ALJ/BMD/avs Mailed 3/18/2004

Decision 04-03-034 March 16, 2004

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

In the Matter of the Application of Southwest Gas Corporation for Authority to Increase Rates in San Bernardino, Placer, El Dorado, and Nevada Counties, California.

Application 02-02-012

(Filed February 13, 2002)

OPINION REGARDING PROPOSED
GENERAL RATE INCREASE

TABLE OF CONTENTS

Title Pages

OPINION REGARDING PROPOSED GENERAL RATE INCREASES 2 2

1. Summary 2 2

2. Procedural Background 3 3

2.1. The General Rate Case Application 3 3

2.2. Public Participation Hearings 5 5

3. Burden of Proof 6 6

3.1. Discussion 7 7

4. Revenues and Expenses 8 8

4.1. Revenues 8 8

4.1.1. Discounted Special Contracts 10 10

4.1.2. Interstate Pipeline Demand Charges 11 11

4.2. Discussion 12 12

4.2.1. Balancing Account 12 12

4.2.2. Gas Costs and Other Revenues 13 13

5. Expenses 13 13

5.1. Expense Forecasting 13 13

5.1.1. Discussion 15 15

5.2. Labor Loading (pensions, benefits, and payroll taxes) 19 19

5.3. Four-Factor Cost Allocation 19 19

5.4. Labor and Non-Labor Escalation 20 20

5.5. Operating and Maintenance Expenses (Southern and Northern California Divisions) 20 20

5.5.1. Gas Distribution Expenses (Southern California) 20 20

5.6. Account 813 Other Gas Supply Expenses
(Southern and Northern California) 22 22

5.7. Account 881 Rents (Southern and Northern California) 22 22

5.8. Gas Distribution Expenses except Gas Supply and
Rents Expenses (Northern California) 23 23

5.9. Customer Accounts Expenses - Accounts 901, 902, 903,
and 905 (Southern California) 24 24

5.9.1. Discussion 25 25

5.9.2. Customer Accounts Expenses, Excluding Account 902, Meter Reading, and Account 904, Uncollectibles (Northern California) 26 26

5.9.3. Account 902 - Meter Reading 26 26

5.9.4. Account 904 - Uncollectible Expense 27 27

5.9.5. Customer Service and Information
Expenses (Accounts 908 and 909) 28 28

5.9.6. Implementation of the Public Purpose
Program Surcharge Adjustments Adopted in D.03-03-007 28 28

5.10. Sales Expenses (Accounts 912 and 913) 29 29

5.11. Administrative and General Expenses - System Wide 29 29

Title Pages

5.11.1. Account 920 A&G Salaries 31 31

5.11.2. Account 921 - Office Supplies and Expenses 32 32

5.11.3. Account 922 - A&G Express Transferred to Capital 32 32

5.11.4. Account 923 - Outside Services 32 32

5.11.5. Account 924 Property Insurance 33 33

5.12. Account 925 Injuries and Damages, Liability
Insurance and Workers' Compensation 33 33

5.12.1. Account 926 - Pensions and Benefits Expenses 35 35

5.12.2. PBOPs 36 36

5.13. Discussion 38 38

5.13.1. Pensions and Benefits-Regulatory Adjustments 40 40

5.13.2. Miscellaneous Benefits 40 40

5.13.3. Account 930.1 - Safety Advertising 41 41

5.13.4. Account 930.2 - Miscellaneous, Deferred Compensation Directors 41 41

5.13.5. 931 Rents Expense 43 43

5.13.6. Account 935- Maintenance of General Plant 43 43

6. A&G Direct Expenses 44 44

6.1. Southern California Division 44 44

6.1.1. Account 923 - Outside Services 44 44

6.1.2. Account 925- Injuries and Damages 44 44

6.1.3. Account 928 - Regulatory Commission Expense 45 45

6.1.4. Account 930.1 - Safety Education 45 45

6.1.5. Account 935 - Maintenance of General Plant 45 45

6.2. Northern California Division 46 46

6.2.1. Account 923 - Outside Services 46 46

6.2.2. Account 925 - Injuries and Damages 46 46

6.2.3. Account 928 - Regulatory Commission Expenses 46 46

6.2.4. Account 930 - Miscellaneous General Expenses 46 46

6.2.5. Account 935 - Maintenance of General Plant 47 47

7. Rate Base 47 47

7.1. Distribution Plant-Pipeline Replacement Project 47 47

7.2. Background 48 48

7.3. Discussion 50 50

7.4. Pipeline Replacement Program (Northern California) 52 52

7.5. Working Capital 54 54

7.5.1. Materials and Supplies 54 54

7.5.2. Working Cash 54 54

7.6. General Plant 55 55

7.7. Discussion 57 57

7.8. Contract Escalation 58 58

7.9. Truckee Operations Center 58 58

8. Depreciation and Depreciation Reserve 59 59

9. Taxes 59 59

10. Cost of Capital 59 59

Title Pages

10.1. Return on Equity (ROE) and Capital Structure 60 60

10.2. Discussion 61 61

11. Automatic Trigger Mechanism 64 64

12. Attrition 65 65

13. Gas Procurement Costs 67 67

13.1. Discussion 70 70

14. GCIM 77 77

15. Rate Design 77 77

15.1. Implementing the Rate Increase and Amortizing the RRSMA 79 79

16. Comments on Proposed Decision 80 80

17. Assignment of Proceeding 82 82

Findings of Fact 82 82

Conclusions of Law 94 94

O R D E R 96 96

APPENDIX A Operating Expenses

APPENDIX B Southern California Gas Pipeline Replacement Program

APPENDIX C Calculation of Public Purpose Program Surcharges

APPENDIX D Results of Operation - Northern California

APPENDIX E - Results of Operation - Southern California

OPINION REGARDING PROPOSED
GENERAL RATE INCREASES

1. Summary

This decision adopts 2003 general rate increases of approximately $3.6 million and $3.8 million for Southwest Gas Corporation's (Southwest) Southern (Southwest) and Northern California Divisions respectively. The revenue requirement increase in the Northern California Division will be phased in during 2003, 2004, 2005 and 2006. As a result, 80% of the increase will be included in rates for 2003; 10% in 2004; 5% in 2005 and 5% in 2006. The phase-in of these increases recognizes the current economic climate, and the ability of customers to bear both these increases and potential increases in the cost of gas.

The total increases in revenue requirements represent an increase of approximately 9.1 % over base rates, and 4.3% over total operating revenue for Southern California, and 44.0 % over base rates, and 18.3% over total operating revenue for Northern California. The adopted increases represent approximately 63% of Southwest's requested increase in Southern California, and 88% of the requested increase in Northern California.¹ This decision also provides for attrition increases in Southern and Northern California in 2004, 2005 and 2006, that protect against labor and non-labor inflation, and inclusion of the Truckee Operational Center in Southwest's Northern California 2004 attrition year revenue requirements. Southwest is also authorized to amortize amounts currently recorded in the Revenue Recovery Shortfall Memorandum Account (RRSMA) in rates for 2003 and 2004. In addition, this decision adopts a revenue balancing account that protects ratepayers against over-collections, and Southwest against under-collections due to differences between forecasted sales and actual sales.

These rate increases are the first General Rate Increases authorized for Southwest since its last General Rate Case (GRC) in 1995, and are a result of increasing costs for both labor and non-labor expenses, and greater plant investment, that have occurred during the last eight years. The adopted revenue requirements are based on the use of a 2003 test year, and an overall rate of return of 9.17% on Southwest's rate base investment. The adopted revenue requirements provide for an accelerated pipeline replacement program in Southern California to reduce pipeline leak rates and increase safety. As explained in our opinion, we have not adopted recommendations by other parties for a refund of postretirement benefits other than pensions, nor have we adopted a refund of gas purchase costs that occurred in winter 2000-2001. Finally, we defer certain issues regarding other investments, and the future of the trust account for funding future retiree's benefits to Southwest's next GRC.

¹ During the proceeding, Southwest reduced its requested revenue requirement increases from $8.4 to $5.7 million in Southern California, and from $5.5 million to $4.4 million in Northern California.