Report 2013-126 Recommendation 7 Responses

Report 2013-126: Antelope Valley Water Rates: Various Factors Contribute to Differences Among Water Utilities (Release Date: July 2014)

Recommendation #7 To: California Water Service Company

To show water customers that they are attempting to keep rates reasonable, the California Water Service Company should maintain documentation to demonstrate any cost savings expected or achieved as a result of its cost-saving efforts.

Annual Follow-Up Agency Response From September 2015

As documented in its 2015 General Rate Case (GRC) filing with the California Public Utilities Commission, Cal Water has taken a number of steps to control and reduce costs in its Antelope Valley District. For example, in its 2015 GRC filing, Cal Water estimates that per-employee pension costs will be 27% lower than projected during its 2012 GRC. In addition, Cal water is projecting that per-employee retiree health care costs will be 17% lower. Also, Cal Water has undertaken a fundamental change to its capital planning and procurement processes in Antelope Valley that will assist it in delivering capital projects on budget, and meet service requirements at the lowest life cycle cost.

Further, the Audit acknowledged that service areas "with a dense population of service connections allow water utilities to disperse their fixed costs over a larger number of water customers, resulting in lower overall monthly bills, whereas service areas with fewer service connections result in higher monthly bills because the water utilities must spread their fixed costs across fewer water customers." With only 1,400 customers, Cal Water's service area is the smallest of those included in the Audit. It has proposed to consolidate its Palos Verdes and Antelope Valley service areas for rate-making purposes. As such, the number of customers who share the cost of operating the water system would increase. Absent the proposal, revenue in the Lancaster portion of the service area would need to increase by about 34.9% to offset the cost of service. However, with the proposed consolidation, revenue in the Lancaster portion of the service area would need to increase by about 6.4%.

Cal Water will continue to use multiple communication channels to communicate cost savings to its customers. Further, Cal Water's local management will continue to give regular reports to its Officers regarding the service area's operations, including any efficiencies or cost-savings achieved.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

1-Year Agency Response

Cal Water continues to implement several initiatives related to the Audit's recommendation to increase its ability to demonstrate its efforts to control costs.

The efforts of team that was formed to evaluate the cost-efficiency of replacing aging infrastructure, as opposed to repairing it, culminated in the start of the CPUC's tri-annual review of Cal Water's operations and rates, which began on July 3, 2015. The success of the team's efforts is outlined in the Direct Testimony of Scott Wagner, which has been separately emailed to the State Auditor's office.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

We believe that Cal Water could do more to fully implement this recommendation. For example, it could conduct an assessment of Antelope Valley's operating costs to see how they can be reduced. Furthermore, the testimony Cal Water provided does not address cost savings for Antelope Valley ratepayers.

6-Month Agency Response

Cal Water continues to implement several initiatives related to the Audit's recommendation to increase its ability to demonstrate its efforts to control costs.

The efforts of team that was formed to evaluate the cost-efficiency of replacing aging infrastructure, as opposed to repairing it, is flowing into Cal Water's planning for the CPUC's review of Cal Water's operations and rates. The efforts of the team have resulted in several internal changes to the capital planning process, which will assist Cal Water deliver infrastructure projects on time and on budget, and meet service requirements at the lowest life cycle cost. Specifically, these changes include:

- Expanding the capital planning process out to nine years.

- Requiring a more detailed and standardized justification and cost estimate for capital projects.

- Establishing a Change Review Board that addresses changes to the timeline, budget, or scope of projects. The Board consists of the heads from the Engineering, Operations, and Rates Departments, and meets monthly.

- Requiring Officer approval of projects that experience significant cost overruns.

As was discussed in Cal Water's previous update, specific project justifications will be provided during the Commission's upcoming review of Cal Water's operations for all capital projects in the Antelope Valley District with a cost greater than $50,000. In other Districts, this level of detail is required for projects with a cost greater than $100,000. This change will provide customers with a more detailed understanding of the costs and benefits of infrastructure improvements being made in the service area.

California State Auditor's Assessment of 6-Month Status: Partially Implemented

60-Day Agency Response

Cal Water is implementing several initiatives directly related to the Audit's recommendation to increase our ability to demonstrate our cost-saving efforts.

For example, we have formed a team that is evaluating the cost-efficiency of replacing aging infrastructure rather than continuing to repair it, which may be more costly in the long-run.

Also, pursuant to the California Public Utilities Commission's (CPUC) Decision in its most recent review of Cal Water's operations, costs, and rates, specific justifications will be provided for all proposed infrastructure projects in its Antelope Valley District with a cost greater than $50,000. In other Districts, specific justifications are only required for infrastructure projects with a cost greater than $100,000. This change will provide customers with a more detailed understanding of the costs and benefits of infrastructure improvements being made in the service area.

In addition, we are evaluating the best means to conduct our medium- and long-term infrastructure planning, with the goal of establishing procedures that provides more time to analyze various projects and be able to identify those that will provide the most value to customers. The improved process will assist Cal Water deliver infrastructure projects on time and on budget, and meet service requirements at the lowest life cycle cost. Reports on the new procedures will be provided to the CPUC during its next review of Cal Water's operations, costs, and rates, which will begin in July 2015. In the interim, updates will be provided to the Office of Ratepayer Advocates.

California State Auditor's Assessment of 60-Day Status: Partially Implemented

All Recommendations in 2013-126

Agency responses received are posted verbatim.