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Monday, July 8, 2024 | Back issues
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California Supreme Court reverses Public Utilities Commission on water surcharges

The court agreed with a group of water companies that the utilities commission took away a mechanism to protect themselves against sales shortfalls without proper notice.

(CN) — The California Supreme Court on Monday reversed the state's Public Utilities Commission's 2020 order that stopped water companies from using certain surcharges when their revenue falls short because of conservation efforts.

The court agreed with a group of water companies that the commission hadn't clearly informed them that it would consider eliminating the so-called decoupling mechanisms — initially prompted by years of drought and the need to conserve water — in the scoping memos for the yearslong rulemaking proceedings that culminated in the 2020 order.

The scoping memos identify what possible rule changes the commission will be considering, and they give the utilities an opportunity to prepare their arguments and evidence to address them. In this case, the court said, the memos only referred to how to improve water sales forecasting, not to eliminating the decoupling mechanisms.

The two concepts are connected in so far as the decoupling mechanism — intended to remove the utilities' incentive to sell more water — rely on sales forecast. If water sales fall short of the forecasts, the utilities can impose a surcharge on customers in order to meet their operating costs. And if sales exceed the forecasts, the customers get credited.

"The scoping memos gave no signal that the forecasting issue included elimination of the Water Revenue Adjustment Mechanisms and Modified Cost Balancing Accounts — as opposed to, for example, improved forecast methodologies," Associate Justice Leondra Kruger wrote in the unanimous decision.

"The connection between those approaches and questions about how to improve forecasting is simply too attenuated to have given fair notice that the potential elimination of these approaches was within the scope of the proceeding," she said.

Representatives of the commission didn't immediately respond to a request for comment on the ruling.

"We are glad that the California Supreme Court has affirmed the need for notice and an opportunity to be heard on important policy matters in CPUC proceedings," said Joe Karp, an attorney representing the water companies.

The court to some extent signaled its discomfort with the commission's position at the May hearing at which it heard arguments by the Golden State Water Co. and the California-American Water Co., who claimed the commission canceled the decoupling mechanisms without giving them adequate notice.

At that hearing, several of the judges tried to get an answer from the commission as to how the scoping memo for the proceedings, which appeared to focus on the issue of forecasting accuracy, would have alerted utilities to the point that the commission would stop using surcharges.

Darlene Clark, the commission's lawyer, told the court that the parties were well-versed in the rule-making proceedings before the commission, and there is a general body of knowledge regarding what happens in the proceedings as a result of this interactive relationship between the commission and the utilities.

That explanation didn't sit well with Associate Justice Carol Corrigan, who observed that it seemed to defeat the purpose of having a scoping memo in the first place to make the utilities aware of what issues are on the table.

"I'm understanding your argument to be, 'Oh yeah, a scoping memo is what it says, but everybody really knows that there is more to it,'" Corrigan said. "That seems like a very loosey-goosey way of going about this."

According to the commission's response to the utilities petition to overturn its decision, the decoupling mechanisms, or revenue adjustment mechanisms, were a pilot program it created "to sever the relationship between sales and revenue to remove any disincentive for the utility to implement conservation rates and programs."

Not all California water utilities use the surcharges to make up the difference between projected and actual revenue.

However, according to the state utilities commission, these surcharges can also result in undesirable consequences, such as reducing the utilities' incentive to control costs, and shifting their business risks away from investors and onto customers.

This can happen, the commission argues, when actual sales are less than forecast sales during a rainy year in which customers require less water for landscaping or during an economic downturn, as customers limit water use to reduce expenditures and companies are going out of business.

The commission also said that the challenge before the California Supreme Court had been made moot by a 2022 state law meant "to ensure that water corporations are authorized to establish revenue adjustment mechanisms that provide for a full decoupling of sales and revenue in order to further incentivize water conservation efforts."

Although the court conceded that the practical differences between what the new legislation provides and what the water companies were asking for in the legal proceeding might be limited, Kruger said the state's top court could still decide a case on the merits when, as here, "the public interest favors resolution of an important question."

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Categories / Courts, Environment, Government, Regional

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