20170320Transcript Volume II.pdf

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ORIGIIVAL CSB REPORTING
C e rtiJie d S ho rth and Reporte rs
Post Office Box9774
Boise, Idaho 83707
csbreportin [e-mail]
Ph: 208-890-5198 Fax: l-888-623-6899
Reporter:
Constance Bucy,
CSR
BEFORE THE IDAHO PUBLIC UTILITIES COMMISS]ON
IN THE MATTER OF THE APPLICATION
OF INTERMOUNTA]N GAS COMPANY TO
CHANGE ITS RATES AND CHARGES FOR
NATURAL GAS SERVICE TN THE STATE
OF IDAHO
CASE NO. INT-G-16_02
BEFORE
COMMISSIONER KRISTINE RAPER (Presiding)
COMMISSIONER PAUL KJELLANDER
COMMISSIONER ERIC ANDERSON
PLACE:Commission Hearing Room
412 West Washington StreetBolse, Idaho
DATE:March L, 20L7
VOLUME II Pages 454 965
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CSB REPORTING(208) 890-s198
APPEARANCES
For the Staff:!{r. KarL Klein
and !{r. Sean Costello
Deputy Attorneys General
472 WesL Washington Street
Boise, Idaho 83720-0074
For Intermountain Gas
Company:
Mr. Ronald L. Williams
Wllliams Bradbury, P.C
1015 West Hays StreetBoise, Idaho 83702
For The Amalgamated
Sugar Company:
Mr. Peter iI. Richardson
RICHARDSON ADAMS PLLC
Post Office Box '7218
Boise, Idaho 83702
For Northwest Industrial
Gas Users:
![r. Chad M. Stokes
CABLE HUSTON LLP
1001 SW Fifth AvenueSuite 2000
Portland, Oregon 97204
For the Community Action
Partnershlp of Idaho:
Mr. Brad M. PurdyAttorney at Law
2079 North 17th StreetBoise, Idaho 83702
For Idaho Conservation
League and Northwest
Energy Coaliton:
Mr. Benj.*ia g. Otto
Attorney at Law
fdaho Conservation League
Post. Office Box 844Boise, Idaho 83701
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APPEARANCES
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(208 ) 890-s198
INDEX
WITNESS EXAMTNATION BY PAGE
David Swenson
(IGC)
Mr. Williams (Direct)
Prefiled Direct TestimonyMr. Richardson (Cross)
Commissioner Kj eJ-Iander
455
458
478
484
AIlison Spector
( rGC)
Mr. Williams (Direct)
Prefiled Direct TestimonyPrefiled Rebuttal- TestimonyMr. Costello (Cross)
Mr. Purdy (Cross)
Mr. Otto (Cross)
Commissioner Kj ellander
Commissioner Raper
Mr. Williams (Redirect)
486
488
541
578
586
610
620
624
630
Chery1 Imlach
(rcc)
Mr. Williams (Direct)
Prefiled Direct Testimony
Mr. Otto (Cross)
634
636
655
Michael- McGrath
( rGC)
Mr. Wil-l-iams (Direct )Prefiled Direct TestimonyMr. Costel-l-o (Cross )Mr. Purdy (Cross)
Mr. Otto (Cross)
Commissioner Raper
659
66L
681
684
689
692
Michael Gorman
(NWTGU )
Mr. Stokes (Direct)
Prefil-ed Direct TestimonyPrefiled Rebuttal TestimonyMr. Kl-ein (Cross)
Mr. Richardson (Cross)
Mr. Williams (Cross)
Commissioner Raper
Commissioner Kj ellanderMr. Stokes (Redirect)
696
699
854
906
915
924
938
94L
944
Christina Zamora
(CAPAI )
Mr. Purdy (Direct)
Prefiled Di-rect Testimony
949
951
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INDEX
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CSB Reporting(208) 890-s198
EXHIBITS
NUMBER DESCRIPT]ON PAGE
FOR TNTERMOUNTAIN GAS COMPANY:
25.Exhibit
Al-l-ison
sponsored by
Spector
Premarked
Admitted 481
26.DSM Rebate Program Analysis Premarked
Admitted 487
)1 FCCM Vofumetric Margin per Premarked
Admitted 660
28.FCCM Monthly Example Rate
Schedule RS Calculations
Premarked
Admitted 660
29.FCCM Timel-ine Premarked
Admitted 560
30.Rate Schedul-es Premarked
Admitted 660
3l_ .Rate Schedules Premarked
Admitted 660
FOR NORTHWEST INDUSTR]AL GAS USERS:
301.Rate of Return Premarked
Admitted 698
302.Valuation Metrics Premarked
Admitted 698
303.Proxy Group Premarked
Admitted 698
304.Consensus Analysts' Growth
Rates
Premarked
Admitted 698
305.Constant Growth DCE Model Premarked
Admitted 698
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INDEX
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(208 ) 890-s198
EXHIBITS (Continued)
NUMBER DESCR]PT]ON PAGE
FOR NORTHWEST INDUSTRIAL GAS USERS: (Continued)
306.Payout Ratios Premarked
Admitted 698
307.Sustainable Growth Rate Premarked
Admitted 598
308.Constant Growth DCF Model-Premarked
Admitted 698
309.Electricity Sales are Linked
to U.S. Economic Growth
Premarked
Admitted 698
310 Multi-Stage Growth DCF Model-Premarked
Admitted 698
311 .Common Stock Market/Book Ratio Premarked
Admitted 698
31,2.Equity Risk Premium -Treasury Bond
Premarked
Admitted 698
313 .Equity Risk Premium -Utility Bond
Premarked
Admitted 698
314 .Bond Yiel-d Spreads Premarked
Admitted 698
315 .Treasury and Utility
Bond Yiel-ds
Premarked
Admitted 598
316 .Value Line Beta Premarked
Admitted 698
317 .CAPM Return Premarked
Admitted 698
318 .Standard & Poorrs Credit
Metrics
Premarked
Admitted 698
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INDEX
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EXHIBTTS (Continued)
NUMBER DESCRIPT]ON PAGE
FOR THE STAFF:
L2L.Excerpt from Gas Distribution
Rate Design Manual-
Identified
Admitted
907
909
L22.Letter from David Swenson to
LV Customers, 10 /25/76
Identified
Admitted
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CSB Reporting
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BOISE, IDAHO, WEDNESDAY,MARCH L, 2071, 1:15 P. M
COMMISSIONER RAPER: We are back on the
record for the afternoon. It is 1:18, which is me being
late. I will for the record say aI1 the parties
here at 1:15 when I asked. Thank you very much.
again, is the time and place set for the hearing
INT-G-76-02, further identified as in the matter
were
This,
of
of the
application
change its
of fntermountain Gas Company's application to
rates and charges for
and we l-eft
natural-gas
the
servl-ce an
the State of ldaho,off with Company
presenting its direct witnesses.
MR. WILLIAMS: Thank you, Madam Chair, one
preliminary matter. I would ask that Mr. Connor Reiten
be excused as a witness.
COMMISSIONER RAPER: Are there any
objections from
excused? Okay.
the parties as to Mr. Reiten being
MR. WILLIAMS: The Company woul-d cal-l- 1ts
next witness, Davi-d Swenson.
interj ect
here that
Agencies ?
COMMISSIONER RAPER: And if r can
while Mr. Swenson comes up, is there anyone
represents Snake River Alliance or the Eederal
I wi-11- doubl-e-check f or the af ternoon. Nobodyo25
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CSB Reporting(208) 890-s198
SWENSON (Di)
fntermountain Gas Company
presented this morning 1n order to represent those
parties that were intervenors in the case. Okay; so
we'11 stick with the six we've got. Go ahead,
Mr. Wil-l-iams.
DAVID SWENSON,
produced as a
Intermountain
witness at the instance of the
Gas Company, having been first duly sworn
to telf the truth, the whole truth,and nothing but the
fol-l-ows:truth, was examined and testified as
DIRECT EXAMINATION
BY MR. W]LLIAMS:
0 Sir, woul-d you please state your name and
address for the record?
A David Swenson, 555 South Col-e Road.
O And who are you employed by and in what
capacity?
A fntermountain Gas Company, manager of
industrial- services.
O And are you the same David Swenson that on
August t2th, 2076, prefiled 10 pages of direct testimony
in this case?
A Yes.o 25
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CSB Reporting(208) 890-s198
SWENSON (Di)
Intermountain Gas Company
O And if I were to ask you the same
questions contained in that testimony today, would your
answers be the same?
A Yes, except for I have a correction to
make.
O All- right, would you take us to that?
A Yes, on page No. 3, row 7 in Table DS-2,
the titl-e says, "Currently Effective T-3 Rates" and
mistakenly the LV-1 rates were put in that table, and so
"Next 500,000 therms" in Column 2
"Next 50r000 therms." The incorrect rate
The correct rate is 0.02203. Row 3, Bl-ock
let me just take you through
read beginning in the second
transported. " The incorrect
correct number is 0.05463.
that change. Bl-ock 1 shoul-d
cof umn rr lst 100, 000 therms
number is 0 .49572. The
Row 2 says, Block 2 says,
, that shoul-d read,
is 0.45663.
3, second
read, ttAmount
is 0.33442.
correctj-ons if I asked you
in that testimony today,
column says,
over 150,000
The correct
u
"Over 750r 000
therms. " The
therms" should
incorrect price
prlce shou1d read 0 . 007 90 .
So with those
the same questions contained
would your answers be the same?
A Yes.
MR. WILLIAMS: A11 right. Madam Chair, r
would ask that his testimony be spread upon the record aso25
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if read and I would submit this witness to
cros s-exami-nation .
COMMISSIONER RAPER: Without objection,
Mr. Swenson's testimony will be spread across the record
as if read.
(The fol-l-owing prefiled direct testimony
of Mr. David Swenson is spread upon the record. )
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SWENSON (Di)
Intermountain Gas Company
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Swenson, Di 1
Intermountain Gas Company
I. INTRODUCTION
O. Pl-ease state your name, title and business
address.
A. My name is David Swenson.
fndustrial Services at Intermountain
("Intermountain" or
is 555 S. Col-e Road,
"the Company" ) .
Boise, Idaho 83707
I am Manager of
Gas Company
My business address
summarize your educational
in the natural gas industry
fntermountain
O. Mr. Swenson, please
and professional experience.
A. I have been working
for 33 years. I have been at
26 years
Special
where I
Studies.
started as an analyst in
f also previ-ously worked
Gas for over
Pricing and
for IGI
resources Inc., a natural gas marketing company where I
held several posj-tions including Manager of Gas Supply
and Business Development. I was named Manager,
Industrial Services for fntermountain in January 2073.
Prior to this ro1e, I held various positions in
Intermountain's accounting, regulatory and gas supply
departments. In my current assignment, I am responsible
for the retention and growth strategies for al-1
large-vo1ume market segments and to build strong,
strategic relationships with these customers and other
trade al-Iies. I am also responsible to manage policies
and procedures, oversee forecasting and planni-ng, ando25
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Swenson, Di 1a
Intermountaj-n Gas Company
conduct contract negotiations. T also manage the
company's Liquefied Naturaf Gas sal-es efforts. I am a
graduate of Brigham Young University with a Bachel-or of
Science degree in finance and a minor in accounting and
economics. Currently, f al-so serve as a member of the
board of directors of the Boise VaIIey Economic
Partnership.
O. Pl-ease describe the
A. In this testimony,
Company's proposals to:
purpose of your testimony.
and explain theI describe
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(1) Charge al-l- Large Vo1ume Contract ("Industri-al" )
firm service customers a demand charge for the
capacity on the Companyrs distribution system
that is made avail-abl-e to these industrial
customers.
(2) Combine current rate schedules T-4 and T-5 into
a new rate schedul-e, also designated as Rate
Schedule T-4
(3) Eliminate of the Exit Fee provision in the LV-1
Rate Schedule and the historic high provision
that determined access to bl-ock three of the
T-4 Rate Schedule.
rT. INDUSTRIAL RJATE SCHEDI'LES
A. Introduction: Description of Industrial
Rate Schedules
O. As a preliminary matter, please describe and
explain the rate schedul-es that are availabl-e to the
Company's Industrial- customers.
A. Intermountain provides service to its largest
natural gas consumers (hereinafter referred to as "Large
Vol-ume Industrial-") through one fu11y bund1ed sales
tariff and three distribution-onl-y transportation
tariffs. The Company provides firm sales service to the
Large Volume Industrial customers that meet the
eligibility conditions of and el-ect to be served under
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Swenson, Di 2
Intermountain Gas Company
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Swenson, Di 2a
Intermountain Gas Company
Rate Schedule LV-1. Firm distributj-on system-only
provided to Large Volume
meet the eliqibility conditions
under Rate Schedules T-4 or
transportation service j-s
Industrial customers that
of and el-ect to be served
T-5. The Company al-so of fers
interruptible transportation
a distribution system-on1y
service to Large Vol-ume
Industrial customers that meet the eligibility conditions
Rate Schedule T-3.of and elect to be served under
f have prepared Tabl,e DS-1,
availability provisions for
industrial- Rate Schedules.
beIow, which provides the
the Company's current
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Swenson, Di 3
Intermountain Gas ComPanY
Table DS-l Intermountain Gas Company Industrial Rate Classffications
O. Pl-ease describe
interruptibfe industrial
Schedule T-3.
A. CurrentIY, the
Rate to T-3 customers for
how the Company
customers served
charges
on Rate
Company charges a Vol-umetric
interruptible LransPortation
servl-ce. .'
Table DS-2 Currently Elfective T-3 Rates2
Rate
Schedule Tifle Availabiliry Provisionr
LV-1 Large Volume
Firm Sales
Service
Available to any existing customer receiving
service under the Company's rate schedule LV-
I or any customer not previously served under
rate schedule LV-l whose usage does not
exceed 500,000 therms annually, for firm sales
service in excess of 200.000 therms Der year.
T-3 Intemrptible
Distibution
Transportation
Service
Available to any customer.
T-4 Firm Distribution
Only
Transportation
Service
Available for firm distribution transportation
service in excess of 200,000 therms per year.
T-5 Firm Distribution
Service with
Maximum Daily
Demands
Available to any existing T-5 customer whose
daily contact demand on any given days meets
or exceeds a predetermines level agreed to by
the customer and the Company for firm
distibution service in excess of 200,000 therms
per Yeax.
Commodity Charge per therm
Block I l't 250,000 therms $0.49s12
Block 2 Next 500,000 therms $0.4s663
Block 3 Over 750,000 therms $0.33442
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Swenson, Di 3a
Intermountain Gas Company
TABLE DS-2 Currently Effective T-3 Rates2
Commodity Charge per therm
Bl-ock 1 1st 100,000 therms $0.05463
Bl-ock 2 Next 50,000 therms $0.02203
Block 3 Over 150,000 therms $0.00790
1 In additi-on, applicable to al-.1- industrial customers, servj-ce
will only be provided upon execution of a one year minimum
written service contract and, specifically relating to
customers receivj-ng transport service, any customer delivery of
natural gas must occur at any mutually agreeable delivery point
on the Company's distribution system.
Rate Schedule T-3 Interrupti-bl-e Distribution Transportation
Servj-ce, Eleventh Revised Sheet No. 8, Effective: October 1,
2015
2
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Swenson, Dj- 4Intermountain Gas Company
a. Please describe how the Company charges firm
,industrial customers
A. Currently,
Rate to T-4 customers
served on Rate Schedule T-4 -
the Company charges a Volumetric
for firm distribution only
transportation service.
Tabte DS-3 Currently Effective T-4 Rates3
Commodiry Charge per therm
Block I I't 250,000 therms $0.0s777
Block 2 Next 500,000 therms $0.01928
Block 3 Over 750,000 therms $0.0045s
O. Please descrj-be how the Company charges firm
industrial- customers served on Rate Schedule T-5.
A. Differing from the rate schedules described
above, the T-5 customers are billed monthly under a
two-part rate: a demand charge and a volumetrj-c rate.
The demand charge is the product of the T-5 demand rate
times the effective Maximum Daily Firm Quantity ("MDFQ").
The MDFQ is more fully descrlbed below. In addi-tion to
the demand charge, T-5 customers are also charged a
Vofumetric Rate for al-l- firm therms transported and, when
applicable, an
excess of the
overrun rate for all therms transported in
maximum monthly firm amount.
effectlve T-5 rates are shown in
The Company's
Table DS-5,currently
below.
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Swenson, Di 4a
fntermountain Gas Company
Table DS4 Currently Effective T-5 Ratesa
3 Rate Schedule T-4 Firm Distribution Only Transportation
Service, Tenth Revised Sheet No. 9, Effective: October 1, 20L5
Rate Schedufe T-5 Firm Distribution Service with Maximum DaiIy
Demands, Effective: October 1, 2015
4
Firm Service
Demand Charee Finn Daily Demand (Therms)$0.84253
Commodity Charee Firm Thenns Transported $0.00r l1
Over-Run (non-Firm) Service
Commodity Charee Therms Transported in Excess of MDFO $0.04370
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Swenson, Di 5
Intermountain Gas Company
B. Industrial Demand Charge Proposal
O. Pl-ease describe the Company's proposal to bilf
a demand charge to all Industrial customers taking flrm
transportation
A. The testimony of Company Witness Branko Terzic
provides support for demand charges for large industrial
customers. Speclfically, Mr. Terzic makes the points
that it is a fundamental rate making principle that the
capacity of a gas distribution syst.em is designed to meet
customers' cumulative demands when the system peak demand
occurs and that customers should pay their proportionate
share of costs in meeting that system peak demand.
Based on the Company's experience with the current
Rate Schedule T-5 demand charge, the Company is proposing
to add a demand charge to aII firm industrial rate
schedules, to equitably charge al-] firm industrial-
customers for their use of the Company's dlstribution
capaclty. Similar to the rate structure for the current
Rate Schedule T-5, aIl firm lndustrial customers wiff
servl_ce.
also be charged volumetric rates, in
demand rate. The calculation of the
volumetric rates for Intermountain's
addition to the
proposed demand and
firm lndustrial rate
schedules is described and explained in the testi-mony of
Witness Bl-attner. The demand charge for all- firm
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Swenson, Di 5a
Intermountain Gas Company
Rate Schedules will be based on
O. Please explain how a
Maximum Daily Firm Quantity is
A. .Delivery capacity on
the effective MDFQ.
f irm i-ndustrial- customer I s
determined.
Northwest Pipeliner s
as the
resources and
interstate transportation system,
Company's distribution system, are
so there must be a methodology to
as well
finite
allocate that the
resource fairly. A11 firm service, J-arge
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Swenson, Dl 6
fntermountain Gas Company
volume industrial- customer contracts include a mutually
agreed upon MDFQ. The Company utilj-zes
from its SCADA (Supervisory Control- and
daily usage data
system along with connected load ratings
Data Acquisition)
from the
customer's natural gas fired equipment to determine a
recoflrmended MDFQ. Upon confirmation from the engineering
and measurement departments that fntermountain can, in
fact, provide that level of peak service to the customer,
and upon agreement with the cusLomer, that MDFQ is
written into the customer's contract. Once the contract
is executed, Intermountain commits to the LV-1 customers
that it can provide each day during the contract a level-
capacity, 9ds supply and
to the customer's MDFQ.
of interstate transportation
distribution capacity equal
Similarly, Intermountain commits to the firm transport
level of daily
customer's MDFQ.
customers that it can provide that
distribution capacity equal to the
A11 daily natural gas deliveries above the
customer's MDFQ are on an "as availab1e" basis and,
during per'iods of Entitlement, Intermountain could
restrict a customer's usage to no more than the
customer's MDFQ.gas deliveries to
their factories
Knowi-ng that naturaf
and places of business
the contracted MDPQ, industrial customers are
careful to nominate an MDFQ that will satisfy
can be capped by
generally
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fntermountain Gas Company
delivery needs.
C. Proposa1 to Combine Rate Schedu1es T-4 and
T-5
O. Please describe the Company's proposal to
combine current rate schedul-es T-4 and T-5 into a new
rate schedule, also designated as Rate Schedule T-4.
A. The current Rate Schedul-es T-4 and T-5 are
almost identlcal, except that current Rate Schedule T-5
includes both a demand charge and a volumetric charge,
and
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Swenson, Di 1
Intermountain Gas Company
current schedu1e T-4 includes only a vol-umetric charge.
l= shown in Table DS-1, above, the availability
provisj-ons for both Rate Schedul-es are the same, and as
shown in Tabl-e DS-6, below, typical T-4 and T-5 customers
are structurally simj-1ar. Thus, after adding a demand
charge to Schedule T-4, there is no remaining
distinguishing differences between the two rate schedules
and therefore no purpose to be served by continuing to
offer both T-4 and T-5.
Table DS-5 Current Rate Schedules T-4, T-5: Customer data (Actual2015)
Current Rate
Schedule Customers
Therms MDFO
Total Average Total Averase
T4 82 246.066.376 3,000,909 1,447,697 17,655
T-5 13 26,054,206 2.004.170 72.750 5.596
Combined 95 272.120.582 2,8il,427 r,520,447 16,005
D. Industrial Proposed Rates to Industrial.
R^ate Schedu].es
0. Have
Industrial Rate
you reviewed
Schedules,
the proposed rates to
as described and explained in
of Witness Blattner?
I have.
are your general observations rel-ated to
Schedule LV-1 rates?
A. Under the proposed LV-1 rates, ds explained by
(average) LV-1 customerWitness Blattner, the typical
the testimony
A. YeS,
O. What
the proposed Rate
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Swenson, Di 7a
Intermountain Gas Company
wil-l- experj-ence a smal-} decrease j-n annual biIIs. Based
on my review of projected LV-1 customer charges using
2075 billed consumption, current MDEQs and the proposed
LV-1 demand and volumetrj-c rates, customers that consume
gas more evenly from day-to-day and month-to-month (i.e.
a high "Load Eactor"5) wil-l- experience larger decreases
and customers
5 Load Factor is a commonly used measure to describe day-to-day
and month-to-month gas consumption patterns. Load Factor is the
ratio of the average daily therm use divided by some
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that have relatlvely large differences in gas consumption
by day and by month will- experience smaller decreases.
Some LV-1 customers with relatively large differences i-n
gas consumption by day and by month may experience smal-l
increases in annual- bi11s.
O. Why do some Industrial- customers have l-ower
load factors than others?
A. In most i-nstances, industrial customers that
utillze natural gas largely for heating l-oad wlfl show
relatively less usage durlng non-heating load periods and
therefore have a lower than average load factor. In some
instances however, customers have knowingly elect an MDFQ
hiqher than needed, when compared to current gas
consumpti-on, in order to protect future growth
expectations. In a few cases, the customer may have
elected an MDFQ that does not reflect current or future
expected consumption and the Company continues its
efforts to educate such customers regarding the economic
and operational value of a properly set MDFQ. ft is my
bel-ief that the incl-usion of a demand charge in al-l- firm
industrial- large volume rate schedules will- provide the
necessary price signals for industrial customers to
better manage their contracted peak day requirements. As
a result, the Company wil-l be better able to optimize the
use of its distribution system.
Swenson, Di 8
Intermountain Gas Company
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Intermountain Gas Company
O. What are your general observations related to
the new proposed rate Schedule T-4 and the proposed Rate
Schedule T-4 rates?
A. In general, the proposal to combine current
Rate Schedules T-4 and T-5, and to charge a demand rate
to customers in this cl-ass has simil-ar impacts on these
measure of the peak day or, in thls case, the MDFQ. The
greater the difference between the MDFQ and the average daily
use, the lower the Load Factor, For customers that are charged
a demand raLe and a volumetric rate, totaf charges are
inversely related to a cusLomer's load factor, for a given
levef of consumption.
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fntermountain Gas Company
customers as the LV-1 impacts that. I described above.
That is, under the proposed T-4 rates as explained by
Witness Bl-attner, the typical (average) T-4 customer will
experience a small decrease in annual- bi11s. Based on my
review of projected T-4 customer billing based on 2015
billed consumption, current MDFQs and the proposed demand
and volumetric rates, T-4 customers with relatj-ve1y high
l-oad factors will experience larger decreases, customers
with l-ower foad factors wil-1 experience smaller decreases
and, in some cases, T-4 customers with the lowest load
factors may experience smalI increases in annual- bil-l-s.
O Please explain the Eirm Demand Rel-ief
which is included in the proposed LV-1 and T-4provr_ s r_on,
Tariffs.
A.The Firm Demand ReIief provision states,
"Demand charge relief wil-l- be afforded to those LV-1 (or
T-4 ) customers when circumstances impacted by force
majeure events prevent the Company from delivering
natural gas to the customer's meter." The Company has
incl-uded this provision to provide a mechanism to refund
the affected portion of a customer's demand charge in the
unlikely event that the company cannot deliver the
customer's fuII MDFQ for any days during a given month.
This provision does not provide for refunds to a customer
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Intermountain Gas Company
otherwise
gas to one
o.
provis j-on
A.
fail-s to del-iver the needed amount of natural
of the Company's city gates.
Pl-ease explain the removal of the Exit Fee
formerly found in the LV-1 Rate Schedule.
When the Company
it was believed
first implemented the T-4 Rate
Schedule,that many
and
did
customers would
in fact, the majority
switch to T-4. In
desi-re to switch to T-4 service
of the large vol-ume industrial-s
order to not saddle remaining
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customers wlth the cost of interstate capacity that
Intermountain hel-d on behalf of those customers migrating
to T-4, the Exit Fee provision required those T-4
customers to pay for some of that capacity cost over a
two-year period. Since most of the large volume
industrials migrated to transport years ago and most of
the remaining LV-1 customer are relatively small-, the
amount of capacity that would be freed up by one of the
customers migrating to transport if largely insignificant
and so the Company proposes to eliminate this provision.
O. Please expJ-ain why LV-1 customers were removed
from eligibility to use the T-3 tariff as an overrun
service.
A. LV-1 customers utilize fntermountain's WACOG
supply. In the unlikely event of Entitlement, curtailment
or during periods of managing a T-3 imbalance, it woul-d
be difficult, if not impossible, to identify the source
of gas supplies used by an LV-1 customer.
O. Please explain the removal of the historic high
therm use provision from the T-4 Rate Schedule.
A. Because the Company is proposing the inclusion
of a demand charge for the T-4 Tariff, there is no longer
any concern that customers growing in the l-owest price
taif block or those wlth unusually high usage for just a
short perlod of time, would cause other customers to bear
Swenson, Di 10
Intermountain Gas Company
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fixed costs belonging to those growi-ng customers. So the
Company proposes to eliminate this provision.
O. Does this conclude your testimony?
A. Yes, it does.
Swenson, Di 10a
Intermountain Gas Company
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CSB Reporting(208) B 90-5198
SWENSON (X)
Intermountain Gas Company
(The fol-l-owing proceedings were had in
open hearing. )
COMMISSIONER RAPER: And we wil-l- move on
to cross-examination. Does Commission Staff have any
questlons?
MR. KLEIN: None.
COMMfSSIONER RAPER: Thank you
MR. STOKES: We have no questions.
MR. PURDY: I have no questions. Thank
you.
COMMISSIONER RAPER: Mr. Richardson?
MR. RICHARDSON: Thank you, Madam Chair,
just a couple for
testimony.
this witness, dt least on the direct
CROSS-EXAMINATION
BY MR. RICHARDSON:
O
A
o
Good afternoon, Mr. Swenson.
Good afternoon.
So on page
bottom of that
8 of your direct test j-mony,
asked as totowards the page, You were
refative to theyour
rate
general
schedule
A
observations proposed new
see that?for T-4 customers. Do you
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CSB Reporting
(208 ) 890-s198
SWENSON (X)
fntermountaj-n Gas Company
0 So I'd like to discuss your answer that
begins over on page 9, beginning on fine 3. There you
identify three possible outcomes from the Company's
proposed changes in the T-4 customer billings. First,
you state that customers with relatively high l-oad
factors will experience larger decreases. Then you state
that customers with fower load factors wil-1 experience
smal-l-er decreases, and then you conclude that "j-n some
with the lowest load factors maycases, tt customers
experience smal-l-
that?
AI
OSo
the probability of
increases in annual bil1s. Do you see
do.
you used the word "will" to descrj-be
a rate decrease for customers with
higher and relatively lower load factors, and I assume by
that use,
customers
you
wil-l-
A
and
mean that it is a certaj-nty that those
experience rate decreases; correct?
Yes. As I was looking at the l-ist of
what thecustomers
proposed rates wouId,
I was referring to, so, you
perfect certainty, you know,
change would, the
do to their bi11s,
know, 20-20
doesn't
change in
y€sr that's what
hindsight,
rea11y exist and
but when I wasmaybe "wi11" is too strong of a
looking at those numbers, that's
word,
how it turned out.
O Thank you, but you used the word "may" too25
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CSB Reporting
(2oB) 890-5198
SWENSON (X)
Intermountain Gas Company
describe the probability that customers with
l-oad factors will- experience a rate increase
course, correct me if I'm wrong, but doesn't
the l-owest
and, of
the word
"may" imply
A
O
some uncertainty, doesn't it?
Yes.
lncreases ?
So are you you aren't uncertain,
with the lowest loadthough,
factors
are you, that customers
will experj-ence rate
A I think it was highly is highly 11ke1y
load factors may experiencethat customers with very l-ow
a rate increase.
O So there's really no uncertainty, is
there, that those customers with the lowest load factors
are going to experi-ence rate increases?
MR. WILLIAMS: Madam Chair, w€ had this
debate earlier, but back then it was the presumed rate
structure of the Company that hasn't been implemented, so
I think the same assumption should appfy to Mr. Swensonrs
testimony. Assuming that the rate design the Company
puts into pIace, he's testifying to the rates that wou1d
fall out of that, and I don't think we can have one set
of assumptions in the morning and then cross-examinlng
him as he absolutely knows what you're going to be
setting as rates in this case.
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CSB Reporting
(208 ) 890-s198
SWENSON (X)
Intermountain Gas Company
asking him what the Commission was going to do. f was
cross-examining him on his testimony, quoted his
testimony, what does it mean. f wasnrt asking what you
were going to do.
COMMISSIONER RAPER: Yes, to the extent
that you were asking him what was in his testimony, I
think that he repeated the language in his testimony, as
much as you may have been attemptlng to do something el-se
with that information, so if you have questions to
continue on that path, but I heard him restate the
language that he used in the testimony, so you can
continue along the path if you're trying to get somewhere
el-se with that.
O BY MR. RICHARDSON: So if I could repeat
where I was, I kind of lost my train here,you
the
arentt
uncertaJ-n, are you, that the customers with Iowest
load factors are going to receive a rate increase based
upon the Company's recommendations?
A Yes, and therers a reason for that and I
could concoct any kind of scenarj-o
be based
that you
on an imaginary
asked me to do,
that wou1d, you know,
that could fit anythingcustomer
but f'm trying to base
on T-4 customers
this off
and thata complete l-ist of the effect
is what I saw.
O Okay, not your imaginary customers, buto25
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CSB Reporting(208) 890-s198
SWENSON (X)
fntermountain Gas Company
your actual real customers with low load factors, they're
going to receive a rate increase;
A
O
Repeat that again,
Your customers with
right ?
please.
the lowest load
it's likely that they might, yeS
You have some uncertainty to that?
Because I'd have to look at each
individual- instance to reaIIy give
factors are going to
We11,
to that question, and
that fit that profile
recej-ve a rate increase,' right?
A
v
A
and so I I 1l- stick wlth the wording
I have in the testimony that it may result in an
increase.
O And you described those increases "small
increases in annual- bilfs"; correct?
A Correct.
there are a
you a
number
you over and above,
whatever. I think
speciflc answer
of customers
you quantify for me what you mean
annual bills?by small- increases in
A You know, I guess
Blattner as I don't as I sit
a schedule that will- tell
O And can
I would mirror witness
here, I don't really have
this
know,
there
based
1s high, thls is low,
admittedly, f think what you're getting to is
you
.lrt^.LL D
know,
you
that
will be a significant
on our proposed rates
cost increase to
and f don't think
Amalgamated
the Companyo25
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CSB Reporting
(208 ) 890-s198
SWENSON (X)
fntermountain Gas Company
would deny that, and so whether we want to argue about
whether it's small-we t re notor large or whatever,
that Amalgamated wil-l-disputing
annualized
the fact
cost increase-
be facing an
described that as significant?
think it's fair to say that.
you want to amend your testimony to
"signj-f icant" ?
O
A
V
identified that
approaching 190
A
u
class Amalgamated
revenue?
about the customers that Mr.
Sugar is significant, what
Erdwurm from Staff
have rate increases
And you
Yeah, I
So did
change the word "smal-l-" to
MR. WILLIAMS: Objection. His testimony
is what it is. Hers already answered this question a
couple, you know, a few times.
COMMISSIONER RAPER: Hls testimony is on
the record.
O BY MR. RICHARDSON: So if a 13 percent
rate increase for Amalgamated
are gor_ng
percent,
to
A
n
A
how would you describe that?
Significant.
And do you know what percentage of the T-4
Sugar Company represents in terms of
Yes, I do.
What is that number?
In 2016 Amalgamated Sugar accounted for 31o25
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CSB Reporting(208) B9o-s198
SWENSON (Com)
Intermountain Gas Company
percent of annualized T-4 vofume and 13.6 percent of
annual-ized revenue, 3t percent and 73.6 percent.
0 So 31 percent of the volume in the T-4
class is going to receive a significant rate increase if
your proposal is adopted; correct?
A Correct.
MR. RfCHARDSON: That's afl I have, Madam
Chairman.
COMMISSIONER RAPER: Thank you. Mr. Otto?
MR. OTTO: No questions, Madam Chair.
COMMISSIONER RAPER: Are there any
questions for Mr. Swenson from the Commissioners?
President Kj el-l-ander.
COMMISSIONER KJELLANDER: Thank you.
EXAMINATION
BY COMMISSIONER KJELLANDER:
O Mr. Swenson, I think you're the right one
to ask as manager of industrial- services, I was reminded
when we were handed this Order from 30 plus years d9o,
it's been a long
about some of the
time since we've had any discussion
customer classes, and I would have
enjoyed actually
whose names are
talking to any
on that Order,
of three Commissioners
but theyrre al-I dead,SO25
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here we are 30 some years later and f have to confess
that as I l-ook at Amafgamated Sugar, f haven't seen them
in this Hearing Room other than for an ldaho Power case.
Could you please describe for me what a large volume
transportation customer, specifically Amalgamated Sugar,
what services do they actually take from you so that I
can get a better picture?
A Sure. A transport customer receives from
Intermountain Gas Company, basical-1y other people call- it
leasing or renting our capacity from the city gate with
the interstate pipeline to their meter at their
facility.
0 And thatrs it; so they contract separately
for their natural- gas
A Yes.
O in terms of a commodj-ty, then?
A Correct, which is the more significant
part of the total energy cost.
COMMISSIONER KJELLANDER: Okay, thank
you.
COMMISSIONER RAPER: Any other questions
from the Commissioners? Any redirect?
MR. WILLIAMS: No redirect.
COMMISSIONER RAPER: Thank you, Mr.
Swenson, for testifying. You are excused.
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CSB Reporting(208) 890-s198
SWENSON (Com)
Intermountain Gas Company
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CSB Reporting
(208 ) 890-s198
SPECTOR (Di)
Intermountain Gas Company
(The witness left the stand. )
COMMISSIONER RAPER: Next witness.
MR. WILLIAMS: My next witnesses -- my
next witness would be Allison Spector, and it will- be
both her direct and her rebuttal testimony.
ALLISON SPECTOR,
produced as a witness at the instance of the
Intermountain Gas Company, having been first duly sworn
to tell- the truth, the whole truth, and nothing but the
truth, was examined and testif ied as fol-l-ows:
D]RECT EXAMINATION
BY MR. W]LLTAMS:
O Woul-d
business address for
please state your name and
record?
briefly
employee
Utilities
you
the
A My name is Allison Spector and my business
address is 555 South Col-e Road, Boise.
O And Ms. Spector, could you
descrj-be your rol-e with Intermountain Gas?
A Absolutely. I'm a shared
fntermountain Gas and the Montana-Dakota
of
Group
for theand I provj-de energy efficiency policy management
Company.o 25
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(208 ) 890-s198
SPECTOR (Di)
fntermountain Gas Company
Spector that
consisting of
of 16 pages?
A
o
testimony are
prefiled in this case
30 pages and rebuttal
O And Ms. Spector, are you the same Allison
direct testimony
testimony consisting
I am.
And also accompanying
Exhibits 25 and 26; is
Thatrs correct.
your direct
that correct?
same
your
same?
A
o
questions
rebuttal
AII right,
contained
and if I were to ask you the
in your dj-rect testimony and
testimony today, would your answers be the
A They would.
MR. WILLIAMS: AII right; so Madam Chair,
I would ask that Ms. Spector's direct and rebuttal
testimony be spread upon the record as if read, and
Ms. Spector 1s availab1e for cross-examlnation.
COMMISSIONER RAPER:
will spread the direct and rebuttal
Spector across the record as if read
25 and 26 for the record.
into evidence. )
rebuttal testimony of
the record. )
Without objection, we
testimony of Ms.
and admit Exhibits
( IGC Exhlbit Nos. 25 & 26 were admitted
(The foll-owing prefiled direct and
Ms. AIIison Spector is spread upono25
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Spector, Di 1
Intermountain Gas Company
I. INTRODUCTION
O. Please state your name and business address.
Spector. My businessAl-1ison A.A. My name is
address is 400 North
My e-mail address is
Efficiency and
Corporation.
of Demand Side
Fourth Street, Bismarck, ND 58501.
al-1ison. spectorGintgas . com.
for Cascade Natural Gas
O. By whom are you empJ-oyed and in what capacity?
A. My corporate rol-e is Manager of Conservation
PoIicy as a shared employee of the Montana-Dakota
Utilities Group of which Intermountain Gas Company is a
part. I am actively providing Demand Side Management
program development support to lGC and am additionally
responslble for support and development of polj-cy, and
standards and guidelines regarding Intermountain's
environmental- and conservation efforts.
0. How long have you been employed by the Utility
Group?
A. I have been employed within the Utility Group
since June 2008 where I served as a Conservation Analyst,
then Conservation Manager, then Manager of Energy
Community Outreach
In June 20L4, I took on the rofe of Manager
Management for Montana-Dakota Util-ities.
In January 2076, I was offered the role of Conservation
Policy Manager for Cascade and was additionally tasked
with providing support services to Intermountain int25
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Spector, Di 1a
Intermountain Gas Company
matters related to
joining MDU, f was
for State Community
Washj-ngton, DC. I
later as a Program
Associate Director
a. What are
qualifications ?
Demand Side Management. Prior to
employed by the National Association
Services Programs (NASCSP) in
served NASCSP as a Program Assistant,
Coordinator, and last1y as the
of Weatherization Servi-ces.
your educational and professional
T 25
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Spector, Di 2
Intermountain Gas Company
A. I graduated from Goucher College 2005, with a
Bachel-or of Arts degree j-n Communications and Media
Studies with an emphasis in policy conimunlcationsi and a
Bachelor of Arts degree in Political Science, degree of
distinction.
I have eight years' experJ-ence designing and
implementing utility-run energy efficiency programs, and
an additional three years in energy policy & advocacy.
I am experienced in the design and implementation of
viabl-e, cost-effective Demand Side Management (DSM)
portfolios. I have performed analysis of the cost
effectiveness of DSM portfolios under both the Utility
Cost Test and Total Resource Cost Test. f have designed
conservation rebate programs at all stages from planning
through implementation; designed tariff fllings in
support of these programs; selected and hired program
implementation staff ,' devel-oped requests for proposals
for program delivery and eval-uation contractors; and have
developed and filed annual program performance reports.
published
Efficient
Evolution
di scus ses
management
I also
by the
Economy
of DSM
co-authored a peer-reviewed paper
American Association for an Energy
titled, "Natural Selection: The
Valuation and Use of the UCT" which
the importance of naturaf gas demand side
efforts and optimal methods of programo25
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Intermountain Gas Company
val-uation.
applying a
performed.
The paper al-so addresses the importance of
relevant discount rate to any DSM anal-ysis
II. SCOPE A}ID ST'MMARY OF TESTIMONY
O. What is the purpose of your testimony in this
docket?
A. My
First, I wil-l-
testimony will cover four primary areas.
define the purpose
current
of natural-gas Demand
influencingSide Management and the
Intermountain
conditions
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Intermountain Gas Company
Gas Company's
describe the
its DSM potential- and
am
Exhlbit 25
utifized by the
the development
Company to assess
of associated
decision to engage in DSM. Second, I will
modellng
targets. The third section wil-f describe how
Intermountain's conservation rebate portfolio was
designed and how appropriate rebate fevels were
determj-ned. In the last secLion I will present
Intermountain's targeted approach to program delivery and
implementationr ds more fu11y described in the testimony
of Ms. Imlach.
O. Are you
proceeding?
A. Yes. I
sponsoring any exhibits in this
which are described
sponsoring the following exhibits,
in my testimony:
Demand Side Management Potential
Assessment
Exhibit 26 Portfolio Design Analysis
III. PT'RPOSE OF NATURAI GAS DEMA}ID SIDE
MA}IAGEMENT
O. What is the purpose of Demand Side Management?
A. Demand Side Management (DSM) is a strategy used
by utilities in order to optimize their consumers' energy
use. When paired with supply side resources, demand side
management helps ensure reliability and affordability of
a resource.o 25
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Intermountain Gas Company
In the case of a natura1 gas l-ocal- distributj-on
company like Intermountain Gas Company, DSM means finding
opportunities to purchase therms through conservation as
opposed to purchasing through a natural gas supplier.
This transaction considers both commodity and
transportation costs and includes encouraging voluntary
reductions to natural- gas usage by offering conservation
i-ncentives to its customers.
.As stated in the earlier testi-mony provided by
Mr. Kirschner, Natural- gas is an abundant, affordabJ-e,
and clean burning resource. Uslng this 90% efficient
resource
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Intermountain Gas Company
directly for space and water heat end use applications in
most efficient application
incentives associated with
the residential sector is the
of natural gas. Conservation
high-efficiency natural gas space and water heating
equlpment would provide the Company with the two-fol-d
benefit of acquirlng essential DSM resources whil-e
allowing natural gas to serve the role it performs best,
as a direct space and water heating fuel.
Oak Ridge National Laboratories, and others
have acknowl-edged the value of Demand
a best-cost resource for utilities.
Side Management as
Intermountain will-
a program whose
savings that result
be utilizrng this
ultimate intent is
resource to operate
to produce
than lf
energy
in lower overal-1 rates
pIace.
0.
recover
Side Management Program with
Commission?
the program were not in
Does the Company intend to file for approval to
the costs associated with a natural gas Demand
the Idaho PubIic Utilities
A. Yes. The Company is seeking approval of a new
Rebate Program in support of its DSMEnergy Efficiency
efforts, and has submitted proposed Original Tariff Sheet
No. 76 (DSM Tariff), which is supported by the testimony
of Company witness Imlach. This proposed DSM Tariff
sheet is part of Exhibits 30 and 31 sponsored by Companyo25
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Intermountain Gas Company
witness Michael McGrath.
The Company is simul-taneously seeking recovery
in the form of a fixed cost coflection mechanism (FCCM),
which wilI accompany its Demand Side Management program.
More information regarding this mechanism can be found in
the testimony of Mr. McGrath.
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Intermountain Gas Company
Finally, the Company intends to submit a f11ing
foll-owing program approval to obtain deferred treatment
of incremental staffing expenses (salaries assocj-ated
with employees that would not otherwise have been hired
in the absence of a DSM program) and administrative/
outreach costs resultj-ng from operation of a Company run
Demand Side Management Program.
O. Please summarize the type of
proposing to operate.
A. fntermountaj-n is proposing to
gas conservation incentive program for
customers. This program wil-l- provide
program you are
operate a natural-
residential
rebates for the
installation of high-efficiency natural gas equipment,
and natural gas ENERGY Star certified homes. The rebates
will help bridge the up-front cost of higher efficj-ency
equipment and thus optimize the amount of energy being
used in participants' homes.
O. Why is this program focused on residential
equipment rebates and ENERGY Star homes?
A. Rebates have been proven to be an effective
means of encouraging the use of energy efficient
equipment in the residential sector, and for the
construction of energy efficient natural- gas homes.
As the region's l-ocal- distribution company that
is providing fuel- for space and water heatingo25
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fntermountaj-n Gas Company
applications, it is intuitive that the Company focus on
natural gas space and water heating equipment, and ENERGY
Star homes in the residential sector. As described in
both this testimony, and the testimony of Ms. Imlach, the
Company is well positioned to leverage existing
experience in the operatj-on of an equipment rebate
program, and build partnerships with builders and
contractors for the purpose of introducing them to the
val-ue and beneflts of energy efficiency.
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fntermountaj-n Gas Company
Li-kewlse, Intermountain' s conservation
potential- modeling has demonstrated that focusing on the
residential sector is a vj-able strategy for the Company
to achleve meaningful energy conservation results. The
program wil-l- therefore allow the Company to effectively
engage in utility-operated DSM efforts.
O. Are other fdaho utilj-ties successfully using
rebate programs in support of thej-r Demand Side
Management efforts?
A. Absolutely. Both Avista and fdaho Power offer
rebates for high-efficiency residential equipment, and
other energy conservation measures. Both programs are
filed with the ldaho Publ-ic Utility Commj-ssion and are
ratepayer recovered. Both programs result in energy
savinqs for their compani-es and customers.
Intermountain Gas reviewed the design of both
of these Idaho-focused programs, and examined their
associated efficiency and rebate levels. Thls
information was taken into account as IGC developed its
potential assessment. The Company also sol-icited employee
feedback, and gathered other IGC specific research to
refine its conservation portfolio and gauge program
feasibility and value to fntermountain's service area.
O. Will the Company consider expandi-ng measure
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A. Absolutely. Intermountain intends to treat DSM
ramp-up as a phased approach, with its first priority
residential-being conservation achievements in the
sector. Eollowing the successful launch of its
residential conservation program, the Company will-
develop efforts including a targeted rebate portfolio of
prescriptive conservation measures for 1ts commercial
sector customers.
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O. What does the Company anticipate as the
benefits of engaging in natural gas DSM at this time?
A. The Company sees naturaf gas DSM as a natural
fit for the utility, its customers, and the surrounding
community. A conservation incentive program utiliz:-nq
rebates for high-efficiency natural gas equipment offers
an environmentally beneficial, cost-effective supplement
to supply side resources, while optimizLng reglonal
energy usage through the direct use of natural- gas.
With fdaho regulators now accepting the Utility
Cost Test (UCT) as a vlable method of program val-uation,
and with growing in-house expertise in this area, the
Company is positioned to offer cost-effective rebates to
its customers.
UItimately, everyone benefits when utifities
acknowledge the environmental and economic importance of
allowing natural gas to do what lt does best-provide a
fuel for space and water heat directly in customers'
homes - as efficiently as possible. The full benefit of
usinq naturaf gas directly for space and water heat is
described in detail in the testimony of Mr. Kirschner.
a. Are there any rate impacts associated with the
operation of a DSM program?
A. A Demand Side Management program operated
through rebates for energy efficient space and water heat
Spector, Di 1
Intermountain Gas Company
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fntermountain Gas Company
equipment is a strategic investment in energy resources
that wou1d otherwise be wasted through inefficiency. As
described earlier, the direct use of natural gas for
space and water heating is an efficient application of
this resource. Achieving DSM 1n combination with direct
use increases the value of the Company's investment i-n
this effort. The Company's DSM program is designed to
maximize the
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fntermountain Gas Company
potential- of the naturaf gas on its system to serve as
many homes as possi-ble as cost effectively as possible.
It is Intermountain's goal to cost-effectively
acquire demand side resources based on Intermountainrs
most recently acknowl-edged avoided costs. This provides
value to both the Company and its ratepayers. Rates will
be j-nfl-uenced by two factors associated with the program:
the recovery of fixed costs, and the recovery of
administrati-ve program expenses.
Rate impacts associated with the recovery of
fixed costs wil-l- be carefull-y designed as to make the
Company whole for reductions to usage associated with the
implementation of a DSM program.
Administrative program expenses re1ated to the
operation of the Companyrs DSM effort have been designed
as not to exceed the threshold past which such an
investment woul-d not be cost-effective to the Company and
its customers.
O. Can you please elaborate on what you mean by
" fixed cost recovery?"
Gladly. In this case fntermountainA
for fixed cost recovery to miti-gate losses to
from its conservation efforts. Thisresulting
wil-l- allow the Company to remain whol-e as it
pursues cost-effective forms of conservation
is filing
margin
mechanism
actively
to maximi-zeo25
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fntermountain Gas Company
natural- gas efficiency and bring value to its customers.
O. Can you elaborate on what you mean by
"administratj-ve program expenses?"
A. There will be reasonable costs associated with
the operation of Intermountain's DSM program. The
Company anti-cipates an initial budget of approxi-mately
$225, 000, which wll-l-
outreach; and for the
include funding for program
of a dedicated staff forhirlng
program support
al-so leverage
and implementation. The Company will
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Intermountain Gas Company
existing staff resources, which wil-l not be included as
part of its program delivery budget. Intermountainrs
rebate portfolio has been designed to shou1der these
costs whil-e stil-1 maintaining cost effectiveness under
the Utllity Cost Test (UCT). The Company anticipates
that rebate payments will- be in the range of $200,000
$600,000 in the first program year based on customer
interest and the effectiveness of its program outreach
efforts.
As stated earlier, 1t is the Company's
intention that DSM effort procure therms through
investment in natural gas molecul-es and their associated
transportation costs at a cost lower than that of
a1ternative resources. Therefore, the program design
wil-l ensure that energy efficiency purchased by the
utility through DSM efforts will- result in lower overall-
rates to customers than would be experienced if the
program was not 1n operation.
O. Does the Company intend to file a fol-low-on
application to seek recovery of program expenses?
A. Yes. Tt is the Company's intention to fil-e a
foIIow-on application to seek recovery of all rebate
costs assocj-ated with its DSM effort, as well- as its
program delivery budget
would have not otherwise
and the salaries of staff that
been hired without the presenceI25
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Intermountain Gas Company
of the Company's Demand Side Management rebate program.
Program expenses have been bal-anced against the
associated therm savings of the rebate portfolio and have
been assessed as cost effective under Exhibit 26
associated with this filing.
O. Have you prepared an exhibit summarizing the
fixed cost col1ection mechanism accompanying the design
of your DSM program?
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A. Yes. Details and exhibits supporting the FCCM
can be found in the testimony of Mr. McGrath.
a. What are the benefits to ratepayers if the
Commission approves this recovery of programmatic
expenses, including the staff posltions you describe?
A. A well-designed DSM program, like the one the
Company is proposing, results in both electri-c and
natural gas savlngs. Electric savings comes from the
customers' decision to use natural gas directly for space
and water heating, ds opposed to the reduced efficiency
of usinq natural gas to generate the electricity to power
equipment for the same end use. As the testimony of Mr.
Kirschner has indicated, by the time a customer turns on
an el-ectric appliance, up to 622 of the energy from the
original fuel has been Iost. The full fuel cycle
efficiency of natural- gas equipment is about 922.
Therefore using natural gas space and water heating
equipment directly, ds opposed to using electricity for
these end uses, results 1n meaningful conservation of
energy resources. Naturaf gas savings is then achieved
through Intermountaj-n's program by providing rebates for
extremely energy-efficient models of natural gas space
and water heating equipment. The installation of
high-performance natural gas equipment and proliferation
of ENERGY Star natural gas homes resul-ts in a carbon
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Intermountain Gas Company
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Intermountain Gas Company
footprint reduction, which is good for the environment,
and the entire community.
The program is beneficiaL to al-1 ratepayers
because 1t secures a long-term supply (16-30 years) of
demand side resources in the form of quantifiable naturaf
gas conservation. This resource helps supplement
traditional supply slde resources at a cost equal to or
lower than traditional- supply when factoring for both the
avoided
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Intermountain Gas Company
molecule cost and the transportation to del-iver the
resource. It also helps mitigate future capacity
constraints to ensure ongoing reliability.
Intermountain's program is beneficial from a
customer standpoj-nt, because it helps mitigate the
upfront cost of high-efficiency equipment run on natural
gas- a clean-burning, reliable, and affordable resource.
By incentlvizinq for high performance natural gas
equipment and ENERGY Star Homes, the Company is working
t.o ensure that natural- gas 1s being used as efficiently
as possible wlthin that customer's home. This provides
economic savings for the customer.
IV. DMS POTENTIAI ASSESSMENT
0. Could you please describe the contents of
Exhibit 25 "Demand Side Management Potential Assessment"
of your testimony?
A. Absolutely. Exhibit 25 provides an examination
of the total demand side management potential available
to Intermountaln's residentia] sector. This was modeled
through an analysis tool cal-1ed TEAPot, which was
developed by Nexant for IGC's sister company, Cascade
Natural Gas Corporation in 20L4. TEAPot refers to the
acronym,
The modef
Technical-, Economic, and Achievabl-e Potential .
technol-ogles, climate zone, load forecasts, and market
incorporates an analysis of avail-able
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Intermountain Gas Company
segments.
fntermountain utllized the TEAPot tool in order
to better understand the DSM potential in its service
area under both the Utility Cost Test (UCT) and the Tota1
Resource Cost (TRC) test.
Based from Intermountainrs data for
and premise counts, the TEAPot was first run
f ollowing assumptions : 3 .69?" discount rate,' 1
both usage
with the
.0 cost
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benefit ratj-o; 2.60? inflation rate. Two
scenarios were modeled, gauging potential
Utility Cost Test (UCT) and TotaI Resource
test.
Al-l- scenarios were operated using a
DSM measures.
separate
under both the
Cost (TRC)
portfolio
Theof energy efficient natural gas
resulting analysis provides the
therm savings under the lens of
Company with a range of
Technical, Economic, and
Achievable potential. This has all-owed the Company to
better understand the total- conservation potential
associated with its proposed portfolio of high-efficiency
residential equipment measures.
O. What data was input by the Company 1n order to
operate the TEAPot model?
A. Intermountain specific assumptions programmed
into the TEAPot modeling toof can be found on Exhibit 25.
O. Who ran the TEAPot model and from where were
the inputs derived?
A. The TEAPot modeling tool was operated by
fntermountain staff for the purposes of assessing the
Company's DSM potential and assisting in the design of
the measures comprising the proposed conservation rebate
portfolio. Inputs were derived from fntermountain's data
as descri-bed above.
O. Can you please describe the difference betweeno25
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Intermountain Gas Company
Technj-cal, Economic, Achievable, and Program Potential-?
A. Technical Potential refers to the savings that
could be achieved if all homes theoretically eligible to
receive high-efficiency natural gas equipment did so
without regards to economics or personal preference. If
the Company could make all qualified homes upgrade to all-
possible measures,
result. The only
the applicability
the Technical Potential- would be the
limitation is technical feasibility and
of the measure to be installed.
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Intermountain Gas Company
Economic Potentiaf examines the savings that
could be achieved through measures that pass a cost
woul-d be achievedeffectiveness test. It considers what
j-f everyone who could theoreticalTy afford to install
pre-screened high-efficiency natural gas equipment did so
without regards to personal preference or alternative
priorlties. In other words, economlc potential fooks at
a high-Ievel cost-effectiveness under current economic
conditions, but does not consider customer interest,
priorities, or perceptions of energy conservation.
Achievable Potential further refines the
Company's understanding of DSM potential by examining it
under the fens of economic and social real-1ties. ft asks
area, and customer awareness?"
a fourth level of potential,
which 1s not directly model-ed under TEAPot, but has been
considered by the Company, cal-l-ed Programmatic Potential.
"how much savlngs wiIl
utility rebate measures
Intermountain I s service
There is afso
Programmatic
Potential by
reali stically
resul-t from this portfolio of
based on real--world conditions in
Potential further refines Achievable
examining what level of savings can be
accomplished within the
regulatory parameters
current staffing,
budgetary, and of the utility
operating the program.
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Intermountain Gas Company
l-eve1 of potential, Nexant,.the architects of the TEAPot
model-, recognized its significance. In the written
narrative provided for the study that was performed for
Cascade in 20L4, they stated that "Program Potential-
reflects the realistic quantity of energy savj-ngs the
utility can realize through DSM programs during the
horizon defined in the study. Savings delj-vered by
program potential is often less than achievabl-e
potential, due to real--world constraints, such as utility
program budgets, cost-effectiveness thresholds,
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regul-atory and policy statements, and decj-sj-ons on which
subset of cost-effective measures a utility ultimately
decides to incl-ude 1n its portfolio" (Assessment of
Achievabl-e Potential- e Program Evaluatj-on, Y2, Section
2.2, p15).
Intermountain has therefore developed inltial-
programmatic targets as a number bl-ended between the
Achievable Potential estimates modeled in its analysis,
and further refined by in-depth discussions with IGC
distract staff regarding the on-the-ground realities of
fntermountain's service area.
O. What measures were included in your analysis,
and why were these sefected?
A. Intermountainfs analysis included a range of
high-efflciency residential- sector measures including
ENERGY Star certlfied homes, energy efflci-ent natural gas
furnaces, fireplace inserts (an important air-quality and
woodstove replacement measure), and water heaters. The
Company examj-ned several efficiency ranges, eventually
narrowing in on the highest tiers availabl-e within the
market in which Intermountain operates and for which it
had vafid data.
The Company examined the viability, and
associated energy savings potentj-a1, of portfol-io
measures under several- conditions lncluding: (1)
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Intermountain Gas Company
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fntermountain Gas Company
conversions from non-gas to high-effj-ciency natural gas
equipment, as well- as instal-l-ations in the new
construction sector; (2) replacement of broken
Iower-efficiency natural- gas equipment with high
efficiency natural gas equipment; and (3) replacement of
functioning lower-efflciency natural- gas equipment with
high-efficiency natural gas equipment before the end of
the measure's useful Iife. Analysis concentrated on
space and water heating applications in new and existing
construction, as well- as on the viability of rebates for
ENERGY Star homes.
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fntermountain Gas Company
0. Could this analysis be further refined or
expanded to other measures at a fater date, af warranted?
A. Absolutely.
range of conservation
continui-ng to expand
avail-able resources.
The Company intends to
options on an
and refine its
ongor-ng
analysis
explore a
basis,
based on
V. CONSERVATION REBATE
O. What circumstances have
resul-ted in the Company's interest
a conservation rebate program?
A. Three primary factors
Company's interest in achievlng
PORTFOLIO
changed that has
and ability to develop
have precipj-tated the
demand side management
program.
Order No. 33444
through the use of a conservation rebate
First, I read the Commission's
in Avista's 20t5 general rate case as sanctioning
Avista's proposal to adopt the Utllity Cost Test (UCT) as
a reasonable method of valuation of natural gas DSM.
Following that 1ead, Intermountain has utillzed the UTC
alongside other tests, whj-ch has allowed the Company to
assess the viabil-ity of natural gas DSM options, identify
mul-tiple cost-effective measures that would attain
greater DSM value clarity, and resul-t in a more viable
DSM portfol-io under the Utility Cost Test (UCT). The UCT
reflects the Company's perspective as an investor-owned
LDC, and results in the identification of a robusto25
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Intermountain Gas Company
portfol-io of natural- gas DSM measures.
Second, conservatj-on is an issue of public
importance. This means conserving electricity through
the direct use of natural gas for space and water heat,
as well as maximizing the efficiency of natural gas
equipment used in residential customers'
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homes. The Company continues to promote the direct use
of natural gas and supports the adoption of energy
conservation and DSM programs.
Intermountain has theThird,opportunity to
its service areapositively
to ensure
influence the energy mix in
efficiency
residential
natural gas is being used with maximum
space and water heating fuel in the
sector. Pairlng direct use with
high-efficiency natural gas equipment is a wj-n-wj-n for
the Company, the environment, and ratepayers.
Intermountain 1s glad to have the opportunity to pursue a
program to encourage responsible use at this time.
In liqht of the above, the Company has
developed in-house expertise necessary to ful1y assess
its DSM potential, viable conservatlon measures, and to
support the design and implementation of a ful1y
articulated energy-efficiency residential rebate program.
Company staff will continue to perform this work and will
be actively engaged in supporting this program on an
ongoing basis and ramping up additional staffing
resources as cost-effectlve and appropriate.
O. Coufd you please further elaborate on how a
rebate program results in DSM and the efficient use of
natural gas directly for space and water heat
applications ?
that
asa
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fntermountai-n Gas Company
A. Rebates will result in the efficient use of
natural gas directly for space and water heating
applications by driving the sales of high-efficiency
natural gas equipment and ENERGY Star natural- gas homes.
Natural gas fired energy efficiency upgrades from
standard efficiency (code level) equipment results in a
reductj-on to the amount of therms utilized for a given
end use. This savj-ngs will then be recorded as energy
conservation attributabl-e to this program. The direct
use of natural gas further reduces
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Intermountain Gas Company
the strain on electric load which could better be applied
to afternative end uses in a home.
O. Has
detail-ing the
A. Yes.
Intermountain developed an exhibit
rebate program portfol-io it has developed?
A ful1 summary of Intermountain's rebate
portfolio
26: "DSM Rebate Program Analysis, " which offers the full-
cost analysis that went into the Company's program
design.
O. Can you please further describe how your rebate
program will operate?
A. Gladly. As expJ-ained in greater detail in the
testlmony of Ms. Imlach, the Company's conservation
rebate program wil-l- be open to all customers on its
residential- rate schedule. f ntermountain wil-1 be
providing rebates for a range of cost-effective natural
gas high-efficiency HVAC and water heat equipment, as
well as for ENERGY Star natural gas homes.
There will be two tiers of rebates - one for
upgrades from standard efficiency to high-efficlency
natural gas equipment. The second tler will provide
incentives for natural gas ENERGY Star homes, and for
upgrades from standard el-ectrlc to high-efficiency
natural gas equipment. Rebates wil-I be administered by
the Company and issued in the form of a check following
and associated details can be found in Exhibit
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fntermountaj-n Gas Company
receipt of a completed and val-id rebate application;
which includes proof of sal-e and instal-latj-on of
associated equipment, or certification documentation in
the case of Energy Star homes
advertised via bitl inserts,
. Rebates will- be
through education to area
and district staff, andcontractors,
through other
via programmatj-c
media as appropriate.
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Intermountain Gas Company
An annual report
overall
of each
of expenditures, activj-ties,
therm savings,
provided at the
O. What
and cost effectiveness wil-1 be
end program year.
be included in the Company'smeasures will
rebate portfolio and how were they
proposing
sel-ected?
a The Company is
of the followj-ng
ENERGY Star
a rebate portfolio
comprised measures:
Certified Natural- Gas Homes
($1,200 rebate)
95%+ AFUE Natural- Gas Furnace
Tier 1: ($350 rebate), Tier 2: ($500
rebate )
High Efficlency 90%+ Natural Gas Combo
Radiant Heat System
Tier 1: ($1,000 rebate), Tier 2: ($1,200
rebate )
B0%+ AFUE Natural- Gas Fireplace fnsert
Tier 1: ($200 rebate) Tier 2: ($250
rebate )
702+ EE Natural Gas Eireplace Insert
Tier 1: ($100 rebate), Tier 2: ($200
rebate )
.61+ Energy Factor Naturaf Gas Water
Heater
Tier 1: ($50 rebate), Tier 2: ($75 rebate)o 25
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Intermountain Gas Company
.91+ Enerqv Factor Natural Gas Tankless
Water Heater
Tier 1: ($150 rebate)
rebate )
These measures were selected based on
factors: (1) identified viability in
toof , (2) overal-1 cost ef fectlveness
Tier 2, ($200
the following
the TEAPot modeling
when model-ed in the
conservation
availability
area and an
portfol-io development tool; (3) general
of these measures in Intermountain's service
(4) opportuni-ty for greater penetration of
these
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Spector, Di 19
Intermountaj-n Gas Company
measures within IGC's service territory as demonstrated
through both TEAPot and observed directly by the
Company's staff operating the field at the district l-evel
and; (5) the presence of simifar measures in established
natural gas conservation programs in the Northwest.
O. Why is the Company proposing two level-s of
rebates ?
A. Intermountain is proposing two cost-effective
tiers of rebates: one for converting from standard to
high efficiency natural gas equipment, and one for
converting from standard el-ectric to high effici-ency
natural gas equipment. A higher incentive will be
provided for el-ectric-to-gas equipment upgrades in
acknowledgement of the higher up-front equipment costs
and loglstlcal costs of conversion. The program will
begin with the baseline assumption of a 252 cost increase
between gas and electric equipment measures of the same
end use. Rebates wilf be set at as cfose to 30U of
incremental cost as posslble without exceeding l-evel,ized
cost thresholds. Intermountai-n agrees
use of
with the
of Mr. Kirschner that the direct natural
space
f uel-
and water heating is the best application
testimony
gas for
of this
source. The higher-level rebate acknowledges this
while helping a small increase in rebate amount tova1ue,
further bridge the incremental- cost difference betweeno25
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Intermountain Gas Company
electric and natural- gas equipment.
O. Can you please describe the assumptions
utilized in the development of your rebate portfolio?
A. Yes. A description of each assumption used to
model the viabil-ity of Intermountain's conservation
portfolio has been outl-ined in detail- below:
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Spector, Di 20
fntermountain Gas Company
Therm Savings Therm savings inputs were based
from the zonal assumptions coded into the model- which
fall- within the average of Intermountain Gas
Eastern and Western climate zones. Current
Company' s
assumed therm
savings are in the
an averaged savings
measures withi-n new
conservative range and are based
resulting from the installation
upon
of
construction,existing construction,
a turnover measure.manufactured, replacement, and as
Conservation Targets: After careful-
consideration, and guidance from both the TEAPot model-
and Company personnel, Intermountain is setting a program
year target of 65,000 therms, reflecting the Achievable
Potential that can be acquired through Intermountain's
proposed portfolio of conservation measures. It was
developed by running the TEAPot model with IGC
forecasting data, dssessing the volume of incentives
needed to achieve the varj-ous potential Ieve1s, and
reviewing the outcomes
behind the conservatlon
,)tr
with district staff. More details
targets can be found in Exhibit
Basing Intermountain's portfolio design from a
target of 65,000 therms ensures that the Company is able
to maintain cost-effectiveness upon a strong foundation
of realistic expectatj-ons. That said, it is also the
Company's deslre to push beyond the existing market ando25
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fntermountain Gas Company
drive positive change in equipment purchasing behavior
within Intermountain's communities. The Company is
therefore setting a "stretch" goal of 91,825 therms based
on its TEAPOT modeled Technical Potentlal, which is
aspirational-
certain this
rather than achievabl-e. Because IGC is not
stretch goal
not
is realistic,
dependent upon
rather upon the
program
thl scost-effectiveness is
aspirational target, but real i- st ic
achievable target developed by the Company.
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Spector, Di 2l
Intermountaj-n Gas Company
However, Intermountain will aspire to achieve this goal
with planned staffing and budget levefs, in order to
attain the greatest value possible for the Company and
its customers, through the Companyrs investment in DSM.
Target Levelized Cost: The Company has
developed a levelized cost target of $0.531 which was
based from the following inputs:
Commodity Cost of Gas (WACOG) : $0.32164
Fixed Cost of Gas (Pipeline + Storage Fixed +
Commodit! Costs) : $0.20418
These two numbers added together equal
$0.53182, which is the threshol-d used in determining
which measures would be cost-effective to include in
Intermountain's program. Intermountain wil-I reassess
avoided costs on an ongoing annual basis to ensure that
the cost-effectiveness threshold is up-to-date and
reflects the current avoj-ded costs of the Company.
Program Expenses: The Company anticipates a
programmatic budget of $225,000 for program outreach and
operational expenses incl-uding two FTE staff to deliver
the program. This is a preliminary estimate of the
Company's staffing and administrative needs, and it is
subject to change as necessary to ensure approprlate
program delivery and cost effectiveness. However, any
adjustments made to this origi-na1 assumption will beo25
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Spector, Di 27a
Intermountaj-n Gas Company
placed within the confines of t.he program's
cost-effectiveness modeling to ensure the portfofio does
not exceed the $0.531 threshol-d. Anticipated total
rebate expenditures for the program year will vary based
upon the measures that drive customer participation.
However, preliminary estimates are in the $200k - $600k
range for rebates paid in assocj-ation with the portfolj-o
of measures
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Spector, Di 22
Intermountain Gas Company
pre-screened from program cost effectiveness and modeled
under the associated spreadsheets.
Rebate Levels: Rebate levels were based on
similar natural gas offerings
within IGC's service
Rebate l-evel-s have
and equivalent electric
areas and surrounding
30% of incremental cost as possible, and higher where
to ensure that they arecost-effective, in order
sufficient to
measures
regr_ons.been set to be as close to
free ridership.
Ievel-s will- help
fntermountain' s
attracting customer interest
. Thoughtfully constructed
and avoiding
incentive
klck-start natural- gas DSM efforts in
service area and dri-ve customers towards
fncremental Costs: fncremental cost levels were
shaped by the baseline market assumptions developed
refined with
environmentally benef icial
mitigating the risk of free
during the design of
on-the-ground market
fntermountain will be
equipment choices while
ridershlp.
the TEAPot mode1, and
research performed by the Company.
monitorlng lnstalled measure costs
on an ongoing basis and will- make adjustments to these
assumptions as appropriate.
Measure Life: Measure l-ife assumptions were
based from the figures utilized by Nexant in its modeling
tool, engineering best practlces, and the standard
measure life assumed for the same piece of equipment ino25
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Intermountain Gas Company
comparable utility programs.
Discount Rate: The model utilizes a 2A-year
of themortgage rate refl-ecting the averaged
measures within Tntermountain's rebate
1 i fespan
portfolio with an
APR of 3.69%. This approach acknowledges the low-risk,
long-term value, and reliabil-ity of home-based energy
ef f iciency j-nvestments. It likewise acknowl-edges the
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Intermountain Gas Company
utility's investment in demand side resources through a
long-1ived energy efficiency portfolio as a viable
supplement to supply side resources.
The Company shall regularly moni-tor, and update
program variables on an annual- basis, in order to make
adjustments, as appropriate to the program design.
O. Is the Company considering cost effectiveness
at the individua1 measure l-evel-, the portfoli-o, or both,
and why was this approach taken?
A. The Company is considering cost-effectiveness
at the portf olio l-evel-. f n addition, the discrete
individual leve1,
variations in cost effectiveness taking place
from measure to measure.
measures
portfolio
with minor
A11 measures
the Company have strong
the TEAPot model. The
within the Company's proposed
are generally viable at the
conservation
developed by
screened via
that the real
costworld application
effective.
within the portfol-io
UCT results and were
Company is confident
of its rebate portfolio is
O. Under what cost test/s are these measures
deemed to be cost effective and what were the underlying
inputs that l-ead to that conclusion?
A. The proposed conservation program portfolio as
deslgned 1s cost-effective to the Company under thet25
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fntermountain Gas Company
Utility Cost Test.
The main drivers of cost-effecti-veness of the
Utility Cost Test are utility rebate payment levels and
administrative expenses which are balanced out against
totaf energy savings. This approach treats supply and
demand side resources as equally valuable. Under the
UCT, the customer is seen as a supplier from whlch the
Company is purchasing natural gas. The Company
"purchases" unused therms and their associated
transportation costs from customers resulting from the
use of
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Company-drlven purchases of energy-efficient natural gas
equipment. A cost effective DSM rebate program under the
UCT must ensure that the Company pays the same amount or
less for demand side resources as it does for supply side
resources. In the case of Intermountain's proposed
portfolio, the UCT result is be1ow the $0.531 levelized
cost threshold, meaning that the portfol-io is cost
effective since it cost the same or fess to "purchase"
unused therms, with their associated transportation
costs, from the customer via IGC's conservation portfofio
than it does to purchase energy from traditional
suppl j-ers.
The Company also performed analysis of its
proposed conservation portfolio under the Total Resource
Cost Test. The main drivers of the TRC are the cost of
the energy savings equipment purchased by the customer
and the Company's associated administrative costs,
balanced against the total energy savings. The test.
scrutinizes the customer's purchasing decision, focusing
on whether the investment in energy savlngs yields
adequate payment to the customer under current energy
prices. However, this level- of analysis is not typically
conducted when assessing a supplier from which natural
gas will be purchased. And the customer from which DSM
is purchased may see additional- benefits and val-ue beyond
Spector, Di 24
fntermountain Gas Company
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energy savings that, when paired with the rebate offered
by the utility, may motivate them to purchase high-
efficiency natural gas equipment.
Furthermore, lower natural gas costs today wiII
not necessarily translate into l-ower natural gas costs in
the future. It is when natural gas is the l-owest prlced
that consumers are more 1ike1y to be driven towards use
of the product. Encouraging conservati-on during lower
natural- gas costs by providing an additional economic
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motlvation through rebates, is essential to proper
management of this precious natural resource and to
maintain reliabllity for the Company. Therefore, even
though the TRC result does exceed the Company's levelized
cost threshold, Intermountain believes that portfolio is
still cost effective, and worth pursuing.
0. Will the Company be utl11zing the same di-scount
rate for the development of its conservation portfolio as
it did for its DSM potential- analysis?
A. Yes. Intermountain's program design was
informed by its TEAPot DSM anal-ysis and all- inputs have
been synchronized accordingly.
O. Does the Company intend to calculate total
annuaf therm savings achievements on a net or gross
basis?
A. The Company lntends to calcul-ate savings on a
gross basis, based on the program's deemed therm savings.
O. PJ-ease describe the ways the Company intends to
mitigate free ridership as part of this program?
A. The Company wll-l- be workj-ng to mitlgate free
ridership in several- ways through the development and
implementation phases of its program.
Eirst, Intermountaj-n has taken free ridership
risks into account in the development of its program
portfolio. Eor example, the Company had initially
Spector, Di 25
Intermountain Gas Company
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Intermountain Gas Company
considered l-ower efficiency l-evels for furnace and water
heat incent j-ves. However, after consulting with dj-strict
staff throughout IGC's servj-ce area, Intermountain's DSM
development team learned these measures were already
being sold without the need for further incentive. The
Company took this feedback seriously as measures were
sel-ected.
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fntermountain Gas Company
Second, the Company is following guidance
developed
model that
by Nexant during
rebate
the development of the TEAPot
levels of at l-east 30? of the
i-ncrementaf
suggests
cost of a measure are more 1ike1y to result
1n program particlpation. fntermountain wil-l- bring out
rebates as close to, or higher, than these level-s as
implementation
infl-uence the
where available, to
cost-effectiveness.
gather information,
l-evel-s of equipment
and post program
determine the
program has on customer purchasing
decisi-ons.
Fourth, the Company will make program updates
on an ongoing basis to ensure that rebates are only
provided for measures that are not already saturating the
posslble while maintaining program
Third, the Company will-
where available, on the efficiency
installed in customers' homes pre
market so
incentive
addition
that they serve their intended purpose-as an
that drive positive consumer behavior.
Finally, it is important to note that in
to free ridershlp, there will be a certain
percentage of homeowners that will- purchase Energy Star
homes and high-efficiency natural gas equipment as a
direct resuft of Company marketing and outreach that wiIl
not appfy for a conservation incentive. Thls will resul-t
in therm savings directly attributable to Intermountain'so25
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Intermountain Gas Company
program that is l-eft unquantified. However, the Company
believes that both these savings, and free ridership will
1ikely be minimal.
a. Are there any other energy benefits associated
with this program?
A. Yes. Utilizing high performance natura1 gas
equipment in place of el-ectric equipment results in the
direct use of natura1 9ds, which is a more efficient use
of the resource
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Spector, Di 21Intermountain Gas Company
for providing
Department of
home space and water heating. The
Energy recognizes source efficiency as the
and therefore electricoptimal measure of efficiency,
savings resulting from the use of energy-efficient
natural gas equipment should be considered when
evaluating the merits of a natural gas DSM program.
O. What actions wil-l the Company take to help
ensure the program operates as anticipated?
A. Intermountain has developed a cost-effective,
low risk conservation portfolio. The Company has
selected proven measures with known therm savings values
and has estimated program participation leveIs via the
TEAPot model- which has been updated with Intermountain
specific inputs. fntermountain further refined this
figure with direct input from district staff to provide
the most real-1stic estimate possible for therm savings
achieved during 1ts ramp-up phase. In addition, fGC
developed a modest, but realistic budget, minimj-zing sunk
costs to two FTE employees in order to bal-ance having
adequate staff to deliver the rebate program, and
cautiously managing program expendi-tures prior to
demonstrated performance.
Quite simply, the Company has planned its
portfolio design to ensure customers are offered an
attractive, welI-staffed, and successful- program.o 25
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Spector, Di 21a
Intermountain Gas Company
Rebates have been set at l-evels designed to drive
customer i-nterest, while balancing against the l-aw of
the program does not perform asdiminishing
anticipated,
returns. If
Intermountain wilI examine the root cause of
this underperformance and will adjust. The Company is
confldent that in the event of unforeseen problems, the
program could withstand lower than anticipated
participatj-on, or the need for additional- expendltures if
abso-Iutely necessary.
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O. What impact will failing to achieve annual
therm savings targets have on program cost effectiveness
and operation?
A. If the Company fails to achieve its annual
therm savings targets, the overal-l- cost effectiveness of
its program portfolio will be lowered. However, the
conservation portfolio was designed to withstand lower
particlpation l-evels if necessary. This was done by
prudently budgeting program ramp-up costs, while
maintaining rebates at level-s comparable to other natural
gas utility programs. In the event that program
participation was 1ow enough to resul-t in
cost-effectiveness bel-ow Intermountain's $.531 threshold,
the Company would reexamine its rebate l-evel-s, portfoJ-io
design, and outreach strategy for following years.
a. What impact will- exceeding annual therm savings
targets have on program cost effectiveness and operation?
A. If the Company were to exceed its annua1 therm
savings targets, the portfolio as a whol-e would become
even more cost effective than anticipated since more
therms wou1d be saved for the same budgeted leve1 of
lnvestment. In such a case, the Company would assess if
participation levels were sustainable, and if so, would
work within the parameters of its TEAPot analysis and
feedback from dlstrict staff, to expand its program and
Spector, Di 28
Intermountain Gas Company
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Spector, Di 28a
Intermountain Gas Company
raise associated targets as appropriate.
VT. PROGRJAM DELIEVERY A}ID IMPLED{ENTATION
O. Can you describe how the conservation/DSM
program proposed by the Company will be implemented?
A. Absolutely. With this general rate case, the
Company seeks to implement its first ever Demand Side
Management Program (DSM) for the residential sector with
a request
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for cost recovery to be fil-ed pending approval of the DSM
program. Thj-s program will be impJ-emented in-house, and
1ed by fntermountain's Manager of Energy Utllization.
The Company anticipates that two additional positions
will be developed in association with this program. This
includes an FTE position designed to process and verify
rebates, perform al-I required data tracking and
reportlng, and to serve as an energy advisor to IGC
customers. The second anticipated position would provide
deeper analysis of energy conservation measures and
potential and would support training and technical-
assistance to area HVAC contractors in regards to
Intermountain's program, and would perform quality
control inspections as needed. The Company wil-I also
leverage existing staff resources such as its Consumer
Sales Representatives who are positioned to reach out
directly to customers to encourage program participation.
The Company also intends to reach out to local
builders and contractors to introduce them to
high-efficlency natural gas equipment options and
increase the proliferation of these technol-ogies in the
communities served by IGC. Intermountain's goal wilI be
to build a robust Trade Ally network compri-sed of
carefully screened equipment dealers and instal-l-ers whom
it will work with to encourage greater participation in
Spector, Di 29
Tntermountaj-n Gas Company
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Spector, Di 29a
fntermountain Gas Company
this program.
Additional- detail regarding program structure
the testimony of Ms. Im1ach.and del-ivery can be
O. How will
found in
the Company publicize and promote its
DSM rebate program?
A. The Company intends to publicize and promote
1ts DSM program through as many channels as possible,
which may include: biII inserts; utility newsletter
messaging;
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information on the Companyrs websit.e; word-of-mouth by
existing Consumer Safes Representatives; flyers and
brochures; co-op advertj-slng with l-ocal- contractors;
bill-boards; home and garden shows; home builder
association meetings; radio, print, and tel-evision ads,'
and other media and methods as cost-effective and
appropriate.
O. Will the Company consider expanding 1ts
program, or adding additional measures following program
ramp-up?
A. Yes. As stated earl-ier, it is the Company's
intentlon to explore additional- DSM opportunities
following its initial ramp-up. Program changes and
expansions will be based from the on-the-ground results
of its DSM program, as well as ongoing feedback from
district staff, area contractors, and Intermountain's
customers.
O. Does thls conclude your testimony?
A. Yes it does.
Spector, Di 30
Intermountain Gas Company
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O. Pl-ease state your name, positlon and business
address.
A. My name is Allison A. Spector. My business
address is 555 S. Cole Rd, Boise, ID 83709.
O. Are you the same Allison Spector that prepared
and previously presented prefiled direct testimony on
behalf of Intermountain Gas Company in this Case?
A. Yes.
O. What is the purpose of your rebuttal testimony?
A. The purpose of this testimony is to respond to
the testimony of Staff and some interveners relating to
the Company's DSM and FCCM proposals. Specifically, I
will (1) further clarify the purpose of the Company's
proposed Demand Side Management program,' and (2) describe
the core differences between Intermountain's energy
efficient conversion rebate program and the robust
portfolio of rebates the Company now intends to offer;
(3) explore the feasibil-ity of certain portfolio
expansions and adjustments; (4 ) address intervener
critiques of the Company's DSM goal-setting and
preliminary conservation potential modeling; and (5)
dj-scuss the challenges and potential- opportunities
associated with the development of a fow income
weatherization program.
O. Does the Company consider its proposed
Spector, Reb. 1
Intermountain Gas Company
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Spector, Reb. 1a
Intermountain Gas Company
conservation efforts to be a true DSM program?
side management program
the form of conserved
A.
acquires
energy as
the case
Yes. A "true" demand
demand side resources i-n
a replacement for supply side resources. fn
of a hlgh-efficiency natural gas equipment
rebate program, unused energy is
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Spector, Reb. 2
fntermountain Gas Company
acquired by provlding a financial incentive (rebate) to
increase the desirabiLLty/ affordabil-ity of higher
efficiency equipment that might otherwise be passed over
by the customer in lieu of more affordable, lower
efflclency equlpment. This description reflects both the
intent and design of the Intermountain's proposed DSM
program.
O. Staff witness Donohue does not recommend your
proposed Tier 2 Incentives. If natural conservation
is the primary goal of its program,
offering two tiers of incentives-one
gas
iswhy Intermountain
t ier
rebate for
for existing
customerscustomers, and a second, higher
converting from an al-ternative heat source?
A. Intermountain recognizes that the direct use of
natural gas for space and water heating in a residential
dwelling is the best use of thls resource. However, our
knowledge of the market has demonstrated that the
j-ncremental- cost of upgrading from equipment that
utilizes electricity or other fuel sources to naturaf gas
equipment is higher than converting from l-ower to hlgher
efficiency natural gas equipment. The Company has
therefore designed a two-tier natural gas energy
conservatj-on program that acknowledges the differences in
cost experienced by new natural gas customers as opposed
to existing customers. In the case of both tiers, theo25
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Spector, Reb. 2a
fntermountain Gas Company
rebate refl-ects a payment for therms that would otherwise
have been wasted through the use of l-ess efficient
equipment.
It is-and continues to be-Intermountain's
intent to actively encourage both new and existing
customers to purchase the highest effi-ciency space and
water heating equipment for their homes, and for builders
to construct homes to meet the
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Spector, Reb. 3
Intermountain Gas Company
Energy STAR standard. This is evidenced through the
TEAPot input Exhibit Number 25, page 7, offered in my
previous testimony. fn this exhibit, the l-ist of
measures modeled incfudes a header l-isted as "Baseline. "
The "Basel-ine" header in Exhibit No. 25
exclusj-ve1y l-ists lower efficiency natural gas equipment
as that which is being replaced via the Company's
conservation incentive. This basefine is applicable to
both tiers equalJ-y, meaning that Intermountain is
assuming that households being approached through this
program have already decided that they will- be purchasj-ng
natural gas equipment. Thus, the rebate offered in Tier
Two isn't intended to drive the decision to convert to
but to drive natural gas conservationnatural 9ds,
through the
equipment.
testimony of
selection
In fact,
witness
"Intermountain Gas's
of higher effi-ciency natural gas
as acknowl-edged by the Staff
Donohue on page 77, lines 3-11,
cost-effectiveness cafcufations
ignore the reductlon in el-ectric/wood/propane use and the
increased consumption of natural- gas that conversions
generate. Instead, the Company assumes that the customer
was going to convert anyway and is si-mp1y trying to
ensure that the conversion is as efficient as possible.
While that is a 1audabfe goal, it means that the resource
the Company purchases with the incentj-ve is the efficiento25
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Spector, Reb. 3a
Intermountain Gas Company
furnace or water heater, not the conversion. "
O. In their response to DR #1, witness Rivas of
the Idaho Conservation League claims that "fntermountain
makes no effort to set goals for either tier [of its
rebate programl and instead focuses in several- parts of
the testimony on the generalized benefits, ds opposed to
the customer speciflc benefits of fuel- swj-tching and
direct use of natural gas. Does the Company agree with
this
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Spector, Reb. 4
fntermountain Gas Company
characteri zation?
A. No. fntermountain
target of 65,000 therms that
has a cJ-early developed
was utilized for program
stretch goal of 91,825 thermsand adevelopment purposes,
which the Company will achieve throughout the
This target incfuded
and existing residential
in detail later in this
with witness Rivas's
11-13 of his testimony,
"a DSM program largely
and businesses to become
strive to
course of the first program year.
savings resulting from both new
customers, as wil-l- be described
testimony.
O. Does the Company agree
characterj-zation on p.11, lines
that Intermountain is proposing
based on encouraging households
new customers?"
A. No. Whil-e the Company recognizes that direct
use of natural gas for space and water heating is the
most efficient application of this product, the goal of
Intermountain's DSM program is to conserve energy by
higher
ofa
driving customers from l-ower efficiency to
efficiency natural gas
conservation rebate.
equipment by the use
As currently designed, the Company's focus is
on applications of high-efficiency space and water
heating technology in the homes of both new and existing
customers. This is demonstrated through the "Vintage"O 25
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Spector, Reb. 4a
Intermountain Gas Company
header in Exhibit No.
testimony, which lists
equipment incentivized
25 offered in my prevr_ous
under whichthe conditions
through the Company's proposed
program would be used
gas equipment. These
detail befow:
New: Where
to replace lower-efficiency natural
vintages/conditions are described in
hiqh efficiency natural gas
equipment l-s being installed in a
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Spector, Reb. 5
Tntermountain Gas Company
home where that type of natural gas equipment did not
previ-ously exist.
Ear1y Retirement: Where hiqh efficiency natural
gas equipment is being installed in place of a furnace,
water heater, or hearth that has not yet exhausted 1ts
usef ul- Iif e.
Turnover:Where high
installed as
efficlency natural gas
equipment is being
furnace, water heaterr or hearth
functional- and/or has exhausted
Intermountain ran its
a replacement for a
that is no longer
its useful l-ife.
TEAPot modef with all
vintages equally represented when developing the
preliminary "Achievable Potential" target util-ized by the
Company. Since the target was developed as a bl-end of all
assocj-ated vintages, it is neither practlcal, feasible,
nor desirable to the Company that it achleve its DSM
targets though conversions al-one. Relying solely on
conversions would set the Company up for faj-l-ure in
meeting its DSM targets and would not achieve naturaf gas
reductions sufficient to hol-istic reductions to system
demand.
Finally, the concurrent adoption of the fixed
cost coflectj-on mechanism proposed by the Company as part
of this rate case, is required in order to make
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Spector, Reb. 5a
Intermountain Gas Company
conservation, and will put the Company in a strong
position to focus on maximizing the efficiency of space
and water heating equipment in a customer's home.
O. Is the direct use of natural gas mutually
excl-usj-ve to the implementation of a
conservation program?
A. Absolutely not. The direct
in no way detracts from or diminishes
robust energy
use of natural gas
the ability of the
Company to promote energy conservation and
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Spector, Reb. 6
fntermountain Gas Company
achieve its DSM
the Company wilf
When dlrect use takes place,
can through
the most
its rebate program
targets.
do all it
to ensure that customers chose efficient space
and water heating
O. Witness
of his testimony,
are incentives for
equipment
Rivas also
that "all
for their homes.
states on page 6, fines 1-9
six measures in Exhibit 25
high capital cost equipment targeting
agree with this characterization?new customers. " Do you
A. Not entirely. The Company's proposed DSM
program was designed for both new and existing
Intermountain customers. The Company does however agree
with ICL-NWEC's response to Intermountain's DR #11, part
c, where Mr. Rivas posits that "common sense dictates
that purchasing new heating equipment is typically a
Iarge expense for most Idahoans. Accordingly, any
incentive for higher efficiency equipment is useful. "
This statement accurately reflects the Company's
intent-to help customers overcome the initial- up-front
costs of purchasing high efficiency natural gas equipment
as opposed to standard efficiency natural gas efficiency
for both new and existing customers.
O. In the Idaho Conservation League's response to
Intermountain's DR #3 & #4, ICL cl-aims that IGC's own
program history proves that the Company's DSM program is
not Iikely to resul-t in upgrades from upgrading existingo25
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Spector, Reb. 6a
Intermountaj-n Gas Company
equipment to a higher efficiency unit. Do you agree with
this statement?
A. No. The program witness Rj-vas references
(https : / /www. intgas. com/conservation/rebate-program) is
entirely separate and distinct from the Demand Side
Management
The purpose
program now being proposed by the Company.
to provideof the furnace rebate program was
an i-ncentive
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Spector, Reb. 7
Intermountai-n Gas Company
for hlgh-efficiency natural- gas furnaces associated
excl-usively with convers j-ons. This was written into the
actual rules of this program. The program resulted 1n
100? of rebates going to new heating customers because
that's how 1t was designed to operate. The DSM program
being proposed in this case was modeled to include an
even distribut.ion of new customers, replacements made to
non-functioning, lower-efficiency natural gas equipment,
and replacements made to lower efficiency naturaJ- gas
equipment prior to the end of the useful life of that
equipment.
O. Can you please further describe the differences
between the Company's previous conversion rebate program
and the new DSM program it is proposing?
A. There are several materia] differences between
the High Efficiency Natural Gas Furnace Rebate Program
operated by Intermountain Gas Company and the DSM program
now being proposed by the utility.
First: The furnace program is centered soleIy
gas furnaces. No
with this
on rebates for high-performance natural
other rebates are offered in association
program. The DSM program proposed by Intermountaj-n Gas
Company offers six measures, including lncentives for
Energy STAR naturaf gas homes. It 1s the Company's
intent to explore the j-nclusion of additional- measures on25
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an ongoing basis and to expand the program to provide
commercial rebates following program ramp-up.
Second: The furnace program is only available
to new customers. It was designed to exclusively drive
energy efficient conversions and is targeted entirely
Spector, Reb. 1a
Intermountain Gas Company
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Spector, Reb. I
Intermountain Gas Company
to this market. Language regarding the "conversions
only" nature of the program is transparently offered at
https : / /www. intgas. com,/conservat j-on/rebate-program, the
Company's High-Efficiency Natural Gas Furnace rebate
program webpage. In contrast, the Company's proposed DSM
program will be equally open to both new and existing
customers and this wiII be made cfear on all program
messaging and signage. Intermountain's energy
conservation team will be actively messagi ng this new
program to aII qualified customers regardless of whether
the upgrade is from electric-to-gas or gas-to-gas.
Furthermore, as acknowledged by both Staff and the
Company, the rebates that wil-l- be offered for direct use
were based upon the assumption that a conversion was
already golng to take place and that the objectlve was to
ensure that direct use was paired with the most efficient
equipment availabl-e to maximize efficiency and
environmental benefits .
Third: The current furnace rebate program
offered by the Company
efficient/DSM targets,
savings of this measure
assessment tooIs. The
and
is not associated with energy
nor was the total potential
modefed through potential
program was also not considered a
thus associated savings wereformaf DSM program,
neither tracked nor included as demand side resources foro25
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Spector, Reb. 8a
Intermountain Gas Company
the purposes of IRP
program now proposed
savings target which
planning. In contrast, the DSM
by the Company has a clearly defined
TEAPot model.was assessed via the
Associat.ed energy savings wiff be tracked on an ongoing
basis, and the program wil-l- be considered a tool- for the
acquisition of demand side resources and incl-uded as part
of the Company's fntegrated B.esources Planning.
O. Does the company plan to dlscontinue its
High-Efficiency Natural Gas
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Furnace program and replace it with the furnace offering
through its proposed DSM program?
A. Yes. The proposed offering though the
Company's new residenti-al DSM portfolio is of a higher
efficlency standard (95%+) than the one previously
offered by fntermountain (902) and since the Company's
DSM program is open to both new and exlsting customers,
it woul-d not make sense to continue operati-on of a more
restrictive, fess efficient rebate program.
O. Is Intermountain receptive to making changes to
its residential portfolio as recommended by some parties
to this proceeding?
A. Yes, provi-ded that they occur in con;unction
with implementation of a fixed cost coll-ection mechanlsm
(FCCM). The Company would also like to begin this
expanded DSM commitment wlth a manageable core of rebate
offerings while it ramps up the staffing and
rebate-processing capabilities necessary to meet program
demand. The goal is to develop a foundation from which
more sophisticated efforts can be later l-aunched.
0. Following adequate time to ramp-up your initial
portfolio of residentj-al- measures, what changes
recommended by Staff and other parties would
Intermountain be open to considering?
A. Intermountain woul-d be amenable to researching
Spector, Reb. 9
Intermountain Gas Company
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Spector, Reb. 9a
Intermountain Gas Company
costs associated with certain additional- measures
including showerheads and aerators as part of its early
rebate offerings, glven
cost-effective retailer
our abllity to process
distribute via mail as
sufficient time to find a
for this measure, and to ramp-up
appllcations for this measure and
appropriate. In addition, duct
sealing,air infiltration, and insul-ation
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measures shoufd also be studled and considered, once the
program has been fu11y ramped up, has had sufficient time
to mature, and a FCCM has been put into p1ace. The FCCM
is important in protecting the Company from revenue
losses due to conservatlon.
O. Is the Company receptive to convening an Energy
Efficiency Advisory group and providing an annual- DSM
report as recommended in the Staff testimony of witness
Donohue on p. 20, Iines 8-18?
A. Yes.
O. What does the Company perceive as the rofe of
market transformation and building code support in a
natural gas DSM portfolio?
A. The Company is supportive of the market
transformation efforts offered by organizations such as
NEEA, and already invests in market transformation and
R&D efforts offered by the Gas Technology Institute.
Intermountain woufd be highly receptive to lncluding
market transformation and support of more efficient
building codes into its proposed DSM program. However,
in order to maintain the cost-effectiveness of its
program portfolio, and thus ensure regulatory recovery of
DSM investments, the Company would need regulatory
approval to quantify the therm savings associated with
these efforts and ensure that the effort did not prevent
Spector, Reb. 10
Intermountain Gas Company
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Intermountain Gas Company
the portfol-io from passing the Utility Cost Test.
O. Does the Company agree with witness Rivas's
cl-aim in NWEC-fCL's response to Intermountain's DR #6,
that "the specific cost-effectiveness test used to
determine economic potential- has no bearing on achievabl-e
potential using the technical- - economic- achievabl-e
prografl[natic construct?"
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Spector, Reb. 11
Intermountain Gas Company
A. No. The use of the TRC resul-ts in a different
outcome to a DSM program's techni-ca1, economic, and
achievable potential due to the dj-fferences in the
primary drivers of cost effectlveness
SpecificalJ-y, under the Utility Cost
l-evels (30? of incremental cost, 602,
into account in the determination of
in each cost test.
Test, program rebate
etc. ) are taken
overal-l conservation
potential. This is not taken into account under the Total-
Resource Cost Test.
O. Does the Company agree with witness Rivas's
cfaim in NWEC-fCL's response to Intermountain's DR #6,
that Intermountain, "refined the economic potential by
usinq both achlevable and programmatj-c potential to
define achievable potential [and] that number was then
refined further again base on the 'information' of fiel-d
staff to devefop the program potential?"
A. No. The TEAPot model- refined technical
potential into economi-c potential. Then this was refined
by the model into achievabl-e potential. Eollowing this
process, the Company did develop program potential based
on feedback from the field. This was used exclusively
for the purposes of developing the budget for
Tntermountain's initial residentlal- DSM portfolio and
ensurlng that it remained cost-effective under the
Utility Cost Test. Basing a program budget from theo25
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Spector, Reb. 11a
fntermountain Gas Company
achievable target of 97,825 wou1d risk setting the
could not beprogram up
achieved.
o.
for failure if that number
Is the Company receptive to
goal of 91,825 therms
Achievabl-e Potential
raising its target
to its "stretch"that were
identified as the in the Company
TEAPot modeling run?
The 65,000
is the fl-oor
A therm target developed by the
be.l-ow which theCompany
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program would no longer be cost-effective under current
rebate l-evel-s and budget design. Therefore, it is
essential that this target be met. The 9'7,825 is an
aspirational goal, and one we wifl work to achieve, Lf
possible. However, it is ul-timately the Company's goal
to set itself up for program success, partlcularly in its
early years, in order to 1ay a strong foundation from
which our efforts might grow. The Company further
appreciates that ICL-NWEC acknowledges in their response
to Intermountain data request #1, that there is no suite
of measures that Intermountain coul-d enact that woul-d
accomplish the unreal-istically high and arbitrarily
derived therm savings target of 7.11 mil-l-ion therms
witness Ri-vas has initially posited on page J , l-ines
11-16 of his testimony.
a. Would the Company be amenable to removing its
second-tier incentives (with the exception of its Energy
STAR homes rebate) as recommended in the Staff testimony
of witness Donovan on page 3, lines 11-15?
A. The rebate amount associated with the Company's
second tier portfol-io is intended to help bridge the gap
between the cost of standard efficiency electric
equipment and high-efficiency natural gas equipment.
This tier is important because it encourages househol-ds
already in the process of electric-to-gas conversion from
Spector, Reb. L2
Intermountain Gas Company
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Spector, Reb. t2a
fntermountain Gas Company
not missing an opportunity to use natural gas as
efficiently as possible. Thj-s line of reasoning is
supported on page seven, lines 13-16 of witness
Kirschner's direct testimony, "energy efficiency and
demand side management programs shoul-d contemplate the
direct use of natural gas as a strategy that is in the
customer's best interest; a strategy that reduces
environmental impacts
and extending a vital
and saves dol-l-ars while preservj-ng
natural resource. " In this
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Spector, Reb. 13
fntermountai-n Gas Company
case, the Company is considerlng direct-use conversions
as yet another market that can and shoul-d be pursued in
the Company's pursuit of demand side resources. However,
the Company is receptive to making further adjustments to
1ts tier-two rebate levels with the guidance of Staff.
a. Is the Company amenable to uslng the ReaI
Discount Rate (inflati-on adjusted weighted average cost
of capital) of 3.54% as recommended by Staff in the
testimony of witness Donohue on pages 7 and B, Iines
78-25 and l-2 respectively?
A. Yes. The Company is comfortable with the
concept of applying a Real Discount Rate to its
conservation portfolio. However, the Company woul-d
prefer that the WACC utilized as the nominal discount
rate reflect the 1.42% which was fifed by the Company.
This number can then be adjusted by the 2.62 infl-ati-on
rate as described in witness Donohue's testimony.
O. What are the Company's thoughts on the
recommendation by Staff witness Donohue on pages 79 and
20, lines 22-25, and 7-4 respectively that the Commission
require a DSM portfolio even if the Fixed Cost Collection
Mechanj-sm is not approved?
A. The Company is deeply concerned at the prospect
of operating a DSM portfol-io if the FCCM mechanism is not
approved. The FCCM is designed to align the Company'so25
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Spector, Reb. 13a
Intermountain Gas Company
interests in support
the Company neutral-
of demand side management by making
to individual- customer usage. This
acti-ve1ymeans that the Company wil-l be empowered to
encourage the best, most efficient use of energy in a
customer's home as opposed to being economj-calIy
dependent on how much
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Spector, Reb. 74
Intermountain Gas Company
natural gas a customer actually uses. It is for this
reason that Intermountai-n feels it can deliver a much
more robust and
gradually evolve
Company
income
habits
income, " and other
the Company is able
why not.
A. While the
desire to increase
aggressive
to become
and
DSM program that would
incl-usive of base]oad measures
duct sealj-nq, once a FCCMsuch as insulation, air
mechanism is in p1ace.
O. On page five,l-ines 3-9 of her testimony,
witness Zamora of the Community Action Partnership
Association of Idaho describes a
customer data she
range of low-income
see collected by the
its customers are lowincluding,
based on various crj-teria, the average consumption
of 1ow income customers compared to non-Iow
wou]d l-1ke to
"how many of
simifar data. fs this information that
to coll-ect? Please describe why or
Company appreciates witness Zamoraf s
the region's knowledge of the
Iow-income populations within Intermountain's service
territory, it 1s against Company policy to identify, and
coll-ect information on a demographic subset of its
customers. However, Intermountain is receptive to
discussing methods for better understanding the needs of
Iow income natural- gas customers with CAPAI and other
stakehofders. How to get to the type of information Ms.o 25
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Spector, Reb. 14a
fntermountain Gas Company
Zamora seeks would be a good topic to be discussed by an
Energy Efficiency Advisory Group.
O. Is fntermountain wi1I1ng to consider the
implementation of a l-ow-income weatherizati-on program
outside of this proceeding?
A. Yes, provided that program cost recovery is
allowed, and a FCCM mechanism is in place, the Company
would be open to considering the implementation of a l-ow-
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Spector, Reb. 15
Intermountain Gas Company
its residential portfolio. Again, this
for discussion by an Energy Efficiency Advisory
income weatherization program following the ramp-up of
would be a good
weatherization costs
the rebate
topic
Group.
O
t\
often unabl-e to sufficiently cover
and are unabl-e to take advantage of
Can you please elaborate?
Yes. The Company
Zamora on page 8,
constructed [1ow
agrees with the testimony of
witness lines 3-5 that assert that "a
properly incomel program shoul-d be
effective, conserve energy resources and help those who
cannot otherwise afford to reduce their non-discretionary
consumption. " However, in order to achieve this
objectj-ve, Intermountain would need to offer
weatherlzation rebates at a leve1 that is sufficient
(when leveraged with state and Federal funds) for
qualified agencies to deliver weatherization services to
customers. Without sufficient rebate levels, agencies are
This means that whlle a utility may
program.
have
lnvest.ed in the design, and perhaps even staff, for a
weatherization effort, the program may be left unused by
weatherization agencies if they do not have sufficient
funds to complete the necessary work. I experienced this
phenomena firsthand in Cascade's Oregon and Washington
service areas. Due to DOE prioritization of homes witho25
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Spector, Reb. 15a
Intermountain Gas Company
hiqh energy burden, and the current 1ow price of naturaf
gas as compared to other fuel sources, agencies
experienced challenges weatherizing homes where DOE funds
were required. Ultimately, program success was achieved
by creatj-ng a mechanism that bridged the gap between the
avoided cost payment eligible under Cascade's traditional
l-ow income weatherizati-on program, and the total
installed cost of
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qualified work performed.
However, it is Intermountain's understanding
that al-1 conservation programs operated j-n the State of
Idaho must be cost effective in order to qualify for rate
recovery. This understanding is consistent with
ICL-NWECrs response to Intermountain DR #9 in which
witness Rivas recommends that fntermountain Gas "use the
same method to value the benefits of low income
weatherizati-on as that used to val-ue any gas conservation
measure, or other exlsting low income weatherization
programs in fdaho. " This means that creating a proqram
that is of true value and use to the agencies delivering
weatherization services will remain a challenge.
O. Does this concl-ude your testimony?
A. Yes, it does.
Spector, Reb. t6
Intermountain Gas Company
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CSB Reporting
(208 ) 890-s198
SPECTOR (X)
Intermountain Gas Company
(The fol-Iowing proceedings were had in
open hearing. )
COMMISSfONER RAPER: Is there any
cross-examination from Commission Staff?
MR. COSTELLO: We have some questions,
yes.
CROSS_EXAMINAT]ON
BY MR. COSTELLO:
O Ms. Spector, the
that you outline, the Company's
DSM proposal j-ncludes incentives
natural- gas; is that correct?
A That is correct.
O And so a customer
Company, the
demand side
proposal
management or
for the direct use of
who switches from
heating with electricity
would increase obviously
is that correct?
to heating with natural gas
their natural- gas consumption;
A They would increase their natural gas
consumption, but utiliz:nq the program that we've set
forth, they would do it in the most efficlent way
possible utilizing high efficiency natural gas
equipment.
O Okay; so the Company but the Companyo25
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CSB Reporting(208) 890-s198
SPECTOR (X)
fntermountain Gas Company
didn't include an increase in natural gas use in its
cost-effectiveness cal-culation for its direct use
measures, did it?
f1
()E
convert to gas
would provlde a
A
a
A
anyway,
higher
Correct.
under the Company I s
is that
proposal, it
correct ?
No, it did not.
Thank you; so 1f the customer was going to
incentive;
And so wouldn't that
It wouldn't be free
incentive's purpose is to drive the
efficlency natural gas equipment,
potential- customer to convert, so
assumed and the incentive is not
be free riding?
ridership, because the
customer to hiqh
not to drive the
the conversion is
conversion, but as long as the customer is
converting anyway, we want them to use the
intended for the
going to be
highest
efficlency equipment possible; otherwise
opportunity year after year for the life
equipment.
O So you're saying it's not
A It's not free ridership,
O Will you turn to page J,
of your rebuttal testimony?
A Oh, rebuttal?
O Yes, please.
that's a lost
span of that
free riding?
no.
l-ines 14 and 15,
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CSB Reporting(208) Be0-s198
SPECTOR (X)
Intermountain Gas Company
A Lj-nes 74 and 15 you said?
O Uh-huh; so at lines 74 and
lndicate that the ful-l- benefits of
15, you
gas directly for
testimony of Mr.
using
in thespace and water heat is described
Kirschner; is that correct ?
me see.
L4 and 15
what you
would you
benefit of
and water
14 and 15. Li-nes
dlrectly for space
bit different than
I'm not seeing that in lines
that I see here are a little
described on page 1.
admit that Mr. Kirschner
A Let
0 But
A He did describe the
use of space and water heat in his
O Okay, was thls full
included in the cost-effectiveness
testimony?
A No,
cost-effectivenes s
a Thank you.
that direct use of natural
9ds, natural 9dS,
j-n his testimony?
benefit of the dlrect
testimony.
benefit quantified and
analysis in your
fully realized,
d j-rect use, use
incl-uded the full
burning gas to
A
o
a1f or most of
of natural 9ds,
That's correct.
For this efficiency to be
electric use displaced by
uslng
heat
it was not incl-uded in my
analysis for demand side management
Your testimony also states
qas is more efficient than
generate electricity; is that correct?
woufd have to be generated by a natural-25
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gas plant; is that correct?
A That wou]d be a f air statement.
O Okay, are you aware that natural gas is a
relatively smal-1 portion of Idaho Power's el-ectrical
generation in comparison to, for example, hydro and other
renewab.l-es?
A I will take it that that is true.
O Thank you. Does the Company's DSM
proposal include any measures for general service, some
commercial and industrial customers?
A At this timer DO, our proposal is
primarily residential-, but it is our intent to
incorporate a commercial conservation program following
this proceeding.
O But the FCCM proposed by the Company does
inc1ude general service, cofirmercial-, and industrial
customers; is that correct?
A That would be a question for Mr.
McGrath.
O You're unaware if that's incl-uded in the
ECCM?
A I'm not the expert on that. I'm unaware
if it was included.
O Okay; so your testimony, both your direct
and rebuttal testimony, discusses and emphasizes the
CSB Reporting(208) 890-s198
SPECTOR (X)
Intermountain Gas Company
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CSB Reporting
(208 ) 890-s198
SPECTOR (X)
Intermountain Gas Company
importance of having the FCCM instltuted concurrently
with the proposed DSM program?
A That's correct, yeah.
O Okay. Are you aware of any circumstances
where this Commission has granted both of these programs
concurrently before?
A No, Irm not aware.
0 Okay. Are you aware that prior to a grant
of an ECCM, at least 1n Idaho, for fdaho utilities, the
util-ities have always maintained typically a longstandlng
energy efficiency program before they apply for
decoupling or before they apply for the fixed cost
coll-ection mechanism?
MR. WILLIAMS:Objection. I think she
She didnft know. I mean,the question.just answered
isn't that the
O
same question?
BY MR. COSTELLO:Wel-l-, are you aware that
other utll-ities have energy efficiency programs before
they appfy for FCCM?
MR. WILLIAMS: Same objection.
COMMISSIONER RAPER: Do you want me to
rule on the objection?
MR. COSTELLO: Sure. Yes, please.
COMMISSIONER RAPER: The witness has
testifled that she is not aware of those programs. Ifo25
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CSB Reporting
(208 ) 890-s198
SPECTOR (X)
Intermountain Gas Company
there are more programs or other things that you want to
substantiate, I believe the first one was Idaho Power
that she was testifying to.
MR. WILLIAMS: I apologize.
COMMISSIONER RAPER: So if the second
question was if the first was Idaho Power and the
second is other utilities that the witness can go ahead
and answer that question and go ahead.
MR. COSTELLO: Thank you.
O BY MR. COSTELLO: Did you know that Avista
had a gas DSM from the late 1990s and decoupling was
granted in 2075?
A I was aware that in the case of Avista,
decoupling did
v
doesn't have a
happen post implementation of a program.
Did you know that Rocky Mountain Power
decoupling mechanism in Idaho at all?
I was not aware of that.
Okay. Just to change focus for a moment,
believe that cost-effective energy
a l-east cost option for servj-ng the
that correct?
f1'
n
would you
efficlency
Company' s
you
to be
customers; is
A Absolutely.
O Okay, would you agree that even non-DSM
program customers actually benefit from DSM?
A Yes, there can be broader societaloZ3
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CSB Reporting(208) 890-s198
SPECTOR (X)
fntermountain Gas Company
benefits associ-ated with demand side management.
O Okay; so that being the case, wj-II the
Company proceed with the proposed DSM without the
proposed FCCM?
A No, the fixed cost collection mechanism is
essential- to the implementation of a robust demand side
management effort, because it decouples the Company's
earnings and the amount of usage from a customer to the
Company's ability to encourage energy conservation, so
order to be fully empowered to ramp up a robust DSM
portfol-io, the fixed cost collection mechanism is very
important to the Company.
0 So your answer is no?
A Yes.
O So you're saying that the Company would
forego a lower cost service option for customers if it
can't get full recovery of fixed costs in between rate
cases; is that correct?
an
A I cannot speak to that. That wouldn't be
my decislon.
a Welf, you just said
not going
that if you're not
to go forward withgranted both that you're
either; is that correct?
A From my perspective, the fixed cost
collection mechanism is essential- to being able to moveo25
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CSB Reporting(208) 890-s198
SPECTOR (X)
Intermountain Gas Company
forward for a robust DSM program. That said, it woul-d
to whether or not we would proceednot be my decision as
n your opinion, would the
a fixed cost adjustment
reimbursement to lostthat limited Company
resulting from DSM?
That would be outside the scope of my
speak to that.
MR. COSTELLO: That's all I have. Thank
if that was
Company or
mechanism
fixed marqin
nA
testimony to
not granted.
Thank you; so in
would you entertain
you -
COMMISSIONER RAPER: Thank you. Northwest
fndustrial- Gas Users?
MR. STOKES: We have no questions.
MR. PURDY: Madam Chalr, Irve got
four-1nch mic cord here, So I'm at a bit of a
disadvantage, but I wil-l try to speak 1oudIy.
COMMISSIONER RAPER: You're doing
MR. PURDY: Thank you, never have
soft spoken.
a
good.
been
COMMISSIONER RAPER: I've never been
accused of that either.
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CSB Reporting
(208 ) 890-s198
SPECTOR (X)
Intermountain Gas Company
BY MR. PURDY:
O Good
meet you.
A Good
0 Iam
hear everything that
CROSS_EXAMINATION
afternoon, Ms. Spector. It's nice to
afternoon
afso hard of
Mr- CostelIo
hearing
asked
and didn't
not to
it's my
thatrs
cover the same
intention to
ground twice, and
Iimit my cross to
you, so I'l-1
at this point
your rebuttal,
quite
try
if
page by page,
related to my
fail to refer
let me know,
al-I right with
A Sounds
O AndI just want
isnrt aII
number or
to go through 1t
that many pages
refer you if I
l-ine number, j ust
have pertains to
because
you.
good.
really
there
a page
first
client's issues, so I'l-1
you to
but the question I
page 74, lines 5 through L9, and 1n that
COMMISSIONER KJELLANDER: Mr. Purdy, are
or di-rect?you in rebuttal
MR. PURDY: I thought I said I'm l-imiting
my cross to rebuttal at this point in time.
COMMfSSIONER KJELLANDER: That' s fine.
I'm apparently as poor at hearing as you described.
MR. PURDY: I feef your pain.a 25
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CSB Reporting(208) 890-s198
SPECTOR (X)
Intermountain Gas Company
O BY MR. PURDY: So thatfs rebuttal page 74,
l-ines 5 through 19.
A Yes.
O Okay, my question is in that testimony, we
generally challenge Intermountain Gas's ability to track
l-ow income data and that is what this pertains to and you
state that the reason is that is "against Company
policy"; is that right?
A That is my understanding, yes.
O A11 right; so what Company policy do you
believe prevents the tracki-ng of low income data?
A From my understanding in conversations I
had with our customer service management, I had been tol-d
that is against our policy to
pertaining to customer income
income customers in that way.
understanding.
O So woul-d that
for the customer?
A I be]ieve that
rather I'm not a customer
coll-ect information
or matters relating to low
That is my best
be a confidentiality concern
the concern and I would
service person, so I will
caveat that this is outside of my field, but it is my
understanding as it was described to me is that we are
uncomfortable collecting j-nformation on customers,
specific demographic information, specifically income ino25
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CSB Reportlng(208) 890-s198
SPECTOR (X)
Intermountain Gas Company
this case, that we woul-d have in our records. We want to
avoid anything that could ul-timately be perceived as
discriminatory, but that is the extent of my
understanding of why we woul-d not col-l-ect that
information, and there are others in the Company that
could speak much better to it than myself.
O I appreciate that, but isn't it true that
you testified at length about the inability or
unwil1ingness of Intermountain Gas to engage in l-ow
income data tracking? You did bring that subject up and
testify about it; correct?
A Correct.
a A11 right.
A
unwill-ingness.
be worth further
Although
I think
discussion
I wouldn't characterize it as an
that this is something that woul-d
within the context of a
conservation advisory group outslde of this proceeding.
a Okay, and isn't it your understanding that
that's something that Ms. Zamora in her direct testimony
also suggested?
A Correct, yes.
A11 right; so
for the record,
her testimony
information be
nV
there. Just
knowledge, in
conf idential-
we're on the same page
did Ms. Zamora, to your
ever suggest that
released pertaining to anyo25
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SPECTOR (X)
Intermountain Gas Company
single customer?
A I don't have her testlmony j-n front of me,
but to my best recoll-ection, she did not suggest that
sensitive customer information be released.
O Thank you, and are you aware that other
utilities, including Rocky Mountaj-n Power, Idaho Power,
and Avlsta, all- file monthly data tracking reports with
the Commission and various parties that are not
confidential and that break out the data track into l-ow
income residential customers and non-low income
residential- customers; are you aware of that?
A f was not aware of that, flo.
O Okay; so you're not aware that they have
been doing that for quite some time, thouqh, are you?
A No.
MR. WILLIAMS: Asked and answered.
MR. PURDY: I won't ask about the time
frame.
COMMISSIONER RAPER: It has been asked and
answered.
MR. PURDY: All- right, thank you.
O BY MR. PURDY: Weff, is there any
particular reason, and I don't mean to cover the same
ground, but is there any particular reason that Idaho
excuse me, that Intermountain Gas Company cannot provideo25
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SPECTOR (X)
fntermountain Gas Company
the same type of monthly tracking report that these other
utilities are providing?
MR. WILLIAMS : Ob j ect j-on . I think that
was the topic of several questions beforehand with regard
to this witness saying what the Company's policy is and
she's not an expert on the policy, but that is the
Company's pollcy and I rea1ly think we've been through
this one once.
MR. PURDY: f '11 gladJ-y restate the
question, Madam Chalr.
COMMISSIONER RAPER: Okay.
O BY MR. PURDY: fs there any reason other
than Company policy that you can think of why
Intermountaln Gas cannot provide the same j-nformation
that these other el-ectric utilities are providing on a
monthly basis?
A I wou1d defer to regulatory to be abl-e to
more effectively answer that.
O Okay, fair enough, thanks. Have you
considered that there might be means of obtaining very
significant information regarding the magnitude, the
number of low income customers that Intermountain Gas has
through the use of alternative methods, such as
at census data by county and then counting the
Intermountain Gas customers within that county
looking
number of
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SPECTOR (X)
Intermountain Gas Company
extrapolating between the two, have you considered that
possibility?
A Provided that this was something that was
all-owabl-e under Company policy,yes. I considered upon
Zamora that there mightreading
be means
able to
the testimony of witness
of collecting information provided that we were
of the Company.
Staff witness Daniel
do so within the parameters
O Okay.
Klein's testimony and
Have you read
exhibits ?
A f believe so. What were they pertaining
to?
O A number of issues. The one I'm
interested in is Iow income data tracking.
A No.
O You didn't read that part of hj-s testimony
or what?
A No, now that you've
I do not bel-ieve I have read that
described it further,
u
Exhibit 779,
I 'm tal-king
A
that.
Okay; so you're
pages 1 through 3,
about, the monthly
not
testlmony, no.
familiar with his
which show exactly what
tracking reports?
No, unfortunateJ-y, f 'm not famil-iar with
a Okay, thanks.
on to another issue that Mr.
AIl right, I want to move
Costel-fo covered to someo25
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SPECTOR (X)
Intermountain Gas Company
extent. Again, I'll try not to retread the same ground.
Are you aware that other utilities, such as fdaho Power,
Avista, or Rocky Mountain Power, have implemented DSM
programs for years prior to receiving any kind of a fixed
cost coll-ection mechanism?
A I am aware of that in the way that I
utilities had notdescribed previously. f knew
received decoupling prior to implementation of
aware of each utility's
that some
the
conservation. I was not equally
situat.lon regarding that.
O Okay, and are you
low income weatherizatj-on, Idaho
weatheri zaLLon program commenced
mechanism?
aware that specific to
Power's l-ow income
in, I believe, the late
1980s,1on9
adj ustment
A
before it received any kind of a fixed cost
I was not directly aware of that, but I
will take it that that is the case.
MR. PURDY: Okay. Excuse me one moment.
(Pause in proceedings. )
O BY MR. PURDY: Now, in your testimony for
various reasons you refer to Cascade Natural Gas in both
the states of Oregon and Washington; is that true?
A That is correct, yeah.
0 Okay. Are you aware that Cascade had a
l-ow income weatherization program in place for a numbero25
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SPECTOR (X)
Intermountain Gas Company
of years pri-or
mechanism that
2016?
A As Irm aware,
decoupling mechanism prlor to
in place as a resul-t of their
was a decoupling mechanism in
income conservations that were
to the recent approval of a fixed cost
just took place this past September of
Cascade Natural Gas had a
the one that was just put
l-ast rate case, so there
place near or when the low
put into place around 2001
or 2008 were significantly expanded.
O But they had existed prior to that, had
they not?
A Yes, they had existed in a more bare bones
incarnation prior to the implementation of the decoupling
mechanism as part of Cascade Natural Gas's rate case
around, as I said it was around, 2006 to 2001, dS I
recall-.
0 Okay, and now, isn't it true that Cascade
Natural Gas is owned by the same parent company as
Intermountain Gas?
A That is correct.
O A11 right; so my final question in that
area is that if in fact a bare bones, ds you put it, low
income weatherization program was in place before Cascade
got its first decoupli-ng mechanism, why shouldn't a
sister company do the same thing?o 25
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SPECTOR (X)
Intermountain Gas Company
A Because as I described in my testj-mony,
we're very receptive to discussing the implementation of
a low income weatherj-zation program outside of this
proceeding and 1n buil-ding that program, we would want to
operate from best practi-ces that we've identified over
the years of operating a similar program through Cascade
Natural Gas, so while we could implement in theory a bare
bones program, I think it would make a great deal of
sense to convene outside this proceeding as part of an
advisory group and to discuss what the optimal program
design would be rather than rushing into the design and
then later making changes, and havlng a fixed cost
collection mechanism in place will, ds I said before,
from a conservation perspective feave us far less
inhibited in the pursuit of demand side management.
into the nextO Now, that's a nice segue
area I wanted to dj-scuss. You further state,
need a reference, it's page 74, beginning on
believe, that the Company might consider such
low income weatherization, and Ireferring to
quoting here,
that "program
mean by this
alfowed?
A
only i-f the FCCM mechanism
cost recovery is al1owed. "
last statement, program cost
and if you
line 22, I
a program,
think I'm
is in place and
What do you
recovery is
The cost associated with anyo25
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administration on the Company side in terms of a staff
person that is maintaining and administering the low
income weatherization program and the relatj-onship wlth
the agency, as well as any rebate payments associated
with the program, we would be seeking recovery for
that.
O Now, just to clarify, a rebate program for
low income weatherization would not look the same as i-t
does for fuel- conversion, wou1d it? fn other words,
doesn't the rebate go to the CAP agencies who weatherize
the home and not the customers?
A Yes. To be cfear, the other program you
referred to woul-dn't be strictly for fuel- conversion. rt
woul-d be for energy efficiency demand side management,
but yeS, the program that you just described for l-ow
income would operate differently in that that rebate
would go directly to the low income weatherization agency
providing weatherization services to an Intermountain Gas
customer.
O Okay, and, again, back to the statement
program cost recovery is a11owed, how do you envision a
process by which the Company is given this assurance of
cost recovery? Do you approach the Commission first or
how would that play out in your mind?
A I would probably defer to regulatory here
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SPECTOR (X)
fntermountain Gas Company
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CSB Reporting(208) 890-s198
SPECTOR (X)
Intermountai-n Gas Company
as to what their preference would be.
O A1I right, you also stated
your rebuttal, line L, that fntermountain
low income
on page 15 of
Gas is willing
weatherizationto consider implementation of a
program, and I quote, "following
residential- portfolio. " Do you
A Yes.
ft means
the ramp-up of its
recall that testimony?
O
the ramp-up of
A
What does this statement mean, following
a residential program?
demand side management
assuming that a residential
program is approved, following
that time we woufd be hiring on staff in order to deliver
that program. We would be shoring up the infrastructure,
looking at rebate processing, all of the components
necessary to the operation of that program, so once that
program is ramped up and we're feellng in a confident
position in terms of our staffing capability, we would be
highly receptive to the implementation of a low income
weatherization program pending, of course, the fixed cost
collection mechanism and the recovery of programmatic
expenses and rebates as I previously described.
O Okay, and I want to be clear that I
understand you. Are you suggesting that somehow 1ow
income weatherization would be the Iast thing
implemented, other residential- DSM programs noto25
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SPECTOR (X)
fntermountain Gas Company
identified in your filing in this case would go fj-rst or
those other programs would all happen at the same time?
A
timing for
l-ow i-ncome
At this
the program.
weatheri- zation
point I did not assign a
I wou]dn' t characte rLze
speci fic
that the
program woul-d be the l-ast
program ramped up and implemented. We are going to have
a program manager who will be engaged in the day-to-day
implementation of the program and there wil-l- be some
latj-tude, I assume, in the design, but I don't see any
reason why we woul-dn't want to at the very least engage
in an earnest dialogue with an advisory group very early
on in the process to at least start discussing what a low
income weatherization program would look like.
O How soon coufd we begin such an advisory
group?
A I can't commi-t to a date f don't believe
myself, but I would think it would be safe to say that
following this proceeding we coul-d certainl-y --
O I'm sorry, following what
A Eol-l-owing this proceeding we coul-d
certainl-y look at appropriate time l-ines, but I can't
commit to what timeline that wou]d be.
a Eair enough. Now, you seem. to cast doubt,
and f 'm referring to page 15, beginning on l-ine 4, as to
the viability of a cost-effective low j-ncomeo25
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SPECTOR (X)
Intermountain Gas Company
weatherization program for Intermountain Gas.
Specifically beginning on l-ine 8 of page 15 in your
rebuttal-, you refer to "rebates" that would need to be
offered to fund a LIWA program, l-ow income weatherization
program; is that true?
A That 1s correct, yes.
O And excuse me, that's all I had on
that. On page 15, beginning on
state that "Without sufficient
you aware
line 71, you further
rebate level-s, agencies
weatherizationare often unable to sufficj-ent1y cover
costs and are unable to take advantage of the rebate
Ievel. " Do you recafl- that testimony?
A I do. That was my experi-ence in both
Washington State and Oregon
weatherization programs.
O And I want to
regarding our l-ow income
get
that
into that in a bit, but
first of a]1, are
already weatherize
Idaho's CAP aqencj-es
Intermountain Gas customers' homes?
A I am. I received j-n our data requests
information regarding the amount of homes served already,
yes.
O And isn't it true that the CAP agencies
are using solely federal funding to do that?
A I do not know that for certain in the
State of Idaho, but if you say that's the case, then Io25
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SPECTOR (X)
fntermountaj-n Gas Company
will- take it that that is the case.
O I do, thank youi so and do you have any
opinion as to whether these this program is being
effectively, cost-effectively, operated and providing
quality work as you put it?
A I would like to clarify that there is a
difference between the cost-effective operation of a 1ow
income weatherization program run directly by an agency,
which is often using its own cost tests and its own
valuation of the cost effectiveness, often conducting an
audit to determine the cost effectiveness on a
home-by-home basis, and the cost effectiveness of a
utility providing addltional incentives toward the
weatherization of low income homes, so the rebate
provided by a utility would be separate and distinct from
and have its own cost-effectiveness valuation and
calculation separate from the valuatj-on and cal-culation
performed
performing
different
bya
that
fow income weatherization agency
work, so I would character:-ze this as two
programs.
O I understand what you're saying, and isn't
that something that could be addressed during the
formation through the advisory group of a low income
weatherization program for the util.ity?
A Yes, and that was absolutely the intent of25
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CSB Reporting(208) 890-5198
SPECTOR (X)
fntermountain Gas Company
my testimony was to air what we have previously
experienced and some of what we perceive as barriers in
terms of the cost effectiveness from a utility standpoint
to provide additional- funds and what we have experj-enced
in other states regarding the effective coordination
and the utility. That would be an
of discussion.
between agencies
excellent topic
U
estimation that
And isn't it
if the CAP
federal funds are subjected
a fair projection in
agency even though
to a different
cost-effectiveness test, perhaps, than utility funds,
isnrt it fair to say that augmentation of overal-l funding
through the inclusion of utillty funds would enable the
CAP agencies to expand their servj-ces, serve more
customers, possibly even install better measures, more
measures ?
A Yes, but not necessarily and the reason
why I say yes, but not necessarily is that 1t depends on
there are cases that we have seen in which agencies would
prefer to utilize, and I don't know if this would be the
case here, but there are cases that I have seen in which
your
the
or maybe
l-es s
they want
AS
agencies prefer to
leverage a bit with
inclined to utilize
to be able to spend
utilize strictly DOE funds
the LIHEAP funds, but are
the utility funds, because
down as much federal- fundso25
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possibl-e in order to receive an equal amount of funds in
the following funding year.
O Well, but do you have any firsthand
knowledge as to how the Idaho CAP agencies do that? Are
you describing them or are you describing your
observations in general?
A My observations in general.
O Okay. Now, you state, and I'm getting
back to the Oregon and Washington low income
weatherization programs and the barriers that they faced
and problems that they had, that "I experienced this
phenomena firsthand in Cascade's Oregon and Washington
service areas"; correct?
A That is correct, yes.
O A11 right. Are you again are you aware
of the recent docket in the State of Washington, and if
you want a reference number, itrs UG-152286, Order 72,
whereby the Washington Utilities and Transportation
Commission approved an all-party settl-ement in which
Cascade Natural Gas and essentially the equivalent of
CAPAI in Washington, The Energy Project, agreed that
there were problems with Cascade's program as it was
structured that created a barrier that had nothing to
doing with the CAP agencj-es 1n Washington and their
performance; would you agree with that?
CSB Reporting
(208 ) 890-s198
SPECTOR (X)
Intermountain Gas Company
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SPECTOR (X)
fntermountain Gas Company
A I woufd agree that there was that
and docket and regardlng thesettlement agreement
characterization that
agencies and their
agree
from
wlth that.
it had nothing
performance, yes,
There were external-
to do with the
I would absolutely
circumstances
I won'L speak for fntermountain, but from the
Cascade hat, y€s, there were barriers to implementation.
ft was not the fault of the agencies, but there was some
priority list concerns from the Department of Energy.
The Washlngton agencies were adhering falrly strictly to
that priority list and it was resulting in l-ess Cascade
Natural- Gas homes being served, and what we did was work
to develop a program to alleviate barriers to
implementation that were circumstantial and maybe
pollcy-based, but were not in no way would I
charactertze it to be the faul-t of those fow income
agencies.
O You said you read the settl-ement
agreement. Were you part of that hearing in
Washington?
A I was not directly part of that hearlng,
no.
a I didn't think I recognized you.
A Okay.
O Regarding the experiences that you haveo25
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SPECTOR (X)
Intermountain Gas Company
had in Oregon and Washington, it just strikes me, and
this is my concern, that you're using what you just
conceded was a programmatic issue on the part of Cascade
Natural Gas and you're using that to cast doubt on the
ability of the Idaho CAP agencies, and coincidentally, if
you're not aware, it spent out ARRA funding, ARRA
funding, it was the second state in the nation to spend
out ARRA funding and consequently proved themselves
competent.
MR. WILLIAMS: Objection. Counsel- is
basical1y testifying at this point. There's not a
question in there.
MR. PURDY: I thought it was a question.
I just asked if she was aware of that.
COMMISSIONER RAPER: I thought it was
movr_ng
direction
where the
a question
get to the
it sounded to me l-ike it was moving in the
of you providing testimony for the
funds came from and what they did.
for the witness rel-ated to that,
question.
MR. PURDY:
O BY MR PURDY
thank you.
testified that
record as to
If you have
then please
you are
Okay,
You
aware that Idaho is the second state to spend out ARRA
funds; correct?
A Correct. Erom my understanding, Idaho25
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CSB Reporting(208) 890-s198
SPECTOR (X)
fntermountain Gas Company
agencles did spend out their ARRA funds very qulckly.
O But isnrt it true that by raj-sing your
concerns with what happened in Oregon and Washington, in
this case here in Idaho you are in fact casting doubt?
A No, I woufd not characterize this as me
casting doubt.
O Then why did you bring this up?
A I brought it up in good faith to describe
what my dlrect experiences had been in the design and
evolution of Iow income weatherization programs for which
I had experience in Washington and Oregon, and I know
Washington actually did a very exemplary job in their
spend-down of ARRA funds as we}l, and I'm not cal-1ing the
ab111ty of any agency or state into question in terms of
their delivery of these programs, but j-n describing my
experiences, I was merely beginning a dial-ogue through
whi-ch assuming that we move forward with recovering a
fixed cost collection mechanism, we could begin to design
a program that woufd be of the greatest value and benefit
to Intermountain's low income customers.
O AII right,
had in Oregon and
regarding the
Washington,
experiences that
you have you state that
in Washington,after some difficulty
Cascade, to perform a
weatherizat j-on program
of the agencies
weather 1ow rncome
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SPECTOR (X)
Intermountain Gas Company
overcame this, but you said, "program success was
mechanism that bridged theachieved by creating
between the avoided cost payment eligible under Cascade's
traditional low income weatherization program, and the
total instal-Ied cost of qualified work performed"; is
that true?
A Absolutely.
O Okay, what is this bridging mechanism that
you were referring to?
A The bridging mechanism, it began in Oregon
and we called i-t the CAT mechanism, the Conservation
Achievement Mechanism, and it began around 20ll or 2072.
f don't recall the exact year,
the
but there was an
weatherization program that was conducted by H. Gil Peach
& Associates and as a resuft of the analysis that he
performed, he helped us identify barriers to
implementation of the program, because what we had seen
was when the program first ramped up, and that was before
f came on board, it was 2006, I came on board in 2008,
but when the program first ramped up, it was slow and
then over the years when ARRA funding was available, we
saw a large spike in particlpation and we were very
excited by that, but then participation began to drop off
and drop off and it dropped exponentially, and we were
gap
independent eval-uation of Oregon low income
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concerned, and we received some guidance from H. Gil
Peach & Associates.
We convened a meeting with our regulators
and with the agencies and with OECA, the representatives
of the low income weatherizatj-on agencies, and Gi1 Peach
and we all- sat together in a room and we discussed what
can we do to make this program effective, what are your
needs, what is working, what is not working today, and
one of the biggest challenges was the amount of funds
that were being provided through that program were fairly
nominal- as compared to their ability to actually deliver
weatherization servj-ces, what those total install-ed costs
were, you know, and that was the challenge, but I w111
caveat that the Oregon regulatory environment probably
wouldn't be the best point of comparison to the Idaho
regulatory environmentr so what happened next was a
discussion with staff and ul-timately a filing that
al-lowed us to pay the total installed cost of the work
performed by the agencies, and this took place because of
the regulatory envlronment in which this problem had
manifested, and so we were able to move forward with
programs and bridging those costs. It allowed the
agencies to become less dependent on Department of Energy
funding, whlch had some very strict priority 11st
conditions associated with it and those priority lists,
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Intermountain Gas Company
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Intermountain Gas Company
the conditions, one of them was energy burden and that's
gas goes down so too does the
was my experience in the
if the cost of
energy burden,
circumstances
Oregon.
O
experiences in
tale, couldn't
that we coul-d
learn from?
If1
testimony.
I
sorry if this
second time,on
has been covered,
you. Eina11y, and
but you brought 1t
rebuttal, lines B
natural
so that
that I was describing in the State of
Okay; so lnstead of just looking at the
Oregon and Washington as a cautionary
they al-so be vlewed as something of val-ue
bring to the advisory group in Idaho and
Precisely. That was the intent of my
A11 right, thank Itm
upa
throughpage 76
that in
of your
front of10, do you have you?
A Yes, I do.
O You testified that creating a low income
weatherization program of "true val-ue and use to the
agencies delivering weatherization services wil-l- remain a
challenger" and you're referring to Idaho, are you not?
A I'm sayj-ng that it wil-l remain a challenge
in light of the very straightforward valuation of cost
effectiveness in the State of Idaho as I understand it.
O A11 right. Yet , af the Idaho agencies areo25
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SPECTOR (X)
Intermountain Gas Company
already ef fectively, whether j-t's under a federal-
standard and not yet regardless that it's not yet
under an Idaho PUC standard, but the fact that they are
effectively
that they,
weatherizing low j-ncome homes demonstrate
A, they're already operating such a program
job offor your customers and, B, they're doing a good
it; 1s that your understanding?
A It is my understanding and we're
appreciatlve of the good work that is belng performed on
behalf of our customers already, but I would maintain
that the manner in which low income weatherization is
being val-ued through the agencies is different, because
that's looking at your own j-nternaf cost effectlveness.
In terms of the delivery of the program versus the therms
saved, you're conducting an independent audit for each
individual home to gauge the cost effectiveness home by
home and so the operati-on of your program, of course, is
being carefully screened on your side for cost
effectiveness, but regarding the utility and the
utillty's ability to provide addltional leveraged funds
for the purpose of l-ow i-ncome weatheri-zation, we are a
regulated utility utilizinq ratepayer money. ft's going
to be run under the utilit.y cost test, perhaps al-so the
total resource cost test, and under valuation, that
additional- amount of money that would be provided by theo25
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SPECTOR (X)
fntermountain Gas Company
utility, that is the piece that we're questioning as to
whether or not we can develop something that is cost
effective.
MR. PURDY: Madam Chair, if I may have a
very brief moment with my client, I can wrap this up
quickly.
COMMISSIONER RAPER: Sure.
(Pause in proceedings. )
MR. PURDY: Thank you for your testimony.
That's all I have.
THE WITNESS: Thank you.
COMMISSIONER RAPER: Mr. Purdy, next time
you discuss with your client, turn your mic off.
MR. PURDY: I didn't think 1t was working.
COMMISSIONER RAPER: Mr. Richardson, do
you have anything for this witness?
MR. RICHARDSON: No questions, Madam
Chair.
COMMISSIONER RAPER: Thank you. Mr.
Otto.
MR. OTTO: I do have a few questlons.
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Intermountain Gas Company
CROSS-EXAM]NATION
a Do you need a glass of water or
BY MR. OTTO:
anything?
Am I going to
Hopefully not,
dlrect testimony your business
A
a
need one?
so first, f noticed in your
address was North Dakota
and then you said
Boi se ?
A f 'm
today it's Boise, so are you now in
a
O Shared
and
but my busj-ness address for
I'm doing for Intermountain
Road.
O Okay. We11,
occasionally.
A Thank you.
shared employee
employee?
so I am a fittle bit
the purposes
Gas would be
of everywhere,
the work that
A
of
555 South CoIe
wel-come to town, dt l-east
0 f want to start with
question and there's been some back
clients and Intermountain Gas about
this DSM program, and I lust want to
that. From your Intermountain Gas's
goal of their proposed DSM measures
another big picture
and forth between my
what's the goal of
clear the air on
perspective, 1s the
in this case too25
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SPECTOR (X)
fntermountain Gas Company
to make sure
acquire additional customers in order to increase sal-es
or is it to conserve gas?
A The purpose of our demand side management
program is to conserve gas.
Okay, thank you. We agree and I just want
that we're on the same page there.
We are.
shared employee
correct?
A
nY
And you just mentioned that you are a
between MDU and Intermountain Gas;
And Cascade.
And Cascade, that's right, and in fact,
of conservationyou're
policy.
doesn't
shared
fair?
the, 1et's see, the manager
it really
stick with that; is
A
o
You have a couple
matter. What you
employee and we'11
of titl-es.
testified to
f guess
is that you were a
that
A
nV.
Cascade, t.hey
testimony that
experience in
A
o
A
That is perfectly fair.
I'Il- stop thinking out
letrs see, so and
you have almost about a
this area?
Yes, thatrs correct.
Cl-ose to?
Yeah.
Ioud
f saw
now,
in
and
decade
your
of
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SPECTOR (X)
fntermountain Gas Company
O So is it fair to say that because of that
Intermountain Gas is not starting DSM from aexperience,
bl-ank sl-ate?
about what is
experience of
They can rely on your experience and the
the sister companies in order to form
programs; is that a fair statement?
A They can rely on my experience i-n terms of
the overal-I design envisioning of these early stage
development of programs and, of course, ds I'm needed, I
would be glad to provlde them with addltional information
and support. f'm not going to be the on-the-ground
program delivery person for this effort.
O f would hope not. You seem to have plenty
to do already, although you do a good job here, I should
be clear. As part of your rol-e managj-ng these programs,
is it fair to say that you're aware of the range of
measures that are avail-abfe in the market in the
Northwest and the service providers that. are out there
and the kind of administratlve tools that are avail-abl-e
in our region; are you generally aware of those?
A Yes.
O Okay, thank you. We're golng to move to a
different topic now, and this is your direct testimony on
page 72
I don't
and this is where you
think this wilI impact
the in-house DSM
talk about as you turn,
you too much, but you talk
potent.ial assessment. Theo25
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SPECTOR (X)
Intermountain Gas Company
beginning of
we're going
of the three
the discussion is before page L2, but what
to get into, this is where you described kind
stages of what is an assessment. Are you on
the page now?
A Yes.
O Okay.
A Wel1, describing our assessment, I
bel-ieve, not what an assessment is, but what our
assessment was.
O Good point, yes, so that begins with the
technical potential; correct?
A Correct.
O Okay, and then on lines 20 beginnlng on
l-1ne 20 through 23, you sdy, "If the Company coufd make
aIl quallfied home upgrades to aIl- possible measures, "
is that a definition of the technical potential?
A Yes, my understanding of technical
potential woul-d be if you could ;ust wish into existence
hiqh efficiency equipment into afl homes, that would
be require them, that would require them that they
would appear. That's technical potential.
O Okay, you used the word "equipmenL." Now,
in your experience l-ike through Cascade who offers are
there non-eguipment conservation measures availabfe
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A You mean theoreticalJ-y?
O Technically.
A Yes. Technically, yes.
O Did the technical potential study for
Intermountain Gas incl-ude non-equipment measures as a
technical possibility?
A I would clarlfy the characteri-zatj-on. I
shou1d clarify that this would be a technical potential
model as opposed to a technical potential study, so our
TEAPot, we utll-ized a TEAPot model-, but we did not
conduct a holistic study, which would be much more in
depth. It would have a l-ot more parts to it. What we
did is we took our TEAPot model- and we lnputted a series
of measures into the model- and then modeled out the
technical, economic, and achievable potential for those
model-s f mean for those measures within the TEAPot
model.
O So you preselected -- just so I understand
what you're saying, you preselected a range of measures
and then inputted those into a model?
A Correct, yeah.
O So you have not even asked the question
whether technically in Idaho insulation is an avail-abl-e
conservation measure?
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Intermountain Gas Company
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SPECTOR (X)
fntermountaj-n Gas Company
of TEAPot.
first step in
e ffective ?
A
o
A We did not model- that within the context
A And isn't the technical potential that
grder to understand if something is cost
Yes
So how does not examining whether
available, so that we're notinsulatlon is technlcally
doing that, right, so then we don't know if it's cost
effective, how does that comport with this Commission's
directive telling Idaho utilities to pursue all-
cost-effectj-ve energy efficiency?
A We perceive this to be a starting point
from which we wil-l- be able to, assuming we have a fixed
cost collection mechanism in place and cost recovery for
our program, the portfolio that we put together and
modeled is a starting point from which more robust
measures coul-d be added on to the program, and so I woul-d
see this as a scaffolding program. This is a foundation
from whlch additional measures could be added and the
program coul-d grow.
The insulation that you describe woul-d
probably be very appropriate to examine following a fixed
cost colfection mechanism being put into place, which
would, as I said, allow the Company to no longer be25
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SPECTOR (X)
Intermountain Gas Company
inhibited from the aggressive pursuit of demand side
management.
O So are you now testifylng that the Company
won't even study the cost-ef f ective potential- unl-ess
there's a fixed cost coll-ection mechanism in place?
A I cannot speak to that. I was not given
guidance elther way regarding that, so I can't speak to
that.
0 Okay, fair enough. Now, we said before
that you've been doing this about 10 years and there's
some corporate or sister utilitles in there.
A Yes.
IIY
way: fs it
those sister
included in
A
o
cost of insulating the home,
accounting mechanisms or the
upon which through which
A Yes, that
as you described it.
said that l-et me ask it this
that the lnformation l-earned at
is readily availabl-e to be
And you
fair to say
utilities
a study that would apply to
Coul-d you please restate
Sure, such as the cost of
Idaho?
that again?
a measure, the
of ki-nd of theand the cost
administrative mechanisms
you would run
information would
that program.
be avail-able
O Okay, thank you. Okay, werre going to
move to just the last two questions I have, threeo25
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SPECTOR (X)
Intermountain Gas Company
v
efficiency gas
A
that feedback
questions, and this is 1n your rebuttal- testimony and
this is about the fixed cost coll-ection mechanism, and
recognizing what you have said beforehand, so on page 13
and l-ines of your rebuttal, Iines 18 through 79, you
testify, "The Company is deeply concerned at the prospect
of operating a DSM portfol-io if the ECCM is not
approved"; is that correct?
A That is correct.
performs a
only that is
conservation
And currently the Company operates a high
rebate program?
Currently the Company performs sorry,
threw me there. Currently the Company
has a direct use i-ncentlve for conversions
separate and distinct from an energy
rebate program.
COMMISSIONER KJELLANDER :Excuse me,
someone needs to turn off their mJ-crophone, because
does someone have their microphone on?
MR. OTTO: You know, that could have been
mine just blowing up, because it seems to not be working.
I apologize, I don't know what's happening.
COMMISSIONER RAPER: Mr. Williams is going
to pass
COMMISSIONER KJELLANDER: Oh, much better.
MR. OTTO: Okay, how about now?o 25
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SPECTOR (X)
Intermountain Gas Company
THE WITNESS: I can hear you
wonderfully.
0 BY MR. OTTO: Okay; so to get us back on
track, you said that the Company currentl-y provides an
incenti-ve to encourage conversions into gas.
A Yes, it is a furnace rebate program that's
specifically used in to incentivize conversions, but
it is afso only incentj-vizinq for 90 percent plus
furnaces, so there's the efficiency component, but the
key driver for that specific program was direct use.
O But there is an efficiency component, as
you just said?
A There's an efficiency component 1n that we
wanted to incentivize responsible growth. If we're going
to incentivize for growth, w€ wanted to do it responsibly
in an energy efficient manner, but it's not a DSM
program.
O So did your deep concern about a portfolio
arise before or after the currentl-y operatlng incentive
as that has a conservation component?
A Could you please rephrase that?
O So you testified the Company is deeply
concerned about running a DSM portfolio without a flxed
cost mechanism.
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Intermountaj-n Gas Company
O Did this deep concern arise was. this
deep concern in place when the Company offered its
current incentives for efficient furnaces?
A I can't speak to that.
MR. WILLIAMS: Objection. She already
testifj-ed that the current program is not a DSM program
and I thlnk he's attemptlng to import the objection to
the concerns with DSM into a program that she just
testified is not DSM, so I thj-nk that the character of
the questlon is a mischaracterization.
MR. OTTO: She testified that the current
program has
and also to
two purposes: one is
ensure that conversion
to encourage conversion
is to a high
ef f iciency appli-ance.
real-m of a DSM program
the Company's concern
I think that that is within the
and I'm trying to understand when
about fixed cost collection
arose.
MR. WILLIAMS: You know, I'11 withdraw my
objection so we can move on.
COMMISSIONER RAPER: Thanks for making
that one easy on me, Mr. Wil-l-iams.
MR. OTTO: I'II rephrase my question.
COMMISSIONER RAPER: Mr. Otto, to extent
that you want her to testify, l-et her testify, but don't
charactertze things for her, how 1s that?O 25
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SPECTOR (Com)
Intermountain Gas Company
MR. WILLIAMS: That's the objection I
wanted to make.
O BY MR. OTTO: You know, I wil-l- stop there.
I'lI let this go, with one last question. What I meant
was on that topic. This is the last question, and in
your professional judgment and experience, do al-l
customers benefit when a utility acquires cost-effective
conservat ion ?
A I woul-d say as much, that there is a
benefit beyond just a single customer for demand slde
management efforts.
MR. OTTO: Thank you very much.
THE WITNESS: Thank you.
COMMISSIONER RAPER: ATe there any
questions
President
from the Commissioners? It looks like
Kjellander has a question.
EXAMINAT]ON
BY COMMISSIONER KJELLANDER:
O First of all, I want to thank Mr. Purdy
for indlrectly inferring that the then administrator of
the fdaho Office of Energy Resources did a far better job
of getting the ARRA funding out for energy efficiency
than Oregon and Washington, and the question I want too25
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SPECTOR (Com)
Intermountain Gas Company
get to is
efficiency
lot based
we talk a lot about cost-effective
and the definition of that seems
on the time which we
energy
to change a
use that
phrase. Here we are
and place in
in a time in which we have
historically stable natural- gas prices. We additionally
have market transformation that exists, for example, with
water heaters. No matter what we buy off the shelf, it's
going to be more energy efficient than what it is we are
trying to replacer So how do those factors impact in your
mind what might be perceived as today's definition of
cost-effective energy efficiency?
A We11, I think there's a few different
things at play here. First, in terms of you were saying
that the cost of natural gas is fairly fow at the moment
as compared to other fuel- sources, I would say that
that's a wonderful reason to engage in demand side
management, because at a time when natural gas is 1ow,
that's when customers are going to be most inclined to
disregard the drive to energy efficiency, and so it's
l-ess directly urgent to them, so a rebate for a high
performance, a high efficiency natural gas furnace or
water heater will- further press them, will further drive
them when they're not necessarily getting the same
economic signal through the cost of natural gas.
You know, we want to incentj-vlze them to25
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SPECTOR (Com)
Intermountain Gas Company
go to the most efflcient piece of equipment possible, so
in times of low prices, if they go to a lower efficiency
model-, then that's a lost opportuni-ty, I think as I said
before, year after year after year for the life of that
measure.
Second, because the Commission 1s now
amenable to the use of the utility cost test, it al-Iows
the utility to value natural gas demand slde management
in a way that is lntuitive to us looking at supply side
and demand side resources on equal footing, and so for us
in terms of demand side management, this is a transaction
between us and the customer where we wil-I be purchasing
therms that aren't used from the customer as a demand
side resource as opposed to purchasing it from a supplier
and the utllity cost testas a supply
allows us to
course, when
valuation is
side resource,
demonstrate that value and
you're talking about cost
to purchase that molecule
or l-ower than we would from the
t)
understand this
As a follow-up,
as a consumer,
and we've got a
our goal, of
effectiveness and
at the same price
side.
trying to
say that my water
in p1ace, I don't
to choose now
out
supply
and f'm
so let's
programheater goes
know what it Iike yet, but I
water heater and
get
one off the shelf
l-ooks
between a tankfess
that is not energy efficient, how much of an incentive or25
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SPECTOR (Com)
Intermountain Gas Company
rebate does there have to be for that tankl-ess water
heater before I as a consumer recognize based on the life
of that technology this actually has benefit to me?
A The general
incentj-ve is you want
best practice in designing
your
about
to set your incentive at least
30 percent of the incremental costr So the cost
and that high efficiency water heater that
purchase, there's that incremental- cost, and
you want to incentivize for at least 30
that incremental- cost and then, of course, if
is able to provide an incentive and it
dj-fference between the water heater that you were going
to purchase
you should
so ideally,
percent of
the utility
demonstrates that it's cost effective that's above that
30 percent,
further. If you provide an incentive that's too high,
there's a loss in returns for that.theoretically
COMMISSIONER KJELLANDER: WeI1, and we
heard the term free rider and I don't expect you to
answer this question,
are always
then it wil-1 motivate the customer even
but that's an issue that we as
concerned with is when does theregulators
incentive essentlally incent the activities that would
have occurred otherwise and there's no question there,
but thank you.
THE WfTNESS: Thank you.
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SPECTOR (Com)
Intermountain Gas Company
Commissioner quest.ions ?
EXAMINATION
BY COMMISS]ONER RAPER:
O I have a couple, a couple follow-up and a
couple that I had walking in. Ms. Spector, with regard
to the l-ow income tracking that Mr. Purdy was talking
about and the questions rel-ated to that and fntermountain
Gas's policy regarding not tracking low j-ncome customers,
is that a policy that preexisted the merger with MDU or
is that an MDU policy that trickled down?
A That's not something that frm real1y able
to speak to. I think probably customer service or
regulatory would be more aware of that than f am.
a And what witness would I ask that question
of, then?
A Witness McGrath, I believe, may be able
to.
MR. WILLIAMS: Why do you think he's
clean-up?
O BY COMMISSIONER RAPER: Okay. A11 right,
I will save that one for Mr. McGrath. With regard to
where President Kjellander's questions were going and
free ridership, people who would purchase anyway and theo25
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SPECTOR (Com)
Intermountain Gas Company
rebate programs specifically, did the
assessment of the number of homes, So
right,
Gas do
terrltory
terms of
a
that's what's in the test j-mony,
study of how many homes in their service
currently heat wlth natural gas?
A There was a little bit of analysis
customers that already heat with natural
Company do an
300,000 customers,
did Intermountaln
1n
gas
25, I bel-ieve.
O And the answer in Exhibit 25 would refl-ect
what, then?
A I'11 have to go back t.o it, because that
was a number that was provided by our analysts.
that was placed into our
should be in my Exhibit
TEAPot assessment and that
woul-d be Exhibit
O Okay.
A Hold on. Okay; so that
25, page 2 of 3, we had some numbers as
venture into the percentage of customers
a preliminary
that are
currently utilrzinq, so that would be under end use
saturation which would refer to current customers and we
had some, I'l-l- caveat it, preliminary numbers that we
plugged into our model regarding how many customers,
natural gas customers, were currently using natural gas
as their space heating fuel.
O And that number is? Will you state that
for the record, please?25
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preliminary numbers, it was single family B7 percent,
multi family 70 percent end use saturation, manufactured
BB percent end use saturation, but then end use fuel
share was 99 percent, and these were the preliminary
numbers that were rendered for the sake of the TEAPot
model-, so I would caveat that there may be numbers
outside of this that was utilized for TEAPot that others
may wish to provide more offlcially.
O Okay, and reaIIy, my question doesn't go
j-nto inputs into the TEAPot model so much as it does a
concern that the peopl-e who have the ability to convert,
to fuel- switch to natural 9as, may already be saturated,
because would you agree that there's a portion of the
population that even if they want to convert to natural
gas and even with a rebate program that is not something
that they can financially support?
A I would clarify that the program that I
designed, the demand side management program, the primary
motivation of that program isn't conversion. If in the
course of you know, when customers are converting to
natural gas and they're moving toward the direct use of
naturaf 9ds, which we do support, we want them to go
we want them to move to the highest efficiency natural
gas equipment possible, but the main driver of this
CSB Reporting
(208 ) B9o-s198
SPECTOR (Com)
Intermountain Gas Company
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program is demand side management, so whether they are a
new customer or an existing customer, we want to drive
them to energy efficiency, so this wouldn't be focused on
conversions and whether the conversion market has been
saturated, but rather is there an opportunity to achieve
greater efficiencies of natural gas equipment j-n our
service area, dt least that would be our goal.
O But wouldn't you say that saturation in
the market wil-I be a direct reflection of how many
conversions you can make in order to support demand side
management and higher efficiency?
A That wouldn'L be my perception. Even if
we have a high saturation of natural gas customers today,
if they have lower efficiency equipment in their homes,
then and there's l-ower ef f i-ciency equipment out on
trucks in the market, then it would not be a program that
the market has already been saturated to drive these
customers, whether they're existing or new, to high
efficiency natural gas equj-pment, because the equipment
that's currently in their homes may only be to code, and
so to not have thls program would result in a lost
opportunity for deeper energy savings.
O So you did a good job worklng your way
through it being not fue.l- switching, but DSM, but my
question actually was to, my original question was to,
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SPECTOR (Com)
Intermountain Gas Company
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the Iow income portion of that. If you have a large
percentage of your customer market who has already
converted, and I apprecj-ate from the l-ow income
questioning that you don't have the data, rlght, like I
understand Mr. Purdy's testj-mony that you donrt have the
data on who your low income customers are specifically --
A Correct.
O -- but is there an acknowledgment or a
recognition by the Company that if a portion of the
market is already saturated and has switched to natural-
gas that there must be a portion of that market who heat
through oil or electric that simply don't have the means,
that are too poor to even util-ize it with a rebate? I'm
just wondering if that was something that was considered
in putting the programs and the rebates together.
A The program designed, the program that we
are proposing right now, did not take income into
account, how many customers would be able to afford it,
but in the running of the TEAPot model- for that section
of measures, the model would have assumed a certain
percentage of customers' uptake in the program, but it
wou]d not have looked at income.
O Whether they could afford it?
A Whether they could afford it.
O Okay, thank you. One last quest.ion, how
CSB Reporting(208) 890-5198
SPECTOR (Com)
Intermountain Gas Company
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[phone]
SPECTOR (Com)
Intermountaln Gas Company
do you respond to the assertion that
DSM, however you want to characterize
that yourself, those programs
pressure on naturaf gas rates
demand?
conversion, rebate,
may actually put
because it wil-1
A If the program operates as it's intended,
it should proportionately offset any additional usage
proportionately, but with a fixed cost collection
mechanism in place, we would no longer be driven by the
volume of naturaf gas that's utilized. I see what
you' re
O Yeah, that doesn't get to the answer, so
Iet me clarify, if I can.
A Thank you.
O When you have conversion as a porti-on of
your rebate program, you are necessarlly by converting
those customers, you're increasing the demand on natural
9as, because people who weren't util-izing natura1 gas for
heating their homes, Iet's sdy, are then utilizing it for
heating their homes. Take out water heaters and the
smafler commodity numbers there, smaller vol-ume. In
doing that, is there any recognition by the Company that
you actually contribute to upward pressure on natural gas
rates because the demand is greater, it becomes greater
because more peopJ-e are utifizing natural gas to heat
it, rrll let you do
upward
increase
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CSB Reporting(208) B9o-s198
SPECTOR (ReDi)
Intermountain Gas Company
their homes?
A Unfortunately, naturaf gas rates aren't my
speci-alty, although I woufd say that y€s, you would be
increasing the use of natural- 9ds, but you would be
decreasing the use of electricity, so there would be that
dlrect use benefit, but as to pressure on rates, that's
outside of my field of expertise.
COMMISSIONER RAPER: Fair enough. Any
questions generated by my questions? And is there any
redirect, Mr. Wil-l-iams?
MR. WILLIAMS: I do have a couple of
questions, Madam Chair.
RED]RECT EXAMINATION
BY MR. W]LL]AMS:
0 Questions were to you by, both by,
Mr. Costel-lo and Mr. Purdy for
gr_ven
Staff and CAPAI to the
effect that in one instance, the llnkage you have drawn
between demand side management and the fixed cost
col-lection mechanism and in Mr.Purdy's case, the link
Company was trying to drawbetween the strong
between the fixed cost collection mechanism and l-ow
l-ink the
income weatherization, so my question 1s that if the
Commission were to order either one or both of thoseo25
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SPECTOR (ReDi)
fntermountain Gas Company
programs without the desired fixed cost collection
mechanism, it would be the Company's response to comply
with that order, wouldnft it?
A I believe that is the case, yes.
a That's the right answer.
A We1l, good.
O If the Commj-sslon tells us to do
something, we're going to do it?
A Of course. If you put it that wdy, of
course
O So there were analogies drawn, again, by
Mr. Purdy and Mr. Otto as to sister companies, Cascade
primari-ly, dolng things in Oregon and Washington, and Irm
going to suppose that with Cascade, there are thlngs
culturally occurring in Oregon and Washington and the
focus on soclal-izing some of those costs in those states
that are not necessarily the same culture that we have
here 1n Idaho.' would you agree with that?
A Absolute1y.
O And woufd you thatrs enough, and then
finalJ-y, you were discussing with, I think, Mr. Purdy the
very significant impact of the federal funds in those
states in those programs and how some and where in
Idaho there's almost a total reliance on federal funding
for l-ow income weatherization, but in those other stateso25
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CSB Reporting
(208 ) 890-5198
SPECTOR (ReDi)
Intermountain Gas Company
there's the utilities
funds. Can you give
have to pay towards
O Soin
building on
me in those
feel
the federal-
if you know,
distribution or
top of
states,
for thekind of a some kind of a
the percentages between what
what the state utllities are doing, and then
customer is doing or do you understand that
A Yes.
0 Okay.
A So I can only speak to Cascade Natural
Gas, f can't speak to how the other utilities are
approaching it, but usj-ng Oregon as an example, i-f an
agency receives a penny of DOE funds, then theyrre hel-d
to the ful1 l-ist of parameters and regulatj-ons associated
with those funds, and while the agencies are committed to
best practices and they want to do things correctly,
there are some factors that were inhibiting participation
and so under our CAT program, I would say that the
majority of the funds are now coming from Cascader so
let's call it B0 percent, l0 to 80 percent, are coming
from Cascade, 30 percent are probably from LIHEAP funds,
and zero percent are comj-ng from the customer because
it's a low income weatherj-zation program and they donrt
is putting into that,
that
that respect,
that's being
federal- monies are dolng and
what the
question?
the money that Cascade
sociali- zed or it I so25
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CSB Reporting(208) 890-s198
SPECTOR (ReDi)
Intermountain Gas Company
spread across the rest of the customer base for
col-Iection?
That wou]d be
to as federal funding,
if there's a rethinking
correct, yeah.
30 percent that you referred
the change of administration,
A
U Okay, and the
wlth
of federal- commitments for those
dollars, would that have
effectiveness of how the
an impact on
program woul-d
the cost
operate?
the State ofA As it woul-d be valued in
Idaho, absolutely.
State of Oregon, I
differently, but as
The way the value
think that wou]d be
is perceived in the
interpreted
I
as I said, has a very
cost effectiveness, So
have a big difference.
further questions.
COMMISSIONER RAPER:
Spector, for your testimony. You
(The witness left
COMMISSIONER RAPER:
understand it, the State of Idaho,
straightforward means of valuating
within that context, y€s, it woul-d
MR. WILLIAMS: Madam Chair, I have no
Thank you, Ms
are excused.
the stand. )
Okay, we wil-l take a
ten-minute break, come back at flve minutes after 3:00.
(Recess. )
COMMISSIONER RAPER: Okay, seeing that
everyone is back, we wil-l go back on the record ando25
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CSB Reporting(208) 890-s198
TMLACH (Dr)
Intermountain Gas Company
Intermountain Gas is prepared to call their next
witness
MR. WILLIAMS: Intermountain Gas calls
Cheryl Imlach.
CHERYL IMLACH,
produced as a witness at the instance of the
Intermountain Gas Company, having been first duly sworn
to tell the truth, the whole truth, and nothing but the
truth, was examined and testified as follows:
DIRECT EXAMINATION
BY MR. WILL]AMS:
O Would you please state your name and
business address for the record?
A My name is Cheryl Imlach. My business
address is 555 South Cole Road, Boise, Idaho.
O By whom are you employed and in what
capacity?
A I'm employed by Intermountain Gas Company.
I'm their manager of energy utilization.
O And are you the same Cheryl Imlach that
prefiled direct testimony in this case in August
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A Iam.
O If f were to ask you today the same
questions contained in that testi-mony, wou1d your answers
be the same?
A Yes, they woul-d.
MR. WILLIAMS: Madam Chaj-r, I wou1d ask if
Ms. fmlach's testimony could be spread upon the record as
if read and she is available for cross-examination.
COMMISSIONER RAPER: Without objection, we
will spread Ms. Imfach's testimony across the record as
if read.
(The foll-owing prefiled direct testimony
of Ms. Cheryl Imlach is spread upon the record.)
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CSB Reporting
(208 ) 890-s198
IMLACH (Di)
fntermountain Gas Company
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Imlach, Di 1
Intermountain Gas Company
I. INTRODUCEION
O. Please state your name and business address.
A. My name is Cheryl Imlach. My business address
is 555 S. Cole Road, Boise, Idaho. My e-mail- address is
Cheryl . Iml-achGintgas . com.
0. By whom are you employed and in what capaclty?
A. I am employed by Intermountain Gas Company
("Intermountain" or the "Company") as the Manager of
Energy Utilization. In this capacity, I have been tasked
with leading the operation and tactical implementation of
the Company's emergent Demand Side Management (DSM)
efforts and associated rebate program. I l-ead the
Company' s
I am al-so
integrated
o.
Group?
A.
economic and technological devel-opment efforts.
in charge of forecasting customer growth for
resource planning.
How long have you been employed by the Uti-1ity
f have been with Intermountain for 24 years
Southeast
was
starting
section
first as a Consumer Specialj-st in the
of IGCrs service territory. In 2005, I
promoted to Manager of Treasury Services.
became the Manager of Revenue Accounting.
title is Manager of Energy Utilization, a
began in 20L6.
In 2007, I
My current
role which I
O. What are your educational- and professionalo25
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Imlach, Di 1afntermountain Gas Company
quali fications ?
A. f am a graduate of
f earned a bachelor's degree
in 7992 and an M.B.A in 2002.
Idaho State University where
in business administrati-on
I have extensive
management and fiscal-experaence l-n
oversight in
both financial
the utility sector.
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Imlach, Di 2
fntermountain Gas Company
I am also wel-l versed in the
efforts designed to encourage
direct use of natural gas.
docket ?
tactical implementation of
efficiencies through the
II. SCOPE A}ID ST'MLNRY OF TESTIMONY
O. What is the purpose of your testimony in this
First, I
My testimony
wil-l- discuss
residentlal- conservation
will cover three primary areas.
the feasibility of operating a
rebate program and the
A
preparations Intermountain has made to launch this
effort. Next, I wiII offer a detailed description of our
proposed program ramp-up. Lastly, I wil-l- describe
anticipated program benefits and predicted resufts.
O. Are you sponsoring any exhibits in this
proceeding?
A. No, although I participated in the preparation
of Origi-nal Tariff Sheet No. 76, Rate Schedule DSM (DSM
Tariff), which is the Company's proposed Tarlff that
would obtain demand side resources through rebates for
select energy efficlency equipment and upgrades. This
proposed DSM Tarlff sheet is part of Exhibits 30 and 31
sponsored by Company witness Michael McGrath.
III. FE]ASIBILITY OF DEI'TAI{D SIDE },TA}IAGEMENT A}ID
ASSOCIATED PREPARiATIONS
O. What steps has the Company taken in preparationo25
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Imlach, Di 2a
fntermountain Gas Company
of the l-aunch of a residential conservation rebate
program in fntermountain's service area?
A. As explained in the testimony of Ms. Spector,
the Company has performed an assessment of both its total
DSM potential and the cost effectiveness of offering
rebates for residential conservation measures. In
addition, the Company has al-so
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fml-ach, Di 3
Tntermountain Gas Company
performed
State of
a desk audit of simil-ar rebate programs in the
fdaho including both Avista and Idaho Powerrs
energy conservation efforts.
Intermountain has also hel-d meetings with its
district employees to ensure that the measures 1n its
portfolio were not already saturated in the 1ocal
markets, and that rebate levels are meaningful from an
"on-the-ground" perspective. Eeedback from district
staff ultlmately drove the Company to make changes to
their initial program design, raising minimaf efficiency
l-evels from .64 to .67 for water heaters and for 972
Annual Fuel Utilizatj-on Efficiency (AFUE) to 95% AEUE for
furnaces. Feedback from the districts also provided a
better understanding of the incremental costs associated
with upgrades from standard efficiency to
Intermountain' s
high efficiency
service area.natural gas equipment in
The Company has
contractors and buil-ders
with local area HVAC
understand what
on the market today
and buil-ders in the
measures and
also met
to better
natural gas equipment is availabl-e
and how to assist those contractors
energy efficientsel-ection of more
equipment.
Fina11y,
comprehensive set
Intermountain has developed a
rebate eligibilityof trade aIIy and
guidelines that will- be used to govern the program, after25
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Imlach, Di 3a
Intermountain Gas Company
hoped-for approval by the Commissj-on.
O. What is the current demand for high-efficiency
natural- gas equipment and ENERGY Star homes in
Intermountain's service are?
A. Within the residential market, there is
currently a mj-x of older equipment, and l-ower-grade
energy efficiency measures being utilized by customers.
While
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Imfach, Di 4
Intermountaj-n Gas Company
energy efficient upgrades are not uncommon in the Boise
metropolitan area, anecdotal feedback suggests that
penetration is inconsistent, and lower efficiency
equipment is still readily available to IGC customers,
contractors and builder. There is l-ikewise a strong
opportunity to
equipment and
increase the presence of
ENERGY Star homes in other
energy efflclent
parts of the
service area as well-.
O. What impacts do you anticipate your program
will- have on the residentlal- sector?
A. Maklng rebates availabl-e for energy-effj-cient
natural gas equipment and ENERGY Star homes wiIl drive
increased sales of these essential upgrades, leading to
energy savings that woul-d have not been otherwise
achieved without the program. Other gas utllities in the
northwest have achj-eved conslstent energy savings throuqh
rebates for energy efficiency measures. The Company
bel-ieves this momentum can be replicated in
fntermountain's servi-ce area in Idaho. More
specifically, based on
resufts, blended with
the Company's TEAPot
feedback from dlstrict
area contractors, fntermountaln believes it
therms with a
modellng
staff, and
can achieve a
stretch goaltherm savings
of 91 ,8235 as
This savings
target of
described
65,000
in the testimony of Ms. Spector.
will be achieved by using rebates too25
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Imlach, Di 4a
Intermountain Gas Company
encourage the purchase of energy efficient natural gas
space and water heating equipment and ENERGY Star homes
in the residential sector.
O. How wil-l success resultlng from this program be
measured?
A. Success means that the Company has met or
exceeded its programmatic therm savings targets, and that
the program's pre-screened measures have been performed
safely, j-n accordance with industry best pract j-ces.
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The program metrics that will be used to
determine performance will include total- therm savings
achieved; Util-ity Cost Test (UCT) results in relation to
the $0.531 threshold,' total conversions to
high-efficiency natural gas equipment directly
attributable to the Company's rebate program; total
number of ENERGY Star homes directly attributable to the
Company's rebate programi and the results of any quality
assurance inspection outcomes.
O. How does the Company intend to directly
attribute natural- gas savings to your conservation rebate
program?
A. Natural gas savings wilf be considered directly
attributable to the Company's natural gas conservation
program if it is associated with a successfully completed
conservation incentive application for a rebate eligible
measure. The Company will be using deemed therm savings
based from the appropriate climate zone programmed in the
TEAPot model. The risk of free ridership associated with
customers applying for incentives for equj-pment they
would have otherwise installed will be mitigated in the
ways descri-bed within the testimony offered by Ms.
Spector.
O. What will the Company do once the measures in
its portfolio achieve market transformation in
Imlach, Dl 5
Intermountain Gas Company
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Intermountain Gas Company
Intermountain's service area?
A. Measures eligible for incentive as part of the
Company's conservatlon rebate program will be examined on
an ongoing basis to ensure that they support the most
efficient technologies available on the market within
Intermountain's service area. In the event that a
measure becomes saturated into the local market r or
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Intermountain Gas Company
becomes mandated by code, the Company will replace it
with a higher-ti-er energy savings measure as they become
avail-ab1e.
IV. PROGRAM RJAMP UP A}.ID DELIEVERY
A. Please describe the first 90 days of operation
for your conservation rebate program, if approved.
A. Fol-l-owing the approval of the Company's DSM
proqram, Intermountain will fil-e for the collection of
costs as described in Ms. Spector's testimony. Upon
approval of the recovery mechanism, the Company will
issue a solicitation for two new staff to support daily
program operation and
As Manager
oversee this proce s s
the DSM
implementation.
of Energy Utilization, T will
and provide ongoing management and
team. We will meet with ourtooversight
dlstrict team to finalize all program terms and
that they have the resourcesconditions,
necessary to
contractors.
applications
and to ensure
explain the program to customers
We wil-l- provide easy-to-complete
for distribution by our district
and area
rebate
and program
Westaff, and for distribution to local contractors.
wil-l- convene meetings with area contractors to launch a
residentlal- trade aIly program to encourage partnership
with the HVAC and buil-der communities on the sale of
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homes over standard-efficiency alternatives. We will
have an enrolfment campaign to invite al-l- well-qualified
contractors to participate in our trade aIIy program. We
will- perform ongoing monitoring of work and wil-I gather
customer feedback to ensure that the program operates as
intended.
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fntermountain Gas Company
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Intermountain Gas Company
While program ramp-up is taking pIace, the
Company will concurrently implement internal
best-practices for rebate processing and data coll-ection
to ensure that customer rebate requests are processed in
a timely manner, and that we are able to report all-
program findings and outcomes with maximum transparency
and clarity. We wil-1 also train our call center staff to
ensure they are prepared to answer customer questions
about our energy efficiency rebate program and to refer
customers to the approprlate departmental- contacts.
O. Pl-ease describe the guidelines that will be
associated with this program and how they wilI be
enforced.
A. Intermountain has developed terms and
the operation of its rebate
be avail-ab1e to residential-
conditions that will govern
program. The program wil-1
customers who use natural gas as their prr_mary space or
be the space heatwater heating fuel
fuel for al-l- space
must be the water
Natural qas must
heating applications.
heat fuel- for al-1 water
Natural gas
heating
applications. Energy savings equipment must meet the
program requirements specified in the program's terms and
conditlons. Rebate eligible measures will be performed
through l-icensed & bonded contractors. A Trade A11y
program wil-l- help enforce best practices in equipmento25
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Iml-ach, Di 1a
fntermountain Gas Company
instaflation, and ensure a commitment to assisting
customers through the rebate application process.
AII rebate applications will be subject to
verification and review, including a review of all
associated invoices. Staf f will- be availabl-e to perform
both randomized and targeted quality assurance
inspections as appropriate. Trade
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All-ies whose work does not pass QC inspection will be
removed from the program.
O What existing resources are available to the
Company for program delivery?
A. In addition to the in-house expertise
harnessed for our DSM analysj-s and the design of our
rebate portfolio, we have the following resources
availabl-e to support our rebate program:
First, we have an Energy Utilizatj-on management
position, which f now hold with the Company. In this
capacity, I will be overseeing the practi-ca1
implementation and da1ly operation of our program.
Second, we have customer-facing Company staff
in each district served by the Utility that have been
instrumental in providing feedback to ensure the smooth
integration of this effort into thelr day-to-day
operations. They will be thoroughly trained on all
rebate program guidelines and requirements and wil-1 be
avail-able to answer customer questions, and provide
support to area contractors.
Thlrd, we have an existing program that has
been used to promote efficient natural gas equipment in
partnership with area contractors. We intend to increase
the focus of this program to focus on the measures
availabl-e under our DSM rebate portfolio. This will
Imlach, Di I
Intermountain Gas Company
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Iml-ach, Di Ba
fntermountain Gas Company
serve as a starting point from which we wil-l- be abl-e to
launch a more comprehensive trade a1ly program effort.
Eourth, as stated earf ier, fntermountaj-n's
Customer Service team wil-l- be trained on all aspects of
our rebate program and wil-l- be avai1able to answer
customer questions and refer them to the appropriate
program contacts.
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Imfach, Di 9
Intermountain Gas Company
FinalIy, we have ongoing customer outreach
materials such as our monthly bill-stuffers that wiII
contain messaging designed to encourage additional
program participation.
V. A}ITICTPATED BENEFITS A}ID OUTCOMES
O. What are the anticipated outcomes e associated
benefits of the Company's conservation rebate program?
A. The anticipated outcome of the Company's
rebate program is an energy savings achievement 65,000
therms in the first year with a stretch target of 97,825
therms based on the TEAPot's model of Achievable
potential. Intermountain also antlcipates a gradual
increase in the availability of high-efficlency natural
gas space and water heating equipment and ENERGY Star
homes in its service area, which will be encouraged
through partnership with area contractors.
Benefits assoclated with the Company's rebate
program include the cost-effective acquisition of demand
side resources for load management,' environmental
benefits and increased efficiencies associated with the
direct use of
the testimony
partlcipating
lower energy
existence.
natural- gas that was described in detail- in
of Mr. Kirschner,' and direct benefits to
homeowners such as increased comfort and
bj-l-l-s than if the program were not in
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O. Does the Company anticipate a limit to the
amount of DSM potential in its service area?
A. While there is a finite level- of DSM potential-
for any given measure within an energy conservation
portfolio, housing stock wilI contj-nue to age over time,
and
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Intermountain Gas Company
technofogies
opportunities
will- explore
will conti-nue to evol-ve, offering additj-onal
for energy efficiency, which the Company
on an ongoing basis.
concl-ude your testimony?O. Does this
A. Yes it does.
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CSB Reporting(208) 890-s198
IMLACH (X)
Intermountaj-n Gas Company
(The fol-Iowing proceedings were had in
open hearing. )
COMMISSIONER RAPER: And we'l-l move on for
cross-examination. Commission Staff?
MR. KLEIN: None from Staff.
COMMISSIONER RAPER: Thank you.
MR. STOKES: We have no questions, Madam
Chalr.
MR. PURDY: I have no questions. Thank
you.
MR. RICHARDSON: No questions, Madam
Chair.
COMMISSIONER RAPER: Mr. Otto?
MR. OTTO: f do have two questi-ons, really
two.
CROSS-EXAMINAT]ON
BY MR. OTTO:
O So page 2 of your direct testimony, right
up at the top there, lines L and 2, you say you're well
versed in the tactical implementation of efforts designed
to encourage efficiencies, and I'm just asking you to
descrj-be a few of those tactical implementation efforts.
What do you mean by that?o 25
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A What I mean by that is my first career
with lntermountain Gas Company was as a consumer sales
rep 1n the eastern Idaho market and I spent 13 years in
my career building rel-ationships with l-ocal area heating
contractors, builders, working with building contractors
associations, and I think that that experience is part of
what woul-d lend my abilities to help implement the DSM
program that we've proposed, because I think those types
of ski1ls are going to be important when we hit the
ground running, when we reach out to those stakeholders
that are out there that are going'to be facing with our
customers that we're wanting to incent to use natural gas
as efficiently as possible.
O I agree, that is good experience, and then
the second question is about on page 3 and it builds off
what you just said. There's not a specific line here,
but on page 3, you continue to answer the question and
you talk about hoJ-di-ng meetings with district employees
and HVAC contractors to understand what's out there and
available.
A Correct.
O Ts that a fair paraphrase of that
testimony?
A Yes.
O So part B of question 2, so did those
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CSB Reporting
(208 ) 890-5198
TMLACH (X)
Intermountain Gas Company
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discussions include non-equipment measures l-j-ke
insulation or weatherization, whether that's avaifable
and they coul-d deliver it?
A It wasn't part of the discussion, per se.
As in Allison Spector's testimony, the landing point for
our initial efforts with our proposed DSM is the measures
that we have outlj-ned 1n her testj-mony and those were the
things that we were trying to make sure that we
understood, that those were accurate measures, that those
are the measures that we shoul-d be pursuing, and based
upon the feedback and the relationships that they have
with the heating dealers and the buil-ders in the area,
they did give us some good feedback that they believe
that the percentage efficiency rating of the equipment
that we should be incenting should be the 95 percent and
jumping us up to the 6J, .61 on the water heaters, and so
we took that feedback so that we were maklng sure that we
were incenting for the things that were not what was
currentl-y being just migrated to by nature.
MR. OTTO: Thank you. That's aII the
questions I have.
COMMISSIONER RAPER: Do the Commissioners
have any questions?
COMMf SSIONER RAPER: Nor do I, Ms. Iml-ach.
Thank you for your testimony.
CSB Reporting(208) 890-5198
]MLACH (X)
Intermountain Gas Company
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CSB Reporting
(208 ) 890-s198
TMLACH (X)
Intermountain Gas Company
THE WITNESS: Thank you.
MR- WILLIAMS: No redirect.
COMMISSIONER RAPER: Oh,my apologies.
potted plantMR. WILLIAMS: f'm Sust a
sitting here.
COMMISSIONER RAPER: I just knew.
(The witness l-eft the stand. )
MR. WILLIAMS: Madam Chair, I believe that
we can proceed with Mr. McGrath and also get Mr. Gorman
done today would be my hope, unless someone
grueling cross-examination for Mr. McGrath,
we woul-d be willing to insert Mr. Gorman to
schedule.
COMMISSIONER RAPER: I don't
has just
in which case
meet his
nodding
ask my
of heads, so we can fet Mr. McGrath
see any
go and I can
grueling questions at
MR. W]LLIAMS:
the end.
Okay. AlI right, the
Company cal-l-s Mike McGrath and, Madam Chair, while he's
was wondering if we couldcoming up to the stand, I
excuse Company witness Spector
They wj-Il not be returning as
and Imlach at this point.
be excusedwitnesses and
from the hearing.
COMMISSIONER RAPER:Are there any
objections to excusing witness Iml-ach and witness Spector
no objections,for the remainder of the hearing? Seeing25
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CSB Reporting(208) 890-s198
McGRATH (Di)
Intermountaj-n Gas Company
granted, they're excused.
MICHAEL McGRATH,
produced as a witness at the instance of the
fntermountain Gas Company, having been first duly sworn
to tell- the truth, the whole truth, and nothing but the
truth, was examined and testified as follows:
DIRECT EXAMINATTON
BY MR. WILLIAMS:
O Would you please state your name and
business address for the record?
A My name is Mike McGrath. I work for
fntermountain Gas Company at 555 South Cole Road in
Boise, Idaho.
O fn what capacity are you employed?
A I am the director of regulatory affairs at
Intermountain Gas.
O And are you the same Mike McGrath that in
this case filed
accompanied by
A
u
11 pages of
Exhibits 2J,
That's correct
And 1f f were to
direct testimony and
28, 29, 30, and 31?
questions as contained in that
ask you the same
direct testimony, would
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your answers today be the same?
A They would be the same.
MR. WILLIAMS: Madam Chair, I would ask
that Mr. McGrath's direct testimony be spread upon the
record as if read, and Exhibits 21 through 31 be entered
into evidence.
COMMISSIONER RAPER: With no objection,
Mr. McGrathrs testimony will be spread across the record
as if read, and Exhibits 21 through 31 wil-l be admltted
to the record.
(IGC Exhibit. Nos. 21 31 were admitted
into evidence. )
(The fol-lowing prefiJ-ed direct testimony
of Mr. Mlchael McGrath is spread upon the record. )
CSB Reporting(208) B 90-s 198
McGRATH (Di)
Intermountain Gas Company
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McGrath, Di 1
fntermountaj-n Gas Company
O. Please state your name, tJ-t1e and buslness
address.
A. My name is Michael McGrath. I am the Director
of Regulatory Affairs at Intermountaj-n Gas Company. My
busj-ness address is 555 S. Col-e Road, Bolse, Idaho 83707.
O. Mr. McGrath, please summarize
and professional experience.
A. I graduated from Brigham Young
your educational
a Bachelor of Science
MBA from Boise State
Degree in Business.
University. I have
University with
I afso have an
attended, and
graduated from, numerous educational opportunities that
focused on regulatory ratemaking sponsored by the
American Gas Association. I have been with Intermountain
Gas Company for over 30 years serving in progressively
responsible positions that included regulatory rate
making, financial forecasting and planning, industrial-
marketing and gas supply.
O. What is the purpose of your testimony?
A. First I will di-scuss fntermountain's proposal
to implement a fixed cost collection mechanism, in order
to bring a l-evef of consistency or stabil-ity to Company
revenues, from year-to-year. Second, I wil-l- discuss the
tariffs that are attached to the Application, pointing
out tariff changes as wel-I as describing the new tariffs.
O. Addressing your first point, please describeo25
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McGrath, Di 1a
Intermountain Gas Company
the Company's proposed approach to
A. The Company is proposing
Cost Col-Iection Mechanism ("FCCM" )
fixed cost col-l-ection.
to implement a Fixed
that will break the
Iink between fntermountain's (a) margln from its
residential- and commercj-al- customers and, (b) the natural-
gas deliveries to these
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McGrath, Di 2fntermountain Gas Company
same core market customers. As a result of the ECCM, the
traditional link between Intermountain's gas deliveries
and earnings will be broken. Therefore, fntermountain's
revenues and earnings will be unaffected by variations in
the quantities of gas that it del-ivers to its residential
and commercial customers. Each month, the Company w111
reconclle the difference between (1) the Company's actual
Fixed Cost Collection Margin per customer, by rate cIass,
and (2) the Company's Allowed Fixed Cost Collection
Commission in this proceed-ing.
the term that you used, "Fixed
Cost Coflection Margin. "
A. The term Fixed Cost Collection Margin refers to
the distribution margin that the Company relies on to pay
for the fixed costs of providing safe and reliable
service to its customers. The Fixed Cost Collectlon
Margin
c1ass,
o
Margin 1s the
cost per therm
Equlvalently,
be calculated
per customer for that month for the same rate
as approved by the
Please explain
margin associated with the distribution
for the applicable rate
Cost Collectionthe Eixed
schedules.
Margin can afso
as total sales service margj-n less PGA
revenues and less revenues recovered from the customer
charge for the applicable rate schedufes.
O. Which rate schedufes will be effected by the
Company's proposed Eixed Cost Collection Mechanism?o 25
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McGrath, Di 2a
fntermountain Gas Company
A. The Company's proposed FCCM will- apply to Rate
Schedul-es RS, Residential- Service; GS-1, General Service,'
IS-R, Residential- Interruptible Snowmelt Service; and
IS-C, Smal-l- Commercial Interruptible Snowmelt Service.
In this testimony, references to Rate Schedul-e
RS or Residential- Service wifl also include Rate Schedul-e
IS-R, Residentj-al Interruptible Snowme1t Service
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and references to Rate Schedule GS-1 or Generaf Service
will also include Rate Schedule IS-C, Sma11 Commercj-a1
Interruptible Snowmelt Service.
O. Please explain why the Company is proposing to
implement this FCCM.
A. The margin that the Company relies on to pay
for the Company's fixed costs to (1) operate and maintain
its system and (2) expand and replace aging portions of
its distributlon system has been declinlng over time, ds
our customer's homes and businesses continue to use
progressively less natural gas as a result of revisions
to building code standards, more efficient appli-ances as
well as other customer behaviors that conserve energy.
While the Company's proposal to implement a Demand Side
Management (DSM) program adds measurabl-e value to our
customers and the environment, these same DSM programs
will-, nonetheless, exacerbate an a.l-ready decreasing
usage, and therefore margin, per customer. The FCCM that
the Company is proposing will allow the Company to
effectively promote and advocate for its proposed DSM
program without the financial disincentives that
currentfy exist, wlth margins directly connected to sales
volumes.
O. fn addition to the declining usage per customer
resulting from energy conservation measures, are there
McGrath, Di 3
Intermountaj-n Gas Company
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McGrath, Di 3a
fntermountain Gas Company
other determinants or factors than can afso infl-uence the
naturaf gas sales to the Company's Rate Schedule RS and
GS-1 customers?
A. Yes. The Company's RS and GS-1 Eixed Cost
Collection Margin can vary from year-to-year due to
fluctuations in the del-iveries of natural gas (measured
in therms) caused by variability in the weather as well-
as changes in the loca1,
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McGrath, Di 4
Intermountain Gas Company
regional, and nati-onal economy. The deviations in
defiveries caused by these determinants, however, are
generally erratic and short-term in nature.
O. How will the Affowed Fixed Cost Coll-ection
Margin per customer for Rate Schedules RS and GS-1 be
determined?
A. Each month, the Company will reconcile the
dj-fference between (1) the Company's actual Fixed Cost
Collection Margin per customer, by the aforementloned
rate cfasses and, (2) the Company's Allowed Elxed Cost
Col-lection Margin per customer for that month for those
same rate classes, ds approved by the Idaho Commission in
this proceedlng. The lnitial A1l-owed Fixed Cost
Col-lection Margin per customer for each month wil-l- be
calcul-ated as the monthly Fixed Cost Col-lection Margin
divided by monthly biJ-1ed customers, separately for Rate
Schedules RS and GS-1, based on the Distribution Cost per
therm rates and billing determinantsl that are approved
in this proceeding, as determined by the Idaho
Commission, and cal-culated in the Company's compliance
fi 1 ing
If the Dlstribution Cost per therm rates for
Rate Schedule RS or Rate Schedule GS-1 are revised at any
the
be
time after t.he rates in this proceeding
Allowed Elxed Cost Collection Margin per
are approved,
customer wil-l-25
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McGrath, Di 4a
Intermountain Gas Company
accordj-ng1y revised based on the new Distribution Cost
per therm rates for Rate Schedule RS and Rate Schedule
GS-1, and the billlng determinants that are approved in
this proceeding.
1 For these rate schedules, "Bi-1-ling Determinants" is the count
of monthly bills (or customers) and the totaf therms (and
therms by rate block, j-f appropriate) that are used in a rate
case, such as this proceeding INT-G-16-02, to determine the
rates that are approved by the Idaho Commisslon.o 25
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McGrath, Di 5Intermountain Gas Company
The derivation of the initial Al-lowed Fixed
Company's proposed rates, is shown
Please explain Exhibit 21 .
Monthly RS Al-l-owed Cost
shown on lines 1 to 9,
The calculation of the
Coll-ection Margin per customer is
and the calculation of the Monthly GS-1 Al-lowed Cost
Coll-ection Margin per customer is shown on l-j-nes 10 to
30. Because the methodologies that f used to calcu1ate
the RS and GS-1 All-owed Cost Collection Margin
Cost Coll-ection Margin
and GS-1, based on the
in Exhibit 21 -
methodology. Rate
are shown on Lines
Blattner also used
per customer for Rate Schedules RS
per
RS
Schedu]e RS customers and Therm sales
1 and 2. Company Witness Lori
this data to calculate
o
A
customer are identical I will only explain the
and the annual-
the Company's
totals onproposed RS and GS-1 rates
Exhibit 21 are also shown
The Company's proposed RS
rate are shown on Exhibit
on Ms. Blattner's Exhibit 20.
customer charge and vol-umetric
2f, lines 4 and 5, and the
cal-cul-ated margins associated with the customer charge
Exhibit 2f, lines 7and vol-umetric charge are shown on
and 8.
Margins
o.
to Rate
Lastly, the monthly Allowed Cost Co1lection
per customer are shown on l1ne 9.
Pl-ease explain (a) why the FCCM wil-l apply only
Schedul-es RS and GS-1, and (b) why the ECCM wj-11-o 25
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not appl-y to Rate Schedul-es LV-1, T-3 and T-4.
A. The Company proposes to apply the FCCM to Rate
Schedules RS and GS-1 because (1) the Company's proposed
DSM energy efficiency programs wj-l-I initial-fy apply to
residential and general service customers, but not to the
McGrath, Di 5a
fntermountain Gas Company
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McGrath, Di 6
Intermountaln Gas Company
customers served by rate schedules LV-1, T-3, and T-4;
(2) most of the variability
that the Company experiences
these two rate cfasses; and
1n year-to-year FCCM margin
is associated with sales to
two customer groups
Company' s
distribution
(3) these
a significant portion of the
flxed costs and, therefore,
represent
allocated
margr-n.
f have prepared Table MM.1 below to show 2076 weather
normalj-zed deliveries and distribution margin for.
Intermountain's rate classes.
. Table MM.l 2016 Weather Nomalized Ileliveries and Distribution Margin
Rxe Schedule RS includes current Rate Schedules RS-l and R$2. Proposed Rate
Schedule T-4 includes current Rate Schedules T4 and T-5.
I have prepared Table MM.2 below to show total
distribution margin and vol-umetric margin by class, based
on current rates and 2016 rate case billing determinants.
Table Ml\rL 2 Distribution
Proposed Class
Margin and FCCM
Note: hoposed Rde Schedule RS includes curreat Rate Schedules RS-l and RS-2. Proposed Rate
Schedule T-4 includes current Rate Schedules T-4 and T-5.
RS
IS.R
GS-l
I34 LV-l T-3 T4 Total
Distibution margin $53.232.253 $19.530.463 M03.987 $727.673 $9.183.1 13 $83.077.4E9
u.t%23.5o/o 0.5o/o 0.9o/o ll.l%o lfr)..U/oaso/o oftptal
2L.27E.706 t0.797266 63t.756 3.990.n9 28.Mt283 65.139.9qDeliveries (MMBtr)
32.7o/o 16.60/o l.U/o 6.1%43.7o/o IOO-V/oas % of total
RS
IS-R
G$r
rs-c
CNG LV-l T-3 T4 Total
Distribution Margin ss3.2322s3 $19.s30.463 s403.987 s727,673 $9-183-l 13 s83-077.489
Volumeric margin $39.048-014 st1-7v2-M5 s403-987 $727.673 $8.73 1,332 s66-703.050
Volumetric as %
distribution marsin
73.9o/o 9t.r%100.0%100.0%95.1o/o 80.3o/o
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McGrath, Di 7
fntermountain Gas Company
Table 1 demonstrates that 81.6 percent of total Company
distributj-on margin are provided by Residential Rate RS
and General- Service Rate GS-1 and 49.2 percent of total
defiveries are made to Residential Rate RS and General
Service Rate GS-1.
0. Please describe specific elements of the FCCM.
A. The Company's proposed FCCM w111 recover or
return annuaf RS and GS-1 FCCM margin shortfal-ls or
surpluses for each FCCM Year period, defined as the \2
months October through September. The RS and GS-1 FCCM
adjustment rates to be applied in the upcoming FCCM Year
are calcu1ated as the annual- margln shortfall-s or
surpluses for the 72 months ended September plus the
final reconcil-iation balance for the prior (October
through September) FCCM Year divlded by projected annual
RS and GS-1 therm deliveries for the upcoming 12 months
ended September. The Company wil-l- file an annual FCCM
calcul-ation prior to October 1st, usingr ds available,
actual data and projected data for the October through
September period.
O. Pl-ease describe the ECCM calculations that you
mentioned r-n your prr_or response.
I have prepared Exhibit
the calculations that I
FCCM cal-cul-ations for Rat-e
A
example
Example
of
28 to provide an
wiII explain below.
Schedules RS and GS-1o25
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McGrath, Di la
Intermountain Gas Company
are provided
The example
are shown on
I created.
on Exhibit 28, pages 1 and 2, respectively.
and therms that"actual" monthly
linesland2of
customers
both pages are numbers that
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McGrath, Dl I
Intermountain Gas Company
The Company will determine the Fixed Cost
Collection Adjustment Factor
of each annual FCCM year, i. e
("FCCAE") pri-or to the start
each 12-month period,
followlngOctober through September, according to the
process:
(1) Eor each month of the FCCM Year,
wil-l cal-cul-ate the monthly actual
the Company
FCCM margin
28, page L, monthly
shown on line B, and
per customer for Rate Schedules RS and GS-1 by
dlviding monthly actual ECCM margin for Rate
Schedules RS and GS-1 by monthly billed
customers for Rate Schedules RS and GS-1.
Referring to
Schedu]e RS
actual FCCM margins
the monthly actual
the FCCM calculations for Rate
on Exhibit
are
calculated values of FCCM
per customer are shown on l-ine 11.
(2) For each month of the FCCM Year, the Company
wil-l- cal-cul-ate the difference between Al-l-owed
and actual- FCCM margin per customer, for Rate
Schedules RS and GS-1. The cal-culated monthly
dlfferences between all-owed and actual ECCM
margr-n per
on Exhibit
customer Rate Schedule RS are shown
28,
(3) For each month
page !,
of the
Company wilI calculate
line 12.
ECCM Year period, the
ECCM margin shortfal-l-so25
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McGrath, Di Ba
Intermountain Gas Company
or surpluses by multiplying the margin per
customer di-fferences times actual customers for
each rate group, by month. The cal-cul-ated
monthly FCCM margin shortfall-s or surpluses for
Rate Schedule RS are shown on Exhibit 28, page
7, l1ne 13.
(4) The Company wil-l- calcul-ate RS and GS-1 FCCAFs
by dividing the total ECCM Year Rate
Schedule-specifi-c margin shortfal-l- or surplus
by projected therm del-iveries for the upcoming
FCCM Year, October through September.
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The RS and GS-1 FCCAFs wll-l- also include a
reconcil-iation of (a) the prior FCCM Year
(i.e., October through September) final FCCM
margin shortfal-l- or surplus and (b) the prior
ECCM Year adjustment charges or credits.
Referring to Exhibit 28, page !, the Company
would calculate the FCCM Year 1 RS FCCAF by
dividing the 12-month total deficiency,
($177,2L3; Column (M), Iine 13) by projected
FCCM Year 2 RS therms.
O. P1ease explain how actual FCCM margin per
customer will be calculated.
A. Every month, actual FCCM Margin, for RS and
GS-1 separately, will- be determined directly from the
actual booked base distribution margin on a bill-ing month
basis, minus calculated customer charge margin.
O. Pl-ease describe the timing of FCCM
cal-cul-ations, filings and rate adjustments.
A. The ECCM Year adjustment factor that is in
effect starting October lst of each year will be based on
the cal-cul-ations re1ated to the prior FCCM Year, that is,
ECCM cal-cul-ations for the prior October through September
period. Each FCCM filing will- also inc1ude a final
reconciliation of actual- and allowed FCCM margin, two
FCCM Years ago. I have prepared Exhibit 29 to ill-ustrate
McGrath, Di 9
Intermountaj-n Gas Company
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McGrath, Di 9aIntermountain Gas Company
the timing of FCCM calcu1ations and FCCAFs. Referring to
Exhlbj-t 29, the FCCAFs that will- be in ef fect starting
October 1 for FCCM Year 3 w111 be calculated based on (a)
ECCM Year 2 margin shortfal-l-s or surpluses plus (b) a
shortfalls or
(c) divided by
final reconcillation of FCCM Year 1 margin
surpluses
FCCM Year
and FCCM Year 1 FCCAF revenues,
3 projected delivery vol-umes (therms) .
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McGrath, Di 10
fntermountaj-n Gas Company
O. Will the calculation of the first FCCAEs after
the FCCM is approved be as depicted in Exhibit 29?
A. It is not 1ike1y that the timing of the first
FCCAE will be as depicted in Exhibit 29, unl-ess the FCCM
is approved effective October 1 The initiaf FCCAF will
approval, on the first
date of the FCCM. That
become effective upon Commission
October 1 following the effective
lnitial FCCAF wiIl recover the actual and projected
for each month starting
FCCM, through September.
margln surpluses and shortfalls
with the effective date of the
For example, if
this proceeding
and GS-1 FCCAFS
based
eight
projected therm
2OLB.
O. If the
modified before
new rates and the ECCM
effective February L,
woul-d become effective
are approved in
2011, the first RS
October 7, 2071
on FCCM margin surpluses
months Eebruary through
and shortfalls for the
distribution rates are
1n
September, 2071, divided by
sal-es for October 2017 through September
Company's base
new base rates
rate case become effective, wil-I
the Company's next base
any of the FCCM
calculations be modified?
A. Yes. If the Company's base distribution rates
are modified before the Company's next base rate case,
the Company will- make a corresponding revj-sion to the
Al1owed Flxed Cost Collection Margj-ns per customer, byo25
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month. The Company will include the revised Al-Iowed
Fixed Cost Collection Margins per customer, with
supporting documentatj-on, wj-th between-rate-case rate
change filings.
O. Has the Company prepared an ECCM tariff?
McGrath, Di 10a
Intermountain Gas Company
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McGrath, Di 11
Intermountain Gas Company
A. Yes. The Company's proposed a FCCM Tariff
which is shown as Original Tariff Sheet No. ll, pages 1
through 4,
o.Coufd
which are shown on both Exhibit 30 and 31.
that implements
you
the
briefly describe the tariff package
rates proposed by Intermountain in
this case?
A. Yes. Exhibit 30, which I am sponsoring, shows
the changes to Intermountain's tariffs, by striking over
proposed del-etions to existlng tariffs and underlining
additions or amendments to those existing tariffs.
Exhibit 31, which I am also sponsoring, shows these same
tariffs, both existing and new, in a cfean format.
Exhibit 31 is also shown as Attachment A to the
Application.
O. Does this concl-ude your testimony?
A. Yes.
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CSB Reportlng
(208 ) 890-s198
McGRATH (X)
Intermountain Gas Company
(The following proceedings were had in
open hearing. )
COMMISSIONER RAPER: And we will move to
Commission Staff for cross.
MR. COSTELLO: Just a couple of questions.
CROSS-EXAMTNATION
BY MR. COSTELLO:
O So woul-d you agree with Ms. Spector that
cost-effective energy efficiency is a l-east cost option
for serving Intermountain's customers?
A You know, it's not the, T-H-E, least cost
options. We're looking at the best least cost opti-ons to
serve our customers in so many ways. DSM can be one of
those ways, you know, our cost-cutting measures that have
been testified to in our testimony, the way that we
procure our
millions of
every day.
that's one
o
natural gas on a day-to-bay basis and inure
dol-l-ars of benefits to our customers each and
There are so many least cosL options, but
of them, yes.
And would you agree that even non-DSM
would benefit from a Company-sponsoredprogram customers
DSM program?
A You know, Lf you want to restrict me to ao25
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CSB Reporting
(208 ) 890-s198
McGRATH (x)
Intermountain Gas Company
order, Mr. W1l-l-iams
yes or no answer, I'd say yes, but the
woul-d be an interesting discussj-on, but
O Thank You, yes
asked the
moment
O Right.
A -- because as
we'11 certa j-nly do whatever
do, but that aside, would we
management without the fixed
Mr. Williams pointed out,
this Commission orders us to
proceed with demand side
cost col-l-ection mechanism,
cost col-]ection mechanism
worksr so
question
would the
magni-tude of that
yeah.
outside of an
earl-ier to Ms.
CompanySpector, outside of an order,
vol-untarlly proceed with its
proposed FCCM?
proposed DSM without the
A Let's restrict my answer to how you
prefaced it without an order. Let's put that aside for a
fro, we wouldn t t .
that I addressed
benefits to the
indifferent, our
That fixed
in my testj-mony has so many important
Company in terms of making us
flxed cost coll-ection indifferent to the
safes to our customers and in fairness, one of those
things that we should become indifferent to is demand
side management. That's one of many of the items I bring
up in my testimony as to why we need the fixed cost
coll-ection mechanJ-sm, DSM being one of those, but wou1d
we do DSM in and of itsel-f , ilor we wouldn't.25
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CSB Reporting
(208 ) B9o-s198
McGRATH (x)
Intermountain Gas Company
You know, I'm sorry it's taken those other
companies so long to figure out they needed those
mechanisms. Avista has one. Idaho Power has one. We
need one, too, and it's not because of DSM in and of
itself. There are so many other reasons, and it seems to
have been a proposed gap in time, if you will r or an
alluded to gap in time that there's generally been so
many years between the implementation of DSM and a fixed
cost collection mechanism. That does not have to be the
case. We're much more forward-looking than that and
believe they have to happen at the same time.
O So the implication of that is that you
would forego an identifled fower cost service option for
customers if you can't get full fixed cost recovery?
A That's correct. For the Company to be
indifferent to its sal-es, we would need both, and that's
not to say we're
side management
would llke us to
program. It's not
have right out of
as robust as some
not prepared to launch a robust demand
the chute,
got to wal-k before you run and we're prepared
walking.
O So would you entertain a fixed
adjustment mechanism that was l-imited just to
reimbursement for lost fixed margin
we woul-dn't. It
resulting
but you've
to start
A No,
cost
Company
from DSM?
doesn't make sense.o 25
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CSB Reporting(208) 890-s198
McGRATH (X)
Intermountain Gas Company
MR. COSTELLO: Thank you. That's all the
questions I have.
MR. STOKES: We have no questions, Madam
Chair.
MR. PURDY: I have just a couple.
CROSS-EXAMINATION
BY MR. PURDY:
O Given that Ms. Spector and/or her
attorney, he punted this issue to you regarding the
policy that woul-d prohibit low j-ncome data tracking and
not to steal thunder from Commlssioner Raper, but
A Thanks for that, Al}ison.
O I'm sure she'Il find some stones I
dldn't kick over, could you explain exactly what the
policy is? Where it came from? When? Why?
A You know, there 1s no policy. There is no
law that wou1d prohibit us from asking the question as to
thelr income l-evel-s. It's been our practice before we
were acquired by MDU and now after, but I'd l-ike to point
something out, "Ring, Ring, HeI1o, Intermountain Gas
Company, how much money do you make in a year?" Excuse
fr€, it's not our position to have to gain from every one
of our customers -- j-t's our requirement to serve ouro25
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CSB Reporting(208) B9o-s198
McGRATH (X)
fntermountain Gas Company
customers with natural
Ievel-, and I would like
our low income
gas regardless of their income
to point out, we do track, in my
customers. We simply do it in aopanfon,
di-f f erent
l-evel-s.
way than is being proposed by earmarking income
We know how many of our customers receive
LIHEAP assistance to pay their energy bill and j-t's about
61 300 customers in a year. Now, we know that without
having to ask our customers their income l-evel-, and I
understand there might be some benefits to that, but we
do have that metric available to us.
O Mr.
that is what CAPAI
telephone and say
A No,
McGrath, is it
has proposed,
how much money
your impression that
you pick up the
do you make?
the l-ow i-ncome
reporLs,
Idaho Power?
one more time. l
that was my attempt at acting out what
in gathering that kind of informationit might sound l-ike
from our customers.
O Have you reviewed any of
data tracking reports, monthly tracking
submitted by Rocky Mountain, Avista, or
A Pl-ease ask your question
think the answer is still going to be oo, but I want
to
O Have you ever reviewed any of
data tracking reports, that by the way track
the monthly
both25
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CSB Reporting(208) 890-s198
McGRATH (x)
Intermountain Gas Company
residential non-1ow income and residential- low income,
submitted month1y by Idaho Power, Rocky Mountain, and
Avista?
A I have not.
O You have not?
A Correct, I have not.
O Just for referral purposes, you might look
at Mr. KIein' s, Staf f witness Daniel- KIe j-n' s, Exhibit
7L9, pages
are, and so
plethora of
1 through 3, which
if I were to tell
data in there that
MR. WILLIAMS:
Again, Mr. Purdy
haven't heard a
1s testifying
question
MR. PURDY:
Chair. I'm just trying
even has an idea as to
witness and by CAPAI in
have examples of what those
you that there is a
is pertinent
Objection at this point.
as to this data. I
awhile.for quite
Irm not testifying, Madam
to elicit from this witness if he
what has been
this case, if
these reports, he knows what they
would be bothered by the type of
contained in them.
proposed by
he has seen
contain, and if
information that
my
any of
he
is
MR. WILLIAMS: And he was asked if he had
seen those and his answer was no.
MR. PURDY: And then my next question, the
fo1low-up, was would you be bothered, words to that25
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CSB Reporting
(208 ) 890-s198
McGRATH (X)
Intermountain Gas Company
effect, that was where I was going, if they contained
this kind of information. Thatrs not testimony.
lead him down
COMMISSIONER RAPER: Yeah, if you want to
that path with questions and get him to
hj-m to be, Mr. Purdy, then that would bewhere you
fine, but
together;
want
do it with questions as opposed to your linking
is that cl-ear? Thank
MR. PURDY: Okay,
THE WITNESS: Is
you.
a question on the
you.
thank
there
table?
O BY MR. PURDY: Yeah, I'm going to ask it
here in lust a second.
A Okay.
O Woul-d you be bothered by a report that
provided oh, for instance, number of arrearages in a
gi-ven year for
A
understand your
Tntermountain Gas Company
Intermountain Gas, customer arrearages?
Would I be bothered, I'm trying to
would I be bothered if
were to collect that
our customers? Let me be cl-ear
question,
information on behal-f of
that, you know, I've got at l-east four bosses in this
room. If my wife were here, I'd be totally overwhelmed.
I can give you my opinion on that, but not the col-l-ective
wj-sdom of the entire management team. PersonalIy, I
wouldn't be bothered. f don't think there's any Holyo25
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CSB Reporting(208) 890-s198
McGRATH (x)
Intermountain Gas Company
Grail here to know what shoul-d and shoul-dn't be
collected, but it
spectrum,'
it going
how is
has to be looked at in a pretty broad
it going to affect our customers, how is
the sensitivity
so oh, but, you
to affect our ability to serve,
our customers might have towards this and
know, why not discuss.
O Okay, one more
this will sort of tie in with
with, another metric might be
disconnected during the
versus non-low i-ncome.
internally held by the
even know because these
example, because I think
what you just finished
how many customers were
for non-payment low income
that data that is
year
Isn't
Company and the customer doesn't
are just account numbers, these
are not names of people?
A As I mentioned before, I'm aware that the
Company
not that
has metrics tying account numbers to whether or
customer received LIHEAP assistance, so, you
know, using that metrJ-c, I believe it shoul-d be an easy
step to gets towards of the disconnected customers, were
there, if dny, those customers receiving LIHEAP. Does
that answer your questlon?
O Yeah, I think so.
l-ook at examples of these monthly
submitted by the three el-ectrics?
Wou1d you be willing to
reports currentJ-y
A Right, and that review woul-d go beyondO25
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CSB Reporting
(208 ) 890-s198
McGRATH (X)
Intermountain Gas Company
myself to include others, but you bet.
MR. PURDY: That's all- I have. Thank
you.
COMMISSIONER RAPER: Thank you, Mr. Purdy.
Mr. Richardson?
MR. RICHARDSON: No questions, Madam
Chair.
COMMISSIONER RAPER: Mr. Otto.
MR. OTTO: I do have just a very short
fine of questioning.
CROSS-EXAMINAT]ON
BY MR. OTTO:
O Mr. McGrath, you've testified here and on
the stand that having the
for a DSM
fixed cost mechanism is a
necessary step program; is that fair to kind of
wrap up, summarize your testimony that way?
A I think that's a fair statement, Mr. Otto
indifferent as toft's necessary for
the throughput on
DSM agqressively,
the Company to be
its system. If 1t's going to pursue
it needs a fixed cost col-l-ection
mechanism, and I stated, in my opinion, they need to be
coincident with one another.
O So if the Commission were to approve aoZJ
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McGRATH (X)
fntermountain Gas Company
fixed cost col-l-ection mechanism, is Intermountain Gas
willing to quickly conduct a third-party Commission-done
study of the potential- in the servj-ce area for
cost-effective conservation as a necessary first step in
ramping up those DSM programs?
A Let me repeat the questlon, please, Mr.
Otto.
Okay, I' l-1 repeat it.
If this Commission were to approve the
Company fil-ed,
O
A
fixed cost coll-ection mechanism that the
would Intermountain Gas Company be willing to proceed
with some third-party evaluations to help us look into
different cost-effective measures for demand side
management? If that's your question, the answer woul-d be
yes.
O That is very cl-ose
to be clear about this,'
questj-on, but I
is, what we asked
to my
thatjust want
for is there's rea11y a trade name for it, the
conservation potential
that's a known
type of thing
A
rock star
type
that
Now,
^E(JI
you
1et
assessment, so that type of
study i-n the trade, is that the
would be willing to do quickly?
me mention that Al-Iison is our
O Yes.
A on the demand sj-de management, ao25
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CSB Reporting(208) 890-s198
McGRATH (x)
Intermountain Gas Company
recognized expert in the Northwest, and I believe I've
heard her say very qood things about such an organization
and f donrt know why we woul-d be opposed to that, but I
would need to consuft with certainl-y her before
proceeding and others, but if you're asking me
personally, I think that's a positive step.
O Fair enough. One last questi-on. You
proposed the fixed cost coflection mechanism should cover
both the residential and the commercial cl-ass; true?
A Yes, RS and GS, which are our smal-l-
commercial- customer classes.
O So assuming that mechanism in pIace, would
you aqree it's very important to quickly have some DSM
measures for that commercial class?
A Yes, I would, and as I mentioned, you need
to wal-k before you run. There are regulatory recovery
for demand sidemechanisms that need to be in place
management programs. We
ready to go to include,
accommodations.
MR. OTTO:
That' s all-.
need to hire staff, but we're
to your point, GS customer
Okay, ready to go. Thank you.
COMMISSIONER RAPER:Are there any
Purdy stole mine, butquestions from the
as luck would have
Commissioners?
it, I do have one other question.o 25
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CSB Reporting
(208 ) B9o-s198
McGRATH (Com)
Intermountain Gas Company
EXAMINATION
BY COMM]SSIONER RAPER:
O So I'm trying to make the connection with
where the Company's mindset is at and you've been punted
to by others as the regulatory 9uy, so you seem like the
guy t.o ask. DSM programs would not be offered to all-
customer classes, but fixed cost recovery would be
recovered from maybe not a1I, but more customer classes
than what the DSM programs woul-d initially offer, so I
here ramp-up in re1ation to DSM, to a robust program is
the other language, but fixed cost recovery woul-d
presumably begin, you know, upon implementation of DSM
programs. Is there a bal-ance? f mean, you know, we the
Commission are charged with making it fair, just, and
reasonable to ratepayers
A Right.
O so where does that bal-ance come in? ls
there a ramp-up of programs and ramp-of recovery or is
there a set filing date upon which you start new programs
and have additional recovery? What does that look l-ike
to you as the regulatory guy?
A WeIl, let me again state, Commissioner
Raper, that I'd like to be careful about joining too
closely together the need for the fixed cost col-l-ectiono25
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CSB Reportj-ng
(208 ) 890-5198
McGRATH (Com)
Intermountain Gas Company
mechanism purely from a demand side management program
standpoi-nt. There are many, many other reasons why our
Company has been subjected to decreasing usage from so
many other level-s, but that being said, you tal-ked about
customer classes a moment ago, the fixed cost collection
mechanism as fifed by the Company is only geared toward
residential and GS or small- commercial customer cl-asses.
I think the Northwest Industrial- Gas Users
could better testify to this point than f can, but
there's a reason in that natural gas companies are
different than a fuJ-Iy integrated l-inear el-ectric
company. I mean, we don't generate the power. We don't
transmit the power. There's other different entities
that do that and they have, if you wi11, much less to
save from a nat.ural gas perspective on a from a DSM
perspective, so they're excluded from our target.ed
ramp-up to demand side management and from our fixed cost
collection mechanism.
It is strictly to
but another
residential and
commercial customers,
I believe, was, you
dominoes that would
know, what
fall to get
part of your question,
I see maybe is the
towards DSM. To me,
do
US
the first important step was to tell this Commission
we're ready to go, but it's important for us to see how
the Commission finally weighs 1n on that matter, both aso25
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CSB Reporting(208) 890-s198
McGRATH (Com)
Intermountain Gas Company
to our mechanism and our proposed demand
Commission were to say
side management
yes to both of
don't want to
couple of
with the
program.
those, we
If this
would come back
say immediately, because
days off myself, but very
Staff and give a proposal
costs we think shoul-d be
in, you know, I
I 'd l-ike to take
soon and sit down
a
as to these are the klnds of
looked at for recovery. Now, do
you agree or disagree, so we put
if you will, what costs need to
the formufa out there,
be recovered from that
kind of program. You know, there are rebates, for
instance, involved 1n that and you'd see us do that
relatively quickJ-y. Did
question, Commissioner?
I miss any part of your
f 'm sorry.
RAPER: No, I think
you. Is there any
you got
redirect
COMM]SSIONER
to it generally, yes. Thank
from counsel-?
MR. W]LL]AMS:
COMM]SS]ONER
No redirect.
RAPER: Thank you, Mr
McGrath.It appears to be all we have for you.
THE WITNESS: I'm about $3.00 richer.
COMMISSIONER KJELLANDER: That's my kids'
college fund.
(The witness left the stand. )
MR. WILLIAMS: Madam Chair, that completes
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CSB Reportlng
(208 ) 890-s198
McGRATH (Com)
Intermountain Gas Company
witnesses.
on and can you repeat that?
MR. W]LLIAMS:
the Company's direct case.
COMMISSIONER RAPER: Do you have your mic
Madam Chair, that completes
Mr. Williams, and I
that we would move
order to present Mr
MR.
MR.
believe it was agreed
to Northwest Industrial
COMMISSIONER RAPER: Thank YOU,
to early on
Gas Users 1n
Gorman and his testimony next
STOKES: Yes, thank you
PURDY: Madam Chair, I'm sorry to
found out Iinterrupt, I
do have to be
did have an interim matter. I
5:15 , 5220, is
someplace and leave no later than probabJ-y
that going to be a problem?
COMMISSIONER RAPER: We might look to the
other attorneys in getting a yes or no answer to that
problem.
MR. WILLTAMS: I don't think so.
many days this
adjudicate the
need to adjourn
commitments, then
MR.
COMMISSIONER RAPER: We can take however
case, you know, needs in order to fu11y
facts and evidence in the record, so if we
at 5:15 today because you have other
that is what we will do.
PURDY:Thank you.
RAPER: Thank you for lettingCOMMISSIONERo25
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CSB Reporting
(208 ) 890-s198
GORMAN (Di)
NWIGU
me know.
MICHAEL P. GORMAN,
produced as a witness at the instance of the Northwest
Industrial- Gas Users, having been flrst duly sworn to
te1l the truth, the whol-e truth, and not.hing but the
follows:truth, was examj-ned and testified as
DIRECT EXAMINAT]ON
BY MR. STOKES:
0 Please state your name and address for the
record.
A My name is Michael- Gorman. My address is
1,6690 Swingley Ridge Road, Chesterfield, Missouri.
0 What's your employment position and who do
you represent in this proceeding?
A I'm employed by Brubaker & Associates. We
are regulatory and economic consultants and f am
representing the Northwest Industrlal- Gas Users.
O And your position with Brubaker &
Associates ?
A Yes.
O What is your
A f am the managing principal- with Brubakero25
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CSB Reportlng(208) 890-s198
GORMAN (Dr)
NWIGU
& Associates. We are consultants for large consumers of
utility services. From that standpoint, we work 1n all
aspects of requlatory proceedings, rate cases, resource
planning proceedings, and general policy proceedings for
the effective and balanced regulation of utility
companles. We are al-so we al-so work with large
industrial consumers in procurement of competitive
supplies, such as electric power and natural gas.
direct testimony
of 19 of pages and 18 exhiblts and prefi1ed
testimony consisting of
A Iam.
O If I were
26 paqes in this proceeding?
to ask you
O And are you
caused to be fil-ed preflled
today that you answered, woul-d your
same?
correction.
the same Mike Gorman that
consisting
rebuttal-
the same questions
answers be the
that, please?
64 of my direct testj-mony on
that sentence reads "of the
that should be corrected to
gas utility industry, " and
A They would with one typographical
O And what is
A It's on page
line 18. The beginni-ng of
electric utility industry, "
state "of the electric and
with that, that
testimony.
completes my corrections to my
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CSB Reporting
(208 ) 890-5198
GORMAN (Di)
NW]GU
MR. STOKES:
the testimony and exhibits
as if read of Mike Gorman.
sorry?
With that, I move to enter
and spread it upon the record
Did I say that wrong, f'm
COMMISSIONER RAPER: No, yourre fine,
dlrect and rebuttal?
MR. STOKES: Yes.
COMMISSIONER RAPER: Okay, I just wanted
to make sure
MR. STOKES: And the exhibits as well.
COMMISS]ONER RAPER: Okay, thank you; so
spread both the direct andwith no objection, we
rebuttal testimony of
wil-l-
Mr. Gorman on the record, as weII
as Exhiblts 301 through 318.
(NWIGU Exhibit Nos. 301 - 318 were
admitted into evidence. )
(The fol-lowing prefiled direct and
rebuttal testj-mony of Mr. Michael P. Gorman is spread
upon the record. )
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O PLEASE STATE YOUR NAME AND BUS]NESS ADDRESS.
A Michael P. Gorman. My business address is
L6690 Swingley Ridge Road, Suite 140, Chesterfleld, MO
53 017 .
O WHAT IS YOUR OCCUPATION?
A I am a consuftant in the fiel-d of public
utility regulation
Associates, Inc.,
and Managing Principal of Brubaker &
energy, economic and regulatory
consultants.
O PLEASE DESCRIBE YOUR EDUCATTONAL BACKGROUND AND
EXPERTENCE.
A This information is incLuded in Appendix A to
my testimony
O ON WHOSE BEHALF ARE YOU APPEAR]NG IN THIS
PROCEED]NG?
A I am appearing on behal-f of Northwest
Industrial Gas Users ("NWIGU").
I. OVERVTEW A}ID TESTIMONY SI'MLNRY
O WHAT INCREASE HAS IGC REQUESTED IN THIS RATE
CASE?
A The overafl increase sought by Intermountain
Gas Company ("IGC")in this proceedlng is $10,165,000.1
YEAR HAS IGC PROPOSED FOR THTS CASE?O WHAT TEST
tL IGC is proposing a test year reflecting six
actual- (January-June 2016) and six monthsmonths
Gorman, Di 1
NW]GU
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projected data (July-December 2016) for the twelve months
ending December 37, 2016. The Company states that it
will provide the Idaho Public Utilities Commission
("Commission") with monthly updates to the sj-x months of
projections through December 31, 2016, to refl-ect actua1
data.2
lfcc Exhj-bit No. 76, page 1 (Darrington Direct) .
2Direct testlmony of Ted Dedden, page 2.
Gorman, Di 1a
NWIGU
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A DO YOU BELIEVE ]GC HAS JUSTIFIED ITS PROPOSED
oVERALL TNCREASE OF $10,166,000?
A No. I bel-ieve IGC's claimed revenue deficiency
is overstated. Based on my detailed analysis of several
aspects of the operations of IGC, f have determined that
the Company's revenue requirement is overstated by at
l-east $4,208,000. This revenue requirement does not
i-ncorporate other parties' adjustments, which could lower
the revenue requirement even further.
It should be noted that if my testimony does
not address a specific cost of service issue, this should
not be interpreted as NWIGU accepting IGC's position.
NWIGU reserves the right to accept and adopt other
parties' adjustments.
O PLEASE SUMMARIZE THE REVENUE REQUIREMENT
ADJUSTMENTS THAT NWIGU IS PROPOSING.
A I am proposing a reduction to IGC's revenue
requirement as a result of adjustments to the return on
equity and capital structure (collective1y, rate of
return), other revenues, affiliate costs, incentive
compensation and income taxes. This information is
outlined bel-ow in Table 1.
Gorman, Di 2
NWIGU
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3
I
NWGU's Adjustments to !GC's
Proooeed Revenue Requirement
Adiustments:
1. Rate of Retum
2. OtherRevenues3 Affiliate Costs
4. lncentive Compensation
5. Bonus Depreciation
6. TotalReduction
$10,166
TABLE 1
Cateqorv of Adiustment
Requested lncrease
7. Adjusted lncrease $5€58
Amount of Reduction
($1,689)
(206)
(1,381)
(704)
e28)
($4.208)
II. RATE OF RETURN SI'MMARY
O WHAT RATE OF RETURN IS IGC REQUESTING IN THIS
PROCEEDING?
A IGC is requesting an overall rate of return of
'7 .42e". This rate of return is based on a requested
return on equity of 9.92, and
of 50% long term debt
a capital structure
composed
overal-l-
cost of
\z
rate of return includes
and common equity. IGC's
an estimate of embedded
debt of 4 .942 .3
IS TGC'S REQUESTED OVERALL RATE OF RETURN
REASONABLE?
A No. IGC's requested return on coflImon equity of
9.92 is significantly in excess of its current market
Gorman, Di 3
NW]GU
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cost of equity. Setting a return on equity 1n excess of
IGCrs current market cost of equity is imbalanced because
it results in unjustified rate increases to retail
customers to support an above-market rate of return on
equity investments in its utility plant and equipment.
3Chiles Direct at 2
Gorman, Di 3a
NW]GU
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Gorman, Di 4
NW]GU
Further, IGC's proposed capital structure
50.0% common equity and 50.0% long-term debt j-s not
reasonable. Based on its most recent financial-
IGC's common equity ratio,
of
statements,
short-term debt is
most recent actuaf
common equity ratio
set at 52.02.
approximately 41.952
capital structure, I
be set at 48.08 and
including
. Based on its
recommend IGC's
its debt ratio be
a Do You PRoPosE A MORE REASONABLE RETURN ON
EQU]TY FOR RATE-SETTING PURPOSES FOR TGC IN THIS CASE?
A Yes. I performed a detalled investigation of
the current capital market for regulated utj-Iity
companies, including gas utility companies, and performed
several market analyses to estimate IGC's current market
cost of equity that fairly compensates its investors for
the j-nvestment risk of a gas dj-stribution company
operating with fGC's currenL financiaf and business
risks. Based on this study, as detalfed later in this
testimony, I find a fair return on equity to fall within
I recommend IGC's returnthe range of 9.22 up to 9.42.
on equity be set at 9.32.
inappropriate to award IGC
However, I bel-ieve it would be
a return on equity greater
of 9.42.than the high-end of my estimated ranqe
O WHAT WOULD BE THE IMPACT OE THE CLATMED REVENUE
DEF]CIENCY ]F THE RETURN ON COMMON EQUITY REQUESTED BYo25
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NWIGU
IGC OF 9.9% WERE REDUCED DOWN TO 9.3% AND ]TS CAP]TAL
STRUCTURE BE BASED ON A 48.0% COMMON EQUTTY RAT]O?
A Reducing IGC's return on equity used to develop
its revenue requirement woul-d reduce its claimed revenue
deficj-ency by $1,187,000. Thls reduction in the overal-I
rate of return and resulting revenue
only an adjustment to the requested
9.92 down to 9.32.
requirement reffects
return on equity from
Reducing
to 48.0? would have
IGC's common equity ratj-o from 50.0%
an additional reduction in IGC's
claimed revenue deficiency of $502,000.
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O W]LL A 9.3% RETURN REPRESENT EAIR COMPENSATION
FOR ]GC ]N THIS PROCEEDING?
A Yes. As outfined later in this testimony, a
9.3% return on equity represents fair compensation in the
current low capital cost market environment where IGC and
all utilities currently operate within, wil-l maintain a
strong investment grade bond rating, and support its
access to external capital. Therefore , for these
reasons, I bel-leve that a 9.32 return on equity
represents a fair and balanced overalf rate of return
t.hat fairly compensates investors, and minimizes
unnecessary rate increases on retail- customers.
IIT. OTHER REVENT'ES
O WHAT LEVEL OF OTHER REVENUES HAS IGC INCLUDED
IN THE COST OF SERVICE IN
A IGC has included
six months ending June 30,
31 through December 31 of
TH]S CASE?
actual other revenues for the
2016 plus a forecast for July
2016. The forecast is based on
for 2015.4amountsthe calendar year
o Do You AGREE WITH THIS AMOUNT?
A No. Eor the other revenue items shown in the
tabl-e below, the amount reallzed during the first six
months of 2Ot6 have increased approximately 6.42 over the
first six months of 2015.
4Direct Testi-mony of Ted Dedden, pages 5 and 6
Gorman, Di 5
NWIGU
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Gorman, Di 6
NWIGU
TABLE 2
Other Revenues Year To Year Comoarison
Other Revenues
Miscellaneous Service
Field Collection Charge
Return Check Charge
Account lnitiation Charge
Reconnection Charge
lnterest on Past Due Accounts
Other Miscellaneous
Cash Discounts
Total
Percentaqe lncrease
$1,551,820 $1,458,327
January -June 2016 s
$606,844
15
58,720
481,284
25,894
367,312
7,917
3,834
January -
June 2015 5
$576,543
8,160
38,940
429,446
45,056
349,405
8,353
2,423
Year over
Year lncrease
$30,300
(8,145)
19,790
s1,838
(19,162)
17,906
(436)
1,411
$93,493
6.4o/o
Rather than using 2075 data as the forecast for
July through December of 20L6, the first six months of
2076 better represents the ongoing level of other revenue
for the items shown above. Therefore, I recommend usJ-ng
the first six months of 201,6 as the forecasted amount for
July 31 through December 31 of 2076 for other revenue
items listed above. This calculation wil-l- annualize the
year over year increase in other revenue actually
months of 20L6.experienced during
O HOW DOES
FTRST SIX MONTHS OF
the first six
THIS ANNUALIZED LEVEL, BASED ON THE
20T6, COMPARE TO THE OTHER REVENUE
AMOUNT FOR THESE ]TEMS ]NCLUDED IN THE COST OF SERVICE BY
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Gorman, Di 5a
NWIGU
A My recommendation resul-ts in a $206,000
increase in other revenues and a $206,000 reduction to
the revenue requirement in t.his case.
5lGC rxhiblt No. 9 (Dedden Direct) .
6ZO|S other revenues (NWIGU DR No. 1-31), less July through
December forecast, IGC Exhiblt No. 9 (Dedden).o 25
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Gorman, Di 1
NWIGU
IV. AFFILIATE COST
O HAS IGC TNCLUDED CHARGES FROM AFFTLIATE
COMPANIES ]N ]TS DETERMINATION OE THE REVENUE
REQUIREMENT?
A Yes. IGC has included $15,828,000 of
affil-iated charges in the test year in this case.7
O HOW DOES TH]S LEVEL COMPARE TO PRIOR YEARS
AFFTL]ATE CHARGES?
A For 20Lt through 2075 affiliate charges have
ranged from $13,995,000 to $14,870,000, averaging
$14,441 ,000 during t.he five-year period. The test year
amount j-ncluded in the cost of service represents a 9%
increase above the five-year average and a
most recent actual ca]endar
10? increase
above 2075, the year l-evel of
affiliate costs. B The tabl-e below shows the total
affiliate cost for 2077 through 2015 and the test year
amount.
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3
3 Trcc Exhibit No. 11 (Dedden Direct).
SBased on data provided in response to NWIGU DR No. 1-33
Year
TABLE 3
Affiliate Cost
Actual
Test Year
Forecast
(1)(21
2011
2012
2013
2014
2015
Average
$14,869,658
$14,306,186
$13,995,404
$14,618,315
$14.M4.524
$14,446,817
2016 $1s,827,869
Gorman, Di 7a
NWIGU
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NW]GU
As shown in Tabl-e 3, actual affi1iate cost (Column 1) has
varied up and down with no specific trend.
O HAS IGC PROVIDED ANY EXPLANATION FOR THIS
INCREASE IN COST FROM AFFILIATE COMPANIES?
A No.
charges in his
explanation or
sought by the
O WHAT
962 of the
direct testimony, but
justification for the
ComPany. e
AFFILIATE COST AREAS
provides no
increased level
HAVE EXHIBITED
IGC witness Dedden discusses affiliate
SIGN]FICANT INCREASES?
A The increase in affil-iate costs generally
occurs in three areas:
1 Customer support, which incl-udes billing
and coll-ection, customer servj-ce and
customer development;
2. Informatron SCTV].CCS,
technology
which incl-ude
risk management,
information technology, communications and
information systems; and
3. Charges from MDU Resources Group, Inc.
("MDUR"), whlch include payro11,
procurement, enterprise technol-ogy and
general and adminj-strative services.
Together the increase in these areas comprise
total- increase in affiliate costs.
information
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NWIGU
O ARE YOU RECOMMENDING AN ADJUSTMENT TO THE LEVEL
OE AFF]LIATED COSTS TGC HAS ]NCLUDED IN THE REVENUE
REQUIREMENT?
A Yes. f recommend reducing the test
affiliate cost to the five-year average level-
year
experienced
during 20L7 through 2015, or $14, 441 ,000 .
adjustment reduces the affiliate charges by
the test year.
This
$1,381-,000 in
9Direct Testimony of Ted Dedden, pages 8 through 12.o 25
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V. INCENTI\IE COMPENSATION
O HAS IGC ]NCLUDED INCENTIVE COMPENSATION ]N THE
DETERMINATION OF REVENUE REQU]REMENT?
A Yes. IGC is j-ncluding $704,000 of incentive
compensation and related payroll taxes in the revenue
requirement 1n this case.10 This amount reflects a
reduction for the incentive compensatlon that IGC
specifically attributes to meeting the net income
financial metric. However, IGC continues to seek
recovery of incentive compensatlon it attributes to
meeting metrics for cost control and customer
satisfaction.
o ARE YOU OPPOSED TO TNCENTIVE COMPENSATION
COSTS?
A No. However, I bel-ieve a properly developed
incentive plan should reward employees for their specific
performance, which can be demonstrated to result in
customer benefits or employee safety for IGC gas delivery
operations.
V.A. Incentive Metrics
O ARE IGC INCENTIVE METR]CS BASED ON MEETING
METRICS FOR ITS RETAIL CUSTOMERS AND EMPLOYEES?
A No. As a result, dfl IGC employee's performance
1s measured against the combined results achieved by IGC,
Gas andCascade Natural- Gas Company, Great Pl-ains Natural
Gorman, Di 9
NWIGU
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Montana-Dakota Utilities operating across eight states.
This is a valid concern if IGC employee performance is
based on the achievement of metrics that consider the
combined results of the MDU electric and gas utility
segment.
10rcc Exhibit No. L5, page 17 (Darrington Direct).
Gorman, Di 9a
NWIGU
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Even if cost control and customer satlsfaction
were determined to be appropriate metrics for incentive
compensation that is refl-ected in customer rates, these
metrics reflect the results of operations, which are not
speciflcally based on the performance of IGC service
quallty or IGC employee safety. Therefore, there is no
proof t.hat IGC ratepayers receive any benefit from the
MDU incentive program.
O DO YOU BELIEVE SHAREHOLDERS REAP SUBSTANTIAL
BENEFTTS FROM INCENTIVIZING MDU-W]DE COST CONTROL AND
CUSTOMER SAT]SFACTION?
A Yes. Incentives based on measureabl-e
achievement for cost control- and customer satisfaction
can benefit ratepayers through Iower costs and improved
service reliability. However, MDU's metrics do not
identify which customers get the beneflts. Eurther, and
importantly, these MDU incentives benefit shareholders.
Controlling costs wil-l- clearly improve earnings and
provide cash flow. Improvi-ng customer satisfactlon may
reduce uncollectible expense and collection costs and
coul-d also result in customers and regulators being more
receptive to rate increases.
Performance metrics that achieve these results
can lead to increased earnings and cash flows, which will
support enhanced stock valuation, growth in
Gorman, Di 10
NWIGU
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NWIGU
earnings,/dividends, and reduced investment risk. These
are undeniably benefits to MDU shareholders.
Therefore, shareholders should bear the cost of
incentive programs that achieve such benefits. Also, to
the extent the i-ncentivized performance
cost of the
r_ncreases
earnings and cash fl-ows, the incentive
programs can
still provide
the utility's
be paid from these increased earnings and
benefits to sharehol-ders without increasing
cost of service.
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O ARE YOU PROPOSING AN ADJUSTMENT TO THE LEVEL OF
INCENTIVE COMPENSATION TNCLUDED IN TGC'S REVENUE
REQUIREMENT?
A Yes. For the reasons discussed above, I
recommend ellminating the incentive compensation cost
incfuded in IGCfs revenue requirement. IGC has not
proven that this program produces benefits to its IGC
customers. However, shareholders benefit from these
programs due to improved operating performance and
enhanced and stabl-e returns. Therefore, shareholders
receive the benefits and shou]d bear the cost of the
incentive program. My reconrmendation reduces revenue
requirement by $704, 000.
VI. BONUS DEPRECIATION
O PLEASE EXPLATN THIS ISSUE.
A IGC has elected not to take bonus depreciation
f or the ca]culation of f ederal- income tax in 2076.77
Bonus depreciation allows a company to write-off 50? of
the cost of certain plant additions in the flrst year of
operation for the determination of federal income tax.
The recognition of
rapid build-up of
tax bal-ance. This
since accumulated
to rate base. By
bonus depreciatlon results 1n a more
the accumulated deferred federal income
would reduce revenue requirement,
deferred income taxes are a reduction
not electing to take bonus
Gorman, Di 11
NWIGU
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depreciation,
increasj-ng the
IGC is inflating its rate base and
revenue requirement. f am recommendj-ng an
the rate base and revenue requirement to
additional accumul-ated deferred federal-
adj ustment
recogn j-ze
income tax
to
the
associated with bonus depreciation.
llResponse to NWIGU DR No. 1-34.
Gorman, Di 11a
NWIGU
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NWIGU
O DO CUSTOMERS PROVIDE THE CASH ASSOCIATED WITH
FEDERAL DEFERRED INCOME TAXES?
A Yes. The federal i-ncome tax expense included
in rates does not refl-ect the savings enjoyed by the
and other acceleratedutility, as a result
depreciation options
Code. The reductlon
expense, due to bonus
increase in deferred
of bonus
allowed by the fnternal- Revenue
in current federal income tax
depreclation, is offset by an
income tax expense in the
establlshment of customer
customers paying federaf
is not currently paid to
customers are providing a
the utility.
free capital,
rates. As a result of
income tax expense in rates that
the federal government,
source of cost free capital to
fn recognition of this provision of cost
deferred federal income taxes are
a reduction to rate base, revenue
and 1n the determination of tariff rate
recognized
requirement
AS
charges.
O HAVE YOU CALCULATED AN ESTIMATE OF THE REVENUE
REQU]REMENT ASSOCIATED WITH THE COMPANYIS DECTS]ON TO NOT
ELECT BONUS DEPRECTATION?
A Yes. The estimated average growth in plant
during 2076 is approximately $12,1 00,000.12 Assuming all
of this plant is e1igib1e, bonus depreciation would allow
a 50? write-off in the current year equal to $6,350,000.O 25
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Recogniz:-ng this bonus depreciation would generate an
additional $2,223,000 of accumul-ated deferred federal
income taxes at a 35% federal- income tax rate. Based on
my recommended pre-tax rate of return, the revenue
requirement associated with this additional deferred tax
rate base reduction amount is $228,000. I recommend that
L2LGC Exhibit No. "7, page I (Dedden Direct)
Gorman, Di L2a
NW]GU
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NWIGU
the Commi-ssion reduce IGC's revenue requirement by
$228,000 to recognize this bonus depreciation optj-on
available to IGC.
VII. CI.ASS REVENT'E SPREAD
O PLEASE DESCRIBE THE COMPANYIS PROPOSED SPREAD
OE ITS CLAIMED REVENUE DEFICIENCY ACROSS RATE CLASSES IN
THIS CASE.
A The Company's proposed revenue spread is shown
in Table 4 beIow.
O IS THE COMPANY'S PROPOSED REVENUE SPREAD
Companv Prooosed Non-Gas Revenue Spread
($ Millions)
TABLE 4
Source: Blattner, Exhibit No. 20
Flala
Proposed
lncrease / (Decrease)
Amount Percent
Current
Revenues
Residential: RS
GeneralService: GS-1
Large Volume: LV-1
Transport - lntem.rptible: T-3
Transport - Firm: T-4
Total
$53.23
19.53
0.40
0.73
9.19
$83.08
$7.76
4.47
(0.14)
(0.53)
(1.39)
$10.17
14.60/o
22.9o/o
-35.5o/o
-72.3o/o
-15.1%o
12.2Yo
$7.76
4.47
(0.14)
(0.53)
(1.39)
$10.17
14.60/o
22.9%
'35.5o/o
-72.3%
-15.1o/o
12.2o/o
lncrease /
(Decrease)
Needed to Reach
Cost of Service
Amount Percent
REASONABLE?25
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NWIGU
A
cl-asses to
Company's
Company' s
currently
Yes. The proposed spread moves ali- rate
cost of service based on resul-ts of the
cfass cost of service study, and at the
claimed revenue deficiency. C1asses that are
earning above system average rates of return
wil-l receive
bel-ow system
increases.
rate decreases, while classes providing
average rates of return will- recej-ve rate
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o Do You suppoRT THE coMpANy's pRoposED CLASS
REVENUE ALLOCATION BASED ON THE RESULTS OE TTS CLASS COST
OE SERVICE STUDY?
A Yes. The Company's proposed class revenue
allocati-on is based on the results of its cfass cost of
service study. Since the cost of service study moves
rates towards cost of service, I agree with the Company's
proposal to
resufts of service study.
certain issues with someHowever, I do take
aspects of the Company's class cost of service study.
More specifically, certain aspects of the cost of servj-ce
study I believe over-allocate costs to the Large Volume
LV1, Transportati-on Interruptible T-3 and Transportation
Firm T-4 rate cfasses. I will comment on those cost of
service aspects later. However, these adjustments to the
Company's cfass cost of servj-ce study I recommend be
implemented in the Company's next rate case. I bel-ieve
the Company's proposed spread of its revenue deficiency
in this case is reasonable, but a more accurate cost of
service study and further movement to cost of service
should be considered in subsequent rate cases.
VIII. CI.ASS COST OF SERVICE STI'DY
O HAVE YOU REVIEWED THE COMPANY'S CLASS COST OF
SERV]CE STUDY?
base its class revenue allocation on the
its class cost of
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NWIGU
A Yes. The class cost of service study is
discussed in the direct testimony and exhibits of Lori A
Bl-attner.
O PLEASE DESCRIBE THE COMPANYIS CLASS COST OF
SERVICE STUDY.
A In its cfass cost of service study, the Company
has classified and allocated transmission mains and
storage plant assets on a demand basis. Distribution
mains in Account 316 have been separated into two
categories and cl-assified
demand related. Using the
as either customer related or
zero-intercept method, the /
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Company determined that about 41 .2% of Account 3'16
distribution mains should be classlfied as customer
related and al-located to each rate class based on the
number of customers. Demand related costs have been
aflocated primarily on the basis of a single coincident
peak demand.
O IS THE COMPANY'S CLASS COST OE SERVICE STUDY
REASONABLE?
A Yes. f generally support the Company's class
cost of service study, but with one exception. That is,
I disagree with the Company's use of a peak and average
al-Iocator for Account 375 (Distribution Structures and
Improvements), and Account 378 (Distribution Measuring
and Regulation Equipment) .
o How sHouLD THE COSTS rN ACCOUNT 375 AND ACCOUNT
378 BE ALLOCATED?
A The peak and average al1ocation methodology
provides a significant al-l-ocation based on annual
throughput of the customer cl-asses. Therefore, the peak
and average al-l-ocator for these accounts would be
inappropriate because these accounts do not refl-ect costs
that vary with the l-evel- of throughput. Rather, these
costs are largely fixed in nature and relate to either of
the customer's peak day demand, in setting this equipment
based on the largest delivery day within the year, or are
Gorman, Di 15
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NWIGU
more customer rel-ated in that they reflect the Company's
much ascost for connecting
they do for ensuring
meet the customers'
The demand
customers
that they
demands on
to the system
adequate
AS
have capacity to
allocation
the system.
of Accounts 375 and 378
should be al-l-ocated on design day demand along with
costs. Alternatively,
other
distribution capacity-related they
andshould be allocated on the basis of design day demand
a customer component as these
maximum design day demand, and
system. However, the peak and
investments relate to both
cost of connecting to t.he
method is simply
cost-causation in
avera9e
not a factor that accurately reflects
assigning
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Gorman, Di 16
NWIGU
costs for these accounts between rate cl-asses.
Therefore, the Companyr s proposal for peak and average
al-l-ocation of these costs across rate classes should be
rejected. I recommend the Commission direct IGC to
modify its cost of service study in its next rate case
and allocate Accounts 375 and 378 on a combinati-on of
design day demand, and a customer component along with
other distribution-related capacity costs.
O DOES NARUC RECOGN]ZE THAT DEMAND COSTS CAN BE
ALLOCATED BASED ON PEAK DAY DEMANDS AND THE NUMBER OF
CUSTOMERS?
A Yes. In 1ts 1989 manual,
rel-ated costs can
NARUC recognizes that
be allocated todemand or capacity
classes based on two factors:
(2) the number of customers.
Rate Design ManuaI states the
(1) peak day
The NARUC Gas
following:
demands, and
Distribution
Demand or capacity costs vary with the size ofplant and equipment. They are related to
maximum system requirements which the system is
designed to serve during short intervals and donot directly vary with the number of customersor their annual- usage. Included in these costsare: the capital costs associated withproductlon, transmission and storage plant and
their rel-ated expenses; the demand cost of gas;
and urost of the capita1 costs and e:q>enses
associated with that part of the distributionplant not alLocated to customer costs, such asthe costs associated with distribution mains in
excess of the minimum size (pages 23-24,
emphasis added) .
O DOES THE COMPANY DESIGN ITS DISTRIBUTION SYSTEMo25
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TO MEET THE
Afn
testimony of
the Company
PEAK-DAY DEMAND OF ITS CUSTOMERS?
part, y€S. As
Company witness
described in the direct
Hart Gil-christ at page 4,
has to design and buil-d the distribution
system with enough
demand, regardl-ess
days.
capacity to meet the system peak day
on non-peakof what the demand is
Gorman, Di 16a
NWIGU
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O IS ANNUAL VOLUME, OR AVERAGE DEMAND, A DESTGN
CR]TERION EOR A TYPICAL LDC FACILITY?
A No. Annual vol-ume, or average demand, is
certainly a factor consj-dered in identifyi.ng the variable
cost of operating the system. However, the actual
physical size of the distribution mains, compressors, and
related equipment is based on customers' contributions to
the system peak day demand. Annual vol-umes or average
demands do not describe the main size or system capacity
that is necessary to provide firm uninterruptible supply
of service to al-I customers every day of the year.
Rather, the system's capacity must be sized for peak day
demand, so that all customers can util-ize their
entitlement to that capacity to receive a .firm,
uninterrupted, supply of gas every day of the year,
including the day of the peak demand.
O DOES THE COMPANY ALSO DESIGN ITS DTSTR]BUT]ON
SYSTEM IN ORDER TO CONNECT CUSTOMERS TO THE SYSTEM?
A Yes. As described in the direct testimony of
Company witness Lori A. Blattner at page 9, the Company's
distribution mains (FERC Account No. 376) are installed
to meet both system peak load requirements and to connect
customers to the utility's gas system. As a resul-t, it
is appropriate to recognize a customer component of
distribution main costs when al-Iocating those costs to
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NWIGU
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NWTGU
customer classes.
o IS THE RECOGNITION OF A CUSTOMER COMPONENT OF
DISTRIBUT]ON MAIN COSTS AN ACCEPTED PRINCIPLE IN THE GAS
INDUSTRY?
A Yes. As noted above, NARUC recognizes both a
demand and customer aIl-ocation of distribution mains.
Company witness Lori A Blattner also agrees, stating in
her
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direct testimony at page 9 that identifying a portlon of
mains investment as customer rel-ated is an accepted
pri-nciple throughout the gas industry.
O WHY ]S IT APPROPRIATE TO ALLOCATE THE COSTS OE
DISTRIBUTION MA]NS ON A CUSTOMER COMPONENT?
A While it is true that a gas distribution system
has to be sized to accommodate the design for peak day
demands, it must al-so be designed to physically connect
Each customer's service with the city gate gas receipt
points. Consequently, whil-e peak requirements will
infl-uence the diameter of mains, the linear feet of maj-ns
(and total actual- cost) wil-l depend upon the locatj-on of
customers on the system. As an i1lustration, more
investment is needed to serve 10,000 customers at various
different geographical l-ocations each with a peak demand
of l- Mcf than one customer with a peak demand of 10,000
Mcf at a single location.
o wHy rs THE coMPANY'!S PROPOSED ALLOCATTON OF
DISTRIBUTION MAIN COSTS USING THE CO]NCIDENT DEMAND
METHOD W]TH A CUSTOMER COMPONENT MORE ACCURATE THAN OTHER
COST ALLOCATION APPROACHES SUCH AS THE PEAK & AVERAGE
METHOD?
A The Company's proposed al-location of
dj-stribution main costs using both a customer and a
demand component best ref1ects cost causation principles.
Gorman, Di 1B
NWIGU
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The Company designs its distribution mains and regulator
station equipment to meet the firm coincident demands of
the Company's rate classes on the system peak day. The
Company also designs its system of distribution mains so
that al-l- customers are connected to the system. The
Company does not design its system to meet the total
annual volumes, or average demands, of its rate classes.
Only when
meet the
the distribution main system is designed to
cfasses is the Companypeak day demand of its
abl-e to deliver gas each and every day
meet its customersr demands. Thus, the
t.he costs of these facilities to
of the year to
Company incurs
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NWIGU
both meet class coincident demands and to connect all
customers to the distribution
the costs of these facllities
basis and on a customer basis
are incurred and as a result,
cost causation than the Peak
main system. Al-locating
on a coincident demand
reflects how these costs
more accurately reflects
and Average method, which
on a volumetric, orpartially allocates these costs
average demand, basis.
rX. RATE DESIGTiI
PLEASE DESCR]BE THE COMPANY'S PROPOSED RATE
THE LARGE VOLUME AND TRANSPORTATION RATE
The Company's proposed rate design is also
by witness Lori Blattner. In her direct
she indicates that the Company proposes to add
(,Y
DESIGN FOR
CLASSES.
A
addressed
testimony,
a demand charge to the Large Volume LV-1 rate schedule,
and to combine the Transportation T-4 and T-5 rate
schedul-es to create a single rate. Combining rate
schedules T-4 and T-5 would resul-t in the implementation
of a demand charge for T-4 customers.
o IS THE COMPANY'S PROPOSED RATE DESIGN FOR THE
LARGE VOLUME AND TRANSPORTAT]ON RATES CLASSES REASONABLE?
A Yes. In general, customers' demands are a
primary dri-ver of the required capacity of the
distributlon system, and the necessary distribution25
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capital investment. The cost of the dlstribution system
equipment required to meet peak demand is fixed, and does
not vary with the amount of gas throughput. Therefore,
the implementati-on of a demand charge for these large
industrial- customers al1gns with sound cost of service
principles. Recoveri-ng fixed costs through
charges rather than vofumetric charges wil-l
stabilize the revenues cofl-ected from these
demand
help
classes, and
provide effective price signals to these customers.
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o Do You HAVE ANY RECOMMENDATIONS FOR THE
COMPANY'S RATE DESIGN PROPOSAL?
David
A Yes, as explained
Swenson, Intermountain
in the Direct Testj-mony of
has proposed to implement a
rate schedu]e TF-4. The
resul-ts of several
demand charge
demand charge,
on the redesigned
if approved, would be the product of the
Daily Firmdemand rate times the effective Maxlmum
Quantity (MDFQ) contained in a written service contract
between the customer and Intermountain. Because a demand
charge has never been used on TF-4 customers, I recommend
that Intermountain conduct an open season to al-l-ow TF-4
customers, and al-1 other industrial customers who
contract with the Company for an MDFQ, the ability to
reset their MDEQs in the event the rate redesign of rate
schedule TF-4 is approved.
X. RATE OF RETI'RN
O WHAT DOES YOUR RATE OF RETURN TEST]MONY
ADDRESS ?
A My testimony will address the current market
rate of return, forcost of equity, and resulting overall
IGC. In my analyses, I consider the
market models and the current economic envi-ronment and
outlook for the utility industry as well- as the financial-
integrity of IGC given my reconimended return on equity
and overal-l- rate of return.
Gorman, Di 20
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I will also respond to IGC wj-tness Dr. J.
Stephen Gaske's recommended return on equity, and IGC's
requested return on equlty, of 9. 90%.
My silence in regard to any issue should not be
construed as an endorsement of fGC's position.
A PLEASE SUMMARIZE YOUR RECOMMENDAT]ONS AND
CONCLUSIONS ON RATE OF RETURN.
A As discussed above, I recommend the Commission
award a return on common equlty of 9.30%, whi-ch is the
midpolnt of my recommended range of 9.20? to
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9.402. My recommended return on equity wil-1 fairly
compensate IGC for
equity, and it wil-1
this
its current market cost of common
mitigate the clalmed revenue
proceeding by fairly balancing thedeficiency in
interests of al-1 stakeholders.
I al-so take issue with the Company's proposed
capital- structure. The Company is requesting a capitaf
structure composed of 50% equity and 50% debt. While the
Company's common equity ratio has varied over time, the
most recent capital structure for IGC appears to be based
on an approximately 48% equity and 522 debt mix. I would
al-so note that another MDU gas subsldiary, Cascade
Natural Gas Company recently settl-ed on a rate case in
Oregon and agreed for an overall- rate of return based on
a 492 equity and 512 debt capital structure, and a 9.42
return on equity.13 With this as a background, I believe
a reasonable capital structure woufd be composed of 4BZ
coflrmon equity and 52% debt. This reasonably ref l-ects
IGC's most recent actual capital structure and is line
with the capltal structure that MDU affiliates have found
reasonable for smal-l-er gas distribution companies.
O WHAT ]S YOUR RECOMMENDED OVERALL RATE OE
RETURN?
A Based on my recommended return on equity of
9.30%, my proposed capital structure, and the Company'so25
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embedded cost of debt, I recommend an overall- rate of
return of 7.032 as developed on my Exhibit No. 301-.
O PLEASE DESCRIBE THIS SECTION OF YOUR TESTIMONY.
A In thj-s section of my testimony, I will explain
the analysis I performed to determine the reasonable rate
of return in this proceedlng and present the results of
my analysis. I begin my estimate of a fair return on
equity by reviewing the authorized returns approved by
the regulatory commissions in various jurisdictions, the
market
13Public Utilitv Commj-ssj-on of Ore gon vs. Cascade Natural Gas
Corporation, Docket UG 305, Order No. 16-411 at p. 3 (Dec.72,2076).
Gorman, Di 2ta
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assessment of the regulated utility industry investment
risk, credit standing, and stock price performance. I
used this information to get a sense of the market's
perception of the risk characteristics of regulated
utility investments in general, which 1s then used to
produce a refined estimate of the market's return
requirement for assuming investment risk simifar to IGC's
utility operations.
As described below, I find the credit rating
outlook of the industry to be strong, supportive of the
industry's financial integrity, and access to capital.
Eurther, regulated util-itj-es' stocks have exhibited
strong price performance over the last severaf years,
which is evidence of utility access to capital.
Based on this review of utility credit outlooks
and stock price performance, I concl-ude that the market
continues to embrace the regulated utility industry as a
safe haven investment option and views util-ity equity and
debt investments as l-ow risk investments.
X.A. Industry Authorized Returns on Equity, Access to
Capital,, and Credit Strength
O PLEASE DESCRIBE THE OBSERVABLE EVIDENCE ON
TRENDS IN AUTHORIZED RETURNS ON EQUITY EOR ELECTR]C AND
GAS UT]L]TIES, UTILITIES' CREDIT STANDING, AND UTIL]TIES'
ACCESS TO CAPITAL TO FUND INFRASTRUCTURE INVESTMENT.
Gorman, Di 22
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A Authorized returns
and gas utilitles have been
last 10 years as ill-ustrated
recent authorized returns on
utilities have declined down
delivery util-ities' returns
9 .452 .
on equity for both electric
steadily declining over the
in the graph below. More
equity for electric
to about 9.6%, and local gas
on equity have declined to
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Figure 1
Authorized Retums on Equity
(Excludes Limited lssue Riders)
11.00%
1O.52o/"
10.50%1 10.31%
10.1S%10"446h 10.39%
1o
10.00%10.2m 10.22yo 10.1 o/o g.lso/o
9.91yo 9.94olo 9,600/o 9.64Io
g.7g\o
9.50o/o 9.680/o 9.60%--a
9.45%
9.00o/o
8.50o/"2006 2007 2008 2009 2010 2011 2012
.-*-€lrtric -+- Gas
2013 2014 2015 2016"
Source and Note:
Regulatory Research Associates, lnc., Regulatory Focus, Major Rate Cass Decisions - January - September 2016,
October 14, 2016 al page 7.
Note: Limited issue rider cases are not excluded for gas;
the use of limited issue rider cases in which an ROE is determin€d is extremely limited in the gas industry.
'The data irEludes the period Jan ' sep 2016.
While the dec1ines in authorized returns on equlty are
public knowledge, and align with declining capital- market
costs, utilities are maintaining strong investment grade
credit standing, and have been able to attract large
amounts of capital at low costs to fund very large
capital programs.
O HAVE UTILITIES BEEN ABLE TO ACCBSS EXTERNAL
CAPITAL TO SUPPORT INFRASTRUCTURE CAP]TAL PROGRAMS?
A Yes. In its October 2l , 2016 Capital
Expenditure Update report, S&P Global- Market InteJLigence
FinanciaT Focus, a division of SNL, made several refevant25
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coflrments about utility investments generally and gas
delivery investments specifically:
Capital expenditures throughout the U.S. power
and gas sectors in calendar-2076 are projected
to be at an al-l-time high. The nation'sIargest electric and gas utilities areinvesting in infrastructure to comply with
sweepj-ng environmental regulations, implement
new technologies, build new natural 9ds, solar
and wind generation and upgrade aglng
transmission and distribution systems.
Moreover, their near-term capital spending
forecasts continue to escalate. Since ourprevious review of industry CapEx estimates,the util-ities in the RRA Index have added about
$11 billion of projects to their to-do listsfor 2016-20L8, according to our review of
spending plans detail-ed in investorpresentations. While most companj-es raisedtheir forecasts or left them unchanged, a
handful- did reduce CapEx plans through 2018(see below for individual- examples.) Total
CapEx in 2016 for the companies i-n the RRA
Index is projected to be almost $117 billion.
Erom a natural gas perspective, many util-ities
are participatlng in the sizabl-e and ongoing
expansion of the nat j-on's gas midstreamnetwork. In addition, replacement of mature
gas distribution infrastructure has gained
widespread momentum and is 1ike1y to continueat materi-al levels for many years, consideringstate and federal- mandates to address safety.
*
*
*
Conversely, the ratio of gas utility CapEx to
depreciation and amortization was largely flat
from 2000 through 2010, ranging from 1.6x to2.0x. However, after 2010, the ratio grew
fairly steadily to reach 2.6x, on average, in
2075, like1y as accelerated infrastructure
replacement programs were implemented acrosso25
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Gorman, Di 24a
NWIGU
the country. A series of high-profile gas
l-eaks have spurred public and regulatory
support for programs that incentivize pipeline
replacement, such as riders that all-owutilities to recover their i-nvestment without
having to wait for a general rate case.
***
For gas utilitles, the CapEx-to-operating cashflow ratio has fluctuated far moresubstantially than f or el-ectric util-ities. Gasutilities saw large swings in the ratio from
2000 through 2012, with a peak of 1.6x in 2000
and a low of 0.7 in 2009. Since reaching
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7.2x in 20L2, the ratlo appears tostabilized somewhat, although 2015
Iower at l- . 0x. 1a
have
was slightly
Indeed, historj-ca1 versus projected outlooks
for the gas industry's capital j-nvestments are shown
below in Figure 2 below. As shown in this graph, gas
industry investment outlooks are expected to be
considerably higher in the forecast (2016-201-8), relative
to the last l-0-year hj-storical period. As noted by S&P
Gl-obal Market Intelligence, this capital investment is
exceeding internal sources of funds to the gas utilities,
requiring them to seek external capital to fund capital
investments.
15,000
14,q)O
Figure 2
Natural Gas Utility lndustry Gpital Expenditures
Actual
II Forecast
I12,000
10,000
8,000
6,OOO
4,000
2,OOO
I
I
Iee
Ec
-e6a
-f
t
I I
I
I
I
I
I
I02005 2006 2007 2008 2009 2010 2011 2012 2013 20tl 2015 2016 2017 2018 2At9
yetr
SourEe: sNL Fimrcials, cadtal kpenditurc Updste, October 27, 2016. Pege 7
Gorman, Di 25
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As shown in Figure 2 above, capital expenditures have
been increasing for the natural- gas utility industry. At
the same time, however, SNL Financj-a1 reports that
14 SaP GIoba-I Market Intelllgence Financial Focus: "Capital
Expenditure Update," October 21, 2076 at 1 and 5.
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NWIGU
over the period 2010 through 2016 S&P
for the natural- gas utllity industry
imProving. 1s
O HAVE CREDIT RATING AGENCIES
the bond ratJ-ngs
have been generally
COMMENTED ON
DECLINING AUTHORIZED RETURNS ON EQUITY?
agencies recognize the
returns and the expectation
returns for
declining trend
Credit rating
in authorized
that regulators will continue lowering the
U.S. util-ities while maintaining a stable
Specifically, Moody's states:
A Yes.
credit profile.
Lower Authorized Equity Returns ltilJ. Not llurt
Near-Term Credit Profi].es
The credit profiles of US regulated util-itieswll-l- remain intact over the next few years
despite our expectation that regulators will
continue to trim the sector's profitability bylowering its authorized returns on equity
(ROE) .16
Further, in a recent report, S&P states:
2. Earned returns
authorized returns
will ramain in ].ine with
Authorized returns on equlty granted by U.S.utility regulators in rate cases this year have
been steady at about 9.5%. Utifities have beenadept at earning at or very near those
authori-zed returns in today's economic and
f iscal- envj-ronment. A sIow1y recovering
economy, natural- gas and electric prices coming
down and then stabllizLnq at fairly low Ievels,
and the same experience with interest rates
have l-ed to a perfect "non-storm" for utility
ratepayers and regulators, with util-itiesbenefitting alongside those importantconstltuenci-es. Util-lties have largely usedo25
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this protracted period of favorable
circumstances to consolidate andinstitutional-ize the regulatory practices that
support earnings and cash flow stability. We
have observed and we project contj-nued use ofcredit-supportive policies such as short lags
between rate filings and flnal decisJ-ons,
up-to-date test years, flexible and dynamictariff clauses for major expense items, andalternative ratemaking approaches t.hat all-owfaster rate recognition for some new
i-nvestments. 17
l5Ratings reported by S&P.
L6Moody's Investors Service, "US ReguJ-ated Utilities: Lower
Authorized Equity Returns Wi-Il- Not Hurt Near-Term Credit ProfiJ-es, "
March 10, 20).5 .
L'TStandard & Poor 's Ratinqs Services: "Corporate Industry
Credi-t Research: Industry Top Trends 2076, Utilj-ties, " December 9,
2075, at 23, emphasis added.
Gorman, Dl 26a
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O HAVE UTILITIES BEEN ABLE TO ACCESS EXTERNAL
CAPITAL TO SUPPORT INFRASTRUCTURE CAP]TAL PROGRAMS?
A Yes. While cost of capital and authorized
returns on equity were declining, the utility industry
has been able to fund substantial- increases in capital
investments needed for infrastructure modernization and
expansion. The Edison Electric Institute ("EEI")
reported in a 2075 financial review of the el-ectric
industry financial performance that 1n 2017 el-ectric
"j-ndustry-wide capex has more than doubled sj-nce 2005."18
EEI afso observed that, despite this nearly
tripling of capital expenditures during the period
2005-2075, a majority of the funding for utilities'
capital expendltures has been provided by internal- funds.
EEI reports approximately 258 of funding needed to meet
these increasing capital expenditures has been derived
from external- sources and 152 of these capital
expenditures have been funded by internal cash. Further,
despite nearly tripling capital expenditures, the
electric utility industry debt j-nterest expense has
decl-ined by approximately 1.9% despite increases in the
amount of outstanding debt. le This is clear proof that
capital market costs have declined.
O IS THERE EVIDENCE OE ROBUST VALUATTONS OF GAS
UTILITY SECUR]T]ES?
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A Yes. These robust val-uations are an indication
that util-ities can sell securities at high prices, which
access capital under
at relatively low
is a strong
reasonable
indication that they can
terms and conditions, and
cost. As shown on my Exhibit No. 302,
valuati-on of the gas util-ities included
the historical
in Dr. Gaske's
proxy group based on a price-to-earnings ratJ-o,
price-to-cash flow ratio and market
lBEdison Electric lnstitute, 2075 FinanciaT Review, AnnuaL
Report of the U.S. Investor-Owned ELectric UtiLity Industry, page 17l9rd., pages 8 and 11.o 25
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price-to-book value ratio, indicates utility security
valuations today are very strong and robust relative to
the l-ast 10 to 15 years. These strong val-uatj-ons of
utility stocks indicate that utilities have access to
equity capital under reasonabl-e terms and costs.
O HOW SHOULD THE COMMISSION USE TH]S MARKET
INFORMATTON IN ASSESSING A EA]R RETURN EOR IGC?
A Market evidence is quite clear that capital
market costs are near historically l-ow fevefs.
Authorized returns on equlty have fallen to the l-ow to
mid 9.0% area; utilities continue to have access to large
amounts of external capital to fund large capital
and util j-t j-es' investment grade credit
are stable to lmproving. The Commission should
weigh all this important
fair return on equity for IGC.
x.B ted Uti].i Indus ttarket Outlook
O PLEASE DESCRIBE THE CRED]T RATING OUTLOOK FOR
REGULATED UTTLITIES.
A Regulated utilities' credit ratings have
improved over the last few years and the outlook has been
Iabeled "Stable" by credit rating agencies. Credit
analysts have also observed that utillties have strong
access to capital at attracti-ve pricing (i.e., Iow
capital costs), whlch has supported very large capital
programs;
standings
carefully
evidence
observabl-e market
an assessl_ng a
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programs.
Standard & Poorrs ("S&P") recently published a
report titled
Industry Top
S&P noted the
"Corporate Industry Credit Research:
Trends 20L6, Utilities." In that report,
following:
Ratings Outlook. Stable with a slight blas
toward the negative. Utilities in the U.S.
continue to enjoy a confl-uence of financial,
economj-c, and regulatory environments that are
tail-or-made for supporting credit quality. Low
interest rates, modest economic growth, andrelatively stabl-e commodity costs make forl-ittIe pressure on rates and therefore on the
sunny disposition of regulators.
Gorman, Di 28a
NWIGU
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'Credit Metrics. We see credit metrics
remaining within historic norms for theindustry as a whole and do not project overallfinancial performance that woul-d affect thej-ndustry' s creditworthiness .
Industry Trends. Taking advantage of thefavorabfe market conditions, utilities have
been maintaining aggressive capital spending
programs to bol-ster system safety and
reliability, as well as techno1ogical advances
to make the systems "smarter." The el-evated
spending has not l-ed to large rate increases,but if macro conditions reverse and lead torislng costs that command higher ratesr w€
would expect util-ities to throttle back on
spending to manage regulatory risk.20
Similarly, Fitch states:
StabLe Financia]. Performance: The stable
financial performance of Utilities, Power & Gas
(UPG) issuers continues to support a sound
credit profile for the sector, with 932 of the
UPG portfolio carrying j-nvestment-grade ratings
as of June 30, 2015, including 65% in the 'BBB'rating category. Second-quarter 2015 LTM
ILong-Term Maturity] leverage metrics remainedrelatively unchanged year over year (YOY) whil-einterest coverage metrics modestly improved.Fitch Ratings expects this trend to broadlysustain for the remainder of 2015, driven bypositive recurring factors.
Low Debt-Funded Costs: The sustained l-owinterest rate environment has allowed UPG
companies to refinance high-coupon legacy debt
with fower coupon new debt. Gross interest
expense on an absolute value represented
approximately 4.6% of total adjusted debt as of
June 30, 2015, a decline of about 150 bps fromthe 6.lZ recorded in the midst of therecession. Eitch believes a rise 1n i-nterestrates woul-d largely be neutraf to creditquality, as issuers have generally built enough
headroom j-n coverage metrics to withstand
higher f i-nancing costs.
Capex Moderately DecJ.ining: Fitch expects thea25
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capex/depreciation ratio to be at the lower endof its five-year historical range of 2.0x-2.5xin the near term, reflecting a moderate decl-inein projected capex from the 2071,-2014 highs.
The capex depreciation ratio was relatively
f l-at YOY at about 2.4x. Capex targets
investments toward base infrastructure
upgrades, utility-sca1e renewables and
transmission investments .
***
Key credit metrics for IUCs Iinvestor-ownedutility companiesl remained relatively stable
YOY and continue to support the sound credit
profiles and Stable Outlooks characteristic of
the sector. EBITDAR [Earnings Before Interest,
Taxes, Depreciation,
20standard & Poor's Ratings Senzices: "Corporate Industry
Credit Research: Industry Top Trends 2076, Utilitiesr" December 9,
2075, al 22, emphasis added.
Gorman, Di 29a
NW]GU
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Amortization and Rentl and FFO IEunds From
Operationsl coverage ratios were 5.6x and 5.9x,respecti-vely, for the LTM ended second-quarter
2075, while adjusted debt/EDITDAR and
FFO-adjusted leverage were 3.5x and 3.4x,respectively.2l
Moody's recent comments on the U.S. Utility Sector
state as foflows:
Our outl-ook for the US regulated util-itieslndustry is stabl-e. This outlook ref l-ects ourexpectations for fundamental businessconditions in the industry over the next 72 to
1B months.
>> The credit-supportive regrulatory environmentis the main reason for our stab].e outlook. We
expect that the rel-ationship between regulators
and utilities in 2016 will remaincredit-supportive, enabling util-ities torecover costs in a timely manner and maintain
stable cash f1ows.
>> We estimate that the ratio of cash f].ow from
operations (CFO) to debt will hold steady at
a.bout zLZ, on averagre for the industry, overthe next 12 to 18 months. The use of timely
cost-recovery mechanisms and continued expense
management wil-l- help uti-lities offset a l-ack ofgrowth in electriclty demand and lower al1owedreturns on equity, enabllng financial- metricsto remain stabl-e. Tax benef its tied to the
expected extension of bonus depreciation will
al-so support CFO-to-debt rat j-os.
**
>> UtiJ.ities are increasingly using hoJ.ding
company J-everage to drive returns, a creditnegative. Although not a drj-ver of our outlook,util-ities are using leverage at the hoJ-ding
company l-evel- to invest in other businesses,
make acquisitions and earn higher returns onequity, which coul-d have negative implications
across the whol-e f ami1y.2z
Gorman, Di 30
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O PLEASE DESCRIBE UTILITY STOCK PRICE PEREORMANCE
OVER THE LAST SEVERAL YEARS.
A As shown in the graph below, SNL Elnancial has
recorded utility stock price performance compared to the
market. The industry's stock performance data from 2004
through September 2076 shows that the SNL Electric and
Gas Company Indexes have outperformed the market 1n
downturns and trail-ed the market during
2Lritch Ratings: "U.S. Utilities, Power & Gas Data comparator,"
September 21, 2015, at 1 and 7, emphasis added.
22Moody's Investors Service: "2016 Outl-ook - US Regul-ated
Utifities: Credit-Supportive Regulatory Environment Drives Stabfe
Out.l-ookr " November 6, 201-5, at 1-, emphasis added.o 25
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recovery. This relatively stable price performance for
utilities supports my conclusj-on that utility stock
investments are regarded by market particlpants as a
moderate- to low-risk investment.
FIGURE 3
lndexComparison
40.w
30.0%
20.0yn
LA.O%
O,M
-10.096
-20.0%
-30.0%
40.M
-50.096
,
IE3
II
E
E34
--a t: - -a--- a- SiltEl€ctric
- b .Sr{LGas
-{- s&P500
z(xx 2005 2006 Xn7 2008 2009 2010 2011 70t2 2013 7074 2015 2016
Sorrrc: Sr{L Flnrrrid, da tlrqrlh Scptcmbcr 3O, 2915.
O HAVE ELECTRIC UTILITY fNDUSTRY TRADE
ORGANIZATIONS COMMENTED ON ELECTRIC UTILITY STOCK PRICE
PERFORMANCE?
A Yes. In its 4th Quarter 2015 Financial Update,
the EEI stated the following concerning the EEI Electric
Utility Stock Index ("EEI Index"):
EEI Index returns during 20t5 embodied theIarger pattern seen j-n Table I since t.he
2008 /2009 financial crisisr ES industry
business models have migrated to anincreasingly regulated emphasis. The industry
Gorman, Di 31
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Gorman, Di 31a
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has generated consistent positive returns but
has lagged the broader markets when marketspost strong gains, which in turn have been
sparked both by sl-ow but steady U.S. economic
growth and corporate profit gains and by thewillingness of the Federa1 Reserve to bolster
markets with historically unprecedented
monetary support in the form of three rounds ofquantitative easing and near-zero short-terminterest rates. Whil-e the Fed did raise
short-term rates in December 2075 for the first
time since 2006ffi (from zero to a range of 0.252
hardly effects Isic]
l-on er-term ields which remai-n at
historical-l-y l-ow level-s and are inf]uenced more
by the l-evel- of infl-atj-on and economic strength
than by the Fed's short-term rate policy
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RegrrJ.ated Fundamenta3.s Renain StabJ.e
The rate stabil-ity offered by state regulation
and the ability to recover rising capital
spending in rate base shield regulatedutilities from the volatili-ty in the
competitj-ve power arena and turn the growth of
renewabl-e generation (and the resufting needfor new and upgraded transmission l-ines) into arate base growth opportunity for many industryplayers.
*
*
**
In the shorter-term, analysts continue to seeopportunity for 4-62 earnings growth for
regulated utilities in general along withprospects for slightly rising dividends (with a
di-vidend yleld now at about 4Z for the industryoverall). That formula has served utilityinvestors quite well 1n recent years,
delivering long-term returns equivalent to
those of the broad markets but with much lowervolatility. Provided state regulation remainsfair and constructive in an effort to address
the interests of ratepayers and investors, it
would appear that the i-ndustry can continue to
deliver success for aI1 stakeholders, even in
an environment of flat demand and considerab]e
technol-ogical change. 23
O WHAT ARE THE IMPORTANT TAKEAWAY POINTS EROM
THIS ASSESSMENT OF UT]LITY INDUSTRY CRED]T AND INVESTMENT
RISK OUTLOOKS?
A Credit rating agenci-es consider the regulated
utility industry to be "Stable" and bel-ieve investors
wil-1 continue to provide an abundance of l-ow-cost capltal
to support utilities' large capit.al programs at
attractive costs and terms. AlI of this reinforces myo25
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belief that utility investments are generally regarded as
and the marketsafe-haven or low-risk investments
continues to demand low-risk investments such as utility
securities. The ongoinq demand for low-risk investments
can reasonably be expected to continue to provlde
attractj-ve fow-cost capital for regulated utilities.
23EEI Q4 2015 FinanciaL Update: "Stock Performance" at 4 and
6, emphasis added.
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X.C. IGC Investnent Risk
O PLEASE DESCRIBE THE MARKET'S ASSESSMENT OF THE
INVESTMENT R]SK OF TGC.
A The market's assessment of fGC's investment
risk is described by credlt rating analysts' reports.
IGC does not have a stand-al-one credit rating from S&P,'
rather, it is a who11y-owned subsidiary of MDU Resources
MDU Resources' current corporate bond rating from S&P is
BBB+ with a Stable outl-ook. MDU Resources i-s not rated
by Moody's. Specifically, S&P states:
Rationale
The stable outlook refl-ects MDU's announced
sal-e of its unregulated natural- gas processing
facility, which is consistent with the
company's longer-term strategy of selling its
higher risk assets and focusing its growth onits lower-risk regulated businesses. The
company's recent sale of its exploration and
production businesses and its oi1 refinery
increases our confidence that the company wil-1
continue to successfully execute on thisstrategy. On a forward-looking basisr we
expect that the l-ower-risk regulated utility
and pipel-ine businesses wil-l- account for more
than 50% of the consolidated company. Based on
the Iower-rj-sk strategy, MDUrs financial-
measures will- be better positioned 1n thefuture to support our current view of the
company's financial risk.
MDU's business risk profile incorporates our
combined view of its various dlverse
businesses, which include l-ower-risk regulated
utilities, partially offset by relativelyhigher-risk construction services. On a
forward-looklng basis we view MDU as consistingof four prlmary business segments: regulatedutilities (44%) , regulated pipeJ-ines (B?),
constructj-on materials (37%), and construction
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Gorman, Di 33a
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services (11%). MDU's regulated utility
busi-nesses serve approximately 1 mill-ion
customers in Idaho, Minnesota, Montana, North
Dakota, Oregon, South Dakota, Washington, and
Wyoming. Overa11, MDU has been able to
successfully work with regulators andeffectively manage regulatory risk. Followingthe sale of MDU's unregulated natural- gas
processing assets, the gas midstream operation
assets wil-l consist almost entirely of
lower-risk regulated pipeline operations andwill make-up about B% of consolidated MDU.
***
We assess MDU I s financial risk based on our
projections that FFO to debt wil-l- approximate
L'72-20e". We expect the company's financial-
measures to gradually improve and stabilizefollowing the
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3
T
sale of its higher risk assets and the use of
proceeds to reduce debt. Under our base-case
scenario of continued rate case increases,capital spending at about $350 millibn, modestutility customer growth, and continued EBITDA
growth at the construction materials business,
we expect 207'7 EFO to debt of about 18%,placing the company solidly in its financial-risk profile category.2a
XI. IGC'S PROPOSED CAPITAL STRUCTURE
O WHAT IS IGC'S PROPOSED CAPITAL STRUCTURE?
A IGC's proposed capital structure is shown below
in Tabl-e 5. This i-s IGC's targeted capital structure and
consistent with IGC's actuaI capltal structure over the
previous three years. IGC's proposed capital structure
is sponsored by IGC witness Mr. Mark Chiles.
TABLE 5
!GC's Proposed Caoital Structure
Description
Long-Term Debt
Common Equity
Total
Source: Chiles Direct at 2
Weisht
50.00%
50.00%
100.00%
O PLEASE COMMENT ON IGCIS PROPOSED CAPITAL
STRUCTURE.
A IGC's proposed capital structure is not
reasonab.l-e. The Company' s most recent capital structure
Gorman, Di 34
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as shown on its FERC Form 2 for the period ending
December 31, 2015, is composed of approxi-mately 48?
common equity and 522 long*term debt. This capital
structure as of December 3L, 2075 is developed in Table 6
befow.
24Sdp GTobaL Ratings: rfResearch Update: MDU Resources Group
Inc. Outl-ook Revised To Stable Erom Negative On Planned Sale Of
Unregulated Assets,' Ratings Affj-rmed, " November 27, 20L6 at 2-3.
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TABLE 6
IGC Actual Capital Structure
(Year-end 2015)
Description Weiqht
52o/o
48o/o
10Oo/o
Long-Term Debt
Common Equity
Total
Source: FERC Form 2 for the period
ending December 31, 2015.
I recommend using IGCrs actual capital structure at this
capj-ta1 structure fordate as
setting
o
a reasonabfe ratemaking
rates.
WHY DO YOU BELIEVE THAT A CAPITAL STRUCTURE
COMPOSED OF 48? COMMON EOUITY WOULD BE REASONABLE FOR
SETTING RATES?
A This capital structure is reasonably consistent
with fGC's parent
for setting rates
For example, in a
company's use of a capital structure
for its operating utility subsidiaries.
recent case in Oregon, Cascade Natural
a ratemaking overall rate ofGas Company settled for
return based on a 9.4%return on equity and a capital
492 common equity. My recommendedstructure composed
capital structure
rati-ng.
Further,
of
is reasonably consi-stent with that
credit rating agencles are aware of
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MDU's ratemaking settlements in proceedings, and have
concfuded that MDUrs credj-t rating outl-ook is "Stable,"
at a strong investment grade rating of BBB+ from S&P. A
second consideratlon is a capital structure that contains
more common equit.y than necessary to support an
investment grade bond rating at IGC and its parent
company wil-l- unnecessarily increase costs to retail-
customers. Increasing the common equity ratio of total-
capltal wil-l- increase the overa1l rate of return and
re1ated income tax expense.
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Hence, a capital structure with a more reasonable ba1ance
of conrmon equity and debt wilf lower the overal-l- rate of
return, income tax expense and revenue requirement, whil-e
preserving IGC's strong investment grade bond rating as
proxied through that of its parent company, MDU
Resources, and reflects a better bafance of the interests
of MDU's shareholders and retail- customers in its Idaho
service territory.
xI.A. Embedded Cost of Debt
O WHAT IS THE COMPANY'S EMBEDDED COST OE DEBT?
A Mr. Chil-es is proposing an embedded cost of
debt of 4.94% as developed on page 1 of his Exhibit No.
03.
I will not take i-ssue with IGC's embedded debt
cost.
XII. RETI'RN ON EQUITY
O PLEASE DESCR]BE WHAT IS MEANT BY A ''UTILfTYIS
COST OE COMMON EQUITY. ''
A A utility's cost of common equity 1s the
expected return that investors reguire on an investment
in the utility. fnvestors expect to earn their required
return from receiving dividends and through stock price
appreciation.
O PLEASE DESCRIBE THE FRAMEWORK FOR DETERMINING A
REGULATED UT]LITY'S COST OF COMMON EQU]TY.o 25
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A In general, determining a fair cost of common
equity for a regulated utility has been framed by two
hall-mark decislons of the U.S. Supreme Court: Bl-uefield
Water Works & Improvement Co. v. Pub. Serv. Comm'n of W.
Vd., 262 U.S. 619 (1923) and Fed. Power Comm'n v. Hope
Natural Gas Co., 320 U.S s91 (7944).
identify the general financial
be considered in establ-ishing
for a public utiJ-ity. Those
that the authorized return
to
These decisions
and economic standards to
the cost of common equity
general standards provide
should: (1) be suffj-cient
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maintain financial integrity;
reasonabfe terms; and (3) be
(2) attract capital under
commensurate with returns
investors could earn by investing in other enterprises of
comparable risk.
O PLEASE DESCRIBE THE METHODS YOU HAVE USED TO
ESTIMATE ]GCIS COST OE COMMON EQUITY.
A I have used several models based on financial
theory to estimate IGC's cost of common equity. These
Di-scounted Cash FIowmodel-s are: (1) a constant growth
("DCF") model usang
(2) a
consensus analystsr
pro j ections,'
growth rate
model; (4) a
Pricing Model ("CAPM") .
group of publ1c1y traded
simllar to IGC.
XII.A. Risk Proxy Group
constant growth DCF
estimates,' (3) a multi-stage
Risk Premium model; and (5)
growth rate
using sustainable
growth DCF
a Capital Asset
these models to a
investment risk
I have applied
utilities with
O PLEASE DESCRIBE HOW YOU ]DENTIFIED A GAS PROXY
UTIL]TY GROUP THAT COULD BE USED TO REASONABLY REELECT
THE INVESTMENT R]SK OF IGC AND USED TO ESTIMATE ]TS
CURRENT MARKET COST OF EQUITY.
A I used the same gas utility proxy group as IGC
witness Dr. Gaske. Dr. Gaske started with companies
incl-uded in the Natura1 Gas Utility Industry as followed
by The Val-ue Line Investment Survey ("Value Line"). He
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then excluded from the Value Line Natural- Gas Utility
Industry companj-es with avail-abfe retention growth rates
that: (1) did not have an j-nvestment grade credit rating
from S&P and Moody's, (2) companies that did not pay
dividends, (3) did not have growth rate projections from
Zack's or Thomson Fi-rst Call-; and (4) companies that were
invol-ved in significant merger or acquisition activity.
Additionally, Dr. Gaske removed any proxy company that
did not derive at least 70?" of its operating
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income from regulated natural gas distribution
operations, or did not have at l-east lOZ of its assets
devoted to regulated natural gas distribution
operations.25
Based on these selection criteria, it appears
that Dr. Gaske excluded NiSource because it cut its
dividend in the third quarter of 2075 and restructured
its company by spinning off its midstream gas assets. It
appears that Dr. Gaske excluded UGI because it was
invol-ved in M&A activity in 20L5. The term and scal-e of
the M&A activity were not fu11y disclosed in public
reports.
O WHY ]S IT APPROPRIATE TO EXCLUDE COMPANIES
WHICH ARE ]NVOLVED IN MERGER AND ACQUIS]T]ON ("M&A'')
ACTIVITY FROM THE PROXY GROUP?
A M&A activity can distort the market factors
used in DCF and risk premi-um studies. M&A activity can
have impacts on stock prices, growth outlooks, and
rel-ative volatility in hlstorical- stock prices if the
market was anticipating or expecting the M&A activity
prior to it actually being announced. This distortion in
the market data thus impacts the reliabil-ity of the DCE
and risk premium estj-mates for a company involved 1n M&A.
Moreover, companies generally enter into M&A in
order to produce greater shareholder value by combining
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companies. The enhanced sharehol-der value normally couJ-d
not be realized had the two companies not combined.
When companj-es announce an M&A, the public
assesses the proposed merger and develops outlooks on the
value of the two companies after the combination based on
expected synergies or other val-ue adds created by the
M&A.
As a result, the stock value before the merger
is completed may not
and dividend payments
reflect the forward-looking earnings
for the company absent the
25caske Direct at 18-19.o 25
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merger or on a stand-al-one basis. Therefore, an accurate
DCF return estimate on companies j-nvolved in M&A
activities cannot be produced because their stock prices
do not reflect the stand-al-one investment characteristics
of the companies. Rather, the stock price more 1ike1y
reflects the shareholder enhancement produced by the
proposed transaction. For these reasons, it j-s
appropriate to remove companj-es involved in M&A activity
from a proxy group used to estimate a fair return on
equity for a utility.
O PLEASE DESCR]BE WHY YOU BELIEVE YOUR PROXY
GROUP IS REASONABLY COMPARABLE IN ]NVESTMENT R]SK TO IGC.
A The proxy group is shown in my Exhibit No. 303.
has an average credit ratingThe proxy group
from S&P of A,which
corporate
than S&P's
of BBB+.
corporate
The proxycredit rating for MDU
is higher
Resources
has an average corporate credit
A2. MDU Resources is not rated
this informatj-on, I believe the
risky, but reasonably comparable
IGC.
rating from Moody's
by Moody's. Based
proxy group is Iess
in investment risk
group
of
on
to
The proxy group has an average common equity
ratio of 48.08 (including short-term debt) from SNL
Einancial ("SNL") and 53.6% (excluding short-term debt)
from The Val-ue Line Investment Survey ("Value Line") inO
,)q.
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20].5.
identical-
My proposed common equity
to the proxy group coflrmon
short-term debt. Based on
ratio of 48.0% is
equity ratio
these risk factors,including
I conclude
investment
the proxy group reasonably
risk of IGC.
approximates the
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XII.B. Discounted Cash Flow Mode]'
O PLEASE DESCRIBE THE DCF MODEL.
A The DCE model posits that a stock price is
valued by summing the present value of
cash f lows discounted at the i-nvestor's
return or cost of capital. This model
mathematically as fol1ows:
expected future
required rate of
is expressed
Po= Dr a Dz D-
1t+$t (1+K)2 (1+K)'
Po = Current stock Price
D = Dividends in periods 1 - i
K = lnvestor's required retum
(Equation 1)
This model- can be rearranged in order to
or investor-reQuired return
it is reasonable to assume
will- grow at a constant rate,
estimate the di-scount rate
otherwise known as "K tt Tf
that earnlngs
then Equation
and dividends
I can be rearranged as follows:
K =Dr/Po+G (Equation2)
K = lnvestor's required return
Dr = Dividend in first year
Po = Current stock price
G = Expected constant dividend growth rate
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O PLEASE DESCRIBE THE ]NPUTS TO YOUR CONSTANT
GROWTH DCF MODEL.
A As shown in Equation 2 above, the DCF model
stock price, expected dividend, andrequires a current
expected growth rate in dividends.
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O WHAT STOCK PRICE HAVE YOU RELIED ON IN YOUR
CONSTANT GROWTH DCF MODEL?
A I relied on the average of the weekly hiqh and
fow stock prices
a 13-week period
proxy group. An
to market price
of the uti-liti-es in the proxy group over
10, 2076 for theending on November
average stock price is less
variations than a price at
stock price
susceptible
singJ-e point
is Iess
a
susceptible
not reflect
A
in time. Therefore, do average
to aberrant market price movements, which may
the stock's long Lerm value.
1 3-week average
enough
current
stock price reflects a period
that is still short to contain data that
reasonably
period is
reflect s
not so short as to
market expectations but the
be susceptible to market
reflect the stock's long
a 13-week average stock
between the need to reflect
price variations that may not
term value.
prace rs a
In my judgment,
reasonable balance
current market expectations and the need to capture
sufficient data to smooth out aberrant market movements.
O WHAT DIVTDEND DID YOU USE ]N YOUR CONSTANT
GROWTH DCE MODEL?
A I used the most recently paid quarterly
dividend as reported in Val-ue Line.26 This dividend was
annualized (multiplied by 4) and adjusted for next year's
growth to produce the D1 factor for use in Equatlon 2o25
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above.
O WHAT D]VIDEND GROWTH RATES HAVE YOU USED IN
YOUR CONSTANT GROWTH DCE MODEL?
A There are several- methods that can be used to
estimate the expected growth in dividends. However,
regardless of the method, for purposes of determining the
market-required return on common equity, one must attempt
to estimate investors'
/
26The Val-ue Line fnvestment Survey, September 2, 2016
Gorman, Di 4Ia
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consensus about what the dividend, ox earnings growth
rate, will be, and not what an individual- investor or
analyst may use to make individual investment decj-sions.
As predictors of future returns, security
analysts' growth estimates have been shown to be more
accurate than growth rates derived from historlcal data.27
That is, assuming the market generally makes rational-
investment decisions, analysts' growth projections are
more 1ike1y to influence investors' decisions which are
captured j-n observable stock prices than growth rates
derived only from historlcal- data.
For my constant growth DCF analysis, I have
relied on a consensus, or mean, of professional security
analysts' earnings growth estimates as a proxy for
j-nvestor consensus dividend growth rate expectations. I
used the average of analysts' growth rate estimates from
three sources: Zacks, SNL, and Reuters. A11 such
projections were avail,able on November 77, 2076, and all
were reported onl-ine.
Each consensus growth rate projection is based
on a survey of security analysts. There is no cl-ear
evidence whether a particufar analyst is most infl-uential
on general market investors. Therefore, a single
analyst's projecti-on does not as reliably predict
consensus investor outlooks as does a consensus of market
Gorman, Di 42
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anal-ysts' projections. The consensus estimate is a
simple arithmetic average, or mean, of surveyed anal-ysts'
earnings growth forecasts. A simple average of the
growth forecasts gives equal weight to al-l- surveyed
analysts' projectj-ons. Therefore, a slmple averager or
arithmetic mean, of analyst forecasts is a good proxy for
market consensus expectations.
2'7Seet e.g., David Gordon, Myron Gordon, and Lawrence Gould,
"Choice Among Methods of Estimating Share Yie1d, " The Journal- of
Portfofio Management, Spring 1989.
Gorman, Di 42a
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O WHAT ARE THE GROWTH RATES YOU USED TN YOUR
CONSTANT GROWTH DCF MODEL?
A The growth rates I used in my DCF analysis are
shown in my Exhibit No. 304. The average growth rate for
the proxy group is
O WHAT ARE
DCF MODEL?
A As shown
6.242 .
THE RESULTS OF YOUR CONSTANT GROWTH
in my Exhibit No
median constant growth DCE returns
are 9.38% and 8.99?, respectiveJ-y.
median better describes the central-
. 305, the average and
for the proxy group
The proxy group
tendency of the proxy
group average is skewed by
COMMENTS ON THE RESULTS OF YOUR
group resul-ts because the
high-end outliers.
O DO YOU HAVE ANY
CONSTANT GROWTH DCF ANALYSIS?
A Yes. The constant growth DCF analysis for the
proxy group is based on a group average long term
sustaj-nabfe growth rates of 6.242. The three- to
five-year growth rates are hlgher than my estimate of a
maximum Iong-term sustainable growth rate of 4.25%, which
I discuss later in this testimony. Further, the DCF
result based on the proxy group is subject to an out11er.
Mainly, the DCF return for South Jersey Industries is
almost 74eo and is based on a growth rate estimate of
10.00%. Therefore, the median DCF result for the proxyo25
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Gorman, Di 43a
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group more accurately reflects the central tendency of
Hence, for all these reasons f bel-ieve thethe group
constant growth DCF analysis produces a reasonable
high-end return estimate.
A HOW DID YOU ESTIMATE A MAXIMUM LONG_TERM
SUSTAINABLE GROWTH RATE?
A A long-term sustainabl-e growth rate for a
utility stock cannot exceed the growth rate of the
economy in which it sells its goods and services. Hence,
the long-term maximum sustainable growth rate for a
utility investment is best proxied by the
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projected long-term Gross Domestic Product ("GDP"). BLue
Chip Financial- Forecasts projects that over the next 5
and 10 years, the U.S. nominal GDP wll-l- grow
approximately 4.25%. These GDP growth projections
refl-ect a reaL growth outl-ook of around 2.22 and an
inflation outlook of around 2.7% golng forward. As such,
the average growth rate over the next 10 years is around
4.252, which I believe is a reasonable proxy of long-term
sustainable gtrowth.28
fn my multi-stage growth DCF analysis, I
discuss academic and investment practitloner support for
using the projected long-term GDP growth out1ook as a
maximum sustainabl-e growth rate projection. Hence,
recognizing the long-term GDP growth rate as a maximum
sustainabl-e growth is 1ogica1, and is generalJ-y
consistent with academj-c and economic practitioner
accepted practices.
XII.C. Sustainab].e Growth DCF
O PLEASE DESCRIBE HOW YOU ESTIMATED A SUSTAINABLE
LONG TERM GROWTH RATE FOR YOUR SUSTA]NABLE GROWTH DCF
MODEL.
A A sustaj-nabl-e growth rate is based on the
percentage of the utility's earnings that is retained and
reinvested in utifity plant and equipment. These
reinvested earnings increase the earnings base (rate
Gorman, Di 44
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Gorman, Di 44a
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base). Earnings grow when plant funded by reinvested
earnings is put into service, and the utility is al-l-owed
to earn its authorized return on such additional- rate
base investment.
The internal- growth methodology is tied to the
percentage
paid out as
of earnings retained in the company and not
divldends. The earnings retention ratio is 1
minus the dividend payout ratio.
the earnings retention
As the payout ratio
declines,rat.io increases. An
increased earnings retention ratio w1ll-
growth because the business funds more
retained earnings.
fuel- stronger
investments with
28Blue Chip Financiaf Foreca-qts, December 1, 2076, at 14o25
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Gorman, Di 45
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The payout ratlos of the proxy groups are shown
in my Exhibit No. 306. These dividend payout ratios and
used to develop aearnings retentj-on ratios then can be
sustainabl-e long-term earnings retention
sustainabl-e long term earnings retention
gauge whether analysts' current three- to
growth rate prolections can be sustained
indefinite period of time.
The data used to esti-mate the
sustainable growth rate is based on the
market-to-book ratio and on Val-ue Line's
growth rate. A
r.atio will help
five-year
over an
Iong-term
Company's current
three- to
five-year projections of earnings, dividends, earned
returns on book equity, and stock issuances.
As shown in my Exhibit No. 307, the average
sustainabl-e growth rate for the proxy group using this
internal growth rate model is 6.55%.
O WHAT IS THE DCF EST]MATE USING THESE
SUSTAINABLE LONG_TERM GROWTH RATES?
A A DCF estimate based on these sustai-nabl-e
growth rates is developed in my Exhlbit No. 308. The
sustainable growth DCF analysis for the proxy group
produces an average and medj-an result of 9.69%.
XII.D. Multi-Stage Growth DCF Model
O HAVE YOU CONDUCTED ANY OTHER DCF STUD]ES?
A Yes. My first constant growth DCF is based ono25
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Gorman, Di 45a
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consensus analysts' growth rate projections
reasonable reflection of rati-onal investment
soitlsa
expectat j-ons
over the next three
this constant growth
to f ive years. The l-imitation on
DCF modef is that it cannot refl-ect
a rational expectation that a perlod of high or l-ow
short-term growth can be followed by a change in growth
to a rate that is more reflective of long term
sustainable growth. Hence, I performed a mul-ti-stage
analysis to reflect this outlook of changinggrowth
growth
DCF
expectat j-ons.
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O WHY DO YOU BELIEVE GROWTH RATES CAN CHANGE OVER
TIME?
A Analyst-projected growth rates over the next
three to five years wil-I change as utility earnings
growth outl-ooks change. Utility companies go through
cycles in making investments in their systems. When
utility companles are making large investments, their
rate base grows rapidly, which in turn accelerates
earnings growth. Once a malor construction cycle is
completed or levefs off, growth j-n the utility rate base
sl-ows and its earnings growth slows from an abnormally
high three- to five-year rate to a lower sustainable
growth rate.
As major construction cycles extend over longer
periods of time, even with an accelerated construction
program, the growth rate of the utility wil-l- slow simply
because rate base growth will slow and the utility has
Iimited human and capital resources avaifable to expand
1ts construction program. Therefore, the three- to
five-year growth rate projection should be used as a
long-term sustainable growth rate, but not without making
a reasonabfe informed judgment to determine whether it
considers the current market environment, the industry,
and whether the three- to five-year grovrth outl-ook is
sustainabl-e.
Gorman, Di 46
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O PLEASE DESCRIBE YOUR MULTI_STAGE GROWTH DCF
MODEL.
A The multi-stage growth DCF model- reflects the
possibility of non-constant growth for a company over
time. The multi-stage growth DCF model refl-ects three
growth periods: (1) a short-term growth period consisting
of the first flve years; (2) a transition period,
consisting of the next five years (6 through 10); and (3)
a long term growth period starting in year 11 through
perpetuity.
For the short-term growth period., I relied on
the consensus analysts' growth projections described
above in relationship to my constant growth DCF model.
For the t.ransition perlod, the growth rates were reduced
or increased by an equal factor reflecting the difference
between the analysts' growth rates and the long-term
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Gorman, Dl 41
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sustainable growth rate. For the
period, I assumed each companyt s
long-term
long-term growth
growth would converge to
growth rate.
growth
in which
the maximum sustainabl-e
O WHY IS THE GDP GROWTH PROJECTION A REASONABLE
PROXY FOR THE MAXIMUM SUSTA]NABLE LONG-TERM GROWTH RATE?
A
rate that
they sell
is created
Such investment, in
economic Arowth and
words,
growth
sales growth
Iower Ievel,
sales growth
decade. As
conservative
growth
base.
turn, is driven by service area
demand for utility service. In other
Utilities cannot indefinitely sustain a
exceeds the growth rate of the economy
services. Utilities' earnings/dividend
by increased utility investment or rate
util-ities invest
SaIes growth, in
in their service areas.
The U.S. Department of Energy, Energy
fnformatlon Administration ( "EIA" ) has observed utility
in plant to meet sales demand
turn, is tied to economic growth
tracks the U.S. GDP growth, albelt at a
as shown in my Exhibit No. 309. Utility
has lagged behind GDP growth for more than a
a resul-t, nominal- GDP growth is a very
proxy for utility sales growth, rate base
earnings growth. Therefore, the U.S. GDPgrowth,
nominal
highest
nY
and
growth rate is a conservative proxy for the
sustainable long term growth rate of a utility.
]S THERE RESEARCH THAT SUPPORTS YOUR POSITIONo25
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THAT, OVER
D]VIDENDS
OF THE U.S
fl'
THE LONG TERM, A COMPANY'S EARNINGS AND
CANNOT GROW AT A RATE GREATER THAN THE GROWTH
. GDP?
Yes. This concept is supported in published
work. Specifically, in a
Financial Managementr "
Joel F. Houston, the
analyst
textbook
literature and academic
titl-ed "Fundamentals of
published by Eugene Brigham and
authors state as f ol-lows:
The constant growth model- is most appropriatefor mature companies with a stable history of
growth and stabl-e future expectations.
Expected growth rates vary somewhat among
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companies, butoften expected
dividends for mature firms areto
the same rate as nomina1 gross domestic product(reaI GDP plus infl-ation) .2e
The use of the economic growth rate is al-so
supported by investment practitioners:
Estimating Growth Rates
One of the advantages of a three-stage
discounted cash ffow modef is that it fits with
life cycle theories in regards to companygrowth. In these theories, companies are
assumed to have a life cycle with varying
growth characterj-stics. Typically, thepotential for extraordinary growth in the near
term eases over time and eventually growth
slows to a more stable leveI.
**
Another approach to estimating long-term growth
rates is to focus on estimatlng the overall
economic growth rate. Agaj-n, this is the
approach used in the lbbotson Cost of Capital
Yearbook. To obtain the economic growth rate,
a forecast is made of the growth rate's
component parts. Expected growth can be brokeninto two main parts: expected infl-ation and
expected real- growth. By analyzing these
components separately, it 1s easier to see thefactors that drive growth.30
O IS THERE ANY ACTUAL INVESTMENT HISTORY THAT
SUPPORTS THE NOT]ON THAT THE CAPITAL APPRECIAT]ON FOR
STOCK INVESTMENTS WILL NOT EXCEED THE NOMINAL GROWTH OF
THE U. S. GDP?
A Yes. This is evldent by
compound annual growth of the U.S.
geometric growth of the U.S. stock
a comparison of the
GDP compared to the
market. Mornj-ngstar25
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measures the
stock market
approxj-mately
U. S. nominal-
approximately
historical- geometric growth of the U.S
over the
5. B%.
compound
6 .22 .3L
period L926-2075 to be
During this same time peri-od, the
annual growth of the U.S. GDP was
29"FundamentaLs of Financial Management, " Eugene F. Brigham and
Joel E. Houston, Eleventh Edition 200'7, Thomson South-Western, a
Division of Thomson Corporation at 298, emphasis added.
3)Morningstar, Inc., Ibbotson SBBI 2073 VaLuation Yearbook aL
51 and 52.
31U.S. Bureau of Economic Analysis, January 29, 201,6.
Gorman, Di 4Ba
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As such, the compound geometric growth of the
U. S. nominal- GDP has been hi-gher but comparable to the
the U.S. stock market capitalnominal- growth
appreciation.
that the U.S.
of
This historical relationship indicates
GDP growth outfook is a conservative
estimate of the long-term sustainable growth of U. S.
stock investments.
O HOW D]D YOU DETERM]NE A SUSTAINABLE LONG-TERM
GROWTH RATE THAT REFLECTS THE CURRENT CONSENSUS OUTLOOK
OF THE MARKET?
A I relied on the consensus analystsr projections
of long-term GDP growth. Bl-ue Chip Economic Indicators
publishes consensus economists' GDP growth projections
twice a year. These consensus analysts' GDP growth
outlooks are the best avai-l-able measure of the market's
assessment of long-term GDP growth. These analyst
projections refl-ect all current outl-ooks for GDP and are
likely the most influential on investors' expectations of
future growth outlooks. The consensus economists'
published GDP growth rate outlook is 4.70% over the next
10 Years.32
Therefore, I propose to use the consensus
economists' prolected 5- and 10 year average GDP
consensus growth rates of 4.252, ds publlshed by Bfue
Chip FinanciaT Forecasts, as an estimate of long termo25
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sustainable growth. Bfue Chip Financial- Forecasts
projections provide real GDP growth projections of 2.2%
and 2.1-Z and GDP infl-ati-on of 2.1e" and 2.0%33 over the
S-year and 10 year projectj-on periods, respectively.
These consensus GDP growth forecasts represent the most
likely views of market parti-cipants because they are
based on published consensus economist projections.
32Blue Chip Financiaf Forecasts, December 1, 2016, at 14
331d.
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O DO YOU CONSIDER OTHER SOURCES OE PROJECTED
LONG-TERM GDP GROWTH?
A Yes, and these sources corroborate my consensus
analysts' projectionsr ds shown bel-ow in Table 14.
Source
Bl ue Ch i p F i n a nci al Forecasfs
EIA- Annual Eamings Outlook
Congressional Budget Office
Moody's Analytics
Social Security Administration
The Economist lntelligence Unit
TABLE 7
GDP Forecasts
Term
5-10 Yrs
25 Yrs
10 Yrs
30 Yrs
50 Yrs
35 Yrs
lnflation
2.1Yo
2.10/o
2.Oo/o
2.Oo/o
Nominal
4.3o/o
4.4o/o
4.0Yo
4.10/o
4.4o/o
3.9%
Real
GDP
2.2o/o
2.2o/o
2.lYo
2.0o/o
GDP
1.9o/o 2.0%
The EIA in its AnnuaT Energy OutLook projects real
GDP out until 2040. In its 2016 Annual- Report, the EIA
projects real- GDP through 2040 to be 2.22 and a long term
GDP price inflation projection of 2.LZ. The EIA data
supports a long-term nominal GDP growth outlook of 4.Aeo.34
ALso, the Congressional Budget Office ("CBO")
makes long-term economic projections. The CBO is
projecting real GDP growth to be 2.0e" during the next 10
years with a GDP price inflation outlook of 2.0e".35 The25
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CBO 1O-year outlook for nominal- GDP based on this
projection is 4-02.
Moody's Analytics also makes long-term economic
projections. In its recent 3O-year outlook to 2045,
Moody's Analytics is projectlng real GDP growth
34oor/nra Annuaf Energy outlook 2016 with Projections to 2040,
May 20L6, Table 20.
35ceo: The Budget and Economic outfook: 2016 to 2026, January
2076, at 14 0 .
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of 2.)eo wlth GDP infl-ation of 2.0%.36 Based on these
projections, Moodyrs is projecting nominal GDP growth of
4.LZ over the next 30 years.
The Social- Security Administration ("SSA")
makes long-term economic projections out to 2090. The
SSA's nominal GDP projection, under its intermediate cost
scenario of 50 years, is 4.4%.31 The Economist
Intelligence Unj-t, a division of The Economist and a
thj-rd-party data provider to SNL Einancial, makes a
Iong-term economic projection out to 2050.38 The
Economist Intelligence Unit is projecting real GDP growth
of l.9Z with an infl-ation rate of 2.02 out to 2050. The
real GDP growth projectj-on is in l-ine with the consensus
economists. The long-term nominal GDP projection based
on these outl-ooks is approximately 3.92.
The real GDP and nominal GDP growth projections
made by these independent sources support the use of the
consensus economist S-year and 10-year projected GDP
growth outl-ooks as a reasonable estimate of market
participants' Iong term GDP growth outlooks.
O WHAT STOCK PRICE, DIVIDEND, AND GROWTH RATES
DID YOU USE IN YOUR MULTI_STAGE GROWTH DCF ANALYSIS?
A I rel-ied on the same 13-week average stock
prices and the most recent quarterly dividend payment
data discussed above. For stage one growth, I used the
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consensus analysts' growth rate projections
above in my constant growth DCF model. The
discussed
first stage
growth
term of
stage,
through
growth
covers the first five years, consistent with the
the analyst growth rate projections. The second
or transiti-on stage, begins in year 6 and extends
year 10. The second stage growth transitions the
rate from the first stage to the third stage using
a linear trend. For the third stage,or long term
year Lt, Isustainable growth stage, starting in
36www.economy.com, Moody's Analytics Forecast, January 6, 2076
37www. ssa. gov, "2016 OASDI Trustees Report, " Table VI. G4 .
3Bsl'll FinanciaT,
January 13, 2076.
Economist Intelligence Unit, downloaded on
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Gorman, Di 52
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used a 4.252 long-term sustainable growth rate based on
the consensus economistsr long-term projected nominal GDp
growth rate.
O WHAT ARE
DCF MODEL?
A As shown
medi-an DCF returns
THE RESULTS OF YOUR MULTT-STAGE GROWTH
in my Exhibit No. 310, the average and
on equity for the proxy group are
1.79% and 7.572, respectively.
O PLEASE SUMMARIZE THE RESULTS EROM YOUR DCF
ANALYSES.
A The results from my DCF analyses are summarlzed
in Tabl-e 8 below:
TABLE 8
Summarv of DCF Results
Proxv Group
Description Averaqe Median
Constant Growth DCF Model
(Analysts' GroMh)9.38%8.99%
Constant Growth DCF Model
(Sustainable Growth)9.69%9.69%
Multi-Staoe Growth DCF Model 7.79%7.57o/o
I conc1ude that my DCF studies support a return
on equity of 9.40% for the proxy group. I gave primary
weight to based on my median constant growth DCF
(analysts' growth) result and the resul-ts of my constant
growth DCF (sustainable growth), which I find as a25
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Gorman, Di 52a
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reasonable estimate of the proxy group's central tendency
and a reasonable high end DCE return estimate.
XII.E. Risk Premir:m Model
O PLEASE DESCRIBE YOUR BOND YIELD PLUS RISK
PREMIUM MODEL.
A This model is based on the principle investors
require a higher return to assume greater risk. Common
equity investments have greater risk than bonds because
bonds have more security of payment 1n bankruptcy
proceedings than common equity and the coupon payments on
bonds represent contractual obligations. In
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contrast, companies are not requi-red to pay dividends or
equity investments.guarantee returns
Therefore, coflrmon
riskier than bond
year over
The common
on common
This risk premi-um model- is based on two
estimates of an equity risk premium. First, I estimated
the difference between the required return on utility
common equity investments and U.S. Treasury bonds. The
difference between the requj-red return on common equity
and the Treasury bond yleld is the risk premium. I
estimated the risk premium on an annual basis for each
equity securities are considered to be
securi-ties.
the period January 1986 through September 2076
were based onequity required returns
regulatory commission-authorized returns for electric
utility companies. Authorized returns are typically
based on expert witnesses' estimates of the contemporary
investor-required return.
The second equity risk premium estimate is
based on the difference between regulatory
commisslon-authorized returns on coflImon equity and
contemporary I'A'r rated utility bond yields by Moody's.
sel-ected the period January 1986 through September 2076
because public utility stocks consistently traded at a
premium to book value during that period. This is
il-lustrated in my Exhibit No. 311, whlch shows the
I
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market-to-book ratio since 1986 for the el-ectric utility
industry was consistently above a multiple
this period, regulatory authorized returns
sufficient to support market prices that at
exceeded book value. This is an indication
of 1.0x. Over
were
least
that
regulatory authorized returns on common equity supported
a utility's ability to issue additional common stock
without diluting existing shares. It further
demonstrates utilities were able to access equity markets
without a detrimental- impact on current shareholders.
Based on this analysis, ds shown in my Exhibit
No. 3L2, the average indicated equity risk premium over
U.S. Treasury bond yields has been 5.36U for
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gas utilities. Since the risk premium can vary depending
upon market conditions and changing investor risk
perceptions, I bel-ieve using an estimated range of risk
premiums provides the best method to measure the current
return on common equity for a risk premi-um methodology.
I incorporated five-year and 10-year rolling
average risk premiums over the study period to gauge the
variability over time of risk premiums. These rolling
average risk premiums mitigate the impact of anomalous
market conditions and skewed risk premiums over an entire
business cycle. As shown on my Exhibit No. 3L2, the
fj-ve-year rolling average gas risk premium over Treasury
bonds ranged from 4.71? to 6.682, while the 1O-year
rolling average risk premium ranged from 4.30% to 6.29%.
As shown on my Exhibit No. 313, the average
indicated equity rlsk premium over contemporary Moody's
utility bond yields was 3.98% for gas util--ities. The
five-year and 1O-year rolling gas average risk premiums
ranged from 2.802 to 5.51? and 3.11% to 4.93%,
respectively.
O DO YOU BELIEVE THAT THE TIME PERIOD USED TO
DERIVE THESE EQUITY RISK PREMIUM ESTIMATES IS APPROPRIATE
TO FORM ACCURATE CONCLUSTONS ABOUT CONTEMPORARY MARKET
CONDITIONS?
A Yes. The time period I use in this risk
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premium study is a generally accepted period to develop a
risk premium study using "expectationaf" data.
Contemporary market conditions can change
dramatically during the perj-od that rates determined in
this proceeding will be in effect. A relatively long
period of time where stock val-uations refl-ect premiums to
book value is an indication the authorized returns on
equity and the corresponding equity risk premiums were
supportive of investors' return expectatlons and provided
utilities
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access to the equity markets under reasonable terms and
conditions. Further, this time
smooth abnormal market movement
period is
that might
long enough to
distort equity
risk premj-ums
ris k premrums
Duff &
risk premiums. Whil-e market conditions and
do vary over time,
reasonable perlod
this historical- time period is a
to estimate contemporary
studies, suchsome ASAlternatively,
referred to l-aterPhelps
recommended that
return data" in
long historical
achieved returns
in this testimony, have
"actual achieved investmentuse of
a risk premium
t.ime periods.
study should be based on
The studies find that
over short time periods may not reflect
to unexpected andinvestors' expected returns due
abnormaf stock price performance. Short-term, abnormal
actua] returns would be smoothed over time and the
achieved actual investment returns over long time periods
wou1d approxJ-mate investors' expected returns.
Therefore, it is reasonable to assume that averages of
annual achieved returns over long time periods will
generally converge on the investors' expected returns.
My risk premium study is based on expectational
data, not actuaf investment returns, and, thus, need not
encompass a very long historlcal- time period.
O BASED ON HISTOR]CAL DATA, WHAT RISK PREMIUM
HAVE YOU USED TO ESTIMATE IGC'S COST OF COMMON EQUITY ]N25
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THIS PROCBBDING?
A The equity risk premium shoufd refl-ect the
relative market perception of risk in the utility
industry today. I have gauged investor perceptions i-n
utility risk today in my Exhibit No. 3L4, where I show
the yield spread between utility bonds and Treasury bonds
over the last 36 years. As shown in this schedule, the
average utility bond yield spreads over Treasury bonds
for I'A, and "Baa" rated utility bonds for this historical
period are 1.52% and 7.96%, respectively. The utility
bond yield spreads
Gorman, Di 55a
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over Treasury bonds for I'A, and "Baa" rated utilities for
2OL6 were 1,.31 % and 2.1-82, respectively. The current
average I'A'r rated utllity bond yield spread over Treasury
bond yields is now 1ower than the 36 year average spread.
The current "Baa" rated utility bond yield spread over
Treasury bond yields is higher than the 36-year average
spread
A current 13-week average 'rA'r rated utility
bond yield of 3.1 4% when compared to the current Treasury
bond yield of 2.462 as shown in my Exhibit No. 315, page
t, implies a yield spread of around 130 basis points.
This current utility bond yield spread is lower than the
36-year average spread for I'Arr rated utility bonds of
1.529-.. The current spread for the "Baa" rated utility
bond yield of 1.878 is also l-ower than the 36 year
average spread of I.962. Eurther, when compared to the
projected Treasury bond yield of 3.40U, the current "Baa"
utility spread is around 0.93S, lower than the 36-year
average of 7.962.
These utility bond yield spreads are evidence
that the market perception of utility risk is about
average relative to this historical time period and
demonstrate that utilities conti-nue to have strong access
to capital in the current market.
O HOW DO YOU DETERMINE WHERE A REASONABLE RISK
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PREMIUM IS TN THE CURRENT MARKET?
A f observed the spread of Treasury securities
relative to public utility bonds and corporate bonds in
gauglng whether or not the risk premium in current market
prices is relatively stable relative to the past. What
this observatj-on of market evidence clearly provides is
that the valuations in the current market place an above
average risk premium on securities that have greater
risk.
This market evidence is summarized below in
Tab1e 9, which shows the utility bond yield spreads over
Treasury bond yields on average for the period 1980
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through 201"6
of 20L6. I
and the spreads for the first three quarters
also show the corporate bond yield spreads
for Aaa corporates and Baa corporates.
TABLE 9
Comparison of Yield Spreads Over Treasurv Bonds
Average Historical Spread
Q3,2016 Spread
Source: Exhibit No. 314.
A Baa
1.52o/o 1.960/o
1.37o/o 2.18o/o
CorporateAaa Baa
0.84o/o 1.94o/o
1.10o/o 2.22oh
The observable yield spreads shown in the table
above illustrate that securities of greater risk have
above average risk premiums rel-ative to the long-term
hj-storical average risk premium. Specifically, A-rated
utility bonds to Treasuries, a relatively low-risk
investmenL, have a yield spread in 2016 that has been
very comparabl-e to that of its long-term historical yield
spread. The A utility bond yield spread is actually
below the yield spread over the l-ast 36 years. This i-s
an indication that low risk investments like Aaa
corporate bond yield and A-rated utility bond yield have
premium val-ues relative to minimal risk Treasury
securities.25
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In contrast, the higher risk Baa utility and
corporate bond yields currently have an above-average
yield spread of approximately 20 basis points (2.18% vs.
1.962). The higher risk Baa utility bond yields do not
have the same premium val-uations as their lower risk
A-rated utility bond yields, and thus the yield spread
for greater risk investments is wider than lower risk
investments.
This illustrates that securities with greater
risk such as Baa yields versus A yields are commanding
above average risk premium spreads in the current
marketplace. Utility equity securities are greater risk
than Baa utility bonds.
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Because greater risk securities appear to support an
above-average risk premJ-um relative to historical
averages, this woul-d support an above-average risk
premium j-n measuring a fair return on equity for a
utility stock or equity security.
A WHAT ]S YOUR RECOMMENDED RETURN EOR IGC BASED
ON YOUR RISK PREM]UM STUDY?
A To be conservative, I am recommending more
weight to the high-end risk premj-um estimates than the
low-end. I state this because of the relatively 1ow
Ievel of interest rates now but relative upward movements
of utility yields more recently. Hence, I propose to
provide 752 weight to my high-end risk premJ-um estimates
and 25% to the 1ow end. Applying these weights, the rj-sk
premium for Treasury bond yields would be approximately
6.72,3e which is considerably higher than the 31 year
average risk premium of 5.35% for gas utilities and
reasonably refl-ective of the 3.42 projected Treasury bond
yield. A Treasury bond risk premium of 6.7% and
projected Treasury bond yield of 3.42 produce a rj-sk
premium est j-mate of 9. 50U. SimilarIy, applying these
weights to the utility risk premj-um indicates a risk
premium of 4.8eo.40 Thls risk premium is above the
3l-year historical average risk premium of 3.98% for gas
utilities. This risk premium in connection with the
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current Baa
produces an
9. 10%.
observabl-e utility bond yield of 4.33%
estimated return on equity of approximately
Based on this methodology, both my Treasury
bond risk premium and my utility bond risk premium
indi-cate a return of 9.30%.
39 (4.tiT *
40 e.809 *
(6.68? *
(5.51% *
1 5%)
1 5Z)
6. 05%,
4 .832 ,
rounded to 6.1%
rounded to 4.8?
252) +
25e") +
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xII . F. 9gpilglegEgl€ricing Model ( "Clpr{" ;
O PLEASE DESCRIBE THE CAPM.
A The CAPM method of analysis is based upon the
theory that the market-required rate of return for a
security is equal to the risk-free rate, plus a risk
premium associated with the specific securj-ty. This
rel-atj-onship between risk and return can be expressed
mathematically as follows:
Ri : R; + Bi x (R* - Rr) where:
R1
R1
Rm
Required return for stock iRisk-free rate
Expected return for the market
port foI io
Beta - Measure of the risk for
stock
B1
The stock-specific risk term in the above
equation is beta. Beta represents the investment rj-sk
that cannot be diversj-fied away when the security is held
in a diversified portfollo. When stocks are held in a
diversified portfolio, firm-specific ri-sks can be
eliminated by balancing the portfolio with securities
that react in the opposite direction to firm-specific
risk factors (e.9., business cyc1e, competition, product
mix, and production limitatj-ons) .
The risks that cannot be eli-minated when held
in a diversified portfolio are non-diversifiable risks.
Non-diversifiable risks are related to the market ino25
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general and referred to as systematic
can be eliminated by diversificatj-on
risks. In a broad sense, systematic
risks. Risks that
are non-systematic
risks are market
risks and non-systematic
CAPM theory suggests the
risks are business risks. The
market will- not compensate
diversified
will be
investors for assuming ri-sks that can be
away. Therefore, the only risk investors
compensated for are systematlc or non diversifiabl-e
risks. The beta is a measure of the systematic or non
diversifiable risks.
/
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O PLEASE DESCR]BE THE ]NPUTS TO YOUR CAPM.
A The CAPM reguires an estimate of the market
risk-free rate, the Company's beta, and the market risk
premium.
O WHAT DID YOU USE AS AN ESTIMATE OF THE MARKET
RTSK-FREE RATE?
A As prevj-ously noted, Bfue Chip Financial-?
Forecasts' projected 30-year Treasury bond yield 1s
3.402.47 The current 3O-year Treasury bond yield is
2.462r ds shown in my Exhibit No. 315. I used Bl-ue Chip
Einancial- Forecasts' projected 30 year Treasury bond
yield of 3.40? for my CAPM analysis.
O WHY D]D YOU USE LONG_TERM TREASURY BOND YIELDS
AS AN ESTIMATE OF THE RISK_FREE RATE?
A Treasury securities are backed by the full
faith and credit of the United States government so
long-term Treasury bonds are considered to have
negligible credlt risk. Al-so, long-term Treasury bonds
have an investment horizon similar to that of cornmon
stock. As a resul-t, investor-anticipated long-run
infl-ation expectations are reflected in both common stock
required returns and long-term bond yields. Therefore,
the nominal- risk-free rate (or expected infl-ation rate
and real risk-free rate) included in a long-term bond
yield is a reasonabl-e estimate of the nominal- rj-sk-free
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rate lncluded in common stock returns.
Treasury bond yields, however, do include risk
premiums refated to unanti-cipated future inflation and
interest rates. A Treasury bond yield is not a risk free
rate. Risk premiums related to unanticipated inflation
and j-nterest rates are systematic of market risks.
Consequently, for companies with betas less than 1.0,
using the Treasury bond yield as a proxy for the
risk-free rate in the CAPM analysis can produce an
overstated estimate of the CAPM return.
ALBlue Chip Financlal Forecasts, December 1, 2016 aL 2o25
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Gorman, Di 51
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O WHAT BETA DID YOU USE IN YOUR ANALYSIS?
A As shown in my Exhibit No. 3L6, the proxy group
average VaJ-ue Line beta estimate is 0.14.
O HOW DID YOU DERIVE YOUR MARKET RISK PREMTUM
ESTIMATE?
A I derived two market risk premium estimates: a
forward-looking estimate and
historical average.
The forward-looking
one based on a long-term
estimating the expected return
estimate was derived by
on the market (as
represented by the S&P 500) and subtracting the risk-free
rate from this
on the S&P 500
the long-term
on the market.
the achieved return above
Duff & Phelps'
estimates the historical
estimate. I estimated the expected return
by adding an expected inflation rate to
historical arithmetic average real- return
The real-return on the market represents
the rate of inflation.
20L6 VaLuation Handbook
arithmetic average real- market
return over the period 1926 to 2015 as 8.7%.42 A current
consensus analysts' inffation projection, ds measured by
the Consumer Price Index, is 2.32.43 Using these
estimates, the expected market return is L1,.202.44 The
market risk premium then is the difference between the
Ll.20Z expected market return and my 3.40? risk-free rate
estimate , ot approximately 7. B0%.o 25
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My historical- estimate of the market risk
premium was also cafcul-ated by using data provided by
Duff & Phelps in its 2076 VaLuation Handbook. Over the
period 1926 through 2075, the Duff & Phelps study
estimated that the arithmetic average of the achieved
total return on the S&P 500 was t2.0T4s and the total
42Duff & Phelps, 2076 Valuation Handbook: Guide to Cost of
Capital at 2-4. Calculated as [(1+0.12)/ (1+0.03)]-1.
43Bfue Chip FinanciaL Forecasts, December 1, 2076 aL 2-
{ [ (1+0.087) * (1+0.023) ]-1]* 100.44ouff & PheTps, 2076 Val-uation Handbook: Guide to Cost of
Capital aL 2-4.
Gorman, Di 6la
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return on long term Treasury bonds was 6.O0%.46 The
indicated market risk premium i-s 6. 0% (12 .0% 6. 0%
6.0%).
O HOW DOES YOUR ESTIMATED MARKET RTSK PREMIUM
RANGE COMPARE TO THAT EST]MATED BY DUFF & PHELPS?
A The Duff & Phelps analysis indicates a market
risk premium fafls somewhere in the range of 5.5% to
6.92. My market risk premium fal-ls in the range of 6.0?
to 1.82. My average market risk premium of 6.9% is
consistent with the high-end of the Duff & Phelps range.
O HOW DOES DUFF & PHELPS MEASURE A MARKET RISK
PREMIUM?
A Duff & Phelps makes several- estimates of a
forward-looking market risk premium based on actual
achieved data from the historical- period of 1926 through
20L5 as wel-f as normal-ized data. Using this data, Duff &
Phelps estimates a market risk premium derived from the
total- return on large company stocks (S&P 500), l-ess the
income return on Treasury bonds. The total return
includes capital appreciation, dividend or coupon
reinvestment returns, and annual yields received from
coupons and/or dividend payments. The income return, in
contrast, only refl-ects the income return received from
dividend payments or coupon yields. Duff & Phelps cfaims
the income return is the only true risk-free rate
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associated with Treasury bonds and 1s the best
approximation of a truly risk free rate.47 f disagree
with this assessment from Duff & Phelps because it does
not ref1ect a true j-nvestment option available to the
marketplace and therefore does not produce a legitimate
estimate of the expected premium of investing in the
stock market versus that of Treasury bonds.
Nevertheless, I will use Duff & Phe1ps' conclusion to
show the reasonableness of my market risk premium
estimates.
46 td.
41 td. at 3-28.
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Duff & Phelps' range is based on several
methodol-ogies. Eirst, Duff e Phelps estimates a market
risk premium of 6.geb based on the difference between the
total- market return on common stocks (S&P 500) Iess the
income return on Treasury bond investments over the
1926-2015 period.
Second, Duff & Phelps updated the Ibbotson &
Chen supply-side model which found that the 6.9% market
risk premium based on the S&P 500 was influenced by an
abnormal- expansion of price-to-earnings ("P/E") ratios
rel-ative to earni-ngs and dividend growth during the
period, primarily over the last 25 years. Duff & Phelps
bel-ieves this abnormal P/E expansion is not sustainabl-e.48
Therefore, Duff & Phelps adjusted thls market risk
premium estimate to normaltze the growth 1n the P/E ratio
to be more in line with the growth in dividends and
earnlngs. Based on this al-ternative methodology, Duff &
Phelps published a long-horizon supply-side market risk
premium of 6.03%.4e
Finally, Duff & Phelps developed its own
recommended equity, or market, rj-sk premium by employing
an analysis that considered a wide range of economj-c
information, multiple risk premium estimation
methodologies, and the current state of the economy by
observing measures such as the l-evel- of stock indices and
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corporate spreads as
on this methodology,
indicators of
and utilizinq
perceived risk.
a "normalized"
Based
ri-sk-free rate of 4.0%, Duff & Phelps concluded that the
or forward-looking, market risk premium
an expected return on the market of
current
is 5. 5%,
o q9 50
u
A
expected,
implying
WHAT ARE THE RESULTS OE YOUR CAPM ANALYSIS?
As shown in my Exhibit No. 31,7 , based on my 1ow
market risk premium
premlum of 1.8%, a
of 6.0? and my high market risk
risk-free rate of 3.40%', and a proxy
48 td.
49 rd.
at
dL
at
3-30.
3-31.
3-4 0
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I
a
group beta of 0.14, fry CAPM analysis produces a return of
1.862 to 9.192. Based on my assessment of ri-sk premi-ums
in the current market, ds discussed above, I recommend
the proxy group high end CAPM return estimate of 9.L9%,
rounded to 9.20%.
XII.G. Return on Equity Strnmary
O BASED ON THE RESULTS OF YOUR RETURN ON COMMON
EQUITY ANALYSES DESCRIBED ABOVE, WHAT RETURN ON COMMON
EQU]TY DO YOU RECOMMEND FOR IGC?
A Based on my analyses, I estimate IGC's current
market cost of equity to be 9.308.
TABLE 10
Return on Common Equitv Summarv
Descriotion Results
DCF 9.40o/o
Risk Premium 9.30%
CAPM g.2Oo/o
My recommended return on
of my estimated
Tabl-e 10 above,
common equity
range of 9 -20%
the high-end
studies. The
of 9. 30?
to
of my
low-end
within
is at the midpoint
9.402. As shown in
estimated range
is based on my
my recommended
is based on my DCF
CAPM return. The risk premlum is
range.
My return on equity estimates refl-ect
Gorman, Di 64
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My return on equity estj-mates reflect
observabl-e market evidence, the impact on Federal- Reserve
policies on current and expected long-term capital- market
costs, dD assessment of the current risk premium built
into current market securities, and a general assessment
of the current investment risk characteristics of the
electric and gas utility lndustry, and the market's
demand for utility securities.
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XII.H. Financial Inteqrity
A W]LL YOUR RECOMMENDED OVERALL RATE OE RETURN
SUPPORT AN INVESTMENT GRADE BOND RATING FOR IGC?
A Yes. I have reached this conc1us j-on by
comparing the key credit rating
at my proposed return on equity
test-year-end capital structure
financial ratlos using S&Pfs new
financial ratios for IGC
and the Company' s actual-
to S&P's benchmark
credit metric ranges.
the business ri-sk of
ratings. On May 27 ,
by including
categori-es.51
O PLEASE DESCRIBE THE MOST RECENT S&P E]NANCIAL
RATIO CREDIT METRIC METHODOLOGY.
A S&P publishes a matrix of fi-nancial- ratios
corresponding to its assessment of
utility companies and related bond
2009, S&P expanded its matrix criteria
additional- business and financial risk
Based on S&P's most recent
business risk profile categories
ttStrong,tt ttSatisfactory, tt ttFair, tt
are
credit matrix, the
"Excel-1ent, "
"Vulnerable. " Most utllities have
ttWeakr t' and
a business risk
profile of "Excellent" or "Strong. "
The flnancial risk profile categories are
"Minimal, " "Modest, " "Intermediate, " "Significant, "
"Aggressive, " and "Highly Leveraged. " Most of the
utilities have a financial risk profile of "Aggressive."
IGC's parent, MDU Resources, has a "Satisfactory"o 25
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business risk profile and a "Significant" financial risk
profile.
o PLEASE DESCRIBE S&P'S USE OF THE F]NANC]AL
BENCHMARK RATIOS IN ITS CREDIT RATING REV]EW
A S&P evaluates a utility's credit rating based
on an assessment of its financial and business risks. A
combination of financial- and busj-ness rj-sks equates to
the overal-]
51SeP updated its 2008 credit metric guidelines in 2009, and
incorporated utility metric benchmarks wj-th the general corporate
rating metrics. Standard & Poor 's RatingsDirect: "Criterj-a
Methodology: Busj-ness Rlsk/Ej-nancj-al Risk Matrix Expanded," May 21 ,
2009.
Gorman, Di 65a
NWIGU
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Gorman, Di 66
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assessment of IGC's total credit risk exposure. On
November 19, 2013, S&P updated
a matrixupdate,
defines
l-evel- of
S&P published
the l-evel of
business risk.
its methodology. In its
of financial ratios that
financial risk as a function of the
S&P publlshes ranges
ratios that it uses as guidance
for primary financial
in its credit review for
utility companies. The two core financlal- ratio
benchmarks it rel-les on in its credit rating process
incl-ude: (1) Debt to Earnings Before Interest, Taxes,
Depreciati-on and Amortization ( "EBfTDA" ) ; and (2) Funds
Erom Operations ("EEO") to Total- Debt.s2
o HoVi DID YOU App],y S&p'S FINANCIAL RATIOS TO
TEST THE REASONABLENESS OF YOUR RATE OF RETURN
RECOMMENDATIONS ?
A I calcul-ated each of S&P's financial ratios
based on fGC's cost of service for its retail-
jurisdictional operatj-ons. While S&P would normally l-ook
at total consolidated IGC financial- ratios in its credit
review process, fly investigation in this proceeding is
not the same as S&P's. I am attempting to judge the
reasonabl-eness of my proposed cost of capital for
rate-setting in IGC's retail- regulated utility
operations. Hence, I am attempting to determine whether
my proposed rate of return will in turn support cash flowo25
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metrics, balance sheet strength,
grade bond
and earnings that will
support an
financial
investment rating and IGC's
integrity.
O PLEASE DESCRIBE THE RESULTS OF THIS CREDIT
METRIC ANALYSTS AS IT RELATES TO IGC.
A
at a 9.30%
The S&P financial metric calculations for IGC
return are developed on my Exhibit No.318,
IGC' s
and
page 1. The credit metrics produced beIow, with
financial risk profile from S&P of "Significant"
business risk profile by S&P of "Satisfactory",wil-I be
used to assess the strength of the credit metrics based
on IGCf s retail- operations in Idaho.
52Standard & Poor's RatingsDirect: "Criteria: Corporate
Methodofogy," November 19, 20L3.
Gorman, Di 66a
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shown
ratio
My proposed debt ratio for IGC is
on page 3 of my Exhibit No. 318, this
is above the S&P median debt ratio of
52.02. As
adjusted debt
approximately
median of51% for A-rated utiliti-es and below the S&P
53.6%. for BBB rated util-ities. Hence, I concl-uded this
capital structure reasonably supports IGC's current
investment grade bond ratlng.
Based on an equity return of 9.30% and a 48.03
This is within S&P's "Intermediate" guideline range of
2.5x to 3.5x."53 This ratio supports an investment grade
credit rating.
IGC's reta11 operations EEO t.o total debt
common equity ratio, fGC wilf
to produce a debt to Earnings
Deprecj-ation and Amortization
be provided an opportunity
Before Interest, Taxes,
("EBITDA" ) ratio of 2.1x.
30% equity return and a 48.0% common
262, which is within S&Prs "Intermediate"
range of 23e" to 35%. This EFO/total
investment grade bond rating.
9.308 andreturn on equity
and the Company's
credit metrics continue to
coverage at a 9.
equity ratj-o is
metric Auideline
debt ratio wil-l-
At my
proposed capital
debt cost, IGC's
support an
recommended
structure,
financial
of
embedded
support credit metrics at an investment grade utility
Ievef.
XIII. RESPONSE TO IGC IIITNESS DR. iT. STEPHEN GASKE
Gorman, Di 67
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XIII.A. Sr:mmary of Rebuttal
O WHAT IS DR. GASKE'S RETURN ON EQUITY
RECOMMENDATION?
A Dr. Gaske recommends a return on equity of
9.90% based on resul-ts summarized in Table 11 bel-ow.
s3rd.
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NW]GU
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TABLE 11
Dr. Gaske's Results
Median Hiqh Low(1) (21 (3)
Adjusted
Median
(4)
DCF
Basic (Analyst) Growth
Blended Growth
9A0%
8.61Yo
11.060/o
9.50%
7.59%
7.660/o
9.04Yo
8.28o/o
Risk Premium
Large Company Stocks
s00)
Small Company Stocks
Regression Analysis
Market DCF (S&P 500)
Forward-Looking CAPM
(s&P 10.00%9.00%
18.60%
9.90%
12.10o/o
9.70o/o
Reject
9.200/o
9.00o/o
9.10Yo
Source: Direct Testimony of Dr. J. Stephen Gaske at 39.
As outl-ined in Table 11 above under Column (4) ,
Dr. Gaske's DCF models indicate a return no higher than
9.042. Further, reasonabl-e adjustments to his rj-sk
premium studies woul-d indicate a fair return on equity
for IGC regulated operatlons of no higher than 9.202.
Hence, a reasonable interpretation of Dr. Gaske's models,
adjusted to reflect fGC's regulated operations i-nvestment
risk, indicates a fair return on equ.ity in this
proceeding of 9.0% to 9.22, which supports my return on
equity recommendation.
O DO DR. GASKE'S RETURN ON EQUITY STUDIES SUPPORT
A 9.90U RETURN FOR IGC?
A No. Dr. Gaske's studi-es support a return on25
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NWIGU
equity in
v
A
anal-ysis.
the range of 8.61% to 9.40? for IGC.
PLEASE DESCR]BE DR. GASKEIS DCF ANALYSIS.
Dr. Gaske developed two versj-ons of the DCF
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His first approach is based on a traditional or basic DCF
analysis usj-ng analysts' projected growth rate estimates.
Thls basic DCF analysis estimates a return on equity for
IGC in the range of 7 . 30% and L0 .632, with a medj-an of
9.04%. Then, Dr. Gaske increased his proxy group return
by adjusting each DCE estimate by a 4.0e" flotation cost
adjustment. This increased the proxy group median from
9.04% up to 9.40%.
Second, Dr. Gaske develops a blended DCF
analysis relying on both his retention and analysts'
projected growth rate estimates. His retention growth
rate j-s based on Value Line projected dividends, earnings
and returns. This blended approach yields a return on
equity in the range of 1 .362 to 9.74% with a median of
8.282. Agaj-n, Dr. Gaske adjusted his blended growth DCF
return by a 4.0% to account for flotation costs. This
increased his blended growth DCF return from 8.28% to
8.61%.
O PLEASE DESCRIBE THE ISSUES YOU HAVE WITH DR.
GASKE'S DCE ANALYSES.
A My primary issue with Dr. Gaske's DCF studies
lies 1n his proposal to adjust al-l of the DCF return
estimates by a flotation cost adder of 4.02. The effect
of this flotation cost adjustment is to increase the DCF
return estimate by approximately 35 basis points.
Gorman, Di 69
NWIGU
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o
ADJUSTMENT
A
adj ustment
costs for
should be
DO YOU BELIEVE THAT DR. GASKE'S FLOTATION COST
TO HIS DCF RETURN ESTIMATES IS REASONABLE?
No. Dr. Gasker s proposed f l-otation cost
for IGC is not based on known and measurable
IGC. Therefore, his fl-otation cost adjustment
rej ected.
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O HOW DID DR. GASKE DEVELOP A FLOTAT]ON COST
ADJUSTMENT FOR IGC?
A Dr. Gaske reviews a representative
flotation costs incurred with 32 new common
sample of
stock i-ssues
by gas utilities
flotation
since January 2004
cost of 4.I2. Dr
This produces an
Gaske rounds this up
return on equity by
flotation cost
average
to 4.0%,and lncreases his proposed
approximately 35 basis points. This
adjustment 1s intended to recover the cost a utillty
incurred by issuing additional stock to the publ1c.sa
O WHY IS DR. GASKE'S FLOTATION COST ADJUSTMENT
FLAWED?
A Dr. Gaske's flotation cost adjustment is not
based on the recovery of prudent and reasonable flotation
expenses for IGC. Rather, ds discussed at pages 76-L1 of
his direct testimony, Dr. Gaske derives a ffotation cost
adjustment based on cost j-nformation of other companies
relying on publicly available information. Because Dr.
Gaske does not show that his adjustment is based on IGC's
actual and verifiabfe flotatlon expenses, there are no
means of verifying whether his proposal is reasonable or
appropriate. Stated differently, Dr. Gaske's flotation
cost adder is not based on known and measurable IGC
costs. Therefore, the Commlssion should reject his
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O ]E DR. GASKE HAD SHOWN AN ACTUAL AND VERIEIABLE
FLOTATION EXPENSE ALLOCATED TO fGC'S REGULATED
OPERATIONS, WOULD HIS PROPOSED FLOTATION COST ADJUSTMENT
BE REASONABLE?
A No. A cl-ear understanding of how
and verifiabl-e fl-otation costs were treated
the actual
in the past
for ratemaking
the flotatlon
purposes is also
expenses had been
these costs would
needed. Specifically, if
amortized to cost of
service, then
recovered in
allowing a
have already been
the case, thenpast rates. If this is
54caske Direct testimony aL 75-11
Gorman, Di 70a
NWIGU
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return on equity adjustment in this case would provide
cost recognition j-n prospective rates for costs that have
already been recovered, this doubl-e recovery of flotation
costs would be unjust and unreasonabl-e.
As such, Dr. Gaske woufd have
Resources' actuaf fl-otation costs that
al-located to regulated operations, show
these costs were incurred, and show how
treated for ratemaking purposes in the
this clear demonstration, Dr. Gaske's
cost adjustment is simply not a known
component of IGC's cost of service in
O CAN DR. GASKE'S DCF ANALYSES
PRODUCE MORE REASONABLE RESULTS?
A Yes. Removing the
from Dr. Gaske's DCF studies
to identify MDU
are properly
the time period
they have been
past. Without
proposed flotation
and measurable
this case.
BE ADJUSTED TO
cost adjustment
DCF return in the
and high-end
reffect the
ffotation
produces a
range of 8.3% up to 9.0%. These are the medians of his
studies which efiminate low-endproxy group
outliers.Hence, these estimates reasonably
investment risk and a fair return for his proxy group
Dr.based on hls own DCE studies. Conservatively,
Gaske's DCF studies demonstrate that a fair return on
equity for IGC in this case is not higher than 9.042, or
approximately 9.02.
O DO YOU HAVE ANY OTHER ISSUES WITH DR. GASKE'SO25
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NWIGU
DCF RETURN RESULTS?
A Yes -Dr. Gaskers proposal to set the
above the median DCF results will-
return on
pl-ace an
be
equity for IGC
unreasonable burden on the ratepayers
re j ected. As d j-scussed be1ow, IGC ' s
comparable to the risk of the utility
in the proxy group.
O WHY DO YOU BELIEVE THAT TGC
ARE COMPARABLE TO THE RISKS FACED BY
GROUP COMPAN]ES?
and shoul-d
relative risk is
companies included
EACES RISKS THAT
DR. GASKE'S PROXY
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9
A This is evident by Dr. Gaske's own testimony.
He describes hj-s stringent methodology to identify
companies that are risk comparable to fGC's operations
and on his Exhlbit No. 05, Schedule 3, he shows that the
average credit rating for his proxy group of A is
slightly higher than the MDU Resources' credit rating of
BBB+ from S&P. The relative risks discussed on pages
30-38 of Dr. Gaske testimony are already incorporated in
the credit ratings of the proxy group companies. S&P and
other credit rating agencies go through great detail in
assessi-ng a utility's business risk and financial- risk in
order to evaluate their assessment of its total
investment risk. Therefore, this total risk j-nvestment
assessment of MDU, in comparison to a proxy group, is
fuIIy absorbed into the market's perception of MDU's risk
and the proxy group fully captures the investment risk of
MDU.
O HOW DOES S&P ASSIGN CORPORATE CREDIT RATINGS
FOR REGULATED UTILITIES?
A fn assigning corporate credit ratings the
credit rating agency considers both business and
financial risks. Business risks among others include
company's size and competitlve position, generation
portfolio, ds well as a consideration of the regulatory
environment, current state of the industry and the
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economy as whole. Specifically, S&P states:
To determine the assessment for a corporateissuer's business risk profile, the criteria
combine our assessments of industry risk,country risk, and competitive position. Cashflow/leverage analysis determines a company'sfinancial- risk profile assessment. Theanalysis then combines the corporate issuer's
business risk profiJ-e assessment and itsfinanciaf risk profile assessment to determineits anchor. In general-, the analysis weighs
the business risk profile more heavily for
investment-grade anchors, while the financial
rlsk profile carries more weight for
speculative-grade anchors. 5s
55standard & Poor's RatingsDirect:
"Criterj-a/Corporates/General-: Corporate Methodol-o9y, " November 19,
2013.o 25
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O PLEASE DESCR]BE DR. GASKE'S UTILITY R]SK
PREMIUM ANALYSES.
A Dr. Gaske develops three risk premi-um studies
based on the average Moody's corporate bond yield for the
5-month period from December 20\5 to May 2076 of 4.342.56
For his first risk premium study Dr. Gaske derived an
equity risk premium of 5.12, which is the difference
between the annual total return on a large company stock
of 12.02 and the return on long-term corporate bonds of
6.3% since 1926 as published by Morningstar SBBI
Presentation 7926-2015 Slide 6.51 Then, Dr. Gaske added
the Moody's corporate bond yieJ-d of 4.32 to hls risk
premium of 5.12 to produce a return on equity for MDU of
10.008. (Gaske Direct testimony at 26).
In his second risk premium anal-ysis Dr. Gaske
estimates a risk premium over the return for a small
company stock again using the
Associates. He estimates MDUI
based on the Company's prolected
ratio and he determines that MDU
1Oth decil-e, which has a return
data from Ibbotson
market capitalization
rate base and equity
falls in the Ibbotson's
of 20.6%. Then, he
q
estimates a risk premium of L4.2? over the return of
long-term corporate bonds of 6.4e". Adding his small
company risk premium of 14.2% to Moody's corporate bond
yield of 4.32 produces a return on equity of 18.6U.o 25
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Fina11y, Dr. Gaske developed an additional- risk
premium based on the concept that equity risk premia are
inversely related to interest rates. He developed a
regression analysis based on the authorized gas returns
and 3O-year Treasury yields during the period 1,992 to the
second quarter of 2016. Applying his regression equation
to the current (2.65%), near-term projected (3.08%) and
55caske Direct Testimony al 26
57 td.
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NWIGU
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long-term projected
an average return on
for IGC.
(4.30?) yields, Dr. Gaske estimates
equity based on this model of 9.972
O ARE DR. GASKE'S LARGE AND SMALL COMPANY RISK
PREMIUMS A FAIR RETURN ON EQU]TY ESTIMATE FOR MDU?
A No. Dr. Gaske's large and small- risk premium
estimates reasonably reflect returns on the overall
market or some unregulated market index. These returns
on equlty were
IGCrs regulated
A No. This
First, Dr. Gaske has
risk adjustment for
is unreasonable for several reasons.
not cal-ibrated to reflect the low risk of
utility operations.
o Do You BELIEVE THAT DR. GASKE'S PROPOSAL EOR A
SMALL COMPANY RETURN ON EQU]TY ADDER FOR IGC IS
REASONABLY DEVELOPED?
not properly
IGC relative
gauged an investment
to his proxy
Therefore, to the extent IGC coufd justify a
group.
smaII
company risk adder, it should be relatlve to the proxy
group market return and not to the return on the total-
market. Second, the development of a small- company adder
should not be the only consideration in devel-oping a fair
return for fGC's regulated business operations. The risk
assessment for IGC's regulated operations should reflect
smal-l- company risk adders, dS well as regulatory risk
reductions. Dr. Gaske's small company risk return is notoZJ
842
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a fair return for IGC because he ignores the risk
reduction produced by regulatory protections and
cost-based prices.
Finally, Dr. Gaske's risk premium analysis is
the development of his small company risk premium of
1,4.2%. The total return of 20.6% for the 10th decil-e
reflects risks that are not characteristic of IGC. This
total return used by Dr. Gaske refl-ects companies that
have beta estimates of approximately 1.40.58 These beta
estimates are substantially higher than the average beta
of 0.74 for the proxy group. Therefore, hj-s small
company risk premium produces a return estimat.e that
5BSgeI Vafuation Yearbook at 109.
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is inflated and does not reffect a risk appropriate
return for IGC. Hence, the return produced by Dr. Gaske
smal1 company risk premj-um is not reasonable and shoul-d
be rejected.
O DO YOU HAVE ANY COMMENTS CONCERN]NG DR. GASKE'S
LARGE COMPANY RISK PREMIUM?
A His large company
same deficiencies described
risk premium suffers from the
above in regards
. Gaske's large
to his smaff
company
more in
company risk premium. However, Dr
risk premium produces a return on
line with market expectation.
O TS DR. GASKE REGRESSION
METHODOLOGY REASONABLE?
equity that is
RISK PREMIUM
Gaske's contention that there is a
rel-ationship between equity risk
not supported by academicpremiums and interest rates is
research. While academic studies have shown that, in the
A No. Dr.
simplistic inverse
past, there
variables,
changes over time and
perceptlon of the risk
has been an inverse rel-atj-onship among these
researchers have found that the rel-atj-onship
is influenced by changes in
of bond investments rel-ative to
equity investments, and not simply changes to interest
rates.59
In the 1980s, equity risk premiums wereo25
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inversel-y related to interest rates but that
rate volatility
interest rates
was likely
that existedattributabl-e to the interest
at that time.As such,
relative
when were more
vo1ati1e,
increased
the perception of
the investment
bond investment risk
relative to risk of equities.
caused changesThis changing investment risk perception
in equity risk premiums.
59The Market Rlsk Premium: Expectationaf Estimates Uslng
Analystsr Forecasts," Robert S. Harris and Fel-icia C. Marston,
JournaL of Applied Finance, Volume 11, No. 7, 2001-and "The Risk
Premium Approach to Measuring a Utility's Cost of Equity," Eugene E
Brj-gham, Dilip I{. Shome, and Steve R. Vlnson, FinanciaT Management,
Spring 1985.
Gorman, Di 75a
NWIGU
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In today' s
not as
marketplace,
extreme as it
interest rate
WAS during the 1980s.60
risk of bond
volatility is
Nevertheless,
months ol-d. Based
changes in the perceived
j-nvestments rel-ative to equity investments still- drive
changes in equity premiums and cannot be measured simply
by observing nominal interest rates. Changes in nominal
interest rates are heavily influenced by changes to
inflation outlooks, which al-so change equity return
expectations. As such, the relevant factor needed to
explain changes in equity risk premiums is the relative
changes to the risk of equity versus debt securities
investments, and not simply changes in interest rates.
Importantly, Dr. Gaske's analysis simply
ignores investment risk differentials. He bases hls
adjustment to the equity risk premium excl-usively on
changes in nominal interest rates. This is a flawed
methodol-ogy that does not produce accurate or rel-iabl-e
risk premium estimates.
O DO YOU HAVE ANY OTHER ISSUES W]TH DR. GASKEIS
REGRESS]ON RISK PREMIUM?
A Yes. Dr. Gaske's Treasury yields used to
estimate the return for IGC of 9.9L2 are based on the
current (2.652) ,
projected 30-year
near-term (3.082) and long-term (4.30?)
Treasury yields, which are al-most six
on the most recent Bfue Chipo25
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publication the current and near-term projected 3O-year
Treasury yields are 2-28% and 2.822, respectively-61
Further, Dr. Gaske's long-term projected Treasury bond
yield of 4.30% is simply too high and is unreasonabl-e.
His projected 4.30% yield 1s approximately 200 basis
points higher than the current Treasury bond yield of
2.28% and approximately 720 basis points higher than the
projected Treasury yield of 3.L%62 that wil-l cover the
rate effective period as
60wThe Risk Premium Approach to Measuring a Utility's Cost of
Equity, " Eugene F. Brigham, Dili-p K. Shome, and Steve R. Vinson,
Financial Management, Spring 1985, aL 44.
6lBfue Chip FinanciaL Forecasts, December 1, 2Ot6 aL 2.
62 td.
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NWIGU
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NW]GU
projected by the consensus economists. Dr. Gaske's
long-term projected Treasury yield of 4.30* is wel-l-
beyond the rate-effectj-ve period, and as such, is not a
reasonable interest rate to use in a risk premium study.
O CAN DR. GASKE'S REGRESS]ON RISK PREMIUM
ANALYSIS BE REVISED TO REFLECT CURRENT PROJECTIONS OF
TREASURY YIELDS?
Yes. Disregarding
belief that risk
Dr. Gaske's simplistlc and
incomplete be explained by
his data can beonly changes to
used t.o produce
nomj-nal j-nterest rates,
a reasonable return estimate. By adding
my weighted average equity risk premium over Treasury
bonds of 6.L% t.o his updated current (2.282), near-term
(2.82%) and long-term (3.12) projected Treasury yields
will- produce a return on equity estimate no higher than
9.22 for IGC.
O PLEASE DESCR]BE DR. GASKE'S MARKET DCF
ANALYS]S.
A Dr. Gaske developed a market DCF anal-ysis as a
benchmark to test. the reasonabfeness of his
A
DCF estimates. He calculated
included in the S&P
premlums can
the required
500, based on
proxy
return
group
for the
companaes
dividend
an expected
rate ofyield of 2.12 and an expected growth
9.42, which produced a
O DO YOU HAVE
market DCF return of L2.1e".63
ANY CONCERNS IN REGARDS TO DR.o 25
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GASKE'S MARKET DCF ANALYSIS.
A Yes. I have two major concerns with his
market DCF return is based on aanalysis. First, his
growth rate of 9.42,
Iong-term sustainable
whlch is significantJ-y above the
discussed earlier. It
growth rate of 4.7% that I
is unreasonable to assume that
is al-most twice the growth of thethis growth rate that
U.S. economy can be sustained indefinitely.
63Exhibit No. 05, Schedule 6, Page 1 of 10.
Gorman, Di 11a
NWIGU
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Second, the S&P 500 includes companies with
risk characteristj-cs significantly different than the
risks encountered by IGC and its parent company. The
companies j-n the utility industry operate as natural
monopolies and are shiel-ded from the economic turbulence
faced by corporations operating in other industries. As
noted by the major credj-t rating agencies, the utility
industry has relativeJ-y l-ow risk 1n comparison with the
market. Indeed, the regulatory process itsel-f provj-des
an effective mechanism to mitigate some of the market
risks lnfluencing the U.S. economy. Therefore, using Dr.
Gaske's market DCF anal-ysis as a benchmark w1ll produce
an unrel-iabl-e and inflated return on equj-ty for a
Iow-risk utility such as IGC. Therefore, the Commission
should disregard the results of Dr. Gaske's market DCF
analysis.
O CAN DR. GASKE'S R]SK PREM]UM STUDIES BE USED TO
ESTIMATE A FAIR RETURN FOR ]GC REGULATED OPERATIONS?
A Dr. Gaske's risk premi-um model-s largely ignore
the investment risk and a fair return based on that risk
for IGC's regulated operations. Hence, these model-s are
primarily just not useful in estimating a fair
risk-ad;usted return for regulated utillty systems.
However, he has estimated two returns for the
S&P 500: one based on a rlsk premium estimate of 10.0%
Gorman, Di '7I
NWIGU
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(Dr. Gaske's large company risk premium) and one based on
a DCF return on the market of 72-l.Z. The midpoint of
these two estimates produces a market return estimate of
11.058. Using a risk-free rate of 3.12, and a comparable
risk proxy group systematic risk beta factor of 0 .1 4,
would produce a risk premium estimated fair return for
the proxy group of 9.00?.64
As dj-scussed above his smal-l- company stock
return of 78 .62 is based on non-regulated smal1
companles. There has been no demonstration that this
proxy
64 ,1t.05%-3. 1% ) x 0.74+3.1%:8 .982, rounded to 9. OO% .
Gorman, Di 7Ba
NWIGU
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Gorman, Di 19
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group reasonably reflects the investment rj-sk of MDU
Resources, much less its l-ower-risk regulated
subsidlaries. Hence, this smal-l company market return
estj-mate shoul-d simply be rejected. Therefore, I did not
incl-ude this market return in the revision of his market
UUT .
O PLEASE DESCRIBE DR. GASKE'S CAPM STUDY.
A Dr. Gaske develops a CAPM study based on a
DCE-market return of 12.7% as described above, a
risk-free rate of 2.632 based on the 3O-Yr. Treasury
yield, and a proxy group beta of 0.1 4. These inputs
produced a market risk premium of 9.5e" and CAPM return on
equity of 9.12, ds shown in the table on page 29 of his
direct testimony.
O WHAT ]SSUES DO YOU HAVE W]TH DR. GASKE'S CAPM
ANALYS]S?
A In his CAPM study Dr. Gaske again rel-ies on his
DCF-derived market return of 72.!e", which as I described
above consists of a growth rate
s igni ficant Iy
pro j ecti-ons
rate of 4.1%.
growth estimate is
sustainable growth
market risk premlum
rej ected.
O CAN DR. GASKE'S CAPM STUDY BE REVISED TO
consensus economist
estimate of 9.42. This
higher than the
for a long-term
Therefore Dr. Gaske's
of 9. 5% is overstated and should be
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PRODUCE A
A
8.1%, an
estimate
FAIR RETURN EOR ]GC REGULATED OPERATIONS?
Yes.Using my highest
risk-free rate
market risk premium of
of 3.18 and a beta
a CAPM return estimate
updated
of 0 .'14,wil-l result in
of 9.10%6s, which will- fairly compensate j_nvestors and
ratepayers.
O DOES THIS CONCLUDE YOUR D]RECT TESTIMONY?
A Yes, it does.
658. t? x o.i 4 + 3. 1% : 9.tz
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NWIGU
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Gorman Di-Reb 1
NW]GU
O PLEASE STATE YOUR NAME AND BUSTNESS ADDRESS.
A Michae1 P. Gorman. My business address is
1,6690 Swingley Ridge Road, Suite 140, Chesterfield, MO
63017.
A ARE YOU THE SAME MICHAEL P. GORMAN WHO
PREVIOUSLY FILED TESTIMONY IN TH]S PROCEEDING?
A Yes. On December 76, 2016, I filed Direct
Testimony on
("NWIGU").
behalf of Northwest fndustrial Gas Users
O WHAT IS THE PURPOSE OF YOUR REBUTTAL TESTIMONY?
A I will respond to the Direct Testimony of Idaho
Public Utilities Commission Staff wi-tnesses Michael-
Morrison and Bentley Erdwurm. I will respond to Mr.
Morrj-son's positions on fntermountain Gas Company's
("IGC" or "Company") cost of service methodology, and his
proposed all-ocation of the revenue increase among the
Company's rate classes. I will respond to Staff witness
Erdwurm's proposed Flrm Transportation rate design. I
will- also address some of the testimony presented by
Amalgamated Sugar.
O PLEASE SUMMARIZE YOUR CONCLUSIONS AND FINDINGS
AS LAID OUT IN YOUR REBUTTAL TESTIMONY.
A f take issue with Staff witness Morrlson's
conclusion that the Company's class cost of service study
("COSS") is unreliable. The Company dld developo25
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Gorman Di-Reb 1a
NWIGU
al-Iocation factors based on actual l-oad studies of the
Company's customers. The Company rel-ied on the best
information availabl-e to measure each class's
contribution to the system colncident peak and
non-coincident peak. Mr. Morrison proposes alternative
methods which would provide
class contribution to these
the data needed to complete
pref ers is not avail-abl-e.
improved estimates of. the
allocation factors, but notes
the al-l-ocation factors as he
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NWTGU
I al-so take issue with Staffrs proposed phase-in of
the Company's proposed demand-based pricing for its Large
Vol-ume and Flrm Transportation customers. The Company's
pricing is consistent with its cost of service, which is
the best estimate availabfe in the record of the
Company's cost of providing service to these large
customers. Further, this pricing based on cost of
service wil-1 provide efficient prlce signals to these
customers to make efficient consumption decisions, and
al-low them to make economic conservation-rel-ated changes
in operations or investments in
that al-l-ows them to manage their
efficlent demands on the Company
pricing signals created through
pricing structure is reasonable,
I also commenL on the need
customers that demonstrate that
energy assets in a means
bills while placing more
system. The superior
the Company's proposed
and should be adopted.
for mitigations for
the change to demand
for those customers. Theprj-cing can create
Commission shoul-d
are detrlmentally
difficulties
investigate whether such customers that
impacted by a demand-based Flrm
Transportation rate can alternativel-y choose
Interruptible Transportation service r or shoul-d be
considered for a load retention rate. If a load
retention rate option is selected, the Commission shou1d
require all customers to make contribution to costs not25
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covered by the l-oad retentj-on rate because retaining the
customers woufd benefit the system as a whole.
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NWIGU
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NWIGU
I . COST OE' SERVICE STT'DY
O PLEASE SUMMARIZE MR. MORRISON'S POSITIONS ON
THE COMPANY'S COST OF SERVICE METHODOLOGY AND H]S
PROPOSED REVENUE SPREAD.
A Mr. Morrison argues that
produce a fair allocation of costs
for the following reasons:
IGC's COSS does not
to fGC's rate classes
1 IGC did not conductnot produced a fair
costs.
a load study and has
al-location of capacity
2 IGC's distribution service costs (EERC
Accounts 380 through 385) are properly
regarded as customer-re1ated, but were not
al-located across rate classes reasonablyby IGC (Morrison Direct Testimony at 9 and
10).
3 IGC's proposal to classify distributioncosts in Account 31 6 as both demand and
customer-rel-ated i-s inappropriate (Id. at
11 and 12) .
4 IGC's COSS should not have excl-uded two
Interruptible Snow Melt classes (IS-R and
IS-C) (rd. at 16).
o DrD MR. MORRISON PROPOSE CHANGES TO CORRECT THE
COMPANY'S CLASS COSS BASED ON THESE CONCERNS?
A
study,
cost of
No. Mr. Morrison concluded that without a l-oad
it is impossible to develop a suitabl-e alternatj-ve
service methodology. Therefore, he recommends
that the revenue reguirement be allocated in proportion
collected fromto the normalized revenue currently being
each customer cl-ass. AIso, Mr. Morrison recommends thatO25
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Gorman Di-Reb 3a
NWIGU
IGC, Commission Staff and other stakeholders hold
workshops to develop a Ioad
methodoLogy after thj-s rate
o rs MR. MoRRrsoN's
study and cost of service
case (Id. at 3).
PROPOSAL FOR AN EQUAL PERCENT
ALLOCATION ON NORMAL]ZED REVENUES REASONABLE?
A No.
30 years ago
the Company's
The Company's current rates were developed
and much has changed in the lndustry and on
system since that time. To
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continue the rate spread that has existed for
untenable unless that rate
such a long
spread is
Company' s
information
period of time
justified by a
class COSS is
avail-able
parties to
merit, they
COSS which
l-s
to the Company,
develop a class
class COSS. In contrast, the
based on the best, most recent
Commission Staff, and other
COSS in this proceedi-ng.
While certaln arguments made by Mr. Morrison have some
are not adequate to abandon the Company's
informationis, again, based on the best
availabl-e in the record. For these reasons, I recommend
Mr. Morrison's proposed equal percent allocatlon on
normaf revenues across aI1 rate cfasses be rejected.
ft is important to adjust rates toward cost of
service for several purposes including: (1) to send
accurate price signals for efficient use and conservation
of gasi Q) to allow customers to lmplement effective
utility management initiatives; and (3) to equltably
adjust rates across rate classes in this proceeding. Mr.
Morrison's proposal fails to meet these objectives.
Accurate price signals are particularly important in
this case, ds outlined by the proposed demand-side
management and conservation efforts undertaken by IGC and
described in the direct testimony of IGC witness Allison
Spector. Effectively implementing efflcient and accurate
price signals that reflect cost of servj-ce better
Gorman Di-Reb 4
NWIGU
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Gorman Di-Reb 4a
NWIGU
supports economic demand-side management and conservati-on
programs which do not create uneconomic impacts on either
the Company or customers. That is, if prices are set
based on cost of service, then incremental- revenue l-oss
from demand-side management and conservatj-on efforts
shoul-d more closely align with reductions in incremental
utility cost. NWIGU witness Ed Finklea 1s separately
providing testimony addressing price signal issues.
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For these reasons, the Company's efforts to move
rates toward cost of service should be approved by the
Commissi-on, and encouraged in this and future cases.
O W]LL YOU RESPOND TO THE COSS DEFIC]ENC]ES
IDENTIFIED BY MR. MORRISON?
A Yes. I respond to each of Mr. Morrisonfs
concerns related to the Companyrs class COSS, and I show
that whil-e his overview of the COSS 1s reasonable, his
critlcisms of the Company's COSS are overly crltical, and
do not diminish the useful-ness of the Company's class
COSS nor provide a sufficient basis for util-izLnq a
different methodology.
I.A Load Studv
O PLEASE RESPOND TO MR. MORRISON'S CONCERNS WITH
THE COMPANY'S CLASS COSS.
A Mr. Morrison argues that the Company's class
COSS is not a reasonable methodology of allocating costs
across rate classes because the allocators are not based
on a load study.
O WHAT DOES MR. MORRISON MEAN BY LOAD STUDY?
A He states that a load study determines peak
then be used to allocate commonusage by class
equipment costs
which can
across rate classes that cannot otherwlse
be directly al-located. (Morrison
lines 15-18). He further states
Direct Testimony at 4,
that a load study
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NWIGU
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Gorman Di-Reb 5a
NWIGU
generally is used to determine coincident peak ("CP")
al-locators and non coincident peak ("NCP" ) al-locators.
He opines that CP allocators generally are used for
larger transmission and storage costs, and NCP al-focators
are more appropriate for capacity-related portions of
distribution plant
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Gorman Di-Reb 6
NW]GU
which are generally sized
connected to distribution
as a whole. (Id. at 5-6) .
for specific customers
circuits rather than the system
O WHY DOES MR. MORRISON BEL]EVE THAT THE
COMPANY'S COSS DID NOT MEASURE CAPACITY ALLOCATTON
FACTORS REASONABLY?
A He states at page 7 that
al-locators
the Company's
was based on bothdevelopment of
monthly billing
data for other
capacity
data for
cl-asses. He states
that the Company
approximately 150
who are equipped
demand, with the
approximately 340,000
("GS'r ) customers who
certain classes, and daily peak
lines B-2t
combined peak day
at page J,
information from i-ts
fndustrial and Transportation customers
with meters capable of recording daily
monthly billing information from
Residential and General Service
are not equipped with metering
equipment that can measure daily demands.
Mr. Morrison states that the Company subtracted the
peak usage of the Industrial and Transportation customers
from the system peak, and the amount of peak that was not
servi-ng these two customer groups was then allocated to
the Residential and GS classes. The allocation of the
peak daily usage for the Residentlaf and GS classes was
then based on their January monthly consumption data.
O DO YOU BELIEVE THAT THE COMPANYIS METHOD OFo25
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Gorman Di-Reb 6a
NWIGU
MEASURING EACH CLASS'S CONTRTBUTION TO THE SYSTEM PEAK ]S
UNREL]ABLE AS MR. MORRISON SUGGESTS?
A No. I believe the Company's methodology is
based on the best information available, and has produced
the most accurate description of class contributlons to
the system peak that has been presented in the record.
Further, I believe this methodology is generally
consistent with j-ndustry practices and produces a
reasonable method of allocating peak day capacity costs.
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Gorman Di-Reb '7
NWIGU
Importantly, the methodology accurately measures the
system daily peak and the peak for the Transportatj-on and
Industrial customer cl-asses. The only Iimitation, if
dfly, in measuring contributions to peak day demand 1n the
Company's study is its estimate for the Residential- and
GS cl-asses' peak day
As Mr. Morrison properly notes, however, it is not
the Residential- and GS cl-asses'possible to
contribution to the system CP demand directly. These
classes do not have the metering equipment that aIlows
for dail-y consumption measurement. (Morrison Direct
Testimony at
measure each
assumptions
GS c.l-asses.
'7 , lines 13-14) . As a result, in order to
class's contribution to IGCrs
would have to be made for the
Therefore, Staff's concern with the
demand.
measure
CP,
Residential and
Company's COSS simply cannot be
However, and more importantly,the Company's
proceeding.
limitation
on metering
unique, but
for the Residential and GS cl-asses is not
it is generally the standard across the
industry. Therefore, the Company's efforts to utilize
existing infrastructure to measure each class's
contribution to CP is generally consistent with industry
practice, and is reliabl-e.
O IF THE RESIDENTIAL AND GS CLASSES DO NOT HAVE
METERS CAPABLE OF MEASURING THEIR CONTR]BUT]ON TO CP,
cured in thls
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DOES THAT MEAN ]T IS NOT POSSIBLE TO ACCURATELY ALLOCATE
CAPACITY COSTS TO THESE CLASSES?
A No. In my
to Residential- and GS
experience, gas utilities' service
customers is normally based on
meters that are not capable of measuring daily
consumption. Indeed, measuring daily consumpti-on
requlres a
Therefore,
more sophisticated and more expensive meter.
it is normal- for gas util-ities to estimate
these classes' contribution to the CP of the system.
Gorman Di-Reb '7 a
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However, because these classes have predictable
weather-sensitive load characteristics, utiliti-es can
pro;ect usage using weather data for historical- periods
reasonably we11. f believe these estimates are rel1able.
O SHOULD THE COMPANY HAVE INSTALLED METERING
EQUIPMENT THAT WOULD BE CAPABLE OF MEASURTNG DAILY
CONTRIBUTIONS TO THE SYSTEM DEMAND FOR THE RESIDENTIAL
AND GS CLASSES SO ]T COULD COMPLETE A LOAD STUDY AS
CONTEMPLATED BY MR. MORRISON?
A OnJ-y 1f such metering investment would be found
to be a prudent investment and economically justified.
Installing meters for the purpose of doing a cl-ass COSS
simply would be unl-ike1y to meet this standard unl-ess
done on only a subset or sample of these smal-Ier
customers. Installing a subset of this equipment would
allow for a statistical measurement of classes' CP.
However, alternative statistical evaluations can be
performed using monthly sal-es data. The Company's
methodology relies on existing infrastructure and
metering equipment to make these approximations in a
simil-ar but different manner than a statistical test of
specific customers on the system. Again, the Company's
methodology is reasonable.
Mr. Morrison states at page B, lines L1-22 of his
testJ-mony, that the Company is replacing Encoder Receiver
Gorman Di-Reb B
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Gorman Di-Reb 8a
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Transmitter ("ERT") meters with ERT meters capable of
recording hourly consumption information for each of its
customers. He states that a relatively smal1 number of
these meters coul-d be used to obtain the peak information
needed to develop accurate CP and NCP alfocators.
Residential and GS customers generally do not monitor
their gas consumpti-on on a daily basis. Rather, they
monitor and manage their monthly gas bi11s. GeneralIy
speaking, these classes do not need more detall-ed
interval-
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Gorman Di-Reb 9
NWIGU
data than monthly consumption. More specifically,
however, metering equipment for these smaller customers
that is capable of measuring daily consumption levels
generally is far more expensive than the existlng
metering equipment that is not capable of this
measurement detail.
O DO YOU BELIEVE THAT THE COMPANY'S METHOD OF
DEVELOPING COINCIDENT DEMAND ALLOCATORS IS GENERALLY
CONSISTENT WITH INDUSTRY PRACTICE?
A Yes. It is normal for utility companies not to
have more sophisticated meteri-ng equipment for smaller
customers such as GS and Residential customers. For
these weather-sensitive customers, the Company's practice
of approximating their contribution to system peak
through monthly volumes is a wefl regarded and normal
methodology for measuring coincident demand affocators.
This is recognized by the National Association of
Regulatory Utility Commissloners ("NARUC") .
The NARUC Gas Distribution Rate Design Manual
("NARUC Manual-") recognizes that installing meters
capable of daily usage can be very costly. In its
Manual, NARUC indicates that instead for smafl customers'
classes, CPs can be measured as follows,
However, since system peaks in the gas
are highly weather sensitive, a fairly
correlation between temperature versus
industryreliable
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consumption can be developed from utilityrecords. By applying a least square fit to
"average degree day" and "use per day" data for
each customer group, one can calculate with
reasonabl-e accuracy the demands to be placed onthe system.***
b. Determination of Load Curves By Bil-linq
Records
Load curves can be determined for some classesfrom the bil-l-inq records of customers who are
equipped with standard recording instruments.This is feasible for
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Gorman Di-Reb 10
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cl-asses 1n which all, or nearly all, the
customers are so equipped. Normally, this isthe case for interruptible and large industrial
customers, a tlny fraction of al-1 customers
served by a utility.r
o Do you HAVE ANy CONCERNS WrTH MR. MORRTSON'S
PROPOSAL FOR WORKSHOPS FOLLOW]NG THIS RATE CASE TO
DISCUSS THE IMPORTANCE OF ACCURATELY MEASURING CP AND
NCP?
A No. I belleve workshops would be beneficial if
all stakeholders are able to participate in the process.
However, that does not take away from the fact that the
Company's class COSS is the best information avaifable in
thls record and is reasonable to use to al-l-ocate IGC's
cost of service across rate classes consistent with the
best information on cost causation.
O DOES MR. MORRISON TAKE ISSUE WITH ANY OTHER
ASPECTS OF THE LOAD DATA USED TO MEASURE PEAK DAY
ALLOCATORS?
A Yes. At page B of his testimony, he notes that
the Company measured its peak day on January l, 2076. He
states that thls is a holiday. He opines that holiday
usage may not reflect normal-ized load characteristics of
all t.he customers on the system.
O PLEASE RESPOND
A I generally agree with Mr. Morrison that the
Company can consider a normal-ized review of loado25
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characterist j-cs on the system j-n measuring CP and NCP.
As long as the data used in the study is generally
accepted, and generally reflects the load characterj-stics
on the system, then I would agree. However, no witness
in this proceeding has challenged the Company's findings
on the reasonableness and accuracy of its CP aflocation
factors based on the actual load data used by the
Company.
IWLRUC Gas Distribution Rate Design ManuaT, June 1989, pages
28-29, emphasis added.
Gorman Di-Reb 10a
NWIGU
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I.B. Customer-Related Costs
O DOES MR. MORRISON TAKE ISSUE WITH THE COMPANYIS
DISTR]BUTION SERV]CES AND THE COMPANY'S CLASSIF]CATION OE
THEM AS CUSTOMER-RELATED?
A In part. Mr. Morrj-son does not dlspute that
costs associated with FERC Accounts 380 through 385 are
properly classified as customer-related. However, he
disagrees with the Company's method of allocating these
costs across customers based on a weighted meter method.
Instead, he believes that these costs should be directly
assigned across rate cl-asses.
O IS THE COMPANY'S USE OF A WEIGHTED METER
ALLOCATION OE CUSTOMER-RELATED COSTS REASONABLY
CONSISTENT WITH ACCEPTED INDUSTRY PRACT]CE?
A Yes. Again, the NARUC Manual supports a
weighted meter customer allocation of costs. The NARUC
Manuaf states as folfows:
a. Customer Costs
Customer costs may be distributed in proportion
to the number of customers 1n a cIass, or a
more detailed study may be made whereby certain
components of the customer costs may bedistributed on a per-customer basis, directly
assigned or distributed on a weighted
per-customer basis. The l-atter method permits
recognition of known or ascertainabl-e customercost differences such as the frequency of meterreadings, complexity in obtaining readings or
integrating meter reading charts, and the
individiual- [sic] attention which may be glven
to large customers, such as separate meter
Gorman Di-Reb 11
NWIGU
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reading schedules. (IJARUC ManuaL, page 24.)
o Do You AGREE WITH MR. MORRTSON'S CRITICISM?
A No. Again, I think he is being too critical of
the Company's methodology. Absent the accounting records
necessary to al-l-ocate costs across rate classes as
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Gorman Di-Reb 12
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Mr. Morrison proposed, the best methodology is to use the
weighted metering
proceeding.
Mr. Morrison
methodology used by the Company j-n this
acknowledges that the Company does not
have the accounting
allocate these costs
records availabfe to directly
across rate classes as he
11nes 13-16). Again, the Company's
proposes.
cl-ass COSS(Page 10,
reflects the best information avalfable to develop an
accurate measurement of the Company's total system cost,
b,ased on costand allocate that cost across rate classes
causation.
O DID MR. MORRISON OFFER AN ALTERNATTVE TO A
WE]GHTED METER ALLOCATION OF THESE CUSTOMER-RELATED
COSTS ?
A He offered a concept as an alternative to the
weighted meters. At page 11 of his testimony, he
suggested that absent accountlng data necessary for a
direct allocation of these costs, a better methodology
for allocating distribution servi-ce costs would be based
on the relative cost of installing distribution servj-ces
for each class. He states that he would expect "the
costs of regulators
costs of regulators
of ERT devices to be
of ERT devices used
to be all-ocated in proportion to the
used by each
allocated in
class,tt and t'the costs
proportion to the costs
by each class, and so-on. " Heo25
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Gorman Di-Reb t2a
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bel-ieves that the informatj-on required
al-locators is readily available through
Company uses to estimate 11ne extension
7-18 ) .
a rs MR. MoRRrsoN's ALTERNATTVE
to create these
the system the
costs. (Lines
METHOD OF
ALLOCAT]NG D]STRIBUTION SERVICE COSTS REASONABLE?
A The concept
However, Mr. Morrj-son
the difference between
is generally reasonable, yes.
does not attempt
the resul-ts that
to actually show
would result from
his method and the Company's results. As Mr. Morrison
notes, the information is readily available, and it could
have been used to challenge the Company's
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weighted meter allocation method. Howeverr oo
information has been offered that disputes the accuracy
of the Company's derlved customer alfocators.
As noted above, the Company's practice is generally
consistent with industry practices. Mr. Morrison's
concept certainl-y has merit, but he has not shown that it
wou1d produce allocators that are materially different
than the Company's allocators. While Mr. Morrison's
crltique does not justify rejecting the Company's method
in this case, it could be considered by the Company as an
afternative method of allocating distribution costs in
the next rate case. As such, if the Commission desires
additional information on devel-oping customer al-location
factors, then the Company should be directed to provide
both its weighted meter allocation methodology, and Mr.
Morrison's proposed incremental- cost allocation
methodol-ogy consi-stent with the Company's line extension
policies. After a review of the two alternative analyses
in the next rate case, the Commission can consider
evi-dence on which one produces a more reasonabl-e
alf ocati-on.
I.C. Distribution Main Costs (Account 376) - Demand and
Customer
o DrD MR. MORRTSON TAKE EXCEPTION TO THE
COMPANY'S CLASSIFICATION OF DTSTR]BUTION SERVICE COSTS ON
Gorman Di-Reb 13
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Gorman Di-Reb 13a' NWIGU
BOTH DEMAND AND CUSTOMER?
A Yes. Mr. Morri-son takes issue with the
Companyrs proposal to classify 41.76% of its distribution
mains (EERC Account 316) as customer-related, and the
remaining 52.84% as demand-related. The customer-rel-ated
portion of distribution mains is allocated.on the number
of customers in each c1ass, and the demand-related
porti-on is al-located on each class' single CP demand.
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O
Gorman Di-Reb 74
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A
argues
should
O WHY DOES MR. MORR]SON TAKE ISSUE WITH THE
COMPANY'S PROPOSAL TO CLASS]EY A PORT]ON OE DISTRIBUT]ON
MA]NS AS CUSTOMER RELATED?
At page 72 of his testlmony, Mr. Morrlson
that the customer-rel-ated classification of plant
can bebe l-imited to the incremental costs that
identified wlth individual customers. He further argues
t.hat because distrlbutlon mains serve multiple customers,
it is noL approprlate to classify any portion of
distribution mains as customer-related. He also argues
that the cost of connecting customers to the system is
already captured in the distribution services (FERC
Accounts 380 through 385) which are properly classified
as customer-re1ated.
O DO YOU AGREE WITH MR. MORR]SONIS ASSESSMENT?
A No. I disagree with Mr. Morrison's position
that it is not reasonable to classlfy a portion of
distribution main costs contai-ned in FERC Account 376 as
customer-reIated.
O WHY WOULD SMALLER DISTRIBUTTON MA]NS BE
PROPERLY CLASSIFIED AS BOTH CUSTOMER AND DEMAND RELATED?
A The Company designs and incurs costs for 1ts
distribution mains to both meet the peak day demands of
the customers connected to that system, and to have
adequate length of distribution main in order to connect25
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Gorman Di-Reb 74a
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all customers to the system. As such, distribution main
both number of customers and theircosts are driven by
locations, as wefl-as the coincident demands of the
customers connected to the distribution main
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Gorman Di-Reb 15
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O CAN YOU PROVIDE AN EXAMPLE THAT ILLUSTRATES WHY
LENGTH OE MAIN VARIES BY CUSTOMERS AND NOT ONLY COMBINED
PEAK DAY DEMANDS?
A Yes. Cons j-der an example
two customers with the same peak day
where the Company has
demand connected to
a distribution loop, and
apart
would
that
from each other.
the customers are two miles
For this distrlbution loop, IGC
to meet
need to install two miles of distributlon main,
have
of the two
adequate capaci-ty
customers. The of
the peak
main 1s
day demands
determined
by the geographic distance the two customers.
length
between
Now assume IGC has another portion of its
distribution system where again there are two customers
with the same peak day demand but they are l-0 mil-es
apart. For this distribution 1oop, the Company would
need to instal-l 10 mil-es of distributlon maln to connect
these customers to t.he distribution system, again using
main slzed to meet the combined peak day demands of the
two customers.
While in each of the two distribution loops, the
day demand, themains are sized to meet the combined peak
second loop would require
investment because 1t will
considerably more distrj-bution
Iength of distribution main
require five times greater
to connect the customers to
maj-n is not drj-ven by thethe system. This length of25
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Gorman Di-Reb 15a
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customer's peak demand but, rather, is driven by the
customer location and length of main needed to connect
the customer to the system. As such, the number of
customers and the location of customers on this
distribution loop are important engineering design
features, ds wel-l as cost-causation bases for determining
the utility's cost of providing distribution service to
al-f customers.
In this example, IGC designs its distributlon system
both to meet the peak day demands of the customers on its
distribution loops, and to have adequate
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Gorman Di-Reb L6
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length of main to connect all customers to its
distribution system. Hence, the cost-causation factors,
or the engineering
day demands of the
design parameters, reflect both peak
customers and length of main needed to
connect the customers to the system.
TAKE ]SSUE W]TH THE COMPANY'So DOES MR. MORRTSON
ZERO MINIMUM INTERCEPT METHODOLOGY TO ARRIVE AT THE
CUSTOMER DEMAND SPLTT FOR
A Yes. At pages
Morrison states that the
]TS DISTRIBUTION MAIN COSTS?
13 and 14 of his testimony, Mr.
Company shou1d not have included
the minimum sized pipe in this study, but rather should
have lncluded a capacity component as a regression
modeling factor. He opines that the different sizes in
pipe throughout the system should have been a factor 1n
the regression study. He opines that the Company's use
of a nominal- pipe diameter without a capacity factor in
its regression model is a concern.
O PLEASE RESPOND TO MR. MORRISON'S CONCERN WITH
THE COMPANY'S MINTMUM INTERCEPT METHOD.
A I do not agree with Mr. Morrison that a
capacity component should have been a factor in the
mj-nimum size study. In my experience, the minimum pipe
size is a proper factor used to estimate the zero
capacity intercept point for determining appropriate
cl-assification of distribution costs as capacity ando25
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customer-reIated.
The purpose of the
distribution main cost
of the capaci-ty demands
study is to identify how much
the Company woul-d incur regardless
of the customers on the system.
It is this portion of
then be classified as
distrlbution main costs that should
customer-related. A11 other
distribution main costs should be classified as
demand-refated. For these reasons, I believe the
Company's methodology to determine the split in
classification for distribution mains cost between
customer and demand is reasonable.
Gorman Di-Reb 16a
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Gorman Di-Reb 71
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O
CLASSIFY
DEMAND?
A
from IGC
subj ect
customer
customers
ARE THERE ADDITTONAL BENEFITS TO THE SYSTEM TO
DISTRIBUTION MA]N COSTS BETWEEN CUSTOMER AND
Yes. Interruptible customers receive service
throughout most of the year, but they are
to interruption on fGCrs peak days. Without a
component of distribution mains, interruptible
woul-d not be obligated to pay for any portion
of the Company's dlstribution main costs, because they do
not contribute to IGC's peak day demand. Under IGC's
proposal, interruptible customers would pay a customer
all-ocation component of the distribution system, which
represents its costs for connecting interruptible
customers to the system.
O IS ]GC'S COST OF SERVICE PRACTICE OF ALLOCATING
DISTRIBUTION MAIN COSTS ON CUSTOMER AND DEMAND CONSISTENT
W]TH TNDUSTRY PRACT]CE?
A Yes. As described in my direct testimony,
NARUC recognizes that demand or capacity-rel-ated costs
can be all-ocated on both peak day demand and the number
of the customers.
Also, in a recent annual update on gas rate
Association ("AGA") statedstructures, the
the following on
mains as a cost
American Gas
classi-fying a portion
of customer component.
of distribution
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The largest part of a natural gas customer'sbill is the cost of the gas itsel-f, over whichthe utility has little control. This cost
accounts for about 4L cents of every doll-ar of
revenue received by a distributionutility. Ifootnote omitted] The bill- amount forthe gas portion varies with price as well- as
amount consumed. Natural- gas utilitles afsoincur costs that are not dependent on a
customer's consumption. These "fixed" costs
may include:
*
*
*
Meter readingBilling
Fixed costs on plant and equipmento Depreciation and taxeso Distribut.ion mains, meters,and
service l-ines
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Gorman Di-Reb 1B
NWIGU
Most administ.rative and general expenseso Wageso Bui-J-dings, energy, etc.
Natura1 gas storage
Customer and servi-ce O&M
Most utilities recover at l-east a portionof these costs through a fixed charge on a
customer's biI1.2
O DID MR. MORRISON HAVE ANY OTHER COMMENTS
RELATED TO APPROPRIATE ALLOCATIONS CONCERNING
D]STRIBUTTON MAIN COSTS IN ACCOUNT 316?
A Yes. At pages 6 and 26 of his testimony, Mr.
*
*
Morrj-son suggests that
customer/demand split
distribution mains in Account 316, it may be
to use NCP or peak and average allocators.
distribution main costs are partially demand
rather than using a
to al-l-ocate the costs of
appropriate
While
related, it
is never appropriate to use a peak and average ("P&A")
all-ocator to allocate these costs.
O IS IT REASONABLE TO USE A PEAK AND AVERAGE
ALLOCATOR FOR DISTRIBUTION MAIN COSTS?
A No. It is not appropriate to use a P&A
methodology as an appropriate demand allocation factor
for any capacity-related costs, lncluding smal1
distribution mains in Account 316. Using a P&A al-locator
distorts the al-Iocation of distribution main costs to be
predominantly based on volumetric use rather than the
need for capaci-ty during the peak day to provide firmo25
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service to the customers. The effect of the P&A 1s to
shift capacity-related costs to higher load factor
customers from lower l-oad factor customers.
Indeed, NARUC recognizes that the P&A methodology is
generally used to mitigate impacts on low l-oad factor
customers, rather than to properly allocate
demand-rel-ated costs. NARUC describes the P&A
methodol-ogy as:
2American Gas Association Enerqy AnaTysis,
Rate Structure: The Customer Charge Component -
28, 2075.
"Naturaf Gas Utility
2015 Update, " May
Gorman Di-Reb 18a
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This method reflects a compromise between thecoincident and noncoincldent demand methods. . .This method allocates cost to alI classesof customers and tempers the apportionment ofcosts between the high and low l-oad factorcustomers. (NARUC Manual at 27-28, emphasis
added) .
NARUC's characterization of the P&A method 1s in
stark contrast to its description of allocating
based on coincident demandscapacity-related costs
non-coincldent demands.
and
NARUC characterizes the
demand-based allocation of these factors as apportioning
capacity-related costs in proporti-on to the demands that
customers place on the system. (Id. at 21).
Further, Mr. Morrj-son's own testimony makes it clear
that the Company incurs capacity-related costs based on
peak day usage of customer classes. At page 4 of his
testimony he states that "In general, plant equipment is
designed to meet the maximum load that will be placed on
individual- pieces of plant equipment,
system peak. " The
so costs are caused
P&A alfocatorby the need
simply does
to meet
not reflect cl-ass contributions to the system
causation.peak and does
OAT
not allocate cost based on cost
PAGES 15 AND 76 OF MR. MORRTSON'S TESTIMONY,
HE STATES CONCERN ABOUT THE COMPANY'S ALLOCATION OF GROSS
PLANT ]N SERVICE. PLEASE RESPOND.
A Mr. Morrison states that an allocation 1n the
COSS of gross plant in-service includes an opportunity too25
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Gorman Di-Reb 19a
NWIGU
earn a fair rate of return on the Company's investment,
which is only a fraction of the Companyts costs- He
bel-ieves that the Company's gross pJ-ant-in-service
introduces factors other than the Companyrs actual-
investment in the Company's allocation methodology.
I do not follow Mr. Morrison's testimony on this
point. The Company's flnancial- statements as far as I
can tel-1 are audited financial- statements that follow
appropriate Generall-y Accepted Accounting Principles
('rGAi\Pr' ) and
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regulatory accounting princlples.
its gross plant in-service across
As such, allocating
rate cfasses for plant
useful wil-1that is prudently incurred, and used and
accurately determine the Company's cost
service to its rate classes.
I.D. Exclusion of Customer C].asses
of providing
o AT PAGE 16 OE MR. MORRISON'S TESTIMONY HE TAKES
ISSUE WITH THE COMPANYIS COSS BECAUSE IT EXCLUDED TWO
INTERRUPTIBLE SNOW MELT CLASSES ]S_R AND TS-C. PLEASE
RESPOND.
A He states that the Company
are relatively smal-l-, and the
explained that these
cl-asses consumption for
these customers was included with Residential and GS
classes. He states the Company also
information rel-ated to Schedul-e H-1,
Area Hook-up Fee.
A No.
including them
which unli-ke1y
would agree that Mr.
these interruptlble
in a cfass COSS is
these customers in
did not provide
Ketchum-Sun ValIey
Morr j-son' s proposal to separate
customers from firm service customers
reasonable, I do not believe combining
one cl-ass will skew the reliability of
O DO YOU BELIEVE THE EXCLUSION OF THESE CLASSES
RENDERS THE COMPANY'S COSS UNRELIABLE?
These classes are relatively sma11, and
in with the Residential and GS classes
had any effect on the allocation. Whil-e I
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the cost study I
the Company to do
them in 1ts COSS
case is not shown
recoflrmend that the Commission direct
this in its next rate case. Including
other cl-asses in this
value or accuracy of
as a component of
to diminish the
the Company's COSS in this case.
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NWIGU
II . RE\IENT'E ALLOCATION
o PLEASE DESCRTBE MR. MORRISON'S PROPOSED REVENUE
ALLOCATION.
A Mr. Morrison recommends allocatinq
non-gas revenue r_ncrease
base rate non-gas
class.each rate This
increase to all classes
the approved
normalizedin proportion to
currently being
the
revenue collected from
resul-ts in an equal percentage
of about 4.22, based on Staff's
revenue deficiency.
o Do You AGREE WITH MR. MORRISON'S PROPOSED
REVENUE ALLOCATION?
A No.His proposed allocation is based on his
Company's COSS unfairly al-l-ocates cosLs
classes. As described in my direct
Company's proposed class revenue
based on the results of its cl-ass COSS.
belief that the
among customer
Lestimony, the
allocatlon is
Since the COSS moves rates towards cost of
agree with the Company's
servlce, I
its cl-ass
revenue allocation on the
proposal to
results of
base
its class COSS.
O PLEASE SUMMARIZE YOUR CONCLUS]ONS AND
RECOMMENDATIONS .
A The Company's COSS should be used as the basis
for allocating any approved revenue -increase in thls
case, instead of Mr. Morrison's proposed equal percentage
increase. Distribution main costs included in Accounto25
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Gorman Di-Reb 2la
NWIGU
31 6 should be al-located using a customer/demand sp11t as
proposed by the Company. IGC should contj-nue to develop
peak day demand all-ocators based on accepted industry
practice. However, Mr. Morrison's proposal for
consideration of more data, including a normalized
assessment of contributions to peak day, shou1d be
investigated in the next rate case to determine if it
produces a better estimate of classes' contribution to
CPs and NCPs. Lastly, f am not opposed to Company
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NW]GU
and stakeholder workshops to discuss
methodology and the development of a
IIT. PROPOSED RATE
cost of service
load study.
DESIGN
a DoES STAFF COMMENT ON THB COMPANY'S PROPOSED
RATE DESIGN IN TH]S PROCEEDING?
A Yes. Staff witness Bentley Erdwurm comments on
the Companyrs proposed revisions to the structure of the
Large Volume and Transportation classes' rate designs.
He notes at page 18 of his testimony that the Company
proposes a new charge of Maximum Daily Firm Quantity
("MDFQ") for its LV-1 , T-4 and T-5 customers. He al-so
observes that the Company is proposlng to combine
Transportation rates T-4 and T-5.
Mr. Erdwurm opines that introducing a demand charge
into the Company's Large Volume and Transportation rates
recognizes the Company's costs to serve these customers
are derived in large part by demands they place on the
system. However, he also opines that the Company has not
supported the amount of its proposed MDFQ charge with a
COSS. (Erdwurm Direct Testimony at 18, 1j-nes 22-24) .
Therefore, he concludes that Staff recommends that the
amount of MDEQ charge be addressed at the workshop
proposed by Staff.
In this case, Staff is willing to move in part
toward an MDFQ charge for the LV-1 and T-4 classes. Heo25
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states that a demand charge will better match customersr
payments to the cost the Company incurs. Therefore, he
recommends a demand charge of 20Q/Lherm per month for
nominated MDFQ. The remaining part of the charges would
be based on a four-tiered volumetric rate structure as
shown on his Exhibit No. !16, page 2.
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O IS STAEE'S PROPOSED RATE DESIGN EOR LARGE
VOLUME AND TRANSPORTATION CUSTOMERS REASONABLE?
A No. For the reasons outlined above, f disagree
with Staff's conclusion that the Company has not provided
a reasonabfe and rel-iabl-e class COSS. Indeed, Staf f 's
contention that the Company has not performed a load
study is overly critical and simply does not recognj-ze
that the Company actually did perform a load study using
the best load data that was available to the Company.
That same data is generally used by utilities to perform
load studles and class cost of service studies throughout
the industry. Staff's proposal for more detailed data is
a worthwhile goaI, but the reality is that that meter
data desired by Staff is simply not available for the
Residential and General- Service classes.
I also agree with Staff wj-tness Erdwurm that it is
appropriate to price the Large Volume and Eirm
Transportation customers largely on the basj-s of a demand
charge because that is how the Company incurs costs to
serve these customers. However, the same is also true
for the delivery costs for aII other cl-asses. Eor these
reasons, pricing Firm Transportation customers based on
predominantly a demand charge is consistent with cost of
service, is consistent with the Company's cost of
providing service to these customers, is ba1anced and
Gorman Di-Reb 23
NWTGU
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produces an accurate price signal for these customers.
O ]S THERE A SIGNIFICANT DIFFERENCE BETWEEN THE
AMOUNT OF F]RM TRANSPORTATION REVENUES RECOVERED ON
DEMAND CHARGES AND ON VOLUME CHARGES BETWEEN THE
COMPANY'S AND STAEF'S PROPOSALS?
A Yes. While there appear to be some problems
with Mr. Erdwurm's proof of revenue for the
Transportation class, it is clear that he intends to
col-l-ect about 102 of the delivery revenue for the T-4
class based on vo1umetric charges. This
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Gorman Di-Reb 24
NWIGU
is shown on hj-s proof of revenue attached to Exhibit No.
776, page 2 of his direct testimony. There, he shows
demand charge recoveries based on a 20Q/Lherm per month
for MDFQ of approxlmately $3.1 million out of a total
approximately $10 mil1ion collected from the combination
of Firm Transportation classes T-4 and T-5.
In significant contrast,
proposal, the Company proposes
$5.5 mi-1lion through a demand
under the Company's pricing
to recover approximately
of a classcharge, out
the combined Firm Transportation
over 102 of the
charges, which is
revenue assrgnment to
cl-ass of $7.6 mill-ion.This results in
class revenue being col-lected in demand
materlally different than the Staff's proposed 30% of
delivery charges. (Direct Testimony of Lori A. Blattner,
Exhibit No. 24, page 2).
Because the Company's rate design comports more
accurately with the undisputed fact that delivery charges
for the Eirm Transportation group are primarily based on
demands of this group, the Company's proposed pricing
structure produces a far more reliabl-e and accurate price
signal to LV-1 and T-4 classes than the pricing structure
proposed by Staff. Because accurate pricing signals
encourage conservation and efficient procurement of
utility services, I strongly recommend the Commi-ssion
approve the Company's proposed pricing structure for theo25
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NWIGU
T-4 customers
0
ABOUT LOW
CUSTOMERS
ONLY?
A
impacts on
customers
HOW DO YOU RESPOND TO MR. ERDWURMIS CONCERN
LOAD FACTOR AND HIGH LOAD EACTOR TRANSPORTAT]ON
IF THE RATE ]S MODTFIED TO A DEMAND CHARGE
I appreciate
customers.
Mr. Erdwurmts concern about rate
Whil-e there could be impacts on
factor, neither Mr.
that there woul-d be
based on variance in load
Erdwurm nor the Company has proven
any detrimental
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Gorman Di-Reb 25
NWIGU
rate impact on any customer. For these reasons, I
believe movement to the demand-based pricing structure as
proposed by the Company is appropriate.
O D]D THE AMALGAMATED SUGAR COMPANY, LLC
("AMALGAMATED") WITNESS DR. DON READING COMMBNT ON THE
POTENTIAL NEGATIVE IMPACT ON IT AS A RESULT OF A
DEMAND-BASED PRICING STRUCTURE?
A Yes. Amalgamated witness Dr. Don Reading
stated that the proposed movement to a demand-based
pricing structure woul-d create a significant rate
proposes
impact
a fiveon Amalgamated. As a result, Dr. Reading
rate case phase-i-n to a demand charge rate
the T-4 tariff. (Direct Testimony of Dr.
structure for
Reading at 13).
O PLEASE COMMENT.
A I appreciate Amalgamated's concern about
impacts on its facilities associated with more accurately
pricing Firm Transportation service based on a
demand-based charge. However, rather than creating a
phase-in to this rate structure, I believe a more
balanced and equitable method would be simply to afl-ow
Amalgamated to consider different tariff rate
alternatives, ot a load retention rate if the Commission
finds one to be in the public interest. With regard to
this the Commission should consider, and Amalgamated
could comment oo, the followlng:o 25
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Gorman Di-Reb 25a
NWIGU
1 Can Amalgamated move to IGC's TnterruptibleTransportation rate T-3? This would continueto provide delivery servj-ce priced on avofumetric usage structure, but service would
be subject to interruption. The volumetricrate structure of T-3 could mitigate the impact
on Amalgamated.
2 IGC could consider a seasonal-
Interruptibl-e rate that woufd
for Amalgamated and other low
Transportation customers .
or alternative
be appropriateload factor
3 To the extent Amalgamated is not capable oftaking Interruptible Transportation service(T-3), and the Commissj-on bel-ieves that it isin the
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pub11c interest to mitigate the impact on
Amalgamated j-n this filing, it could beappropriate to design an Amalgamated-specificload retention rate. This rate could produce aphase-in for Amalgamated toward a demand-basedpricing structure on the Firm Transportation
T-4 rate. However, during the period of thephase-in, dny discount provided to Amalgamated
woul-d be spread across al-1 rate cl-asses, ratherthan only require other Firm Transportation
customers in cl-ass T-4 to subsidize Amalgamatedduring the tariff rate structure phase-in
period.
To the extent the Commission believes maintalning
Amalgamated on its Firm Transportation rate is in the
public j-nterest, and other customers are better off
retainj-ng Amalgamated on the system as opposed to
potential-1y losing this customer on the system, then al-]
customers could support the discount provided to
Amalgamated during the phase-in period. In this manner,
aIl- customers woul-d share equally i-n any l-oad retention
benefits the Commj-ssion finds to be 1n the public
interest and appropriate costs for TGC's customers.
O PLEASE SUMMARIZE YOUR POSITION ON RATE DES]GN.
A I recommend the Company's proposed rate design
for Large VoIume and Firm Transportation customers being
set on a demand basi-s or MDEQ be approved. The demand
rate, however, should be set based on the cost of service
the Commission finds to be appropriate for the LV-1 and
T-4 rate classes. To the extent the Commissi-on finds it
is in the public interest to provide a phase-i-n to anyo25
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Gorman Di-Reb 26a
NWIGU
large Transportation customers that are not abl-e to take
Interruptible service,
such customers should
then any discounts provided to
customers andbe spread over all-
not simply
retention
customers
0
A
other Transportation customers. Load
efforts benefit all customers equally, and all
shou]d share in the cost of load retention.
DOES TH]S CONCLUDE YOUR REBUTTAL TESTIMONY?
Yes, it does.
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CSB Reporting
(208 ) 890-s198
GORMAN (X)
NWIGU
(The following proceedings were had 1n
open hearing. )
MR. STOKES: I open him up to
cros s -examination .
COMMISSIONER RAPER: Thank you. Staff?
MR. KLEIN: Yes, thank you.
CROSS_EXAMINATION
BY MR. KLEIN:
o Mr. Gorman, my name is Karl Klein. f'm
the attorney for the Commission
A Good afternoon.
O Good afternoon.
with the Company's proposal to
customer and demand?
Staff.
Do you generally agree
classify its mains as both
A
o
Yes. Distribution mains,
And could you turn to page
yes.
76 of your
direct testimony, please?
A I'm there.
0
a quote from
Manual- that
A
0
And on page 76 of your direct, you've got
the 1989 NARUC Gas Distributj-on Rate Design
supports your position?
Yes.
And your quote was from a sectiono25
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CSB Reporting
(208 ) 890-s198
GORMAN (X)
NWIGU
entitled, "Customer Costs"; is that correct?
Yes.
Do you have a copy of that manual up there
with you?
A
O
A Ido not, no.
KLEIN: Okay, may I
I want to show the
approach? I've
witness and mark
MR
got an excerpt
as an exhlbit and distribute.
COMMISSIONER RAPER: Sure.
(Mr. Klein approached the witness.)
(Staff Exhibit No. 721, was marked for
identification. )
a BY MR. KLEIN: Have you had a chance to
take a look at that?
A Yes, sir.
O Okay; so exhlbit as it states, Exhibit
!2I is what i-t is and itrs an excerpt from the 1989 NARUC
Gas Distribution Rate Design Manual; is that correct?
A Yes.
a And if you l-ook at 1t, the quote that you
raise in your testimony is at pages 23 and 24, I be11eve.
A Correct.
a Do you see that?
A I do.
O If you turn up and go up a l-ittle higher
that
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CSB Reporting
(208 ) 890-s198
GORMAN (X)
NW]GU
in the same section, page 22, I befieve it is, about
midway at page 22 under the section
costs, in the second paragraph under
dealing with customer
customer costs it
says, "A portion of the costs associated with the
distribution system may be included as customer costs.
However, the inclusion of such costs can be
controversial-"; is that correct?
n It is.
And if you'11 turn to page
to you. Itrs on the
23, I want to
first paragraph
third sentence.
read another excerpt
up there. I think it's starting with the
It says, "The contra argument to the inclusion of certain
distribution costs as customer costs is that mains and
services are installed to serve demands of consumers and
should be afl-ocated to that function. Under thls basic
system theory, only those facilities, such as meters,
l-.aregulators and service taps, are considered to
customer related, as they vary directly with the number
of customers on the system. " Do you see that quote?
A Yes.
a So would you agree that Dr. Morrison's,
Staff witness Morrison's, position is generally
consistent with this }atter approach that I just
quoted?
A Welf , j-t's consistent with the contrao25
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CSB Reporting
(208 ) 890-s198
GORMAN (X)
NWIGU
argument that they're noting by NARUC. I would note that
NARUC doesn't specifically endorse that argument.
O That was realIy just my point, that the
NARUC manual does include arguments for both positions;
correct ?
A Correct.
COMMISSIONER RAPER: Mr. Kl-ein, f 'm sorry,
but can I get clarification, do you want this admitted as
Exhibit 72L for the record?
MR. KLEIN: Sure.
COMMISSIONER RAPER: It's not currently
part of the record; correct?
automatically
MR. KLEIN: No, under the Rules
admitted if it's identified for
know, marked as an
if we can have it
exhibit for identification,
admitted, that would be great.
wanted to makeCOMMISSIONER RAPER: I just
sure and it will be Exhibit I2L.
MR. KLEIN: Thank you.
COMMISSIONER RAPER: Thank you.
admitted into(Staff Exhibit No. 721 was
evidence. )
a BY MR. KLEIN: So Mr. Gorman, if we could
talk about MDFQ now for a littl-e bit, so MDFQ is the
maximum daily firm quantlty and under the Company's
it's
you
but yeah,
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(208 ) 890-s198
GORMAN (X)
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proposal,
charge to
bill; is
it's multlplied by their proposed $0.30 MDFQ
obtain the demand portion of the customer I s
that correct?
That is correct, y€s.
And it's true that MDFQ is nominated by
customers; is that correct?
A
o
Company states that that is how
they plan for the amount of capacity that they
for that customer.
reserve
O That they would plan for the customer to
nominate?
A With the amount
ensure that they're capable of
that customer.
O Okay, and it's
who nominate higher MDFQs will
ir?
A They will
of their contract with the
of capacity they j-ncur to
providing firm service to
also true that customers
see higher biI1s, j-sn't
pay for additional MDFQs that
under the Companyrs proposed
A
Company and
they actually use,
prlcing structure
OSo
A
avail-abl-e basis,
OSo
It's part
it's the
YES,
would you
but that's only avail-able on an as
though.
would you agree that for a customero25
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CSB Reporting(208) 890-s198
GORMAN (X)
NWIGU
would you agree that a customer who wants to lower their
bil-I should take care to avoid nominating more MDFQ than
is needed?
A WeII, there would be problems with that.
First, they're going to pay for the MDEQ they actual-Iy
take under the Company's proposed pricing structure, but
second, they need to be aware that in the event the
Company is capacity short, they're only obligated to
serve the company up to their MDFQ, so they run the risk
of being curtailed under certain conditions if they would
try to manipulate the prlcing structure in that way and
not pay for all the firm service they actually need, but
the bottom line is they're going to pay for that capacity
whether they nominate it or not if they actually use it
and it is provided to them by the Company.
O Is it correct that a customer is obligated
to his or her or its MDFQ nomination for the year?
A I bel-ieve it is for a year, then they can
revj-sit that with the Company, assuming the contract is
for one year
O
per
If
the contract term.
11 of your direct
you could look at page 20, Iines 7 to
testimony.
A f'm there.
O In that section
a demand charge has never been
in part, "Because
TF-4 customers, I
you say
used on25
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GORMAN (X)
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recommend that Intermountain conduct an open season to
al-Iow TF-4 customers, and al-l- other industrial customers
who contract with the
reset their MDFQs in
schedule TE-4 is approved. " Did I
A Yes.
0 The Company conducted an open season
several months d9o, which ended Monday, November 28Lh,
2016, and it allowed MDFQ renominations; is that
correct ?
Company for
the event the
an MDFQ, the ability to
rate redesign of rate
read that correctly?
that they did
MDFQS.
from the Company
20L6,
that
AI
specifically, but
woul-d have to check on that
it's my understanding
developing their
copy of a l-etter
work with companr-es r_n
O Ihavea
to its large vol-ume customers dated October 25Lh,
where they're talking about that. Have you seen
l-etter?
A I have not.
MR. KLEIN: Okay. May I approach the
witness, please?
COMMISSIONER RAPER: With an additional
exhibit ?
MR. KLEIN: Yeah.
COMMISSIONER RAPER: Sure.
(Mr. Klein approached the witness.)o 25
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CSB Reporting(208) 890-s198
GORMAN (X)
NWIGU
MR. KLEIN: Could I have this marked as
Staters L22 for identification?
(Staff Exhibit No. 722 was marked for
identification. )
O BY MR. KLEIN: Please let me know when
you've had a chance to read through that.
A I read it
O So in that letter, it
Company did conduct or was conducting
ended Monday,
A
nY
correct ?
A
o
indicates the
an open season that
November 28th, 2076; correct?
It does say that.
And it's allowing MDFQ renominations;
Yes
Does this prior open season satisfy your
requesting an additional- openrequest or are you
season?
A Well, to the extent the rates change
rel-ative to what the Company is proposing, because there
are financial lmplications of the rates in selecting an
MDFQ, I believe it's appropriate for the Company to go
back and work with its industrial customers based on what
the actual rate will be.
O So if there were an addit.ional open season
after rates are approved, wouldn't that likely l-ead to ano25
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GORMAN (X)
NW]GU
underrecovery of revenue?
A Well, I mean, it's part of the difficulty
revenue requirement.in designing rates
ft's going to have
approved rate is in
to recover the
some variability
line with what
to them, but if the
the Company is
the customers' MDFQproposing, then I
nominations wou]d
would expect that
not change with the implementation of
what the Companyfinal rates if they reasonably refl-ect
is requesting in its case. I befieve it is appropriate
and transparent to provide the customers with the actual
rate that will be in effect, because it does have
financial implications in nominating the existing MDFQ.
MR. KLEIN: Okay, no further questions.
Thank you very much.
COMMISSIONER RAPER: So without objection,
we wi-11- enter Exhibit 722 i-n the record.
(Staff Exhibit No. 122 was admitted into
evidence. )
COMMISSIONER RAPER: Move on to cross or
he's your wj-tness, move on to CAPAI.
MR. PURDY: I don't have any questions for
Mr. Gorman. Thank you.
COMMISSIONER RAPER: Mr. Richardson.
MR. RICHARDSON: Thank you,
Madam Chairman, just a couple.o 25
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GORMAN (X)
NWIGU
CROSS_EXAMINAT ION
BY MR. RICHARDSON:
O Good afternoon, Mr. Gorman.
A Good afternoon.
O You typically represent large customers of
utilitles; correct?
A I do, yes.
0 And you're representing a group call_ed the
Northwest Industrial- Gas Users here?
A Iam.
O And does that represent the industrial gas
users on Intermounta j-n Gas's system?
A Yes.
O It doesn't include Amalgamated Sugar, does
ir?
A It does not.
O On page 4, beginning on l-ine 5 of your
rebuttal testimony, you state that although arguments
made by Mr. Morri-son have some merit, they are not
adequate to abandon the Company's cost of service study.
Do you see that?
A I do.
O And first of aII, your use of the phrase
"abandon the cost of service study, " you're noto25
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CSB Reporting
(208 ) 890-s198
GORMAN (X)
NWIGU
suggesting, are you, that this Commission has already
approved this cost of service study such that it will be
abandoned, rather you're suggesti-ng that it not be
adopted; rlght?
A f am recommending that the Commission not
accept Mr. Morrison's excuse me, Dr. Morrison's
recommendation to not accept
reliable
the Company's cost of
and accurate measurement of
across rate classes.
servr_ce
its cost
study as a
of service
O I'm sorry, I didn't hear that l-ast phrase.
A That the Company's cost of service is an
accurate measurement of the Company's cost of service
across its rate cl-asses.
0 AIso, oD page 4 of your rebuttal testimony
on line 10, you note that it's "important to adjust rates
toward cost of service, " and when you use the phrase
"adjust rates toward cost of service," you're not
recommending a move to cost of service all at once, are
you?
A We1l, generally moving towards setting
rates at cost of service is an objective which benefits
all- stakeholders in the process, plus the Company and the
shareholders and alf customers served by the utility, but
often there can be a concern about gradualistlc movements
towards cost of service rates, so recognizlng the need toO25
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(208 ) 890-s198
GORMAN (X)
NWIGU
mitigate
pursuing
service,
movement
balances
rate impacts on
the objective of
I recognize that
towards cost of
cl-asses of customers whife
setting rates at cost of
the Commisslon may want to make
serv].ce l_n a way that fairly
process.
when you say
all the stakeholders in the
O So just
"movement towardstt and
to be clear,
you mention the word gradualism,
it's not your recommendation in this docket that the
Commission move all customers to cost of service 1n this
one docket; correct?
A I'm recommending the
proposed allocation of the
Commlssion adopt the
Company' s revenue deficiency
in this case.
O Right, but that wasn't the question.
You're not recommending that the Commission in this
docket move all customers to cost of service based upon
thisthe cost of service study fil-ed by the Company in
case; correct?
A f'm recommending
cost of servi-ce consistent with
recommended in this case.
rate shock?
they move it cl-ose to
what the Company
O And are you familiar with the concept of
I am.
And would it be fair to say that you are
A
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CSB Reporting
(208 ) 890-s198
GORMAN (x)
NW]GU
generally opposed to setting a
the rate changes would result
A Generally that
utility's rates such that
i-n rate shock?
is the
there is a balance for all- customers
objective as long as
being considered in
determining how
Company's cost
of rate shock,
rates should be adjusted to reflect the
of service. Knowing that there's a notion
generally that implies that there will be
an impact on the customer's bill that can't be avoided by
some changes in rates. In assessing whether or not rate
shock is a real impli-cation, I think there's also a need
to consider whether or not the design of rates in
produclng an effective price signal to the customers can
allow them an opportunity to modify their consumption
behavior and mitigate the impact on their bil1s that are
created by a change in rates or movement of rates towards
cost of service.
O So one of the objectives in implementing a
rate design change in order to avold rate shock, if I
heard you correctly, is to allow the customer time to
respond to the new rate proposals in order to mitigate
the financlal impact; correct?
A It would be expected that if the
were changed to reflect cost of service that the
rates
Company
pricewould respond or a
signal inherent. in
customer would respond to
that rate and that could
the
requl-re some25
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time to modify operations in a way that allows it to buy
utility service in the most economical manner available,
and an efficient price signal al-lows for those efficient
procurement decisions on the customer's behalf in order
to accomplish that objective.
O And efficient procurement decisions may
involve such capital j-ntensive decisions as to
reconfigure a boil-er system, sdy, from natural gas to a
different field; correct?
A That's one option. The other option coul-d
be a backup fuel- and taking interruptlb1e service from
the utility. It coul-d be modlfying production facil-j-ties
in order to stretch out the production schedule in a way
that reduces demand on peak day demands of the utility,
thereby reducing their peak day demand contribution.
There coul-d be other means. For f ow l-oad factor
customers, there may be opportunities to improve foad
factor based on looking for ways to find greater use for
the facility for longer periods of time. Therers a whol-e
host of opportunities here, possibil-ities that can be
considered by the customer in assessing what
opportunities are avail-abl-e to it to mitigate the impact
on its bill caused by a movement of the rate towards cost
of service.
O And have you represented food processors
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GORMAN (X)
NWIGU
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CSB Reporting(208) 890-s198
GORMAN (X)
NWIGU
in your activities before regulatory commissi-ons?
A Large industrial companies that are in the
food business I have, yeS.
O So you're aware that a food processor fike
the Amal-gamated Sugar Company is sort of enslaved to the
process of the harvest and the processing period;
correct?
A I believe there probably 1s limitations ln
its flexibility for production, but that doesn't
necessarily suggest that there may not be opportunities
to manage their utility bi11.
O And you brought up the concept of
gradualism earlier, would it be fair to say that you are
generally supportlve of the concept of gradualism when
customers are faced with large rate i-ncreases?
A When the rate increase is going to have a
the customer and thedetrlmental impact
customer group has
on the company or
demonstrated that impact and the
make movementsCommission finds its appropriate to
towards cost of service over time.
O So with all those caveats in mind, would
it be fair to say you are generally supportive of the
concept of gradualism when utility customers are faced
with large rate increases?
A With that explanation I am, yes.o 25
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CSB Reporting
(208 ) 890-s198
GORMAN (X)
NWIGU
Company is facing a
A They
large rate increase
O And would you agree that Amal-gamated Sugar
in this docket?
rate increase asare
all the other customers.
under the Company's rate
O And woul-d
a transportation service
you agree that the end resul-t of
that rate increase has very dispirit results for
different customers in the same class?
A It has different bill impacts for
customers on the same c1ass, but it's the same rate.
O ft's the same rate, so does that affect
your conclusion that graduali-sm is a desirabl-e ratemaking
tool ?
A With the condition that there may be
opportunities to mitigate the impact on the bill by the
customers that may be important informatj-on for the
Commission to consider in how quickly it wants to move
its rate to cost of service.
O So even though the rate impact is the same
and the dispirit bill impact does not change your
conclusion that gradualism is a desirabfe tool- for this
Commj-ssion to apply?
A I think my testimony was gradualism is an
important concept, but it may not justify }imitations in
the movj-ng towards cost-of-service-based rates if the
facing
Itr s
T-4.
the same
o 25
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CSB Reporting
(208 ) 890-5198
GORMAN (X)
NWIGU
customers can undertake actions that mitigate the bill
impact caused by moving rates to cost of service.
O And that could be a big if, couldn't it?
A No, not necessarily. It could be, but not
necessarily.
O But
A It's
it could be?
a possibllity, yeS.
the industrial customers on theY
transportation
adverse to each
A
n\z
i-sn't it?
A
And
schedul-e in this case, theyrre somewhat
other i-n this case, aren't they?
I'm not sure what you're referring to.
ft's a zero sum game of cost of service,
From a cl-ass basis, the class revenues,
to produce the class revenue aside.rates are designed
OSo
if you wj-11,
losers in the
if some customers within the class are,
winners, there's going to be necessarily
same class; correct?
A Anybody who
would be a loser from their
extent the rates are based
gets a rate increase, I guess,
perspective, but to the
on specific load
characteristics and the rate 1s changed to reflect that
which better aligns to cost of service, then there could
be some customers that have bigger bill impacts than
other customers based on the same rates.o 25
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GORMAN (X)
NWIGU
O Larqer bil-l increases?
A Larger bill increases
MR. RICHARDSON: That's all I had,
Madam Chairman.
COMMISSIONER RAPER: Thank you. Mr. Otto?
MR. OTTO: No questions, Madam
Chairwoman.
COMMISSIONER RAPER: Do the Commissioners
have any questions for this witness?
MR. WILLIAMS: f might have some.
COMMISSIONER RAPER: Oh, fry apologies.
I'm looking at you like dldn't we already go there.
MR. WILLIAMS: Potted p1ant.
COMMISSIONER RAPER: Potted p1ant, yeah.
Commissioner Anderson reminded me you stated it yourself.
I'm just adhering
MR.
compliment.
to your own assertion.
WILLIAMS: I accept it as a
COMMISSIONER RAPER: Do you have any
cross-examinati-on of this witness?
MR. WILLIAMS: We do have a few
questions.
o 25
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CSB Reporting
(208 ) 890-s198
GORMAN (X)
NWIGU
CROSS-EXAMINATTON
BY MR. WILLIAMS:
O Good afternoon, Mr. Gorman.
A Good afternoon
O I'm going to ask you
three categories, and the first one
of your adjustments. The second one
return on equity, and then fina1ly,
testimony on cost of service, so if
of your direct testimony --
A f'm there.
three questions in
has to do with some
wiff fall into your
rebuttal-
to page I
into your
you'd turn
o
particular cost 1n
transactional cost
basically
recommend
and in this instance, you find a
this case, the affil-iated cost,
of affiliated companies,
recommend, and I'm reading down on
instead of using what's ldentif j-ed
and you
l-ine 21, you
as the test
year cost for affiliated transactions that this Company
instead adopt a five-year average that ends before the
test year; do I understand that correctly?
A WeII, therers more explanation in my
testimony for that, because that cost hasn't fl-uctuated
much in the last five years, and the Company didn't
explain the rather signlficant increase from the previous
flve years through the test year25
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GORMAN (X)
NWIGU
o
A
justified, and
didnrt fluctuate
to incl-ude what
Right.
-- because the increase in cost
because the cost over the last
seemed more
wasn t t
five years
bal-ancedsignificantly, it
the cost has been over the last five
years as a ratemaking cost.
\z
finding that
year booking
A
made by the
the other half was
Sure, but in this
the Companyrs so
of these costs that
instance so
do you dispute
r_n your
the test
the Company did?
I'm disputing
since itCompany
O So half of the test year was actual- and
the projected cost increase
wasnrt justified.
youtre
projected; is that the
is the projected part
basis of what
of that?objecting to
A We1l,the ful-l year was the test year
and --
O Right, that's
A the Company, I guess, was booking
COMMISSIONER RAPER: Mr. Wi11iams, I'm
sorry, but if you will al-l-ow him to finish. You're
talking over the top of them. It makes it hard --
MR. WILLIAMS: Sure, hy apologies.
COMMISSIONER RAPER: -- for everyone and
our court reporter. Thank you.
THE WfTNESS: The basis of my adjustmento25
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GORMAN (X)
NW]GU
is the Company didn't justify the increase in the
affil-iate service charges and that recognizes that the
Company was aware it was a test year in 2076 and it did
start to book higher affiliate charges for sj-x months in
2016 and then projected to continue to have higher
what it hadaffilj-ate charges throughout '16 relative to
actually been billed by the service company for
five years. Without an explanation of why there
need for an increase in those costs, I think the
Commission should reject that as an unexplained
the prior
was a
and
unj ustified
nV
a standard
cost increase.
that
BY MR. WILLIAMS: So do you think this is
should be applied across al-l- of the
basis, go to a five-year averaging ofCompany's cost
costs ?
A That wasn't my recommendation. I
explained the way f went about reviewi-ng that cost and
why T think it's an appropriate adjustment.
O But in your in this instance, you're
asking this Commission to step out of the test year and
do a five-year average and in particul-ar, you want
five-year averaging for, and I'II just pick your second
category, information services,' would that be a correct
summary of your recofirmendation regarding information
services ?o 25
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CSB Reportj-ng(208) 890-s198
GORMAN (X)
NWIGU
A Not even cl-ose to a correcL summary of my
testimony.
O Okay.
A fn my testimony, I'm recognizing the
Commission is the one that determines whether or not the
Company's test year costs are reasonabl-e and appropriate
for settlng rates. I've identified the affil-iate service
costs as being one component which increased
significantly in the test year rel-ative to prior years,
and because it increased signiflcantly, that increase was
not justified, even explained by the Company, I'm
recommending the Commission not accept it as a reasonable
cost for affiliate service charges in the test year and
adjust it down to what I have been able to demonstrate is
a more reasonabl-e cosL of actual- charges fntermountain
from its service company moreGas Company has received
recently.
of your
return,
page 19.
a Mr. Gorman, if you could turn to page 20
testimony, I want to talk about your rate of
return on equity testimony. It begins roughly on
OSo
December -- weI1,
fil-ed on December
A I'm there.
I'm assuming
1et me back
15th and on
that you are aware in
up. Your
December
testj-mony was
about the sameo25
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GORMAN (X)
NWIGU
time, I think it was either the 15th or the 15th, the
Federal Reserve at its open market meeting raised the
targeted federal- funds rate by 25 basis points. Was that
increase taken into account in your recoflrmended return on
equity or, alternatively, should it have been taken into
account ?
A Kind of a long answer to that question,
because 1t is important, the Federal Reserve increased
the overnight rate, which is a 24-hour interest rate
which banks charge to one another for loaning money to
each other. That's a gauge when the Federal- Reserve
increases that
Federal Reserve
interest rate, J-t's a gauge
perceives the strength of
a short-term rate, I have
of how the
the U. S
economy. It is to emphasize
that very strongly, a
Eederal Reserve makes
short-term rate, and when the
that signal to the market, the
market takes that informatlon 1n terms of assessing what
the long-term outlook is for the U.S. economy with
particular concern about what thatrs going to do to
long-term inflation outlooks.
Based on the market's assessment of what
the Federal Reserve perceives is the strength of the U. S
economy, the market then adjusts long-term security
val-ues, includlng equity securities and debt securities,
in forming changes in long-term capital- market costs.25
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CSB Reporting(208) 890-5198
GORMAN (X)
NWIGU
The Federal Reserve, it was widely expected leading up to
the Federaf Reserve's actual increase in the federal-
funds rate that that would occur in December of this
year.
Most of the market
indicators suggested the
or the economy,
increase short-term interest rates,
been artificially depressed by the Eederal Reserve for
many years now, so the market priced that change in the
federal- funds rate by the Federaf Reserve in long-term
economic
stronger
that and
securities,
I inaudible ]
prof essional-
out over the
and that's evident
economic indicators
and that the Federal Reserve woufd
economy was getting
recognr_ ze
which had
by reviewing comments by
that surveys all the
economists that
what they expect
two years
the Eederal
federal open market committee
Leading
was widely anticj-pated
to increase short-term
up to
project treasury bond yields
and up to ten years out and
Reserve to do at thelr next
next
meeti-ng.
December of
that the Federal
that year,
Reserve was
ir
gor-ng
interest rates, so most of the
long-term market part.icipants
expectation into the value of
because the market generally
were already factoring that
Iong-term securitiesr so
reacts to expectations
to occur, the securityrather than wait for actual events
prices I've used in my return on equity study alreadyo25
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NWIGU
reflected an increase in the federal funds rate that
occurred in December of 2016.
O So I think that was a yes?
A I told you it was going to be a long
answer.
Do, f'm serious.
study does refl-ectAMy
that the Eederal-
the expectati-ons
increase short-term
O But
Reserve was going
last
to
interest rates in December of
O Okay,
feds announced that
right, and at
year.
that same meeting, the
basis point
take those
they were expecting an additionaf 15
increases in 2011. Does your recoflrmendation
into effect as weII?
long-term security valuations now with the fed
that statement and
A Well, they hadn't made that statement
until after they raised interest rates in 2076, but
Iooking at
having made
analysts looking whether or not
professional securi-ty
those i-ncreases wiII
actually take p1ace, they are embedded in observable
interest rates rlght now, but when we look at observabl-e
interest rates right now, long-term treasury securities,
more specifically utility bond yields, they have not
changed significantly since the time f did my study.
O Okay, but your testimony was filed on
December 16th and my question is when you made youro25
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NWIGU
reconrmendations on return on equity, did you factor in a
possible 75 basis point increase in 20L1 to your
recommendation? Did you have time do that?
A It wasnft announced at that time
Okay.
-- but for the reasons I just went over, I
belleve that the observabl-e
the capltal market cost did
announcement.
O So as we sit
market evidence shows that
not change with that
here in March
o
A
declsion of the Commission
early Apri1,
in a possible
do you think
coming out in
this Commission
rate increase from the feds
and a possible
l-ate March or
should factor
and a rising
interest rate market in their ROE decision?
A I think the rislng interest rate market is
still highly uncertain, because capital market
participants are watching the fed for what it will do,
and to the extent the fed is announcing its expectation
of ralsing interest rates, it hasn't actually done that
yet. I woul-d note that there has been some bumps in the
economy noted by the Federal Reserve as to whether or not
they'11 actually increase interest rates as it's
expecting to do this year, but probably more j-mportantly,
when you l-ook at long-term utility bond ylelds, they have
not increased much more recently relative to what theyo25
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were at the end of the 2016.
They are higher now than they were in the
middl-e of 2076. In the middle of 2016, that was right
about the time of the Brexit announcement and there was
significant uncertainty about the impact on the wor1d
economy that was going to happen by significant change in
the European unions, trade agreements internally and with
externa1 partners. That calmed down by the end of the
year, but, again, from the end of year 2076 to more
recently, utiJ-ity bond yields have not changed
significantly and that is in recognition of announcements
by the fed that they plan to increase the federal funds
rate again this year.
O Would you agree that we're in a rising
interest rate market compared to a static or declining
interest rate market?
A I would agree that utility lawyers have
been asking me that very question for the last five years
and they have been dead wrong every time for the l-ast
five years. We are likely going to see short-term
interest rates go up, but I don't think we're going to
see long-term interest rates go up until there's
prolonged Ievels of increased inflation in the economy,
and right now and the Federal Reserve has opined
si-milar to that and right now there just doesnrt seem to
CSB Reporting(208) 890-s198
GORMAN (X)
NWTGU
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GORMAN (X)
NWIGU
be sustai-ned levels of inflation that woul-d drive an
increase in long-term capital market cost.
O So did you see Janet Yell-en' s remarks
today in response to the Dow going up over 300 points?
A I did not.
O Okay. When you l-ook at your proxy group,
how many of those utilities -- fet me back up for a
minute. You didn't take issue with the Company's
proposed fixed cost col-l-ection mechanism and can I assume
you do not have a specific objection to that?
A For industrial- customers, I support it. I
think it provides a cl-ear price signal and an incentive
to make efficient consumption decisions for large
industrial customers, and I also think it stabilizes the
utili-ty's revenue collecti-on, which reduces its
investment rlsk and fowers its cost of capital.
O And in your proxy group, Exhibit 303, do
you have a recollection of how many of the utilities in
that group have some sort of rate decoupling mechanism?
A You know, I didn't look at that
specifically, because revenue stability, cash fl-ow
part of rewarding a bondstability is such an
rating to a utility
investment risk that
rather than look at
important
company, so that 1s one element of
is refl-ected in a bond rating, So
specific efements of risk, I insteado25
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GORMAN (X)
NWIGU
looked at total
encapsulated by
rating analysts
investment risk, which is best
what the bond rating tells uS, credit
be1ieve that investment risk is, so I
rel-ied on the bond rating to get
risk
a general sense of what
business and the financial-of the proxy company
was.
O And wou1d you accept, subject to check,
that a number of the utilities in that proxy group, more
than half, have some kind of rate decoupling mechanism?
A I haven't verified that, but it wouldnrt
surprlse me if that's true.
O And you with thewould disagree, then,
projected ROE and thennotion that you set a
ROE adjustment based
collection mechanism
you make an
on whether there's a fixed cost
as opposed to doing one and then
by j-tsel-f in anthat particular variableisolatlng
analys i s ?
I mean,
subj ect
issue is
A No,
what we're
Company,
whether
I think
looking
you've got that
at is whether or
upside down.
not the
Intermountain Power Company, that the
or not Intermountain Power Company 1s
currentfy comparabl-e in risk
If regulatory mechanisms are
Intermountain Power Company's
be comparable with the proxy
group company.
that reduce
to the proxy
implemented
risk, then it may no
group investment risk.
longer
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GORMAN (X)
NWIGU
may be a lower risk.
COMMISSIONER RAPER: fntermountain Gas?
THE WITNESS:Thank you, Intermountain Gas
analysis I would do toCompany, so that
determi-ne whether
would be the
or not f would recommend a reduction to
my return on equity if regulatory mechanisms were
implemented that reduced its operating risk.
a BY MR. WILLIAMS: A11 right. Now, Mr.
Gorman, have you or has your firm done cost of service
studies for your clients. For gas utllities or for other
utilities across the country?
A We routinely do cost of service for al-I
companies, el-ectric, 9ds, water, and wastetypes of
water.
O fn partlcular, you've done or your company
has done ones done them for gas companies?
A Yes, many times.
a When you do wel1, 1et me ask this
question: You reviewed the Company's cost of service
study proposed in this case,' correct?
A We did. We generally -- that's one of the
maj-n issues we go through j-n a utility rate filing is to
look at the revenue requirement, look at the proposed
spread and see whether or not the proposed spread and any
revenue deficiency is consistent with the cost ofo25
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GORMAN (X)
NWIGU
service. We critically review the company's cost of
service study to ensure that the revenue deficiency
spread across
very important
CASCS.
rate classes is reasonable, so that is a
aspect of things we do for al-l- rate
O And if you had been unhappy with what you
found in eval-uating the Company's, I assume, then, you
would have proposed your own separate cost of servj-ce
study and presented it in this case?
A We routj-nel-y do that and as a matter of
fact, it's unusual- where we don't offer testimony making
some modifications to the company's class cost of
service.
O And you've testified in a number of
jurisdictions on gas cases, is it al-so routine for staff
to prepare cost of service studies if they don't l-ike
what they're seeing?
A I don't know if there's a standard for
staff, but
their own
in most jurisdictions, staff will offer up
cl-ass cost of service study,\16c
had a lot ofO So Mr. Gorman, if you
discussion with Mr. Richardson and others about
gradualism and phasing in. If there is a recognized
intraclass subsidy that is occurring within a particular
customer cIass, Irm not talking about interclass, buto25
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GORMAN (X)
NWIGU
intraclass, and this Commission were to phase those in,
would not your clients be essentially paying more than
the identified cost of service to their detriment in
order to phase in or allow this gradualism of billing to
occur?
A Not under my recommendation My
it'srecommendation was if the Commission finds
appropriate to phase in the
it's in the publlc j-nterest
which gives them a gradual
cost-of-service-based rates
with Amalgamated to mitigate
it's in the public interest,
rate for Amalgamated because
to provlde a rate structure
movement to that
that the benefit of
the lmpact on that
then that discount
working
cost, if
should be
spread over all- customers, not just other transport.ation
customers, because all customers benefit no less or no
more by supporting Amalgamated while they phase in their
rates to cost of service.
MR. WILLIAMS: AIl right. Madam Chair, I
have no further questions.
COMM]SSIONER RAPER:Thank you. Are there
any questions from the Commissioners? President
Klellander almost l-ooked like he might have had one, but
he declined.
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GORMAN (Com)
NW]GU
EXAMINATION
BY COMMISSIONER RAPER:
O f have one question and your testimony ran
a large spectrum of all of the issues, so f have a lot of
answers from what cross has been given, but Irm going to
cherry-pick bonus depreciation. You took issue in your
direct at page 11 of why Intermountain Gas was not taking
advantage of bonus depreciation, and in the Genorafs
rebuttal, witness Genorars rebuttal, there was an
explanation that foregoing bonus depreci-ation was far
outweighed by taking that. Are you famll-iar with the
rebuttal ?
A Yes, I am.
O Does that position taken by the Company on
rebuttal change your perspective or your testimony at aff
on taking issue with the fact that the Company did not
take advantaqe of bonus depreciation?
A No, and the reason it doesn't is because
she is speaking from a consolidated MDU basis
net operating loss carried forward in the most
on usang
effective
way for MDU Resources and f don't doubt that they're
for the operatingdoing that. The problem T have is that
subsidiary, in this case Intermountain Gas
the cost of service should reflect the Company's
uti-1ity
Company,a 25
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GORMAN (Com)
NWIGU
effort to mi-nimize that cost of service using all
opportunities availabl-e to it whil-e sti11 recovering its
reasonabfe and prudent cost of service from retail
customers.
The reason MDU can't use bonus
depreciation for Intermountain Gas Company is because it
has so much net operating losses at the parent company
Ievel; therefore, it can't use additional- depreciation
charges against j-ncome taxes that are otherwise availabl-e
at the operating utility l-evel, So the utility's cost of
service is increasing because of the MDU net operating
l-oss carry-forwards, which are the effect which are
the result of things beyond thelr cost of providing
service to Intermountain Gas customers, so I believe
there is a real- conf l-ict here with MDU Resources' ability
to use the additional tax write-offs at the consol-i-dated
parent
Company
there's
company, tax practices; whereas, at the utility
IeveI, customers have to pay more not because
not current income tax being generated at the
bit of it, but al-I thatutil j,ty, there
current income
is, quite
tax being the utility and
Idaho is belng
forward to the
a
generated at
paid for by retail customers here in
offset by net operating l-oss
parent company level, so the
customers are being harmed,
net effect is I think
because the utility's cost
carried
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GORMAN (Com)
NW]GU
structure isn't as low as it woul-d otherwise have been if
it didn't have al-l- these net operating losses,
non-regulated net operating l-osses, dL the parent company
Ieve1.
O Okay; so one fol-low-up based on that
answer, then, so this, ds I understand your answer, this
piece, this bonus depreciation piece, Rdy j-nure to the
detriment of ratepayers by looking at the whole picture,
the whole company from an MDU perspective,but do you
having the
difference of
bel-ieve that there are other offsets within
parent company there that wou1d offset the
what bonus depreciation woul-d otherwise provide as a
benefit to the Intermountain Gas customers?
A
there are, I
subs idiarles
f haven't reviewed it
benefits to thethink,
of MDU existence
specifically, but
operating utility
of the parentby the
Those benefitscompany structure
affil-iate service
are charged through
was one of my otheragreements.
testimony.
That
adj ustments
the parent
the form of
pay for
question
benefits
r_n my Customers get benefits from
company, parent service company, structure in
this central-ized service company, but they
those benefits, so they're not free,
the
so the only
other
reason why
utility fevel
is if customers are paying for
from a service company, is there a
they should forego savi-ngs at the operatingo25
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GORMAN (Com)
NWIGU
because of other events that are going on outside of the
service company up at the parent company level, so T
quo there and I don't think it'sdon't see a quid pro
appropriate in settlng rates
COMMISSIONER RAPER: Thank you. Oh,
l-ooks l-i-ke President Kjellander has decided he has a
quest j-on.
ir
COMMISSIONER KJELLANDER: Just call me
Commissioner Kj e11ander.
COMMISSIONER RAPER: Commander
COMMISSIONER KJELLANDER: Commander works,
too.
EXAMTNAT]ON
BY COMMISSIONER KJELLANDER:
O I enj oyed t.he exchange you had about the
fed and its impact on util-ities. I'm not sure that I
fol-l-owed every step of it. I
the testj-mony you provided to
but so much of that discussion
fact that once this is set and
can't wait to fook back at
get a clear glimpse of it,
seemed to hinge on the
an order i-ssued that
somehow it's frozen in stone forever. We haven't seen
this utility in for a rate case in 31 years
Realistically, what does this begin to suggest about theo25
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GORMAN (Com)
NWIGU
need for more
your answer,
natural gas
participated
A
question is
we know to
not be
and my
return
the current market cost
Iow in relationship
of equity, they're
to a change in
free to file
rates for
come any time
the ratemaking
frequent rate cases? And if you could in
share with us what you've seen in the
industry in some of the other cases you've
j-n as far as the frequency of rates cases.
Okay, the way I interpret one part of your
if we set the return on equity based on what
exist today, does that mean the utili-ty will-
fairly compensated when the rates are in effect,
if theresponse to that is you are right that
on equity is so
another rate case and seek an i-ncrease in
changes in capital costs 1f they should go
soon, so there is a natural method through
process that utility investors are protected from
increasing capital market costs, because the utility can
simply f il-e another rate case.
The next extension of that is if capital
market costs don't go up and the utility sets rates and
then doesn't come back in, then rates may be hi-gher than
necessary to fairly compensate the utility's j-nvestors,
and that would be incumbent on utility customers, then,
to make a complaint to the Commission to pull the utllity
in for a rate decrease. The utility incurs a lot of
money in putting on a rate case and they get to recovero25
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it. ft I s part of a rate case expense. When customer
groups make a complai-nt to the Commission, they i-ncur a
lot of money to fil-e those complaints, but they don't get
to recover it. They have to eat that cost themsel-ves and
hope rates wil-l- eventually be decreased and that provides
a good return on their efforts to manage their costs for
the utility service, so there is a bit of an imbal-ance
there.
The need for more frequent rate cases is a
double-edged sword. Customers don't l-ike increases, they
Iike decreases. Investors don't l-ike decreases, they
l-ike increases, so it's truly a competing interest on the
frequency of rate cases, because it costs all the parties
money to come in for a rate case if you're the customers,
so they don't want it more often than necessary, but at
the same tlme, they don't want to forego the cost of a
rate case and forego great decreases if the utility
actually is overrecovering its cost of service, so j-t's
kind of a complicated question, and I think probably the
best answer is you realIy need to look at the numbers to
see whether or not a rate case makes sense either for the
utility to increase rates or for customers to decrease
rates.
I think one way that wou1d kind of benefit
all- the stakeholders would be to l-eve1 the playing field
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GORMAN (ReDi)
NWIGU
for customers in the event we think rates are too high to
show some evj-dence that woul-d be convincing to the
Commi-ssion that woul-d then cause the Commi-ssion to order
the Company to come in and show cause their rates are
reasonable,
a rate case,
expense,
utility
and that way the utility's cost of incurring
which is recoverable in their rate case
could generate this ratepayer protection from a
that exceed their cost of serviceriding on rates
over a long period of time.
COMMISSIONER RAPER: fs there any
redirect ?
MR. STOKES: Yes, Madam Chair, just a few.
REDIRECT EXAM]NATION
BY MR. STOKES:
O Going back to the conversation about rate
schedule T-4, why are some customers going to get a
larger bill impact in rate schedule T-4?
A It depends on by changing t.he rates
from a vo.l-umetric rate to a capacity rate, the actual
impact on the bil-l will depend on the load factor, how
much throughput you have in relationship to how much
capacity is needed to provide the service, and maybe an
example could help ill-ustrate this. If you had twoa25
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NWIGU
industrial- customers, one they both make widgets. One
is abl-e to move its widgets across town by renting a
pickup truck and it only needs to move 10 widgets. The
cost of that pickup truck to rent it is $100. The fuel-
cost might be $5.00. If you're going to move 10 widgets
across town, t.he cost of moving a widget is $10.50.
Another bigger industrial customer may
have 11000 widgets to move, so they rent a semi. They
pay $1,000 to rent the semi. They incur $50.00 for gas
to operate the semi, so their total cost is $1,050, but
they're moving 1,000 widgets, so their cost of moving the
widgets is $1.05 per widget. If you price the cost of
transporting the widgets across town based on the fixed
cost, the capacity needed to move the widget across town,
plus the operating cost, then both of those customers
truly refl-ect what the economic costs of the car rental
place would be to allow them to move their wldgets across
town.
On the other hand, if you take the cost of
the $1,050 and the $105 andthe two entitles combined,
combine them together and
then the small-er customer
cost that is significantly
create a volumetric charge,
is going to pay a widget-moving
under -- below what his costs
of rentlng a truck and movlng the widget would be on a
pure fixed and variable pricing structureo25
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GORMAN (ReDi)
NWIGU
get the average
the average cost
you move the low
the mix to come up with the vol-umetric
of those industrial- customers
Conversely, the bigger customer if
volumetric charge woul-d pay more,
of moving the widget
they
because
will- increase when
the equation and do
charge, so if both
volume customer i-nto
rented their vehlcles, the
rental agency, both wouldcapacity from the same vehicle
get more
having a
them move
accurate pricing from that vehicl-e rental by
component to help
utility
to size
has to j-ncur capacity costs
capacity.
such that they have
their pipes in a certain amount and then reserve
that capacity for the utility
utility, a period where they
what the customers have told
on peak day demand for the
have no more capacity than
them they need on that peak
d.y, and that customer takes that amount of capacity on
peak day, but somethi-ng far l-ess on non-peak days, then
it moves l-ess volume through that level- of capacity
throughout the year, its volumetric charge woufd be
greater than another customer that contracts for a firm
amount of capacity and runs capaclty almost at 100
fixed and varj-able pricing
their wldgets across town.
The same is true for If the
It moves far morepercent
volume
load throughout the
through that pipe and
that
year.
its current
the capacity, then, would be lower, even
unit charge for
though they'reo25
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GORMAN (ReDi)
NWIGU
both paying
costs of the
nY
pipeline.
Okay; so for two
if one is getting
customers on rate
a larger bitling impact
because the customer
the same price for capacity and variabl-e
schedule T-4,
than another customer, is that
that's getting the larger billing impact is not currently
paying their fair share of fixed costs?
A No, j-t's an indlcation of just how they
use the capacity they're buying from the Company. Moving
from a variable pricing structure to a fixed and variabfe
pricing structure, a low load factor customer like1y wlII
see a larger increase than a high load factor customer.
They both pay the same price for capacity in volumetric
usage for the pipeline, but the bill woul-d be impacted
differently and they both wou1d pay the utility's cost
for firm capacity and variable use of that capacity.
MR. STOKES: Thank you. Nothing
further.
COMMISSIONER RAPER: Thank you for your
time and testimony and explanation.
THE WITNESS: Thank you for accommodating
my schedule.
COMMISSIONER RAPER: Abso1utely.
(The witness left the stand. )
COMMISSIONER RAPER: We are comingo25
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probably too cfose to the 5:15 hour to we would
begin -- well-, I'm thinking out loud like Mr. Otto now,
so I'm backtracking like he does occasionally. Are there
any witnesses that can be accommodated with the time
frame that we have remaining this afternoon? I'm
thinking CAPAI. With the time that we have remaining
this afternoon, is there a consensus that CAPAI, that
Ms. Zamora, could be taken care of in the next 20 to 25
minutes ?
Ms. Zamora.
either.
MR
MR
MR
WILLIAMS: We have no questions for
STOKES: We have no quest j-ons
RICHARDSON: We don't either.
MR. OTTO: No questions.
COMMISSIONER RAPER: So
Ms. Zamora, I wil-l ask if there are any
dismissing Mr. Gorman for the remainder
MR. PURDY: Then it sounds like it,
yeah.
COMMISSIONER RAPER: It was directed at
Mr. Purdy, but he took my question l-ast time, so it's
fair that everyone else took his, and before we swear in
objections to
of the hearing
MR. WILLIAMS: No objections.
COMMISSIONER RAPER: Seeing no objections,)25
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ZAMORA (Di)
CAPAI
we wil-I dismiss Mr. Gorman so that he doesn't have to
return, and we will take up with CAPAI.
CHR]STINA ZAMORA,
instance ofproduced as a witness at the
Action Partnershlp Association of Idaho,
first duly sworn to tell the truth, the
nothing but the truth, was examined and
follows:
the Community
havj-ng been
whofe truth, and
testified as
DIRECT EXAMINATION
BY MR. PURDY:
O Would you please state your name and by
whom you are employed?
A Christina Zamora, Community Action
Partnership Association of Idaho.
O And in what capacj-ty are you employed?
A Irm the executive director.
O And have you previously prefiled on
December 16 direct testimony consisting of 11 pages and
no exhiblts?
Yes.
AII right, if I
as contained in
were to ask you those same
questions today your prefiled direct
A
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ZAMORA (Di)
CAPAI
testimony, would your answers be the same?
A Yes.
MR. PURDY: With that, T would ask that
the direct testimony of Ms.
record as if read and she is
Zamora be spread upon the
avail-ab1e for cross.
COMMISSIONER RAPER: With no obj ections,
the recordwe wil-I spread Ms. Zamora's testimony across
for cross.as if read and present her
(The foll-owing prefiled direct testimony
of Ms. Christina Zamora is spread upon the record.)
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CAPAI
r. INTRODUCTION
Q:Pfease state your name and business address
A: My name is Christina Zamora. I am the
Executive Director of the Community Action
Association of Idaho at 3350 W. Americana
Partnership
Terrace, Suite
360, Boise, ID 83706
Q: on
proceeding?
A: The
whose behalf are you testifying in this
Community Actlon Partnership Association of
Idaho ("CAPAf") Board of Directors asked me to present
the lowthe views of an expert oo, and advocate for,
income customers of Intermountain Gas Company
(hereinafter, "CompaDy, " or ("Intermountain") .
II. BACKGROT ![D & QUALIFICATIONS
Q: Please describe CAPAITs organizational-
structure and the functions it performs, relevant to its
involvement 1n this case.
A: CAPAI is an associatlon of the following
private, nonprofit organizations that fight poverty in
Idaho: 1) The Community Action Partnership (CAP-N &
CAP-NC); 2) El Ada, Inc. (EI Ada); 3) The Western Idaho
Community Action Partnership (WICAP); 4) The South
Central Community Action Partnership (SCCAP); 5) The
Southeastern Idaho Community Action Agency, Inc.
(SEICAA); 6 The Eastern Idaho Community ActionO25
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CAPAI
Partnership, Inc. (EICAP); 1) The Community Council- of
Idaho, Inc. (CCI), and; B) Metro Community Services (MCS)
formerly named the Canyon County Organization on Aging,
Weatherization and Human Services, fnc. The last two
agenci-es, CCI and MCS, are designated in CAPAI's Bylaws
as "special purpose agencies." These agencies are
focused on providlng services to migrant and senior
populations, respectively. Colfectively, the six
Community Action Agencies (sometimes referred to as
ttCAPs " )
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CAPA]
along wit.h CCI and MCS are referred to as "member
agencies. " For the purposes of the Stipulatlon at issue
in this proceeding, there is no relevant distlnction
between a Community Action Agency and a special purpose
agency.
Each member agency has a designated service
area. Combining all agencies, every county in Idaho is
served. The agencies design their various programs to
meet the unique needs of communities located within their
respective service areas. Not every agency provides all
of the followi-ng services, but al-l work with people to
promote and support increased self-sufficiency. Programs
provided by CAPS inc1ude: empJ-oyment preparation and
retention, education assistance, chifd care, emergency
food, senior independence and support, clothing, home
weatherization, energy assistance, affordable housing,
health care access, and much more.
Q: What is the relatlonship between CAPAI and the
member agencies?
n-CAPAI j-s effectively the umbrel-Ia organi zat j-on
to the members tothat provides
assist them in
a myriad of services
carrying out their individual misslons
throughout
technical
fdaho. Such services include training and
assistance, coordination of resources, program
planning and assistance with implementation, programmatic25
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CAPAI
administrative oversight, and advocacy for the l-ow-income
in Idaho, among other things.
Q: Are the individual member agencies represented
on CAPAI's Board of Directors and, if sor how?
A: Yes they are. Each agency has an Executive
Director and 1ts own Board of Directors that establishes
policy for
the day to
that agency.
day functions
The Executive
of the agency
of each member
Director manages
In addition,
agency sits on the
are currently B
each Executi-ve Di-rector
CAPAI Board of Directors. Thus, there
CAPAI Board members.
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CAPAI
Q: Which of the eight member agencies provide
fow-i-ncome assistance to Intermountain's service
territory?
A: The member agencies whose
overJ-aps with the service terrltory
service territory
of fntermountain are
WICAP, CCI, MCS, Ef Ada, SCCAP, SEICAA and EICAP.
Q: Have you testified before this Commission in
other proceedlngs?
A: Yes, I have testified on behaff of CAPAI in
numerous cases lnvolving United Water, fdaho Power,
AVISTA, and Rocky Mountain Power, among others.
III. ST'MMARY
Q: Would you please summarize your testj-mony in
this case?
A: My testimony addresses CAPAI's position
regarding the Company's proposed increase to the flxed
customer charge, Intermountain's proposal to consol-j-date
its Residential- classes into a slngle customer c1ass, a
need for more extensive data tracking for l-ow income
customers, and the implementation of a low income
weatherizatlon DSM program
Q: Are there any exhibits to your testimony?
A: No.
IV. CAPAI I S RECOMMENDATIONS AI{D PROPOSAIS
A. Conso]-idation of Residentia1 C].ass.o 25
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CAPA]
n.Y.
Companyt s
a single
A:
What is CAPAITs position regardj-ng the
to combine the residential class intoproposal
class ?
CAPAT agrees that there is no rationale for
resi-dential- cl-ass into the two categoriesseparating the
currently in existence: space heati-ng only and space
combined with water heating. Consequently, CAPAf has no
objection to this proposal.
B. Proposed Increase to Customer Charge.
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CAPAT
Q: What 1s CAPAITs
Intermountain t s proposed
customer charge?
A: CAPAI submitted numerous discovery request.s to
regardlng the Company's lowIntermountain seeking data
income customers ranglng
are l-ow income based on
from how many of its customers
various criter j-a,the average
compared toconsumption habits of l-ow income customers
non-low income and other data that woul-d provide CAPAI
with the ability to determine whether a higher customer
charge and resulting in b11l-s that are lower due to
reduced commodity charges, but the Company has not
historically tracked the data necessary to make
determinations such as those presented by this question.
Q: Does
position on the
the lack of data necessarily alter CAPAI's
position wlth respect to
increase to the Companyrs
A: Not in
proposed increase
thi-s instance.
to the customer charge?
Were the proposed
CAPAI might haveincrease signlficantly greater, then
objections to
Q: What
it.
A: A higher
a price signal that
conservation. This
income customers who
would those objectlons be?
flxed customer charge obviously sends
is contrary to the objective of
is particularly problematic for 1ow
could otherwise reduce their bill-s
by reduclng discretionary consumption. On the othero25
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CAPAI
hand, as noted by the Company, some 1ow income customers
with gas heating consume more gas than woul-d be expected
due to non-discretionary conditions such as poorly
insul-ated housing. PJ-aclng more of an overal-l rate
increase on the commodity charger ds opposed to the fixed
customer charge, will obviousl-y have a negative effect on
such customers. This is why CAPAI proposes that the
Company begin tracking Low j-ncome data ranging from the
percentage of its customers who are l-ow income to their
consumption habits.
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CAPAI
C. Low Income Data Tracking
Q: What type of low income data do you propose
that fntermountain track?
A: As discussed beIow, I believe that question
should be addressed
GeneraIly speaking,
obtain a better idea of the percentage of the Company's
income and their consumptioncustomers who are low
habits. This type of data would be helpful to the
Commission in, among other thj-ngs, understandlng the true
impact of certain residential rate design proposals on
the Company's customers.
Q: Does the Company's l-ack of l-ow income data as
you describe surprise you?
A: Not entirely. Due to the unique l-evel- of
regulatory oversight of natural- gas utilities, and the
fact that Intermountain does not file general rate cases
with the same frequency of Idaho's efectrj-c utilities, it
is not surprisj-ng that the Company has not historically
tracked this information. Consequently, it is fair to
state that this is falrly new ground we are covering in
this proceeding.
Q: Would you please elaborate on this point?
A: As Intermountain notes l-ow income customers do
not fa1l neatly into a high or l-ow consumption population
collaboratively by an advisory group.
it woufd be of signiflcant help to
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CAPAI
of the residential class of customers. Some low income
consumers consume relatively high level-s of natural- gas
due to a number of factors, including housing stock that
is poorly insulated, large fami1ies living in a
relatively small space, and so on. Other low income
customers might inc1ude senior citizens who
relatively energy-efficient housing for many
have lived ln
Ilve afone and are frugal in their use of gas
appliances. ConsequentJ-y, their consumption
lower than average.
years, who
consuming
might be
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CAPAI
Q: What effect do these factors have on CAPAI's
proposal to implement a low income weatherization program
for the Company?
A: It is essential that we begin tracking low
i-ncome data for fntermountain so that we have a better
understanding of the specific needs of the Company's
customers in order to create a well-tailored program that
provides access to energy conservation to the majority of
Intermountain' s cusLomers.
Q: How do you propose enhancing Intermountain's
Iow income data tracking?
I believe that the creation of an advisory
group outside the scope of this proceeding invofving the
Company, CAPAI, the Commission Staff, and aII other
interested persons to ldentify areas and issues where
better data woul-d be productive would be an efficient
method of identifying the data and how best to collect
and track it. The outcome of this effort could,
conceivably, be used with respect to other utilities.
D. Low Income Weatherization Progra:n
Q: Have you had occasion to discuss the
implementation of a l-ow income weatherization program
with Intermountain?
A: Yes, I have.
Q: What was the outcome of that discussion?25
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A: Although I cannot speak for the Company, my
impression is that it is willing to consider the
implementation of a low income weatherization program
outside of the scope of this proceeding.
Q: What j-s your proposal to the Commj-ssion in that
regard?
A: CAPAITs proposal is that the Commission order
the creation of an advisory group invol-ving the Company,
CAPAI, and, particularly, the Commissj-on Staff, along
with all other interested persons, to coflrmence a
discussion of how to implement a low income
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CAPAI
weatherj-zation program that 1s
helping low i-ncome customers to
through l-ess consumption of gas
both effective in terms of
reduce their bi-11s
in a way that they cannot
otherwise afford. A properly constructed program should
be effective, conserve energy resources and help those
who coufd not otherwise afford to reduce their
non-discretionary consumption.
IV. ST'M!,IARY
Q: Would you please summarize your testimony?
A: Yes. I woul-d lj-ke to thank the Company for
meeting
income
with CAPAI to discuss the possibility of a fow
weatherization program which CAPAI befieves is
hiqhly warranted. CAPAI sees no reason to oppose the
Company's proposal to consolidate its resident.ial
customers j-nto a slngle cl-ass. CAPAI also does not
oppose the Company's proposed customer charge increase
but believes that it is essential for Intermountain to
begin more enhanced data tracking so that the impact of
future rate design proposals on low income customers can
be fully assessed.
Q: Does this conclude your testimony?
A: Yes it does.
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ZAMORA
CAPA]
(The foll-owing proceedings were had in
open hearing. )
COMMISSIONER RAPER: Commission Staff?
MR. KLEIN: None.
COMMISSfONER RAPER: Thank you.
MR. STOKES: We have none. Thank you.
COMMISSIONER RAPER: Mr. Richardson.
MR. RICHARDSON: No questions, Madam
Chair.
COMMISSIONER RAPER: Thank you. Mr.
Otto.
MR. OTTO: No questions, Madam Chair.
COMMISSIONER RAPER: Mr. Wil-liams.
MR. WILLIAMS: No questlons.
COMMISSIONER RAPER: Are there any
questions from the Commissioners? So no redirect to be
had from Mr. Purdy.
MR. PURDY: T guess not.
COMMISSIONER RAPER: Ms. Zamora, thank you
for your time in sitting through
are dismissed. Do you wish that
for the remainder of the hearing?
MR. PURDY: At her
COMMISSIONER RAPER:
today's hearing. You
Ms. Zamora be dismissed
discretion, yes.
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(The witness l-eft the stand.)
COMMISSIONER RAPER: I think wi-th that
we'll- cal-l- it a day and start fresh in the mornj-ng.
we wifl meet at
rf
there are no objections to 9:00 d.fl.,
9:00 a.m. in
testimony
and get out
the Hearing
did f myself
Room to begin Staffrs
anyone who wanted to testify
Staff in theof here? Okay, we'1f begin with
mornr_ng.Thank you.
(The Hearing recessed at 4240 p.m. )
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