5. Is the Cost Information Used to Calculate the Proposed Fees Reliable and Accurate?

5.1. Costs Based on OEA Estimates

SCE states that its DA service fees are based on "cost-of-service regulatory treatment," and that the proposed service fees were developed with great detail to ensure that the fees are accurate and that costs are recovered from those who cause the costs to be incurred.⁵⁷

AReM states that SCE's costing methodology is deficient because the OEA SCE uses to determine the amount of time spent performing DA activities is nothing more than in-house discussions with current employees. AReM contends that this approach falls short of "operational expert analysis," and produces questionable results because interviewed employees will seek to justify their own existence in the interest of preserving their jobs.⁵⁸ AReM states that SCE has not demonstrated that the proposed fees which rely on OEA estimates are cost-based. AReM recommends that an independent, qualified expert be used to recommend process improvements and to conduct time-and-motion studies where SCE's OEA was used.⁵⁹

SCE responds that its OEA is appropriate and sufficient for identifying the amount of incremental labor required to perform certain DA services, and that a full time-and-motion study is not required in every instance.⁶⁰ SCE states that it determined which estimation method was most applicable for each sub-task and used a combination of estimation methods to develop many of the proposed service fees. SCE states that OEA is frequently employed when activity durations are difficult to estimate and are influenced by a number of factors.

As an example, SCE states that there is significant variability in the frequency of DASR processing and the time needed to process a DASR. SCE states that, while the manual review of a DASR is estimated to take one minute, it will take more time to process a DASR for a service account that has switched multiple times between ESPs when compared to one that has stayed with the same ESP for a long time.

SCE contends that averages produced by time-and-motion studies showing this kind of variation will be skewed toward the high side due to the magnitude of the longer time durations in the sample. SCE states that time-and-motion studies on tasks with variability in duration or frequency could be misrepresented if the work observed by the study was not representative of the typical or normal work encountered.

AReM responds that a time-and-motion expert would be accustomed to dealing with variability in task times.⁶¹ CMTA states that involving the employees who actually perform the associated activity is an appropriate first step in a cost study, but this is not sufficient. CMTA contends that an appropriate analysis requires a qualified expert to estimate the time required to perform tasks and to determine if there are more effective and efficient ways to accomplish those tasks.⁶²

Discussion

The development of accurate and reliable costs requires the underlying data to be reasonably accurate and based on actual, recorded operational information. Estimates based on historical records or time-and-motion studies are based on objective, quantified and easily verified measurement of the activities being performed or the cost of items purchased. However, costs based on SCE's OEA estimates are subjective and potentially less accurate because they are "best guess" approximations.

SCE explains that, while in some cases time was recorded to validate estimates, the OEA estimates were primarily developed through an interview process. Interviewed personnel were asked to identify the steps involved in an activity and the approximate time necessary to perform those steps. SCE states that some activities, such as ESP establishment, were not being performed, even though estimates were developed for those activities.⁶³

When asked what approaches SCE used to verify the accuracy of OEA estimates, SCE states that the estimates were reviewed by an independent party/contract employee performing the overall study to ensure personnel used consistent estimating methods from fee to fee, and that the data was reviewed by the operational experts' managers and by the overall project management team.⁶⁴ SCE states that management's review would detect any overestimating of time as compared with productivity measurements for performance appraisal purposes.⁶⁵ However, SCE does not explain how an employee's performance productivity measurements are compared with task-specific estimates to ensure accurate, reliable OEA estimates. SCE states that because the OEA-derived estimates were approved by management and an outside consultant, they are accurate and reliable.⁶⁶

SCE states that, in some cases, measured recorded times were available, but in some cases, OEA estimates "are a little bit more of an educated guess."⁶⁷ However, no statistical methods were routinely used to validate the reliability of the OEA estimates. Thus, there is no objective basis for assessing the reliability and accuracy of the OEA estimates.

When asked about the level of precision of the OEA estimates (i.e., their accuracy within a range of, for example, plus or minus 10%), SCE states that, "It's really hard to say." When asked what would be the effect of overstating or understating an OEA estimate, SCE states, "there would be cross-subsidization going on between the different groups, between direct-access and the non-direct-access customers."⁶⁸

We have identified unexplained inconsistencies in certain OEA estimates, and these inconsistencies cast doubt on the accuracy and reliability of the costs derived from OEA estimates. Several of the proposed fees, for example, are based, in part, on OEA-derived estimates involving two technical specialists who review work for quality control purposes.⁶⁹

According to SCE, one technical specialist "reviews the field tracking system to ensure the meter information and test results are input correctly, while the second technical specialist reviews the engineering tracking system to ensure that the correct information was input for the job."⁷⁰ These quality control activities are described identically for each of the services for which they are performed, and in most cases were estimated to take the technical specialists each five minutes to perform their task.

However, SCE's OEA results show that this particular activity requires 10 minutes when performed for one service but requires only five minutes when performed for the other services.⁷¹ The Application does not explain why it takes twice as long for a technical specialist performing tasks for one service as it takes for the same kind of technical specialist performing identical tasks for another service.

In its comments on the proposed decision, SCE contends that the apparent inconsistency described above is because the tasks involved in providing Meter Maintenance Services include processing trouble reports to ensure that meter problems were corrected and the information in the system is clear so that the trouble ticket can be closed. However, the Application does not say this.

These inconsistent estimates cast doubt on the accuracy and reliability of SCE's OEA, especially since SCE has not taken steps, except in limited instances, to objectively verify the accuracy of its OEA estimates. This is of particular concern because, as shown in Table 1, most of the proposed fees for non-discretionary services are based on costs developed using OEA estimates.

Given that OEA estimates are used extensively throughout SCE's development of DA service fees, we are concerned about the accuracy and reliability of the information SCE is relying upon to price essential services to its competitors.

The OEA estimates have not been adequately validated or verified in a way that provides reasonable confidence in their accuracy or reliability, and, therefore, the accuracy of the OEA estimates is unknown. OEA estimates were developed for some activities, such as ESP establishment, even though those activities were not being performed.⁷² The accuracy of an estimate of time required to perform an activity is even more questionable when that activity is not actually being performed.

The reliability of OEA-derived estimates could have been improved using various techniques to independently verify their accuracy and range of variation or error. For example, one way to verify or validate the accuracy of an OEA estimate would be to compare the OEA estimate with results derived from a time-and-motion study for the same activity in order to establish a benchmark and to determine the average deviation from that benchmark. Except in limited instances, SCE has not done this.⁷³

Another way to verify or validate the accuracy of OEA estimates would be to determine the average of the OEA estimates made by several individuals performing the same task, and the range of variation around that average. There is no evidence that SCE attempted to do this.

Because SCE's OEA estimates produce inconsistent results for identical activities, and because SCE has not objectively verified the accuracy and reliability of its OEA estimates, it is unknown whether SCE's OEA estimating method consistently produces accurate and reliable costs. Therefore, SCE's OEA methodology is unreasonable.

The Commission has an interest in ensuring that UDCs comply with its incremental cost policy, and that the costing methods used are reasonable. Although D.97-10-087 allowed each UDC to file its own DA tariff, the Commission stated its intention to eventually adopt a uniform DA tariff for statewide use to eliminate inconsistent and differing rules among the utilities.⁷⁴ This requires consideration of, among other things, consistency in UDC costing methodologies and other issues affecting the appropriateness of DA service fees.

Although the Commission established the policy that non-discretionary fees should be based on incremental costs, the Commission has not heretofore considered or approved the UDCs' incremental costing methodologies to ensure the Commission's policy is appropriately and consistently applied. Such a review would necessarily consider how cost data is gathered and used to develop fees, including, for example, the appropriate use of historical records versus time-and-motion studies versus OEA-derived estimates.

Thus, the Commission should consider for all UDCs which costing methodologies are compatible with its policies. UDC costing methodologies have implications for DA statewide, and should be considered in the Anticipated Proceeding that intends to examine the appropriateness of all of the UDCs' DA service fees and tariffs. For all these reasons, SCE's costing methodology used to develop the proposed service fees should not be approved in this proceeding.

With respect to the inadequacies with SCE's OEA methodology and inconsistencies in identifying tasks performed for similar functions, SCE should be especially scrupulous in how it develops fees to be charged to its ESP competitors, and to its DA and other customers. SCE must take special care to avoid the appearance of bias, careless indifference toward competitors or anticompetitive conduct.

Before approving SCE's costing methodology, we should consider the appropriateness of charging ESPs for costs caused by end-use customers who directly contact the UDC, and we should have confidence that methods like OEA produce accurate and reliable costs. These issues have statewide implications for DA that should be addressed in a proceeding involving all UDCs and a broader spectrum of interested parties than have participated in this proceeding.

5.2. Cost Components - Inclusion of Corporate and Division Overhead Costs

SCE states that the labor costs included in the proposed service fees are based on 2006 direct labor costs for an employee's labor classification, and include related labor overhead costs (A&G and division overhead loadings). SCE states that these overhead costs are included to ensure that the associated costs of labor are included in its calculation of incremental costs to perform specific tasks.⁷⁵

CMTA and AReM contend that providing an incremental unit of DA service does not change SCE's corporate overhead costs. Therefore, according to CMTA and AReM, overhead costs are not incremental, and inclusion of these overhead costs in SCE's service fees is inappropriate.⁷⁶ CMTA and AReM state that the A&G costs represent 14.6% of the labor rates used in SCE's incremental cost calculations. CMTA and AReM state that SCE also inappropriately includes a division overhead loading that represents from 22.7% to 38.2% of loaded labor cost, and, when combined with the corporate A&G loading, these overhead loadings account for from 37.3% to 52.8% of the incremental labor rates.

CMTA and AReM contend that these corporate and division overhead costs are already included in the base rates set in SCE's GRC proceeding, and that these costs are possibly being double-collected in both base rates and in the DA service fees. CMTA and AReM contend that this inappropriately shifts costs from bundled service customers to DA customers. CMTA and AReM assert that SCE's overhead costs should be collected only in base rates as determined in its GRCs, and recommend that the fees be recalculated to exclude these overhead loadings.⁷⁷

SCE responds that it incurs corporate A&G costs in support of all activities, including DA, and therefore a portion of those costs are appropriately recovered in DA fees through its A&G loadings. SCE states that SCE's administrative, financial, regulatory, legal, and human resources departments support DA services by tracking DA activities and costs, providing payroll and human resources support for the personnel working on DA activities, and responding to regulatory and intervenor inquiries. According to SCE, excluding corporate A&G costs from labor rates would understate the actual cost of providing services to DA participants, resulting in subsidization of DA services by SCE's bundled service customers.⁷⁸

Similarly, according to SCE, division overhead loadings recover costs for direct supervision and other non-labor costs necessary to support personnel in each operating organization. Division overhead rates are based on the supervisor-to-worker ratios and non-labor costs, and are specific to each operating group performing services for DA customers, including the Customer Communication Organization, Revenue Services Organization and Meter Services Organization.

SCE asserts that CMTA and AReM overstate the percentage of incremental labor rates attributable to division and corporate loadings because the percentages cited by CMTA and AReM represent the ratio of corporate A&G and division overhead costs to unloaded direct labor.⁷⁹ SCE states that its approach is consistent with that used in similar proceedings where the Commission approved the application of division overhead and corporate A&G loadings for similar services, including D.05-12-041 and Resolution E-4013 (the CCA Proceeding).⁸⁰ SCE contends that, because it is proposing that the forecast revenue for DA service fees continue to be treated as Other Operating Revenue (OOR), there is no possibility that SCE would "double collect" for any of these services because OOR from the DA service fees will be credited against SCE's overall revenue requirement.

SCE states that the forecast expenses for providing DA services are also included in SCE's GRC forecast, and that it will propose continued OOR treatment of the DA service fee revenues in its 2009 GRC. This, according to SCE, reduces, dollar-for-dollar, the revenues that must be collected through base rates, and therefore, the costs of DA services (including overhead costs) are not collected twice. ⁸¹

Discussion

D.97-10-087 requires that service fees be based only on recurring costs that recur each time a transaction is processed, but provides no guidance as to whether labor overhead costs should be reflected in DA service fees. However, DA services cannot be provided without paying the salaries and benefits, and providing the A&G support for the employees providing DA services. For example, the costs of administering the hiring of personnel to perform DA activities and the costs for preparing DA staff paychecks are among the costs included in A&G costs. Therefore, it is appropriate to reflect A&G costs in DA service fees. Similarly, division overhead costs support the employees providing DA services, and a share of those costs should be included in DA service fees. Excluding A&G and division overhead costs will understate the actual cost of providing DA services.

The A&G and division overhead loadings included in the service fees are similar to those applied to other SCE services, and we find them to be reasonable. We also find that inclusion of A&G and division overhead loadings does not result in a double collection of the costs for DA services because the revenue from the DA service fees will be included in OOR in SCE's next GRC.

⁵⁷ SCE-1, p. 9. SCE Opening Brief, p. 3.

⁵⁸ AReM Opening Brief, pp. 6-8.

⁵⁹ AReM Opening Brief, pp. 5, 8.

⁶⁰ SCE-2, pp. 6-7.

⁶¹ AReM Opening Brief, p. 7.

⁶² CMTA Opening Brief, pp. 2-3.

⁶³ TR 66:1-17.

⁶⁴ TR 66:25-67:18.

⁶⁵ TR 20:24-21:13.

⁶⁶ SCE-1, p. 12. SCE Opening Brief, p. 6. SCE Reply Brief, p. 4.

⁶⁷ TR 65:19-28.

⁶⁸ TR 67:19-68:5.

⁶⁹ SCE-1, pp. 54, 63, 72, 73, 75.

⁷⁰ See SCE-1, p. 63.

⁷¹ The particular task in question is performed by the technical specialist reviewing the engineering tracking system to ensure that the correct information was input for the job.

⁷² TR 66:1-17.

⁷³ TR 65:25-28, SCE Opening Brief, p. 6.

⁷⁴ 76 CPUC2d, 296, 329.

⁷⁵ SCE-1, p. 16.

⁷⁶ Exh. AReM/CMTA-1, p. 7.

⁷⁷ Exh. AReM/CMTA-1, pp. 7-8. AReM Opening Brief, pp. 8-11. CMTA Opening Brief, p. 5.

⁷⁸ Exh. SCE-2, p. 3. SCE Opening Brief, pp. 8-9.

⁷⁹ SCE represents that the corporate A&G and division loadings actually comprise only 20% of SCE's total loaded labor, not the 37.3% cited by AReM and CMTA. SCE Reply Brief, pp. 8-9.

⁸⁰ Exh. SCE-2, pp. 3-4. SCE Opening Brief, pp. 8-9. SCE Reply Brief, pp. 7-8.

⁸¹ Exh. SCE-2, p. 4. SCE Opening Brief, p. 10. SCE Reply Brief, pp. 9-10.