Total Operating Expenses:
Ponderosa's estimate of total company operating expenses (at present rates less depreciation and taxes) at $ 9,875,942 is greater than CD's estimate of $8,827,696 by $1,048,246 or 11.87%. A comparison of CD's and Ponderosa's estimates of total operating expenses for test year 2009 is shown in Appendix A. CD has made the following modifications to Ponderosa's estimates: (a) a disallowance of $48,300 for a new employee; (b) a reduction of $346,725 in executive salary expense; (c) disallowed bonuses; (d) capped benefits at 42% of salaries and wages; (e) the application of the constant dollar method (CDM) to estimate 2009 test year expenses; and (f) the difference between the use of eight month annualized data for 2007 in Ponderosa's initial filing and CD's use of a full year of actual 2007 recorded expenses. These adjustments are further described below.
In Ponderosa's original rate case filing, it used eight months of 2007 recorded data, then annualized it and increased each expense amount by a composite growth factor, based on a three year average of the historical increase in labor and non-labor expenses. The factor was based on the average proportion of labor and non-labor in the total expenses and did not break them into sub-components. Ponderosa then added expense amounts for five additional employees.
CD does not agree with Ponderosa's escalation method. Ponderosa's methodology includes other factors that increase expense levels such as changes in operations and customer growth. For example, if the utility had ten computers and then added another computer, the electricity usage would increase due to the addition of a computer. The growth in expense is due to a change in operations. If computers are not added uniformly each year then this method of forecasting operating expenses would be flawed. For test year ratemaking purposes, CD attempts to estimate expenses for a normal operating year and then escalate the expense for inflation. CD started with Ponderosa's recorded end of the year 2007 labor and non-labor expense data and then applied the constant dollar method to compute Ponderosa's estimated 2009 expenses. The constant dollar method is used to measure financial statement items in dollars of the same (constant) purchasing power. Historical cost is restated in units of constant purchasing power in the following way:
(Historical Expense) x (Average CPI for the Current Year/CPI at Time of Expense incurrence)
Restating all accounts in constant dollars provides greater comparability among different years because all expenses appear in the same "current year average dollars," regardless of when the expenses were incurred. Therefore, CD used the inflation factors for each year and compounded them to 2007 dollars. This is the same expense forecasting principle and methodology the Commission approved and adopted in Resolution T-16711 in 2003 for Ponderosa's previous GRC.
The detail expense accounts are divided into four components: salaries, benefits, rents and other. The expense was analyzed by account and by the components of each account. CD accepted Ponderosa's historical ratio of labor and non-labor expenses and used these ratios to escalate expenses into the test year using DRA's estimated labor and non-labor escalation factors.5
Ponderosa proposed to add five new employees in test year 2009. These proposed employees carry an annual cost of $201,314 for the test year 2009. After a review of Ponderosa's submitted reasoning, CD accepts the addition of four new employees and adds their associated expense to its 2009 estimate. CD does not agree with the addition of one regulatory analyst position. Ponderosa maintained that it needed this additional employee position to meet the ever increasing regulatory and legislative requirements.
Although telephone subscribers' needs for telephone and related communications technology change and the regulatory environment evolve correspondingly, CD sees no evidence that state regulatory requirements have increased significantly in recent years. Ponderosa cited a number of examples of increasing regulatory tasks such as the new LifeLine certification process and resulting activities. In fact, since Ponderosa's last GRC proceeding, the Commission has relieved carriers of the burden of LifeLine customers' certification and verification. This task has been handled by a third party administrator since 2006. In addition, the Commission has allowed carriers to claim expenses related to LifeLine implementation from the LifeLine fund, as they are incurred. CD therefore, disallows Ponderosa's proposed salary and benefits for one new proposed regulatory analyst position which will lower Ponderosa's employee salaries/wages expense by $48,300.
CD examined the payroll expense separately from the analysis of the individual accounts and analyzed the payroll by positions for 2007. CD's analysis of details of the weekly and daily responsibilities of Ponderosa's executives indicates there are duplications of tasks among the executive and upper management positions. Therefore, CD disallowed the regulated portion of salaries related to duplicate executive tasks which resulted in a reduction in the payroll by $346,725 from the base year calculation.
Ponderosa added bonuses to regulated salaries and wages of its employees. CD does not agree with inclusion of bonuses in rate case expenses. CD acknowledges that it is within Ponderosa's shareholders' right to reward employees with bonuses, but payment of bonuses must not be charged at the expense of the rate payers who subsidize this regulated telephone company. Therefore, CD disallowed bonus payments of $94,503 from the base year calculation.
Ponderosa's level of benefits to total compensation appears to be high when compared to other similarly situated utilities. For test year 2009, the ratio of benefits to total compensation is 54%. CD applied a ratio of 42% that it deemed to be more reasonable for rate making purposes.
CD's use of the 42% benefit to salary ratio was developed through a comparison of ratios utilized by other communication carriers involved in General Rate Cases (GRC), a survey of the annual report filings and general rate cases of small water companies ranging from 2000-10,000 customers as well as U.S. Bureau of Labor Statistics (BLS) data, dated December 10, 2008 6 for those indicators relevant to small ILEC's operating in California.
CD found the average benefit to salary ratio for the water survey group to be 33%.7 While the study of the latest available data from the BLS, for similarly situated companies by size, location, and operation type as well as other indicators resulted in an average benefit to salary ratio of 42% 8. The BLS ratio supports CD's proposed rate of 42% therefore, CD caps the ratio of regulated benefits to salaries/wages at 42%, for the test year 2009 and concludes that its proposed benefit to salary ratio of 42% for Ponderosa is appropriate and adequate.
During the June 24th field visit to Ponderosa's facilities, CD staff noticed that Ponderosa's customer service department closes at 4:30 pm every day, Monday through Friday. This is a time when many of Ponderosa's customers might still be at work, or on the road returning from work. CD recommends that Ponderosa extend its customer service hours to 5pm and also open for 4 hours on Saturdays. Ponderosa is not ordered to make this change but should it accept CD's recommendation; it shall inform its customers of the extended and additional customer service hours.
5 CD used the November 30, 2008 DRA estimates of Global Insight U.S. Economic Outlook estimates of Non-Labor and Wage Escalation Factors for 2007-2009 as follows:
Year |
Labor (%) |
Non-labor (%) |
2007 |
3.75 |
3.0 |
2008 |
2.9 |
6.8 |
2009 |
3.9 |
(0.5) |
6 http://www.bls.gov/news.release/ecec.nr0.htm.
7 Kenwood GRC filing Test Year 2009 at 35%, Alco Annual Report 2007 at 48%, East Pasadena Annual Report 2007 at 24%, Fruitridge Annual Report 2007 at 25%, Penngrove Annual Report 2007 at 32%.
8 Ibid, Table 8.
