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

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                                      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