The California Supreme Court has reset the clock on a bid by California's Public Utilities Commission to pull the plug on a program intended to incentivize water conservation, but which the commission said has allowed water utilities to instead charge customers more without any real concern for controlling costs.
In the July 8 ruling, the unanimous state high court ruled specifically that the CPUC did not provide enough notice under the law to water utilities before ending the so-called rate decoupling program, officially known as Water Revenue Adjustment Mechanism.
The court sided with the state's largest water utilities, who had argued they were bushwhacked by the CPUC at a meeting and weren't given the time legally allotted to them to prepare counter arguments to the CPUC's findings related to the end of the decoupling program.
Attorney Joseph Karp, of the firm of Sheppard Mullin Richter & Hampton, of San Francisco represented the utilities before the state Supreme Court. He praised the ruling, saying it "puts utilities on a level playing field again" to defend "a very imporant policy" that allows the state to meet water conservation goals while allowing water utility companies to remain solvent and able to meet water supply needs across California.
The CPUC did not reply to a request for comment from The Record.
The case centered on the decision by the CPUC in 2020 to end the WRAM program. Introduced in 2008, the program allowed water utilities to balance out their revenue streams while the state moved to encourage the utilities' water customers to reduce their water consumption.
Historically, water utilities earn revenue in large part from customers paying bills that rise or fall based on their level of water consumption.
However, under WRAM, the state commission gave utilities the choice to decouple their revenue from actual water consumption. Instead, under WRAM, utilities are allowed to use water use forecasts to set their revenue targets. If actual water sales fall short of those forecasts, the utilities are allowed to impose surcharges on water customers to make up the difference. If water sales exceed forecasts, the utilities then would refund the difference to customers through credits on their water bills.
When it was introduced, the decoupling program was intended to incentivize water utilities to encourage their customers to conserve water, assured that they could maintain their systems and pay their bills, even if customers theoretically paid less.
However, in 2020, the CPUC said it determined the decoupling program was no longer needed. They asserted water conservation had become a way of life for Californians, and now the decoupling program was being used by water utilities to reduce any need to control costs, as they could just shift the costs and associated risks of revenue overruns onto customers, rather than investors.
Following that decision, four water utilities - including Golden State Water Company, California-American Water Company, California Water Service Company and Liberty Utilities Corp. - filed suit, together with California Water Association, which represents 90 regulated private water utilities in California.
The lawsuit asserted the CPUC violated the water companies' rights to argue against the decoupling program elimination.
They assert the CPUC took the action at a meeting in which the commission's agenda listed a discussion concerning "Forecasting Water Sales." The so-called "scoping memo" associated with that agenda item indicated the CPUC would "examine how to improve water sales forecasting" and discuss "what guidelines or mechanisms ... the Commission (can) put in place to improve or standardize water sales forecasting" for water utilities.
In the state Supreme Court decision authored by Justice Leondra Kruger, the court said the agenda and associated memo "does not fairly include the possibility that the Commission would" eliminate the decoupling program.
"Even if ... the scoping memo suggested that some issues related to the (decoupling) approach might be addressed, the scoping memos gave no signal that the forecasting issue included elimintion of the Water Revenue Adjustment Mechanisms and Modified Cost Balancing Accounts - as opposed to, for example, 'improved forecast methodologies,'" Kruger wrote.
He said the connection between what the CPUC posted and the action it actually took at the meeting was "simply too attenuated to have given fair notice that the potential elimination of these approaches was within the scope of the proceeding."
The justices further rejected the CPUC's contention that the WRAM program was essentially always up for debate, because the commission has regularly discussed the program's benefits and drawbacks for years.
"This case is about whether petitioners had notice that their (decoupling programs) were under consideration in this proceeding, not whether they had notice that the mechanisms could or even would be under frequent reconsideration in the future," Kruger wrote.
The justices said the ruling doesn't block the CPUC from taking similar action in the future, and does not require the commission "to agree with the Water Companies."
But they said the CPUC's actions improperly "frustrated the Water Companies' ability to advocate effectively for their position." So, if the CPUC wishes to eliminate the decoupling program, they will need to essentially start over, the court said.
In response to the ruling, Jennifer Capitolo, Executive Director of the California Water Association, applauded, saying: “The regulatory process depends on procedural safeguards to ensure that water rates accurately reflect the true costs of providing service. This decision is essential for maintaining a fair and predictable regulatory environment for utilities and their customers.
“For utilities that use it, decoupling can be a crucial tool for promoting water conservation without compromising the financial stability of our utilities," Capitolo said.
Karp said four of the companies will be headed back to the CPUC to discuss the future of the WRAM program in the months and perhaps years to come.
When asked if he believed the courts will again be asked to weigh in on the future of the program, Karp said: "I hope not."