18. General Office Labor

GO labor includes labor associated with common customer account expenses and A&G expenses. SCWC estimates GO labor to be $7,765,300 in 2003 and $8,120,400 in 2004, while ORA estimates $6,445,900 for 2003 and $6,627,700 for 2004.

As discussed below, we adopt GO labor in the amounts of $6,864,200 for 2003 and $7,077,000 for 2004.

18.1. Discussion

A reasonable estimate of GO labor lies somewhere between the SCWC and ORA numbers. ORA used 2001 recorded expenses and escalated that amount by labor inflation factors to estimate the test year amounts. As SCWC points out, that methodology does not consider the effects of the CPP. On the other hand, even when considering the effects of the CPP, SCWC's estimates appear to be high when compared to recorded information.

The last recorded year not affected by the CPP was 2000. GO labor expense for that year was $5,723,700.⁵⁰ SCWC's test year 2003 request of $7,765,300 exceeds the 2000 recorded expense by $2,041,600, or 35.7%, which is a substantial three-year increase. SCWC's testimony offers little in the way of justification for the large increase other than identifying the need for an additional auditor and indicating that some of the unfilled vacancies were necessary to fulfill the requirements of the Sarbanes-Oxley Act of 2002 and other new Securities and Exchange Commission rules. When possible, recorded data is useful in testing the reasonableness of utility budgets. We note that the recorded 2002 GO labor expense amounted to $6,002,175,⁵¹ which is 20% less than the $7,519,900 estimated by SCWC for that year. The difference appears to be greater than the effect of the CPP. SCWC explains, "Although the CPP ended in mid-2002 and the hiring freeze was removed, many positions were not actually filled until the end of 2002, or the beginning of 2003, so again the 2002 recorded expense does not include some or all of the costs associated with these positions."⁵² SCWC further states that, at the time of the application (November 2002), there were 14 positions in the general office that were not filled. The expense portion of the related salaries amounted to $740,700. This is consistent with SCWC's explanation that during the CPP there was a company-wide hiring freeze and, at its peak, there was close to a 10% vacancy rate within the entire company (including proposed new positions). If the recorded 2002 expense were adjusted for the 14 vacancies, the amount would be $6,742,875. We feel this would be a reasonable basis for determining the test year estimates for GO labor expense. The positions have either been filled or are necessary for auditing purposes. SCWC used labor inflation factors of 1.8% for 2003 and 3.1% for 2004. Application of those factors to the adjusted 2002 recorded expense results in our adopted estimates of $6,864,200 for 2003 and $7,077,000 for 2004.

SCWC included 1.5% per year increases for equity adjustments. The utility's showing, however, does not provide the basis for the adjustment or describe how the percentage was determined. Therefore, we will not adopt the adjustment. SCWC also includes an explicit overtime factor based on year 2000 information, indicating that overtime during the CPP timeframe is not indicative of normal operations. In this case, it is not clear that 2000 overtime is reflective of what can be expected in the test years. SCWC had estimated 2003 GO labor expense that was 35.7% higher than the 2000 recorded amount. Our adopted amount for 2003 is 19.9% higher than the 2000 recorded amount. Some of the overtime incurred in 2000 should no longer be necessary due to the increased staffing included in the test year amounts. What that amount should be is unclear; however, our methodology in adopting the test year estimates includes recorded 2002 overtime. We assume that amount and the new positions will cover overtime needs. Lastly, we assume that the new auditor position specifically requested by SCWC is included in our estimates. The increased costs should be more than offset by the specific assignment to Region 3 of the water quality manager and support analyst, who were previously in, and charged to, the general office.