R Comments on the Straw Proposal

Straw Proposal Scorecard Positives Attempt to reconcile rate structure and cost structure Focus on marginal costs Maintains tiered rates Negatives Based on untested/questionable assumptions Too prescriptive/One size doesn’t fit all Produces unpalatable results 2

Problematic Assumptions Single system/Single Source of Supply Relationship between Marginal Cost and Average Cost No subsidization across ratemaking areas 3

Straw Proposal Rate Design Residential Rates Recover 100% of fixed costs in monthly service charges Three tier volumetric rates Tier 1 rate equal to average variable cost Tier 2 rate equal to 50% of LRMC Tier 3 rate equal to 100% of LRMC Non-Residential Rates Recover 100% of fixed costs in monthly service charges Single volumetric rate equal to Residential Tier 2 rate 4

Straw Proposal Results Monthly Service Charges GSWC service charges will increase 45% to 230% over current levels Volumetric rate revenues will decrease about 32% system wide (range from 2% to 56% decrease by ratemaking area) compared to current levels Shift in revenue recovery from large usage customers to small usage customers 5

Straw Proposal Volumetric Rates Important Considerations: What about multi-system ratemaking areas with multiple sources of supply? How do you define Long-Run Marginal Cost of Water? What if the assumption about LRMC is wrong 6

LRMC Assumption Viability of proposal for volumetric rates depends upon an assumption regarding relationship between LRMC and Average Cost 7

What if the LRMC Assumption is wrong If LRMC is less than twice the average water supply cost, Tier 2 rate will be less than Tier 1 rate GSWC’s analysis: Nine ratemaking areas Assumed LRMC = Most expensive source of supply Results: 4 of 9 GSWC ratemaking areas will have Tier 2 rate less than Tier 1 rate (average supply cost) 8

Additional Complications Non-Residential Rates Non-residential customers will be paying less than the average cost for all usage in 4 ratemaking areas Revenue Recovery GSWC will under-collect its revenue requirement in 4 ratemaking areas 9

Straw Proposal Volumetric Rates Impact on Golden State’s Rates compared to current levels: Tier 1 rates decline in all 9 ratemaking areas. Declines range from 15% to 89% Tier 2 rates decline in 6 of 7 ratemaking areas. Declines range from 50% to 85% Tier 3 rates decline in 6 of 7 ratemaking areas. Declines range from 12% to 74% Non-residential volumetric rates decrease in 8 of 9 ratemaking areas. Declines range from 42% to 94% 10

Straw Proposal Revenue Reallocation Effects Results from GSWC’s analysis: Revenue recovery will shift from Non-Residential customers to Residential customers in all 9 ratemaking areas Revenue recovery will shift from large-usage Residential customers to low-usage Residential customers in 6 ratemaking areas Revenue re-allocation within Residential customer class depends on LRMC of supply 11

Straw Proposal Customer Bill Impacts Impact on Golden State’s Average Bills For Low Usage Residential customers: Monthly bills increase in all GSWC ratemaking areas. Increases range from 9% to 96% compared to current rates For Average Usage Residential customers: Mostly unfavorable results. Decreases in two ratemaking areas of less than 5%. Increases in seven ratemaking areas, ranging from 11% to 175%. For High Usage Residential customers: Bill decreases in 6 ratemaking areas, and increases in 3 ratemaking areas. For Non-Residential customers: Mixed Results. Depends on how the tier 2 rate compares to current rates. 12

Effect on Low Income Customers Customer usage distribution of Low-Income rate mirrors distribution of residential customer class Impact of Straw Proposal on Low Income customers will be similar to residential class as a whole For Low Usage, Low Income customers, significant increases in monthly bills unless size of CARE discount increases For High Usage, Low Income customers, effect on monthly bill depends on change to Tier 2 and Tier 3 rates 13

Public Purpose Balancing Account Proposal: Track excess volumetric revenues in PPBA to fund Low Income, Conservation, and Ratepayer Reward Programs Problems: 1. Situations where Tier 2 rate less than Tier 1 rate 2. Quarterly clearing mechanism results in uneven/uncertain financing 3. Who qualifies for Reward 14

Sales Forecasting Straw Proposal: Setting volumetric rate equal to average supply cost makes sales forecast unnecessary Problem: Proposal only works if you assume single source of supply (or uniform cost of supply). With multiple supply sources, average variable supply cost will vary with supply mix. Supply mix will vary with sales. 15

Summary Proposal does align cost structure and rate structure Detrimental to Low Usage Residential customers Re-allocate revenue recovery from Non-Residential to Residential Strong tendency to re-allocate revenue recovery from large usage residential to low-usage residential Cost assumptions unsupported by data Jeopardizes funding for conservation and low income programs Need for sales forecast is not eliminated 16

Questions? 17