7. Productivity Factor
An X-factor reduction to the post-test year rate adjustment has been included in the past ratemaking for SoCalGas and SDG&E as an incentive for management to improve corporate performance over time. The companies describe it as a "mandated" offset to inflation and customer growth.31 An additional "stretch" factor in prior ratesetting has provided a boost to the incentive by pushing SoCalGas and SDG&E to outperform the industry's X-factor by some increment.
a. X-Factor
Ex. 153 and 154 demonstrate the survey results that derive a Total Factor Productivity index for the gas and electric distribution companies studied, and the 1992-2002 average annual growth rates, as determined by these studies, are 1.16% for gas and 0.47% for electric distribution operations.32 An X-factor reduces the increase otherwise made to rates to reflect changes in productivity.
No party opposes the econometric derivation of the 1.16% and 0.47% gas and electric X-factors, although they did not always explicitly support their inclusion. ORA replicated the survey results and has determined that the productivity rates are reasonable if the Commission adopts the MPC method proposed by SoCalGas and SDG&E.33 In order to adopt the settlements, we understand the necessity to forego some of the litigated positions in order to reach a reasonable compromise. Although we do not adopt an X-factor at this time, we will order SoCalGas and SDG&E to include the necessary studies for an X-factor as part of the next GRC.
b. Stretch Factor
From 1998 through 2002 SoCalGas had stretch factors of 0.6% increasing to 1.0% in 2002 and 200334 and SDG&E had stretch factors of 0.55% adopted in D.99-05-030.35 In this proceeding, SoCalGas and SDG&E oppose inclusion of any stretch factors. Essentially SoCalGas and SDG&E argue that after the prior years' obligations to achieve the stretch factors they have captured all efficiencies to meet the requirement. The companies state that after the merger to form the holding company they were required to pass through the merger's savings to customers. Merger savings are avoided costs that were already captured in the development of the test year. These savings are not relevant to the improvement of efficiency of the ongoing operations of the companies.
Inherent in the use of any X-factor is the collective effect of the differences in the population of the index and the target(s) SoCalGas and SDG&E. A stretch factor removes some element of the worse-performers' impact on the index; otherwise we target average performance rather than best performance. If the productivity study had removed the worse performers, or weighted the better performers, or could more specifically identify the companies most like SoCalGas and SDG&E, then the study results alone could be a reasonable target. It was clear on the record that the studies did not exclude the worst or find the best matches; they relied on the largest population with sufficient data. TURN describes the SoCalGas and SDG&E proposal as one that would "reward mediocrity by setting productivity on an average basis with no stretch factor and to ignore the actual performance of the utilities that are being regulated."36
c. Conclusion
As discussed above, we do not adopt the proposed X-factors for SoCalGas and SDG&E, and for SDG&E nor will we adopt a stretch factor for SoCalGas and SDG&E. We recognize that the adoption of a minimum floor and maximum ceiling displace the use of a productivity factor and a stretch factor and find it to be a reasonable compromise of their litigated positions.
31 Ex. 151, p. JVL-22, line 1.
32 See Ex. 153, Table 2 X factor Calibration for Southern California Gas Company - Productivity Results: Gas Distribution, and Ex. 154, Table 2, X factor Calibration for San Diego Gas & Electric Company - Productivity Results: Power Distribution.
33 Ex. 333, p. 3-1.
34 Ex. 151, p. JVL-22, lines 8 & 9.
35 Ex. 152, p. JVL-17, line 8.
36 Ex. 561, p. 13.
