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California Supreme Court:
Public Utilities Commission Failed to Notify Water Companies of Surcharge Elimination
Opinion Says Scoping Memos Governing Hearing Framed Issue as One of Improvement in Rate Development
By Kimber Cooley, Staff Writer
The California Supreme Court held yesterday that Public Utilities Commission scoping memos—required to describe the issues to be considered at a proceeding—and prior administrative rulings did not give notice to water utilities that eliminating the use of established rate formulas was on the table where they only discussed improvement to better meet conservation goals and provide consumers with affordable water.
Five large water utilities with more than 10,000 service connections and an association representing their interests sought to set aside the order eliminating the use of a rate-setting mechanism known as the Water Revenue Adjustment Mechanism (“WRAM”) that “decouples” revenues from sales.
The decoupling mechanism allows water companies to impose surcharges on customers when the actual use falls below a forecasted number.
Justice Leondra R. Kruger, writing for a unanimous court, authored the opinion setting aside the order. She wrote:
“The issue before us does not concern the merits of this decision, but the process that led up to it. The question is whether the commission gave adequate notice that the elimination of the decoupling mechanism was one of the issues to be considered in the proceeding. We conclude that the answer is no. We further conclude that the commission ’s failure to give adequate notice requires us to set the order aside.”
Large water utilities must periodically seek approval by the Public Utilities Commission of future rate-setting formulas through a formal application process. One key issue during the evaluation of the rates is how the structure balances the financial incentive of a water utility in selling more water with California’s interest in reducing water consumption due to frequent periods of drought.
Seeking to alleviate the inherent tension in those two interests, the commission in 2008 authorized certain utilities to implement a WRAM formula, which tracks the difference between quantity-rate revenues authorized by the commission and those actually billed by the utility. Customer surcharges are an available option if the authorized rate based on forecasts exceeds the actual billing, protecting their interest when revenue falls short due to conservation efforts, weather, or other factors.
The purpose of adopting this approach was to promote conservation by reducing the incentive to sell more water.
In the challenged 2020 order, the commission prohibited the water companies from proposing the WRAM/MCBA approach but allowed them to instead propose using a different formulation—the Monterey-style WRAM (“M-WRAM”)—which is not a full decoupling mechanism.
The M-WRAM approach adjusts for the difference between the revenue collected under a tiered conservation rate structure, designed to impose increased costs for water use exceeding certain thresholds, and the actual revenue that would have been collected under a uniform structure.
Concerns With Method
After the 2008 authorization of the WRAM method, the commission began a more vigorous review of the mechanism after it became concerned that factors such as weather, the economy, and drought declarations reduced consumption and affected WRAM balances. The commission became concerned with customer perception that the WRAM formulation was punishing them for conserving water.
In 2015, the commission issued a scoping memo for a proceeding on the matter which asked, among other things, whether the WRAM mechanisms and forecasting methodologies could be improved.
A subsequent amendment to the scoping memo, and two administrative rulings in June and September 2019, considered further possible improvements to the rate-determining formula to address affordability and low-income programs, among other things. None of these mentioned the elimination of the WRAM formula as an option.
The high court issued writs of review in May 2022 to the petitioning water companies challenging the 2020 order and consolidated the cases.
Issues Under Consideration
Kruger looked to §1701.1, which provides for the issuance of a scoping memo before proceedings, and said:
“At the outset of a quasi-legislative proceeding, the Public Utilities Code and commission rules alike require the assigned commissioner to issue a scoping memo that identifies the issues under consideration….Identifying the issues under consideration facilitates informed participation—including presentation of arguments and evidence—by those who may have a stake in the resolution of those issues.
“If the commission cannot fairly be said to have complied with the statutory scoping memo requirement, it has failed to regularly pursue its authority.”
The jurist was unpersuaded by the commission’s contention that the initial scoping memo gave adequate notice, writing:
“The initial scoping memo described the forecasting issues as follows: ‘Forecasting Water Sales [¶] a. How should the commission address forecasts of sales in a manner that avoids regressive rates that adversely impact particularly low-income or moderate income [sic] customers?...”
She continued:
“This forecasting issue does not fairly include the possibility that the commission would order the water companies not to ‘propose continuing existing Water Revenue Adjustment Mechanisms…’ ‘in their next general rate case applications.’...The connection between those approaches and questions about how to improve forecasting is simply too attenuated to have given fair notice that the potential elimination of these approaches was within the scope of the proceeding.”
Future Reconsideration
The commission argues that the water companies were on notice that the WRAM decoupling may be discontinued in the future due to the continuing application process for rate-structures. Rejecting this contention, Kruger wrote:
“That argument misses the mark. This case is about whether petitioners had notice that their WRAMs and MCBAs were under consideration in this proceeding, not whether they had notice that the mechanisms could or even would be under frequent reconsideration in the future.”
She added:
“To be sure, it would not have been improper for the commission to reassess whether policy considerations supported ending use of the WRAM/MCBA approach….But it was improper for the commission to do so under the auspices of the first scoping memo, which referred to improving forecasting methodologies without making any reference to potential changes to—let alone wholesale elimination of—that approach.”
Mootness Rejected
The commission argues that the passage of Senate Bill 1469, signed in to law by Gov. Gavin Newsom in September 2022, renders the case moot. As amended by the bill, §727.5 provides:
“Upon application by a water corporation with more than 10,000 service connections, the commission shall consider, and may authorize, the implementation of a mechanism that separates the water corporation’s revenues and its water sales, commonly referred to as a ‘decoupling mechanism.’”
Kruger did not accept that the legislation addressed the exact questions at issue and said that “the statute’s requirement to ‘consider’ authorizing ‘a mechanism’ to decouple sales from revenues” is not equivalent to the remedy being sought in the case before the court—the vacatur of the 2020 order.
She added that “[t]he practical difference between these remedies may well be limited,” but reasoned that it was sufficient to save the case from mootness.
The justice declared that “even if the case were technically moot, we may decide a case on the merits when, as here, the public interest favors resolution of an important question.”
The case is Golden State Water Company v. Public Utilities Commission, 2024 S.O.S. 2257.
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