(CN) — Two California water utilities went before the state's Supreme Court on Wednesday to argue that the Public Utilities Commission cut corners when it decided to discontinue the use of surcharges to compensate the utilities for sales shortfalls from water conservation efforts.
The Golden State Water Co. and the California-American Water Co. claim that the commission made the decision to eliminate the so-called decoupling mechanisms without giving them adequate notice that it was considering this option as part of a yearslong rulemaking procedure.
As a result, the utilities argue, they had no opportunity to provide evidence to support their case that these mechanisms — which allow them to impose a surcharge on their customers when they face a revenue shortfall because of California's efforts to conserve water in drought-plagued years — were serving their purpose.
"The utilities were blindsided by the the commission's decision," Joe Karp, an attorney representing the two water utilities told the court. "The commission made a bad decision based on an inadequate record."
The utilities's argument gained some traction with the court as many of the judges tried to get an answer from the California Public Utilities Commission's lawyer 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.
According to Darlene Clark, the commission's lawyer, the parties were well-versed in the rule-making proceedings before the utilities commission, and there's 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 ar 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 California Public Utilities Commission also claims that the petition for the California Supreme Court has been mooted by a since enacted state law that gives utilities the opportunity to ask the commission for decoupling mechanisms in their future rate case applications.
According to the commission's lawyer, officials won't be relying on the challenged decision to discontinue these surcharges when considering such applications, given the new statute.
That line of reasoning, however, prompted Associate Justice Joshua Groban to wonder why the commission wants a ruling on the merits of the utilities' petition to begin with.
"I understood you to be saying the findings here are really irrelevant ... because it's all opened again in current proceedings," Groban said. "If that is the case, my very basic question is, why does the commission care whether we decide this issue on the merits?"
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