7. Reasonableness of Costs

This section addresses SDG&E's prudence in controlling and reasonably managing the costs incurred to restore service following the 2003 Wildfires. Before we can consider the reasonableness of the proposed allocation of costs to retail customers we must first examine the total costs incurred, consider any available revenues to offset to these costs to determine the incremental costs, and then determine the appropriate allocation of incremental costs.

SDG&E stated that it had no insurance coverage that would reimburse the costs of the Wildfires. The justification is the cost of insurance estimated at $3 million annually for $10 million in coverage.20 Thus in about two years the premiums would have equaled the coverage provided for the Wildfires. Based on this explanation it is reasonable not to expect insurance coverage for these costs.

SDG&E used an "incremental cost criteria" to calculate costs includable in the Wildfire Account. That is, the company assumed direct labor at straight - time (excluding overtime) and other costs that were incurred solely to restore service are incremental to existing costs already included in rates. SDG&E stated its belief that this approach is in conformance with Resolution E-3238. ORA concludes that SDG&E's calculations of incremental costs are a reasonable basis for recovering the Wildfire Account. ORA further supports the recovery of the incremental costs either through the amortization of the expenses included in the Wildfire Account and the capital expenditures added to SDG&E's rate base, as calculated by SDG&E.21 UCAN notes various adjustments and proposes several specific disallowances, and in addition to those issues which are discussed below, UCAN otherwise opposes the rate recovery of the Wildfire Account costs based on its burden of proof arguments.

We find that, except for one exception as noted in the following section, SDG&E has accounted for its costs in a reasonable manner and it is reasonable to allow rate recovery of the Wildfire Account costs.

ORA's prepared testimony in Ex. ORA-1 indicates that its staff conducted a review of the costs incurred to restore service and found only the one exception noted in its testimony. Otherwise, ORA believes the incremental costs to be reasonable.22 The one cost recovery exception noted by ORA is to exclude from recovery $9,146 for advertisements used to publicly thank the other utilities that provided mutual assistance to SDG&E.23 We will adopt this minor adjustment, with which SDG&E has agreed.

UCAN submitted prepared testimony in Ex. 151, which makes several recommendations:

1. Disallow $738,400 for food-related costs that cannot be justified. (p. 6.)

2. An estimated $42,348 in pole test and treat expenses avoided over the next 4 years should be offset against the Wildfire Account O&M expense. (p. 7.)

3. Prior to evidentiary hearings, UCAN was concerned that SDG&E used an incorrect franchise fee and uncollectible allowance for an error of $67,000. (p. 10.)

4. UCAN expresses a non-monetary concern that SDG&E's tree-trimming inventory has increased, rather than decreased in the fire-damaged area. (p. 8.)

5. SDG&E incorrectly accounts for $7.2 million in various Support Services as an expense, which should be allocated between expense and capital (rate base) based on the relative split of direct labor - 15.8% to expense and 84.2% to capital. (p. 9.)

6. Because of the rate impact of SDG&E's Cost of Service A.02-12-028 (2004 increase under collection plus 2005 attrition increase.) the Commission should amortize the Wildfire Account over two years instead of one. (pp. 10-11.)

UCAN applies an additional reasonableness test to SDG&E's request that was not employed by ORA. UCAN argues that some of SDG&E's costs are excessive when compared to a fair market price for the commodity.24 UCAN does not dispute that SDG&E incurred the costs nor does it disagree with SDG&E's process for allocating costs to the Wildfire Account. It does take exception to the ratemaking treatment of certain costs. UCAN in total considered cost causation, cost reduction and cost avoidance as a part of its examination of SDG&E's proposals.

The company spent $5.4 million to provide meals, snacks, water and other items, and over 92,000 meals. UCAN could not determine the accuracy of the 92,000 meal count. UCAN disputes the total based upon the duration of the project and the number of personnel involved. UCAN first equates the total to 30,677 person-days of meals, assuming 3 meals per day. Next, UCAN argues that the personnel counts provided by SDG&E in testimony and data responses total only 1,339 and not 1,800 as stated by the company in Ex. 2 and this suggests 5,400 meals a day not the 6000 included in Ex. 2.25 UCAN expresses a very significant concern with SDG&E's contract management practices and concludes that SDG&E did not exercise sufficient reasonable control over costs or the performance of some vendors.

UCAN closely examined the snack and drink cost of approximately $2 million and took exception to the costs incurred for Gatorade, bottled water and Red Bull energy drink. UCAN opined that SDG&E paid its vendors a significant premium compared to the nearby COSTCO in La Mesa, California, and based on a daily consumption calculation, determined that SDG&E was over-charged by $582,300.26 UCAN argued that employees appeared to consume extraordinary quantities and that SDG&E exercised no reasonable control over unit costs. UCAN justifies the disallowance by showing that the other costs included in a typical retail price are already separately charged to the Wildfire Account as ancillary costs and labor. UCAN also argued in its opening brief that food services costs should be further reduced by $113,11127 based on its calculation of extra (i.e., unnecessary) meals.

SDG&E's rebuttal testimony objects to UCAN's price comparison and argues that it "did not have the luxury of time or resources to evaluate all options ahead of time, plan out exactly what was needed and then competitively bid for these emergency services and supplies." SDG&E argues too that it was against company practices for employees to make purchases on behalf of SDG&E28 without going through established processes"29 SDG&E also argues that UCAN made a simplistic count of meals without considering such things as some tired and hungry employees (Ex. 4) ate more than a single portion, there was no "rationing," the incidental feeding of police, fireman and even fire victims, and overall, UCAN did not consider the complexity of the project to quickly restore service after the wildfires. The company concludes that it "followed its procedures and generally accepted practices and utilized established catering firms that it believed could meet the challenge during this extraordinary time. The unit prices for meals, snacks and drinks were in line with typical rates utilized by the catering industry."30

UCAN proposes to apply a further appropriate test to the costs that is more rigorous than the ORA tests discussed above. UCAN argues that SDG&E unreasonably paid excessive prices that were charged by the food service vendors for the basic commodities of bottled water and various energy drinks by failing to exercise reasonable control over the contractors or its own employees.

Discussion

The essential question is whether SDG&E exercised sufficient control over its vendors to ensure that despite the desperate situation of the Wildfires it paid reasonable prices for essentially basic commodities: bottled water, energy drinks, and snacks. We believe that it did, and we reject UCAN's arguments to the contrary. As ORA argued in its Reply Brief:

Over the course of almost a month, SDG&E and its Mutual Assistance and Contract crews worked around the clock in extremely hazardous conditions and often in inaccessible areas to restore utility service. The suggestion that SDG&E should have diverted resources to comparison shopping for Gatorade does not strike ORA as either [sic] responsible, reasonable, or a productive use of limited resources.31

We agree, and therefore decline to make the disallowances. Furthermore, comparing the prices paid by SDG&E for drinks for its workers to prices at a local Costco is not appropriate for weighing whether SDG&E met its burden of proof for cost control purposes as it fails to create a consistent comparison.

UCAN determined that SDG&E replaced 2,872 poles used for distribution service, and that 73% of the destroyed poles (2,096) were over 15 years old which put them on a 10-year inspection and treatment cycle. UCAN believes that no inspection will be needed on the new poles during the next 10 years and this will avoid inspections at $34.29 per pole.32 UCAN allows for the 30% of 2,096 older poles (861) that were already inspected before they were destroyed by the fire so SDG&E only avoids inspecting the remaining 70% or 1,235 poles that were destroyed before inspection. Savings calculated by UCAN total $42,348.33 UCAN proposes to offset this amount from the Wildfire Account and avoid the complication of adjusting base rates to reduce the number of pole inspections forecast in base margin rates.

SDG&E responds that an offset is unreasonable because under conventional cost of service ratemaking "practices do not require the utility to expend every dollar of its authorized revenue requirement as the utility may have predicted would be necessary in its cost of service application. To the contrary, traditional test year ratemaking principles permit the utility to redeploy its authorized revenue requirement in order to accommodate the real world circumstances it encounters during the test period."34 SDG&E argues further that money "saved from avoiding inspections of the recently replaced poles, if not needed for inspection and treatment of other poles, will most likely be spent on other reliability-related activities."35

Discussion

SDG&E requests $627,000 for both franchise fees and otherwise uncollectible revenue (billed to customers but never collected).36 Initially UCAN identified what it believed to be a computational error of $7,000 for Franchise Fees and Uncollectibles. SDG&E testified that the correct calculation is to increase the recoverable costs ($15,300,000) by a factor that recovers both the uncollectible allowance and the appropriate franchise fees. This is a typical ratemaking convention to ensure the utility an opportunity to recover the full amount of authorized revenues. The calculation has to allow for a full recovery including collecting from all customers the amount otherwise uncollectible from a few, plus the franchise fees SDG&E must pay on the total. SDG&E calculates37 the gross-up factor as: 1 / 1 - (3.67% + 0.266%) = 1.041. The revenue requirement request after "grossed-up" is $15,300,000 x 1.041 = $15,927,000.

Discussion

UCAN withdrew its testimony without further explanation following SDG&E's rebuttal.38 After reviewing SDG&E's calculation we agree that it has made the correct calculation for recovery of the franchise fee and otherwise uncollectible revenues. We will use this method as a part of the calculation of the final revenue requirement authorized in this decision.

UCAN argues that SDG&E has been removing large numbers of trees as a result not only of the Wildfires but also due to the bark beetle infestation that killed many trees and led to a programmatic removal of affected trees. UCAN points out that a tree inventory before October 6, 2003, i.e., prior to the Wildfires, showed 145,575 trees. A September 2004 inventory showed 145,661 trees, an increase of 86 trees. UCAN is concerned that after the removal of numerous trees due to the Wildfires and the bark beetle, the inventory tally should have clearly fallen, and that SDG&E needs to explain this anomaly.

SDG&E explains in rebuttal that many scorched trees are retained in the inventory until they determined whether or not the tree will survive. Additionally, SDG&E added scorched trees outside the rights-of-way and not in the previous inventory because they may fail and could subsequently fall into the overhead lines.

SDG&E's explanation is reasonable and no further action is necessary at this time.

20 Ex. SDG&E-3, p. 15.

21 Ex. ORA-1, pp. 2-4, 3-3, 4-3, 6-3, 7-2, and 8-2.

22 Ex. ORA-1, pp. 1-4 and 1-5.

23 Ex. ORA-1, p. 7-2.

24 This would equate to the "cost reduction" standard included in D.01-02-075.

25 Ex. 151, pp. 2-3, compared to data in Ex. 2, p. 30.

26 UCAN adds 7.75% for sales tax and then deducts a 10% discount from the total. UCAN initially calculated an adjustment of $738,400, corrected at hearing by the witness.

27 UCAN Opening Brief, p. 7, and shown in detail in footnotes 63 and 64 on p. 23.

28 UCAN does not say SDG&E should have done "snack-runs" to COSTCO, only that SDG&E was charged too much by the vendors it used for food services.

29 Ex. 4, pp. 2-3.

30 Ex. 4, p. 8.

31 ORA Reply Brief, p. 5.

32 Ex. 151, p. 6, see also UCAN DR 3, Q 15, and DR 3, Q 18.

33 Ex. 151, pp. 6-7. (1,235 poles @ $34.29 = $42,348.)

34 Ex. 5 p. 2. (Rebuttal.)

35 Ex. 5, p. 2.,

36 Ex. 3, attached Exhibit D-4. (SDG&E captioned attachments to testimony as "exhibits," thus Ex. 3 contains attachments also titled as exhibits.)

37 Ex. 5, p. 6.

38 Transcript, p. 115, deleting Section B. Franchise Fees and Uncollectibles, in Ex. UCAN-1 at p. 10.

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