8. Administrative and General Expenses

8.1 Payroll

Suburban based its administrative and general payroll expenses estimate on all existing positions, as well as three proposed new positions: corporate counsel, vice president of quality assurance, and regulatory analyst. ORA recommends eliminating an existing district manager position, as well as the three proposed new positions.

a. District Manager

Suburban has a district manager for each of its two service areas. ORA recommends eliminating one of these positions on grounds that Suburban is a single-district company. Suburban argues that the position ORA seeks to eliminate has existed for at least 12 years and was only temporarily vacant for part of 2001.

Although the Commission in 1996 combined the San Jose Hills and Whittier/La Mirada districts into a single district for ratemaking purposes, Suburban continued to have a manager for each of these service areas. The two service areas are geographically distinct, with a mountain and valley between them, and in total serve 74,000 customers. The evidence shows that no other Class A water utility has a single district manager for a system with 74,000 customers. The testimony showed that San Jose Hills faces contamination and supply problems far different from those of Whittier/La Mirada. Our order adopts Suburban's expense recommendation in retaining district managers for each of these two service areas.

b. Corporate Counsel

Suburban said it proposed the corporate counsel position to deal with accelerating legal costs and intensifying water quality issues. ORA argues that Suburban has failed to show a particular need for in-house counsel, nor has it estimated any savings attributable to the new position. Suburban acknowledged that even with the new position, it expects to require substantial outside counsel for various specialties. We agree with ORA that the position has not been justified, and we disallow this expense.

c. Vice President of Quality Assurance

Although this is a proposed position, Suburban hired a vice president of quality assurance in May 2002, maintaining that increasingly stringent regulatory requirements to which Suburban is subject require an executive level position. The company states that the vice president of quality assurance supervises and directs all quality assurance efforts, as well as all emergency planning and preparedness activities, and coordinates all dealings with county, state and federal water quality regulators. ORA maintains that Suburban has functioned well without an executive level position of this nature, and that justification is lacking. The record establishes Suburban's need to constantly address water quality assurance at an executive level. We will authorize the expense for this position.

d. Regulatory Analyst

Suburban states that it proposed the addition of a regulatory analyst to cope with the demands of rapidly evolving regulatory requirements of this Commission. ORA argues that the new position has not been justified. We are aware of no regulatory requirements of this Commission that Suburban has not been able to effectively address through its existing personnel. We disallow expenses requested for the new position.

8.2 Pension and Benefits

The differences between Suburban's and ORA's pension and benefit estimates are due to different payroll estimates and are reconciled in the adopted revenue requirements.

8.3 Insurance

In estimating insurance, ORA used recorded amounts from 1997 to 2001, then trended to 2003 and 2004 and increased premiums by 15% for each test year. However, uncontested testimony by Suburban's insurance agent showed that the cost of current policies had increased by 35%, even with steeply increased deductibles. The agent attributed this to an increasingly restrictive insurance market exacerbated by the September 11 attacks. The agent estimated that premiums at the next renewal are likely to increase by another 35% to 50%. Based on this testimony and the exhibits supporting it, ORA agreed that it would increase its estimate of property and casualty insurance costs for the current period. For the same reason, we will adopt Suburban's estimates of insurance costs for the test years.

There was little disagreement on allocation of insurance costs. Southwest, Suburban's parent company, purchases insurance for its various subsidiaries, including Suburban. The cost of premiums are allocated to the subsidiaries based on various factors, including risk, payroll and capitalization. We accept Southwest's allocation formula as reflecting industry practice.

8.4 Water Conservation

Suburban estimated expenses for advertising to encourage water conservation at $38,000 for test year 2003 and $36,000 for test year 2004. ORA disallowed these amounts, noting that there had been no expense in this category in the last five years. However, testimony at hearing showed that Suburban faces seriously diminished groundwater supply because of contamination. In view of this, Suburban's plans through advertising to encourage conservation and reduce the amount of expensive purchased water seem prudent and desirable. We will adopt Suburban's estimates.

8.5 Regulatory Commission Expenses

Suburban's recorded expenses for this rate case were $55,000 at the beginning of last year, but the company expects that to increase to more than $100,000 because of unanticipated issues that have been added to this proceeding (Maple acquisition, BH Properties matter, reduction in revenue requirement because of the BPOU Project Agreement). Based on the only recorded amount, ORA estimated a total of $60,000 for this proceeding. Because at least two of the issues added to this proceeding were essentially uncontested at hearing (BH Properties and BPOU adjustment), and because the Maple acquisition issue could have been dealt with earlier by Suburban, we discount Suburban's estimate and allot $80,000 for regulatory expense.

8.6 Extraordinary Legal Fees

ORA excluded expenses for extraordinary legal fees on the basis that Suburban failed to justify such expenses. However, Suburban showed that the expenses (an $800,000 legal cost recorded in 1993 and amortized over a subsequent 12 years) had been authorized by the Commission in Suburban's last general rate case. (In re Suburban Water Systems (1996) 66 CPUC2d 59; see also Ex. 15, Attachment 5.) As of the beginning of the first test year, 2003, Suburban will only have recovered eight years of the 12-year amortization. We will allow the recovery of the remaining legal expense.

8.7 BPOU Litigation

ORA's estimate for BPOU Litigation is zero for test years 2003 and 2004, while Suburban estimates $181,587 and $186,417 for those years, respectively. ORA notes that the BPOU Project Agreement was signed last year and further litigation in that proceeding is unlikely. Suburban offered evidence showing that it is involved in two other San Gabriel Basin contamination inquiries unrelated to the BPOU. Its estimates for litigation are not for defense-related costs (which we disfavored in In re San Gabriel Valley Water Company (2001) D.02-10-058), but instead anticipate plaintiff costs in the event Suburban joins in litigation against parties alleged to be responsible for groundwater contamination. The BPOU Project Agreement was an outgrowth of litigation brought by water agencies, including Suburban. In view of the agreement's dramatic benefits to water purveyors and their customers, we want to encourage Suburban in its efforts to require responsible parties to help pay for past pollution. We will accept these plaintiff litigation estimates.

8.8 Office Supplies and Other Expenses

ORA estimates for office supplies and other office expenses are based on recorded year costs escalated to 2001, with the resulting average escalated to the test years. Suburban has accepted ORA's estimates, as do we.

8.9 Miscellaneous General Expenses

In the category of Miscellaneous General Expenses, dealing primarily with fiduciary insurance and professional dues for organizations like the California Water Association, Suburban bases its estimate on actual insurance costs after allocation by its parent company and escalated costs of dues, including announced increases. ORA's estimates are based on a five-year average. We deem Suburban's estimates more reliable. For test year 2003, we authorize $82,284. For test year 2004, we authorize $86,016.

8.10 Miscellaneous Expenses

The Miscellaneous Expenses account deals with car and truck expenses. ORA's estimates are based on a five-year average, with insurance based on the 2001 recorded expense escalated by 15%. Suburban's estimates are based on an internal analysis and Commission escalation factors. We adopt ORA's estimates, except that we adjust them to reflect Suburban's auto insurance forecasts for the reasons discussed earlier in our analysis of insurance costs. For test year 2003, we authorize $256,712. For test year 2004, we authorized $286,940.