Rate Design (Including Reclaimed Water)
After the just and reasonable revenue requirement (cost of service) has been determined, rates are designed to collect the authorized revenues. In Decision (D.) 86-05-064 the Commission set forth its water rate design policy by segregating a utility's revenue requirement into fixed and variable components.

Fixed Costs
Fixed costs do not vary with the level of sales, while variable costs change proportionately with sales. As determined by the Commission, fixed costs are as follows:

• Maintenance expense
• Transmission and distribution expense
• Customer account expense, excluding uncollectibles
• Administrative and general expense
• Rent expense
• Depreciation expense
• Property tax expense
• Gross return on investment (rate base)

Variable Costs
All remaining costs, such as purchased water, pump taxes, electric power, and uncollectibles, are variable costs. The most significant variable costs are those associated with water supply.

Retail water purveyors generally obtain their water supply from two sources: groundwater, pumped from local underground aquifers, and purchased water, delivered by wholesale water agencies. Wholesale water agencies, usually referred to as water districts, transport water long distances to the State's metropolitan areas. While most purveyors in California obtain water from one or both of these sources, a small percentage take water from local surface sources such as lakes and rivers.

In addition to the capital and operation and maintenance costs associated with constructing and maintaining wells, pumps, and connections with wholesale water agencies, there are water-related costs that are not within the control of the local water purveyor. These costs include:

Power Costs
Electricity and/or natural gas used to pump groundwater from wells and boost water to higher pressure zones are obtained from local energy provider.

Replenishment Fees
In most areas of California, water is pumped from local groundwater basins at a greater rate than replenished by nature. Many areas have formed water replenishment districts to manage the groundwater basins. Groundwater assessment fees, also referred to as pump taxes, are levied by these agencies to cover the costs of purchasing water for recharging the basins and developing and maintaining projects that ensure the long-term viability of the basins. In some areas, the courts have established a safe yield for the basins and assigned groundwater rights based on historical usage by the pumpers.

Purchased Water
In areas where the local water supply is insufficient, wholesale water districts, quasi-governmental agencies, have been formed to import water, typically from remote sources, rivers and manmade reservoirs. Importing water from these remote locations requires extensive water conveyance systems, which may include canals, aqueducts, and large transmission pipelines. Additionally, storage reservoirs and treatment plants are used to ensure a reliable and safe water supply is available for local water purveyors. Each wholesale water agency sets the rates for purchased water to recover operational and maintenance expenses and infrastructure costs.

Not only are power costs, replenishment fees, and purchased water costs beyond the control of local water purveyors, but they can be subject to unexpected and significant variations over short time periods. Price changes in fuel oil, which is used in generating electricity, can drastically impact electric rates, as was evidenced in the 1970s. Variations in rainfall and other weather conditions impact the annual groundwater replenishment costs. Additionally, fluctuations in demand, source availability, and water treatment requirements impact purchased water costs.

For these reasons, when the Commission sets water rates, it does not estimate future changes in water production costs.

To avoid inherent forecasting inaccuracies, the Commission allows water companies to file offset rate increases or decreases, between general rate filings, after the actual changes in costs are known. Frequently, offset increases occur mid-year, since many wholesale and replenishment districts operate on a non-calendar fiscal year. Furthermore, the Commission requires water production cost changes and revenues to be tracked in balancing accounts with interest to ensure that ratepayers and shareholders are treated fairly. Overcollections are refunded to customers through billing surcredits and undercollections.

Partial Listing Wholesalers:

Santa Clara Valley Water District
Central Basin Metropolitan Water District
West Basin Metropolitan Water District
Calleguas Municipal Water District
Castaic Lake Water Agency
Las Virgenes Municipal Water District
Upper San Gabriel Valley District Water District
Stockton East Water District
San Francisco Water Department
Kern County Water Agency
Alameda County Flood Control & Water Conservation District

Partial Listing Replenishment Districts:

Water Replenishment District of Southern California
Mojave Water Agency