California Water Service Group (CWT) 2020 Q2 法說會逐字稿

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the California Water Service Group Second Quarter 2020 Earnings Conference Call. (Operator Instructions)

I would now like to turn the call over to Mr. David Healey, Vice President and Corporate Controller. Please go ahead, sir.

Thank you, Lisa. Welcome, everyone, to the 2020 Second quarter results call for California Weather Service Group. With me today are Martin Kropelnicki, our President and CEO; and Thomas Smegal, our Vice President, Chief Financial Officer.

Replay dial-in information for this call can be found in our second quarter results release, which was issued earlier today. The replay will be available until September 30, 2020.

As a reminder before we begin, the company has a slide deck to accompany the earnings call this quarter. The slide deck was furnished with an 8-K this morning and is also available at the company's website, at www.calwatergroup.com.

Before looking at the second quarter results, we'd like to take a few moments to cover forward-looking statements. During the course of the call, the company may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties, and actual results could differ materially from the company's current expectations.

Because of this, the company strongly advises all current shareholders as well as interested parties to carefully read and understand the company's disclosures on risks and uncertainties found in our Form 10-K, Form 10-Q, press releases and other reports filed from time to time with the Securities and Exchange Commission.

I'm going to pass it over to Tom to begin.

Thanks, Dave, and welcome, everyone, to our second quarter earnings call. Just as a preface, I think most of you who are on the call are aware that the major factor for the company in this quarter is really the same as it was in the first quarter, and that is that we have not received either a proposed decision or a decision on our California General Rate case, which was expected prior to January 1, 2020.

I'm going to begin the results discussion on Slide 8 of the deck and talk a little bit about the quarter and then on the year-to-date basis, and then go on from there.

For the second quarter, the start of Slide 8, our net income decreased by $11.7, to $5.3 million, and that is a difference from a $0.35 gain in the second quarter of 2019 to an $0.11 gain in the second quarter of 2020.

The big factor here is that we had no rate relief from the California Commission. And we estimate that if the rate relief had come in, there's 2 big factors here and it's the same 2 factors we talked about on the first quarter call. It's a total of $29.1 million that we believe would have been achieved, this is additional pretax income, if the commission had rendered a decision on a favorable basis to the company. And of that, for the second quarter, $10.9 million represents the pure delay resulting from the settlement agreement that the company filed with the consumer advocate back in October of 2019. And so that is being tracked in an interim rate memorandum account for future recovery.

And then $18.2 million, which represents income from our disputed cost recovery regulatory mechanisms. And those, remember, are mechanisms that we've had for many years, first of all, to decouple our sales from revenue. We'll talk quite a bit more about that later in the call. And then secondly, our regulatory mechanism for the pension and health care balancing accounts. Because those are in dispute in the case, we didn't record them as we would normally have. And had we recorded them in the quarter, we estimate an additional revenue would have been $18.2 million.

Those regulatory mechanisms match up to some cost increases that we had in the quarter. We had $6.5 million of increased water production expenses, of which $5.7 million would have been offset by those regulatory mechanisms. And we had $2.1 million of increased pension benefit expenses, which also would have been offset by those regulatory mechanisms had they been in place.

Other factors for the quarter, we saw a rebound in our unrealized benefit plan investment performance. That was $3 million higher than in the second quarter of 2019. And other things that happened which would be typical of a utility company in our situation, our depreciation expense went up very similar to the first quarter. So it was up $2.2 million in the second quarter, and that's related to increased plant investments in 2019. And we did have an increase in our maintenance costs, of about $1 million.

Turning to Slide 9, on a year-to-date basis very similar story and very similar explanation. The numbers are different, but the explanation is the same. So our net income decreased by $24.4 million, to a loss of $15 million on a year-to-date basis.

In terms of earnings per share, we have a loss of $0.31 for year-to-date, as compared to a gain of $0.19 in 2019.

Again, the 2 factors related to the rate case: we believe that had a rate case been adopted and it was favorable to the company on these matters, the $19.8 million, representing the delay of the settlement agreement amounts, and $26 million related to our regulatory balancing accounts that we've been discussing.

For the year-to-date basis our unrealized benefit plan investment performance was $4 million lower than in the first half of 2019, and that's really due to comparatively strong market conditions in the first quarter of 2019.

And other impacts on a year-to-date basis, again very similar. We see depreciation expense increased $4.3 million and maintenance expense increased $1.6 million.

On Slide 10, this is a very similar slide to what we gave you in the first quarter earnings deck. Our opinion of the estimated benefit on a full year basis from the California GRC has not changed. As shown in the table on that chart, we believe the benefit is between $38.9 million and $42.2 million on an annual basis. And so we continue to expect that when we get a decision in the case, that will be the benefit to the company.

Our 2020 sales forecasts, as we mentioned last quarter, are about 7% lower than the 2019 adopted sales. So in discussion of the RAM and the MCBA, we believe that we're much more likely to be closer to adopted sales than we were in 2019. And as I mentioned earlier, we would have been allowed to record additional revenue of $5.6 million to $10.9 million in the second quarter if the settlement had been adopted, with the low end of the revenue range linked with $5.2 million reduction in depreciation expense.

So getting a little bit more granular, on Slide 11, on the disputed GRC items, I just wanted to point out the 2 things, that are the RAM and the MCBA, we believe that in the second quarter that's about $14.9 million that would have been reported in those balancing accounts, and the pension and medical cost balancing accounts we believe would have been $3.3 million.

And again, we're highly confident that past amounts that are recorded in those accounts are recoverable regardless of the commission's decision on a go-forward basis in our current General Rate Case. And the other disputed items in the rate case we don't believe are major factors in either the second quarter or the year-to-date results.

I'm going to skip the EPS bridges that we have, because those are described in the narrative.

And I'm going to turn it over to Marty for an update on COVID-19.

Good morning, everyone. Thanks, Tommy. It certainly has been an interesting second quarter dealing with the COVID-19 pandemic.

As I think most people know, utility workers are considered essential workers. And therefore, most of our employees, 90-plus percent of our employees, have been at work in the field every day. Accordingly, that makes protecting those employees as well as protecting our customers very, very important. We are complying with all local regulations in our service areas as well as we were an early mandator of masks and other PPE for all of our employees.

As you've probably seen in the press, California and specifically Southern California, L.A. Counties, and Kern Counties have seen a surge in cases, and we have seen increasing case loads and hospitalizations in the past few weeks as well as we've seen a handful of employees also contract the virus outside of work. So in cases like that, we've been able to minimize any disruption of service. Obviously, we isolate any employee that has any type of exposure in order to keep them from getting other employees sick. And we have been successful in doing so.

Our customer centers in all 4 states have remained closed and will remain closed until further notice, and we have suspended all collection activities in an effort to keep people supplied with water.

In addition, we've offered additional help through a direct grant program. As you may recall, the company allocated $0.5 million for charitable contributions. Some of that went to work in local food banks and local food pantries throughout the service areas. Another part of that grant went to what we call a direct aid or a direct grant for customers who are struggling to pay their bills. And so that's proven to be, I think, beneficial. And more importantly, I received a lot of letters from customers who appreciate the fact that we were helping them out.

To date we've had no disruption of service, despite COVID-19, in addition to some of the rioting and stuff that we saw in Southern California at the end of May and in early June. And so we continue on track doing what we do best, which is providing clean drinking water for our customers.

Tommy, do you want to go through the business impacts of the pandemic?

Sure. Thanks, Marty. So we have seen increased customer account aging. And remember, this is due in part to the increased unemployment rate and also in part to the regulatory commissions telling us that we can't have collection activity.

The company, I think as Marty may have noted last quarter, we voluntarily suspended collection activity before our state regulatory commissions required us to do that. But nevertheless, there are now regulatory mandates to suspend collection activity. And in California, that mandate at this point goes through April of 2021. So it's going to be a long-term suspension of collection activity.

Our bills that are outstanding more than 90 days, and those are the bills that would normally have been sent to collection, those bills increased to $3.4 million. And in the past when we've had those bills sent to collection, only a portion of those amounts are typically uncollectible. So we've raised our estimate on the balance sheet, this is the bad debt reserve balance for doubtful accounts, from $0.8 million to $1.6 million as of the end of the second quarter.

Our water sales have continued strong, particularly on the residential side. That is offsetting a drag on sales in business, industrial and public authority sales. That last bit I think was school closures, for example, in the late spring. We do see in resort areas in Hawaii, in particular, a decline in sales that we're observing there.

The California utility, Cal Water, as we mentioned in the first quarter, activated the catastrophic event memorandum account. That allows us to track costs associated with COVID. And in the second quarter, we recorded approximately $600,000 of incremental operating expenses to the memorandum account. Those are amounts that we will seek to recover in a later filing from the commission. Memorandum account, as you'll recall, is not something that we typically book the revenue from until there's an authorization to recover that revenue.

In addition to the $600,000 of incremental operating expenses, when we do have bad debts and those do go to collection at the end of this period that will be included in our request to the commission for recovery.

Hawaii has a very similar mechanism that we're working to put in place. There's been a filing with the Hawaii Public Utilities Commission as well there.

Our liquidity is strong. At the end of June, at the end of the quarter, we had $114 million in cash and additional current capacity on our lines of credit of more than $170 million.

Marty, do you want to talk to us about all the fun stuff in California?

Boy, there's a lot going on in California. Starting off with, some of you may have seen the CPUC, the California Public Utilities Commission, extended its deadline for considering and concluding on our 2018 General Rate Case to September 30. That means in order to meet that deadline the commission must issue a proposed decision no later than August 25. So we continue to monitor that in hopes that we can get that wrapped up.

As Tom pointed out earlier, we're feeling the financial consequences of not having rate relief, and it gets pretty confusing each quarter to talk about our results with and without rate relief. So we hope to get that wrapped up in the third quarter.

Perhaps more importantly, from a policy perspective on July 3, the CPUC issued an unexpected proposal in an unrelated case. And I want to read to you the full name of this OIR, and I'll come back and talk about it. The full name is called, “Evaluating the Commission's 2010 Water Action Plan Objectives of Achieving Consistency Between Class A Water Utilities' Low-Income Rate Assistance Programs Providing Rate Assistance to All Low-Income Customers of Investor-Owned Water Utilities and Affordability.” So it was an OIR looking at the consistency and the goals of achieving consistency of Low-Income Rate Assistance programs.

So this July 3 proposed decision that kind of came out of left field, if adopted, would require Cal Water and other water utilities that are regulated by the CPUC to propose removing its decoupling mechanism in the next General Rate Case. This decision is troubling for a number of reasons.

First and foremost, it draws conclusions on a very, very limited set of data and evidence. In fact, we don't even know what was used to construct the data tables used by the commission to draw these conclusions. There were only 2 hours of workshops provided in conjunction with this rule-making. And we think it's just a bad decision and also goes against the state's goals of making conservation a way of life. And we have aggressively gone after decoupling and conservation early on, as prescribed by the Water Action Plan.

So we are very much involved in talking to the commission last week and this week about this proposed decision and find it going in the wrong direction of the state's policy in support of conservation and the conservation goals of the state. Just to remind everyone, California has an ag business that's over $60 billion. It's the largest ag state in the union. And we're growing in population from almost 40 million to 45 million over the next decade.

So the idea of getting rid of decoupling -- basically, implementing what's in this OIR essentially increases rates for most of the customers, including low-income customers. So we are just flat-out against it, and we're lobbying against it.

It's also unclear what the effect this policy decision could have on the current proposed decision that we're waiting for. So legally, it should push into the next rate case cycle, but we're looking into that and digging into that right now.

So there will be more to come on this PD that was issued here in early August. We have a lot of efforts focused on basically asking for a hold to get more evidence on the record and to have a full examination of all the data that's available for the last 12 years of decoupling. And we believe that the commission would get to a different conclusion if they had all the evidence on the table.

Looking at the capital investments for the quarter, this, frankly, was a highlight with everything going on that's been kind of negative news. It's nice to see that our capital program was up 9.5% compared to the same period of last year. So we had $133.5 million invested in the first half of 2020. The company previously estimated it would spend between $260 million and $290 million in capital during 2020.

While the company has experienced some individual project slowdowns, we've seen other things like our main replacement program being able to accelerate. And so over all, we have remained on track, at least as of right now, midyear 2020. Of course that could change depending on how things go with the virus and if there's any more pending shutdowns that could affect our overall ability to get capital invested and put into the ground.

In addition, we've added an incremental $5 million in capital investment for our Rainier View acquisition that closed during the second quarter. And if you turn the page, I want to talk about business development, which includes Rainier View. The Washington Water Service Company and the Washington UTC, which is the commission in Washington, approved our acquisition, and we closed on that acquisition in June, which now makes Washington Water Service Company the largest investor-owned, rate-regulated utility by the UTC in the state of Washington.

In addition, we have filed applications in Hawaii with the regulators for approval of our Kalaeloa system in Oahu and a Kapalua system in Maui for the change in control, and we anticipate those closing, hopefully, by the end of the first quarter of 2021.

You see in the slides that Rainier View added approximately 18,500 customers. The Kalaeola system will add about 200 customers. And for the history buffs, that's the former Barbers Point Air Base on Oahu. That's going to be redeveloped into residential and commercial properties. And then the Kapalua water and wastewater system, which is just north of our Ka'anapali system on the island of Maui, which has a couple of large hotels, golf courses and developments.

So you add those up, at closing the 2 in Hawaii, that would add just under 4% to our total customer connection count for the year of 2020, which we think is very healthy given all that we've been dealing with, with the pandemic and everything else. So our business development team has continued to be busy and continued to do good work.

Tom, do you want to go through the next couple of slides?

Sure. Thanks, Marty. So on the capital investment history slide, which is Slide 19, we did update our 2021 projection to include an additional $5 million of investment in the former Rainier View Water. So you'll see a little bit of a bump there.

And if you flip to Slide 20, which is our regulated rate base, we have now included the estimated increased rate base in 2020 as well as capital investments in 2021 for Rainier View. And so those numbers have gone up just a little bit. Obviously, that's much smaller than our California operations, and it doesn't change the shape of those curves, but we have updated those numbers.

As you can see, we continue to be on track, as Marty mentioned, and our expectation is that these are still the numbers, assuming the settlement gets adopted by the commission.

I will add, and apologies that it's not in the deck, but you'll notice on Slide 20 we have the third row is called “Advice Letters Included in Settlement,” of about $150 million. That's the California settlement. Yesterday, the company filed with the commission an advice letter to begin the recovery process on its Palos Verdes Water Reliability Project. This is a $96-point -- I think it's a $96 million authorized advice letter for that very large project, the largest project in the company's history. And we did make that advice at our filing. It is subject to a review process, and we don't anticipate that that advice letter will be approved anytime soon. We're targeting early 2021 for the approval of that advice letter.

But just for those of you who are looking at the rate base and the light green area, if you will, on that chart, the good news is that most of that has already now been filed for.

So Marty, I'll turn it over to you for wrap-up.

Great. Thanks, Tom. Well, you should get the sense there's probably 3 or 4 main things we're focused on in the third quarter. First, the PD, the proposed decision, on affordability and low-income assistance, staying focused on that, as well as our efforts to conclude on our 2018 General Rate Case. This is one of the longest delayed rate cases I think we've probably had in at least the last decade. So we're anxious to get that wrapped up with the commission and get put to bed.

Additionally, the COVID response. It seems to change every day and CDC requirements keep moving around, and we have to show up to work every day. We're not a company that has a lot of employees sheltering in place. We have to show up and continue to produce and provide water for our customers. So making sure we continue to take every step possible to protect our employees and our customers as we deal with COVID and we go into the fall season, which includes going into the flu season.

And lastly, and this may become one of the more important items as we move later into the third quarter, we're moving into wildfire season and the real possibility of continued Public Safety Power Shutdowns. And as we know, the power may go out but people still need water. And so the operations team has done a very good job at preparing for wildfire and the PSPS season, and we are well ready to handle any challenges that come our way.

So Q3 looks to be a very busy quarter for us, and we look forward to sharing our results with you as we wrap up the quarter and report our results at the end of October.

So with that, Lisa, we will open it up for questions, please.

(Operator Instructions) Your first question comes from the line of Durgesh Chopra, with Evercore ISI.

Before I ask you, I just wanted to say that I truly appreciate all the work here and all your transparency. Clearly, very, very challenging times for you guys, but you have sort of kept the investment community up to speed on everything that's been going on. So kudos to you for doing that.

Look, I wanted to ask you on the proposed decision just a quick clarification. If I go back to Slide 11, is the proposed decision sort of applicable to the RAM and MCBA decoupling mechanism, which is the second bullet? Or is it the RAM/MCBA decoupling along with the pension and medical costs? I just wanted to sort of just get some clarification on that.

Sure. The proposed policy decision of the commission, the low-income docket, is focused only on the RAM and MCBA mechanisms. And again, as Marty said, the way that the proposed decision is written, it would impact the company in the next rate case cycle. So it would be the 2021 filing, if that proposed decision were adopted without any changes. And so it wouldn't affect either of those things in the interim period.

However, you should know that the Ratepayer Advocate obviously litigated that issue, the RAM issue, with us here in this rate case, and they have supplied comments to the commission in the rule-making that suggests, “Why wait? Let's get this over with for Cal Water.” And so it's certainly something that we need to be wary of, we need to continue to fight against and make sure that the commission understands that it's not just flipping a switch to go from being a decoupled water utility to not being decoupled. There's some severe rate design changes that have to take place.

What the decoupling did back in 2008, just to remind everyone, is it allowed the company to adopt an incredibly risky rate design. You've seen that in the RAM balances that we've had over the years. But the rate design is such that more of our costs are being recovered through quantity rates rather than fixed charges, and more of those quantity rates are being recovered through the top tier. So it's an accelerating cost recovery that focuses our fixed costs recovery on those customers who are using a lot of water.

And if you look at the companies who don't have decoupling, those companies that have the MRAM price adjustment mechanism, you will see that they recover far more of their revenues through fixed costs and they have much flatter rate designs.

And so it would be premature and really discouraging if the commission were to take the RAM out of play for us in the current rate case without changing the rate design. And that's really the one good thing in the proposed decision. There's a sea of bad in that proposed decision, but the one good thing is that it recognizes there's a great deal of effort that needs to take place to change the rate design and other factors to get rid of a RAM mechanism. And so we hope that at least that language is persuasive on the commission in our current case.

I hope that helps, Durgesh.

Understood, Tom. Super helpful, yes. And then just on the EPS bridge, Tom, Slide 12, so am I thinking about this correctly? Sort of the impact of the $14.9 million, that shows up in sort of the water production cost bar chart? Is that the right way to think about it? So you're not getting essentially recovery for those higher-than-allowed water production costs? Is that the right way to think about it?

Yes. So on the bar chart you see the water production costs. That isn't going to equal exactly the $14.9 million, because part of that $14.9 million is the lower revenue that wasn't achieved. So I mentioned that water sales were about where we wanted them to be. I think they're about 96% of adopted. So there's a smaller component of the $14.9 million which is actually the revenue loss from not having decoupling, rather than just the water sales component.

Understood. That makes sense. Then just finally, any sort of color that you can share with us? Obviously, it seems like from your commentary early on that you've met with the commission a couple of times here in the past few weeks. So what is your expectation going into August 6? Do you think that the commission actually rules on it? Or do you suspect that this will sort of be addressed in a future proceeding? Just any color that you can share with us would be appreciated.

Sure. So we've divvied up the meetings. I did the first couple of meetings, and Tom is going to do 1 or 2 of them this week as well. We think it's a fair question to always ask about kind of low-income and underserved communities. Having said that, we think it's a pretty big reach to go from saying “we're going to examine the consistency of Low-Income Ratepayer Assistance programs,” to saying “get rid of decoupling.” So that's been kind of our message to the commission.

And it varies kind of commissioner by commissioner. I've had one commissioner say, “Well, I just don't believe in conservation, and I think we should get rid of the increasing block rates and shrink the number of tiers.” The problem with that, it smacks right into the goal of what they're trying to accomplish, which is kind of equity among underserved communities and low-income ratepayers. That increases rates for almost all class of customers. And frankly, when you do that you start to reward the high water users and penalize the low water users.

So our point has been really simple. At a minimum, put a hold on it, allow for a proper examination of all the data and facts, not just in this very narrow, limited band of data that we believe the Cal Advocates put together. And then let's have a full discussion about it. It's a really big policy shift.

And so on one hand, the State Water Resources Control Board has done all this work on making conservation a way of life, how do you continue to grow the economy, dealing with the growing ag business, dealing with the growth in population and making conservation a way a life. And now you have a PD coming out saying we want to undo all that. So there's a break there that's really important in terms of state policy versus what the CPUC is trying to propose implementing.

So we're pointing out those inconsistencies because we think they're very important. For those of you who remember, when we implemented the RAM we kind of took it on the chin initially from a Wall Street perspective because we were giving up our ability to make more money as water sales went up. And we said back then it was just -- it's the right policy decision for the state and for the company because we want to aggressively promote conservation.

So we're laying out the arguments. When you talk to the commissioners' staff, they're pretty tight-lipped. The policy advisers are pretty tight-lipped. They ask a lot of good questions around our positions and about the data that we're relying on. So we're asking for a minimum of a hold, if not an alternate basically kind of scrapping the proposed decision.

And it's scheduled to be discussed on the 6th of August, and we'll have to wait and see what happens. Any commissioner could put a hold on it or a stay. Likewise, another commissioner could write an alternate.

Understood. Thank you. And just one last one quickly, and I appreciate you answering all my questions. Will you be issuing sort of a release on August 6 or an 8-K, like, regardless of where this thing goes, given that it's a pretty material event for you? Or you're not ready to say that at this time.

We'll keep everyone updated. I think if there's a hold, just a plain hold, on August 6, that may not result in an 8-K. But any actual decision or indication of an alternate proposed decision being published, that's going to result in an official communication. I think if you don't see something, it means that it was held, because you'll see something in any other case.

Your next question comes from the line of Ryan Connors with Boenning & Scattergood.

So I wanted to continue the discussion on decoupling for a minute and maybe play devil's advocate on your view that this new proposal is bad policy. You mentioned taking it on the chin from The Street. I think we probably threw a few of those jabs. And the reason is that we've believed that one of the reasons why ROEs in California are close to the low in the country is that, notwithstanding your comments, Tom, about the riskiness of the rate structure, they've argued that that decoupling mechanism reduces the inherent risk in the business. And it seems like they've been successful in that, in kind of pushing ROEs down.

So I guess my question is, let's just imagine for a second that you don't get your wish and this thing does move ahead. Might there be a silver lining, in that it takes away their ability to argue that, at least to the extent they can't make the opposite argument they've been making all along? And could we actually see some relief on the ROE side in the next few years if that were to happen?

Ryan, those are very good points. I think the fact pattern, though, to keep in mind is remember that our cost of capital is a group effort that is 4 companies, 3 of whom have the RAM mechanism and the fourth being San Jose Water. If you go back to all of those proceedings, there's never been a recognition of any difference in the allowed ROE between the 3 RAM companies and San Jose Water with respect to the cost of capital and the riskiness there. And so I'm not sure that we can put a lot of faith in the idea that removing a RAM mechanism would cause there to be an increase to our ROE.

And so I'm hopeful that you're right, but at the same time, I'm a little bit doubtful that that might actually take place. And I'll just leave that there. We'll have to wait and see.

And obviously, for those of you who don't recall, we will be filing for a new cost of capital next March that would be theoretically effective on January 1, 2022. And that's the standard process with the commission.

Marty, do you have anything to add there?

No, I think that's right. I think if the decoupling reduced the risk, we would certainly be hitting our ROE every year. And certainly, that hasn't been the case over the last 10 years. I think it helps remove the disincentive to promote water sales, right, and allows -- because it locks in the margin.

But I think, to your point, Ryan, if it goes the other way, that does become an argument in the cost of capital, and certainly we would evaluate that with the economists that help us write our testimony and we'll look at that quantitatively and quantitatively. But I think it still just goes back, to me, it gets back to simple math. And the policy decision for the state is California is a massive, massive state, and there's no “new sources” of water. You can go to de-sal, which is a large carbon footprint and very expensive. And so your least-cost alternative has continued to be conservation. And there's 40 years of case study on the electric and gas side in California that decoupling works.

So I really think it's a shortsighted decision with a very narrow band from within the commission that's trying to do this, and I think their logic is just bad. But I think, to your point, if they reverse it, would we potentially use that argument in our cost of capital? Yes, potentially, and it's probably a fair argument. I don't know if it will gain any traction. They're pretty hard to argue with on cost of capital, but we could certainly try.

Got it. Okay. Now I think you've covered a lot of the big picture -- excuse me, the tactical issues pretty well. So my last question was just more big picture, very big picture in nature. If you look at the COVID situation, on the surface it seems like regulated utilities have not really been treated that well from a policy and a stimulus standpoint. On the one hand, you're deemed essential and you've got to keep operating, which costs money. But then you're required to give the product away if that's what your customers are saying they need, even though we've got massive stimulus coming out of the federal government for households in terms of unemployment benefits and stimulus checks.

So I guess my question is, how did we get there? And are there any efforts underway industry-wide to kind of lobby for better treatment as we move forward into these next rounds of stimulus, to say, “Hey, if we're going to be sending these checks out, can we require at some level some kind of audit to make sure that people are taking care of their basics, water, electric, et cetera, before they're doing more discretionary things?” It just seems like the utilities are kind of caught in a bad spot here in terms of how this is playing out. Any thoughts on that?

Let me take it first, Tom, and then you can jump in, too, Tom.

NAWC, I think, as you know, we recruited Rob Powelson. The government affairs team I think has been very busy kind of tracking, monitoring and trying to get input on the bills.

I think what's challenging with any stimulus bill kind of right now, and we saw it today with the contraction of GDP, is I think we're talking kind of mere survival points right now for people who haven't been working. So I think it's a little harder to kind of push that.

We're pretty fortunate. For us, we have the catastrophic COVID memo account that allows us to track incremental costs that we incur as a result of the pandemic, and there's a potential for future recoverability of those costs once we collect them all and file for them and they go under review.

So what I think is more interesting is for the customers that we use that direct grant program for I have received half a dozen letters this week from people, customers who I've never met, thanking me for the grant program. And the majority of letters basically said, “Thank you, really appreciate the help. I know I fell behind, but I'm on a payment plan, and I plan on paying the company back. And so I want to give you that credit back and please use it someplace else in the community who needs it more.”

And what's been a really -- this is kind of Hell Week for Tom and I, with the quarter, our auditors are here, we've got board meetings. When I got those letters I actually smiled and said, despite all the stuff that's happening in the world there are people out there who care and do the right thing.

And so I think it's all to be determined. I think -- I try to take a walk on my lunch break. Things are still tightly shut down on the West Coast. Restaurants aren't open, hotels aren't open. The economic consequences of this downturn are going to continue to be massive.

So I think it's a little hard as a utility to kind of push that agenda point now federally where they're looking at aid packages. I'm more interested if they do a capital improvement program or a capital spending program and making sure that the water utilities get fair and equitable treatment on any dollars that might be allocated for capital projects in what they're considering right now on the Hill. And Rob Powelson has been very, very involved with that.

Tommy, anything you'd add on that?

No, I think that's great, Marty.

Your next question comes from the line of Jonathan Reeder with Wells Fargo.

Do you think there's going to need to be some resolution in the low-income ratepayer docket in the CPUC before you get a GRC proposed decision, given the RAM uncertainty?

I don't know the answer to that, Jonathan. I think that that could be an issue in the GRC. I don't know that it is or it isn't. I think the way that the PD in the low-income is written, it doesn't affect our GRC, but I can't get into the mind of the folks that are working on our current GRC case. That's certainly a possibility.

I guess from my perspective, it just seems like unless the CPUC removes the RAM/MCBA issue entirely and doesn't open a separate investigation into the issue, it would seem like the GRC proposed decision needs to defer to the outcome in this docket.

Yes, but I think the difference, Jonathan, is the GRC, there's been a proposed settlement that's been on the table since October. And I think from a case law perspective they are 2 separate proceedings, whereas ours was supposed to be concluded by 12/31/2019.

So I haven't seen -- and I was going back in my mind thinking about all the years I've worked at Cal Water and also at Pacific Gas & Electric, have I ever seen kind of a retroactive rate-making type of ruling come from the PUC, and I can't think of one. So I think the merits from a case law perspective speak to our favor.

But as Tom said, it's really hard -- you look at what this PD is called and where it ended up and the fact it was a very, very, very limited data set, and you do kind of scratch your head. And so we're trying to figure out what the heck is going on with it. So I think I would say, never say never, but I think the arguments are in our favor and the case law is in our favor. But I would say, never say never, because you just never know.

Let me give you one more thing, Jonathan, or 2 more data points on this. First of all, under state law the commissioners can't talk to one another about these cases. And remember that our General Rate Case is with Commissioner Randolph. It's our understanding that she cannot have talked to Commissioner Guzman Aceves about her policy decision. And so whatever delay was involved in our rate case, at least up until July 3, had nothing to do with the policy decision that Guzman Aceves was working on, at least as a theoretical legal standpoint goes. And Commissioner Randolph is a good government lawyer, meaning that she's a lawyer who believes in good government. So I don't believe that that wall had been breached. So whatever delay in our rate case, at least up through July 3, didn't have anything to do with the policy decision.

I'll also point out that I know it's probably not a company that most of you follow, but the Liberty water utilities that are in California have a proposed decision, and that decision addresses some of these same issues of the RAM and other balancing accounts. The proposed decision came out I think just on Monday of this week; maybe it was Friday of last week. And that does not coordinate with the policy proposal. It says the RAM is doing great, that Park Water and Apple Valley should continue their RAM mechanisms, they should continue their pension balancing accounts.

And so it doesn't seem like there's a coordination of efforts there. But again, we'll have to wait and see what eventually comes out.

Right. I guess what I'm just trying to think of is, is there any scenario where this proposed decision, the low-income ratepayer docket, different investigation, but then your proposed decision in the rate case still comes out and says, nope, you can't have the RAM/MCBA. That doesn't seem to make sense, that it gets pulled away in one docket while the broader policy discussion is going on still. Or then, conversely, if I guess the PD is adopted in its current form in the low-income ratepayer docket and it says, okay, it's going to get rid of it in the next rate case, so not this current one, you would think then by de facto the next -- this current GRC proposed decision should include continuation of it. Versus, I guess, Public Advocate's position to get rid of it right away.

It seems that legally they shouldn't be intertwined, and I guess that one shouldn't have been influencing the other or delaying the proposed decision in your General Rate Case. But now they are intertwined, it would appear.

I see what you're saying, Jonathan. I think if the PD in the low-income case were adopted as it was originally written, it would be very difficult for the commission to concurrently come out and say Cal Water should get rid of their RAM mechanisms in the case that they filed in 2018. I totally agree with you there. And so I guess that's a potential silver lining.

I did point out earlier the comments, obviously, from the Ratepayer Advocate, that “let's get this over with” kind of comments. So that could potentially result in a change to the proposed decision in the policy case. We're very hopeful that that is not the case.

But you're right from that standpoint. I think they wouldn't want to have 2 decisions in conflict with one another.

Thanks for mentioning that about the Liberty utilities. I wasn't aware of that. It's interesting, too.

I guess with all this in mind how would you handicap the chances that the CPUC decides the low-income ratepayer docket at this August 6 meeting? Last I saw, I think it was on the consent agenda for approval.

That's typically where it starts, Jonathan, until somebody pulls it off consent or puts a hold out. That's the typical pattern, is it starts out as an agenda decision and it starts up on consent.

It really is dependent upon the commissioners and their offices deciding that the comments that we've made and the effort that we've been making to educate people on this issue are meritorious enough to delay the proposed decision or potentially to write an alternate decision. There has not been a specific response from any commissioner as of now to hold the PD or to offer to change the PD. And that may not be typical for them to announce that kind of thing. These are all usually very last-minute kinds of items.

So unfortunately, I think we're going to be waiting even as meetings continue to go on, and not just Cal Water, but the other parties to the case and other interested parties, continue to meet. I don't think you're going to hear about a hold or a potential alternate until very close to next Thursday's meeting.

Your next question comes from the line of Angie Storozynski, with Seaport.

I'm not actually going to ask any questions about the RAM, because nobody clearly knows. But my other question is, however, so you have the catastrophic memorandum accounts for COVID-related expenses. And so I just wanted to make sure that that means that when you report earnings, adjusted earnings, that those costs are not flowing through the P&L, because you are deferring them to this memorandum account. Is that correct?

So actually, that's not correct. So the catastrophic event account is a memorandum account, and our accounting policy is that we will recognize regulatory assets and liabilities from balancing accounts. A memorandum account has a reasonableness check, and that is at the end of the filing process.

So I mentioned the $600,000 in the quarter that we booked to the memorandum account. That's in the P&L as expense. And in a future period, we would file for recovery from the commission and be able to -- we would book revenue associated with that once we're approved to do so by the commission.

Okay. Because you are pretty much the only California utility that I can think of, and I cover electric, gas and water, that still flows those expenses through the P&L. I think everybody else assumes that there is an assumption of recovery, and as such, those are not expensed.

Okay. Well, I'll get you in touch with our auditors, and we'll get them working on that. That's been the company's revenue recognition policy for some time. So we feel comfortable with that distinction between balancing accounts and memorandum accounts. And our trigger, again, is the commission giving us an order to recover something, and then we'll go ahead and book that as a reg asset and book this revenue.

So similarly, any types of backup power expenses for PSPS events, that also will be flown through the P&L?

Correct. And that, if you'll recall, I believe last year we did have an amount of expense. I don't have that in front of me. But we have a different memorandum account for PSPS, and we do expect to file for recovery on that. It's in our financial statements from last year. I don't have that in front of me to give you the number, but that did flow through the P&L and is expected future recovery once we make that filing.

And there are no further questions at this time.

Great. Well, everyone, thank you. Obviously, there will be a lot happening during the third quarter, as Tom said. As we get through the proposed decision on affordability, if there's any major things there we would be doing a filing on that. And we're working on the rate case and getting through COVID.

So we'll look forward to talking to everyone at the end of Q3. Thank you for your questions today and for being here, and we hope everyone is safe, and we'll talk to you soon. Thanks, everybody.

This concludes today's conference. You may now disconnect.