7. Escalation Rates

SGV and DRA used DRA's Energy Cost of Service Branch (ECSB) forecasted labor and non-labor inflation factors to increase various expenses from recorded year to test year 2008 and escalation years 2009 and 2010.³⁹ However, their estimates were based on different time periods. SGV used March 2007 ECSB inflation factors for its July 2007 application and updated October 2007 ECSB inflation factors for its November 16, 2007 rebuttal testimony. DRA used June 2007 ECSB inflation factors.

Although there was a dispute between SGV and DRA on whether the ECSB inflation factors used by SGV in its rebuttal testimony or used by DRA in its direct testimony should be adopted, both parties concurred not to object to the use of the latest ECSB inflation factors used by SGV or DRA, or a more current version.⁴⁰

Inflation factors commonly change from the time a utility prepares a GRC application to the time an evidentiary hearing is held. In this instance, approximately six months passed from the time SGV filed its application and an evidentiary hearing was held. During that period, ECSB updated its inflation factors six times on a monthly basis. Hence, it is appropriate to adopt the most recent version of ECSB inflation factors. However, it is not appropriate to adopt, as SGV and DRA tacitly support, a more recent version of ECSB published inflation factors that are not in this record and were issued subsequent to submittal of this matter. Regardless of inflation's direction, October 2007 ECSB inflation factors are the most recent inflation factors in the record and should be adopted.

Minor differences in forecasted operating revenues and operating expenses resulted from SGV's and DRA's use of different versions of ECSB inflation factors. The adoption of October 2007 ECSB inflation factors resolves those minor differences in forecasted operating revenues and expense accounts. Other test year differences between SGV and DRA are not due to different inflation factors. The October 2007 ECSB inflation rates of 3.2% for labor and 3.0% for non-labor are adopted for the test year.⁴¹

³⁹ ECSB prepares monthly labor and non-labor inflation factors to inform division management of the trends in the general price level of utility wage contracts and non-labor expenses.

⁴⁰ Section II. (D) 4 of Exhibit 38.

⁴¹ Exhibit 18, p. 14.