XI. Escalation

There are three primary escalation factors for the test year: labor, non-labor, and capital additions. Only ORA and SoCalGas and SDG&E address these items in testimony and briefs.

A. Labor

ORA's labor escalation forecasts are based on Global Insight's First Quarter, 2003 forecast of Average Hourly Earnings for workers in the Electric, Gas, and Sanitary Services sectors of the U.S. economy (AHE49NS). SDG&E used an earlier First Quarter 2002 forecast. SoCalGas used a different Global

Insight forecast, UCIS, instead of the AHE49NS survey and ORA used the same source too, but a more recent forecast. SoCalGas and SDG&E argued that their forecasts for Test Year 2004 more closely reflect the actual rate of wage rate changes experienced in 2002 and 2003 and should be adopted ahead of ORA's more recent data. ORA only argued that its data is more recent. We agree with SoCalGas and SDG&E that the forecasts must be relevant to the expected outcome; considering the recent trends in their own labor costs is a valid tool to use in conjunction with the surveys. SoCalGas and SDG&E have the ability to affect their labor costs in contract negotiations and by either filling or leaving positions vacant. We have adopted the agreed upon litigation positions.

We are not unaware that a party could subjectively advocate the selection based upon outcome. SoCalGas and SDG&E argued in the next section that the more recent non-labor estimate should be used because it is more recent; but they argue the older labor escalations are a more reasonable fit.

B. Non-Labor

SoCalGas and SDG&E in the opening litigation brief in one sentence defer to ORA's "more recent data." ORA provided a more complete argument, consistent with their use of more recent labor escalations. ORA concurred with SoCalGas to use a new index (JGTOTALMS), which is a UCIS constructed index whose use was adopted by the Commission in D.98-01-014, in SoCalGas' PBR mechanism. SDG&E used the same index for its gas non-labor escalation, which was also used for its PBR, also in D.98-01-014. For the electric non-labor escalation, SDG&E used five sub indices from Global Insight's UCIS. SDG&E then abandoned this position in its opening litigation brief (p. 305). For SDG&E, ORA's more recent data yields a higher 2004 escalation rate for gas and electric, but a lower rate for SoCalGas. Consistency should be our goal, and here both applicants and ORA support the more recent non-labor forecast using ORA's data. We adopt the agreed upon non-labor escalation rates.

C. Capital Projects Escalation

SDG&E and SoCalGas used the Handy-Whitman construction cost indexes for the Pacific region to compare capital additions across years and to adjust capital additions in years before 2004 to 2004 dollars. ORA agreed with the use of these indices but argued in its brief to use a more recent First Quarter 2003 survey. For the two non-labor indices, the 2002 survey results in a lower rate than the first Quarter 2003. We will adopt the First Quarter 2003-based escalation rates. Absent other arguments, we favor the most recent forecast over older data.

In adjusting the SoCalGas and SDG&E spreadsheets to prepare this decision, we discovered that the escalation rates as argued by SoCalGas and SDG&E were not the rates used in preparing the end-of-litigation revenue requirements. We correct this error and use the rates as litigated and adopted. There is a difference between the applicants briefs and the comparison exhibit. We rely on the applicants' worksheets for the agreed upon escalation rates.