20180412NW Natural to Staff 1-23.pdf

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Michael C. Creamer (ISB No. 4030)
Preston N. Carter (ISB No. 8462)
Givens Pursley LLP
601 W. Bannock St.
Boise,ID 83702
Telephone: [phone]
Facsimile: [phone]
mcc@ givenspursley.com
prestoncarter@ givenspursley.com
14134585_2.docx [ 3988.1]
Attorneys for NW Natural
IN THE MATTER OF THE
APPLICATION OF NW NATTJRAL
FOR ACQUISITION OF FALLS
WATER COMPANY
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
Case No. FLS-W-18-01
NTIV NATURAL'S RESPONSE TO THE
FIRST PRODUCTION REQIJEST OF
THE COMMISSION STAFF
NW Natural responds to the First Production Request of the Commission Staff to NW
Natural, dated March22,2018, as follows.
REQUEST NO. 1: The Company states that it has a long-term goal to acquire, manage,
and develop a "meaningful water utility business". (Palfreyman Direct at 3.) What safeguards
are in place to prevent Falls Water customers from being burdened with overhead costs scaled
for a potentially larger water business that would not exist if Falls Water remained a stand-alone
water utility? Will an inordinate cost burden be borne by Falls Water, as a consequence of it
being acquired?
RESPONSE TO REQUEST NO. 1: Falls Water customers will not bear an inordinate
cost burden as a result of being acquired. Falls Water will remain a stand-alone water utility
immediately following the acquisition. As a stand-alone utility, we can only justify costs that
NW NeTunal,s RESPoNSE TO Fn.ST PRODUCTIoN REQUEST oF THE CoMMISSIoN STAFF - I
benefit Falls Water ratepayers. Any such incremental costs at the water utility would need to be
deemed prudent as part of a rate proceeding at the Commission before we could include those
costs in rates.
Over time, as strategic acquisitions are made, there could be economies of scale that
could be achieved as we expand further into the water utility sector. This is a long-term strategy
that will not have an immediate impact on Falls Water at the time of the acquisition. To the
extent that we can achieve economies of scale, Falls Water would benefit from these activities,
as would any other entity that shares in the synergies. Falls Water would need to demonstrate to
the Commission that any such shared activities were prudent.
The response to this Request is sponsored by Justin Palfreyman.
NW NeTuneL,S RESpoI.ISB TO FIRST PRODUCTION REQUEST OF THE CoMMISSIoN STAFF - 2
REQUEST NO. 2: Post-acquisition, will Falls Water customers be billed through the
same billing system as the system used for NW Natural's gas customers?
RESPONSE TO REQLIEST NO. 2: No, NW Natural does not have any immediate
plans to migrate Falls Water customers to NW Natural's billing system. Over time, however, to
the extent Falls Water's customers could benefit from such a shared service, NW Natural and
Falls Water could explore such an opporfunity.
The response to this Request is sponsored by Justin Palfreyman.
NW NATURAI-,s RgspONSg TO FIRST PRODUCTION REQUEST oF THE CoMMISSToN ST TT - 3
REQUEST NO. 3: In NW Natural Gas' last general rate case, what was the per-
customer cost approved for the billing function (on an annual revenue requirement basis)?
RESPONSE TO REQUEST NO. 3: ln our last rate case (OPUC Docket UG 221, frnal
order issued November 16,2012), the per-customer cost for the Company's billing function was
$33.78 annually.
The response to this Request is sponsored by Justin Palfreyman.
NW NATURAL,S RESPoNSE TO FIRST PRODUCTION REQUEST oF THE CoMMISSION STeTn - 4
REQUEST NO. 4: Post-acquisition, will any NW Natural gas system billing costs be
allocated to Falls Water?
RESPONSE TO REQUEST NO.4: No, NW Natural's billing system costs will not be
allocated to Falls Water following the acquisition.
The response to this Request is sponsored by Justin Palfreyman.
NW NeTunaT'S RESPoNSE To FRST PRODUCTION REQUEST OF TgT COITUISSION STAFF - 5
REQUEST NO. 5: The Company cited achieving economies of scale, including for
"billing systems", as a benefit of NW Natural's acquisition of Falls Water Company.
(Palfreyman Direct at 3.) Has NW Natural quantified potential savings associated with the
economies of scale of its billing systems?
a. If yes, please provide the current average cost per Falls Water customer for customer
billing and the expected average cost per Falls Water customer for customer billing
subsequent to the acquisition.
b. [f no, how did NW Natural determine that the allocated cost of its billing system to
Falls Water customers represents a savings relative to the cost of the current Falls
Water billing system?
RESPONSE TO REQLIEST NO. 5: NW Natural has not quantified potential savings
associated with the economies of scale of billing systems/integtation.
a. Not applicable.
b. NW Natural has not made the determination that that the allocated cost of its billing
system to Falls Water customers represents a savings relative to the cost of the current Falls
Water billing system. Rather, NW Natural identified shared billing systems as potential
opportunity to achieve lost efficiencies for Falls Water. In the event that Falls Water could
demonstrate that such an opportunity exists and that using an integrated billing system would be
a prudent decision, Falls Water would seek approval from the IPUC to recover such costs.
The response to this Request is sponsored by Justin Palfreyman.
NW NeTuneL,S RESPoNSE TO FIRST PRODUCTION REQUEST OF THE COMMISSION STAFF - 6
REQUEST NO. 6: With respect to the economy of scale savings from technology
investments, please provide some examples of savings for Falls Water and quanti$r these
savings.
RESPONSE TO REQUEST NO. 6: NW Natural and Falls Water do not have
immediate plans to make technology investments. Over time, as sffategic acquisitions are made,
economies of scale savings could be achieved from technology investments as we expand into
the water utility sector. For example, we could deploy standardized solutions to manage
customer information and billing, SCADA systems and automated operational processes. We
currently do not have forecasts for these savings as the magnitude of savings will depend on our
ability to successfully execute our growth strategy, as well as other various factors.
The response to this Request is sponsored by Justin Palfreyman.
NW NATURAL,S RESPoNSE To FIRST PRoDUCTIoN REQUEST oF THE CoMMISSIoN STAFF - 7
REQUEST NO. 7: With respect to the economy of scale savings from integrated
planning processes, please provide some examples of savings and quantify these savings.
RESPONSE TO REQUEST NO. 7: NW Natural and Falls Water do not have
immediate plans to integrate Falls Water's planning processes with other water utilities. Over
time, as strategic acquisitions are made, economies of scale savings could be achieved from
integrated planning processes as we expand into the water utility sector. For example, if there is
an opportunity to consolidate additional water utilities, savings could be achieved by the shared
planning process and shared assets that could benefit a consolidated utility by spreading costs to
a broader base that might not otherwise be economical for a single small water utility. We
currently do not have forecasts for these savings as the magnitude of savings will depend on our
ability to successfully execute our gtowth strategy and other factors.
The response to this Request is sponsored by Justin Pallieyman.
NW NATURAL'S RESPoNSE To FIRST PRoDUCTIoN REQUEST oF THE CoMMISSIoN STAFF - 8
REQUEST NO. 8: What is the estimated current Falls Water expenditure for integrated
planning processes?
RESPONSE TO REQUEST NO. 8: Falls Water is budgeting S50,000-S75,000 for an
updated Water Master Plan and hydraulic model.
The response to this Request is sponsored by Justin Palfreyman.
NW NeTunaT,S RESPoNSE TO Fm.ST PRODUCTION REQUEST OF THT COPTTT,TISSION STAFF - 9
REQUEST NO. 9: If Falls Water estimated expenditures for the integrated planning
process is unknown, how did NW Natural determine that the allocated cost of the integrated
planning processes represents a savings relative to the current cost of the Falls Water integrated
planning processes? (Palfreyman Direct at 3.)
RESPONSE TO REQLIEST NO. 9: Please see NW Natural's Response to FLS-W-I8-
0l IPUC DR 7 and 8.
The response to this Request is sponsored by Justin Palfreyman.
NW NATURAL'S RESPoNSE TO FIRST PRODUCTION REQUEST oF THE CoMMISSIoN STAFF - IO
REQUEST NO. 10: With respect to the economy of scale savings from shared services,
please provide some examples of savings and quantify these savings.
RESPONSE TO REQUEST NO. 10: NW Natural and Falls Water do not have
immediate plans to integrate shared services. Over time, as strategic acquisitions are made,
economies of scale savings could be achieved from shared services. For example, savings could
be achieved from application of common operational systems and resources such as accounting,
engineering, technology and regulatory support. We currently do not have forecasts for these
savings as the magnitude of savings will depend on our ability to successfully execute our
growth strategy and other factors.
The response to this Request is sponsored by Justin Palfreyman.
NW NATURAL,S RESPoNSE TO FIRST PRODUCTION REQUEST OF TUT COITauIssIoN STAFF - I I
REQUEST NO. 11: Given that NW Natural intends to maintain the current Falls Water
operation and retain Falls Water staff, how can NW Natural support its claim of shared services
savings? (Palfreyman Direct at 3.)
RESPONSE TO REQUEST NO. 11: An example of where this could occur is if there
are some services, such as legal and engineering, that Falls Water might need to contract out,
which could be handled in-house at NW Natural at a better price than market rates.
The response to this Request is sponsored by Justin Palfreyman.
NW NATURAL,S RESPONSE TO FM.ST PRODUCTION REQUEST OF THE COMMISSION STAFF - 12
REQUEST NO. 12: Are shared services to Falls Water improved or enhanced after the
acquisition? Please explain. Also, please describe the tangible benefit to customers of (perhaps
expanded) shared services post-acquisition.
RESPONSE TO REQUEST NO. 12: NW Natural will provide services to Falls Water
only to the extent that Falls Water can demonstrate that those services were prudently incurred.
NW Natural has been in the regulated utility business for nearly 160 years. Our professional
staff is experienced in the design, build out, management, and expansion of infrastructure assets.
Additionally, we have a broad base of employees with expertise in legal, technology, customer
service and engineering fields, who, over time, could help to improve or enhance operations at
Falls Water.
NW Natural and Falls Water do not have immediate plans for NW Natural to provide
services to Falls Water, or vice versa. As such, we currently do not have forecasts for the
tangible benefits of shared services to Falls Water's customers.
The response to this Request is sponsored by Justin Palfreyman.
NW NeTuneI,S RESPONSE TO FR.ST PRODUCTION REQUEST OF THE COMMISSION STAFF - 13
REQUEST NO. 13: When will the economies of scale berealized? Are economies of
scale expected to be zero or negative in the first year, post-acquisition?
RESPONSE TO REQLIEST NO. 13: Economies of scale may take three to five years
tobe realized, depending on the speed at which we execute our growth strategy. We do not
expect negative economies of scale in the first year post-acquisition, but it is possible that there
are zero in the first year post-acquisition.
The response to this Request is sponsored by Justin Palfreyman.
NW NAruRAL,S RESPoNSE To FR.ST PRoDUCTIoN REQUEST oF THE CoMMISSIoN STA.FF - 14
REQUEST NO. 14: Are economies of scale savings conditioned on employee attrition?
Please explain.
RESPONSE TO REQUEST NO. 14: No, the opportunities for economies of scale
described in the Application, Direct Testimony, and in response to IPUC Staff s First Production
Request are not conditioned on employee attrition.
The response to this Request is sponsored by Justin Palfreyman.
NW NeTuneL,S RESPoNSE TO FIRST PRODUCTION REQUEST oF THE CoMMISSToN STaTT - I5
REQUEST NO. 15: Are economies of scale conditioned on water company acquisitions
in addition to Falls Water? In responding, please explain how the number of acquired systems
and their location affect economies of scale, and whether some threshold number of water
customers is necessary to realize these scale economies.
RESPONSE TO REQLTEST NO. 15: We expect that, over time, we will achieve
efficiencies through scale within NW Natural's water business, which will benefit Falls Water
customers. In the event that we can acquire additional water utilities, we will look at the
strategic value of these entities and determine where economies of scale can be achieved. We do
not have a set number of systems or threshold of customers that we believe are needed to realize
the economies of scale.
The response to this Request is sponsored by Justin Palfreyman.
NW NaTunaI,s RespoNST TO FIRST PRODUCTION REQUEST OF THE CoMMISSIoN STAFF - I6
REQUEST NO. 16: In light of claimed scale economy savings that would tend to lower
the revenue requirement, does NW Natural plan to defer filing for a rate increase for a
predetermined period following the acquisition? Please explain.
RESPONSE TO REQUEST NO. 16: NW Natural has not proposed to defer filing for a
rate increase for a predetermined period following the acquisition. As described in the
Application, NW Natural believes there are opportunities for economies of scale that could result
in savings to Falls Water customers and also understands there are areas of Falls Water's
distribution system that will require capital investment. At this time, NW Natural is not certain
when Falls Water will capture savings and when it will invest in its system. Over time, we will
need to monitor if and when there is an upward pressure on rates that would jeopardize Falls
Water's opportunity to earn a fair rate of return. NW Natural is not seeking to raise rates with
this Application, however.
The response to this Request is sponsored by Justin Palfreyman.
NW NATURAL,S RESPONSE TO FIRST PRODUCTION REQUEST OF TgN COUUTSSION STAFF - I7
REQUEST NO. 17: The Company states that water infrastructure in the United States
"is generally old and suffering from substantial defened maintenance." Does this situation exist
at Falls Water? If not, does the Company expect the situation will exist for Falls Water in the
foreseeable future? (Palfreyman Direct at 2.)
RESPONSE TO REQLIEST NO. 17: We do not believe this situation exists at Falls
Water. The statement was made in reference to the water utility sector in general. We do not
expect the situation will exist for Falls Water in the foreseeable future, but we do anticipate
making capital improvements to maintain the system so that it does not suffer from deferred
maintenance.
The response to this Request is sponsored by Justin Palfreyman.
NW NeTunal's RESpoNST To Fm.ST PRoDUCTIoN REQUEST oF THE CoMMISSIoN STAFF - 18
REQUEST NO. 18: The Company lists some anticipated capital improvement projects.
(Palfreyman Direct at 5.) Assuming the acquisition is approved, when does NW Natural plan to
embark on capital projects? Please include descriptions of expenditures and associated estimated
costs.
RESPONSE TO REQT EST NO. 18: Within the next five years, we anticipate the need
for at least one additional well and one storage tank.
We expect that the well (#l l) will need to be in-serviceby 2020 to meet fire flow
requirements, peak demand, and for pressure regulation. The well's location will be determined
when the updated hydraulic model of the water system is completed. We anticipate that it will
be located in the northern area of the water system. The flow rate of the well will likely be no
less than 1,000 gallons per minute.
The storage tank is expected to be needed in 2020 or soon after. Falls Water does not
currently have storage, and it is anticipated that storage will be needed for pressure regulation
and the ability to meet peak demand. The tank is expected to be 1.5 million gallons and located
near Well #9.
The response to this Request is sponsored by Justin Palfreyman.
NW NeTuneL,S RESPoNSE To FIRST PRoDUCTION REQUEST oF THE CoMMISSIoN STAFF - I9
REQUEST NO. 19: What are the estimates for population growth in the Falls Water
service territory?
RESPONSE TO REQUEST NO. 19: We anticipate population growth within the
service territory of approximately 5o/o annually over the next five years.
The response to this Request is sponsored by Justin Palfreyman.
NW NeTun,eT,S RESPoNSE TO FIRST PRODUCTION REQUEST OF Tm CoMMISSIoN STAFF - 20
REQUEST NO. 20: ln the opinion of NW Natural, does Falls Water currently have the
resources and expertise to invest in and execute on the upgrades and expansions required to
provide water service to its service territory? Please explain.
RESPONSE TO REQUEST NO. 20: We believe Falls Water has the expertise to
identify needed upgrades and expansions, and that it has the expertise to execute those projects.
However, Falls Water, like many small water utilities, does not have the same ability to access
capital to fund these projects as NW Natural.
The response to this Request is sponsored by Justin Palfreyman.
NW Ne,Tun,qI's RESPoNSE TO FR.ST PRODUCTION REQUEST OF THE COMMISSION STAFF - 2I
REQUEST NO. 21: The Company states that Falls Water's president, Brent Johnson,
will continue in his current role for one year, and that Falls Waters' existing employees and
independent contractors will continue to work for the water utility and provide service to
customers. (Palfreyman Direct at 4-5.) Has NW Natural specified a duration of its commitment
to existing employees and independent contractors (e.g., l-year,3-years), or is this commitment
open-ended?
RESPONSE TO REQUEST NO. 21: NW Natural has committed to retain all
employees at compensation levels no less than their current salary and benefits for a period of
two years, with exceptions for termination for cause. Please see Section 5.04 of the Agreement
and Plan of Merger.
The response to this Request is sponsored by Justin Palfreyman.
NW NaTuneL,S RESPONSE TO FIRST PRODUCTION REQUEST OF THE CoMMISSIoN STAFF - 22
REQUEST NO. 22: Would terminating existing Falls Water management, employees,
and severing relationships with independent contractors one year after the acquisition breach any
commitments made by NW Natural? Please explain.
RESPONSE TO REQUEST NO.22: Please see Response to FLS-W-18-01 IPUC DR
21.
The response to this Request is sponsored by Justin Palfreyman.
NW NATURAL'S RESPoNSE TO FIRST PRODUCTION REQUEST OF THE COMMISSION STAFF - 23
REQUEST NO. 23: Do any benefits from economies of scale (from any source, including from
system operations or economies ofscale related to overheads, shared services, or other costs that
apply across multiple business units) exist in addition to those specified above? Please explain
and quantify the scale economies.
RESPONSE TO REQUEST NO.23: We do not foresee additional economies of scale
beyond those described in testimony and further expanded on in response to FLS-W-18-01 IPUC
DR 6, FLS-W-I8-01 IPUC DR 7, and FLS-W-I8-01 IPUC DR 10, though additional benefits
may be realized over time as we execute our growth strategy.
The response to this Request is sponsored by Justin Palfreyman.
Dated: April 12,2018
GTVENS PURSLEY LLP
Michael C. Creamer
Preston N. Carter
Givens Pursley LLP
Attorneys for NW Natural
/
NW NATURAL',S ReSpoNsp ro FIRsr PRoDUCTToN REQUEST OF THE COUtvttSStON Srerr - 24
CERTIFICATE OF SERVICE
I certify that on Apil12,2018, a true and correct copy of NW NATURAL'S RESPONSE TO
THE FIRST PRODUCTION REQUEST OF THE COMMISSION STAFF was served upon all
parties of record in this proceeding via the manner indicated below:
Commission Staff
Diane Hanian, Commission Secretary
Idaho Public Utilities Commission
472W. Washington Steet
Boise,ID 83702
[e-mail]. eov
Brandon Karpen
Deputy Attorney General
Idaho Pubtic Utilities Commission
472W. Washington Street (83702)
P.O. Box 83720
Boise, D 83720-0074
Brandon. Karpen@puc. idaho. sov
Electronic Mail
Electronic Mail
/
Preston N. Carter
NW Nerunal's RrspoNSE To FIRST PRoDUCTIoN REeUEST oF THE CoMMIsstoN Srern - 25
L/t-:-