Docket: Exhibit Number Commissioner Admin.

Law Judge DRA Project Leads

: : : : :

A.12-04-019 DRAMichael R. Peevey Gary Weatherford Ryninta Anatrya Terence Shia

DIVISION OF RATEPAYER ADVOCATES CALIFORNIA PUBLIC UTILITIES COMMISSION

REPORT ON CALIFORNIA-AMERICAN WATER COMPANY’S APPLICATION FOR THE MONTEREY PENINSULA WATER SUPPLY PROJECT, A.12-04-019 (PUBLIC VERSION)

San Francisco, California February 22, 2013

TABLE OF CONTENTS
CHAPTER 1 - PLANT SIZING AND GROUNDWATER REPLENISHMENT ............... 1-1  A.  INTRODUCTION .......................................................................................................... 1-1  B.  C.  1.  SUMMARY OF RECOMMENDATIONS .................................................................... 1-3  DISCUSSION ................................................................................................................. 1-3 

It Would Be Imprudent to Authorize a Plant Size Smaller than 9.6 MGD (without GWR) or 6.4 MGD (with GWR)................................................................. 1-3  2.  DRA Recommends the Commission Require Cal Am to Pursue All Reasonable Efforts to Include GWR in the MPWSP and Construct a 6.4 MGD Desalination Plant as its First and Primary Option. ........................................................................ 1-4  3.  The Commission Should Authorize Cal Am to Construct a 9.6 MGD Desalination Plant to Avoid Unnecessary Delay and Additional Costs to Ratepayers in the Event that the GWR Project is Not Viable. ..................................................... 1-6  4.  The Commission Must Establish Criteria for Determining Whether Cal Am Should Construct a 6.4 MGD Plant (with GWR) or a 9.6 MGD Plant (without GWR). ......................................................................................................... 1-7  5.  The Commission Must Ensure that the Process for Determining Whether Cal Am Should Construct a 6.4 MGD Plant (with GWR) or a 9.6 MGD Plant (without GWR) Appropriately Considers and Protects the Interests of Ratepayers. ........................................................................................................... 1-8  6.  The Commission Should Authorize Cal Am to File an Advice Letter to Reduce the Size of the Desalination Plant Component of the MPWSP from 9.6 MGD to 6.4 MGD in the Event that Established Criteria are Satisfied. ............. 1-9  D.  CONCLUSION ............................................................................................................... 1-9  CHAPTER 2 - COST MARKUPS............................................................................................ 2-1  A.  INTRODUCTION .......................................................................................................... 2-1  B.  C.  1.  SUMMARY OF RECOMMENDATIONS .................................................................... 2-2  DISCUSSION ................................................................................................................. 2-3 

Mitigation Allowance ................................................................................................. 2-3  a)  Cal Am Proposes a Mitigation Allowance of 1% Based on the Larger Plant Size Regardless of Plant Sizing. .................................................................... 2-3  b)  DRA Recommends a Mitigation Allowance of 1% Based on Most Probable Capital Costs Plus Contingency............................................................... 2-3  2.  Implementation Allowance......................................................................................... 2-4  a)  Cal Am Proposes an Implementation Allowance of 20% of Total Base Construction Costs. ................................................................................................. 2-4  b)  DRA Recommends an Implementation Allowance of 15% of Total Base Construction Costs. ................................................................................................. 2-5 

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Contingency Allowance ............................................................................................. 2-6  a)  Cal Am Proposes a Contingency Allowance of 25%. ............................................ 2-6  b)  DRA Recommends a Value of 20% for the Contingency Allowance. ................... 2-7  c)  DRA Recommends Applying the Contingency Allowance of 20% Only on Total Base Construction Costs. ........................................................................ 2-10  4.  Accuracy Allowance................................................................................................. 2-12  a)  Cal Am Proposes an Accuracy Range of +25% and -15%. .................................. 2-12  b)  DRA Recommends Removal of the Accuracy Range and the Establishment of a Capital Cost Cap and Absolute Capital Cost Cap Ceiling. ............................ 2-13  D.  CONCLUSION ............................................................................................................. 2-16  CHAPTER 3 - CAPITAL COSTS OF DESALINATION PLANT FACILITIES .............. 3-1  A.  INTRODUCTION .......................................................................................................... 3-1  B.  C.  1.  SUMMARY OF RECOMMENDATIONS .................................................................... 3-1  DISCUSSION ................................................................................................................. 3-4  Desalination Plant Capital Cost Estimates ................................................................. 3-4  a)  Desalination Plant Supply Facilities (“intake facilities”) ....................................... 3-5  i.  A project cost cap of $4.5 million should be adopted for the implementation of the test slant well program because it reflects Cal Am’s most up-to-date MPWSP project description. .................................................... 3-5  ii.  A 20% cushion added to Cal Am’s estimated cost for the installation of slant production wells is sufficient to cover additional labor costs that may be required to finish construction; all other potential costs related to special site and schedule conditions should be covered under the project’s contingency and/or mitigation allowance........................................................... 3-7  iii.  Consistent with the updated project description and production slant wells layout, the cost calculation of temporary structures for the production slant well construction should be based on a 460’ x 48’ area and a 380’ x 48’ area for the 9.6 and the 6.4 MGD plants, respectively. ...................................... 3-9  iv.  The feedwater pipeline diameter for the 9.6 MGD plant should be sized at 36-inch, not 42-inch. ........................................................................... 3-10  v.  Unit costs of identical components for the intake facilities should be standardized, unless there is a justified need for special construction. ............ 3-11  vi.  Cal Am should further explore the alternative site for the slant production well cluster because, among other benefits, it would result in a shorter distance between the two well clusters and a less expensive beach connector pipeline. ............................................................................................................ 3-12  b)  Desalination Process ............................................................................................. 3-13  i.  The cost of the Pretreatment Filter Backwash System for the 9.6 MGD plant size option should be the same as the cost for the 6.4 MGD plant size option since Cal Am has stated that both plant size options would require the same backwash facilities. ........................................................................... 3-13  ii.  The most probable base construction costs should not reflect the inclusion of a partial second pass for the RO systems. .................................................... 3-14  c)  Desalination Plant Return Facilities (“brine disposal”) ........................................ 3-15 

3. 

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A cost cap of $300,000 should be adopted for the metering structure and outfall connection for the brine conveyance facilities. .............................. 3-15  ii.  The redundancy on the process equipment for calcite treatment should be eliminated. ........................................................................................................ 3-15  2.  In the event that Cal Am must pursue a contingency plan for brackish source water, the Commission should require the company to file a Petition to odify the decision resulting from this application.................................................... 3-16  3.  In the event the PCA outfall proves infeasible, DRA recommends the Commission require Cal Am to file a Petition to Modify the decision resulting from this application for authorization to construct the next best alternative, an outfall at the CEMEX property. .......................................................................... 3-17  a)  Option 1: Modify Outfall by Placing Pipeline Inside the Existing Outfall and Adding Brine Diffusers at the End of the Outfall ................................................. 3-17  b)  Option 2: New Outfall Off-Shore CEMEX Property ........................................... 3-18  c)  Option 3: Brine Pipeline to Moss Landing and discharging through MLPP Cooling Water Outfall or the Existing Marine Refractories Outfall ......... 3-18  4.  The Commission should require Cal Am to submit an information-only filing with its test slant well results and Energy Minimization and Greenhouse Gas Reduction Plan. ................................................................................................. 3-20  a)  Test Slant Well Results ......................................................................................... 3-20  b)  Energy Minimization and Greenhouse Gas Reduction Plan................................. 3-21  D.  CONCLUSION ............................................................................................................. 3-22  CHAPTER 4 - OPERATIONS & MAINTENANCE (“O&M”) COSTS ............................. 4-1  A.  INTRODUCTION .......................................................................................................... 4-1  B.  C.  1.  SUMMARY OF RECOMMENDATIONS .................................................................... 4-1  DISCUSSION ................................................................................................................. 4-2 

i. 

Electrical Costs ........................................................................................................... 4-2  a)  Desalination Plant and Intake Well......................................................................... 4-2  b)  Conveyance and Miscellaneous .............................................................................. 4-3  c)  Corrections to the Energy Calculations in the 2013 Monterey Desalination Model v6.2-Public ............................................................................. 4-4  i.  Specific Weight of Sea Water ............................................................................ 4-5  ii.  Unit Conversion for Flow from AFY to MGD .................................................. 4-5  d)  Sensitivity Analysis ................................................................................................ 4-6  2.  Labor Costs ................................................................................................................. 4-9  3.  Chemical Costs ........................................................................................................... 4-9  4.  Membrane and Media Replacement ........................................................................... 4-9  5.  Repair & Replacement (R&R) ................................................................................. 4-10  D.  CONCLUSION ............................................................................................................. 4-11  CHAPTER 5 - COST RECOMMENDATIONS FOR CAL AM ONLY FACILITIES ...... 5-1  A.  INTRODUCTION .......................................................................................................... 5-1  B.  SUMMARY OF RECOMMENDATIONS .................................................................... 5-3 

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C.  1. 

DISCUSSION ................................................................................................................. 5-6 

The Cal Am Only Facilities Project Cost Cap of $106.875 Million Approved by the Commission for the Regional Desalination Project Should Not be Applied to the MPWSP. ............................................................................................. 5-6  a)  The Commission’s Prior Approval of the Settlement Agreement for the RDP is Not Precedential and Should Not be Followed in this Proceeding Because Cal Am is No Longer Pursuing the RDP. .............................. 5-7  b)  In D.12-07-008, the Commission stated that it would not approve Cal Am’s request to move forward with constructing the Cal Am Only Facilities until it determined how those facilities would relate to the project to replace the RDP. ........................................................................... 5-9  c)  Cal Am’s application for the MPWSP, A.12-04-019, modifies the cost estimates for the Cal Am Only Facilities provided in A.04-09-019 and the Settlement Agreement approved by the Commission. .......................................... 5-10  2.  Capital Costs of Cal Am Only Facilities .................................................................. 5-12  a)  The Commission should adopt a capital cost cap of $58.8 million and set an absolute capital cost ceiling at $66.1 million. ....................................................... 5-12  b)  Transfer Pipeline, Seaside Pipeline, Monterey Pipeline, and Terminal Reservoir ............................................................................................... 5-13  i.  Unless there is a justified need for special construction, Cal Am’s unit costs for the Cal Am Only Facilities pipelines should be calculated using the cost estimate methodology that it utilizes for the MPWSP desalination plant components. ............................................................................................. 5-13  ii.  The estimate of the terminal reservoirs should reflect the cost of bove-ground or partially-buried tanks. ............................................................. 5-14  c)  ASR Facilities ....................................................................................................... 5-15  i.  The cost of the ASR Pipeline, the Recirculation Pipeline, and the Backflush pipeline should be calculated using Cal-Am's standard methodology for estimating pipeline costs. ................................................................................. 5-15  ii.  The Capital Cost of Proposed ASR Wells 5 and 6 Should be Determined Based on the Capital Cost of the Recent Construction of ASR Wells 1-4. ...... 5-16  iii.  Cal Am Should not Recover Costs Associated With the ASR Facilities that Have Already Been Recovered or Are Currently Being Reviewed through the Advice Letter Process. .................................................................. 5-18  iv.  The estimated cost of the Right of Way Easement and/or Land Acquisition for the Fitch Park ASR site for Wells 5 and 6 should be similar to the cost of the easement for the Seaside Middle School site for existing ASR Wells 3 and 4. ................................................................................................... 5-20  v.  Consistent with the contingency allowance used in the recent construction of existing ASR Facilities, the contingency allowance for the ASR Facilities should be calculated at 11% of the Base Construction Costs........................... 5-21  d)  Escalation Factor and Mark-Ups .......................................................................... 5-22  i.  The December 2012 DRA Energy Cost of Service Branch Memorandum would provide a more consistent and accurate escalation factor for the Cal Am Only Facilities. .................................................................................... 5-22 

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A project contingency allowance of 20 percent is reasonable and consistent with the data provided by Cal Am.................................................................... 5-24  iii.  A mitigation allowance of 1%, as recommended for the desalination plant total cost estimate, is reasonable and consistent with the given data. .............. 5-25  iv.  An implementation allowance of 15%, as recommended for the desalination plant total cost estimate, should be authorized for the estimate of Cal Am Only Facilities. .................................................................................... 5-26  D.  CONCLUSION ............................................................................................................. 5-26  CHAPTER 6 - PROJECT FINANCING ................................................................................. 6-1  A.  INTRODUCTION .......................................................................................................... 6-1  B.  C.  1.  SUMMARY OF RECOMMENDATIONS .................................................................... 6-1  DISCUSSION ................................................................................................................. 6-2 

ii. 

DRA recommends that Surcharge 2 should be reinstated in a modified form that appropriately protects and accounts for the use of these public funds. ..................... 6-2  a)  Cal Am Proposes to Reinstate Surcharge 2 with Several Modifications. ............... 6-2  b)  The Proposal to Reinstate Surcharge 2 has significant benefits. ............................ 6-4  i.  Surcharge 2 Would Moderate Rate Shock. ........................................................ 6-4  ii.  The implementation of Surcharge 2 significantly reduces the overall cost of the MPWSP. ........................................................................................... 6-5  c)  Cal Am’s Proposal to Reinstate Surcharge 2 has Several Issues that Adversely Effect Ratepayer Interests and Must be Modified. ................................................. 6-6  i.  Cal Am’s proposed use of Surcharge 2 Inappropriately shifts capital risk to Ratepayers. .............................................................................................. 6-6  ii.  Cal Am’s Proposed Use of Surcharge 2 Funds May Inappropriately Benefit Cal Am and its Shareholders. ................................................................ 6-7  iii.  Cal Am’s Proposal Deviates from Traditional Utility Ratemaking. .................. 6-8  d)  DRA Proposes Implementing Surcharge 2 with Several Modifications. ............... 6-9  i.  The Benefits of Reinstating Surcharge 2 outweigh the Policy Issues. ............... 6-9  ii.  Funds Collected through Surcharge 2 Must be treated as a Contribution and Excluded from Rate Base. ........................................................................... 6-9  iii.  The Surcharge 2 collection schedule must be modified to ensure that it does not overlap with Surcharge 1 and is coordinated with the construction schedule. ........................................................................................................... 6-10  iv.  Surcharge 2 and Cal Am funds should be used in a balanced approach to fund the riskiest years of project construction. ............................................ 6-12  v.  Surcharge 2 funds collected in the memorandum account should only be distributed after those costs have been found to be reasonable. ....................... 6-13  vi.  Surcharge 2 funds should earn Cal Am’s Authorized Rate of Return as Compensation for the Capital Risk Assumed by Ratepayers in Funding the MPWSP. ..................................................................................................... 6-13  2.  DRA Recommends that Any SRF Loans Used to Finance the MPWSP Must be Protected and Accounted for in Accordance with the Requirements Set Forth in past Commission Decisions Pertaining to the Use of These Public Funds by Investor Owned Utilities. .............................................................. 6-14 

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Commission Precedent Dictates Requirements for the Use of SRF Loans by Investor Owned Utilities which Ensure that these Public Funds will be Properly Used and Accounted For. .................................................................. 6-14  b)  Although Cal Am Has Committed to Use Any SRF Monies that it Obtains for the MPWSP in Accordance with Commission Precedent, the Company’s Proposal to Treat these Public Funds as Debt in its Capital Structure Appears to Conflict with the Policy Underlying the Commission’s Past SRF Decisions....................................................................................................... 6-16  3.  DRA recommends that Cal Am use contributions from public agencies to finance the MPWSP to the extent possible and required that Cal Am uses such funds in accordance with Commission requirements and policy governing the use of public funds by investor owned utilities. ............................... 6-18  4.  Cal-Am should Use the Least Expensive Debt Source Available to Fund Portions of the Project Financed with Cal-Am Long-Term Debt. ........................... 6-19  5.  DRA recommends using the same financing structure for the entire project and not a separate financing plan for the portion of the plant called “Cal Am Only Facilities.” ........................................................................................ 6-19  D.  CONCLUSION ............................................................................................................. 6-20  CHAPTER 7 - RATEMAKING TREATMENT FOR MPWSP AND “CAL AM ONLY FACILITIES” ............................................................................................................................ 7-1  A.  INTRODUCTION .......................................................................................................... 7-1  B.  C.  1.  SUMMARY OF RECOMMENDATIONS .................................................................... 7-1  DISCUSSION ................................................................................................................. 7-1 

a) 

Cal Am should be permitted to record interest during construction but not given the authority to record or earn an equity return prior to project completion ... 7-1  2.  The ratemaking treatment for “Cal Am Only Facilities” should be no different from the other portions of the MPWSP....................................................... 7-2  D.  CONCLUSION ............................................................................................................... 7-3 

APPENDIX A – QUALIFICATIONS AND PREPARED TESTIMONY APPENDIX B-1 THRU B-4 APPENDIX C-1 THRU C-15 APPENDIX D (CONFIDENTIAL)

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MEMORANDUM The Division of Ratepayer Advocates (“DRA”) of the California Public Utilities Commission (“Commission”) prepared this report presenting its analysis and recommendations on the Application of California-American Water Company’s (“Cal Am”) Request for a Certificate of Public Convenience and Necessity (“CPCN”) for the Monterey Peninsula Water Supply Project (“MPWSP”) A.12-04-019. In its application, Cal Am requests authorization to initially size the desalination plant portion of the MPWSP at 9.6 million gallons per day (“MGD”). However, if the Monterey Peninsula Groundwater Replenishment (“GWR”) Project, a joint project between the Monterey Regional Water Pollution Control Agency (“MRWPCA”) and the Monterey Peninsula Water Management District (“MPWMD”), reaches certain milestones by the time Cal Am is ready to construct the desalination plant (currently estimated to be in 2017), and the cost of GWR water is reasonable, Cal Am seeks authorization to file an advice letter to reduce the size of the desalination plant component of the MPWSP to 6.4 MGD and supplement water supplies with water purchased from the GWR Project. Ryninta Anatrya and Terence Shia serve as DRA’s project coordinators in this proceeding, and are responsible for the overall coordination in the preparation of this report. The prepared testimonies of DRA’s witnesses are contained in this report. Appendix A of this report contains the qualifications of DRA’s witnesses. DRA’s legal counsel for this case is Jonathan Knapp.

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EXECUTIVE SUMMARY In its Application, A. 12-04-019, filed on April 23, 2013, Cal Am requests a Certificate for Public Convenience and Necessity (“CPCN”) to construct the the Monterey Peninsula Water Supply Project (“MPWSP”) consisting mainly of a 9.6 MGD desalination plant at a cost of $277.8 million or a smaller 6.4 MGD plant at a cost of $223.5 million. Construction of the smaller plant would be contingent on the Monterey Regional Water Pollution Control Agency (“MRWPCA”) Groundwater Replenishment (“GWR”) Project reaching certain milestones by the time Cal Am is ready to construct the desalination plant and the cost of GWR water being reasonable. Cal Am would then supplement water supplies with water purchased from the GWR Project. DRA has scrutinized the costs, ratemaking, and financing of Cal Am’s proposed MPWSP. DRA recommends that the Commission require Cal Am to pursue all reasonable efforts to include the GWR Project in the MPWSP and construct a 6.4 MGD plant. For the desalination plant portion of the project, DRA recommends capital costs be capped at $146.2 million. Should costs exceed the cost cap, DRA recommends the company be required to return to the Commission for further authorization, but in no case should there be any ratepayer recovery of funds expended in excess of an absolute capital cost ceiling of $182.7 million for this option. If the GWR Project is not viable, DRA recommends a 9.6 MGD desalination plant with a capital cost cap of $173.3 million and an absolute capital cost ceiling of $216.6 million. Table A provides a summary of DRA’s cost recommendations for Cal Am’s proposed project.

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Table A: Cal Am’s vs. DRA’s Capital Cost Estimates (in 2012 Dollars) of the Proposed Desalination Plant Facilities.1 9.6 MGD PLANT
CAL AM DRA PROPOSED RECOMMENDED CAL AM EXCEEDS DRA

COST (2012 DOLLARS) MOST PROBABLE CAPITAL COSTS WITH CONTINGENCY HIGH END OF ACCURACY RANGE LOW END OF ACCURACY RANGE

$221,600,000 $277,000,000 $188,400,000

$173,300,000 $48,300,000 $216,600,000 $60,400,000 $147,300,000 $41,100,000

6.4 MGD PLANT
CAL AM DRA PROPOSED RECOMMENDED CAL AM EXCEEDS DRA

COST (2012 DOLLARS) MOST PROBABLE CAPITAL COSTS WITH CONTINGENCY HIGH END OF ACCURACY RANGE LOW END OF ACCURACY RANGE

$178,800,000 $223,500,000 $152,000,000

$146,200,000 $32,600,000 $182,700,000 $40,800,000 $124,000,000 $28,000,000

In addition to the above, Cal Am requests authorization to spend up to $106.875 million on the “Cal Am Only Facilities” consisting of conveyance pipelines, storage tanks, and Aquifer Storage and Recovery (“ASR”) facilities. DRA recommends these costs be capped at $58.8 million, a reduction of $48 million, with an absolute capital cost ceiling of $66.1 million. These facilities are necessary for either option.
DRA’s detailed cost breakdown for the desalination plant facilities discussed in this chapter is attached hereto as Appendix C.
1

3

DRA also estimates lower Operations & Maintenance (“O&M”) costs for the 6.4 MGD and the 9.6 MGD plants of $7.19 million and $8.82 million, respectively, lowering the annual revenue requirement by around $2 million per year over what Cal Am proposed. In terms of financing scenarios, DRA recommends the Commission reinstate a customer Surcharge 2 on bills to offset the cost of this project, provided various ratepayer safeguards are incorporated to protect the public character of the funds and to ensure that neither Cal Am nor its shareholders are able to profit from the use of these public funds. The reinstatement of this Surcharge 2 will allow Cal Am to gradually phase in the new higher rates, thus avoiding rate shock, and result in real cost savings of up to $10.9 million per year in avoided earnings that would have to be paid to Cal Am and tax savings. DRA analyzed a number of different financing scenarios2 as shown in Appendix C to this report. Using DRA’s capital cost recommendations for the desalination facilities (excluding the “Cal Am Only Facilities” 3), DRA’s own calculation of the annual revenue requirement for the “Cal Am Only” facilities, DRA’s O&M estimates,4 and DRA’s Surcharge 2 recommendations with no other public monies, result in the following annual revenue requirements for the different project sizes:

These model scenarios incorporate DRA’s financing recommendations, but DRA ran the model excluding the test slant well because costs for this portion of the project are currently being tracked in the Surcharge 1 Memorandum Account, but DRA does not oppose including the test slant well with the entirety of the MPWSP if this portion of the project is found to be “used and useful” after a reasonableness review.
2

DRA did not use the Model to calculate the annual revenue requirement of the “Cal Am Only facilities” because the model did not have the flexibility to use DRA’s recommended ratemaking treatment for these facilities, but instead hardcoded into the model the moving of project costs quarterly into ratebase instead of waiting for the entire project to be used and useful. See Appendix C-9 for further details of DRA’s illustrative calculation of estimating the first year revenue requirement impact of “Cal Am Only Facilities.”
3

In addition, the O&M costs as reflected on the summary page of the model output did not accurately reflect DRA’s or Cal Am’s engineering estimates for O&M as entered into the detail O&M input pages of the model. For this summary table, DRA uses O&M from Appendices C-14 and C-16.
4

4

DRA Capital Costs Plant Capital Costs (excluding “Cal Am Only Facilities”)5 6.4 MGD + GWR $146.2 Million 9.6 MGD $173.3 Million $58.8 Million $232.1 Million 9.6 MGD $16.1 Million $10.1 Million $8.82 Million $0 Million $35.02 Million

“Cal Am Only Facilities” Capital $58.8 Million Cost Total Capital Cost 1st Year Revenue Requirements $205 Million 6.4 MGD + GWR

Desalination Plant (not including $11.9 Million “Cal Am Only Facilities”) “Cal Am Only Facilities” O&M Annual Cost GWR Purchased Water Cost Total 1st year Annual Project Revenue Requirement $10.1 Million $7.19 Million $8.75 Million $37.94 Million

In contrast, Cal Am’s capital cost proposal (including the “CAW Only Facilities”), Cal Am’s O&M estimates, and DRA’s Surcharge 2 recommendations6 with no other public monies, would result in the following annual revenue requirements for the different project sizes:

The Plant Capital Costs include the cost of the test slant well assuming that the test slant well will be found to be “used and useful” after a reasonableness review.
5

For the purposes of showing the difference between DRA’s and Cal Am’s proposed annual revenue requirement as a result of capital cost differences, the following numbers were generated using DRA’s proposed financing scenario with Surcharge 2 and the use of only Cal Am long-term debt and equity with no other public monies.
6

5

Cal Am Capital Costs Total Capital Costs (including CAW Only Facilities)7 1st Year Revenue Requirements Desalination Plant (not including “Cal Am Only Facilities”) “Cal Am Only Facilities” O&M Annual Cost GWR Purchased Water Cost Total 1st year Annual Project Revenue Requirement 6.4 MGD + GWR $285.6 Million 9.6 MGD $328.4 Million

6.4 MGD + GWR $24.5 Million

9.6 MGD $32.9 Million

$15.3 Million $9.03 Million $8.75 Million $57.58 Million

$15.3 Million $11.01 Million $0 Million $59.21 Million

While there are many different scenarios, the above example shows that when using DRA’s recommended financing proposal, DRA’s capital cost recommendations would save Monterey ratepayers $80.6 to $96.3 million in total capital costs, resulting in a ratepayer savings of $19.6 to 24.2 million per year.

The Plant Capital Costs include the cost of the test slant well assuming that the test slant well will be found to be “used and useful” after a reasonableness review.
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6

Organization of Report Chapter Number 1 2 3 Description Executive Summary Plant Sizing and GWR Cost Markups Capital Costs of Desalination Plant Facilities O&M Costs of Desalination Plant Facilities Cal Am Only Facilities Project Financing Project Ratemaking Qualifications Attachments Model Spreadsheets Confidential Brine Disposal Analysis Witness Ryninta Anatrya; Terence Shia Suzie Rose Terence Shia Ryninta Anatrya; Suzie Rose; Justin Menda Justin Menda Ryninta Anatrya; Suzie Rose Inderdeep Atwal Inderdeep Atwal; Terence Shia All All All Justin Menda

4 5 6 7 Appendix A Appendix B Appendix C Appendix D

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 A.

CHAPTER 1 - PLANT SIZING AND GROUNDWATER REPLENISHMENT INTRODUCTION This chapter presents DRA’s recommendations regarding Plant Sizing for the Monterey Peninsula Water Supply Project (“MPWSP”), and DRA’s recommendations regarding issues pertaining to the possible inclusion of a Groundwater Replenishment (“GWR”) Project in the MPWSP. The recommendations presented in this section are based on DRA’s review of California-American Water Company’s (“Cal-Am”) direct testimony, supplemental testimony, and data request responses, as well as data request responses provided by the Monterey Regional Water Pollution Control Agency (“MRWPCA”) and Monterey Peninsula Water Management District (“MPWMD”). The lead agency for the GWR Project would be the MRWPCA.8 The project involves taking effluent from the MRWPCA’s existing wastewater treatment plant and providing further treatment through a new advanced water treatment plant.9 The highly treated product water10 would then be injected into the Seaside Basin Aquifer, where it would be diluted and stored for a period of time (likely two to six months)11 before being withdrawn for potable consumption via Cal Am’s existing and proposed ASR Wells.12 Cal Am would then purchase the treated water via a Water Purchase Agreement13 in order to withdraw the water via the four existing and two proposed ASR Wells.14 As part of its original application (“A.12-04-019”) for the MPWSP, Cal Am proposes the following desalination plant sizes:
A.12-04-019, Appendix A, MRWPCA-MPWMD-Cal-Am GWR Project Planning Term Sheet and Memorandum of Understanding (“MOU”) to Negotiate in Good Faith, at p. 3.
8 9

A.12-04-019, Direct Testimony of Richard C. Svindland, at p. 28.

Id. (explaining that the advanced treatment will include micro-filtration, reverse osmosis, ultraviolet light, and hydrogen peroxide treatment).
10 11 12 13

Id. at p. 31. Id.

See A.12-04-019, Appendix A, MOU (explaining that MRWPCA would treat the water and inject the water into the Seaside Basin Aquifer, MPWMD would provide approximately 50% funding for the GWR project, and Cal Am would purchase the water).
14

A.12-04-019, Direct Testimony of Richard C. Svindland, at p. 30.

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 “9.0 MGD” - Constructing a 9.0 million gallons per day (“MGD”) Desalination Plant.  “5.4 MGD with GWR” - Constructing a smaller sized desalination plant of 5.4 MGD, and purchasing a portion of the replacement supply from a GWR Project that is currently in the early stages of planning by the MRWPCA. In its Supplemental Testimony, Cal Am updates the desalination plant sizes as follows:  “9.6 MGD” - Constructing a 9.6 MGD Desalination Plant.  “6.4 MGD with GWR” - Constructing a smaller sized desalination plant of 6.4 MGD, and purchasing a portion of the replacement supply from a GWR Project that is currently in the early stages of planning by the MRWPCA. The plant sizes that include GWR would involve Cal Am:  Building a smaller sized desalination plant;  Purchasing GWR water via a Water Purchase Agreement (“WPA”); and,  Potentially constructing dilution water facilities consisting of a dilution water pipeline and an injection well.15 Cal Am proposes in its application that it “will closely monitor the progress of the GWR Project and will make a decision at the time it is ready to begin construction on the desalination plant…whether to construct”16 a larger or smaller desalination plant. Cal Am proposes that the Commission approve a larger plant size, and if the GWR Project is on target for schedule, cost, and public acceptance, then Cal Am will “request to the
See Cal-Am Response to Data Request DRA-A.12-04-019-CAL-AM 007, attached hereto as Exhibit 1, Response to Question 7 (explaining that the cost of these facilities would not increase the overall project cost of GWR project alternatives).
15 16

A.12-04-019, Direct Testimony of Richard C. Svindland, at p. 29.

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CPUC via an Advice Letter Compliance filing that a smaller…desalination plant be constructed in lieu of the larger.”17 B. SUMMARY OF RECOMMENDATIONS DRA recommends that the Commission: 1) Require Cal Am to pursue all reasonable efforts to include the GWR Project in the MPWSP and construct a 6.4 MGD desalination plant as its first and primary option. Authorize Cal Am to construct a 9.6 MGD plant to avoid unnecessary delay and additional costs to ratepayers in the event that the GWR Project is not viable. Establish criteria for determining whether Cal Am should construct a 6.4 MGD plant (with GWR) or a 9.6 MGD plant (without GWR). Ensure that the process for determining whether Cal Am should construct a 6.4 MGD plant (with GWR) or a 9.6 MGD plant (without GWR) appropriately considers and protects the interests of ratepayers. Authorize Cal Am to file an advice letter to reduce the size of the desalination plant component of the MPWSP from 9.6 MGD to 6.4 MGD in the event that the established criteria are satisfied.

2)

3) 4)

5)

C.

DISCUSSION 1. It Would Be Imprudent to Authorize a Plant Size Smaller than 9.6 MGD (without GWR) or 6.4 MGD (with GWR).

In supplemental testimony filed January 11, 2013, Cal Am provided updates on the progress of the MPWSP and requested to “make the desal plant slightly larger to accommodate changes in demand and supply.”18 DRA evaluated Cal Am’s request to increase plant capacity and concluded that the request is both reasonable and prudent.19 Table 1-A summarizes the results of this analysis.

17 18 19

Id. A.12-04-019, Supplemental Testimony of Richard C. Svindland, at p.11. Appendix B-1 provides DRA’s analysis on Plant Capacity.

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Table 1-A. Plant Capacity Analysis, Based on RBF Technical Memorandum "Recommended Capacity for the Monterey Peninsula Water Supply Project"20 Plant Demand Unmet Capacity by Other Sources (MGD) (MGD) 9.0 9.40 9.6 9.40 5.4 6.28 6.4 6.28 Running Capacity of Plant 104% 98% 116% 98%

9.0 MGD plant size 9.6 MGD plant size 5.4 MGD plant size (with GWR) 6.4 MGD plant size (with GWR) 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
20 21 22

As shown in the above table, a plant capacity smaller than 9.6 MGD or 6.4 MGD with GWR could result in a plant being required to operate above 100% of design capacity. Based on the results of this analysis and the importance of providing the Monterey Peninsula with a safe and reliable source of water, DRA finds that it would be imprudent to authorize a plant size smaller than 9.6 MGD or 6.4 MGD with GWR. 2. DRA Recommends the Commission Require Cal Am to Pursue All Reasonable Efforts to Include GWR in the MPWSP and Construct a 6.4 MGD Desalination Plant as its First and Primary Option.

In its application, Cal Am proposes that if the GWR Project “reaches certain milestones” by the time Cal Am is ready to construct the desalination plant and the cost of the water from the GWR Project is reasonable, Cal Am would file a Tier 2 Advice Letter to reduce the size of the desalination plant and supplement water supplies with purchased water from the GWR Project.21 Cal Am has entered into a Memorandum of Understanding (“MOU”) with MRWPCA and MPWMD in which all parties make a good faith commitment to pursue development of the GWR Project.22 Parties to the MOU have at various points identified numerous advantages of GWR, including:

A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 1 A.12-04-019, at pp. 1, 6.

A.12-04-019, Appendix A, MRWPCA-MPWMD-Cal-Am GWR Project Planning Term Sheet and MOU to Negotiate in Good Faith.

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 Diversification of the water supply portfolio;  Reduced power requirements;  Reduced amount of MRWPCA discharge into Monterey Bay; and,  Advancement of the State of California’s recycled water policies.23 In addition to the above items, DRA identified several other benefits of including a successful GWR component in the overall MPWSP project. In particular, Cal Am ratepayers could benefit from the lower costs of public funds to finance a GWR component.24 Further, with an estimated start-up date of almost a full year before the desalination plant is scheduled to come on line,25 the GWR Project could increase the likelihood of Cal Am achieving meaningful reductions in Carmel River withdrawals before the State Water Resources Control Board’s December 2016 Cease and Desist Order deadline. Based upon the numerous environmental and water reliability benefits associated with GWR, and provided that the GWR Project proves to be feasible, costeffective (when considering the additional value provided by the increased safety and reliability of a diversified water supply portfolio), and meets other identified criteria, as explained below, DRA recommends the Commission require Cal Am to pursue all reasonable efforts to include the GWR Project in the MPWSP and construct a 6.4 MGD desalination plant as its first and primary option.26 Although DRA compared the estimated cost of including the GWR Project in the MPWSP, as compared to the cost of the 9.6 MGD plant option without GWR. This

A.12-04-019, Direct Testimony of Richard C. Svindland, at pp. 32-33; A.12-04-019, Direct Testimony of Keith Israel, at p. 8.
23 24 25

A.12-04-019, Direct Testimony of Keith Israel, at p. 8.

See Cal-Am Response to Data Request DRA-A.12-04-019-MRWPCA 001, attached hereto as Exhibit 2, Response to Question 5 (explaining that the most current projection for the GWR project schedule anticipates completing construction and starting injection in the fourth quarter of 2016) and A.12-04-019, Supplemental Testimony of Richard C. Svindland, at p. 6 (explaining that based on the revised schedule, the desalination plant is not expected to be on-line until December of 2017). See p. 1-8 of this testimony for DRA’s recommendations on establishing criteria for the decision of whether to include GWR in the MPWSP.
26

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analysis proved to be extremely difficult due to the amount of uncertainty that exists at this stage of the MPWSP. Many factors will ultimately contribute to the final cost of each of these proposed components of the MPWSP, including: the capital cost of the desalination plant options (i.e., the actual amount that Cal Am spends to construct the desalination plant), the financing scenario, the surcharge and contribution scenario,27 and the purchase price of the GWR water.28 Each of these factors is currently uncertain. The range of possible values for each of these factors, as well as the interplay amongst them, creates a large variance in the possible cost or savings of including the GWR Project in the MPWSP. Accordingly, DRA believes that the cost-effectiveness of GWR is best analyzed at a future date when some or all of these factors are better defined. Thus, DRA supports Cal Am’s proposal to assess the cost-effectiveness of the GWR Project as part of the ultimate determination regarding the feasibility of including this component of the MPWSP. 29 DRA further recommends that the additional value provided by the increased safety and reliability of a diversified water supply portfolio should be considered as a part of this cost-effectiveness assessment. 3. The Commission Should Authorize Cal Am to Construct a 9.6 MGD Desalination Plant to Avoid Unnecessary Delay and Additional Costs to Ratepayers in the Event that the GWR Project is Not Viable.

As noted, in order to meet the water supply needs of the Monterey Peninsula, DRA finds that the appropriate capacity for the desalination plant component of the MPWSP is 9.6 MGD without GWR or 6.4 MGD with GWR. Although DRA recommends the Commission require Cal Am to pursue all reasonable efforts to include the GWR Project in the MPWSP and construct a 6.4 MGD desalination plant as its first
See Chapter 6, infra (analyzing Cal Am’s proposals and providing DRA’s recommendations regarding financing, surcharge, and contribution scenario for the MPWSP).
27

See “2013 Monterey Desalination Model v6.2-Public,” Assumptions tab, whereby changing the Plant Assumptions (including the GWR cost), the Financing Assumptions, and the Surcharge & Contribution Assumptions significantly changes the difference in the costs of the two plant size options.
28

A.12-04-019, Direct Testimony of Richard C. Svindland, at p. 29 (stating, “Some of the criteria that [Cal Am] will use in making this decision are…Do the costs associated with [GWR] still make financial sense…is the cost of [GWR] water comparable to desalination?”).
29

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and primary option, because the GWR Project is still in an early, planning stage it is not yet possible to determine whether it will ultimately be a viable component of the MPWSP. Therefore, as a procedural matter, DRA recommends that the Commission approve a 9.6 MGD desalination plant because, as recommended below, Cal Am could subsequently obtain Commission approval via the Advice Letter process to down size the plant if the GWR Project is viable. By contrast, if the Commission were to approve a 6.4 MGD plant and then it was subsequently determined that the GWR Project was not viable, it would be necessary for Cal Am to file a new application for Commission approval to construct a 9.6 MGD plant, which would result in unnecessary delay and additional cost to ratepayers. Accordingly, in light of the current uncertainty surrounding the GWR Project, and since the 6.4 MGD plant (with GWR) could proceed under the umbrella of a Commission issued Certificate of Public Convenience and Necessity (“CPCN”) for the 9.6 MGD plant, DRA recommends the Commission approve a 9.6 MGD desalination plant as a component of the MPWSP. 4. The Commission Must Establish Criteria for Determining Whether Cal Am Should Construct a 6.4 MGD Plant (with GWR) or a 9.6 MGD Plant (without GWR).

DRA agrees with the Planning and Conservation League (“PCLF”) and the Monterey Peninsula Regional Water Authority (“MPRWA”) that the Commission must establish criteria for determining whether Cal Am should construct a 6.4 MGD plant (with GWR) or a 9.6 MGD plant (without GWR).30 To this end, DRA supports Cal Am’s proposal for a workshop in the spring of 2013 focused on the development of such

Motion to Establish Criteria for Decision on Desalination Plant Sizing, Planning Conservation League Foundation, A.12-04-019, filed December 12, 2012, at p. 2 (stating, “PCLF believes that, rather than relying on Cal-Am’s amorphous and undefined criteria, the Commission itself should establish the guiding criteria to determine whether Cal-Am should construct a smaller or larger desalination plant.”); Response of Monterey Peninsula Regional Water Authority to Planning and Conservation League Foundation’s Motion to Establish Criteria for Decision on Desalination Plant Sizing, A.12-04-019, filed December 27, 2012, at p. 1 (stating. “[t]he Authority agrees with PCLF that the Commission should establish criteria to guide the decision on the sizing of the desalination plant proposed in [Cal Am’s] application based on determination concerning the progress and cost-effectiveness of the proposed [GWR Project], and other relevant factors.”).

30

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criteria.31 Although cognizant of the challenges that would be involved in developing criteria to guide Cal Am’s decision on desalination plant sizing, DRA believes that a collaborative effort amongst the Parties would be productive. 5. The Commission Must Ensure that the Process for Determining Whether Cal Am Should Construct a 6.4 MGD Plant (with GWR) or a 9.6 MGD Plant (without GWR) Appropriately Considers and Protects the Interests of Ratepayers.

To ensure that the process for determining whether Cal Am should construct a 6.4 MGD or 9.6 MGD plant appropriately considers and protects the interests of ratepayers, DRA recommends the Commission require Cal Am to minimally notify the Commission and Parties to this proceeding in a public compliance filing of the facts and circumstances which justify its determination 30 days prior to starting construction on the desalination plant component of the MPWSP, regardless of the ultimate plant size.32 Significantly, were the Commission to adopt DRA’s recommendation to expressly require Cal Am to pursue all reasonable efforts to include the GWR Project in its ultimate decision, and with a signed MOU signaling good faith efforts to pursue the GWR Project presented and referenced in Cal Am’s testimony,33 the Commission would be able to make future ratemaking adjustments or cost disallowances if it is shown that Cal Am failed to diligently pursue the GWR Project in conflict with the best interests of its ratepayers. Although such after-the-fact disallowance in a future ratemaking proceeding

31

Response of California-American Water Company to the Planning and Conservation League Foundation’s Motion to Establish Criteria for Decision on Desalination Plant Sizing, A.12-04-019, filed December 27, 2012, at p. 2. See Administrative Law Judge’s Ruling on Pending Motions and Other Subjects, A.12-04-019, dated February 13, 2013, at p. 10, Ordering Paragraph No. 3 (wherein ALJ Gary Weatherford rules that until the Commission acts on A.12-04-019, or if the Commission approves the MPWSP, until the project comes online, “Cal-Am shall notice the Service List and a newspaper of general circulation (both electronically) and ratepayers (via bill messages) of the location and availability of new quarterly MPWSP progress reports on California-American Water Company’s Supply Project website: http://www.watersupplyproject.org.”). The compliance filing recommended by DRA above should be disseminated in the same manner as the quarterly progress reports referenced in the ALJ’s recent ruling to ensure that ratepayers receive timely notification that a decision on plant sizing has been made.
32 33

A.12-04-019, Direct Testimony of Richard C. Svindland, at p. 33.

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would provide some ratepayer relief, it would do little to reverse the overall consequences of an imprudent Cal Am decision that might have been prevented in the first place. Thus, as noted, the Commission must establish criteria to guide Cal Am’s decision on desalination plant sizing and must require Cal Am to timely notify the Commission and all Parties to this proceeding of its ultimate decision. 6. The Commission Should Authorize Cal Am to File an Advice Letter to Reduce the Size of the Desalination Plant Component of the MPWSP from 9.6 MGD to 6.4 MGD in the Event that Established Criteria are Satisfied.

As noted, in its application Cal Am proposes that if the GWR Project “reaches certain milestones” by the time Cal Am is ready to construct the desalination plant and the cost of the water from the GWR Project is reasonable, Cal Am would file a Tier 2 Advice Letter to reduce the size of the desalination plant and supplement water supplies with purchased water from the GWR project.34 Thus, in the event that the Commission established criteria is satisfied, and thus, the GWR Project appears viable, DRA recommends the Commission authorize Cal Am to file a Tier 2 Advice Letter to down size the desalination plant component of the MPWSP. D. CONCLUSION In order to meet the water supply needs of the Monterey Peninsula, DRA finds that the appropriate capacity for the desalination plant component of the MPWSP is 9.6 MGD without GWR or 6.4 MGD with GWR. Although DRA recommends the Commission require Cal Am to pursue all reasonable efforts to include the GWR Project in the MPWSP and construct a 6.4 MGD desalination plant as its first and primary option, because the GWR Project is still in an early, planning stage it is not yet possible to determine whether it will ultimately be a viable component of the MPWSP. Therefore, as a procedural matter, DRA recommends the Commission approve a 9.6 MGD desalination plant because Cal Am could subsequently obtain Commission approval via the Advice Letter process to down size the plant if the GWR Project is viable.
34

A.12-04-019, at p. 1.

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However, to ensure that the process for determining whether Cal Am should construct a 6.4 MGD or 9.6 MGD plant appropriately considers and protects the interests of ratepayers, DRA recommends the Commission establish criteria to guide Cal Am’s decision, and require Cal Am to minimally notify the Commission and Parties to this proceeding in a public compliance filing of the facts and circumstances which justify its determination 30 days prior to starting construction on the desalination plant component of the MPWSP, regardless of the ultimate plant size.

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CHAPTER 2 - COST MARKUPS INTRODUCTION This chapter presents DRA’s recommendations regarding the California-American Water Company (“Cal Am”) cost markups for the proposed Monterey Peninsula Water Supply Project (“MPWSP”). These cost markups include Mitigation, Implementation, Contingencies and Accuracy Allowance, which combine to increase the MPWSP budget by as much as 71%.35 The methodology for developing these cost markups originated in the work done by RBF Consulting (“RBF”) for its 2009 Technical Memoranda. RBF updated its cost estimates in Cal Am’s Application (“A.12-04-019”) filing on April 23, 2012 for the proposed plant sizes of 9.0 million gallons per day (“MGD”) or 5.4 MGD with the Groundwater Replenishment Project (“GWR”). The Technical Memorandum was updated again in Cal Am’s Supplemental Testimony on January 9, 2013 for the revised plant sizes of 9.6 MGD or 6.4 MGD with GWR. Although the nominal values changed, the percentages used to develop the various cost markups remained the same. To develop its recommendations, DRA reviewed the final report of the Bureau of Reclamation (“BOR”),36 Direct and Supplemental Testimony from Cal Am in A.12-04019 and A.04-09-019, the 2013 Monterey Desalination Model v6.2-Public, and Cal Am’s responses to DRA’s data requests from A.12-04-019 and A.04-09-019.

Percentage markup is proposed as 1% mitigation costs, 20% implementation costs, 25% contingency allowance, and 25% at the high end of the accuracy allowance and -15% at the low end.
35

In 2010, DRA engaged the professional consulting services of the Bureau of Reclamation to review and analyze the technical feasibility, reliability, risks, and cost estimates of the project alternatives for a major desalination plant in Monterey Bay, as proposed by California-American Water Company, summarized in the report titled, “Bureau of Reclamation Review Comments on Coastal Water Project and Alternatives Monterey, CA,” March 11, 2010, referred to below as the “BOR Report,” attached hereto as Exhibit 3. The BOR Report contains an objective, professional opinion by a third-party consulting service about the Coastal Water Project and its project alternatives, including the North Marina Alternative. See A.12-04-019, at p. 5 (wherein Cal Am states that the MPWSP is a variation of the North Marina Alternative, which the Commission reviewed and analyzed in A.04-09-019).
36

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B.

SUMMARY OF RECOMMENDATIONS DRA makes the following recommendations on Cal Am’s cost markups for the proposed MPWSP: 1. Mitigation allowance should only be assigned a percentage of 1% of the total base construction costs plus contingency costs. This percentage should reflect the actual project corridor affected by this project due to the possible variations in the slant well intake system. 2. Implementation allowance should be established at 15% of the total base construction costs since the allowance is no longer needed to cover construction of a pilot plant, which has received a separate line-item estimate. 3. Contingency allowance should be lowered to 20% of total base construction costs consistent with current Commission practice and in recognition of previous uncertainties being resolved (i.e., land acquisition, opportunity costs of funds being used, and ownership issues). 4. The accuracy range allowance should be removed from the MPWSP and a capital cost cap of $173.3 million for the 9.6 MGD plant and $146.2 million for the 6.4 MGD plant should be established as the most probable cost estimate. An absolute capital cost ceiling of $216.6 million for the 9.6 MGD plant and $182.7 million for the 6.4 MGD plant should be established to account for potential conflicts that may arise from inaccurate cost estimation. Spending above the most probable cost estimate (i.e., capital cost cap) but below the absolute capital cost ceiling should require a reasonableness review of all costs incurred as part of a separate application. Spending

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above the absolute cost ceiling should not be recoverable from Cal Am’s ratepayers. DISCUSSION 1. Mitigation Allowance a) Cal Am Proposes a Mitigation Allowance of 1% Based on the Larger Plant Size Regardless of Plant Sizing.

In its Supplemental Testimony, Cal Am defines mitigation costs as a “line item used to cover various items that are likely to arise during the permitting process of the project.”37 Cal Am also gave an example of a mitigation cost as “the cost to pay into a wetland bank for any disturbed wetlands along the project corridor or the additional monitoring that may be required when working around threatened species.”38 Following the discussion of the mitigation costs for the project at the December 11-12, 2012 cost workshops, Cal Am confirmed that the mitigation cost for the larger (9.0 or 9.6 MGD) desalination plant project is estimated at 1%. For the smaller (5.4 or 6.4 MGD) desalination plant project, however, Cal Am has retained the same mitigation cost as the larger project because it contends that the impacts on the entire project corridor would essentially be the same for the larger and smaller proposed desalination plants.39 Thus, Cal Am claims that the mitigation cost is slightly higher than 1% but is less than 2% for the smaller project.40 b) DRA Recommends a Mitigation Allowance of 1% Based on Most Probable Capital Costs Plus Contingency.

DRA recommends that the Commission establish mitigation allowance of 1% of most probable capital costs plus contingency. Contrary to Cal Am’s contention that the

37 38

A.12-04-019, Supplemental Testimony of Richard C. Svindland, at p. 11.

The threatened species at stake is the Snowy Plover because the bird nests at the proposed site of the slant well intake system.
39 40

A.12-04-019, Supplemental Testimony of Richard C. Svindland, at p. 11. Id.

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impacts on the project corridor would be the same for either the larger or smaller proposed desalination plants, it appears the project impacts would significantly vary based upon the ultimate size of the plant. For example, according to Cal Am, the 9.6 MGD plant size will require nine intake wells and related appurtenances while the smaller 6.4 MGD plant size will only require seven intake wells and related appurtenances.41 Similarly, Cal Am has recommended eight intake wells and related appurtenances for the 9.0 MGD plant option and six intake wells and related appurtenances for the smaller 5.4 MGD plant option.42 Because the number of proposed wells ranges from a low of six to a high of nine depending on plant size, it appears that the corresponding environmental impacts, including the impact on the Snowy Plover’s habitat, will be more widespread if a larger plant is ultimately constructed.43 Also, Cal Am has not substantiated its assertion that the environmental impacts will be the same regardless of plant size. Thus, the mitigation costs should remain at 1% for each respective plant size to account for these differences with the slant well intake system. 2. Implementation Allowance a) Cal Am Proposes an Implementation Allowance of 20% of Total Base Construction Costs.

In its response to DRA’s request for justification, Cal Am defined implementation costs as “future engineering, legal, permitting, and day-to-day administrative and management work required to implement the MPWSP project components as described in Table 2, Summary Description of Facilities, of Appendix E of A.12-04-019.”44 Cal Am further explained in its response that “implementation costs for the intake, desalination plant and product water pipeline were estimated at 20% of the base construction costs for these items.”45 Cal Am also stated that in 2009 it estimated
41 42 43 44

A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 11, at pp. 3-4. A.12-04-019, Appendix H, at pp. 2-3. The EIR addressing the MPWSP will address the environmental impacts of the various plant sizes.

Cal Am Response to DRA Data Request DRA-A.12-04-019-CAL AM-007, attached hereto as Exhibit 1, Response to Question 2.
45

Cal Am Response to DRA Data Request DRA-A.12-04-019-CAL AM-007, attached hereto as Exhibit

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implementation allowance of 15% for construction of the desalination plant using a design-build method and 30% for construction of the intake system using a design-bidbuild method.46 Based upon these two estimates, Cal Am derived a 2009 total estimate for the North Marina Alternative Plant’s implementation allowance of $20,900,000, or approximately 20% of the estimated construction costs. With the MPWSP, Cal Am decided to implement a design-build method for the intake and product water pipeline and use a single value of 20% for estimating the Implementation Costs for the intake system, desalination plant, and product water pipeline components of the MPWSP. RBF reaffirms this value by stating, “implementation costs were estimated at 20 percent of base construction cost” in the latest Technical Memorandum provided for Cal Am.47 As stated earlier, this revised Technical Memorandum is based on previous work done by RBF in 2009 and has been updated in Cal Am’s current application. In each of these cases, implementation allowance remains at 20% of base construction costs. b) DRA Recommends an Implementation Allowance of 15% of Total Base Construction Costs.

DRA recommends that the Commission establish an implementation allowance of 15% of base construction costs for all components of the MPWSP. DRA disagrees with Cal Am’s method of applying the same 20% developed in 2009 to the base construction costs of the currently proposed MPWSP which significantly differs from the proposed North Marina Alternative Plant. More specifically, Cal Am’s method is not tenable because the factor of 20% used in 2009 included 5% for the construction of a pilot plant48 – a component that is not included in the currently proposed MPWSP.49

1, Response to Question 1(a).
46 47

Id.

A.12-04-019, Supplemental Testimony of Richard C. Svindland, filed January 11, 2013, Attachment 3, at p. 5. See BOR Report, supra note 36, at p. 29 (stating, “[f]or the June 2009 costs the workshop indicated that the extra 5% was included for the Implementation Costs for a total of 20% (or approximately $4 million) for the North Marina Alternate for the Pilot Plant construction and associated engineering and operations.”).
48 49

Coastal Water Project (“CWP”) Notes from the July 2009 Cost Workshop, attached hereto as Exhibit 5,

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Although the 5% included in the 2009 overall implementation cost percentage also addressed implementation of a test slant well, DRA already allocates a set amount of $4.5 million as the project cost cap for the test slant well in the current proceeding.50 Since the 2009 implementation allowance percentage of 20% included a 5% cost adder for components either not being implemented in the current project or for which costs are accounted elsewhere, DRA recommends an implementation allowance of 15% of the total base construction costs as appropriate in this proceeding. 3. Contingency Allowance a) Cal Am Proposes a Contingency Allowance of 25%.

Cal Am proposes contingencies at 25% of the sum of base construction costs, implementation costs, and Right-of-Way (“ROW”)/Land/Outfall Costs in its original application.51 Cal Am also notes in its Supplemental Testimony that it does not plan on changing any of the contingency factors used in the cost estimates.52 This is due in part to the fact that Cal Am has yet to fully permit and design any of its desalination project facilities although it has finalized the amount of the land purchase for the desalination plant itself. Thus, Cal Am stated that it would be “premature to reduce any contingency factors that is has used to estimate the cost of this project.”53 Cal Am also noted that the percentage used to estimate contingency costs is consistent with the “Regional Desalination Project (‘RDP’) since 2009, as documented on April 15, 2010 in the Joint Response to Data Request CWP #53 and CWP Project Cost Comparison.”54 RBF confirmed this statement by stating that the cost estimates it gave to
at p. 9 (stating, “Cal Am proposes to increase part of implementation cost for the Design/Build (DB) facilities to 20% (exhibit K, table 1) of the Desalination Plant cost of $80 million. The extra 5% is primarily for the pilot plant and engineering services for the slant test well to bring the project to the conceptual design phase.”). See Chapter 3, Section C(1)(i), supra (explaining, DRA’s explanation for its recommended cost cap of the test slant well).
50 51 52 53 54

A.12-04-019, Appendix E, at p. 5. A.12-04-019, Supplemental Testimony of Richard C. Svindland, at p. 10. Id. Cal Am Response to DRA Data Request DRA-A.12-04-019-CAL AM-007, attached hereto as Exhibit

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Cal Am are based on RBF’s May 20, 2009 Technical Memorandum “RBF’s 2009 Technical Memorandum.”55 RBF’s 2009 Technical Memorandum describes Contingency for the CWP as: The Contingency is derived as 20 percent of the base capital cost estimate for the project. The Contingency allowance is included for unforeseen circumstances at this time that may occur during design and construction, including such circumstances as change of project scope as a result of these CPCN proceedings and potential permit requirements, extensive project delays as a result of litigation, legal fees, changes in market conditions including changes in land values and materials, changes in regulations, and the like. For construction, the contingency accounts for unforeseen field conditions that may result in change orders, and the like. This contingency allowance is in line with recommendations from the Association for the Advancement of Cost Engineering (AACE) for a project at this level of development.56 Thus, RBF defines contingency for Cal Am as costs to be used for unforeseen circumstances that may occur during design and construction. b) DRA Recommends a Value of 20% for the Contingency Allowance.

DRA disagrees with RBF’s definition of contingency recommended for Cal Am as monies used to pay for the unforeseen events that may occur during the course of construction. These events should be covered by using a percentage of an estimate’s direct costs in an effort to reduce the risk of cost overruns. The Association for the Advancement of Cost Engineering (“AACE”) states that contingency estimates should

1, Response to Question 1(b). A.12-04-019, Supplemental Testimony of Richard C. Svindland, filed January 11, 2013, Attachment 3, at p. 5 and the May 20, 2009 RBF Technical Memorandum attached hereto as Exhibit 4.
55

RBF’s 2009 Technical Memorandum, supra note 55, Updated Capital Cost Estimate for the Coastal Water Project, at p. 18.
56

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cover only those risks that could reasonably occur during the course of work whereas the direct costs are estimated at their most probable values.57 AACE further explains, For risk management purposes, contingency can be assigned to the critical items based upon their relative potential to contribute to cost variances. However, contingency should never be included in the control budget for a critical item contingency is its own budgeted control account except in the case of estimates which are prepared for line item bidding. Risks are dynamic and periodic range estimates should be conducted to reassess project risks and to reassign and/or release contingency as appropriate throughout the project’s life... In no event should contingency ever be treated as a source of funds to cover scope changes. 58 Thus, contingency estimates should not be a catch-all or used to make-up for inaccurate estimating. DRA also disagrees with Cal Am’s methodology for estimating contingencies at 25% of the sum of base construction costs, implementation costs, and ROW/Land/Outfall Costs. Once again, Cal Am has relied on circumstances related to the 2009 proceeding that are not relevant or applicable to the MPWSP. In the May 20, 2009 Technical Memorandum from RBF, contingency was initially derived as 20% of the base capital cost estimate for the project. This technical memorandum was presented to Cal Am before the July 2009 Cost Workshops where Cal Am explained to parties how the contingency allowance was developed. Cal Am stated, “the amounts allocated for contingencies are a policy call and are based on the experiences with each item in the Capital Cost Estimate.”59 Certain parties also made known that Cal Am’s contingency allowance of 20% might be inadequate due to the following items not being included in Cal Am’s cost estimate: “Ownership issues; Acquiring water rights for additional
57 58 59

AACE Recommended Practice No. 41R-08, available at http://www.aacei.org/resources/rp/. Id. A.04-09-019, Cost Workshop Notes July 2009, attached hereto as Exhibit 5, at p. 3.

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supplies from the Carmel river; Opportunity cost for use of funds while the project is under construction and/or in litigation; and, accuracy of timeline in the project “in service” date and, land acquisitions.”60 These items were labeled as issues that needed further discussion and required a record to be developed. However, these issues are very different from the circumstances surrounding the current proceeding. Many of these issues from the 2009 proceeding do not apply to the MPWSP, and as such, the irrelevance of these issues in the MPWSP removes the need for a higher contingency allowance. First, specific ownership issues were raised by the previous project because, as explained in D.10-12-016, it was a regional project with a publicprivate partnership in which Cal Am would own the pipeline, conveyance, and pumping facilities necessary to deliver the water to its customers, while other agencies would manage the source intake, desalination plant, and outfall.61 By contrast, under Cal Am’s proposed MPWSP, the company would maintain sole ownership of the majority of the facilities including the source intake, desalination plant, outfall, and the delivery systems to its customers. The water rights issue from the Carmel River is not applicable in the case of the MPWSP because this source has been exhausted with no potential for providing additional supply.62 Cal Am addresses the opportunity cost for use of funds while the project is under construction and/or litigation with its proposal to cease any Surcharge 2 collections that will fund the project should it be held up by litigation or any other reason for an estimated period of longer than 3 months.63 The timeline issue for the project in service date may still be an issue in the MPWSP, but contingencies should not be used to cover the inaccuracy in timeline estimating as it should only be used to cover the design and construction of the project itself. Land acquisition should not be an issue
60 61

Id. at p. 9.

Decision Approving Regional Project, Adopting Settlement Agreement and Issuing Certificate of Public Convenience and Necessity for California-American Water Facilities, D.10-12-016, issued December 3, 2010, at p. 5. A.04-09-019 explored the possibility of obtaining additional rights on the Carmel River, but additional rights cannot be secured at this time.
62 63

A.12-04-019, Direct Testimony of Dave Stephenson, at p. 19.

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in the MPWSP as Cal Am has further refined its land costs in its Supplemental Testimony. More specifically, Cal Am reports that it closed on approximately 46 acres of land to be used for the desalination plant, and Cal Am continues to negotiate with CEMEX regarding the property rights that it needs to construct the slant well intake system and believes it will obtain these property rights by the fall of 2013.64 Although the issues that were raised in the cost workshop from July 2009 do not have relevance in the case of the MPWSP, Cal Am still relies on its 2009 estimates for developing a contingency allowance for the MPWSP. Cal Am actually updated its contingency estimate following the cost workshop with a revised Technical Memorandum dated August 14, 2009 from RBF, which states, “[t]he Contingency is increased from 20 percent of the base capital cost estimate for each of the projects to 25% based on consensus amongst CAW and MCWD.”65 Thus, the parties addressed the contentious issues raised in the cost workshop by agreeing to an increase of the contingency allowance from 20% to 25%. As shown above, these issues are irrelevant for the MPWSP. Accordingly, DRA recommends a value of 20% for the contingency allowance on total base capital cost estimates. c) DRA Recommends Applying the Contingency Allowance of 20% Only on Total Base Construction Costs.

Further, DRA disputes Cal Am’s methodology of applying the contingency allowance on top of implementation costs and ROW/Land/Outfall Costs in addition to base construction costs. DRA has reviewed these calculations and concludes that the project contingency has not been calculated in accordance with the standard practice used by Cal Am during its General Rate Cases (“GRC”). Typically, Cal Am calculates project contingency only on base construction costs. For example, Cal Am estimates tank rehabilitation projects as follows:66

64 65

A.12-04-019, Supplemental Testimony of Richard C. Svindland, at pp. 3-4.

August 14, 2009 Technical Memorandum, Capital and O&M Cost Estimate Update, attached hereto as Exhibit 32, at p. 10.
66

Excerpt from DRA testimony summarizing Cal Am’s Request, DRA Ex 9 – Monterey Plant Testimony,

2-10

1 2 3 4 5 6 7 8 9 10 Looking at the table above under the 2012 column, contingency is shown as 20% with a value of $56,600, which is 20% of the total base construction costs of $283,000 ($253,500 + $12,000 + $7,900 + $9,600) = $283,000, from the above table). The MPWSP applies the contingency allowance in a much different way by taking the summation of the total base construction costs, the implementation costs, and the ROW/Land/Outfall costs to obtain a most probable cost estimate. The contingency allowance is then applied to this most probable cost estimate.67 DRA recommends employing this practice of applying contingency allowance on total base construction costs used in GRCs in this case for the MPWSP.

at pp. 1-13, in A.10-07-007, Cal Am’s Statewide GRC. See 2013 Monterey Desalination Model v6.2-Public (providing that for the 9.6 MGD Plant: Base Construction Costs ($141.4 million) + Implementation Costs ($28.3 million) + ROW/Land/Outfall Costs ($5.8 million) = Most Probable Cost Estimate ($175.5 million). Contingency Allowance = $175.5 million x 25% = $43.9 million.).
67

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As explained above, since Cal Am has purchased the land that it needs to construct the desalination plant and believes it will obtain the property rights that it needs for slant well intake system by the fall of 2013,68 the contingency allowance should not be applied to land acquisition costs. With regard to the contingency allowance being applied to implementation costs, Cal Am defines contingency in the 2009 cost estimates from RBF’s technical memoranda as, “the contingency is derived as 20 percent of the base capital cost estimate for the project.” Cal Am has not substantiated that this method of applying contingency on base cost estimates should be revised for the MPWSP. Also, as noted, contingency is properly defined as costs used to cover unforeseen events that occur during the course of construction. Thus, implementation costs, such as engineering, legal, and permitting costs that are allocated prior to project construction should not be covered by the contingency allowance. These two cost markups reflect different phases in the development of the project and should not be applied on top of each other to provide a higher markup for cost estimating purposes. Thus, DRA recommends a methodology that uses a 20% contingency allowance and applies this value to only the base construction costs. 4. Accuracy Allowance a) Cal Am Proposes an Accuracy Range of +25% and -15%.

In its Supplemental Testimony, Cal Am states that its capital cost estimate for this stage of project development is considered to have an accuracy range of -15% to +25% consistent with previous estimates calculated by RBF.69 As noted, these previous estimates appear in the 2009 Technical Memorandum produced by RBF for Cal Am in the CWP. Cal Am refers to AACE’s recommended practice for the Cost Estimate Classification System that provides guidelines for applying the general principles of estimate classification to project cost estimates.70 This system “maps the phases and

68 69 70

A.12-04-019, Supplemental Testimony of Richard C. Svindland, at pp. 3-4. A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 3, at p. 5. AACE Recommended Practice No. 18R-97, available at http://www.aacei.org/resources/rp/, at p. 2.

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stages of project cost estimating together with a generic maturity and quality matrix.”71 This matrix has been included for reference below:

3 4 5 6 7 8 9 10 11 This matrix illustrates Cal Am’s proposal of classifying the MPWSP in its current phase as Class 4 utilizing an accuracy range of -15% to +25% by picking the low point for the low range value and the lower midpoint for the high range value.72 b) DRA Recommends Removal of the Accuracy Range and the Establishment of a Capital Cost Cap and Absolute Capital Cost Cap Ceiling.

DRA agrees with applying AACE’s definition of Accuracy Range as, “[a]n expression of an estimate’s predicted closeness to final actual costs or time. Typically
71 72

Id.

A.04-09-019, Cost Workshop Notes July 2009, attached hereto as Exhibit 5, at p. 3. A.12-04-019, Cost Workshop Presentation December 11-13, 2012.

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expressed as high/low percentages by which actual results will be over and under the estimate along with the confidence interval these percentages represent.”73 Notably, Cal Am’s testimony in A.04-09-019 previously defined accuracy range as a range of outcomes that could represent one number within a probable range of future outcomes.74 Cal Am further stated in its prior testimony that there could be “a 50 percent chance that the final cost outcome will be higher than the most probable cost estimate, and that it may be as high as 25 percent more than the most probable cost estimate.”75 DRA recognizes that this most probable cost may have cost overruns or underruns, and at best, this project could be the 50/50 outcome.76 Still, DRA is constrained in its review of this application to the engineering studies currently available, and thus, recommends the most likely outcome that Cal Am proposes as the most probable cost estimate without the accuracy range applied. DRA notes that an accuracy range reflects the uncertainty surrounding a cost estimate.77 In refining cost estimating further, DRA finds that an estimator could assign a single cost value to the estimate, and when an estimator is required to choose a single point, this estimator tends to pick the “most likely” value.78 With more uncertainty, an estimator will choose to identify a minimum and maximum cost based on the estimator’s experience as well as the “most likely” cost in three point estimating.79 In the case of the MPWSP, this “most likely” value is equivalent to the most probable capital cost estimate of the entire project while the minimum cost reflects the low end of the accuracy range

73 74

AACE Recommended Practice 10S-90, available at http://www.aacei.org/resources/rp/, at p. 4.

A.04-09-019, Cal Am Rebuttal Testimony of F. Mark Schubert, dated September 20, 2004 and amended July 14, 2005, at pp. 8-9.
75 76

Id. at p. 9.

Another way of describing this 50/50 outcome is the point at which there are an equal number of possible outcomes on either side of the final cost estimate, so in this case, the 50/50 outcome is the median, or the average. Lawrence, Gordon R., “Use and Misuse of Capital Cost Estimate Contingency-Why Deleting it Makes Projects More Expensive, Not Less,” ISPE, 2007, at p. 2.
77 78 79

Id. Id.

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and the maximum cost represents the high end of the accuracy range. To understand the difference between single point and three point estimating, probability must be considered. Cal Am relies on theories in probability as stated in its testimony in A.04-09-019 that its cost estimate falls within a range of possible outcomes, and the probability of the final cost estimate could be 50 percent higher to 25 percent higher. Essentially, Cal Am provides a single value as the most probable cost estimate within a range of value outcomes using the most probable cost with the protection of an accuracy range of +25% and -15%. Thus, Cal Am formulates its cost estimate on its engineering experience and knowledge at this point in time while factoring in the probability that this cost estimate may overshoot or undershoot the most probable value. This method leads to ambiguity with this final cost estimate having a range of probable values so this final cost estimate should be narrowed down to a single value to eliminate some of these uncertainties. With the accuracy range further defined, DRA can now relate current Commission practice towards cost estimation in relation to the MPWSP. DRA normally applies this practice of single point estimating for Cal Am and other Class A Water Utilities in making recommendations on plant additions by providing a single value for any specific plant item. For example, DRA recommended a value of $685,000 for the cost of the Toro Arsenic Treatment Plant in A.10-07-007 compared to Cal Am’s proposal of $1,955,400, and the Commission ultimately decided on a single value of $685,000 based on DRA’s recommendations in D.12-06-016.80 The Commission did not make a recommendation for a range of values for this particular plant item and makes a practice of only recommending a single value. With this in mind, DRA recommends only the most probable cost estimate of $173.3 million for the 9.6 MGD Plant and $146.2 million for the 6.4 MGD Plant be adopted by the Commission in this proceeding to set a sensible limit on capital costs based on its current review during this conceptual phase. Thus,
D.12-06-016, at pp. 91-92, Ordering Paragraph No. 19 (ordering Cal Am to record $685,000 in ratebase for the Toro Arsenic Treatment Plant in the Commission’s Final Decision resolving Cal Am’s Statewide GRC).
80

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DRA recommends a capital cost cap at this most probable cost estimate but still recognizes that Cal Am will need to go forward with the design process and may encounter costs above this cap. This leads to a quandary in providing incentives to effectively manage costs in advance of obtaining actual bids and finalizing the design process. To address this concern, DRA also recommends an absolute capital cost ceiling of $216.6 million for the 9.6 MGD Plant and $182.7 million for the 6.4 MGD Plant. This absolute capital cost ceiling reflects a 25% cost markup above the capital cost cap to acknowledge the complications that may arise in the design process. However, DRA recommends the Commission not allow any ratepayer recovery of costs beyond the absolute capital cost ceiling. Further, DRA recommends that if Cal Am exceeds the capital cost cap it must apply to the Commission in a new application and justify the recovery of costs greater than the abovementioned capital cost cap of $173.3 million for the 9.6 MGD Plant and $146.2 million for the 6.4 MGD Plant so that a reasonableness review is conducted in this new application. The Commission should require that any monies that Cal Am spends over the capital cost cap but below the absolute capital cost ceiling require a reasonableness review in a new application. DRA recommends the absolute capital cost ceiling cap be an absolute cap, and any monies spent above the absolute capital cost ceiling should not be recoverable from Cal Am’s ratepayers. D. CONCLUSION Cal Am proposes inflated percentages for the cost markups used in developing cost estimates for the MPWSP. The mitigation allowance should be assigned a standard percentage of 1% of the total base construction costs plus contingency. The implementation allowance should reflect the actual circumstances of the current proceeding and therefore be set at 15% of the total base construction costs. Similarly, contingency allowance should also reflect the proposed project’s actual uncertainties and be set at a value of 20% of total base construction costs. The accuracy range allowance should be removed from the MPWSP and a capital cost cap be established equivalent to the most probable cost estimate as adopted by the Commission in this proceeding and an absolute capital cost ceiling be established equivalent to 25% above the capital cost cap. 2-16

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If Cal Am exceeds the absolute capital cost cap ceiling, the Commission should require Cal Am to submit a new application to provide further reasonableness review of all project expenses in this new application.

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CHAPTER 3 - CAPITAL COSTS OF DESALINATION PLANT FACILITIES A. INTRODUCTION This chapter presents DRA’s recommendations regarding the cost of constructing the desalination plant facilities of the Monterey Peninsula Water Supply Project (“MPWSP”) proposed by California-American Water Company (“Cal Am”) in Application (“A.”) 12-04-019. Cal Am’s most probable capital costs of these facilities are proposed to be $221.6 million for the 9.6 million gallons per day (“MGD”) plant and $178.8 million for the 6.4 MGD plant. This chapter also discusses the need and process for appropriate contingency planning should Cal Am’s originally proposed project components prove infeasible. DRA’s analysis and recommendations are based upon its review of Cal Am’s application, direct and supplemental testimony, responses to DRA’s data requests, and the capital cost spreadsheets within the 2013 Monterey Desalination Model v6.2-Public (“model”) which was circulated among the parties on January 3, 2013. DRA’s analysis consists of three sections: the desalination plant supply facilities (“intake facilities”), the desalination process, and the desalination plant return facilities (“brine disposal”). B. SUMMARY OF RECOMMENDATIONS 1) Cal Am’s capital cost estimates of the desalination plant facilities for the

6.4 and the 9.6 MGD plants should be reduced by modifying Cal Am’s cost assumptions and calculation methods. More specifically, in many instances the proposed costs were inconsistent with the MPWSP project description update, not fully justified, or calculated incorrectly. Table 3.A provides a summary of DRA’s cost reductions for the two plant sizes. Cost discrepancies of specific line items are discussed in the Discussion section below.

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Table 3.A: Cal Am’s vs. DRA’s Capital Cost Estimates (in 2012 Dollars) of the Proposed Desalination Plant Facilities.81 9.6 MGD PLANT
CAL AM DRA PROPOSED RECOMMENDED $46,900,000 $83,600,000 $10,900,000 $141,400,000 $39,000,000 CAL AM EXCEEDS DRA $7,900,000

COST (2012 DOLLARS) Desalination Plant Supply and Return Facilities Desalination Plant Product Water Pipeline BASE CONSTRUCTION COSTS

$73,100,000 $10,500,000 $10,900,000 $0

$123,000,000 $18,400,000

IMPLEMENTATION COSTS ROW EASEMENT AND LAND ACQUISITION MOST PROBABLE CAPITAL COSTS WITHOUT CONTINGENCY

$28,300,000 $5,800,000

$18,400,000 $5,800,000

$9,900,000 $0

$175,500,000

$147,000,000 $28,500,000

PROJECT CONTINGENCY ALLOWANCE MITIGATION ALLOWANCE MOST PROBABLE CAPITAL COSTS WITH CONTINGENCY HIGH END OF ACCURACY RANGE LOW END OF ACCURACY RANGE

$43,900,000 $2,200,000 $221,600,000 $277,000,000 $188,400,000

$24,600,000 $19,300,000 $1,700,000 $500,000

$173,300,000 $48,300,000 $216,600,000 $60,400,000 $147,300,000 $41,100,000

DRA’s detailed cost breakdown for the desalination plant facilities discussed in this chapter is attached hereto as Appendix C.
81

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6.4 MGD PLANT
CAL AM EXCEEDS DRA $6,300,000 $7,200,000 $0

COST (2012 DOLLARS) Desalination Plant Supply and Return Facilities Desalination Plant Product Water Pipeline BASE CONSTRUCTION COSTS

CAL AM DRA PROPOSED RECOMMENDED $39,100,000 $64,500,000 $10,900,000 $114,500,000 $32,800,000 $57,300,000 $10,900,000

$101,100,000 $13,400,000

IMPLEMENTATION COSTS ROW EASEMENT AND LAND ACQUISITION MOST PROBABLE CAPITAL COSTS WITHOUT CONTINGENCY

$28,300,000 $5,000,000 $147,800,000

$18,400,000 $5,000,000

$9,900,000 $0

$124,500,000 $23,300,000

PROJECT CONTINGENCY ALLOWANCE MITIGATION ALLOWANCE MOST PROBABLE CAPITAL COSTS WITH CONTINGENCY HIGH END OF ACCURACY RANGE LOW END OF ACCURACY RANGE

$28,800,000 $2,200,000 $178,800,000 $223,500,000 $152,000,000

20,200,000 1,400,000

$8,600,000 $800,000

$146,200,000 $32,600,000 $182,700,000 $40,800,000 $124,000,000 $28,000,000

2 3

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2)

If Cal Am determines that it is necessary to use an intake system other than

the shallow slant intake wells proposed in its supplemental testimony, DRA recommends that the Commission require Cal Am to file a petition to modify the decision resulting from this application and obtain the Commission’s approval before moving forward. 3) Given the proposed location of the desalination plant, the PCA outfall is the most feasible option for brine disposal. In the event that the PCA outfall becomes infeasible, DRA recommends that the Commission authorize the next best alternative, which is to construct an outfall at the CEMEX property in order to minimize the additional capital and O&M cost to the project. 4) DRA recommends that the Commission require Cal Am to submit an information-only filing with its test slant well operation results and the Energy Minimization and Greenhouse Gas Reduction Plan. This information will provide references for any future modifications made to the project cost estimates and/or contingency plans. C. DISCUSSION 1. Desalination Plant Capital Cost Estimates DRA recommends that the most probable capital costs of the 9.6 and the 6.4 MGD plants be established at $173.3 million and $146.2 million, respectively. The project capital cost cap of both plant options should be set at the most probable capital costs because it represents a sensible limit on the capital costs of the project at this point in time. Consistent with DRA’s recommendation in Chapter 2 of this testimony, the absolute capital cost ceiling of both plant options should be calculated as 125% of the most probable capital costs. Thus, DRA recommends that the Commission establish the absolute capital cost ceiling for the 9.6 MGD and the 6.4 MGD plants at $216.6 million and $182.7 million, respectively. Specific cost reductions leading to DRA’s recommended most probable capital costs are further discussed in the following sections.

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a)

Desalination Plant Supply Facilities (“intake facilities”)

A project cost cap of $4.5 million should be adopted for the implementation of the test slant well program because it reflects Cal Am’s most up-to-date MPWSP project description.

Although in its application Cal Am proposed a cost estimate of $5 million for the test slant well, the company’s updated project description shows that the proposed test slant well will no longer contain design components associated with the previous estimate.82 In a response to a DRA data request, Cal Am provided two estimates for the slant test well; one estimate is for a well with a pump-to-waste system ($5 million) and the other estimate is for a well with a beach diffuser ($4.5 million).83 The two cost estimates are summarized in Table 4 below. Table 3.B: Two options for test slant well configurations with cost estimates.84 Option 1 2 Description Total Cost

700 LF, 12-inch slant well with a pump-to-waste system $5,000,000 800 LF, 20-inch slant well with a below-grade diffuser $4,500,000

15 16 17 18 19 20 The test slant well design has evolved since these cost estimates were provided to DRA. Originally, the test slant well was intended to evaluate the feasibility of the 180foot aquifer for the MPWSP intake water system. However, Cal Am subsequently proposed to allow the test slant well to screen two aquifers in order to evaluate both the 180-foot aquifer and the Sand Dunes Aquifer.85 Notwithstanding this proposed
A.12-04-019, at p. 15 (wherein Cal Am proposes a cost estimate of $5 million for its test slant well); see also A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachments 9 and 11 (describing the proposed design change of the test slant well).
82

Cal Am’s Response to DRA-A.12-04-019-CAL AM 002, attached hereto as Exhibit 8, Responses to Questions 1 and 2.
83 84 85

A cost estimate table with further details on line items is included in Appendix B-2. A.12-04-019, California-American Water Company Contingency Plan Compliance Filing, filed

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modification to the design of the test slant well, Cal Am stated in response to a DRA data request that the cost estimate of the test slant well remains the same since the length of screen currently proposed is the same as what was originally proposed in its application.86 The length of the test slant well, as currently described in Cal Am’s model, is 790 LF. This length closely matches with Cal Am’s description of test slant well option 2. Cal-Am originally planned to reconfigure the test water disposal of pump-to-waste pipes for reuse in the production slant wells.87 However, the company no longer expects a pump-to-waste system to be incorporated into actual production. Instead, an all-gravity intake system is to be designed and constructed in order to limit the future need to travel up and down the beach.88 It would be imprudent to build a pump-to-waste system that will not be pursued as part of the production wells. A more appropriate and costeffective test water disposal system would then be a below-grade or a beach diffuser, which is reflected in the cost estimate for the test slant well configuration for Option 2 above. Therefore, the cost spent on the test slant well program should be capped at $4.5 million, Cal-Am’s estimate for a test slant well with a beach diffuser. Further, a test slant well cost cap at $4.5 million is appropriate because the Operations and Maintenance (“O&M”) costs for the test slant well are already included under the line item “engineering, permitting, misc.”89 This item was part of the $4.5 million estimate that Cal Am submitted as part of its response to DRA’s data request. Therefore, no additional costs are expected when the test slant well comes online. In addition, the majority of the line items under Cal Am’s test slant well estimate have been confirmed to be a reasonable amount by a slant test well expert. Specifically, $3.5 million out of the $4.5 million are reflected as the most probable budget by a slant
November 1, 2012, at p. 3. Cal Am’s Response to DRA-A.12-04-019-CAL AM 022, attached hereto as Exhibit 9, Response to Question 1.
86 87 88 89

See notes on cost estimate detail in Appendix B-2. A. 12-04-019, Supplemental Testimony of Richard C. Svindland, at p. 3:14-18.

Cal Am’s Response to DRA-A.12-04-019-CAL AM 001, attached hereto as Exhibit 10, Response to Question 5.

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well designer and driller.90 Cal Am’s cost estimate for the test slant well therefore reflects a highly accurate number and the most probable cost that will be incurred by a slant well designer and driller during the implementation of this program. Thus, Cal-Am’s previous estimate of $5 million does not reflect its new proposal to change the design of its slant production wells to an all-gravity well system. As noted, Cal Am’s $5 million estimate is for a test slant well with a pump-to-waste system that the company no longer intends to pursue.91 Accordingly, DRA recommends that the cost spent on the test slant well program should be capped at $4.5 million since O&M costs and the confirmation of budget by a slant well expert have been accounted for in this estimate. ii. A 20% cushion added to Cal Am’s estimated cost for the installation of slant production wells is sufficient to cover additional labor costs that may be required to finish construction; all other potential costs related to special site and schedule conditions should be covered under the project’s contingency and/or mitigation allowance.

Instead of the additional 50% cushion that Cal Am has proposed on top of its base construction cost for the installation of slant production wells, an additional 20% is a more appropriate estimate to be added to account for the conditions that Cal Am has identified. More specifically, Cal Am states that the 50% cushion is necessary to account for proposed modifications to the slant production well design, location and construction schedule92 that were made to minimize environmental impacts to the Western Snowy Plover, an endangered species that nests along the coastline of the proposed project area.93 In particular, Cal Am has proposed an additional 20% cushion to cover more

Cal Am’s Response to DRA-A.12-04-019-CAL AM 002, attached hereto as Exhibit 8, Response to Question 1; Details from Response to Question 1 are attached hereto as Exhibit 6.
90 91 92

A.12-04-019, Supplemental Testimony of Richard C. Svindland, at p. 3:14-18.

See 2013 Monterey Desalination Model v6.2-Public (wherein proposed cost was included); Cal Am’s Response to DRA-A.12-04-019-CAL AM 024, attached hereto as Exhibit 11, Response to Question 5 (wherein Cal Am provides cost justification). Cal Am’s Response to DRA-A.12-04-019-CAL AM 002, attached hereto as Exhibit 8, Response to Question 4 (identifying the Western Snowy Plover as nesting along the coastline of the proposed project
93

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labor shifts and additional crew that may be needed to finish construction in a timely manner.94 DRA recommends that a 20% cushion be added to Cal Am’s estimate to provide for more labor shifts and additional crew that may be needed to finish construction in the available time frame.95 However, as explained in more detail below, the other costs related to the installation of the slant production wells that Cal Am may incur are unknown at this time and should therefore be accounted for in the contingency allowance and/or mitigation allowance allocated for the MPWSP. Although Cal Am claims that a 50% cushion is justified, in part, by additional potential costs related to accessing the project site that may be incurred if barge delivery of the test slant well is necessary, Cal Am has neither evaluated the feasibility of barge delivery, nor ruled out the possibility of delivery from the land along the shoreline.96 Accordingly, as delivery over land remains a possibility, which would obviate the need for barge delivery, and thus, consideration of the corresponding construction risks and additional mobilization costs identified by Cal Am, DRA recommends that these potential costs be accounted for in the contingency allowance allocated for the MPWSP. Further, although Cal Am also justifies the addition of 50% cushion, in part, by reference to unknown costs associated with special construction and site challenges, such costs are highly speculative, and thus, should properly be accounted for in the project’s mitigation allowance. More specifically, Cal Am has identified potential costs related to special construction and site challenges, such as “limited availability of specialized
area); A.12-04-019, Supplemental Testimony of Richard C. Svindland, at p. 3:14-18 (stating that Cal Am plans to avoid the critical Snowy Plover habitat by relocating the proposed slant wells to the wet part of the beach (“swash zone”) and changing the intake system design to an all-gravity well system); Supplemental Testimony of Richard C. Svindland, Attachment 11, at p. 6 (explaining that each cluster of slant wells will have to be completed within a five-month period during which the Snowy Plovers do not nest, from October through February); and the Details from Response to Question 4 attached hereto as Exhibit 7. Cal Am’s Response to DRA-A.12-04-019-CAL AM 024, attached hereto as Exhibit 11, Response to Question 5.
94 95 96

Id.

Supplemental Testimony of Richard C. Svindland, Attachment 11, at p. 6 (describing the two methods as the land route shown in Figure 4 and via a barge).

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drilling equipment,” which, according to Cal Am, has “an unknown effect on price,” “increased potential for storm and wave damage,” and “possible costs of environmental monitoring during construction”.97 These costs may or may not occur during construction. Thus, consistent with the definition of contingency allowance presented in Chapter 2 of this testimony, Cal Am should use the contingency allowance of 20% recommended by DRA to cover these unexpected costs in the event that they must be incurred. Additionally, Cal Am’s proposed modification of the design of the slant wells should mitigate many of the environmental challenges of the project site. Finally, in the event that the currently proposed design of the slant wells and construction plans require further environmental mitigation, Cal-Am should use its mitigation allowance of 1% to cover any such costs.98 Adopting DRA’s recommendation would reduce Cal Am’s capital cost estimate for the 9.6 and the 6.4 MGD plants by $4 million and $3 million, respectively. iii. Consistent with the updated project description and production slant wells layout, the cost calculation of temporary structures for the production slant well construction should be based on a 460’ x 48’ area and a 380’ x 48’ area for the 9.6 and the 6.4 MGD plants, respectively.

Cal Am’s estimate of temporary structures needed during construction does not reflect the most up-to-date project description in its supplemental testimony. To successfully complete construction in the swash zone of the beach, temporary sheet piling and wave protection are required to be implemented and removed before March 1, when the nesting season of the Snowy Plovers starts.99 Cal Am’s estimates for these structures are $4.7 million and $3.9 million for the 9.6 MGD and the 6.4 MGD plants, respectively, and are based on a sheet piling area of 650’ x 80’ for the 9.6 MGD plant and 550’ x 80’
Cal Am’s Response to DRA-A.12-04-019-CAL AM 024, attached hereto as Exhibit 11, Response to Question 5.
97

See Chapter 2, Section C(1), infra (explaining the application of mitigation cost in this case as consistent with Cal Am’s example).
98 99

A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 11, at p. 6.

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for the 6.4 MGD plant, respectively. DRA’s analysis of this item is based on the most current project map, the cross section of the South well cluster, and the plan view of the well cluster.100 In Cal Am’s supplemental testimony, the cross section and the plan view figures of the proposed four-well cluster (9.6 MGD plant size option) show a temporary sheet piling perimeter of 460 feet and a depth of 48 feet.101 Although figures of the proposed three-well cluster for the 6.4 MGD option are not available for review, available information and figures can be used to estimate the area of sheet piling needed for this option. Cal Am’s figures of the slant wells cluster for the 9.6 MGD plant and the scales included in those figures show that a three-well cluster would have a sheet piling perimeter of approximately 380 feet and a depth of 48 feet.102 There are significant discrepancies between the areas of sheet piling that Cal Am describes to be necessary in the figures of its supplemental testimony and the areas used for cost estimating. As a result, Cal Am’s estimate for this line item exceeds the most probable cost that it will incur. DRA’s assumptions and more accurate estimate of the sheet piling area would reduce Cal Am’s estimate of the temporary structures by $2.4 million for the 9.6 MGD plant and $2 million for the 6.4 MGD plant. iv. The feedwater pipeline diameter for the 9.6 MGD plant should be sized at 36-inch, not 42-inch.

Cal Am’s estimate of the proposed feedwater pipeline cost should be based on a 36-inch pipeline. According to Cal Am’s supplemental testimony, the company plans to convey the pumped intake water to the proposed desalination plant via a 8,300 linear feet (“LF”), 36-inch diameter intake pipeline.103 However, in many instances, Cal Am also refers to this pipeline as a 42-inch pipeline.104 Cal-Am estimated the cost of this pipeline
100 101 102

A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 11, at p. 6, Figures 5-7. Id. At p.6, Figures 6-7.

Modifications to Cal Am’s figure have been made by DRA to illustrate the recommended measurements for temporary sheet piling, attached hereto as Appendix B-3.
103 104

A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 11, at p. 7. A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 3, at p. 4, Attachment 11

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to be $2.6 million for the 9.6 MGD plant and $2.2 million for the 6.4 MGD plant, based on a 42-inch pipeline unit cost. The increased size of the feedwater pipeline for the 9.6 MGD plant from 36-inch to 42-inch is excessive and unnecessary. According to the North Marina project description analyzed in the final Environmental Impact Report (“EIR”) for the Coastal Water Project (“CWP”), a 36-inch pipeline is sufficient to supply intake water for an 11 MGD plant.105 Thus, Cal-Am’s proposed 42-inch pipeline for a 9.6 MGD plant is unwarranted. Significantly, as noted above, Cal-Am stated in its MPWSP Project Description Update that a 8,300 LF, 36-inch diameter intake pipeline should be used, and therefore, Cal-Am has not even attempted to justify the need for a 42-inch pipeline. Accordingly, DRA recommends that the feedwater pipeline design for the 9.6 MGD plant incorporate a 36-inch pipeline at a unit cost of $250/LF, as discussed further in the next section. v. Unit costs of identical components for the intake facilities should be standardized, unless there is a justified need for special construction.

In Cal Am’s cost estimates for the 5.4, 6.4, 9.0, and 9.6 MGD plants, identical components for the intake facilities should have the same unit costs. For instance, Cal Am’s unit cost for a 36-inch HDPE/FPVC trenched pipeline used in the cost estimates for a 6.4 MGD plant is reported at $270/LF. However, Cal Am inexplicably identifies a lower unit cost of $250/LF for the same type of pipeline to be used at the same location, as proposed for the 9.0 and 5.4 MGD plants.106 Cal-Am has provided no explanation for the difference in reported unit costs for this particular type of pipeline. Since Cal-Am has demonstrated its ability to implement this type of pipeline at a lower cost of $250/LF, Cal Am should standardize this particular unit cost across all plant size options. Calculating the cost of a 36-inch HDPE/FPVC trenched pipeline at $250/LF would reduce the total
at p. 4; 2013 Monterey Desalination Model v6 1. California-American Water Company Coastal Water Project Final Environmental Impact Report, Vol 1, at p. 3-28.
105 106

See 2013 Monterey Desalination Model v6 1, tabs “Capital 5.4 MGD,” and “Capital 9.6 MGD.”

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line item estimate of the feedwater pipeline by $525,000 for the 9.6 MGD plant and $125,000 for the 6.4 MGD plant size proposals.107 Furthermore, standardizing the unit cost of the line item “Tunnel Caissons” would result in a cost reduction of $100,000 to the base construction cost of the 6.4 MGD plant.108 vi. Cal Am should further explore the alternative site for the slant production well cluster because, among other benefits, it would result in a shorter distance between the two well clusters and a less expensive beach connector pipeline.

Cal Am should pursue its alternative site for the slant production wells cluster rather than locating its two clusters of slant wells at twice the distance. Currently, two clusters of slant wells are proposed for both the 9.6 and the 6.4 MGD plants. The two clusters are to be connected by a 900 LF, 36-inch HDPE/FPVC beach connector pipeline that will be constructed using a trenchless technology.109 The beach connector pipeline was calculated at $1,140/LF, resulting in a total of $1 million for both the 9.6 and the 6.4 MGD plant options. Cal Am also identified a site for an alternative slant well cluster between the two proposed clusters.110 No further information about this alternative site was supplied in Cal Am’s updated project description. The Commission should require Cal Am to further explore this alternative site for a slant well cluster before it proposes to construct the North slant well cluster at twice the distance from the South slant well cluster. If pursued, this alternative site could reduce the distance between the two well clusters from 900 LF to approximately 450 LF. It would also result in benefits such as potential cost reduction of $500,000 for both plant options, less environmental impact on the beach due to shorter length of pipeline, shorter construction duration, and increase in efficiency of future maintenance due to shorter
107 108

The cost reduction applied to the feedwater pipeline for the 9.6 MGD plant assumes a 36-inch pipeline.

DRA compared the unit costs of “Tunnel Caissons” for both the 9.6 and the 6.4 MGD plants. Although completely identical, this item was estimated at $200,000 for the 9.6 MGD plant and $250,000 for the 6.4 MGD plant. DRA adopted the lower unit cost for the reasons explained in Section E above.
109 110

A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 11, at pp. 5-6. A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 11, Figure 5.

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distance between well clusters. The decreased length of construction is particularly advantageous since the construction period for the slant wells is restricted by the Snowy Plover season, limiting the construction period to five months (October - February). b) i. Desalination Process

The cost of the Pretreatment Filter Backwash System for the 9.6 MGD plant size option should be the same as the cost for the 6.4 MGD plant size option since Cal Am has stated that both plant size options would require the same backwash facilities.

The cost of the Pretreatment Filter Backwash System for the 9.6 MGD plant size option should be the same as the cost for the 6.4 MGD plant size option since Cal Am has stated that both plant size options would require the same backwash facilities.111 Notably, it is appropriate to have identical backwash facilities for all plant size alternatives because regardless of the number of pretreatment filters112 only one pretreatment filter will need to be backwashed at any given time. However, although Cal Am has proposed identical Pretreatment Filter Backwash Systems for both plant size options, the company identifies a corresponding cost of $750,000 for the 6.4 MGD plant size option,113 and identifies a cost of $800,000 for the 9.6 MGD plant size option.114 Cal Am has provided no explanation that justifies the difference in costs for these identical facilities. Thus, since Cal Am has stated that the Pretreatment Filter Backwash System can be implemented for $750,000 for the 6.4 MGD plant size option, DRA recommends that the cost of the identical facilities for the 9.6 MGD plant size option be lowered to $750,000.

See Capital Cost tabs of “2013 Monterey Desalination Model v6 1” (identifying identical backwash facilities for the 9.6 and 6.4 MGD plant size options, i.e., a Pretreatment Filter Backwash System consisting of two 750 gallons per minute (“gpm”) 25 horsepower pumps, a 0.2 million gallon (“ MG”) backwash tank, and 500 linear feet (“LF”) of 36-inch pipe).
111

According to the Capital Cost tabs of “2013 Monterey Desalination Model v6 1,” Cal Am proposes 11 pretreatment filters for the 9.6 MGD plant size option, and 7 pretreatment filters for the 6.4 MGD plant size option. The filters are all identical sizes for both plant size options.
112 113 114

“2013 Monterey Desalination Model v6 1,” Capital 6.4 MGD tab. “2013 Monterey Desalination Model v6 1,” Capital 9.6 MGD tab.

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ii.

The most probable base construction costs should not reflect the inclusion of a partial second pass for the RO systems.

Cal Am’s cost estimates for the Desalination Plant include a partial second pass of RO, consisting of second pass RO feed pumps and second pass RO membrane arrays, for both plant size options.115 The partial second pass is proposed to treat 40 to 50 percent of the finished water from the first pass.116 Cal Am states that “the partial second pass is required to provide additional removal of three constituents of concern, specifically boron, chloride and sodium.”117 Cal Am has failed to provide sufficient justification for the need for a partial second pass of RO. As test well data is not yet available at the proposed MPWSP site, it is not yet possible to determine whether additional treatment above and beyond the first pass of RO will be necessary to meet the California Department of Public Health (“CDPH”) regulatory standards for boron, chloride, and sodium. If additional treatment does prove to be necessary, it is not yet possible to determine to what extent it would be required, nor to determine the most cost effective way of achieving the desired water quality improvements. At the present time there is not sufficient justification to include the cost of a partial second pass of RO in the base construction costs. Therefore, DRA recommends eliminating the costs of the second pass membranes and pumps from the base construction costs. If test well data indicates that additional treatment is necessary, Cal Am should utilize the contingency allowances of the project cost estimate to account for the additional costs of these facilities. This adjustment provides for a $3.1 Million reduction for the 6.4 MGD plant size option, and a $4.4 Million reduction for the 9.6 MGD plant size option.

115 116 117

“2013 Monterey Desalination Model v6 1,” Capital Cost tabs. A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 11, at p. 9. Id.

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c)

Desalination Plant Return Facilities (“brine disposal”)

A cost cap of $300,000 should be adopted for the metering structure and outfall connection for the brine conveyance facilities.

In its application, Cal Am requests $300,000 for the brine connection of the pipeline to the outfall. During discovery, DRA requested that Cal Am provide a cost breakdown of the line items that comprise the $300,000 estimate. Cal Am responded that it is presently unable to identify the components of the metering structure and the outfall connection since this aspect of the project has not been designed.118 Further, Cal Am insists that the cost provided is reasonable based on the collective experience of the company and Cal Am’s consultant.119 Without knowing the components that comprise this line item, it is difficult to determine whether the cost estimate provided is appropriate. Due to the limited information provided regarding the scope of this line item, a cost cap at the requested amount of $300,000 should be placed on this line item. This item should be excluded from contingency allowance placed on the overall capital cost of the project. ii. The redundancy on the process equipment for calcite treatment should be eliminated.

Cal Am requests $800,000 for the process equipment for all the plant size options. The chemicals involved in this line item adjust the desalinated water for pH (sodium hydroxide), alkalinity (carbon dioxide), and provide disinfection (sodium hypochlorite). In the Model, Cal Am assumes each of the chemical treatments costs will be $200,000. The capital cost spreadsheets account for calcite treatment twice in the cost estimate. In order to compensate for this redundancy, $200,000 was removed from this line item. This results in an adjusted cost of $600,000.

Cal Am’s Response to DRA-A.12-04-019-CAL-AM 020, attached hereto as Exhibit 12, Response to Question 1(a).
118 119

Id.

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2.

In the event that Cal Am must pursue a contingency plan for brackish source water, the Commission should require the company to file a Petition to Modify the decision resulting from this application.

If Cal Am needs to pursue a contingency plan for brackish source water, the Commission should require the company to file a Petition to Modify its application in order to ensure that that the feasibility, cost and schedule impacts of any proposed contingency plan are sufficiently analyzed. As noted, in its Compliance Filing of November 1, 2012, Cal Am identified eight contingency plans for use in the event that its “base project” becomes infeasible. Cal Am’s Compliance Filing analyzed alternative intake systems and different intake locations to prepare for the possibility of undesirable test results in the 180-foot aquifer and/or the sand dunes aquifer.120 Costs and schedule impacts of these contingency plans were further analyzed in Cal Am’s supplemental testimony.121 The costs associated with the contingency plans identified by Cal Am to date are highly speculative and dependent on the final Subsequent EIR analysis of the environmental impacts of these plans. The results of the test slant well also play a significant role in determining which contingency plans are most appropriate to be further pursued. As demonstrated by the range of additional costs in its supplemental testimony, Cal Am may incur as much as $12.4 million if it were to implement one of its brackish source water contingency plans.122 Further, the alternative intake system(s) and/or different intake location(s) identified by Cal-Am may face other obstacles, e.g., permitting and litigation risks. Thus, due to the high incremental costs and other potential obstacles associated with these contingency plans, DRA recommends that Cal Am be required to file a Petition to Modify the decision resulting from this application in the event that its test slant well is unable to extract seawater from the Sand Dunes
A.12-04-019, California-American Water Company Contingency Plan Compliance Filing, filed November 1, 2012
120 121 122

A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachments 5 and 6. A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 6.

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Aquifer. A Petition to Modify the Commission’s final decision on the project would require the Commission to conduct a reasonableness review of any additional costs and provide transparency and an opportunity for parties to this proceeding to review any modifications to the MPWSP project description proposed by Cal Am. 3. In the event the PCA outfall proves infeasible, DRA recommends the Commission require Cal Am to file a Petition to Modify the decision resulting from this application for authorization to construct the next best alternative, an outfall at the CEMEX property.

In compliance with the ALJ’s ruling concerning contingency plans, Cal Am submitted a contingency plan compliance report on different aspects of the project, including contingency plans for the PCA outfall in the event that it no longer becomes a feasible option.123 Cal Am lists three contingency options for brine disposal to either: 1) modify the existing outfall by inserting a pipe exclusively for brine discharge; 2) build a new outfall at the CEMEX property; or 3) convey the brine effluent to Moss Landing and send the effluent to the Moss Landing Power Plant (“MLPP”) outfall or the Marine Refractories outfall. While all of the contingency plans provide their own permitting and additional operations and maintenance (“O&M”) expenses, the review of the contingency plans was based on the feasibility of the design and the additional net capital cost. In the event the PCA outfall proves infeasible, DRA recommends that the Commission require Cal Am to file a Petition to Modify the decision resulting from this application for authorization to construct the next best alternative, an outfall at the CEMEX property. a) Option 1: Modify Outfall by Placing Pipeline Inside the Existing Outfall and Adding Brine Diffusers at the End of the Outfall Option 1 consists of placing a pipe within the existing PCA outfall and disposing the brine through new diffusers. The area in between the inserted pipeline and the outfall would be used for normal effluent demand. This contingency plan would allow the PCA to use the outfall to maximum capacity and the daily operations would be independent of
A.12-04-019, California-American Water Company Contingency Plan Compliance Filing, filed November 1, 2012.
123

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PCA discharge.124 However, it appears that placing the new pipeline within the outfall effectively would decrease the capacity of the PCA outfall for the other parties that utilize the outfall.125 Thus DRA finds that Option 1 is not a viable project contingency for the PCA outfall. b) Option 2: New Outfall Off-Shore CEMEX Property The second contingency plan involves constructing an outfall off-shore of the CEMEX property near the slant well intake system. While this option is independent of the PCA outfall, this contingency plan presents its own challenges. This option would require an outfall tunnel, and thus, present additional construction challenges and increase the project’s budget by $8.2 million. However, this option would avoid the costs associated with Cal Am’s primary proposal for brine discharge facilities, thus resulting in a net increase of only $2.5 million.126 c) Option 3: Brine Pipeline to Moss Landing and discharging through MLPP Cooling Water Outfall or the Existing Marine Refractories Outfall The final contingency option involves transporting the brine effluent to Moss Landing and discharging the effluent either through the MLPP cooling outfall or the Marine Refractories Outfall. Even though these two options are independent of the PCA, they are the most expensive contingency options. The majority of the additional net cost is a result of the additional pipeline required.127 This contingency option includes the
A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 9. Updated Technical Memorandum on Contingency Planning for MPWSP prepared by RBF Consulting, dated January 9, 2013.
124

Further support for this finding is contained in a confidential section of DRA’s testimony, attached hereto as Appendix D (during discovery Cal Am provided DRA a copy of a draft outfall agreement between Cal Am and PCA. Cal Am submitted the outfall agreement confidentially pursuant to Public Utilities Code section 583 and Commission Order 66-C, and thus, DRA’s analysis of particular terms in the draft agreement, and the agreement itself, has been omitted from the public version of DRA’s testimony).
125

A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 9. Updated Technical Memorandum on Contingency Planning for MPWSP prepared by RBF Consulting dated January 9, 2013(wherein RBF estimates this will save approximately $5.7 million dollars from the project.
126

Updated Technical Memorandum on Contingency Planning for MPWSP prepared by RBF Consultants dated January 9, 2013. A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 9.
127

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additional cost of pipeline to connect to the MLPP ($19.1million) or to connect to the Marine Refractories outfall ($18.6 million). As noted above, using Option 2 or either of the two outfalls in Option 3 would avoid the cost of the brine discharge facilities. The avoided cost of excluding the brine discharge facilities might complicate the process of obtaining a permit to discharge brine to the ocean. According to Cal Am, the brine receiving facility is a PCA facility for diluting, sampling, neutralization, aeration, treatment and aeration of the influent.128 The required treatment will depend on the quality of the brine discharge. In the 2009 final Environmental Impact Report (“FEIR”), dissolved oxygen was the limiting factor for the brine effluent.129 Additional treatment might be required to discharge brine in compliance with the California Ocean Plan, and these additional costs are not reflected in the overall net cost of the contingency plan. One purported advantage identified for all of the brine disposal contingency options is the elimination of brine storage at the desalination plant.130 Although a cost savings of $400,000 would result from its elimination, this storage basin was intended to store brine in the event that the outfall was inoperable or to collect enough brine effluent for disposal for the 6.4 MGD plant size option. Removing the brine storage tank would remove the measure of safety associated with being able to store brine in the event of unforeseeable problems with the outfall. Given the current location of the desalination plant, the proposed plan to utilize the PCA outfall is the most feasible option. While the contingency plan options are not intended to substitute the proposed project, in the event the PCA outfall no longer becomes a viable option, contingency
Both options would require an additional 42,000 LF of pipeline). Cal Am Response to DRA.A.12-04-019-CAL-AM 003, attached hereto as Exhibit 13, Response to Question 1(a).
128

Id, Response to Question 9(a) (citing FEIR, at pp.4.3-29,48-49) (explaining that the FEIR states the ambient dissolved oxygen concentration in the Monterey Bay near the PCA outfall could be as low as 4.25mg/L, which is less than the Ocean Plan dissolved oxygen limit of 5 mg/L).
129

A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 9. Updated Technical Memorandum on Contingency Planning for MPWSP prepared by RBF Consulting, dated January 9, 2013, at pp. 11-14.
130

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option 2 (new outfall at CEMEX property) is the next best option given the location of the desalination plant. Even though option 2 is not cheaper than contingency option 1 (pipe in pipe configuration within PCA outfall), option 2 would avoid any potential problems associated with option 1.131 If it becomes necessary for Cal Am to pursue a contingency plan for the PCA outfall, the Commission should require the company to file a Petition to Modify the decision resulting from this application in order to ensure that that the feasibility, cost and schedule impacts of any proposed contingency plan are sufficiently analyzed. A Petition to Modify the decision would require the Commission to conduct a reasonableness review of any additional costs and provide transparency and an opportunity for parties to this proceeding to review any modifications to the MPWSP project description proposed by Cal Am. 4. The Commission should require Cal Am to submit an information-only filing with its test slant well results and Energy Minimization and Greenhouse Gas Reduction Plan. a) Test Slant Well Results

According to Cal-Am, the purpose of a test slant well is to provide data which will, in turn, help to clarify technical issues such as water quality, well capacities and salinity levels.132 More importantly, the feasibility of a slant well in either the Sand Dunes Aquifer or the 180- foot Aquifer would be able to be better determined by the operational results of this test well. Cal-Am should also be able to use these results to improve the MPWSP by providing input for the project’s value engineering. Cal Am should be required to submit an information-only filing on its test slant well operation results. The results of the test slant well will play a significant role in determining which source water contingency plan(s) Cal Am should adopt in the event
A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 7. Updated Technical Memorandum on Contingency Planning for MPWSP (the additional capital cost difference between the two contingency plans is $500,000). A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 7. MPWSP Contingency Plan O&M Costs (both contingency plans are estimated not to incur any additional O&M cost).
131 132

A.12-04-019, Direct Testimony of Richard C. Svindland, at p. 28:1-10.

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that its original proposal for the use of brackish source water from the Sand Dunes Aquifer proves infeasible. The results of the test slant well will also provide confirmation in the event that capital and O&M costs have to be modified to reflect more accurate data regarding intake water quality and well feasibility. b) Energy Minimization and Greenhouse Gas Reduction Plan

Desalination plants require a significantly higher energy input than surface water treatment plants, and the O&M costs of a desalination plant are impacted significantly by the cost of energy. Cal Am estimates that the power costs of the proposed desalination plant would be approximately 42% of the total yearly O&M costs.133 The future cost of energy is difficult to predict, adding an increased layer of uncertainty to future O&M costs. DRA believes that this uncertainty warrants an increased interest in energy efficiency measures for the desalination plant. The Final Environmental Impact Report (“FEIR”) for the Coastal Water Project required Cal Am to develop an Energy Minimization and Greenhouse Gas Reduction (“EMGGR”) Plan. Specifically, the FEIR required Cal Am to develop and implement an EMGGR Plan that would reduce the project’s carbon footprint to below 7,000 metric tons per year. The FEIR also required that this EMGGR Plan be reviewed and approved by the Commission prior to the commencement of project operations.134 Cal Am anticipates

See “2013 Monterey Desalination Model v6.2-Public,” O&M tabs. For the 9.6 MGD plant size option , Cal Am identifies power as $4,640,000 of a total yearly O&M cost of $11,010,000. For the 6.4 MGD plant size option, Cal Am identifies power as $3,680,000 of the $9,030,000 total yearly O&M cost (excluding the cost of purchased water from the GWR project).
133

Mitigation Measure 4.8-5c in Coast Water Project FEIR states: “The project sponsor(s) shall develop and implement an Energy Minimization and Greenhouse Gas Reduction Plan that documents an approach that would reduce the project’s carbon footprint to below 7,000 metric tons per year. The plan may include a variety of measures to reduce the combined carbon footprint of the intake, treatment, and distribution components of the project, including the installation of premium energy efficient equipment (i.e., state of the art energy recovery systems), participation in PG&E’s Climate Smart Program, LEED compliant facilities, roof-top or locally produced solar power, use of renewable energy sources, etc. The carbon footprint for all components of the approved project shall be established and reported each year using real energy usage data for the previous year and the most current PG&E power system emission factor for greenhouse gases (or other emission factor deemed reliable in the absence of a PG&E emission factor). All emission reductions that would be associated with the efficiency measures, etc., shall be
134

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that the amended EIR for the MPWSP will include a similar requirement regarding an EMGGR Plan.135 DRA recommends that the Commission require Cal Am to submit an informationonly filing detailing its EMGGR Plan once the plan is complete, and prior to the commencement of plant operations. D. CONCLUSION DRA’s desalination plant facilities cost recommendations result in the most probable capital costs of $173.3 million and $146.2 million for the proposed plant options of 9.6 and 6.4 MGD, respectively. DRA recommends that the Commission adopt DRA’s most probable capital costs as the capital cost caps of the two plant options. Further, DRA recommends that the absolute capital cost ceiling be set at $216.6 million for the 9.6 MGD plant and $182.7 million for the 6.4 MGD plant. In the event that Cal Am must pursue a contingency plan for its brackish source water, a Petition to Modify must be filed at the Commission to allow for a reasonableness review and transparency among parties. If a contingency plan for brine disposal needs to be pursued, DRA recommends Cal Am to move forward with the construction of an outfall at the CEMEX property, to minimize additional costs. Lastly, in order to provide more clarity on its project cost assumptions and contingency plans, DRA recommends that the Commission require Cal Am to submit information-only filings with its test slant well results and Energy Minimization and Greenhouse Gas Reduction Plan.

substantiated in the plan. The plan shall be reviewed and approved by the CPUC prior to the commencement of project operations.” Cal Am’s Response to Data Request DRA-A.12-04-019-CAL AM 009, attached hereto as Exhibit 14, Response to Question 1b (stating, “California American Water anticipates that the amended EIR for this project will include a mitigation measure similar to the Mitigation Measure 4.8-5c in the Coastal Water Project FEIR.”).
135

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CHAPTER 4 - OPERATIONS & MAINTENANCE (“O&M”) COSTS INTRODUCTION In the 2013 Monterey Desalination Model Spreadsheet v6.2-Public (“Model”), the annual O&M costs for the 6.4 million gallons per day (“MGD”) and 9.6 MGD plant size options are estimated in 2012 dollars. The estimated Operations and Maintenance (“O&M”) cost includes the operation cost of the intake wells, desalination plant, Begonia Iron Removal Plant (“BIRP”), desalinated water conveyance facilities (i.e., Castroville Seawater Intrusion Project (“CSIP”) Return Pump Station, Valley Greens Pump Station, Aquifer Storage and Recovery (“ASR”) Pump Station), and the ASR system.136 DRA’s recommendations are based upon its review of Cal Am’s application, Model, testimony, capital cost spreadsheets, and response to DRA’s data requests. B. SUMMARY OF RECOMMENDATIONS Cal-Am estimates the annual O&M costs in 2012 dollars for the 6.4MGD and 9.6 MGD plant to be $9.03 million and $11.01 million respectively.137 By contrast, DRA estimates the O&M cost of the aforementioned plant sizes to be $7.19 million and $8.82 million, respectively. A breakdown of the following components and discrepancies between Cal-Am’s and DRA’s cost estimates are displayed in Table 4-A.

136 137

In the Model, the ASR system is comprised of the Segunda Pump Station and the ASR wells.

These cost estimates do not include the cost of purchased recharged water from the Monterey Regional Water Pollution Control Agency. DRA has captured the price of the purchased recharge water in as the calculation of the revenue requirement, rather than O&M costs.

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Table 4-A: Comparison and Discrepancy between Cal Am and DRA O&M Cost Estimates 6.4MGD PLANT
Category Energy Chemicals Labor and Misc. Membrane and Media  Replacement Repair and Replacement Total Cal Am $3,680,000 $630,000 $2,730,000 $410,000 $1,580,000 $9,030,000 DRA $2,270,000 $530,000 $2,710,000 $350,000 $1,330,000 $7,190,000 Cal Am Exceeds  DRA $1,410,000 $100,000 $20,000 $60,000 $250,000 $1,840,000

4 5

9.6MGD PLANT
Category Energy Chemicals Labor and Misc. Membrane and Media  Replacement Repair and Replacement Total Cal Am $4,640,000 $770,000 $3,090,000 $550,000 $1,960,000 $11,010,000 DRA $2,890,000 $730,000 $3,070,000 $480,000 $1,650,000 $8,820,000 Cal Am Exceeds  DRA $1,750,000 $40,000 $20,000 $70,000 $310,000 $2,190,000

6 7 8 9 10 11 12 13 14 15 16 17 18 19

C.

DISCUSSION The overall O&M cost is separated into the following components: electrical,

labor, chemical, and repair and replacement (“R&R”) costs. 1. Electrical Costs

Cal Am estimates the total annual energy requirement for the 6.4 MGD and 9.6 MGD as 38.7 million kilowatt-hour (“kW-hr”) per year and 51.5 million kW-hr per year, respectively. DRA estimates that the energy requirement for the plant sizes listed above are 18.9 kW-hr per year and 26.5 million kW-hr per year, respectively. Electric rates were derived for both the intake wells/desalination plant portion of the project, and the desalinated water conveyance facilities. a) Desalination Plant and Intake Well

In Cal Am’s supplemental testimony, Cal Am worked with the Pacific Gas and Electric Company (“PG&E”) to develop average seasonal rates based on the December

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2012, E-20 rate schedule.138 The power cost includes the following additional fees: transmission rate adjustments, public purpose programs, nuclear decommissioning, competition transition charge, energy cost recovery amount, Department of Water Resources (“DWR”) bond, and a new system generation charge. The Model has three different power cost scenarios for energy costs associated with the intake wells and the desalination plant that are based on: (1) primary voltage; (2) secondary voltage; and (3) transmission voltage.139 PG&E calculated the average monthly charge for each month, taking into consideration all of the aforementioned additional fees. The seasonal rates are calculated by taking the average rates for the individual months in that particular season. DRA used the secondary voltage scenario to estimate the energy costs because it has the highest rates of the three options, and thus represents the worst case scenario. b) Conveyance and Miscellaneous

Cal Am escalates the 2011 power rates for the conveyance facilities by 4% to estimate the 2012 rates.140 The desalinated conveyance water systems will be charged according to PG&E’s E-19 schedule. The chart below shows the trend of the electrical rates for the past five years.141

A.12-04-019, Supplemental Testimony of Richard C. Svindland, at p. 9. The definition of PG&E’s seasonal periods is provided on PG&E’s website, available at http://www.pge.com/tariffs/tm2/pdf/ELEC_SCHEDS_E-20.pdf (defining the “summer season” from May 1 through October 31 of each calendar year, and defining the “winter season” from November 1 through April 30 of each calendar year).
138

Model (One of the user input options found in the Inputs tab for both the 6.4MGD and 9.6MGD plant sizes). The three service voltages scenarios are defined on PG&E’s E-20 tariff schedule, available at http://www.pge.com/tariffs/tm2/pdf/ELEC_SCHEDS_E-20.pdf (The three scenarios are based on how power is delivered to the system. In the primary voltage scenario the customer is served from a single customer substation, or without transformation from one of PG&E’s serving distribution systems at one of the primary voltages specified in PG&E’s Electric Rule 2. For the secondary voltage scenario the voltage class is less than 2,400 volts or if the classification does not match the “primary” or “transmission” definitions. In the transmission scenario, the customer is serviced without transformation at one of the standard transmission voltages listed in PG&E’s Electric Rule 2).
139

Footnote in 2013 Monterey Desalination Model v6.2-Public, under CAW Average Labor Rates chart in the O&M spreadsheets.
140

The historical rates for E-19 schedule are provided by PG&E website, available at http://www.pge.com/nots/rates/tariffs/electric.shtml#COMMERCIAL. Notably, the rates shown in
141

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0.12 0.11

Figure 4-A: Schedule E-19 Rate History

Winter (Primary) Summer (Primary) Winter (Secondary) Summer (Secondary) Winter(Transmission)

Rate ($ per kW‐hr)

0.1 0.09 0.08 0.07 0.06

Year

Summer (Transmission)

2 3 4 5 6 7 8 9 10 11 12 13 14 Figure 4-A shows a decrease in overall power rates from 2011 to 2012. The primary and secondary E-19 schedule was used for the desalinated water conveyance pipelines.142 The average summer and winter rates were calculated similar to the method used to calculate the primary and secondary rates in the E-20 schedule. The additional fees were taken from PG&E’s schedule E-19 tariffs.143 Similar to the analysis done by PG&E, DRA assumes that the energy requirement and flow demand is the same for each month of each season. c) Corrections to the Energy Calculations in the 2013 Monterey Desalination Model v6.2Public

DRA recommends two corrections to the Model: 1) the Model should incorporate the specific weight of sea water in the intake well and desalination plant portions of the

Figure 4-A do not include any surcharge rates. 2012 Monterey Desalination Model (Primary E-19 is used for the ASR pump station. Secondary E-19 is applied to BIRP, desalination water pump station, CSIP return pump station, Valley Greens Pump Station, Segunda Pump Station, and ASR extraction wells). DRA assumed the same power schedules for these project components in their power cost calculation.
142

Electric Schedule E-19.Found on PG&E’s website, available at http://www.pge.com/tariffs/tm2/pdf/ELEC_SCHEDS_E-19.pdf
143

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energy cost calculations; and 2) the Model should be modified to accurately convert acrefeet per year (“AFY”) to MGD. i. following formula. Specific Weight of Sea Water

The power required for each component of the project is calculated using the

6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 The formula provides that power (“P”) is dependent on the required flow (“Q”), specific weight of the fluid (“γ”), amount of lift required (“H”), and the efficiency of the pump (“η”). The Model underestimates the amount of power required by using the specific gravity of fresh water in all of the power cost estimations. DRA incorporated the specific gravity of sea water in the power costs from the intake well and the desalination plant through the reverse osmosis process. This modification is necessary since the intake system and the desalination plant are the most energy intensive components of the project. For the energy calculations, DRA assumed a specific weight of 8.5485 lbs. per gallon of seawater.144 ii. Unit Conversion for Flow from AFY to MGD

In the O&M spreadsheets in the model, the seasonal demand is converted from AFY to MGD One MGD is equivalent to approximately 1120 AFY. In the Model, the required seasonal flow is multiplied by two before it is divided by 1120 AFY. This calculation is applied throughout all aspects of the project. According to Cal Am, “the reason some cells are multiplied by two is to convert a six month volume flow to a oneyear flow volume.”145 By multiplying the seasonal flow rates by two when converting the flow units, Cal Am double counts the required annual demand. The annual flow is broken down by the
144 145

Fluid Mechanics, Seventh Edition, at p. 827. Table A.3 (Properties of Common Liquids).

Cal Am response to DRA-A.12-04-019-CAL AM 019, attached hereto as Exhibit 15, Response to Question 1.

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two seasons defined by PG&E winter and summer since the rates are structured differently.146 Once the energy cost for each season is calculated, the two costs are added together to get the annual cost. The source of Cal Am’s miscalculation is due to the flow demand units being based “per year”. Cal Am effectively assesses annual demand as if the year was comprised of two winters and two summers. In order to avoid this miscalculation, the annual flow from AFY to MGD should be converted before separating the demand between the two seasons. Cal Am’s multiplication by two of the seasonal flow rates when converting the flow units double counts the required annual demand. After taking into account all of the corrections identified above, DRA estimates the annual energy cost of the 9.6 MGD and 6.4MGD plant to be $ 2.89 million and $2.27 million, respectively. d) Sensitivity Analysis

Sensitivity analysis was performed to display the uncertainty of how the increase in electrical rates would affect the annual electrical rates and the overall annual O&M cost. DRA’s analysis assumes that the only variable is the overall percentage change in electrical rates over the course of one year. The change in overall electrical cost for the 6.4 MGD and 9.6 MGD can be seen in Figure 4-B below. Only the 6.4 MGD and 9.6 MGD capacity plants were evaluated since they represent the highest-cost scenarios in terms of energy usage with or without the inclusion of Groundwater Replenishment (“GWR”) facilities.147

Electric Schedule E-19. PG&E’s website, available at http://www.pge.com/tariffs/tm2/pdf/ELEC_SCHEDS_E-19.pdf, (explaining that the summer season has three billing periods per day: peak hour, partial peak, and off-peak. Winter is divided into the partial peak and the off-peak time period).
146 147

See Chapter 1, supra (explaining DRA’s recommendation regarding GWR and plant sizing).

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Figure 4-B: Overall Effect of Electrical Rates due to Increasing Electrical Rates within One Year
1000000 900000

Increase in Electrical Cost ($)

800000 700000 600000 500000 400000 300000 200000 100000 0 0% 5% 10% 15% 20% 25% 30% Increase in Electrical Rates in One Year 6.4MGD 9.6 MGD

3 4 5 6 7 8 9

Figure 4-B shows that an increase in electrical rates has a small effect on the annual cost of electricity. A one percent increase in electrical rates results in an increase of approximately $22,700 and $28,900 per year for the 6.4 MGD and 9.6 MGD plant sizes respectively. Figure 4-C shows the effect of the increase in electrical rates on the overall O&M cost.

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Figure 4-C: Overall Effect of Total O&M Cost due to Increasing Electrical Rates within One Year 6.4MGD
5%

% Increase in Total O&M

4% 3% 2% 1% 0% 0% 5% 10% 15% 20% 25% 30% % Increase in Electric Rates in One Year

4 5
10% 9%

9.6 MGD

% Increase in Total O&M

8% 7% 6% 5% 4% 3% 2% 1% 0% 0% 5% 10% 15% 20% 25% 30% % Increase in Electric Rates in One Year

6 7 8 9 10 As shown in the charts above, an increase in electrical rates has a small effect on the overall O&M costs. Even though the overall effect of an increase in electrical rates has a small effect on the overall O&M cost over the course of one year, the compounded effect over multiple years could be significant.

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2.

Labor Costs

According to Cal Am, the labor cost rates were calculated using 2011 labor rates and escalating it by a factor of 4% in order to calculate the labor costs in 2012. DRA based its escalation factor on the December 2012 Energy Cost of Service (“ECOS”) Branch Escalation Memorandum (“Memorandum”).148 The Memorandum references a 3.1% labor escalation from 2011 to estimate the 2012 labor cost. DRA adjusted the hourly wages of the ten positions identified as Cal Am plant operator, operations foreman, utility worker, utility foreman, operations supervisor, plant manager, administrative assistance, SCADA supervisor, lab water quality specialist, and lab assistant applying the proper labor inflation rate of 3.1% to arrive at its estimate for labor costs. This adjustment reduced the estimated annual labor cost by approximately $20,000 for both the 6.4 MGD and 9.6 MGD plant sizes. 3. Chemical Costs

Cal Am estimates the annual chemical cost for the 6.4 MGD and 9.6 MGD plant to be $630,000 and $770,000, respectively. When the chemical costs were calculated in 2009, the unit prices were obtained from the chemical distributor Univar USA.149 Cal Am escalated the 2009 costs with a 4% escalation factor per year. Similar to the labor cost, DRA based their escalation factors on the Memorandum. As explained below, DRA also removed the chemical costs associated with the de-chlorination at the ASR wells.150 Based on the corrections mentioned above, DRA recommends an annual chemical cost of the 6.4 MGD and 9.6 MGD plant of $530,000 and $730,000, respectively. 4. Membrane and Media Replacement

In order to calculate the annual cost of membrane replacement, Cal Am assumes that 17% of the reverse osmosis membranes would have to be replaced on a yearly
148 149

ECOS December Memorandum on Inflation Rates, dated December 31, 2012.

A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 3. MPWSP Project Capital and O&M Cost Estimate Update prepared by RBF Consulting dated January 9, 2013, at p.11. See Chapter 5, infra (explaining DRA’s recommendation regarding removing de-chlorination from the ASR wells).
150

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basis.151 The annual membrane replacement cost for the 9.6 MGD and 6.4 MGD are $550,000 and $410,000, respectively. The cost associated with Cal Am’s membrane replacement includes the membrane replacement for the first pass elements, second pass elements, and the multi-media sand in the pretreatment filters and cartridge media filter. In the Model, the 5.4 MGD and 9.0 MGD membrane/media replacement were prorated in order to calculate the cost for the 6.4 MGD and 9.6 MGD plants.152 DRA does not contest the rate of the membrane replacement but does recommend removing the membrane replacement cost associated with the second pass process153. Factoring in this adjustment, DRA estimates the annual membrane and media replacement cost to be $480,000 and $350,000 for the 9.6 MGD and 6.4 MGD, respectively. 5. Repair & Replacement (R&R)

R&R is calculated based on a fixed percentage of the capital cost of certain components of the project. Cal Am uses a flat rate of 1.5% and applies this percentage to the estimated cost of the intake wells, desalination plant base construction, and the southern non-pipeline facilities.154 Cal Am estimates the annual cost of R&R to be $1.96 million and $1.58 million for the 9.6 MGD and 6.4 MGD plants, respectively. DRA does not contest the percentage used by Cal Am to estimate R&R. The nominal value of R&R costs are reduced to reflect the difference between Cal Am’s and DRA’s estimates of the costs for the intake wells, desalination plant base construction costs, and southern nonpipeline facilities DRA recommends the total R&R costs for the 9.6 MGD and 6.4 MGD plant sizes be $1.65million and $1.33 million, respectively.

A.12-04-019, Supplemental Testimony of Richard C. Svindland, Attachment 3. MPWSP Project Capital and O&M Cost Estimate Update prepared by RBF Consulting dated January 9, 2013, at p.11.
151

Model (The annual membrane replacement costs for the 5.4 MGD and 9.0 MGD plants are $361,000 and $420,000 respectively).
152

See Chapter 3, supra (explaining the rationale behind DRA’s recommendation to remove the second pass process from the desalination plant process).
153 154

Intake wells base construction cost includes the slant wells and the intake pump station.

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D.

CONCLUSION DRA recommends that the Commission adopt its cost methodologies for the

O&M costs of the 6.4 MGD and 9.6 MGD plant sizes. DRA’s recommended revision to the 2013 Model to correct the flow conversion from AFY to MGD would reduce the overall energy requirement for both plant size options. Further, using the inflation rates as reflected in the Memorandum would reduce the overall chemical and labor costs. DRA’s recommendations to reduce the overall capital cost of the desalination plant, southern non-pipeline facilities, and the intake system would also reduce the annual membrane and media replacement and R&R costs.

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 A.

CHAPTER 5 - COST RECOMMENDATIONS FOR CAL AM ONLY FACILITIES INTRODUCTION This chapter presents DRA’s recommendations regarding the California-American Water Company (“Cal Am”) facilities (“Cal Am Only Facilities”) associated with the proposed Monterey Peninsula Water Supply Project (“MPWSP”). These facilities were previously proposed in the Regional Desalination Project (“RDP”) Settlement Agreement filed with the Commission on April 7, 2010, and updated by the settling parties on August 31, 2010 (“Settlement Agreement”).155 The Cal Am Only Facilities are comprised of the Transfer Pipeline, the Seaside Pipeline, the Monterey Pipeline, the Terminal Reservoir, and the Aquifer Storage and Recovery System (“ASR”).156 The Settlement Agreement proposed a cost cap of $106.875 million for the Cal Am Only Facilities.157 In D.10-12-016, the Commission approved the RDP, issued the Certificate of Public Convenience and Necessity (“CPCN”) for the Cal-Am Only Facilities, and adopted the Settlement Agreement, including its provisions regarding the $106.875 million cost cap.158 Although Cal Am contends that the $106.875 million cost cap should be applied in the instant proceeding, DRA disagrees for several reasons. First, the Commission’s approval of the Settlement Agreement in D.10-12-016, including its approval of the agreement’s $106.875 million cost cap for the Cal Am Only Facilities, is not Commission
Settling Parties’ Motion to Approve Settlement Agreement, A.04-09-019, filed September 20, 2004, attaching Settlement Agreement by and among California-American Water Company, Marina Coast Water District, Monterey County Water Resources Agency, Monterey Regional Water Pollution Control Agency, Public Trust Alliance and Surfrider Foundation (“Settlement Agreement”), as Exhibit 1; see also Marina Coast Water District’s Notice of Filing of Conformed Copy of Water Purchase Agreement Containing Previously-Announced Revisions Acceptable to the Signatories, A.04-09-019, filed August 30, 2010.
155 156 157 158

A.12-04-019, Direct Testimony of F. Mark Schubert, P.E., at p. 6: 1-5 Settlement Agreement, supra note 1, at p. 10, Section 8.1.3.

Decision Approving Regional Project, Adopting Settlement Agreement and Issuing Certificate of Public Convenience and Necessity for California-American Water Facilities, D.10-12-016, issued December 3, 2010, at p. 201, Conclusion of Law No. 52.

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precedent that must be followed in this proceeding.159 In D.12-07-008, the Commission accepted Cal Am’s withdrawal from the RDP in recognition of “uncertainty surrounding CEQA, financing, and the ability to obtain permits” for the project.160 Thus, the Commission should reject Cal Am’s request to selectively implement provisions from a Settlement Agreement that is not binding on the Commission for the RDP, a project that is no longer being pursued. Next, following the demise of the RDP, the Commission concluded that it would not approve any future cost recovery for the Cal Am Only Facilities until it determined how such facilities would relate to the project that replaces the RDP.161 Lastly, contrary to Cal Am’s contentions,162 Cal Am’s application for the MPWSP modifies the cost estimates for the Cal Am Only Facilities provided in A.04-09-019 and the Settlement Agreement. Because the Commission’s approval of the Settlement Agreement in D.10-12-016 is not precedential and Cal Am is longer pursuing the RDP, and the Commission has subsequently stated that it will not approve any future cost recovery for the Cal Am Only Facilities without analyzing those facilities as part of a new, proposed water supply solution for the Monterey Peninsula, and since Cal Am’s
Id. at 203, Conclusion of Law Nos. 62-63 (wherein the Commission recognized that its approval of the Settlement Agreement was not precedential). See also Rule 12.5 of the Commission’s Rules of Practice and Procedure (“Commission adoption of a settlement is binding on all parties to the proceeding in which the settlement is proposed. Unless the Commission expressly provides otherwise, such adoption does not constitute approval of, or precedent regarding, any principle or issue in the proceeding or in any future proceeding.”).
159 160

Decision Granting Motion to Withdraw Petition and to Modify Decision 10-12-016 and Closing Proceeding, D.12-07-008, dated July 12, 2012, at p.24, Conclusion of Law No. 2. Decision Granting Motion to Withdraw Petition and to Modify Decision 10-12-016 and Closing Proceeding, D.12-07-008, dated July 12, 2012, at p.24, Conclusion of Law No. 1 (wherein the Commission concluded “[i]t would not be reasonable to approve Cal-Am’s Petition to Modify D.10-12-016 without fully determining how the Cal-Am facilities would relate to the project ultimately determined to replace the Regional Desalination Project; therefore it is reasonable to accept Cal-Am’s April 23, 2012 withdrawal of that petition.”); see also California-American Water Company Petition for Clarification and Modification of D.10-12-016, filed October 14, 2011, at p. 7 (wherein Cal Am requested “that the Commission clarify that the Company may proceed with the California American Water facilities (except the transfer pipeline) even if the Regional Desalination Project is modified or an alternative project is proposed,” and emphasized that such clarification is necessary in order to avoid the potential for “delayed recovery of reasonable costs through the advice letter process.”). A.12-04-019, at p. 13 (wherein Cal Am states, “[t]he current estimated cost of the California American Water-only facilities remains unchanged from the $107 million the Commission approved in D.10-12-016 . . . .”).
162 161

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cost estimates for the Cal Am Only Facilities have, in fact, changed, DRA recommends that the Commission use updated, available cost information to establish an accurate capital cost cap and absolute capital cost ceiling for the Cal Am Only Facilities in this proceeding. DRA’s recommendations are based upon its review of the final report of the Bureau of Reclamation,163 Cal Am’s direct and supplemental testimony, the 2013 Monterey Desalination Model v6.2-Public (“Model”), Cal Am’s responses to DRA’s data requests, and Advice Letters (“AL”) filed with the Commission. B. SUMMARY OF RECOMMENDATIONS DRA’s recommendations result in a cost estimate of $58.8 million (2012 dollars) for the Cal Am Only Facilities.164 This value should be adopted as the capital cost cap for the Cal Am Only Facilities proposed in Cal Am’s current application, A.12-04-019. Similar to DRA’s recommendation for an absolute capital cost ceiling for the entire MPWSP,165 an absolute capital cost ceiling of $66.1 million should be implemented for these particular facilities. DRA recommends that in order to recover any costs that exceed the capital cost cap of $58.8 million Cal Am should be required to file a new application that justifies all costs incurred above the cost cap and below the absolute capital cost ceiling of $66.1 million. But in no event should Cal Am be allowed to recover any costs exceeding this absolute cost ceiling from its ratepayers. Cal Am’s shareholders should be responsible for any costs above the absolute capital cost ceiling of $66.1 million. Table 4.A summarizes DRA’s recommendation regarding the project costs for the Cal Am Only Facilities.

In 2010, DRA engaged the professional consulting services of the Bureau of Reclamation to review and analyze the technical feasibility, reliability, risks, and cost estimates of the project alternatives for a major desalination plant in Monterey Bay, as proposed by California-American Water Company.
163 164 165

Cal Am’s cost table with DRA’s modifications is attached in Appendix C-39 and C-40.

See Chapter 2, Section C(4)(b), infra (explaining DRA’s recommendation that the Commission impose an absolute capital cost ceiling for the MPWSP).

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Table 4.A: Summary of DRA’s Cost Recommendations
CAL AM PROPOSED $7,000,000 $7,930,000 $14,800,000 $338,000 $12,000,000 $7,430,000 $3,830,000 $53,400,000 $14,500,000 $3,430,000 $71,300,000 $22,700,000 $1,000,000 $11,900,000 $106,900,000 DRA RECOMMENDED $5,650,000 $6,760,000 $12,300,000 $328,000 $9,100,000 $4,530,000 $2,560,000 $41,200,000 $6,180,000 $3,170,000 $50,600,000 $7,610,000 $582,000 $58,800,000 $66,100,000 CAL AM EXCEEDS DRA $1,350,000 $1,170,000 $2,500,000 $10,000 $2,900,000 $2,900,000 $1,270,000 $12,200,000 $8,320,000 $260,000 $20,700,000 $15,090,000 $418,000 $11,900,000 $48,100,000 -

COST (2012 DOLLARS)

Transfer Pipeline Seaside Pipeline Monterey Pipeline Valley Greens Pump Station Terminal Reservoir and ASR Pump Station ASR Wells ASR Pipelines and Backflush Facilities Total Base Construction Cost Implementation Cost Total ROW/Easement/Land Cost Most Probable Capital Costs without Contingency Project Contingency Allowance Mitigation Allowance Accuracy Allowance Overall Total Absolute Cost Ceiling

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DRA’s cost reductions are based on the following specific recommendations: a) Transfer Pipeline, Seaside Pipeline, Monterey Pipeline, and Terminal Reservoir i. The unit costs of Cal Am Only Facilities pipelines should be calculated using Cal Am’s standard methodology unless there is a justified need for special construction. ii. Cal Am has shown that a mitigation measure regarding the aesthetics of the proposed Terminal Reservoir (“reservoir”) will be implemented. Thus, this reservoir should be pursued and estimated as above-ground or partially-buried tanks rather than below-ground tanks. b) ASR Facilities i. Consistent with the contingency allowance used in the recent construction of existing ASR Facilities, the contingency allowance for the ASR Facilities should be calculated at 11% of the Base Construction Costs. The capital costs for proposed ASR Wells 5 and 6 should be determined based on the capital costs from the recent construction of existing ASR Wells, namely $6.1 Million. Similarly, the estimated cost of the Right of Way easement and/or Land Acquisition for the Fitch Park ASR well site should be similar to that of the existing ASR well site easements, namely $544,000. Cal Am should not recover costs associated with the ASR Facilities that have already been recovered or are currently being reviewed through the Advice Letter process.

ii.

iii.

c) Escalation Factor and Cost Mark-Ups

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i.

The cost escalation rate should be standardized to the December 2012 DRA Energy Cost of Service Branch Memorandum consistent with the escalation methodology used for the MPWSP desalination plant financial model.

ii.

Cal Am’s fixed amount of its project contingency allowance is unjustified. Instead, a project contingency allowance of 20% should be adopted because it is consistent with the recommended practice of the Association for the Advancement of Cost Engineering (“AACE”) and Cal Am’s technical memorandum provided by RBF Consulting.166

iii.

Having insufficiently justified its proposed $1 million mitigation cost, Cal Am should instead be authorized a mitigation allowance of 1% to be added to the base construction cost with contingency. This methodology is discussed further in Chapter 2 of this testimony.

DISCUSSION 1. The Cal Am Only Facilities Project Cost Cap of $106.875 Million Approved by the Commission for the Regional Desalination Project Should Not be Applied to the MPWSP.

The Cal Am Only Facilities project cost cap of $106.875 million approved by the Commission in D.10-12-016 for the Regional Desalination Project (“RDP”) should not be applied to the MPWSP for several reasons: (1) the Commission’s prior approval of the Settlement Agreement is not precedential and Cal Am is no longer pursuing the RDP; (2) in D.12-07-008, the Commission stated that it could not approve Cal Am’s request to move forward with the Cal Am Only Facilities until it determined how those facilities would relate to the project to replace the RDP; and, (3) Cal Am’s application for the
166

See Chapter 2, Section C(3), infra (explaining, DRA’s recommendations regarding contingencies).

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MPWSP, A.12-04-019, modifies its cost estimates for the Cal Am Only Facilities provided in A.04-09-019 and the Settlement Agreement. a) The Commission’s Prior Approval of the Settlement Agreement for the RDP is Not Precedential and Should Not be Followed in this Proceeding Because Cal Am is No Longer Pursuing the RDP.

The cost cap of $106.875 million was presented to the Commission as part of a proposed Settlement Agreement put forward by six parties in the RDP proceeding, A.04-09-019, notably excluding DRA.167 In D.10-12-016, the Commission approved the proposed Settlement Agreement filed on April 7, 2010 and updated on August 31, 2010.168 In adopting the Settlement Agreement, the Commission approved all of its terms, including the cost cap of $106.875 million for the Cal Am Only Facilities.169 Then on October 14, 2011, Cal Am filed a Petition for Clarification and Modification of D.10-12-016 (“Petition for Clarification”) in order to obtain the Commission’s approval to move forward with the Cal Am Only Facilities regardless of the ultimate outcome of the RDP.170 In Cal Am’s Petition for Clarification, the company reported that it had entered into Commission-sponsored mediation regarding the RDP with two of the settling parties in D.10-12-016, the Marina Coast Water District (“MCWD”) and the Monterey County Water Resources Agency (“MCWRA”).171 Subsequently, Cal Am filed an update with the Commission on January 18, 2012 in which it explained that the parties to the mediation were unable to reach agreement on how to address multiple issues and challenges related to the RDP.172 Thus, Cal Am stated it would not move forward with
167 168 169

Settling Parties’ Motion to Approve Settlement Agreement, A.04-09-019, filed April 7, 2010. D.10-12-016, at p. 203, Ordering Paragraph No. 1.

Id. at p. 201, Conclusion of Law No. 52 (wherein the Commission adopted the “Settling Parties’ proposed cost cap of $106.875 million . . . for the Cal-Am facilities . . . .”). California-American Water Company Petition for Clarification and Modification of D.10-12-016, filed October 14, 2011, referred to below as “Petition for Clarification,” at p. 2.
170 171 172

Id. at p. 1.

California-American Water Company Compliance Filing: Mediation Update, A.04-09-019, filed January 18, 2012, at p. 1.

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the RDP and had begun considering alternative desalination projects.173 As noted, in D.12-07-008, the Commission approved Cal Am’s withdrawal from the RDP, citing several issues that had contributed to uncertainty surrounding the project, i.e., “CEQA, financing, and the ability to obtain permits . . . .”174 Thus, as explained, since the Commission’s prior approval of the Settlement Agreement is not precedential and Cal Am is no longer pursuing the RDP, the Commission should reject Cal Am’s request to selectively implement provisions of the Settlement Agreement, i.e., provisions concerning the $106.875 million cost cap for the Cal Am Only Facilities. The Settlement Agreement was approved to facilitate implementation of the RDP, and thus, help solve the water supply constraints on the Monterey Peninsula.175 Presumably, at the time of the Commission’s approval of the Settlement Agreement in D.10-12-016, on December 3, 2010, the Commission and the settling parties expected the RDP would be implemented. However, given subsequent events that transpired which contributed to uncertainty surrounding the project, as identified by the Commission in D.12-07-008, the Commission ultimately accepted Cal Am’s withdrawal from the RDP and its application for the MPWSP, A.12-04-019.176 Thus, as Cal Am is no longer pursuing the RDP, and the Settlement Agreement was predicated upon its implementation, the Commission should reject Cal Am’s request to

173 174 175

Id. D.12-07-008, dated July 12, 2012, at p.24, Conclusion of Law No. 2.

D.10-12-016, at p. 203, Conclusion of Law No. 63 (wherein the Commission concluded, “Commission precedent establishes that we cannot bind the actions of future Commissions; however, we believe the settlement is a fair, just, and reasonable compromise of the many long-standing, difficult, and costly issues involved in solving the water supply constraints on the Monterey Peninsula and ensuring that the restrictive water reductions set forth in the State Water Resources Control Board Cease and Desist Order can be avoided if the Regional Project is built.”). D.12-07-008, at p.19 (italics added) (stating, “[i]t is unfortunate that Cal-Am withdrew its support for the Regional Desalination Project, but given the various events that have overtaken the decisions we reached in December 2010, we see no alternative but to move forward with the new application, A.12-04019, seeking the Monterey Peninsula Water Supply Project. At this point, there is simply too much uncertainty associated with the Regional Desalination Project to force Cal-Am to pursue that project further. It is not reasonable to allow time to continue to elapse and costs to continue to accrue for the Regional Desalination Project, a project that, due to a significant change in circumstances since 2010, has no reasonable prospect of achieving its goals.”).
176

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selectively implement particular provisions of the Settlement Agreement regarding the prior cost cap of $106.875 million. Instead, DRA recommends the Commission reexamine the cost estimates for the Cal Am Only Facilities in order to assess the reasonableness of such costs in relation to Cal Am’s current proposal for the MPWSP. b) In D.12-07-008, the Commission stated that it would not approve Cal Am’s request to move forward with constructing the Cal Am Only Facilities until it determined how those facilities would relate to the project to replace the RDP.

As noted, on April 23, 2012, Cal Am filed a withdrawal of its Petition for Clarification of D.10-12-016 and a new application for approval of the MPWSP, A.12-04-019.177 In D.12-07-008, the Commission stated that it could not approve Cal Am’s Petition for Clarification until it determined how the Cal Am Only Facilities would relate to the project to replace the RDP.178 Thus, the Commission treated Cal Am’s withdrawal of its Petition for Clarification as a motion and granted it.179 In addition, the Commission ordered that Cal Am “should not claim any costs incurred for the [Cal Am Only Facilities] after January 17, 2012, the date [Cal Am] announced its withdrawal from the RDP . . . .”180 Accordingly, the Commission stated that it would not approve any future cost recovery for the Cal Am Only Facilities until it could determine how those facilities would relate to the project that would ultimately replace the RDP.181 Such a Commission determination would necessarily require a current analysis of costs associated with the Cal Am Only Facilities in relation to the MPWSP. Nonetheless, Cal Am’s application for approval of the MPWSP includes the Cal Am Only Facilities and requests the Commission implement the prior cost cap of
177 178 179 180 181

Id. at p.1. Id. at p. 24, Conclusion of Law No. 1. Id . at p. 25, Ordering Paragraph No. 1. Id. at p. 25, Ordering Paragraph No. 2. Id. at p. 24, Conclusion of Law No. 1. See supra note 149, and accompanying text.

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$106.875 million.182 Thus, DRA recommends that in accordance with the Commission’s directive in D.12-07-008, the Commission reject Cal Am’s request to selectively implement provisions of the Settlement Agreement, i.e., provisions pertaining to the prior cost cap of $106.875 million and reexamine the cost estimates for the Cal Am Only Facilities in order to assess the reasonableness of such costs in relation to Cal Am’s current proposal for the MPWSP, the proposed project which has replaced the RDP. c) Cal Am’s application for the MPWSP, A.1204-019, modifies the cost estimates for the Cal Am Only Facilities provided in A.04-09-019 and the Settlement Agreement approved by the Commission.

Cal Am’s application for the MPWSP modifies the cost estimates for the Cal Am Only Facilities provided in A.04-09-019 and the Settlement Agreement approved by the Commission. More specifically, although Cal Am has provided unit cost justifications for the Cal Am Only Facilities proposed in the Settlement Agreement, cost changes have been made in the new cost spreadsheet that Cal Am submitted with the MPWSP. Table 4.B below shows cost differences between the Cal Am Only Facilities proposed in 2009 and Cal Am’s current cost estimates.

182

A.12-04-019, at p. 13.

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Table 4.B: Cost differences between Cal Am Only Facilities presented in 2009 and Cal Am’s updated estimates183
BASE CONSTRUCTION COSTS Seaside Pipeline Trenched Pipeline Monterey Pipeline Trenched Pipeline Special Construction Terminal Reservoir and ASR Pump Station Reservoir Structures ROW Easement and Land Acquisition Pipelines in TAMC ROW Terminal Reservoir Total Difference (2009$ - 2012$) $11,365,200 $1,800,000 $6,600,000 $1,100,000 $800,000 $11,100,000 $1,700,000 $10,500,000 $1,400,000 $1,000,000 ($265,200) ($100,000) $3,900,000 $300,000 $200,000 $5,686,800 $5,148,000 $6,800,000 $1,652,000 CAL AM'S 2012 ESTIMATES CAL AM'S 2009 ESTIMATES DIFFERENCE BETWEEN CAL AM'S ESTIMATES (2009$ - 2012$)

3 4 5 6 7 8 9 10 11 12 13 14 15 Contrary to Cal Am’s assertion that “[t]he current estimated cost of the California American Water-only facilities remains unchanged”184 the preceding table shows that Cal Am’s costs have changed since the Commission approved the Settlement Agreement. DRA’s recommendations were developed using updated information to arrive at a reasonable cost cap for the Cal Am Only Facilities. The unit cost estimates presented by Cal Am in its Cal Am Only Facilities cost spreadsheet are nearly 8 years old and based on outdated information. Detailed cost estimates of the Cal Am Only Facilities were first prepared by JR Conkey & Associates back in 2004. This report, also known as the “Conkey Report”, was updated to incorporate costs for a desalination plant at Moss Landing. It then became the basis of cost estimates for the Proponent’s Environmental Assessment (“PEA”) and the Conceptual Design Report (“CDR”) of the Coastal Water Project (“CWP”) in 2005. In
All costs in Table 4.B are reported in 2009 Dollars. Data source: 2009 CWP Capital Cost Estimate (2009 Dollars) attached hereto as Exhibit 16 and 2013 Monterey Desalination 6Model v6.2-Public.
183 184

A.12-04-019, at p. 13.

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2009, the 2004 Conkey Report was used again to update the Cal Am Only Facilities costs in 2009.185 To arrive at the 2012 costs reported in its Cal Am Only Facilities spreadsheet, Cal Am escalated its 2009 base construction costs to 2012 dollars.186 The Cal Am Only Facilities are now proposed as part of the MPWSP. With the cost adjustments and ASR facilities developments that Cal Am has made since the approval of the RDP,187 a revised cost cap for Cal Am Only Facilities is warranted to reflect the most up-to-date information and costs. In coming up with its recommendations, DRA utilized the most recent data on the construction of ASR facilities and the cost estimating methodology presented by Cal Am for its MPWSP desalination plant facilities. 2. Capital Costs of Cal Am Only Facilities a) The Commission should adopt a capital cost cap of $58.8 million and set an absolute capital cost ceiling at $66.1 million.

As summarized in Table 4.A, DRA recommends the most probable capital cost for the Cal Am Only Facilities to be set at $58.8 million (2012 Dollars).188 The most probable cost should be adopted as the Cal Am Only Facilities project cost cap because it represents a sensible limit on the capital costs of the project. In replacement of Cal Am’s accuracy range, an absolute capital cost ceiling at $66.1 million, which reflects a 12.5% mark-up above DRA’s most probable cost, should be adopted. This absolute capital cost ceiling, as discussed further in Chapter 2 of this testimony, allows Cal Am to account for additional costs that may occur over its most probable cost estimate. DRA recommends a lower absolute capital cost ceiling mark-up than the desalination plant facilities because the Cal Am Only Facilities is at a slightly

Cal Am Response to DRA-A.12-04-019-CAL AM 013, attached hereto as Exhibit 18, Response to Questions 1-3.
185 186 187

2013 Monterey Desalination Model v6.2-Public, tab “CAW-Only Facility Capital”

Cal Am Response to Data Request DRA-A.12-04-019-CAL AM 004, attached hereto as Exhibit 17, Response to Question 2.
188

More details on these cost reductions are shown in Appendix C-13.

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more developed stage than the desalination plant facilities. Additionally, unlike a desalination plant, the Cal Am Only Facilities consist of projects that are more common (i.e. pipeline installation, tanks, and ASR facilities). Thus, an absolute capital cost ceiling at $66.1 million, which reflects a 12.5% mark-up above DRA’s most probable cost, is warranted. DRA’s cost reductions of the Cal Am Only Facilities are further discussed in the following sections. b) i. Transfer Pipeline, Seaside Pipeline, Monterey Pipeline, and Terminal Reservoir

Unless there is a justified need for special construction, Cal Am’s unit costs for the Cal Am Only Facilities pipelines should be calculated using the cost estimate methodology that it utilizes for the MPWSP desalination plant components.

Cal Am has not provided justification for any of its MPWSP pipeline unit costs other than an explanation that “the assumed cost per diameter inch for a 36-inch Mortar Lined and Coated Steel Pipe (‘MLCSP’) is estimated at approximately $10 per diameter inch.”189 When DRA requested further justification for this unit cost, the company objected, stating that creation of such a spreadsheet would be “unnecessary and burdensome.”190 Thus, Cal Am inexplicably used a unit cost of $396/Linear Foot (“LF”) in its estimates for the South Transfer Pipeline, Seaside Pipeline, and the Monterey Pipeline of the Cal Am Only Facilities, and a lower unit cost of $380/LF for the identical type of pipe to calculate the ASR pipeline.191 As shown in Table 2 above, these varied unit costs result in cost discrepancies between the cost estimates proposed in 2009 and Cal Am’s updated costs.

Cal Am Response to Data Request DRA-A.12-04-019-CAL-AM 017, attached hereto as Exhibit 19, Response to Question 4(a).
189 190 191

Id., Response to Question 4(b).

Special construction is required at various sections of these pipelines. The costs of this special construction are estimated as separate line items from the trenched pipelines. All four pipelines are described as MLCSP.

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The methodology of using a “cost per diameter-inch” to calculate a pipeline unit cost is reasonable. However, Cal Am’s unit cost for the three Cal Am Only facilities pipelines is inconsistent with this methodology and Cal Am has not provided DRA with justification for the cost difference. Adjusting for this discrepancy, the costs of the Transfer Pipeline, Seaside Pipeline, and Monterey Pipeline should be estimated at $360/LF.192 DRA’s pipeline cost reductions are summarized in table 4.A above. ii. The estimate of the terminal reservoirs should reflect the cost of above-ground or partially-buried tanks.

Although Cal Am considered a Terminal Reservoir with above ground storage tanks for the CWP, and the Bureau of Reclamation recommended such a reservoir be pursued in order to reduce construction costs, in its current application Cal Am proposes to use more expensive underground tanks. Cal Am planned to construct a reservoir with above ground tanks for the Coastal Water Project (“CWP”); the Final Environmental Impact Report (“FEIR”) for the CWP analyzed two 3-million gallon (“MG”) above ground concrete tanks that were to comprise Cal Am’s proposed reservoir.193 As noted, the Bureau of Reclamation recommended that the parties investigate constructing the 6 MG reservoir structure above ground in order to reduce estimated construction costs of the CWP.194 Nonetheless, in its current application for the MPWSP, Cal Am has proposed an estimate for the reservoir system of $1.1 per gallon (“/gal”), which reflects the use of underground storage tanks.195 DRA disagrees with this proposal and instead recommends that Cal Am use above ground tanks, as it proposed in the CWP, for the reservoir system,
A.12-04-019, Direct Testimony of F. Mark Schubert, P.E. pp. 5-7 (describing the three pipelines as having a common diameter of 36-inch. At $10/diameter-inch the cost per linear foot (“$/LF”) of each of these pipelines is $360/LF).
192

California American Water Company Coastal Water Project Final Environmental Impact Report, at pp. 3-20, Section 3.2.5.2 (stating the terminal reservoir proposed for use with the CWP was to be 33-feet high with a 130-feet diameter, and explaining that it would receive water from the desalination plant when production exceeds customer demand. Further, the reservoir was also to receive water from other sources, such as ASR or the Carmel River, as conditions required.).
193 194 195

BOR Report, supra note 31, at p. 25. 2013 Monterey Desalination Model v6.2-Public, tab “CAW-Only Facility Capital.”

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which would reduce unit costs from $1.1/gal to $0.7/gal.196 With this adjustment, the total cost of the Terminal Reservoir structures is estimated at $4.6 million. Notably, Cal Am anticipates that “mitigation measures for the visual impacts of the reservoir (for example, partially buried or use of berms) will be specified in the Coastal Development Permit issued by the California Coastal Commission and the Use Permit issued by the City of Seaside.”197 In the event that a mitigation measure for visual impacts must be adopted, Cal Am should cover the additional costs with the mitigation allowance authorized for the MPWSP. c) i. ASR Facilities

The cost of the ASR Pipeline, the Recirculation Pipeline, and the Backflush pipeline should be calculated using CalAm's standard methodology for estimating pipeline costs.

The cost per linear foot (“LF”) of the ASR Pipeline, the Recirculation Pipeline, and the Backflush Pipeline are not adequately justified, and are higher than the unit costs of identical components presented as part of the Desalination Plant Capital Cost Estimates. Using the “cost per diameter-inch” methodology198, a 30-inch MLCSP pipeline of ASR Pipeline would correspond to a unit cost of $300/LF, which is the estimate DRA provides in its adjustment. The unit costs of the Recirculation Pipeline and the Backflush Pipeline199 are also not adequately justified, and are higher than the unit costs of identical components presented as part of the Desalination Plant Capital Cost Estimates. DRA recommends
The unit cost of $0.7/gal was analyzed in the BOR report. This unit cost was originally estimated by Cal-Am in 2009 to show the construction cost of an above ground tank. Bureau of Reclamation Review: Comments on Coastal Water Project and Alternatives, Monterey, C, at p. 25.
196

Cal Am Response to Data Request DRA-A.12-04-019-CAL AM 024, attached hereto as Exhibit 20, Response to Question 2(a).
197 198 199

See Chapter 3, Section(C)(1)(iv) infra (explaining, the “cost per diameter-inch” methodology).

Cal-Am Response to Data Request DRA-A.12-04-019-CAL-AM 025, attached hereto as Exhibit 22, Response to Question 3 (explaining the necessity to backflush the ASR wells on a weekly basis in order to prevent plugging and fouling of the well screens. The backflush water is not suitable for use in the distribution system and is pumped to waste. The disposal site for the backflush water is the Backflush Reclamation Basin. Water is conveyed from the wells to the Backflush Reclamation Basin via the Backflush Pipeline.).

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using the unit cost estimates provided for the Desalination Plant as a basis for estimating the unit costs for the Recirculation Pipeline and the Backflush Pipeline. The Recirculation Pipeline, a 12-inch diameter Polyvinyl Chloride (“PVC”) pipe, is identical to the 12-inch diameter PVC pipeline for the Castroville Seawater Intrusion Project (“CSIP”) pond. Thus, DRA referred to Cal Am’s CSIP Pipeline cost of $100/LF200 and adjusted the Recirculation Pipeline estimate according to this number. DRA’s unit cost of $150/LF for the Backflush Pipeline, a 20-inch diameter PVC pipeline, was calculated by interpolating costs for the 12-inch and 24-inch PVC piping.201 Table 4.C summarizes DRA’s recommendations on unit costs of the Cal Am Only Facilities pipelines. Table 4.C: DRA’s recommendation on Cal Am Only Facilities pipelines unit costs Item Description Cal Am ($/LF) DRA ($/LF) Cal Am Exceeds DRA ($/LF) $127

ASR Pipeline Recirculatio n Pipeline Backflush Piping 11 12 13 14 15 16

30-inch Diameter ML/CSP

$427

$300

12-inch Diameter PVC

$180

$100

$80

20-inch Diameter PVC

$225

$150

$75

ii.

The Capital Cost of Proposed ASR Wells 5 and 6 Should be Determined Based on the Capital Cost of the Recent Construction of ASR Wells 1-4.

The capital cost of ASR Wells 5 and 6202 and associated facilities203 should be determined based on the recent construction costs of ASR Wells 1-4. As discussed
200 201 202

2013 Monterey Desalination Model v6.2-Public Id.

See “2013 Monterey Desalination Model v6.2-Public,”CAW Only Tab. Cal-Am refers to the proposed Wells as ASR Well 3 and ASR Well 4. In order to avoid confusing the proposed ASR Wells with the

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above, Cal Am’s cost estimates for ASR Wells 5 and 6 and associated facilities rely on estimates initially developed in 2005 as discussed earlier in this chapter. Recent comparable construction costs for Wells 1-4 provide a more accurate means of estimating the actual cost of constructing two additional ASR wells. DRA finds that the two new proposed wells would add significant value to the MPWSP. More specifically, the two new proposed ASR wells, Wells 5 and 6, would provide Cal Am with an increased ability to inject excess river flows and/or desalinated project water into the Seaside Aquifer during the wet season and withdraw this water during the dry season. Cal Am currently operates a total of four ASR wells at two separate sites: ASR Wells 1 and 2 are located at the Santa Margarita Site and owned by the Monterey Peninsula Water Management District (“MPWMD”) and operated by Cal Am; and ASR Wells 3 and 4 are located at the Seaside Middle School Site and are owned and operated by Cal Am. The proposed wells, Wells 5 and 6, would be located at Fitch Park and also owned and operated by Cal Am. Cal Am acknowledges that the costs for the new wells would be similar to the costs of the existing wells.204 Further, MPWMD recently finished construction of two comparable ASR Wells, Wells 1 and 2, for a final construction cost of $5,762,225.205 MPWMD has also completed construction of Well 3 and is in the process of constructing Well 4. As of January 2013, MPWMD is on target for a $6.1 million budget for these comparable facilities.206

existing ASR Wells at Seaside Middle School which have typically been referred to as ASR Wells 3 and 4, DRA refers to the proposed wells as ASR Wells 5 and 6 in this testimony. See “2013 Monterey Desalination Model v6.2-Public.” CAW Only Tab (wherein the cost estimate for the ASR Wells includes line items for a monitoring well, two test wells, and two ASR Well Head Facilities including Electrical, Instrumentation and Controls (“E/I/C”)).
203

Cal-Am Response to Data Request DRA-A.12-04-019-CAL-AM 011, attached hereto as Exhibit 21, Response to Question 1(b)(ii) (wherein Cal-Am states, “Wells #5 and #6 along with the finished site will be similar in construction to Wells #3 and #4.”).
204

MPWMD Response to Data Request DRA-A.12-04-019-MPWMD 001, attached hereto as Exhibit 10, Response to Question 1(b)(ii).
205 206

Id.

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Accordingly, based on the construction costs of ASR Wells 1 through 4, DRA estimated the costs for ASR Wells 5 and 6 to be $6,070,286. Appendix B-4 provides the detailed calculations. iii. Cal Am Should not Recover Costs Associated With the ASR Facilities that Have Already Been Recovered or Are Currently Being Reviewed through the Advice Letter Process.

D.10-12-016 authorized Cal Am to construct the “CAW Only Facilities” proposed in the RDP, and to file semi-annual Tier 2 Advice Letters to move expenses associated with the CAW Only Facilities into rate base.207 This process applied to the costs associated with the ASR Facilities at Fitch Park.208 Accordingly, Cal Am has already begun permitting and constructing the ASR Facilities that are proposed in this application and has recovered some of the associated costs through advice letters (see Table 4.D). Specifically, Cal Am has completed one test well and one monitoring well at the Fitch Park site and recovered the costs of these facilities, as well as associated permitting and engineering fees, through the advice letter process.209 As this work has already been completed and the monies recovered, the amount recovered through the advice letter process should be deducted from the estimated costs of the ASR Facilities in the instant proceeding. DRA reviewed Cal Am’s advice letter (“AL”) submittals for the ASR Facilities, i.e., AL 895, AL 932, and AL 944, and determined that a portion of the work proposed in this application has already been completed, and the associated costs have already been recovered, or are currently being reviewed through the advice letter process. The following ASR Facilities Project Costs have been recovered or have been submitted by Cal-Am for recovery and are currently being reviewed:
207 208 209

D.10-12-016, Section 13.2.2. D.10-12-016, Section 13.

See Cal-Am Response to Data Request AL 944 CAW-001, attached hereto as Exhibit 25, Response to Question 11 (referencing the drilling and development of a test well at the Fitch Park ASR site), and CalAm Response to Data Request AL 944 CAW-002, attached hereto as Exhibit 26, Response to Question 1c (explaining that ASR Systems installed, tested, and monitored an ASR monitoring well at Fitch Park).

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Table 4.D: Cal Am Advice Letter Submittals for ASR Wells 5 and 6 and Associated Facilities at Fitch Park. Item AL 865 AL 932 Project Costs $404,468 $716,621 Status Approved for recovery210 Submitted, currently being reviewed211 AL 944 $417,512 Amount approved for recovery by DWA disposition issued 1/18/13212, Cal-Am is appealing DWA’s disposition.213 Total $1,538,601

3 4 5 6 7 8 9 DRA deducted the total amount of $1,538,601 from the ASR Facilities estimated costs, as this work has already been completed, and these costs have either been recovered, or are currently being reviewed through the AL process. Notably, in the event that the final amount approved for recovery for Advice Letters 932 and/or 944 differs from the amounts requested by Cal-Am, the actual amounts approved for recovery should instead be deducted from the estimated costs for the ASR Facilities.

Cal Am Response to DRA-A.12-04-019-CAL-AM 004, attached hereto as Exhibit 17, Response to Question 2(i).
210 211 212 213

Id., Response to Question 2(ii). DWA disposition for AL 944, AL 944A, and AL 944B, attached hereto as Exhibit 23.

See Cal Am’s February 7, 2013 filing, “Review of Industry Division Disposition and Motion to Stay Refunds” (wherein Cal Am requests Commission review of the DWA disposition for AL 944, AL 944A, and AL 944B and requests the Commission to stay the refunds required by the DWA disposition).

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iv.

The estimated cost of the Right of Way Easement and/or Land Acquisition for the Fitch Park ASR site for Wells 5 and 6 should be similar to the cost of the easement for the Seaside Middle School site for existing ASR Wells 3 and 4.

Cal Am estimates that the Right of Way (“ROW) Easement and/or Land Acquisition cost for ASR Wells 5 and 6 at Fitch Park, which consist of two separate sites, to be $400,000 per site, for a total of $800,000.214 In order to construct and operate ASR Wells 5 and 6 at the Fitch Park site, a lease or easement would be needed from the United States Army. The cost of this has not yet been negotiated.215 Cal Am states that the $800,000 cost estimate is a “planning level market value estimate for the Fitch Park ASR well sites”216 Cal Am has stated that construction of ASR Wells 5 and 6 and the finished site217 will be similar to the existing recently constructed ASR Wells 3 and 4, located at the Seaside Middle School site.218 As the ROW easement and/or land acquisition cost necessary for Wells 5 and 6 has not yet been negotiated and is currently a planning level estimate, the most probable cost of this line item for the Fitch Park site is more accurately estimated using the cost of the easement at the existing Seaside Middle School ASR site. The cost of the existing easement for the Seaside Middle School site for Wells 3 and 4219 was $272,000. Thus, DRA accordingly has allotted a total cost of $544,000 for ROW easement and/or land acquisition for the two Fitch Park sites.220

214 215

“2013 Monterey Desalination Model v6.2-Public. CAW Only Tab, ASR Well Sites.

Cal-Am Response to Data Request DRA-A.12-04-019-CAL-AM 025, attached hereto as Exhibit 22, Response to Question 2.
216 217

Id., Response to Question 2b.

See MPWMD response to Data Request DRA-A.12-04-019-MPWMD 001, attached hereto as Exhibit 28, Appendix p.3 (wherein grading, paving, fencing, landscaping, etc. are included as a part of the budget for the finished site for ASR Wells 3 and 4). Cal-Am Response to Data Request DRA-A.12-04-019-CAL-AM 011, attached hereto as Exhibit 21, Response to Question 1b(ii).
218

MPWMD Response to Data Request DRA-A.12-04-019-MPWMD 001, attached hereto as Exhibit 10, Response to Question 3(b).
219 220

Two sites at $272,000 each.

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v.

Consistent with the contingency allowance used in the recent construction of existing ASR Facilities, the contingency allowance for the ASR Facilities should be calculated at 11% of the Base Construction Costs.

Due to Cal Am’s recent construction of nearly identical facilities, DRA recommends that the contingency allowance for the ASR Facilities, including the ASR Wells, the Fitch Park finished site, the ASR Pipelines, and the ASR Backflush Facilities, be calculated at 11% of the base construction costs. Cal Am has confirmed that construction of ASR Wells #5 and #6 and the finished site will be similar to the existing ASR Wells, Wells 3 and 4, that were recently constructed.221 Thus, as the new ASR Wells, Wells 5 and 6, will be similar to the existing wells that were recently constructed, it is appropriate to use a lower contingency allowance for these facilities. Although Cal Am could have updated the ASR Facility estimates to detailed cost estimates, it has failed to do so. During the development of the Coastal Water Project, Cal Am stated that “[d]etailed cost estimates of ASR Wells [5 and 6] will be prepared after the monitoring well is complete.”222 The monitoring well referred to in this statement is the monitoring well at the Fitch Park site, which was completed in November of 2011.223 Prior to that, in 2009, MPWMD constructed Wells #1 and #2; these wells also provide recent comparable construction costs.224 Nonetheless, despite the availability of more recent cost data, Cal Am failed to update its cost estimates for the construction of ASR Wells #5 and #6.225

Cal-Am Response to Data Request DRA-A.12-04-019-CAL-AM 011, attached hereto as Exhibit 21, Response to Question 1b(ii).
221

Cal-Am Response to Data Request 04-09-019 CWP #50, attached hereto as Exhibit 24, Response to Question 5
222

See Cal-Am Response to Data Request AL 944 CAW-001, attached hereto as Exhibit 25, Response to Question 11 (referencing the drilling and development of a test well at the Fitch Park ASR site), and CalAm Response to Data Request AL 944 CAW-002, attached hereto as Exhibit 26, Response to Question 1c (explaining that ASR Systems installed, tested, and monitored an ASR monitoring well at Fitch Park).
223

MPWMD Response to Data Request DRA-A.12-04-019-MPWMD 001, attached hereto as Exhibit 28, Response to Question 1b. Notably, MPWMD owns Wells #1 and #2.
224

Cal Am Response to DRA-A.12-04-019-CAL AM 025, attached hereto as Exhibit 22, Response to Question 4.
225

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Therefore, to determine an appropriate contingency allowance for the ASR Wells #5 and #6, DRA used the construction budget for ASR Wells #3 and #4. The average contingency percentage budgeted for this project by MPWMD is 11% of Base Construction Costs.226 According to MPWMD, which is in the process of constructing ASR Wells #3 and #4, construction is approximately halfway complete. The project is currently on budget, without having made use of the amount allotted to contingency thus far in the project.227 The contingency allowance of 11% of Base Construction Costs used in the construction budget for ASR Wells #3 and #4 has thus far been more than adequate and is expected to be adequate for the entire project.228 Therefore, DRA recommends a contingency allowance of 11% of Base Construction Costs for the ASR Facilities. d) i. Escalation Factor and Mark-Ups

The December 2012 DRA Energy Cost of Service Branch Memorandum would provide a more consistent and accurate escalation factor for the Cal Am Only Facilities.

The December 2012 Escalation Memorandum (“Memorandum”) generated by the DRA Energy Cost of Service Branch should be utilized by Cal Am to escalate its 2009 Cal Am Only Facilities costs to 2012 Dollars. It has been a standard practice for DRA and water utilities to use the cost escalation rates provided in the Memorandum rather than using a constant escalation factor.229 Table 4.E summarizes the 2012 annual inflation rate for both labor and non-labor items, as presented in the Memorandum.

226 227

For a detailed accounting of the calculation of the 11% contingency refer to Appendix B-4.

MPWMD Response to Data Request DRA-A.12-04-019-MPWMD 001, attached hereto as Exhibit 10, Response to Question 1 (wherein MPWMD explains that it completed construction of Well 3 on budget and is in the process of constructing Well 4 which is expected to be on budget, and has partially constructed the related facilities, which are expected to use some or all of the contingency allowance for the project, but not exceed this amount.).
228 229

Id.

D.07-05-062, Opinion Adopting Revised Rate Case Plan for Class A Water Utilities, Appendix A, at p. A-19 (wherein the use of “Estimates of Non-labor and Wage Escalation Rates” memorandum is described to be appropriate for escalation and the use of composite non-labor 60% / compensation per hour 40% inflation factors is described for the estimation of non-labor escalation year expenses.).

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Notably, Cal Am adopted the Commission’s labor and non-labor escalation rates, as provided in the December 2011 DRA’s Energy Cost of Service Branch Memorandum, in its MPWSP desalination plant financing model.230 These rates were used to calculate the inflation factors, “based on a projected five year compound annual growth rate using the 2011 through 2015 projections from the CPUC Escalation Memorandum, December 2011.”231 However, inconsistent with the treatment of the escalation factor applied to the desalination facilities, Cal Am applied a factor of 12.5% to the 2009 Cal Am Only Facilities total base construction cost to show estimates in 2012 Dollars.232 This factor of 12.5% corresponds to a compounded annual inflation rate of 4%. Table 4.E: Summary of DRA Energy Cost of Services December 31, 2012 Monthly Memorandum Year 2009 2010 2011 2012 Labor 1.5% 1.9% 2.6% 1.7% Non-Labor -3.6% 4.8% 5.5% 0.7%

12 13 14 15 16 17 18 19 Based on the information presented in Table 4.E, DRA calculated the Compounded Annual Growth Rate (“CAGR”)233 for the escalation rates from year 2009 to 2012 and applied this annual rate to the Cal Am Only Facilities costs that were reported in 2009 Dollars. In generating the weighted inflation rates for each year, DRA utilized the composite factor of 60% non-labor and 40% compensation per hour. DRA’s calculation of CAGR is summarized in Table 4.F below. In contrast to the 4% compounded annual rate used by Cal Am, DRA escalated Cal Am’s 2009 cost estimates
230 231 232 233

2013 Monterey Desalination Model v6.2-Public. A.12-04-019, Direct Testimony of Jeffrey T. Linam, at p. 5: 19-27 2013 Monterey Desalination Model v6.2-Public, CAW-Only Facility Capital tab.

The Compounded Annual Growth Rate (“CAGR”) was used in the 2013 Monterey Desalination Model v6.2-Public to calculate the labor and non-labor inflation factors from the years 2011 through 2015.

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to 2012 Dollars using a compounded annual rate of 3%. The use of the DRA Energy Cost of Service Branch Memorandum is consistent with Commission practice and significantly lowers the total cost estimate. Table 4.F: DRA’s calculation of CAGR for the escalation of 2009 to 2012 costs Inflation Factor Year 2010 2011 2012 CAGR (20092012) Labor 1.9% 2.6% 1.7% NonLabor 4.8% 5.5% 0.7% Weighting Factor Labor 40.0% 40.0% 40.0% NonLabor 60.0% 60.0% 60.0% Combined Weighted Inflation 3.6% 4.3% 1.1% 3.0%

5 6 7 8 9 10 11 12 13 14 15 16 ii. A project contingency allowance of 20 percent is reasonable and consistent with the data provided by Cal Am.

A fixed contingency allowance of $22.7 million was included by Cal Am in its Cal Am Only Facilities cost estimate. This corresponds to a 32% project contingency allowance, calculated as a percentage of the most probable cost of the project.234 A 32% contingency allowance is considerably higher than the 20% established in the 2009 RBF technical memorandum prepared for Cal Am on cost estimates updates related to the CWP.235 A 20% contingency was identified in that memorandum to be “in line with recommendations from the Association for the Advancement of Cost Engineering (“AACE”) for a project at this level of development.”236

The 2013 Monterey Desalination Model v6.2-Public, tab “CAW-Only Facility Capital” shows the most probable cost of Cal Am Only Facilities as the sum of total ROW easements/ land acquisition costs, implementation costs, and total base construction costs.
234 235 236

RBF’s Technical Memorandum, supra note 50. Id.

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Cal Am’s progress on Cal Am Only facilities since the authorization of the RDP includes the ASR monitoring well construction at Fitch Park, the right of entry for the Monterey Pipeline crossing, and the appraisal of the Transportation Agency for Monterey County (“TAMC”) right of way.237 Cal Am’s progress on these facilities contributes to greater clarity of project conditions. Thus, it is unreasonable for Cal Am’s contingency allowance to increase from 20% to 32%. Considering the progress that has been made, the contingency allowance of the project at this point should be equal to or less than the previously recommended allowance in 2009. Therefore, Cal Am should be authorized a contingency allowance of 20% of the Cal Am Only Facilities total base construction costs.238 iii. A mitigation allowance of 1%, as recommended for the desalination plant total cost estimate, is reasonable and consistent with the given data.

A mitigation allowance for the Cal Am Only Facilities should be calculated as a percentage, rather than as a fixed amount of cost. In its Cal Am Only Facilities cost spreadsheet, Cal Am allocates a fixed amount of $1 million for the project’s mitigation allowance.239 This cost was added to the sum of most probable capital cost and the project contingency allowance. Having a fixed amount of mitigation allowance without any cost breakdown is unjustified. Mitigation costs are unknown at this time and they can only be estimated as a certain percentage of the total project cost. A mitigation allowance of 1%, originally adopted for the RDP in 2009, is consistent with the percentage recommended for the MPWSP.240 Therefore, a 1% mitigation allowance of most probable capital cost plus contingency should be adopted for the Cal Am Only Facilities. This allowance is reasonable and consistent with Cal Am’s cost methodology for the desalination plant
Cal Am Response to DRA-A.12-04-019-CAL AM 004, attached hereto as Exhibit 17, Response to Question 2.
237 238 239 240

See Chapter 2, Section (C)(3), infra (explaining, DRA’s recommendations regarding contingencies). 2013 Monterey Desalination Model v6.2-Public, CAW-Only Facility Capital tab

Cal Am’s response to DRA-A.12-04-019-CAL AM 007, attached hereto as Exhibit 27, Response to Question 1(b).

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estimate.241 A mitigation allowance at 1% of the most probable capital cost plus contingency results in a cost reduction of $418,000. iv. An implementation allowance of 15%, as recommended for the desalination plant total cost estimate, should be authorized for the estimate of Cal Am Only Facilities.

Cal Am estimates the implementation allowance for Cal Am Only Facilities to be 27% of the project base construction cost. However, in its estimate of the MPWSP, Cal Am “decided to use a single value of 20% for the purposes of estimating implementation costs for the intake system, desalination plant, and product water pipeline components of the MPWSP,” regardless of the type of project delivery (design/build versus design/bid/build). 242 In Chapter 2 of this testimony, DRA recommends that the Commission authorize an implementation allowance of 15% for the MPWSP, rather than the 20% proposed by Cal Am. DRA’s recommendation appropriately excludes pilot plant and slant test well costs from this allowance. DRA recommends that the Commission authorize the same implementation allowance of 15% applied to the MPWSP for the Cal Am Only Facilities. Cal Am’s proposed implementation allowance of 27% does not correspond with any of its cost justifications and is inconsistent with the cost methodology used in the MPWSP. Thus, the proposed implementation allowance for Cal Am Only Facilities is unreasonable and unjustified. An implementation allowance of 15% results in a cost reduction of $8,320,000. D. CONCLUSION DRA’s cost recommendations in this chapter result in a more reasonable capital cost cap of $58.8 million on Cal Am Only Facilities, in replacement of the $106.875 million that Cal Am requested. This new cost cap reflects information not available when this project was initially proposed in 2009 and provides consistency with the cost
See Chapter 2, Section (C)(1), infra (explaining, DRA’s recommendations regarding mitigation allowance).
241

Cal Am Response to DRA Data Request DRA-A.12-04-019-CAL AM-007, attached hereto as Exhibit 1, Response to Question 1(a).
242

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methodology used for the desalination plant portion of MPWSP. An absolute capital cost ceiling should be adopted at $66.1 million. Cal Am should not be allowed recovery of any costs incurred above this absolute capital cost ceiling.

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 3. 2. b. A.

CHAPTER 6 - PROJECT FINANCING INTRODUCTION This section addresses the rate impact, financing and ratemaking issues stemming from California-American Water Company’s (“Cal Am”) application for construction of the Monterey Peninsula Water Supply Project (“MPWSP”), A.12-04-019. Cal Am proposes to use several sources of funding to finance the proposed project. This section addresses Cal Am’s proposal and DRA’s recommendations regarding the proposed funding of the project. B. SUMMARY OF RECOMMENDATIONS 1. Any public money, e.g., State Revolving Fund (“SRF”) loans, used to finance the MPWSP must be properly protected and accounted for in accordance with Commission requirements and policy to preserve the public character of the funds and to ensure that neither Cal Am nor its shareholders are able to profit from the use of these funds. a. More specifically, DRA recommends that Surcharge 2 should be reinstated in a modified form that appropriately protects and accounts for the use of these public funds. Similarly, DRA recommends that any SRF loans used to finance the MPWSP must be protected and accounted for in accordance with the requirements set forth in past Commission decisions, e.g., D.05-01-048. DRA recommends that Cal Am use contributions from public agencies to finance the MPWSP, to the extent such funds are available, and that such funds be used in accordance with Commission requirements governing the use of public funds by investor owned utilities. Cal Am should use the least expensive Cal Am long-term debt source to fund the portions of the project that are financed with debt.

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4.

DRA recommends that Cal Am use the same financing structure for the entire project and not a separate financing plan and ratemaking treatment for the portion of the plant referred to as “CAW Only Facilities.”

DISCUSSION 1. DRA recommends that Surcharge 2 should be reinstated in a modified form that appropriately protects and accounts for the use of these public funds. a) Cal Am Proposes to Reinstate Surcharge 2 with Several Modifications.

Cal Am proposes to reinstate Surcharge 2 to fund the MPWSP. The Commission approved Surcharge 2 in D.06-12-040 to fund construction costs on a pay-as-you-go basis.243 Surcharge 2 was originally established to avoid rate shock and reduce the overall cost of the previous long term water supply project, i.e., the Coastal Water Project, to customers. The Commission later found that Surcharge 2 was no longer applicable because the Coastal Water Project would be financed by public agencies.244 Since the current application relies on Cal Am as the primary source of funding for the MPWSP, the company is requesting the reinstatement of Surcharge 2. Cal Am proposes that Surcharge 2 be reinstated immediately after the Commission issues the Certificate of Public Convenience and Necessity (“CPCN”) for the MPWSP. The proposed schedule for Surcharge 2 is as follows:245

D.06-12-040, Ordering Paragraph No. 2 (wherein the Commission authorized California-American Water Company “to implement the proposed Special Request 2 Surcharge after the Commission issues a Certificate of Public Convenience and Necessity (‘CPCN’) for the Coastal Water Project, or alternative long term supply solution, in Phase II of this proceeding.”).
243 244 245

A.12-04-019, Direct Testimony of David P. Stephenson, at p. 17. A.12-04-019, Supplemental Testimony of David P. Stephenson, at p. 16.

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Cal Am’s Proposed Surcharge 2 Schedule April 2014 Oct. 2014 April 2015 Oct. 2015Oct.2017 Surcharge 1 Surcharge 2 Total Surcharges 15% 30% 45% 15% 45% 60% 0% 60% 60% 0% 60% 60%

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Cal Am requests that the Surcharge 2 collections be accounted for as a recovery of costs and tracked in a memorandum account along with total costs to construct the project. Under Cal Am’s proposal, the memorandum account would accrue interest at the same rate as would the costs incurred for the project. Once the project is complete and the Surcharge 2 ends, the remaining balance in the memorandum account would be transferred to plant in service as the total cost of the project. Cal Am proposes several mechanisms to adjust Surcharge 2 if there are delays or issues with the project. First, Cal Am proposes to file Tier 1 advice letters on May 15 and November 15 of each succeeding year after a CPCN is issued until Surcharge 2 ends. The goal of these advice letter filings would be to adjust the Surcharge 2 rate, either downward or upward, in the event that the rate of collection is estimated to result in more than a 5% variance in recovery, based on a maximum collection of $99.1 million. These Tier 1 advice letters would be effective on July 1 and January 1, respectively, of each year. Surcharge 2 would be collected until the project goes into service. Surcharge 2 would be tracked in a memorandum account with all project costs. Surcharge 2 would be used to offset construction costs, and therefore, the costs offset by the funds collected via

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the surcharge would be excluded from the capitalized costs of the project resulting in a lower revenue requirement for ratepayers246 Cal Am proposes that Surcharge 2 would cease if the project were “temporarily held up by litigation or any other reason for an estimated period of longer than 3 months.”247 After a cessation of Surcharge 2, Cal Am would file a Tier 1 advice letter to show that the project was ready to move forward again before reinstating Surcharge 2. If the project terminates, Cal Am would file an application within 120 days in which it would propose how to dispose of the “Surcharge 2 collections that are over and above prudently incurred costs.”248 b) i. The Proposal to Reinstate Surcharge 2 has significant benefits.

Surcharge 2 Would Moderate Rate Shock.

Cal Am’s proposal to implement Surcharge 2 would benefit ratepayers by gradually increasing rates and avoiding a sudden and substantial spike in rates, a situation commonly referred to as rate shock. As proposed by Cal Am, the MPWSP would ultimately result in a significant increase of up to a 100% ($46.0 million annual revenue requirement increase)249 in rates for the company’s ratepayers in the Monterey Peninsula.250 Surcharge 2 will help to reduce the shock of the future rates when the project is brought online. In D.06-12-040, the Commission recognized the value of mitigating rate shock, explaining, “[i]implementation of the Special Request Surcharge 2 should be delayed until the CPCN is issued for the Coastal Water Project, or an alternative long-term supply solution. Staggering introduction of the surcharges will

246 247 248 249 250

A.12-04-019, Direct Testimony of David P Stephenson, at p. 19. Id. Id. A.12-04-019, Attachment F, 9.0 MGD No SRF Scenario. Appendix A, at p 3.

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allow Cal-Am to gradually ramp-up rates to moderate rate shock that will otherwise be severe, and prepare customers for future rate increases.”251 ii. The implementation of Surcharge 2 significantly reduces the overall cost of the MPWSP.

Implementation of Surcharge 2 would not only serve to moderate rate shock, but would also lower project costs by removing a significant amount of such costs from potential rate base. As proposed by Cal Am in its application, Surcharge 2 would remove nearly $100 million from rate base. Along with the added benefit of removing the portion of the project funded by Surcharge 2 from rate base, according to Cal Am portions of the plant funded via Surcharge 2 would be exempt from the property tax base, resulting in a savings of up to $1.00 million252 in the project’s annual revenue requirement.253 Furthermore, since Surcharge 2 would be used to fund construction on a pay-as-you-go basis, significant savings related to project financing would also be achieved. Table 6-1 compares the project’s revenue requirements with and without Surcharge 2 and SRF financing. Table 6-1-Year 1 Revenue Requirement (Desalination plant, “CAW Only Facilities” and O&M) as Proposed by Cal Am* No SRF/No Surcharge 2 No SRF/Surcharge 2 6.4 MGD Plant $64.8 Million 9.6 MGD Plant $66.1 Million $48.1 Million $49.4 Million $58.4 Million $58.7 Million $44.3 Million $44.6 Million SRF/No Surcharge 2 SRF/Surcharge 2

18 19

*These values were calculated using Cal-Am’s 2013 Monterey Desalination Model v6.2Public.xslx with Cal Am’s proposed Capital Costs and Proposed Ratemaking Treatment.
251 252 253

D.06-12-040, at p. 11. A.12-04-019, Direct Testimony of David P Stephenson, at p. 32. Id. at p. 31.

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c)

Cal Am’s Proposal to Reinstate Surcharge 2 has Several Issues that Adversely Effect Ratepayer Interests and Must be Modified.

Cal Am’s proposed use of Surcharge 2 Inappropriately shifts capital risk to Ratepayers.

In its application, Cal Am proposes that the project would be funded upfront by money supplied from ratepayers via Surcharge 2 (see Table 1). Table 1-Monterey Peninsula Water Supply Project 5.4 MGD Plant with SRF Financing (Amounts are in Millions of Dollars): 2013 Uses of Cash Capital Expenditures AFUDC Total Uses of Cash Sources of Cash Surcharge 2 Net Short-Term Debt Net Long-Term Debt Net Equity Total Sources of Cash 7.5 4.4 0.0 0.0 11.9 27.0 .5 0.0 0.0 27.5 31.8 15.1 1.5 1.7 50.1 32.8 (20.0) 54.7 61.9 129.4 99.1 0.0 56.2 63.6 218.9 11.9 0.0 11.9 27.5 0.1 27.6 50 0.0 50.0 123.6 5.8 129.4 213.0 5.9 218.9 2014 2015 2016 Total

10 11 12 13 According to the schedule proposed by Cal-Am, the company would not begin to supply its own funds to finance the project until 2015. This is a critical aspect of Cal Am’s proposal to finance the MPWSP given that there are significant concerns that the project

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may be delayed or derailed by various factors, e.g., results of the test slant well program or the Environmental Impact Review (“EIR”) process, litigation pertaining to water rights, etc. Traditionally, with regard to abandoned projects, shareholders are at risk and must bear the cost for cancelled projects unless the Commission finds that an exception applies.254 For example, if a project is prudently pursued and abandoned during a period of great uncertainty, provided that the project and associated expenditures are reasonable, the project costs may be recovered from ratepayers.255 Cal Am has generally been able to recoup costs expended on abandoned projects associated with the long-term water supply issue on the Monterey Peninsula.256 Thus, it is important to address how Surcharge 2 funds are used in terms of the funding schedule for the MPWSP. It is imperative that ratepayers are not shouldering the entire risk of a failed project via the exclusive use of Surcharge 2 funds during the initial years of construction. Additionally, as explained below, DRA recommends that a number of safeguards be put in place to ensure that ratepayer funds collected through Surcharge 2 are adequately protected. ii. Cal Am’s Proposed Use of Surcharge 2 Funds May Inappropriately Benefit Cal Am and its Shareholders.

In addition to the possibility of ratepayers unfairly bearing the risk of project abandonment under Cal Am’s current proposal for the implementation of Surcharge 2, it is also possible that Cal Am and/or its shareholders may unfairly profit from the use of these public funds to finance the MPWSP. According to Cal Am’s proposal, the funds to be provided by ratepayers via Surcharge 2 for construction of the project would not be accounted for in the value of the project. Thus, if Cal Am were to sell the plant at fair market value they could profit from the funds supplied by ratepayers because the ratepayers’ contribution would not have been recorded as a contribution and thus would not have been deducted from the acquisition price of the plant. This creates the potential
Application of Pacific Gas and Electric Company for authority, among other things, to increase its rates and charges for electric and gas service, D.84-05-100, issued May 16, 1984, at p. 1.
254 255 256

Id. D.06-12-040, at p. 34.

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that ratepayers might fund for a second time the portion of the plant that they had previously funded through Surcharge 2. Although in D.06-12-040 the Commission explained that it was premature to address the issue of selling the plant and how funds supplied by ratepayers are made whole, it is now necessary that the Commission address the issue in this proceeding. The size of the contribution made by ratepayers via Surcharge 2 in this application distinguishes it from D.06-12-040. Surcharge 2, as proposed by Cal Am, is funding nearly 30% of the total project cost and thus the issue of protecting these funds if the project or district were sold is especially important and must be addressed at this time. iii. Cal Am’s Proposal Deviates from Traditional Utility Ratemaking.

In accordance with traditional principles of utility regulation public utilities are provided a fair rate of return in exchange for contributing capital to the construction of new projects as needed.257 Surcharge 2 as proposed by Cal Am is an accumulation of ratepayer funds to finance the building of the MPWSP on a “pay-as-you-go” basis. The use of ratepayer money to build a new project violates this pact between the ratepayer and the private utility because the utility is not taking on the full capital risk during the construction of the MPWSP. Furthermore, as a matter of general utility regulation policy, utility projects are first funded by private utilities (shareholders) and then rewarded with a return (profit) after the project is found to be used and useful.258 Although Cal Am’s proposed use of Surcharge 2 would create an unsupportable transfer of risk to ratepayers, because of the ratepayer benefits that could be achieved under a different structure, DRA would support Surcharge 2 if modified to remove the

Principles of Public Utility Rates by Bonbright, Danielsen and Kamerschen, at p. 92 (wherein the author states that “reasonable rates are rates adequate to yield revenues that will cover all legitimate operating expenses plus a return on investment sufficient to maintain sound corporate credit and to attract required amounts of new capital.”).
257

D.08-40-018, In the Matter of the Application of San Jose Water Company (U 168 W) for an Order Approving the Sale of the Main Office under Section 851 and Authorizing the Investment of the Sale Proceeds under Section 790, dated October 2, 2008, at p. 5.
258

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exclusive risk placed upon ratepayers during the initial stages of the project and to include adequate compensations for the portion of risk that remains. d) i. DRA Proposes Implementing Surcharge 2 with Several Modifications.

The Benefits of Reinstating Surcharge 2 outweigh the Policy Issues.

Although the concept of Surcharge 2 is in tension with traditional principles of utility regulation, the reinstatement of Surcharge 2, modified in accordance with DRA’s recommendations, would significantly benefit ratepayers. For example, ratepayers would benefit from having up to $100 million excluded from rate base. Further, Cal Am has indicated that portions of the plant funded via Surcharge 2 would be exempt from property tax, which, according to the Company, would yield a yearly savings of 1.05% on the plant funded by Surcharge 2.259 In total, the implementation of Surcharge 2, modified in accordance with DRA’s recommendations, could result in a yearly savings of up to $10.9 million in annual revenue requirements.260 ii. Funds Collected through Surcharge 2 Must be treated as a Contribution and Excluded from Rate Base.

The Commission must ensure that capital supplied by ratepayers via Surcharge 2 is established as a public contribution and is permanently excluded from Cal-Am rate base. This would ensure that Cal-Am, a private utility, would not be able to profit from the use of these public funds. Accordingly, the Commission must treat the funds collected through Surcharge 2 as a customer contribution to the MPWSP, deducted from rate base.

259 260

A.12-04-019, Direct Testimony of David P Stephenson, at p. 31. Appendix A, at p. 45.

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iii.

The Surcharge 2 collection schedule must be modified to ensure that it does not overlap with Surcharge 1 and is coordinated with the construction schedule.

Cal Am states it would implement Surcharge 2 according to a schedule to collect 38% of the capital costs for the 9.6 MGD plant option or 47% of the capital costs for the 6.4 MGD plant option. Table 6-2–Cal Am’s Proposal for Surcharges 1 and 2261 April 2014 Oct. 2014 April 2015 Oct. 2015Oct.2017 Surcharge 1 Surcharge 2 Total Surcharges 15% 30% 45% 15% 45% 60% 0% 60% 60% 0% 60% 60%

8 9 10 11 12 13 14 15 16 17 18 DRA disagrees with Cal Am’s proposed timing for Surcharges 1 and 2 because it would result in an unnecessary overlap, which would, in turn, undermine the goal of mitigating rate shock. Although DRA supports reinstatement of Surcharge 2 to reduce the cost of the project, the Commission must ensure that the collection of Surcharge 2 results in a gradual increase of customer rates to the final plant-in service revenue requirement once the project is complete. Thus, the Commission should ensure that the Surcharge 2 collection schedule does not overlap with Surcharge 1. Surcharge 1 is currently being collected at a rate of 15%. Cal-Am anticipates that the collection of Surcharge 1 will continue until May 2015.262 As shown above in Table 6-2 above, the collection of Surcharges 1 and 2 at the same time would result in an undue burden on
261 262

A.12-04-019, Supplemental Testimony of David Stephenson, at p. 15. Id.

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ratepayers by establishing a 45% increase in rates upon approval of the CPCN for the MPWSP. In D.06-12-040, the Commission faced similar circumstances and recognized the potential for rate shock, and thus, ensured that the prior Surcharges 1 and 2 did not overlap.263 Similarly, DRA recommends that Surcharge 2 be phased in as indicated in Table 6-3 below: Table 6-3– DRA’s Recommendation for Collection of Surcharges 1 and 2 During Construction of MPWSP April 2014March 2015 Surcharge 1 Surcharge 2 Total Surcharges 15% 0% 15% April 2015Nov. 2015 0% 30% 30% Nov. 2015April 2016 0% 45% 45% May 2016Oct.2017 0% 60% 60%

8 9 10 11 12 13 14 15 DRA’s proposed schedule would balance the need to collect enough funds to provide significant cost savings for consumers while maintaining a gradual increase in rates. It should be noted that once the desalination project becomes used and useful, and is producing water, the Monterey District revenue requirement will be at least 68% higher264 than they are today. Phasing in this surcharge reduces the overall cost of the project and avoids the rate shock that would result if customers were presented with a sudden 68% increase in the Monterey District revenue requirement.

263 264

D.06.12.040, at p. 36.

Using DRA’s scenario for the 9.6 MGD plant with a total revenue requirement of $31.1 million and dividing this by Cal Am’s stated current 2011Monterey revenue requirement in A.12-04-019, Appendix F, of $45.4 million, this results in a 68% increase in revenue requirement.

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iv.

Surcharge 2 and Cal Am funds should be used in a balanced approach to fund the riskiest years of project construction.

If Surcharge 2 is to be adopted, Cal Am and ratepayers should share in the risk of capital in the project by funding the project in a more balanced way to ensure that both parties are more proportionately sharing the risk in exchange for an appropriate return. Accordingly, DRA recommends shifting the timing of the use of Surcharge 2 funds and Cal Am funds to distribute risk more evenly. Cal Am proposes to fund the first three years of the project, as follows: 2014 Surcharge 2 Net Short-term Debt $7.5 Million $4.4 Million 2015 $27.0 Million $.5 Million Year 3 $31.8 Million $15.1 Million

10 11 DRA proposes to alter the funding schedule as follows: 2014 Surcharge 2 Net Short-term Debt 12 13 14 15 16 DRA’s recommendation has two advantages. First, DRA’s proposal ensures that ratepayers and Cal Am are more equitably invested in the early stages of the MPWSP. This would alleviate concerns that Surcharge 2 funds would solely be used in the initial stages of the MPWSP and exclusively subject to the risk of project abandonment during 0 $11.9 Million 2015 $19.4 Million $8.1 Million Year 3 $46.9 Million 0

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the most volatile period of the project timeline (the first 3 years of project construction). Second, DRA’s proposal ensures that ratepayers would be able to earn Cal Am’s return on equity, as explained in more detail below, on the memorandum account holding Surcharge 2 funds, potentially offsetting the cost of funding Cal Am short-term debt used for longer periods of time.265 v. Surcharge 2 funds collected in the memorandum account should only be distributed after those costs have been found to be reasonable.

DRA recommends that Surcharge 2 funds should be held in a separate memorandum account awaiting a reasonableness review of project expenses. The first memorandum account that should be established should be titled the Surcharge 2 Memorandum Account, where funds collected from Surcharge 2 should be tracked. The second, separate memorandum account that should be established should be titled the MPWSP Construction Memorandum Account, where construction costs from the entirety of the MPWSP should be tracked. Following a reasonableness review when Cal Am requests to amortize its MPWSP Construction Memorandum Account through a Tier 2 Advice Letter process, approved construction costs from the MPWSP Construction Memorandum Account would then be reimbursed from the Surcharge 2 Memorandum Account. This will ensure that Surcharge 2 funds are only used to fund reasonable and prudent costs. vi. Surcharge 2 funds should earn Cal Am’s Authorized Rate of Return as Compensation for the Capital Risk Assumed by Ratepayers in Funding the MPWSP.

It is reasonable for ratepayers to earn a fair rate of return for the use of Surcharge 2 funds. Since even under DRA’s proposed structuring of Surcharge 2 ratepayers will be paying for a project prior to the project becoming used and useful, it is reasonable that the amounts that are paid by ratepayers and available for use by Cal Am receive appropriate
Cal Am Response to Data Request DRA-A.12-04-019-CAL AM 021, attached hereto as Exhibit 29, Response to Questions 1 and 2 (referencing the Federal Reserve Rate and General Obligation Bond Rate, attached hereto as Exhibits 30 and 31, respectively).
265

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recognition. As compensation for the capital risk placed upon ratepayers pre-funding project costs, an adequate rate must be applied to the balance of accumulated Surcharge 2 amounts. More specifically, Surcharge 2 funds should accrue interest at the same rate as Cal Am’s authorized return on equity. Since Surcharge 2 results in ratepayers becoming implicit investors in a water supply solution, it is only appropriate that their “invested” funds via Surcharge 2 receive the same equity return that Cal Am’s investors would have the opportunity to receive. The interest earned would be added to the memo account and used to fund the project and further reduce the project’s final rate base. 2. DRA Recommends that Any SRF Loans Used to Finance the MPWSP Must be Protected and Accounted for in Accordance with the Requirements Set Forth in past Commission Decisions Pertaining to the Use of These Public Funds by Investor Owned Utilities. a) Commission Precedent Dictates Requirements for the Use of SRF Loans by Investor Owned Utilities which Ensure that these Public Funds will be Properly Used and Accounted For.

SRF loans are authorized by the federal Clean Water Act and provide low interest loans for projects that will improve water quality.266 In its application, Cal Am states that it has received correspondence indicating the project would qualify for funds based on a “non-point source water pollution control.”267 The Commission has established rules to govern the distribution and repayment of SRF loans to ensure that the integrity of this public money is protected.268 In D.05-01048, the Commission established a procedure with multiple components for the use of customer surcharges by investor owned public utilities to repay SRF loans: an SRF surcharge would be clearly indicated on customer bills; a balancing account would be

266 267 268

See e.g., A.12-04-019, at p.14. Id.

See e.g., D.05-01-048, Opinion on Borrowing Under the Safe Drinking Water State Revolving Fund and Repayment Through a Surcharge, dated January 27, 2005, at p.18, Ordering Paragraph Nos. 2-8.

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established and funded via the SRF surcharge; these funds would be collected with a fiscal agent approved by Department of Water Resource (“DWR”); the SRF surcharge would be adjusted periodically to reflect changes in the number of connections and should last as long as necessary to repay the loan.269 As explained by Commission, the establishment of special accounting requirements for the use of an SRF surcharge in the manner is “necessary to ensure that there are no unintended windfalls to the utility shareholders.”270 Further, in D.05-01-048 the Commission found that portions of utility plant funded via SRF loans should be permanently excluded from rate base for ratemaking purposes.271 Cal Am has acknowledged that this treatment should apply to the current application. Cal Am states, “the Commission has established rules, practices and procedures to ensure that property financed through government loans should never result in increased profits or income to the borrowing utility and that the responsibility for the entire loan should be borne by the customers receiving the benefit from the property. California American Water has treated the State Revolving Fund loan proceeds in this application in the same manner where it has assumed the ability to secure and use such funds.”272 DRA recommends that the Commission explicitly require in its final decision on this application that any SRF monies used to finance the MPWSP be accounted for in accordance with the requirements prescribed for the use of these public funds in D.05-01-048.

269 270 271 272

Id. at p. 10. Id. at p. 16. Id. A.12-04-019, Direct Testimony of David P. Stephenson, at p. 21.

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b)

Although Cal Am Has Committed to Use Any SRF Monies that it Obtains for the MPWSP in Accordance with Commission Precedent, the Company’s Proposal to Treat these Public Funds as Debt in its Capital Structure Appears to Conflict with the Policy Underlying the Commission’s Past SRF Decisions.

Cal Am proposes to use SRF loans as a substitute for long-term debt in its financial model used to estimate the revenue requirement for the MPWSP. Cal Am states that “the rate for long term debt depends upon whether the project qualifies for SRF financing. The revenue requirement calculations assume a rate of 2.5% for SRF financing and a rate of 5.0% if California American Water is required to obtain long-term debt for the project.”273 This is further illustrated in Table 1 of that testimony:

16 17 18 In this table, Cal Am presents the SRF financing scenario and only has one line indicating Net Long-Term Debt financing.

273

A.12-04-019, Direct Testimony of Jeffrey T. Linam, at p. 6.

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In D.08-09-002 and D.05-01-048, the Commission treated SRF loans as a contribution to the project financing and excluded such funds from rate base.274 This is consistent with the Commission rules ensuring that SRF loans are not considered a part of rate base.275 Cal Am must do the same in this case to ensure that they are compliant with the rules established by the Commission with regard to the use of public funds, such as SRF loans. Furthermore, if SRF loans were used in the manner suggested by Cal Am, Cal Am would essentially be allowed to take a 100% equity stake and receive a return on equity for a larger portion of the project than envisioned by the Commission. Cal Am’s financing proposal as presented in its testimony and financial model would essentially use Cal Am equity and SRF loans to fund the MPWSP. This would allow Cal Am to take a higher equity position in the project than envisioned in Decision 12-07-009, which authorized the establishment of cost of capital for the period from January 1, 2012 through December 31, 2014. The Cost of Capital application determines the appropriate level of debt-to-equity and rate of return for a water utility that is at a sufficient figure “to permit the company to raise enough capital to provide reliable service at a reasonable rates.”276 Under the adopted settlement in that case, Cal Am is authorized to use a debtto-equity ratio of 47% debt to 53% equity with a return on equity of 9.99%.277 Under the financing model presented by Cal Am, the utility is inappropriately applying SRF loans
See D.08-09-002, Decision Conditionally Granting California Water Service Company Authority to Borrow from the Safe Drinking Water State Revolving Loan Fund with Repayment Through a Customer Surcharge in its Lucerne Service Area, dated September 4, 2008, at p. 38, Ordering Paragraph No. 14 (“CWS shall exclude the surcharge and service fees from regulated operating revenue, and shall exclude plant financed through the surcharge from rate base, for ratemaking purposes.”); id. at p. 38, Ordering Paragraph No. 16 (“The utility plant financed by the [Safe Drinking Water State Revolving Fund] loan, and paid for with surcharge and service fee revenue, is permanently excluded from rate base for ratemaking purposes.”); D.05-01-048, at p. 10 (“We will authorize the surcharge with the following conditions . . . The utility plant financed through the surcharge shall be permanently excluded from rate base for ratemaking purposes. . . .”).
274 275 276 277

D.05-01-048, at p. 16. D.12-07-009, Decision Approving Settlement Agreement, dated July 12, 2012, at p. 13. Id.

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as a substitute for long-term debt even though the lower cost of these funds has not been incorporated into the calculation of Cal Am’s weighted cost of capital. Thus, Cal Am is able to receive the return on equity for a greater portion of the cost of the project than was envisioned under the cost of capital proceeding. Cal Am’s proposal alters the debt-toequity ratio adopted in the cost of capital proceeding and increases the return for the utility beyond what was established in that proceeding. Cal Am’s proposed treatment of SRF loans in the financing model includes these funds in its capital structure for the project and this usage is inappropriate, not in the public interest, and would result in “windfall” profits for the utility, which is counter to past Commission decisions with regard to the use of SRF loans. The Commission has established rules that SRF loans are not to be dispersed in a way that would result in SRF funded plant being included in a company’s capital structure for the project and an “unintended windfall(s) to the utility shareholders”278 and those rules should be applied in this case. 3. DRA recommends that Cal Am use contributions from public agencies to finance the MPWSP to the extent possible and required that Cal Am uses such funds in accordance with Commission requirements and policy governing the use of public funds by investor owned utilities.

The financing of the project should be achieved in the most cost effective manner. To that end, public contributions should be used if available. A contribution from a public agency such as MPWMD would reduce the revenue requirement of the project. Cal Am has agreed to further discuss public agency contributions and DRA would encourage acceptance of such a proposal if it results in reduction of the financing costs of the project to ratepayers.279

278 279

D.05-01-048, at p. 16. A.12-04-019, Supplemental Testimony of Jeffrey T. Linam, Attachement 1, at p. 9.

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4.

Cal-Am should Use the Least Expensive Debt Source Available to Fund Portions of the Project Financed with Cal-Am Long-Term Debt.

Cal Am proposes to use Cal Am long-term debt as a funding source if the project fails to qualify for SRF loans. In this event, Cal Am would obtain long-term debt from its parent company, American Water Capital Corporation. Cal Am proposes to pass on the cost of this debt to ratepayers. DRA recommends that Cal Am explore all avenues to reduce the cost of long-term debt. MPWMD has identified two potential avenues for Cal Am to reduce the cost of long-term debt. First, Cal Am may be able to obtain tax-exempt debt in lieu of the traditional corporate debt to fund the long-term debt component at a cost savings.280 Second, MPWMD has suggested using the agency credit as a backstop for Cal Am’s credit worthiness.281 This could potentially reduce the cost of debt and create additional savings for ratepayers. DRA recommends that Cal-Am explore all available avenues to reduce the cost of any long-term debt. Cal-Am has agreed to use tax-exempt debt to the extent it is available and is willing to further explore the other MPWMD proposals.282 5. DRA recommends using the same financing structure for the entire project and not a separate financing plan for the portion of the plant called “Cal Am Only Facilities.”

Cal Am has proposed to treat “Cal Am Only Facilities” in the same manner as in D.10-12-016.283 In D.10-12-016, the Commission approved a Settlement Agreement regarding the Regional Desalination Project, a previous attempt to solve the long term water supply issue in the Monterey Peninsula that was ultimately abandoned.284 This regional project consisted of a public-private partnership, as defined in D.10-12-016,
280 281 282 283 284

Id. at p. 8. Id. Id. A.12-04-019, Direct Testimony of David P. Stephenson, at p. 23; A.12-04-019, at p. 25.

See Chapter 5, Section (C)(1), infra (explaining why the Commission should reject Cal Am’s request to selectively implement provisions of the Settlement Agreement approved by the Commission in D.10-12-016 because, among other reasons, the Settlement Agreement is not precedential and Cal Am is no longer pursuing the Regional Desalination Project).

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whereby Cal Am was to have owned the Cal Am Only Facilities (the pipeline, conveyance, and pumping facilities necessary to deliver the water to its customers) while other agencies were to have managed the source intake, desalination plant, and outfall. In the proposed MPWSP, Cal Am would maintain sole ownership of the majority of the facilities including the source intake, desalination plant, outfall, and the delivery systems to its customers. As a result, the financing of the entirety of these costs should be treated in the same manner as the rest of the recommendations made for the MPWSP above. D. CONCLUSION Cal Am has proposed funding the MPWSP with several sources of financing. If the Commission adopts Cal Am’s proposed allocation of financing with SRF loans, it would lead to a violation of Commission policy with regard to preserving the integrity of public funds by utilizing SRF loans as a substitute for Cal Am long-term debt. The Commission must ensure any public money, e.g., “SRF” loans, used to finance the MPWSP must be properly protected and accounted for in accordance with Commission requirements and policy to preserve the public character of the funds and to ensure that neither Cal Am nor its shareholders are able to profit from the use of these funds. More specifically, DRA recommends that Surcharge 2 should be reinstated in a modified form that appropriately protects and accounts for Cal Am’s use of these public funds. Similarly, DRA recommends that any SRF loans used to finance the MPWSP must be protected and accounted for in accordance with the requirements set forth in past Commission decisions. DRA recommends that Cal Am also use contributions from public agencies to finance the MPWSP, to the extent such funds are available, provided that Cal Am uses such funds in accordance with Commission requirements governing the use of public funds by investor owned utilities. Furthermore, Cal Am should use the least expensive debt source to fund the portions of the project that are financed with debt. Finally, DRA recommends that Cal Am use the same financing structure for the entire project and not a separate financing plan and ratemaking treatment for the portion of the plant referred to as “Cal Am Only Facilities.”

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CHAPTER 7 - RATEMAKING TREATMENT FOR MPWSP AND “CAL AM ONLY FACILITIES” A. INTRODUCTION Cal Am proposes that the “Cal Am Only Facilities” proceed with a ratemaking treatment different from other portions of the MPSWP. Unlike the majority of the MPWSP costs that Cal Am proposes to record in a Surcharge 2 memorandum account with borrowing costs and an equity return capitalized for inclusion in ratebase upon project completion, the costs associated with “Cal Am Only Facilities” are proposed to accrue interest along with an equity return and enter ratebase semi-annually regardless of project completion.285 B. SUMMARY OF RECOMMENDATIONS 1. DRA recommends that all MPWSP costs be tracked in a memorandum account with only the account balance greater than the amounts received via Surcharge #2 permitted to accrue interest at the actual cost of borrowed funds (Cal Am’s short-term and long-term debt). Only after the project is found to be “used and useful” and included in utility plant in service should Cal Am be permitted to record an equity return on capital investment. 2. DRA recommends using the same ratemaking treatment for the entirety of the MPWSP and not a separate ratemaking plan for the portion of the project called the “Cal Am Only Facilities.” C. DISCUSSION 1. Cal Am should be permitted to record interest during construction but not given the authority to record or earn an equity return prior to project completion

Cal Am has proposed calculating interest on the MPWSP Surcharge 2 memorandum account “by applying the actual costs of the borrowed funds and the posttax return on equity.”286 However, the Commission should be clear and unambiguous
285 286

A.12-04-019, Direct Testimony of David P. Stephenson, at pp. 24-25. Id.

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that while Cal Am is permitted to record interest during construction consistent with the actual costs of borrowed funds for amounts recorded in the memorandum account, under no circumstance should Cal Am be permitted to record or capitalize an equity return prior to the project being found to be used, useful and included in utility plant in service. Additionally, since Surcharge 2 collections from the Surcharge 2 Memorandum Account would be used to offset the project costs recorded in the MPWSP Construction Memorandum Account, the Commission should make clear that only that portion of recorded costs greater than the collected Surcharge 2 amounts would be subject to interest calculations. 2. The ratemaking treatment for “Cal Am Only Facilities” should be no different from the other portions of the MPWSP.

Cal Am has proposed to treat the “Cal Am Only Facilities” in the same manner as approved in D.10-12-016.287 However, D.10-12-016 was the result of non-precedential settlement for a previous project for which Cal Am has since withdrawn all support.288 More importantly, in the decision accepting Cal Am’s motion to withdraw from this previous project, the Commission explicitly stated that consideration of “Cal Am Only facilities” would need to be done in conjunction with whatever replacement project was ultimately identified.289 In the previous and since abandoned project called “The Regional Project,” or “Regional Desalination Project,” Cal Am was to have owned only that portion of the project known as the “Cal Am Only Facilities” (the pipeline, conveyance, and pumping facilities necessary to deliver the water to its customers) while other agencies were to have managed the source intakes, the actual desalination plant, and the outfall. However, in the replacement MPWSP which is the subject of the instant proceeding, Cal Am would
287 288

A.12-04-019, Direct Testimony of David P. Stephenson, at p. 23; A.12-04-019, at p. 25.

California-American Water Company Compliance Filing: Mediation Update, A.04-09-019, filed January 18, 2012, at p. 1 (stating, “[Cal-Am] has determined that it is no longer reasonable to move forward with the Regional Desalination Project and has begun considering alternative desalination projects.”).
289

D.12-07-008, Conclusion of Law No. 1.

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maintainssole ownership of the majority of all project facilities. As a result, there is no rational basis for treating one portion of the project in a ratemaking manner any different from the other portion. Furthermore, if Surcharge 2 is reinstated as DRA recommends, an alternative ratemaking mechanism will exist to lower overall project costs and implement rate increases gradually. Cal Am’s proposal that the “Cal Am Only Facilities” be “treated as used and useful as soon as they are constructed” with semi-annual advice letters allowing uncompleted project portions to begin earning a return is completely unwarranted. D. CONCLUSION DRA recommends that all MPWSP costs be recorded in the MPWSP Construction Memorandum Account and treated similarly without preferential ratemaking treatment afforded the portion of the project that is identified as “Cal Am Only Facilities”. Additionally, consistent with DRA’s recommendation to use a modified Surcharge 2 to lower overall project costs, only that portion of costs recorded in the MPWSP Construction Memorandum Account that are greater than total Surcharge 2 amounts collected in the Surcharge 2 Memorandum Account should be permitted to accrue interest at the actual cost of borrowed funds (the weighted average of Cal Am’s short-term and long-term debt). Only after the project is found to be “used and useful” and included in utility plant in service should Cal Am be permitted to record an equity return on capital investment.

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