7. Escalation Rates
Escalation rates are necessary to derive a forecast for the test year that partly relies on historical data and, pursuant to the rate case plan, to adjust the test year for the subsequent two escalation years. The escalated forecasts can include both operating expenses and rate base. (See D.04-06-018, pp. 10-15.) The rate case plan determined that a standard was necessary, and it adopted the use of "Estimates of Non-Labor and Wage Escalation Rates" and the "Summary of Compensation per Hour," both published by ORA. Further, any item not covered by these factors is to be escalated using the most recent 12-month "US Cities CPI-U" also published by ORA. Today's decision, the first for Apple Valley under the new rate case plan, will adhere to the plan's requirements unless a party shows good cause for a deviation.
In its application, Apple Valley used several factors for its estimates. For labor, it used the actual cost-of-living-adjustment in effect for 2005 to adjust 2004 recorded wages. It then used a forecast of a further 3% increase for 2006, the test year.7 ORA proposed that in 2006 we adopt a 2.2% labor escalation factor, consistent with the March 31, 2005 estimates published by ORA.8 ORA forecast a 0.0% change for 2006 non-labor expenses. For 2007, ORA forecast a labor escalation of 1.7% and 0.0% for non-labor. ORA proposed, and we will also adopt where appropriate, a 2.2% CPI-U escalation rate for 2006.9 We will use the ORA rates of escalation - for labor, no-labor and rate base - as described in the rate case plan. There are some unique exceptions, including pension and benefits expenses, where we will consider the arguments on escalation rates raised by ORA. Otherwise, we adopt labor escalation rates of 2.2% and 1.7% for 2006 and 2007, respectively; non-labor escalation of zero for both 2006 and 2007; and CPI-U rates of 2.2% and 1.7% for 2006 and 2007. Apple Valley and ORA used these rates in the Joint Comparison Exhibit.10
Not all test year estimates are trends of recorded costs that require escalation to the test year. For example, in this proceeding, the adopted insurance expense is based on a specific forecast rather than a trend. We have adopted test year estimates that are either the result of trended and escalated recorded costs, or specific estimates for the test year, based upon the most persuasive evidence presented by either party.
7 Ex. 1, p. 20.
8 Ex. ORA-1, pp. 3-2 & 3-3, and 4-1.
9 See for example, Main Office Insurance at ORA Ex-1, p. 4-7.
10 Ex. 20, p. 2, item 2.
