STATE OF CALIFORNIA ARNOLD SCHWARZENEGGER, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

January 16, 2004 Alternate to Agenda ID #2881

Ratesetting

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

Enclosed is the Alternate Proposed Decision of Commissioner Lynch to the Proposed Decision of Administrative Law Judge (ALJ) DeBerry.

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

Public Utilities Code Section 311(e) requires that an alternate to a draft decision be served on all parties, and be subject to public review and comment prior to a vote of the Commission. Rule 77.6(d) provides that comments on the alternate draft decision be filed at least seven days before the Commission meeting.

Comments on the alternate decision must be filed and served January 28, 2004. Reply comments are due February 4, 2004.

Pursuant to Rule 77.3 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. Please also provide an electronic copy of the comments and reply comments to Trina Horner at tah@cpuc.ca.gov.

ANG:epg

Attachment

COM/LYN/epg ALTERNATE DRAFT Agenda ID # ______

Alt. to Agenda ID #2881

Ratesetting

Decision ALTERNATE PROPOSED DECISION OF COMMISIONER LYNCH (Mailed 1/16/2004)

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 22

1. Summary 22

2. Procedural Background 33

2.1. The General Rate Case Application 33

2.2. Public Participation Hearings 55

3. Burden of Proof 66

3.1. Discussion 77

4. Revenues and Expenses 88

4.1. Revenues 88

4.1.1. Discounted Special Contracts 1010

4.1.2. Interstate Pipeline Demand Charges 1010

4.2. Discussion 1212

4.2.1. Balancing Account 1212

4.2.2. Gas Costs and Other Revenues 1313

5. Expenses 1313

5.1. Expense Forecasting 1313

5.1.1. Discussion 1515

5.2. Labor Loading (pensions, benefits, and payroll taxes) 1919

5.3. Four-Factor Cost Allocation 1919

5.4. Labor and Non-Labor Escalation 2020

5.5. Operating and Maintenance Expenses (Southern and Northern California Divisions) 2020

5.5.1. Gas Distribution Expenses (Southern California) 2020

5.6. Account 813 Other Gas Supply Expenses (Southern and Northern California) 2222

5.7. Account 881 Rents (Southern and Northern California) 2222

5.8. Gas Distribution Expenses except Gas Supply and Rents Expenses (Northern California) 2323

5.9. Customer Accounts Expenses - Accounts 901, 902, 903, and 905 (Southern California) 2424

5.9.1. Discussion 2525

5.9.2. Customer Accounts Expenses, Excluding Account 902, Meter Reading, and Account 904, Uncollectibles (Northern California) 2626

5.9.3. Account 902 - Meter Reading 2626

5.9.4. Account 904 - Uncollectible Expense 2727

5.9.5. Customer Service and Information Expenses (Accounts 908 and 909) 2828

5.9.6. Implementation of the Public Purpose Program Surcharge Adjustments Adopted in D.03-03-007 2828

5.10. Sales Expenses (Accounts 912 and 913) 2929

5.11. Administrative and General Expenses - System Wide 2929

5.11.1. Account 920 A&G Salaries 3131

5.11.2. Account 921 - Office Supplies and Expenses 3232

5.11.3. Account 922 - A&G Express Transferred to Capital 3232

5.11.4. Account 923 - Outside Services 3333

5.11.5. Account 924 Property Insurance 3333

5.12. Account 925 Injuries and Damages, Liability Insurance and Workers' Compensation 3434

5.12.1. Account 926 - Pensions and Benefits Expenses 3535

5.12.2. PBOPs 3636

5.13. Discussion 3838

5.13.1. Pensions and Benefits-Regulatory Adjustments 4040

5.13.2. Miscellaneous Benefits 4141

5.13.3. Account 930.1 - Safety Advertising 4141

5.13.4. Account 930.2 - Miscellaneous, Deferred Compensation Directors 4242

5.13.5. 931 Rents Expense 4343

5.13.6. Account 935- Maintenance of General Plant 4343

6. A&G Direct Expenses 4444

6.1. Southern California Division 4444

6.1.1. Account 923 - Outside Services 4444

6.1.2. Account 925- Injuries and Damages 4444

6.1.3. Account 928 - Regulatory Commission Expense 4545

6.1.4. Account 930.1 - Safety Education 4545

6.1.5. Account 935 - Maintenance of General Plant 4545

6.2. Northern California Division 4646

6.2.1. Account 923 - Outside Services 4646

6.2.2. Account 925 - Injuries and Damages 4646

6.2.3. Account 928 - Regulatory Commission Expenses 4646

6.2.4. Account 930 - Miscellaneous General Expenses 4646

6.2.5. Account 935 - Maintenance of General Plant 4747

7. Rate Base 4747

7.1. 2002 Plant Additions 4747

7.2. Distribution Plant-Pipeline Replacement Project 4848

7.3. Background 4848

7.4. Discussion 5252

7.5. Pipeline Replacement Program (Northern California) 5454

7.6. Working Capital 5555

7.6.1. Materials and Supplies 5555

7.6.2. Working Cash 5555

7.7. General Plant 5757

7.8. Discussion 5858

7.9. Contract Escalation 5959

7.10. Truckee Operations Center 5959

8. Depreciation and Depreciation Reserve 6060

9. Taxes 6060

10. Cost of Capital 6060

10.1. Return on Equity (ROE) and Capital Structure 6161

10.2. Discussion 6262

11. Automatic Trigger Mechanism 6565

12. Attrition 6666

13. Gas Procurement Costs 6767

14. Gas Cost Incentive Mechanism (GCIM) 7777

15. Rate Design 7777

15.1. Implementing the Rate Increase and Amortizing the RRSMA 7979

16. Comments on Proposed Decision 8080

17. Assignment of Proceeding 8181

Findings of Fact 8181

Conclusions of Law 9292

O R D E R 9393

OPINION REGARDING PROPOSED
GENERAL RATE INCREASES

1. Summary

This decision adopts 2003 general rate increases of approximately $1.73 million and $3.47 million for Southwest Gas Corporation's Southern and Northern California Divisions respectively. The revenue requirement increase in the Northern California Division 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 adopted increases represent approximately 30% of Southwest's requested increase in Southern California, and 79% 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 8.93% on Southwest's rate base investment. As explained in our opinion, we have not adopted recommendations by other parties for a refund of postretirement benefits other than pensions. We adopt a refund of gas purchase costs that occurred in winter 2000-2001 of $12.18 million. 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.