12. Attrition
Both Southwest and ORA propose attrition year adjustments that increase revenues for expected inflation, and the pipeline replacement project.72 ORA proposed that the attrition index be offset by an estimated 1% productivity factor. ORA also initially proposed a 1% "kicker" for Southern California to provide revenue for additional pipeline replacement. However, ORA now proposes an additional revenue requirement to fund increased pipeline replacement in attrition year adjustments depending on the adopted pipeline replacement in the test year. In its reply brief, Southwest agreed to ORA's attrition proposal subject to modifying ORA's proposed kicker increase, providing an index adjustment based on constant dollar historical average of non-pipeline replacement-related capital expenditures, and implementing attrition year increases plus rate relief in 2004 and 2005 in Northern California.
We will adopt ORA's proposed attrition year methodology, modified by Southwest's changes except for the kicker. However, there is no need to adopt an attrition mechanism for pipeline replacement, since our adopted pipeline replacement revenue requirements are based on equal amounts of pipeline replacement for test year 2003, and attrition years 2004, 2005, and 2006. Our adopted attrition mechanism balances increases in costs, with expected efficiencies in productivity, a mechanism that is equitable for both Southwest and its customers.
We remind Southwest that it is obligated to continue its pipeline replacement program at the levels adopted in this opinion. Because of the importance we place on this program, and the costs of this program adopted in the revenue requirement, if the annual reports addressing the pipeline replacement program show that the pipeline replacement program is delayed or reduced for any reason, a negative adjustment to the attrition allowance is warranted. The adjustment shall be based on the pipeline footage replaced in the prior year, compared to the authorized footage times the adopted revenue requirement for the pipeline replacement.73 This mechanism provides an incentive to Southwest to accomplish its proposed program without unreasonably penalizing Southwest if it is unable to install minor amounts of authorized footage in any year.
72 See Reply Brief, Attachment C. 73 For example, if only 90% of the authorized pipeline replacement footage in 2004 is accomplished, then the adjustment in 2005 would be 10% times the 2004 pipeline replacement revenue requirement.
