VII. Escalation and Attrition Advice Letter Procedure

The most recent memorandum entitled, "Estimates of Non-labor and Wage Escalation Rates" as described in D.04-06-018, shall be used for Escalation Years 1 and 2 rate increase requests and shall be sought by Tier 1 advice letter no later than 45 days prior to first day of the escalation year. The advice letter filing shall include all calculations and documentation necessary to support the requested rate change. The requested rate increase shall be subject to the pro forma earnings test, as specified in D.04-06-018. Revenue requirement amounts otherwise subject to rate recovery, e.g., through balancing or memorandum accounts, shall not be subject to escalation.

All rate base items, including capital additions and depreciation, shall not be escalated but rather shall be subject to two test years and an attrition year, consistent with D.04-06-018. If the Escalation Year and Attrition Year advice letters are in compliance with this decision, GO 96-B, and other requirements, the advice letter shall be effective on the first day of the escalation or attrition year, consistent with the procedures set forth in GO 96-B.

Utilize the following methods for preparing escalation year requests:¹⁶

1. Estimate escalation year labor expenses by the most recent labor inflation factors as published by the DRA.

2. Estimate non-labor escalation year expenses, excluding water production related expenses, by the most recent composite non-labor 60%/compensation per hour 40% inflation factors published by DRA.

3. Estimate escalation year water production related expenses based on escalation year sales.

4. Adjust for all non-recurring and significant expense items prior to escalation. A significant expense is equal to or greater than 1% of test year gross revenues.

5. Expense items subject to recovery via offset accounts, e.g., balancing accounts, shall not be escalated.

6. Estimate escalation year expenses not specifically addressed in DRA's published inflation factors, (such as insurance) based on CPI-U for most recently available 12 months, as provided in D.04-06-018.

7. Escalation year expenses may also be increased by the most recent five-year average customer growth or other growth adopted by the Commission.

8. For the first escalation year, estimate customers by adding the five-year average change in customers by customer class or other growth adopted by the Commission to the test year customers. For the second escalation year, estimate customers by adding the five-year average change in customers by customer class or other growth adopted by the Commission to the first escalation year customers.

9. Estimate sales for the escalation years for the residential, multifamily, and business classes by multiplying the number of customers for each escalation year by the test year sales per customer. Use the test year sales for all other customer classes for both escalation years.

10. Forecast sales revenues for the escalation years based on each year's forecast of sales and customers. Other revenues will be estimated using a five-year average of recorded other revenue.

Class A Water Utilities

Rate Case Plan

Attachment 1 of 2

¹⁶ In each water utility's escalation year advice letter filing, the most recent DRA inflation factors will be used.