolution/128758.htm. Date accessed: June 6, 2018).

http://www.cpuc.ca.gov/ccd/

http://docs.cpuc.ca.gov/published/final_resolution/128758.htm

15-2

2) Informal Complaints - Denote written consumer contacts expressing 1 dissatisfaction with, or a dispute with a utility regarding issues 2 within the regulatory authority of the CPUC. These issues are 3 forwarded to the utility company for investigation and response. 4

3) Impound - Impounds are a type of informal complaint sent to the 5 utility for resolution. The disputed charges are held in trust with the 6 Commission’s Fiscal Office pending case resolution. Depending on 7 the outcome, the money may then be distributed to the utility, to the 8 consumer, or a portion to each as the result of a compromise. 9

4) Phone Contacts - Denote all consumer calls in reference to concerns, 10 questions, and complaints related to utility companies. These 11 contacts are no longer coded as complaints, inquiries, etc. 12

5) Inquiries - Denote written consumer contacts requesting facts and 13 information for a situation. 14

Table 15-1 below summarizes the types of contacts CAB received from Park 15

customers from 2013 through 2017. 16

Table 15-1 Contacts Received by CAB from Park Customers190 17

Contact Type 2013 2014 2015 2016 2017 Complaint 28 3 1 2 2 Informal Complaint 7 19 15 17 6 Impound 1 3 1 1 2 Phone Contact 11 36 80 39 17 Inquiry 7 0 0 0 0 Total contacts 54 61 97 59 27

2) General Order 103-A (“GO”) Compliance 18 Customer Complaints Received by Park a)19

GO 103-A outlines performance standards for Class A and B utilities on customer 20

and regulatory complaints. GO 103-A, Appendix E, Section 5 – Response to Customer 21

and Regulatory Complaints Performance Standard states: 22

Rate of complaints to CAB: Percentage of customers who file 23 complaints with the Commission’s CAB. Performance shall be 24 calculated as follows: 25

190 CAB Data from Excel spreadsheet in January 15, 2018 Email from Alan F Reynolds of the Consumer Affairs Branch to Kyle Graff of ORA.

15-3

Number of complaints reported annually to the utility by the 1 CAB/Total number of customers. 2 Performance measure: less than or equal to 0.1%. 3 Source of data: Data shall be obtained from the quarterly reports 4 provided by the Commission to the utility from the Commission’s 5 Consumer Affairs Tracking System. Results shall be reported to the 6 second decimal place. 7 For complaints requiring utility investigation and response through the resolution 8

process, CAB sends regulated utilities a subset of the complaints found in Table 15-1. 9

Under GO 103-A, Park’s compliance is evaluated using only the contacts that Park was 10

made aware of by CAB. ORA evaluated Park’s GO 103-A compliance and the results are 11

summarized in Table 15-2 below. 12

Table 15-2 Park’s GO 103-A Customer Service Performance 13

2013 2014 2015 2016 2017 No. of Complaints

Reported to Utility191 8 20 15 14 10

No. of Customers192 27,235 27,287 27,309 27,339 27,402

No. Complaints as % of No. Customers 0.03% 0.09% 0.05% 0.05% 0.04%

GO 103-A Standard (<0.1%) Compliant Compliant Compliant Compliant Compliant

The complaints from Table 15-2 above are broken down by type in Table 15-3 14

below. Most of the complaints were regarding high bills and water rates. 15

16

191 Response to ORA’s data request KGF-003 (Customer Service, Park), Question 1.b. 192 Exhibit F – Minimum Data Requirements, Basic Information. Page CB – II.A. Basic Info 19.

15-4

Table 15-3 No. of Customer Complaints Received by Park193 1

2

3

3) Other GO 103-A Standards 4 Park provided data on the other standards it must meet under Appendix E of GO 5

103-A relating to customer service and reporting. These standards include telephone, 6

billing, meter reading, and work completion performance standards. In the second and 7

fourth quarters of 2017, Park’s “Customer Requested Work Completion Performance 8

measure” was slightly over the 5% standard.194,195 The standard is defined as the 9

“number of customer orders not completed on or before the scheduled date/total number 10

of customer orders scheduled and completed in the reporting month.”196 Park states the 11

increase to above 5% was due to staffing changes in operations. In the first quarter of 12

2018, Park improved this performance measure to below 5% and is now compliant with 13

GO 103-A. From 2013 to 2017, Park met all other performance measures including 14

telephone, billing, meter reading, and work completion performance standards of 15

Appendix E of GO 103-A.197 16

4) Customer Complaints Sent Directly to Park by its 17 Customers 18

Park also receives complaints directly from its customers regarding various water 19

quality issues. A summary of these complaints can be seen below in Table 15-4. Data in 20

the table represents complaints from all three water systems within Park’s service area. 21

Most of the complaints concerned water taste, odor, or color. 22

193 Response to ORA’s data request KGF-003 (Customer Service, Park), Question 1.b. 194 General Order 103-A, Appendix E, Section 4(B), Page 4. 195 Park’s Response to Data Request KGF-003 (Customer Service, Park), Question 2. 196 General Order 103-A, Appendix E, Section 4(B), Page 4. 197 Response to Data Request KGF-003 (Customer Service, Park), Question 2.

Complaint Type 2013 2014 2015 2016 2017 High Bill 5 10 11 6 6 Water Rates 0 7 3 5 2 Others 3 3 1 3 2 Total 8 20 15 14 10

15-5

Table 15-4 Customer Complaints Sent Directly to Park198 1

COMPLAINT TYPE 2013 2014 2015 2016 2017 Taste and Odor 11 13 12 15 4

Color 7 2 11 27 5 Turbidity 3 2 2 6 3

Visible Organisms 0 0 2 3 1 Illnesses (Waterborne) 0 0 1 0 0

Other 0 1 4 3 0 Total 21 18 32 54 13

2

5) Measures to Reduce Customer Complaints 3 In the last three years, Park has implemented several measures to try to inform 4

and educate their customers, including: 5

IVR Arrangements – Park has enhanced their Interactive Voice 6 Response (“IVR”) phone system to now offer payment 7 arrangements without having to request it through a customer 8 service representative. 9

Park offers customers many convenient options to pay their bills. 10 Credit cards/Electric checks, through a Third Party Vendor, are 11 accepted through the IVR phone system and through park’s website. 12 They utilize a Third Party Vendor, Pay Near Me, to allow customers 13 to pay their bills in cash at any 7-Eleven store. Park also offers 14 Easy Pay for customers who’d like the option of having their 15 payments drawn automatically from their checking accounts. 16

Park offers payment extensions for their customers experiencing 17 financial hardship. 18

Conservation Efforts – Park has increased their conservation efforts 19 by offering many different programs. They offer a home water 20 audit to help residents take steps to reduce their water consumption. 21 This year Park held their annual conservation event. They invited 22 members of the community to tour their Conservation Garden and 23 become better educated about the need to conserve water, as well as 24 steps they can take at their own homes. 25

198 Park’s response to Data Request KGF-003 (Customer Service, Park), Question 3a.

15-6

Park offers its customers the opportunity to use the DropCounter 1 App, free of charge and available on both their Smart Phones and 2 computers, so that they are able to monitor their water usage. The 3 app also gives tips and other information about Conservation. 4

If any of Park’s residential customers encounter a leak on their 5 property, we will offer a courtesy leak adjustment once the 6 customer provides us with the proof that the repairs have been 7 made. 8

Web Site – Park’s website is available to provide customer account 9 information as well as information about the company. Park 10 continually take steps to improve their website to provide their 11 customers with the most current and important information. 12

New Customer Welcome Brochure – Park has updated customer 13 information brochures that they give to each new customer. The 14 brochure gives new customers information regarding their water 15 service and other information about the company.199 16

6) Safety 17 Under the Public Health Security and Bioterrorism Preparedness and Response 18

Act of 2002, community water systems serving more than 3,300 people must complete 19

an Environmental Protection Agency Vulnerability Assessment.200 Park complied with 20

this requirement in 2004 and included a certification of completion of this assessment 21

for each of its three water systems.201 The vulnerability assessment addresses the 22

following components of the water systems: 23

1. Pipes and constructed conveyances; 24 2. Physical barriers; 25 3. Treatment; 26 4. Storage; 27 5. Distribution facilities; 28

199 Minimum Data Requirements. Service Quality. H-2. 200 Public Health Security and Bioterrorism Preparedness Act of 2002, page 683 (https://www.gpo.gov/fdsys/pkg/PLAW-107publ188/pdf/PLAW-107publ188.pdf. Date accessed: June 6, 2018). 201 Park Exhibit F - Minimum Data Requirements. Vulnerability Assessment Certifications. MDR E-17.

https://www.gpo.gov/fdsys/pkg/PLAW-107publ188/pdf/PLAW-107publ188.pdf

15-7

6. Electronic, computer, or other automated system which are 1 utilized by the public water system; 2

7. The use, storage, or handling of various chemicals; and 3 8. The operation and maintenance of such system. 4 ORA also reviewed Park’s Emergency Response Plan (“Plan”) that Park prepared 5

to assist its employees with specific guidelines and instructions for responding to 6

emergency situations resulting from natural disasters, technological incidents, and 7

national security emergencies affecting Park’s facilities and its water distribution service 8

area. This Plan establishes the emergency organization, assigns general procedures, and 9

provides for coordination of planning efforts of the emergency staff and service elements 10

utilizing the Standardized Emergency Management System.202 Park’s most significant 11

hazards are earthquakes, fire/arson, and short-term power failure.203 12

CONCLUSION D.13 The Commission should find Park’s customer service to be satisfactory and in 14

compliance with the requirements of GO 103-A. 15

202 Emergency Response Plan – Liberty Utilities (Park Water Corp.) June 2014 at p. 1. 203 Emergency Response Plan – Liberty Utilities (Park Water Corp.) June 2014 at p. 3-1.

16-1

WATER QUALITY CHAPTER 16:1

INTRODUCTION A.2 This chapter presents ORA’s analysis and recommendations on Park’s water 3

quality. 4

SUMMARY OF RECOMMENDATIONS B.5 The Commission should find Park in compliance with all applicable state and 6

federal water quality standards. 7

DISCUSSION C.8 1) Service Area Operations 9

Water System Description a)10 Park operates its water systems under permits from the Division of Drinking 11

Water (“DDW”) of the California State Water Resources Control Board (“Water Board”). 12

DDW regulates California’s public drinking water systems and oversees a variety of 13

drinking water-related activities. Park’s service area is divided into three separate water 14

systems in southeast Los Angeles County, listed in Table 16-1 below. These systems are 15

designated as the Compton/Willowbrook (Compton West) Water System, the Lynwood 16

(Compton East) Water System, and the Bellflower/Norwalk Water System. Park served 17

126,637 people in 2015.204 18

19

204 Liberty Utilities (Park Water) Corp. 2015 Urban Water Management Plan. October 19, 2017. Page 17.

16-2

Table 16-1 Park’s Water Systems and Water Supply205 1

Water Supply b)2 In 2016, the Compton West Water System obtained 53% of its source water from 3

the Metropolitan Water District of Southern California (“MWD”) and obtained the other 4

47% from wells that pump groundwater from the Central Basin Aquifer.206 The MWD is 5

a consortium of 26 cities and water districts that provides drinking water to nearly 19 6

million people in parts of Los Angeles, Orange, San Diego, Riverside, San Bernardino, 7

and Ventura counties. The MWD currently delivers an average of 1.7 billion gallons of 8

water per day to a 5,200-square mile service area.207 The MWD imports water from the 9

Colorado River Aqueduct and from the Sacramento – San Joaquin Delta by way of the 10

State Water Project.208 11

The Compton East Water System obtained 70% of its source water from the 12

MWD and 30% from wells that pump groundwater wells from the Central Basin 13

Aquifer.209 14

The Bellflower/Norwalk System obtained 54% of its source water from the MWD. 15

An additional 42% came from wells that pump groundwater from the Central Basin 16 205 Liberty Utilities (Park Water) Corp. 2015 Urban Water Management Plan. October 19, 2017. Pages 10, 42. Units are in acre feet. The data is given for the year 2015. 206 Compton/Willowbrook 2015/2016 Consumer Confidence Report and Annual Water Quality Report. Park Exhibit F – Minimum Data Requirements G-4. Page 2. 207 Compton/Willowbrook 2015/2016 Consumer Confidence Report and Annual Water Quality Report. Park Exhibit F - MDR G-4. Page 2. 208 Compton/Willowbrook 2015/2016 Consumer Confidence Report and Annual Water Quality Report. Park Exhibit F - MDR G-4. Page 2. 209 Lynwood/Rancho Dominguez 2015/2016 Consumer Confidence Report and Annual Water Quality Report. MDR G-4. Page 2.

Water System Number of Connections

Groundwater Production (Acre Feet)

Purchased Water

(Acre Feet)

Recycled Water (Acre Feet)

Volume of Water

Supplied (Acre Feet)

Compton West 6,930

3,520

6,059

208

2,073 Compton East 4,483 1,582

Bellflower/Norwalk 17,384 6,132 Total 28,797 9,787

16-3

Aquifer. The remaining 4% was comprised of recycled water that Park distributes to 1

large irrigation customers like CALTRANS, public schools, parks, golf courses, and 2

nurseries.210 3

Water Treatment c)4

Park describes its water treatment as follows: 5

In all service areas, chlorine is added to all well water. On-site 6 sodium hypochlorite generation systems are installed at active wells. 7 Calcium hypochlorite powder chlorination systems are used on the 8 stand-by wells. At Well 19-C, a chloramines disinfection system is 9 used. A Proposition 50 funded arsenic and manganese treatment 10 plant was installed at Well 9D. In addition, Park adds fluoride at 11 active groundwater wells.211 12

2) DDW Drinking Water Enforcement Actions 13 Park’s response to Minimum Data Requirements (“MDR”) Item G.5 indicates that 14

it has received no water quality citations from DDW since 2014.212 The Water Board’s 15

Drinking Water Enforcement Actions database confirms Park’s claim as it does not show 16

any recorded citations for Park’s water system since 2014.213 The CA Drinking Water 17

Watch also shows no violations or Enforcement Actions.214 18

3) Water Quality Reports 19 DDW Sanitary Survey Report a)20

ORA reviewed the most recent DDW Sanitary Survey Reports for each of Park’s 21

three water systems. The reports evaluate eight major elements of each water system, 22

including 1) source of supply, 2) treatment facilities, 3) distribution system, 4) finished 23

210 Bellflower/Norwalk 2015/2016 Consumer Confidence Report and Annual Water Quality Report. MDR G-4. Page 2. 211 Liberty Park Water Revenue Requirements Report, Test Year 2019. Water Treatment, page 11. 212 Park Exhibit F – Minimum Data Requirements. Questions G.1 - G.3. 213 State Water Resources Control Board. Drinking Water Enforcement Actions. (https://www.waterboards.ca.gov/drinking_water/programs/DWPEnforcementActions.shtml. Date Accessed: June 6, 2018). 214 CA Drinking Water Watch. Violations/Enforcement Actions. (https://sdwis.waterboards.ca.gov/PDWW/JSP/Violations.jsp?tinwsys_is_number=3289&tinwsys_st_code=CA. Date Accessed: June 6, 2018).

https://www.waterboards.ca.gov/drinking_water/programs/DWPEnforcementActions.shtml

https://sdwis.waterboards.ca.gov/PDWW/JSP/Violations.jsp?tinwsys_is_number=3289&tinwsys_st_code=CA

https://sdwis.waterboards.ca.gov/PDWW/JSP/Violations.jsp?tinwsys_is_number=3289&tinwsys_st_code=CA

16-4

water storage, 5) pumps, pump facilities, and controls, 6) monitoring, reporting, and data 1

verification, 7) system management and operation, and 8) operator compliance with state 2

requirements.215 The DDW Sanitary Survey Reports found that all three water systems 3

are well operated and maintained by qualified and professional staff.216 4

The Sanitary Survey Reports mention various deficiencies of the water system that 5

Park should fix or improve. Deficiencies noted by DDW include upgrading undersized 6

mains (less than 4 inches), repairing a leak from a sample tap, and water quality 7

monitoring deficiencies. In all three water systems’ reports, DDW noted a common 8

deficiency related to system flushing. The reports state that Park’s systems are flushed 9

on an “as needed” basis. For example, the Lynwood system did not flush dead ends in 10

2010, 2011, and 2013.217 The reports state that not flushing regularly could lead to aged 11

water, bacteriological regrowth, and buildup of biofilm and sediments. The DDW reports 12

recommend that Park flush dead ends annually, at a minimum, and that it establish a long 13

term plan to reduce the number of dead ends in the water systems.218 14

Consumer Confidence Reports (CCR) b)15 As required by the California Health and Safety Code §116470, every public water 16

system should annually prepare a CCR and mail or deliver a copy of the report to each 17

customer.219 The CCR is based on data collected during, or prior to, the previous 18

calendar year. The report includes information on source water, levels of any detected 19

contaminants, compliance with drinking water regulations, and other educational 20

215 State Water Resources Control Board. The California Water Boards' Annual Performance Report - Fiscal Year 2014-15. Glossary. (https://www.waterboards.ca.gov/about_us/performance_report_1415/regulate/25111_ddw_comm_inspections.shtml. Date Accessed: June 6, 2018). 216 2015 Sanitary Survey of Bellflower/Norwalk, Page 18; 2015 Sanitary Survey of Lynwood, Page 23; and 2014 Sanitary Survey of Compton/Willowbrook, Page 19. 217 Lynwood DDW Report, May 9, 2014, page 2. 218 2015 Sanitary Survey of Bellflower/Norwalk, Page 18; 2015 Sanitary Survey of Lynwood, Page 23; and 2014 Sanitary Survey of Compton/Willowbrook, Page 19. 219 State Water Resources Control Board, Consumer Confidence Reports (CCRs). (https://www.waterboards.ca.gov/drinking_water/certlic/drinkingwater/CCR.shtml. Date Accessed: June 6, 2018).

https://www.waterboards.ca.gov/about_us/performance_report_1415/regulate/25111_ddw_comm_inspections.shtml

https://www.waterboards.ca.gov/about_us/performance_report_1415/regulate/25111_ddw_comm_inspections.shtml

https://www.waterboards.ca.gov/drinking_water/certlic/drinkingwater/CCR.shtml

16-5

information.220 The CCR is also known as the Annual Drinking Water Quality Report.221 1

In the 2014-2017 CCRs for each of Park’s three water systems, Park stated that the 2

drinking water was in full compliance with all applicable state and federal drinking water 3

regulations in the previous year.222 4

(i) 1,4 Dioxane 5

Park has sampled all of its wells for 1,4-Dioxane.223 Although it is not a regulated 6

contaminant, the Water Board had set a notification level (“NL”) of 3 parts per billion 7

(“ppb”), reducing this value to 1 ppb in 2010. Park states that there are currently four 8

wells in the Bellflower/Norwalk system and one well in the Lynwood with levels higher 9

than the NL. However, the Water Board does not recommend taking these wells out of 10

service until they exceed the response level, which is 35 ppb.224 Park has monitored for 11

this chemical, finding steady levels ranging from non-detect to 4.1 ppb.225 12

4) Future Water Quality Regulations 13 In its response to MDR Item G.8, Park discussed several issues that may arise 14

within the next five years and their potential impact on Park’s operations. 15

1,2,3-Trichloropropane a)16 In 2017, the Water Board finalized the MCL for 1,2,3-trichloropropane at 5 parts 17

per trillion (“ppt”). Park has been monitoring this constituent as part of the annual 18

Volatile Organic Compounds (“VOCs”) monitoring. Park states there is no detection in 19

active wells and that the regulation will have little impact on operations.226 20

220 Ibid. 221 Park Exhibit F - Minimum Data Requirements. MDR G-4 Consumer Confidence Reports from 2014 to 2017. MDR G-4. 222 Ibid. 223 2014-2017 Consumer Confidence Reports for all three Park water systems. MDR G-4. 224 1,4-Dioxane, SWRCB, DDW, (https://www.waterboards.ca.gov/drinking_water/certlic/drinkingwater/14-Dioxane.html. Date Accessed: June 6, 2018). 225 2014-2017 Consumer Confidence Reports for all three Park water systems. MDR G-4. 226 Liberty Park Water – Revenue Requirements Report, Test year 2019. Page 137.

https://www.waterboards.ca.gov/drinking_water/certlic/drinkingwater/14-Dioxane.html

16-6

Perchlorate b)1 California’s Environmental Protection Agency Office of Environmental Health 2

Hazard Assessment has published a new Public Health Goal for perchlorate in 2015, 3

lowering the level from 6 ppb to 1 ppb. Park states that there are currently no wells with 4

perchlorate levels above 1 ppb and that the regulation will have little effect on 5

operations.227 6

VOCs c)7 Liberty Utilities vulnerability assessment requires the groundwater sources be 8

tested for VOCs on an annual basis. Testing in 2016 showed detection of 1,1-9

dichloroethylene at well 46C.228 At the current level of 0.6 - 0.7 ppb, it is well below the 10

MCL of 6 ppb. New DDW regulations require Park to conduct sampling on a quarterly 11

basis, rather than on an annual basis.229 12

CONCLUSION D.13 ORA reviewed Park’s MDR responses, DDW Sanitary Survey Reports, CCRs, 14

and the Water Board’s databases, and concluded that Park’s three water systems meet all 15

the applicable state and federal water quality standards. 16

17

227 Liberty Park Water – Revenue Requirements Report, Test year 2019. Page 137. 228 Liberty Park Water – Revenue Requirements Report, Test year 2019. Page 139. 229 Liberty Park Water – Revenue Requirements Report, Test year 2019. Page 139.

17-7

RATE DESIGN CHAPTER 17:1

INTRODUCTION A.2 This chapter presents ORA’s analysis and recommendations on Park’s proposed 3

rate design. This includes Park’s request to maintain its conservation rate design 4

program. Additionally, the company requests updating the breakpoint delineation 5

between Tier 1 and Tier 2 for residential metered service. The monthly breakpoint 6

currently stands at 9 hundred cubic feet (“Ccf”), and Park requests to lower the 7

breakpoint to 8 Ccf to reflect current consumption levels. 8

Park currently provides service under the following tariff schedules: 9

Schedule No. Name 10 PR-1-R Residential Metered Service 11

PR-1-NR Nonresidential Metered Service 12

PR-4F Non-Metered Fire Sprinkler Service 13

PR-5 Fire-Flow Testing Charge 14

PR-6 Reclaimed Water Service 15

PR-9CM Construction and Other Temporary Meter Service 16

LC Late Payment Charge 17

UF Public Utilities Commission Reimbursement Fee 18

CARW California Alternative Rates for Water 19

CARW-SC California Alternative Rates for Water Surcharge 20

SUMMARY OF RECOMMENDATIONS B.21 For the residential tariff, ORA agrees that the current conservation rate design in 22

place achieves the State’s conservation goals. ORA recommends that Park continue to 23

use this rate design. Additionally, ORA agrees with Park’s requests to lower the monthly 24

breakpoint between Tier 1 and Tier 2 from 9 Ccf to 8 Ccf. 25

17-8

For the non-residential tariff, Park contends that an increasing block rate design 1

would not send appropriate price signals to customers due to variations in usage. 2

Therefore, Park requests to continue its use of a single quantity rate design. ORA agrees 3

with Park’s proposal. 4

DISCUSSION C.5 1) Residential Customers 6 Park currently provides water service under the residential customer tariff using an 7

increasing block rate design. This design includes two blocks, or tiers, to promote 8

conservation. Specifically, Park sets the two tiers based on seasonal consumption 9

patterns. The Tier 1 rate block is based on the approximate winter usage. This winter 10

consumption level approximates the average indoor use. The Tier 2 block rate includes 11

all consumption above this level. Currently, the two tiers are set with a price differential 12

of 15%. These two tiers comprise the quantity charge that is set such that it amounts to 13

75% of the revenue for each bill. The company asserts that this rate design methodology 14

adequately promotes conservation measures. 15

Park’s proposed rate design is the same conservation rate design contained in the 16

Settlement Agreement between Liberty Park Water and ORA (then DRA) dated June 15, 17

2007 filed in the Conservation OII (I.07-01-022) and authorized by the Commission in 18

D.08-02-036 dated February 28, 2008 and again in Liberty Park Water’s prior general 19

rate case (“GRC”) by D.16-01-009. Park requests that the general rate design 20

methodology remain the same, but requests to update the numerical tier breakpoint using 21

the recorded 2016 data. As a result of the 2016 bill tabulation analysis, Park requests to 22

update the Tier 1 breakpoint from the adopted 9 Ccf per month to the proposed 23

breakpoint of 8 Ccf per month. 24

ORA agrees that the consumption levels have decreased and, as a result, it is 25

necessary to modify the tier breakpoints to reflect this change. Therefore, ORA 26

recommends that the Commission approve Park’s Tier 1 proposal to lower the breakpoint 27

from 9 Ccf to 8 Ccf per month. 28

17-9

2) Non-Residential Rate Design 1 Park proposes retaining a single quantity rate for non-residential customers in its 2

service areas. It does not propose developing increasing block rates because that would 3

likely require reclassification of their customers based on customer and consumption data 4

that is not available at this time.230 Park would need to reclassify customers because 5

there is significant variation of usage within these customer classes and therefore, 6

consumption data must be used to develop classifications to send appropriate price 7

signals without penalizing inelastic use. Park further states that non-residential customers 8

are responding to the conservation signals implemented in D.16-01-009 and sent by the 9

current rate design as evidenced by the declining trend in commercial water usage. 10

After evaluating the total consumption for this customer class, ORA agrees that 11

this rate design methodology has demonstrated a conservation effect. ORA does not 12

contest Park’s rate design methodology for the non-residential customer class. 13

3) Other Rates and Fees 14

Park determines the reclaimed water tariff by calculating the differential between 15

the Metropolitan Water District treated water and the Central Basin Municipal Water 16

District recycled water rates. In effect, this results in the same rate design methodology 17

as the non-residential tariff, but the savings between the two water classifications are 18

passed onto ratepayers. Also, Park proposes to increase the rate for the Schedule No. 4, 19

Fire Service by the percent increase requested in this GRC. ORA does not contest either 20

the reclaimed water tariff nor the Fire Service tariff rate design methodology. 21

4) California Alternative Rates for Water 22

The Commission authorized Park’s low-income ratepayer assistance program, 23

known as California Alternative Rates for Water (“CARW”) in 24

D.06-10-036 and it became effective on January 1, 2007. Park’s authorized CARW 25

program consists of a $7.40 per month service charge discount for qualifying customers 26

who meet the income eligibility requirements that are established annually by the 27 230 Park Exhibit B Revenue Requirements Report at p. 152.

17-10

Commission. The eligibility income guidelines are based on the Commission guidelines 1

established for the California Alternate Rates for Energy (“CARE”). 2

Park states that customers already enrolled in Southern California Edison’s or the 3

Gas Company’s CARE programs are automatically eligible for Park’s CARW program. 4

Additionally, customers may self-certify their eligibility for the program by completing 5

Park’s CARW program application pursuant to the Commission’s guidelines. The 6

CARW program is funded by a surcharge applicable to all non-eligible customers and 7

currently has 9,615 participants. 8

Park proposes maintaining its CARW program for the next rate case cycle and 9

recommends that the Commission increase the amount of the discount provided to 10

eligible customers by the overall percentage increase authorized by the Commission in 11

this proceeding. 12

ORA agrees that Park should maintain its existing CARW program, and 13

recommends decreasing the CARW surcharge from $6.14 to $2.01 to reflect the 14

program’s over-collection of about $800,000 as of the end of 2017. Both the CARW 15

discount and surcharge should also be increased by the overall percentage increase 16

authorized by the Commission in this proceeding. Please refer to Chapter 13 of this 17

report for ORA’s position regarding the CARW surcharges. 18

5) Phase-In of Test Year Increase 19 Park proposes phasing-in the rate increase authorized for the Test Year in this 20

proceeding, provided that any portion of the adopted revenue requirement for 2019 for 21

which recovery is deferred to a subsequent year of the rate case cycle will be recoverable 22

in that year and will accrue interest at the adopted rate of return. Park makes this proposal 23

so that the Commission can consider a mechanism that would “level out” the rate 24

increases over the rate case cycle which, due to the methodologies adopted in the Revised 25

Rate Case Plan, are typically much larger for the test year than the escalation years.231 26

231 Park Water Company’s Revenue Requirements Report TY 2019 at p. 156.

17-11

Generally, the Commission should use a rate phase-ins to avoid a sudden increase 1

in rates. While ORA supports the concept of assisting economically challenged 2

customers, ORA notes that Park has an existing mechanism to achieve this goal. The 3

CARW program offers low-income customers individual water bill subsidies to make 4

individual bills more affordable. This program is an appropriate mechanism to make 5

rates more affordable for economically challenged individuals. CARW provides subsidies 6

to economically challenged individuals. A rate phase-in is merely a payment plan for 7

rate increases. Using rate phase-ins to provide support to economically challenged 8

customers may mask the true effectiveness of affordability programs. This could 9

potential harm economically challenged ratepayers by realizing that the affordability 10

program is not effective when a rate phase in period is over. 11

ORA is not opposed to applying a rate phase-in for customers that are facing a 12

significant rate increase. The Commission has previously recognized the usefulness of 13

rate phase-ins when a large rate increase is adopted. For example, in 1983 the 14

Commission issued a memorandum describing its CAPS (deferral of a portion of a 15

general rate increase) policy. CAPS provided a policy or guideline by which the 16

Commission could phase-in a revenue requirement increase of greater than 50% for Class 17

A water utilities with a cap on revenue requirement increases of 50% per year for up to 18

three years.232 19

The Commission traditionally uses a rate phase-in to mitigate a sudden increase in 20

rates. Rate phase-ins are appropriate where substantial rate increases may result in a 21

dramatic increase in rates for customers. However, customers ultimately pay the full cost 22

of the adopted rate increase plus interest at the authorized rate of return on any initially 23

deferred rate increase. 24

Based upon ORA’s recommended revenue requirement which is significantly less 25

than the 50% Class A benchmark, the Commission should disallow Park’s request to 26

phase-in the test year increase. 27 232 CPUC Memorandum – February 22, 1983 - CAPS Standard Procedure, at 1.

17-12

CONCLUSION D.1 ORA recommends that the Commission adopt its proposals regarding the 2

conservation rate design methodology for residential and non-residential customers for 3

use in the Test Year 2019 rate case cycle. ORA’s proposals are conservation conscience 4

while considering overall affordability of water service across all customer classes. ORA 5

also recommends that the Commission adopt its proposals regarding miscellaneous 6

revenues, CARW, and the phase-in of rate increases. 7

18-1

ESCALATION YEAR INCREASES CHAPTER 18:1

INTRODUCTION A.2 This chapter presents ORA’s recommendation for Park’s post-test year revenue 3

requirement mechanism. For escalation and attrition filings, in conformance with 4

General Order 96-B, Class A Water Utilities should file a Tier 1 advice letter proposing 5

new revenue requirements. Advice letters should follow the escalation procedures set 6

forth in the Revised Rate Case Plan and must include supporting workpapers. The 7

Commission should require Park to implement a post-test year revenue requirement 8

mechanism to adjust the escalation years 2020 and 2021 revenue requirement whether 9

Park is over-earning or under-earning. 10

SUMMARY OF RECOMMENDATIONS B.11 For Park’s 2020 and 2021 escalation/attrition year filings, the Commission should 12

require Park to file a Tier 2 advice letter proposing new revenue requirements and 13

corresponding revised tariff schedules whether the filing results in an increase or decrease 14

in tariff rates. The Commission should include in the final decision on Park’s 15

Application an ordering paragraph containing the following language: 16

For escalation years 2020 and 2021, Park must file Tier 2 advice letters in 17 conformance with General Order 96-B proposing a new revenue 18 requirement and corresponding revised tariff schedule. Park’s filings must 19 include rate procedures set forth in the Commission’s Revised Rate Case 20 Plan233 for Class A Water Utilities and must include appropriate supporting 21 workpapers. The revised tariff schedules must take effect no earlier than 22 July 1, 2020 and July 1, 2021, respectively, and will apply to service 23 rendered on and after their effective dates. The proposed revisions to 24 revenue requirements and rates must be reviewed by the Commission’s 25 Water Division (Water Division). The Water Division must inform the 26 Commission if it finds that the revised rates do not conform to the Revised 27 Rate Case Plan, this order, or other Commission decisions, and if so, reject 28 the filing. 29

233 D.07-05-062, Appendix A.

18-2

DISCUSSION C.1 Neither the rate case plan nor the Revised Rate Case Plan require Class A Water 2

Utilities to file escalation advice letters to revise revenue requirements and tariff 3

schedules in between the Test Years of a GRC.234 However, if the decision for this GRC 4

Application does not require Park to file escalation/attrition year revisions, Park may 5

choose to file escalation advice letters only during the years it is under-earning, while 6

choosing not to file attrition advice letters during the years in which it is over-earning, 7

thereby avoiding any rate decrease regardless of how much, or how often it may be over-8

earning. 9

Going forward the Commission should require Park to submit an earnings test 10

before being awarded any Escalation or Attrition Year increases. If Park is over-earning, 11

the Commission should require Park to file for the appropriate rate decrease. 12

The Commission has the authority to require downward adjustments if the utility 13

is over-earning. The Commission’s decision for California-American Water Company’s 14

2012 GRC included such a requirement, stating in Ordering Paragraph No. 7: 15

For escalation years 2013 and 2014, California American Water Company 16 shall file Tier 2 advice letters in conformance with General Order 96-B 17 proposing a new revenue requirement and corresponding revised tariff 18 schedules for each district. The filings shall include rate procedures set 19 forth in the Commission’s Revised Rate Case Plan (D.07-05-062) for Class 20 A Water Utilities and shall include appropriate supporting workpapers. 21 The revised tariff schedules shall take effect no earlier than January 1, 2013 22 and January 1, 2014, respectively, and shall apply to service rendered on 23 and after their effective dates. The proposed revisions to revenue 24 requirements and rates shall be reviewed by the Commission’s Division of 25 Water and Audits (DWA). DWA shall inform the Commission if it finds 26 that the revised rates do not conform to the Revised Rate Case Plan, this 27 order, or other Commission decisions, and if so, reject the filing.235 28

29 The Commission should include similar language in its decision on Park’s Application.30

234 Adopted in D.04-06-018, and D.07-05-062, respectively. 235 D.12-06-016, Ordering Paragraph 7.

APPENDIX A

QUALIFICATIONS AND PREPARED TESTIMONY

Appendix A-1

QUALIFICATIONS AND PREPARED TESTIMONY 1 OF 2

VICTOR CHAN 3

Q1. Please state your name, business address, and position with the California Public 4 Utilities Commission (Commission). 5

A1. My name is Victor Chan and my business address is 320 West 4th Street, Suite 6 500, Los Angeles, California. I am a Program and Project Supervisor in the Water 7 Branch of the Office of Ratepayer Advocates. 8

Q2. Please summarize your education background. 9

A2. I graduated from Cal Poly, Pomona with a Bachelor of Science in Mechanical 10 Engineering. I am a registered mechanical engineer with the State of California. 11

Q3. Briefly describe your professional experience. 12

A3. I have been employed by the Commission since August 1996. From 1996 to 2003, 13 I worked as a utilities engineer for the CPSD Division where I performed safety 14 audits on various gas, electric, telephone and cable utilities. Since 2003, I have 15 held various lead positions for the Water Branch of ORA and served as a project 16 manager for general rate cases of various Class-A water companies in California. 17

Q4. What is your responsibility in this proceeding? 18

A4. I am the project lead in the Park Water GRC. I am also sponsoring ORA’s Report 19 on the Results of Operations’ Memorandum, Executive Summary, Chapter 1 – 20 Introduction and Summary and Chapter 18 − Escalation Year Increases. 21

Q5. Does this conclude your prepared direct testimony? 22

A5. Yes, it does. 23

Appendix A-2


HERBERT R. MERIDA 3 4

Q.1. Please state your name, business address, and position with the California 5 Public Utilities Commission (Commission) 6

A1. My name is Herbert Merida. My business address is 505 Van Ness Avenue, San 7 Francisco, California, 94102. I am a Public Utilities Regulatory Analyst IV in the 8 Water Branch of the Office of Ratepayer Advocates. 9

Q2. Please summarize your education background. 10 A2. I graduated from the San Francisco State University with a Bachelor of Science 11

Degree in International Business Management, a minor in Economics, and a 12 Master of Business Administration Degree. 13

Q3. Briefly describe your professional experience. 14 A3. Regarding my professional experience, I have been employed by the Commission 15

for 11 years and have worked on many general rate case proceedings. Also, I have 16 held a variety of positions at Levi Strauss & Co., Siemens A.G., the Employment 17 Development Department, the State Compensation Insurance Fund, and most 18 recently the Commission. 19

Q4. What is your responsibility in this proceeding? 20 A4. I am responsible for Chapter 2, Water Consumption and Operating Revenue and 21

Chapter 17, Rate Design in this proceeding. 22 Q5. Does this conclude your prepared direct testimony? 23

A5. Yes, it does. 24

25

Appendix A-3

QUALIFICATION AND PREPARED TESTIMONY 1 OF 2

JEFFREY ROBERTS 3 4

Q1. Please state your name, business address, and position with the California Public 5 Utilities Commission (“Commission”). 6

A1. My name is Jeffrey Roberts and my business address is 320 W 4th Street, Los 7 Angeles, CA 90028. I am a Public Utilities Regulatory Analyst (PURA) in the 8 Water Branch of the Office of Ratepayer Advocates (ORA). 9

Q2. Please summarize your educational background and professional experience. 10 A2. I received a Bachelor of Science Degree in Finance from Stockton University in 11

2011. In April of 2013 I joined the Commission, where I worked as a Regulatory 12 Analyst on a variety of assignments including advice letters, application filings, 13 and general rate case proceedings. My experience includes duties as project 14 coordinator for Great Oaks Water Company application for debt issuance 15 (A.14-01-023), analyzing portions of A&G expenses and payroll for the Cal-Am 16 GRC (A.13-07-002), review of payroll, income taxes, and memorandum accounts 17 for the Suburban Water Company GRC (A.14-02-004), the review of sales, 18 revenues, and rate design for the Park Water GRC (A.15-01-001), review of 19 payroll, expenses, and executive compensation for San Gabriel GRC 20 (A.16-01-002) and sales, payroll, new positions and rate design for Suburban 21 Water Company GRC (A.17-01-001). 22

Q3. What is your responsibility in this proceeding? 23 A3. I am responsible for Operations & Maintenance and Administrative & General 24

Expenses (Chapter 3), and Payroll and New Positions (Chapter 4) 25 Q4. Does this conclude your prepared direct testimony? 26 A4. Yes, it does. 27 28

29

Appendix A-4

QUALIFICATIONS AND PREPARED TESTIMONY 1 OF PAT ESULE 2

Q.1. Please state your name, business address, and position with the California 3 Public Utilities Commission (Commission). 4

A1. My name is Patricia Esule. I am a Public Utility Regulatory Analyst (“PURA 5 IV”). My business address is 320 W. 4th Street Ste. 500, Los Angeles, CA 90013. 6

Q2. Please summarize your education background. 7 A2. I received an Associate Degree in Liberal Arts from College of the Sequoias in 8

Visalia, California in 1979. I attended NARUC Rate School in 2004. I have also 9 completed Utility Finance & Accounting for Non-Professionals course in 2007. 10

Q3. Briefly describe your professional experience. 11 A3. I have been employed by the Office of Ratepayer Advocates – Water Branch since 12

May 2003. I have provided testimony in many GRCs as an analyst/witness on 13 capital projects, operational and administrative expense, low-income programs, 14 and water conservation. Additionally, I have performed the duties of project lead 15 for the 2009 Great Oaks Water Company GRC, the California Water Company 16 request in 2017 for a Certificate of Public Convenience and Necessity (“CPCN”) 17 to create a Travis district, and various other special applications and advice letters. 18

My previous professional experience includes Associate Transportation 19 Representative – CPUC Safety Enforcement Division, Supervisor - CPUC 20 Consumer Affairs Branch, Sales Representative – AT&T Communications, Billing 21 Specialist – AT&T Communications. 22

Q4. What is your responsibility in this proceeding? 23 A4. Chapter 5, Utility Plant in Service. My review includes all plant additions except 24

those concerning reservoirs and main replacements. 25 Q5. Does this conclude your prepared direct testimony? 26

A5. Yes. 27

28 29

Appendix A-5


SUNG B. HAN 3 4 5 Q. 1 Please state your name, business address, and position with the California Public 6

Utilities Commission (Commission). 7 A. 1 My name is Sung B. Han and my business address is 505 Van Ness Avenue, San 8

Francisco, CA. I am Senior Utilities Engineer in the Water Branch of the Office of 9 Ratepayer Advocates (ORA). 10

Q.2 Please summarize your educational background. 11 A.2 I received a Bachelor of Science degree in Mechanical Engineering from San 12

Francisco State University in 1970 and a Masters of Science degree in Mechanical 13 Engineering from University of California, Berkeley in 1972. I have taken various 14 courses in financial accounting, regulatory economics, and depreciation from 15 various institutions. I am also a licensed Professional Mechanical Engineer in the 16 State of California. 17

Q.3 Please summarize your business experience. 18 A.3 After graduation from Berkeley, I joined the Commission. I worked on various 19

formal proceedings before this Commission, including various types of rate 20 proceedings, valuation studies and other investigations initiated by the 21 Commission. I have analyzed and testified on various aspects of utility operations 22 including plant, depreciation, operations and maintenance expenses, 23 administrative and general expenses, revenues, rate design, and conservation. I 24 have also worked as Project Manager for various energy and water rate 25 proceedings. 26

Q.4 What is your responsibility in this proceeding? 27 A.4 I am responsible for Chapter 6 Main Replacement, Chapter 7 Advanced Meter 28

Infrastructure, Chapter 8 Depreciation Reserve and Depreciation expense, Chapter 29 9 Rate Base of ORA’s Report on the Results of Operations of Liberty Park Water 30 Company. 31

Q.5 Does this conclude your prepared direct testimony? 32

A.5 Yes, it does. 33

Appendix A-6

QUALIFICATIONS AND PREPARED TESTIMONY OF 1 Jose R. Cabrera 2

3 Q.1 Please state your name, business address, and position with the California Public 4

Utilities Commission (Commission). 5 A.1 My name is Jose R. Cabrera. My business address is 505 Van Ness Avenue, 3rd 6

floor, San Francisco, California 94102. I am employed by the Commission as a 7 Public Utilities Regulatory Analyst V in the Office of Ratepayer Advocates, Water 8 Branch. 9

10 Q.2 Please summarize your education background. 11

A.2 I am a graduate of California State University, Sacramento, with a Bachelor of 12 Science Degree in Accounting. I also hold a Master of Science Degree in 13 Taxation from Golden Gate University, San Francisco. 14

15 Q.3 Briefly describe your professional experience. 16 A.3 Prior to the Commission, I worked for the Department of the Treasury, Internal 17

Revenue Service, for 5-1/2 years as an Internal Revenue Agent, and in public 18 accounting with a certified public accountancy firm. 19

20 From 1988 to 1992 I was a part-time Lecturer of Accounting in the Department of 21

Accounting, School of Business, at California State University, San Francisco. 22 Prior to this, I was an Adjunct Professor at National University in the Graduate 23 School of Taxation. 24

25 As the tax witness, I am responsible for federal and state income, other tax 26

estimates and related policy positions in general rate cases. 27 28

Q.4 What is your responsibility in this proceeding? 29

A.4 I am responsible for the preparation of Chapter 10, “Taxes Other Than Income,” 30 and Chapter 11, “Income Taxes,” in the Report on the Results of Operations for 31 Liberty Utilities, Park Water Company’s general rate case test year 2019. 32

33 Q.5 Does this conclude your prepared direct testimony? 34

A.5 Yes, it does. 35

36

Appendix A-7


MEHBOOB ASLAM 3 4 Q.1. Please state your name and business address. 5 A.1. My name is Mehboob Aslam. My business address is 320 west 4th Street, Suite 6

500, Los Angeles, CA 90013. 7 8 Q.2. By whom are you employed and in what capacity? 9 A.2. I am employed by the California Public Utilities Commission as a Utility 10

Engineer. 11 12 Q.3. Please briefly describe your educational background and work experience. 13 A.3. I graduated from the University of Engineering & Technology, Lahore, Pakistan 14

with a Bachelor of Science Degree in Mechanical Engineering and graduated from 15 Western Kentucky University with a Master of Science Degree, in Business 16 Administration with an emphasis in Accounting and Finance. 17

18 I have been employed by the CPUC since 2001. From 2001 through 2002, I was a 19

member of the Consumer Protection and Safety Division, where I studied energy 20 utilities’ operating practices to enforce the rules and regulations relating to safe 21 use of the plant and workforce. I Performed engineering reviews, and conducted 22 incident investigations for both gas and electric utilities. I have also helped resolve 23 customers’ complaints. 24

25 From 2002 through present, I have been working for Division of Ratepayer 26

Advocates in its Water Branch; mostly dealing with Class-A water utilities. I have 27 performed evaluations of public utility plant and properties, regulation of utility 28 tariffs and rates, studies of cost of service, and studies of the utility’s operating 29 practices to enforce the rules and regulations relating to ratemaking. I have 30 presented my findings and recommendations as an expert witness at public 31 hearings before the Commission. I have also been actively involved with few of 32 Commission’s OIR/OII proceedings. 33

34 Q.4. What is your area of responsibility in this proceeding? 35 A.4. I am responsible for evaluation of Liberty’s requests and cost allocations of its 36

General Officer. My findings are presented in Chapter 12 of ORA’s report. 37 38 Q.5. Does this conclude your prepared testimony? 39 A.5. Yes, it does. 40

Appendix A-8


JAMES J. SIMMONS 3 4 Q.1. Please state your name and business address. 5 A.1. My name is James J. Simmons. My business address is 505 Van Ness Avenue, 6

San Francisco, California 94102. 7 8 Q.2. By whom, and in what capacity are you employed? 9 A.2. I am employed by the California Public Utilities Commission (CPUC) 10

as a Public Utilities Regulatory Analyst (PURA) V in the Office of Ratepayer 11 Advocates (ORA). 12

13 Q.3. Please summarize your educational background, professional certifications, and 14

professional work experience. 15 A.3. Education 16

Bachelor of Science degree in Business Administration from the University of 17 Maryland, College Park, with an emphasis in Accounting. 18 Certifications 19

1984 - Certificate of Certified Public Accountant (CPA) and license from the West 20 Virginia Board of Accountancy. 21 2007 - Certificate of Certified Rate of Return Analyst (CRRA) from the Society of 22 Utility and Regulatory Financial Analysts (SURFA.) 23 Professional Work Experience and Duties: 24

West Virginia Public Service Commission (1979-1985) 25

Senior Utilities Analyst in the West Virginia Public Utilities Commission 26 (WVPSC) staff: investigation and the preparation of audit and revenue 27 requirement reports on a variety of regulated utilities, and testifying as a staff 28 expert witness in rate setting proceedings before the WVPSC. 29 Division of Ratepayer Advocates (1985-1996) 30

Financial Examiner (FE) IV and Public Utilities Regulatory Analyst (PURA) V in 31 the CPUC’s Division of Ratepayer Advocates (DRA): participated in the financial 32 examinations, analyses and review of major regulated public utilities, testifying on 33 behalf of ratepayers in rate proceedings before the CPUC. Among other 34

Appendix A-9

assignments, I worked on the 1991 Implementation Rate Design of Pacific 1 Telephone Company and General Telephone Company of California, on the issues 2 of rate design of Message Telecommunications Services, Directory Assistance 3 Services, and elasticity. I worked on: the general rate cases (GRCs) of AT&T 4 Communications, Pacific Bell, and General Telephone Company of California; a 5 review of the affiliate transactions of Pacific Bell Directory; and the Roseville 6 Telephone Company’s Test Year 1995 GRC and Application for regulation under 7 the New Regulatory Framework as project coordinator. 8 Telecommunications Advisory and Compliance Staff (1996-2000) 9

PURA V in the CPUC’s Telecommunications Division: assisting administrative 10 law judges and the Commission in an advisory capacity in the preparation of 11 decisions and resolutions; the review and processing of applications for certificates 12 of public convenience and necessity (CPCN) and of advice letters of local 13 exchange telecommunications companies; and serving as staff liaison to the 14 following Public Policy Programs: the Universal Lifeline Telephone Service 15 (ULTS) Marketing Board; the ULTS Administrative Committee; and the 16 Community Technology Fund; oversight and all CPUC staff administrative 17 functions for the ULTS program, including the preparation of budgets, contracts, 18 and Commission-authorizing resolutions. Among my major TD assignments, I 19 advised and assisted the Administrative Law Judge (ALJ) assigned to Pacific Bell 20 Telephone Company’s Rate Design Application to rebalance rates to distribute the 21 explicit Universal Service subsidies received from the California High Cost Fund-22 B (CHCF-B) and other assignments related to the Commission’s implementation 23 of the Telecommunications Act of 1996. 24 Office of Ratepayer Advocates (2001-Present) 25

PURA V in the CPUC Office of Ratepayer Advocates (ORA): participation in 26 major proceedings before the CPUC in a position of ratepayer advocacy; among 27 other duties, preparing formal reports and testifying in the general rate cases of the 28 following companies: San Gabriel (Fontana District), California Water Service, 29 San Jose, California-American, and Apple Valley Water Companies. In 2010, I 30 investigated and prepared a protest to Golden State’s Region 1 Annual Water 31 Revenue Adjustment Mechanism (WRAM) and Modified Cost Balancing 32 Accounts (MCBA) Advice Letter. 33

Q.4. What is the purpose of your testimony today? 34

A.4. I have prepared and am sponsoring the following Chapters of ORA’s Testimony on 35 Park Water Company’s General Rate Case and Results of Operations Report for 36 Test Year 2019 in this proceeding: 37 Chapter 13: Review of Existing Balancing and Memorandum Accounts 38

Appendix A-10

Chapter 14: Special Requests 1

Q.5. Does that complete your prepared direct testimony in this proceeding? 2

A.5. Yes, at this time. 3

4

Appendix A-11

QUALIFICATIONS AND PREPARED TESTIMONY 1 OF KYLE GRAFF 2

Q.1. Please state your name, business address, and position with the California 3 Public Utilities Commission (Commission). 4

A.1. My name is Kyle Graff and my business address is 505 Van Ness Avenue, San 5 Francisco, California 94102. I am a utilities engineer in the Water Branch of the 6 Office of Ratepayer Advocates. 7

8 Q.2. Please summarize your education background. 9 A.2. In 2017, I received my Bachelors of Science degree in Chemical Engineering from 10

the University of California, Berkeley. I have passed the Fundamentals of 11 Engineering exam and am a registered Engineer in Training (EIT). 12

13 Q.3. Briefly describe your professional experience. 14 A.3. I have been working in the Water Branch of the Office of Ratepayer Advocates on 15

Class A water utility regulatory matters since 2017. 16 17 Q.4. What is your responsibility in this proceeding? 18 A.4. I am responsible for ORA’s Reports on Water Quality (Chapter 16) and Customer 19

Services (Chapter 15). 20 21 Q.5. Does this conclude your prepared direct testimony? 22

A.5. Yes, it does. 23

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