CC SR 20220503 02 - Cal Water Q&A
CITY COUNCIL MEETING DATE: 05/03/2022
AGENDA REPORT AGENDA HEADING: Regular Business
AGENDA TITLE:
Consideration and possible action to receive an update report from California Water
Service regarding their proposed rate increases with the California Public Utilities
Commission.
RECOMMENDED COUNCIL ACTION:
(1) Receive and file an update report from California Water Service (Cal Water)
regarding their proposed rate increases with the California Public Utilities
Commission (CPUC).
FISCAL IMPACT: None
Amount Budgeted: N/A
Additional Appropriation: N/A
Account Number(s): N/A
ORIGINATED BY: McKenzie Bright, Administrative Analyst
REVIEWED BY: Karina Bañales, Deputy City Manager
APPROVED BY: Ara Mihranian, AICP, City Manager
ATTACHED SUPPORTING DOCUMENTS:
A. April 20, 2021, staff report reviewing Cal Water’s 2019 General Rate Case
B. June 1, 2021, staff report authorizing participation in Cal Water’s 2021 Cost
of Capital Application
C. September 7, 2021, staff report authorizing participation in Cal Water’s 2021
General Rate Case
D. December 7, 2021, staff report providing overview of Cal Water’s
conservation programs
E. Public comment by Deputy City Manager Karina Banales on behalf of the
City of Rancho Palos Verdes (page E-1)
F. City Council Questions and Cal Water Responses (page F-1)
BACKGROUND:
At the April 5, 2022, City Council meeting, Mayor Bradley requested that Cal Water be
invited to a future meeting to address concerns regarding their proposed rate increases,
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particularly as it may relate to recovering costs incurred as a result of the Palos Verdes
Peninsula Water Reliability Project (PVPWRP).
In the past year, Cal Water rates have been discussed at the following City Council
meetings:
• April 20, 2021 – Cal Water provided a presentation on the 2018 (emphasis added)
General Rate Case (GRC), which incorporated the cost of the PVPWRP(D.20-12-
007). Effective February 2021, the average residential customer (using 15 CCF of
water, with a 5/8” x 3/4” meter) saw their bill increase by $13.97 or 15.1% (see
Attachment A) as part of the 2018 GRC.
• June 1, 2021 – the City Council authorized the City’s participation in the Cal Water
2021 (emphasis added) Cost of Capital Application. The Cost of Capital, if
approved, would increase average bills by $0.72, or 0.7% (see Attachment B).
• September 7, 2021 – the City Council authorized the City’s participation in the Cal
Water 2021 (emphasis added) General Rate Case. If approved, it would increase
average bills (using 15 CCF of water, with a 5/8” x 3/4” meter) by $2.64 or 2.5%
per month beginning in 2023 (see Attachment C).
• December 7, 2021 – Cal Water provided a presentation on its conservation
programs (see Attachment D).
The City is participating as a party in the two current Cal Water rate cases before the
CPUC – the Cost of Capital (A. 21-05-002) and the 2021 GRC (A. 21-07-002). The City
will be participating in evidentiary hearings scheduled later this month.
On April 20, 2022, Deputy City Manager Bañales appeared before the Administrative Law
Judge to which the GRC application is assigned to provide the City’s initial public
comments. Her presentation is attached to this staff report (Attachment E).
The CPUC hosted a series of virtual public forums where residents could provide live
public comments from April 4-25, with April 20 dedicated for Palos Verdes customers.
Residents can submit public comments on either of these cases electronically via the
case docket cards through October 18, 2022.
In response to the City’s participation in the two rate cases, the City Council invited Cal
Water to attend tonight’s meeting to provide an update and to answer questions related
to their rate cases before the CPUC, which Cal Water accepted. Tonight’s presentation
will primarily be dedicated to a question-and-answer session. Cal Water representatives
have responded to a list of the City Council’s questions in advance of tonight’s meeting
(Attachment F).
DISCUSSION:
To facilitate the question-and-answer session proposed to occur at the meeting, the
following discusses information related to the proposed rate increases.
Palos Verdes Peninsula Water Reliability Project (PVPWRP)
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In October 2020, Cal Water announced the completion of the PVPWRP, which added
seven miles of new drinking water pipeline and a pump station on Crenshaw Boulevard
north of Silver Spur Road. Prior to the completion of the project, 90% of the Peninsula
relied on one 60-year-old pipeline and a single pump station.
The CPUC determined in Decision (D.) 20-12-007 that Palos Verdes customers would
bear the rate impacts of the PVPW RP. This was intentional on the part of the CPUC,
stating in its decision:
“[The] Settlement Agreement protects customers in Cal Water’s Antelope Valley
area (a low-income area) from bearing the costs of the mainline pipe replacement
project in the Palos Verdes area (a high -income area). Both areas are part of the
Los Angeles Area for ratemaking purposes. Chapter 15 , Section J, of the
Settlement Agreement provides detailed rate calculation instructions to prevent the
cost of the Palos Verdes pipeline replacement project from bleeding over into the
calculation of rates for Antelope Valley customers.”1
The decision to D.20-12-007 created a regulatory mechanism to calculate additional rates
applied only to Palos Verdes customers as a result of the PVPWRP as the benefits are
borne solely by Palos Verdes customers and therefore the costs are levied solely on Palos
Verdes.
Cal Water is in negotiations with its contractor regarding who should bear certain
unanticipated costs incurred for construction of the mainlines. All undisputed costs have
been included in rate cases, but due to the uncertainty and sensitivity related to Cal
Water’s ongoing negotiations regarding the disputed claims, Cal Water has requested
authority in the 2021 GRC to open a memorandum account to track all incremental costs,
legal costs, and other expenses associated with bringing the matter to a resolution. This
request is currently under review, along with the 2021 GRC and, separately, the 2021
Cost of Capital Application.
Cost of Capital Applications and General Rate Cases
The City is participating in Cal Water’s current Cost of Capital and GRC applications
(Attachments B and C). Both come before the CPUC on a triennial basis for approval.
The GRC for a water utility sets rates based on the amounts of infrastructure
improvements, operation expenses, and water sales approved by the CPUC. The Cost
of Capital proceeding sets rates based on the amount of return a utility can earn on its
infrastructure improvements. The Cost of Capital provides the utility an opportunity to
receive proper funds for future infrastructure improvements.
The Cost of Capital Application provides utilities with funding to finance the cost of
infrastructure improvements and repay debt.
1 See CPUC “D. 20-12-007: Decision Approving a Partial Settlement Agreement, Ruling on Post-Hearing
Motions and Authorizing California Water Service Company’s General Rate Increases for 2020, 2021 and
2022.” Hyperlink directed to quote on page 13, first paragraph.
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A GRC is the formal request to raise rates. Utilities must include information to justify the
proposed rate increase, such as historical company expenses, details on infrastructure
improvement projects, and expense projections for the upcoming t hree years The
implementation of the 2018 GRC was delayed due to COVID-19, which is why customers
saw a significant increase in their February 2021 water bills, rather than on a strict triennial
cycle.
Water Rates in Rancho Palos Verdes
Water rates in RPV are relatively more expensive than rates in other regions due, in part,
to the following:
• All drinking water must be purchased as there are not adequate groundwater
reserves.
• All water must be pumped uphill, due to the topography of the Peninsula, whic h
requires additional energy.
See Attachments A and C for full account of the most recent rate cases. As an example
of recently increased and proposed rates through the GRCs, the table and graph below
illustrate the approximate monthly bill of RPV customers at various water usage levels
with two different meter sizes. This does not include bill increases as a result of Cost of
Capital applications, because rate increases as a result of CoCs is significantly less than
from a GRC. Additionally, public messaging typically compares differences between rate
cases, rather than annual/monthly changes. Actual bills may vary, based on discounts,
taxes, fees, etc. – these are intended for illustrative purposes only to show the difference
between the recent general rate increases.
Table 1: RPV Monthly Bills, Based on Water Usage and Meter Size
Water Usage Meter Size Previous
1/2017 Bill
Current
2022 Bill
Proposed
2023 Bill
Low-usage (6 CCF) 5/8”x3/4” $49.71 $61.66 $49.38
Low-usage (6 CCF) 1” $81.47 $109.33 $108.52
Average (15 CCF) 5/8”x3/4” $92.51 $106.48 $109.12
Average (15 CCF) 1” $124.27 $154.15 $168.26
High-usage (30 CCF) 5/8”x3/4” $173.22 $213.03 $251.01
High-usage (30 CCF) 1” $204.98 $260.70 $310.15
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Graph 1: RPV Monthly Bills, Based on Water Usage and Meter Size
If the rates as proposed in the 2021 GRC are adopted, the average Rancho Palos Verdes
customer (with a 5/8” meter using 15 CCF of water) will see an increase of nearly
$17/month or 18% from January 2017 – for a monthly bill of $110 in 2023. Average-usage
customers with a 1” meter will see an increase of $44/month, or 35% from January 2021
– for a monthly bill of $168 in 2023.
It should be noted that a majority of Rancho Palos Verdes customers have 5/8” meters.
The City Council has previously authorized letters to the CPUC expressing concern that
the current service charge unfairly penalizes customers with larger meters.
The table below compares the 5/8” meter to 1” meter service charge, across the 201 5
GRC and 2018 GRC decisions and proposed 2021 GRC rates. Monthly bills are based
on service charge and quantity usage charges which are based on a tiered system.
Table 2: Palos Verdes Service Charge per Meter Size
Meter Size D. 16-12-042
Service Charge
D. 20-12-007
Service Charge
A. 21-07-002
Proposed Charge
5/8” Meter $21.17 $31.78 $39.42
1” Meter $52.93 $79.45 $98.56
The intention of service charges is to allow utilities to recover up to 50% of their fixed
costs and the proportion of the service charge, or the difference between meter sizes, is
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a direct correlation of the maximum outflow capacity of the meter. The service charge for
a 1” meter is 2.5 times greater than a 5/8” meter due to the greater maximum outflow
capacity of the 1” meter, as established in D.85-06-064. The allocation of service charges
for the various meter sizes is calculated based on the CPUC’s Standard Practice Manual
U-7-W, which directs water utilities to spread the service charge over the meter sizes in
proportion to the maximum capabilities of the meters themselves to handle flows. Utilities
are required to deliver up to the maximum capabilities of every meter in their system,
whether or not the tap is on. Utilities must have appropriately sized water lines or may
need to upsize their water lines to accommodate customers’ potential demand and fire
flow requirements to keep the water system reliable and available 24 hours per day, 365
days per year.
The City has requested that the CPUC consider redistributing costs from service charge
to quantity fees. A nearly $100 fee without any water usage for residents with 1” meters
is a significant cost, particularly for residents on a fixed income and/or residents who
diligently try to conserve water. Furthermore, providing additional financial weight to
quantity fees, as compared to service charges, may result in enhanced incentives to
conserve water.
The City understands that service charges are meant to pay for som e of the fixed costs
of water systems, but has conveyed to the CPUC that customers with larger meters are
unfairly burdened by the service charge and ask ed that the CPUC consider re-
apportioning rates so that bills are more directly affected by water usage, rather than
meter size.
CONCLUSION:
The City recognizes there are some unique circumstances at play that necessitate higher
service charges in RPV compared to other tariff areas, but repeated, significant increases,
due to and following the PVPWRP, are concerning. Members of the City Council have
submitted questions to Cal Water in advance of this meeting, pertaining to service
charges, the PVPWRP, and efforts to reduce water rates. Representatives from Cal
Water will be available this evening to answer these and other questions posed by the
City Council.
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01203.0005/785125.1
CALIFORNIA WATER SERVICE COMPANY PUBLIC HEARING
April 20, 2022, 5:30pm
Public Comment by Assistant City Manager, Karina Banales, of City of Rancho Palos Verdes on
behalf of City of Rancho Palos Verdes.
Regarding the application of CALIFORNIA WATER SERVICE COMPANY (U60W), a California
corporation, for an order (1) authorizing it to increase rates for water service by $80,484,801 or
11.1% in test year 2023, (2) authorizing it to increase rates on January 1, 2024 by $43,582,644 or
5.4%, and (3) authorizing it to increase rates on January 1, 2025 by $43,197,258 or 5.1% in
accordance with the Rate Case Plan, and (4) adopting other related rulings and relief necessary
to implement the Commission’s ratemaking policies. (A2107002.)
• On behalf of the City Council and the residents of Rancho Palos Verdes , I am expressing
concern regarding the proposed rate increases for the Palos Verdes tariff area.
• Rancho Palos Verdes does not have any groundwater reserves, so all water must be
purchased and, due to our location, pumped uphill, resulting in service charg es
significantly higher than neighboring cities that are not served by Cal Water, and that are
among the highest even within the Cal Water service area.
• In February 2021, Palos Verdes ratepayers saw significant increases in their bills as a result
of the Palos Verdes Peninsula Water Reliability Project. The project added seven miles of
new drinking water pipeline for customers on the Palos Verdes Peninsula and added a
new pump station. As a result, customers’ service charges increased by 50%, and quantity
usage rates increased by 5% for tier 1, 23% for tier 2, and 55% for tier 3.
• As proposed in the case being discussed tonight, Palos Verdes ratepayers will have a 24%
increase in service charge, and 33% increase for usage for tiers 2-4, on top of the increases
as a result of the reliability project.
• If the rates as proposed are adopted, the average Rancho Palos Verdes ratepayer will see
an increase of nearly $18/month or 20% from January 2021 – for a monthly bill of $110
in 2023.
• The City urges the Commission to protect City ratepayers against overspending by
requiring Cal. Water to demonstrate the need for infrastructure investment based on the
actual, physical conditions of the current systems that serve the City, rather than simply
on the infrastructure age. The Commission should not allow the Applicant to rely simply
on the age of its infrastructure to determine whether that infrastructure should be
replaced. The City urges the Commission to require that the Applicant demonstrate that
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01203.0005/785125.1
the physical condition of infrastructure warrants replacement or up-grading or
modernization.
• Any request for contingency allowances for most capital projects should be denied in
advance of expenditures. Contingency amounts are, by definition, unknown, and
therefore inappropriate for inclusion in revenue requirements. In D.21 -08-036, the
Commission stated that “budgeting for contingencies is not necessarily appropri ate in the
context of a general rate case, where the utility must demonstrate the reasonableness of
every dollar in its forecast revenue requirement.”
• Any request to continue to receive funding for projects previously funded but still
incomplete should be summarily denied. City ratepayers should not be required to fund
projects twice when they have yet to receive benefits once.
• We appreciate the efforts of the CPUC and the Public Advocates Office to ensure
Californians’ access to safe and reliable utility infrastructure and services at low ratepayer
costs, and we would ask that additional consideration be granted for the Palos Verdes
tariff area, to ensure the proposed increase is reasonable and justified.
• Thank you.
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Cal Water responses to RPV Council questions
April 26, 2022
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I would like to know when Cal Water will drop their unfair 3/4" versus 1" meter upcharge and go
strictly to a usage charge rate? This is the only fair and right way to advocate less water usage.
There currently is no plan to eliminate service charges from our water rates. Further, service charges are
commonly used by utilities across the state and country, and allow utilities to cover a portion of their
total fixed costs (such as pipelines, staff, facilities, water testing) to operate and maintain their systems.
Basing services charges based on service size is a common practice, as established not only by the
California Public Utilities Commission but also by the American Water Works Association. There are
basic costs that Cal Water incurs to serve any given customer, regardless how much water a customer
uses. These costs include operating and maintaining the water system (pipes, valves, meters, etc.) and
providing customer service, such as billing, payment processing and responding to customer calls. These
costs are fixed, meaning they don’t vary by how much water you use (or don’t use) at any given time.
This is also known as a readiness to serve charge for being connected to the system and Cal Water must
be ready to serve water to your property at any time. The California Public Utilities Commission has
conducted engineering tests on meters by size, and Cal Water’s readiness to serve duty means we must
be ready and able to serve the maximum capacity of the meter. The practice is not unfair. Customers
with larger meters, on average, do use more water than customers with 5/8-inch meters. In our Palos
Verdes service district in 2020, customers with 1-inch meters used an average of 63% more water than
customers with a 5/8-inch meter.
Having a fixed charge also means that a portion of fixed costs can be removed from volumetric billing
and provides some revenue stability.
We ran a hypothetical scenario if all customers regardless of meter sizes were charged one single service
charge. In this scenario, a single service charge would increase costs for the vast majority of customers
in order to benefit a small portion of customers. 76% of customers with 5/8 x ¾” meters would see a
$26.58 average increase in their monthly bills, and 15% of customers with a 1” meter would see a
decrease of $32.56 per month.
Also, I would ask if they would realize that people are hurting financially and what they are doing to
work towards reduced water rates?
California Water Service is committed to operating efficiently to keep costs as low as possible for our
customers. The regulatory framework within which we operate ensures that our customers pay rates
based on the cost of service, and that we do what is necessary to provide safe and reliable service.
In operating our water system, it is our goal to balance multiple factors – affordability, conservation, and
cost of operations (improvements and maintenance). In this 2021 Infrastructure Improvement Plan
application, we have introduced a new Tier 1 block group at a highly discounted rate of $1.65 per unit
for the first 6 units of water. Customers can control their bills by using less water, and the new proposed
Tier 1 per-unit cost is greatly reduced, 67% lower than the current Tier 1 rate.
Cal Water has a customer assistance program that reduces the monthly bill for people who qualify, and
we have a hardship grant program available as well. During the pandemic, we requested and received a
moratorium on bill increases, and our shareholders contributed $400,000 to pay off arrearages accrued
during the pandemic. We also worked diligently to ensure that our customers were eligible for state and
federally funded arrearage relief, and we have proposed an arrearage management program that would
allow portions of accrued arrearages to be forgiven for customers who follow an agreed upon payment
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Cal Water responses to RPV Council questions
April 26, 2022
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plan. Of course, we also have an industry-leading conservation program that customers can use to
reduce their water use and, as a result, better control their water bills. The median water use in our
Palos Verdes service district was 15 CCFs in 2020, the highest among our service districts. As per our
previous discussions with the City, we would very much like to work with the City on a joint campaign to
encourage water conservation. Not only is using less water in everyone’s best interest because of
California’s ongoing water scarcity issue but also because using less water is a direct way for customers
in PV to better manage their bills.
Why are water rates continuing to increase far exceeding inflation and other cost indexes?
The Consumer Price Index is very limited indicator of inflation. The Consumer Price Index does not cover
price changes in construction, raw materials, manufacturing, and other parts of the economy. Material
prices are based on the Producer Price Index (PPI), a measure of the price of manufactured goods, which
is typically double the core CPI. A large share of our operating costs and consequent rate increases is
driven by the construction needed to install and maintain our infrastructure. Even when considering a
more appropriate index such as PPI, one must also consider that using indices has a flattening effect
because indices, by their nature, account for a very large variety of products and services, when the cost
of water infrastructure may be more greatly affected by a limited range of goods and services within the
index. One also must consider the necessity of infrastructure projects. Water mains and booster pumps
must be replaced at the end of their useful lifespans, which is dictated by the age and physical condition
of the asset, rather than the market conditions affecting replacement cost.
Of course, we must also consider the inherent context of providing water service on the Palos Verdes
Peninsula, where there is no local source of water. Water must be purchased and pump up and out to
the peninsula. Purchased water for Palos Verdes in 2020 was a cost of $26.6 million, and the power to
get the water to customers cost $3.6 million that year. Despite all of that, our current proposal with the
CPUC would result in typical Palos Verdes customers using 15 Ccf per month seeing a 2% increase in
their bills, if approved as proposed.
Why was the Palos Verdes water improvement the project so far over budget, behind schedule and
why are the peninsula rate payers being saddled to pay for a project that was chronically over budget
and behind schedule?
In the CEQA document and in all of our communications with customers, which started at least one year
before the project broke ground, Cal Water shared that construction of the PVPWRP would take
approximately two years. The PVPWRP broke ground in July 2018 and was put into service in July 2020.
The Project was broken up into phases to minimize traffic impacts and any temporary inconvenience to
residents, and activities were timed to avoid peak traffic hours throughout construction. While we faced
delays in certain phases, the overall project was completed within the approximate two year timeframe
we estimated.
Regarding project costs, each cost estimate that was shared was based on a certain level of design
completed and the information we had at the time regarding jurisdictional requirements and site
conditions. As the design progressed and stakeholder requirements became known, the cost estimate
changed accordingly, as it would with any major construction project.
Utilities can only charge customers for investments that are "used and useful" for providing utility
service and PV customers are benefitting from the PVPWRP.
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Cal Water responses to RPV Council questions
April 26, 2022
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How is Cal Water working to provide increased affordability, cost competitiveness and efficient water
services to the residence of the Palos Verdes Peninsula?
We are always encouraging our customers to take advantage of our conservation, low-income
assistance, and/or hardship grant programs. One element in our efforts to preserve affordability is our
currently proposed residential rate design with a four-tiered inclining commodity rate to promote
conservation, while keeping rates low for basic indoor water use. This approach substantially discounts
the commodity rate for the first tier of water usage (up to 6 Ccf or 4,488 gallons per month) to protect
affordability. It is also important to restate that conservation is not only a means by which customers
can have more control over their bills but also a way to reduce operational costs. We recently conducted
a study that showed the economic value of water conservation: The analysis indicated that lower per-
capita water demand between 2010 and 2019 reduced operating costs by 3.2% to 19.9% in the five
districts studied. The districts that relied on purchased water, a characteristic shared by our Palos
Verdes service district, saw the most cost efficiencies, as one would intuit. Districts that relied on local
groundwater pumping saw lower but still significant cost reductions.
Really, why is the water rate a function of the water line diameter rather than the usage?
It is not a function of water line diameter, which is a factor but not the sole factor. Water rates comprise
of two main elements: a fixed monthly service charge, which is determined by service size, and
commodity usage charges, which are designed in increasing block rates.
As shared previously, the allocation of service charges for the various meter sizes are calculated based
on the CPUC’s Standard Practice Manual U-7-W, which directs water utilities to spread the service
charge over the meter sizes in proportion to the maximum flow rates of the meters themselves.
To provide background on the maximum outputs of meters, a 5/8” meter has a max flow rate of 20
gallons of water per minute, and a 1” meter has a max flow rate of 50 gallons per minute. As a utility, we
are required to deliver up to the maximum capabilities of every meter in our system, whether or not the
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Cal Water responses to RPV Council questions
April 26, 2022
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tap is on. If a customer has a bigger meter, there is increased water flow, and as a result, there are
associated higher costs to handle and meet those higher demands. Utilities must have appropriately
sized water lines (or may need to upsize its water lines) to accommodate customers’ demand and fire
flow requirements to keep the water system reliable and available 24 hours per day, 365 days per year.
Part of the fixed costs associated with this requirement are captured in the service charges.
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