14. A&G Expenses

SCE forecasts results sharing expenses of $88,642,000 for test year 2006.43 Costs are recorded in Accounts 500, 588, 905, and 920/921.

The stated intent of the Results Sharing program is to link compensation to employees' annual job performance, business unit, and company performance. All full-time employees are eligible to earn a cash bonus based on team (business unit or department) and SCE performance against related clear and measurable business goals. Bargaining-unit employees participate at the same level and under the same guidelines as other non-exempt employees. Each year, the results sharing award will increase or decrease based on overall SCE business results.

Apart from the Results Sharing program for bargaining unit/non-exempt employees, SCE's results sharing proposal also includes (1) a small group of senior managers (less than 6% of all employees) that are eligible for the Management Incentive Program (MIP), which is based on the same Results Sharing program targets, except for higher potential payouts and greater individual accountability; (2) a small group of employees (less than 1% of all employees) that are eligible for the Major Customer Division (MCD) Incentive Compensation Plan, which is based on similar Results Sharing program targets, except for higher potential payouts and greater individual accountability; and (3) executives who are not officers that are eligible for the Executive Incentive Compensation Plan (EIP) which is based on a set of measurable, Company performance goals approved by the Board of Directors.44

SCE states that, while individual and business unit performance are important components of SCE's Results Sharing program, SCE operating income has the potential to have the biggest impact on the Results Sharing payout.

SCE states that its request for full cost recovery from ratepayers is consistent with the Commission's decision in its last General Rate Case D.04-07-022, as well as with the GRC decisions for test year 1994 for Southern California Gas Company (SoCalGas) and test year 1993 for PG&E where the Commission approved the policy recommendations in the report from a thorough Commission-sponsored 1991 workshop on incentive compensation and granted full recovery of the costs of the utilities' employee incentive programs.

ORA calculates a five-year straight line historical average of the payouts for all four elements of SCE's results sharing program to be $69.1 million. ORA states that ordinarily, it would recommend that ratepayers and shareholders share the expenses of the incentive program with ratepayers bearing no more than a portion of the cost responsibility commensurate with the benefits received from the program. For example, in SCE's last GRC, ORA recommended that ratepayers bear 50% of the cost responsibility of the program. However, for this program in this rate case cycle, ORA recommends no ratepayer funding of the Results Sharing Incentive Program for the following reasons:

    · First, the data on which the five-year payouts are based is so compromised by years of under-reporting of employee safety incidents and fraud in the customer satisfaction surveys that it has no credibility.

    · Second, SCE has not shown that the current results sharing program will provide ratepayers with any better protection from the under-reporting and fraud of the last one, or will result in verifiable ratepayer benefits.

In June 2004, SCE submitted a "PBR Customer Satisfaction Investigation Report" to the Commission. The Report concludes that some SCE employees falsified data to influence the outcome of customer satisfaction surveys. These surveys are used to determine the amounts of incentive payments to reward for SCE customer service.

In December 2004, SCE submitted a "PBR Illness and Injury Recordkeeping Investigation Report" to the Commission. This Report concludes that, "due to under-reporting of work-related injuries and illnesses and the failure to accurately track all such incidents, SCE did not have sufficiently reliable data to support SCE's request for rewards under the health and safety PBR incentive mechanism."

ORA provided details of these reports; and, in its opinion, the data related to two of the components (customer satisfaction and employee safety), which SCE uses to determine results sharing, is not credible. ORA states that, in light of the evidence, using SCE's recorded data as a basis for charging ratepayers for future expenses is unreasonable.

In response to ORA's recommendations, SCE asserts the following:

    · ORA's recommendation, in effect, punishes SCE for its proper and responsible corporate response to a very unfortunate situation. ORA takes the findings from SCE's Customer Satisfaction and Illness & Injury Recordkeeping investigations that were so candidly communicated to the Commission out of context in an effort to disallow the expenses for SCE's Results Sharing program for a future period. That is not only unfair but would, if ORA's recommendation is adopted, create bad public policy: it would discourage open and responsible self-monitoring and self-correction. It would additionally undermine SCE's concerted efforts to manage its workforce by encouraging desired behavior and deterring unacceptable behavior.

    · By focusing only on the Results Sharing goals implicated in SCE's Customer Satisfaction and Injury & Illness Recordkeeping investigations, ORA paints a distorted picture of the Results Sharing program. Removing the portion of Results Sharing pay-outs associated with the customer satisfaction and employee safety goals for those organizations impacted by the misconduct identified in the investigations results in a reduction to our Test Year forecast for the program of approximately 7.5%, or $6.5 million. This reflects a "worst case" scenario since it assumes zero progress is made for the two goals.

    · ORA's witness completely ignored the corrective actions SCE has taken and is taking to prevent the recurrence of similar data problems, and which were described at length in the investigation reports she based her recommendation on. Those corrective actions include: (1) taking disciplinary action against employees where the evidence established that they had engaged in wrongdoing or otherwise did not meet SCE's expectations of appropriate conduct; (2) refunding or foregoing nearly $50 million in PBR rewards; (3) reinforcing SCE's values at the management and leadership levels; (4) taking steps to recommit to SCE's core value of integrity; and (5) taking a hard look at SCE's incentive programs to avoid inadvertent "competition" between values and performance measures.

    · SCE also, in recognition of the seriousness of the customer satisfaction and employee safety reporting issues found during SCE's internal investigations, reduced the modifier for the Results Sharing program in 2004, which resulted in a lower pay-out to all employees under the program.

We will not adopt ORA's recommendation to completely eliminate ratepayer funding of the results sharing program. SCE's actions in investigating and reporting the customer satisfaction and the injury and illness recordkeeping problems were appropriate. Additionally, SCE's corrective action, as detailed above, appears to be a reasoned response to prevent such incidents from reoccurring. We also note that the organizations implicated in the Customer Satisfaction and Injury & Illness Recordkeeping investigations make up a small portion of the company, and the actions of only a portion of the employees in those organizations resulted in at reductions to the 2004 results sharing for all employees in the program. On a forward going basis, we believe SCE is capable of conducting its results sharing program in an appropriate manner. However, because of past problems, its efforts need to be scrutinized. In its next GRC, SCE should provide detailed information on how its final results sharing goals were determined for the 2006 - 2008 period, what steps were taken to ensure the integrity of both the data and the process for making awards, and any further consequences or any required actions imposed by either SCE or the Commission, as a result of the Customer Satisfaction and Injury & Illness Recordkeeping investigations.

We now address ORA's backup proposal to split results sharing program costs 50%/50% between ratepayers and shareholders. There are a number of previous Commission decisions regarding such allocation of costs of incentive pay responsibility.45 Costs were either fully reflected or split 50%/50% between shareholders and ratepayers. In D.04-07-022 we declined ORA's recommendation to split results sharing costs 50%/50% between ratepayers and shareholders. First of all, SCE's total compensation was within market and results sharing did not result in SCE's compensation exceeding market. We also noted management discretion to offer a mix of variable and fixed pay. D.04-07-022 also found no evidence that results sharing created outcomes that are contrary to ratepayer interests and concluded that full ratepayer funding of the forecasted amount was justified.46

We continue to feel that it is important that results sharing (1) not result in compensation that exceeds market levels, (2) be subject to management discretion, and (3) not be contrary to ratepayer interests. However, as a matter of equity and fairness, we also feel it is important to properly align and assign the benefits and costs of results sharing between ratepayers and shareholders. We will adjust SCE's request accordingly.

Apart from total compensation considerations, the Results Sharing program has elements that provide both shareholder and ratepayer costs and benefits. Examining those costs and benefits provides information for determining whether the benefits and costs of results sharing are correctly aligned from the ratepayer and shareholder perspectives.

SCE's statement that operating income has the potential to have the biggest impact on the Results Sharing payout is evidenced by the operating income multiplier which is directly applied in calculating the awards. If the operating income goal is 100% achieved, the multiplier would be 1.0. The multiplier can increase up to a maximum of 2.0 (if 106% of the goal is reached) or decrease to 0.5 (if 94% or less of the target is achieved). In general, there is no direct ratepayer benefit related to the operating income multipliers.

According to SCE, operating income as used in results sharing calculations is the net of operating revenues less operating expenses. It appears to be similar to the net operating revenue that is derived in the standard summary of earnings table used for GRC purposes. In the Joint Comparison Exhibit, SCE's request reflects a net operating revenue amount of $844,096,000.

To the extent that SCE exceeds its operating income goal, most of the increased costs of results sharing (up to $59,000,000) could be funded from the resulting increased net operating revenue (up to $51,000,000). To the extent SCE fails to meet its operating income goal, the reduced costs of the results sharing (up to $29,500,000) can be used as a partial offset to the reduced net operating revenue (up to $51,000,000).47 From the shareholder point of view, the potential cost of up to $8,000,000 in a good earning year would be offset by coverage of reduced earnings of up to $29,500,000 in a bad earning year. Whether this aspect of the results sharing mechanism is necessary or correctly designed is questionable. However, the utility's financial performance is more of a shareholder, rather than ratepayer, concern. We will therefore leave the design of this aspect of results sharing up to the company and its employees and assign the benefits and costs to shareholders.

Ratepayer interests are more served by the goals that form the basis of the target results sharing amount before adjustment for operating income. That amount is $59,000,000. While 25% of that target relates to financial goals and performance (O&M budget and core capital budget) that relate primarily to shareholder interests, the remaining 75% of target, or approximately $44,200,000, relates to goals such as customer service, operating excellence, safety and reliability, which appear to have ratepayer value and benefit. We note that $44,200,000 is 50% of SCE's test year results sharing request.

Based on the above analysis of the costs and benefits of the results sharing program, we find it equitable to assign 50% of SCE's requested results sharing costs to ratepayers and 50% to shareholders. We believe this correctly aligns ratepayer/shareholder costs and benefits. As discussed above, we assume SCE's estimated results sharing awards used for total compensation study purposes are funded partly by ratepayers, partly by increased earnings, and partly by shareholders. Even if SCE were to reduce the results sharing program to reflect only ratepayer funding, the $44,200,000 reduction would result in SCE's compensation being approximately 3% less than market as determined in the total compensation study.48 The 3% figure is within the study's plus or minus 5% margin of error, and SCE's compensation would still be considered to be statistically equivalent to the market average. We note that SCE's actions, during this 2006 - 2008 GRC cycle, regarding its results sharing awards and the funding of those awards will impact our future view of this program's viability.

SCE awards Spot Bonuses to its employees at business units' discretion to recognize outstanding performance. Over the three-year period, 2001 through 2003, SCE gave 14,321 Spot Bonuses totaling $14,114,322. ORA recommends that Spot Bonuses be disallowed from various accounts before forecasting for the 2006 Test Year. The Joint Comparison Exhibit indicates that the effect of ORA's recommendation on the 2006 GRC revenue requirement is to reduce test year expenses by $240,000 in Account 560, $328,000 in Account 580, $403,000 in Account 901, and $1,665,000 in Account 920/921.

The Commission addressed the appropriateness of charging ratepayers for spot bonuses in SCE's last GRC decision, stating:

If it were shown that the Spot Bonus program does not result in employees receiving above-market total compensation, and that the program does not produce outcomes that are contrary to ratepayer interests, we would be inclined to include the program costs in the authorized revenue requirements.

...SCE states that `SCE's total compensation includes a Spot Bonus program,' (SEC opening brief, p. 181), and that `Spot Bonuses are an integral part of SCE's Total Compensation Program' (Id., p. 184). However, even though SCE's total compensation package includes spot bonuses, for ratemaking purposes we are more concerned with the portion of total compensation that is measured in the SCE/ORA total compensation study. Since that study explicitly excludes spot bonuses (Exhibit 77, p. 12), we are in no position to conclude that the Spot Bonus program does not result in SCE's overall total compensation being above market level. Accordingly, we cannot conclude that the costs of the Spot Bonus program are reasonable. The costs will be removed from recorded years 1999 and 2000 as proposed by ORA. (D.04-07-022, pages 214 - 215.)

ORA reasons that since D.04-07-022 explicitly stated that the reason Spot Bonuses could not be included in the revenue requirement was that they were not included in the total compensation study; and, since Spot Bonuses were again not included in the total compensation study for this proceeding, it is consistent and logical to conclude, for this proceeding, that it is not reasonable to include such costs in the revenue requirement.

ORA also asserts its testimony shows and as SCE's witness confirmed on the witness stand, SCE's use of Spot Bonuses during recorded years has been unreasonable, possibly fraudulent, and definitely not consistent with ratepayer interests. ORA states that its audit revealed:

    · In 2003, 5,876 Spot Bonuses were awarded to 2,987 SCE employees.

    · Over a three-year period, 2001-2003, 11 employees were given 586 Spot Bonuses. ORA states this is not reasonable.

    · One employee, who is in the executive incentive compensation program, received two Spot Bonuses in 2001 for $50,000 each. ORA states that it is unfair for SCE to ask that ratepayers fund additional compensation to an executive management employee.

In ORA's opinion, SCE's recent problems with "misuse" and "misclassification" are ample assurance that Spot Bonuses are contrary to ratepayer interests.

SCE implemented a new method for tracking Spot Bonuses and the basis for awarding an employee with a bonus in November 2004. Because Spot Bonuses are currently not ratepayer funded, and because ORA recommends against ratepayer funding for Spot Bonuses in this GRC, ORA also recommends against including a new tracking system in the revenue requirement.

In rebuttal, SCE asserts that it demonstrated that the inclusion of spot bonuses in the Company's total compensation would result in it being within 1.9% of market. SCE states it would still be within 5% of market, and the Spot Bonus program does not result in employees receiving above-market total compensation. SCE notes that its analysis assumed that all comparator companies would not have any spot bonus costs, even though the likelihood is great that at least some of these comparator companies have spot bonus programs similar to SCE's program.49 SCE therefore claims that its estimate of 1.9% of market represents a worst-case and it would likely be lower if cost data were available with respect to comparator companies.

SCE's witness indicated that he did not disagree with ORA's statement that 586 awards to 11 employees over three-years was unreasonable. However, he stated that, in this case:

    It was a misclassification of payments that were made to a group of employees whereby they would be receiving overtime payments, exempt overtime payments, I believe. And what happened was rather than coding it in the appropriate way, they paid through the Spot Bonus Program. To the best of my knowledge, that's something that has been corrected, as have a lot of things since the initial audit that was done around our Spot Bonus Program.50

Regarding the new tracking system, SCE indicates that the expenses to develop the system were incurred in 2004 and are not included or reflected in the test year 2006 expense forecast. However, SCE argues that any ongoing maintenance expenses for the system should be included in future funding requests since the tracking system is a necessary expense for properly administering and monitoring the program.

D.04-07-022 specified two criteria that should be met in order to recover costs of the Spot Bonus Program in rates. The first is that it does not result in employees receiving above-market total compensation. The second is that the program does not produce outcomes that are contrary to ratepayer interests. We will also use those criteria to evaluate the program for this GRC.

Regarding total compensation, SCE has provided convincing testimony that shows that the inclusion of Spot Bonuses would result in it being, at worst, within 1.9% of market. Using the Total Compensation Study's plus or minus 5% margin of error criterion, the Spot Bonus program would not result in SCE's employees receiving above-market total compensation.

The record concerning ratepayer interests is less convincing. In explaining the 586 awards to 11 employees, SCE indicates there may have been a coding error related to overtime charges. It is not clear that the coding error is applicable to only those 586 awards or whether it was possibly applicable to other Spot Bonuses awarded during that same timeframe. Also, while SCE's witness indicates that, to the best of his knowledge, the problem has been corrected, it is not clear if or how the recorded Spot Bonuses were corrected. The appropriate level of test year Spot Bonuses is questionable. Inclusion of inappropriate Spot Bonuses in determining test year expenses is contrary to ratepayer interests.

Also, SCE has implemented a new method for tracking Spot Bonuses and the basis for awarding an employee with a bonus. The review process and reasons for giving Spot Bonuses are identified in ORA's testimony. However, neither ORA nor SCE provide any information on the effects of implementing the new system for tracking and awarding Spot Bonuses. The new system was implemented in November 2004, while the embedded recorded data used for forecasting test year costs is for the year 2003. Whether 2003 recorded Spot Bonuses are reflective of what the award level will be under the new system is questionable. SCE's proposal for including Spot Bonuses for test year 2006 is not supported. For this GRC, we will therefore adopt ORA's recommendation to exclude rate recovery of such costs by reducing test year expenses by $240,000 in Account 560, $328,000 in Account 580, $403,000 in Account 901, and $1,665,000 in Account 920/921.

Regarding the ongoing costs associated with the new tracking system, the costs involved here are very small. Moreover, we are not precluding future rate recovery of Spot Bonuses. On a forward looking basis, the tracking system appears to be essential in substantiating how and why spot bonuses are awarded to employees. SCE should be allowed to request and recover reasonable ongoing costs in the future.

Talent Management is responsible for providing strategic and tactical leadership for SCE's talent acquisition, assessment, and employee and organizational development. SCE used a budget-based approach to forecast test-year expenses of $8,483,000 for Accounts 920 and 921. SCE's test year forecast is an increase of $2,014,000 over recorded 2003 costs. SCE states that this increase is due primarily to the costs associated with the Leadership Programs at SCE which were previously funded, in part, by shareholders. Several of SCE's Leadership Programs were expanded or initiated as part of the Consent Decree SCE entered into in 1996. SCE states that, although the Consent Decree expired in 2003, SCE has continued its commitment to the established programs and is seeking 100% ratepayer funding to ensure their continued success.

ORA used SCE's Last Recorded Year expenses as a basis to forecast SCE's Account 920 of $3,192,000 and 921 of $3,277,000. ORA's proposal results in SCE continuing 100% funding of the Cross-Training and Leadership Program and 50% funding of the Leadership Grant and Leadership @ EIX programs. ORA's recommendations result in SCE shareholders funding approximately $2,000,000 of the $2,335,000 proposed by SCE for 2006.

ORA states that ratepayers and shareholders benefit equally from the Leadership Grant and Leadership @ EIX Programs and should share the costs equally.

Also, ORA states that SCE is requesting funds for positions in its Leadership programs and at the same time is requesting funding for each business group. ORA concludes that because two different SCE business units/departments are requesting ratepayer funding for labor expenses for one employee, SCE is double collecting. According to ORA, there should only be one of SCE's business units/departments requesting salary for each employee in the cross training program. The funding for salary should be transferred between SCE's business units/departments for the temporary placement of the employee for the year that the employee is in the training program.

In response to ORA's recommendations, SCE asserts that the Leadership Programs benefit ratepayers and should be funded by them. SCE provides the following reasons:

· SCE's Leadership Programs provide opportunities for diverse employees to formally develop essential skill sets that allow them to advance in the company through further education, cross-training programs and mentoring.

· Since SCE has an aging workforce problem, it must invest in the development of its employees or there will be an inadequate set of skills and experience among the company's middle and senior management.

· By developing talent in-house, SCE's Leadership Programs will help avoid significant expenses for recruitment, compensation, signing bonuses, and relocation.

· SCE's Leadership Programs are consistent with the California Utilities Diversity Council's efforts to promote diversity among the California regulated utilities.

SCE terms "incorrect" ORA's assertion that two different departments or business units are requesting funding for each employee that assumes a cross-training position. According to the company, the position in the home organization, which the cross-training participant has temporarily vacated, is not eliminated. The home organization must still complete the work formerly completed by the cross-training program participant, typically by hiring a new employee to perform the work, back filling the position for the duration of the cross-training assignment, or using another SCE employee on overtime basis. The company therefore maintains that there is no request for duplicate funding.

SCE has provided information that justifies the existence of its Leadership Programs. However, the company does not justify the change from full or partial shareholder funding of the programs to full ratepayer funding of the programs. SCE asserts that the Leadership Programs benefit ratepayers and should be funded by them. On the other hand, SCE does not assert that the Leadership Programs do not benefit shareholders. The relative benefits to shareholders were not addressed despite the fact that shareholders funded $1,580,000 of the program's total of $1,901,000 in 2003. There is a need to justify why it is reasonable for ratepayers to pay for costs previously funded by shareholders. If SCE wants to shift such a large percentage of these costs from shareholders to ratepayers, it should fully address the implicit assumption that shareholders no longer benefit, or never did benefit, from the programs. Lacking such analyses, costs will continue to be allocated to shareholders. However, we will allocate 50% of the Cross Training Leadership and Executive Leadership Program to ratepayers, in recognition that the program does provide some benefit to ratepayers. Therefore, ratepayers and shareholders will equally share Leadership Program costs, which total $2,335,000 in the test year. The adopted Talent Management test year forecast is therefore $7,315,000.

Given SCE's reasonable explanation of why it has not requested double funding of positions, we will not pursue that issue any further.

SCE uses a five-year average to forecast $4,880,000 for Human Resources (HR) Client Services. To support the BPI Project, SCE indicates that it is expanding Organizational Development/Organizational Change Management (OD/OCM) activities and the needed funds are in line with the 1999 and 2000 level of expenses. In rebuttal testimony, SCE indicates that, in April 2005, it hired a senior manager to lead the OD/OCM effort and expects to complete staffing the organization by the end of 2005. While SCE's request is $700,000 over 2003 recorded, full staffing for OC/ODM activities will result in incremental costs of approximately $1,500,000.

ORA recommends using SCE's last recorded year expenses of $4,309,000. In ORA's opinion, SCE has not provided sufficient information to support its assertion that its test year expenses will increase to the 1999-2000 levels. ORA argues that SCE implemented methods which reduced its labor and non-labor expenses and that SCE's staffing levels have remained relatively flat from 2001 through 2003. ORA also argues that SCE's rebuttal testimony supporting OC/ODM activities was untimely.

In its prepared testimony, SCE acknowledged staffing reductions that reduced expenses for HR Client Services from the 1999-2000 levels. SCE also indicated it expected expenses related to OD/OCM activities would increase test year staffing levels and expenditures to be more in line with recorded years 1999 and 2000. Recorded amounts were $6,496,000 for 1999 and $5,588,000 for 2000.

SCE's rebuttal testimony provided additional information to support increased OC/ODM activities in the test year. That information which reflects organizational changes starting in the April 2005 timeframe became available about the time ORA issued its testimony. It would have been inappropriate for SCE to make its principal showing in rebuttal or to delay in providing ORA with relevant requested information. However, it is reasonable for SCE to rebut ORA testimony with relevant information that could not have been provided earlier. SCE's principal showing was that a five-year average was appropriate because additional expenses related to OC/ODM would increase test year levels above recently recorded amounts. The rebuttal testimony provides information to support that showing, and we will adopt SCE's test year estimate of $4,880,000.

SCE states that the compensation for SCE's executive officers is part of its competitive total compensation package, and includes a level of base salary, incentives and benefits designed to attract and retain well-qualified executives. The company further states that it competes for executive talent from both utilities and other industries, so its salary and incentive programs must be competitive in order to attract the talent it requires. For Account 920/921, SCE forecasts test year executive compensation costs to be $15,385,000, based on an historic average of 2002 and 2003 expenditures. SCE states that the years 2000 and 2001 were affected by the energy crisis.

For the same reasons discussed previously, for recommending that zero Results Sharing program costs be included in rates for this GRC cycle, ORA also recommends zero funding for the Executive Incentive Compensation Plan for this GRC cycle. Also, for the remainder of executive compensation costs in this account, ORA used a four year average of 2000 - 2003 recorded data to forecast test year expenses of $8,707,000. ORA used a four year average due to fluctuations in expenses and SCE's change in the mix of its executive officers.

While ORA notes that SCE pays its executives total cash compensation at 11.8%above market levels and SCE's executive benefits are 41.3% above comparator companies in the market, SCE notes that if the Total Compensation Study excluded executive incentives (bonuses) from its calculations, the total compensation for executives would be 32.8% below market.

For the same reasons discussed previously, for rejecting ORA's recommendation that zero Results Sharing program costs be included in rates for this GRC cycle, we also reject ORA's recommendation of zero funding for the Executive Incentive Compensation Plan for this GRC cycle.

In D.04-07-022, the Commission declined to adopt ORA's recommendation that ratepayers and shareholders contribute equally to the costs of executive bonuses. However, our earlier discussion in this decision, regarding the Results Sharing program, stated that, as a matter of equity and fairness, we feel it is important to properly align and assign the benefits and costs of results sharing between ratepayers and shareholders. That applies to the Executive Incentive Compensation Plan as well.

In our discussion of results sharing, we developed a 50%/50% allocation of costs between ratepayers and shareholders based on the described structure of the program and our perception of the relative costs and benefits. Similar information for the Executive Incentive Compensation Plan is not in evidence. However, SCE states:

In December of each year, the Board of Directors approves a set of performance goals for the Company, and the Compensation Committee adopts these goals as measures that will be used to determine executive bonuses to be paid under the Executive Incentive Compensation Plan. These goals identify critical areas of utility performance and set measurable, challenging standards to define successful attainment. These goals include targets that improve value for both ratepayers (e.g., customer satisfaction, improved safety performance, and financial performance) and shareholders (e.g., improved earnings per share). These goals are emphasized at all levels of the Company through the year and focus performance on areas critical to the utility's business success.51

The performance goals of the Executive Incentive Compensation Plan are comparable to those used for results sharing. Absent specific information on how executive incentive compensation is structured and calculated, we will assume it is also similar to that for results sharing and similarly allocate 50% of the costs to ratepayers and 50% to shareholders. We will also assume that the appropriate level for 2006 is the five-year historic average amount of $6,026,000, of which $3,013,000 will be included in test year rates.

We recognize that executive compensation, which consists of both base pay and incentive pay, was evaluated as part of the Total Compensation Study, and, in total, SCE's compensation was at market levels. In our decision today we are not recommending reduced compensation for executive officers. We are merely assigning certain costs to shareholders. This does not appear to be contrary to the purpose of the Total Compensation Study, which obtained competitive compensation data and compared that data to SCE's compensation levels. The Total Compensation Study did not specify or differentiate between ratepayer and shareholder funding for either comparator company compensation or SCE compensation.

For the remaining executive compensation costs in Account 920/921, we will use an average of 2002 and 2003 data, which is reflective of current executive officer levels and salaries and excludes reduced non labor costs related to the energy crisis. This results in test year labor costs of $7,017,000 and non-labor costs of $2,069,000.

The total forecasted test year executive compensation included in Account 920/921 is $12,099,000, as opposed to SCE's request of $15,385,000.

SCE uses a two-year average of 1999-2000 recorded data to forecast $1,826,000 for non-labor expenses for the HR Equal Opportunity business unit. SCE expects non-labor expenses to return to pre-energy crisis levels.

ORA uses a five-year average to forecast $1,352,000 for non-labor expenses to capture fluctuations.

Both SCE and ORA used five-year averages to forecast the related labor expenses. SCE explains that non-labor costs have not yet returned to pre-crisis levels but SCE anticipates that several programs will return levels recorded in the pre-crisis years 1999 and 2000. While SCE has expressed its intentions, whether costs will return to pre-crisis levels and, if so, how fast that will occur is not clear or certain. The recorded 2003 non-labor expense is $1,090,000. The five-year average used by ORA results in a test year estimate of $1,352,000, and provides an increase of $262,000 over the 2003 recorded level. Due to the uncertainties, ORA's estimate using the five-year average is reasonable and will be adopted.

For In House Legal Resources, SCE's test year forecast for non-labor expenses recorded in Accounts 920 and 921 is $3,607,000, based on the 2003 recorded amount. Included in the 2003 recorded amount are costs of $267,000 for document and records management software purchase, $459,000 for computer and outside consulting services, and approximately $200,000 for SCE's Whiteboard Filing Tracking System.

In developing its estimate of $2,680,000, ORA removed, as one-time non-recurring expenditures, $927,000 in 2003 recorded costs related to software purchases, computer and outside consulting services, and the Whiteboard Filing Tracking System.

Recorded amounts for this activity were $2,826,000 in 1999, $2,636,000 in 2000, $2,577,000 in 2001, $2,724,000 in 2002 and $3,607,000 in 2003. ORA's estimate of $2,680,000 is in line with the 1999-2002 expenditure levels. Because of the increase in 2003 over the prior recorded years, it is necessary to determine the recurring nature of the increased 2003 costs. SCE explains that its documents and records management software purchase and the Whiteboard filing Tracking System were shell purchases and that the systems need to be customized to meet the needs of the Law Department. Ongoing expenses are necessary for refinements and upgrades, new license agreements, and maintenance work. While SCE asserts that the ongoing costs will exceed the purchase prices for the systems, there is little evidence to support that claim. We will however continue the funding for these two systems at the purchase price for each of the years in this GRC cycle. Regarding computer and outside consulting services, SCE believes it may need certain services but does not quantify its needs in any way. It is also not clear whether or not some of these types of activities are included in the 1999-2002 recorded data. Continuation of the $459,000 in non-labor test year expenses for computer and outside consulting services is not supported by the record and will not be included in our adopted estimate of $3,148,000.

TURN recommends that SCE track in-house legal expenses separately by subject matter or project. TURN provides the following reasons for its recommendation:

· Without such information it is impossible to normalize expenses unusual or non-recurring expenses for ratemaking purposes. Edison has normalized its outside counsel expenses to account for the non-recurring nature of certain energy crisis legal expenses. Edison did not adjust any in-house attorney costs, even though in-house lawyers may have worked on some of the same energy crisis-related proceedings.

· Tracking in-house costs can assist in comparing the cost-effectiveness of increasing in-house staff versus hiring outside counsel, as well as in evaluating relative staff performance and work load distribution. Given the size of Edison's law department (currently 82 staff) TURN is skeptical that using "experience and judgment," even in combination with regular performance reviews, is always sufficient to perform these management functions.

· It is standard business practice for most law offices to track expenses by case or proceeding for billing purposes. SoCalGas and SDG&E track legal and regulatory expenses (both in-house and outside counsel) by proceeding.

ORA also recommends that SCE be required to track its in-house legal costs, indicting that SCE's ratepayers will be better served if they do. ORA suggests that the Whiteboard and DM/RM systems might assist in this endeavor.

SCE states that, as required by the Commission, SCE's Law Department currently tracks time for work performed on behalf of affiliates. However, whether or not SCE's Law Department should institute a time track system by subject matter should be left to the discretion of SCE's Law Department management. Based on its experience when the Law Department implemented a time tracking system during 1994-1998, SCE concluded that there is no legitimate business reason for it to track the time of its in-house attorneys that would justify the cost and inconvenience of doing so. SCE states that a time track system is not necessary because the Law Department has in place other means to evaluate and allocate work. Work is evaluated and allocated by using: (1) the judgment and experience of the practicing attorney and the supervising attorney, (2) the case team approach (which involves the collaboration of the lead attorney and a case manager to identify resource needs and keep management apprised of the status of regulatory proceedings through regular case meetings), and (3) the employee performance assessment mid-year and annual evaluations.

SCE argues the comparison of SCE's Law Department to that of SoCalGas and SDG&E is inappropriate, because those in-house attorneys work for the parent company and therefore need to track the time spent on utility matters in order to bill their costs to the utility.

SCE also notes that neither TURN nor ORA identified, quantified, or analyzed the costs to SCE's ratepayers of a time tracking system, noting that the Whiteboard and DM/RM systems are document retention and retrieval systems, not time tracking systems.

According to SCE, its experience indicates there is no value in instituting a time tracking system for in-house counsel. The company points to other means for evaluating and allocating work, including judgment, a team approach, and an assessment of employee performance. These means may suit SCE's purposes. However, from the standpoint of a regulator, these means are difficult to evaluate in analyzing the reasonableness of SCE's in-house legal expenses. As identified by TURN, a time tracking system may provide types of information that would be valuable from a regulatory standpoint and perhaps even from an SCE management standpoint. However, without more information, we will not impose such a time tracking system. In its next GRC, SCE should provide a study on, or analysis of, a time tracking system for its in-house counsel. It should include an estimated cost of performing this activity, any perceived benefits or detriments and any analysis related to the tracking system that was in place during the 1994 - 1998 timeframe. With this type of information, we can make an informed decision on the merits of time tracking.

SCE used a budget based method to forecast a test year expense level of $9,608,000. SCE states that at the end of 2003, SCE Regulatory Policy and Affairs (RP&A) Department had 97 full time equivalents (FTEs) and 10 vacancies. SCE's test year forecast includes the 97 FTEs, the 10 vacancies and 8 additional employees to perform work relating to Transmission Owner Tariff, Wholesale Distribution Access Tariff, Advanced Metering and Demand Response, regulatory compliance, and Permits to Construct and Certificates of Public Convenience and Necessity application for new transmission and subtransmission facilities.

ORA used the last recorded year, 2003, to forecast test year labor expenses. ORA states that during the test year SCE will have several regulatory proceedings that will close and that SCE expects other proceedings will expand and new issues will emerge. Therefore, ORA considers SCE's existing staffing level to be sufficient to address its workload and meet its responsibilities in the test year. Additionally, ORA removed labor expenses associated with SCE's Washington D.C. Office. ORA's test year estimate amounts to $8,411,000.

We are not convinced that all the additional positions requested by SCE are necessary. As ORA suggests, some proceedings will close, while others are opened. It generally appears that SCE's incremental budgeting over the last recorded year focuses on anticipated increases and fails to fully discuss embedded recorded activities that may not continue through the test year. However, in general it is reasonable to assume some increases in SCE's regulatory responsibilities over time. Also, although it did not quantify the number, SCE indicates that it already has filled some of the 2003 vacancies. Rather than reflecting the filling of 10 vacancies existing in 2003 and 8 new positions, we will assume the addition of 9 FTEs for the test year. We will therefore adopt a test year expense level of $9,075,000 for RP&A labor. The adopted level implies a continuation of some vacancies and a potential lessening of the workload due to some proceedings reflected in 2003 recorded data closing before and during the test year.

ORA's adjustment to remove labor expenses associated with the Washington D.C. Office is apparently tied to the fact that SCE removed lease costs for the office from its GRC forecast. Other than that ORA's adjustment is unexplained. SCE asserts that work performed by these employees involves representation before the FERC, and that these costs are allowable pursuant to the CPUC and FERC approved jurisdiction allocation methodology. We agree with SCE and will not impose an adjustment to remove the Washington D.C. Office labor, as proposed by ORA.

SCE used a budget-based method to forecast $1,996,000 for non-labor corporate Environmental, Health and Safety (EH&S) expenses included in Account 920/921. SCE states that the last recorded year plus new incremental expense is the most accurate approach to estimating the cost of the new programs that are being developed.

ORA used the last recorded year amount of $1,641,000 to forecast this account. ORA states its method is reasonable, since SCE's recorded 2003 expense increased by $611,000 over the 2002 level.

In its rebuttal testimony, SCE explains that most of the increase in 2003 over 2002 was related to a $456,000 reduction in the 2002 EMF budget. The reduction was specific to 2002 and these non-labor costs were restored in 2003. Other reductions in 2002 related to the energy crisis. We also note that in 2000, the pre-energy crisis non-labor recorded expense was $2,212,000, which is slightly higher than SCE's test year request. SCE's request for an additional $355,000 in non-labor expense to support 7 new EH&S personnel to which ORA did not object is reasonable. We will adopt SCE's forecast of $1,996,000 for EH&S non-labor that is included in Account 920/921.

SCE's Public Affairs test year forecast of $9,120,000 is based on 2003 recorded costs plus a projected increase of $841,000 to cover the expenses to fill six FTE vacancies that existed at the end of 2003 and five new positions in 2006.

ORA recommends a 25% adjustment to SCE's test year forecast of Public Affairs expense, which results in a test year expense estimate of $6,859,000. ORA claims this is consistent with the Public Affairs adjustment adopted in D.04-07-022. Also, based on its review of a 2003 time-tracking study of SCE's Public Affairs activities, ORA concluded that SCE has included inappropriate charges for Public Affairs activities in the 2003 base year which is the basis for SCE's test year request.

In response to ORA, SCE states that the 2003 time-tracking study was a pilot study and that it removed costs associated with lobbying, political support and corporate citizenship/company representation activities performed at the local level on the more recent and appropriate 2004 time-tracking study. SCE also indicates that its request of $9,145,000 already reflects self imposed reductions $1,064,000 based on the 2004 time-tracking study, $2,418,000 for Washington and Sacramento Offices' costs, $173,000 in one-time local lobbying expense, $298,000 in local non-labor expenses.

SCE's time-tracking studies were apparently conducted in response to D.04-07-022, where the Commission disallowed 25% of SCE's Public Affairs request in order to strike a fair balance of ratepayer and company interests.52 That disallowance was in response to the ORA and Aglet recommendations that 50% of the costs be disallowed. A properly conducted time-tracking study would provide a better basis for allocating public affairs related costs between ratepayers and shareholders. For purposes of this GRC, SCE's use of the 2004 time-tracking study is better than ORA's reliance on the 2003 study which has been characterized as a pilot study. The 2004 study was more comprehensive, and better reflects the current structure of the Public Affairs Department. We will use it, as proposed by SCE, to differentiate between ratepayer and shareholder cost responsibilities for Public Affairs expenses. However, SCE states that the 2004 time-tracking study results were applied to the 2003 recorded expenses to obtain the differentiation between 2003 expenses that are properly charged to ratepayers and the 2003 expenses that are properly charged to shareholders. It is not clear that this method is entirely correct, since SCE also states that the Public Affairs Department has changed markedly in the time between the respective rate cases, and there are differences in the scope and nature of Public Affairs' responsibilities.53 Specifically, the legislative and coalitions areas of responsibility were eliminated. What is not clear is whether the 2003 recorded costs have been adjusted to reflect the new scope and nature of Public Affairs before the shareholder/ratepayer allocations were applied.54 In its next GRC, SCE should redo the time-tracking study to reflect the areas of responsibilities requested for the test year and ensure that the results are appropriately applied to whatever methodology is used to forecast test year expenses for the Public Affairs Department.

Regarding SCE's request for incremental funding over the 2003 recorded adjusted expense level, SCE has filled the vacancies existing at the end of 2003. We will include costs related to those positions in the adopted expenses. We will also impose a 14% reduction to reflect charges to shareholders, based on SCE's 2004 time-tracking study.

Concerning the proposed five additional FTEs in 2006, we are not convinced they are necessary and will exclude them from the adopted Public Affairs expenses. SCE indicates that the new positions are needed to (1) meet new transmission and substation siting requirements as well as other Public Affairs operational and customer service needs; (2) protect ratepayers from local governments creating new revenue sources by establishing or increasing fees sought from electric utilities: (3) reduce the number of cities per region manager from five and one-half to five; (4) provide general education to local governments. In general these activities are not new. To the extent that they are continuing activities there may well be similar activities embedded in the 2003 recorded that will not extend through test year 2006. Also, the addition of six FTEs in 2004 may reduce some pressure related to these needs. We will provide that incremental funding of $395,00055 over the 2003 recorded adjusted level of $6,537,000 for labor. Therefore, for Public Affairs, Account 920/921, we adopt $8,749,000 rather than SCE's requested amount of $9,120,000.

SCE used a budget-based analysis to forecast the Account 920/921 test year labor expense for ES&M activities, which amounts to $13,541,000.

ORA agreed with SCE's proposed staffing level for ES&M but calculated the labor expense using an average 2003 labor rate, resulting in its test year estimate of $12,663,000.

SCE asserts that ORA calculated the average 2003 labor rate is incorrect, because ORA used the end of year number of FTEs in its calculation. According to SCE, there were more FTEs at the year endue to the addition of 16 FTEs during 2003. SCE's 2003 labor rates were based on actual salaries paid in 2003 to ES&M employees by job classification.

In order to properly calculate the average salary for 2003, the total labor expense should be divided by the average number of employees for the year, not the year-end number. While a weighted average number of employees for the year would be more appropriate, SCE calculates the simple average of the beginning and end of year employees to be 103 employees, as opposed to ORA's use of 111 end-of-year employees. Use of 103 as the average number of employees results in an average cost of $94,120. When applied to the 145 proposed number of employees for the test year, the result is a higher ES&M labor cost than requested by SCE. SCE's estimate that is based on a cost per employee using actual salaries paid in 2003 is reasonable and its test year ES&M labor forecast of $13,541,000 will be adopted.

SCE used a budget-based analysis to forecast the Account 920/921 test year labor expense for the Qualifying Facilities Resource Department. SCE's test year request amounts to $3,656,000 and includes the market costs for three additional employees over the 2003 recorded level.

ORA agreed with SCE's proposed staffing level for QF Resources, but calculated the labor expense by applying the average 2003 labor rate to the resultant 39 FTEs. ORA's adjustment resulted in a test year estimate of $3,590,000.

The difference between ORA and SCE is minor. Whether new employees will be hired at some market rate or something less, or whether the composition of the existing 36 employees will change or remain the same is uncertain. ORA's assumption that the overall net labor cost will be the average salary in 2003 applied to the expected number of employees in 2006 is reasonable. We will adopt ORA's estimate of $3,590,000 for QF Resources labor included in Account 920/921.

In SCE's last GRC, the Commission required SCE to "conduct a study, using appropriate statistical methodology, of reporting errors for reimbursable expenses of all employees, including those not subject to General Order 77K reporting requirements." (D.04-07-022, page 240.) Pursuant to that requirement, SCE conducted a review of recorded 2003 reimbursable expenses to verify that reimbursable expenses charged to ratepayer accounts were appropriate ratepayer expenses and not expenses that should be charged to shareholder accounts or below the line. SCE used a Monetary Unit sampling statistical methodology, which selects a statistically representative sample of expense reports to make inferences about the entire population. SCE states that the detailed review of the sample determined that of the 338 expense reports reviewed: 306 expense reports (totaling $297,932) correctly classified either ratepayer or shareholder reimbursable expenses, eight expense reports (totaling $10,019) could not be located, and 24 expense reports (totaling $40,748) had charged reimbursable expenses incorrectly to ratepayers (totaling $14,104). Based on these findings, SCE proposed to adjust $374,489 of the $14,615,079 recorded 2003 reimbursable expenses.

In contrast to SCE's proposed adjustment, ORA recommends that $1,060,531 of 2003 reimbursable expenses should be shareholder funded and that this amount should be disallowed from Accounts 920 and 921. There are two differences between SCE's adjustment and ORA's adjustment. The first difference is due to ORA's view that 100% of the expenses related to eight expense reports that could not be located should be disallowed. The second difference is due to ORA's assumption that certain recognition related expenses should be shareholder funded.

ORA also took issue with SCE for not reviewing all of the expenses reports for the year associated with the 24 employees who had errors in their expense report included in the sample. ORA also recommends that SCE be ordered to review all reimbursable expense reports for each employee whose annual total reimbursable expenses are $25,000 or more.

With respect to the eight missing reports, SCE applied the 4.29% error rate consistent with the rest of the sample. With respect to recognition awards, SCE states that ORA did not provide any rationale for the disallowance and that SCE's inclusion of such costs is consistent with its last GRC decision. SCE also states that to review all of the expense reports associated with the 24 employees who committed errors would have violated basic sampling principles by examining expense reports that were outside of the sample. SCE also asserts that it is unreasonable to assume employees who make an error on one report will make the same error on all reports. SCE states that it has a three tier review of expense reports and it is unlikely that would happen.

We will adopt ORA's recommendation and disallow 100% of the expenses for the missing eight expense reports. While a 100% error rate on those reports is unlikely, the expenses are wholly unsupported and that effect should be included in determining the adjustment. SCE should be able to provide accounting data and backup for its recorded transactions. If it cannot do so, it is reasonable to exclude such costs from rates. ORA states that had the eight missing reports been evaluated at 100% error, the statistical result for the most likely reimbursable expense error would be extrapolated to $687,307. We will adopt and reflect that amount to adjust the recorded 2003 reimbursable expense adjustment to Account 920/921.

As recommended by ORA, for the next GRC, SCE agrees to perform a review of all reimbursable expense reports for each employee included in SCE's General Order 77-L submittal whose annual total reimbursable expenses are $25,000 or more for any of the years 2004, 2005 and 2006. ORA indicated that would cover approximately 10% of the reimbursable expenses. SCE state that while it will correct any errors found in the review, it is important to note that since the sample will not be statistically significant (selected at random), any error found in the judgmentally selected sample cannot be extrapolated to the entire population. SCE is correct. To cover the approximate 90% of the remaining reimbursable expenses, SCE should also conduct another statistical study for recorded 2006 reimbursable expenses, for the remaining employees whose annual reimbursable expenses are less than $25,000, similar to that performed for 2003 recorded reimbursable expenses.

ORA's recommendation to eliminate recognition awards is similar to its proposal in the last GRC to disallow the SONGS 2 & 3 awards and recognition program. In denying that request, we stated:

The SONGS 2 & 3 awards and recognition program provides employees with incentives to perform above and beyond already high performance standards. Such a program is consistent with current human performance theories and is utilized at many corporations. ORA has not shown why ratepayer input is a necessary condition for ratepayer funding for the program. Even though ratepayer dollars may be involved, SCE management is entitled to a reasonable degree of discretion in determining how to motivate employee performance. Moreover, the costs at issue are not so large as to warrant a cost-benefit analysis to determine the program's effectiveness. (D.04-07-022, page 34.)

In proposing its adjustment for recognition awards in this proceeding, ORA did not provide any information or argument that would lead us to conclude that our discussion in the last GRC on this topic should now be disregarded. ORA's recommendation will therefore not be adopted.

Consulting expenses related to executive compensation are included in Account 923. SCE uses a five-year average to forecast $844,000 for this activity. SCE states that this methodology recognizes the fluctuating expenses over the last five years for outside services.

To estimate this account, ORA used recorded 2003 expenses, reduced by $226,000 for one-time, nonrecurring costs related to compensation design and an executive benefit index valuation study. ORA's methodology results in an estimate of $790,000.

SCE's rebuttal testimony indicates that the costs identified by ORA as being one-time and non-recurring are ongoing in nature. While postponed during the energy crisis, the executive benefit valuation study is conducted every three-years. Benchmarking studies are also needed and used to demonstrate the reasonableness of total compensation. It appears these activities may not be required every year but may be incurred in conjunction with GRCs. However, even if the $226,000 were normalized at $75,000 per year over the three-year GRC cycle, the resulting estimate would be greater than either SCE's or ORA's estimates, which differ by only $54,000. SCE's estimate of $844,000 is reasonable and will be adopted.

SCE based its forecast of $8,226,000 for account 923 and $3,111,000 for Account 928 on three-year averages (2001-2003) of recorded amounts. SCE states that it adjusted the recorded amounts for nonrecurring energy crisis effects, specifically by reducing 2001 outside counsel expenses by $4,841,000 for work associated with the energy crisis. SCE asserts that expenses for 2006 will be higher than recorded 2003 due to increasing legal challenges in such areas as ISO tariff amendment, Sarbanes-Oxley compliance work and EMF issues.

ORA utilized the 2003 recorded amount of $6,366,000 for Account 923 and $1,846,000 for Account 928 as the bases for its estimates. ORA argues that data for years affected by the energy crisis should not be used for forecasting purposes. ORA also state that, for Account 923, the use of last recorded year is a more accurate reflection of where SCE's costs are headed as SCE has shown that as its in-house legal increased, its need for outside counsel has dramatically decreased.

For Account 928, ORA further reduces its estimate to remove what it considers to be a one-time, nonrecurring expense; that being $1,505,000 associated with SCE's past participation in the Commission's Gas Border Price Investigation. ORA's test year estimate for Account 928 is therefore $341,000.

ORA's use of recorded 2003 as the base for forecasting test year expenses is more appropriate than SCE's three-year average. In light of the fact that a post-energy crisis recorded year, 2003, is available for analysis, for accounts affected by the energy crisis, it is reasonable to exclude the recorded data affected by the energy crisis for forecasting purposes. It is simpler than attempting to identify and add or subtract energy crisis-related adjustments in order to normalize expenses for that year or years.

We will adopt ORA's estimate of $6,366,000 for Account 923.

Regarding 2003, while SCE has identified potential issues that may increase its costs above 2003 recorded level, it has not quantified those costs. Also, the record does not substantiate that all 2003 recorded activities are necessarily ongoing through the test year. Cost for new activities may be offset by the effect of one-time or nonrecurring costs in 2003 not being incurred in the test year.

Regarding ORA's adjustment to Account 928 to remove costs incurred in 2003 for the Gas Border Price Investigation, SCE argues that this investigation is representative of the type of Commission regulatory proceeding that SCE participates in regularly on behalf of its ratepayers. Also, SCE states that the investigation is ongoing and expects to incur related costs in 2006. SCE's explanation is reasonable, especially in light of the fact that ORA's further adjustment would reduce expenses for Account 928 significantly below any of the recorded amounts for the years 1999 through 2003. We will therefore use the unadjusted 2003 recorded amount of $1,846,000 to forecast the test year expense for Account 928.

SCE used a budget based method to forecast $980,000 for non-labor corporate EH&S expenses included in Account 923. SCE states that the last recorded year plus new incremental expense is the most accurate approach to estimating the cost of the new programs that are being developed. SCE further states that it did not use the five-year average method because two of the years were highly anomalous as a result of the energy crisis, skew results of the average and grossly under-fund this account.

ORA used a five-year average of $172,000 to forecast this account. ORA believes the average captures the cyclical nature of the account and provides a sufficient level of expense for the test year.

In its prepared and rebuttal testimony, SCE supports its budget by identifying the following proposed consultant activities:

· $250,000 to update existing information management systems and communications materials to support regulatory compliance, public health and safety,

· $100,000 for its EMF group to provide Field Management Plans for new and existing public schools,

· $250,000 for Public safety to provide resources to develop electrical safety educational materials, thus supplementing existing programs and improving coordination of existing programs, and

· $208,000 for the Environmental Services and Consulting section to ensure compliance with endangered species requirements.

SCE's requested budgeted activities, totaling $808,000, appear reasonable and are discrete consultant activities. SCE has provided no information on what is embedded in the historic data and whether those consultant activities will continue through the test year. There is no justification for including the 2003 base year costs in the estimate. We will therefore adopt a test year forecast of $808,000 for the EH&S non-labor included in Account 923.

SCE used a budget-based analysis to forecast the Account 923 test year consultant expense for ES&M activities, which amounts to $3,400,000.

ORA recommends that SCE's request be reduced to reflect the last recorded year's expenditures, because SCE has been unable to adequately justify its request for an increase over that amount. ORA recommends an amount of $2,607,000.

SCE argues that ORA's use of 2003 recorded is inappropriate because the recorded amounts used by ORA include refund-related consulting cost adjustments that are not forecasted to reoccur during the test year. The adjustments were one time refunds received - pursuant to FERC proceedings - from El Paso and Reliant. SCE states that it made these consulting cost adjustments because its consultants performed studies that contributed to the successful resolution of the proceedings against these companies on terms favorable to California. SCE also criticizes ORA for not taking into account the Commission's recent long-term procurement plan decision (D.04-12-048) that SCE believes will result in higher than forecasted consultant costs due to the potential need for independent evaluators whenever a utility or a utility's affiliate participates in a utility procurement solicitation.

While criticizing ORA's use of 2003 recorded information, SCE has provided little to support its test year consultant budget for ES&M. In its direct showing, SCE indicates the types of situations where consultants are used and the fact that its costs have been held to the $3 million level for the past two years. SCE provides no detail on its budget, only indicating that due to ES&M's resumption of the procurement function in 2003, recent experience is more relevant for forecasting purposes. It was in rebuttal that SCE brought up potential costs related to D.04-12-048, which was issued after SCE prepared its testimony.

Other than potential independent evaluator costs, SCE has not justified its ES&M consultant budget request. The independent evaluator costs are speculative as it depends on the number of SCE/SCE affiliate bids that are submitted. Rather than use SCE's budget, we will instead use the 2003 recorded amount of $2,607,000 as the test year estimate. We will not adjust this amount to remove the affect of approximately $400,000 in refunds; because, based on the record, it is not possible to determine that other refunds or other reductions to 2003 recorded consulting costs of that magnitude will not occur in the test year.

For QF Resources consultant costs, SCE used the 2003 recorded amount, increased by $224,000 to reflect future business needs. SCE's request amounts to $400,000.

ORA recommends no increase over the recorded 2003 amount of $176,000, because recent history does not reflect a return to spending at the level requested by SCE.

In its direct testimony, SCE supports its request to more than double its consulting budget over the 2003 recorded level by citing an expected need for supplemental resources due to new renewable procurement activities and legislative and regulatory initiatives. SCE also cites the potential need for supplemental resources in the event of disputes, negotiations or litigation with QF contracts. While SCE provided a little more detail about potential activities in its rebuttal showing, there is nothing specific to support the reasonableness of the requested increase of $224,000. Also, SCE suggests that it is more cost-effective to contract on a short term basis with outside consultants with the expertise to evaluate technical aspects of a study rather than to add a technical expert to its labor base. However, there is no evidence that shows that any such cost-effective analysis was done in determining the $224,000 incremental request. Finally, since specific consultant activities and costs are not identified for the base year, it is not possible to determine whether all recorded 2003 activities will continue through the test year. If embedded activities terminate before the test year, the associated costs can be used to fund other activities. For these reasons, we will use the last recorded expense level of $176,000 as the test year forecast for QF Resource consultant costs included in Account 923.

For worker's compensation staff, SCE uses a budget based method to forecast an expense of $6,319,000 for the test year. SCE states that this method takes into account additional employees and medical management contractors that are necessary to comply with the utilization review statutes and regulations as well as the guidelines of the State Office of Self-Insurance Plans.

ORA incorporates a five-year average method, to account for fluctuations during the 1999-2003 time period. This results in a test year estimate of $4,259,000.

From 1999 through 2002, SCE recorded amounts ranging from $3,095,000 to $3,730,000 for this account. The recorded amount for 2003 was $7,324,000. SCE attributes the significant increase to increased costs for medical management contractors and the increase in the Self-Insurers Security Fund Payment. Compared to 2003, SCE added two additional employees and two additional medical management contractors during 2004. For the test year estimate, these adjustments are offset by a reduction in Self-Insurers Fund payment. ORA states that the 2004 unadjusted recorded amount for worker's compensation staff is approximately $5,700,000. ORA's use of a five-year average reduces the test year expense significantly below that needed to support existing staffing levels without providing convincing evidence regarding why it is prudent to do so.

SCE reasonably supports its test year estimate of $6,319,000 which we will adopt.

For forecasting the Worker's Compensation Reserve, SCE uses a three-year average to take into account the increase in worker's compensation payment reserve expenses which commenced in 2001 and continued through 2003. SCE forecasts a reserve of $44,466,000 for the test year.

ORA incorporates a five-year average method, due to fluctuations during the 1999-2003 time period. This results in an estimate of $36,360,000.

TURN proposes that the test year forecast be set at 10% above the adjusted recorded 2004 reserve expense, or $30,779,000. TURN also proposes a two-way balancing account that would provide 90% recovery for any amounts within plus or minus 30% from the forecasted amount. The 90% figure is intended to balance any forecasting inaccuracy under current conditions. TURN also proposes that Nuclear MIP reserve expenses transferred to Account 528 should be excluded when computing the balancing account results.

The recorded-adjusted worker's compensation reserve expenses for the year 1999 through 2004 are as follows:

$27,299,000

$21,171,000

$31,162,000

$43,596,000

$58,640,000

$27,981,000

Subsequent to providing TURN with the recorded 2004 amount, SCE determined that the figure does not include the Claims Division expenditures, which on average amount to approximately $9,500,000 per year. If that amount were added to the $27,981,000 recorded amount for 2004, the total would be about $38,500,000.

In its prepared testimony, SCE states:

Our test year 2006 reserve expense forecast is expected to be lower than our 2003 recorded, based upon using a three-year average. Due to the current changes in workers' compensation regulations, SCE foresees lower expenses than 2003 recorded but does not believe future expenses will return to 1999-2000 levels. Although no one can forecast exactly what the future expense will be, SCE believes that a three -year average would be the most accurate estimate at this time.56

Recorded 2004 data substantiates that the test year expense will likely be less than the 2003 recorded amount. The extent to which it will be below 2003 recorded is at issue. SCE uses a three-year average, ORA uses a five-year average and TURN uses 2004 recorded increased by 10%.

TURN points out that 2004 data represents the only time frame subsequent to the passage of SB 899, and recommends that such data be used due to significant known changes in circumstances. ORA also points to the enactment of AB 227, SB 228 and SB 899 as reasons to expect lower workers' compensation costs in the test year.

TURN also points out that even though benefit levels increased by 20% from 2003 to 2004, the amount of the benefits paid declined by 14.7% and was almost the same in 2004 as 2003. Also, even though benefit levels increased by another 15% from 2004 to 2005, and the number of claims jumped 60%, the benefits paid out remained unchanged from first quarter 2004 to first quarter 2005.

SCE argues that ORA's five-year average is inappropriate, because 1999 and 2000 are not representative of test year expenses. While that may be true, it also appears that recorded 2003 data is not representative of test year expenditures. An average of 2001 and 2002 recorded data results in an amount of $37,379,000, which is not materially different from the 2004 recorded amount that includes an approximation of Claims Division expenditures. Based on our discussion above, we will adopt $37,379,000 as a reasonable test year forecast for workers' compensation reserve expense.

As stated earlier, the adopted amount is close to that recorded in 2004. To a certain extent, 2004 reflects recent workers' compensation reforms. We will not prejudge potential legislation that may increase costs. Also, we do not see a necessity for a balancing account as proposed by TURN in its prepared testimony and modified in its reply brief.57

SCE used a budget based method to forecast $1,491,000 for corporate safety expenses. SCE states that the last recorded year plus new incremental expense is the most accurate approach to estimating the cost of the new programs that are being developed. SCE further states that it did not use the last recorded year method, because the method does not consider the need for additional programs to help prevent work-related injuries.

ORA used the last recorded year amount of $967,000 to forecast this account. Recorded 2003 data reflects the highest level of expenditures over the last five years, and ORA believes that amount should provide sufficient funding for SCE's test year requirements.

ORA correctly recognizes that the 2003 recorded amount of $967,000 is higher than any of the expenses in the years 1999 to 2002, which ranged from $760,000 to $953,000. This indicates a general increase in corporate safety costs, which is generally reasonable and may be desirable if employee safety is enhanced. However, SCE proposes a $524,000 increase (54%) in this account over the 2003 recorded level based on its budget method. SCE's use of 2003 recorded data and budgeted incremental costs for new programs does not consider possible cost reductions either for recorded activities that may be replaced by new programs or productivity improvements that may reduce existing costs. We will specifically include labor expense of $228,000 for developing a Corporate Safety Center of Excellence for the prevention of sprains and strains which account for about 50% of all work place injuries. We will also include $70,000 in non-labor expenses. We will not include $226,000 in labor expense budgeted to improve SCE's ability to track safety performance measures. We will assume that if truly necessary, such activities can be funded from that part of the unspecified budget that is based on the recorded 2003 expense level. We therefore adopt a test year forecast of $1,265,000 for the corporate safety activities in Account 925.

For test year 2006, SCE forecasts a total of $51,159,000 for pension costs. SCE states that its contributions for pensions include normal cost plus amortization of liabilities for ad hoc cost of living adjustments and various reserves, and that its current funding policy has been in effect since at least 1982.

ORA explains that SCE's forecast is based upon determinations made by SCE's retirement plan actuary using the Frozen Initial Liability actuarial cost method, one of the methods allowed for pension funding under the Employee Retirement Income Security Act of 1974 (ERISA), and the same method used in previous GRCs. SCE's forecast is a three-year average of the Rate Recovery Allowance amounts, assuming quarterly payments. In response to a data request, SCE provided its actuary's calculations for the ERISA minimum contribution, which fluctuates depending on which year the credit balance is used. In the interest of reducing costs to ratepayers, ORA recommends using the credit balance in 2008, which results in the lowest contribution amount -- a three-year average of $46,109,000. ORA asserts that there is no rationale for ratepayers to fund above a level necessary to keep the pension fund sustainable.

In rebuttal, SCE argues that ORA's minimum funding proposal should be rejected as unwise policy particularly in today's environment in which pension underfunding is a significant public policy issue. SCE also provided information that indicates that the ERISA minimum cost calculation, as proposed by ORA, should be updated and would now result in a three-year average pension cost of $48,690,000.

First of all, we will consider the ERISA minimum cost to be $48,690,000 rather than the $46,109,000 shown in ORA's testimony. Both costs were calculated by SCE's actuary. SCE states that the update better reflects all of the available IRS guidance on the application of the SCE Retirement Plan's funding method in the development of minimum required contributions. The revision was based on a review of IRS guidance starting with information received at the annual Enrolled Actuaries' meeting held during April 4-6, 2005, in the form of written responses from the IRS to questions submitted by actuaries. ORA objects to the updated number pointing out that the guidance provided by the IRS at the meeting was accompanied by a caveat that it does not necessarily represent the positions of the Treasury or the IRS and cannot be relied upon by any taxpayer for any purpose. SCE explains that the IRS requires this caveat, which gives it the flexibility to change its position and gives taxpayers less ability to rely on it when dealing with IRS. SCE's update and explanation are reasonable.

ORA proposed a minimum funding method in SCE's last GRC. The Commission rejected the proposal, stating in part:

If sound actuarial practice indicates a funding level above ERISA minimum funding requirements, we favor a conservative policy of authorizing expenses for that larger funding level to avoid potential under-funding that could jeopardize the interests of either retirement system beneficiaries or future generations of ratepayers. In light of this policy, the issue in this GRC turns on whether ORA's approach is sufficiently conservative and in line with actuarial practice.58

In that proceeding there was a large difference between SCE's requested $31,450,000 and ORA's recommendation of $0. SCE contended that ORA's method was not usable either for ERISA minimum funding purposes or for IRS tax deductibility purposes. ORA's method in that case could be interpreted then to be neither sufficiently conservative nor in line with actuarial practice. In this proceeding, that appears not to be the case. The difference between the results of SCE's normal cost calculation of $51,159,000 and the results of the ERISA minimum cost calculation of $48,690,000 is $2,419,000, which is not substantial. The ERISA minimum calculation could therefore be considered sufficiently conservative. Also the calculation was performed by SCE's actuary, so it appears to be in line with actuarial practice.

Since our concerns expressed in D.04-07-022 have been alleviated, we will adopt ORA's proposal to reflect the ERISA minimum calculations in forecasting pension costs. The ERISA minimum calculations are set to maintain the funding necessary to protect employees from an insolvent pension fund. Under current circumstances, we will not require SCE's ratepayers to fund more than that. The adopted funding level for SCE's pension plan is $48,690,000.

In its prepared testimony, ORA opposed a step in SCE's calculation of the 401(k) Savings Plan. That step escalates the projection factor in 2005 to allow for an anticipated increase in costs related to plan changes. ORA indicated that SCE did not identify how the additional escalation factor correlated to the anticipated increase in costs related to the plan change and recommended excluding the additional escalation factor in calculating the plan costs. This resulted in a $13,958,000 difference between SCE and ORA. However, in its opening brief, ORA states that SCE has since provided supporting calculations, and ORA no longer opposes SCE's 401(k) adjustment. We therefore adopt SCE's 401(k) Savings Plan calculations.

SCE used a budget based method to forecast expenses of $15,020,000 in this account. SCE states that the executive benefits forecast recognizes and accrues what the required expenses, as determined by its actuaries' use of Generally Accepted Accounting Principles. SCE also states that the design of the executive retirement and survivor benefit plan has been unchanged since 1995, when the plan configuration was revised to reduce costs by eliminating post-retirement survivor benefits for executives and reducing their pre-retirement survivor benefits.

ORA used a four-year average of $8,574,000 to normalize 2003 expenses, and then applied SCE's pension and benefit escalation rate, resulting in a test year estimate of $10,647,000. ORA asserts its approach is reasonable because it normalizes the extraordinarily high 2003 costs and brings SCE executive benefits compensation more in line with the executive benefits provided by other companies.

ORA apparently did not analyze the actuarial valuation of executive benefits, but rather relied on historical data and projected escalation factors. SCE argues, perhaps correctly, that ORA's four-year average of 1999-2002 data is flawed, because the costs in some of those years were significantly affected by the energy crisis. However, by 2003, salaries and bonuses had returned to normal levels.59 Therefore, rather than our evaluating the accuracy of the actuarial valuation, it would be reasonable to escalate the 2003 recorded amount of $11,157,000 to the test year level. This method assumes no significant changes to the plan and no changes in the number of eligible executives and results in an adopted estimate of $13,855,000 for executive pensions and benefits.

ORA's concern regarding executive benefits, as it relates to those for other companies should be addressed in the context of the Total Compensation Study.

SCE uses a factor of 0.8930% to calculate test year franchise fees. The factor is a weighted three-year average (2006 - 2008) that considers increases in franchise fees paid to the Counties of Los Angeles and San Bernardino during the three-year rate case cycle. SCE states that this method normalizes the change over the GRC cycle ensuring that ratepayers are not overcharged and that SCE shareholders do not absorb all the expense increases.

ORA recommends a franchise fee factor of 0.8737 for the test year forecast, because it properly reflects the 2006 franchise requirements.

ORA apparently opposes normalization of the franchise fee factor over the three-year GRC cycle. SCE's use of a weighted average for the three-year period, attempts to develop a single franchise fee factor that, over the three-year rate case cycle, will provide recovery of anticipated franchise fees, including those related to franchise fee factor increases that will likely occur during 2006. Those increases are due to the expiration of the current agreements with San Bernardino on June 13, 2006 and Los Angeles on December 27, 2006. Both counties have a statutory right to a payment based on either 2% of SCE's gross annual receipts arising from the use, operation, or possession of the franchise or 1% of SCE's gross annual revenues derived from the sale of electricity within the county limits, whichever calculation is greater. SCE indicates that 1% of its gross receipts would provide the greater payment and would significantly increase the franchise fee payments to both counties. While the three-year average overstates the probable factor for 2006, it understates the probable factors for 2007 and 2008. That is the nature of cost normalization over multiple years. SCE's method is reasonable and its proposed franchise fee factor of 0.8930% will be adopted for this GRC cycle.

Greenlining has raised issues related to corporate governance, good corporate citizenship, philanthropy, management diversity, supplier diversity, corporate transparency, executive compensation, and cost-cutting.

In Greenlining's opinion, SCE has, at best, an average record in some of the categories and a below average record in others. In summary, Greenlining proposes the following:

    1) Edison be urged, but not ordered, to demonstrate its commitment to supplier diversity by honoring its 1989 GO-156 commitment to supplier diversity of 22.5%, a commitment filed with the CPUC and reached with the Greenlining Institute,60

    2) Edison consider the importance in our diverse society of greater opportunities in upper management for Latinos and Asian Americans, as it committed to in its 1989 agreement with the Greenlining Institute. Edison has already demonstrated this leadership with regard to African Americans,61

    3) Edison recognize the importance of philanthropy, particularly in the context of multi-million dollar executive compensation packages, with a special focus on underserved communities,62

    4) Edison be put on notice that top executive compensation, even if technically absorbed by the shareholders, directly affects ratepayer costs (since unions now carefully monitor top executive compensation packages63); and,

    5) Edison consider linking large top executive bonuses ($73 million over the last three-years to the top thirty executives) to issues of concern to this Commission, including philanthropy to the poor, supplier diversity, management diversity and quality consumer services.

Greenlining states that it is not asking the Commission to take any punitive actions regarding SCE on any of the above mentioned issues. Instead, it urges the Commission to highlight Edison deficiencies, highlight the direction that this Commission is going in regard to these matters, and urge Edison to be a leader in these areas.

Regarding supplier diversity, SCE notes that a 22.5% supplier diversity goal for Minority Business Enterprises (MBEs) is not only higher than the GO 156 collective goal of 21.5% for Women, Minority, Disable Veteran Business Enterprises (WMDVBEs), but also unreasonable given the Commission's decision to eliminate exclusions. SCE foresees capital expenditures in the near future where there are no minority suppliers because the company will be purchasing large components of transformers, wire, cable, and wood poles directly from existing manufacturers. Since these components are no longer excluded from the base used to determine the utility's supplier diversity percentage, SCE believes that a 22.5 % goal for MBEs, as proposed by Greenlining, is unrealistic.

Regarding workforce diversity, SCE testified that it recognizes the need to make solid progress in the area of workforce diversity, especially in the top 500 positions. In this regard, SCE has a diversity strategy in place that includes focused recruiting strategies as well as internal programs, such as the company's Leadership Programs, that provide the company with a more diverse internal pool of candidates.

Regarding philanthropy, SCE states that it has made a philanthropy goal of 1% of pretax income with 60% going to nonprofit and community based organizations that support the underserved community. It is SCE's position that this should appropriately be left to the discretion of SCE since the company's cash contributions are funded by EIX's shareholders and therefore should not be mandated by the Commission.

Regarding Greenlining's recommendation to tie executive bonuses to philanthropy, SCE states that the Commission has previously rejected a similar proposal and nothing new has occurred that would justify a change in the Commission's decision. SCE further states that Greenlining's new proposal to link executive bonuses to supplier diversity and workforce diversity, which was not discussed in testimony or hearings, is vague and unsubstantiated. It is SCE's position that the Commission has previously rejected Greenlining's attempt to link executive compensation to philanthropy and should likewise reject Greenlining's attempt to link executive compensation to either supplier diversity or workforce diversity.

Regarding Greenlining recommendations related to corporate transparency, SCE states that the issue of reporting requirements for executive compensation has been addressed by the Commission in R.03-08-019 and does not need to be addressed in this proceeding.

During the proceeding, Greenlining provided a copy of its annual supplier diversity report for major utilities regulated by this Commission. The 2004 report, rates utility efforts with respect to contracting practices with MBEs.64 With 16.4% of its contracts going to minorities, SCE ranked 5th with a C+ rating.65 The information shows a wide variance in how different utilities utilize MBE suppliers. However, utilization of MBE suppliers is highly dependent on the utilities' needs and the availability of MBE vendors to fulfill those needs. Use of MBE suppliers for telecommunication and energy utilities may be significantly different due to differences in the mix of products and mix of vendors. There may even be significant differences in availability of MBE suppliers for electric and gas utility needs. However, the variance in MBE utilization between utilities does suggest that there may be MBE opportunities that some utilities may be overlooking. Practices and plans related to the utilization of WMDVBE suppliers are the subject of annual utility and Commission reports required by General Order 156. If potential improvements in supplier diversity can be identified through this process, they should be considered for implementation.

SCE's previously stated goal of 22.5% for MBE suppliers was developed when utilities were able to exclude certain services or products due to their specialized nature and lack of potential WMDVBE suppliers. We agree with SCE's position that such a goal may no longer be realistic, due to the Commission's elimination of exclusions in D.03-11-24. General Order 156 currently specifies goals of 15% for MBE's, 5% for Women and 1.5% for Disabled Veterans. Other than to encourage utilities to continue to seek improvements in providing opportunities for each of the segments, we do not feel it is appropriate to mandate or suggest higher goals for specific utilities at this time. Changes to the Commission's specific goals should be considered in the context of modifications to General Order 156, on a generic basis, so that the views of all potentially affected parties can be considered.

In its opening brief, Greenlining proposes that SCE be required to track its supplier diversity achievements for small and medium sized minority businesses and to report to its CEO and top management the dollar amount of its supplier diversity that is awarded to minority owned businesses with revenues of $10 million or less. As a threshold matter, SCE states that small and medium sized minority businesses are not a vendor category recognized by the Commission in General Order 156. However, SCE has voluntarily agreed to analyze this type of data as part of the Company's efforts on the California Utilities Diversity Council. SCE states that it has not yet been established that this kind of analysis would necessarily lead to enhanced minority owned businesses, nor is it part of the Commission's General Order 156 guidelines. Therefore, SCE argues that it should not be required to report its supplier diversity achievements for small and medium sized minority businesses. We appreciate SCE's cooperation in voluntarily providing the requested information, but for the reasons suggested by SCE will not establish a requirement to do so. If deemed appropriate, such a requirement can be developed generically, in the future.

During the proceeding, Greenlining developed information that showed among SCE's top 100 managers, 10% were African American, 4% were Latino and 4% were Asian American. While Greeenlining commends SCE for its achievements regarding African Americans, it criticizes that for Latinos and Asian Americans whose population is larger than that of African Americans by six times and two times, respectively.

SCE has shown that it can achieve significant African American representation in its management through internal development and outside hiring. Its results in this area are commendable. SCE also recognizes the need to make solid progress in the workforce diversity and cites its strategies and programs to do so. We look forward to seeing the results of its efforts. As part of its next GRC filing, SCE should provide information on its workforce diversity achievements, similar to that provided by Greenlining in Exhibit 505.

During the proceeding, Greenlining developed information that compared SCE's philanthropy to bonuses to top executives. For example, in 2004 while bonuses to the CEO amounted to approximately $8,700,000 and bonuses to the top 30 executives amounted to approximately $30,200,000, SCE's philanthropy consisted of $80,000 to African Americans, $237,000 to Latinos, $142,000 to Asian Americans, and $1,266,000 to the poor. According to SCE, it has committed to a philanthropy goal of 1% of pretax income with 60% going to nonprofit and community based organizations that support the underserved community. While Greenlining would commend that goal, it urges SCE to consider President Peevey's urging of utilities to develop strategic long-term philanthropic programs where cash philanthropy equals or exceeds 2% of pretax profits and at least 80% is committed to underserved and poor communities.

For many reasons, including good corporate citizenship, social responsibility, and public perception, philanthropy is an important consideration for SCE/EIX and corporations in general. However, we previously indicated that we have no jurisdiction to order a change in SCE's giving practices,66 and that still holds true today. We would hope that in EIX/SCE's determination of its philanthropic goals, consideration is given to President Peevey's stated opinions and preferences in this area. We will not however specify or mandate such goals.

In D-04-07-022, for purposes of ratemaking, we declined Greenlining's attempt to link SCE's executive compensation package to its philanthropy. We stated that link was not supported by any study and was without merit.67 After consideration of the record in this proceeding, we again find no support for linking philanthropy and executive compensation and will not do so.

Similarly, we will not link executive compensation to either supplier diversity or workforce diversity, as suggested by Greenlining. To the extent that executive compensation is reflected in rates, it has been justified through the total compensation study that is included as part of the record in this case. For ratemaking, we have found that on an overall basis SCE's total compensation is within the market range and is reasonable. However, we will not preclude SCE or any other utility from including either supplier diversity or workforce diversity results in determining incentive compensation for the responsible employees or executives. Such incentives may or may not be appropriate depending on the circumstances.

Greenlining also asserts that ratepayers bear the cost of excessive executive compensation, particularly when unions take such compensation into account during bargaining with top management. We will not adjust any costs or make any policy decisions based on that assertion. It would be speculative to attempt to quantify any associated ratepayer costs. Also, the total compensation study can put possible cost increases into perspective. As stated previously, as a whole, SCE total compensation is within market and is reasonable. We also note that, in this decision, we have allocated certain compensation costs between shareholders and ratepayers. We see no reason to further consider Greenlining's assertion.

Finally, Greenlining requests more transparency in the reporting of executive compensation. To the extent that its request is tied to modifying the filing requirements related to General Order 77-K (since replaced by General Order 77-L), we decline to do so. Such reporting requirements related to executive compensation have been addressed in R.03-08-019, most recently in D.05-09-021, and do not need to be addressed in this proceeding. To the extent Greenlining feels more information or clarification of information is necessary, it should pursue its needs through discovery in GRC or other related proceedings.

43 As reflected in the Joint Comparison Exhibit.

44 For reference, as of June 28, 2005, SCE' results sharing request was as follows:

Results Sharing $61,877,000

MIP 16,779,000

MCD 682,000

EIP 8,416,000

Total $87,754,000

45 For instance see D.86-12-095, 23CPUC 2d 149, 187; D.92-12-057, 47 CPUC 2d 143, 201; D.93-12-043, 52 CPUC 2d 471, 496; and D.96-01-011, 64CPUC 2d 241, 368.

46 See D.04-07-022, Section 6.7.2.3.2.

47 If SCE's operating income is 94% of target, assuming target is a level that would produce an authorized rate of return, SCE's net revenue would be reduced by approximately $51,000,000. Likewise if operating income is 106% of target, SCE's net revenue would be increased by approximately $51 000,000.

SCE's results sharing request of $88,482,000 for 2006 is calculated as 75% x (2003 maximum payout) x (2006 labor) / (2003 labor). The 100% maximum payout would be approximately $118,000,000. The maximum target revenue before adjustment for operating income would be approximately half of that amount or $59,000,000. A 0.5 multiplier would reduce the target amount by $29,500 and a 2.0 multiplier would increase it by $59,000,000.

48 SCE indicated that elimination of results sharing would result in SCE's compensation being reduced to 8% below market rather than 1.6% above market. We assume a 50% reduction cutback in the program would result in half of that reduction.

49 ORA states that it never considered the possibility of having Spot Bonuses included in the total compensation study, reasoning that it is inappropriate to include Spot Bonuses because they vary greatly from company to company, they are a small part of total compensation and they are not routinely tracked by the consulting firms that are responsible for conducting compensation studies.

50 SCE/Cogan, 20 RT 1923, lines 18-28.

51 Exhibit 62, page 103.

52 Finding of Fact 191.

53 SCE/Exhibit 103, pages 32-33.

54 For example, if an employee's activities were related 70% to ratepayers in 2003, but after reorganization that employees activities were now related 90% to ratepayers, the application of the 2004 time-tracking study showing the 90% ratepayer share to the 2003 recorded amount would not properly reflect ratepayer cost responsibility in the base year and might result in an inappropriate assumptions regarding the base year amount that is used for forecasting the test year.

55 (6 positions adopted / 11 positions requested) x $841,000 requested x 86% ratepayer share.

56 SCE, Exhibit 71, page 63.

57 In its rely brief, on page 11, TURN modified its balancing account proposal to cover 100% of the recorded costs as opposed to the 90% proposed in its original testimony.

58 D-04-07-022, mimeo. pages 219-220.

59 SCE, Exhibit 101, page 60.

60 Edison is presently at 16%, versus 23% for SBC.

61 Ten African Americans are included among the top 100, versus only four Latinos and four Asian Americans.

62 In 2004, only $1.3 million in philanthropy was given by Edison to the poor, versus $10.3 million in compensation given to Edison's CEO.

63 Unrefuted evidence by Greenlining expert Michael Phillips, Exhibit 501, pp 13-15.

64 See Exhibit 506.

65 For comparison, SBC ranked 1st with 23.0% and an A- rating, Southern California Gas Company ranked 2nd with 17.7% and a B rating, SDG&E ranked 3rd with 17.4% and a B rating, AT&T ranked 4th with17.2% and a B rating, Verizon ranked 6th with 15.2% and a C+ rating, and PG&E ranked 7th with 11.1% and a D rating.

66 See D.04-07-022, Section 6.7.2.2.3.

67 Id.

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