21. Pensions and Benefits

A major part of the Pensions and Benefits (P&B) cost is for medical insurance premiums. SCWC indicates that in 2001, it spent $5,417,307 on P&B expenses, while the recorded expense for 2002 was $7,101,845, a 31% increase. SCWC states it expects to see a 13% increase in medical premiums for 2003/2004. Accordingly, the utility has projected its P&B expense to be $8,085,700 in 2003 and $8,711,800 in 2004.

ORA states that it estimated P&B costs by using 2001 expenses and escalating to 2003 and 2004 using ORA's escalation rates, while SCWC used an annual increase of 28% for health care costs based on some preliminary information it received from a health care provider and approximately a 10% increase for other cost components to derive its estimates. ORA argues that SCWC's proposed increases are excessive, that health care providers often quote higher rates at the beginning of negotiation, and that the projection of these costs is unreasonable. ORA notes that P&B cost has been fluctuating substantially and, in some years, it has actually declined substantially. For instance in 2000, the P&B expense declined 28%. ORA concludes that general inflationary increases are reasonable for the test year estimates.

SCWC argues that ORA's proposal to increase 2001 recorded expenses by less than 3% annually is inadequate to cover the costs that SCWC has already incurred and will incur in the future.

As discussed below, we adopt P&B expense amounts of $7,598,900 for 2003 and $8,130,900 for 2004.

21.1. Discussion

SCWC has provided information that shows its recorded P&B expense for 2002 was $7,101,845. ORA's 2003 estimate, which was based on 2001 recorded information, amounted to $5,261,500. This indicates that significant cost increases, especially in the medical area, are not covered by general inflation. For this reason, it appears reasonable to use the most recent recorded data as the basis for the test year estimates. The 2002 recorded P&B amount of $7,101,845 will therefore be escalated to derive estimates for test years 2003 and 2004. We will consider SCWC's indicated 13% annual increase for medical in determining the appropriate escalation factors. There is also merit in ORA's argument regarding the use of a general inflationary increase due to factors such as fluctuations in historic costs, including significant reductions from one year to the next. Medical costs approximate 40% of the P&B expense. We will weight the 13% projected annual medical increase by that 40% and the annual general inflationary increase of 3% by the remaining 60% of P&B expense. The resultant escalation factor is approximately 7% per year. The 7% annual escalation is applied to the recorded 2002 P&B expense to derive the adopted amounts of $7,598,900 for test year 2003 and $8,130,900 for test year 2004.