2015 General Rate Case Rebuttal Testimony

Transcription

1 Application No.: Exhibit No.: Witnesses: A SCE- M. Bennett G. Henry S. Lu P. Miller J. Trapp R. Worden (U -E) 01 General Rate Case Rebuttal Testimony Human Resources (HR) Department, Benefits And Other Compensation Before the Public Utilities Commission of the State of California Rosemead, California September 01

2 SCE-: Human Resources (HR) Department, Benefits And Other Compensation Table Of Contents Section Page Witness I. HR DEPARTMENT EXPENSES...1 P. Miller A. Human Resources Department FERC Account 0/1 Salaries and Related Expenses...1 a) b) c) SCE s Application...1 ORA s Position...1 SCE s Rebuttal to ORA s Position... (1) () ORA s Proposed Reduction Incorrectly Assumes 1 Human Resources Positions Were Eliminated... ORA s Proposed Reduction Fails to Account for SCE s Removal of the Four Positions From the Forecast... S. Lu B. SCE s Executive Officers... P. Miller 1. FERC Account 0/1 Salaries and Related Expenses... a) b) c) SCE s Application... ORA s Position... SCE s Rebuttal to ORA s Position... (1) ORA s Proposed Reduction of the Executive Officer Forecast by Substantially Eliminating Ratepayer Funding of the EIC Should Be Rejected... -i-

3 SCE-: Human Resources (HR) Department, Benefits And Other Compensation Table Of Contents (Continued) Section Page Witness () () () The Substantial Reduction of Executive Officers Incentive/Variable Pay Programs Will Necessarily Lead to Corresponding Increases in Base Salary to Remain Market Competitive... Incentive Compensation Is an Integral Part of Employee Compensation and Cannot Simply Be Shifted to Shareholders Without Violating Cost-of-Service Ratemaking Principles... Neither TURN Nor ORA Has Alleged the Compensation Is Unreasonable or That SCE Has Acted Imprudently... R. Worden P. Miller II. SHORT TERM INCENTIVES...1 M. Bennett A. Short Term Incentive Program SCE s Application...1 ORA s Position...1 TURN s Position...1 SCE s Rebuttal...1 a) ORA s Methodology for Its Proposed Test Year Forecast Is Flawed...1 (1) ORA Improperly Utilizes Preliminary Unadjusted Data and Nominal Dollars in Its Forecast...1 -ii-

4 SCE-: Human Resources (HR) Department, Benefits And Other Compensation Table Of Contents (Continued) Section Page Witness () ORA Erroneously Applies the Averaging Methodology Since Short Term Incentive Program Costs Show a Clear and Continuous Upward Trend From b) c) d) e) f) g) h) TURN s Methodology for Its Proposed Test Year Forecast Is Flawed...1 ORA s and TURN s Recommendations Are Completely Inconsistent With the TCS Undisputed Determination That SCE s Total Compensation Levels Are Below Market by.0 Percent...1 ORA s and TURN s Arguments Over Ratepayer Benefits From Short Term Incentive Program Goals and Demands That Shareholders Fund Program Costs Ignore Cost-of-Service Ratemaking Principles...1 Even If Properly Considered, Achievement of Short Term Incentive Program Goals Benefits Ratepayers... ORA s Rejection of Ratepayer Funding for the NOEIP Portion of the Short Term Incentive Program Improperly Relies on the TCS Results in the Executive Job Category... ORA s Recommendation of Lower Ratepayer Funding for Non-Represented Employees As Compared to Their Represented Peers Lacks Any Reasoned Justification... Conclusion... R. Worden M. Bennett III. LONG TERM INCENTIVES... J. Trapp A. Long Term Incentives SCE s Application... -iii-

5 SCE-: Human Resources (HR) Department, Benefits And Other Compensation Table Of Contents (Continued) Section Page Witness... ORA s Position... TURN s Position... SCE s Rebuttal... a) b) c) d) ORA s Reliance on TCS Results in the Executive Job Category Is Improper... ORA and TURN Ignore SCE s Evidence Regarding Universal and Expanding Use of LTI by Comparable Companies and SCE s Increasing Reliance on LTI to Attract and Retain Executives... ORA s and TURN s Insistence That the Commission Continue to Refuse Ratepayer Recovery of LTI Ignores Cost-of-Service Ratemaking Principles... Conclusion... IV. RECOGNITION PROGRAMS...0 M. Bennett A. The Costs of SCE s Spot Bonus and ACE Programs Should Be Recovered in Rates SCE s Application...0 ORA s Position...0 SCE s Rebuttal...0 a) b) c) In Past and Recent Rate Cases the Commission Has Approved Recognition Programs...1 ORA Fails to Acknowledge the Impact of Recent Changes to SCE s Awards to Celebrate Excellence Program... SCE s Recognition Programs Add Ratepayer Value... -iv-

6 SCE-: Human Resources (HR) Department, Benefits And Other Compensation Table Of Contents (Continued) Section Page Witness d) e) f) g) h) The Cost of SCE s Recognition Programs Is Reasonable... ORA Erroneously Removes All Spot Bonus Expenses From HR FERC 0... SCE Properly Presented Expenses for Employee Recognition Programs... Other State Agencies Recognize the Value of Employee Recognition Programs... Conclusion... V. PENSION AND BENEFITS PROGRAMS... A. B. Introduction... FERC Account - Pension and Benefits Programs SCE s Application... ORA s Position... SCE s Rebuttal... a) ORA s Forecast Methodology, Which Calls for Reductions to SCE s Per-Person Program Cost Forecasts, Is Flawed and Should Not Be Used... (1) ORA s Use of 01 FERC Form 1 Preliminary Data Is Inappropriate... () FERC Form 1 Data for Account Includes Other Expenses Than Pension and Benefits... () ORA Assumes That Its Collective 1.1% Reduction Can Be Applied to Each Individual Benefit... b) SCE s Labor Costs Are Reasonable... -v-

7 SCE-: Human Resources (HR) Department, Benefits And Other Compensation Table Of Contents (Continued) Section Page Witness C. FERC Account Pension Program... G. Henry 1... SCE s Application... ORA s Position... SCE s Rebuttal...0 a) b) c) d) e) ORA Has Not Presented Any Compelling Reason to Adjust SCE s Initial Pension Request to Account for Updated 01 Forecast...1 ORA s Pension Cost Adjustment for Remaining SONGS Employees Is Not Appropriate...1 No Pension Cost Adjustments Related to the Four Corners Sale Are Appropriate... The Lack of Pension Benefit Reductions Since 1 Does Not in Any Way Suggest That Benefits Are Excessive... The Existing Two-Way Account Treatment Is Critical to Effective Ongoing Pension Plan Operation and Must Be Continued... M. Bennett G. Henry D. FERC Account - 01(k) Savings Plan... M. Bennett 1... SCE s Application... ORA s Position... SCE s Rebuttal... E. FERC Account Medical Programs SCE s Application... ORA s Position... SCE s Rebuttal... -vi-

8 SCE-: Human Resources (HR) Department, Benefits And Other Compensation Table Of Contents (Continued) Section Page Witness a) b) c) d) e) f) ORA s Use of Preliminary 01 FERC Form 1 Data Is Inappropriate... ORA s Use of the Berkeley Forum s Escalation Rate Is Inappropriate... SCE Has Used Reasonable Trend Rates to Develop Its 01 Medical Program Costs...1 SCE s Labor Costs Are Reasonable...1 Conclusion... ORA s Recommendation Regarding Medical Benefit Escalation in the Post-Test Year Mechanism Should Be Rejected... F. FERC Account Dental Plans SCE s Application... ORA s Position... SCE s Rebuttal... G. FERC Account Vision Service Plan SCE s Application... ORA s Position... SCE s Rebuttal... H. FERC Account Retiree Health Care and Life Insurance (Post-Retirement Benefits Other Than Pensions)... G. Henry 1... SCE s Application... ORA s Position... SCE s Rebuttal... a) There Is No Compelling Reason to Change SCE s Initial PBOP Request... -vii-

9 SCE-: Human Resources (HR) Department, Benefits And Other Compensation Table Of Contents (Continued) Section Page Witness I. FERC Account Disability Programs... M. Bennett 1... SCE s Application... ORA s Position... SCE s Rebuttal... a) b) c) SCE Has Already Corrected the Escalation Factor Error... ORA s Use of Preliminary 01 FERC Form 1 Data Is Inappropriate... SCE s Labor Costs Are Reasonable... J. FERC Account - Group Life Insurance SCE s Application... ORA s Position... SCE s Rebuttal... K. FERC Account - Miscellaneous Benefit Programs SCE s Application... ORA s Position... SCE s Rebuttal... L. FERC Account Executive Benefits SCE s Application...0 ORA s Position...0 SCE s Rebuttal...1 a) SCE s Executive Benefits Program Is Market Competitive and Promotes Retention of Key Executives...1 -viii-

10 SCE-: Human Resources (HR) Department, Benefits And Other Compensation Table Of Contents (Continued) Section Page Witness b) c) Recent Out-of-State Commission Decisions Support SCE s Recovery of Executive Benefits Program Costs... Conclusion... Appendix A 01 GRC Analysis of ORA s Recommended Disallowances Appendix B ORA s Response to Data Request SCE-DRA-01-DAO Appendix C ORA s Response to Data Request-SCE-DRA-0-STA Appendix D from Alan Zilberman, Bureau of Labor Statistics, dated April, 00 Appendix E ORA s Response to Data Request SCE-DRA-0-STA Appendix F SCE s Response to Data Request TURN-SCE-00 Q.0 Appendix G SCE s Response to Data Request DRA-SCE-1-DAO Q.0 -ix-

11 SCE-: Human Resources (HR) Department, Benefits And Other Compensation List Of Tables Table Page Table I-1 Summary of Recorded and Forecast Expenses (Constant 01 $000)...1 Table I- Summary of Recorded and Forecast Expenses (Constant 01 $000)... Table II- Summary of Recorded and Forecast Expenses (Constant 01 $000)...1 Table II- SCE Results Sharing/Short Term Incentive Program Recorded / 01 Forecast (in Thousands of 01 Dollars)...1 Table III- Summary of Recorded and Forecast Expenses (Constant 01 $000)... Table V- Summary of Recorded and Forecast Expenses (Nominal $000)... Table V- Summary of Recorded and Forecast Expenses (Nominal $000)... Table V- Summary of Recorded and Forecast Expenses (Nominal $000)... Table V- Summary of Recorded and Forecast Expenses (Nominal $000)... Table V- Summary of Recorded and Forecast Expenses (Nominal $000)... Table V- Summary of Recorded and Forecast Expenses (Nominal $000)... Table V-1 Summary of Recorded and Forecast Expenses (Nominal $000)... Table V-1 Summary of Recorded and Forecast Expenses (Nominal $000)... Table V-1 Summary of Recorded and Forecast Expenses (Nominal $000)... Table V-1 Summary of Recorded and Forecast Expenses (Nominal $000)...0 -x-

12 I. HR DEPARTMENT EXPENSES A. Human Resources Department 1. FERC Account 0/1 Salaries and Related Expenses a) SCE s Application For the Test Year 01, SCE s application estimated $.1 million of Operations and Maintenance (O&M) expenses for the Human Resources department, 1 a $1. million decrease from 01 recorded expenses. The majority of the decrease was due to Operational Excellence initiatives, including the centralization of the training group into Human Resources. SCE subsequently reduced its request by $0.0 million to remove four positions that previously supported SONGS. Table I-1 Summary of Recorded and Forecast Expenses (Constant 01 $000) 01 Recorded/Adjusted 01 Forecast $, $, b) ORA s Position ORA agrees with SCE s forecast method (last recorded year for labor costs and -year average for non-labor costs) for FERC Accounts 0/1. However, ORA recommends a labor reduction of $1.1 million in FERC 0 to remove 1 Human Resources positions that supported SONGS in 01. ORA also recommends an additional $. million reduction in FERC 0/1, 1 SCE-0, Vol. 1R, p.. SCE-0, Vol. 1, pp. - and pp. -. Three positions were removed from Human Resources test year forecast in SCE s Application (see Ex. SCE-0, Vol. 1, pp. -). Pursuant to the Joint Scoping Memo and Ruling of Assigned Commissioner and Assigned Administrative Law Judges, issued on March, 01, one additional position was removed from Human Resources test year forecast (see SCE-0, Vol. 1R, p. submitted on April, 01). At Table 1- (ORA-1, p. 1), ORA appeared to split the proposed reduction between labor and non-labor forecasts. Per ORA s response to data request SCE-DRA-00-DAO, Q.1, ORA confirmed the recommended reduction is in labor expenses only. 1

13 yielding a total forecast of $1.0 million. This rebuttal addresses ORA s recommended reductions discussed in Exhibit ORA-1. SCE addresses ORA s additional reductions associated with savings from Operational Excellence initiatives in Exhibit SCE-. c) SCE s Rebuttal to ORA s Position (1) ORA s Proposed Reduction Incorrectly Assumes 1 Human Resources Positions Were Eliminated Human Resources positions can be assigned to various SCE work groups/or projects. Human Resources positions were assigned to SONGS during 01 as a result of the unplanned outage to address potential workforce reductions and related impacts. ORA s proposed reduction assumes that these Human Resources positions were permanently and solely dedicated to SONGS. By 01, only four positions were assigned to SONGS; the remaining eleven positions were reassigned to support other work groups. On June, 01, SCE announced the permanent retirement of Units & at SONGS. SCE then determined that only one of the four remaining Human Resources positions assigned to SONGS would still be needed. SCE s revised 01 Test Year forecast reflected the elimination of those three Human Resources positions. On March, 01, SCE was directed via the Joint Scoping Memo and Ruling of Assigned Commissioner and Assigned ALJs to remove all SONGSrelated costs from its Test Year forecast. As a result, SCE removed the labor and non-labor expenses for the sole remaining Human Resources position assigned to SONGS through the Test Year in its supplemental submission (Exhibit SCE-01). ORA is thus wrong in asserting that SCE included in its Test Year forecast expenses that the Commission ordered SCE to remove. SCE did not eliminate the eleven Human Resources positions that were only temporarily assigned to SONGS through 01 and they are properly included in SCE s forecast as current and existing Human Resources positions. For these reasons, ORA s proposed adjustment to remove an additional eleven positions from SCE s Test Year forecast ORA-1, p.. SCE-0, Vol. 1, pp. -. SCE-1, Supplemental Testimony, p..

14 should be rejected and SCE s forecast for FERC 0/1 (which already accounts for the elimination of four SONGS-related Human Resources positions) should be adopted. () ORA s Proposed Reduction Fails to Account for SCE s Removal of the Four Positions From the Forecast Even assuming ORA s proposed reduction was justified (which SCE disputes as discussed in greater detail above), ORA incorrectly calculated the amount of the reduction. ORA recommends an adjustment of $1.1 million in labor expenses from the Test Year 01 forecast based on a reduction of 1 employees in 01. However, ORA also acknowledges that SCE has already reduced its forecast by $0,000 by removing four HR positions at SONGS. ORA s proposed $1.1 million reduction was calculated by multiplying SCE s annual employee expense of $0,0 by fifteen positions, which fails to consider that SCE already removed of the 1 positions. Since ORA intended to remove all of the remaining positions that formerly supported SONGS, only should be removed since four had already been removed. Removing those same O&M expenses would be duplicative. Accordingly, even if ORA s logic were otherwise correct, its reduction should be $0,1 (i.e. $0,0 x positions), not $1.1 million. B. SCE s Executive Officers 1. FERC Account 0/1 Salaries and Related Expenses a) SCE s Application Table I- Summary of Recorded and Forecast Expenses (Constant 01 $000) 01 Recorded/Adjusted 01 Forecast $, $1, ORA-1, p.. ORA-1, p..

15 1 1 b) ORA s Position ORA does not take issue with SCE s -year average forecast of labor and nonlabor expenses from ORA also does not dispute the inclusion of the costs of certain Edison International (EIX) executive officers and Shared EIX/SCE officers in the forecast nor the allocation of those costs between EIX and SCE in relation thereto. However, ORA recommends reducing SCE s Executive Officer forecast by $.1 million, equal to.% ratepayer funding of incentive cash bonuses under the Executive Incentive Compensation Plan (EIC). ORA calculated the recommended reduction as a -year average of recorded EIC expenses, and then allocated 1.% to shareholders and.% to ratepayers. c) SCE s Rebuttal to ORA s Position (1) ORA s Proposed Reduction of the Executive Officer Forecast by Substantially Eliminating Ratepayer Funding of the EIC Should Be Rejected 1 1 (a) ORA Misapplies the Results of the Total Compensation Study to Justify the Proposed Reduction to SCE s Executive Officer Forecast Although ORA does not dispute SCE s forecast of Executive Officer labor or non-labor costs (including its forecast of EIC costs), ORA still seeks to eliminate 1.% of ratepayer funding of the EIC costs, principally relying upon the above-market compensation of SCE s executives. However, the chief basis for ORA s proposed reduction is the Executive job category results from the Total Compensation Study (TCS) prepared by Aon. ORA s citation to only those results relative to the Executive job category fundamentally ignores the designed purpose and ORA-1, p.1, lines -1. Appendix B in Exhibit SCE- Human Resources Department, Benefits and Other Compensation Rebuttal Testimony: ORA s Response to SCE-DRA-01-DAO, Response to Q.. ORA claimed that ORA s recommendations regarding compensations did not rely on the separate job categories as the basis for adjustments to GRC revenue requirements. However, this runs directly contrary to ORA s testimony in Exhibit ORA-1 at p. 1, where ORA declares: The main reason ORA recommends a lower level of ratepayer funding is because SCE Executives are being compensated significantly above market level (citing to the TCS results in SCE-0, Vol., Part, p. 0).

16 scope of the TCS. As the Commission has frequently acknowledged, total compensation studies are intended to show comparison of a utility s total compensation paid to all categories of its workforce in the aggregate with the external market. 1 As a natural consequence of viewing the workforce in the aggregate, the total compensation studies regularly show that the salaries and benefits of some categories of employees fall above market levels and some fall below market levels. To illustrate this point, the following tables show results from total compensation studies performed in connection with SCE s 00, 00, 00 and 01 General Rate Cases (GRC) D.1-0-0, p..

17 The variation in results in job categories from each of the respective past GRCs shown in the foregoing shows why the TCS was not designed or intended to evaluate specific categories of SCE s workforce. As a result, its results cannot be viewed as evidence that SCE s executive compensation and benefits are unreasonable. During SCE s 01 GRC, the Executive job category was shown to be.% below market, ORA did not propose any upward adjustment to market levels, and in fact pressed further reductions to SCE s executive officer compensation. The TCS was designed to view SCE s compensation in the aggregate. The objective of the TCS is to determine if total compensation for SCE s workforce as a whole is reasonable compared to the market. According to the TCS results presented in this General Rate Case (included in Exhibit SCE-0, Vol., Part ), SCE s overall compensation is within market levels which ORA does not dispute. 1 It is also unreasonable for ORA to cherry pick one class of 1 Appendix B, pp. B-1 to B-, SCE-, Human Resources Department, Benefits and Other Compensation, ORA s response to SCE-DRA-01-DAO, Response to Q. ( ORA does not have any reason to doubt Aon (Continued)

18 employees (in this case, SCE s executives, who are a small population of total positions in the TCS and a small category of SCE employees overall) that is above market levels in this particular TCS when SCE s overall compensation is within market. Such a small sample does not lend itself to an accurate assessment of SCE s Executives in comparison with executive pay levels in the external market in isolation. 1 Even if the TCS results could support market assessments by job category, the fact remains that the TCS, in total, shows SCE s total compensation for its workforce in the aggregate is statistically at market and, therefore, its components should not be subject to selective adjustment. 1 Moreover, the logical extension of ORA s assertion that ratepayer funding of SCE Executives should be reduced as a result of the TCS results showing they are.% above market is that ORA should support higher ratepayer funding for other SCE job categories whose compensation is shown to be below market, such as Managers/Supervisors and Professional/Technical employees. Instead, ORA advocates for decreases in ratepayer funding of incentive pay for every category of SCE s represented and non-represented workforce including job categories, such as Managers/Supervisors, Professional/Technical and Clerical categories, whose compensation by category are more than % below market according to the TCS results. 1 (b) ORA s Recommended Adjustment Harms SCE s Ability to Attract and Retain Skilled Executives ORA s recommended reductions target the variable pay components of SCE s Executive Officers, namely EIC and long-term incentives, and purports to leave base salary untouched. Such selective reductions would micro-manage how SCE allocates total cash compensation between salaries, incentives and benefits. In D.-1-0, the Commission observed that incentive pay is part and parcel of the overall compensation scheme, that the Commission Continued from the previous page Hewitt s estimate that SCE s total compensation is within percent of market. ) and Q. (ORA does not contest any of the TCS results.). 1 See, SCE-0, Vol., Part, p. (Table shows the Executive job category of the TCS encompassed thirteen out of a total of 1 SCE executive positions and only thirteen of the 1, job positions compared to the external labor market in the TCS). 1 Appendix B, pp. B-1 to B-, SCE- Human Resources, Department, Benefits, and Other Compensation, ORA s Response to Data Request SCE-DRA-01-DAO.

19 should not attempt to micromanage utility incentive compensation programs and the allocation of total cash compensation between salaries and incentives should be left to each utility s discretion. ORA does not dispute that comparable utilities and other industry companies with which SCE competes for executives offer variable/incentive pay programs similar to those offered by SCE. ORA does not acknowledge the competitive executive labor market and the struggle to balance cost consciousness with market competitiveness. Incentive/variable pay programs persist as an essential component of the executive compensation package because they are absolutely necessary to attract and retain executives and SCE cannot afford to eliminate them. Were SCE to eliminate the incentive bonus obtainable by executive officers through the EIC, SCE would be far below market levels for executive compensation and would be unable to recruit new officers or retain many of the ones we have. Removing 1.% of EIC for SCE s Executive Officers would place SCE s compensation in the Executive job category at.% below market. 1 Moreover, along with its removal of 1.% of ratepayer funding for EIC, ORA is also recommending zero ratepayer funding of long-term incentives and executive retirement plan benefits. Removal of those items from the executive compensation package would drive SCE s executive job category.% below market. 1 1 (c) ORA s EIC Sharing Proposal Improperly Disregards Ratepayers Benefits Arising From the EIC Program ORA s EIC Sharing Proposal, reflected on Table 1-1 of its testimony, 1 shows ORA s view that financial performance of the utility provides no benefit to ratepayers. ORA expresses this view despite the fact that the Commission has recognized that a financially strong utility benefits ratepayers in several ways. Financial goals encourage employees to control costs and maintain the financial strength of the company. 1 Financially strong companies also 1 Appendix A, p. A-1, SCE-, Human Resources Department, Benefits and Other Compensation, 01 GRC Analysis of ORA s Recommended Disallowances. 1 Appendix A in Exhibit SCE- Human Resources Department, Benefits and Other Compensation Rebuttal Testimony: 01 GRC Analysis of ORA s Recommended Disallowances. 1 ORA-1, p.. 1 D.1-0-0, p..

20 typically have lower borrowing costs, helping to reduce the cost of utility projects, which benefits ratepayers. 0 ORA cites to excerpts from the 01 Joint Proxy Statement of SCE and Edison International to support its view that SCE s incentive programs for its executives inure to the sole benefit of shareholders. Notably, the 01 Joint Proxy Statement contains several references to the design of the executive compensation and related incentive programs supporting strategies aligned with ratepayer benefit. 1 The 01 Joint Proxy Statement was intended to advocate approval of executive officer compensation to a specific audience of their shareholders so is written to that audience. ORA s claim that EIC goals only benefit shareholders overlooks the fact that shareholders and ratepayers all benefit from the high performance of SCE s executive officers and achievement of goals tied to SCE s operational excellence. As the Commission has noted: operating and individual performance metrics benefit ratepayers in ensuring that the executives are carrying out directives and activities to ensure the operational safety and reliability of the utility systems () The Substantial Reduction of Executive Officers Incentive/Variable Pay Programs Will Necessarily Lead to Corresponding Increases in Base Salary to Remain Market Competitive If SCE were to reduce or eliminate incentive pay, it would need to increase base salary in order to maintain market competitive total compensation. Shifting the pay mix away from variable pay and toward fixed pay impedes SCE s ability to manage its executive staff and makes SCE s labor costs less flexible, as base pay does not vary with Company or employee performance. Variable pay allows management to reward high performing executives over those that are performing below that which is expected for their position. Unlike base pay, variable pay does not become an annuity as it must be earned each year. 0 Id Joint Proxy Statement, p. ( Our strategy is to provide customers safe, reliable and affordable electricity as a foundation for long-term sustainable growth and shareholder value. ); p. ( The strategic and operational goals are focused on factors identified as key to the success of our overall business strategy. ). D , pp. 1-.

21 () Incentive Compensation Is an Integral Part of Employee Compensation and Cannot Simply Be Shifted to Shareholders Without Violating Cost-of-Service Ratemaking Principles ORA s testimony proposes that SCE shareholders serve as an alternative source of funding for EIC, implying that funds advanced by shareholders are sitting idle and waiting to fund Company programs. First, assigning program costs to shareholders implies that SCE should pay employees below market if it is to earn its authorized return (in the absence of savings elsewhere). ORA s proposed disallowance of EIC, long term incentive programs, executive retirement plan benefits and the reduction of over percent of SCE s Short Term Incentive Program costs essentially forces the Company to either shift resources to cover the absence of ratepayer funding of millions of dollars of those programs forecast costs or substantially cut the bonus amounts and benefits paid to its workforce. Elsewhere, the ORA proposes a.%, or $ million, reduction to the Company forecast of SCE employee Pensions and Benefits. Given the TCS results indicate that SCE s workforce is paid percent below market in the aggregate, ORA s purported assignment of variable pay and benefit program costs would be confiscatory, as set forth in the U.S. Supreme Court s Bluefield case. Rather than subjecting SCE shareholders to reduced returns, the punitive cuts proposed by ORA would, instead, likely cause the cessation of those programs in their current form. () Neither TURN Nor ORA Has Alleged the Compensation Is Unreasonable or That SCE Has Acted Imprudently TURN and ORA testimony does not allege SCE has acted imprudently or that the compensation (including incentive pay components) is unwarranted. The incentive pay programs (including EIC and the Short Term Incentive Program and Long Term Incentive Program (both of which are discussed in greater detail below)) are included in the Total Compensation Study, which the Commission has directed SCE and ORA to develop and rely upon in GRCs. This Commission has always held that it sets customer rates based on cost-of-service principles. In the absence of a finding that the programs are unreasonable in some fashion, these principles warrant ORA-1, p. 1, lines 1-0. Exhibit SCE-0, Vol., Part 1, p. (discussion of Bluefield Waterworks & Improvement Co. v. Public Service Commission of West Virginia, U.S. (1) and key holding that customer rates that do not result in a reasonable return on utility investments are confiscatory).

22 inclusion of the costs when setting an authorized revenue requirement. Only when these costs are included in an authorized revenue requirement would SCE have an opportunity to earn its authorized return and continue to attract investors for the vital capital program.

23 A. Short Term Incentive Program II. SHORT TERM INCENTIVES Table II- Summary of Recorded and Forecast Expenses (Constant 01 $000) 01 Recorded/Adjusted 01 Forecast $1, $1, SCE s Application SCE s Application requests ratepayer recovery for its Short Term Incentive Program comprising (a) Results Sharing, an incentive pay program for exempt and non-exempt (including unionrepresented) employees, (b) the Management Incentive Program (MIP), an incentive pay program for senior managers, and () the Executive Incentive Compensation Plan (NOEIP) costs for non-officer executives. SCE has forecast Short Term Incentive Program expenses of $1.1 million for Test Year 01. SCE utilized an Itemized Forecast methodology, which applies the historical Short Term Incentive Program costs for 01 of $1. million, and utilized said costs to calculate an expense ratio (stated as a percentage) for the program by dividing the 01 program costs by the 01 recorded labor expense. Since the Short Term Incentive Program costs are directly impacted by SCE s total labor costs and SCE projected a decrease in the number of employees due to Operational Excellence initiatives, SCE applied the resulting expense ratio to the projected non-capital labor forecast for As a result, SCE s Test Year 01 forecast of $1.1 million for the Short Term Incentive Program is 1% (or $1. million) less than its 01 recorded expense.. ORA s Position ORA recommends a $.0 million reduction to SCE s Short Term Incentive Program, over % below SCE s forecast. If adopted, ORA s recommended reduction would cut rate recovery for SCE s Short Term Incentive Program from $1.1 million down to $. million. This results in a proposed total Short Term Incentive Program Test Year 01 rate recovery of $. million. ORA s proposed disallowances include: Reduction of initial forecast via use of a -year average Short Term Incentive Program expense and labor cost ratio (versus SCE s use of recorded adjusted 1

24 data) and varying labor forecast (based upon ORA labor force reductions in other volumes), resulting in a reduction of SCE s Test Year forecast from $1.1 million down to $. million (a difference of $. million) ; Zero ratepayer funding for the NOEIP portion of the Short Term Incentive Program, resulting in a further $.0 million reduction of SCE s Test Year Forecast; Fifty percent reduction of ratepayer funding for the MIP portion of the Short Term Incentive Program, resulting in a further $1.1 million reduction of SCE s Test Year Forecast; Fifty percent reduction of ratepayer funding for the non-represented SCE employees participating in the Short Term Incentive Program, resulting in a further $0. million reduction of SCE s Test Year Forecast; and Twenty-five percent reduction of ratepayer funding for the represented SCE employees participating in the Results Sharing Program, resulting in a further $. million reduction of SCE s Test Year Forecast. ORA s stated reasons for the foregoing reductions are: (a) SCE s Test Year forecast methodology utilizing 01 Short Term Incentive Program recorded cost versus 01 non-capital labor forecast ratio is excessive and inadequately supported ; (b) SCE s customers should not pay the full costs of the Short Term Incentive Program since: (i) program goals provide benefits to both shareholders and ratepayers and, therefore, both should share the funding of this program ; (ii) nonofficer executives and senior managers receive disproportionate payouts compared to those of rank and file employees; and (iii) the TCS shows SCE s executives are compensated above market.. TURN s Position TURN recommends a $. million reduction to SCE s Short Term Incentive Program, or.% less than SCE s forecast. If adopted, TURN s recommended reduction would cut rate recovery for SCE s Short Term Incentive Program from $1.1 million to $.1 million. TURN s proposed reductions include: If the Commission rejects ORA s proposed reductions to SCE s labor forecast, the reduction to SCE s Test Year forecast of $1.1 million would be $. million to $. million ($. million x.%). 1

25 Reduction of initial forecast via application of a reduced Short Term Incentive expense to non-capital labor cost ratio of. percent, resulting in a reduction of SCE s Test Year forecast from $1.1 million to $.0 million (a difference of $. million); Exclusion of ratepayer funding for Short Term Incentive Program goals tied with lobbying goals, resulting in an additional reduction of SCE s Test Year forecast of $1. million ; and Exclusion of ratepayer funding of 0% or, alternatively 0% of Short Term Incentive Program goals associated with O&M cost savings, resulting in an additional reduction of SCE s Test Year forecast of $. million (or, alternatively, of $. million); and Exclusion of ratepayer funding of Financial Performance goals included in NOEIP, resulting in an additional reduction of $.1 million. TURN s reasons for the foregoing reductions are: (a) SCE s 01 forecast methodology utilizing 01 Short Term Incentive Program recorded cost versus modified non-capital labor expense ratio based on 01 approved funding represents a significant escalation of incentive payments and is highly skewed toward managers and executives; (b) ratepayers should not be responsible for paying bonuses for effective lobbying; (c) shareholders should share the cost of O&M reduction-related bonuses and (d) financial performance goals for NOEIP benefit shareholders rather than ratepayers.. SCE s Rebuttal Results Sharing, MIP, and NOEIP are SCE s Short Term (annual) Incentive compensation programs, under which eligible employees, including represented employees, have the opportunity to earn bonuses based on their job performance and the Company s and applicable Operating Unit s achievement of certain established goals. The Short Term Incentive Program has been TURN s reduction relative to lobbying goals encompasses $,000 from 01 Results Sharing forecast costs and $1.0 million from 01 NOEIP costs. SBUA, Expert Report on Issues Affecting Small Businesses, pp. and -. The Small Business Utility Advocates (SBUA) recommends that the Commission approve short term incentive pay for SCE employees, but makes certain proposals relative to the operation of the program. However, as SBUA does not dispute SCE's Short Term Incentive Program forecast or otherwise recommend any specific reductions to the forecast, SCE shall not address the SBUA's proposals here. 1

26 and continues to be an integral component of the applicable SCE employee s market competitive total compensation package and allows ratepayers to place a portion of employees compensation (increasing as a percent of total compensation based on job classification) at risk unless goals such as effective customer service, safety, cost control, and efficiency are met. Employee performance contributes to realization of these goals, thus encouraging performance beneficial to ratepayer interests. As noted above, having the Short Term Incentive Program as a component of total compensation protects ratepayer interests by enabling SCE to attract and retain competitive talent in a challenging labor market. The TCS performed by Aon Hewitt under joint management of ORA and SCE included these incentive compensation programs and showed SCE total compensation levels are below market by.0 percent. As discussed in greater detail below, ORA s citation to the TCS results only in the Executive job category to support reductions in NOEIP is wildly misplaced given that none of the SCE employees within NOEIP fall into the TCS Executive job category. Outside of ORA s misplaced reference to the TCS Executive job category results, ORA otherwise makes little mention of the TCS and avoids any reference to its key conclusion that SCE s workforce compensation is at market. In TURN s testimony, TURN completely ignores the TCS and its results. a) ORA s Methodology for Its Proposed Test Year Forecast Is Flawed As noted above, SCE utilized an Itemized Forecast methodology, which applies the historical Short Term Incentive Program costs for 01 of $1. million and utilized said costs to calculate an expense ratio (stated as a percentage) for the program by dividing the 01 program costs by the 01 recorded labor expense. Since the Short Term Incentive Program costs are directly impacted by SCE s total labor costs and SCE projected a decrease in the number of employees due to Operational Excellence initiatives, SCE applied the resulting expense ratio to the projected non-capital labor forecast for In its testimony, ORA recommends using a -year average of historical costs for 00-01, multiplied by a -year average of SCE s labor costs, to arrive at a reduction of $. million from SCE s overall Short Term Incentive Program forecast. SCE contests this methodology for the following reasons: SCE-0, Vol., Part, p., Table C-. 1

27 1 (1) ORA Improperly Utilizes Preliminary Unadjusted Data and Nominal Dollars in Its Forecast ORA cites to SCE s response to a data request providing 01 recorded and 01 forecast data as the basis for determining its proposed 01 forecast. However, as explicitly referenced in SCE s response, SCE was only providing preliminary and draft recorded data. 0 The General Rate Case Plan specifies that, Include at least five years of recorded data for each FERC account used in the development of the test year revenues and revenue requirement. 1 Therefore, it is wrong for the ORA to utilize data that has been clearly identified by SCE as preliminary unadjusted information. SCE has since finalized the 01 recorded and adjusted Short Term Incentive Program costs which are shown below in Table III-. ORA also incorrectly utilized Nominal Dollars in Table 1-1 while indicating that SCE recorded costs were shown in 01 Dollars. Table III- below correctly reflects recorded costs for years in Constant 01 Dollars. ORA-1, p., lines SCE s Response to Data Request DRA-SCE--DAO Q. ( 01 Recorded Labor cost is preliminary and draft. ). 1 D , p. B-, Section F. 1

28 Table II- SCE Results Sharing/Short Term Incentive Program Recorded / 01 Forecast (in Thousands of 01 Dollars) 1 () ORA Erroneously Applies the Averaging Methodology Since Short Term Incentive Program Costs Show a Clear and Continuous Upward Trend From ORA uses a -year average to forecast Short Term Incentive Program costs, stating: ORA methodology is more appropriate because recorded RS/STIP payments and labor expenses fluctuated during this period. This explanation ignores Commission authority on the proper methodology as a review of SCE s historical recorded/adjusted expenses from indicates a continuous upward trend over the -year period. In D.-1-0, the Commission stated that if recorded expenses in an account have shown a trend in a certain direction over three or more years, the ORA-1, p.. SCE-0, Vol., Part 1, p. 1, Figure IV-1. 1

29 last recorded year is an appropriate base estimate. Therefore, SCE appropriately utilized the last recorded year as the base to which the labor forecast was applied to calculate the Test Year forecast. b) TURN s Methodology for Its Proposed Test Year Forecast Is Flawed As noted above, SCE applied the historical Short Term Incentive Program costs for 01 of $1. million and utilized those costs to calculate an expense ratio (stated as a percentage) for the program by dividing the 01 program costs by the 01 recorded labor expense. Since the Short Term Incentive Program costs are directly impacted by SCE s total labor costs and SCE projected a decrease in the number of employees due to Operational Excellence initiatives, SCE applied the resulting expense ratio to the projected non-capital labor forecast for In its testimony, TURN recommends a Test Year 01 forecast applying a constant ratio based on the 01 Commissionapproved Short Term Incentive Program, funding approximating.% of 01 recorded labor costs to 01 forecast labor dollars. A combination of factors, including the number of eligible employees, target award levels, labor expense, and Company and OU performance, drives Short Term Incentive Program costs. Program costs increased in 01 primarily due to better than target performance. TURN s application of a constant ratio as a forecasting methodology assumes Company and OU performance remains static and eliminates any incentive to achieve better than target performance given the reduced funding level. c) ORA s and TURN s Recommendations Are Completely Inconsistent With the TCS Undisputed Determination That SCE s Total Compensation Levels Are Below Market by.0 Percent ORA s and TURN s testimony recommending reductions of short term incentive programs covering SCE s entire workforce ignore the results of the TCS. In the context of General Rate Cases, the purpose of total compensation studies is to determine whether the utility s total compensation is at market levels and, therefore, the reasonableness of the utility s employee costs. As in all previous total compensation studies, SCE and ORA jointly participated in the TCS and made decisions by consensus on its development and implementation, including study methodology, choice of SCE-0, Vol., Part 1, p.. The Total Compensation Study was submitted by SCE as SCE-0, Vol., Part. 1

30 the consultant to perform the study, selection of comparator companies, selection of survey sources, and which elements of compensation to include and which to exclude. For cash compensation, SCE and ORA mutually agreed to include both base pay and short-term (annual) incentives, such as Results Sharing, MIP and NOEIP, in the TCS. The TCS results clearly show that: Overall, SCE total compensation is below the competitive norm (by.0 percent). SCE supports the TCS as an independent measure of whether SCE s compensation is reasonable and therefore recoverable under standard cost of service ratemaking. As the Commission considers each of the adjustments to SCE s compensation and benefits forecast proffered by ORA and TURN, the question persists as to how they can reconcile severe reductions of ratepayer funding for incentive and benefits programs covering SCE s entire represented and non-represented workforce when the TCS concludes the workforce is being paid percent below market. For ORA in particular, ORA directly co-managed the TCS and the various meeting notes detail ORA s active role in overseeing every aspect of how the TCS was conducted. In addition, ORA was one of the earliest advocates of using total compensation studies in rate cases. Given such, ORA s continuous demands for reduction of ratepayer funding across SCE s workforce without any effort to challenge the TCS conclusion that SCE s workforce is paid at or below market remains highly questionable. SCE continues to seek explanation from ORA to harmonize its punitive adjustments to SCE s forecast with the results of the TCS, but to no avail. As the only independent evaluation of SCE employees total compensation, the TCS show SCE s overall compensation levels at five percent under the competitive norm (or statistically at market even if taking into account Aon Hewitt s plus or minus five percent degree of accuracy) and, therefore, its employee compensation costs are reasonable. However, ORA and TURN seek to decouple short-term incentives (and other variable pay programs) from SCE s total compensation, claiming SCE should not be allowed to recover those same reasonable compensation costs from ratepayers. The Commission has previously rejected this line of reasoning in D where it concluded that: (a) [b]ecause total compensation is reasonable, (defined as prevailing market rates for comparable skills) SCE-0, Vol., Part, Total Compensation Study, p.. D.-1-0, pp. 0-1 and. Appendix B, pp. B-1 to B-, SCE-, Human Resources Department, Benefits and Other Compensation, ORA s Response to Data Request Set SCE-DRA-01-DAO. 1

31 the ratepayers should reasonably fund a revenue requirement that includes the full market-based employee compensation for the adopted levels of staff ; (b) there is no basis to exclude the incentive component and force shareholders to assume a portion of the reasonable cost of employee compensation ; (c) there is no merit in [ORA]'s argument that shareholders should fund any portion of the incentive portion of market-based employee compensation ; and (d) short term incentives do not solely benefit the company: if employees work harder or smarter to earn incentives (even just to achieve the target incentives) then ratepayers should benefit too. The Commission has recognized in rate case decisions that short term incentive compensation is a valuable tool for attracting and retaining skilled professionals to run and manage the companies, and to carry out and meet safety, diversity, and customer service goals. 0 Moreover, the Commission has held that as long as total compensation was reasonable, it would not interfere with the utility s decision on the particular mix of base pay, incentives, and benefits: 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.-1-0, and that we reject here. 1 Although both ORA and TURN criticize SCE for providing allegedly disproportionate payouts from the Short Term Incentive Program to management as opposed to rank and file employees, such criticism does not acknowledge standard characteristics of short term incentive programs (e.g. employees with higher levels of base pay naturally receive higher bonus payouts since those payouts are a percentage of base pay and employees with managerial and supervisorial rules are more willing to accept a higher percentage of at-risk pay). Moreover, and contrary to ORA s and TURN s purported concern about the disproportionate nature of Short Term Incentive Program payouts, ORA and TURN seek the exact same level of reduced ratepayer funding for D.0-0-0, p.. 0 D.1-0-0, p.. 1 D.0-0-0, p. 1. 0

32 both senior managers participating in MIP and non-represented rank and file employees participating in Results Sharing. Offering under-market compensation would undoubtedly harm SCE s ability to retain high-performing employees in its workforce and to attract highly qualified employees, all in support of SCE s effort to provide safe and reliable service to our customers. d) ORA s and TURN s Arguments Over Ratepayer Benefits From Short Term Incentive Program Goals and Demands That Shareholders Fund Program Costs Ignore Cost-of-Service Ratemaking Principles ORA s and TURN s positions are not only inconsistent with the results of the Total Compensation Study, but also fundamentally at odds with previous Commission decisions on Short Term Incentive Programs and cost-of-service ratemaking principles. As stated in SCE s direct testimony (and left completely unaddressed by ORA and TURN), cost-of-service ratemaking principles make it clear that as long as the utility s total compensation is reasonable, the Commission should not interfere with management decisions on how to allocate that total among various forms of compensation. Since the market level of compensation is, by definition, the amount set by the labor market as necessary to attract and retain employees, recovery of costs to pay the market level of compensation should be treated as legitimate operating expenses incurred by the utility to provide service to its customers. Although ORA and TURN make no effort to dispute the TCS results showing SCE s total compensation is reasonable, ORA and TURN instead rely on strained arguments relative to shareholders receiving benefits from achievement of goals associated with the Short Term Incentive Program and, as a consequence, should be forced to fund ORA s and TURN s deep cuts in the Program. As discussed in greater detail above, SCE s shareholders should not be treated as alternative sources of funding for the utility s reasonable workforce costs. 1