NARUC SUMMER COMMITTEE MEETINGS Committee on Water Agenda California Regulatory Initiatives Case History – California American Water B. Kent Turner – President California American Water July 16, 2007

1 Background California PUC’s Water Action Plan approved in December Adopts four key water principles: Safe, high quality water Highly reliable water supplies Efficient use of water Reasonable rates and viable utilities

2 California American Water Had Several Pre-Existing Programs Some conservation programs in all districts Low Income proposals made in a number of cases Consolidated tariffs in some service areas Active intense conservation program in Monterey Inclining block rate structure in Monterey - based on individual customer needs Active low income program in Monterey

3 California American Water Proposals in Los Angeles District Rate Case – Filed January 2006 Implementation of an Infrastructure System Replacement Surcharge (ISRS) (DSIC-like program) –All utility plant replacements part of proposed ISRS. –Can’t be revenue generating or expense reducing. –ISRS adjusted quarterly, based on completed plant additions. –Implementation would be ministerial, approved in 15 days. –All ISRS-related capital expenditures subject to prior review and full examination prior to being recovered in base rates.

4 L.A. District GRC Proposals (continued) Variation from current CPUC tariff –Place more fixed cost recovery in quantity rate –Tiered rates for residential customers –Approve a Water Revenue Adjustment Mechanism to track lost revenues and implement revenue/sales decoupling –Approve only with other requests in the case are approved Full integration of rate tariffs in Los Angeles –Remove current rate differential between service areas due to purchased water and power rates

5 L.A. District GRC Proposals (continued) Implement a Low Income Rate Assistance Tariff Implement Full-Cost Purchased Water and Power Balancing Accounts –In conjunction with proposed rate design, conservation programs –Keeps customers and company whole Implement Conservation Program, Memorandum Account –Provide incentives to promote conservation –Allocate funding to comply with Best Management Practices –Memorandum account facilitates recovery of prudently incurred expenditures

6 Intra-Case Rulings and Agreements Case Bifurcated into Two Phases –Phase 1: development of revenue requirement –Phase 2: determination of rate design, related items Phase 2 Includes: –All rate design issues –WRAM Account determination –Changes in purchased water and power balancing accounts Agreement Reached on Most Revenue Requirement Issues Settlement Reached on LIRA proposal - Allows monthly fixed fee rebate to qualified individuals

7 Intra-Case Rulings and Agreements (continued) Settlement Reached on Conservation Program –Allows increased spending, memorandum account to track all incurred costs –Allowance for additional water auditing resources Agreement that California American Water would not seek full consolidated rates Conceptual Settlement Reached on All Phase 2 issues –Service charges reduced to 25% of fixed cost recovery –Three-tier residential rate design with a winter/summer component – rate blocks would be fairly large and compressed –Single-tier commercial rate design with winter/summer component

8 Intra-Case Rulings and Agreements (continued) Water Revenue Adjustment Mechanism –Will track all variances in fixed cost recovery from the adopted amount in a rate case –Revenue decoupling mechanism Implement Modified Cost Balancing Account –Tracks variations in purchased water and power costs due to production changes –Approved mechanism would use decision-adopted source production requirements based on usage

9 Items Related to WAP that Remain Open No Agreement on WRAM and ROE Adjustment –DRA initially requested a 300 basis point reduction in authorized ROE (against the existing authorized ROE, not requested ROE) –DRA subsequently modified its request to a range of 150 to 300 bp reduction No Agreement on ISRS Implementation

10 ALJ’s Initial Proposed Decision Requires a 50 bp Reduction in Authorized ROE –Per implementation of WRAM account and Modified Cost Balancing Accounts –Decision to reduce ROE by 50 bp based on limited hearing input –Decision to reduce the ROE misapplies energy utility experience – CPUC, considered, but never specified a reduction in authorized ROE –Would set precedent for other water companies –Does not consider all “risk impacts” Authorizes an ISRS, but much more restrictive than company proposal

11 ALJ’s Initial Proposed Decision (continued) Requires Full Review of All ISRS Additions Before Approval of the Surcharge All Differences in Costs Between Projects Proposed and Which Actually Occur Have to be Fully Explained

12 Current Proceeding Status Initial PD Modified Twice Due to Comments of Parties 50 bp ROE reduction will be removed if a Conservation Loss Adjustment Mechanism replaces the WRAM –CLAM only tracks effects of estimated revenue variances due to conservation programs and rate designs –WRAM decouples sales from revenues; tracks variances in fixed cost recoveries Phase 1 Decision Held until August for Possible Issuance of an Alternate Decision Addressing the ROE Adjustment Issue Proposed Decision in Phase 2 Can’t be Issued until Phase 1 is Resolved and a Hearing on Phase 2 Issues is Held