U-1034-99 Hedemark Testimony.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
INTERMOUNTAIN GAS COMPAN
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Case No. U-I034-99
PREPARED TESTIMONY OF N. CHALES HEDEMRK
Q. Please state your name, business address and position with the
applicant.
A. My name is N. Charles Hedemark. My business address is 555 South Cole
Road, Boise, Idaho. I am Vice President of Marketing for Intermountain
Gas Company.
Q. What is your educational background?
A. I am a graduate of the College of Idaho with a Bachelor of Arts degree
in Marketing. I have also taken additional courses at the University
of Idaho, University of Utah and Boise State University. I have
attended various courses and seminars dealing with utility and industry
related matters.
Q. Will you briefly describe your responsibilities.
A. As Vice President of Marketing for Intermountain Gas Company, I am
responsible for planning, supervising and controlling the marketing,
administration and operations for Intermountain Gas Company's five
operating divisions.
Q. Have you previously given testimony before this Commission?
A. Yes. I have testified before this Commission on several occasions.
Q. What is the purpose of your testimony in this proceeding?
A. My testimony deals with the Company's rate design, the effect it has on
its customers, its relationship to cost of service and its relationship
to competing energy fuels, and sales projections.
Q. What is the basis for the rate design proposed by the Company?
The rate design follows guidelines set forth by the Idaho Public
Utilities Commission in three previous Intermountain Gas Company
general rate Orders. Those Orders provided that the pricing of utility
service should be based primarily on the cost of providing service to
definable customer classes. The Orders also stated that although the
cost of service must support the basic rate struèture ,other
considerations should enter into the rate design. In each succeeding
proceeding, the Company has been giving more weight to the cost of
service in designing rates. In our last case, U-I034-95, we proposed
and were allowed to allocate the deficiencies weighting 50% on the cost
of service deficiency and 50% on an across-the-board percentage. In
this case, we are moving the final step in proposing rates that reflect
the full cost of service.
Based upon the Company's current rate structure and the cost to serve
the various customer classes, what is the range of revenue deficiencies
for these classes?
The revenue deficiencies range from a .1% increase to a 32.2% increase
as shown in Ms. Kennedy's Exhib it 8, Schedule 2.
What is the principal cause of this deficiency?
A portion of this revenue deficiency is caused by loss of volume sales
to large industrial customers, especially sales decreases to the
fertilizer industry. In this case, we have spread the decreased gross
margin to all rate groups based on the cost to serve.
In considering future sales to large customers, many have the ability
to readily convert to alternate energy sources. Especially significant
is the uncertainty of natural gas industrial sales due to the current
price softness in the petroleum market. This softness is pronounced in
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heavy distilates (#5 and #6 grade processing oils). These fuels are
currently being offered. to processors in Idaho at rates lower than
comparable natural gas prices.
Did the residential and commercial classes also contribute to the
revenue deficiency through declining use?
Yes.
Will the increased sales effort in the residential and commercial
classes offset this declining use?
The Company has proj ected a therm decline in the residential class of
5.5% and 4% for the commercial class. This decline will amount to a
volume reduction in both classes of just over 5,000,000 therms. If
this decrease were to be entirely offset through addition of new
customers, it would take approximately 4,700 net new residential and
480 net new commercial customers. Our current customer attrition shows
approximately 2,200 customers leaving our system yearly (generally due
to housing demolition or fuel switching). We are forecasting a decline
in the attrition to approximately 2,000 customers for 1982-83.
Our marketing effort for 1981-82 projects nearly 3,000 new customers.
This will reflect an increase of approximately 800 net new residential
and small commercial customers for this period. For 1983, we are
forecasting (with our current level of marketing promotion) an increase
of 4,010 customers or a 2,000 net customer addition. While these
increasing sales and sales projection numbers are encouraging, we still
have an available new market (primarily due to our recessionary
economy) that is not large enough to offset the effect of declining use
per customer.
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In residential new construction, our marketing penetration has improved
from 28% in Fiscal Year 1980 to 33% in Fiscal Year 1981 and currently
is forecasted at 51% in Fiscal Year 1982. The number of dwelling units
constructed in our service territory and within reach of our system was
3,706 in 1980, 2,274 in 1981 and an estimated 1,258 for 1982. As can
readily be seen, our market penetration performance has improved
significantly. Due to the extremely low level of home construction
today, however, this improved market penetration will not offset
declining use for this next year.
The risks associated with further declining sales have necessitated the
Company's proposal for a revenue stabilization clause, as was
previously described in Mr. Worthan' sand Mr. Lebens' testimony. I
want to emphasize that if this mechanism is approved, it would not take
effect in our rates until October of 1983. This clause in periods of
increased sales or extremely cold weather will allow us to credit the
excess revenues to all customer classes. A paragraph describing this
mechanism appears in all proposed tariffs, Exhibit 10, Schedules 1
through 4.
What general changes in rate design is the Company proposing?
The Company has been utilizing a seasonal rate design since i 980 and is
proposing its first major modification to this rate design. The
modification proposes a two-step declining block rate in the
residential classes and an additional third step in the commercial
class. Our seasonal rate design was initially proposed to assist
conservation by allowing customers who can and will conserve the
opportunity to do so by charging a low customer charge in the
spring-summer-fall period to encourage them to extinguish their pilot
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lights and remain on service. This rate design has served those
purposes well. Our seasonal disconnects were lowered over 50% and our
customers did take advantage of the conservation opportunities.
We wish to retain the seasonal rate design. However, we are proposing
to also include a declining block rate in the winter in residential
tariffs and an additional block in both the summer and winter periods
in the commercial tariff.
Why is Intermountain proposing a declining block structure?
While it is Intermountain's present and future position to actively
promote responsible energy use through conservation, the changing
annual fuel use by our customers due to conservation and substitution
of other energy forms for natural gas has provided a supply of natural
gas that, in the short run, exceeds our current ability to market this
gas to either new customers or to existing customers for increased
usage through adding new appliances. Since we are currently not
placing the gas into new markets as fast as our consumers are
conserving, it is important that we provide price incentives to promote
increased usage from existing customers.
Block rates will allow customers who increase consumption to benefit
from their usage through price discounts. Residential customers who
have annual high load factors (year-round usage) would continue to
benefit through our multiple use residential service tariff.
The block rate structure proposal is also responsive to suggestions of
the IPUC staff and intervenors in Case No. U-I034-95, in that the
higher first block allows the Company to recover more of its fixed
costs without substantially raising its customer charges.
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Will you identify the schedules for the proposed rate schedules and the
sections on the schedules where the changes may be found?
The rates which I propose are shown in Exhibit 10, Schedules i through
4. Most changes are shown in the area of the Exhibits entitled,
"Rates. "
What changes do you propose for Rate Class RS-l?
The RS-l Rate Class is for all residential customers not otherwise
specifically provided for. This is shown on Exhibit 10, ScheduleL.
In this Rate Class we are proposing to increase the winter customer
charge by approximately the average cost of service class percentage
deficiency from $6.50 to $7.35 per bill. We also propose to raise the
spring-summer-fall customer charge from the current $2.50 per bill to
$3.00 per bill. With our reconnect charge at a current $20.00 during
working hours and $30.00 for other hours, this increase in the customer
charge should not adversely' affect the number of seasonal
disconnections.
Under the Commodity Charge portion we have increased the first block
rate to recover the fixed costs to serve each customer. The second
block after the first 15 therms per bill is increased less than average
to allow those customers utilizing gas for volume uses to have a lower
cost as their usage increases.
The revenues to be produced by this Rate Schedule have been computed by
applying these prices to the sales included in the test period. The
results of the computation are displayed in Exhibit 9, Schedule 1.
For Rate Schedule RS-l, the increase from this customer group is 13.9%
What changes do you propose for Rate Class RS-2?
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A. Customers in this class have multiple residential uses including space
heating and water heating. As shown in Exhibit 10, Schedule 2 t the
rate we are proposing has the same customer charge in the winter period
as Rate Class RS-l. We are proposing to increase the customer charge
in spring-summer-fall period to a $5.00 level and reduce the commodity
charge for that period to be equal to the lowest block rate that we are
proposing for the winter period. This lower rate provides an incentive
for customers to use additional gas in the spring-summer-fall period
and especially assist in new water heating sales.Under the winter
period, the commodity charge shows the same declining block structure
as found in the RS-l rate with 15 therms being the initial block and
all other therms in the lower block. Revenues to be produced by this
revised rate schedule have been compared by applying these prices to
the sales included in the test period. The results of that computation
are displayed in Exhibit 9 t Schedule 1. For the Schedule RS-2, the
increase from this customer group is 10.2%.
Q. What changes does the Company propose to Rate Class GS-l?
A. Rate Class GS-l is for commercial customers whose requirements for
natural gas do not exceed 2,000 therms per day. Requirements in excess
of 2,000 therms per day may be served under this Rate Schedule upon
execution of a one-year written service contract. The changes are
shown on Exhibit 10, Schedule 3. The current GS-l tariff has a
summer-winter two block rate structure with the usage break at 2,000
therms. In our last general case the combining of Rate Schedules GS-l
and GS-2 was accomplished by establishing a two block rate. With this
structure, the rate matches revenue with the cost to serve both the
small commercial customers and the larger customers.
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The two block rate still causes some dislocation for the intermediate
size customer because the rate difference between the two blocks is too
large. This means that an intermediate customer using nearly 2,000
therms per month is purchasing gas at the same price as the small
customers. A secondary problem develops because the second block rate
had to be substantially lower than the first block so that the average
revenue from the larger customers matches the cost to serve the larger
customers. As a result, the current rate for the second block is lower
than the cost to serve the largest customers.
The size of the new block has been established to balance the relative
therms sold in the lower block (therms over 2,000 therms per bill) with
the therms sold in the new block. This design will help provide a more
even percentage increase throughout the range from the smallest to the
largest customer. The increase will range from 10% for the smallest to
6% for the intermediate customer at a monthly consumption of 2,000
therms and up to 15% for the larger customers with a monthly
consumption of 14,000 therms.
The first step of the rate design was increased by the uniform
percentage deficiency for this class. In the other steps, this rate
decreases proportionately as usage increases. The customer charge
portions of these tariffs were not changed. In the residential classes
we increased the customer charges based on a uniform percentage. In
the commercial class, we found the winter customer charge to be
appropriate. We have decided not to increase either summer or winter
customer charges. The revenue to be produced by this revised tariff
Rate Schedule has been computed by applying these prices to the sales
included in the test period. The results of the computation are
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displayed on Exhibit 9, Schedule 1. For the Rate Schedule GS-l, the
increase from this customer group is 10.3%.
Q. Would you explain why you propose to cancel the WP-l class?
A. Currently, the WP-l class is available for irrigation (water pumping)
service between April 1 and November 30 of each year. Studying this
rate class and applying the percentage increase of 11% based on cost to
serve this customer class, the result was a commodity cost comparable
to the spring-summer-fall portion of the GS-l tariff. Additionally,
because the block rate proposed for GS-l matches the diversity of usage
in this group (small vs large pumpers), we propose to cancel this
tariff and serve these customers under the summer seasonal portion of
the GS-l customer class.
Q. Would you explain why you propose to cancel the P-l and S-1 tariffs?
A. In the last three general rate cases, as we moved these classes closer
to full cost of service, customers served under these tariffs found it
advantageous to shift contracted volumes to LV-I. With this shift,
significantly fewer therms sold were under S-1 and P-l tariffs. The
cost of service study of these classes (due largely to lower volumes)
shows increases of 32% .and 26% as shown on Ms. Kennedy's Exhibit 8,
Schedule 2.
After considering these increases, it is evident that these prices will
exceed the equivalent of prices on Rate Schedule LV-l for all
combination customers. These customers wiii benefit by shifting
interruptible therms to LV-l by increasing their contract demands.
Other customers whose usage is primarily seasonal save by shifting
entirely to GS-l.
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Q. How will these differences be recovered for the volumes transferred
from cancelled tariffs S-1 and P-l?
A. The revenue deficiency from S-1 and P-l was recovered in the customers
classes LV-1 or GS-l based on the volumes that were projected to
transfer to these tariffs. This is shown on Exhibit 9, Schedule 2 and
was recovered with a 1.8% increase in LV-l and a .5% increase in GS-l.
Q. What changes do you propose for Rate Schedule LV-I?
A. The cost of service study as shown in Ms. Kennedy's Exhibit 8,
Schedule 2 shows that nearly all costs were collected by the present
rate. However, transfer volumes from the discontinued S-1 and P-l
classes to LV-l resulted in a shortfall of $975,000 as shown on
Exhibit 9, Schedule 2. These costs were recovered by first raising the
demand charge of the first 10,000 therm level to an amount equal to the
direct cost related to demand and second, to maintain the equity we
increased the second block by an equal cents per thermo The changes in
the demand levels provided more revenue than the deficiency; therefore,
the excess was offset by decreasing the commodity rate. The revised
LV-l Tariff is shown on Exhibit 10, Schedule 4.
To further encourage careful load management in nomination of contract
demand. we are proposing an additional payment for overrun gas of 25ç
per therm above the proposed commodity rate. In the past, overrun gas
was priced at the GS-l rate and after consideration, we believe overrun
gas should be at a price higher than regular rates because such
overruns could cause Intermountain to incur additional penalties from
its pipeline supplier at the same levels we are proposing to pass on to
LV customers.
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The revenues to be produced by this revised tariff rate schedule have
been computed by applying these prices to the sales included in the
test period. The results of the computation are displayed on
Exhibit 9, Schedule 1. For Rate Schedule LV-I, the increase from the
customer group is shown to be '1.9%.
Q. What is the LV-l new service discount you are proposing?
A. As shown on Exhibit 10, Schedule 4, a new service discount is intended
to encourage new industrial sales. If an industrial customer nominates
a higher contract demand and where his daily average usage for any
given month is above his prior daily contract's demand, he would be
allowed to purchase additional gas at a 3t per therm discount until the
next contract period.
This one year price incentive is intended to (1) encourage expansion of
additional process loads utilizing natural gas; (2) encourage new
industrial customers; (3) encourage the return to natural gas of
industrials that have switched to other fuels.
While we acknowledge this rate may not by itself cause new industrial
expansion, it can assist in limiting startup costs and be an
encouragement to utilize natural gas in new process loads.
Q. Have you studied your proposed rate design in relationship to other
energy sources?
A. Yes. I have summarized the information on Exhibit 11, Schedule I, "The
Cost of Residential Utilized Heating Energy, Southern Idaho." This
Exhibit graphically illustrates the utilized heat energy on delivery to
one's furnace taking into consideration the heating unit efficiency.
As this Exhibit illustrates, we have a competitive advantage in both
RS-l and RS-2 Rate Schedules in the price of our product vs Utah Power
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& Light and #2 heating oil found throughout southern Idaho. We also
have an advantage over Idaho Power for resistance heating charges, and
we are competitive with residential heat pumps installed on the Idaho
Power system when compared with our RS-2 rate design. We have a
disadvantage when compared to the price of wood, coal and Idaho Falls
electricity.
Q. Have you studied your proposed rate design in relation to other
commercial energy sources?
A. Yes. I have summarized this information on Exhibit 11, Schedule 2.
This Exhibit graphically illustrates the utilized heating energy
relationship for competing fuels for medium sized commercial accounts
using approximately 1,000 therms peak heating load. This Exhibit shows
a competitive price advantage for natural gas when compared to the
majority of competing fuels, with the exception of coal.
Q. Will the rate design submitted by Intermountain Gas Company cause a
reduction in its market penetration?
A. In my opinion, it will not. As shown on Exhibit 11, Schedules 1 and 2,
the relationship of the cost of natural gas to the other energy sources
will not be significantly affected by this rate proceeding.
Q. Have you attempted to share the increased burden equitably while
considering the cost of service to various customer classes?
A. Yes. This rate design follows a full cost of service methodology and
is the last step in a systematic progression to a full cost based rate
design, and does not materially affect the competitive costs of
Intermountain i s product.
Q. Does this rate design provide an incentive for your customers to save
energy?
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A. As has been demonstrated in the past, the seasonal rate design coupled
with lower summer charges, especially in RS-l and GS-l Rate Classes,
has encouraged our customers to extinguish pilot lights when their
equipment is not being used while allowing both the customer and
Intermountain the benefits of continued and consistent service.
Q. Does this conclude your direct testimony?
A. Yes, it does.
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