IX. Payroll

AVR and ORA agreed that 5.6% of total payroll would be capitalized. However, they disagreed on the method of forecasting payroll and associated benefits. These differences are summarized by item in the following table.

YEAR 2003 YEAR 2004

(Dollars in Thousands)

Items	AVR	ORA	Difference	AVR	ORA	Difference
O&M Payroll Operations Customer Maintenance	$ 465 257 213	$ 330 183 151	$271	$ 492 272 225	$ 341 189 156	$303
A&G Payroll10	758	567	191	797	582	215
A&G Payroll Benefits	464	430	34	489	449	40
Total Differences			$496			$558

A. O&M Payroll

AVR annualized its December 31, 2002 payroll rates and added a 2.5 % cost of living (COLA) increase granted for 2002, estimates of merit salary adjustments to be granted during 2002 by individual employee, and overtime by individual employee to arrive at a December 31, 2002 payroll base. AVR employed this same process to derive its test year 2004 payroll estimate.

AVR and ORA subsequently agreed to use ORA's COLA percentages of 1.9% for 2003 and 2.7% for 2004. We concur. However, they differed on whether merit salary adjustments were appropriate.

ORA used AVR's 1999 payroll expense adopted in the last rate case (D.99-03-032) as a base. ORA used that base for test year estimates because ORA concluded from a comparison of AVR's 2001 employee salaries to other California public and private water employees that AVR's salaries were approximately 44% higher than employees of other water utilities. ORA increased that 1999 payroll base by its labor escalation factors to bring the O&M payroll estimates up to test year 2003 and 2004 levels.¹¹ These escalation factors are the same factors ORA and the Commission's Water Division use for all water utilities. ORA did not provide for merit increases during the test years.

ORA's estimates are flawed because they assume that the previously adopted 1999 payroll estimates are currently valid except for the need to include yearly COLA increases. ORA's method ignores actual salary and workload changes that occurred from 1999 through 2002.

It is appropriate to use AVR's payroll estimates because they realistically reflect actual payroll. We adopt the payroll estimates of AVR.

B. A&G Payroll

AVR and ORA utilized the same methods for their A&G payroll estimates as they did for O&M payroll estimates and the evidence and reasoning presented concerning A&G payroll are essentially the same. Therefore, A&G payroll estimates should be calculated in a manner consistent with our O & M payroll discussion and conclusion for adopted O&M payroll estimates.

C. A&G Payroll Benefits

There are no differences between the rates AVR and ORA used for medical, dental, and post retirement benefits other than pension. The differences result solely from applying these benefits to payroll estimates. We will apply these rates to the payroll estimates being adopted in this proceeding.