Utility Cost Recovery Mechanisms and Financial Sustainability

1. Utility Cost Recovery Mechanisms and Financial Sustainability SURFA 43rd Financial Forum Georgetown University Conference Center Washington, DC April 14-15, 2011 Stephen St Marie Advisor on Policy and Planning California Public Utilities Commission April 15, 2011

2. The Purpose and Need • In spite of the “best” forecasts, we do not know how much water will be sold in any future period • We want customers to conserve – and we have programs to encourage savings • We cannot engage in “Retro-Active Ratemaking”

3. Water Usage Changes from Year to Year

4. Cut Back! But how much? • California Water Action Plan • 20% by 2020 • Climate Action! • Conservation Rate Design – increasing-block rates • Other Conservation Programs

6. Two Basic Tracker Types D.03-06-013 • Balancing accounts • Memo accounts There is usually significant distinction between a balancing account and a memorandum account as used by the Commission. Both accounts are typically employed to ensure the accurate recovery of the actual cost of a regulatory program. The goal is to avoid the risk of over- or under-recovery in retail rates of reasonably incurred program costs. Balancing accounts have an associated expectation of recovery. They have been pre-authorized by the Commission, and it is the amounts – and not the creation of the accounts themselves – that the Commission reviews for reasonableness. Memorandum accounts, in contrast, are accounts in which the utilities record amounts for tracking purposes. While the utilities may later ask for recovery of the amounts in those accounts, recovery is not guaranteed.

7. DeCoupling Water Revenue • Monterey-Style WRAM • Track revenue difference due to rate design • Does not track the change in revenue do to change in Q (quantity sold) • Full WRAM • Tracks difference between Adopted Q revenue v Actual Q revenue • Tracks differences due to sales and rates

8. Within the Rate-Case Cycle • Appropriate de-coupling mechanism may recoup the revenue losses due to conservation. But …. • Is it conservation or something else? • What if it is a lot of money? Or reverse? Or “Forecast Error”? • What if the Company does not show “effort”?

9. What are the Stakes? • Water Utilities have high proportion of fixed costs – low proportion of costs that vary with consumption • Water rates are designed to send a conservation signal – high use charge • Small differences in sales Q can make a large difference in sales R

10. Utility Cost DifferenceAssociated with Small Quantity Difference

11. Utility Revenue DifferenceAssociated with Small Quantity Difference

12. Effects of a Small Quantity DifferenceOn Costs Planned Quantity 1,000 Units Actual Quantity 990 Units Planned Cost $1,000 Actual Cost $996

13. Effects of a Small Quantity DifferenceOn Revenue Actual Cost $996 Traditional 2-part rate – matches costs $996 Two-part rate with 75% Variable $992.50 $3.50 Single Rate – All Variable $990 $6 Tiered Rate w 2x end block $980 $16

14. Thank you! For Additional Information: www.cpuc.ca.gov SST@cpuc.ca.gov 415-703-5173