Introduction
Background
The California Public Utilities Commission’s (CPUC) mission is to regulate services and utilities, protect consumers, safeguard the environment, and assure that Californians have access to safe and reliable utility infrastructure and services. The CPUC, which was established by a constitutional amendment in 1911, includes five members (commissioners) serving six‑year terms who are appointed by the Governor and approved by the Senate. It regulates privately owned—also known as investor‑owned—electric, natural gas, telecommunications, water, railroad, rail transit, and passenger transportation companies along with other utilities in the State, and it authorizes the rates these utilities may charge. The CPUC obtains its funding by imposing fees on the public utilities it regulates. This audit focuses on CPUC’s regulation of privately owned water companies (water utilities) through its ratesetting processes.
State Regulation of Private Water Utilities
Many Californians receive their water through water utilities. Specifically, as of October 2018, there were 98 water utilities serving an estimated 5.6 million Californians, or 14 percent of the State’s population, in both rural and urban areas of California, including parts of Sacramento County, the San Francisco Bay Area, and Los Angeles. The CPUC categorizes these 98 water utilities into four classes based on their number of service connections, which represent buildings that receive water from a utility, as shown in Table 1. Almost all customers that receive water from private water utilities receive their services from the nine large water utilities that comprise Class A. The Class B, C, and D water utilities (small water utilities) serve fewer than 10,000 connections each and collectively serve 57,000 customers. About half of the Class A water utilities have multiple districts or areas to which they provide services. For example, in 2018 the largest Class A water utility, California Water Service Company, was serving 21 districts throughout California ranging from Chico to the Antelope Valley, while the San Jose Water Company was providing services to customers in only one district in the San Jose area.
| CLASS | NUMBER OF SERVICE CONNECTIONS | NUMBER OF WATER UTILITIES |
TOTAL SERVICE CONNECTIONS |
|---|---|---|---|
| A | More than 10,000 | 9 | 1,456,600 |
| B | Between 2,000 and 10,000 | 5 | 27,700 |
| C | Between 500 and 2,000 | 22 | 21,400 |
| D | Fewer than 500 | 62 | 8,000 |
Source: Amounts reported by the CPUC as of August 2018.
The Roles and Responsibilities of Key Players in the CPUC’s Water Ratesetting Processes
- The commissioners: Governor appointees who issue decisions and adopt resolutions for the CPUC, such as approving a general rate case
- Administrative Law Judges (ALJs): Preside over cases, such as a general rate case, and draft proposed decisions for action by the commissioners.
- The Water Division: Performs research, analysis, and assessments of regulated water utilities, including reviewing advice letters, and communicates the results to the commissioners.
- The Public Advocates Office (Public Advocates): An independent entity within the CPUC that represents and advocates on behalf of the interests of water customers to obtain the lowest possible rate for service consistent with reliable and safe service levels, such as providing recommendations to the commissioners for a utility’s proposed rate change.
Source: The CPUC’s website and documents related to general rate case and advice letter processes.
In total, the CPUC regulates more than 1.5 million water utility service connections. As a part of its responsibilities, state law requires the CPUC to determine whether a water utility’s proposed rates are just and reasonable before the utility can change the rates it charges its customers. To facilitate this determination, the CPUC has a process referred to as a general rate case proceeding to evaluate those proposed rate changes. Once the commissioners have issued a decision for a general rate case, the CPUC requires water utilities to submit informal requests known as advice letters to change their water rates. We describe the key players in these processes in the text box.
General Rate Case Proceedings
State law requires the CPUC to establish a schedule that requires Class A utilities to file a general rate case application every three years. To facilitate the three‑year review period, the CPUC has set a timeline for the various stages of the review process, which starts with the submission of a proposed application as shown in Figure 1. The CPUC’s estimated length for a proceeding is about 340 days for a single‑district Class A water utility and about 560 days for a multidistrict utility before the commissioners issue a formal decision. The proceedings may take longer if commissioners issue any extensions during the process.
Figure 1
CPUC’s General Rate Case Proceeding for Class A Single‑District Water Utilities Is Estimated to Take Nearly a Year to Complete
Source: The CPUC’s decision #07-05-062 outlining the general rate case process for Class A water utilities, and documents related to the nine general rate cases we reviewed.
Note: This timeline represents the CPUC’s estimated schedule of a general rate case proceeding for a single‑district utility; however, the CPUC allows the ALJ
to modify this schedule if necessary. According to the CPUC, the time frame for a proceeding involving a utility with multiple districts is approximately six months longer due to its additional complexity.
In addition to the timeline of the process, the CPUC outlines the various steps and parties involved in general rate case proceedings as well as a list of requirements a water utility must satisfy in its general rate case application. Before the utility submits its formal application, the Public Advocates Office reviews the proposed application for any deficiencies. Once Public Advocates determines that the water utility’s application meets the requirements set out in the rate case plan, the utility can submit its formal application to the CPUC. After receiving the formal application, the CPUC generally holds several hearings. For example, to begin the proceeding, an ALJ holds a conference to set the schedule for the proceeding.1 The ALJ may also schedule a public participation hearing to allow customers to raise concerns about the general rate case proposal or the water utility’s operations. If a general rate case application does not include material changes from the prior general rate case, an ALJ may determine that a public participation hearing is unnecessary. Once Public Advocates and other parties to the proceeding submit their prepared written testimony, the ALJ may elect to hold an evidentiary hearing, which is a series of oral presentations by the parties to the proceeding that include testimony on the evidence they have presented. After all hearings during a proceeding have concluded, the ALJ prepares a proposed decision outlining his or her recommendation for the commissioners that includes a discussion of relevant issues raised in the proceeding. The commissioners issue a final decision (CPUC decision) on the proceeding based on a majority vote.
Categorization of Advice Letters
Water utilities also file advice letters to request approval from the CPUC to change their rate structure, including rate increases or decreases, or to change their service terms or conditions. One of the primary uses of an advice letter is for a water utility to change rates as previously authorized by a statute or a decision by the commissioners, such as a decision that the CPUC issues at the end of a general rate case. The CPUC also allows small water utilities to use the advice letter process as an alternative to the more formal general rate case process because these utilities are less complex than Class A water utilities. A water utility may also submit an advice letter for other reasons that do not impact rates, such as a transfer of ownership or the offering of a new service.
The CPUC classifies advice letters into three categories, referred to as tiers, based on how the CPUC processes and approves them. Tier 1 advice letters—the most common—take effect upon filing and water utilities often submit them to comply with a CPUC decision, such as increasing rates to reflect changes in the Consumer Price Index. In contrast, Tier 2 and Tier 3 advice letters require CPUC staff review and disposition before they can take effect. The Division of Water and Audits (Water Division) has the authority to approve Tier 2 advice letters because the requests generally do not impact rates, such as when a water utility updates its service area map. As a result, these types of advice letters have high approval rates.
Tier 3 advice letters, which are more complex than advice letters for other tiers, require the passage of a formal resolution by commissioners for approval. For example, a small water utility may submit a Tier 3 advice letter for an informal general rate case to increase rates, or a Class A utility may submit one to petition to change a CPUC resolution. According to Public Advocates, it is not involved in the advice letter review process but it can receive notification of proposed rate changes as a result of advice letters and occasionally files a protest to an advice letter. We present the number of advice letters submitted by water utilities by tier from fiscal years 2015–16 through 2017–18, and the percentage the CPUC had approved as of November 2018, in Table 2. In total, the CPUC regulates more than 1.5 million water utility service connections. As a part of its responsibilities, state law requires the CPUC to determine whether a water utility’s proposed rates are just and reasonable before the utility can change the rates it charges its customers. To facilitate this determination, the CPUC has a process referred to as a general rate case proceeding to evaluate those proposed rate changes. Once the commissioners have issued a decision for a general rate case, the CPUC requires water utilities to submit informal requests known as advice letters to change their water rates. We describe the key players in these processes in the text box.
| 2015–16 | 2016–17 | 2017–18 | ||||
|---|---|---|---|---|---|---|
| CLASS | SUBMITTED | APPROVED | SUBMITTED | APPROVED | SUBMITTED | APPROVED |
| 1 | 241 | 98% | 215 | 98% | 226 | 97% |
| 2 | 85 | 94% | 104 | 94% | 62 | 95% |
| 3 | 55 | 87% | 30 | 83% | 36 | 47%* |
Source: Analysis of the CPUC’s advice letter data.
Note: Although the CPUC may modify an advice letter before approving it, the CPUC does not track whether it modified the terms of an advice letter before approval. Therefore, we do not present this information in the table above.
* According to the Water Division, as of November 2018, 12 advice letters were still pending a formal resolution by the commissioners, which explains the lower approval rate for fiscal year 2017–18.
General Rate Case Proceedings
State law requires the CPUC to establish a schedule that requires Class A utilities to file a general rate case application every three years. To facilitate the three‑year review period, the CPUC has set a timeline for the various stages of the review process, which starts with the submission of a proposed application as shown in Figure 1. The CPUC’s estimated length for a proceeding is about 340 days for a single‑district Class A water utility and about 560 days for a multidistrict utility before the commissioners issue a formal decision. The proceedings may take longer if commissioners issue any extensions during the process.
In addition to the timeline of the process, the CPUC outlines the various steps and parties involved in general rate case proceedings as well as a list of requirements a water utility must satisfy in its general rate case application. Before the utility submits its formal application, the Public Advocates Office reviews the proposed application for any deficiencies. Once Public Advocates determines that the water utility’s application meets the requirements set out in the rate case plan, the utility can submit its formal application to the CPUC. After receiving the formal application, the CPUC generally holds several hearings. For example, to begin the proceeding, an ALJ holds a conference to set the schedule for the proceeding. The ALJ may also schedule a public participation hearing to allow customers to raise concerns about the general rate case proposal or the water utility’s operations. If a general rate case application does not include material changes from the prior general rate case, an ALJ may determine that a public participation hearing is unnecessary. Once Public Advocates and other parties to the proceeding submit their prepared written testimony, the ALJ may elect to hold an evidentiary hearing, which is a series of oral presentations by the parties to the proceeding that include testimony on the evidence they have presented. After all hearings during a proceeding have concluded, the ALJ prepares a proposed decision outlining his or her recommendation for the commissioners that includes a discussion of relevant issues raised in the proceeding. The commissioners issue a final decision (CPUC decision) on the proceeding based on a majority vote.
Categorization of Advice Letters
Water utilities also file advice letters to request approval from the CPUC to change their rate structure, including rate increases or decreases, or to change their service terms or conditions. One of the primary uses of an advice letter is for a water utility to change rates as previously authorized by a statute or a decision by the commissioners, such as a decision that the CPUC issues at the end of a general rate case. The CPUC also allows small water utilities to use the advice letter process as an alternative to the more formal general rate case process because these utilities are less complex than Class A water utilities. A water utility may also submit an advice letter for other reasons that do not impact rates, such as a transfer of ownership or the offering of a new service.
The CPUC classifies advice letters into three categories, referred to as tiers, based on how the CPUC processes and approves them. Tier 1 advice letters—the most common—take effect upon filing and water utilities often submit them to comply with a CPUC decision, such as increasing rates to reflect changes in the Consumer Price Index. In contrast, Tier 2 and Tier 3 advice letters require CPUC staff review and disposition before they can take effect. The Division of Water and Audits (Water Division) has the authority to approve Tier 2 advice letters because the requests generally do not impact rates, such as when a water utility updates its service area map. As a result, these types of advice letters have high approval rates.
Tier 3 advice letters, which are more complex than advice letters for other tiers, require the passage of a formal resolution by commissioners for approval. For example, a small water utility may submit a Tier 3 advice letter for an informal general rate case to increase rates, or a Class A utility may submit one to petition to change a CPUC resolution. According to Public Advocates, it is not involved in the advice letter review process but it can receive notification of proposed rate changes as a result of advice letters and occasionally files a protest to an advice letter. We present the number of advice letters submitted by water utilities by tier from fiscal years 2015–16 through 2017–18, and the percentage the CPUC had approved as of November 2018, in Table 2.
Infrastructure Investment Reviews
To better provide services to their customers, water utilities may undertake infrastructure improvement, repair, or installation projects (infrastructure projects), such as a new water metering system, reservoir replacement, or pipeline replacement. State law requires the CPUC to determine whether such infrastructure projects, once completed, are being used and are useful for the utility’s operations. Once the CPUC makes this determination, the utility may increase its rates to reflect the cost of such a project. The CPUC may make this determination during a general rate case proceeding if the utility requests in its application to include the cost of an infrastructure project as a part of its proposed rate change. However, a utility may also submit an advice letter to obtain a rate increase to reflect the costs of an infrastructure project.
Footnote
1 Regulations allow a commissioner to preside over a general rate case with, or instead of, an ALJ. For all nine general rate cases we reviewed, an ALJ presided over the proceedings. Therefore, for the purposes of this report, we refer to the ALJ as the presiding officer over general rate cases. Go back to text