February 6, RE: Southern California Edison 2006 General Rate Case, A , et al.

Transcription

1 Frank A. McNulty Senior Attorney February 6, 2005 Docket Clerk California Public Utilities Commission 505 Van Ness Avenue San Francisco, California RE: Southern California Edison 2006 General Rate Case, A , et al. Dear Docket Clerk: Enclosed for filing with the Commission are the original and five copies of the SOUTHERN CALIFORNIA EDISON COMPANY (U 338-E) COMMENTS ON PROPOSED DECISION OF ALJ FUKUTOME in the above-referenced proceeding. We request that a copy of this document be file-stamped and returned for our records. A self-addressed, stamped envelope is enclosed for your convenience. Your courtesy in this matter is appreciated. Very truly yours, Enclosures cc: All appearances in A , et al. (U 338-E) P.O. Box Walnut Grove Ave. Rosemead, California (626) Fax (626)

2 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Application of Southern California Edison Company (U 338-E) for Authority to, Among Other Things, Increase Its Authorized Revenues for Electric Service in 2006, and to Reflect that Increase in Rates. Investigation on the Commission s Own Motion into the Rates, Operations, Practices, Service and Facilities of Southern California Edison Company. ) ) ) ) ) ) ) ) ) ) ) Application (Filed December 21, 2004) Investigation (Filed May 26, 2005) SOUTHERN CALIFORNIA EDISON COMPANY (U 338-E) COMMENTS ON PROPOSED DECISION OF ALJ FUKUTOME MEGAN SCOTT-KAKURES JAMES M. LEHRER FRANK A. MCNULTY Attorneys for SOUTHERN CALIFORNIA EDISON COMPANY 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California Telephone: (626) Facsimile: (626) scegrc@sce.com Dated: February 6, 2006

3 SUMMARY OF RECOMMENDATIONS In this 2006 general rate case, SCE has requested a test year increase of $325 million. The Proposed Decision (PD) issued on January 17, 2006, authorizes an increase of $61 million, a reduction to SCE s request of some $264 million. The major categories of these cuts are shown in the figure below: PD Adjustments (112) (44) (30) (17) (9) (41) (11) 61 0 SCE Error, Deprec., Mohave Results Sharing T&D Expense A&G Gen O&M Capital- Related Other ALJ As shown in the figure above, of the $264 million of cuts, some $112 million is a combination of an error in the rate of return, Mohave generating station transitioning to temporary shutdown, and a compromise depreciation rate adjustment, mid-way between SCE s request and the ORA s proposals. SCE has determined it can operate for this GRC cycle within the PD s allowed depreciation rates and the rest of the $112 million would not affect SCE s operations in the immediate future. As such, they are not addressed in the attached comments, but for a single footnote. The remaining cuts to SCE s request, totaling some $152 million, if adopted, would require SCE to significantly reduce 2006 operating budgets. There are two areas of reductions within this $152 million that are particularly alarming those with a direct impact on electric system reliability and the stepped-up investment in recruitment, training and retention of SCE employees. If these particular adjustments were to be adopted by the Commission, SCE s system reliability would suffer the consequences. The PD s employee training and compensation adjustments would likewise detrimentally affect the number and quality of employees SCE can successfully recruit and retain. The PD proposes cuts of $8.55 million to SCE s T&D operations and maintenance expense that are earmarked for reliability-related work, including: 1

4 $1.0 million adjustment to Maintenance of Misc. Station equipment; $3.35 million adjustment to Poles and Structures Transmission Tower repair; $1.6 million reduction to Insulators and Conductors; $1.7 million cut from the Structural Analysis Methodology (SAM) Pole Inspections; $0.9 million cut from Fleet Vehicle replacement request. Second, the PD proposes cuts of $110 million to SCE s 2006 T&D capital expenditures needed to set new customer meters and replace worn out infrastructure, including: $7.27 million from SCE s 2006 estimate of the cost to install new customer meters; $17.5 million from SCE s program to replace aging underground cable; $10.5 million from SCE s program to replace A-Bank transformers at substations; $4.9 million from SCE s Distribution Protection and Control Replacement Program; $13.1 million from SCE s Substation Equipment Reactive Replacement Program. Below are some examples of electric system investments that would be cancelled or postponed, if the PD is adopted: 16 A-Bank Transformers would not be replaced, all of which are at least 20 years older than their design lives; 174 Circuit Breakers would not be replaced; 160 Distribution Circuits (RCSS) would not be automated; 1,014 Distribution switches would not be replaced; 500 miles of aged underground cable would not be changed out; 31 of the least reliable Distribution Circuits would not be upgraded; 1,100 poles would not be fiberglass wrapped or steel stubbed a lost opportunity to extend their operating lives. Next, the PD would cut some $51 million from SCE s request in a number of employee training and compensation programs, taking some important tools away from the company as it works to address the looming problem of a workforce age bubble. Some of the programs the PD would cut are: 2

5 SCE s incentive compensation program, Results Sharing, would be cut in half, an adjustment of $44 million, based solely on a policy that shareholders should fund 50 percent of incentive compensation; a policy the Commission repudiated just 19 months ago in D This cut is irrational in light of the PD s finding, based on uncontroverted evidence, that SCE s total compensation is reasonable. The SONGS Aging Workforce replacement program would be cut $2.95 million. T&D Aging Workforce initiatives would be cut $2.5 million, plus $.900 million cut from the T&D Skills Training Delivery program. The PD would also cut $1 million from SCE s Talent Management program, which provides high-potential employees a chance to gain important management skills. The PD rejects the Post-Test Year ratemaking proposals of every party, opting instead for its own new methodology. SCE proposed to continue the same ratemaking approach the Commission adopted just 19 months ago in D , in which SCE would be given the authority to spend the budget approved by its Board of Directors in , subject to a balancing account. The PD invokes a novel rationale for rejecting SCE s proposal, observing that since no party elected to review SCE s evidence, the company s capital forecast cannot be adopted. The PD compounds the problem by applying capital escalation rates that are not in the evidentiary record. While SCE s forecast most accurately represents the revenues needed to provide reliable service to its customers, if the Commission adopts the ALJ s new methodology, it must use capital escalation rates from the evidentiary record. In the comments that follow, SCE identifies proper capital escalation rates for 2007 and 2008, based on record evidence. The PD makes significant adjustments to SCE s request for funding the Workers Compensation reserve going forward ($7 million), and also uses the accumulated reserve a shareholder liability as a rate base offset; the PD wrongly assumes that the reserve represents a source of working capital from ratepayers. This rate base offset adjustment penalizes SCE shareholders twice first, SCE made a prudent decision to forgo earnings and establish the reserve with shareholder equity because authorized levels were inadequate; second, the PD would take this reserve and subtract it from rate base, again diminishing SCE shareholders equity. 3

6 These two Workers Compensation adjustments are not only wrong, but fundamentally at odds with each other. First, the record demonstrates that SCE shareholders are responsible for the current reserve balance because previously-authorized levels were inadequate and now depleted. For test year 2006, SCE has a request for Workers Compensation reserve contributions going forward, and the PD would adjust that request by $7 million. The PD would ensure that SCE shareholders continue to subsidize the reserve with their equity, and that subsidy would be used to reduce rate base, year after year. This adjustment penalizes SCE for acting responsibly, and in the case of the reserve, penalizes SCE twice. This PD further erodes SCE s rate base by perpetuating the Commission s policy of denying inclusion in rate base of the permanent portion of SCE s fuel inventory. The PD errs by relying, in part on a twenty-year old decision as the basis for rationalizing the adjustment, when SCE clearly pointed out that the reason for inclusion of the fuel inventory is because the Commission embraced a new policy just 19 months ago, in SCE s last GRC. The PD reiterates Commission dismissal of SCE s request, but does not address the reasons for cherry-picking these adjustments that only reduce rate base. The Commission has a responsibility to address the consequences of its changed policy if it concludes that a portion of customer deposits represent a long-term source of capital for SCE, then it must likewise recognize that a portion of SCE s fuel inventory is always held by SCE, thus warranting long-term financing. The Commission has recognized this fact for natural gas distribution companies, and SCE s circumstance is the same. In sum, the PD reduces SCE s 2006 request by some $264 million, with $152 million of cuts presenting SCE with varying degrees of operating challenges, some with a significant impact on workforce recruitment and system operation. The following comments address the most troubling aspects of the PD and the areas which would have the most impact on company operations. At minimum, the Commission should reverse the adjustments identified in these pages. 4

7 Comments of Proposed Decision SUBJECT INDEX Section Title Page 1. Introduction Generation Expenses - Mohave Generation Expenses - SONGS The PD Errs In Arbitrarily Reducing The SONGS 2 & 3 RFO Estimate Removing Bechtel Supplemental Labor From SCE s RFO Estimate Is Inconsistent The PD Arbitrarily Reduces Aging Workforce Replacement Costs Transmission And Distribution Expenses Subaccount Miscellaneous Transmission Expenses Other Organizations Subaccount Maintenance of Miscellaneous Station Equipment Subaccounts (Poles and Structures) and (Insulators and Conductors) Subaccount Overhead Line Operations Subaccount IMM Distribution Operations and Engineering Subaccounts and Aging Workforce Subaccount Management and Supervision Subaccount Research, Development and Demonstration (RD&D) Customer Accounts Expenses and Customer Service and Information Subaccount Information Technology Application Services Subaccount and Account 908 Customer Satisfaction Survey Administrative And General Incentive Compensation The PD Would Reverse Commission Ratemaking Policy...9 i

8 Comments of Proposed Decision SUBJECT INDEX (CONTINUED) Section Title Page Operating Income Is Linked To Ratepayer Benefits SCE s Total Compensation Is At Market Levels And Thus Reasonable Shareholders Will Not Systematically Subsidize SCE s Cost Of Service Spot Bonuses Talent Management Account 920 Regulatory Policy and Affairs Accounts 923 and 928 Outside Counsel Account 925 Workers Compensation Reserves Pension Costs Transmission and Distribution Capital Expenditures Customer Growth Meter Sets Underground Primary Cable Distribution Circuit Breaker Replacement Power Transformer Replacement Program A-Banks Distribution Protection And Control Replacement Program Substation Equipment, Reactive Replacement Program Tools, Spare Parts, And Equipment Furniture, Equipment, And Facilities Non-Operational Blanket Rate Base Working Cash Post-Test Year Ratemaking Conclusion...25 ii

9 Comments of Proposed Decision TABLE OF AUTHORITIES California Law Page(s) Commission Rules of Practice and Procedure Rule Rule Cal. Code of Regulations Title ,23 Federal Statutes I. R.C. 461(h)(2)(C)...22 Commission Decisions D D D D D D D D Cases Citrus Valley Estates v. Commissioner, 99 T.C. 379 (1992)...15 Lorimore v. State Personnel Board, 232 Cal. App. 2d 183 (1965)...16,23 iii

10 1. Introduction Pursuant to Rule 77.3 of the California Public Utilities Commission (Commission) Rules of Practice and Procedure, Southern California Edison Company (SCE) comments on the Proposed Decision Of ALJ Fukutome (PD). The PD would cut $264 million from SCE s request, a reduction based on factual and legal errors throughout the PD. 1 The 25-page limit on comments precludes SCE from addressing each of those errors, so SCE focuses on the most significant of them Generation Expenses - Mohave The PD would authorize $ million (SCE share) of Mohave Operations and Maintenance (O&M) expenses for 2006, 3 based on adopting the temporary shutdown scenario. The correct amount of O&M expenses for this scenario is $ million (SCE s share) Generation Expenses - SONGS 6.1 The PD Errs In Arbitrarily Reducing The SONGS 2 & 3 RFO Estimate The PD would reduce the refueling and maintenance outage (RFO) expense forecast by $1.082 million (100% level). The PD makes an incorrect change to the forecast (RFO) expense by removing repair of the Unit 3 main generator rotor from the average of six RFOs SCE used to develop the 2006 estimate. 5 The 2006 forecast is a combination of routine and one-time activities. The estimated cost to repair the Unit 3 main generator rotor should remain in the average of one-time activities because: (1) removal of any one-time activity simply because its cost estimate is higher (or lower) than other recorded one-time activities is arbitrary and defeats the purpose of using an average; (2) averaging, by design, normalizes the peaks and valleys that always occur during RFOs; 6 (3) other high cost activities 1 The PD incorrectly states the test year increase as being $61 million. This error is the product of updating the revenue requirement calculation for the 2006 authorized rate of return, but failing to likewise update the revenues at present rates (Exh. 172, Table II-2). Both calculations should be performed using the same rate of return to properly display the PD s test year increase of $85 million, not $61 million. 2 SCE s comments are organized using the same sequence of topics followed in the PD. For those subject areas of the PD not addressed in these comments, the corresponding headings are omitted. 3 PD, 4.4, p Exhibit 77, p PD, 6.7.5, p Exhibit 89, p

11 will likely occur during ; 7 and (4) the recorded costs of RFO one-time activities are increasing Removing Bechtel Supplemental Labor From SCE s RFO Estimate Is Inconsistent The PD erroneously reduces $750,000 from RFO core activities (100% level) which are due to changes to the Bechtel Labor Contract that will surely increase future labor costs. 9 The record supports and the PD would adopt this adjustment for the base O&M cost estimate, but the PD would disallow it for the RFO forecast. No party opposed including the Bechtel contract cost in the RFO estimate and this adjustment should be restored. 6.3 The PD Arbitrarily Reduces Aging Workforce Replacement Costs The PD would reduce aging workforce replacement costs by $2.95 million (100% level), based on anomalous data for the HP technicians showing that the average retirement age was This is unfair and unreasonable because the HP technicians aging workforce replacement costs constitute only $0.408 million of the $5.9 million requested. The average age of SONGS 2 & 3 employees retiring overall is 58 with 17 years of service. 11 SCE analyzed average age at retirement and length of service of the HP technicians along with other important job classifications. 12 The data for HP technicians, while correct, is anomalous because 52 is a fairly young age for retirement. The record shows that the average ages at retirement for the other important job classifications were significantly higher. 13 The aging workforce and hiring replacements for those aging employees is an important issue for SONGS 2&3, SCE, and the nuclear industry. Denying half of the aging workforce replacement costs adjustment because of anomalous data in one work group is wrong. The Commission should adopt SCE s entire aging workforce replacement costs adjustment without change. At most, any reduction should be limited to the $0.48 million (100% level) for the HP technicians portion of the aging workforce replacement cost adjustment Exhibit 89, p Exhibit 11, p. 52, Table XVII-9, line The change to the Bechtel Labor Contract is described at some length in Exhibit 6, pp in connection with an adjustment to SCE s base O&M forecast. 10 PD, 6.2, pp See Exhibit 62, p See Exhibit 62, p See Exhibit 62, pp See Exhibit 62, Table II-4, p

12 9. Transmission And Distribution Expenses 9.1 Subaccount Miscellaneous Transmission Expenses Other Organizations The PD disallows $2,200,000 based on the assumption that SCE only needs half the funding it requested. 15 A more consistent approach to funding this IT support would be to recognize that the larger proportion of additional FTE over the 2005 base level approximately 90 percent 16 are due to increased workload, which the PD recognizes. 17 In addition, if the Commission concurs in SCE s funding request associated with aging workforce (discussed below), all 49 FTE would need IT support, and thus 100 percent of the requested IMM funding should be authorized. 9.2 Subaccount Maintenance of Miscellaneous Station Equipment The PD disallows $1,045,000 for maintenance of substation equipment, finding that SCE provided insufficient support. 18 SCE provided detailed analysis of disconnect switch failures, the need for proactive maintenance, 19 and the derivation of its $751,000 test year request for disconnect switch maintenance. 20 The PD should be modified to add $751,000 to this subaccount. 9.3 Subaccounts (Poles and Structures) and (Insulators and Conductors) The PD disallows $3,350,000 for subaccount (Poles and Structures) based in part on the assumption that 25% of SCE s life extension program is duplicative of costs embedded in the recorded data. This assumption is in error: SCE witness Stueland testified that there were no costs relating to tower painting and bolt tightening in the recorded data. 21 The only cost relating to tower maintenance was to stencil tower identification numbers in The PD also bases the disallowance on the assumption that a large-scale painting program may reduce the need for tower painting that is done normally and the bolt tightening aspect of the program may reduce the need to tighten bolts on an as-needed basis, similar to the historical period. 23 Again, 15 PD, 9.10, pp Exhibit 94, p. 61 (44 of 49 FTE are due to increased workload). Ninety percent of the $4,400,000 requested IT support funding amounts to $3,960, PD 9.10, p Id., , p Exhibit 94, p , footnote 104, 107, 108, and Appendix J. 20 Id., p. 65, footnote 105, Appendix I. 21 Stueland, SCE, Tr. 10/ Id., PD, , p

13 the PD errs. The record includes SCE s response to a DRA data request in which SCE detailed the maintenance activities it plans to do, including bolt tightening and tower painting. 24 Spreading this life extension work over 9 rather than 6 years, as the PD does, is imprudent in light of the delayed life extension work due to the financial crisis. 25 The Commission should authorize SCE s requested funding level of $8,923,000 for subaccount The PD bases its $1,625,000 disallowance of incremental test year funding for cleaning line insulators, subaccount (Insulators and Conductors), on the same erroneous assumption it applied to poles and structures. 26 For the same reasons, and based on the same evidence discussed with respect to Poles and Structures, the Commission should authorize SCE s requested funding of $8,656,000 for maintenance of insulators and conductors. 9.4 Subaccount Overhead Line Operations In 2003, SCE conducted 1,152 Structural Analysis Methodology (SAM) inspections for $576,000. For 2006, SCE requested incremental funding of $2,284,000 to conduct Structural Analysis Methodology (SAM) inspections of 5,720 poles. 27 The PD adopts ORA s recommended total funding level of $1,152,000 for 2,304 inspections, finding: SCE has not provided any information that demonstrates a need to increase the level of spending for this program by a factor of four. There is no indication that there is such a significant backup in meeting the need for inspections caused either by poles failure or visual inspections. 28 The PD overlooks evidence directly on point. In a data request response contained in a crossexamination exhibit, SCE was asked to [e]xplain in detail why the 2006 forecast of SAM inspections increase so dramatically to 5,720, 29 to which SCE responded: A SAM inspection is generally identified as a result of an overhead detail inspection or intrusive inspection. The 5,720 is based on existing work due in 2006 plus an estimate of future work that will become due in 2006 as a result of ongoing inspections. Poles that are candidates for SAM inspection in 2006 are already identified and SAM inspections are the result of a failed intrusive inspection or the result of a visual inspection: 24 Exhibit 94, Appendix C. 25 Exhibit 32, p PD, , pp The 2006 request is for an incremental funding of $2,284,000 to conduct 4,568 more SAM inspections than were conducted in ORA recommends incremental funding of $576,000 to conduct 1,152 additional SAM inspections than were conducted in The amount in dispute is $1,708,000 to conduct 3,416 more SAM inspections in 2006 than ORA recommends. 28 PD, , p

14 The SAM inspection determines if the pole needs to be replaced, or if the life of the pole can be extended by performing a less costly repair, such as steel stubbing, fiberglass wrap, pole top extension or wood pecker fill. The benefits that have resulted are identifying poles that can be repaired instead of being replaced or do not need to be replaced at all, thus extending the useful life of an existing asset. 30 SAM technology allows SCE to repair some poles that would otherwise be replaced simply because their structural integrity is in question. SCE did provide evidentiary support for its request, and SCE s test year funding for SAM inspections should be increased by an additional $1,708, Subaccount IMM Distribution Operations and Engineering Subaccount records expenses for services provided to TDBU by other departments Internal Market Mechanism (IMM) charges. SCE requested $8,885,000 for the test year; the PD authorizes $936,000 less. The PD incorrectly states: there is nothing in SCE s direct testimony to support its vehicle costs other than the indication that the costs were developed using a budget based methodology. 31 This overlooks detailed evidence on TDBU s current fleet and proposed vehicle replacements and additions. 32 As SCE witness Baker testified in rebuttal, during SCE needs to replenish its stock of medium and large build-up vehicles that were acquired in the late 1980s and early 1990s. 33 The requested funding increase is driven not only by the need to replace aging vehicles, but also by TDBU s significantly increased workload, requiring SCE to increase its crew count. The PD implicitly recognizes increased costs in response to increased workload. 34 Additional medium and large build-up vehicles are required to support this work. The PD should be modified to add $936,000 to subaccount Subaccounts and Aging Workforce The PD errs by imposing an impossible burden of proof. SCE identified cost increases to hire, train, and mentor new employees to maintain its ability to provide safe, reliable service in the face of its aging workforce. The PD in several instances denies the requested incremental funding because Continued from the previous page 29 Exhibit 223 (SCE response to data request DR-ORA-46, question 3). 30 Exhibit 94, p PD, 9.17, p Exhibit 94, p. 70, footnote 115 and Appendix K, SCE s response to DR-ORA-55, Question 1. The information on the record includes budget code, vehicle description, lease length, number in fleet, price per vehicle, and number delivered together with total cost for years Exhibit 94, page 71. There are 190 medium and large build-up vehicles in TDBU s fleet that are more than 15 years old and 213 medium and large build-up vehicles that are 10 to 15 years old. 34 PD, 9.26, p

15 SCE did not identify the specific number of employees expected to retire. In subaccount the PD acknowledges that SCE has shown that in general its workforce is aging, but disallows $713,000, stating: a more precise showing on how the number of retiring employees was calculated and how past retirements were accommodated historically is necessary to justify the incremental increases requested by SCE. 35 In subaccount , although the PD recognizes the necessity to train new employees and authorizes training funding for new employees associated with added workload, it disallows $661,000 for training funding related to aging workforce because SCE s analysis of how many employees will retire when first eligible, or how many employees will retire at any age or age range, is lacking. 36 Additionally, the PD errs in characterizing the aging workforce-associated training funding as limited to $661,000. In fact, other parts of SCE s requested training funding in subaccount are driven by aging workforce. The PD disallows $1,150,000 for Training Evaluation and Knowledge Management, 37 a program to document the detailed knowledge of SCE s T&D systems possessed by highly experienced, outgoing senior employees who are eligible to retire and who comprise a significant part of the age bubble SCE is facing; 38 absent such a showing the PD assumes that the necessary funding is imbedded in historical costs. The PD would require SCE to support this request with an exact prediction of the number of employees that will actually retire. No one can make such a determination, including the Commission which as publicly acknowledged 39 faces its own age bubble and potential serious loss of skilled, experienced workforce. Absent a requirement that employees announce retirement long in advance, the best any utility, or the Commission, can do is to consider retirement eligibility and the various factors bearing on retirement (Social Security, interest rates, stock market performance, etc.) and make a reasonable judgment of the number of employees that should be hired and put in the years-long training pipeline. SCE introduced abundant evidence of the severity of the age bubble problem and the 35 PD, 9.24, p. 77 (emphasis added). 36 PD, 9.26, p. 79 (emphasis added). 37 Id., 9.26, pp As SCE witness Kludjian testified, the Company is facing acute workforce attrition in the management, technically skilled (e.g. Engineering, Planning) and trades classifications (e.g., Linemen, System and Substation Operators, Maintenance Electricians and Test Technicians). Exhibit 94, pp Although a great deal of information regarding the electrical system is fully documented, knowledge regarding the configuration, development, and maintenance of our system in the undocumented form of long experience on the job could be captured from senior employees prior to retirement through interviews and focus groups. 39 ORA, Chia, Tr. 24/

16 substantial lead time required to train new employees in the key job classifications. 40 Interestingly, the PD considers such factors and authorized incremental funding of $600,000 associated with aging workforce for subaccount (adding five transmission system operators). However, the PD did not apply that methodology consistently. By disallowing $2,524,000 in subaccounts and based on an impossible burden of proof, the PD denies SCE the funding to accelerate hiring and training to prepare for inevitable retirements. In sum, the PD errs in assuming these costs are imbedded in historical data. Such an assumption implies that the inflow and outflow of employees is at a steady state, which is simply not true. 41 As SCE witness Grigsby testified, SCE must take active steps now to mitigate the risk of not having employees with the requisite skills and experience available when the inevitable vacancies occur. SCE must get ahead of the long lead times essential to bring replacement workers up to the necessary level of competency. 42 By deferring spending on this problem in key areas, the PD exacerbates, rather than mitigates that risk. 9.7 Subaccount Management and Supervision In addition to disallowing $1,150,000 for Training Evaluation and Knowledge Management, discussed above, the PD also disallows $3,200,000 for business software, which it assumes incorrectly is imbedded either in recorded 2003 costs or in the increase in this subaccount from 2003 to 2004 of $5,600, However, these costs are incremental; in part, they support new CPUC and CAISO regulatory requirements. Additionally, they represent non-capitalized software enhancements to core systems. 44 They do not represent activities performed in the historic period (including 2004). 45 The PD also disallows $900,000 for Skills Training Delivery, again concluding that the cost is imbedded in historical data. The PD errs: $472,000 is caused by increased student count driven by 40 Exhibit 87, pp ; Exhibit 101, pp As SCE witness Worden explained, this conclusion that the necessary funding is imbedded in historical costs is mathematically erroneous. It would be correct only if the age distribution of SCE employees remained fairly constant over time which has not happened. This is the case of the aging workforce problem for SCE and other similarly affected entities. Exhibit 87, p Exhibit 101, pp PD, 9.26, p Exhibit 94, pp and Appendix B. 45 Exhibit 134, p. 351A. 7

17 increased workload, and $428,000 is to develop new and expanded curriculum to meet the increased training needs of planners and powerline trades such as lineman apprentices Subaccount Research, Development and Demonstration (RD&D) In disallowing $2.6 million of SCE s $4.2 million dollar request, the PD imposes a virtually insurmountable burden of proof. The PD asserts that SCE s support for its request is insufficient because SCE has not provided an adequate level of detail concerning each project. 47 However, SCE did provide ORA with detailed information regarding the specific subject areas in which SCE plans to develop its program. SCE s approach is entirely consistent with the showing SCE made in its previous GRC, and that showing was approved in D ORA conceded it was simply unaware of this precedent when it developed its recommendation. 48 Moreover, funding of RD&D is sound public policy. SCE s proposed program will benefit ratepayers by providing technologies that maintain system reliability in light of an aging infrastructure, better technologies for use in infrastructure replacements, 49 enhancements in public and employee safety, and improvements in environmental stewardship and siting processes. 50 Consistent with the RD&D one-way Balancing Account adopted by the Commission, SCE will refund, with interest, any unexpended funds allocated to this account. If this previously authorized balancing account approach is no longer acceptable, it may be necessary for the Commission to adopt a process for reviewing project-by-project requests outside the GRC. 10 Customer Accounts Expenses and Customer Service and Information 10.6 Subaccount Information Technology Application Services In rejecting SCE s forecast based on a three-year trend and disallowing $3.3 million, the PD ignores the record, which contains a detailed, budget-based analysis in rebuttal testimony of the cost drivers for this account 51 based on the actual number of software applications (in function points) added since 2001 (18.1%) and the expected average annual growth in systems maintenance for Exhibit 94, pp PD, 9.19, p ORA, Chia, Tr. 23/ Exhibit 94, p Id., p Those cost drivers relate to steadily increasing regulatory activity and new customer-related initiatives. Exhibit 99, p

18 through 2006 (18.4%). 52 These percentage increases exceed the percentage increases for the customer growth cap for this account Subaccount and Account 908 Customer Satisfaction Survey By denying SCE s requested funding of $863,000 for this item, the PD ignores the fact that the proposed new customer satisfaction survey will gather and analyze additional detailed data on service quality which SCE currently does not have and requires in order to pinpoint areas of customer dissatisfaction. 54 The new process will review five times the current data, allowing SCE to analyze customer satisfaction with many more critical individual transactions Administrative And General 14.1 Incentive Compensation The PD would cut $44.2 million from SCE s Results Sharing Program costs and $3.286 million of Executive Compensation based on erroneous findings and a flawed policy of splitting the costs of these programs equally between shareholders and ratepayers. 56 Because the PD s rationale for reducing these two cost categories is the same, SCE addresses them together. The PD also would disallow all funding for SCE s Spot Bonus program, $14 million, which is also addressed below The PD Would Reverse Commission Ratemaking Policy Addressing ORA s proposal to split incentive compensation costs between ratepayers and shareholders, the PD observes: There are a number of previous Commission decisions regarding such allocation of costs of incentive pay responsibility. Costs were either fully reflected or split 50%/50% between shareholders and ratepayers. 57 The PD apparently believes that each of those prior decisions is equally applicable to the present facts, allowing it to choose which precedent to follow. But the PD glosses over key developments in the evolution of Commission ratemaking policy on incentive compensation. When the issue of cost 52 Exhibit 99, pp Exhibit 99, p Exhibit 50, pp ; Exhibit 99, p Exhibit 99, p The PD would adopt total Executive Compensation expenses of $ million, rather than SCE s $ million. If SCE adopts the PD s recommendation to limit ratepayer funding of incentive compensation to 50%, there would have to be an adjustment to SCE s working cash allowance as well. 57 PD, , p

19 recovery of incentive compensation first arose in the mid-1980s, the Commission held workshops to gather input from all interested parties on what its ratemaking policy should be. In its decision on PG&E s 1993 GRC, the Commission quoted the consensus of the workshop: The consensus reached in the workshop was that the Commission should not attempt to micromanage utility incentive compensation programs. Instead of adopting a cookie cutter approach, workshop participants recommend that the Commission review incentive compensation programs utility by utility, as a component of the total cash compensation requested in each utility s general rate case. They proposed, moreover, that the allocation of total cash compensation between salaries and incentive should be left to each utility s discretion. 58 The Commission followed this policy in PG&E s 1993 GRC (D ) and Southern California Gas Company s 1994 GRC (D ), allowing full recovery of reasonable base and incentive compensation from ratepayers in both cases. Then, on the eve of electric utility restructuring, the Commission abruptly abandoned this policy in PG&E s 1996 GRC (D ), SCE s 1995 GRC (D ) and PG&E s 1999 GRC (D ), deciding in each case to split incentive compensation between shareholders and ratepayers. In none of those three decisions, however, did the Commission explain why it abandoned the policy adopted in D and D Finally, in its decision on SCE s 2003 GRC, the Commission revisited this issue, concluding that the earlier policy had been the correct one: We also note that it would be within SCE s managerial discretion to offer all cash compensation to employees in the form of base pay instead of a mix of base pay and incentive pay. In the event SCE were to do so, we would not take issue with ratepayer funding of the resulting compensation as long as total compensation is reasonable. If total compensation does not exceed market levels, a disallowance of reasonable expenses for the Results Sharing program would in effect be a substitution of our judgment for that of SCE managers regarding the appropriate mix of base and incentive pay. That is the sort of micromanagement that the Commission rejected in D , and that we reject here. 59 The PD does not explain why it rejects the policy adopted in D and D and reiterated just 18 months ago in D in favor of the misguided policy followed in D , D , and D The Commission needs to speak with a consistent voice on this issue so utilities can rationally plan their compensation programs. Having endorsed full ratepayer funding of incentive compensation as recently as July 2004, the Commission should not change course once again and arbitrarily limit recovery to 50%. 58 Re Pacific Gas & Electric Co., D , (mimeo), p Re Southern California Edison Co., D , (mimeo), p

20 Operating Income Is Linked To Ratepayer Benefits A key premise underlying the PD s disallowance of 50% of SCE s incentive compensation is this finding: In general, there is no direct ratepayer benefit related to operating income multipliers. 60 First, it is of questionable relevance to even inquire into who benefits from a particular utility performance measure. Almost every activity a utility engages in from reading a customer s meter, to installing a new transformer, to repairing an electric distribution line can be said to benefit ratepayers, shareholders, and employees. After all, if the utility did not perform these activities the utility would cease to exist ratepayers would receive no service, employees no compensation, and shareholders no return on their investment. Second, even if this benefit inquiry were relevant, ratepayers do have an interest in the utility s operating income. The PD correctly observes that operating income as used in results sharing calculations is the net of operating revenues less operating expenses. 61 Operating revenues are largely the product of Commission-authorized rates times kilowatt-hour sales. Operating income measures how the company manages its expenses relative to those authorized revenues. A utility that achieves favorable operating income by controlling costs can pass the benefit of that good performance through to ratepayers when its revenue requirement is reset in its next GRC. On the other hand, a utility that does not manage its operating expenses will not earn its authorized rate of return, leading to a higher cost of capital, which will be passed directly through to its customers. Thus, contrary to the PD, ratepayers do benefit from favorable operating income. As SCE s testimony states: Operating income translates all aspects of SCE s day to day performance into measurable financial results. 62 The PD s finding of no direct ratepayer benefit related to operating income is just plain wrong. Since this erroneous finding underpins the PD s 50% cut to SCE s incentive compensation, that cut is also erroneous SCE s Total Compensation Is At Market Levels And Thus Reasonable The Commission has held that: Under cost-of-service regulation, the utility is entitled to all of its reasonable costs and expenses, as well as the opportunity to earn a rate of return on the utility s rate base. 63 The PD states: For ratemaking, we have found that on an overall basis SCE s total 60 PD, , p Id. 62 Exhibit 65, p Re Pacific Gas and Electric Co., D , (mimeo), p. 6 (emphasis added); 2003 Cal PUC LEXIS

21 compensation is within the market range and is reasonable. 64 If, as is the case here, total compensation is within market and thus reasonable, utilities should be able to offer a mix of incentive and base pay and recover those costs from ratepayers. 65 The only reason given for cutting $44.2 million from SCE s compensation is the misguided and repudiated policy of splitting incentive compensation between shareholders and ratepayers. The PD would apparently have approved the entirety of SCE s compensation if SCE offered base pay only. This should be a matter of utility management discretion. Furthermore, there is no reason to believe ratepayers would somehow be better off if SCE s incentive compensation were to be replaced with base pay. In fact, certain costs tied to base pay, such as pensions, would increase. SCE s total compensation is reasonable, so SCE is entitled to recover all costs of that compensation Shareholders Will Not Systematically Subsidize SCE s Cost Of Service The PD notes that if Results Sharing were to be completely eliminated, SCE s compensation would be 8% below market, so eliminating half of the program would put SCE about 3% below market. 66 According to the PD, this would leave SCE within the total compensation study s plus or minus 5% margin of error and SCE s compensation would still be considered to be statistically equivalent to the market average. 67 This is a faulty analysis. Statistical error arises in a compensation study due to sampling of jobs from various employers and compensation data bases. But no sampling is involved in simply subtracting $44.2 million of SCE s compensation. This cut would put SCE below market and impede its ability to attract and retain employees. And, as SCE Chief Executive Officer Alan Fohrer testified, shareholders will not make up the difference: I think in terms of policy for the Commission to find in a decision that they are going to take a portion of employee compensation that is well within the compensation study guidelines and elect to have that funded by shareholders would set a terrible precedent. In that case, why not take 20 percent of all compensation across the company and say, We expect you to employ 13,000 people, but we re only going to pay for ten. 64 PD, , p In fact, in PG&E s 1986 GRC, the Commission held: A small premium above market does benefit the ratepayer, (and stockholder), particularly with regard to safeguarding PG&E's large investment in employee training. We are reminded of PG&E's testimony that it costs $99,000 to train one lineman. In summary it is our conclusion that any short-run savings for ratepayers realized by cutting wage and salary expense in this proceeding would be lost through increase in long-run costs. Re Pacific Gas and Electric Co., D , 1986 Cal. PUC LEXIS 88, *72; 23 CPUC2d 149 (emphasis added). 66 PD, , p. 120, footnote PD, , p

22 If the Commission reduces the compensation that we have available to pay our employees, we will have two choices: reduce the number of employees or reduce the salaries they get paid. 68 Neither of the options identified by Mr. Fohrer cutting employee compensation or reducing the number of employees is viable. First, SCE already has to use substantial overtime just to meet existing workload. Second, SCE operates in a competitive marketplace for labor and must pay its employees market levels of compensation, as SCE Vice President Grigsby testified: [A]ny form of compensation is there for the purpose of attracting and retaining the talent that you need to run the business. If you, for some reason limit the compensation that you make available to levels that are not competitive in the marketplace, then you re not going to be able to attract and retain the skills that you need to provide service to ratepayers. 69 At a minimum, the Commission should approve recovery of a market level of compensation Spot Bonuses The PD would disallow all funding for Spot Bonuses for this GRC due to data problems involving mis-coded overtime, 70 which ORA characterized as individuals receiving too many spot bonuses in a given year. 71 SCE witness Cogan described the steps taken to correct these problems. 72 However, as shown in ORA s testimony, over the period approximately $9,000,000 was spent on spot bonuses to employees who received no more than 1 of 2 awards in a given year. 73 Such awards clearly do not suffer from the problems identified in the PD, and it would be reasonable to authorize $2,636,000 for spot bonuses for the test year Talent Management Funding of SCE s Leadership Programs should not be based on some assumed apportionment of benefits between ratepayers and shareholders, 74 but on whether they are a legitimate and reasonable cost of service, which these programs clearly are. Prior to the Consent Decree, ratepayers funded all the costs of these programs. During the term of the Consent Decree, SCE s shareholders at least partially funded these Programs (although ratepayers certainly continued to benefit) because SCE had 68 SCE, Fohrer, Tr.6/ SCE, Grigsby, Tr.19/ PD, , pp Exhibit 203, pp through SCE, Cogan, Tr. 20/ Exhibit 203, p. 4-12, Table

23 no choice but to account for them in this manner. 75 The PD errs in ignoring the Consent Decree and by applying the wrong standard Account 920 Regulatory Policy and Affairs The RP&A Department has long been under-staffed. 76 The PD s alleged deficiency of SCE s filing - that SCE did not discuss recorded activities that may not continue through the test year - is contrary to the record 77 and was never identified as an issue. 78 Cutting SCE s request for 18 FTEs to half that number is based solely on a nonexistent deficiency Accounts 923 and 928 Outside Counsel The PD would base 2006 outside counsel expenses (Accounts 923 and 928) on the erroneous finding that 2003 is a post-energy crisis recorded year and therefore unadjusted. 79 The PD erroneously assumes that SCE adjusted energy crisis-related expenses for 2001 only. 80 In fact, were adjusted as well: 81 Accounts 923 and 928 Adjustments Year FERC investigation El Paso Bankruptcy TOTAL 2000 $0.375 million $0 $0.407 million $0.782 million 2001 $1.756 million $1.845 million $1.240 million $4.841 million 2002 $1.797 million $1.398 million $0 $3.195 million 2003 $4.214 million $1.255 million $0 $5.469 million Total: $8.142 million $4.498 million $1.647 million Since have been adjusted, these recorded-adjusted years are representative of test year expenses and should be used as the basis for forecasting 2006 expenses Account 925 Workers Compensation Reserves SCE used a three-year average ( ) to forecast $ million for Account 925 reserves, thus capturing the period of the dramatic increase in workers compensation payment and Continued from the previous page 74 PD, 14.3, p Exhibit 62, p Exhibit 71, pp Exhibit 71, p. 65 (footnote 63 and accompanying text). 78 Exhibit 201, pp. 10-C-13 through 10-C PD 14.30, p Id. 81 See SCE s Opening Brief, p. 140, footnote 656 (citing Tr. 17/1526, Tr. 16/1470). 14

24 claim reserve expenses that commenced in The PD correctly includes the reserve expenses for the Claims Division (approximately $9.5 million/year), since Account 925 reserve expenses include both Workers Compensation and Claims expenses. 83 The PD also correctly finds that years 1999 and 2000 are not representative of test year expenses. 84 But the PD errs in finding that 2003 is not representative of test year expenses simply because 2004 reserve expenses were relatively lower than 2003 expenses. 85 Workers Compensation Reserves Year $ Million Basis 2000 $ recorded 2001 $ recorded 2002 $ recorded 2003 $ recorded 2004 $ Recorded for Workers Comp. ($ million) and estimate for Claims as set forth in PD ($9.5 million). Just because 2004 expenses were lower than 2003 does not mean that 2003 is unrepresentative. In fact, excluding 2003 would be inconsistent with the steady increases in workers compensation expenses since Given the variations in recorded expenses and since no one can predict whether 2003 or 2004 is more representative of test year expenses, a reasonable approach would be a four-year average of expenses, or $ million. This is a $1.491 million reduction to SCE s request, but far more reasonable than the PD s approach of relying solely on the older data to set 2006 funding Pension Costs The PD adopts ORA s proposal to reflect the ERISA minimum calculations in forecasting pension costs, authorizing $48.7 million in 2006, a $2.4 million reduction to SCE s request. 86 SCE s rebuttal 87 and briefs identified the factual, legal, and policy reasons that argue so strongly against locking ratemaking onto ERISA minimum funding. 88 While today the minimum funding amount does 82 SCE s Opening Brief, Section , footnotes 671 and 672 and accompanying text (citing Exhibit 71, pp and Exhibit 103, p. 18). 83 PD, 14.40, pp Id. 85 Id. 86 PD, 14.44, p Exhibit 101, pp First, the federal courts have declined to prescribe minimum pension contribution amounts, deferring such matters to the judgment of enrolled actuaries. (See, for example, Citrus Valley Estates v. Commissioner, 99 T.C. 379 (1992), Continued on the next page 15