INT Robinson Direct.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
INTERMOUNTAIN GAS COMPANY )
)
Case No. U-I034-88
PREPARED DIRECT TESTIMONY OF WARREN L. ROBINSON
Q. Please state your name, business address and position with
Intermountain Gas Company.
A. My name is Warren L. Robinson. My business address is 555
South Cole Road, Boise, Idaho. I am Assistant to the
President for Corporate Planning.
Q. Briefly describe your educational and work background.
A. I graduated from Brigham Young University in 1974 with a
Bachelors of Science degree in Business Administration. I
then worked for the J. I. Case Company of Racine, Wisconsin
in the position of Accountant and Division Representative
on Special Assignment. In 1976, I moved to Boise, Idaho and
attended Boise State University, where I graduated with a
Master of Business Administration degree in the same year.
I began my employment with Intermountain Gas Company
as a Financial Analyst in October of 1976. I have served
as the Director of Budgets and Financial Planning and
Manager of Planning Services. I assumed my present respon-
sibilities in January of 1980.
Q. Please describe your responsibilities as Assistant to the
President for Corporate Planning.
A. Generally, my responsibilities include coordinating the
various planning activities of the Company, as well as
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developing, analyzing and submitting various planning
assumptions for review by management.
Q. What is the purpose of your testimony?
A. During the past several years, per household consumption of
natural gas has decreased in the Intermountain Gas Company
service territory. The purpose of my testimony is to iden-
tify the primary variables that have caused this reduction,
describe the impact that these variables have on the con-
sumption of natural gas and forecast the impact of changes
on these variables to the per household consumption of
natural gas during 1981.
Q. How much has per household consumption of natural gas
declined?
A. Over the past six years, per household consumption of natural
gas, adjusted for normal weather, has declined from 1126
therms per household in 1973 to approximately 800 in 1979.
Q. What variables have been identified as causing the per
household consumption of natural gas to decline?
A. The reduction in per household consumption can be explained
primarily by changes, with relation to the price of all
other goods, in the price of natural gas, the price of
electricity, the price of insulation and per capita income.
There are other variables that may have an impact on per
household consumption of natural gas, but we have found
that 93% of the variation in the consumption of natural gas
can be explained by variations in these four variables.
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The real price of natural gas has been rising, that
is, the price per therm of natural gas is rising faster
than the prices of other goods. This is one reason, and
perhaps the single most important reason, why the per
household use of natural gas has been declining. The real
price of electricity has been falling, that is, the price
per kilowatt hour is rising less quickly than the prices of
other goods. This, along with the problem of electricity
being priced substantially below its marg inal cost,
explains some of the preference consumers have for electri-
city relative to natural gas. The real price of insulation
has been relatively stable, which means that the price of
insulation relative to the price of natural gas has been
falling. This decline in the price of insulation relative
to the price of natural gas provides an additional incen-
tive to increase insulation and consequently, to reduce
consumption of natural gas. Real per capita income
declined between 1977 and 1980. The impact of these
changes in real income will be to increase gas consumption.
Q. What effect do these variables have on natural gas
cons umpt ion?
A. An econometric study was completed by Intermountain to
determine the effect of these variables on the per house-
hold consumption of natural gas in our service terri tory.
The findings of that study showed that:
A) A 10% increase in the real price of natural gas, with
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all other factors remaining constant, will, over an
eight year period, cause an 11.1% decrease in the con-
sumption of natural gas.
B) A 10 % increase in the real price of electricity, with
all other factors remaining constant, will, over a
five year period, cause a 1.3% increase in the per
household consumption of natural gas.
C) A 10% increase in real per capita income, with all
other factors remaining constant, will, over a six
year period, cause a 2.1% decline in the per household
consumption of natural gas.
D) A 10 % increase in the real price of insulation, with
all other factors remaini)g constant, will, over a
seven year period, cause a 3.7% increase in the per
household consumption of natural gas.
Exhibit ios illustrates these findings in summary form.
The real prices of natural gas, electrici ty and insu-
lation are determined by dividing the actual prices of these
goods by the Consumer Price Index. This creates a variable
that measures the price of the good in question relative to
the prices of all other goods while eliminating the impact
of inflation. The per capita income variable has also been
adjusted for inflation.
The study consisted of an econometric analysis showing,
wi th a 95% conf idence factor, the effect of changes in the
real prices of natural gas, electricity and insulation and
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in per capita income (the independent variables) on consump-
tion of natural gas (the dependent variable).
Q. What assumptions were made in making the calculations in
the study?
A. The prices of natural gas and electricity were calculated
on the rates in effect for Intermountain Gas Company and
Idaho Power Company on April 1, 1980. With regard to the
price of insulation, it was assumed that the real price of
insulation would remain constant during 1980 and 1981.
Inflation for 1980 and 1981 was estimated to be 14% and 9%
respecti vely. The per capita nominal income in Idaho was
assumed to increase by 9% in 1980 and 11% in 1981.
Q. Do you feel that these assumptions are realistic?
A. Yes, I do. The estimated levels of inflation for 1980 and
1981 are very conservative projections. Recent price trends
indicate an inflation rate in 1980 of 18%. The assumptions
related to the per capita income for those living in our
service terri tory are consistent with the levels projected
by the Idaho Econometric Model which is used by the Office
of the Governor, Division of Management and Budget. With
regard to the real price of insulation, it was felt that
the more conservative approach would be to estimate a
constant real price.
Q. Based on the findings of this study, what will happen to
therm sales in the twelve months following July 1, 1980?
A. Given the changes that have occurred in the real price of
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natural gas between 1974 and 1980, and the change in the
average price of gas in 1981 resulting from the recent
tracking increase on April 1, 1980, the per household con-
sumption of natural gas will decrease 7% from the 1980 level
of consumption. The impact of changes in the real price of
electricity will cause a further decline of 0.112%. Changes
in real per capita income will cause per household consump-
tion to increase by. 797% and the changes in the real price
of insulation will cause consumption to fall by .162%. The
net effect is that the per household consumption of natural
gas will decrease by 6.5%.
Q. How many fewer therms will Intermountain sell as a result
of this decrease in consumption?
A. Sales will decrease by approximately 4,100,000 therms in
the twelve months following July 1, 1980.
Q. How reliable is this projection?
A. As I said earlier, 93% of the variation in per household
consumption can be explained by the four key variables
mentioned. In plotting actual consumption against pro-
jected consumption during the test year, the greatest dif-
ference is only 1.07 therms per household per year and the
standard error of the regression is 1.039 therms per house-
hold per year. There is a 95% probability that the actual
consumption of natural gas during the relevant time frame
will be wi thin approximately 82,000 therms of the projected
amount. The adjustment procedure presented by Mr. Lebens
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will protect both Intermountain and the ratepayers from any
error in this therm comsumption projection.
Q. Is this sale reduction a known and measurable change?
A. Yes. It is based on relative real prices and real per
capita income that are known prior to the filing of this
case. Therefore, the sales reduction will be experienced
by Intermountain. If this sales reduction is not con-
sidered by the Commission in this case, it will be
impossible for Intermountain to earn its authorized rate of
return.
Q. Does that conclude your direct testimony?
A. Yes, it does.
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