2009 Catalina Gas General Rate Case. Application No.: J. Hong K. Kelley D. Klun R. Rohaley R. Worden Y. Schiminske D. Tang (U 338-E) Before the

Transcription

1 Application No.: Exhibit No.: Witnesses: SCE-1 J. Gillies J. Hong K. Kelley D. Klun R. Rohaley R. Worden Y. Schiminske D. Tang (U -E) 00 Catalina Gas General Rate Case Before the Public Utilities Commission of the State of California Rosemead, California September, 00

2 00 Catalina Gas GRC Table Of Contents Section Page Witness I. INTRODUCTION...1 R. Rohaley A. Background...1 B. Present Operations... C. Regulatory Background... II. FORECAST OF GAS SALES... J. Gillies A. Purpose... B. Methodology... C. Gas Sales Forecast... D. Number of Customers... III. OPERATIONS AND MAINTENANCE (O&M) EXPENSES... R. Rohaley A. Introduction... B. ESTIMATING METHODOLOGY Introduction.... Description of Estimating Methods... a) Analysis and Adjustments of Historical Data... b) Estimating Test Year Expenses... C. Summary and Overview of O&M Request Gas Production LPG Processing Terminal Labor and Expenses... a) Historical Analysis... (1) Adjustments... () Labor... () Non-Labor...1 i

3 00 Catalina Gas GRC Table Of Contents (Continued) Section Page Witness b) Estimated Test Year Expense Gas Production LPG Processing Terminal Maintenance Supervision and Engineering...1 a) Historical Analysis...1 (1) Adjustments...1 () Labor...1 () Non-Labor...1 b) Estimated Test Year Expense...1. Gas Distribution Mains and Service Expenses...1 a) Historical Analysis...1 (1) Adjustments...1 () Labor...1 () Non-Labor...1 b) Estimated Test Year Expense...1. Gas Distribution Maintenance of Mains...1 a) Historical Analysis...1 (1) Adjustments...1 () Labor...1 () Non-Labor...1 b) Estimated Test Year Expense...1. Gas Distribution Maintenance of Meters and House Regulators...1 a) Historical Analysis...1 (1) Adjustments...1 ii

4 00 Catalina Gas GRC Table Of Contents (Continued) Section Page Witness () Labor...1 () Non-Labor...1 b) Estimated Test Year Expense Gas Distribution Meter Reading Expenses...0 a) Historical Analysis...1 (1) Adjustments...1 () Labor...1 () Non-Labor...1 b) Estimated Test Year Expense.... 0/1 Gas Distribution Safety Training, Misc. Non-Operating Expenses, Customer Accounting and Office Supplies... a) Historical Analysis... (1) Adjustments... () Labor... () Non-Labor... b) Estimated Test Year Expense.... Gas Distribution - Other Operating Revenue (OOR) Bottle Propane Sales.... Gas Distribution - Other Operating Revenue (OOR) Service Establishment... IV. CAPITAL PROJECTS... R. Rohaley A. Introduction... B. Infrastructure Replacement Program Overview... iii

5 00 Catalina Gas GRC Table Of Contents (Continued) Section Page Witness. Background.... Need for Infrastructure Replacement Program.... Vendor Selection Process.... Project Management... a) Cost.... Conclusion...0 C. SCADA Enhancement Project Overview...1. Need for SCADA Enhancement Project...1. Vendor Selection Process.... Project Management... a) Costs.... Conclusion... D. Pebbly Beach Village Line Replacement Project Overview.... Actual Project Costs Exceeded Original Forecast... a) Non-Participation of Santa Catalina Island Company... b) Estimate for Contractor Costs... c) Changes in Project Scope.... Conclusion... E. LPG Vaporization Plant Upgrade Overview.... Project Work Scope Changes... iv

6 00 Catalina Gas GRC Table Of Contents (Continued) Section Page Witness a) Heat Tracing System... b) Electrical Supply System... c) Alarm Annunciator System... d) Ball Valve Replacement...0 e) Gas Tank Purge...1 f) Fire Water System Modification... g) Gas Monitoring System.... Conclusion... V. SUMMARY OF UTILITY PLANT... J. Hong A. Summary of Plant-In-Service... B. Plant Additions and Retirements... C. Allowance for Funds Used During Construction... D. Capitalized Overheads... E. Common Plant Facilities... VI. SUMMARY OF DEPRECIATION EXPENSE AND ACCUMULATED DEPRECIATON... A. Overview... B. Depreciation Rates... C. Depreciation Expense... D. Weighted Average Depreciation Reserve... J. Hong VII. RATE BASE... J. Hong A. Utility Plant In Service... B. Working Cash... C. Depreciation Reserve...0 v

7 00 Catalina Gas GRC Table Of Contents (Continued) Section Page Witness D. Accumulated Deferred Taxes--Plant...0 E. Accumulated Deferred Taxes Uniform Capitalization...1 VIII. TAXES... D. Klun A. Introduction... B. Taxes Based On Income General.... State Income Tax.... Federal Income Tax.... Deferred Income Tax Expense.... Investment Tax Credit (ITC).... Alternative Minimum Tax (AMT).... Changes in Tax Law... C. Payroll Taxes... D. Ad Valorem/Property Taxes... IX. COST ESCALATION... Y. Schiminske A. Introduction Labor.... Non-Labor... B. Methodology and Estimates Labor Escalation... a) Historical Years 00 Through b) Forecast Period 00 Through Non-Labor Escalation... vi

8 00 Catalina Gas GRC Table Of Contents (Continued) Section Page Witness a) Global Insight Indexes... b) A&G Non-labor Escalation Excludes Health Care Costs... X. RESULTS OF OPERATIONS...0 K. Kelley A. Purpose...0 B. Results Of Operations At Present Rates...0 C. Results Of Operations At Proposed Rates... XI. RATE DESIGN... D. Tang A. Purpose... B. Present Rate Levels... C. Proposed Rate Design Summary.... Baseline Allowances.... Customer Charges.... Usage Rates.... Multi-Family Rates.... Domestic CARE Rates.... Domestic DE Rates.... GCAC Rates... D. Proposed Rate Levels and Bill Comparisons... XII. DIFFERENCES BETWEEN NOI AND APPLICATION...0 R. Worden Impact of Differences on Base Revenue Requirement...1 Appendix A Witness Qualifications vii

9 00 Catalina Gas List Of Figures Figure Page Figure III-1 Total O&M Expenses (Constant 00$)... Figure III- FERC Acct..: Gas Production LPG Processing Terminal Labor & Expenses (Constant 00$)... Figure III- FERC Acct.1: Gas Production LPG Processing Terminal Maintenance Supervision & Engineering (Constant 00$)...1 Figure III- FERC Acct : Gas Distribution Mains and Services Expenses (Constant 00$)...1 Figure III- FERC Acct : Gas Distribution Maintenance of Mains (Constant 00$)...1 Figure III- FERC Acct : Gas Distribution Maintenance of Meters and House Regulators (Constant 00$)...1 Figure III- FERC Acct 0: Gas Distribution Meter Reading Expenses (Constant 00$)...1 Figure III- FERC Acct 0/1: Gas Distribution Safety Training, Misc. Non-Operating Expenses, Customer Accounting and Office Supplies (Constant 00$)... viii

10 00 Catalina Gas List Of Tables Table Page Table II-1 Gas Sales Forecast (Therms)... Table III- Summary of Adjusted O&M Recorded and Adjusted 00-00/Forecast (Constant 00, In $000)... Table IV- Capital Expenditure Forecast... Table IV- Project Costs...0 Table IV- Project Costs... Table IV- Cost Estimate versus Actual... Table IV- Project Scope Changes... Table V- Summary of Plant Weighted Average Balances (Nominal $000)... Table VI-... Table VII- Summary of Weighted Average Rate Base... Table VII- Computation of Working Cash Allowance (Nominal $000)...0 Table VIII-1 Summary of Taxes (Nominal $000)... Table IX-1 O&M Labor Price Indexes and Escalation Rates... Table IX-1 O&M Non-Labor Price Indexes and Escalation Rates... Table IX-1 Correspondence Between Employee Categories and UCIS Variables... Table X-1 Southern California Edison Company 00 GRC Results of Operation At Present Rates Excluding 00 Test Year Rate Request Thousands of Dollars...1 Table X-1 Southern California Edison Company 00 GRC Results of Operation at Present Rates And Proposed Rates for Catalina Gas Operations Thousands of Dollars... Table XI-1 Baseline Allowances Therms per Month... Table XI-1 Base Rate Comparison... ix

11 I. INTRODUCTION A. Background Southern California Edison Company (SCE) submits in this application its Test Year 00 General Rate Case (GRC) for its gas operations on Santa Catalina Island (Catalina). In this application we will describe our current gas operations on Catalina, discuss and support our 00 Test Year funding requirement, and our plan for continuing to provide safe and reliable service to Catalina customers. This GRC presents a traditional evaluation of recorded costs and a forecast of test year 00 base rates, consistent with the Commission approved rate case plan. 1 SCE makes this application to request a reasonable increase in operating expenses and to allow the company an opportunity to earn its authorized return on capital investment. SCE forecasts a Test Year 00 revenue requirement of $1. million. The increase of $0.1 million is an increase of percent in base rates and a percent increase in total gas rates. SCE is not requesting attrition year increases for either 0 or 0. In this GRC, SCE forecasts O&M expense for gas operations on Catalina to be $,000 for Test Year 00, which results in an overall increase of six percent above 00 recorded O&M expenses. The major cost driver for this increase is greater O&M expense due to maintenance requirements for the system infrastructure. The activities SCE performs to provide adequate service and the costs of these activities are described and supported in the testimony and workpapers. Our total capital expenditure request is $. million for projects expected to close through 00. The primary drivers for the expenditures are related to infrastructure replacements and for a new monitoring and control system. The testimony sets forth a detailed justification for the gas distribution replacement and upgrade plans. The gas distribution system has continued to age and there is a serious need to repair and replace portions of the system. The repair and upgrade of the gas distribution system will minimize costs 1 D Since filing the NOI, SCE has updated plant additions recorded through year-end 00. The capital expenditures reflected in our total request includes a forecast of spend through 00. 1

12 over the long-term with the goal of preserving the current level of system reliability. The request in this GRC reflects SCE s efforts to continue to operate and maintain our system in a safe, reliable and costeffective manner consistent with applicable law and regulations. B. Present Operations SCE s production and distribution system serves approximately 1,00 residential and commercial customers who reside primarily within the Avalon city limits including Pebbly Beach Village. SCE s gas production facilities are located at the Pebbly Beach Gas Plant in Avalon, which is distributed to customers through. miles of underground distribution pipes. C. Regulatory Background SCE has been the primary provider of utility service (including gas distribution) to Catalina residents and commercial customers since 1. Over this forty-five year period, SCE has been authorized to increase its base distribution rates only two times, once in 1, and subsequently in the 00 General Rate Case. The wholesale cost of gas, which is not included in this proceeding, is passed through to customers through the Gas Cost Adjustment Clause (GCAC), which was established by the Commission in D.0 in. SCE also serves,00 electricity customers and 1,00 water customers on Catalina. Decision (D.) 0 authorized SCE to purchase all of the gas, water and electric service facilities in Catalina. Both base distribution revenue increases were phased-in over a three year period.

13 II. FORECAST OF GAS SALES A. Purpose The purpose of this chapter is to describe the forecast of Catalina Island gas sales for the years 00 to 0. It consists of a summary of the forecast and a brief description of the methodology used to produce the forecast. The forecast calls for total sales to decline slightly in 00 compared to 00. Sales were 1, therms in 00, while 0, therms are predicted for 00. Sales are forecast to decrease again in 00 to,0 therms, about a 1. percent decline from the previous year. Gas therms are then predicted to remain unchanged at the 00 level for the remainder of the forecast. B. Methodology The Catalina Island gas sales forecast is constructed by combining separate forecasts of residential and non-residential gas consumption. Non-residential sales consist mainly of commercial customers. Each of these forecasts in turn consists of two parts: a customer forecast, which is based on the number of active service connections, and secondly, a forecast of monthly gas consumption per customer. The natural gas consumption per customer forecasts are based upon econometric models that utilize monthly data over the period January 1 to February 00. These models estimate a statistical relationship between natural gas consumption per customer and other factors we believe influence the demand for natural gas. The principal driver of variation in residential natural gas consumption is winter season weather. We find a high degree of statistical significance between changes in winter season temperatures and changes in winter season residential gas consumption. We also find that changes in Catalina Island natural gas rates influence gas consumption, though the measured effect is small, with a higher degree of statistical uncertainty. The major source of variation in non-residential gas consumption is the number of visitors to the Island. We use the number of cross-channel and cruise ship passengers as a proxy for the total number of tourists. We find that this variable is highly statistically significant in explaining variations in historical

14 non-residential natural gas consumption. Similar to residential gas consumption, winter season weather is also an important factor in explaining non-residential gas consumption. C. Gas Sales Forecast As shown in Table II-1 residential natural gas consumption is forecast to increase about. percent in 00, decline in 00 and then remain unchanged thereafter. The reason for the increase in 00 is a return to cooler, more typical winter weather. We estimate that winter season temperatures in 00 (expressed as heating degree days) were about eight percent below normal i.e., significantly milder than is typical. A return to more normal winter temperatures has the effect of increasing residential gas consumption, all other things equal. On the other hand, residential gas rates are expected to be about 1 percent higher in 00 compared to 00, measured in constant dollars. Beyond 00, we assume that residential gas rates remain about unchanged in real terms at the 00 level. The impact of higher gas rates in 00 and afterwards is to decrease residential gas consumption, all other factors unchanged. The forecast calls for non-residential sales to decline about two percent in 00 compared to 00 and to fall a further one percent in 00. As indicated, non-residential sales are influenced largely by the number of tourists visiting the island. The number of cross-channel visitors fell sharply in both 00 and 00 compared to 00. A likely reason for the decline is higher ferry passenger rates due to increases in fuel costs. We expect a modest recovery in cross-channel passengers in 00 and beyond, compared to 00, but given the likelihood that fuel costs will remain high; the projected number is still significantly below the number of cross-channel visits experienced prior to 00. The number of passengers visiting Catalina on cruise ships, however, has remained at a relatively high level over the past few years. We expect the number of cruise ship visitors to remain at about the average throughout the forecast period. D. Number of Customers The other component of the sales forecast is the number of customers that are projected during the test year. The number of residential gas customers has been relatively constant since 00, averaging 1,1 to 1,1. However, since mid-00, the number has risen a little faster than usual. By February 00, the

15 number of residential customers had reached 1,0. In order to capture this recent upward trend, but not unduly extrapolate this trend into the future, we use the average number over the most recent six months as a proxy for the number of residential customers throughout the forecast period. We therefore assume residential customers are constant at a level of 1,0 in 00 and beyond. The number of non-residential customers has also been mostly unchanged, not just over the last few years, but throughout most of the historical period. However, since the beginning of 00, the number of non-residential customers has been declining at a slightly more noticeable rate. In order to capture this recent trend, but not unduly extend it into the future, we assume that the number of future non-residential customers is equivalent to the number of non-residential customers averaged over the most recent six months. We thus assume that non-residential customers are unchanged at a level of. Table II-1 Gas Sales Forecast (Therms) Year Residential Commercial Total 00,,01 1, 00, 1,1 0, 00,01,,0 00,01,,0 0,01,,0 0,01,,0 Note: 00 contains actual sales to February and estimates thereafter.

16 III. OPERATIONS AND MAINTENANCE (O&M) EXPENSES A. Introduction This chapter describes the $,000 in O&M expenses SCE expects to incur in Test Year 00. The request represents a percent increase from the recorded/adjusted 00 expenses of $,000. The O&M subaccounts included in this application record the labor and non-labor expenses incurred for the general supervision, operation and maintenance of Catalina Island s gas production and distribution systems. Funding at this level is vital to ensuring that SCE continues to operate and maintain the gas production and distribution systems in a safe, reliable, and cost-effective manner. SCE s recorded O&M expenses over the last five years have increased by percent overall, since SCE filed the last gas rate case and are on an upward trend. Most of the increase is due to: (1) continued compliance with the various state and federal regulations; () increased maintenance, testing, and repair of gas pipelines; and () increased staffing levels. SCE plans to continue operating and maintaining the gas production and distribution systems at this spending level through the Test Year, with only a modest increase above recorded/adjusted 00 levels. Figure III-1 shows the combined five-year historical expenses for Catalina accounts, together with the 00, 00 and 00 forecasts. Table III- shows these same 00 through 00 expenses summarized by FERC account. The details and support of each FERC account in this chapter includes a description of the account, an explanation of the adjustments made to recorded costs, an explanation of the year-to-year variances, an analysis of the various forecasting methodologies considered for each account, and the basis for the Test Year forecast. See Figure III-. SCE only forecast Test Year expense levels.

17 Figure III-1 Total O&M Expenses (Constant 00$) 1, O&M Labor O&M Non-Labor O&M Labor O&M Non-Labor O&M Total 0 0 Forecast Table III- Summary of Adjusted O&M Recorded and Adjusted 00-00/Forecast (Constant 00, In $000) Account: L NL 0.1 L NL.0 L.0 NL L 1.0 NL 0.0 L NL L 0.0 NL /1 L /1 NL TOTAL L TOTAL NL

18 B. ESTIMATING METHODOLOGY 1. Introduction The purpose of this section is to describe the process SCE used to evaluate historic expenses incurred and the need to adjust these recorded levels to project a reasonable forecast for 00 Test Year O&M expense. This section contains a detailed description of the methodology used to develop estimates for each FERC account and describes the standards for adjusting recorded O&M expenses. In addition to the descriptions contained here, further detail is included in our workpapers.. Description of Estimating Methods The approach used to estimate future O&M funding levels for a given activity is a structured and systematic process; however, it does leave room for some judgment to be used. There are various internal and external factors influencing expense levels in any particular group of accounts. Therefore, it is essential that the methodolgy provide a certain amount of flexibility to allow judgment and good business sense to drive decisions.uu a) Analysis and Adjustments of Historical Data The first step of the estimation process includes a thorough review of historic recorded labor and non-labor expenses. The next step is to remove one-time non-recurring expenses to normalize and smooth out the recorded historic expenses to forecast normal ongoing operations for each functional area. This review requires that recorded labor and non-labor expenses for the period 00 through 00 be escalated to constant 00 dollars to provide comparable year-to-year analysis. Often, there is no clear pattern established in the historical record due to year-to year variations. There are many reasons for variations in historical recorded expenses for a given function, which can be one-time, non-recurring operational events that have no bearing on future-year expenses. Other variations are accounting adjustments that simply move recorded expenses from one account to another. The process of adjusting recorded costs helps to establish an appropriate level for the 00 base year and provides a consistent record from which to analyze trends or averages for

19 forecasting purposes. Recorded year adjustments are discussed for each FERC account and are described in detail in our workpapers. b) Estimating Test Year Expenses After we adjust our historical data to reflect a consistent record of on-going operations for each functional area the historical data can be used to make initial estimates of our Test Year forecast. Several different methods are used to calculate Test Year estimates of labor and non-labor expenses within each account. These methods include: Linear trending: Historic years (00 00) in,, and year increments of recorded/adjusted O&M expenses are trended using standard regression analysis. Regression results with an absolute R-Squared value equal to or less than 0. were rejected as being statistically unreliable for forecasting purposes. Averaging: Historic years (00 00) in,, and year increments of recorded/adjusted O&M expenses are arithmetically averaged. Averages having standard deviations equal to or greater than ½ of the average value were rejected as being statistically unreliable for forecasting purposes. Last-Year Recorded: Test Year estimate is equivalent to the last year (e.g., 00 base year) of recorded/adjusted O&M expenses; and Budget Based: Test Year estimate is based on a detailed analysis of the activities that we expect to perform and the expenses we expect to incur in the Test Year. Not all functional accounts lend themselves to a mathematical estimating method based on historical data. Wide variations in expense levels would tend to reduce the use of the trending as an accurate predictor of Test Year expenses. Some expenses are subject to external factors that cannot be accurately predicted based on what happened in the past. Other functions may be better estimated using a special study approach, a bottoms-up calculation of resources required. Other functions may be more accurately estimated by using a combination of historical analysis (i.e., trending, averaging, last year recorded) and budget-based approach for incremental costs. The combination approach starts with a base level of expenses to cover those activities that are expected to continue in the

20 future and then add or subtract incremental costs to that base amount. The addition or subtraction of incremental costs to the base amount will account for expected changes in workload, scope of work, or new activities not previously performed. C. Summary and Overview of O&M Request 1.. Gas Production LPG Processing Terminal Labor and Expenses We are requesting a total of $0,000 for Test Year 00 in FERC Account., which includes $,000 for labor and $,000 for non-labor. Figure III- shows recorded expenses for the past five years, as well as forecast years Figure III- FERC Acct..: Gas Production LPG Processing Terminal Labor & Expenses (Constant 00$) Labor Non-Labor 0 Other Total Forecast 1 1 This account includes the labor and material expenses incurred in operating and maintaining the gas production plant. In addition, the activities associated with this account include maintaining the gas utility s emergency procedures manual, which includes regular inspections and testing of the gas production facilities, tracking and reporting the results of these inspections and tests to the Commission, and training for respective duties contained in the emergency procedures manual. See G.O. -A () Until mid-00, SCE was required to develop and maintain a Risk Management Plan (RMP). Upon further review in 00, it was determined through approval from internal departments and external (Continued)

21 State regulations require that the gas plant have in place an emergency procedures manual to cover the potential emergency condition that can develop whether or not a fire has occurred. Such procedures include shutdown or isolation of equipment to ensure the cutoff of escaping gas or liquid, use of fire protection facilities, notification of public authoirities, first aid, and duties of personnel. The required training activities are designed to increase the knowledge and expertise of our field personnel to match industry standards. Regulations require personnel to have the necessary knowledge, skills, and abilities to carry out the duties and responsibilities as provided in the various operating procedures. These regulations require SCE to develop comprehensive operating procedures and formalized training programs. To meet these requirements, SCE, with the assistance of outside consultants, created detailed operating procedures and training manuals and established formal employee training programs. We anticipate that these procedures and programs will need to be continually modified to ensure that SCE complies with changing regulatory requirements. a) Historical Analysis (1) Adjustments One adjustment was made to this FERC account in 00 to remove a nonrecurring Catalina gas transaction related to diesel fuel. () Labor Labor expenses for the period 00 through 00 ranged from a low of $1,000 in 00 to a high of $1,000 in 00. As indicated in Figure III-, historical costs have no clear trending from 00 through 00 with the costs fluctuating upward and downward through the years. In 00 and 00 the recorded costs were relatively higher than in recent years for this account, Continued from the previous page agencies that SCE is no longer required to maintain a RMP. These costs were embedded in our historic expenses through mid-00. See NFPA chapter Fire Protection, Safety, and Security See Title 0 Code of Federal Regulations,.

22 which was primarily due to the implementation of enhanced preventive maintenance measures at the gas production plant. Labor expenses over the last few years have remained relatively stable, with the exception of 00 when the costs decreased due to less overtime. This decrease was partially offset by an increase in contractor work that recorded as non-labor. () Non-Labor Non-labor expenses for the period 00 through 00 ranged from a low of $,000 in 00 to a high of $0,000 in 00. As indicated in Figure III-, historical costs have no clear trending from 00 through 00 with the costs fluctuating upward and downward through the years depending on the amount of consultant work required each year. b) Estimated Test Year Expense For Test Year 00, we forecast $0,000 for FERC account., which equals the 00 Base Year. The last recorded year methodology is the most appropriate methodology for forecasting Test Year expenses in this account because we expect to continue to perform the same activities that recorded to this account in 00. The linear trending methodologies yielded the lowest Test Year forecasts for labor and the highest forecast for non-labor expenses. Linear trending was rejected because of low R- squared statistics for both labor and non-labor expenses. Also, the results from linear trending were not at the operating levels required to provide this function in the Test Year. The five year averaging methodology was rejected as the basis for the 00 Test Year amount for labor since the results were lower than necessary to provide this function going forward. Using the three and four-year averages resulted in a higher forecast than what was needed. The averaging methodology was also rejected for forecasting non-labor expenses because the results were higher than necessary to provide this function. 1

23 ..1 Gas Production LPG Processing Terminal Maintenance Supervision and Engineering We are requesting a total of $,000 for Test Year 00 in FERC Account.1, which includes $1,000 for labor and $,000 for non-labor. Figure III- shows recorded expenses for the past five years as well as our estimates for forecast years Figure III- FERC Acct.1: Gas Production LPG Processing Terminal Maintenance Supervision & Engineering (Constant 00$) Labor Non-Labor Other Total Forecast This account includes labor and material expenses incurred in the general supervision and direction of the maintenance of SCE s LPG gas vaporization plant. a) Historical Analysis (1) Adjustments One adjustment was made to this FERC account in 00 to remove a nonrecurring Catalina gas transaction related to diesel fuel. () Labor Labor expenses for the period 00 through 00 ranged from a low of $,000 in 00 to a high of $,000 in 00. 1

24 As indicated in Figure III-, historical costs for labor and non-labor from 00 through 00 have fluctuated throughout the years with no pattern. () Non-Labor Non-labor expenses for the period 00 through 00 ranged from a low of $,000 in 00 to a high of $,000 in 00. As indicated in Figure III-, historical costs for labor and non-labor from 00 through 00 have fluctuated throughout the years with no discernable pattern. The increases in 00 and 00 were due to contract and consultant work for implementing training programs and emergency plan preparation related to the new gas plant. 1 In addition, gas piping modifications of the deluge system, fire suppression inspections, an additional leak detector, and gas calibration at the LPG plant contributed to increased costs in these years. These types of costs are expected to occur periodically through the Test Year because of the associated maintenance and operation with the gas production plant. b) Estimated Test Year Expense The forecast labor expense of $1,000 and non-labor expense of $,000 for Test Year 00 is equal to the five-year (00-00) average for this account. The five-year averaging methodology is the most appropriate for forecasting Test Year expenses in this account because the result smoothes out the year-to-year fluctuations for the Test Year. The linear trending methodologies yielded the highest and the lowest forecast for labor and the highest Test Year forecast for non-labor. Linear trending was rejected because of the negative labor results and results that are higher or lower than what is forecast to be required to provide this function in the Test Year. The last recorded year methodology was rejected as the basis for the Test Year forecast for labor expenses because the result was lower than necessary to provide this function going forward and for non-labor expense because the result was higher than necessary. 1 Shaw Environmental conducted most of the training emergency plan preparation for the new gas plant. 1

25 . Gas Distribution Mains and Service Expenses We are requesting a total of $,000 for Test Year 00 in FERC Account, which includes $,000 for labor and $,000 for non-labor. Figure III- shows recorded expenses for the past five years as well as our estimates for forecast years Figure III- FERC Acct : Gas Distribution Mains and Services Expenses (Constant 00$) Labor Non-Labor 1 1 Other Total 1 Forecast This account includes labor and material expenses incurred in operating the gas distribution system mains and services. a) Historical Analysis (1) Adjustments Two adjustments were made to the recorded non-labor expenses; a $,000 reduction in 00 and an $,000 reduction in 00. Both of these adjustments remove a Catalina gas transaction related to diesel fuel. () Labor Adjusted labor expenses for the period 00 through 00 ranged from a low of $,000 in 00 to a high of $,000 in 00. As indicated in Figure III-, historical adjusted labor costs have remained consistent. 1

26 () Non-Labor Non-labor expenses for the period 00 through 00 ranged from a low of $1,000 in 00 to a high of $,000 in 00. As indicated in Figure III-, adjusted non-labor costs from 00 through 00 have trended upward. Most of the increase in recorded costs was due to consultant work to develop and maintain regulatory compliance plans and vendor fees to prepare documentation and provide assistance as regulations changed and updates were required. b) Estimated Test Year Expense For Test Year 00, we forecast $,000 for FERC account, which equals the 00 base year. The last year recorded methodology is the most appropriate methodology for forecasting Test Year expenses in this account because we expect to continue to perform the same type and level of activities that recorded to this account in 00. The linear trending, averaging, and last year recorded methodologies yielded the same Test Year result for labor of $,000, with the exception of the five-year trending that resulted in $1,000. Linear trending for non-labor had strong R-squared results at one or close to it, however it was rejected because of results that were higher than necessary to meet forecast expenses in the Test Year. The averaging methodologies for non-labor were also rejected because of results that were lower than what is required to cover expenses in this function for the Test Year. Both of these methodologies were rejected because they resulted in higher or lower forecast expenses than necessary to provide this function going forward.. Gas Distribution Maintenance of Mains We are requesting a total of $1,000 for Test Year 00 in FERC Account, which includes $,000 for labor and $,000 for non-labor. Figure III- shows recorded expenses for the past five years as well as our estimates for the forecast years

27 Figure III- FERC Acct : Gas Distribution Maintenance of Mains (Constant 00$) Labor 1 Non-Labor 0 Other Total Forecast This account includes the costs incurred in the maintenance of distribution services and mains. Also included are payroll, automotive, and other expenses incurred in receiving calls, researching, or locating underground facilities at customers request. a) Historical Analysis (1) Adjustments Two adjustments were made to the recorded non-labor expenses, a $0,000 reduction in 00 and an $1,000 reduction in 00. Both of these adjustments removed nonrecurring Catalina gas transactions related to diesel fuel. () Labor Adjusted labor expenses for the period 00 through 00 ranged from a low of $,000 in 00 to a high of $,000 in 00. As indicated in Figure III-, historical costs for labor have remained relatively constant. () Non-Labor Adjusted non-labor expenses for the period 00 through 00 ranged from a low of $,000 in 00 to a high of $,000 in 00. As indicated in Figure III-, historical 1

28 costs for labor have remained relatively consistent while non-labor costs have shown no discernable pattern. In 00, recorded non-labor costs were substantially higher due to outside consultant costs. Because of changing regulations, consultants were hired to revise our Operations Manual to ensure compliance with the various regulatory requirements. In addition, contractors performed a gas system assessment and redesigned the operator qualification procedures to ensure compliance with the various regulations. b) Estimated Test Year Expense For Test Year 00, we forecast $1,000 for FERC account, which equals the 00 Base year. The last year recorded methodology is the most appropriate methodology for forecasting Test Year expenses in this account because we expect to continue to perform the same type and level of activities that recorded to this account in 00. The linear trending methodologies yielded both the highest and lowest non-labor forecasts. However, linear trending was rejected because of a low R-Squared result, or results that were unrepresentative of Test Year expenses. The averaging methodologies were rejected as the basis for the 00 Test Year amount for non-labor expenses because they resulted in forecasts higher than necessary to meet Test Year expenses.. Gas Distribution Maintenance of Meters and House Regulators We are requesting a total of $,000 for Test Year 00 in FERC Account, which includes $,000 for labor and $1,000 for non-labor. Figure III- shows recorded expenses for the past five years as well as our estimates for the forecast years

29 Figure III- FERC Acct : Gas Distribution Maintenance of Meters and House Regulators (Constant 00$) Labor 0 0 Non-Labor Other Total 0 Forecast This account includes expenses incurred in the maintenance and relocation of existing gas meters and house regulators. Also included in this account are the costs of testing, servicing, activating, and deactivating customer meters. a) Historical Analysis (1) Adjustments One adjustment was made to this FERC account in 00 to remove a Catalina gas transaction related to diesel fuel. () Labor Adjusted labor expenses for the period 00 through 00 ranged from a low of $0 in 00 and 00 to a high of $,000 in 00. As indicated in Figure III-, historical costs for labor have shown no discernable pattern. () Non-Labor Adjusted non-labor expenses for the period 00 through 00 ranged from a low of $0 in 00 to a high of $,000 in 00. As indicated in Figure III-, historical costs for non-labor costs have shown no discernable pattern. 1

30 b) Estimated Test Year Expense For Test Year 00, we forecast $,000 for FERC account, which is equal to the five-year (00-00) average for this account. The five-year averaging methodology is the most appropriate for forecasting Test Year expenses in this account because the result smoothes out the yearto-year fluctuations for the Test Year. This account reflects costs for meter work related to capital projects for the relocation and installation of meters and in recent years have been capitalized. However, due to the infrastructure replacement work planned during this rate case cycle, we anticipate an increase in meter testing and maintenance. We are requesting recognition for that additional work for the Test Year and are using a five-year average as our forecast. The linear trending methodologies yielded both the highest non-labor forecast and the lowest labor forecast. However, linear trending was rejected because the labor forecast was negative and the results for non-labor were higher than forecast needs to provide this function in the Test Year. The last year recorded methodology was rejected because the recorded 00 costs are not expected to remain at this level for either labor or non-labor expenses.. 0 Gas Distribution Meter Reading Expenses We are requesting a total of $,000 for Test Year 00 in FERC Account 0, which includes $,000 for labor and $1,000 for non-labor. Figure III- shows recorded expenses for the past five years as well as our estimates for the forecast years

31 Figure III- FERC Acct 0: Gas Distribution Meter Reading Expenses (Constant 00$) Labor Non-Labor Other Total 1 Forecast This account includes the labor and non-labor expenses related to reading customers gas meters. a) Historical Analysis (1) Adjustments No adjustments were made to the recorded expenses in this FERC account. () Labor Labor expenses for the period 00 through 00 ranged from a low of $,000 in 00 to a high of $,000 in 00. As indicated in Figure III-, historical costs for labor have shown no discernable pattern. () Non-Labor Non-labor expenses for the period 00 through 00 ranged from a low of $0 recorded in 00 and 00 to a high of $1,000 in As indicated in Figure III-, historical costs for non-labor is relatively consistent. 1

32 1 1 1 b) Estimated Test Year Expense For Test Year 00, we forecast $,000 for FERC account 0, which is equal to the five year (00-00) average for this account. The five-year averaging methodology is the most appropriate for forecasting Test Year expenses in this account because the result smoothes out the yearto-year fluctuations for the Test Year period. Linear trending was rejected due to the negative forecast expenses for both labor and non-labor. The last year recorded methodology was rejected because the recorded 00 costs are not expected to remain at this level for either labor or non-labor expenses.. 0/1 Gas Distribution Safety Training, Misc. Non-Operating Expenses, Customer Accounting and Office Supplies We are requesting a total of $,000 for Test Year 00 in FERC Account 0/1, which includes $1,000 for labor and $1,000 for non-labor. Figure III- shows recorded expenses for the past five years as well as our estimates for the forecast years

33 Figure III- FERC Acct 0/1: Gas Distribution Safety Training, Misc. Non-Operating Expenses, Customer Accounting and Office Supplies (Constant 00$) Labor Non-Labor Other Total Forecast This account includes office supplies and expenses incurred with the general administration of the utility s operations assigned to specific A&G departments and not provided for in other accounts. In addition, it also includes costs associated with conducting safety-related training, supervision and management costs. a) Historical Analysis (1) Adjustments One adjustment was made to this FERC account in 00 to remove a nonrecurring Catalina gas transaction related to diesel fuel. () Labor Adjusted labor expenses for the period 00 through 00 ranged from a low of $1,000 in 00 to a high of $1,000 in 00. As indicated in Figure III-, historical costs have increased since 00. This was primarily due to the labor costs associated with hiring a new superintendent to oversee the water and gas operations.

34 () Non-Labor Non-labor expenses for the period 00 through 00 ranged from a low of $1,000 in 00 to a high of $1,000 in 00. As indicated in Figure III-, historical costs have no clear trend from 00 through 00 with the costs fluctuating upward and downward through the years. Prior to 00, the non-labor costs were substantially lower than in the last three years of recorded expenses. This recent history is more representative of the non-labor expenses expected to continue through the Test Year because of the need for consultants. Because of the changing regulations, SCE retained consultants to improve the maintenance and repair of the gas production and distribution system. These consultant costs are expected to occur through the Test Year in order to provide our personnel with plan procedures and formal new and ongoing training for the gas operations. b) Estimated Test Year Expense For Test Year 00, we forecast $,000 for FERC account 0/1, which is equal to the last year recorded labor expense and the three-year (00-00) average for non-labor expense. The last year recorded methodology is the most appropriate methodology for forecasting Test Year labor expenses in this account because we expect to continue to perform the same type and level of activities that recorded to this account in 00. The three-year averaging methodology is most appropriate for forecasting Test Year non-labor expenses in this account because the recent history is more representative than base year 00 of what is expected to occur in the Test Year due to consulting work requirements. Since 00, consultants have been hired to improve operations of the gas facilities for maintenance and repair of the system. The linear trending methodologies were rejected due to higher results than what is needed to meet operating requirements in Test Year 00. The last year recorded methodology was rejected because the recorded 00 costs are not expected to remain at this level for non-labor expenses.

35 1. Gas Distribution - Other Operating Revenue (OOR) Bottle Propane Sales SCE supplies propane to major customers not connected to Catalina s gas distribution system on a retail basis to support heating systems in remote parts of Catalina Island. SCE also supplies propane to individual customers for personal use. Propane sales on a retail basis is necessary due to its limited availability on Catalina. Forecast OOR propane sales to individual customers for 00 are estimated to be $,000. SCE expects to record revenues in the Test Year consistent with the five-year average (00-00) revenues.. Gas Distribution - Other Operating Revenue (OOR) Service Establishment SCE also receives revenues for miscellaneous gas system service establishment charges to new customers. These revenues represent approximately $1,000 per year. SCE expects to record similar charges as recorded from 00 to 00 and therefore used a five-year average for our test year request.

36 IV. CAPITAL PROJECTS A. Introduction This chapter describes the $. million in capital expenditures for projects estimated to close by year-end These expenditures are vital to ensuring that SCE continues to provide safe and reliable gas service to its customers on Catalina. SCE will devote $1.0 million of these funds to replacing its aging and deteriorating infrastructure and the automation of the monitoring and control of the gas plant and distribution system. The gas distribution system, most of which is more than 0 years old, will be replaced during a long-term, systematic infrastructure replacement program that will carry through several rate case cycles. SCE will also install a Supervisory Control and Data Acquisition (SCADA) system that will automate the monitoring and control of the gas plant and distribution system. In addition, SCE is requesting $1. million in incremental capital expenditures related to scope changes to projects previously approved in SCE s 00 Catalina Gas GRC. These scope changes occurred on the Pebbly Beach Village Line Replacement and the Liquefied Petroleum Gas (LPG) Vaporization Plant Upgrade. The scope changes are discussed in detail below. SCE is only seeking recovery of the additional capital spend that is above Commission approved levels. Table IV- lists each project and the capital expenditures SCE is requesting in this application. 1 See workpapers for cost estimate of each project.

37 Table IV- Capital Expenditure Forecast Projects Costs Infrastructure Replacement Program $0,000 Automation System SCADA $,000 Pebbly Beach Village Line Replacement Project* $,000 LPG Vaporization Plant Upgrade* $1,1,000 Total $,1,000 * The Commission approved these projects in SCE s 00 Gas General Rate Case (D ). SCE s request reflects the incremental capital expenditures above authorized levels. SCE has already incurred a majority of the project costs. B. Infrastructure Replacement Program 1. Overview In 00, SCE began the Infrastructure Replacement Program to systematically replace the piping on its aging and deteriorating gas distribution system. The long-term project, which involves replacing up to 00 feet of pipe per year, will continue through several rate case cycles. The Infrastructure Replacement Program is a critical part of SCE s commitment to continue to provide safe and reliable service to its gas customers on Catalina Island. SCE projects capital expenditures of $0.0 million for this project.. Background The Catalina Island gas distribution system consists of. miles of pipeline, nearly all of it installed over forty years ago prior to SCE purchasing the gas system from the Santa Catalina Island Company (Island Company). When the pipeline was originally constructed, cathodic protection was installed to prevent the steel pipes from corroding and rusting. When cathodic protection is installed, a pipeline can safely operate for many years, often forty years or more, before it deteriorates. However, even with cathodic protection, the pipeline will eventually wear out and require replacement. SCE utilized a third-party vendor specializing in gas distribution pipelines to perform annual leak detection surveys. The vendor has found indications of underground gas leakage as a

38 result of corrosion. 1 These inspections have also found sections of pipeline with moisture intrusion, which can cause corrosion of the valve or the pipeline itself, eventually leading to further gas leakage. In addition, SCE crews, while performing periodic inspections or during the course of their routine work, have also identified deteriorated sections of pipeline. 1 Whenever evidence of significant rust or corrosion has been found, those sections of the pipeline have been either repaired or replaced. 1. Need for Infrastructure Replacement Program At the start of the infrastructure replacement project, SCE and contract personnel will inspect the pipeline to identify the sections most in need of replacement. Priority will be given to those sections that demonstrate the highest level of deterioration. The existing steel pipeline will be replaced with medium density polyethylene (MDPE) which has an expected life of approximately 0 years. MDPE is the gas industry s standard for replacement of gas distribution piping for both residential and commercial applications. MDPE is the best choice because of its many unique properties, including: MDPE is flexible and can conform to uneven ground contours and can withstand considerable earthquake (seismic) activities MDPE is not subject to corrosion MDPE is easier to install than steel pipelines because of the simplicity of the joining process and its lighter weight MDPE is less expensive than steel pipeline 1 See workpapers entitled Heath Report for copies of the leak detection surveys. 1 See workpapers for copies of the SCE gas field crew log books that note gas leakage. 1 In addition, SCE submits to the Commission quarterly gas leak related incident reports. See workpapers entitled Heath Report for copies of the leak detection surveys and the workpapers entitled Quarterly Report of Reportable and Non-Reportable Gas Leak-Related Incidents for copies of the quarterly reports.