Order No 17701 and Errata Notice.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF INTERMOUNTAIN GAS COMPANY FOR
APPROVAL OF ITS PROPOSED RATE
SCHEDULES ¡ . . . . . . . . . . .
)
)
)
)
)
CASE NO. U-l034-99
ERRATA NOTICE
On November 4, 1982, the Idaho Public Utilities Commis-
sion issued Order No. 17701 in the above entitled matter. That
order contained errors that should be corrected as follows:
PAGE 14, CONCLUSIONS OF LAW, PARAGRAPH #1, LINE 3 READS:
. .. $5,497 ,245 will allow the Company the opportunity ...
SHOULD READ:
. .. $5,647,291 will allow the Company the opportunity...
APPENDIX A
Due to a calculation error, $202,458 was used as the
amount of accumulated deferred state income tax to be refunded.
The correct amount is $126,700. This $75,758 correction is shown
in the attached amended Appendix A.
DATED at Boise, Idaho, this ~)(Æ'day of November, 1982.
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MYRNA r-ERS":COMMISSION SECRETARY
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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION )
OF INTERMOUNTAIN GAS COMPANY FOR )
APPROVAL OF ITS PROPOSED RATE )
SCHEDULE. . . . . . . . . . . .. )
)
CAE NO. U-1034-99
ORDER NO. 17701
I. PROCEEDINGS AND APPEARCES.
On April 30 t 1 982, the Idaho Public Utili ties Commis-
sion received an Application from Intermountain Gas Company
(Applicant or Company) requesting authority to increase its rates
and charges for natural gas service in the state of Idaho. on
June 22, 1982, a pre-hearing conference was held to consider the
issues presented by this Application. Formal hearings on this
Application were held August 16-17, 1982 and October 12-13, 1982.
Appearances Were entered by the following:
APPLICANT
FMC
TOM N. AMBROSE, ESQ. and
EUGENE C. THOMAS, ESQ.
MOFFATT, THOMA t BARRETT, & BLATON
300 First Security Building
P. O.Box 829
Boise, ID 83701
FREDERIC V. SHOEMAER, ESQ. and
R. MICHAL SOUTCOMBE, ESQ.
CLEMONS, COSMO & HUPHREY
1110 First Interstate Bank Building
Boise, ID 83702
and
JAMES N. ROETH ,ESQ.
PILLSBURY, MAISON & SUTRO
P.O. Box 7880
San Francisco, CA 94102
EEKER INDUSTRIES DAN L. POOLE, ESQ.
ELA, BURKE, EVANS ,BOYD & KOONTZ
1010 First Interstate Bank Building'
P . 0 . Box 1559
Boise, ID 83701
N. RADY SMITH, ESQ.
MERRILL & MERILL
Spaulding Building
P.O. Box 991
Pocatello, ID 83201
SIMPLOT
and
JOAN M. CLOONAN, ESQ.
ASS I STANT GENERAL COUNSEL
J. R. SIMPLOT COMPANY
One Capital Center
P.O. Box 27
Boise, ID 83707
., ,.
COMMISS ION STAFF MASHA H. SMITH, ESQ.
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
472 West Washington Street
Boise, ID 83702
I I . REVENUE REQUIREMENT.
A. The Application.
In its original Application, Intermountain Gas Company
requested increased revenues in the amount of $10,097,617. On
September 10, 1982, the Applicant filed its revised exhibits in
this case demonstrating a reduced revenue deficiency of $8,694,848.
This reduction resulted from the FERC' s approval of a reduced
contract demand level for the Applicant and from an update of the
estimated test year figures to actual results. Applicant's
rebuttal exhibits further reduced its proposed deficiency to
$7,464,179.
B. Test Year Adjustments.
The Applicant presented its case using a test year
period ending July 31, 1982. At the time of the filing of the
Application, the test year included five months i actual data and
seven months 'estimated data. The data were updated in the Com-
pany's revised exhibits to include actual figures through the end
of the test year. The Staff presented several adjustments to the
Applicant's test year.
1 . T- 1 Revenue.
Applicant did not include as revenue in its test year,
the amount of money it had received for the transportation of gas
for others under its T-l schedule. The Staff adjusted the test
year to annualize the T-1 revenues received by the Company with
the assumption that revenue from the transportation of gas will
continue at present levels. The Commission finds that this is a
reasonable assumption, and therefore, finds that T-1 revenue
should be inc luded in the tes t year.
2. Bad Debt Provision.
The Staff made two adjustments to the bad debt provi-
sions provided by the Company. First, the Staff contended that
ORDER NO. 17701 -2-
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pro forma additional bad debt expense for the test year ended
July 31, 1982, was overstated by $42 ,700. It therefore reduced
operation and maintenance expenditures by that amount. Applicant
had a bad debt expense rate of .64%, which was based upon actual
expenses for the year ended July 31, 1982. The Commission finds
that the previously-approved bad debt provision was .6%. The
Commission therefore accepts for bad debt expense .6% of the
actual gross operating revenues for the test year ended July 31,
1982.
Secondly, the Staff opposed the increase in the pro-
vision for bad debts in the Company i s revised exhibits because it
was based on a rate of . rio. The Company had originally requested
that the rate be increased to .64%. The Staff pointed out that
the actual test period bad debt experience was .64%, and main-
tained that the .6% provisiön previously allowed is still ade-
quate for the Company. On rebuttal, Applicant proposed a .685%
rate for its bad debt provision. The Commission finds that, in
light of the apparently increasing bad debt expense of the Com-
pany, an adjustment to the percentage at which bad debts will be
provided for is in order. We, therefore, approve a bad debt
provision of .65%. Applicant i s pro forma bad debt expense has
been increased to $43,748.
3. Weatherization and Financing Expen.se.
The Staff took issue with the Applicant i s projected
increase in Other Financing and Administrative Expenses related
to its weatherization and financing program. The Staff contended
that based on the current level of expense of $17,060 a projected
expense of $82,940 in the Company i s revised exhibits was unreason-
able. On rebuttal, the Company presented Exhibit 11, Schedule 4,
showing a calculation of a minimum fee for the financing program
in fiscal year 1983 of $69,583. The Commission will adopt the
rebuttal projection of the Applicant. We find that this is a
reasonable estimate of the anticipated expense in this category.
ORDER NO. 17701 -3-
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,
I
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We also desire to encourage the Company to be active in its wea-
therization and financing program.
4. Price Level Adjustment.
In its original case, Applicant used the. most recently
published Consumer II Price Index for All Urban Consumers as the
appropriate indicator for its price level adjustments. The per-
centage derived from the index and presented in Applicant's
revised exhibits was 7.10%.
Staff calculated a price factor by using the average of
three indices : the Implici tPrice Deflator t the Producer Price
Index and the Consumer Price Index. The percentage computed was
2.5%. The Staff method brought all operation and maintenance
expenses not otherwise adjusted up to price levels current as of
July 31, 1982, the end of the test year.
On rebuttal, Applicant stated that it supported Staff IS
methodology because it gives a more realistic estimate of the
current rate of inflation. However, Applicant urged the Commis-
sion to use the level adjustment to recognize some measure of
inflation for the future not just fortest-year..end price levels.
Thus, the Applicant would use a 6. 2~o price level adjustment.
The Commission finds that the Staff's methodology is
reasonable. It is sufficient to average the indices and bring
the expense level forward to the test year end price levels. We
will not compute the price level adjustment in the manner sug-
gested by Applicant.
5. Overlapping Test Year.
Staff expressed concern about the test year used by
Applicant because it included two months that were also included
in the test year for Applicant i s last rate case. This is a valid
concern and we find that overlapping test years are not condoned
by the Commission. We do recognize that there are some circum-
stances that may require an Applicant to present an overlapping
ORDER NO. 17701 -4-
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test year. In this case we will allow the use of the test year
prpposed by the Company.
C. Adjustments to State Deferred Taxes.
In Order No. 17499, issued on August 20, 1982, the
Commission adopted the flow-through of state income taxes in
Idaho Power Company's Case No. U-1006-l85. In keeping with that
Order, the Staff recommended that deferred state income taxes of
Applicant be flowed through and that accumulated deferred state
income taxes be amortized over a five-year period.
Applicant strenuously objected to this treatment of its
state income tax expense. It pointed out that generally accepted
accounting standards prefer the normalization method to flow-through.
It also contended that flow-through causes a mismatching of ex-
pense with the customers being required to pay the expense.
The Commission finds again, as it did in the above-
mentioned case, that it is not reasonable or just to charge Idaho
ratepayers for state income taxes that the Company does not pay
to the State. A correct matching for this expense occurs when
the customers pay only the actual dollars of tax that Applicant
pays to the State.
Applicant also opposed flow-through on the grounds that
it would lose its accellerated depreciation benefits. We do not
believe this to be the case. However, we are aware that a request
for a ruling on this question has been made in the Idaho Power
case and the outcome of that request may affect our treatment of
Applicant's state income taxes.
D. Capital Structure and Return on Equity.
Applicant presented Dale Blickenstaff as its witness
for return on equity. His recommendation was a range of 1710-
18.510. This range was chosen after using five methods of com-
puting return on equ.i ty. Blickenstaff stated that he put more
emphasis on the market-to-book and the risk premium methodologies
than on the DCF method and the comparable earnings methods for
other natural gas utilities and industrials.
ORDER NO. 17701 -5-
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The growth factor used in his DCF formula was 7.8%.
Blickenstaff conceded that this was an unrealistic percentage but
noted that even if the growth factor were4iro the cost of equity
to Intermountain would remain a very high 16.68%.
Staff witness Carlock recommended a return on equity of
15.25% if the revenue stabilization clause requested by the
Company is adopted by the Commission. In the event that the
revenue stabilization clause is not adopted, her recommendation
would be for a 15.75% return on equity. Her cost of equity
determination was based on the comparable earnings method for
industrials and utilities in conjunction with the OCF method.
Carlock's estimate of the current and near- future
equity capital returns for industrials is in the range of 14.5%-
16%. After evaluating risk factors, she recommended that same
range for the Applicant.
The Commission finds that a 15.75% return on equity is
fair and reasonable for Applicant. This is . the same return
stipulated to by the parties and found just and reasonable by the
Commission less than a year ago. We find no justification in the
record for a change in that return at this time.
We note that the Company adopted in its revised exhi-
bi ts, the Staff approach of treating deferred income taxes as a
deduction from rate base rather than an inclusion in the capital
structure at zero cost of capital. This conforms to the Commis-
sion's preferred method of treatment.
The Company included short-term debt in the amount of
$2,068,250 in its capital structure. This amount was computed
based on a four-year average. The Staff argued that the four-
year average recognizes large short-term debt requirements pre-
sent in past years that are no longer necessary today. The Staff
therefore recommended that short-term debt be coniputed at the
average daily amount outstanding during the test year and the
amount of $270,278 be included in the capital structure.
ORDER NO. 17701 -6-
e e
The Commission finds that for the purposes of this
case, it is fair and reasonable to compute the short-term debt
amount in the manner proposed by the Company. The four-year
average computation was adopted in the past when the Company had
large short-term debt requirements. The Company argued that the
effect of this averaging .mayhave been to prevent it from recover-
ing all of i.ts past short-term debt expense. Although the Company no
longer has such requirements, and the current short-term debt
balance is small, the Commission finds that the use of the four-
year average is reasonable. Using the four-year average in this
case should make the Company whole for any deferrals that .may
have occurred in the past. In the next rate case the methodology
for computing short-term debt will be at issue and subject to
change.
Both Applicant and Staff computed the effective cost
rate of short-term debt at l05% of the current prime rate.
Applicant's rate was 16.5% and Staff's was 14.175% because of the
change in the prime rate. The Commission will use the current
prime to compute an effective cost rate of 12.6%.
E. Oeclining Therm Sales Adjustment.
The Company proposed that calendar year 1981 weather
normalized residential sales be reduced by a factor of 5.5% and
commercial sales reduced by a factor of 4.4% for the purpose of
determining the revenue requirement. These factors represent the
average annual decline in use per customer that the Company has
experienced in these classes over the period 1973-1981. This
request is based on the assumption that the use per customer will
continue to decline at this average rate in the future and that
there will be no change in the number of customers. Thus ,the
Company predicted sales of 238,834,081 therms.
The Staff pointed out several flaws in the Company's
approach. First, it ignores the fact that the number of custo-
mers might change. Applicant's own witness, Mr. Hedemark, indi-
ORDER NO. 17701 -7-
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cated that the Company has had success in its marketing efforts
and that the number of customers is now increasing and- is expected
to increase in the future. No provision was made for this increase.
Staff agreed that there have been declining therm sales
in the past. However, it maintained that the purpose of this
caSe is to adjust for expected changes relative to the test
period, not to try to make up for past losses. The Staff also
pointed out that Applicant relies exclusively on use-per-customer
as a gauge for delining therm sales adjustment and does not
consider total therm sales per class of customer. The Staff's
analysis showed a lesser decline in sales than the Company's.
Therefore, Staff recommended that the revenue requirement be de-
termined on the basis of sales of 246,179,594 therms.
The Commission finds that the appropriate thermnumber
to use for establishing a revenue requirement in this case is
240,020,227. This we computed by subtracting from the Staff's
proposed therm sales level, the Companyfs projected sales decline
figure of 6,159,367therms. There has been a distinct and
undisputed history of declining therm sales for Applicant. The
Commission finds that for many of the same reasons the four-year
average short-term debt amount should be used in this case, the
Company's declining therm number should be used. If infa.ct,
Staff witness Ferguson is correct in predicting that thermsales
have either leveled out or are on the rise, this will be readily
apparent when the Applicant again requests a rate change and an
adjustment can be made at that time based on what will then be
historical figures. We suspect that the effect of this Order,
regardless of the therm sales number we use t will be to drive
sales downward. We note that neither the Company nor the Staff
took into account the elasticity effect of the present rate
increase.
Applicant complimented Mr. Ferguson f s weather normal-
ization model as being excellent and stated that it would be to
ORDER NO. 1770l -8-
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the mutual advantage of the Staff and the Applicant to refine and
modify it in order to establish a working weather normalization
methodology. We applaud the efforts of the Staff in this regard
and direct that the Staff and the Company work together to develop
and refine what was presented in this case.
ILL. REVENUE STABILIZATION CLAUSE.
Applica.nt proposed that the Commission allow it to
establish an Unrecovered Revenue Stabilization Account that would
provide the Company with an assured gross margin. The gross
margin would be approved by the Commission in setting rateS for
the Company and a band setting minimum and maximum levels of that
gross margin on a monthly basis would be established. Monthly
entries would be made to the account for any deviations in actual
gross margin of either a minimum or maximum nature. Annually on
October l, an adjustment would bemaçlechanging the Company IS
rates bya 12-month cents per therm decrease or increase in
amounts sufficient to refund or recover accumulated amounts
recorded in the account.
The Staff supported Applicant i s request for a revenue
stabilization clause. However, in doing so it pointed out sev-
eralareas that the Commission might wish to consider and/or
cha.nge if the account were allowed.
The Commission finds that the requested revenue stabi-
lization clause should not be adopted. This clause is too much
like a guaranteed return for us to feel comfortable withi t. We
also note that the potential loss in sales for Applicant is
greatest in the industrial class. This industrial variable
militates against the adoption of a revenue stabilization clause.
Should an industrial loss occur, it would be of such magnitude as
to require the Applicant to immediately come in for relief. We
therefore find that it is not in the public interest to allow the
Company to adopt a revenue stabilization account. We note from
OROER NO. 17701 -9-
e .
the testimony of the Applicant t s witnesses that there has been a
distinct improvement in the attention paid to the residential
class and concern for its .growth.
iv. REVENUE ALLOCATION ANO RATE OESIGN.
The Company proposed that rates in this case be set on
100% cost-of-service method. This would mean that the majority
of the increase will be borne by the residential and small com-
mercial customers with the large volume customers receiving very
little increase. The Staff did not oppose this recommendation.
In each of Applicant t s last several cases, increasingly
more weight has been given to the cost of service in allocating
revenues between classes. We find that it ísfair, reasonable
and nondiscriminatory to establish the rates in this case on a
full cost-of-service basis.
Applicant proposed to increase the customer charge for
residential customers receiving service under the RS-lrate
schedule from $6.50 to $7.35 per winter bill and from the $2.50
to $3 . 00 per sumer bill. It maintained that the increase in
customer charge should not adversely affect the number of seasonal
disconnections since the reconnect charge is currently $20 during
working hours and $30 at other times.
For residential customers with both water heating and
space heating who received service under the RS-2 rate schedule,
Applicant proposed an increase in the customer charge for the
sumer months from $2.50 to $5.00 per bill. For the winter
months it proposed an increase of from $6.50 to $7.35.
Staff witness Schunke recommended no change in. the
customer charge for the RS-1 and RS-2 customer classes. In his
opinion, the customer charge increase proposed by Applicant would
have a negative impact on customers and give' them the impression
that they are paying for something they are not getting.
ORDER NO. 17701 -10-
..
The Commission finds that an increase in the customer
charge in the RS-1 and Rs-2 customer classes is not appropriate
at this time. We strongly suggest that in lieu of a customer
charge, the Company propose tariffs that use minimums in the
residential classes. The structure of the customer charge, i.e.,
separate ones for winter and sumer months, could also be adopted
with the use of minimums. If the Company does not implement a
tariff using minimum levels, the Staff is directed to investigate
and present this type of a rate design in the Company' snext rate
case.
Applicant requested that the Seasonal Interruptible
Service (S-l), Peak Interruptible Service (P-l) and Water Pumping
Service (WP-l) rate schedules be deleted. The Staff had no
objection to this request. It appears that many of the customers
in these classes will shift to either the GS-l or LV-l rates even
if those schedules are retained . The Commission t therefore,
approves the eliíIination of these rate schedules.
In the General Service (GS-l) rate schedule the Company
proposed no change in the customer charge but did restructure the
commodity charge by pricing the therms in three levels instead of
two. Formerly the commodity charge had a price for the first
2,000 therms and a separate price for therms over that level.
The proposed schedule prices the first 200 therms J with respective-
lydeclining rates for the next 1800 therms and any usage over
2, OOOtherms. The Staff supported the Company's p:roposed change.
The Commission finds this rate structure to be fair and reasonable.
The Company proposed an additional payment of 25t per
therm above the proposed commodity rate for overrun of gas taken
by customers with La:rge Volume Firm Service (LV-I). Applicant
explained that it is important that these industrial customers,
because of their large volumes, contract for gas at their peak or
second month peak demand leveL. Fixed costs of the LV-1 class
are built into the demand charge. To the extent a customer does
not contract for its proper demand, the Applicant spreads the
ORDER NO. 17701 -11-
e e
fixed cost among other customers in the class. In addition,
Applicant must pay its pipeline supplier if it overruns its
contract demand with the pipeline supplier.
The Intervenors in this case (all LV-l customers) filed
post-hearing memoranda taking issue with this proposal to require
a 25t per therm charge when they exceed on a monthly basis their
contract demands. The Intervenors pointed out that under this
proposal, any LV-l customer who exceeded on a monthly basis the
volumes specified in its contract, would be required to purchase
all of the overrun therms at a rate of approximately 71.6t per
thermo This rate is higher than either the residential or GS..1
commodi ty rates. This would have to be paid whether or not the
Company overran its contract demand with the pipeline supplier.
The Intervenors stated that it is appropriate for a
procedure to be established so that Applicant can recover any
penalty charges imposed by the pipeline when Applicant overruns
its demand levels. However, the Intervenors do not feel that the
Company's proposal has any relationship to recovery of those
amounts since customer classes other than LV-l could cause Ap-
plicant 's overruns.
Intervenors contend that if Applicant believes it is
important to have some form of "penalty" to insure that LV-1
customers contract for the level of demand that they anticipate
using on a monthly basis, then the Company should propose an
overrun rate that is more reasonably tied to the costs incurred
by Applicant in serving such excess gas deliveries and that has a
reasonable economic basis.
The Company in its post-hearing memorandum contended
that its calculations show that if the 25t per therm surcharged
is not adopted, it is advantageous for the LV-1 customers to drop
their contract demand to their third highest peak. If this
should happen, the Company contends that adjustments must be made
in the rate case to insure that the proper volume levels are
included for determining revenuerequi remen t.
ORDER NO. 17701 -l2-
e e
the Commission finds that the Company has a valid con-
cern for the large industrial customers contracting at the appro-
priate level. However, from the record before us, we are unable
to find that the 25t per therm charge is a fair and reasonable
way to insure that customers contract for their proper demand
levels. We, therefore, direct the Company to closely monitor the
actual use of the large indust.rial customers as compared to their
contract demand levels. If it appears that customers are not
contracting within a reasonable range of their actual usage, then
the Company should come to us and immediate attention will be
given to this matter.
FINDINGS OF FACT
I
Intermountain Gas Company is a "gas corporation" and a
"public utility" as those terms are defined in Chapter 1, Title 61,
Idaho Code and is under the jurisdiction and regulatory authority
of this Commission.
II
The rates contained in the Company's tariffs on file
with the Commission do not provide a fair, just and adequate rate
of teturn and are no longer fair, just and reasonable.
III
The appropriate test year to be used in this case is
the 12-month period ended July 31, 1982, using 12 months' actual
data.
iv
The proper rate base to be used in considering this
Application is $67 ,414 t 595.
ORDER NO. 17701 -13-
e e
v
The proper adjustments to be made to the .Applicant i s
test year data are those shown in Appendix A to this Order.
VI
An overall rate of return of 12.072% derived from a
return on common equity of 15.75'0 is in all respects fair, just
and reasonable.
VII
The allocation of the increased revenue herein allowed
among the various classes of service as set forth above is in all
respects fair, just and reasonable .
CONCLUS IONS OF LAW
I
Applicant i S present rates are not fair and reasonable.
Allowing the Applicant to increase its rates in the amount of
$5,497,245 will allow the Company the opportunity to earn a
reasonable return on its investment.
II
The allocation of the rate increase in the classes of
service as outlined in this Order constitutes a just and reason-
able allocation of the rate increase among the various classes of
service.
o R D E R-.-_._-
IT IS THEREFORE ORDERED that the rates, tariffs and
charges authorized in the text of this Order shall be formally
filed with the Commission and become effective on the date fo1-
lowing approval unless a different effective date is provided on
the tariffs or by the Commission.
ORDER NO. 17701 -14-
e e
ANYONE having an interest in this Order shall have the
right within twenty (20) days from the service date of this Order
to apply for a rehearing in regard to any matter determined
herein.
DONE by Order of the Idaho Public Utili ties Commission
at Boise, Idaho, this Jii day of November, 1982.
r
COMMISSIONER
ATTEST:~nßQ~
SECRETARY
hclAa
IN THE MATTER OF THE APPLICATION )
OF INTERMOUNTAIN GAS COMPANY FOR )
APPROVAL OF ITS PROPOSED RATE )
SCHEOULE. . . . . . . . . . . .. )
)
CASE NO. U-1034-99
ORDER NO. 17701
ORDER NO. 17701 -15-
ee
456789101112
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