PUC Robert Smith Direct.pdf

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DIRECT TESTIMONY OF ROBERT E. SMITH
INTERMOUNTAIN GAS COMPANY
CASE NUMER U-1034-88
4 Q. Please state your name and business address for the record.
5 A. My name is Robert E. Smith. My business address is 472 West
6 Washington Street, Boise, Idaho.
7 Q. By whom are you employed?
8 A. I am employed as Audit Section Supervisor by the Idaho Public
9 Utilties Commission.
10 Q. Please describe your employment and educational background.
11 A. I received a Bachelor of Business Administration degree in Accounting
12 from Boise State University in 1972. Followig graduation, I was
13 employed in the construction industry as an Accountant until Apri
14 1975, when I came to work for the Commission. During the course of
15 my employment with the Idaho Public Utilties Commission, I have
16 attended regulatory training seminars at Michigan State University,
17 Iowa State University, and Ohio State University.
18 Q. Mr. Smith, have you previously testified as an expert witness?
19 A. Yes. I have appeared numerous times before this Commission, and
20 presented testiony and exhibits concerning accounting and financial
21 matters .for electric, gas, water and telephone utilties.
22 Q. What is the scope of your testiony in this case?
23 A. Through my testiony and exhibits, I wi present the Commission
24 staff position concerning Rate Base, Operating Results, and Revenue
25 Requirements for Intermountain Gas Company.
26 Q. Mr. Smith, looking at your Exhibit No. _' page 1 (RES- 1), would
27 you please explain the purpose of this exhibit?
28 A. Yes. I prepared th exhibit to develop the staff-recommended level
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1 of operatig income for Intermountain Gas Company for the test period
2 ended June 30, 1980, without any rate relief.
3 Q. Would you briefly describe the columns identified as (a) through (1),
4 as they appear on this exhibit?
5 A. Yes. Column (a) was taken directly from Mr. Worthan's Exhibit No.
6 102, as revised and filed with this Commission on August 7, 1980.
7 This column includes all of the Company's normaliing and pro forma
8 adjustments. In column (b), I have eliinated the Company's proposed
9 elasticity adjustment. Mr. Anderson's testimony deals with the reasons
10 the staff feels that this adjustment is necessary. The calculation of
11 this adjustment is shown on Exhibit No. _' page 2 (RES-1A).
12 Columns (c), (d) and (e) of this exhibit are the adjustments proposed
13 by Mrs. Carlock in her testimony. The adjustment shown in Column
14 (f) to the Company's bad debt expenses is shown in detai on my
15 Exhibit No. _' page 3 (RES-1B). Intermountai Gas Company, in
16 their filg to this Commission, included an adjustment to increase
17 their provision for bad debts to a level of 6 tenths of one percent of
18 gross operating revenues. I analyzed the Company's actual bad debt
19 write-offs and recoveries of those write-offs for the most recent
20 24-month period, as shown on page 4 of Exhbit No. _ (RES-IC),
21 and came to the conclusion that the Company's proposed level of 6
22 tenths of one percent was too high. I believe a level of 5- 1/2 tenths
23 of one percent would be more accurate. This number is not based
24 upon any calculation; it is an intuitive number, picked from my analy-
25 sis of the 24-month period.
26 Q. Lookig at your Exhibit No. _' page 4 (RES-IC), for a moment,
27 particularly at Column (i), it would appear that as of July 1980 the
28 Company was actually experiencing net write-offs of .573 percent of
2 ROBERT SMITH
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1 gross revenues, which is in excess of your recommended level of .55
2 percent. Why is that?
3 A. During the 1979-80 witer heating season, a moratorium agaist ser-
4 vice terminations existed for Intermountai Gas Company. As a result,
5 bad debt write-offs for the Company increased subsequent to the
6 heatig season. The Company's policy on write-offs is that a write-off
7 wi be made 60 days after termination of service if there is noactivity
8 in the account . As a result of this policy, bad debt write-offs have
9 a tendency to increase in the 60-90 day period followig the heating
10 season. However, in the fal months, as the heating seaSon
11 approaches, the Company has experienced an increase in their
12 recoveries of bad debts, as customers catch up on their bils in order
13 to get service for the following heating season. I believe that this
14 same increase in bad debt recoveries wi occur as we approach this
15 next heating season.
16 Q. This Commission, in its Order No. 15735, in Case No. U-I034-84,
17 authorized Intermountain Gas Company to establish a bad debt
18 balancing account effective December 1, 1979 ,and charge to that
19 account the diference between actual bad debts and the level esta-
20 blished in Commission Order No. 14859 in the Company's last general
21 rate case. The level established in that case was 3 tenths of one
22 percent of gross operating revenues. The Commission further ordered
23 that the bad debt balancing account would terminate 12 months from
24 the effective date of the balancing account or upon the effective date
25 of any later Final Order in a general rate case of Intermountai Gas,
26 whichever occurred first. At that time the bad debt expense level
27 would be established. Do you propose that the 5-1/2 tenths of one
28 percent be the level established for bad debts of Intermountai Gas
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1 Company and that the bad debt balancing account should terminate
2 effective with the Final Order of this Commission in this case?
3 A. I do propose that the bad debt expense level for Intermountai Gas
4 Company be set at 5-1/2 tenths of one percent, with the effective
5 date of this Commssion's Final Order. However, I do not propose
6 that the balancing account be terminated with the date of that order.
7 I propose that the bad debt balancing account be continued to
8 December 1, 1980, and that the Company continue to book the differ-
9 ence between bad debt write-offs and the provision established as of
10 the effective date of this Commission's order to the bad debt balancing
11 account. As I indicated earlier in my testimony, the fal months tradi-
12 tionaly show an increase in recoveries of bad debts. To ignore the
13 effect of these recoveries from last heating season, while recognizing
14 the increase experienced in write-offs, would be a gross inequity to
15 the Company's ratepayers.
16 Q. Referring back to your Exhibit No. , page 1 (RES-I), would you
17 explain Column (g)?
18 A. Yes. In the Company's exhibits, Mr. Worthanmade an adjustment to
19 the Company's cost of gas purchases on Schedule 4 of Revied Exhibit
20 No. 102. In that calculation, at lie 10, for SGS Commodity Costs,
21 Mr. Worthan used a commodity rate per therm of 22 . 192q: . That rate
22 includes SGS storage gas credits from Northwest Pipelie of 3. 542q:
23 and 3. 850q: . Those SGS storage gas credits have terminated and no
24 longer exist. The rate that should appear on Mr. Worthan's exhibit
25 is 29. 584q:. Exhibit No. ~, page 5 (RES-ID), shows the calculation
26 I made to correct this error in Mr. Worthan' s exhibit. That adjust-
27 ment is what appears in Column (g) of my Exhibit No. ~, page I
28 (RES-I).
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1 Q. Would you explai Column (h) on Exhibit No. _(RES-l) please?
2 A. Yes. Column (h) is no more than a reversal of the adjustment
3 Mr. Worthan included in his Exhibit No. 102, Schedule 1, Column H,
4 to recognize a 9 percent increase in the Company's Operation &
5 Maintenance Expenses due to the effects of inflation.
6 Q. In other cases before this Commission, you have made similar propo-
7 sals to recognize the effect of inflation on a Company's operations.
8 Is that correct?
9 A. Yes. I made a similr proposal before this Commission in Utah Power
10 & Light Company's last general rate case.
11 Q. Why are you removing this adjustment in this case?
12 A. In the Utah Power & Light Company case, ths Commission stated:
13 "No one in this society is immune from the effects
14 of inflation. Inflation causes real pain to all
15 entities; individuals, governments and public uti1i-
16 ties. Utah Power & Light Company has not made a
17 showing in this case of how they have attempted to
18 deal wi th this pain.... Absent a showing by the
19 Company of its sincere attempts to deal with the
20 realities of inflation in its operation and
21 management all the way from the top to the bottom,
22 this Commission cannot grant an attrition allowance
23 based upon the general allegation of a need due to
24 inflation." (Order No. 15408, page 10.)
25 i agree with the Company 'witness that inflation is real and can have
26 an impact on a Company's earnings. However, the Idaho Public
27 Utilties Commission has established a policy which indicates that a
28 Company must make a clear showing of positive action taken to reduce
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1 and minimize expenses to deal with this problem before this Comms-
2 sion wi take any actin to recognize an attrition factor. The staff
3 of the Commission does not feel that Intermountai Gas Company has
4 made this showig, and therefore recommends a deIl of this adjust-
5 ment.
6 Q. Is Column (0 ,of your Exhibit No. ~, page 1 (RES-I), the level
7 of operations that the staff recommends the Commission consider in
8 setting rates for Intermountain Gas Company?
9 A. Yes. Column (i) is a composite of Columns (a) through (h), and is
10 the staf's recommended operatig results for use in this case.
11 Q. Mr. Smith, wil you now look at your Exhibit No. ~, page 1
12 (RES-2), entitled "Average Rate Base", and identiy the columns shown
13 on that page?
14 A. Yes. Column (a) is the rate base proposed by Mr. Worthan on Revised
15 Exhibit No. 102, Schedule 2, page 1. This rate base, with the excep-
16 tion of the cash workig capital component, is the actual average
17 derived from the Company's books and records for the test year ended
18 June 30, I980, unadjusted. In Column (b) I have made an adjustment
19 to the Company's level of cash workig capital. In Column (c) I have
20 made an adjustment to the Company's rate base to eliinate the Confer-
21 ence Center. This adjustment was recommended by Mrs. Carlock.
22 Column (d) of my exhibit is the staff-recommended adjusted rate base
23 to be used for setting rates by the Commission in this case.
24 Q. Would you please expla the adjustment shown in Column (b), entitled
25 "Cash Workig Capital Adjustment"?
26 A. Yes. Intermountain Gas Company retaed the fir of Arthur Anderson
27 & Company to perform a detaied lead-lag study, to determine what
28 Intermountai Gas Company's cash workig capital requirements are.
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1 Mr. Larry Gelhaus of that fir appeared as a witness for Intermountain
2 Gas Company to present the results of that study. Durig the course
3 of our investigation I carefully reviewed that study, and have made
4 certain changes that I believe are . appropriate . Exhibit No.
5 page 2 (RES-2A), shows the summary of the lead-lag study as adjusted
6 by staff. This sumary is identical to Exhibit No. 104 sponsored by
7 Mr. Gelhaus, with the exception of the items indicated by an asterisk,
8 which are the numbers changed by this staff.
9 Q. Could you briefly explai each of the changes made on this exhibit?
10 A. Yes. Lines 7 and 8, Column (c), were developed through a detaied
11 analysis ofa sample of 100 vouchers from Intermountain Gas Company's
12 Accounts Payable files. Durig the course of the review of Arthur
13 Anderson's workpapers, errors were found in the calculation of elapsed
14 days between two dates, incorrect dates used and the use of expense
15 items not alowed by this Commission as Operating Expenses. The
16 staff felt it necessary to restate the entire Accounts Payable portion
17 of that study, and in the course of that work found that, in many
18 cases, payments to suppliers were being made prematurely; that is ,
19 prior to actual due date. Therefore, in each case, the staff analyzed
20 the due date and computed a new payment date accordigly. We
21 utized that date to determine the lead time between the point where
22 a service was received and payment was rendered. The result of the
23 staff's work in this area increased the lead days for Accounts Payable
24 and Materials & Supplies from 15.67 days, shown on Mr. Gelhaus's
25 Exhibit No. 104, to 16.44 days, as shown on the staff exhibit.
26 Lines 14, 15 and 16, Column (c) of this exhibit, were restated
27 by the staff agai because premature payment was being made in al
28 three of these areas. The staff analyzed the due date and adjusted
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1 the payment date accordigly, resultig in the lead days shown on
2 the staff exhibit.
3 Line 21 , Column (c), agai was due to what the staff considers
4 to be a premature payment. Intermountain Gas Company paid 100
5 percent of their anticipated State Tax Liabilty on January 9, 1980.
6 Tax laws require that at least 80% of their estimated tax liabilty is
7 due and payable on January 15, the balance due and payable on July
8 15. The Company has indicated that the payment of 100 percent of
9 estimated tax liabilty was made in order to avoid interest charges on
10 the unpaid balance between January 15 and July 15, at 8 percent,
11 during a period of 12 percent plus, short-term interest rates. The
12 staff does not believe that this was a prudent decision; therefore, we
13 restated the tax liabilty, assuming an 80 percent payment on January
14 I5 and the balance due and paid on July I5, 1980. This is exactly
15 the way that Arthur Anderson & Company calculated the lead days for
16 Federal Income Tax; that is, on a hypothetical statutory basis.
17 Lines 22, 23 and 25, Column (b), were changed by the staff to
18 show zero where Mr. Gelhaus included non -cash expenses. The staf
19 takes the position that the calculation of the workig capita, excludig
20 Materials & Supplies and LNG Inventory, is made to determine the
21 amount of cash invested by the stockholders in the Company (in excess
22 of the investment in Plat, Materials & Supplies, and Inventories) to
23 meet the Company's daiy cash flow requirements. Deferred Income
24 Taxes and Depreciation Expenses are book expenses only; there are
25 no cash out-flows associated with these expenses. Rather, they
26 become a source of cash in-flow from the Company's customers, and
27 are a source of capital used for reinvestment by the Company in addi-
28 tionalPlant. I find the Company concept - that investors in the
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1 Company somehow have an additional investment in the Company to
2 fund depreciation on their origial investment pending reimbursement
3 by the Company's customers - totaly incomprehensible.
4 The last item changed on Exhibit No. , page 2 (RES-2A),
5 was lie 25, in both Columns (b) and (c). It appears that the number
6 used in the Company's exhibit for Column (b) was a derived number,
7 backed into; that is, all of the other nUìbers in that column were
8 calculated by the Company and lie 30 was plugged to create the
9 balance shown between lies 4 and 31 on their exhbit . It is
10 interesting to note that the title of that lie on the Company's exhibit
11 was "Cost of Common Equity". The number that appeared on that
12 exhibit was $1,289,883. That number is less than the Company's
13 annual dividends in effect for the last two years. The staff has sub-
14 stituted on this lie actual dividend payment requirements, which do
15 represent cash out-flows from the Company ; and, in Column (c), has
16 included a lead time of 45 days, representig the average period of
17 time from the mid-point between payments to the payment date of
18 dividends. This is similar to the method used by the Company on
19 lie 27 for Preferred Stock Dividends.
20 The Company's exhibit for Column (c) of lie 30 included a lead
21 time of zero, the rationale for this lead period being that the stock-
22 holder is entitled to earn his return on a daiy basis. Therefore, no
23 lead would exist. I cannot agree with this arguent. In this case, a
24 stipulated Return on Equity was arrved at durig the prehearing
25 conference. That return is 14-1/2 percent. The Return on Equity
26 determination is made by determining what return an investor wi
27 require in order to attract capital into the company. That determi-
28 nation assumes that an investor is knowledgable and recognizes the
9 ROBERT SMITH
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1 time value of money, to which Mr. Gelhaus made reference durig
2 cross-examination in this case. The required rate of return is an
3 annual rate, used in conjunction with other capital cost annual rates
4 to determine an overal weighted cost of capital, or annual required
5 rate of return, to set rates for a utilty company. The argument
6 advanced by Mr . Gelhaus , that the common equity investor theoreti-
7 cally earns that return on a daiy basis., is conceptualy correct. The
8 14-1/2 percent return agreed to in this case is the sane as an annual
9 rate of 13-I/2 percent compounded on a daiy basis. A knowledgable
10 investor, aware of the time value of money, recognizes this fact and
11 incorporates that time value of money in his decision-makig process.
12 Q. What conclusions have you come to as a result of your analysis of the
13 lead-lag study presented by Intermounta Gas Company?
14 A. After going through the entire lead-lag study, I have come to the
15 conclusion (with the changes noted earlier) that Intermountai Gas
16 Company has a net lead in the collection of revenues to cover cash
17 operating and capital costs of 1. 7 days.
18 Q. What is the significance of this 1.7 day lead in revenues?
19 A. The staff of the Commission agrees totally with the Coinpany that the
20 lead-lag study approach is certaily preferable over the other alter-
21 nate methods used at this time. With the changes in the study pro-
22 posed, the i. 7 day lead in operating revenues provides a negative
23 working cash component to the working capital increments of rate base.
24 This calculation is shown on Exhibit No. _' page 3 (RES- 2B) .
25 Q. Have you calculated the amount of rate relief necessary for Inter-
26 mountai Gas Company to earn a fai rate of return, based upon the
27 staff's analysis in this case?
28 A. Yes, I have. That calculation is shown on staff Exhibit No.
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1 (RES-3). Using the staff-recommended rate base~ the stipulated rate
2 of return, and the staff recommended operatig results, Intermountai
3 Gas Company needs an increase in gross revenues of $3,878,972, as
4 shown on lie 7 of this exhibit.
5 Q. .Mr. Smith, have you tested the Company's application for conipliance
6 with the Federal Wage & Price Guidelies?
7 A. Yes, I have. Exhibit No. ~ (RES-4) shows that the Company's
8 application and the staff's recommendation both comply with the
9 Guidelies.
10 Q. Does that conclude your testinony?
11 A. Yes, it does.
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INTERMOUNTAIN GAS COMPANY
Reversa 1 of Company- Proposed
Elasticity Adjustment
(a)
1 Revenues - (Exh. #102 t Sch. #3, Line 7, Col. C)
Cost of Gas:
Therms (Exh. #102,Sch. #3, line 7, Col. B)
ODL Rate (Exh. #102, Sch. #4, Line 7, CoL. C)
Cost Adjustment
Before Tax Adjustment
Statutory Tax Rate
Income Tax Adjustment
Net Operating Income Adjustment (Lines 1-4-7)
2
3
4
5
6
7
8
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(b)
4,156,842
37. 666ll
(c)
$ 2,264,568
1,5651716
$ 698,852
.4951
$ 346,002
$ 352,850
INTERMOUNTAIN GAS COMPANY
CASE NUMBER U- 1034-88
Staff Exh. No. (RES-1A)Page 2 --
R. E. Smith
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INTERMOUNTAIN GAS COMPANY
Bad Debt Expenses
Twe 1 ve Months Ended June 30, 1980
(a)
1
2
3
4
5
6
7
Staff Adjusted Operating Revenues w/o Increase
Bad Debt Provision Per Revenue Dollar
Staff Recommended Bad Debt Leve 1
Test Period Expenses included in 0 & M
Adjustment Requi red
Company Adjustment Included in Exhibit No. 102
Staff Adjustment
(b)
$ 156,242,720
.0055
$ 859,335
764,172
95,163
183,828
88,665
INTERMOUNTAIN GAS COMPANY
CASE NUMBER U-1034-88
Staff Exh. No. (RES-lB)
Page 3 --
R. E. Smith
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7 E INTERMOUNTAIN GAS CO
'; ~CASE NO. U-I034-88
~ i Staff Exh. No.I- ,.Page 4 (RES-l~
-g ~R. E. SmithV' 0I-
oE
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e
INTERMOUNTAIN GAS COMPANY
Purchased Gas Cost Adjustment
(a)
Therms
1 SGS Purchased Gas Cost
(F rom Exh. 102, Sch. 4, Line 10)
Corrected by Staff
Adjustment Required
8,611,000
8,611,0002
3
e
(b)
Northwest
Commodity
Ratel
22. 192(\
29. 590(\
lNorthwest Pipeline Commodity Rate for SGS Gas used
by Intermountain Gas Company reflects the pass-through
of Storage Credits of 3.542(\ effective October 1, 1979,
and 3.850(\ effective November 15, 1979. These credits
have expired. The expiration of these credits was not
included in the Company's Adjustments.
(c)
Cost
$ 1,910,953
2,547,995
$ 637,042
INTERMOUNTAIN GAS COMPANY
CASE NUMBER U- 1034-88
Staff Exh. No. . (RES-I0)Page 5 --
R. E.Smith
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(a)
1 Ope rat i ng Revenues2 Cycl ical
3 Non-Cyc 1 i ca 1
4
5 Purchased Gas Cost
6 Ope rat ion & Maintenance Expense
7 Accounts Payable
8 Materi a 1 s & Supp 1 i es
9 Payroii
10 C & K
11 Other
12
13
14
15
16
17
18
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20
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23
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25
26
27
28
29
30
31
General Taxes
Property Taxes
Franchi se Taxes
Unemp 1 oyment Taxes
FICA
Income Taxes
Current Federal
Current State
Deferred
Deferred ITC - Net
Depreci at i on Expense
Interest Expense
Short Term
Long Term
Preferred Stock Divi dends
Common Equi ty Di vi dends
Tota 1 Cost of Servi ce
32 Net (Lead) Lag Days
INTERMOUNTAIN GAS COMPANY
Lead/Lag Study
Summary Cal cul at ion
(b)
12 Month
Test Period
6-30-80 (Adjusted)
$ 58,338,068
100,471,487
$ 158,809,555
$ 132,247,658
$2,979,513
63,171
6,121,346
(492,435)
3,457,735
$12,129 ,331
$692,957
1,800,201
62,695
355,270
$2,911,123
$684,567
162,217
-0-*
-0-*
$846,784*
-0-*
$ 842,393
3,170,922
610,884
2,028,394*
$ 154,787,489*
*These numbers di ffer from the numbers shown on
Company Exhibit No. 104 and represent the differ-
ence between that Exhibit and the IPUC Staff
Recommendat ion
e
(c)
(Lead) Lag
Days
38.09
33.92
35.45
( 35.00)
( 16.44)*
( 16.44)*
( 14.82)
( 35.45)61.01
(260.50)*
(270.00)*
( 76.06)*
( 16.92)
( 91. 50)
(326.00)*-0-
-0-
-0-
( 15.00)
( 90.00)
( 45.00)
( 45.00)*
( 37.15)*
( 1.70)*
(d)
Dollar Days
2,222,097,010
3,407,992,839
5,630,089,849
(4,628,668,030)
( 48 , 983 , 194) *
( 1,038,531)*
( 90,718,348)17,456,821
210,956,473
( 180,515,299)*
( 486,054,270)*
( 4,768,582)
( 6,011,168)
( 62,637,881)
( 52,882,742)*-0-
-0-
-0-
( 12,635,895)
( 285,382,980)
( 27,489,780)
( 91,277 ,730)*
(5,750,651,136)*
INTERMOUNTAIN GAS COMPANY
CASE NUMBER U-I034-88
Staff Exhibit No. (RES-2A)Page 2 --
R. E. Smith
e e
INTERMOUNTAIN GAS COMPANY
Calculation of Cash Working Capital
For the 12 Months Ended June 30, 1980
Cash Payments:
1 Purchased Gas Costs
2 0 & M Expenses
3 Genera 1 Taxes
4 Federal & State Income Taxes (Current)
Interest Expense:
5 Short Term
6 Long Term
7 Preferred Stock Dividends
8 Common Stock Di vi dends
9 Total Cash Payments
10 Net (Lead) Lag (1.7) +365 =
11 Cash Working Capital
(a)
$ 131,697,557
12,101,231
2,870,374
684,567
842,393
3,170,922
610,884
2,028,394
$ 154,006,3Z2
$(
(.00466)
717 ,669)
INTERMOUNTAIN GAS COMPANY
CASE NUMBER U- 1034-88
Staff Exh. No. (RES-2B)Page 3 --
R. E. Smith
e e
INTERMOUNTAIN GAS COMPANY
Revenue Requi rement
Test Year Ended June 30, 1980
(a)
1
2
3
4
5
6
7
Rate Base
Rate of Return Required
Net Operating Income Required
Net Operati ng Income Earned
Net Operating Income Deficiency
Net to Gross Conversion ~
Gross Revenue Defi ci ency
$ 73,782,438
.10482
$ 7,733,875
5,775,382
1,958,493
.5049
$ 3,878,972
INTERMOUNTAIN GAS COMPANY
CASE NUMBER U- 1034-88
Staff Exh. No. (RES-3)R. E. Smith --
.~
INTERMOUNTAIN GAS COMPANY
Profit Margin Limitation Test
($000)
A. Profit Margin Data
Last 3 Fiscal Years Completed Prior to 10-02-78
Sales,Cost,Profit & Margin Data (a)(b)(c)
Fiscal Years Ending Dates 9-31-75 9-31-76 9-31-77(Month - Day - Year)
(1)Operating Revenues $60,398 $72,595 $91,436
(2)Less:Operating Expenses $50,930 $62,594 $82,191(Excluding Income Taxes)
(3)Gross Profits Before Income $ 9,468 $10,001 $ 9,245Tax & Interest Expenses
(4)Profit Margin 15.7%13.8%10.1%(3).(1)
B. Sales-Weighted Average of Best 2 of 3 Profit Margins Reported in A(4) =14.6%
$ 9,468 + $10,001
$60,398 + $72,595
=$ 19,469
$132,993 14.6%
C. Base-Year Profit $15,920
D. Method of Calculation of Base-Year Profit:
or
(1)
(2)
Actual Base-Year Profit $9,245
The Average of Actual Base-Year Profit Plus the Multiple of Base-Year
Revenue and the Best 2-out-of-3 Margin
$9,245 +($91,436 x 14.6%)
2 $15,920
E. Allowable Program Year Profit - Must Meet Two-Part Test:
Test No.1
Program Year Profit Margin Limited to 14.6%
14.6% x $158,524 $23,144
Test No.2
(1) Base-Year Profit Reported in C
(2) Plus: Allowable Program Year Growth
(Line 1 x 13.5% (.065 CompoundedJ)
$ 15,920
(3) Subtotal
(4) Plus: Physical Volume Increase (Decrease)
(6.5)% x $18,069
(5) Allowable ~ Test No. 2
+ 2,149
$ 18,069
+( 1,174)
$ 16,895
Therefore, Maximum Allowable Profit Margin (the lesser
amount from Test No. 1 and Test No.2) =$ 16,895
F. Program Year Profit Test
Company Requested:
Staff Recommended:
$ 12,043
$ 11,856
Therefore, either the Company request or the Staff
recommendation qualifies under the Profit Margin
Limitation Test
INTERMOUNTAIN GAS COMPAN
CASE NUMER U-1034-88
S taf f Exh. No. (RES-4)
R. E, Smith