20170321Transcript Volume VI.pdf

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ORIGINAL CSB REPORTING
C e rtifted Sh o rth and Rep o rte rs
Post Office Box9774
Boise,Idaho 83707
csbreportin [e-mail]
Ph: 208-890-5198 Fax: [phone]
Reporter:
Constance Bucy,
CSR
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OE ]NTERMOUNTAIN GAS COMPANY TO
CHANGE ITS RATES AND CHARGES EOR
NATURAL GAS SERV]CE IN THE STATE
OF IDAHO
CASE NO. INT-G-L6_02
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BEFORE
COMMISSIONER KRISTINE RAPER (Presiding)
COMMISSIONER PAUL KJELLANDER
COMMISSIONER ERIC ANDERSON
PLACE:Commj-ssion Hearing Room
412 West Washington Street
Boi-se, Idaho
DATE:March 3, 2011
VOLUME VI Pages 1611 - 1980
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CSB REPORTING(208) 890-s198
APPEARANCES
For the Staff:Mr. KarL K].ein
and I'Ir. Sean CostelLo
Deputy Attorneys General
472 West Washington StreetBoise, Idaho 83720-0074
For Intermountain Gas
Company:
Mr. RonaLd L. IVi].liansWilliams Bradbury, P.C
1015 West Hays Street
Boise, Idaho 83102
For The Amalgamated
Sugar Company:
Mr. Peter iI. Richardson
RTCHARDSON ADAMS PLLC
Post Office Box 72]-8Boise, fdaho 83702
For Northwest Industrial
Gas Users:
fdr. Chad M. Stokes
CABLE HUSTON LLP
1001 SVf, Fifth AvenueSuite 2000Portland, Oregon 91204
For the Community Action
Partnership of Idaho:
Mr. Brad M. PurdyAttorney at Law
20]-9 North 17th Street
Boise, Idaho 83102
For Idaho Conservation
League and Northwest
Energy Coaliton:
Mr. Benjamin J. Otto
Attorney at Law
Idaho Conservation League
Post Office Box 844Boise, Idaho 83701
}
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APPEARANCES
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CSB Reporting(208) 890-s198
INDEX
WITNESS EXAMINATION BY PAGE
Branko Terzic
( IGC)
Mr. Williams (Direct-Reb)
Prefiled Rebuttal- TestimonyMr. Wil-liams (Direct-Reb Ct I d)Mr. Costel-l-o (Cross-Reb)
Mr. Stokes (Cross-Reb)
Mr. Otto (Cross-Reb)
r6t2
!674
7624
7629
16 31
1632
J. Stephen Gaske
( rGC)
Mr. Wil-l-iams (Direct-Reb)
Prefil-ed Rebuttal Testimony
Mr. Williams (Direct-Reb Ct'd)Mr. Costello (Cross-Reb)
1 638
764L
1120
71 22
Phillip Fry
(IGC)
Mr. Wil-l-iams (Dlrect-Reb)
Prefil-ed Rebuttal- Testimony
Mr. Wil-l-iams (Direct-Reb Ct'd)
Commissioner Kj ellander
Commissioner Raper
Commissioner Anderson
Commissioner Kj ellander
t] 23
1126
7713
1780
1781
t1 82
1783
Lori Blattner
(IGC)
Mr. Wil-l-iams (Direct-Reb)
Prefil-ed Rebuttal TestimonyMr. Will-iams (Direct-Reb Ct'd)
Mr. Klein (Cross-Reb)
].184
71 86
1B 15
tB26
Linda Murray
(rGC)
Mr. Wil-l-iams (Direct-Reb)
Prefiled Rebuttal Testimony
tB29
1B 31
David Swenson
(rcc)
Mr. Williams (Dlrect-Reb)
Prefil-ed Rebuttal TestimonyMr. Stokes (Cross-Reb)
Mr. Richardson (Cross-Reb)
Mr. Wi]liams (Direct-Reb Ct'd)
1845
1848
18 63
186'7
1B 90
David Heintz
( rGC)
Mr. Wi11j-ams (Direct-Reb)
Prefiled Rebuttal TestimonyMr. Stokes (Cross-Reb)
1892
LB94
1908
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INDEX
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CSB Reporting
(208 ) 890-s198
INDEX(Continued
W]TNESS EXAM]NATION BY PAGE
Michael McGrath
(rGC)
Mr. Williams (Direct-Reb)
Prefiled Rebuttal- Testimony
Mr. Wi-lliams (Direct-Reb Ct'd)Mr. CosteIIo (Cross-Reb)
Mr. Purdy (Cross-Reb)
Mr. Otto (Cross-Reb)
Commissioner RaperMr. Williams (Direct-Reb Ct'd)
1 910
7972
194 8
1951
1 954
t966
L91 4
191 6
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]NDEX
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CSB Reporting(208) 890-sl-98
EXHIBITS
NUMBER DESCR]PTION PAGE
EOR INTERMOUNTAIN GAS COMPANY:
33.MDU Resources Group,
Earnings Per Share
PremarkedAdmitted 1640
36 Occupat ional- Employment.
Report of Utilities PremarkedAdmitted 1830
31 .IGC Job Description PremarkedAdmitted 1830
38.IGC Job Description PremarkedAdmitted 1830
?o Revised Testimony & Exhibitof John Kohl-meier
PremarkedAdmitted 1785
40.Norma]ized Test Year Base Rate
Revenue Difference, etc.
PremarkedAdmitted 1785
4L.CV of Phillip C. Fry PremarkedAdmitted L724
42.CV of Patri-ck Shannon PremarkedAdmitted 7724
45.U.S. LDCs with Decoupling
Mechanisms
PremarkedAdmitted 1911
46.Admitted L97B
48.Definitions Identified 1815Admitted 1816
FOR THE STAEF:
123. L25.Admitted L978
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INDEX
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CSB Reporting(208) 890-s198
BOISE,IDAHO, FRIDAY, MARCH 3, 20t1, 9:30 A. M
COMMISSIONER RAPER: Good morning. It
March 3rd, Friday. We are in the third day, home
stretch, of Case No. INT-G-16-02. I will note for the
benefit of the record this mornj-ng that we stil1 have
l_s
no
representation from Intervenor
also have no representation in
Snake River Al-11ance. We
the room from the Federal
Agencies who
while I think
afternoon, he
were also an intervenor in this case, and
on the record Mr. Purdy had l-eft yesterday
is back today, so happy to see you.
MR. PURDY: Thank you.
COMMISSIONER RAPER: Good to have you
join, and I am prepared to begin
yesterday and get this moving, so
where we left off
if the Company would
like to cal-I its next rebuttal wi-tness.
MR. WILLIAMS: The Company woul-d cal-l-
Branko Terzic.
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1611 COLLOUY
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CSB Reporting
(2oB ) B 90-sl_98
TERZIC (Di-Reb)
Intermountain Gas Company
produced as a
Intermountaln
sworn to tel-l-
BRANKO TERZ]C,
rebuttal witness at the instance of the
Gas
the
the truth, resumed
Company, having been previously duly
truth, the whol-e truth, and nothing but
the stand and was further examined and
testif ied as foll-ows:
DIRECT EXAMINATION
BY MR. WILL]AMS:
O Would you please state your name and
business address for the record?
A Yes, Branko Terzic, 1800 M Street NW,
Washington, D.C., 20036.
O And for this case did you prepare five
pages of rebuttal testimony?
A rdid
O And if I were to ask you the same
questions contained in that rebuttal- testimony, wou1d
your answers today be the same?
A They wou1d.
MR. WILLIAMS: Madam Chair, I woul-d ask
that Mr. Terzic's rebuttal testimony be spread upon the
record, and I have a couple of preliminary questions for
him.o 25
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CSB Reporting
(208 ) B9o-s198
TERZIC (Di-Reb)
Intermountain Gas Company
COMMISSIONER RAPER: Without objection,
Mr. Terzic's rebuttal testimony will be spread upon the
record as if read.
testimony
record. )
(The following prefiled rebuttal
of Mr. Branko Terzic is spread upon the
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Terzl-c, Reb. L
Intermountain Gas Company
O. Please state your name, title and business
address.
A. My name is Branko lerztc and my business
address is 1800 M Street NW, Second Fl-oor, Washington,
D.C. 20036.
O. By whom are you employed and in what capacity?
A. I am employed as a Managing Director at the
Berkeley Research Group
O. Are you the same Branko Terzic who filed
Prepared Direct Testimony earlier in this proceeding?
A. Yes, I am.
O. What is the purpose of your rebuttal- testimony
in this proceeding?
A. I am responding to the direct testimony of
Idaho PUC Staff Witnesses Randy Lobb and Michael
Morrison.
O What issue will- you comment on in Dr.
Morrison's testimony?
A. The issue is Dr. Morrison's testimony is his
reconrmendation to this Commission that the Company's cost
of service study be
revenue requirement
ignored and
be all-ocated
that "...the Company's
an proportion to the
collected from eachnormalized revenue currentl-y being
rate c.Iass . " (Morrison P. 3 L. 5-B )
O. Do you agree with Dr. Morrison'sa25
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Terzic, Reb. 1a
Intermountain Gas Company
reconrmendation ?
A. No. I
disingenuous. Dr
cost of service
do not. The recommendation is
Morrison asserts that the Company's
with recent datastudy, prepared in 2016
and based on industry acceptabl-e methodology, "will not
result i-n a fair al-location of the company's revenue
requirement among its rate classes" (Morrison P. 2 L.
L9-20) .
Yet, he makes a recommendatlon to this Commission
that it use an allocatlon method based on revenue
"currently coIIected". That revenue is based on rate
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Terztc, Reb. 2
fntermountaj-n Gas Company
schedules developed
established 1n the
Staff witness Lobb
"...the current l-evel-
from cost of service studies
l-ast general rate case
recognized that in his
of revenue coltected
in 1985. Even
testimony that
from each class
was establ-ished without cost of service over the last 30
years..,tt
O.
service
( Lobb
why
study
The
the Company's cost of
data concerning recent costs and
service study uses recent
usage by customers to
estimate the various cost allocation f actors. ttf,hile it
is true that access to more exact customer l-oad surveys
that the
service study
thinks it is self-evident
P. 74 L. 5-6) .
would the use of
be preferred?
Company's cost of
woul-d be ideaI, I
Company's use of
methodology, even
recent data in 1ts cost of
if al-l the numbers are not exact, is
superior to the imputed use of 30 year ofd data as
implied in Dr. Morrison's recommendation and observed by
staff witness Lobb.
O. Do you agree that it woul-d be preferable to
have data from a load study for use in developing a cost
of service study?
A. Yes, I do. However, as pointed out by Company
wltness Heintz, absent the avall-abili-ty of such data the
Company must then, and did, rely on other recognized
allocatlon methodologies and principles used throughouto25
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Terzic, Reb. ,2a
Intermountain Gas Company
the natural- gas industry.
O. Do you have any differences of opinion with the
testimony of Mr. Randy Lobb?
A. Yes, this is with respect to hls testimony on
the FCCM proposed by the Company. Firstly I woul-d ask
the Commission to disregard Mr. Lobb's finaf
recommendation that the Commission "adjust the Company's
ROE downward"
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Terztc, Reb. 3
Intermountain Gas Company
shoul-d it approve the FCCM. This Commission has extensj-ve
experr-ence
company and
with the determination of a fair ROE for this
for all the other utilitles under its
jurisdiction. That experience, most likely is similar to
mine during my time as a state and federa1 regulator, in
recoqnizing the difficulty in making a single numerical-
adjustment to an ROE based on any one regulatory
treatment, rate design or cost factor. I woul-d observe,
having made such decisions in numerous rate cases, that,
since ROE is based on real-'financial markets viewing
multiple attributes of a company, there is no direct way
to measure the effect of a single regulatory treatment on
the ROE required.
I would further add that even if Mr. Lobb was
correct that this single treatment would resul-t in a
lower ROE requirement, there are likeIy other regulatory
decisions to be made in this case, ds in all utility rate
cases, where those other regulatory decisions would
increase the risk and requj-re a "higher" ROE than
otherwise woul-d be the case.
O. Do you agree with Mr. Lobb's recommendation
that the Commission deny the Company's FCCM request?
A. No, I do not. Besides the positive attributes
of the program as
ask the Commission
testified to by the Company, I would
to consj-der what damage woul-d be doneo25
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a
lerzic, Reb. 3aIntermountain Gas Company
if it was to approve the FCCM as requested. The
request with the ful-l-Commissi-on can approve
that annua]
the ECCM
knowledge
required
or other more frequent reports
of the Company wil-1 provide sufficient.
as to any possible problems with the program
any potential corrections going forward.
information
and direct
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Terzic, Reb. 4
Intermountain Gas Company
The FCCM is a decoupling mechanism which recognizes
that DSM and other exogenous factors now and in the
future can lower sales volumes without commensurate
reduction in necessary plant investment. The costs in
the ECCM are reviewed in this case and reviewable in the
future by this Commission. The use of the cost of
service presented by the Company, and incorporated in the
FCCM, is a superior choice than rel-iance on a method tied
to regulatory decisions made thirty years ago. For these
reasons, I see no reason to not accept the FCCM,
What woul-d be the consequences of denial- of the
staff recommendations woul-d
and acceptance of other
result in the company's
of fixed charges in thehigher risk of non-recovery
Company's Commj-ssion approved revenue requirement.
The FCCM as requested is one mechanism to recover
recognized fixed charges incurred by the Company. The
other mechanism to recover more fixed charges requested
by the Company was an increase in the residential
O.
Company's
A.
customer
per month
( Erdwurm
recommend
proposed FCCM?
Denial of the FCCM
charge from a current weighted average of $3.83
(Erdwurm P. 4 L. 11) to $10.00 per month
P.4 L.27) . The staff witness Erdwurm has
a much lower increase in the customer charge to
an average of $5.50 per mont.h.o 25
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Terzj-c, Reb. 4a
Intermountain Gas Company
Should the Commission accept the two staff
reconrmendations for
customer charge, it
a lowered residential and commercial
would result in rates which are
designed
rate at
to recover fixed charges in
of sal-es.
the volumetric usage
pro j ected level-s Should sales vo]umes
fall- short of.projections, which can occur because
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Terztc, Reb. 5
Intermount.ain Gas Company
of weather, economic or programmatic reasons
wltl not recover the same fixed charges this
deemed necessary and appropriate to deliver
the Company
Commission
service to
consumers.
There is no good public policy reason for choosing a
series of rate recommendations which increase the risk of
under recovery of fixed charges. There are good public
policy reasons to support both requests.
National and state regulatory policles, with respect
to gas distribution utilities have been directed to
encourage efficiency and conservation to ultimately lower
monthly bills to consumers. Keepj-ng in mj-nd that even
without any such policies the l-east interested consumer
wil-1 stifl- experience lower natural gas purchases after
installing a modern replacement furnace.
However the consumer's reduction in energy (therm)
usage does not diminish the capital investment already in
place to serve consumers. The service line to the house
does not change, the meter does not change nor is there a
reduction in the size of distribution gas system plpe
when new efficient appliances are installed.
Conversefy a lower unit energy charge for del-ivered
naturaf 9ds, which generally accompanies a higher
customer charge, does not stimulate the furnace, 9ds
stove or water heater to use more therms than a previouso25
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Terzic, Reb. 5aIntermountain Gas Company
higher volumetric rate.
Thus, I recommend that the Commj-ssion approve both
the higher customer charge and the FCCM as appropriate
public policies to improve the prospects for fixed cost
recovery.
O. Does that conclude your testimony?
A. Yes it does
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CSB Reporting(208) 890-s198
TERZIC (D1-Reb)
Intermountain Gas Company
(The fol-Iowing proceedings were had in
open hearing. )
D]RECT EXAM]NATION
BY MR. WILLIAMS: (Continued)
O Mr. Terzic, there's been a l-ot of
discussion that you have heard in this case about
gradualism with respect to cost of service. Could you
explain in the context of Bonbright's principles the
importance of gradualism?
A Yes. Thls is from the original Bonbright
book. Itrs carried over into the revised edltlon with
Kamerschen and Daniel-son. They're call-ed principles.
These are Bonbright's observations of what utility
ratemakers should take into consideration when they're
making rates, and Bonbright himsel-f recognizes that some
of these principles individually are in confl-ict and so,
for example, one of the principles is that the utility
rates should have the attributes of simplicity and yet,
many state commissions have rates designed to be
economically correct, which are very complex, rates which
have time-of-use pri-cing, real--time pricing, net
metering, multi-ple part rates, extension rates, tariffs,
and so to have both simplicity and economically perfecto25
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CSB Reporting(208) 890-s198
TERZIC (Di-Reb)
fntermountain Gas Company
rates, 1et's say nodal prlcing, which is common now in
the el-ectric transmlssi-on, makes it demonstrate that
there is conflict.
The word gradualism doesn't appear. I
indicate thatthink counselor had me read it My
to doone of the questi-ons
rates themsel-ves and
notes
with stability of
the minimal unexpected changes
seriously adverse to existing customers is the language
I've looked at. That is one of the goals of ratemaking.
On the other hand, right after that Bonbright says that
the rates ought to be fair with respect to apportlonment
of total costs of service among different consumers, and
we have this exact question here with respect to which
one of the two of these two conflicting goals shou1d take
precedent, so is it the stabil-ity of rates or is it going
to where your rates are more fair in apportionment of
costs, so the Commission, this Commission, has been aware
of Bonbright since his original book, I think 1968.
You've had numerous testimony on it. f'm
fu11y confident that with the eight, rf you wi1l,
principles or eight guidelines, they'11 understand that
there's no one that's controlling, and so the stability
of rates is just one of a number of factors t.he
Commission shoul-d look at.
O And if one of the other principles is
there has
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CSB Reporting
(208 ) 890-s198
TERZIC (Di-Reb)
Intermountain Gas Company
monopoly pricing regulation to substj-tute market pricing,
how does the dispute between gradualism and market prices
get resolved?
A WelI, this Commission is aware of periods
in history where costs have escalated dramatically and
there have had to have been large rate increases given.
I did this during the period'81 to'86. We had double
diqit rate cases because we had double di-git infl-ation
and doubl-e digit interest rates, and so yeS, it would
have been nice to have stable rates, but the other
principle is that the Company has to have the revenue and
cash flow stability and has to recover its costs under
the fundamental principles of ratemaking.
Even now natural gas is a pass-through for
a distribution utility and so
from eight to two, that's very
when the
unstable
price of gas
and yet, it
of gas went
goes
gets
frompassed through or if tomorrow the
four back to eight or back to 12
that wou1d be passed through and
with the market, and so yeS, it's
factors.
or some higher number,
the consumer would live
price
o
recommended
adopts the
opinion on
just one of a number of
And you
ROE should
fixed cost
heard testimony about whether a
be adjusted if the Commissj-on
collection mechanism, what is your
the val-idity of such an adjustment?o 25
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CSB Reporting(208) 890-s198
TERZIC (Di_Reb)
fntermountaj-n Gas Company
A Yes, a couple of issues here. No. 1, if
you have a peer group of companies, it's not cl_ear
whether all of the decouplj-ng, if you wiII, is even
reported. For example, if
utillty which never back in
got off of decl-ining block
a decoupled utility, but it
current, under the current
had a gas or electric
'80s
you
the
rates, it
would be
definition.
coupled, which never
would not show up as
one under the
Second1y, not all of those listed types of
decoupling are full decoupling. If you only have
weatherizatj-on norma1ization, that doesn't adjust for
changes in technology. It doesn't adjust for changes in
end use. It merely adjusts for weather, for the
variabil-ity of weather, and there are other treatments,
too, that may not the one here where you're having a
small j-ncrease in the customer charge is just another
it's a partial decoupling. ft's not going to be a full
decoupling.
The argument, just
argument of whether you should put
distrlbution and fixed costs into
rea11y a
col-f ateral1y, the
some of the
the customer charge is
Commissi-oners. I
mean, You
you can
a fixed
question of
can define
cal-I it a fixed
asset charge or
nomencl-ature,
a customer charge
charge as some
something else
to only do that or
commissions do or
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a bit of the demand costs. It's rea11y -- the
nomencfature should not be 11miting, in my opinj-on, as to
what you put 1n the fixed rate.
Yeah, a customer charge is a fj-xed charge.
Tt is a partial of a fixed rate. You can incl-ude
whatever you think is appropriate or you can change the
rate design and have a three-part rate, so those things
aren't controll-ing with the decoupling, so you've got
peer group that you may not even know how much they're
decoupled or not, and secondly, it's very difficul-t to
isolate one item. There are many other i-tems of
ratemaking which add or detract from risk, and we could
do a laundry l-ist and you could chase a rate of return
witness around for hours about well, did you factor this
ratemakj-ng treatment or that ratemaking treatment, and
the bottom line is that one makes the assumption that the
ratemaking is just and reasonable, the stock market
prices will reflect that, and keep in mind, we don't
rea11y do a discounted cash fl-ow. We run the formul-a in
reverse. We put in the stock price, put in some
estimates of future earninq and try and calculate what is
the return on equity i-.p,rt"O by the market, and the
market has all of this informatj-on. I think your expert
witness will- be ab.l-e to cover that.
MR. WILLIAMS: No additional- live
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TERZIC (Di-Reb)
Intermountain Gas Company
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(208 ) 890-s198
TERZIC (x-Reb)
Intermountain Gas Company
questions, Madam Chair. Mr. Terzic is available for
cross-examinati-on .
COMMISSIONER RAPER: Thank you. Does
Commission Staff have any questions of this witness?
MR. COSTELLO: Just a couple of questions.
CROSS-EXAMINAT ION
BY MR. COSTELLO:
O Mr. Terzic, would you please turn to page
3, l-ines 7 and 2, of your rebutta1 testimony?
A Yes.
O Okay, there you state that this Commission
has extensive experi-ence with the determination of a fair
ROE for this Company; is that correct?
A And the whole sentence says, "and for all
the other util-ities under its jurisdiction," that's
correct.
O Okay, and I think it's come up a coupJ-e of
times, but fntermountain Gas hasn't come in in 30 years;
is that correct?
A Yeah, but there was no prohibition against
this Commissionthis Commission looking
annualJ-y monitors every
annual- report, and any
I mean,
every utility files anutility,
time this Commisslon fel-t thato25
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CSB Reporting
(208 ) 890-s198
TERZIC (x-Reb)
fntermountain Gas Company
this Company was overearning, I belleve you have the
authority for a show cause or to initiate a rate caser ds
could any customer under most regulatory schemes.
a Thank you. Yeah, I just wanted to be
clear this Commission through no fault of its own has
virtually no experience 1n determining an ROE for this
particular Company; i-s that true?
A
am sure, has
what's going
otherwi-se, it
nY
Staffr s
Yes, but this
checked the ROE
on in the market
Commisslon al-so annua11y, I
of this Company against
and the industry;
charges
wouldn't be doing its
Thank you. Just one
proposal to increase the RS
reduces the level of fixed
j ob.
last
and
costs
question.
GS customer
currently
is thatrecovered through the commodity charge;
correct ?
have.
A That would be the arithmetic, yes.
MR. COSTELLO: Thank you. That's all I
COMMISSIONER RAPER: Mr. Stokes.
MR. STOKES: I just have one question.
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(208 ) 890-s198
TERZIC (x-Reb)
fntermountain Gas Company
CROSS_EXAMINAT]ON
BY MR. STOKES:
O Good morning. Do you think the Commlsslon
should spread rates as some parties recommend in this
case based on the cost of service study that was done 30
years ago or from the cost of service study that was
performed in this case?
A My testimony, f believe, is that they
shou1d use the most recent data available. Even though
it's not perfect, there is much new data in the current
cost of servj-ce study
example, all the large
customers are metered.
better to use that and
which is valuably important.
commercial and industrial
For
That data is there. It's much
then cal-culate the missing
formulas than toimputing the varlous
3O-year-old data which cannot only
go
by
detailed data by
back and use the
acci-dent would be
MR
further.
Mr. Purdy.
as valuabfe as the current data.
STOKES: Thank you. f have nothing
COMMISSIONER RAPER: Thank you.
MR. PURDY: No questlons, Madam Chair.
COMMISSfONER RAPER: Mr. Richardson.
MR. Rf CHARDSON: Madam Chai-r, I don't haveo25
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(208 ) 890-s198
TERZIC (X-Reb)
Intermountain Gas Company
any questions for this witness.
COMMISSIONER RAPER: Thank you. Mr.
Otto.
MR. OTTO: Madam Chair, I do have a few
questions.
CROSS-EXAMTNATION
BY MR. OTTO:
O Good morni-ng, Mr. TerzLc.
A Good morning.
O I want to turn to page 4 of your
testimony, your rebuttal-
A Yes.
O and this woul-d be l-ines 10 through 72.
A Yes.
O And you state that denylng the fixed cost
mechanism and acceptance of other Staff reconrmendations
woul-d resul-t in the Company's higher risk of non-recovery
of the fixed charges. Are you with me?
A Yes.
O So are those other Staff recommendations
you're referring to, is that the fixed charge, the
customer charge?
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CSB Reportlng
(208 ) 890-s198
TERZIC (x-Reb)
Intermountain Gas Company
O So how do customers directly and
immediately benefit from reducing fixed cost
volatility?
costs,
asking.
A Wel-l, therers
they're fixed, so I'm
O Okay, l-et me clarify. How do customers
directly and immediately benefit from reducing the
volatillty of fixed cost collections by the utility?
A I'm sorry, but by defini-ti-on, fixed cost
col-lections are not vol-ati1e.
O What I'm trying to get at sorry to
interrupt the Company's ability to recover its fixed
costs if it's 1n a volumetric rate is vol-atile;
correct ?
A Thatrs correct.
O And your proposals are to reduce that
volatility, that col-l-ections volatility; is that
correct?
A Yes.
O How does that how does that proposal
immediately and directly benefit customers?
A WelI, I thlnk you'l1 see there's economic
testj-mony that it sets a more correct priclng and the
vol-umetric rate has only the variable charges, the
no vol-atility in fixed
not sure what you're
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(208 ) 890-s198
TERZIC (x-Reb)
Intermountain Gas Company
charges having to doing with energy, not having to do
with the fixed cost, and then, secondly, the financial --
the rate of return witness, others would indicate and we
had the earlj-er colloquy about your return on equity
effect is that there 1s a beneflt from the market
understanding that the Company has reduced its volatility
of its earnings which are derj-vative of the revenues
comlng.
O By yourve also testj-fied that in this case
there should be no refl-ection of that reduced volatility
in the rate of return.
A No,
separate adjustment
group is made up of
that factor.
flo, I would say there should be no
for that, particularJ-y since the peer
many companies which already have
0 So over time there coul-d be a reductlon in
the Intermountain Gas cost of capital, but that woul-d
have to play out over some number of years and
circumstances ?
A Over I'm not sure what you mean by over
tlme. The rate of return testimony is as given and I
think I would defer to the rate of return witness on rate
of return testj-mony, specifically what was included in
that witness's testimony, so I'm not sure, maybe you
could rephrase your question.O 25
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CSB Reporting(208) 890-s198
TERZIC (X-Reb)
Intermountain Gas Company
0 No, I think that answered it.
A Okay, thank you.
O Earlier you mentioned that both t.he
Commission and any customer group is free to disagree
with the utility's rate structure, that they're free to
open a case and revisit that.
A They're free to
f or a case, I bel-ieve . That ' s regulatory
here in Utah.
true that fntermountai-n Gas
Commission to adjust its
volatility regardless of any
petition
typically
the Commission
practice. I doubt it would differ much
O And isn't it true
A Idaho, excuse me
v
is afso free to
rates to cover
And isn't it
approach the
col-lections'
fixed cost mechanism?
A The Company is
when it bel-ieves the rates are
free to apply for rates
inadequate or i-ncorrect,
yes
for a couple of
Idaho Commission
from a variety of
fixed costs, the
al-so consistently
AI
0 I'm golng to move over to rate design just
questions, so are you aware that the
has been presented with rate designs
utilities that al-l-ocate al-1 or most
fixed charges, but the Commissj-on has
rejected them for policy reasons?
have not read those Orders, oo.a 25
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CSB Reporting(208) 890-s198
TERZIC (x-Reb)
Intermountain Gas Company
Y
Energy P1an,
And are you aware that
Action CE-6, includes a
PUC and
the Idaho State
specific
Idaho utilitiesrecommendation that the ]daho
continue to adopt rate designs
efficient and effective use of
A It seems l-ike a
rate design wj-tnesses that
Bonbright and others argue
are the
have I have not read the documentr so...
O So then 1n general, in your opinion, does
a hlgher prlce for a unit of commodity encourage
efficient use of that commodlty?
A Under I think you'l1 see from the
testimony l-ater of the rate
that encourage more
energy?
reasonabl-e goa1. I don't
of return witness of the
that's not necessarily true.
that the l-ast rates the
ones that are correct andmarginal cost rates
that the customers
should use as much
should conserve, but the customers
they need, and so there are those two
factors in there, so that the more correct rate design, I
belleve and I'm stuck with believing this, because f'm
the guy that voted for the largest decoupling ever in
American history, which was the switch in 7992 of the
pipelines from a 50 percent al-location of fixed costs,
cal-fed Seaboard formula, 50 percent allocati-on of fi-xed
costs to the volumetric rate to a zero aflocation of
fixed costs to the volumetric rate. For the interstateo25
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CSB Reporting(208) 890-5198
TERZIC (x-Reb)
Intermountain Gas Company
naturaf gas pipe1ine history, the benefits of that have
been demonstrabl-e over the l-ast since 1992r so Irm
stuck, if you wi11, with my own prior history of being an
advocate of higher fixed charges.
O So the beginning part of that answer had
an interesting point, I think, and that is it's about
rate design is about finding a balance, would you agree,
between sending an effective signal for customers as weff
as ensuring they're paying thelr fair share of the
costs
A Right.
O a balancing effort?
A That's correct, and the rate design has
both two components: one is the level of rates and
behind that t.he al-l-ocation among customer c.l-asses,' and
then, secondly, the level of ratesi and then, third, the
exact design of the rates, whether to have a two-part
rate, which you haver or a three-part rate, so there's
multlple aspects to it.
MR. OTTO: Thank you . That ' s al-I the
questions.
COMMISSIONER RAPER: Any questi-ons from
the Commissioners? Any redirect of Mr. Terzic?
MR. WILLIAMS: No redirect.
COMMISSIONER RAPER: Thank you, Mr.o 25
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CSB Reporting
(2oB ) B9o-s198
GASKE (Di-Reb)
Intermountain Gas Company
TerzLc, for your partlcipation.
THE WITNESS: Thank you very much.
MR. WILLIAMS: Madam Chair, could Mr.
Terzic be excused from the hearing?
COMMISSIONER RAPER: If there's no
objection from any other parties, Mr. Terztc j-s excused
from the remainder of the proceeding.
THE WITNESS: Thank you.
(The witness left the stand. )
MR. WILLIAMS: The Company would call as
its next witness Mr. Steve Gaske.
produced as a
fntermountain
sworn to tel-1
J. STEPHEN GASKE,
rebuttal- wi-tness at the instance of the
the truth, resumed
testlfied as follows:
DTRECT EXAMINATION
BY MR. W]LL]AMS:
0 Woul-d you please state your name for the
record?
A My name is J. Stephen Gaske.
Gas
the
Company, having been previously duly
truth, the whol-e truth, and nothing but
the stand and was further examined and
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CSB Reporting
(208 ) 890-s198
GASKE (Di-Reb)
fntermountain Gas Company
O And are you the
pages of rebuttal
same Stephen Gaske that
testimony, includingprefiled 4L
Exhibi-t 33?
A Yes.
questions --
contained in
be the same?
A
u
A
Do you want
Certainly.
O And if f were to ask you the same
the questions
your rebuttal
today that are the same
testimony, would your answers
Yes, with a couple of
to fead us
smal-1 exceptions.
to those?
21 at the bottom of
Mr. Gorman'sthe page, footnote 43, I
On page
reference testlmony
and atand it says at
page 33 of my
footnote 56 at
page 55,
rebuttal
that should be page 58,
testimony, a similar change, &t
the bottom, I reference page 29 of my
and that should be page 31.
with those changes noted, woul-d your
direct testimony
OSo
answers be the same today?
A Yes.
MR. WILLIAMS: Madam
that Mr. Gaske's rebuttal testimony
record as if read and Exhibit 33 be
evidence.
Chair, I would ask
be spread upon the
admitted into
COMMISSTONER RAPER: Without objection,
Mr. Gaske's rebutta1 testimony will be spread upon theo25
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(208 ) 890-5198
GASKE (Di-Reb)
Intermountain Gas Company
record as if read, and Exhibit 33 is admitted into the
record.
(IGC Exhibit No. 33 was admitted into
evj-dence. )
testimony of
record. )
(The following prefiled rebutta1
Mr. Stephen Gaske is spread upon the
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Gaske, Reb 1
Intermountain Gas Company
O. Pl-ease state your name, posltion and business,
address.
A. My name is J. Stephen Gaske and I am a Senior
Vice President of Concentric Energy Advisors fnc., 1300
19th Street NW, Suite 620, Washington, DC 20036.
O. Are you the same J. Stephen Gaske who filed
Prepared Direct Testimony earlier in thls proceeding?
A. Yes.
O. What is the purpose of your rebuttal- testimony
in this proceeding?
A. I am responding to the Direct Testimonies of
Mark Rogers and Terri Carlock on behalf of the Staff of
the Idaho Public Utilities Commissj-on ("Staff")regarding
of thethe return on common
Direct Testimony of
Northwest fndustrial
capital and portions
P. Gorman on behal-f
equity
Michael-of the
Gas Users ( "NWIGU" ) related to the
return on equity capital and capital structure. These
witnesses recommend an al-l-owed return on common equity of
9.25 percent and 9.3 percent, respectively, for
Intermountain Gas' Idaho natural gas distribution
operatlons. However, ds shown in my Prepared Direct
Testimony, and as dj-scussed herein, a return on cofiimon
equity of 9. 9 percent is required for Intermountain Gas
to be in a posltion to raise capital on reasonabl-e terms.
I disagree with several areas presented in theo25
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Gaske, Reb 1a
Intermountain Gas Company
testimonies of Mr. Rogers, Ms. Carl-ock and Mr. Gorman
that lead them to recommend an j-nadequate return,
including:
1 While Staffrs ROE analys.is and much of the discussion
regarding methodol-ogies and model-s is contained in the Direct
Testimony of Mr. Rogers, Staff's ROE recommendation appears in
the Dlrect Testimony of Ms. Carl-ock.o 25
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Gaske, Reb 2
Intermountain Gas Company
1. Failure of Staff and Mr. Gorman to adequately
refl-ect that Intermountaln Gas' Idaho natural
gas distribution operations face greater
overall risks than the typj-cal company in the
2
proxy groupi
Failure of Staff and Mr. Gorman to consider the
entj-re range of resul-ts produced by the DCF
model-, and in the case of Mr. Gorman, failure
to use the expected
in his multi-stage
Mr. Gorman's use of
"sustaj-nable" growth rate
DCF,.
3 an understated utility Risk
gives partial weight to
risk premium from
giving ful-l- weight to the
Premium approach that
an out-of-date market
7981-7991 rather than
market risk premium for the most recent
five-year period,'
Mr. Gorman's capital asset pricing model
( "CAPM" ) estimates based on hlstorical market
risk premium data that understate investors'
requi-rements under current market conditlons;
Failure to take into consideration investors'
expectations for higher interest rates as the
Eederal Reserve continues taking steps to
normalize monetary policy after an extended
perJ-od of artificially-l-ow interest rates;
4
5
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Gaske, Reb 2a
Intermount.ain Gas Company
6. The recommendation of an inadequate a flotation
1
cost adjustment; and,
Mr. Gorman's recommendation to reduce the
conrmon equity ratio
a ]evel that is less
in the capital structure to
than the actua1 and target
ratio of Intermountain and well-below.the
median common equity ratj-o for the proxy group
companr_es.
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Gaske, Reb 3
fntermountain Gas Company
I. REASONABLENESS OF ROE RECOMMEIIDATIONS
Mr
O. Please provide an overview of
Gorman's ROE recommendations 1n this
A. Ms. Carlock recommends a range
Ms. Carl-ock' s and
proceeding.
of return on
8.5 percent to 9.5
9.25 percent. In
a reduction of 25 basis
fntermountain Gas to 9. 0
equity for
percent and
Intermountain Gas of
a point estimate of
Ms. Carlock recommends
the authorized ROE for
addition,
points 1n
percent if
Fixed Cost
the Commission approves the Company's proposed
Collection Mechanism ("PCCM"). Staff witness
Rogers does not perform his own ROE analysis, but rather
makes certain adjustments to the DCE analysis presented
in my Prepared Direct Testimony to include the blended
growth rate (i.e.r dD average of the analysts' earni-ngs
growth estimate and the sustainabl-e growth rate,
calcufated using Val-ue Line data) for each proxy group
company and to reduce the flotation cost adjustment.
Mr. Gorman recommends a very narrow range of return
on conrmon equlty of 9.2 percent to
recommends a cost of equity of 9. 3
Risk Premium analyses, the results
9.4 percent, and
percent based on
of his constant
his
growth
hisDCF model using analyst growth rate estimates, and
CAPM analysis. Mr. Gorman al-so performs a constant
growth DCF anal-ysis using sustainabl-e growth rates and a
multi-stage DCF analysis using long-term GDP growth, buto25
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Gaske, Reb 3aIntermountain Gas Company
he does not appear to
establishing his range
performing his DCF and
rely on those results in
same proxy
used in my
group of gas
or making his recommendation. In
CAPM analyses, Mr. Gorman used the
distribution companies that I
Direct Testimony.
O 25
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Gaske, Reb 4
Intermountain Gas Company
O. Please assess the reasonableness of both Ms.
Carlock's 9.25 percent and Mr. Gorman's 9.30 percent
recommended returns on comnon equity.
A. Figure L, be1ow, is a histogram of al-I returns
on common equity authorized in natural gas distribution
company rate proceedings covered by Regulatory Research
Associates between 201,2 and 2016.
Figure 1: Authorized Returns on Equity for Gas DistributionQ0l220l6)2
35
30
25
20
15
10
5
0
"de,$t c,c
^.Sg't
,"S ,g ,rr# "C ^'"S ^,t- "Ctrt "i6t ^,c' .'c' ^,c' ^,c'
*s1
The ROE reconrmendations of Ms. Carl-ock and Mr. Gorman are
at the l-ower end of equity returns that have been
authorized for gas distribution companies since 201"2.o 25
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Gaske, Reb. 4a
fntermountain Gas Company
Of the 120
only 14 (or
percent and
rate case decisions with explicit ROE awards,
L7.1 percent) have been lower than 9.25
77 (or L4.2 percent) have been l-ower than
Source: ReguJ-atory Research Associates.2o25
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Gaske, Reb 5
Intermountain Gas Company
9.30 percent. This indicates that Ms. Carlock's and Mr.
Gorman's ROE recommendations are lower than the vast
majority of returns all-owed by Commissions during the
past five years. The medj-an authorized ROE during this
period for gas distribution companies was 9.73 percent,
and there have been 4\ decisions (or 34.1 percent) with,
explicit ROE
corroborates
percent cost of
awards of 9.90 percent or higher, which
recommended 9. 90the reasonabl-eness of my
common equity.
have other general concerns with Staff's
analyses and recommendations.
O. Do you
and Mr. Gorman's
A. Neither Staff nor Mr. Gorman appear to have
taken into consideration the fact that interest rates are
ri-sing and are expected to continue to increase in 20L'l ,
as the Federa1 Reserve normalizes monetary policy after a
prolonged period of holding interest rates artificially,
low fol1owing the financial crlsis and Great Recession.
At its December 20tG Federal Open Market Committee
("FOMC") meeting, the Federal Reserve not only raised the
target federal funds rate by 25 basis points as expected,
but 1t also announced the Committee members' expectations
that the federal funds rate will be increased an
additional 15 basis points in 2011 based on the current
economic outlook for employment and j-nfl-ation.3
According to Bl-ue Chip Ej-nancial Forecasts, B9 percent ofo25
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those surveyed after the FOMCTs
3 FOMC, "Economic Projections of Eederal- Reserve Board members
and Federal- Reserve Bank presidents, " December 14 , 201,6,
Figure 2.
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December meeting expect the Federa1 Reserve wil-I raj-se
short-term interest rates again at either the March or
June meeting.4 In response to the question about how
much they expect the Federal Reserve will- raj-se interest
rates in 2071, 53 percent of those surveyed expect an
increase of 50 basis points, 29 percent expect an
increase of 75 basis points, and 13 percent expect an
increase of 100 basis points.s Since the filing of my
Direct Testimony in August 201,6, yields on 30-year
Treasury bonds have increased approximately 90 basis
points (from 2.23 percent on August 12, 2016 to 3.11
percent in mid-January 20t7 ) . In a period of anomalous
financial market conditions due to the Eederal Reserve's
extraordinary interventions, the results of an ROE
analysis based on recent historical data (such as
dividend yields
the CAPM) need
in two recent
to be interpreted
decislons the FERC
carefully.
expressed
For example,
concern that
in the DCF model or the risk-free rate 1n
Eederal- Reserve actions may have artificially reduced
current divldend yields and the resul-ts of the DCF
model.6 Expectations for higher interest rates indicate
that capital costs for public utilities will be higher on
a going-forward basis than in recent years.
IT. REI,ATI\TE RISK OF INTERMOI'NTAIN'S IDATIO GAS
OPERATIONSo25
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4 BJ-ue Chip
7, 201'l .
rbld.
Opinion No
531-8,150
156 FERC,
Financial Forecasts, VoI. 36, Issue No. i--, January
5
6 . 531, 741 FERC 9[61,234 (2014); aff'd in Opinion No.
FERC t[61,165 (March 3, 2015); and Opinion No. 551,
9,61,234 (Sept . 28, 20L6), para . 720-122 .o 25
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O. Do you agree with Ms. Carl-ock's concl-usion
concerning the risks of Intermountain relative to the
proxy companies?
A. No. Ms. Car1ock does not provide a risk
analysis and appears to ignore the greater business and
financial risks of Intermountain.
Eor exampfe, Ms. Carlock ignores the circumstances
of the proxy companies when she recommends that approval
of the proposed Eixed Cost Collection Mechanism ("FCCM")
shou1d be accompanied by a corresponding reduction in the
authorized return on coflImon equity for Intermountain Gas.
As shown in Exhibit No. 5, Schedule 7 of my Di-rect
Testimony, 66.1 percent of the operating companies held
by the companies in the proxy group have rate design
mechanisms that reduce volumetric risks and 66.1 percent
al-so have monthly customer charges for residential
customers that are higher than the $10.00 being proposed
by Intermountain Gas. Thus,
currentl-y has mechanisms that
the typical proxy
reduce their rate
company
design
reduce
basison equity
indicates
by 25
that
risk. However,
Intermountain's affowed return
points if the FCCM is approved
incorrectly belleves the proxy
have mechanisms to reduce their
As noted on page 38, l-ines 5-9
Ms. Carlock's recommendation to
companies do
rate design
of my Direct
she
not already
risks.
Testimony, my25
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analysis assumed that the proposed FCCM and customer
charge wou1d be approved, and that such approval would
tend to eliminate differences in that particular risk
element. Thus, a slight upward adjustment in the allowed
rate of return on equity woul-d be
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required if these proposals are not approved, but no
downward adjustment woufd be appropriate if they are not
approved.
In addition, her recommended rate of return is
insufficient rel-ative to current rlsk premium and capital
asset priclng model estlmates of the cost of capital. As
a resul-t, Ms. Carlock's recommended rate of return does
not adequately reflect the greater risks of
fntermountain.
O. Please explain your disagreement with Mr.
Gorman's assessment of the Company's business risk.
A. At one point in hj-s testimony Mr. Gorman
concludes that " the proxy qroup is -less risky, but
reasonably comparable in j-nvestment risk"7 to
Intermountain Gas. Later, however, he incorrectly claj-ms
that the criteria I used to select the proxy group
ensures that there are no differences in risk.B
Although I tried to sel-ect proxy companies that were as
similar as possible to Intermountain there were some
significant risk differences that remaj-n.
As explained in my Direct Testimony, the typi-cal
proxy company has a more diversifi-ed economy in 1ts
service territory and is between 9 and 22 times larger
than fntermountain Gas' Idaho jurlsdictionaf gas
distributj-on operations. e That is an unavoidable fact
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because there are no comparably-sized, publicly-traded
companies with analystsr consensus growth
The higher rate of
rate estimates.
1
8
9
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Direct
Direct
Testimony of Michael P. Gorman, page 12, lines 1-7.
Testimony of J. Stephen Gaske, at 31o25
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return required by smal-l-er utility operations has been
demonstrated empir j-cal1y. 10
Moody's lnvestors Servj-ce has described how it
considers the diversity of utllity operations as a risk.
Specifically,
Efectric and
in "Rating Methodology for Regulated
Gas Utilities" Moody's stated:
We afso consider the diversity of utiTityoperations (e. g. , requlated el-ectric, gds ,water, steam) when there are material-
operations in more than one area. Economicdiversity is typicaTTy a function of thepopulation, size and breadth of the territory
and the businesses that drive its GDP and
empToyment. For the size of the territory, we
tWicaTTy consider the number of customers andthe vol-umes of generation and/or throuqhput.
For breadth, we consider the number of sizeabLemetropolitan areas served, the economicdiversity and vitality in those metropoTitanareas, and any concentration in a particuLar
area or industry.TT
Much of Intermountain Gas' fdaho service territory is
characterized by the small size and sma]l town lack of
diversity described by Moody's. Moody's rating
methodol-oqy confirms that companies with those attributes
have el-evated risk, which suggests that an allowed return
above the return required for the typical proxy company
is appropriate in this proceeding.
O. On pages 22-32 of his testimony, Mr. Gorman
provides general information on the utility industry,
includlng authorized returns, capital spending trends,
credit rating agency commentary, and utillty stock pricea25
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performance.Do you have any comments on this section?
10 Michael Annin, Equity and the SmafT-Stock Effect, Pub1ic
Utilities Fortni hrl-October 15, 1995.
11 Moody's, "Rating Methodology: Regulated Electric and Gas
Utilities," December 23, 2073, p. 19.o 25
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A. Much of the industry perspective that Mr.
Gorman provj-des in this section of his testj-mony pertains
to electri-c utilities, not gas distribution companies.
As such, this evidence is not particularly relevant to
the determination of a fair return for Intermountain Gas
because the business and operating rlsks for el-ectric
utilities are not the same as those for gas distribution
companies.
With regard to his analysis of gas utilities in
general,
been more
200412 is
in Figure
Mr. Gorman's claim that gas utillty stocks have
stable than the general stock market since
debatable. The basis for his claim is the graph
3, page 31 of his testimony. However, the
standard deviation of gas
1s 17.5
utility returns shown on Mr
Gorman's Figure 3
deviation of the
percent, while the standard
is only 15.8 percent.
returns suggests that
relative stabil-ity of
I agree with Mr. Gorman that capital spending
forecasts for the natural gas industry are considerably
higher than the historical average since 2005.13 As Mr.
Gorman states, "this capital investment is exceeding
internal sources of funds to the gas utilities, requiring
them to seek external capital to fund higher capital
S&P 500 returns
This wider spread in the probable
Mr. Gorman is overestimating the
gas utility returns.
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investment. " Intermountain Gas is al-so engaged in a
next few years inlarge
order
and to
capital spending program over the
to comply
replace
with federal- pipeline
infrastructure.
safety requirements
Given this need foraging
ongor_ng
1,2 Direct Testimony of Michael P
page 31, Iine 4.
Ibld, at 25.
Gorman, page 30, line 31 to
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Intermountain Gas Company
access to capital, it is very important that the
authorized return on common equity for Intermountain Gas
be set at a level that al-lows the Company to compete for
capital on reasonable terms with comparable risk
utilitles.
O. What is your conclusion regarding the risk
analyses of Staff and Mr. Gorman?
A. The cost of common equlty recommendations of
both Staff and Mr. Gorman fail to adequately reflect the
greater business and financial risks of Intermountainrs
gas distribution operations in comparison to the risks of
the proxy companies. The Company has greater business
risks, and Tntermountain also has above-average financial
risks due to its proposed common equity ratio being l-ower
than the proxy group median.la
has a cost of capital that is
for the proxy
rate of return
fact.
model using
model using
Intermountain therefore
above the average or median
the other parties'
recoflrmendations sufficiently refl-ect this
III. DCF ANATYSES OF MR. GOR!,TAIiI AIID MR. ROGERS
4.Mr. Gorman's DCF Analyses
O. Pl-ease summari ze Mr. Gorman' s DCF analyses.
A. Mr. Gorman constructed a Constant Growth DCF
companies and none of
analyst growth rates, a Constant Growth DCF
sustainable growth rates, and a Multi-Stageo25
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Growth DCF model-. These mode1s produce a range of
average ROE estimates from 1.79 percent to 9.69 percent.
8.99Mr. Gorman derives a range of DCE returns from
percent (based
growth
on the median results of his constant
74 rbid, at 38o25
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DCF analysis using analysts' earnings growth rates) to
9 .69 percent (based on the average resul-ts of his
constant growth DCF anal-ysis using sustainable growth
rates), and he concl-udes that the DCF studies support a
return on equity of 9.40 percent. ls
O. Do you agree with Mr. Gorman's concfusion
regardi-ng his DCE returns?
A. No, I do not. Mr. Gorman states that "hj-s DCF
studies support a return on equity of 9.40 percent for
the proxy companies, " which is the same as the median
return of my Basic DCF anafysis which relies on analysts'
earnings growth estimates. However, Mr. Gorman does not
lncl-ude the required fl-otation cost adjustment, nor does
he make an appropriate adjustment for the greater risk of
Intermountain Gas' Idaho naturaf gas distribution
operati-ons relative to the average proxy company. In
fact, Mr. Gorman's DCF based on analysts' estimates shows
a range of 6.84 13.95 percent, and his DCF based on
sustainable growth indicates a range of 1.72 L2.13
percent. fn addition, when Mr. Gorman's "Mul-ti-Stage"
DCE ana1ysis is re-calculated using "Sustainable" growth
as the second stage, the resulting analysis indicates a
range of 1.74 12.22 percent, with a median of 9.14
percent. Consequently, my est j-mate of 9. 90 percent is
reasonable DCEwell within the range of Mr. Gorman'so25
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resul-ts.
O. What growth rate estimates does Mr. Gorman use
in his three DCE model-s?
15 Direct Testimony of Michael- P. Gorman, aL 52.
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A. For
uses a simple
esti-mates of
estimated growth rates),
Zacks and Yahoo! Finance,
consensus forecasts. Mr.
model uses a growth rate
his Constant Growth DCF modeI, Mr. Gorman
average of three different consensus
earnings growth (Zacks, Reuters, and SNL
whereas I
which are
Gorman's
use those reported by
both based on
Sustainable Growth DCF
based on Value Line's
three-to-five year projections of earnings, dividends,
earned return on book equity, and projected book value
growth from stock issuances. The results of these inputs
to his analysis are simi1ar to mj-ne. Both Mr. Gorman's
analysts' earnj-ngs growth estimates of 6.24 percent and
his sustainable growth estimate of 6.55 percent are
somewhat higher than my corresponding growth rate
estimates.
Mr. Gorman's Multi-Stage DCE model uses growth rates
for each proxy company that are a form of weighted
average of the analysts' earnings growth forecasts for
each company (in years 1-5) and the nominal GDP growth
forecast (in years 11-200) . Mr. Gorman gives significant
weight to his long-term growth rate, which is based on
U.S. projected nominal GDP growth, by assuming that each
proxy company's growth rate will converge to the
prolected growth rate for U.S. GDP of 4.25 percent withino25
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10 years. As dj-scussed below, this 1s inappropriate.
O. Are analysts' growth rates generally a superior
measure of long-term investor expectations?
A. Yes. Although analysts' longest-term growth
forecasts are typically expressed as five-year forecasts,
these forecasts generally represent growth rate
expectations for a longer period of time than the
five-years expressed in the forecast. There is a large
o 25
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amount of literature that suggests analysts' growth rate
forecasts are a superior measure of the long-term growth
rate expectations that are refl-ected in stock prices.
For example, Vander Weide and Carleton found that
analysts' earnj-ngs growth rate forecasts have a very
highly significant relationshlp with stock prices.16
This indicates that the analysts' earnings growth
estimates are an accurate estimator of long-term growth
rate expectations implicit in stock prices, even though
the analysts' earnings growth estimates are putatively
five-year estimates. Similarly, Marston, Harris and
Crawford examined publicly available data from 7982-1985
and found that plausible measures of risk are more
closely related to expected returns derived from a
constant growth DCE model than to those derived from
multi-stage growth modeIs.17
0. Did Mr. Gorman provide any assessment of the
growth rates used in his Constant Growth DCF model to
growth estimates by reference to other benchmarks?
A. Yes. Mr. Gorman notes that the average
earnings growth estimate of 6.24 percent for his proxy
group in his Constant Growth DCF model is "hJ-gher than my
long-term sustainable growth rate of 4.25eotntB and he
observes that "the median DCF
Gaske, Reb 74
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76 Vander Weide, J.H. and Carleton, W.T., "Investor Growth
Expectations: Analysts vs. History, ,t The JournaL of Portfofio
Management, Spring 1988. pp.'78-82.
E. Marston, R. Harris, and P. Crawford, "R-isk and Return j-n
Equity Markets: Evidence Using Einancj-al- Analysts'
Eorecasts," in Handbook of Security Analysts' Forecasting and
Asset Affocation, J. Guerard and M. Gultekin (eds.),
Greenwich, Cl , JAf Press,' as described in R. Harris. and F.
Marston, "Estimating Sharehol-der Risk Premia Using Analysts'
Growth Forecasts," FinanciaJ Management, Summer 7992, p. 64.
Direct Testimony of Michaef P. Gorman, at 43.
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resuft for the proxy group more accurately reffects the
central tendency of the grouprrl9 due to the outlier growth
rate for South Jersey Industries. He states that "a
long-term sustainabl-e growth rate for a utility stock
cannot exceed the growth rate of the economy in which it
sell-s lts goods and services"20 and therefore the
long-term GDP growth rate of 4.25 percent is the maximum
logical growth rate. However, 1t is important to note
that the GDP growth rate is an average for al-l- activities
in the economy. At any given point in time, some
companj-es or industries grow faster than the economy,
while other companies or lndustries are growing sl-ower or
declining. Thus, it is not unusual for the growth rates
of some companies or industries to be below or above the
average GDP growth rate for signlficant periods of time.
In addition, the use of GDP growth rates in Mr. Gorman's
Multi-Stage DCF anal-ysis is flawed in that it assumes
that over the long-term, all- companies in the proxy group
converge to the same growth rate. That is why it is
important to place primary reliance upon company-specific
growth rate information in order to distinguish between
sectors and companies with declining, or below average
growth, and those that are expected to comprise the
above-average growth sectors and companies.
O. Do you agree with Mr. Gorman's use of projected
Gaske, Reb 15
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nominal-
growth
GDP growth rates as the second-stage sustainable
rate in his analysis?
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A. No. On page 1 of his Exhibi-t No. 30'l , Mr.
Gorman calcufates the long-run "sustainable" growth rate
to be 6.55 percent not 4.25 percent. Mr. Gorman states
that "a sustaj-nabl-e long-term earnings retention ratlo
will help gauge whether analysts current
three-to-five-year growth rate projections can be
sustained over an indefinite period of time. "21 Because
Mr. Gorman's sustainable growth rate, 6.55 percent,
exceeds the analysts' growth rate of 6.24 percent,
investors reasonably can expect the analysts' growth
rates to be sustained over an indefinite period of time.
Thus, investors woul-d not expect the proxy companies'
average growth rates to decl-ine to the forecasted growth
rate in U.S. GDP within any time period that is
materially significant for the DCF analysis.
O. Is there a more reasonable way to cal-culate Mr.
Gorman's Multi-Stage DCE model-?
A. Yes. Mr. Gorman's use of U.S. GDP growth in
calculating a Multi-Stage DCE yields an implausibly 1ow
median return of 1.51 percent for the proxy companies. As
shown on attached Exhibit No. 33, Schedule 7, when one
uses Mr. Gorman's "Sustainable" growth rates as the
second stage
7 .14 12.22
of the DCF model, the result is a
percent, and a much more plausible
reasonable median of 9.1 4 percent.
range of
and
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b. Staff DCF Analyses
O. Please summarize Mr. Rogers' testimony
regarding the use of analystst earnJ-ngs growth rates in
the DCE model-.
A. Mr. Rogers states that "growth rate util-ized by
Mr. Gaske in the Basic DCF is simply the qrowth estj-mates
for each of
analysts at
First Call-.
that provide earnings estimates for
company; they are not the estimate
the companies in the proxy group from
both Zacks Investment Research and Thomson
The values from both
together to determine the growth
proxy companies."22 Mr. Rogers expresses concern with the
Basic DCE anal-ysis because he appears to be.l-ieve that
"unless, by chance, both analysts have correctly
predicted the actual growth rate, then the model will
inevitably be based on j-ncorrect estimates and incomplete
information. "23 Fina11y, he concludes that "the estimates
from both analysts vary by up to 202, " which leads him to
conclude that "the mode1 is inherently fl-awed and wil-l- be
based to some degree on incorrect estj-mates."24
O. What is your response?
A. As a preliminary matter, I want to clarify that
the earnings growth estimates from Zacks and Thomson
First CaIl are consensus estimates
analysts are
rate for each
of industry
each proxy
of a single
averaged
of the
analysts
group
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empl-oyed by Zacks or Eirst CaII, as Mr. Rogers
2L
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Ibid, at 45.
Direct Testimony of Mark Rogers, at 9.
Ibid, at 10.
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Gaske, Reb 18Intermountain Gas Company
appears to bel-1eve.More importantly, Mr. Rogers
significance of growth rate estimates.
esti-mates for the proxy group
the information on which investors
misunderstands the
The earnings growth
companies represent
are basing their decision to buy or
at whatequity of
issue is
each company, and prices. The rel-evant
not whether the earnings growth rate estimate is
ultimately
whether the
at the time
correct or incorrect; rather, the key issue is
growth rates reflect j-nvestors' expectations
that they buy or sell the stocks. The
consensus growth rate estimates are a good estimate of
j-nvestors' growth rate expectations when they make
buy/sell decisions. I do not agree with Mr. Rogers that
the DCF model j-s flawed simply because there is a range
of growth rate estimates. Indeed, this diversity of
opinion is one reason why some j-nvestors sell the stocks
and others buy the stocks. It is the consensus. of those
diverse opinions that leads to an equilibrium in the
market prices at which purchases/sales occur.
O. Please describe the reasons why Mr. Rogers
argues the Commission shoul-d rely on the Blended DCF
analysis rather than the Basic DCE analysis.
A. Mr. Rogers argues that the Blended DCE analysis
is more re1iab1e and less subjective because it combines
earnJ-ngs growth rates from analysts with retention growth
se1l the conimon
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rates.25 Mr. Rogers also contends that "retention rates
are the primary driver of dividend growth and book val-ue
per share, which are the two primary
25 Direct Testimony of Mark Rogers, at 11
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variables for attracting common equity investors."26 Mr.
Rogers also notes that fntermountain Gas has not fil-ed a
general rate case in decades, and argues that "using a
sustainable long-term growth rate more accurately
reflects the reality of fntermountain Gas in that the new
rate of return may also be 1n ef fect for many years.'r27
O. Do you agree with Mr. Rogers' reliance on a
Blended DCE analysi-s?
A. No, I do not. As discussed previously in my
Rebuttal- Testimony, academic research has shown that
earnings growth expectations are the most important
determinant of stock prices, not dlvidend growth or book
value growth. The retention growth rate changes based on
management decisions to conserve cash, manage the
dividend payout ratio, or invest in capital projects that
support growth or enhance re1iability and safety. In
addition, analysts' earnj-ngs growth rates have been shown
to be the most rel-iabl-e indicator of future dlvidend
growth, and the estimate on which investors rely when
setting stock prices. Final1y, the timing of rate case
filings has nothing to do with the appropriate growth
rate 1n the DCF model-.
O. Mr. Rogers presents a regressj-on analysis in
whlch he finds that there is a near perfect linear trend
in dividend growth for MDU Resources, making future25
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Intermountain Gas Company
predictions
accurate.2B
on dividend payments for MDU Resources quite
Please comment on this analysis.
A. Mr. Rogers' regression analysis has an
R-squared of 0.99, which causes him to concfude that
" Ir] ather than relying on the opinion 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
MDU Resources is not
Intermountain Gas because MDU
for Intermountain Gas."29 First,
a member of the proxy group for
Resources is a diversified
company with a minor portion of its business engaged in
natural gas distribution operations. Second, Mr. Roger's
regression analysis incorrectly suggests that the risk of
a company can be defined by a linear regression of past
dividend payments. Investment risk does not simply
involve the trend of past results but, instead, invofves
the uncertainty associ-ated with unexpected and
unpredictable events in the future. Third, the
regression analysis of dividends presented by Mr. Rogers
is not even particularly rel-evant for j-nvestors.
Instead, earnings and stock prices are both far more
rel-evant. As shown on attached Exhibit No. 33, Schedule
2,a regression
share has an
analysis of MDU Resources' past earnr_ngs
R-square of 0.04 which, if one were toper
accept Mr. Rogers' methodology, suggests that MDUo25
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Resources' earnings are entirely unpredictable and that
the investment is highly risky. However,
Z6
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Direct Testimony of Mark Rogers, at 13-14.
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reasonable forecasts of the future involve more than mere
analysis of past trends, and a regression of past trends
does not establish either future expectations or a leveI
of predictabj-Iity.
IV. CAPITAT ASSET PRICING MODEL ANALYSIS
0. Please describe your disagreement with Mr.
Gorman's use of the Capital Asset Pricing Model to
estimate the cost of common equity capital for
fntermountain Gas.
A. My primary disagreement with Mr. Gormanrs CAPM
analysis is his method of estimating the market risk
premlum used in the analysj-s. Research studies provide
empirical support. for the proposition that equity risk
premla generally increase as interest rates decrease, and
vice versa. For example, ds shown in the Risk Premium
analysis in Exhibit No. 5, Schedule 5 to my Direct
Testimony, there is an inverse relationship between the
natural gas utility equity risk premia and interest
rates. Despite this fact, Mr. Gorman uses historical-
average market risk premiums.
For example, Mr. Gorman cal-culated two alternative
estimates for the risk premium. He cal-l-s one of his
estimates a "forward-1ooking" estimate, but that number
is rea11y derived from the average historical- real return
on conrmon stocks from 7926-20L5, adjusted for projected
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inffation. From those historical returns, he subtracts
the current projected bond yield from BJ-ue Chip Financial-
Forecasts to get a risk premium estimate. Although two
of the three elements in his "forward-Iooking" risk
premium are forward-Iooking, the essential core element
of the calculation is an
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Intermountain Gas Company
historical average that does not refl-ect current market
conditions. Mr. Gormanrs other risk premium, which he
call-s an historical- risk premium, is calcul-ated somewhat
differently, but it is obviousl-y based on historical
averages rather than current forward-looking data.30
There generally is a strong j-nverse relationship
between required risk premiums and bond yields, and we
are currently in a period with exceptionally low bond
yields and above-average risk premiums. In addition, in
my Dlrect Testimony I calculated a true forward-looking
market risk premium using the S&P 500 companies, which is
considerably higher than historical- averages. Thus, Mr.
Gorman's historical- average data assumes inappropriately
low market risk premiums for current market conditions.
O. Does Mr. Gorman's CAPM analysis produce
plausible resul-ts ?
A. No. As shown in Exhibit No. 3Il, Mr. Gorman's
CAPM analysis based on the long-term historical average
risk premium produces an
of 1.86 percent; a return
implausibly l-ow return estimate
this l-ow has never been awarded
to a gas distributj-on company in either the l-ast five
years or the l-ast 30 years.31
O. Did you al-so develop a CAPM result in your
Direct Testimony?
A. Yes. As shown in Table 2 on page 29 of my25
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Direct Testimony, if one were to use the CAPM as a
benchmark of a reasonabl-e return, the most reasonable
current
30
31
Direct Testimony of Michael- P. Gorman, at 51
Source: Regulatory Research Associates.
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estimate woul-d be 9.1 percent for the typical proxy
company. This estlmate based on forward-lookinE data is
consistent with the DCF estimates and far more plausible
than Mr. Gorman's much lower CAPM esti-mate that is based
on unadjusted historical data.
V. ELOTATION COST ADJTJSI!{ENT
a. What are Mr. Gorman's concerns with your
estimate of flotat.ion costs?
A. Mr. Gorman asserts that the flotation cost
adjustment for Intermountaj-n Gas "is not based on known
and measurable costs for IGC".32 In addition, Mr. Gorman
bel-ieves I should have identified Intermountain Gas'
actual and verifiabfe flotation costs that are properly
allocated to regulated operations, show the time period
over whlch these costs were incurred, and show how they
have been treated for ratemaking purposes in the past.33
O. How do you respond to these concerns?
A. Mr. Gorman mis-states the purpose of my
fl-otation cost adjustment. He cl-aims that the
"adjustment 1s intended to recover the cost a utility
incurred" in the past and he opposes it because it is not
"based on IGC's actual and verifiabfe flotation
expenses.rr34 As I explained in my Direct Testi-mony:
A more important purpose of a ffotation cost
Gaske, Reb 23
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adjustment rs to estabfish a return that Lssufficient to enabl-e a company to attractcapitaL on reasonabl-e terms. This fundamentaf
requirement of a fair rate of return Ls
anaTogous to the wefL-understood basicprincipTe
?,
33
34
Direct Testimony of Michael- P
Ibid, at 7l-.
Ibid, at 70-71.
Gorman, at 69
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that a f irm, or an individuaf , shoul-d maintaina good credit rating even when they do notexpect to be borrowinq money in the nearfuture. Regard-Zess of whether a company canconfidently predict its need to issue new
common stock severaf years in advance, it
shouLd be in a position to do so on reasonabLe
terms at aLl- times without dil-ution of the book
vafue of the existing investors' common
equity.3s
The primary purpose of the fl-otation cost adjustment is
to be consistent with the capital attraction standard
which requires that the return be sufficient to enable
the company to raise capital on reasonabl-e terms on a
forward-Iooking basis. In this regard, it is simil-ar to
an insurance premium. A company is not required to show
that it has had accidents or catastrophes in the past in
order to include an insurance premium in its cost of
service. Instead, the point of the insurance premium is
to ensure that the company can pay for future costs that
may or may not ever materialize. Mr. Gorman's suggestion
that fl-otation costs can only be recovered after the fact
misses the entire point of the capital attraction
standard. Moreover, I am not aware of any ratemaking or
regulatory accounting convention that provides for the
amortizatj-on and recovery of past flotation costs
associated with issuing coflImon equity.
O. Please summarize your position regarding a
flotation cost adjustment as it rel-ates to Mr. Gorman'so25
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fntermountain Gas Company
testimony and
A. Eor
Testimony, I
adjustment is
address part
your
the
revised results.
reasons explained in my Direct
believe that a fl-otation cost
in this case. However, to
continue to
reasonable
of
35 Direct Testimony of J. Stephen Gaske, page 17, lj-nes 8-17o25
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Mr. Gorman's concern, I calcul-ated the actual fl_otation
costs incurred by MDU Resources Group as a resul-t of its
three most recent public offerings in 1998, 2002, and
2004. The averaqe flotation cost for these three
issuances (shown in Exhibit No. 33, Schedul-e 3) was 3.5
percent, which is consistent with my flotation cost
adjustment of 4.0 percent.
O. What arguments does Mr. Rogers provi_de in
opposition to your calculatj-on of the flotation cost
adj ustment?
A. Whll-e Mr. Rogers agrees that recovery of
flotation costs is appropriate for Intermountain Gas,36
he takes lssue with the method I have used to apply the
flotatlon cost adjustment to the return estimate for each
proxy group company. In particular, Mr. Rogers argues
that the flotation cost adjustment should only drpply to
the dividend yield component of the return, not the
entire return estimate.3T
O. Is there support in academic l-iterature for
your approach, which muJ-tiplies the entire return by a
specified factor to adjust for flotation costs?
A. Yes. Myron Gordon, who is credited with
developing the constant growth DCF model for estimating
rate of return, has stated that a regulatory agency
shoul-d set the all-owed rate of return greater than the
Gaske, Reb 25fntermountain Gas Company
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investor return requirement so as to al1ow
a price that wil-l- yield net
Professor Gordon advocates
the firm to
proceeds equal
the following
issue stock at
to book value.
adj ustment :
Direct Testimony of Mark Rogers, at 17.
Ibid, at L9-20.
36
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The aqency need onTy estimate the proportionthat the proceeds per share on an Lssue bear tothe price of the stock and adjust the affowedrate of return so that the price per share isthe indicated ratio of the book value pershare. If the proceeds on an l-ssue are 97percent of market price, the agency shouJdmaintain market price at about 170 percent of
book rzal.ue.3B
In order to meet thls requirement, the fl-otation cost
adjustment must be applied to the entire rate of return.
The flotation cost adjustment that I have proposed
attempts to meet the same standard.
VI. RISK PREMIUM A}IAIYSIS
O. Pl-ease summarize Mr. Gorman's bond yield plus
equity risk premium analysis.
A. In addition to his CAPM analysis, Mr. Gorman
includes two additional Risk Premium approaches to
estimate Intermountain Gas' cost of equity.
Mr. Gorman's first approach cal-culates the annual-
risk premium for each year from 1986 through September
2016 by taklng the difference between regulatory
commission-authorized equity returns and J-ong-term
Treasury bond yields.3e From that data, Mr. Gorman
selected the 1981-7991 5-year average risk premium of
4.I1 percent as the Iow end of his range, and the
20L2-2076 5-year average risk premj-um of 6.68 percent as
the hiqh end. He then used a weighted average of these
two numbers to derive his risk premium of esti-mate ofo25
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6.10 percent.40 However, rf one wanted t.o know the most
recently required risk premium, it
3B Myron J. Gordon, The Cost of Capitaf to a Pubfic Utility,
Michigan State University, l9'74, pp 165-166.
Exhibit No. 3\2.
.25 x 4.712 + .15 x 6.68t : 6.10%
39
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woul-d be more accurate to simply use the
. When added topercent
2072-201,6
the U S. Treasury
that
average of 6.68
bond yield of 3
approach indicates
percent.4l
Mr. Gorman's
risk premium for
as the difference
4 percent used by Mr. Gorman,
a utility return requirement of 10.08
second approach cal-culates the average
the period 1986 through September 2016
between the average authorized equity
returns for natural- gas distribution compani-es and the
concurrent A-rated utility bond yie1d. From that data,
Mr. Gorman aqaln used the 1987-1991 S-year average of
2.80 percent, and the 2072-2016 5-year average of 5.51
percent, to produce a weighted average of 4.8 percent.42
Again, af one wants to know the most recently required
risk premium, it would make more sense to simply use the
20L2-2076 average of 5.51 percent. When added to the
utility bond yield of 4.33 percent used by Mr. Gorman,
that approach indj-cates a current utility return
requirement of 9.84 percent.43
O. What would have been the overall result if Mr.
Gorman had limited his gas utility risk premium
cafculations to the most recent five-year period instead
1s 25 years outblending in
of date?
A. At
another five-year period that
page 58, li-nes 20-21 and page 64, Table 1025
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of his testimony, Mr.
of his two gas utility
Gorman indicates that the mid-point
percent, which
Intermountai-n,also is his recommended
risk premium is 9.3
rate of return for
However, i-f he
Direct Testimony of Michael P. Gorman, at 58, fine 14.
0.25 x 2.80'Z + 0.75 x 5.51% : 4.80%.
Direct Testimony of Michael- P. Gorman, at 58, l-ine 18.
4L
4Z
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Gaske, Reb 28
Intermountain Gas Company
had employed the more reasonabl-e approach of
the most recent five-years
rnid-point of his two risk
been 9.96 percent:
of risk premi-ums,
premi-um analyses would have
using only
the
Table 1
Mr. Gorman's RiskPremium Analysis Using Current Data
ROE based on
T-Bond Yield
Mid-
Point
ROE based on
Utility Bond
Yield
Utility Risk Premi am 20 12-20 | 644
Plus: Current Bond Yieldas
Required Gas Utility ROE
6.68%
3.40%
10.08%9.96Vo
5.51%
4.33%
9.84%
respond?
the
In other words, if Mr. Gorman had not inappropriately
mixed 1988-799L data into his analysJ-s, his gas utility
risk premlum analysis woul-d have indicated a required
rate of return of 10.0 percent.
O. Mr. Gorman suggests that your large and small
company Risk Premium analysis is flawed because it is
based on the broad market for conrmon stocks and does not
refl-ect the below market risk of Intermountai-n Gas and
utility
A.
operations in
As discussed
general.45 How do you
in my Direct Testimony,a 25
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purpose of my sma1l company historical- Risk Premium
analysis is to serve as a benchmark to assess the
44 Michaef P. Gorman, Exhibit
and Exhibit No. 313, Col. 4
Direct Testimony of Michael-
18.
Direct Testimony of Michael
No. 372, Col . 4, l-ines 31 and 34;
, lines 31 and 34.
P. Gorman, page 58, l1nes 14 and45
P. Gorman, aL 144625
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Intermountain Gas Company
reasonableness of my DCF analysis and to place in context
ROE of 9. 90 percent.4T The smal-fthe Company's requested
company
cost of
risk adder serves as a useful- indicator of the
capital for Intermountain Gas because a gas
distribution utility must offer potential returns that
all-ow it to compete for equity capital with other
j-nvestments of comparable risk. I indicated that gas
distribution compani-es generally have Iower risks than
the average of aff smal1 pub11cIy-traded companies.
However, the significant average risk premiums earned by
sma1l companies are informative, and provide some
relevant context for the authorized return for
Intermountain Gas' Idaho gas distribution operations.
Therefore, I beli-eve this informatj-on is relevant for
purposes of demonstrating the reasonableness of my
recommended rate of return. I have not used my sma11
company Risk Premium analysis to establish the
recommended cost of common equity capital for the
Company, but only as a general benchmark to corroborate
the reasonabl-eness of my DCF results.
O. In addition to your historical benchmark risk
premiums, did you calcul-ate a current risk premium
specific to naturaf gas utilities?
A. Yes.
a. Do you agree with Mr. Gorman that gas utility25
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risk premiums are not inversel-y related to bond yields?
41 Di-rect Testi-mony of J. Stephen Gaske, at 39
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A. No, I do not. According to Mr. Gorman,
academic research does not support the "simplistj-c
inverse relationship between equity risk premiums and
interest rates"48 that are contained in my Risk Premium
analysis.
that the
Mr. Gorman
relationship
percent
by the
argues
changes
that "researchers have found
over time and is influenced
by changes in perception of the risk of bond investments
relative to equity investments, and not simply changes in
interest rates."49 However, the Risk Premium analysi-s in
Exhibit No. 5, Schedule 5 of my Direct Testimony
demonstrates that there is in fact an inverse
relationship between natural gas utility equity risk
premia and interest rates.
Using data slmilar to the analysis in Mr. Gorman's
Exhibit Nos. 372 and 313, my regression produced the
following relationship:
Intercept + Coefficient x Bond Yiel-d : Utllity
Risk Premium
0.0845 - 0.5632 x Bond Yield : Utility
Risk Premium
The regression statistics indicate that this equation is
statistically
more than 19
is explained
in the above
of the variation in the risk premj-um
coefficient
significant and the R-square reveals that
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relationship between bond yields and the natural- gas
utility risk premium. For every change of 100 basis
points in the bond yie1d, the natural gas utility risk
premj-um changes by approximately 56 basis
Direct Testimony of Michael P. Gorman, at 75.
rbid.
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points in the opposlte directi-on. Thus, Mr. Gorman's
observations clearly do not apply to natural gas
util-ities.
VII. I,IARKET DCF A}iIALYSIS
O. How do you respond to Mr. Gorman's concerns
regarding your Market DCF Analysis?
A. Mr. Gorman has concerns with the analysts'
projected growth rates for the S&P 500
use in my Market DCF analysis because
are above the average projected growth
Gorman
rate oflonq-term
compan j-es
think that
companies
companies that I
those growth rate
i-n the U. S.rate
economy of 4.25.50 However, Mr
"sustainable" growth
is 6. 55 Percent. sl
the proxy
Thus, there 1s no.reason to
investors' growth expectations for speci-f i-c
is limited to the projected growth in the
estimates that the
economy.
Moreover, fry current Market DCE rate of return
estimate indicated by analysts' growth rate projections
is 72.7 percent, which is very close to the L2.0 percent
long-term average return earned by large-company coflrmon
stocks during the period L926-2076.s2 Thus, a current
market DCE rate of return estimate that is virtually
identical to the average return achieved during the past
90 years is clearly sustainabl-e in the long run. Like my
Risk Premium analysis, the purpose of my Market DCEo25
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Direct Testimony of Michael P. Gorman, at '77.
Gorman Exhibit No. 30'1, page 1, line 8, co1. 11.
See Direct Testimony of Mj-chael- P. Gorman, page 61, Line 22
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reasonableness of my DCF analysis and provide context for
my recommended ROE of 9.90 percent and to estimate a
current market risk premium for my CAPM analysis. s3
As noted earl-ier, analystsr earnings growth rate
forecasts are a superior measure of the long-term growth
rate expectations that are reflected in stock prices. My
approach to conducting a Market DCF is virtually
identical- to one adopted by the Eederal Regulatory Energy
Commission ("EERC") in a recent order. In response to
arguments similar to those proffered by Mr. Gorman 1n
this proceeding, the FERC concl-uded:
We are aLso unpersuaded that the growth rateprojection in the NETOs' CAPM study was skewed
by the NETOs' rel-iance on analysts' projections
of non-utility companies' medium-term earningsqrowth, or that the study failed to considerthat those anaTysts' estimates reffect
unsustainabLe short-term stock repurchase
programs and are not long-term projections. As
expLained above, the NETOs based their growthrate input on data from IBES. which the
Commission has found to be a rel-iabLe source of
such data. Thus, the time periods used for the
growth rate projections in the NETOs' CAPM
study are the time periods over which IBESforecasts earnings growth. Petitioners'
arguments aqainst the time period on which the
NETOs' CAPM anaTysis is based arel in effect,
arguments that IBES data are insufficient in a
CAPM studY.sa
Thus, the FERC did not agree with
for the S&P
the argument that
500 are unsustai-nabl-eanalysts' projections
and not reliable for
broad-based market index.
estimating the cost of capital for a
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a. On page 18 of his testimony, Mr. Gorman argues
that the S&P 500 companies I use in my Market DCF
analysls have risk characteristics that are significantly
different than the risks encountered by Intermountain Gas
and its parent company. What is your response?
A. I agree that those companies have different
risks, which is why my recommended rate of return for
Intermountain Gas' Idaho gas
signi ficantly
distrlbution operations of
Iess than the 12.7 percent
for the market as a whole. ss
9.9 percent
DCF rate of
Moreover, dS
return estimated
l-s
beta to adjust for
earl-ier, af one were to use a CAPM
the differences in risk, the result is
of return of 9.1 percent for thean indicated rate
average proxy company.56
VIII. CAPITAI STRUCTI'RE
O. At pages 34-36 of his testimony Mr. Gorman
recommends reducing Intermountain Gas' ratemaking capital
structure from 50.0 percent common equity to 48.0
percent. Is this change appropriate?
A. No. Mr. Gorman provides two fl-awed reasons for
hj-s recommendation. Elrst, he argues that "for the
period ending December 31, 2075" fntermountaj-n's common
equity ratio was approximately 4B percent.sT However,
Mr. Gorman ignores the fact that Intermountain's more
recent quarterly colnmon equity ratio at the time of the
shown
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rate filing was approximately 52 percent (i. e. , 51. 85? ) .
theAs discussed in
53
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Direct Testimony of J. Stephen Gaske, at 39.
150 FERC \67,765, Docket Nos. ELL7-65-002, Opinion No. 531--8,
para. L12.
Schedul-e 6, Direct Testimony Exhibit No 5.
Direct Testimony of J. Stephen Gaske, at 31.
Dlrect Testimony of Mj-chae1 P. Gorman, p. 34, I1nes 1,4-!1.
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Prepared Direct Testimony of Intermountain witness Mr.
Mark ChiIes, fntermountain attempts to maj-ntain a target
common equity ratio of 50.0 percent and that, although
the common equity ratio varies from time to time, it has
generally been maintained slightly above 50.0 percent in
recent years. Table C.2 on page 3 of Mr. Chiles'
testimony shows the following common equity ratio
history:
Table2
Intermountain Gas Company
Common Equitv Ratio
t2t3t/2013 54.27%
t2l3U20t4 52.40o/o
t2/3U20ts 47.95o/o
6130/2016 51.8s%
Mr. Gorman's use of the lowest number in recent years,
December 20L5, which was not even the most recent vaIue,
is not indicative of a current or expected common equity
ratio for Intermountain.
Second, Mr. Gorman argues that the "proxy group has
an average common equity ratio of 48.0% (including
short-term debt)..." However, he also observes that the
)I
proxy
s3. 6%
companr-es
(excluding
have an average common
short-term debt) ..."58
equity ratio of
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to incl-ude only Iong-term debt in the capi-taI structure
long-term nature of the ratebecause that matches the
base.
58 Direct Testimony of Michaef P. Gorman, p. 39, Ii-nes 16-1825
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Intermountain's filed equity
comfortably within the
proxy companies, and as
reasonable based on the analysis of historical-, current
and projected capital structures for Intermountain Gas
and the proxy group. "s9 As shown in my Direct Testimony
Exhibit No. 5, Schedule B, the proxy company coflrmon
equity ratios are in a range between 41.5 percent and
58.9 percent with a median equity ratio of 54.33 percent.
Slx of the seven proxy companies have common equity
ratios greater than the 50.00 percent level filed by
fntermountain Gas. Thus, the Company's coflrmon equity
ratio 1s neither unusual nor extreme and should be
adopted by the Commission.
O. What effect. does the capital structure have on
the costs of doing business?
A. Most large companies are financed using a mix
of debt and equity
amount of debt in
capital. Including a reasonabl-e
the capital structure can provide a
l-ow-cost source of funds because the common equj-ty
hol-ders shield lenders from a portion of the risks of the
company. However, the requirement to pay a fixed l-evel
of interest and repay principal as scheduled, causes the
possibility of bankruptcy or other financial di-stress to
increase as the firm takes on more debt. Financial
range
Ms.
ratio of 50.0 percent is
of equity ratios of the
Carl-ock testifies "is
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"leverage" provided by fixed debt payments also tends to
translate relatively smal-1 ffuctuatj-ons in a companyrs
operating income into much larger variatlons in the net
income availabl-e to common stockho]ders. When the
59 Direct Testimony of Terri Carlock, at 8
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proportion
the lenders
of debt is increased beyond some l-eveI, both
and the stockholders require
return on their investments to compensate
risks involved. In financial theory, there is an
range of equity ratios that
capltal of a company.
O. Is it common for commissions to adjust the
ratemaking capital structure when the capital structure
1s normal in comparison with companies that have slmilar
ris ks ?
A. No. Because there are numerous factors that go
into establ-ishj-ng a company's capitaJ- structurel the
coflrmon approach is for regulators to recognize that,
unl-ess the capital structure is extreme, the appropriate
capital structure is a matter for management discretlon
and judgment.
O. What factors are important for determinlng the
approprlate capital structure for a company?
A. The amount of debt that is economical for a
fj-rm depends on i-ts business risks and the perceived
probability that it could experience unexpected
difficul-ties that would render it unabl-e to meet its debt
obligations. Although firms in the same industry
generally tend to have simil-ar business risks, there is
often a general, very broad, range of equity ratios
greater
for the
mi-nimizes the overall
rates of
greater
optimal
cost of
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associated with companj-es in particular industries.
Eirms in the same industry have different capital
structures for many reasons. Eor example, within a given
industry, there may be wide dj-fferences in the vintages
of capital and operating strategies of individual
companies. Another important factor is the quality of a
firm's earnings in terms of cash flow and
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contlnuing operations. When aII factors are considered
the managers of a company are usually in the best
position to evaluate the prospective risks and operating
needs of their company and determine the most appropriate
capital structure.
O. In addition to individual differences in
business risks, are there other important factors that
can determine the appropriate capital structure for a
company?
A. Yes. Another important factor is the
transaction cost of raising new capital. fn order to
borrow funds from outside sources, a company typically
pays issuance costs that are close to one percent of the
amount borrowed. In contrast, raising new common equity
funds from outside sources generally invol-ves flotation
costs that are 3-5 percent of the amount of capital
raj-sed. In addition, oo a percentage basis, fl-otation
and issuance costs generally are proportionately l-ower
for larger issues. Consequently, there often is a
"pecking order, " whereby firms attempt to raise as much
new capital as possible from internal-Iy-generated
retaj-ned earnings and issue debt only when internal funds
are not sufficient to finance attractive projects and
maintain the desired dividend l-evel-s. The higher
flotation cosLs associated with raising equity capital
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from external- sources means that, up to a point, it is
externall-ess expensiwe to issue debt
financing as possible before
equity markets.
for as much
turning to the external-
Different companies al-so have different patterns of
large
then pay
needs for financing. A company mj-ght take on
amounts of debt to finance new projects, but
down its debt and increase its equity ratj-o
after the project is in
over time
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service. When a company'
financial flexibility is
s debt ratio is high, 1ts
restricted. This means that its
ability to undertake additional
it may not be abl-e
capital if adverse
Thus, when one
often uneven pattern
times when achieving
to refinance
circumstances
projects is
its debt or
arise.
Iimited, and
rar_se new
and the
there
considers financing costs
of capital investments,may be
may notthe target capital structure
be as desirable as minimizing the issuance costs that the
firm incurs as it operates on a dynamic basis. A
wel-l--managed company might reasonably maintain a
rel-atively high equity ratio for extended periods of time
and then undertake a large amount of additional debt to
finance a new project. The important point is that wide
differences in capital structures exist within any given
industry from time to time and a determination of the
"appropriate" capital structure for a particular company
should not be made in a vacuum which ignores that
company's unique history, business needs and
circumstances.
O. At pages 2l and 35 of his testi-mony, Mr. Gorman
cites a settlement invol-ving Cascade Natura.l- Gas Company
as support for his capital structure and return on equity
recommendations. Does a settlement provj-de a valid
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A. No. It is
cannot be relied upon
particular element of
Iikely to be multiple
invol-ved in reachinq
well- established that settlements
to support a position regarding any
the settlement because there are
tradeoffs and considerations
a settlement.In fact, section 13
specifically states:on page 9 of the Cascade settlement
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Gaske, Reb 39Intermountain Gas Company
"No StipuTatinq Party shaff be deemed to have
agreed that any provision of this Stipulation
r-s appropriate for resoLving issues in anyother proceeding ..."
Thus, it is inappropriate for Mr. Gorman to cite that
settlement as a precedent j-n an fntermountain proceedlng
or any other proceeding.
IX. SUMMARY
O. Vrlhat does your analysis of Mr. Gorman's cost of
capital testimony indicate?
A. As discussed earlier, Mr. Gorman's
reconrmendation to reduce the common equlty ratio from 50
percent to 4B percent ignores Intermountain's
demonstrated adherence to a 50-50 target capital
structure. Moreover, Tntermountain Gas' proposed equity
ratio of 50.0 percent is befow the median equity ratio
for companies j-n the proxy group and is toward the lower
end of the range of equity ratios. As such, the proposed
equity ratio of 50.0 percent 1s reasonable for ratemaking
purposes, but is also a source of above-average financial
risk.
Mr. Gorman and I both agree that Intermountain is
riskier than the proxy company group, however, his
recommended rate of return fails to adequately refl-ect
Intermountain's greater risk. 60
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identified severaf fl-aws that, when corrected, indicate
that my proposed return on equity
risk
is reasonabl-e . Fi-rst,
his anal-ysis of gas
data with data that
the current data is
utility premiums mixed current
out of date. When only
utility risk premium
is 25 years
used his gas
60 Direct Testimony of Michael- P. Gorman, page 39, J-ine 14-15.O 25
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analysls indicates a current required return on equity of
10.0 percent for natural gas utiJ-ity companies. Second,
the core factor in Mr. Gorman's CAPM analysis is based on
average historical- returns from L926-20L5. When a proper
hisand reasonable current market risk premium is used,
CAPM analysis would suggest a medj-an rate of return of
9.7 percent for the proxy companies. Third, his
multi-stage DCE anal-ysis assumes that i-nvestors' expect
the growth rate of al-l proxy companies to decline to the
average growth rate in the economy within a relatively
short time period. However, it is far more reasonable to
expect that after an initial time period, the analysts'
projected growth rates will at least equal the earnings
retention growth rates, which Mr. Gorman ca1ls
"sustainable" growth. When sustainable growth is used in
his multi-stage DCF instead of U.S. GDP growth, the
median proxy company ROE is 9.74 percent. Considering
these corrections and his other analyses in the context
of the greater risk of Intermountain, Mr. Gorman's
analyses confirm the reasonableness of my 9.9 percent
recommended return on cofirmon equity.
O. What does your analysis of Staff's cost of
capital evidence indicate?
A. Staff and I both agree that fntermountain's
proposed common equity ratio is reasonabl-e. However,25
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Staff's cost of common equity analysi-s is based'solely on
DCF analyses and fails to consider other estimation
methods which indicate that the cost of common equity
capital for the proxy companies currently is greater than
the DCE anal-yses would suggest. Moreover, Staff's
analysis fails to adequately consider Intermountainrs
greater risks rel-ative to those of the proxy
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companres.
companies
above 10.0
recommended
Eor example, two of Staff's seven proxy
have Basic DCF rates of return significantly
percent, which places my
return on common equity
9. 9 percent
clearly within a zone
of reasonableness.
0. Pl-ease summarj-ze the conclusions of your
Rebuttal- Testimony.
A. The returns on common equity recommended by
Staff and Mr. Gorman are inadequate to meet the tests of
a reasonable rate of return because they do not consider
the relative business and financial- risks of
Intermountain Gas compared with the proxy group
companies, and because they do not take into account the
expectations for higher interest rates in the near
future.
O. Does this conclude your Prepared Rebuttal
Testimony?
A Vaq
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CSB Reporti-ng(2oB) B9o-s198
GASKE (Di-Reb)
Intermountain Gas Company
(The following proceedings were had in
open hearing. )
MR. WILLIAMS: And if I could ask Mr.
Gaske a couple of questj-ons in response to some
testimony.
COMMISSIONER RAPER: Sure.
DIRECT EXAM]NATION
BY MR. WILLIAMS: (Continued)
n Mr. Gaske, do you agree
that the federal funds rate
with Mr. Gorman's
forsuggestion
l-oans only affects the cost of short-term
overnight
loans and
impliedly has little or no
A The federal
effect on utility ROE?
funds rate, which is the
loans to banks, has a very
of banks to l-oan money and
For that reason, it causes
longer-term instruments,
interest rate for
strong effect on
the money supply
effect
overnight
the ability
in general.
that affectsa ripple
such as stocks
that we're al-l-
says anything
the press and
and bonds and things like that. I think
aware that almost any time Janet Yellen
at all, the markets move, it's headlines in
that's because the change in the federal
funds rate actually has much broader implications than
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CSB Reporting(208) 890-5198
GASKE (Di-Reb)
Intermountain Gas Company
Ioans, that it ripples
O And Mr.
unanticipated changes
markets, in the month
through the whol-e economy.
Gaske, was there -- were there
in the market, in the financial
prior to the filing of Mr. Gorman's
reflected in hi-stestimony that
analys 1 s ?
were not fully
A Yes. The election, very b1unt1y, al-most
immediately caused interest rates to go up. Within a
couple of days, they went up by 30 to 40 basis points.
Within a month, the projected ylelds on long-term
treasury bonds went up 50 basis points, and it was a
pretty substantial change in the market and the when
Mr. Gorman was talking the other day, he said that the
increase in the Federal Reserve federal funds rate was
anticipated and he's correct that one increase was
anticipated. Shortly after the election, the
antlcipatlon was for several federal funds rate. increases
in the upcoming yearr so those effects were not
incorporated by the time of his testimony.
MR. WILLIAMS: Madam Chair, I have no
additional live questions.
COMMISSIONER RAPER: Does Commission Staff
have any cross-examination of this rebuttal- witness?
MR. COSTELLO: Just one question.
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CSB Reporting(208) 890-s198
GASKE (x-Reb)
Intermountain Gas Company
CROSS-EXAM]NATION
BY MR. COSTELLO:
O So didn't stock prices also go up after
the election?
A Yes.
MR. COSTELLO : That ' s al-I I have .
THE WITNESS: WeIl-, and growth rate
expectations.
MR. COSTELLO: I'm sorry?
THE WITNESS: And growth rate
expectations.
MR. COSTELLO: Thank you.
COMMISSIONER RAPER: MT. StoKes.
MR. STOKES: No questions.
COMMISSIONER RAPER: Mr. Purdy.
MR. PURDY: I have none. Thank you.
COMMISSIONER RAPER: Mr. Richardson.
MR. RfCHARDSON: No questions, Madam
Chair.
COMMISSIONER RAPER: Mr. Otto.
MR. OTTO: No questions, Madam Chair.
COMMISSIONER RAPER: Any questions from
the Commissioners?
Any redirect by the Company?o 25
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CSB Reporting(208) 890-5198
FRY (Di-Reb)
Intermountain Gas Company
MR. WILLIAMS: No redirect.
COMMISSIONER RAPER: Thank you, Mr. Gaske,
for your time.
THE WfTNESS: Thank you.
(The witness l-eft the stand. )
COMMfSSIONER RAPER: Would you l-j-ke thls
witness to be excused?
MR. WILLIAMS: Yes, Madam Chair. .
COMMISSIONER RAPER: With no objection,
Mr. Gaske is excused from the remai-nder of the
proceedings.
MR. WILLIAMS: Intermountain Gas would
call- as its next witness Phil Fry, Dr. Phillip Fry.
PHILLIP C. FRY,
produced as a rebutta1 witness at the instance of the
Intermountain Gas Company, having been first duly sworn
to tel-I the truth, the whole truth, and nothing but the
truth, was examined and testified as follows:
DTRECT EXAMINATION
BY MR. WILLIAMS:
O Would
busi-ness address for
state your name and
and your employment?
you please
the recordo25
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CSB Reporting(208) 890-s198
FRY (Di-Reb)
Intermountain Gas Company
A Yes,
place of employment
College of Business
the Micron Business
Drive.
U
my name is Phillip Ery, F-r-y, and my
is Boise State University in the
and Economics, and that address is
and Economics Building, University
asked you the questions, the same
that prefiJ-ed rebuttal testimony,
MR. WILLIAMS: Madam Chair, I have a few
additional live questlons. First, let's spread his
testimony.
O BY MR. WILLIAMS: Are you the same Phil
Ery that fil-ed rebuttal testimony of 25 pages with
attached Exhibits 47 and 42 in this proceeding?
A Yes, I am
And if I
questions,
wou1d your
nA
contained in
answers today be the same?
Yes, sir, they would.
MR. WILLIAMS: Madam Chair, f'd ask that
Dr. Fry's testimony be
and Exhibits 4l and 42
spread upon the record as if read,
be admitted.
COMMISSIONER RAPER:Without objection,
be spread upon the
and 42 admitted into
Dr. Fry' s rebuttal-
record as if read,
the record.
into evidence. )
testimony will
and Exhibits 4l
(IGC Exhibit Nos. 4l e. 42 were admitted
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(The foll-owing prefiled rebuttal-
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CSB Reporting(208) 890-s198
FRY (Di-Reb)
Intermountain Gas Company
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O. Please state your name, position and business
address.
A.
professor
Management
Economics at
1s COBE-Bo1se
Boise State University.
State University, 7925
My business address
University Dr.,
My name is Phillip C. Fry. I am a tenured
in the Information, Technology and Supply Chain
Department in the College of Business and
Boise, ID
O.
83125.
Woul-d you please describe your educational and
professional background?
A. I have a Ph.D. in Quantitative Business
Analysls
employed
19BB in
from Louisiana State Universlty. I have been
at Boise State University continuously since
the CoIIege of Business & Economics where I teach
a variety of
a co-author
courses incl-uding business statistics. I am
of the textbook Busi'aess Statistics: A
Decision-tlaking Ay>pzoach, 70th edi tioa, published by
Pearson Education. I was afso a co-author of the same
textbook for the 5th through 9th editi-ons. A copy of my
curriculum vitae 1s attached as Exhibit 4]-.
O. What 1s the purpose of your rebuttal testlmony?
A. I am providing rebuttal testimony rel-ated to
the statistical- models used by the Company for weather
normal-ization, as well as commenting on the statistical
relevance of the model-s proposed by Dr. Morrisori.o 25
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O. rn
testimony, did
collaboration
preparing and offering this rebuttal-
you work alone or did you work in
with anyone else?
A. This rebuttal testimony and the analysis behind
it was a collaborative effort between myself and Dr.
Patrick Shannon,
co-author of the
whom is al-so a Ph.D. Dr. Shannon is a
textbook Busiaess Statistic,s: A
De c i s ion-I"Iak iag Atrtpro acb,,
Pearson Education as well
70th edition, published by
as the co-author on the 1st
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through the 9th editions of the same textbook. Dr.
Shannon's curriculum vitae is
this testlmony. To the extent
was conducted by Dr. Shannon,
attached as Exhibi-t 42 to
that some of the analysis
or that some of this
testimony was written by Dr. Shannon, f have reviewed
that work, concur in it, and adopt it as my own.
O. Do you and Dr. Shannon agree with Dr.
Morrison's statement that "a peculiar feature of the
Company's model is its use of different weather
coefficients for different months"? (Morrison Di, l-i-ne
22, page 19).
A. No, we do not believe that it is "pecu1iar".
seems reasonabfe to expect that monthly effects exist
natural- gas usage. If these effects do exist, then
explicitly incorporating different coefficients for
different months is a reasonable modeling approach in
regression analysis. The statistical tests performed
the Company's models reveal- that the coefficients for
different months are statistically significant.
O. How would you respond to Dr. Morrison's
statement that the use of autoregressive terms in a
II
fn
on
the
predictive
(Morrison
weather normal-ization model is inappropriate?
Di, l-ine '7, page 20) .
A.Dr. Morrison states that including
problem" that canautoregressive terms is an "obviouso25
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cause a model- to become "grossly unstable" when used to
make predictions beyond the time period of the data used
to create the model. We disagree and bel-ieve Dr.
Morrison either does not fully understand the concept of
stability in the statistical- sense, or is misusing the
term. Instability, in statistical- vernacular, is a term
that is generally used to describe the sensitivity of the
estimated regression coeffj-cients when a new sample of
data is used to estimate
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the regression model. One potential- cause of this
instability is multicollinearlty, which occurs when the
independent variables are hiqhly correlated with each
other. Another cause of i-nstability occurs when higher
order terms, such as cubic terms are used 1n the
regression modef. The use of higher order terms can
cause the matrix of independent variabl-es to become
il-1-condit.ioned, which can l-ead to instability in
estimating the regresslon coefficients. The Company did
not use higher order terms in its regression equati-ons
and there is no evidence of serious mul-tj-col-linearity in
the Company's model. Consequently, it is my opinion, and
the opinion of Dr. Shannon, that the Company's weather
normalj-zation model is not "grossly unstable".
O. What about Dr. Morrison's statement that the
autoregressive terms make the model grossly unstabl-e when
used to make predictions beyond the tlme period of the
data used to create the model-?
A. We al-so disagree with this statement. Errors
in forecasts are comprised of three components: intrlnsic
error (1.e., noise in the data), parameter estimation
error (errors in estimating the model's coefficients),
and model error (i.e., making the wrong assumptions about
how the future will resembl-e the past). We have
statistical measures for the first two error sources, but
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not for the third. However, we know that for any
regression model the further into the future the mode1
forecasts, the greater the overal-l- forecast error
becomes. So when predictions are made outside the mass
of data used to develop the mode1, forecast errors become
more pronounced. This is true for any model, but it is
especially true of polynomial models, such as those
developed by Dr. Morrison.
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O. Why did the Company incl-ude an autoregressive
term in its models?
A.
Company's
data used
The use of an autoregressive term in the
models is a direct result of the time series
to develop the regression model-. Data that
respect to time (e.9., hourly, dai1y,
are referred to as time series data.
are
ordered with
weekly, etc. )
Residuals from time series regressions are often
correlated, that is adjacent errors tend to move in the
same direction. This is referred to as autocorrel-ation.
If untreated, autocorrel-ation corrupts the optimal
properties of ordinary least squares regression.
Including an autoregressive error correction is an
appropriate statj-stical remedy in the presence of
autocorrelated errors. Because autocorrel-ated errors are
common in time-series regression analysis, statistical
procedures (e.9., Cochrane-Orcutt, Hildreth-Lu, and
others) have been developed and incl-uded 1n commercial
statistical software packages to deal- wlth this issue.
O. Dr. Morrison states that the Company's models
were created using autoregressive terms, but that these
terms were not included in the calculation of monthly
consumption and that their omission underestimates the
Companyrs monthly consumption estimates. Is this correct?
A. No, Dr. Morrison is wrong on this point. Theo25
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Company's model includes an autoregressive term to
errors. The statisticalcorrect for autocorrelated
software used by the Company,
determine
eViews, performs a
if autocorrelati-on isstatistical test to
present. If it is present, the software
estimate of the autoregressive term and
into the forecast automatj-caIIy.
includes an
incorporates it
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O. Do you agree with the Dr. Morrison's statement
that the use of autoregressive terms in weather
normalization vio1ates regression' s fundamental
independence assumption (Morrison Di, page 20-2L, l-j-nes
?5-1 \Ll .
A. Absolutely not. The independence assumption
relates to the statistical property that the error terms
are not correlated. This assumption is not violated
because an autoregressive term is used. This assumpti-on
is violated in this case due to the nature of the time
series data employed in estimating the model. The use of
the autoregressive term is, 1n fact, a remedy for this
violation, rather than a vlolation itself. Adjustment
for autocorrelation (aIso referred to as serial
correl-ation) are discussed in the textbook The
Statistical Sleuth, by Ramsey and Schafer, which is Dr.
Morrison's statistical reference book of preference.
(Morrison Di, 1ine, 23-24, page 27.). More extensive
explanations for dealing with autocorrelated error terms
can be found in other and more widely used textbooks on
econometrics, such as those by Johnston, I(menta, Judge,
Greene, and Wooldridge.
O. P1ease comment on Dr. Morrison's statement at
page 27 of his testimony that the relationship between
Heating Degree Days and consumption is "c1earIy
Fry, Reb. 5
Intermountain Gas Company
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non-Iinear" .
A. We disagree that
recommends the
the rel-atj-onship shown in the
scatterplot
mode]. We
use of a nonlinear regression
bel-ieve that from a practical perspective the
scatterplot shows a strong positive linear relationship.
One woul-d not expect when modeling real consumptj-on data
to find a perfect linear relationship. However, any
departures from perfect l-inearity in this instance are
minimal. A straight line would fit that relationship
quite wel-I, especially in the center mass of the
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observations. Furthermorer we do not see a pronounced
coaster pattern in
the need for a
curvature (e.9., a U
the scatterplot that
polynomial model with
shape ) or roll-er
woul-d recommend
quadratic and cubic terms.
O. Why would you not fit a polynomlal model to
this data?
A. The idea behind regressj-on analysj-s is to
estimate conditional means of the dependent variable
(e.9., consumption) given the explanatory variables.
They are not expected to go through all the data points.
We can always improve the fit to the data by adding more
terms. However, this may J-ead to overfitting the sample
data. In such a case we begin to fit the noise more than
the signal. Eitting a cubic polynomial model implicitly
assumes there is some reason why consumption would vary
as a 3rd degree polynomial of heating degree days. We do
not believe that such an assumption can be supported by
the scatterplot.
O. Are there other reasons to avoid using a
polynomial regression mode1
linear?
when rel-ationships are highly
A. Yes. Polynomial- models create predictor
variabl-es from other variabl-es. For example, the
variabl-e X is used to create the variable y2. Creating
variables in this way can introduce multicollinearity ino25
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the mode1, which causes some estimation challenges
Eurthermore, using polynomial terms makes the
interpretati-on of the estlmated
intuitive and more difficult.
coefficients less
In linear regresslon
model-s, the coeffj-cients represent the mean change in the
holding other predictordependent
variabl-es
understand
variable whil-e
in the model- constant. Thls helps us
the effect of one independent variable on the
dependent variabl-e from all- the other predictors j-n the
model-. However, in regression model-s wlth
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polynomial terms we cannot hold just one predictor
variab1e constant because other predictor
been created from it and will change when
variable X changes.
higher-order terms,
independent variabl-e
for that independent
we start to make the
Eurthermore, because
the effect of a change
is lnfluenced by the
variabl-es have
the predictor
there are
in the
vafue we set
variabl-e (i. e. , it depends on where
change in the independent variable) .
isol-ate the effectsThis makes it more challenging to
that predictor has on the dependent variabl-e. So, unless
there is a strong curvature, U-shape, ot rol-l-er coaster
pattern in
preferred
O.
the plot, a l-inear model 1s generally
to a polynomial- one.
What approach to model building did Dr.
model s ?Morrison use for hls regression
A. Dr. Morrlson states that he used a
backward/mixed stepwise regression procedure to develop
model-s of per-customer consumptj-on for the Company's RS-1
and RS-2 classes and for each of the separate GS-1
subclasses.
a. What is backward stepwise regression?
A. Stepwise regression is an automated procedure
carried out by a computer program. While there can be
slight variatlons in the way different software packages
perform stepwise regression the backward stepwiseo25
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technique is performed using a regressj-on model which
begins by containing all the potential independent
variables provided by the analyst. Independent variabl-es
which make no statistical contributlon to the model- are
then removed from the regression one at a time. The
procedure terminates when al-l remaining
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independent variabl-es in the model are judged to be
statistlcally significant. Backward stepwise is
essentially a variable shrinkage technique.
O. Can there be shortcomings using an automated
procedure such as stepwise?
A. Yes.
O. Woul-d you briefly identify potential
shortcomings that could arise from using a stepwise
procedure?
that can arise when
A. Yes. The following
using a
are some of the shortcomings
procedure:
on the statistics
stepwise
The significance 1evels
for sel-ected models violate the standard
statistical assumptions because the model
has been selected rather than tested
within a fixed mode1.
Models that are created using stepwise
techniques may be over-simplifications of
the real- models of the data (See Roecker,
EII-en B. (1991) Prediction Error and its
Estimation for Subset-Selected ModeLs.
Technometrics, 33, 459-468. )
One of the main issues with stepwise
regression is that it searches a large
space of possible model-s. Consequently,25
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it is prone to overfitting the data. This
means stepwise models will- often fit the
sample better than new (out of sample)
data.
O. Have any stati-sticians called into question the
use of stepwise
A. Yes.
regressi-on techniques ?
Erank E. Harrell, Jr., Chair of
Vanderbilt University, one of theBiostatistics at
leading schol-ars on
Modeling Strategies
this subject and author of Regression
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(2007) publlshed by Springer-Ver1ag has stated that among
its various shortcomj-ngs, stepwise regression procedures
can:
Cause severe biases in the resulting
multivariable model fits whil-e losing va1uable
predictive information
signiflcant variables.
from deleting marginally
' Result in R2 values that are biased too hlqh
compared to the population
' Produce test statisti-cs that do not have the
correct distrlbution
' Produce regressions coefficients that are
biased
' Make variabl-e sel-ectj-on in the presence of
multicollinearity arbitrary.
' Relieve the analyst from thinking about the
problems of multicollinearity and of forming
and testing hypotheses more generally
O. What does it mean that stepwj-se procedures are
prone to overfitting the data?
A. Because stepwise procedures can search over a
large number of potential variabl-es without regard to how
those variabl-es truly relate to the research questi-on at
hand, they are susceptible to selecting independent
variables that have a hiqh risk of overfitting theo25
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estimated mode1 to random features in the data. That is,
they are susceptible to fitting the noise rather than the
This is due to the fact that thesignal in the data.
analyst is letting the computer mechanically select the
regression predlctor variables without consideration for
the research question being studied. Thus, it becomes
possible for a variable, such as a cubic term, to be
included in the estimated model because it fits sample
data wel-l, even when the term makes no practical sense
from a business or research perspective. If the
inclusion of the term resul-ts because it closely fits the
sample data, rather than
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because j-t makes sense in terms of the probl-em at hand,
there is a risk that the estimated model- is overfitting
the data.
O. What are the consequences to overfi-tting a
model, or "curve fitting"?
A. Overfitting can result in a mode1 that fits the
sample wel-I but does a very poor job of describing or
predicting outside the range of sample data.
Consequently, they fa1l when applied to new sets of data
such as occurs when such models are used in forecasting
applications. Vie often are unaware of this, however,
because models that are the result of a curve fitting
approach are rarely tested using new data.
O. Are Dr. Morrison's models fl-awed, because they
are curve fitted?
A. Yes. Dr. Morrison states that he has used a
cubic term-heating degree days cubed-- as a variable in
his regression models. However, that is not a variabl-e
that an analyst woufd conslder as being a drj-ver for
therms used, because heating degree days cubed does not
provide an intuitive, business, or economic
interpretation for the issue under study. For example,
the graph that Dr. Morrison says indj-cates a nonl-inear
rel-ationship
to model the
does not suggest the need for a cubic term
relationship. However, if such a term wereo25
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available to a computer, then an automated procedure,
such as a stepwj-se regression algorithm, could sel-ect it
only because it more closely fits the sample data- even
when it has no real- economj-c or business meaning to the
analysis at hand. Because the algorithm, rather than the
analyst, is choosing variabl-es automatically to achj-eve a
goal, it does not consider the theoretical rel-evance of
the variables it fits. Consequently, the algorithm may
choose variables that fit the noi-se in the set of data.
Furthermore, if the algorithm selects a term that has no
practlcal signifi-cance it
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coufd el-j-minate a term that had practical significance,
but was marginally statistically inferior to a selected
variabl-e. Overfitting is especially likeIy to occur when
a model- is selected from a set of potential- mode1s such
as woul-d be the case in a stepwj-se regression procedure.
a. Do you have other concerns with Dr. Morrison's
use of a cubic term in a regression model?
A. Yes. Potentially, such a term could create
some instability in the estimation process. That is, a
cubic term could cause numerical overflow, or round-off
errors, depending on the statistical software being used.
This could resul-t in estimation errors for the
coefficients. Furthermore, a cubic term could produce an
influential observatlon that significantly infl-uences the
regression coefficients estimates. Fina11y, when higher
degree polynomial- models, such as those with a cubic term
are used, extrapoJ-ation, or forecasting, beyond the range
of data is highly unrel-iable.
O. How could a cubic term produce an influential-
observation?
A. An influential- observati-on is one that has a
large effect on the estimated regression coefficients.
Large values when cubed become significantly large and
values less than one become much small-er when cubed.
Using a cubic term coul-d produce val-ues that are much
Fry, Reb. 11
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more extreme than the typical data val-ues, thus resulting
in an influential observation.
O. Are there any
using a cubic term that
predictor vari-abl-e?
other potential problems with
is developed from another
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A. Yes there are. A potential cause of
multicollinearity is when predi-ctor variables are used to
create quadratic and cubic terms. This is referred to as
structural mul-ticollinearity.
O. Vfhat is multico]-l-inearity?
A. Multicollinearity in regression analysis is a
condition where certain predictor variables are
correlated with other predictor variables or are
correlated with a linear combination of predictor
variables in the model. Regression analysis assumes that
the independent variables are nelther correlated with
each other nor with a linear combination of other
predictor variables.
O. Why might Dr. Morrison's models suffer from
mul-ticol-linearity?
A. Dr. Morrison used the predictor Heating Degree
Days (HDD) to create two other predictors: Heating Degree
Days2 and Heating Degree Days3. Structural
mul-ticoll-inearity occurs when a predlctor is used to
create other predictors. Because two of the varj-abl-es
have been created from another predictor variab1e there
is a high degree of correl-ation between the predictors.
In other words, if we know the vafue of the predictor
variable HDD we can perfectly predict the val-ues of the
other predictor variables HDD2 and HDD3.
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O. What are the consequences of mul-ticollinearity?
A. There can be several-, but one consequence is
that multicol1inearity can cause estimated regression
coefficients to have an unexpected sign (e.9., a negative
sign when a positive sign is expected). Dr. Morrison's
RS-1 regression model- which contains the terms HDD, HDDZ,
and HDD3, clearly suffers from this multicollinearity
problem of having unexpected si-gns on a regression
coefficient.
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O. Why do you
an unexpected sign?
A. Al-f the HDD
say that Dr. Morrison's model-s have
highIy positively
The THDD3 term has
his RS-1 model are
the dependent variable.
a positive correl-ation of 0.928 with
the dependent variable (See correl-ation matrix below).
Correlation: RS-1, EYr, THDD, TIIDD2 , THDD3
variables in
correlated with
TYr
THDD
THDD2
THDD3
RS-1
-0.041
0.990
0.978
0 .928
0.005
0 .0L2
o -022
0.961
0.900 0.983
TYT THDD THDD2
The positive correlation indicates that the two variables
tend to move in the same direction-that is, as one
variab1e increases, the other variabl-e generally
increases. In this case, ds heating degree days
increase, therm usage would increase. Consequently, one
woul-d expect to see a positive sign for the estimated
regression coefficient on each of the HDD terms,
including the cubic term.
O. What is the sign on the cubic term in Dr.
Morrison's RS-1 model?
A. The estj-mated regression coefficient is
negative. The val-ue is -26.15. (See computed output
below) :
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Coefficients
Term
Constant
TYT
THDD
THDD2
THDD3
Coef
44.319
-1.575
1 .19
54.92
-26.75
SE Coef
0.221
0.223
1.93
4.64
2.93
T-Val-ue
200 .48
-1.01
4.03
11. B4
-9.14
P-Val-ue
0.000
0.000
0.000
0.000
0.000
V]F
1.01
75.91
431 .42
11 4 .28
Again, the interpretation of the regression coefficients
is made more complex by the quadratic and cubic terms.
We expect that j-ncreases in HDD woul-d increase
consumption, but the negative term on the cubic
coefficient suppresses this effect.
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In addition, the inclusion of quadratic and cubic terms,
which are highly correl-ated with heating degree days,
will tend to impact the value of the regression
coefficient on HDD making it difficul-t to determine the
actual impact that HDD has on consumptJ-on.
O. Is there a similar probl-em in Dr. Morrison's
RS-2 model?
A. Yes. Again, the estimated coefficient on the
cubic term is negative, but the cubic term is positively
rel-ated to the dependent variable.
O. What other consequences might resul-t from
multicollinearity?
A. Mul-ticolllnearity can al-so produce regression
estimates that are not statistlcally significant, even
though the independent variables are signlficantly
correfated with the dependent variable.
O. Has this occurred with any models developed by
Dr. Morrison?
A. Yes. The GS-20 model developed by Dr. Morrison
is shown in the computer output below.
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Model Summary
a
7332 .63
R-sq
'78.89e"
R-sq (adj )
78.31U
R-sq (pred)
11 .362
Coefficients
Term
Constant
TYT
THDD
THDD2
THDD3
Coef
550 8
219
190
231 6
-644
SE Coef
108
109
944
2268
1433
T-Val-ue
50.96
2 .55
0.84
1.05
-0.45
P-Val-ue
0.000
0 .012
0.404
0.296
0 .654
VIF
t .02't5.79
431 .29
71 4 .52
The T-Va1ue for the heating degree variables indicate
that those coefficients are not statistically
significant. The THDD degree variable becomes
insignifj-cant due to the presence of the THDD2 and THDD3
which are attempting to explain the
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same variation in the dependent variable as THDD.
the statistical impact of the THDD
the inclusion of the quadratic and
O. How does this compare to
by the Company?
A. The Company's estimated
the table below:
Variable
i-s diminished
Thus,
due to
cubic variables.
the GS model developed
GS model is shown on
Coefficient Std. Enor t-Statistic Prob.
c
JAN65
FE865
MAR65
APR65
MAY65
ocr65
NOV65
DEC65
TR-WgO
SEP
AR(1)
156.4242
0.455898
0.444788
0.394486
0.266841
0.139923
0.226815
0.317030
0.425533
-0.358425
22.8U95
0.45873
4.0/6,121
0.010226
o.011479
0.015224
0.009867
0.013030
0.042276
0.018106
0.011871
0.098681
5.490874
0.081063
38.66029
44.58060
38.74695
25.91217
27.U308
10.73825
5.365158
17.50950
35.8/.741
-3.632153
4.1U173
5.500312
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0004
0.0001
0.0000
R-squared
Adjusted R-squared
Mean dependent var
S.D. dependent var
324.9130
179.4880
you believe the
construed to be
0.992613
0.991953
In this estimated model all- coefficients are
statistically significant and because a linear model- was
used, the interpretation of
is both straightforward and
O. Could you briefly
the regression coefficients
i-ntuitive.
summarize why
cou]d bemodels developed by Dr. Morrison
a curve fitting approach to modef
A. Recall that in layman's
building?
terms, "curve fitting"o 25
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refers to the use of independent variabl-es in a
regressJ-on modef without regard to their theoretj-cal- or
business rel-evance. When terms are included because they
simply increase the measure of fit, R2, in
regression equation, we are suscepti-bIe to
the estimated
CUrVE fitting.
resultAn automated regression estimation technique can
in curve fitting when
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variables that have no
mode1. The analyst is
whether a variable that
theoretical- relevance enter the
relieved from having to consider
is in the model makes economic
sense because
It is hard to
j ustification
However, such
the automated procedure just
imagine there is an economic,
for the use of a cubic terms
a term coul-d enter and remain
sel-ects it
or practi-caI,
his models.
a model
sel-ection
an
an
that was developed using a mechanical variable
process.
O. How does the Companyrs approach to regression
overcome the shortcomings associated with automated
estimation procedures such as stepwise, ds advocated by
Dr. Morri-son?
A. The Company developed its models from a
research perspective. fnitial-Iy, variabl-es that made
economic sense in modeling the situation belng studied
were identified. Then, the Company applied standard
statistlcal techniques such as correl-ation analysis to
determine potential independent variabl-es. Fina11y,
li-near regression models using those potential variables
were estimated and tested for their significance.
0. What other issues exist with respect to the
models proposed by Dr. Morrison?
A. The data used by the Company witness Bl-attner
and by Dr. Morrison are time series data. One issue thato25
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time-series data can exhibit is autocorrelated errors,
dealt withwhich was mentioned earlier. The Company has
this issue by expl-icitly correcting for the
autocorrel-ated error terms
procedure. Dr. Morrisonr s
autocorrelated errors.
using an autoregressive
model has not deal-t with
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a. How do you know that the model-s proposed by Dr
Morrison exhibit autocorrelated errors?
A. I computed a Durbin-Watson statj-stic for each
model Dr. Morrison proposed.
O. What is a Durbin-Watson statistic?
A. A Durbin-Watson statistic is calculated from
the regression model's residuals. In regression we
assume that the errors are independent. The
Durbin-Watson test statistic is used to test this
assumption.
O. What were the results of these tests for the
models developed by Dr. Morrison?
A. The following table shows the calcul-ated
Durbin-Watson test statistic for each model developed by
Dr. Morrison.
Model Durbin \ilatson Statistic Sigrificant at lYo
RS.1 1.2955 YES
RS.2 t3461 YES
GS-IO 1.8u5 INCONCLUSTVE
GS-l1 1.140 YES
GS.2O 1.007 YES
statistics show strong evidence ofThe Durbin Watson test
positively correlated
Morrison's models but
error terms in aII of Dr.
the GS-10. In that model the test
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for positive
presence of
autocorrelation was inconcl-usive. The
these positively correl-ated error terms does
not conform with the assumptions concerning the
independence of error terms that isdistribution and
assumed in regression analysis.
O. What should be done when there is positive
correl-ation in the error terms?
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A. One remedy would be to introduce an
autoregressive error correction as was done with The
Company's models. The Company's models were tested for
the presence of autocorrel-ated error terms and if such
errors were detected an estimation procedure to correct
for i-ts effects was used.
O. Is there anything else related to Dr.
Morrison's model-s you wish to comment on?
A. Yes, I examined the residuals from his models.
One assumption of regression analysis is that the
residual-s (i . e. , error terms ) f rom the regression f ol-Iow
a normaf distribution.
O. How did you examine the residuals from Dr.
Morri-son's models?
A. I produced probability pJ-ots and
Anderson-Darling statistics for each model estimated by
Dr. Morrison. If the residuals are normally distributed,
then their probability plot will be a st.raight l-ine and
the P-Val-ue for the Anderson-Darling statistic wilI be
large (e. g. , ) 0. 05) .
O. What did you conclude from the residual
analysis ?
A. The probability plots (shown below) indicate
that the resi-duals do not follow a normal distribution.
This concfusion is verified by the fact that the
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Anderson-Darling Statistic P-Val-ues are very small, all
less than 0.05, indicating that the distribution of the
residuals for each regressi-on model do not fol-low a
normal distribution. This is a violation of the linear
regression assumptions .
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Mean -2.59486E-MStD€\, 2.796N
'64AD 5.127P-Value <0.005
-'' : 1O:
Mean 2.569279E-UStD6/ 4266N]54AD 3308P-Value <0.005
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M€n -7.53262E-13
StDry 949-5N 153AD 2-45AP-Value <O.0O5
M€n -2laorsE-13StDd 20.69N 164AD 3260
P-Value <O.OO5
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Man -236349E-13
StDd ,,:'I5N 152
AD 3460P-Vdu. <OO05
O. Is there anything el-se
about the differences between the
you would like to add
Company's and the
Staff's models?
A. Yes. The Company produced forecasts using their
RS-l and RS-2 models as well- as forecasts using the
models that Dr. Morrison developed.
O. Did Dr. Morrison provide a comparison of his
model-s to actual consumption?
A. No. In Company Production Request No. 19 to
Staff, the Company asked that Staff "provide a comparison
of Staffrs monthly consumption forecasts for 20L6
compared with actual- consumption". Dr. Morrison's
response was, "The Company did not provide consumption
information by class for all months of 2016, so it is
impossible to provide the comparison requesLed by theo25
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Intermountain Gas Company
Company". On January
Staff noting that the
23rd,
201,6
the Company sent an email- to
customer and consumption data
for January through June of 2016 had been provided to
Staff in response to Production Request No. 113 and LL4,
"pR 113 & 114 2016 BiIIing Data. x.l-s", and again asked
that Staff perform the requested
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fntermountain Gas Company
comparison usj-ng the data from Production Request No. 113
and 1.74. Dr. Morrison responded to that emaj-I request by
stating, "I did not perform the analysis you have
requested. " Because Dr. Morrlson did not provide the
comparison, the Company cal-culated a comparison between
Staff's models and actual-s for the years 2012 through
2076.
O. Before you explain that comparison and why it
results of1s important, what did you conclude from the
the comparison?
A. The comparison of the RS-1 and RS-2 models
showed that Dr. Morrison's models would not have
predicted usage in each of the years 20L2 through 2016 as
of those samewell as the Company's models did for each
years.
O.
important?
A
Why is performing this comparative analysis
Once a mode] is deemed to be stati stically
a forecasting
forecasts. A
comparison of the Company and Staff model-s in terms of
their relati-ve abil-ities to forecast total therms
provides added justification for the preference of one
model over another.
O. How was such a comparison conducted?
significant, the
model's worth is
only real-
how well
measure of
it actually
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Intermountain Gas Company
A. The compari-son
both Dr. Morrison's and
essence, a comparison of
made looking back at how
was conducted by "back-casting"
models. fn
RS-2 models was
the Company's
the RS-1 and
wel-l- they forecast the years
from 20l.2-20L5 as well as how they performed in the test
Company's and Dr. Morrison'syear of 20L6. Both the
models were applied to
variabl-es where
the actual-heating degree days and
each month to cal-culatetrendapplicable
the forecast usage.
actual- usage val-ues.
The forecasLs were then compared to
Next, commonly used
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Intermountain Gas ComPanY
measures of forecast accuracy were computed and the
comparatj-ve results are summarized below:
2012
MAD
R$l Forecast Accuracy Gomparison
2012-2013 2011 2015 2016 2016
MAD iIAD ilIAD MAD ilIAD
Company backcast
Staff backcast
Company backcast
Staff backcast
Company backcast
Staff backcast
2012
MAD
RS-2 Forecast Accuracy Comparison
2013 2014 201s 2016
MAD MAD MAD MAT)
2012-
2016
MAI)
Company backcast
Staff backcast
Company backcast
Staff backcast
Company backcast
Staff backcast
83,898 76,687 68,351 127,48
g0,lgg 80,9€ 104,485 ril,343
129,799
115,7il
MAPE MAPE MAPE ]JIAPE MAPE
97,236
111,113
MAPE
5.21olo
8.66%
6.88%
8.69%
5.44o/o
12.190/o
12.f90/o
19.71o/o
8.01o/o
1s.53%
Bias Bias Blas Bias Bias
7.67Yo
12.96Yo
Bias
2
I
4
-2
1
6
-{0 0
I6
.t6
26
476,961
1,030,642
262,564 345,853
t106,9/B 544,813
410,il2 534,584
724,414 902,087
MAPE MAPE MAPE MAPE MAPE
40/6,121
721,780
MAPE
3.60%
9.09%
2.610/o
4.54Yo
3.09%
5.67Yo
4.050/o
7.47o/o
1.50Vo
8.63%
Bias Bias Bias Bias Bias
3.570/o
7.080/o
Bias
6 4
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8
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O. Wou1d you please explain the tables?
A. The MAD refers to the mean absol-ute deviation
and is a measure of forecast accuracy. The MAD is the
averaqe of the
The smaller the
absol-ute value of the forecast errors.
MAD, the less the forecast value deviates
from the true val-ue in
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Intermountain Gas Company
an absofute sense on averaqe, so smal-Ier MAD val-ues are
preferred. The MAPE is the mean absolute percentage
error, which is an al-ternative measure of forecast error.
ft measures the average of the absolute val-ue of the
forecast errors as a percentage of the actual demand
value. Smal-l-er MAPE values are preferred. Ej-na11y, the
bias is a measure of the tendency of the forecast model-
to over or under forecast. Positive measure of bias
indicate that the forecast is less than the actual- (i.e.,
under forecast).
superior to Dr.
Morrison's forecasts i-n every year with respect to MAD,
In terms of these measures of
model-s generally outperformed the
Staff. With the exception of the
RS-1 model for 2016 and the Bias
2015 the Company's forecasts were
accuracy the Companyrs
models proposed by
MAD ca]culation for the
cal-culation for RS-2 in
hishly
laymen' s
Company' s
opinion
MAPE and Bias.
O. Because much of your testimony is so
technical, can you provide a brief summary, in
terms regarding the Company's model-s?
A. Yes. Dr. Shannon and I reviewed the
approach to developing its forecast. It is our
that:
The Company's
variables that
models were developed using
are theoretically rel-evant too25
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Fry, Reb. 24a
Intermountain Gas Company
modeling demand.
The Company's models are statistically
significant.
The estimated coefficj-ents in the Company's
models are statistically signiflcant with the
expected signs.
The Company's model-s corrected for
autocorrelated error terms.
The Company's models provided good forecast
accuracy.
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O. Do you have any final- thoughts regarding the
Companyrs models?
A. Yes. As stated in the letter filed wlth this
Case as Exhibit No. 18, it is Dr. Shannon's and my
opinion that the methods the Company used in preparing
its three statistical regression models are appropriate
and are based on sound statistical methodology. We
bel-ieve that the methods used by Intermountain are
appropriate for weather normafization and that
Intermountain's approach foll-ows the methodology
authorized by the IPUC in Case U-1034-!34.
O. Does this conclude your rebuttal testj-mony?
A. Yes, thank you, it does.
Fry, Reb. 25
Intermountaj-n Gas Company
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CSB Reporting(208) 890-s198
ERY (Di-Reb)
Intermountain Gas Company
(The foll-owing proceedings were had 1n
open hearing. )
DIRECT EXAMINATION
BY MR. WILLIAMS: (Continued)
O So Dr. Fry, yesterday you heard Dr.
Morrison comparing the regression coefficients for the
GS-1 class that were used in the Company's 1986 case
compared to the
by the Company
Staff exhibit.
GS regression coefficlents that were used
in this case and that was entered as a
Do you recall that testimony and, if so,
and respondcould you summarize your understanding of it
to that?
A Yes, I do
understand it, the 1986
model, differences were
recal-l- that testimony. As I
mode1 and the Company's current
by Dr. Morrison and
those two model-s.
to accomplish the
pointed out
Staff related to the coefficients of
While those two mode.l-s are intended
same end, and that is
model usage, they go
to develop a regressj-on equation to
about it somewhat differently, and
sinister or nefari-ous about either
the 1986 approach, those monthly
listed there are indicator
referred to as dummy variables,
there's nothj-ng
approach, but in
coefficients that are
variables, sometimeso25
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CSB Reporting(208) 890-s198
ERY (Di-Reb)
fntermountain Gas Company
which are intended to capture the effect for that month
alone.
That effect is then captured in the
constant term of that 1986 regression equation, so those
coefficients are larger than the coefficients that are
seen in the Company's current model, because in the
current model, the Company models both the calendar and
the heating degree days effects together and so the
coefficients are not identical in the sense that for the
1986 mode1, a coefficlent on a month is either going to
be a zero or one outcome when that month occurs, and with
respect to the Company's modef, that coefficlent is going
to capture the heating degree days and the month effect
and so it would be mul-tiplied against the heating degree
days 1n that month, so there rea11y i-s no way to say
because the coefficients of the 1986 model- are much
different than the coefficients of the current mode1, you
reaI1y are looklng at apple and oranges, if you wi11, in
the sense that the coefficients capture different
effects.
O Now, Dr. Fry,
Dr. Morrison state that the
you also heard yesterday
to include anCompany fail-ed
autoregre s s ive
statement that
term in its modeI, and j-s that a correct
the Company failed to do that, and did
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autoregression, did he apply that appropriately?
A I believe, if I recall correctly, that
Dr. Morri-son stated that whil-e the Company had an
autoregressive term in its regression equation, they
failed to use that term to produce their forecast and
thatfs not correct. The Company did use that term to
produce its forecast. It, I think, is important to
recognize that the autoregressive term that the Company
has used 1s an autoregressive term on the error component
so that the coefficient 1s multiplied against the
previous period's resj-dual-, not the previous peri-od's
consumption, and because the residual is a smal-I va1ue,
it represents the difference between the actual and the
predlcted amount, just the l-eftover unexplained portion.
ft's not the full consumption for the prevlous month.
Consequently, it's not unstable. It's a correction, a
remedy for the fact that tj-me series data often presents
us with error terms that are correlated in adjacent time
periods and so the autoregressive term is a correction
for that correl-ation.
0 So Dr. Fry, Dr. Morrison testified that
the Company's regressj-on model is flawed and his is not.
Did you and Dr. Shannon who you co-teach with and wrote
this testimony wlth, did you have a chance to review and
compare both the Company's and Dr. Morrison's regression
CSB Reporting(208) 890-s198
FRY (Di-Reb)
Intermountain Gas Company
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(208 ) Be0-s198
FRY (Di-Reb)
fntermountain Gas Company
model-s and do you have
A We did.
reviewed those models and our concl-usion
and myself
is that the
Company's model 1s following sound statistical practice,
that the model represents a reasonabl-e model-1ng approach
to modeling weather normal-j-zation. When we fooked at the
Staff's model, the Staff has included terms there that we
think couJ-d be consj-dered to be unnecessary. In fact, in
some of the Staff's models, those terms act.uaIIy are not
statistically significant and so the Company's mode1 has
foll-owed in our opinion sound statlstical- methodology.
O And yesterday you heard Dr. Morrison say
that his R-squared analysis was a backcast of his
regresslon model. Do you agree with that and dld you
conduct a backcast of a different nature?
A We did conduct a different backcast. I
wou1d state that the R-squared measure is not the best
measure for evaluating the quality of a forecast, because
the R-squared measure can overl-ook the bias that can
exi-st 1n a forecast. Bias exists when forecasts
consj-stently over-
R-squared values in
what we did was we
or underforecast. You can have hiqh
bias, so
r-s a
a conclusion from that review?
Both Dr. Shannon
the presence of signiflcant
Iooked at a backcast, which
procedure
member at
recommended by J.
the Universi-ty of
Scott Armstrong, a faculty
Pennsylvania who is an experto25
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in business forecasting applications, and the backcast as
indicated that on alternative measures related to the
quality of the forecasting procedures that the Company's
models for the RS-1 and RS-2 scenarios have l-ower mean
absolute deviations, have lower mean absolute percentage
errors, and have better bias measures, lower bias
measures, ofl average than the model proposed by Staff.
O So what does that mean?
A One of the criteria upon whlch you can
evaluate a forecasting equation is you can fook at how
well it forecasts into the future if you have a holdout
example or if it's possible for you to be able to
postpone your model and look at what future results woul-d
be; however, in this case, that's not possible, so we go
back and l-ook at how well- the model would predict the
past performance, and what we found is that the past
performance with respect to the Company's model is
superior to that for the model given by the Staff in the
RS-1 and RS-2 scenario.
0 So my understanding of your backcast is
you took your model- and you went back in time to a year
prior to the period we're talking about, whether it was
201,5 or 20L4, and you evaluat.ed your model based on known
inputs and known outputs; is that a correct summation of
your backcast?
CSB Reporting
(208 ) 890-s198
FRY (Di-Reb)
Intermountain Gas Company
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ERY (Di-Reb)
fntermountain Gas Company
A Correct. What we did was we took the
models that were estimated and we used those model-s to
predict the past against which we had actual- val-ues to
compare to.
a And Dr. Morrj-sonrs model did not do that,'
correct ?
A Doctor we actualIy, I should say the
Company actua11y, did the backcast on his model. We
simply took the results of the backcast that the Company
performed for both their models and Dr. Morrison's models
and then we cal-culated alternative measures, the mean
absolute deviation, the mean absolute percentage error,
and the bias on those di-f ferent model-s.
MR. WILLIAMS: Madam Chalr, I have no
additional- questions .
COMMISSIONER RAPER: Thank you.
Commission Staff?
MR. KLEIN: The Company
to prepare these additionalovernlght
could take
and let you
of data, I
obj ection
10 minutes with my witness
know how we can respond,
would appreciate it.
had some time
questions, and 1f I
to think about them
that was quite a bit
COMMISSIONER RAPER: Is there any
from the Company?
MR. WILLIAMS: No objection.o 25
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CSB Reportj-ng(208) 890-s198
FRY
Intermountain Gas Company
COMMISSIONER RAPER: Mr. Klein, do you
if we go around and ask cross-examination of other
intervenors, does that provide you enough time or would
you want to be in the room for those? Does it require a
break, I guess, is what I'm asking?
MR. KLEIN: I woul-d prefer to be in the
room. We'd prefer a 1O-minute break. Thanks.
COMMISSIONER RAPER: Okay, 10 minutes it
is. 10 after 10:00, we wiII reconvene at 20 after 10:00.
(Recess. )
COMMISSIONER RAPER: Okay, we are back on
the record and we are in a position, I believe, now to
have Commj-ssion Staff cross-examj-ne Dr. Fry.
MR. KLEIN: Thanks for the short break.
We don't have any cross.
COMMISSIONER RAPER: WeIl-, thanks for the
short break. Mr. Stokes.
MR. STOKES: I have about an hour of cross
for this witness. I'm joking, we have no questions.
COMMISSfONER RAPER: Mr. Purdy.
MR. PURDY: I have zero questions. Thank
you.
COMMISSIONER RAPER: Mr. Richardson.
MR. RICHARDSON: No questlons, Madam
Chair.25
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CSB Reporting
(208 ) 890-5198
FRY (Com-Reb)
Tntermountain Gas Company
COMMISSIONER RAPER: Mr. Otto.
MR. OTTO: No questions, Madam Chair.
COMMfSSIONER RAPER: Commissioners?
COMMISSIONER KJELLANDER: One.
EXAMINAT]ON
BY COMM]SSIONER KJELLANDER:
O If I had 10 different experts, all of whom
had authored books with 10 different model-s, what's the
l-ikelihood that any one of them would agree with
another?
A You woul-d flnd, sir, the l-ikelihood that
they would agree with respect to methodology. You could
also find that they would agree with respect to
statistical- significance on the mode1, but the challenge
with regression modeling is every model is going to think
that it is the best model. There are some things that we
l-ook at and some things we can check. There are some
validation checks that can be made, and when those
indi-cate that perhaps remedj-al measures need to be taken,
we can take some remedial- measures, but the truth is, as
you
wdY,
front
said, that
to think about it, t.o get into
door or the back door or Santa
there's more than one wdy, perhaps another
the house through the
Clause comes down25
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CSB Reporting(208) 890-s198
FRY (Com-Reb)
Intermountain Gas Company
the chimney, but it
agreement as to what
standard approach to
interpretation.
doesn't mean that there isn't some
is appropriate
modeling and a
with respect to a
standard approach to
COMMISSIONER KJELLANDER: And I think I
see the next opportunity for a Ph.D. dlssertation and
that is to model what you just said.
COMMISSIONER RAPER: Any other questions
from the Commission?
EXAMINATION
BY COMMISSIONER RAPER:
0 f have
yes/no answer that has
one and I'm going shoot for that
been elusive to Mr. Wil1iams up to
this polnt, and that is with
doing things differently than
begin from a different pIace,
pIace, wouldn't the Company's
the recognition that you're
Mr. Morrison and that they
so they end in a different
mode1 be stronger if they
had more complete load data?
A More data
O I failed.
A Irm sorry, more data is generally always
wel-come.
COMMISSIONER RAPER: Fair enough. That'so25
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CSB Reporting
(208 ) 890-5198
FRY (Com-Reb)
Intermountain Gas Company
al-l- I have. Is there any redj-rect f rom the Company?
MR. WILLIAMS: No redi-rect.
COMMISSIONER RAPER: Thank you.
COMMISSIONER ANDERSON: May I fo11ow up?
COMMISSIONER RAPER: Uh-huh. You okay
with a Commissioner asking a question, Mr. Williams?
MR. WILLIAMS: I guess.
EXAMINATION
BY COMMISSIONER ANDERSON:
O More data belng always wel-come, but
doesnrt and maybe I'm wrong, but does the backcast
actually help eliminate some of that more data issue
because you go back and l-ook at the formula that was
used?
A When you look at the backcast,
was able to
what it
tel-l-s you
forecast,
the extent
is how wel-l your mode1 predi-ct,
more better
happened, so to
hope that it's
hope to be able
calf that
model, capture what had already
that we have more data, and we
datar we could al-ways
precise estimates. We
that the models that we estimate have
that by the theory are consistent, and so as
data, they woul-d become even more consistent
perhaps
wouldto get more
consistency,
coefficients
we had moreo25
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CSB Reporting
(208 ) B9o-s198
FRY (Com-Reb)
Intermountain Gas Company
to the true val-ues that are unobservable, so werre trying
to get representation of the true values that we can't
observe, and the way we do it is, one way we can do it
is, through modeling and because of the modeling
techniques that have been employed, they're said to be
consistent j-n terms of the estimators, meaning that as we
got more data, we woul-d have a tendency, a tendency, ofl
average to move cl-oser to the true val-ues.
COMMISSIONER ANDERSON: Thank you.
EXAM]NAT]ON
BY COMMISSIONER KJELLANDER:
O To, I think, Commissioner Anderson's
of diminishing return j-npoint, but isn't there a point
terms of more data, more data,
A
o
A
more data?
Most certainly.
Okay.
And yes, the answer to that is yes.
COMMISSIONER KJELLANDER: I got it.
COMMISSIONER RAPER: Congratulations,
Commander Kjel-l-ander. Is there
Commissioners' questions?
any redirect based on the
MR. WILLIAMS: Nothing.
COMMISSIONER RAPER: Thank you.Thanko25
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CSB Reporting(209) 890-s198
BLATTNER (Di-Reb)
fntermountain Gas Company
your Dr. Fry, for your testimony and your time.
THE WITNESS: Thank you.
(The witness l-eft the stand.)
COMMfSSfONER RAPER: The Company may
its next rebuttal witness.
MR. WILLIAMS: The Company would call
BIattner.
call-
Lori
LORI BLATTNER,
produced as a rebuttal wj-tness at the instance of the
Intermountain Gas Company, having been previously duly
sworn to tel-l the truth, the whol-e truth, and nothing but
the truth, resumed the stand and was further examined and
testified as folfows:
DIRECT EXAMINATION
BY MR. WILLIAMS:
O Woul-d you
business address for the
A I'm Lori
please state your name and
record?
Blattner, 555 South Cole Road,
Boise, Idaho.
O And
prefi-1ed rebuttal
two exhibits, 39
the same Lori- Bl-attner that
consisting of 15 pages and
this case?
are you
testimony
and 40, ino25
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CSB Reporting(209) 890-5198
BLATTNER (Di-Reb)
fntermountain Gas Company
A Yes, I am.
O And if I were to ask you the same
prefiled rebuttal testimony,
the same?
questions contained
woul-d your answers
A They
MR.
that Ms. Blattner's
an your
today be
wouId.
WILLIAMS: Madam Chair,
rebuttal- testimony be
I would ask
record as if read and that Exhibits 39 and
spread
40 be
upon the
entered
into the record.
COMMISSIONER RAPER: Without objection,
Ms. Blattner's rebuttal testimony will be spread upon the
are admitted torecord as if read. Exhibits 39 and 40
the record
(IGC Exhibit Nos. 39 & 40 were admitted
into evidence. )
testimony of
record. )
(The following prefiled rebuttal-
Ms. Lori Bl-attner is spread upon the
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Blattner, Reb. 1
Intermountain Gas Company
O. Please state your name, posj-tion and business
address.
Analyst
My name is Lori A
with Intermountain
or "Company" ) .My busi-ness
83707.Road, Boise, ID
O. Are you the same Lori B1attner
and previously presented prefiled direct
behal-f of Intermountaj-n Gas Company
A. Yes.
A . Blattner.
Gas Company
address is
f am a Regulatory
( " Intermountain"
555 South Cole
that prepared
testimony on
in this Case?
O. What is the purpose of rebuttal- testimony?your
wil-l-A. My rebuttal testimony address the
following areas:
1) Discuss the Weather Normalization case upon
whlch the Company's weather normalization
process is based,
2) Discuss important differences between the
Normal- heating degree days used by the Company
in this proceeding and the Average weather year
used by Staff witness Morrison, and
3) Explain Staff's incorrect use of the
Company's GS "subclasses".
O. Will your rebuttal testimony discuss the
statistical- methods employed by Dr. Morrison in the
creation of hi-s al-ternati-ve weather normalization modefs?o 25
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Blattner, Reb. 1a
Intermountain Gas Company
A. No.
Dr. PhiIip Fry
The regression modeling is
and Dr. Patrick Shannon in
addressed by
Dr. Fryrs
rebuttal-testimony.
Weath,er Nolrlaa,Tizatioa Case (U-7034-734)
Please explai-n this case.o
A. On
u-1034-734,
July 30, 1986, the Company filed Case No.
an Application with
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the Idaho Public Util-ities Commlssj-on requestlng
authority to util-ize its proposed weather normal-ization
model for ratemaking purposes. In the Order from that
Case (Order No. 21048) , the Commissj-on "encourages fGC's
efforts to improve and refine its weather normalization
methodology". The Company was "authori-zed to implement
its proposed weather normalization model for internal
forecasting and ratemaking purposes", with the Commission
reserving decision on its appropriateness until such time
as it is presented in a ratemaking case for
consideration.
O. Has the Company been using this method slnce
L986?
A. Yes, the Company has been using the methodology
outlined in the above referenced Case slnce its
authorizatj-on. The weather normal-ized consumption level-s
resulting from this method have been used and
incorporated in all of the Company's PGA filings
following L986. These normafized therm safes have been
reviewed by the IPUC Staff during the annual PGA audits.
Addltionally, the forecast usage for the months of March
through October in the Company's Integrated Resource
Plans (IRP) have been forecast based on this method.
Again, these cal-cul-ations have been reviewed by Staff as
part of the Staff's audits of the Company's IRP filings.
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Blattner, Reb. 2
Intermountain Gas Company
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Blattner, Reb. 2aIntermountain Gas Company
O. Who developed the weather normal-ization
methodology employed by the Company?
A. The methodology was developed by Dr. John M.
Kohlmeier, then a Partner with Arthur Andersen & Co.
Beginning on Page 1 of his Revised Direct Testimony in
Case U-1034-734 (see Exhibit 39) he outlines his
professlonal credentials in the
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Blattner, Reb. 3
Tntermountain Gas Company
areas of quantitatlve methods where
modeling, planning and forecasting.
O. Pl-ease explain the method.
A. The "Methodofogy Overvj-ew"
he specialized in
found on
of Revlsed Exhibit No. 1 from Case U-1034-L34
Pages 2-3
( see
Exhibit 39) 1s as follows:
"To determine the degree to which actual- therms
safes were higher or Lower than normal as a resul-t
of actual- weather, it -r.s necessary to first quantify
the reLationship between weather and safes. This
quantification js achieved through the use of
multiple reqression anaTysis at Intermountain Gas
Company (IGC) . Therm usaqe .r.s sLatrsticaTTy
estimated as a function of weather and non-weather
variabJ-es. The rel-ationship between qas use and its
main determinants js mea sured in three regression
equations, one which explains resrdential- space
heating-only sales / one which explains residentiaf
space and water heating saLes, and one which
explains smaLL commerciaL sal.es. All equations are
system wide.
To expTain qas use/ the regressr-on equations
use weather concepts, such as heating degree days,
and economic information, such as gas price.
Combining data for alL months of at J-east six fiscafo25
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Intermountain Gas Company
yeats
within
in each regression aLfows enough variation
information from more thanthe data to gatn
one weather concept and from economic variabLes.
The summary statrstics for the equations demonstrate
that the regress-1ons ate accurate in expLaininq
detaiLed in thenonthly variations in saLes as
methodol-ogy descriptions. Each
tested for autocorrel-ation and
necessary.
to
regression was
corrected when
Once the regression equations have been
estimated, it -r.s thespecified and
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Bl-attner, Reb. 4
Intermountain Gas Company
coefficients of the weather variabl-es that are
important to the weather adjustment process. These
coefficients measure the response of saLes to
changes in those weather variabLes. For exampTe,
the coefficient of the heating degree day (base 55")
variabl-e in the space heating only, residential
total- system equation represents the number of
additional- therms per customer that one additional-
heating degree day (base 65') would cause. The
coefficient of the heating degree day (base 45')
variabfe represents the number of additionaL therms
per customer that one additional- heating degree day
(base 45") wouJ-d cause. Two weather variabl-es are
used because an additional- degree drop in
additional- use oftemperature befow 45'
gas than a degree drop
and 45". The effect of
causes more
in temperature between 65"
the HDD45 r.s additive to the
effect of the HDD65. By nultipTying these
coefficients by the difference between the normal-
and actuaL heating deqree days (base 55" ) and
heating degree days (base 45" ) , the difference
between actuaf and normaL therms per customer is.
determined.
l/ote that the non-weather variabLes are used
only to estimate the regression equations and thato25
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Bl-attner, Reb. 4a
fntermountain Gas Company
onJy the coefficients of the weather variabl-es are
used in the actual- adjustment. Afso note that the
primary purpose of the model-s is to adjust sa-Z.es
that have already occurred rather than to predict
future sa-Les. "
O. How are the Company's weather normalj-zation
models today the same or dlfferent from the 1986 model-s?
A. In t986, the mode]s included
and 65 degree
a heating degree
day level. As Dr
rational-e for
day term at both
Kohlmeler stated
the 45
in his testimony, the
using both the traditional 65 degree base as well- as a
second 45 degree base was to
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Bl-attner, Reb. 5
Intermountain Gas Company
capture the fact that customers behave differently with
respect to very cold temperatures than they do to more
moderate temperatures. He also incl-uded monthly binary
terms for October through Apri1, and a Usage Trend
variable. Each year, the Company uses multiple
regression analysis to develop regresslon equations for
each of its core market classes (RS-1, RS-2 and GS) on a
total company basis as was done in 7986. Over time, the
varlabl-es have changed some. With the warmer weather we
have experienced over the past decades, the HDD45 terms
are no longer statistically significant, because we have
not had enough weather at low temperatures. As Dr. Fry
discusses in his rebuttal testimony, the Company also
determined that monthly HDD55 coefficients better
captured the
temperature
a degree day
the furnace
will- cause a
way customers respond
at different times of
1n June
back on,
furnace
differently to
the year. For example,
may not cause the customer to turn
but an extra degree day in January
that is already on to work a l-ittl-e
harder. These variables incorporate what the HDD65 and
the binary variables together were measuring in the
original model-s. A Usage Trend variabl-e is al-so incl-uded
in the Company's 2016 models.
O. Wasn't the Usage Trend variable rejected by the
Commission in the 1986 Case?o 25
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Blattner, Reb. 5a
Intermountain Gas Company
A. No. The Company had proposed an additional
normal-izatj-on adjustment to actual usage based on the
Usage Trend variabl-e. This additional adjustment was
withdrawn by the Company. However, the Usage Trend
variable properly remained in the Weather Normal-lzation
model-s.
O. How did the proper construction of the weather
variabl-es ensure an accurate
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Blattner, Reb. 6
Intermountaj-n Gas Company
matching of gas usage and
A. On page 4 of Dr
No. !, he explained that
weather in the 1986 filing?
Kohlmeierrs Revised Exhibit
"One of the
quantifying the rel-ationship between
critical aspects in
qas use and weather
is the correct matching of weather data with sales data".
Heating degree day data was collected from five NOAA
weather stations: Caldwe1I, Boise, Idaho Fal1s,
Pocatello, and Twln Fal-Is. Intermountain's service
terrj-tory contains areas that can have dramatically
different temperatures at a given point in time. To
incorporate these weather differences, the weather
varj-ables needed to be constructed using weather data
weighted by the number of customers who experienced that
same local weather. Those divisions were represented by
the Caldwe11, Boise, Idaho Falls, Pocatel-lo and Twin
Falls weather stations. Because residential and some
commercial customers are bil1ed cycIica11y, usage data in
a particular month represents sales in the current month
and previous month. To correctly match weather and
sal-es, the weather variables used in the analysis
represent weighted total-s of the daiJ-y values of these
variables for the month. Each day's weather measure is
weighted by the number of customers for a particufar
month who experienced that weather.
O. Are the weather variables constructed in theOZ3
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Intermountain Gas Company
same manner in the 201,6 filing?
A. The weighting methodology is exactly the same
in 201,6 as it was in 1986. Over the years, the Company
has seen growth in bot.h the Sun Valley and Rexburg areas.
To ensure that these areas were properly reflected in the
weather data, the Company began collecting weather from
both Sun Val-Iey and Rexburg. Thus the weighting has been
expanded from the origj-naI 5 weather stations to now
inc]ude 1
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Bl-attner, Reb. 7
Intermountain Gas Company
weather stations
Coryaay NomaZ heating degre,e daye vs. Staff
Average weatb.er year
O. Is Staff's Average Weather Year approach
approprj-ate for ratemaking purposes?
A. For the following reasons, the Company does not
believe Dr. Morrisonfs Average Weather Year should be
used for ratemakj-ng purposes:
1) The Average Weather Year used by Dr. Morrison was
based on a 14-year average of heating degree days
that ended L2 years before the test year,
2) The method used by Dr. Morrison is not a common
industry practice for cal-culating Normal HDDs nor is
it a met.hod supported by the National Oceanic and
Atmospheric Administration (NOAA),
3) The data chosen by Dr. Morrison was not weighted
appropriately to reflect Intermountain's current
customer base.
O. What definition of Normal- heating degree days
was used by the Company in this Case?
A. As the Company discussed in pre-filed testimony
(Blattner Di, page 4, fine 3-72), a RoIIlng 30-year
Normal was used by the Company. NOAA uses a 30-year
deflnition of Normal that is recalculated at the end of
each decade. Many utilities, including Intermountain,o 25
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Blattner, Reb. 1a
fntermountain Gas Company
have tried to minimize the large "shock" that can come
with the every ten year update to Normal- weather by
util-iz:-ng a Rolling 30-year Normal that is updated
annually rather than at the end of each decade. As
detailed in their most recent Rate Case (AVU-G-15-01),
Avista also uses a 30-year rolling average definition of
Normal. Intermountain based its case upon Normal heatlng
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degree days from the 3O-year period ended December 20L5.
a. How is this Normal weather used by
fntermountain?
A. The Company col-l-ects heating degree day data
from seven weather stations including: Boise, Ca1dwell,
Twin Fal-1s, Sun Va11ey, Pocatello, Rexburg, and Idaho
Fal-ls. The heatlng degree days for each day are summed
and then averaged for the 30 year period. This process
creates 355 days' worth of 30-year average heating degree
days for each of the seven weather stations. The da1ly
data is then weighted by the number of customers in each
dlvision represented by the weather stations and by the
billing cycles, dS described in regards to the actual
weather weighting above. This is done separately for
each rate cl-ass. The customer weights are based on the
most recently completed cal-endar year, in this case 2015.
Because the weather in Intermounta j-n' s servj-ce territory
can be so di-verse, this process al-l-ows for an accurate
matching between the weather data and the number of
customers that would experience that weather. The data
was summed by revenue month and became the Norma1 heating
degree days used by the Company in the case. In the
actual months, actuaf heating degree days are compared to
Normal heating degree days and the monthly regression
coefficient is applied to the difference to arrj-ve at the
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fntermountain Gas Company
normali zlng adj ustment
In the forecast months,
for the month for each rate class.
rate cfass Normaf heating degree
days are used
cal-culate the
in the appropriate regression equations to
forecast monthly usage given Norma1 heating
degree
nY
Normal-
days for each class (RS-l, RS-2, and GS-1).
Did Dr. Morrison use the same definition of
to develop his proposed normalized usage?
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Intermountain Gas Company
A. He did not. Instead, Doctor Morrj-son chose to
experiment with an Average Weather Year. As stated in
Staff Response to Intermountain's Production Request No.
L3, "an average weather year 1s a year consisting of
average weather months". For each month, Dr. Morrison
used an average of a select series of RS-1 monthly
Heating Degree Day (HDD55) values provided by the Company
in its response to Staff's Producti-on Request No. 27.
O. What was the HDD65 data that was incl-uded in
response to Staff Production Request No. 27?
21, the
stored
In response to
Company provided
Staff's Production
a download of the
Request No.
data that was
1n it.s eViews database. The Company provided a
dataset for RS-1, RS-2 and GS-1. That data only included
actual- data from October 1989 through April 2015. In
written discussions with Staff regarding additional
information related to Production Request No. 21 that was
needed to complete the review, Dr. Morrlson stated, "You
won't need to provide me temperature data. f can download
that myself, if you provj-de me the list of facil-ities
from which the temperature information was obtained".
Consequently, the Company provided the l-ist of weather
stations, but no further heating degree data.
0. In the Company's review of Dr. Morrison's work,
how was the Average Weather Year cal-culated?o 25
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A. Dr. Morrison used the HDD65 data from only the
RS-1 file (see the HDD tab of Dr. Morrison's file
incfuded in response to Production Request No. 73, "PR
#13-36 Workpapers Morrison Normallzation.xlsx"). The
HDD65s for each month
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Intermountain Gas Company
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Blattner, Reb. 10
Intermountain Gas Company
were summed and that answer was divided
months. In the calculation of Average
from October 1989 through Ma1, 2693 was
data from June 2003 through April 20\5?
A. No reason was given. However,
bel-ieve it was an error on Dr. Morrison's
O. Was a reason given for the exclusion of the
by the number of
Weather, only data
used.
in my opinion, I
part to excl-ude
from theL2 years of weather
Morrison included the
calcul-ation of his
the most recent
analysis.
data in the
it does not make logical sense
industry?
A.
an Average
the manner
the industry accepted use
a Rolling 30-year average.
different time period, but
fourteen year average that
date the case was filed.
of the
Some
recent 12 years of
data
Dr.
from the Normal HDD calculations.
O. Is the use of an Average Weat.her Year for
normalization standard practice 1n the natural gas
regressr_on
to exclude
equations, so
those years
however, of
average or
I am not aware of another gas utility that uses
Weather Year for normal-ization ca]culated in
used by Dr. Morrison.I am aware,
NOAA 30-year
utilities use
none that I am aware
a slightly
of use a
stops twelve years before the
O. Are there any additlonal- problems with Dr.
Morrison's Average Weather Year approach?o 25
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A. Yes. The actual- HDD65 data provided to Dr.
Morrison in response to Production Request No. 27 was
customer and cycle weighted based on the actual customers
and cycles for each actual- month. As the following chart
il-l-ustrates, the percentage
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Intermountain Gas Company
of customers llving within the Company's warmer western
state has increased compared with theregion of the
percentage of
region. Thus,
2015 customers
customers living in
the weighting the
is much different
the colder eastern
Company
than the
used based on
weighting would
have been 1n the 1989 through 2003 data used by Dr.
Morrison.
Percent of Customers Living h the Western Region
66%
64%
62%
60%
58%
s5%
54%
s2%
1990 1995 2000 2005 2010 2016
O. What is the dollar impact t.o Test Year Base
Rate Revenue as proposed by the Staff, caused by using
Dr. Morrison's abbreviated and improperly weighted
Average Weather Year for normalization purposes?
A. Dr. Morrison has infl-ated his Normalized Test
Year Base Rate Revenue by $3.6 mj-lIion as outl-ined in
Exhiblt No. 40. The Average
Dr. Morrison is colder than
Weather Year
the
cal-culated by
Normal- heating
9% for RS-2.degree days by 5? for RS-1 and
Company' s
GS-1 and by
/
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Blattner, Reb. 11a
Intermountain Gas Company
Using the colder Average
produces higher usage per
Weather Year heating degree days
customer when applied to Dr.
Morrison's models than does using Intermountain's Normal
heating degree days applied to those same model-s.
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O. In your opinion, is Dr. Morrison's proposal
that the Company now set rates based on Average Weather,
instead of Normal- heati-ng degree days, and use a 14-year
average of heating degree days that ended 72 years before
the test year, instead of using 30 years of weather
history, a material- change to this Commission's
sanctioned weather normal-ization methodology for
fntermountain, as authorized in Commlssion Order No.
2L048 in Case No. U-1034-734?
A. AbsoIutely. In my opinion, the proposed
changes are so material as to render them essentially a
new methodology and a significant departure from the
weather norma1ization methodol-ogy authorized by this
Commission for the Company in Case No. U-1034-734. In
making such a materia1 deviation from prior Commissi-on
approved practice, I believe the burden is on Dr.
Morrison to prove his methodology is better than the
current methodology approved by the Commission and used
by other natural gas util-ities. In fact, Dr. Morrison's
methodology is inferior , for the reasons outl-ined above.
GS " Sttbc,Zasses "
O. Please define GS "Subclasses".
A. GS "Subcl-asses" are an arti-ficial- construct
based on the way the Company reports billing data. The
Company's billing data reports GS-10, cS-11, GS-20 (until-
Blattner, Reb. 72
Intermountain Gas Company
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Tntermountain Gas Company
August 2075), GS-60, and GS-12. The GS-60 designation
tracks customers that use natural gas to pump i-rrigation
water, while GS-72s are customers that use natural- gas
f or CNG vehicl-es. A1though the remaining categorj-es are
tracked on Intermountainrs biJ-1ing records, they do not
represent customer groups with
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Blattner, Reb. 13
fntermountain Gas Company
homogeneous usage characteristics. They are instead
internal- billing designations. GS-10 denotes customers
that are billed at the end of the calendar month while
GS-11 denotes customers that are bifl-ed on a blIIing
cycle basis. With the implementation of the new CC&B
customer information system i-n 2015, it was determined
that the GS-20 designation was indistinguishable from the
GS-10 designation as both groups were bil-l-ed on a
calendar month basis. As the data provided in response
774 illustrates, the
the GS-10 designation
than the case of CNG,
to Production Request Nos. 113 and
into
Other
GS-20 designati-on was rol-l-ed
beginning in August of 2075.
which has a separate pricing
tariff, these groups are all-
tariff.
O. Should
differently for
A. Yes.
No. 15, p B illustrates,
the CNG (GS-12)normafize
structure in the GS-1
bil-led under the GS-1
any of the GS-1 "subclasses" be treated
weather normalization?
As Company witness Darrington's Exhibit
the Company did not weather
or water (GS-60) salespumper
Thein the actual- months of
characteristics of both
from the characteristics
the filing.
these groups
of the rest
usage
are very different
of the GS-1 cl-ass.
Since GS-12 usage is
the forecast months
relatively flat,
on 2015 usage. The
the Company based
forecast monthso25
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Intermountain Gas Company
for GS-60 were
Morrison agreed
appropriate for
O. What
designations ?
A. While
Intermountain' s
customer groups
They are
based on a three-year average. Dr.
that weather normal-ization was not
these customers.
about the cS-10, GS-11 and GS-20
these categories
b111ing records,
with homogeneous
are l-isted on
they do not represent
usage characteristics.
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Blattner, Reb. 74
Intermountain Gas Company
instead internal billing designations. As noted above,
GS-20 is no longer a designation tracked in the system.
It is therefore inappropriate to segregate these
"subclasses" for weather normalization. The
the aggregated data from these designations
base its total GS-1 regression analysj-s and
weighting.
Company uses
upon whj-ch to
weather
these subcl-asses
treatment?
O. Did Dr. Morrison also use aggregated GS-1 data
in his analysis?
A. No. Dr. Morrison decided to use the detailed
billing data to segregate the GS-1 cfass and bull-d three
separate weather normalj-zation equations. As Dr.
Morrison outl-ined in his Direct Testimony (page 3, lines
15-16), "my analysis of the Companyrs GS-1 subclasses 1s
more detailed than the Company's". He created separate
equations for GS-10, GS-11 and GS-20. As noted
previously, the GS-20 designation was rolled into the
GS-10 designation in 20L5 and does not exist separately
today.
0. Do the consumption patterns of
differ sufficiently to warrant separate
A. No. Since the subclasses are only desj-gnations
made by the Company to identify the meter reading
schedule of the customer, there is nothing
distinguishable about the customers. Breaking the classo25
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Intermountaj-n Gas Company
into artificial groups does not enhance the overa1l
accuracy of the equations. In factr dS Dr. Fry's
rebuttal- testj-mony points out, Dr. Morrisonrs equations
for GS-1l and GS-20 include variables that are not
statistical-ly significant .
single mode1 based upon the
model- with sound statistics
hls rebuttal testimony.
fn contrast, the Company's
entire GS-1 class provides a
as Dr. Fry demonstrates in
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O. Does this conclude your Rebuttal- testimony?
A Yes.
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CSB Reporting(209) 890-s198
BLATTNER (Di-Reb)
fntermountaln Gas Company
(The fol-lowing proceedings were had in
open hearing- )
MR. WILLIAMS: Thank you, and I have a few
additional questions for Ms. Bl-attner , tf I might.
DTRECT EXAMINAT]ON
BY MR. WILLIAMS: (Continued)
O Ms. Blattner, a lot of the there's been
a l-ot of terms and definitions that have been used the
l-ast coupl-e of days with respect to modeling. Have you
prepared an exhibit that helps us aII get on the same
page as far as definitions in this worl-d of regression
and normal- weather?
A I have.
MR. WILLIAMS: If I could get what's been
premarked as Exhibit No. 48 handed out.
(Mr. McGrat.h distributing documents. )
(IGC Exhibit No. 48 was marked for
identification. )
O
first of all,
preparation?
A
yesterday listening to
BY MR. WILLIAMS: So therers been we11,
woul-d you explain this exhibit and its
Yes, I td love to, so as I
the testimony and
was si-tting
trying to thinko25
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BLATTNER (Di-Reb)
Intermountain Gas Company
of questions that would help clarify some of the issues,
it seemed like we were getting into a really tangled-up
mess of where we rea1Iy didn't know where we were, right,
and so I went home fast night and I was trying to explaln
it to my family over dinner and my son was l-ike, "Mom,
all you have to do is explain it to them l-ike you would
explain it to me, " so f tried to put together this
17-year-old definition of what we're talking about and
then, hopefully, we can go from there and I hope if you
have questions, then I'm happy to go more in detail, but
I'm hoping that this will give us a starting point so at
least we I re all talking the same language in regards to
the Company's
o
A
testimony.
Did you prepare
I did, yes.
MR. WILLIAMS:Okay, I would move that it
be admitted into evidence at this point.
COMMfSSIONER RAPER: Without objection,
Exhibit No. 48 is admitted to the record
(IGC Exhibit No. 48 was admitted into
evidence. )
O BY MR. WILLIAMS: A11 right; so Ms.
Blattner, there's been a lot of discussions about 30
years of data, 26 years of data, 74 years of data, other
data sets for different parts of a model attempting to
this Exhibit No. 48?
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BLATTNER (Di-Reb)
Intermountain Gas Company
define normal weather. Coul-d you put those different
data set years into the different categorj-es on your
definitions sheet?
A Yeah, I think first Ird like to go through
the definitions sheet reaIIy quick
0 Okay.
A and I think there's two main issues
that we're talking about from the Company perspective
that weather normal-ization 1s the umbrell-a and then
within that, you have the cal-culation of normal heating
degree days and that's an important issue in the gas
industry. It's something that has come up often in the
Iast 20 years that I've been working on this, whatrs the
appropriate definition of normal weather, and NOAA uses a
3O-year average that
utilities around the
ends each decade, and a lot of
country instead of using the
they've gone to a rollingdecade-ended NOAA definition,
30-year average.
I believe in reading the testimony from
Avista's l-ast case, thatrs the definition that they use,
and so we're very consistent, I think, with what other
util-ities are doing, so we're using a rolling 3O-year
normaf definition of the weather, and so there's a
cal-culation of the appropri-ate normal weather, and then
the second part is the regression equation that you applyo25
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BLATTNER (Di-Reb)
Intermountain Gas Company
to the normal- weather to calcul-ate usage, and I think
it's realJ-y important to keep those two areas completely
separate, because the calculation is different and the
time period of data that the Company used is different in
the two different steps, so that's what f've tried to do
in the modeling definitions is give you the definition of
regression modeling and then the definition of how we
calculate normaf weather, and normal weather becomes the
variable that you
of the regression
usage, So I did --
At
Terms Used Above,
you go to Staff's
picked on the very
that, it's easy to
O Please
apply these
model- to and
at the top are
the very bottom
so if we want to
proceed.
so if you take
coefficients that come out
that equals the norma.l-
Modeling Definitions.
there's Statistlcal
do a quick
Exhibit L24 from yesterday
Iast page, so we can just
turn to.
example, if
and they
stick with
A Okay,'on the very last
page, the
so those
second co]umn over is label-ed "Coefficient" and
are the coefficients that come out of the model-
and I've listed them here. The constant and this is a
simpllfied example.
are in the model- in,
I dldn't put all
but just to give
of the terms that
you an idea of how
it works, you take t.he constant and you add this
coefficlent that comes out of the model, multiply that byo25
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CSB Reporting(209) 890-s198
BLATTNER (Di-Reb)
fntermountain Gas Company
the normal degree days, and when you do the math on that
and add it up, that would be your usage for January, so
kind of see what the difference is between theyou can
coefficient and
you apply that
things that we
there's a and thi-s
then the heating degree day variabl-e that
coefficient to, so those are the two
want to keep separate, and in the center
is the crux of the difference
between us and Staff is that there is a distinct
difference in the way that we're calculating our normal
heating degree days.
Staff is taking an average of the data
that we provided to calculate our regression equations.
They're using an average of the weather that's included
in that, but they only used 74 years of datar so theirs
is based on October 1989 through May of 2003, and they
only used heating degree day data for the RS-1 c1ass.
The Company is using data from January --
weather data from January
we cal-culate a unique set
customer class. Because
1986 throuqh December 20L5 and
of heating degree days for each
service territory is so
a lot different weather in
our
different
FalIs,
weather
that reflects what
diverse, you can experience
Boise than you can in Idaho and so we weight our
stations and that
our customers are
heating degree days
weather by seven
gives us weather
actually experiencing, and so thoseo25
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BLATTNER (Di-Reb)
Intermountain Gas Company
are summed are averaged for the 3O-year period and
the different,then they're weighted by the customers in
seven different, l-ocations around the state, so that's
our normal weather.
O And Ms. Blattner, you listened to Dr.
Morrison yesterday when he revised his testimony to say
that the Company did not provide to him the full range of
heating degree days. Do you have a response to that?
A Yes, I have too many papers up here, so we
did provide the data to Dr. Morrlson. In production
request 27, which I think was actually what you just had,
in production request 2J, we provided the 26 years of
data for the regression equations, and then as and so
that 26 years of data is what was in our database, but
there have been some changes in the way that our
customers have used natural gas over the l-ast, you know,
30 years, and so with the help of our consul-tants, we
Iooked at different ways to model that time period, and
we determined that the structural shifts are important
enough that we've shortened the data series, so things
like the building codes that they put in place in the
early 1990s, the efflciency factors that you find on new
appliances and those sorts of things have changed the way
that customers use natural gas.
The pricing environment, you know, we hado25
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CSB Reporting(209) 890-5198
BLATTNER (Di-REb)
fntermountain Gas Company
the blg run-up in
we had it kind of
price environment
in response to all
shortened the data
went through 20L4,
better refl-ect how
gas prices in
tail- back off
the early 2000s and then
and wetre in a lower
now, so the way
of that input
series so that
that customers behave
is different, and so we
it started in 2003 and
natural gas today. We're not are trying to
to know how
really would
going to use
forecast how
they used it in 1989. We want they're going
to use it today, and so that was our method.
O Ms. Blattner, ds far as the calculation of
the heating degree days and the 30-year period, was that
data used in ful-f for that period of time? You're now
talking about your regressJ-on model versus your heating
degree day calculation; correct?
A So the data that we provided so that
was data that we provided Dr. Morrison was for regression
equatlons.
O Okay.
A And then the second piece, the data for
the heating degree days, the normal weather calculation,
Dr. Morrison 1n 1n my testimony actua11y, my rebutt.al
testimony on page 9, beginning on line 9, "fn response to
Staff's Production Request No. 2J, the Company provided a
download of the data that was stored in its eViews
because we felt like that
our current customers are
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BLATTNER (Di-Reb)
fntermountain Gas Company
database.
and GS-1, "
The Company provided a data set for RS-1, RS-2
data from
written
and, "That data included only actual-
October 1989 through April
so that was
2075," and then, "In
discussions "the data that we just
di-scussed.
That's the data that was included in our
regression equation calculation, and then, "In written
discussions with Staff regarding additional information
related to Production Request No. 21 that was needed to
complete the review, Dr. Morrison stated, 'You won't need
to provide me temperature data. I can download that
myself, if you provide me the list of facil-ities from
which the temperature information was obtained.'
Consequently, the Company provided the Iist of weather
stations, but no further heating degree data"; so we did
not provlde Dr. Morrison the 30 years of temperature data
that we used to calcul-ate the normal heating degree days.
O Ms. Blattner, you are famil-iar with
Exhibit No. 46 in which I di-scussed with Dr. Morrison
yesterday and these are screenshots from his model with
respect to the summation of the heating degree days?
A Yes, I am.
O Okay, would you wal-k us through that
Exhibit No. 46?
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CSB Reporting(209) 890-s198
BLATTNER (Di-REb)
Intermountain Gas Company
model that he provided us in response to a production
request asking him how he performed his cal-culations, and
this is from the heating degree day tab, So this is the
variabl-e that he's calculated to apply his coefficients
to, so it's the heati-ng degree day calculation, that
separate part of what we've been talking about.
0 Can you point to on that exhibit or do
you need a copy of that exhibit?
A f've got it.
O So could you point to the formula on that
exhlbit ?
A So the formula, you can see several
places, tf you Iook in Figure 1 --
MR. KLEIN: Excuse me, do we have a copy
of Exhibit 46?
COMMISSIONER RAPER: I do-
MR. KLEIN: Got it.
THE WITNESS: So if you look about under
Fj-gure 7, you can see the word "VLOOKUP" and then you go
across to the formula bar and you can see the "SUMIf"
statement, and so what's that doing is starting on l-ine 3
can see that line 3and summing through
is October 1989 and
that line t66 goes
data from October
Iine 166l
that goes
through May
3 you can see
he's using
which is a
so you
and Figure
of 2003,
,nn?
cn
1989 through Mayo25
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CSB Reporting(209) 890-5198
BLATTNER (Di-Reb)
Intermountain Gas Company
14-year data series that ends 72 years before the test
year.
O BY MR. WILLIAMS: And did the Company's
summation of this data continue on for additional- years
in a period of time?
A So we didn't use this data. This was not
the data that we used to cal-cul-ate our normal weather.
We used 30 years of average temperatures from NOAA from
our seven weather stations.
O Right, okay; so yesterday Dr. Morrison in
his correction of his testimony, is that correction
addressing the same error you're talking about on this
Exhibit 46 or is that a different error?
A He's corrected a different error. The
portion of his testimony that he corrected addressed
regresslon equations. It didn't address the calcul-ation
of normal heating degree days.
O And have you made a correction to include
al-1 30 years
calcul-ation?
of data and can you us to that
dj-fference, the
opposed to the
calculated
point
theHave you
of goingquantification
74?
A
to 30 years as
would be of using the shorter time series
what the impact
of normal
heating degree days versus the more traditional- 30 years,
Yeah; so we wanted to see
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CSB Reporting(209) B 90-5198
BLATTNER (Di-Reb)
Intermountain Gas Company
and I've included that as an Exhibit No. 40 with my
rebuttaf testimony.
O And
A Yes; so I've been doing exhibits long
enough that I should have put header column letters and I
didn't do that, so I apologize, so we'l-.1- have to count
over on columns. Hopefully, you'II bear with me, so what
I've done is compared Dr. Morri-son's average weather with
could you take
quantificationshow us what that
my
you
Dr.
f inal-
important to get this number
A So it's reaIIy
us to that exhibit and
was ?
customer cl-asses, and if you
it results in a $3.5 million
revenue requirement.
question, why is it
right ?
important to get this
I
rolling 3O-year normal in the first two columns, and
can see the difference in col-umn 3, and then I used
Morrison's mode1, so I took his regressj-on model and
so the fourth column is what he calculated out of
his regression model, and then I used his regression
modef and input our rolling 30 heating degree days and so
that therm dlfference is in column, gosh, what. is that,
six, and then I multiplied that by our customers and then
by our current the currently effective base rates to
come up with the revenue difference, and I dld thls for
the Company'seach customer,
total this aIl
impact to the
u
uP, on page 3
Company's
And the
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CSB Reporting(209) 890-s198
BLATTNER (X-Reb)
Intermountain Gas Company
number right because it is this is a significant
material change to the way that util-ities in Idaho
cal-cul-ate normal weather, and the risk of artificially
assuming that weather is co1der than it rea11y is *orad
deny the opportunity for Intermountain to earn its
authorized rate of return, So this is a very important
issue for the Company.
MR. WILLIAMS: Madam Chair, I have no
additional- questions .
COMMISSIONER RAPER: Is there any
cross-examination from Commission Staff?
MR. KLEIN: Yes, thank you.
CROSS-EXAMINATION
BY MR. KLE]N:
O Ms. Blattner, could you turn to page 2,
fines 10 to 74 of your rebuttal testi-mony, please? And
in that testimony, you state that the weather normalized
consumption level-s resulting from this method have been
used and incorporated in al-l of the Company's PGA filings
following 1986. These normalized therm sal-es have been
reviewed by the IPUC Staff during the annual PGA audits.
Do you see that?
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CSB Reporting(209) 890-s198
BLATTNER (X-Reb)
Intermountain Gas Company
O So do you know for a fact that the Staff
reviews normalized therm sal-es in the Company's PGA
filings ?
A So Irve sat down with several- different
Staff, actually some of them are in the room
taken them through the method that we used to
therm sal-es, so I guess this 1s another
issue that we didnrt that I didn't tal-k
the definitions list, but there's two different
things that the models do,
members of
today, and
normalize
important
about on
o
Staff reviewed
PGA filings?
A
exactly how
so my model,s
was whether
forecast
not you knew if
the Company's
My question
normalized
or
therm sal-es in
actual- consumption
Yes,
Okay,
actual- gas costs, isn't the need
normalized consumption levels in
and I've walked through with them
process.
the PGA ensure the Company
of how much the
from normal- conditions?
then because of this true-up to
for accuracy j-n
the PGA minimal?
O
So yes,
we do that
So does
recovers its actual gas costs regardless
l-evels vary
it does.A
o
A So I guess I woul-d say that it's sti1I
very important in the PGA, because if you mess that up a
Iittle bit, l-ike if your devisor is too big, Lf theo25
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CSB Reporting(209) 890-s198
BLATTNER (X-Reb)
Intermountain Gas Company
number of therm sal-es that you have is too
affects the customer's prlces and that's a
the price
so while
that you charge customers based
big, that
real impact on
on the PGA, and
Sdy, a general rate case; correct?
impact to the Company is bigger in
but I think the impact to the
the PGA.
uP,
isa
it's deferred, you know, and customers get trued
the customer for that year is impacted and I think it
materlal and important consideration.
O But not as important a consideration as
would be needed for,
A So the
a general rate case,
customer is bigger in
MR. KLEIN: Thank you.
COMMISSIONER RAPER: Mr. Stokes.
MR. STOKES: We have no questions.
COMMISSIONER RAPER: Mr. Purdy.
MR. PURDY: I have none. Thank you.
COMMISSfONER RAPER: Mr. Richardson.
MR. RICHARDSON: No questions, Madam
Chair.
MR. OTTO: No questi-ons, Madam Chair.
COMMISSIONER RAPER: Any questions from
the Commissioners? Any redirect necessary by the
Company?
MR. WILLIAMS: No redirect.
COMMISSIONER RAPER: Thank you, Ms.o 25
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CSB Reporting
(208 ) 890-s198
MURRAY (Di-Reb)
Intermountain Gas Company
Bl-attner.
Llnda Murray to the stand.
produced as a
Intermountain
to te1I the truth,
truth, was examined
(The witness left the stand. )
MR. WfLLIAMS: The Company woul_d cal-l-
LINDA MURRAY,
rebuttal witness at the instance of the
first duly swornGas Company, having been
the whole truth, and nothing but the
and testif ied as f oll-ows:
DIRECT EXAMINATION
BY MR. W]LLIAMS:
0 Please state your name and buslness
address for the record.
A Linda Murray, 555 South Cole Road, Boise,
Idaho.
0 And are you the same Linda Murray that
caused to be prefiled in this case seven pages of
rebuttal testi-mony, along with Exhlbits 36, 31 , and 38?
A Yes, that's correct.
O And if I were to ask you today
rebuttal
the same
test j-mony,questions contai-ned in that
would your answers today be
prefiled
the same?o 25
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(208 ) 890-5198
MURRAY (Di-Reb)
Intermountain Gas Company
A Yes, they woul-d.
MR. WILLIAMS: Madam Chair, f would ask
that Ms. Murray's
she is availabl-e
testimony be spread upon the record and
for cross-examination
COMMISSIONER RAPER: Do you want her
exhibits admitted?
MR. WILLIAMS: Yes, and
Thank you very much.
COMMISSIONER RAPER: Ms
her exhibits
admitted.
Murray's rebuttal
testimony without objectlon is spread upon the record as
if read, and Exhibits 36, 3J, and 38
MR. WILLIAMS: That's correct.
COMMISSIONER RAPER: -- are admitted to
the record.
(IGC Exhibit Nos. 36 - 38 were admitted
into evidence. )
(The fol-l-owing prefiled rebuttal-
testimony of Ms. Linda Murray is spread upon the record.)
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Murray, Reb. 1
Intermountain Gas Company
O. Pl-ease state your name, position and business
address.
A. My name 1s Linda L. Murray. Human Resources
Director. My business address is 555 S CoIe Rd, Boise,
rD 83709.
O. Would you please describe your educational- and
professional background?
A. I am the Director of Human Resources and have
worked in this rofe since joining the Company in 2007. I
am responsibl-e for al-1 disciplines in the Human Resources
(HR) arena for fntermountain Gas Company and Cascade
Natural Gas Corporation. I am a certified HR
professlonal through The Socj-ety for Human Resource
Management (SHRM) as Seni-or Certifled Professional (SCP)
and through Human Resource Certification Institute (HRCI)
as Senior Professional in Human Resources (SPHR). Prior
to joining Intermountain Gas Company, f worked at
Regional Human ResourceWeyerhaeuser in a
from 2000 to 2006,Trust Joist Corporation
from 1995 to
Manager
as the
rol-e
Manager,
prior to
US Bank
O. What is the
A. The purpose
discuss why the use of
of your rebuttal testimony?
testimony is to (1) to
of Labor Statistics ("BLS")
Compensation Services
that held various Human Resource positions with
and Albertsons
2000 and
Inc.
purpose
of this
Bureauo25
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Murray, Reb. 1a
Intermountain Gas Company
survey data should not be used as proposed by Staff
witness Terryi and (2) further cl-arify the purpose of the
Company's use of nationally recognized independent salary
surveys and the use of the survey data to establ-ish
salary ranges.
O. Does the Company agree with Mr. Terry's
recoflrmendation that BLS data for the state be equally
weighted to the national- surveys the Company uses?
A. No. The Company bel-ieves it currently uses
accepted practices in determining
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Murray, Reb. 2fntermountain Gas Company
compensation. The Occupational Employment Statistical
Survey (OnSl used by the BLS encompasses a large number
of organizations so the questions and job descriptions
used 1n the survey are very broad. The broad scope of
the OES survey does not provide the level- of accuracy,
job match and company size that the surveys we use
provide.
O.
A
Can you explain what you mean by broad
Yes . To illustrate this po j-nt, I will
scope ?
review
the Occupation code 51.-4!27 "Welders, Cutters, Solderers,
and Brazers" l-isted on Mr. Terry's Exhibit 704 (See
Exhibit No. 36, page 15.) As you can see, several- jobs
are grouped into one. When an empJ-oyer responds to the
survey, it marks down the headcount in the column for
which employees' sal-ari-es reside. As you can see, not
only is the employer forced to place employees into
descriptions grouped with other jobs, but there is a l-ack
of clear identiflcatlon of the wage belng paid. For
instance, look at col-umn 'rc'r on Exhibit. No. 36. The
Annuaf Salary range is $62,920-$80,019. This is a broad
range and the Company is not able to use actual salarj-es
as it would when participating in the surveys it uses.
You can compare this description to our job description
for welder, as shown in Exhibit No. 31. As you can see,
there are requirements in our job that woul-d not beo25
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Murray, Reb. 2a
Intermountaj-n Gas Company
included in the descriptions for a welder working in a
machine shop. Our wel-ders must complete test wel-ds that
pass state and federal- code requi-rements. They are
required to pass Operator Qualification (OQ) tests and
have the skil-1s to respond to gas-related emergencies.
(A similar comparison can be made using Exhlbit 36, pg. 4
Occupational- Codes L7-102L "General and Operations
Managers" to Exhibit 38 "Mgr, District Ops").
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Murray, Reb. 3
Intermountaj-n Gas Company
O. Do you have other concerns with
data as Mr. Terry suggests?
A. Yes. There is a lag in t.he data
The most current survey data availabl-e was
June of 20L6 for May of 2075. The surveys
the use of BLS
the BLS uses.
published j-n
we use have
and
more current data. Also, as stated earl-ier, we need to
be able to compete in our ]abor market for skill-s
experience,' especially today in our regulated
environment. Idaho is a rural state and the OES
incl-udes a large number of areas
survey
thatnon-metropolitan
data. The use of this dataIowers the statewide
groups the Company in
survey
with a
meet lntermountain's minimum
ilfustration of the variance
labor market that would not
job qualifications. An
can be found by looking at
surveys. The Logan, UT
area which I understand to beMetropolitan
made up of Idaho
includes several
some of the
Metropolitan
is only 722
metropolitan
Statistical-
employees in
smaff towns
Franklin County which
and the difference 1s 22%
bel-ow the natlonal- leveI.Compare this
area which is
to the Pocatell-o
not far away whichStati stical
the differences between metropolitan surveys
only shows
1n our
state. Intermountain cannot determine how much these
bel-ow the national level-. This
non-metropoJ-itan areas further bring down
state numbers. Using the BLS data twice
the Company's
to bal-ance theo25
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Murray, Reb. 3afntermountain Gas Company
surveys the Company uses furthers the gap of accurate
data. To include survey data with a labor pool that does
not meet the minimum requirements for a majority of our
jobs with no way to determine the size and scope of the
survey participants (these are kept confidential by the
BLS) would diminish the integrity of our compensation
practices, and if the Company were to l-ower its
standards, it cou.l-d have a direct impact on the safety
and wellbeing of our customers.
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O. Does the Company consider its use of market
survey data to be sound and consistent with other
util-ities and employers of similar slze and scope?
A. Yes. Intermountain Gas Company makes every
attempt to use commonly accepted practices to ensure we
are competitive 1n our industry and al-so in the labor
markets in which we compete. The markets for the
employees with the skill-s and experience required by our
industry is qui-te competitive. For that reason, the
compensation we offer must provlde the same general pay
levels and components in its total remuneration package
as are inc1uded in the packages provided by the Company's
competitors for l-abor.
O. What is the practice that Intermountain uses to
determine salaries?
A. It is fntermountain's standard practice to
market price jobs using national general industry, ds
wel-1 as utility specific, data. This practice is
consistent in the utility industry. We support this
approach for non-utility specific roles at Intermountain,
given that the Company recruits from, and Ioses talent
to, general industry for these ro1es.
O. Are there other factors that the Company
considers besides market data?
A. Yes. Intermountai-n does consider l-ocaI markets
Murray, Reb. 4
Intermountain Gas Company
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Murray, Reb. 4a
Intermountain Gas Company
and particj-pates in surveys for jobs that are recruited
localIy. Intermountain also has a union workforce which
feeds some of our professional positions. The Company
afso faces internal pay compression issues that must be
balanced when trying to attract some of our most talented
field employees into professional posltions. This is
common in all industries where employees receive overtime
and later transition to exempt roles. Many of our union
employees are required to provide emergency response so
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overtime for emergencies and pay for standby can be
significant. Most employees actually take a pay cut to
move into professional- rol-es and the Company must bal-ance
the financial impact of such an event as much as possible
without paying above a market based salary.
O. Do you have additional- processes in place to
ensure that the Company is not paying more than the
minimum necessary to attract and retain a qualified
workforce?
A. Yes. Periodically the Company contracts with
an outside lndependent consul-tant to review compensation
programs and practices. For instance, in 2013, the
Company contracted with Aon Hewitt, a recognized leader
in human resource solutions, to provide a third-party
review of base compensation and incentive compensation.
A copy of this report was provlded in Response to Staff
Production Request No.66. This review will- be performed
again in 2011.
O. What was the result of the 2013 Aon Hewitt
survey?
A. The report issued by Aon Hewitt indicated that
Intermountain's compensation programs are well designed
and util-ize high quality and established external survey
sources to ensure the Company's programs align weII with
other util-ities and industries that compete for the same
Murray, Reb. 5
fntermountain Gas Company
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Murray, Reb. 5a
Intermountain Gas Company
types of employees. It was suggested that the Company
consider moving salary structures sllghtly more
aggressively than in the past to keep the Company from
falling below market competitive l-evels. It was
determined in the study that fntermountain's salary
structure midpoints when compared to market was at 0.94
(i.e. slightly below market), which is considered
well-placed for our market.
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Murray, Reb. 5Intermountain Gas Company
O. When fntermountain recruits external-
candi-dates,
higher than
does the Company find that sal-aries are
the labor market that you recruit from?
A. No. lnterna11y, we have a desire
competitive wage below the midpoint of the
to hire at a
industry
need to hiresalary ranges. We have found that often
near the midpoint; which suggests we are
or lagging the labor market. Recently we
we
either equal to
did a
three-year l-ook back at the externaf hires for our
non-union posi-tions. The average comp-ratio for those
employees that we hired at was 0.94, again - slightly
bel-ow the market mid-polnt. We al-so analyzed our current
non-union workforce as a whole and the average tenure of
our employees is 13 years and the average comp-ratio is
0.98. This helps to validate that we are not paylng
above market even when our workforce is wel-l- seasoned and
established.
O. Does the Company take any other measures to
ensure that compensation does not exceed market average?
A. Yes. In addition to periodic third-party
reviews, Human Resources reviews standard benchmark jobs
in the corporation annua11y, including job "families"
such as engineers, construction supervi-sors, finance,
human resources and system analysts. The Company's total-
compensation package for benchmark jobs are compared too25
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Murray, Reb. 6a
Intermountain Gas Company
market average compensation for comparable positions to
compensating employees at theensure that the Company is
appropriate pay grade and range. Human Resources al-so
reviews positions on an "as needed" basis throughout the
year to ensure it is competitiveJ-y compensating within
the established pay ranges.
O. How does the Company determine the market
average when it determines the appropriate pay grade and
range.
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Murray, Reb. '7
fntermountain Gas Company
A. When we market price a position within the
organization, Intermountaj-n pulls data from all of our
survey and/or online sources. The Company uses many
reputable industry surveys when determining base pay
Ievels, including the American Gas Association, Mercer
Benchmark, Miffiman, Towers Watson, World at Work and
Compensation Analyst, among others. The first step i-n
determining market average base pay for a partj-cuJ-ar
position 1s to revj-ew the requirements of the positions
listed in our surveys and onl-ine sources against the job
description we have completed. Once we have determined
at least a 70% match, we then use the 50th percentile
pricing associated with that position to determine where
our job will fit in
this by taking cuts
and organization
then becomes the
associated with
our pay grade
of data based
size. This 50th
structure. We look at
on geography, industry,
percentile wage Ievel
pay level or "grade"Company's market
the job. To be clear, our pay grade is
set at the middle of the market range of pay, as
indicated by these sources.
O. Do you have any concluding thoughts that you
would like to share?
A. Yes I do. Intermountain Gas Company takes
prlde in being a lean, innovative Company. We have very
a knowledgeable, hard-working and giving staff ofo25
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Murray, Reb. 7aIntermountain Gas Company
employees that contribute to the success of our
communities and Company. We want to be sure that they
are fairly compensated and recognized for their
contributions.
O. Does this concl-ude your testimony?
A. Yes, it does.
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CSB Reporting(208) 890-s198
MURRAY
Intermountaj-n Gas Company
(The following proceedings were had in
open hearing. )
COMMISSIONER RAPER: Can we move oD, then?
You have
MR. WILLIAMS: No, nothing five.
COMMISSIONER RAPER: Commission Staff have
any questions of thls rebuttal- witness?
MR. COSTELLO: No questions.
COMMISSIONER RAPER: Mr. Stokes.
MR. STOKES: We have none.
COMMISSIONER RAPER: Mr. Purdy.
MR. PURDY: And I have none.
COMMISSIONER RAPER: Mr. Richardson.
MR. RICHARDSON: No questions, Madam
Chair.
MR. OTTO: No questions, Madam Chair.
COMMISSIONER RAPER: Any questions from
the Commissioners? No redirect necessary.
MR. WILLIAMS: No redirect.
COMMISSIONER RAPER: Thank you,
Ms. Murray, for your time.
THE WITNESS: Thank you.
(The witness left the stand. )
MR. WILLIAMS: I would ask that
Ms. Blattner and Ms. Murray and Dr. Fry be excused. Io)q
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CSB Reporting(208) 890-s198
SWENSON (Di-Reb)
fntermountain Gas Company
COMM]SS]ONER
objection, Ms. Murray, Ms
Dr. Ery.
MR. WILLIAMS: And Mr. Gaske
COMMISSIONER RAPER: I think
MR. WILLIAMS: Al-f right.
COMMISSIONER RAPER: Without
they're al-l- dismlssed from the remainder of
hearing.
think I may have asked Dr.
BY MR. WILL]AMS:
O Would you
business address for the
Fry to be excused.
RAPER: Perhaps. Without
Bl-attner, and, if we missed,
as wel-I.
t^74 got Gaske.
ob; ection,
the
please state your name and
record?
MR. WILLIAMS: The Company would cal-I Dave
Swenson.
DAVID SWENSON,
produced as a rebuttal wj-tness at the instance of the
Intermountain Gas Company, having been previously duly
sworn to tefl- the truth, the whole truth, and nothing but
the truth, resumed the stand and was further examlned and
testi-f 1ed as f ol-1ows:
DIRECT EXAM]NATION
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CSB Reporting(208) 890-s198
SWENSON (Di-Reb)
fntermountain Gas Company
A David Swenson, 555 South Cole Road, Boise,
Idaho.
0 And are you the same Dave Swenson that
rebuttal testimony of eightprefiled in
pages ?
A
a
this case
I am.
And if I were to ask you today
rebuttal-
the same
questions contained in that
woul-d your answers today be
A Yes.
MR. W]LL]AMS:
prefiled
the same?
test j-mony,
Madam Chair, I would ask
that Mr. Swenson's
record as if read,
cross-examination .
rebuttal- testimony be spread upon the
and he is tendered for
COMMISSIONER RAPER: Without objection,
Mr. Swenson's rebuttal- testimony will be spread upon the
record as if read.
testimony of Mr
record. )
(The following
David Swenson
prefiled rebuttal
is spread upon the
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Swenson, Reb. 1
Intermountain Gas Company
O. Pl-ease state your name, position and business
address,
A. My name is David Swenson. I am Manager of
Industrial Services at Tntermountaj-n Gas Company
("Intermountain" or "the Company"). My business address
is 555 S. Cole Road, Boise, Idaho 83707.
O. Are you the same David Swenson
direct
that prepared
testj-mony onand prevlously presented pre-filed
behalf of Intermountain Gas Company
A. Yes.
in this Case?
O. What is the purpose of your rebuttal testimony?
A. The purpose of my rebuttal testimony is to
address Dr. Reading's direct testimony rel-ative to the
impact of Intermountaln's proposed tariffs on one of its
industrlal customers, Amalgamated Sugar.
O. Do you have an inj-tial comment in response to
Dr. Reading' ?
A. Yes. Intermountain woul-d first like to state
that it is very aware of the impact that the proposed
rate design will- have on al-l- of its large
volume/industrial customers month1y natural gas
transportation bills including Amalgamated Sugar's.
Intermountain appreciates and val-ues every customer and
Amalgamated is no exception. Intermountain also
recognizes the value that Amalgamated provides to theo25
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Swenson, Reb. 1a
fntermountain Gas Company
Idaho economy. Intermountain has worked in the past
several years to assi-st Amalgamated with tariff
migrations and to negotiate mutual-Iy beneficial
agreements to help Amalgamated make efficient energy
choices as Amalgamated experienced growth in its natural
gas usage. fntermountain deeply appreciates the working
relationshlp with Amalgamated and sincerely hopes that
the mutually
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Swenson, Reb. 2
Intermountain Gas Company
continue long after
a. Dr. Reading
design proposal to now
atypical and decidedly
beneficial working relat j-onship
this Case is
critici zes
incl-ude a
between the parties will
complete.
the Company's rate
demand charge as
the importance of a
unreasonabl-e. Do you agree?
A. I do not agree with either assertj-on. The use
of Demand Charges are not at all "atypical" as purported
by Mr. Reading, they are a common practice within the
industry, particularly for firm service tariffs. Dr.
Reading did not provide any evldence to back his
assertion, but a search of northwest gas util-ities
tariffs Iocated in cl-ose proximity to Intermountain show
that most include at Ieast a monthly Customer Charge
while both Northwest Natural and Questar Gas include a
monthly demand charge for their firm large vol-ume
customers. In regards to Mr. Readings' assertion that
the Company's proposed rate deslgn is "unreasonable", I
would l-ike to address this in two important respects.
First, I
workabfe
would
system
to encourage large
MDFQ el-ection. Our
indicated that the
again emphasize
to ration our
customers
existing pipe
to be judicious
capacity and
with their
rateexperrence
existence of
with the T-5
those customers' interest in settlng
protected thelr peak day need, while
a demand charge increased
an MDEQ that
at the same keepingo25
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Swenson, Reb. 2a
Intermountain Gas Company
monthly charges
Secondly,
as low as reasonably possible.
the proposed rate design changes are
number of Intermountain's smaller tonecessary as
medium sized
a
customers in the industrial group are
currently bearing a
cost recovery. They
larger users due to
proportionally larger share of fixed
therefore are subsidizrng other
the way the current rate design
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Swenson, Reb. 3
Intermountain Gas Company
recovers those fixed costs. As the total T-4 block 3
therm use grows, the l-eve1 of subsidization worsens. It
would be unreasonable to continue these interclass
subsidies.
Let me explain
collects al-most all-
further. Todays' T-4 rate structure
bl-ocks with recovery more heavily weighted
block. Amalgamatedfs combined 2076 annual
two price
to the first
therms sales
show that only 10% of the Company's therm use was billed
in the first block whife over 102 was billed in the
Company's third bl-ock. This means that 10% of
Amalgamated's 2076 usage contrj-buted only to the variable
cost of provlding that service, leaving other customers
to provide the bulk of fixed cost recovery.
O. Is Amalgamated at fault for this?
A. No, Intermountain is not suggesting Amalgamated
has done anything wrong; they mereJ-y operated under
today's effective tariffs to maximj-ze their economics.
The Company is simply suggesting that T-4 usage patterns
have materially changed over the past decade and
therefore in this Case proposes a new rate design to
reflect those changes. For example, the following table
shows the total annual large volume (LV) sales of the
Company, both with and without Amal-gamated (TASCO; The
Amalgamated Sugar Company)
fixed cost in the first
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Swenson, Reb. 4
Intermountain Gas ComPanY
I ntermountain Annua I La rge Volu me/l nd ustria I Sa les
350,000
300,000
250,000
200 000
15o,cqo
100,000
50,@0
2003 2004 2005 2006 2@7 2008 2009 2010 20tL 20t2 2013 20L4 2015 2015
ETotal LV Sales ITotal LV Less TASCO
As you can see from this Table, total LV sales, and
Intermountain's sales to Amalgamated, were relatively
consistent in the years 2000 through 2010 where
Amalgamated comprised anywhere ftom 2% to 4Z of total LV
sales. However, beginning approximately in 2010,
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Amalgamated began a significant ramp-up
to the point where their 2016 combined
for nearly one-fourth of aII LV Sales.
rapid increase j-n usage
class is, in part, one
compared to the
of the reasons
in it gas usage
sales accounted
Amal-gamated' s
rest of the LV
for needing a
were closer todemand charge. When all LV
parlty in volumetric usage,the interclass subsidies
customers
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Swenson, Reb. 4a
Intermountain Gas Company
between customers with high versus low l-oad factors was
not as great a concern as it is today. Now, with
Amalgamated accounting for such a larger volume of annual
purchases whll-e having a middl-ing annual load factor,
compared to the rest of the LV customers, the interclass
subsidies became much more pronounced and needed to be
addressed.
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Swenson, Reb. 5
fntermountain Gas Company
0. Please explain further the rel-ationship between
Amalgamated's plant operations and fntermountaj-n's
proposed rates.
A. A11 three Amalgamated plants have
none of them have a 2076 load
seasonal- l-oad
profiles
than 604.
operated,
and factor higher
beingThe plants may run "24/J" when they are
as Dr. Reading testifies, but they do not run
year round, as do many other industrial customers.
0. Could a change in how Amalgamated operates
change the financial impact associated with
Intermountain's proposed rates and proposed demand
charge?
A. Yes, as Dr. Reading acknowledges, Amalgamated's
energy consumptions is highest in the fall and winter
processing months (Reading, Di, page 1). The winter
months especially coincide with fntermountaj-n's highest
sales and transportation capacity and energy demand
months. If Amalgamated were able shiftr or "smooth out",
its operation in the winter months, with its energy
consumption spread more evenly throughout the year, its
rate lmpact would more in line wlth the other industrial-
and transportation customers j-n this case, which 1s a
modest proposed rate decrease.
O. Dr. Reading concludes that Intermountain has
failed to keep up with changes in both customer usageo25
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Swenson, Reb. 5a
Intermountain Gas Company
patterns and to keep its rate design current and
relevant. Do you agree?
A. f both agree and disagree. First, I agree that
had the Company implemented a demand charge in 20L0,
customers with l-oad profiles like Amalgamated woul-d have
already been accustomed to more fairly paying for the
impact their operation
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has on the Company's transportation system, and woufd
have had more t.ime to change usage patterns in response
to pricing signals. However, fntermountaj-n's fail-ure to
make rate design changes earlier is not an acceptable
reason to postpone or dil-ute making those rate design
changes now.
Dr. Reading makes the assertion that "customers" - I
assume he is only speaking for Amal-gamated - have
established usage patterns and made plant investment
based on Intermountain's 31 years of not filing a general
rate case and not charglng for demand. However, dS the
table above shows, Company records j-ndicate otherwise.
Virtually all of the significant increase in
Amalgamated's dai1y, monthly and annual- usage over the
past decade largely occurred beginning in 2010. In fact,
Amalgamated's combined 2016 annualized usage exceeds 2009
by over 1400U. It is difficult to understand how a
relatively smooth usage pattern until- 2070 could be
prlmarily responsible for all- or a significant portion of
Amalgamated's investment decisions over the past 31
years, ds Dr. Reading implies.
Second, I disagree with Dr. Readi-ng's assertion that
the Company failed to keep up with changes j-n customer
usage patterns. The Company has a data base of monthly
billed usage of all LV customers going back to 1986, and
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Swenson, Reb. 6
Intermountain Gas Company
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Swenson, Reb. 6a
Intermountain Gas Company
has daily records of tel-emetry vol-umes (SCADA) going back
to 1990. Using that data Intermountain performs various
monthly, quarterly, annual- and mul-ti-year reports and
analysis that identifies patterns for each individual
customer, market segment and LV rate c1ass. This very
data has been used to track and chart these patterns and
provided the basj-s for the rate study sponsored in this
Case.
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Swenson, Reb. 7
fntermountain Gas Company
O. Dr. Reading testifies as to the significant
percentage increase that Amalgamated wilf be paying
fntermountain for gas transportation service. With
Amalgamated purchasing its own gas or commodity, do you
have an estimate of the total- naturaf gas delivered to
the burner tip cost increase (i.e. both transportation
cost, and energy cost) that Amalgamated would experience,
if the Company's Demand Charge for T-4 customers is
implemented?
A. Intermountain is not
or any transport customer, pays
privy to what Amalgamated,
a marketer for gas
that customer. Howeverdelivered on behalf ofsupplies
assuming
supplies
$0 .321 64
that
equal
(which
Amalgamated purchased delivered gas
to Intermountain's current WACOG of
I believe is very conservative as
evidence suggests marketers can supply gas supplies at a
discount to fntermountaj-n's WACOG) and adding to that
Amalgamated's 2016 average cost per therm for
Intermountaj-n transport of $0.01315, yields a defivered
cost of gas cost of $0.34133 per therm. Increasing
fntermountain's transport cost by 658 to $0.02254 yields
a new del-ivered cost of $0.35018 per therm or a net
increase of only 2.62 for Amalgamated's total- cost of gas
service. In fact increasing Intermountain's transport
charge by 100% yields a total increase in del-ivered gaso25
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Swenson, Reb. 7a
Intermountain Gas Company
cost of only 42.
o.
implement
in "rate
Dr. Reading finds the Company's proposal to
a demand charge as unreasonabl-e, and resulting
shock" for Amalgamated. As an al-ternative, he
phasing in the demand charge over the next fiveproposes
general rate cases, with the expectation that the Company
wou]d fil-e a
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Swenson, Reb. B
Intermountain Gas Company
qeneral rate case once every five years. Do you find a
of a Demand Charge to be reasonable?30 year phase
A. No.Eirst, ds I indicated above, a 2.6eo
increase in the total-cost of gas
interstate and distributi-on
transportation and gas commodity - can hardly be
described as "rate shock". Second, in essence, Dr.
Reading is proposing that al-l- other industrial customers,
especially ones with hiqh load factors and most their
volume in the first and second blocks, continue to
subsidize Amalgamated's use of fntermountain's gas l-ines
and gas line capacity for the next 30 years. As
described in Intermountaj-n's filing, the company designs
its system to provide enough peak capacity for that
design weather day. While that capacity is robust enough
for flrm customers' needs, it is still finite. It is
patently unfair to allow a single customer, or cl-ass of
customers, to access that capacity at the financial
expense of the remaining customers. Therefore the
company believes that customers should bear their fair
a1location of the cost of peak day capacity use and a
demand charge based on MDFQ sends the correct price
signal to T-4 customers. Intermountaj-n bel-ieves that the
time has come, or is even past due,to implement a Demand
day capacity costCharge that 1s designed recover peak
fn
SCTVACC the
all-incl-usive cost of
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Swenson, Reb. 8aIntermountain Gas Company
from peak users. The proposed rate design is fair for all
industrial customers, and reduces cross subsidization
among customers in a rate cl-ass with extreme variation in
Ioad profiles.
O. Does this complete your rebuttal testimony?
A. Yes.
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CSB Reporting
(208 ) 890-s198
SWENSON (x-Reb)
Intermountain Gas Company
(The following proceedings were had 1n
open hearing. )
COMMISSIONER RAPER: And we'fL move to
Commission Staff for any cross-examination.
MR. KLEIN: None.
COMMISSIONER RAPER: Thank you. Mr.
Stokes.
MR. STOKES: I just have a few.
CROSS-EXAMINATION
BY MR. STOKES:
0 Good morning.
A Good morning.
O Why are some T-4 customers seeing an
increase on thelr bil-ls?
A That's a great question. I think 1n my
testimony I indicated that one of the big factors is
related to the individual customer's load factor, and I
think that I would add to that at this point that another
factor particularly regarding Amalgamated Sugar is the
amount of therms that they've been using in the tail
block or the third block of the T-4 rates, which reaIIy
doesn't recover any fixed costs. About 10 percent of
their total therms in 2076 were in the tail block, so by25
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CSB Reporting
(208 ) 890-s198
SWENSoN (x-Reb)
fntermountaj-n Gas Company
their therms would be
vj-rtue of adding a demand charge of any nature to our
rate structure, which would mean that now 70 percent of
our fixed costs
that in and of itself
helping us
is al-so to be responsibl-e for a
bill impact, dD increased bill impact.
a Okay; so are they basically being asked to
pay the cost to serve thelr plant?
A Yes.
0 Is 1t fair in your view for one industrial
customer to ask other industrial customers to pay the
cost to serve their plant?
A No.
A Have you looked at Avista's rate schedules
for transportation customers?
A Yes.
a And how is that set up?
A You know, f think f have that somewhere in
my case , if I coul-d f ind it. It might take me a second
to find it. Sorry, f brought a lot of papers with me.
Itfs here somewhere, but I -- oh, here it is right here.
Avista Corporation, 11th Revisj-on Sheet 746,
Transportation Service for Customer-Owned Gas ldaho, I
think the unique part of this particular rate schedul-e
MR. RICHARDSON: Is this in your
testimony?
recover
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CSB Reporting(20e) 890-s198
SWENSoN (X-Reb)
Intermountain Gas Company
THE WITNESS: It is not. I'm just
responding to the question.
MR. RICHARDSON: May we see a copy of what
the witness is referring to?
COMMISSIONER RAPER: f'm sorry, was it an
objection or was it just a questlon?
MR. RfCHARDSON: It's a point of
cl-arification, Madam Chair. The witness is referring to
a document that's not in the record
think we should have an opportunity
COMM]SSIONER RAPER:
or his testimony.
to review it.
Is there a way, Mr.
that the
none of us
I
Stokes, that your question
wj-tness is not referring to
have the benefit of looking
MR. STOKES:
transportation rate
tell me, are there
A No,
can be worded so
a document that
at?
schedul-e, can you explain can you
multiple blocks?
there's not. There's a single block
for al-l therms used.
So whether or not you're a smal-l
a large transportation
customer charge and then you're
through the block?
Sure, that's fair.
BY MR. STOKES: In general, Avista's
with a single
O
prrce
transportation customer or
customer, you're paying a
paying and then you go
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CSB Reporting(208) 890-s198
SWENSON (X-Reb)
Tntermountain Gas Company
O Okay.
A Irm not an expert
from what I understand, that is
O In comparison to
transportation schedule that has
so the more you consume, the less
therm?
in Avista's tariffs, but
correct.
Intermountain t s
a decl-ining block rate,
they' re payj-ng per
please restate that?
-- my question is compare how
one block is set up
-H.
V
Would you
I'm trying
Avista's rate schedule with the
versus fntermountain's.
current and
Correct.
proposed T-4
three-b1ock
Well, you know, fntermountainrs
rate as opposed to Avista just
rate.
Woul-d Amalgamated be better or worse with
s chedule ?
rate schedul-e would conti-nue as
A
a declining
has a single
I
Avista's rate
A
numbers, but
better off,
wil-1 admit
WeIl, I
my opinion
obviously,with a
haven't actually calculated
would
that I haven't run
be that they wou1d be
declining block rate, but I
those numbers.
ODo
A No,
you think
and the
rate shock applies here?
reason that I answer that way
these proceedingsis we've already had this discussj-on j-n
that Amalgamated Sugar spends quite a bit of moneyo25
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CSB Reporting(208) 890-s198
SWENSoN (X-Reb)
Intermountain Gas Company
annually on their total energy or total natura1 gas bill.
Not knowing what they pay their marketer, f'm guessing
probably, you know, $20-30 million a year in total- energy
costs, and whil-e f've admitted previously that y€S, you
know, from the natural- 9dS, from the distributi-on
standpoint, thls will be you know, 1f I were on the
other side of the fence, it woul-d be a significant bill
impact, but overall taking into account what they're
paying for natural- 9dS, commodity, to a marketer, I don't
think it is rate shock.
MR. STOKES: Thank you. Nothing further.
COMMISSIONER RAPER: Mr. Purdy.
MR. PURDY: No questions, Madam Chair.
Thank you.
COMMISSIONER RAPER: Mr. Richardson.
MR. RICHARDSON: Thank you, Madam Chair, I
do have a couple.
COMMISSIONER RAPER: I expected that there
might be.
CROSS-EXAMINATION
BY MR. RICHARDSON:
O Good afternoon, Mr. Swenson
morni-ng, Mr. Swenson, sorry about that.
f mean good
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CSB Reporting(208) 890-s198
SWENSoN (X-Reb)
fntermountain Gas Company
A Yes.
O Would you refer to page 2 of your rebuttal
testimony?
A I'm there.
O Beginning at line 3, you're asked the
question, and I'l-I read it to you, "Dr. Reading
criticizes the Company's rate design proposal to now
include a demand charge as typical and decidedly
unreasonable. Do you agree?" Do you see that
question?
A I do.
O And then
COMMISSIONER RAPER: Mr. Richardson, I'm
sorry, just for the sake of the record, as atypical?
MR. RICHARDSON: As atypical, the letter
rra, typical.
COMMISS]ONER RAPER:Okay, the way I heard
typlcal. " I justyou read it for the record was "as
wanted to make sure
MR. RICHARDSON: There's been an
alliteration there, ds atypical.
COMMISSIONER RAPER: Thank you.
MR. RICHARDSON: Thank you.
O BY MR. RICHARDSON: Then you
Iine 5 by stating, and I'11 quote, "The use
respond on
of demando25
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CSB Reporting
( 208 ) B 90-51 98
SWENSON (x-Reb)
Intermountain Gas Company
charges are
purported by
the portion
that demand
put it in
actually
testimony
charges
Let
not at al-1 'atypical, '" that's atypical, "as
Mr. Reading." Woul-d you please direct me to
of Dr. Reading's testimony where he purports
are "atypj-cal"?
A
u
me
The reason I ask that is
quotes and you reference that
because you do
Dr. Reading
Dr. Reading'stestified to that.
available to you
A I'm looking
Do you have
there ?
at
O Okay, I would
page 5 of Dr.
f'm there.
it right now, yes.
refer you, to speed things
Reading's direct testimony.a1ong, l-ook at
And if you'd reference l-ines 5 to B, isn't
it true that Dr. Reading testifies just the opposite of
what you suggest where he says that he is often
supportive of rates reflecting costs such as the
imposition of a demand charge?
A Tt does say that.
MR. RICHARDSON: So Madam Chair, to keep
the record straight here, I'm going to move to strike a
portion of this witness's testimony where he refers
incorrectly to Dr. Reading's testimony, and that woul-d be
on page 2, beginning on l1ne 5 with the words "The use,"
ending on li-ne 11 with the words "volume customers."
A
tl
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CSB Reporting(2oB) B9o-s198
SWENSON (X-Reb)
Intermountain Gas Company
because, first
through all of
to find out if
woul-d like to
page B
that Dr
Dr. Readingrs testimony in
there was an atypical, and
we can either do that or
I object
LU go
searcha word
if counsel
I think that
representation
his purpose has
MR. WILLIAMS: And I'd object.
of all, we haven't had a chance
the point is made t.hat if counse1 made the
that in fact it is not used, then I think
been his point has been made that it was a misquote
and I think that we'd be happy if in fact it was not
used, we'd be happy to admit that the quote marks were
i-naccurately applied.
MR. RICHARDSON: I'I1 withdraw the motion,
Madam Chair.
COMMISSIONER RAPER: Thank you, Mr.
Richardson.
O BY MR. RICHARDSON: If
of your rebuttal testimony at
most of their vo]ume in the
Reading is proposing that all other
customers, especially ones with hiqh
first and second blocks,
continue to subsidize Amalgamatedrs use of
Intermountain's Gas fntermountain Gas's lines
l-ine capacity for the next 30 years. Do you see
quote?
A I do.
l-oad factors and
you'd
line 6,
reference
you testify
industrial
and gas
that
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CSB Reporting(208) 890-s198
SWENSON (X-Reb)
Intermountain Gas Company
O Wasn't Dr. Reading' s recofllmendation to
phase in the cost of service changes based on when the
Company chooses to fife its rate cases and not on a fixed
number of years?
A He did not state a specific number of
years. He just made the suggestion that we phase in
essentlally this change over the next five rate cases, I
bel-ieve, without quoting him, and obviously, we wouldn't
anticipate, I wouldn't think, again, like witness
McGrath, I don't speak for the Company in all instances,
I wouldn't expect that we woul-d file a case every year
for five yearsr so you would have to anticipate that he's
suggesting that we would -- and I don't know any utility
that does, that we would have to spread out this change
over a number of years, and, you know, this isntt in
quotesr So Irm not quoting him here, but
be made, that
that's an
interpretation that could
suggesting that we spread
of years, which would in
he's asking us or
this change out over a number
fact cause a continuation of the
subsidization that r_s now occurrrng.
in fact, he recommended that the rate
change be
correct ?
spread over a number of rate cases, not yearsi
O But
A Correct.
O Wasnrt Dr. Reading's didn't Dr. Readingo25
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CSB Reporting(208) 890-s198
SWENSoN (X-Reb)
Intermountain Gas Company
testify that the frequency and tlming of general rate
cases is uniquely under the control- of the Company?
A I believe he did.
O And do you disagree with that?
A Well-, subject to some of the other things
that have been on the record today, generally yes, but
therers other ways that we coul-d be asked to f il-e a rate
CASC.
v
Gas is planning
And do you anticipate that Intermountain
to wait another 30 years before it fil-es
its next general rate case?
A f'm not the right witness to answer that
question
O So you have no understanding of that
whatsoever?
WILLIAMS: Objection, asked and
answered.
RICHARDSON: I asked him if he r'l-l_
move oor Madam Chair
MR
MR
u
page 4 of your
A
oz
you provide us
A
And on page 4
with a graph;
Correct.
BY MR. RICHARDSON: Would you refer to
rebuttal-testrmony?
there.Okay, f'm
of your rebuttal- testimony,
correct ?
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CSB Reporting(208) 890-s198
SWENSoN (X-Reb)
Intermountain Gas Company
O And am I correct that that graph shows the
annual vofume, the annual-
for Intermountain Gas over
large volume,
approximately
industrial sales
the last 13
years ?
A
O
represent total
Sugar sales?
A
O
Yes.
And does the sol1d bar on that graph
large vol-ume sales without Amalgamated
Correct.
And then the hash-lined bar, that
represents total- large volume
Sugar; correct?
A Correct.
O And just to be
sales j-ncludes transportatj-on
industrial cl-ass,' correct?
sal-es with Amalgamated
cl-ear, the large vol-ume
and your large volume
A Correct, it includes all large vol-ume
sales.
O And can you briefly te1I me
conclusion was from the information shown
graph?
what your
on this
A Well, one conclusion that f can take from
that 1s that Intermountai-n Gas's large vol-ume sal-es have
greatly changed, greatly increased, since, you know,
beginning 2070/2011 time period and the vast majority ofo25
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CSB Reporting(208) 890-s198
SWENSON (X_Reb)
Intermountain Gas Company
that change is due to increased usage at Amalgamated
Sugar.
O And I guess just back-of-the-envelope
calculation, it looks l-ike Amalgamated has gone from
about two percent of your large vol-ume sal-es to nearly 25
percent; is that about right?
A I think so. You know, depending on which
years you choose, but
definltely in the bal-1
O And do
yes, I would agree that's
park.
you have an understandlng of what
the driver is behind that dramatic, af
characterization, behind that dramatic
vol-ume?
you will
increase
accept my
in sales
A
o
A
We11, I believe so.
And what 1s your understanding of that?
Vrlefl-, ry understanding in discussions with
over this period of time
When you say the "companyrr --
Sorry, Amalgamated Sugar employees that I
with that their desire was to burn l-ess coal
natural- 9dS, which, of
the company
Y
A
have worked
and move to
was willing
additional
them to do
\l
course, the Company
the ability with someto support
investment
that.
and we had
to be abl-e to provide capacity for
And Amalgamated made contributj-ons to theo25
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CSB Reportlng(208) 890-s198
SWENSON (X-Reb)
fntermountain Gas Company
Company' s
serve the
required up
fntermountain Gas
agreement based on
increased revenues
increased volumes
made was covered via a facilities
costs of making that additional- investment to
additional volume to switch from coaf to gas?
Wellr yes and no. AII- of it was not
front. Quite a bit of the investment that
A
a mr_nr_mum usage
and margins we
would help pay
guarantee so that the
received from those
for that investment or
some of that investment
O It actually entered into agreements to pay
for the additional investment to Intermountain Gas for
that increased vol-ume?
A Please restate that l-ast part of it.
MR. RICHARDSON: Would the court reporter
read it?
(The last question was read back by the
Notary Public. )
THE WITNESS: Yes.
O BY MR. RICHARDSON: And now if you would
l-ook at stil-I on that page 4, with the understanding,
of course, that Amalgamated has already entered into
agreements to pay for the cost of that additional
capacity, would you read the l-ast two sentences on page 4
of your rebuttal testimony?
A Beginning on row 9?o 25
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(2oB ) 890-s198
SWENSON (x-Reb)
Intermountain Gas Company
0 Yes.
A "When all LV customers were closer to
parity in volumetric usage, the intercl-ass subsi-dies
between customers with high versus l-ow load factors was
not as great
Amalgamated
a concern as it is today. Now, with
accounting for such a Iarger
annual
volume of annuaf
l-oad factor,
the intercl-ass
needed to be
purchases
compared
subsidies
whil-e having
to the rest of
a middling
the LV customers,
became much more pronounced and
addressed. "
O And by "needed to be addressed, " I assume
you mean the lmpositlon of a demand charge now for the
first time?
A Yes, and mj-nor correction there, it may
not be all that relatj-ve to this proceeding, but prior to
our last general case, fntermountain Gas actually did
have demand charges in large volume tariffsr so I just
wanted to make that distinction that this is not
completely brand new. It's just been a long time.
O Brand new for at least the last 30 plus
years ?
A Yes, correct.
O So the relationship between those two
sentences suggests that prior to Amalgamated's growth
beginning approximately 2077 or 'L2 according to theo25
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(2oB) 890-s198
SWENSON (X-Reb)
Intermountain Gas Company
graph,
charge
the i-ssue of subsidies and the need for a demand
wasn't a very great concern?
A No.
O But now, according to the last sentence on
that page, now that Amalgamated has become larger, the
Company has decided to impose a demand charge?
A Yes, but I wouldn't say that it's just.
completely related to Amalgamated Sugar. If you look at
that chart, it looks like the 1ow point is approximately
2004. During that year about three-and-a-ha1f percent of
the total T-4 volumes were in that tail- bIock, which to
ffie, anyway, doesn't seem to be a significant number, and
some calculations Ibear with me. I'm trying to find
made, but anyway,
terms of the tail
the number in 2076 is far greater in
bl-ock or the third bl-ock usage.
u How I'm sorry, can
determi-nation based on
you
this
show me how we
can make that graph?
A Well-, you can' t
number that f know that
based on the graph. It's
f 've l-ooked atjust a
know,I can l-ike
and, you
it, but
just based
provide that to you if you'd
on the records and the annuaf numbers and
figures
that's the approximate
O So based
and thj-s graph, help me
number.
on your testimony on thls page
understand why I shouldn't
that we calcul-ate for our customers, f know that
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(208 ) 890-s198
SWENSoN (x-Reb)
Intermountain Gas Company
concl-ude that the
demand charge rate
Sugar Company.
A rf
discuss
reason the Company's filed its proposed
is to sole1y penalize the Amalgamated
you will also in my testi-mony, I
MR. WILLIAMS: Madam Chair, I'n going to
object to that question. The purpose is not to penali-ze
Amalgamated Sugar in the rate design. I think the
characterization of hls question that the penalty was
intended is inappropriate.
COMMISSIONER RAPER: Yes, I think he
framed the question in a way that ascribed motive. Can
you rephrase in another way, Mr. Richardson?
MR. RICHARDSON: I think Irll- move onr
Madam Chair.
COMMISSIONER RAPER: Okay.
O BY MR. RICHARDSON: On page 5 of your
rebuttal testimony, beginning there in the middle at
about line 13
A Okay.
a you state that if Amalgamated were able
to shift, or smooth out, its operatj-on in the winter
months, with its energy consumption spread more evenly
throughout the year, its rate impact woul-d be a modest
proposed decrease.o 25
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(208 ) 890-s198
SWENSON (x-Reb)
fntermountain Gas Company
A Yes, that's what it says.
MR. WILLIAMS: Objection, f think that's a
mischaracterization of what the testimony how the
testimony actually reads.
MR. RICHARDSON: I could read the sentence
in its entirety.
OBY
able to shift, or
months, with its
out, its operation in the winter
consumption spread more evenly
rate impact woul-d be more in
MR. RICHARDSON: "If Amalgamated were
smooth
energy
throughout
line with
the year, its
the other industrial and transportation
customers in thls case, which is a modest proposed rate
decreasett,' correcL?
MR. WILLIAMS: Thank you.
BY MR. RICHARDSON: Is that what youro
testimony says?
A
o
testj-mony that
operaLions, it
A
smoothi-ng to get
that their MDFQs
Thatrs what it says.
So may I paraphrase it that it's your
if Amalgamated were abl-e to smooth out its
would experience a modest rate decrease?
Wlth the understanding that in that
them closer to 100 percent load factor
woufd drop significantly. I would tell
al-l- those numbers, but I would not
that imaginary scenario, if you wi1l,
you that I haven't
be surprised if in
run
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(208 ) 890-s198
SWENSON (X-Reb)
fntermountain Gas Company
that it coul-d
Amalgamated.
O
Iead to a modest price decrease for
But your testimony here is not based on an
ir?imaginary scenario,
A We11,
O It's
the proposed rate
A It's based on a hypothetical smoothing of
Amalgamated Sugar's usage.
O And do you know what Amalgamated Sugar
does ?
A Yes, they process sugar beets to make,
among other things, you know, sugar products.
O And do you know if sugar beets are a
perishable crop?
A To my knowledge, yeS, they are.
O So do you know that sugar beets rot if
they're not processed promptly after harvest?
MR. WILLIAMS : Ob j ection. I thi-nk the
cross goes far beyond his rebutt.al testimony. We're now
into their industrial process.
MR. RICHARDSON: Madam Chair, the witness
brought up the subject.
COMMISSIONER RAPER: I agree that with the
assertion by Mr. Swenson that if it smoothed out
IS
it's based on a hypothetical.
not based on your understanding of
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operations, it would change the Company's position that
it's fair cross at this point.
MR. WILLIAMS : All- right .
MR. RICHARDSON: Thank you, Madam Chair.
O BY MR. RICHARDSON: And f asked if you
knew that sugar beets rot if they're not processed
promptly after harvest.
A Subject to check, I would accept that.
O And do you know when generally the sugar
beet harvest takes place?
A Generally, I understand it's 1n the fal_I
and I think that's in Dr. Reading's testimony as wel-l-.
O So given your testimony that sugar beets
are perishable and that they must be promptly processed
after harvestlng and that harvest takes place in the
fal-1, that doesn't give Amalgamated very many options to
smooth out its operations, does it?
A No, to be clear
MR. WILLIAMS: Objection. I mean, I think
he was answering on a set of hypothetical- assumptions
that have now moved into fact, and I bel-ieve the
concl-usi-on that's being asked for is based on facts that
have been given to him to accept that he hasn't verified,
so I just think werre, again, pretty far afield in the
processing and industrial processes of sugar beets.
CSB Reporting(208) 890-5198
SWENSON (x-Reb)
Intermountain Gas Company
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SWENSON (x-Reb)
Intermountain Gas Company
MR. RICHARDSON: I'm assuming the
witness's testimony under oath constitutes facts upon
which I can ask questions.
COMMISSfONER RAPER: I'd say at this point
that you've probably made your point within that regard,
Mr. Richardson. Can you either wrap it up with regard to
this particular portion of the testimony and move on to
different grass?
O BY MR. RICHARDSON: Do you think 1t would
smooth out operations if Amalgamated were to switch back
to coal- from natural- gas?
A It coufd. I don't really know. You know,
you're asking me a question that I think only an
Amalgamated Sugar person coul-d answer.
O But then you testified earl-ier that the
reason Amalgamated's great increase in demand was because
they swltched from coal to gas?
A r did.
0 Okay.
on page 6
you state
6 of your rebuttal
testimony,
testimony,
as sertion
On page
at line
that "Dr
5 of your
. Reading
and then
rebuttal
makes the
you go onthat 'customers, "'to sdy,
have"I assume he is only speaking for Amalgamated -
establ-ished usage patterns and made plant investment
based on Intermountain's 31 years of not filing a generalo25
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CSB Reporting(208) 890-s198
SWENSON (x-Reb)
Intermountain Gas Company
rate case and not charging
what your assumption where
speakj-ng for Amalgamated, "
on.
A WeII,
several- occaslons he
for demaodr " and I'11
you sdy, "I assume he
what that assumption
ask you
is only
is based
in Dr. Reading's testimony, on
used the word "customers" and I j ust
hewanted to make the distinction that I don't believe
was speaking for al-l B0 some odd T-4 customers, because
there's only one in here, Amalgamated Sugar, who takes
who intervened in this case, so obviously, Dr. Reading
was not referring to every customer, but to one single
customer and that was the point of that statement.
O So do you disaqree wlth Dr. Reading that
customers, and generally speaking here, customers
generally and not solely Amalgamated, that customers do
in fact establish usage patterns and make plant
investment decj-sions based at least in part on the cost
of their energy supplies?
A I suppose thatrs the case. It sounds
reasonabfe,' however, again, you're askJ-ng me a question
that Amalgamated Sugar personnel would be able to
answer.
O And part of your job at the Company is
you're responsible for the retention and growth
strategi-es for all large vofume market segments and too25
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(208 ) 890-s198
SWENSoN (x-Reb)
Intermountain Gas Company
build strong strategic
and their trade all-ies
direct testj-mony.
A That 1s
relationships with these customers
and that's on page 1 of your
correct.
the customers wlthO So you don't know that
whom you are building strong strategic
any investment decisions based upon the
product?
rel-ationships make
cost of your
A I can certainly imply that, but those
details are not shared with me in those conversations.
O Referrj-ng to page 7 of your rebuttal
testimony, I believe you observe, do you not, that
Amalgamated Sugar does not buy natural- gas from the
fntermountain Gas Company; correct?
A That is correct.
O And you also state, do you not, that you
have no firsthand knowledge as to what Amalgamated Sugar
pays for naturaf 9ds, do you?
A No.
O But despite the fact that you don't have
any firsthand knowledge of what Amalgamated pays for
natural gas and the fact that Amalgamated does not buy
natural- gas from Intermountain, you go on to make a
calculation as to what you think Amalgamated pays for
natural gas; correct?25
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SWENSON (x-Reb)
Intermountain Gas Company
A I make an assumption.
O You make a calculation as to what you
think Amalgamated pays for natural 9ds, do you not?
A I do, based on some informat.ion that
Amalgamated Sugar employees gave me.
O And your calcul-ation estimates the
combined cost for delivery of two separate products; that
is, the transportation and commodity products,' correct?
A Correct.
O And you conclude,
two different
do you not, that if one
were to combine the products, that is,
Amalgamated would have
. Do you see that?
commodj-ty and transportation, that
a net increase of only two percent
A I do.
IGC's increase is
OSo
AI
with low commodity prices, do you think
somehow more reasonabfe?
think the answer to that questj-on is
when you take the whole
into consideration that
energy cost,
the overal-l-
natural gas cost,
percentage
real1y than,
l_ncrease
some ofin that cost j-s much smaller than,
the other numbers that Irve seen in
testimony, so. . .
O So is that a yes, that
l-ow commodity prices somehow makes the
proposed transportation increase more
Dr. Reading's
you believe that
gas Company's
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SWENSON (x-Reb)
fntermountain Gas Company
A My answer based on
when you take a look at the entire
Amalgamated Sugar that while f've
transportation bill impact will be
you fook at the overal1 cost, it's
percent increase.
O Is it Intermountain
case that its transportation rate
to the commodity price of natural
A No.
A
question of
together for
my testimony is that
cost impact to
admitted that the
significant that when
only around a two
Gas's position in this
shoul-d somehow be tied
gas ?
O If the delivered price of natural gas is
relevant -- which you agree it is, do you not?
A Yeah, to Amalgamated Sugar, y€s, it 1s.
O is it relevant to this Commission's
deliberations as to Intermountain's transportation
rate ?
o
Wel1, I think to the to answer the
overal-l- rate shock, y€s, I think it is.
So you're tying the two products somehow
determining reasonableness ?
No, I think that maybe in my mind things
a bit twisted here. f think the bottom line
I've stated before on the stand and in my
fault of its
A
are gettlng
is thatr ES
testimony, that Amalgamated Sugar through
own has been getti-ng a great advantage at
no
the expense oto25
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SWENSON (X-Reb)
Intermountain Gas Company
the other T-4 customers, and in this case, we filed rates
and charges that wil-l- el-iminate that subsidization and I
believe because of that itrs falr
O So if we were back
when natural gas prices were five
a couple of years
times higher than
your proposed
ago
they
are today, how
transportati-on
A
nY
A
reasonable would be
rate rncrease?
Well
Woul-d that change your concl-usion?
We11, I think we have to go back more than
just a few years to find gas prices that would be that
high, but I think if gas prices were that high, then
Amalgamated Sugar wouldnrt have converted to natural
gas.
0 Wou1dn I t what ?
A If natural gas prices were five times
higher than today, then we probably wouldn't be sitting
here having this conversation, because Amalgamated Sugar
wouldn't have switched from coal to natural- gas.
O But the questj-on was if the commodity
price of gas is, sdy, $15.00 instead of $2.00, does that
change the conclusion as to the reasonableness of the
transportation rate?
MR. WILLIAMS: Objection, there's no basis
to assume a $15.00 commodity price for natural gas.o 25
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CSB Reporting(208) 890-5198
SWENSON (X-Reb)
Intermountain Gas Company
COMMISSIONER RAPER: I think it's been
asked and answered, al-so.
MR. WILLIAMS: That, too.
0 BY MR. RICHARDSON: You previously worked
for a company cal-l-ed IGI Resources, did you not?
A r did.
O What's IGI Resources?
A It's a natural gas marketi-ng company as we
call it.
0 And so in your positlon with IGI
Resources, were you able to famil-iarize yourself with
commodity prices of natural gas?
A Yes.
O Do you recal-l- when natural gas prices were
$1s.00?
A I can recall days when gas prices spiked
that high or maybe even higher, but, you know, as far dsr
like, a seasonal or even for a month period, I don't
recall- prices being that hiqh, but that was a long time
ago.
v
asked you if
as $15.00.
A
o
That's wasn't the question. I had just
you recal-l natural gas prices being as high
Sure, yeS.
And was that when you were at IGIoZ3
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(208 ) 890-s198
SWENSON (x-Reb)
Intermountain Gas Company
Resources ?
A
o
A
0
Intermountain
transportation
reasonabl-e to
No.
You were at Intermountain Gas?
I was back at the utility, yes.
So when gas prices were at $15.00, did
Gas think that it ought to l-ower its
rate to make the delivery price more
its customers?
A No, because as you're aware, our charges,
cost ofour transportation charges, are
service, not on alternate energy
that.
based upon our
prices or anything l-ike
O So the commodity gas price is not
reasonabfe or not rel-evant, if you wiI1, to your
transportatlon rate,' correct ?
MR. WILLIAMS: Madam Chair, I think
MR. RICHARDSON: He's answering the
question.
MR. III]LLIAMS: -- he already has answered
this question several times.
COMMISSIONER RAPER: He was shaking his
head. If you'l1 let him get it on record, then Mr.
Richardson can move on.
a BY MR. RfCHARDSON: Correct?
A Please restate it. Ifm not sure what frmo25
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CSB Reporting
(208 ) 890-s198
SWENSON (ReDi-Reb)
Intermountain Gas Company
answering right now.
MR. RICHARDSON: Could you repeat the
question, please?
(The l-ast question was read back by the
Notary Publ-ic. )
THE WfTNESS: Yes, Ir11 give you that.
MR. RICHARDSON: I thlnk that's all I
have, Madam Chair.
COMMISSIONER RAPER: See how effective
that was?
MR. OTTO: No questions, Madam Chair.
COMMISSIONER RAPER: Do the Commissioners
have any questions of this witness? Any redirect from
the Company?
MR. WILLIAMS: I have a couple of
questions, Madam Chair.
COMMISSIONER RAPER: Okay.
REDIRECT EXAMINATION
BY MR. W]LL]AMS:
O So Mr. Swenson,
this case and moved to a demand
when the Company fil-ed
charge based on MDFQS,
the Company basically
industrial- customers
hosted an open season giving all
the opportunity to reset theiro25
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(208 ) 890-s198
SWENSON (ReDi-Reb)
fntermountain Gas Company
contract MDEQs j-n order to more accurately reflect their
actual demand; is that correct?
A
u
better shape
years, would
accommodation
to move some
months?
A
o
That is correct.
And if Amalgamated were to find ways to
its or move its load around during the
the Company be willing to make an additional
on Amalgamated's MDEQs if they were willing
of that high peak month usage into other
I believe we wou1d, yes.
A11 rlght, and do you know if sugar beets,
could be stored in a non-perishableIike potatoes,
environment ?
A
question.
Honestly, I don't know the answer to that
MR. WILLIAMS: No additional questions,
Madam Chair.
COMMISSIONER RAPER: With that, thank you
for your testimony, Mr. Swenson.
(The witness left the stand. )
COMMISSIONER RAPER: Why don't we take a
1S-minute break, l-et everyone stretch their Iegs. We
will- return at 10 minutes to noon and finish up with the
last two rebuttal witnesses. Nobody is leaving until
we're done.o 25
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(208 ) 890-s198
HEINTZ (Di-Reb)
Intermountain Gas Company
(Recess. )
COMMISSIONER RAPER: Okay, we're back on
the record and the Company may call its next rebuttal
witness.
MR. WILLIAMS: The Company calls Mr. David
Heintz.
DIRECT EXAMINATION
BY MR. WILLIAMS:
O Sir, would you please state your name and
business address for the record?
A. My name is David Heintz. My business
address is 293 Boston Post Road West, Suite 500,
Marlborough, Massachusetts.
O And by whom
capacity or capacities?
A I'm the vice
Energy Advisors.
COMMISSTONER
are you employed and in what
president with Concentric
KJELLANDER: Before you go
because weany further, did he have any direct testimony,
might want to get hj-m sworn in
MR. WILLIAMS: f thought that had
occurred.o 25
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CSB Reporting
(208 ) 890-5198
HEINTz (Di-Reb)
Intermountain Gas Company
produced as a
Tntermountain
DAV]D HEINTZ,
rebuttal witness at the instance of the
Gas Company, having been first duly sworn
to tell the truth,
truth, was further
the whole truth, and nothing but the
examined and testif ied as foll-ows:
COMMISSIONER RAPER: Please continue.
O BY MR. WILLIAMS: Are you the same David
Heintz that caused to be prefiled 1n this case seven
pages of rebuttal- testimony, along with a four-page
appendix?
A Iam.
O And if you were to be asked the same
questions today as contained in your prefi-1ed rebuttal
testlmony, would the answers be the same?
A They would.
MR. WILLIAMS: Madam Chair, I woul-d
tender I woul-d ask that this witness's prefiled
rebuttal testj-mony be spread upon the record as if read,
and he's ava1lab1e for cross-examination.
COMMISSIONER RAPER: Thank you. Without
Heintz's rebuttal test j-mony will be spreadobjection, Mr.
upon the record AS
of Mr
(The
David Heintz
if read.
foll-owing prefiled rebuttal testimony
is spread upon the record. )o 25
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Heintz, Reb. 1fntermountain Gas Company
O. Pl-ease state your name, position and business
address.
A. My name is David Heintz and I am a Vice
President with Concentric Energy Advisors, Inc., 293
Boston Post Road West, Suite 500, Marlborough, MA 07152
O. Would you please
professional- background?
A. I hol-d a B.S. in
describe your educational- and
Economics from the
Pennsylvania
University of
State University and a M.B.A. from the
Pi-ttsburgh. I began my professional- career
at the Federal Energy Regulatory Commission and have
worked for two interstate pipeline companies and the
the last 79 years I have workedBoston Gas Company.
as a consultant in the gas and electric industries with a
prlmary focus on regulatory issues includlng cl-ass cost
of service studles. A sunrmary of my education and
experience is contained in Appendix A which is incl-uded
at the end of this testimony.
O. What is the purpose of your rebuttal testimony?
A. I am responding to the Staff witness Morrison's
critique of the cl-ass cost of service methodol-ogies used
by Intermountaln Gas Company ("IGC" or "Company") in 1ts
filing. In addition, I will address the impact on cost
of service al-focations of Dr. Morrison's revisions to the
T-3 and T-4 billing determj-nants.
Eor
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Heintz, Reb. 1a
Intermountain Gas Company
a. What are Dr. Morrison's j-ssues with the
Company's class cost of service study?
A. Dr. Morrison's issues include (1) the l-ack of
load study to
two small- rate
use of certai-n
O. What
study?
determine peak usage; (2 ) the excl-usion of
classes from the cost study, and (3) the
cost allocation methods and al-l-ocators.
is Dr. Morrison's concern regarding a load
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B
9
A. A major allocation factor in the class cost of
service study is the coincident peak demand factor which
is used, in whole or in part, to allocate demand rel-ated
costs to the rate classes. Dr. Morrison argues t.hat a
load study is necessary to determine the peak usage by
rate class so as to al-l-ocate these costs i-n a manner
consistent with the principals of cost causation.
O. Is a l-oad study required to determine the
coincident peak usage of the rate classes?
A. No. While a load study may provide a more
precise estimate of each cl-asses' peak usage, it is not a
requirement to meet the principal of cost causation. A
l-oad study of the type envisioned by Dr. Morri-son
requires daily recording meters at a representative
sample of customers along with the systems and personnel
time to col-lect, store and analyze the data. At this
time the Company does not have the smart meter technology
fu1ly in place to provide such data, nor is it required
in order to do a cost of service study. Instead the
Company has applied a commonly used gas industry approach
to estimating the rate cl-asses' peak demands. In my
experience the use of load studies is rel-atively uncommon
in the natural gas industry. Rather, variatj-ons of the
Company's method for determining the peak demand factor
is the more cofiImon practice.
Heintz, Reb. 2Intermountain Gas Company
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Intermountain Gas Company
O. What method did the Company use to determine
the peak demand factor?
A. The Company determined the peak demand factor
of the daily meteredby subtracting the actual- usage
customers from the most recent
all-ocated the remainj-ng demand
peak day. ft then
to the non-daj-Iy metered
classes,
clas ses ,
usage.
in this case the residentia]and general servlce
(the peak month)on the basis of their January
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Heintz, Reb. 3
Intermountain Gas Company
This method fairly apportions the
l-imitations ofcl-asses within the
O. Do you agree with
allocation of transmi-ssion "usually
determined using data
A. No. While I
from multiple peak days"?
days for allocation the
the peak day.
have seen the use of multiple peak
more common method is the use of
O. Do you agree with Dr. Morrison that
"distribution plant is usually allocated using a NCP
al locators " ?
A. No. Non-coincident peak ("NCP") allocators are
commonly used in the electric industry for the al-location
of electric distributlon costs. The use of
non-coincident peak a1locators for gas distribution costs
is, in my experience, rare and the use of coj-ncident peak
allocators is the coflrmon practice. As noted by Company
witness Gilchrist, the Company has designed and built its
system to deliver gas supply to core market and
non-interruptlble industrial- customers on the coldest
peak-day period. In order to meet peak-day demand, the
Company has to design and buil-d the distribution system
with enough capacity to meet this demand, regardless of
what the demand is on non-peak days.1
O. What is Dr. Morrj-son's objectlon to the
peak demand to the
the avail-abl-e data.
Dr. Morrison that the
and storage costs are
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Heintz, Reb. 3a
fntermountain Gas Company
Company's al-location of service and regulator costs?
A. The Company used a weighted customer factor
the al-location of service and regul-ator costs uslng a
weighti-ng factor based on meter costs. Dr. Morrison
argues that the regulator costs should be allocated in
proportion to the costs of
for
1 Direct Testimony of Hart Gil-chrlst, page 4, lines 14 LIo25
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services and regulators used by each cl-ass.
O. Does the Companyrs accounting records incl_ude
the cost of services and regulators used by each rate
class ?
A. No. The Company's accounting records include
the total- costs related to regulators and services but
this information is not kept by rate class.
ConsequentJ-y, an accepted natural gas industry approach
to this allocation factor was ut111zed, whlch was to use
a weighting factor base on meter cosLs.
O. Do meter, service and regul-ator costs increase
with a customer's peak demand and consumption?
A. Yes. A larger customer requires larger and
more expensive meters and services. Since meter costs can
generally be acquired r or calculated, by rate class, 1t
1s a common industry practice to use the meter costs as a
weighting factor for other customer related equipment
costs. This 1s the approach used by the Company.
O. Do you agree with Dr. Morrison's statement that
since mains serve multiple users it is not appropriate to
classify any portion of the mains costs as customer
rel-ated?
A. Absolutely not. Some distribution main
investment is necessary to connect a customer to the
distrlbution system that is completely independent of the
Heintz, Reb. 4
Intermountain Gas Company
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Heintz, Reb. 4a
Intermountain Gas Company
level of peak demand of the customer. To the extent that
this component
the requirement
the customer I s
of distribution mai-n cost is a function of
to connect the customer, regardless of
size, it is both appropriate and necessary
classesto a]locate the cost of those facil-ities to rate
based on the number of customers, and not peak demand.
Mr. Gorman agrees on page 18 of his direct testimony that
the
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Heintz, Reb. 5
fntermountain Gas Company
Company's "proposed allocation of distrlbution maj-n costs
using both a customer and a demand component best
refl-ects cost causation prlnciples". This point can be
illustrated with a simpJ-e example. Assume there is a
single industrial customer on the Intermountain system
with a peak demand of 5,000 therms. Further, assume that
elsewhere on the system there is a neighborhood of 1,000
resldential customers with an aggregated peak demand of
51000 therms. It is obvious that in order to connect all
of those residential customers to the system, the Company
would have to invest in far more distribution mains
footage for those
in for the single
distribution mains
customers than it would have to invest
industrial customer. The extra
investment i-s due sole1y to the number
the peak demand of those
cost allocation and notes that "A portion
associated with the distribution system may
be included as customer cost. "2
of customers on the system, not
customers.
O. Is the cl-assification of dlstribution mains
costs on a customer and demand basis consistent with
accepted regulatory practice?
A. Yes. The Nationaf Association of Regulatory
Utility Commls sioners ("NARUC")
dlscusses several
Gas Distribution Rate
methodol-oqies andDesign Manual-
approaches to
of the costs
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Heintz, Reb. 5a
Intermountain Gas Company
O. What are the common methods used to
the customer component of distribution mains?
A. The two common methods used are the
and minimum size. The zero-inch method, used
Company, uses regression analysis to identify
a hypothetj-cal- "zero sized" main, the cost of
necessary to serve
determine
zero-inch
by the
the cost of
which is
2 National- Association of Regulatory Utility Commissioners,
Gas Distribution Rate Design I,IanuaT aL 22 (June l-989) .o 25
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Heintz, Reb. 6
Intermountain Gas Company
customers connected to the system whether or not they
system. The minimum systemon theplace any demand
method identifies the minimum si-zed distribution main
needed to serve customers and then cl-assifles that
portion of distributlon mains as customer-related.
0. Do you agree with
zero-inch method used by the
Dr. Morrison that the
Company should have used
capacity (diameter squared)
the regression analysi.s?
A. No. The cost of
rather than pipe dj-ameter in
distributj-on main is driven by
size (diameter) and length (feet). Capacity is not a
cost factor. The purpose of the zero-inch study is to
determine the cost of a "zero-sized", i.e. zero diameter,
main.
O. Is it necessary to have "project leve1"
informatj-on for the zero-inch study, as suggested by Dr.
Morrison?
A. Not at all-. In all the zero-inch studies I am
familiar with, yearly vintage data; total cost
by stze (diameter), type (stee1, plastic), and
is necessary. The yearly costs are brought to
year vafue by use of the Handy-Whitman Index, a
infl-ation index. Dr. Morrison seems to believe
for a
per year
footage,
current
utility
that
costmulti-decimal point precision is required
study. He is wrong: Such a standard is unattainable.o 25
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Heintz, Reb. 6a
Intermountain Gas Company
O. Is it necessary to include the snow meft
classes, IS-R and IS-C, ds separate cl-asses of service in
the cost study?
A. No. As explained by Company witness Blattner,
the Company incl-uded the snow mel-t. customers as
residential or commercial customers rather than separate
classes of service. Given these customers' low annual-
throughput volumes, it is
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Heintz, Reb. 1
Intermountain Gas Company
not necessary to include them as separate cl-asses in the
cost study.
a. Pl-ease summarize your testimony regarding the
Company's class cost of servj-ce study.
A. The Companyrs class cost of study was conducted
using standard industry accepted methodol-ogies that are
commonly employed by a significant number of natural gas
companies in the country, and is a methodology recognized
by NARUC and multiple state regulatory commissi-ons.
O. Regarding the adjustments Dr. Morrison made to
the T-4 billing determinants, what effect does Dr.
Morrison's arbitrary real-location of the spread of therms
in the T-4 billing bl-ocks have on the allocation of costs
between customer cl-asses in Dr. Morrison's proposed
methodology?
A. Dr. Morrison is basing his revenue requirement
As explained
artificial
the effect
al-l-ocation on normal-ized test year revenue.
by Company witness Darrington, Dr. Morrison's
inflation of t.he margin for the T-4 class has
of forcing the T-4 class to bear more than their fair
share of the revenue requirement.
a. What effect does the averaging applied by Dr.
Morrison to the T-3 customer class have on the allocation
of costs between customer classes?
A. Artlficially inflating the billing determinantso25
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Heintz, Reb. 1aIntermountain Gas Company
for the T-3 cl-ass will force a higher revenue requirement
to T-3 than is fair based on the usage of the customers
that currently comprise the class. Nowhere in Doctor
Morrison's testimony does he provide a justification for
this adjustment to the T-3 class.
O. Does this complete your testi-mony?
A. Yes.
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CSB Reporting
(208 ) B 90-s198
HETNTZ (X-Reb)
Intermountain Gas Company
(The fol-lowing proceedings were had in
open hearing. )
COMMISSTONER RAPER: And does the
Commission Staff have any questions of this witness?
MR. KLEIN: No.
COMMISSIONER RAPER: Mr. Stokes.
MR. STOKES: I just have a few.
COMMISSIONER RAPER: Thank you.
CROSS-EXAMINATION
BY MR. STOKES:
performed
industry?
O Good morning.
A Good morning.
O fs the manner 1n which the Company
its cost of service study coflrmon in the gas
A
0
possible to
Staff wou]d
Yes, in my opinion and an my experr_ence.
or is it currently
study the way that
Okay, do you
conduct a cost
think it's
of service
Iike you to perform it?
A If by that
you know, kind of a l-oad
necessary.
you mean whether there is a,
study required, flo, that is not
O Okay, is it currently I guess myo25
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CSB Reportj-ng
(208 ) 890-s198
HEINTZ (x-Reb)
Intermountain Gas Company
question was, is 1t currently possible?
A The Company does not currentl-y have the
l-oad information that Staff has indicated that they would
like to see for a cost of service study.
O Do you think the Commj-ssion should spread
the rates based on the cost of service study that was
done for this case or the cost of service study that
existed 30 years ago?
A I think the appropri-ate use woul-d be the
current cost of service study. It reffects the current
situation on the system much more accurately than
something revenue requirements from a 30-year-ago
case.
MR. STOKES : Thank you . That ' s al-l- I
have.
MR. PURDY: I have no questions.
Thanks.
MR. RICHARDSON: No questions, Madam
Chair.
COMMISSTONER RAPER: Mr. Otto.
MR. OTTO: No questions, Madam Chair.
COMMISSIONER RAPER: Do the Commissioners
have any questions? Redirect by the Company?
MR. WILLIAMS: No redirect.
COMMISSIONER RAPER: Thank you.o 25
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CSB Reporting(208) 890-s198
McGRATH (Di-Reb)
fntermountain Gas Company
(The witness left the stand. )
MR. WILLIAMS: The Company would call- as
its next witness and final- witness Mr. Michael McGrath.
COMMISSfONER RAPER: If there's a standing
ovation, don't take it personally.
produced as a
fntermountain
MICHAEL McGRATH,
rebuttal witness at the instance of the
Gas Company, having been flrst duly sworn
to tel-l-nothing but the
truth,examined and
testified as follows:
DIRECT EXAM]NAT]ON
BY MR. WILLIAMS:
O Woul-d you please state your name and
busi-ness address for the record?
A Yes, my name is Mike McGrath. My business
address is 555 South Cole Road, Intermountain Gas
Company.
O Are you the same Mike McGrath that
previously filed direct testlmony in this case?
A Iam.
O And are you also the same Mike McGrath
the truth,
resumed the
the whole truth, and
stand and was further
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CSB Reporting(208) 890-s198
McGRATH (Di-Reb)
Intermountain Gas Company
that caused to be prefiled in this case 19 pages of
rebuttal- testimony, along with Exhibit No. 45?
A I am.
O And if
questions contained in
f were to ask you today the same
that rebuttal testimony, woul-d
your answers be the same?
A My answers wou1d be the same.
MR. WILLfAMS: Madam Chair, I would ask
that Mr. McGrath's testimony be
if read, and Exhibit 45 entered
spread upon the record as
into the record.
Mr. McGrath's
COMMISSIONER RAPER: Without objectlon,
rebuttal testimony wilJ- be spread upon the
read, and Exhibit 45 wil-I be entered intorecord as if
the record.
(IGC Exhibit No. 45 was admitted into
evidence. )
testimony of
record. )
(The following prefiled rebuttal
Mr. Michael McGrath is spread upon the
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McGrath, Reb 1
Intermountain Gas Company
O. Pl-ease state your name, position, and buslness
address.
A. My name is Michael- McGrath. I am the Director
of Regulatory Affairs at Intermountain Gas Company
My business("Company", "fntermountain" or "fGC")
address is 555 S. Cole Road, Boise, Idaho 83101.
O. Are you the same Mike McGrath that pre-filed
direct testimony in this case on behalf of Intermountain
Gas Company?
A. Yes.
O. What is the purpose of your rebuttal testimony?
A. The purpose of my rebuttal testimony is to
address concerns related to the proposed FCCM that were
raised by
(rcL) /NW
Staff and the Idaho Conservation League
Energy Coalition ("NWEC"). I will al-so summari-ze
the effect on revenue requirement from each of the
adjustments proposed by the Company.
0. Pl-ease summarize your rebuttal to Staff 's and
NWEC's testimony that takes issue with the Company's
fixed cost collection mechanism (FCCM).
A. Staff's Mr. Lobb and NWEC's Mr. Rivera
criticlze the FCCM as fol-l-ows:
1. Mr. Lobb asserts that the Company provided
no support
or impact
for declining use per customer
of economic condi-tions (Lobb page 12,o 25
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McGrath, Reb 1a
Intermountain Gas Company
2
lines L2-75);
Mr. Lobb raises a concern that the Company
proposes to include GS in the FCCM, yet no DSM
programs are currentl-y proposed for the GS rate
cl-ass (Lobb page 13. Lines 7'7-23);
Mr. Lobb testifies that the Company's proposed
five-year DSM spending plan has an
insignificant effect on sales, based on Staff
analysis of the revenue impact of DSM programs
on fixed revenue recovery for the Company,
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McGrath, Reb 2
Intermountain Gas Company
4
compared to Avista El-ectric, Avista Gas and
Idaho Power. (Lobb, page tL, l-1ne 25 through
Page 12, line 11);
Mr. Lobb asserts that the FCCM contai-ns a
provisj-on to collect incremental customer fixed
costs in support of new customer additions, yet
the Company has provided no evidence that there
are incremental costs to serve these customers
(Lobb page L2, line 20 through page 13, l-ine
8);
Mr. Lobb argues that the Company cost of
service study (COSS) is inadequate, and
therefore the Residential- cl-ass' cost
responsibil-ities under existing tariffs may not
be accurate, so therefore the FCCM revenues
would also be inaccurately weighted (Lobb page
L3, line 71 through page14, line 10);
Mr. Lobb states that because both the
Company and Staff are proposing increases to
fixed customer charges, that the FCCM is
unnecessary. (Lobb page 14, Iine 11 through
page 15, line 5),
Mr. Lobb recommends a reduction to all-owed ROE
if the FCCM is approved (Lobb page 15, lines
6-72) ;
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McGrath, Reb 2a
Intermountain Gas Company
I Mr. Rivas, representing NWEC1, asserts that
weather, economic conditions, or customer
behaviors are "a normal risk to utility
operations" (Rivas, page 9, l-ines 2L - 23);
Mr. Rivas recommends that if the ECCM is
approved, a 3% annuaf rate cap should be
implemented (Rivas, page 10, lines 19-20);
9
1 ICI and NWEC generally support decoupling (referred to in
testimony as "revenue regulation"). (Rivas, page 9 l-ines 17-18)o 25
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McGrath, Reb 3
Intermountain Gas Company
10. Mr. Rivas further contends that sales will
likely increase because of fuel switching and
page 7L, l-inesthe FCCM is unnecessary (Rivas
20-22), and
11. Mr. Rivas
includes
asserts that "A proper rate
a low monthly customer charge
( Rivas,
design
along
Page 15
u
with a decoupling mechanism"
l-ine 14 ) .
What is the Company response to these
critlcisms ?
A. My testimony below
further evidence, in support
w1l-l- discuss, and provide
of the following:
Use Per Customer1. Declining Normal-ized
("NUPC") has been, and continues to be, a
signiflcant j-ssue for the Company;
2 fncremental- costs for new customers added to
the distribution system must be considered in
FCCM,.the
3
the design of
The FCCM must
instant case
be implemented as
in order to fairly
part of the
compensate for
4
the adverse financial impacts that new
conservation measures wil-l- have on the
Company's distribution revenues and returns;
Revenue stability helps the utility remain
financially strong, can help reduce theO25
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McGrath, Reb 3a
Intermountaj-n Gas Company
5
frequency of rate filings, but does not
guarantee earnings;
Decoupling is symmetrical and fair, and
eliminates risks to both the Company and
ratepayers, and works
rate design, and
wel-l with IGC's proposed
6 Decoupling is widespread throughout the
country, and the Companyrs proposed FCCM wil-l-
put the Company back in line wj-th its peers.
Please di-scuss the Company's experience wltho
declining NUPC.
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McGrath, Reb 4
Intermountain Gas ComPanY
A. The following summarizes IGC's residential use
per customer, expressed on a weather-normalized basis:2
RS-l Chart I
As the above Chart 1 shows, Rate Cl-ass R-1 has
experienced a significant and persistent decline in NUPC
over the past two decades. Similarly, aS shown on Chart
2 below the R-2 residential class has also experienced
significant and consistent decl-ining NUPC-
2Historical usage normalized consistent with Company
historical and proposed normal-ization methodology.
12-Month RolEng NormdLed Use Per Customer (RS1)
R2 - 0^7531
?E?333383?EE?EEEE?SEEEEEEEE
65,
6$
610
59
5t0
5S)
53
510
49)
470
,t*)
o
=<,
!2F
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McGrath, Reb 5
Intermountain Gas Company
RS-2 Chart2
l2-Month Ro$rqg Nsmdized Use Per Custorner (R$2)
9{}
$20
gD
8Srs
Eso
€ oao
!emF7m
700
t4
ie
IU
ffi * (r,r985
3 3BB g??? 3 ?3E.? 3? 3E?? ? EE ?E E ? E
O. Please explain why R-l and R-2 NUPC has
persistently decl-ined over the past two and one half
decades?
A. Declining NUPC is a documented, long-term trend
throughout the country. This trend was examined
extensively by such organizations as the American Gas
Association, which reported a trend in decl-ining use per
residential natural gas customer of 1 percent annually
from 1980 to 2000, and accelerated thereafter:
' Weather-adjusted use per residential customer
feII by 1-3.1 percent from 2000 through 2006.
' The annual rate of decline in this 2000 to 2006
timeframe more than doubled rel-ative to the
pre-2000 period, increasing to 2.2 percent
annua11y.o 25
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Further acceleration was witnessed in the 2004
to 2006 period, as evidenced by a 4.9 percent
annual rate of decline. "3
3 An Economic Analysis of Consumer Response Lo Naturaf Gas Prices,
by Frederick Joutz and Robert P. Trost, prepared for the AGA,
March 2007
McGrath, Reb 5a
fntermountain Gas Company
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Categorically, declining NUPC can be attributable to:
1. Utility-sponsored Energy Effi-ciency
(EE)/DSM programs,'
2. Customer self-funded conservation
measures;
3. Improvements in appliance efficiencies and
building code requirements,
4. Consumer responsiveness to increase in
natural gas prices and/other economic
factors, and
5. Trends in weather and cl-imate changes.
O. Pl-ease explain each of these factors.
A. Utility-sponsored EEIDSM programs are similar
to what the Company 1s proposing in the instant case.
These Company-funded measures result in direct energy
efficiency spending for Intermountain Gas customers.
Each program will have an avoided unit of energy and
known levels of participation.
Customer-funded conservatlon measures are the result
of customers acting independently of utility-sponsored
programs (e.9., when a customer installs j-nsulation
purchased at a home improvement store). Unlike
company-funded conservation programs that track actual-
instal-Ied energy efficiency measures, customer-funded
install-atlons are not tracked by the ut11ity.
McGrath, Reb 6
Intermountain Gas Company
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McGrath, Reb 6aIntermountain Gas Company
fntermountain Gas has proactively promoted customer
self-funded conservation through various publications and
outreach. This outreach, ds well- as broader regional and
national- messaging, changes customers' attitudes towards
energy use and can spur investment in energy savings
measures.
4 See "THE EFFICIENT AND DIRECT USE OF NATURAL GAS" section of the
Company's 2015 Integrated Resource P1an, pages B0-85. Case No
rNT-G-15-01O25
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Appliance efficiencies and bui1ding code changes
affect customer usage whenever an existing (less
efficient) appliance is replaced by a new (more
efficient) one, and new housing stock replaces ofd stock.
There are known changes to building requirements and
appliance efficiency standards that have been enacted
over the past few decades. These include lncreased
appliance efficiency requirements for furnaces and hot
water heaters. Additionally, Idaho has passed a series
of more stringent building codes.
Price elasticity and economic impact on usage can be
estimated using econometric modelling, but wil-l- have Iess
of a degree of accuracy compared to known and measurable
hard EElDSM install-ations. Although prices are 1ow now,
1n the not so distant past, prices were high, and
customers responded by installing 1ow cost permanent
measures (weather strippi-ng, water heater jackets, set
back thermostats, etc. ) and high cost permanent measures
(insulated doors, added wal1 and attic insulation,
efficient windows, etc.) as well as temporary measures
(closing off rooms, turni-ng down thermostats and wearing
sweaters). The permanent measures reduce NUPC forever,
long after the natural- gas prices return to moderate
l-eve1s.
Trends in climate and weather changes, over time, is
McGrath, Reb 7
fntermountain Gas Company
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McGrath, Reb la
Intermountain Gas Company
self-explanatory. The simplicity in design of the
proposed FCCM captures all- the above forms of
conservation, and is fair to both the utility and
ratepayers, as the ECCM is symmetrical.
O. Can util-ities such as fntermountain Gas Company
control- any of these variants?
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McGrath, Reb 8Intermountain Gas Company
A. No. Utilities are a key stakeholder in the
determination of utillty-sponsored EElDSM program
spending, but the amount is ultlmately decided by
regulators. Utilities have no control over nationally /
internationally traded commodities such as natural 9ds,
and therefore cannot control the lmpact of price
demand. Utilities may have only a minimalelasticity
impact on
less impac
appliance
o.
on
customer-driven conservation measures, and even
t on housing stock, building codes, oL
replacement.
Please el-aborate on how customer-funded
conservation contributes to declining NUPC.
A. Existj-ng customers may choose to invest in
conservation measures using their own money, never
utilizing company sponsored programs. This may occur
because of a l-ack of understanding of the existence of
utility programs or inellglbility based on program
requirements. Because the utility is unaware of these
conservation measure installations, quantification of
avoided usage is impossible. However, quantification of
energy savings for an lndividual, representative premise
is easily obtainable for many conservation measures. The
effectiveness of thermal resistance, for instance, is
measured in "R-val-ue" units. f ncreas j-ng a surf ace' s
R-val-ue reduces heat l-oss. Therefore, when a consumero25
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McGrath, Reb Ba
Intermountain Gas Company
instal-1s additional- insulation in their home,
attic
thus
j-ncreasing
ceilings,
the surf ace ' s R-val-ue (e . g. ,f1oor,
( allwal1s, etc. ) thelr naturaf gas
The following
usage
table
else
being equal)
demonstrates
sample 1,000
will decline.
the impact of increasing R-values in a
square foot home in Boise, Idaho:s
. com/residentialenergvcaf culator .5 See www.enerqydepoto25
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McGrath, Reb 9
Intermountain Gas ComPanY
Table I
! Sflinoa
oLD ---
I\R-Vah€R-10 R-l,r R-12 R-13 R-i4 R-15 R-16 R-17 R-l4 R-l9
-'t't 2.
n-12 1.8X 21q
-r3 3 5_3X 3.af,1
-14 4 7&3Aol 3.3*1.59(
R-15 5 e r.,6.7%4.61 LAX 1.31
-16 5 tti .'lf}3*7.AC 5_7C 1.O*LiE 1-1
-1-r 11.a-ax 67 5-O I 3.5*2.2 1
-ta 1229I 9-79t 7 5-119I 3-196 1.9*o grf,
-19 I 13.09(10.5*4.19t 4.7*5)*a*1 ) 7.A 1.7 0.696
R-20 10 1a7q 11 )q qrq 7A 5qq a a tLcA )t*l5*n7*
As the above table indicates, an existing homeowner who
upgrades their home with insulation, which increases the
overall R-value of the dwelting, Can decrease their
natural gas usage significantly. For example, increasing
the R-value from R-10 to R-16 would reduce usage by more
than ten Percent.
As this table shows, even a modest improvement in
R-value can have a significant impact on decl-ining usage.
Attachment 1 provides the assumptions and supporting
documentation for Table 1 above.
O. Please elaborate on how increased appliance
efficiencies contribute to declining NUPC'
A.Applianceefficiencieshavebeenincreasingon
both a mandated and voluntary basis. The u.s. Department
of Energy (,'DOE") regutates minimum efficiency standards
for many appliances, including gas furnaces, boilers' and
water heaters. In the early 1990s the DoE changed the25
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McGrath, Reb 9a
Intermountain Gas Company
standards on Annual Fuel Utilization Efficiency ("AFUE")
furnace was requiredfactors. Under the new code, a gas
to meet at l-east an B0% AFUE whil-e high efficient gas
furnaces must achieve at least
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McGrath, Reb l-0
Intermountain Gas Company
a 90t AFUE to meet the new standard. This is an
increase from the 788 AFUE standard enacted in 19926.
O- Have building codes changed as well?
A. Yes. Idaho has adopted the fnternational_
("IECC") . Significant changes
changes are as follows:
Energy Conservati-on Code
to Idaho's building code
Table 2 - IlistoryT
O. How do these building code changes affect
natural gas consumption?
A. Simil-ar to the example provided in Tabl-e 7,
changes in building codes have resulted in mandatory
increases 1n R-value. Therefore, new buildings will be
significantly more energy efficient. As oId housing
stock is replaced, average consumption (all else being
equal) decreases.
0. How does decoupling solve the problem of
1..lan-l5
Commercial: 2012 IECC without amendments
Residential z 2012 I ECC with amendments, bringing the effective
resulb back to he levels contained in the 2009 codes.
26-itar-07
The 2006 IECC becomes mandatory for new buildings statewide
effective January 1, 2008.
2lI-]lrar42 ldaho adopts fte 2000 IECC effctive January 1, 2003
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Intermountain Gas Company
declining NUPC?
A. Util-ities and regulators across the
have realized that they alone cannot control-
usage, and that vol-umetric rates that affect
utilities' earnings depending on how much (or
customers use is not good public policy.
country
customer
the
how little)
6 The National- Appliance Energy Conservation Act of 1987, enacted
March 77, 198'7 .
,/adopt ion/states / idaho .7 See https :, / /www. enerqycodes.25
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From a utility perspective, earnings fluctuate based on
factors beyond their control- (i.e., weather, customer
self-funded conservation, equipment replacement and
consumer behavior). This can result in uncontrollabl-e
earnings degradation as conservation/efficiency measures
only result in l-ower usage. Over time, it is expected
that weather will average out. Severing the l-ink between
utility earnings and sales enables the utility to freely
promote, and encourage, lower usage regardless of the
impact of al-l- these listed exogenous factors that impact
sal-es. Such regulatory treatment al-so provides
flexibility between rate cases if state policy dictates
greater or reduced utillty-funded EE/DSM, and general
promotion of the conservation of energy.
O. Does the Company's proposed FCCM el-iminate the
customer usage dilemma?
A. Yes, it does. The Company's proposed FCCM
protects both the utillty and its customers from changes
in usage. The FCCM is symmetrical it can result in
elther a charge or a credit depending on actual revenues
per customer (which is Iargely driven by volumetric
charges).
O. Does the proposed FCCM guarantee Intermountain
Gas Company's earnings?
A. No, it does not. The FCCM trues up revenues to
McGrath, Reb 11
Intermountaj-n Gas Company
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the amount allowed on a per-customer basis. It does not
true up other revenue requirement components. The
utility remains at risk for managing its capital
expenditure programs, managing its operations (e.9.,
sal-arj-es and wages, benefits, overtime, maintenance
programs,
McGrath, Reb 11a
fntermountain Gas Company
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McGrath, Reb L2
fntermountain Gas Company
uncofl-ectibl-es, outsJ-de services,
(including property taxes that are
most municipalities).
o.
proposed
utility
A.
volumetric cost recovery,
financially vulnerable to
which makes
etc. ), and paying taxes
adjusted annually by
percentage of
the Company
sal-es variations between rate
Pl-ease explain any additional beneflts that the
revenue per customer FCCM construct has for the
and ratepayers?
Intermountain Gas has a high
cases. This is illustrated in the fol-l-owing table:
Table 3 - Fixed and Variable Revenues (At Proposed Rates $000's)
Distribution
Revenues Fixed Variable
Rate Class,Total $$%%
RS (Combined)$60,988 $37,018 6t%$23,970 39%
GS $23,997 $tr3,505 56%$10,492,'44%
@latfirer, Exhibit Z4,page 4 of 4).
It is in ratepayer's best interest to have a financially
stable utility along with more stable energy biIIs.
Revenue stability through decoupling helps avoid the need
for the Company to seek general rate increases more
frequently as conservation activities (and other
contributors to decl-ining use per customer) increase.
O. Why is the Company proposing to calculate the
FCCM on a revenue-per-customer basis?25
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McGrath, Reb 72a
Intermountain Gas Company
A. Cafculating decoupling adjustments using a
per-customer approach protects the utility from
under-co1J-ecting revenue requirements associated with
adding new
successful-
and adding
customers
customers. Intermountain Gas has been very
naturalover the past decades in promoting
system. These
gas
new customers to its new
can only be added if the utillty can retain
this new revenue stream to
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pay for the incremental- j-nvestments necessary to serve
these customers (i.e., new mains, service lines, meters,
system maintenance, bi11ing, etc. ) . Tf these revenues
from new customers were refunded through decoupling, then
the Company would incur a shortfall in revenues each time
it attached a new customer. This woul-d l-ead to a
rational decision by the Company to not expand, which
woufd (over the long run) adversely impact all ratepayers
because new customers help spread fixed costs over more
units.
O. Has the Company quantified any of these
incremental- costs to serve new customers?
A. Yes. Since its l-ast rate case in 1985, the
number of Intermountain Gas residential customers has
increased from 85,400 to more than 300,000. In the same
period, the number of commercial customers has increased
from 13,300 to nearly 32,000. Whife more customers
increase sal-es revenue, they also require more investment
in non-revenue generating j-nfrastructure such as pipeline
expansion and replacement and customer care systems and
information technology (Madison, page 10, l-ine 15 through
page 72, fine 15).
Additionally, Intermountain has spent approximately
$551 million in capital additions, largely attributabl-e
to customer growth (Kivisto page 2, lines 17-18.)
McGrath, Reb 13
fntermountain Gas Company
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The Company's Application includes the following
costs dj-rectly related to service new customers:
McGrath, Reb 13afntermountain Gas Company
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McGrath, Reb L4
Intermountain Gas ComPanY
Table 4
(Darrington, Exhibit 13, page 1 of 7).
O. Staff testimony of Mr.
Intermountain' s annual percentage
Lobb suggests that
programs on
comparison
Power, and
this time.
fixed revenue recovery
impact of EEIDSM
is insignificant in
to Avista Electric, Avista
that the Company does not
Gas and Idaho
need the ECCM at
A. No
Do you
. Mr.
agree ?
Lobb provides
sed five-year
f ol-Iows:
informat j-on comparing
DSM spending to thethe Company's propo
listed Companies as
lncrease in Gross Plant in Service
Month Gross Plant
($ooo)
Line
Reference
Dec-l5 $599,921 I
Dec-16 633,587 25
Change $33,666
EE/DSM Spending as a Percentage of Total
Distribution RevenueECompany
lntermountain Gas 0.03o/o 0.r5%
Avista Gas 0.18%0.18%
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McGrath, Reb 14a
fntermountain Gas Company
As this comparison
difference between
shows, there is a significant
and electric EDCgas LDC spending
spending.The proposed Intermountain Gas spending
8 I'Low'r refers to the l-owest l-evel of annual- spending percentage over
the life of the respective p1ans, and "Hi-gh" refers to the highest
annua1 percentage.o 25
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McGrath, Reb 15
Intermountain Gas Company
wil-l- ramp up to comparable l-evels to the other Idaho gas
uti11ty, Avista Gas. Regardless of the potentia1 impact
of utility-sponsored EElDSM programs may have on fixed
cost recovery, the FCMM should be implemented immediately
upon the final decision in this Case. The function of a
decoupling mechanism renders moot the magnitude of the
utility-sponsored programs on utility earni-ngs, and
al-leviates the inevitabl-e earnings degradation associated
with appliance efficiency, changes in building codes, and
customer-funded EElDSM.
0. Is fntermountai-n Gas' proposed EE/DSM program
flexibl-e over the five-year plan?
A. Yes. As discussed in Company witness Ms.
Allison Spector's pre-fiIed testimony, the Company is
proposing a deferral mechanism that enables the
Commisslon and interested parties to design fl-exibl-e
EE/DSM programs between rate cases without the need for
( Spector,frequent rate cases.
O. What is the impact of
proposedfntermountain's higher
the ECCM?
result in higher fixed cost recovery
subject to vol-umetric recovery. This
comparatively smal-l-er FCCM adjustment
page 5, Iines 1-5).
implementing
flxed customer charges on
A. A11 else being equal, higher fixed charges
and fewer dol-lars
transl-ates into a
than if customero25
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charges are not increased (or increased less than
proposed). As illustrated above in Table 3, however,
even with the higher proposed customer charges, the leve1
of vol-umetric recovery is stil-1 substantial.
O. Mr. Rivas recommends a 38 cap for the ECCM. Do
you agree?
McGrath, Reb 15a
Intermountain Gas Company
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A. No. The proposed cap is arbitrary and
unnecessary. The FCCM is a symmetrical mechanism that
can result in either a charge or credit. As stated
above, in conjunctj-on with fGC's proposed higher fixed
customer charges the FCCM wil-l- have l-ess variability
compared to implementing it at current rates.
O. Is Intermountain's FCCM considered mainstream
for a U.S. gas utility?
A. Yes, it j-s. Two-thirds of the gas LDC
decoupling mechanisms currently in place are based on
revenue per customer. The calculations are
straight-forward and easy for customers to understand.
As of January 2071, sixty-seven (6'7) U.S. LDCs have a
decoupling mechanism. Covering twenty-nine (29) states,
these 61 utilities represenL approximately one-third of
the natural gas LDCs in the country:
McGrath, Reb L6
Intermountain Gas Company
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McGrath, Reb 16a
Intermountai-n Gas Company
Summarv of Decouoline Mechanism Concentrations in U.S.:
Exhibit 45 provides further detail- by utility.
testimony as it relatesO. Please summarlze your
FCCM.to the Company's proposed
lll 2 ll l11 1(Gl I l12 11 llll I 22
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6lsl,2 7l2l 2 1 11 1131 1131,2 61
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McGrath, Reb 77
Intermountaj-n Gas Company
A. By
consumption
disincentive
el-iminating the link
and Company earnings,
for utll-1ties to
energy efflciency programs.
implemented decoupling are no
promoting conservation (that
sales
between customer
decoupling removes the
promote conservation and
Companies that have
longer caught between
reduces sal-es ) and growing
revenues (by increasing sales). Breaking the fink
between utilj-ty sal-es and revenues is the best way to
promote conservatlon activlties fully and freely. Other
mechanisms that only compensate the utillty for the costs
of conservation programs, fa11 short. Approaches that
are limited to program cost recovery ignore other very
reduction. As Mr. Terztcsignificant causes of
states in hls direct testlmony: " [An] FCCM is a natural-
and important component or counter-weight to a wel-1
designed and implemented demand-side management (DSM)
program" (Terzic, page 74, l-ines 3-4). He further states
that decoupling is appropriate whenever a utility rate
design is such that a decrease in sales vol-umes adverseJ-y
affects the ability of the utility to earn a reasonabfe
return on investment (Terzic, page L6, Iines L4-76) . Mr.
Terzic appropriately links the Company's financial
performance with decfining use per customer that results
from conservation activities.
In suflrmary, the proposed FCCM is fair, symmetrical,o 25
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McGrath, Reb 71a
Intermountain Gas Company
and a necessary first step before Intermountain Gas can
effectively promote conservation, regardless of the
source. The FCCM is also important in protecting the
Company from revenue degradation beyond its control.
O. Rebuttal- testimonies by other Company Witnesses
have either rejected or modified the adjustments proposed
by the IPUC Staff. Will you please
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summarize the effect on revenue requirement of each
adjustment proposed by the Company?
A. Yes. I will begin with the rebuttal testimony
of Company Witness Gaske. Mr. Gaske rejects the Staff's
proposal to reduce the Companyrs return on equity to
9.25e". The effect of Mr. Gaske's rebuttal increases the
Company's revenue requirement by $1,259,010 as compared
to the Staff's Revised Exhibit 103.
O. What effect on revenue requirement does the
rebuttal testimony of Company Witness Adams have?
A. Mr. Adams rejects Staff Witness Carlock's
proposal to remove the Company's Cash Working Capital
requirement from rate base. The effect of t.his increases
the Company's revenue requirement by $141,803 as compared
to the Staff's Revised Exhibit 103.
O. Company Witnesses Blattner, Fry, and Darrington
rebutted and rejected certain aspects of Staff Witness
Morrison's testimony. WiII you please summarize the
effect on revenue requirement that these Company
rebuttals have?
A. Yes. The combined effect of the rebuttals
presented by Ms. Blattner, Dr. Fry, and Mr. Darrington is
an increase of $2,024,596 as compared to the Staff's
Revised Exhibit 103.
O. What effect on revenue requirement does the
McGrath, Reb 1B
fntermountain Gas Company
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rebuttal- testimony of Company Witness Dedden have?
A. In his testimony, Mr. Dedden accepted certain
of Staff's proposed adjustments, however, he rejected
others. The effect on revenue requirement of those items
McGrath, Reb 1Ba
Intermountain Gas Company
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Intermountai-n Gas Company
rejected by Mr. Dedden is an increase of $38,780 as
compared to the Staff's Revised Exhibit 103.
O. What effect on revenue requirement does the
rebuttal- testimony of Company Witness Murray have?
A. Ms. Murray rejects Staff's adjustment to the
Company's test year salary expense. The effect of this
increases the Company's revenue requirement by $274,296
as compared to Staff's Revised Exhibit 103.
O. Are there any other adjustments to the
Company's revenue requirement that have not been
mentioned elsewhere in testimony?
A. Yes. When the Staff submitted its revised
Exhibit 103, the
amount presented
L/L7 /71 Updated
presented by the
Company noticed that the income tax
in the col-umn l-abeled "New Adj from
PR#178", Line 23 did not match the amount
Company and
the Staff
accepted by the Staff. The
Company contacted regarding this issue and the
Staff told the Company that it woul-d correct the error
from the stand. The revenue requirement effect of this
issue is an increase of $328,25'7 as compared to the
Staff's Revised Exhibit 103.
O. Does this concl-ude your testimony?
A. Yes, 1t does.
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CSB Reporting
(208 ) 890-s198
McGRATH (Di-Reb)
fntermountain Gas Company
(The foll-owing proceedings were had in
open hearing. )
MR. WILLIAMS: Madam Chair, I just have
two preliminary questions for Mr. McGrath.
COMMISSIONER RAPER: Okay.
D]RECT EXAMINATION
BY MR. WILLIAMS: (Continued)
O Mr. McGrath, yesterday Dr. Reading said
that al-l the parties have agreed to workshops on how to
develop a cost of service study following this case. Did
you hear that statement and do you agree with it?
A Counselor, could I get you off your pace
for a moment
a Sure.
A and just take a brief moment on behal-f
of Intermountain Gas Company and thank al-l the
this case for all their hard work andparticipants in
sincere focus on of both the Company and our
multitude of binders thatcustomers. We've got a
behalf
everyone had
requestsr so
to wade through and
thank you very much
about 250 production
for your hard work and
consideration. Thank
To your
you.
question, I'm sorry, could youo25
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(208 ) 890-5198
McGRATH (Di-Reb)
Intermountain Gas Company
repeat the question?
O My question was would you please say some
nice things about everybody in the room, which f bel-j-eve
that's been asked and answered, so my next question 1s
that Dr. Reading said all- parties have agreed to
workshops in how to develop a cost of service study, did
you hear that testimony and do you agree with his
characteri zation?
A I did hear that testimony and I do not
agree with that characterization.
O Did you also hear testimony from Dr.
Morrison yesterday where he said that you told him the
Company had 80,000 smart meters on residential service
that were capable of providj-ng the load data that he
requested and should have provided to the Staff, do you
agree with that statement?
A I do agree with that statement. We had,
I'd call it, a ride-along with Mike to where we got 1n
and it was a
territory and
great opportunity to go out
investigate, you know,
on the homes and whatnot,
the pickup truck
into our service
pape
and I
that we're
meters in
in the ground and meters
did mention that the Company j-n a pilot program
just now initiating does have 80,000 smart
the Boise area that can be interrogated by
tower rather than a truck driving around to interrogateo25
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CSB Reportlng(208) 890-s198
McGRATH (Di-Reb)
Intermountain Gas Company
those meters.
I wou1d l-ike to point out that it's not
fulIy functional- at this time. For instance, the
software platform that's needed to fully implement the
interrogation of those smart meters and to analyze its
data, we're mil-lions of dollars away from having that as
a fu11y functional- platform, and even if we were to
acceferate that, it would probably put constraints on our
capital budget. We do have plans to continue to move
those smart meters forward, but we're simply not 1n a
condition today to allow
that I think f've heard
studies availabl-e and we
for the types
an assumption
do not.
There's no one more than myself that wants
that happen.
we're a few
Even if it were to implemented, and,
years away, that doesn't mean that
necessarily after they are in place experience the
of l-oad studies
that we have those
to see
again,
we'l-l-
kind of cold weather when our system is tested, 1f you
will, to have a peak day, so even though the system is 1n
place, the Company may or may not experience the peak
day.
We took our existing peak day that's on
the record and as Mr. Heintz has testified, we used
industry-accepted standards in assigning that peak day to
our residential- and commercial- customer classesr so,o 25
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(208 ) 890-s198
McGRATH (X-Reb)
fntermountain Gas Company
again, that's a misnomer that
load data for its residential
don't. Werre headed that way
fuIly implemented.
have no additional- quest j-ons.
have any cross-examination?
BY MR. COSTELLO:
a Mr.
Iines 1 through 9,
MR.
MR.
MR.
THE
the Company has in place
and commercial classes, w€
and I'l-l- be glad when it's
MR. WILLIAMS: AII- right. Madam Chair, I
COMMISSIONER RAPER: Does Commission Staff
MR. COSTELLO: We have a few questj-ons.
CROSS-EXAMINATTON
incl-ude an
table that
McGrath, could you Lurn to page 9,
of your rebuttal testimony?
PURDY: Sorry, counsel, what page?
COSTELLO: It's page 9.
PURDY: Thank you.
WITNESS: I'm there.
a BY MR. COSTELLO: There you produce you
example of energy efficiency. You include a
shows how increasing insulation affects usage
in a sample
A
O
1,000 square foot home in Boise.
Yes.
And you state that increasing the R-valueo25
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CSB Reporting(208) 890-5198
McGRATH (X-Reb)
Intermountain Gas Company
from R-10 to a modest R-16 reduces natural gas usage by
more than 10 percenti is that correct?
A Yes, based on the table.
O This just seems like a very effective
energy efficiency measure; would you agree?
A I agree, and I be1leved it was important
for me to point out that these are exactly the kind of
measures that are the marketplacetaking
heavily
place in
towards
today
isthat contributed
experr-encr-ng
these kinds
what the Company
in declining usage customer. There'sper
inof measures that are the homes. You know,
most of our customer growth has occurred in the recent
future, if you wi]l, that have these kinds of insulation
measurements already in place, but yes, they do make a
dlfference and we felt that , Lf you wiII.
O Thank you, but you didn't attempt to model
the cost effectiveness of insul-ation 1n the CPA or the
conservation potential assessment; right?
A Thatrs correct. f hope the record is
cl-ear that we wanted to walk before we cou1d run, if we
get the fixed cost collection mechanism and if we
implement demand side management. We wiII after we get
our feet on the ground begin to analyze programs l-ike
that to determlne whether or not they're cost
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McGRATH (X-Reb)
Intermountain Gas Company
O Thank you. Cou1d you now turn to page 4
of your rebuttal testimony?
A Yes.
O It starts on line 5. Are you there?
A
u
I'm there, thank you.
So there you describe
calculated historical decline in gas
customer; correct?
A That is correct.
the Company's
consumption per
O And you highlight steep declines from 2000
to 2006; correct?
A Correct.
O So however, wouldn't this woul-dn't
these historical decl-ines be reconci-l-ed in this rate case
through the use of current per customer consumption?
A If the correct 3O-year normal weather were
adopted and if the correct weather normal-ization
equations were adopted, y€s, this general rate case would
capture the correct normal-ized usage per customer as it
is today. Does that answer your question?
O Yes, thank you.
A Thank you.
MR. COSTELLO: That's all- I have. Thanks.
COMMISSIONER RAPER: Mr. Stokes.
MR. STOKES: No questions.o 25
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McGRATH (X-Reb)
fntermountain Gas Company
COMMISSIONER RAPER: Mr. Purdy.
MR. PURDY: I do have a few and was going
to ask to switch places with Mr. Otto, but I think f've
refined mi-ne such that we hopefully won't cover the same
territory.
CROSS-EXAM]NATION
BY MR. PURDY:
O Mr. McGrath, I woul-d l-ike to start with,
generally speakj-ng, pages 5 through 7 and page B of your
rebuttal, though I'm fairly confident that this wil-l be
general enough that you can answer from memory, but if
you do need a reference, please ask.
A Yeah, please, let's take it one page at a
time , af you wil1.
O Okay, well -- but, again, I think you make
this argument at both locations in your testimony and
generally speaking, you can agree or not, you do discuss
the fact that many customers voluntarily and at their own
cost' currently install- weatherization measures, whether
it's from weather stripping to upgradlng to fuel not
fuel conversions, but to more expensive activities and
that the Company is not compensated for these measuresi
is that correct?25
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CSB Reporting(208) 890-s198
McGRATH (X-Reb)
Intermountain Gas Company
A We11, I don't know if f
of that as more expensive activities,
market forces when we go
i-nstance,
out to buy a
for that
characterLze any
but y€s, there are
replacement
is more thanappliance,
likely more efficient than the
appliance
one itrs replacing, so
yeS, I would agree there's factors in existence that are
causing probably all of us here in this room to conserve
energy.
O Thank you, and I simply meant that buying
a new gas water heater is probably a little more
expensive than weather stripping a door.
A I would agree with that.
0 Okay. Is it possible, Mr. McGrath, that
if an expanded residential DSM portfolio were somehow
immediately put lnto place that many of these voluntary
customer-funded measures we've just identified might
become part of a new residential DSM program, for
i-nstance,
resul-t in
for which if the program is prudent would
the recovery of revenues attributable to the
program and reduce consumption by the Company if that
were rol-Ied into a DSM program, the things that they're
already voluntarily dolng?
A I apologize, that's an awfully long
question and my braln can maybe try and capture the
essence of that. You know, there was a l-ot of if it wereo25
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McGRATH (X-Reb)
fntermountain Gas Company
possi-b1e kinds of
mentioned, we need
Company magically
in our demand side
but I think
tones i-n there, but as I think I
to wal-k before we run. We can't as a
adopt a whole plethora of measurements
management
it would be
program. We wil-I l-ook at
unreal-i-stic to assume wemany,
could
basket
snap our fingers and have a
of offerings, if you wi11,
0 I agree, it's been
much larger market
for our program.
a long few days
A Thank you.
O and it was a litt1e convoluted, so I'l-l_
move on. Woul-d you agree that many, if not most, of the
types of measures that we just discussed, weather
stripping might be an exception, but the more expensive
measures the customers are vol-untarily lmplementing in
their own residences are essentially inaccessibl-e to many
low income customers due to their, simply due to their,
f inancial circumstances ?
A I wouldn't agree with the term
inaccessible. I would say more difficul-t to access, but
not lnaccessibl-e, but I apologize, f don't mean to be at
al-I insensitive to the position that there are indeed
some that may not
blanket
be able to afford, but I don't want to
agree to a statement that would say they're
inaccess j-ble to that group as a whol-e.
O I agree and I thought I said that thereo25
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(208 ) 890-s198
McGRATH (X-Reb)
Intermountain Gas Company
might be some customers who cannot afford --
A I apologize. I woul-d agree with that,
yes, some customers, uh-huh.
0 Thank you. Would you agree that the
typical low income customer or household, to the extent
that you're aware, is unl-ike1y or far less likely to be
able to participate in Intermountain Gas's only current
DSM offering, either fuel- conversion or upgrade in
appliance rebate program?
A I canrt testify to that, f'm sorry.
O Well, put
A If you coul-d possibly try and restate the
question, I'11 try it again.
O Okay, put in more practical- terms, is it
less 1ike1y that somebody who 1s financially struggling
very, very hard through life is going to be less likely
than someone who is not to switch from an electric
baseboard source of heating to a new gas furnace?
A Yes, Iess li-ke1y, but I bet the payback
woul-d be phenomenaf .
O Over time?
Over a short period of
And isn't it true that many of
the factcustomers cannot for reasons such as that they
rent and it's impractical or not allowed by the landlord,
A
n
time.
these
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McGRATH (X-Reb)
Intermountain Gas Company
they cannot even engage in those kinds of DSM measures;
isnrt that true?
A I would imagine if you're renting that the
decision would be more up to the l-andl-ord than it would
be the person living 1n that premise.
O Okay, thank you. Now, I'11 refer you to
paqe L4 of your rebuttal and are you there?
A I am, thank you.
I, and on page L4, there are a
charts, af you wi11, that
spending as a percentage of
O Faster than
couple of tabl-es there or
of DSMcompare the amount
total distribution revenue, particularly in the second
table; is that correct
A That would be correct, thank you.
a on line 8, okay, and the other
util-ities that Intermountain is compared to in that table
include the Avista el-ectric side of their business, the
gas side, and Idaho Power Company; correct?
A Correct.
O All right, you note that there is at I
think the word is, significant difference between
Intermountain's spending compared to Avista Gas's, but
that will become more comparable as Avista ramps up its
DSM programs; correct?
A Let me ask you if you meant to say ouro25
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McGRATH (x-Reb)
fntermountain Gas Company
statistics would be more comparable to Avista Gasrs if we
were to ramp up
0
A
over time
I'm sorry, would you repeat that?
be more in line
Did you mean
with Avista
ramp up over time?
that's what I meant.
to say our
Gasrs as we
statistics woufd
wou]d choose to
but maybe I misheard you.
answer is yes?
O Yes. If I said otherwise, f'm sorry,
A
a
A
I thought so,
Okay; so your
Yes.
O Okay; so my
what's your perceived time
is simply when
to when this ramp-up
before you are
question
line as
it will- takewil-I take and how long
comparable to Avista's investment level?
A I can't answer that, except with a
commj-tment from the Company that if we were to be al-1owed
our fixed cost collection mechanism to capture the impact
of declining usage, not only from DSM, but a1I the other
measures attested to, we commit to get our feet more
firmly on the ground with a commitment through employees
and programs, and as I mentioned before, look at
additional programs. I
future and
don't know what Avista has in
that's going to
behind or not, so
make us, would
make us, continually lag
mind in the if
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an answer in 2079 we wou1d then match Avista. We just
don't know at this point.
O Now, aside from whether the Commission
grants your request for an FCCM in this case, is there a
reason why the Company coul-d not begin some initial steps
as outfined in part by Ms. Donohue yesterday, and perhaps
other witnesses, some initial steps that wouldn't go alt
the way toward actual- implementation of a program
resulting in reduced revenues, and as an example, I'11-
give you the steps of simply assembling an advisory group
or contractlng with a third-party evaluator to conduct
that conservation potential- assessment analysis, couldn't
that be done rlght now?
A I would agree that without risking the
Company to declining usage per customer, it's always
great to sit at the table with the parties and discuss
things fike we are here today.
O Okay, and would you agree with me that
whether we I re talking about all the way through
implementation or something short of that that the
expansion of a fu1Iy robust DSM portfofio for the Company
is not going to take place overnight, is it?
A That's correct.
O So does that cast some doubt on the
Company's seemingly what I perceive as a sense of urgency
CSB Reporting
(208 ) 890-s198
McGRATH (X-Reb)
Intermountain Gas Company
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Intermountain Gas Company
that this FCCM be implemented immediately before DSM
expansion takes place?
A Excuse me,Mr. Purdy, but you seem to
imply that the reason for the need for the FCCM is solely
thatbecause of demand
strong of linkage,
the need for that
management. Does
O No,
side management, so I don't see
I guess,
col-l-ection
as you may percej-ve between
mechanism and demand side
that answer your question?
think we're off track,
so 1et's try to get back on.
A Thank you.
O If I rve read al-l- the testimonies
correctly, Intermountain Gas has made it pretty clear
j-n DSM portfoliothat it does not
expansion unl-ess
this Commission.
wish to engage
and until it has an approved FCCM from
A That's absolutely correct, thank you.
O And so what I was trying to ask you j-n an
awkward wdy, perhaps, but be that as it may, won't it
take some time to ramp up the DSM portfol-io before a
single
tlme,
additional- therm is conserved, and during that
wouldn't it be possible for the Company to begin
it doesn't. I
perhaps doing the work necessary to satisfy
concerns and other concerns about the FCCM?
A Well-, let me say we're subject to
Staff's
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McGRATH (X-Reb)
Intermountain Gas Company
decl-ining usage per customer now, today, right now.
Yourre correct in saying to fuIly lmplement a demand side
management program, those therm l-osses, if you wi11,
woul-d increasingly occur over time.
O And so if I understood your answer
correctly, you do not disagree with me that during the
time period that it will take to ful1y implement and then
actually commence a DSM program, there's going to be a
not insignificant amount of time during which the Company
can begin preparing, making perhaps a better case for its
FCCM?
position
case for
premise,
A No, you're
that additional
assuming it's the
time is
Companyr s
to make the
agree with that
necessary
I do notthe need for a FCCM and
Purdy.
I understand, that's
it right now, but you're not going
due to conservation for the period
why you're asking for
to l-ose any revenues
of time that it takes
Mr
O
to go through all the steps necessary to expand the
Company's DSM portfolio; true?
A No. We will be losing revenues due to
conservation, because there's so many activities
happening 1n the free marketplace today that's
contri-buting towards our declining usage per customer.
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vol-untary measures we I ve already discussed, there will be
no additional revenue fosses due to new DSM, will there,
during that time?
A I woul-d agree with that, yes.
O Okay, and if I understand your testimony
correctly, you contend that the approval of an FCCM wil-I
reduce the frequency of rate cases as DSM programs, new
DSM programs, are implemented; is that true?
A There again, I think you tied those two
things together. If you could maybe point to my
testimony where I make that linkage. I would agree that
the fixed cost col-lection mechanism would reduce the
frequency of general rate, the need for general rate,
cases for Intermountain Gas.
O Let me see if I can find the actual f
think you've answered my question, but let me look.
Yeah, I donrt have it rlght in front of me, so if I
understood you correctfy, I'm sorry if I've already asked
this, but f want to make sure I understand it
A Sure.
O so you are agreeing that the
implementation or the approval and implementation of an
ECCM w1l-I result in less frequent rate cases by the
Company as DSM is implemented?
A Correct, it helps ensure the Company's
CSB Reporting
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Intermountain Gas Company
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fixed cost collection, not its return as testified to,
not its return on rate base, but it helps ensure the
Company is collecting its fixed costs, ds would a higher
customer charge.
O I was just going to ask you that, and
doesn't a higher customer charge also amel-iorate some of
the concerns you have about lost revenues?
A You know, amel-iorate might be a good term,
because the Ievel- proposed by the Staff, in my opinion,
is not sufficient. The customer charge proposed by the
Company in the interest of changing the Company's
customer charge right away to ful-l col-lection of fixed
costs, the proposed $10.00 -- nor did the proposed $10.00
fuI1y collect the Company's fixed costs, but y€s, I would
agree that the higher your fixed costs as you approach
full- cost col-Iection through the customer charge, it
amel-iorates certainl-y the need for a general rate case or
the flxed cost coll-ection mechanism. If you're short
that ful-l- collectj-on, you need the mechanism.
O Thank you. My final- question is that
given the fact that the Company has not fil-ed a general
rate case in 31 years, roughly, and that f don't think
anyone can disagree we're not going to fu11y expand your
DSM portfolio overnight, there's going to be a period of
time, whether it's a year or three years, J-sn't your
CSB Reporting
(208 ) 890-s198
McGRATH (X-Reb)
Intermountain Gas Company
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McGRATH (X-Reb)
Intermountaj-n Gas Company
concern over the increased frequency of general rate case
filings premature at this point in time?
A f don't believe So, no.
O Could you expand on why that is?
A The Company would be concerned if lt
beli-eves it woul-d have to, excuse me, but in an Idaho
Power-Ilke fashion file general rate cases repeatedly
over time. That's not our business model- generally.
O When was the Last I'm sorry, were you
fini shed?
Go ahead,
When was
thank you.
the l-ast fdaho Power general rate
case ?
A You know, there's been settlements in
recent history. f can't give you a time.
O I'm sorry?
A There's been settl-ements in the past. I
A
o
can't give
and today,
31 years,
McGrath.
you a specific date, but between 31 years
l-et' s j ust say there' s been several.
MR. PURDY: I'11 grant you it hasnrt
but that is all I have. Thank you, Mr.
ago
been
THE WITNESS: Thank you,
COMMISSIONER RAPER: MT.
Mr. Purdy.
Richardson.
MR. RICHARDSON: No questions, Madamo25
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McGRATH (X-Reb)
Intermountain Gas Company
Chair.
COMMISSIONER RAPER: Mr. Otto.
MR. OTTO: Mr. Purdy did cover most of the
ground, but I do have a few remaining.
COMMISSIONER RAPER: He amelj-orated your
questions ?
MR. OTTO: He did.
THE WITNESS: Do I need my own definition?
COMMISSIONER RAPER: Maybe.
CROSS-EXAMINATION
BY MR. OTTO:
O So Mr.McGrath, first, just a general
or disagree that conserving eachquesti-on, do
mofecu]e of
wisely is a
A
o
you agree
gas so that we use thls preclous resource
l-audable goal?
Yes.
f want to turn to on page 12 of your
through 13, you staterebuttal- testimony, at lines 10
are you on the page?
A Iam,
o "rt
to have a financially
stable energy bilfs";
thank you.
is in the ratepayer's best interest
stabl-e utility along with more
1s that correct?o 25
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McGRATH (X-Reb)
fntermountain Gas Company
That i-s correct.
So how do customers benefit the first
to have a financiallypart of the statement, the interest
stable utility, how do customers beneflt directly today
from that revenue
A
o
A Let
stability?
me use the example of
i-t' s been.
this past
There's some ofwinter. We al-l know how cold
us in the room that can look back more years than others
to recal-I a time when it was so cold, but l-et me use the
month of January that's stil-l recently on our minds. If
the Company's proposed fixed cost cofl-ection mechanj-sm
were to be in place this past January, the Company would
have charged less to its residentlal- and commercial
customers by $1.8 mil-l-ion. Now, that's a benefit to help
stabilize energy biIIs for our customers. Our customers
would have benefited from more stabl-e energy bi11s,
similar to our PGA mechanism. You know, the Company has
always been in favor of stable prices.
O So that next year, though, to make up
for so that next year so not that next year, next
year based on your example
A 2000 and --
O '18, sdy, wouldn't you have to come and
true up and ask customers to pay a tittle bj-t more to
make up for the 1.8 million they didn't col-l-ect, youo25
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McGRATH (X-Reb)
Intermountaj-n Gas Company
didn't collect this wlnter?
A We woul-d have given back --
O Good point. Okay, we' l-1 move on.
A -- which, again, is a benefit to our
customers through more stable energy bill-s.
O Okay, do you agree that customers al-so
benefit from cost-effective conservation measures?
A From cost-effective conservation measures,
y€s, customers, uh-huh.
o
Ms. Spector
A
O
have quite
And were you here for the testimony of
yesterday?
I was.
And would you agree that she appears to
in analyzing the costa bit of expertj-se
effecti-veness of DSM?
A I think I call-ed her a rock star. She's
very knowledgeable on that subject matter, yes.
O You're lucky to have her.
A We are.
0 And were you here for the testimony of
Ms. Iml-ach yesterday?
A I was.
O And would you agree that she has extensive
experience in the service territory about efficiency
providers and possibly the potential here?o 25
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McGRATH (x-Reb)
Intermountain Gas Company
A She's a great boots-on-the-ground advocate
for the Company, yes.
O Okay, l-ast thing, thi-s is at page 6 of
your rebuttal and at the top of the page here I I ll
give you a minute.
A Irm on page 6
O At the top of
factors that infl-uence your
customeri j-s that correct?
A Those
contributing factors
customer.
O Now,
here, you }ist five
net use per
thank you.
the page
declining
five points listed are all
to decl-ining normalized usage per
the first one is that would be DSM
programs that
right ?
A
o
conservation?
A
o
page, You say
promoted those
A
O
appliance
on l-ines 79 through 20
Intermountain Gas has
of this same
Intermountain Gas woul-d admini-ster; is that
Correct.
And No. 2 woul-d be customer-funded
Correct.
And
that
sel-f-funded conservatlon
proactively
measures; true?
Correct.
Okay, and No. 3 includes j-mprovements to
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McGRATH (X-Reb)
Intermountain Gas Company
A Point No.
O Yes, back
would be improvements in
codes; is that correct?
A Correct.
3, excuse me?
to the top of the page, No. 3
appliance standards and building
O Now, on page 1 -- actuaIly, the question
is on 7 , but your answer is on page B, and the question
is, which is the relevant thing, can Intermountain Gas
control any of those variants, are you referring back to
those flve variants?
A Yes, with an emphasis on the factors that
are taking place already in the marketplace.
0 Sure, and you say that you can't you
cannot controf those variants; is that your answer to
that question?
A WelI, the Company woul-d have more control-
over point No. 7, more control than the others, but not
full- control.
O Your own programs? And you say that you
are proactively promoting the self-funded conservation;
woul-d you agree that activity has an infl-uence on
customers ?
A Yes, we would hope so and that it appears
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O Right; so you're having an impact, and are
you aware that the Idaho building codes are a resul-t of
negotiated rulemaking at the Idaho Department of Building
Safety, which j-ncludes substantive measures to include
stakehol-der input?
A f 'm aware of the code, not the ful-l-
actions that took place behind the code. I would accept
that statement, certainly.
O And wou1d you are you aware that
fntermountain Gas employees have attended that negotj-ated
rulemaking and the col-laboratives behind it?
A Yes, we have an interest, Intermountain
Gas Company certainly has an interest, for matters that
especially lnclude safety-refated reasons.
O Those codes also include conservation
issues as we]1?
A Yes.
0 So do you feel- you have the ability to
influence building codes through that process?
A The Company woul-d hope that it can
influence buildi-ng codes, keeping in mind the needed
safety precautions for our customers, yes.
O So it's rea11y most accurate to say that
fntermountain Gas can and does influence some causes of
customer usage, but not al-l-?
CSB Reporting
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McGRATH (X-Reb)
Intermountain Gas Company
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McGRATH (X-Reb)
Intermountain Gas Company
A I woul-d accept that, yes.
O Woul-d you agree that one policy
justification, and an important policy justification, for
a fixed cost collection mechanism is to correct for the
Company's own actions in asking their customers to
consume l-ess of their product?
A That would be one component, but, again,
the need for that mechanism does not fu11y rely on any
linkage, dDy single, si-ngular linkage, to demand side
management programs.
O Although you've clearly
that in your mlnd, the fixed
is a precursor to DSM?
A That is correct.
stat.ed in your
O So which is it? Is
col-l-ection mechanism necessary for
for a bunch of other reasons?
A Al-1 of the above.
cost col-lection
a fixed cost
DSM or j-s it justified
It's justifled for many
more robust
programs by the
testimony
mechanism
reasons, one of
sponsorship of
Company.
o
which woul-d include a
demand side management
And that woufd benefit customers, right,
their ability to conserve
A That would
a:c?YqU.
benefit their ability or that
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McGRATH (X-Reb)
Intermountain Gas Company
O Sure, sure; so for those other reasons for
having the fixed cost coll-ection mechanism other than,
you know, freeing up your, I'm goi-ng to calf it,
enthusiasm for DSM, how do those other reasons to have
the ECCM directly and immediately benefit customers?
A Wel-l, I mentioned price stability. It
ameliorates the need to come in for frequent general rate
cases. It makes for a more financially strong utlIity,
which afso benefits customers.
a But you're unwil-Iing to ref lect that in
your return on equity 1n this case?
A We bel-ieve it's already been reflected.
MR. OTTO: That's all.
COMMISSIONER RAPER: Are there any
questions from the Commissioners for Mr. McGrath? f have
one or two. I promj-se, I will not unnecessarily
elongate.
THE WITNESS: You know we're hungry;
right ?
COMMISSIONER RAPER: That's why ffm not
going to keep you.
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McGRATH (Com-Reb)
Intermountain Gas Company
EXAMINATION
BY COMMISSIONER RAPER:
O OkaY; so even just with Mr. Otto's
questioni-ng, it is clear, but it has been clear, I think,
throughout the hearing and particularly your answers and
other Company witness answers to questions that DSM is
only a portion of the reason that you are asking for a
fixed cost col-l-ection mechanism; yes?
Yes.A
II Do you know of a natural
the Northwest, across the country that
al-l-owed a fixed cost mechanism without
program in place?
A You know, am f aware of that, Do. f am
aware that the industry and regulatlon has matured, if
you wi11, over time to recogni-ze with witnesses l-ike
Ralph Cavanaugh from the I'm sorry, what's his
organization in Washington, D.C., but he's an advocate
COMM]SSIONER KJELLANDER: RDC
gas utility in
a commission has
having a DSM
THE WITNESS: Yeah, RDC of pointing out
go hand in hand to rea11y help to see that
truly get behind DSM. They need that kind
Is the Company willing to on its own
therm sales without such a mechanism, flo,
they
the
of
need to
companaes
mechanism.
encourage l-owero25
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we're not, and I don't think j-t's fair to look across the
country at past practices and assume that's the correct
model- going forward, that there needs to be that delay.
O BY COMMISSIONER RAPER: Yes, and I didn't
ask about a delay.
A I'm sorry.
O It ' s okay. WeIl-, that ' s all- right . It
wasn't about having DSM first. It was even
simultaneously, which was not the question. Has there
ever been a fixed cost recovery that was permitted by a
commj-ssion without a DSM program, so not in advance of,
just have you ever heard of a natural gas utility that's
gotten a fixed cost recovery that didn't have a DSM
program with it?
A I have not heard. They usually go if you
have one, I believe you have the other.
O So this may be above your pay grade and,
if so, then feel free to answer that wdy, but did the
Company feel llke in filing this case and asking for a
fixed cost recovery like they were sweetenj-ng the pot by
including DSM with the rate case filing?
A f wouldn't choose the term "sweetening the
pot, " Madam Chair.
O Fair enough.
A I would say 1t was a fairness issue.
CSB Reporting(208) 890-s198
McGRATH (Com-Reb)
Intermountain Gas Company
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McGRATH (Di-Reb)
fntermountai-n Gas Company
COMMISSfONER RAPER: Okay, thank you.
That is al-1 I have. Is there any redirect by
Mr. Wil-1iams?
MR. WILLIAMS: Madam Chair, you stimul-ated
one question
COMMISSIONER RAPER: I apologize to
everyone
THE WITNESS: Did I not thank everyone at
the beginnj-ng?
REDIRECT EXAMINATION
BY MR. W]LL]AMS:
O I am told by my boss
A Which one? There are several in the
room.
O the one that just hovered behind me
that in fact in North Dakota there are fixed fee
recoveries for natural gas utilities that do not have a
DSM program in place and so are you aware of that?
A No. Thank you for the enlightenment.
MR. WfLLIAMS: Pretty blatant, wasn't
ir?
COMMISSIONER RAPER: Yeah
MR. WILLIAMS: A11 right, ho furthero25
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questions.
COMMISSIONER RAPER: f'm going to object
and sustain.
MR. WILLIAMS: Al-l- right.
COMMISSIONER RAPER: Okay, Mr. McGrath,
thank you for your tlme
THE WITNESS: Thank you.
COMMISSfONER RAPER: -- and your testimony
and you are dismissed.
(The witness left the stand. )
COMMISSIONER RAPER: I believe that
exhausts the witness list and everyone in the room. Are
there any
Commission
further items or issues to come before the
today?
MR. WTLLIAMS:
that any exhibitsone motion
inadvertently skipped over in
only mine, but anyone else's,
I don't believe we've missed
Madam Chair, I
that we may have
the admissions
be admitted to
would make
process, not
the record.
dfly, but it's kind of a
recovery effort.
COMMISSIONER RAPER: Thank you for that
asslstance. f had that on my list. I was going to get
there, but I appreciate your covering it as wel-lr So
pursuant to Rule 26'1, any exhibits marked during the
hearing without objectj-on are deemed admitted at thiso25
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identlfication were admitted into evidence.)
COMMISSIONER RAPER: Intervenor funding
requests pursuant to Rule L64 have 1,4 days from today.
We did have the public hearing last night. One gentleman
cal-Ied in to listen in. Nobody was here to participate
or cal-Ied in to participate, so no public hearing
testimony on record. f appreciate the people in the room
that came to that in order to be a part of the hearing.
74 days from today the record will fu11y
close with the submission of any intervenor funding
requests. That would be March 14 days when you start
counting from tomorrow starts on a Saturday, so 1t
happens to fall on March 20th. That will be the date any
intervenor funding requests are due.
I do appreciate everyone's attendance,
everyone's cordial-ity towards one another. I know there
were times when it got a little far afield. f appreciate
the parties' willingness to develop the record for the
benefit of the Commissioners' deliberations to come to a
wel-I-reasoned decision with regard to aII of the matters
that are in front of us in this case, so thank you. We
wlIl consider the record fuIJ-y developed and deliberate,
render a decision as quickly as possible.
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MR. WILLIAMS: And Madam Chair, in
cJ-osing, I would simply echo your comments that the
Company greatly appreciates everyone in this room and f
personally appreciate working with all of the co-counsef.
As much as we might have mixed it up at timesr we
thoroughly enjoyed it and appreciated the professional-ism
of everyone and especj-a11y the Commissioners and the
Chair's management of this case.
COMMISSIONER RAPER: Thank you. With
thatr we are adjourned.
(The Hearing adjourned at 12:41 p.m. )
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<:
AUTHENT]CATTON
This is to certify that the foregoing
proceedings held in the matter of the application of
Intermountain Gas Company to change its rates and charges
for natural gas service in the State of Idaho, commencing
at 9:30 a.m. on Wednesday, March L, 2076, and continuing
through Friday, March 3, 2016, dt the Commission Hearing
Room, 472 West Washington Street, Boj-se, Idaho, is a true
and correct transcri-pt of said proceedings and the
original thereof for the file of the Commission.
Accuracy of al-1 prefiled testimony as
originally submitted to the Reporter and incorporated
herei-n at the directi-on of the Commission is the sol-e
respons j-bility of the submitting parties.
5
CONSTANCE
Certified
S. BUCY
Shorthand Rep #187
25
198 0 AUTHENT]CATION