Total Operating Expenses

Calaveras' estimate of total company operating expenses (less taxes and less depreciation) at $5,575,784 is greater than CD's estimate of $4,186,572 by $1,389,213 or 33.18%. A comparison of CD's and Calaveras estimates of total operating expenses for the test year 2009 is shown in Appendix A. Differences between CD and Calaveras estimates includes the following: a) elimination of salary and benefits for a proposed new employee in 2009, b) capping benefits at 38% of salaries and wages, c) reduction in regulated portion of executive salaries, d) reduction in the rate case expenses and, e) the difference between the use of nine month annualized data for 2007 in Calaveras initial filing and its use of a self-judged capped annual growth rates in labor and non-labor expenses and the Constant Dollar Method (CDM) as used by the Commission. These differences were discussed in the September 11, 2008 meeting between CD staff and Calaveras representatives. Details of the results are described below.

For operating expenses, Calaveras forecasted 2009 expenses based on the following methodology. First, Calaveras separated labor expenses into salaries and benefits and non labor expenses into rent, clearance, and others. Then, it took 2007 expenses and applied an 8% capped growth rate to labor expenses and 2% capped growth rate to non-labor expenses and added two proposed employee expenses for 2008 to project 2008 expenses. These growth rates were solely based on the company's own judgment which, CD could not independently verify. Finally, Calaveras used 2008 expense projections and used the same growth rates as used in 2008, added the two proposed employee expenses for 2009 and projected its 2009 test year expenses. Calaveras believes this methodology to be reasonable for a small company.

CD does not agree with Calaveras' estimated labor related and non labor expense growth rates. The growth rate factor used by Calaveras is too high compared to the Division of Ratepayers Advocates' of the California Public Utilities Commission

(DRA's) labor and non-labor inflation factors3. CD used Calaveras' recorded expenses in terms of labor and non-labor expenses and applied the CDM to estimate Calaveras' 2009 expenses. This is the same methodology used in T-16756 for adopted Calaveras previous General Rate Case in 2003.

The constant dollar method is used to measure financial statement items in dollars of the same (constant) purchasing power. Historical cost is restated in units of constant purchasing power as follows:

(Historical Expense) X (Average CPI for the Current Year/CPI at Time of Expense incurrence)

Restating all accounts in constant dollars provides greater comparability among years because all expenses appear in the same current year average dollars regardless of when the expense was incurred.

Therefore, CD used Calaveras' recorded expense figures from the annual reports for the years 2005, 2006 and 2007 and then applied the recorded inflation factors for labor and non-labor for each year to convert the recorded expenses to 2007 dollars. CD then developed an average of the inflation-adjusted amounts for those three years and used it as its base estimates. CD then applied the cumulative inflation factors for 2008 and 2009 to the base estimate to arrive at the test year 2009 estimate. Because rent expenses are not subject to the same variability as other types of expenses, the CDM was not applicable. CD accepted Calaveras recorded rent expenses and escalated it into the test year using DRA's estimated non-labor escalation factor.

At the September 11, 2008 meeting between CD staff and Calaveras representatives, Calaveras expressed its concern that February 2008 labor and non labor inflation factors data were dated. In response to this concern, CD updated its estimates and utilized the latest DRA's data issued on November 30, 2008.

Calaveras initially requested to add four new employees in year 2008 and 2009. Calaveras' proposed four new employees carry an annual cost of $219,825 in year 2009. After reviewing the Calaveras justifications, CD accepts the addition of three new employees and has added the associated expense to its 2009 estimate. CD does not agree with the addition of one of the two new Central Office Tech/Installer/Repair Persons in 2009. Given the down turn in the housing market and existing economic conditions in the Calaveras territory, and based on staff field investigation, CD concludes Calaveras would be sufficiently staffed with one additional Central Office Technician earmarked for 2008 to maintain the current level of service quality to its customers. Elimination of the second proposed Central Office Technician for 2009 reduces expenses by $62,857 for related salary and benefits.

CD examined the Payroll expense separately from the analysis of the individual accounts. CD found that two of executive employees have similar titles and overlapping responsibilities. Although CD recognizes that it is Calaveras business decision to staff as many positions as it chooses, CD does not find it reasonable for ratemaking purposes to fund these duplicative expenses in its General Rate Case. CD, therefore, reduces the corporate operation salary expenses by disallowing the regulated salary of one executive position by $113,692 from the base three year average calculation.

Calaveras' level of benefits to total compensation is excessive. For test year 2009, the ratio of benefits to total compensation is 64.04%. CD believes a ratio of 38% is more reasonable. CD's use of the 38% benefit to salary ratio was developed from ratios utilized by other companies involved in General Rate Cases (GRC's). CD staff surveyed regulated small water companies ranging from 2000-10,000 customers filing rate cases with the Commission. CD found their average benefit to salary ratio was 28%4. Further, CD staff studied the latest available data from the U.S. Bureau of Labor Statistics (BLS), dated December 10, 20085 and found that BLS included paid leaves in its benefit calculations. For all small private companies with 1-49 employees total benefits to salaries and wages was 34%, and for all small private companies with 1-99 employees the ratio was 35.5%6. All of these ratios were below CD's proposed rate of 38%. Additionally, after all disallowed benefit expense items and cash bonuses as discussed below, Calaveras benefit to salary ratio equals 38%. Therefore, CD caps the ratio of regulated benefits to salaries/wages at 38%, for the test year 2009 and concludes that CD's proposed benefit to salary ratio of 38% for Calaveras is appropriate and adequate. CD also considered a review of the percent of benefits to total compensation that the State of California pays Commission employees. This 38% level represents a baseline for small Communication Carriers.

Upon further detailed review of Calaveras' components of salaries/wages and benefits for 2007, CD  found  that the benefits package provided employees included items that are not prudent nor reasonable for rate making purposes.  For example, each employee regardless of position is given an annual bonus in addition to their base salaries and wages. The bonuses paid to 45 listed employees totals $67,500 and is disallowed as there is no connection between the bonuses and operational results.   Further, employees are reimbursed for co-payment and out of pocket medical expenses a cost that should be borne by the employee and therefore the associated expense disallowed in the amount of $94,255.    Lastly, a meat distribution plan at a total expense of $109,704 is disallowed as it does not offer any recognizable benefit to the operations of the regulated telecommunications company.  CD acknowledges that a regulated company may choose to provide these benefits to its employees but these expenses must not be borne by rate payers. 

Finally, CD found Calaveras contributes to Employee Profit Sharing Plan at 15% of salaries and wages with no contribution from employee or shared expenses from the shareholders. CD determined not all costs of Employee Profit Sharing should be charged to the rate payers and portions of it should be the responsibility of either the shareholders or employees or any combination of the two parties. Hence, CD accepted a cap of 10% of salaries and wages for the employer contribution expenses of the employee Profit Sharing Plan for the rate case calculation purposes. The remainder 5%, is the Calaveras business decision how to expense outside of rate making process. CD disallowed $131,214 for the difference above 10% employer contribution to the employee Profit Sharing Plan.

Calaveras estimate of rate case expenses is $225,000 amortized over a three year period and hence, it added $75,000 to expenses for the test year 2009. In Calaveras' last rate case, the Commission authorized rate case expenses of $50,000 for test year 2004.  Using the non-labor inflation factors for 2007, CD projects that the rate case expenses for the test year 2009 to be $61,000 and is added to the Corporate Operations Expense category. This reduces rate case expenses by $14,000 for the test year 2009.

3 Division of Ratepayer Advocates: Estimates of Non-labor and Wage Escalation Rates for 2008 through 2012 from the November 2008 Global Insight U.S. Economic Outlook.

4 Kenwood GRC filing Test Year 2009 at 28%, Alco Annual Report 2007 at 47%, East Pasadena Annual Report 2007 at 23%, Fruitridge Annual Report 2007 at 25%, Del Oro Annual Report 2007 at 18%.

5 http://www.bls.gov/news.release/ecec.nr0.htm.

6 Ibid, Table 8.

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