filed in the matter of the application of the golden state
TRANSCRIPT
BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE STATE OF CALIFORNIA
In the matter of the Application of the GOLDEN STATE WATER COMPANY (U133W) for an order (1) authorizing it to increase rates for water service by $49,518,400 or 14.97% in 2022; (2) authorizing it to increase rates by $16,107,100 or 4.22% in 2023, and increase rates by $17,207,900 or 4.31% in 2024 in accordance with the Rate Case Plan; and (3) adopting other related rulings and relief necessary to implement the Commission's ratemaking policies.
Application 20-07-012
Filed July 15, 2020
REPLY BRIEF OF GOLDEN STATE WATER COMPANY
GOLDEN STATE WATER COMPANY Joseph M. Karp Keith Switzer Chris Kolosov Vice President, Regulatory Affairs Winston & Strawn LLP 630 East Foothill Boulevard 101 California Street, 35th Floor San Dimas, CA 91773-9016 San Francisco, California 94111-5894 (909) 394-3600, Ext. 680 Telephone: (415) 591-1000 Facsimile: (415) 591-1400 Email: [email protected] [email protected] Attorneys for Golden State Water Company November 5, 2021
FILED11/05/2104:59 PM
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TABLE OF CONTENTS
Page SUMMARY OF RECOMMENDATIONS ............................................................................. iv
I. INTRODUCTION.......................................................................................................... 1
II. EXECUTIVE SUMMARY ........................................................................................... 2
III. SPECIAL REQUEST NO. 2 – ESTABLISHMENT OF MEDICAL COST BALANCING ACCOUNT ............................................................................................ 8
A. A Multitude of Factors are Causing Extraordinary Volatility in the Health Insurance Market and Golden State is Too Small of a Company to Influence Health Insurance Premium Costs. ........................................................................... 9
1. Volatility in health insurance premium costs is the result of manifold extraordinary conditions, including the COVID-19 pandemic, not “typical market fluctuations”. ..................................................................... 9
2. Golden State lacks the market power to influence health insurance premiums, and Cal Advocates’ assertions to the contrary are belied by the record in this proceeding. .................................................................... 12
B. Historical Costs Do Not Provide Any Reliable Basis for Accurately Forecasting Golden State’s Health Insurance Premiums for the 2022 to 2024 Rate Case Cycle. ................................................................................................... 17
C. Establishing the Medical Cost Balancing Account is in the Interests of Both Golden State and its Ratepayers. .......................................................................... 19
IV. SPECIAL REQUEST NO. 8 – ESTABLISHMENT OF BALANCING ACCOUNT FOR GENERAL LIABILITY INSURANCE COSTS ............................................. 22
A. Numerous Factors are Contributing to Extraordinary Volatility in the Liability Insurance Market, and Golden State is Too Small of a Company to Exert Influence Over Liability Insurance Premium Costs.............................................. 24
1. The liability insurance market is experiencing tremendous volatility due to extraordinary conditions, not “typical market fluctuations.” ......... 24
2. Golden State lacks the market power to influence liability insurance premiums, and Cal Advocates’ assertions to the contrary are belied by the record in this proceeding. .................................................................... 26
B. Historical Costs Do Not Provide Any Reliable Basis for Accurately Forecasting Golden State’s Liability Insurance Premiums for the 2022 to 2024 Rate Case Cycle. ................................................................................................... 28
C. Establishing the GLICBA is in the Interests of Both Golden State and its Ratepayers. ............................................................................................................ 32
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V. SPECIAL REQUEST NO. 13 – CONSOLIDATION OF LOS OSOS AND SANTA MARIA CUSTOMER SERVICE AREAS ................................................................ 35
A. Cal Advocates’ Claim that Consolidation Would “Place an Unfair Burden on the Lower-Income Santa Maria Rate Making Area” is Both Unsupported and Untrue. .................................................................................................................. 35
1. Cal Advocates’ claims regarding relative incomes and home values in the Santa Maria and Los Osos CSAs rely on inapplicable data, and Cal Advocates fail to consider the impact of the affordability issue on the less wealthy residents of the Los Osos CSA. ............................................ 35
2. Cal Advocates’ apparent contention that Special Request No. 13 would result in unreasonable subsidies is contrary to clearly articulated Commission policies and the facts of Golden State’s consolidation proposal. .................................................................................................... 41
B. Cal Advocates’ Claims Regarding Operational Benefits and Water Supply Considerations Misinterpret the 1992 Guidelines and Misconstrue the Commission’s Policies on Consolidation. ............................................................ 45
C. Golden State’s Rate Consolidation Proposal Would Not Negate Conservation Price Signals in the Los Osos CSA. ...................................................................... 49
D. Cal Advocates’ Assertion that Affordability is not an Issue in the Los Osos CSA Ignores Reality and Misconstrues the Commission’s Policies Concerning Consolidation and Affordability. .......................................................................... 52
E. Cal Advocates’ Focus on a Consolidation Proposal from More than 20 Years Ago is Misguided Because the Current Limited Proposal is Substantially Different and Circumstances Have Significantly Changed. ................................. 57
F. There is no Basis for Cal Advocates’ Argument that Golden State Must Thoroughly Examine All Other Options Before Proposing Consolidation, and Consolidation of the Los Osos and Santa Maria CSAs Remains the Best Option. .................................................................................................................. 59
VI. CONCLUSION ............................................................................................................ 65
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TABLE OF AUTHORITIES Page
COMMISSION RULES
Rule 13.10 ................................................................................................................................11, 40 Rule 13.12 ......................................................................................................................................1
COMMISSION DECISIONS
Decision 05-10-042 .................................................................................................................. 21-22 Decision 07-05-062 ....................................................................................................................1, 19 Decision 11-11-018 ........................................................................................................................20 Decision 14-10-047 ................................................................................................42, 46, 53, 56, 61 Decision 18-12-021 ............................................................................................................15, 16, 59 Decision 19-09-051 ......................................................................................................21, 27, 28, 34 Decision 20-09-019 ..............................................................................................................8, 14, 23 Decision 20-12-005 ........................................................................................................................34 Decision 21-10-024 ........................................................................................................................14
OTHER COMMISSION DOCUMENTS
2005 Water Action Plan .................................................................................................................42 Affordability Metrics Framework Staff Proposal, R.18-07-006 (Jan. 24, 2020) (Appendix A to D.20-07-032)........................................................................................................40 Order Instituting Rulemaking on the Commission’s Proposed Policies Governing Restructuring California’s Electric Services Industry and Reforming Regulation; Order Instituting Investigation on the Commission's Proposed Policies Governing Restructuring California’s Electric Services Industry and Reforming Regulation”, issued in R.94-04-031, I.94-04-032, 1994 Cal. PUC LEXIS 336 ...................................................................................................... 21-22 Report on Balanced Rate Rulemaking, R.11-11-008 (Jan. 30, 2014) (Attachment A to D.14-10-047) .....................................................................................................53
CASES
Bluefield Water Works v. Pub. Serv. Com’n., 262 U.S. 679 (1923) ........................................ 21-22 F.P.C. v. Hope Nat. Gas Co., 320 U.S. 591 (1944) ................................................................. 21-22
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SUMMARY OF RECOMMENDATIONS
Special Request No. 2 – Establish the Medical Cost Balancing Account
• The Commission should authorize Golden State to establish the Medical Cost Balancing
Account, as proposed by Golden State. (Pages 8-22)
Special Request No. 8 – Establish the General Liability Insurance Cost Balancing Account
• The Commission should authorize Golden State to establish the General Liability
Insurance Cost Balancing Account, as proposed by Golden State. (Pages 22-35)
Special Request No. 13 – Consolidation of Los Osos and Santa Maria CSAs
• The Commission should authorize Golden State to consolidate the Los Osos and Santa
Maria CSAs for ratemaking purposes, as proposed by Golden State. (Pages 35-65)
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BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE STATE OF CALIFORNIA
In the matter of the Application of the GOLDEN STATE WATER COMPANY (U133W) for an order (1) authorizing it to increase rates for water service by $49,518,400 or 14.97% in 2022; (2) authorizing it to increase rates by $16,107,100 or 4.22% in 2023, and increase rates by $17,207,900 or 4.31% in 2024 in accordance with the Rate Case Plan; and (3) adopting other related rulings and relief necessary to implement the Commission's ratemaking policies.
Application 20-07-012
filed July 15, 2020
REPLY BRIEF OF GOLDEN STATE WATER COMPANY I. INTRODUCTION
Pursuant to Rule 13.12 of the Rules of Practice and Procedure1 (“Rules”) of the
California Public Utilities Commission (“Commission”) and Decision 07-05-062 (“Rate Case
Plan” or “RCP”),2 Golden State Water Company (“Golden State”) submits this reply brief
(“Reply Brief”) addressing the arguments raised by the Commission’s Public Advocates Office
(“Cal Advocates”) in their opening brief (“Opening Brief”) in respect of Golden State’s General
Rate Case (“GRC”) Application 20-07-012 (“Application”), seeking authorization to increase
rates in 2022, 2023, and 2024.
Cal Advocates argue that the Commission should reject three of Golden State’s special
1 Rule 13.12 of the Rules of Practice and Procedure of the Commission (specifying, among other requirements, that factual statements be supported by identified evidence of record). 2 D.07-05-062 at A-12 (stating: “Each party may file a brief that responds to the issues raised by other parties in opening briefs.”)
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requests included in the Application (“Special Requests”): (i) Special Request No. 2, under
which Golden State would be authorized to establish the Medical Cost Balancing Account,
(ii) Special Request No. 8, under which Golden State would be authorized to establish the
General Liability Insurance Cost Balancing Account, and (iii) Special Request No. 13, under
which Golden State would be authorized to consolidate its Los Osos and Santa Maria customer
services areas (“CSAs”) for ratemaking purposes.
In this Reply Brief, Golden State demonstrates that the contentions underlying Cal
Advocates’ recommendations to deny the Special Requests are not supported by the record in
this proceeding and are imprudent. To the contrary, the record evidence demonstrates that each
of Golden State’s requests is just and reasonable, such that the Commission should authorize all
the contested Special Requests as proposed by Golden State.
II. EXECUTIVE SUMMARY
The facts in this proceeding’s record demonstrate that granting each of the contested
Special Requests is fair, prudent, and warranted. Cal Advocates’ arguments to the contrary are
based on their unsupported opinions and inaccurate characterizations of prior Commission
decisions. Accordingly, Golden State is confident that when the Commission analyzes the
evidence in this proceeding, the Commission will conclude that each of Golden State’s three
contested Special Requests should be authorized.
Special Requests No. 2 and No. 8, which seek authorization to establish a Medical Cost
Balancing Account and a General Liability Insurance Cost Balancing Account, respectively,
have certain similarities. As set forth in Golden State’s Opening Brief, those similarities arise
because both requests are the result of market conditions that have created extraordinary
volatility and uncertainty regarding the amounts that Golden State ultimately will be required to
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spend to fund the utility’s portion of its employees’ health insurance costs and to obtain prudent
amounts of liability insurance. However, there are different root causes of the volatility and,
critically, different facts and circumstances that the Commission must consider when reviewing
Special Requests No. 2 and No. 8. In Cal Advocates’ Opening Brief, they commingle their
objections to both balancing accounts into a single section,3 reflecting Cal Advocates’ failure to
address the specific facts in the record that are unique to the Medical Cost Balancing Account or
the General Liability Insurance Cost Balancing Account, respectively, and that demonstrate the
reasonableness of establishing each of these balancing accounts.
Cal Advocates’ objections to both balancing accounts are that (i) Golden State has failed
to show that there is anything other than typical market fluctuations impacting both health
insurance premiums and liability insurance premiums, (ii) Golden State is able to control these
costs, (iii) Golden State’s historical costs are good predictors of what these costs will be during
this rate cycle, and (iv) balancing account treatment will afford no ratepayer benefit and “would
simply allow Golden State to pass on imprudently incurred health and general liability insurance
costs to captive ratepayers.”4 In each case, these assertions are based almost entirely on Cal
Advocates’ unsupported opinions, and the evidence in this proceeding’s record demonstrates
exactly the opposite to be true.
As explained in detail in Golden State’s testimony and Opening Brief and discussed
further below, the extreme volatility and uncertainty of health insurance and general liability
insurance costs are the result of extraordinary conditions that are outside of Golden State’s
3 Opening Brief of the Public Advocates Office (hereinafter “Cal Advocates Opening Brief”) at 13-15. 4 Id. at 14.
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control, not “typical market fluctuations”, as Cal Advocates contend.5 In both cases, that
volatility and uncertainty severely impair Golden State’s ability to set rates that fairly reflect the
costs of serving its customers. Golden State’s historical costs are not reliable indicators of what
either health or liability insurance will cost over the next three years, as was demonstrated by the
extraordinarily high renewal premiums incurred when Golden State renewed its liability
insurance policies for 2021. Whereas Cal Advocates’ claims are based almost entirely on its own
opinions, Golden State provides actual data for its historic costs and from top-tier third party
insurance experts that demonstrate that balancing account treatment is entirely reasonable,
prudent, and consistent with the conditions under which the Commission has concluded in the
past that balancing accounts should be authorized.
As set forth in Golden State’s Opening Brief, Special Request No. 13, to consolidate the
Los Osos and Santa Maria CSAs for ratemaking purposes, arose from the company’s concern
that the affordability of water service is becoming an issue for its Los Osos CSA customers. Cal
Advocates make numerous assertions as to why the Commission should not approve the
consolidation, but many of their claims are premised upon their fundamentally flawed and
unsupportable contention that the consolidation would unfairly burden lower-income Santa
Maria customers by causing them to subsidize water service for higher-income Los Osos
customers. Cal Advocates base this contention on census data regarding relative incomes and
home values in the cities of Santa Maria and Los Osos, arguing that this data demonstrates that
the Santa Maria CSA is less wealthy than the Los Osos CSA. Because the geographical
boundaries of Golden State’s Santa Maria and Los Osos CSAs do not even roughly align with
the municipal boundaries of the cities of Santa Maria and Los Osos, this census data in no way
5 Id. at 13.
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supports Cal Advocates’ assertion. To the contrary, as set forth in Golden State’s testimony and
Opening Brief, the Santa Maria and Los Osos CSAs are similar on both the higher and lower
ends of the income spectrum and everywhere in between, including wealthy, less wealthy, and
truly low-income customers (in very similar percentages).
Moreover, Cal Advocates’ assertions of unreasonable subsidies from Santa Maria
customers to Los Osos customers run counter to (i) the reality that, on multiple levels, there are
already inherent subsidies built into the current CSA and ratemaking structure, and this is
particularly true in the Santa Maria and Los Osos ratemaking districts, which comprise water
systems that do not share common infrastructure (six in the Santa Maria CSA and two in the Los
Osos CSA), and (ii) the Commission’s Water Action Plan. Therein, the Commission specifically
endorses developing policies for subsidizing high-cost areas, including through consolidation of
districts or rates.
Cal Advocates’ other arguments against Golden State’s consolidation proposal are
similarly misguided. They misinterpret the Commission’s four-pronged analysis for considering
whether a consolidation is in the public interest, such that three of the four prongs could never
support consolidation among districts that do not share infrastructure. This clearly was not the
Commission’s intention because if it were, there would only be a two-pronged analysis—as three
of the four prongs would be subsumed into this single question. Cal Advocates also misconstrue
the Commission’s determinations set forth in Decision 14-10-047, both (i) to mischaracterize the
framework endorsed therein as one possible method for determining that rates have become
unaffordable as the exclusive method for making such a determination, such that a utility should
not take action to address affordability issues except in strict accordance with that framework,
and (ii) to require utilities to conduct an in-depth analysis of every one of the possible methods
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of addressing an affordability issue before proposing a method for addressing an affordability
problem. Both these interpretations are contrary to the plain language of Decision 14-10-047,
would impair the ability of utilities to address affordability issues in a timely manner, and should
be rejected by the Commission.
Cal Advocates’ other two arguments against the consolidation proposal—that its adoption
would negate conservation price signals in the Los Osos CSA and that the Commission should
reject the proposal because it rejected a much different consolidation proposal 21 years ago—are
similarly without merit. The record in this proceeding demonstrates that Golden State’s Los Osos
customers are great conservers of water who are in the habit of conserving water; these
customers pay over two-and-one half times more per ccf than the average Golden State
customer; and the consolidation proposal would result in their rates being frozen for the time
being, not decreased. Under these circumstances, there is simply no reason to believe (much less
anything in the record to demonstrate) that the proposed consolidation would result in increased
water usage in the Los Osos CSA.
As to the Commission’s decision of more than two decades ago upon which Cal
Advocates urges the Commission to rely, the consolidation proposal in that proceeding would
have consolidated seven different ratemaking districts spread over more than 500 miles and
resulted in a service territory comprising 50,000 service connections. The instant proposal is to
consolidate just the Los Osos and Santa Maria CSAs, which are within 15 to 20 miles of each
other and will result in a district comprising 18,000 service connections. As such, the proposals
are fundamentally different, both in terms of the scope and scale of the consolidations proposed
and the underlying circumstances upon which the proposals are premised. Therefore, the
Commission should give no weight to Cal Advocates’ contention that the Commission’s
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conclusion in Decision 00-12-063 is applicable here.
As detailed in Golden State’s testimony and Opening Brief, Golden State’s rate
consolidation proposal in this proceeding is reasonable, warranted, and similar to other
consolidation requests approved by the Commission in recent years. Under Special Request No.
13, Golden State would freeze the Los Osos customers’ rates (other than for supply cost offsets
and certain other surcharges and surcredits) and include the remaining portion of the combined
revenue requirement (including the portion of the traditional—i.e., unconsolidated—Los Osos
customer revenue requirement that will not be recovered from the Los Osos customers because
of the rate freeze) in the rates of current Santa Maria customers. Over future rate cycles, the Los
Osos rates would be increased only by changes in the Consumer Price Index (“CPI”) until such
time as the revenue requirement per ccf in the Santa Maria district equals the revenue
requirement per ccf in the Los Osos district, at which time the ratemaking for Los Osos and
Santa Maria customers will be fully merged.
Critically, using the data set forth in the Application,6 the rate impact from the
consolidation in the Santa Maria district would be an increase of between only $0.21 and $0.26
per ccf; whereas the savings for Los Osos customers would be between $2.43 and $2.89 per ccf
(depending on whether the effect of a 2021 escalation year increase in the Los Osos district is
factored into the analysis). Further, even with the consolidation, the revenue requirement per ccf
in the Santa Maria district would be 15% lower than Golden State’s system-wide average
revenue requirement. Providing this just and reasonable relief to all customers in Los Osos is
6 See, infra, notes 130 and 164, regarding some variation due to the settlement in principle with Cal Advocates.
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warranted and should be approved in this proceeding—not put off until sometime in the future
when the situation has grown acutely worse and implementing a solution more onerous.
For all the foregoing reasons, Golden State respectfully requests that the Commission
carefully consider the data supporting each of the three contested Special Requests in this
proceeding and reject Cal Advocates’ unsupported statements of opinion, misstatements and
misinterpretations of prior Commission decisions, and efforts to miscast Golden State’s
proposals. Golden State has justified each of Special Request Nos. 2, 8 and 13. They are just and
reasonable and should be adopted.
III. SPECIAL REQUEST NO. 2 – ESTABLISHMENT OF MEDICAL COST
BALANCING ACCOUNT
The Commission has identified four conditions that, when present, warrant the use of
balancing accounts to protect both the utility and ratepayers from likely forecast error:
1. The expense is caused by an event of an exceptional nature
that is not under the utility’s control;
2. The expense cannot have been reasonably foreseen in the
utility’s last GRC and will occur before the utility’s next
scheduled rate case;
3. The expense is of a substantial nature in the amount of
money involved; and
4. The ratepayers will benefit by the memorandum account
treatment.7
With regards to Special Request No. 2, pursuant to which Golden State would track differences
between its forecast and actual health insurance premiums, Cal Advocates claim that Golden State
7 D.20-09-019 at 46-47.
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failed to establish three8 of these conditions, but the evidence in the record in this proceeding
demonstrates the opposite to be true. Accordingly, the Commission should reject Cal Advocates’
assertions that (i) the extraordinarily volatile and uncertain health insurance market is not
exceptional and that the premium costs are within Golden State’s control, (ii) these expenses can
be forecast based on historical costs, and (iii) ratepayers will not benefit from balancing account
treatment, as set forth in detail below.
A. A Multitude of Factors are Causing Extraordinary Volatility in the Health
Insurance Market and Golden State is Too Small of a Company to Influence
Health Insurance Premium Costs.
1. Volatility in health insurance premium costs is the result of manifold
extraordinary conditions, including the COVID-19 pandemic, not “typical
market fluctuations”.
The Medical Cost Balancing Account will record the difference, positive or negative,
between the forecasted amounts in the test year and attrition years for employee medical, dental
and vision insurance premiums. During normal times, Cal Advocates are correct that any such
difference would merely be caused by “[t]ypical market fluctuations,”9 but the present, recent
past, and near future cannot be described as “normal” when it comes to matters related to
healthcare. As Golden State explained in its Opening Brief,10 the health insurance market is
8 In their Opening Brief, Cal Advocates do not argue that the expense is not of a substantial nature with regards to the amount of money involved. Accordingly, this factor does not appear to be a point of contention. In any case, Golden State’s testimony and Opening Brief demonstrate that the amount of money involved is substantial. (See Golden State Opening Brief at 15 (citing GSW-11 (Prepared Testimony, Matthew Currie (hereinafter “Currie Prepared”) at 23:6-9 (citing excel workbook: SEC-40_EXP_Pension Benefits, tab: RPT_Summary_All)).) 9 Cal Advocates Opening Brief at 13. 10 Golden State Opening Brief at 7-15.
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experiencing extreme volatility as a result of uncertainties arising from a multitude of rapidly
changing factors, including the novel coronavirus (“COVID-19”) pandemic and major legislative
changes and uncertainty. These multiple exceptional circumstances create a very significant risk
that the increases in Golden State’s health insurance premiums over the rate case cycle will
diverge from the company’s forecasts and the standard escalation factors set forth in the Rate
Case Plan.
As the Commission is well aware, the COVID-19 pandemic has upended typical patterns
and behaviors in virtually every area of operations and, indeed, in virtually every area of life
more generally. Golden State’s insurance expert, Mr. Matthew Currie, explained that the long-
term cost effects associated with the COVID-19 pandemic remain shrouded in uncertainty, but
the direct impact on healthcare premiums is real and present and may be felt for many years to
come.11 He explained that those impacts may be the result of deferred or abandoned care by
participants and loss of employer-sponsored health care,12 and that the impacts of deferred care
are only just beginning to appear across the healthcare system, but that it is clear that such
impacts will result in unique costs that defy historical precedents.13 And indeed, there have been
numerous recent news reports that, consistent with Mr. Currie’s record testimony, describe
hospital emergency rooms now being swamped not just by COVID-19 patients, but by people
who deferred treatment for other medical issues because of the COVID-19 crisis.14
11 GSW-71 (Rebuttal Testimony, Matthew Currie (hereinafter “Currie Rebuttal”) at 17:20-18:1. 12 CAL PA-18 (Responses to AMX-018, Response 22.a). 13 Id. 14 See, e.g., ERs are now swamped with seriously ill patients — but many don't even have COVID, Kate Wells, National Public Radio (October 26, 2021), available at: https://www.npr.org/sections/health-shots/2021/10/26/1046432435/ers-are-now-swamped-with-seriously-ill-patients-but-most-dont-even-have-covid (explaining: “Terrified of contracting COVID-19, people who were sick with other things did their best to stay away from hospitals. Visits to emergency departments dropped to half their normal levels, according to the Epic Health Research Network, and didn’t fully rebound until the summer of 2021
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As to Cal Advocates’ attempt to characterize these current circumstances as “[t]ypical
market fluctuations”, Mr. Currie stated clearly why this claim must be rejected:
If recovering from a pandemic and attempting to calculate the
financial cost of such an extraordinary event is not “exceptional in
nature,” I think a person would be hard pressed to identify a
qualifying event. No company in world history has been faced with
these circumstances before. Yes, there was a pandemic
approximately 100 years ago, but companies were not challenged
with forecasting the future cost of their medical insurance plan as
they were emerging from the pandemic. This ongoing event is
outside of anyone’s control.15
There is little doubt that the resumption of health care services to normal levels will result in
significant cost increases—the uncertainty lies in defining the ceiling for those costs in these
unprecedented times.16 The COVID-19 pandemic continues to evolve, exacerbating the already
volatile medical insurance market and making Golden State’s medical insurance costs in the
2022 to 2024 rate cycle extremely difficult to determine at the present time.17 Accordingly, the
COVID-19 pandemic should be sufficient, without any other complicating factors, for the
Commission to conclude that the current volatility and uncertainty in the healthcare insurance
market is exceptional in nature.
. . . But now, they’re too full [as] patients are showing up to the ER sicker than they were before the pandemic, their diseases more advanced and in need of more complicated care. Months of treatment delays have exacerbated chronic conditions and worsened symptoms. Doctors and nurses say the severity of illness ranges widely and includes abdominal pain, respiratory problems, blood clots, heart conditions and suicide attempts, among others.”) Pursuant to Rule 13.10, Golden State requests that the Commission take official notice of this article. 15 GSW-71 (Currie Rebuttal) at 23:4-11. 16 Id. 17 GSW-11 (Currie Prepared) at 25: 4-10.
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But the COVID-19 pandemic is not the only event causing such volatility. Rather, as Mr.
Currie explained, legislative changes and uncertainty are also making future healthcare insurance
highly unpredictable. The country’s newly elected President, Joe Biden, is a strong proponent of
healthcare market reform and has already expressed his plans to explore expansion of the
Affordable Care Act, as well as Medicare for all or the expansion of Medicare coverage.18 Mr.
Currie explained that, if enacted, those changes will undoubtedly impact health insurance
premiums. Moreover, multiple pieces of recent legislation have already been enacted that may
impact the cost of health insurance in the future, including, but not limited to, Mandatory
Pharmacy Benefit and Drug Cost Reporting legislation, the No Surprise Billing Act, and
Transparency Regulations.19 The extent of those impacts are not quantifiable at the present time,
particularly as the likelihood of the additional legislation being passed remains an unknown.
In sum, there are tremendous unknowns as to health insurance costs even for 2022—with
2023 and 2024 being more unpredictable still—and those unknowns arise from exceptional
circumstances, not “typical market fluctuations.” Accordingly, the Commission should reject Cal
Advocates’ contention that Golden State has failed to establish that the volatility and uncertainty
in health insurance premium costs arise from events of an exceptional nature.
2. Golden State lacks the market power to influence health insurance
premiums, and Cal Advocates’ assertions to the contrary are belied by the
record in this proceeding.
Cal Advocates misconstrue Golden State’s testimony in an attempt to claim that Golden
State has the ability to influence the costs of health insurance and thereby overcome volatility in
18 GSW-71 (Currie Rebuttal) at 17:8-12. 19 Id. at 17:14-18.
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the healthcare insurance market, when in reality, Mr. Currie stated explicitly that Golden State
lacks market power due to its small size. As Mr. Currie explained:
The health insurance industry is a mammoth, multifaceted market
where relatively small employers like [Golden State] have very
little leverage. The complex structure of provider contracts and
related networks results in a less than desirable negotiating
position for a health insurance consumer like [Golden State]
considering its member count. The best negotiating tool is
comparing quotes among insurance companies, which [Golden
State] routinely explores through assistance of its professional
insurance broker.20
Accordingly, Golden State specifically explained that it is a price-taker in the health insurance
market and as such, lacks control over health insurance premiums. Golden State compares the
quotes that it receives in order to obtain the best prices that it can, but its “control” is limited to
exploring the options available and then selecting policies based on the quotes offered—so if all
quotes are significantly higher than forecasts due to volatility caused by events of an exceptional
nature, Golden State has no ability to change that reality. And extraordinary health insurance
costs are in fact being driven by the events of an exceptional nature described above and
producing extreme volatility across the market for health insurance.
Cal Advocates state that the Commission has previously found “that utilities are able to
influence expenses such as health care through the negotiation of contracts” and therefore
utilities should not receive balancing account treatment for such expenses,21 but its citation to
Decision 20-09-019 is inapposite to the present situation. In Decision 20-09-019, the
20 Id. at 22:10-16. 21 Cal Advocates Opening Brief at 13 (citing D.20-09-019 at 47).
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Commission denied Liberty Apple Valley’s request to renew its Employee and Retiree
Healthcare Balancing Account and Liberty Park’s request to establish an Employee and Retiree
Healthcare Balancing Account, commenting that “Liberty can significantly influence health care
expenses particularly under its much larger corporate structure. In fact, negotiating health care
contracts is one of the areas in which a larger corporate structure should be able to exert more
control of costs.”22 But as Mr. Currie explained, Golden State is a small actor and price-taker in
this market. Further, a material factor in the Commission’s denial of balancing account treatment
in Decision 20-09-019 was the Commission’s finding that “health care costs have stabilized”
compared to the situation in which Liberty Apple Valley had previously been authorized to
establish the balancing account.23 But as set forth above, the record in this proceeding
demonstrates extreme uncertainty in the health insurance market at the present time.
Cal Advocates also cite to the Proposed Decision in Suburban Water Systems’
(“Suburban”) most recent GRC,24 for which the Final Decision was issued on October 27,
2021,25 denying the continuation of Suburban’s Employee Healthcare Balancing Account.26 But
there too, Suburban negotiates its employee health insurance together with its parent, Southwest
22 D.20-09-019 at 50. 23 Id. 24 Cal Advocates Opening Brief at 13 (citing Proposed Decision Approving and Adopting Settlement Agreement, Resolving Remainder of Disputed Issues and Authorizing Suburban Water Systems’ General Rate Increases for 2021, 2022, and 2023, A.20-03-001 at 37 (Issued on Sept. 17, 2021)). 25 D.21-10-024. 26 Id. at 36-37.
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Water Company,27 who owns utility companies in six states28 and is therefore situated much
differently than Golden State.
An appropriate comparison for Golden State’s Special Request No. 2 is included in
Decision 18-12-021, establishing the 2018-2020 rates of California American Water Company
(“Cal-Am”) and authorizing Cal-Am to establish a Group Insurance Balancing Account very
similar to the Medical Cost Balancing Account that Golden State is requesting in this
proceeding.29 In that proceeding, Cal-Am requested the two-way balancing account to track the
difference between total requested net group insurance costs on a per-employee basis and the
actual level of new group insurance costs incurred on the same basis.30 Cal-Am explained that
the account was warranted due to the volatility of group insurance costs, which made it difficult
to forecast accurately a reasonable level of group insurance expense.31 The evidence upon which
Cal-Am relied was similar to the evidence in the record here—historic volatility in its insurance
costs,32 its consultant’s prediction that insurance premiums would increase in the range of 7%-
10% annually (compared with the 11% prediction in this case), and the volatility of insurance
costs resulting from possible changes to healthcare legislation.33 The only issue that Cal-Am
faced that Golden State does not face was that Cal-Am’s parent company, American Water
Company, was to be renegotiating insurance coverage with vendors after the filing of the GRC,
27 Suburban Opening Brief in A.20-03-001 at 23 (“Suburban’s parent company, Southwest, determines the medical and dental plans for Suburban’s employees”). 28 See Southwest Water Company, “About Our Company”; available at: https://www.swwc.com/about-our-company/. 29 D.18-12-021 at 228-231. 30 Id. at 228. 31 Id. 32 Id. at 229-230. 33 Id. at 228.
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and Cal-Am had little control over the parent company’s negotiations.34 But as discussed above,
due to its relatively small size, Golden State also lacks control when negotiating with insurance
companies. Moreover, due to the COVID-19 pandemic, the volatility that Golden State faces in
forecasting health insurance premiums for the 2022 to 2024 rate cycle is far worse than that
faced by Cal-Am in 2018.
Golden State would be more than happy to have the ability to use “its market capital and
size” to pressure insurance providers to lower premiums—as that would not only help keep water
rates down; it would also reduce the premiums that its employees need to fund and therefore
would be a helpful factor in attracting top talent.35 Golden State would also be more than happy
to lock in its current rates with an insurance provider through 2024 but “no insurance provider in
the world would guarantee health insurance rates for that long.”36 The simple fact is that Golden
State will be shopping for insurance for the 2022 renewal at the end of 2021 and trying to get the
best value in coverage, but “all of the quotes it will receive will most certainly consider what
happened in 2021 regarding [Golden State’s] claims and what the future of the health insurance
market looks like at that point.”37 Cal Advocates’ assertion that Golden State has any ability to
exert control over the uncertainties and volatility currently impacting the health insurance market
has no basis in reality or the record and should be rejected.
34 Id. at 229. 35 Golden State Opening Brief at 19. 36 GSW-71 (Currie Rebuttal) at 21:9-11. 37 Id. at 21:1-6.
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B. Historical Costs Do Not Provide Any Reliable Basis for Accurately
Forecasting Golden State’s Health Insurance Premiums for the 2022 to 2024
Rate Case Cycle.
Cal Advocates assert that the expenses to be recorded in the Medical Cost Balancing “are
reasonably foreseeable . . . can be based on historical rates . . . [and that] [t]o the extent that costs
for these products are trending upwards, these trends are captured in past premium rates,”38 but
the record demonstrates that these assertions lack any merit. As set forth above and discussed in
detail in Golden State’s Opening Brief, Special Request No. 2 arises from ongoing extraordinary
conditions in the insurance markets that materially increase the uncertainty of forecasting future
health insurance premium costs. For medical insurance, between 2017 and 2020, the actual
premium increases that Golden State incurred to renew its policies were 15.5%, 5.6% 4.1% and
1.3%,39 demonstrating that even under relatively normal conditions, there is significant
uncertainty involved in forecasting health insurance premium increases. But due to
circumstances of an exceptional nature—the COVID-19 pandemic and major legislative changes
and uncertainty—present conditions are anything but normal, such that the uncertainty
underlying future healthcare insurance premiums is exponentially more severe. Moreover, as set
forth in detail in Golden State’s Opening Brief, Mr. Currie discussed a long list of other
aggravating factors that make historic health insurance premium costs unreliable predictors of
future costs at the present time, including, among many others: the inadequacy of current
premiums to support claims and retention costs, increasing costs associated with specialty drugs,
the aging of the US population and Golden State’s covered personnel in particular, rapid
38 Cal Advocates Opening Brief at 13. 39 GSW-71 (Currie Rebuttal) at 16:1-4.
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advances in medical science that have resulted in unprecedented numbers of very high cost
claims, surging medical malpractice costs, and insurance provider consolidation resulting in less
competition and higher prices.40
Critically, because of the tremendous uncertainty and volatility in the medical insurance
markets, Golden State and its insurance advisors analyzed data from numerous expert sources in
their efforts to forecast health insurance premiums for this rate case cycle, and based on that
expert analysis, determined that historical costs are very unlikely to be reliable predictors of
future costs. After reviewing data provided by four different experts that specialize in the health
insurance market,41 Golden State ultimately relied on an Oliver Wyman survey because of the
central position of its estimate among the range of estimates received42 and because Oliver
Wyman is routinely relied upon by actuaries and underwriters as a resource over other surveys.43
Based on that Oliver Wyman survey information and taking into account Golden State’s
demographic adjustments, Golden State’s insurance brokers have estimated medical insurance
premiums to increase by 11.0% in 2021, and about 11% for each year during the period of 2022,
2023, and 2024.44 These estimates of top experts present a major change from historical costs,
40Golden State Opening Brief at 10-12 (citing GSW-71 (Currie Rebuttal) at 13:13-16). 41 Cal Advocates’ witness for insurance matters provided lower cost forecasts based on data provided by IHS Markit, but as discussed in Golden State’s Opening Brief, IHS Markit is a massive consulting firm covering many industries but does not specialize in the health insurance market and does not even include the health insurance industry as an area of expertise on their website. (Golden State Opening Brief at 12 (citing GSW-71 (Currie Rebuttal) at 13:13-16).) 42 Cal Advocates’ witness for insurance matters argued that it was unreasonable for Golden State to use the 100th percentile values in the Oliver Wyman survey rather than the more modest 50th percentile values. (Report and Recommendations on General Office, Mehboob Aslam (hereinafter “Aslam GO Report”) at 46:13-15.) But Mr. Currie explained that its insurance broker consulted with their actuaries and underwriters, who advised that the 100th percentile was recommended in such a mercurial market. (GSW-71 (Currie Rebuttal) at 12:16-23.) 43 GSW-71 (Currie Rebuttal) at 18:6-11. 44 GSW-11 (Currie Prepared) at 24:10-13.
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strongly indicating that historical costs are not a reasonable predictor of the costs Golden State
will be required to incur during the 2022 to 2024 rate case cycle.
Finally, Cal Advocates fail to address that, under the Rate Case Plan, the second and third
years of the rate case cycle are not individually forecasted and simply escalate medical insurance
expenses using pre-determined labor inflation factors,45 and in 2019, this factor was 2.4% and
the five-year annual average, from 2015 to 2019 was 1.5%, which is much lower than the
historical increases in medical premiums.46 As stated above, the actual premium increases that
Golden State incurred to renew its policies were 15.5%, 5.6% 4.1% and 1.3%47—for an average
increase of 6.625%. Accordingly, even under normal circumstances in which historic costs may
be a reasonable predictor of future health insurance premiums, there is a significant risk of a
shortfall in health insurance premium expenses during the attrition years. And, again, current
circumstances are anything but normal.
C. Establishing the Medical Cost Balancing Account is in the Interests of Both
Golden State and its Ratepayers.
Cal Advocates make numerous claims in their effort to assert that authorizing the
Medical Cost Balancing Account is not in the interest of Golden State’s ratepayers, but the facts
set forth in Golden State’s testimony and Opening Brief demonstrate that none of these claims
have any merit.
First, Cal Advocates contend that “[t]he proposed balancing accounts could eliminate
Golden State’s incentive to negotiate for the lowest possible rates,”48 but as detailed in Golden
45 D.07-05-062 at A-19. 46 GSW-11 (Currie Prepared) at 24:5-8. 47 GSW-71 (Currie Rebuttal) at 16:1-4. 48 Cal Advocates Opening Brief at 14.
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State’s Opening Brief, this assertion has no basis in reality. Golden State’s employees pay a
portion of their health insurance premiums, and health insurance coverage and premiums paid by
Golden State’s employees form an essential piece of the total compensation package for
competitive hiring and retention. 49 As such, Golden State has strong incentives to keep health
insurance premiums as low as possible.50 If Golden State does not control the cost that
employees must pay towards health insurance, it will have a harder time attracting and retaining
top-quality talent. Authorization of the Medical Cost Balancing Account would not change that
Golden State’s employees would continue to bear their share of the health insurance costs, such
that Golden State will continue to be incentivized to keep health insurance premiums as low as
possible.51
Second, Cal Advocates claim that “the balancing account would remove incentives for
Golden State to explore ways to minimize or contain health care costs, such as adopting greater
cost-sharing for health coverage between employer and employees or using its market capital
and size as an effective negotiating tool.”52 As to cost-sharing, Golden State testified specifically
that the company continually looks for ways to reduce its insurance costs, including by reducing
the coverage offered to its employees.53 As to “not using its market capital and size as an
effective negotiating tool,” as discussed in detail above and in Golden State’s Opening Brief,
49 As explained in Golden State’s Opening Brief, this is a key difference between the instant request of Golden State and the 2010 request of San Gabriel Valley Water (“San Gabriel”), another Class A water utility that had requested a balancing account for tracking employee health and dental expenses. The Commission rejected that request but placed a lot of emphasis on the fact that San Gabriel bore 100% of its employees’ health insurance costs. Decision 11-11-018 at 25-27. 50 GSW-71 (Currie Rebuttal) at 21:22 - 22:4. 51 Id. at 22:2-6. 52 Cal Advocates Opening Brief at 14. 53 GSW-11 (Currie Prepared) at 25:12-13.
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Golden State would like nothing better than to be able to pressure insurance providers to lower
premiums, because that would both help keep water rates down and reduce the premiums that its
employees need to fund. But as a relatively small company procuring health insurance in a
mammoth, multifaceted market, this is just not Golden State’s reality.
Third, Cal Advocates claim that the Medical Cost Balancing Account “would simply
allow Golden State to pass on imprudently incurred health . . . insurance costs to captive
ratepayers.”54 But this is a two-way balancing account, and, as Golden State stated clearly in its
Opening Brief, there is tremendous uncertainty in the health insurance markets such that actual
premium increases may vary from the estimates provided by Oliver Wyman and, in the case of
vision insurance, Eyemed. If these projections turn out to be correct, the premiums that Golden
State is actually required to fund during this rate cycle will exceed the amounts authorized in this
proceeding, particularly in the attrition years, and ratepayers will pay the under-collection. But if
Golden State’s forecasts and escalation rates are ultimately too high, Golden State’s customers
will be credited back the over-collection. In authorizing two-way balancing accounts in other
recent proceedings, the Commission has made clear that such balancing accounts provide
flexibility to utilities to address cost variances but at the same time allow unspent funds to be
returned to ratepayers.55 Moreover, under the regulatory compact, public utilities are intended to
have an opportunity to earn a reasonable return on investment and cost recovery of prudently
incurred expenses, in exchange for meeting their obligation to serve their customers.56 Setting
54 Cal Advocates Opening Brief at 14. 55 D.19-09-051 at 155. 56 “Order Instituting Rulemaking on the Commission’s Proposed Policies Governing Restructuring California’s Electric Services Industry and Reforming Regulation; Order Instituting Investigation on the Commission's Proposed Policies Governing Restructuring California’s Electric Services Industry and Reforming Regulation”, issued in R.94-04-031, I.94-04-032, 1994 Cal. PUC LEXIS 336 at *54 (“The traditional compact . . . ensures the utility’s financial integrity by granting it an opportunity to recover
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rates that do not reflect the costs of providing safe and reliable service to utility customers would
ultimately jeopardize that compact, which would benefit neither utilities nor ratepayers.
Finally, Cal Advocates claim that “[b]alancing accounts also reduce transparency to
customers’ water rates if amortized outside the GRC process, resulting in a surcharge added to
customer’s bills. The proposed expenses in a GRC gives ratepayers an opportunity to review the
filing as well as participate and intervene.”57 If this is truly a concern, the Commission can order
that the Medical Cost Balancing Account cannot be amortized until Golden State’s next GRC.
Golden State would have no objection to such an order.
In sum, none of the arguments raised by Cal Advocates in opposition to the Medical Cost
Balancing Account have any merit. The evidence in the record in this proceeding demonstrates
that Golden State has met is burden of proof as to the establishment of the balancing account,
such that Special Request No. 2 should be granted.
IV. SPECIAL REQUEST NO. 8 – ESTABLISHMENT OF BALANCING ACCOUNT
FOR GENERAL LIABILITY INSURANCE COSTS
The principles underlying Golden State’s Special Request No. 8 for the establishment of
the General Liability Insurance Cost Balancing Account (“GLICBA”), which will track the
difference between the third-party premium amounts for general liability, excess liability and
umbrella policies (but not self-insurance amounts) included in the revenue requirement and the
actual liability insurance expense Golden State incurs, are similar to those underlying the
reasonably incurred expenses and earn a fair return on its investment); see, also, D.05-10-042 at 9 (“We have already noted that under traditional regulation of integrated utilities, providing an opportunity for a reasonable return on investment was at the core of the regulatory compact.”); see, also, Bluefield Water Works v. Pub. Serv. Com’n., 262 U.S. 679 (1923); F.P.C. v. Hope Nat. Gas Co., 320 U.S. 591 (1944). 57 Cal Advocates Opening Brief at 14.
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company’s request for the Medical Cost Balancing Account, and the same four conditions for the
establishment of balancing accounts apply.58 Moreover, although there are different root causes
of the volatility in the liability insurance market versus volatility in the health insurance market,
the effect of that volatility is the same: rates that are unlikely to reflect the actual costs that
Golden State incurs in order to procure prudent insurance policies, absent a balancing account.
And Cal Advocates raise the same arguments in their objections to the GLICBA as they do in
their objections to the Medical Cost Balancing Account; their Opening Brief commingles their
objections to both balancing accounts into a single section.59 In so doing, Cal Advocates fail to
address the specific facts in the record that are unique to the Medical Cost Balancing Account or
the GLICBA, as applicable, and demonstrate the reasonableness of establishing each of these
balancing accounts. As such, Cal Advocates’ objections are no more reasonable in the context of
the GLICBA than they are in the context of the Medical Cost Balancing Account.
As set forth in detail below, the evidence in the record regarding the GLICBA
demonstrates that the Commission should reject Cal Advocates’ assertions that (i) the
extraordinarily volatile and uncertain market for liability insurance is not exceptional and that the
premium costs are within Golden State’s control, (ii) these expenses can be forecast based on
historical costs, and (iii) ratepayers will not benefit from balancing account treatment. To the
58 The four conditions are: (1) the expense is caused by an event of an exceptional nature that is not under the utility’s control; (2) the expense cannot have been reasonably foreseen in the utility’s last GRC and will occur before the utility’s next scheduled rate case; (3) the expense is of a substantial nature in the amount of money involved; and (4) the ratepayers will benefit by the memorandum account treatment. (D.20-09-019 at 46-47.) As was the case with the Medical Cost Balancing Account, Cal Advocates do not argue that the liability insurance expense is not of a substantial nature with regards to the amount of money involved. Accordingly, this factor does not appear to be a point of contention with respect to the GLICBA either. In any case, Golden State’s testimony and Opening Brief demonstrate that the amount of money involved is substantial. (See Golden State Opening Brief at 28 (citing GSW-71 (Currie Rebuttal) at 3:5-10).) 59 Cal Advocates Opening Brief at 13-15.
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contrary, the Commission should conclude that the GLICBA is warranted and approve its
establishment.
A. Numerous Factors are Contributing to Extraordinary Volatility in the
Liability Insurance Market, and Golden State is Too Small of a Company to
Exert Influence Over Liability Insurance Premium Costs.
1. The liability insurance market is experiencing tremendous volatility due to
extraordinary conditions, not “typical market fluctuations.”
With regard to liability insurance, Cal Advocates claim that “Golden State has not
pointed to any event of an exceptional nature but merely references various market forces that
are driving premiums up” and that “[t]ypical market fluctuations are not events of an exceptional
nature, and merely because premiums are going up does not mean that a utility is not able to
forecast those increases,”60 but the record demonstrates that Cal Advocates’ contentions have no
merit. Both Mr. Currie and Mr. Brad Powell, a senior regulatory analyst for Golden State,
provided testimony detailing how the extraordinary volatility and uncertainty in the liability
insurance market are the result of exceptional events that are outside of Golden State’s control.
Mr. Currie explained how the liability insurance market has been materially impacted by such
exceptional events:
Insurance rates can be greatly influenced by the perceived risk as
determined by the prospective insurer based on not only the
Company’s loss history, but also by the loss history of the industry
as a whole. In recent years the rates for California utilities [have]
been influenced by an increase in inverse condemnation claims
stemming from wildfires. Other factors such as world-wide
catastrophic losses resulting from disasters can cause drastic spikes
60 Id. at 13.
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in insurance rates when insurers find they have limited funds to
write new policies.61
Mr. Powell elaborated, explaining how the current liability insurance market has diverged from
the past not only because of increases in the number and scope of disaster events but because the
associated exposure has increased tremendously in the litigation ensuing from such events:
If the demonstrable increase in occurrences and financial cost of
natural disasters is not enough to meet the “exceptional in nature”
test, one can add in the emerging risk component the insurance
industry is now quantifying called “social inflation.” Social
inflation essentially refers to the trend of rising insurance costs due
to increased litigation, plaintiff-friendly judgments, and higher jury
awards. Both of these factors represent deviations from the norm
when compared to historical risk environments, thus making them
“exceptional in nature” by definition. These market conditions are
obviously outside of anyone’s control . . . .62
Cal Advocates’ categorization of these events and the associated exposure as “typical
market fluctuations” must be rejected because the volatility in the current market is completely
outside of what can be observed in the historical record and beyond even what top industry
experts are able to forecast accurately. Indeed, Golden State’s recent experience with liability
insurance renewals for 2021 demonstrates the extreme volatility in the liability insurance market.
As explained in Golden State’s testimony and Opening Brief, not only were the actual renewal
premiums far higher than what Cal Advocates claimed to be reasonable forecasts, they were also
higher than the forecasts included in Golden State’s original Application.63 But it was precisely
61 GSW-11 (Currie Prepared) at 10:18-26. 62 GSW-85 (Rebuttal Testimony, Brad Powell (hereinafter “Powell Rebuttal”) at 46:12-21. 63 Golden State Opening Brief at 23-24.
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because Golden State recognized the uncertainty underlying these insurance premium forecasts
that the company requested the GLICBA. As Mr. Powell explained, “the industry experts have
been shooting off flares to warn companies of the impending significant change in the liability
insurance industry.”64
2. Golden State lacks the market power to influence liability insurance
premiums, and Cal Advocates’ assertions to the contrary are belied by the
record in this proceeding.
As discussed above with respect to the Medical Cost Balancing Account, Cal Advocates
misconstrue Golden State’s testimony in an attempt to establish that Golden State has the ability
to influence the costs of liability insurance and thereby overcome volatility in the liability
insurance market, when in reality, as Golden State explained in its Opening Brief, Golden State
is a price-taker and small actor in the marketplace.65 Just as Mr. Currie explained in the context
of the health insurance market, in the context of the liability insurance market, Mr. Powell
explained that the idea that Golden State can obtain lower premiums by “trying harder” at the
negotiation table is farfetched.66 Mr. Powell stated: “The liability insurance industry is a
mammoth, multi-faceted market where relatively small companies like [Golden State] have very
little leverage to influence premiums. The best negotiating tool is comparing quotes among
insurance companies that [Golden State] routinely explores through assistance of its professional
insurance broker.”67
64 GSW-85 (Powell Rebuttal) at 43:5-7. 65 Golden State Opening Brief at 31-32. 66 GSW-85 (Powell Rebuttal) at 45:12-14. 67 Id. at 45:14-17.
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As discussed above, Cal Advocates argue that the Commission has previously found
“that utilities are able to influence expenses such as health care through the negotiation of
contracts” and therefore utilities should not receive balancing account treatment for such
expenses,68 but this claim does not support rejection of the GLICBA any more than it supports
rejection of the Medical Cost Balancing Account. In fact, none of the cases cited by Cal
Advocates address this issue in the context of the liability insurance market, and the Commission
has recently found that enormous energy utilities should be granted balancing accounts in respect
of their liability insurance costs. As discussed in Golden State’s Opening Brief, one such
example is Decision 19-09-051, issued in the in the 2019 GRC for San Diego Gas & Electric
Company (“SDG&E”) and Southern California Gas Company (“SoCalGas”). In that proceeding,
the Commission explained:
Market fluctuations and the recent wildfires in California make
insurance costs difficult to predict. There are also many factors that
affect insurance premiums and certain factors are outside of
Applicants’ control or are difficult to foresee.69
Accordingly, the Commission authorized SDG&E and SoCalGas to establish a two-way Liability
Insurance Premium Balancing Account (“LIPBA”) because of this unpredictability regarding
liability insurance premiums,70 finding that the LIPBA “allows Applicants to address these
uncertainties in a timely manner and at the same time ensure that there is adequate insurance
coverage for known risks.”71 And the Commission made clear that its conclusion was not based
solely on wildfire risk unique to electrical utilities, as it rejected claims that the LIPBA should
68 Cal Advocates Opening Brief at 13 (citing D.20-09-019, p. 47). 69 D.19-09-051 at 534. 70 Id. 71 Id. at 751, Finding of Fact #227.
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only be applicable to SDG&E, stating that “SoCalGas is also exposed to liability insurance
fluctuations for different risks.”72 But the critical point disproving Cal Advocates’ position
regarding Golden State’s ability to influence liability insurance premiums is that the Commission
did not find that these energy utilities—entities that are many times larger than Golden State73—
can influence control over the costs of their liability insurance policies such that the requested
balancing accounts would not be necessary.
Just as the Commission concluded in the SDG&E and SoCalGas GRC that a balancing
account is an appropriate mechanism for managing volatility in the liability insurance market, so
too should the Commission conclude here. The record in this proceeding leaves no doubt that
Golden State is facing an extraordinarily unpredictable liability insurance market, and if
behemoths like SDG&E and SoCalGas cannot exert influence over the market and negotiate
their way into premiums that are consistent with their forecasted liability insurance expenses, the
notion that Golden State should be able to do so must be rejected.
B. Historical Costs Do Not Provide Any Reliable Basis for Accurately
Forecasting Golden State’s Liability Insurance Premiums for the 2022 to
2024 Rate Case Cycle.
Contrary to Cal Advocates’ claim that Golden State’s liability insurance expenses “are
72 Id. at 535. 73 SDG&E provides energy service to 3.6 million people through 1.4 million electric meters and 873,000 natural gas meters in San Diego and southern Orange counties. See SDGE, “About Us”; available at: https://www.sdge.com/more-information/our-company/about-us. SoCalGas is “the nation’s largest natural gas distribution utility . . . [delivering] . . . energy to 21.8 million consumers through 5.9 million meters in more than 500 communities.” See SoCalGas, “About SoCalGas”; available at: https://www.socalgas.com/about-us/company-profile?__cf_chl_managed_tk__=pmd_XXFMR0hoAFg.b3JuhIcBFRc3V9hJa80ijyC4lnrnAQk-1635890109-0-gqNtZGzNAzujcnBszQbl.
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reasonably foreseeable given that Golden State typically forecasts these costs in rates,”74 the
volatility in the liability insurance market is such that the amounts Golden State will be required
to incur in this rate cycle are extremely difficult to predict.75 Cal Advocates assert that the
expenses to be recorded in the GLICBA “can be based on historical rates . . . [and that] [t]o the
extent that costs for these products are trending upwards, these trends are captured in past
premium rates,”76 but the record demonstrates that these assertions are entirely counterfactual.
Specifically, the actual costs of Golden State’s renewals of its liability insurance coverage for
2021 as compared with Cal Advocates’ recommended renewal amounts for 2022, which Cal
Advocates asserted to be sufficient based on historical costs, clearly demonstrate that, due to the
ongoing extraordinary conditions in the liability insurance market, historical costs are entirely
inadequate as predictors of costs over the 2022 to 2024 rate cycle.
As described in detail in Golden State’s Opening Brief,77 Cal Advocates contend in their
testimony that Golden State’s insurance broker, Aon, provided forecasts for liability insurance
that are too high and that using historical costs for 2022 and the May 2020 CPI-U of 0.1% across
the board for 2023 and 2024 increases would result in sufficient coverage for Golden State’s
liability insurance costs.78 With regard to 2022, Cal Advocates’ recommendation would result in
a General Liability increase of 5.91%, an Excess Casualty increase of 34%, and an Umbrella
Liability increase of 2.15%.79 But in the interim period since Golden State served its prepared
74 Cal Advocates Opening Brief at 13. 75 GSW-85 (Powell Rebuttal) at 47:1-4. 76 Cal Advocates Opening Brief at 13. 77 Golden State Opening Brief at 22-24. 78 CAL PA-3 (Aslam GO Report) at 45:1 - 46:2. 79 Id. at 45:6-8.
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testimony, the company renewed those policies for 2021. The actual increase incurred by Golden
State for the General Liability policy was 15%,80 more than two-and-a-half times the 5.91% that
Cal Advocates deemed sufficient. The actual increase for Excess Casualty was 56%, not the 34%
that Cal Advocates deemed sufficient, and even to obtain that 56%, Golden State reduced its
limits from $50 Million to $40 Million.81 As for the Umbrella Insurance, Golden State achieved
a percentage decrease of -14%, rather than the 2.15% increase that Cal Advocates deemed
sufficient, but it managed to do so only by reducing its limits by 50%—from $10 Million to
$5 Million—which means the cost of coverage actually increased by a staggering 72% per
million dollars in coverage.82 Golden State desired greater excess liability coverage, but retaining
existing coverage limits would have been cost prohibitive.83 Such reductions to Golden State’s
policy limits can have serious consequences, as the purpose of purchasing insurance is to protect
Golden State and its ratepayers against risk and significant financial loss.84 There are minimum
coverage limits arising from statutes, contracts and other carrier requirements,85 and Golden
State undertakes a careful analysis before lowering coverage limits. As Mr. Currie explained,
annually, Golden State’s risk services team meets with their insurance advisors to discuss the
renewal strategy, including as to the appropriateness of the current limits of coverage.86 The
2021 renewals resulted from this in-depth analysis.
In sum, Golden State’s actual experience with 2021 renewals demonstrates that the
80 GSW-71 (Currie Rebuttal) at 3:5. 81 Id. at 3:10. 82 Id. at 3:6. 83 CAL PA-18 (Responses to AMX-018, Response 15.b). 84 CAL PA-18 (Responses to AMX-018, Response 15.c). 85 Id. 86 GSW-11 (Currie Prepared) at 2:24-27.
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historical metrics that Cal Advocates recommend are very poor predictors of the future of the
liability insurance market.87 As Mr. Currie stated:
Unfortunately, the liability insurance market is not holding to Cal
Advocates’ maxim that future increases mirror historical increases.
As described in my prepared testimony, the market is anxious in
regards to the current state of litigation in the nation and the ever-
increasing threat of a catastrophic loss. The renewal increases
[Golden State] is observing is not a mystery or surprise to anyone
who understands and follows the insurance industry. The real
question is not whether the increases [Golden State] has forecasted
will come to fruition, but rather will those increases be enough.88
Mr. Powell minced no words in describing Cal Advocates’ erroneous claim: “the foundational
reason Cal Advocates put forth in denying the liability insurance balancing account crumbled
under the weight of actual data.”89
Critically, Golden State’s concerns regarding the volatility of the liability insurance
market arise directly from information provided by its insurance advisor, Aon. As described in
Golden State’s Opening Brief,90 Aon is one of the top insurance brokers in the United States,
maintains relationships with numerous qualified insurers, is knowledgeable and familiar with
utilities and regulated industries, and monitors the market for each line of insurance coverage to
obtain a complete understanding of the market environment so that it can support Golden State’s
efforts to obtain appropriate insurance at a reasonable price.91 Because of the tremendous
87 GSW-71 (Currie Rebuttal) at 3:22-25. 88 Id. at 4:2-8. 89 GSW-85 (Powell Rebuttal) at 43:7-9. 90 Golden State Opening Brief at 24. 91 GSW-71 (Currie Rebuttal) at 6:20 – 7:3.
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uncertainty and volatility in the liability insurance markets, Golden State, with the assistance of
Aon, forecasted health insurance premiums for this rate case cycle, and based on that expert
analysis, determined that historical costs are very unlikely to be reliable predictors of future
costs. In contrast, Cal Advocates’ conjecture that Golden State’s historical liability insurance
costs are good predictors of the costs of liability insurance during the 2022 to 2024 rate cycle is
based solely on their own opinions; they did not cite to a single third-party source to support
their claims.92
Finally, Cal Advocates fail to address that, under the Rate Case Plan, the second and third
years of the rate case cycle simply escalate liability insurance expenses using the CPI-U, (which
was 0.1% as of May 2020 and 1.7% as of February 2021).93 Accordingly, even under normal
circumstances in which historic costs may be a reasonable predictor of future liability insurance
premiums, and even if Golden State were able to leverage expert advice to develop a reasonably
accurate forecast of these expenses for the test year, there is a significant risk of a shortfall in
liability insurance expenses during the attrition years because of the extreme volatility resulting
from extraordinary market conditions.
C. Establishing the GLICBA is in the Interests of Both Golden State and its
Ratepayers.
Cal Advocates make numerous claims in their effort to assert that authorizing the
GLICBA is not in the interest of Golden State’s ratepayers—indeed, the exact same claims that
92 See Golden State’s Opening Brief at 25-26 (citing GSW-85 (Powell Rebuttal) at 44:3-7 for Mr. Powell’s observation that while Cal Advocates has access to IHS Markit research, they failed to cite to it; Mr. Powell concluded that this could only be because either (1) Cal Advocates did not consider IHS Markit’s projections for the liability insurance market, or (2) IHS Markit’s view of the future of liability insurance costs was just as draconian as Golden State’s forecasts and thus did not support Cal Advocate’s opinions.) 93 GSW-71 (Currie Rebuttal) at 19:16-17.
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they make in connection with the Medical Cost Balancing Account because their arguments are
commingled—but here too, the facts set forth in Golden State’s testimony and Opening Brief
demonstrate that none of these claims have any merit.
First, Cal Advocates contend that “[t]he proposed balancing accounts could eliminate
Golden State’s incentive to negotiate for the lowest possible rates,”94 but as with the same claim
asserted in respect of the Medical Cost Balancing Account, this contention is fundamentally
flawed. Just as Mr. Currie explained in the context of the health insurance market, in the context
of the liability insurance market, Mr. Powell explained that the idea that Golden State can obtain
lower premiums by “trying harder” at the negotiation table is farfetched.95 Indeed, as discussed
in Section IV.A.ii above, the Commission has approved liability insurance cost balancing
accounts for energy utilities that are behemoths in comparison to Golden State. If those utilities
lack the ability to exert influence over the market and negotiate their way into premiums that are
consistent with their forecasted liability insurance expenses, the notion that Golden State should
be able to do so is nonsensical.
Second, Cal Advocates claim that the GLICBA “would simply allow Golden State to
pass on imprudently incurred . . . general liability insurance costs to captive ratepayers.”96 But as
with the Medical Cost Balancing Account proposal, this is a two-way balancing account. As
Golden State stated clearly in its Opening Brief, there is tremendous uncertainty in the liability
insurance markets such that actual cost increases may vary from the estimates provided by Aon.
If these projections turn out to be correct, the premiums that Golden State is actually required to
94 Cal Advocates Opening Brief at 14. 95 GSW-85 (Powell Rebuttal) at 45:12-14. 96 Cal Advocates Opening Brief at 14.
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fund during this rate cycle will exceed the amounts authorized in this proceeding, particularly in
the attrition years, and ratepayers will pay the under-collection. But if Golden State’s forecasts
and escalation rates are ultimately too high, Golden State’s customers will be credited back the
over-collection.
Moreover, Golden State’s statements above regarding the importance of setting rates that
reflect the cost of providing service, in accordance with the regulatory compact, apply equally in
the context of the GLICBA. In fact, the Commission appears to acknowledge this point in its
decisions authorizing liability insurance balancing accounts to SDG&E, SoCalGas and Pacific
Gas & Electric Company. Therein, the Commission states that the balancing account allows the
applicable utility “to address [ ] uncertainties in a timely manner and at the same time ensure
that there is adequate insurance coverage for unknown risks.”97 These statements seem to
suggest that without the balancing accounts, utilities may not incur the higher premiums required
to buy adequate liability insurance in a timely manner (i.e., until the next rate cycle), a decision
that may prove detrimental both to the utility and to ratepayers.
Finally, Cal Advocates claim that “[b]alancing accounts also reduce transparency to
customers’ water rates if amortized outside the GRC process, resulting in a surcharge added to
customer’s bills. The proposed expenses in a GRC gives ratepayers an opportunity to review the
filing as well as participate and intervene.”98 As with the Medical Cost Balancing Account, if
this is truly a concern, the Commission can order that the GLICBA cannot be amortized until
Golden State’s next GRC. Golden State would have no objection to such an order.
In sum, none of the arguments raised by Cal Advocates in opposition to the GLICBA
97 D.19-09-051 at 751, Finding of Fact #227; see, also, D.20-12-005 at 254. 98 Cal Advocates Opening Brief at 14.
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have any merit. The evidence in the record in this proceeding demonstrates that Golden State has
met is burden of proof as to the establishment of the balancing account, such that Special
Request No. 8 should be granted.
V. SPECIAL REQUEST NO. 13 – CONSOLIDATION OF LOS OSOS AND SANTA
MARIA CUSTOMER SERVICE AREAS
The Commission should approve Golden State’s Special Request No. 13 to consolidate
the Los Osos and Santa Maria CSAs because the benefits of consolidation are clear; the apparent
and growing high cost and affordability issues in the Los Osos CSA cannot be ignored; the data
show that these issues in the Los Osos CSA can be addressed without imposing significant
burdens on Santa Maria ratepayers; and the proposal meets all the Commission’s guidelines
concerning consolidations. Although Cal Advocates make numerous meritless arguments against
Special Request No. 13, their central argument, to which they return repeatedly, is that Santa
Maria ratepayers are lower income than Los Osos ratepayers such that consolidation would result
in less wealthy customers in the Santa Maria CSA subsidizing water service for more wealthy
customers in the Los Osos CSA. This central thesis is unsupported by the record, demonstrably
false, and a distraction from the issues at hand.
A. Cal Advocates’ Claim that Consolidation Would “Place an Unfair Burden on
the Lower-Income Santa Maria Rate Making Area” is Both Unsupported
and Untrue.
1. Cal Advocates’ claims regarding relative incomes and home values in the
Santa Maria and Los Osos CSAs rely on inapplicable data, and Cal
Advocates fail to consider the impact of the affordability issue on the less
wealthy residents of the Los Osos CSA.
Purportedly to support its claim that Golden State’s proposed consolidation of the Los
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Osos and Santa Maria CSAs “places an unfair burden on the lower-income Santa Maria rate-
making area,” Cal Advocates contend that median household income is approximately 23
percent higher and that the median value of an owner-occupied housing unit is approximately 60
percent higher in Los Osos compared to Santa Maria.99 But this claim is based on US Census
Data on median income and home values in the cities of Los Osos and Santa Maria,100 and as
Golden State detailed in its Opening Brief,101 suffers from a fatal problem. That is, the
boundaries of Golden State’s Los Osos CSA do not align with the boundaries of the city of Los
Osos—to the contrary, there are large portions of the city of Los Osos that are not within Golden
State’s Los Osos CSA.102 And the same holds true for Golden State’s Santa Maria CSA: there
are large portions of the city of Santa Maria that are not within Golden State’s Santa Maria CSA
and, more importantly, large portions of Golden State’s Santa Maria CSA that are outside the
boundaries of the city of Santa Maria.103 Accordingly, the United States Census data that Cal
Advocates claim to show that the consolidation would put an unfair burden on lower income
ratepayers does not actually show any such thing and is, in fact, like comparing apples to
oranges. If the Commission were to rely on this United States Census data to draw conclusions
as to the comparative wealth of the Los Osos and Santa Maria CSAs, it would be plain and
incontrovertible legal error, because the city boundaries of Los Osos and Santa Maria do not
even roughly align with the service territory boundaries of Golden State’s Los Osos CSA and
99 Cal Advocates Opening Brief at 3; Exhibit CAL PA-16 (Report and Recommendations on Special Request 13: Consolidation of Los Osos and Santa Maria Ratemaking Areas, Edward Scher (hereinafter “Scher Report”)) at 18:9-21. 100 Cal Advocates Opening Brief at 3. 101 Opening Brief of Golden State Water Company (hereinafter “Golden State Opening Brief”) at 66-67. 102 Exhibit GSW-4 (Los Osos Report on Results of Operations) at Table 3-B, at pages 1-2 of 2. 103 Exhibit GSW-5 (Santa Maria Report on Results of Operations) at Table 3-B, at pages 1-6 of 6.
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Santa Maria CSA, respectively. As such, there is no basis to conclude that consolidating the Los
Osos and Santa Maria CSAs would result in less wealthy customers subsidizing water service for
more wealthy customers. In fact, the record evidence indicates the contrary: the percentage of
low-income customers in the Los Osos and Santa Maria CSAs is virtually the same (within 1%),
as discussed below.104
Moreover, Cal Advocates themselves admit a truth that is a direct contradiction of their
claim regarding the relative wealth of the two CSAs: “Neither the Los Osos or the Santa Maria
RMAs are uniformly low- or high-income.”105 As Mr. Keith Switzer, Golden State’s Vice
President of Regulatory Affairs, explained in his testimony106 and Golden State emphasized in its
Opening Brief,107 there are wealthy, less wealthy, and low-income customers in each of the
CSAs. Just as there are high income property owners in the Edna Road area of the Los Osos
CSA, the southern portion of Cypress Ridge, in the Santa Maria CSA, is largely comprised of the
golf course residences surrounding the Cypress Ridge Golf Course.108 And critically, the same
holds true on the other end of the income spectrum. The relative “fairness” of the “burdens” of
consolidation surely must take into account the lower income customers in the Los Osos CSA,
but Cal Advocates generalize the Santa Maria CSA as “lower income” and ignore the burdens
borne by lower income customers in the Los Osos CSA. As Mr. Switzer stated, “Cal Advocates’
characterization of Golden State’s proposal as equating to lower income Santa Maria customers
104 See, infra, note 113 and accompanying text. 105 Cal Advocates Opening Brief at 3. 106 Exhibit GSW-24 (Prepared Testimony, Keith Switzer (hereinafter “Switzer Prepared”)) at 52:18 – 53:16. 107 Golden State Opening Brief at 69. 108 Exhibit GSW-5 (Santa Maria Report on Results of Operations) at Table 3-B, at page 1 of 6.
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unfairly subsidizing higher income Los Osos customers is inflammatory and may very well be
inaccurate.”109
In their Opening Brief, Cal Advocates move from their discussion of the inapposite US
Census Data to relevant data regarding the California Alternative Rates for Water (CARW)
program, but contrary to Cal Advocates’ claims, that data only provides further evidence that rate
consolidation is warranted. First, Cal Advocates compare the number of CARW customers in
Los Osos (357) with the number in Santa Maria (1,839), as if the absolute number of low-income
customers somehow demonstrates that the Santa Maria CSA, as a whole, is indeed “lower
income.”110 But of course this is nonsensical, as the entire Los Osos CSA had 3,294 service
connections as of December 2019, whereas the Santa Maria CSA had 14,934 service
connections111—and the small size of the Los Osos CSA and consequences thereof are major
drivers of the consolidation proposal. Given the difference in relative size, the difference in the
absolute number of low-income customers is as expected. Indeed, Cal Advocates admit in the
very next sentence of their Opening Brief that this “equates to a slightly higher percentage of
CARW customers in Santa Maria (11.8%) than in Los Osos (10.79%).”112 Although the
percentages cited by Cal Advocates are slightly off, Golden State generally agrees with this
statement. As set forth in Golden State’s Opening Brief, whether the Commission examines
(i) just residential customer data, (ii) all metered customer data, or (iii) all metered customer data
plus flat rate/private fire, the difference in the percentages of customers subscribing to the low-
109 Exhibit GSW-86 (Rebuttal Testimony, Keith Switzer (hereinafter “Switzer Rebuttal”)) at 71:20 – 72:16. 110 Cal Advocates Opening Brief at 3. 111 Exhibit GSW-24 (Switzer Prepared) at 31:11-14. 112 Cal Advocates Opening Brief at 3 (emphasis added).
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income tariff in Golden State’s Los Osos CSA versus Golden State’s Santa Maria CSA is less
than 1%.113
Cal Advocates then set forth their primary argument concerning the CARW program,114
which seems to be that because the CARW subsidy is higher in Los Osos than Santa Maria ($30
versus $11, without consolidation), low-income customers in Los Osos “are more financially
equipped”115 than low-income customers in Santa Maria, and, apparently, less worthy of
Commission concern on affordability grounds. This argument is completely wrong. The
Commission need only look at the relative size of the CARW subsidies versus the relative size of
water bills for low-income customers in the Los Osos and Santa Maria CSAs, together with the
relative water usage of low-income customers in the Los Osos and Santa Maria CSAs, to see that
this data actually provides further evidence that rate consolidation is needed.
The average CARW usage across all of Region 1 is 10 ccf. Based on the rates for each
region as filed, using this data, the average CARW bill, before any CARW discount, would be
$151.27 for low-income customers in the Los Osos CSA and $56.25 for low-income customers
in the Santa Maria CSA.116 As such, based on this Region 1 data, the additional $19.00 CARW
discount ($30.00 - $11.00) that would apply in the Los Osos CSA absent consolidation would
still leave the low-income customers in Los Osos paying more than two-and-one-half times what
low-income customers in Santa Maria would pay. When these calculations are done using the
113 Golden State Opening Brief at 68 (including a table with data drawn from Exhibit GSW-105 (GSWC - RO Model (Excel)) at the following tabs: (i) CARW/CAP customer count data from RO Model, “W_Reports_All” workbook, “CARW” tab, and (ii) total customer count data from RO Model, “SEC-30_REV_Sales-Customers” workbook, “Y_Rec Cust_EOY” tab). 114 Cal Advocates Opening Brief at 3-4 (citing to GSW-106 (Golden State’s Workpapers), File W_Reports_All, tab: CARW Consolidated). 115 Cal Advocates Opening Brief at 4. 116 Exhibit GSW-91 (Workpapers – Ratepayer Assistance Program (CARW)).
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CSA-specific average CARW usage in the Los Osos CSA, which is 4 ccf, and the CSA-specific
average CARW usage in the Santa Maria CSA, which is 11 ccf, 117 the average CARW bills as
filed are $74.96 in Los Osos and $59.94 in Santa Maria. Accordingly, using this CSA-specific
data, the additional $19.00 CARW discount that would be received by low-income customers in
the Los Osos CSA absent consolidation would be sufficient to cover the differential between the
two districts, but only because the quantity of water used by low-income customers in the Los
Osos CSA is almost 64% less than the quantity of water used by the low-income customers in
the Santa Maria CSA. And critically, at 4 ccf, the Los Osos low-income customer usage is only
2/3 of the 6 ccf that Commission staff has determined “to be the best representation of statewide
essential service at this time.”118 The reality that Los Osos low-income customers are using 33%
less water than is considered to be the “essential service” quantity, while Santa Maria low-
income customers are using nearly quadruple that amount, is further evidence that there is a
serious affordability problem in the Los Osos CSA. Accordingly, the higher CARW subsidy in
the Los Osos CSA versus the Santa Maria CSA does not resolve the water affordability issue for
Los Osos low-income customers and, in fact, only further demonstrates that rate consolidation is
necessary and should be approved by the Commission.
1172019 Annual Report of Golden State Water Company to the Public Utilities Commission State of California for the Year Ended December 31, 2019 at 158-159 (setting forth a bill comparison for the Los Osos and Santa Maria CSAs at 2020 rates and using 4 ccf for the Los Osos CSA and 11 ccf for the Santa Maria CSA). Pursuant to Rule 13.10, Golden State requests that the Commission take official notice of this annual report. 118 See Appendix A to D.20-07-032, Affordability Metrics Framework Staff Proposal, R.18-07-006 (Jan. 24, 2020) at 19 (explaining that the California’s Environmental Protection Agency’s Office of Environmental Health Hazard Assessment (OEHHA) had identified 6 ccf as “representing essential water need” and that the State Water Resources Control Board had noted in an August 2, 2019 workshop conducted in R.17-06-024 that it too was considering adopting essential usage of 6 ccf as part of the Statewide Low-Income Water Rate Assistance Program (AB401)).
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2. Cal Advocates’ apparent contention that Special Request No. 13 would
result in unreasonable subsidies is contrary to clearly articulated
Commission policies and the facts of Golden State’s consolidation
proposal.
Cal Advocates conclude their claim that the proposed consolidation would unfairly
burden Santa Maria ratepayers by arguing that “[r]ates should reflect the cost of service.”119 It is
unclear how this statement follows from their ill-conceived arguments concerning relative
incomes, number or share of low-income customers, or magnitude of subsidy for low-income
customers, but it seems an attempt to associate their position with a relatively well-known
principle of rate design. The problem is that, in this case, Cal Advocates misapply the principle.
It is correct that the Commission seeks to set rates that reflect the cost of service (which is why,
for example, extreme fluctuations in certain categories of costs resulting from major atypical
events or circumstances over which the utility has no control should be tracked in memorandum
or balancing accounts),120 but that does not support Cal Advocates’ position that “the cost of
service is higher in Los Osos than in Santa Maria” and therefore the two CSAs should not be
consolidated.121 Such a position would be antithetical to any level of agglomeration of
customers, but Golden State is not aware of any utility service in California or the country that is
offered on the basis of individualized costs and rates. To the contrary, the Commission explicitly
advised in Decision 14-10-047 that consolidation could be an appropriate response to high cost
119 Cal Advocates Opening Brief at 3 (citing D.14-06-029). 120 Such as the effects the COVID-19 pandemic are likely to have on health insurance premiums in the next few years. See, supra, Section III.A.1. 121 Cal Advocates Opening Brief at 3-4.
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and affordability issues in a particular district,122 which is precisely why Golden State has
proposed the consolidation of the Los Osos and Santa Maria CSAs in this proceeding.
Indeed, as evidenced in the Commission’s Water Action Plan, which the Commission
adopted in 2005 and reaffirmed in 2010 (adding some action items to carry forward the progress
on the principles and objectives set forth therein), the Commission has recognized that
subsidization among customers in different areas can be a useful and reasonable tool for keeping
water service affordable. The Water Action Plan includes among its objectives setting rates that
balance investment, conservation, and affordability, and one of the action items associated with
that objective was developing policies for subsidizing high-cost areas, either through some
variation of a “high-cost” fund or through consolidation of districts or rates.123 The Commission
described this action item as follows:
There can be a significant difference in the cost of providing safe,
reliable, and adequate water in different geographic areas. In many
areas charging the full cost of providing water service would result
in either rates that are unaffordable to many customers in the
region or in rate shock where the price increases by a large
amount. In the past the Commission has implicitly subsidized
customers in higher cost areas by keeping their rates low while
raising the rates to customers in lower cost areas. This practice is
called “regionalization”, “consolidation” or “postage stamp
rates”.124
122 D.14-10-047 at 13. 123 California Public Utilities Commission, Water Action Plan, Dec. 15, 2005, at 20. 124 Id. at 20-21.
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Cal Advocates’ contention that Los Osos and Santa Maria should not be consolidated on the
grounds that the cost of service is higher in Los Osos than in Santa Maria is entirely inconsistent
with this stated principle of the Commission’s Water Action Plan.
Moreover, as Mr. Switzer correctly noted, “The reality is that, on multiple levels, there
are already inherent subsidies built into the current CSA and ratemaking structure.”125 He further
explained:
[C]ustomers who live at lower elevations within a given CSA are
subsidizing the pumping costs to serve customers who live at
higher elevations within the same CSA, and customers who live
close to a source of production or storage within a given CSA are
subsidizing the costs of piping water to customers within the same
CSA who live further away. Accordingly, to suggest that water
customers only pay for the costs of their own water service even
within a CSA is not correct.126
To consider these implicit subsidies, the Commission need look no further than the existing
Santa Maria CSA, which is comprised of six non-contiguous systems—it is an incontrovertible
fact that the costs of providing water service in one of these six systems are different than the
costs of providing water service in each of the other five systems. Yet Cal Advocates surely
would not advocate that all CSAs should be broken apart into units as small as the Los Osos
CSA, because as Mr. Switzer also explained, a small customer base is a major contributing factor
to high cost and affordability issues:
Golden State has carefully considered the reasonableness of having
customers who live in the Los Osos CSA continuing to bear
increasingly higher water rates than other Golden State customers
125 Exhibit GSW-24 (Switzer Prepared) at 47:1-2. 126 Id. at 47:10-16.
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who live in close proximity to them (in some cases, closer than
other customers in the same CSA), in significant part because they
are grouped into a smaller ratemaking area and, therefore, have
their infrastructure costs spread over a smaller number of water
connections.
…
Consolidating the two CSAs broadens the customer base, creating
more equity among all of Golden State’s customers in the San Luis
Obispo County and Santa Barbara County service areas, and
diversifying the group of customers that will share all costs going
forward.127
In sum, the figures and arguments put forward by Cal Advocates in no way demonstrate
that the Santa Maria CSA is generally “lower income,” that “Los Osos customers are more
financially equipped to handle” their increasingly unaffordable rates, or that consolidation would
result in unreasonable subsidies. Similarly, Cal Advocates’ assertion that consolidation would
result in an “unfair burden” lacks any credible support—to the contrary, as stated in Golden
State’s Opening Brief: “In light of the whole picture, the increased costs to Golden State’s Santa
Maria customers that would result from the Los Osos consolidation are not unreasonable nor
exceptional in comparison with recent consolidations.”128
That is, because the Santa Maria district has more than quadruple the number of
customers and almost 12 times the water usage as compared with the Los Osos district, and
because Golden State has proposed gradual convergence of the Los Osos and Santa Maria rates
127 Id. at 47:20 – 48:23. 128 Golden State Opening Brief at 59.
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over time,129 based on the proposal set forth in the Application,130 the rate impact from the
consolidation in the Santa Maria district would be an increase of between only $0.21 and $0.26
per ccf, whereas the savings for Los Osos customers would be between $2.43 and $2.89 per ccf
(depending on whether the effect of a 2021 escalation year increase in the Los Osos district is
factored into the analysis).131 And, even with the consolidation, the revenue requirement per ccf
in the Santa Maria district would be 15% less than Golden State’s system-wide average revenue
requirement.132 The Commission should, therefore, reject Cal Advocates’ inflammatory and
incorrect claims and approve the proposed consolidation.
B. Cal Advocates’ Claims Regarding Operational Benefits and Water Supply
Considerations Misinterpret the 1992 Guidelines and Misconstrue the
Commission’s Policies on Consolidation.
The Commission should afford no weight to Cal Advocates’ argument that because the
Los Osos and Santa Maria CSAs do not share infrastructure, the operations prong of the
Commission’s four-pronged guidelines for consolidation developed in 1992 (“1992 Guidelines”)
does not support consolidation.133 As a preliminary matter, and has been well-established in this
proceeding, the Commission has been clear that the 1992 Guidelines are not requirements for
barriers to consolidation:
Although we eliminate the 1992 guidelines as a hurdle for parties
proposing consolidation of water districts, we do require that the
129 Exhibit GSW-86 (Switzer Rebuttal) at 70:15-19. 130 As explained in Golden State’s Opening Brief, the numbers will be slightly different based on the settlement in principle with Cal Advocates. 131 Exhibit GSW-86 (Switzer Rebuttal) at 70:19 – 71:1. 132 Id. at 71:1-2. 133 Cal Advocates Opening Brief at 4.
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four broad categories underlying the principles of the 1992
guidelines be addressed in consolidation proposals. In so doing,
proponents of a consolidation proposal are free to argue that
consolidation is in the public interest, in light of (1) proximity,
(2) rate comparability, (3) water supply, and (4) operation, and
other factors that affect the public interest.134
That said, all four prongs in the 1992 Guidelines support the proposed consolidation.
While Cal Advocates are critical of Golden State’s testimony that operational similarities of staff
and processes demonstrate that the operations prong supports the proposed consolidation, Cal
Advocates’ criterion for meeting the operations prong—shared physical infrastructure—is
inconsistent with the 1992 Guidelines. If Cal Advocates were correct in their position that there
must be identifiable operational benefits “that cannot be equally realized without rate
consolidation”135 in order for the Commission to find that the operations prong supports
consolidation, then, as Golden State explained in its Opening Brief, 136 this prong could only
support consolidation if the systems were physically close enough to share infrastructure. But the
Commission included operations and proximity as separate prongs in the 1992 Guidelines, which
would have been nonsensical if the operations prong requires that shared infrastructure be
present—that is, the operations prong could never be found to apply separately from the
proximity prong. Similarly, if shared infrastructure were necessary to find that the water supply
prong supports the public interest, then the water supply prong also would be subsumed into the
proximity prong. To the contrary, these prongs must consider an assessment of the ease and
usefulness of integration. Cal Advocates reject Golden State’s detailed analysis of the potential
134 D.14-10-047 at 11. 135 Exhibit CAL PA-16 (Scher Report) at 12:13-15. 136 Golden State Opening Brief at 42-43.
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future benefits of consolidation as too modest or uncertain to be considered,137 but they fail to
provide any reasonable basis for their position. Rather, Cal Advocates invent their own criterion
when they assert that shared infrastructure is necessary for the Commission to find that
consolidation is in the public interest.
Indeed, Cal Advocates repeatedly misconstrue the inquiry of the 1992 Guidelines by
implying that, on issue after issue, Golden State must prove that identified benefits and synergies
would not or could not happen absent consolidation. Cal Advocates argue that in order to
characterize potential water supply transfers that leverage a broader unified geographic area a
potential benefit of consolidation, Golden State must explain why such transactions and transfers
could not happen absent consolidation.138 Golden State has not and does not take the position
that such water transfers would be impossible without consolidation, but rather that they may be
facilitated by integration of a single organization and unified rates across a larger area. As Mr.
Switzer explained: “Negotiating these types of trades or transfers would be simpler and more
equitable to Golden State ratepayers over time if the costs were distributed over a single,
consolidated rate making area.”139
Similarly, Cal Advocates argue that Golden State’s claims of organizational benefits
regarding management of employees and contracting processes could be done without
consolidation. That is not relevant to the inquiry. As explained in detail in Mr. Switzer’s
testimony and Golden State’s Opening Brief, the many similarities in the operations of the Los
Osos CSA and the Santa Maria CSA should result in a relatively seamless consolidation of the
137 Cal Advocates Opening Brief at 4-5. 138 Id. at 4. 139 Exhibit GSW-24 (Switzer Prepared) at 44:10-14.
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two CSAs. And although Golden State is not aware of any redundancy in the operations, to the
extent that there is any redundancy in operations or resources, that redundancy will become
apparent and, over time, could be eliminated and result in costs savings for customers in the
consolidated CSA.140
Cal Advocates’ positions concerning the water supply prong should be rejected for
similar reasons, and the Commission should find that the water supply prong supports Golden
State’s consolidation proposal. As discussed in Mr. Switzer’s testimony and Golden State’s
Opening Brief, both CSAs rely primarily on groundwater rather than purchased water, such that
issues associated with properly managing and maintaining the health of groundwater basin are
common among all eight water systems—the two systems comprising the Los Osos CSA and the
six systems comprising the Santa Maria CSA.141
Moreover, the small number of customers supporting the investments in the Los Osos
CSA is creating potential water supply problems in the Edna Valley Groundwater Basin,142 an
issue that the proposed consolidation will help address. As explained in Golden State’s testimony
and Opening Brief, homeowners in the Los Osos CSA with large properties are drilling their own
wells to avoid paying for the high-cost water service, but the same aquifer that their individual
wells tap also serves the Edna Valley system.143 These homeowners do not have the same water
conservation incentives as utility customers that pay tiered water rates, and having numerous
large property owners drilling their own wells increases the risk of groundwater depletion—
140 Golden State Opening Brief at 40-42 (quoting Exhibit GSW-24 (Switzer Prepared) at 41:14 – 43:16). 141 Golden State Opening Brief at 43 (quoting Exhibit GSW-24 (Switzer Prepared) at 43:18-28). 142 Exhibit GSW-24 (Switzer Prepared) at 52:18-20. 143 Id. at 52:21-23.
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which raises both water availability and water quality issues.144 The consolidation of the two
CSAs can help mitigate these harms by halting steep price increases in Los Osos that contribute
to people abandoning utility water service. It is surely in the public interest to break the
unfortunate cycle of high rates resulting from the small number of customers in the Los Osos
CSA leading to customers abandoning water service, thereby further decreasing the number of
customers, and both leading to higher rates and jeopardizing the water supply in the Edna Valley
Groundwater Basin.
C. Golden State’s Rate Consolidation Proposal Would Not Negate Conservation
Price Signals in the Los Osos CSA.
Cal Advocates are correct that average water usage in the Los Osos CSA is significantly
lower than in the Santa Maria CSA, and that much of the lower usage in Los Osos can probably
be ascribed to the persistent high cost and affordability problems in Los Osos,145 but Cal
Advocates’ conclusion that rate consolidation will negate conservation price signals has no basis
in the record or in fact. Indeed, Cal Advocates provide no quantitative analysis supporting their
central conclusions that consolidation of the CSAs “could reduce conservation in the Los Osos
water system”146 or lead to Los Osos customers “increasing consumption,”147 or that such
“potential” for increased consumption means rate consolidation is inappropriate. It is very
unlikely that any qualitative analysis could support such assertions.
As stated in Golden State’s Opening Brief, Golden State’s proposal is for a rate freeze
(other than for supply cost offsets and certain other surcharges and surcredits) in the Los Osos
144 Id. at 52:22 – 53:13. 145 Cal Advocates Opening Brief at 4-5. 146 Id. at 5. 147 Id. at 6.
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CSA for the upcoming GRC cycle and, after this rate cycle, Los Osos rates would continue to
increase each year by the annual percent change in the CPI, until the revenue requirement per ccf
in the two former ratemaking districts are equal to one another. Under these mechanics (by
which rate increases are slowed but rates are not reduced), Cal Advocates’ assertion that “[r]ate
consolidation would change the price signal to consumers even though the marginal cost for
producing additional water for the consolidated water systems would remain the same”148 and
such “incorrect price signals could reduce conservation” is not supported by any facts in the
record,149 and does not make sense. To the contrary, as Mr. Switzer stated, Los Osos customers,
“are great conservers of water who are in the habit of conserving water, and consolidation would
result in their rates being frozen, not decreased.”150 Because water will not be getting any less
expensive and customers in Los Osos pay over two-and-one half times more per ccf than the
average Golden State customer151 and are in the habit of conserving water, there is simply no
reason to believe, much less any evidence in the record to demonstrate, that the proposed
consolidation will result in increased usage in the Los Osos CSA.
Cal Advocates couch their argument in the assertion that consolidation “has the potential
to disrupt” the Commission’s stated policy objective to set rates “that balance investment,
148 Id. at 7. 149 In their Opening Brief, Cal Advocates back-pedal on the claim made in their testimony that “Los Osos customers are likely to react to this reduction in the price of water by increasing their consumption. (See Exhibit CAL PA-16 (Scher Report) at 16:13-15.) Apparently, in preparing their Opening Brief, Cal Advocates came to understand that the proposed consolidation will not result in water prices being reduced in the Los Osos CSA and realized that they needed to modify their argument. 150 Exhibit GSW-86 (Switzer Rebuttal) at 60:18-21. 151 Id. at 59:24-25.
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conservation, and affordability.”152 As explained in Golden State’s Opening Brief,153 Cal
Advocates’ failure to provide any supporting analysis (which failure continues in Cal Advocates’
Opening Brief) reveals how indefensible Cal Advocates’ position is. Cal Advocates’ statement
that the current situation in Los Osos “appears to be achieve [sic] this goal,”154 ignores the reality
of the high cost and affordability problems in Los Osos—the precise factors underlying Golden
State’s proposed rate consolidation.155 Cal Advocates’ statement also ignores that the
Commission’s Water Action Plan specifically recognizes rate consolidation of higher and lower
cost districts as an action item supporting its objective of “setting rates that balance investment,
conservation, and affordability.”156 Los Osos customers use on average 60% less water than the
average Santa Maria customer and 63% less than the average across Golden State’s service
territories,157 yet Los Osos customers pay over two-and-one-half times more per ccf than the
average Golden State customer.158 As Mr. Switzer stated: “Discrepancies of this magnitude call
into question whether there truly is an appropriate balance between conservation and
affordability in the Los Osos ratemaking district.”159
Golden State’s rate consolidation proposal will (1) immediately halt significant rate
increases in Los Osos, (2) prevent the high cost and affordability problems from worsening
(which they almost certainly will continue to do without consolidation), and (3) over time,
152 Cal Advocates Opening Brief at 6 (citing 2010 Commission Water Action Plan, Objective 5, p. 3). 153 Golden State Opening Brief at 59-62. 154 Cal Advocates Opening Brief at 6. 155 Exhibit GSW-24 (Switzer Prepared) at 32:6-13. 156 See, supra, notes 123-124 and accompanying text. 157 Exhibit GSW-86 (Switzer Rebuttal) at 59:19-22. 158 Id. at 59:24 – 60:1. 159 Id. at 60:1-3.
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slowly moderate the relative cost for water service and improve affordability for Los Osos
customers, all while (4) avoiding rate shock or other significant burdens for Santa Maria
customers by effecting the consolidation through a gradual convergence of rates.160 Cal
Advocates’ assessment of both the current “balance” among investment, conservation, and
affordability, and the balance that would result from consolidation lacks any merit. The
Commission should reject Cal Advocates’ contentions and approve Golden State’s consolidation
proposal precisely because consolidation of the Los Osos and Santa Maria CSAs will help to
balance investment, conservation, and affordability, as contemplated by the Water Action Plan.
D. Cal Advocates’ Assertion that Affordability is not an Issue in the Los Osos
CSA Ignores Reality and Misconstrues the Commission’s Policies
Concerning Consolidation and Affordability.
Cal Advocates are correct that “Golden State’s consolidation proposal is premised on its
assertion that affordability is becoming an issue for Los Osos customers,”161 but contrary to Cal
Advocates’ contentions, Los Osos costs are not merely “relatively high when compared to other
areas.”162 The relevant figures have been stated many times throughout this proceeding, but as
Cal Advocates continue to downplay the problem, Golden State will again summarize here the
concerning high cost and affordability issues that its customers in the Los Osos CSA face.
As Golden State explained in its Opening Brief,163 while the revenue requirement per ccf
ratio between the Los Osos CSA and the Golden State system-wide average was 233% at the
time of the 2014 GRC, the ratio is 260% at current rates, and would increase to 268% at the rates
160 Exhibit GSW-24 (Switzer Prepared) at 45:14 – 46:16. 161 Cal Advocates Opening Brief at 7. 162 Id. 163 Golden State Opening Brief at 35-37; 50-53.
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proposed in Golden State’s Application,164 absent consolidation. This is much higher than the
150% metric set forth in Decision 14-10-047 for considering a service area to be high cost.165
And critically, the numbers are moving in the wrong direction and at a troubling rate. When
Golden State filed the Application, just six years had passed since Decision 14-10-047 was
issued, but using the data included in the Application, without consolidation, the increase in this
high-cost figure during that six-year period will be 35% (the difference between the 268% and
233%).
Cal Advocates state that “Commission guidelines identify an affordability issue when an
essential usage level of water costs 2.5% of the median household income,”166 but Cal
Advocates’ contentions regarding those guidelines misconstrue the Commission’s policies set
forth in Decision 14-10-047. Nothing therein suggests that a utility should not—much less
cannot—take action unless the 2.5% affordability metric is breached, even when the utility
recognizes that water service is becoming less and less affordable. To the contrary, the Division
of Water Audits (“DWA”), which developed the high cost and affordability framework and
related metrics discussed in Decision 14-10-047, made clear that “[n]o consensus was reached
regarding the use of the Framework as a generic mechanism to be used by the water utilities for
use in district consolidation.”167 And the Commission’s explicit statements in Decision
164 As explained in Golden State’s Opening Brief, actual rates and percentages will be slightly different based on the settlement in principle reached with Cal Advocates. For example, the revenue requirement for the Los Osos CSA would increase to 266% at the rates included in the settlement in principle (as compared with the 268% at the rates proposed in the Application). 165 Attachment A to D.14-10-047 (Report on Balanced Rate Rulemaking (R.11-11-008), CPUC Division of Water and Audits, Jan. 30, 2014 (hereinafter “DWA Report”) at 22-23. 166 Cal Advocates Opening Brief at 7 (citing D.14-10-047 at 12). 167 DWA Report at 6.
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14-10-047 demonstrate exactly the opposite: “[W]e reiterate that the framework is a tool, not a
mandate and its use is discretionary. Utilities may use alternate approaches.”168
Accordingly, the Commission can conclude that water service rates in the Los Osos CSA
are or are becoming unaffordable, even if the rates do not exceed the 2.5% affordability metric.
And Golden State is not alone in recognizing the undeniable trend towards unaffordability in Los
Osos. As set forth both in Golden State’s Opening Brief and above, property owners in Los Osos
who have the resources to drill their own wells are doing so to avoid paying the high costs of
utility water service.169 This makes the situation ever worse for those customers not situated
(geographically or economically) to do so, by stranding an ever-smaller pool of ratepayers to
support necessary infrastructure improvements.170
And the changes in the data for the Los Osos CSA are troubling even by the 2.5%
affordability metric. The record demonstrates that:
• At the time of the 2014 GRC, the annual cost of water service at the essential usage level
(6 ccf/month) in Los Osos was 40% less than the 2.5% affordability metric, using median
household income data for San Luis Obispo County.171
• At the rates proposed in Golden State’s Application absent consolidation, the cost of
essential water service will be within 32% of the 2.5% affordability metric, using median
household income data for San Luis Obispo County.172
168 D.14-10-047 at 15. 169 Golden State Opening Brief at 45 (citing Exhibit GSW-24 (Switzer Prepared) at 52:18 – 53:1). 170 Id. 171 Exhibit GSW-24 (Switzer Prepared) at 35:10-13. 172 Id. at 35:13-15.
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• Golden State only serves two of eight zip codes in San Luis Obispo County and
conducting the affordability analysis using data for only those two zip codes in the Los
Osos CSA reveals that for one of the zip codes, the cost of essential water service is
within 27% of the 2.5% affordability metric.173
Cal Advocates claim that this “do[es] not definitively establish a trend.”174 Cal Advocates
therefore seem to base their denial of the affordability issue in Los Osos on the data in the record
having been drawn from a relatively small number of points in time—the comparison of the data
reflected in the Decision 14-10-047 and in the 2020 Application. But there is no basis for Cal
Advocates’ suggestion that a more frequent affordability analyses would demonstrate any
different trend. To the contrary, the steep increase in the cost of water in the Los Osos CSA as
compared to Golden State’s other service areas over the six years between the issuance of
Decision 14-10-047 and the filing of the 2020 Application strongly supports that examining the
interim years would have reflected the same trend as the above data.
Moreover, in arguing that there is not an affordability issue in the Los Osos CSA, Cal
Advocates repeat their same argument that, per the Application, low-income residents in the Los
Osos CSA will receive a higher CARW subsidy as compared with low-income residents in the
Santa Maria CSA ($30 as compared with $11) and that this “would be the second-highest
CARW credit in Golden State’s RMAs.”175 But it is unclear (and Cal Advocates fail to explain)
how this data is intended to demonstrate that there is not an affordability problem in the Los
Osos CSA, and it in fact demonstrates no such thing. Again, the relative size of the CARW
173 Id. at 35:15-18. 174 Cal Advocates Opening Brief at 8. 175 Id. at 7.
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subsidy is not sufficient by itself to draw any conclusions about relative affordability. And the
reality that average usage for low-income customers in the Los Osos CSA is 4 ccf—33% percent
below the 6 ccf that has been identified as the “essential service” quantity—demonstrates that
providing the higher CARW subsidy in the Los Osos CSA versus the Santa Maria CSA does not
resolve the water affordability issue for Los Osos low-income customers.176 In fact, this data
only further demonstrates that rate consolidation is necessary and should be approved by the
Commission.
Further, Golden State strongly disagrees with Cal Advocates’ assertion that “there is no
urgent need to act,”177 both because Cal Advocates are parroting the incorrect claim from their
testimony that Decision 14-10-047 set forth a “threshold for action”178 that has not been met, and
because now is indeed the time to act. As explained above and discussed in Golden State’s
Opening Brief,179 the 2.5% DWA affordability metric is not a “threshold” or trigger point. And
as Mr. Switzer stated: “Waiting to consider consolidation, as Cal Advocates recommend, will
most likely exacerbate the current circumstances, making future consolidation proposals less
palatable because the rate gap between Los Osos and Santa Maria customers will likely have
gotten bigger.”180 Whether or not the Los Osos CSA has exceeded the DWA affordability metric,
waiting to act until there is a dire unaffordability crisis, which one can see coming, would be
imprudent and a disservice to ratepayers. The Commission can, and should, authorize the
176 See, supra, note 117-118 and accompanying text. 177 Cal Advocates Opening Brief at 8. 178 Exhibit CAL PA-16 (Scher Report) at 9:21-23. 179 Golden State Opening Brief at 51-52 (citing D.14-10-047 at 15 and Ordering Paragraph #1). 180 Exhibit GSW-86 (Switzer Rebuttal) at 56:3-6.
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proposed consolidation in this GRC to ensure that the ratepayers in the Los Osos CSA will
continue to have access to quality water service at affordable rates.
E. Cal Advocates’ Focus on a Consolidation Proposal from More than 20 Years
Ago is Misguided Because the Current Limited Proposal is Substantially
Different and Circumstances Have Significantly Changed.
Cal Advocates contend that the Commission should deny Special Request No. 13 because
“[t]he Commission has previously considered and denied a request to consolidate the Los Osos
system,”181 but in citing to a proceeding of more than 20 years ago, Cal Advocates ignore critical
information. That is, while Cal Advocates’ argument attempts to draw parallels between the
instant consolidation proposal and the request that was denied more than 20 years ago in
Decision 00-12-063, the two requests are fundamentally different, both in terms of the
consolidations proposed and the circumstances underlying the proposals. Therefore, the
Commission should give no weight to Cal Advocates’ contentions that the Commission’s
conclusion in Decision 00-12-063 is applicable here.
First, the proposals themselves are irrefutably very different. The prior request concerned
seven CSAs covering more than 50,000 customers spread over distances up to 500 miles apart.
The present proposal is to consolidate only the Los Osos and Santa Maria CSAs, which cover
only 18,000 total customers located within 15-20 miles of each other.182 In fact, some customers
in the Los Osos CSA are in closer proximity to some customers in the Santa Maria CSA than to
other customers in the Los Osos CSA, and vice versa.183
181 Cal Advocates Opening Brief at 9. 182 Exhibit GSW-86 (Switzer Rebuttal) at 65:13-16. 183 Exhibit GSW-24 (Switzer Prepared) at 41:2-7.
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Second, as Golden State has explained above and throughout this proceeding, Golden
State’s proposal to consolidate the Los Osos and Santa Maria CSAs is based on current
circumstances—high cost and affordability metrics that have been worsening in the Los Osos
CSA for at least the last 6 years. At no point has Golden State made any argument that the
proposed consolidation of Los Osos and Santa Maria CSAs should be approved because of facts
upon which Golden State relied to support its proposal to consolidate seven CSAs in 2000.
Accordingly, the Commission’s conclusion in Decision 00-12-063 is irrelevant not only because
the instant consolidation request is much narrower than the request of more than two decades
ago, but because there is absolutely nothing in the record of this proceeding that suggests that the
data that the Commission considered when issuing its decision 21 years ago remain valid—even
with regards to the Los Osos and Santa Maria CSAs. And the data regarding the Clearlake,
Arden Cordova, Bay Point, Simi Valley and Ojai ratemaking districts that factored into the
Commission’s decision of 21 years ago are of course entirely irrelevant to the current proposal;
indeed, as of 2017, Golden State no longer even serves the community of Ojai.184
Third, the Commission’s policies have evolved in the decades since Decision 00-12-63
was issued. Indeed, Decision 14-10-047, which was published fourteen years after
Decision 00-12-63, specifically identified rate consolidation as a reasonable method of
addressing high cost and affordability issues. As Mr. Switzer explained, Special Request No. 13
resulted from Golden State’s analyses rooted in Decision 14-10-047185 and the Commission’s
receptiveness towards rate consolidation evidenced in Decision 14-10-047.186 While Cal Advocates
184 See Exhibit GSWC-05 (Rebuttal Testimony of Mr. Jon Pierotti) filed in A.17-04-002 at 2:8-10. 185 Exhibit GSW-24 (Switzer Prepared) 32:16 – 35:8. 186 Id. at 49:21 – 50:5.
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would have the Commission delve into the annals of history to look for relevant precedent on
consolidation issues, there are, unsurprisingly, Commission decisions from within the past
decade—indeed, even much more recent decisions—that provide guidance on consolidation that
supports a finding of the reasonableness of Special Request No. 13. Golden State detailed two
such recent Commission decisions on consolidation and their similarities to the current proposal
in its Opening Brief.187 Golden State will not repeat that analysis here but urges the Commission
to look at this more recent precedent. These decisions reflect the Commission’s conclusions in
Decision 14-10-047 regarding the reasonableness of rate consolidation as a means to address high
cost and affordability issues, and the Commission found therein that consolidation of small
ratemaking districts into a larger area would be beneficial in helping to stabilize rates, because
there would be a larger number of customers over whom to spread costs.188 These are the issues
central to the need for consolidation of the Los Osos and Santa Maria CSAs in this GRC.
F. There is no Basis for Cal Advocates’ Argument that Golden State Must
Thoroughly Examine All Other Options Before Proposing Consolidation,
and Consolidation of the Los Osos and Santa Maria CSAs Remains the Best
Option.
Both in their testimony and their Opening Brief, Cal Advocates argue that Golden State
must investigate all options for ensuring that rates in the Los Osos CSA “remain affordable”
before the Commission should authorize rate consolidation189—arguing that Golden State should
“examine other options,” “thoroughly examine other options,” and “thoroughly examine all other
187 Golden State Opening Brief at 53-59. 188 D.18-12-021 at 28-29. 189 Exhibit CAL PA-16 (Scher Report) at 17:4-6 and 17:11 – 18:6; Cal Advocates Opening Brief at 10-11.
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options.”190 As Mr. Switzer explained, exploring each of the six alternative strategies from
Decision 14-10-047 in-depth would not be an efficient use of utility resources because several of
the alternatives are unworkable given the particular circumstances of the Los Osos CSA.191
Specifically, Mr. Switzer stated:
[A] rate design solution to improve affordability through adjusting
the first tier quantity does not work for a ratemaking area where
the average customer monthly usage is only 6 ccf. Similarly, both
the reduction in high costs and the budget plan alternatives were
deemed impractical because the major driver of the high costs in
Los Osos are the combination of low usage and high investment
costs per ccf, neither of which are solvable through budgeting.192
Golden State also explained that it did not pursue the Rate Support Fund (“RSF”) alternative
because Golden State has not implemented an RSF in any of its service areas, and because
California Water Service, which had been the leading proponent of the RSF among the Class A
investor-owned water utilities, has more recently proposed to eliminate their RSF program in
favor of implementing consolidated regional rates.193 Taking all of this into account, Golden
State determined that the rate consolidation of the Los Osos and Santa Maria CSAs set forth in
Special Request No. 13 is a reasonable approach for addressing the high cost and affordability
issues in the Los Osos CSA.
Implicit in Cal Advocates’ claims that Golden State should “thoroughly” examine other
options or prove that consolidation is the “best solution”194 is a contention that Golden State is
190 Cal Advocates Opening Brief at 10-12 (emphasis added). 191 Exhibit GSW-86 (Switzer Rebuttal) at 63:10-17. 192 Id. at 63:17-24. 193 Id. at 64:24 – 65:4. 194 Exhibit CAL PA-16 (Scher Report) at 17:4-6.
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required to include in its request to the Commission an in-depth analysis of all potential options
to address the high cost and affordability issues in the Los Osos CSA. As explained in Golden
State’s Opening Brief,195 no such requirement exists in Decision 14-10-047 or any other
Commission decision or relevant policy pronouncement. To the contrary, Decision 14-10-047
introduces its list of potential solutions by explicitly instructing that utilities are not required to
propose more than one option—or even any of the options—from the list: “Proposals for rate
balancing, based on identified high cost and affordability problems, may include one or more of
the following strategies but need not be limited to them…”196 Further, rate consolidation, as
Golden State proposes now, is specifically included in that list.197 Thus, Cal Advocates are
simply wrong that Golden State has failed to fulfill any requirement related to alternative options
for addressing high cost and affordability issues. Cal Advocates are inserting requirements into
Decision 14-10-047 that are not there and should not be adopted, because they would not be
sound policy. Rather, such requirements would cause utilities to expend extensive resources
without corresponding benefits and would cause needless delays in utilities’ efforts to address
high cost and affordability concerns.
Further, throughout this proceeding, Cal Advocates have failed to identify any alternative
proposal that would better address the high cost and affordability problems in the Los Osos CSA,
opting instead to deny that the problems exist and to invent regulatory requirements that would
require Golden State to expend resources developing in-depth proposals on alternatives that are
195 Golden State Opening Brief at 63-66. 196 D.14-10-047 at 13 (emphasis added). 197 Exhibit GSW-86 (Switzer Rebuttal) at 63:4-8; Decision 14-10-047 at Ordering Paragraph #3 (“The proposed solution(s) [to mitigate high cost and unaffordability] may include the following but need not be limited to them: […] consolidation in some form (i.e., rate consolidation, cost consolidation, rate base consolidation, operational consolidation)…).
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unworkable just so that it could “prove” its proposal to be superior. It would have been a waste
of utility resources for Golden State to conduct a thorough analysis of every alternative
mentioned in Decision 14-10-047, as several of them easily could be dismissed as impractical.198
In their Opening Brief, Cal Advocates for the first time hint at two possible alternatives to
Special Request No. 13, but neither suggestion has any basis in the record, and Golden State
does not view either as superior to Special Request No.13, or even workable. Specifically, citing
the proceeding from 2000 in which Golden State had proposed to consolidate seven CSAs and
create a large ratemaking area comprising 50,000 customers, Cal Advocates state:
In the prior proceeding regarding a potential Los Osos
consolidation, Cal Advocates raised the potential of a uniform
surcharge of 1-2% in order to spread increases more equitably
across all of Golden State’s seven districts. This potentiality
received favorable feedback, with the Decision finding that “it is
an example of a more equitable sharing of increased costs than
[Golden State’s] proposal.” The possibility of Golden State
pursuing the sale of the high cost districts to neighboring public
water entities was also raised.199
As to Cal Advocates’ first suggestion—the 1-2% surcharge—by framing the 2000 proceeding as
“a potential consolidation of Los Osos” and then stating that the surcharge “received favorable
feedback” and the Commission found it “an example of a more equitable sharing of increased
costs” than Golden State’s proposal, Cal Advocates’ statements are misleading. That is, Cal
Advocates make it seem like the Commission found the 1-2% surcharge superior to a
consolidation proposal similar to the one requested in this proceeding. But as explained above,
198 Exhibit GSW-86 (Switzer Rebuttal) at 63:16-18. 199 Cal Advocates Opening Brief at 11.
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this is entirely incorrect, and the Commission’s statements regarding the 1-2% surcharge in the
21-year-old proceeding regarding the consolidation of seven CSAs are not applicable to Golden
State’s current proposal to consolidate just the Los Osos and Santa Maria CSAs. And, the record
in this proceeding demonstrates that Golden State in fact considered multiple scenarios for its
consolidation proposal before concluding that consolidating just the Los Osos and Santa Maria
CSAs is the prudent course.200
Cal Advocates’ second suggestion—the possibility of Golden State pursuing the sale of
the high-cost district to neighboring public water entities—is entirely unrealistic. Golden State
has no intention of pursuing a sale of the Los Osos system, nor is it aware of any public water
entities that are interested in purchasing the Los Osos system. And given the many challenges
facing the Los Osos CSA, that is not surprising. Those challenges include the “Basin Plan”
resulting from litigation among the Los Osos Community Service District, Golden State, S&T
Mutual Water Company and the County of San Luis Obispo that requires significant
infrastructure investments by Golden State to promote and maintain the long-term balance and
health of the Los Osos Groundwater Basin;201 the small number of customers to support those
infrastructure costs;202 and the homeowners with large properties drilling their own wells to
avoid paying for water service, thereby shrinking the pool of customers actually paying for water
utility infrastructure while at the same time creating perils for the health of the Edna Valley
Groundwater Basin that serves the Edna Road area of Los Osos.203 And of course, Cal
Advocates did not provide any details as to any entity that might possibly be interested in
200 Exhibit GSW-86 (Switzer Rebuttal) at 63:10-12. 201 Exhibit GSW-24 (Switzer Prepared) at 52:4-9. 202 Id. at 52:14-16. 203 Id. at 52:18 – 53:16.
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purchasing the Los Osos system, because there is nothing in the record on this topic. Rather, this
“alternative” is something Cal Advocates introduced into this proceeding for the first time in
their Opening Brief.
Finally, in arguing that Golden State failed to explore all options before proposing rate
consolidation of the Los Osos and Santa Maria CSAs, Cal Advocates repeat their flawed
argument that there is no affordability problem in the Los Osos CSA, and that because the 2.5%
affordability metric has not yet been breached, “[t]here is no urgent need for the Commission to
take action.”204 Cal Advocates then imply that Golden State has misrepresented Cal Advocates’
position by stating in its testimony that “Cal Advocates recommend that GSWC not address the
problem until we absolutely have to.”205 But Cal Advocates continue to demonstrate that this is
indeed their position, as they assert repeatedly in their Opening Brief that the need to take action
to address the high water cost and affordability issues in the Los Osos CSA is not urgent.206 For
all the reasons set forth above and in Golden State’s Opening Brief, Cal Advocates is wrong. As
Mr. Switzer explained, waiting to undertake consolidation will very likely exacerbate the current
circumstances, making any future consolidation proposals more problematic because the rate gap
between customers in the Los Osos and Santa Maria CSAs will likely have grown wider.207
Although the Los Osos CSA has not yet exceeded the DWA affordability metric, waiting to act
until there is a dire unaffordability crisis would be imprudent. The Commission can and should
204 Cal Advocates Opening Brief at 11. 205 Id. 206 Id. at 8 (stating “there is no urgent need to act on this consolidation proposal and Golden State has time to consider other options”); id. at 8 (stating “there is no urgent need to act and the Commission has time to consider additional evidence presented by Golden State in its next GRC”); id. at 10 (stating “[t]here is no urgent need for the Commission to take action given that rates in Los Osos do not meet the criteria for an affordability issue”). 207 Exhibit GSW-86 (Switzer Rebuttal) at 56:3-6.
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authorize the proposed consolidation in this GRC to ensure that the ratepayers in the Los Osos
CSA will continue to have access to quality water service at affordable rates.
VI. CONCLUSION
The facts in this proceeding’s record demonstrate that each of (i) Special Request No. 2,
authorizing Golden State to establish the Medical Cost Balancing Account, (ii) Special Request
No. 8, authorizing Golden State to establish the GLICBA, and (iii) Special Request No. 13,
authorizing the consolidation of the Los Osos and Santa Maria CSAs for ratemaking purposes, is
fair, prudent, and warranted. Cal Advocates’ arguments to the contrary are based on their
unsupported opinions and inaccurate characterizations of prior Commission decisions.
Accordingly, Golden State requests that the Commission authorize each of these contested
Special Requests.
November 5, 2021 Respectfully submitted, /s/ Joseph M. Karp Joseph M. Karp
Chris Kolosov Winston & Strawn LLP 101 California Street, 35th Floor, San Francisco, California 94111-5894 Telephone: (415) 591-1000 Email: [email protected]
Attorneys for Golden State Water Company
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