Representatives from California American Water, or Cal Am, San Marino’s water utility, faced several tough questions from the San Marino City Council, which received a presentation about California American Water’s general rate case application at its meeting last Friday.
All utility companies are required to submit a general rate case application every three years to the California Public Utilities Commission, or PUC, which regulates the state’s privately owned electric, natural gas, telephone, water and sewer utilities.
Cal Am’s updated application, which was submitted to the PUC in July 2016, calls for a 16.29 percent rate increase in 2018, 3.43 percent rate increase in 2019, and an increase of just over three percent in 2020.
These increases are proposed for the San Marino Water System, which includes all of San Marino and portions of El Monte, Temple City, San Gabriel, Rosemead and Los Angeles County.
Cal Am Water External Affairs Manager Brian Barreto said the application has four components.
The utility has proposed $10.6 million worth of infrastructure improvement projects, which include investments in automatic water meter readers, new power generators, water main replacements, purchase of new water rights and other projects.
Next, Barreto noted that an increase in operating costs, including imported water, fuel, energy and chemicals, covered a component of the application.
Conservation efforts have also resulted in declining water sales, according to Barreto.
“So because of all of the good work that we’ve had with regards to conservation efforts and the drought, it’s created a sizable deficit that we must address at this time,” he said.
“The more we save, the more we become the victim of what we’ve already saved,” Mayor Richard Sun stated toward the end of a nearly hour-long back-and-forth between Council Member Steve Talt and California American Water’s Conservation Manager Monica Na.
Talt and Na, in particular, clashed about the fourth component of the application, consolidated rates.
Barreto defined consolidated rates, as “all customers would share a fixed cost for the region. There would be a common service charge for all of our Southern California districts and then there would be a uniform rate structure for the San Marino system, Baldwin Hill system and Duarte system.”
Na explained that the primary benefit of consolidated rates would be that it would improve water affordability, including a reduction of large rate changes to a small group of customers, more flexibility to encourage water conservation and to lower other operating costs.
“In any consolidation scenario there will be some winners and losers, so to speak, in the immediate time frame. The [PUC] and the company is looking at a longer-term scenario,” she continued, adding that she recognizes that Cal Am’s Los Angeles district would be absorbing more of the variable costs. “You gain more over the long run.”
Referring to Na’s point that consolidated rates would result in a reduction of large rate changes, Talt asked Na, “Under what terms is 16 percent not a rate shock?”
“It’s not 50 percent,” Na responded.
“If Cal Am Water doesn’t see a 16 percent increase as a rate shock, then really, we’ve got a problem there because it is a rate shock,” Talt continued, noting that the Baldwin Hills system will experience a rate decrease, while the Duarte system will experience a much smaller rate increase.
Na stated that the rate increase would be the same with or without consolidation, prompting Talt to inquire about the purpose of the rate increase.
Na and Barreto pointed to a pie chart, which purportedly detailed Cal Am’s increased expenses.
“Without numbers and actual percentages there, that’s not a presentation, that’s just pretty colors,” Talt retorted.
Na noted that the average water bill for customers connected to 14,000 Cal Am meters is currently $32 and would increase by $5 in the first year of the rate increase.
Saving his comments toward the end of the discussion, Mayor Sun took a quick poll of the 10 residents in attendance.
“[A] sixteen percent jump [is] not a small percentage,” Sun said. “I want to see hands from the audience to see how many of you are paying $32 per month.”
No one raised a hand. “Certainly I’m not,” he responded to his own question. “I only pay that for one kid,” Talt added.
“Everybody’s paying a lot more than that. So your 16 percent jump is not just $5 per month,” Sun concluded.
Talt continued his questioning.
“How much of that increase is going toward labor? And how much of that labor is going toward top executives for something that people need? Those are questions I would hope the Utilities Commission is asking,” he asked.
Na said that the Public Utilities Commission did not ask those questions during its testimony period, which concluded last month.
“I don’t mean to communicate that we’re not at all sensitive to rate shock. In fact that is one of our primary concerns,” she answered, noting that the consolidation of rates was structured to be gradual.
“But it’s not graduated. It’s knock them over the head the first year and then lower back in year two or three. There is nothing about a 16 percent increase that is graduated. Why haven’t you spread that over three years?” Talt retorted, clarifying that the rate increases would be compounded.
Na explained, “What we, [Cal Am], have is a reasonable rate of return and that’s because we’re a monopoly and people have no ability to opt out of water and they need water for life. The Public Utilities commission is acting as that market mechanism.”
Talt returned her comment, stating, ““You’re taking what’s naturally given and making a pretty substantial profit off it.”
Na went on, noting, “We don’t profit off water at all. That cost is simply a pass through. We make no profit on water. We make profit on our investments. We make profit on our boosters, on our pumps, on our pipes, on our treatment facilities. Things that we invest in to make sure the infrastructure is good and provides a reliable source of water.”
Talt called that “funny math.”
“With regards to the proposed increase, that’s a proposal,” Barreto clarified.
“We’re in the middle of a [negotiation] process that we have with the public utilities commission, so that number may change. And logically it has changed in the past if we go back and look at previous rate applications,” he added.
Still unsatisfied, Talt asked how much the Duarte Water System, one of two other systems in Cal Am’s Los Angeles District, pays for water.
“Their rate is 26.86 cents for the first 82,200 gallons. Your rate is 27.54 cents for the 9,700 gallons,” Na answered.
“Why?” Talt quickly followed.
“That’s completely based on consumption patterns, which is an average of consumption in that service area,” Na explained.
“If you just pass on the cost of actual water, the consumption levels shouldn’t matter. Right?” Talt resumed.
“[The difference in rates is] based on two things. It’s based on consumption level. That’s the rate you pay for how much water you use. And then it’s based on the cost of the water in that area and that’s a variable cost and that’s a pass through,” she stated.
Still unimpressed, Talt asked, “Why is it a variable cost? Are you talking about them getting water from a different God?”
“It’s just how rate design is calculated,” Na said. “We don’t see the sense in that ourselves, and that’s part of the reason why we would like to consolidate rates across our service areas. It does not make a whole lot of sense that someone so close to you could be at a totally different rate for a totally different quantity of water.”
Talt then asked why the California Public Utilities Commission’s Office of Ratepayer Advocates, or ORA, which reviewed Cal Am’s consolidated rate proposal, recommended a 1.65 percent water rate increase in 2018 and 3.42 percent increase in 2019.
ORA’s proposed rate increases would allow Cal Am to raise approximately
$11 million in two years as opposed to the $40 million Cal Am hopes to collect with its proposed rate increases. Statewide, Cal Am proposed approximately $34 million worth of water service improvements, according to an analysis by ORA.
“They can propose what they would like to propose. Sometimes they target capital spending,” Na said.
“But San Marino has [Metropolitan Water District] costs that Duarte does not have. MWD costs are the highest cost of water in San Marino,” she added, noting that the San Marino Water System receives 10 percent of its water from MWD due to a purchasing agreement and to meet water use demands.
“The difference in the average bill impact between the LA service area, Duarte, San Marino, Baldwin Hills, they would all have the exact same rate design. This only reflects the difference in consumption,” Na concluded.
“The city had on retainer a water rate attorney. He has been following the case, informing the council, letting us know when we need to take action,” Interim City Manager Cindy Collins noted.
The California Public Utilities Commission will determine the appropriate rates for California American Water at the end of 2017. Rate increases will be implemented in Jan. 2018; however, it is likely that will be postponed to a later date next year, according to Barreto.