XVII. SoCalGas Plant Additions

SoCalGas asked for an increase in rate base as a result of capital additions installed since the last test year as well as forecast to occur in the test year itself. It explained its request was influenced by such factors as the aging of pipeline already in service, retrofitting and inspecting transmission pipelines, new business requiring more capacity, and necessary relocation of facilities.⁹⁸ The testimony identified what were called "key factors" or "drivers" that supported the request. In addition, there were workpapers and data responses to the parties' detailed inquiries that are not always included in the record as exhibits but served to inform the parties.

A. Gas Transmission

ORA proposed a Test Year 2004 estimate for weighted average plant in service of $6.890 billion for SoCalGas, which is $166.42 million less than the company's end-of-litigation position, $7.057 billion. We will consider in turn the differences proposed by ORA and others. Apart from those specific adjustments found to be a more likely estimate for Test Year 2004, we otherwise adopt the SoCalGas end-of-litigation position.

1. Gas Transmission Retrofit - Pipeline Integrity

ORA objected to one component of the $39,487,000 estimated capital cost for Transmission Pipeline replacements in Account 302. ORA proposed a lower

estimate to retrofit a pipeline segment in 2004. Included in this retrofit is the use of "pigs" that travel through and inspect the pipelines. First, ORA believed that a proposed retrofitting of 110 miles for $32,820,000 (approximately $300,000 per mile⁹⁹) was overstated. SoCalGas used an estimated $1 million for each five miles plus a valve replacement at $90,000 each. ORA stated that it used recorded data for earlier retrofitting on SoCalGas Line 3007, derives an estimated cost of $218,000 per mile.¹⁰⁰

SoCalGas disputed the ORA estimate as incomplete and inaccurate. It claimed ORA overstated the length of the test project (only 4.2 miles not five) and understated the costs ($1 million instead of $1,034,375), which raised the cost to $246,000 per mile. A valve is needed every five miles for $18,000/mile ($90,000/five miles). SoCalGas argued that ORA omitted the $30,000 cost of a verification dig every mile and $6,000/mile for pig launcher/receiver facilities¹⁰¹ that were already in-place for Line 3007. Thus SoCalGas had a final estimate of $300,000 per mile ($246,000 + $18,000 + $30,000 + $6,000).¹⁰² ORA did not challenge this in its reply. TURN supported the ORA adjustment (but did not offer testimony itself) but we find ORA's calculation and argument to be lacking credibility. In its opening litigation brief, TURN argued the cross-examination of SoCalGas' witness by TURN supported the possibility of cheaper non-pigging options.¹⁰³ We did not find this convincing. SoCalGas provided sufficient convincing evidence to support its estimates for the pipeline integrity project. We will therefore adopt the $32,820,000 estimate for Test Year 2004.

TURN proposed a further adjustment in its brief where SoCalGas proposed $14.8 million in bulk projects, under $1 million.¹⁰⁴ The entire proposal is bootstrapped to one identified but delayed project, the Mountainview project. TURN and SoCalGas agree that the supporting workpapers relied on by TURN are not in the record, and thus we decline to consider this recommendation.

2. Laboratory Equipment - Budget Category 718

SoCalGas proposed to purchase (or has already purchased) an FTIR analyzer for $150,000 in 2003 and a new electron microscope for $250,000 in 2004.¹⁰⁵ ORA argued that historical two-year average purchases were much lower, only $267,303.¹⁰⁶ This is an example of where a trend, with dubious precision to the last detailed $303, is not a reasonable alternative to answering the question of whether or not SoCalGas needs a new FTIR analyzer and/or a new electron microscope. We will include the estimates but we will be watchful that SoCalGas buys an FTIR analyzer and an electron microscope at prices similar to those authorized by adopting this estimate.

As noted before, so many years have passed since the last fully litigated proceeding, we believe that this test year needs to be a real expression of actual expectations and not simply a device for SoCalGas or SDG&E to artificially increase the volume of dollars generated by the base margin charged in retail rates. We note that the Proposed Settlement adopts the SoCalGas estimate, without explanation and without any explicit agreement whether the equipment is needed or whether it will be bought and used.¹⁰⁷ Any failure to follow through on adopted expenditures or program changes will be directly relevant to the credibility of SoCalGas and SDG&E in subsequent proceedings when considering the reasonableness of their forecasts and professional judgments. Clearly, we could not expect SoCalGas and SDG&E to spend the exact dollars for the precise activity forecast; but we do expect that on the whole they will do what they forecast to do.

B. Gas Engineering

1. Capital - Software Development Budget Category 723

ORA agreed with the SoCalGas forecast of $750,000 but points out that rate base should be weighted based upon when an item enters service. The Test Year spreadsheet calculations cannot be adjusted to reflect the likely third or fourth quarter in-service date, so ORA pragmatically forces an adjustment to the amount, using $375,000 as the addition, to replicate the effect of the weighting process. In subsequent years, any remaining undepreciated or unamortized balance should be reflected in rate base for the full year. We adopt this reasonable fix around the spreadsheet limitation. Again, we expect SoCalGas to actually spend the money on this program.

C. Gas Distribution Operations - Capital Expenditures

1. Natural Gas Vehicle Project (Category 734)

TURN opposed the 2004 $3.824 million rate base addition for natural gas vehicle refueling stations. TURN argued that because SoCalGas did not include revenues from public access to the stations in the miscellaneous revenue forecast, the investments would not be cost effective and the addition should be denied.¹⁰⁸ SoCalGas argued that it only included mandatory program costs (relative to its own fleet) and there is no discretion as to whether the stations are otherwise cost effective. SoCalGas further asserted that revenues from outside sales are already captured, and cited the Natural Gas Vehicle Account (NGVA) in Section V, Sheet 11, of the Preliminary Statement in its tariffs as approved by the Commission.¹⁰⁹ We will not make any further adjustment and we will rely on the end-of-litigation spreadsheets to accurately reflect the inclusion of only mandatory programs.¹¹⁰ We adopt $3.824 million.

2. New Business & Pressure Betterment

The New Business and Pressure Betterment plant expenditures are costs of adding new residential, commercial and industrial meters to the pipeline system as well as reinforcement of the existing distribution network by extending or adding new pipelines or by "uprating" pipelines to a higher maximum allowable operating pressure. By using an historical trend of costs, ORA proposed an $8.7 million lower estimate,¹¹¹ which SoCalGas opposed. The two agreed on the customer growth rate, but ORA wanted to trend costs whereas SoCalGas argues it built a detailed cost estimate relying on hours of crew time, equipment, etc., to reach its estimate of $41.168 million.¹¹² This is another example where the Proposed Settlement adopts the company estimate without explanation. We will adopt the company estimate because it is not a mechanically derived trend; it attempts to rely on a detailed estimate and our preference is to utilize facts and reasonable assumptions over the mathematically simple.

3. Routine Main Replacement

SoCalGas seeks funding to replace 4,400 miles of pipelines installed prior to 1947. This pre-1947 pipeline is described as cathodically unprotected, i.e., it is subject to corrosion. SoCalGas and SDG&E have portrayed as a theme in these applications the issue of "aging infrastructure" and the need for significant funding to refurbish the physical utility systems. The intervenors have been skeptical, alluding to the companies' past failures in maintenance rather than aging infrastructure. This decision looks to whether SoCalGas (and elsewhere SDG&E) adequately justifies specific requests for maintenance and replacement, for both capital investments in rate base and in the appropriate expense categories.

SoCalGas cites three reasons for replacing mains: discretionary replacement when the main is perceived to be a safety hazard; maintenance costs in excess of the cost of replacement; and replacement done as part of a pipeline inventory management program.¹¹³ SoCalGas' expenditures over the three years 2000 - 2002 increased dramatically over 1999 levels. In its rebuttal showing, SoCalGas presents details on cost estimates; it provided detailed cost estimates supporting a rate $278,900 per mile compared to ORA's rate of $205,997. It also included information on the rates of leakage for pre and post-1947 pipelines.¹¹⁴

ORA reviewed the request and proposed a seven-year average, citing the recent large increases in forecast expenditures for 2003 and 2004. It pointed out the request is twice the average for this period. ORA also noted that the company does not have, or could not provide, data on the trend for replacement of pipelines by vintage. So it depends on whether we believe the assertion that the pipes are leaking more, which would support accelerated replacement, or whether we believe the long run trend is more reasonable. The difference is $2.888 million. We believe that SoCalGas is correct, old pipelines will leak at an increasing rate as they continue to age.

We will adopt the SoCalGas estimate, $26.818 million, and we expect it to replace the forecast pipeline mileage. This item was `settled' at the SoCalGas estimate without explanation or justification¹¹⁵ so we will impose the expectation that the mileage of replacements will occur at the rate SoCalGas proposed.

4. Routine Service Replacement

SoCalGas asserted that service connections to customers are replaced due to leaks because replacement is cheaper in this instance than repair. Four causes were described for service replacements, another area with sharp increases in test year 2004: replacing bare steel pipes; relocating curb meter sets in curb meter boxes in coastal areas that suffer from extreme corrosion; increased costs in permitting and paving and waste water management; and abandonment of services.

As with main replacement, ORA was concerned at the request's significant difference from the historical trend. Again, SoCalGas was able to be very specific - replacing a forecast of 58.7 miles - but was unable¹¹⁶ to give ORA historical mileages or costs because it lacked detailed operating records. This issue was also "settled" at SoCalGas' request. SoCalGas has made a more convincing and detailed showing to justify the forecast expenditures that are not refuted by a trend analysis. We will adopt SoCalGas' litigation request, and to ensure the money is used appropriately, we will require SoCalGas to keep accurate records, this time, to demonstrate that it in fact replaces some significant mileage of service connections in exchange for the $11.008 million included in rate base for Test Year 2004.

5. Freeway/Franchise Work

SoCalGas must move its facilities at the request of the California Department of Transportation (CalTrans) or local agencies (Franchises) when either of these two is making their own infrastructure changes. SoCalGas had stated there were four factors affecting its forecast: the known improvements to freeway and railroad systems; population increases and development in urban areas requiring new or up-graded infrastructure; funding available to governmental agencies for road widening and infrastructure improvements; and finally, increased permitting and paving costs due to more stringent requirements from city, county and state agencies.¹¹⁷ These have the appearance of being reasonable categories or criteria for forecasting test year expenses. ORA asked SoCalGas to identify projects or estimates attributed to these four factors that were included in its forecast. SoCalGas only provided data for known projects that total $6.767 million in 2004 compared to the request for $12.803 million.¹¹⁸ We note the Proposed Settlement uses $7.0 million, a virtual rounding to ORA's proposal. We note that the $6 million difference looks like unreasonable padding of the original estimate. SoCalGas was capable, and had the opportunity, of including any increased costs - its fourth factor - into the 2004 project estimates where we assume it had no incentive to "low-ball" those estimates. In this instance, ORA asked the right questions and SoCalGas lacked the right answers.

TURN provided the most compelling cross-examination on this issue, focusing on the likelihood of CalTrans experiencing significant budget reductions that affect SoCalGas related projects as readily as projects anywhere else. TURN showed that SoCalGas' witness maintained an unreasonable "optimism" about the 2004 funding for projects.¹¹⁹ TURN recommended an estimate of $5,884 million, based on an average of 1996-2002 data.

We will adopt the ORA estimate of $6.767 million. Although TURN's trend is lower, ORA's estimate is based on the likely identifiable projects for the test year.

6. Other Capital Replacements

ORA took exception to one particular activity, the rate of replacement for regulator stations. In Ex. 301,¹²⁰ ORA argued that SoCalGas had not justified a replacement program predicated on the age, over 35 years old, of replacing the 530 facilities (out of 2,000) exceeding this target age. ORA suggested that with maintenance they need not necessarily be replaced. ORA pointed out the five-year expenditure trend is not consistent with the request for $8.276 million in 2004. In its brief, ORA argued the rate of replacement based on age, using SoCalGas data would suggest replacing 28 regulator stations annually and that the SoCalGas request for 57 replacements in 2004 is inconsistent.¹²¹

We will adopt the ORA estimate for other capital replacements of $5.2 million for 2004. ORA has reasonably considered the details in SoCalGas work papers and looked to the trends as well, so it is not simply a lower number, but a reasonable estimate derived from critical analysis of the data.

7. Cathodic Protection

Cathodic protection is a process that impedes the corrosion of steel pipelines. SoCalGas sought a test year estimate of $8.586 million, for activities that include the installation on new steel pipelines, the completion of the installation of protection on existing distribution mains, and the replacement of some cathodic protection anode beds. SoCalGas argued that some of the anode beds have exceeded their functional life and need replacement,¹²² and this portion amounts to $2 million. ORA proposed the use of the 2001 actual expense as the forecast for 2003, which in turn leads to the 2004 estimate. SoCalGas argued this ignores other increases in costs since 2001.¹²³ SoCalGas also claimed that it replaced large areas that were easier to retrofit in 2001 and 2002 so the unit cost is lower in those years.

A consistent goal of this decision is to set expectations; what we expect the utility to do and what we expect ratepayers to pay in exchange. We adopt the SoCalGas request of $8.586 million, but we note that we expect SoCalGas to subsequently show in its next GRC that it performed the work on the scope and scale as requested for necessary cathodic protection installation and replacement.

8. Special Main Replacements

SoCalGas proposed an extensive replacement or abandonment of mainly older, pre-1931 installations based on an engineering survey for those facilities that are more susceptible to earthquake damage and are therefore more hazardous. One cause cited for the failure of older pipeline is that welding techniques were inferior and industry standard welder qualifications only were introduced around 1930.¹²⁴ Again, we learn more in rebuttal Exhibit 66 than we do from the original showing in Exhibit 3. ORA relied on a three-year average after determining the expenditures are outside of the seven-year trend; ORA also believed SoCalGas has not shown that the rate of deterioration has changed to warrant an accelerated rate of replacement.¹²⁵ SoCalGas specified eight projects that it completed in 2003 and forecast to complete in 2004, and even though this estimate exceeds ORA's trend we find it reasonable to include these specific estimates because the detailed information where SoCalGas has or will perform specific projects outweighs the use of a trend. We adopt SoCalGas' test year estimate of $10.371 million.

9. Measurement Equipment

Measurement equipment includes the costs of meters, regulators, and instruments to record either volume or pressure. These last items are Gas Energy Measurement Systems (GEMS) used for non-core (essentially large) customers.

Meters are the principal interface between the utility and the customer; it is vital to have accurate meters so that customers are fairly charged for their true consumption. Customers must also be safe. SoCalGas proposed to purchase new meters during the test year to meet the demand of new customers and to replace old meters that are unreliable or unsafe. A regulator is a necessary adjunct to the meter and SoCalGas asserts it installs a new one with a new meter and with meter "change-outs" (replacements). There are both "Little" and "Big" GEMS and non-core customers pay the original cost for the installation as a part of a Contribution In Aid of Construction (Contribution). This contributed plant is in rate base but SoCalGas does not earn a return on the cumulative balance. As contributed plant requires replacement, the company capitalizes the costs as they do for conventional plant additions.¹²⁶ Replacements financed by SoCalGas earn a return while in ratebase.

ORA used a seven-year average, which SoCalGas believes resulted in elimination of a portion of the meter replacement program costs and the related regulators, and GEM replacements. Using the agreed upon rate of new business (and therefore meter) growth SoCalGas says ORA would under fund new meters and regulators by 17,000 units. We adopt the SoCalGas estimate for new meter capital costs because it correctly provides for the expected new meters and regulators in 2004.

ORA disputed the replacement program for Rockwell and Tin meters,¹²⁷ which would amount to SoCalGas replacing 392,000 meters¹²⁸ more than the 2001 actual replacements and the GEM replacements. ORA disputed the need based upon the percentage of leaky meters and used a rate of 17.5% meters as leaky, compared a system average of 5% for other types of meters, and proposed a five-year allowance of 87,500 meters.¹²⁹ It is necessary to know which specific meters are leaking if the scope of the replacement program is based upon the rate of leaky meters in the total population. SoCalGas satisfied us that the rate of leakage with these meters is unacceptable and could be hazardous. ORA cannot predict which meters will leak. We agree with SoCalGas that the Rockwell and Tin meters should be promptly and systematically replaced and we adopt the SoCalGas capital cost estimates for the replacement program.

SoCalGas argued that when it is necessary to replace contributed plant that the cost should be capitalized and included in rate base. ORA argued¹³⁰ that only non-core customers should bear the costs of GEM replacements. The ORA recommendation to disallow recovery of the costs in base margin rates is technically incorrect; if the costs are to be borne solely by non-core customers, one option is that SoCalGas should still capitalize the costs and in the appropriate rate design process we could set rates so that only non-core customers paid the related rate impacts. We decline to do this in this proceeding.

Any specific cost allocation to gas customer classes belongs in the Biennial Cost Allocation Proceeding (BCAP) and we decline to preclude rate recovery. ORA argued that the tariffs¹³¹ require non-core customers to have the GEM type of equipment installed at their own cost. This is a contribution as discussed above. ORA would have these customers contribute the replacement GEMs as well, paying for plant beyond the original installation. A contribution method would again not be a disallowance; it would be a specific ratemaking tariff recommendation. This would ensure that specific customers bore only their own costs, if any. By treating them as further contributions ORA would exclude these costs from this proceeding. SoCalGas argued that the tariffs only consider the conditions to obtain initial service and do not address replacements. We do not adopt ORA's contribution interpretation and we have not required customers to directly pay for ongoing repairs and replacements of plant originally contributed under the existing tariff rules¹³² for SoCalGas. We adopt the SoCalGas capital cost estimate for the test year because it reflects the best estimate of its cost to provide service in the test year.

We adopt the total SoCalGas estimate for capital expenses of all measurement equipment, $28.147 million for Test Year 2004.¹³³

10. Support Labor

Support Labor includes labor and non-labor costs for the Regional Planning Office for construction design, field management and other related costs. ORA's adjustments were predicated on its own adjustments to Routine Main and Special Main Replacements, above and New Business. None of those adjustments were adopted so we adopt here the SoCalGas Test Year 2004 forecast of $38.8 million.

11. Software Application - Gas Maintenance &
Inspection

SoCalGas requested $5.522 million for test year 2004 to replace Distribution Operations Maintenance and Inspection systems with new technology to automate field order and data capture processes. The capital expenditures were justified as necessary for compliance with Federal Department of Transportation as well as Commission regulations. ORA's test year recommendation was adjusted to be consistent with its proposed reductions to Routine Main and Service work and the level of new business activities.¹³⁴ Because none of ORA's related adjustments are adopted, there is no adjustment to this expenditure. Because we agree with SoCalGas that the expenditures are necessary to comply with both the state and federal the regulations, we will adopt $5.522 million as the test year capital expenditure for gas maintenance and inspection software.

D. Information Technology Capital Expenditures

SoCalGas requested $52 million in information technology capital expenditures in 2004, and included previous expenditures of $37.6 million in 2002 and $35.8 million in 2003 to derive the total rate base additions for Test Year 2004.¹³⁵ The applicant used five witnesses and described 35 capital expenditure projects in detail, characterizing them as "backbone" or "infrastructure" projects that require continued maintenance, repair and up-grade. ORA and others, after they made their detailed investigations, objected to several of the SoCalGas capital expenditures forecast for 2004. Except as discussed below, we find that SoCalGas justified the additions as necessary to provide adequate and reliable service and the cost forecasts were reasonable.

1. Windows 2000

ORA proposed to disallow $1.1 million in 2004 for the conclusion of a Windows 2000 Active Directory Services Project, because it was to be completed within 2003. SoCalGas argued that it was true the project was completed in 2003 but not true that the $1.1 million would not be spent. SoCalGas did not enlighten us in its Briefs or in Ex. 9, that includes the expenditure for 2004 why and how a completed project still has an additional $1.1 million of costs. We will adopt the ORA adjustment to Test Year 2004 resulting in an allowance of $25.1 million instead of SoCalGas' $26.2 million.

E. Information Technology - Desktop and Laptop Computers

Both SoCalGas and SDG&E proposed a program to replace desktop and laptop computer equipment on a three-year systematic basis. In the testimony, they relied on external studies to bolster their estimates and they included in the estimates an average configuration (some equipment purchased would be either more basic or advanced depending upon user needs) and new operating systems (Windows).

TURN vigorously opposed the computer related forecasts in its opening litigation brief for SDG&E¹³⁶ and in particular the replacement cycle and cost estimates for personal computer replacements. In addition to the first two issues, there is a related question on the accounting treatment, whether to capitalize and then depreciate the costs, or to book the costs directly to expense each year. The computer issue is common to both companies and we will treat it here as a joint issue. TURN argued:

"1. The Commission should first address the computer refresh cycle, rejecting the proposed 3-year cycle in favor of the 5-year cycle proposed by TURN and UCAN, and consistent with the utility's depreciation showing. In the alternative, the refresh cycle should be no less than 4 years. Based on the adopted refresh cycle, the Commission should order SDG&E to adjust its 2004 computer replacement forecast accordingly. This will produce a reasonable forecast for the number of desktop and laptop computers that will need to be replaced in 2004.

"2. The Commission should next determine the reasonable cost per desktop and laptop computer. Multiplying those figures by the forecast for the number of computers described above will produce a reasonable computer replacement budget for 2004.

"3. Finally, the Commission must apply here the outcome on the `capitalization threshold' issue. If the Commission adopts TURN's proposal to reduce the SDG&E threshold to the current SoCalGas threshold of $500 or to the current Sempra corporate threshold of $1,000, all of the computer purchases would be capitalized rather than expensed. Appropriate modifications to the proposed SDG&E revenue requirement would need to be made to reflect this outcome." (TURN opening litigation brief - SDG&E, mimeo., p. 29.)

1. Replacement Cycle

The applicants' witness and TURN used independent references, Gartner Group reports,¹³⁷ to reach difference conclusions on both replacement cycle and reasonable computer configurations. Applicants took the most expensive interpretation to replace more frequently at the short-end of the recommended range (three years) while TURN stretched to the outer range (five years) and they again went high-low on configuration. Applicants also argued that software support for Windows operating systems, purchased with computers, have limited lives.¹³⁸ TURN argued that the Microsoft software support is maintained for systems that are used by SoCalGas and SDG&E for the five-year cycle it advocated.¹³⁹ While we agree with TURN that a longer cycle is in keeping with the recommendations of the industry expert reports in the record, TURN's five-year cycle is as extreme as the three-year cycle proposal; we want SoCalGas and SDG&E to stay sufficiently current in technology so that they are efficient and cost effective. We will adopt a four-year cycle because we believe that the three or five-year options are too aggressive (in opposite directions). We note the partial settlements compromised on a four-year cycle. One consistent concern throughout this case is that the adoption of a revenue requirement is not viewed as a "bucket of money" entirely at the discretion of the applicants' management to use differently than was authorized. SoCalGas and SDG&E must understand that in exchange for the funding of a four-year cycle we expect them to actually replace 25% of all computers annually.

2. Cost

TURN's discussion delved into the detailed specifications of specific desktop and laptop computer models as used by SoCalGas and SDG&E for their 2004 estimates and more recent, up-dated models that are faster, better and cheaper - a consistent trend in personal computers. SDG&E's 2003 Thinkpad T-23 for $3,628 has become TURN's 2004 Thinkpad T-40 for $2,535.¹⁴⁰ These were used as illustrations of the machines available. SoCalGas and SDG&E argued that some computers would be more complex and expensive due to user needs and others would be less powerful but still adequate.

Computer costs will likely continue to decrease as shown by TURN and for the same price a purchaser is likely to find a better machine is available over time. The estimate used by SoCalGas and SDG&E is old and we will therefore use the more recent estimates of $2,535 for a laptop and $1,166 for a desktop computer.¹⁴¹ TURN would have us consider whether the companies should buy a new mouse and keyboard too. We will not specify that level of detail. Applicants' witness stressed that individual machines would vary in components, based on user need, and the estimate was an average machine. We expect applicants to buy the necessary and reasonable equipment with flexibility on individual machines for more memory or other special features necessary for the user to do their job efficiently. We expect SoCalGas and SDG&E to take advantage of acquiring computers that include any technical improvements for the same average budget price over time and not to spend less money for the computers as the prices fall to buy less than current machines. The prices quoted by TURN should continue to provide adequate computer resources to SoCalGas and SDG&E for the next several years.

3. Accounting

As discussed elsewhere we adopt the accounting change to allow SoCalGas and SDG&E to raise their capitalization threshold to $5,000. Although these computers may now be expensed, we expect SoCalGas and SDG&E to maintain detailed records of their personal computers.¹⁴² We expect them to demonstrate in the next rate proceedings that; (1) they purchased enough machines to comply with a four-year replacement cycle and (2) they spent the money provided in rates to buy the best machines available for the price. SoCalGas and SDG&E should not "pocket the difference" by buying fewer or cheaper machines. We recognize that not all machines need have the same level of performance, but we expect the total mix to be adequate and as functional as possible within the available funding limits.

4. Gas Industry Restructuring Implementation

In I.99-07-003, the Commission investigated options for changes to the regulatory and market structure of the natural gas industry. In April 2000, parties signed a Comprehensive Settlement Agreement (CSA) resolving many of the issues raised in the I.99-07-003. In December 2001, in D.01-12-018, the Commission adopted the CSA with some modifications. SoCalGas sought to recover in rate base the capitalized costs incurred to develop necessary software to implement the proposed restructuring, arguing that some of the work was performed prior to D.01-12-018 in anticipation of approval of the CSA; other aspects of the work were performed immediately following issuance of D.01-12-018, because SoCalGas believed it could rely on Finding of Fact 72¹⁴³ and proceeded with the project until around August 2002.¹⁴⁴

SoCalGas filed several implementation advice letters in 2002, which were denied without prejudice in February 2003 by Resolution G-3334 and SoCalGas was told to file an application to implement D.01-12-018. In June 2003, SoCalGas filed A.03-06-040 that offered two options: (1) a "Compliance Case" which implemented the CSA as adopted in D.01-12-018; and (2) a "Preferred Case" which would have made substantial changes to D.01-12-018. On September 29, 2003, the Assigned Commissioner's Scoping Memo determined that "The issues to be considered in this proceeding are limited to the adoption of tariffs, as proposed in the compliance case of SoCalGas, for implementing D.01-12-018."¹⁴⁵ The Commission issued D.04-04-015 on April 1, 2004, approving the implementation of the CSA without further modifications to it or to D.01-12-018 and it closed A.03-04-060. That decision did not address the recovery of software development costs SoCalGas seeks to recover in this proceeding. SoCalGas cites D.01-12-018 as directing it to seek recovery in its next performance based ratemaking proceeding or rate case.¹⁴⁶

ORA and the SCGC opposed recovery of the implementation costs in this proceeding, and to the extent that they argued to address recovery in A.03-04-060 we reject that as moot.

SCGC argued¹⁴⁷ that a portion of SoCalGas' request is for work related to an interim settlement that was not adopted by the Commission. In rebuttal SoCalGas argued that it redeployed (i.e., reused or reallocated for recovery elsewhere) some software development tools and some computer hardware totaling $588,000. Additionally, $492,000 was written-off as a loss in June 2002¹⁴⁸ for activities solely attributed to the interim settlement. SCGC also argued that

any allowed rate base addition should be weighted for a later implementation¹⁴⁹ date of July 2004 instead of January 2004. Finally SCGC challenged the accuracy and completeness of SoCalGas' explanations of implementation costs. SCGC asks without providing a detailed explanation that we exclude "at least $0.9 million" for interim settlement related costs not transferable to the CSA implementation. This is too vague for us to deny cost recovery; we will rely on SoCalGas' accounting internal controls to prevent any "double payment"¹⁵⁰ of capitalized costs to multiple projects. We discuss elsewhere ORA's audit report that did not assert generic issues of duplication or overall failures of internal controls that could lead to double recovery.

ORA did not dispute including these costs in rate base.¹⁵¹ In the Comparison Exhibit, SoCalGas and ORA note that another portion of the project was omitted from ORA's spreadsheet calculations of the revenue requirement. In fact the parties agreed on the rate base components, and this decision reflects the correct calculation.

We agree with SCGC that implementation in July is more probable than January 2004 and we adopt the Test Year 2004 expenditure estimate of $3.2 million¹⁵² with the rate base calculation to be adjusted for a weighting for an in-service date on July 1, 2004.

F. Customer Service

1. Dispatch Phase I and II

This is another item where the Comparison exhibit shows differences only in the spreadsheet calculations of the revenue requirement between SoCalGas and SDG&E and ORA. In fact, the parties agreed¹⁵³ on the rate base components, and this decision reflects the correct calculation.

⁹⁸ Ex. 6, p. 3, and pp. 37-65.

⁹⁹ Ex. 6, pp. 39.

¹⁰⁰ ORA opening litigation brief, p. 205.

¹⁰¹ We will not dwell on this image; but a pig launcher/receiver is a mechanism to place the pig into the pipeline and to remove it later.

¹⁰² Sempra opening litigation brief, p. 113.

¹⁰³ TURN opening litigation brief, pp. 43-47.

¹⁰⁴ TURN opening litigation brief.

¹⁰⁵ SoCalGas justified the need for this equipment in its testimony without relying on a trend.

¹⁰⁶ ORA opening litigation brief, p. 206.

¹⁰⁷ SoCalGas Proposed Settlement, Attachment D, p. 123.

¹⁰⁸ TURN opening litigation brief, p. 79.

¹⁰⁹ Sempra opening litigation brief, p. 151.

¹¹⁰ See also, the April 22, 2003 Scoping Memo, p. 8.

¹¹¹ Ex. 301, pp. 21-26.

¹¹² Ex. 3E, p. FA-19 forward.

¹¹³ Sempra opening brief, p. 25.

¹¹⁴ One of the striking features of the proceeding is the enormous amount of rebuttal testimony. In a case where ORA could not review a NOI for deficiencies, SoCalGas (and SDG&E) should have erred on the side of much too much information in the direct showing. Instead, Witness Ayala's Ex. 3, prepared testimony has 94 pages and his rebuttal, Ex. 66, has 172 pages. This was not unique to this witness or this subject area.

¹¹⁵ SoCalGas Proposed Settlement, Attachment D, p. 112.

¹¹⁶ ORA opening litigation brief, p. 212.

¹¹⁷ ORA opening litigation brief, pp. 212-213, and Ex. 301, pp. 21-15 through 21-17.

¹¹⁸ Comparison Exhibit, p. 112.

¹¹⁹ TURN opening litigation brief, pp. 18-24.

¹²⁰ Ex. 301, pp. 21-18 and 21-19.

¹²¹ ORA opening litigation brief, p. 214.

¹²² Ex. 3, p. FA-77.

¹²³ Sempra opening litigation brief, p. 33.

¹²⁴ Ex. 3, p. FA-79 and Ex. 66, p. FA-52.

¹²⁵ Ex. 301, pp. 21-23 through 21-25.

¹²⁶ See Ex. 66, pp. FA 56 - FA 62, and Sempra opening litigation brief, pp. 36-38. The brief uses 17,000 meters on p. 36 and 20,000 on p. 37.

¹²⁷ Rockwell was a manufacturer of some meters and other meters are made of the metal alloy tin.

¹²⁸ ORA opening litigation brief, p. 218.

¹²⁹ ORA opening litigation brief, p. 219.

¹³⁰ Ex. 301, pp. 21-29 to 21-32.

¹³¹ ORA cites Gas Rules 20 and 21 and Tariff Schedule GT-F (which are approved by the Commission) at p. 219 of the opening litigation brief.

¹³² See Rule 20, Gas Main Extensions and Rule 21, Gas Service Extensions. These rules, as adopted by the Commission, delineate the responsibilities of the customers and the utility, including the obligation of the customer to pay for and contribute the ownership of certain plant to the utility at the time service is established. The rules do not make the customer directly responsible for ongoing maintenance or replacement.

¹³³ SoCalGas Joint Comparison Exhibit, p. 116.

¹³⁴ SoCalGas Comparison Exhibit 149, p. 118.

¹³⁵ Ex. 9, pp. JCB-40, ff. In addition, ORA and others reviewed detailed workpapers and data request responses that were not identified as exhibits.

¹³⁶ TURN filed a separate opening litigation brief on the SDG&E application.

¹³⁷ See Ex. 536.

¹³⁸ Ex. 32, p. 60.

¹³⁹ Page 24, TURN opening brief on SDG&E.

¹⁴⁰ TURN brief, Table 8-C, p. 25.

¹⁴¹ TURN SDG&E opening brief, Table 8-B, p. 22.

¹⁴² Expensed items, under $5,000, may not have as detailed an inventory process as items that are capitalized and depreciated. We expect SoCalGas and SDG&E to closely monitor their computers and have adequate records even though the equipment may be charged as an expense when purchased.

¹⁴³ "The reforms herein have been delayed and need to be implemented quickly." (Mimeo., p. 139, D.01-12-018.)

¹⁴⁴ Sempra opening litigation brief, p. 171 and referring to Ex. 10, pp. SE-13 and SE-14.

¹⁴⁵ Mimeo., p. 4.

¹⁴⁶ Sempra opening litigation brief, p. 172.

¹⁴⁷ Ex. 750, pp. 1-7.

¹⁴⁸ Ex. 71, p. SEE-4.

¹⁴⁹ Rate base is calculated so that it reflects the average investment for the test year, so for new additions the start of service date would be used to reflect the portion of the year the component was in service. A July service date would be weighted at 50% of the investment cost in 2004 and 100% in subsequent years. There is a similar effect for depreciation.

¹⁵⁰ Ex. 750, pp. 6-7.

¹⁵¹ SoCalGas Comparison Exhibit, Ex. 149, p. 124.

¹⁵² Ex. 149, p. 124.

¹⁵³ SoCalGas Comparison Exhibit, Ex. 149, p. 123.