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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
INTERMOUNTAIN GAS COMPANY Case No. U-I034-88
PREPARED DIRECT TESTIMONY OF WALTER H. SMITH
Q. Please state your name, address and position with
Intermountain.
A. My name is Walter H. Smith. My business address is 555
South Cole Road, Boise, Idaho, and I am Acting President of
Intermountain Gas Company.
Q. What are your responsibilities?
A. I am responsible for policy and operations of the Company.
Q. What is your educational background and your work experience?
A. I have a Bachelor of Science degree in Civil Engineering from
Oregon State University. For the last thirty-two years I
have been involved in utility construction and operations.
For the past eleven years I have been employed by
Intermountain Gas Company. For ten of those years I was
involved in the technical operations of the Company and for
the past year I served as Executive Vice President. In
April of 1980, I became Acting President of the Company.
Q. Will you briefly describe the Company' s operation and
business?
A. The Company is engaged in the distribution of natural gas
to approximately 96,000 customers in 64 communi ties in the
southern part of Idaho in an area generally known as the
Snake River Basin. In terms of annual gas deliveries, 39%
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is residential and commercial, 51% industrial and LO%
interruptible.
Q. When was the last general rate case determination for
Intermountain Gas Company made by the Idaho Public
Utilities Commission?
A. On August l7, 1979, the Idaho Public util i ties Commission,
in Case No. U-I034-75, authorized an increase of $l,719,205
in revenue based on a 10. l4l% overall rate of return and a
l4% return on common equity.
Q. Has Intermountain Gas Company been able to achieve the
overall rate of return and the return on common equity
allowed by the Commission in that Order?
A. No. As of September 30, 1979, at the conclusion of one of
the coldest winters and best earnings periods in the
Company's history, the rate of return on rate base was 9.7%
and the rate of return on common equity was 11. 7%. Each
month since that time, the rates of return have declined.
For the twelve months ending February 29, 1980, the rate of
return on rate base was 8.2% and was 7.7% on common equity.
Q. What amount of revenue are you requesting in this rate case?
A. We are requesting a $5,562,079 increase, representing a
percentage increase of 3.6%. Details on the rate base, the
revenue deficiency and the overall rate of return will be
presented by Mr. Worthan.
Q. Do you believe Intermountain Gas Company could obtain a fair
and equitable rate of return without this further rate
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increase?
A. I do not see where this would be possible. Intermountain
dislikes raising rates as much as anybody else, but under
current conditions an increase is mandatory if the Company
is to provide adequate service as is required by law.
Increased costs for labor and material continue to erode
the Company i s earnings despite stringent monitoring by the
Company. Additionally, Mr. Worthan will discuss various
factors we have identified that caused 86% of the revenue
deficiency experienced by the Company. We are asking the
Commission to make the adjustments necessary to correct the
adverse impact of these factors in this case, and unless
such adj ustments are made, it will be impossible for
Intermountain to earn its authorized rate of return.
Q. In your opinion, is the Company operating eff iciently?
A. In my opinion, we are operating very efficiently. Although
we have had an increase in our operation and maintenance
expenses during the past year, it has not been unreasonable.
Since our last rate proceeding, the Company has worked
exceedingly hard to utilize our manpower, equipment and
resources to the maximum benefit of the Company and rate-
payers.
Q. What has Intermountain done to control the cost of gas?
A. In fiscal 1979, we expended approximately $82 million to
purchase gas. Intermountain, in concert with the other
natural gas distributors in the Pacific Northwest, has used,
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and is continuing to use, its best efforts to limit Canadian
gas supply increases. Intermountain has, with other
Northwest gas companies, presented to the British Columbia
government and to the Canadian government the severe finan-
c ial impact recent price increases have had on the economy
of Southern Idaho. We have secured the very good coopera-
tion of the Idaho government officials, the Idaho Public
Utilities Commission and the Idaho Congressional delegation
in these efforts. The recent announcement of the agreement
between the United States and Canada providing the formula
for computing possible gas prices shows some fruits of the
combined effort.
Addi tionally, Intermountain and the Pacif ic Northwest
natural gas distributors have closely examined the rate
cases filed by our supplier, Northwest Pipeline Corporation,
with the Federal Energy Regulatory Commission and have been
quite successful in this regard during two recent Northwest
rate cases. In the 1978 case, FERC Case No. RP78-50,
Northwest filed for a total increase of about $30,000,000,
of which $3,300,000 would have been allocated to Intermoun-
tain. The case was resolved with a total increase of
$23,600,000, of which $2,600,000 was allocated to Inter-
mountain. In Northwest' s 1979 case, FERC Case No. RP79-57,
$34,484,000 was requested, of which $3,300,000 was to be
allocated to Intermountain. The case was concluded with no
increase at all.
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Q. What has the Company done to control the approximately $LO
million expenses for depreciation, general taxes and income
taxes?
A. The Company has employed on a consulting basis a depre-
ciation expert to ascertain that the depreciation charges
are just and equitable. We employ on an annual basis an
income tax expert to ascertain that our income tax payments
are in conformity with current tax laws and we closely
monitor the tax assessments of the State Tax Commission to
ascertain the accuracy of its assessments.
Q. What has Intermountain done to control the approximate $ll
million operation and maintenance expense?
A. The $ll million of operation and maintenance expenses
consti tutes the maj~r expense items over which the cor-
poration has direct control. The major increases in opera-
tion and maintenance expenses during Fiscal 1979 over
Fiscal 1978 were for increases in wages and salaries ¡
increase in bad debts ¡ increased maintenance expense for
mains, services, meters and regulators ¡ and for increased
operation of the LNG plant.
Of the $ll million, approximately $5 million is for
wages and salaries and $6 million is for all other items of
expense. For the fiscal year 1 979, wages and salaries
charged to Maintenance and Operating Expenses increased
8.6%, which closely parallels cost of living increases
during that period. There were 382 regular full-time
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employees and l7 part-time and temporary employees, for a
total of 399 employees, on September 30, 1978. On
September 30, 1979, there were 372 regular full-time
employees, l6 part-time and temporary employees, for a
total of 388 employees.
Q. What are the prospects of the Company being able to main-
tain the workforce at the current level?
A. New federal regulations are likely to cause the Company to
add additional personnel to comply with new governmental
regulations. I specifically cite additional part-time help
which was required this past winter to administer the new
credit policies that resulted from the Public Utilities
Regulatory Policy Act of 1978 (PURPA). The National Energy
Conservation Policy. Act will cause us to staff for a soon-
to-be mandated residential conservation program. Proposed
revisions by the Department of Transportation for addi-
tional pipeline leak surveying will cause additional man-
power to be added to staff irrespective of customer growth.
While the Company constantly looks for innovative ways to
accomplish these additional tasks, it is my judgment that
addi tional staff will have to be added.
Q. Will you cite some specific things that the Company has
done to control other expenses.
A. Our biggest single controllable expense is manpower. The
Company engaged in a very thorough performance appraisal of
every employee of the Company. We analyzed in depth every
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job required to be performed and the measure by which the
performance should be evaluated. The Company has shifted
personnel when necessary to insure full utilization of all
of its personnel. As a result, we have been able to
accompl ish all necessary tasks with fewer people than in
the prev ious year.
Intermountain has invested in equipment that makes it
possible for about one-sixth of our transportation fleet to
operate on compressed natural gas (CNG). The use of CNG in
our vehicles allows us to reduce the fuel costs by less
than half of what it would cost to operate on gasoline.
Current fuel costs for CNG are equivalent to about 48t per
gallon of gasol ine.
The Commission authorized additional revenues in the
last general rate case, U-I034-75, in a timely manner. The
Company promptly commenced negotiations to arrange for $10
million long term financing and did succeed in obtaining an
agreement for that bond issue by mid-October. wi thin days
after the financing agreement was consummated, the restric-
t ions imposed by the Federal Reserve Board were announced
and favorable utility financing became virtually impossible.
The results were a $10 million loan bearing interest at
LO 3/4%, which allowed the Company to retire a $7 million
loan bearing interest of 9% over the prime rate. This has
resul ted in a substantial decrease in interest payments.
Had the Commission not authorized the revenues until required
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by the statutory time limit, or had the Company not acted
promptly, such savings in interest payments would not have
been achieved. It is evident that prompt action on the
part of the Commission enabled Intermountain to pass sig-
nificant savings on to its customers.
With our annual insurance bill exceeding $600,000 per
year, we had an audit conducted of our Risk Management
Program by an independent risk management consultant in an
effort to determine if our exposures were adequately covered
by insurance and covered at the lowest possible cost. The
results of that audit did not indicate any great savings
that could be made in our insurance program. The audit
indicated that we have an acceptable program for the money
invested.
With the advent of more powerful and less expensive
computers, we have just completed an in-depth study of our
data processing equipment, organization and needs. As a
resul t of that study, we have placed an order for two
Hewlett-Packard Model 3000 computers to replace our
ex isting Univac equipment, which is approx imately ten years
old. The new equipment is many times more powerful than
our existing equipment, and it will allow us to do many
tasks that have been impossible for us to accomplish in the
past and to increase the efficiency of other functions. We
anticipate the installation of the new computer in
September, 1980, and we will real ize some savings in equip-
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ment maintenance costs. Offsetting that savings will be
increased costs for telephone charges for computer ter-
minals in our outlying district and di vis ion off ices. Upon
the completion of the new computer installation, there will
be direct access computer terminals in all our district and
division off ices, where current customer information will
be constantly available from the central data file in
Boise. This is a service which we have not previously been
able to provide our customers.
Q. Are there any other measures that the Company had taken this
past year to contain expenses?
A. Although it is not a new procedure, the operating budget
process for Intermountain consists of each division and
department preparing its operating budget for the fiscal
year commencing October 1 during the previous May and June.
The budgets are then reviewed and revised by the company
management, which then submits the budget to the Board of
Directors for approval or modification. Finally, the
budgeted and actual expense for each month and month-to-
date are compared and reviewed on a line-by-line basis each
month.
Q. What has the Company done to increase the number of custom-
ers served by the system?
A. The Company has filed with this Commission a financing plan
wherein, if approved, the Company will be able to assist
homeowners in financing the conversion of their older
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heating systems from other less abundant fuels to more
efficient gas-fired units. The Company has also instituted
in the past year a new marketing plan which segments the
markets and sets the goals for our marketing personnel.
Finally, we have filed with this Commission proposed
changes in the Gas Main Extension Policy wherein main
extensions and service lines will be installed with greater
consideration being given to the proposed use of gas by the
customer.
Q. Mr. Smith, what type of future do you foresee for
Intermountain Gas Company?
A. The long term future for the Company is, in my opinion,
very bright. Natural gas is abundant and environmentally
acceptable. The price of electricity energy is expected to
increase dramatically in the near future, and supply will
be very tight. Southern Idaho in general, and the Treasure
Valley in particular, is one of the fastest growing areas
of the country. The demand for natural gas as a prime
energy source will increase substantially.
In order to adequately meet the challenge of this
increased demand, however, the Company will have to be in a
strong financial position. The past few years have been
d iff icul t from a financial standpoint for Intermountain' s
utility operations. Our stock is selling at only about
two-thirds of its book value, the Company has just barely
been earning dividends and our interest coverage ratios
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have been low.
We feel that a successful conclusion of this rate case
would give Intermountain a reasonable opportunity to
actually earn its authorized rate of return. This will
allow the Company to begin to build the strong financial
base so necessary to meet the upcoming challenge of pro-
v id ing the energy needed to keep Southern Idaho strong,
growing and vibrant.
Q. Does that conclude your direct testimony?
A. Yes, it does.
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