INT Worthan Direct.pdf

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BEFORE TH IDAO PUBLIC UTILITIES COISSION
INTRMAIN GA COMAN )
)
CAE NO. U-1034-88
Prepared Direct Testimony
of
RUSSELL L. WOR'l
Q. Please state your name, business address and position with Intennountain.
A. My nam is Russell 1. Worthan. My business address is 555 South Cole
Road, Boise, Idaho and I am Treasurer and Assistant Secretary of
Intermuntain Gas Company.
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 Comany and what
posi tions have you held with the Company?
A. I have been employed by Intermtmtain since 1963 and have held various
maagement positions. Those positions include experience in the
Operating Divisions, Customer Accotmting, Data Processing and General
Accotmting. In March 1972, I was elected Assistant Treasurer, and
in Jtme 1979, I was elected to the position of Treasurer.
Q. Will you briefly describe your responsibilities?
A. In my capacity as Treasurer, I have overall responsibility for the
supervision, direction and control of Financial Planing and Forecasting,
Corporate Insurance, Cash Maagement and General Ratemaing. In addition,
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my duties include raising capital to finance Company operations and
construction of facilities necessary to provide servce to present and
future customers.
Q. Have you previously given testimny before this Conussion?
A. Yes, I have testified before this Conussion on several occasions.
Q. What is the purpse of your testimony in this Case?
A. I will discuss Exhibit No. 102, Schedules 1 through 7, which deal with
the determnation of the cost of capital, rate base, cost of service
and resulting revenue deficiency. In addition to the exhibit, which
was prepared tmder my supervision and direction, I will also discuss the
financial affairs of Intennountain 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 Jtme
30, 1980, adjusted for known and measurable changes which have occurred
or will occur on or before Jtme 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 proj ected data
for the five months ending Jtme 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 and measurable changes which have occurred
during the test year or will occur during the twelve months following
the test year.
Q. Mr. Worthan, which exhibits are you sponsoring at this hearing?
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A. I am sponsorin Exhibit No. 102, which consists of seven (7)
schedules and Exibit No. 103.
Q. Please identify Exhibit No. 102.
A. Exhibit No. 102, Schedule 1,. is entitled "Cost of Service and Increased
Revenue Required, Twelve Months Ended June 30, 1980, as Adjusted."
Schedule 2 is entitled "Average Rate Base and Return, Twelve Moths
Ended June 30, 1980." Schedule 3 is entitled "Gas Sales, Normlization
Adjustmnt. " Schedule 4 is entitled "Cost of Gas Normlization
Adjustmnt." Schedule 5 is entitled "Adjustment to Test Year Cost of
Service, Twelve Months Ended June 30, 1980." Schedule 6 is
enti tled "Gapi tal Structure and Cost of Capital, June 30, 1980."
Schedule 7 is our Corporate General Maagement Policy No. ios 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.
Colui (a) identifies the particular cost of service components. Colui
(b) shows the actual revenues and costs as recorded on the Company's books
for the seven months ended June 30, 1980. Colui (c) reflects the
projected data for the five months ending June 30, 1980. This represents
the Company's expected revenues and costs from Februry 1980 through
June 1980, and is derived from the Company's fiscal 1980 plan.
Q. Mr. Worthan, what does Colui (d) of Schedule 1 reflect?
À. Colui (d) represents the Company's revenues and costs for the twelve
month ended June 30, 1980.
Q. Mr. Worthan, would you explain the remaining coluns of Schedule 1?
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A. Yes. Co1ui (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 adjustment is addressed in detail on Schedule 3 and Schedue
4, and will be explained later in my testimony.
Colui (f), the normlized test year, is a sumrization of coluis
(d) and (e). Colui (g), Adjustments, srnrizes the known and
measurable changes which have been or will be effective on or before
June 30, 1980. These adjustments are explained in detail on Schedule 5.
Colui (h), the requested test year endìng June 30, 1980, is
the srnrization of colui (f) and (g). Colui(i), proposed
increase, reflects the increased revenue, income taxes and operating
income. These amounts are determned by derivation of the operating
income shown on line 13, colui (j).
Colui (j) is then a sumrization of colun (h) and colui (i).
It reflects the required total cost of service necessary to provide
a return on rate base & 11.748%.
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Q. Mr. Worthan, under colun (j), line 14, you show a rate base of
$74,680,214, and on line 15, a rate of return of 11.748%. 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-
tion to 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 amtmt of $103,713,915 shown
on line 2, page 1 of your Schedule No.2?
A. The details of the calculation of that numer appear on page 2 of
Schedule 2. I have computed a twelve-month average balance using
the average of month-end balances. The amunt of $103,713,915 is
shown on line 27, of page 2.
Q. What adjustments have you made to average plant in service?
A. I have made no adjustments to plant in service and related accumlated
depreciation. My inclusion of the Conference Center and all distribution
mains in the rate base differs with Conussion Order No. 14859 in Case
No. U-1034-75.
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,
Intennountain has adopted a new policy with regard to the use of the
facili ty as set forth in Exhibit 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 Intermuntain 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. Worth, would you explain your inclusion of all distribution
mains?
A. In Order No. 14859, the Conussion, 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
comrehensive review of its main extension policy contained in its General
Service Provisions for possible revision. In addition, Intermtmtain
recently filed with this Conussion a proposed Main Extension Policy which
provides a prudent and realistic method of evaluating an extension project.
Intermuntain submits that the proposed main 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 examle, of the four main extensions
deleted from Intermtmtain' s rate base by the Conmssion 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 type of analysis
used in the previous rate case will result in uncertainty between
Intennountain and the staff regarding the existence of cutomers on
numrous main extensions throughout the state, and that 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 treatment will unecessarily further comlicate an already
complicated proceeding.
Q. Mr. Worthan, how did you arrive at the amtmt of the accumlated
depreciation for the test year that appears on page 1 of Schedule 2?
A. The calculation of this amtmt is derived in the sam way as Average
Plant in Service, namely , twelve-month average of average monthly
balances. The Depreciation Reserve amunts to $32,209,552 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 deduGted the twelve-month average of the month-
end balances of Advances in Aid of Construction.
Q. Please explain Working Capital and the derivation of the amtmts 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 amtmt for materials and supplies inventory determned?
A. I have used the amunt of $679,400 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 amount is derived in Schedule 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 customrs, Intermuntain hås prepared a
lead-lag study in this Case. The specific purpose of this study is to
identify the investors' capital required to pay delayed recovery of costs.
Mr. Gelhaus of Arthur Andersen & Co. is sponsoring Exhibit No. 104,
which details a zero amtmt of required cash working capital. Based on
this study, Intermuntain proposes to use the lead- lag days shown in
colui (c), Exhibit No. 104, in future cases before this Coimission.
Q. Please continue your explanation of the components of working capitaL.
A. The amtmt for LNG inventory represents the average of twelve-monthly
averages. The determation of this amount is shown on page 6 of
Schedule 2.
Q. Please explain the line entitled "Return at 11. 748%."
A. My calculation of the overall return is set forth on Schedule 6. I
will cover this cost later in my testimony.
Q. Mr. Worthan, on Schedule 1, co1un (e), you identify a normlization
adjustment. Would you please explain this adjustment?
A. This adjustment is set forth in more detail on Schedule 3, entitled
"Gas Sales Normlization Adjustment" and Schedule 4, entitled "Cost
of Gas Normlization Adjustment." Schedule 3 shows the five distinct
factors affecting gas sales revenue for the twelve-month test year.
The amount of $48,873,461 (linê 3) is the net effect of pricing all
volums 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-1, RS-2; GS-1, Small Coimercial; 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 has been theConussion' s
usual position that revenue requirements be based upon norml weather
condi tions .
Q. How did you adjust for weather?
A. The weather adjustment was calculated for these weather sensitive rate
classes. An adjustment 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 accumlative degree days reported by the National Oceanic
and Atmspheric Admnistration adjusted for the cyclical variation
to the nonnl 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 month. The base load, actual in July or Augut in some cases,
was added to the nonnlized 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
volumes for RS- 1, RS- 2, GS-1 and GS- 2 sales.
Q. What was the net effect of this adjustmnt?
A. The test year sales were decreased by 2,033,177 therm, which decreased
revenue of $1,10l,880t as shown on line 4, Schedule 3.
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purchsed from Northwest Pipeline Corporation by the Company under
its rate schedules.
The total cost of gas shown on line 15 is $132,247, 658 ~ To
arrive at the amunt of the adjustment, the total cost of gas incurred
during the test year ending June 30, 1980, which is $102,476,569, mut be
deducted.
Q. What is the adjustment required?
A. The adjustment is $29,771,089, as shown on line 17.
Q. Would you explain the income tax adjustment shown on line 11, colun
(e) of Exibit No. 102, Schedule I?
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 colui
(d) of that schedule.
Q. Earlier in your testimony, you refer to two types of adjustments 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 account the known and measurable
chages 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 colui (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
40f 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 Jtie 30, 1980. The amunt of this measurable change is
$515,788. In addition, I have increased salaries by that portion of
the 8% anual increases which the Company will pay during the twelve
months following June 30, 1980. The amunt to be paid is $137,670.
The total salary adjustment is an increase of $653,458, show on
Schedule 1, 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 determed
and is measurable.
The increases to be paid during the twelve months following
June 30, 1980 are clearly defined by Company policy on merit increases
for non-union persoIUel.
Q. How was the adjustment for group insurance and pensions determned?
A. Group insurance and pension costs are a function of payroll. For
the test year ended June 30, 1980, the total group insurance premium
charged to expense were $311,313, and the total salaries charged to
expense were $5,467,888 or 5.693~ per dollar of payroll. The cost
per dollar of payroll was nnl tiplied by the increased salaries to
determne the adjustment for increased insurance charged to expense
of $37,201. The same procedure was utilized in determning increased
pensions of $50,316.
Q. Please explain the liability and property insurance adjustment.
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is set out on lines 8, 9 and 10, page 2 of Schedule 5.
Q. Adjustmnt 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 amtmt. The 9% adjustment
to the other operating expene is in recognition of the mininn level
of inflation for the twelve month 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 Commission recognize that
the Company's other costs, such as postage, contract services, form
an supplies in general, have risen since the begining of the historical
test year being used in this Case. This is the miinn that Intermuntain's
cost will increase during the twelve months following June 30, 1980. The
total adjustmnt requested is $283,430.
Q. Mr. Worthan, you have made other specific adjustments to payroll,
insurance, etc. Why have you made a singular adjustment to other
costs shown on line 26, page 2, Schedule 5 of Exhibit No. 102?
A. Even though the amunt of $3, 149,223 is large, the identifiable
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parts are numerous and small. The amtmt of tim spent on further
refining this adjustment wouid not be cost-effective for the ratepayer.
Q. Mr. Worthan, would you please explain the adjustment for the RCS
Program?
A. It is expected that Idaho's State Energy Plan will be accepted by
the United States Departmnt of Energy and that Intennountain' s RCS
Program will begin on October 1, 1980 to comply with federal law.
The followig itern mae up the $151,500 adjustment being requested:
$122,000
14,400
3,600
11,500
$151,500
Q. What is adjustment 9, Study Amortization, shown on page 2 of Schedule
Personnel
Employee Expenses
Equipment
Start-up Costs
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 amortization adjustmnts.
Q. Does this complete your explanation of adjustments to operating and
maintenance expenses?
A. Yes, the sum of the items just explained equals $1,319,714, which is
shown on Exhibit No. 102, Schedule 5, page 2, line 31.
Q. Please explain the general tax adjustment decrease of $118,563 which
is shown on page 3 of Schedule 5.
A. This total adjustmnt consists of the following taxes:
2. Payroll taxes
$(163,181)
$ 44,618
1. Ad valorem taxes
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The adjustmnt 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 adjustmnt 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 t 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 shown in colum (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 the twelve months following the test year reduced by the surtax
exemption and amortization of investment tax credits. The income
tax for the test year June 1980 is $2,116,002, as shown on Schedule
5, page 4, line 12.
Q. Please explain Exhibit No. 102. Schedule 6, entitled "Capital Structure
and Cost of CapitaL."
A. Schedule 6 is comprised of five pages. It is a determnation of
the Company's capitalization and costs of capital including a
determation of its overall weighted cost of capitaL. On page 1,
it sets forth the Company's capital structure on June 30, 1980 in
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colui (b). Colui (c), required adjustmnt, is the reduction of
COTIn equity for the effect of non-utility investments. The
equity amount of $3,223,154 is detailed on page 2 of Schedule 6.
Colum (d) shows the adjusted capital structure on June 30, 1980.
Colui (e) then shows the percent of the whole for each component
of the capital structure. Colum (f) sets forth the effective cost
rates: short-term debt, 20.339%; long-term debt, 9.277%; preferred
equi ty, 8.632%; COTIn equity, 17. 500%; and deferred income taxes
at zero cost.
Q. Mr. Worthan, are effective cost rates shown in more detail in your
schedules?
A. Yes, short-tenn debt is set forth on page 3 of Schedule 6. Long-tenn
debt is derived from page ~ and preferred stock is taken from page 5.
The effective cos't rate for COTIn equity is the return on equity
being requested in this Case.
Q. Please explain colum (g) of Schedule 6, page 1.
A. Colui (g), the weighted cost of capital, is derived as a product of
colum (e) and colum (f). The total weighted cost of capital, ll. 748%,
is shown in colum (g), line 6.
Q. Mr. Worthan, what operatin income is required by the Company to give
an overall rate of return of 11.748% on rate base?
A. Based upon a rate base of $74,680,214, show on Schedule 2, page 1,
and the test year ending June 30, 1980, the return required would be
$8,773,432 on an anual basis.
Q. Have you determned the resulting return deficiency and related
revenue increase required by the Company?
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A. Yes. On Exibit No. 102, Schedue 1, under colui (i), I have
shown the return deficiency of $2,859,350 on line 13. The related
increase in revenue is $5,662,079, as shown on line 3.
Q. Mr. Worthan, as the Financial Officer, would you discuss the reason
why Intermuntain has not had a reasonable oportunity to earn the
authorized return of 14% on COJJn 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-1034-75.
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 February 29, 1980
in comparison with amunts 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 February 29, 1980 was .
virtually norml, which provided an opportunity for comparison with no
adjustment required.
Line 11 of Exhibit 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?
A. The condition is due to factors beyond maagement's control,
primarily record high inflation, increased bad debt expense and
declining usage per customer. On lines 12 through 19 of Exhibit No.
103, I have shown five factors which mae up 86% of the return deficiency
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of 5.70%. They areas follows:
1. Reduced cutomer usage
2. Increased bad debt 'expense
3. Chane in depreciation expense
4. GR unecovered5. Price level chge
These factors were not provided for by this Conssion when its Order
No. 14188 was issued.
Q. Mr. Worth~ has the Company presented these factors before this
Conssion in the current Case?
A. Yes, we have. Mr. Robinson and Mr. Lebens address the reduced use
by residential customers. I have addressed further increased levels
of bad debt expense. Intennuntain has been allowed by this Conussion
to collect its rates effective April 1, 1980 for the current costs of
GRI, so this problem no lo~ger exists. Also included in my testimony
is a proposal to recover in rates a 9% price level change, even though
the inflation rate at both the wholesale and consumer levels is at
double digit levels.
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, Intermountain will not
have a real opportunity to earn its authorized rate of return.
Q. Mr. Wortan, does this conclude your direct tes timony?
A. Yes Sir, it does.