1. DRA Perspective on Pricing, Cost, and Ratemaking Aspects of Recycled Water Delivered to and by Investor-Owned Utilities CPUC Water Recycling Rulemaking: Workshop #3 January 19, 2012

2. Water and Costs do not Flow Seamlessly The State Water Project and the Colorado River Project have subsidized imported water and hidden the full cost of pumping massive amounts of water long distances. Not all wastewater rates are tied to potable usage. Recycled water rates do not necessarily reflect the cost of service. –Subsidies from grants, loans, and other customers.

3. Key Policy Questions for the Commission Is there a good reason for recycled water rates to be less than potable water rates? Are there options beyond discounted rates that can equitably incent customers to use recycled water? How can recycled water tariffs be designed to ensure overall revenue neutrality for investor-owned water utilities?

4. Current Standard Practice Discounts between 15% and 25% off of potable rates. Special contracts for large customers (e.g. refineries) Differential pricing by customer class in some cases Usually one rate rather than block rates.

5. UtilityTariffs Price Potable Water (per CCF) Price Recycled Water (per CCF)Difference (Potable - RW) Alisal Water Corporation (Alco Water Service) Apple Valley Ranchos Water Company Schedule No. 1 General Metered ServiceTier 1: $2.157 Does not provide RW currentlyNA Cal American (Cal Am) Monterey Schedule No. MO-1 General Metered Service Tier 1 Residential (per 10 cf): $0.2821 Tier 1 (Non residential per 10 cf, see notes): $0.4082- $.1261 (per 10 cf) California Water Service Company Dominguez Schedule No. Dom-1-R, Dom-RC-1Tier 1: $2.6285 1st Tier for Title 22 Water: $1.8233 R.O. Water: $2.7957 Nitrified Water: $1.7647 1st Tier for Title 22 Water: $0.81 R.O. Water: -$0.16 Nitrified Water: $0.86 Hermosa-Redondo Schedule No. HR-6 Reclaimed Water, HR-1 Residential MeteredTier 1: $3.1874$2.9538$0.2336 Palos Verdes Schedule No. PV-6 Reclaimed Metered, PV- 1-RTier1: $3.2758$2.5940$0.6818 Westlake Schedule No. WK-1-R Residential Metered Service, Schedule. No. WK-6 Reclaimed Metered ServiceTier 1: $2.9636$2.4678$0.4958

6. Golden State Water Company Metropolitan District Schedule No. ME-1- R,Schedule No. ME-1-NR, Schedule ME-3 Residential Tier 1: $3.417 Non-Residential: $2.965$2.076 Residential: $1.341 Non-Residential: $0.889 Great Oaks Water Company Schedule No. 1 General Metered ServiceTier 1 Residential: $1.18 Does not provide RW currentlyNA Park Water Company PR-1 Residential Metered Service, PR-6 Reclaimed Water ServiceTier 1: $3.31$2.720$0.59 San Gabriel Valley Water Company Schedule No. LA-6 Recycled Water, Schedule No. LA-1C: General Metered Service Conservation RatesTier 1: $1.9523$1.771$0.18 San Jose Water Company Schedule 1 General Metered Service, Schedule RCW - Recycled Water Metered ServiceTier 1: $2.5157 Irrigation: $2.1293 Industrial: $1.6242 Agricultural: $1.6242 Irrigation: $0.3864 Industrial: $0.8915 Agricultural: $0.8915 Suburban Water Systems Schedule SJ-3: San Jose Hills Recycled Water, SJ- 1: Residential Tariff Area No. 1, Tier 1: $1.60 Tariff Area No. 2, Tier 1: $1.665 Tariff Area No. 3, Tier 1: $1.736 Tariff Area No. 1: $1.396 Tariff Area No. 2: $1.451 Tariff Area No. 3: $1.510 Tariff Area No. 1: $0.204 Tariff Area No. 2: $0.214 Tariff Area No. 3: $0.226 Valencia Water Company* Schedule No. 1-R General Metered Service, Schedule No. 5 - Recycled and Untreated Water ServiceTier 1:$1.144$1.144$0.00 * if accepted, Dedicated Irrigation Meter - Mixed Source tariff will have these prices:Tier 1 DIM-MS: $1.362$1.144$0.22

7. Current Statute Public Utilities Code 455.1 – Governs implementation of recycled water tariffs through advice letters Protests lead to hearings (d) If any other party, including the commission organization or division created pursuant to Section 309.5, [DRA] protests in writing the schedule filed by a water corporation for the service of recycled water, the commission shall set the matter for a hearing on the protest to be held within a reasonable time from the time that the party files its written protest with the commission.

8. Current Statute – Water Code Section 13580.8 – Governs how the CPUC should consider setting recycled water rates (d) The commission shall, as appropriate, provide a discount from the general metered rate of the water utility for potable water by either of the following means: (1) Passing through to the customer the net reduction in cost to the water utility in purchasing and delivering recycled or nonpotable water as compared to the cost of purchasing and delivering potable water. (2) Granting to the customer a uniform discount from the water utility's general metered potable water rate when the discount in paragraph (1) is determined to be an insufficient incentive for the customer to convert to the use of recycled or nonpotable water. If the commission provides for a discount pursuant to this paragraph that is greater than the water utility's reduction in cost, the commission shall authorize the water utility to include the aggregate amount of that discount in its revenue requirements to be applied to, and recovered in, rates that are applicable to all general metered customers.

9. Current Statute – Water Code Section 13550 – Reasonable Use (a) The Legislature hereby finds and declares that the use of potable domestic water for nonpotable uses, including, but not limited to, cemeteries, golf courses, parks, highway landscaped areas, and industrial and irrigation uses, is a waste or an unreasonable use of the water within the meaning of Section 2 of Article X of the California Constitution if recycled water is available which meets all of the following conditions, as determined by the state board, after notice to any person or entity who may be ordered to use recycled water or to cease using potable water and a hearing held pursuant to Article 2 (commencing with Section 648) of Chapter 1.5 of Division 3 of Title 23 of the California Code of Regulations: (1)The source of recycled water is of adequate quality for these uses and is available for these uses. In determining adequate quality, the state board shall consider all relevant factors, including, but not limited to, food and employee safety, and level and types of specific constituents in the recycled water affecting these uses, on a user-by- user basis. In addition, the state board shall consider the effect of the use of recycled water in lieu of potable water on the generation of hazardous waste and on the quality of wastewater discharges subject to regional, state, or federal permits. (2)The recycled water may be furnished for these uses at a reasonable cost to the user. In determining reasonable cost, the state board shall consider all relevant factors, including, but not limited to, the present and projected costs of supplying, delivering, and treating potable domestic water for these uses and the present and projected costs of supplying and delivering recycled water for these uses, and shall find that the cost of supplying the treated recycled water is comparable to, or less than, the cost of supplying potable domestic water.

10. Observations on the Key Policy Questions Is there a good reason for recycled water rates to be less than potable water rates? – There is a tension between positive incentives (discounted rates) and negative incentives (unreasonable use enforcement). – Some utilities are turning to availability fees. – Municipal codes requiring recycled water use under certain conditions have been considered. – Concerns about safety and risk have diminished.

11. Observations on the Key Policy Questions Are there options beyond discounted rates that can equitably incent customers to use recycled water? – Negative incentives for continued use of potable water. – Retrofit costs. – Promotional benefits. – Greenhouse gas offset credits.

12. Observations on the Key Policy Questions How can recycled water tariffs be designed to ensure overall revenue neutrality for investor- owned water utilities? – Adjust potable sales forecasts and account for cost differentials (purchased water, power, chemicals). – Set recycled water rates equal to potable water rates. – Use availability fees. – Mechanisms to recover “lost” potable revenues.

13. Sales and Revenue Decoupling has not Benefitted Ratepayers These mechanisms give the water IOUs too much protection. – They shield the utilities from declining revenues due to non- conservation factors, such as the economy and the weather. Variable costs have generally not gone down with conservation, resulting in fewer production costs savings than anticipated. – Purchased water, power, chemicals. Customers have the perception that they are getting penalized for conserving due to high surcharges to recover the under collections. Revenue Decoupling shifts sales risk from shareholders to ratepayers, making the companies less risky. – To restore the balance of risk and reward, the return of equity should be reduced to compensate consumers.

14. Revenue Decoupling has Harmed Vulnerable Populations Multiple year surcharges lead to huge rate increases. – Rates are going up in the rate cases to make up for the reduced sales and concurrently customers are having to pay for the under collections from previous years in the WRAM/MCBA balancing accounts. The smallest districts with the fewest customers, many of which have a large number of low-income customers, have the highest levels of under collections.

15. Procedural Possibilities Modify the Rate Case Plan to require sales forecast conversions (potable to recycled) in GRCs. – Revise, if needed, via Advice Letter. All Class A and B IOUs present a comprehensive justification for recycled water rates in their next GRC. Use the OIR to set parameters for rate setting, and implement via Advice Letter.

16. Recommendations Require justification for discounts for recycled water use. Avoid use of WRAM/MCBA mechanisms to obtain revenue neutrality. Work with the SWRCB and local governments to identify opportunities for application of reasonable use authority and codes and standards.

17. The Legislative Analyst’s Office predicts a dire scenario by 2030. Rationing and scarcity pricing would have harmful social and economic effects.

18. Questions? Picture of the Sacramento-San Joaquin Delta at Sunrise : http://www.google.com/imgres?imgurl=http://archieastrid.files.wordpress.com/2012/01/0102120732a.jpg&imgrefurl=http://archieastri d.wordpress.com/&h=480&w=640&sz=73&tbnid=UU39CeXEvOf0ZM:&tbnh=107&tbnw=142&prev=/search%3Fq%3DSacramento% 2BDelta%2Bat%2Bsunrise%2Bphoto%26tbm%3Disch%26tbo%3Du&zoom=1&q=Sacramento+Delta+at+sunrise+photo&docid=Dxk k_UZsqW_F5M&hl=en&sa=X&ei=J4sXT76-I6OqiALVvc2kCA&ved=0CD0Q9QEwBQ&dur=3000