Application No.:
Exhibit No.:
Witnesses:
A.04-12-014
SCE-18
W. Gayler
D. Kracke
S. Pickett
J. Shimmel
T. Muir
V. Gutierrez
J. Sahl
D. Van Iderstine
K. Cini
K. Payne
S. Hemphill
(U 338-E)
2006 General Rate Case
Rebuttal Testimony
SCE-18 - Administrative & General
Before the
Public Utilities Commission of the State of California
Public Version
Rosemead, California
May 2005
SCE-18: Administrative & General
Table Of Contents
Section
I.
Page
FINANCIAL ORGANIZATIONS........................................................ 1
A.
Introduction .............................................................................. 1
B.
ORA’s Recommendations Ignore The Significant
Burdens Imposed On SCE To Implement And
Effectively Comply With The Requirements Of The
SOX. .......................................................................................... 2
C.
ORA Recommends Disallowing $1.3 Million Of
Controllers Account 923 Expenses For SOX
Compliance. .............................................................................. 3
D.
ORA Recommended Disallowance Of $1.4 Million
Of Audit Services Account 920/921 Expenses
Ignores The Internal Requirements Necessary For
SOX Compliance ....................................................................... 4
E.
ORA Recommended Disallowance Of $0.1 million
Of Treasurers Account 920 Expenses Ignores The
Internal Requirements Related To The
Implementation Of SOX And That The Additional
Employee Was Not Included In The 2003 Recorded
Data........................................................................................... 7
Witness
W. Gayler
II.
RISK CONTROL ................................................................................. 9
D. Kracke
III.
LAW ................................................................................................... 10
...............................................................................................................
S. Pickett/
J. Shimmel
A.
Introduction ............................................................................ 10
B.
ORA’S Recommended Adjustment To Account 921
(In-House Attorneys (Office Supplies and
Expenses)) Is Not Appropriate............................................... 11
C.
ORA Errs In Its Recommendation To Reduce FERC
Accounts 923-928 (Outside Counsel Expenses) .................... 12
D.
The Commission Should Not Mandate SCE’s Law
Department To Track In-House Legal Expenses .................. 15
-i-
SCE-18: Administrative & General
Table Of Contents (Continued)
Section
IV.
V.
VI.
VII.
Page
WORKERS’ COMPENSATION ........................................................ 16
...............................................................................................................
A.
Introduction ............................................................................ 16
B.
The Commission Should Reject ORA’s Proposal
With Respect To Account 925 – Workers’
Compensation Staff ................................................................ 16
C.
The Commission Should Reject ORA’s Proposal
With Respect To Account 925 – Workers’
Compensation And Claims Reserve ...................................... 18
D.
The Commission Should Reject TURN’s Proposal
To Use 2004 Reserve Expenses As The Basis For
Test Year Expenses ................................................................ 20
REGULATORY POLICY AND AFFAIRS ........................................ 24
A.
Introduction ............................................................................ 24
B.
ORA Errs In Its Recommendation To Reduce Labor
Expenses In Regulatory Policy & Affairs .............................. 24
ENVIRONMENTAL, HEALTH & SAFETY .................................... 27
A.
Introduction ............................................................................ 27
B.
ORA Uses Unjustified And Inappropriate Forecast
Methods .................................................................................. 27
C.
FERC Account 921 ................................................................. 29
D.
FERC Account 923 ................................................................. 29
E.
FERC Account 925 – Employee Safety.................................. 30
PUBLIC AFFAIRS ............................................................................ 32
A.
Introduction ............................................................................ 32
1.
ORA’s Reduction Proposal Is Premised Upon
Errors And Misunderstandings .................................. 33
-ii-
Witness
J. Shimmel/
T. Muir
V. Gutierrez
J. Sahl
D. Van Iderstine
SCE-18: Administrative & General
Table Of Contents (Continued)
Section
Page
2.
ORA Improperly Disregarded PA’s Need To
Fill Six Vacancies That Existed At The End
of 2003 And To Add Five New Positions In
2006 .............................................................................. 34
3.
One-Time Local PA 2003 Lobbying Activities
Adjustment Charged To Shareholders Was
Performed Correctly .................................................... 34
4.
SCE 2004 Time-Tracking Study Was
Performed Correctly - The 2003 TimeTracking Study Was A Pilot Program ........................ 35
5.
a)
ORA Mischaracterized Many Of PA’s
“Educating” And Monitoring TimeTracking Entries ............................................... 36
b)
ORA Misunderstood The Ratepayer
Purpose For Many “Educating” And
Monitoring” Time-Tracking Entries................. 37
c)
Even If ORA Was Correct, The Hours
Related To Alleged Mistakes In The
2003 Study Do Not Support A 25
Percent Reduction ............................................. 38
Witness
ORA Proposal To Reduce The Franchise
Factor Should Be Rejected .......................................... 38
VIII. ENERGY SUPPLY & MANAGEMENT ........................................... 39
A.
Introduction ............................................................................ 39
B.
ORA’s Labor Adjustment Is Incorrect ................................... 39
C.
ORA’s Consultant Adjustment Assumes 2006
Refunds With No Justification And Ignores Future
Consulting Expenses SCE Will Incur Because Of
The Commission’s Recent Long-Term Procurement
Plan Decision .......................................................................... 40
D.
SCE’s Forecast Remains Robust ............................................ 42
-iii-
K. Cini
SCE-18: Administrative & General
Table Of Contents (Continued)
Section
IX.
X.
Page
QUALIFYING FACILITIES ............................................................. 43
A.
Introduction ............................................................................ 43
B.
Costs For New FTEs .............................................................. 43
C.
Consulting Costs .................................................................... 45
RESOURCE PLANNING AND STRATEGY ................................... 47
A.
Introduction ............................................................................ 47
B.
ORA Erroneously Concludes That RP&S Is
Overstaffed By One FTE ........................................................ 47
C.
ORA Erroneously Calculated RP&S’ 2004 Average
Cost Per FTE .......................................................................... 48
D.
ORA Misunderstands The Challenges Of Staffing A
New Division........................................................................... 49
E.
Conclusion .............................................................................. 51
Appendix A Witness Qualifications
-iv-
Witness
K. Payne
S. Hemphill
SCE-18: Administrative & General
List Of Figures
Figure
Page
Figure VII-1 Impacts Of Existing And Proposed Shareholder Reductions .......................... 33
Figure X-2 Year-End 2004 RP&S Organization Chart ......................................................... 48
1
-v-
SCE-18: Administrative & General
List Of Tables
Table
Page
Table VI-1 Impacts Of ORA Proposal On SCE EH&S Programs ......................................... 28
Table VIII-2 Summary Of Forecast ES&M Labor Costs ...................................................... 39
Table X-3 Comparison Of Labor Expenses (Partial/Full Year) ............................................ 49
1
-vi-
1
I.
2
FINANCIAL ORGANIZATIONS
3
A.
Introduction
SCE has estimated total A&G expenses of $38.6 million (2003 $) in test year 2006
4
5
for its Financial Organizations – Controllers, Audits, Treasurers and Tax Department.
6
These expenses record to FERC Accounts 920, 921, 923, 926 and 930. ORA has proposed
7
an approximate $1.8 million reduction for the Financial Organizations. However, included
8
in ORA’s recommendation is an increase in the Participant Credit P&B of $1.0 million
9
which reflects ORA’s recommendation related to the Mohave Generating Station. In order
10
to isolate the impacts of ORA’s recommendation related to the Financial Organizations we
11
have removed the Participant Credit P&B from both SCE’s and ORA’s forecast. SCE’s
12
forecast, absent the Participant Credit P&B is $38.9 million and ORA’s forecast is 36.1
13
million. As result, ORA has recommended a $2.8 million reduction for the Financial
14
Organizations.
Specifically, ORA recommends that $1.3 million in Account 923 for Controllers, $1.4
15
16
million of Audits expenses in 920 and 921 and $0.1 million in Account 920 of Treasurers
17
expenses be denied. A majority of these expenses are the additional resources necessary
18
to ensure the Company complies with the requirements of the Sarbanes – Oxley Act
19
(SOX).
TURN recommends an adjustment to the methodology used to calculate the
20
21
capitalized A&G rate1. SCE does not oppose TURN’s adjustment.
SCE’s rebuttal to ORA’s recommendations are addressed below.
22
1
TURN Report, Marcus, p. 48, line 8.
1
1
B.
ORA’s Recommendations Ignore The Significant Burdens Imposed On SCE
2
To Implement And Effectively Comply With The Requirements Of The
3
SOX.
4
SOX was created by Congress in 2002 in response to an unprecedented string of
5
accounting scandals (e.g., Enron, WorldCom, etc.). The adopted legislation was intended
6
to provide on-going regulation with respect to corporate governance, financial statement
7
integrity, and internal controls for public companies.
8
9
10
11
Due solely to the SOX legislation, SCE has had to create and maintain a corporatewide compliance infrastructure to sufficiently monitor and report upon internal controls
over financial reporting.
It is important to note that the impact of SOX is not a one-time occurrence, and
12
extends beyond the initial year of compliance with the legislation. Annually, the Company
13
must demonstrate that it has established and maintained adequate controls that are
14
designed and operating effectively. On-going SOX compliance for SCE includes the
15
following:
16
The Company must ensure that over 100 business processes and 1,300 related key
17
controls that were documented as required by SOX continue to operate as designed. Of
18
the 1,300 key controls, 900 are from SCE and 400 are from the Edison Mission Group. The
19
CEO and CFO must certify that internal controls over financial reporting have been
20
designed under their supervision and the preparation of the financial statements are
21
reliable and in accordance with generally accepted accounting principles. In order for the
22
CEO and CFO to make such a certification, the Company has developed an internal
23
certification process throughout the organization. This process includes reviewing and
24
testing all 1,300 key controls on an on-going basis to ensure that they continue to operate
25
as designed. If there are changes in the design of key controls, the SOX documentation
26
must be updated on a timely basis and the new controls must be tested for operating
2
1
effectiveness. The Company is also responsible for tracking and remediating all internal
2
control deficiencies.
3
SOX also requires the outside audit firm for the Company to independently walk-
4
through all of the business processes and to either directly test the 1,300 key controls or
5
review the results of internal audits testing.
Due to the rigidity and depth of the ensuing audit standards associated with SOX,
6
7
compliance with this law has proven to be a costly exercise in both internal and external
8
resources for all publicly traded companies. Across the country the cost to effectively
9
implement SOX has been much greater than anyone anticipated. A review of the proxy
10
statements of various utilities where audit fees were disclosed for 2003 and 2004 show
11
that, similar to SCE, the recorded external audit fees for these companies nearly doubled
12
in 2004 compared to 2003.
13
Contrary to ORA’s contention, the recorded 2003 expenses do not reflect the
14
required additional resources necessary to perform the massive and extensive compliance
15
program on behalf of management. Therefore, we feel that the requested incremental cost
16
requirements related to SOX are reasonable as they are an undisputed cost of service.
17
C.
ORA Recommends Disallowing $1.3 Million Of Controllers Account 923
18
Expenses For SOX Compliance.
19
As described above, compliance with SOX requires an on-going increase in effort by
20
SCE’s outside auditors (PriceWaterhouseCoopers). The outside auditors are required to
21
test and/or verify that all 1,300 key controls are operating effectively throughout the year.
22
In addition, external auditors are also required to independently walk-through all
23
processes with the business process owners to ensure that the external auditors have a
24
thorough understanding of the process for them to effectively test the key controls. As
25
such, SCE included a $1.3 million increase above the 2003 recorded levels for Account 923
26
to reflect the additional on-going outside auditing costs related to the compliance
27
requirements of SOX. The proposed increase was based on a written estimate provided by
3
1
PriceWaterhouseCoopers detailing their increase above current audit fees for the on-going
2
audit requirements related to SOX. As discussed above, SCE’s requested increase in
3
Account 923 related to outside Audit fees is consistent with increases incurred by other
4
utilities.
5
SCE’s past experience demonstrates that a level of outside consulting services
6
equivalent to 2003 recorded levels will be necessary in the future. As shown in Exhibit No.
7
SCE-7, Volume 2 the recorded Account 923 costs in 2003 were almost identical to those
8
incurred in 1999. Based on past history, it is not unreasonable to assume that some form
9
of unanticipated legislation or regulation (i.e. SOX, FASB, etc.) will evolve in the future
10
that will require the Company to incur outside consultant expenses.
Therefore, we feel that the incremental cost requirement requested is reasonable.
11
12
D.
ORA Recommended Disallowance Of $1.4 Million Of Audit Services
13
Account 920/921 Expenses Ignores The Internal Requirements Necessary
14
For SOX Compliance
15
The ORA has based their recommendation on two incorrect assumptions:
16
a)
embedded in SCE’s base year 2003 recorded expenses, and
17
18
19
20
The additional FTEs needed to test compliance with SOX are already
b)
SCE did not provide a methodology for allocating costs between the utility
and non-utility.
With regards to a) above, the 2003 recorded costs do not reflect the incremental
21
costs associated with the on-going SOX testing. Even though SOX was enacted in July
22
2002 to be effective on or after September 30, 2003, in June 2003 the Securities and
23
Exchange Commission extended the deadline for calendar year corporations until
24
December 31, 2004. Therefore, the majority of the testing for SCE was performed during
25
2004. Planning, project management, coordination of the testing, designing standard
26
templates and starting some of the tests began around September 2003 and the Audit
27
Services Department (ASD) used approximately two FTEs to accomplish that task during
4
1
all of 2003. During 2004, the first year of implementation, ASD hired six additional
2
auditors and reassigned fifteen existing auditors in addition to utilizing third party
3
consultants to support management’s opinion on internal controls as of December 31,
4
2004. In 2005 ASD plans to hire an additional four auditors to supplement its internal
5
staff to meet the on-going SOX requirements. This amounts to a total of ten additional
6
auditors above 2003 recorded levels necessary to effectively perform the on-going required
7
activity related to SOX compliance.
8
9
As discussed above, SCE and the non-utility affiliates identified approximately
1,300 key controls that needed to be tested on an on-going basis. ASD was responsible for
10
evaluating the design and operating effectiveness of all key controls and reporting the
11
results of those tests to senior management. Testing included the following:
12

Understanding and evaluating management’s scoping process
13

Conducting walkthroughs of all processes from beginning to end
14

Evaluating the design effectiveness of the key controls
15

Developing test plans and determining appropriate sample sizes to assess
16
approximately 1,300 key controls at the process level at two different time
17
intervals during the year
18

Executing and documenting the results of the test plans
19

Reviewing and testing controls over the use of spreadsheets and system
reports
20
21

in the COSO model
22
23

26
Conducting reviews of critical applications, addressing general IT controls,
application controls, and computer operation
24
25
Reviewing and testing entity level controls using the five criteria established

Reporting exceptions, making recommendations and retesting remediated
controls
5
1
With regards to b) above, SCE did provide a methodology for the recovery of the
2
costs associated with the non-utility affiliates. See Exhibit SCE-7, Volume 2, page 24,
3
lines 22 through 24, “To the extent Audit Services performs work for non-utility affiliated
4
companies, the costs are subject to the affiliate credit mechanism discussed in Exhibit
5
SCE-8, Results of Operations,” and page 25, lines 7 through 9, “All non-utility affiliate
6
credits will be refunded to customers through the Other Distribution Mechanism
7
Balancing Account (ODAM) per the Post Transition Ratemaking Decision (D.99-10-057).”
8
ASD’s test year request of $1,190,000 in non-labor expenses pertains to both utility
9
and non-utility costs. ORA is recommending $715,000 for ASD non-labor expenses.2 Of
10
the $475,000 non-labor expenses denied by the ORA, $231,000 pertains to the non-utility
11
affiliates and will be credited to the ratepayers via the appropriate Balancing Account
12
Mechanism. The remaining $244,00 pertains to increases related to utility operations and
13
is made up of the following expenses:

14
$45,000 in third party consultant costs for both IT and EH&S specialized
skills.
15

16
An increase in training costs of $100,000 necessary to provide adequate
17
training for the 10 new auditors and the existing Audit staff in order to meet
18
professional organization’s requirements for active certification.

19
An increase in travel and other non-labor costs of $99,000 for the ten new
auditors and the existing Audit staff.
20
The requirements for Audit Services related to SOX are in addition to normal
21
22
activities, such as operational audits, they perform in reporting to the Audit Committee.
23
Recorded 2003 costs do not reflect the on-going costs of running such a massive and
24
extensive compliance program. Therefore, we feel that the incremental cost requirements
25
requested for Audit Services are a reasonable cost of service.
2
ORA Testimony, page 10-B-4.
6
1
E.
ORA Recommended Disallowance Of $0.1 million Of Treasurers Account
2
920 Expenses Ignores The Internal Requirements Related To The
3
Implementation Of SOX And That The Additional Employee Was Not
4
Included In The 2003 Recorded Data.
5
In November 2004, Cash Management added one FTE, (SOX Compliance
6
Accountant) to its permanent staffing, directly as a result of the new compliance
7
monitoring and certifications required by SOX. On a daily basis, the Cash Management
8
division of the Treasurer's Department is responsible for monitoring and accounting for
9
thousands of cash flow transactions through the Company's various bank accounts. These
10
transactions represent millions of dollars in customer receipts, operating and capital
11
expenditures, etc. For each of these cash transactions Cash Management analysts
12
monitor and assign the appropriate accounting, consistent with GAAP. Given the
13
expanded reporting and certification requirements imposed by SOX, the division's
14
workload became unmanageable as all existing staff members were 100 percent committed
15
to pre-existing operational responsibilities. Prior to SOX, the existing staff was dedicated
16
to ensuring the operational integrity of the banking transactions and related
17
reconciliations, but were not required to understand and interpret financial accounting
18
standards, monitor these transactions for recurring SOX compliance, and address the
19
expanded audit coverage that resulted from SOX. Since SOX has placed the burden of
20
certification at the process owner level, the Cash Management division needed an FTE
21
position dedicated to coordinating all the accounting efforts, internal and external audit
22
support, and FASB rule interpretations on an ongoing basis. Given the large number of
23
transactions and the large dollar magnitude of these transactions, Cash Management is
24
responsible for operations that inherently come with significant risk, if they are not
25
captured and reported correctly and on a timely basis. The most effective way to manage
26
this risk was to create the SOX Compliance Accounting position which has as its central
27
responsibility the assurance that all of the division's transactions are recorded and
7
1
accounted for in compliance with FASB and SOX control standards. The additional cost of
2
this FTE is fractional compared to the dollar magnitude of cash transactions being
3
monitored and properly reported. Without this position, the Cash Management division
4
would not be able to certify each quarter that controls were effective as required under
5
SOX regulations.
8
1
II.
2
RISK CONTROL
In its testimony, ORA originally recommended an overall expense level for the Risk
3
4
Control Group of $2.401 million for Test Year 2006. This expense level is $631,000 less
5
than SCE’s request of $3.032 million.3 The reduction was based on erroneous calculations
6
of average labor costs per FTE.
7
Based upon (i) ORA’s response to an SCE data request 4 and (ii) a follow-up
8
conversation with ORA analyst Joel Tolbert on May 10, 2005, it is SCE’s understanding
9
that ORA does not contest SCE’s requested expenses for the Risk Control Group, and that
10
ORA will be submitting Errata withdrawing Chapter 10-B, Section III-E from its report.
11
No Intervenors have submitted testimony contesting SCE’s forecast expenses for the Risk
12
Control Group. Therefore, the Commission should adopt SCE’s requested expense levels
13
for the Risk Control Group.
3
ORA Testimony, page 10-B-2, lines 20-24.
4
ORA Response to Questions 1 through 5 in DR-SCE-10.
9
1
III.
2
LAW
3
A.
Introduction
4
In ORA’s Report on the Results of Operations, Volume 1, on SCE’s Law
5
Department, ORA takes issue with our 2006 test year forecast of the following FERC
6
accounts:

7
Account 921: SCE’s 2006 test year forecast is $3.607 million, which is equal
8
to our 2003 expenses. Because ORA proposes an adjustment of $927,000 for
9
“one-time non-recurring expenditures,”5 ORA’s forecast for 2006 test year is
$2.608 million.
10

11
Accounts 923 and 928: SCE’s 2006 test year forecast for its outside counsel
12
expenses is based upon a three-year average and is $8.226 million for
13
Account 923 and $3.111 million for Account 928, for a combined total of
14
$11.337 million. ORA proposes to use SCE’s 2003 recorded expenses, instead
15
of a three-year average, to forecast 2006 test year expenses. In addition,
16
ORA proposes a $1.505 million adjustment to Account 928 to remove costs
17
associated with SCE’s expenses associated with the Commission’s Gas Border
18
Price Investigation, OII 02-11-040.6 As a result, ORA’s forecast for 2006 test
19
year is $6.366 million for Account 923 and $341,000 for Account 928, for a
20
combined total of $6.707 million.
SCE discusses these FERC accounts below. SCE also discusses TURN’s proposal
21
22
that SCE be required to implement a time track system to track in-house legal expenses
23
by subject matter or project.
5
ORA’s Report on the Results of Operations, Volume 1, p. 10-C-7.
6
ORA’s Report on the Results of Operation, Volume 1, pp. 10-C-8 and 10-C-10.
10
1
B.
ORA’S Recommended Adjustment To Account 921 (In-House Attorneys
2
(Office Supplies and Expenses)) Is Not Appropriate
3
SCE’s 2006 test year forecast for Account 921 is $3.607 million, which is equal to
4
our 2003 expenses. In our testimony, we indicated that the 2003 non-labor expenses
5
recorded in Account 921 increased above 2002 levels by $927,000 as a result of $267,000
6
for document and records management software purchase and development, $200,000 for
7
initial development of SCE’s Whiteboard Filing Tracking System, and $459,000 for
8
computer and outside consulting services.7 Because ORA proposes an adjustment of
9
$927,000 for “one-time non-recurring expenditures,”8 ORA’s forecast for 2006 test year is
10
$2.608 million. However, we did not remove these expenditures from our 2006 test year
11
forecast because these expenses are representative of test year expenses as there are
12
recurring expenses associated with the ongoing upgrade and maintenance of these
13
systems.
In Account 921, SCE records expenses for office supplies and related expenses,
14
15
including software purchases and outside computer consulting services. In 2003, SCE
16
purchased document management and records management (“DM/RM”) software which
17
SCE will continue to upgrade during the 2004–2006 timeframe. SCE also incurred
18
expenses for its Whiteboard Filing Tracking System in 2003. This system will be
19
upgraded regularly during the 2004–2006 timeframe in order to meet the needs of SCE
20
and our customers. Both of these systems assist SCE in filing documents electronically
21
and facilitate our ability to file and store pleadings electronically.
Contrary to ORA’s suggestion and as noted above, the purchase of software and
22
23
computer-related services are not one time, or non-recurring expenditures. SCE
24
realistically anticipates that there will be on-going expenses for the Whiteboard and the
7
SCE-7, Volume 3, p. 17.
8
ORA’s Report on the Results of Operations, Volume 1, pp. 10-C-7 through 10-C-8.
11
1
DM/RM System. Furthermore, the Whiteboard and DM/RM Systems will need to be
2
modified to meet the specific needs of our Law Department, therefore SCE forecasts that
3
the 2006 on-going expenses of the Whiteboard and DM/RM systems will exceed the 2003
4
expenses to purchase these systems. Specifically, SCE’s 2005 and 2006 forecast for these
5
combined projects alone is $612,800 and $651,305, respectively. In addition, as a result of
6
these new systems and the need for ongoing future refinements and upgrades, SCE will
7
continue to require the assistance of computer and outside consulting services to develop
8
relational databases and enhance and maintain our computer systems. During 2006, we
9
expect to use computer and outside consulting services to make on-going improvements
10
and code changes to our numerous software systems. In addition to the Whiteboard Filing
11
Tracking System and the DM/RM Management System, we believe we will need computer
12
and outside consulting services for Attorney Portal, Claims Management System,
13
Corporate LawPack, Compulaw, and Electronic Invoicing. Based upon the foregoing, we
14
believe that our 2003 expenses are representative of the level of expenses we expect to
15
incur in 2006.
16
C.
ORA Errs In Its Recommendation To Reduce FERC Accounts 923-928
17
(Outside Counsel Expenses)
18
SCE’s 2006 test year forecast for its outside counsel expenses is based upon a
19
three-year average and is $8.226 million for Account 923 and $3.111 million for Account
20
928, for a combined total of $11.337 million. ORA proposes to use SCE’s 2003 recorded
21
expenses, instead of a three-year average, to forecast 2006 test year expenses. In addition,
22
ORA proposes a $1.505 million adjustment to Account 928 to remove costs associated with
23
SCE’s expenses associated with the Commission’s Gas Border Price Investigation, OII 02-
24
11-040.9 As a result, ORA’s 2006 forecast is $6.366 million for Account 923 and $341,000
25
for Account 928, for a combined total of $6.707 million.
9
ORA’s Report on the Results of Operations, Volume 1, pp. 10-C-8 and 10-C-10.
12
1
ORA’s selection of 2003 recorded expenses as the basis for the 2006 forecast is not
2
reasonable for the following reasons. First, we expect our 2006 outside counsel expenses
3
to exceed 2003 levels due to increasing legal challenges arising from our transmission
4
responsibilities related to ISO tariff amendments, ISO operations, interconnection,
5
planning, grid expansion, joint-ownership dispute, market and design, existing contract
6
disputes, and regulatory challenges. In addition, we expect our need for outside counsel to
7
increase in areas relating to Sarbanes Oxley compliance, workers’ compensation benefits,
8
power purchase contracts disputes, environmental impact studies and reports relative to
9
transmission grid expansion, EMF issues, and condemnations of property used for
10
transmission grid expansion.
11
ORA erroneously suggests that the increased number of in-house attorneys is
12
sufficient to address SCE’s continuing legal responsibilities in test year 2006.10 However,
13
SCE’s 2006 forecast for Accounts 923 and 928 already takes into consideration the
14
additional in-house attorneys SCE expects to hire. While we have been able to shift work
15
to our in-house attorneys, we still expect the need for outside counsel to increase due to
16
the growth of legal activities in the areas identified above. In other words, without the
17
increase of in-house attorneys, SCE’s 2006 forecast for Accounts 923 and 928 would be
18
higher than our current 2006 test year request.
Second, by selecting 2003 recorded expenses as the basis for forecasting 2006 test
19
20
year expenses, ORA is implying that the recorded expenses for 1999-2002 are not
21
representative of 2006 test year expenses. However, ORA only provides an explanation as
22
to why expenses in 2001 are not representative of 2006 test year expenses. With regard to
23
2001, ORA points to SCE’s data request response where we characterized 2001 as an
24
extraordinary year due to the financial energy crisis in California.11 However, SCE’s 2001
10
ORA’s Report on the Results of Operations, Volume 1, p. 10-C-9.
11
ORA’s Report on the Results of Operations, Volume 1, p. 10-C-9 (citing DR-ORA-11, Question 1).
13
1
recorded expenses of $8.2 million for Accounts 923 and 92812 are representative because
2
we adjusted nonrecurring expenses associated with the California energy crisis. Indeed,
3
SCE already adjusted its 2001 outside counsel expenses by $4.841 million for outside
4
counsel expenses associated with work relating to the energy crisis.13 Therefore, contrary
5
to ORA’s suggestion, 2001 (as adjusted by SCE) is representative of 2006 test year
6
expenses.
Further, ORA’s proposal to reduce forecasted test year expenses for Account 928 by
7
8
$1.505 million14 for outside counsel expenses SCE incurred due to its participation in the
9
Gas Border Price Investigation OII 02-11-040 is unreasonable.15 Contrary to ORA’s claim,
10
the expenses SCE incurred is not unusual. OII 02-11-040 is representative of the type of
11
Commission regulatory proceeding that SCE participates in regularly on behalf of its
12
ratepayers. Furthermore, as the Commission is fully aware, OII 02-11-040 is on-going,16
13
and SCE expects to incur expenses relating to this investigation in 2006.
Because of ORA’s proposed reduction of $1.505 million to Account 928, ORA’s 2006
14
15
forecast is actually less than 2003 recorded expenses. Indeed, ORA’s 2006 forecast is
12
See Figure II-7 of SCE-7, Volume 3, p. 20.
13
See the Workpapers for SCE-7, Volume 3, Law Department: page 38 Account 923 Business Unit
Adjustment 4; pages 81-82, Account 928 Company-wide Adjustments 2 and 3 and Business Unit
Adjustment 2.
14
In 2003, SCE incurred approximately $XXXXX in outside counsel expenses relating to OII 02-11-040.
Even if the Commission were to adopt ORA’s proposal and adjust Account 928 by excluding outside
counsel expenses associated with OII 02-11-040 (which the Commission should not), ORA appears to
overstate the amount of outside counsel expenses incurred in 2003. As indicated in SCE’s Response to
DR-ORA-5, Question 01, SCE provided documentation that showed the detail of expenditures in 2003
incurred by SCE’s Law Department and Energy Supply and Management Department for SCE’s
participation in the Border Price Gas OII in three cost categories: Consulting ($XXXXXXX), Outside
Legal ($XXXXXX), and Other $XXXX). Two of the cost categories, “Outside Legal” and “Other” pertain
to Law Department’s FERC Accounts 923/928, while the cost category “Consulting” pertain to Energy
Supply and Management Department’s FERC Account 923. ORA has erroneously assumed that all
three cost categories pertain to Law Department’s FERC Accounts 923/928.
15
See ORA’s Report on the Results of Operations, Volume 1, pp. 10-C-8 and 10-C-10.
16
The Commission has yet to issue a decision in Phase IA of the investigation. SCE is currently in
discovery in Phase IB and the schedule for this phase has not yet been set.
14
1
lower than any of the total Account 923 and Account 928 recorded expenses for the years
2
1999 – 2003. Simply stated, we do not believe that ORA’s forecast would provide the
3
necessary revenue requirement to perform the legal work required by SCE.
4
D.
The Commission Should Not Mandate SCE’s Law Department To Track In-
5
House Legal Expenses
6
In TURN’s testimony, Mr. Marcus proposes that the Commission order SCE to
7
track in-house legal expenses by subject matter or project.17 Whether or not our Law
8
Department should institute a time track system should be left to the discretion of SCE’s
9
Law Department management. As indicated by TURN witness Marcus, the reason for
10
time track, namely, for billing purposes,18 is not applicable to SCE’s in-house attorneys.
11
Mr. Marcus points to SoCalGas and SDG&E as examples of utilities that track expenses
12
by proceeding, however, the analogy is inappropriate because those in-house attorneys
13
work for the parent company and therefore need to track the time spent on utility matters
14
in order to bill their costs to the utility. In summary, there is no legitimate business
15
reason for SCE to track the time of our in-house attorneys that would justify the cost and
16
inconvenience of doing so.
17
Testimony of William B. Marcus in Report on Various Results of Operations Issue in Southern California
Edison’s 2006 Test Year General Rate Case, p. 49.
18
Id.
15
1
IV.
2
WORKERS’ COMPENSATION
3
A.
Introduction
In ORA’s Report on the Results of Operations, Volume 1, on SCE’s Workers’
4
5
Compensation Division, ORA takes issue with our test year forecast of the following FERC
6
Account:

7
Account 925: SCE’s 2006 test year forecast is $50.785 million for its
8
Workers’ Compensation Division, which consists of (1) $6.319 million for
9
A&G salaries and related expenses (based on a budget based approach), and
10
(2) $44.466 million in reserves (based on a three-year average). Because ORA
11
uses a five-year average, ORA’s forecast for test year 2006 is $40.619 million,
12
which consists of (1) $4.249 million for A&G salaries and related expenses,
13
and (2) $36.360 million in reserves.19
In addition, TURN makes a proposal to set 2006 test year rates for Account 925
14
15
(reserves) at 10% above the adjusted recorded 2004 reserve expense, or $30.779 million. 20
16
Additionally, TURN recommends implementing a two-way balancing account such that
17
there would be 90% recovery for all expenses within 30% of this ratemaking figure. As
18
discussed more detail below, TURN’s proposal should be rejected.
19
B.
The Commission Should Reject ORA’s Proposal With Respect To Account
20
925 – Workers’ Compensation Staff
21
SCE’s 2006 test year forecast for Account 925 expenses for the salaries and related
22
expenses of our workers’ compensation staff is $6.319 million. As indicated in our
23
testimony, we have used a budget based approach for our forecast that takes into account
24
two additional employees and two additional medical management contractors we hired
19
ORA’s Report on the Results of Operations, Volume 1, p. 10-C-10.
20
TURN’s Report on various Results of Operations issues (Marcus), p. 53.
16
1
during 2004.21 The new employees and medical management contractors are necessary to
2
i) comply with utilization review statutes and regulations (California Labor Code Section
3
4610), ii) to meet guidelines established by the State Office of Self-Insurance Plans, iii) to
4
resolve claims on a timely basis, iv) to assure that medical services are not over-charged
5
due to provider mis-coding, v) to ensure medical services billed to SCE are related to
6
compensable injuries and illnesses, and vi) medical services fees are paid pursuant to the
7
appropriate fee schedule.22 Indeed, as a result of SCE’s contracting with a medical
8
management and medical bill audit service, we have experienced significant savings in the
9
amounts paid to medical service providers.23
Incorporated in SCE’s A&G forecast for workers’ compensation is the mandatory
10
11
training of claims staff pursuant to the enactment of AB 1262, the mandate of SB 228 for
12
employers to develop a facility to accept electronic billing by medical providers by 2006,
13
and the increased cost of funding to the California Division of Industrial Relations (an
14
increase from 20% user funding to 100% user funding).
ORA’s use of a five-year average to forecast Account 925 A&G expenses for our
15
16
workers’ compensation staff would result in a $2.06 million reduction of our 2006 test year
17
forecast from $6.319 million to $4.259 million. ORA recommends the use of a five-year
18
average due to “fluctuations” during the 1999-2003 time period.24 However, a five-year
19
average is not appropriate because it does not incorporate the staff increases we
20
implemented in 2004 to comply with the utilization review statutes and regulations as
21
well as the guidelines of the State Office of Self-Insurance Plans. If ORA’s forecast is
22
adopted, we will be forced to decrease our use of the medical management and medical bill
21
SCE-7, Volume 7, Chapter V, pp. 55, 59-60. An errata will be submitted regarding this portion of the
testimony to reflect the 2004 staffing change in the Workers’ Compensation Division.
22
SCE-7, Volume 7, Chapter V, pp. 55, 58-60.
23
SCE-7, Volume 7, Chapter V, p. 58.
24
ORA’s Report on the Results of Operations, Volume 1, p. 10-C-10.
17
1
audit service, which will adversely impact our ability to audit medical bills of the medical
2
service providers, and it will result in increased payments to medical providers. Simply
3
stated, ORA’s use of a five-year average to forecast 2006 expenses would result in a
4
revenue requirement that is insufficient to cover the costs necessary to perform the
5
activities required of the Workers’ Compensation staff. ORA’s forecast should be rejected
6
as impractical and unrealistic.
7
C.
The Commission Should Reject ORA’s Proposal With Respect To Account
8
925 – Workers’ Compensation And Claims Reserve
9
SCE’s 2006 test year forecast for its Account 925 reserves is $44.466 million and is
10
based on a three-year average. In contrast, ORA proposes using a five-year average,
11
which results in a 2006 forecast of $36.360 million. A five-year average is not appropriate
12
because years 1999 and 2000 are not representative of test year expenses. Years 1999 and
13
2000 do not take into account the dramatic increase in workers’ compensation payment
14
and claim reserve expenses which commenced in 2001 and continued through 2003. As
15
indicated in SCE’s testimony, our reserve expenditures soared during 2001 through 2003
16
as a result of increased utilization of medical services, legislative changes in workers’
17
compensation indemnity benefits, and changes in the statutory medical fee schedule.25
18
Legislative changes in the workers’ compensation area have also resulted in an increase in
19
our reserves and claim payments. For example, as a result of AB 749, weekly employee
20
benefit increases for temporary disability, permanent total disability, and survivor
21
benefits increased from $602 per week in 2003 to $728 per week in 2004, and $840 per
22
week in 2005. These new benefit levels are indexed through 2006, and then will be subject
23
to cost of living increases based on the increase in statewide average weekly wages
24
thereafter. Consequently, reserve expenses recorded in Account 925 will not return to
25
1999 – 2000 levels. Additionally, effective January 1, 2005, SB 899 mandates that
25
SCE-7, Volume 7, Chapter V, pp. 62-63.
18
1
employers are liable for up to $10,000 in medical costs per claim until each claim is
2
denied, even if the claim is subsequently found not to be work related.
3
Further, ORA’s reliance on a data request response from SCE that indicates that
4
workers’ compensation expenses may be reduced in 2006 as a result of AB 277, SB 288,
5
and SB 899 is misplaced.26 In its testimony, ORA states that “ … information provided by
6
SCE that its reorganization and the enactment of AB 227, SB 228 and SB 899 will
7
significantly reduce its workers compensation costs in the test year.”27 This is a
8
mischaracterization of SCE’s position.
Indeed, consistent with SCE’s data request response cited by ORA, SCE’s 2006
9
10
forecast for its Account 925 (reserves) expenses are less than its 2003 recorded expenses
11
by $14.174 million and about equal to its 2002 recorded expenses. Also, as indicated in
12
SCE’s data request response, any reduction in workers’ compensation expenses is
13
contingent upon how these bills are implemented if at all. Although it was the intent of
14
the legislature that SB 899 would reduce workers’ compensation costs, this piece of
15
legislation is being challenged by the California Applicant's Attorney's Association, the
16
California Medical Association and the California Labor Federation. Likewise, although
17
AB 227 and SB 228 contain cost reduction provisions in the area of medical utilization, it
18
is premature to know if these provisions will result in savings to SCE. Currently, there
19
are approximately 18 bills related to workers’ compensation introduced in this legislative
20
session -- many of which are aimed at reversing the reforms enacted in 2003 and 2004.
26
ORA’s Report on the Results of Operations, Volume 1, p. 10-C-11. ORA cites SCE’s response to DR-ORA67, Question 06 (b), where SCE stated: “As stated in our testimony on page 63, we expect that our
reserves will not fluctuate substantially in the test year. We base this statement on our belief that
enactment of AB 227, SB 228, and SB 899, will at minimum, halt the incremental increases in workers’
compensation expenses, and may if appropriately implemented by regulation, actually reduce the cost of
workers’ compensation to the company in 2006 and beyond.” ORA’s Report on the Results of Operations,
Volume 1, p. 10-C-11 (emphases added).
27
ORA’s Report on the Results of Operations, Volume 1, p. 10-C-12.
19
SCE believes that the ORA's proposed five-year average is inappropriate because it
1
2
does not take into consideration the full impact of AB 749 benefit increases. Nor does SCE
3
believe that it is prudent for ORA to rely upon enacted legislation that has not been fully
4
implemented, and that is currently being challenged in the courts and by members of the
5
California legislature.
6
D.
The Commission Should Reject TURN’s Proposal To Use 2004 Reserve
7
Expenses As The Basis For Test Year Expenses
8
In contrast to SCE’s forecast of $44.466 million for 2006 test year expenses for
9
Account 925 (Workers’ Compensation – Reserves), which is based on a three year
10
average,28 TURN’s witness Mr. Marcus proposes that 2006 test year rates be set at 10%
11
above the adjusted recorded 2004 reserve expense, or $30.779 million.29 Additionally,
12
TURN recommends implementing a two-way balancing account such that there would be
13
90% recovery for all expenses within 30% of the ratemaking figure (i.e., $30.779 million).30
14
As a threshold matter, SCE agrees with Mr. Marcus’ assessment that it is a difficult
15
science to forecast future workers’ compensation expenditures.31 As with any injury and
16
illness related forecast, there are numerous variables that affect the accuracy of a forecast.
17
SCE does not believe that TURN has considered important variables in developing its
18
forecast. For example, SCE does not believe that TURN has used the services of an
19
actuary in developing its forecast. Further, SCE believes that TURN did not consider
20
relevant factors such as the current age and co-morbid factors of employees to whom the
21
workers’ compensation benefits are planned.
28
See SCE-7, Volume 3, p. 62.
29
TURN’s Report on Various Results of Operations issues (Marcus), p. 53.
30
Id.
31
Id., p. 49.
20
As even acknowledged by TURN, it is “bad form” to use 2004 data for estimating
1
2
purposes, yet that is what TURN has done.32 TURN’s forecasting methodology does not
3
acknowledge the statistical variability inherently embedded in their claims forecasting
4
methodology will change over a period of time, and yet there is no allowance for this. As of
5
year-to-date 2005, we have experienced a 60% increase in the number of claims being filed
6
along with an increase requirement in reserves. Yet, TURN’s forecasting methodology
7
does not take into account the increases we are facing. In comparison, SCE has selected a
8
three-year average and firmly believes that its forecast considers claims paid out, prior
9
losses, paid severity and projected case losses over a sustained period of time. TURN, on
10
the other hand, concedes that it has used a “bad form” approach based upon one years
11
worth of recorded data. SCE is required to establish reserves based upon generally
12
accepted industry practices that forecasts should not be based upon the aggregate sum of
13
one year’s data.
In regards to the history of claims payments, TURN comments that the benefits
14
15
paid out have a fairly narrow range over the past nine years (1996 – 2004).33 TURN’s
16
analysis, however, ignores three fundamental facts. First, the average cost of a claim,
17
whether measured by the amount paid out in a year or measured by the amount reserved
18
for the life of an employee, has substantially increased. In other words, if we incurred and
19
paid the same number of claims in the test year as we did in 1997, the cost would be
20
substantially higher because of the statutory benefits changes, inflation, etc. The actual
21
impact on SCE is magnified by the fact that we are experiencing a 60% increase in claims
22
during the first quarter of 2005.
Second, the paid benefits are, in fact, liquidated reserves, and the remaining
23
24
reserves represent the Company’s estimated future liability for the life of all claims and
32
Id., p. 50.
33
Id., pp. 50-51.
21
1
claimants known to the Company. Because reserves are based on a life time calculation,
2
they have to be adjusted annually. TURN’s use of one year worth of data to determine
3
future costs does not take into account this adjustment.
Third, because individual claims are evaluated based on an estimated usage of
4
5
medical for the lifetime of the claim or the claimant, it is inappropriate to use benefits
6
paid over a one year period as an indicator of reserve adequacy. TURN does not have
7
sufficient demographic information of the employees or SCE’s workers’ compensation
8
claims history to determine the future cost of claims.
9
TURN has indicated in its testimony that recent changes in legislation have
10
lowered SCE’s reserve, specifically the passage of SB 899.34 However, as indicated earlier
11
in SCE’s rebuttal testimony in response to ORA, there are currently approximately 18
12
bills related to workers’ compensation introduced in this legislative session -- many of
13
which are aimed at reversing the reforms enacted in 2003 and 2004. Additionally,
14
TURN’s “bad form” forecasting method overlooks the weekly benefit increases for
15
temporary disability, permanent disability, and survivor benefits increased from $602 per
16
week in 2003 to $728 per week in 2004 and $840 per week in 2005. Further, effective
17
January 1, 2005, SB 899 mandates that employers are liable for up to $10,000 in medical
18
costs per claim until each claim is denied, even if the claim is subsequently found not to be
19
work related. More recently, the May 12, 2005 the California Workers’ Compensation
20
Institute Bulletin informed its members that emergency regulations have been filed which
21
require revising physician fees for services rendered to injured workers on or after May 14,
22
2005. The increase in fees is required in order keep fee schedules from falling below
23
Medicare allowances. In other words, SCE will be incurring increases in the maximum
24
allowable physician fees for services rendered after May 14, 2005.
34
Id., pp. 50, 52.
22
1
In summary, TURN’s “bad form” forecasting methodology should be rejected
2
because it is solely based upon 2004 data, which fails to take into consideration recent
3
legislative challenges to workers’ compensation reform, 2005 fee updates and an increase
4
in the number of claims being filed. Furthermore, TURN’s forecast is not based upon any
5
acceptable actuarial standards of practice and is not consistent with any known insurance
6
industry forecasting methodology that SCE is aware of. TURN’s approach is
7
unacceptable, unreasonable and, cannot be justified.
8
9
Finally, the Commission should reject TURN’s proposed balancing account
treatment. First, unlike traditional balancing accounts, SCE would receive, at most, 90%
10
(as opposed to 100%) of all expenses within 30% of the adjusted recorded 2004 reserve.
11
Such a balancing account treatment is unlikely to result in full recovery of workers
12
compensation reserve expenses. Workers’ compensation expenses are subject to numerous
13
regulatory requirements, and it is not necessary to mandate a new balancing account
14
which would require Commission oversight outside of the GRC.
23
1
V.
2
REGULATORY POLICY AND AFFAIRS
3
A.
Introduction
The ORA recommends a $1,742,000 reduction to SCE’s forecast for Account 920
4
5
labor costs in Regulatory Policy & Affairs (“RP&A”).35 ORA relies on historical data that
6
reflects an increased workload without a commensurate increase in staffing. ORA
7
apparently bases its recommendation on 2003 base year recorded labor costs, plus a
8
$677,000 five-year aggregate labor cost for RP&A functions performed out of SCE’s
9
Washington, D.C. office. SCE, on the other hand, used a budget-based approach to
10
develop its Account 920 labor forecast of $9.608 million.
11
B.
ORA Errs In Its Recommendation To Reduce Labor Expenses In
12
Regulatory Policy & Affairs
13
ORA’s analysis is faulty in three ways. First, it does not dispute that SCE’s
14
workload has increased.36 Yet, it “considers” staffing levels “sufficient.”37 Apparently,
15
ORA has considered neither the emergency cost-saving measures during the energy crisis
16
nor the increase in regulatory activity in its aftermath. In fact, SCE experienced a 62%
17
increase in Advice Letter filings from 1995 to 2003. The CPUC and the State continue to
18
debate issues of market design and reliability. Preliminary decisions indicate that the
19
CPUC is interested in increasing the role and requirements of investor-owned utilities to
20
ensure reliability.38 These will result in a whole new area of filings to demonstrate
21
compliance with CPUC decisions.
35
ORA’s Report on the Results of Operations, Volume 1, pp. 10-C-12 through 10-C-14.
36
“During the test year SCE will have several regulatory proceedings that will close and SCE expects that
other proceedings will expand and new issues will emerge.” ORA’s Report on the Results of Operations,
Volume 1, p. 10-C-14.
37
Id.
38
For example, see ALJ Walwyn December decision in the Long-Term Procurement proceeding 04-04-003
(D. 04-12-048).
24
1
SCE’s RP&A has not been fully staffed for several years. Due to the energy crisis,
2
and in an effort to seek more stable rates in its aftermath, SCE did not request an
3
increase in this area sooner. Now it is trying to more adequately staff a function critical to
4
its operations as a regulated entity.
5
Second, ORA fails to acknowledge that a more robust compliance program serves
6
the interests of ratepayers by assuring consistency with regulatory requirements. In the
7
past, SCE’s Regulatory Compliance group has focused on external audits and
8
investigations as vehicles to enhance compliance. SCE’s recent investigation into
9
reporting of data for Performance Based Ratemaking has informed a decision to take a
10
more proactive approach to compliance. Rather than rely solely on a diagnostic model of
11
audits and investigations, SCE recognizes the need to revamp its compliance program to
12
ensure greater scrutiny of filings and to keep up with complex regulatory decisions. This
13
can only be accomplished through the more adequate staffing requested by SCE in several
14
areas of RP&A.
15
SCE recognizes that this critical need cannot go unaddressed. In 2004 and 2005,
16
SCE took steps to manage increasing workloads by hiring employees in the areas listed
17
below. This increased staffing provides greater assurance that filings will be adequately
18
prepared and reviewed prior to submission to the CPUC. Without the positions listed in
19
the table below, SCE’s ability to respond to regulatory requirements would be severely
20
hampered.
25
RP&A Division
Full-Time Equivalents
Revenue & Tariffs (Pricing Design & Research)
3 FTEs in 2004
Revenue & Tariffs (FERC Rates & Regulation)
1 FTE in 2004
Regulatory Affairs
1 FTE in 2004 and 1 in 2005
Regulatory Compliance
2 FTEs in 2005
Total
8 FTEs in 2004 and 200539
Third, ORA reduces labor and associated costs of the Washington, D.C. office by
1
2
$677,000 without explanation. As best SCE can determine, it appears that ORA’s
3
calculation is based on the total recorded labor costs for a five-year period, rather than
4
one-year recorded costs of $132,000.40 The work performed by those employees involves
5
representation before the Federal Energy Regulatory Commission. These are allowable
6
costs pursuant to the CPUC and FERC-approved jurisdiction allocation methodology.41
7
Unless the CPUC is prepared to reverse itself on that matter, the costs associated with
8
these employees should remain.
39
Note that ORA references a 6-employee increase in its testimony at 10-C-3, but an SCE Data Request
Response specifies 8 positions, 6 MPP2s and 2 Managers. See SCE Response to DR-ORA-67,
Question 03, b.
40
RP&A’s recorded costs for Washington, D.C. operations from 1999 through 2003 total $677,000 (or
$132,000 per year). These costs represent 33% of an administrative assistant and 65% of a Director
responsible for FERC-related work over the five-year recorded period. In Footnote 210 on page p-10-C13 of ORA’s Report on the Results of Operations, ORA references a one-time adjustment of lease costs
associated with the Washington, D.C. office as background for its recommendation that labor costs also
be reduced. Although a small portion of the Washington, D.C. office lease should be attributed to
ratepayers, we have decided not to request recovery of these costs.
41
See SCE-08, Volume 1, Results of Operations, p. 17, lines 8-12 (D. 04-07-022).
26
1
VI.
2
ENVIRONMENTAL, HEALTH & SAFETY
3
A.
Introduction
For TY 2006 RP&A/EH&S forecasts $8.178 million in expenses necessary to carry
4
5
out its responsibilities. The ORA is recommending a decrease of $1.7 ($1.678) million for
6
a total of $6.491 million, or a 21% reduction. The ORA took no issue with SCE’s forecast
7
for Account 920 for labor expenses, including the increased number of EH&S personnel
8
at 11 positions (see ORA 10-C-15; SCE Reply to DR-ORA-14, Question 07(D) “EH&S
9
New Position Justification”).
However, ORA’s proposed $1.7 million decrease would reduce funding of our non-
10
11
labor expense for new EH&S personnel and eliminate new and necessary projects that
12
would be undertaken by them. The work that would be eliminated by ORA is required to
13
i) protect public safety, ii) ensure compliance with existing EH&S requirements,
14
iii) enhance employee safety, and iv) develop a system-wide approach to obtaining
15
necessary environmental permits. In addition, for FERC Account 925 which covers
16
Corporate Safety, ORA seeks to reduce four of our proposed positions, two for industrial
17
ergonomics and two for safety data analysis and reporting. This proposed reduction in
18
Account 925 directly conflicts with ORA’s failure to take issue with the overall proposed
19
increased in EH&S staffing levels (see ORA 10-C-15). SCE has clearly articulated the
20
justification for the additional personnel. (SCE Reply to DR-ORA-114, Question 07(b)).
21
We believe that the ORA’s testimony is based on the use of inappropriate forecast
22
methods for our FERC Accounts. ORA does not provide adequate justification for the
23
proposed reductions, nor do they propose alternatives for meeting our EH&S operational
24
requirements. Our objections to ORA’s proposed reductions are discussed below.
25
B.
ORA Uses Unjustified And Inappropriate Forecast Methods
26
ORA has selected different forecast methods for FERC Accounts 921, 923, and
27
925. SCE used the “budget-based” method to develop our forecast for these accounts
27
1
because the “last recorded year” plus “new incremental expense” is the most accurate
2
approach to estimating the cost of these new programs. The impacts of ORA’s proposal
3
on EH&S programs are shown in Table 1.
Table VI-1
Impacts Of ORA Proposal On SCE EH&S Programs
F ERC Ac c o u n ts
F ERC Ac c o u n t 920
La bor
F ERC Ac c o u n t 921
Non -La bor
S CE
ORA
F o re c a s t F o re c a s t
2006
($000)
2006
($000)
$3,711
$3,711
F ERC Ac c o u n t 925
Co rp o ra te S a fe ty
La bor
Non -La bor
Gr a n d Tot a l
$0
P ro g ra m Im p a c ts
Non e
LRY
$1,996
$1,641
$355
5-Yea r
Aver a ge
F ERC Ac c o u n t 923
Non -La bor
Me th o d
S CE
Re qu e s te d
In c re m e n ta l
In c re a s e
Ov e r ORA
($000)
$980
$172
$1,491
$967
$1,111
$657
$808
$250k will elim in a t e pu blic sa fet y
m a t er ia ls for 'F ir st Respon der s',
Agr icu lt u r a l Wor ker s, Ar bor ist s, a n d
Con st r u ct ion Wor ker s
$250k will elim in a t e m a t er ia ls a n d
ext er n a l con su lt a n t s t h a t su ppor t
E H &S r egu la t or y com plia n ce
$100k will elim in a t e a bilit y t o a ssist
Ca lifor n ia Depa r t m en t of E du ca t ion
in pr epa r in g E MF 'F ield Ma n a gem en t
P la n s' for n ew pu blic sch ools
$208k will elim in a t e a bilit y t o develop
syst em -wide en vir on m en t a l
m it iga t ion t o im pr ove ou r a bilit y t o
obt a in en vir on m en t a l per m it s
$524
LRY
$454
$380
$310
$70
$8,178
$6,491
$1,687
28
$227 will elim in a t e in du st r ia l
er gon om ics pr ogr a m t h a t is n eeded t o
pr even t st r a in s, spr a in s a n d
cu m u la t ive t r a u m a wor k in ju r ies
$227 will elim in a t e sa fet y a n a lysis
a n d r epor t in g im pr ovem en t s t h a t a r e
design ed t o im pr ove t h e effect iven ess
of ou r sa fet y pr ogr a m in t h e
pr even t ion of wor k in ju r y.
$70 will elim in a t e t h e a bilit y t o do
er gon om ic field sit e a ssessm en t s
1
C.
FERC Account 921
This account represents the non-labor expense corresponding to Account 920. In
2
3
our 2006 TY, EH&S forecasts $1.996 million. ORA is recommending $1.641 million for a
4
difference of $355,000, or an 18% decrease. ORA’s argument for using 2003 recorded
5
costs as the basis for forecasting this expense is that: “in 2003, costs in this account
6
increased $611,000 over the previous year and no explanation was given as to why this
7
was the case.” Most of this difference (i.e., $456k) is accounted for in the one-time
8
reduction of non-labor expense in the 2002 EMF budget. This reduction was specific to
9
that year, and these non-labor expenses were subsequently restored in 2003. The other
10
decreases in 2002 reflected companywide budget cuts due to the energy crisis. EH&S
11
has requested additional non-labor funds to support seven new EH&S personnel and
12
ORA does not take issue with EH&S’s forecast for Account 920. (See ORA 10-C-15). The
13
ORA’s testimony incorrectly assumes that the 2002 decreases were due to reduced
14
program needs rather than a one-time budget constraint during the energy crisis. The
15
restoration of these costs in 2003 should not be seen as a budget increase to support on-
16
going EH&S work. Instead, additional non-labor budget is needed to support the seven
17
new EH&S personnel.
18
D.
19
FERC Account 923
This account is used primarily to fund outside consulting services that are
20
performed more effectively than using permanent SCE Staff. These consultants can
21
provide specialized expertise for discrete projects in areas where maintaining such
22
expertise in-house is not cost effective. Additionally, Account 923 funds the production
23
of public safety materials by outside vendors. This practice is more cost effective than
24
developing and producing the materials in-house.
25
Our TY 2006 forecast was for $980,000; the ORA is proposing $172,000 for a
26
difference of $808,000, or a crippling 83% proposed reduction. EH&S seeks support for
27
our requested GRC funding levels to protect public safety ($250k), support California
29
1
Department of Education EMF requirements for new public schools that are located near
2
SCE transmission facilities ($100k), ensure compliance with existing and more
3
demanding EH&S requirements ($250k), and to obtain environmental permits more
4
expeditiously ($208k). These funds will be used to perform work more effectively by
5
external consultants. ORA’s supposition that increased staffing levels obviate the need
6
for consultants is incorrect. Finally, ORA’s proposed forecast (based on a five-year
7
estimate) does not take into account important new EH&S programs. Two of the five
8
recorded years were highly anomalous as a result of the energy crisis and therefore skew
9
results of the average and grossly under-fund the account, as seen in the discrepancy
10
between the two forecasts.
11
E.
12
FERC Account 925 – Employee Safety
This is the account where EH&S records Corporate Safety, labor and non-labor
13
expenses. EH&S has forecast a total of $1.491 million for TY 2006, and ORA has
14
proposed $967,000, with a difference of $524,000, or a 35% decrease. The ORA proposal
15
would eliminate $226k for two positions needed to improve the analysis and reporting of
16
Corporate Safety activities, and reduce $228k in labor expense for two Industrial
17
Ergonomists, who are needed to prevent work-related injuries. The ORA’s position here
18
is not consistent with their testimony (see ORA 10-C-15), which did not oppose our 11
19
new EH&S positions, four of which are located in the Corporate Safety area. Over time,
20
as our work force ages and mechanization replaces direct work, the rate of acutely
21
traumatic work-related injuries will decrease as cumulative injuries rise. The field of
22
industrial ergonomics will develop new ways to prevent these work-related injuries from
23
occurring. ORA’s proposal would eliminate $70k for non-labor expenses to support this
24
important work. EH&S seeks to improve our ability to analyze work injury data to
25
strengthen Corporate Safety programs. To be effective, our safety professionals will
26
need to evaluate specific work tasks and tools, and develop alternative methods of doing
27
field work. These evaluations and assessments will be used by Corporate Safety
30
1
management with responsibility for oversight of safety performance; Business Unit line
2
management; Business Unit safety managers; and general personnel in order to prevent
3
work injuries to themselves and to others. SCE believe the ORA’s forecast, based on the
4
“last recorded year,” is inappropriate because it does not consider the need for additional
5
programs to help prevent work-related injuries.
31
1
VII.
2
PUBLIC AFFAIRS
3
A.
Introduction
Only ORA has proposed adjusting the Public Affairs Department’s (PA) $9.145
4
5
million request in this General Rate Case (GRC). ORA recommends that the Commission
6
reduce SCE’s request by an additional 25 percent over the PA self-imposed shareholder
7
exclusions it already reflects. ORA’s reliance on a citation to the Commission’s
8
D.04-07-022, which decided SCE’s 2003 GRC, should be rejected because PA’s request
9
already reflects shareholder exclusions that ORA does not address. Moreover, ORA’s
10
proposed disallowance is not based on the “evidence” ORA cites in its testimony.
ORA’s proposed 25 percent reduction to SCE’s request of $9.145 million overlooks
11
12
an essential fact: The total direct labor and non-labor O&M forecast for the PA
13
Department in base year 2003, before SCE’s self-imposed shareholder reductions, was
14
$12.257 million. The Washington and Sacramento Offices’ costs of $2.418 million were
15
excluded from the GRC request. In addition, $173,000 in one-time 2003 PA local lobbying
16
expenses and $298,000 in local PA non-labor expenses were excluded. Finally, $1.064
17
million (14 percent) in local PA labor expenses were also excluded based on a 2004 time-
18
tracking study, leaving a GRC request of $9.145 million.42
ORA proposes to reduce an additional $2.286 million (25 percent), based not on the
19
20
strength of the evidence, but instead by rote citation to the Commission’s “split-the-
21
difference” decision in SCE’s 2003 general rate case. Taking ORA’s suggestion this year
22
would, in fact, result in a 36 percent reduction because ORA totally disregarded the $1.535
23
million already charged to shareholders for local PA activities.43 ORA’s invocation of the
42
See Workpaper at SCE-18, Chapter VII, Part I, p. 1 for Summary of PA reductions leading to PA $9.145
million request.
43
The 36 percent reduction does not include the $2.48 million for the Washington and Sacramento offices
charged to shareholders. See Workpaper at SCE-18, Chapter VII, Part I, p. 2 for calculation of the 36
percent.
32
1
prior decision is inappropriate. PA’s 2006 request is based on different components and
2
PA has been reorganized since the 2003 GRC.
Figure VII-1
Impacts Of Existing And Proposed Shareholder Reductions
14
12.3
$ in Millions
12
10
8
0.8
9.1
2.8
(2.4)
6.3
(1.5)
6
4
2
0
2003
Washington- Local PA Fill Vacant & SCE GRC
Recorded Sacramento
Adjust
New
Expense
Adjust
Positions
3
1.
ORA Add'l
Adjust
ORA
Forecast
ORA’s Reduction Proposal Is Premised Upon Errors And
4
Misunderstandings
5
In recommending an additional 25 percent reduction in the SCE local PA
6
Department’s already triple-discounted request, ORA incorrectly: (1) disregards the $1.535
7
million PA has already charged to shareholders, and excluded from its request, as well as
8
an additional $2.4 million adjustment to remove expenses for our Washington/Sacramento
9
offices; (2) summarily and without analysis rejects PA’s request for necessary staff
10
increases in 2004 and 2006, even though the increased staffing would still have PA
11
staffing well below the 1999 level; (3) mistakenly relies on and misidentifies a number of
12
errors in a 2003 pilot time-tracking study, attempting to discredit SCE’s request, when a
13
more comprehensive final 2004 time-tracking study was the one actually utilized to
14
allocate PA’s activities between ratepayers and shareholders; and (4) attempts to provide
15
only selected time-tracking entries or disregards the ratepayer purpose for the activities.
16
In addition, ORA recommends a $1.982 million reduction in requirements for franchise
17
fees, even though the increased franchise requested costs are driven by unavoidable
33
1
statutory increases in franchise fees for agreements that will be renewed in 2006 and will
2
have to be paid not just over part of the year 2006, but over all of 2007 and 2008 as well.
2.
3
ORA Improperly Disregarded PA’s Need To Fill Six Vacancies That
4
Existed At The End of 2003 And To Add Five New Positions In 2006
5
In its recommendations, ORA also concludes that, “SCE’s current staffing
6
level of 93 should be sufficient enough to address the test year needs for its PA
7
Department.”44 ORA did not address the PA testimony on pages 32-34 of SCE-7, Volume
8
4, which establishes the need to fill six vacancies or leaves-of-absence positions that
9
existed at the end of 2003 and to add five more positions in 2006. In attempting to support
10
its claim of a downward trend in PA labor costs, ORA disregards the six vacancies or
11
leaves-of-absence that existed at the end of 2003. All six of these vacancies or leaves-of-
12
absence were filled in 2004; this is consistent with PA’s budget-based projected growth for
13
2004. Therefore, the alleged downward trend upon which ORA relies in asking the
14
Commission to reject PA’s request for $841,000 in additional labor and non-labor expense
15
in the test year is without basis.
3.
16
One-Time Local PA 2003 Lobbying Activities Adjustment Charged To
17
Shareholders Was Performed Correctly
18
Citing PA’s response to a Data Request, ORA alleges that PA has taken
19
inconsistent positions in its testimony and DR response (DR-ORA 30 – Question 2d) as to
20
whether ratepayers or shareholders were charged for a legislative activity.45 The DR
21
response had an omission and because the word “not” before the word “include” was
22
missing, the answer should have read, “Legislative activities (performed by local PA
44
ORA Report, Volume 1, p. 10-H-4, lines 3-6.
45
Id. at pp. 10-H-5, lines 27 and 28 and 10-H-6, lines 1-5.
34
1
employees) which are not included in SCE’s request” (emphasis added). There is, in fact,
2
no inconsistency.46
In addition, ORA failed to acknowledge that PA did charge most of its
3
4
lobbying activities relating to municipalization to shareholders and cites SCE’s response to
5
DR-ORA-30, Question 6.47 In its response to Question 6c, PA stated, “PA tracked its time
6
spent by its employees on Corona (2,080 hours), Irvine (141 hours) and Moreno Valley (232
7
hours) municipalization lobbying activities and charged to shareholders that time spent.”
8
PA then stated that it had subsequently found that four RMs involved in municipalization
9
lobbying did not charge their time to shareholders. These RMs spent 369 hours on
10
municipalization lobbying activities and PA will deduct the labor dollars for these hours
11
from its request.48
4.
12
SCE 2004 Time-Tracking Study Was Performed Correctly - The 2003
13
Time-Tracking Study Was A Pilot Program
14
In an important tacit concession to PA’s effort to address the 2003 GRC
15
decision, ORA’s proposal to discount PA’s request is not based on any fundamental
16
objection to PA’s effort to create the “bright line” between local PA shareholder and
17
ratepayer activities found to be missing in the 2003 GRC Decision. Instead, ORA’s 25
18
percent adjustment is based on a limited number of allegedly misclassified entries.
19
However, they are entries from the wrong time-tracking study. ORA erroneously relies on
20
the limited 2003 pilot time-tracking study and does not address the 2004 comprehensive
21
final time-tracking study that is the basis for the ratepayer-shareholder split PA General
22
Rate Case request. The result of that 2004 study, which formed the basis of SCE’s
23
request, has not been addressed by ORA and should be adopted.
46
SCE pointed this out in our later DR proposed to ORA, but ORA nevertheless refused to abandon its
position. A copy of this data request is provided in Appendix A to this rebuttal.
47
ORA Report, Volume 1, pp. 10-H-6, lines 16-28.
48
This represents 13 percent of the total 2,822 hours tracked in the pilot.
35
The 2004 final time-tracking study had 11,594 entries, which tracked the
1
2
time of 66 PA employees in 15-minute intervals for 35 different job activities over a period
3
from April 15, 2004, to June 2, 2004. The study was used to allocate costs between
4
ratepayers and shareholders at the 86 percent/14 percent level. In its testimony, ORA
5
relied on the earlier pilot program that used a fall 2003 time frame and had only 6,736
6
entries for 60 employees. ORA identifies a limited number of entries in the pilot study it
7
says were categorized incorrectly, and concludes that all the results of the entire study
8
should therefore be rejected. The purpose of the pilot study was implemented to test the
9
entire study approach with the PA personnel and to “work out the bugs.”49 Therefore,
10
ORA’s attempt to rely on that study is misplaced and should be disregarded. 50
Even in attempting to undermine the 2003 study time-tracking results, ORA:
11
12
(1) mischaracterizes many of the time-tracking entries; and (2) overlooks or denies the
13
ratepayer purposes for the activities.
In this section, PA will address one example relating to each of these
14
15
mistakes by ORA and has provided a work paper with a table addressing many more of
16
the misleading statements and misunderstanding by ORA.51
a)
17
ORA Mischaracterized Many Of PA’s “Educating” And Monitoring
18
Time-Tracking Entries
19
One example alone demonstrates that ORA’s testimony is misleading
20
and should be rejected. ORA selectively quotes “Meeting/discussion regarding SCE
49
In addition, the 2004 study was completed after the local PA Department was restructured. See SCE-7,
Volume 4, Footnote 4, p. 7.
50
Following the 2003 Pilot Study, additional training was given to the 2004 study participants and
additional categories were added in response to the results of the pilot study.
51
See Workpapers at SCE-18, Chapter VII, Part 1, pp. 3-5 for a table citing further misleading quotes or
misunderstandings, including the fact that the Region AOR Big Creek (“High Sierra Workshop”) Trips
are an appropriate ratepayer activity because they are utilized to educate local officials on utility issues
impacting their local governments, such as present and future rates and to determine how current and
future issues facing cities relate to SCE.
36
1
charitable contributions.”52 In fact, the complete tracking entry states, “Meeting with
2
Signal Hill Forestry to discuss PROACT, GRC, and DWR energy rebates. Also, discussed
3
charitable contribution request for Being Alive Long Beach.” The primary purpose of the
4
meeting was to educate a government official about energy issues and the ORA’s selective
5
use of only a portion of the quote is misleading.
b)
6
ORA Misunderstood The Ratepayer Purpose For Many “Educating”
7
And Monitoring” Time-Tracking Entries
8
For example, ORA cites “Spot Municipalization strategies
9
meeting/activities for Moreno Valley, Beaumont, Oxnard, Victorville, etc.”53 In PA’s
10
original testimony, on page 29, lines 3-8 of SCE-7, Volume 4, PA describes the general
11
education that was provided to cities in 2003 relating to potential municipalization
12
activities. Cities are SCE customers and request our assistance in order to make
13
knowledgeable decisions about forming a municipal utility. A wrong decision could not
14
only adversely affect the city, but SCE’s existing customers within the city.
15
The same is true for “Monitoring” Spot municipalization activities.54
16
PA’s monitoring of municipalization activities addresses a Company need to understand
17
how municipalization will impact SCE. For example, the Energy Commission requires
18
SCE to project as part of SCE’s long-term procurement program the potential bypass due
19
to municipalization. In addition, the takeover of SCE’s facilities or a portion of its service
20
territory raises Municipal Departing Load and resource adequacy issues as well as
21
potential condemnation impacts, including compensation and public interest matters.
22
Therefore, the monitoring of municipalization activities is an appropriate ratepayer
23
function.
52
See ORA Report, Volume 1, p. 10-H-8.
53
Id. at p. 10-H-8.
54
Id. at p. 10-H-9, lines 8-10.
37
c)
1
Even If ORA Was Correct, The Hours Related To Alleged Mistakes In
2
The 2003 Study Do Not Support A 25 Percent Reduction
3
Even if ORA was totally correct, the 2003 time-tracking hours for all
4
the alleged incorrect entries would represent only six percent of the total hours spent, not
5
25 percent.55
5.
6
ORA Proposal To Reduce The Franchise Factor Should Be Rejected
ORA’s assertion that PA’s franchise fee factor of .8930 percent should be
7
8
rejected in favor of a lower .8737 percent would require SCE’s shareholders to absorb some
9
$2,824 million per year for years 2007 and 2008 in increased franchise fees SCE will have
10
to pay the counties of Los Angeles and San Bernardino beginning in 2006 after the
11
Company’s current Broughton Act franchises – which pay a fee based on two percent of
12
facilities – expire in December and June 2006, respectively, and are replaced – as by law
13
they must be – with 1937 Franchise Act franchises paying one percent of gross receipts.56
14
In order to avoid this under collection, PA proposed the averaging approach in years 2006,
15
2007 and 2008 as set out in its testimony.57 This forecasting method normalizes the
16
change over the three-year GRC cycle ensuring not only that ratepayers are not
17
overcharged, but that SCE recovers the cost-increase over the three-year GRC cycle.
18
Offering no alternative, ORA would simply have SCE’s shareholders absorb one of the
19
most basic costs of a utility’s operations, that of the franchises it must have in order to
20
locate its facilities in local streets and public rights-of-way.58
55
See Workpapers at SCE-18, Chapter VII, Part I, p. 6 for factual support and calculation of six percent.
56
See ORA Report, Volume 1, at pp. 10-H-9 lines 26-30, through 10-H-12 lines 1-6.
57
See SCE-7, Volume 4, pp. 40-41.
58
In ORA’s response to SCE-ORA-08, ORA simply chose not to answer the portion of the data request that
asked, “Does ORA contend those higher franchise fees should be borne by SCE shareholders?”
38
1
VIII.
2
ENERGY SUPPLY & MANAGEMENT
3
A.
Introduction
In Chapter 11-A of its Report, ORA recommends an Energy Supply and
4
5
Management (ES&M) 2006 expense level $1.671 million below SCE’s forecast. ORA’s
6
recommendation should be rejected because its proposed reduction to SCE’s forecast
7
expense is inappropriate, as discussed below.
8
B.
9
ORA’s Labor Adjustment Is Incorrect
SCE is pleased that ORA recognizes the importance of adequately staffing ES&M.
10
However, in calculating the labor cost associated with 145 FTEs forecast by SCE, ORA
11
uses an incorrect average labor rate.
12
SCE’s 2003 labor rates were based on actual salaries paid in 2003 to ES&M
13
personnel in certain job classifications. These rates are shown on page 43 of SCE’s
14
workpapers and are summarized below.
Table VIII-2
Summary Of Forecast ES&M Labor Costs
Average
# Of FTEs
2003 Labor Rate:
Thousand $/FTE
2006 Expense:
Thousand $
Business Analyst
Tech. Spec. & Fin. Analyst
Power Sys. Planner & Spec.
Project Manager
Manager 1 & 2
Manager 3 & Exec.
13
29
37
49
11
6
66
85
85
102
115
135
858
2,465
3,145
4,998
1,265
810
Total
145
93.39
13,541
Job Classification
15
ORA’s labor expense recommendation is less than SCE’s because ORA calculated its
16
2003 average labor rate incorrectly. ORA calculated its proposed labor rate by dividing:
17
(a) recorded/adjusted 2003 labor expense of $ 9.694 million, which represents ES&M’s
18
total labor cost during 2003, by (b) a year-end, rather than average, 2003 FTE level. This
19
calculation understates ES&M’s average 2003 labor rate because more FTEs were
39
1
employed at the end of 2003 than at the beginning of the year. As discussed in SCE’s
2
opening testimony, ES&M added 16 FTEs to its staff during 2003.59
Averaging 95 FTEs at the beginning of 2003 with 111 FTEs at year-end results in
3
4
an average 2003 FTE count of 103. Correcting ORA’s methodology by replacing 111 FTEs
5
with 103 FTEs produces an average 2003 labor rate of 94.12, which is higher than the
6
93.39 rate used by SCE and would yield a higher ES&M labor cost than SCE had forecast.
7
C.
ORA’s Consultant Adjustment Assumes 2006 Refunds With No Justification
8
And Ignores Future Consulting Expenses SCE Will Incur Because Of The
9
Commission’s Recent Long-Term Procurement Plan Decision
As SCE has demonstrated, actual consultant expenses incurred by ES&M during
10
11
2002 and 2003 were $3.123 and $3.067 million respectively.60 Based on ES&M’s approved
12
2004 budget, ES&M expected 2004 consultant expense to increase to $3.46 million. ES&M
13
forecast consultant expenditures remaining at the $3.4 million level during 2005 and
14
2006.
In developing 2002 and 2003 recorded/adjusted ES&M consultant expenses, SCE
15
16
deducted ES&M consulting costs associated with one-time refunds received—pursuant to
17
Federal Energy Regulatory Commission (FERC) proceedings—from El Paso and Reliant.61
18
SCE made these consulting cost adjustments because its consultants performed studies
19
that contributed to the successful resolution of the proceedings against these companies on
20
terms favorable to California. In developing its forecast of 2006 consultant costs, ORA
21
relied on ES&M’s 2003 recorded/adjusted data which includes these refund-related
59
See SCE-7, Volume 5, p. 6.
60
See SCE-7, Volume 5, Chapter I workpapers, p. 46. As shown therein, these consulting expense figures
are in constant 2003 dollars, before being adjusted to: (1) deduct $1.388 million and $0.436 million for
FERC proceeding-related refunds in 2002 and 2003, respectively; and (2) deduct $177,000 and $24,000
for accounting reconciliation adjustments made during 2002 and 2003, respectively.
61
See SCE-7, Volume 5, Chapter I workpapers, p. 46. The El Paso refund received by SCE in 2002 was
$1.245 million. SCE received refunds of $0.143 million and $0.436 million from Reliant in 2002 and
2003, respectively.
40
1
consulting cost adjustments. As ES&M does not typically receive refunds, it is not
2
appropriate to rely on recorded/adjusted data that includes the effect of such refunds in
3
forecasting 2006 consulting expenses. Indeed, the proceedings that led to the one-time
4
refunds were investigations of market conditions and behaviors that preceded or existed
5
during the 2000/2001 energy crisis, and neither SCE nor ORA are forecasting a repeat of
6
these conditions and behaviors between now and 2006. Accordingly, ORA’s 2006 forecast
7
of ES&M’s consultant expenses should not be adopted.
Additionally, ORA does not take into account the Commission’s recent long-term
8
9
procurement plan decision (D.04-12-048), which was issued after SCE prepared its GRC
10
forecast, but before ORA submitted its GRC testimony. This decision will very likely
11
result in a substantial increase in ES&M’s 2006 consultant costs beyond the level forecast
12
by SCE due to the decision’s requirement that SCE engage an independent evaluator (IE)
13
whenever a utility or a utility’s affiliate participates in a utility procurement solicitation. 62
14
Although SCE may not bid a utility project in every utility solicitation, SCE does not know
15
whether any of its affiliates, such as the Edison Mission Group (EMG), will choose to bid.
16
This is because to maintain fairness SCE has established protocols that preclude
17
communications between SCE personnel and corporate governance personnel at Edison
18
International (with certain prescribed exceptions) and personnel employed by affiliates on
19
matters relating to utility procurement solicitations. Accordingly, SCE must engage an IE
20
(at least initially) for every solicitation. If the utility and all its affiliates do not bid, then
21
SCE can terminate the IE’s engagement. If a utility or an affiliate does bid, however, the
22
IE engagement will last for the duration of the solicitation. Insofar as the Edison Mission
23
Group is active in the California market (for example, EMG owns the Sunrise project
62
See D.04-12-048 Findings Of Fact 94 and 95, Conclusion Of Law 29 and Ordering Paragraphs 28. This
decision requires utility projects to compete head-to-head with non-utility projects in utility solicitations,
and lifts the ban on participation by utility affiliates.
41
1
which is under contract to the California Department of Water Resources), it would not be
2
unexpected for SCE to receive a bid from that affiliate.
3
Based on the number of procurement solicitations SCE is likely to conduct in 2006
4
to serve its load, satisfy the Commission’s Resource Adequacy and Local Area Reliability
5
requirements, and meet the State’s Renewable Portfolio Standards, ES&M’s 2006
6
consulting costs for IE work alone could reach three million dollars.63 This recent decision
7
is an excellent illustration of why an adequate allowance for unpredictable consultant
8
expenditures is needed to fund procurement-related activities that cannot reasonably be
9
performed by ES&M staff.
ES&M’s 2004 budget for consultant costs was based on the best information
10
11
available to SCE at the time the GRC forecast was prepared and is a better forecast of
12
2006 ES&M consulting expense, especially in view of the discussion above, than the
13
expense forecast by ORA.
14
D.
For the reasons set forth above, the Commission should recognize the drawbacks
15
16
SCE’s Forecast Remains Robust
inherent in ORA’s recommendation and adopt SCE’s ES&M forecast as presented.
63
This estimate assumes an IE cost of $600,000 per solicitation and five solicitations in 2006 (two five-year
solicitations to serve load and meet the Commission’s requirements for Resource Adequacy/Local Area
Reliability, one ten-year solicitation targeting new generation, and two renewables solicitations).
42
1
IX.
2
QUALIFYING FACILITIES
3
A.
Introduction
SCE requested $4,428,000 in expenses for Test Year 2006 for the QF Resources
4
5
Business Unit (QFR). ORA recommends a reduction of $289,833, for a total of $4,138,167.
6
ORA bases its proposed reduction on two recommendations. First, ORA recommends a
7
reduction of $65,833 in account 920 with respect to the salary for the addition of three
8
FTEs. Specifically, ORA asserts that the salary level for these FTEs should be based on
9
the average salary for the business unit rather than the market rate for the positions
10
being filled. Second, ORA recommends a reduction of $224,000 in Account 923 for
11
consulting services. This reduction maintains this account at 2003 base year levels.
ORA’s recommended reductions should be rejected for the reasons discussed below.
12
13
14
B.
Costs For New FTEs
Largely as a result of increased activity in the area of renewable procurement and
15
related regulatory activities, QFR is currently hiring three new FTEs. As the Commission
16
and ORA are aware, activities in these areas have intensified during the last several years
17
as a result of a number of circumstances, including the enactment of Senate Bill (SB)
18
1078, the expiration of existing Qualifying Facility (QF) contracts and pricing issues
19
related to the expiration of five year amendments entered into between SCE and most of
20
its QFs during the energy crisis. The FTEs being hired will have their primary focus in
21
the areas of renewable procurement, procurement-related regulatory functions, and
22
contract administration to accommodate this increased activity. Judgments and decisions
23
made in each of these areas have the potential to affect ratepayer costs and achieve
24
ratepayer values for several years to come. Accordingly, QFR is seeking high quality
25
candidates with the substantive, technical and industry expertise to assist QFR in
26
achieving the best outcomes for ratepayers. Attracting the appropriate candidates
27
requires high-level job classifications commensurate with the responsibilities and
43
1
expectations associated with each of these job functions. Simply stated, the salary
2
required to fill these positions with qualified candidates is higher than ORA’s
3
recommendation to average the salaries of all current QFR employees.
4
SCE projected the costs associated with these positions using the 2003 Market
5
Reference Point (MRP) for the Job Family and Job Description for each position.
6
Specifically, the MRP for two of the manager positions (Program/Contract 3) is $93,600.
7
The MRP for the third manager (Project/Product 2) is $108,000. The total increase
8
associated with these three positions based on the market is $295,000. ORA’s
9
recommended averaging approach would result in a salary of $92,060 for each of the
10
positions, or a total of $276,190. This approach fails to recognize the difference in job
11
classifications, and also, if adopted, would place SCE at a competitive disadvantage in
12
seeking qualified candidates.
13
SCE also filled a 2003 vacancy in 2004 and significantly upgraded the position from
14
a Manager, Program/Contract job description to a Manager 3 level to account for
15
dramatically increased activities in the regulatory, legislative and procurement areas now
16
and in the foreseeable future in the renewable/QF area. This upgrade constitutes a more
17
than $46,000 increase requested over ORA’s recommendation.
18
The Commission should adopt SCE’s requested increases and reject ORA’s
19
recommended reductions. Policy decisions reflected in SB1078 have embarked the State
20
and its load serving entities on a course of renewable procurement that requires increased
21
attention. These activities did not exist prior to the effective date of SB 1078, and clearly
22
warrant the hiring activity now being undertaken by SCE. Additionally, the expiration of
23
five year pricing amendments entered into by SCE during the energy crisis with most of
24
its QFs, coupled with accelerating efforts at the Commission to address avoided cost issues
25
and QF pricing policy require significant attention within the QFR business unit. The
26
Commission should authorize SCE to seek the most qualified candidates at market level
27
salaries to augment SCE’s capabilities in these areas.
44
1
2
C.
Consulting Costs
SCE has requested $400,000 for consultant services, representing a 127.3% increase
3
over the 2003 level. SCE is the respondent or a participant in numerous, highly technical
4
proceedings pending before the Commission and the California Energy Commission (CEC),
5
concerning, among other things, RPS implementation, renewable procurement,
6
integration costs, avoided cost, transmission, Distributed Generation (DG), and Net
7
Energy Metering (NEM). In addition, SCE is actively engaged in policy level discussions
8
at both agencies and in the Legislature concerning a variety of subjects including, among
9
others, repowering, renewable energy credits and the Governor’s rooftop solar initiative.
10
In some of these areas, such as for example, implementation of the market price referent
11
methodology, and integration evaluation by the CEC, SCE’s experts have not only
12
provided consulting advice to SCE, but have produced work materials that have been
13
endorsed by the Commission and the CEC.
14
During the energy crisis, SCE substantially curtailed its Account 923 expenditures.
15
In 2003, as it began to regain its financial footing, SCE was able to rely increasingly on
16
outside consultants to assist QFR’s growing work demands and the need for technical
17
analysis associated with procurement activities and regulatory mandates. By way of
18
example, in 2004, SCE used consultants to assist SCE with several other technical issues:
19
modeling of wind forecasts to minimize the imbalance costs associated with the deviations
20
of scheduling SCE’s QF wind resources to the California Independent System Operator
21
(CAISO); assisting SCE in understanding the technical details of gas forward price
22
projections in order to provide critical input to the Market Price Referent portion of the
23
RPS proceeding; and assisting SCE in a critical evaluation of the CEC’s Renewable
24
Integration Cost models, which provides input to the RPS bid evaluation process for the
25
renewable solicitations.
26
27
SCE has requested an increase of $224,000 above 2003 expenditures, based on
anticipated further increases in workload above the 2003 level. Among other things, SCE
45
1
anticipates a continuing higher level of workload in response to existing and possibly new
2
initiatives from the CPUC and CEC over the next several years. Among these are RPS
3
implementation at the CPUC and the CEC, the Integrated Energy Policy Report at the
4
CEC, the Energy Action Plan, new compliance requirements imposed by the CPUC and
5
the CEC, the short-run avoided cost (SRAC) proceeding and the expiring QF contract
6
proceeding. Additionally, SCE anticipates that substantial new work will be involved in
7
performing RPS solicitations and new requirements in the event Renewable Energy Credit
8
(REC) trading is implemented. SCE will hire consultants to handle the increased work
9
responsibilities as well as use their expertise to determine the technical viability of
10
various generating resources. SCE has recently committed to negotiating repowering of
11
existing wind QF contracts. SCE will require the use of consultants to advise SCE on the
12
technical viability of specific wind resources.
13
From a practical perspective, it is more cost-effective for SCE to contract on a short-
14
term basis with outside consultants with the expertise to evaluate technical aspects of a
15
study rather than to add a technical expert to SCE’s labor base as a FTE. Therefore,
16
SCE’s requested increase in this account reflects a balanced approach to QFR’s increased
17
workload. By relying on consultants for certain projects, SCE has been able to avoid
18
seeking even greater increases in FTEs, potentially at significantly higher salary levels
19
than requested above. Simply stated, the increase in consulting budget would more than
20
offset the salary increase that would be required with respect to FTEs capable of
21
performing the consultant’s work. Reliance on consultants rather than FTEs to perform
22
highly specialized, one-time tasks provides greater flexibility to QFR to control overall
23
costs in the short-term than hiring FTEs to meet these needs.
24
25
Under these circumstances, the level of consultant funding sought in this account is
reasonable, and ORA’s recommendations should be rejected.
46
1
X.
2
RESOURCE PLANNING AND STRATEGY
3
A.
Introduction
ORA recommends that SCE’s test year request for Resource Planning & Strategy
4
5
(RP&S) be reduced from $2,309,000 to $2,095,629 (a $213,371 reduction). ORA relies on
6
analysis based on data from a data request to support its recommendation. ORA’s
7
analysis is faulty in three ways:

8
First, ORA states that RP&S is “overstaffed by one FTE.” This is factually
wrong.
9

10
Second, ORA relies on 2004 actual recorded expenses assuming that the
11
staffing level for the group was constant throughout the year. In reality,
12
staffing levels increased by five FTEs during 2004. Thus, 2004 recorded
13
expenses significantly understate the amount necessary to support a full year
14
of operational activities that are performed by RP&S’s current staff.

15
Finally, ORA rejects a benchmark of $91,418 per FTE, indicating this
16
benchmark “seems high for a developing division.” ORA offers no support for
17
this conclusion, ignores previous GRC findings regarding this developing
18
division, and even worse, does not seem to understand the difficulty of finding
19
qualified staff for resource planning after the function was eliminated a
20
decade ago.
Each of these errors will be addressed in greater detail below.
21
22
23
B.
ORA Erroneously Concludes That RP&S Is Overstaffed By One FTE
ORA’s conclusion regarding RP&S’ staffing level relies on SCE’s response to data
24
request DR-ORA-138, which shows staffing levels at the end of 2004. RP&S’ staffing level
25
for budgeting purposes was 16.4 at year-end 2004. The additional person included in the
26
data request response is part of a cross-training program and is not reflected in RP&S’
47
1
budget. The organization chart below identifies each individual working in RP&S
2
including Sandra Blain, the person in the cross-training program.
Figure X-2
Year-End 2004 RP&S Organization Chart
Resource
Planning
&
Strategy
Resource Planning & Strategy
Harold Ray
Executive Vice President
Stuart Hemphill
Director of Resource
Planning & Strategy
1
3
8.4
9.4
Mark Minick
Generation
Planning Manager
Jacqueline Jones
Demand Side
Planning Manager
Darell Holmes
Transmission
Planning Manager
Robin Zamora
Budgets &
Acctg. Analyst*
3.4
Steve Powell
Business
Analyst
4.4
Amir Angha
Business
Analyst
5.4
Maggie Poon
Business
Analyst
6.4
Huong Vu
Business
Analyst
7.4
Sandra Blain
Cross-Training
Leadership
Program Participant
10.4
Janos Kakuk
Integrated
Planning Manager
Dorothy Wong
Executive
Assistant
11.4
Luis Pando
Integrated
Planning Manager
2
12.4
13.4
Mike Whatley
Integrated
Planning Manager
Mark Nelson
Strategic Projects
Manager
14.4
Herbert Quan
Manager Project/Product
15.4
Peter Yeung
Manager Project/Product
16.4
Marco Velazquez
Communication
Specialist
N/A
Total FTEs = 16.4
* Shared with Business Planning & Development
As of December 31, 2004
The cross-training person is compensated through Human Resources, not RP&S.
3
4
As can be seen in the organization chart above, only 16.4 FTEs worked in RP&S at year-
5
end, 2004. Accordingly, ORA’s conclusion regarding RP&S’ staffing level is wrong.
6
C.
7
ORA Erroneously Calculated RP&S’ 2004 Average Cost Per FTE
Again, ORA relies on SCE’s response to data request DR-ORA-138 to support its
8
recommendation that the average cost per FTE for RP&S is $83,392. This analysis is
9
wrong in two major ways. First, as described above, ORA wrongly uses 17.4 FTEs in its
10
calculation of average cost per FTE. This is an error, as only 16.4 FTEs were employed by
11
RP&S at the year-end 2004. The effect of ORA’s error is to reduce the average cost per
12
FTE reflected in RP&S’ history by over $5,000 per FTE.
48
Second, ORA relies on RP&S’ 2004 recorded labor expenses of $1,451,000 to develop
1
2
its estimate of average cost per FTE. ORA’s use of this value for the development of an
3
average annual cost per FTE is flawed. Since additional FTEs were added to RP&S
4
throughout the year, 2004 recorded labor expenses understate the amount necessary to
5
support current staffing levels. Since RP&S hired individuals in March, April, May, June,
6
July, and August of 2004, none of whom had a full year’s salary incorporated into the 2004
7
recorded expenses, the recorded labor expenses used by ORA are low. The table below
8
shows the breakdown of labor expenses as requested for 2006, recorded in 2004, and
9
adjusted 2004 expenses, which reflect the amount RP&S would have required if all of its
10
staff had been employed in the department since the beginning of January 2004.
Table X-3
Comparison Of Labor Expenses (Partial/Full Year)
Total
2006 Requested
($ thousands)
2004 Recorded Partial Year
($ thousands)
2004 Corrected Full Year
($ thousands)
$1,581
$1,451
$1,516
As the Table demonstrates, ORA’s failure to account for new hires in the recorded
11
12
year data leads to an understating of RP&S’ annual expenses by $65,000 per year.
13
D.
14
ORA Misunderstands The Challenges Of Staffing A New Division
Lastly, in its testimony, ORA rejects a value of $91,418 per RP&S FTE because this
15
benchmark “seems high for a developing division.” This statement implies a belief that it
16
is cheaper to build an organization than to maintain one. This reasoning is faulty.
17
18
19
20
21
22
23
24
25
26
As stated in SCE’s 2003 General Rate Case testimony:
Rebuilding Edison’s resource planning organization is a challenging but
doable task. Most of the company’s resource planning talent has left the
company, so recruiting outside of the company will be required. The
initial plan is to recruit a small staff in 2003 and rely significantly on
consultants until sufficient staff is assembled and trained. Initial budget
estimates suggest about $2.6 million will be required. Staffing will consist
of about 16 people, largely with backgrounds in economics and other
analytical disciplines.
Additionally,
49
Staffing the organization will pose a considerable challenge. Because of
the limited in-house resource planning talent, Edison will likely need to
search for new employees outside the company. This search will require
on campus recruiting for entry-level staff, general job postings for
experienced staff, and the deployment of retained search firms for highly
talented staff.64
1
2
3
4
5
6
Indeed, it took 20 months to staff 16.4 employees with the skills necessary to
7
8
perform resource planning. Resurrecting the lost art of resource planning from a decade of
9
dormancy is not the same or easier than maintaining an existing staff. This organization
10
is a higher level organization than the organizations ORA identified and requires a higher
11
average cost per FTE, not a lower average cost per FTE as ORA claims. Even so, SCE’s
12
request for 2006 budget is $96,400 per FTE, which is $3,600 per FTE lower than what was
13
estimated in SCE’s 2003 General Rate Case. Overall, RP&S’ budget-based request for
14
both labor and non-labor expenses is almost $300,000 less than what was identified in the
15
2003 General Rate Case (i.e., $2,309,000 vs. $2,600,000).
The CPUC found SCE’s request for RP&S expenses (i.e., $2.6 million) and staffing
16
17
plan as identified in the 2003 GRC to be “constructive and reasonably conservative”:
Based on SCE’s showing in response to Commissioner Wood’s probing, we
are confident that, to date, SCE has been taking reasonable steps to so
position itself. Earlier this year, in the procurement proceeding, the
Commission stated its expectations for IRP and encouraged the utilities to
begin designing and creating the internal processes necessary to support
IRP. (D.01-04-050, pp. 96-97.) SCE will clearly need IRP capabilities, and
its plans to develop a fairly small organization with IRP capabilities and
to institute oversight and coordination by the Resource Planning
Committee strike us as constructive and reasonably conservative in light of
current uncertainties.65
18
19
20
21
22
23
24
25
26
27
ORA has performed no analysis that would demonstrate anything different than
28
29
what the CPUC already found “constructive and reasonably conservative.”
64
SCE 2003 General Rate Case, Supplemental Testimony, Volume 1, pp. 39-40.
65
Decision 04-07-022, (mimeo) p. 305 (emphasis added).
50
1
2
E.
Conclusion
Using 2004 recorded data to forecast 2006 operations is problematic as the group
3
hired five additional FTE’s during 2004. Thus, 2004 recorded expenses significantly
4
understate the amount necessary to support current RP&S staffing and activity levels.
5
SCE’s request for RP&S reflects the minimum level necessary to adequately perform long-
6
term resource planning under a changing environment. ORA’s recommendation would
7
significantly impact the group’s ability to perform this function. Furthermore, ORA’s
8
recommendation is based on a misuse of data and incorrectly calculates an insufficient
9
expense level for RP&S. For all of the reasons stated above, ORA’s analysis should be
10
rejected. SCE’s estimate of $1,581,000 is a reasonable request to fund the resource
11
planning function necessary to meet the CPUC’s objectives of resource planning.
51
1
Appendix A
Witness Qualifications
1
SOUTHERN CALIFORNIA EDISON COMPANY
2
QUALIFICATIONS AND PREPARED TESTIMONY
3
OF WILLIAM R. GAYLER
4
5
Q. Please state your name and business address for the record.
6
A. My name is William R. Gayler, and my business address is 2244 Walnut Grove
7
8
9
Avenue, Rosemead, California 91770.
Q. Briefly describe your present responsibilities at the Southern California Edison
Company.
10
A. I am currently a Manager in the Corporate Budgets Department of the
11
Controllers Organization for the Southern California Edison Company.
12
Q. Briefly describe your educational and professional background.
13
A. I received a Bachelor of Science degree in Business Administration from United
14
States International University in 1980. I began my employment with Southern
15
California Edison in 1981 as a Tariff Analyst in the Revenue Requirements
16
Department, now known as the Regulatory Policy and Affairs Department. In
17
1986 I transferred to the Capital Recovery Division of the Controllers
18
Organization primarily working on Rate Base issues. In 1988 I was transferred
19
to the Tax Department on a cross training assignment. In 1989 I returned to the
20
Revenue Requirements Department primarily working on revenue allocation
21
and rate design issues. In 1996 I returned to the Capital Recovery Division of
22
the Controllers Organization primarily working on Rate Base issues. In March
23
1999 I transferred to Corporate Budgets.
24
Q. What is the purpose of your testimony in this proceeding?
25
A. The purpose of my testimony in this proceeding is to sponsor portions of Exhibit
26
SCE-18, entitled Administrative & General, as identified in the Tables of
27
Contents thereto.
A-1
1
Q. Was this material prepared by you or under your supervision?
2
A. Yes, it was.
3
Q. Insofar as this material is factual in nature, do you believe it to be correct?
4
A. Yes, I do.
5
Q. Insofar as this material is in the nature of opinion or judgement, does it
6
represent your best judgment?
7
A. Yes, it does.
8
Q. Does this conclude your qualifications and prepared testimony?
9
A. Yes, it does.
A-2
1
2