20170321Transcript Volume IV.pdf

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t ORIGINAL CSB REPORTING
C e rtifted S h o rt h and Rep o rter s
Post Office Box9774
Boise,Idaho 83707
csbreportin g@yahoo. com
Ph: 208-890-5198 Fax: l-888-623-6899
Reporter:
Constance Bucy,
CSR
BEFORE THE IDAHO PUBLIC UTILITIES COMM]SS]ON
IN THE MATTER OE THE APPLTCATION
OF INTERMOUNTAIN GAS COMPANY TO
CHANGE ITS 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)
COMMISS]ONER PAUL KJELLANDER
COMMISSIONER ERIC ANDERSON
PLACE:Commissj-on Hearj-ng Room
472 West Washington StreetBoise, Idaho
DATE:March 2, 2071
VOLUME IV - Pages 1198 L607
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CSB REPORTING
(208 ) 890-s198
APPEARANCES
For the Staff:Mr. KarI K].ein
and ![r. Sean Costel].o
Deputy Attorneys General-
412 West Washington StreetBoise, Idaho 83720-0074
For Intermountain Gas
Company:
Mr. Rona].d L. Wi].1ians
Will-iams Bradbury, P. C
1015 West Hays StreetBoise, Idaho 83102
For The Amalgamated
Sugar Company:
Mr. Peter .f. Richardson
RICHARDSON ADAMS PLLC
Post Office Box 12]-8Boise, Idaho 83702
For
Gas
Northwest Industrial
Users:
Mr. Chad M. Stokes
CABLE HUSTON LLP
1001 SW Fifth AvenueSuite 2000Portland, Oreqon 97204
For the Community Action
Partnership of Idaho:
Mr . Brad M. PtrrdyAttorney at Law
2019 North 17th Street.
Boise, Idaho 83702
For fdaho Conservation
League and Northwest
Energy Coali-ton:
Mr. Benj=nia g'. Otto
Attorney at Law
Idaho Conservation LeaguePost Office Box 844
Boise, Idaho 83701
o 25
APPEARANCES
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CSB Reporting
(208 ) 890-s198
INDEX
WITNESS EXAM]NATION BY PAGE
Bentley Erdwurm
( Staff )
Mr. Klein (Direct)
Prefiled Direct Testimony
Mr. Wj-IJ-iams (Cross )Mr. Stokes (Cross)
Mr. Otto (Cross )Commissioner RaperMr. Klein (Redirect)
1198
720L
1223
]-230
1234
1242
7243
Stacey Donohue
( Staff)
Mr. Costello (Direct)
Prefiled Direct TestimonyMr. Williams (Cross)
Mr. Otto (Cross )Mr. Richardson (Cross)
Mr. Purdy (Cross)
Mr. Costel-l-o (Redirect)
l.245
L241
127 9
L282
7294
1,288
7295
Daniel Klein
( Staff )
Mr. Costello (Direct)
Prefll-ed Direct TestimonyMr. Wil-l-iams (Cross )
Commissioner Raper
7296
7298
7320
7327
Johnathan Farley
( Staff )
Mr. Costel-l-o (Direct )Prefil-ed Direct TestimonyMr. Purdy (Cross)
1328
13 31
134 1
Terri- Car]ock
( Staff )
Mr. KIein (Direct)
Prefiled Dlrect Testimony
Pref i-Ied Mark Rogers' Testimony
Mr. WiIIiams (Cross)
L344
1341
1357
137 I
Edward Finkl-ea
(NWIGU )
Mr. Stokes (Direct-Reb)
Preflled Rebuttal Testimony
Mr. Wil-Liams (Cross-Reb)
Mr. Richardson (Cross-Reb)
L392
1395
1410
L4t3
Don Reading
(Amalgamated)
Mr. Richardson (Direct)
Prefiled Direct Testimony
Prefiled Rebuttal TestimonyMr. WiIllams (Cross)
Mr. Stokes (Cross)
Commissioner Raper
Mr. Richardson (Redirect)
]-420
L422
L452
7411
j-489
1,499
1500o25
INDEX
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CSB Reporting(208) 890-s198
INDEX(Continued
WITNESS EXAMINATION BY PAGE
Jacob Darrington
(IGC)
Mr. Wil-l-iams (Direct-Reb)
Prefil-ed Rebuttal- Testimony
1503
150 6
Ted Dedden
(IGC)
Mr. Williams (Direct-Reb)
Prefiled Rebuttal TestimonyMr. Williams (Direct-Reb Ct'd)Mr. Klein (Cross-Reb)
L572
1514
153 6
1537
Michael- Adams
(IGC)
Mr. Williams (Direct-Reb)
Prefiled Rebuttal TestimonyMr. Wil-l-iams (Direct-Reb Ct'd)
154 1
154 3
t5B2
Donna Genora
(IGC)
Mr. Williams (Direct-Reb)
Prefiled Rebuttal Testimony
Commissioner Raper
158 4
1590
1603
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INDEX
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CSB Reporting
(2oB ) B9o-s198
EXHIBITS
NUMBER DESCRIPTION PAGE
EOR THE STAEF
L01 .Selected Natural Gas
Distribution Companies
PremarkedAdmitted 1346
7L2.Embedded Residential
Customer Charge Estimate
Premarked
Admitted l.200
113 .RS-1 BilI Comparison PremarkedAdmitted L200
7L4.RS-2 BilI Comparison Premarked
Admitted 7200
115 .General Service BitI
Comparison
PremarkedAdmitted L200
116 .Proof of Revenue Premarked
Admitted 7200
711 .Resident.ial & General-
Service Rates
PremarkedAdmitted 7200
118 .CSC Metrics Premarked
Admitted 1320
119 .Avista
Report
Credit Tracking
- Idaho
Premarked
Admitted 1320
L20.Order No. 30625 in Case
No. GNR-G-08-01
Premarked
Admitted 1330
EOR NORTHWEST ]NDUSTRIAL GAS USERS:
319 .CV of Edward A. Finklea Premarked
Admitted L394
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INDEX
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CSB Reporting(208) 890-s198
EXHIBITS (Continued)
NUMBER DESCRIPTION PAGE
EOR THE AMALGAMATED SUGAR COMPANY:
501.CV of Dr. Don C. Readlng Premarked
Admitted 7427
EOR INTERMOUNTAIN GAS COMPANY:
Adjustment to StaffExhibit 101, Schedule 1
PremarkedAdmitted 1513
34.Cash Worklng Capital PremarkedAdmitted 7542
?(Method of Determining
Cash Working Capital
Requirements, by State
PremarkedAdmitted L542
43.Staff Allocation of
Revenue to Exj-sting and
Proposed Cl-asses
Premarked
Admitted 1505
44.Adjustment to StaffExhibit 110
PremarkedAdmitted 1505
47-List of changes toMr. Darrington's Direct
Testimony
Identified 1503Admitted 1505
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INDEX
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CSB Reporting
(2AB) 890-s198
ERDWURM (Di)
Staff
BOISE, IDAHO, THURSDAY,MARCH 2, 2011, 1:15 P. M
COMMISSIONER RAPER: Okay, it is now
almost 1:15 p.m. on March 2nd. We are back on the record
to continue with the direct and cross-examination of
Staff witnesses, so Mr. Klein, you can call your next
witness.
MR. KLEIN: Thank you. The Staff cal-l-s
Mr. Bentley Erdwurm.
produced as
having been
BENTLEY ERDWURM,
a witness at the instance
first duly sworn to tell
nothing but the truth, was
of the Staff,
the truth, the whol-e
examined andtruth, and
testi fied as follows
DTRECT EXAMINATION
BY MR. KLEIN:
O Thank you, Mr. Erdwurm, would you please
state your full name for the record?
A Yes, Bentley Erdwurm.
O How do you spe1l your last name?
A E-r-d-w-u-r-m.25
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CSB Reporting
(208 ) 890-5198
ERDWURM (Di)
^L^ccJLdII
O Thanks. By whom are you employed and in
what capacity?
A Idaho Publ-ic Utilities Commission as a
util-ities analyst.
O And are you the same Bentley Erdwurm who
filed testimony in this case, including Staff exhibits
what dj-d I do with my exhibits? Oh, yes, so you're the
same Bentley Erdwurm that fil-ed direct testimony in this
case with Exhibits 772 through 777, along with and
then ultimately revised testimony with revised exhibits?
A Yes.
O If I was to ask you the wel-l-, do you
have any changes to your testimony anymore?
A There's no changes beyond what was
provided yesterday or the day before.
O Okay, thanks. If I were to ask you the
same questlons that are posed in your testimony, would
your answers be the same?
They wouId,
MR. KLEIN:
yes.
And with that, f move to
spread Mr. Erdwurm's testimony
Lt1 .
on the record and to admit
Exhibits 772 through
A
COMM]SS]ONER RAPER
Without objection, we wiII spread
across the record as if read, and
Thank you, Mr. Klein.
Mr. Erdwurmrs testimony
Exhibit s 712 througho25
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Lll will be admitted.
(Staff Exhibit Nos. 71,2 1,1,1 were
admitted into evidence. )
(The following prefiled direct testimony
of Mr. Bentl-ey Erdwurm is spread upon the record. )
CSB Reporting(208) B9o-s198
ERDWURM (Di)
Staff
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CASE NO. INT_G_16_02
REVISED 02/28/L]
ERDWURM, B (Di) 1
STAFE
O. Please state your name and business address for
the record.
A. My name is
address is 412 West
Bentley Erdwurm.
Washington Street,
My business
Boise, Idaho.
in what capacity?O. By whom are you
A. I am employed by
Commission as a Utilities
employed and
the Idaho PubIic Utilities
Analyst.
O. What is your educati-onal and professional
background?
A. I received a B.A. in Economics from the
University of DaIIas in 7918, and an M.S. in Economics
from Texas A&M University in 1980. I have worked for the
Idaho Publ-ic Utilities Commi-ssion since November 2015 as
a Uti-l-itles Analyst.
industry experience,
design, revenue and
I have over thirty years of utility
ratefocused on cost allocation,
l-oad forecasting, the regulatory
and statisticaltreatment of acquisitions, and financial
analysi-s. I have testif ied as an expert witness both for
Utility Commj-ssion andregulatory agencies
as a consultant to
(Texas Public
the Arj-zona Corporatj-on Commissi-on),
and utilities (California American Water, Alabama Gas
Corporation, and UNS Energy Corporation subsidiarj-es
Tucson E1ectric Power Company, UNS Electric and UNS Gas) .
O. What is the purpose of your testimony?
A. My testimony addresses rate design issues25
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CASE NO. INT_G_76_02
REVISED 02/28/77
ERDWURM, B (Di) 2
STAFE
including: (1) residentlal and general service customer
charges;
schedules
(2) combining the two current residential rate
(Schedule RS-1 and Schedule RS-2) into
rate schedule; (3)
SETVICC
introducing a
rate; and (4)
fourth rate tier
a single
into
thethe general
large volume
rate design for
and transportation classes.
O. Please summarize your testrmony.
that:f am recommending
the residential- customer charge be increased to
$5.50 per month, dD average monthly increase of
$1.67 per month (43% increase);
the residential- usage charges (excluding gas
costs) for current Residential-: (a) RS-1
customers be decreased by 462 for April through
November, and decreased by 16% from December
through March; and (b) RS-2 customers be
decreased by 13% from ApriJ- through November,
and slightly increased by 6Z from December
through March;
the general service customer charge be
j-ncreased to $9.50 per month, an average
monthly increase of $5.00 per month (111%
increase);
the general service usage charges be decreased
by L6%, 792 and 22% in usage tiers l, 2 and 3,
A
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CASE NO. ]NT_G-16-02
REV]SED 02/28/71
ERDWURM, B (Di) 3
STAFF
5
6
1
respectively;
residential rate schedules RS-1 and RS-2 be
combined into a single residential rate
schedule;
the Company's proposal to introduce a fourth
rate tier into the general service rate be
approved,' and
the Company's proposal to j-ntroduce a charge
for Maximum Daily Eirm Quantity (MDFQ) be
approved, but at a lower charge of $0.20 per
therm rather than the Company's proposed $0.30.
Are there areas where you disagree with theo.
Company' s
A
pos it ion ?
Other than
revenue requirement,
and MDFQ charges, ily
Company's proposal to
customer-related cost
adjustments to conform to
and the l-evel- of customer
only disagreement involves
include a portion of mains
Staff' s
charges
the
in the
cal-cul-ation. I exclude mains from
that calculation. However, including or excl-udj-ng mains
has no effect on my customer charge recommendations,
because of customer lmpact considerations.
RESIDENTIAT AI{D GENERAI SERVICE CUSTOMER CTIARGES
O. You mentioned you would discuss the Company's
service.customer charges for residential and general
charge" is.Pl-ease explain what a "customerO25
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A. In general, a "customer charge" is a fixed
amount that a customer must pay each month without regard
to how much gas the customer uses.
O. Pl-ease state the Company's current residential
and general service customer charges.
A. The residential customer charge is $2.50 per
month for the billing months of April through November (B
months of the year) and $6.50 per month for the billing
months of December through April (4 months of the year).
The current weighted average residential customer charge
is $3.83.
The general service customer charge is $2.00
per month for the billing months of April through
November (B months of the year) and $9.50 per month for
the billing months of December through April (4 months of
the year). The current weighted average general service
customer charge is $4.50.
a. What are the Company's proposed residential and
general service customer charges?
A. The Company's proposed residentlal customer
charge is $10.00 per month (161% increase) for all months
of the year. The Company's proposed general service
customer charge is $35.00 per month (6182 increase) for
all months of the year. The Company has recommended
eliminatlng the seasonal differential.
CASE NO. ]NT_G-16_02
REVISED 02/28/L]
ERDWURM, B (DT) 4
STAFE
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CASE NO. INT-G-16_02
REVISED 02/28/L1
ERDWURM, B (Di) 5
STAEF
a. What customer charges are you recommending for
classes ?
A
customer
charge of
seasonal
the residential and general servj-ce
As stated above, f recommend a residential-
charge
$9.s0.
of $5.50 and a general service customer
customer charge of $3.83. To balance this
Staf f 's recoflrmendation el-imlnates the
variation in customer charges,AS proposed by
the Company.
O. Given that you are proposing customer charge
i-ncreases, are you proposing offsetting usage charge
decreases ?
A. Yes. Given a revenue objective, and two rate
components - a customer charge and a usage charge - to
recover revenue,an increase in customer charge will
decrease in the usage charge. Staff
increase (a 439:" increase) in the average
necessitate a net
proposes a
residential
$1.67
increase, Staff proposes Residentiaf usage charges
(excluding gas cost) of $0.11747 per therm that would
apply over the entire year. As explained below, Staff
proposes to eliminate current seasonal differentials and
favors combining the current Residential RS-1 and RS-2
into a single rate schedu1e. For current RS-1 customers,
Staff's proposed usage charge represents a decrease of
$0. 1-4531 per therm (462 decrease) for November through
April usage, and a decrease of $0.03215 per therm (762O25
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CASE NO. INT_G-16_02
REVISED 02/28/77
ERDWURM, B (Di) 6
STAFF
decrease) for December
RS-2 customers, Staff's
a decrease of $0.02453
November through April
$0.00910 per therm (6%
March usage.
The
charge j-ncrease of $5.00 is
through March usage. Eor current
proposed usage charge represents
per therm (13% decrease) for
usage, and a smal-l- increase of
increase) for December through
general service Staff-proposed customer
decreases of $0.03530 (762
decrease), and $0.03821 (22% decrease)
2 and 3, respectively.
O. Why do you support eliminating the seasonal-
differentiation in customer charges?
A. Having the same customer charge throughout the
year is consistent with how the Company incurs customer-
related costs over the year. Costs most closely tied to
specific customers are the capital costs and expenses of
metering, meter reading, bil1ing, the service line, and
customer service. Monthly customer-related operation and
maintenance expenses are driven by the number of
customers, but not by variations in usage over the year.
The capital cost of customer-rel-ated plant items and the
associated depreciation expense is constant over the
year, much like a fixed-rate mortgage payment. Minor
monthly variations in customer-related capital costs are
offset by
decrease),
usage charge
$0.03683 (19e"
for usage tiers t,
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CASE NO. INT-G_76_02
REVISED 02/28/77
ERDWURM, B (Di) 1
STAEE
unrelated to monthly usage. A l-evel customer charge
with the i-ncursion of costs.helps match revenue
O. Pl-ease explain how customer charges should be
determined for util-ities in general.
should be considered in theA. Several factors
determination of customer charges. The weighting of the
factors depends on the specific circumstances of the
utility, the communities served, and the regulatory
jurisdiction. For Idaho and other jurisdictions where
rates are based on historical test years (as opposed to
forward looking or future test years), factors include:
1. the level of customer-related cost;
2. the bill impact in moving
proposed rates,'
3. the total bill for "basic
from current to
needstt;
price signals
and the
4
5
marginal cost
that promote
effi-cient use
the customer
pricing and
conservation
of resources; and
charges of other utilities.
CUSTOMER-REI,ATED COSTS
O. Please explain how average embedded cost is
used to help
A. The
determine the customer charge
overafl- revenue requirement cafcul-ation is
based on historical-, average embedded costs subject to
it generallyknown and measurable adjustments; therefore,25
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CASE NO. ]NT-G-16_02
REVISED 02/28/11
ERDWURM, B (Di) 8
STAEE
al-l-ocation for Intermountain Gas
in the testimony of Staff witness
Morrison has recommended that the
cost-of-service study be rejected
is important to
these costs when
have a cost-of-service study based on
determini-ng customer charges. Cost
is more fu11y addressed
not provide
factors to
Ioad data necessary to
Mike Morrison. Dr.
Company's proposed
because the Company did
calculate accurate
al-l-ocate costs among the classes.
Customer-related unit costs based on hj-storical- average
embedded costs (i.e., customer-rel-ated costs per customer
in a specific class) cannot be accurately calculated
without a cost-of-service study.
O. Did you attempt to calculate a residential
customer charge based on average embedded costs with the
data provided by the Company?
A. Yes, I estimated a cost-based residentia.l-
customer charge to be $8.57 per month. The cal-culation
is included as Exhibit ll2 to my testimony. However, I
dld not recommend a residential customer charge based
exclusively on average embedded cost because, ds
mentioned above, Staff has proposed to reject the
cost-of-service study. Furthermore, Staff considered
several other factors when developing its proposed
customer charges.
O. Did you exclude all portions of mains from youro25
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customer-rel-ated cost calculatlon?
A. Yes. A given maj-n serves multiple customers,
possibly from different rate classes. My customer
components such as meters and servi-ces are associated
with specific customers, at their premises. I have
restricted the customer-rel-ated classification to ltems
that serve specific customers rather than multiple
customers. The classification of costs as "Customer" is
further described 1n Dr. Morrisonrs testimony.
BILL IMPACTS
O. Please dj-scuss how b111 impact considerations
affect your customer charge recommendations.
A. Substantial changes in rate design may in some
cases impose unexpected hardships on some customers. For
this reason, Staff considers how rate changes affect
customers over a wide range of usage levels. Customer
charge increases have the Iargest impact in percentage
terms on lower-use customers. Conversely, customer
charge increases have the smallest impact in percentage
terms on high-use customers. Staff believes that
implementing the Company-proposed $10. 00 residential
customer charge (1614 increase) and $35.00 general
service customer charge (6182 increase) would excessively
impact some customers.
As discussed below, Staff is recommending
CASE NO. INT_G_1.6_02
REVISED 02/28/L7
ERDWURM, B (Di) 9
STAFF
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CASE NO. INT-G-1.6_02
REVISED 02/28/71
B (Di) 10
STAFF
approval of the Company's
Residenti-aI RS-1 and RS-2
proposal to combine the
residential rate schedules.
Separate
and RS-2
current
combi-ned
bitl comparison tables are presented for RS-1
that quantify the effect of moving from the
residential rate schedul-es to Staf f 's proposed
schedule. The residentlal bitl
tables for RS-1 are presented in Exhibit !73,
for RS-2 are presented as Exhibit 714.
residential rate
Current rates are differentlated by season; therefore,
the tables show resul-ts for ApriI through November and
compar]-son
and tabl-es
for December
comparr-sons
through March. Al-so, separate
are presented excluding the cost
bill
of gas and
focuses onincluding the
distribution
cost of gas. This proceeding
and storage costs and not on the cost of
gas. The cost of gas 1s specified in a separate tariff,
which is an adjustment mechanism that generally recovers
changes in commodity costs on an annual- basis.
For an RS-1 customer durlng April through
November, moving from current rates to Staff-proposed
rates decreases monthly bi11s by $2.09 (-15% excluding
gas costs and -62 including gas costs) for a typical l-ow
use residential customer using 35 therms per month, and
by $5.72 (-27e" excluding gas costs and -10% lncluding gas
costs) for an average residential- customer using 60
therms per month.o Z)
L2LO ERDWURM
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For an RS-1 customer during December through
March, movi-ng from current rates to Staff proposed rates
decreases monthly bi11s by $2.15 (-16% excluding gas
costs, and -6? including gas costs) for a typical l-ow-use
residential customer using 35 therms per month, and by
$2.91 (-762 excluding gas costs and -6% including gas
costs) for an average residential- customer using 60
therms per month.
For an RS-2 customer during April through
November, moving from current rates to Staff-proposed
rates increases monthly bil1s by $2.74 (232 excluding gas
costs and 8? including gas costs) for a typical low use
residential customer using 35 therms per month, and by
$1.53 (11% excl-uding gas costs and 3% including gas
costs) for an average residential- customer using 60
therms per month.
For an RS-2 customer during December through
March, moving from current rates to Staff proposed rates
decreases monthly bills by $0.68 (-62 excluding gas
costs, and -2% includlng gas costs) for a typical- low-use
residentlal customer using 35 therms per month, and by
$0.45 (-3% excluding gas costs and -1? including gas
costs) for an average resldential customer using 60
therms per month.
A generaf servj-ce bill comparison table is
CASE NO. INT_G_76_02
REVISED 02/28/71
ERDWURM, B (Di) 11
STAFE
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presented in Exhibit 115. The Staff-proposed general
service rate includes a fourth rate tier, dS proposed by
the Company and adjusted for the Staff revenue
requirement.
O. Please discuss the proposed fourth general
service rate tier.
A. The Company proposes that a fourth rate tier be
added to the general service schedule. Staff recommends
approval of this proposal. The general service schedul-e
currently has a declining block deslgn, whereby the usage
rate declines as usage inc::eases. Staff has confirmed
that on average the Company's larger general service
customers are less costly to serve on a per therm basis;
therefore, Staff favors retaining the decl-ining block
design for general service. The proposed fourth block
woul-d apply to usage j-n excess of 10,000 therms per
month. During the test year, monthly usage did not fall
in the over 10r000 therms range. Therefore, introducing
the fourth block wil-1 benefit any prospective customer
that uses over 10,000 therms, but does not affect the
rate calculations appJ-icable to customers with Iower
usage. Additionally, introducing a fourth general
service rate block al-l-ows for a smoother transltion for
customers switching from the general service to the Iarge
vofume class, or in the opposite directlon.
CASE NO. INT_G-76_02
REVTSED 02 / 28 / 1,7
ERDWURM, B (Di) 72
STAFE
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O. Do you have concerns about increasing the
general service customer charge beyond $9.50?
A. Yes. The general service class is diverse,
with customers ranging in size from the "mom and pop"
stores to larger retail, office and manufacturing
operations. The Company should study whether the general
service class should be divided into two or more cl-asses.
If such division is appropriate the Company should
propose different customer charges for each of the new
classes. This would avoid having the smallest general
service customers subsidizing the largest general service
customers. In this proceeding, Staff seeks to avoid
recommending a "one-size fits-a11" general service
customer charge in excess of $9.50 that may overstate the
customer-related costs of the smal-lest general service
customers.
Dr. Morrison has proposed that, after this
proceeding ends, a cost-of-service workshop be held where
Staff, the Company and interested parties may afso
discuss methodologies and direction of rate design in
future proceedings. General Servj-ce rate design issues
shoul-d receive special attentj-on.
O. Given the last Intermountain Gas general rate
case was fil-ed over 30 years d9o, did you cal-cul-ate the
effect of inflation when adjusting the current customer
CASE NO. TNT-G-76_02
REVISED 02/28/I7
ERDWURM, B (Dr) 13
STAFF
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CASE NO. TNT_G_76_02
REVISED 02/28/L1
ERDWURM, B (Di) 74
STAFF
charges ?
I Vac Comparing the increase in the price of
the increase in the price of a typical
t
of goods provides some perspective on the
gas service to
market basket
size of customer charge or bil-l- increases. The Bureau of
Labor Statistics Consumer Price fndex shows the weighted
purchased
on this
resldential- customer charge
average percentage prrce
by American consumers is
percentage increase, the
would increase to $8.58,
charge would increase to
increase for al-l- items
124% since 1985. Based
and the general
$10.08. These
service customer
results
illustrate that Staff's proposed customer charge
increases (43? and 1113 for residential- and general
servj-ce, respectively) are l-ess than the infl-ation rate
for the typical market basket of goods (L242) . But as
mentioned above, there are several- factors to consider
when determining the customer charges.
TOTAJ, BILL FOR BASIC NEEDS
O. When you eval-uate how rate design affects
customers with basic needs, how do you define "basic
needstt ?
A. Analysts may differ on the number of therms
required to meet monthly "basic needs". However, the
general idea is to determine a usage l-evel that provides
a very basic level of service, but meets health ando25
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safety objectives. Monthly therms may differ by the
number of end uses served (e.9., space heating, water
heating, and cooklng), the month in question, and perhaps
the number of members in the household.
O. Have you examined the percentage increase in
the annuaf biII for basic needs?
A. Yes. For simplicity, f assume basic needs are
met with an average usage of 35 therms per month the
fow use-residentiaf l-eveI cited above.
Assuming the customer is currently served under
RS-1, the total current annual- bill, excluding 9ds, is
$L63.29. The total- Staff-proposed annual bill, excluding
gas costs, is $138.02. The bills of basic needs RS-1
customers will- decrease under Staff-proposed rates, with
the annual bill decreaslng by $25.27, or $2.71 per month.
Assuming the customer is currently served under
RS-2, the total- current annual bill, excluding 9ds, is
$123.6L. The total Staff-proposed annual biIl, excluding
gas costs, is $138.02. The annual bill increase is
$74.47, or $L.20 per month.
PRICE SIG}IAT CONSIDERATIONS
0. Pl-ease explain why the marginal cost of
providing service, and the price signal, should be
considered when designing rates.
A. Marginal cost pricing sends the customer a
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CASE NO. INT-G-76_02
REVISED 02/28/71
ERDWURM, B (Di) 15
STAFF
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CASE NO. ]NT_G-76_02
REVISED 02/28/77
ERDWURM, B (Di) 1,6
STAFF
price slgnal that refl-ects the cost of additional
consumption. Economic efficiency occurs when the price
the customer pays for the next therm consumed equals the
marginal cost of provlding that next therm.
Given that most utility customers use some 9dS,
the "marginal" decision is whether to use another unit of
9ds, as opposed to whether to become an Intermountain Gas
customer and i-ncur a customer charge.
O. Has Staff considered marginal cost pricing
princi-pIes when considering its customer charge proposal?
A. Yes. The fntermountain Gas system is
experiencing customer growth that
upgrades to meet future throughput
necessitates system
extent customers conserve, capaci-ty
requirements. To the
is avail-abl-e to meet
future l-oad growth, potentially deferring the need for
costly investments. The best way to encourage
conservation is to keep usage rates at level-s that
recognize the longer-run costs of expanding the system.
This may produce usage rates that are based primarily on
marginal-cost principles. These marginal cost-based
usage rates may exceed rate l-evels from an average
embedded cost of servj,ce study. The margi-nal cost
approach to rate design is forward-1ooking, while the
average embedded approach is based on historical costs.
Both approaches should be considered in ratemaking.O 25
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CASE NO. INT_G_16_02
REVISED 02/28/11
ERDWURM, B (Di) 77
STAFF
COMPARISONS TO OTHER UTILITIES
O. Are Staff's proposed customer charges l-ower
operating inthan those of some other gas uti-l-ities
nearby states?
A. Yes. However, Staff's recommendation
constrained by customer-impact considerations.
Company's last general rate case was fil-ed over
ago. Staff cannot recommend that three decades
^i c6
is
The
30 years
of rate
Staff' sdesign changes be
proposed customer
and to customers,
matches Avi-sta's
accomplished in a single
charges are fair to both the Company
and the residential- charge almost
recently approved customer charge
(Avista's residential customer charge is $5.25).
COMBTNING RS-1 and RS-2 RESIDENTIAI SERVICE
O. Have you reviewed the Company's proposal to
combine the Company's two current residential rate
schedu.l-es (Schedu1e RS-1 and ScheduJ-e RS-2) lnto a single
rate schedule?
A. Yes.
O. Pl-ease explain your review of the proposal, and
regarding it.whether you
A. I
have any
reviewed
recommendations
profiles of the two
consumption profile
very similar, with
the monthly average consumption
classes, and noted that the
of each c]ass over twel-ve months
peaks and valleys in consumption
l_s
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matching. Based on this similarity, I recommend that the
RS-1 and RS-2 classes be combinedr ds proposed by the
Company.
I"ARGE VOLT'ME /TRA}ISPORTATION
O. Have you examined the Company's proposals for
large volume and transportatlon customers?
A. Yes. The Company has two key proposal-s.
First, the Company proposes a new charge for MDFQ
(Maximum Daily Firm Quantj-ty) for its LV-1 customers and
for customers in the current T-4 and T-5 rate categories.
Second, the Company proposes combining the T-4 and T-5
rate categori-es.
O. What is the purpose of the MDFQ charge?
A. MDFQ is a type of demand charge. It is best
characterized as a reservation charge, because it is
based on customers' estimates of their maximum needs, ds
opposed to actual usage over some time interva1 (e.9.,
over one or two days). Introducing a demand charge into
the Company's large volume and transportation rates
recognizes that the Companyrs costs to serve these
customers are driven in large part by the maxj-mum demands
they place on the system. At this time, the Company has
not supported the amount of its proposed MDFQ charge with
a cost-of-service study. Consequently, Staff recommends
CASE NO. ]NT-G-76-02
REVISED 02/28/71
ERDWURM, B (DT) 18
STAFF
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that the amount of the MDFQ charges be addressed at the
aforementioned workshop proposed by Staff.
O. Although Staff recommends that the proposed
amount of the MDFQ charge not be approved in this case,
does Staff nevertheless support the approval of an MDFQ
charge in this proceeding?
A. Yes. fntroduclng a demand charge will- better
match what customers pay to the Company's costs to serve
them. However, Staff recommends that the Company's
proposed $0.30 per therm per month MDEQ charge be reduced
to $0.20 per therm per month for nominated MDEQ. The
recommendation to reduce the charge is based on the
lmpact on speciflc customers.
Introducing a demand charge will shift costs
from higher load factor customers to l-ower l-oad factor
customers. Staff bel-ieves this is appropriate, and that
lower l-oad factor customers should pay more, because they
are more costly to serve (other things being constant).
However, Staff supports a more gradual phase-in of demand
charges than proposed by the Company.
0. Has the Company provided additionaf MDEQ
information to Staff since the application was fil-ed?
A. Yes. The Company al-Iowed customers to nominate
new MDFQ after it fil-ed this case. Staff incorporated
the new MDFQ when calculating 1ts proposed rates.
CASE NO. ]NT-G-L6_02
REV]SED 02/28/11
ERDWURM, B (Di) 19
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CASE NO. INT_G_16_02
REVISED 02 / 28 / I-1
ERDWURM, B (Di) 20
STAFF
O. Why did the Company al-low customers to nomlnate
new MDEQ?
knew that they
Consequently,
nominate. On
woul-d be
customers
A.Previous MDFQs were nomj-nated before customers
charged for each therm nominated.
had littIe disincentive to over-
the other hand, customers nominated the new
MDFQs knowing that a charge would apply to each therm.
O. Were affected customers notifled in writing
that they had an opportunity to nominate new MDFQs?
A. Yes. Intermountain Gas sent an October 25,
20L6 letter to customers informing them of the "Open
Season" that would al1ow them to change the amount of
their nominated MDFQ. Customers were informed that the
MDFQ rate proposal would have "both operational and
financial ramifj-cations". Customer responses were due
back to Intermountain Gas on or before November 28, 2076.
As such, customers had approximately thirty days to
consider their decisions and contact the Company.
O. Describe how and MDFQ charge will affect
customers' biIls.
A. The impact on specific customers varies widely.
Based on the Company's proposed rates, large vol-ume
customers would see percentage changes in annual- bil1s
(based on 2076 usage) ranging from a decrease of B% to an
increase of 20?". T-4 transportati-on customers would see25
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CASE NO. INT-G-16_02
REVISED 02/28 /11
B (Di) 2L
STAFF
percentage changes ranging from a decrease of 56e" to an
increase of l90Z (with the standard devj-ation in the
percentage increase of 514). T-5 transportations would
see percentage changes ranging from a decrease of 24% to
an increase of 62. Staff's proposal to reduce the MDFQ
charge w111 reduce the substantial variation in
percentage changes in bill-s. Staff believes that
introducing the MDEQ charge will better refl-ect costs,
regardless of these impacts.
0. Do you support combj-ning T-4 and T-5 as
proposed by the Company?
A. Yes. This simplifies the tariff . Al-so, there
appears to be no reason for separate tariffs.
RE\ZENT'E PROOF
O. Have you prepared a proof-of-revenue tabl-e that
shows that Staff-proposed rates will accurately recover
the Staff-proposed revenue target under normal-ized
conditions ?
A. Yes. This schedule is attached as Exhibit 116.
Absent a cost-of service study, the percentage of revenue
by cl-ass is maintained at
a summary of current
general- service rates
proposed large vol-ume
current levels. Additionally,
Staff-proposed residential- and
included as Exhibit 171. Staff-
and transportation (as well as
and
l_s
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residential and general service) rates are show in
Exhibit 11-6.
a. Does this conclude your direct testimony in
this proceeding?
a voq it dOeS.r vv,
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CASE NO. INT-G_16_02
REVISED 02/28/71
ERDWURM, B (Di) 22
STAFF
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CSB Reporting(208) 890-s198
ERDWURM (X)
Staff
(The following proceedings were had in
open hearj-nq. )
COMMISSIONER RAPER: And we'll go to the
Company for cross-examination.
CROSS-EXAMINATION
BY MR. WILLIAMS:
Good afternoon, Mr
Good afternoon.
Erdwurm
I want to start on page B of your
testimony
Okay, f'm here.
And on line lJ, 76 and lJ, you estimate a
cost-based residential- customer charge of $8.58 or $0.57
per month; is that right?
A Thatrs correct. The Company, just for
cl-arifi-cation, the Company did ask a foll-ow-up production
request and they thought their Company had mentioned
there may be a double count i-n there, and I had a
revj-sj-on that lowered that down in the neighborhood of
5.50, $6.50, plus or minus a litt1e bit.
O Okay, I apologize for not keeping up with
all of the adjustments, and the Company calculated one
based on the result was $13.71; is that correct?
o
A
a
A
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CSB Reporting(208) 890-s198
ERDWURM (X)
Staff
A That's correct.
O Okay, and is the primary difference
between yours and the Company's estj-mate from a dol-l-ar
standpoint the fact that you did not allocate main line
costs to residential customers; is that a correct
summation?
A There's more to it than that. The purpose
of that cafcufation wasn't to come up with what I thought
an accurate customer charge would be, because I created
some all-ocation factors that would have- purposefully
lowered the calculation, so the 5.50 that 1s corrected
would be a littl-e l-ower than what it coufd have been.
O What was the single biggest factor between
the Company's at 13.71 and
was the biggest adjustment
A The biggest
made some assumptions about
l-ot more costs, a l-ot more
being now at 6.50? What
your mind that you made?
you
in
adjustment was probably that I
al-locations. I allocated a
costs to the industrial- cIass,
for instance, or the commercial- or the general service
cfass than what I really thought woul-d have happened.
The idea was to get a l-ower bound for the number, not to
come up with an accurate representation of what would I
cal-culate with f ull data in a case.
O But, again, were in essence,You,
of the main distributi-onreal-locating a certain portrono25
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CSB Reporting
(208 ) 890-5198
ERDWURM (X)
Staff
lines back to the industrial- customers and away from the
residential customers; woul-d that be a correct general
statement of your testimony?
A That's correct, but it was done for the
purpose of comi-ng up with a lower bound for the
resldential customer charge. When I made a
recommendation, I wanted to be able to say that, for
instance, I
to be able
was an upper
than what I
reconrmended a $5. 50 customer charge, I
which Itothat that $5.50 charge,
would
from an impact perspective, was
have calculated with the resul-t
say
bound
wanted
thought
less
l_n
Exhibit ll2.
O But would you agree that in this exercise,
you were attempting to allocate fixed costs that you
determined were appropriate for residential customers and
al-locate those fixed costs in some fashion to a customer
charge or did that concept have anything to do with how
you came up with j-t?
A I excluded any allocation of mains. I
think that's what you're
O That's what I'm getting at.
A Right.
O Okay, you excl-uded allocation of mai-n,
okay.
A But it wasn't the lion's share of the25
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CSB Reporting(208) 890-s198
ERDWURM (X)
Staff
difference.
O So with
calculations, did you
respect to
look at any
ca-l-cul-ations or were
the rest of your
residentlal load data
you able to do thisto make your
without load
A
the type of
data?
As I saj-d, it was a l-ower bound. It's not
number that I would have recommended as a
standal-one recommendation. It was a number that was used
to ensure that my recommended 5.50 was no higher than
what I would put as a
O Okay;
Iower bound. If
lower bound.
so you were
you were to
the math you
j ust
did,
establ-ishing a
a number
basically
recommend
based on kind of woul-d you have a
number for that?
A The lower bound?
0 Not the lower we already have your
l-ower bound. You said that you're simply attempting to
establish a l-ower bound or did I miss something?
A Yeah, I establ-j-shed a lower bound, but I
don't have an estimate for what an accurate charge would
be. It would be higher than the lower bound.
O It would be higher than your 6.50;
correct?
It would be higher than the 6.50
But maybe not as high as Ms. Bl-attner' s
A
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CSB Reporting
(208 ) 890-s198
ERDWURM (X)
Staff
L3 .1 L?
A Exactly.
O So that's essentially the range of
potential monthly a monthly fixed charge that
generally reflects fixed costs with the exclusj-on of the
main, the main costs being afl-ocated to residential?
A Well-, it doesn't col-l-ect al-1 fixed costs,
because in residential rates,
sel-dom -- I've neve.r
residential gas rates
always
residential gas rate. Residential
company I've seen col-l-ect some of
the volumetric pj-ece; otherwise,
would be much higher.
O Okay; so Mr. Lobb
references $5.50 as the Staff's
seen a demand charge in a
in any
cosLs through
gas rates
the fixed
the customer charge
in his testimony
recommendation for a
You're familiar with that testimony?monthly charge.
A
O So you'd
your lower bound, your
recommendation
say that recommendation is below
lower band?
Yes.
A That recoflrmendation matches
on what the customer charge
bound calcul-ation was just
my
woul-d be.
to ensure that
exceed that
Again, my
I didn't
6. 50.
l-ower
that my recommendation didn't
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CSB Reporting
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ERDWURM (X)
Staff
A The 5.50 customer charge recommendation
was tempered by the gradualism concept where werre going
from a charge of, a weighted average charge of,3.83 per
month up to a 5.50, which is around a 42 percent
increase, and I fel-t l-ike in a single rate case that was
a reasonable step. If I were a witness in a future case,
I may well come up with a hlgher recommendation, but in
this case, I limited the amount of charge to 5.50, even
though I perhaps coul-d have justified in a future case a
higher charge.
O So as far as
there's the cost of service
the record in this
study the Company
be, it calcul-ates
case,
did, as
a monthly
$10.00 a
flawed as it may
charge of $13.71,
month charge for
or may not
yet the Company
residential RS-1;
recommends a
is that correct?
A Yes, you tempered your recoflrmendatj-on,
yes
O Okay; so and when you came out with a
also tempered, Staff tempered,
fair?
doll-ar recommendation,
theirs, too; woufd that
a
A That's correct.
O Okay, and Mr. Lobb also says that going to
well-, teII me first of aII, for residential
customers, what is the current fixed charge and I
understand it's seasonal; correct?
you
be
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A Wel-l, when you take the weighted
average l-et me go back to my --
O fsn't it 3.50?
A I think you're thinking about just a
second. It's $2.50 from April through November, which 1s
eight months, and it's $6.50 from December through March,
which is four monthsr so the wei-ghted average charge,
that's the easier one to talk about, is $3.83 on
average.
O Is the weighting by months or is it by
therms?
A You woul-dn't weight a customer charge by
therms. You'd weight it by months, because have
have eight months at
you
2.50eight
months
months at you
so when
go divide
another way to
o
going to a 5.50 a month mit j-gates
cost collection mechanism. Were
testimony?
A
have l-ess of a
have a higher
and four
you do that calcul-ation and you
says that
fixed
at 6.50,
by L2,you get 3.83. I couldn't think of
do that calcul-ation.
So Mr. Lobb in his testimony, he
the need for a
O
you famil-iar with that
I'm famil-iar with that testimony, yes.
But to the extent that you weight you
fixed monthly charge, you wou1d in fact
volumetrj-c charge,' correct?25
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Staff
A
.r
Thatrs correct.
And if the if either of these two
in place this last winter, either a
charge or a fixed cost collection
mechanisms were
higher monthly
mechanism, it woul-d be logical to conclude that the
been paying less on a vol-umetriccustomers would have
basis in a col-der than normal winter?
A Well , if it's a colder than norma1 winter,
so what you say makes sense.
MR. WILLIAMS: Okay. Madam Chair, I have
no further questions.
COMMISSIONER RAPER: Thank you. Mr.
Stokes
CROSS_EXAMINAT]ON
BY MR. STOKES
0 Good afternoon.
A
U
Good afternoon.
What is the maximum dail-y therm quantity
charge?
A It's the customer nominates what it
thinks the maximum daily
month, the maximum that
gas throughput wilf be during a
during the
to
it wilf incur any tj-me
year, and thatrs what the Company stands ready25
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ERDWURM (X)
Staff
provide.
customer
recommended
You take that quantity thatrs
and you multiply the
$0.30 a therm and
nomj-nated by the
the Companycustomer
I recommended $0.20 a therm
and that gives you the charge associated with that
number. Itrs a type of demand charge. A l-ot of
utilities or pipelines woul-d cal-l it more of a
reservation charge, because it's based on a nomination
rather than an actual- amount, but I think it's a
reasonabl-e demand charge.
I
A
nY.
A
because it's
o
imposition of
A
witnesses
This is for large customers; right?
Large customers only --
Okay.
excl-uding the T-3 doesn't have it,
i-nterruptlbl-e .
Right, and you said you support the
this type of charge on T-4 customers?
AbsoluteJ-y. Every witness I don't know
argued that there should be a 1ot of theany
1-.t
only --
demand
demand
type of
the main way you
There are
but this
orT the T-4 rate is based on volumetric, so the
woul-d collect it would be a
different ways you could do
is a reasonable demand charge.
these
charge.
charges,
n
charges
A
haveSo why is it good policy to
for large customers?
Because the Company has to stand ready too25
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Staff
supply whatever the peak use of a large
so the costs are more driven by the peak
customer as opposed to the vo1ume of gas
through the l-lner so I prefer to have at
rates recovered sometimes more than half
customers are paying their
because they
share of the
charge. In my case, because there's a transition,
there's gradualism that we have to be concerned about
here. My $0.20 charge works out to about 28 percent
coll-ected through demand, but I would be willing if I
were a witness in a future case, T wouldn't see anything
wrong with having maybe 50 or 60 percent collected
through demand charges.
O And is the reason why these separate
charges are appropriate is
customer is, and
demand of the
that goes
l-east industrial-
by a demand
ensure that the
fixed costs?
A Exactly. You don't want somebody to put a
big demand on the system one duy, this woul-d be an
extreme case, one day in a year and then never use any
gas the other 364 days, because then that wdy, the person
basically if you have a totally volumetric recovery Iike
what exists now, you basically get customers avoiding
their what they should pay as part of what they're
creating for the system cost.
O So for low foad factor customers in T-4
right now, they are shifting the fixed costs to the high25
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ERDWURM (X)
Staff
load f actor customers; woul-d that be
A Right now, yes, that woufd be the case,
because it's volumetric right
what
now.
O Okay;
schedule T-4 if you
SO l_s the impact on rate
charge? I mean, someimpose this
customers are going up?
A You know, since the case was fi1ed,
customers have renominated. They've had the open season
the bestwhere they
i-nf ormation
can renominate the MDFQs and
that I have is what I -- what the Company
answered back in my production request 799 where they
of how much what the impacts would be ongave details
speci fic
group of
customers and the range was very wide in the T-4
customers.
O But for the customers who are getting a
just being
Isn't that
larger
asked
bill impact
their
in T-4, aren't they rea11y
share of the fixed cost?to pay
rateswhy the are goj-ng up?
Well-, actually, that's true,
MR. STOKES: Okay, thank you.
A yes.
I have
nothing further.
COMMISSIONER RAPER: Thank you, Mr.
Stokes. Mr. Purdy.
MR. PURDY: I have no questJ-ons.
Thanks.25
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Staff
COMMISSIONER RAPER: Mr. Richardson.
MR. RICHARDSON: No questions, Madam
Chair.
COMMISSIONER RAPER: Mr. Otto?
MR. OTTO: Yes, I do have some questions,
Madam Chair.
CROSS-EXAM]NATION
BY MR. OTTO:
o
A
\2
HeI1o, Mr.
HeIl-o.
I'm going
Erdwurm.
to ask you
charge
just a couple of
and then frm alsoquestions about the
going to go into the
customer charge.
A Okay.
customer
GS cl-ass, but we'l-I start with the
O It appears through your testimony and also
your
set
conversation here with Mr. Williams that when you
the recommended customer charge for the residential
class that you
math-based and
is that fair?
A
the ideas, yes.
considered a range of issues and some were
some were policy-based, l-ike gradualism;
That's fair. That's one way to split up
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O Okay, and in your experience, is this
blend of both math and policy a conrmon practice for
commissions when setting rates?
A It is.
O Thank you, and then for the components
that you did include in the customer charge, dfr I right
in understanding that you included things that you could
attribute to a specifj-c customer and attempted to not
incl-ude things that were more difficul-t to attribute to a
specific customer?
A That's true. I inc1uded metering, meter
reading,
billing
and the service l-ine
billing, some customer service expenses, and
and collectj-ons, billing and collection
Those are
costs,
thethat goes to it.
normally include in a customerthings that
charge. I
industry
and f've
testified
GS class now
block.
I would
wouldn't include mains, and I've worked in the
for 35 years
recommended the same approach in every case f've
l_n.
O Okay, thank you. f want to move into the
both for commissions and utilities
Okay.
and the Company has proposed a fourth
A That's correct.
A
o
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Staff
t2 of your
wrote the
penmanship
confirmed
I'm right.
Company' s
average
relative
per therm basis. Do
O And youfve recommended that, okay; so page
direct testimony one second, please- I
wrong number down oh sorry, l_ine 71, poor
on my part, it says that Staff has
I apologize, I'm off track here. Oh, Do,
Okay, Staff has confirmed that on average the
are less
you see that in
larger general service customers
costly to serve on a
your testimony?
A Isee
a Okay;
confirm this when you
that, yeS.
so the question is how
had -- when the Staff
did you
has questlons
answering the question
at the peak month usage
something thousand
in the GS c1ass, and I
factor based on the
about that cost of servi-ce study?
question.
taklng
A Okay, good I can get an
of costs by this may not be
doing a cost of service study, but it is
allocating or for
approxi-mation
sufficient for
sufficient for
that I addressed here. I looked
for, I think there was, like, 30
customers, however many there are
calculated kind of a type of load
demand, which was the average over the year
to the peak month, okay, and then I did a
correlation analysis that l-ooked at the rel-ationship
between l-oad factor and -- looked at the relationshipo25
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Staff
between load factor and the size of the customer and
there were some exceptions, but typically, larger
customers had higher load factors. Larger customers had
higher load factors and that means that they are cheaper
to serve given that the majority of the costs on the
system are fixed, okay, and by the way, the Company did a
similar analysis, but as a confirmation of t.he analysis,
I did different breakdowns.
I looked at it from kind of different
stratifications of the general service class, and I was
actually concerned about a declining block rate in the
fourth tier, but my calcul-ations confirmed what the
Company had said in their testimony.
O What were your concerns about a declining
bl-ock in the fourth tier?
A We11, I had concerns about declinlng block
in general, because I think that you need to have a good
reason to have a rate that when the usage charge, the
cost per therm increases or decreases, decreases as you
use more and so it wasn't going to be a defaul-t where
if f don't know anything about the cost basis of the
class, I might want to have a flat rate or maybe an
inclining block rate, which would then encourage
conservatlon, but the resufts
strong that it was cl-ear that,
of the analysis were so
clear to me that, actually25
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ERDWURM (X)
Staff
the Company was justified in making this a declining
a great extent before I wentbIock, so I analyzed that
with the declining block,
default.
to
had mentloned in
in that analysis,
the class?
because that's certainl-y not my
O You the question the
you found some
Right.
Could you just briefly kind of provide
answer before that
exceptions within
A
a
example?
be some
say thls
incurred,
were some
better.
there are going to be some
Ioad factor, but you never
schedu1e you're working on,
perfectly fits the cost of
You're never going to find
large customers that are l-ow
regardless of what rate
you never get a rate that
everybody in the class.
a rate design where you can
exactly as they were
some exceptions. There
the who1e, on average, it's
better reflects costs to
an
A WeII, just simply stated, there's going to
small customers that are high low factor and
rate asslgns costs
so yeah, there were
exceptions, but on
It's more fair. It
have a declining block rate
inverted bl-ock rate.
O Thank you for
than a flat rate or an
that. Is
understanding that the Company proposed
it your
a fourth block 1n25
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this GS class to address a smal-l- set of users that have a
very large that use much more gas than most other
customers in that GS block?
A That's true.
O And I recall- from
level-s of consumption were
industrial- user level-; i-s
the testimony that the
to more of an
that your recol-lection?
A Well, there's going to have to be some
you know, sometimes when you get to those threshol-ds
where you go from general
there's going to be those situations, so they're
would be
closer
service size to industrial
slze I
close to that threshol-d between when a customer
general servi-ce and be i-ndustrial, and what the
Company one of the Companyrs justifications was it
al-lows for a reasonable transitlon between the rate
schedules, and by the way, there's stil-I, even with the
fourth block, there's stil-l- going to be, the general
service is still going to be, higher even for that big
customer than when they hlt industrial, but it's usually
a good it shows well thought-out rates
good transitions between customer cl-asses
hit a transition where you go from the
when you have
and
service and then you use a little bit
industrial. You don't want
largest
more and
you don't
general
you hit
change
an myright there. ft's nice to
that to be a huge
have transitions,25
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A Yes,
should be sp1it, but
shoul-d tal-k about.
opinion, and that accomplishes it.
O Okay. Now, I want to just turn to page 13
of your testimony
A Okay
O and you state starting on lines 6 and 1
that the Company should study whether general service
should be divided into two or more cl-asses. Do you stand
by that testimony?
I stand by it.
I think it's somethj-ng that we
I'm hoping that we have a Mike
Morrison recommended a rate design meeting or rate design
conference or whatever we want to cal-l- this and I think
it's one of the things we shoul-d tal-k about, because
general service is a very diverse set of customers, and
that was one of the one of the things that I think we
could get have some i-mprovement in rate design.
MR. OTTO: One second, please.
(Pause in proceedings. )
O BY MR. OTTO: Do you think that that
consideration could be done rel-atively quickly? Do you
think we have the information available now to look at
whether separating the class would make sense?
A f don't know. That woul-d be better
addressed to Dr. Morrison.
Irm not sure i-t
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Staff
O Eair enough. Okay, f'm going ask it, so
instead of adopting a fourth block now, woul-dn't it be a
good practice
those results,
class and come
designed rate
A the fourthNo, I
because,
okay. I
to adopt
affects
to resol-ve the cost of service study, use
l-ook at cl-ass the composition of that
back in the future with a more accurately
structure for the general service class?
think it's good
block now,
customers,
one of your
transition
woul-d adopt
nu
cl-ass, it' s
90 percent
sound right
A
depends on
and unless
questions from
question, two
the consumption
you?
I don't belleve
constitutes maybe
cfass; does that
woul-d be it
with very high use,
of me, I couldnrt say
first of all, it very few
think even you had mentioned that in
questions and
between general
it does provide for a nicer
service and industrial, so I
the fourth block now.
Those very high use customers 1n the GS
my
of
to
recoll-ection that that
for the
that
where you draw the fine
I had the data in front
what percent of customers use what percent of therms.
MR. OTTO: Faj-r enough. That's all- the
questions I have.
COMMISSIONER RAPER: Are there any
the Commissioners? I have one quick
parts.o 25
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ERDWURM (Com)
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THE WITNESS: Okay.
EXAMINATION
BY COMMISSIONER RAPER
O It be will- be fast. With regard to some
of the conversation you had with Mr. Stokes with
Northwest Industrial Gas Users and some of the cross that
Mr. Richardson has presented with regard to his client,
Mr. Gorman yesterday testifj-ed that if Amalgamated didn't
receive the fuII move to the proposa1 by the Company now
that Mr. Gorman believed that any mitigation of those
costs should be spread not just across j-ndustrial
customers, but across all customers and afl- rate classes
because of the benefit of Amalgamated to the system. Do
you agree with that statement by Mr. Gorman and, if so,
why or why not?
A Yourre probably not going to like my
answer here,
te11 you that
carve-out, so
we didn't do
think if you
but I could argue
be in
it both ways, but I will
I would not favor of a separate
irrelevant ifthat wou1d make the question
the separate carve-out at all, because I
do it for one customer, there's going to be
a 1ot of other customers that are going to want
something, afso, okay, and I just never, in my experj-ence25
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ERDWURM (ReDi)
Staff
f've never seen a I personally have never seen a
situation where after the fact the customers or the
companies or commissions were rea1ly that happy that they
had a separate carve-out for certain customers, but the
arguments for spreading it to all customers is
Amalgamated is an important customer on the system.
You know, it's very important for the
State of Idaho as to the economy which benefits everyone,
okay, so I coul-d make an argument on that that
spreading if you were going to do it for spreading it
to al-l- the classes; however, I could al-so make an
argument sorry, I coul-d al-so make an argument that
maybe it should just go to the industrials or maybe the
general service and industrials, but there's no perfect
answer on that one, but like I said, I woul-d encourage
you not to do a separate carve-out.
COMMISSIONER RAPER: Thank you. Is there
any redirect by Mr. Klein?
MR. KLEIN: Yes, thank you.
REDTRECT EXAMINATION
BY MR. KLEIN:
Mr. Lobb's
O Mr. Erdwurm, the Company asked you about
testimony regarding the increase in the25
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ERDWURM (ReDi)
Staff
customer charge and the need for an FCCM. Do you recal-I
that ?
A I reca11 that, right.
O So does an increase in the customer charge
decrease the fixed costs recovered in the commodity
rate ?
A Does an increase 1n the customer charge,
increase in the customer
recovered in a commodity
MR. KLEIN:
charge decrease the amount
rate, yes, it does.
That's a1l- I have.
COMMISSIONER RAPER: Okay, thank you for
your testimony, Mr. Erdwurm.
THE WITNESS: Thank you.
COMMISSIONER RAPER: You are dismissed.
(The witness l-eft the stand. )
COMMISSIONER RAPER: Staff can present its
next witness.
MR. COSTELLO: Thank you. Staff ca11s
Stacey Donohue to the stand.
25
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DONOHUE (Di)
Staff
STACEY DONOHUE,
produced as a witness at the j-nstance of the Staff,
having been first duly sworn to tel-f the truth, the whol-e
truth, and nothing but the truth, was examined and
testified as follows:
DIRECT EXAMINAT]ON
BY MR. COSTELLO:
0 Good afternoon.
A Good afternoon.
O Please state your full- name and spell your
l-ast name for the record
A Stacey Donohue, D-o-n-o-h-u-e.
O Thank you, and by whom are you employed
and in what capacity?
A I'm employed by the Idaho Public Utilities
Commission and I'm a utilities analyst.
O Thank you. Are you the same Stacey
Donohue who prefil-ed direct testimony, 22 pages of direct
testimony, in this case on December 15th, 20L6?
A f am.
0 Do you have any changes to that
testlmony?
A I do have one correction. On page 6, lineo25
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DONOHUE (Di)
Staff
10, .393 should be .376
O Thank you. Do you have any other
changes?
A No, that's all.
O So if I were to ask you the questions set
forth in your testimony, woul-d your answers be the same
today --
They wouId.
subject to that change?
MR. COSTELLO: With that, I
A
\J
Stacy Donohuers prefiled
across the record, and I
cros s -examinat i-on .
direct testimony
woul-d tender the
would ask that
be spread
witness for
COMMISSIONER RAPER: Without objection,
Ms. Donohue's direct testimony will be spread upon the
record as if read.
(The fol-lowing prefiled direct testimony
of Ms. Stacey Donohue is spread upon the record.)
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CASE NO. INT-G-1.6_02
L2/L6/76
(Di) 1
STAFF
0. PLEASE state your name and business address for
the record.
A. My name 1s Stacey Donohue.My business address
Idaho.
in what capacity?
is 412 West Washington Street, Boise,
O. By whom are you employed and
A. I am employed by the Idaho Public Util-ities
Commission as a Utilities Analyst in the Utilities
Division.
O. What is your
background?
A. I received a
education, experience and
B .A. in History from James Madison
Masterr s of Publ-ic
from Boise State University in
the Commlssion Staff in 2010, I
University in
Administration
20!0. Prior to
7999 and a
(M. P.A. )
j olning
was employed as an Energy Specialist at the fdaho Office
of Energy Resources where my main responsibillty was
managing the administration of stimulus-funded energy
efficiency and renewable projects. While completing my
M. P.A., f was hired by the Boise State University
Department of Publ-j-c PoIlcy and Administration to conduct
survey research and author a report on customer service
and state-wide interagency relatlonships for the Idaho
Transportation Department (ITD), which was presented to
the ITD Board. I have attended the New Mexico State25
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CASE NO. INT-G_I6_02
1.2/76/76
DONOHUE, S. (Di) 1a
STAFF
University
Practi-ca1
Center for Public Utilities' course in
Training, the National- Regulatory
course on "Electricity's CurrentResearch
Regulatory
Institute' s
Challenges, "
Conferences,
International Bnergy Program Evaluation
and the
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Association of Energy Services Professional Annual
Conference, as wel-l- as dozens of web trainings related to
utilj-ty issues. f serve on Idaho Powerf s Energy
Efficiency Advisory Group, Avista's Energy Efficiency
Advlsory Committee, the Regional Technical Forumrs PoIicy
Advisory Committee, the Northwest Energy Efflciency
Alliance's Cost-Effectiveness Committee, and Idaho
Power's fntegrated Resource Plannlng Advisory Councll. I
have filed comments representing Staff's position on
el-ectric and gas demand-side management (DSM) program
design and prudency, 1ow-income weatherization programs,
demand response, fixed cost-adjustment mechanism design
and associated recovery, integrated resource p1ans, and
most recently, community so1ar. In addition, f have
filed testimony on DSM issues in two general rate cases.
In 20L5, I was recognized by the Northwest Energy
Coal-ition wit.h its 4 Under 40 leadership award for my
work in clean energy.
0. What issues wil-l your testimony address?
A. My testimony wil-l address fntermountain Gas
Company's DSM proposal. I will focus on four particular
aspects of the proposal: 1) the Company's avoided cost
cal-cul-ation and use of the Utility Cost Test (UCT); 21
the proposed measures, cost-effectj-veness calcul-ations,
and incentives for efficiency and fuel--switching
CASE NO. INT-G-76_02
t2/16/76
(Di) 2
STAFF
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measures; 3) concerns with the Conservation Potential
Assessment (CPA)
CASE NO. INT-G-16_02
72/76/76
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CASE NO. INT-G_1.6_02
12/t6/76
DONOHUE, S. (Di) 3
STAEF
analysis, findings,
recommendations for
year projections; and 4)
the Company's portfolio with
Tier 1
should be updated usr_ng a
Weighted
year
the Tier 2
the
and five
aligning
standard Idaho Commission DSM expectations.
O. Please summarize your testimony.
A. I maintain that the Company's avoided cost
calculation and use of the UCT are reasonable. I also
believe that the cost-effectiveness calcul-ations,
energy efficiencysources, and assumptions for
rebates are reasonable, but
discount rate that reflects Company's real
rather than 20Average Cost of Capital (WACC)
mortgage rates. However, I recommend removr_ng
exceptdlrect use incentives for al-1 measures for Energy
provideSTAR Certified Homes, because the Company did not
sufficient evidence quantifying the benefit to customers.
In additionr hy
the analysis and
industry norms,
review of the Company's CPA found that
methodology are not consistent with
which explains the very smal1 amount of
forecasted savi-ngs for the first year and for every year
year ramp-up period. Lastly, I propose a
recommendations that would a11gn the Company's
in the five
handful- of
portfol-io with
expectations.
O. How
standard Idaho Commission DSM
wiIl your testimony be organized?
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CASE NO. INT_G-I6_02
L2/L6/16
(Di) 4
STAEF
A. I will first describe the Company's proposed
DSM portfolio. My testimony will then be subdivided
under the foll-owing headings:
1) Avoided Cost and the UCT, p. 5
2) Proposed Measures, p. B
3) CPA Ana1ysis, p. 74
4) Idaho Commission's Standard DSM
Expectations, p
Please explain the
20
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proposal.
A.
Company's DSM portfolio
The portfolio consists of seven measures and
the Company offers two tiers of incentives for each
measure. Tier 1 is for "Energy Efficiency Rebates. '' Tier
2 ts for "Direct Use Rebatesr " al-so commonly known as
fuel- conversions. The only exception to the two tier
structure is the Energy STAR Certifled Home measure - it
is only availabl-e as a direct use measure.
The measures in both t.iers are identical; the
only difference is the circumstance in which the measures
are installed. Tier 1 rebates apply when a measure
replaces an existing natural gas appliance (i.e. a
naturaf gas furnace) . Tier 2 rebates apply when a measure
is installed during a fuel- conversion (i.e. when a
customer switches from el-ectric to natural gas space) .
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CASE NO. INT-G_16_02
t2/L6/L6 DONOHUE, S. (Di) 5
STAEF
As illustrated in Table L, rebates for fuel
conversions are higher than energy efficiency rebates.
Table 1: Intermountain Gas's Proposed DSM Portfolio
ss 1 page 12
Avoided Cost and the UCf
a. Pl-ease explaln your review of
avoided cost. calculation and the use of
A. The Company proposes to use a
$0.53182 that includes acost target of
commodity cost and the fixed cost of gas, which the
Company represents are pipeline and storage costs at
$0.20418. Staff was able to closely replicate this value
and confirmed that it aligns with the avoided cost
methodol-ogy approved by the Commission in Order Nos.
33444 and 33464.
I also agree with the Company's use of the UCT.
The UCT is a test. that measures the cost-effectiveness of
DSM measures. As Company Wj_tness Spector correctly
states: "Idaho regulators now Iaccept] the Utility Cost
a
the Company's
the UCT.
levelized avoided
$0 .327 64
Tier 2Ti.er L
Measure EE
Rebate
Direct,
Use
Rebate
Energy STAR Certified Homes nla sL,20095? AFUE Natural Gas Furnace $3s0 $s00
$1, 200Hi-EF Combinat,ion Radiant Heat $1, 000
808 AFUE Natural Gas Fireplace Insert $200 92s0
$r-0 0 $2 00702 FE Natural Gas Fireplace
.67 Natural Gas Water Heat,er $s0 $7s.91 EF Condensing Tankless Water Heater $ls0 9200
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Test (UCT) . " Spector Direct at 1 . Staff has long
maintained that the UCT
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CASE NO. INT-G-!6_02
t2/76/1.6
DONOHUE, S. (Di) 5a
STAFF
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assesses cost-effectiveness more accurately and
transparently than the other cost-effectj-veness tests do,
because the UCT is limited to the costs and benefits that
accrue to the utility, and hence, ratepayers. The
Commission has all-owed utilities to use the UCT as the
threshold for determj-ning cost-effectiveness. See Order
No. 33365.
All of the energy efficiency measures (incented
at the Tier 1 l-eve.l-) are antlcipated to be UCT cost-
effective with levelized costs per therm ranging from
$0.376 to $0.507, for an average of $0.379. About hal-f
of the dlrect rebate measures (incented at the Tier 2
Ievel) are anticlpated to be cost-effectj-ve under the
UCT, with l-evellzed costs ranging from $0.424 to $0.610.
The Company anticipates that combj-ned Tler 2 rebate
offerings al-so wil-1 be UCT cost-effectj-ve, with an
average l-evelized cost of $0.5214.
O. Although you generally agree with the Company's
Tier 1 energy efficiency cost-effectiveness assumptions
and methodology, are there any aspects of the methodology
with which you disagree?
A. Yes. Although the Company's cost-effectiveness
assumptions for Tier l- rebates are reasonable, I disagree
with the Company's use of the 20 year mortgage rate as a
discount rate for residential measures under the UCT.
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CASE NO. TNT_G_76_02
t2/1.6/76
(Di) 6
STAFF
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CASE NO. INT_G-76_02
L2/L6/16
DONOHUE, S. (Di) 1
STAEE
O. Please explain why the 20 year mortgage rate is
not appropriate for the UCT, and recommend an
al-ternative.
A. It is commonly accepted to use a 3-5% discount
rate for another cost-effectiveness test, the Total-
Resource Cost Test (TRC). Eurther, I acknowledge the
credible argument made by Company Witness Spector around
a very l-ow discount rate in her publication "Natural
Selection: the Evolution of DSM Vafuation and the Use of
the UCT" that was provided 1n response to Staff
Production Request No. 180. Nevertheless, it remains
standard practice to use the WACC for the UCT. fn
addition, the Company's response to Staff's Production
Request No. L92 indicates that Nexant, the Company's DSM
consultant, applied the WACC to the UCT when it developed
Cascade Natural Gas's DSM portfol-lo. In discussions with
Staff, Intermountain Gas frequently referenced its
al-lgnment with
developing its
Cascade Natural- Gas's methodology in
DSM
In this
proposal.
case, Staff
rate for the
testimony.
1 .LZ would
Company in Staff
It is important to
proposes a 1.72 discount
Witness Carl-ock' s
note that if approved,
discount rate.be the Companyrs nominal
However, I recommend converting this to the "reaf"
discount rate within the cost-effectiveness analysis in25
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order to account for the effects of inflation. This
aligns with the methods currently used
Power and Avista. Adjusting the 1.lZ
by both Idaho
nominal
CASE NO. ]NT-G_16-02
L2/76/76
DONOHUE, S. (Di) 1a
STAEF
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CASE NO. INT_G_16_02
L2/L6/16
(Di) B
STAEF
discount rate to account f or inf l-ation at 2.6eo results in
a real discount rate of 3.54%.
O. Does the Company's DSM portfolio remain
discount rate?
Company, so it increases
cost-effectiveness.
recommended discount rate is
discount rate proposed by the
the portfolio's
Proposed Measures
O. Do you support the Companyrs proposal to incent
the Tier 1 energy efficiency measures included in its DSM
proposal ?
cost-effective using a
A. Yes. Staff's
slightly lower than the
A. Yes, I support
Tier 1 energy efficiency
to more efficient natural
O. Why do you support
A. I reviewed each of
assumptions the Company used
different
the Companyrs proposal to offer
rebates to customers who upgrade
gas equipment.
the Company's proposal?
the proposed measures, the
in its cost-effectiveness
of
calculations, the sources for those assumptj-ons, the
cost-effectiveness methodology, and the results of the
calculations. These assumptions generally look
reasonable, but it is important to understand there is
l-ess data, and therefore less consensus, on the amount
natural- gas savings per measure than for electric
efflciency measures. However, Intermountain Gas haso25
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supplied savings estimates from Cascade Natural Gas,
KEMA Laboratories, theNexant,
CASE NO. INT_G-16_02
72/L6/16
DONOHUE, S. (Di) 8a
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CASE NO. INT_G-16-02
t2/16/16
DONOHUE, S. (Di) 9
STAFF
Consortium for Energy Efficiency, the U.S. Department of
Energy, and a variety of national gas utilities which
combined provide a reasonabl-e basis from which to faunch
a portfolio. As is standard practice for electric DSM
program, I recommend that Intermountain Gas's programs be
subjected to impact and process evaluatj-ons to verify
these savings and ensure that DSM is a cost-effecti-ve
investment for customers.
0. Do you support the Company's proposal to incent
the Tier 2 direct use measures included in its DSM
proposal ?
A. No, f do not support incentives for Tier 2
direct use measures. f am not opposed to incentives for
fuel conversions, but util-ities must be able to quantify
the vafue of the resource to its customers in order to
use customer funds to acqulre that resource. Company
witness Kirschner's testimony provides a high-1eve1
explanation regarding the benefits of the direct use of
natural gas to customers and the envj-ronment, but the
cost-effectiveness analysis provided by Company witness
Spector did not quantify any of those benefits as they
relate to fntermountain Gas's customers.
O.
Company
Pl-ease explain the cost.-ef fect j-venes s analysis
witness Spector provided in her testimony and
accompanyang
switching.
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A. The Company used an interesting assumption
regarding conversions: instead of assuming that the
efficient gas furnace installed during the conversion
replaces electric/propane/wood heat, the Company assumed
that the efficient gas furnace would replace an
inefficient gas furnace that the customer would have
installed during the conversion without the incentive.
This means that Tier 1 (energy efficiency) measures and
Tier 2 (direct use measures) have exactly the same amount
of energy savings in the cost-effectiveness analysis.
See Spector Direct, Exhibit 26. In fact, al-l assumptions
in the cost-effectiveness calculations for Tler 1 and
Tier 2 measures are identlcal- except for the increased
j-ncentives for Tier 2. Even though the Company's cost-
effectiveness calcul-ations show the same amount of
savings in both circumstances, the Company is willing to
pay a greater incentive when the measure is part of a
fuel- conversion.
a. fs this consistent with how other fdaho
utifities have valued fuel conversi-ons in
cost-ef f ecti-veness calculations ?
A. No. Avista also offers fuel conversions, but
has a very different approach. Because electrj-c-to-gas
fuel conversions decrease electric consumption, Avista
considers fuel- conversions to be an electric efficiency
CASE NO. INT-G_76_02
L2/76/L6
DONOHUE, S. (Di) 10
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measure and calculates the cost-effectiveness of the
measure based on
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CASE NO. INT-G_16_02
72/76/76
DONOHUE, S. (Di) 10a
STAFF
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the avoided el-ectric consumption plus the increased gas
consumption.
In contrast, Intermountain Gas's
cost-effectiveness calculations ignore the reduction in
el-ectric /wood/propane use and the increased consumption
of natural gas that conversions generate. Instead, the
Company assumes that the customer was going to convert
anyway and is simply trying to ensure the conversi-on is
as efficient as possible. While that is a l-audabl-e goal,
j-t means that the resource the Company purchases with the
incentive is the efficient furnace or water heater, not
the conversion. Since the value of the resource for both
stand-afone efficiency measures and fuel conversions is
the efficiency of the new equipment, it is not reasonable
to provide a greater incentive for conversions.
O. Why is the Company providing a higher j-ncentive
for fuel swltching than for energy efficiency?
A. The Company maintains that the higher incentive
for direct use measures offsets the hlgher cost that
customers incur when they convert to natural gas water or
space heat. Company witness Spector attests that "A
higher incentive will be provided for el-ectric-to-gas
equipment upgrades in acknowl-edgment of the higher
up-front equipment costs and logistical costs of
conversion." Spector Direct at 19.
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CASE NO. INT-G-16_02
72/16/16
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CASE NO. INT*G_76_02
t2/1-6/1.6
DONOHUE, S. (Dr) 72
STAFF
you
forincentive conversions, whichpaying a higher
certainl-y have a
measures ?
A. It is a widely
offer higher j-ncentj-ves
O. On what basis do oppose Intermountain Gas
higher incremental- cost than efficiency
higher
higher
also be
accepted industry practice to
as necessary for measures with
incremental- costs. An i-ncentive to address the
incrementaf cost for fuel switching measures would
Intermountain Gas if it hadacceptable for
demonstrated cost-effectj-veness by accurately valuing the
resource deferred by the conversj-on (i.e. reduced
electric /wood/propane consumption plus increased na.tural
gas consumption). But since the Company only
demonstrated the cost-effectiveness of the efficiency
aspect of the measure, it is not reasonable to incent
anything beyond the incremental- cost of the efficiency
upgrade.
O. The Company has stated that it needs to acquire
65,000 therms in energy savings for j-ts DSM portfol-io to
be cost-effective. How will removing the j-ncentives for
fuel- conversions impact this acquisition goal? Eor
exampJ-e, if j-ncentives for hal-f of the measures are
removed, will- savings drop by half (to 32,500 therms) and
therefore no longer be cost-effective?
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therefore cost-effectiveness of the portfolio) should not
be adversefy affected by removing incentives for fuel
conversi-ons because
CASE NO. INT-G-L6_02
72/76/t6
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CASE NO. INT-G_76_02
72/76/16
DONOHUE, S. (Di) 13
STAFF
the savings associated with fuel conversions and
efficiency measures are exactly the same-the only
difference is the amount of the incentive payment.
Customers who are converting to natural gas will still
receive a rebate for instal-ling an energy efficient
appliance as part of the conversi-on, but under my
proposal they will receive the Tier 1 incentive amount
rather than the Tier 2 incentive amount.
It is possible that fewer people wil-l upgrade
to an efficient appliance without the higher incentive
when converting to gas. However, this potential
reduction in savings will likely be offset in the
cost-effectiveness calcul-ation by the reduction in
expenses from removing the higher Tier 2 incentive
payments.
O. fntermountain Gas already provides an incentive
to customers who convert to natural gas. How is that
different from the Company's proposal in this case?
A. The Company's current offering has some
simll-arities to its proposed Tier 2 rebates. The Company
currentfy offers incentj-ves to customers for installing
high efficiency natural gas equipment when they convert
to natural- gas. The current offering is reasonable
because incentive costs are not recovered in rates, but
instead are paid for
not subjected to the
by sharehol-ders and, therefore, are
Commission's approval for recovery.
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O. What is your recommendatlon regarding Tier 2:
Direct Use incentives?
A. Because it is not appropriate to value the
resource on an efficiency basis but pay the incentive
based on the cost of a conversion, f recommend that the
Company provide a Tier 1 rebate for each measure
regardless of whether it is installed in the context of a
fuel conversion or not.
The Company has categorized Energy STAR
Certifled Homes as a direct use measure rather than an
efficiency measure because it is new construction. But
because the Company has only proposed one rather than two
incentive amounts for this measure, t.he distinction is
not concerning. I recommend including the Energy STAR
Certified Homes incentive in the single, consolidated
Iist of incentives.
CPA Analysis
O. Let's turn now to your concerns about the
Company's CPA anal-ysis. To start, please explain what a
CPA is.
A. The National- Action Pfan for Energy Efficiency
(NAPEE) guide on potential studles states that a CPA - or
Conservation Potential Assessment is "a quantitative
analysis of the amount of energy savings that either
exists, is cost-effective, or could be reafized through
CASE NO. INT_G-16_02
72/t6/76
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the implementation of energy efficiency programs and
policies. "
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CASE NO. INT-G-L6_02
1,2/76/76
(Di) lLa
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See NAPEE 2001 at 2-1. CPAs are important because Idaho
utilities use them to determine the amount of energy
efficj-ency included as a resource in their Integrated
Resource P1ans.
O. Earl-ier, you stated you have some concerns with
the Companyrs CPA, analysi-s, findings, and five year
savings projectj-ons. Please explain your concerns.
A. I have two prlmary concerns wlth the CPA
conducted by Nexant for the Company: 1) the very limited
number of measures analyzed for savings potential; and 2)
the calculation used to estimate the portion of economic
potential that is achievable potential. These
shortcomi-ngs resul-t in a very l-ow fj-rst year achievabl-e
potential that remains l-ow in the five year projectj-on of
DSM savings.
O. Pl-ease elaborate.
A. Sure. My first concern is that the Company's
CPA only analyzed the savings potential of seven
residential measures that the Company already planned to
include in its DSM portfolio. This is the opposite
approach taken by most other CPA analyses. Usual1y, a
CPA analysis begins by identifying and anal-yzlng all
availabl-e measures in order to determlne the amount of
technical, economic, and achievabl-e energy effici-ency
potential- in the service terrltory. Eor electrj-c
CASE NO. INT_G_16_02
72/!6/L6
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CASE NO. INT-G-16_02
t2/16/76
(Di) 15a
STAFF
utilities, the technical potential
analyzing thousands of measures.
for
is cal-culated by
Fewer measures exist
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CASE NO. ]NT-G-76_02
L2/76/76
DONOHUE, S. (Di) 16
STAFF
natural- gas DSM, but for comparison, Avista's 2074 Idaho
natural gas CPA included one hundred measures across the
residential, commerci-al, and industriaf sectors.
Intermountain al-so opted not to analyze several
cornmon residential measures often incented by other gas
utilities. Examples of some common residential- measures
include replacing inefficient windows and showerheads,
adding attic and floor insulation, sealing HVAC ducting,
upgrading to programmable and/or smart thermostats,
conducting home energy evaluations and providing reports.
fn addltion to not analyzing these residential measures,
the Company decided not to analyze any commercial- or
industrial- energy efficiency measures.
The Company maintains that it did not conduct a
ful-l CPA because it preferred to begin its DSM efforts
with a limited group of residentia1 measures with which
it has direct experience.
of measures that leads to a
Beginning with a smal1. subset
more robust portfolio is not
there is a credibl-e ramp-up
other concerns about the CPA?
concern I have with the
an unreasonable approach
in subsequent years.
O. Do you have any
A. Yes. A second
if
Company's CPA is the calcufation used to get from
economic potential to achievable potentlal. After
identifying the technical potential, the second step ino25
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CASE NO. ]NT-G-L6_02
L2/L6/L5
DONOHUE, S. (Di) l1
STAEF
most CPAs is to calculate the economic potenti-al by
determining how much of the technical potential is
cost-effective after a utility's cost to incent and
adminj-ster the programs are included. The economic
potential is then further refined into the achievable
potentj-al, which refl-ects the amount of cost-effective
energy efficiency that customers will acquj-re, often
referred to as market uptake.
During discussions with Staff, Intermountain
explained that three levels of
identified based on differing
achievable potential were
level-s of incentives.
Including
consi stent industry standards because those costs
have been included as part of theshoul-d already
cost-effectiveness screening at the economic level.
However, the bigger problem is that the Company's
Response to Production Request No. 792 indicated that the
incentive costs, but not administratj-ve cosLs, were
already incl-uded in the calculation of economic
potential. But the Company's analysis showed a
significant decrease between technj-cal and economic
potential energy savings that does not appear to be
sufflciently explained if only administrative costs were
included, which could mean that incentive costs were
counted t.wice.
incentive costs at the achievable level is not
with
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CASE NO. INT-G-16_02
!2/16/16
DONOHUE, S. (Di) 1B
STAEF
O. You al-so mentioned concerns about the level of
savings projected by the CPA. Please explain those
concerns.
A. Sure. Regardless of the details of the
analysis, the Company's CPA methodology produced savj-ngs
targets that are extremeJ-y low. In the first year, the
Company only found 91,825 therms of achievabl-e savings,
which is a 962 reduction from the economic potential.
According to the Company, that is 0.04% of resldential-
safes (Spector, Exhibit 25) . Even after five years the
achievable target only amounts to 0.19U of residential-
sales.
target
70,500
gas CPA
savings
To put that in
is 230,000 therms
resi-dential customers. Avista's
context, Avista's 20L6 Idaho gas
of achievable savings from
20I4 Washington
found 215,980 therms of achievable first
from 141,000 residential customers. It
seem that fntermountain
year
would
97 ,825 therms from its
It's also
Gas could produce more than
300, 000 residential- customers.
important to note that the Company's
not based on the amount of1Sfirst year target
achievabfe energy
first year target
savings target of
as a percentage of
savings identified in the CPA. The
is actually based on a "programmatic"
65,000 therms, which means that savings
residential sal-es is lower than 0.04%.25
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The Company has explained that the 65,000
therms target is simply the minimum savings needed in
order for the portfolio to remain cost-effective. It
further explains that while it is commj-tted to acquiring
the achievabl-e target, it wanted to establish very
real-istic programmatic targets to ensure portfolio
viability in the early years.
f am not opposed to earIy, modest goals as the
Company learns how to implement a DSM portfolio, but it
is important for the Company to meaningfully accelerate
its acquisition into a more robust portfolio. In my
discussions with the Company personnel, they have stated
that this 1imited CPA was undertaken as a starting point
that would all-ow them to launch thelr DSM portfol-io
without undue expense or complj-cation. As such, they
believe the 3-5 year potential estimates understate the
savings they will actually be able to acqui-re and have
expressed a willingness to conduct a more complete CPA in
the future. I recoflImend that the Commlssion order the
Company to complete a CPA developed according to industry
best practices to inform and be lncluded with the
Company's 2019 Integrated Resource Pl-an.
O. Shou1d the Commission require the Company to
implement j-ts DSM proposal even if the Commission does
not approve the Companyrs request for the FCCM?
CASE NO. INT_G-16-02
72/76/76
DONOHUE, S. (Di) 19
STAEF
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CASE NO. INT_G_16_02
72/16/76
DONOHUE, S. (Dr) 20
STAFF
A. Yes. The Company's cost-effectj-veness analysis
shows that its proposal is less expensive than the
supply-side alternative. Therefore, the Company should
implement it as a least cost resource.
Idaho Commissionf s Standard DSM E:qlectations
0. Do you have any other reconimendations regarding
the Company's proposal?
A. Yes, I recommend that the Commission order the
Company to adopt standard Idaho Commissj-on DSM
requirements estabfished for the three large electric and
gas utilities. These are wel-l--established practices,
familiar to the Commission, Staff, and intervenors, and
incfude forming an energy efficiency advisory group
comprised of stakeholders, Lrade allj-es, and customers to
help guide the Company's i-mplementation of its DSM
portf olio. The Company shoul-d also f il-e an annual- DSM
report to document program performance,
cost-effectiveness, program implementation methods, and
expenditures. The Company's programs should be
periodi-calIy reviewed by third-party eval-uators to verify
savings and confirm that delivery strategies align with
industry best practices.
The energy efficiency advi-sory
also advise the Company on other standard
group should
including support for enhanced residential
expectations,
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codes, participation in market transformation efforts,
the
CASE NO. INT-G_16_02
t2/76/16
(Di) 20a
STAEE
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potential for a low income offering, and establishing a
tariff rider for funding all DSM programs, which the
Company discussed with Staff. The advisory group coul-d
al-so provide input on a more complete CPA as well- as
program implementation practices that would help the
Company ramp up to a more meaningful level- of DSM
acquisition in the coming years.
O. Please list all- of your reconrmendations in this
case.
A. I recommend that the Commi-ssi-on approve the
Company's proposed DSM portfolio with some important
changes.
Fj-rst, I recommend that the Company calcul-ate
the cost-effectiveness of its portfolio using the real
WACC as the discount rate.
Second, f recommend the Commission direct the
Company to incent al-I measures at the Tier 1 leve1 onJ-y,
with the exception of the Energy STAR Certified Homes
measure, which should receive the Tier 2 incentive.
Third, I recommend the Commission direct the
Company to conduct a CPA that meets or exceeds industry
standards in the context of i-ts 2019 IRP.
Fourth, I reconimend the Commission direct the
Company to align with standard Idaho Commission DSM
expectations, which include convening an energy
CASE NO. INT-G-16_02
72/76/76
DONOHUE, S. (Di) 2l
STAFF
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efficiency advisory group comprised of stakeholders.
This advisory group can help the Company consider a plan
for delivering an annual DSM report, independent
third-party evaluations, support for enhanced residential
building codes, participation in market transformation
efforts, a fow income offering, and the aforementioned
improved CPA.
0. Does this concl-ude your testimony in this
proceeding?
A. Yes, it does.
CASE NO. ]NT-G-76_02
72/76/76
DONOHUE, S. (Dr) 22
STAFF
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DONOHUE (X)
Staff
(The following proceedings were had in
open hearlng. )
COMMISSIONER RAPER: And does the Company
have any questions?
MR. WILLfAMS: Yes, Madam Chair, w€ do.
CROSS-EXAMINATION
BY MR. WILLIAMS:
Good afternoon, Ms. Donohue.I
A
oY
comes from page
Good afternoon.
conversl0ns
really have one question and it
your direct testimony towards the
in this question, we're talking
now and cost effectiveness and you
I just
10 of
l-ine 1Bbottom, and
about fuel
on
reference Avista offering fuel conversions, and I take 1t
in the Avista exampJ-e, you consider it more appropriate
and the reason that you consider it more appropriate is
that they are also calculating the avoided cost with
respect to electric efficiencies; is that a somewhat
reasonabl-e assumption or summation of what you said?
A Let me clarif y that a l-ittle bit.
Avi-sta's cal-cul-ation of the cost effectiveness of its
fuel conversions assumes that it is offsetting efectrical-
use, and so it j-ncludes a decrease in el-ectrico25
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DONOHUE (X)
Staff
consumption and the
and an increase in
thank you very much. Is
done within the context
avoided costs associated with that
natural gas consumption.
O Right, that's what I j-ntended to ask, so
of
electric and gas or is that
recommending Intermountain
that something thatrs easier
a utility that is both
something that you're
Gas al-so take into account?
A No, it's not something that's necessarily
easier for a dual- fuel utility to undertake, because the
savings are generally estimated by a third-party
independent consuftant and those consultants are capable
of estimating gas savings and electric savings, so no, it
doesn't make a difference.
a Okay; so if fntermountain took that
additional step
into
in analyzing electrical avoided costs and
taklng that account, wouJ-d that change your opinion
of their proposal?
A If they were to properly value the avoided
costs associated with fuef conversions and factor that
into their cost-effectiveness calculation and it was cost
effective, then that wou1d be 1ike1y to change my
recommendation.
O And the fact that up north you have one
utility
from one
that can have an incentive to switch customers
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DONOHUE (X)
Staff
competition, so
when in southern
that may in fact
to speak, there's no
Idaho we're
difference there,
about two utilities
same customer 1n
would affect the
be competlng
ta1 king
for the
this space,
analysis of
A
could be a
Avista does
people from electricity
as a l-east cost resource
that's not a factor that
this ?
I think that pardon me, I think that it
factor,' however, my understanding is that
not benefit financially from converting
to 9ds, so they are looking at it
decision.
O Rlght, they're not affected one way or the
other, it's a zero sum game for them?
A I don't think that that my
understandi-ng is that that
is that as a company, they
is not true. My
are harmed when
customers from el-ectric heat or water heat
natural- 9aS, and I'l-l- caveat that that's just my
understanding
t.hey move
and on to
understanding.
O
made whole on
A
harmed, which
made whole.
o
A
So you say they're harmed, then, are they
that harm?
I would to the extent that they are
I did not testify to, they are currently
And how are they made whole?
They have a decoupling mechanism for botho25
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Staff
gas and el-ectric.
MR. WILLIAMS: A1l- right, Madam Chair, I
have no further questions.
COMMISSIONER RAPER: Thank you,
Mr. Williams. Mr. Stokes.
MR. STOKES: We have nothing, Madam
Chair.
COMMISSIONER RAPER: And Mr. Purdy,
wanted to defer to Mr. Otto, is that correct, with
to this witness?
MR. PURDY:Yes, f
this up.
think that woul-d help
you
regard
come
reduce my cross and speed
COMMISSIONER RAPER:
back to Mr. Richardson, Mr. Otto, do
cross-exami-nati-on for this witness?
Thank you.
Mr. Otto, we'11
you have
CROSS-EXAMINATION
BY MR. OTTO
Good afternoon, Ms. Donohue.
Good afternoon.
There we go, got the microphone going,
in preparing your testimony, did youthat's exclting; so
revi-ew the avoided costs of gas and the cosL to acqui-re
savings from the Company's proposed suite of measures?
o
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CSB Reporting(208) B 90-s 198
DONOHUE (X)
Staff
A r dld.
O And are they cost effectj-ve now today?
to?Which measures are you referring
The Tier 1 measures, l-et ' s say.
The Tier 1 measures are cost effective-
O And j-sn't it true itr s Idaho State po11cy
for utilities to pursue al-1 cost-effective
conservation?
A That has been included in Commission
directives, yes.
O Okay, now, I want to turn to page 19 of
your testimony and you're there?
A Uh-huh.
O Okay, and it's lines 7 through 10 and you
say that you're not opposed to early, modest goals as
they learn how, and this is the important part, that it's
important for the Company to meaningfully accel-erate its
acquisitlon into a more robust portfolio. Do you see
that?
A I do.
O What do you mean by meanlngfully
accelerate ?
A I think by meaningfully accelerate, you
want to see a very significant ramp-up over the
A
o
A
that they inc1uded in their forecast, and they
years
incfuded ao25
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Staff
five-year
the fifth
the suite
year, itrs stil-1
of measures that
forecast for their DSM portfollo, and even in
don't expand
class. It's
O
testimony?
A
important for the
AI
O
offerings to
very small- even
Yesterday did
Were you here for
I was.
O Did you hear
very smal-I. They donf t expand
they plan to offer. They
the commercial and lndustrial
in the fifth year.
McGrath's
that ?
him use the phrase it's
wal-k before they run
you hear Mr
Company to
did.
consider a measure,
flow showerheads, is
more Iike crawling?
A I'I]-
O Based
reviewing other gas
j-t's hiqhly 1ike1y
with regards to DSM? So would you
water, like 1owlike, to conserve hot
that walking or running or is that
call that walking.
on your experience and expertise in
conservation programs, do you believe
additional cost-effective conservation
is avail-able in IGC' s service territory?
A Yes.
O Now and would that be today, out there
in the market today?
A I think that's a reasonabl-e assumptlon.
O Now, suppose the cost of gas increases oro25
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the cost to acqulre conservation decreases, would that
result in even more conservation measures being cost
e ffect ive ?
A YeS.
O So wouldnrt having an existing DSM program
consisting of currently cost-effective measures be a
solid foundation upon which to wal-k forward and add
additional measures?
A Yes.
O Okay, go to page 20, so fines one
second, please.
o
begins on line
(Pause in proceedings. )
BY MR. OTTO: Oh, sorry, page 19 and it
71. Are you there?
A Yes.
O And you're recommending the Commission
order the Company to complete
to industry best practices.
best practices to me?
a CPA developed according
Coul-d you describe those
A Sure. A robust and credible conservation
potential assessment usually begins with hiring a
consultant. They do a market characterization and
establish the technical potential availabl-e in a service
territory, where if theoretically, every inefficient
application was replaced with an efficient appliance oro25
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Staff
application or behavior. They then screen that for cost
effectiveness and now the amount of measures and
potential remaining are only those that are cost
effective. ft's called the economic potential, and after
the economic potential is established, that is further
documented lnto what is generally ca11ed the achievable
potential, which is based on acquisition rates or ramp
rates within a utllity's particular service territory.
And does fntermountain Gas's TEAPot
here, does that conform with those
n
model they used
standards ?
A
a)Y
that. The rest
No, it does not.
Do you see any reason why
of that sentence foffows
sorry, strike
woul-d be at page 19 and l-ine 20, so it's
sorry, this
continuing that
sentence. Are you with me?
A Yes.
O It says, "included with the Company's 20L9
IRP. " Are you recommending that the Company study the
issue and begin rolling things out after the '19 IRP or
are you recommending that the study could happen right
now and those resufts could be available and feed into
that study, that IRP?
COMMISSIONER RAPER: Your mic just
MR. OTTO: I coul-d repeat because25
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THE WITNESS: No, I heard the question.
We dontt f don't have a pos j-tion on exactly when that
study has to happen.
before the IRP process
It could happen sort
takes
of shortly
the resul-tsthat
coul-d be rol-led into the IRP included as part of
coul-d happen sooner
place so
and then
The studythe near term
if the Company
proposal more
o
reason why
A
o
coul-dn't be undertaken
action p1an.
was interested and wanted to make its DSM
robust more quickly.
BY MR. OTTO: Is there any objective
can you hear me now?
I can hear you.
Is there any objective reason that the CPA
right away?
f'm aware of, but I don't have aA Not that
full- and complete understanding of what may be
constraining the Company.
0 And woul-d you agree that all customers
benefit when a utility acquires cost-effective
conservation?
A Yes.
MR. OTTO: Thank you. That's all the
quest j-ons I have.
COMMISSIONER RAPER: Mr. Purdy, did Mr.
Otto take care of any cross that you might have?
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COMMTSSIONER
MR. PURDY:
redundancy and state at the
RAPER: Go ahead.
But I will- try to avoid
outset that this is rea1Iy
for my edification and cl-arification
COMMISSIONER RAPER: Do you have your mj-c
on?
(Pause in proceedings. )
COMMISSIONER RAPER: Okay, Mr. Purdy, go
ahead and try again.
MR. PURDY:Okay, I wiIl repeat that just
am reaIlyin case someone did not hear it. As I said, I
asking these questions for
for the Commission and my
clarification for the record
own edif ication as wef l-.
CROSS_EXAM]NATION
BY MR. PURDY:
O Starting on page 76
testimony, line 77, you talk about
subset of measures that leads to a
j-s not an unreasonabfe approach if
of your di-rect
beginning with a small-
more robust portfolio
there is a credible
ramp-up r-n subsequent years,
of DSM measures do
so my question initially is,
you consider fal-I within awhat kind
small- subset?
A Sorry, could you repeat the page and lineO25
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number?
a Yeah, absolutely, itrs page 16, line lJ,
"Beginning with. "
A Okay, and is my mic working? And your
question is what those smal-l- what the subset of
measures woul-d be?
O Examples of what they would be, yes.
A Insulation is an j-mportant one.
Programmabl-e or smart thermostats is another,' 1ow flow
showerheads or faucet aerators. Home energy reports have
shown to be very effective for natural gas DSM.
O Okay, thank you.Would you consider a l-ow
fall- under the smallincome weatherization program to
subset category?
A I don't
falI inside or outside
certainly important to
O Okay,
page L6, it wouldn't
subset of measures if
subsequent yearsr my
what does subsequent
looking at?
know that it would necessarily
of a small- subset, but it's
consider.
and then your words on l-ine 79 of
be unreasonabl-e to engage in a smal-l-
there is a credlble ramp-up in
question is simply 1n your mind,
years mean? What time frame are we
A The time frame coul-d be anything between
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DONOHUE (X)
Staff
the steepness of the ramp rather than the amount of
time.
v
mean just how
implemented?
A
Okay, by steepness of
quickly these programs
the ramp, do you
are being
How quickly the programs are impJ-emented;
are consi-dered and added to thehow quickly more measures
portfolio; how quickly additional customer classes are
added, that sort of thing.
O Okay. Now, f'm referring to page 19 and I
hope f don't step on already covered ground, but on line
9 -- excuse me, line'1, you refer to the fact that you're
not opposed to early, modest goals as the Company learns
how to implement a DSM portfolio, but it must
meaningfully accelerate that, and f think you've maybe
talked about what meaningfully accelerate means. Modest
goa1s, again, would that be small subset klnd of programs
or do you have anything in particul-ar in mind?
A What I'm saying here is I'm responding to
the Company's position that it started with a small
modest program and it plans to ramp up, and my position
is I don't oppose that, that is reasonable, except that
it does not appear that their five-year ramp-up is much
of a ramp-up.
O Okay, thank you. Let's see, then, oD page25
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CSB Reporting(208) 890-s198
DONOHUE (X)
Staff
19, l-ine lJ ,
that from Mr-
wel1, I'm sorry,
Otto, So I I Il- skip
about the conservation
you already answered
that, but I do have a
potential assessmentquestion
process.
complete?
Do you know how long that typically takes to
A I donrt know exactly. I woul-d
four and six months.
I would
estimate between maybe
O Okay, so
incl-uded with the Company's
that before any substantial-
implemented we have to wait
that point in time?
A No, I don't
able to analyze additional
TEAPot model and determlne
and you recommend that it be
2019 IRP. Does that mean
DSM programs can be
until 2079 or sometime after
think so. If the Company was
through its own
cost effective,
measures before
measures even
they could
conducting,
o
you know, a
Okay, and
before the
that they're
certainly rol-l out additional
fuIly-formed CPA.
in that regard, I don't want to
horse, is it your recofiimendation
and then form the advisory
the same time?
put the
that we
group,
cart
do the CPA first
vice versa or at
A
certainly form
it's starting
O
You know, I
the advisory
to develop its
Or the CPA?
the Company should
first, not wait until-
IRP to do that
think
group
2079
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A Right, the CPA generally feeds into the
fRP, so...
O Okay; so we coul-d ostensibly initiate or
put together the advisory group fairly soon, couldn't
we?
A Yes.
MR. PURDY: Sorry, Madam Chair, I'm just
making sure I don't ask the same questions Mr. Otto
asked.
COMMISSIONER RAPER: You're good.
O BY MR. PURDY: And if you need a
reference, f'm just generally going to ask you some
questions about your testimony on page 20, beginning on
line 22, extending into page 23, ending on line 'l , and
you talk about, you know, an expanded DSM portfolio and
just examples of the types of programs that could be
implemented including a low income offering. My question
is l-et's say the advisory group comes up with a proposed
program of this nature and then it is decided that it
should be pursued, how do you envi-sion that happening
procedurally? Should the Company just implement the
program and then hope that after a year it's found
prudent or shoul-d it approach the Commission fi-rst? How
do you see that happening?
A Let me clarify, so are you asking if the
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CSB Reporting
(208 ) 890-s198
DONOHUE (X)
Staff
a 25
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CSB Reporting(208) 890-5198
DONOHUE (X)
Staff
Company was
additional-
mechanism
to wanted to add additional- measures or an
program or programs, what
for them doing that before
woul-d be the
the CPA was
conducted?
0 Rlght r oY does the CPA need to be
conducted first?
A No, the CPA does not need to be conducted
first. The Idaho utilities generally don't have, in most
tariffs outlining indlvidualcases don't have, specific
measures and exactly what must be in the incentive
level-s. Rocky Mountain Power does have that, but they
have sort of a flexible provision where they inform us of
changes and unl-ess we object, they ro11 those out, and so
the Company could just what I would envision is the
Company consulting with its energy efficiency advisory
group, getting feedback, and then adopting those
additlonal measures and programs and then filing for
prudency later.
0 Later, sdy, a year later?
A Yes.
MR. PURDY: Okay, thank
here. f think that covers
you. We're
it. Thank you veryclosj-ng in
much.
COMMISSIONER RAPER: Mr. Richardson.
MR. RICHARDSON: Thank you, Madam Chair.25
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CSB Reporting(208) 890-s198
DONOHUE (X)
Staff
BY MR
quick
about
CROSS-EXAMTNATION
RICHARDSON:
O Good afternoon, Ms. Donohue,
questions. Page 9, bottom of page 9,
incentives for fuel switching.
A Yes.
just a couple
you talk
O Then over on page 10, you discuss some of
the fuel- switching opportunities, such as conversion to
natura1 gas from electric or propane or wood. Do you see
that ?
A I do.
0 Do you think it would be reasonable for
the Company to investigate incentives to switch to a fuel
other than 9ds, like coal?
A If they had reason to bel-ieve that that
could be a cost-effective resource for their customers,
it might be reasonabl-e to investigate it.
MR. RICHARDSON: Thank you. That's al-l- I
have, Madam Chair.
COMMfSSIONER RAPER: Thank YOU,
from theMr. Richardson. Are there any
Commissioners? Then redirect
questions
by Mr. Klein or Mr.
Costello?
MR. COSTELLO: Just one question.o 25
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CSB Reporting
(208 ) 890-5198
DONOHUE (ReDi)
Staff
REDIRECT EXAM]NATTON
BY MR. COSTELLO:
a Did you say that bot.h the electrj-c and gas
sides, speaking about Avista here, both the el-ectri-c and
gas sides are harmed by fuel- switching; is that what you
said earlier?
A My understanding from Avista is that the
Company overall does not benefit financially from moving
customers from electric heat sources to gas heat sources.
O Would you say that the electric side would
be the one that's harmed if that conversion were to take
place?
A Yes.
O Okay; so wouldn't the el-ectric side, then,
need the reimbursement?
A That's correct.
MR. COSTELLO: Thank you. That's all I
have.
Donohue,
COMMISSIONER RAPER: Thank your Ms
for your testimony. You are excused.
(The wltness left the stand. )
(Recess. )
COMMISSIONER RAPER: Okay,
have the mic issue finished or corrected
now, I think we
for now, soo25
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CSB Reporting(208) 890-s198
KLE]N (Di)
Staff
we'l1 go back on the record and Staff can cal-l their next
witness.
MR. COSTELLO: Thank you, Staff calls
Daniel Klein to the stand.
DANIEL KLEIN.
produced as a witness at the instance of the Staff,
having been first duly sworn to tel-l the truth, the whole
truth, and nothing but the truth, was examined and
testified as follows:
D]RECT EXAMINATTON
BY MR. COSTELLO:
O Mr. Klein, wil-l you please state your ful1
name and speJ-l your l-ast name for the record?
A Daniel Klein, K-I-e-i-n.
O Thank you, and by whom are you employed
and in what capacity?
A I'm employed by the Idaho Public Utilities
Commission as a utilities compliance investigator.
O Are you the same Daniel- Klein who filed 22
pages of dj-rect testimony 1n this case on December 16th,
20L6?
A I am.o 25
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CSB Reporting(208) 890-s198
KLEIN (DT)
Staff
O Thank you. Do you have any changes to
your testimony?
A
o
I do not.
So if f were to ask you the
testimony, would your
questj-ons set
answers be theforth in your dlrect
same today?
A They woul-d.
MR. COSTELLO: With that, I would ask that
prefiled direct testj-mony be spread acrossDaniel Klein's
the record and tender the witness for
cross-examination.
COMMISSIONER RAPER: Without objection,
Mr. Klein's direct testimony will be spread across the
record as if read.
(The following prefiled
of Mr. Daniel Kl-ein is spread upon the
direct testimony
record. )
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CASE NO. INT-G-76_02
12/76/16
(Di) 1
STAFF
0. Please state your name and buslness address for
the record.
A. My name is Daniel Klein. My business address
is 472 West Washington Street, Boise, Idaho 83102.
O. By whom are you employed and 1n what capacity?
A. I am employed by the Idaho Public Utll-ities
Commission (Commission) as a Utilities Compliance
Section.Investigator in the Consumer Assistance
O. What
background?
A. Prior
is your educational- and professional
to my employment with the Commj-ssion, I
private industryhad three years of experience worklng in
for Qwest Corporation as a Sa1es Consultant in Boise,
Idaho. I received a Bachelor of Arts Degree in
Communicatj-on from Boise State University in Boise,
Idaho, in May 1998.
O. Have you previously testified before the
Commission?
A. Yes.
0. What
proceeding?
A. The
is the purpose of your testimony in this
purpose of my testimony is to present
issues:Staff's positi-on on the followlng consumer
1. Payment methods;
2. Convenience fees,'o 25
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CASE NO. INT-G-16_02
72/16/16
(Di) 2
STAFE
3
4
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Pay stat j-ons;
Customer Service Center performance;
The new Customer Information System;
The Customer Notice and Press Rel-ease fil-ed
in this case,'
1
o
Customer rel-ations; and
Credi-t and col-l-ectlon activity reports.
you sponsoring any exhlbits with youro. Are
testimony?
A. Yes,I am sponsoring Exhibit Nos. 118 and 119
O. Please summarize Stafffs recommendations as
they rel,ate to consumer issues.
A In sunimary, Staff recommends that Intermountain
Gas Company
fees for its
(the Company): (1) Eliminate convenience
resldentiaf customers; (2) Cover the cost of
accepting payments at
stations; and (3 ) Fil-e
activi-ty reports with
PAY-II{ENT METHODS
authori-zed Western Union pay
col-Iecti-onmonthly credit. and
the Commi-ssion.
a. Does the Company track payment methods used by
customers ?
A. Yes. Intermountain Gas provided Staff with
historical data regarding bill payment.Payment by ma1I
are paid,
provided through
is still the most common way that bll-Is
fol-lowed by onllne bilf payment serviceso25
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CASE NO. INT-G-76_02
72/1-6/L6
(Di) 3
STAEF
customers I banks or other financial- institutions.
Some data requested by Staff was not avail-able.
The Company stated that it previously used BillMatrix as
its third-party vendor for handling payment transactions
by phone, but that in March 2016, it migrated to
SpeedPay, another third-party payment vendor. As a
resul-t, the Company cl-aims it no longer has access to
historical data that provides detailed information about
the payment methods and channels used by customers to
make payment through BillMatrix. However, Intermountain
Gas indicated that it did know the total number of
payments made through BiflMatrix for each of the past two
years: 163,591 in 20t4 and 744,625 in 201,5. See Company
response to Staff Production Request No. 159.
CODT\IENIENCE FEES
O. Does Staff have any recommendations with regard
to convenience fees that customers are charged for
certain payment
Yes.Customer paying by credit or
withdrawal from a checking or
account were historically charged $2.1 5 per
by BillMatrix and are currently charged $1.99
transactions ?
A debit card
savings
transaction
by
el-iminate
t^L L,
handJ-ing
or authorized
SpeedPay.
the $1.99
Staff recommends that the Company
convenience fee charged by SpeedPay
Intermountain Gas' residential customers foro25
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CASE NO. INT-G_16_02t2/76/t6 KLETN, D. (Di) 4
STAEE
Staff afso recommends
payment transactions by phone.
that the Company file an
application with the Commission to provide its expected
costs to offer this free payment option. The Company may
request to defer those costs for later recovery through
rates. Based on the number of payment transactions
handled by the Company's former vendor, BillMatrix, in
2075 (744,625) and Avista's cost per transaction ($1.50),
Intermountain Gas' annual- cost woul-d be approxj-mately
$217,000. See the Companyrs response to Staff Production
Request No. 159.
O. Has any other regulated utility in ldaho
eliminated convenience fees?
A. Avista initiated a fee free payment program
this year (2076). See Case No. AVU-E-16-01, Order No.
33494.
O. Please describe Avista's fee free payment
program.
A. Under Avista's fee free program, convenience
fees were eliminated for residential customers. Instead,
Avista pays associ-ated transaction costs for payments
made through its third-party vendor. That transaction
cost ($1.50) is much lower than the convenience fee
previously paid by Avista customers ($3.50). Avista
defers and records the costs it incurs to offer the feeo25
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CASE NO. INT-G-76_02
L2/t6/76
(Di) s
STAFF
free payment program for Iater recovery through rates.
O. Why does Staff believe this is a good idea?
A. In the past, few utility customers used credit
cards to pay utility bills, and fewer still- used debit
cards. Card use was viewed as a convenience rather than
a necessity, and
costs of handling
util-1ties were reluctant to absorb the
these transactions.
customers who used the service
According
there has
for goods
These practices have
to the 2013 Eederal
Accordingly, the
that privilege.
in recent years.
Payment Study,
consumers paying
while debit and
paid for
changed
Reserve's
and services by paper check,
credit card transactions have increased. Using a credit
or debit card to pay for products and services is now a
routine practice, and mosL businesses and service
providers, especially in the retail- sectorr oo longer
charge convenience fees. As more customers come to rely
on payment by debit and credit cards, they become
frustrated by and object to paying an extra charge to pay
utility bil-l-s using their pref erred method of payment.
In addition, convenience fees often have the
greatest impact upon
population, includj-ng
society' s most vul-nerabl-e
been a consistent decl-ine in
Iow i-ncome individual-s
to meet the basic necessities of
to the 2073 FDIC National Survey
daily living
of Unbanked
who struggle
. According
andz5
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CASE NO. ]NT_G-16-02
72/16/t6
(Di) 6
STAEE
Underbanked Households, 282 of U.S. households were
either unbanked or underbanked.
"Unbanked" persons lack a savings or checking
account and do not have a flnancial relationship with a
bank or credit union. Unbanked households have l-imited
optlons to avoid paying a convenience fee since most fee
free payment
"Underbanked"
options require readily available cash.
persons may have a checking or savings
al-so use financial services for an array ofaccount,
products
and auto
rates.
but
such as check cashing servi-ces, pawn shop loans
title loans al-l- of which charge high interest
Underbanked persons may afso use credit and
prepaid debit cards to pay their bi1ls.
According to the Survey, 6Z of Idaho households
were unbanked, and L9% were underbanked, for a combined
total of 252, or 740,543 households. More than half of
the unbanked cite their inability to build up a reserve
in an account or maintain a minimum bal-ance as the main
reasons they lack a bank account. Other contrj-buting
factors incl-ude hiqh fees, unpredictabl-e and unknown
fees, distrust or dislike of banks, lack of ID, bad
credit, and poor past experiences. Age can also be a
factor; nationally, about half of people between the ages
of 18 and 24 are unbanked or underbanked due to l-ack of
established credit. Those who have a relationship wj-th ao25
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CASE NO. INT_G-76_02
72/76/76
(Di ) 't
STAEF
bank or credit union tend to rely on credit and debit
cards for financial transactions.
O. What are the benefits to eliminating
convenience fees?
A. The Commission's Consumer Assistance Staff has
received complaints from utility customers about having
to pay convenience fees. Other utilitles have confirmed
that most customers who consider paying by phone el-ect
not to when they understand that an additional fee will
be assessed. Efiminating the fee will- provide customers
with more fee free payment options and will help lessen
the financial burden on customers who are struggling to
meet financial obligations.
The number of customers who do not pay their
bi1ls on time wil-I also likely decrease. Residential-
customers who avold paying by credit or debit card due to
the convenience fee may elect to do so
elimj-nated. Therefore, customers wilI
avoiding the
reduced costs
fee and the Company will
if the fee is
benefit by
benefit from
associated with collection activity.
Staff notes that all payment methods for
utility services have transaction costs. Although these
costs have historically been recognj-zed as prudent, Staff
bel-ieves that, in the current cl-imate, it is
inapproprj-ate to charge some individual-s for their chosena25
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CASE NO. INT-G-16_02
72/t6/76
KLEIN, D. (Di) B
STAFF
method of payment, whil-e embedding the costs associated
with other methods into rates. Provided that the Company
is prudent in its sel-ection of a third party vendor
(either retaining SpeedPay or selecting a different
vendor) and minimizes its costs, the transaction costs
associated with receiving payment for services should be
included in base rates.
fn summary, removing the $1.99 convenj-ence fee
will bring the Company's payment practices j-n line with
other Idaho utilities, improve customer satisfaction, and
increase timely payments. Eliminating the convenience
fee will- al-so add j-ncreased payment choice for customers.
PAY STATIONS
O. Please explain what a pay station is.
A. In this contextr a pay station is an entity
that col-Iects bill payments from utillty customers and in
turn, remits payment to the utility. A pay station that
provides this service under contract with a utility is
referred to as an "authorized pay station".
Intermountain Gas contracted with WesternO. Has
Union to handle payment
A. Intermountain parent company, MDU
has a contract with WesternResources Group, fnc. (MDU),
Union that covers all four of the utilities owned by MDU.
O. Do any other regulated utilitj-es use Western
transactions ?
Gas'
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CASE NO. INT-G-16_02
t2/16/75
(Di) 9
STAFF
Union
Union
to handle in-person
A. Yes, Avista and
as their pay station
payment transactions?
fdaho Power also use Western
vendor. Although aI1 three
companr-es use
onl-y Company
the service.
Western Union, Intermountain Gas is the
that does not cover the cost of providing
Instead, Western Union charges Intermountain
Gas customers $1.00 to process payments. This processing
charge is retained by Western Union. According to the
Company's response to Staff Production Request No. 159,
94,685 payments were made at Western Union pay stations
in 2075. Intermountain Gas does not accept cash payment
at Company offices, So customers must use pay stations
for cash transactions.
O. Does Staff have any recommendations with regard
to pay stations?
A. Staff recommends that Intermountain Gas cover
the cost of accepting payment at authorized pay stations.
Currently Idaho Power and Avista both use Western Union
for their authorized pay stations; however, Western Union
does not charge Idaho Power and Avista customers a fee.
Instead, Idaho Power and Avista absorb the cost of
customers' payments made at authorized Western Union
payment stations. If the utility absorbs the transaction
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CASE NO. ]NT-G-L6_02
L2/16/L6
KLETN, D. (Di) 10
STAFF
customers. For example, Idaho Power currently pays $.80
per transaction and Avista pays $.16.
The Company may request to defer, f or l-ater
recovery through rates, the costs associated with
offering free payment at authorized pay stations. Based
on Avista's cost ($.76 per transaction) and the number of
transactions handled by Western Union in 20!5 (94,686)
fntermountain Gas' annual cost would be approximately
$12,000. See the Company's response to Staff Production
Request No. 159.
CUSTOMER SERVICE CENTER PERFOR!,TA}ICE
O. Pl-ease provide a brief description of the
Customer Service Center.
A. The primary Customer Service Center (CSC) is
located in Merj-dian, Idaho, and currently has about 108
customer service representatives (CSRs) . A satellite
office in Bismarck, North Dakota, has eight CSRs. The
Credit and Coll-ections Department is afso located in
Bismarck. The CSC is open from 6am to Bpm, Mountain
Time, spanning the three time zones served (Central-,
from IdahoMountain and Paciflc). The CSC takes calls
customers from 7am
provides customer
to 7pm Mountain
servi-ce for all-
Time. The CSC
four utilities owned by
MDU Resources Group, fnc. (Intermountain Gas, Cascade
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CASE NO. INT-G_16_02
L2/1.6/76
KLETN, D. (Di) 11
STAFF
Natural- Gas) .
O. What data does the
CSC performance?
A. The Company tracks
the CSC, speed of answer,
and abandoned ca1ls. The
as calls that are handled
cal-Is that are handled by
interval- between when a calI
Company coll-ect to measure
incoming cal-l-s received by
service level-, handling time,
Company defines incoming cal-l-s
through the IVR as well- as
CSRs. Speed of answer is the
incoming telephone system
by a CSR. Service level-
answered within a certain
answering B0?
Handling time
reaches the Company's
when the call is picked upand
a customer servr-ce
plus any additional
the transaction or
Abandoned cal-l-s are
incoming telephone
terminates the calI
is the percentage
number of seconds
but the calling
with a
of calls
(e. g. ,
less) .
it takes for
party
CSR.
of al-l- cal1s in 60 seconds or
is the average amount of time
representative to talk with a customer
"off-line" time it takes to complete
fu11y resolve the customer's issue(s).
cal-l-s that reach the Company's
system,
before speaking
O. What is the Company's primary performance
objective for its CSC?
A. The Company's primary performance objective is
to answer BOU of its cal-l-s within 60 seconds. In Staff 's
opinion, a service fevel- objective of 80? of calls25
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CASE NO. INT_G-16_02
L2/16/L6
KLETN, D. (Di) 72
STAFF
answered within 60 seconds is reasonable. That
performance objective is consistent with the objectives
of other energy utilities serving Idaho customers.
O. How has the CSC performed?
A. In general, the CSC has performed well-. Of the
data provided for 2074, 2015 and January - August 2076,
the Company met or exceeded its service level objectives
in 23 of 32 months. Unfortunately, when Intermountain
Gas converted to the parent company's -MDU- new Customer
Information System, service fevel-s decl-ined and the
Company did not meet its performance objective. During
that seven month period, from August 2015 through
February 201,6, service levels ranged f rom a l-ow of 56.62
to a high of 15.82.
More recently,
Staff Exhibit 118 shows
service l-evel-s have improved
alI monthly and annual metrics
performance with respect to Idahomeasurj-ng CSC
customers.
NEW CUSTOMER rNFOR}4ATION SYSTEI{
O. Last year the Company changed j-ts Customer
(CIS). Pfease discuss that change andInformation System
how it has impacted customer service.
A. Again, Intermountain Gas migrated to MDU's
Intermountain Gas' share ofexisting CIS
MDU's total
in August 20L5.
CIS cost was approxJ-mately $8, 800, 000.o 25
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CASE NO. INT-G-76_02
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KLETN, D. (Di) 13
STAFF
Intermountain Gas' previous stand-alone CIS was installed
in 2004 at a cost of $4,4001000, and was no longer
supported by the company from which j-t was purchased.
The new CIS is now used and shared by all four MDU-owned
utilities. The common platform allows each CSC team
member to use identical technology and uniform procedures
when servi-ng customers. The work1oad is shared among the
team members, providing additional flexibility for
workforce management and emergency response.
O. Was any functionality l-ost in the conversion to
MDU's CIS?
A. Yes, some functionality was fost that was
useful- to Customer Service Representatives (CSRs) and/or
beneficial to customers. In
l-ess user-friendly,
some tasks or track
making 1t
information. Eor example,
the abllity to make comments regarding a service address
that woul-d stay attached to the service address
regardless of who the customer is at any particul-ar point
in time. It is now more difficul-t to determine customer
chronol-ogy or usage history at a service address.
The ability to change the date that field
orders would be worked was lost, which was a beneficial
function when collection activity was under way. Under
the Company's ol-d CIS, the date of disconnection could be
general, the new
harder for CSRs
system is
to perform
CSRs fost
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CASE NO. INT_G_16_02
t2/76/16
KLETN, D. (Di) l4
STAEF
moved to
payments
payment
process
pl-ans to
was also
a later date to aIl-ow additional
to be posted to an account. The
time for
ability for
col-l-ectionshelter debt and stop the
lost, which has created the need for
more manual- follow up to be done if payment 1s missed
under a pIan.
O. Was any functionallty gained in the conversion
to MDU's CIS?
A. Yes. The new system is web-based rather than a
stand-alone software program. This makes it easier to
access from any computer, to navigate, and to use default
Windows-based shortcuts, such as copy and paste.
The new system has made it possible to automate
and standardize letters that are sent t.o customers.
Letters that have been sent to customers can also be
viewed onl-ine by all system users, providing easier
access to customer communj-cations and enhancing the
ability to respond to customer questions that might
arise.
The new system al-so has the ability to
automatic email- notification to customers. For
provide
example,
an email can be sent automatically
or owner when a tenant discontinues
to a property manager
service and
responsi-bility for payment of
account hol-der on a Continuous
future bills reverts to the
Service Agreement. Thiso25
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CASE NO. INT_G-76-02
1.2/16/\6
KLErlJ, D. (Di) 15
STAFF
all-ows timely notice to property managers or owners of
tenant actions and the resulting change in bill
responsibility.
Eees that are based on the time that orders are
placed now automatical1y bill at the correct rate and
don't have to be assigned manua11y. Eor example, if an
order is placed during business hours vs. after hours,
the system automatically bil-l-s at the correct rate. Thj-s
change improves billing
Customers with
now be grouped under one
accuracy.
large numbers of servj-ces can
responsible person or entity.
system, Iarge-vol-ume bull-ders
limited on how many service
In the Company's previous
or property managers were
l-ocations could be combined under one account.
Customers can now add a 4-digit PIN for
verification and authentication when using onl-ine
seff-service options. In the past, customers had to
provide a Social- Security Number for identification
purposes, to which some customers objected.
The new system has also added the ability to
change or delay the due date of blll-s outside of the
customer's normal bi111ng cycle. This provides customers
the opportunity to set a due date that corresponds with
the date they receive funds, which is particularly
advantageous to fixed-income customers.o 25
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CASE NO. INT-G_76_02
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KLETN, D. (Di) 16
STAFF
O. Has Staff drawn any conclusions about the
migration to MDUrs CIS?
A. As mentioned previously, the switch to the new
CIS negatively affected CSC performance for several
months and resulted in some lost functionality. The new
system, however, introduced new functionality that, over
time, will increase efficiency, improve billing accuracy
and communication with customers, and resolve concerns
expressed by customers 1n the past about billing and
payment options.
That being the case, Staff maintains
positive outcomes of the migration outweigh the
outcomes and, therefore, the new system provides
that the
to both the Company
CUSTOMER NOTICE A}iID
O. Did Staff
Release related to
A. Yes. The
were filed with the
reviewed both and determined
informed customers that written
Company's application could be
This requirement is outl-ined in
(IDAPA 31.01.01.125.01) . When
of the omission on August 76,
and to fntermountain Gas' customers.
PRESS RELE.ASE
review the Customer Notice and Press
this case?
Customer Notice and Press Rel-ease
application. Staff
that neither document
Company' s
negative
beneflts
comments regarding the
filed with the Commission.
Commission Rule 125.01
Staff notified the Company
20L5, the Company corrected25
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CASE NO. INT_G-76_02
L2/16/76
KLEIN, D. (Di) L]
STAFF
the customer notice posted on its website and revised the
remainj-ng notices being sent to customers.
In addition, the Customer Notice and Press
Release dj-scussed two separate cases its Purchase Gas
Cost Adjustment (PGA)case (INT-G-16-03) and its General
Rate Case (INT-G-L6-02) - under the following caption:
"Intermountain Gas Company files for an overall- decrease
to its prices. "
Staff believes that it was inappropriate and
potentially misleading to focus customer attention on the
net impact of the two distinct cases. Although both
Applications were filed on the same d.y, one case
addresses an annual- temporary rate adjustment based on
the Company's gas rel-ated costs, while the other
represents a permanent change in base rates, which has
not occurred since 1986. Staff notes that Rule 125.03 of
the Commission's Rules of Procedure provides that, "[t]he
information required by this rule is to be clearly
identified, easily understood, and pertain only to the
proposed rate change." See IDAPA 31.01.01.125.03.
fn summary, the Commission's final order for
the Company's now completed PGA Case (INT-G-16-03, Order
33604), addressed this issue as follows:
The Commission's rules requlre t.hat customernotices clearly identify a utility's
proposal (s) in a way that can be easilyunderstood. IDAPA 31. 01. 01. 125. 03. Theo25
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CASE NO. INT-G_16_02
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KLETN, D. (Di) 18
STATF
purpose of this rule is to encourage wide
dissemination to customers of the proposed
rate change and allow customers toparticipate in the proceedings before the
Commission. IDAPA 31.01. 01 .L25. Combiningnotice of an annual- rate adjustment with a
proposal to permanently increase base ratesdid not produce the clarity called for in the
Rules of Procedure. fn the event of future
simult.aneously-fil-ed applications, we direct.the Company to strictly adhere to the
language and lntent of our customer notice
rul-e.
Order No. 33604 at 3
CUSTOMER REI,ATIONS
0.
complaints
regarding
A.
informal
Pl-ease describe
and inquiries
fntermountain
how many and what
the Commission has
Gas between 20L3 and
type of
received
an1trLULJ.
The following
complaints and
chart shows the number of
inquiries received over the past
four years:
I![TER!{OT'![TAIN GAS
COMPI,AI}iIT & INQUIRY TOTAI,S
20L3-20L6
20L3 20L4 20L5 20L6*
Credi-ts; &i CoJlecligae;; ,,t:: ',;' .::' ;::;:tl!iii1;,:,',': l6x'i -'.l1,Sf-,,,;i, .*,,i-!!r:;LineExtension/Insta11ation542L
.sqiv;c-e;;gutagg/ndpi{.t$ri"l;:r:::ii:rir i"rliiJ;ij:i.ri0E::i,iil;:9rli:I::,**i:':2;iBilling 29 33 28 28
Ra!{s.1:g,,ro}iiie!:,:;','r:",,';;r,,;,.,:,.,;;,:..i,L:.. j..?3,!j,,, ,;;.XOj,1irl;#iiliii - 9,1All Other 18 11 18 13
Tot^aI.;-,-1,r;ii,.;i+i;+.i;:i;1,.1;,",,,1;;,1;ii;,;ru', r;11.1;11.531.=,.,,;rt1'3911,iii1I.Qffi1;;;;6f:;* .fanuary - November
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CASE NO. INT-G_16_02
t2/76/76
KLETN, D. (Di) 79
STAFF
oY'
inquiries
YTD show?
What did your analysi-s of complaints and
received by the Commission from 2013 to 2076
The highest general category is Credit and
due to non-payment or had been notified that
jeopardy of losing their service due to
Tn many instances, customers needed
making payment arrangements, identifying
financial assistance, or obtaining a
Coll-ections. This category incl-udes customer issues
related to denial- of service, disconnection, and
deposits. The majority of complalnts and inquiries in
were from customers who had beenthis category
disconnected
they were in
non-payment.
assistance in
resources for
medical emergency certificate.
Billing was the next highest category. This
category inc1udes such issues as billing errors, meter
mal-function or fail-ure, and hiqh bilIs. Complaints and
lnquiries about rates and polices was the thlrd highest
category. This category includes such j-ssues as rates,
operating procedures, and customer service.
O. What are the current complaint trends?
A. The Commission has received fewer complaints
and inquiries about Intermountain Gas for each period
analyzed. Complaints and inquiries about deposits have
been declining since 2015. There were a significantO25
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CASE NO. INT-G-16_02
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KLETN, D. (Di) 20
STAFE
number of complaints
service in 2013-2075,
far in 20L6.
Staff notes
and inquiries about disconnection of
but the number has decreased thus
that the number of complaints and
inquiries regarding service outages and repai-r j-ssues
have been consistently low over time, which reflects the
Company's continued commitment to provide safe and
reliable service to its customers.
Another issue that has continued to show up at
a consistent level are complaints and inquiries about
rebilling of usage due to meter failure or mal-function.
If a customer's meter fail-s to regJ-ster any usage, for
example, and bil-ls the customer based on zero usage, the
Company wil-l-
usage during
operational.
A
increase in the number of payments comj-ng
Commission instead of Intermountain Gas.
indicated that the problem appeared to
disconnect notice and has committed to
rebill the customer based on its estimate of
the period of time when the meter was not
new issue that arose this year was an
to the
The
arr- se
Company
from its
notice to make the
changing the
Company's address more prominent,
have yet been made.although
O.
number of
no changes
To what might
complaints and
fntermountain Gasr declining
inquirles each year beo25
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CASE NO. ]NT_G_76-02
L2/L6/1,6
KLErN/ D. (Di) 2L
STAFF
attributed?
A. Intermountain Gas' declining number of
complaints and inquiries filed with the Commission may be
the result of significant changes in the way the Company
provides customer servi-ce. As discussed above, the new
Customer Service Center and Customer fnformation System
required a substantial amount of planning and training,
which no doubt have been beneficial- in the J-onger term.
It appears the Company is increasing efforts to work with
its customers to come up with acceptable payment
arrangements and generally help customers keep their
service connected.
CREDIT A}ID COLLECTION ACTIVITY
reporting
What is Staff's recommendation with respect to
credit and col-lection activity?
Staff recommends that Intermountain Gas fileA.
monthly
reports
already
reports submitted to the Commission from those utilities
()
reports wlth the Commi-ssion simifar to the
that Avista, Tdaho Power and Rocky Mountain Power
submit. Staff Exhlblt No. 119 includes recent
as examples.
O. What
A. The
disconnecti-on
purpose do these reports serve?
reports incl-ude information
and reconnectj-on of service,
on arrearages,
unpaid debt,
understandand energy usage. They are used to bettero25
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residential customer behavior with respect to payment of
bi11s and response to utility collection activity. The
reports differentiate between l-ow income and non-low
income customers to determine whether l-ow income
customers are disproportionately affected by a utility's
credit and coll-ection practices. The reports also enable
Staff to monitor the impact of a1l-owing Idaho Power,
Avista, and Rocky Mountain Power to disconnect service
without knocking on customer doors. See Case No.
GNR-U-74-07, Order No. 33229.
O. Does this concl-ude your direct testimony in
thls proceeding?
A. Yes, it does.
CASE NO. INT-G-L6_02
72/L6/76
KLETN, D. (Di) 22
STAFF
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CSB Reporting
(208 ) 890-s198
KLEIN (X)
Staff
(The fol-lowing proceedings were had in
open hearing. )
COMMISSfONER RAPER: And we'Il- move to the
Company for any cross-examination.
MR. COSTELLO: I apologize, Madam Chair,
we do have two exhibits for Daniel Kl-ein.
COMMISSIONER RAPER: Oh, Exhibit 118 I
had them written down, thank you, Mr. Costel-1o, and we
will admit Exhibits 118 and 119 for the record. Thank
you.
(Staff Exhibit Nos. 118 & 119 were
admitted into evidence. )
COMMISSIONER RAPER: Does the Company have
any cross-examination of this witness?
MR. WILLIAMS: Yes, w€ do.
CROSS-EXAM]NATION
BY MR. WILLIAMS:
O Good afternoon, Mr. Klein.
A Good afternoon.
O You recoflrmend eliminating convenience fees
that customers have to pay when paying by phone using
SpeedPay; is that correct?
A Correct.o 25
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CSB Reporting(208) 890-s198
KLEIN (X)
Staff
o
customers $1.99
And SpeedPay is currentl-y charging those
per bill?
Correct.
And you think that Intermountain Gas can
get down to Avista's rate of about $1. 50 per call.
negotiate that, but
A
o
A
they could get
O
They would need to
to there or maybe
So did you do some
that fntermountain has
even fower.
surprises me. Does it surprise
more customers using SpeedPay
analysis on number of
customers of Avista versus Intermountain Gas using the
same servi-ces ?
A I do know the customer numbers.
O Are they equivalent?
A Intermountain Gas has a larger number of
customers.
O So that would be the basis on why you
think Intermountain cou]d do it better?
A That as wel-l- as the other entities under
MDU, so they should have more bargaining power.
O Okay, but for now we're talking about
Intermountain and you're comparing Intermountain's
customers to Avista's gas customers or total customers?
A Total- customers.
O Okay, that
you
for a gas utility than Avista's combined?o 25
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CSB Reporting(208) 890-s198
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Staff
A Not necessarily. Werre just looking at
Idaho, not total
O
A
O
customers,
A
u
in price?
A
n\z
going back to
recoflrmending
the Company;
A
Posslbly.
Now, on page 10 of
the prior line, you
a shift of that cost
correct? We'l-l- get
your testimony we1I,
essentially are
from the customer to
page 10 in a minute
are with the
Iater through
Oh, okay.
-- Avista.
So if all- of Avistafs Washington
they may actually have a larger base?
Correct.
And that might account for the difference
to
possibility of
rates.
o So what
using this particular
A I don't
percentage. I
that woufdn't
Yes, I would say we
that being collected
percentage of the customer base is
method to pay bills?
know that I would have a
wou1d only have transaction numbers, so
necessarily equate to a percentage, because
the same customer could use it
customers that use this method to
O Do you think it's the majority of their
pay bilIs?o 25
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A I would not say itrs not the majority
of the customers.
O How do you think most customers pay their
bill-s ?
A Right now it's either through online
banking or mailed-in payments.
O Do you think that could account for 80, 90
percent of t.he payments?
A frm not exactly sure what the percentage
is. Irm not sure if f have that information to be
honest.
O Greater than 50 percent?
A It woul-d be probably greater than 50
percent.
a And are there fees the customers incur in
paying by those methods? Well, let's break it down.
On1ine banking, is there a transactional fee on that
payment ?
A Not on the customer side.
O Right, that's what I'm talking about.
A Yes.
O And then if you pay by mail-, there's a
stamp?
A Uh-huh.
0 So why is it you picked this particular
CSB Reporting(208) 890-s198
KLEIN (X)
Staff
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CSB Reporting
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KLBrN (x)
Staff
group of customers that choose one of the higher methods
of paying that the costs of that choice be social-ized
among the rest of the customer base?
A I thlnk part of the thinking there is that
particular method, choice of method of payment, is on the
rise, especially in the younger age group. You have a
Iot more people that is their preferred method of
payment.
O So are we talking paying by a phone call
or paying by a text message or an app?
A It probably could be any of those, but
it's preferred using debit or credit.
O And I misunderstand, SpeedPay, is that a
voice cal-l or how does that work?
A Right now it's a voice call.
O Okay; so it's a subgroup of customers that
you think the younger generation is using their phone to
pay and they're incurrj-ng the highest transactional- costs
and you bel-ieve that should be a socialized cost?
A I bel-ieve that's a preferred method of
payment.
O And then so now I'm on to page 10 and you
from the customerwhen they shift
Company should
think that those costs
to the Company that
until the next rate
the absorb those costs
case and then file a request l-ater on25
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CSB Reporting
(208 ) 890-5198
KLErN (X)
Staff
recovery of that deferral?
A WeIl, it woul-d
don't know that it would have
be a def erral- account. I
to necessarily be in a rate
that was set up.on howcase. It just
oY
would have to
A
O
depends
So until the next case -- wel-l, there
some mechanism
Yes.
Let me say
there is no cost item to
case for that additional
that again.
reimburse the
charge,'would
On Exhibit
Company in
that be a
103,
this
correct
statement ?
A
o
I'm sorry, on what
We1l, Staff Exhibit
exhibit? I'm sorry.
103 accumu.l-ated the
various Staff adjustments to the Company's revenue
requirement and there is not an adjustment to make the
Company whole for absorbing this cost; is that a correct
statement?
A Because Staff doesn't know what those
costs would be, it woul-d be hard to inc1ude that on that
exhibit I woul-d thj-nk, but that is not my exhibit, so I
coul-dn't testif y to that.
O Wouldn't your recommendati-on be $1.50 per
customer per month that uses this method rlght now?
A That's a comparable, but we don't know
what the actual- cost woul-d be.o 25
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CSB Reporting
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KLEIN (X)
Staff
a Wel-l-, the actual cost now is $1.99 per
bill, but you're recommending 1.50.
A I'm just providing an example of what the
cost could be.
MR. I/{ILLIAMS: Al-1 right. Madam Chalr, I
have no further questions.
MR. STOKES: We have no questions here,
Madam Chair.
COMMISSIONER RAPER: Thank you,
Mr. Stokes.
MR. PURDY: I have no questions. Thank
you.
MR. RICHARDSON: No questions, Madam
Chair.
COMMISSIONER RAPER: MT. Otto.
MR. OTTO: No questions, Madam Chair.
COMMISSIONER RAPER: Thank you. Are there
any questions from the Commissioners?
COMMISSIONER RAPER: Just one quick one as
a result of your conversation with Mr. Viilliams.
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CSB Reporting(208) 890-s198
KLEIN (Com)
Staff
BY COMMISSIONER RAPER
O You
incurrlng that 7.99
EXAMINATION
indi-cated that the
customers.
Do you have
low income
bill pay option is
connection toIs there any
any information regarding
customer that is
are young
l-ow income there?
whether there's a
connection for the customers that are
incurring that additional bj-11-?
A WeII, I don't think we should characterlze
that it's just younger customers that are incurring that
cost. I mean, t.he cost is incurred by anybody that pays
by that method. The young demographic prefers to use a
debit card preferably as their method, so if they wish to
do that, they would incur that cost, but l-ow income is
definitely a group that could have to pay using that
method and in doing So, a 1ot of, like, benefits now go
to cards. You're not getting a check any longer, so if
you use an EBT, it's going to be a card. If you want to
use it for that payment method, you're kind of stuck with
that fee at thls point, so that would affect low
income.
O But you're not sure what percentage of the
customer base that utilizes that method is a low income
customer?a 25
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CSB Reporting
(208 ) 890-s198
FARLEY (Di)
Staff
A No, I don't think I have statistics on
that, Do.
COMMISSIONER RAPER: Okay, thank you. Is
there any redirect?
MR. COSTELLO: No redirect, thanks.
COMMISSIONER RAPER: Thank you, Mr. Klein,
for your testimony.
(The wltness left the stand. )
COMMISSIONER RAPER: Staff can call- its
next witness.
MR. COSTELLO: Thank you, Staff cal1s
Johnathan Earley to the stand.
JOHNATHAN FARLEY,
produced as a witness at the instance of the Staff,
having been first duly sworn to tell the truth, the whole
truth, and nothing but the truth, was examined and
testified as follows:
DIRECT EXAMINATION
BY MR. COSTELLO:
O
name and spell
A
Farley, would
l-ast name for
please state your
record?
Mr.
your
Itrs
you
the
Johnathan Farley, F-a-r-1-e-y.o 25
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CSB Reporting(2oB) 890-s198
FARLEY (DT)
Staff
O By whom are you employed and in what
capacity?
A The Idaho Publi-c Util-ities Commi-ssion and
Irm a utilities compliance investigator.
O Are you the same Jonathan Farley that
prefiled 10 pages of dj-rect testimony in this case on
December !6, 2076?
A Yes, I am.
O Do you have any changes to that
testimony?
A I do not.
O So if I were to ask you the questions set
forth in your testimony, your answers would be the same
today?
A Yes, they would.
MR. COSTELLO: With that, I would ask that
Johnathan Farley's prefiled direct testj-mony be spread
across the record and tender the witness for
cros s-exami-nation .
So would you l-ike toCOMMISSIONER RAPER:
admit his Exhibit L20 as weII?
MR. COSTELLOz !20,
COMMISSIONER RAPER:
Y€S, I
That's
With no ob j ect j-on, Mr. Farley' s testimony
across the record as if read, and Exhibit
apologize.
all right.
will be spread
720 wifl beo25
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admitted to the record.
(Staff Exhibit No. L2O was admitted into
evidence. )
(The following preflJ-ed direct testimony
of Mr. Johnathan Farley is spread upon the record. )
CSB Reporting(208) 890-s198
FARLEY (Dr)
Staff
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CASE NO. INT_G_76_02
L2/16/16
(Di) 1
STAFF
O. Please state your name and business address for
the record.
A. My name i-s Johnathan
address is 412 West Washj-ngton
831 02.
Farley. My business
Street, Boise, Tdaho
the Idaho Public Utll-ities
O. By whom are you
A. I am employed by
Commission (Commisslon) as
employed and in what capacity?
a Utilities Compliance
Investigator.
O. What is your educati-onal and professj-onal
background?
A. I received a BA in Political Science from
Sal- j-sbury University in 2070. From 2009 to 2014, I was
employed as a Project Manager with an investigative and
intelligence services firm in Al-exandria, Virgi-nia. My
primary duties included contract administration and
coordination of field investigations and other research
activities with company personnel- and contractors.
In 2014, I accepted the position of
Weatherization Coordinator with the Community Action
Partnership Association of Idaho (CAPAI) in Boi-se, Idaho
My primary functj-on was to serve as the day to day
administrator of the Idaho Low fncome Weatherization
Program. Along with ensuring state and federal program
compliance, I served as a liaison to five sub-grantees25
13 31 FARLEY, J
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CASE NO. INT-G_16_02
t2/16/16
(Di) 2
STAFF
aiding in po11cy development, training and technical
assistance.
Since joining the Commission Staff (Staff), I
offered by theattended the Basic Utility Rate School
Center for Public Utilitles at New Mexico State
University. I have earned certificates through the U.S.
Office of Energy Efficiency & Renewable Energy's Federal
Energy Management Program (FEMP) in the areas of planning
and financing renewable energy projects, strategies for
O&M and energy conservation, Energy Savings Performance
Contracts (ESPC), and Utility Energy Service Contracts
(UESC) .
O. Have you previously testified before the
Commission?
A. No.
O. What is the purpose of your testimony in this
proceeding?
A. The purpose of my testimony is to address: (1)
tariffs submitted wlth the Companyrs application; (2)
billing audits and customer migrations; (3) the Company's
l-ine extension poJ-icy; and (4) gas service rules.
O. Please summarize your testj-mony.
A. I will be recommending: (1) the Company file
all tariff sheets subject to change as a resul-t of the
Commission's final- order in this case in both legislativeo25
7332 EARLEY, J
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CASE NO. INT-G-76_02
t2/16/1,6
FARLEY, J. (Di) 3
STAFF
and clean format; (2) the Commj-ssion accept the Company's
schedul-es RS-1 andcombine residential- rateproposal to
RS-2 into a
Commission
ninety (90)
revise its
single residential- schedufe; (3) the
order the
of
Company to f1l-e a new case within
the Commission's flnal- order todays
line extension tariff;Company
into i-tswork with Staff to integrate Gas
tariff.
TARIFF SI'BMISSION
O. Are utilities requi-red to submit all proposed
tariff changes, includj-ng revisions or cancel-l-ations of
existing tariff sheets, with an application?
A. Yes. Under the Commission's Rul-es of Procedure
Rule I27, the Company is required to provide all proposed
changes to the tariff with its initial appfication.
IDAPA 31. 01. 01 .721. Submission of existing and proposed
tariffs enables the Commission, parties, customers, and
the public to understand the Company's proposed changes.
It also fulfills the Company's responsibillty to provide
updated tariffs to those Commissj-on Staff charged with
the administrative responsi-bility to maintain utility
tariffs.
O. Have you reviewed the Company's proposed tariff
changes fil-ed with its Application?
A. Yes. fn one instance, the Company proposes a
and (4) the
Safety Rul-es
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CASE NO. ]NT-G-16_02
72/L6/76
(Di) 4
STAFF
new demand-side management (DSM) program offering rebates
for the instal-l-ation and use of energy efficient
equipment.
its tariff
Production
intends to
The Company currently has a rebate
under Schedule ER. In response t.o
program in
Staff
Request 60, the
cancel- Schedule
Company indlcated that it
ER if the Commission
its proposed DSM program. However, the Company
accepts
should
with itshave submitted Schedule ER, marked as cancelled,
initial application.
There are a number of other instances where
testimony submitted with the Company's application will
require tariff changes but revisions were not provided.
For example, based on changes proposed by the Company 1n
its initlal application, Sections A, C and D of the
General Service Provisions of the Company's tariff wilf
need revision. Those secti-ons refer to tariff schedules
RS-1, RS-2, and T-5, the Company's authorized rate of
return r or other substantive information that the Company
has proposed to cancel- or change through this case.
Updates to obsol-ete information should have been
reflected in proposed tariffs in the Company's initial-
application.
O. Did the Company meet the requirements of Rule
L2t?
A. No, it did not.o 25
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CASE NO. ]NT-G-T6_02
t2/16/76
FARLEY, J. (Di) 5
STAFF
O. Since the Company did not submit all proposed
revisions to its tariff, what is your recommended
solution?
A. f recommend the Commission order the Company to
file all changes to its tariff in legislative format
along with the f inal- cl-ean copy of the Company's
conforming tariff at the concfusion of this case. The
tariff changes presented in legislative format will
further aid Staff in reviewing the Company's conforming
tariff.
BILLING AUDITS AT{D CUSTOMER MTGRATIONS
O. What are "billing audits" and why are they
important?
A. Bi111ng audits are conducted by the Company to
ensure customers are on the proper rate schedu1e. The
Company l-ooks at customer specific information such as
clty zoning codes, and customergas usage,
appliances
schedule.
property use,
to assess if
mix-ups, drive rate errors and
not be addressing these types
O. What are "customer
A. When I use the term
the customer is on the proper
variabl-es
billing errors, but I wiII
of audits in my testlmony.
migrations " ?
"customer migration", f am
The Company analyzes different
dependent on customer cl-ass. Billing audits are al-so
used to detect meter mal-function or failure, meter
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CASE NO. INT-G-L6-02
72/76/L6
FARLEY, J. (DT) 6
STAFF
referrlng to
another. For
rate schedule
on the general service
large vol-ume rate
schedul-e (LV-1) .
O. Why would a customer move to a different rate
schedule ?
A. A customer woul-d move from one rate schedule to
another if usage or end use changes and the customer no
longer qualifies to receive service under the current
rate schedule or would qualify for a more favorabl-e rate.
For example, a residential customer moving from RS-1 to
RS-2 can save around $0.08 a therm during the winter
months just by changing rate schedules.
0. Doesn't the Company's application propose
combining the RS-1 and RS-2 rate schedules?
A. Yes, and I support the Company's proposal to
schedul-es notcombine RS-1 and RS-2. Combining the two
customers moving from one rate schedule to
example, a customer
(cS-1) moving to a
the Company's tariff, it eliminates the
residential accounts to determine proper
assignments.
residential- customers the only rate classO. Are
where migrations between
A. No.
only
need
rate
s impl i fie s
to monitor
schedule
schedul-es is possible?
O. How does the Company ensure non-residential
customers are on the proper rate schedule?25
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CASE NO. INT-G-76_02
t2/16/76
FARLEY, J. (Di) 1
STAFF
A. Accounts for Large
customers are reviewed by the
these customers have contracts
Volume and Transportation
Company monthly because
specifying usage and
penalties.
According to the Company, it reviews the
largest GS-1 accounts on a quarterly basis to determine
if the customer's usage has grown large enougrh to merit
large volume service. If a customer has twel-ve months of
contact the
usage near or exceeding 200,000
customer to discuss
therms, the Company wil-l
changing rate schedul-es.
LINE EXTENSION POLICY
O. Have you reviewed the Company's current line
extension policy?
A. Yes, I reviewed
articulated in its tariff
the Company's policy as
along with explanations
Staff production requests.provided
Sections
in responses to
A and C of the tariff's General Service
Provisions pertain to main and servj-ce line extensions.
For conveni-ence, I wil-l- refer to the sections of the
tariff addressing both maln and service l-ine extensions
as the Company's "l-ine extension policy". There have
been no substantive revisions to these sections of the
tariff since 1986 and Staff is concerned that some of the
critical concepts and methodologles contained in the
tariff are seriously outdated.25
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CASE NO. INT-G-76_02
t2/16/76
(Di) B
STAFF
O. Please provlde an example of why you think the
line extension policy need to be revised?
A. fn its current state, the Companyrs line
extension policy states that any main extension project
with a rate of return of less than 12.52 wil-l- not be
constructed without an advance payment from the customer
for aI1 construction costs above the allowance provlded
by the Company. The fact that the Company's current rate
of return is embedded in the tarlff creates a conflict
wherever the Commission might approve a different rate of
in this case.return, ds is likely to happen
tlY
policy
A production request
No. 226, the Company filed the following response
The methodology and model-s from which Main
and Servi-ce Line Extension financial-evaluations were based are outdated and in
need of revision. Consequently.the Company. .proposes that, followinq this
case (INT-G-L6-02), it work with Staff andprepare a compliance filing that updates
Intermountain's Main & Service Extensionprovisions last approved by this Commissionin June of 1986. During the interimperiod between the outcome of this case andthe preparation and approval of the Company'srevised Main & Service Extension provisions,
the Company wil-l- record and keep al-l- amounts
received as Contributions in Aid ofConstruction ( "CfAC" ) and thereafter provide
customer adjustments as necessary.
I recommend the Commission order Intermountain Gas
Does the Company agree that
needs to be revised?
Yes. In response to Staff's
its line extension
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CASE NO. INT-G-1.6_02
t2/76/76
(Di) 9
STAEF
Company to fil-e
policy no later
Commissionrs final order
a case to revise its line extension
than 90 days from date of the
in this case.
GAS SERVICE RT'LES
O. What comments do you have regarding the Gas
for Gas Util-ities (IDAPA
31.31.01.000) and
(TDAPA 31.11.01).
the Safety and Accident Reporting RuIes
In Case No. GNR-G-08-01, Order No.
30625, the Commi-ssion suspended Gas Service Rule 702,
which requires gas util-ities to inspect installations of
gas appliances and makes an incorrect and obsol-ete
reference to the Commission's adoption of the National-
Fuel- Gas Code and the Uniform Mechanical Code. The
Commissionrs Safety and Accident Reporting Rules
Service Rul-es ?
A. The Commission has
gas safety-the Service Rules
correctly refer to the
Commission. See Staff
Order No. 30625.
Gas Service
two rule sets that address
codes currentl-y adopted by the
Exhibit No. 120 for a copy of
Rule 702 has not been repealed and
the two sets ofthe conflicting provisions contained in
rul-es have occasionally caused confusion when Staff or
other parties are researching code requlrements. Order
No. 30625 indicated that the Commission Staff and other
interested parties would informally review the Gaso25
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Service Rul-es. Staff's objective was to determine
whether the remaining provisions of the Gas Service
Rules, whi-ch address maintaining system maps, plans and
records as well as meter testing and accuracy, were still
necessary and if so, whether they could be incorporated
into gas utilities' tarlffs. Moving relevant
requirements into each utility's tariff would then allow
the Commisslon to propose repeal of the entire rule set.
This coll-aborative review has not taken place
and Staff recommends that the Commission once again
direct the Company and Staff to undertake this review
foll-owing the conclusion of this case.
0. Does this conclude your direct testimony in
this proceeding?
A. Yes, 1t does.
CASE NO. INT-G_16_02
L2/16/16
EARLEY, J. (Di) 10
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CSB Reporting
(208 ) 890-s198
EARLEY (X)
Staff
(The fol-l-owing proceedings were had in
open hearing. )
COMMISSIONER RAPER: Does the Company have
any cross-examination?
MR. WILLIAMS: No questions.
MR. STOKES: We have no questions, Madam
Chair
COMMISSIONER RAPER: Mr. Purdy.
MR. PURDY: f actually do have just a
brlef question or two.
CROSS-EXAM]NATION
BY MR. PURDY:
O Good afternoon, Mr. Earley.
A Good afternoon.
O You testified that you were previously
employed by my client CAPAI as the weatherizatj-on
coordinator and that your day-to-day functions were to
basically serve as the coordinator of the l-ow income
weatherizatj-on program,' is that true?
A Correct.
O Okay. Now, f real-lze the point of your
testimony is other than l-ow income weatherization, but
were you here when I crossed Company wj-tness Spector ando25
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CSB Reporting(208) 890-5198
FARLEY (X)
Staff
Mr. McGrath regardlng 1ow income data tracki-ng?
A Yes, f was.
O And you do testify about the Company's
billing audits it performs; correct?
A
n\z
is obtained
5, beginning
when you're
A
O
Yes, I do.
And in describing what type of information
through those audits, and I'm l-ooking at page
on fine 15 of your direct testimony, tel-l- me
there
Yeah,
and
Irm there
you state, and I'm quotj-ng, "The
Company looks at customer specific information such as
gas usage,
appliances
schedule";
u
property use, city zoning
to assess if the customer
codes, and customer
is on the proper
correct ?
ft's correct
Given what you heard about l-ow income data
tracking, my question is simply this: Do you feel- that
thls type of audit and the information obtained by it and
through it might be useful in the context of low income
data tracking?
A I wouldn't be able to attest to the
information that the Company coll-ects. From my
understandi-ng,
at the utility
this information is coll-ected by the CSRs
and it's specific to this information, so25
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CSB Reporting(208) 890-s198
FARLEY (X)
Staff
I wouldn't be able to speak to the Company's abllity to
the information that Idetermine income l-evel-s based upon
was gi-ven by them.
O Okay, and CSRs are customer servj-ce
reps ?
A Oh, yes, I'm sorry, y€s, customer service
reps.
MR. PURDY: Thatrs aII I had. Thank you.
COMMISSIONER RAPER: Thank you. Mr.
Richardson.
MR. RICHARDSON: No questions, Madam
Chair.
COMMISSIONER RAPER: Mr. Otto.
MR. OTTO: No questions, Madam Chair.
COMMISSIONER RAPER: Any questions from
the Commissioners? I have none.
Is there any redirect by Staff?
MR. COSTELLO: No, Madam Chair.
COMMISSIONER RAPER: Thank you, Mr.
Farley, for your testimony.
THE WITNESS: Okay, thank you.
(The witness l-eft the stand. )
COMMISSIONER RAPER: Staff may call its
next wi-tness.
MR. KLEIN: Staff calfs Terri Carlock.25
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CSB Reporting
(208 ) 890-s198
CARLOCK (Di)
Staff
for one moment
COMMISSIONER RAPER: If f can interject
whif e Ms. Carl-ock qets sworn in,
had spoken prior about you being excused at
the afternoon, is there any objection to
Mr. Purdy, we
some point in
Mr. Purdy being
hearing today?
dismissed from the remainder of the
So with that, when you need to go.
f'm ableMR. PURDY: I'l-I wait as long as
to.
COMMISSIONER RAPER: Thank you.
produced as
having been
TERR] CARLOCK,
a witness at the instance of the Staff,
first duly sworn to tel-l- the truth, the whole
nothing but the truth, was examined andtruth, and
testifled as follows:
DIRECT EXAMINATION
BY MR. KLEIN:
O Ms. Carlock, woul-d you please state your
the record?
Terri Carlock.
By whom are you employed and in what
full name for
0
capacity?
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CSB Reporting(208) B9o-s198
CARLOCK (Di)
Staff
Commission as the deputy administrator in the utilities
division and as the audit supervisor.
MR. KLEIN: Now, Ms. Carlock offered
direct testimony on her own accord. She's also going to
be sponsoring the direct testj-mony of Mark Rogers who is
no longer with the Commissj-on.
O BY MR. KLEIN: Ms. Carlock, are you
familiar with Mr. Rogers' work here?
A Yes, I supervised his work.
O Okay; so do you have any changes at this
point to either your direct testimony or the testimony
you're sponsoring for Mr. Rogers?
A No.
o rf I
your testimony and
wouJ-d you give the
A Yes.
were to ask you the
the testimony of Mr.
same answers?
and with
be
same questions in
Rogers today,
MR. KLEIN: Okay,
ask that both sets of testimony spread
for
that, I woul-d
on the record
as if read and I tender the witness
cross-examination.
COMMISSIONER RAPER: Is Ms. Carlock also
sponsori-ng Exhibit No. 101?
MR. KLEIN: We have a probJ-em with that
over here as she will be sponsoring that exhibit and weo25
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would like that to be admitted. Thank you.
COMMISSIONER RAPER: Ms. Carlock's
testimony and the testimony sponsored the testimony
filed by Mr. Rogers, but sponsored by Ms. Carlock in the
proceeding, wil-I be spread upon the record as if read,
and Exhibit L0'7 is admitted.
(Staff Exhibit No. 701 was admitted into
evidence. )
(The following prefiled direct testimony
of Ms. Terri Carfock is spread upon the record.)
CSB Reporting
(208 ) 890-s198
CARLOCK (Di)
Staff
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CASE NO. INT-G-16_02
L2/76/2076
CARLOCK, T (Di) 1
STAEF
O. Pl-ease state your name and address for the
record
A. My name is Terri Carlock.My business address
Idaho.is 412 West Washlngton Street, Boise,
a. By whom are you empJ-oyed and in what capacity?
A. I am the Deputy Administrator of the Utilities
Division at the Idaho Publ-ic Utilities Commi-ssion. I am
responsible for supervising the Accounting/Audit Section
and coordlnating Staff's policy positions with Staff
Administrator Randy Lobb.
0. Please outline your educational- background and
experience.
A. I graduated from Boise State University in
1980, with B.B.A. Degrees in Accountj-ng and Finance. f
have attended varj-ous regulatory, accounting, rate of
return, economics, finance, and ratings programs. I
Chair the Task Force on Internatlonal Flnancial Reporting
Standards with the National- Association of Regulatory
Utility Commissioners (NARUC) Staff Subcommittee on
Accounting and Finance. I previously chaired the NARUC
Staff Subcommittee on Accounting and Finance for three
years, chaired the Subcommittee on Economics and Finance
for more than three years, and chaired the Ad Hoc
Committee on Diversifi-cation. I have been a presenter
for the Institute of Public Utilities at Michigan Stateo25
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CASE NO. INT-G-16_02
72/76/2076
CARLOCK, T (Di) 2
STAEF
University and for many other conferences. Since joining
the Commission Staff i-n May 1980, I have participated in
audits, performed financial anal-ysis on various
companies, and have presented testimony before this
Commission on numerous occasions.
O. Please describe the scope of your
responsibilities in the preparatlon of thls case.
A. My responsibilities were numerous but generally
fal-I in three basic categories. The first category
lncludes analyzing accounting theories, policies and
ratemaking. This responsibility is to assure the
theories and policies used to establish rate base and the
revenue requirement are implemented appropriately and are
consistent with general ratemaking and accounting
theories.
The second category of responsibility involves
supervrsr-ng
work of five
all accountants working on this case. The
Staff Auditors forms the basis
witness testimonles. I discussed numerous
with Staff and assisted in coordinating the
of accounting
adj ustments
positions and
revenuetestimonies. T support the adjustments
requirement impacts presented by Staff
and Terry.
and
witnesses Romano
The third category of responsibiJ-ity rel-ates to
the cost of capital. I supervi-sed Staff witness Rogerso25
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in his work and testimony on the IegaI standards for
determining a fair and reasonabfe rate of return, and the
analysis to calcul-ate the discounted cash fl-ow (DCF) cost
of equity. I incorporate his DCF recommendations on cost
of equity with my additional- evaluations to present
Staff's final cost of capital recommendations. My
testimony supports the Staff recommendations for the
9.252 return on equity and the development of the
recommended 1.7% overall rate of return.
O. Please explain Staff's analysis of rate base.
A. The primary components in rate base are
plant-in-service accounts. Since many plant-in-service
accounts have long deprecJ-ation 1ives, a rate base audit
covers many years. A rate base audit focuses on
verifying that plant is used and useful, actuaL capital
expenditures are documented and reasonably incurred, and
plant is properly capitalized i-n the correct accounts and
properly depreciated. UsuaIIy these audits are completed
f or al-l- new plant installed since the last rate case.
With Intermountain Gas Company (Intermountain Gas,'
Company) the last rate case was approxi-mately 30 years
ago so plant items during that time may have been
replaced or may be fu1ly depreciated. Due to the long
revj-ew period, the rate base audit was divided in severaf
parts and it began when fntermountain Gas flled its
CASE NO. INT-G-16_02
1"2/76/2016
CARLOCK, T (Di) 3
STAFF
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CASE NO. ]NT-G-16_02
72/L6/20L6
CARLOCK, T (Di) 4
STAFF
Notice of Intent. During the audit, Staff encountered
some difficulties because the Company has updated its
accounting systems and computer models. Differences
between the ol-d and new systems resulted in specific
information requested by Staff not being available at all
or not in the form requested by Staff. Staff thus
conducted additional audit tests and trend analyses when
specific project records were not avallable.
Staff completed its audlt and analyzed various
adjustments. U1timately, Staff recommends only two
specific rate base adjustments as shown on Staff Exhibit
No. 103: (1) removing cash working capital; and (2)
reclassifying part of the Customer Services Center. When
Staff next audits the rate base, Staff wil-I begin its
audit testing and verification at system conversion, and
wil-1 verify both account information and project
documentati-on from 20L0 forward.
O. Pl-ease explai-n the adjustment to remove Cash
Working Capital from rate base.
Intermountain Gas has usedA.
quantify
bel-1eve
Cash Working Capital (CWC).
Company has adequately shown
have supplied these funds.
a lead-lag study to
Staff doesn't
that Company
Therefore, Staff
the
shareholders
recommends removing CWC from rate base.
O. What is a "lead-Iag study"?o 25
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CASE NO. INT-G-16_02
L2/1.6/2076
CARLOCK, T (Di) 5
STAFE
between
A. A "1ead-lag study"measures timing differences
operational expenses (ther_ncurswhen a utility
lead) and theexpense time revenues are received, i. e. it
revenue fug) .gets paid for services provided (the
O.
a lead-1ag
Do you have any concerns with the Company using
study to recommend including CWC in rate base
for thls case?
A. Yes. CWC reflects funds required to pay for
the ongoing utility operations. A lead-Iag study does
not adequately show that shareholders are suppling the
cash for CWC. Only when the funds are supplied by
utility sharehol-ders should it be incl-uded in rate base
to earn a return paid by customers. CWC is not
automatically incl-uded in rate base for utilities. Often
when Inventories, and Materlals and Supplies are included
in rate base util-ities cannot demonstrate the need for
CWC in rate base. fn this case, rate base includes
$3,195,291 in Materials & Supplies Inventory and
$3,225,344 in Gas Storage Inventory.
Intermountain Gas explained its lead-1ag study
in Response to Staff Production Request Nos. 5 and 6.
There, the Company concl-uded that revenue lag times
exceeded the expense l-ead times during 2015, so CWC is
supplied by the Company. The Company's workpapers show
existing lead and lag times under the Company operatj-ons25
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CASE NO. ]NT_G_76-02
L2/L6/2076
CARLOCK, T (Di) 5
STAFF
during 2015. Lead tj-mes are dlrectly determined by the
Company operations and practices. Revenue 1ag times are
afso influenced by the Company billing operations and
coll-ection practices. A change in operating practices
will change the level- of working capital and can even
show no working capital requirements. Staf f stil-l-
doesn't believe the Company has adequately shown that the
source of the funds 1s truly supplied by the Company
shareholders.
Staff has thus removed $1,131 ,1 43 of Cash
shown on Exhibit No.Working Capital from rate base as
103, Adjustment 3. This results in a $134,941 reduction
in revenue requirement.
O. Pl-ease explai-n how Staff witness Rogers's
testimony on cost of equity l1nks with your testimony.
A. Staff witness Rogers prepared testimony and
exhiblts under my direction on the lega1 standards for
cost of equity and the discounted cash flow (DCE) method
of determj-nlng the return on equity. I will- discuss risk
factors, the Staff recommended return on equity range and
the Staff recommended overall rate of return range. I
will also support the point estimates recoflrmended by
Staff to be applied to the rate base for the test year
revenue requirement cal-culation as shown on Exhibit No.
103, Adjustment 2.o 25
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CASE NO. INT-G_16_02
L2/76/2076
CARLOCK, T (Di) 7
STAFF
a. Please summarize the cost of capital
reconrmendations .
the range
I am recommending a
of B .58 9. 5% with a point of 9.252
recommended overall-of capital is
of 1 .72.range of 6.8?1 .32
The theoretical approach used by the Company
for cost of capital is simil-ar to that used by Staff. My
judgement and the judgement of Staff witness Rogers in
some application areas results in different outcomes and
recornmendations from those expressed by the Company.
Since the approaches are very simi-Iar, Staff has not
developed a different proxy group for comparison
purposes.
O. Please discuss risk considerations for
fntermountain Gas.
A. Risk is a degree of uncertainty refative to a
company. Utilities for the most part continue to be
lower risk than other industries. Utilities continue to
have l-imited competition for distribution of utility
services within the certificated area. With limited
competition for regulated services, there is less chance
of losses related to pricing practices and marketing
strategies. Under regulation, utllities are generally
al-l-owed to recover through rates, reasonabl-e, prudent and
A return on common equity in
The
in theweighted cost
with a point
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CASE NO. INT-G_16_02
t2/L6/2076
CARLOCK, T (Di) B
STAFF
justifiable cost expenditures refated to regulated
services. Unregulated firms have no such assurance.
The main risks for Intermountain Gas relate to
gas price fluctuations, change in plpeline rates, and
replacement of gas mains. Price risks for Intermountain
Gas are minimal since all- gas costs and pipeline costs
are deferred and recovered annually at 100% 1n the
Purchased Gas Adjustment.
Considering aI1 of
by Staff witness
the factors evaluated by
myself and
reasonable
Gas be set
this range
woul-d not
reasonable
return on
at 8.5?
equi-ty
o q9
Rogers, I recommend a
attributed to Intermountain
Although
the return
point within
equity granted
of the fair and
9.252 in
is reasonable,
normal-Iy be at
any
on
either extreme
range. I utilized a point of
cal-culating the overal-l- rate of return and revenue
requirement.
a. What are the costs, capital structure and
overal-l- cost of capital reconimended by Staff?
A. The capltal structure of 50% debt and 50%
equity is the same as recommended by the Company. This
capital structure is reasonabl-e based on the analysis of
historical, current and projected capital structures for
Intermountain Gas and the proxy group.
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CASE NO. ]NT-G-16_02
t2/L6/2076
CARLOCK, T (Di) 9
STAFF
The cost of debt is 4-942. The Company and
Staff recommendations are consistent for the cost of
debt.
The capital structure,
overall rate of return are shown
component costs and
in the following table:
OveraII Weighted Cost of Capital
Source
Long Term Debt
Common Equity
Total
Percent Cost
50% 4.94%
s0% 9.25%
t00%
Overall Rate of Rettrn
2.5%
4.6%
7.lo/o
O. Are there decisions in this case that would
change your recoflrmended return on equity?
A. Yes. Staff witness Lobb recommends that. the
Eixed Cost Col-l-ection Mechanism (FCCM) not be adopted in
this case. If the FCCM mechani-sm is approved by the
Commission, the return on equity point within the range
of reasonableness should be reduced. Staff recommends
the point be reduced by 25 basis points resulting in a
return on equity of 92 and a 1% overal-l- rate of return.
0. Does this concl-ude your direct testimony in
this proceeding?
A. Yes, it does.
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(The fol-l-owing prefiled direct testimony of
Mr. Mark Rogers, sponsored by Ms. Terri Carlock, is
spread upon the record. )
CSB Reporting
(208 ) 890-s198
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CASE NO. TNT-G_16_02
L2/76/16
ROGERS, M. (Di) 1
STAFF
O. Pl-ease state your name and business address for
the record.
A. My name is Mark Rogers. My business address is
412 West Washington Street, Boise, Idaho.
0. By whom are you employed and in what capacity?
A. I am employed by the Idaho Publ-ic Utilities
Commission as a Utilities Analyst in the Utilities
Divisi-on where my primary role has been developing and
reviewing utility rate design, cost of service studies,
tariff modifications, integrated resource planning,
multi-state all-ocation and emerging utility issues.
O. What is your educational- and professional
background?
A. I graduated from the University of Idaho with a
Bachel-or of Science degree in biological systems
engineering. I hol-d a Master's of Environmental Science
with an emphasls in ecosystems and biodiversity from the
Swedish Universj-ty of Agrlcultural Sciences in Uppsala,
Sweden. f also hofd a Master's of Environmental- Science
with an emphasis in water resource engineering from the
Uni-versity of Natural Resources and Applied Life Sciences
Vienna, Austria. Furthermore, I have graduated with a
Master's in Business Administration from Boise State
University. f have worked previously
the International Water Association in
as an analyst for
the Specialist25
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CASE NO. INT_G_76_02
t2/16/16
ROGERS, M. (Di) 2
STAFF
Group for Stat.istics and Economics, where I have
published statistical data on international water
services. I have been employed as a utillties analyst
wlth the Commission since July 2015, have attended the
New Mexico State University Center for Publ-ic Util-ities'
course in Practical Regulatory Training, and serve on
Avista's Technical Advisory Committee.
O. What is the purpose of your testimony?
A. I will provide Commission Staff's position on
Intermountain Gas Company's ("Intermountai-n Gas";
"Company") DCF return on equity.
O. Can you please summarize your
A. Of course. In my testimony,
Company's proposed return on equity. I
Company's methodology of using a Basi-c
Elow ("DCE") to determine the return on
wil-l- provide recalculated
testimony?
I will address the
wiIl outline the
Discounted Cash
equity. With
to include a
to derive a more
equity.
the
UUT
results ofmethodologies. I
the DCE analyses
O. Pl-ease
regards to this, I wil-I address the need
Blended DCF methodology with a Baslc DCF
reasonable, and long-term oriented return on
Furthermore, I will out.line a controversy in
Company's flotation cal-culation used in both
and conclude
describe the
with a summary.
standards for determining a
fair and reasonable rate of return.25
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CASE NO. INT-G-76_02
L2/16/76
ROGERS, M. (Di) 3
STAEE
A. Absolutely.
return for a utility
Bl-uefieLd Water Works
Supreme Court and is
Natural- Gas.
The 1ega1 test of a fair rate of
company was established i-n the
decision of the United States
repeated specifically in Hope
fn
West Virginia
692, 43 S. Ct.
Court stated:
Bl-uefiel-d Water Works and Improvement Co.
Pubf ic Service Commission, 262 U. S. 6'7 9,
6'15, 61 L. Ed 7716 (1923) , the Supreme
A public utility is entitl-ed to such rates aswill permit it to earn a return on the valueof the property which it employs for the
conveni-ence of the public equal to thatgenerally being made at the same time and inthe same general part of the country on
investments i-n other business undertakings
which are attended by corresponding risks and
uncertainties; but it has no constitutionalright to profits such as are realized oranticipated in highly profitable enterprises
or speculative ventures. The return should
be reasonably sufficient to assure confidencein the financial soundness of the utility and
should be adequate, under efficient and
economical management, to maintain and
support its credit and enable it to raise the
money necessary for the proper discharge ofits public duties. A rate of return may be
reasonabl-e at one time and become too hlgh or
too Iow by changes affecting opportunities for
investment, the money market and business
condltions generally.
The Court refined these guidelines 1n Federal- Power
Commission v. Hope Naturaf Gas Company, 320 U.S. 591,
603, 64 S.Ct. 2Bt, 88 L.Ed. 333, 345 (1944) z
O 25
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CASE NO. INT_G_76_02
t2/76/76
(Di) 4
STAFF
From the investor or company point of view itis important that there be enough revenue notonly for operating expenses but also for the
capital costs for the business. These includeservice on the debt and dividends on thestock. (Citation omitted) By that standardthe return to the equity owner should be
commensurate with returns on investments inother enterprises having correspondinq risks.
That return, moreover, should be sufficient toassure confj-dence in the financial integrityof the enterprise, so as to maintain itscredit and to attract capital.
The Idaho Supreme Court has adopted these rate of return
guidelines. See AppTication of Citizens Utilities Co.,
ll2 Idaho 1061 , L06'7 , 139 P.2d 360, 366 (1987 (Bl-uef ield
and Hope clarify "that the primary objective in
ratemaking is to allow the utility to meet its legitimate
operat.ing expensesr ds wel-] as to pay creditors, provide
dividends to sharehol-ders, and maintain its financial-
integrity so t.hat it might attract new capital").
As a resul-t of these United States and Idaho
Supreme Court decisions, three standards have evol-ved for
determining a fair and reasonable rate of return: (1)
The Flnancial fnteqrlty or Credit Maintenance Standard;
(2) The Capital Attraction Standard; and, (3) The
Comparable Earning Standard. If the Comparable Earnings
Standard is met, the Financial fntegrity or Credit
Maintenance Standard, and the Capital Attractlon Standard
will al-so be metr ds they are an integral part of the
Comparable Earnings Standard.o 25
13 50 ROGERS, M
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CASE NO. INT-G_T6_02
72/16/76
(Di) s
STAFF
O. Pfease describe
Standard and how the cost
this approach?
A. The Comparable
determining the cost of
that a given investment
costs. In competitive
toward those i-nvestments
Therefore, for a utility
markets,
equal to
similar
the Comparable Earnings
of equity is determined using
Earnings Standard for
markets, Lf the
firm is not equal to the return being earned on other
investments of similar risk, the flow of funds will be
equity 1s based
should earn its
upon the premise
opportunity
return earned by a
other firms
equity
of
approach is
and flope NaturaL
earning the higher returns.
to be competitive in financial
it should be all-owed to earn a return on
the average return earned by
The Comparable Earnings
the Bl-uefieLd Water Works
risk.
supported by
Gas decisions
returns.
O. Has
as a basis for determinlng those average
the Comparable Earnings Standard been
consj-dered in the testi-mony and analyses conducted by Mr.
Gaske and yourself?
A. Yes, it has. As Intermountain Gas is a
subsidiary of the Montana-Dakota Utilities Resource Group
("MDU"), it trades no common stock. Due to this
parent/subsidiary rel-ationship, there is no direct equity
market data available for utility operations ato25
13 61 ROGERS, M
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Intermountain Gas. Consequently, Mr. Gaske and I have
both used a discounted cash flow methodol-ogy that meets
the Comparable Earnings Standard by using a proxy group
of similar companies to determi-ne Intermountain Gas's
return on equity. fn fact, both the recommendations from
Mr. Gaske and myself include return on equity rates
greater than 8.422, which is the average return on equity
for the companies in the proxy group. Thus, not only has
the Comparable Earnings Standard been met, but our
recommendations both exceed the standard of the test. As
a result, the Iegal standard for setting the rate of
return on common equity has al-so been satisfied.
O. Let's turn our attention to the discounted cash
flow methodol-ogy. Pl-ease explain the basis for the DCF
method.
A. The DCF method is based upon the theory that
(1) stocks are bought for the income they provide (i.e.,
both divj-dends and gains from the sale of the stock), and
(2) the market price of stocks equals the discounted
vafue of al-l future incomes. The discount rate r or cost
of equj-ty, equates the present value of the stream of
income to the current market prlce of the stock. The
f ormul-a to accompli-sh this goal- is:
CASE NO. ]NT_G_16_02
12/L6/76
ROGERS, M. (Dl) 6
STAFF
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CASE NO. INT-G-16_02
t2/76/76
ROGERS, M. (Di) 1
STAFF
D1 D2 DN
Equation No. 1-1
+
PN
PVPo +++
Where:
Po : Current Price
D - Dividend
Ks Capitalization Rate, Discount Rate, or Required Rate
of Return
N : Latest Year Considered
The pattern of the future income stream is the
key factor that must be estimated in this approach. Some
simplifying assumptions for ratemaking purposes can be
made without sacrificing the validity of the results.
Two such assumptions are: (1) the dividends per share
grow at a constant rate in perpetuj-ty and (2) prices
track earnj-ngs. These assumptions lead to the simplified
traditional DCF formula, where the required return is the
dividend yield plus the growth rate (g):
Equati-on No. l-2
D
Ks
(1+t<"1r (1+X";z (1+X";N (1+K";N
+g
DLo
O. Is this traditional- DCF formula the same
formul-a presented by Mr. Gaske in his testimony?25
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CASE NO. INT_G-16_02
t2/16/76
ROGERS, M. (Di) I
STAFF
A. No. But it is the basis for the formul-a used
by Mr. Gaske in his testimony. The traditional- DCF
formula assumes that dividends are paid annua11y, and
that they increase once a year starting one year from the
present. In both practice and theory, however, this
assumption is i-ncorrect. Rather, most companies,
includlng utilities, tend to pay dividends on a quarterly
basis instead of an annual basis. To reflect this
concept, Mr. Gaske modlfied the traditional- DCF formula
to approximate the ti-ming of dividend payments on a
quarterly basis. Thus the DCE model presented in his
testimony is:
Equation No. 1-3
Do (1+ .0625q)
K +g
P
O. fs it acceptable to apply this adjusted formul-a
for the DCF model when calculating fntermountain Gas's
return
A
on equity
Yes.
model, modifying it to account
payments is acceptable in this
in this proceeding?
While there are
CASC.
many forms of the DCF
for quarterly dividend
Comparable Earnings Standard described
reasonabl-e rate of return equal to the
earned on other investments of similar
Specifically, the
a fair and
return being
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CASE NO. INT_G-76_02
72/t6/76
ROGERS, M. (Di) 9
STAFF
but one company in the proxy group issues quarterly
di-vidends, it is acceptable in this proceeding to modify
the formu1a to account for the timing of these payments.
a. Please describe the growth rate in terms of the
traditional- DCF?
A. Of course. The growth rate utilized by Mr.
Gaske in the Basic DCF is simply the growth estimates for
each of the companies in the proxy group from analysts at
both Zacks Investment Research and Thomson First Ca1I.
The values from both analysts are averaged
rate for each of the
together to
determj-ne the growth proxy
equity wi1] becompanaes.
compared to this growth rate.
O. Are there any negative consequences associated
with using such an approach?
A. Yes, specifically when relying sole1y on this
approach. Whil-e Zacks Investment Research and Thomson
First Ca1l are two respected firms, the bottom line 1s
that the growth rates used in the analysis rely on
estimates that are subjecti-ve to the skil-l of the
analysts developing them. As Mr. Gaske states in his
testimony, the Basic DCE analysis assumes that the
analysts' earnings growth forecasts incorporate al-l-
informatj-on required to estimate a long-term expected
growth rate for a company. See Gaske Direct at 20. This
Intermountain Gas's return on
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CASE NO. INT-G-16_02
L2/76/16
ROGERS, M. (Di) 10
STAFF
argument in itsel-f would l-ead one to ask, "what is all
information required to estimate a long-term growth
rate?" The answer to this is subjective based on what
the analyst deems to be important enough to include. fn
this regard, each analyst woul-d separately estimate the
future growth rate based on their own opinion of what
information shoul-d be incluoed in the estimate.
This produces a mode1 that has three outcomes:
(1) both analysts predict the correct growth rate; (2)
one analyst predicts the correct growth rate; or (3)
neither analyst predicts the correct growth rate.
Unless, by chance, both analysts have correctl-y predicted
the actual growth rate, then the model w1l-l inevitably be
based on incorrect estimates and incomplete information.
In terms of the proxy group of companies, the estimates
from both analysts vary by up to 2OZ. In this capacity,
that model is inherently fl-awed and will be based to some
degree on incorrect estimates. Such
method is used
implications are
as the sol-e basis forconcerning when this
calculating a return
O. Are there
acceptable to use as
A. Yes, there
Gaske, is a Blended
as presented in the
on equity within a DCE model-.
other forms of the DCF model that are
well ?
are.One such model, ds described
DCF model that i-ncorporates
traditional DCF, while
by Mr.
growtho25
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CASE NO. ]NT-G-76_02
L2/16/76
ROGERS, M. (Di) 11
STAFF
incorporating a long-term retention rate.
O. Does the Bl-ended methodology remove the
subjectivity inherent in the Basic DCF model?
A. The Blended methodology does not completely
remove the subjectivity because hal-f of the Blended DCF
model is based on the Basic DCF. However, by
incorporating the retention rate to the mode1, the
subjectivity is greatly reduced.
O. Please explain how the retention rate works
within the DCF model-.
A. The retention rate 1s described as the
percentage of earnings retained by the Company, used for
future investments. The remaining portion of earnings is
paid out as dividends to sharehol-ders. If a company is
expected to retain a portion of its earnings (b), and
expects to earn a return on common equlty (r), then its
earnings, dividends, book value and market price would be
expected to grow at the rate of (b*r). Erom thisr w€ can
derive a new DCE model by replacing the growth rate wlth
the Company's expected return on equity times its
retention rate:
Equation No. t-4
D
Po
KS + (b* r)
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CASE NO. INT-G-L6_02
t2/L6/1.6
ROGERS, M. (Di) 12
STAEF
O. Is this the formula used by the Company in the
Blended DCE model?
A. To an extent, yes. This formul-a represents a
variation of the traditlona1 DCF using the Company's
return on equity and retention rate. However, as the
Blended methodol-ogy uses both the retention rate and the
growth estimates from the analysts at Zacks Investment
Research and Thomson Eirst Ca11, this formula is combined
with the Basic DCF formula, before being modified to
incorporate the quarterly dividend payment. Thus the
final formul-a for the Blended DCF methodology that the
Company uses is:
Equation No. 1-5
Do (1+.0625q) (q + (r*b) )
K +
Where the
together
O.
over the
A
the esti-mates
P
growth rate and
to form the bl-end
What advantages
Basic DCF model?
z
retention rate are averaged
of the two methodologies.
does the Blended DCF mode] have
f15 prevj-ous1y described, the subjectivity of
used for the growth rate is reduced to half
of the l-evel of the Basic DCF. Moreover, the blended
methodology is not based on the subjectivity of analysts,
but rather on the earnings and dividends associated witho25
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CASE NO. ]NT-G-1 6_02
L2/t6/L6
ROGERS, M. (Di) 13
STAFF
each company. While Mr. Gaske used forward
values for these variables in his model, the
l-ess thanof such numbers are substantially
looking
subj ectivity
an anal-ysts
example
from 2000
forecasts, and much more predictable. Take for
the annual- dividend payment from MDU Resources
t.o 20L5, ds shown in the f ollowing graph:
MDU Resources - Annual Dividend Payment 2OOO - 2015
to 80
5D 75
so.70
SO.(''5
s().60
s0.55
so.so
s().45
5(]..1o
90.:r:,
$o.30
6)o-c,
oCL
c(u
ilr(Ea--,(u<t'.2
6
o',.'. 'yEo.O?49,-111.374
R' - O.99oG
1998 200()2002 2004 2t,06 2l)04 2l)10 20!'2 2014 2016
Year
It is evident that dividend payments have been
steadily rising for MDU Resources over the past ten
years. The regression model-, and R2 value of 0.99 shows
a near perfect 1inear trend in dividend growth, making
future predictions on dividend payments for MDU resources
quite accurate. Rather than relying on the opinions of
analysts, using this type of data from the proxy group of
companies more accurately measures the proxy group's
future growth and the comparable return for fntermountain25
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CASE NO. ]NT_G_16_02
72/16/76
ROGERS, M. (Di) 74
STAEE
Gas.
O. Are there any other advantages to utilizing the
Blended DCF mode]?
A. Yes. Beyond having more verifiable and
accurate estimates for growth, the Blended DCE model is
al-so better for estimating long-term growth. That is,
the Value Line forecasts used by both Mr. Gaske and
myself
2079
growth
Tntermountain Gas. Mr. Gaske himself
estimate the proxy group's retention rate from
2021. This approach calculates a more sustainable
rate that better refl-ects the workings of
describes the
benefits of this approach:
Since these retention rates are projected tooccur several years in the future, they shouldbe indicative of a normal expectation for aprimary underlying determinant of growth that
would be sustaj-nable lndefinitely beyond theperiod covered by analysts' forecasts.
Gaske Direct at 23.
Given that fntermountain Gas has not fil-ed a
general rate case in decades, using a sustainable long-
term growth rate more accurately reflects the reality of
Intermountaj-n Gas in that the new rate of return may also
be in effect for many years. Thus, the Blended DCF model
is of primary importance if Intermountain Gas does not
file another general rate case j-n the near future, ds the
Company's return on equity will not be soleIy based offo25
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CASE NO. INT_G_16_02
t2/76/76
ROGERS, M. (Di) 15
STAFF
of growth estimates from 3rd party analysts, but rather
as Mr. Gaske describes, a "cruising speed" that companies
can be expected to maintain indefinitely.
Gaske states that:Eurthermore, Mr.
The primary determinant.s of growth for the proxy
companies wilf be (i) their ability to find and
develop profitable opportunities; (ii) theirability to generate profits that can bereinvested in order to sustain growth; and,(ii-i) their willingness and incl-ination toreinvest ava11able profits. Expected future
retention rates provide a general measure ofthese determinants of expected growth,
particuJ-ar1y items (ii ) and (j-i j- ) .
Gaske Direct at 22.
He continues by pointing out that
earnings and proportion of earnings retained
Company is the primary
firm's book value per
testimony, stocks are
driver in the rate of
the l-evel of
by the
growth in a
stated 1n myshare. As previously
bought for the income they
provide, both gains from dividends and from the eventual-
sal-e of the stock. Therefore, Lf retention rates are
the primary driver of dividends and the firm's book
value per share, and stocks are bought for both their
dividends and future value, then it is only logical that
the primary driver of both be used to devel-op the return
on equity.
O. So you recommend an approach that incorporates
retention rates through the bl-ended methodology?a 25
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CASE NO. INT-G-76_02
72/L6/16
ROGERS, M. (Di) 76
STAFF
A. Absolutely. Incorporating a Blended DCF in
the analysis more adequately refl-ects the long-term
nature of Intermountain Gas's rate filings, reduces the
impact of the subjectivity and dependence of the 3rd
party analysts in the Basic DCF mode1, and reflects the
fact that retention rates are the primary driver of
dividend growth and the book val-ue per share, which are
the two primary variables for attracting common equity
investors.
O. Alright then let us move on. You stated 1n the
summary of your testimony that you would discuss the
flotation adjustment used by the Company. Can you please
explain what a flotation cost adjustment is?
A. Of course. When a publicly traded company
issues securities in the form of stocks or bonds, the
Company i-ncurs expenses in many forms including, but not
limited to, 1ega1 fees, underwritj-ng fees, banking
and/or registration fees. The difference between the
cost of equity before issuance, and the cost of the new
equity is termed the fl-otation cost. fn essence, when
new securj-ties are issued, the existing shareholders'
j-nvestments wil-1 become dil-uted. To mitigate
fl-otation cost
yield component
fair return on
allowances are applied to the
of the DCF mode] in order to
thls,
dividend
compute a
common equity.o 25
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CASE NO. INT-G_76_02
L2/16/1.6
ROGERS, M. (Dr) 11
STAEF
O. Is the fl-otation adjustment necessary in this
case even though Intermountain Gas does not issue common
equity?
A. While Intermountain Gas does not issue common
equity directly, it is issued by MDU. So using a
flotation cost is still acceptable. It also serves to
meet the legaI obligation to satisfy the Comparable
Earnings Standard of the proxy group of companies.
However, the method the Company has used to incorporate
the flotation cost into both DCF models is controversi-a1,
and does not foll-ow the conventional methodology.
O. Can you please explain the flotation
calcul-ation?
A. Absolutely. As previously described in
Equation No. 1-3, the traditional approach to the DCF
mode.l- describes the investorr s required rate of return on
equity capital as:
Equation No. 7-6
D
KS +g
Po
If Po is the proceeds per share actually received by the
Company from which dividends and earnl-ngs
Bo or the
will be
generated, that is, if Po equals book value pero25
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CASE NO. INT-G-L6_02
72/16/1.6
ROGERS, M. (Di) 1B
STAFF
share, then the companies required return is:
Equation No. l-1
D
r +g
Bo
The flotati-on cost percentage (f), and proceeds per share
Bo are related to market price Po as fol-lows:
Equation No. 1-B
D/.1 -f\ : Pr \r Ll - uo
By substltuting Equation No
following formula, which is
for flotation:
1-8 into l-1, we obtain the
the required return adjusted
Equatlon No. l-9
D
r:+q
P ( 1-f)
This equation is the standard equation for flotation cost
as the "conventional-"adjustments and
approach. Its
widespread, and
is referred to
use in regulatory proceedings 1s
the formula is out]ined i-n severa]
corporate
0.
finance textbooks.
Can you please provide an example of how this
used?computation is
A. Yes.Assume a hypothetical widget companyo25
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CASE NO. ]NT-G-76_02
L2/L6/76
ROGERS, M. (Di) 19
STAEF
needs to raise $100 million in common stock at $20 a
share to finance future capital expenditures. If the
underwriting and legaI 4%, and the company
to pay out $1
expenses are
in dividendsexpects
future growth of 4.252, then the
used to calcul-ate the new cost of
per share, with a
above equation can be
equity as f ol-l-ows:
r:
$r
+ .0425 . 0945 or 9.452
$20 ( 1-. 04 )
not issued new stock, the f1otatlon
not be taken into account, and the
of equity would have simply been
+ 4.252 9.25% -
Had the company
component would
company's cost
($1/ ($20* (1-o%))
O. How has Intermountain Gas applied the flotation
adjustment formul-a in this case?
A. Flotation costs compensate for the decrease in
proceeds due to expenses associated with issuing stock.
Therefore, it is an adjustment to the stock price. When
looking at Equation No. l-9 above, it can be seen that
the flotation adjustment needs to be applied only to the
dividend yield component of the formul-a, and not the
growth component.
In his testimony, Mr. Gaske has applied the
ffotation ad;ustment not just to the dividend yield
component of the formula, but to the entire DCF model-.o 25
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CASE NO. INT-G-16_02
72/16/16
ROGERS, M. (Di) 20
STAFF
By doing so,
adjustment is
art i ficial 1y
O. Can
the return on
Yes.
the general theory underlying the flotation
ignored, and the return on equity is
inflated.
you provide an example of how this inf1ates
equity?
Take our previous example ofA.
company
9 .452 .
entire
equity:
where we cal-culated the cost of new
If we apply
DCF, we would
the ffotation adjustment
obtain the following cost of new
$1
+ .0425 )*1. 04 .0962 or 9.622
the widget
equity at
to the
I_
$20
Applying the flotation adjustment to the growth
component of the formu1a has increased the return on
equity f rom the previous cal-cul-ation of 9 .45%, to a rate
of 9.62e". Similarly, Mr. Gaske's use of the ffotation
adjustment formula artificially inflates the return on
equity by applying the fl-otation adjustment to the entj-re
DCF model-.
o.
overall-
equity?
A
So what do you recommend in terms of the
methodology used to calculate the return on
I recommend incorporating a Blended DCF with
the Basic DCF to more adequately reflect the long-termo25
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CASE NO. INT_G-76_02
t2/16/76
ROGERS, M. (Di ) 21,
STAFF
nature of Intermountain Gasr rate f11ings, to reduce the
impact of the subjectivity and dependence of the 3rd
party analysts in the Basic DCF model, and to reflect the
fact that retention rates are the primary driver of
dividend growth and the book val-ue per share, which are
the two primary variables for attracting common equity
investors. Furthermore, I recommend applying the
flotation adjustment onJ-y to the dividend yield portion
of the DCF, which is the widely accepted conventj-onal
approach to incorporating a flotation adjustment to a
DCF.
O. Do you have any exhibits attached to your
testi-mony regarding the recalcul-ated DCErs using the
appropri-ate cal-culation of the flotation adj ustment ?
recalculated DCFA. Yes, Exhibit No.
resul-ts for both the Basic
L01 shows the
DCF and Blended
conventional flotation adjustment applied
of the DCF.dividend yield portion
Does this concl-ude your testlmony?
Yes, it does.
DCE, wlth the
only to the
A
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CSB Reporti-ng
(208 ) 890-s198
CARLOCK (X)
Staff
(The following proceedings were had in
COMMISSfONER RAPER: And does the Company
have any questions of this witness?
MR. WILLIAMS: Madam Chai-r, we do
CROSS-EXAMINATION
open hearing. )
BY MR. WTLLTAMS:
O Good afternoon, Ms.
A Good afternoon.
O So first I'm going
working capital, and if you would
testimony towards the bottom there
the Company has Staff
adequately shown that the
Carl-ock.
to tal-k about cash
turn to page 4 of your
and when you say that
doesn't believe the Company has
Company' s sharehol-ders have
what I transl-ate that to is your
faifed to meet its burden of
capital; would that be a fair
That would be correct.
supplied these
statement the
proof on cash
summation?
A
funds, so
Company
working
has
O Okay, and I assume you have reviewed the
rebuttal testimony of Michael Adams where he provides 15
pages of testimony and an Exhlbit 34 whlch is the
Company's lead-1ag study on cash working capital; did youO25
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CSB Reporting(208) 890-s198
CARLOCK (X)
Staff
review that?
A I did. Mr. Adams completed a lead-}ag
study, but I do not believe that that shows that the
Company necessarily needs cash working
O Okay; so even with that
and exhibits, it's still your position
has failed to meet its burden of proof
correct ?
capital.
enhanced testimony
that the Company
on this issue,'
A That 1s correct, and there are several-
reasons for that. One reason would be simply that
Exhibit 34 includes interest expense that has been added
to revenues, but revenues already incl-ude the cost of
debt reflected for interest expense and that if there is
a slight change in either the expense or the lead times
that the cash working capital requirement would
disappear, and usually when you're showing a need that
you fook at a balance sheet analysis and when I did that
for current assets and current liabilities, the current
liabilities were greater than the current assets,
indicating
basis for
to me that there was no need, so that's the
of proof
my
has
conclusion that I do not believe the burden
been met.
Okay, but you're not disputing that the
cash working capital to operate,' correct?
The Company needs cash to operate, but
u
Company needs
Ao25
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cash working capital- included 1n rate base 1s not
needed.
O And part of your reason is that you
believe the Company could change its operating practices
so that there is not elther the l-ead or the fag in
matching bil-l-s to pay and revenues in?
A The Company doesn't have to change its
practice significantly. There just needs I mean, you
cou1d simply have a slight change in, for instance, the
revenue lag. If the change in the revenue lag changed
simply by two days, and that's any time between zero time
of payment after a bill is received untif 720 days after
the bil-1 is received for collection purposes or their
assumptj-on for service lag, that would change the actual-
need for revenue requirement or, I'm sorry, the cash
working capital need j-n revenue requirement to negative.
There woul-d be a reduction in the lag by approximately
1. 5 mil-l-ion and that is greater than what the Company is
claiming for cash working requirement of 1.1 mifl-ion.
O But I think my questj-on was rel-ated to
your testimony on page 6 where on l-ine 4 you sdy, "A
change in operating practices wil-l- change the level of
working capitaI," and so when I asked you the question is
it your testimony that the Company if the Company
changes its operating practices, they could solve this
CSB Reporting
(208 ) 890-5198
CARLOCK (X)
Staff
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CSB Reporting
(208 ) 890-5198
CARLOCK (X)
Staff
problem and I
nA
require a major
needs to change
capital. That
implements are
It just means
change and
by two days
doesntt mean
drastically
that there is
thought you answered no.
think I answered that it wouldn'tNo, I
that the methodology only
to el-iminate cash worki-ng
the policies that the Company
incorrect or inappropriate.
variabll-ity there and that
over some of that.the Company has control
O So one of
operating practices is to
billings and col-Iections,
that they could use?
they could change their
more aggressive in their
be one of the tool-s
the ways
become
woul-d that
A I don't even think they need to do that.
Their study uses a midpoint in coming up with the Iag in
time. I don't believe that a 15-day midpoint necessarily
represents the appropriate lag when you take into
consideration many of the automatic payments that are
made faster than any of the checks received from the
customers, so those simple changes in the study itself
woul-d show that cash working capital would not be needed.
That doesn't mean that the Company needs to change its
policy, but the Company coufd change a littfe bit of its
policy. Tt coul-d just tweak it a little bit and
eliminate that cash working capital need.
O And my question was one of the tweaks it25
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CSB Reporting(208) Be0-s198
CARLOCK (X)
Staff
coul-d make would be to be a littl-e more aggressr_ve r_n
that be one ofcollecting its
A
o
they could do?
but that wou]d
that would be one of
I know you have other
be one of the tooLs in
the things that
things on the 1j-st,
the toolbox to
if you will?
the problem. I'm
not the practices
bills and that would
Yes, however go ahead and finish.
reduce
sayr-ng
of the
the cash working capital need,
A It would be if that is
that the study 1s the problem,
Company.
O But Staff didn't produce its own cash
worklng
balance
capital study,
sheet analysis?
A I relied analysis that I completed
what the issues were with
you instead relied more on your
on the
and explained earlier comparing
the Company's analysis. f dld make changes to the leads
and the lags in the Company's study to see if that wou1d
eliminate cash working capital and 1t did, and f also
looked at the current assets and current liabilities that
would be part of a balance sheet analysis to determine
whether the Company actually provided those funds and
they did not.
O Okay; so page 5 of your testimony, l-ine
73, you said cash working capital is not automatically
included in the rate base for util-ities. Did you haveo25
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CSB Reporting(208) 890-s198
CARLOCK (X)
Staff
the opportunity to look at Mr. Adams's Exhibit 35 where
he says 43 states out of 50 al-l-ow cash working capital in
the rate base?
A I did look at his analysis, but that
doesnrt mean that it's automatic. I know for a fact that
many of these states it 1s not automatic and even the
is not completely accurate.
think he acknow1edges with a
reference for Idaho
O AndI
footnote the particulars of the fdaho lead-lag studi-es
that Rocky
capital.
where that
where they
Do you disagree
came from? Are
haven't found this?
Mountain uses to establ-ish cash working
with his disclosure of that's
there other examples in Idaho
A
companies that
Eor instance,
inventories and the
The other examples in
don't even ask for a
many
Idaho incl-ude
cash working
of the companies simply have
different components of rate
capital.
the
base
that are incl-uded. For the Company, there are two of
those. Inventories is approxj-mately 3 million that's
incl-uded in rate base, and gas inventory pieces is an
additional 3 million, so that is what most of the
companies, Idaho Power and Avista, utilize for their
working capital. That is not cash working capltal, but
it is a working capital- that provides adequate cash ffow
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CSB Reportlng(208) 890-s198
CARLOCK (X)
Staff
0 Would you agree that there
two sources of funds that the utility can
of them is customer-provided funds and the
investor-provided funds?
A There are customer-provided
are essentially
draw from, one
other is
funds. There
are tax-provided funds, accumulated deferred investment
tax credits, for instance. Deferred taxes, those are not
Company-supplied items. f wou1d argue that not al-l- of
the debt is necessarily Company-supplied, because that's
included in the capital structure and they're already
receiving a return on that, so to receive an additional
return because of the debt would be inappropriate.
O So it seems like you didn't lj-ke my
question very we11.
imply
also a
A I'm not agreeing with
O So on page 5 of your
that inventories and material-s
working
source of working capital as
capital; 1s that correct?
A That's correct, and the Company has
included t.hose items in rate base and Staff has not made
an adjustment to them.
O So with your recommendations in this
particular case with respect to cash working capital,
woul-d there be an incentive for the Company to move cash
your question.
testimony you seem to
and supplies are
opposed to cash
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CSB Reporting
(208 ) 890-s198
CARLOCK (X)
Staff
working capital j-nto one of those other categories or as
another example take out short-term debt? Those woul-d be
recognized in ratemaki-ng, woul-dn't they?
A Short-term debt would be recognized in the
a cash workingcapital structure, but it woufd not be
capital requirement. If you moved to
inventories or material-s and suppli-es,
ancrease
I believe that
there's a good chance that there would be an adjustment
to those items for reasonableness and so manipuJ-ating
cash working capital in that fashion probably would not
achieve an end result of getting the cash working
capital.
()
I mean, you
capital were
just say gas
that and pulI
imprudent?
Ift
accounts and
Because your auditors
would audit and flnd that
moved into inventories or
woul-d find that out?
if cash working
supplies or let's
reserve storage, the auditors would find
that back out and also find that
Part of our audit fooks at trends for al-f
if inventories or materials and supplies
what the
if it was
would investigate
of that was, so
would probably make an
the Company to try to
increase signlficantly, we
reason was and the prudence
simply a shifting, then we
adjustment. I woul-dn't encourage
be cl-ever 1n that area.o 25
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CSB Reporting
(208 ) 890-5198
CARLOCK (X)
Staff
O Irm not suggesting that, but we did
discuss earl-ier your
small tweaks to where
A AndI
idea that al-f we
this would come
needed was a few
into compliance.
al-so lndicated that the study is the
problem, not the practices of the Company.
MR. WILLIAMS: A1l- right. Madam Chair, I
have no further questions. Oh, wait, no, I take that
back.
O BY MR. WILLIAMS: That was just cash
working capital. I have some return on equity questions.
Actually, you thought you were going to get off so
easily; so Ms. Carlock, it's correct that Staff did not
perform a separate DCF study with independent proxy
companies, but instead relied on the Company's proxy
group; is that a correct statement?
A Yes, we looked at the Company's proxy
group and bel-ieved that that was a reasonable proxy
group. We also looked at MDU for comparison purposes.
O And I so inappropriately accused Mr. Lobb
of his recommendation earlier this morning, but it was in
fact your recommendation that if the Company's proposed
fixed cost collection mechanism gets adopted by the
Commission that there shoufd be an additional- 25 point
basis haircut in the recommended ROE?
A I wouldn't call it a haircut, but I dido25
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CSB Reporting(208) 890-s198
CARLOCK (X)
Staff
recommend a 25 basis point adjustment to the return on
equity to recognize the l-ower risk from the Company of
having a fixed cost collection mechanj-sm that covers so
many aspects of true-ups that the Company has requested
and that wou1d significantly reduce the risk of the
Company.
O So, again, I want to return to the proxy
group, because this is a reafly important point, but
within that proxy group, were you aware that over
two-thirds of the companies in that proxy group had some
form of a rate decoupling mechanism already in place?
A Yes, but they were not the same mechanism
that the Company is asking for and that is reflected in
stock prices and the risk characteristics of rating
agencies.
O Well-, there's many types of decoupling
mechanisms, aren't there?
A There are.
O Okay, but in the general vernacular,
they're all
purpose?
ln
attempting to accomplish somewhat the same
They are attempting to levelize revenues
or another and that reduces risk, so from
that point of view, yes, they accomplish the same thing.
O So while we heard earfier that the Staff
for some reason
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CSB Reporting
(208 ) B9o-s198
CARLOCK (X)
Staff
has some concerns on a take-it-or-feave-it basis in this
case regarding
mechanism, we
two-thirds in
mechanisms, do
A
0
the Companyrs fixed cost col-l-ectj-on
don't know the attributes of the other
the proxy group that have rate decoupling
we?
Not all of them, no.
Okay, but woul-d it be appropriate to
adjust your
average of
recommended
those?
A
proxy group ROE reconimendation by a weighted
two-thirds times your 25 basis point
that do havereduction for the groups
f don't believe it is, no.
O Okay. Now, on December 15th, the Federal
Reserve raised fed fund rates you're probably ready
for this question Irm sure 25 basis points and your
testj-mony was fil-ed on December 16th. If m going to
assume you didn't take that rate adjustment into account
when you filed your testimony on December 16th?
A I didn't be1ieve a specific adjustment
would be needed. I wasn't sure when that would occur,
but it was expected.
O If it occurred the week before, would it
have changed your recommendation on ROE for the
Company?
A I don't believe it would have, Do.o 25
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(208 ) 890-5198
CARLOCK (X)
Staff
O f f we're sitting here -- well_, did you
take into account the same announcement of the Eederal
Reserve that it is anticipating
points adjustments
I did not make a
percent basis
that is reflected in
three additionaf 25
in 201,'7 ?
specific adjustment
the anal-ysis that is
A for
that, but
included for the projections from various investors that
would go into the stock price.
a And that shows up in the DCF analysis?
A Yes.
O And the DCF anal-ysj-s that you relied on
was prepared by the Company?
A The DCE anal-ysis that I relied on is a
modj-fication of similar points that the Company utilized
The methodology is not totally different, but there are
differences in the application between what the Company
used and what the Staff has utilized.
O And the Company's DCF analysis was
performed, f et's Sdy, well- before they f il-ed their case
in August of 2016?
A That's correct, but Mr. Gaske has used
multlple forward-looking analyses in coming up with his
recoflrmendations .
a And did you appfy additional
forward-looking analyses in December when you l-ooked ato25
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CSB Reporting
(2oB ) I 9o-s198
CARLOCK (X)
dL-ccJLdII
that proxy group?
AI
numbers and what
looked at the reasonableness of the
the changes were in the market to see if
needed to be refl-ected and theresomething additional
were modifications that are incl-uded in Staff's
reconrmendation, ye s.
O So do you
Commlssion to take under
think it is appropriate
consideration expected
for this
upward
pressure in 2015
for the Company ?
on j-nterest rates when they set the ROE
A 2015 has already occurred.
O I mean, I'm sorry, 2071 .
A No, because
already been refl-ected in
I bel-ieve some of that has
the market.
MR. WILLIAMS: Okay, no further
questi-ons.
COMMISSIONER RAPER: Mr Stokes ?
questions.
Rlchardson?
MR. STOKES: We have no
COMMISSIONER RAPER: Mr
MR. RICHARDSON: No questions, Madam
Chair.
COMMISSIONER RAPER: Mr. Otto?
MR. OTTO: No questions, Madam Chair.
COMMISSIONER RAPER: Are there any
questions from the Commissioners that don't suffer aootrLJ
1390
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CSB Reporting(208) 890-s198
stroke by the blinking light?
Any redirect from the Commissi-on Staff?
MR. KLEIN : No redi-rect .
COMMISSIONER RAPER:Thank you,
now that we haveMs. Carlock, for
concluded Staff's
your testimony, and
testimony, we will take a break and
back in 10 at quarter after 3:00.
(The witness feft the stand. )
(Recess. )
COMMISSIONER RAPER: If we can get back on
the record, Northwest
witness, but we were
together. It doesn't
Industrial Gas Users has a rebuttal
to try and get Mr. Reading
a lot of sense to put
then do Mr.for direct, take a rebuttal witness, and
Reading's rebuttal.
Madam Chair.
going
make
MR. RICHARDSON: Sorry about that mj-x-up,
COMMISSIONER RAPER: Pardon?
MR. RICHARDSON: Sorry about that
him on
mr_x-up.
okay withCOMMISSIONER RAPER: No, is that
you?
MR. RICHARDSON: ft's wonderful-.
COMMISSIONER RAPER: Okay. Wel-l-, then
that's the way that we wil-l- proceed, so Northwest
fndustrial Gas Users if you would like to cal-I your25
13 91 COLLOQUY
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CSB Reporting(208) 890-5198
FINKLEA (Di_Reb)
NWIGU
rebutta] witness.
MR. STOKES: Yes, I would like to cal-l- Ed
Finklea to the stand.
EDWARD A. EINKLEA,
as a rebuttal witness at the instance of the
Industri-al Gas
produced
Northwest
sworn to the truth,
examined
teIl
Users, having been first duly
the whole truth, and nothing but
and testifled as follows:the truth, was
DIRECT EXAMINATION
BY MR. STOKES:
0 Please state your name and address for the
record.
A My name is Edward Finklea. My address is
545 Grandview Drive in Ashland, Oregon.
O What 1s your position and who do you
represent in this proceeding?
A I serve as the executi-ve director of the
Northwest Industrial- Gas Users and I'm a witness for them
in this proceeding.
O Okay, are you the same Ed Pinklea that
caused to be filed prefiJ-ed rebuttal testimony consisting
of eight pages and one exhibit?o 25
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CSB Reporting
(208 ) 890-s198
FINKLEA (Di-Reb)
NWIGU
fam
If I were to ask you the same questions
today with a couple of corrections, woul-d your answers be
the same?
A Yes, with the exception of I do have a
correction on page 7.
O What is that?
A On page 7 there's a sentence that reads,
"The Commi-ssion should approve the rate reductions
requested by fntermountain for Industrial Schedules LV-1
and Flrm Transportation Rate T-4," and to that should be
added, "and Interruptible Rate T-3. "
MR. STOKES: With that, I move to enter
the testimony and exhibit and spread it upon the record
as if read.
COMMISSIONER RAPER: Exhibit
MR. STOKES: One exhibit. The exhibit is
A
o
his professi-onal qualifications, I
COMMISSIONER RAPER:
bel-ieve.
oh,
book was not t.abbed. You are correct.
f apologize, my
With no
objection, we will spread the testimony of Mr. Finkl-ea on
the record, rebuttal t.estimony of Mr. Finklea on the
record, as if read and Exhibit No. 319 is entered into
the record.
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CSB Reporting
(208 ) 890-s198
FINKLEA (Di-RCb)
NWIGU
(NWIGU Exhibit No. 319 was admitted into
evidence. )
(The following
Edward Fink]ea
prefj-led rebuttal-
testimony of Mr
record. )
is spread upon the
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FINKLEA (Di-Reb) 1
NWIGU
o.
A.
attorney
Northwest
o.
PLEASE STATE YOUR NAME AND YOUR EMPLOYER.
My name is Edward A. Finklea, and I am an
serving as the Executive Director of the
Industrial Gas Users ("NWIGU").
PLEASE SUMMARIZE YOUR EDUCATIONAL BACKGROUND
AND EXPER]ENCE
A. My resume is attached as Exhibit 319 to this
testimony.
A. ON WHOSE BEHALF ARE YOU APPEARING IN THTS
PROCEEDING?
A
member
servi-ce
Idaho,
Company
O.
A.
respond to
Commission
I am appearing on behal-f of NWIGU. NWIGU
companies purchase safes and transportation
from local- distribution companies ("LDCs") in
Washington and Oregon, including Intermountain Gas
("IGC" or the "Company").
WHAT IS THE PURPOSE OF YOUR TESTIMONY?
The purpose of my rebuttal testi-mony 1s to
the Direct Testimony of Idaho Public Utifities
Staff witness Michael Morrison. In
particular, I will- respond to Mr. Morrison's positlon
that all rate cfasses of customers should receive a rate
increase despite the results shown in the company's cost
of service study.
O. DID YOU FILE DIRECT TESTIMONY?
A No.o 25
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FINKLEA (Di-Reb) 1a
NWIGU
O. WHAT IS MR. MORRISON'S PROPSAL FOR SPREADING
ANY RATE INCREASE GRATNED ]N THIS PROCEED]NG?
A. Mr. Morrison is reconrmending that any revenue
deflciency found to exi-st be spread to al-l- customers on
an equal percentage of the margin being col-l-ected from
each rate class. For natural gas LDCs the margin is the
difference between the delivery rate and
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FINKLEA (Di-Reb) 2
NWIGU
the commodity cost
customers, who are
of the gas. For
only purchasing
service from the LDC, the "margin"
O. WHAT REVENUE ALLOCAT]ON
transportation
cross-town delivery
is the entire rate.
DO YOU RECOMMEND?
A. I support the revenue al-location recoflrmended by
the Company, with decreases going
LV-1 and Eirm Transportation Rate
j-ncrease going to other schedul-es.
allocation because it is consistent
to Industrial- Schedule
T-4, and the entire
I support that
with the result of
Intermountain' s
supported by the
service.
o. wHY DO
cost of service study and is ful1y
analysis of Mr. Gorman regarding cost of
YOU DISAGREE WITH MR. MORRISON'S
PROPOSED REVENUE ALLOCAT]ON?
A. There are three primary reasons I disagree.
First, there is no competing cost of service analysis
that supports any other rate spread. Whil-e Mr. Morrison
has criticj-sms of the company's cost of service study, no
al-ternative has been proposed for consj-deration by the
Commissj-on. Second, thls case is unique in that it has
been over 30 years slnce Intermountain had a raLe case,
so to ignore the results of the cost study and simply
kick the issue to the next rate case offers no resoluti-on
of what has been,
misal-l-ocation of
by the Company's own analysis, a
costs for many, many years.o 25
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EINKLEA (Di-Reb) 2a
NWIGU
Essentially, Intermountain's industrial rates have been
too high for a very long time and Mr. Morrisonrs
recommendation is to simply make that situation worse by
allocating an unjustifiable rate increase to these
customers. Third, ignoring the results of the cost of
service study sends al-I the wrong price signals to
customers regarding the value of firm
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FINKLEA (Di-Reb) 3
NWIGU
delivery service from Intermountain and how costs are
incurred to provide that firm service on a peak day.
O. WHY SHOULD THE COMM]SS]ON ACCEPT THE RESULTS OF
THE COMPANYIS COST OF SERV]CE STUDY?
A. The Commission should accept the results
because two very experienced analysts, Ms. Blattner and
Mr. Gorman, have carefully studied how Intermountain's
cost are incurred and both reached independent
conclusions that support each other. In addition, the
resufts are consistent with how I understand costs are
incurred when transport j-ng natural- gas. The capacity of
the system is designed to meet peak day demand. Since
LDCs only deliver 9dS, unl-ike electrj-c utilities that
generate, transmit and deliver electrici-ty, we are only
concerned about allocatlng fairly the delivery costs. If
costs are to fol-Iow benefits in the natural gas delivery
business, then the customer classes that impose peak day
requirements should pay for those delivery capabilitles.
Mr. Morrison's criticism of the company's cost study
defl-ects, but does not rebut,
cost causation in the natural
this basic principle of
gas distribution industry.
of the cost of serviceIn addition, the
studies do not point
customer classes, but
results
to minor misallocati-ons between the
a significant misalignment between
cost incurrence and rates. Thus, the results should noto25
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be ignored in this proceedi-ng
classes a rate increase. Mr.
by allocating all customer
Morrison' s recommendation
woul-d exacerbate the existing misal-l-ocations.
FINKLEA (Di-Reb) 3a
NW]GU
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FINKLEA (Di-Reb) 4
NWIGU
o. cAN you porNT To AN EXAMPLE TO RATESETTING EOR
IDAHO NATURAL GAS CUSTOMERS THAT RECOGN]ZES THE PEAK URE
OF COST INCURRANCE ]N THE DEL]VERY OF NATURAL GAS?
A Not directly on cross town delivery, but the
transportatj-on of gas by Intermountain's
pipeline recognizes this approach. Northwest
interstate
supplying
Pipeline serves Intermountain and that pj-peline's rates
are set by the Federaf Energy Regulatory Commission
("FERC"). FERC uses straight fixed varj-able rate design
to establish interstate pipeline rates. A1I fixed costs
are allocated to the capacity charge and Northwest
Pipeline assesses those charges based on the customer's
contract demand. Thus, all fixed costs of the interstate
pipeline system are collected through demand charges that
are based on contract demand. Durj-ng peak period events
no shipper can exceed their contract demand, and peak
usage sets the level of the charges. Those charges are
paid every month regardless of actual usage. FERCTs
method of setting rates has been in place si-nce the 1990s
and has effectively allocated pipel-ine capacity 1n
accordance with customers' demands they place on the
pipellne system.
in essence follows
asses slng
O.
Intermountain's cost of servi-ce study
the FERC method of assigning costs and
charges.
WHY DO YOU CONSIDER THIS CASE UNIQUE?o 25
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FINKLEA (Di-Reb) 4a
NWIGU
A. This case is unique because it has been since
1985 that the Company had a general rate case - Thj-s adds
addressing the misal-l-ocation thata sense of urgency
exists.
to
currently
assumed to
The rates establ-ished in 1985 can be
have reflected cost of service among the
time. However,
For exampfe,
service in 1985
bundled sales
customers cl-asses as they existed at that
much has changed in the ensuing 32 years.
Intermountain only provided bundled sal-es
and the interstate pipeline only provided
service as wel-l-. The
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FINKLEA (Di-Reb) 5
NWIGU
transportatlon rates Intermountaj-n has charged since the
the fate 1980sadvent of transportation service in
refl-ect the margins on the industrial sales schedules
from 32 years ago. Since that time, facilitles that
served customers at the time have significantly
depreciated. Similarly, new services have been brought
to many customers. The servj-ce territory of
Intermountain also looks very different than it did in
1985. Thus, it is very lmportant to review the results
of a current cost of service study before setting new
rates.
From the
have been long
results of the
perspective of
time customers
cost of service
many of NWIGU's members who
of fntermountain,
study imply that
excess of cost of
the
for many
service,years they have paid rates r-n
and they have therefore been subsidizLr.g residential and
commercial servj-ce, perhaps for decades. This raises a
question of
1f the rate disparities are then ignored in t.his case and
instead become exacerbated by the revenue al-focation
recommended by Mr. Morrison.
NWIGU sponsored the work of Mr. Gorman to determine
if Intermountain 's cost study was accurate. Mr.
Gorman's careful- analysi-s conf irms that f ntermountain has
performed a cost study consistent with cost causation
fundamental- fairness for industrial customers
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EINKLEA (Di-Reb) 5a
NWIGU
principles well- recognized in the natural gas in
industry. Based on this record, after goi-ng decades
without rate adjustments, I find Mr. Morrison's
recommendation to be insufficient to warrant a departure
from the Company's fll-ed proposal and 1t provJ-des no
sound basis for assessing a rate increase to
fntermoutain's industrial schedules.
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FINKLEA (Di-Reb) 6
NWIGU
O. ARE INACCURATE PRICE SIGNALS SENT TO
INTERMOUNTAfNIS CUSTOMERS IE ]NDUSTR]AL RATES ARE
INCREASED DESPITE THE CROSS_SUBSIDIES SHOWN BY THE
COMPANY'S COST STUDY?
A. Yes. fnaccurate price signals are being sent
under Intermountainrs current rates and the inaccuracies
wil-l- be exacerbated if Mr. Morrison's recommendations are
adopted by the Commission. Setting natural gas delivery
rates consistent with cost causation principles is an
important objective of ratemaking if the Company and the
Commissi-on want customers to have accurate price signals
to enabl-e customers to make efficient consumption
decisions in purchasing gas distribution capacity. If
the industrial class pays too much for distribution
service, it impedes economic development by creating
price signals for customers to seek alternatives to
natural- gas service when the al-ternatives may not be
competitlve on a strict cost of service basis. Loss of
these inflated margin customers would cause earnings and
credit impairment to t.he utility because the l-ost revenue
woul-d exceed cost avoidance or revenue that could be
serving another customer in a different rategained by
class that
customers
the price
is paying a subsidized rate. Conversely, for
that pay too littl-e for gas delivery services,
increased demand, whichsignal may incent ano25
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FINKLEA (Di-Reb) 6a
NW]GU
woul-d result in the utility col-l-ecting too 1j-ttIe
incremental revenue compared to the incremental cost for
serving those customers.
Similarly, if residential- and commercial-
distribution service is underpriced, that gives the wrong
price signal to those consumers. Under-pricing
residential and commercial service undercuts efforts to
implement demand side management programs targeted at
reducing consumption during peak periods. Resldential
conservatj-on programs, for example, are undercut if the
gas delivery service is underpriced during peak usage
periods as
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customers may chose to take the subsidized service over
investj-ng in conservation measures that would decrease
their consumption.
Properly pricing distribution service is very
important in this environment where natural gas commodity
prices are l-ow. Delivery charges collected by
fntermountain today are a much higher percentage of the
burner tip price of natural gas than ten years ago when
commodity prices were so high. Unregulated commodlty
markets give consumers the proper price signals regarding
the commodity price of gds, but those price signals can
be undercut if the delivery charges do not refl-ect cost
of service.
O. WHAT RESULT ARE YOU RECOMMENDING THE COMMISSON
ADOPT?
A. The Commj-ssion should approve the rate
reductions requested by Intermountain for Industrial
Schedules LV-1 and Firm Transportation Rate T-4 and
Interruptible Rate T-3. Since the size of the overall-
rate increase in this proceeding shoul-d be smaller than
what was requested by Intermountain, the size of the
increase for residential- and commercial- customers shou]d
be reduced by the entire decrease in the overall rate
increase. That way residential and commercial customers
see a smal-ler increase than was requested by the company.
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NWIGU
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FINKLEA (Di-Reb) 7a
NWIGU
The realignment
be accomplished
residential- and
requested. This
real]ocation on
of rates requested by Intermountain wiIl
wi-thout as high an increase
commercial customers as was
for
initially
of theadj ustment
residential
eases the impact
and commercial- customers. So
NWIGU agrees that if Intermountain gets a smaller overal-l-
rate increase than the one it filed for, the size of the
industrial- rate decreases shou]d be no more than what
Intermountain requested.
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FINKLEA (Di-Reb) B
NWIGU
NWIGU supports Staff witness Mr. Morrison's
suggestion that all parties embark on a coffaborative
process to refi-ne the cost of service study and make
further adjustments in a future Internlountain rate case.
Adjustments could be made in a future case without
causJ-ng any customer cl-ass to experience too great an
j-ncrease. If instead an increase that is not justified
by Intermountain's cost of service study is allocated to
industrlal- customers anyway in thls case, to correct the
misallocation in the future would take a greater increase
for residential and commercial-customers. NWIGU's
outcome and recognizes
service study may be
reconrmendation is
that adjustments
necessary in the
O. DOES TH]S CONCLDUE YOUR TESTIMONY?
a responsible
to the cost of
future.
A. Yes.
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(208 ) 890-s198
FTNKLEA (X-Reb)
NWIGU
(The foll-owing proceedings were had in
open hearing. )
COMMISSIONER RAPER: Does the Company have
any cross-examination for this witness?
MR. WILLIAMS: We do, Madam Chair.
COMMISSIONER RAPER: Okay.
CROSS-EXAMINAT]ON
BY MR. WILLIAMS:
O Mr. Finkl-ea, we've heard a lot of
testimony about the market share and the market size of
Amalgamated in this case, and your customer group is
comprised of a l-ot of food processors in Idaho; is that
correct ?
A Well, food processors, but many others as
well. Our organization
have 32 members i-n three
has been around since 7984. We
states,Oregon, Washington, and
Idaho are the J.R.Idaho, and among
Simplot Company,
food processing,
Basic American,
and several of
our members in
DarigoId.
our members
ConAgra, Idahoan, but
ON Semiconductor is a
then outside the
member, BYU-Idaho,
allegations
customer.
That's a few of our members,
have multiple facilities.
O And yourve heard testimony and
of rate shock with respect to one industrialo25
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FINKLEA (X-Reb)
NWIGU
Do you have
section of your
cost of service
this case?
objection, this
to anyplace in
rate shock.
in general. I'm going
while. I think that it
of rates across rate
have you looked at that from a cross
customers for the rate I guess the
study that the Company has proposed in
MR. RICHARDSON: Madam Chair, in aid of
is cross-examination. He hasn't pointed
the witness's testimony where he discusses
MR. WILLIAMS: That is correct. I'm
asking him to respond to comments that have been made by
another witness in this case.
MR. RfCHARDSON: But he's cross-examining
this witness on this witness's testimony and if he wanted
to cross-examine other witnesses on their testimony, he
had that opportunity.
COMMISSIONER RAPER WeIl, in looking at
even for the purpose
the record, j-t was in
this witness's rebuttal- testimony,
of why his
reference
rebuttal testimony is on
to the cost of service study and rate increases
to allow it
goes to the
at least for a l-ittle
generality of spread
is what thiswhich
witness's testlmony
THE
classes,
is on the
WITNESS:
think there's any evidence
record to present.
first of all, I don't
record that
We11,
in thiso25
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FINKLEA (x-Reb)
NWIGU
resi-dential and commercial customers woul-d suffer rate
shock if the Company's allocation based on its cost study
was implemented by the Commission. We're,
talking about a percentage of two or three
between addressing what the Company thinks
misal-location between the classes and t.he
I think,
position of the
Staff that there should be an equal- percent of margi-n
increase, so I in my opinion don't see any rate shock on
that.
I've heard the discussion during the
hearing about the rate shock to the particul-ar customer
j-nvol-ved of Amalgamated and my only observation with
regard to that is that the rate that's paid for the
delivery of the gas by the local distribution company, it
is a very smal-l component of the del-ivered price that
Amalgamated faces, and in my experience as someone who
actually watches gas markets, f see fluctuations within a
week or two weeks in the price of natural- gas that
exceeds the amount that is at dispute in this
proceeding.
MR. WILLIAMS: Madam Chairman, I have no
further questions.
COMMISSIONER RAPER: Thank you. Does
Commi-ssion Staff has any cross?
MR. KLEIN: Staff has none.
di-f f erence
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(208 ) I 90-s198
FINKLEA (x-Reb)
NWIGU
BY MR. RICHARDSON:
Northwest Industrial Gas Users is
COMMISSIONER RAPER: Mr. Richardson.
MR. RICHARDSON: Thank you, Madam Chair.
CROSS-EXAMINATION
0 Mr. FinkIea, your position with the
as executj-ve director;
is that correct?
A That's correct, sir.
O You're also an attorney; is that
correct ?
A I'm an attorney by training, but I have
grown up to become a client.
a And as a cllent, I assume that means
you're not testifying in this proceeding as a lega1
opinion?
A Thatrs correct, I am not.
Have you testified before commj-ssions on
studles before?
No, f have not.
So you're not an expert on cost of
I
cost of service
servi ce ?
A No, I am not. I have seen these kinds of
debates for 30 years and I have employed people that have
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FINKLEA (X_Reb)
NW]GU
performed cost of servi-ce studies, but I have never
prepared a cost of service study.
O So you're not testifying to this
Commission as an expert
on the cost of servi-ce
on what thi-s Commission shoul-d do
issues,are you?
based on the record
Company
Mr.
results,
A Wel-l, I 'm testif ying
of the cost of service study that was done
and the careful work that was done by our
by the
expert
Gorman on what the Commission should do with the
not on the details of the cost studies themselves.
O
investigation
A
O On page 4
you're asked if you coul-d
setting for Idaho natural
So you personally have not conducted any
into the cost of service study itsel-f?
I relied on Mr. Gorman.
the peak
delivery
ON CTOSS
of your testimony at
point to an example
gas customers that
of cost incurrence
l-ine 3,
to rate
recognr_ zes
in thecapacity nature
of natural 9ds,
town delivery. "
delivery?
A
industry use
comes from a
station and
distributors
and you answered, "Not directly
What's that mean, cross town
WelI, that's a term that many of us in the
for what local distributors provide. Gas
productj-on facility by plpeline to a gate
what Intermountain Gas and other local
do is move that gas from the gate station to25
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FINKLEA (X-Reb)
NWIGU
the customers and f refer to that as cross town
delivery.
0 So would it be accurate to paraphrase your
answer to that question as a simple no?
A That's my understanding.
O Then the rest of your answer, it's a
fairly long paragraph, goes into some detail- about how
the Eederal Energy Regulatory Commission sets capacity
rates for natural gas
That's
pipelines; correct?
correct.A
u
defer to the
So do you think this
federal- government for
Commission should
instructing 1t how it
should set rates for local- distrlbution companies?
A I think how the Pedera1 Energy Regulatory
Commission sets rates for pj-pelines is rel-evant to this
proceeding and to how 1ocal distributor rates are set,
because of the recognltion of the heavy fixed cost aspect
of the delivery of natural 9ds, whether i-nterstate or
across town, but I certalnly would not say every state
should defer to the federal- government.
O But they should certainly, according to
your testimony, refer to the federal- government for how
to set rates for thls local- distribution company?
A Wel-l-, the largest regulatory settlng in
the whole United States has to do with how interstateo25
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FINKLEA (X-Reb)
NWIGU
pipelines set their
to me, but I'm not
state simply defer
it's seems highly re1evant
woul-d ever advocate that a
ratesr so
lmplying or
to the federaf government.
we're not setting rates
are we?
O And that's because
for an j-nterstate pipeline here,
A No, but
similar service.
O On line
you're setting rates for a pretty
1,9 of the same page, you talk
about a sense of urgency to address what you have
that ?described as a misal-locatj-on. Do you see
A Yes, slr.
O But when did this sense of urgency become
apparent to you?
A When I
a So this
saw the Company's cost study.
sense of urgency became apparent
to you sometime within the last six months?
A Wel-l-, since didn't they file in August?
thatft's a little more than six, but since then, in
range, correct.
o
problem if
gas flowing
problems?
A WeIf, whether the gas flows or not, the
question we're dealing with is how to price it and the
So explain to me how this is an urgent
Intermountain Gas has been able to keep the
for the last 30 plus years with no
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FINKLEA (x-Reb)
NWIGU
misal-location of costs within the l-ocal- distribution
industry can l-ead to improper pricing si-gnals and
resulting from that can mean improper energy choices by
consumers, so that's where the sense of urgency comes,
that if you have identifled misallocations that they
shoul-d be addressed. They shouldn't just be kicked down
the road.
0 So this sense of urgency that just became
apparent to you wlthin the last eight months is relative
to a problem that's been
decades ?
A Well-, we start from the proposition that
the rates set three decades ago must have been based on
proper cost of service. I started doing work with this
organization the year after that
was not directly involved, so I
what's in that Order, but short
in existence for three
case was decided, so I
can't
explalning to one of the
of the customers bringing
Commissioners
say any more than
as Mr. Gorman was
yesterday, short
proceeding and
of
a complaint
investj-ng the money and doing their own cost of service
study and taking on the burden of proof in a complai-nt
proceeding, there's no way for customers realIy to
address something 11ke this when a utility doesn't file a
case, and when they haven't filed for decades, the sense
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FINKLEA (X-Reb)
NWIGU
O And over on page J , beginning on lj-ne I ,
you talk about unregulated commodity markets giving
consumers the proper price signals regarding the
commodity prlce of 9ds, but then you go on to say that
those price signals can be undercut if the delivery
charges do not refl-ect the cost of service. I was
wondering if you coul-d explain to me what you mean by how
the delivery price signals can be undercut.
A Well-, the commodity is only the commodity
and because it is unregulated, in any given time, we as
consumers have to accept that that's the price of gas
this month, but the delivery charge is set by tariffs and
if those delivery charges don't reflect cost of service,
then as to the delivery,the wrong price signal is being
j-t's that aspect of the pricesent to
signal,
of gdsr
the consumers, so
the total del-ivered price
cost of gas is a
not, from thedifferent bundl-e of services, is it
agar_n,
but an
commodity?
A
a
inappropriate
market basket
the commodity
a small- piece of
important plece.
But the delivery
Very
And
different, y€s, sir.
so in your mind, is
to discuss the delivery
of costs, single market
and the delivery? Is it
it appropriate or
charges as a single
basket of services,
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FINKLEA (x-Reb)
NWIGU
services ?
A Well, therers actually three services in
this business. There's the commodity itself. There's
the interstate transportation of that 9dS, and then
there's the delivery, and in all three of those areas you
theneed to be concerned about pricing those, but because
we don't have to concerncommodity is deregulated,
ourselves with that, but with both interstate and cross
town delivery of gas, that's where the price signals are
relevant.
O And do you think that the commodity price
should be a factor in det.ermining the transportation
rate ?
A No.
MR. RICHARDSON: Thank you, Madam
Chairman, that's all- I have.
COMMISSIONER RAPER: Mr. Otto.
MR. OTTO: No questions, Madam Chair.
COMMISSIONER RAPER: Are there any
questions from the Commissioners?
Any redirect, Mr. Stokes?
MR. STOKES: Nor ilo, Madam Chair.
COMMISSIONER RAPER: Thank you, Mr.
Einklea, for your time. You sat through a lot of
testimony to have your opportunity. I appreciate youro25
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READTNG (Di)
Amalgamated Sugar Co.
patience.
THE WITNESS: Well-, it ' s al-l- worth it. My
wife thinks I'm crazy, but I still- fike doing this.
COMMISSIONER RAPER: You're on record, be
careful.
(The witness l-eft the stand. )
COMMISSIONER RAPER: So we have now moved
to Dr. Reading finally has his opportunity.
MR. RICHARDSON: Amalgamated Sugar would
cal-l Dr. Reading to the stand.
DR. DON READING,
produced as a
Sugar Company
the truth, the
witness at the instance of the Amal-gamated
sworn to teIILLC, having been first duly
whol-e truth, and nothing but the truth,
was examined and testified as follows:
D]RECT EXAMINATION
BY MR. RICHARDSON:
o Are
prefiled direct and
501 to be prefiled
A Yes.
O And
you the same Dr. Reading who caused
rebuttal- testj-mony and Exhibit No.
in this case?
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or corrections to make to your prefiled rebuttal or
dj-rect testimony?
A Not at this time.
MR. RICHARDSON: Madam Chairman, I would
move that the prefiled direct testimony and rebuttal
testimony of Dr. Readj-ng be spread upon the record as j-f
it were read 1n full, and that Exhibit No. 501- be marked
for identification purposes and admitted i-nto the
record.
COMMISSIONER RAPER: Thank you. You do
not suffer the same deficiency as Staff. We wifl- enter
Dr. Reading's testimony, both direct and rebuttal, upon
the record as if read and enter Exhibit 501.
MR. RICHARDSON: Thank you, and just for
the record, we do have an Exhibit 502 that was admitted
yesterday on cross-examination, so we do have two
exhibits total.
COMMISSIONER RAPER: Thank you for the
cl-arif ication.
(Amalgmated Sugar Company Exhibit No. 501
was admitted into evidence. )
(The fol-lowing prefited direct and
rebuttal testimony of Dr. Don Readinq j-s spread upon the
record. )
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READING (Di)
Amalgamated Sugar Co.
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O. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is Don Reading and my busj-ness address
is Ben Johnson Associates, 6070 Hill Road, Boise, Idaho.
I am Vice President and Consulting Economist for Ben
Johnson Associates.
O. HAVE YOU PREPARED AN EXHIBIT OUTL]NING YOUR
QUAL]FICATIONS AND BACKGROUND?
A. Yes. Exhibit No. 501 serves that purpose.
O. ON WHOSE BEHALF ARE YOU TESTIFYING IN THIS
DOCKET?
A. I am testifying on behaff of The Amalgamated
Sugar Company LLC (Amalgamated). Amalgamated produces
sugar from sugarbeets grown by over 750 member/growers of
its parent cooperative the Snake River Sugar Company.
Amalgamated is the second largest manufacturer of sugar
from sugarbeets in the United States and sel-Is sugar
throughout the country. Amalgamated's over 750
grower/members raise sugarbeets on over 180r 000 acres of
irrigated land, primarily in Southern Tdaho, producing
approximately 1,000,000 tons of sugarbeets annually.
These sugarbeets are processed in factories that are
Iarge scale, heavy industrial facil-ities that operate
24 /1. Amalgamated' s three f actories (Nampa, Twin Fal-l-s
and Paul) process sugarbeets during the fall and winter,
produce sugar 11 months of the year, and operate molasses
Reading, Di 1
Amalgamated Sugar
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Reading, Di 1a
Amalgamated Sugar
separators year-round. Energy consumptJ-on (particularly
naturaf gas consumption) is highest during the sugarbeet
processing months in the fall and winter. Sugarbeets are
processed into both refined sugar and animal feed
products. The sugarbeet industry contributes afmost 2%
to the Idaho gross domestic product each year and
represents al-most 10? of Idaho's total cash
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receipts from crops.
A. WHAT ]S THE PURPOSE AND GENERAL CONCLUSION OE
YOUR TEST]MONY IN THIS CASE?
A. I have been asked by Amalgamated to testify as
to the reasonableness of the requested rate design
changes proposed by the Intermountain Gas Company ( "Gas
Company" or 'rIGCr') and also to address the need for the
Gas Company to implement an industry standard vested
interest refund program for customer funded line
extensj-ons and improvements. I conclude that due to the
Gas Company's failure to keep up with changes in both
customer usage patterns and its failure to keep its rate
design current and relevant, that any rate design changes
shou1d be phased in over a period of years in order to
ameliorate rate shock and to allow customers time in
which to adjust their usage/budgets and consumption
patterns j-n order to respond to the Gas Company's
radicall-y reconfigured rate design. I also concl-ude that
the Gas Company should implement a vested interest refund
program that conforms to modern util-ity practices.
O. WHEN WAS THE GAS COMPANY'S LAST GENERAL RATE
CASE?
A. The last general rate case for the Gas Company
was in 1985, 37 years ago.
O. TN YOUR EXPERIENCE IS ]T UNUSUAL FOR A LARGE
Reading, Di 2
Amalgamated Sugar
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Amalgamated Sugar
INVESTOR_OWNED UTIL]TY LIKE THE GAS COMPANY TO ALLOW OVER
THREE DECADES TO LAPSE BETWEEN GENERAL RATE CASES?
A. Yes, it is both unusual and it has consequences
for the company and its ratepayers.
O. BY ''CONSEQUENCES'' DOES THAT MEAN IT IS
DETRTMENTAL TO WA]T SO LONG BETWEEN RATE CASES?
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rNT-G-76-02 7425
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Amalgamated Sugar
A. Not entirely.
be commended for keeping
Certainly the Gas Company should
its costs down, in part by
reducing employee counts on a per
On the
customer basis and
runnfng an
have built
other hand, customers
usage patterns, and even investment in plant,
based on thirty years of experj-ence/expectations with the
existing rate design. If over those thirty years rate
design changes were cal-Ied for, the customers of the Gas
Company were not made aware of those pending changes and
as a resul-t have not been able to plan for or budget
capital expenditures to accommodate those pending rate
design changes.
O. HAS THE GAS COMPANY BEEN ABSORBING TNCREASED
COSTS OVER THE LAST THIRTY YEARS?
A. No. The Gas Company has not been absorbing all
its increased costs at the expense .f its Investors over
of the l-ast thirty years. Changes in its single largest
expense, 9ds commodity, are passed through to its
ratepayers annually on a dol-Iar-for-doIl-ar basis. In
essence, this case is about the cost to deliver the
commodity (natural gas) and not about the cost of the
commodity itsel-f . Because the Gas Company does not j-ncur
costs to produce the commodity it delivers, it is more
akin to a regulated distribution only electric uti-Ilty
than a fu11y integrated el-ectric utility or even a fu11y
efficient shop.
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rNT-G-76-02 1426
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Amalgamated Sugar
integrated water
production costs
utility, both of which incur commodity
to varying degrees
O. WHAT ARE YOUR OVERALL IMPRESSIONS OF THE GAS
COMPANY' S FILING?
A. The General- Rate Case fil-ed on August 72, 2015,
asks for an increase 1n revenues of
$10.2 mill-ion or 4.06% for IGCfs 334,650 customers. It
contains some significant and
rate structure for the various
percentage change
far reaching changes to the
rate cl-asses. The
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Amalgamated Sugar
in the rates proposed by the has a widely
customer cl-asses but
Company
variousdisparate impact on not
afso customers within a
j ust
q j-ven rate class.
O. WHAT IS THE ]MPACT ON YOUR CL]ENT, THE
AMALGAMATED SUGAR COMPANY?
A. Amalgamated is a Large Vofume and
Transportatj-on customer. For this class of customers,
the Company is proposing, for the first time, a demand
charge, based on a Maximum Daily Fj-rm Quantity (MDFQ)
that is nomj-nated by the customer. The MDFQ quantity is
nominated in a contract between IGC and the customer and
is in effect throughout the term of the contract. The
customer in turn pays the Gas Company each month for the
ful-I amount of its MDEQ regardless of whether that ful-f
amount is consumed.
O. IN WHAT WAY IS THIS A CHANGE IN THE WAY IGC HAS
BEEN DOING BUSINESS OVER THE LAST THTRTY YEARS?
A. Atl of the Gas Companyrs chargesr up to now,
have been based on the actual- volume of natural gas
demandconsumed by its customers. The imposition of a
charge wil-l- produce a significant amount of revenue for
IGC and will have repercussions on the rates for other
services. This dramatj-c change in rate design can have a
significant impact on customer rates depending on the
usage pattern of each individual customer.a 25
rNT-G-L6-02 7428
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Amalgamated Sugar
O. PLEASE EXPLAIN?
A. With the introductj-on of the new demand charge
the vol-umetric charges per therm are proposed to be
reduced significantly by from 65? to '75e" depending on the
usage block for the T-4 rate c1ass. In advocating for
the movement from the current-vol-ume-usage only rate
design, the Gas Company is basing its proposed rate
design on its preferred
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cost-of-service (COS) study. The end result is the
movement to a MDFQ demand charge desi-gn in a single step,
based solely on an implementation to the full COS, as
filed by the Company.
0. IN YOUR OPINTON rS THE COMPANY'S PROPOSAL A
REASONABLE OR TYPICAL RATE DESIGN CHANGE?
A. As a Phd Economist, I am very comfortabl-e and
often supportive of rates reflecting costs such as the
imposition of some l-evel of demand charges to recover
fixed/demand related costs. However, as an expert in
utility rate design and with severaf decades of
experience in the fie1d, f must conclude that thls one
step dramatic rate design change that is proposed after
31 years with no change in the rate structure is
decidedly unreasonabl-e.
O. IF YOU ARE GENERALLY SUPPORTIVE OF DEMAND
CHARGES TO RECOVER DEMAND RELATED COSTS, THEN WHY DO YOU
CONCLUDE THAT fGC's PROPOSED MDEQ DEMAND CHARGE ]S
UNREASONABLE?
A. One of the fundamental theories behind utility
rate design is to properly price each distinct commodity
such that the customer can make rational economic
decisions j-n response to accurate prlce signals.
Rational responses to increased price slgnals such as
proposed by IGC include such measures ds, (1) increasing
Reading, Di 5
Amalgamated Sugar
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Amalgamated Sugar
the price at which the rat.epayer's own products (sugar)
are sofd into the market, (2) altering usage patterns to
amel-iorate the increased costs such as changing
production times or methods, (3) switching to a different
product such as coaf or electricity, (4) moving
production to a l-ower cost facility or l-ocation, and/or
(5) even choosing to cease operations.
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INT-G_L6_02 14 31
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O. WHAT IS THE COMMON THEME AMONG THESE RATIONAL
ECONOMIC RESPONSES TO INCREASED PRICE SIGNALS?
A. Many such choices are i-nterdependent and often
a rational- economic response invol-ves a combination of
severaf of the above. However, what al-l of these
possible responses have in coflimon is that they typically
cannot happen instantly, and they never take place in a
vacuum. Unfortunately, the Gas Company's proposal,
assuming the cost of service study 1s 'accurate, ' is
asking its customers to respond to these dramatic changes
instantly, in a vacuum, and with no advance notice.
O. WHAT IS THE TERM OF ART IN REGULATED UTILITY
JARGON FOR WHAT YOU ARE DESCRIBING?
A. Rate shock, which frankly is very descriptive
of the Gas Company's proposal. IGC has simply not
proposed any mitigation for those customers facing rrate
shock' from the proposed new rate structure.
O. HOW DOES THE GAS COMPANY ADDRESS TH]S PROBLEM?
A. fGC witnesses in their testimony use quotes
from ratemaking experts (Bonbright for example) as
guidlng ratemaking principles. They assert that they are
using sound rate making principles in their proposed rate
deslgn. lTerzic p. 7, Blattner p L9-201 However nowhere
in the fil-ed testimony is there a mention of'rate shock'
as one of the cornerstone's of sound rate design.
Reading, Di 6
Amalgamated Sugar
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rNT-G-1 6-02 1432
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o. WHAT rs 'RATE SHOCK' AND HOW DO REGULATORY
COMMISSIONS TYPICALLY ADDRESS ]T?
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6a
Sugar
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Amalgamated Sugar
A. There is no bright line test to
shock; the Edison Electric Institute has
identify rate
described it as
"the pain associated with large rate
Federal Energy Regulatory Commission
increases as l-ow as 292 to be "rate
increases. " The
has identified
shock. tt1
rate shock
Fortunately
in thisfor this Commission, mitigation of
case does not cal-I for a balancing of the
the utility in being made who1e in terms
interests of the ratepayer
"pain associated with large
IS IT THAT THE COMMISS]ON
interests of
of recovery of
in terms of
rate increases. "
costs and the
avoiding the
o. How
SHOCK IN THIS
WHOLE?
overall rate
not
CAN AVOID RATE
CASE AND ST]LL MAKE TNTERMOUNTAIN GAS
A. Even if the Commission were to grant the Gas
increase request, the
be around four percent.
The rate shock to be
Company's entire requested rate
Certainly
avoided in this case is caused by a radical departure
from decades of recovery of fixed costs through
volumetric charges to the proposed collection of a1l
fixed costs through a demand charge that has heretofore
never been assessed. The most conrmon method of
addressing rate shock, assuming the underlying increase
the first place, is to find a way ofis justified
"deferring or phasing in rate increases. "2
increase woul-d only
a shocking number.
l_n
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INT-G-L6_02 l.434
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Amalgamated Sugar
o. wHrLE NOT CALLTNG rT RATE SHOCK, DrDN'T A
COMPANY WITNESS DISCUSS RATE CONTINUITY AS AN ]MPORTANT
PRINCIPLE OF RATE DESIGN?
at p.
Fn 47.
1 Rate Shock Mitiqation, Edison Electric Institute, June 2007
3. FERC Docket No. RM81-38; Order No. 298,48 FR 24,323 aL
2 Rate Shock Mitigation, Edlson Electric Instltute supra at 3o25
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Amalgamated Sugar
A. Yes. IGC witness Bl-attner states that her
understanding of good rate design principles should
include rate continuity which she defines dsr "Rate
continuity requires that changes to the rate structure
shoul-d be graduaT allowing customers to modify their
usage patterns over time." (Emphasis added) [Blattner, p,
31 l-1nes 14-161
O. DID TGC's WITNESSES FULLY EXPLAIN THE IMPACT OF
ITS RATE DESIGN PROPOSAL ON TTS LARGE ]NDUSTRIAL
CUSTOMERS?
A. No. For example, Gas Company witness Swenson
at page 9 in his testimony asserts, that given his
review, that some T-4 customers with high foad factors
will 'experience large decreases' and those customers
with the lowest foad factors "may experience small
increases. "
Based on my review of projected T-4 customer
biTTing based on 2015 bil-l-ed consumption,current MDFQs and the proposed demand and
vol-umetric rates, T-4 customers with refativelyhigh foad factors wiLL experience Tarqer
decreases, customers with l-ower Load f actorswiLf experience smaLLer decreases and, in some
cases, T-4 customers with the Lowest foad
factors may experience smaff increases, in
annuaf bills.
Mr. Swenson obviously did not review carefully all T-4
customers or he could not have concluded some fow factor
customers would only 'experience smalf increases' .25
rNT-G-1 6-02 1436
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Amalgamated Sugar
O. PLEASE EXPLA]N?
A. The rate increase for the Amalgamated Sugar
Company, a T-4 customer, is anything but "small." Based
on the past L2 months bi1I1ngs IDecember 20L5 through
November 20L61, using Amalgamated's original-ly nominated
MDFQ, it would have its rates increase by $893 t529 or a
12.2% increase if the Company's proposed rate design and
increase were to be approved by the Commission.
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Amalgamated Sugar
Amalgamated Bills lncrease Over the past 12
Months Under lntermountain Gas Proposal:
OriginalMDKI
Eacilitv
Orisinal
MDFQ
Dollar
lnerlease
Perentage
lncrease
Nampa $5,m0 $zeo,ggo 5s.8%
Twin Falls 1!,Lm0 Sgzg,ogr W.g/o
Paul 29.0m 522s,%7L4%
TOTAL 375.m0 5839,529 72.296
Sou rce: Ama I ga maEd Secgng Producti on leq uF t f4,
o. rGC HAS ALLOWED ITS TRANSPORTATION CUSTOMERS TO
ADJUST THEIR ORGINAL ESTIMATES OF MDFQ, HAVE YOU USED
THOSE ADJUSTED VALUES IN THE CALCULATION OE THE INCREASE
IN BILL]NGS IN THE TABLE ABOVE?
A. Yes. IGC provided a calcul-ation of the bill
changes over
Amalgamated
used in the
the past
Production
12 months in its Response to
Those are the valuesRequest #4.
above tabl-e with the exception of the Nampa
IGC assumed the Nampafacility.
plant had
In their Response
their MDGQ
#4,
adj usted down to 80r 000 therms from
the original estimate of 155,000 therms. Amalgamated,
however, has informed me that there will- be no change
for the Nampa p1ant.
set forth in my
from the original estimate of MDGQ
Therefore, the bill
testimony for that
the 80,000 provided
Amalgamatedrs MDFQ
change
facility
amounts
are based on 155,000 MDFQ not
in Production Request #4.
based, in partr orl plansestimates are25
lNT-G-1 6-02 1438
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Amalgamated Sugar
to replace coal consumption
environmentaf reasons. The
with natural gas for obvious
Gas Companyrs proposed rate
design changes
those plans.
in this case may cause a reeval-uation of
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Amalgamated Sugar
With the lower nominated MDFQ for Amal-gamated's Twj-n
Fal-ls and Paul facilj-ties,and under fGC's proposed rate
increase would stil-l- bechanges,
$563 ,494,
the overal-l- rate
for an overall increase of 48.58.
i Sou rce: Ama I ga mated Second Producti on Req ues t #4,witr
l,lampa at Original lyDFa.
O. WHAT ADDITIONAL INFORMATION DID INTERMOUTAIN
GAS PROVIDE TO AMALGAMATED IN PRODUCTION RESPONSE +4?
provided a compari-son of
rate design and that
IGC in this additional
A. The Gas Company also
the bill-s based
proposed by IGC
calcul-ation used
on the current
in this case.
the "volumetric charge that woul-d be
necessary to arrive at the Gas Company's fil-ed customer
cl-ass specif ic revenue requirement". This volumetrj-c
increase appears to be about 3.8? over the vofume blocks.
The Gas Company appears to assert that because
transportation customers
MDFQ downward there will
have adjusted thelr estimates of
be less col-l-ected in the demand
Amalgamated Bills lncrease Over the Past 12
Months Under lntermountain @s Proposal:
Adiusted MDFQ
tbllar
lncrease
Percentage
lngeasgFaciliW
Adiusted
MDFQ
55.896Namoa155,0(D S2/o,990
9tq,?fi 66.1%Twin Falls 160,0m
15.3%i5.m W,26Paul
5563,494 &5%TOTAL 390,0m
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Amalgamated Sugar
charge.
to be an
Hence, according to the Gas Company, there
increase in the charge per therm to make up
needs
the
difference in the cost of servi-ce estimate in the
transportat j-on cl-ass' s revenue requirement.
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Reading, Di 11
Amalgamated Sugar
o. Do You HAVE A RESPONSE TO THE CONTENTION THAT
BECAUSE TRANSPORTAT]ON CUSTOMERS HAVE REVISED THEIR MDEQ
DOWN THERE SHOULD BE AN INCREASE IN THE RATE PER THERM?
A. Because a cost of service study allocates costs
among
volume
customer cl-asses based on both demand and the
of gasr any
class
change
will
in the assumed
study
input of demand
classes.
should be
impact the decrease
COMPLETELY OBLIVTOUS
otherfor any given
Therefore, a
re-estimated
va1ld cost
impact al-1
of service
in MDFQ's would have
O. HAS THE GAS
in order to judge what
on the cl-asses
COMPANY BEEN
TO THIS PROBLEM?
A. Not entlrely
offered any mitigation
the T-4 rate
As stated above, IGC has not
proposal to ease the rate shock
for those firms most severely impacted by the Gas
Company' s
did offer
rate design proposal. However, the Gas
two-year phase in when 1t initially
schedule:
a
Company
offered
When the Company first implemented the T-4 Rate
Schedufe, it was beLieved that many customers
woul-d desrre to switch to T-4 service and infact, the majority of the Targe vol-ume
industrials did switch to T-4. In order to not
saddLe remaininq customers with the cost of
interstate capacity that Intermountain heJ-d on
behaLf of those customers migrating to T-4, theExit Fee provision required those T-4 customersto pay for some of that capacity cost over a
two-year period. Since most of the large voLume
industrials migrated to transport years ago ando25
rNT-G-16-02 7442
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Amalgamated Sugar
most of the remaining LV-7 customer arereLatively smaLL, the amount of capacity that
woufd be freed up by one of the customers
migrating to transport is Targely insignificant
and so the Company proposes to el-iminate thisprovision. ISwenson, p. 9, 10]
As the Gas Company did when it introduced T-4
Amalgamated 1s requesting a phase in of IGC's
structure proposed in this Docket.
rates,
rate design
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Amalgamated Sugar
O. WHAT IS YOUR EXPERT RECOMMENDATION FOR
AMALGAMATED ]N RESPONSE TO THE GAS COMPANYIS PROPOSED
RATE DESIGN?
A. On Amalgamated Sugar's behalf, I propose a
measured phase-in to mitigate the rate design impact of
t.he Gas Company's proposed rate increase. Another rate
design structure that shoul-d be consj-dered is to offer
transportation customers a seasonal- rate option. I
realize the Gas Company, in this fi11ng, is advocating
the elimination of seasonal- rates for its residential and
general service customers. However, given the
fundamental- change in rate design being proposed by IGC,
a variety of rate structures should be explored going
forward that would meet the needs of both the Gas Company
and its customers.
O. PLEASE EXPLATN?
A. I should note that my recommendations are based
on the assumption
Company's cost of
design proposals.
O. WHY ARE
''ASSUMPTf ON'' ?
A. I have
of the details of
that the Commission adopts the Gas
service study as well as its rate
YOUR RECOMMENDATIONS BASED ON AN
not conducted an independent eval-uation
the Gas Company's recommended cost of
an endeavor is extremel-y timeservice study. Sucho25
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Amalgamated Sugar
consumj-ng and expensive and beyond the scope of
Amal-gamated's budget for prosecuting this rate case. I
should also note that all cost of service studies,
require the use of many inputs that are based on judgment
cal-l-s. That is why cost of service studies are often
referred to in my profession as much art as they are
science.
O. W]TH THAT ASSUMPTTON IN M]ND, WHAT IS YOUR
SPEC]F]C RECOMMENDATION ]N THIS CASE?
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rNT-G-1 6-02 7445
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A. f recommend that, if the Commission adopts
IGC's cost of service study, that its effects should be
implemented on an incremental basis.
O. BY INCREMENTAL, DO YOU MEAN OVER A SET PERIOD
OF TIME, SUCH AS SEVERAL YEARS?
A. No. The results of thj-s cost of service study,
if adopted, shoul-d be implemented over the next five
Intermountain Gas Company general rate cases.
O. IF THE GAS COMPANY ONLY FILES A GENERAL RATE
CASE EVERY THTRTY YEARS, WOULDN'T YOUR PROPOSED
]MPLEMENTAT]ON PER]OD BE UNREASONABLY LONG?
A. The timing and frequency of rate cases are
uniquely in the control of the utility. Five general rate
cases over thirty years woul-d resul-t in a case every slx
years. That is not an unreasonable time period in which
to correct for the last thirty years of rate design
neglect on the Gas Company's part.
O. ARE THERE OTHER REASONS FOR A RELATIVELY LONG
]MPLEMENTATION PHASE IN PERIOD FOR TH]S NEW RATE DESIGN
PROPOSAL?
A. Yes. Due to the radically changed MDFQ rate
design proposed by the Gas Company I am confldent that
customers will- adjust their usage patterns. Those
changes will, in turn, change the input data to the COS.
Those changed lnput data will in turn alter the
10
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Reading, Di 13a
Amalgamated Sugar
concfusions in the cost of service study. This becomes
an iterative process with new changes causing new changes
and on and on. It is not a static, moment in time
process.
service
As customer usage patterns change, cost of
responsibilities wil-1 al-so change. It therefore
cost of servj-ce studymakes sense not to adopt a single
result and fu11y
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Reading, Di 74
Amal-gamated Sugar
implement it
the last and
implementation, for the
vested interest tariff
as if it were, and wil-l constantly remain,
final word on the subject.
O. WHAT IS THE OTHER ]SSUE AMALGAMATED IS
ADDRESSING ]N TH]S DOCKET?
A. Amalgamated is al-so
first
proposing the
time for this utility, of a
linefor customer funded
extensions and system improvements.
A. WHAT IS THE REASON FOR AMALGAMATED'S VESTED
INTEREST REFUND PROPOSAL?
A. Amalgamated has been funding line extensions
and system improvements for many years. It simply wants
to protect its investment shoul-d other customers take
advantage of the lj-nes or other system improvements that
Amalgamated has paid for.
A. WHAT ARE THE PARAMETERS YOU RECOMMEND FOR THE
VESTED INTEREST REFUND PROPOSAL YOU ARE MAKING?
A. A properly designed line extension tariff
shoufd incl-ude the standard, accepted and approved
principles used by regulated utilities and approved by
this Commission for util-ities l-ike Idaho Power Company
and United Water. It should include such provisions as:
i. Definitions for Addj-tional- Applicants,
Points of Delivery, and Service
Attachments,o 25
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Reading, Di \4a
Amalgamated Sugar
ii. Vested Interest Charges, Vested Interest
Refunds, and
all-ocations,
Formulas that
cost,
Vested Interest Portions
.l-11-.define the apporti-onment of
iv. Vested Interest Refunds.
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Reading, Di 15
Amalgamated Sugar
O. ARE YOU RECOMMENDING THE COMMISSION ADOPT A
VESTED INTEREST REFUND MECHAN]SM IN THIS DOCKET?
A. Normally this woufd be the opportune time to do
so. However, in response to the Commission Staff's Tenth
Production Request No. 226, December '7, 20L6 the Gas
Company stated:
RESPONSE TO REQUEST NO. 226:
The nethodoTogy and model-s from which the Main
and Service Line Extensions financiaf
evaLuation were based are outdated and in needof revision. ConsequentTy, rather than expendthe siqnificant time and effort to answer thisquestion, and the fofLowinq questions 227
through 229, the Company drscussed with Staff
and proposes that, f oLJ-owing this case(INT-G-I6-02), it work with Staff and prepare a
compliance filing that updates Intermountain' s
Main and Service Extension provisions Last
approved by this Commission in June of 7986.
Amalgamated expects that they be included in the "Company
discuss [ions] with Staff" in the future in order to be a
part of the solution to this, admittedly somewhat complex
issue. Amalgamated hereby provides assurance to the
Commission that it work diligently with IGC and the Staff
so that a workable vested interest refund rul-e for line
extensions and system improvements wiLl be drafted for
the Commission's due consideration.
O. WHAT CONCLUDING REMARKS DO YOU HAVE?
A. That the radical, one step, rate designo25
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Reading, Di 15a
Amalgamated Sugar
proposed by the Company be phased in over the next fj-ve
general rate cases for the reasons described above- A1so,
that IGC, working the parties to this case, file a vested
l-ine extension tariff that would include accepted general
principles.
A. DOES THIS END YOUR TESTIMONY AS OF DECEMBER 76,
2016?
A. Yes.
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Reading (Di-Reb) 1
Amalgamated Sugar
O. ARE YOU THE SAME DON READING WHO FILED DIRECT
TESTIMONY ON BEHALF OE THE AMALGAMATED SUGAR COMPANY LLC
rN THrS DOCKET ON DECEMBER 16, 2076?
A. Yes, I am.
O. BEEORE YOU BEGIN YOUR REBUTTAL TESTIMONY DO YOU
HAVE ANY GENERAL REMARKS REGARDING THIS COMMISSION'S
H]STORIC APPROACH TO COST-OE-SERV]CE STUDIES AND THE
MOVEMENT OF CUSTOMERS TOWARDS COST_OF_SERV]CE BASED
RATES?
A. Yes. This Commission has hlstorically, and
appropriately, taken a very conservative approach to
movement of customers toward full cost-of-service rates.
This conservative approach is evidenced by the following
order. Itpassage from an Idaho
is important to note
a general policy, an
about cost-of-service
Power general rate case
inherent and healthy
study results. It
very reluctant to make major sudden changes in rates
based on a single cost-of-servi-ce study. FinalIy, as is
apparent from the following passage, the Commission's
vlew as to what constitutes a "significant" rate change
puts both the Company's proposal, as wel-I as Staff's
proposal, in this case in much better historic and
real-world perspective. Here is what the Commission has
had to say about cost-of-service studies and the
that the Commission has decfared, ds
skepticism
has al-so been
25
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Reading (Di-Reb) 1a
Amalgamated Sugar
magnitude of rate changes
studies in an Idaho Power
that ought to be driven by such
general rate case:
fmportant interests in rate stability andcontinuity preclude adopting the extremelylarqe shifts in revenues from one cl-ass to
another that are depicted. In addition, theresufts of cost-of-service studies are not soprecise that the determination of appropriate
revenue shifts is an exact certaint
Nonetheless, the passage of time since the
Commission's l-ast examination of fPCo's rates
has al-1owed several classes to dri-ft further
away from cost-of-service rates. Recogn:-zinq
that cost-of-service studies are not precise,
we think it important that cross subsidies
among customer cl-asses should be minimized.
Accordingly, as outlined below we takesignificant steps to move each cl-ass cfoser toits indicated cost-of-service. The increases
shown 1n Appendix 3 for the smal-l- general
service (Schedule 1) and the irri ation servi-ce
(Schedul-e 24) should be tempered bv importantinterests i-n rate stabil-it and continuit for
these cl-asses. Increases of 15? and
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Reading (Di-Reb) 2
Amalgamated Sugar
10.232 respectivelv in these schedul-esrepresent significant moves toward cost-of-service and send an important price signal to
customers making consumption decisions within
these cfasses. l
o. ARE THERE OTHER TNDTCATIONS OF THE COMMTSSION'S
GRADUAL]SM AND SKEPTICAL POLICIES TOWARD IMPLEMENTATION
OF COST-OF-SERVICE STUDIES?
A. Yes in a Washington Water Power (now Avista)
general- rate case the Commission articul-ated and
implemented the very same pollcy:
Important interests in rate stability andcontinuity preclude adopting the extremelylarge double digit shifts in revenues from oneclass to another that were requested. Inaddit.ion, we recognized that the results ofcost-of-service studies are not so precise thatthe determination of appropriate revenue shifts
is an exact certainty. The number of years
between examinations of cost-of-service and
revenue al-l-ocation issues for the Company has
aflowed several- classes to drift a
considerabl-e distance from full- cost-of-service
and requires gradual incremental- moves to
cost-of-service rates. We approve a two step
move to accomplish the Company's one-third moveto fu1l cost-of-service, a 20% move the firstyear reflected in the rates approved by thj-sOrder, and an addltional- 15% move to begin oneyear from the date of this Order.2
It is lmportant to note that even a "one-thj-rd move to
full- cost-of-service" was too extreme for the Commission.
Instead, the Commission rejected
toward cost-of-service in favor
the one-third movement
of two,
(202)
much smaIler,
rate changes equal to a one-fifth movement toward
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rNT-G-1 6-02 7454
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Reading (Di-Reb) 2a
Amalgamated Sugar
toward cost-of-service.
findings are completely
my direct testimony of
Of course, those Commission
in line with my recoflrmendation in
a one-fifth movement toward
cost-of-service in each subsequent IGC general rate case.
O. HAVE THE COMM]SS]ON STAFE OR THE COMPANY
ADHERED TO THESE COMMISSION POLIC]ES ]N THIS CASE?
A No. I have seen nothing in this case that
would warrant a departure from the Commission's
historical- treatment of cost-of-service study results
both in terms of its skeptlcism as to the results and as
to its temperance in maklng "significant" changes to
rates in response. I have also seen nothing in this case
that suggests either the Staff or IGC have even
considered these cost-of-service guidelines that have
been so well- articulated and conslstently enforced by the
1 pUC Docket No. fPC-E-95-5, Order No. 25880 at page 34. Emphasis
provided.
2 puc Docket No. WWP- E-98-1 1, Order No. 28091 at page 30.25
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Commission. Amalgamated is, quite simply, relyj-ng on
this Commission to adhere to its existing policies
relative to cost-of-servi-ce studies. Thls is especially
important because no other party has even mentj-oned those
policies, 1et alone articulated any rationale for
departure from those policies. Al-though those policies
are not embedded in a rul-e or regulation, I believe that
Amalgamated, and customers in general, are well justified
on their reliance on prior commission declared policies
deallng with very gradual movement toward cost-of-service
study resul-ts. A11 that assumes, of course, that there
is a valid cost-of-service study in the first place
whlch is simply not the situation in this case regardless
of one' s view of the Commission's established policies
with regard to implementing rate changes based on
cost-of-service studies.
O. WHOSE DIRECT TESTIMONY WILL YOU BE ADDRESS]NG
IN YOUR REBUTTAL TEST]MONY?
A. The Idaho Commission Staffs' (Staff) witnesses
Michael Morrj-son and Bentley Erdwurm. My Rebuttal
Testimony will focus on why it is inappropriate for the
Staff to make rate design changes while at the same time
Staff completely and unequivocally rejects the company's
rate design study (a.k.a. its cost-of-service study or
*COS"). Thls inconsi-stency leads me to the conclusion
Reading (Di-Reb) 3
Amalgamated Sugar
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that the rate design for the transportation customers
proposed by the Commj-ssion Staff is not founded on sound
rate making principles. It is simply not reasonable to
make rate design changes without at feast some certainty
that those changes are supported by a valid cost-of-
service study. Rather than shooting in the dark, my
recofirmendation to the Commission is that, whatever
revenue increase is granted Intermountain Gas (IGC,
Company) that it be spread on an equal percentage on the
individual customers' bi1ls. Significant changes to rate
design shoul-d only be implemented only after a valid,
acceptable, cost-of-service (COS) is completed. This is
especially crltical because of the thirty-plus years of
commodity-usage-on1y rates; thirty-pIus years of no
demand charge; and thirty plus years without a
cost-of-service study.
Reading (D1-Reb) 3a
Amalgamated Sugar
10
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O. ]N YOUR DTRECT TESTIMONY DIDN'T YOU RECOMMEND
THAT IF THE COMMTSSION WERE TO ADOPT IGC' S
COST-OF_SERVICE STUDY THAT DEMAND CHARGES SHOULD BE
PHASED IN OVER THE COMPANY'S NEXT E]VE GENERAL RATE
CASES?
A. Yes. I am generally comfortable with and often
supporti-ve of some level of demand charge as part of an
appropriate rate design. A critical caveat, and as I
stated in my direct testimony, is that my recommendation
assumed the Company's COS study was 'accurate'.3 That
recommendation changes now that I have reviewed Staff's
thorough and thoughtful testimony regarding fGC's
cost-of-service study. I agree with Staff that, in it.s
present form, the Company's COS should not be used as the
basis of determining an acceptable rate design. That, of
course incl-udes both the proposed al-location among the
customer classes, as weII as the level of a demand
charge. I wil-f review my recommendations, including the
five rate case phase in for a demand charge, based on the
criteria discussed in my direct testimony - after an
acceptable cost-of-service study is prepared and adopted
by the Commission.
A. WHAT IS THE TRANSPORTATTON RATE STAFF
RECOMMENDED ]N ITS DIRECT TEST]MONY?
A. Despite its reasoned rejection of the Company's
Reading (Di-Reb) 4
Amalgamated Sugar
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Reading (Di-Reb) 4a
Amalgamated Sugar
cost-of-service study, Staff still supports the
imposition of a demand charge. This is a dramatic change
after more than thirty years of commodity-only charges.
Staff does recommend reduclng t.he Company's proposed
demand charge for Transportation customers by only 28%,
even though it rejects the cost-of-servj-ce study upon
which that charge is based. IGC recommends that
Transportation customer cl-asses T-4 and T-5 be
consol-idated and the imposition of a demand charge, based
on the Minimum Daily Firm Quantity (MDEQ), of $0.21923
per therm. a Staff recommends a reduction to the MDFQ
based
3 Direct Testlmony D. Reading, Amalgamated, p
4 Application, Rate Schedule T-4.
6, lines 6-7
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INT_G_T6_02 1459
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demand charge to $0.20 per therm without the benefit of a
valid cost of service study.s
O. WHAT DID STAEE USE AS A BAS]S FOR ]TS
RECOMMENDATTON OF $0.20 PER TERM OF NOMTNATED MDFQ FOR
THE DEMAND PORTION OF THE T_4 RATE DESIGN?
A. Staff witness Erdwurm stated:
fntroducing a demand charge into the Company's
large volume and transportation rates
recognizes that the Company's costs to serve
these customers are driven in large part by the
maximum demands they place on the system. At
this time, the Company has not supported the
amount of its proposed MDFQ charge with a
cost-of-service study. Consequently, Staff
recommends that the amount of the MDFQ charges
be addressed at the aforementioned workshop
proposed by Staff.o
Therefore, Staff simply accepts the introduction of a
demand charge for transportation customers, even though
it rejects the use of IGC's cost-of-service study as a
basis for determj-ning the l-evel- of what that demand
charge should be.
O. TF THE COMMISSION STAEF AFFIRMATIVELY REJECTS
IGC, s COST_OF-SERVICE STUDY TO DETERM]NE THE MDFQ RATE,
WHAT COULD FORM THE BASIS OE ITS RECOMMANDATION?
Readj-ng (Di-Reb) 5
Amalgamated Sugar
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Reading (Di-Reb) 5a
Amalgamated Sugar
A. The level of the MDFQ demand rate per therm is
admittedly not based on any cost-of-service
justlficatlon. I can only concl-ude, therefore, that it
is arbitrary. Staff witness Erdwurm justlfies this
recommendation only by observing that his proposed rate
is lower than that proposed by the Company:
The recommendation to reduce the charge is
based on the impact on specific customers.
Introducing a demand charge will shift costs
from higher ]oad factor customers to l-ower load
factor customers. Staff believes this is
appropriate, and
customers shoul-d
that lower load factor
pay more, because they are
beingmore costly
constant).
to serve (other things
E _.3 Direct Testimony B.
6 Direct Testimony B.
Erdwurm, I
Erdwurm, I
PUC Staff,
PUC Staff,
p. 19, I j-nes
pgs. 18, 19,
9-1 1.
lines L8-2.
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Reading (Di-Reb) 6
Amalgamated Sugar
However, Staff supports a more gradual phase-in
of demand charges than proposed by the
Company. 7
Therefore, the goal of Staff's proposed rate design is to
moderate the impact of the Company's proposed rate design
on 'specific customers' by proposing a l-ower demand
charge than that offered by IGC. However, if the starting
point, (the Company's demand charge proposal) is based
on a fatally flawed cost-of-service study, it seems
illogical and arbitrary to use that same starting point
to set rates at al-l- even 1f the goal is to moderate the
effect.
O. DO YOU BEL]EVE STAFF WAS ABLE TO ACCOMPLISH ITS
GOAL OF MODERATING THE RATE IMPACT OE THE COMPANY' S
DEMAND CHARGE PROPOSAL?
A. No.
Sugar. It is
It is certainly not
hard to make an exact
Amalgamated
to apples
on its
as pointed
would resul-t
three plants
true for
comparison because Staff's rates are
apples
based
proposed J-ower revenue requirement, however
out in my Direct Testi-mony, IGC's proposal
in a 12.22 rate increase for Amalgamated's
based on the original nomination
increase based on updated MDFQ.
of MDFQ and a 48.5%
Based on the updated MDFQ
and Staff's fower recommended revenue requirement,
an unacceptableStaf f 's rate design woul-d still mean25
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Readi-ng (Di-Reb) 6a
Amalgamated Sugar
68.2? rate increase for Amal-gamated. Mr. Erdwurm points
out in his Direct Testimony that T-4 transportation
customers' percentage changes in rates, based on the
Company's original proposal would range from a decrease
of 56% to an increase of 190U.8 I do not have monthly
therm data for all- T-4 customers and therefore cannot
cal-culate Staff's rate deslgn recommendations in order to
judge the moderating impact Staff's proposal wou1d have
on individual customers in the c1ass. Neverthel-ess, just
Iooking at a very small moderating impact on the rate
shock concerns I have for Amalgamated it would be safe to
assume there would stil-l- be a wi1d1y disparate rate
impacts (both plus and mj-nus rate changes) among
customers in the T-4 class.
7 Direct Testimony B
B Direct Testimony B
IPUC Staff, p.19, l-ines L8-20.
lPUC Staff, pgs. 20, 21, fj-nes 25-3.
Erdwurm,
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Reading (Di-Reb) 1
Amalgamated Sugar
O. WHAT ]S THE CAUSE OF THESE WILDLY DISPARATE
RATE ]MPACTS AMONG IGC' S CUSTOMERS IN THE T_4 CLASS W]TH
THE ]NTRODUCTION OF DEMAND CHANGES BASED ON MDFQ?
A. As pointed out in
individual- customer's l-oad
Staff's testimooy, an
factor plays a major role the
percentage change in rates with the introduction of a
full-, dS determined by the Company, COS demand charge. I
do not have load factors for al-l- of IGC's T-4 customers;
however a proxy for a T-4 customers' l-oad factor can be
developed by dividing the annual therm consumption by the
total customers' nominated MDFQ. The chart bel-ow depicts
this load factor proxy on the left axis plotted against
axis as proposedthe percentage
by the Company
provided by IGC
rate change
for the T-4
on the right
customer cl-ass for 2016 as
rna Production Request Response. e The
the three Amalgamated Sugar plantschart al-so identifies
(Nampa, Pau1, Twin Ea11s).
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Reading (Di-Reb) -l a
Amalgamat,ed Sugar
650
600
550
LoT*It! tr50lEoi rooor*a 300EBro
=\- 2m
2
b15o!
100
50
IGCT4 Crffirrrs 2016:ftemel]rDfQ {leftAr&} and Percentage
lncrease ln Propoced Rabs (Rlglrt Anis|
2{Xlt
150ta
-50,6
NAMPA
?
TWtB FAtL5a 1an9a ort!(,3srIr6 ;c
qoIoc
096
!
..f...-*..,-.....
;I i
r. g+ . ,.1"
'r ... 1.,, !
I
I
-i
-1q)t6. -, thcrm/ lloRl (Pyoryhr told F.ctorh L.ttArE
-oraR.t
Chrna! Lln!
" P.raq! irb Ch.n$i REht tudr
As the chart clearly indicates most (843) T-4 customers
that have the hlghest load factors would receive a rate
decrease, while the other t6% \-4 customers with the
lowest load factors would
9 Response to IPUC Staff Production Request #199.
0
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Reading (Di-Reb) B
Amalgamated Sugar
experience
customers
receive rate increases, with just four or five
exceeding a 100? increase,
facility.
LARGE PERCENTAGE
including
Amalgamated's
o. wrTH
AMALGAMATED'S
PauI
THE INCREASE FOR
THREE PLANTS RELET]VE TO THE MAJORITY OF
OTHER T-4 CUSTOMRS CAN ONE DEDUCE, UNDER THE COMPANY'S
PROPOSAL, THAT THEY ARE BEING ASKED TO CONTR]BUTE A
S]GNIFICANT SHARE OF THE CLASS RATE INCREASE?
A. Yes, and
the T-4 class as a
then some. As orlginally filed by IGC
whole is slated to recei-ve a DECREASE
of $1,386,412.70 Amalgamated, on the other hand woufd see
an INCREASE in its rates of $839,529.tr Keep in mind that
rate deslgn
customer's
is a 'zero sum game.' That is, one
rate decrease is directly
So, then,
funded by its
neighbor's rate increase.Amalgamated is
solely funding the majority of the rate
bul-k of f GC's transmisslon customers.
O. TRANSPORTAT]ON CUSTOMERS WERE
decreases for the
GIVEN A CHANCE TO
ADJUST THEIR NON]MATED MDFQ AETER IGC F]LED ITS RATE
CASE. WERE THE PROXY LOAD FACTORS IN THE CHART ABOVE
CALCULATED WITH THE ORGINAL MDFQS OR THE ADJUSTED FACTORS
THAT WERE ALLOW BY IGC AFTER CUSTOMERS CAME TO UNDERSTAND
THE IMPACT IT WOULD HAVE ON RATES?
A. I do not have individual firms' data for the
adjusted MDFQ so the abo.;e chart was developed using the25
rNT-c-76-02 L466
o
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2
3
4
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8
Y
10
11
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13
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15
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18
19
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24
Reading (Di-Reb) Ba
Amalgamated Sugar
originally f il-ed val-ues. However the Company did provide
the vafues for changes in MDFQ for the LV-1-, T-4, and T5
classes.l2 The data shows the MDFQ for the LV-1 and T-5
classes were actually
While
adjusted upward by 4.0% and 2t.Jeo
the T-4 classes adjusted MDFQs
or down 1,1 .LZ. Amalgamated dropped
respecti-veIy.
252,722 therms
it's MDFQ for
l-ower
the three plants
of the magnitude
by
of
85,000 therms or 71.92.
An indication the importance
10 Direct Testimony Lori Bl-attner, IGC, Tab]e B-2, p. 11.
11 Response to Amalgamated Production Request #4.
12 Ema11 from Mlke McGrath, IGC, to Bentley Erdwurm, IPUC Staff,
December 24, 2076.o 25
rNT-G-76-02 1461
o
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3
4
5
6
1
B
9
Amalgamated is to fGCs system is that for both the
original and adjusted MDFQs Amalgamated comprised 322 of
total revenue for the T-4 cl-ass.
O. STAFF W]TNESS ERDWURM DEVELOPED HIS RATE DESIGN
PROPOSALS USING THE REVENUE REQUIREMENT FOR EACH RATE
CLASS AS PROPOSED BY STAEF WTTNESS MICHAEL MORRISON. HOW
DID DR. MORRISON ASSIGN STAFF' S RECOMMENDED REVENUE
REQUIREMENT AMONG THE VARIOUS RATE CLASSES?
A. According to Dr. Morrison, because the
Company's cost-of-service study was fatally flawed and
cou1d not be used, he spread Staf f 's reconrmended revenue
requirement proportionally to each customer class based
on the revenue collected at current rates.
The Company's methodology will not result in a
fair al-l-ocation of the Company's revenue
requirement among its rate classes and, absent
a l-oad study, it is not possible to develop a
suitabl-e alternative revenue allocation
methodology. Ipropose that the Company,
Commission Staff, and the Company's
stakeholders hol-d workshops in order to develop
a suitabl-e load study and cost-of-service
methodology. Until- a satisfactory cost-of-
service study is completed, I propose that the
Company's revenue requirement be allocated in
Reading (Di-Reb) 9
Amalgamated Sugar
10
11
72
13
L4
15
76
71
1B
19
20
2l
22
23
24
O 25
rNT-c-1 6-02 !468
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9
10
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76
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20
27
.)a1, /_
23
24
Reading (Di-Reb) 9a
Amalgamated Sugar
proportion to the normal-j-zed revenue currently
being col-l-ected f rom each rate class.13
It would take a giant leap of faith to assume the current
revenue al-l-ocation among customer cl-asses on IGC's system
has any relationship to current cost causation. As
stated above, the current rates have been in place for 31
years
three
and no matter how those al-locations were determined
decades d9o, the
undergone
Company's customer cl-ass prof iIe
has certainly enormous changes in that time.
O. COULD YOU PLEASE BRIEELY DISCUSS SOME OF THOSE
.ENORMOUS' CHANGES THAT HAVE OCCURRED TO INTERMOUNTAIN
GAS OVER THE PAST 31 YEARS?
13 Dlrect Testlmony M. Morrison, PUC Staff,pgs. 2, 3, l-ines 22-8.o 25
rNT-G-76-02 r469
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Reading (Di-Reb) 10
Amalgamated Sugar
A. According to the Company,
The Company's rate base of approximately $66.4
million as filed in its Iast rate proceeding in
1985 has increased to about $231 mil1ion, as
filed in thls proceeding. Operating costs,
excluding Cost of Gas and income taxes, have
al-so j-ncreased since the l-ast rate filing from
approximately $26.8 million to approximately
$11.1 mill-ion, or an increase of $44.9
mi1lion. 1a
Therefore since IGC's l-ast general rate proceeding back
in 1985, the Company's rate base has more than tripled
and it operating costs have increase by 2682.
O. DO YOU KNOW WHAT RELITIVE SHIFTS THERE HAVE
BEEN AMONG THE VARIOUS CUSTOMER RATE CLASSES ON
INTERMOUNTAIN' S SYSTEM S]NCE THE LAST RATE CASE THAT
WOULD IMPACT THE RESULTS OF ANY VALID COST-OF-SERVICE
STUDY?
A. Only to a certain extent. Eor example,
consider just two consolidated rate cl-asses; the
residential class and the commercial- cl-ass for the number
of customers. There has been a significantly higher
growth rate in the number of residential customers than
in the number of commercial customers. The number of
residentiaf customers grew from 85,418 j-n 1985 to 302,19025
rNT-G-1 6-02 L410
o
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10
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1B
79
20
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j-n 2015 or by 2542, whereas commercial- customers
increased from 13,310 to 31,860 or by a rate about haff
as fast at 139%.1s The slower growth in the number of
commercial- customers is due, in part, to the fact that
the Company did not have transportation rates in place in
1985. With the deregulation of interstate pipelines in
the 1990s IGC put in place an evolving set of 'T' rates
that were approved by the Commission. As a result, large
use customers migrated from the commercial cl-ass to the
various transportati-on clas'ses. The current T-4 rate was
approved by the IPUC in JuIy 1998.16 It is axiomatic that
dif f erent customer cl-asses have dj-f f erent load prof iIes.
14 Direct Testimony Nicofe Kivisto, IGC, p. 2, -l-j-nes 18-23.
15 Direct Testimony Scott Madison, IGC, p. 1 7, Tabl-e M.5
16 Idaho Publ-ic Utilitles Commissi-on order No. 2'7656, Case No
INT-c-98-2, July 1998.
Reading (Di-Reb) 10a
Amalgamated Sugar
o 25
rNT-G-1 6-02 L47L
a
o
1
2
3
4
5
6
1
x
9
These different foad profiles form the foundation of cost
al-location studies and drive the cost responsibility for
each cfass. Therefore, there is no way to determine what
cost responsibility each customer cl-ass might have simply
by looking at the current revenue from current rate
classes.
O. TN YOUR DIRECT TESTIMONY YOU PROVIDED A BREIE
PROF]LE OF AMALGAMATED SUGAR'S EXTENS]VE OPERATIONS AND
ITS ]MPORTANCE TO ]DAHO'S ECONOMY. HOW DOES
AMALGAMATED, S NATURAL GAS CONSUMPTION COMPARE TO OTHER
T_4 CUSTOMERS ON IGCS SYSTEM?
A. The chart below clearly shows Amalgamated is,
by far, IGCs largest individual transportation customer.
The thinner l-ower bars to the right of the Amal-gamated
three plants' combined bar incl-ude other T-4 customers
that have more than one facility in IGC's service
territory along with those single site customers.
Reading (Di-Reb) 11
Amalgamated Sugar
10
1t-
t2
13
t4
15
76
t1
18
t9
20
27
22
23
24
o 25
rNT-G-76-02 7412
o 1
2
3
4
5
6
1
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9
10
o
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13
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16
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o
Reading (Di-Reb) 11a
Amalgamated Sugar
IGC T-4 Customer Oass Th?rm Consumptlon 2015 r
ComblnedPlants
70,000,000
60"000p00
5(r,o00,o0o
ro,000,000
30,0m,000
20,(p0,000
10,firo,firo
- ii Flan
6
EosF
I
T-tlCustomars
If just individual locations of T-4 customers are
considered the pattern looks much the same with
Amalgamated ranking first, second, and seventh in annual
therm consumption.
25
rNT-G-1 6-42 l.47 3
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4
5
6
7
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10
11
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o 13
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16
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20
27
22
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o
Reading (Di-Reb) 12
Amalgamated Sugar
IGC: T-.1 Clustomer Class Tlrerm Consumptiou
2015
30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
0 [{ Ctrstomers
Frankly, AmalgamaLed was ambushed by the Company's filing
in this case. By that f mean the recommendation of full
cost-of-service-based rat.es (flawed as the COS may be) by
IGC and the proposed imposition of demand charges after
paying only commodity charges for well- over thirty years.
As I explained in my direct testimony, customers must
have adequate time (years) and advance notice (years) to
adjust to such dramatic rate structure changes,
especially those as dramatlc as filed by IGC in this
case. The Commission Staff has recommended rate design
workshops wi-th the Company and interested parties.
Amalgamated plans to fu11y participate in those
workshops. fn conjunction with those workshops
Amalgamated plans to explore a range of al-ternatj-ve rate
9t
I,o
t{
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rNT-G-1 6-02 L47 4
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8
9
10
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Readlng (Di-Reb) 72a
Amalgamated Sugar
designs that might include seasonal rates, ratchet rates,
establ-ishing a new customer class for the largest
transportation customers or have special contracts that
would better accommodate the utillty and the customers'
load profile, along with other, yet to be defined,
possible approaches.
O. WHAT ARE YOUR RECOMMENDATIONS TO THE
COMM]SSION?
A. My recommendatlon 1s once the Commission
determines the revenue requirement for Intermountain Gas
that it be spread on
customer's individual
an equal percentage on each
bills and that any significant rate
design changes are made
cost-of-
only after the Company prepares a
o 25
rNT-G-L6-02 7415
o 1
2
3
4
5
6
1
8
9
service (COS) that is acceptable, reasonable and approved
by the IPUC
O. DOES THIS END YOUR TESTIMONY AS OF FEBRUARY 15,
2076?
A. Yes.
10
11
72
o 13
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15
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20
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Reading (Di-Reb) 13
Amalgamated Sugar
o 25
rNT-G-76-02 L416
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4
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CSB Reporting
(208 ) 890-s198
READING (X)
Amalgamated Sugar Co.
(The following proceedings were had in
open hearing- )
MR. RICHARDSON: And Dr. Readinq, dS a
preface to tendering you for cross-examination, I just
cannot reslst reading to you from a fortune cookie that I
got at dinner last night with my wife and the fortune is,
I think, apropos to your testimony today. It says, "You
always have the right answers. They just sometimes ask
the wrong questions, " and with that, I will- tender
Dr. Reading for cross-examination, Madam Chair.
COMMISSIONER RAPER: Thank your Mr.
Richardson. Does the Company have any questions?
MR. WILLIAMS: Yes, Madam Chair, we do.
CROSS-EXAMINATION
BY MR. W]LL]AMS:
O Good afternoon, Dr. Reading.
A Good afternoon.
proposed
proposal
O On page L2 of
a measured phase-in
your direct testimony,
of the Companyr s rate
general rateto occur over the next five
you
design
CASES.
A
O
Yes.
If the Company filed a rate case once
instead of once every 30 years, are youevery 10 yearso25
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CSB Reporting(208) 890-5198
READ]NG (X)
Amalgamated Sugar Co.
and I golng to be around with they finish that phase?
A Someone that does some forensic statistics
that look at life expectancies, I would say at 76, no.
O And if the Commission adopted what I will
describe as a much more modest or reasonable phase-in
intercl-ass subsldies
instance? How would
period, how woufd you handle the
that have been identified in that
if there is in fact a
affects one party on
recommendation as far
difference?
AAs
remember, I presented
O We1l,
subsidy within the
a phase-in, what is
as who should pick
class that
your
up that
I'd have to look it up, but as I
in my rebuttal testimony
I think we're talking about wel1,
between direct andgo ahead. It's
rebuttal, so go
A
hard to distlnguish
ahead.
The answer I want to give well, I ' 1l-
get t.o the rebuttal, Ijust. give the answer and when we
w11l say ditto.
COMMISSIONER RAPER: Both are part of the
record.
MR. WILLTAMS: I recognize that. I just
I would try and just doagreed with their counsel- that
one and then the other.
MR. RICHARDSON: Madam Chair, I have noo25
1418
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CSB Reporting
(208 ) Be0-5198
READ]NG (X)
Amalgamated Sugar Co.
problem with Dr. Reading belng cross-examined
simultaneously on both sets of testimony.
THE WITNESS: Responding to your question
how would I recommend handling it, and my recoflrmendation
would be that all parti-es in this case have said l-et's
get together after the case and have a workshop. There
is a variety of ways it could be handl-ed. One witness
mentioned retention rates, f think seasonal- rates,
interruptible rates. When you have the uniqueness of
Amalgamated in this case when you're talking about a
class versus a customer and the l-ast witness just said
rate shock applied, if f understood him correctly, to a
c1ass,
clas s ,
Amalgamated
looking at
is such a large percentage of the T-4
them, I'd say maybe they need a special
Maybe they need an interruptible rate.
We need to J-ook at those kinds of rates,
and touching on Mr. Richardson's
contract.
witness, after 30 years, f don't
questions
know what
to the last
I'm not denying
they are and the
the panlc is.
that the current cl-ass structures the way
l-oad factors that
some, given
shifts, but
are defined
O
their cost of service
we don't have to have
Amalgamated has causes
study, intraclass
those classes as they
now locked in.
BY MR. WILLIAMS: And thank you
answer You're very weII, let me take you
for your
back to theo25
7419
o
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2
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5
6
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9
question, because I'm not sure that I heard the answer as
much as f heard a great description of a process, and so
the question that I had is that if you assumed that there
is an interclass subsidy that is going on, I'11 ask you
to assume that, there have been identified in this case
two potential groups of customers that could make up that
difference if there 1s in fact a subsidy going to
Amalgamated, and I'm going to throw a third class in
there, I'm going call them the sharehol-dersr So I'm
assuming that if Amalgamated has been i-s going to be
given a slow ramp to some cost of service that hasn't
been identified, you're not suggesting that the Company's
shareholders should be the ones that are helping
Amalgamated get to cost of service, are you?
A I'l-l- answer that in two ways. I think the
straightforward way would be no. An addendum to that
answer would be Amalgamated is such a large customer, I
believe it was in Mr. Swenson's testimony, he indicated
that Amalgamated's gas consumptj-on since 20L0 to the
present had increased L,400 percent. I found that a
shocking number. I did a back-of-the-envelope
calculation, cal-culated that they would be consuming
they be wou1d be consumj-ng in 2009 6 mil1ion therms,
they're currentl-y at 85 million therms, so that in fact
is true, and the reason it's true 1s that they have
CSB Reporting(208) 890-s198
READ]NG (X)
Amalgamated Sugar Co.
10
11
72
13
!4
15
76
77
18
19
20
2L
22
23
24
o 25
1480
o
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3
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L6
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23
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CSB Reporting(208) 890-s198
READING (X)
Amalgamated Sugar Co.
converted four boilers, I think, and theyrre looking at
another one from coal to gas.
If the company would then this is going
to your shareholder question, if the company woufd then
decide qosh, maybe i-t's cost effective to go back to coal
and, in fact, spent the money to do it and they spent a
lot to convert, then a significant portion of the load
would go away and I would think that woul-d affect the
whole Company and would impact the sharehol-ders.
O You think you have a yes or no question
and you don't even get close.
A IthoughtTresponded.
COMMISSIONER RAPER: Try again.
a BY MR. WILLIAMS: So turning to your
rebuttal testimony, Dr. Reading, so the very first part
of your
before
rebuttal- testimony, you basically state on page 1
you begin your rebuttal, you give us a brief
history of Amalgamated and
of the testimony, you give
importance of Amalgamated.
only witness in this case
A I didnrt hear the
then I think towards the end
another brief proflle of the
Is it fair to say that the
youtre rebutting is yourself?
Iast part of your
question
0 Is the only witness in the case in those
two secti-ons is you're rebutti-ng yourself ?o 25
1481
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CSB Reporting(208) Be0-s198
READ]NG (X)
Amalgamated Sugar Co.
A For some reason I'm not tracking, I'm
sorry.
O Okay; so if you look on page L, you have
the question before you begin your rebuttal testimony,
you have general remarks regarding the Commission's
historic approach to cost of service.
A Yes.
O You're rebutting yourself?
A Yes.
.rY
question. In
mi-l-lion therms
therms ?
A
o
A
how efse to put
because they got
you're
'15.
some '76 so
me throw in,
are kind of
Okay, thank you. It wasn't a trick
2075 Amalgamated purchased approximately 65
total per year. Did you say 95 million
84.
84?
Let
0 So would you
65
the numbers, I don't know
squishy in this case,
went along, so sometimes
accept that in 20L5, you
million therms total for the
to check.
ir,
updated as time
talking about '15. Sometimes you're talking about
Sometimes you're talking about some months '15 and
purchased approximately
year?
A Subjecto25
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CSB Reporting
(208 ) Be0-s198
READ]NG (X)
Amalgamated Sugar Co.
O Okay, and 43 million of those therms were
in the third block of the T-4 schedule?
A As f remember, I presented that in my
testimony and something l-ike 10 percent of those were in
the third bIock, a really big percentage, yes.
O Do you recall the prices per therm of the
three blocks and the break points for those?
A Okay, I would have to look. Let me answer
generally and then I coul-d answer specifically. Most of
the discussion that's occurred so far in the case i-s that
because
they' re
Another
of Amal-gamated's load factor is one reason
getting such a disproportj-onate increase.
reason is, is relative to the rest of the cIass,
when they consume, they really
significant portion is in that
there's really two reasons that
consume, and so a
very
the
fowest bIock, so that
in this case has such a
dlspirit such a wj-de,
combinat.ion of the two,
desperate
s igni fi cant
so the break
proposal made by IGC
desperate and
impact, so it's a
significant. It
deeply discounted
was, for better want
points were
of a better word,
as it went through the b1ocks.
O So would you agree that the third block
that Amalgamated is purchasing is at $0.06 per therm?
A I' 1l- accept that.
O And that's roughly 10 percent of the firsta25
1483
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3
4
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9
block?
A Yeah.
a Okay.
MR. RICHARDSON: Madam Chair, Lf I could
clarify, when you say "purchasirg, " are you talking about
purchasing capacity and not purchasi-ng therms?
MR. WILLIAMS: f'm talking about
purchasing therms, because there is no purchase of
capacity at this point. It's all on a volumetric
basis.
O BY MR. WILLIAMS: So the third block at
$0.06 per therm is roughly 10 percent of the first bIock,
$0.06 per therm and the first block is about 250?
A Those round numbers
O It makes sense, doesn't it?
A You're jarring my memory.
O Okay, 250, 500, 750 woul-d be the blocks,
and by the time you get to the third block, which is 10
percent of Amalgamated's purchases, you're at 10 percent
of what the first bl-ock pri-ce is?
A Yes.
0 And do you think the first bl-ock recovers
both fixed and variabl-e costs?
A None of the blocks col-l-ect fixed and
variable. They let me revise that. I think where
CSB Reporting(208) 890-s198
READ]NG (X)
Amal-qamated Sugar Co.
10
11
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13
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20
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o 25
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CSB Reportlng(208) 890-s198
READTNG (X)
Amalgamated Sugar Co.
you t re
so l-ow
takinq me is that the fact that the third block is
that it contributes significantly less to the
Company's fixed costs.
O Thank you for getting there without me
dragging you.
A I'm trying to expediter so I would say
thatrs a self-evident fact.
O And can you imagine any cost of service
study that woul-d identify $0.06 per therm as collecting
flxed costs?
A Not very much of it and I would add that
that is the rate that IGC has used to charge
transportation customers, and if you look back through
the record of the past 30 years, I don't know if the
numbers match up, but there's always been a deeply
declining block rate, so Amalgamated is simply doing what
the Commission -- what the Company has presented to the
Commission and the Commission has approved.
O And I appreciate that, which had nothlng
to with my question, but does Amalgamated pay Northwest
Pipeline a demand charge for transport?
A Sure.
O What do they pay?
A f would have to look. I don't know what
the demand charge is, but they pay. I think Mr. Swensono25
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CSB Reporting(208) 890-5198
READING (X)
Amalgamated Sugar Co.
had an estj-mate of what it wou1d be or what the gas
charge is.
O Would you accept, subject to check, it's
$0.44?
A Subject to check.
O Okay; so on page 7 of your rebuttaf
testJ-mony, this actually was a very interesting chart,
Dr. Reading, that you prepared on this page and this is
going to take me a l-ittl-e while to qet to my question,
but I've always assumed that primarily the problem for
Amalgamated in this case was its l-ow demand charge,
but and you al1uded to it earl-ier is that, and f think
Mr. Gorman did as wel-l-, and that when I l-ook at this
chart, there are three spikes of the Nampa, PauI, and the
Twln Fall-s p1ant, and when I look at the rel-ative
relationship on the blue l-ine, which is the demand curve
or the surrogate demand curve, if you wi1l, those plants,
except for maybe Twin Fal1s, but Nampa and Paul- certainly
are within a pretty reasonable range of your surrogate
demand charge, and yet,you
thatyou
said
agree
this
have these huge price spikes
those price spikes, in fact,and so would
I think you
caused by the fact that your Block 3
a fow volumetric rate that it doesn't
this problem that you're identifying
earl-ier, are as much, if not more,
demand that is such
come wel-1, isn't
here more ino25
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CSB Reporting(208) 890-sr-98
READING (X)
Amalgamated Sugar Co.
relation to your heavy
$0.06 cents than it is
demand, annual- demand,
the other industrial-s
observation?
hitting on t.he Block 3 rate at
the fact that Amalgamatedfs
is not quite as strong as some of
on the left side; is that a fair
A f haven't specifically investigated
of interrelated and that
ir. r
see
fact
the two as being sort
that when they are on
is the
and the months that their ]oad
factors are high, that's when they have the big percent
in the lowest block and then, of course, when they don't
consume at aI1, then j-t's in the higher bIock, so I would
say that I woul-d say they're interrelated, but that
the fact it's in the lower block is certainly a
significant part.
0 And if I were to l-ook at that table and
then I look at the far right side, I mean, that seems to
make sense that the outliers that are Mr. Finklea's
cfients that have pretty poor demand, annuaf demand,
factors, which is the drop-off of the blue l-ine, are al-so
seeing the price spikes, and those would be
demand-related pricing, billing impacts; correct?
A Yeah.
O But I just don't see Amalgamated fitting
into that categoryi is that correct?
A No, I will go with you that a lot of gas25
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CSB Reporting
(208 ) 890-s198
READING (X)
Amalgamated Sugar Co.
in the l-ower block is a slgnificant contributor to the
fact that the institute of demand charges as proposed are
causing the big impact 1n rates on the Company. I wil-l
accept that.
MR. WILLIAMS: A11 right. Madam Chair, I
have no further questions. Wait, hold on.
(Pause in proceedings. )
O BY MR. WILLIAMS: Dr. Reading, one of your
proposals was for possibly a special contract for
Amalgamated that moved it essentially to its own rate
class.
days
Idaho
A Right.
O And you and I both remember in the ol-d
that was essentially FMC? That was l-ike FMC on the
isn't
Power system?
A Yes, and
O So once
that essentlally
rate cl-ass is not
subsidiz:-nq that might
class to cost of service would be spread across the rest
of the customer base?
A It woul-d change the outcome of the total
cost of service simply because Amalgamated is such a
large customer.
that
Simplot and DOE and Micron.
they become a separate rate class,
a proposal that to the extent that
at its cost of service, then the
need to occur to bring that rate
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CSB Reporting
(208 ) 890-s198
READ]NG (X)
Amalgamated Sugar Co.
MR. WILLIAMS: A1l right. Madam Chair,
that finishes me
COMMISSIONER RAPER: Commission Staff have
cros s -examinat ion?
MR. KLEIN: Staff has none.
COMMISSIONER RAPER: Mr. Stokes?
MR. STOKES: Yes, Madam Chair.
CROSS_EXAMINATION
BY MR. STOKES:
O Good afternoon; so in your di-rect and
rebuttal- testimony, you indicate that you're comfortable
with and often supportive of some Ievel of capacity
rate design; is thatcharge or
correct ?
demand charge as part of
A That's correct,and Amalgamated,
with the company have
company recognizes that
Mr. Richardson and I in
talked with the company
meetlng
and the
demand charges
norma] kind of
are coming
ratemaking
and that demand charges are a
apparatus and that it's in the
future. The point that I'm stressing in my testimony 1s
the fact that there's this sudden change that caught
needs to beAmalgamated
some kind of
by surprise and, therefore, there
accommodation in going forward and that as To25
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(208 ) 890-5198
READING (X)
Amalgamated Sugar Co.
recommend, we need to take a deep breath,all get
the cost oftogether
servi-ce
as everybody recommended and redo
study and determine what the demand charge would
be or what the classes should be, et cetera.
O Okay, l-et's get to the sudden change in
Itmthe second year, but why
sorry, capacity charges
they do?
are these commodity
appropriate on a system? What do
A
u
Commodity charges?
Capacity.
A Oh, capac j-ty,
of the Company when it
they contribute to the flxed
costs
pipes,
fixed
installs the trenching,
defray theiret cetera, storage stations, helps
costs
O And fixed costs are things that include,
l-ike, O&M and taxes and that sort of thing as well;
right? So it's the operat j-on of
A I'm not sure I'd
the util-ity?
throw in O&M in it. I'd
certainly throw in yeah, I would agree wlth that,
okay.
0 Okay, and to
that each customer is paying
costs; right?
be more precise, it ensures
its fair share of fixed
A Neither one of us woul-d be in the business
if we could define fair share. We have different ideaso25
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(208 ) 890-s198
READING (X)
Amalgamated Sugar Co.
about what is fair and what
in my testimony, accepting
study slam, one step, fu11
charges as they're defined,
not the fact that there are
contribute to fixed costs.
isn't fair, and as I stated
the Companyrs cost of service
cost of service for the demand
that's what I'm objecting to,
demand charges that
O Okay; so in your rebuttal testimony, for
the first time you criticize Intermountain's cost of
service study; correct?
A That is correct.
O Can you point to me where in the record I
would find Amalgamated's cost of service study?
A I think as I put in my direct testimony,
Amalgamated has not done a cost of service study.
O But in your direct testimony you didn't
object to the Company's cost of service study; correct?
A I was assuming, and if you read my
testimony, f said an -- what did I -- acceptable what
term did I use? I used a term that it was an acceptable,
reasonable cost of service study. Accurate, I thlnk I
used the term accurate, which after I reread my testimony
since cost of service is an art as much as a mathematical
exercise, accurate is kind of a funny term to use, but
what I meant was an acceptable, accurate cost of service
study.o 25
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When I read Staff's testimony, as I said
in my rebuttal, they went through the numbers and listed
a whole set of reasons why they thought that. it wasn't
worthwhile. I looked at those reasons and decided that I
should not accept it because it was not accurate.
O Okay, can you give me a couple of those
reasons ?
A There's not a l-oad study, that I wrote
some down. They didn't do a load study. The line
some of the l-ine extension costs were off . I wou]d have
to Iook, but there was several. If you go through Dr.
Morrisonrs testimony, he ticks them off.
O Fair enough, I'l-l move on. Is it
proper is setting proper price slgnals an important
consideration in ratemaking?
A Oh, absolutely.
O Okay, is cost causation an important
consideration in ratemaking?
A Sure.
O Okay, you indicate that Amalgamated was
ambushed by this rate filing because Amalgamated has paid
commodity only charges for the l-ast 30 years; is that
correct ?
A That's correct.
O Has Amalgamated significantly i-ncreased
CSB Reporting(208) 890-s198
READING (X)
Amalgamated Sugar Co.
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(208 ) 890-s198
READING (X)
Amalgamated Sugar Co.
its gas usage in the past six years compared to prior
usage ?
A Yeah, that's what I mentioned earlier.
That's that 7,400 percent
million therms to about 85
O Andsoasl
reason that they increased
increase going from about 6
mill-ion therms.
understand it,part of the
is because
reason.
evaluating
they switched from coal-; is
their gas usage
that correct?
whether or
A I woul-d say that's the primary
O Okay; so when the company was
not to switch from coal to naturaf 9ds, were
they looking at the
A That
rel-ative prlce
would be one of
of gas versus coal?
the items.
be looking at what they
regulation and air
gi-ven the election, they
O Okay.
A They would also
viewed as the future of carbon
A I think
7.9 percent. I think
request. I don't know
O So 1.9
I'd have to fook
control, et cetera.
may revise that.
o But
You know,
when you look at the total cost of gas
del-ivered to the p1ant, what percentage of that is
comprised of the rate that Intermountain charges ?
Did I say 77
I responded to a production
if it was from you or IGC.
percent? Okay.o 25
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CSB Reporting(208) 890-s198
READING (X)
Amalgamated Sugar Co.
A
think I only
ten months,
u
Mr. Swenson?
A
oY
That was based on not a full year. I
had their pipeline costs for, Iike, nine or
so I looked at those numbers.
Have you read the rebuttal testimony of
Yes.
Do you agree with him that Iet me come
actua1ly. Are you aware that Intermountainback to that,
believes that other industrial- customers are subsidizinq
the rates of Amalgamated and that the intraclass
subsidies became more severe due to Amalgamated's
increased usage?
A Would you
O Sure. Are
and the gas users believe
are subsidizing the
intraclass subsidies
repeat that?
you aware that Intermountain
that other industrial customers
rates of Amalgamated and that the
became more severe due to
Amalgamated's increased usage?
A Yeah, when they converted,
became I wouldn't the percentage of
costs i-ncreased, yes.
O And Amalgamated's position
change in rate design should be done over
cases; is that correct?
A And I woul-d stress the two
the subsidy
covering fixed
is that any
five rate
reasons Io25
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CSB Reporting
(208 ) 890-5198
READING (X)
Amalgamated Sugar Co.
picked that: one was i-t is the Company's
to have rate cases,' and the second one is
decision when
some symmetry on the fact that
thought gosh,
they haven't
current trend
the case and the Company
of fiJ-ing once every 30
position that other industrial-
the rates for the next 150
I
Iet's give it
been in for 30
O
continues its
years.
So if that's
years, 1s
customers
years ?
it Amalgamated's
should subsidize
A No, I
and thegas Company
tomorrow. When I was with the
woul-d say that would be up to the
gas users. Amalgamated can come in
Commission way
IGC controfs
back when,
when it hasthere was pancaking rate cases.
a rate case.
O Well-, ry question was if you assume that
they continue with the current rate of filing rate cases,
which is once every 30 something years.
A Oh, a hypothetical?
O If you assume, yes.
A Okay, given the cost of servi-ce study is
correct and that they wait another 30 years, I would have
to agree with you and that's why I think that that is not
a rational- thing to do and why I think that rates in this
case shoul-d be spread on an equal- percentage basis so
that we can step back and look at aff of the factors thatO25
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CSB Reportj-ng
(208 ) 890-s198
READ]NG (X)
Amalgamated Sugar Co.
are being brought out in this case, 9et them fixed, file
another case and go forward.
O
" zero sum gamett
A
O
A
don't
What do you mean by the phrase this is a
on page 8 of your rebuttal testlmony?
Where?
On page 8 of your rebuttal- testimony.
Point me to the line so f make sure that I
A I think I know what you mean, but I want
to make sure.
0 It's on page
mind that rate design is a
mean by that?
B, line 9. ft says, "Keep in
'zero sum game.'" What do you
A That means that once the revenue
all-ocation has made has been made, then the classes
O I thlnk
and the rate designs that are proposed
then other classes
for each class, if
Oh, I see where you're
class is a zero sum game
been determined.
a cfass of customers, the
sum game mean?
one cl-ass pays more,
O
not spread;
A
going. Rate design within the
once the class allocation has
O But if you have
T-4 customers, what does zero
pay l-ess.
So we're talking about rate design here,
correct ?
Right, yeah.
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READING (X)
Amalgamated Sugar Co.
A Zero sum game means that if you put a high
demand charge,
would pay less.
some customers would pay more and some
If
those
amounts.
charge, then
pay different
nY
you stay with an all commodity
different intraclass customers would
Okay,wou1d you agree that if an
is not paylng the cost to serve itsindustrial customer
plant using your zero sum game that other industrial
customers within that class are required to subsidize
those rates?
A Again, f'd stay away from subsidize, but
there would be a shift, yes.
O Well, if they're not paying their fair
share of rates, what do you
A Again, it depends on what fair share is,
but I wlll- accept that we'l-I draw a hard 11ne on fa j-r
share and I would agree with you.
O Is it true that almost all the costs in
rate schedul-e T-4 are col-l-ected on the first two
blocks ?
A Yes, Mr. Williams and I did that dance and
absolutely.
O Right, do you know what percentage of
Amalgamated's therm usage falls in the first two
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CSB Reporting(208) 890-s198
READTNG (X)
Amalgamated Sugar Co.
think it was 10 percent
wou1d l-ook. 10 percent
SO
A I'm trying to remember. I did that. I
O Okay;
the third block where
or less. Subject to check, I
rings a bel-l-.
the remainder of that would be in
they're not collecting the fixed
COSt S ?
A Yeah. I think I said 10 percent, so when
they're cranking, 70 percent.
O Right, and who has to make up the rest of
those fixed costs?
A Say that again.
O Who has to pay the rest of those fixed
costs that Amalgamated is not paying?
A Depending
T-4 rate, others in the
O Yeah,' so your
on an equal percentage?
A For this case.
O For this case,
the Company doesn't file for
A Then we'Il all
rates, but all- parties have
get back together, and talk
MR. STOKES:
Thank you.
on what the all-ocation is to the
class.
proposal is to spread rates
and then what happens if
30 years?
keeping paying those same
agreed to have a workshop,
about the cost of service.
We have nothing further.
o 25
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CSB Reporting
(208 ) 8 90-s198
READING (Com)
Amalgamated Sugar Co.
COMMISSIONER RAPER: Mr. Otto.
MR. OTTO: Much to my disappointment, I
have no questions for Dr. Reading.
THE WITNESS: Gosh, Ben.
COMMISSIONER RAPER: Are there any
questions from the Commissioners? I have one.
THE WITNESS: Oh.
CROSS_EXAMINATION
BY COMM]SSIONER RAPER:
O Wel-l-, maybe more than one. It might
amount to something more than one, so you've done this
for a long time, Dr. Reading.
A I'm thinking this morning when getting
ready,
design,
f came to the conclusion that f was in a different
but
more than 40
I've been in thls chair for the first time
years a9o, so yes.
So I'l-l- avoid telling you that I'm 45 and
you began when f was five years o1d, so you have a weal-th
of j-nformation, a weal-th of knowledge. I will- recognize
for the record you also have represented in your time
different customers, different cl1ents.
A Oh, it would take me a long time to
remember, but yes, yes.
U
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READING (ReDi)
Amalgamated Sugar Co.
O fn your 40
have you ever seen a rate
plus years of representation,
design that looks to phase in a
rate cases?
would be Dor but f've also
change over
A
never seen
five general
The answer
a case where there hasn't been a rate filing
for 30 years.
did get
earlier.
Is there
COMM]SSIONER RAPER:
the yes/no answer that Mr.
No argument, but I
Williams was going for
That is all- that I have for you, Dr. Reading.
any redirect?
MR. RICHARDSON: I've just got one quick
one with your i-ndulgence, Madam Chair.
REDIRECT EXAMINAT]ON
BY COMMISS]ONER RAPER
O Dr. Reading, there were some questions
shareholders
this case
about cost of service and shifting costs to
and the l-ike. The cost of service study in
uses a 1CP; is that correct?
Correct, January
What does that
nd
0
t1
n
A
1st
Okay,
What
finish the
Irm sorry.
question.
does that mean to use a 1CP?
That means that at the Companyrs peak,o 25
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READING (ReDi)
Amalgamated Sugar Co.
which in this partlcular case is January 1st, that is
what the demand allocations are set on.
O So if Amalgamated
off and didn't consume
year, what would happen
Sugar took that holiday
that one day of the
rates ?
uniquenesses in
Raper's questlon and
a case where a
any gas on
to their
A That would be that would be hard to
determine. Because they are such a significant part of
the rate class, it woul-d mean that the allocation to the
whole T-4 rate cl-ass would go down and they wou1d recei-ve
all- of those othera less aflocation on that, along with
customers, and I think along with the
this case to respond to Commissioner
that is I donrt think f've ever seen
single customer within a class dominated it so much.
Usually there's more homogeneity among the different rate
cfasses and so you don't get the dispirit impacts, but it
woul-d l-ower the rates for Amal-gamated, along with al-l- the
other customers in the class.
O So if Amalgamated took a holiday on
January 1st and consumed no gas that day, there would be
absolutely no subsidy of Amalgamated, would there? They
would contribute nothing to the system peak.
A Everybody's rates would go down. I think
maybe at my perll, let's Sdy, I would not agree with
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(208 ) 890-5198
READING (ReDi)
Arnalgamated Sugar Co.
MR. RICHARDSON: On that note, Madam
Chair
COMMISSIONER RAPER: Your witness i_s
disagreeing with you.
MR. RICHARDSON : that concl-udes
Amalgamated's case, Madam Chair, and may Dr. Reading be
excused?
COMMISSIONER RAPER: Yes. Thank you,
Dr. Reading, for your honest testimony.
THE WITNESS: One step too far.
(The wltness left the stand. )
COMMISSIONER RAPER: With that, w€ are to
the Company's rebuttal. I have a l-ist. The Company has
t2 rebuttal- witnesses to take
to get a couple under our belt
think that if we
afternoon, we can
so unless anyone
the Company's
up. I
this
try
be
done by midday
needs a potty
rebuttal.
tomorrow, I'm hoping,
break, fet's move into
MR. WILLIAMS: So Madam Chair, unless
there's an objection, what I would propose in the next 30
to 45 minutes is we take what at.l-east I perceive to be
some of the easier ones.
COMMISSIONER RAPER: I would love that.
Thank you.
MR. WILLIAMS: And if I couId, withouto25
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DARRINGTON (Di-Reb)
Intermountain Gas Company
objection, have Jacob Darrington come back on to the
stand.
COMMISSIONER RAPER: Thank you, and may I
ask whil-e Mr. Darrington is coming to the stand, did you
have the document promised yesterday regardlng the
correction of numbers in his testi-mony? Thank you.
MR. WILLIAMS: I do.
(IGC Exhiblt No. 4'7 was marked f or
identification. )
COMMISSIONER RAPER: Mr. Wi11iams, if you
would 1j-ke to proceed with rebuttal.
JACOB DARR]NGTON,
produced as a
Intermountain
sworn to tel-l-the
the truth, resumed
t.estif ied as fol-lows:
BY MR. WILL]AMS
rebuttal witness at the instance of the
Gas Company, having been previously duly
truth, the whole truth, and nothing but
the stand and was further exami-ned and
DTRECT EXAMINAT]ON
O Sir, would you please identify yourself
again for the record?
A My name is Jacob Darrington.o 25
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CSB Reporting(208) 890-s198
DARRINGTON (Di_Reb)
Intermountain Gas Company
prefiled
yesterday
exerc]-se,
numerical changes
true-up; correct?
a You're the same Jacob Darrington that
direct testimony that we discussed earlier
in this case and presented?
A Yes.
a And when we were going through that
it became apparent there were a number of
that rel-ated to the Company' s September
A
O
by page
has been
Yes.
All rlght, and to us the pain ofspare
wentpage
what
that
turning,
handed
you instead back and prepared
to you and marked as Exhibit No. 47
identlfies each and every numerical change in your
direct testimony?
A Yes.
O Okay; so wou1d you briefly speak to that
exhibit?
A Yes; so there are, I believe, 43 different
changes here and as it states on the second page, these
are due to the Company's orlglnal and amended responses
to Staff production request No. l'78, otherwise known as
the September update
MR. WILLIAMS: Madam Chair, we would move
for the admission of Exhibit No. 41 for the record.
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CSB Reporting
(208 ) Be0-s198
DARRINGTON (Di-Reb)
fntermountaj-n Gas Company
Exhibit 4'l will be admitted to the record.
(IGC Exhibit No. 41 was admitted into
evidence. )
O BY MR. WILLIAMS: And are you al_so the
same Jacob Darrington that prefiled rebuttal testimony
consisting of three pages with two exhibits, 43 and 44?
A Yes, I am.
O And if f asked you the same questions j-n
that rebuttal testimony, would your answers be the same
today?
A They would.
MR. WILLIAMS: Madam Chair, I would ask
that Mr. Darrington's rebuttal testimony be spread upon
the record and he is available for cross-examination.
COMMISSIONER RAPER: Without objection,
Mr. Darringtonrs rebuttal testimony will be spread upon
the record as if read and Exhibits 43 and 44 wilf be
admitted into the record.
(IGC Exhibit Nos. 43 s,. 44 were admitted
into evidence. )
(The following prefiled rebuttal
testimony of Mr. Jacob Darrington is spread upon the
record. )
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DarrJ-ngton, Reb. 1
Intermountain Gas Company
O. Please state your name, posj-tion and business
address.
A. My name 1s Jacob Darri-ngton. I am employed by
fntermountain Gas Company ("Intermountain" or "the
Company" ) as a Regulatory Analyst. My business address
is 555 South Cole Road, Boise, ID 83707.
O. Are you the same Jacob Darrington that prepared
and previously presented prefiled direct testimony on
beha1f of fntermountain Gas Company in this Case?
A. Yes.
What is the purpose of your rebuttal- testimony?o.
A.
following
review of
Morrison' s
1.
2
The purpose of my
three issues that
the supporting cal-culati-ons
Exhibit Nos. 110 and 111:
Stating that he "Accepted
Determinants" for the T-3
response to the Companyrs
then uslng an
calculate the
No. 20 but
testimony is to rebut the
were discovered during my
to Company Witness
Company Billing
customer cl-ass in
Production Request
inf1ated five-year
T-3 normafized test
3
average to
year revenue.
Arbitrarily
in the T-4
reallocating the spread of therms
billing bl-ocks.
Ignoring the Lost Gas adjustment proposed by
the Company.o z5
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Darrington, Reb. 1a
Intermountain Gas Company
O. What Billing Determinants did Doctor Morrison
use for the T-3 customer cl-ass?
A. In response to Company Production Request No.
had the20, Dr. Morrison provided an Excel
electronic copies of Exhibits No.
file that
110 and No . 111- ,
including
that Excel
supporting cal-culations. On the f j-rst tab of
f11e, titled
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Darrington, Reb. 2Intermountain Gas Company
"Proposed Al-l-ocatj-on_Ex110, " Dr. Morrison stated that he
'rAccepted Company Billing Determinants" for fS-R, IS-C,
cS-12 (CNG), LV-1, T-3, T-4 and T-5 (see Exhibit No. 43).
However, after reviewing the supporting ca1culations
provided in this Excel fife, it is apparent that Dr.
Morrison did not accept the Company's billing
determi-nants for the T-3 customer class, but instead used
a five year average to determine total throughput.
Additionally, Dr. Morrison's direct testimony never
discussed an adjustment to the T-3 customer class
throughput. This adjusted throughput is 12% hlgher than
the original throughput fil-ed by the Company. Dr.
Morrison's analysls ignores the fact that three of the
largest T-3 customers migrated to the T-4 customer cl-ass
during the five year period he used for averaging. He
al-so ignored actual throughput for the first six months
of 2016. The overall effect of this averaging causes T-3
normalized
be
test year margin (i.e.
overstated by $81,559,
revenues less cost of
which can be seen ongas) to
Exhibit
reasons
proposed
O.
No. 44, Page I, Column (d), Line 13. For the
stated above, the Company rejects Dr. Morrison's
adjustment to the T-3 customer cfass.
Wil-l you please explain th.e effect of Dr.
arbitrary reallocatj-on of the spread of therms
bilting blocks?
Morrison's
in the T-4o25
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Darrington, Reb. 2a
Intermountain Gas Company
A. Yes. As mentioned above, Dr. Morrison stated
that he "Accepted Company Billing
T-4 customer class. While it is
Determinants" for the
true that he accepted
for the T-4the total- actual and forecasted throughput
customer class, ds presented by the Company, he
arbitrarily real-l-ocated the spread of therms in the
billing blocks. The effect of this reallocation was to
j-ncrease the throughput in to the higher margin 1st bl-ock
and decrease the throughput in the other l-ower margin
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Darri-ngton, Reb. 3
Intermountain Gas Company
bl-ocks. He not only adjusted the forecast months, but
also adjusted the actual bil-l-ed data for January through
June of 2016. Because Dr. Morrison had no objection to
the actual- and forecasted throughput for the T-4 customer
class in total, there is
reallocate the spread of
as to achieve an infl-ated
customer class. The total
no val-id reason to arbitrarily
therms to the billing blocks so
test year margin for the T-4
impact of this error increases
the Company's test year margin by $221 ,80'7, which can be
seen on Exhibit No. 44, Page 2, Column (d), Line 13.
O. Pl-ease address the exclusion of the Lost Gas
expense adjustment.
A. Certainly. With this filing, the Company
proposed to update the Lost Gas Expense benchmark. To do
this, dfl adjustment for the difference between the
benchmark and the proposedcurrent Lost Gas Expense
benchmark was included in cost of gas normal-ization.
this adjustment from the
the
Dr. Morrisonrs work excludes
normalized test
Gas adjustment
year.
from the current case
witness has filed testimony opposing
The effect is to exclude the Lost
even though no Staff
the adjustment.
O
A
Does this conclude your testimony?
Yes it does.
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CSB Reporting(208) 890-s198
DARRINGTON
Intermountain Gas Company
(The following proceedings were had 1n
open hearing- )
COMMISSIONER RAPER: Do you have anything
you need to do or are you presenting him for cross?
MR. WILLIAMS: I'm just presenting him.
COMMISSIONER RAPER: Does Commission Staff
have any cross?
MR. KLEIN: No cross from Staff.
COMMISSIONER RAPER: Thank you. Mr.
Stokes ?
MR. STOKES: We have no cross, Madam
Chair.
COMMISSIONER RAPER: I think you get off
the hook with Mr. Richardson, he left the room.
THE WITNESS: There we go.
DR. READING: He trusted me enough to say
he has no questions.
COMMISSIONER RAPER:Thank you, Dr.
. Otto?Reading, he's lucky
MR.
to have you. Mr
OTTO: No questions,
RAPER: Are
Madam Chair.
COMMISSIONER there any
questlons from the Commlssj-oners? You did pick a great
witness, Mr. WiIliams. No redirect there. Mr.
Darrington, thank you for aI1 your time and efforts in
putting together your case.o 25
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CSB Reporting(208) 890-s198
DEDDEN (Di-Reb)
Intermountain Gas Company
THE WITNESS: Thank you.
COMMISSIONER RAPER: You are dismissed.
(The witness left the stand. )
MR. WILLIAMS: Madam Chair, I'm going to
next turn to Ted Dedden, but if I could have just a
moment with him.
COMMISSIONER RAPER: Sure.
(Pause in proceedings. )
COMMISSIONER RAPER: Pl-ease proceed
whenever you're ready, Mr. Wil-l-iams.
MR. WILLIAMS: I went so fast I have to
find him in my book.
produced as a
Intermountain
TED DEDDEN,
rebuttal- witness at the instance of the
Company, having been
the whol-e truth, and
first duly sworn
the truth,
resumed the
nothing but the
truth,stand and was further exami-ned and
testif ied as f of l-ows:
DIRECT EXAMINAT]ON
BY MR. WILLIAMS:
0 Sir, woul-d you please identify yourself
for the record?
Gas
to tell-
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CSB Reporting(208) 890-5198
DEDDEN (Di-Reb)
Intermountain Gas Company
A Yes, Ted Dedden, director of accounting
and f i-nance with f ntermountain Gas.
O And you are the same are you the same
Ted Dedden that filed prefiled rebutta] testimony in this
case consisting of 11 pages with one Exhibit No. 32?
A Yes, f am.
O And if I asked
today, woul-d your answers be
this rebuttal- testimony?
A Yes.
MR. WILLIAMS:
you those same questions
the same as contained in
A11 and Madam Chair,
upon the record
right,
spreadI would ask that his testimony be
and Exhibit 32 admitted.
COMMISSIONER RAPER: Without objection,
Mr. Dedden's rebuttal testimony will be spread upon the
record as if read and Exhibit 32 is admitted.
(IGC Exhibit No. 32 was admitted into
evidence. )
(The foll-owing prefiled rebuttal-
testimony of Mr. Ted Dedden is spread upon the record.)
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Dedden, Reb. 1
Intermountaj-n Gas Company
0. Pl-ease state your name, position and business
address.
A. My name is Ted Dedden. I am the Accounting &
Finance Director of Intermountain Gas Company. My
business address is 555 S. Col-e Road, Boj-se Idaho 83707.
O. Are you the same Ted Dedden that pre-filed
direct testimony in this case on behalf of Intermountaln
Gas Company?
A. Yes.
O. What is the purpose of your rebuttal- testimony?
A. My testimony will- address the adjustments to
Other Revenues, Affiliate Costs, and Incentive
Compensation proposed by NWIGU Witness Gorman, and will
respond to the testimony and proposed adjustments
presented by fPUC Staff Witness Romano.
I. Rebutta]. to NIiIIGU tlitness Gorman
O. Will you please explain, ds you understand it,
the amount and reasoning support.ing Mr
adjustment to Other Revenues?
A. Yes. Beginning on page 5 of
Gorman's proposed
his
testimony, Mr.
test year Other
that the first
Revenues by $206,000.
six months of 2076 are a
di-rect
the Company's
Gorman argues
Gorman proposes to increase
Mr.
better
representation of the ongoing level- of Other Revenues
than the last six months of cal-endar year 2075, upono25
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Dedden, Reb. 1a
Intermountaj-n Gas Company
which the Company based its forecast of Other Revenues
for July through December of 2076. Therefore, according
to Mr. Gorman, the first six months of 2076 shoul-d be
used to forecast the last six months of 2016. As
previously mentioned, this would result in a $206,000
increase in Other Revenues and thus a decrease to the
Company's overal-l- revenue requirement.
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Dedden, Reb. 2fntermountain Gas Company
O. Do you agree with Mr. Gorman's proposed
adjustment to Other Revenues?
A. No, I do not.
a. Will you please explain why you do not agree
with this adjustment proposed by Mr. Gorman?
A. Yes, but I would like to clarify two things
before I begin. First, I want to make it clear that Mr.
Gorman's proposed adjustment is in relation to Other
Revenues as stated on Exhibit No. 9, Lines 1 through 72
and not the total Other Revenues as stated on Exhiblt No.
8, Line 2 (which inc1udes interest income) .
Second, Mr. Gorman has not incorporated into his
direct testimony the information from the Company's
updated revenue requirement cal-cul-ation which was filed
in response to IPUC Staff Production Request No. I18 and
upon which the IPUC Staff is basing its proposed
adjustments. In response to this production request, the
Company provlded actual data through September of 2076,
to incl-ude Other Revenues, and an updated forecast of
revenues,
December
l-evel of
expenses, and rate base for October through
of 20t6. In this update, the Company's total
Other Revenues was forecasted to be $2,963,511
Witness Deddenrs Exhibit No. 9, p.1, Column (d),(Company
Line 12 as filed in response to IPUC Staff Production
Request No. 178).o 25
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Dedden, Reb. 2a
Intermountain Gas Company
This updated level of Other Revenues j-s only $21,352
(O.92%) lower than actual Other Revenues through December
31, 2076. Based upon the accuracy of the Companyrs filed
amount for Other Revenues, the Company rejects Witness
Gorman's proposed adjustment and instead proposes that
the level- of Other
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Dedden, Reb. 3Intermountain Gas Company
Revenues presented in its updated test year be accepted.
This is consistent with the Staffrs Exhibit 103, which
makes no adjustment to test year Other Revenues.
O. Will you please explain, ds you understand it,
the amount and reasoning supporting Mr. Gorman's proposed
adjustment to Affiliate Costs?
A. Yes. Beginning on page 7 of his direct
testimony, Mr. Gorman simply argues that the Company's
test year Affillate Costs are too high in comparison with
the five-year average of Affiliate Costs. It is
important to note that Mr. Gorman is not arguing that
Affiliate Costs are inappropriate to include in customer
rates, rather he is only arguing that the Company's total
forecasted level of Affiliate Costs are too high when
compared to actually incurred costs. Consequently, Mr.
Gorman proposes to adjust the Company's level- of
Affiliate Costs downward. The total proposed adjustment
by Mr. Gorman to Affiliate Costs is $1,381,000.
Gormanr s proposedDo you agree with Mro.
adj ustment
A No, I do not.
O. Wilt you please explain why you do not agree
with this proposed adjustment?
A. Yes. The total amount of actuaf and forecasted
Affiliate Costs included in the response to fPUC Staff
to Affiliate Costs?
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Dedden, Reb. 3a
Intermountain Gas Company
Production Request
amount of Affiliate
No. 178 was $15,499,927. The actual
Costs through December 3L, 2015 was
updated level of Afflliate Costs is$15,552 ,419. This
l-ower than actual-costs by $52,552 (0.34%) .Based upon
of Affiliate
proposed
the accuracy of the Company's filed amount
Costs, the Company rejects Witness Gorman's
adjustment and instead proposes that
Affil-iate Costs be accepted.
the updated level of
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Dedden, Reb. 4
Intermountain Gas Company
a. Please describe Mr. Gorman's proposed
adjustment to Incentive Compensation.
A. Mr. Gorman argues that the Companyrs customers
do not "receive any benefit from the MDU incentive p1an"
because the incenti-ve plan metrics "refl-ect the resul-ts
of operations, whj-ch are not specifically based on the
performance of IGC
Testimony, p. 10,
that "cost control-
ratepayers through
service quality" (Gorman
Line 3-6). Although Mr.
Direct
Gorman
and customer satisfaction can
agrees
benefit
rel-iability, " he does not bel-ieve
improved service
that the Company's
customers are benefited because the incentive plan is
based on the combined efforts of multiple utili-ties and
"MDU's metrics do not identify which customers get the
benefits" (Gorman Direct Testimony, p. 10, Line 10-13).
Mr. Gorman concludes that since "IGC has not proven that
this program produces benefits to its IGC customers, " its
cost shoul-d be removed from the Company's revenue
requirement (Gorman Direct Testimony, p. lL, Line 4-5).
O. Do you agree with this proposed adjustment?
A. No I do not. Mr. Gorman's argument does not
take into consideration the fact that it is the
j-ndividual efforts of each utility that achj-eve the
combined utllity group goals of the incentive
compensation p1an. Mr. Gorman's argument that the
l-ower costs and
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Dedden, Reb. 4a
Intermountain Gas Company
incentive plan metrics "are not based on the performance
of IGC service quality" or that the metrics "do not
identify which customers get the benefits" is false
because, ds each individual- utility works to manage i-ts
business to achieve its individual goals for cost control
and customer satisfaction, the customers of that utility
are benefited even if the combined utility group goals
are not achieved
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Dedden, Reb. 5
Intermountain Gas Company
(Gorman Direct
12-13). Each
1ts business
Testimony,
utility has
in order to
p. 10, Line 3-4 and Lines
the responsibility to manage
achieve its individually
assigned
if there
porti-on
is to be
of the incentive compensation plan goals
any chance of an incentive compensation
payment.
By actively and effectively managing its busi-ness,
Intermountain met 1ts cost control- goal by underspending
its total- planned expenditures for O&M for the year
ending December 37, 2016, thus directly benefi-ting its
customers. To achieve the customer satisfaction goal,
the combined utility group must be within the top 35
companies in the annual JD Power Gas Utility Customer
Satisfactlon Study. This requires each utility to work
diligently to achieve the highest leve1 of customer
satisfaction possible because the goal is measured
against the performance of the other compani-es in the
study, not against some target level- of customer
satisfaction (i.e. achieving a particufar score in the
study) .
Since the Company's
by the cost control and
customers are directly benefited
customer service goals of the
incentj-ve compensation p1an, Mr. Gorman's proposal to
remove such costs from the revenue requirement are
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Dedden, Reb. 5a
fntermountain Gas Company
0. What has been this Commissj-on's practice with
respect to incentive compensation?
A. It has been the practice of this Commission to
al-low j-ncentive compensation in the calcul-ation of the
revenue requirement if it is related to customer
benefits. In fdaho Power Case No. IPC-E-08-10 (Order
30722) , the Commj-ssion 3tated,
"IT]he Commission affirms that incentive pay isproperly included in annual- revenue requirementif it is rel-ated to identifiabl-e customerbenefits. We find Staff's recommended
adjustments to the 2008 test year incentiveaccrual appropriate so that employee incentivepay in the
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Dedden, Reb. 6
Intermountain Gas Company
revenue requirement is directly related toiryroviag service or reducila.gi costs to
c,ustolaerstt (emphasis added) .
Additionally, in PaciflCorp Case No. PAC-E-10-07 (Order
32L96), the
compensation
shoul-d "onIy
efficiency,
reason, the
requirement
related to
expense included in
reflect incentives
customer servi-ce and
Company proactively
the portion of incentive
Commission stated that the incentive
the revenue requirement
tied to operational
safety. " For this
removed from its revenue
compensatj-on expense
this does notthe earnings goal because
benefit customers (see Darrington Direct Testimony, p.
L2, Lines 11-13).
II. Rebuttal to Staff Tlitness Romano
O. Does the Company accept any of the proposed
adjustments presented by Witness Romano?
A. Yes it does.
O. WilI you please explain?
A. Yes. The Company accepts Ms. Romano's proposed
adjustments to certain management expenses, injuries and
damages, and other proposed adjustments presented on
Staff Exhibit No. 101.
O. WiII you briefly outline which of the proposed
adjustments presented on Exhibit No. 101 the Company does
not accept?
A. Yes. The Company does not accept the Staff'so25
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Dedden, Reb. 6a
fntermountain Gas Company
adjustment for the
expenses; 2) Rotary
expenses which were
later refunded; and
disallowed expenses
following: 1) Chamber of Commerce
and Lions club dues; 3) certain
duplicated; 3) an expense which was
4) Staff's determination of
in the forecast period.
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Dedden, Reb. 7
Intermountain Gas Company
O. Will you please explain
of Staffrs proposed adjustment to
expenses?
the Company's rejection
Chamber of Commerce
A. Yes. On page 8 of her testimony, beginning on
l-ine 3, Ms. Romano argues that expenses related to
Chambers of Commerce shoufd not be lnc]uded in customer
rates. She states that "Chambers of Commerce advocate
for businesses on issues that i-mpact the business'
ability to successfully compete in the market. But here,
where the Company is a monopolistic utility, the
Chambers' actions shoul-d not impact the Company's
successtr (Romano Direct Testimony, Page B, Lines 3-7).
Ms. Romano's argument to dj-sal1ow Chamber of Commerce
expenses in the amount of $18,150 hinges on the fact that
the Company does not have to compete in the marketplace.
The Company dj-sagrees.
O. WilI you please explain further why the Company
rejects Ms. Romano's argument regarding competition?
A. Yes. Natural- gas can be used to heat homes, to
heat water, to cook food, and to dry clothes, to name a
few. On each of these fronts, the Company faces
competition from electricity and other heating fuels to
include oil and propane. During its review of Ms.
Romano's testimony, the Company was surprised to see her
argument that the Company does not face competition. The25
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Dedden, Reb. 7a
fntermountain Gas Company
Company was also confused because earl-ier in her
testimony, Ms. Romano offered a cl-ear example of the
competition the Company faces when she stated that Staff
al-l-owed advertising expenses that "remind the ratepayer
of the low cost of using natural gas instead of
electricity to heat their homes" (Romano Direct
Testimony, Page 3, Lines L2-L2) . Consequently, the
Company, through discovery questions, asked
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Dedden, Reb. B
fntermountain Gas Company
the Staff why it be1ieved that the Company did not face
competition as a provider of energy. fn response to
Company Production Request No. 49, Staff stated that
"[s]ome element of competition does exist," and that the
Company "may compete with electrj-c utilities as a heating
fuel source when systems are 1nstal1ed or replaced. "
Furthermore, in a reaffirmation of Ms. Romano's position,
the Staff stated that because of the competition faced by
the Company it "included advertlsing expenses informing
customers of the low cost of gas versus el-ectricity. "
Based on the above, it 1s cl-ear that both the
Company and the Staff belleve that the Company faces
competition in the energy marketplace. Therefore, the
Company rejects Ms. Romano's cl-aim that the Company does
not face competitj-on.
O. Does the fact that the Company faces
competition affect the determinatj-on of certain costs as
recoverable from customers?
A. Yes. As stated above, it i-s clear that Staff
is allowlng advertising expenses
competition. This is consistent
has allowed in the past when it
in the face ot
with
stated
charge its
the Company
ratepayers
customers for "advertising
faces competition, because
what the Commission
that a company may
in areas in which
we feel- that the
derive direct or indirect benefit from thiso25
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Dedden, Reb. 8a
fntermountain Gas Company
information or the increased business which the
advertising may encourage" (Case No. U-1000-37, Order No
74423, Page 33).
The Commission's assessment that customers benefit
from such advertj-sing makes sense for two reasons.
First, advertising can encourage customer growth
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Dedden, Reb. 9
Intermountain Gas Company
on the Company's distribution system, which increases the
sharing of fixed costs among a greater number of
customers thus potentially reducing current customer
rates. Second, very few of the Company's current
customers use natural- gas in every application discussed
above and there are direct beneflts to letting them know
about. the environmental and cost-savings benefits of
using natural gas versus other energy sources.
O. What is the Company's position on the St.aff 's
proposed adjustment to Chamber of Commerce expenses?
A. The Company believes it is logical to extend
the Commission's determination discussed above to incl-ude
Chamber of Commerce expenses, since these Chambers help
the Company compete in the marketplace thereby enabling
it to offer its customers more and lower-priced options
for energy.
Additionally, Chamber meetings and activities are
great opportunities for the Company to work with
customers on issues of mutual concern. Furthermore,
Chambers help to
they are based by
healthy business
both the Company
develop the local economies in which
and creating aattracting business
environment which is a direct benefit to
Commission has granted recovery of
expenses in the past (see Case No.
and its customers.Final1y, this
these types of
IPC-E-O3-13, Order No.a 25
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29505) . Therefore, the Company bel-ieves that Chamber of
Commerce expenses are a legitimate business expense that
help the Company successfully compete in the marketplace
and also benefits the Company's customers and should not
be denied rate recovery.
Dedden, Reb. 9a
fntermountain Gas Company
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Dedden, Reb. 10
Intermountain Gas Company
0. Will you
not accept Staff I s
dues ?
to the Rotary Cl-ub
Lions Club. These
please explain why the Company does
adjustment to Rotary and Lions Cl-ub
A. Yes. On Exhibit No. 101, Schedule 3
lines 44 and 51, Staff
, Page 4,
dues paid
Falls
comrnunity and customer functj-on.
as proposing to remove
fdaho Fal-Is and the Twin
service clubs
network with the
serve an rmportant
They provide
Company's customers and
of
opportunities to
help strengthen the communj-ties in which they live. These
are direct customer benefits. Additionally, this
Commission has granted recovery of these expenses in the
past (see Case No. IPC-E-03-13, Order No. 29505).
Therefore, the Company proposes that Staff's adjustment
to the Rotary Cl-ub of Idaho FaIIs and the Twin Falls
Lions Club in the amount of $215 not be accepted.
O. Will you pJ-ease describe the Company's
adjustment for certain duplicated expenses?
A. Yes. The Company found that two expense l-ine
items on Exhiblt No. 101, Schedule 3, O.r," 4, l-ines L04
and 1-01 were duplicated. Additionally, the Company found
that the amount on Exhiblt No. 101, Schedul-e 3,page 4,
TheIine 82 was already
Company confirmed in
these expenses were
captured on Exhibit No. 102.
its accounting software that each of
only incurred once. The total amounto25
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Dedden, Reb. 10a
Intermountain Gas Company
of duplicated expenses is $1, 498,
from Staffrs proposed adjustment
items.
O. Will you please explain
adjustment rel-ated to an expense
refunded?
and should be removed
for these duplicated
the Companyrs
item which was later
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Dedden, Reb. 11
Intermountain Gas Company
The Company
Schedule 3,
found that the amount on Exhibit
No. 101,page 5, line 723 ($100) was refunded
in April of 2016. Consequently, this reduces Staff's
total proposed adjustment by an additional $100.
O. Please describe how the Company proposes to
adjust Staff's determination of disall-owed expenses for
the forecast period.
A. The Company proposes to recalculate Staff's
determination of disal-lowed expenses for the forecast
period. On Exhibit No. 101, Schedule L, Staff used the
rel-atj-ve percentage of disal-lowed expenses to the total
expenses for the period January through September of 2016
and applied that percentage to the forecast period
October through December of 2076. fn so doing, Staff did
not take into consideration that certaj-n expenses it is
proposj-ng to disallow do not occur during the last three
months of the year, specJ-fically golf sponsorships and
the American Heart Association Heart Walk sponsorship.
Therefore, the Company recal-culated the proposed
adj ustment
December of
connection
to the forecast period October through
fr
20L6 by
with the
removj-ng these expenses. This, in
other adjustments discussed above,
reduces Staff's
Exhibit No. 101,
seen on Exhibit
total expense
Schedul-e 1 to
No. 32, Page 1
disallowance of $190,980 on
$152 ,471, which can be
, Line 26.o 25
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O. Does this conclude your rebuttal testimony in
this proceeding?
A. Yes it does.
Dedden, Reb. 11aIntermountain Gas Company
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CSB Reporting(208) 890-s198
DEDDEN (DiReb)
fntermountain Gas Company
(The following proceedings were had in
open hearing. )
MR. WfLLIAMS: And Madam Chair, I had one
additional question I wanted to ask Mr. Dedden.
COMMISSIONER RAPER: Go ahead.
DIRECT EXAMINATION
BY MR. WILLIAMS: (Continued)
yesterday Mr. Gorman
Commissionreiterated his bel-ief
affiliated
should reject
to a five-year
affil iated
servi-ces and
O SoMr Dedden,
that the
costs and instead gotest year
averaging
costs, one
of those costs,
of those items
and within those
was information
customer support costsr so could you explain a littl-e bit
more the business reasons on why that cost and some of
those other costs that Mr. Gorman seeks to exclude
because he finds the test year costs as being too hiqh
and the business reasons behind how those costs were
refl-ected in 2076?
A Sure; so the primary driver of that
increase relates to our customer information system
development
was all the
that was during the development stages, it
costs related to consulting, internal- Iabor,
software licensj-ng, as welI as other contractor costso25
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CSB Reporti-ng
(208 ) 890-s198
DEDDEN (X-Reb)
Intermountain Gas Company
were able to be capitalized into the project into rate
base- That project went liwe in August of 20L5, so
starting in 2016, all thosethereafter, for the most part
cosLs converted from
support and
those costs
ongor_ng
shifted
capital over
mai-ntenance of
from capital,
to expense for the
the system; therefore,
therefore, to
expense.
MR. WILLIAMS: And Madam Chair, with that,
I would tender Mr. Dedden for cross-examination.
COMMISSIONER RAPER: Does Commission Staff
have any questions of Mr. Dedden?
MR. KLEIN: Yes, Madam Chair.
CROSS_EXAMTNATION
BY MR. KLE]N:
O Mr. Dedden, ofl page B of your rebuttal
testimony, Iines 2 Lo 5, are you there?
A Yes.
O You reference Staff's response to
production request No. 49 and say that Staff stated that
some element of competition does exist. and that the
Company may compete with electrj-c utilities as a heating
fuel source when systems are install-ed or replaced. Do
you see that?a 25
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CSB Reporting(208) 890-s198
DEDDEN (x-Reb)
Intermountain Gas Company
A Yes, I do.
O But isn't it true that in the prior
sentence of the Staff's discovery response, the Staff
says that it
is relatively
A
0
lines 71 through
all-owed recovery
past; do you see
A
0
29505, and then afso
argument in
and the Twin
A
nV
reference
10 you use this same
Rotary Cl-ub of Idaho Falls
belj-eves the competition at the retail l-evel
Iimited?
Yes.
If you go to page 9 of your rebuttal,
the Commission has10
of Chamber of Commerce expenses in the
you state that
that?
Yes, f do.
And you reference Commission Order No.
on page
to the
Fa1ls Lions Club; do you see that?
Yes.
But isn't it true that in the Order you
reference, the Commj-ssion did not allow ful-l- recovery of
those expenses?
A Correct. As I understand the Order, fufl-
recovery is not a11owed.
O And isn't it true that in that partj-cu1ar
case, the Staff's proposed adjustment included several
different groups and organizations, such as the Edison
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CSB Reporting
(208 ) 890-s198
DEDDEN (x-Reb)
Incermountain Gas Company
A Yes.
O So itrs possible that the Commission's
decision in that case was driven more by the benefits
provided by the Edison Electric Institute than loca1
Chambers of Commerce and Rotary Clubs?
A I guess I can't speculate to the specific
nature granting which costs they al-l-owed.
O Are you aware that in Case No.
AVU-E-04-0L, whj-ch occurred just one year later, Avista
did not receive recovery of any organizational- and
Chamber of Commerce dues?
A No, Irm not aware of that one.
MR. KLEfN: That's al-I I have. Thank
you.
COMMISSIONER RAPER: Thank you, Mr. Kl-ein.
Mr. Stokes.
MR. STOKES: We have no questions, Madam
Chair.
COMMISSIONER RAPER: Mr. Richardson.
MR. RICHARDSON: No questions, Madam
Chairman.
COMMfSSIONER RAPER: Mr. Otto
MR. OTTO: I do. No questions, Madam
Chair.
COMMISSIONER RAPER: Any questj-ons fromo25
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CSB Reportlng(208) 890-s198
DEDDEN (X-Reb)
Intermountain Gas Company
the Commissioners? Any redirect?
MR. WILLIAMS: No redirect.
COMMISSIONER RAPER: Thank you, Mr
Dedden, for your time.
THE WITNESS: Thank you, you're welcome.
(The witness left the stand. )
COMMISSIONER RAPER: Do you want to try
another one, Mr. Williams?
MR. WILLIAMS: f do, but not a rate of
return wltness.
COMMfSSIONER RAPER: Al-f of us are
grateful.
MR. WILLIAMS: As much as I l-ove Mr.
Gaske, I think that
the afternoon, so f
it's not a proper
would cal-l- Mlchael-
topic for 4:30 in
Adams.
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CSB Reporting(208) 890-s198
ADAMS (Di-Reb)
lntermountain Gas Company
produced as a
Intermountain
to tell- the truth,
truth, was examined
the whole truth,
and testified as
and nothing but the
follows:
MICHAEL ADAMS,
rebutta] witness at the instance of the
Gas Company, having been flrst duly sworn
DIRECT EXAM]NATION
BY MR. WILLIAMS:
0 Mr. Adams, would you -- we1l, please
identify yourseJ-f for the record.
A My name is Michael Adams and I am with
Concentric Energy Advisors. f'm here on behalf of the
Company.
O And are you the same Michael Adams that
prefiled rebuttal testimony consisting of 20 pages and
Exhibits 34 and 35?
A f am.
0 And if f were to ask you the same
questions today contained in your prefiled rebuttal
testimony, woul-d your answers today be the same?
A They would.
MR. WILLIAMS: So Madam Chair, I woul-d ask
that Mr. Adams' testlmony be spread upon the record and
Exhibits 34 and 35 submitted.o 25
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CSB Reporting
(208 ) 890-5198
ADAMS (Di-Reb)
Intermountain Gas Company
COMM]SSIONER RAPER:Without objection,
be spread upon the
and 35 will be
Mr. Adamsr rebuttal testimony will
and Exhibits 34record as if read,
admitted to the record
(IGC Exhiblt Nos. 34 & 35 were admitted
into evidence. )
testimony of
record. )
(The following
Mr. Michael Adams
prefiled rebuttal
is spread upon the
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I. INTRODUCTION AND TITTNESS QUAIIFICATIONS
O. Please state your name and business address.
A. My name is Michael- Adams. My busi-ness address
is 293 Boston Post Road West, Suite 500, Marlborough,
Massachusetts 07'7 52.
O. By whom are you employed and in what position?
A. I am a Senior Vice President with Concentric
Energy Advisors, Inc. ("Concentr j-c" ) .
O. Please describe Concentrj-c.
A. ConcenLric provides regulatory, economic,
market analysis and financial advisory services to energy
and utility clients across North America. Our regulatory
and economj-c services include regulatory policy, utillty
ratemaking (e.9., cost of service, cost of capital, rate
design, and alternative forms of ratemaking), and the
implications of regulatory and ratemaking policies. Our
market analysis services include energy market
assessments, market entry and exit analyses, and energy
contract negotiations. Our financial- advisory activities
lnclude merger, acquisition and divestiture assignments,
due diligence and valuation assignments, prolect and
corporate finance services, and transaction support
servi-ces.
O. What are your responsi-bi1ities in your current
position?
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Adams, Reb. 1
Intermountain Gas Company
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.A
Adams, Reb. 1a
fntermountain Gas Company
A. As a consultant, my responsibilities incl-ude
assisting clients in identifying, assessing and
addressing business issues. My primary areas of focus
have been regulatory,
issues.
financial, and accounting-related
O. Have you ever testified in a regulatory
proceeding?
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Adams, Reb. 2
Intermountain Gas Company
A. Yes. I have provided expert testimony or
reports before the Arkansas Public Serwice Commission;
the Connectj-cut Publ-ic Utilities Regulatory Authority;
the Federa] Energy Regulatory Commission (FERC); the
Hawaii Public Utility Commission; the IIIinois Commerce
Commission; the Maryland Public Service Commission; the
Massachusetts Department of Telecommunications and
Enerqy; the Missouri Public Service Commission; the New
Hampshlre Publ-ic Utilities Commissj-on; the Okl-ahoma
Corporation Commission; the Ontario Energy Board; the
Pennsylvania Public Utility Commission; the Public
Util-lties Commission of Texas; and the State Corporation
Commission of Virginia. My testimonies typically address
issues related to cost of service/revenue requJ-rement,
shared services, accounting-related issues, cash working
capital , and/or cost al-Iocations.
O. Please describe your education.
A. I have an M.B.A. in Finance from the University
of Ill-inois Springfield and a B.S in Accounting
the AmericanIl-linois College. I am a member of
Institute of Certified Public Accountants and the
Illinois Society of Certified Public Accountants.
O. Pl-ease describe your qualifications.
A. I have over thirty-flve years of direct
experience in the public utility industry. I have worked
from
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Adams, Reb. 2a
Intermountain Gas Company
for an investor-owned utility, a regulatory agency, and
most recently as a consul-tant to the energy industry. f
have managed and/or participated in a wlde variety of
consul-ting engaqements and, as previously stated, I have
provided expert testimony before Federal and State
regulatory bodies.
II. PI'RPOSE A}ID SCOPE
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a. What is the purpose of your rebuttal testimony?
A. I have been asked by Intermountain Gas Company
("Intermountain" or the "Company") to respond to the
direct testimony of Idaho PubIic Utilities Commission
(the "Commission") Staff wi-tness Terri Carlock, as it
relates to inclusion of cash working capital ( "CWC" ) in
the Company's rate base. First, I will- respond to the
concerns set forth in the direct testimony of Staff
witness Carlock. I will then provide a detailed
explanation of how the Company's CWC requirement, as
included 1n the direct testlmony of Company witness Jacob
Darrington, was determined.
O. Please define what you mean by the phrase "cash
working capital. "
A. Cash working capital is the amount of funds
required to finance the day-to-day operatj-ons of the
Company.
O. Are you sponsoring any exhibits in this
proceeding?
A. Yes. Company Exhibit Nos. 34 and 35 have been
prepared under my direction and supervision and are
accurate and complete to the best of my knowledge and
belief. Specifically, Exhibit 34 shows the revenue lag
and expense l-eads developed by analyzing the Company's
cash transactions and invoices for the twel-ve months
Adams, Reb. 3Intermountain Gas Company
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Adams, Reb. 3a
Intermountain Gas Company
ended December 31, 201,5. The developed leads and lags
were applied to the 2016 test year expense l-evel-s to
determine the Company's requested l-evel of CWC.
Exhibit 35 provides a l-ist, by State regulatory
jurisdictlon, of whether the State includes working
by which thecapital in rate
working capital
base, and, if so, the manner
requi-rement is determined.
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Adams, Reb. 4
Intermountaj-n Gas Company
O. Did the Company incl-ude the requested level of
CWC in its direct case?
A. Yes, the CWC requirement was presented in the
direct testimony of Mr.
III. ST'MMARY
Darrington.
CONCERNS EXPRESSED BY STAFF
Jacob
OF THE
WITNESS CARLOCK
O. What position did Staff witness Carlock propose
in response to the Company's incl-usion of CWC in its rate
base ?
A. As set forth in Ms. Carlock's direct testj-mony,
Staff recommended removing the CWC requirement from rate
base.
O.
pos ition?
A
What support does Ms. Carlock offer for her
Staff witness Carlock's position is based
Company had used asolely on the rationale that the
lead-lag study to quantify the amount of CWC.
to her testimony, Staff does not
had adequately shown that Company
supplied the funds, and therefore
removal of CWC from rate base1.
O. Does
regarding the
base ?
A. Yes.
Staff recommends the
believe that
shareholders
According
the Company
had
Ms. Carl-ock express other concerns
incfusion of CWC 1n the Company's rate
Ms. Carl-ock states that "a lead f ag studyo25
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Adams, Reb. 4
Intermountain Gas Company
does not adequately show
the cash for CWC-2" She
that shareholders are supplying
further opines that "often when
Inventories, and Material-s and Supplies are included in
rate base utili-ties cannot demonstrate the need for CWC
in rate base.3" Fina11y, Ms. Carl-ock states
1 Direct Testimony of Terri Carlock, p. 4, l-ines 20-24
2 ld., p. 5, lines 9-11.
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Adams, Reb. 5Intermountain Gas Company
show no working
doesn't believe
capital requirements. Staff
the Company
are also
and
practices
can even
stilf
the Company has adequately shown that the
source of the funds is truly supplied by the Company
shareholders . 4 "
IV. RESPONSE TO STAFF WITNESS CARLOCK'S
POSITION
O. Is it unusual for regulated utilities to
include a CWC requirement in rate base?
A. No. Many state regulatory jurisdictions all-ow
the utilities that they regulate to include a CWC
that "Lead times are directly determined by
operations and practices. Revenue Lag times
influenced by the Company billing operatJ-ons
col-l-ection practices. A change in operating
will change the level of working capital and
requirement in rate base, ds shown
At least four States determine the
the FERC methodology
method. Therefore,
the inclusion of CWC
(i.e., 7/8th
on Exhibit No. 35.
l-evel- of CWC employing
of O&M) or some other
over B0 percent of the States allow
in rate base. No instances were
identified, excluding Idaho, whereby a State determined a
util-ities' CWC allowance based upon a "balance sheet
analysis" as
O. rs
suggested by
the use of a
Staff witness Carlock.
lead-lag study the predominant
method relied upon by State regulatory commissions to25
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Adams, Reb. 5a
Intermountain Gas Company
determine a regulated utillties'
A. Yes. Of the 50 States,
CWC requirements?
over two-thirds of the
States determine the
upon the resufts of a
Idaho
level of cash working capital based
lead-Iag study. I have included
4 rd., p. 6, lines 1-9.o 25
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Adams,
fntermountain Gas
Reb. 6
Company
as a State which determines a utilitiesr CWC requirement
based upon a lead-Iag study given
Rocky Mountain Power proceedings.
O. What other methods have
agencies rel-ied upon to determine
CWC requirements?
A. Whil-e I have found the
the decisions in the
State regulatory
a regulated utilities'
lead-Iag study to be the
predominant method, the
agencies have util-ized
FERC and some
the 45 days,
method of
State regulatory
1/Bth of I'o&Mrr
determining a
CWC requirements. The method of determining a
CWC requirement could not be determined for
States.
Has the Idaho PubIic Utilities Commi-ssion
or
expenses
company's
company' s
seven (7)
o.
as an al-ternative
relied upon a lead-1ag study to determine a regulated
utilities' CWC requirements?
A. Yes. Tn its' 2008 (PAC-E-08-07 (filed
9/3/2008) ) and 2011 (PAC-E-ll-72 (f iled 4/21 /201,1) ) rate
cases, Rocky Mountain Power Company updated lead-Iag
studies supporting the cal-cul-ation of CWC included in
rate base. The CWC calculations were stated to be
consistent with the treatment included in its' l-ast two
general rate cases. ln t.he 2070 General Rate Case, the
Commission accepted Rocky Mountaln Power's 2001 fead
study with the directive that in the next rate case
fag
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Adams, Reb. 6a
Intermountain Gas Company
demonstrate that a lead lag study appropriately considers
the source of the funds.
O. How did Rocky Mountain Power demonstrate the
source of funds included in the lead-lag study, as
directed by the Commission?
A. Rocky Mountain responded that a lead-lag study
provided
capital
the best measurement of its' required working
funds and appropriately considered the source of
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the funds.5 A settl-ement was reached in the proceedi-ng,
and the Commj-ssion's final Order was silent on the topic
of CWC.
O. How do you respond to Ms. Carlock's statement
that "a lead 1ag study does not adequately show that
sharehol-ders are supplying the cash for CWC"?
A. I disagree with Ms. Carl-ock's statement. The
Company has only two sources of funds: investor-provided
funds or customer payments. By examining the timing of
cash transactions via the lead-Iag study, it can be
determined whether the funds are investor provided or
customer provided. The net results of the lead-1ag study
demonstrated that the Company's investors had, on a net
basis, supplied funds to maintaln operations wh11e
awaiting customer funds.
O. Please elaborate.
A. As I previously discussed, the Company provides
service to its customers throughout a given month, bi11s
its customers, and awaj-ts payment for the services
provided. On average, the Company has a revenue lag of
44.96 days. This represents the period of time during
which investors provide funds that al-lows the Company to
continue to provide services to j-ts customers while
awaiting payment.
The investor supplied funds are offset by
Adams, Reb. 7
Intermountain Gas Company
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Adams, Reb. 1a
Intermountain Gas Company
services that are provided to the Company by suppliers,
thefor whi-ch customer payments are made prror
to its
to
remittal of payments by the Company suppliers.
funds.These instances represent customer provided
5 Direct Testimony of Steven R. McDougal, Case No. PAC-E-17-!2, p
32, Ii-ne 14 - p. 33, l-ine 14.o 25
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Adams, Reb. 8
Intermountain Gas Company
The lead-Iag study found that, oD average,
during the test period, investor-provided funds exceeded
customer-provided funds in the amount of $1,143,988.
This is the amount of CWC that represents the net
difference between investor-provided funds and
customer-supplied funds. This amount represents the
amount of net CWC that the Company has included in rate
base and on which the Company should be abl-e to earn a
return.
O. Please respond to Ms. Carl-ock's comment that
"often when Inventori-es, and Materials and Supplies are
included in rate base util-ities cannot demonstrate the
need for CWC in rate base. "
A. The lnclusion of Inventories, and Materj-als and
nothing to do with the levelhaveSupplies in rate base
of CWC that shoul-d be included in rate base. Inventories
and Material-s and Suppl-ies reflect expenditures that the
Company makes to have the necessary items on hand to be
able to provide prompt and rel-iab1e service to its
customers. These are items that are incl-uded in rate
base and on which the Company earns a
incl-usion of Inventori-es and Materials
return. The
and Supplies in
for, or therate base in no
appropriateness
base.
way diminishes the
of, including the
need
CWC requirement in rate
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Adams, Reb. Ba
InLermountain Gas Company
Eurther, the lead-1ag study only examined cash
expenditures for
for the benefit
incl-uded in rate
supplies are not
O. How do
that "Lead times
services provided by or to the Company,
of its customers. Therefore, the items
base as inventories and materials and
al-so considered in the lead-Iag study.
Ms. Carlock's statementyou respond
are directly
to
determined by the Company
operations and practices. Revenue Lag times are
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Adams, Reb. 9
fntermountain Gas Company
also influenced by the Company b1l1j-ng operatj-ons and
col1ection practices. A change in operating practices
will change the l-evel- of working capital and can even
show no working capltal requirements. Staff still
doesn't bel-ieve the Company has adequately shown that the
source of the funds is truly supplied by the Company
shareholders " ?
A. I have previously responded to
j-naccurate assertion that the Company has
shown that the source of funds reflected
requJ-rement have been
Ms. Carfock's
shareholders. But, f
statement that the lead times are directly
Company operations and practlces, and that
lag is also influenced by Company billing
collection practices.
not adequately
by the CWC
supplied by the Company's
also take exception to her
determined by
the revenue
operations and
0. Do you agree that l-ead times are directly
determined by the Company operations and practices?
A. No. Whil-e I understand Ms . Carlock' s
statement, 1t is not as cut and dry as she implies.
example, when the Company uses a vendor to provide a
service, the service provider w111 perform the work,
submit an invoice for reflecting the cost that
For
Intermountain should for the work performed, and thepay
fortime to remit payment such services. While theo25
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Adams, Reb. 9a
Intermountain Gas Company
Company could arguably delay payment for the
done so repeatedly, the service
services
provider
overdue
provided, if
will either incl-ude an j-nterest charge on the
bal-ance, increase the cost of providing the service to
for the Company in the
of the expenditure are
the Company, or refuse
future. Therefore, the
largely outside of the
to work
terms
Company's control.
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Adams, Reb. 10
Intermountain Gas Company
Using wages as another example, the Company has
to compete for labor against other companies. Employees
look not only for a competitive wage, but certainty as to
the timing of payment for the services that the employee
provides. Once again, the Company's practices are
largely driven by factors outside of its control.
O. Based upon your review of the Company's
operations and practices, did you ldentify any practices
that were materially different than those of other
utilities for whlch you have prepared lead-1ag studies?
A. No. The Company's operations and practj-ces
are, in large part, consistent with those that I have
examined for other regulated utilities.
O. How do respond to Ms. Carlock's statement that
"Revenue Lag times are also inffuenced by the Company
billing operations and collection practices"?
A. Once again, f disagree with Ms. Carlock. The
timing of many of practices associated with the
provisioning of services to its customers and billing and
collection practices employed to receive payment for such
services are set forth in the Company's tariffs and
admlnistrative rul-es approved by the Commj-ssion.
O. Based upon your revj-ew of the Company's billing
and collection practices, did you identify any practices
that were materially different than those of othero25
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Adams, Reb. 10a
Intermountain Gas Company
utilities for which you have prepared lead-Iag studles?
A. No. The Companyrs billing and collection
practices are, in large part, consistent with those that
I have examined for other regulated utilities.
O. Was Staff asked if they bel-ieved that the
Company's billing operations and practices were
inappropriate?
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Adams, Reb. 11
Intermountain Gas Company
A. Yes, and in response to Request No. 4, Staff
responded "No".
O. Has Staff suggested an al-ternative to the
incl-usion of CWC in the Company's rate base?
A. In response to Request No. 6, Staff suggested
that the Company perform "A Balance Sheet Analysi-s
demonstrating shareholder capital exceeds other sources
of capital when the use of funds exceeds rate base
components earni-ng a return."
O. Does Staff witness Carl-ock provide an
explanation of what is meant by "A Balance Sheet
Analysis " ?
A. No.
what analyses
Staff did not provide an explanation as to
shoul-d be performed and/or what the results
of the analyses may indicate.
O. What does a "Bal-ance Sheet Analysis" mean from
an accounting perspective?
A. A review of the bal-ance sheet, which can be
referred to as a "balance sheet analysis", provides
insight into the financial health of a company.
Comparison of the balance sheet of a business over time
provides a general indication of performance of the
business.
The balance sheet anal-ysis woul-d begin with a
comparison of total- assets and liabilities. Thea25
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Adams, Reb. 11aIntermountain Gas Company
difference is a company's net worth. If total- assets
exceed total liabilities, the business is sol-vent and net
worth is positive. When liabilities exceed assets, the
business is insol-vent and net worth is negative.
comparison of totalO. In your opinion, does
assets and l-iabilities provide
Intermountain's CWC needs?
A. No. A company's net
the
an indication of
worth and its' CWC
Further, the
both regulated and
requj-rements are
Company's balance
non-
not the same thing.
sheet may include
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Adams, Reb. 72
Intermountain Gas Company
regulated assets and liabilities, whereas the lead-Iag
study appropriately examines only those revenues and
expenses associated with the provisioning of regulated
gas service to fntermountain's customers.
O. Have you also examined Intermountain's current
assets and current liabilities?
A. Yes. From an accounting perspectlve,working
assetscapital can be assessed by calculating current
minus current liabil-ities. If current assets are l-ess
than current liabilities,an entity has a working capital
def i-ciency.
O. What were the results of the current asset and
current l-iabillties analysis?
A. Based upon Intermountain's year end 2015
financials, current liabil-ities exceeded current assets
by $10.7 million, which means the Company has a working
capital deficiency.
O. Are there other methods that
by regulatory agencies to quantify the
capital to be included in rate base?
A. Yes. The FERC and some State
have been accepted
level- of working
agencr_es
!/BLh) of
CV\IC.
O.
have the approved the incl-usion
regulatory
of 45-days (or
annualj-zed OeM expenses as an approximation of
Have you calculated the level of CWC that wou1d25
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Adams, Reb. l2a
Intermountain Gas Company
be included in rate base using the 45 day or l/BLh,
method?
A. Yes,employing
wou]d be
the 45 day or l/Btin method, the
$28.L mil-1ion. This figureCWC requirement
represents 7/?Lh
$225 mi-11-ion6.
of the Company's total O&M expenses of
6 Amended response to IPUC Staff Production Request No. 178.o 25
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Adams, Reb. 13
Intermountain Gas Company
O. After reviewing Staff witness Carl-ock's filed
testimony, have you
CWC that shoul-d be
in Ms. Carlock's
recommended level of
Company's rate base?
testimony has modifiedA. Nothing
my belief that the
properly included
modified
included
your
in the
V. LEJAD-I.AG STI'DI.
O. fs the analysis of the Company's
and expense l-eads typically referred to as
study?
A.Yes. The Company's CWC
accurately quantified and
$1,143,9881 of CWC.
revenue lags
a lead-lag
requirements were
lead-Iag study that
date customers receive
Company has
in rate base
analyzed
servi-ce
determined by the preparation of a
time between thetherag
the
theavailabl-e to Company. This lag
time during which
and date that customers'
services, but
the Company
for them at
recer_ves
a later
payments
is offset
are
by a lead
and
The "lead"
goods
date.
are
pays
bothand ttlagtt
l-ead and
daily CWC
the annual
1ag days
factor.
measured in days.
were then divided by
This CWC factor was
The dollar-weighted
365 to determine a
then muJ-tiplied by
determine thetest year cash expenses to
amount of CWC required for operatJ-ons. The resulting
amount of CWC was then included as part of the Company's
rate base. The test year operating expenses to which the
l-eads and lags were applied in this proceeding areo25
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Adams, Reb. 13a
Intermountain Gas Company
described in the testimony of Company witness
l-eads and lags
Darrington.
that wereO. What are the various
considered in the CWC analysis?
7rdo25
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Adams, Reb. t4
Intermountain Gas Company
A. Two broad categories of leads
considered: 1) Iags associated with the
revenues owed to a company
times associated with the
and lags were
coflection of
("revenue laqs"); and 2) l-ead
payments for goods and services
leads").received by the
O. What
L
between
natural
payment
O.
A.
Company ("expense
is a revenue lag?
A revenue lag refers to the elapsed time
the delivery of the Company's product (i.e.,
gas) and its ability to use the funds received as
for the delivery of the product.
What is an expense lead?
The expense l-ead refers to the elapsed time
time when the
from when a good or service is provided to a company to
company pays for the good orthe point in
service and the funds are no longer avaifabl-e to the
company.
O. What was the source of information you employed
to determine the leads and lags 1n your CWC analysis?
A. Informatj-on from the Company was utilized,
including data from their Accounts Payable, Customer
Service, Human Resources, Payro1l, and Tax systems. The
information derived from these sources, together with
anal-yses of specific invoices, 1ed to the determination
of the appropriate number of lead-Iag days for
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Adams, Reb. 74a
Intermountain Gas Company
1. Revenue Lag
O. How was the revenue lag
A. The revenue lag measures
from the date servi-ce was rendered
the date payment was received from
determined?
the number of days
by the Company until
customers. In the
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Adams, Reb. 15
Intermountain Gas Company
calculation, the revenue lag was dlvided into three
distinct components: 1) service lag; 2) billing lag; and
3) collections lag. An explanation of each component of
the revenue lag follows.
O. What is meant by service lag?
refers to the numberA. The service
from the mid-point of
reading date for that
mid-point methodology,
lag
the
of days
servi-ce period to the meter
service period. Using the
the average lag associated wlth
days (365 days in
bv 2).
monthly billing schedul-es and
The average billing lag was
the provisioning of service was 15.21
the year divided by 12 months divided
O. What is meant by billing 1ag?
A. Billing lag
days from the date on
customer was bill-ed.
refers to the average number of
which the meter was read until the
The billing 1ag was determined by
analyzing the
meter readlng
determined to
a. What
Company' s
records.
be 4.40 days.
is meant by collections 1ag?
collections lag refers to theA. The average
amount of time from the date when the customer received a
bill to the date that the Company received payment from
its customers. Based on weighted average data from the
Company and by considering accounts receivables balances
by days aged, the average coll-ection 1ag was determinedo25
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to be 25.35 days.
O. Please summarize the cal-cul-ation of base
revenue 1ag days.
A. The ca]culation of the overall base revenue
lag, by lag component, is summarized in the followlng
table.
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Adams, Reb. 15a
Intermountain Gas Company
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Adams, Reb. 16
Intermountain Gas Company
Revenue by Component
Service Lag 1,5.21
Billing Lae 4.40
Collections lag 25.3s
Total Lag 44.96
2. E:q>ense Leads
a. What expense-related leads were considered in
the lead-1ag analysis?
A. Lead times associated with the following
expense categories were considered in the lead-lag study:
a) employee benefits; b) base payroll; c) FICA (social
security) and other withholdings, lncluding federal and
state withholdings,' d) cost of gas, e) other operations
and maintenance expenses; f) general taxes other t.han
income taxes, g) income taxes; and h) interest on
long-term debt.
O. How was the expense lead associated with the
Companyrs Employee Benefit programs considered in the
analysi s ?
A. The Company makes monthJ-y premium payments to
MDU Resources Group, Inc. for various employee benefits.
The premlum payments include medical, dental, vision,
life, long-term disability, accident.al death and
dismemberment, business travel, reti-ree medical, retiree
dental, and retiree Medicare supplement payments. Based
on the monthly premium payments a dol-lar-weighted leado25
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Adams, Reb. 15a
fntermountain Gas Company
t j-me of 9.24 days
December 3L, 20L5.
O. Provide
was calcul-ated for the 12 months ended
an explanation of the expense leads
Company's payroll expenses.associated wlth the
A. Intermountain's employees are paid every other
Friday. Payroll lead days were determined by averaging
the nominal lead time by pay period. The resulting
expense lead was 72.93 days.
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Adams, Reb. 71
Intermountain Gas Company
O. Pl-ease explain the lead effect associated with
Eederal- fnsurance Contribution Act ("FICA") .
A. The Company el-ectronically transfers the dollar
amounts associated with the employee and employer share
of FICA to the
respective due
after payroll
authorities.
appropriate
dates. For
is the statutory due date to
this payment schedule
the federal-
lnto account
federal- authori-ties on t.heir
FICA, the next business day
and considering weekends and bank holidays, drr
incrementaf lead time of 3.07 days was calculated for
FICA-related transactions. The FICA l-ead time is
"incremental-" in the sense that it shoul-d be added to the
lead time on base payroll to derive the total amount of
lead time associated wlth the remittance of EICA
withhol-dings. When added to the base payroll lead time,
a total- expense lead for EICA of 16.00 days was
calcul-ated.
O. Please explain the l-ead effects assocj-ated with
Federal- and State withhol-di-ng taxes.
Taking
A. The Company electronically
amounts associated with the employee
transfers t.he dol-1ar
and employer share
business dayof Federal withholding taxes on the next
after payroll is remitted and
the Idaho State Tax Commission
State withholding taxes per
payment due dates. Taking
this payment schedule into account and consideringo25
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Adams, Reb. 77aIntermountain Gas Company
weekends and bank holidays, dh incremental- Iead time of
3.07 days was
t7.1 8 days for
cal-culated for federal withholdings and
state withhol-dings. The Federal- and State
withholding tax
that it should
l-ead time is "incremental" in the sense
be added to the l-ead time on base payroll
l-ead time associated with
taxes. When added to the
to derive the total amount of
federal and state withholdj-ng
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base payroll lead time, a total- expense lead of 16.00
days for Federal withholdings and 24.1 0 days for State
withhol-dings was cal-cul-ated.
O. What is the overal-l expense l-ead time
assocj-ated with the Company's payroll and withholdings?
A. Based on the expense leads explai-ned above for
payro11, FICA, and other Federal and State withhotding
taxes and taking into account expense amounts for 20L5, a
weighted average lead time of 13. 82 days was determined
for payroll and wlthholdings.
O. What 1s the expense l-ead time associated with
the Company's purchases of natural gas?
A. Based on an examination of invoices from
commodity and pipeline suppliers to the Company, a
weighted expense l-ead time of 4t.29 days was determined.
This lead time incl-udes a half month of service lead
time.
O. What are other operations and maintenance (O&M)
expenses and what lead times were assocj-ated with such
expenses ?
A. The Company engages in transactions with other
vendors (not associated with pensions, benefits, payrolI,
fuel, or taxes) for a variety of purposes including
facility maintenance, system maintenance, and customer
service. Invoices from providers of such services were
Adams, Reb. 18Intermountain Gas Company
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Adams, Reb. 1Ba
Intermountain Gas Company
analyzed in order to estimate a l-ead time associated with
payment for services related to other O&M activities.
The analysj-s indicates that on average, invoj-ces were
paid by the Company 3L.14 days after receipt.
0. What are the various general taxes consj-dered
in the analysis?
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Adams, Reb. 19
Intermountain Gas Company
A. The general taxes considered in the study
included Franchise Fees, Property Taxes and Payroll
Taxes.
O. Explain the lead effects associated with each
type of general taxes considered in the analysis.
for franchise fees inA. The statutory due date
Idaho vary by
schedul-es and
cons iderat ion,
jurisdiction. Taking these varied
actual payment information into
a doll-ar-weighted expense l-ead of 169.50
days was calculated.
The Company makes semiannual property tax
payments. Taking the actual due dates into
consideration, dD expense lead of 131.88 days was
determined.
The State withhol-dings expense l-ead explained
days, was utilized for the payroll taxesabove , 24 .10
expense lead.
O. How
income taxes?
A. The
did your study address State and Eederal-
Iead time associ-ated with State and Federal
based on the provJ-sions of theincome tax payments was
Internal Revenue Code that require estimated tax payments
15, June
year.
of 25 percent of total income taxes due on April
15, September 15, and
Taking this schedule
December 15 of the current
lnto consideration a l-ead time ofo25
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Adams, Reb. 19a
fntermountain Gas Company
37.88 days for income taxes was determined.
O. Provide a description of how lead times
associated with the Company's interest expenses were
addressed by the study.
A. The Company generally made interest payments on
its long-term debt twice
actual- payment dates on
dol.l-ar-weighted l-ead of
was determined.
a year
interest
at varying times. Using
payments, a
87. 68 days for j-nterest payments
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O. Based upon the resul-ts of the lead-Iag study
and the level- of expenses sponsored by Company witness
Darrington, what level of CWC requirements was inc1uded
in Intermountain's rate base?
A. As shown on Exhibit 34, a CWC requirement of
$1r143,988 was lncluded in the Company's rate base.
O. Does this concl-ude your rebuttal testimony?
A. Yes, it does.
Adams, Reb. 20
Intermountain Gas Company
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CSB Reporting(208) 890-s198
DEDDEN (Di_Reb)
Intermountain Gas Company
(The following proceedlngs were had in
open hearing. )
MR. WILLIAMS: I had one question for Mr.
Adams bef ore I turn hi-m over.
DIRECT EXAMINATION
BY MR. WILLIAMS: (Continued)
O And Mr. Adams, did you hear the
cross-examination of Staff witness Carlock?
A
u
the study as
the we1l,
r did.
And specifically her reference
opposed to the cash and al-so the
to tweaking
no need for
the rel-ati-ve need of the cash working
analysis that shecapital study versus the balance sheet
proposes instead?
A r did.
O Do you have a response to that?
A I disagree with her comments. f mean, the
balance sheet approach, I commented in the testimony, I
included that they show a current liability greater than
current assets, which is a working capital requirement.
I think the difference in large part between what the
Staff witness is talking about and what I've tal-ked about
in my testimony is she's using broadly the terms worklngo?\
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CSB Reporting
(208 ) 890-s1-98
DEDDEN (Di-Reb)
Intermountain Gas Company
capital versus cash working capital. She talked about
ADIT is already in rate base as aADIT, for
reduction
it in cash
the ADTT,
instance.
to rate base, so
capital
to then al-so somehow include
working would be a double counting of
thatso I think there's differences like
between what she thinks and what I think.
MR. WILLIAMS: Al-1 right. Madam Chair, I
have no additional direct.
COMMISSIONER RAPER: Thank you
Commission Staff, dny cross?
MR. KLEIN: No, Commission Staff has
none.
COMMISSIONER RAPER: By consensus?
MR. KLETN: By CONSENSUS.
COMMISSIONER RAPER: Mr. Stokes
MR. STOKES: We have none, Madam Chair.
COMMISSIONER RAPER: Mr. Richardson
MR. RICHARDSON: No questions, Madam
Chair.
COMMISSIONER RAPER: Mr. Otto.
MR. OTTO: No questions, Madam Chair.
COMMISSIONER RAPER: Any questions from
the Commission? You're batting 1,000, Mr. Williams.
MR. WILLIAMS: So Madam Chair, how about
we go from cash working capital to bonus depreciation?o 25
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CSB Reporting
(208 ) 890-s198
GENORA (Di-Reb)
Intermountain Gas Company
COMMISSIONER RAPER: Thank you, Mr. Adams.
THE WITNESS: Thank you.
(The witness left the stand. )
MR. WILLIAMS: Donna Genora.
produced as a
fntermountain
DONNA GENORA,
rebuttal witness at the instance of the
Gas Company, having been first duly sworn
to tell the truth, the whol-e truth,and nothing but the
follows:truth, was examined and testified as
DTRECT EXAMINAT]ON
BY MR. WILLIAMS:
O Woul-d you please state your name and
business address for the record?
A Yes, Donna Genora at 7200 West Century
Avenue, Bismarck, North Dakota, 58503.
O And in what capacity do you serve and who
r_s your employer?
AMy
company ofparent
lead.
employer is MDU Resources, which is the
IGC, and I'm the tax director, tax
O And Ms. Genora, yesterday Mr. Gorman
testified that the that Intermountain's customers ino25
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fdaho did not get to reali-ze the tax benefits of bonus
depreciation in the test year because as being a part of
the MDU Group for tax purposes, they were not abl-e to
take ful-l advantage of that, and do you agree wlth that
characterization of Mr. Gorman's testimony on that
point ?
A I think there's two important factors that
are missing from that conclusion that he made, so the
first one being that being part of the consol-idated
group, IGC has been receiving since we acquired IGC tax
benefits that go directly to the ratepayers. For
example, in year 20L2-L21,4, they were in a net operating
l-oss position, and because we're part of a consolldated
group, we can actually cash fund those as wel-I. As a
resul-t, their rate base doesn't go up because theyrre not
on their books, So that's one benefj-t that goes on there,
and nearly every year sj-nce we acquired, they also have a
consol-idation tax benefit that comes in.
Again, that is something that will once
the tax return is filed -- because generally on a
consol-idated basis, you wiII be in a benefit position.
Now, it will be 81 entities in our group, and so what
happens is that that benefit does get al-located and does
come down to IGC and goes to the ratepayers, so that's an
important lesson.
CSB Reporting(208) 890-s198
GENORA (Di-Reb)
Intermountain Gas Company
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CSB Reporting
(208 ) 890-s198
GENORA (Di-Reb)
Intermountaj-n Gas Company
You know, really, just every year since
we've acquired IGC, they have benefited from being part
this, you know,
you know, as a
of the consolidated group. To fook at
say, $200,000 that he's talking about,
Company by itself , j-t's just looking at one piece of the
pi-cture. There's other benefits that are already in
there, so I don't rea11y think you're comparing apples
and apples, and the other reaIly major component of this
is normalization violation, so if we were to bring in
those hypothetical deferred tax liabilities into rate
base, and that's not the positlon we're taking on the
consolidated returnr we would just have a normal-ization
violation, and the penalty of that is very severe for
IGC, because
day forward
depreci-ation
they woul-d no longer
to take advantage of any accel-erated
when they fil-ed
You know, in that, you know, MDU
Resources, the parent group, when we do tax planning and
I'm looking at and recommending to management what
positions are we going to take, what elections are we
going to take, you know, we're in two different
industries, so we're in util-ity regulated and then
non-regulated. The non-regulated, they make money and so
that cash goes to these regulated companies, even though
from a tax perspective, they're in net operating losses
be allowed from that
their federal tax return.
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CSB Reporting
(208 ) 890-s198
GENORA (Di-Reb)
fntermountaj-n Gas Company
in the State of ldaho, due to all of the capital
expenditures, they get these j-nvestment tax credits.
The Company doesn't make enough money if
they ;ust stand alone without being part of a
consol-idated group, they don't make enough money to
util-ize those credits, but because they're part of a
consolidated group, like a good example is, the l-ast tax
return we fil-ed was 20L5 and had IGC filed stand-alone,
do with bonus, this just
example,
has to
they would have only util-ized $63,000
Because we I re part of a consolidated
uti11zed,
regulatory
you amortize it over life. I mean,
asset, but then that deduction
quite often because
from a tax basis, I
losses, and so they
cash because, 1ike,
cost of servi-ce and then
so I would contend that
they've always been
benefited.
of the hiqh capital expenditures, so
mean, they're usually running into
don't have to they can use that
for and this doesn't have t.o
do wlth the consolidation
of tax credits.
group,they were
the otherabl-e to util-ize 655,000, and what happens is
companaes
credits.
fund them. They pay them for those tax
Then once those tax credits are
goes
the
actually
it's a
right to
rate base,goes directly to
ever since we've acquired IGC,
ratepayers have directly
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CSB Reporting(208) 890-5198
GENORA (Di-Reb)
fntermountain Gas Company
This particular year, due to extraordinary
events in the oil- and gas industry and the refineryr ds a
business, you know, we're a stewart of the ratepayers
here. We do look at I mean, I look at what j-s this
qoing to do and
revenue. The decision was a prudent business decision.
The other i-t's a consequence of getting out of a very
high vol-atil-e industry so that we can be a Company that
is very compl-imentary to a public utility, and so in that
process of rebalancing our portfollo, we had a tax
consequence
micro 1eveI,
and this decision realIy was made on that
but
had a permanent
had a number of,
cash, and so the
just saying hey,
team, but you are
again, have these
things that we do
this is not a
impact, and 1n
you know,
decision
revenue maker for us. This
my rebuttal testimony, l
9.5 million. For us, that's
wasn I t made to increase
,wetre
for the
W€,
it really does impact. You know
this one year, you know, this is
still- going to benefit because
MR.
tax credits. We have, you know, other
help the ratepayers.
WILLIAMS: And Madam Chair, Mr.
McGrath reminded me that I forgot t.o spread her
testimony.
COMMISSIONER RAPER: I was wondering about
that.
THE WITNESS: Do I have to say this again?o 25
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CSB Reporting(208) 890-s198
GENORA (Di-Reb)
Intermountain Gas Company
MR. WILLIAMS: No, or we can ask the court
reporter to read it back.
O BY MR. WfLLfAMS: So Ms.
the same Donna Genora that
pages of rebuttal- testimony
A Yes, I am.
O If f were to
Genora, are you
this case seven
15th , 201,'7 ?
prefiled in
on February
ask you the same questions in
answers be thethis rebuttal testimony, would your
same?
A Yes, they would.
MR. WILLIAMS: And Madam Chair, I'd ask
that the tes.timony be spread and she is avaj-lab1e for
cross-examination if anyone dare.
COMMISSIONER RAPER: Thank you, Mr.
Wil-l-iams . With no ob j ection, Ms . Genora' s rebutta1
testimony will be spread upon the record as if read.
(The foll-owing prefiled rebuttal-
testimony of Ms. Donna Genora is spread upon the record.)
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O. Please state your name, position and business
address.
A. My name is Donna Genora. I am the Tax Director
for MDU Resources Group. My address is 1200 W. Century
Ave., Bismarck, North Dakota, 58503.
O. What are your responsibil-ities As Tax Dlrector?
A. I oversee and direct all tax matters of the MDU
Resources Group companies. Many areas of responsibility
incl-ude federal and state income, sales and use, and
property tax compliance; planning, and financial
reporting for income taxes.
O. Wou1d you please describe your educational and
professional background?
A. I graduated from San Jose State University with
a Bachelor of Scj-ence in Accounting and I am pursuing a
Masters 1n Taxation from Villanova University School of
Law. I have worked as a tax professional for over 20
years, holding positions of increasing responsibility in
both public accounting and industry. I have held my
current positlon at MDU Resources since February of 2075.
Prior to joining MDU Resources, I served as the Tax
Director for SOAProjects, from 2072 to 2015, and a Senior
Tax Manager at Omnicell, Inc., and before that at Ernst &
Young. I am a Certified Pub1ic Accountant licensed in
the states of California and North Dakota.
Genora, Reb. 1
Intermountain Gas Company
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Genora, Reb. 1a
Intermountain Gas Company
O. What is the purpose of your rebuttal testimony?
A- My rebuttal testimony will respond to the
di-rect testimony of Mr. Michael Gorman, who testifies on
behal-f of the Northwest Industrial Gas Users ("NWfGU"),
that Intermountain Gas Company ("Intermountain" or the
"Company" ) should have e1ected to take bonus tax
depreciation, whi-ch Mr. Gorman bel-ieves should then cause
a reduction in the Company's revenue
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requirement in this case.
O. What 1s bonus depreciation?
A. Since the begj-nning of the 2008 recession,
Congress has used different approaches to boost the
economy, including the allowance of "bonus
depreciation"-which allows more rapid recovery of certain
capital investments than its economic depreciation. The
assumpti-on is that the money wiJ-1 be rei-nvested. Bonus
depreci-ation allows taxpayers to deduct from taxable
income 50 to 100 percent of the cost of the new asset.
As with accelerated depreciation, bonus depreciation
reduces the taxable income of the taxpayer and the amount
of taxes it must pay. For regulatory purposes, bonus
depreciation increases the accumul-ated deferred income
taxes in the year claimed, therefore as Mr. Gorman
expressed, decreases the revenue requJ-rement.
O. Are al-l taxpayers who are eligible for bonus
depreciation deductions required to cl-aim them?
A. No. The 1aw permits al-l taxpayers to elect not
to cl-aim bonus depreciation in any year, without
llmitatlon of industry classification.
O. Are there exlsting commission regulations or
previous rulings requiring gas utilities to take bonus
depreciation?
A. I am not aware of any such regulatlons, past
Genora, Reb. 2fntermountain Gas Company
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Genora, Reb. 2a
fntermountain Gas Company
orders or economic disincentives to opting out of using
bonus depreciation.
a. Does an option to elect out of bonus
depreciation
taxpayer?
suggest that it does not always benefit the
A. Yes.
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Genora, Reb. 3
fntermountain Gas Company
O. Does
depreciation in
A. No.
o. will
determines its
tax returns?
A. Yes.
the Company intend to claim bonus
20t6?
you please explain how Intermountain
tax liabil-ity and prepares and files its
tax
MDU
Each
and
for
page
net
Intermountain files its federal i-ncome
return as part of a consol-idated tax group of which
the common parent.
own taxab]e income
the individuaf items
Resources Group, Inc. ("MDUR") is
member of the group reffects its
deductions . Af ter el-iminations,
each member are aggregated and reflected on the first
of the federal- form t!20 as consolidated items. The
consol-idated taxable income or loss is computed,
l-imitations, and a taxsubject to various electj-ons and
is calculated on thls amount.
O. why
depreciation?
A. Ona
did the Company choose not to take bonus
consolidated and business
long-term strategic management decision
forego bonus depreciation for qualifying
and placed in service for 20L6. Both tax
unit basis, a
was made to
assets acquired
and non-tax
factors were considered at both the fntermountain and
consol--idated group l-evel-s. Management concf uded that the
benefit to forego bonus depreciation far outweighed25
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Genora, Reb. 3afntermountain Gas Company
taking bonus depreciation.
O. What are some of the tax and non-tax factors
considered when deciding to deduct bonus
A. Factors considered are current
depreciation?
and budgeted
and taxabl-ecapital
J-ncome,
investments, forecast operating
state taxexisting federal and credits and net
operating l-oss carryovers, impact of other permanent tax
adjustments, the
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likelihood of federal- tax reform, economic risk of
various j-ndustries, and debt.
O. How did these factors impact the decision to
forego bonus?
A. The most compelling factors in management's
decision are rooted in the unprecedented changes in the
oi1 and gas industry and expi-ring state tax credits.
Management and its Board of Directors adopted a strategy
to l-ower risk in the MDUR business portfolio and
accordingly sold off assets and lines of business with
hiqh volatility. The disposal of these lines of business
generated nearly $868 million of tax losses during 2075
and 2016.
O. How does bonus depreciation lmpact expiring
state tax credits?
A. Electing out of federal- bonus depreciation
would not have an impact for states which are
non-conforming to federal bonus depreciation such as
fdaho. However, for the remaining states that conform to
federal- bonus depreciation a significant amount of state
tax credits are at risk of expiration. By not deducting
bonus depreciation, w€ have the ability to util-ize
approximately $9.5 mil-l-ion of tax credits t.hat woul-d
otherwise expire had we not elected out of bonus and
carried over federal net operating tax losses for the
Genora, Reb. 4
Intermountain Gas Company
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Genora, Reb. 4a
Intermountain Gas Company
next five years.
O. Has bonus depreciation been taken in past
years ?
A.From acquisition in 2008 through 20L4,
and MDU Resources have utilized bonusIntermountain
depreciat.ion, therefore reducing the federal income tax
that woul-d otherwise be payable in that year.
0. Is the decision to deduct bonus depreciation
based on whether or not the Utility Group as a whole
benefits ?
A. Yes. The decision was made to promote the best
tax outcome for the consolidated
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Genora, Reb. 5
fntermountain Gas Company
group as a whole. Mr. Gorman's proposal would mean that
the group pays more tax than is necessary.
fs there a benefit in participating in a
consolidated tax group?
A. Yes. It has been MDUR's
as part of a consolidated group is
experi-ence
beneficlal
that filing
to the
group. The MDUR group has complementary business cycles,
diversification, and access to capital, collective
regulatory and business process synergies and expertise.
For Intermountain, in years where they have been in a net
operating loss position, the consolidated group was abl-e
to utilize thei-r tax losses or monetize them within the
group such that no net operating l-oss deferred tax asset
remained to i-ncrease rate base.
O. What other
proposal creates?
A. Mr. Gorman
objections does Mr. Gorman's
recommends adjusting rate base equal
to the tax effected amount of bonus depreciatlon not
taken. This "additional- deferred taxes" creates a
violation of the IRS Normalization Rules.
O. What 1s normal-ization?
A. Normal-ization spreads the tax benefits
associated with utility assets over the same period that
the costs of those assets are recovered from customers.
It seeks to treat current and future utility customerso25
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Genora, Reb. 5a
Intermountain Gas Company
equitably by allowing a1l customers to enjoy the tax
benefits of depreciation.
O. Why is Intermountain subject to the IRS
normalization method of accounting?
A. NormaLization came about when accel-erated
depreciation first became
is using the tax system to
i-nvest
tax 1aw. In essence, Congress
extend loans to taxpayers that
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Genora, Reb. 6Intermountain Gas Company
in plant and construction assets. The loan is extended
when accelerated depreciation is claimed and it reduces
the taxpayer's tax liability. The loan is repaid as the
asset continues to produce taxabl-e revenue when there is
no more tax depreciation, therefore increasing the
taxpayer's tax liablJ-ity. This is commonly referred to
as an "interest-free" l-oan from the government. The
complication came about when utilities were required to
pass through the benefit of accel-erated deprecj-ation to
ratepayers in the ratemaking process. Rather than meeting
the intent of Congress to stimufate the economy, the tax
benefit went to the ratepayers. As a result, Congress
included a provision requiring the normal-izatj-on method
of accounting to be used in order to ensure that the
company claiming the deduction under the new law recelved
the benefits of accelerated deprecj-ation.
O. How does Mr. Gorman's proposal create a
normallzation violation?
A. The Regulations provide
calculated with respect to actual-
that deferred taxes are
tax Iiability. By
taxes used indefinition,
ratemaking
hypothetical deferred
is inconsistent with normal-i-zation ruIes.
Furthermore, under these rul-es, it is impermissible to
flow the tax benefits of accelerated depreciation
deductlons (i.e. "bonus depreciation") through too25
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Genora, Reb. 6a
fntermountain Gas Company
ratepayers
benefits.
lowers the
benefit of
Meanwhile,
if the taxpayer has not yet realized such
Said another way, the reduction of rate base
revenue requirement, whlch transmits the tax
bonus depreciation to the ratepayer in 20L6.
of bonus deprecj-ationthe Company elects out
and will- receive related tax benefits (i.e. a reduction
of its tax l-iability to the government) over the l-ives of
the assets. In this example, the ratepayer clearly
receives the related tax benefit faster than does the
Company, thus causing a
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Genora, Reb. 7
Intermountain Gas Company
normal-ization viol-ation.
O. What are the implications of a normal-i-zation
viol-ation?
A. The effect woul-d be to risk the permanent loss
to util-ize any form of accelerated depreciation. The net
result would be the l-oss of a zero-cost capital source,
thereby increasing the Company's cost of capital and
harming ratepayers through higher rates.
O. Pl-ease summarize the Companyrs position?
A. I do not agree with Mr. Gorman's bonus
depreciation
normalization
adjustment. Eirst, his proposal creates a
viol-ation. The only objective met is a
benefit with significant detrimental-
consequences for both Intermountain and its
to the loss of future accelerated
short-term tax
long-term tax
customers due
depreciation deductions. Second,
to forego bonus depreciation was
prudent and rational tax planning
restructuring strategies.
0. Does this concl-ude your
A. Yes.
the Company's decision
grounded in sound,
and business
testimony?
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CSB Reporting(208) 890-s198
GENORA (Com-Reb)
fntermountain Gas Company
(The fol-l-owing proceedings were had in
open hearing. )
COMMISSIONER RAPER: Does Commission Staff
have any cross-examination questions?
MR. KLEIN: No.
MR. STOKES: We have none, Madam Chair.
COMMISSIONER RAPER: No one dares.
Mr. Richardson.
MR. RICHARDSON: No questJ-ons.
COMMISSIONER RAPER: Mr. Otto.
MR. OTTO: No questions, Madam Chair.
COMMISSIONER RAPER: Any Commissioner
questions ?
EXAM]NATION
BY COMMISSIONER RAPER:
O So I dare because, you know, that's what I
do. Just for clarification, MDU benefits by including
Intermountaj-n Gas in its tax preparation, too; correct?
With the appreciation that your testimony was that you
are looking at whether IGC benefits
A Yes.
O -- MDU benefits
A Abso1utely.o otr
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a by including them, so you made a
comment earlier before we spread your testimony on the
record about how generally including a company like IGC
in with the whole is beneflcial-. Did you do an
analysis or did anyone with the Company do an analysis in
this case, with an exception of penalties that you talked
about that can be severe, you know, rul-e those out,
you've got to do everything on a straight l-ine basis so
that there are no penalties involved, was there an
analysis done by the Company of what happens when these
things are done at MDU as a corporation and what the
resul-t would be if Intermountain Gas separately took the
fu1l beneflt, not just the bonus depreciation piece?
A So we do keep records on IGC separate,
rightr so everything, you know, al-l- the tax rates, the
deferred, it's a separate Company and so we revj-ew those
records on a regular basis, yes.
O Yes, so the records are kept, then was
there an analysis performed, because the Company chose to
file j-n a way that elected not util-izing bonus
depreciation because the Company was taking advantage,
according to testimony, of throwing everything into one
pot with MDU? Was there an analysis done based on those
separate records that you keep of we1l, the MDU one 1s
clear because that's part of this case, was there a
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CSB Reporting(208) B9o-s198
GENORA (Com-Reb)
fntermountain Gas Company
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CSB Reporting
(208 ) 890-s198
GENORA (Com-Reb)
Intermountain Gas Company
separate analysis, then, oS to what the benefits to
Intermountain Gas coul-d have been had those tax benefits
and everything been fil-ed separately?
A Yes.
O And that resul-ted in?
A I mean, it would be a number simil-ar to
what we had, so it would be about $9 mil-l,ion of more tax
deduction and so IGC wou]d have been a]most a net zero as
far as taxable income for year 2016, if that's what
you're asking.
O WeI1, I appreciate that for what it is. I
didn't ask it very good, c1early, so if I can rephrase
your answer and my monosyllabic phrases, so what you're
saying is there was an analysis of how IGC would have
been impacted had they separated and performed those
functions, like bonus depreciation, outside of the
corporate umbrella of MDU?
and without
Yeah, we
cal-culation
do both, right, so we do a with
and that's rea1Iy where we came
have these permanent $9 mil-l-ion
A
up with we were going
detriment. We do that analysis
have other business units that
on a regular basis. We
would like for us to take
to
different tax positions because
to struggle on a regular basis.
straight on the record here, not
it helps them, so we have
What I wou]d Iike to set
taking bonuses is noto25
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CSB Reporting
(208 ) 890-s198
GENORA (Com-Reb)
Intermountain Gas Company
what we woul-d do. f mean, w€ always would take bonuses.
I don't ever want to pay taxes, right. That's not a
success on my end for me doing my job. Unl-ess there was
a prudent, very good business reason to do it, we
wouldnrt, so this i-s an extreme exceptj-on for the
Company.
When we did the analysis and
you know, what woul-d that do to IGC or any
you know, we made
of management on
we're proposing,
that, so it was a
phone cal-1s
the team and
to everyone,
talked about
looked at,
other utility,
you know, all
here's what
input likewhat do you think, and
well- thought-out, long
got
conversatlon
COMMISSIONER RAPER: Thank you. That is
all- I have. Is there any redirect?
MR. WILLIAMS: No redirect.
COMMISSIONER RAPER: Thank you for your
among many l-evels.
time and your testimony.
THE W]TNESS:
(The witness
COMMISSIONER
COMMISSIONER
MR. WILL]AMS:
it a day.
Thank you.
Ieft the stand. )
RAPER: Cal-l- it a day?
KJELLANDER: YCS
We can do one more or calf
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to go with Commander Kjellander and Irm going to cal_l it
a day. We will meet back here at 9:00 a.m. tomorrow.
I'm outvoted, we are meeting at 9:30 a.m. tomorrow
morning.
MR. STOKES: Can I ask that Mr. Finklea be
excused from the hearing?
COMMISSIONER RAPER: Yes, without
objection, Mr. Einklea is excused for the remainder of
the hearing, and we have a public hearing at 7:00 p.m.
tonight. We'11 expect all- the parties to be there. Just
kidding. We wil-1 be here at 7:00 p.m. tonight for the
public hearing 1n this case and so that by the time we
finish tomorrow, w€ can cfose the record and we will
del-iberate and issue an Order, So I will either see you
at 7:00 p.m. tonight or 9:00 a.m. tomorrow morning back
here in the Hearing Room -- 9:30 tomorrow morning. We
are adjourned.
(The Hearlng recessed at 4:50 p.m. )
CSB Reporti-ng
(208 ) 890-s198
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7607 COLLOQUY