INT Revised Worthan Direct.pdf

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BEFORE '! IDAO PUBLIC UTILITIES CQSSION
INTRMUNAIN GA CCMAN )
)
CAE NO. U-1034-88
Revised
Prepared Direct Testimny
of
RUSSELL L. WOR1H
1 Q.Please state your name, business address and position with Intenntain.
2 A. My nam is Russell L. Worthan. My business address is 555 South Cole
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Road, Boise, Idaho and I am Treasurer and Assistant Secretary of
Intermuntain Gas Company.
5 Q. What is your educational background?
A.I am a graduate of Idao State University with a Bachelor of Science
Degree majoring in accounting. I have attended various courses and
seminars dealing with utility-industry related matters.
Q. How long have you been employed by Intermuntain Gas Company and what
posi tions have you held with the Company?
A.I have been employed by Intermuntain since 1963 and have held various
maagement positions. Those positions include experience in the
Operating Divisions, Customer Accounting, Data Processing and General
Accounting. In March 1972, I was elected Assistant Treasurer, and
in June 1979, I was elected to the position of Treasurer.
16 Q. Will you briefly describe your responsibilities?
17 A. In my capacity as Treasurer, I have overall responsibility for the
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supervsion, direction and control of Financial Planing and Forecasting,
Corporate Insurance, Cash Maagement and General Ratemaing. In addition,
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my duties includ raising capital to fince Comany operations and
contrution of facilities necessary to provide servce to present and
future customrs.
Q. Have you previously given testiiny before this Conssion?
A. Yes, I have testified before. this Commssion on several occasions.
Q. What is the purpose of your testimony in this Case?
A. I will discuss Revised Exibit 102, Schedules 1 through 7, which deal with
the detennnation of the cost of capital, rate base, cost of service
and resulting revenue deficiency. In addition to the exhibit, which
was prepared under my supervision and direction, I will also discus the
financial affairs of Intennuntain Gas Company.
Q. What is the test year used in this Case?
A. The test year selected by the Company is the twelve months ending June
30, 1980, adjusted for known and measurable changes which have occurred
or will occur on or before June 30, 1981.
Q. Mr. Worthan, would you describe the development of the test year you
have selected?
A. I have taken from the Company's books and records the actual data
for the seven months ending January 31, 1980 and the actual data
for the five months ending June 30, 1980.
To this test year ending June 30, 1980, I have mae two tyes
of adjustmnts: (1) the normlization of revenues and cost of gas;
(2) the adjustment for known an measurable changes which have occurred.
during the test year or will occur during the twelve JOnth following
the test year.
Q. Mr. Worthan, which exhibits are you sponsoring at this hearing?
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A. I am sponsoring Revised Exhibit No. 102, which consists of seven (7)
schedules an Exhibit No. .103.
Q. Please identify Revised Exhibit No. 102.
A. Revised Exhibit No. 102, Schedule 1, is entitled "Cost of Servce and
Increased Revenue Required,. Twelve :Mnths Ended June 30, 1980, as
Adjusted." Schedule 2 is entitled "Average Rate Base and Return,
Twelve :Mnths Ended June 30, 1980." Schedule 3 is entitled "Gas Sales,
Normlization Adjustment." Schedule 4 is entitled "Cost of Gas Normlization
Adjustmnt." Schedule 5 is entitled "Adjustmnt to Test Year Cost of
Service , Twelve :Mnths Ended June 30, 1980." Schedule 6 is
enti tIed "Capital Structure and Cost of Capital, June 30, 1980."
Schedule 7 is our Corprate General Management Policy No. 105 regarding
use of the Conference Center.
Q. Please explain Schedule 1.
A. Schedule 1 shows the Company's total cost of service and increased
revenue required for the twelve months ended June 30, 1980, as adjusted.
Colum (a) identifies the particular cost of service' comonents. Colum
(b) shows the actual revenues and costs as recorded on the Company's
books for the seven months ended June 30, 1980. .Colum (c) reflects
the actual data for the five moths ending Jmie 30, 1980.
Q. Mr. Wortha, what does Colum (d) of Schedule 1 reflect?
A. Colum (d) represents the Comany's revenues ánd costs for the twelve
months ended June 30, 1980.
Q. Mr. Worthan, would you explain the remaining colums of Schedule 1?
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A. Yes. Colum (e) reflects the normlization adjustmnt necessary to
reflect authorized increased gas sales revenues, increased cost of
gas occurring during the test year and the related income taxes.
This adjustmnt is addressed in detail on Schedule 3 and Schedue
4, and will be explained later in my testimony.
Colum (f), the normlized test year, is a sunrization of colums
(d) and (e). Colum (g), Adjustments, sumrizes the known and
measurable chages which have been or will be effective on or before
June 30, 1980. These adjustments are explained in detail on Schedule 5.
Colum (h), the requested test year ending June 30, 1980, is
the sumrization of colum (f) and (g). Colum (i), proposed
increase, reflects the increased revenue, income taxes and operating
income. These amunts are determned by derivation of the operating
income shown on line 13, colum (j).
Colum (j) is then a sumrization of colum (h) and colum (i).
It reflects the required total cost of service necessary to provide
a return on rate base ø 10.482%.
Q. Mr. Wortha, under colum (j), line 14, you show a rate base of
$74,639,546, and on line 15, a rate of return of 10.482%. Are these
the proposed average rate base and return?
A. Yes, and the components of each are developed in separate Schedules,
Nos. 2 and 6.
Q. Please explain Schedule 2, entitled "Average Rate Base and Return,
Test Year Ended June 30, 1980."
A. Company Schedule 2 consists of six pages. It shows the average
rate base for the test year ended June 30, 1980. Page 1 of the
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Schedule sets . forth the .average plant in service, average accum-
lated depreciation, the average amunt of advances in aid of construc-
tionto be deducted and the various components of working capital
to be included in rate base. Pages 2 through 6 are supporting pages for
page 1 of Schedule 2.
Q. How did you arrive at Gross Plant in the amunt of $103,700,751 shown
on line 2, page 1 of your Schedue No.2?
A. The details of the calculation of tht numer appear on page 2 of
Schedule 2. I have computed a twelve-ionth average balance using
the average of month-end balances. The amunt of $103,700,751 is
shown on line 28, of page 2.
Q. What adjustmnts have you made to average plant in service?
A. I have made no adjustments to plant in service and related accumated
depreciation. My inclusion of the Conference Center and all distribution
mains in the rate base differs with Conssion Order No. 14859 in Case
No. U-L034-75.
Q. Why was the meeting facility included in rate base?
A. As was noted in its petition for rehearing in Case No. U-1034-75,
Intermountain has adopted a new policy with regard to the use of the
facili ty as set forth in Exbit No. 102. Schedule 7. Under this policy,
the Conference Center is available for Company or Company- sponsored
use only. After working hours and weekend use is only available when
an employee of Intermountain is an active member of the group request-
ing the use of the facility. Therefore, 100% of the working hours
have been used for utility purposes.
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Q. Mr. Worthan, would you explain your inclusion of all distribution
main?
A. In Order No. 14859, the Commssion, in maing the adjustmnt to delete
certain distribution mains stated, "the critical factor underlying
that conclusion is a conviction that the Company, as a general matter,
maes its decisions to contract new mains in a realistic and responsible
maer. "
Before this order in the last case, the Company had started a
comprehensive review of its main extension policy contained in its General
Service Provisions for possible revision. In addition, Intermuntain
recently filed with this Commssion a proposed Main Extension Policy which
provides a prudent and realistic method of evaluating an extension project.
Intermuntain submits that the proposed man extension policy will be a
satisfactory monitoring system in the future for its main extension
construction. The analysis of the staff witness in the previous case,
al though useful to highlight the issue, is not satisfactorY for a
criterian of measurement. As an exale, of the four main extensions
deleted from Intermuntain's rate base by the Commssion in Order No.
14859 because there were no customers on such lines, two currently
have customers on them. It is easy to see that the tye of anlysis
used in the previous rate case will result in uncertainty between
Intermuntain and the staff regarding the existence of cutomers on
munerous main extensions throughout the state, and tht a very
expensive anual review of all main extensions will be necessary in
order to determne whether customers are using the extension during
that particular year. This may lead to the same portion of plant
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being in rate base in one year and out of rate base in another. This
inconsistent treatmnt will unecessarily further complicate an already
complicated proceeding. (The IPUC has approved our Application.)
Q. Mr. Worth, how did you arrive at the amount of the acculated
depreciation for. the test year tht appears on page 1 of Schedule 2?
A. The calculation of this amunt is derived in the sam way as Average
Plant in Service, namely, twelve-month average of average monthly
balances. The Depreciation Reserve a~unts to $32,214,030 as shown
on page 3, line 27 of Schedule 2.
Q. Did you deduct Advances in Aid of Construction from the Average Net
Plant in computing rate base?
A. Yes, as shown on line 5, page 1 of Schedule 2 and detailed on page 4
of Schedule 2. I have deducted the twelve-month average of the moth-
end balances of Advances in Aid of Construction.
Q. Please explain Working Capital and the derivation of 'the amounts set
forth on Schedule 1, page 1.
A. As is explained by Mr. Gelhaus, Working Capital represents an allowance
for the funds the utility's shareholders have invested other than in
utility plant which are required in the norml day-to-day operation of the
utili ty . The i tern included in working capital are materials and supplies,
LNG inventory, and cash working capital requirements.
Q. How was the amunt for materials and supplies inventory determned?
A. I have used the amunt of $696,975 as a necessary level of materials
and supplies for the day-to-day operation, maintenance, and replacement
to Intermuntain's existing system and necessary new construction.
The amunt is derived in Schedue 2, page 5.
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Q. How did you determe the cash working capital requirements?
A. Because the use of the 45-day rue does not adequately measure the
investmnt required to serve its customers, Intermuntain has prepared a
lead-lag stud in this Case. The specific purpose of this study is to
identify the investors' capi tal required to pay delayed recovery of costs.
Mr. Gelhaus of Arthur Andersen & Co. is sponsoring Exhibit No. 104,
which details a zero amimt of required cash working capital. Based on
this study, Intermuntain proposes to use the lead- lag days shown in
colum (c), Exhibit No. 104, in future cases before this Conmssion.
Q. Please continue your explanation of the components of working capita1.
A. The amunt for LNG inventory represents the average of twelve-monthy
averages. The determation of this amunt is shown on page 6 of
Schedule 2.
Q. Please explain the line entitled "Retur at 10.482%.
A. The calculation of the overall return is set forth on Schedule 6. I
will cover this cost later in my testimny.
Q. Mr. Worthan, on Schedule 1, colum (e), you identify a normlization
adjustment. Would you please explain this adjustment?
A. This adjustmnt is set forth in more detail on Schedule 3, entitled
"Gas Sales Normlization Adjustment" and Schedule 4, entitled "Cost
of Gas Normlization Adjustmnt." Schedule 3 shows the five distinct
factors affecting gas sales revenue for the twelve-month test year.
The amount of $26,883,528 (line 3) is the net effect of pricing all
volumes in that period for rate increases placed into effect through
April 1, 1980.
Q. Please explain the adjustmnt for norml weather on line 4 of
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Schedule 3.
A. Residential RS-l, RS-2; GS-l, Small Conmercial; and GS-2, General
Sales, have been adjusted for norml weather conditions. These sales
are sensitive to weather conditions since the major portion of the
gas requirements are for space heating. It ha been the Commssion's
usual position that revenue requirements be based upon norm weather
condi tions .
Q. How 'did you adjust for weather?
A. The weather adjustment was calculated for these weather sensitive rate
classes. An adjustmnt was further identified for each of the Company's
five operating divisions. To arrive at adjusted sales related to the
monthly heating load in each division, I have compared the actual
average accumative degree days reported by the National Oceanic
and Atmspheric Admnistration adjusted for the cyclical variation
to the norml degree on a thirty-year average adjusted for the sam
billing cycle variation. These factors were then applied to the
monthly heating loads in each rate class for each operating division
by morith. The base load, actual in July or Augut in some cases,
was added to the normlized heating load to arrive at a total
normlized by rate class by division by month. The projected
monthly volumes were sumrized to provide the total proj ected
volums for RS-l, RS- 2, GS-l and GS- 2 sales.
Q. What was the net effect of this adjustment?
A. The test year sales were increased by 3,852,133 thenn, which increased
revenue of $2,047,338, as shown on line 4, Schedule 3.
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Q. Mr. Worth, would you please explain line 5, volum changes, and
line 6, reclassifications, on your Gas Sales Normlization Schedule 3?
A. Line 5 and line 6 are the adjustmnts necessary to nornlize for
expected usage requirements and to reflect current contract and
demad volum changes under ,Rate Schedules LV-l, S-L and P-l.
The Company has deemed these adjustmets necessary to properly
reflect a norml year's gas sales.
Q. Please explain the adjustment for the decreasing sales factor shown
on line 7 of Schedule 3.
A. This adjustment is for the 6.5% decrease in residential consumtion
described in Mr. Robinson's testimny. This reduction is a know
and measurable change since the factor is based on changes in
relative prices and real income that have already occurred over
the past eight years.
Q. What is the net effect of the normlized adjustment to gas sales?
A. The effect would be a decrease in therm sales of 4,450,449, as shown
on Schedule 4, and increased related revenues of $24,622,490.
Q. Please explain the normlization adjustment for the cost of gas as
detailed on Schedule 4.
A. The cost of gas purchased is based upon the Company's purchase
requirements for the twelve month test year as adjusted for the
normlization of gas sales in the aiunt of 330,416,372 therm
derived from Schedule 3. The total requirements are the sum of
total sales volumes and Company-used fuel.
Lines 6 through 13 show the calculation of the cost of gas
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purchased from Nortwest Pipeline Corpration by the Company. under
its rate schedules.
The total cost of gas shown on line 15 is $129,494,799. To
arrive at the amunt of the adjustmnt, the total cost of gas incurred
during the test year ending June 30, 1980, which is $104,597,228, mut be
deducted.
Q. What is the adjustment required?
A. The adjustmnt is $24,897,571, as shown on line 17.
Q. Would you explain the income tax adjustmnt shown on line 11, colum
(e) of Revised Exhibit No. 102, Schedule 1?
A. The income tax adjustmnt is necessary to show the additional taxes
generated as a result of increased income through the normlization
of gas sales. The income tax calculation uses the sam statutory
tax rate which was in effect during the test year, shown in colum
(d) of that schedule.
Q. Earlier in your testimny, you refer to two types of adjustmnts to
the test year ending June 30, 1980. You have explained one, the
normlization adjustment. What is the other tye?
A. The other adjustment takes into accotmt the known and measurable
changes which have occurred during the test year or will be
experienced by the Company in the twelve months following the test
year. This type of adjustment is reflected in colum (g) of Schedule
1 for operating and maintenance, taxes-general, taxes-federal, and
state income. These adjustments are shown in detail on pages 1, 2, 3 and
4 of Schedule 5.
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Q. Please explain your adjustmnt to operating and maintenance detailed
on Schedule 5, pages 1 and 2.
A. Salaries and wages have been increased to reflect pay levels in
effect on Jme 30, 1980. The ammt of this measurable change is
$461,009. In addition, I have increased salaries by that portion of
the 8% anual increases which the Company will pay during the twelve
months foiiowing June 30,1980. The amount to be paid is $138,087.
The total salary adjustment is an increase of $599,096, shown on
Schedule 5, page 1, line 8.
Q. Mr. Worthan, are the components of the salary adjustment known and
measurable?
A. Yes. Level of payroll on June 30, 1980 has already been determned
and is measurable.
The increases to be paid during the twelve months following
June 30, 1980 are clearly defined by Company policy on inri t increases
for non-union personnel.
Q. How was the adjustment for group insurance and pensions determned?
A. Group insurance and pension costs are a fmction of payrol1. For
the test year ended June 30, 1980, the total group insurance premium
charged to expense were $429,071, and the total salaries charged to
expense were $5,533,550 or 7. 754~ per dollar of payroll. The cost
per dollar of payroll was multiplied by the increased salaries to
determne the adjustment for increased insurance charged to expense
of $46,454. The same procedure was utilized in detennning increased
pensions of $76,504.
Q. Please explain the liability and property insurance adjustment.
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A. The total amunt of the adjustmet, a $36,644 decrease, reflects
increased workmen's compensation insurance benefits on increased
payroll and property insurance which are offset by the decrease
in premium for lüibili ty insurance currently being experienced. These
decreased premium have already been paid and are currently being
amrtized to expense at these levels.
Q. Please explain the adjustment for the C & K Exploration Joint
Venture refud.
A. The refund represents the available cash attributable to ratepayer
funding as determed by the Commssion in Order No. 14967. That
Order set the rate of refund at .1464: per therm sold. The adjustment
was calculated on the basis of normlized sales for the twelve months
ended June 30, 1980. The total amunt of the adjustmnt is a decr~ase
of $207,751.
Q. How was the adjustment for reguatory commssion fees detennned?
A. This adjustment reflects the latest billing on fees based on calendar
year 1979 revenues and the acculated rate case expenses amortized
over the period the new rates will be in effect. The total amOlmt
of the adjustmnt is $98,503.
Q. The provision for bad debts shows an increase of $183,828. Please
explain this adjustment.
A. The bad debts experienced by the Company have increased from .3% to
. 6% of the total sales revenue. This growth in bad debts is primarily
due to the more flexible credit policy adopted during the last year.
I have calculated the test year provision based upon a provision
rate of .6% of proposed revenues. The derivation of this adjustment
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is set out on lines 8, 9 and 10, page 2 of Schedule 5.
Q. Adjustment numer 7, detailed on page 2 of Schedule 5, deals with
expense price increases. Please explain the expenses included and
the price increase determned.
A. Lines 15 through 21 set forth .the expense levels for the twelve months
ended June 30, 1980 for seven types of operation and maintenance
expenses that have been adjusted for known and measurable changes
individually. I have subtracted the total shown on line 25 from the total
operation and expense level at June 30, 1980, line 15. While the actual
costs incurred on other non-payroll expenses, line 26, are self-explanatory,
the price level change of 9% is a derived amunt. The 9% adjustment
to the other operating expense is in recognition of the minii level
of inflation for the twelve months ending June 30, 1980. Economists
expect the level of inflation to be in the double digit range of from
10% to 18% during the upcoming year. The official admnistration
forecast calculates that prices, overall, will rise 9% this year.
The Company is requesting that the Commssion recognize that
the Company's other costs, such as postage, contract services, form
and suplies in general, have risen since the begining of the historical
test year being used in this Case. This is the minimu that Intermtmtain' s
cost will increase during the twelve months following June 30, 1980. The
total adjustment requested is $302,001.
Q. Mr. Worthan, you have mae other specific adjustments to payroll,
insurance, etc. Why have you made a singular adjustment to other
costs show on line 26, page 2, Schedule 5 of Revised Exhibit No. 102?
A. Even though the amunt of $3,355,566 is large, the identifiable
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1 parts are numerous and small. The amunt of tim spent on further
refining this adjustment would not be cost-effective for the ratepayer.2
3 Q. Mr. Worthan, would you please explain the adjustment for the ReS
Program?
A. It is expected that Idao's State Energy Plan will be accepted by
the United States Department of Energy and that Intermotmtain's RCS
Program will begin on October 1, 1980 to comply with federal law.
The following items mae up the $151,500 adjustment being requested:
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Personnel
Employee Exenses
Equipment
Start-up Costs
$122,000
14,400
3,600
11,500
$151,500
14 Q. What is adjustment 9, Study Amortization, shown on page 2 of Schedule
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5?
A.In Commssion Order No. 14859 in Case No. U-1034-75, a three-year
amrtization of $ 18,019 per year was authorized in writing-off
studies totaling $54,058. The adjustment for $18,019 represents the
second of the . amrtization adjustmnts.
20 Q. Does this complete your explanation of adjustment~ to operating and
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maintenance expenses?
A. Yes, the sum of the items just explained equals $1,231,510, which is
shown on Exibit No. 102t Schedule 5, page 2, line31.
.24 Q. Please explain the general tax adjustmnt decrease of $106,606 which
is shown on page 3 of Schedule 5.25
26 A. This total adjustmnt consists of the following taxes:
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1. Ad valorem taxes $(148,063)
$ 41,4572. Payroll taxes
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The adjustment to ad valorem taxes is based upon 1% of market value.
The market value is based on the cost indicator and operating income
indicator currently. established. The payroll tax adjustmt represents
the increase in payroll taxes incidental to the payroll increases explained
earlier.
Q. Did you mae an adjustment for federal and state income taxes?
A. Yes, I did.
Q. Please explain the adjustment.
A. On Schedule 5, page 4, I have shown the calculation necessary to arrive
at the income tax that would be paid at the level of operating revenues
and costs of service show in coltm (h) of Schedule 1.
Q. Was the income tax calculation made incorporating the federal income
rates currently in effect?
A. Yes. The 1980 test year income tax was calculated by taking into
account the adjusted interest expense and depreciation. The calculation
used the reduced rate of 46% which will be experienced by the Company
in thetwel ve months following the test year reduced by the surtax
exemtion and amrtization of investment tax credits. The income
tax for the test year June 1980 is $1,969,321, as shown on Schedule
5, page 4, line 12.
Q. Please explain Revised Exibit No. 102, Schedule 6, entitled "Capital
Structure and Cost of Capi ta1. II
A. Schedule 6 is the Company's capitalization and costs of capital as
stipulated to by all the parties.
Q. Mr. Worthan, what operating income is required by the Comany to give
an overall rate of return of 10.482% on rate base?
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A. Based upon a rate base of $74,639,546, shown on Schedule 2, page 1,
and the test year ending June .30, 1980, the return requìred would be
$7,823,717 on an anual basis.
Q. Have you determined the resulting retur deficiency and rélated
revenue increase required by the Company?
A. Yes. On Revised Exhibit No. 102, Schedule 1, under colum (i), I have
shown the return deficiency of $2,295,029 on line 13. The related
increase in revenue is $4,545,511, as shown on line 3.
Q. Mr. Worthan, as the Finacial Officer, would you discuss the reasons
why Intermuntain has not had a reasonable opportunity to earn the
authorized return of 14% on commn equity?
A. I have prepared Exhibit No. 103 to analyze the earnings deterioration
twelve months after the test year adopted in Intermuntain's last
general rate case, U-L034-75.
Commssion Order No. 14859 in that case authorized a test year
ending January 31, 1979 adjusted for known and measurable changes
which would exist through January 31, 1980. In Exhibit No. 103,
I have used the income statement twelve months ending Februry 29, 1980
in comparison with amounts allowed in the last general rate case. This
comparison is set forth in colum (b) and colum (c).
The weather for the twelve months ending Februry 29, 1980 was
virtually norml, which provided an opportunity for comparison with no
adjustment required.
Line 11 of Exibit No. 103 shows the return on equity deficiency
of 5.70% experienced by Intermuntain in that twelve month period.
Q. Mr. Worthan, what are the factors which have caused this conditon?
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1 A. The condition is due to factors beyond magement's control,.2
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primarily record high inflation, increased bad debt expense and
declinng usage per customer. On lines 12 through 19 of Exibit No.
103, I have shown five factors which make up 86% of the return deficiency
of 5. 70% . They are as follows:
1. Reduced customer usage
2. Increased bad debt expense
3. Change in depreciation expense
4. GRI unrecovered5. Price level chae
These factors were not provided for by this Commssion when its Order
No. 14188 was issued.
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Q. Mr. Worthan, has the Company presented these factors before this
Commssion in the current Case?
15 A. Yes, we have. Mr. Robinson and Mr. Lebens address the reduced use.16
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by residential customers. I have addressed further increased levels
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of bad debt expense. Intermuntain ha been allowed by this Commssion
to collect its rates effective April 1, 1980 for the current costs of
GRI, so this problem no longer exists. Also included in my testimony.19
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the inflation rate at both the wholesale and conSumr levels is at
double digit levels.
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By recognizing these factors and providing for them, this Commssion
can enhance the Company's financial stability and allow it a realistic
opportunity to earn its return on equity. If adjustments are not made
to take these very real factors into account, Intermuntain will not
have a real opportunity to earn its authorized rate of return..Q. Mr. Wortha, does this conclude your direct testimony?
29 A. Yes Sir, it does.
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