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California Public Utilities Commission
It Could Improve the Transparency of Water Rate Increases by Disclosing Its Review Process and Ensuring That Utilities Notify Customers as Required

Report Number: 2018-118


The California Public Utilities Commission (CPUC) regulates privately owned electric, natural gas, telecommunications, water, railroad, rail transit, and passenger transportation companies, and other utilities in the State. As a part of its oversight of water companies, the CPUC regulates 98 privately owned water companies (water utilities), which serve about 14 percent of Californians throughout the State. State law requires the CPUC to verify that a water utility’s proposed rates are just and reasonable before it permits the utility to change its rates. The CPUC performs this verification through a process referred to as a general rate case proceeding, and water utilities submit advice letters to implement changes to their rates and operations. For this audit, we reviewed whether the CPUC’s ratesetting processes are reasonable, appropriate, and transparent to the public.

The CPUC Has Not Provided Customers With Clear Information About Water Rate Increases and Its Process for Approving Rates

The CPUC could do more to provide customers with understandable information about the reasons their water rates are changing, its general rate case process, and the advice letters that authorize changes to water rates. At present, it does not clearly disclose to customers the full impact that its decisions may have on water rates and it has not made information about its ratesetting processes readily available.

The CPUC Has Not Ensured That Water Utilities Notify Customers About Public Hearings and Proposed Rate Increases as Required

The CPUC does not verify whether water utilities comply with regulations related to certain types of notifications to the public. The CPUC requires water utilities to provide these notifications and to do so within a specified time frame. However, several of the utilities we reviewed did not always provide timely notifications to customers, thereby possibly limiting the ability of those customers to offer comments and participate effectively in the ratesetting process.

The CPUC Has Not Conducted Audits of Water Utilities as Required

The CPUC does not conduct audits of large water utilities; instead, it relies on its independent Public Advocates Office’s (Public Advocates) review of these utilities during general rate case proceedings. However, the CPUC’s chief compliance officer expressed concern that the Public Advocates’ reviews do not meet the intent of a law requiring periodic audits of these utilities. In addition, the CPUC has not conducted audits of all the smaller water utilities as frequently as required by law. Without timely and effective audits, the CPUC lacks assurance that these water utilities are complying with applicable requirements, which could affect the rates and service that customers receive.

Other Areas We Reviewed

We reviewed the reasonableness of the three‑year term for the general rate case, as well as the CPUC’s processes for reviewing water utility infrastructure projects and for ensuring that the costs of capital factored into the ratesetting process are representative of actual and necessary costs. We did not identify a need for the CPUC to modify its three‑year general rate case term or find any issues with its processes concerning costs of capital or reviewing infrastructure projects.

Summary of Recommendations

By May 2019, the CPUC should begin to publish after each general rate case a summary of why, and by how much, water rates will change as a result of the proceeding.

By July 2019, the CPUC should make information about the general rate case process and advice letters more understandable to the public.

The CPUC should implement a process by May 2019 to verify that water utilities are providing their customers with timely notifications of rate increases and public hearings.

The CPUC should begin to audit Class A water utilities, or develop policies and procedures by May 2019, to ensure that the Public Advocates’ reviews of Class A water utilities provide appropriate assurance as intended by the law. The CPUC should ensure it completes audits of all small water utilities as required.

Agency Comment

The CPUC agreed with our recommendations and indicated that it plans to implement them.

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