9. Parent Company Allocation

Suburban's estimate of expenses allocated to Suburban from its parent company, Southwest, is $1,965,315 for test year 2003 and $2,017,591 for test year 2004. ORA's estimate is $439,728 for test year 2003, and $455,128 for test year 2004. There are three principal issues that account for the difference. First, ORA excluded certain Southwest expenses that it claimed were of little or no benefit to Suburban. Second, ORA excluded Suburban's share of certain Southwest officer salaries that it alleged are duplicative of officer functions at Suburban. Finally, ORA used a three-factor analysis in allocating Suburban's share of its parent's expenses, while Suburban used a more common four-factor analysis.

We adopt Suburban's estimates of expenses, including officer salaries, because we believe ORA has failed to make a persuasive case for altering those estimates. We adopt ORA's three-factor allocation because Suburban has not convinced us that Southwest subsidiaries that have "clients" instead of "customers" should receive a preference in the allocation of parent company costs.

As to expenses, ORA excluded items it deemed not directly related to Suburban, including Southwest's franchise fees for its Delaware registration, quarterly and annual shareholder reports, Securities and Exchange Commission (SEC) filings, and costs of shareholder meetings. Suburban also excluded certain parent company costs, such as consultant expenses, but it included costs associated with Southwest's status as a public company. Suburban argues that it receives many benefits as a subsidiary of a larger entity, including greater purchasing power for insurance, greater access to capital markets at lower interest rates, and streamlined cash management functions. ORA presents us with no supporting authority or precedent for excluding what appear to be normal cost items shared by a parent company with its subsidiaries.

Similarly, ORA excludes certain Southwest officer positions that appear to duplicate the titles of officer positions at Suburban, including chief financial officer, corporate controller, vice president of human resources, and director of communications. At hearing, Suburban presented evidence showing that the functions of these Southwest officers are different from the functions of Suburban officers with similar titles. For example, Southwest's chief financial officer deals with the SEC and the equities markets, allowing Southwest and Suburban to attract less expensive capital. The corporate controller directs all accounting personnel and prepares reports to the SEC. The corporate accountant is responsible for the consolidated financial reporting of all subsidiaries to management, the board of directors, stockholders and the SEC. These are functions not performed by Suburban's officers but necessary to corporate governance. Again, ORA presents us with no supporting authority or precedent for excluding these parent company officer positions, and its argument that their function is unnecessary because their titles duplicate titles at Suburban is unpersuasive. We will accept Suburban's estimates of the parent company expenses.

We come to a different conclusion as to allocation. Southwest is a holding company. It has four rate-regulated utilities: Suburban; New Mexico Utilities, Inc.; Windermere Utility Company, and Hornsby Bend Utility Company. Non-utility subsidiaries include ECO Resources Inc.(ECO); Operations Technologies, Inc.(OpTech), and Master Tek International (Master Tek). ECO and OpTech provide contract operation and management of wastewater and water systems owned by municipalities, while Master Tek provides utility submetering, billing and collection services for multi-family properties.

In allocating parent company expenses to subsidiaries, the Commission generally follows a four-factor approach, measuring each subsidiary's (1) direct operating expenses, (2) end-of-year gross plant, (3) total customers, and (4) payroll. The results are applied to determine a subsidiary's share of its parent company expenses. Suburban applied these four factors to its allocation. ORA applied a three-factor test, eliminating "customers" of each subsidiary because non-regulated subsidiaries like ECO reported that they had clients rather than customers. By entering "0" for ECO customers, ECO's share of parent company costs was reduced, and Suburban's share was increased, despite ECO's annual revenue of $62 million or more.

ORA notes that it has used two- or three-factor analyses for other Class A water companies where appropriate, most recently in dealing with Park Water Company. ORA's analysis is persuasive, and we adopt the ORA allocation formula in this proceeding. Suburban thus is allocated 32.6% of the parent company costs, rather than the 45.2% recommended by Suburban.