8. Los Angeles Division

The impact of test year 2008 LA Division issues upon which the parties could not agree are reflected in the following table and discussed in the remainder of this decision. Those issues include operating revenues, operating expenses, rate base, and return on rate base.

(Dollars in Thousands)42

8.1. Operating Revenues

The $6,780,000 difference in test year operating revenues resulted from different recommended returns on rate base, addressed in our prior rate of return discussion, and SGV reducing its forecasted operating revenues for water sales losses due to its introduction and implementation of enhanced water conservation programs. SGV and DRA concur on the number of customers by customer class and in the basic water consumption patterns of customers.

8.1.1. Impact of Enhanced Conservation Programs

SGV proposed to implement enhanced conservation programs in partnership with the Central Basin Municipal Water District (CBMWD) and the Upper San Gabriel Valley Municipal Water District (SGVMWD). Those programs would mainly be for education and replacement of plumbing fixtures and appliances with water efficient plumbing fixtures and appliances.

SGV forecasted that the enhanced conservation programs would result in water sales losses of approximately 148 acre-feet for the test year, half of its forecasted annual water sales losses due to a start up of enhanced conservation programs. It forecasted additional water sales losses of 296 acre-feet for escalation year 2009 and an additional 206 acre-feet for escalation year 2010 due to the enhanced conservation programs.43

SGV derived its water sales losses by multiplying a stated amount of water savings for individual water efficient plumbing fixtures and appliances times the number of plumbing fixtures and appliances to be installed in the test and escalation years. Those per unit water savings were based on California Urban Water Conservation's Council (Council) Best Management Practice (BMP) computation formulas.

SGV did not address the accuracy of those BMP computation formulas. It also did not address customers cancelling water savings from plumbing fixtures and appliances by increasing other water uses, such as additional landscaping, new pools, or hot tubs. Appropriate methods to forecast water sales losses are a policy issue that should be resolved on an industrywide basis. The September 6, 2007 scoping memo and ruling excluded a conservation rate design and water revenue adjustment mechanism (WRAM) from this proceeding. Revenue adjustment mechanisms are under consideration in both the water conservation investigation (Investigation (I.) 07-01-022) and in applications filed by California-American Water Co., including both GRC and a separate application for its Monterey district. We have declined to separately address revenue adjustment mechanisms. (See D.07-06-024, 2007 Cal. PUC LEXIS *70-71.) We will direct SGV to file a conservation rate design application, including WRAM, modified cost balancing account and conservation memorandum account proposals, for its LA and Fontana Divisions within 90 days of the issuance of this decision. We will coordinate SGV's conservation rate design proposal for its Fontana district with its July 2008 GRC and may consolidate the conservation rate design application with I.07-01-022. DRA's water sales forecast should be adopted.

8.2. Operating Expense

The differences in test year 2008 operating expense forecasts between SGV and DRA were in: (1) purchased water and assessments; (2) payroll, pension, and benefits; (3) uncollectible; (4) franchise fees; (5) insurance; (6) administrative expenses transferred; (7) allocated common expenses; (8) payroll taxes; and (9) income taxes, as shown in the following tabulation.

(Dollars in Thousands)44

8.2.1. Purchased Water & Assessments

The $40,000 differences in purchased water and assessments resulted from the use of different sales forecasts. There was no dispute on the unit cost per acre-foot of purchased water or on the various assessments by the CBMWD and SGVMWD. Agreed-upon unit costs per acre-foot of purchased water and assessments should be applied to the sales forecast being adopted in this proceeding.

8.2.2. Payroll, Pension & Benefits

The $1,224,000 difference in test year payroll, pension and benefits between SGV and DRA resulted from different forecast methods.

SGV's forecast was based on April 2007 actual salary levels for all existing positions in the LA, Fontana, and General Divisions as a salary base. To that base, SGV added all new positions being requested in this proceeding. It also assumed that all vacant positions would be filled by the beginning of the test year. Bi-annual step increases for entry level positions were also factored in for all new and recently hired non-exempt employees. That total amount was annualized and escalated to the test year based on ECSB inflation factors. SGV then allocated that total escalated company payroll to its LA Division based on the proportional total recorded year 2006 data of the LA Division to the total company. SGV used the same method to forecast related vacation, holiday, and sick leave costs (employee benefits) separate from payroll costs.

DRA's forecast was based on 2006 recorded gross payroll data for individual employees of the LA Division. Employee benefits were included in that forecast. DRA reduced the base amount of payroll and employee benefits by approximately $980,000 for payroll included in the LA division stores clearing, transportation clearing, and construction work in progress accounts which are cleared to other expense or capital accounts.46 No adjustment was made to the payroll and benefit base for filling vacant positions or step increases from the 2006 recorded year to test year 2008. DRA then applied ECSB's inflation factors to that base payroll and benefits amount. From that amount, DRA excluded the salary of a half year Water Treatment Operator I position included in the 2006 recorded payroll amount and excluded all new test year positions.

There are five basic differences between SGV's and DRA's forecasting methods. The differences are applicable equally to forecasted payroll and employee benefits. These differences are in: (1) payroll base, (2) vacant positions, (3) step increases, (4) current positions, and (5) new positions.

We do not agree with the payroll base approach used by both SGV and DRA. SGV's forecast is based on total company payroll (LA, Fontana, and General Divisions) and allocated to the LA Division based on recorded 2006 payroll ratios. This method inappropriately assumes that individual divisions' 2007 and test year 2008 payrolls would change in the same proportion as recorded 2006 payroll. For example, the 2006 allocation method would over-allocate salary to the LA Division if six senior level LA Division employees retired in 2007 and were replaced with six new employees at entry level salary or if some of those positions remained vacant. Further, Fontana Division has experienced substantial growth and General Division's engineering department spends the majority of its time on projects for the Fontana Division.47

We also do not agree with the payroll base approach used by DRA because its use of an unadjusted 2006 recorded LA Division payroll does not capture the most recent effect of payroll changes that occurred throughout the year or during 2007. As an example, if an employee earning $5,000 a month received a $1,000 a month salary increase on December 1, 2006, SGV would not be able to recover $11,000 of that employee's salary in test year 2008. This is because the recorded 2006 payroll base reflects only $61,000 of payroll ($5,000 x eleven months and $6,000 x one month) for that employee and understated the employee's 2007 salary of $72,000 ($6,000 x 12 months). Also, DRA reduced the payroll base by amounts cleared to other expense and capital accounts without adding those amounts in its forecast of those expense and capital accounts.48 Such a reduction, without including it in forecasts for other expense and capital accounts, precludes SGV from recovering reasonable payroll costs.

While we disagree with SGV's use of total company payroll base to derive test year payroll for its LA Division, its approach provides a more realistic result than DRA's use of recorded 2006 payroll as discussed above. We adopt SGV's April 2007 actual salary levels to calculate an annualized base payroll, adjusted to reflect adopted ECSB inflation factors and further adjusted to reflect the impact of the following discussion on vacant positions and step increases.49

SGV included in its payroll base the salaries for 12 vacant positions.50 These positions were included on the basis that they would be filled prior to the beginning of the test year. SGV also made no allowance for vacant positions whether caused by unfilled positions, employee departures, separations, or retirements on the basis that it would be fully staffed. SGV explained how it fills vacant non-supervisory field or office positions. First, SGV posts a vacancy notice at all SGV locations for one week so that current employees may apply if interested. If there are internal applicants, they are evaluated and a replacement is selected, usually within two weeks. If there are no internal applicants or no qualified internal applicants, SGV looks outside of the company to fill those vacant positions, which takes up to two months.

We have previously rejected SGV's forecast of fully staffed positions given that most, if not all utilities, have vacant positions.51 We again question whether SGV can fill all of its vacant positions by the beginning of the test year and remain fully staffed throughout the test year. Vacancies result from a multitude of reasons including unplanned departures and retirements. The evidence confirms that vacancies will continue. SGV had one less vacancy, 11 versus its current 12, in its 2005 Fontana Division GRC.52 Since the filing of this GRC, SGV has filled several of its vacant positions but had six new terminations during that same time period.53 Even if SGV fills vacant positions from within its company, the process would result in those employees' positions being vacant. Based on this evidence we can only conclude that there will be comparable vacancies throughout the test and escalation years. We again reject SGV's assumption that it will be fully staffed through the test year and we remove the 12 vacant positions from SGV's forecasted payroll.

SGV included step increases in its payroll forecast for new and recently hired non-exempt employees.54 SGV explained that it did so because it does not pay new employees at the full pay rate scale for their positions when they are first hired. As the employee becomes fully trained and experienced, the rate of pay is gradually increased in scheduled, periodic steps until the employee reaches full pay scale for the position. For example, a meter reader has a scale rate of pay of $26.14 per hour, but the starting rate of pay is $18.16 per hour. There are seven pay steps from that starting pay to the top pay achievable through satisfactory performance appraisals. Over the past three calendar years, 96 SGV employees were eligible for a total of 282-step increases. Of those, only six-step increases were delayed and seven were granted early. SGV concluded that step increases should be included because they are a regular occurrence and predictable.

We excluded step increases in LA Division's prior GRC. There was no showing that test and escalation years would have a high level of entry level step increases compared to a recorded base year, or that the recorded base year had an unusually low number. SGV did not discuss offsetting adjustment for the possible effects of higher paid senior employees "topping out" in the salary brackets or for savings due to their departure.55 Although SGV identified specific employees eligible for step increases in this proceeding, it again failed to include offsetting adjustments for the possible effects of departure and retirement of higher paid senior employees. We exclude step increases from forecasted payroll.

DRA excluded two Water Treatment Operator I positions (approximately $53,000 each) that were filled in 2004 from its base payroll. These positions were excluded on the basis that SGV did not provide actual justifications for the positions.56 However, a review of the record substantiated that SGV explained these positions in response to DRA's Master Data Request and provided job records for both positions.57 The two Water Treatment Operator I positions should be included in the test year payroll forecast.

SGV included two new positions in its test year payroll forecast. Those positions are a Customer Serviceman/Conservation Specialist and a Water Treatment Operator III.

SGV requested authority to include a new Customer Serviceman/Conservation Specialist position in LA Division test year expenses. This position was requested so that SGV could comply with the Commission's Water Action Plan (WAP) and California Urban Water Conservation Council's BMP. This position would be used to satisfy BMP No. 1 which requires SGV to directly contact not less than 20 percent of its single-family and multi-family residential units during the reporting period and perform water use surveys on 15 percent of its single-family and multi-family residential units within ten years.58

DRA excluded this position from its test year payroll and benefits forecast on the basis that: (1) the status of the position was uncertain; (2) SGV does not have a Conservation Coordinator in place to design a comprehensive conservation program; (3) SGV forecasted only $1,991 of conservation expense to be used for materials and supplies; and (4) the more aggressive conservation program involving a $650,000 annual expense to the LA Division addressed in our Operating Revenues discussion would be administered primarily by CBMWD and SGVMWD.59

Although SGV does not yet have a Conservation Coordinator in place, such a position is approved by this decision based on DRA's concurrence that General Division should be authorized to include such a position. Irrespective of whether the aggressive conservation program may be administered by two municipal water districts, the Customer Serviceman/Conservation Specialist position will be responsible for implementing the BMP No.1 surveys. These surveys equate to approximately 40 customer contacts and 3 actual residential survey and audits per workday, an ambitious schedule.60 A new Customer Serviceman/Conservation Specialist position should be included in the test year payroll forecast.

SGV also requested authority to include a new Water Treatment Operator III position in test year expenses. This position was actually filled in January 2008 due to a significant increase in monitoring and maintenance required for major new treatment facilities that have been added since April 2006. Those additions included a new treatment facility at Plant B5; new reservoirs and booster pumps at Plant M2; new wells at new Plants B25 and B26; and new wells, reservoirs, booster pumps, and chlorinators at the new Plant B24. Additional monitoring and maintenance will be required due to the approval of two new wells, three new booster stations, four new reservoirs, and six emergency generators in this GRC proceeding.61

DRA excluded this new position from its test year forecast for two reasons. First, this position fell within the last GRC cycle and the Commission had already adopted a level of payroll expenses for that time period. Second, SGV should explore the possibility of having polluters fund the position in part or full because the duties of that position would include plant sites where certain operation and maintenance expenses are reimbursable by polluters and other public funds.62

DRA's reason for excluding this position on the basis that it was added within the last GRC cycle has nothing to do with the need for this new position. As such, DRA's argument is unconvincing. Also, DRA's second reason does not justify exclusion of the position given that it asserts that the position should be funded in part, or in full, by polluters. DRA's funding position convinces us that this new position is needed to undertake additional monitoring and maintenance of new facilities placed in service to mitigate adverse impacts from polluters. We concur with DRA that, to the extent SGV may be reimbursed, any reimbursement from polluters and other public funds should be used to offset the cost of this position. However, it is not in ratepayers' interest to postpone the additional monitoring and maintenance functions required of these new facilities until it can be determined whether polluters will reimburse SGV. SGV has substantiated that its proposed position for additional monitoring of new facilities. A new Water Treatment Operator III position should be included in the test year payroll forecast.

8.2.3. Uncollectibles

The $6,000 difference in uncollectibles resulted from the use of different operating revenue estimates. SGV and DRA both used a 0.0877% rate to calculate their individual estimates. The 0.0877% uncollectible rate should be applied to the operating revenue estimates being adopted in this proceeding.

The $66,000 difference in franchise fees resulted from the use of different operating revenue estimates. SGV and DRA both used a 0.9734% rate to calculate their individual estimates. The 0.9734% franchise fee rate should be applied to the operating revenue estimates being adopted in this proceeding.

8.2.5. Insurance

The $37,000 difference in test year insurance resulted from a disagreement between SGV and DRA on umbrella insurance. SGV negotiated a single umbrella policy covering SGV and its affiliated companies in order to achieve greater buying power and lower overall premium cost for SGV and each of its affiliates.63 Although the policy covers all of SGV affiliates, each affiliate is separately billed by an insurance agent.

SGV pays approximately 65% of the total umbrella premium and its affiliates pay the remaining 45%. DRA contends that SGV overpaid for its umbrella insurance and should only pay 55% of the total umbrella insurance premium. DRA derived 55% by allocating the total umbrella insurance premium to SGV and its Arizona Water Company (AWC) affiliate based on the number of vehicles, number of employees, and assets.64

This is not a new issue. The Office of Ratepayer Advocates (ORA), DRA's predecessor, unsuccessfully raised this same issue in the 2002 Fontana Water Company GRC proceeding. ORA's position was rejected by the Commission in D.04-07-034. Irrespective, we will revisit the issue.

An insurance company assesses risks and decides what the premium will be based in part on location. From that assessment of risks and assignment of premium, an insurance agent bills each SGV affiliate for the premium applicable to its own separate coverage. A review of SGV's master umbrella insurance policy pertaining to premiums applied to motor vehicles owned by SGV and AWC affiliate substantiates SGV's position that the assessed risks and premium allocated to each affiliate are different. For example, both SGV and its AWC affiliate had umbrella liability insurance for a 2005 Ford F-250 classified to operate in a radius of 50 miles with a primary rating factor of a 1.00. Although there is only a $139.00 difference between the original cost of SGV vehicle CA137 having an original cost of $28,139 and that of a similar vehicle AZ13 of AWC having an original cost of $28,000, the difference in liability insurance was $351.00. The liability premium on the SGV vehicle was specifically identified to be $674.00 and the liability premium on the AWC vehicle was $323.00.65

There is no evidence of improper allocation or billing of umbrella liability insurance to SGV. The umbrella insurance estimate of SGV should be adopted.

8.2.6. Administrative Expense Transferred

The $44,000 difference in test year 2008 Administrative Expense Transferred resulted from a difference between SGV and DRA on the percentage of overhead that should be recovered from SGV affiliates.

Pursuant to D.93-09-036, SGV developed a written service agreement to recover costs for its services being provided to its affiliated companies. That agreement provided for monthly billing for all services rendered by SGV to its affiliates, including charges for time devoted by SGV employees to affiliate activities, corresponding fringe benefits, related overheads and general office supplies.

Consistent with its past practice, SGV used a 10% rate to forecast its test year recovery of overhead costs associated with the services SGV provides to its affiliates. SGV demonstrated that the Commission has consistently found that the cost allocation method between SGV and its affiliates was reasonable. However, SGV could not answer whether the Commission specifically determined that its 10% overhead rate was reasonable or how the 10% overhead rate was developed.66

DRA used a 15% overhead rate on the basis that the overhead rate used by SGV was arbitrary. DRA used a higher overheard rate based on its belief that a 10% overheard rate ignored recovery of certain unidentified costs and that the rate should be increased.67

We find no support for the use of either a 10% or a 15% overhead rate in this proceeding. However, consistent with the Commission's affiliated transaction rules and the service agreement of SGV, there should be an allocation of SGV overhead to its affiliates for work SGV performs for its affiliates. Given a minor difference in the test year estimate between SGV and DRA, we will adopt a 10% overheard rate for this proceeding only. SGV shall prepare and complete a study prior to its next LA Division and General Division GRC that justifies an overhead rate to be applied for recovery of its overhead costs associated with its direct services being provided to its affiliated companies.

8.2.7. Allocated Common Expenses

Allocated common expenses consisted of General Division operating expenses common to both the LA and Fontana Divisions. The largest components of General Division operating expenses were executive and management payroll along with related payroll costs such as pensions, benefits, and payroll taxes.

The $224,000 difference in test year allocated common expenses resulted from differences in forecasting payroll, Chairman of the Board's salary, a current position, and new General Division positions, as addressed in our payroll, pension and benefits and General Division discussions. Test year allocated common expenses should be as set forth in our General Division Section 9 discussion.

8.2.8. Payroll Taxes

Payroll taxes include Federal Insurance Contribution Act (FICA) tax applicable to Social Security and Medicare, Federal Unemployment Tax Assessment (FUTA), and State Unemployment Tax Assessment (SUTA). The statutory tax rate for Social Security is 6.2% on the first $102,000 of each individual's annual wages for Social Security plus 1.45% of each individual's total annual wages for the Medicare. The statutory tax rate for FUTA is 0.8% and for SUTA, 1.8%. The FUTA and SUTA tax rates are applied to the first $7,000 of each individual's annual wages.

The $184,000 differences in test year payroll taxes resulted from the use of different payroll estimates. Differences in payroll estimates for escalation years 2009 and 2010 resulted from both the use of different payroll estimates and from the use of different individual base payroll limit subject to a 6.2% Social Security tax. DRA used a statutory $102,000 base payroll limit subject to Social Security taxes for both escalation years whereas SGV increased that individual payroll limit for the escalation years based on inflation factors.

Payroll taxes should be based on the statutory tax rates and the payroll estimates being adopted in this proceeding. Absent evidence that the federal government will increase its statutory base payroll limit in the escalation years or that statutory increases will be based on a labor inflation factor, we reject the use of inflation factors to increase payroll tax rates for the test and escalation years. Those statutory tax rates applicable to this GRC are: 6.2% on the first $102,000 of each individual's annual wages for Social Security, 1.45% of each individual's total annual wages for Medicare, 0.8% on the first $7,000 of each individual's annual wages for FUTA, and 1.8% on the first $7,000 of each individual's annual wages for SUTA.

8.2.9. Income Taxes

SGV and DRA both used an 8.84% state tax rate and 33.22% federal tax rate to calculate their respective income tax estimates. The $2,749,000 difference in income taxes resulted from applying state and federal tax rates to different operating revenues, operating expenses, and rate base estimates. The 8.84% state and 33.22% federal tax rates should be applied to the operating revenues, operating expenses, and rate base estimates being adopted in this proceeding.

8.3. Rate Base

The $1,269,000 difference in test year rate base resulted from differences in the treatment and allocation of a new Fontana Office Complex and an El Monte Office Building, as discussed in the subsequent General Division discussion. Test year allocated common rate base should be as set forth in that discussion.

8.4. Return on Rate Base

Even with a partial settlement agreement on revenue, expenses and rate base, the parties did not agree on the appropriate return on rate base for the test year. SGV contends that the rate of return should be 10.99% and DRA asks for 9.3%. Test year return on rate base should be 9.65% as set forth in our prior cost of capital discussion and applied to the adopted test year results of operations.

42 Amounts under $500 are rounded to the nearest thousand. For example, $500 is rounded up to $1,000. There are also minor differences due to rounding.

43 Reporter's Transcript vol. 2, pp. 112 and 113.

44 Amounts under $500 were rounded to the nearest thousand. For example, $500 was rounded up to $1,000. There were also minor differences due to rounding.

45 Attachment A.

46 Exhibit 26, pp. 3 and 9.

47 Exhibit 9, p. 21.

48 Exhibit 17, p. 20.

49 Since SGV used April 2007 actual salary levels, annualized ECSB's 2007 payroll inflation factor is not applicable for the test year. However, it is appropriate to apply ECSB's 2008 and 2009 payroll inflation factors to the adopted base payroll for the escalation years.

50 Exhibit 10, p. 6.

51 See, e.g., D.05-07-044, mimeo., p. 10.

52 D.07-04-046, mimeo., p. 15.

53 Exhibit 20, p. 4.

54 The monthly step increase rate for 2007 was $187.00, 2008 was $189.81, and 2009 was $194.17.

55 D.05-07-044, mimeo., p. 10.

56 Exhibit 26, p. 3-10.

57 Exhibit 20, p. 10 and Attachments B and C.

58 Exhibit 10, p. 4.

59 Exhibit 26, p. 3-10.

60 Exhibit 10, p. 4.

61 Id.

62 Exhibit 26, p. 3-10.

63 Affiliated companies include Arizona Water Company, Utility Investment Company, Rosemead Properties, Inc., and United Resources, Inc.

64 Exhibit 29, p. 50.

65 Exhibit 20, Attachment D.

66 Reporter's Transcript vol. 2, pp. 125 through 127.

67 Id.

Previous PageTop Of PageNext PageGo To First Page