20170320Transcript Volume I.pdf

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t ORIGIIYAL CSB REPORTING
C e rtiJie d S h o rthand Reporte rs
Post Office Box9774
Boise,Idaho 83707
csbreporting@yahoo. com
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 INTERMOUNTAIN GAS COMPANY TO
CHANGE ]TS RATES AND CHARGES FOR
NATURAL GAS SERVICE IN THE STATE
OF IDAHO
CASE NO. INT-G-16_02
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BEFORE
COMMISSIONER KRISTINE RAPER (Presiding)
COMMISSIONER PAUL KJELLANDER
COMMISSIONER ERIC ANDERSON
PLACE:Commission Hearing Room
412 West Washington StreetBoise, Idaho
DATE:March 7, 20L1
VOLUMEI-Pagesl-453
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(208 ) 890-s198
APPEARANCES
For the Staff:Mr. Kar]. Klein
and Mr. Sean Coste1Lo
Deputy Attorneys General
472 West Washington StreetBoise, Idaho 83120-0074
For Intermountain Gas
Company:
Mr. Rona].d L. 9li].].iams
Williams Bradbury, P.C
1015 West Hays Street
Boise, Idaho 83702
For The Amalgamated
Sugar Company:
Mr. Peter iI. Richardson
RICHARDSON ADAMS PLLC
Post Office Box 7278Boise, Idaho 83102
For
Gas
Northwest Industrial
Users:
Mr. Chad M. Stokes
CABLE HUSTON LLP
1001 SW Fifth Avenue
Suite 2000Portland, Oregon 91204
Eor the Community Action
Partnership of Idaho:
Mr. Brad M. PurdyAttorney at Law
2079 North 17th StreetBoise, Idaho 83102
For fdaho Conservation
League and Northwest
Energy Coal-iton:
Mr. Benjamin iI. Otto
Attorney at Law
Idaho Conservation League
Post Office Box 844
Boi-se, Idaho 83701
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APPEARANCES
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CSB Reporting
(208 ) 890-s198
]NDEX
WITNESS EXAMINAT]ON BY PAGE
Nicole Kivisto
(rGC)
Mr. Wil-f iams (Direct )Prefiled Direct Testimony
9
72
Scott Madison
( rGC)
Mr. Williams (Direct)
Prefil-ed Direct TestimonyMr. Richardson (Cross)
22
25
49
Hart Gilchrist
(IGC)
Mr. Wil-l-iams (Direct )Prefil-ed Direct Testimony
Commissioner Raper
54
51
91
Mark Chil-es
( IGC)
Mr. Williams (Direct)
Prefiled Direct Testimony
Prefiled Rebutal Testimony
93
96
111
J. Stephen Gaske
(rGC)
Mr. Wj-l-liams ( Direct )Prefil-ed Dlrect Testimony
118
!20
Ted Dedden
(rGC)
Mr. Wil-l-iams (Direct)
Prefil-ed Direct Testimony
207
205
Jacob Darrington
(IGC)
Mr. Will-iams (Direct )Prefiled Direct Testimony
229
235
Branko Terzic
( IGC)
Mr. Williams (Direct)
Prefiled Direct TestimonyMr. Stokes (Cross)
Mr. Richardson (Cross)
Mr. Otto (Cross)
Commissioner Raper
Mr. Williams (Redirect)
266
268
304
308
316
318
319
Lori Bl-attner
(IGC)
Mr. WiIl-iams (Direct )Prefiled Direct TestimonyMr. Richardson (Cross)
Mr. Otto (Cross )Mr. Wil-l-iams (Redirect)
322
324
3944tl
425
Connor Reiten
(IGC)
Mr. Wil-l-iams (Direct )Prefil-ed Direct Testimony
Mr. Costel-1o (Cross)
Mr. Richardson (Cross)
Mr. Otto (Cross)
432
435
448
449
45225
INDEX
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EXHIBITS
NUMBER DESCR]PTION PAGE
FOR ]NTERMOUNTA]N GAS COMPANY:
1 Organizational Structurefor MDU Utillties Group, Inc.
Premarked
Admitted 11
2 DeIj-vering Natua1 Gas to
Homes & Businesses
Premarked
Admitted 55
3 CaIcul-ation of Debt fnterest
Costs
Premarked
Admitted 94
4 CV of J. Stephen Gaske, Ph.D.Premarked
Admitted 119
5 General Economic Statlstics
1984-2075
Premarked
Admitted 119
6 Rate Base 13-Month Average Premarked
Admitted 204
1 Gas Pl-ant in ServiceOriginal Cost
Premarked
Admitted 204
B Statement of Operating fncome Premarked
Admitted 204
9 Other Revenues and Interest
Income
Premarked
Admitted 204
10.Cost Allocation Manual, 20L6 Premarked
Admitted 204
11.Cross Charge Summary Premarked
Admitted 204
72.Rate Base 13-Month Average Premarked
Admitted 234
13.Gas Plant in Service
Original Cost
Premarked
Admitted 234
L4.Statement of Operating Incomewith Adjustments
Premarked
Admltted 23425
]NDEX
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EXHIBITS (Continued)
NUMBER DESCRIPTION PAGE
FOR INTERMOUNTAIN GAS COMPANY: (Continued)
1-5.Unbil-l-ed Adj ustment Premarked
Admitted 234
L6.Deficiency in Operating
Revenue
Premarked
Admitted 234
]-7.CV of Branko Terzic Premarked
Admitted 261
18.Letter from Patrick Shannonto Lori Blattner, 6/22/L6
Premarked
Admitted 323
19.Distribution PIant Mains Premarked
Admitted 323
20.Class Cost of Servi-ce Study
Current Return
Premarked
Admitted 323
2L.Class Cost of Servi-ce Study
Account Detail Premarked
Admitted 323
aaz,L.Class Cost of Service Study
Account Inputs
Premarked
Admltted 323
23.Cl-ass Cost of Servj-ce Study
External- Al-l-ocations Factors
Premarked
Admitted 323
24.Rate Design Analysis andCalculations Premarked
Admitted 323
FOR THE AMALGAMATED SUGAR COMPANY:
502.Order No. 20966 in Case
No. U-032-134
Identified
Admitted
47]-
476
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BOTSE, IDAHO, WEDNESDAY, MARCH L, 2071, 9:30 A. M
COMMISSIONER RAPER: Good morning. This
is the time and place set
No. INT-G-L6-02, further
for a technical hearing in Case
identified as in the matter of
the application of Intermountaln
authority to change its
service to natural gas
This hearing is taklng
out of the way off the
Gas Company
charges for
in the State
for
natural gas
of Idaho.
rates and
customers
place to consider the general rate
72Lh, 2076,
natural gas
case filed with the Commission on August
seeking authority to increase rates for
servace.
My name is Kristine Raper. T'm the Chair
of today's proceedings. To my left is President
Kjellander, and to my right is Commissioner Anderson. We
comprise the
decision in
Commission and we will ul-timately render a
these matters. Housekeeping matters being
by taking
with the
record, we'11 begin this morning
of the parties and we can beginappearances
Applicant.
MR. WILLIAMS On behalf of the Applicant
the firmIntermountain Gas Company, Ron WiIIiams of
Williams Bradbury
COMMISSIONER RAPER: Thank you.
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MR
with the Attorney
Commission Staff,
KLEIN: Karl Klein and Sean Costello
General's office on behalf of the
and with me to my l-eft 1s Randy Lobb,
di-vlsion of the Publicthe dlrector of the utilities
Utilities Commi-ssion
COMMISSIONER RAPER: Thank you. Let's
see, we'Il work our way across the front.
MR. OTTO:Benjamin Otto with the Idaho
the Northwest Energy Coalition.Conservation League and
My witness Diego Rj-vas
before 11:00.
is on an airplane and wil-l be here
COMMISSIONER RAPER: Thank you.
ChairmanMR. RICHARDSON: Thank you,
Raper. My name is Peter Richardson with the firm
Richardson & Adams here
COMMISSIONER RAPER: You aren't coming
through on the microphone.
MR. RICHARDSON : Good morn j-ng . Thank you,
Commissioner Raper. My name is Peter Richardson with the
firm Richardson & Adams. frm here on behalf of the
Amalgamated Sugar Company, and
Blickenstaff, general counsel
to his left is our witness Dr.
to my left is Scott
with Amalgamated Sugar, and
Don Reading.
morning, Madam Chair,
Brad Purdy on behalf of the Community Action Partnership
MR. PURDY: Good
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Assoclation of Idaho, aka CAPAI, and to my l-eft is the
executive director of CAPAI Christlna Zamora.
COMMISSIONER RAPER: Thank you.
MR. STOKES: Good mornJ-ng, Chad Stokes for
the Northwest Industrial Gas Users, and on my left I have
Ed Finklea of the Gas Users and on my right Mike Gorman,
our expert.
COMMISSIONER RAPER: And is there anyone
that we've missed for purposes of identifying parties to
the record? We have Snake River Alliance who was a party
to the proceedings and is there a representative here for
Snake River All-iance? Okay, if anyone arrives, I guess
as we go through a witness list, I wilL continue to ask
so that they have an opportunity if need be to ask
questions or cross, and is there anyone here on behaff
the Federal- Executive Agencies who is also an intervenor
in the matter?
Okay, with that, welcome everyone. There
are more seats to this side of the Hearing Room if more
people come in. f don't know if you can point them in
that direction or not, but if we get more crowded, then
we stll-l- have some seating available, but it looks l-ike
all the parties have a mj-crophone that they have access
to, so are there any preliminary matters that need to
come before the Commission?
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MR. WILLIAMS: Madam Chair, Irve handed
out a schedul-e of witnesses. You and I have discussed
that. as weII as with some of the counsel. It is the
Companyrs preference with two exceptions that it present
its direct case followed by intervenors and Staff,
fol-lowed by the Company's rebuttal case. Two exceptions
to that would be Mark Chil-es when he comes up for his
direct testimony, we will- al-so spread his direct and
rebuttal, and the same for Allison Spector, and so the
cross-examination of the direct case wil-1 also include
the rebuttal-.
As we discussed at the Bench, there are
there will be issues of some rebuttal wi-tnesses that are
al-so di-rect witnesses and sometimes there' s not a clear
separatlon between what's direct testimony and what's
rebuttal, so there will the Company has agreed to some
latitude in that, although I wou1d ask that if something
is a l-ittle more distinct and comes directly out of the
direct testimony that those direct testimony-related
questions occur when the witness appears on direct. To
the extent it's a blendlng and if the questions are
occurring in the third part of the phase when there's
rebuttal, then we wiII be ffexible.
COMMISSIONER RAPER: Okay, and you and I
did speak before the proceedings and for purposes of the
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record, my feedback for that was
Those questions besides the two
about will be only on the direct
that direct is direct.
witnesses that you spoke
testimony of those
necessarily is sometherewj-tnesses, but in rebuttal,
link from rebuttal- from the
wil-l be given latj-tude.
MR. WILLIAMS:
so to the extent the direct
the questions are related to
direct testimony and those
That would be correct and
case is being presented and
rebuttal, it woul-d be our
wiIl be handl-ed?
preference that they reserve those questi-ons for rebuttal-
and wil-I be objected to if it becomes too apparent that
j-t's just rebuttal cross-examj-nation.
COMMISSIONER RAPER:Okay. Are there any
how that will bequestions from any of
handled, how rebuttal
the parties on
MR. RICHARDSON: Madam Chair, Peter
Richardson with Amalgamated.
COMMISSIONER RAPER: Yes.
MR. RICHARDSON: The Amalgamated
Company would also like
Dr. Reading as rebuttal
Company is planning to
him at the same time.
to spread the testimony
and direct separately as
Sugar
of
the
do
COMMISSIONER RAPER: Okay.
MR. RICHARDSON: rather than sponsoring
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COMMISSIONER RAPER: Okay
MR. WILLIAMS: Madam Chairman, but
Dr. Reading's rebuttal- testimony
direct case. I think it woul-d be
is rebuttal- to our
appropriate for in that
case and f think thatdirectinstance he's rebutting the
his cross-examination on his
happen at the same time.
COMM]SSIONER
rebuttal testimony shoul-d
RAPER: Well-, by rul,e, the
so whether Dr. Readj-ng has
his dlrect , if he's the last
Company gets the l-ast
his rebuttal sometime
witness, it will occur
bite,
after
at the same time.
MR. WILLIAMS: Okay, I misunderstood.
Okay, so exactly, so my
when he's on the stand
cross-exami-nation for Dr. Reading
wil-] be first his direct testimony
He wouldand then we wil-l go to his rebutta1
not be appearlng after the Company's
COMMISSIONER RAPER:
MR. WILLIAMS: Okay,
that.
I apologize.
testimony.
rebuttal.
No.
I misunderstood
MR. RICHARDSON: That was not our intent,
COMMISSIONER RAPER: Would it
you, Mr. Richardson, if
and that way his direct
same time lust prior to
we just present
and rebuttal can
be okay with
Reading lastDr.
occur at the
the Company's rebuttal?o 25
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MR. RICHARDSON: That would be fine,
Madam Chair.
COMMISSIONER RAPER: Okay, that is the way
we will proceed. Are there any other preliminary
matters ?
MR. STOKES : Yes, Chair, w€ would ask that
be rel-eased after the hearingMike Gorman, our expert,
today, if possible. We
happen this afternoon if
woul-d like his examinati-on to
that works for the parties.
there any
testj-mony after
COMMISSIONER RAPER: ATC
to Mr. Gorman presenting hlsobj ections
the Company has an opportunlty to present their direct?
MR. WILLIAMS : No ob j ections, Madam Chai-r,
and we'll see where we are as we get towards the end of
the day and it would be our intent to try and accommodate
Mr. Gorman's travel schedul-e.
COMMISSIONER RAPER: Thank you.
MR. OTTO: Madam Chair, one more point.
here beforeAs f mentioned,
11:00. I doubt
before that, but
as well, So
the 1ine, I
Diego,
we'Il-
I 'm j ust saying we' 1l-
guess.
COMMISSTONER RAPER:
on Thursday
back of
our witness, will be
be done with the Company's direct
he will be avail-abl-e all day
Okay, any other preliminary matters?
stand in the
Thank you, Mr. Otto.
We anticipate a
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multi-day hearing. If there is no objection, we wil-l-
break somewhere around midday for lunch. I think it's
probably
them as
not useful to schedule breaks in. We'l-1 take
time allows between witnesses and as partj-es need
I promise to aIlow something betweenan opportunity, but
now and the lunch hour and then something in the
afternoon. If anyone
are any matters that
needs anything in between or there
need to be discussed, then bring it
course of the hearing and weto my attention during
can certainly break as
the
needed.
f think we're ready to start with the
Company's first witness.
MR. WILLIAMS: Al-l right, the Company
woul-d call- Nicole Kivisto.
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9 KrvrsTo (Di)
Intermountain Gas Company
N]COLE KIVTSTO,
produced as a
Intermountain Gas Company, having been first duly sworn
to tel-l- the truth, the whole truth, and nothing but the
truth, was examined and testified as follows:
DIRECT EXAM]NATION
BY MR. WILLIAMS
O Ms. Kivisto, could you please state your
record?
business address is
North Dakota, 58501.
name and business address for the
A Nicole Kivisto. My
400 North Fourth Street, Bismarck,
witness at the instance of the
And what is your employment and yournY
position with
A
Intermountain
Montana-Dakota
0
bit closer so
the Company?
I am the president and CEO
Gas Company, Cascade Natural
Utilities, and Great Plalns
And can your microphone be
the court reporter can hear
of
Gas,
Natural- Gas.
moved a l-ittl-e
you? So
prefiled into haveMs. Kivisto, if I -- did you cause
this case direct testimony of five
A Yes, I did.
O And if I were to ask
questions contained in that preflled
pages ?
you today the
direct testimony,o 25
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KrvrsTo (Di)
Intermountain Gas Company
woul-d your answers be the same with a couple of numerical-
adj ustments ?
A
u
to us?
A
true-up to our
requirement of
1?
MR.
Certainly. On
test period, we
9.4 which would
page 2, line L3, wj-th the
have filed a new revenue
replace the 70.2 on l-ine
That i-s correct.
And coul-d you point those adjustments out
WILLIAMS: A11 right, so Madam Chair, wlth
that, I woul-d ask that Mr. Kivisto's direct testimony be
spread upon the record as if read and she is avail-abl-e
for cross-examination.
COMMISSIONBR RAPER: Okay, without
objection, we
the record as
Iike Exhibit 1
to admit exhibits
through them with
that ?
at the end or do
will- spread Ms. Kivisto's testimony across
if read, and you had an exhibit, would you
to be admitted?
THE WITNESS: Please.
COMMISSIONER RAPER: Without objection
MR. WILLIAMS: Madam Chair, are you going
we do them as we get
witnesses? Do you have a preference on
COMMISSIONER RAPER: Might as well- as get
them in as part of the record.25
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Krvrsro (Di)
Intermountain Gas Company
MR. WILLIAMS: Al-1 right
COMMISSIONER RAPER: So we will- admit,
with no objection we'l-l- admit, Exhibj-t 1
(IGC Exhibit No. 1 was admitted into
evidence. )
of Ms
(The following prefiled direct testimony
Nicole Kivisto is spread upon the record. )
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Kj-visto, Di 1
Intermountain Gas Company
O. Please state your name and business address.
A. My name is Nicole A. Kivisto. My business
address is 400 North Eourth Street, Bismarck, North
Dakota 58501.
O. By whom are you employed and in what capacity?
A. I am the President and Chief Executive Offlcer
(CEO) of Intermountain Gas Company ("fntermountain" or
"Company") and Cascade Natural Gas Corporation (Cascade),
subsidiaries of MDU Resources Group, Inc. (frMDU
Resources") I am al-so the President and CEO of
Montana-Dakota Utilities Co. (Montana-Dakota) and Great
Plains Natural Gas Co., both divisions of MDU Resources.
O. Pl-ease describe your
professional- experiences .
A. I hol-d a bache.l-or's
educational background and
degree in accounting from
have worked forMinnesota State Universlty Moorhead. I
MDU Resources/Montana-Dakota for twenty years and have
been in my current capacity since January, 2015. I was
Vice President Operations of Montana-Dakota and Great
Plains Natural- Gas Co., divisions of MDU Resources, from
January 2074, until assuming my present position. Prior
to that, I was the Vice President, Controller and Chief
Accounting Officer for MDU Resources for nearly four
years, and held other finance-rel-ated positions prior to
that.z5
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Kivisto, Di 1a
Intermountain Gas Company
O. Please describe your duties and
responsibil-ities with the Company.
A. I have executive responsibility for the
development, coordination, and implementation of
strategies and policies relative to operations of the
above mentioned companies that, in combination, serve
over one million customers in eight states.
O. What is the purpose of your testimony?
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Kivisto, Di 2
Intermountain Gas Company
A. I w1l-l- provide an overview of fntermountain and
wil-l- summarize the key drivers behind the Company's need
an overview of thefor rate rel-ief . I will also provi-de
MDU Resources organizational structure and operations
that allows cost savings to ffow through to Intermountain
and its customers in Idaho. f am also avail-abl-e to
answer questions of a general nature, and that relate to
MDU Resources' support provided to Intermountain. Scott
Madison, who is the Executj-ve
and Business
Vice President, Western
Development, ofRegion Operations
Intermountain and
Mr. Madison wil-1
lj-ves in Boise, reports directly to me
introduce the other witnesses in this
case and provide more detail- on some of the key drivers
behind this rate case filing.
O. Would you briefly explain why the Company is
seeking a raLe increase at this time?
A. The rate increase of $9.4 mil-lion being
requested in this filing is necessary for the Company to
continue to provide quality service to 1ts 339,000
customers in Idaho and to improve service by investing in
new and replacement lnfrastructure. For these reasons,
Intermountain continues to make capital investments in
utility plant. Intermountain has spent approximately
$551 mil-Iion in capital addi-tions, primarily natural gas
main l-ines and services, since its l-ast general rateo25
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Kivisto, Di 2aIntermountain Gas Company
case. The Company's rate base of approximately $66.4
mill-ion as fil-ed in its last rate proceeding in 1985 has
increased to about $231 million, ES fil-ed in this
proceeding. Operating costs, excluding Cost of Gas and
j-ncome taxes, have also increased since the l-ast rate
f1ling from approximately $26.8 million to approximately
$11,.1 million, or an increase of fi44.9 million. An
increase in rates is also necessary to attract sufficient
capital dollars from investors, which will be
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Kivisto, Di 3
Intermountain Gas Company
used to maintain and improve quality servj-ce to our
customers, provide adequate operating and maj-ntenance
coverage, and malntain a sound financial positi-on.
O. What are some of the major areas of operating
cost increases?
A. Depreciatlon expense related to the capital
investments made by the Company has significantly
increased since the Company's last general rate case.
The Company has also experienced signlficant operating
cost increases associated with information and customer
support technology systems, medical expenses and the cost
of federal regulatory compliance, and pipeline safety.
These and other expenses are discussed more fuIly in the
testimony and exhibits of Company witnesses, Hart
Gilchrist and Jacob Darrington.
O. Please discuss how fntermountain is managj-ng
costs and the Company's effort to mitigate the impact of
increased costs on its customers?
A. Intermountain has a long history
increasing cost pressures in order to avoid
cases. This is evidenced primarily by the
decades between this general rate case and
of mitigating
filing rate
severaf
the Companyr s
since thefast general
acquisition
s ynergi st ic
rate case in 1985. In addition,
by MDU Resources, Intermountain has found
savings in the form of joint senioro25
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Kivisto, Di 3a
fntermountaln Gas Company
management, a unified customer service center located in
Meridian, Idaho, joint billing and payment processing,
also l-ocated 1n fdaho, and uniform accounting and
customer information system software. fntermountain has
al-so significantly reduced its cost of debt.
O. Do you have an exhibit that shows how
Intermountaj-n fits withln the MDU Resources' corporate
structure ?
A. Yes. Page 1 of Exhibit No. 1 shows an
organizational chart of MDU Resources and its affiliated
operating utilities and support companies, including
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Intermountain. As shown on this page, there are a number
of operating subsidiary companies that are not part of
what I will refer to as the "MDU Utilities" that are
regulated operatj-ng companies and share common
administrative and general (A&G) costs. Page 2 of
Exhibit No. 1 shows all of MDU Utilities operations and
those utilities' respective service territories and the
states 1n which they operate. As you can see from the
ftdp, Intermountain is the franchised gas utiJ-ity serving
southern Idaho.
O. What cost savings have resulted from the MDU
Utiflties affifiatlon?
A. There has been meaningful cost savings that
have flowed through to Intermountain as a result of MDU
Resources' acquisition of Intermountain. Tabl-e 1 bel-ow
is chart showing Intermountain's A&G costs for 201,5 and
for the pre-acquisition year of 2005
Kivisto, Di 4
Intermountaj-n Gas Company
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3
Kivisto, Di 4aIntermountain Gas Company
lntermountain Gas Company
A&C Costs
2007 - 2015
s25,flr0,(m0
$zo,qro,flto
s15,qr0,000
s10,fit0,fl10
ss,filo,ooo
so
2W7 2008 2fl,g
{-A&G
2010 20Lt 2015
Table K.1
As you can see from Table K.1,A&G costs for the Company
Iarge part to
MDU Resources.
have decreased by
the greater scale
l9Z since 2001, due in
efficiencj-es brought by
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Kivisto, Di 5
Intermountain Gas Company
O. What has been the impact on fntermountain's
customers related to this A&G cost savings?
cost savings did not come at theA.
expense
service.
the same
These A&G
of the Company's commitment to qual-ity customer
Rather, Intermountain was able to do both at
time; increase j-ts customer service quality
whil-e reduclng A&G costs.
O. How does Intermountain's customer satisfaction
compare to
A.
other similarly situated util-ities?
J.D. Power conducts annual surveys of customer
satisfaction for residential- gas utilities. In 2073
Intermountain tied for first place in J.D. Power's
midsized gas util-itiescustomer service
operating in the
ranked third and
ranking
west.
for
In 2074 and 2015 Intermountain
second, respectively, in overal-1
customer satj-sfaction according t.o J.D. Power
O. Does this conclude your direct testimony?
A. Yes. Thank you,
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CSB Reporting(208) 890-s1e8
KTV]STO
Tntermountain Gas Company
(The following proceedings were had in
open hearing. )
COMMISSIONER RAPER: And your witness.
Are you opening her up for cross?
MR. WILLIAMS: Yes, she's open for
cros s-examinati-on .
COMMISSIONER RAPER: Thank you. Staff?
MR. KLEIN: Staff doesn't have any
cross-examination for this witness.
COMMISSIONER RAPER: Thank you. Northwest
Industrial Gas Users?
MR. STOKES: No questions, Your Honor.
COMMISSIONER RAPER: CAPAI?
MR. PURDY: I have no questions. Thank
you.
COMMISSIONER RAPER: Mr. Richardson?
MR. RICHARDSON: Amalgamated has no
questlons for this witness, Madam Chair.
COMMISSIONER RAPER: Mr. Otto?
MR. OTTO: No questions.
COMMISSIONER RAPER: Any questions
the Commissioners? Thank you, Ms. Kivisto.
THE WITNESS: Thank you.
(The witness left the stand. )
MR. WILLfAMS: That's a good slgn.
from
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CSB Reporting(208) 890-s198
MADTSON (Di)
Intermountain Gas Company
COMMISSIONER RAPER: You may call your
next witness
MR. WILLIAMS: The Company would call as
its next witness Mr. Scott Madison.
SCOTT MADTSON,
produced as a
Intermountain
witness at the instance of the
Gas Company, having been flrst duly sworn
to tell- the truth,
truth, was examined
the whole truth,and nothing but the
f ol-lows:and testi-fied as
DIRECT EXAMTNATION
BY MR. WILLIAMS
O Woul-d you
the
please state your name and
record?business address for
A My name is Scott Madison. My business
address is 555 South Col-e Road, Boise,
position do
Idaho, 83709
nY
Company?
A
general manager
opportunity for
Resources.
And in what you serve the
My position is executive vice presi-dent,
of western region, and business
Intermountain Gas Company or for MDU
O And Mr. Madison, are you the same Mro25
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CSB Reporting
(208 ) B 9o-s198
MADTSON (Di)
fntermountain Gas Company
Madison that prefiled direct testimony in this case of 13
pages ?
Yes,
And
sir, I am.
you have no exhlbits?
I have no exhibits.
And with the exception
that you're going to
of, again, some
A
A
o
numerj-cal updates
if I were to ask
thls direct testimony,
you please l-ead us all
you the same questions
point out to us,
as contained in
my
21,
On
would your answers be the same as
through the changes?
answers woul-d be the same, except
similar to Nicole, it's a true-up
line 27, the number 10,165,700
A Yes,
for on page 5, l-ine
to our test period.
would be changed to 9,351,675 or 3.70
27 as filed.
percent from the
4.04 percent on line
0 Al-I right; so with those changes, again,
if I asked you these questions, your answers would be the
same as in this prefiled direct testimony?
A Yes, they would.
MR. WILLIAMS: So Madam Chair, I would ask
that Mr. Madison's direct testimony be spread upon the
record as if read, the questions and answers, and then
Mr. Madison is availabl-e now for cross-examination.
COMMISSIONER RAPER: Without oblection, we
wil-l spread Mr. Madison's testimony on the record as 1fo25
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read.
(The foll-owing prefiled direct testimony
of Mr. Scott Madison is spread upon the record. )
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CSB Reporting(208) 890-5198
MADISON (Di)
Intermountain Gas Company
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Madison, Di 1
Intermountain Gas Company
O. Please state your name and business address.
A. My name is Scott Madison.
O. By whom are you employed and in what capacity?
A. I am Executive Vice President, Western Region,
Operations and Business Development, for Intermountain
Gas Company ("Intermountain" or the "Company") and
Cascade Natural- Gas Corporat.ion (Cascade) . Intermountain
and Cascade are whol-Iy owned subsidiaries of MDU
Resources Group, Inc. (MDU Resources) headquartered in
Bismarck, North Dakota. Intermountain is headquartered
in Boise, Idaho and Cascade is headquartered in
Kennewick, Wash.i-ngton.
O. Pfease describe your educational background and
professional experiences.
A. I am a graduate of the University of Idaho with
a Bachelor of Science degree in Accounting. I have
participated in several executive education programs,
the Harvardincluding attending
Business School. I
Association and the
Chairman EIect and
executi-ve education at
the Idaho Association of Commerce and Industry, and the
Boise Metro Chamber of Commerce, and am the former
President of the Idaho Petroleum Council. I have served
as Chairman of the Board for the Better Business Bureau
am a Di-rector of the Northwest Gas
Western Energy Institute. I am
a member of the Executive Committee of
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Madison, Di 1aIntermountain Gas Company
of Idaho.
O. Please describe your work experj-ence.
A. I served as Vice President, Controller and
Chief Accounting Officer
each of its subsidiaries
for Intermountain Industries and
from L991 to 2008. 'From 1987 to
L991 I was a Senior Manager with Arthur Andersen LLP. I
ama
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Madison, Di 2
Intermountain Gas Company
Certified Public Accountant and a member of the American
Institute of Certifled Public Accountants and the Idaho
Society of Certifled Public Accountants.
O. Pl-ease describe your duties for Intermountain
and Cascade.
A. I oversee the day-to-day operations of both
util-ities. My office 1s
0. Pl-ease provide
A. Intermountain
Company's existing retail
situated utilities. I am
Iocated here in Boise.
a bri-ef overview of the Company.
distributionprovides naturaf gas
243services to '75 communities in Idaho, wj-th dedicated
employees. During 2015, Intermountain had an average of
334,650 customers in Idaho and the Company's headquarters
are located in Boise, Idaho. Intermountain was
incorporated in Idaho in 1950, and in 2008 became a
wholly owned subsidlary company of MDU Resources.
O. What is the purpose of your testimony?
A. First, I will introduce the other witnesses
providing testimony on the Company's behal-f. My
testj-mony will then summarize the Company's rate increase
request, identifying the primary drivers behind the need
for rate rel-ief . Specifically, I wil-l- explain how
customer growth has helped push Intermountain into
needing a general rate increase. I will-
rates with other
compare the
si-milar1y
also available to answero25
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Madison, Di 2a
Intermountaj-n Gas Company
questions of a general nature.
O. Would you please introduce and provide a brief
description of each of the witnesses filing testimony on
behalf of Intermountain in this proceeding?
A. Yes. In addition to me, the fol-l-owing witnesses
have, or wiII, present direct testimony on behalf of
Intermountai-n:
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Madison, Di 3
Intermountaj-n Gas Company
Ms. Nicole A. Kivisto, President and Chief
Executive Officer (CEO) of fntermountain, has provided an
wlth otheroverview of the Company and its rel-ationship
MDU Resources' companies and MDU Utilities, and the
economies of scale savlngs thls lnterrelationship brings
to Intermountain. Ms. Kivlsto summari-zed the need for
rate relief and highlighted the importance of attracting
needed to build andthe necessary
maintain the
capital investment
Company' s infrastructure.
Mr. Hart Gilchrist, Vice President of
Operations, wil-I explain how a gas company operates, will
present evidence regarding the Company's operations and
mai-ntenance expenses and share the results of the A&G
cost study and point out how Intermountain's A&G costs
compare to other companies as well as compared to pre and
post-acquisition by MDU Resources. Mr. Gilchrist wiLl-
al-so discuss Intermountain' s investment j-n natural gas
i-nf rastructure.
Mr. Steve Gaske, Senior Vice President of
Concentric Energy Advisors, wiIl testify as to the
Company's cost of capital and present studj-es that
support his recommended fair rate of return on
Intermountain' s common equity.
Mr. Mark Chil-es, Vice President,Regulatory
the company'sAffairs and Customer Servlce, will address25
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Madison, Di 3a
Intermountain Gas Company
capital
and the
structure, the proposed cost of embedded debt,
overall rate of return. He will also discuss
fntermountain's commitment to outstanding customer
servace.
Mr. Ted Dedden,Director, Accounting and
wil-l- address Intermountain' s
earnings as wel-l as the cross
companies.
Finance for the
unadjusted rate
charges between
Company,
base and
af f il-iate
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fntermountain Gas Company
present Intermountainr s
calcul-ate the Companyr s
deficiency.
Mr. Jacob Darrington,Regulatory Analyst, wifl-
rate base and wiII
current revenue
regulated
regulated
Mr. Branko Terzic, Managj-ng Director, Berkley
Research Group, will present testimony in support of the
Company's proposal to increase customer charges to the
resldentj-aI and commercj-a1 markets, implement a demand
charge for the Company's industriaf customers and the
reasons supporting the implementation of the Company's
proposed fixed cost collection mechanism (FCCM) .
Ms. Lori Blattner, Senior Regulatory Analyst, wiII
present the Company's Cost of Service study (COS) and
wilI discuss other proposed changes to both residential
and general service rates and tariffs.
Mr. Dave Swenson, Manager of Industriaf
Services for Intermountain, will explain proposed changes
for the Company's industrial tariffs that wilI provide an
incentive for economic development and industrial-
expansion within the Company's service territory.
Director of theMr. Dan Kirchner, Executive
Northwest Gas Association, w111 discuss the current
electric industry
power plants, and
of natural gas versus
shift from coal to natural gas flred
the comparative
electricity,
benefits of direct use
for space and water,tr.
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Madison, Di 4aIntermountain Gas Company
heating.
Ms. Allison Spector, Manager of Conservation
Policy
discuss
energy
for the Company and Company affiliates, will
the development of IntermounLainfs proposed
efflciency and demand side management programs.
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Madison, Di 5Intermountain Gas Company
Utilization for
implementation
management programs
tariffs.
Ms. Cheryl Im1ach,Manager of Energy
wil-l- discuss thethe Company,
of Intermountain's proposed demand side
to include the proposed program
Mr. Michael McGrath, Director,Regulatory
Company' s
and wil-1
Affairs, will
general rate
discuss the history of the
cases before the Commissi-on
introduce the Companyrs proposal to implement a fixed
cost collectlon mechanism (ECCM) . Mr. McGrath wil-l- also
present the proposed tarlff changes.
0. Do you have an initial observation regardlng
this rate case filing and general rate increase request?
A. Yes. Intermountai-n faces many challenges in
running a natural gas distributlon business, which
chalJ-enges include maintaining a safe and reliable
distribution system for a growing customer base,
installing new and expensive customer care and billing
system, and significant capital spending and associated
depreciation expense related to replacing core
infrastructure. Despite these expense related
challenges, the Company has been able to provide to its
customers the lowest natural pri-ces in the region, Lf
not the country, and to
to file a general rate
gas
foravoi-d several- decades having
rncrease.25
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Madison, Di 5aIntermountain Gas Company
o.
requested
Woul-d you please
increase in this
summari ze Intermountain I s
A.
require
Increasing rate
Intermountaln to
filing?
base and operating expenses
request a rate increase of
$9,35L,6L5, or 3.102. Thls increase is based on an
overafl- rate of return of 1 .42% with a capital structure
common equity component of 50% and a return on equity of
9.90%. The Company is using a 2016 test period that is
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Intermountain Gas Company
six months actual and six months forecast.
average annual usage l-evel- of 141 therms per
will see a
$46. B3 to
last general rate
Based on an
year, the
bill
$49.]-4.
average
increase
o.
filing?
A.
RS-2 residential customer
of $2.31 per month, from
When was the Company's
1985.
O. What are the Companyrs current
commerci-al rates, the proposed rates in
residential and
this case, and
the percentage rate
A. Table M.1
changes over the
primary driver of
increases by
below shows
class ?
the Company's percentage
rate increase request for Intermountaj-n's different rate
schedules.
Table M.l
Rate Schedule Current
Rate
Proposed
Rate
o/o
Increase
$ Monthly
Increase
RS-l Residential $0.89ffherm $0.92lTherm 3.26Yo $1.16
RS-2 Residential $0.7SlTherm . $0.79lTherm 4.93Yo $2.31
GS-l General Service $0.69lTherm $0.73lTherm 6.29o/o $12.16
a. What has been the Company's history of rate
A. Shown below on
last ten years, and what has been the
those rate changes?
Tabl-e M.2 are rate
Intermountain's residential customers from
histories for
1985 through
201"6. As the Company has not
increase request since 1985,
filed a general rate
the retail residential- rate25
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decreases occurring from 2007 through 20L6 are entirely
resul-t of the drop in the whol-esal-e price of gas.
a
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Intermountain Gas Company
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Intermountain Gas Company
Table M.2
r{TERltouNTAtil Aes collFl-uv
Residertial Price History
150.0
r25,0
't00,o
Eo-cF
oo.!
Eo(,
75-O
a1irtr
a
I_H ----Iz Ls)_o
25.O
0-o
ac,oN
toN
@ots
(\'o
F
t-oo
o
o
ra
o
I)6
-+--R$1 +-R$2
O. How do Intermountain's retail rates compare to
other natural gas utilities?
A. The company has worked hard to manage its
business for the benefit of its customers since its Iast
general rate case, whj-ch was over
hard work has resul-ted in some of
thirty years ago. This
the most affordabl-e
U.S. Tabl-es M.3.1 andresidential- prices
M.3.2 beIow, whlch
in the Western
were prepared at my direction and are
as of JuIy 2076, comparebased on tariff reviews
Intermountain's residentia] and commercial rates to
residential and commercial rates of other gas util-ities
in the Northwest.25
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fntermountain Gas Company
Table Mjt.l- Comparison of IGC Residential Rates to other Northwest LDC Rates
Residential Bill - 100 Therms
Northwestern US(1)
$114.31 III $9r.83 se1.73 $8&rs $rs.ss ggs.r,trrIII 514s2I
lGc-rDAvista-OR NW Nat-OR ENSTAR-AK CNG-WA Avista-WA NW Nat- CNG-OR Avista-lD PSE-WA
WA
(11 Data taken from tariffs as ot7/712016,
Table M.3.2- Comparison of IGC Commercial Rates to other Northwest LDC Rates
Commercial Bill - 1,000 Therms
Northwestern US(1)
$963
s9O1 Ssss $eor Sssz
t776 5749I itzt $ese $on
Avista-OR CNG-WA NW Nat-OR NW Nat- ENSTAR-AK Avista-WA CNG-OR
WA
PSE-WA AViSIA.ID IGC.ID
(1) Data taken from tariffs as ot7/112016.
As shown on Table M.3.1, comparj-ng resi-dential bills
for 100 therms consumed, Intermountain had the lowest
bill out of ten different gas utility bilts surveyed for
utilities in the Northwestern U.S. (AIaska, Idaho,
Oregon, and Washington). Table M.3.2 shows the same
results regarding commercial gas utility rates, where the25
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Company had the l-owest bill out of ten for 1,000 therms
consumed. The
Madison, Di 8a
fntermountain Gas Company
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Madison, Dl 9Intermountain Gas Company
metrics shown on Tables M.3.1 and M.3.2 validate the
Company's commj-tment to managing its business for the
benefit of its customers.
O. How do Intermountain's A&G expenses compare to
other natural- gas utilities?
As shown on Tables M.4.1, M.4.2 and M.4.3
Intermountain's A&G expenses, oo a per customer basis,
are consistently well be1ow the average expense level of
al-f gas utilities, regional gas utillties, and like sized
gas util-ities incl-uded in the SNL data base.
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Madison, Dl 9aIntermountain Gas Company
Table M.4.1
A&G/Customer: All 5NL Listed Gas Utilitiess600
$soo
s400
&oo(J
$zoo
5100
s-
s(100)
Sros Sroz 5uo Srrg Srrg Srzo $tzt Srzs S121
2007 2008 2009 2010 20LL 2012 2013 2ot4 2015
year
min IIMG :max -e-average
Table M.4.2
A&G/Customer: SNL Regional Gas Utilities
$rso
Sloo
Sso
s-
s80 Sgz Sgo 5se Sae Seo s8s Sse 5gr
oU
2oa7 2008 2009 2010 2011
Year
2012 2013 2014 2015
min IIMG Imax -i.average
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Madison, Di 10
Intermountai-n Gas Company
S+oo
s300
8 szooL)
Sloo
s-
$roz
Table M.4.3
A&G/Customer: SNL Like-Sized Gas Utilities
9ror s110 Sns SLZZ Sur SrrE $rra Srrz
2007 2008 2009 2010
rate increase proposed in this
effect of the two filingsr oD
approximate 2Z rate reduction
2012 2013 2A74 2o1s
face, is an
for our customers.
2411
Year
min eslMc ilmax -i-average
O. Is the Company proposing any rate changes in
this case related to the wholesale cost of natural gas?
A. No, fntermountain is not proposing changes in
this filing rel-ated to the commodity cost of natural gas
or upstream pipeline transportation costs. Changes in
the commodity/wholesale cost of natural gas and
transportation costs included in customersr rates are
addressed in the Company's annual Purchased Gas Cost
Adjustment (PGA) filing, which is occurri-ng
simultaneously with the filing of this case. The
concurrent PGA filing, if approved, will result in about
a 6eo rate reduction for Idaho customers. In other words,
the PGA downward rate adjustment is greater than the base
and the net ratecase,
their
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O. What are the factors causing fntermountainrs
request for a base rate increase j-n this filing?
A. Primarily, customer growth. Because of this
growth, the Company's rate base and depreciation expenses
are growing, along with concurrent increases j-n operating
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costs necessary to
addition to growth
serve this growing customer base. fn
stj-mulated investment and expenses,
Intermountain is also needing to replace information and
technology systems that are primarily customer servi-ce
related. Another reason for the Company's j-ncreasing
operating expenses relates to the regulatory demands
associated with pipeline safety regulations and
compliance.
O. You mentioned that growth is a significant
cost driver for this rate increase filing. Could you
explain that reason in greater detail?
A. Absolutely. Bel-ow is a table that charts
customer growth in the Company's service territory that
has occurred between 1985 and 2015.
Table M.5- 1985 2015 Customer Growth
lntermountain Gas Company
Average Residential and Commercial Customers
1985 vs. 20L5 Residenriar
302,790
300,000
250,000
200,000
150,000
100,000
Residential
85,418
50,000
Commercial
:11,860Conrnrercial
13,310w ry
t98s 2015
Year
Madison, Di 11
fntermountain Gas Company
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Intermountain Gas Company
O. Is Customer growth important for the Company
and the state of ldaho?
A. Yes. From a Company perspective, customer
growth is important in allowing Intermountain to spread
its fixed costs more broadly and lower the per-customer
fixed cost component of rates. I also consider customer
growth for the Company
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Madison, Di 72
Intermountain Gas Company
to be a key indicator of a growing, healthy and
diversified state economy. Company witness Dave Swenson
has additional testimony on this topic, on how
Intermountain could play a role in helping expand the
Company's customer base and contribute to growing the
state's economy.
O. You mentioned that growth al-l-ows the Company to
spread fixed costs more broadly among customers. If that
is true, why is growth also a driver of this rate
increase request?
A. Primarily because of Intermountain's
investment in non-revenue generating infrastructure, such
as pipeline expansion and replacement. There are l-ittle
or no additional- revenues associated with the Company
having to replace pipe that is at or nearing the end of
its useful life, or where we have to replace a four-inch
pipe with
diameter
an eight-inch pipe, because the smaller
can no longer meet the transportation demand at
that point in the system. Similarly, there 1s no
additional- revenue generated as a resul-t of
Intermountain's heavy i-nvestment in customer care systems
and information technology.
O. Please summarj-ze the Company's proposal in this
filing for a fixed cost col-lection mechanism?
A. As discussed in much greater detail by Company25
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Madison, Di 72a
fntermountain Gas Company
witness Mike McGrath and Intermountain's consultant on
this topic, Mr. Branko Terzic, the Company is proposing a
fixed cost col-l-ection mechanism (ECCM) that woul-d break
the link between therm sal-es and revenues. The FCCM
removes both the financial- disincentive to promote energy
efficiency, as well- as the i-ncentive for the Company to
increase earnings by promotlng gas usage. The FCCM would
all-ow
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Madison, Di 13
Intermountaln Gas Company
fntermountain to partner more effectively with customers
and other stakeholders to
without the conservation
on the Company's recovery
Company is proposing that
effective March 7, 2011.
support conservation efforts,
efforts having a negative
of utility fixed costs.
these mechanisms become
impact
The
a. Does this concl-ude your direct testimony?
A. Yes. Thank you.
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CSB Reporting
(208 ) 890-5198
MADISON (X)
Intermountaln Gas Company
(The following proceedings were had in
open hearing. )
my mic was off,
COMMISSIONER RAPER: I apologize, Connie,
and we will go to does Commission Staff
examination for the witness?
MR. KLEIN: No questions.
MR. STOKES: No questions.
COMMISSIONER RAPER: CAPA]?
MR. PURDY : No questi-ons .
COMMTSSIONER RAPER: Amalgamated?
have any cross
MR. RICHARDSON: Thank you, Madam
Chairman, Amalgamated does have a couple of questions.
CROSS-EXAMINATION
BY MR. RICHARDSON:
O Good morning, Mr. Madison.
A Good morning.
O I woul-d refer you to page 10 of your
direct testimony, and on that page, you note that there
are actually two rate change requests that have been
filed for by Intermountain Gas. That would be this
general rate case and concurrently there's a purchased
gas adjustment filing; correct?
A Correct.o 25
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CSB Reporting
(208 ) B 90-s198
MADISON (X)
fntermountain Gas Company
O And you also observe that the purchased
gas adjustment filing, or PGA case, results in a
reductj-on of overall rates of 6 percent, and that would
be at line 10. Do you see that?
A Yes.
O Does this reduction apply to what's called
the Company's weighted average cost of gas or usi-ng the
industry acronym WACOG, W-A-C-O-G?
A Yes.
O But you conc1ude this porti-on of your
twotestimony by stating that "the
filingsr oD their face, is an
reductlon for our customers";
net effect of the
approximate 2 percent rate
correct ?
That is correct.
But Intermountain Gas isn't taking credlt
for the 6 percent WACOG reducti-on, are
A
o
A Wel-I, our WACOG changes,
influence on our WACOG. I mean, it is
commodity pricing,
commodity pricing
example, we hedge
we didn't make that
higher costs 1n the
spot market. We've
or to have capacity
but also our ability
resul-ts in different
you?
but we do have
drlven by
to impact that
numbers. Eor
a significant portion of our gas. If
decision, we could be exposed to
wintertime if we only bought on the
entered into agreements to purchase
in storage faciliti-es, which a.l-lowsO25
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CSB Reporting
(208 ) 890-s198
MADISON (X)
Intermountain Gas Company
us to buy gas during the summertime, which has
historically been at l-ower rates and then del-iver that
gas to our customers in the wintertime when there are
higher rates, So that provides lower costs to our
customers, so in general, the driver of that is market
driven, but there are some things that we can infl-uence
in the WACOG pricing.
In addition, our rel-ationship with our gas
supply company provides a significant amount of pipeline
offset fees. Those pj-pelines are used when we're not
usi-ng them and those savings whi-ch are significant in our
WACOG and our PGA filings fl-ow back to our residential
customers, so the driver behind I would say the WACOG
change is a change in commodity prices, but there are
pieces of that that we have control of through our gas
purchase process.
0 So the essence of the WACOG is the market;
correct ?
A The essence, yes.
O So you're not suggesting, are you, that
this Commissi-on shoul-d consider the rate decrease in the
WACOG when it determines the reasonableness of your
base ratesrequested 4 percent increase in the Company's
in this case, are you?
A No, si-r.o 25
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CSB Reporting
(208 ) 890-s198
MADTSON (X)
Intermountain Gas Company
O So if the WACOG experiences a 6 percent
increase rather than a 6 percent decrease, your
recommendations for a rate increase in this case would
not be affected; correct?
Correct.
So you would agree, then, wouldn't your
that the rate case, that this rate case that the rate
A
u
case to recover
or a decrease,
changes 1n the
is essentially
WACOG, whether an increase
i-rrel-evant to whether the
Commission should
increase in rates
approve your requested 4 percent
in this case?
A f would say in this case it is irrelevant,
but the net impact to the bills to our customers are
impacted by the change in the WACOG, so I mean, I think
that was the point of this testimony was that overall-, af
you're a residential customer and you're Iooking at your
biIl, you woul-d have a net decrease, but I wou1d agree
with your line of questioning.
O So you do agree that your testimony on
this point is irrelevant to the Commission's decision on
the Company's rate case?
MR. WILLIAMS: Madam Chair, I befj-eve he's
already answered that question.
COMMISSIONER RAPER: Asked and answered,
sustained.o 25
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CSB Reporting(208) 890-s198
MADISON (X)
Intermountain Gas Company
MR. RICHARDSON: Thank you,
Madam Chairman, I think I made my point. Thank you, Mr
Madison.
COMMISSIONER RAPER: Mr. Otto?
MR. OTTO: No questions, Madam Chalr.
COMMISSIONER RAPER: Are there any
questions from the Commissioners?
Redirect, Mr. Wifliams?
MR. WILLIAMS: No redirect.
COMMISSIONER RAPER: Thank you, Mr.
Madison, for your testimony. I believe you are
excused.
THE WITNESS: Thank you.
(The witness left the stand. )
MR. WILLIAMS: The Company would call Mr
Hart Gilchrist.
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CSB Reporting(208) 890-s198
GILCHRIST (Di)
fntermountain Gas Company
HART GILCHRIST,
produced as a witness at the instance of the
Intermountain Gas Company, having been first duly sworn
to tel-I the truth, the whol-e truth, and nothing but the
truth, was examined and testified as follows:
DIRECT EXAM]NATION
BY MR. WILLIAMS:
O Sir, please state your name and buslness
address for the record.
A My name is Hart Gilchrist and my business
address is 555 South Col-e Road, Boise,
capacity do
Idaho, 83709.
you work for theO And in what
Company?
A I serve as the vice president of
operations for Intermountain Gas Company.
And are you the same Hart Gilchrist that0
prefiled Ll
one exhibit,
A
O
pages of
Exhibit
Yes, I
And if
direct testimony in this case with
No. 2?
am.
questJ-ons as contained
testimony -- wel-1, let
have a couple of edits
I were to ask you the same
in your prefiled direct
me back up. Mr. Gilchrist,
or changes to your testimony
do you
thato25
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CSB Reporting
(208 ) 890-s198
GILCHRIST (Di)
Intermountain Gas Company
you would like
A
v
A
reference is in
Then on page 4,
that shoul-d be
as well
al-so be
Exhibit
to make?
Yes, I do
Would you
Yes, sir.
Exhibit
Iine 5,
please point us to those?
On page 3, Iine L4, the
3. That should be Exhibit 2
the reference 1s to Gas Station,
then on l-ineGate,
6, the reference to
Stati-on, and
should also be Exhibit 2,
reference of Gas Station should
Station, G-a-t-e, and line J,
a reference to Exhibit 2, and
references
simil-ar programs
not true in
there, and that
oh, excuse me.
On page 5 at
does that remain
G-a-t-e,
Exhibit 3
as on line 6 the
changed to Gate
3 should also be
one final change on page 71 , line 3, it
"Cascade Natural- Gas is operating under
in both Oregon and Washington, " that is
Oregon, just Washington, that reference
is all.
O So with those changes
COMMISSIONER KJELLANDER :
line 1 there's a reference to Exhibit 3,
Exhiblt 3?
THE WITNESS: No, sir, thank you, that
shoul-d also be Exhibit 2
COMMISSIONER KJELLANDER: Thank you.
COMMISSIONER RAPER: Mr. Williams, go
ahead.o 25
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CSB Reporting
(208 ) 890-s198
GTLCHRTST (Di)
Intermountain Gas Company
O BY MR. WILLIAMS: So Mr. Gilchrist, if I
were to ask you
direct testimony
answers today be
the same questions contained in your
with those changes noted, would your
the same?
A Yes.
MR. WILLfAMS: Madam Chair, Mr. Gilchrist
is availabl-e for cross-examination.
COMMISSIONER RAPER: Without objection, we
wil-l spread Mr. Gilchrist's testimony across the record
as if read and admit Exhibit 2.
(IGC Exhibit No. 2 was admitted into
evidence. )
(The folfowing prefiled direct testimony
of Mr. Hart Gilchrist is spread upon the record. )
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Gilchrist, Di 1
fntermountain Gas Company
I. INTRODUCTION
O. Please state your name, title and business
address
A. My name is Hart Gilchrist. I am Vice President,
Operations, for Intermountain Gas Company. My business
address is 555 South Cole Road,
would
Boise, Idaho 83709.
O. Mr. Gilchrist,you please summarize your
educational and professional
A. I have been working
and at Intermountain Gas for
an Engi-neerlng Technj-cian in
experr-ence.
in the natural gas industry
I started as22 years,
the Boise
where
I was named Vice President, Operations
Prior to this role I have held numerous
District office.
in July 2015.
positions in the
operations department. In my current assignrpent, I am
responsible for corporate and field operations and
engineering functions for the Company. These activities
include transmission and distrj-bution integrity
management, corrosion, leak survey, damage prevention,
gas measurement, public awareness and lnstal-l-ation and
maintenance of natural- gas facilities in our distribution
system.
I have bachel-or's degrees in finance and marketj-ng
Idaho and an MBA from Boise Stateoffrom the University
University. I serve
board of directors,
on the United Way of
Boise State University
Treasure Va11ey
College ofo25
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Business and Economics Advisory Board, College of Western
Idaho Foundation Board, Amerj-can Gas Association Managing
Committee, Northwest Gas Association Board and Boise
Chamber of Commerce Advisory Board.
O. What is the purpose of your testimony in this
docket ?
Gilchrist, Di 1a
Intermountain Gas Company
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Gilchrist, Di 2
Intermountain Gas Company
A. My testlmony wiII cover several areas.
First, I will discuss the delivery chain involved in
bringinq natural gas from the welI-head to the consumer,
and the rol-e fntermountain plays in the last , part , or
1ocal distribution, of that delivery chain. Second, I
wifl provide some detail- on certain operatJ-ons and
maintenance expenses of the Company operating as a l-ocal
gas distribution company ("LDC"). Third, I wi]l- explain
the Company's focus on building and maintaining a safe
and rel-iable natural gas distribution system and the
costs j-ncurred in that endeavor. Fourth, I wj-11 explain
Intermountain's infrastructure replacement program and
spending and lay out a proposal for a future program and
regulatory case that would allow the Company to identify
parts of its distribution system that has aged or has
been ldentified as needing replacement per federal-
pipeline safety programs to the point where it needs to
be replaced in the near-term, and how Intermountain can
recover our replacement costs more quickly for a portion
of this pipeline replacement.
II. GAS SUPPLY CHATN
O. PIease describe fntermountain's delivery chain.
Where does Intermountain acquire its natural- gas and how
is the cost of that wholesale commodity passed through to
customers of the Company?o 25
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Gilchrist, Di 2a
Intermountain Gas Company
A First, it 1s important to distinguish the role
an LDC, and that it is not a
utility. By that, f mean it does
gas welfs that are ultimately used
Intermountain plays as
vertically integrated
not own any producing
to supply its retail customers in Idaho. Instead, the
Company contracts with
the gas needed to meet
provide service to its
a wholesale supplier to acquire
its regulatory obligation to
Idaho
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Gilchrist, Di 3
Intermountain Gas Company
Customers. Currently, Intermountain has contracted with
IGI Resources, Tnc., a who11y owned subsidlary of BP
Energy ("IGf /BP" ) to acquire wholesal-e gas on behalf of
Intermountain, and arranger or contract, for,
transportatj-on of that gas to the Company's various
distribution systems in southern Idaho. That
contacted-for delivery occurs over an interstate pipeline
system that is not owned by fntermountain, but in the
Company's case, is owned by Williams-Northwest Pipeline
Company ("NW Pipellne"). Prices for wholesal-e gas
acquired by IGIlBP on behalf of Intermountain are market
driven, while transportation costs paid to NW Pipellne
are at rate-of-return regulated prices set by FERC. Both
gas commodity costs and transportation costs are then
passed through, dollar for do11ar, to fntermountain's
customers pursuant to the Company's annual- Purchased Gas
Adjustment (PGA) cost recovery filing.
O. Please describe fntermountain's gas supply
chain.
A. Page 1 of
the gas supply chain
consumer. As shown
Exhiblt 2 is
from the gas
on this
a simplified
welfhead to
diagram of
the end
ground at the gas
with the varlous
we11head,
wells connected via
gas comes out of the
independently owned,
a gathering system
processing stat j-on.
diagram,
which is
to a gas compressor station and gaso25
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Gllchrist, Di 3a
Intermountaj-n Gas Company
IGIIBP will acquire a gas supply on behalf of
Intermountain from producers/wholesalers who represent a
well-head owner. It does not matter to Intermountain where
the gas originates; j-t's just a commodity to us. IGI
then contracts with one or more interstate pipeline
owners to move the contracted-for gas to a city gate or a
farm tap, where Intermountain takes delivery of the
wholesal-e gas and distributes 1t to our customers.
/
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Intermountain Gas Company
O. Please describe what happens once fntermountain
takes delivery of the wholesal-e gas.
A. The Company takes delivery of gas at a variety
of points on the NW Pipeline system that roughly
correspond with the various Idaho cities, towns and farms
served by Intermountain. Those multiple delivery points
Page 1
of
are the "Gate Station" box as shown on Exhibit 2,
Downstream from the "Gate Station" box on Page 1
Exhibit 2 is the portion of the diagram showing storage
facilities, compressor stations, distribution pipelines,
and industrJ-a1, commercial and residential consumers.
Atl of these facilities and infrastructure are designed
and buil-t to deliver gas supply to core market and
non-interruptible industrial customers on the coldest
peak-day period. The storage facilities, or liquid
natural gas (LNG) facillties are an additional failsafe
necessary to provide deliverabiJ-ity and rel-iability on
the col-dest peak-day period. Peak-day is defined as the
maximum daiJ-y quantity of gas distrlbuted through the
Company's system. Tn order to meet peak-day demand, the
Company has to design and bu1ld the distributj-on system
with enough capaclty (or using correct pipe size and
pressure blends) to meet this demand, regardless of what
the demand is on non-peak days. The Company receives the
gas at pressures between 500-80O psig and through a25
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Gilchrist, Di 4aIntermountain Gas Company
series of pressure
district regulator
cuts (via regulators at city gates,
stations and domestic regulators)
customers between 20 psig and 4 oz.del-ivers gas to
O. Where
our
does Intermountain provide retail gas
service in Idaho, and what is the Company's customer
base.
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Gilchrist, Di 5Intermountain Gas Company
base consists of 302,790
cusLomers and 31,860 commercial customers.
III. OPERJATIONS ATiID MAIINTENAIiTCE OF PI.ATiIT AI{D
FACILITIES
O. Pl-ease describe the Company's operation centers
in fdaho and elsewhere that support customers in Idaho.
A. The Company has a general office, five (5)
major operations centers with two (2) satellite service
A Page 2
Company's service
current customer
of Exhibit 2 shows a map
area in southern Idaho.
center in
of the
The Company's
residential-
These five
Twin
centers serving
customer servi-ce
Intermountain customers, as well as a
Iocated 1n Bolse, is made
Meridian. The general office,
up of Intermountain's
administrative staff. This staff includes
Intermountain's executive team and employees that lead
Intermountaj-n's safety, training, operations,
engj-neering, accounting, regulatory, human resources,
cash processing, marketing/public reJ-ations, information
technology and geographic information systems. Each of
the five operations centers is made up of our operations
and service groups. These groups provide all- field
service activities, operations and maj-ntenance (pipeline
safety compliance) activities, customer acquisitlon
activities and emergency response activities:.
operations centers are located in Nampa, Boise,o 25
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Intermountain Gas Company
Ealfs, Pocatello and Idaho Fal-1s. The two satellite
service centers, located in
respectively, provide field
Hailey
service
and Soda Sprinqs,
activities and
emergency response
The MDU Resources'
activities in our more remote areas.
customer service center, located in
Meridian, serves over a mll-l-ion customers in eight (8)
states across 4 brands: Intermountain,
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Gilchrist, Di 6
Intermountain Gas Company
Cascade Natural Gas, Montana-Dakota Utilitles and Great
Plains Natural Gas. The 2070 addition of the customer
service center has been an asset to Idaho's economy and
Intermountain is fortunate that MDU Resources selected
Idaho and Meridian in particular to make this signlflcant
capital investment for j-ts customer service center.
O. Coul-d you please describe the effort and
i-nvestment the Company has made in information and
technol-ogy systems?
A. Yes, but first let me set the stage for you.
In 1985, Intermountain served less than 100,000 customers
with approximately 425 employees, compared to serving
approximately 330,000 customers today wlth 241 employees,
plus shared services employees. We have been able to
achieve thls significant reduction in
customer-to-employee ratio through several- avenues:
transformation of the personal computer,' operations
mobile field solutions, incfuding electronic fiefd order
completion and Ieak survey; implementation of encoder
receiver transmitters (ERT's) on customer meters;
integrated geographlc information system (GIS) ;
el-ectroni-c pipeline safety compliance system that
interfaces with GIS and; electronic work management
system. Each of these technol-ogy implementations has
al-l-owed Intermountain to streamllne work processes,o 25
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reduce paperwork and back-office activities and continue
to maintain a safe,rel-iab1e distribution system.
O&M costs historically been
or deferred in the past?
O. How have
maintained, reduced
A One example,
pertains to the
as referenced above related to
ERT' s,200L-2002 implementation of the
(AMR) system. Thecompany' s automated meter reading
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Intermountaj-n Gas Company
AMR system i-ncluded the installation of approximately
280r000 ERTrs on customer meters and the implementation
of three mobil-e collectors installed in vehicles to
capture monthly meter reads. Prior to the implementation
of the AMR system, Intermountain collected monthly
foot, using 2J meLercustomer meter reads
reader staff.Upon
abl-e
staff of employees
as wel-l- as natural
manua11y,
completion
to read the
on
of the AMR implementation,
same amount of customerthe company is
meters with 7 employees. Intermountain continues to read
330r 000 customer meters today with the same number of
employees, thus deferring additional O&M costs of
addltional employees since 2007.
rV. SAFETY
a. Many of fntermountain's operating expenses
to both customerrelate to the Company's commitment
safety and employee safety. Please give us an idea of
the safety systems the Company has in place regarding
customer safety, and how that impact's system operations.
A. fntermountain is committed to customer safety.
As part of this commitment, Intermountain has an
extensive pipeline safety program, which will be
discussed later in this testimony as well- as a dedicated
to address customer needs and concerns
gas emergencies. The company's first
responders are trained to assess, make safe and repairo25
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Intermountain Gas Company
any abnormal- operating conditions on the distribution
system. This group of employees is made up of service
technicians and constructj-on crews. The company keeps
employees in these positions on stand-by 24 hours per
duy, seven days per week to allow for quick response to
customer needs, facility damages and outages. This is
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Gilchrist, Di I
Intermountain Gas Company
accompli-shed by investing in safety and ensuring a
qualified workforce. A11 of our operations employees go
through a series of training modules covering aIl- aspects
of their jobs and have to display competency through
testing and hands-on evaluatj-ons. This program is called
Operator Qualification. Additj-onal1y, our service
technicians go through an extensive service technician
apprentice program which consists of cl-assroom training
as welf as ride-al-ong's with seasoned employees. Service
technicians cannot be on-ca11 or respond to emergencies
on their own until the successful completion of the
f ul-I year. All ofapprentice program which takes one
these programs help ensure that the
qualified workforce that prudently
distribution system and provides a
customers.
0. You also mentioned employee
second part of Intermountain's safety
elaborate?
A. Intermountainrs employee
company provides a
operates the
safe system for our
safety as the
commitment. PIease
safety goal is
drive towards zero
injuries. As such,
"Commitment to Zero",
vehlcle accidents and
evidencing a
zero employee
the Company views safety as
reality it is an operating
InLermountain' s Commitment
in investment, although in
expense. As part of
to Zero Lhe Company provides25
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al-I necessary Personal- Protective Equipment (PPE) to its
employees. This incfudes the likes of hard hats, safety
glasses, high vlsibility clothing, gloves, safety toe
footwear, etc. The Company also provides its employees
with regular safety training as wel-1 as defensive driving
tralning specifically geared toward zero accidents.
Tntermountain's belief is that a seri-ous commitment to
and
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Intermountain Gas Company
investment in safety will help to ensure that
Intermountain I s employees go home in the same condition
they came to work in.
0. What are some of the federal safety
requirements that are driving the Companyrs maintenance
costs ?
A. fntermountain has several processes or systems
in place that help ensure the safe operatj-on of our
dj-stribution system. Most of these are derived from
federal- pipeline safety requj-rements that can be found in
the Code of Eederal Regulations, Title 49, Part L92.
Specifically, I wil-1 discuss the following areas: Leak
Survey, Corrosion, Atmospheric Corrosion, Public
Awareness, Damage Prevention, Regulator Station
inspection and testing, Valve maintenance, Transmission
Integrity Management and Dj-stribution Integrity
Management. Intermountain applies these processes to
approximately 6,275 miles (32 million feet) of gas
mainline and approximately 350,000 service lines.
O. Please explain the federal- Leak Survey,
Corrosion and Atmospheric Corrosion requirements?
A.Leak Surveyz Tntermountain is requJ-red
to leak survey all naturaf gas distributi-on pipelines of
its non-business districts every four (4) years and those
j-n business districts annually. The Company is requiredo25
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Gilchrist, Di 9a
Intermountain Gas Company
to survey all natural gas transmission l-ines annually and
if they fal1 1n a Cl-ass 3 location (46 or more buildings
intended for human occupancy within 220 yards of the
pipeline of any continuous mile) have to be surveyed
twice annual1y.
Corrosion: Eor aII steel- natural- gas
pipellnes, Intermountain must protect them against
external corrosion using the followlng means: (1) install-
pipelines
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Gilchrist, Di 10
Intermountain Gas Company
with an external- protective coating; (2) have a cathodic
protection system installed which is designed to protect
the pipe; typically this "system" is a combinat.ion of
anodes and rectifiers. These systems have to be annually
inspected to insure they are functionlng properly to
protect the steel- pipelines against external corrosion.
This is done by measuring the "pipe-to-soi1" interface of
cathodically protected and isolated pipe districts,
regardless of the use of anodes or rectifiers. In
addition, rectifiers are inspected every two (2) months
to ensure they are properJ-y protecting the steef pipe.
Atmospheric Corrosion: A1l- pipe and
components rel-ated to the natural gas pipeline system
that are above ground and exposed to the atmosphere are
inspected every three (3) years to ensure the atmosphere
is not causing any deterioration to our system.
O. Please explain the federal Public Awareness,
Damage Prevention, Regulator Station inspection and
testing requirements.
A. PubLic Awareness: Intermountain fol-lows
the American Petrol-eum Institute (API) Recommended
Practice (RP) Ll62 which is incorporated by reference
into Part L92. Activitles surrounding public awareness
include educating the public, appropriate government
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Gil-christ, Di 10a
fntermountain Gas Company
activities on the following: (1) use of the Idaho one
call- (Digline) system prlor to excavati-on; (2) possible
hazards assocj-ated with unintended releases from a gas
pipeline facility; (3) physical indications that such a
release may have occurred; (4 ) steps that shoul-d be taken
for public safety in the event of a gas pipeline refease;
and (5) procedures for reporting such an event.
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fntermountaj-n Gas Company
Damaqe Prevention: The Company
excavation
engages rn
work (whenl-ocation of gas
notified by the
relationship
DigJ-ine at no
facilities prior to
excavator) through its contractual
wlth Digline of Idaho. Excavators can calI
charge to the excavator.Dlgline then
locates
hours of the
contacts a Company representative who
Intermountain gas facilities within 48
request.
meet with
Additionally,
excavaLors to
Company
educate
representatives regularly
them about the importance
of safe excavation.
Regulator Station inspection and testing: The
Company inspects each regulator station and its equipment
is in good mechanical
and re1iabi11ty, is set
on an annuaf basis to ensure it
condition,
to control,
has adequate
rncrease or
capacity
rel-ieve
installed and protected from dirt, liquids, and
pressure, and ls properly
other
Acrossconditions that coul-d prevent proper
Intermountain' s distribution system,
regulator stations that recei-ve this
operations.
the Company has 664
annuaf maintenance.
Val-ve Maintenance: Each Company valve that is
elther on a transmission cfass pipeline or which may be
used for the safe isolation of Intermountainrs system is
required to be and is inspected annua11y. For
transmission cl-ass valves this includes partially
operating the valve; for the remaining valves thiso25
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includes checking and servicing the valves. The Company
has 5r 115 valves that receive this annual maintenance.
O. Final-ly, what are the federal safety
requirements related to Transmission Integrlty Management
and Distribution Integrity Management?
Gilchrist, Di 11a
Intermountain Gas Company
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Intermountain Gas Company
A Transmissr.on Integrit y Manaqement Pl-an
(TIMP): The Company j-mplements the TIMP
of transmission pipeline that fall-s in a
Area (HCA) . An HCA is an area or circl-e
transmj-sslon pipeline containing elther
on any segment
High Consequence
along the
20 or more
buildings
identified
intended for human occupancy, or an otherwise
has 290 miles ofsite. The company
transmission pipeline and 74 of those miles are in an
HCA. There are 42 specific pipe segments that fall under
the TIMP. Federal TIMP requirements sub;ects covered
pipelines in TIMP areas to a process of threat
identification, risk assessment, baselj-ne assessment,
repair/mai-ntenance, preventatj-ve and mitj-gative measures,
quality control, performance management and management of
change, followed by reassessment of each segment of
covered plpeline every seven years.
Distribution Inteqrity Management Pl-an
(DIMP): The federal DIMP safety requirements
seven elements: 1) Demonstrate knowledge of
system; 2) Identify threats; 3) Eval-uate and
risk; 4) Identify and impJ-ement measures to
5) Measure performance, monltor results and
consists of
distribution
prioriti ze
address rlsk;
evaluate
ef fectiveness,' 6) Perform periodic evaluation and
improvement; and 1) Report results. The Company
implements the DIMP on any segment of distribution l-ineo25
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Intermountain Gas Company
in the company territory; in other words, the entire
distribution system that is within the company's
j urisdiction.
a. Please describe the O&M costs related to these
safety processes and programs in 2015, ds well as how
they have trended historically and how the company
expects them to trend in the future.
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A. Intermountain's O&M costs related to District
Operations each year can be attri-buted to the safety and
maintenance of our pipel-ine system. These are costs
associated with our field employees, tools and equj-pment,
whlch are responsible for carrying out the safety
programs and processes previously discussed. In 2075,
the District Operatj-ons O&M cost were $17.825 million.
Wh1le these costs have certainly increased over the last
30 years due to salary increases, cost of living
increases, etc., the company has been able to control
these cosLs remarkably well. For example, in 2017, these
same O&M costs were $16.333 million. fn the future, the
expectation is that O&M costs will continue to rise, but
at a more accelerated rate due to recent and upcoming
pipeline safety regulations, notably DIMP and associated
agi-ng infrastructure replacements as referenced abover ds
wel-1 as pending transmission pipeline regulation, quality
assurance regulation and pipeline safety management
system regulation, to name a few.
V. PIPELINE REPI,ACEMENT
O. The fourth point you wished to discuss was the
Companyrs investment in gas pipeline infrastructure.
Could you give an overview of the Company's commltment to
and spending on infrastructure replacement?
A. fntermounta-in's annual capital requirements has
Gilchrist, Di 13
fntermountain Gas Company
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fntermountain Gas Company
steadily increased from approximately $ 17 mill-ion in
2008, to approximately $42 mil-l-ion in 2075. Capital
spending of $43.5 million and $42 mil-l-ion is planned for
the years 2016 and 2017 respectively. A significant
portion of this capital spending relates to
infrastructure replacement.
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Intermountain Gas Company
O Please describe Intermountain's ongoing program
for managing and replacing its natural qas pipe?
A. The Company ls continuing its pipeline
i-ntegrity management program to systematically replace
sel-ect portions of pipe in its natural gas distribution
system in Idaho. The pipelj-ne integrity management
program is a risk based replacement program that assesses
risk based on a pipe segments d9€, material, operating
pressure, leak history, damage history, etc..
Intermountain began replacing infrastructure in 20L5
under the Distribution Pipeline fntegrity rule that
became effective j-n 2073. Since 2005, Intermountain has
been conducting
pipelines, but
2075 under the
of plastic pipe
pipeline assessments on our transmj-ssion
have only had to make minor repairs. In
company's DIMP, approximately 30,000 feet
was removed and replaced. The company
another 22,000 in 2016 and 25,000 inplans to
2071 .
remove
distrlbution
company
system and schedule replacement of pipe as
determined by the risk model and available monetary
resources.
The will- continue to model the
Please describe Intermountain's protocol for
replacement ?
Intermountain uses its TIMP and DIMP as drivers
o.
pipeline
for pipeline replacement. These two plans both use a25
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fntermountain Gas Company
risk-based approach to assessing pipelines and
which segments of pipe need repair or
. Once pipe segments have been identified
determining
replacement.
replacement,
requiremenLs
available in
for
replacement
the company assesses the capital
for replacement compared to capital
a given year. This then determines how much
can be achieved in a glven year.
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fntermountain Gas Company
O. Do you believe the current pace for pipefine
replacement and the system for rate basing that
investment is adequate, or is there a potentially better
regulatory model for more expeditiously replaclng pipe
that is at or near the end of its useful- life?
A. I bel-ieve a better way to more quickly fund and
replace pipeline infrastructure would be through a
pipeline infrastructure cost recovery mechanism (ICRM)
that would allow fntermountain to accel-erate its spending
in this area,
are incurred
and to more timely recover those costs that
to promote the safety and reliability of
Intermountain' s dlstribution system.
O. Is Intermountain proposing a pipeline ICRM in
this case?
A. No. However, the Company intends to follow
this case with an ICRM case filing.
O. Why is the eventual establishment of a pipeline
ICRM important to Intermountaln?
A. There are many portions of Intermountain's
system that need to consj-dered for replacement based on
material, d9e, leak history, excavation activity, etc.
Intermountain is obligated to provide safe, reliable
service to its customers, and to that end, Intermountain
is using a systematic approach to identify the elevated
risk pipe segments and replace those segments fi-rst. Ao25
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Intermountain Gas Company
potential problem for the Company
incurred for replacing pipe has no
with those costs. In other words,
is that the costs
new revenue associated
performing these
system improvements increases costs and reduces earni-ngs.
able to incur these0. How has fntermountain been
costs without rate recovery to date?
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Intermountain Gas Company
A.
primarily
operating
from the
However,
the point
Over the past few years fntermountain has
funded its pipeline improvement progr.am through
efficiency improvements, many of them resulting
MDU Resources' acquisition of fntermountain.
rate base and other cost increases have reached
that Intermountain can no longer fund this
additional operatinglarge a capital investment from
efficiencies.
O. What are the benefits to customers and the
Company if a pipeline cost recovery mechanism were
established and approved by the Commission?
A. In addltion to updating the pipeline system to
continue operating a safe and reliabl-e system, the
mechanism will potentially reduce the need for future
rate cases. Vrlithout an ICRM, Intermountain will 1ike1y
be in a position where it wil-l- need to file subsequent
rate cases for cost recovery of this single and
significant capital spending program, until- such time as
the Company's modeling indicates an acceptable l-evel of
risk profile is attained. An ICRM will provide an
incentive for the Company to control other costs between
rate cases and reduce the need for incurring addltlonal
rate case costs.
O. Can you please describe how such a mechanism
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Intermountain Gas Company
A. Yes. Intermountain woul-d annually fil-e for
recovery of pipeline replacement investment incurred over
a set period of time, likely a 72 month peripd. It would
also seem that the timing of the flIing might best
coincide wlth Intermountain's annual- PGA filings in
August, with
of recovery
an effective date of October 1. The period
investment woul-d be a
matter for
for the prior
determination
year' s
by the Commission.
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O. Do other MDU Resources' Companies and other gas
utilities in the northwest currentfy have a similar
mechanism in place in other states?
A. Yes. Cascade Natural- Gas is operati-ng under
similar programs in both Oregon and Washington where it
files for recovery of pipeline replacement costs under a
pipeline CRM. In addition, Northwest Natural- Gas
currently has a System Integrity Program, which was
adopted to encourage Northwest Natural to replace bare
steel and cast iron pipe. Cascade's Washington cost
recovery mechanism was based on Northwest Natural-
mechanism in place in Oregon.
a. Do you anticipate that there would be O&M
savings associated wlth the replacement of some of the
aging infrastructure?
A. As a general rul-e, there will be less O&M costs
associated with new infrastructure, ds opposed to aging
or obsolete pipelines. On a net basis however,
Intermountain will continue to see overall increased OeM
costs to maintain a system, some of which is now
approaching 60 years 1n age. It 1s important for the
Company to systematlcally reinvest and upgrade a portion
of its pipeline system every year, in addition to making
the investments needed or requlred to meet reliability
requirements. While such systematic reinvestment works
Gilchrist, Di 1,7
Intermountain Gas Company
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Intermountain Gas Company
to slow the growth
in a year to
Does this
of annual- O&M costs, it does not
result year reduction in overal-l O&M costs
O
A
concl-ude your direct testimony?
Yes. Thank you.
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CSB Reporting
(208 ) 890-5198
GILCHRIST (Com)
Intermountain Gas Company
(The following proceedings were had in
open hearlng. )
COMMISSIONER RAPER: And move to
Commission Staff for cross.
MR. KLEIN: Staff has no cross.
COMMISSfONER RAPER: Thank you.
MR. STOKES: Madam Chair, we have no
CTOSS.
MR. PURDY: No cross.
MR. RICHARDSON: No cross, Madam Chair.
MR. OTTO: No quest j-ons, Madam Chair.
COMMISSIONER RAPER: Thank you. Are there
any questions from the Commissioners? I actually have
two. You almost got away.
EXAMINATION
BY COMMISS]ONER RAPER:
O With reference to page 3 of your direct
testimony, fine 22,
pressure system set?
A Yes,
referred to as
by farm tap, do you mean a hiqh
HPSS,
front
farm tap
or high
is our new vernacul-ar
like is 1n your
pressure service set, much
yard, yes.
correct. f identified that it was0 That iso25
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CSB Reporting
(208 ) 890-s198
GILCHRIST (Com)
Intermountain Gas Company
a multi-valve, I think. I got it right at the time,
though. One more question. On page B, generally you
speak to the employee safety and I didn't see a reference
to average number of accidents or whatever record is
reflected by the safety program for the Company. Can you
elaborate on that?
A Sure. Just by way of statistics from
2076, the year we just completed, we had two employee
lnjurj-es. One was with days away, so it was a .44 DART
rate, which is tops 1n the industry, and we had seven
vehicle accidents in that year, which is al-so ahead of
the AGA industry standardr so by way of 20L6r we had very
good statistics showing that our safety programs are
working very wel-l-.
COMMISSIONER RAPER: Thank you. Thatrs
all- I have. Any redirect, Mr. Wil-l-iams?
MR. WILLIAMS : No redi-rect .
COMMISSIONER RAPER: With that, Mr.
Gilchrist, you are excused. Thank you for your
testimony.
THE WITNESS: Thank you.
(The witness l-eft the stand. )
COMMISSIONER RAPER: Next witness?
MR. WILLIAMS: The Company woul-d call- Mark
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CSB Reporting
(208 ) 890-s198
CH]LES (Di)
Intermountain Gas Company
MARK CHILES,
produced as a witness at the instance of the
Intermountain Gas Company, having been first duly sworn
to tel-l- the truth, the whol-e truth, and nothing but the
truth, was examined and testified as fol-Iows:
DIRECT EXAMINATION
BY MR. WILLIAMS:
O Sir, would you please state your name and
business address for the record?
A My name is Mark Chiles. My business
address is 555 South Cole Road, Boise, ldaho, 83709.
O And what is your titl-e and capacity at
Intermountai-n Gas?
A I serve as the vj-ce president of
regulatory affairs for Intermountain Gas and Cascade
Natural Gas and the vice president of customer service
for the MDU Utilities Group, which incl-udes Intermountain
Gas.
O Okay; so Mr. Chlles, are you the same Mr.
Mark Chiles that had prepared and filed eight pages of
direct testimony in this case?
A Yes, I am.
O And if I asked you the same questj-onso25
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CSB Reporting(208) 890-5198
CH]LES (Di)
Intermountain Gas Company
contained in that prefiled direct testimony, would your
answers today be the same?
A Yes, they would.
0 So turning now to your rebuttal testimony
filed February 15th, 2077 , are you the same Mark Chiles
that caused to be prepared and prefiled three pages of
rebuttal testimony with sorry, wlth no exhibit.
Exhibit 3 relates to your direct testimony and not your
rebuttal testimony; is that correct?
A That is correct.
O Okay; so if I were to ask you the same
questions today, your three pages of rebuttal testimony,
woul-d your answers be the same today?
A Yes, they would.
MR. WILLIAMS: So Madam Chair, I would
move that both the prefiled direct testimony along with
Exhibit 3 -- well, the prefiled direct testimony and the
rebuttal testimony be spread upon
and then I woul-d ask for admission
COMMISSIONER RAPER:
the record as if read
of Exhibit No. 3
both direct and rebuttal
Without ob;ection, we
of Mr. Chil-es on thewj-11 spread
record as if
the record.
evidence. )
read, and Exhibit No. 3 will- be admitted to
(IGC Exhlbit No. 3 was admitted into
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(The following
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record. )
prefiled direct and
Chiles is spread upon the
CSB Reporting(208) 890-s198
CHILES (Di)
Intermountain Gas Company
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n Dla'\r. .,-dse state your name, title and business
address.
A. My name is Mark A. Chiles. I am the Vice
President of Regulatory Affairs for fntermountain Gas
Company (IGC, fntermountain, or Company) and Cascade
Natural Gas Corporation and the Vice President of
Customer Service for the MDU Utilities Group (MDUG) . My
busj-ness address is 555 South CoIe Road, Boise, ID 83707.
O. Mr. Chiles, would you please summarize your
educational and professional experience.
A. I am a graduate of Boise State University with
a Bachelor of Business Admlnistration degree in
Accounting. I am a certified public accountant and a
member of the American Institute of Certlfied Public
Accountants and the Idaho Society of Certified PubIic
Accountants. I have over 20 years of experience in the
energy industry lncluding time spent in the utility, gas
marketing, and exploration and production industrles.
During my utility career, I have held the posi-tions of
Accounting Manager, Di-rector of Accounting and Finance,
and Vice President and Controller. I was appointed to my
current position in March 2016. I am responsibl-e for
providing executive leadershlp and management for
regulatory affairs and customer service including the
scheduling and credlt and collections functi-ons.
Chll-es, Di 1
Intermountain Gas Company
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Chiles, Di 1a
Intermountain Gas Company
O. What is the purpose of your testimony in this
proceeding?
A. The purpose of my testimony is to explain and
support the capital- structure and return on rate base
requested
into the
in this proceeding and provide some insight
customer service center structure, methodology
of sharlng customer service costs,
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Chll-es, Di 2Intermountain Gas Company
resufts of operations, and efficiencies gained in this
area sj-nce the purchase of IGC by MDU Resources, fnc.
(MDUR) .
O. Please summarize your testj-mony.
A. In brief, I w11l- provide informatlon that
shows:
a Intermountain's proposed return on rate
base (ROR)
at a fair
provides a reasonable return for our investors
cost to our customers. The ROR is based on a
50/502 common equlty ratio with a Return on Equity (ROE)
of 9.92 and a debt cost of 4.942.
a The structure of the customer service
function, how the customer service function is charged
out to the MDUG brands,
organi zational- structure
efficiencies gained through the
and implementation of customer
how these chanqes have providedfocused technology, and
significant savings to fntermountain's customers.
O. What is the return on rate base and capital
in this case?structure that fntermountain is requesting
A. The Company is requesting a
of 1 .42? with a capital structure of
debt. The components and calculation
rate of return are shown in Table C. 1
return on rate base
50% equity and 50%
of the proposed
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Chiles, Di 2a
fntermountain Gas Company
Tab1e C.I Proposed Return on Rate Base
Capital Structure Cost Component
TotaI Debt 50%4 .942 2.41%
Common Equity 50%9. 90U 4 .95?.,
100?1 .422
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Chiles, Di 3
Intermountain Gas Company
O. The Company is proposing a capital structure of
50% equlty and 50% debt. Why does the Company feel this
is the appropriate capital structure?
A. Intermountain is proposing a capital structure
consisting of 50? common equlty and 50% long-term debt,
consistent with the Company's target capital structure
and in line with the Company's average actual capit.al
structure for the last three years and projected
structure for 2076. fntermountainrs parent company, MDU
Resources, makes equity infuslons in order to maintain
the target capj-tal structure. Intermountain is committed
to maintainlng a healthy balance of equity and debt, ds
discussed in the direct testimony of Company witness, Dr.
J. Stephen Gaske. Table C.2 below provides a summary of
the four-year history of Intermountain's capital
structure.
Table C.2 Capital Structure
72/3L/20L3 12/31/2074 72/31/20L5 6/30/2016
Total Debt 45.132 41 .60% 52.052 48.15?;
Common
Equity
54 .27 %52.402 41.952 51.853
O. How does Intermountain's proposed capital
structure compare to that of other gas distribution
companies ?
A. As discussed 1n Dr. Gaske's testj-mony, theo25
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Chifes, Di 3a
Intermountain Gas Company
median equity ratio
of gas distribution
of March 37, 2016.
for the companies in his proxy group
companies was approximately 53.80% as
As such, Intermountain's proposed
in line with other gas distributioncapi-ta1 structure
companies.
O. Why is
equity?
l_s
the Company proposing a 9.90? return on
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A. The Companyrs request for a 9.90% ROE is based
on the testimony and exhibits presented by Dr. Gaske. It
is Intermountaj-n's opinion and bel-ief that a 9.90? ROE
represents a fair return on investment for
Intermountain's shareholders, and is also fair to
Intermountain' s customers.
0. How did you cal-culate the cost of debt proposed
in this filing?
A. The 4.94? cost of debt is calculated based on
the weighted average debt of the Company that is
outstanding at June 30, 2016, dS shown on page 1 of
Exhibit 3, and the projected weighted average cost of
debt for expected new long-term debt, ds shown on page 1
of Exhibit 3.
O. Wil-l any of the debt included in this fillng
come due within the next five years?
A. Yes, page 1 of Exhibj-t 3 al-so shows a schedule
of current outstanding debt with maturity dates.
O. Does Intermountain plan to issue any equity or
debt offerings in the near future?
A. Yes, Intermountain plans to issue both equity
and long-term debt in 20L6. The equity and debt
issuances planned for the next five years are shown on
page 2 of Exhibit 3. The goal 1n issuing the new
long-term debt is to match a funding mechanism with the
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Intermountain Gas Company
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Intermountain Gas Company
l-ives of the assets that Intermountain is investing in to
serve its customers. In this case the Company j-ntends on
i-ssuing long-term
coincide with the
assets.
O. Pl-ease
customer service
debt with a term of 30 years to
life of natural- gas distribution system
describe the current structure of the
function of Intermountain Gas Company.
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Intermountain Gas Company
A. In 2010 the
combining the customer
MDUG went through
service centers
the process of
of each of the
brands into a single customer service entity providing
support to each of the utility group brands. The MDUG
chose Meridian, Idaho as the primary locatj-on of the
service center. The Meridian location is home to the
customer service center, customer development and
programs group, and the scheduJ-inq group. A satellite
customer service center is located in Bismarck, ND along
with the credit and coll-ections department.
0. Now that the customer service function has been
consolidated into one entity, who do those employees work
for?
A. All of the customer service employees working
in the areas of customer service,credit and collections,
and scheduling arecustomer development and programs,
Montana-Dakota Utilities employees.
O. How 1s fntermountain charged for its portion of
the customer service expense?
A. The cost al-locations of the customer service
function are detalled in the Intermountain Gas Company
Cost Allocation Manual, which is Exhibit 10, sponsored by
Mr. Dedden.
O. What efflciencies have been gained through the
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Intermountai n Gas Company
A. Erom an employee head count standpoint, the
MDUG has been able to reduce the overal-l head count in
the customer service area. Instead of each brand having
management
center, each
its own management team, there is a single
the serviceteam.Al-so, prior to
brand had its
combining
utility own customer information
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Intermountain Gas Company
system. The MDUG has now successfully implemented a new
customer information system
brands, finishing with IGC
(CIS) across all of the
in August 2075. The CIS
an Oracle project called Customer Care andimplemented is
Billing (CC&B)
us to cross train
Havlng aI1 of our brands on
our customer service agents
CC&B allows
handle call-s from multiple brands instead of a
so they can
single
brand.
O. What benefits to fntermountain's cust.omers have
resul-ted from these structure changes and technology
improvements you just described?
A. Due to the organizational restructuring,
process lmprovements, and new technology implementations,
Intermountain has been able to reduce the cost of the
customer service function to its customers by nearly $1.0
mil-lion since 2010 to 2015. At the same time
Intermountain has continued to provide the same, tf not
better, Ieve1 of service to its customers.
There has also been an economic impact to the
restructuring.Treasure Va1ley due to
Intermountain employed
department prior to the
the organi-zational
43 people in its
consolidation of
customer service
the customer
service operations in Meridian. The Meridian l-ocation
now employs 165 people, addj-ng significant payroJ-J- to the
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Intermountain Gas Company
O. How does fntermountain measure the quality of
its customer service?
A. Intermountain uses several metrj-cs in analyzing
customer caIls,its service to customers,including
cal-l-, andresponse time, length
cal-Is. During 2015,
600,298 cal-l-s with an
seconds. The average
of number of dropped
office answeredthe Customer Service
overall average answer speed of 49
length of calls was 4 minutes 28
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Intermountain Gas Company
seconds, and the abandoned or dropped call rate was 5.4 Z
of alf cal-ls. The Company also tracks customer
complaints. Of the 600,298 call-s received in 2075,
complaints reported to the ID PUC or escal-ated to a
supervisory l-evef relatlng to high bi1ls and
disconnection were only 69 and 715, respectively.
O. Are there other things the Company is doing in
the customer service area?
A. Yes, Intermountain has been a leader in moving
customers from paper
billing and payment
j-ssues approximately
billing and payments
processing. Currently
to el-ectronic
Intermountain
792 of
e]ectronic form. From June
fntermountain has i-ncreased
the monthly customer bills in
2015 to June 2016
the number of el-ectroni-c
bill-s issued by approximately 20%. Intermountaln
currentl-y collects approximately 66.52 of its monthly
customer payments through the e1ectronic process.
Intermountain has also worked hard to reduce
the amount
on payment
expense of
l-ine with
region.
plans.
0. 43U of
other gas
Intermountain
of bad debt expense by workj-ng with customers
is projecting a bad debt
gross revenue
only utilities
for 20]-6 which is in
in the Mountain
Intermountain also uses social media as a means
to reach and inform our customers. Our Intermountain25
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Intermountain Gas Company
website, Eacebook and Twitter are the primary sources of
social- media used by the Company.
O. Do you have any other comments on the customer
service provided by Intermountaln?
A. Yes, only to reiterate what Nicole Kivisto
pointed out in her testimony. Intermountain has ranked
at the very top 1n customer satisfaction according to the
JD Power's customer servj-ce ranking for midsized gas
util-ities in the West.
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According to mid-year resul-ts, Intermountain will finish
near the top agai-n 1n 2076.
O. Does this concl-ude your testimony?
A. Yes.
Chiles, Di 8
Intermountain Gas Company
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Chiles, Reb. 1
fntermountain Gas Company
O. Pl-ease state your name, position and business
address.
A. My name is Mark A. Chiles. I am the Vlce
President of Regulatory Affairs for Intermountain Gas
Company (IGC, fntermountaj-n, or Company) and Cascade
Natural Gas Corporatlon and the Vice President of
Customer Service for the MDU Utilities Group (MDUG).My
83707.business address is 555 South CoIe Road, Boise, ID
O. Are you the same Mark Chiles that pre-filed
direct testi-mony in this case on behal-f of the Company?
A. Yes.
O. What is the purpose of your rebuttal- testlmony?
A. The purpose of my rebuttal testimony is to
address recommendations made by IPUC Staff witness Daniel
KIein regarding the el-imination of convenience fees and
pay station fees for residential customers. I will- afso
respond to Staff's recommendatlon that fntermountain file
monthly reports with the IPUC regardj-ng credit and
col-l-ection activity.
O. Staff witness Klej-n recommended that the
Company eliminate the convenience fee charged to a
residential customer for paying by credit or debit cards,
or through authorized withdrawafs from a checking or
savings account. Do you agree with this recommendation?
A. f do agree with allowing our customers theo25
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option of choosing from a menu of convenient payment
options to incl-ude a "no cost option" for the customer.
Today, the Company provides alternative methods for the
customer to pay their gas bill running the spectrum from
free, Iess expensive to more expensive. A goal
Chiles, Reb. 1a
fntermountain Gas Company
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Chiles, Reb. 2
Intermountai-n Gas Company
of the Company has been to reduce our payment transaction
costs by inviti-ng customers to use the feast expensive
means of payment processing, which is allowlng the
Company to e1ectronically withdraw the payment from the
customer's bank account as approved by the customer.
There is no fee charged to the customer for this payment
service. Other electronic means of payment are the
credit/debit card payments. Customers using these
methods pay a $1.99 convenience fee. The concern of
Intermountain is that if it begins paying the convenience
fee on behalf of it.s customers, then many customers will
switch from less expensive payment method to a credit
card payment method in order to capitalize on credit card
reward plans. This wouf d al-l-ow individual benef its to
the detriment of other customers and the Company.
a. Does the Company have any other concerns
regardlng the elimination of the convenience fees?
A. Yes, the Company woul-d want to insure that if
the convenience fee were eliminated as a direct customer
costs of doing business woul-d still becharge that these
recovered in order
Staff includes in
to make the Company whole. Commiss j-on
their recoflrmendation a comparison of
AVE-E-16-1 Ordertransaction cost data to the Avlsta case
No. 33494. While fntermountain strives to keep costs as
low as possible, there is no guarantee that Intermountaino25
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Chil-es, Reb . 2a
fntermountain Gas Company
woul-d be able to attain the same rate as Avista for
credit/debit card payment processi-ng. Al-so, Staff
testimony references the current level of credit/debit
card payments as a reference for future expense. The
Company anticipates that participation could increase
once the Company 1s paying the transaction fee and woul-d
request recognition
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fntermountain Gas Company
that the overafl cost for credit/debit transactions coul-d
materia.l-1y vary according to transaction fee cost and
volume.
O. Does the Company accept that recovery through a
deferral mechanj-sm is an acceptable method of cost
recovery?
A. Yes, the Company would accept cost recovery
through a deferral mechanism in order to provide doll-ar
for dol-lar recovery of the additional cost incurred by
the Company to eliminate the convenience fee currently
paid directly by the customer.
O. Staff witness Kleln afso recommends the
elimlnation of the Western Union fee for pay station
reconimendatlon?payments
A.
Do you agree
Not entirely.
with this
Within the recommendation for the
elimination of the convenience fee, the Staff has
proposed payment processing transaction costs and
transaction 1eve1s that might either be unachi-evable or
materially different than those predicted by Staff. The
Company requests that the costs incurred for pay station
payments be recovered through a deferral- mechanism on an
annual basis to insure dollar for dollar recovery of the
additional costs incurred by the Company.
O. Staff witness Kl-ein is requesting that
Intermountain file monthly credit and collection reportso25
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with the IPUC. Does the Company have
this request?
A. Yes. fntermountain would
any concerns with
request that the
reports be submltted on a quarterly basis and that
information be treated as confidential.
O. Does this concl-ude your testimony?
A. Yes, it does.
the
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CSB Reporting
(208 ) 890-5198
CHILES
Intermountain Gas Company
(The fol-lowing proceedings were had in
open hearing. )
MR. WILLIAMS: Madam Chair, Mr. Chiles 1s
available for cross-examination.
COMMISSIONER RAPER: Thank you. Does
Commission Staff have any cross?
MR. KLEIN: No cross
COMMISSIONER RAPER: Thank you. Northwest
Industrial Gas Users?
questions
MR. STOKES: No cross.
MR. PURDY: I have none, thank you
COMMISSIONER RAPER: Thank you.
MR. RICHARDSON: No cross, Madam Chair.
MR. OTTO: No questions, Madam Chaj-r.
COMMISSIONER RAPER: Thank you. Any
from the Commissioners? No redj-rect necessary
by the Company.
MR. WILLIAMS: Probably
COMMISSIONER RAPER: Mr. Chifes, thank you
for your time. You are excused.
THE WITNESS: Thank you.
(The witness l-eft the stand. )
MR. WILLIAMS: I think we're on a record
pace. The Company woul-d cal-l Mr. Steve Gaske to the
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CSB Reporting
(208 ) 890-s198
GASKE (Di)
Intermountaln Gas Company
J. STEPHEN GASKE,
produced as a witness at the instance of the
fntermountain Gas Company, having been first duly sworn
to tef] the truth, the whol-e truth, and nothing but the
truth, was examined and testified as follows:
DIRECT EXAMINATTON
BY MR. WILLIAMS:
O Slr, please ldentlfy yourself.
A My name is J. Stephen Gaske, and I am a
senior vice president of Concentric Energy Advisors. My
address j-s 1300 19th Street, Washington D.C.
O Thank you, Mr. Gaske, for the long trip
out here to present as a witness for the Company. You
had caused to be prepared and prefiled 40 pages of direct
testj-mony in this case, along with Exhibits No. 4 and 5;
is that correct?
A Yes.
O Soif
questlons contained
I were
r-n your
today to
prefiled
ask you
direct
the same
testimony of
be theAugust l2Lh,
same?
20L6, would your answers today
A Yes.
MR. WILLIAMS: Madam Chair, I woufd askZ3
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CSB Reporting(208) 890-s198
GASKE (Di)
Intermountain Gas Company
that Mr. Gaske's prefiled direct testimony be spread upon
the record as if read and for the admission of Exhibits 4
and 5.
COMMISSIONER RAPER: Without objection,
Mr. Gaske's direct testimony, along with Exhibits 4 and
5, is spread across and admj-tted to the record.
(IGC Exhibit Nos. 4 & 5 were admitted into
evidence. )
(The following
of Mr. Stephen Gaske is spread
prefiled direct testimony
upon the record. )
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Intermountain Gas Company
O. Please state your name, position and business
address.
A. My name is J. Stephen Gaske and I am a Senior
Vice President of Concentric Energy Advisors, Inc., 1300
19th Street, NW, Suite 620, Washington, DC 20036.
O. Would you please describe your educational and
professional- background?
A. I hold a B.A. degree from the University of
Virginia and an M.B.A. degree with a ma;or in finance and
investments from George Washington University. I al-so
earned a Ph.D. degree from Indiana University where my
major field of study was public utilities and my
supporting fields were finance and economics. A copy of
my r6sum6 is included as Exhibit 04 to this testimony.
O. Have you presented expert testimony in other
proceedlngs ?
A. Yes. I have fil-ed testimony or testified in
more than 100 regulatory proceedings in North Ameri-ca.
These submissions have included testimony on the cost of
capital and capital structure issues for el-ectric and
natural gas distribution and oil and natural- gas pipeline
operations before 11 state and provincial regulatory
bodies. In addltion, I have testified or submitted
testimony on issues
pricing, regulatory
such as cost allocation, rate design,
principles and generating plantotrLJ
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fntermountain Gas Company
economics before regulators in four Canadian provinces,
and seven U.S. state public utility commissions. I also
have testj-fied or fil-ed testimony or affidavits before
various federal regulators, incl-uding the Eederal- Energy
Regulatory Commissj-on on more than thirty occasions, the
National Energy Board of Canada, the U.S. Postal- Rate
Commission, and the Comision Reguladora de Energia of
M6xico. Topics covered
included rate of return,
al-location, rate design,
principles
in these submissions have
capital structure, cost
revenue requirements, regulatory
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and market power. During the course of my consulting
career, I have conducted many studies on issues rel-ated
to regulated industries and have served as an advisor to
numerous cllents on economic, competitive, and financial
matters. I also have spoken and lectured before many
professional groups including the American Gas
Association and the Edison Electrlc Institute Rate
Fundamentals courses.
I. INTRODUCTTON
A. Scope and Overview
O. What is the scope of your testimony in this
proceeding?
A. f have been asked by Intermountain Gas Company
("Intermountain" or the "Company") to estimate the cost
of common equity capital for the Company's natural- gas
distribution operations in the state of Idaho. In this
testimony, I cal-culate a range for the cost of common
equity capital for Intermountain's Idaho natural gas
distribution operations based on a Discounted Cash FIow
("DCE") analysis of a group of proxy companies that have
risks similar to those of Intermountaj-n's Idaho gas
distrlbution operations. I then place Intermountaj-n
within the range establ-ished by the DCE analyses by
comparing the risks of the Company to those of the proxy
gas distribution companies and by considering several
Gaske, Dl 2Intermountain Gas Company
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alternative benchmark analyses.
return is Intermountain requestj-ngnWhat rate ot
proceeding?
Based on its
in this
A test period capital
the following
structure,
Intermountaln 1s requesting rate of return:
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Intermountain Gas Company
Table G.1: Requested Rate of Retum -Idaho Gas Distribution Operationsr
Source Percent Cost
OveraII Rate of
Refurn
Long-Term Debt 50.000%4.94o/o 2.47%
Common EquiW s0.000%9.90%4.95%
TOTAL 100.00ff/o 7.42%
As my testimony discusses, an overall- allowed rate'of
return of 1.42 percent, with Intermountain at this time.
those
B. Company Background
O. P1ease describe Intermountain's
of its parent company, MDU Resources
A. Intermountain is a who1Iy-owned
operati-ons and
Group, Inc.
division of MDU
Resources Group, Inc. ("MDU Resources") that is engaged
in natural gas distribution in the state of Idaho.
Intermountain provides gas distribution service to
approximately 320, 000 residential, commercial and
industrial customers in approximately 75 communities in
southern Idaho, the largest of which are Boise, Nampa,
Meridj-an, PocatelIo, and Cal-dwell-.
Through its division, Montana-Dakota Util-ities
Co. ("Montana-Dakota"), MDU Resources j-s engaged in the
generation, transmission, and distributi-on of
electricity, and the distribution of natural gas in the
states of Montana, North Dakota, South Dakota, and
Wyoming. MDU Resources also owns Cascade Natura.l- Gas25
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Intermountain Gas Company
Corporation,
of Washington
which distributes natural gas in the states
and Oregon,
distributes
and Great Plains Natural Gas
Company, which
Minnesota and
engaged in
natural gas in the states of
North Dakota. MDU Resources is also
r Projected average capital structure and rate of return for 2016O25
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Gaske, Di 4Intermountain Gas Company
utility infrastructure construction, natural gas
gathering and transmission, and produces and markets
aggregates and other construction materials.
Natural- gas distribution assets comprised 30. B percent2
of MDU Resources' total- assets in 2075, and natural gas
distribution revenues comprised 19.5 percent3 of total
operating revenues. Idaho accounted for 32.0 percent of
the natural gas distribution operating sales revenues for
MDU Resources, while Washington (26.0 percent), North
Dakota (15.0 percent), Montana (8.0 percent), Oregon (8.0
percent), South Dakota (6.0 percent), Minnesota (3.0
percent) and Wyoming (2.0 percent) accounted for the
other 58.0 percent of retail- gas distribution operating
sales revenues.4
O. Would you please describe Intermountain's ldaho
natural gas distribution service territory?
A. Intermountain provldes natural gas distribution
service to approximately 320,000 customers j-n 15
communities in Southern Idaho, operatinq 290 miles of
transmission Iines and 6,216
As shown in the testimony of
Madison, the customer base in
m1les of dlstribution mains.
percent residential- customers and 10
witness Scott
is approximately 90
percent commerclal-
Company
Idaho
and industrial customers. Intermountain's service
territory primarily consists of towns and small citieso25
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dotted throughout relatively sparsely populated areas.
With the exceptj-on of Boise, the local- economies served
by Intermountain are heavily dependent on agriculture,
Iight manufacturing, and providing retaif and other
services for surrounding agricultural- areas.
2
3
4
MDU Resources, 2015 Form 10-K, at 83.
Ibid. , aL 82.
Ibid., at 11.25
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Intermountain Gas Company
O. What is your understanding of the factors that
are drivlng
A. As
the rate case filing by fntermountain?
dj-scussed in the testimony of Company
filed a rate casewitness Madison, fntermountain has not
since 1985. The primary reasons for the filing are
related to customer growth, which has resul-ted in
increased investment in rate base, along with concurrent
increases in operating costs necessary to serve this
growr_ng
needed
customer base. In addition, Intermountain has
to replace customer-service related information
and technology systems, has experienced increased
operating expenses rel-ated to the regulatory demands
associated with pipeline safety regulations and
compliance, and has higher right of way costs. Company
witness Nicole Kivisto testifies that fntermountain has
spent
since
base
this
fited
approximately $551 million in capital additions
the last general
has increased to
proceeding, from
in the last rate
II. CAPITAT
rate case. The Company's rate
about $231 million, ds filed in
approximately $66.4 million as
proceedinq in 1985.
STRUCTT'RE
structure is Intermountain filingO. What capital
in this proceeding?
A. As discussed in the testimony of Intermountain
witness Mark ChiIes, Intermountain is using a capitalo25
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structure consisting of 50 percent debt and 50 percent
equity. Although Intermountaj-n's common equity ratio has
fl-uctuated around the 50 percent level- in recent years,
this is the target capital structure that Intermountain
seeks to maintain in its operations.
O. What effect does the capital structure have on
the costs of doing business?
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fntermountain Gas Company
A. Most large companies are financed using a mix
of debt and equity capital. Including a reasonably smal-l
amount of debt in the capital structure can provide a
l-ow-cost source of funds because the common equity
holders shield lenders from a portlon of the risks of the
company. However, the requirement to pay a fixed fevel
of interest and repay principal as scheduled, causes the
possibility of bankruptcy or other financial- dj-stress to
increase as the firm takes on more debt. Financial-
"Ieverage" provided by fixed debt payments also tends to
translate relatively smal-l fluctuations in a company's
operating income lnto much larger variations in the net
is increased beyond some level, both
stockholders require greater
for thereturn on their investments to compensate
risks involved. In financial theory, there is an
income available to
proportion of debt
the l-enders and the
range of equity ratios
capital of a company.
O. What factors
appropriate capital
A. The amount
common stockholders. When the
that minimizes the overall
are important for determining the
company?
economi-cal- for a
rates of
greater
optimal
cost of
structure for a
of debt that is
firm depends on its business risks and the perceived
probability that it could experience unexpected
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Intermountain Gas Company
obligations. Although firms in the same industry
generally tend to have similar busi-ness risks, there is
often a general, very broad range of equity ratios
associated with companies in particular industries.
Firms in the same industry have different capital
structures for many reasons. For example, within a given
industry, there may be wide differences in the vintages
of capital and operating strategies of individual
companies. Another
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important factor is the quality of a firm's earnings in
terms of cash flow and continuing operations. When all-
factors are considered the managers of a company are
usuall-y in the best position to evaluate the prospective
risks and operating needs of their company and determine
the most appropriate capi-tal structure.
O. In your opinion, is the capital structure used
by Intermountain in this rate filing reasonable?
A. Yes . f ntermountain' s equity rat j-o is
comfortably within the range of equity ratios of the
proxy companies. As shown 1n my Direct Testj-mony Exhibit
05, Schedu1e 8, the proxy company common equity ratios
are in a range between A1 percent and 58 percent, with a
median of 54.3 percent. Six of the seven proxy companies
have higher common equity ratios than Intermountai-n,
which indicates that its common equity ratio is neither
unusual- nor extreme.
III. FINA}ICIAI !,IARKET STT'DIES
A. Criteria for a Fair Rate of Return
O. Please describe the criteria which should be
applied in determining a fair rate of reLurn for a
regulated company.
A. The United States Supreme Court has provided
general guidance regarding the level- of allowed rate of
return that will meeL constitutional- requirements. fn
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Bl-uefieLd Water V{orks & Improvement
Service Commission of West Virginia
(1923)), the Court indicated that:
Company v. Public
(252 u. S. 579, 693
The return should be reasonably sufficient to
assure confidence in the financial- soundness ofthe utility, and shou1d be adequate, underefficient and economical management, tomaintain and support its credit and enabl-e itto raise the money necessary for the
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Intermountain Gas Company
proper discharge of its public duties.
of return may be reasonable at one time
become too high or too low by changes
affecting opportunities for investment,
money market, and business condltlons
generally.
A rate
and
the
The Court has further elaborated on this requirement in
v. Hope Naturaf
There the Court
1ts decision in Federal- Power Commission
Gas Company (320 U.S. 597, 503 (1944)).
described the relevant criterla as follows:
Erom the i-nvestor or company point of view, it
is important that there be enough revenue not
only for operating expenses, but also for thecapital costs of the business. These include
service on the debt and dividends on thestock.... By that standard, the return to theequity owner should be commensurate withreturns on j-nvestments in other enterprises
having corresponding risks. That return,
moreover, shoul-d be sufficient to assure
confidence in the financial integrity of theenterprise, so as to maintaln its credit and toattract capital.
Thus, the standards established by the Court in Hope
and B-Zuefiel-d consist of three requirements. These are
that the allowed rate of return should be:
1. commensurate with returns on enterprises
with corresponding risks;
2. suf f icient to mai-ntain the f inancial-
integrity of the regulated company; and
3. adequate to allow the company to attract
capital on reasonable terms.
These legal criteria will be satisfied best by employingo25
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Gaske, Di 8afntermountain Gas Company
the economic concept of the "cost of capital" or
"opportunity cost" in establishing the all-owed rate of
return on common equity. For every investment
alternative, investors consider the risks attached to the
investment and attempt to evaluate whether the return
they expect to earn is adequate for the risks undertaken.
Investors also consider
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whether there might be other
that would provide a better
invol-ved. This weighing of
competitive nature
investment opportunitles
return relative to the risk
alternatlves and the hiqhly
of stocks and bonds
of capital markets
to adjust in such
causes the prices
a way that
that is justinvestors
adequate
Ievel- of
order to
can expect to
for the risks
earn a return
invo1ved. Thus, for any given
a return that investors expect 1nrisk,
induce
there is
them to voluntarily undertake that risk
and not invest their money efsewhere. That return is
referred to as the "opportunity cost" of capital or
"investor required" return.
O. How should a fair rate of return be evaluated
from the standpoint of consumers and the public?
A. The same standards should apply. When an
unregulated entlty faces competition, the
that competition and consumer choi-ces will-
pressure of
combine to
determine the fair rate of return. However, when
regulation is appropriate, consumers and the public have
a long-term interest in seeing that the regulated company
has an opportunity to earn returns that are not so high
as to be excessive, but that also are sufficient to
encourage continued replacement and maintenancer ds well
as needed expansions, extensions, and new services.
Thus, both the consumer and the public interest depend ono25
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Gaske, Di 9a
Intermountain Gas Company
estabfishing a return that wil-l- readily attract capital
without being excessive.
0. How are the costs of preferred stock and
long-term debt determined?
A. For purposes of settj-ng regulated rates, the
current embedded costs of preferred stock and long-term
debt are used in order to ensure that the company
receives a
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Gaske, Di 10Intermountain Gas Company
return that is sufficient to pay the fixed dividend and
interest obligations that are attached to these sources
of capital.
O. How is the cost of common equity determined?
A. The practice in setting a fair rate of return
on coflrmon equity is to use the current market cost of
common equlty in order to ensure that the return is
adequate to attract capital and is commensurate with
returns avail-able on other investments with similar
fevels of risk. However, determining the market cost of
common equity is a rel-atively complicated task that
requires analysis of many factors and some degree of
judgment by an analyst. The current market cost of
capital for securities that pay a fixed l-evel of interest
or divldends is relatively easy to determine. For
example, the current market cost of debt for
pub11c1y-traded bonds can be cafculated as the
yield-to-maturity, adjusted for fl-otation costs, based on
the current market price at which the bonds are selling.
In contrast, because common stockholders receive only the
residual earnings of the company, there are no fixed
contractuaf payments which can be observed. This
uncertainty associated with the dividends
will be paid greatly complicates the task
that eventually
of estimating
the cost of common equity capital. For purposes of thiso25
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testimony, I have relied on several analytical approaches
for estimating the cost of common equity. My primary
approach rel-ies on two DCE anal-yses. In addition, I have
conducted two risk premium analyses, a market DCF
analysis of the S&P 500, and a Capital Asset Pricing
Model ("CAPM") analysis as benchmarks to assess the
reasonableness of the DCF resul-ts. Each of these
approaches is described later in this testimony.
o ,tr
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Intermountain Gas Company
B. Interest Rates
O. What are the general
affect the cost of capital?
A. Companies attempting
must compete with a variety of
Prevailing interest rates and
and the Economy
economic factors that
to attract common equity
alternative investments .
other measures of economi-c
trends influence investors'perceptions of
on both short-outl-ook and its implications and long-term
capital markets. Page 1 of Schedule 1 of Exhibit 05
shows various general economic statistics. Real- growth
in Gross Domestic Product ("GDP") has averaged 2.6
percent annually during the past 30 years, 2.4 percent
for the past 20 years, and 7.4 percent for the past 10
years. After increasing at an annual rate of 2.4 percent
in 20L5, the Bureau of Economj-c Analysis reported that
GDP for the first quarter of 2016 grew at a real annual
rate of 0.8 percent. s According to Bl-ue Chip Economic
Indicators, the consensus forecast for expected growth in
real GDP is 1.9 percent in 20766 and 2.3 percent in 2011 .1
Likewise, the U.S. unemployment rate has improved i-n
recent months to 4.7 percent,B but the l-abor force
participation rate for civil-ians 16 years and over
remaj-ned at 62.6 percent f or May 20L6, near the l-owest
rate since the late 1970s.9 Improvements in the U.S.
unemployment rate are partly attributed to the reduced
the economic
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U.S. l-abor force and are not fully explained by job
growth.
Federal-
fn light of these weak economic conditions, the
Reserve has maintained its federal
U.S. Department of Commerce, Bureau of Economic Analysis, News
Release, May 21, 2076.
Blue Chip Economic Indicators, Vol. 4I, No. 6, June 10, 201,6,
aL 2.
Th';A =,t- ?, eL J.
U.S. Department of Labor, Bureau of Labor Statistics, News
Release, June 3, 2476, at 1.
Ibid, al 2.
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funds rate of 0.25 percent to 0.50
loans to banks in order to provide
the U. S. financial markets. lo
In October 2014, the Federal
percent for overnight
continued liquidity to
Open Market Committee
("FOMC") ended its Quantitative Easing proqram, whlch
provided extraordinary monetary stimulus for the U.S.
economy for several years through asset purchases of
mortgage-backed secur-ities and Treasury bonds. However,
the Federal Reserve's accommodative policy continues
today. SpecificaIIy, the FOMC recently noted, " Ithe
FOMC'sl policy, by keeping the Committee's holdings of
longer-term securities at sizable levels, should help
malntain accommodative financial conditions. "ll
In June 2016, the FOMC noted that, "with gradual
monetary policy, economicadjustments in
activity wiII
the stance of
expand at a moderate pace and labor market
indicators will strengthen. "12 The FOMC further noted
that "inflation is expected to remain fow in the near
term, in part due to earller declines in energy pricesr "
but is expected to rise over the medlum term.
In addition to the stated expectations of the FOMC,
market analysts are expecting increases in interest rates
in the short and medium term. The l4ay 2076 issue of Blue
Chip Ej-nancial Eorecasts surveyed leading economists and
market participants concerning their views regarding theo25
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timing of possible future increases in short-term rates
by the Federal Reserve. Bl-ue Chip reports that
approximately B7 percent of those surveyed expect that
the FOMC will gradually
10
11
L2
Statement of the Federaf Open Market Commlttee, June 15, 2A76
rbid.
rbid.
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Intermountain Gas Company
increase its overnight policy rate by no l-ater than
September 2016.13 The average yield on the 30-year U.S.
Treasury bond in May 2016 was 2.63 percent. By contrast,
the Blue Chip consensus estimate projects that the
average yi-eld on the 3O-year U.S. Treasury bond will-
increase to 4.30 percent for the period from 2018 through
2022.74 Thus, the consensus estimate from leading
economists is for an j-ncrease of 161 basis points in U.S.
Treasury bond yields over the next several years.
As pages 2-4 of Schedule 1 of Exhiblt 05 show,
interest rates on longer-term A-rated and Baa-rated
public utility bonds have j-ncreased since the beginni-ng
of 2075. Between January 2075 and May 20L6, the average
yield on A-rated public utility bonds increased from 3.58
percent to 3.93 percent, and the average yield on
Baa-rated public utillty bonds increased from 4.39
percent to 4.60 percent. Credit spreads, whj-ch measure
the incremental cost of corporate debt rel-ative to U.S.
Treasury bonds, are flat compared to one year o9o, with
the average spread of Baa-rated utility bonds over
3O-year U.S. Treasury bonds at 2.07 percent in June 2075
and 1,.91 percent in May 2076.
fnvestors al-so are influenced by both
As shownand projected
Schedule 1 of
on Page 1 of
Exhibit 05, during the past decade, the
the historical-
l-evel- of i-nflation.
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Consumer Price Index has increased at an
rate of 2.0 percent and the GDP Implicit
a measure of price changes for all goods
average annual-
Price Deflator,
produced in the
United States, has
. According
lncreased at an average
to Bl-ue Chip Economic
rate of 1. B
percent.
Consumer
Indicators, the
Price Index
13 Blue Chlp Financial- Forecasts, Vo}. 35, No. 5, May 1,2076,
at 14.
Blue Chip Financial Forecasts. Vo1. 35, No. 6, June 1t 20761
at 14.
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is forecasted to increase by 1.3 percentls and 2.3
percentl6 for 2016 and 20L1, respectively. Over the
intermediate and longer-term, however, investors can
expect higher infl-ation rates as the Eederal Reserve's
accommodative monetary po11cy, which began in 2008,
places upward
once economic
O. How
pressure on consumer and producer prices
growth returns to historical levefs.
are current economic conditions refl-ected
equity markets?
. The equity markets have
stock market decline in 2008
Federal Reserve's massive
in the
large
mortgage-backed securities
recovered from the
and 2009, but the
A
interest rates on government bonds and
market valuation bubble that i-ncreases
purchases of
have created
federal- debt and
artificially low
a potential stock
the risks in the
equity market.
C. Discounted Cash Flow ("DCF") Method
O. Please describe the DCF method of estlmatlng
the cost of common equity capital.
A. The DCF method reffects the assumption that the
market price of a share of conrmon stock represents the
discounted present value of the
dividends that lnvestors expect
stream of afl future
the firm
method suggests that investors in common
to pay
stocks
The DCF
expect to
realize returns from two sources: a current dividendo25
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yield plus expected growth in the val-ue of their shares
as a resul-t of future dividend increases. Estimati-ng the
cost of capital with the DCF method, therefore, is a
matter of cal-culating the current dividend yield and
estimating the
15 Blue Chip Economic fndicators, Vol. 41, No. 6, June 10,2076,
dL Z.
Ibid., at 3.L6o25
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long-term future growth rate in dividends that investors
reasonably expect from a company.
The dividend yield portion of the DCE method
utilizes readily-available informatlon regarding stock
prices and dividends. The market price of a firm's stock
reflects investors' assessments of risks and potential
earnings as well as their assessments of alternative
opportunities in the competitive flnanciaf markets. By
using the market price to calculate the dividend yield,
the DCF method implicitly recognizes investors' market
assessments and alternatives. However, the other
component of the DCF formufa, investors' expectations
regarding the future long-run growth rate of dividends,
is not readily apparent from stock market data and must
be estimated using informed judgment.
O. What is the appropriate DCF formula to use in
this proceeding?
A. There can be many
basic DCE formufa, depending
different versions of the
dividend increase
payments.
moCel that
most reasonable regarding the
on the assumptions that are
timing of future dividend
is most appropriate to useIn my opinion,
is based on the assumptions
next annual
that dividends are
paid
isa
quarterly and that the
half year away. One version of this quarterly model
assumes that the next dividend payment will be received
ir a
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in three months, or one quarter. This model multiplies
the dividend yield by (1 + 0.75q). Another version
assumes that the next dividend payment wifl be received
today. This model- multiplies the dividend yield by
(1 + O.Sq). Sj-nce, oo average, the next dividend payment
is a half quarter away, the average of the resul-ts of
these two model-s is a reasonable approximation of the
average timing of dividends and
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Intermountain Gas Company
dividend
companies
these two
fncreases
that pay
quarterly
that investors can expect from
dividends quarterly. The average of
dividend model-s is:
7+0 .625
P +g
Where: K : the cost of capital , or total- return that
investors expect to receive;
P - the current market price of the stock;
D9 : the current annual dividend rate; and
g : the future annual growth rate that
investors expect.
In my opinion, this is the DCF model that is most
appropriate for estimating the cost of common equity
capital for companies that pay dividends quarterly, such
as those used in my analysis.
D. Flotation Cost Adjustment
O. Does the investor return requirement that is
estimated by a DCF anal-ysis need to be adjusted for
flotation costs in order to estimate the cost of capital?
A. Yes. There are significant costs associated
with issuing new coflImon equity capital, and these costs
must be considered in determlning the cost of capital.
Schedule 2 of Exhibit 05 shows a represent.ative sample of
flotation costs incurred with 32 new common stock issues
by natural gas distribution compani-es since January 2004.
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Fl-otation costs associated with these new issues averaged
4 . 10 percent.
This indicates that in order to be able to issue new
common stock on reasonable terms, without diluting the
value of the existing stockholders' investment,
fntermountain must have an expected return that places a
val-ue on its
Gaske, Di 15a
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equity that is approximately 4.0 percent above book
va1ue. The cost of common equity capital is therefore
the investor return requirement mul-tiplied by 1.04.
One purpose of a flotation cost adjustment is to
compensate common equity investors for past flotation
costs by recognizing that their real investment in the
company exceeds the equity portion of the rate base by
the amount of past flotation costs. Por example, the
proxy companies generally have incurred fl-otation costs
in the past and, thus, the cost of capital invested in
these companies is the investor return requirement plus
an adjustment for flotation costs. A more important
of a flotation costpurpose
return that is sufficient to
adj ustment
enable a
is to establish a
company to attract
capital on reasonable
requirement of a fair
terms. This fundamental
rate of return i-s
well--understood basic principle that a
analogous to the
firm, or an
individual-,
when they do
should maintain a good credit rating even
not expect to be borrowj-ng money in the near
future. Regardless of whether a company can confidently
predict its need to issue new common stock severa1 years
in advance, it should be in a position to do so on
reasonabfe terms at al1 times without dilution of the
book val-ue of the existing investors' common equity.
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applied to the entire common equity investment and not
just a portion of 1t.
E. DCF Study of Natura1 Gas Distribution
Companies
a. Would you please describe the overall approach
used in your DCF analysis of Intermountain's cost of
common equity for its Idaho natural- gas distrj-bution
operatJ-ons?
A. Because Intermountain's Idaho natural gas
distribution operations must compete
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Intermountain Gas Company
for capital with many other potential projects and
investments, it is essential- that the Company have an
allowed return that matches returns potentially avail-abl-e
from other similarly risky investments. The DCF method
provi-des a good measure of the returns required by
investors in the financial- markets. However, the DCF
method requires a market price of common stock to compute
the dividend yield component. Since Intermountain is a
subsidiary of MDU Resources and does not have
publicly-traded common stock, a direct, market-based DCF
analysis of
distribution
Intermountain's Idaho natural gas
operations as a stand-al-one company is not
an al-ternative, I have used a group of
naturaf gas distribution companies that have
possible. As
publicly-traded common
purposes of estimating
Intermountainrs Idaho
stock as a
the cost of
proxy group for
common equity for
distributionnatural- gas
operations.
O. How did you select a group of natural gas
distribution proxy companies?
A. I started with the twelve companies that The
Value Line Investment Survey ("VaIue Line") classifies as
Natural Gas Util-ities to ensure that the company is
considered to be primarily engaged in the natural- gas
distribution busi-ness and that retention growth rateo25
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projections are avail-abl-e. From that group, I elimlnated
any companies that did not have investment-grade credlt
ratings from either Standard & Poor's ("S&P") or Moody's
Investors Service ("Moody's") because such companies are
not sufficiently comparable in terms of business and
flnancial risk to Intermountain. fn addition, I excluded
any companies that did not pay dividends, or that did not
have future growth rate estimates provided by either
Zacks or Thomson First CaIl, or that were currently
engaged in significant
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mergers or acquisitions. In order to ensure that the
companies are prlmarily engaged in the natural gas
distribution business, I eliminated any companies that
did not derive at least 70 percent of their operating
income from regulated natural gas dlstribution operations
in 2075, or that did not have at least 10 percent of
their total assets devoted to the provision of natural
gas distribution service in 2075. As shown on page 1 of
theseSchedule 3 of Exhibit 05, seven companies met
crlteria for inclusion in the proxy group.
O. How did you calculate the dividend yields for
the companies in your proxy group?
A. These calculations are shown on pages 7-2 of
Schedule 4 of Exhibit 05. For the price component of the
calculation, I used the average of the high and 1ow stock
prices for each month during the six-month period from
December 20L5 through May 2076. The average monthly
dividend yields were calculated for each proxy group
company by dividing the prevailing annualized dlvidend
for the period by the average of the stock prices for
each month. These dividend yields were then multipJ-ied
0.625q) to arriveby the quarterly DCF model
at the projected divldend
model.
factor (1 +
yield component of the DCF
O. Please describe the method you used to estimateo25
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the future growth rate that investors expect from this
group of
A
employed
analyst
estimate
companies.
There are many methods that reasonably can be
in formulating a growth rate estimate, but an
must attempt to ensure that the end result 1s an
rate that
that fairly
investors
reflects the forward-looking growth
expect. I developed two different
proxy companies. In theDCF analyses of the
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first approach, I conducted a Basic DCF analysis that
for the growth
approach used a
relied on analystsf earnj-ngs forecasts
of the model. My second
the analysts' earnings growth projections
growth (a1so known as " sustainabl-e growth" )
forecasts of
equity) to produce a
rate component
combi-nation of
and retention
forecasts from Value Line (based on
dividends, earnings, and returns on
Blended Growth Rate Analysis.
F. Basic DCF Analysis
O. How dld you estimate the expected future growth
rate in your Basic DCF anal-ysis?
A. In my Basic DCF anal-ysis, I have estimated
expected future growth based on long-term earnings per
share growth rate forecasts of investment analysts, which
are an important source of information regarding
investors' growth rate expectations. This Basic DCE
anal-ysis assumes that the analysts' earnings growth
forecasts incorporate all information required to
estimate a long-term expected growth rate for a company.
growth
and
I have used the consensus estimates of
forecasts published Zacks Investmentby
(as
earnangs
Research
Thomson First CaIl reported on Yahoo! Finance) as the
prr-mary sources
calcul-ations.
for analysts' forecasts in my
As shown on paqe
the
4 of Schedule 4 of
Exhlbit 05, the average of analysts' long-termo25
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earnings growth rate estimates
distribution proxy companies is
median is 5.00 percent.
O. How did you calculate
the Basic DCF analysis?
for the natural gas
5.61 percent, and the
the cost of capital using
A. These cal-cul-ations are shown on page
dividend
6of
yield is
factor
Schedul-e 4 of Exhibit 05.
multiplied by the quarterly
The annual
dividend adlustment
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fntermountain Gas Company
(1 + 0.625q), and this product is added to the growth
rate estimate to arrive at the i-nvestor-required return.
Then, the investor return requirement 1s mul-tiplied by
the flotation cost adjustment factor, 7.04, to arrive at
the Basic DCF estimate of the cost of common equity
DCF analysiscapital for the proxy companies. The Basic
indicates
in a range
analysis,
the third
O.
Analysis
expectations for the proxy companies?
A. The Blended Growth Rate approach
Vafue Line retentlon growth forecasts; and
estimates of long-term earnings growth for
from various investment analysts,
and Thomson First CaI1.
a cost of common equity for the proxy companies
from 1.59 percent to 11.06 percent. In this
the median for the group is 9 .40 percent and
quartile is 70.24 percent.
G. Blended Growth Rate Analysis
How did you use your Blended Growth Rate
to estimate investors' long-term growth rate
combi-nes: (i )
(ii )
each
CONSCNSUS
company
What approach did
growth retention
as published by Zacks
you use in calculating the
Growth rate?
O.
long-term
is based
The long-term retention growth
on the cafculation of retention
rate component
growth rates
using Value Line forecasts for each company.
O. Please describe the retention growth rateo25
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fntermountaj-n Gas Company
component of your analysis.
A. I have relied upon Vafue Line projections of
the retention growth rates that the proxy companies are
expected to begln maintaining three to five years in the
fuLure. Although companies may experience extended
periods of growth for other reasons, in the long-run,
growth i-n earnings and dividends per share depends in
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Intermountain Gas Company
part on the amount of earnings that is being retained and
reinvested in a company. Thus, the primary determinants
of growth for the proxy companies wil-1 be (i) their
ability to find and develop profitabfe opportunities;
(ii) their ability to generate profits that can be
reinvested in order to sustain growth; and, (j-ij-) their
willingness and incl-ination to reinvest avail-able
profits. Expected future retention rates provide a
general measure of these determinants of expected growth,
particularly items (ii) and (iii) .
a. How can a company's earnings retention rate
affect its future growth?
A. Retention of earnings causes an increase in the
book value per share and, other factors being equal,
increases the amount of earnings that is generated per
share of common stock. The retention growth rate can be
estimated by multiplying the expected retention rate (b)
by the rate of return on common equity (r) that a company
is expected to earn in the future. For example, a
company that is expected
and retain 15 percent of
to have a growth rate of
to earn a return of 72 percent
expected
f oll-ows:
its earnings might be
9 percent, computed as
0.75 x 72+ : 9Z
On the other hand, another company that is also expected
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earnings might be expected to have a growth rate of 3
percent, computed as follows:
0.25x12+:32
Thus, the rate of growth in a firm's book value per share
of earnings and theis primarily
proportion of
determined by the
retained
leveI
earnangs in the company.
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O. How dld you calcufate the expected future
retention rates of the proxy companies?
A. For most companies, Value Line publishes
forecasts of data that can be used to estimate the
retention rates that 1ts analysts expect individual
companies to have three to five years in the future.
Since these retention rates are projected to occur
several years in the future, they should be indicative of
a normal expectation for a primary underlying determinant
of growth that would be sustai-nabIe indefinitely beyond
the period covered by analystsr forecasts. Whil-e
companies may have either accelerating or decel-erating
growth rates for extended periods of time, the retention
growth rates expected to be in effect three to five years
1n the future generally represent a minimum "cruising
speed" that companj-es can be expected to maintain
indefinitely. The derivation of Val-ue Line's retention
growth rate forecasts for each of the proxy companies i-s
shown on page 3 of Schedul-e 4 of Exhibj-t 05. The
projected earnings per share and projected dividends per
share can be used to calcufate the percentage of earnings
per share that is belng retained and reinvested in the
company. This earnings retention rate is multiplied by
the projected return on common equity to arrive at the
projected retention growth rate. The average retention
Gaske, Di 23
Intermountain Gas Company
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Intermountain Gas Company
growth rate for the proxy companies is 4.44 percent, and
the median is 4.17 percent.
O. How dld you utilize the analysts' projected
earnings growth rates and the projected earnings
retention growth rates in estimating expected growth for
the proxy companies in the Blended Growth Rate Analysis?
A. As shown on page 5 of Schedule 4 of Exhiblt 05,
I cal-culated a weighted average
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Intermountain Gas Company
of the analysts' projected
projected retention growth
growth rate estimates for
earnings growth rates and the
rates to derive long-term
each
proxy companies?
on page 1 of
In these calculatJ-ons, f gave
of the proxy companies.
one-hal-f weighting to the
earnings growth rat.e projections and one-half
to the projected retentj-on growth rates. The
the blended growth rates for the proxy
is 5.06 percent, and the median j-s 5.17
How did you utilize these Bfended Growth Rate
1n estimating the return on common equity
capital that investors require from the
analysts'
weighting
average of
companies
percent.
O.
estimates
A. These calculations are shown
Schedule 4 of Exhiblt 05. Again, the annua.l- dividend
yield for each company is multiplied by the quarterly
dividend adjustment factor (1 + 0.625q), and this product
is added to the growth rate estimate to arrive at the
investor-required return. FinaIIy, the investor return
requirement is multiplied by the flotation cost
adjustment factor, 7.04, to arrive at the cost of common
equity capital for the proxy companies. This Bfended
Growth Rate Analysis indicates that the cost of conrmon
equity capltal for the natural gas distribution proxy
companies 1s in a range between 1.65 percent and 9.50
percent. In thls analysis, the median for the group iso25
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Intermountain Gas Company
8.61 percent and the third quartile is 8.95 percent.
0. Earlier you discussed the fact that the Federal
Reserve Board has been setting interest rates and
monetary policy in a way that artificially depresses
yieJ-ds on U.S. Treasury debt. What does this mean for
the cost of common equity for gas distribution companies?
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Intermountain Gas Company
A. The DCF cost of equity results for regulated
gas distribution companies are being affected by
artificlal factors in the current and projected capital
markets, including the following two key factors: (1)
the Federal Reserve's ongoing accommodative monetary
policy; (2) and the market's expectati-on for
substantially higher interest rates.
Rlsing interest rates historically have had a
negatlve effect on stock prices, especially for dividend
paying stocks such as utilities. When interest rates
begin to rise, the return on gas utility equities may be
less attractive to investors as compared with other
investments of comparable risk. The market's expectatJ-on
for rising interest rates suggests that the cal-culated
cost of equity for the proxy companies using current
market data is 1ikely to be an artificially depressed
estimate of investorsf required return at this time.
H. Risk Premiu:n Anal.ysis
O. Have you conducted additional analyses 1n
determining the cost of equity capital for Intermount.ain?
A. Yes. The risk premium approach provides a
general guideline for determining the level of returns
that investors expect
stocks. Investments
from an investment in common
in the common stocks of companies
carry consi-derably greater risk than investments in bondso25
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of those companies since
the resldual i-ncome that
common stockhol-ders receive only
is left after the bondholders
have been paid.
or liquidation of
on the assets of
of bondholders.
bondholders with
In addition,
the company,
a company are
This priority
in the event of bankruptcy
the stockhol-ders' claims
subordinate to the claims
standing provides
greater assurances
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fntermountain Gas Company
that they will recei-ve the
expect and that they wil-I
investment when the bonds
return on investment that they
rece.l_ve a return of their
Accompanying the
stocks is a
mature.
greater risk
requirement
associated with common
by investors expect to earnr ofl
return that is the return they
by investing in less risky bonds. Thus, the
that they can
greater than
rlsk premi-um approach estimates the return i-nvestors
require from common stocks by utiLt-ztnq current market
information that is readily available in bond yields and
adding to those yields a premium for the added risk of
j-nvesting in common stocks.
Investors' expectations for the future are
infl-uenced to a large extent by their knowledge of past
experience. Ibbotson Associates annually publishes
extensive data regarding the returns that have been
earned on stocks, bonds and U.S. Treasury bills since
1926. Historically, the annual return on large company
common stocks has exceeded the return on long-term
bonds by
average, a
could earn
corporate
percent )
added to
a premium of 570
from 1926-2015.17
basis points (5.7
When this premium isper
the
year
average yield on Moody's corporate bonds in
recent months of approximately 4.3 percentl8, the resul-t
is an investor return requirement for large company
stocks of approximately 10.0 percent. However, investorsa25
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in smaller companies expect higher returns over the long
term, due to the additional business and financlal- risks
that smafler companies face. According to fbbotson
Associates, companies in the same size range as
Intermountainfs Idaho natural gas distribution operations
have had a premi-um of 1,420 basis points (I4.2 percent)
L1 Morningstar SBBI Presentation, 7926-2075, Slide 6.
Caf cufation: (72.0 percent - 6.3 percent : 5.'/ percent) .
Exhibit 05, Schedul-e 1, at 3. The average yield on Moody's
corporate bonds from December 2015 through May 2016 has been
4 .34 percent.
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over the average return on long-term corporate bonds. le
When added to the recent average corporate bond yie1d,
this size-rel-ated premium suggests an expected return of
18.6 percent. This analysj-s indicates that the rate of
return that I am proposing in this proceeding would be
low rel-ative to the historic risk premiums earned by
similarl-y-sized unregulated companj-es.
0. Did you al-so perform another risk premium
analysis ?
A. Yes, I did. Research studies provide empirical
support for the proposition that equity risk premia
generally increase as interest rates decrease, and vice
versa. In fact, the data provided in Schedul-e 5, Exhibit
05 produce statistical resul-ts that are consistent with
existing research in this area. Using this data, I
performed a l-inear regression to estimate the
rel-ationship between 30-year U. S. Treasury bonds and the
risk premium required for regulated gas distribution
companies. The resul-ting equation is presented in
Schedule 5, Exhibit 05 and re-created bel-ow:
Intercept + Coefficient x Bond Yield : Risk Premium
0.08465 + (- 0.5653 x Bond Yield) : Risk Premium
The regression statistics indicate that this equation is
statistically significant and the R-square reveal-s that
approximately 79 percent of the variation in the risk
Gaske, Di 2'7
Intermountain Gas Company
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premium is explained by the bond yie1d. The negative
coefficient in the above equation demonstrates the
inverse relationship between bond yields and the risk
19 lbbotson SBBI 2015 Cl-assic Yearbook, at 108-109. Ibbotson
Associates defines size ranges based on market capitalizati-on
f ca.Iculated the implied market capitalization for
Intermountaj-n Gasr Idaho natural- gas distribution operatlons
based on the Company's pro forma rate base ($236.926 mil-lion)
and the projected average equity ratj-o tor 2016 (50.00
percent). This places Intermountain's Idaho natural gas
distribution operations in Ibbotson Associates' tenth
decil-e. Calcul-ation:. 20.6 percent - 6.4 percent :
14.2 percent.
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Intermountain Gas Company
premium. For every change of 100 basis points in the
bond yield, the risk premi-um changes by approximately 51
direction.basls points in
This Risk
the opposite
Premium analysis was conducted using three
different risk-free rates: (1) the current average yleld
on 30-year Treasury bonds, (2) the near-term projected
yields on 3O-year Treasury bonds in 2076 and 2071; and
(3) the longer-term projected yields on 30-year Treasury
bonds from 2018-2022. Based on these three interest
rates, the regression equation produces an average ROE
estimate is 9.92 percent.
I. Market DCF Analysis
O. What other analysis did you conduct in
determining the cost of equity capital for Intermountain?
A. For an additional- benchmark of the
reasonabl-eness of my DCF results, I calcu1ated the
current required return for the companles in the S&P 500
fndex. Using data provlded by the Bloomberg Professional-
service, I performed a market capitali-zation-weighted DCE
cal-culation on the S&P 500 companies based on the current
dividend yields and long-term growth rate estimates as of
May 31, 2076. These calculations are shown in Schedule
6, pages 1-9 of Exhibit 05. The current secondary market
required ROE for the S&P 500 rs 12.13 percent. This
analysis lndicates that the rate of return that f am25
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proposing in this proceeding is low relative to the
return required by investors who invest in the S&P 500.
J. Forward-Looking CAPM
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Intermountain Gas Company
O. Many analysts woul-d argue that gas distribution
less risky thancompanr-es are
Does this make
eval-uating the
A. No.
significantly
Some analysts
risk between
the S&P 500 a
the S&P 500 companies.
poor benchmark for
greater
natural gas distribution
large magnitude of this
the proxy company DCF
DCF resul-ts?
The DCE
use the
proxy companies.
a rel-iable measure
required return for the S&P 500 is
than the return required for the
company proxy group, and the
difference is an indicator that
resul-ts may be on the 1ow side.
CAPM to adjust for differences in
average and a particular group of
I do not consider the CAPM to be
cost of capital, one could use
results to achieve a
the market
V{hil-e
it to adjust the S&P 500
risk-adjusted benchmark
company proxy group.
used as the measure
shown on Schedule 6,
beta estimated by Value Line for
0.7 4. Using thls beta estimate
following CAPM results:
of the
for the natural gas distribution
For example, Beta is frequently
of relative risk in the CAPM. As
page 11 of Exhibit 05, the average
the proxy companies is
would produce the
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]-16
Table G.2: CAPM Results
S&P Current Required Return 12.l3o/o
Less: May'16 T-Bond 2.63%
Market Risk Fremium 9.50o/o
x hoxy Company VL Beta 0.74
LDC Risk Premium 7.06%
Plus: May'16 T-Bond 2.630/o
IDC CAPMCostof Eq.9.690/o
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Thus, if one were to use the CAPM as a benchmark of
a reasonabfe return, this benchmark generally supports
in this proceedinq.2othe recommended ROE of 9. 9 percent
K. Relative Risk Analysis
O. Have you compared the risks faced by
fntermountain's ldaho natural- gas distribution operatj-ons
with the risks faced by the proxy group of companies?
A. Yes. There are four broad categories of risk
that concern .investors. These include:
1. Business Risk;
2. Regulatory Risk;
3. Financial- Risk; and,
4. Market Risk.
O. Pfease describe the business risks inherent 1n
the naturaf gas distribution industry.
A. Busi-ness rlsk refers to the abllity of the firm
cost of operations.to generate revenues that exceed its
Business risk exists
costs are inherently
fevel of demand for
because forecasts of both demand and
uncertain. Markets
the firm's output may
and later
change and the
be sufficient
becometo cover its costs at one time
insufficlent. Sunk investments in long-Iived naturaf gas
distributlon assets, for
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Intermountain Gas Company
20 This CAPM calculation is identicaf to the one adopted by the
U.S. Federaf Energy Regulatory Commission earfler this year.
Martha Coakley, et af. v. Bangor Hydro-EJectric Company, et
df., Opinion No. 531, 147 FERC g.67,234 (2074\; aff'd in
Opinion No. 531-8, 150 FERC t[ 61,165 (March 3, 20L5). Note
that FERC used the CAPM only as a benchmark, but set the
alfowed rate of return above the median indlcated by a DCF
analysis of proxy companies because of the current abnormal
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fntermountain Gas Company
which cost recovery occurs over a period of thirty years
or more, are subject to enormous uncertaintj-es and risks
that demand, costs, supply, and competition may change in
ways that adversely affect the value of the investment.
O. What are some of the business risks faced by
Intermountain's Idaho natural gas distribution
operations ?
A. The Company' s natural-
operations in Idaho face many
that are associated with other
gas distributlon
the same business risks
natural gas distribution
companies. However, Intermountain's Idaho natural- gas
distribution operations face some particular rj-sks that
distinguish the Company from the proxy group of
distribution companies, including its smal1er size and
general-1y less diversified economies in the cities and
towns that it serves.
As shown on page 1 of Schedule 3 of Exhibit 05,
Intermoutain's Idaho natural gas distribution operations
are significantly smaller than the operations of any of
the proxy companies and a fraction of the size of the
typical proxy company. For example, the proposed 20L6
rate base of Intermountainfs Idaho natural gas
distribution operations is equal to only 4.5 percent of
the year-end 2075 total- assets of the median proxy
company. Similarly, fntermountain's Idaho natural gas
of
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distribution test year requested operating revenues and
operating income are only 10.8 percent and 9.3 percent of
the year-end 201,5 l-evel for the median proxy company,
respectively. Thus, depending upon the measure of size,
the typical proxy company is somewhere between 9 and 22
times the size of Intermountain's Idaho naturaf gas
dlstribution operations.
implications
The Company's smafler size has
significant
Associates
for business ri-sks. Ibbotson
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has documented the significantly higher returns that
generally have been associated with small companies.
With its smal-I revenue base relative to the proxy
group companies, Tntermountain's Idaho natural gas
distribution operations are subject to greater risk that
a major employer or industry, such as a manufacturing
facility, agricultural processing facility or government
faci11ty, might downsize or cfose. Eor example,
fntermountain has witnessed the downsizlnq, and even
closure, of large potato processing plants as technology
has replaced line workers. Events such as these could
signlflcantly affect overall employment and income in the
towns served. Eactors that negatively lnfluence the
IocaI economy can reduce demand for Intermountain's Idaho
natural gas distributlon service and adversely impact
investments in facil-ities used to provlde those services.
Another risk faced by Intermountain is the fact that
it currently recovers a substantial portion of its fixed
costs in the volumetric component of its rates and has
experienced declining average use per customer, due in
part, to the relatively new housing stock of its customer
base, more energy efficient appliances, and stricter
building codes. As discussed 1n the testimony of Company
witness Lori Blattner, fntermountain is proposing to
raise the monthly customer charge for irs Idaho natural
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fntermountain Gas Company
gas distribution operations for residential and
commercj-al- customers. For example, Intermountain is
proposlng to raise the monthly customer charge for
residential- customers from $2.50 (summer) /$5.50 (winter)
to $10.00 regardless of the time of year. Company
witness Mike McGrath explains in his testimony that
Intermountain is also proposing to implement a Fixed Cost
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Collection Mechanism ("FCCM") that will break the link
between Intermountain's (a) margin from its resi-dential-
and commercial customers and, (b) the natural gas
deliveries to these same core market customers.
O. Would the implementation of Intermountain's
proposed customer charge reduce the Company's risk
profile relative to the proxy group?
A. No. Because the ROE recommendati-on is
establ-ished for a company based on its risk profile
relative to the proxy group, it is necessary to consider
how the implementation of a higher customer charge would
affect the Company's risk proflle relative to the proxy
companies. Schedul-e I of Exhibit 05 shows that the
average monthly customer charge for the operating
utilitles held by the proxy group companies ranges from
$5.00 to $23.00, with an average of $12.41.
Schedule 7 shows that 66.67 percent of the operating
util-ities hel-d by the proxy group have monthly customer
charges for residential customers that are higher than
the $10.00 customer charge being proposed by
Intermountain in Idaho.
Similarly, Schedule 7 al-so shows the operating
utilities with some form of vol-umetrj-c protection (e.9.,
revenue decoupling mechanisms, strai-ght fixed-variable
rate design, formula rate plans) similar to the FCCM
Gaske, Di 33
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proposed by Tntermountain. As shown on Schedul-e 7, 66.61
percent of the operating utilities hel-d by the proxy
group have protection against volumetrj-c risk similar to
the decoupling mechanism that is being proposed by
Intermountain.
If Intermountain's requests to increase the customer
charge and implement revenue decoupling in Idaho are
approved, all else being equaI, the Company will- be
comparable in risk to the proxy group companies on those
factors, and no
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fntermountain Gas Company
upward adjustment to the required rate of return on
conrmon equity would be necessary. However, Lf the PUC
were to reject Intermountain's proposed customer charge
increase or decoupling mechanism, the Company's Idaho
natural gas dlstribution operations would have generally
higher risk than the proxy companies in those
characteristics.
Considering only its smaller size, fntermountain's
Idaho natural gas distrlbution operations mj-ght require a
return that is approximately 100 basj-s points higher than
the return required for the typical proxy company. In
additlon, with the exceptj-on of Boise, the Company's gas
distribution operations are primarily concentrated in
smaller cities and towns with local economies that are
generally fess diversified than those of
compani-es. In summary,
distribution operatlons
of the proxy companies.
O. What are the regulatory risks faced by
fntermountain's fdaho natural gas utility operatj-ons?
A. ReguJ-atory risk is closely related to business
risk and might be considered just another aspect of
busi-ness risk. To the extent that the market demand for
a natural gas distribution company's services is
sufficlently strong that the company could conceivably
fntermountain' s
are riskier than
the proxy
fdaho natural gas
the operations
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fntermountain Gas Company
recover all of its costs, regulators may neverthel-ess set
the rates at a l-evel- that will not al-Iow for ful-l cost
recovery. In effect, the binding constraint on natural
gas distribution companies is often posed by reguJ-ation
rather than by the working of market forces. One purpose
of regulation is to provide a substitute for competition
where markets are not workably competitive.
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fntermountain Gas Company
As such, regulation often attempts to replicate the type
of cost discipline and risks that might typically be
found in highly competitive industries.
Moreover, there is the perceived risk that
regulators may set a1lowed returns so low as to
effectively undermine investor confidence and jeopardlze
the ability of natural gas distribution companies to
finance their operations. Thus, in some instances,
regulation may substitute for competition and in other
instances 1t may limit the potential returns avail-able to
successful competitors. In either case, regulatory risk
is an important consideratj-on for investors and has a
significant effect on the cost of capital for all firms
in the natural gas distribution industry.
The regulatory environment can significantly affect
both the access to, and cost of capital- in several ways.
As noted by Moody's, "If]or rate-regulated utilities,
whj-ch typically operate as a monopoly, the regulatory
envi-ronment and how the utility adapts to that
environment are the most important credit
consideratlons. "21 Moodyrs further noted that:
Utility rates are set in a political/regulatory
process rather than a competitive or free-marketprocess; thus, the Regulatory Framework is a key
determinant of the success of utility. The
Regulatory Eramework has many components: the
governing body and the utility leglslation or
decrees it enacts, the manner in which regulatorso25
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are appointed or elected, the rules and procedures
promulgated by those regulators, the judiciary thatinterprets the laws and rules and that arbltrates
disagreements, and the manner in which the utility
manages the political and regulatory process. In
many cases, utilities have experienced credit stressor default primarily or at least secondarily becauseof a break-down or obstacle in the Regulatory
Framework - for instance, laws that prohibited
regulators from including investments in uncompleted
power plants or plants not deemed "used and usefuf"in rates, ot a
Moody's fnvestors Service, ReguTated ELectric and Gas
Utilities, December 23, 2473, at 9.
21
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dj-sagreement about rate-making that could not be
resol-ved until- after the utility had defau1ted onits debts.22
Regulatory Research Associates (r'RRA'r ) rates the Idaho
PUC as Averaqe/2, which is the middle rating on the
nine-point sca1e.23 RRA describes the regulatory
environment in Idaho as "rel-atj-veIy balanced from an
investor viewpoinL. "24
Intermountain's Idaho
This RRA rating suggests that
natural qas distribution operations
have average regulatory risk.
a. Would you pJ-ease describe Intermountain's
relative financial risks?
A. Financial risk exists to the extent that a
company incurs fixed obligations in financing its
operations. These f ixed obligations j-ncrease the l-evel-
of income which must be generated before common
stockholders receive any return and serve to magnify the
effects of business and regulatory risks. Eixed
financial obligations also increase the probability of
bankruptcy by reducing the company's financial-
ffexibility and ability to respond to adverse
circumstances. One possibl-e indicator of investors'
perceptions of rel-ative financial risk in this case might
be obtained from credit ratings.
Page 2 of Schedul-e 3 of Exhibit 05 shows the credit
ratings assigned by S&P and Moody's to each of theo25
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compani-es j-n the comparison group and MDU Resources.
fntermountaj-n does not have its own credit rating. The
median S&P credit rating for companies j-n the proxy group
is A. By comparison, MDU Resources' long-term rating
from S&P is BBB+ with a negative outl-ook. This suggests
that the perceived business and financial risk of MDU
Resources is
22
23
rbid.
Regulatory Research Associates, Idaho Commission Profile, June
21, 2016.
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sl1ght1y higher than that
comparison group.
The capital structure
of the typical company in the
05 show that Intermountain's proposed common
of Exhibit
equity ratlo
than theof 50.00 percent is almost four percent lower
53.88 percent median for the proxy companies as of March
31, 2076, suggesting that Intermountain's financial risk
is above average relative to the proxy group. In
addition, the Company's befow-average credit rating
suggests that a higher common equity ratio woul-d be
required to offset Intermountain's above-average business
risks.
O. Woul-d you please describe Intermountain's
market risks?
A. Market risk is associated with the changing
value of all- investments because of business cycles,
inflation, and fluctuations in the general cost of
capital throughout the economy. Different companies are
subject to different degrees of market risk largely as a
resuft of differences in their business and financial
risks. Overal1, the market risk of Intermountain's Idaho
data on Schedule B
natural gas distrlbution business
of the companies in the comparison
0. How do the overall risks
is comparable to that
group.
of the
compare with the risks faced by fntermountain's
proxy companies
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Intermountain Gas Company
naturaf gas distributlon operations?
A. Intermountainrs Idaho naturaf gas distribution
above the medi-anoperations
rel-ative to
has average
face overal-l- rlsks that are
those of the proxy companies.Although it
has
to its sma1l
rate design
vol-umetric risk
regulatory risk, Intermountain
risks due primarilyabove-average
size rel-ative
business
to the proxy companies, its
risk (i.e., very l-ow customer charge) and
due to the absence of a revenue decoupling mechanism
despite declining average use per customer, and its
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exposure to rel-atj-ve1y undiversifj-ed l-ocaI economies in
most of its service territory. Intermountain also has
above-average financial risks due to its proposed common
equity rati-o being l-ower than the proxy group median, and
the credit rating for MDU Resources being l-ower than the
proxy group median.
Although my analysis assumes approval of
Intermountain's proposed monthly customer charge and
FCCM, absent approval of those proposals, the Company
would continue to face greater rate design risk than the
typical company in the proxy group, the majority of which
have fixed customer charges wel-l- above that of
Intermountain's current customer charge in Idaho. The
greater busj-ness risk l-eads me to concl-ude that investors
apprar_se
natural
the overall risks of Intermountain's Idaho
rel-ative
Consequently,
distribution
Intermountain's Idaho
to be above average
companies.
natural gas
gas distribution
to the risks of
operati-ons
the proxy
requires an allowed
above the median of
rate of return
the range for
by my DCF
that is significantly
the companies in the
analyses.
business
proxy group indicated
IV. ST'MLIARY A}ID CONCLUSIONS
O. Pl-ease summarize the resul-ts of your cost of
capital study.o 25
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A. f conducted two DCF ana1yses on a group of
natural gas distribution companies that have a range of
risks that is roughly
Intermountain's Idaho
comparable to those of
natural- gas distribution
operat j-ons.These resul-ts are summarized as follows:
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Gaske, Di 39
Intermountaln Gas ComPanY
Table G.3: Summary of DCF Results
Basic DCF
Analysis
Blended
Growttr
RAtE DCF
Analysis
Hieh tt.06%9.50%
3'd Ouartile 10.24%8.95o/o
Median 9.40%8.61%
1tt Quartile 8.04o/o 8.17o/o
Low 7.59%7.660/o
\
In addition, I conducted two risk premium analyses, a market DCF analysis of the
S&P 500, and a CAPM analysis to test the reasonableness of my DCF analyses.
Those results are sunmarized as follows:
Table G.4: Benchmark Risk Premium and Market DCF Analyses
Return
Risk Premium (Long-Term Corporate
Bonds)
vs. Large Company Stocks 10.0%
vs. Small Company Stocks 18.6%
Risk Premium @egression of Authorized
ROEs against 30-yr Treasury vields)9.9%
Market DCF (S&P 500)t2.t%
Forward-Lookins CAPM 9.7%
My risk premium, market DCF and CAPM analyses suggest
that the DCF results generally are 1ow relative to
current market benchmarks. In particular, all of the DCF
return estimates are considerably below the 18.6 percent25
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rlsk premium return benchmark for companies in
Intermountain's rel-ative size range. Similarly, the DCF
estimates for the natural- gas distribution proxy
companies are well below the 12.I percent market DCF
estlmate for the S&P 500 companies, and supported by the
9.1 percent CAPM estimate for the natural gas
distribution proxy companies.
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O. What rate of return on common equity do you
recommend for Intermountain's ldaho naturaf gas
distribution operations in this proceeding?
A. My analyses indlcate that an appropriate rate
of return on coilimon equity for Intermountain's Idaho
naturaf gas distrlbution operations at this time is 9.90
percent, which is approximately the midpoint between the
median and the third quartj-}e of the range for my Basic
DCF analysis. This recommended return reflects my
assessment that the overal-l risks of fntermountain's
Idaho natural- gas distribution operations are above
average relative to those of the proxy companies, and the
fact that the DCF results appear to be quite low relative
to the other benchmarks at this time. Although the
Company has average regulatory risk relative to the proxy
companies, it has above average business and financial-
risks. In addition to 1ts smal-l size relative to the
proxy companies, Intermountain's Idaho naturaf gas
significantly
wel-l- as
distrj-bution operations are faced with
higher than average
volumetric risk due
rate design risk as
to declining average use per
customer. Furthermore, Intermountain has higher than
average financial risks as demonstrated by its proposed
equity ratio being l-ower than the proxy group medj-an, and
the credit rating for MDU Resources being below the proxy25
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Gaske, Di 40a
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group median. Thus, fly recommended return is
appropriately positioned to reflect the risks faced by
operationsfntermountain's Idaho natural gas
the
distribution
relative to the ri-sks faced by proxy companl_es
Prepared DirectO. Does this concl-ude your
Testimony?
A. Yes
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CSB Reporting
(208 ) 890-5198
GASKE
Intermountain Gas Company
(The following proceedings were had 1n
open hearing. )
MR. WILLfAMS: He is available for
cross-examination.
COMMISSIONER RAPER: Commission Staff?
MR. KLEIN: No cross from Staff.
COMMISSIONER RAPER: Thank you.
MR. STOKES: No cross, Madam Chair.
COMMISSIONER RAPER: Thank you.
MR. PURDY: No cross from CAPAI.
MR. RICHARDSON: No cross, Madam Chair.
MR. OTTO: No questions, Madam Chalr.
COMMISSIONER RAPER: Thank you. Any
questions from the Commissioners? I applaud everyone's
efforts at on putting on their microphone and utilLzrng
them. I am having a difficult time, so I will work on
that, getting my microphone turned on. No redirect, I
assume, by the Company?
MR. WILLIAMS: I didn't know if the
Commissioners had any questions.
COMMISSIONER RAPER: I thought that. I
asked, but maybe not. Thank you, Mr. Williams.
MR. WILLIAMS: A11 right. Obviously, no
redirect.
COMMISSIONER RAPER: Thank you, Mr. Gaske,o 25
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CSB Reporting(208) 890-s198
DEDDEN (DT)
Intermountain Gas Company
you are excused.
Ted Dedden.
produced as a
Intermountain
to tell the truth,
truth, was examined
the whole truth,
and testified as
and nothing but the
follows:
THE WITNESS: Thank you.
(The witness left the stand. )
MR. WILLIAMS: The Company woul-d call Mr
TED DEDDEN,
witness at the instance of the
Gas Company, having been first duly sworn
DIRECT EXAMINATION
BY MR. WILLIAMS:
0 Would you please state your name and
business address for the record?
A Yes, my name is Ted Dedden. My address is
555 South Cofe Road, Boise, Idaho, 83709.
0 Mr. Dedden, what is your capacity working
for the Company?
A I'm the director of accounting and
finance.
O And are you the same Ted Dedden that
prefiled direct testimony of 72 pages, along witho25
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CSB Reporting
(208 ) 890-s198
DEDDEN (Di)
Intermountain Gas Company
Exhibits 5 through 11 1n this case?
A Yes, I
And if f asked you the same questions
testimony, what would
am
O
contained in your prefiled
your answers today be?
A They woul-d
of some numerical updates.
direct
be the same with the exception
O Okay; so could you walk us through those
numerical updates and the reason for those?
A Yes. The premise for the updates are
based on our response to Staff request, production
request, No. 718 where we updated our forecasted period
to include actuals for the period JuIy through September
of 2076, and al-so an amendment that was processed at
year-end, depreciation expense, rate base, and
accumulated depreciation.
a And so for purposes of thls record, I'm
going to be referring to that update as the September
update of the forecast and is that update reflected on
Staff Exhibit 103?
A Yes.
O Okay, and do you remember what column that
is on that exhibit?
A I apologize, ror I don't. I do not have
that exhiblt here.o 25
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O So would you accept, subject to check,
that that September update is shown in the first column
or co1umn E of the Excel- spreadsheet that is entitled,
"Actual Resu.l-ts to September with Updated Forecast
Production Request 1'18"?
A YeS.
O AIl right; so please wal-k us through the
changes.
Okay, on page 3 of my testimony, line 2,
the figure for the test period changes from 235,968r000
to 236,655,324, and then moving on to page 4 of my
testimony, on line \4, operating revenues changes from
236,530,000 to 238,922,261, and on llne 15, test year
expenses changes from 235,335,000 to 236,630,331, and on
Iine 76, net operating income changes from 1,794,000 to
2,291,930, and then moving down to row excuse me, 23,
operating revenue changes from 233,631,000 to
235,965,515, and the last revision is on page 6, Iine 3,
other revenues changes from 2,893,000 to 2,956,146, and
that conclude my updates.
O At1 right; so with those changes noted, if
I were to ask you today the same questions contained in
your prefiled direct testimony, would your answers be the
same?
A Yes, they would.
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CSB Reportlnq
(2oB) 890-5198
DEDDEN (Di)
fntermountain Gas Company
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(208 ) 890-s198
DEDDEN (Di)
Intermountain Gas Company
MR. WILLIAMS: Madam Chair, I woul-d ask
that Mr. Dedden's direct testimony be spread upon the
through 11 berecord as if read and that Exhibits 6
admitted.
COMMISSIONER RAPER: Without obj ection,
across theMr. Dedden's direct testimony wilJ- be spread
read the record as if read and Exhiblts 6 through 1l- wil-l
be admitted.
(IGC Exhibit Nos. 6 - 11 were admitted
into evidence. )
(The foll-owing prefiled direct testlmony
of Mr. Ted Dedden is spread upon the record.)
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Intermountain Gas Company
O. Pl-ease state your name, title and business
address.
A. My name is Ted Dedden. I am
Einance Director of Intermountain Gas
business address is 555 S Cole Road,
you please0. Mr. Dedden, would
the Accounting &
Company. My
Boise Idaho 83707
summarlze your
educational- and prof essiorral- experience.
A. I have been wlth Intermountai-n Gas Co. for over
3 years, with prior experience with one of
Intermounta j-n' s af f iliate companies - Cascade Natural- Gas
Corp. as their Manager, Accounting Systems for three
years. Prior to thls ro1e, I served in various
accounting and finance groups with Puget Sound Energy
from L918 until 2000 in staff and management rol-es with
progressive responsibil-ities in Plant Accounting, General
Accounting, and Division Operations. f am a graduat.e of
the University of Puget Sound with a bachelor's degree in
Business Administration, with an accounting emphasis.
O. What is the purpose of your testj-mony in this
proceeding?
A. My testimony describes Intermountain Gas
Company' s,
2076 test
("Intermountain" or the "Company") unadjusted
year Rate Base and fncome Statement In
I will discuss the nature of transactions with
companies durinq the test year, the costs of
addition,
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Intermountain Gas Company
which are reflected in test year expenses sponsored by
Mr. Jacob Darrington.
O. Are
A. Yes.
sponsoring the
herein:
you sponsorr_ng any
In addition to my
exhibits ?
f o1l-owing exhibits,
testimony, f am
which are described in
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fntermountain Gas Company
Exhibit No. 06 Unadjusted Rate Base
Exhibit No. 0l Monthly Rate Base Bal-ances
Exhibit No. 0B Unadjusted Income Statement
Exhibit No. 09 Other Revenues
Exhibit No. 10 IGC Cost Allocation Manua]
Exhibit No. 11 Affiliate Charges Included in
Test Year
r. UNADiN'STED TEST YEJAR RATE BASE A}ID INCOME
STATEMENT
O. What is the Company's proposed test year for
this case?
A.
December
to June,
O.
proj ected
A.
Intermountain is proposing a test perlod ending
31, 20L6, reflecting six months actual, January
and six months projected data, July to December.
P1ease describe the basis for the 2016
data.
The 2076 projected data was prepared as part of
ongoing budgeting process. It incorporates
best outlook for capital and expense j-tems
year 20L6 and the forecasted revenues for
the Company's
the Company's
for calendar
that period.
O. Have any adjustments been made to the forecast
to determine
requirement?
A. Yes
the test period rate base and revenue
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necessary to determine the appropriate rate base and
expense l-evels for rate making purposes. These
adjustments are discussed by Company witness Jacob
Darrington in his testlmony.
O. What j-s the unadjusted rate base for the test
year?
Dedden, Di 2a
Intermountain Gas Company
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A. As shown on Exhibit 06,
l-ine 9, the unadjusted rate base
capital
basis,
page 7,
for the
items;
cofumn (b),
test period is
net gas plant$236,655,324. It consists of five
in service, materials and supplies inventory,gas storage
and customerinventory, accumulated deferred income taxes
advances.
Net plant is the thirteen-month average of
gross plant
accumufated
l-ess the thirteen-month average of
provj-sj-ons for depreciation. Added to the
net plant amount is materials and supplies inventory and
gas storage inventory, both of which are thirteen-month
averages. Accumulated deferred income taxes and customer
advances are deductions from rate base as they are
recognized as an interest-free funding mechanism from
ratepayers. Exhlbit 01, pages 1-6 show the development
of the thirteen-month averages for the items described
above.
O. Pl-ease discuss how the forecasted, JuIy to
December, amounts were determined.
A. The July to December forecasted amounts are
shown on Exhibit 07 , pages 7-6, lines 1,5-25. These
amounts were determined as follows:
Gas Plant in Service: is based on forecasted
expenditures and retirernents. On
department managers review current
a quarterly
spending andO25
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Intermountain Gas Company
update future months to determine forecasted capital
expenditures and retirements. Then the plant accounting
group runs the close out and depreciation process.
Accumul-ated Provision for Depreciation and
Amort.ization:is based on forecasted capital expenditures
and retirements. On a quarterly
managers review current spending
to determine
basis, department
and update future months
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Intermountain Gas Company
forecasted capital expenditures and retirements. Then
the plant accounting group runs the cl-ose out and
depreciation process.
Plant Material-s and Operatinq Supplies and
Undistributed Stores:are based on a three-year
historical- average.
Gas Storage Inventory: is based on projected
the periodboil-off, injections, and wlthdrawals for
ending December 37, 2076.
Accumulated Deferred Income Taxes: is based on
the Company's approved capital budget and the resul-tant
well- as book-tax timingbook-tax timing
differences on
differences as
assets previously placed in service.
Advances in Aid of Construction: is based on a
historj-cal three-year average.
O. What are the unadjusted
for the test year?
A. As shown on Exhlbit 08,
revenues and expenses
page l, column (d) ,
total operating revenues
test year expenses are
08, page L, column (d) ,
line 3, the unadjusted
are $238,922,26L. The
test year
unadj usted
on Exhibitshown$236,630,331 as
line 24. This
$2 ,2 91, 930 AS
produces
shown on
a net operating income of
Exhibit 08, page l, column (b) ,
line 25.
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Intermountain Gas Company
operating revenues ?
Test year operating revenue consists of gas
revenue and other revenues. Gas operating
are the revenues generated by the sal-e and
A
operating
revenues
transportation
transportation
page 7, col-umn
of gas under the Company's sale and
rate schedules. As shown on Exhj-bit 08,
(d), line t, the unadjusted test year gas
operating revenues are $235 ,965, 515. Forecasted,
December, gdS operatlng
July to
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Intermountain Gas Company
revenues from residential and commercial- customers are
based on forecasted customers, weather-normalized usage
per customer amounts, and currently approved rates.
revenues from industrialForecasted gas
customers are
operating
based on currently approved rates and
forecasted usage obtained from the Industrial- Services
Manager, which 1s primarily based on historical usage.
Eorecasted Gas Operating Revenues also includes
non-regulated sal-es of liquefied natural gas (LNG) from
the Company's Nampa storage facility, which are
forecasted based on historical flgures.
O. Wilt you please explain how you included
revenues and cost of gas expenses related to the Cost of
Gas Del-ivered but Unbilled (CGDU) in the presentation of
your test year data?
A. Yes. Test year operating revenue and cost of
gas expense through June 2076 includes a reduction to
revenue of $21.6 mlllion and a reduction to cost of gas
expense of $27.2 mil-l-ion due to the effect of CGDU
resulting in a gross margin reduction of $6.4 mil-l-ion.
This same deficit is removed from the determination of
revenue requirement as seen in the testimony of Company
witness Darrinqton. For simplicity, the forecast period
July - December 20L6 does not include revenue or cost of
gas expense related to CGDU.o 25
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fntermountaj-n Gas Company
a. What Other Revenues did the Company record
during the test year?
A. The Company recorded other revenues associated
with miscellaneous services, field col-l-ection charges,
return check charges, account initiation charges,
reconnection charges, interest on past due accounts,
other miscellaneous non-operating revenues, cash
dj-scounts, rents, interest income, Allowance for Eunds
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Intermountain Gas Company
Used During
non-utility
period JuIy
Construction ( "AEUDC" ) equlty, and
revenues. Forecasted other revenues for the
to December are based on calendar year 2075.
Revenues ofIn total, the Company
$2,956,1 46 during the
page L, line 2, column
recorded Other
revenues is shown on Exhibit
test year, dS shown on Exhibit 08,
(d) . An itemized listing
, column
of other
(d) .
0. What expenses are
09, page 1
included in the Company's
unadjusted income statement?
A. The following cl-assification of expenses are
included in the Companyrs income statement:
' Cost of gas;
' Ope.ating and maintenance expenses;
' Dupreciation and amortization expenses;
' Taxes Other Than Income Taxes;
' Federal and State Income Taxes; and
' Interest Expenses.
The unadjusted test year levels for these expense items
are shown on Exhibit 08, page 7, col-umn (d) , lines 5
through 23.
O. Please discuss the how the forecasted, July to
December, amounts were determined.
A. The July to December forecasted amounts are
shown on Exhiblt 08, page L, cofumn (c). These amounts
were determined as follows:o 25
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a Cost of Gas: is based on forecasLed customers,
weather-normal-ized usage per customer
and currently approved rates. Cost of
related to non-regulated sales of LNG
f orecasted based on hi-storical- data.
Operation and Maintenance Expense: is
amounts,
gas
l_s
forecasted by each department of the Company.
Eorecasting is done at the object level (i.e.
Labor, Contract Service, Materials) and not at
a FERC account level (i.e. Transmission
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a
a
a
FaciIj-ties Operations/Maintenance Expense,
Distrj-bution Operations/ Maintenance Expense) .
In order to obtain the Functional categories
(determined by FERC account), the Company used
2015 historical data to allocate the forecasted
amounts to the various FERC accounts.
Depreciation: is based on Idaho PUC approved
depreciation rates, assets currently in
service, and forecasted capital additions and
retirements. ForecasLed capital additions and
retirements are determined by each department's
expectation of future projects to be completed
or retired by December 31, 2076.
Payroll Taxes are primarily based on total
taxable compensation multiplied by a payroll
tax rate, f.5 percent, based on fast year's tax
to salary percentage. Payroll taxes related to
incentive compensation were calculated on an
individual basis. Payroll taxes related to
supplemental executlve retirement plan payments
were forecasted based on history;
Property Taxes: are based on an annual tax
assessment received
for the July to June
Franchise Taxes: are
from Idaho counties 1n May
tax period;
based on the portion of25
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Intermountain Gas Company
Company customers that
of a city that- has a 3%
Company customers live
therefore, the forecast
live within city limits
franchise tax. Not all
within city limits,
is based on a
historical realized rate of 2.58% of all
revenue;
a : is based on the Company's
outstanding bonds, and
Interest Expense
line of credit,
forecasted new
credit interest
combination of
provided to the
long-term debt. The line of
expense is based on a
Prime and LIBOR rate estimates
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fntermountain Gas Company
Company by the MDUR
Interest expense
based on
Treasury Department.
the Company's outstandingon
bonds is the stated interest rates
identified in the terms of each bond issuance,'
and
fncome Taxes: are based on the statutory
Idaho rate of 1 .42federal rate of 35.0% and
for an effective tax of 39.81%. The estimate
al-so incl-udes permanent and timing dif ferences.
II. AFFILIATE TRJA}ISACTTONS
O. Does Intermountain's revenue requirement
include costs which are directly or indirectly charged to
the Company by affiliated companies?
A. Yes, 1t does.
a. Does fntermountain recej-ve charges from MDU
Resources Group, Inc. ("MDUR")?
A. Yes. MDUR has several departments that provide
services to the operating companies. These departments
incl-ude:
' Payroll Shared Services;
' Procurement Shared Services;
' Enterprise Technology Service;
' General and Administrati-ve Servi-ces.
O. What services does Payroll Shared Services
provide to Intermountain?
a
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A. PayrolI Shared Servj-ces processes payrolJ- and
is al-so responsible for the preparation, filing and
payment of aII payroll-rel-ated federal-, state and l-ocal-
tax returns. Since fntermountain does not have any
departments that provide payroll
Dedden, Di 8a
Intermountain Gas Company
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fntermountain Gas Company
related services, Payroll Shared Services is also
responsible for the accumul-atj-on of tj-me entry records,
and maintenance of employee records for the Company.
O. Please describe the services provided by
Procurement Shared Services.
A. Procurement Shared Services creates and
maintains the Corporation's natlonal accounts for the
purchase of products, goods and services. The group is
al-so responsibJ-e for monj-toring the level of services,
quantities, discounts and rebates associated with
establ-ished national- accounts. Intermountain places
specific purchase requests for required materials and
services with approved vendors.
O. What functj-on does the Enterprise Technology
Services provide?
A.
guidance,
Enterprise Technology Services provides policy
infrastructure-related information technology
('r ITrr ) f unctions and security-f ocused governance.
O. Is there al-so a Utility Group IT department?
A. Yes. The Utllity Group IT Department is
responsible for supporting applications specific to the
billing system;
and Data
utility group such as customer care and
financial- software; Supervisory Control
Acquisition ("SCADA") and mobile applications;
Geographic Information System ("GfS"), and the
Enterprise
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Intermountaj-n Gas Company
and fixed asset accounting software ("PowerPlan").
0. What services does the General- and
function provide?Administrati-ve Services
A. The General- and Administrative Services
function provldes the following servj-ces to alf MDUR
companies:
' Corporate governance, accounti-ng and planning;
' Corn*unications and public affairs;
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Intermountain Gas Company
a
Human resources;
Internal Audit;
fnvestor Relations;
LegaI;
Risk Management,'
Tax and compliance;
Travel; and
Treasury Services.
How are the costs of the General- and
a
a
a
a
a
O
Administrative Services function billed to the MDUR
companies?
A. Costs that directly relate to a busj-ness unit
are directly assigned to that. business. The remaining
unassigned expenses are al-located to the operating
companies uslng the corporate allocation methodology.
O. Please descri-be the corporate al-l-ocation
methodology.
A. The allocation factor is developed to apportion
unassigned administrative costs via a capitalization
factor based on the 12-month average capitalization at
March 31. Capitalization includes total- equity and
current and non-current long-term debt (including capital
Iease obligations) .
O. Are there other affiliated costs that are
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Intermountain Gas Company
A. Yes. There are certain affiliate-owned assets,
such as the General Office/Annex facility, that are used
for the benefit of all MDUR operating companies. To
cover the cost of ownership and operating costs
associated with these owned assets, a revenue requirement
(i.e., asset return plus annual operating expenses) is
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fntermountain Gas Company
computed for
requirement
companies as
based on the
is billed
a monthly
number of customers
the shared assets. The resulting revenue
to the other MDUR operating
f ee. The costs are all-ocated
0. Does Intermountain own
bil-1ed to other MDUR companies?
Center Iocated in Meridian, ID.
associated with that facility is
Montana-oakota/Great Plains and
served by each utility.
facilities that are
The revenue requirement
bill-ed
A. Yes. fntermountain owns the Customer Care
Cascade
to
as a monthly fee.
affiliated
care center
O.
companies
reflected
How are the amounts billed to
associated with the customer
in fntermountain's determination of its revenue
requj-rement in this proceeding?
A. Revenues from affil-iate billings for the
Customer Care Center are included in Other Operating
Revenues (Account 4BB) .
O. Are there departments at Montana-Dakota/Great
P1alns that provlde services to each of operating
companies ?
A. Yes. These departments include:
' Leadership Group - composed of the Executive
a
Group and
speci fic
Customer
Directors that oversee shared utility
functions;
Services include such functions aso25
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fntermountain Gas Company
the cal-l- center, scheduling and online
servr_ces;
a
Information Technology and Communicatj-ons
provides services associated with Management
fnformation Systems, Technology and Compliance;
Administrative Services - provides such
functions as procurement, office services, and
fleet operations;
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fntermountain Gas Company
' Gas Supply and Control.
O. How are the costs associated with these
services bil-led to the individual operating utilities?
A. The groups have calcufated methodologi-es to
al-locate the costs to the utility companies based on
services performed for each utility company.
O. Have you prepared an exhibit, which summarizes
the nature and leve1 of such charges?
A. Yes. Exhibit No. 10 is the Company's cost
al-location manua1 which provides details of the services
and the al-l-ocation methodology. Exhibit
a summary of affiliated charges incl-uded
revenue requirement.
O. Does that complete your direct
a Yac, it dOeS.fvU,
No . 11 provi-des
in the Company's
testimony?
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CSB Reporting
(208 ) 890-s198
DEDDEN
fntermountain Gas Company
(The fol-lowlng proceedings were had in
open hearing. )
COMMfSSIONER RAPER: Does Commi-sslon Staff
have any cross for this witness?
MR. KLEIN: No, Madam Chair.
COMMISSIONER RAPER: Thank you.
MR. STOKES: We have no cross,
Madam Chair.
MR
MR
MR
PURDY: I have no cross.
RICHARDSON: No cross, Madam Chair.
OTTO: No questions, Madam Chair.
COMMISSIONER RAPER: Thank you Any
. Dedden,questions from
thank you for
the Commissioners? With that, Mr
your time. You are excused.
THE WITNESS: Thank you.
(The wltness left the stand. )
MR. WILLIAMS: The Company would call as
its next wj-tness Jacob Darrington.
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CSB Reporting(208) 890-s198
DARRINGTON (Di)
fntermountain Gas Company
JACOB DARR]NGTON,
produced as a
f ntermountai-n Gas Company, having been first duly sworn
to tell the truth, the whole truth,and nothing but the
follows:truth, was examj-ned and testifled as
DIRECT EXAMINATION
BY MR. WILLIAMS:
O So please, sir, state your name and
business address for the record.
A My name is Jacob Darrington. My business
address is 555 South Cole Road, Boise, Idaho, 83109.
O And in what capacity are you employed by
at Intermountain Gas?
A I'm a regulatory analyst.
O Okay, and Mr. Darrington, you prepared
direct testi-mony of 15 pages with Exhibits 12, 13, 74,
15, 16?
A Yes, I did.
witness at the instance of the
And f'm going to assume, because you did a
accounting adlustments, you're going to wal-k
a few changes in your testimony as wel-1 as did
As Mr. Dedden, y€s.
v
l-ot of the
us through
Mr. Chiles.
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O I'm sorry, Mr. Dedden did. Would you
please show us some of the revisions in your testj-mony
that relate to the September update?
A Yes,' so starting on page 4 or, sorry, paqe
3, Iine 20, gas utility plant in service changes from
596,065,559 to 594,'705,943, and moving on to the next
page, page 4, line 4, the number 16,555,5'72 changes to
71,325,388. Line 9, the number 308,450,846 changes to
305,953,230. Line 15, the number 4,303,085 changes to
4,5'73,686.
COMMISSIONER KJELLANDER: Excuse me, could
you please sl-ow down?
THE WITNESS: Yes.
COMMISSIONER KJELLANDER: Thank you.
Could you repeat that number?
THE WITNESS: Yes. The new number i-s
4,5'13,686. Again on line 15, the number 146,265 changes
to 156,408. On line 19, the number changes from 281
sorry, yeah, changes from 281 ,614,113 to 2B'7,152,113.
Llne 2 of page 5 changes from 3,749,131 to 3,195,297, and
then on line 6 of page 5 stil-I, the number 3,795,613
changes to 3,225,344. On the same page, line 10, the
number 856,019 changes to 194,161. On llne 13 of page 5,
the number 3,890 changes to 76,040. Turning to page 6 --
MR. KLEIN: Pardon me, could you repeat
CSB Reportlng(208) 890-s198
DARR]NGTON (Di)
fntermountain Gas Company
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CSB Reporting(208) 890-5198
DARRINGTON (DT)
Intermountain Gas Company
that l-ast number?
l-ine 13. Turning to
changes to L,743,988
page 6, I j-ne 5, the number 7,032, 68 B
On line L9
THE WITNESS: YCS
MR. KLEIN: Thank you.
THE WITNESS: The new number is L6,040 on
COMMISSIONER KJELLANDER: Excuse me, coul-d
I make a request that you state it in terms of mil-lions
and thousands? It might be easier for us as we try to
throw commas in appropriately.
THE WITNESS: Okay.
COMMISSIONER KJELLANDER: Thank you.
THE WITNESS: On l-ine 19, the number
50,112,477 changes to 49,916,423. On page B, line L, the
number 1,893,11I changes to 8,022,5L2. On line 12 of
page 8, the number 236,926,497 changes r,o 231 ,318,401.
Page 9, l-ine 5, the number of 236,530,903 changes to
255,394,LLL. Oh, excuse me, excuse me, that number is
restated as 255 mil-1ion excuse me. Would it be easier
to state j-n summary at the very end of my testimony or
shoul-d f continue to go through line by line? There are
a l-ot of numbers.
MR. WILLIAMS: Madam Chair, what we
cou.l-d obviously, what we're doing is trying to just
cfear up the record on this point. Woufd it beo25
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CSB Reporting(208) 890-s198
DARRINGTON (Di)
Intermountain Gas Company
if we came to the summary of these numbers
going line
to
by line on each page here, because
THE WITNESS:be refl-ected in Exhibit
O BY MR. WILLIAMS: It's refl-ected in
Exhibit 103 and then you also have rebuttal- testimony
true-up; would that be a
acceptable
rather than
it's going
103
that speaks to the
correct statement,
AMy
true-up related to
have a sheet, like a pi-ece of paper, that
numbers and accuracies on it? I mean, is
September
Mr. Darrlngton?
rebuttal testimony did not reflect the
production request No. LlB.
COMMISSIONER RAPER: Mr. Will-iams, do you
Staff' s
has page
there anything
exhibit thatthat exists that you have besides
has those correct numbers on it or
MR. WILLIAMS: Madam
that you can produce?
Chair, what we w11I
do is we'II produce before the end of the hearing a sheet
l-ike we received yesterday from Staff that went through
Mr. Erdwurmfs testimony that painfully shows each page
and l-ine item and the minor adjustments that are
occurrlng here. We will prepare that and have that ready
for you tomorrow.
COMMISSIONER RAPER: Are there any
objections from the parties on going that route? Thanko25
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CSB Reporting
(2oB) 890-s1-98
DARRTNGTON (Di)
fntermountain Gas Company
go to the summary and why
changes at the end of your
hearing is over, would you
you. Thank you, Mr. Wil-liams, f or making that happen,
on with your witness.and yes, with that, you may carry
o BY MR. WILLIAMS : So Mr . Darr j-ngton, Iet ' s
don't you note the summary
then before thetestimony, and
agree to provide more of a
line by line item changes of these as we just received
from Staff yesterday? f don't even know if you had a
chance to see Staff changes that are along the same
l-ines.
A I wil-l- do that. I will produce that.
MR. WILLIAMS: A11 right, we will do
that.
O BY MR. WILLIAMS: So please, l-et's go to
the end and get into the concluding numbers.
A Thank you. On page 14, line 20, the
number 236,926,497 changes to 231,318,401. On line 2L,
the number IL,494,687 changes to !2,077,166. On line 23,
the number changes from 7'l ,519,945 to !1 ,6091 108. On
page 15, there's two more changes. Line 1 is our new
requested revenue requi-rement and that number changes
f rom 10, 165, 700 to 9, 351,,615, and on lj-ne 3, as been
mentioned before, this represents an increase of instead
of 4.04 percent 3.70 percent.
O So Mr. Darrington, with those changes25
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.ALA
CSB Reporting(208) 890-s198
DARRTNGTON (Di)
Intermountain Gas Company
noted both today and the change sheet that you will be
providing before the end of the hearing, tf f were to ask
you the questions today contained in your direct
testimony, would your answers today be the same?
A Yes.
MR. WILLIAMS: And Madam Chair, I would
ask that Mr. Darrington's testimony be spread upon the
record as if read and that his Exhibits L2 through 76 be
admitted into evidence.
Mr. Darrington' s
the record as if
admitted for the
COMMISSIONER RAPER:
dlrect testimony
read and Exhibits
Without objection,
wiIl be spread across
12 through 16 will be
record.
(IGC Exhibit Nos. 72 16 were admitted
lnto evidence. )
(The fol-lowing prefiled direct testimony
of Mr. Jacob Darrington is spread upon the record.)
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Darrington, Di 1
Intermountain Gas Company
I. INTRODUCTION
O. Pl-ease state your name, business address, and
present position with Intermountain Gas Company.
A. My name is Jacob Darrington. I am employed by
Intermountain Gas Company ("Intermountain" or "the
Company" ) as a Regulatory Analyst. My business address
is 555 South Cole Road, Bolse, fdaho 83707.
O. Woul-d you please describe your education and
prof ess j-onal experience.
A. I graduated from Boise State University in May
2017 with a Bachelor of Arts Degree in
Accounting-Finance. In January 2012, I began work at
Deloitte Tax as a Tax Consuftant where f prepared federaf
and mul-ti-state tax returns for businesses and high-net
worth individuals. Additionally,
specialist as a part of the audit
auditing the provision
utility. I earned my
I continue to keep my
rdaho. In the fall of 2073 I was promoted to Tax Senior
at Del-oltte and took on the additional- responsibility of
revr_ew1ng
of 20L5, I
tax returns of other Tax Consultants. In April
took a position with Intermountain Gas Company
for income
CPA llcense
CPA license
I worked as a tax
team to help with
taxes for a regulated
in the summer of 20L3.
acti-ve in the state of
as a Regulatory Analyst. In July
Regulatory Rate SchooI in Chicago
of 2075 I attended the
sponsored by the25
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Darrington, Di 1a
Intermountain Gas Company
American Gas Association.
O. Would you briefly describe your
responsibilities in your current positlon?
A. Yes. As a Regulatory Analyst, my primary
responsibility as it relates to this proceeding includes
the gatherlng, analyzing, and coordinating of data
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from various departments throughout the Company required
for the preparatj-on and cafcul-ation of the revenue
requirement and rate base.
O. What is the purpose of your testimony in this
docket?
A. My testimony will cover two main areas. First,
I wil-I address Intermountain's regulatory adjustments to
the Company's rate base. Second, I w111 discuss the
Company's adjustments to operating revenues and expenses.
Third, I will discuss Intermountain's revenue
requirement.
O. What 1s the Company's proposed test year for
this case?
A. As descri-bed by Company witness Dedden,
fntermountain is proposing a test period reflecting six
months actual and six months projected data for the
twefve-months ending December 31, 2016.
O. Does the Company anticipate adjusting the test
period projections later in this docket?
A. Yes. The Company wiII provide to the Idaho
Public Uti-lities Commission ("Commission") monthly
updates to the six months of projections for the perj-od
July 7, 2016, through December 37, 20L6, to refl-ect
actual data.
O. Are you sponsoring any exhibits in this
Darrington, Di 2
Intermountain Gas Company
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Darrington, Di 2a
Intermountain Gas Company
proceeding?
A. Yes. I am sponsoring the following exhibits,
which are described in my testimony:
Exhibit No. 72 Rate base
Exhibit No. 13 Rate Base Components and
Adj ustments
Exhibit No. 14
Exhibit No. 15
Operating fncome
Adjustments to Operating Income
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Exhibit No. L6
Calculation
II. RATE BASE
O. What exhibits
Company' s thirteen-month
rate
Summary Revenue Requirement
the adjustments to
A. Exhibit
do you have that summarize the
average rate base and explains
base?
12 is composed of two tabl-es that shows
summaries of the unadjrrsted components of rate base as
presented by Company witness Dedden as weII as
adjustments to those components. Exhibit 13 is a series
of worksheets that describe each of the adjustments made
to rate base.
O. Is the thirteen-month average method used for
al-l rate base items?
A. Yes, with the exception of the Cash Working
Capital allowance, all items included in the
determination of rate base have been calculated using the
average of thirteen monthly balances. The average of the
thirteen monthJ-y balances reflects the l-evel- of
investment maintalned by the Company during the course of
the year and is intended to normalize changes in the
balances that occur during the year. The derivation of
the Cash Worklng Capital allowance is discussed later i-n
this testimony.
O. What is Intermounta-in's projected gas plant ino25
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Intermountain Gas Company
service as of
A. The
investment in
the Company's
December 31, 2076?
thirteen-month average level-
gas utility plant in service
rate base as of December 31,
of gross
incl-uded in
2076 is
$594,705,943, oS shown on
line 2. The thirteen-month
Exhibit 72, page L,
cafculation
column (d) ,
average of this
figure can be found on Exhibit 73, page t, column (e),
line 28.
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Intermountain Gas Company
O. Does this amount of gross plant investment as
of December 31, 2076 reflect any adjustments?
A. Yes. The balance of gross plant investment
reflects an
Obligations
shown on Exhibit 72,
adj ustment
("AROs") in
to remove the Asset Retirement
the amount of $71,325,388 as
page 2
column
column (b) , l-ine 2 and
Exhibit 13, page 1
O. What is the total amount of Int.ermountain' s
(c) .
prolected accumulated provisions for depreciation and
amort i zat ion ?
A. Intermountain's projected accumulated
depreciation
$306,953,230,
line 3. The
figure can be
Iine 28.
A. Yes.
been adjusted to
Progress in the
respectively, as
and (c), Iine 3 and
column (c) and (d) .
and amortization as of December 31, 2016 is
col-umn (d) ,as shown on Exhiblt 12, page 7,
thirteen-month average calculation of this
found on Exhibit 13, page 2, column (f),
O. Are you proposing
the accumulated reserve for
amorti zation?
any adjustments be made to
depreciation and
The accumulated provision balances have
remove the AROs and Retirement Work in
amount of $4,513,686
shown on Exhibit 72,
and $156 ,408,
page 2, co.l-umn (b)
detailed on Exhibit 13, page 2,
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fntermountain Gas Company
O. How was the level- of net pJ-ant included in rate
base ca]culated?
A. Net plant included in rate base is
5281 ,'752,'173, and was cal-culated by subtractj-ng the total
amount of adjusted accumu1at.ed depreciation from the
total amount of adjusted gross plant as shown on Exhibit
L2, page l, column (d) , l-ine 4.
O. What level- of Materials and Supplies was
included in rate base?
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Intermountain Gas Company
A. fntermountain incl-uded 1n rate base a
thj-rteen-month average of the materials and supplies
balance of $3,195,297, as shown on Exhibit L2, page 7,
cofumn (d) , l1ne 5 and as cal-cufated on Exhibit L3, page
3 column (e),
o. Did
line 28
the Company incl-ude any gas storage
base?inventory in rate
A. Yes. f ntermountain incl-uded a thirteen-month
average of the gas storage inventory balance of
$3,225,344 in rate base, ds shown on Exhibit L2, page 7,
column (d), line 6 and as calculated on Exhibit 13, page
4, column (f ) , l-ine 28.
O. Does this amount of gas storage inventory
reflect any adjustments?
A. Yes. The amount refl-ects two adjustments to
the gas storage inventory held at the Company's Nampa
storage facility. The first adjustment of $194t767 r ds
seen on Exhibit 12, page 2, column (d), line 6 and
Exhibit 73, page 4, column (c), removes the gas storage
inventory associated with non-uti-lity sales of liquefied
natural gas ("LNG"). The second adjustment of $16,040,
as seen on Exhibit 72, page 2, col-umn (e), l-ine 6 and
Exhibit 73, page 4, column (d) , removes those costs
associated with the utility portion of gas storage
inventory at the Nampa storage facility in excess of 225
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Int-ermountain Gas Company
mil-lion gaIlons.
O. Why is the establj-shed levef of utility storage
2 milliongas at the
gallons ?
A.
Nampa storage facility set to
This is the amount of LNG requlred to 1)
maintain operational and training requirements at the
Nampa and Rexburg LNG Facilities, 2) maintain an adequate
supply of LNG to provide for the annual- "boiloff" gas
that naturally occurs with the warmlng of LNG and 3)
maintain minimum LNG l-evels to ensure the integrity of
the storage tank.
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Intermountain Gas Company
O. fs Cash Working Capital included in rate base?
A. Yes. Cash workj-ng capital ("CWC" ) 1s the
amount of funds required to finance the day to-day
operations of the Company. A CWC requirement represents
the amount of cash the Company needs to keep on hand to
meet its cash operating expenses. The test year rate base
j-ncludes $1,743,988 for CWC as shown on Exhibit 12, page
l, co1umn (d) , line 7 and cal-cufated on Exhibit 13, page
5, col-umn (e), line 18. The CWC calculation is based
upon lead-1ag
What
study.
15a
a
O
A
Iead-Iag study?
study analyzes theA lead-1ag
the date customers receive service and
fag time between
the date that
customers' payments are available to the
lag is offset by a lead time during which
Company. This
the Company
them at a laterreceives goods and
date . The " l-eads "
The dol-Iar-weighted
355 to determine a
then multiplied by
SCTV]-CCS,
and ttlagstt
lead and
daily CWC
the annual
but pays
are both
1ag days
factor.
test
for
expenses to determine the amount
operations.
O. What is the amount of
measured in days.
are then divided by
This CWC factor is
year cash revenues and
CWC required for
accumul-ated deferred
of
income taxes ("ADIT") deducted from rate base?
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$49,916,423, as shown on Exhibit 12, page 7, col-umn (d) ,
l-ine B. The calculation of this number is shown on
Exhibit 73, page 6, col-umn (k) , line 28.
O. What is ADIT and why is it a rate base
adj ustment?
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fntermountain Gas Company
A. Deferred income taxes arise when income tax
amounts provided for book purposes differ from the amount
of taxes due and payable in the test period. The primary
cause of this tax difference is the straight line
depreciation rates used for ratemaking purposes, versus
the accelerated depreciation rates used when calculating
state and federal income Lax obligations. For a utility
with a growing rate base, there is generally a higher
depreciation expense for tax purposes than for regulatory
book purposes, causing the t-axes computed for regulatory
books (and thus, j-ncluded in revenue requirement) to be
more than the taxes actually payable, in the early years
of the asset's life. In later years, the situation
reverses itself. The accumulated balance of these
deferred taxes is, in essence, either a source or use of
funds avail-abl-e to the company. The net balance of
accumufated deferred taxes has been deducted from rate
base.
O. Please explain how the l-evel- of ADIT was
determined.
A. ADIT was analyzed on
determine whether the ADIT was
included in
or liability
adjustment.
rate base. Amounts
in rate base have
Additional adjust.ments were made to remove
an item-by-1tem basis to
attributable to items
attributable to an asset
been reflected 1n the ADfT
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Intermountaj-n Gas Company
state deferred income taxes and to comply with various
IRS rul-es related to deferred taxes. These adj ustments
t2, page 2,
page 6,
total $13,275,033 and are shown on Exhibit
columns (f) - (1) , fine B and on
columns (c)- (i) .
O. How has Intermountain
Exhibit !3,
accounted for advances in
aid of construction in the Company's rate base?
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Darr j-ngton, Di B
Intermountain Gas Company
of $8,022,512
on Exhibit !2,
on Exhibit 13,
represents the
construction
have been deducted from rate
in the amount
base, dS shown
and calculated
28. This
A. Advances in aid of construction
page I, column (d) , l-ine
page J, column (c), Iine
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thirteen-month average balance of cash
advances received from customers as of December 31, 2016
for construction attributable to Intermountain's
operations. Similar to ADIT, the advances in aid of
and
represent a source of funds available to the
appropriately offset the plant in serviceCompany
balances
0.
base?
December
reflected in rate base.
What 1s Intermountainrs proposed test year rate
The Company's test
3I, 20L6, adjusted
year rate base, dS of
for the known and measurable
adjustments discussed above, is projected to
$231,318,407, ds shown on Exhibit 72, page l,
line 10.
be
col-umn (d) ,
O. Does
pertains to the
A. Yes.
this conclude your testimony as it
Company's rate base?
III. OPERATING REVENUES A}ID EXPENSES
O. What exhibits do you have that summarize the
Company's operating revenues and expenses and the
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fntermountain Gas Company
A. Exhibit 74 presents the unadjusted operating
revenues and expenses as presented by Company witness
Dedden, regulatory adjustments to those operating
revenues and expenses, and the resulting Company proposed
operating revenues and expenses. Exhibit. 15 presents the
detail supporting the proposed regulatory adjustments to
Company's operating revenues and expenses.
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fntermountaj-n Gas Company
O. What is the unadjusted projected level- of
operating revenues and expenses
2076?ended December 31,
A. As presented by Company
twelve months ended December 31,
for the twelve months
witness Dedden, for the
2076,
to be
the Company
$238,922,261, ds
l-ine 3. The
proj ects
shown on
total operating
Exhibit 74, page
revenues
7, column (b) ,
Company projects total operating expenses to be
$236,630,331- as shown on Exhibit !4, page 7t col-umn (b) ,
Iine 24. This produces unadjusted net operating income
of $2,297,930 as shown on Exhibit 14, page 7, column (b) ,
l-ine 25.
a. Are you proposing any adjustments to the test
year gas operating revenues and expenses?
A. Yes. Exhlbit 14, page 2 lists each proposed
adjustment to test year gas operating revenues and
expenses.
0.
on Exhlbit
A. This adjustment
cost of gas expenses from
revenue requirement. This
result of the difference in
Please describe the Unbi1fed Adjustment shown
L4, page 2,column (b), lines 1 and 5
removes unbilled revenues and
the determination of the
unbilled adjustment is the
the timing of when gas is
provided to our
billed for the
customers and when those customers are
gas used. To create a proper matching ofo25
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fntermountain Gas Company
gas costs and revenues for the test year, unbilled
revenues and cost of gas have been excluded from the
ca1culation of the revenue requirement. The adjustment
increases revenues by $26,048,333 and cost of gas
expenses by $20,L15,205, as shown on Exhibit 15, page 7,
column (d), lines L6 and 11. This adjustment pertains
only to the year-to-date actual- data through June 2076.
As discussed by
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Intermountain Gas Company
Company witness Dedden,
December 20L6 does not
the forecast period July
include unbil-Ied revenues
through
and cost
of gas expenses.
O. Is the Company proposing an
revenues and expenses associated with
sales from the Nampa facility?
A. Yes. Non-utility sales of
adjustment to
non-util-ity LNG
Ilquefied
gas have been removed from the Company's test
revenues and cost of gas as shown on
natural
year
Exhibitexpenses,
lines I and 5 and Exhiblt
page 2, col-umn (d) , lines 1 and 2. The result of
adjustment reduces operating
14, page 2, column (c),1trLJ t
the
revenues by $I,91 1,066 and
by $1, 57 6,563. This
of gas expenses
regulated gas
related cost of gas expenses
adjustment eliminates revenues and cost
not associated with the provisioning of
services to fntermountain's customers.
shown
not recovered
O. Pl-ease explain the
on Exhibit L4, page 2,
A. Franchi-se taxes are
franchise tax adjustment
column (d), fines 1 and 19.
rates, and thus have been removed from the
through base
Company's
revenues and expenses for the test year. As seen on
Exhibit 15, page 3, column (d), Iines I and 2, the
adjustment reduces the Company's test year revenues by
$6,7'72,973 and expense by $6,773,6'79.
O. Pl-ease describe the proposed l-ost gas expenseo25
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adjustment shown on Exhibit 74, page 2, col-umn (e), line
q
A. The purpose of this adjustment is to reflect
the current level of lost gas expense. This adjustment
reduces operating expenses by $828,984. Exhibit 15,
pages 4 and 5 support the calcul-ation of thls adjustment.
Darrington, Di 10a
Intermountaj-n Gas Company
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Intermountain Gas Company
O. Please explain the proposed normal-izLrrg
adjustment shown on Exhibit !4, co1umn (f ), lines 1 and
5.
A. This adjustment
between test year
revenues and costs
of gas refl-ect the
normalization and
represents the difference
and cost of gas and normalized
The
revenues
process for
addressed by
class migrations
large volume r or
rate classes at
of gas. Norma1ized revenues and cost
effects from both weather
customer rate class migrations
normalization isdetermining weather
Company witness Bl-attner. Customer rate
refers to the Company's general service,
transport customers who have changed
some point during the test year. The
these customers' actuaf and forecastedCompany
volumes,
removed
revenues, and cost of gas
rate class and included them for a
from their previous
ful1 twelve month
period in their new rate c1ass.
As shown on Exhibit L5, page 6, col-umn (b),
lines 10 and lI, this adjustment reduces operati-ng
revenues by $839,061 and operating expenses by $563,873.
Supporting cal-culations are presented on Exhibit 15,
pages 1'76.
O. Can you describe briefly Intermountain's
Non-Executive Incentive Compensation Pfan?
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Intermountain Gas Company
components. The
target level of
first component is based on achieving a
thirdnet income. The second and
components are based on cost control and customer
satisfactj-on goa1s. Each component 1s worth an equal
:
also a fourthportion
goal
of the incentive payment. There 1s
for directors only based on a review of the
Company' s Employee Survey with employees during the year
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fntermountain Gas Company
O. Is the Company proposj-ng an adjustment to
incenti-ve compensation expense?
A. Yes. Exhibit 74, page 2, cofumn (q), line 9,
10, 11,73, L4, and Ll and Exhiblt 15, page IJ, cofumn
(b), lines I and 9 remove the portj-on of incentive
compensation expense that is based on the Company
achieving a target level of net lncome. The remaining
portion of incentive compensation expense relates to the
metrics described above. These metrics are designed to
benefit the Company's customers by incentivizing Company
employees to control costs while maintaining a safe,
reliable system and a high level of customer
satisfaction. The adjustment reduces incentive
compensatlon expense by $504,928 and payroll taxes by
$47,060 for a total- adjustment to operating expenses of
$551,988.
Exhlbit 15, page 1B provides supporting
cal-cufations that are reflected on page 11 of the
Exhibit.
O. fs the Company proposing an adjustment to the
test year level
Compensation?
A. Yes.
of expenses associated wlth Executive
Exhibit 14, page 2, col-umn (h) , line 14,
15, page 79, column (d), lines 115,
and 2 remove all Supplemental Executive Retirement PIan
and l1 and Exhibit
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Intermountain Gas Company
compensation, Supplemental Income Security Pl-an
compensation and executive j-ncentive compensation
expenses. The Company has chosen to not charge j-ts
customers for these expenses and has therefore removed
them from the determination of the revenue requirement.
The Executj-ve Compensation adjustment reduces operating
by $57,017.expenses by $919,530 and payroll taxes
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Intermountain Gas Company
Exhibit 15, pages 20 and
cal-culations that are refl-ected on
Exhibit.
21, provide supporting
thepaqe 79 of
0. Has the Company removed revenues and expenses
associated with non-utility
A. Yes. Exhibit 74,
and 15 and Exhibit 15, page
10 remove from revenues and
associated with non-utility
activities ?
2, column (i), l-ines 2
co1umn (d) , Iines 4 and
expenses those costs
activities
page
LL,
revenues incl-ude miscel-l-aneous revenue
Non-util1ty
and interest
j-ncome related to the non-qualifying executive
compensatlon. The non-utj-l-ity expenses include
donations, lobbying and Arid Club dues. The "Other
Revenue and Expense" adjustment increases
by $6,623 and reduces operating expenses
a. Is the Company proposing to remove
expense from the
for the test period used to determj-ne
will be the weighted average cost of
other revenues
income tax expense
debt included in the
by $248,083.
interest
test year expenses?
Exhibit 74, page 2, column (j), line 20
page 23, column (d), Iine 1 reduce
A. Yes.
and Exhibit 15,
operatj-ng expenses by $4,205,090. The interest expense
Company' s
base.
o.
cost of capital multiplied by average rate
Has the Company adjusted the test year l-evel- ofO25
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Darrington, Di 13a
Intermountain Gas Company
r_ncome tax expense?
Yes - ExhibitA 74, page
column
2, col-umn (k) , fine 23
(c) , Iine '18 increase
$2,585, 666. Exhibit 15,
and Exhlbi-t 15, page 25,
test year income tax expense by
pages 24 and 25 present the entire test year income tax
expense cal-cul-ation and j-ncl-ude the adjusted level of
revenues and expenses discussed above as well as various
permanent and temporary timing differences.
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Intermountain Gas Company
O. What are
operati-ng expenses
are proposing?
A. As shown 14, page
Ievel of
7, column (d) ,
lines 3 and 24, the adjusted operating revenues
and expenses for the twe1ve months ended December 3L,
20L6 are $255,394,!71 and $243,382,945, respectively.
O. Does that conclude your testimony as it
pertains
expenses?
A
to the Company's operating revenues and
Yes it does.
IV. REVENT'E REQUIREMENT
Please explain how the adjusted net income was
to the required level of operating revenues.
Exhibit 76, page 2, shows the ca.l-cul-ation of
the adlusted Ievel of revenues and
that resuft from the adjustments you
on Exhibit
n
converted
A
the conversion factor, which is applied to the required
net income to produce the required revenue increase. The
conversion factor takes into account revenue-sensitive
items that change as revenue changes, including
uncol-l-ectibl-es, the Commission's regulatory fee, Idaho
state income taxes, and federal- income taxes. As shown on
Exhiblt L6, page 2, column (c), Iine 9, the conversion
factor was determined to be 1.67055.
O. Please summarize the requested revenue
requirement.O 25
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Intermountain Gas Company
A Page 1 of Exhibit 16 presents the
Company's revenue deficiency. Based
rate base of $23'7, 318 , 407, adj usted
cal-cul-ation
of the upon an
average
income
operatinq
of $12,0Ll,1,66, and a weighted average cost of
'7.422, as presented by Company witness Chiles,capital of
the Company's
proposed rates
Company' s
projected after-tax operating income at
is $17, 609, 108. Consequently, the
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revenue deficiency for
31, 20L6 is $9,351 ,6L5.
an overall- increase in
of 3.109" .
the test period ending December
This revenue deficiency requires
rates to the Company's customers
a. Does this conclude your direct testimony?
A. Yes it does.
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(The following proceedings were had in
open hearing. )
COMMISSIONER RAPER: And for purposes of
clarity to restate what will be submitted by the Company
tomorrow morning, the numerical changes that run
throughout Mr. Darrington's direct testj-mony, you will
provide a list of page and fine, o1d number, new number
for the benefit of all the parties and the Commission?
MR. WILLIAMS: Thatrs correct,
Madam Chair, and I believe Staff has done the same thing
that we just got and we will 1f I can call Mr.
Darrington tomorrow back on the stand ;ust simply to
j-ntroduce that one page of changes for the record, it
would be my intent to do that.
COMMISSIONER RAPER: Okay, without
objection from the parties, we wll-l- hand.l-e the change in
numbers that way for tomorrow and move on to
cross-exami-nation of the witness?
MR. WILLIAMS: Yes.
COMMISSIONER RAPER: Commission Staff?
MR. KLEIN : Commissi-on Staf f doesn ' t have
any cross-examination and Madam Chair, just real- quick,
we did hand out Mr. Erdwurm's testimony, revised
testimony, yesterday and if any of the parties, I know
some of them may have been in transit, don't have a hard
CSB Reporting(208) 890-s198
DARRINGTON
Intermountain Gas Company
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CSB Reportlng(208) 890-s198
DARRINGTON
Intermountain Gas Company
copy and would like one, just feel free to tal-k to Sean
Costello or myself in a break and we will get them one.
COMMISSIONER RAPER: Thank you.
MR. STOKES: We have no questions, Madam
Chair.
Thank you.
MR
MR
PURDY: No questions, Madam Chair.
RICHARDSON: No questions, Madam
Chair.
MR. OTTO: No questions, Madam Chair.
COMMISSIONER RAPER: Any questions from
the Commissioners? No redirect necessary. Mr.
Darrington, thank you for your time. You are excused.
THE WITNESS: Thank you.
COMMISSIONER RAPER: We look forward to
having you back tomorrow to present the numbers.
THE WITNESS: Thank you.
(The witness left the stand. )
MR. WILLIAMS: The Company would call as
its next witness Mr. Branko Terzic.
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CSB Reporting(208) 890-s198
TERZTC (Di)
Intermountain Gas Company
BRANKO TERZTC,
produced as a witness at the i-nstance
Intermountain Gas Company, having been
to tel-l- the truth,
truth, was examined
of the
first duly sworn
the whole truth, and nothing but the
and testified as foflows:
BY MR. WILL]AMS:
O Sir, would
business address for the
D]RECT EXAM]NAT]ON
you please state your name and
record?
A Yes, my name is Branko Terztc. My address
is 1800 M Street, Washington, D.C., 20036.
O And Mr. Terzic, could you give us a very
brief synopsis of your professional background?
A Yes. As you can tell, I've been around a
little bit and my career began as a valuation and rates
engineer. I was a commissioner on the State Public
Service Commission, a commissioner on the Federal Energy
Regulatory Commission, CEO of a gas utility, and a
consul-tant in the gas and electric industry for the bul-k
of my career.
O And Mr. Terzic, are you the same Branko
Terzic that prepared and prefiled direct testimony
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CSB Reporting(208) 890-s198
TERZIC (Di)
fntermountain Gas Company
CV?
A Yes, f am.
O And if I were to ask you the questions
direct testimony, woul-dtoday contained in your prefiled
your answers today be the same?
A Yes, they would.
MR. WILLIAMS: So Madam Chair, I would ask
that Mr. Terzic's testimony be spread upon the record as
if read and Exhibit No. 17 entered into the record, and
Mr. lerztc is avallabfe for cross-examination.
COMMISSIONER RAPER: Without ob; ection,
across theMr. Terzic's direct testimony wiII
record as if read, and Exhibit 11
record.
be spread
admlttedl_s into the
(IGC Exhibit No. 71 was admitted into
evidence. )
(The following prefiled direct testimony
of Mr. Branko Terztc is spread upon the record. )
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Terzic, Di 1Intermountain Gas Company
O. Please state your name, title and business
address.
A. My name is Branko Terzic and my business
address is 1800 M Street NW, Second Floor, Washington,
D.C.20036.
O. By whom are you employed and in what capacity?
A. I am employed as a Managing Director at the
Berkeley Research Group.
O. On whose behalf are you testifying?
A. f am testifying on behal-f of Intermountain Gas
Company ("fntermountain" or the "Company")
O. Mr. Terztc, please describe your educational-
and professional background.
A. I have a B.S. 1n Engineering from the
Unj-versity of Wisconsin - Milwaukee. I have over four
decades of regulatory, consul-ting and management
experience in the natural gas and electric public utitity
sectors. My regulatory experience i-ncl-udes service as a
commissioner on the Publ-1c Service Commisslon of
Wisconsin (1-981-7986) and on the Federal- Energy
Regulatory
experience
President
Commission (1990-1993) .
in natural gas incfudes
My management
serving as Chairman,
and Chief Executive Officer of Yankee Energy
ServicesSystem Inc. and its main subsidiary Yankee Gas
Company, a distributi on gas utility in Connecticut. I25
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Intermountaj-n Gas Company
have also served as a ccnsultant to both prj-vate
corporations and to government agencies (domestic and
international-) on a range of regulatory issues affecting
the efectric and natural- gas utllity sectors. I am a
member of the Society of Util-ity Regulatory Financial
Analysts, the U.S. Association for Energy Economics, the
Natural Gas Roundtable, and the Assoclation of Energy
Engineers, among others. f have guest lectured on energy
topics at Johns Hopkins
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Terztc, Di 2
Intermountain Gas Company
University, Yal-e University, Syracuse University, and
George Washington University, and am currently a faculty
member at the Washington Campus (sixteen university MBA
members), where I continue to fecture on j-ssues rel-ated
to the energy industry. A copy of my currlculum vltae is
attached as Exhibit L].
O. What is the
A. My
purpose of
is broken
testimony?
two parts.
your
into
Eirst, I
testimony
intend to explain why the Idaho PubIic
Utilities Commlssion (the Commission) should approve
Intermountain's proposal, presented
Lori B. Blattner, 1) to increase the
in the testimony of
customer charge for
residential and commercial customers. and 2 )
the testimony of David Swenson, to introduce
related rate for industrial customers.
presented in
a demand
In the second part of my testi-mony, I intend to
explain why the Commission should approve the Company's
decoupling proposal called a Fixed Cost Col-Iection
Mechanism, as presented in the testimony of Michael P.
McGrath.
I. CUSTOMER CTTARGE
O. What is the ratemaklng basis for customer
charges and a demand related charge?
A. Both of these charges have their basis 1n the
fact that public utilities, such as el-ectric, natural gaso25
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Intermountaj-n Gas Company
and water utilities,
other fixed costs as
requirements. This
cosLs regardless of
flowing through t.he
are both capital intensive and have
a proportion of their annual- revenue
means that the utility incurs these
the level- of natural gas volumes
distribution system.
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Given that fact, it seems reasonabl-e to charge a
fixed monthly fee to recover some or al-l of these costs.
It seems reasonable to me that residential and commercial
customers would understand the basis for a "customer"
charge as representi-ng a charge to recover some or aII of
the costs to deliver, or distribute, natural gas to their
home or business and to meter and bill the same. Ms.
Blattnerrs testimony presents the disparity between the
current customer charges and the actual Ievel customer
costs assocj-ated with providing monthly service.
The i-ntroduction of demand based charges for the
larger industrial- gas customers is, in my opinion welI
overdue. There is a sound theoretical- and practical- basis
for demand charges and this has been recognized for over
a century. For example, a demand rate was developed by
the British engineer Dr. James Hopklnson in 7892. In the
proposed with a charge based on
U.S. the rate engineer Harry
Public Utility Rates (79L'7 )
and notes that at that time
Barker, writing in the book
describes Hopkinson's work
a three part rate was
the customer's maximum
proportional- to the
thirdpart-afixed
of expenses
customers."(P.7)
It
demand at
for that
amount of
any time
customer )
service
a second part,
shown by meter... a
(for this is rel-ated to the investment
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Notice that this was written at the turn of the last
century where it was already recognized that customer
demand directly caused the necessary l-evel- of investment
and that a "customer charge", the 'third part" in his
summary, was warranted.
Terztc, Di 3a
fntermountain Gas Company
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A fixed charge per month for large industrial
customers has already been adopted by the natural gas
utillty servj-ng Northern Idaho and by other gas
distributlon companies in the Northwest as wel-1.
O. Vrlhat is the origin of fixed costs in a public
ut.ility revenue requirement?
A. The four major components of a public utllity's
annual revenue requirement, the basis for rates, include
1) operating and maintenance expense, 2) depreciation
expense, 3) taxes and 4) return of rate base. Even upon
casual inspection one can see that few costs vary in the
test year with volume of service.
Eor example, depreciation and return do not vary
The annual
on a rate
with customer volumes during the test
depreciation expense ($27,101,712) is
base and annual depreciation rate both
year.
based
regulator. So
annual return
approved
Property
taxes are
these are "fixed" costs.
is based on the approved
approved
Li kewise
rate base
by the
the
and
rate of return. The return too is a fixed cost.
taxes are fixed and based on rate base. Income
b,ased on the approved
the costrate. Leaving us with category of annual
"operating
fabor costs
and maintenance" expenses which consist of
- mostly
sum, for
fixed payroll and benefits with some
a gas distribution system, a
return times the tax
overti-me. ino25
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Tntermountain Gas Company
significant high l-evel of costs are fixed during the test
year.
O. Why 1s there such a high level of fixed costs
in a natural gas distribution utility?
A. First consider that a natural- gas dlstribution
system is desj-gned and built to 1) connect al-l customers
to the distribution grid, and 2 ) to meet the maximum peak
demand requlred by customers. The size needed and
commensurate reasonabf e
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construction Costs are
approved capital costs
utility's rate base.
approved by
become the
the regulator and the
main part of the
Util-itles are capital intensive
meaning that there is a large capital lnvestment needed
for every dollar of revenue. Gas distribution companies
typically need a dollar or more of investment for each
dol-1ar of revenue.
The term demand (also call-ed capacity)
demand of aII
of a utitity
customers insystem is the cumul-ative peak
terms of usage during the peak
is designed and built to meet
day. A natural
the "design peak
gas system
day" which
is the peak load that woul-d occur if the system
experienced the occurrence of the lowest temperatures
during the heating system. "1 In the case of a naturaf
gas
of
the
distribution system this demand is expressed in term
therms
peak
customer
A
U
or cubic feet of gas
day.
What is the basis for
and demand charges in
The questions of both
which can be delivered on
the establishment of
a utility system?
the establishment and
l-evel of customer charges and demand charges are key
issues in the subsequent cost of service studies (COS),
also cal-led afl-ocated cost of service studies (ACOSS).
These COS studies provide the basis for 1) al1ocation of
the revenue requirement to different cl-asses of service25
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Intermountain Gas Company
and 2) provide information for the design of ul-timate
utility rates.
Cost of service studies can be performed on the
or on estimates ofbasis of embedded (accounting)
Long-run marginal or Short-run
regulated utilities in the US,
costs which are
costs
marginal costs. Eor
mostly it is the embedded
1 Gas Rate Fundamentals, 4th Editi-on, Amerlcan Gas Association Rate
Committee i981 P.229
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Intermountain Gas Company
the basis for a cost of service study and ensuing
apportionment. As more fu11y described in the testimony
of Ms. Bl-attner, the COS proceeds by taking the annual-
revenue requirement and apportioning it in three steps:
functionalization, classification and allocation. The
functions are storage and gas supply, transmission,
distribution, other customer costs and revenue related
costs. The cl-assification apportions the previously
functionalized costs to demand related (capacity),
commodity related (gas volumes) and customer related
costs. The third step is to al-locate
costs to the vari-ous customer cl-asses.
relate to the peak
end result is that
from each class of
a utility's
develops the
based on the
the cl-assified
Demand costs
customers. The
revenue required
addition of the
usage of
the COS
customer
customer, demand and commodity costs attributabl-e to that
cfass.
The next step is the design of utility rates for
each class guided by the regulator's direct.ion as to
portion of the customer, demand and commodity related
costs should go into a volumetric charge and how much
into fixed monthly charges.
O. What underlying principle is the basis for
allocating demand costs in a cost of service study?
A. According to Professor Alfred Kahn in The
what
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Intermountain Gas Company
Economics of Regulation (1988) the basis for demand
al-location is "the respective causal- responsibil-ities of
various buyers" (P.95/I) , or in other words what is known
among regulators as the "cost causer is the cost payer"
principle. Kahn el-aborates that the "proper measure of
that responsibility is the proportionate share of each
customer to total- demand placed on the system at 1ts
peak. "
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This view is confirmed by Drs. Paul- J. Garfield and
Wallace P. Love;oy in Public Utility Economics (1954) as
"The annual peak demand on the system determj-nes the size
of the plant; the Iatter essentially determines the total
demand or capacity costs. " They also point out that "the
major difficul-ty arises in the allocation of a cost
category designated demand or capacity costs" and has
"been the subject of study since the turn of the last
century [20th] "
Probably the most quoted authorj-ty
rate making is Professor James Bonbright
on pubJ-ic utility
writing in
discussing thePrinciples of Public Utility Rates. fn
various cost apportlonment formulas for capacity cost
available, Bonbright writes "of the formulas described
the one that woul-d probably come cl-osest to receiving
support from the economists, at Ieast from the standpoint
of cost analysis, is the system peak method." (P. 354)
Most state commissj-ons, some with over a hundred
years of experience, have settled by now on their
preferred demand al-l-ocation method or methods for their
jurisdictional- gas and electric utilities. EERC has done
the same and for natural gas pipelines, switching in 7992
from a "seaboard" formula of 503 demand in the fixed rate
and 50% in the volumetric, to a 100? of fixed cost in the
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Intermountain Gas Company
O. What costs are re1ated to the "customer charge"
on a gas di-stributj-on system?
the Gas Rate Fundamental-s handbookA. According to
"Customer-related costs,
and customer accounting
then, are primarily distribution
costs. They are all-ocated
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Intermountain Gas Company
directly to the customer of a particular class of
an example of
137 )
service. Metering
customer-rel-ated
costs are
costs. " ( P.
costs vary with the
incl-ude, beside meter
a customer and some
These
typically
of bi111ng
exact make
number of customer and
varies with the practices of the individual state
commissions. That is, some states may include more
distribution system costs than others related to demand
The reason for thls is that for residential-
reading costs, the costs
distribution costs. The
up of costs associated with "customer charges"
gas
al-l-ow formeters and the utility's billing systems do
residentlaf and GS customers to be charged
not
for their
maxj-mum demand on the system. Therefore the next best
solution is to convert
which
the expected
is equitable
demand charge into a
as customers in thiscustomer charge,
cl-ass are similar to each other so that the customer
charge collects as a demand charge woul-d.
The testi-mony of Lori B. Blattner indicates that
Intermountain's unit customer-rel-ated costs are estimated
at $13.50 per month,
only $2.50charge
winter
sunrmer
1S
whil-e the Company's monthly customer
in the summer and $5.50 in the
only $2.50,
months. Thus, a customer going on vacat-ion for a
month and shutting off gas appliances would pay
which would be grossly inadequate to recovero25
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Intermountain Gas Company
the fixed cost investment in the distribution system
standing by to provide
the entire month, l-et
service for that customer during
alone the associated meter reading
is thatand billing costs. The impJ-ication of that fact
other customers woul-d have to cover this shortfall in
revenues.
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O. Woul-d higher residential customer charges
negatively impact disproportionate numbers of low income
customers, compared to the company's general population
of residential- customers?
A. Not in this case. The company has prepared an
analysis that
customers is
shows that the usage of low lncome
similar to the usage of the general
population.
Iow naturaf
customers.
high income
Thus it
gas usage
Low usage
customer
is not correct to assume that al-l
customers are al-so "1ow income"
can come from the decision
to only use natural gas only
bya
for
alsocooking rather than space heating. Low usage can
occur annually from retirees who move to warmer cli-mates
in the winter leaving their homes vacant for the high
heating consumption months. Conversely, hiqh natural gas
usage may be experienced by large but poor families
cooking and space heating with ol-der less-efficj-ent
appliances in poorly j-nsulated homes.
Low income customers wil-l- always be affected greater
by increases in the cost of any essential compared to
higher income customers. That is purely a mathematical
statement. Increasing the customer charge is economic
efficient pricinq. Kahn directly addresses this issue by
statj-ng that variations from this pricing may be made for
"expediency and practicality" but that "objections to theo25
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Intermountain Gas Company
principle itself" are for the most part not susceptible
to scientifj-c refutati-on, since basically they involve
(P.100-702/I) Having
rates for "low income"
nonscientific value judgments. "
attempted to deal- with special
customers
periods of
as a state PSC commissioner during the high
inflatlon in the 1980's I wou1d discourage
ameli-orate problems of poverty.using utility rates to
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Intermountain Gas Company
O. Would the shift in customer charger ds proposed
by fntermountain, discourage conservation or encourage
unnecessary use of natural- gas?
A. I do not believe so. Correctly done the
average customer should see a monthl-y bill at the same
l-evel before the change as after. While the fixed
customer charge will- increase, the volumetric charge will-
decrease, leading, on average, to a
as before. Thus, there would not be any price signal
was any cheaperindicating that del-ivered gas servj-ce
than before.
Even if the commodity price of natural is slightly
Iower in the future, due to this shift, it is not people
who use natural gas but their appliances and devices.
These devi-ces do not see any price. When the weather
gets colder the family furnace or cooking range will not
use more gas just because it is less expensive than it
was before. Yes, customers do control the thermostat,
but is 1t Iikely that small- changes in gas commodity
price will cause major changes in life style choices
(increasing thermostat settings in winter or cooking more
often) for the average consumer? Conversely, if the
price of gas is Iower, it 1s afso highly unlikely that
consumers will go out and install a second furnace and a
second kitchen range.
total bill the same
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Intermountain Gas Company
With respect to which price signals to consumers
would cause them to replace lower efficiency furnaces and
appliances for new ones, I believe that consumers are
more 1ikely to change their furnaces and appliances due
to mechanlcal problems, d9e and rebates and other
promotional programs than changes in commodity gas costs.
I doubt whether gas appliance safes have skyrocketed
during this recent period of commodj-ty gas prices at the
recent Iow
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Intermountain Gas Company
$2.00 per MCF
ago of $8.00
level- coming down from a high a few years
per MCE.
you support fntermountain'sO.
change
Do proposal to
a demand chargethej-r rate structure and implement
for Iarge industria.l-
A. Yes, I do.
testimony the capital
system is a factor of
natural gas customers?
As I indlcated earl-ier in
investment in the natural
the size of the system
in a specific
fn
t.his
gas
terms of
how much gas can be del-ivered period of
time. The more gas required in that time period, called
the "demand" (from the view of the customer and
"capacity" from the view of the utility when making its
capital investment), the larger, physically, the system
needs to be and the greater capital cost in i-ncurred.
Under the most basic rate making principles that entitles
which cause the demand shoufd pay their proportionate
share of costs in meeting that demand. Volumetric use is
not the controllinq factor here but the si-ze of the
system is since size dictates how much gas can f1ow, at
safe pressure, in
Eor example,
swimmlng pool with
filJ-ing it with a
would be the same
However, the capaci ty
the relevant time period.
most of us are aware that filling a
a garden hose would take longer than
fire hose. The final volume of water
to fill the pool from either hose.
or demand from the fire hose would25
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Intermountaj-n Gas Company
be much greater than that through the garden hose. Most
people would understand that a large fire hose woul-d be
more expensive than a garden hose and the same is true
for the large natural gas pipes required by large
industrial customers. The large industrial- customers
wou1d have larger service pipes and they woul-d use a
Iarger portion of the capacity of the common distribution
system in the streets.
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Intermountain Gas Company
Another cost associated with "demand" incurred by
the distribution gas system is the cost of Federal Energy
Regulatory Commission (EERC) regulated interstate natural-
gas pipeline system delivering gas to the distribution
system's city gate. fn 7992 the FERC adopted a rate
making design called "straight fixed-variabl-e" (SEV)
which all-ocated all of the fixed costs to a monthly fixed
charge for capacity (demand) leaving only variabl-e costs
in the volumetri-c rate.
Distribution gas utilities as customers of natural
gas pipelines pay a fixed monthly demand rate based on
their reservation of maximum capacity needed. This
capacity/demand is a function of the simultaneous maximum
demand placed by the distributlon customers on the
system. If that demand increases the distribution gas
utility must sign up for more capacity. If demand
diminishes the utility can reduce its demand reservation.
lndustrial customers, along withThus the demand of large
demand of other customer
pipeline capacity must be
classes dlctates how much
reserved. Thus an industrial-
demand charge will- more fairly al-l-ow this cost to be
al-located to the customers causing the demand. Since
generally designed to col-l-ectchanges
the same
INCTCASCS
in rate design are
revenue requirement, as before the change,
in fixed costs would be accompanied with ao25
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decrease in the volumetric rate.
II. FIXED COST COLLECTION MECTIA}IICTSM
O. Turning now to the second part of your
tesLimony, do you have an opinion on whether the
Commj-ssion should adopt he Company's proposal to
implement a Fixed Cost Collection Mechanism ("FCCM")?
Terzic, Di 1,2a
Intermountain Gas Company
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Intermountain Gas Company
A. Yes. It is my opinion that the ECCM presented
in Mr. McGrath's testimony is a necessary component of
the Demand Side Management (DSM) program presented in the
testlmony of Allison A. Spector in this proceeding.
Ms. Spector's testimony i-ncludes a description of
the company's proposed DSM program, the program direct
cost and reference to a revenue decoupling proposal in
the form of the FCCM Tariff i-n Mr. McGrath's testimony.
The purpose of the FCCM is to mltigate revenue l-osses
resulting from this conservation program and other
factors. It is my opinion that the FCCM is a critical
component of the DSM proposal and its acceptance by the
commission would be in keeping with the public interest
and good regulatory practice.
O. What is the nature of the term "fixed costs" in
the context of the FCCM proposal?
A. As I explained earlier, a natural gas utility
incurs certain fixed costs during the test year period
for which the revenue requirement is estimated, and upon
which rates are based. These costs do not vary with the
vol-ume of natural- gas delivered through the Company's
distribution system
An al-located cost of
or taken by any individual customer.
service study, as prepared by all
in support of rate design, has
of fixed and variable costs by
naturaf gas utilities
within it a breakdowno25
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Intermountain Gas Company
customer cl-ass. The problem arises when natural gas
distribution rates are designed to predominately recover
costs in the volumetric component and experienced vofumes
fal-l below those expected. The result will be
prograrnmatic deflciency in revenue and failure to coflect
needed revenues.
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O. Why would the acceptance of the FCCM be in the
public interest and good regulatory practj-ce?
A. Because a FCCM is a naturaf and important
component or counter-weight to a well designed and
implemented demand-side management (DSM) program. It is
a regulatory mechanism for mitigating economic penalties
on the utility associated with the desire to obtaln
environmental and consumer benefits commensurate with a
well-designed DSM program.
DSM 1s one technlque for reducing natural gas
distribution company demand and usage. It usually
responds to a utility regulatory commission's desire to
look at both supply-side and demand-side opti-ons, with an
accompanying analysis costs and rate impacts. Typical
regulatory DSM objectives are the promotion of efflclency
in the consumption of energy and obtaining envi-ronmental
benefits. The fdaho Commission has extensive experience
with such programs, having accepted and reviewed filinqs
by both 1ts electric and natural gas utilities.
The treatment of DSM programs in the natural gas
distribution indust.ry is detalled in the National-
Regulatory Research fnstituters (NRRI) August 1994 paper
"Integrated Resources Planning for Local Gas Distribution
Companies: A Critical Review of Regulatory Policy
fssues". That paper refers to the two basic elements of
Terztc, Di 14
Intermountain Gas Company
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a DSM program as "a set
ratemaking mechanism. "
these Intermountain Gas
of administrative procedures and
In accordance with this report in
Company proceedings
DSM and Mr.
Ms. Spector
has presented the
presented a rate
procedures for McGrath has
making mechanism.
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O. Is a request for a decoupling mechanj-sm, such
as the ECCM proposal appropriate when a utility adopts a
demand side management program?
A. Yes, it is. The Commission recognized this
with its earl-ier cases in the el-ectrj-c industry. For
naturaf gas distribution utilities, the cited NRRI paper
clearly states that ratemaking mechanism el-ements when
adopting DSM "generally attempt to allow recovery of
investments and expenses of various options/ recovery of
revenues caused by lost safes due to successful-
implementation of demand-side management (DSM) options,
or otherwise make supply side and DSM options equally
profitable, offer additional financj-al- incentives for
successful- DSM options, and promote overall costs
minimlzation. " (Page 3) In t.his case, Mr. McGraths
testj-mony on FCCM lays out a specific proposal in keeping
with the DSM program.
a. Ts ratemaking treatment to recover lost
revenues an indispensable part of a DSM proposal?
A. It is. The NRRI report is direct on this point:
"Recognizing the fact that adoption of cost-effective DSM
options may lead to a reduction in sa1es, and therefore,
a reduction of revenues and profits, mechanisms to
compensate the utility for lost revenues have been
proposed and used." Thus, I believe it- is indispensable.
Terzic, Di 15
Intermountain Gas Company
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Intermountain Gas Company
O. Is there a case where a DSM program may not
lead to a reduction in "revenues and profits"?
A. In most cases DSM would l-ead to reduction i-n
revenues.However, if the
al-l fixed costs
distribution gas company rate
fixed charge r or
block rat.es, then
design had an a monthly
decliningif rates were based on steep
the l-ost revenues would
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merel-y reflect lower purchased gas costs. In that case
the utility's return (proflt) would be coll-ected 1n the
f i-xed charge or early rate bl-ocks.
This is not the case in regard to Intermountaj-n Gas
Company's tariffs where both the residential services
tariffs RS-1 and RS-2 have fixed monthly customer charges
of $2.50 per bill April to November and $5.50 December
through March with an energy charge based on dollars per
therm. In this type of rate design the bul-k of the
revenue comes to the utility in the energy charges and
this would include revenues to cover the return component
of the revenue requirement. There is also the exception
where the DSM objective of reduction of negative
environmental impacts is to be accomplished by increasing
the direct use of natural gas.
O. Is a decoupling mechanism, such as the FCCM
proposed here, only required when a distribution gas
company applies for a DSM program?
A. No. A decoupling mechanism is approprlate, in
my opinion, whenever a utifity rate design is such that a
decrease in sales volumes adversel-y affects the ability
of the utillty to earn a reasonable return on investment.
Mr. McGrath's testimony listed a number of reasons why
natural gas sales per customer were decfining on
Intermountain's system, and those factors are found alI
Terzic, Di 76fntermountain Gas Company
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Intermountain Gas Company
around the United States, not just here in ldaho. A
Iegal principle in regulation is that the commission
approved rates must give the utility a reasonable
opportunity to earn a fair return on investment. When a
commissj-on has direct evidence that a regulatory policy
or rate design results directly in the inabllity of a
utility to have that opportunity, then the policy or rate
design must be corrected or effects mitigated.
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O. Is the FCCM the only decoupllng mechanism
avail-abIe?
A. No. Regulators have approved a variety of
decoupling mechanlsms based on l-ocal- preferences,
practices and circumstances. The FCCM proposal for
fntermountain was made with knowledge of this
Commission's first case to investigate financial
dislncentives to energy efficiency in the case of an
electric utility back in 2004. The resul-t was a pilot
Fixed Cost Adjustment mechanism (FCA) for Idaho Power
Company in 2007. In 2072 that pilot was made permanent.
Additionally, in 2075, the Commission approved a
three-year pi-1ot program for an FCA mechanj-sm for Avista
Utilities' electric and natural gas operations.
O. Have regulators explicitly cited l-ost revenue
as a reason for implementing a recovery mechanj-sm?
A. Yes, for example the Ontario Energy Board, the
public utility regulatory agency in the Province of
Ontario, has explicitly listed, among its "Guiding
principles for the DSM Framework" as a principle number
" 4. Gas utilities will be abl-e to recover costs and l-ost
revenues from DSM programs."2 In this case, we have a
regulator - the Ontario Energy Board - and there are
1ike1y others, which has publicly tied decoupling as a
required condition for DSM implementation.
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Intermountain Gas Company
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Intermountain Gas Company
O. What is the significance of an FCCM, or similar
mechanism, to utility investors?
A. A regulated utility, such as a natural gas
distribution company, is required to have facifities
sufficient to provide safe, reliable and adequate service
to its customers. This means that sufficient physical
facilities must be built and available to provide
2 As cited in its recent "Report of the Board Demand Side Management
Framework for Natural Gas Distri-buters (2015-2020) EB-1024-0134"o 25
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Intermountain Gas Company
needed service. The funds to pay for the construction of
the assets come from debt and equity provided by
not incl-ude the cost ofinvestors. Regulators
assets in the revenue
utility
requirement until the facil-ities
do
are actually providi-ng
utility has lmplemented
that the utility, with
servlce. An announcement that the
DSM indicates to the investor
regulatory approval, is
decrease sal-es of natural gas on
for the
toinstituting
the system.
revenue from
would assume
programs
Without some mechanism to compensate
these programmatic lost sales the investor
that the opportunity earn a reasonabl-e
return on their investment has been or is being
diminished especially when the rate design, as in this
case, is predominately based on vo1umes. This factor,
unmitigated, woul-d signal increased risk to the investor.
Thus the establlshment of ECCM provides a better
opportunity, but again no guarantee, of reasonable
returns in the future.
O. Does the issue of giving utility investors a
reasonabfe opportunity to earn a falr return also extend
to fntermountain's proposed increase in its customer
charge for residentiaf and commercial customers and the
establishment of demand charges for large industrial
customers?
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Intermountain Gas Company
j-s proposed in response to the request to establ-ish a DSM
program. The customer charge and demand charges are al-so
designed to, in addition to addressing issues of equity
and cost causation, reduce the uncertainty of revenue
coll-ection but from all- of the other factors which affect
vol-umetric sal-es negatively as I explained earlier in my
testimony.
O. Does that conclude your testimony?
A. Yes it does.
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CSB Reporting
(208 ) 890-s198
TERZIC (X)
Intermountaj-n Gas Company
(The following proceedings were had in
open hearing. )
COMMISSIONER RAPER: And we will move on
to the parties for cross-examination. Commission Staff?
MR. KLEIN: None from Staff,
COMMISSIONER RAPER: Thank you.
MR. STOKES: We do have a couple of
questions, Madam Chair
CROSS-EXAM]NATION
BY MR. STOKES:
O Good morning.
A Good morning.
O Why is Intermountain proposing the fixed
cost recovery charge for the industria1 rate schedules?
A Well, the Company will answer for its own
reasons. f support the proposaf for the fixed cost
recovery charge because it more accurately reflects how
the Company incurs costs. Up until- the 1980s, all of the
utilities in the United States were on a declining block
rate, both gas and efectric, where flxed charges were
recovered in the early bl-ocks and there was no problem of
l-oss of fixed cost recovery if sales volumes were to
drop.a 25
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CSB Reporting
(208 ) 890-s198
TERZTC (X)
fntermountain Gas Company
In the l-980s,
We know it bettercoupling.
reversal-of that,
shock wlth
gas in this country
exporter of natural-
time to go back and
we did what we called
as decoupling, which is the
but in the early 1980s, after the oil-
the President of the United States atand gas
that time issuing a national energy plan which said, in
L911 President Carter's plan said, we would run out of
natural- gas and oil by the year 2000, and at that point
the Publ-ic Utitity Regulatory Policies Act of t97B cal-fed
on state commissions, regulators to look at tlme-of-use
pricing and al-so cal-l-ed on them to l-ook at flat rates or
the inclining block rates, because the conservation of
the vital- resource was 1n the national interest.
Now, of course, we're
with oil and we have a
in a tremendous
global surplus
to the extent that
surplus of natural
we wil-l- become an
9dS, so times are different. ft's
correct that rate design and recover
fixed costs in a fixed charge.
O And what happens if there's no charge that
recovers the fixed charge I'm sorry, the fixed cost?
A Wel-I, with decl-ining volumetric sa1es,
which happens in residential- consumers, I was a CEO of a
gas company for five years, even the most least
knowledgeable consumer when they go out and buy a new
appliance wil-I end up buying l-ess natural gas. The new25
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CSB Reporting
(208 ) 890-s198
TERZTC (X)
Intermountain Gas Company
gas furnaces and gas water heaters are much more
efficient than the ol-d onesr so consistently the entire
natural- gas industry from the residential standpoint has
had a decline i-n volumes from individual- customers purely
from the more efficient and better technologies, and if
you put your fixed costs into the volumetrj-c, the
companr_es
costs of
run the risk of not recovering their fixed
depreciation and return
financially risky and having all
making them much more
kinds of negative
consequences.
O Are these sorts of customer charges
customary on industrial customers?
A Yes, fixed costs have been around, as I
state in my direct testimony, since the late 1800s when
the first electric and gas util-ities realized that they
had fixed costs to recover, and we've had a long history
in this country and worl-dwide of recovering fixed charges
in a fixed rate, incl-uding the two-part rate, which would
be the customer charge and the energy charge and the more
correct three-part rate where you have a customer charge,
an energy charge, and a capacity charge or a demand
charger so these are wel-l--known, 10O-year-ol-d practices
that it's time to return to.
O And just to be cfear, when you say "fixed
costs, " what sort of costs are those?o Z3
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A Yeah, theyrre exactly what you think they
would be. They are costs that don't vary with the vo1ume
of energy or volume of natural gas that the customers use
and so the slze of the pipe, the delivery pipe to your
facility, doesn't change with the volume of gas. The
size of the distribution network bu11t by the company
doesn't change with the vol-ume of gas. The number of
employees employed by the company, the derivative
depreciation, annual depreciation, rate doesnrt change.
The return on the fixed assets doesn't change with the
amount of gas going throughr So all of the -- many of the
components of the revenue requirement; the four major
components of revenue requirement being operating and
maintenance expense, depreciation, taxes, and return.
Very few of those items change with the change in volume.
Clearly, your purchased gas changes for a
distribution company with your change 1n volume, maybe a
l-ittle over time some pumping costs, but predominantly a
distrlbution gas utllity is a fixed pipe network that's
there 24/'7 to meet the maximum demand that the customers
woul-d have on the col-dest day.
O So what are the limitations on collectlng
al-1 the revenues through a vol-umetric charge?
A Wel-I, the problem with collecting all the
revenues, all of the revenues, oD a volumetric charge
CSB Reporting
(208 ) 890-5198
TERZIC (X)
Intermountain Gas Company
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TERZTC (X)
Intermountain Gas Company
woul-d be that in periods of warm weather, there would be
a gross underrecovery and woul-d probably result in a
financial 1oss, and in periods of extremely cold weather,
more than the average for which the rates were designed,
the Company wou1d collect way in excess of its authorized
return or of a reasonabl-e returnr so there is the
positive and negatlve on both sides.
MR. STOKES: Thank you. We have nothing
further.
COMMISSIONER RAPER: CAPAI?
MR. PURDY: I have no questions. Thank
you.
COMMISSIONER RAPER: Amalgamated?
MR. RICHARDSON: Thank you, Madam Chair.
I do have a couple of questions.
CROSS_EXAMINATION
BY MR. RICHARDSON:
I guess it's Commissioner Terztc?
ft's Mr. Terzrc, I think. I was a
u
A
commissioner a long time ago.
O Okay, thank you, Mr. Terzic.
refer to page '7 of your direct testimony, and
that most state commissions, some with over a
Would you
you state
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TERZIC (X)
fntermountain Gas Company
years of experience, have settled by now on their
preferred demand allocation method or methods for their
jurisdictlonal gas and electric util-ities. Thatrs at
line 13. Do you see that?
A Yeah.
O So are you aware that this Commission has
not implemented any demand charge for Intermountain
Gas ?
A Yes.
O So that statement woul-dn't apply to this
Commission; that is, that we don't have a hundred years
of experience with demand charges for this utility, do
we?
A Wel-l-, you stil-l- have costs if you allocate
on demand. Whether you have a rate design that's on
demand is, I think, specifically what you're talking
about.
nv
your testimony?
A
O
And that's not what you're referring to in
That's correct.
Al-so on page 1 of your testimony, you
book, the Principles ofquote from Professor
Public Utility Rates.
Bonbright's
Do you see that ?
A Yes.
O Would you agree with Professor Bonbrighto25
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CSB Reporting(208) 890-5198
TERZIC (X)
Intermountain Gas Company
when he observes in that same book that "the idea of
fairness of rates, of rate changes depends on their level
in a recent period"?
A I have no dispute with that statement
which he made -- which I assume he made. I donrt have
the book in front of me, but I'l-l- take your word that he
did make it and yes, fairness is a standard, a
consideration.
you'd like
O Well,
to refer
A I'II
O Here,
T do have the book in front of me if
discussing the concept of changing
A Remembering back to
so, yes.
the quote, I believe
a And he goes on to state that "to the
extent that people have committed themselves to
j-rrevocabfe or infl-exibl-e and costly i-nvestment
take your word for it,
of course, you woul-d
sr_r.
agree that he's
rates for customers?
to change the
Do you recal-l-
380-page book,
decisions, it is considered to be unfair
cost of price structures substantially. "
that in Professor Bonbright's book?
A If it's in there, y€s.
O I said do you recall that?
A It's a 400-page it's a
so I'm sureo25
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TERZIC (X)
Intermountain Gas Company
O I can give
A Yeah, can
the original Bonbright or
Kamerschen and Daniel-son?
you my copy so you can
f take a 1ook, yes, and is that
is it the later versi-on with
MR. RICHARDSON: Madam Chair, it's the
second edition of Bonbright, 1988. May I approach the
witness ?
the witness the book Bonbright,Principles of
witness. )
I'm handing
Public
Utility Rates, page 74, second edition, and Ifd ask you
to refer to pages 14 to 75.
THE WITNESS: Yes, I would poi-nt out this
is not the original Bonbright. This is the modified and
updated version by actually two friends of mine, Dr.
Al-bert Professor Al-bert Danielson and Professor David
Kamerschen of the University of Georgia who updated and
changed some of the original text, so this is not the
original Bonbright. It is an updated version of
Bonbright.
0 BY MR. RICHARDSON: It's the second
edition; correct?
A Wel-l-, it may be the second edj-tion of the
Danielson, Kamerschen, Bonbright. ft's not the second
COMMISSIONER RAPER: Yes.
(Mr. Richardson approached the
MR. RICHARDSON: Madam Chair,
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TERZTC (X)
Intermountain Gas Company
edition of the original Bonbright.
So this isn't the book you referred to?
That's not the one I used, no.
O But this is considered the Professor
Bonbright seminal- text for utility ratemaking?
A It's not the original I don't want to
quibble, counsel, but it's not the original Bonbright
text. It is referred to as one of the, I guess one of
the, Bonbright texts, but modified by l-ater authors.
0 So if you l-ook to the bottom of page 7 4
over to the top of page f5, itrs the quote I referred you
have committedthe extent that people
to irrevocable or inflexible and costly
unfair todecisions, it is considered to be
cost of prlce structures substantially. Do
you see that?
Yes.
And I assume that you agree with the
statement regarding the unfairness of making substantial
rate changes when
decisions based on
customers have made costly investment
an exi-sting rate structure.
A Yes, I wou1d agree with that.
o
A
to, so to
themselves
investment
change the
o And
Sugar Company has
upon fntermountaj-n
are you aware that the Amalgamated
decisions based
A
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Gas's existing rate structure?o 25
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TERZTC (X)
Intermountain Gas Company
A
O
largest single
fntermountain
MR.
MR.
question and then
questlon out.
objection is,
answered. He
the follow-up
counsel.
think it was asked and
wasn't aware, So I think
simply testi-mony by
COMMISSIONER RAPER: Go ahead and finish
the question. Mr. Terzic, don't answer until- your
counsel has an opportunity to state his objection.
MR. RICHARDSON: Thank you, Madam Chair.
O BY MR. RICHARDSON: I asked you if you
were not aware, then, of the investment decisions
fntermountain Gas's largest single customer has made
based upon the existing rate structure offered by
Intermountain Gas.
MR. WILLIAMS: So Madam Chair, my
No, I am not.
So you're not aware of Intermountain Gas's
customer's decisions based on
WILLIAMS: Objection.
RICHARDSON: If you let me finish the
object, I could perhaps get the
flrst of all, I
said healready
question is just
MR. RICHARDSON: I'11 rephrase the
question, Madam Chair.
MR. WILLIAMS: f trs still-the firstO25
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TERZIC (X)
InLermountain Gas Company
objection is that
He said he's not aware of it and so f donrt see why we
need to pursue the depth of investment by Amalgamated
with a witness that is from Washington, D.C.
MR. RICHARDSON: Madam Chair, if I could
ask the expert wj-tness a hypothetical question based upon
his expertise.
COMMISSIONER RAPER: You may continue to
cross-examine the witness, Mr. Richardson, with the
knowledge that he has asked and answered the question as
to whether he has the specifics on Amalgamated Sugar's
position with the Company, so if you can modify or move
on to some version of something that looks different than
what's being objected to currently, that woul-d be
preferable.
MR. RICHARDSON: Thank you, Madam Chair.
f won't ask him what his knowledge is of Amalgamated's
investment decisions.
0 BY MR. RICHARDSON: But I woul-d ask if you
thewould agree that
Amalgamated Sugar
it is reasonable for a company l-ike
investmentCompany to make
it's been asked and i-t's been answered.
decisions based upon the fact that
costly
for at Ieast the last
30 years, Intermountain Gas has never implemented or even
proposed a demand charge for gas delivery servlces?
A f guess I'm agreeing with you that myO25
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TERZTC (X)
Intermountain Gas Company
assumption
know, but any
rates
graduallsm in
1l-\
nY
A
a si-ng1e
This is
investments to
the firm. One
as this
AS the company in question, which I
company would make decisions on
that were in effect or they
don't
energy use
thought woufd
experience and
that.
based on
be j-n ef f ect at the time. That's been my
don't think anybody would disagree with
O And are you famil-iar with
I
some commissions where rather
large increase that
generally the case when there's large capital
the concept of
ratemaking changes?
Yes.
Can you describe that concept for us?
Yes, there is has been a practice at
than face the actual-ity of
the increase be spread out.
be made or major changes in investment by
of the tools used to mitigate that, of
Commission knows, is having constructioncourse,
work in
so there
in costs
progress in rate base where you phase in things,
is a regulatory practice of phasing in changes
that are toofs familiar to this and other
commassl-ons.
O But we I re not facing a
i-nvestment, a lumpy addition to rate
A Irm not aware of that,
O So did you
gradualism for
large capital
base here, are we?
no
advise your client on the
implementing demand charges inconcept ofO25
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CSB Reporting(208) 890-5198
TERZIC (X)
fntermountain Gas Company
this case?
A I was not asked.
O They did not ask you about that?
A No.
MR. RICHARDSON: Thank you, Madam Chair.
Thatf s al-l I have.
COMMISSIONER RAPER: Mr. Otto?
MR. OTTO: I do have one or two
questions.
CROSS-EXAMINATTON
BY MR. OTTO:
O Hello, Mr. Terzic.
A Yes.
O f was l-istening with quite a bit of
interest to your exchange with the Northwest Industrlal-
Gas Users. In the beginnlng you discussed kind of the
history
we got
designs
account
in your experi-ence of rate design and that when
to the 1980s, there was a movement towards rate
that encouraged conservation; is that an accurate
A Yes.
o of your discussion? And now these
days, in the current times, you said that therers a lot25
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(208 ) 890-s1e8
TERZIC (X)
fntermountain Gas Company
of natural- gas in Amerj-ca; is that correct?
in mind the conservation was
of thebecause we
running short of natural gas.
supply. The federal- government
prohibiting the use of natural-
generation and other purposes,
commodity. We were
an inadequate
passed off
A Yes, and
were runnj-ng
keep
short
It was
even
of the resource, not a conservation so much as much
from the customer standpoint.
O Sure; so today say there's a lot of
gas and so those reasons may
gas for electricity
so it was a conservation
you
be
petrochemical industry can
products that we need, so that
we're dealing with. Now we're
weII, there's a lot of
9ds, so is your testimony that conservatlon isn't
necessarJ-ly important anymore?
A No, it's not that type of conservation
is not. We are not in the position where we need to save
natural gas for vital public purposes. We are not in the
position where we have to save natural- gas so people can
heat their homes the way they want to. We're not in the
position where we're going to save naturaf gas so people
can heat water and have other beneficial uses or save
natural
produce
is not
gas so that our
the plastics and
the conservation
talking about conservation from the standpoint of
min j-mi zing, helping consumers more efficiently use theo25
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CSB Reporting(208) 890-s198
TERZIC (Com)
fntermountain Gas Company
product and minimizing bil-l-s and other
your experience as a
val-id reasons.
regulator in
you believe that aat rate designs, do
encourage a customer to conserve
own benefit?
OSo
setting looking
price signal is a
for themsel-ves for
way to
their
A Yes.
MR. OTTO: Thank you. That ' s al-l .
COMMISSIONER RAPER: Thank you, Mr. Otto.
Are there any questions
one quick question.
from the Commissioners? I have
THE WITNESS: Sure
EXAMINATION
BY COMM]SS]ONER RAPER:
O fn relation to your conversation with the
Northwest Industrial Gas Users and answers to some of
their questions, you tal-ked about reduced recovery by the
utility, by the natural gas utility, because of more
efficient appli-ances and whatnot. Do you can you make
a specific reference to the impact on Intermountain Gas
and how those -- whether those efficiencles that became
avail-abl-e negatively impacted the sales volume for this
partj-cular natural gas company?
A I think t.hat woul-d be a question thato25
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TERZIC (RCDi)
Intermountain Gas Company
that data would exist within
woul-d be better to ask them.
national-1y, the American Gas
documents indlcated there's
year decrease due to the new
and I think it
you that
has in public
two percent
the Company
I will tel-I
Association
been about a
due to the
per
in
furnaces and just the technol-ogy of that.,
changeover
and that's a
number that's in their l-lterature which I've seen, and it
seems from my experlence at Yankee Gas, which f ran for
four or five years, it seems a reasonable estimate.
COMMISSIONER RAPER: Okay, thank you. Any
redirect?
MR. WILLIAMS: Yes, Madam Chair, I have
one redj-rect. Actua11y, it just follows on your question
and I want to understand.
REDIRECT EXAMINATION
BY MR. W]LLIAMS:
O It seems that in thls case there's been in
various parties Iinkage between a fixed cost collection
mechanism and DSM; in other wordsr we heard that in Mr.
Otto and the Chairman's, but what I think I heard you say
that a fixed cost coll-ection mechanism has broader
benefits to the Company and the customers than just
simply 1ts linkage to DSM,' is thato25
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(208 ) B 90-s198
TERZIC (ReDi)
fntermountain Gas Company
A That's correct, because the loss in
revenues from lower vol-ume safes, the lower volume sales
come from a variety of sources, not just mandated or
voluntary DSM programs. It does come from new
technofogies. It does come from consumer preferences.
It does come from changes in housing stock and whether
people are buil-ding large homes or people are retiring.
It comes from demographlcs, So there are many reasons.
The other thing to keep in mind is that
when we ' re talking about going to increasj-ng the fixed
charges and lowering the volumetric rate, generally the
revenue requirement is kept fixed. It is this Commission
that determines the total revenue requirement independent
of the I mean, theyrfl make an estimate of the annual
sales, but you'11 determine the total revenue requirement
based on your determination of reasonable operating and
maintenance expense, reasonable depreciation, reasonabl-e
taxes. That operating and maintenance expense wiIl
include an estimate of the cost of gas 1n a monopoly-type
situation l-ike thisr so that total revenue requirement
stays fixed no matter what the rate design.
After
you've
some of
you
got a
fix the total revenue
requirement,
you pick up
charges, but
choice
the rates in
of rate deslgn. WiIl
fixed or variable
generally the customer class wlII beo25
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respons j-ble f or the same amount of cost. It doesn't
matter on the rate design, and so shifting from a system
where you have a lot of the costs in the variable to the
fixed rate, all things being equa1, shouldn't change the
amount pald by customers. It woufd just change the way
the col-lection is made and indeed, most rate designs will
try and attempt that or try and make the total- revenue
you won't change the total- revenue requirement because
you change the rate design, and within the class you
probably wouldn't change that as well, and so we're not
talking about your increasing or decreasing the rates to
the utility because you're changing the rate design.
We're merely talking about how the customer is going to
pay for the rate, how the customer wil-l pay for service,
and most customers wiIl understand that flxed charges are
appropriate in a fixed rate.
MR. WILLIAMS: Madam Chair, I have no
further questions.
COMMISSIONER RAPER: Thank you, Mr.
Terztc, for your time.
THE WITNESS: Thank you.
COMMISSIONER RAPER: You're excused.
(The wltness left the stand. )
COMMISSIONER RAPER: I'm inclined to
continue to plow through testimony, un-l-ess somebody tel-Is
CSB Reporting(2oB) 890-s198
TERZIC (ReDi)
Intermountain Gas Company
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BLATTNER (Di)
fntermountain Gas Company
me that they need a break right now in order to run down
the hall. Let the record show there were no hands and
we're going to continue through the testimony.
Mr. Wifliams.
MR. WILLIAMS: The Company woul-d cal-l as
its next witness Lori Blattner.
LOR] A. BLATTNER,
produced as a
Intermountain
witness at the instance of the
Gas Company, having been first duly sworn
to tell the truth,
truth, was examined
the whole truth,
and testified as
and nothing but the
f oll-ows:
DIRECT EXAMINATION
BY MR. WILLIAMS:
O Woufd you please state your name and
busi-ness address for the record?
A I'm Lori Blattner, 555 South Col-e Road,
Boise, Idaho, 83709.
O And are you please state your
employment with the Company and the positlon you're in.
A f'm a regulatory analyst.
O Okay, and are you the same Lori Blattner
that prefiled direct testimony in this case consisting ofa25
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A Yes.
O And you have with you Exhibits 79, 20, 27,
22, 23, and 24; is that correct?
A Yoq
O So if I were to ask you the same questions
today contained in your prefiled direct testimony, would
your answers today be the same?
A They would.
MR. WILLIAMS: Madam Chair, I would ask
that Ms. Blattner's testimony be spread upon the record
as if read in fu1l and that her Exhiblts 18 through 24 be
admitted.
COMMISSIONER RAPER: With no objection,
Ms. Blattner's direct testimony will be spread across the
record as if read and we wifl admit Exhibits 18 through
24 in the record.
(IGC Exhibit Nos. 18 24 were admitted
into evj-dence. )
(The foflowing prefiled direct testimony
of Ms. Lori Blattner is spread upon the record.)
BLATTNER (Di)
fntermountain Gas Company
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Blattner, Di 1
Intermountain Gas Company
I. INTRODUCTION
0. Please state your name, title and business
address.
A My name is Lori A
with Intermountain
. Blattner.
Gas Company
address is
I am a Regulatory
( " Intermountain"
555 South Cole
Analyst
or "Company" ) .
Road, Boise, ID
My business
83707.
O. Ms. Blattner, would you please summarize your
educational- and professional- experience.
A. I graduated from University of Idaho in 1993
with a Bachelors degree in Agricultural Economics. I
joined Intermountain Gas in 1997. During my time in the
Regulatory Department, I have attended several ratemaking
cl-asses, lncluding a Threshold Associates cost allocation
training, Navigant Consulting cost of service workshop,
and an SGA Ratemaking seminar. Throughout my career at
fntermountain, I have been responsible for cost of
service and rate making. I have also been j-nvolved at a
high level in integrated resource planning, developing
the annual- purchased gas cost adjustment, weather
normalization and forecasting.
O. Have you previously testified before this
Commission?
A. No.
A. What is the purpose of your testimony?o 25
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Blattner, Di 1a
Intermountain Gas Company
A. My testimony
discuss and support the
covers three areas. First, I wil-l
used to develop the test
weather normalization process
period billing determinants.
Second,
service
discuss
I will- discuss
study prepared
and explain the
the al-l-ocated cl-ass cost of
f or this case. Third I wil-l
rate design changes that are
proceeding.being proposed in this
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Bl-attner, Di 2
Intermountain Gas Company
O. Are you sponsoring any exhibits with your
testimony?
A. Yes, I am sponsorJ-ng the fol-l-owing exhibits:
Ex. 18 Weather Normalization Opinion
Ex. 19 Minimurn System Study Results
Ex.20 Class Cost of Service Summary Results
Ex.2l Class Cost of Service Results - Account Detail
8x.22 Class Cost of Service Account Inputs
Ex.23 Class Cost of Service Allocation Factors
8x.24 Rate Design Calculations
rI. I{EJLTEER NOR!4AI.IZATIOLI
O. Is fntermountain proposing an adjustment to
reflect normal- weather?
A. Yes.
O. Why is an adjustment to gas utility revenues
and volumes to normalize weather appropriate?
A. Temperature is the primary driver of variances
in natural- gas usage, and the Company's rates incl-ude
charges that
charges are
weather wi-l-1
dependent on
affect the revenue received by the
Iower consumption due
will resul-t in lower
are based on consumption. Since these
consumption, variations in
amount of
Company. For example, a year with
to warmer than normal temperatures
revenues for the Company. Conversely higher consumptiono25
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due to colder than normaf temperatures will resuft in
higher revenues for the Company. The Companyr s proposed
DSM programs w111 also resul-t in incrementally lower
usage per customer.
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Intermountain Gas Company
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Intermountain Gas Company
Weather Normalization is the term used to describe
the process
level they
conditions
by which
and from which normalized (pro forma) revenues
can be determined.
O. Would you please describe the weather
normali zation process ?
A. Yes. To determine the degree to which actuaf
gas sales were higher or lower than normal as a result of
actual- weather, it is necessary to first quantify the
refationship between weather and sales. This
quantification is achieved through the use of multiple
regression analysis. The company developed regressj-on
equations based on eleven years of data: one that
describes RS-1 sal-es; another that descri-bes RS-2 sal-es;
and one that describes smal-l commercial sales (GS-1).
O. What are HDD's?
A. HDD's, or heating degree days, are units used
to relate a day's temperature to the energy demands of
temperature sensitive 1oad, pri-marily for space heating.
HDD's are cafculated by subtracting a day's average
temperature from a reference temperature, in this case
65o Fahrenheit.
O. Please continue with your explanation of the
weather normalization process.
would have
usage fevels are ad;usted to the
been under normal weather
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A. Once the regressj-on equations have been
specj-fied and estimated, it is the coefficients of the
weather variables that are of primary importance to the
weather adjustment process. These coefficients measure
the response of sales to changes in the weather. For
example, the coefficient of HDD65 in the resldential
equation represents the change in the number of therms
per customer that a change in one HDD65 would cause. By
multiplying this coefficient by the difference between
the normal number of heating degree days for a particular
month and the number
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that actual-1y occurred, the difference between actual and
normal therms per customer is determj-ned.
O. What data did you use to determine the normal
heating degree days?
A. Normal heating degree days are based on a
rolling 30-year average of heatlng degree days reported
each month by the National Weather Servj-ce. The IGC
service area contains regions with different weather
patterns. To incorporate these different weather
patterns normal weather was constructed using customer
class weighted weather data from the Boise, Caldwe11,
Twin Ea1ls, Sun Va11ey, Pocatello, Rexburg, and Idaho
Falls weather stations. Each year, normal is
recalculated to include the most recent year and drop off
the oldest year, thereby reflecting the most recent
i-nformation availabl-e. The normal weather used in thls
weather normal-ization process includes the 30 year period
1985 through 20L5.
O. Is your proposed weather adjustment process
consistent with sound statistical- practices and the
methodology approved in the Company's Weather
Normafization Case?
A. Yes, the methodology has been revlewed by two
experts in statistics and forecasting, Professors Fry and
Shannon from Boise State University. fn their opinion,
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Intermountain Gas Company
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Intermountain Gas Company
attached as Exhibit 18, "the methods used by
Intermountain Gas Company are an appropriate and adequate
basis for weather normalization". They go on to state
that Intermountain's approach f ol-l-ows the methodology
approved by the Idaho Public Utllities Commj-ssion in Case
u-1034-134.
a. What are the results of the weather
normaf ization process?
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Intermountain Gas Company
A. The test year in this proceeding is the twelve
months ending December 31, 2016, and consists of six
months of actual data, January through June of 2016, and
six months of forecasted data. The six months of actual-
data has been weather norma1ized as discussed above. Ih.
results of the weather normalization are summarized in
Table B. 1 bel-ow.
Table B.1: Weather Normnlization Results
Rate
Class
Achral
TIDD
Normal'
HDD
Actual
Therms
Normal
Therms
Difference
Therms
R-l 4,003.2 3,985.6 22,722,002 22,660,121 (61,875)
R-2 3,891.0 3,931.4 118,984,790 119,838,399 853,609
GS.1 4,076.1 4,034.9 71,988,101 71,008,852 (979,249)
Total (187,515)
The actual- and normal degree days vary for each of the
rate cl-asses due to the weather station weighting process
described above. Overa1l, the weather normal-ization
adjustment resul-ts i-n a reduction in usage of 187,515
therms. There is a corresponding revenue adjust.ment as
explained by Company witness Darrington.
ITI. AILOCATED CI.ASS COST OF SERVICE SET'DY
0. What is an Allocated Cl-ass Cost of Service
Study ("ACOSS") ?
A. An ACOSS is an analysis of costs that assigns
to each customer or rate cl-ass its proportionate share ofo25
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Intermountain Gas Company
the utility's total- cost of service, i.e the utility's
of these studiestotal revenue requirement. The
can be utilized to determine the
results
relative cost of service
for each customer class and to help determine the
individual- class revenue responsibility.
O. What is the purpose of an ACOSS?
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Intermountain Gas Company
A. The purpose of an ACOSS is to determine what
costs are incurred to serve the various classes of
customers of the utility. When these costs are all
tabulated, the rate of return that is provided by each
be determi-ned. Theclass of service of the utility
ACOSS is a tool used to assist determining revenue
rate design. The
the analyst with the
responsibility by rate class and
results of the ACOSS wil-l- provlde
data necessary to design cost-based rates.
O. What is the gulding principal that
followed when preparing an ACOSS?
A. Cost causation is the fundamental-principle
of allocatingapplicable to al-1
costs to customer
cost studies for purposes
groups. Cost causat j-on addresses the
question; which customer or group of customers causes the
utility to incur particular types of costs? In order to
answer thls question, it is necessary to establish a
relationship between a utility's customers and the
particular costs i-ncurred by the utility in serving those
customers.
O. What are the steps to performing ACOSS?
A. In order to establish the cost responsibility
can
an
should be
of each customer
of the utility's
undertaken. The
class, initially a three step analysis
total operating costs must be
three steps which are the predj-cate foro25
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Intermountain Gas Company
an ACOSS are: (1) cost f unctional-ization,' (2) cost
classification; and (3) cost allocation of al-1 the costs
of the utllity's system.
O. Please describe cost functionalization.
A. The first step, cost functionalization,
identifies and separates plant and expenses into specific
categories based on the various characteristics of
utility operation. Tntermountain's functional cost
categories associated with gas service include:
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fntermountain Gas Company
Storage,
the ACOSS
order to
Gas costs
Gas Cost
Transmission, and Distribution. In addition,
includes a function for the cost of gas in
separately track gas costs from base rate costs.
are addressed in the Company's annual Purchased
Adjustment filing (PGA) and are not part of this
further separates the functionalized plant and expenses
: (1)into the three cost defining characteristics of
customer rel-ated,' (2) demand or capacity rel-ated,' and (3)
commodity related.
Customer costs are incurred to extend service to and
attach a customer to the distribution system, meter any
gas usage and maintain the customer's account. Customer
proceeding.
0. Pl-ease describe
A. Classification
costs are largely
customers served,
not the customer
costs associated with minimum
cost classification.
of costs, the second step,
a function of the number and density of
and continue to be incurred whether or
uses any gas.They may include capital
size distribution mains,
SCTV]-CES,
accounting
Demand
expenses.
costs are
meters, regulators and customer billing and
capacity rel-ated costs associated
with a plant that is designed, installed and operated to
meet maximum hourly or daily gas flow requirements, such
as transmission and distribution mains or more localizeda25
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fntermountaj-n Gas Company
distribution faci-lities which are designed to satisfy
individual customer maximum demands.
Commodity
throughput sold
costs are those costs that vary with the
O. Pl-ease
to, or transported for, customers.
describe cost al-l-ocation.
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Intermountain Gas Company
A. The final- step is the allocation of
functional-ized and classified cost el-ement to
individual- customer or rate class. Costs are
assigned or are allocated on customer, demand,
and internal- a1l-ocation factors.
based on
costs to
each
the
directly
commodity
or group
analyses
a rate
Direct assigned rel-ates
identification and isolation
that are incurred to serve a
to the specific
of plant and/or expenses
specific customer
of customers. Dlrect assignments are
of detail-ed data that directly links
cf ass , or to a subset of customers j-n a rate cfass.
Direct assignment of costs 1s the preferred allocation
approach because no aIl-ocation is required to determine
the costs of serving customers in each cl-ass. However,
1t is not realistic to assume that a large portion of the
Company's plant and expenses can be directly assigned as
the majority of the costs are joint use facilities.
Customer, demand and commodity external- allocation
factors such as the number of customers, peak day usage,
and annual usage are developed from the Company's
records. Internal allocation factors are developed
costs, such aswithin the ACOSS from previously allocated
plant or labor costs.
O. How have the demand-related costs been
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fntermountain Gas Company
A. Demand costs have been primarily allocated
using a coincident
by Company Witness
been designed and
peak demand methodology. As described
Gilchrist, Intermountain's system has
buil-t to meet the peak demands of the
customers, therefore al-l-ocating the demand costs on the
basis of peak day utilization is in keeping with the cost
causation principfe. The coj-ncident peak day used to
develop the allocation factor is the Company's most
recent peak day which occurred January L, 2016.
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Intermountain Gas Company
O. How was distribution mains plant account,
Account 376, cfassified
A. A portion of
classified as customer
classified as demand.
lnvestment as customer
throughout the gas
distribution mains
their peak period load
customers.
0. What are the
and al-Iocated in the ACOSS?
the distributlon mains account was
and the remaining costs were
Identlfying a portion of mains
rel-ated is an accepted
to meet both system peak l-oad requirements and to connect
customers to the util-ity's gas system. Therefore, to
ensure that the rate cl-asses that cause the investment in
this plant are charged with
should be all-ocated to the
its cost, distribution mains
rate classes in proportion to
industry. The assumption
(EERC Account No. 316) are
principle
is that
instal-1ed
the level of
a utility?
influence the
requi-rements and numbers of
factors that affect
distribution mains facilities installed by
A. There are two cost factors that
l-evel of distribution mains facil-ities j-nstal-l-ed by a
utility in expanding its gas distribution system. First,
the size of the distribution main (i.e., the dj-ameter of
the main) is directly influenced by the sum of the peak
period gas demands placed on the utility's gas system by
its customers. Secondly, the total- installed footage of
distribution mains is influenced by the need to expando25
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fntermountain Gas Company
the distribution system grid to connect new customers to
the system. Therefore, to recognize that these two cost
factors influence the level- of investment in distribution
mains, it is appropriate to al-l-ocate such investment
based on both peak perj-od demands and the number of
customers served by the utility.
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fntermountain Gas Company
O. How is the customer component of distribution
mains determined?
A. The two most commonly used methods for
determining the customer cost component of distribution
mains f acilities are: (1) the zero-intercept approach,'
and (2) the most commonly installed, minimum-sized unit
of plant investment approach.
Under the zero-j-ntercept approach, which is the
method utilized in Intermountain's ACOSS, a customer cost
component is developed through regressi-on analyses to
determi-ne the unit cost associated with a zero inch
diameter distribution main. The method regresses unit
costs associated with the various sized distribution
mains installed on the utllity's gas system against the
actual- size (diameter) of the varlous distribution mains
instafled. The zero-intercept method seeks to identify
that portion of plant representing the smallest sj-ze pipe
required merely to connect any customer to the utility's
di-stribution system, regardless of the customer's peak or
annual gas consumption.
The most commonly installed, mj-ni-mum-sized unlt
approach is intended to reflect the engineering
lnstalling distribution
This method utilizes
considerations associated with
mains to serve gas customers.
actual instal-l-ed investment units to determi-ne theo25
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Intermountain Gas Company
minimum distribution system rather than a statistical
analysis based upon
entire distribution
i-nvestment characteristics of the
system. While the zero-intercept
method, with rel-iabl-e data,
assoclated with a zero-size
estimates the customer costs
pipe diameter, the
minimum-size method may include
any minimum size pipe considered
some capacity costs since
w111, in fact, be
capable of actually delivering some gas.
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fntermountain Gas Company
O. Pl-ease discuss how the zero-j-ntercept study was
perf ormed and its resul-ts.
A. The results of the zero-intercept study are
The Companyrs plant accounting
instal-l-ed cost, footage, type
shown in Exhibit 19.
therecords provided
(p1astic, steel),
instal-lation ) f or
sj-ze (diameter) and vintage (dat.e of
instal-1ed costs were
distribution mains. The vintage
transl-ated to a common current cost
using the Handy-Whitman Index ("HWI"). The HWI
calcul-ates cost trends for different types of utility
construction with separate indices for gas, electric and
water j-ndustries. Using the HWI adjusted costs, do
install-ed cost per foot was cal-culated for each pipe sj-ze
and type and a regression analysis of the unit costs and
pipe size was performed for both steel- and plastic pipe
types. The resul-ts of the regression analysis can be
expressed formufaically as:
Y:mx+b
Where: y : average cost per installed foot of
Intermountain's distribution mains
m : cost per install-ed foot per j-nch of pipe
diameter
x : diameter of dlstribution mains
b : cost per instal-led foot
The regression analysis shows that regardless of the
the
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Intermountain Gas Company
diameter of the main, the average cost of a distributj-on
main in fntermountain's system will be at l-east equal to
$8.55 per installed foot. This per foot cost component
is related to the process of extending
which is a
the distribution
mains to connect customers,function of the
length of the main and not the size of
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the main, and represents the customer cost component of
distribution mains.
O. How were the results of the zero-intercept
study used in the ACOSS?
A. As shown in Exhibit 19, the customer
rate for both steel and plastic type
the total distribution mains footage
to determine the total customer costs This totaf
customer cost was dlvided by the total HWI adjusted cost
of distribution mains to provide the customer cost
percentage of 41 .16%. This percentage was used in the
ACOSS to apportion the historical installed costs of
distribution mains to the customer component and
allocated to the rate classes on a customer factor. The
remaining distribution mains costs were classified as
demand and allocated on the peak day factor.
O. How were the other distribution plant accounts
cl-assified in the ACOSS?
A. Plant accounts 380 through 385 are classified
as customer related. These accounts lnclude costs
related to services, meters, meter install-ations, and
regulators. Plant accounts 3'75, Structures and
Improvements, and 3'78, Measuring and Regulation, are
classified as demand. Account 3'14, Land and Land Rights,
was allocated on an internal factor based on structures,
pfpe was
for each
cost unit
applled to
pipe type
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Intermountain Gas Company
mains, and services and therefore has costs cl-assified as
both demand and customer.
O. How were the distribution plant accounts
allocated to the rate cl-asses?
A. As noted above the demand component of
distribution mains is al-Iocated on the peak day factor.
The other two demand rel-ated distribution plant accounts
were allocated using a peak and average methodology.
Accounts 375, Distribution Structures and Tmprovements,
and 378, Distribution Measuring and Regulation
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Intermountain Gas Company
Equipment, contain
usage both of which
costs rel-ated to both peak and annual
are incl-uded in the calculation of
the peak
The
regulator
and average allocatj-on factor.
services, meters, meter
accounts were al-]ocated on weighted customer
basis. The weightlng factor was based on a study of the
costs of meters for each rate class. Account 385,
Industrial Regulati-on, was allocated on a weighted
cl-asses.customer basis excluding the residential
0. How were the storaqe plant accounts treated in
the ACOSS?
A. The st.orage plant accounts contain the costs
related to the Company's LNG facillties. As di-scussed by
Company Witness Gilchrist these facilities are needed to
provide del-iverability and reliability during peak
periods. Therefore, the storage plant accounts are
classified as demand and al-located on a peak day basis.
O. How were the transmission plant accounts
treated in the ACOSS?
A. The transmission plant accounts contain the
costs rel-ated to the Company's hiqh pressure transmissj-on
facil-lties. As discussed by Company Witness Gilchrist
these facilities were designed and sized to provide
defiverability durlng peak periods. Therefore, the
transmission plant accounts are classified as demand and
installatlon and house
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Intermountain Gas Company
al-located on a peak day basis.
O. How were the general and intangible plant
accounts treated i-n the ACOSS?
A. The general and intangible
aflocated on an internal factor based
plant accounts were
on the allocations
of storage, transmission
O. Please describe
accumulated depreciation
expenses.
and distribution plant.
the method used to afl-ocate the
reserve and depreciation
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fntermountain Gas Company
A. The accumulated
affocated on
reserve and depreciation
internal factors based on the
0. Please describe the method used to allocate the
storage, transmi-ssion and distribution Operations and
Mai-ntenance ("O&M" ) expense?
A. In general, these expenses were al-focated on
the basis of t-he cost allocation methods used for the
expense were
allocation of the associated plant.
be the same basls as used
Company's corresponding plant accounts.
expenses generally are thought to support
correspondj-ng plant in service accounts.
the all-ocation basis used to allocate
A utility's O&M
the utllity's
As a result,
a particufar
to allocate
plant
theaccount wilI
correspondlng
O. How
accounts 902
expense account
were the customer accounting expenses,
904, treated in the ACOSS?
A. Meter reading
allocated on the basis
expense, account 902, is
of the number of customers
Customer records and collection expense, account 903, is
al-Iocated on a weighted customer basis based on meter
costs. Account 904, uncol-l-ectible expense, is allocated
to the residential- and general service cl-asses based on
an anal-ysis of account wrlte-of f s.
O. How were customer service and sales expenses
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Intermountain Gas Company
A. Customer servj-ce expenses, accounts 907
and-908, are allocated
expenses, accounts 9l-0
on a customer basis. Sales
913, are al-l-ocated to the
residential and general
basis.
service classes on a peak day
throughput
0.Please describe the treatment of Administrative
and General- ( "A&G" ) costs in the ACOSS.
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A. Accounts 923 and 924, outside services and
property insurance, are plant rel-ated and allocated on an
internal- factor consisting of al-located storage,
transmission and distribution pJ-ant. Accounts 925 and
926, injuries and damage and employee pensions and
benefits, are labor related costs and are al-located on an
internal labor factor. Rents and general plant
malntenance expenses, accounts 931 and 932, are al-Iocated
on total- plant basis and the remainj-ng A&G expenses are
aflocated on an lnternal factor comprised of O&M expenses
excluding A&G.
O. How were taxes other than income taxes treated
in the ACOSS?
A. Taxes other than income were allocated on a
plant or labor basj-s depending on the nature of the tax.
Eor example, payroll taxes were allocated on a labor
basis whil-e property taxes were afl-ocated on the basis of
pIant.
O. How were income taxes al1ocated to each
customer class?
A. Income taxes are calcul-ated for each rate class
based on the pre-tax net income for the cl-ass.
O. What rate classes were incl-uded in the ACOSS?
A. In this proceeding Intermountain is proposing
to restructure some of its existing rate classes and the
Blattner, Di 15
Intermountain Gas Company
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Intermountain Gas Company
revised rate classes are those used i-n the ACOSS.
Currently
with the
Intermountain has two residential rate cl-asses
primary difference between the cl-asses being the
presence of gas water heating.
these two
Intermountain is
rate c-Iasses into a singleproposing to
residential
combi-ne
rate cl-ass. Intermountain is al-so proposing
transportation
rate cfass.
to combine its two lndustrial customer
rate cfasses, T4 and T5, into a single
O. V{hy are these classes bej-ng restructured?
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Intermountain Gas Company
A. As more fulIy explained below, Rate Schedules
RS-1 and RS-2 are bej-ng combined because there is no
justification for having different rate classifications
for customers based on whether they use gas for space
heating or water heating in addition to space heating.
With the addition of a demand charge to the T-4
customer class,
the same type of
combined into a
O. Pl-ease
the T-4 and T-5 classes are essentially
are belngservice. Therefore, they
single class of service.
descri-be the results of the ACOSS?
A. The results of the ACOSS are shown on Exhibit
of this exhibit provides a summary of the20. Page 1
rate base,revenues,expenses
shown on
and returns at current
cfass is
cl-as s .
slightly
Volume
rates by As line 7J , the residential-
well- above the system average.
(GS) shows a return
below the system average return while
Sales (LV-1) and Flrm Transport Servicethe Large
class (T-4) show returns
The General Service class
signi ficantly
Interruptible
well above the
this class is
costs.
o. Does
befow the system average. The
Transport Service (T-3) exhibits a return
system average which is to be expected as
not al-l-ocated any peak demand related
the ACOSS show the class revenue
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Intermountain Gas Company
A. Yes. Exhibit
by class at equal rates
exhibit shows the level
20, Page 2, provi-des the results
of return. Line 10 of this
of the revenue deficiency or
surplus necessary to move
return. Line L2 of this
the class to the system average
exhibit shows the revenue
increase or decrease proposed for each rate class and
line 20
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lntermountain Gas Company
shows the propose return for each cl-ass at the proposed
rates. This information is summarlzed in Table 2 below:
TABLE 8.2-Summary of ACOSS Results
0. Please explain the remaining pages of Exhibit
20 and Exhibits 2L, 22 and
A. Exhibit 20, page
function by class. Page 4
service, by cl-ass at equal
provides a functional- and
the rate base by
a functional cost of
23.
3 shows
provides
rates of
total- unit
return and page
cost analysj-s
5
by
theclass. The unit cost
proposed customer and
Exhibit 2t shows
analysis provides
demand charges.
how each account
support for
is classifi-ed and
al-located to the classes. Exhibit 22 shows how the
amount of each account and how the account is
functionaLj-zed, classified and aLl-ocated. Exhibit 23
provides all the external- and internal- al-location factors
Retury @
Propdsed
Rates
Retum @
Current Rates
Revenue
(Deficiency/Surplus
Proposed
Increase
Rate Class
7.42o/o2.21o/o (94,466,759)General
Semice
7.42%143.9*/o
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Intermountain Gas Company
used in the study.
IV. RATE DESIGAI
A. Introduction
O. Please explain the organization of your
testi-mony concerning the Company's proposed changes to
rate classes, rate structures, and rate design.
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Intermountain Gas Company
A. In subsecti-ons B, C, D, and E of this Section
IV of my testimony, f wil-l- describe and explain the
Company's proposals related to rate schedules and rate
structures as fol-l-ows. Specif ica1Iy, I wil-1 explain the
Company' s proposal-s to:
1. Eliminate the current rate schedules for
residential- heating service (Rate Schedufe
RS-1) and residential heating and hot water
service (Rate Schedule RS-2) and create a
single rate schedule for servj-ce to al-l-
residential customers (Rate Schedule RS);
2. Modify the Rate Schedule GS-1 rate structure so
that the rates charged to the customers in this
class more closely refl-ect the Company's costs
to serve these customers, helping to reduce
subsidization within the class;
3. El-iminate the seasonal-
residential and
rate structures by which
service customers are
the summer than in the
general
rates in
4
charged higher
winter periods;
Combine the T-4 and T-5 rate schedules to
create a single rate
Company' s Industrlal-
structure for the
firm transportatlon
service customers (Rate Schedul-e T 4);
5. Modify the Rate Schedule LV-1 rate structure,o 25
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Intermountain Gas Company
by adding a
customers in
distribution
demand charge,
this class are
so that the
system
their
capacity
service;
charged for the
that is made
avail-able for
6. Apply the current Rate Schedule T-5 rate
structure, which incfudes a demand charge, to the
proposed Rate
In subsection F of
Schedule T-4 rate structure,
this Section fV of my testlmony, I
and analysis
proposed rates.
wilI present and support the
that I performed to develop
calculatlons
the Company's
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Blattner, Di 19
Tntermountain Gas Company
you describe and support in the
you guided by any principles and
A. Yes, I took into account (1) the
recommendations of Company Witness Terz)-c,
O. In developing the rate deslgn proposals that
following sections, were
directives ?
findings and
in his
charges
design
testimony
and demand
that were
o.
in this proceeding concerning customer
charges
developed
and (2) the principles of rate
by James C. Bonbright.
Please summarize Company Witness Terzic's
flndings and recommendations concerning customer charges
and demand charges.
A. Mr. Terzic explains that customer charges and
demand charges are two types of fixed fees that are
appropriate elements of sound rate design, because these
charges do not vary based on the l-eve1 of natural gas
volumes flowing through the dlstribution system. Said
another wdy, the Company's fixed costs to construct,
operate and maintain the Company's distribution system
shoufd be largely recovered through fixed charges.
O. What are the Bonbright rate design directives?
A. The industry has long accepted the principles
of rate design first put forth by James C. Bonbright,l
which are:
' Rate attributes: simplicity, understandability,
public acceptabilj-ty, and feasibil-ity ofo25
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Intermountain Gas Company
application and interpretation,'
yielding total revenueaEffectiveness of
a
requirements,'
Revenue (and cash fl-ow) stability from year to
year;
1 James C. Bonbright. Principles of Pubfic Utility Rates (1st
ed. 1961) .
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Intermountaj-n Gas Company
Stability of rates
unexpected
to exlsting
Eairness in
changes
themselves, minimal
that are seriously adverse
customers,'
apportioning cost of service among
different consumers (rates based on cost
causation);
Avoidance of "undue discrimination"; and
Efficiency, promoting efflclent use of energy
by the customer (e.9., such that utillty's
infrastructure and resources are not strained) .
B. Proposed Revisions to Current Residential.
Rate Classifications
O. Please explain the Company's proposal to revise
the residential rate classifications.
A. Currently, the Company's Rate Schedule RS-1 is
applicabfe to residential customers that use natural gas
for space heating, and other purposes, but not for water
heating, and Rate Schedule RS-2 is applicable t.o
residential customers that use natural gas for both
natural gas water heating and natural gas space heating,
as well as other purposes. As I described in the
introductlon, the Company 1s proposing to eliminate the
separate Rate Schedules RS-1 and RS-2 and to create a new
Rate Schedu]e RS.
O. Please descri-be the current Rate Schedules RS-1a25
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Intermountain Gas Company
and RS-2.
A. In 2015 the Company provided service to 66,1832
RS-1 customers and 236,00122 RS-2 Customers. Actual RS-1
2075 consumption was 30,17L,9'19 therms and RS 2
consumption was
average cost of
was 15 percent
!69,532,903. RS-1
$0.90657 per therm
customers paid an
for gas service, which
greater than the average
Z Customer numbers that support the revenue reported in
fntermountain's 2015 FERC Form 2.a 25
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cost of $0.7811'l per therm that RS-2 customers paid for
monthly
be1ow,
gas service. Tab1e 8.3 below shows the average
usage
shows
by RS-1 and RS-2 customers,
the currently effective RS-1
and Table 4,
and RS-2 rates.
Table B.3 Residential Average Monthly Usage3
Table 8.4 Residential Distribution Ratesa
O. Please explain why the Company is proposing to
and RS-2 andeliminate the separate Rate Schedul-es RS-1
to create a new Rate Schedule RS.
Annual Use:
678 Therms
Annual Use:
424 Therms
Residential Usage per Customer: 2015
150
t25
100
Eb7ssF
50
25
Dec
88
tzt
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
10070'553718833473L
138 101 80 s8 36 74 16 16 18 22 48
0
-RS-1
-
RS-2
RS-1 RS-2 Difference o/o Difference
Customer Charge per month
Summer $2.s0 $2.s0 $0.00 0.0%
Winter $6.50 $6.50 $0.00 0.0%
Margin Charge per Therm)
Summer $0.31617 $0.19539 $0. r s199 38.20%
Winter $0.20361 $0.16176 $0.07306 20.ss%
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A. The Company is proposing to el-iminate the
RS-1 and RS-2 becauseseparate Rate Schedul-es
Intermountain's cost drivers6 for gas servj-ce to
res idential-
3 The analysis summarized in Tabl,e 2X is derived from 2015
bj-11ing system data.
Fifti-eth Revised Sheet No. 01, Fiftieth Revised Sheet No. 02.
Effective JuIy 1, 2076.
RS-1 Commodity Charges shown are net of Cost of Gas, $0.55589
per therm. RS-2 Commodity Charges are net of Cost of Gas,
$0.51585 per Therm.
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Intermountain Gas Company
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Blattner, Di 22
Intermountain Gas Company
customers that use gas for space heating are
meaningfully different from the cost drj-vers
service to customers that use gas for water
well as space heating.
Further, there is certainly
for charging commodity rates to
fower than the RS-1 rates by 27
not
for gas
heating as
no cost justification
RS-2 customers that are
percent in the winter and
not appropriate that, oD
charges per therm to RS-2
It i-s
annual
38 percent in the sufirmer.
an annual basis, average
customers are 16 percent
average annual- charges to
O. Are you
that have separate
customers that use
water in addition
less ($.0.12481 per therm) than
RS-1 customers.
aware of any gas distribution companies
rate schedules for residential
gas for heating and (2) hot
Idaho
to space
( 1 ) space
heating?
reviewed
compani-es
A. No, I am not. I
and gas distribution
the tariffs of Avista
in surrounding
than Intermountain
rateGas, no gas distribution
schedul-es for residential
space heating and for hot
heating.
statesT and I determined that, other
company has separate
customers that use gas for
water in addition to space
C. Modifications to Rate Schedu].e GS-1
O. Please describe the current Rate Schedules
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Intermountain Gas Company
A. According to the provisj-ons of Rate Schedule
GS-1, service
distribution
is avail-able at any point
whose
on the Company's
requirements for
per day. In 2075
system
do not
to customers
natural gas exceed 2,000 therms
the Company provided
6 These cost drivers are, generally, the a-I-l-ocators that are used
in the ACOSS to allocate the bal-ances in the Company's plant
and expense accounts to each rate class.
f reviewed the tariffs of the following gas distribution
companj-es: Avista Utilities (Idaho), MDU (Montana), Avista
Utilities (Oregon), Cascade Natural Gas Corporation (Oregon),
Cascade Natural- Gas Corporation (Washington), Avista
Util-ities (Washi-ngton) .
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Intermountain Gas Company
service to 31,7388 GS-1
consumption in 2015 was 103,111,511 therms and GS-1
customers paid an average
gas service. Tabfe B.5,
effectlve GS-1 rates.
cost of $0.71955 per therm for
below, shows the currently
Tabte B.5 General Service Distribution Ratese
The customers in Rate Schedul-e GS-1 are very diverse.
Approximately
customers. Actual_ GS-1
60 percent
annua11y11,
of GS-1 customers use less than
1,200 therms
consumption
which is comparable to the annual
of Residential- RS-2 customers who use gas for
space and hot water heating. At the other extreme, the
Iargest 50 customers, whlch used at least 93,000 therms
annually in 2015, represent 0.15 percent of total 20L5
GS-1 customers, and 7.1 percent (6,834,601- therms) of
total- 20L5 GS-l- annual consumptj-on. This di-versj-ty of
GS-1 annual consumption is demonstrated in Table 6 beIow,
which shows the cumulative distribution of GS-1
RS.1
Summer Winter
Customer Charge $2.50 $6.s0 Der month
Commodity Charge per Thermru
Block I I't 200 Therms per bill $0.21690 $0.1660s per Therm
Block 2 Next 1,800 Therms perBill $0.19517 s0.1448s per Thern
Block 3 Over 2,000 Therms per bill $0.1741s $0.12439 per Therm
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Intermountain Gas Company
customers, by annual consumption.
that Rate Schedule GS-1 incl-udes a
TabIe B.6 demonstrates
wide range of
one extreme, 9'7 .5
less than 20,000
customers that are very different. At
percent of the GS-1 customers consumed
therms in 2075; at.
9
Customer numbers that support the revenue reported 1n
Intermountain's 2015 FERC Form 2.
Fifty-Second Revised Sheet No. 03. Effective July 1, 2016.
GS-1 Commodity Charges shown are net of cost of gas of $0.57761
per therm.
lntermountain provided service to 31,738 GS-1 customers j-n
201,5; L9,484 GS-1 customers (67.4 percent) used L,200 therms or
fess. Totaf therm consumption by these customers was 9,323,339
therms , or 9.0 percent of total- actual- bj-lling system GS-1
consumption.
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fntermountain Gas Company
the other extreme, 0.2 percent of the GS-1 customers
consumed at least 100,000 therms.
Table 8.6 GS-l Annual Consumption Cumulative Distribution
I
As another approach
Tabl-e 8.1
to demonstrate the diverslty of GS-1
customers,below shows the average monthly
the 50 largest GS-1usage by all GS-1 customers, and
customers.
Cumulative Distribution of G5-1 Customers: 2O15 Annual Therms
700.o%
90.o%
80,o%
70.o%
60.o%
5O.Oo/o
40.Oo/o
30.o%
20.o%
to.o%
O.Oo/o
o 20,00o 40,000 60,000
Annual Therms
80,oo0 100,000
60,000
99.6%
100,000
99.9%
20,o00
97 -5o/o
L2OA
@.U/"
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Intermountain Gas Company
Table 8.7 General Service Average Monthly Usage
Based on this analysis of the GS-1 customers, the Company
has determi-ned that although the current GS-1- rate
structure is a reasonable basis for charging most of the
GS-1 customers, it
modifications to GS
is appropriate and necessary to make
1 rates and rate structures that
would impact mostly the largest GS-1 customers, because
the largest GS-1 customers are similar to many Industrial-
LV l- customers, and very different from most GS-1
customers.
O. Pl-ease explain the Companyrs proposed
modifications to the Rate Schedule GS-1 rate structure.
A. The Company is proposing to add a fourth rate
block to the GS-1 rate structure that. would apply to a
GS-1 customer's monthly consumption that exceeds 10r000
General Service Usage per Customer: 2015
E
o-gF
1&000
16,0@
14000
12,000
10 000
8,000
6,000
4,000
2,000
0 Jan Feb Mar Apr May Jun Jul
-GS-1
602 427 34L 247 158 LLA 93
-lg5[
50 15,302 11,855 11,355 11,068 9,670 7,572 7,096
Aug Sep Oct Nov Dec
94 119 120 213 525
7,130 14143 t2,702 L2,716 15,577
AIlGS CustonBrs
Annual Use: 3,052 Therms
Largest 50 Customers
Annual LIse: 135,585
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therms in a month. The company sel-ected 10,000 for the
fourth bl-ock to more reasonably reflect the cost to serve
these largest GS-1 customers, which will therefore reduce
the subsidization by the largest GS-1 customers of the
smaller
Bl-attner, Di 25a
fntermountain Gas Company
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fntermountain Gas Company
GS-1 customers. This fourth
better alignment between the
GS-1 customers and the rates
LV-1 Large Volume Eirm Sales
Customers that utifize
typically small industrlal
are growing businesses that
block wilI also aflow for
rates charged to the largest
charged to the Company's
Service customers. 12
the fourth block are
type
wiII
an industrial class. The fourth
their business at a
customers.
eventually
block rate
rate that
Often, they
qualify for
will al-l-ow
is fair i-n
are larger in
them to grow
comparison to
sca1e.
similar type businesses that
a. Please explain how adding the fourth b1ock, for
monthly consumption in excess of 10,000 therms, will
better align the rates charged to the largest GS 1
customers with the rates charged to the Company's LV-1
Large Volume Firm Sales Service customers.
A. The Company is proposing to modify the GS-1
rate structure - with specific attention to the largest
customers in this rate class: (1) to better align the
Company's rates with the costs to serve these customers,
and (2) to align the rates charged to large GS-1
customers with the rates charged to LV-1 customers. The
50 largest GS-1 customers, with annual consumption
between 98,000 and 541,000 therms, are similar to Rate
LV-1 customers, which typically use between 200,00025
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fntermountain Gas Company
therms and 500,000 annua11y. However, the 20r.5 average
cost per therm to these large GS-1 customers, $0.7004 per
therm,13 was significantly greater than the 20L5 average
cost per therm to the Company's LV-1 customers, $0.4945
per therm. By adding a fourth block and setting the rate
for monthly consumption in
L2 Service under the Companyrs Rate Schedul-e LV-1 is avai-l-abl-e to
customers that use at least 200,000 therms annua1ly.
(1) Actuaf 2015 billing system revenues from all customers with
annuaf usage of at 100,000 therms was $4,540,601,; (2) Annual
2015 billing system usaqe from a1f customers with annual usage
of at least 100,000 therms was 6,482,602; (3) $4,540,601 /
6,482,602: $0.7004.
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Intermountain Gas Company
the fourth bl-ock at an appropriate 1evel, the Company's
proposed modification to the GS-1 rate structure will-
address the significant difference between rates charged
to large GS-1 customers and rates charged to the
Company's LV-1 customers.
D. Elimination of Seasonal Rates
O. P1ease describe and explain the Company's
current Rate Schedules that charge different rates for
gas service in the summer and winter.
A. A l-ist of the current rate schedul-es with rates
that differ by season are listed in Table B.8, bel-ow.
Table B.8 Intermountain Rate Schedules with Seasonal Rate Structures
For the Rate Schedules listed in Table B, the customer
charges and the per therm charges for winter months
(biIIing periods ending December through March) are less
than the customer charges and the per therm charges for
summer months (billing periods ending April through
November) .
Rate Schedule
RS.1 Residential Service
RS.2 Residential Service- Space and WaterHeating
GS-1 General Service
IS-R Residential Intemrptible Snowmelt Service
IS-C Small Commercial Intemrptible Snowmelt Service
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Intermountai-n Gas Company
The rates charged to customers in Industrial Rate
Schedules LV-1 (Large Volume Firm Sal-es Servj-ce), T-3
(Interruptible Distribution Transportation Service), T-4
(Flrm Distribution Only Transportation Service), and T-5
(Firm Distribution Service with Maximum Da1ly Demands)
are the same throughout the year; the rates do not vary
by season.
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fntermountain Gas Company
A. P.l-ease explain why the Company
eliminate rate structures with seasonal
r-s proposing to
rates that are
l-ower for gas service during winter months and higher for
gas usage in summer months.
A. The Company is proposing to eliminate seasonal-
rates because there is no cost justificatj-on to contlnue
the current seasonal rate structures. The resul-ts of the
Company's ACOSS are not developed or reported by season.
O. Are you aware of any gas distribution compani-es
that have rate structures with seasonal rates that are
lower for gas service during winter months and higher for
gas usaqe in suflrmer months?
A. No, I am not. I reviewed the tariffs of Avista
Idaho and gas distribution companies in surrounding
than Intermountainstatesl4 and f determined that, other
distribution company has rates that areGas, no gas
different by
E.
n
Wi-tness
season.
Cost Based Customer Charges
Pl-ease summarize the testimony of Company
Terztc that addresses cost-based customer
charges.
A. To summarize the
in his testimony concerning
recommends that Residential
customer charges should be
points that Mr. Terzic makes
customer charges, Mr. Terzic
RS and General Servi-ce GS-1
increased (1) to match the25
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Intermountain Gas Company
Company' s
year with
costs, which are largely fixed, from year to
the Companyrs distribution service revenues;
(2) to make the Company's rates to these classes better
unit customer-related costs to servereflect the
customers in these classes.
O. Pl-ease provide the current RS-1, RS-2 and GS-1
customer charges.
I reviewed the tariffs of the following gas distribution
companies: Avista Util-ities (Idaho), MDU (Montana), Avista
Util-ities (Oregon), Cascade Naturaf Gas Corporation (Oregon),
Cascade Naturaf Gas Corporation (Washington), Avista Util-ities
(Washlngton).
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Intermountain Gas Company
A. I have prepared Table B.9, below, to show the
current customer charges. To demonstrate the large
differences between the current Residential- and General
Service customer charges
incl-uded in Table B. 9 the
and costs to serve, I have al-so
unit customer-related costs as
determined in Exhibit INT-20: Class Cost of Service
Summary Results.
Table 8.9 Customer Charges and Unit customer-related ACOSS Results
The Company's proposed rates, whj-ch are described in the
following Section IV. E of my testimony, reduces the
significant gap between the current customer charges and
the unit customer-related costs.
F. Proposed Larg'e Industrial. Fir:u
Transportation Rate Schedule
O. Please summarize the Company's proposal
relating to
A. As described and supported in
Company Witness Swenson, the Company is
current Rate Schedul-es T-4 and T-5.
the testimony of
proposing to
Customer Charge per bill RS-1 RS.2 IS.R GS.1 IS-C
Summer $2.s0 $2.s0 $2.50 $2.00 $2.00
Winter $6.s0 $6.s0 s6.s0 $9.50 $9.s0
ACOSS $13.61 $r3.61 $13.61 $46.8s $46.8s
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Intermountain Gas Company
combine Rate Schedules T-4 and T-5, and to charge one set
of rates to all customers in
classification.
As I explain in Section
the single set of rates for
this new rate
IV. H,Rate Design, to design
Rate Schedule T-4, I
Rate T-4 and the
the new
used the ACOSS resul-ts for the new
combined billing determinants of current T-4 and T-5
customers, accounti-ng for customer migration.
G. Cost-based Demand Charges
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Bl-attner, Di 30
Intermountain Gas Company
O. Please summarize the testimony of Company
Witness Terzic that addresses cost-based demand charges.
A. To summarize the points that Mr. Terzic makes
in his testimony concerning demand charges for large
industrial customers, Mr. Terzic recommends that demand
charges should be implemented for Intermountain's large
industrial firm service rate cl-asses because customers'
demand
rel-ated
(as measured by
to the required
and the capital
daily consumption) is closely
capacity of the distribution
system,
system.
o.
demand
investment in that distribution
PIease describe how you designed the proposed
charges for Industrial- customers.
A. The Company plans to implement demand charges
for Rate Schedules LV-1 and Rate Schedul-e T-4. As
explained
has worked
l-evel-s of
in the testimony of Mr. Swenson, the Company
with customers in these classes to determine
contract demand that appropriately reflect the
have avai-Iab1e, to provide
of these customers. I
capacity that
fi-rm rel-iabl-e
designed the
the Company must
service to each
Rate Schedule LV-1 and T-4 demand charges to
recover a large proportion of the respective class
distribution margin revenue reguirement at equal rates of
return. I designed commodity (per therm) charges for
these classes to recover the smaller portion of the c.l-asso25
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Blattner, Di 30aIntermountain Gas Company
distribution margin revenue requirement at equal rates of
return that was not recovered by the demand charges that
I designed.
H.Rate Design
1. Introduction
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Blattner, Dl 31
Intermountain Gas Company
O. Pl-ease describe the principles that you
foll-owed in designing the Company's proposed base rates.
A. I devel-oped the proposed rates to be consistent
with what I am told are the Commission's long standing
rate structure goals of setting rates based primarily on
cost of service, and minimizing lnter and intra class
subsidies. I was also generally guided by Bonbright's
Bonbright's
fairness between rate classes,
stability.
O. Please explain your understanding of these
principles.
rate design principles,
objectives that utility
efficient, simple, and
A. An
economicaJ-1y
distribution
Rate design
understand what they
and especially Mr.
rate structures must be
ensure continuity of rates,
and corporate earnings
efficient rate
justified use
services, and
structure promotes
of the Company's sales and
discourages wasteful use
simplicity is achieved if the customers
of rates
requires
gradual
over ti-me.
pays more
and the rate
that changes
allowing customers
A rate design
than the costs
are being charged, i.e., the level
structure. Rate continuity
to the rate structure shoul-d be
to modify their usage patterns
is fai-r if no customer cl-ass
to serve that class. A rate
design provides for earnings stability if the Company haso25
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a reasonabl-e opportunlty to earn its allowed rate of
return during the time that the rates are in effect.
0. Have you prepared a schedule that shows how you
calculated the proposed rates?
Blattner, Di 31a
Intermountain Gas Company
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fntermountain Gas Company
A. Yes, I have prepared Exhibit
analysis and calcuLations that I used
final proposed base rates. Exhibit 24
the following sections that are related
rate design process.
' Section A shows
cal-endar month
' Section B shows
' Section C shows
24 to show the
to determine the
is organized into
to steps in the
proforma test year normal-j-zed
revenue detail.
billing determinant detail.
the development of class
revenue targets.
' Section D shows the development of the proposed
rates.
In each section, columns A through F show data and
cal-culations by rate class and totals. I have al-so
provided a detailed 1j-ne-by-l-ine explanation of the
cal-culations in Column G.
1. Class Revenue Targets
O. What is the revenue requirement that you used
for the purpose of designing rates?
A. I designed the Company's base rates to recover
distribution margin of $93,243,181 which is shown on
Exhibit 202 Class Cost of Service Summary Resufts, Page
2, Line 13 Column (b) , l-ess Line 3 Co]umn (b) and Exhibit
24 Col-umn E, Line 55.
O. How did you assign the total distribution25
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BIattner, Di 32a
Intermountain Gas Company
margin of $93,243,781 to each of the
cl-as ses ?
A. I determined cl,ass revenue
cfass revenue requirements at equal
Company's rate
targets based on the
rates of return for
each rate cfassls as determined in the ACOSS that I
The ACOSS develops separate revenue requirements for each raLe
class, as shown in Exhibit 20.
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Bl-attner, Di 33
Intermountaj-n Gas Company
prepared. As described above in this testimony, the
ACOSS total- base-revenue requirement for the Company is
net of the costs recovered through fntermountain's
purchased gas adjustment mechanism.
2. Base Rate Ca].cu].ations
O. Pl-ease explain how you designed the Company's
proposed base rates.
A. To design base rates that would recover the
class base revenue targets from the previous step, I
is described bel-ow:fol-Iowed the process
a. I (i)
b
C
that
determined the appropriate leve1 of
customer charges for Rate Schedules RS and
GS-1 and (ii) calculated Customer Charge
revenues for these cl-asses
I (i) determined the appropriate l-evef of
demand charges for the Company's
Industrial firm service Rate Schedules
LV-1 and T-4 and (ii) calculated Demand
Charge revenues for these classes
I determined the remaining Rate Schedule
class revenue requirement to be recovered
from volumetric rates in one of the
following approaches:
1. Eor Rate Schedules RS and GS-1, I
subtracted Customer Charge revenueso25
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Bl-attner, Di 33a
Intermountain Gas Company
2
from total Rate Schedule distribution
margj-n revenue requirements
For Rate Schedules LV-1 and T-4, I
subtracted Demand Charge Revenues
from Rate Schedule distribution
margin revenue requirements
For Rate Schedule T-3, the vol-umetric
rates were designed to recover the
total Rate Schedul-e cl-ass revenue
requirement
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d. I determlned the appropriate commodity
charges by b1ock, for those Rate
Structures with multiple rate blocks
e. f cal-cul-ated revenues at f inal rates.
a. Please explain Step (a) in the rate design
process, which you described as determining the
appropriate l-eveI of customer charges and calcuJ-ating
Customer Charge revenues.
A. To determine the appropriate 1eve1 of customer
charges for Rate Schedul-es RS and GS-1, I considered: (1)
the customer-related rates and unit costs, which are
summarized in Table B.9; in Section IV.E of this
testimony, above and (2) Bonbright's rate design
principles of rate continuity and customer impacts.
As shown in Table 8.9, the customer related costs
for the Residentlal- cfass are $13.61 per customer.
However, to adhere to Bonbri-ght's pri-nciples mentioned
above, the Company is proposing a more gradual increase
in the Residential customer charge to $10.00. The
customer rel-ated costs for the GS-1 class are $45.85.
Again, the Company is proposing a more gradual change of
$3s.00.
O. Pl-ease explain t.he cal-culation of Rate Schedule
RS and GS-1 class customer charge revenues and the class
volumetric revenue target.
Bl-attner, Di 34
Intermountai-n Gas Company
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Intermountain Gas Company
A. I calculated cl-ass customer charge revenues by
multiplying the proposed customer charges times the
customer count billing determinants, which are shown in
Exhibit 24, Line L2. To determj-ne the commodity revenue
targets for Rate Schedule RS and GS-1, (the remaining
class revenue target to be recovered from volumetric
rates to these classes), I subtracted the cl-ass customer
charge revenues from the total cl-ass revenue target,
shown on Exhlbit 24, Line 65.
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Intermountain Gas Company
To the extent the Company's required revenue is
not coflected through the customer charge and the
volumetric charge, the surplus or deficit wil-1 be trued
up using the Company's proposed FCCM as described by
Company Witness McGrath.
O. Pl-ease explain Step (b) in the rate design
process, which you descrlbed as determining the
approprlate level- of demand charges for the Company's
Industrial firm service rate cl-asses and calculating
Demand Charge revenues.
A. I set the demand charges for Rate
would recover a large portion
of the class revenue requlrement at equal rate of return.
The demand charges of $0.30 per therm for LV-1 and T-4
are shown on Exhibit 24, Line 79, and the demand charge
revenues are shown on Exhibit 24, Line 80.
O. Please explain Step (d) in the rate design
process, which you described as determining the
appropriate rates by b1ock, for those Rate Structures
with multiple rate bl-ocks.
Schedul-es
LV-1 and T-4 aL l-evels that
A. As a preliminary matter, I determined that I
the new fourth GS-1 rate block to apply to
of 10,000 therms or more, based on my
billinq data. I then determined that I
commodity rate for that fourth block at
woul-d design
monthly usage
review of GS-1
shou]-d set theo25
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Bl-attner, Di 35a
Intermountain Gas Company
$0.07500 per therm, to reduce the difference between
bill-s at GS-1 rates to these customers and bills at LV-1
rates.
After I determined the appropriate Rate for the
fourth block, Rate Schedule GS-1, I calcul-ated volumetric
rates for all other Rate Schedules, as shown on Exhibit
24, Llnes 110 through and 118.
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O. Please explain Step (e) in the rate design
process, whlch you described as caJ-culating revenues at
f inal- rates.
A. Step (e) is simply the calculation of the
revenues that the proposed rates woul-d produce, based on
rate case Billing Determinants. My calculations, which
are presented in Exhibit 24 Lines 720 to 133, show that
the proposed base rates produce total distribution
margins of $93,244,715, which is greater than the base
revenue requirement of $93,243,L8l by $1,528. The
difference is caused by rounding the proposed per therm
rates to five signifj-cant digits and the proposed
customer charges and demand charges to two significant
digits.
3. Bill Impact Analysis
O. Have you prepared bill-impact analyses?
A. Yes. An average RS-1 customer wifl see an
annual increase of approximately $14.00 or 3% per year.
Current RS-2 customers with average usage wil-I experience
an j-ncrease of $27 .7 0 per year , or 5%. A GS customer
with average usage will- see an increase of 6Z per year,
or $145.90.
O. Does this conclude your testimony on rate
design?
A. Yes, it does.
Blattner, Di 36
Intermountain Gas Company
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CSB Reporting
(208 ) 890-s198
BLATTNER (X)
Intermountain Gas Company
(The following proceedings were had in
open hearing. )
MR. WfLLIAMS: And Ms. Blattner is
avail-abl-e for cross-examination.
COMMISSIONER RAPER: Does the Commission
Staff have any questions?
MR. KLEIN: None at this time. We reserve
until- rebuttal.
COMMISSTONER RAPER: Thank you.
MR. STOKES: No questions, Madam Chair.
MR. PURDY: I have no questions. Thank
you.
COMMISSIONER RAPER: Mr. Richardson?
MR. RICHARDSON: Thank you, Madam Chair, I
do have a couple of questions.
CROSS-EXAMINATION
BY MR. RICHARDSON:
0 Good morning, Ms. Blattner.
A Good morning.
O If you would refer to page 79 of your
direct testimony, you state beginning on page L9 that
"The lndustry has long accepted the principles of rate
design first put forth by Professor Bonbright. " Do youo25
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CSB Reporting
(208 ) 890-s198
BLATTNER (X)
Intermountain Gas Company
see that?
A Yes, on line 76.
O Yes, and then over on page 20, you note
that one of those principles is "Stability of rates
themselves with minimal unexpected changes. I' Do you see
that ?
A Yes.
O Do you think that a single rate increase
afoul of the ratein excess of, Sdy,
stability standard
A I'd
10 percent runs
testimony, there are
into consideration,
point out that as part of that
different items to be taken
you
1i ke
referred to?
to
SCVCN
so whll-e rate stability is one
other competi-ng,fot ofimportant
important
point, there's a
characteristics
a So Irl-1 repeat the question. Do you think
that a rate j-ncrease 1n excess of 10 percent runs afoul
of the rate stability standard you refer to?
A I don't know if it necessarily runs afoul
of rate stabillty. I
percentage number is.
O Isit
A I don'
to be considered.
donrt know what the magic
percent?
have a magic number.
ask for a magic number. I asked
whether a rate increase of 20
20
t
O f didn't
for your opinion as to25
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CSB Reporting(2oB) 890-s198
BLATTNER (X)
Intermountain Gas Company
percent runs afoul of the stability standard you refer
to.
MR. WILL]AMS:
the sense that I belleve she
Madam Chair, f object in
already said she doesn't
if we're going to walk fromSOhave a percentage
10 to 20 to 30 to
in mind,
40 to 50,all we're going to do is
continue to get the same answer.
MR. RICHARDSON : I ' l-1 rephrase the
question, Madam Chair.
O BY MR. RICHARDSON: Is there a rate
increase fevel that would, in your opinion, run afoul of
the rate stability standard?
A I'm sure at some l-evel there is.
O And what l-evel- is that?
A I have not considered what that l-evel
shoul-d be.
O You have no idea?
A No.
O But you testify as to the importance of
rate stability, but you have no idea what that is?
A It's j-mportant to take a look
MR. WILLIAMS: Objection. I think he's
mischaracterizlng her testimony. I think in these pages
she's simply referrlng to the seven or eight points that
Bonbright recommends. f don't beli-eve she's testifyingo25
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CSB Reporting
(208 ) 890-5198
BLATTNER (X)
fntermountaj-n Gas Company
to those.
MR. RICHARDSON: I'11 move ofl, Madam
Chair.
COMMISSIONER RAPER: Thank you.
a BY MR. RICHARDSON: Do you know what rate
increase Intermountain Gas recommended Amalgamated Sugar
suffer in its original application in this case, what
percentage increase?
A I don't have that number with me.
A You don't know that it's 73 percent?
that's betterA That's probably a question
addressed to Mr. Swenson.
OSo you don't know what rate increase
is requestlng for its largest singleIntermountain Gas
A I don't have it as part of my testimony,
No, I asked 1f you knew the number, not
your testimony.
I don't have the number with me.
Do you know the number is the question?
I do not know the number.
So when you were asked to tal-k about these
issues relative to rate
customer?
no.
that it's in
you didn't have in mind
stability and aIl
what was going to
those j-ssues,
happen to your
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CSB Reporting(208) 890-s198
BLATTNER (X)
Intermountain Gas Company
Iargest customer because of this rate case?
A So we not only looked at the impact on
Amalgamated from our rate increase, but al-so as a total
package of their energy costs, and I think that's another
important point is as a percentage of the total cost of
energy, the rate increase was not f don't think it was
in the range that would have been considered extremely
Iarge.
a And what was
mind thatfs not large?
A I don't have
right now and I don't have
that range that you have in
the specific number with me
ir
O WeII, you just
increases that are not 1arge,
those numbers are?
in my head.
referred to a
but you don't
range of
know what
A As I said before, the specifics, I thlnk
Mr. Swenson can address those specifics better, because
he has a better handle on how it impacted each individual
customer. When I fooked at the rate design, I was
looking at the cl-ass as a whole.
O Earlier you referred to overall energy
costs, what were you referring to there?
A The cost, the volumetric cost, the cost of
the commodity of rratural gas that Amalgamated pays,
natural gas from us. Theybecause they don't buy theiro25
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BLATTNER (X)
Intermountain Gas Company
only buy from us the ability to transport natural gas on
our system, so if you're to look at the total- package of
what they're payJ-ng for energy, the amount that they pay
us is relatively smal-l.
O Were you here this morning when Mr.
Madison said it was irrelevant to this Commission's
decision what the commodity cost charges were to
Amalgamated Sugar?
MR. WILLIAMS: Object j-on, I believe that's
a mischaracterization of what Mr. Madison's testimony
was.
MR. RICHARDSON: f think we could have the
record -- the court
answer. r belleve
objected to when I
that.
MR.
reporter read back Mr. Madison's
that's exactly what he said, and I was
asked a fo11ow-up questi-on to clarify
WILLIAMS: f bel-ieve Mr. Madison' s
testimony was for
percentages of a
percent increase
of the general rate increase
reduction in the WACOG and a 4
purposes
6 percent
general base
irrelevant.
that for purposes of this
increase that the WACOG
I don't think there was any
testimony as to the relevance of this impact
Amalgamated's rates, which I think was in his
on
in this case
case and the
decrease was
rate
MR. RICHARDSON: At the risk of
questi-on.
counselo25
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CSB Reporting(208) 890-s198
BLATTNER (X)
fntermountain Gas Company
testifying, I think
just to simply read
said was irre]evant
be better for the record
transcript what Mr. Madj-son
wasn I t.
it might
from the
and what
COMMISSIONER RAPER:Is there a way,
can be asked withoutMr. Richardson, that your question
havlng to ask
for that?
the court reporter to go back in the record
MR. RICHARDSON: I think I can move oD,
Madam Chair.
O BY MR. RICHARDSON: On page 31 of your
direct testimony, Ms. Blattner, you state that you
developed the Company's proposed rates to be consistent
with this Commlssion's longstanding goa1s, and actualJ-y
at line 3 on page 31, you say to be consistent with what
you are tofd are the Commission's longstanding rate
structure goals, so you didn't do any did you do any
independent research on your own as to what are the
Commissionrs longstanding rate structure goals or are you
just relying on what someone tol-d you?
A I relied on what f was tol-d and also
taklng a l-ook at some of the Commissionrs recent
decisions.
O Recent decisions in Intermountain Gas
Company proceedings?
A We11, ds you're aware, I think as everyone25
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BLATTNER (X)
Intermountaj-n Gas Company
is aware, Intermountain
in 30 yearsr so therers
Intermountainr s cases.
hasn't fil-ed a general rate case
not a recent precedent in
O Did you review Intermountain Gas rate case
decisions by this Commission?
A The 1986 case?
O That would be the most recent one,
woul-dn't it?
A Riqht. For a general rate case, yes.
O Did you review that case?
A I reviewed portions of it.
O Of the Orders from that case?
A I mean, I don't have it wj-th me, so you'lI
have to be more specific.
O No, I didn't ask you that. I said did you
review the Orders from that case in preparing for your
testimony in this case?
A So I would have read it last, probably
about last, year thls timer so it's been awhile.
O So the answer is yes?
A Yes.
O So one of the rate deslgn principles you
identify there on page 31 is continuity of rates. Do you
see that?
A Yes.o 25
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BLATTNER (X)
Intermountain Gas Company
O And that's on l-ine B, and then you def ine
the phrase continuity of rates as requiring "changes to
the rate structure should be gradual allowing customers
to modify their usage patterns overtime. " Do you see
that ?
A Yes.
O But the Company doesn't recommend a
gradual change to the rates for its largest
transportation customer in this case, does it?
A So from what you're telling me, no.
O Okay; so that violates one of your rate
design principles, doesn't
ASoasIwas
it?
looking at rate design, I was
class and on average, I
rate design principles.
looking at the entlre customer
believe that we followed these
O So you didn't look at the Company's
largest single customer as
woufd affect it?
how the rate design principles
A When we're looking at rate design, we have
to look not lust at a single customer, but we have to
look at how it affects everyone, and we have to try to be
fair to aII of our customers, not just a single
customer.
O Do you know what percentage of the
Company's transportation customers Amalgamated Sugaro25
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BLATTNER (X)
Intermountain Gas Company
represents in terms of revenue?
Percentage of customers?
Percentage of revenue.
Percentage of revenue? I don't have that
A
A
o
reasonabl-e
proposal on
cfass? You
didn't l-ook
nf1
A
O
number.
O Would you accept that itrs almost
one-third of the Company's transportation revenues?
Subject to check, f woul-d
And wouldn't you think it
to look at the impact of your
at the impact on Amalgamated
So we l-ooked at the entire
bel-ieve that.
woufd be
design
the entire
rate
a customer that large relative to
said you l-ooked at the whol-e cl-ass. You
Sugar?
cl-ass and as
part of that look, we
Amalgamated Sugar. I
the fact that we can't
customer. We have to
everybody, how
customers and
our industrial
would have also l-ooked at
think it's important to go back to
singledesign
take a
rates for a
look at how it affects
it affects, you know, the resj-dential
the commercial customers and
classes and how it affects
then aII of
not just the
largest customer in
affect the smallest
the class, but afso how does 1t
customer in the cfass who maybe isn't
to take arepresented
look at how
in these proceedings, so we have
everybody's affected.o 25
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BLATTNER (X)
Intermountain Gas Company
O So your prlnciples of rate design don't
apply to individual customers?
A I think you
balancing those principles
everyone fairly and you try
in the end to everybody no
is.
O So is it fair to
Amalgamated Sugar experience a
when the overall rate increase
have it's a question of
so that you try to treat
to design rates that are fair
matter what size the customer
have a customer like
73 percent rate increase
is less than four?
A I think it
O No, I asked
coul-d also be argued,
if you thought that
would be.
though
was fair,
not what another argument
A While it may not seem fair to that
particular customer
O f asked if it was falr in your expert
opinion
MR. WILLIAMS: Madam Chair, I object.
needs to answer the question before we get another
question.
She
MR. RICHARDSON: r wou]d like her to
answer the question, Madam Chair. That's what f was
hoping to get.
MR. WfLLIAMS: Weff, then please let her.
COMMISSIONER RAPER: Could you restate the25
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CSB Reporting(208) 890-s198
BLATTNER (X)
Intermountain Gas Company
question that you are seeking an answer to, Mr.
Richardson, please?
MR. RICHARDSON: Yes, Madam Chair.
O BY MR. RICHARDSON: Do you think as an
expert in ratemaking it's fair for an individual
customer, in fact the largest customer, to experience a
13 percent increase when the overall increase is less
than four percent?
A I think it is fair for a1l- customers to be
considered in how the rates will impact them and f don't
think it's necessarily fair that we would keep give
Amalgamated
would have
special treatment so that other customers
to subsidize the costs should be
borne
ways
wetve
across the
by Amalgamated, so the issue
and there's trade-offs in all
tried
that realIy
of fairness goes both
and whatrate design,
design that is falr
smal-lest of our
to come up with is a rate
board to everybody, to the
customers as wel-l as to the largest customers.
O The question was do you think it's fair to
Arnalgamated Sugar
increase when the
four?
A I thlnk that the
are fair to Amalgamated based on
T-4 rate class.
for it to experience a 13 percent
overall rate increase is l-ess than
rates that we designed
in the context of the
o 25
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BLATTNER (X)
fntermountain Gas Company
A
O
0 So the answer is yes?
Yes.
A
And yourre familiar with the rate
concept of gradualism?
Yes.
continuity
0 And a 73 percent increase comports with
that concept of gradualism?
were looking at
Again, when we were designing rates, we
the cl-ass as a whole and we believe t.hat
we have incorporated
A
the concept of gradualism in the
entire T-4 customer cl-ass.rate design
O
Amalgamated?
A
v
experience a
wetre
for the
At least for a1f the customers other than
For all- the customers.
Thatrs gradual for Amalgamated to
13 percent j-ncrease?
MR. WILLIAMS: Madam Chair, I think
we've been asking and answering this question
for several- rounds
Chair.
MR. RICHARDSON: I ' l-l- move oo, Madam
COMMISSIONER RAPER:
RICHARDSON:
I appreciate that.
Ms. Blattner, if youO BY MR.
would refer to Page 33
explain your base rate
of your direct
calculations.
testimony,
Do you see
you
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BLATTNER (X)
fntermountaj-n Gas Company
A On line 6?
O Beginning on line 6.
A Yes.
O Then over on page 34, beginning on line 1
you actually temper, if you wiII, the proposed
residential and general service customer charge by
applying Bonbright's principle of contj-nuity and
gradualism; correct?
A Correct.
O But don't you ignore those principles of
rate design for the transportation customers? In fact,
you don't even mentlon those rate design principles in
your discussion of the demand charges for the
transportation customers
page 35, do you?
A If we look
that need to be col-l-ected
on your testimony beginning on
at the amount of fixed costs
from the industrlal classes, as
Mr. Terzic
propose is
to col-1ect
customers
pointed out,
stil1 bel-ow
all of the
the $0.30
collecting
fixed costs
in a demand charge, so I
demand charge that we
what it woul-d require
from the industrial
believe we applied the
what we applied to thesame theory and
residential and
O
the same method as
But
commercial- customers .
you never even mentj-oned the rate
that you applied on the customer chargedesign principles25
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(2oB ) 890-s198
BLATTNER (X)
Tntermountain Gas Company
for the residential and general service when you were
discussing the demand charges for transportation
customers on page 35 of your testimony, do you?
A I didn't mention it directly in the
question that
the testimony
classes.
n\z
starts on page 5
and that theory
but those are included in
was used for al-l customer
studies has the
So how many different cost of servj-ce
Company prepared and filed for this
Commissionrs consideration in this docket?
A fn this docket right now, the case that
we're talking about?
0 Do you want me to repeat
A Yes, please.
O How many different cost
has the Company prepared and fil-ed for
consideration in this docket?
A We've only filed the one
study that we started with.
O So the answer is one?
A Yes.
0 Are you aware that this
the question?
of service studies
this Commission's
cost of service
Commission has
actually ruled
different cosL
A
that it "always prefers mu1tip1e,
of service studies"?
Irm not aware of that, Do.o 25
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O And would you agree that cost of service
studies are subjective and that the results are di-ctated
by the imagination of t.he drafter?
A I would not agree that it is up to
imagination. We
O Well, in preparing your testimony for this
case, you did say earl-ier that you referred to the
Commissionrs prior Orders dealing with Intermountain
Gas's rates and rate design; correct?
A Correct.
O Then you reviewed Order No. 20966, which
was this Commission's last Order dealing with cost of
service for Intermountain Gas; correct?
A Correct.
MR. RICHARDSON: Madam Chair, mdy I
approach the witness?
COMMISSIONER RAPER: What are you
approaching her with, counsel-or?
MR. RICHARDSON: I woul-d l-ike to
O BY MR. RICHARDSON: Wel-l-, do you have that
Order in f ront of you, Ms. Bl-attner?
THE WITNESS: I do not.
MR. RICHARDSON: May I make it available
for you to refer to?
COMMfSSIONER RAPER: Is there any
CSB Reporting(208) 890-s198
BLATTNER (X)
Intermountain Gas Company
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obj ection?
MR. WILLIAMS: No. In this case what I
would actually like to do is I'd like to maybe take a
short time-out and review with Ms. Blattner,
Mr. Richardson, the portions of an Order over 30 years
ago that he is going to now attempt to cross-examine her
oD, so maybe this is a good time for us to take just a
little time-out to kind of get our bearings on otherwj-se
cross-examinat.ion of something that she probably doesn't
have great recall on.
MR. RICHARDSON: Madam Chair, I'd like to
get on the record that I will be handing the wj-tness a
copy of the Order, get that on the record, and then
perhaps have it marked as an exhibit for Amalgamated and
then I'd be happy to take a break if that's what counsel
for Intermountain would 1ike.
COMMISSIONER RAPER: Is that all right
with your counsef?
MR. WILLIAMS: I think it would save some
time if we did it that way.
COMMISSIONER RAPER: Sure. Proceed.
MR. RICHARDSON: Thank you.
(Mr. Richardson approached the witness.)
COMMISSIONER RAPER: Mr. Richardson asked
if he could approach the witness, provide her wlth the
CSB Reporting(208) 890-s198
BLATTNER (X)
fntermountain Gas Company
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BLATTNER (X)
Intermountain Gas Company
Order and then we'l-l break.
MR. RICHARDSON: Okay, I want this on the
record that this has been provided.
COMMISSIONER RAPER: Understood and
entered as an exhibit.
MR. RICHARDSON: And entered as an
exhibit.
(Amalgamated Sugar Company Exhibit No. 502
was marked for identification. )
COMMISSIONER RAPER: Gotcha.
MR. RICHARDSON: Madam Chalr, I'm handing
the witness Order No. 20966, which I would represent to
you is a true and correct copy of the Commission's final-
Order in fntermountain Gas's l-ast general rate case.
COMMISSIONER RAPER: Okay, we wll-l- take a
1O-minute break, go off the record and resume at LLz20.
(Recess. )
COMMISSIONER RAPER: It appearing that all
attorneys at least are back at their seats, if not al-l
parties and witnesses, w€ can go back on the record. Ms.
Blattner is on the stand and I beli-eve Mr. Richardson has
some questions in relatj-on to Order No. 20966, if you can
fitl us in, Mr. Richardson, on your communication with
Company counsel Mr. Wil-1iams.
MR. RICHARDSON: We exchanged25
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BLATTNER (X)
Intermountain Gas Company
pleasantries, Madam Chair.
MR. WILLIAMS: And f second that.
COMMISSIONER RAPER: I wil-l tell- you it's
not protected by attorney-client privilege.
MR. RICHARDSON : Not at al-l .
O BY MR. RICHARDSON: Ms Blattner, have you
which I wilf
represent was this
had a chance to review Order No. 20966,
cost of service for
Commission' s l-ast Order dealing with
Intermountain?
I have quickly
Fine, and did
this morning in preparation
matter?
A Pri-or to this
O So you
Commlssion's Orders on
to today?
haven't
A
testimony, f've
probably been a
process.
o
to this Order 20966?
skimmed the Order.
you review that
A
of your testimony
prior to
in this
morning I
l-ooked at
did not.
the prior
this utility priorrate design for
Well-, so as
l-ooked at
I mentioned ear.l-ier in my
it previously, but it's
year when we first started this
And when you say "that," you're referring
A
u
This Order, right.
Okay, I only have a couple of questionso25
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BLATTNER (X)
Intermountain Gas Company
left. Would you please and this is in reference to we
had a break, so I lost the continuity here, I had asked
you earlier if you were aware that this Commission has
actual-1y ruled that it always prefers mu1tiple, different
cost of service studies, and I befieve you said you
didn't you weren't aware of that?
A Correct.
O And then f also asked you
would agree that cost of service studies
and that the results are dictated by the
earl-ier if you
are subjective
imagination of
welI; correct?the drafter and you deferred
A WeII, I said
anyone's imagination.
O Thank you; so
Order 20966, which you have
preparation of
last paragraph
A
of service is
gas utilities
Commission has
cost of service
on that as
I don't think it's up to
would you please
referred to in the past in
read theyour testimony, woul-d you please
on page 3 for the record?
The l-ast paragraph on page 3 says, "Cost
the standard that is most often used for
as a measure of general rate l-evel-s. The
always expressed a preference for mul-tiple
studies for purpose of analysis and
read from
establishing the parameters
Reducing any dynamic system
of study has Iimi-tations.
f or cost al-location.
to a static one for purpose
The results of studies varyo25
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CSB Reporting(208) 890-s198
BLATTNER (X)
Intermountain Gas Company
according to the subjective assumptions underlying the
ob3ective arithmetic. "
0 So then would you now agree that this
Commlssion has in fact rul-ed that it always prefers
multiple cost of servj-ce studies?
MR. WILLIAMS: Objection. I believe it's
a mischaracterization to say that that's a ruling by the
Commission that binds all utilities forever.
MR. RICHARDSON: That was hardly the
question I asked.
speaks for itself.
I'11- move oD, Madam Chair. Your Order
COMMISSIONER RAPER: Yes, it does. Thank
you.
O BY MR. RICHARDSON: Now, would you please
read the sentence on page 5 of Order 20965 that appears
directly below the tabl-e in the middl-e of the page?
MR. WILLIAMS: Madam Chair, I belleve the
Order speaks for itsel-f .
COMMISSIONER RAPER: Any response,
Mr. Richardson?
MR. RICHARDSON: I think the question
stands. I think the witness who has testified that she
has relied on this Order in preparation of her testimony
can refer to it on the stand.
MR. WILLIAMS: Well, Madam Chair, Io25
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BLATTNER (X)
Intermountain Gas Company
bel-ieve that's a mischaracterization of the
believe she said she looked at this about a
she prepared her direct case. I don't think
on this in preparing her testimony.
O BY MR. RICHARDSON: I'l-f ask
preparation for
O
cost of service
this utility in
testimony?
A
Can you enlighten me what
for the case, you referred
preparing your testi-mony,
is that what you said?
A So that
the difference is
to the Order, but
testlmony. I
year ago when
she rel-ied
r_n preparlng
not in
Did you refer to this Order in preparation of your
testimony?
A I dld not refer to the Order in
the question.
my testimony.
So you did not refer to the most recent
Order that this Commission has issued for
preparation of your cost of service
So in preparing for the case, I read the
I didn't have theOrder, but as I was writing testimony,
Order beside me referring to it as I was writing
testimony.
O So f'm not sure what the difference is.
you didn't refer to the Order;
MR. WILLIAMS: Madam Chair, I think I
agree with counsel-. f think maybe the hang-up is in theo25
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BLATTNER (X)
fntermountain Gas Company
word "refer. " Hers implying
Order and is bound by it j-n
think she said that she read
extent of what she did. We
that she referred to t.his
preparing her testimony. I
the Order and that's the
probably are hung up on the
of this.word "referral" as opposed to were
COMMISSIONER RAPER:
you
To
aware
the extent that
Mr. Richardson wants to get
record, because the witness
portions of the Order in the
has said that she uti]ized it
at l-east in preparing a year dgo, then, Mr. Richardson,
you may continue on that line in order to get those
sentences from this Order that are important to you as
part of the record, but I bel-ieve that the witness has
testified extensively to the point as to the degree to
which she used it in drafting her testimony in this
matter.
MR. RICHARDSON: Thank you, Madam Chair.
I'd move that this Order No.
No. 502 in thls proceeding.
MR. W]LL]AMS:
COMM]SSIONER
Order No. 20966 is admitted
(Amalgamated
is admitted lnto evidence. )
20966 be admitted as Exhibit
No objection.
RAPER: With no ob j ecti-ons,
as Exhibit 502.
Sugar Company Exhibit No. 502
MR. RICHARDSON: Correct. 501 is
Dr. Reading's qualifications,SO just to not have ao25
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BLATTNER (X)
Intermountain Gas Company
pagination mix-up, we'lI cal-l- it 502 for now.
COMMISSIONER RAPER: Perfect. Thank
you.
MR. RICHARDSON: Thank you, Madam Chair,
that's all the questJ-ons I have. Thank you, Ms.
Blattner.
COMMISSIONER RAPER: Mr. Otto, do you have
any cross-examination?
MR. OTTO: Madam Chair, I do have a few
questions.
COMMISSIONER RAPER: Proceed.
CROSS-EXAM]NATION
BY MR. OTTO:
O Good morning, almost afternoon. On page
1,9 of your testimony, you cite the several principles of
Bonbright. This is a different line of questioning than
Mr. Richardson explored just to head off that pass. Do
you agree that al-l- of those principles are important to
consider when designing rates?
A Yes, I agree a1I those principles should
be considered.
O Do you agree that some of those are more
math-based, for example, the ability to recover the25
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CSB Reporting(208) 890-5198
BLATTNER (X)
Intermountain Gas Company
revenue?
yes.
o
policy-based,
A
0
and policy decisions?
And woul-d you agree that some are more
like fairness and undue discriminati-on?
Yes.
So the principles are a mix of objective
A I think that would be a fair statement,
A Correct.
O Do you agree that there are different rate
achieve those principles equally wefl?
think that there's different rate
designs that achieve different rate
designs that can
A]
put more
maybe, So
emphasis on dj-fferent
that they may not all
parts of
achieve
designs
those
each
achieve or
principles,
of these
equally well-.
O But that's actually a better f wish I
would have asked my question with that answer. Different
rate designs sorry, I ' l-l- stop now. Okay, we' re going
to move oflr so now we're on page 30 of your direct
testimony and -- sorry, 31, my apologies, in l-ines 11 and
L2 you sdy, "An efficient rate structure promotes
economically justified use of the Companyrs safes and
discourages wasteful use"; correct?
A Correct.o 25
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BLATTNER (X)
Intermountain Gas Company
OIn
higher price for
l-ess consumption
ASo
reduce customer usage, but
price goes into effect. I
deciding how they're going
a Lot of things that they
one of the biggest is when
the thermostat
your experience, does a rate does a
a unit of a commodity encourage more or
by a customer?
I think in general
maybe not
think when
a higher price would
the instant that the
customers are
natural 9ds, there are
into that and, you know,
you know, negative 72 in
to use
factor
up, and so I think
but maybe not on a
going to
They're
it' s
daily
it's,
January, they want to
care as much how much
be warm and so theyrre not
gas costs at that moment
going to turn
factored into their decislon,
basis or an hourly basis.
O Fair enough. Would you agree the
thermostat in the home gives the customer the abj-Iity to
react quite qulckly if they shou1d feel incented to do
so?
A So 1f a customer chooses to, they can
definitely affect the heating portion of their load by
turning down the thermostat.
O Would you say -- my apologies if this is
outside your area of expertise, but is 1t fair to say
that the heating load is the majority of a gas usage in a
residential home?o 25
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BLATTNER (X)
Tntermountain Gas Company
now, so
fines 1
we're going to
through, weII,
A
winter months.
heatersr so it
talking about.
v
I think that would be fair to say in the
Summer usage for us wou1d be water
depends on what part of the year you're
We're going to move to a different topic
when you were setting
the customer-related
correct ?
page 34, and -- okay, this is
B and you say you considered --
the customer charge, you considered
rates and units costs; is that
A Uh-huh.
O Do you see that?
A Yeah.
O I just want to understand what components
you incl-uded as customer-rel-ated rates and unit costs, so
woul-d that be, tike, the meter on the house; is that
right ?
A Right; so the customer-related costs would
be the costs that came from the cost of service that
woul-d be impacted by the number of customers, not
necessarily the delivery of gas to those customers on a
peak day, so customer-rel-ated costs are things that don't
change as customers use more 9ds, so a meter is a good
example. They have to have that whether they take any
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BLATTNER (X)
Intermountain Gas Company
O Sure.
A
whether they
O
a meter to a
each house or
A
v
A
oY
A
o
true?
A
nY.
They have to have a pipe to their home
take any gas or not.
And itrs quite easy to assign the cost of
specific customer; right? There's one on
each building?
Correct.
Would you agree?
Uh-huh.
So another sorry.
That's correct.
So there's some cost in billing customers;
customer- re lated
True
And that would be considered a
cost, you could just identify it to a
speciflc customer?
A True.
O What el-se do you include what other
speciflc components have you included in your calculatlon
of the customer cost?
A So other I don't know if I can give
you do you want an exact list of al-l- of the accounts
that we looked at or
0 Okay, Iet me rephrase the question. Are25
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BLATTNER (X)
Intermountain Gas Company
some infrastructure that serves multiple customers
included in your calcul-ation of the customer charge to an
individual customer?
A Yes.
understand what
O Would you agree that it's hard to
of a shared infrastructure is
faj-rIy al-l-ocated
AI
portion
to an
understand. I woul-d aqree
agree that it's hard to
that there's there could be
differences of opinion on how much of that cost wou1d be
al-located to a particul-ar customer. I think Mr. Heintz
makes a good polnt. I don't know if f can refer to
rebuttal testimony at this point, but okay; so there
are costs that are incurred to connect a customer to the
system that maybe aren't defined particularly for that
customer, but there's a customer component to it, so the
example 1s you have one large lndustrial customer that
uses 5,000 therms at a single l-ocation compared to f 'm
not going to get the math right compared to a group of
customer of residential customers that use the same
5,000 therms, but they're in a subdivision, you know,
that is 10 mil-es wide or 10 mil-es long, so the cost, the
cost of connecting that group of customers is more than
the cost of connectj-ng a single industrial customer even
though they have the same usage on a peak duy, so there
individual customer?
wouldn't
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is a customer component of connecting customers to the
system.
a Would you agree that some of that shared
infrastructure serves customers in different rate classes
or some of your sorry, 1et me rephrase. Are you
famil-iar with the design of Intermountain's system
sufficiently to know whether some of that shared
infrastructure serves multiple customers in different
cl-as ses ?
A Yes, yeS, it would serve multiple
customers in different classes.
O Okay, now, we're going to move to my final
topic, so we I re going to page 35 and right at the top
here, you just refer to the fact that the fixed cost
col-l-ection mechanism proposed by the Company is a method
to true up fixed cost recovery.
A Correct.
O Is that a fair paraphrase of that
statement?
A Uh-huh.
O Okay, and in your rate design for the
customer charge, you also say that that shou1d be
designed to include to assure that fixed costs are
collected through the fixed charge; is that true?
A The customer charge that we propose still-
CSB Reporting(208) 890-s198
BLATTNER (X)
Intermountain Gas Company
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BLATTNER (X)
Intermountain Gas Company
doesn't collect all of the Companyrs fixed charges, so
we've tried to move in that direction, but it. still
doesn't collect all of the fixed charges. fn fact, in
some of the pages that we were revj-ewing with
Mr. Rj-chardson, it polnted out that the Company's cost of
service would have said that the customer charge for
residential should have been $13.50 and we've actually
l-owered it t.o $10.00 and so there's still a portion of
that fixed customer-related costs that aren't collected
by our proposed customer charge.
O So would you agree with the statement that
a customer charge and a fixed cost coll-ection mechanism
are two methods to achieve the same goal; that is, to
assure fixed cost recovery to the utility?
A So if the customer charge were high enough
to recover all of the Company's fixed costs in the
customer charge, then I think that statement would be
true, but if you're still- collectj-ng some of the
Company's fixed costs volumetrically, then the two are
not equal.
MR. OTTO: That's al-l- the questions I
have. Thank you.
COMMISSIONER RAPER: Do the Commissloners
have any questions?
MR.
Any redirect?
WILLIAMS: I do have some redirect,25
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BLATTNER (ReDi)
Intermountain Gas Company
Madam Chair.
REDIRECT EXAMINATION
BY MR. W]LL]AMS:
O So Ms. Blattner, you had a nice dlalogue
with Mr. Richardson with respect to your studies that
l-ooked at cl-asses and hls proposition that he said you
should have looked at customers, so when you l-ook at
designing rates for cl-asses, whatrs your fairness meter
or barometer you're looking at at that point?
A When we're looking at designing rates for
a class, we're trying to make sure that those rates are
fair to everybody, and as I was sayJ-ng, we want to make
sure that they're fair not just to the Iargest customer
that has, you know, some representation, but al-so to the
small-er customer maybe that isn't represented in these
proceedings, and we also try to l-ook at whether or not
customers within a class are subsidizinq other customers,
and so I think there I s a real- fairness issue here where
other customers in the cl-ass for multiple years have been
subsidizLng Amalgamated's cost of gas delivery.
MR. RICHARDSON: Madam Chair, I
COMMISSIONER RAPER: Mic.
MR. RICHARDSON: I would l-ike to lodge ano25
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BLATTNER (ReDi)
Intermountain Gas Company
objection. It is assumj-ng facts not in evidence that
Amalgamated is subsidizinq other classes of
customers (lnaudible) .
COMMISSIONER RAPER: I apologize, f know
that you just went through a great deal of explanation,
but it's not coming through on the microphone and Connie
is not getting it on the record. When you played with
the cord before it worked.
MR. RICHARDSON: I'm objectlng on the
basis that the witness I s statement is assuming facts not
in evidence. The assertion that Amalgamated Sugar is
subsidizing other customers or other classes of customers
has been seriousl-y questioned and she asserted as a fact
that Amalgamated Sugar is being subsidized by other
classes of customers and that's an assumption of a fact
that's not in evidence and I object on that basis, Madam
Chair.
MR. W]LLIAMS:Madam Chair, it is in
and her exhibits and othersevj-dence, it is
of the Company,
the rate design
her testj-mony
and through the cost of
document that there is
service study and
a major subsidy
within the industrial-and so I guess I don'tclas s ,
of theunderstand the
testimony and
he says isn't
basis
her exhibits
fair. Now, I
objection. It
that allege the
do acknowledge
is her
fact that what
that thereo25
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BLATTNER (ReDi)
Intermountain Gas Company
have been others that have challenged the
that cost of service study, while in fact
validity of
it is as was
discussed.
MR. RICHARDSON: I
objection if the witness clarifies
subsidy, but the assertion that as a
a subsidy is indeed, as Mr. Williams
this Commission to make a finding ofl,
to make a finding on.
is being subsidized by other
out. If that does not exist
then we understand that i-t's
MR. W]LLIAMS:
maybe restate the question a
to go to that.
Thank you.
O BY MR. WILLIAMS:
a particular class, would it be
noted, a subject for
not for the witness
So Ms. Blattner, within
normal to expect that
]-osers within that class when
done?
would always be the case.
don't have any
that it's an alleged
of fact 1t ismatter
COMMISSIONER RAPER: So to the extent,
then, Ms. Blattner, that to the extent you can point
to a place in the record where you say that Amalgamated
customers, please point that
in that form in the record,
an alleged.
Madam Chair, I think I can
little bit so we don't have
COMMISSIONER RAPER: That woul-d be great
there would be winners and
a cost of service study is
A I think that25
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BLATTNER (RCDi)
Intermountain Gas Company
0 And did you take j-nto account in your
class cost of servi-ce study the fact that there were
winners or l-osers? Dld you
Iook at the class?
A So we l-ooked
the class compared with the
and then internal-Iy inside
study that is part
particular cIass,
assume there were
look at that or did you just
at both. We looked at how
rest of the customer classes
within the industrial class, if
the class, we l-ooked at how
that shaped up among the customers within the c1ass.
O And according to your cost of service
of this case, your cl-ass within the
winners and l-osers within that
you
clas s ,
would it be fair to
were subsidizing the
A That
a1so, then, assume that the losers
winners?
was my assumption based on our cost
there were no subsidies, thenof service study that if
everyone would have remained at the same rate, but to the
extent that some customers are facing a price increase
and some customers are facing a price decrease, even
though the class itself would get a decrease, the
customers that are
for the l-ast period
customers that are
plusses and minuses
cl-ass.
increase would have been,seeing an
of time
getting
have to
been, subsidizinq the
the decrease, because
equal out to come to
those
the
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CSB Reporting(208) 890-s198
BLATTNER (ReDi)
Intermountaln Gas Company
0 So the Company's proposal is to
change and if
position that
es, the only
essentially address those subsidies 1n one
you were to in instead accept Amalgamated's
is the only provislon that appli
that applies, in rate design and all-
that talk about fairness and other things
don't appfy
MR. RICHARDSON: Madam Chair, that's a
mischaracterization of Amalgamated's position. We did
not suggest that gradualism j-s the only ratemaking
principle that applies.
MR. WILLIAMS: Then I stand corrected on
that.
O BY MR. WILLIAMS: So Ms. Blattner, if you
were to assume a gradualizatj-on of rate adjustments
within a cl-ass if there have been winners and losers
gradualism
prlnciple
pri-nciples
identified, to the extent you gradualize that change, are
Ieast continuing as that
subsidies that have been
the other
you not perpetuating
gradualism ramps down
identified?
A Yes.
don't get to
we've set the
to perpetuate
that has been
or at
the
They would for any customers that
that zero point, that
rate in the cost of
class point, that
service, you're going
the subsidies or perpetuate the deficit
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(208 ) 890-s198
BLATTNER (ReDi)
fntermountain Gas Company
o And
service study that
Company's cosL of
methodofogy that was used
in the 1986 case and the cost of
was involved in that case, is the
SCTV].CC study today
in that 1986
in effect the same
case?
A It's the same basic
O Methodology?
A -- methodoJ-ogy.
O Right, and that methodology I'm going to
describe as essentially an al-l-ocated study in the sense
that back then, you didn't have, the Company didnrt have,
meters that would allow you to report peak day usage for
probably any members, maybe j-ndustrials, but certainly
not others; would that be a fair assessment of that?
A Yeah, the way I understand it, we had no
data to on residential and commercial customers and we
were just at the point where we were startlng to get some
telemetry data on our very largest industrial customers,
so there woul-dn't have been daily reads enough to be abl-e
to do any allocations.
O So when I look at Order No. 20966 and
Mr. Richardson's and your discussion about how the
Commission expresses a preference for multiple cost of
service studies, certai-nly the Company did a cost of
service study and presented it and you're a witness on
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service study and did they present afternative cost of
service results?
A Amalgamated did not file an alternative
cost of service study.
O And did Staff do an alternative cost of
service study?
A Staff di-d not ei-ther.
MR. WILLIAMS: Madam Chair, I have no
further questi-ons.
COMMISSIONER RAPER: Does Mike?
MR. WILLIAMS: f 'l-l- ask hls question, how
old were you in 1985?
IInaudible].
COMMISSIONER RAPER: He's not allowed by
Rul-e. Thank you for your testimony and time, Ms.
Blattner. You are excused.
(The witness l-eft the stand. )
COMMTSSIONER RAPER: You may caIJ- your
next witness.
MR. WILLIAMS: Madam Chair, it's 11:55, do
you want to keep going or would you prefer a lunch break?
COMMISSIONER RAPER: So our court reporter
has expressed an interest in a shorter afternoon because
it's easier on her hands. I'm okay going another
witness, maybe missing out on the noon time rush knowing
CSB Reporting(208) 890-s198
BLATTNER (ReDi)
Intermountain Gas Company
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REITEN (Di)
Intermountain Gas Company
that there's a lot of people here that have to find
lunch. Does anyone object to trying to get
one more wj-tness and then doing l-unch after
through maybe
t.hat ?
Swenson and I
questions for
jump down to
so Connor is
okay
MR. WILLIAMS: So my next witness was Dave
suspect that Amalgamated has a lot of
him, so what I'm going to do instead is
Dan Kirschner who is unable to come today,
going to sub in for him; woul-d that be
COMMISSIONER RAPER: That would be fine
MR. WILLIAMS:without objection? I
woul-d call Connor Reiten to the stand.
CONNOR REITEN,
produced as a wj-tness at the instance of the
Intermountain Gas Company, having been first duly sworn
to tel-l- the truth, the whole truth, and nothing but the
truth, was examined and testified as follows:
DIRECT EXAM]NATION
BY MR. WILLIAMS:
O Sir, would you please state your name and
business address for the record?
A Yes, Connor Reiten, R-e-i-t-e-n, and my25
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RE]TEN (Di)
Intermountain Gas Company
business address is 1,9L4 Willamette Fal-ls Drive in West
Lj-nn, Oregon, 91068 .
MR.
being substituted
do is just for the
one.
o BY MR. WILLIAMS:
explain the sad circumstances in
replace your boss as the witness
your background and
organization?
A Yes,
could not
situation,
member of
WILLIAMS: Madam Chair, Mr. Reiten is
for Mr. Kirschner and so what f want to
record make the transition from the
So Mr. Reiten, could you
which you had to come
in this case and some of
your identification with the
unfortunately, our executive director
be here today as a result of some family
but I am here in his place and I have been a
the Northwest Gas Association for a year. I
a Bachelorgraduated from the Universi-ty of Portland with
of Arts degree in political science and have spent my
early career working in servj-ce to the United States
Senator Jeff Merkley, the Eresh Water Trust, the Quinn
Thomas Public Affairs, ds well as a number of Oregon
statewide political campaigns.
O So with the exception of the personal
qualifications and data of Mr. Kirschner, if f was to
otherwise ask you all of the questions contained in his
direct testimony consisting of six pages -- DO, excuseo25
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REITEN (Di)
Intermountain Gas Company
frer seven pages, would your answers today be the same?
A They
MR.
woul-d.
WILLIAMS:Madam Chair,
Kirschner's
Ifd ask that
Mr. Reiten's testimony and
spread upon the record as
for cross-examination.
Mr.testimony be
if read, and would offer hj-m
COMMISSIONER RAPER: With no objection, we
will spread the testimony of Dan Kirschner sponsored by
Connor Reiten across the record as if read.
(The fol-lowing prefiled direct testimony
of Mr. Dan Kirschner, sponsored by Connor Reiten, is
spread upon the record. )
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Kirschner, Di 1
Intermountain Gas Company
O. Please state your name, title and business
address.
A. My name is Dan Kirschner. f am the Executive
Director of the Northwest Gas Association (NWGA). My
business address is 1,91,4 Wiflamette Eafl-s Dr'., Suite 260,
West Linn, OR 91068.
O. Would you please describe the NWGA.
A. The NWGA is a bi-national trade association of
the Pacific Northwest natural gas industry. We are a
whose mission is to501 (c) 6, non-profit
promote natural gas
energy, economic and
organi zat j-on
as a cornerstone of the region's
environmental foundation. The NWGA
accomplishes its mission by producing timely and
regionally relevant information relating to naturaf gas;
by shaping and communicating the industry's perspective,'
through policy analysis and advocacy and by facil-itating
hiqh quality interactions among industry stakehol-ders.
NWGA members incl-ude six local distribution companies
serving communities throughout Idaho, Oregon, Washj-ngton
and British Columbla, and three transmission pipelines
that transport natural gas from production areas in
Al-berta, British Cofumbia and the U.S. Rockies into and
through the Pacific Northwest.
O. Would you please summarize your educational- and
professional experi-ence.o 25
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Kirschner, Di 1a
Intermountain Gas Company
A. I graduated from Eastern Washington University
Government andwith a Bachel-or of Arts Degree
an MBA
an
Economics.
Washington.
Washington
Gorton. I
I also have from the University of
I spent several-years
and of
on the staff of the
State Legislature U. S Senator Sl-ade
worked for a number of years as the Vice
Public Affairs at thePresident of Public PoIicy and
Spokane Regional Chamber of
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Kirschner, Di 2
fntermountain Gas Company
Commerce. I have been the Executive Director of the NWGA
for the past fourteen years.
O. What are
accountabil-ities at
dutles and responsibilitles and
NWGA?
for the successfuf execution
financial status and staff
Board of Directors that
each of the NWGA's nine
chief spokesperson and
and a resource for informatron
Paciflc Northwest. I work to
informed decision-making on
of your testimony?
national and regional trend
your
the
A. I am accountable
of the NWGA's mission, its
management. I report to a
includes representatives of
member companies. I am the
advocate for the industry
about natural gas in the
foster understanding and
relevant issues in the region
O. What j-s the purpose
A. I will descri-be the
toward using natural- gas as a fuel to generate
electricity, replacing coal-fired generation and
supporting j-ntermittent renewable generation. I wil-l-
also di-scuss the relati-ve benefits of burnlnq natural gas
directly in end-use applications.
O. Why is natural gas increasingly used to
generate electricity?
A. In short, natural gas is abundant, clean and
affordable. Gas-fired generation is economic, cIean,
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Kirschner, Di 2aIntermountain Gas Company
It has been less than ten years since North American
producers first achieved economic productj-on of
hydrocarbons, including natural gas and oil, from shafe
formations deep underground. Since then, the amount of
natural- gas that can be ploduced has more than doub1ed
and production has soared. We haven't found more natural
9ds, we found out how to produce natural gas that was
previously lnaccessible.
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Kirschner, Di 3
fntermountaj-n Gas Company
Furthermore, producers are continuously improving
extraction technologies, allowlng more natural gas to be
produced at lower and l-ower prices. Today we are
producing more natural gas than ever before util-izLnq J5e"
fewer drilling rigs than were in operation l-ess than five
years ago.
This
price of
phenomenon
natural gas.
has had
From
than $200 mil-l-ion for
gate. In 20L5, those
million less for the
The 1ow price of
attracti-ve as a fuel
natural qas delivered
same consumers paid al-most
same volume of gas.
natural gas makes it more
for el-ectrical generation.
a dramatic effect on the
1981 to 2000, the average
wellhead was $4.40/Mdth 1n
prr_ce was
paid more
to the city
$100
In the
price of natural gas at the
real dollars. In 20L5, the average wellhead
$2.62. In 2008 Idaho residential consumers
mid-2000s, natural gas was out of favor as a generation
fuel because the fuel price risk was so high. While
still- a risk consideratj-on, that risk has moderated to
the point that gas-fired generation appears to be the
preferred option as both a base Ioad or energy resource,
as well as the ffexibfe, on-demand or capacity resource
required to support the slgniflcant quantities of
intermittent renewable generation built to serve this
region over the last decade.o 25
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Kirschner, Di 3a
Intermountain Gas Company
Fina11y, natural- gas is the cleanest on-demand
generation opti-on that is both economic and can be
permitted and built within a reasonable time frame.
Compared to coal, natural gas can reduce CO2 emissions by
45eo or more, produces 80% fewer nitrous oxide emissions
and virtually eliminates sulphur dioxide, mercury and
particulate emj-ssions. The shif t f rom coal to natural-
gas
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generation is widely credited with a 722 reductj-on in
U.S. energy-refated CO2 emissions from 2005 to 2075.
O. What are the trends regarding natural gas-fired
generation?
A. Abundance, affordability and a cleaner
environmental- profile, these are the same dynamics are
driving the growth of gas-fired generation. Nationally,
natural gas-fired generation is supplanting coal as older
coaf plants are replaced by new, cleaner natural gas
plants, and as the 1ow price of natural- gas makes running
existing gas plants more economical- than existing coal
facilities.
The shift from coal to gas has happened with
astonishing speed. fn 2010, coal-fired generation was
the dominant electricity resource in the U.S., producing
twice as much electricity as natural- gas. In contrast,
natural- gas generation is projected by the U.S. Energy
Information Adminj-stration, or EfA, to exceed coal for
the first time ever during the 2076 calendar year. State
and federal regulations, like the EPA's Clean Power Plan,
wilf only accelerate this national trend.
We are experiencing the same trends 1n our region.
In the NWGATs 20L6 Naturaf Gas Market Outlook
("Out1ook"), we are pro;ecting 1.BZ compounded annuaf
growth rate in gas use for generation purposes from
Kirschner, Di 4
Intermountaj-n Gas Company
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Kirschner, Di 4a
Intermountain Gas Company
2016-71 to 2025-26, exceeding the expected growth in gas
demand from the residential (0.6e"), commercial (0.8%) and
industrial (0. 1% ) sectors. Natural- gas j-s the marginal
generation resource in our region. The projected growth
is expected to come from a combination of additional-
basel-oad (energy) generation and i-ncreased utilization of
fl-exible pJ-ants (capacity) to support renewabl-e
resources.
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Intermountain Gas Company
Natural- gas is also supplanting coal--fired
capacity in the Northwest.generation
coal- plant retirements include the 130
Recent regional
MW JE Corette
Pl-ant i-n Montana, owned by Talen Energy, and the 110
Carbon Plant in Carbon, UT owned by PacifiCorp.
Currently planned closures include the 250 MW Reid
Gardner plant 1n Nevada, to be closed by the end of
the 550 MW Boardman coal in Oregon,
mandated to
MW
2071;
10 percent of
close in 2020;Idaho
plant
Power,which 1s owned by
and one of two 610 MW coal-fired units at Centrafia in
Washington by the end of 2020. There is also increasing
pressure to close other regional coal plants before the
end of their useful lives, most notably Colstrip units 1
& 2 in Montana, co-owned by Puget Sound Energy and Talen
Energy, and North Valmy Unit 1 1n Utah, co-owned by Idaho
Power and NV Energy.
Naturaf gas generatj-on can be expected to replace
some portion of regional coal- retirements because it is
dispatchabl-e, economic and a cfeaner generation resource.
Consequently, the Outlook contemplates a scenario outside
of the Expected
two-thirds (800
retirements with
Demand forecast replacing about
MW) of the planned Boardman and Central-ia
natural gas.
O. What is the Northwest Natural Gas Market
Outlook you referenced?25
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Kirschner, Di 5a
Intermountain Gas Company
A. The Outl-ook is the consensus view of NWGA
members of the dynamics driving the natural- gas market in
the Pacific Northwest. It includes a 1O-year demand
forecast by sector and an analysis of the capability of
the region's infrastructure to serve that demand. It
al-so includes discussions on North Amerlcan and regional
sources of natural gas supply, as welJ- as commodity price
trends. It is an aggregation of the integrated Resource
Plans (IRPs) and long range planning
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Kirschner, Di 6
fntermountain Gas Company
analyses of our member
Outl-ook annually and it
www. nwga . org/outlook.
O. Does natural gas-fired generation make
effective use of the available energy?
A. Naturaf gas is an excel-lent el-ectrj-c generation
fuel- for all of the reasons I've mentioned to this point.
Langley Gul-ch is the region's most recent gas-fired
generation facility and one of i-ts most efficient.
According to the Northwest Power and
Council, it requires about 'l ,!00 Btu
3,473 Btu of electricity ( 1KW) , so 1t
48e" of the available energy to useful
companies. The NWGA publishes the
can be found on our webslte at
Conservation
of gas to
converts
energy.
generate
only about
When
combined with line losses from transmission and
distribution,
to homes and
about 402 of the avail-ab1e energy makes it
businesses, whil-e 60% is wasted.
O. What are the benefits of using natural qas
directly for space and water heat?
A. Uslng natural gas
efficient use of this high
a1l- accounts, more than 90%
directly is the most
enerqy resource. By
it from the wel-l head to homes and buslnesses
energy makes
where it is
burned in highly efficient appliances. In its recent
whitepaper, Dispatching Direct Use: Achieving Greenhouse
Gas Reductions with NaturaL Gas in Homes and Businesses,
quality
of the available
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Kirschner, Di 6a
Intermountain Gas Company
the American Gas Association asserts that a typical gas
electricwater heater uses 50? less energy than
resistance hot water heateri emits half
an
the CO2 and costs
l-ess than half as much to operate on an annual basis.
The same characteristics apply to e1ectric furnaces and
air-source heat pumps.
The NWGA Outlook Expected Demand forecast proj ects
will burnthat under normal weather conditions the region
15 percent or about 32
generate electricity in
The
million Dth/year more gas to
it does today.ten years than
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Kirschner, Di 1
Intermountain Gas Company
Outlook Expected Case forecast includes only the growth
in utilization of existing natural gas plants in the
region for energy or capacity. It does not incl-ude the
potential for natural gas to replace soon-to-be-shuttered
coaf generation 1n the region. If the projected 32
mill-ion Dth of incremental growth in gas used to generate
electricity at about 40 percent efficiency were used
instead directly in homes and businesses at 90 percent
effici-ency, the region's consumers would save tens of
miflions of dollars, reduce CO2 emissions by more than a
mill-ion tons and, most importantly, preserve and extend
this vafuable resource.
O. Do you have any concluding thoughts or comment?
A. Naturaf gas is an abundant, reliable, clean and
affordable source of energy. ft is and wil-l continue to
be key to satj-sfying our region's energy needs going
forward as a fuel for el-ectricity generatlon, in
industrial applications and to heat homes and businesses.
Energy efficiency and demand side management programs
should contemplate the direct use of naturaf gas as a
strategy that is in the consumer's best interest,' a
strategy that reduces environmental- impacts and saves
dollars while preserving and extending a vital natural
resource.
Does
Yes.
this conclude
Thank you.
your dlrect testimony?O
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CSB Reporting(208) 890-s198
REITEN (X)
Intermountain Gas Company
(The foflowing proceedings were had in
open hearing. )
COMM]SSIONER RAPER:And open him up for
You're a fast talkercross with one request from you.
l-ike I am and for the benefit of our court reporter, to
here today,the extent you're
feel free to take
answering any questj-ons
it down one notch so that she can get
it all on the record and that would be great.
THE WITNESS: I wi-l1 do my best
COMMISSIONER RAPER: Thank you. Does
Commission Staff have any questlons?
MR. COSTELLO: Thank you, I have one
question.
CROSS-EXAMINATION
BY MR. COSTELLO:
O Mr. Reiten, in Mr. Kirschner's direct
testj-mony at
testimony?
A
oY
pages 6 and 1 do you have his
I do.
the testimony states generally that
gas for space and water heating
that correct?
direct use of natural-
benef its customers,' is
A Yes.o 25
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(208 ) 890-s198
REITEN (X)
Intermountain Gas Company
O Okay, but your testimony or Mr.
Kirschner's testimony didn't incl-ude any exhibits or
evidence quantlfying that benefit; is that correct?
A Correct.
MR. COSTELLO: Thank you. That's all I
have.
MR. STOKES: We have no questions, Madam
Chair.
COMMISSIONER RAPER: Thank you.
MR. PURDY: I have no questions.
you.
BY MR. RICHARDSON:
x
naturaf gas is
A
nY
switching of coal-fired usage
A We do. Yeah,
COMMISSIONER RAPER: Mr. Richardson?
MR. RfCHARDSON: Just a couple.
CROSS-EXAMINATION
Is 1t your organization's position that
the preferred fuel to coal?
Yes.
And does your organization
to natural
promote the
gas ?
that
Thank
the directwe believe
use of natural gas is the highest use of the fuel, but we
do promote as well the uses of generation fuel-.o 25
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RETTEN (X)
Intermountain Gas Company
O frm sorry, could you repeat that?
COMMISSIONER RAPER: Mr. Reiten?
THE WITNESS: We do promote natural gas as
a generating fuel. It is our position that naturaf gas's
highest. use is in direct use space, but we do also
promote it as a generat j-on f uel.
O BY MR. RICHARDSON: And that would be true
in the industrial sector as well-; correct?
A Yes.
O So this Company has encouraged its
industrial customers to switch from coal- to natural gasi
isn't that true?
MR.
there's nothing in
he's not a Company
MR.
Company witness?
MR.
He -- wel1, 1et me put it this
answer to that question, please
THE W]TNESS: T
WILLIAMS: Objection. Eirst of aI1,
his testimony on that, and secondly,
witness. I just
RICHARDSON: I'm sorry, he's not a
Who is he a witness for?
WILLIAMS: Let me rephrase that.
If you know theway:
that quest j-on.
O BY MR. RICHARDSON: You
Company has promoted the switching of
industrial usage to naturaf gas?
proceed.
do not know the answer to
don't know if this
coal- fuel-
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A I donrt know if Intermounta j_n has promoted
that switching.
O But your association has, hasn't it?
A Our associatj_on serves as a proponent of
natural- 9ds, yes, specifically.
O And that's switching from coal_ to natural
gas; correct?
A It is just in benefit of natural gas or
the beneflts of natural- 9ds, yes. We don't talk
specifically about coal, except for in refation to
natural gas.
O So you do tafk about switching from coal
to natural gas?
A We have tal-ked about some of the benefits
of natural gas over coaI, including carbon reduction and
other particulate matters and such.
O And Intermountain Gas is a member of your
organi zaL:_on?
A That's correct.
MR. RICHARDSON: Thank you. That's all I
have, Madam Chair.
COMMISSIONER RAPER: Thank you. Mr. Otto?
MR. OTTO: I do have just one question.
CSB Reporting(2oB) 890-5198
RETTEN (X)
Intermountain Gas Company
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(208 ) B9o-s198
REITEN (X)
Intermountain Gas Company
CROSS-EXAMINATTON
o This is about page 7 of Mr. Kirschner's
BY MR. OTTO:
testimony and on lines 13 through 76,
efficiency and demand sj-de management
that those are good measures to do in
you describe that
should basicalJ.y
order to conserve
and extend a valuable natural- resource; is that
correct ?
A Yes.
So your organization bel-ieves that
to conserve gas is a good public policy
o
broad-based DSM
goaI,' woufd you agree?
A We believe that demand
an effective that i-t's ef fective in
side management is
conserving natural
9AS, yes.
O And that would apply to all types of
customers and alf types of uses?
A Yes.
MR. OTTO: Thank you, that's aII.
COMMISSIONER RAPER: Are there any
questions from the Commissioners for Mr. Reiten? Any
redirect?
MR. WILLIAMS: No redirect.
COMMISSIONER RAPER: Thank you, Mr.O 25
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Reiten, for coming in and being available to sponsor
Mr. Kirschner's testimony. You
(The witness left
COMMISSIONER RAPER:
question for me, so my next
Swenson and Allison Spector.
are going to have questions
that.
stand. )
And with that, we can
are dlsmissed.
the
do what amounts to a lunch break flve minutes after the
last. Is there another witness that you can present that
would -- that you don't anticipate woul-d take any
elongated amount of time?
MR. WILLIAMS: I don't.
COMMISSIONER RAPER: You don't?
MR. WILLIAMS: I mean, that's not a
I'm assuming
for them, but
COMMISSIONER RAPER: Let's wait until
after l-unch. I have a lot of heads nodding, so we wil-l-
break. Letrs give an hour and 15 so that everyone has an
opportunity to actually eat and get back, so we will meet
back in here at 1:15 p.m., and with that, we are
adjourned unt1l after l-unch.
(Lunch recess. )
two witnesses are Dave
that people
I don't know
O 25
453 COLLOQUY