Productivity Factors

SDG&E proposes to apply a 0.92 productivity factor for electric distribution and a 0.68 productivity factor for gas. These factors were developed from a national utility industry study conducted by Christensen Associates, which developed Total Factor Productivity (TFP) indices. A TFP index measures the ratio of its output quantity index to its input quantity index. It compares the growth trend in the unit cost of the industry to the trend in prices of labor, capital services, and other production inputs.

SDG&E argues that an industry-wide study is appropriate to develop productivity factors because this approach is comparable to the operation of competitive markets. SDG&E states that this study was undertaken in response to the Commission's direction in D.96-09-092, the Edison PBR decision:

"The price and productivity values should come from national or industry measures and not from the utility itself. ... The productivity measure should come from a forecast of industry-specific productivity." (D.96-09-092, mimeo. at p. 15.)

Despite the fact that its proposed productivity factors are less than those adopted for any other energy utility, SDG&E asserts that no stretch factor is necessary. A stretch factor is an addition to the productivity factor to ensure that the utility to which it is applied is indeed "stretching" to achieve efficiency gains. SDG&E argues that the use of a stretch factor is only appropriate when there is a change from traditional ratemaking to PBR, when there is the presumption that significant efficiency gains may be realized, or when there is uncertainty about the level of an appropriate productivity factor. In SDG&E's view, none of these circumstances apply. SDG&E also argues that because the earnings sharing calibration guarantees any gains will benefit customers in future years, the calibration approach is essentially a stretch factor. Finally, SDG&E urges us to consider its proposed productivity factors in conjunction with the proposed escalation methodology. SDG&E contends that using a utility-specific inflation index makes achieving productivity gains more difficult because the update rule will result in a lower figure than if a different measure of inflation were used.