BILL ANALYSIS Ó 1 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE ALEX PADILLA, CHAIR SB 1364 - Huff Hearing Date: April 24, 2012 S As Introduced: February 24, 2012 FISCAL B 1 3 6 4 DESCRIPTION Current law authorizes the California Public Utilities Commission (CPUC) to regulate and fix the rates of utilities, including water corporations, and requires water corporations to make a rate application at least once every three years. Current law requires a bill insert notice or other mailed customer notice of any rate change proposal, with certain exceptions including for rate increases made by Advice Letter and already noticed and approved in a rate case but implemented at a later date. This bill would eliminate this exception to the customer notice requirement for Advice Letter rate increases for water corporations only. Current law authorizes the CPUC and staff at any time to inspect the accounts, books, papers, and documents of any public utility. Current law authorizes the CPUC and staff at any time to inspect the records of transactions between an electrical, gas, or telephone corporation and any subsidiary, affiliate, or holding company on matters that might adversely affect that corporation's ratepayers. Current law requires every electrical, gas, and telephone corporation to submit an annual report to the CPUC on transactions with any subsidiary, affiliate, or holding company, requires the CPUC to periodically audit significant transactions, and authorizes the CPUC to levy a penalty for imprudent or unreasonable transactions. This bill would apply these affiliate transaction requirements to water corporations and authorize the CPUC to use an outside contractor for auditing these water corporations. BACKGROUND Water utility service is a monopoly subject to full rate regulation by the CPUC. California has 135 water utilities, generally classified by their number of service connections, including 10 Class A companies with more than 10,000 service connections; 6 Class B companies with more than 2,000 service connections, 22 Class C companies having more than 500 service connections, and 83 Class D companies with less than 500 service connections. Customer Notice of Rate Increases - The standard process for rate approval is a General Rate Case (GRC), which water corporations are required to file every three years. Current law and CPUC rules require utilities to do a bill insert or other mailed notice to customers of any rate change proposal filed with the CPUC for approval. The goal is to make customers aware of potential increases and enable their participation in CPUC review of the proposed increase and scrutiny of the utility's expenditures given as justification for the increase. Exceptions to the customer notice requirement include rate changes proposed in Advice Letters to implement a rate increase already approved in a GRC. For example, a GRC may approve various capital projects and authorize the utility to implement the rate increase to cover the costs of the project by filing an Advice Letter after construction is completed. Affiliate Transactions - Transparency and reporting requirements related to a regulated utility's transactions with its affiliates are to ensure that ratepayers are not subsidizing parts of a company's business not related to the provision of utility service. Although current law does not list water corporations among the utilities subject to these requirements, the CPUC's Decision 10-10-019, adopted in October 2010, implements substantially the same requirements for Class A and B water corporations. COMMENTS 1. Author's Amendments . The author intends to strike two significant provisions of this bill as follows. Given his intent, this analysis is based on the bill as he intends to amend it. a) Eliminate Section 6 of this bill, page 7, lines 13 to 38, inclusive, and page 8, lines 1 to 18, inclusive. b) Eliminate Section 7 of the bill, page 8, lines 19 to 40, inclusive, page 9, and page 10, lines 1 to 6, inclusive. 1. Author's Purpose . According to the author, water corporations are subject to less oversight, transparency and accountability than electric, gas, and telephone utilities even though water is still a monopoly service subject to cost of service regulation. The author states that this bill will eliminate some of the exceptional treatment given water corporations in CPUC rate proceedings and increase ratepayer participation in those proceedings. 2. Advice Letters . The California Water Association (CWA), which represents the state's water utilities, objects to this bill's requirement for water corporations only of a customer notice for Advice Letter rate increases that were already approved in a GRC. The customer notice made at the time the GRC was filed would have included this increase. CWA claims that requiring a second notice when a rate increase is implemented for capital projects approved in the GRC would be confusing and frustrating to customers who would have no way of affecting the result. The CPUC also objects to this requirement as unnecessary and discriminatory by applying only to water utilities. The author represents that he has reached agreement with CWA and the CPUC on amendments to Section 2 of the bill to address these objections. These amendments eliminate from the bill the second customer notice requirement with an Advice Letter for a previously approved rate increase, but instead require that initial notice to include more detail about proposed costs and rate impacts in the initial customer notice. The amendments also provide, for Class A and Class B water corporations, that the CPUC may require customer notice at the end of the GRC of the approved rates and approved capital projects for which rate increases will subsequently be executed by way of an advice letter. Based on the author's representations of the parties' agreement on these amendments, the committee may wish to consider amending Section 2 of the bill as follows: SEC. 2. Section 454 of the Public Utilities Code is amended to read: 454. (a) Except as provided in Section 455, no public utility shall change any rate or so alter any classification, contract, practice, or rule as to result in any new rate, except upon a showing before the commission and a finding by the commission that the new rate is justified. Whenever any electrical, gas, heat, telephone, water, or sewer system corporation files an application to change any rate, other than a change reflecting and passing through to customers only new costs to the corporation which do not result in changes in revenue allocation, for the services or commodities furnished by it, the corporation shall furnish to its customers affected by the proposed rate change notice of its application to the commission for approval of the new rate. This notice requirement does not apply to any rate change proposed by a corporation pursuant to an advice letter submitted to the commission in accordance with commission procedures for this means of submission,but does apply to a rate increase proposed by a water corporation in an advice letter.The procedures for advice letters may include provision for notice to customers or subscribers on a case-by-case basis, as determined by the commission. The corporation may include the notice with the regular bill for charges transmitted to the customers within 45 days if the corporation operates on a 30-day billing cycle, or within 75 days if the corporation operates on a 60-day billing cycle. If more than one application to change any rate is filed within a single billing cycle, the corporation may combine the notices into a single notice if the applications are separately identified. The notice shall state the amount of the proposed rate change expressed in both dollar and percentage terms for the entire rate change as well as for each customer classification, a brief statement of the reasons the change is required or sought, and the mailing, and if available, the e-mail address of the commission to which any customer inquiries may be directed regarding how to participate in, or receive further notices regarding the date, time, or place of, any hearing on the application, and the mailing address of the corporation to which any customer inquiries relative to the proposed rate change may be directed. (b ) For water corporations with more than 2,000 service connections, the notice required in (a) shall include estimated rate impacts on the various customer classes of the corporation. The commission may require the corporation to inform customers in a separate letter or through a bill insert, at the corporation's discretion, of the outcome of the general rate case, within 60 days if the corporation operates on a 30-day billing cycle, or within 90 days if the corporation operates on a 60-day billing cycle, of the commission's final decision, including the approved rates and the approved capital projects that will subsequently be executed by way of an advice letter. (c) The commission may adopt rules it considers reasonable and proper for each class of public utility providing for the nature of the showing required to be made in support of proposed rate changes, the form and manner of the presentation of the showing, with or without a hearing, and the procedure to be followed in the consideration thereof. Rules applicable to common carriers may provide for the publication and filing of any proposed rate change together with a written showing in support thereof, giving notice of the filing and showing in support thereof to the public, granting an opportunity for protests thereto, and to the consideration of, and action on, the showing and any protests filed thereto by the commission, with or without hearing. However, the proposed rate change does not become effective until it has been approved by the commission. (d ) The commission shall permit individual public utility customers and subscribers affected by a proposed rate change, and organizations formed to represent their interests, to testify at any hearing on the proposed rate change, except that the presiding officer need not allow repetitive or irrelevant testimony and may conduct the hearing in an efficient manner. 3. Affiliate Transactions . This bill would add water corporations to the list of other utilities that are subject to the CPUC's affiliate transaction requirements - making books available for inspection, annual reporting, being subject to audit and potential penalties. CPUC regulations make these same requirements applicable to Class A and Class B water corporations, although water corporations are not referenced in statute. The author has expressed an intent that this bill should make explicit reference to Class A and Class B water corporations as being subject to the CPUC's affiliate transaction requirements. Thus, the author and committee may wish to consider amending sections 1, 3, 4 and 5 of the bill to refer only to a water corporation that has 2,000 or more service connections. 4. Affiliate Transaction Audits . The CPUC's existing affiliate transaction regulations for water corporations authorize the CPUC to contract with an outside entity to audit water corporations. This flexibility is authorized because of the large number of water corporations subject to audit. The author has expressed an intent to retain this flexibility. Thus, the author and committee may wish to consider amending section 4 of the bill to require that the commission to conduct an audit for specified water corporations, "or ensure than an independent audit is conducted." 5. Ratepayer Impact . The additional detail in the original customer notice, and the potential for the CPUC to require water corporations to provide customer notice at the end of a GRC, could increase utility costs that are recovered in rates. POSITIONS Sponsor: City of Claremont City of Placentia Support: City of Cypress City of Stanton Division of Ratepayer Advocates, with exception Oppose: California Public Utilities Commission California Water Association, unless amended An Individual Jacqueline Kinney SB 1364 Analysis Hearing Date: April 24, 2012