California Water Service Group
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In the first quarter of
2006, Cal Water will file an advice letter to allow it to track in a
memorandum account additional funding associated with its retiree health
care plan. Currently, Cal Water funds and recognizes expenses associated
with the plan on a pay-as-you-go basis. The excess expense between
pay-as-you-go and accrual during the employees’ expected service period
has been recognized as a regulatory asset. As of December 31, 2005, the
regulatory asset was approximately $9.8 million. Cal Water intends to
increase its funding so the plan is funded during the employee’s service
period. Cal Water has established two Voluntary Employee Beneficiary
Associations (VEBAs) to allow for increased funding and a current-period
income tax deduction. Cal Water will also file an application to recover
its regulatory asset. Cal Water believes that the CPUC will recognize in
rates the recovery of the regulatory asset and the additional funding of
the plan. If the CPUC does not permit the Company to recover the full
amount of its regulatory asset, the regulatory asset, to the extent not allowed in recovery, will be written off. If the CPUC does not approve the memorandum account, the Company will not be able to recover the higher expenses of approximately $0.6 million per year until such expenses are recognized in its GRC applications. Washington Water is planning to submit a rate filing in the first quarter of 2006, but has not filed as of the date of this report. Review of Property Sales by CPUC In 1995, the California Legislature enacted the Water Utility Infrastructure Improvement Act of 1995 (Infrastructure Act) to encourage water utilities to sell surplus properties and reinvest in needed water utility facilities. In September 2003, the CPUC issued Decision (D.) 03-09-021 in Cal Water’s 2001 GRC filing. In this decision, the CPUC ordered Cal Water to file an application setting up an Infrastructure Act memorandum account with an up-to-date accounting of all real property that was at any time in rate base and that Cal Water had sold since the effective date of the Infrastructure Act. The decision also ordered Cal Water to file an application for approval to replace the operations and customer centers in its Chico district and for treatment of the gain on sale proceeds. D.03-09-021 also directed the CPUC staff to file a detailed report on its review of Cal Water’s application. On January 11, 2005, the Office of Ratepayer Advocates (ORA) issued a report expressing its opinion that Cal Water had not proven that surplus properties sold since 1996 were no longer necessary and useful to provide utility service. ORA also recommended that Cal Water be fined $160,000 and that gains from property sales should generally benefit ratepayers. During the period under review, Cal Water’s cumulative gains from surplus property sales were $19.2 million. On December 1, 2005, the CPUC issued its D.05-12-002. This decision found that Cal Water appropriately reclassified all properties as non-utility property prior to being sold and the criteria Cal Water followed to reclassify its properties were reasonable and consistent with the requirements of the CPUC. Since the properties were properly reclassified, the CPUC found that approval of the property sales was not required and no penalty was warranted. Furthermore, the decision found that Cal Water should be allowed to include in rate base the full cost of the Chico customer center. Although the decision concluded that all gains for the property sales qualified for reinvestment in accordance with the Infrastructure Act, the decision deferred the rate-making issue regarding treatment of sale proceeds to its Order Instituting Rulemaking (R.) 04-09-003. On November 5, 2005, the Commission issued its draft decision regarding the allocation of proceeds from the sale of utility assets. The draft decision states that the CPUC has limited discretion in how it allocates between ratepayers and utility shareholders the gains on sale of real property that meet the criteria in the Infrastructure Act, provided that water utilities reinvest the proceeds in new water infrastructure. If the draft decision is adopted, the Company will be entitled to earn its full authorized return on the proceeds reinvested in utility plant from the gains on surplus property sales that were under review. Based on D.05-12-002 and the draft decision, Cal Water has not recorded any adjustments in its financial statements. Cal Water does not know when the CPUC will issue its decision in the matter of R.04-09-003. If the CPUC rules that any portion of the property sales should be allocated to the ratepayers, Cal Water’s rate base could be reduced, which would lower future revenues, net income, and cash flows. Elimination of the Earnings Test on Balancing Accounts On January 23, 2006, the CPUC issued a draft decision to suspend, until further notice, the non-weather-adjusted earnings test that applies to memorandum and balancing account recovery for water utilities. The elimination of the earnings test should significantly improve Cal Water’s opportunity to earn its authorized rate of return. Over the past three years, Cal Water has been unable to recover $3.5 million in offsettable expenses. The draft decision does not address the weather-adjusted earnings test, which is required for step rate increases. |
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