9. Transmission and Distribution Expenses

9.1. Stipulation on Priority 5 Maintenance

SCE's current maintenance priority system uses a five-point numerical rating scheme. Priority 1 corrections require immediate attention because they pose the greatest risk to public safety or system reliability. Maintenance items rated Priority 2 through Priority 4 pose much less risk to public safety or system reliability and are scheduled for repair according to the specific item and the degree of degradation. Priority 5 items are those that pose a greater safety risk to the employees performing the repair than they do to the public or to system reliability if the maintenance is left unaddressed. An example of a Priority 5 maintenance item is a missing or not completely legible high voltage sign, which poses no significant increased risk to public or employee safety but does put an employee at risk when repairing the signage.

Currently, Priority 5 maintenance is performed on an opportunity basis. When a crew is scheduled to work on a pole, they will repair all Priority 5 maintenance items at that work level and below. D.04-04-065 issued in April 2004 in SCE's Line Maintenance OII (I.01-08-029) directed SCE, in consultation with the Consumer Protections and Safety Division (CPSD) to, among other things, "[a]chieve a more defined period within which system problems are repaired."25 Based on its experience up to, during and subsequent to the Line Maintenance OII, SCE has concluded that compliance with that direction could be interpreted to require that the Company establish date certain criteria for all Priority 5 maintenance items. Although the Commission in D.04-04-065 did not absolutely mandate the termination of opportunity maintenance or specify the time frame in which it expects Priority 5 items to be repaired, that decision does ask that the amount of time for making system repairs be decreased.

SCE developed three time-dependent scenarios (5-year, 6-year and 10-year) for moving Priority 5 work from an opportunity-based approach to the Commission-envisioned "defined period" approach, and analyzed which scenario would be best for SCE and it customers. SCE's application request included $40.8 million per year to perform that work over a 6-year period.

SCE's application request for Priority 5 maintenance was opposed by both ORA and TURN. In its testimony, ORA recommended that SCE continue its current overhead distribution maintenance priority system. Specifically, Priority 5 maintenance items should continue to be repaired as opportunity maintenance. According to TURN, D.04-04-065 does not require SCE to change its Priority 5 maintenance activities in this rate case, and SCE has not complied with the directives of D.04-04-065 to first consult with CPSD and to exhaust other alternatives to accelerated maintenance of all Priority 5 conditions. In its testimony, TURN recommended that the Commission should authorize SCE to continue opportunity based maintenance of Priority 5 conditions until this issue is separately resolved. Even if the Commission were to authorize a change in Priority 5 maintenance, TURN argued SCE's requested budget is excessive and unreasonable.

The issue of Priority 5 maintenance has evolved during this proceeding. Since May 28, 2004, management representatives and staff of CPSD and SCE have worked together in compliance with the Commission's directives in D.04-04-065. As of August 13, 2005, CPSD and SCE have agreed on a set of principles governing a refined priority maintenance system for correcting violations of General Orders 95 and 128. Those principles are set forth in a Memorandum of Understanding (MOU)26 The MOU, would have SCE continue its current opportunity maintenance practice for correction of Priority 5 items until such time as the Commission reviews, approves and authorizes funding for a revised maintenance program to be proposed in SCE's next GRC. In its opening brief, SCE revised its primary recommendation regarding Priority 5 maintenance, consistent with these MOU principles.

On August 29, 2005, SCE, ORA and TURN filed a stipulation regarding the Priority 5 issue. By the stipulation, SCE will withdraw its requested funding for acceleration of Priority 5 maintenance on a date-certain basis, on condition that SCE, ORA and TURN recommend that the Commission (1) find SCE's current opportunity maintenance approach to Priority 5 maintenance to be compliant with D.04-04-065, and (2) direct SCE to continue its current opportunity maintenance practice for correction of Priority 5 items until such time as the Commission authorizes a change in Priority 5 maintenance practices. Consistent with the MOU, SCE would not propose any such change prior to its next GRC. SCE, ORA and TURN identified the stipulation proposal as their primary Priority 5 recommendation in their respective reply briefs filed on September 2, 2005.27

9.2 Discussion

By establishing (1) principles for a refined priority maintenance system for correcting violations of General Orders 95 and 128, and (2) a timeline for the development, testing and implementation of these principles, the SCE/CPSD MOU demonstrates a commitment to comply, and progress in complying, with directives in D.04-04-065 regarding SCE's remedial actions regarding such violations. Due to the extent of the costs needed to correct all such identified violations, it is important to ensure that the safety and reliability concerns are addressed in a cost effective manner. The MOU also appears to have this prime consideration in mind.

For the purposes of this GRC, we find that the MOU provides a reasonable basis for SCE and CPSD to address General Order 95 and 128 violation issues. It is reasonable for SCE and CPSD to continue to work out details for establishing and implementing the new maintenance program. When there is final agreement on the new program, it can be presented for the Commission's consideration and adoption. Since the MOU envisions the implementation and transition period for the new maintenance priority system to begin with SCE's next test year, for this test year 2006 GRC cycle, it is reasonable for SCE to continue its current maintenance program. Therefore, there is no need to increase funding for Priority 5 maintenance at this time. For the 2006 -2008 interim period, as long as SCE and CPSD are meaningfully engaged in developing the new maintenance priority system, we will consider SCE's opportunity maintenance approach to Priority 5 maintenance to be compliant with D.04-04-065.

SCE, ORA and TURN are the only parties that addressed the Priority 5 issue, and, with the filing of the stipulation, agree on how to proceed with this issue. The stipulation, as described above, is generally consistent with the development of a new maintenance program, as envisioned in the SCE/CPSD MOU. It reasonably resolves the Priority 5 issue in this proceeding, is consistent with law, is in the public interest, and will be approved.

For Account 560.100, SCE is requesting a total of $8,390,000 for the test year. Included in that amount is $4,100,000 for eight advanced technology projects.

ORA recommends zero funding for these projects arguing that SCE has not quantified any cost savings that justify inclusion of the costs; and SCE has not shown that the historical spending level is insufficient to meet the system function needs for this sub-account.

In general, budgets or incremental budgets to historic recorded amounts must be explained and justified. Studies which show that short term and/or long term benefits exceed costs could provide persuasive justification for SCE's incremental budgeted costs. However, in this case, SCE indicates that cost benefits/savings estimates are typically developed as a result of (not prior to) these types of programs. Therefore, while SCE can provide cost information, the benefits/savings associated with these T&D advanced technology projects or programs are not known.

The descriptions of the potential benefits of the projects provide general information but there is not sufficient information to determine whether the costs are justified in either the short or long term. With this type of analysis and showing it is possible to explicitly include associated costs in rates but it is not possible to explicitly reflect any of the associated benefits or savings, whatever they may ultimately be, in rates for this rate case cycle. This imbalance is troubling. In general, it is our obligation to consider both the costs and, if applicable, the benefits/savings of utility proposals. If the benefits/savings are ultimately small when compared to costs, the proposal should probably not be implemented or included in rates. If the benefits/savings are substantial, it would be reasonable to include both the costs and benefits/savings in determining rates. For the advanced technology programs/projects, the lack of information regarding benefits/savings precludes us from making such determinations.

In this decision, we are authorizing significant increases in T&D O&M and capital expenditures. How the potential benefits of the advanced technology programs/projects relate to SCE's proposals for increased spending is not clear. Whether the advanced technology spending results in the modification of any future spending related to T&D costs has not been shown. SCE states,

...SCE's advanced engineering program evaluates recently developed technologies which are expected to extend the useful life, enhance utilization and/or provide more cost-effective maintenance of existing transmission assets, improve employee and public safety, lower installed costs, and prevents degradation of system reliability. Expenditures for these activities relate to early implementation of new technology, getting enough of the technology into the field for employees to see how well it can be adapted by SDC, gain hands-experience and assess the benefits from an operating perspective. As part of this effort, SCE-specific installation and maintenance procedures will be developed and information collected to enable field-based cost/benefit analyses. Without such installation and maintenance information, detailed cost/benefit analyses would not be possible. (SCE, Ex. 94, p.50)

For this type of program the benefits/savings may be more long-term rather than short term. However, from the above statement, it appears SCE expects certain benefits to occur when the advanced technology programs/projects are implemented. What those benefits are will not be known for certain until information is collected.

In general, there is merit in SCE `s consideration of new technologies that may benefit the system and ratepayers. We prefer to encourage rather than discourage these activities and will therefore include SCE's proposed costs for this rate case cycle. However, since these technologies appear to have the potential for providing significant benefits, we will also assume a level of cost savings. While in the long term, we would expect the benefits to exceed the costs, for the short-term evaluation process, we will assume savings to equal 50% of the costs, and we will include the net cost of $2,050,000 for the test year.

Similar to its test year forecast for SONGS O&M costs, SCE includes an adjustment to provide additional staffing needed in advance of an anticipated level of retirements caused by the aging of its T&D workforce. In opposition, ORA states that (1) SCE has not shown the connection between the age at which its employees are eligible to retire and the age at which they actually retire, and (2) SCE has not shown that its current programs, already funded in rates, are inadequate to meet staffing needs for the next three-years. At issue, in this account, are positions associated with five transmission system operators ($600,000).

For the transmission system operators, SCE's rebuttal testimony indicates that out of an estimated 56 operators eligible to retire in 2008, 22 will be age 60 or older and 7 would be 62 or older. This contrasts with the projection that, in 2004, 36 operators would be eligible to retire, with 4 over 60 years old and one at or over 62. The increase in retirement-eligible employees from 2004 to 2008 is 20, with 18 more being 60 or older and 6 more being 62 or older. SCE's testimony indicates that the mean, mode and median age of Transmission Distribution Business Unit (TDBU) employees who retired in the past are all less than 60 and that age 62 is a popular retirement age, partially because of the ability to claim Social Security benefits at that age. The utility has provided sufficient justification for its incremental request for five positions and the associated $600,000 will be included in the adopted test year estimate for this account. We assume costs necessary to address retirements at the 2004 level are embedded in existing rates.

SCE uses a budget-based methodology to forecast $9,492,000 for test year expenses for transmission-related training, safety and first aid meetings.

Included in SCE's requests is incremental funding of $3,214,000 to train new employees joining the company as a result of increased workload. ORA opposes this request, because, in its opinion, the training relates to SCE's aging workforce request, which ORA also opposes.

TURN does not seen any reason to spend almost 15% of the entire transmission labor budget on these functions and proposes to hold labor spending to 11.5% of transmission labor expenditures, which is slightly higher than the 2003 percentage. This results in a $1,785,000 reduction to SCE's request.

In response to ORA, SCE explains that the training is for 49 FTEs including the five operators to be hired and trained in 2006 to replace retiring operators. The incremental increase is for training to support the increase in workforce where entry level experience and skills related to the construction, operation, and maintenance of the transmission grid are limited. SCE also states that OSHA and other governmental agencies require that much of the training (i.e. First Aid, Asbestos Awareness, Class A driver's license requirements, and Fire Extinguisher) be provided. Additional training is necessary as updates are made to software, test equipment, and utility facilities.

In response to TURN, SCE states that the correct comparison would be the ratio of training costs to total labor, which would include both O&M and capital related labor. That results in a ratio of 5.9% in 2003 and 7.7% in 2006.

SCE's forecast related to training and safety for this account is reasonable and will be adopted. Regarding ORA's adjustment, it is clear that the majority of the incremental training relates to employees hired because of increased workload. Since we have previously included the costs of the five transmission system operators who will replace retiring operators, it is not necessary to adjust SCE's requested training costs for the 49 anticipated employees. Regarding TURN's adjustment, the more relevant comparison would be to use both O&M and capital labor in determining a ratio of training costs to labor. However, what ratio should be used for the test year is not known. The higher ratio of 7.7% for 2006, when compared to 5.9% in 2003 may be explained by the training required to support the projected increase in workforce where experience and skill sets are limited at the entry level. Even after correcting for the use of total labor, we do not have sufficient support for adjusting SCE's request, based on the training cost to labor ratio, as proposed by TURN.

Account 566.300 records miscellaneous expense generated by other departments and charged back to the business unit through the Interdepartmental Market Mechanism (IMM) system. SCE forecasts the test year amount to be $13,641,000. SCE states there are two significant increases over the 2003 recorded amount. The first is an incremental increase of $1,300,000 related to increased maintenance of older facilities as well as to additional facilities and related maintenance due to SCE's increasing workforce. The second is an incremental increase of $4,400,000 related to Information Technology (IT) department services utilized by TDBU. SCE asserts that increased staffing levels will impose the need for a corresponding increase in IT support.

ORA opposes the adjustments related to both increased maintenance of facilities and IT support, and recommends a test year forecast of $7,941,000 be adopted for this account. ORA indicates that its estimate of workforce increases is less than that of SCE.

In general, SCE's proposed incremental increases for office maintenance appear reasonable. Maintenance on buildings tends to increase as buildings age, and additional workforce requires additional office space and related maintenance. Also, most of the workload increases proposed by SCE have been incorporated in this decision. For that reason, we will include the associated $1,300,000 adjustment in the adopted forecast for this account. However, the SCE's reasons for increased IT costs are not clear. In its testimony, SCE stated, "As discussed in various sub-accounts, TDBU will increase staffing levels in various job classifications; this will impose the need for a corresponding increase in IT support which accounted for $4.4 million of the increase in our test year non-labor request."28 ORA objected because of the differences in workforce estimates between ORA and SCE. However, in rebuttal, SCE also states, "The IT-related incremental expenses are for known and anticipated increases in software license renewal and maintenance of software applications and related O&M expenses critical to the operation of the power grid. Some of these expenses will support software applications, such as the Energy Management System, covered in SCE's capitalized budget that ORA has found reasonable. In addition, the requested incremental expenses include increases in IT hardware development that started in 2004 and will continue through the post-test year period of the GRC cycle. Also included are forecast increases due to deployment of field laptops (field Tools) in support of our Mobile Strategy, and as described, increased data requirements and workforce growth are also included in this request."29

SCE's rebuttal introduced a number of additional reasons for the incremental IT support request, but did not provide any details or quantification. Whether any of this information is contained in workpapers is not known, since the workpapers are not part of the record. While we are inclined to increase costs due to increased workforce, the associated cost is not known. Other reasons given in SCE's rebuttal may justify the portions of the increased cost, at least to some extent, but more detail and cost information are needed to evaluate that completely. In effort to be reasonable and fair, we will adopt $2,200,000 for IT support or 50% of SCE's request. This results in an adopted test year forecast, for Account 566.300, of $11,441,000.

For the test year, SCE forecasts Account 570.400 to be $7,698,000. Embedded in that request is $2,682,000 for increased O&M expense related to capital spending and $1,045,000 for substation life extension funding. ORA excluded both adjustments, resulting in its test year estimate of $3,971,000 for this account. Based on the discussions below, the adopted test year forecast for Account 570.400 is $6,653,000.

9.11.1. O&M Related to Capital Spending

SCE's proposed increase in non-labor for this account is primarily due to the increase of miscellaneous O&M costs in support of the large increases in transmission stations. SCE forecasted that amount to be $3,000,000, indicating that was 3.5% of anticipated incremental capital expenditures of $86,500,000. SCE stated that in aggregate related expenses historically have been approximately 3.5% of the overall capital expenditures. As part of its rebuttal testimony, SCE analyzed 36 substation capital work orders and determined a 3.1% ratio of O&M related costs to capital expenditures. SCE modified its increase request accordingly by reducing it to $2,682,000.

ORA objects to the request stating that SCE had only a summary table to support its 3.5% request and the 3.1% study was submitted in rebuttal which was too late for it to be carefully reviewed.

We will adopt SCE's forecast of O&M expense related to increased capital spending. SCE provided the basis for using the 3.5% factor. It could not provide disaggregated information, but use of such historical information to develop a factor and to apply that factor to the anticipated incremental capital is still a reasonable basis for calculating the incremental O&M. The analysis is simple, but the amount of money at issue is not large. ORA could have come up with an analysis of its own, simple or otherwise. However, even though it does not challenge the fact that these costs exist, ORA chose not to recommend any expense based on its criticisms of SCE's showing. In this instance, ORA's estimate of zero is not reasonable. Costs will likely occur and the best estimate should be included in rates. SCE refined and slightly lowered its request as part of its rebuttal testimony. We will adopt SCE's resultant proposed $2,682,000 adjustment to reflect O&M expense related to incremental capital expenditures.

9.11.2. Substation Life Extension

SCE states that the increase in labor for this account is primarily due to commencement of a life extension program to start a 10-to-15 year maintenance cycle on bulk power disconnect switches, starting with the test year cost of $751,000. SCE also request $294,000 in non-labor costs to support life extension efforts related to replacing deteriorating wood cable trench covers.

ORA asked SCE to provide some support such as engineering reports, failure reports or system reliability reports to support its request. According to ORA, SCE provided nothing but the argument that "...common sense and our experience in the field" justified its proposal. ORA concludes that SCE has provided insufficient evidence that those maintenance activities will extend the useful life of station equipment and recommends the request be rejected.

In this instance, SCE has provided insufficient support for its $1,045,000 request for life extension funding. For activities that will last from 10 to 15 years, there should be some analysis that quantifies the costs and provides some idea of what the benefits will be. While many aspects of the proposed program are appealing, SCE has provided no information or data to support the development or reasonableness of its $1,045,000 request. We will not include SCE's requested funding in this GRC.

SCE requests $9,950,000 per year in incremental funding over the next six years for what it calls its Life Extension Program. SCE claims the program is necessary to maintain system reliability in the face of the Company's vast aging infrastructure. Among the activities SCE includes in its Life Extension Program are: transmission tower painting and repair, pole and fixture repair, replacing steel tower members and components, tightening hardware, and washing insulators. It is SCE's position that by undertaking this work on a more programmatic basis, the overall life of the assets can be extended. Also, the maintenance activities of its Life Extension Program are not routine maintenance and that the costs associated with these activities have not been incurred for seven to ten years and thus, are not embedded in the five years of historical data.

According to ORA, SCE has not shown that current funding levels are insufficient to perform appropriate levels of transmission maintenance, and offers no verifiable analysis to show that this Life Extension Program will extend the lives of the assets. ORA therefore opposes SCE's proposed $10.8 million test year increase.

9.12.1. Account 571.100 - Poles and Structures

SCE requests $8,923,000 for Account 571.100, which relates to maintenance of poles and structures. The forecast is based on the 2003 recorded amount of $2,223,000 plus an incremental $6,700,000 for the transmission life extension program. For the life extension program, SCE proposes to utilize contract labor to inspect, repair and paint 40 to 50 high voltage towers.

ORA opposes SCE's request for the incremental $6,700.000 in ratepayer funds and recommends a test year expense level of $2,223,000 based on the 2003 recorded amount. According to ORA, SCE already receives ratepayer funding for tower painting, bolt tightening and tower footing and crib wall repairs. Currently, the work is performed on an unscheduled, as-needed basis. ORA states that SCE performed no cost/benefit analysis for this additional transmission maintenance program, and offered nothing but unsupported conclusions to show that this program will result in any savings to ratepayers.

9.12.2. Discussion

In its direct testimony, SCE provided very little justification and support for its transmission life extension program. In a data request response to ORA, SCE provided a list of projects totaling approximately $60 million to further justify its proposal.30 The response described the tower location, the proposed work (e.g. Paint Towers), the estimated total cost, and the reason (e.g. Age/Prevent Rust Damage). In 2003, SCE recorded $2,223,000 in Account 571.100. According to SCE's testimony, work included tower painting, bolt tightening, and tower footing and crib wall repairs. With the addition of the life extension program activities, the 2006 request jumps to $8,923,000. There appears to be an overlap in life extension and normal activities, and SCE has not provided an overwhelming amount of information supporting the need and costs of the program. In many ways we agree with ORA's rejection of this adjustment. However, recognizing the system is aging and life extension can be a cost effective alternative to maintaining the integrity of the system, we will not completely reject SCE's request.

SCE indicates these costs have not been incurred over the last 7 - 10 years and are therefore not reflected in the recorded data used for forecasting purposes in this GRC. It is curious that none of the costs occurred in any of the last five years, unless all towers were painted and all bolts were tightened 7 to 10 years ago. Otherwise there would be a more even annual distribution of the activities. The other possibility is that work was deferred for reasons other than need. Spreading any authorized over nine years rather than six, as proposed by SCE, appears more appropriate. Certainly, SCE's actions over the last five years do not demonstrate an overwhelming urgency to perform these activities.

Despite SCE's claim that no such work as envisioned in the life extension program has been incurred over the last five years, we are concerned about the relationship to costs that are embedded in the historic data. For instance the large scale painting program may reduce the need for tower painting that is done normally. Likewise, the bolt tightening aspect of the program may reduce the need to tighten bolts as has been done historically, on an as needed basis. To be conservative, we could remove all embedded costs from the forecast. That would ensure there would be no double counting of life extension and normal activities. However, realizing that there are activities in this account other than tower painting or bolt tightening, we will assume 25% of the life extension program is duplicative of costs embedded in the recorded data used to forecast the test year. We will further reduce SCE's request by this amount to reflect an estimate of cost reductions in normal activities that would result from implementing the scope of the life extension program as proposed by SCE.

The adjustments to spread reduced costs over a longer period of time, result in an adopted test year estimate of $5,573,000 for Account 571.100, compared to SCE's request of $8,923,000 and ORA's recommendation of $2,233,000.

The forecast is for this GRC cycle only. In the next GRC, SCE should provide a more detailed showing on the need and cost of the transmission life extension program (for poles and structures as well as insulators and conductors). The showing should also demonstrate the incremental nature of the program to alleviate our concerns as discussed above. The continuance and level of the program will be considered and determined based on the evidence presented at that time.

SCE requests $8,656,000 for Account 571.200, which relates to maintenance of insulators and conductors. The forecast is based on the 2003 recorded amount of $5,406,000 plus an incremental $3,250,000 for the transmission life extension program. For the life extension program, SCE states the majority of the costs are driven by the fact that particulate levels and other atmospheric conditions in agricultural areas such as the San Joaquin Valley create an increased risk of tracking on insulators. SCE states that its data shows an increasing trend in transmission circuit outages in the area.

ORA opposes SCE's request for the incremental $3,250,000 in ratepayer funds and recommends a test year expense level of $5,406,000, based on the 2003 recorded amount. According to ORA, SCE already receives ratepayer funding for "hot washing" insulators such as those in the San Joaquin Valley and SCE provided no problem reports or engineering reports to justify additional hot washing.

In response to ORA, SCE asserts that recent newspaper articles demonstrate the severe particulate problem exists and that its proposed funding for washing insulators represents an effort to be proactive in maintaining the reliability of the transmission system in the face of a known problem.

Our concerns regarding the life extension program related to insulators and conductors is similar to that discussed above for poles and structures. For Account 571.200, the incremental life extension costs are $3,250,000 above the embedded 2003 costs of $5,406,000. For the same reasons as stated for Account 571.100, we will reduce SCE's request for Account 571.200. We recognize SCE's need to replace and repair insulators in the San Joaquin Valley, but will spread the costs over nine rather than six years. We will also assume that the life extension program replaces some similar activities that are embedded in the recorded data used in the forecast. Similar to that for poles and structures, the reduced costs are 25% of the life extension costs. Our adopted estimate for Account 571.200 is $7,031,000, compared to SCE's request of $8,656,000 and ORA's recommendation of $5,406,000.

For Account 580.100, SCE is requesting a total of $7,600,000 for the test year. Included in that amount is $2,000,000 for seven advanced technology programs. Of those seven programs, ORA recommends that Distributed Energy Resource Advancements, in the amount of $400,000 be included in rates. For the remaining six programs ORA argues that SCE has not quantified any cost savings; certain described functions are those that SCE has historically been performing and the costs should be embedded in historic costs and rates; and SCE's showing, which offers only generalizations to justify the addition of the incremental costs, is insufficient.

SCE's request for advanced technologies for distribution is similar to its request for transmission in Account 560.100. As discussed in that account, we do not wish to hinder consideration of advanced technologies but feel it reasonable to reflect a level of associated cost savings. As we did for transmission, we will assume advanced technologies savings for distribution to equal 50% of the cost of advanced technologies for distribution. Therefore, for the $1,700,000 at issue, $850,000 will be included for the test year in Account 580.100.

For the remaining portion of Account 580.100,31 SCE uses a budget-based forecast to estimate distribution operations supervision & operations expense. ORA uses the last recorded year less $400,000 for Distribution Energy Resource Advancements. SCE estimates $5,172,000 and ORA estimates $5,072,000. The difference is minor. ORA's adjustment for embedded activities is questionable, and we will adopt SCE's estimate for this portion of Account 580.100.

Account 580.200 records expenses for services provided to TDBU by other departments' IMM charges. SCE's test year forecast for this account is based on a budget based methodology resulting in a test year estimate of $8,910,000.

ORA's test year estimate for this account is $7,038,000. The $1,872,000 difference relates to forecasts of vehicle fleet expenses. SCE used its budget based methodology and ORA used a four-year historical average. ORA used the years 1999, 2000, 2001, and 2003, excluding 2002 because the number of vehicles purchased that year was significantly lower than any of the other historical years.

SCE argues that the average cost of TDBU vehicles for the years 1999 - 2003 are not representative of the cost of TDBU's fleets in the future. The major cost of the fleet is medium to large size vehicles (special body and aerial equipment mounted on cabs/chassis). SCE states that the average life of the medium sized vehicles is approximately seven years and the average life of the large sized vehicles is approximately 10 to 15 years. SCE further states that it began a 5-year cycle to replace many of the medium and large sized vehicles in 1998, but the energy crisis significantly slowed that effort in 2001 and 2002 and beyond. SCE also asserts that increases in vehicle costs are also driven by the fact that its workload and workforce are increasing.

SCE has provided a persuasive argument to rebut ORA's use of the four-year average. 2001 and 2003 were impacted by financial restraints caused by the energy crisis. However, there is no data or analysis to quantify the effects of not using those years in the average. Also, there is nothing in SCE's direct testimony to support its vehicle costs other than the indication that the costs were developed using a budget based methodology. In its rebuttal, SCE provided reasons why ORA's estimate is low. We agree that the four-year average likely understates vehicle costs. However, SCE has provided little information to justify its specific request. SCE requests additional vehicle funding of $2,452,000 and ORA recommends additional vehicle funding of $580,000. We have no basis to adopt SCE's forecasted increase. However, to reflect our belief that ORA's estimate is low, we will adopt an increase of $1,516,000, the average of SCE's and ORA's forecasted increases. The adopted test year expense for Account 580.200 is therefore $7,974,000.

SCE requests test year funding of $4,200,000 for Research Development and Demonstration (RD&D). SCE also proposes the continuation of the one-way RD&D Balancing Account that was established in 1988.

ORA recommends funding of $1,600,000 based on a three-year average of historical costs. ORA indicates this is an increase of $400,000 over what SCE currently receives for RD&D.

In 2003, SCE spent $1,169,000 for RD&D in this account. For the test year, it proposes a significant increase of $3,031,000 or 259%. We are not convinced that SCE's requested increase is reasonable or necessary. In its direct testimony, SCE provides a brief description of its current RD&D efforts in six different areas32 in which it expects to utilize its requested funding. SCE includes general descriptions of the programs within each area and the budget for that area. Such support is insufficient to justify a 259% increase in spending. SCE has provided no detailed information, by project or program, that supports its $4,200,000 budget. We have no way of knowing what the scope or cost is for programs or projects that been have historically funded or what the scope or cost is for new or existing programs or projects that are budgeted for the test year. Even by its general descriptions, it is difficult to determine what the existing, continuing and new activities are. There is insufficient support to justify SCE's proposed increase in the authorized spending level. In the absence of such justification, ORA's proposal to use an average of the last three recorded years is reasonable and will be adopted, resulting in a test year forecast of $1,600,000 for Account 580.500.

SCE's proposal to continue the one-way RD&D balancing account is unopposed and reasonable and will be adopted.

For Account 583.400, SCE forecasts, estimates $14,328,000 for the test year, based on the 2003 recorded amount of $6,529,000 plus incremental costs of $7,799,000. ORA reduced SCE's forecast of costs for intrusive pole inspections by $1,800,000 and Structural Analysis Methodology (SAM) inspections by $1,708,000, resulting in its test year forecast of $10,820,000. We will adopt ORA's recommendation, based on the following discussion of the differences.

SCE completed 96,813 intrusive pole inspections in 2003. SCE plans to conduct 128,940 such inspections in 2006 completing the intrusive pole inspection cycle defined in GO 165. SCE then plans to inspect approximately 70,000 poles in both 2007 and 2008. SCE's requested incremental increase of $1,500,000 is based on the intrusive inspection of 128,940 poles. ORA normalized the number of intrusive pole inspections over the three-year rate case cycle at 89,647 inspections per year. At a cost of $45 per inspection, ORA's adjustment results in reducing SCE's costs for these inspections by approximately $300,000 below the recorded 2003 amount.

ORA's normalization recommendation is reasonable and will be adopted. For the years 2007 and 2008, the post test year mechanism assumes the test year expense, inflated to post test year dollars. Under SCE's proposal, where there are significant reductions in the number of inspections in the post test years, it would collect more money over the rate case cycle for intrusive poles inspections than it plans to spend. Rather than modifying the mechanism to adjust for different expenses levels for each of the post test years, we prefer to normalize the test year amount, which is an acceptable ratemaking procedure.

In 2003, SCE conducted 1,152 SAM inspections for $576,000. For the test year, it requests incremental funding of $2,284,000 to inspect a total of 5,720 poles. ORA believes the request to be unreasonable and instead recommends total test year funding of $1,152,000 for 2,304 inspections.

SCE states that a SAM inspection occurs when a pole fails an intrusive inspection or when an inspector or planner visually inspects the pole and requests an immediate SAM inspection. However, SCE has not provided any information that demonstrates a need to increase the level of spending for this program by a factor of four. There is no indication that there is such a significant backup in meeting the need for inspections caused either by poles failures or visual inspections. However, there is value to the program in that the outcome of the analysis extends the life of the pole. For that reason, we feel that it is reasonable to adopt ORA's recommendation, which doubles the funding for this program.

This account records the field service and construction expense related to the turning-off and turning-on of meters at the request of the customer. Over 95% of the costs are incurred by the Field Services Organization of the Customer Service Business Unit (CSBU). SCE forecasted the test year labor expense based on the last recorded year plus an adjustment for customer growth, and the non-labor expense using a three-year historic trend of 2001 to 2003 data. This resulted in its test year forecast of $15,636,000.

TURN adjusted the CSBU portion of this account and recommends a reduction of $878,000, or 5.6%. TURN argues that SCE's trending analysis for non-labor costs is inadequately explained and results in an unreasonable double escalation of non-labor costs from 2002 to 2006. Because of its assertion that service turn on/off costs are directly related to customer growth, TURN used customer growth plus 10% to derive non-labor costs of $2,558,000, compared to SCE's estimate of $3,232,000. For labor costs TURN calculated the average CSBU labor cost per customer over the 1999 - 2003 period and applied it the customer growth resulting in a forecast of test year labor of $12,200,000 compared to SCE's estimate of $12,404,000.

SCE states that TURN ignores the fact that SCE's labor costs in the 2001 to 2003 time period have increase at a rate faster than customer growth. SCE states that TURN recognizes the need to account for at least a portion of the rising non-labor costs, but provides only a modest increase of 10% in real terms plus customer growth as an arbitrary adjustment to the last recorded year of expense. SCE argues that is insufficient to cover its rising costs, primarily related to vehicles.

For labor costs, both SCE and TURN use customer growth in their calculations. SCE's methodology of using the last recorded year and increasing that amount by customer growth is reasonable and will be adopted. We note that labor costs for this account have increased slightly each year from 1999 to 2003. TURN's methodology results in an adjusted 2003 base year amount, before applying customer growth, which is less than either the 2002 or 2003 recorded amount. The reasonableness of the reduced 2003 level is not supported and we will not adopt TURN's proposal.

For non-labor, SCE's rebuttal indicates that it used a three-year trend (2001 to 2003), to forecast test year expenses. This is different than the Joint Comparison Exhibit statement that it was based on the last recorded year plus customer growth. The recorded adjusted non-labor expense for this account increased from $1,969,000 in 1999 to $2,235,000 in 2003, or 12%. Expenses fluctuated during that timeframe, with the lowest amounts being incurred in 2000 and 2001. As discussed later in this decision, we have concerns regarding the use of three-year trends that include years affected by the energy crisis. SCE's test year 2006 request of $3,232,000 is 44% higher than the 2003 recorded amount. Because of the possible effects of the energy crisis and the fairly moderate increase from 1999 to 2003, we will instead use TURN's methodology, which still provides a significant increase over customer growth. The adopted non-labor test year forecast for this account is $2,558,000.

The adopted forecast for Account 586.100 is $14,962,000 as opposed to SCE's request of $15,636,000.

This account records expenses associated with the operation, inspection, and testing of meters and associated metering equipment. SCE's test year forecast for this account is $7,373,000.

Similar to its aging workforce request in Account 562.100, SCE includes an adjustment to provide additional staffing needed in advance of an anticipated level of retirements caused by the aging of its T&D workforce. For the same reasons that it opposed SCE's aging workforce request for Account 566.100, ORA opposes the request for this account. At issue, in this account is $713,000, primarily associated with six distribution meter technicians.

SCE explains that it has identified a potential turnover rate due to retirements in the meter technician classification of approximately 40% over the next five years. Because of extensive training requirements, SCE states that from 2004 to 2008, it will have to increase its normal meter shop staffing, from 14 to 20 employees, with about one third of this group in formalized classroom training at all times.

TURN notes the SCE is requesting a 22% increase in labor from $4,154,000 to $5,067,000 and an increase of 11.3% in non-labor from $2,072,000 to $2,306,000. TURN recommends an increase of 8% based on its opinion that the cost drivers are not rising nearly as rapidly as SCE's expense request. According to TURN, actual meter tests chargeable to O&M expense were 10% below SCE's estimate for 2004. TURN asserts that SCE has provided no data to support the implication that its training costs will significantly exceed historical training costs due to a 13% increase in FTEs.

According to SCE, for April 2005, year to date, it has completed 10% more request tests than for the same period in 2004. SCE states that the discrepancy between the 13% increase in FTEs and the 22% increase in labor costs is due to training needs for employee attrition. According to the company, while labor costs for the Meter Services Organization are recorded in several accounts, all training required for workforce attrition preparation will be charged to Account 586.400.

The record for this account is confusing. First, SCE's testimony does not specifically explain or show the development of its test year estimate. Second, ORA states that it objects to an aging workforce adjustment of $713,000 without identifying what those costs represent (employees or training costs or both). Third there is discussion about forecasted and recorded FTEs in 2004 and 2005, but there is no discussion as to how the numbers relate to SCE's test year labor forecast or the proposed adjustments to the request. Fourth, while there is discussion related to the number of meter tests, there is no discussion as to whether or not the number of meters was specifically included in the development of the test year estimate.

We will first make the assumption that the requested $713,000 in incremental labor primarily represents six meter technicians and their training costs during 2006. There is no indication that any of these employees have been hired yet. As justification for the increase, SCE identifies a potential turnover rate due to retirements (based on age and years of service) of approximately 40% over the next five years. However, SCE does not explain how attrition due to retirements was handled historically and what costs are included in the recorded years. Also it is not clear whether 40% is the percentage of employees eligible to retire or whether it reflects the number of employees expected to retire. SCE only states that 40% is a potential turnover rate. While SCE has shown that in general its workforce is aging, a more precise showing on how the number of retiring employees was calculated and how past retirements were accommodated historically is necessary to justify the incremental increases requested by SCE. We will therefore not include SCE's $713,000 aging workforce adjustment in the adopted test year forecast for this account.

There is significant overlap in the labor adjustments proposed by ORA and TURN. In excluding the aging workforce adjustment, it is not necessary to address TURN's proposal related to labor expense. For non-labor, it is not clear how TURN developed the 8% factor when considering the cost drivers. The increased number of tests in 2005 may be reason to increase the factor. We will not reduce SCE's non-labor forecast.

This account records expense associated with managing, supervising and directing training activities. SCE requested $40,008,000 for the test year. The recorded 2003 amount is $21,997,000. ORA recommends an amount of $29,882,000. Both SCE and ORA include an increase of $5,600,000 in 2004 over 2003 adjusted recorded expenses for training of new and existing planners, field tools training, personal grounds training, and new apprentice training. SCE requests another $12,411,000 in incremental funding for 16 training programs. In objecting to ten of the programs, ORA recommends incremental funding of $2,285,000. SCE stipulates to two of ORA's adjustments: (1) that ethics training be conducted every three-years instead of annually (ORA reduction of $733,000) and (2) diversity training will be at the current level, which is consistent with Consent Decree guidelines (ORA reduction of $458,000).

Both SCE and ORA propose significant increases for distribution related training. SCE's test year request is 82% higher than the last recorded year. ORA's estimate is 36% higher. While SCE has explanations for each of its proposed increases, we are not convinced that increases of this magnitude are necessary to provide safe and reliable service. Whether this is the company's wish list or whether each of the programs are needed now is not clear. Whether certain costs are included in the historic years cannot be determined because a complete list of training activities for each of the historic years is not part of the record. Even if a specific activity is not included historically, there is the question as to whether all historic training activities will be necessary in the test year and if not how much of the new training it would offset.

However, we will include training associated with new employees and increased workload. We consider this to be an important activity. For service planner training, apprentice safety training, apprentice skills training and substation operator training, this amounts to $2,819,000 as calculated by SCE in its rebuttal testimony. An additional $661,000 is attributable to SCE's aging workforce. We will not adopt that amount. SCE has provided much information on the number of linemen eligible to retire, but has not provided the connection to the number of employees that will likely retire. SCE only states that if only a portion of employees retire when they are first eligible to retire, it will take a toll on the remaining employees and that its request will allow for a proactive transfer of experienced journeyman lineman skills and judgment to the new employees and thus assure the continued sage and efficient operation and maintenance of it distribution system. The analysis of how many employees will retire when first eligible, or how many employees will retire at any age or age range, is lacking. We will therefore not adopt SCE's request for incremental training related to aging workforce for this account.

Even though we have provided additional funding for the training of new employees, we are not totally convinced that these types of costs are not at least partially covered by the use of recorded 2003 data and the $5,600,000 increase in 2004 over 2003 that was incorporated in the test year estimates of both SCE and ORA. Because of our concern regarding costs already included in the recorded 2003 base and the magnitude of the proposed increase, we will not authorize additional funding for the remaining training programs at issue. That would be for skills training delivery, construction & maintenance accountant training, training evaluation and knowledge management, and software applications.33 For truly necessary and appropriate activities, we will assume there are funds available in either the portion of the estimate based on the 2003 recorded amount of $21,997,000 or the $5,600,000 increase in 2004.

Even with these adjustments, the 2006 adopted amount for this account is $32,071,000, a 49% increase over the 2003 recorded amount.

SCE uses a budget-based methodology that is a function of customer growth (currently at 1.5% per year) to forecast $3,467,000 for work-order write-offs, the primary driver of this sub-account. ORA's estimate of $1,689,000 is based on a three-year (2001 - 2003) average of historical/adjusted expenditures. ORA used an average because of fluctuations in this account over time. SCE states it is required, as part of its obligation to serve, to provide various services to customers desiring new service or to expand or change service. SCE argues that expenses for customer growth cannot be reasonably forecast using a three-year average.

Based on recorded information, this account increased by 501% from 2000 to 2001, decreased by 68% from 2001 to 2002, increased by 593% from 2002 to 2003 and increased by 51% from 2003 to 2004. These types of changes do not reflect SCE's customer growth which is now 1.5% per year. Use of customer growth to project this account is not reasonable. The large fluctuations are unexplained by the record and an average is appropriate. However, we will add the 2004 recorded amount of $4,592.000 to the average, which results in a 2006 estimate of $2,354,000.

Account 590.980 records management and supervision expense that has been allocated to distribution maintenance through the clearing account process. SCE's test year forecast for this account is based on a budget based methodology, resulting in a test year estimate of $23,058,000.

ORA recommends a total of $12,524,000 for this account. ORA uses the last recorded year, 2003, to forecast the test year amount. ORA states that its estimate is consistent with both the three-year and five-year averages of historical recorded expenses.

TURN recommends a reduction of $2,592,000 from this account and the reallocation of these costs to capital, should the Commission adopt TURN's recommendation on Priority 5 maintenance.

According to SCE, the requested $10,534,000 increase in Account 590.980 is driven by a $14,876,000 increase in the overhead clearing accounts. SCE states that the overhead clearing account growth represents additional work that TDBU expects to perform in the test year. The additional work includes engineering, project management, design and planning support, project economic analysis, project estimating contract review and administration, facility management, work order closing, material management and quality management programs and procedures. As recommended by TURN, SCE agrees to reduce its request by $2,166,000,34 since this decision does not adopt additional funding for Priority 5 maintenance.

SCE's explanation that increased clearing account activity is related to increased work that the TDBU will perform during the test year is reasonable. Its agreement to reduce the request to reflect the elimination of Priority 5 funding is consistent with that explanation. However, it is not clear why the clearing account costs should be shifted to capital rather than be eliminated, since the increased activity related to Priority 5 maintenance has been eliminated and not shifted to capital. Additionally, this decision does not adopt all of SCE's other TDBU O&M and capital requests for the test year. The fact that we are authorizing less of an increase than requested by SCE indicates that the increase in clearing account activity should be less as well. Unfortunately, the record in this proceeding does not detail the relationships between clearing account activity and O&M and capital projects and costs. There is no provision or methodology to adjust clearing account activity when related O&M or capital costs are adjusted. However, we will reduce the increase in this account by 40% or $4,200,00035 to reflect an approximation of the reduction in these clearing account expenses due to reductions in SCE's request for T&D expenses in this decision. TURN's recommended reduction of $2,166,000 is included in this amount.

Costs incurred in the operation of general storerooms are accumulated in Clearing Account 163.600 and cleared to Account 593.300. SCE used a budget based methodology to forecast test year expenses of $4,152,000.

TURN opposes SCE's request noting the decline in productivity with a forecasted 43% labor increase to handle 26% more material. TURN recommends a 31.8% increase, covering the increased materials handled, 26%, plus a 5% increase for labor per materials handled, which results in a recommended $333,000 reduction to SCE's request.

SCE indicates that the supply expense growth in this account is due to a forecast increase in material spending and a change in the way SCE handles material. SCE states that in 2003, it began establishing regional prefabrication centers and contractor material laydown yards in various locations, resulting in increased staffing requirements. However, SCE further states it will result in downstream efficiencies such as improved material control, backlog reduction, improved material distribution and utilization, and a reduction in material-related false starts.

We will not question whether SCE should or should not have changed the way it handles materials. However, we will assume that, overall, the new way of handling materials is no less efficient than handling materials the old way. While SCE has reflected the associated increased costs, it has not reflected any efficiency gains in forecasting this account, nor does it refer to other areas where related efficiencies are reflected. TURN's adjustment reflects current efficiency levels, is reasonable and will be included in the adopted test year expense of $3,819,000.

This account records the costs associated with the maintenance of electric billing meters and ancillary metering equipment. SCE uses the 2003 recorded amounts to forecast the test year labor and non-labor expenses, which total $2,067,000.

TURN opposes SCE's request. The first reason is that SCE reprogrammed 4,000 time-of-use (TOY) meters at a cost of $100 each in 2003, and no such activity is contemplated for the 2004 - 2008 timeframe. The second reason is that repairs of real time energy meters peaked in 2003 at 3,075 and declined by 49% to 1,579 meters in 2004. According to TURN, spending in 2004 was about 7% less than SCE's forecast although the difference between actual spending and SCE's forecast was less than the $400,000 of non-recurring TOU metering in 2003. Therefore, TURN believes it is reasonable to reduce the labor estimate for this account by $130,000.

SCE states that while TURN is correct in noting that the reprogramming of 4,000 TOY meters was a non-recurring event in 2003, the repair and maintenance of newer more complex meters and the repair and maintenance of older, failing meters will increase in the test year, replacing the reprogramming costs.

While SCE indicates that there will be costs in test year 2006 to replace 2003 TOU reprogramming costs, no details on the quantification of the offsetting costs are provided. Also, for the period 1999 to 2003, the two highest expense years were $1,960,000 in 1999 and $2,062,000 in 2003. According to SCE the number of repairs and associated expense increased in 1999 due to reprogramming 5,200 meters for expired time-of-use calendars, and 4,000 of these meters were reprogrammed again in 2003. The expenses for 2000 through 2002 ranged from $1,399,000 to $1,691,000. From this information it appears that the reprogramming of TOU meters substantially affects the total expense level for this account. TURN's proposal to reduce SCE's test year labor request by $130,000 is reasonable and will be adopted. We note that the resulting adopted forecast of $1,937,000 is still significantly higher than expenses recorded in the 2000 - 2002 timeframe, when there was no reprogramming of TOU meters.

For other electric revenues associated with added facilities, SCE used a five year average of recorded 1999-2003 data to forecast test year revenues of $3,661,000.

TURN characterizes the recorded 1999 amount of $2,728,000 as being anomalously low and excludes it from the average, resulting in a test year forecast of $3,894,000.

SCE opposes TURN's adjustment, stating that 1999 is not low when compared to both 1998 and 2004 and from 2001 to 2004 there is a downward trend in revenues. SCE also notes that its forecast is above the 2004 recorded amount of $3,281,000.

From the data presented, an average appears to be an appropriate estimating methodology for this account. However, whether SCE's five year average or TURN's four year average is better is not clear. We will compromise by using the most recent five-year historic average (2000 - 2004) to forecast test year revenues for added facilities amounting to $3,759,000.

25 D.04-04-065, (mimeo.), p. 22

26 The MOU was identified as Late-Filed Exhibit 166 and received in evidence by ruling dated August 30, 2003.

27 If the Commission were to decline adoption of this primary recommendation, SCE, ORA and TURN would revert to their recommendations and arguments regarding ratepayer funding of SCE's accelerated Priority 5 maintenance proposal.

28 SCE, Exhibit 32, pages 69 - 70.

29 SCE, Exhibit 94, page 62.

30 SCE, Exhibit 94, Appendix C.

31 Excluding spot bonuses, which are addressed separately in Section XXX.

32 Improving Existing T&D Asset Utilization; Advanced T&D Technology Applications; Advanced Communication systems; Distributed Generation; Environmental Resources and T&D Impacts; and End-Use Technologies and Load Impacts

33 For software, SCE provides a list of incremental software programs, totaling $3,200,000 intended to support key business processes and maintain compliance in the CPUC and FERC regulatory environments. However, SCE did not explain how these software applications applied to training, which is the subject of this account.

34 SCE recalculated TURN's proposed adjustment, which TURN reflects as its recommendation in its opening brief at page 28.

35 T&D expenses increased by approximately $175 million between 2003 adopted and SCE's 2006 request in this GRC. Total reductions to SCE's request reflected in this decision are approximately $70 million. This percentage reduction of approximately 40% was applied to SCE's proposed increase of $10,534,000 resulting in the approximate $4.2 million reduction to Account 590.980.

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