9. General Division
General Division provides services that are common to the LA and Fontana Divisions. Consistent with the RCP adopted by D.07-05-062, SGV included General Division expenses and rate base investments in this proceeding to be reflected in test year rates for both the LA and Fontana Divisions. The following tabulation summarizes differences in test year General Division common costs prior to allocation between the LA and Fontana Divisions.68 The impact of LA Division test year issues upon which SGV and DRA could not agree is reflected in the following table and discussed in the remainder of this decision.
(Dollars in Thousands)69
Category |
SGV |
DRA |
Difference |
Common Expenses |
$6,600 |
$6,278 |
$322 |
Rate Base |
12,315 |
9,868 |
2,447 |
9.1. Common Expenses
The $322,000 differences in General Division common expenses resulted from different forecasts in: (1) payroll, (2) Chairman of the Board's salary, (3) necessity of a current position, and (4) addition of new positions.
Differences in General Division payroll expenses paralleled those discussed and resolved regarding LA Division payroll, pension, and benefits. Test year General Division payroll forecasts should be as adopted for LA Division payroll, pensions, and benefits.
9.1.2. Chairman of the Board's Salary
DRA recommended that only 54.45 % of the Chairman of the Board's (Chairman) salary charged directly to General Division be allowed in the test year allocated between the LA and Fontana Divisions. DRA argues that his time allocations do not make sense, appeared arbitrary and biased, and SGV failed to justify a need for the Chairman's position.70 This issue is similar to an issue raised in Fontana Division's test year 2003 GRC by ORA, DRA's predecessor.71 We once again address this issue.
The Chairman serves as Chairman of SGV and its affiliates. Based on daily time records, the Chairman spends approximately 82.00% of his time on SGV matters and 16.5% on AWC matters. An additional 1.5% of his time was spent on other affiliates including Utility Investment Company, Rosemead Properties, Inc., and United Resources, Inc.
DRA, unfamiliar with the functions the Chairman performs and unfamiliar with AWC operations, contends that the allocation of 82.0% of Chairman's time and salary on SGV matters in comparison to 16.5% on AWC matters defies common sense. DRA pointed out that both companies serve approximately the same number of customers, 86,089 versus 72,000, and both are Class A water utilities. DRA also questioned a need for SGV to have both a Chairman and a President position.72 Based on these concerns, DRA recommended that the number of customers between SGV and AWC be used to allocate the Chairman's direct salary to SGV, resulting in allowing 54.45% of his salary.73
The Chairman is paid directly by SGV and directly by AWC for the time he devotes to those companies based on daily time records. Those records comply with the affiliated transaction rules adopted in D.93-09-036 and subsequently affirmed in D.04-07-034. We stated in that later decision that we will not disallow any portion of the Chairman's salary since SGV appears to be in compliance with D.93-09-036, and we find nothing else in the record that might support the recommended disallowance.74 Nothing in this record warrants a reversal of our prior decisions on the Chairman's salary. There should be no adjustment to the Chairman's salary. This issue should not be readdressed in future proceedings unless new evidence is brought forward for our consideration.
SGV included a Junior Draftsman position it established and filled in July 2006 as a component of its General Division payroll. SGV added the position due to an increased workload. However, DRA excluded the position because SGV never formally requested and has not justified the Junior Draftsman position.75
The Commission does not manage regulated water utilities. As such, it neither requires a utility to accurately forecast all of its staffing needs over a three-year GRC cycle nor requires a utility to seek Commission authority to add staff positions to meet customer needs. The Commission's sole test for a utility's ability to recover its expenses in future rates is whether the expenses are reasonable. In this instance, SGV added a position due to increased workload. There is no evidence that the budgeted salary was excessive or improper. The Junior Draftsman position should be included as a component of General Division test year payroll expenses.
SGV included as a component of General Division payroll expenses salary and benefits for three new General Division positions. These positions are a Regulatory Analyst, Conservation Coordinator, and a Regulatory Compliance Coordinator.
The parties agree that the General Division should hire a new Regulatory Analysts and Conservation Coordinator. However, DRA excluded those salaries and related benefits from its forecasted General Division payroll on the basis that SGV has a history of not timely filling its authorized positions. DRA recommended that SGV should recover these salaries and related benefits through advice letters only after the positions are filled.
The Commission found in Fontana Division's 2002 GRC that SGV should seek recovery of costs associated with new positions through advice letters based on an observation that SGV has taken its time to fill authorized new positions.76 However, SGV contended that this observation, which occurred in a 2002 GRC decided in 2004, was outdated and no longer applicable.
SGV testified that General Division's new positions would be filled by the beginning of the test year and that some of those positions would even be filled before the start of its 2008 test year.77 There is no evidence to the contrary. General Division test year expenses should include the salaries and related benefits for a new Regulatory Analyst and Conservation Coordinator.
SGV requested authority to include a new Regulatory Compliance Coordinator position in General Division test year expenses. DRA opposed the inclusion of this position on the basis that several of the duties described for the new position duplicated duties of current employees, such as an existing Water Quality Superintendent responsible for drinking water quality and a Safety Coordinator responsible for workplace safety.
SGV explained that once the Regulatory Compliance Coordinator position is filled, these duplicative functions will no longer exist. SGV established this new position to transfer all non-core functions to a person who can be expert in all non-core regulatory compliance issues and can identify, understand, and comply with increasingly complex and stringent regulations. Since its prior GRC, the LA Division has been required to comply with new and enhanced regulatory requirements for which it has not been staffed.78 For example, in 2005 the district was required to undertake an infrastructure needs survey as part of its annual Drinking Water Program report. In 2006, the district's emergency stand-by generators were required to meet South Coast Air Quality Management District Tier 2 emission standards. At the start of 2008, it was required to increase water quality monitoring of emission standards.
SGV has substantiated that it is required to comply with new and enhanced regulatory requirements for which it has not been staffed. General Division test year expenses should include the salaries and related benefits for a new Regulatory Compliance Coordinator.
9.2. Rate Base
The $2,447,000 General Division test year rate base difference resulted from different capital treatment and allocation of (1) an El Monte office building, and (2) a new Fontana office building.
SGV's headquarters and operations offices have been at their current location in El Monte since the company's inception in 1937. Since that time, SGV acquired adjoining properties in 1948, 1952, 1965, 1980, and 1986. These acquisitions were used to accommodate additional office space, storage area, and parking. The latest building expansion occurred in 1965 when the main portion of the existing building was completed. Now, more than 40 years later, the building infrastructure has become obsolete.79 Office space has also become inadequate since 1965 because of a 46% increase in the number of employees, 146 from 100, who occupy the same square footage in the same building. To alleviate its infrastructure obsolescence and inadequate office space, SGV sought to recover through annual advice letters approximately $12,600,000 of forecasted capital costs for either refurbishing or replacing the El Monte building.
DRA provided testimony in opposition to SGV's proposal. In response, SGV reconsidered its advice letter recovery request for full recovery of its cost to renovate or replace the existing building.80 SGV replaced its advice letter request with a request to include $164,000 in the General Division's test year rate base. Of that amount, $108,000 would be used to refurbish existing office space being vacated by 26 General Division employees relocating to a new Fontana building and $56,000 would pay for a more complete and comprehensive long-term space study.81
DRA also opposed SGV's revised request. DRA's opposition was on the basis that SGV violated the RCP, Section IV. F.82 Although the RCP provides for water utilities to update their GRC requests, such request must be made within 45 days after the filing of their GRC application. The updated request exceeded the 45-day limit because it was made at a December 6, 2007 evidentiary hearing, approximately 150 days after the filing of SGV's July 2, 2007 GRC application. DRA further opposed the revised request on the basis that the RCP precludes acceptance within that 45-day period of new or additional items or forecasted costs, as proposed by SGV.
Although SGV failed to satisfy the RCP's 45-day period, that test is not applicable since the revised request relates to the renovation portion of the original request. By its application, SGV requested recovery of its forecasted costs to either refurbish or replace the El Monte building.83 Accompanying testimony further substantiated that SGV engaged a design building firm to perform a space study that recommended either refurbishment (renovation) or replacement of the building to satisfy the company's needs.84 The revised renovation request cannot be considered a new or additional item, disfavored by the RCP.
We decline to treat the revised renovation amount as a forecast update as set forth in the RCP. SGV had substantiated, as part of its initial filing, the need to correct El Monte building infrastructure obsolescence and inadequate office space, leaving the issue of how much should be authorized to correct these conditions. The reason for a substantial reduction of requested capital costs, $108,000 from $12,600,000, to mitigate the inadequacy of its El Monte building is consistent with our goal to encourage prudent investment in water utility infrastructure. General Division's test year rate base should be increased by $108,000 to cover the costs of El Monte building renovations.
However, the request to undertake a more complete and comprehensive long-term space study does violate the RCP 45-day update rule. The request is a new item not requested as part of the application and was not made known until well beyond the 45-day limit. SGV's request to increase General Division's test year rate base by $56,000 to cover a long-term space study is denied.
SGV included $2.9 million, or 30%, of its $9.6 million forecasted cost for a new Fontana office building expected to be completed in December 2008.85 That $2.9 million was allocated to General Division because the new building will house 27 General Division employees, a new Rate Analysts position being approved by this decision and 26 employees located at the El Monte headquarters building. The remaining $6.7 million, or 70%, of building costs along with an additional $3.3 million of related building complex costs would be allocated to Fontana Division since the division will directly use the space.86
DRA excluded all General Division allocation of a new Fontana office building on the basis that it was premature, unsupported, and should be considered in Fontana Division's July 2008 GRC. DRA took this position because Fontana Division was previously authorized to include only $4.9 million of a forecasted $6.0 million cost for a new Fontana office building. That authorization was granted by the Commission in Fontana Division's prior GRC and conditioned upon a subsequent justification of whether the entire new building would be used and useful as part of Fontana Division's July 2008 GRC.87 The Commission took this position because total building cost was not known at the time and the proposed size of the building was questionable. For example, SGV had forecasted that Fontana employees occupying 4,719 square feet of space at that time would be occupying approximately 11,548 square feet, a 144% increase, of office space in the new Fontana building.
DRA also had a space allocation issue in this proceeding given that the employees to be transferred would occupy approximately 79% more space than they occupy in the El Monte headquarters building, from 4,479 square feet to 8,048 square feet. DRA contends that if the transferred General Division employees occupy the same space they currently occupy in El Monte they would need only 17%, not 30%, of a new 26,827 square foot building.88
Consistent with DRA's assertion and SGV's acknowledgment in its opening brief that the final costs of a new Fontana building complex would be reviewed in Fontana Division's 2008 GRC,89 we conclude that this is not the appropriate proceeding to resolve any allocation of new building costs or space. However, SGV proposed, in its opening brief, to include a portion of the new Fontana building's estimated costs in General Division's rate base subject to refund, pending a review of building costs in the upcoming Fontana Division GRC. DRA concurred with this proposal only if a subsequent allocation of part of that building to the General Division is authorized in this proceeding.90
SGV substantiated the existence of an overcrowded space situation at the El Monte headquarters building, as addressed in our prior El Monte Office Building discussion. Therefore, it is reasonable to expect that 27 General Division employees would relocate to the new Fontana Building. Although we authorize an allocation of new building space for those employees, we cannot specify the square footage or costs at this time. That allocation must be decided in Fontana Division's next GRC as acknowledged by SGV and DRA.
Consistent with D.07-04-046 and both SGV's and DRA's comments in this proceeding, we will include $2.9 million of the new Fontana building's current estimated costs in General Division's rate base. The $2.9 million should be allocated $1.5 million to LA Division and $1.4 million to Fontana Division, based on the adopted four-factor rate. LA Division's share should be made subject to refund, pending a review of building costs in the upcoming Fontana Division GRC. Consistent with D.07-04-046, Fontana Division's $1.4 million allocated amount should not be included in rates until the building costs have been reviewed for prudence and the facility's size evaluated to determine whether the entire facility is used and useful. Also, consistent with that decision, should the final amount of the new facility placed into Fontana Division rates by D.07-04-046 exceed the amount for which construction work in progress (CWIP) was allowed, the balance plus an allowance for funds used during construction should be placed into Fontana Division's rate base.
9.3. Four-Factor Allocation Method
There was no dispute on how common General Division costs and rate base investments should be allocated between the LA and Fontana Divisions. SGV and DRA concurred that these common costs and investments should be allocated 52.8% to the LA Division and 47.17% to the Fontana Division, based on a four-factor allocation method.91 Test year common General Division costs being adopted in this proceeding should be allocated between the LA and Fontana Divisions based on agreed upon four-factor rates.
9.4. Recovery of General Department's Common Costs
Although SGV seeks to recover LA Division's share of General Division costs in test year rates, it seeks to recover Fontana Division's share through a surcharge. This is because SGV forecasted that Fontana Division's share of General Division costs would require only a 1.5% incremental revenue requirement above authorized rates adopted by D.07-04-046. We concur with this approach. Fontana Division's share of increased or decreased General Division costs should be recovered via a surcharge or surcredit.
68 Total General Division common expense and rate base were derived by adding allocated expenses and rate base of General Division to LA Division on page 3 of 5 and to Fontana Division on page 4 of 5 of the partial settlement agreement.
69 Amounts under $500 are rounded to the nearest thousand. For example, $500 is rounded up to $1,000. Minor differences occur due to rounding.
70 Exhibit 29, pp. 42 and 44.
71 D.04-07-034, pp. 30 through 34.
72 Exhibit 29, pp. 43 and 44.
73 SGV pointed out that DRA's proposed allowance equated to only 47.3% because DRA applied its 54.45% allocation percentage to a salary paid by SGV that was already reduced by 13%, which was directly allocated to AWC. See Exhibit 33.
74 D.04-07-034, p. 30 and Findings of Fact 22 and 23, p. 67.
75 Exhibit 29, p. 11.
76 D.04-07-034, p. 33 and Ordering Paragraph 7, p. 72.
77 Reporter's Transcript vol. 3, p. 204.
78 Exhibit 20, pp. 6 through 8, and Attachment A.
79 Exhibit 9, pp. 20 and 21.
80 Reporter's Transcript vol. 3, p. 208.
81 Id., pp. 211, 214, and 215.
82 See D.07-05-062.
83 Application, p. 9.
84 Exhibit 9, p. 21.
85 The 30% represents the space General Division employees are expected to occupy based on a new building floor plan.
86 The total projected building and project cost was $12.9 million, of which $9.6 million directly pertains to a new Fontana building.
87 D.07-04-046 mimeo., p. 48.
88 Exhibit 29, p. 61.
89 SGV Opening Brief, p. 67.
90 DRA Reply Brief, p. 8.
91 The four-factor method allocates General Division costs and investments to the LA Division and Fontana Division based on a weighted average of each division's active service connections, direct payroll, direct operating expenses, and gross utility plant.
