9. Labor Costs and Incentive Compensation

SDG&E incurred labor costs of $10.076 million to restore services after the Wildfires. ORA performed test procedures and in its opinion verified that this expenditure is supported by payroll records and was credibly incurred. ORA's testimony notes no exceptions to SDG&E's labor costs.⁵⁴

SDG&E made the assumption that all "straight-time" cost of employee labor was not an incremental cost: it was essentially already included in rates, available to restore service, and therefore was not includable in the Wildfire Account. We agree with SDG&E that this is a reasonable convention for catastrophic event cost recovery. SDG&E identifies $726,000 of "time-and-a-half" and $5,581,000 of "double-time" labor costs as both incremental and allocable to California-jurisdictional gas and electric service, because these costs were incurred solely due to the Wildfires. We find that SDG&E has justified its request to recover these direct labor costs in the Wildfire Account.

In addition to the direct costs of $10.076 million for labor, SDG&E also recorded $726,000 for incentive compensation, and allocated $426,000 as incremental costs to be recovered in the Wildfire Account.⁵⁵

Labor	Cost	Incentive	Percent
Union	$8,209,536	$380,838	4.64%
Non-Union & Non-Management	269,579	44,724	16.59%
Cash Awards & Other	15,000	0	-
Management	1,583,304	300,881	19.00%
Total	$10,077,422	$726,443

Discussion

The record shows that SDG&E did not adjust incentive compensation charged to the Wildfire Account to reflect any actual payment of incentives awarded were specifically attributed to employee performance during the wildfires project. ORA made no examination of the process by which employees might have been awarded incentive compensation for their performance.⁵⁶ SDG&E's witness confirms that there was no attempt to verify the award of incentives, and that the application assumed an automatic accrual.

In A.02-12-028, SDG&E's most recent base margin proceeding, expert testimony was presented by the President and the Vice President of Human Resources, who both testified that SDG&E's incentive compensation program was not an automatic entitlement; that employees were awarded incentive compensation based upon their performance in relationship to specific goals and objectives.

"Well, variable compensation generally has to be re-earned from year to year by individuals. So having specific goals either individual or company goals on a year-to-year basis would require that person to meet those individual goals and the company meet the corporate goals." (Rowland, Transcript p. 1422, A.02-12-028.) And elsewhere:

"The performance review process is an element of how you get to the calculation of incentive compensation." (Giles, Transcript p. 255, A.02-12-028.)

The testimony in A. 02-12-028 showed that although employees might expect some incentive compensation, it was not automatic.⁵⁷ In this application, SDG&E's witness testified that the incentive compensation recorded in the Wildfire Account was a mechanical accrual and was not reconciled to any actual incentives that might have been awarded to employees specifically for their performance during the Wildfires service restoration project. In fact the testimony contradicts the policy statements in A.02-12-028:

"The (incentive compensation) is paid to employees as part of their compensation. It's based on their eligible wages, and to the extent that they had increased wages because of the fire storm, then there was an ICP payout relative to those wages." (Shepherd, Transcript p. 102.)

SDG&E's witness testified in this proceeding that the company "applied that rate at target against the incremental labor"⁵⁸ and thus did not take into consideration whether employees would actually receive incentive compensation in conformance with the compensation plan policies. The witness assumed "payout" would occur in the subsequent year (which would be 2004) and did not reconcile the request to actual awards, if any.⁵⁹

Clearly employees worked hard and for long hours to restore service; indeed, $6.5 million was spent on double-time labor and $5.6 million is included in the Wildfire Account. What is not supported by SDG&E is why management employees are entitled to a 19% bonus or indeed why any bonus should be automatically accrued on top of double-time pay for non-management employer.

SDG&E has not shown clear and convincing evidence that the incentive compensation recorded in the balancing accounts was in fact earned and awarded to employees specifically as a result of the company's incentive compensation program for actions attributed to work performed immediately after the Wildfires to restore service. Nor is it reasonable to treat an incentive mechanism as automatic. Therefore we disallow $426,000 of incentive compensation from the Wildfire Account.

⁵⁴ Ex. ORA-1, p. 3-4, and Transcript, pp. 130-131.

⁵⁵ Ex. SDG&E-4, attached Exhibit J, p. 3.

⁵⁶ Transcript, p. 192.

⁵⁷ A.02-12-028, Ex. 34, p. GJR-5 and GJR-6, Transcript in A.02-12-028, pp. 1416 ff., cross examination of Joyce Rowland. We may consider this information under the Commission's Rule 72 and as a Party Admission.

⁵⁸ Transcript, p. 109.

⁵⁹ Transcript, p. 111.