December 18, 2018 2018-118
The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
Sacramento, California 95814
Dear Governor and Legislative Leaders:
As requested by the Joint Legislative Audit Committee, the California State Auditor presents this audit report concerning the California Public Utilities Commission’s (CPUC) water ratesetting process for investor-owned companies that serve water customers. The CPUC regulates investor-owned water companies (water utilities) and authorizes the rates water utilities may charge customers. To facilitate this authorization process, the CPUC requires large water utilities that serve more than 10,000 connections each, or Class A water utilities, to submit a formal request to change the rates they charge to customers. It requires water utilities to submit these requests, known as general rate case applications, to the CPUC every three years. The CPUC allows small water utilities that serve fewer than 10,000 connections each—Class B, C, and D water utilities—to submit informal requests known as advice letters to change their rates. This report concludes that although the CPUC’s general rate case process appears reasonable and it appropriately followed and documented key steps in its processes, it has not provided customers with clear information about water rate increases or its processes for approving those rate changes.
We concluded that the CPUC does not provide sufficient information to customers about why and by how much its general rate case decisions will change their rates over time. Further, the CPUC does not provide customers with readily accessible information related to its regulation of water rates, including the general rate case and advice letter processes. Without this information, customers may not understand how the CPUC reviews and approves water rates proposed by water utilities, or how they can participate in the process. In addition, the CPUC has not ensured that water utilities notify customers about proposed rate increases and public participation hearings—which are conferences that give customers an opportunity to share their perspective on the requested rate change—as required. Because the CPUC does not verify that water utilities are complying with regulations related to publishing notification of public participation hearings in local newspapers, it lacks assurance that customers have the necessary information at the appropriate time to participate in public hearings. In fact, we found that several of the utilities we reviewed did not provide timely notification to customers, which may have limited their participation.
Finally, the CPUC relies on reviews that its independent Public Advocates Office conducts of general rate cases to fulfill its statutory requirement to conduct audits of Class A water utilities. However, because these reviews are not audits, the CPUC risks that it is not fulfilling the intent of the law. Further, the CPUC does not conduct audits of Class B, C, and D water utilities as frequently as required. These audits can provide the CPUC with a better understanding of how water utilities operate, which can influence whether the CPUC approves a utility’s request to raise its rates.
ELAINE M. HOWLE, CPA
California State Auditor