Surcharge Account Reform
BACKGROUND
We continue to advocate for affordable and predictable water bills for customers by reforming the way investor-owned water utilities recover amounts in memorandum and balancing accounts. These accounts allow utilities to track unbudgeted costs for later recovery through surprise surcharges found on customers’ bills. This is why we refer to them as “surcharge accounts”.
Because surcharge accounts are not included in the budget and rates that result from a California Public Utilities Commission (CPUC) decision in a General Rate Case which authorize how much a utility can profit year over year, they are not readily transparent to customers and decision makers. In fact, customers are often surprised by these charges because they increase water bills unexpectedly. Essentially, surcharge accounts allow a water utility to operate without a predetermined budget.
The use of surcharge accounts has grown in the past decade. At the end of 2020, there were 251 active surcharge accounts totaling $571 million that continue to accumulate with interest.
From 2008 through 2018, surcharge accounts were, on average, 20% of a customer’s total water bill. For some customers, they were as high as 53% of the total water bill.
In the water affordability rulemaking, we asked the CPUC to consider a policy that would permit a Class A Water Utility to recover amounts in surcharge accounts only when its Actual Return on Equity (i.e. profit) is less than its Authorized Return on Equity. If a utility’s Actual Return on Equity exceeds its Authorized Return on Equity, it is not necessary to allow the utility to increase customer bills to recover amounts in surcharge accounts and derive even more profit.
It is notable that from 2018 through 2022, most of the Class A Water Utilities exceeded their Authorized Return on Equity by an average of 22%. For one utility (Great Oaks Water in 2020), Actual Return on Equity was 156% greater than authorized.
The common-sense reform we recommend will help lower customer water bills and help ensure water bills include only recovery of costs that are truly necessary. Utilities should not be permitted to use surcharge accounts to increase their profits beyond the level the CPUC has authorized.