STATE OF CALIFORNIA GRAY DAVIS, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

October 14, 2003 Agenda ID #2881

Ratesetting

TO: PARTIES OF RECORD IN APPLICATION 02-02-012

This is the proposed decision of Administrative Law Judge (ALJ) DeBerry, previously designated as the principal hearing officer in this proceeding. It will not appear on the Commission's agenda for at least 30 days after the date it is mailed. This matter was categorized as ratesetting and is subject to Pub. Util. Code § 1701.3(c). Pursuant to Resolution ALJ-180, a Ratesetting Deliberative Meeting to consider this matter may be held upon the request of any Commissioner. If that occurs, the Commission will prepare and mail an agenda for the Ratesetting Deliberative Meeting 10 days before hand, and will advise the parties of this fact, and of the related ex parte communications prohibition period.

The Commission may act at the regular meeting, or it may postpone action until later. If action is postponed, the Commission will announce whether and when there will be a further prohibition on communications.

When the Commission acts on the proposed decision, it may adopt all or part of it as written, amend or modify it, or set it aside and prepare its own decision. Only when the Commission acts does the decision become binding on the parties.

Parties to the proceeding may file comments on the proposed decision as provided in Article 19 of the Commission's "Rules of Practice and Procedure." These rules are accessible on the Commission's website at http://www.cpuc.ca.gov. Pursuant to Rule 77.3 opening comments shall not exceed 15 pages. Finally, comments must be served separately on the ALJ and the assigned Commissioner, and for that purpose I suggest hand delivery, overnight mail, or other expeditious method of service.

/s/ Angela K. Minkin

Angela K. Minkin, Chief

Administrative Law Judge

ANG:avs

ALJ/BMD/avs DRAFT Agenda ID #2881

Ratesetting

Decision PROPOSED DECISION OF ALJ DeBERRY (Mailed 10/14/2003)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

In the Matter of the Application of Southwest Gas Corporation for Authority to Increase Rates in San Bernardino, Placer, El Dorado, and Nevada Counties, California.

Application 02-02-012

(Filed February 13, 2002)

OPINION REGARDING PROPOSED
GENERAL RATE INCREASE

TABLE OF CONTENTS

Title Pages

OPINION REGARDING PROPOSED GENERAL RATE INCREASES 2 2

1. Summary 2 2

2. Procedural Background 3 3

2.1. The General Rate Case Application 3 3

2.2. Public Participation Hearings 5 5

3. Burden of Proof 6 6

3.1. Discussion 7 7

4. Revenues and Expenses 8 8

4.1. Revenues 8 8

4.1.1. Discounted Special Contracts 10 10

4.1.2. Interstate Pipeline Demand Charges 11 11

4.2. Discussion 11 11

4.2.1. Balancing Account 12 12

4.2.2. Gas Costs and Other Revenues 13 13

5. Expenses 13 13

5.1. Expense Forecasting 13 13

5.1.1. Discussion 15 15

5.2. Labor Loading (pensions, benefits, and payroll taxes) 18 18

5.3. Four-Factor Cost Allocation 19 19

5.4. Labor and Non-Labor Escalation 19 19

5.5. Operating and Maintenance Expenses (Southern and
Northern California Divisions) 20 20

5.5.1. Gas Distribution Expenses (Southern California) 20 20

5.6. Account 813 Other Gas Supply Expenses
(Southern and Northern California) 22 22

5.7. Account 881 Rents (Southern and Northern California) 22 22

5.8. Gas Distribution Expenses except Gas Supply and
Rents Expenses (Northern California) 22 22

5.9. Customer Accounts Expenses - Accounts 901, 902, 903,
and 905 (Southern California) 24 24

5.9.1. Discussion 25 25

5.9.2. Customer Accounts Expenses, Excluding Account 902, Meter Reading, and Account 904, Uncollectibles (Northern California) 25 25

5.9.3. Account 902 - Meter Reading 26 26

5.9.4. Account 904 - Uncollectible Expense 26 26

5.9.5. Customer Service and Information Expenses (Accounts 908 and 909) 27 27

5.10. Sales Expenses (Accounts 912 and 913) 28 28

5.11. Administrative and General Expenses - System Wide 28 28

5.11.1. Account 920 A&G Salaries 29 29

5.11.2. Account 921 - Office Supplies and Expenses 30 30

5.11.3. Account 922 - A&G Express Transferred to Capital 31 31

Title Pages

5.11.4. Account 923 - Outside Services 31 31

5.11.5. Account 924 Property Insurance 31 31

5.12. Account 925 Injuries and Damages, Liability
Insurance and Workers' Compensation 32 32

5.12.1. Account 926 - Pensions and Benefits Expenses 34 34

5.12.2. PBOPs 34 34

5.13. Discussion 36 36

5.13.1. Pensions and Benefits-Regulatory Adjustments 38 38

5.13.2. Miscellaneous Benefits 39 39

5.13.3. Account 930.1 - Safety Advertising 40 40

5.13.4. Account 930.2 - Miscellaneous, Deferred Compensation Directors 40 40

5.13.5. 931 Rents Expense 41 41

5.13.6. Account 935- Maintenance of General Plant 42 42

6. A&G Direct Expenses 42 42

6.1. Southern California Division 42 42

6.1.1. Account 923 - Outside Services 42 42

6.1.2. Account 925- Injuries and Damages 43 43

6.1.3. Account 928 - Regulatory Commission Expense 43 43

6.1.4. Account 930.1 - Safety Education 43 43

6.1.5. Account 935 - Maintenance of General Plant 44 44

6.2. Northern California Division 44 44

6.2.1. Account 923 - Outside Services 44 44

6.2.2. Account 925 - Injuries and Damages 44 44

6.2.3. Account 928 - Regulatory Commission Expenses 44 44

6.2.4. Account 930 - Miscellaneous General Expenses 45 45

6.2.5. Account 935 - Maintenance of General Plant 45 45

7. Rate Base 45 45

7.1. Distribution Plant-Pipeline Replacement Project 45 45

7.2. Background 46 46

7.3. Discussion 48 48

7.4. Pipeline Replacement Program (Northern California) 51 51

7.5. Working Capital 52 52

7.5.1. Materials and Supplies 52 52

7.5.2. Working Cash 53 53

7.6. General Plant 54 54

7.7. Discussion 55 55

7.8. Contract Escalation 56 56

7.9. Truckee Operations Center 56 56

8. Depreciation and Depreciation Reserve 57 57

9. Taxes 57 57

10. Cost of Capital 58 58

10.1. Return on Equity (ROE) and Capital Structure 58 58

10.2. Discussion 59 59

11. Automatic Trigger Mechanism 62 62

Title Pages

12. Attrition 63 63

13. Gas Procurement Costs 64 64

13.1. Discussion 68 68

14. Rate Design 75 75

14.1. Implementing the Rate Increase and Amortizing the RRSMA 76 76

15. Comments on Proposed Decision 77 77

16. Assignment of Proceeding 78 78

Findings of Fact 78 78

Conclusions of Law 89 89

ORDER 91 91

APPENDIX A Operating Expenses

APPENDIX B Southern California Gas Pipeline Replacement Program

APPENDIX C Results of Operation - Southern California

APPENDIX D Results of Operation - Northern California

OPINION REGARDING PROPOSED
GENERAL RATE INCREASES

1. Summary

This decision adopts 2003 general rate increases of approximately $3.8 million each for Southwest Gas Corporation's Southern and Northern California Divisions. In order to minimize the impact on rates, these revenue requirement increases will be phased in during 2003, 2004, 2005 and 2006. As a result, 80% of the increase will be included in rates for 2003; 10% in 2004; 5% in 2005 and 5% in 2006. The phase-in of these increases recognizes the current economic climate, and the ability of customers to bear both these increases and potential increases in the cost of gas.

The total increases in revenue requirements represent an increase of approximately 9.6 % over base rates, and 4.6% over total operating revenue for Southern California, and 43.2 % over base rates, and 17.9% over total operating revenue for Northern California. The adopted increases represent approximately 66% of Southwest's requested increase in Southern California, and 86% of the requested increase in Northern California.¹ This decision also provides for attrition increases in Southern and Northern California in 2004, 2005 and 2006, that protect against labor and non-labor inflation, and inclusion of the Truckee Operational Center in Southwest's Northern California 2004 attrition year revenue requirements. Southwest is also authorized to amortize amounts currently recorded in the Revenue Recovery Shortfall Memorandum Account in rates for 2003 and 2004. In addition, this decision adopts a revenue balancing account that protects ratepayers against over-collections, and Southwest against under-collections due to differences between forecasted sales and actual sales.

These rate increases are the first General Rate Increases authorized for Southwest since its last General Rate Case in 1995, and are a result of increasing costs for both labor and non-labor expenses, and greater plant investment, that have occurred during the last eight years. The adopted revenue requirements are based on the use of a 2003 test year, and an overall rate of return of 9.17% on Southwest's rate base investment. The adopted revenue requirements provide for an accelerated pipeline replacement program in Southern California to reduce pipeline leak rates and increase safety. As explained in our opinion, we have not adopted recommendations by other parties for a refund of postretirement benefits other than pensions, nor have we adopted a refund of gas purchase costs that occurred in winter 2000-2001. Finally, we defer certain issues regarding other investments, and the future of the trust account for funding future retiree's benefits to Southwest's next general rate case.

¹ During the proceeding, Southwest reduced its requested revenue requirement increases from $8.4 to $5.7 million in Southern California, and from $5.5 million to $4.4 million in Northern California.