Findings of Fact

1. Southwest requests increases in revenue requirements for test year 2003 of approximately $4.4 million for Northern California, and $5.7 million for Southern California.

2. Southwest proposes to phase-in the revenue requirement increases over a five-year period to minimize the impact of its rate increases.

3. The Commission authorized Southwest to establish the RRSMA to track the differences between adopted rates and current rates on May 8, 2003.

4. As in any GRC, our primary task in this GRC is to forecast Southwest's reasonable revenue requirements for test year 2003, i.e., he amounts of revenues needed by Southwest to provide adequate public utility service and earn a reasonable rate of return for 2003 under conditions of prudent management.

5. Among other statements, customers participating in the PPHs expressed problems in paying monthly gas bills and explained that retired persons on fixed incomes cannot afford increases in rates.

6. ORA reviewed and accepted Southwest's forecaster number of customers in both Northern and Southern California.

7. The Revenue Balancing Account protects customers if base revenues exceed adopted estimates, and protects stockholders, if bas revenues are less than adopted revenues.

8. Base revenues occurring between the date of this decision and the date for implementing a balancing account could result in an over-collection or under-collection.

9. Southwest and ORA agree that a balancing account for base revenues should be adopted, although Southwest and ORA disagree on an implementation date.

10. ORA and Southwest agree that the revenue shortfall from Discounted Special Contracts should not be included in a revenue balancing account.

11. Although Southwest states it used 10-years of recorded data in the last proceeding to forecast future gas sales, this argument by itself does not justify using the same period in this proceeding.

12. Forecasting methodologies should be judged on the current circumstances and whether the method is appropriate to the recorded information.

13. A comparison of Southwest's and ORA's gas sales forecasts shows that in the most recent years, Southwest's forecasts more accurately predict actual sales.

14. A comparison of Southwest's 10-year modeling with ORA's 25-year modeling methods, shows that the 10-year model more accurately predicts actual results during a 9-year study period.

15. A 30-day period after the effective date of this decision will provide time for the Energy Division to review the revenue balancing account and filed tariffs.

16. Southwest should record interstate pipeline demand charges, fixed storage charges and core margin revenue in the CFCAM balancing account; a policy currently followed by PG&E and SoCalGas.

17. Southwest's expense estimates for the 2003 test year, are generally based on recorded expenses through August 2001, adjusted for new employees, and escalation factors.

18. Many recorded distribution, customer, and A&G expenses, even after adjustments for inflation, demonstrate wide unexplained annual variations between 1997 and 2001.

19. Normalized expenses remove the effects of variances due to unusual variations, or one-time events.

20. Recorded costs, by themselves, do not justify future expense estimates. In addition, Southwest must demonstrate why recorded costs are appropriate for particular account estimates, what changes in staffing and operations might affect the recorded costs, and whether specific adjustments are appropriate.

21. Southwest provided limited information to explain increases, or decreases, in prior years' recorded expenses, and did not adequately support its expense estimates.

22. Appropriate expense estimating methods include averaging, trending, and adjustments for non-recurring expenses.

23. Certain operating expenses may increase as a result of the additions of new customers.

24. Recorded Southern and Northern California distribution expenses in various accounts demonstrate substantial annual account variances that are generally unexplained.

25. Total Southern California distribution expenses, adjusted for inflation, increase dramatically in 1996 and 1997, and then become level in 1999 and 2000.

26. Averaging of recorded amounts will normalize variances that occur from year to year.

27. An estimating methodology based on an analysis of each distribution account using averages over different numbers of years, may not provide a reasonable estimate of total distribution expenses. Instead, distribution expenses should be considered as a whole, and variances that occur from year-to-year can be normalized by averaging total distribution expenses over a given number of years.

28. A three-year average of total distribution expenses, except for gas supply and rents expenses, increased for labor and non-labor escalation, is a reasonable estimate of distribution expenses for Southern California.

29. Southwest's Northern California division began expanding during the mid- 1990s, and distribution expenses were unusually high in 1996, 1997, and 1998. Thus, using the most recent total distribution expenses, except for gas supply and rents expenses, increased for labor and non-labor escalation, is a reasonable estimate for Northern California.

30. A levelized PVC pipeline replacement program over 20 years in Southern and Northern California districts should reduce maintenance costs and maintain safe service.

31. The recorded 2001 expense for Account 881, Rents, is a reasonable estimate for the 2003 Rents expense, as this estimate reflects Southwest's ownership of computers, and declining leasing of computers.

32. Estimates of Customer Accounts expenses in Southern California should reflect customer growth, since the functions causing changes in Customer Accounts expenses are related to the number of customers served.

33. A reasonable estimate for Southern California Customer Account expenses, except for Account 904, Uncollectibles, is a three-year average of past costs per customer in 2001 dollars times the number of customers in the test year, escalated for labor and non-labor factors escalated to the test year.

34. Estimates of Customer Accounts expenses in Northern California, except for Account 902 Meter Reading, and Account 904, Uncollectibles, should reflect customer growth, since the functions causing the changes in Customer Accounts expenses are related to the number of customers served.

35. A reasonable estimate for Northern California Customer Accounts expenses, except for Accounts 902 and 904, is the recorded 2001 customer accounts expense escalated for labor loading and labor and non-labor factors to the test year.

36. Meter reading costs in Northern California have declined annually as a result of using modern meter-reading equipment that reduces labor costs. A reasonable estimate of Account 902, Meter Reading, is the 2001 recorded amount for labor and non-labor expenses escalated to the test year.

37. Customer Accounts expenses for Northern and Southern California should include expected increases in postage costs.

38. A reasonable estimate of the Uncollectibles rates for Account 904 is Southwest's initial request for a rate of 0.1925% in Southern California, and 0.0797% in Northern California.

39. System-wide A&G expenses have varied significantly during the past several years.

40. The recorded amount for Account 920, A&G Salaries, increased by about 13% between 2000 and 2001, an increase that is generally unexplained.

41. A reasonable estimate for Account 920 is to increase the recorded amount by 0.6%, the recorded increase in Account 920 between 1999 and 2000, and further escalate this amount to test year 2003 using the labor escalation factor.

42. The MIP benefits both shareholders and customers; and MIP costs should be allocated to customers and shareholders. In recognition of the management performance criteria that determine the MIP, a reasonable allocation of MIP costs is 60% to customers, and 40% to shareholders.

43. Due to variances in recorded expenses, a reasonable estimate for Account 921, Office Supplies and Expenses is a five-year average escalated to test year 2003 using the non-labor factor.

44. Account 923 Outside Services fluctuated significantly during prior years, and therefore a reasonable estimate for this expense is to use a five-year average escalated to 2003.

45. Recorded expenses for Account 924 Property Insurance declined during two of the past five years, and then increased in the last two years; therefore, a reasonable estimate for Account 924 is the amount recorded in 2001.

46. D&O insurance benefits both customers and shareholders; and therefore, the costs for D&O insurance should be allocated equally between customers and shareholders.

47. During the past five years, Account 925 varied significantly from year to year. A reasonable estimate for Account 925 is an average of the past five-years recorded expenses.

48. No party disputed that Southwest currently funds PBOPs obligations on a cash basis, and not through a trust account. In order to correctly calculate PBOPs obligations, the cash payments need to be included in the PBOP calculations.

49. Southwest testified that Nevada and Arizona did not authorize recovery of Southwest's PBOP costs until July 1996 and September 1997 respectively, and California did not authorize recovery of PBOPs costs until January 1995. Thus ORA's calculations that include PBOP amounts in rates prior to these dates would overstate PBOP recoveries.

50. Southwest's current PBOP trust account was established to pay future retirees. There is no indication in the record, by any party, that Southwest withdrew any monies from its PBOP trust account at any time in the past.

51. There is no reason to deviate from the Commission policy that rejects application of FASB 87 to pension policy, and therefore Southwest's estimates of pensions using a normal cost method for regulatory accounting should be rejected.

52. Southwest's employees receive generous benefits that are included in the labor loading factor, increase all labor costs, and are adopted in this opinion. Although there may be additional health benefits accruing to employees as a result of the Wellness Program, including Wellness Program benefit costs in rates as an additional employee benefit is not reasonable, particularly given the current economic circumstances faced by customers.

53. Safety is an important issue for customers, and is enhanced by safety advertising. It is reasonable to increase Account 930.1 - Safety Advertising, by using an average of expenses in 2000 and 2001 for Southern and Northern California.

54. Southwest's DCP is similar to Edison's DCP. Interest expenses on Edison's DCP were not included in rates in D.96-01-011, and there is no compelling reason to include Southwest's DCP interest costs in rates.

55. A two-year average of past expenses for Account 930.2, excluding interest costs on the DCP, is a reasonable estimate for test year 2003 for Southern and Northern California.

56. Account 931, Rents Expenses, varied significantly during the past several years. A reasonable estimate of Account 931 for test year 2003 is an average of the past five-years' recorded amounts.

57. Due to significantly and unexplained variances in recorded amounts for Account 935, Maintenance of General Plant, it is reasonable to adopt a five-year average of past amounts for test year 2003 for Southern California.

58. In order to normalize differences in recorded expenses, it is reasonable to use a five-year average of past expenses for the Southern California direct expenses in Account 923 and 925.

59. Between 1998 and 1999, Account 935, Maintenance of General Plant, a direct expense in Southern California, measured in constant 2001 dollars, increased by over 90%, and then declined by 12.5% in 2001. A reasonable estimate of the Account 935 expenses is the amount recorded in 2001.

60. Due to unusual increases for Account 923, Outside Services, in 1998 and 1999 that appear to be due to the Northern California expansion and variances in recorded amounts, it is reasonable to use a five-year average of amounts from 1997 to 2001 to estimate test year 2003 for Northern California.

61. Recorded amounts in Account 925, Injuries and Damages in Northern California, declined significantly after 1997, including a negative expense in 1998, and no expense in 1999. A reasonable estimate for account 925 is a five-year average of the expenses between 1997 and 2001.

62. Recorded direct expense amounts in Account 935, Maintenance of General Plant, have declined during the past five years in Northern California, and therefore a reasonable estimate for Account 935 is an average of the past two years.

63. The PVC pipeline replacement program is intended to replace pipe installed in the late - 1950s, 1960s, and 1970s. All parties agree that existing PVC pipe must eventually be replaced for all of Southwest's mains and services.

64. Southwest conducted a PIA to determine the replacement factors that might cause PVC mains and services to fail. Replacement factors include types and numbers of leaks, soil type, pipeline location, installation, potential for external damage, installation, operating pressure, age of pipe, depth of cover, pipe size, and customer types served.

65. The most recent information on leaks indicates that Southwest can address the areas containing upward trends in leaks on a region-specific basis in Southern California.

66. There is no current industry, state or federal standard for acceptable leak leaks.

67. Leaks and leak rates should be reduced to avoid accidents and improve safety.

68. Southwest replaced more PVC pipeline footage in 2001, than it forecasts replacing in 2003, or in attrition years 2004, 2005, and 2006.

69. The adopted PVC pipeline replacement program considers safety, leak rates, and previous PVC pipeline replacements.

70. The adopted PVC pipeline replacement program is less than requested by Southwest, however this program will allow Southwest more time to investigate possible joint trenching opportunities with other agencies and thus help mitigate costs.

71. Given the current economic climate, and an increase in revenue lag observed in March 2002, it is unlikely that customers will pay their bills more quickly than customers paid bills in the past. Thus the lag in revenue payments is unlikely to decrease from 2001.

72. The statutory income tax filing dates best reflect the timing of income tax payments, and therefore is the most reasonable indicator of income tax lag days.

73. Southwest provided substantial information regarding the usefulness of UP project costs to the company's operations and as improvements to efficiencies.

74. A recorded project cost that exceeds budgeted cost is not by itself a measure of unreasonable cost.

75. As a result of the Truckee expansion project, Southwest will need an operations center in the Truckee area. Construction of the Truckee operations center is likely during 2003.

76. The cost of capital reflects a relationship between ROE and the capital structure.

77. Over the last decade Southwest has consistently maintained a capital structure containing significantly more debt than authorized by the Commission.

78. Southwest's debt ratio is higher than the average capital structure of the proxy group used to estimate the cost of equity.

79. The revenue balancing account recommended by Southwest and ORA protects Southwest against the risk due to a loss of revenues, and thus removes a risk affecting the adopted ROE.

80. The attrition year mechanism protects against increased costs due to inflation, and the adopted PVC pipeline replacement program adequately funds pipeline replacement in the attrition years. The attrition year mechanism and the adopted pipeline replacement program reduce risks due to inadequate revenue requirements in the attrition years, and thus reduce risks to the ROE.

81. A ROE of 10.9%, combined with the adopted capital structure, meets our standards for establishing a fair and reasonable ROE and cost of capital.

82. The adopted attrition year proposal provides limited attrition year increases, and minimizes rate increases to customers.

83. Utilities, including Southwest, should purchase diversified portfolios of gas supplies, with the goal of mitigating price risks, and achieving reliability of core supplies and low prices.

84. Utilities, including Southwest, are not directed to purchase specific amounts of gas requirements through fixed-price contracts, or at spot markets, but should maintain flexibility to balance the sometimes-competing goals of price stability and cost minimization, while maintaining supply security.

85. D.02-08-064 criticized Southwest for providing low-cost gas in winter 2000-2001 to the exclusion of price stability.

86. During winter 2000-2001, gas prices substantially exceeded any previous gas price.

87. In Spring 2001 there existed substantial uncertainty regarding future gas prices.

88. Southwest focused its fixed-price contracts on winter 2001-2002, the time of greatest gas system demand.

89. Southwest entered into forward contracts in March and May 2001 for slightly over 50% of its forecast winter 2001-02 core demand. This was a reasonable action given previous Commission guidance in D.02-08-064, and the information available to Southwest gas at the time.

90. Southwest entered into a forward contract in August 2001 that added approximately 30% more to its forward contracts for winter 2001-02.

91. Southwest's decision to emphasize price stability to the exclusion of cost minimization by committing to the August contract hampered Southwest's ability to react to changing market conditions and was unreasonable given the price information available at the time the fixed-price contracts were negotiated.

92. In March 2001 when it agreed to the sale/repurchase transaction with Reliant, the repurchase price agreed to was significantly higher than Southwest's own future price projections.

93. The fact that Southwest requested authority to recover its winter procurement costs over a longer period of time demonstrates that Southwest did not achieve its goal of price stability.

94. The core procurement rates of other utilities indicates that other procurement managers ensured themselves the flexibility to respond to changing market conditions leading up to Winter 2001-2002.

95. Increasing the monthly charge for the Core Industrial rate schedule and the Core General rate schedule will assist in moving customers to appropriate rate schedules with minimum effects.

96. The adopted rate design should minimize adverse customer impacts, reflect cost-of-service considerations, and treat customers using equal amounts of gas under similar schedules the same.