U-1034-99 Schultz Testimony.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
)
INTERMOUNTAIN GAS COMPAN) Case No. U-I034-99
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PREPARED DIRECT TESTIMONY OF RAY L. SCHULTZ
Please state your name, business address and position with Intermountain
Gas Company.
My name is Randy L. Schultz. My business address is 555 South Cole Road,
Boise, Idaho. I am Director of Financial Reporting.
Briefly describe your educational and work background.
I graduated from the University of Notre Dame in May of 1974 with a
Bachelor of Business Administration degree. I began work here in Boise
with the firm of Arthur Andersen & Co. in June 1974, as a staff
accountant. My work with Arthur Andersen & Co. primarily involved the
audit and publishing of financial statements for several different
industries. I was involved with the annual audit of the financial'
statements of Intermountain Gas Company from 1975 to 1977. In May of 1977
I began my employment with Intermountain Gas Company as Director of
Financial Reporting, the position which I presently hold.
Please describe your responsibilities.
I have the overall responsibility for the preparation of the Company's
monthly financial statements and other reports to management and
its year-end reporting requirements such as the Annual Report to
Shareholders, Securities and Exchange Commission filings and the Annual
Report on Form 2 to the Idaho Public Utilities Commission. I am
responsible for the timely and proper completion of the year-end audit
work performed by Arthur Andersen & Co. and I am in charge of
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the accounting for the Company's employee benefit programs. Since 1980, I
have also participated in the preparation of the Company's rate filings
before the Idaho Public Utilities Commission.
What is the purpose of your testimony in this Case?
I am sponsoring and will discuss Exhibit 6, Schedules 1 through 6, which
deal with the determination of the Company's average rate base, cost of
service and resulting revenue deficiency.
Please identify Exhibit No.6.
Exhibit No.6, Schedule 1, is entitled "Cost of Service and Increased
Revenue Required, Twelve Months Ended July 31, 1982, As Adjusted."
Schedule 2 is entitled "Gas Sales - Normalization Adjustment, Twelve Months
Ending July 31, 1982." Schedule 3 is entitled "Cost of Gas - Normalization
Adjustment, Twelve Months Ending July 31, 1982." Schedule 4 is entitled
"Adjustments to Test Year Cost of Service, Twelve Months Ending July 31,
1982." Schedule 5 is entitled "Capital Structure and Cost of Capital, As
of July 31, 1982, Including Unamortized Investment Tax Credits." Schedule
6 is entitled "Calculation of Average Rate Base and Return Dollars ~ Twelve
Months Ending July 31, 1982."
What is the test year used in this Case?
The test year selected by the Company is the twelve months ended July 31,
1982, adjusted for known and measurable changes which have occurred or will
occur on or before July 31, 1983.
Mr. Schultz, would you describe the development of the test year you have
selected?
I have taken from the Company's books and records the actual data for the
five months ended December 31, 1981 and the projected data for the seven
months ended July 31, 1982. To this test year ending July 31, 1982, I have
made two types of adjustments: (1) the normalization of revenues and the
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cost of gas and (2) the adjustment for known and measurable changes which
have occurred during the test year or will occur during the twelve months
following the test year.
Please explain Schedule 1.
Schedule 1 shows the Company's total cost of service and increased revenue
required for the twelve months ended July 31, 1982, as adjusted. Column
(a) identifies the particular cost of service components. Colum (b) shows
the actual revenues and costs as recorded on the Company's books for the
five months endéd December 31, 1981. Colum (c) shows.the Company's
projected revenues and costs for the seven months ended July 31, 1982 and
column (d) represents the summation of columns (b) and (c) or the total
revenues and costs for the twelve months ended July 31, 1982, unadjusted.
Mr. Schultz, would you explain the remaining columns of Schedule I?
Yes. Coluúl (~) reflects the normalization adjustment necessary to reflect
the decrease in gas sales revenues and the cost of gas occurring during the
test year and the related income tax effects. These adjustments are
addressed in detail on Schedule 2 and Schedule 3, and will be explained
later in my testimony.
Column (f), the normalized test year, is the summation of columns (d)
and (e). Column (g), Company Proposed Adjustments, sumarizes the known
and measurable changes which have occurred or will occur during the test
year ended July 31, 1982 or will occur in the next twelve months. These
adjustments are explained in detail on Schedules 4 and 5.
Column (h), the requested test year ending July 31, 1982, is the
summtion of colu~ns (f) and (g). Column (i), proposed revenue deficiency,
reflects the increased revenue required and the related income tax
effect. These amounts are determined through derivation of the operating
income as shown on line 14, column (j).
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divisions. To arrive at the adjusted sales volumes related to the monthly
heating load in each division, the actual degree days for the twelve months
ended December 31, 1981 as reported by the National Oceanic and Atmospheric
Administration were accumulated and adjusted for the effects of the
Company's cyclical billing periods. The published thirty-year average for
norml degree days was then adjusted for the same effects of the
cyclical
billing periods. A factor is then developed from the ratio of normal
degree days as compared to actual degree days. These factors were then
applied to the monthly heating loads for each rate class in each operating
division. The base load (actual usage in July or August, whichever is
less) was then added to the normalized heating load to arrive at the total
normalized load by rate class by division by month. These projected
monthly volumes were then summrized to provide the total projected volumes
for RS-l, RS-2 and GS-l sales.
What was the net effect of this adjustment?
The test year sales were increased by 8,512,067 therms, which increased
revenue by $4,809,489, as shown on line 5 of Schedule 2.
Mr. Schultz, would you please explain line 6, customer volume changes, on
Schedule 2, Gas Sales - Normalization?
Line 6 shows the adjustments necessary to normalize for expected changes in
customer usage requirements and to reflect current contract and demand
level changes under Rate Schedules GS-l, LV-I, S-1 and P-l. The Company
considers these adjustments necessary to properly reflect a normal year's
gas sales during the twelve months following July 31, 1982. The effect of
this adjustment was to reduce gas sales volumes by 66,206,799 therms and
reduce gas sales revenues by $33,082,485.
Mr. Schultz, would you now explain the projected sales decline adjustment
as shown on line 7 of Schedule 2.
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1 A. The adjustment on line 7 reflects the Company's estimate of the decline in
2 customer usage, to be experienced in the twelve month period following July
3 31, 1982, as a result of continued conservation efforts, fuel substitutes,
4 and other factors. This adjustment has been computed only for the weather
5 sensitive rate classes RS-l, RS-2 and GS-l. To arrive at this adjustment,
6 a sales decline factor of 5.5% was applied to the normlized therm usage
7 for rate classes RS-l and RS-2 and a factor of 4.4% was applied to
8 normalized usage for rate class GS-l. These factors represent the average
9 decline in normalized usage for each of these customer classes for fiscal
10 years 1973 - 1981. The appropriateness of this adjustment is further
11 supported by Mr. Brown's testimony. The result of this adjustment
12 was to decrease gas sales volumes by 6,192,427 therms and decrease gas
13 revenues by $3,526,248.
14 Q.What is the net effect of these normalization adjustments on gas sales?
15 A.The net effect is a decrease in therm sales of 63,866,439, as shown on
16 Schedule 3, line 2,column (c),and a decrease in related gas revenues of
17 $9,496,040 as shown on Schedule 2, line 10.
18 Q.Please explain the cost of gas normalization adjustment as detailed on
19 Schedule 3.
20 A. The cost of gas is based upon the Company's normalized purchase
21 requirements for the twelve-month test year as adjusted. The total
22 purchase requirements are equal to total gas sales volumes plus
23 Company-used fuel and unaccounted-for gas. As shown on lines 1-5 of
24 Schedule 3, the Company's total purchase requirements are 245,245,835
25 therms.
26 Lines 6 through 16 show the calculation of the Company's cost of gas
27 purchased from Northwest Pipeline Corporation under their various rate
28 schedules. The total cost of gas shown on line 16 is $112,250,993. To
29 arrive at the normalization adjustment, the total cost of gas for the test
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year ending July 31, 1982, unadjusted, which is $117,664,797 (line 17,
Schedule 3) must be deducted.
What is the adjustment required?
The adjustment results in a decrease in the cost of gas of $5,413,804, as
shown on line 18.
Would you explain the income tax adjustment of $2,021,115 as shown on line
12, column (e) of Schedule I?
This income tax adjustment is necessary to show the additional income tax
benefit generatéd as a result of the decreased income from the
normalization of gas sales. The income tax calculation uses the same
effective statutory tax rate in effect during the test year.
Earlier in your testimony, you refer to two types of adjustments to the
test year ending July 31, 1982. You have explained one, the normalization
of revenues and the cost of gas. What is the other type?
The other adjustment takes into account the known and measurable changes
which have occurred or will occur during the test year or will be
experienced by the Company in the twelve months following the test, year.
This type of adjustment is reflected in column (g) of Schedule 1 for
operation and maintenance expense, depreciation, general taxes, and federal
and state income taxes. These adjustments are shown in detail on Schedule
4, pages 1 through 4.
Please explain your adjustment to operation and maintenance expense as
detailed on Schedule 4, pages 1, 2 and 3.
Salaries and wages have been increased to reflect the employee pay levels
expected to be in effect on July 31, 1982. The amount of this measurable
change is an increase of $316,610. In addition, I have increased salaries
and wages by that portion of the expected annual percentage increases which
the Company will grant during the twelve months following July 31, 1982.
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This a~ount is $460,552.
Mr. Schultz, are the components of these salary adjustments known and
measurable?
Yes. The level of payroll on July 31, 1982 has been determined by the
Company and is measurable.
The increases to be paid during the twelve months following July 31,
1982, are clearly defined by Company policy for increases of non-union
personnel and by written contract for union personnel.
Please explain the adjustment for amortization of deferred vacation pay
expense shown on lines 7 through 11 of Schedule 4, page 1 of 4.
As a result of the issuance of Statement No. 43 by the Financial Accounting
Standards Board in November 1980, the Company was required to reflect the
liability for employees' accrued vacation on the balance sheet and the cost
of establishing the liability was to be expensed through the income
statement. In its recent general rate case filing under Case No. U-I034-95
and approved by this Commission, the Company included $400,000 in its cost
of service to represent this accrued vacation expense. When reco~ding this
liability the Company also recorded a deferred charge in the same amount.
Such deferred charge is now being amortized to operating expense over a
period of twelve months. The adjustment of $163,676 on line 11 of Schedule
4, page 1 of 4, therefore represents the amount of this deferred charge
remaining to be amortized in the twelve months following the test year
ended July 31, 1982.
Mr. Schultz, please explain the accrued vacation expense adjustment of
$36,922 shown on line 15 of Schedule 4, page 1 of 4.
This adjustment represents the estimated increase in the accrued vacation
liability during the twelve months following the test year as a result of
employee salary and wage increases during the same period.
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Mr. Schultz, the provision for bad debts shows an increase of $122,982. .
Please explain this adjustment.
The bad debt. level previously experienced by the Company and approved by
this Commission is .6% of total gas sales revenue. I have calculated the
test year provision based upon the continued use of a provision rate of .6%
applied to proposed gas revenues. The derivation of this adjustment is set
out on lines 33-44, of Schedule 4, page 2.
Adjustment #7, on page 2 of Schedule 4, deals with the amortization of
deferred bad debt expense. Please explain this adjustment.
As granted by Commission Order No. 16330, the Company was allowed to
increase its rates to residential and small commercial customers for the
twelve month period ended March 31, 1982 in order to recover that level of
bad debt expense in excess of the level established in Case No. U-I034-88.
Normalized gas revenues as shown on line 3, colum (f), of Schedule 1 are
stated at the April 1, 1982 rates for the Company. The April 1, 1982 rates
do not include this bad debt surcharge, however, the test year ended July
31, 1982 included $356,352 of deferred bad debt amortization in operation
expense. Therefore, this amount needs to be removed from operation expense
in order to properly match the normalized revenues.
Mr. Schultz, would you explain the adjustment for weatherization and
financing program expenses?
Reference is made to Commission Order No. 16685 for a detailed discussion
of the accounting treatment afforded each of these expenses. The
adjustment for weatherization expenses, as shown on lines 51-54 of Schedule
4, page 2, represents the level of non-payroll expenses related to the
Company's implementation of the weatherization program, to be incurred in
the twelve months following the test year ended July 31, 1982. This
adjustment results in a decrease to operation expense of $27,143.
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As outlined in Order No. 16685, those expenses associated with the
Company's water heater and retrofit rebate program are to be accumulated in
account 186 and amortized as an expense over residential rates. As shown
on line 59 of Schedule 4, page 2, the level of such expenses for the test
year ended July 31, 1982 is $300,700.
As further outlined in Order No. 16685, certain other administrative
expenses related to this program are to be included in account 416 and
included" in cost of service for ratemaking purposes. The adjustment to
reflect these expenses is $16,605 as shown on line 63, Schedule 4, page 2.
Please explain the adjustment for the refund of C & K Exploration advances.
This refund represents the available cash which is attributable to
ratepayer funding of the C & K Joint Venture Exploration Program as
determined by the Commission in the Company's October 1, 1981 tracking rate
case. The rate of refund was .088t per therm sold. The adjustment in this
case was calculated on the basis of normalized sales volumes for the twelve
months ended July 31, 1982. The total amount of the adjustment is a
decrease of $106,719, as shown on Schedule 4, page 2, line 70.
Adjustment number 10, detailed on page 3 of Schedule 4, deals with other
price level adjustments. Please explain the expenses included in this
adjustment and the price increase determined.
Lines 78 through 96 set forth the expense levels for the twelve months
ended July 31, 1982 for those operation and maintenance expenses which have
been adjusted for known and measurable changes individually. I have
subtracted the total shown on line 96 from the total operation and
maintenance expense level at July 31, 1982, (line 75). The actual costs
incurred for other operation and maintenance expenses not separately
adjusted, line 98, are self-explanatory. The price level change of 7.70%
is in recognition of the level of inflation for the twelve months ending
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1 February 28, 1982. The rate used is the ~ost recently published Consumer 2
2 Price Index for All Urban Consumers.
3 The Company is requesting the Commission to recognize that the
4 Company's other costs, such as postage, contract services, forms and
5 supplies, in general, have risen since the beginning of the historical test
6 year being used in this Case. This is the minimum that Intermountain's
7 costs will be increased during the twelve months following July 31, 1982.
8 The total adjustment requested is $300,661, as shown on Schedule 4, page 3,
9 line 101.
10 Q. Mr. Schultz, you have made other specific adjustments to payroll,
11 insurance, etc. Why have you grouped the adjustment to all other costs
12 together instead of identifying them individually?
13 A. Even though the amount of $3,904,685 is large, the identifiable parts are
14 numerous and small. The amount of time spent on further refining this
15 adjustment would not be cost-effective for the ratepayer.
16 Q. Mr. Schultz, explain adjustment 11 regarding the Conference Center, shown
17 on Schedule 4, page 3, line 102.
18 A. This adjustment is made to comply with the Commission Order, in Case No.
19 U-I034-88, that only 50% of the operation and maintenance expenses
20 associated with the Conference Center will be allowed for rate purposes.
21 Q. What is adjustment 12, amortization of underground storage study write-off,
shown on page 3 of Schedule 4, line 103?
In Commission Order No. 14859 in Case No. U~1034-75, a three y¿ar
aniortization period was authorized to recover certain underground
storage study costs totaling $54,058. The Company has $51,484 of further
underground storage study costs which it wishes to charge to operating
expenses. The Company again requests a three year amortization period in
writing-off these costs and the adjustment shown on line. 103, Schedule 4,
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income tax rates currently in effect?
Yes. The calculation used the statutory Federal tax rate of 46% and the
statutory State tax rate of 6 1/2% which will be experienced by the Company
in the twelve months following the test year reduced by the Federal surtax
exemption.
Mr. Schultz, does the income tax calculation include an amount for interest
expense?
Yes, as shown on line 133 of Schedule 4, page 4, I have applied the
weighted average interest cost for short-term and long-term debt to the
average rate base in arriving at the amount for interest charges of
$3,225,310.
How did you arrive at the weighted average interest cost of 4. 313%?
The calculation of this interest cost percentage is supported by my Exhibit
6, Schedule 5. This Schedule is identical to Mr. Worthan' s Exhibit 3,
Schedule 1, page 1 entitled "Capital Structure and Cost of Capital as of
July 31, 1982" except for the inclusion of unamortized investment tax
credits in the calculation of weighted average cost of capital. As noted
on line 8, column (g), I have computed the same overall rate of return as
Mr. Worthan' s above noted Exhibit, that being 11.645%. However, I have
included the amount of unamortized investment tax credits outstanding at
July 31, 1982 in the overall calculation. Just as deferred income taxes
represent a form of financing for the Company, so does the amount of
unamortized lTC, since the Company's policy is to amortize this amount
over the life of the property giving rise to the credit. By including the
unamortized ITC in the calculation at the weighted average cost of capital,
the weighting of the long-term and short-term debt components provides a
lower weighted average cost and provides for the calculation of interest
expense which more closely approximates the level of interest expense to actually
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Please explain Schedule 6, entitled "Calculation of Average Rate Base and
Return Dollars, Twelve Months Ending July 31, 1982."
Company Schedule 6 consists of six pages. It shows the average rate base
for the test year ended July 31, 1982. Page 1 of Schedule 6 sets for the
average gas plant in service, average accumulated depreciation, the average
amount of advances in aid of construction to be dedcuted and the various
components of working capital to be included in rate base. Pages 2 through
6 support the various components of page 1, Schedule 6.
How did you arrive at Original Cost - Gas Plant in Service in the amount of
$110,479,203 as shown on line 1, page 1 of Schedule No.6?
The details supporting the calculation of that number appear on page 2 of
Schedule 6. I have computed a twelve-month average balance using the
average of month-end balances. The amount of $110,479,203 is shown on line
3 i of page 2, Schedule 6.
What adjustments have you made to average gas plant in service?
I have adjusted gas plant in service and the related accumulated
depreciation, for 50% of the original cost of the Conference Center as
adopted by this Commission in Order No. 16951 in CAse No. U-I034-88.
Mr. Schultz, how did you arrive at the amount of the accumulated
depreciation which appears on page 1 of Schedule 6, line 2?
The calculation of this amount is derived in the same way as Average Gas
Plant in Service, namely, twelve-month average of average month-end
balances. The accumulated depreciation amounts to $38,444,368 as shown on
page 3, line 31 of Schedule 6.
Did you deduct advances in aid of construction from average net gas plant
in service in computing the overall average rate base?
Yes, as shown on line 4, page 1 of Schedule 6 and detailed on page 4 of
Schedule 6, I have deducted the twelve-month average of the average
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month-end balances for advances in aid of construction.
Please explain the working capital portion of average rate base and the
derivation of the amounts set forth on Schedule 6, page 1, lines 5-8.
Working capital represents an allowance for funds, which the utility's
shareholders have invested other than in utility plant, required in the
normal day-to-day operations of the utility. The items included in
working capital are materials and supplies inventory, LNG inventory, and
cash working capital requirements.
How was the amount for materials and supplies inventory determined?
I have included the amount of $669,592 as a necessary level of materials
and supplies inventory for the day-to-day operations, maintenance, and
replacement to Intermountain's existing system and necessary new
construction. This amount is further detailed on Schedule 6, page 5.
Mr. Schultz, please explain how you arrived at the amount for LNG inventory
included in working capital.
The amount for LNG inventory represents the twelve-month average of the
average month-end balances for the test year. The calculation of this
amount is shown on page 6 of Schedule 6.
Mr. Schultz, how did you determine the cash working capital requirements?
This Commission adopted a cash working capital requirement of zero in Case
No. U-I034-88. This level had been supported in the Company's direct case
by a lead-lag study. I have again used zero for the cash working capital
requirements as adopted earlier by this Commission.
Please explain line 10 of Schedule 6, page 1 entitled "Overall Rate of
Return" .
The calculation of the overall rate of return of 11.645% is set forth in
Mr. Worthan' s Exhibit 3.
Mr. Schultz, does this conclude your direct testimony?
Yes, Sir, it does.
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