XII. Employee Total Compensation
In compliance with prior decisions, SoCalGas and SDG&E prepared a total compensation study with the concurrent participation of ORA.49 The study determined that the employee salaries for both companies were within a 2.8% range for SoCalGas and a 0.5% range for SDG&E of the studies' "market prices" for the positions reviewed.50 The record in this proceeding does not indicate ORA's specific degree of participation, but no one including ORA objected to the process or the study's results. We will rely on the study for the purposes of adopting labor expenses for Test Year 2004 subject to the other adjustments elsewhere in this decision for the number of employees found to be reasonable for the test year.
SoCalGas and SDG&E compensate many of their employees with a combination of "base salary" and "incentive" components. Depending on the position, the incentives may be an annual or a long-term incentive. In addition, employees receive various other medical benefits and pension benefits discussed elsewhere in this decision. ORA and other parties, including TURN and UCAN through their common consultant, as well as FEA, UWUA and Local 483 raised other specific objections about the number of employees reflected in the SoCalGas and SDG&E test year requests. Those issues are resolved in the discussion of the appropriate accounts or capital costs and also by the adoption of the True Labor Cost Balancing Account (TLCBA), below.
ORA raised an objection to the incentive component of employee compensation. For all management/Supervisor full-time positions and senior executives, the employee's compensation has an incentive component that SoCalGas and SDG&E included in the test year forecast. For SoCalGas, there are 629 positions in the program out of a total 6,466 total employees and 363 out of 3,365 for SDG&E, which are about 10% of the workforce. Implicit in this forecast method is that over and under-performances would balance and actual total payments would reflect the total of all target incentives included in rates. There is a further assumption for estimating labor costs by account that all employees would earn their individual "target" incentive. By illustration, if $100,000 were found to be the market salary based on the study, an illustrative eligible employee could receive $80,000 as a "base" and the $20,000 balance in the "target" incentive. SoCalGas and SDG&E include the full market salary in the test year estimates as combined base and incentive. Based on actual performance, actual individual employees could earn more or less than the target. ORA proposed a disallowance of 50% of all incentive allowances forecast for the test year. The very limited testimony51 in support of this disallowance relied on the application of a disallowance adopted in D.00-02-046 for PG&E, which in turn was previously adopted in D.86-12-095.52
ORA prevailed in the PG&E cases where "incentives" were included for senior executives. The unique circumstances in PG&E's instance beginning in the mid 1980s have not been shown by ORA to apply to SoCalGas and SDG&E in 2001, the study period. There was no persuasive linkage offered by ORA of the PG&E case to the ones before us now. SDG&E has used an incentive component in employee compensation since 1988 and SoCalGas has had a program for all non-represented employees since 1997, which follows from the Sempra merger. We find the two instances, for SoCalGas and SDG&E, to be distinguishable from past PG&E applications. PG&E was proposing to recover expenses assigned to a few executives, whereas SoCalGas and SDG&E have a wider program affecting all manager/supervisor employees.
On cross-examination, the ORA witness testified53 that in the hypothetical as used above, she would not object to a $100,000 salary that was based on the study if it were all "base" pay. But she would recommend a 50% disallowance ($10,000 of $20,000) of any "incentive" component of the same otherwise fair market salary. The disallowance was characterized by ORA as a "policy" recommendation, consistent with ORA's position in the PG&E proceeding. We will not adopt this adjustment because ORA has not shown that conditions in the labor market or the behavior of SoCalGas and SDG&E adequately mimic the conditions that applied to PG&E.
The unrefuted testimony is that SoCalGas and SDG&E and ORA collaborated on a salary study to determine fair market salaries in the service territories. It is not reasonable to then disallow a portion of the fair market salary simply because SoCalGas and SDG&E use an incentive mechanism within that fair market salary range. No testimony was offered to suggest that SoCalGas and SDG&E unfairly evaluate and overpay employees or withhold earned incentives. We have no record to disallow the usage of an incentive component to the total compensation as long as that total compensation is reasonable.
In D.97-07-054,54 a performance-based ratemaking decision for SoCalGas, the Commission made adjustments where it found the total executive compensation was significantly above market,55 while declining to interfere with the "mix" of compensation components: "We concur with (SoCalGas) that as long as its total compensation levels are appropriate we will not dictate how (SoCalGas) distributes compensation among various types of employment benefits." In that case, rejecting recovery of stock options as was proposed by TURN, would have put the compensation package unfairly below market.
Other testimony and cross-examination in this proceeding showed that parties were concerned that the test year estimates assumed all positions were fully paid at "target" and all positions were presumed to be filled, an unlikely dual occurrence leading to an excessive test year expense allowance in rates. The balancing account for labor costs, discussed below, addresses this concern by ensuring that SoCalGas and SDG&E only collect in rates the actual costs of labor as paid to employees.
49 Hewitt Associates. See ORA references in Ex. 302, p. 18-1. See also Appendix I to SoCalGas Ex. 12 and SDG&E Ex. 34 for the respective November 22, 2002 Final Report by Hewitt Associates.
50 Study, p. 3, in Ex. 12 and Ex. 34.
51 Chapter 14 in ORA Ex. 301 and Ex. 302 for SoCalGas and SDG&E, respectively.
52 D.95-12-055, 63 CPUC 2d 570, 592 and D.86-12-095, 23 CPUC 2d 149, 187.
53 Transcript Volume 22, November 7, 2003, p. 2002, line 5 to p. 2003, line 9.
54 1997 Cal. PUC LEXIS 751; 179 P.U.R.4th 237.
55 Conclusion of Law 30.
