XI. Administrative and General Other Expenses

The differences in the administrative and general other expenses category are in insurance, regulatory expense, franchise fees, outside services, and A&G transfer. These differences are itemized in the following table.

YEAR 2003 YEAR 2004

(Dollars in Thousands)

Items	AVR	ORA	Difference	AVR	ORA	Difference
Insurance	$475	$351	$123	$559	$375	$184
Regulatory Expense	58	49	10	58	48	10
Franchise Fees	109	110	(1)	134	116	18
Outside Services	98	93	5	102	97	5
A&G Transfer	(205)	(205)	0	(165)	(169)	4
Total Differences			$137			$221

A. Insurance

AVR and ORA disagreed on the method of forecasting insurance expense. AVR based its estimates on actual insurance premiums for its policy year 2002-2003 and arrived at test year estimates by applying percentage increases estimated by its insurance broker. It opted to use judgment instead of a trending method to estimate insurance expense because of substantial insurance premium increases it experienced following the tragic September 11, 2001 event. Based on its approach, AVR estimated its insurance cost to be approximately $564,000 for test year 2003 and $675,561 for test year 2004. By the end of the evidentiary hearing, AVR reduced its test year estimates downward by more than $80,000 to reflect declining insurance premium increases. AVR's revised insurance expense for test year 2003 was $475,000 and test year 2004 was $559,000.

ORA based its estimates on a linear regression analysis of prior year's recorded insurance expense.

ORA's estimating method is reasonable and should be adopted because it is based on historical increases in insurance premiums. However, ORA's test year estimates need to be adjusted because ORA did not include approximately $37,000 of insurance in its 2002 recorded year base for directors and officers, injuries and damages, and workers compensation insurance expense.¹² The 2002 insurance expense of $354,000 used by ORA should have been increased by the additional $37,000 of insurance to $391,000.

There is no record on what impact this adjustment has on ORA's test year estimates. Therefore, we use informed judgment and apply the 14.2% average annual insurance increase from recorded 1995 through 2002 insurance expense to arrive at a $446,185 insurance expense allowance for test year 2003 and a $509,543 insurance expense allowance for test year 2004.

B. Regulatory Expense

AVR based its estimate for each of the test and attrition years on the regulatory cost incurred by the most recent Park subsidiary having a contested regulatory case. AVR used actual regulatory cost incurred by Park's Santa Paula Water Works, LTD subsidiary for its test year 1992-1993 rate case (Application 91-03-026) as a base. AVR escalated that base to 2002 cost by actual increases in rates charged by its attorney and consultants between this period and by non-labor escalation for miscellaneous items. This escalated total was then amortized over the three-year rate case cycle.

ORA based its estimates on the regulatory cost AVR was authorized in its 1998 rate case (D.99-03-032).¹³ ORA selected AVR's 1998 rate case for the base cost because that case involved litigation similar to this proceeding and is more recent that the 1992 base used by AVR. ORA also used factors to escalate the base cost to 2002 and amortized the resultant cost over the rate case cycle.

AVR has already incurred $129,000 in regulatory expense by the end of September 2002 for this proceeding.¹⁴ An amortization of this amount over the rate case cycle would amount to $36,333, well under the estimates of AVR and ORA. However, AVR has incurred additional cost subsequent to that date for its participation in the November evidentiary hearing and filing of a joint comparison exhibit and opening and closing briefs. AVR is also expected to incur additional costs in filing comments on the proposed decision.

The adoption of AVR's estimates would provide it $46,000¹⁵ to cover the costs of the subsequent activities identified above and $17,100¹⁶ if ORA's estimate is adopted. Absent cost estimates for these additional activities we rely on informed judgment, and conclude that the adoption of AVR's estimates would provide it with more than sufficient funds for the additional activities. On the other hand, ORA's estimates should provide AVR with sufficient funds to cover the cost of these subsequent activities. We adopt ORA's $48,700 regulatory commission expense estimate.

C. Franchise Fees

AVR and ORA both used the 1.5% franchise rate currently in existence. Differences in estimates resulted solely from the use of different gross revenue estimates. AVR and ORA agreed that the current franchise fee should be applied to the gross revenues adopted in this proceeding. We concur.

D. Outside Services

The differences resulted from the treatment of costs for evaluating the vulnerability of AVR's security to terrorist attacks. AVR included $5,000 in both test years to complete this evaluation by the end of 2003, as required by the United States Environmental Protection Agency (EPA). ORA opposed any such allowance until AVR provides justification for the costs.

The September 11, 2001 terrorists' attacks have heightened the need to assess the security of public utilities. Hence, it is reasonable to include $5,000 in the 2003 test year to satisfy EPA's vulnerability assessment requirement. However, it is not reasonable to include a similar amount in the 2004 test year, as requested by AVR, because this assessment will have been completed by the end of 2003.¹⁷ We adopt $98,000 in outside services for the 2003 test year and $97,000 for the 2004 test year.

E. A&G Transfer

The differences between AVR's and ORA's estimates resulted solely from differences in direct A&G expense and rate base estimates. A&G transfer should be recalculated based on adopted operating expense and rate base.