VII. General Office

General Office expenses are apportioned between Fontana and Los Angeles Divisions.

A. Officers' Salaries

The issue here is ORA's recommendation that San Gabriel's officer's salaries be cut. We do not adopt ORA's recommendation for the reasons discussed below.

ORA contends that San Gabriel's executive salaries have increased higher than necessary to account for inflation, and it recommends reductions in estimated Common Payroll Expense of 21.2% and 24.2% for A&G; 12.2% and 15.8% for O&M; and, 7.6% and 11.2% for Customer Accounts, for Test Years 2003 and 2004, respectively. ORA's recommendation is based on an American Water Works Association (AWWA) Compensation Survey for the year 2001. First, ORA calculated an average for the AWWA categories of "Board Operated," "Private," and "State of California" systems. Next, ORA used salary data for Commission regulated Class A water companies, applied ratios for "Number of Connections" and "Total Utility Plant" to that data, and derived an average of those figures. Then, ORA determined its overall salary adjustment by calculating the average of its AWWA Survey averages and the Class A Water Company salary averages.

San Gabriel uses the Employers Group⁸ Executive Compensation Survey as a benchmark for determining the adequacy of its salaries for executives and positions such as accounting, legal, drafting, and other position types that cross industry boundaries. San Gabriel believes that the Employers Group survey is more reflective of the overall job market in which San Gabriel must compete than other available surveys. According to San Gabriel, the 2001 Employers Group Executive Compensation Survey shows that executive salaries increased at substantially above the general rate of inflation in 2001. For example, the average Chief Executive Officer's base salary increase for non-manufacturing firms was 8.59% and for other executives was 7.95%, reflective of the market factors that San Gabriel believes it must consider to attract and retain qualified executives.

We do not agree with ORA's proposed executive payroll reductions because it is not reasonable to use averages from a national survey, such as the 2001 AWWA survey, to assess the reasonableness of salaries in the Southern California job market. Also, the AWWA survey does not adjust its compensation figures for pensions and benefits normally provided by governmental agencies, which comprise the majority of respondents in that survey. Furthermore, applying ratios based on Number of Customers and Plant in Service to make comparisons with salaries paid by other Class A water companies makes little sense since salaries are not directly proportional to these numbers. For these reasons, we adopt San Gabriel's estimate since its method of setting executive salaries is more reasonable.

B. Disallowance of Chairman's Salary

ORA recommends disallowance of 100% of the Chairman's salary. ORA believes that 50% of the salary should be allocated to Arizona Water Company and that the remaining 50% should be disallowed because there are similarities between the responsibilities of the Chairman and the President of San Gabriel.

San Gabriel responds that the Chairman, President, and other executives and employees, who devote time to Arizona Water Company or other affiliates, maintain daily records tracking the direct amount of time they devote to those affiliates. According to San Gabriel, those daily time records are kept in accordance with agreed-upon procedures established and adopted by the Commission in D.93-09-036. Those daily time records and associated charges were admitted as evidence in this case. (Exhibit 8, Attachments F and H.) We will not disallow any portion of the Chairman's salary since San Gabriel appears to be in compliance with D.93-09-036, and we find nothing else in the record that might support the recommended disallowance.

C. Allocation of Chairman's and President's Salaries

Apart from its disallowance recommendation discussed above, ORA opposes allocating to San Gabriel ratepayers part of the salaries paid to San Gabriel's officers. Specifically, ORA states that San Gabriel provided conflicting and incomplete information regarding the time and salary amounts of San Gabriel's officers charged to its affiliates. Thus, until a time and motion study or audit is performed and verifiable accurate records of the President's time are provided, ORA contends that at a minimum, 10% of the President's salary and salaries of other key executives should be allocated to Arizona Water Company and other affiliates.

San Gabriel responds that the Chairman and President receive salaries directly from Arizona Water Company, compensating them based on the amount

of time they devote to that company's matters.⁹ According to San Gabriel, the amounts shown in the monthly summaries of San Gabriel's inter-company charges for services to affiliates do not include those salaries because they are paid directly by Arizona Water Company. The monthly summaries of charges reflect only the time the Chairman and President devoted to the affiliates other than Arizona Water Company. (Exhibit 8, at 27.) Further, San Gabriel states that information on the salaries Arizona Water Company paid directly to the Chairman and President was provided to ORA and are shown in witness Batt's rebuttal testimony (Attachment K to Exhibit 8).

We reject ORA's proposed adjustments for the same reasons we rejected the disallowance discussed above. As far as the record discloses, San Gabriel executives' daily time records are kept in accordance with the procedures established in D.93-09-036.

D. New Positions in General Office

We approve San Gabriel's request for three new positions in its General Office needed to respond to the increasing complexity of regulatory requirements affecting water utilities. These new positions are discussed below.

1. Property Manager

San Gabriel states that the property manager will determine the fair value of property; negotiate agreements; work with escrow, environmental survey and title companies; oversee licenses, easements, leases, and rights-of-way; and, monitor property tax assessments, zoning changes and public works projects. ORA is concerned that a property manager would provide services for some of San Gabriel's affiliates such as Rosemead Properties. San Gabriel responds that even if services are provided for an affiliate, that time would be tracked and the affiliate would be charged for the actual costs associated with the services. Further, San Gabriel disputes ORA's assertions that the duties of the property manager are well suited for consultants to perform. San Gabriel states that especially in Fontana, because of the growing system, hiring a consultant to handle property acquisitions would be expensive and would still require one or more San Gabriel officials to direct and oversee that process. We approve San Gabriel's request because the growth in Fontana Division justifies the new position.

2. Accountant

San Gabriel states that the accountant will assist the chief accountant, who is currently the only employee in the Accounting Department with training and work experience regarding utility accounting methods including the Uniform System of Accounts. ORA opposes San Gabriel's request on the grounds that existing staff is adequate to handle San Gabriel's accounting requirements. We approve San Gabriel's request because it is reasonable that the chief accountant have someone to assist him in utility accounting matters, and to provide back-up when he is not available.

3. Rate Analyst

San Gabriel states that the rate analyst will assist and support the preparation of general rate cases, other Commission applications and advice letters; assist in maintaining balancing and memorandum accounts; respond to data requests; and prepare pro formas and various rate analyses. According to San Gabriel, its Rate Department presently consists only of the Director -- Rates and Revenue and an auditing clerk who focuses on accounting activities. ORA opposes the request on the grounds that San Gabriel currently has sufficient work force to prepare rate cases and thus the additional position is not required. We approve San Gabriel's request because it needs to be in a position to better respond to the increasing complexity of its rate proceedings.

4. Discussion

As discussed above, we approve the three new General Office positions. San Gabriel has adequately demonstrated the need for these positions. However, in the past, San Gabriel has taken its time to fill authorized new positions. Therefore, after San Gabriel has filled an authorized position, it may file an advice letter for inclusion in rates of the costs related to the filled position. Such advice letter filings will be allowed only once a year.

E. Exclusion of Existing Management Positions

ORA recommends that the four existing positions of Director of Tax Accounting, Financial Analyst, Senior Engineer and Vice President be excluded for ratemaking purposes. The record does not support ORA's recommendation, and we reject it, as discussed below. Briefly, the weight of evidence is that the positions are needed and should be reflected for ratemaking purposes.

1. Director of Tax Accounting

ORA recommends disallowance of this position, claiming that the Director of Tax Accounting prepares Internal Revenue Services Form 5500 filings for Arizona Water Company. According to San Gabriel, however, the only Form 5500 filings the Director of Tax Accounting prepares are San Gabriel Valley Water Company's. Further, San Gabriel states that the majority of the work of the Director of Tax Accounting is on San Gabriel matters. Only 42.6 hours of her time were spent on affiliate matters in 2002, and all of that time was paid for by the affiliates. San Gabriel points out that the Commission specifically evaluated the need for and approved the position in D.92-04-032. We reject ORA's recommendation. The weight of the evidence is that almost all the work of this position is performed for the California utilities and the small amount that is not is properly accounted for and charged to the affiliates.

2. Financial Analyst

According to San Gabriel, the financial analyst prepares various reports on such items as pro forma bank balances and short-term borrowing for use by management; monitors and initiates long-term debt payments; and acts as liaison with Bank of America to resolve problems. ORA asserts that these functions could be performed by other personnel such as the Chief Accountant, the General Accountant, or Treasurer. San Gabriel responds that each of these positions has a full slate of duties currently. We find that San Gabriel has justified this position.

3. Senior Engineer

ORA asserts that a vacant Senior Engineer position should be eliminated because San Gabriel's engineering needs are covered by other engineering positions. San Gabriel's Engineering Department currently has only two registered engineers -- the Chief Engineer and the Senior Engineer. San Gabriel states that in its most recent Los Angeles County Division rate case (which covers part of the period of this rate case), the Commission approved a third engineering position in the General Office. San Gabriel says that the engineer is needed to work with developers, and it has advertised and interviewed applicants for this position. According to San Gabriel, it has not been able to hire anyone due to the scarcity of qualified engineers and the intense competition for water system engineers among water companies and water agencies. We find that San Gabriel has justified this position.

4. Vice President

ORA argues that since San Gabriel has a Human Resources Manager and a Manager of Customer Services, the position of the Vice President is redundant. San Gabriel's Vice President Robert W. Nicholson described his own duties as follows: Overseeing the Human Resources Department and the Los Angeles Division Customer Service Department; representing San Gabriel as a board member on the Main San Gabriel Basin Watermaster and as an alternate board member on the Chino Basin Watermaster; procuring and administering all of San Gabriel's business, property, and umbrella liability insurance policies, workers' compensation insurance policies, and employee pensions and benefits policies; in the absence of a Property Manager, handling all San Gabriel's property matters; and being responsible for strategic planning. According to San Gabriel, the Vice President has general oversight responsibilities, whereas the managers are responsible for day-to-day operations of the departments. We find that San Gabriel has justified this position.