FAQ: How are water rates set?

Cal Water’s rates are set by an independent third party, the California Public Utilities Commission (CPUC). The CPUC’s job is to protect customers and make sure that rates are fair and reasonable. Oversight by the CPUC ensures that necessary improvements are made to the water system, that the system is operated efficiently, and that the company only earns a modest return on the funds it invests in water system infrastructure. Rates are based upon “cost of service,” which means that the majority of every dollar a customer pays to Cal Water is dollar-for-dollar what we pay to operate the system.

General Rate Cases

All large water companies regulated by the CPUC are required to file a General Rate Case every three years to ensure that rates accurately reflect the cost of providing service. In the General Rate Case process, the CPUC sets rates to cover the costs of providing water and allow the utility to earn a reasonable return on its investment in the water system. Major costs to operate a water system include purchased electric power, purchased water, treatment costs, groundwater pumping fees, labor, and chemicals.

The six steps in the rate-case process are as follows:

  • Cal Water reviews its historical costs, projected costs, and planned water system improvements and prepares a General Rate Case application for the consideration of the CPUC staff.
  • The CPUC Division of Ratepayer Advocates (DRA) analyzes Cal Water’s application and makes a recommendation. DRA usually recommends a smaller increase than that requested by the utility.
  • The CPUC hosts public hearings to receive input from customers on the application. Customers may also write to the CPUC.
  • The CPUC holds a formal hearing, presided over by an Administrative Law Judge (ALJ), which is similar to a court proceeding.
  • The ALJ issues a proposed decision.
  • The CPUC Commissioners vote on the proposed decision. New rates typically become effective five days later. The entire process can take 18 months or more.

Balancing Accounts

The CPUC requires that water utilities track certain expenses in “balancing accounts.” Balancing account expenses include electricity rates, purchased water costs, and pump taxes.

Once per year, the CPUC and the water utility will review the balancing accounts to determine whether these costs were higher or lower than forecasted in the utility’s previous rate case filing. If the costs are higher, the CPUC authorizes a surcharge on customers’ bills; if the costs are lower, the CPUC authorizes a credit to customers’ bills.

The purpose of balancing accounts is to protect both utilities and customers from unforeseeable — and uncontrollable — changes in costs, and to ensure that rates accurately reflect the cost of providing water service.