Escalation

As described in Exhibit 74, SDG&E's proposed escalation measure is based on historical and forecasted industry-specific data, published quarterly. Separate escalation factors are used for electric and gas. Each proposed index is designed to measure changes in price levels of labor, nonlabor and capital inputs purchased by utilities. SDG&E asserts that this methodology is superior to using a national aggregate price index, such as the CPI, because these CPI-type indices are not designed to provide a framework for analyzing changes in the price level of inputs purchased by utilities, but measure economy-wide changes in the price level of goods and services.

The base rate cost indices proposed by SDG&E are composed of national-level utility-specific cost indices obtained from the Standard & Poor's DRI/McGraw-Hill Economic and Utility Cost Forecasting Services (DRI). The component national level utility cost indices are combined into base rate cost indices using expenditure weights developed from historical expenditures by electric and gas utilities located in California. SDG&E explains that the base rate cost indices are designed to measure changes in the price level of inputs that California electric distribution and gas utilities purchase to operate and maintain public utility assets.

This cost escalation proposal is generally based on the methodology adopted for SoCalGas in D.97-07-054. SDG&E proposes to use average hourly earnings for electric, gas, and sanitary services as the basis for its labor cost index for both electric distribution and gas. Historical data is reported by the United States Bureau of Labor Statistics (BLS) and this data forms the basis of the DRI labor cost index referred to as AHE49NS. Forecasts of this index are readily available from DRI. The proposed labor cost index differs slightly from that adopted for SoCalGas, which is based on two indices.

The proposed index for electric distribution nonlabor O&M expenses utilizes five DRI cost indices: total distribution plant O&M cost index (JEDOMMS), customer accounts operation cost index (JECAOMS), customer service and information operation cost index (JECSIIOMS), sales operation cost index (JESALOMS), and total administrative and general O&M cost index (JEADGOMMS). SDG&E proposes to use the DRI total gas utility nonlabor O&M cost index (JGTOTALMS), the same index adopted for SoCalGas.

The proposed cost index for capital-related electric distribution costs is based on an estimate of the rental price of electric distribution utility structures, which is estimated from three data series obtained from DRI: rental price of capital - nonresidential structures-public utilities (ICNRCOSTPU); chain type price index - investment in nonresidential structures - public utilities (PCWICNRPU), and the Handy-Whitman electric utility construction cost index -total distribution plant, Pacific Region (JUEPD@PCF). All of these indices are obtained from DRI. The proposed cost index for capital related gas costs is based on an estimate of the rental price of gas utility structures, which is estimated from three data series obtained from DRI: rental price of capital - nonresidential structures-public utilities (ICNRCOSTPU); chain type price index - investment in nonresidential structures - public utilities (PCWICNRPU), and the Handy-Whitman gas utility construction cost index-total plant, Pacific Region (JUG@PCF).

While the fundamental basis of the capital-related cost indices is the same as that adopted for SoCalGas, SDG&E proposes to use a three-year moving average of the rental price of utility structures to calculate the capital-related cost indices. SDG&E believes this approach reduces the volatility related to rental prices of public utility structures which means that annual changes in the base rates escalated with these indices are less variable.

The cost indices for electric distribution and gas base rates are each a weighted average of the component cost indices for labor, nonlabor, and capital-related expenses, as described above. The weights used to construct the weighted average are based on average state-level electric distribution expenditures or gas utility expenditures expressed in real 1996 dollars for the period 1992-1996. The annual adjustments for electric distribution base rates average 1.9% per year from 1993 through 1996 compared to average projected adjustments of 1.2% per year from 1997 through 1999. The annual adjustments for gas base rates average 2.5% per year from 1996 through 1996 compared to an average projected adjustment of 1.9% per year from 1997 through 1999.

SDG&E's escalation proposal has not been challenged. Starting in the year 2000, SDG&E proposes to use the percentage changes in the base rate cost indices in the rate indexing formulae to adjust the electric distribution and gas base rates for changes in the cost of inputs purchased by the utility. Exhibit 28 demonstrates that electric escalation is forecasted to average 1.2%, which is 120 basis points below the CPI, which ORA forecasted to average 2.4% over the 1997-2002 time period.

SDG&E will continue to rely on the Market Indexed Capital Adjustment Mechanism (MICAM) to true-up the cost of capital in base rates for significant changes in nominal interest rates. SDG&E explains that the capital-related cost indices provide a basis for partial annual adjustments to base rates for changes in the cost of capital. These partial adjustments would only affect base rates in years when MICAM is not triggered. MICAM adjustments are only made after interest rates change by 100 basis points or more from the previous benchmark.⁸ In years when a MICAM adjustment is triggered, the annual cost of capital adjustments embedded in the PBR cost escalation proposal would be trued up to the MICAM adjustment cost of capital.