20070928Gorman direct 1.pdf

Before the
Idaho Public Utilities Commission
In the Matter of the Application of
PacifiCorp DBA Rocky Mountain
Power for Approval of Changes to
its Electric Service Schedules
Q F r &:: ! 1) F:; ,
2001 SE? 28 Ai"1
IDAHO PUBL!,
UTILITIES COf'iiMI, . 10.;
Case No. PAC-O7-
Direct Testimony and Exhibits of
Michael Gorman
Volume 1 - Revenue Requirement
On behalf of
Monsanto Company
Project 8819
September 28, 2007
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BRUBAKER & ASSOCIATEs, INC
ST. LOUIS. MO 63141-2000
PUBLIC
Before the Idaho Public Utilities Commission
In the Matter of the Application of
PacifiCorp DBA Rocky Mountain
Power for Approval of Changes to
its Electric Service Schedules
Case No. PAC-O7-
Table of Contents to the Direct Testimonv of Michael Gorman
Revenue Requirement Adjustments....................................................................................
2007 Plant Additions ...........................................................................................................
Appendix A
Exhibits:
Exhibit 214 (MPG-
Exhibit 215 (MPG-
Exhibit 216 (MPG-
Public Exhibit 217 (MPG-4)
Exhibit 218 (MPG-
Exhibit 219 (MPG-
Exhibit 220 (MPG-
Testimony of Michael Gorman - Page 1 BRUBAKER & ASSOCIATES, INC.
Before the Idaho Public Utilities Commission
Case No. PAC-O7-
In the Matter of the Application of
PacifiCorp DBA Rocky Mountain
Power for Approval of Changes to
its Electric Service Schedules
Direct Testimonv of Michael Gorman
PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
My name is Michael Gorman and my business address is 1215 Fern Ridge Parkway,
Suite 208, S1. Louis, MO 63141-2000.
WHAT IS YOUR OCCUPATION?
I am an energy advisor and a consultant in the field of public utility regulation and a
managing principal in the firm of Brubaker & Associates, Inc. (BAI).
PLEASE SUMMARIZE YOUR EDUCATIONAL BACKGROUND AND
EXPERIENCE.
These are set forth in Appendix A.
ON WHOSE BEHALF ARE YOU APPEARING IN THIS PROCEEDING?
I am appearing on behalf of Monsanto Company.
PLEASE DESCRIBE THE PURPOSE OF YOUR TESTIMONY.
In this Volume 1 testimony, I propose adjustments to Rocky Mountain Power s (RMP
or Company) claimed revenue requirement in this proceeding. In my Volume 2
Testimony of Michael Gorman - Page 1 BRUBAKER & ASSOCIATES, INC.
testimony, I will recommend a fair return on common equity and overall rate of return
for RMP. I also identify flaws in RMP's proposed rate of return and explain why it is
inflated, unjust and unreasonable.
PLEASE SUMMARIZE YOUR PROPOSED ADJUSTMENTS TO THE COMPANY'
REVENUE REQUIREMENT IN THIS PROCEEDING.
My proposed revenue requirement adjustments are listed in Table 1 below. As set
forth in Table 1, I conclude that the Company s revenue requirement is overstated by
at least $9.97 million.
TABLE 1
Idaho Revenue Adjustment Summary
Description
Amount
($000)
682
542
000
721
020
965
SOz Revenue Credit
Severance Cost
Pension Expense
Major Plant Additions
Return on Equity
Total Revenue Adjustment
Each of the revenue requirement adjustments listed above in Table 1 will be
explained below.
PLEASE SUMMARIZE YOUR RECOMMENDED RETURN ON EQUITY FOR RMP
IN THIS PROCEEDING.
I recommend RMP be authorized a return on equity of 10.0%. As set forth in my
Volume 2 direct testimony, my recommended return on equity is based on several
financial models including the discounted cash flow (DCF) model, risk premium
model, and capital asset pricing model. The financial models were applied to
Testimony of Michael Gorman - Page 2 BRUBAKER & ASSOCIATES, INC.
companies that were reasonably comparable in total investment risk to RMP. Hence,
my recommended return on equity represents fair compensation based on RMP'
investment risk.
I also show that my recommended return on equity will maintain RMP'
financial integrity by supporting credit metrics adequate to maintain RMP's current
bond rating.
As set forth on Exhibit 214 (MPG-1), reducing RMP's return on equity to
10.0% from 10.75% will reduce its Idaho retail revenue requirement by $3.0 million.
Reyenue ReQuirement Adjustments
DID RMP INCLUDE A REVENUE CREDIT FOR SO2 ALLOWANCE SALES?
Yes, but the revenue credit is less than the test year SOz allowance sales revenue.
RMP is proposing to defer the revenue received from the sale of SOz credits and
amortize the revenue deferral over a 15-year period. RMP asserts that this 15-year
period will match the revenue allowance amortization with the life of the asset
producing the SOz allowances.
IS THE SO2 ALLOWANCE SALES REVENUE AMORTIZATION PROPOSED BY
RMP REASONABLE?
No. . There is no legitimate reason to defer and amortize the SOz allowance sales
revenue. ***
***
PUBLIC
Testimony of Michael Gorman - Page 3 BRUBAKER & ASSOCIATES, INC.
WHAT AMOUNT OF SO2 ALLOWANCE SALES REVENUE SHOULD BE
INCLUDED IN RMP'S COST OF SERVICE?
The test year actual allowance revenue of $15.million total Company1 is a
reasonable, albeit conservative, estimate of RMP's annual recurring revenue from the
sale of SOz allowance. As such, SOz allowance sales will be an annual recurring
revenue source that should be recognized in setting RMP's rates.
Therefore, I recommend to include the actual test year SOz allowance sales
revenue in RMP's cost of service. This will lower RMP's Idaho annual revenue
requirement by $682,089, as shown on Exhibit 215 (MPG-2).
WHY DO YOU BELIEVE THAT THE TEST YEAR SO2 ALLOWANCE SALES
REVENUE IS REASONABLY REFLECTIVE OF THE NORMALIZED ANNUAL
RECURRING REVENUE CREDIT FOR RMP?
As shown on Exhibit 216 (MPG-3), RMP has received annual revenue credits in the
range of $14.7 million to $16.2 million in the last three years. The three-year average
annual SOz allowance sales revenue over the three-year period is $15.5 million. The
test year SOz allowance sales revenue of $15.6 million is comparable to the three-
year historical average.
Further, the test year SOz sales allowance revenue is conservative in
relationship to RMP's projected annual SOz revenue through 2015. RMP's projected
SOz allowance sales revenue is included in the confidential response to Monsanto
Data Request No. 2.16, which is attached as Confidential Exhibit 217 (MPG-4).
Based on this assessment, I believe the test year SOz sales allowance
revenue is a reasonable proxy of the annual recurring revenues received by RMP for
McDougai Direct Testimony, Exhibit 11 at p. 3.
Testimony of Michael Gorman - Page 4 BRUBAKER & ASSOCIATES, INC.
SOz allowance sales, and should be used to offset the rate increase needed from
retail sales customers in this proceeding.
IS RMP PROPOSING TO INCLUDE THE AMORTIZATION OF DEFERRED
SEVERANCE COSTS IN ITS REVENUE REQUIREMENT?
Yes. RMP proposes to amortize $39.5 million of deferred employee severance costs
associated with MidAmerican Energy Holdings Company s (MEHC) acquisition of
PacifiCorp from Scottish Power. The Company proposes to amortize the deferred
severance costs over a three-year period.The Company asserts that the
Commission approved the deferrals of these severance costs in Docket No. E-06-11.
IS RMP'S SEVERANCE COST AMORTIZATION REASONABLE?
No. I take two issues with this cost item. The first issue I take with the Company
proposed recovery of deferred severance cost expenses relates to the amount of
deferred severance costs subject to recovery. RMP requested authority to defer
severance costs in Idaho in October 2006.However, its proposed deferred
severance cost balance includes significant severance expenses incurred prior to the
filing at the Idaho Commission requesting this deferral. Including severance cost
expenses in the deferral balance that were incurred prior to RMP's requesting
authority to defer this cost is retroactive ratemaking and should not be permitted.
Therefore, I propose to remove the severance costs from the Idaho allocated
severance cost deferral balance that were incurred prior to RMP's request to the
Idaho Commission for approval to defer these costs in October 2006.
As shown on Exhibit 218 (MPG-5), removing all severance costs incurred prior
to October 2006 lowers the total Company deferral balance subject to recovery from
Idaho customers from $39.5 million down to $13.2 million.
Testimony of Michael Gorman - Page 5 BRUBAKER & ASSOCIATES, INC.
HAVE OTHER JURISDICTIONS REMOVED SEVERANCE COSTS THAT WERE
INCURRED PRIOR TO THE COMMISSION'S APPROVAL FOR DEFERRAL OF
THESE COSTS?
Yes. In Washington, the Commission accepted the Staffs recommendation to limit
severance costs included in the deferral balance to costs incurred after the Company
requested authority from the Commission to defer these costs.
HAS RMP DEFERRED ALL SEVERANCE COSTS ON ITS FINANCIAL
STATEMENTS AS THE COSTS WERE INCURRED?
No. In its second quarter of 2007, SCC10Q, PacifiCorp noted that it had incurred
severance expenses of $3 million and $8 million during the three-month period
ending June 30, 2007 and 2006, respectively, and $8 million and $20 million during
the six-month period ending June 30, 2007 and 2006, respectively. However,
established a regulatory asset of only $2 million which reduced the severance
expenses based on authorization from commissions to start to defer these expenses
in a regulatory asset. Hence, PacifiCorp only started to defer severance expenses for
financial reporting purposes after it received regulatory commission approval for the
deferrals.
Washington State Utilities and Transportation Commission , Docket Nos. UE-061546 and
UE-060817 at pp. 43-44. Order Date: June 21 2007.
Testimony of Michael Gorman - Page 6 BRUBAKER & ASSOCIATES, INC.
IF ALL THE SEVERANCE COSTS INCURRED BEFORE OCTOBER 2006 ARE
NOT INCLUDED IN THE DEFERRAL BALANCE AND AMORTIZED IN FUTURE
RATES, IS IT POSSIBLE THAT RMP WILL BE ABLE TO RECOVER THESE
SEVERANCE COSTS?
Yes. RMP's evidence indicates that severing employees will result in approximately
$22 million of reduced annual employee expense. This employee expense savings is
not yet built into rates and thus is not being passed on to customers. Rather, the
employee expense savings is being retained by RMP until its rates are adjusted to
reflect the lower employee cost.
My proposed deferral balance adjustment removes $26 million of severance
costs from the deferral balance incurred before October 2006. This expense can be
recovered with a little more than one year of RMP's estimated annual severed
employee cost savings.
Rates in this case are not expected to go into effect until January 1, 2008,
which is more than 15 months after the employee severance savings were created.
Hence, RMP can recover the severance costs incurred prior to October 2006 with the
employee expense savings created by the severed employee savings until rates are
adjusted to pass on this saving to customers.
WHAT IS THE SECOND ISSUE YOU TAKE WITH RMP'S SEVERANCE COST
ALLOCATION FOR IDAHO?
RMP's allocation factor for Idaho is inflated. Specifically, as shown on Page 4.17 of
RMP witness Mr. Steven R. McDougal'Exhibit 11, RMP proposes to allocate
873% of the annual severance costs deferral amortization expense to the Idaho
McDougai Direct Testimony, p. 6.
Testimony of Michael Gorman - Page 7 BRUBAKER & ASSOCIATES, INC.
jurisdiction. However, this factor exceeds the amount of merger savings allocated to
Idaho.
Specifically, on Page 4.17, using various allocation factors for specific cost
savings items, Mr. McDougal estimates that the Idaho jurisdiction savings will be
$1,182 581 out of total Company savings of $22,473,994. This indicates that the
Idaho jurisdiction will receive 5.262% of total Company savings created by the MEHC
transaction. Hence, the allocation of deferred severance costs amortization should
be based on the same allocation of merger savings, or 5.262%.
WHAT IS THE IMPACT ON THE IDAHO REVENUE REQUIREMENT FROM YOUR
PROPOSED TWO ADJUSTMENTS THE SEVERANCE COST
AMORTIZATION?
As shown on the attached Exhibit 218 (MPG-5), eliminating severance costs incurred
prior to the deferral authority in Idaho, and reducing the Idaho jurisdictional allocation
factor to 5.262% from 5.873% reduces the Idaho test year severance cost
amortization expense to $231 323 from $773,709 as proposed by RMP. Hence,
these adjustments reduced the Idaho revenue requirement by $542,387.
PLEASE DESCRIBE RMP'S PROPOSED TEST YEAR AMOUNT OF PENSION
EXPENSE.
RMP proposes to increase its total pension expense to $72.5 million from
$49.5 million. This is a total increase of $23 million and an increase of $17 million in
O&M expense. RMP explains that the expense adjustment includes its calendar year
(CY) 2007 pension cash contribution rather than its CY 2007 pension expense. RPM
explains that it believes this adjustment is consistent with the Idaho Commission
practice to include pension cash contribution rather than pension expense in a utility
Testimony of Michael Gorman - Page 8 BRUBAKER & ASSOCIATES, INC.
revenue requirement in two recent rate cases: Idaho Power Company (Case No. IPC-
03-13, Order No. 29505) and Avista (Case No. AVU-04-01, Order No. 29602).
THE PENSION EXPENSE ADJUSTMENT PROPOSED RMP
REASONABLE?
No. RMP's pension expense adjustment should be rejected for at least two reasons.
First, the two Idaho Commission Orders do not support RMP's pension expense
adjustment. In both of these Orders, the Idaho Commission found that the amount of
expense included in a utility s cost of service should be "fair and reasonable.,,4
In the Idaho Power case, the Commission rejected the utility s request to use
the pension service cost in its cost of service. The Company argued that the service
cost was more stable than both the FAS 87 expense and the pension cash
contribution. The record in that case showed that including the pension service cost
in cost of service would have allowed the utility to recover significantly more expense
from customers than was actually being contributed to the pension trust. Because
the significant discrepancy between annual cash contributions and annual pension
service cost, the Commission approved an amount to be included in cost of service
based on the utility s expected cash contribution.
In the Avista case, the utility was allowed to amortize a portion of pension
cash contribution in excess of the annual expense to avoid penalizing the utility for
making additional pension contributions. In the Avista case, the Commission used a
hybrid of expense and cash contribution to set the pension cost of service.
In both cases, the Commission carefully considered the need to balance the
amount of expenses paid by customers with the amount of cash contributions made
0rder No. 29505, p. 21 , and Order No. 29602, p. 24.
Testimony of Michael Gorman - Page 9 BRUBAKER & ASSOCIATES, INC.
to the pension trust. In its determination, the Commission found the pension cost
included in cost of service should be just and reasonable.
DID RMP DEMONSTRATE THAT IT IS JUST AND REASONABLE TO USE THE
PENSION CASH CONTRIBUTION RATHER THAN PENSION EXPENSE IN ITS
COST OF SERVICE IN THIS CASE?
No.In this case, RMP has not supported its implicit assertion that its pension
expense will be consistently lower than its pension cash contribution. Indeed , RMP'
evidence in this case is contrary to this conclusion.
Specifically, RMP witness Erich D. Wilson testified that the Company regularly
reviews changes to laws and regulations, which led to its decision to change its
pension plan to create a more stable and predictable retirement plan cost structure.
Mr. Wilson also stated that the Company changed the pension benefit program to
remain competitive with other energy service providers and reflect recent legislation
passed under the Pension Protection Act of 2006. He asserts that this change allows
businesses to see the benefit of a more predictable method of funding employee
retirement benefits. While Mr. Wilson acknowledges that cash contributions can be
different than the pension expense, he asserts at page 20 that, over the long run , the
accrued expense will equal the total cash contributions; however, in a given year, the
cash contribution may be significantly different than the accrued expense. Further, in
response to Monsanto Data Request No. 9.1, RMP provided its projection of cash
contributions and FAS 87 pension expense over the next five years and over the last
five years.In this response, the Company projections indicate that its cash
contribution in the test year will be significantly higher than in any of the years over
the next five years. As such, the test year cash contribution is not a just and
5 Wilson Direct Testimony, p. 15.
Testimony of Michael Gorman - Page 10 BRUBAKER & ASSOCIATES, INC.
reasonable amount to include in cost of service in this proceeding, because it would
allow the Company to over-recover cash contributions to its pension plan while rates
are in effect.
Mr. Wilson s testimony does not support the implicit contention that RMP'
pension expense will be consistently lower than its annual pension cash
contributions.
WHAT AMOUNT OF PENSION EXPENSE DO YOU PROPOSE BE INCLUDED IN
RMP'S COST OF SERVICE IN THIS PROCEEDING?
The Company s evidence indicates that it has taken measures to stabilize its annual
pension expense. The change to its pension plan appears to be comparable to those
offered to employees in other enterprises and utility companies.
RMP's effort to stabilize pension expenses suggests that the Company
proposal to increase its pension cost of service to an amount above its estimated
annual pension expense is not just and reasonable.Hence, I recommend the
Commission set the Company s pension expense based on the lower of the cash
contribution or annual pension expense in this case. RMP should be required to
demonstrate and prove that it is fair and reasonable to increase its pension cost of
service to reflect its projected cash contribution rather than its expense. RMP has not
made this showing.
As set forth on Exhibit 219 (MPG-6), maintaining the cost of the pension
expense component of cost of service at the pension expense level rather than the
pension cash contribution will reduce the Idaho jurisdictional pension expense by
$1 million.
Testimony of Michael Gorman - Page BRUBAKER & ASSOCIATES, INC.
2007 Plant Additions
HAS RMP INCLUDED MAJOR PLANT ADDITIONS IN ITS RATE BASE IN THIS
CASE?
Yes. The Company increased its rate base for projected plant additions during
CY 2006 and 2007.
IS RMP'S PROPOSAL TO INCREASE ITS RATE BASE AND DEPRECIATION
EXPENSE FOR PROJECTED CY 2007 PLANT ADDITIONS REASONABLE?
No. The Company is using a CY 2006 test year with known and measurable changes
through 2007 as the appropriate test period used to reflect its cost of service in this
proceeding.6 The Company has inconsistently gone outside of the 2006 test year in
order to reflect expected 2007 plant additions without also reflecting expected 2007
sales growth, and known CY 2007 rate base cost decreases. Therefore, RMP's 2007
plant additions to its CY 2006 rate base are inappropriate and unreasonably inflate its
claimed revenue deficiency.
WHY DO YOU BELIEVE THE COMPANY'S REVENUES WILL GROW IN 2007
RELATIVE TO THE 2006 TEST YEAR?
Mr. McDougal testified that the Company s fuel cost is increasing due to customer
load growth.? Also, RMP witness Mark T. Widmer testifies that the Company s filing
reflects a system-wide increase in load of 2.3 million MWh, or growth of 4.1%.8 This
load growth will also increase the Company s revenue in 2007 relative to 2006.
Hence, any increase in rate base caused by 2007 plant additions will be covered in
whole or in part by higher revenue at current rates due to increased sales.
McDougai Direct Testimony. p. 4.
McDougal Direct Testimony, p. 11.
Widmer Direct Testimony. p. 3.
Testimony of Michael Gorman - Page 12 BRUBAKER & ASSOCIATES, INC.
WHAT KNOWN RATE BASE 2007 COST DECREASES DID RMP EXCLUDE?
The Company has not reflected the known rate base reduction in 2007 relative to
2006 created by the increase to accumulated depreciation. RMP is proposing to
charge Idaho customers $22.9 million of Idaho jurisdictional depreciation expense in
CY 2006. Also, in CY 2006, the Company proposed to charge customers $3.3 million
of amortization expense. In total, RMP proposed to recover $26.2 million of its 2006
rate base through this capital expense recovery. This depreciation and amortization
recovery in CY 2006 will increase its accumulated depreciation account which will
decrease its CY 2007 rate base.
This known rate base decrease in 2007 will offset more than 80% of RMP'
proposed plant additions in CY 2007 (depreciation and amortization of $26.2 million
versus plant additions of $32.3 million). As such , RMP has included projected rate
base increases for CY 2007 by reflecting projected plant additions, but has ignored
the rate base decreases created by recovery of additional depreciation and deferred
taxes in 2007 relative to 2006.
WHAT IS THE IMPACT ON RMP'S PROPOSED REVENUE DEFICIENCY IF 2007
PLANT ADDITIONS ARE EXCLUDED FROM ITS 2006 TEST YEAR?
As shown on Exhibit 220 (MPG-7), removing these 2007 plant additions lowers
RMP's resource deficiency by $4.7 million.
HAS RMP UPDATED ITS PROJECTED PLANT ADDITIONS IN 2007?
Yes. The Company s update of its 2007 plant additions indicates that certain major
generating assets will go into service later than originally projected, and the
Company s estimates of additional transmission investments will be lower than
originally projected. RMP's updated 2007 plant additions further illustrate that these
Testimony of Michael Gorman - Page 13 BRUBAKER & ASSOCIATES, INC.
costs do not meet the known and measurable standard to increase test year rate
base, and do not properly reflect known and measurable cost decreases that will in
whole or in large part eliminate these 2007 cost increases in designing rates.
ARE THERE ANY OTHER POST-TEST YEAR FACTORS THAT COULD REDUCE
RMP'S COST OF SERVICE WHEN THE RATES FROM THIS PROCEEDING ARE
IN EFFECT?
Yes.RMP has reached an agreement with various stakeholders in Wyoming
concerning a change to depreciation rates. If those revised depreciation rates are
implemented across its system, then RMP's cost of service for Idaho would be
reduced by approximately $1 million.
DOES THIS CONCLUDE YOUR VOLUME 1 - REVENUE REQUIREMENT DIRECT
TESTIMONY?
Yes, it does.
Testimony of Michael Gorman - Page 14 BRUBAKER & ASSOCIATES, INC.
Qualifications of Michael Gorman
PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
Michael P. Gorman. My business mailing address is P. O. Box 412000, 1215 Fern
Ridge Parkway, Suite 208, St. Louis, Missouri 63141-2000.
PLEASE STATE YOUR OCCUPATION.
I am a consultant in the field of public utility regulation and a managing principal with
Brubaker & Associates, Inc., energy, economic and regulatory consultants.
PLEASE SUMMARIZE YOUR EDUCATIONAL BACKGROUND AND WORK
EXPERIENCE.
In 1983 I received a Bachelors of Science Degree in Electrical Engineering from
Southern Illinois University, and in 1986, I received a Masters Degree in Business
Administration with a concentration in Finance from the University of Illinois at
Springfield. I have also completed several graduate level economics courses.
In August of 1983, I accepted an analyst position with the Illinois Commerce
Commission (lCC). In this position, I performed a variety of analyses for both formal
and informal investigations before the ICC, including: marginal cost of energy, central
dispatch, avoided cost of energy, annual system production costs, and working
capital. In October of 1986, I was promoted to the position of Senior Analyst. In this
position, I assumed the additional responsibilities of technical leader on projects, and
my areas of responsibility were expanded to include utility financial modeling and
financial analyses.
In 1987 , I was promoted to Director of the Financial Analysis Department. In
this position, I was responsible for all financial analyses conducted by the staff.
Among other things, I conducted analyses and sponsored testimony before the ICC
Testimony of Michael Gorman
Appendix A - Page 1 BRUBAKER & ASSOCIATES, INC.
on rate of return, financial integrity, financial modeling and related issues. I also
supervised the development of all Staff analyses and testimony on these same
issues. In addition, I supervised the Staffs review and recommendations to the
Commission concerning utility plans to issue debt and equity securities.
In August of 1989, I accepted a position with Merrill-Lynch as a financial
consultant. After receiving all required securities licenses, I worked with individual
investors and small businesses in evaluating and selecting investments suitable to
their requirements.
In September of 1990, I accepted a position with Drazen-Brubaker &
Associates, Inc. In April 1995 the firm of Brubaker & Associates, Inc. (BAI) was
formed. It includes most of the former DBA principals and Staff. Since 1990, I have
performed various analyses and sponsored testimony on cost of capital, cost/benefits
of utility mergers and acquisitions, utility reorganizations, level of operating expenses
and rate base, cost of service studies, and analyses relating industrial jobs and
economic development. I also participated in a study used to revise the financial
policy for the municipal utility in Kansas City, Kansas.
At BAI , I also have extensive experience working with large energy users to
distribute and critically evaluate responses to requests for proposals (RFPs) for
electric, steam, and gas energy supply from competitive energy suppliers. These
analyses include the evaluation of gas supply and delivery charges, cogeneration
and/or combined cycle unit feasibility studies, and the evaluation of third-party
asset/supply management agreements.I have also analyzed commodity pricing
indices and forward pricing methods for third party supply agreements. Continuing, I
have also conducted regional electric market price forecasts.
In addition to our main office in St. Louis, the firm also has branch offices in
Phoenix, Arizona; Corpus Christi , Texas; and Piano, Texas.
Testimony of Michael Gorman
Appendix A - Page 2 BRUBAKER & ASSOCIATES, INC.
HAVE YOU EVER TESTIFIED BEFORE A REGULATORY BODY?
Yes. I have sponsored testimony on cost of capital, revenue requirements, cost of
service and other issues before the regulatory commissions in Arizona, California,
Delaware, Georgia, Illinois, Indiana, Iowa, Louisiana, Michigan, Missouri, New
Mexico, New Jersey, Oklahoma, Oregon, Tennessee, Texas, Utah, Vermont,
Washington, West Virginia, Wisconsin, Wyoming, and before the provincial regulatory
boards in Alberta and Nova Scotia, Canada. I have also sponsored testimony before
the Board of Public Utilities in Kansas City, Kansas; presented rate setting position
reports to the regulatory board of the municipal utility in Austin, Texas, and Salt River
Project, Arizona, on behalf of industrial ratepayers; and negotiated rate disputes for
industrial ratepayers of the Municipal Electric Authority of Georgia in the LaGrange,
Georgia district.
PLEASE DESCRIBE ANY PROFESSIONAL REGISTRATIONS
ORGANIZATIONS TO WHICH YOU BELONG.
I earned the designation of Chartered Financial Analyst (CFA) from the Charter
Financial Analyst Institute.The CFA charter was awarded after successfully
completing three examinations which covered the subject areas of financial
accounting, economics, fixed income and equity valuation and professional and
ethical conduct. I am a member of CFA's Financial Analyst Society.
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Testimony of Michael Gorman
Appendix A - Page 3 BRUBAKER & ASSOCIATES, INC.
Case No. PAC-07-
Exhibit 214 (MPG-
ROCKY MOUNTAIN POWER
Rate of Return Reduction Impact
1. Proposed Capital Structure
Pre-Tax
Weighted Weighted
Line Descri tion Amount Weiaht Cost Cost
(1)(2)(3)(4)(5)
Common Stock $ 4,645,400 280 50.4%10.75%42%75%
Preferred Stock 41,463,300 410%02%04%
Long-Term Debt $ 4 523,205,000 49.6.26%07%07%
Total $ 9.210,068 580 100.00%52%11.86%
Tax Conversion Factor 614
2. Proposed Capital Structure with ROE Reduction
Line Description Amount Weiaht
(1)(2)
Common Stock $ 4,645,400 280 50.4%
Preferred Stock 41,463 300
Long-Term Debt $ 4,523,205 000 49.
Total $ 9,210 068,580 100.00%
Pre-Tax ROR Impact with ROE Reduction
Rate Base (Idaho)
Revenue Impact with ROE Reduction
Source:1 Williams Direct at 3 and Attach Monsanto 1.6. b..
Pre-Tax
Weighted Weighted
Cost Cost Cost
(3)(4)(5)
10.00%04%14%
5.410%02%04%
26%07%07%
14%11.25%
61%
494 597 902
019,794
Case No. PAC-07-
Exhibit 215 (MPG-
ROCKY MOUNTAIN POWER
SO2 Allowance Sales Revenue Adiustment
Idaho
Line Descri tion Allocated Reference
(1)(2)
SOz Allowance Sales Revenue 855 123 McDougal, Exh. 11 pg. 3.
Remove Rate Base Offset (1,458,728)McDougal , Exh. 11 pg. 3.4
Revenue from Rate Base Change (173 034)Line 2 * 11.862%
Revenue Impact 682 089 Line 1 + Line 3
Case No. PAC-07-
Exhibit 216 (MPG-
ROCKY MOUNTAIN POWER
S02 Allowance Sales Revenue
Date Sales to Date Test Year
Line DescriDtion Booked Dec - 07 2005 2006 2007
(1)(2)(3)(4)(5)
EPA Auction May - 05 065,357 065,357
EPA Auction Jun - 05 200,914 200,914
JP Morgan Sale Dec - 05 13,958,500 13,958,500
JP Morgan Sale Feb - 06 995,000 12,995 000
EPA Auction May - 06 392,408 392,408
EPA Auction Jun - 06 232,244 232 244
Sale Mar - 07 322,500 322 500
Sale Apr - 07 250,000 250 000
EPA Auction May - 07 500,000 500 000
Sale Jun - 07 250,000 250 000
Sales Sep - 07 250 000 250 000
Sales Oct - 07 250 000 250,000
Sales Nov - 07 890,000 890,000
Total 46.556,923 $ 16,224 771 619,652 $ 14 712,500
Year Average 15.518 974
Source:
Steven McDougal, Exhibit 11 , pg 3.
P AC- E-07 -OS/Rocky Mountain Power
July 24, 2007
Monsanto 2nd Set Data Request 2.
Case No. PAC-O7-
Public Exhibit 217 (MPG-
Page 1 of 2
Monsanto Data Request 2.
Referring to page 12 of the testimony of Mr. McDougal, beginning at line 17
please provide for each of the years 2000 through 2006, and as projected for each
of the years 2007 through 2015, the number of S02 allowances sold and the
revenues per allowance, and in total. In addition, please provide for each year the
beginning of year balance, the number acquired, the number sold and the end of
year balance.
Response to Monsanto Data Request 2.
Please see Confidential Attachment Monsanto 2.16 for the data requested above.
This information is confidential and is provided subject to the terms and
conditions of the protective order in this proceeding.
(Steven R. McDougal is expected to sponsor this response at hearing.
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Case No. PAC-07-
Exhibit 218 (MPG-
Page 1 of 3
ROCKY MOUNTAIN POWER
Severance Cost Adjustment
RMP Severance
Proposed Costs
Severance Incurred
line Descri tion Costs After 10/2006
(1)(2)
Non-Executive Total 28,167,501 12,684 222
Executive Total 11 ,354 507 504,070
Total Severance 522 007 188 291
Amortized over 3 years 13,174 002 396 097
Company Idaho Allocation Factor 873%
Gorman Idaho Allocation Factor 262%
Idaho Jurisdictional Amount 773,709 231 323
Idaho Severance Cost Adjustment 542,387
Source:
Erich D. Wilson, Exhibit 24 & 25
Case No. PAC-07-
Exhibit 218 (MPG-
Page 2 of 3
ROCKY MOUNTAIN POWER
Non-Executive Severance Costs
Severance
Costs
Severance Incurred
line Month After 10/2006
(1)(2)
March-823 721
April-582,822
May-167 518
June-769,040
July-012 902
August-966 908
September-632 872
October-391 698 391 698
November-636 674 636 674
December-844 993 844 993
January-695 851 695 851
February-511 396 511,396
March-182,211 182 211
Total Non-Executive 218 606 262 822
Remove Backfill 051 105 578 600
Net Total Non-Executive 28,167,501 12,684,222
Source:
Erich D. Wilson, Exhibit 24
Case No. PAC-07-
Exhibit 218 (MPG-
Page 3 of 3
ROCKY MOUNTAIN POWER
Executive Severance Costs
Severance
Costs Severance
Cappped Costs
Total Employee Severance at 88% of Incurred
Line Month Costs Costs Emplovee Costs After 10/2006
(1)(2)(3)(4)
March-925,013 $ 9,061 014 580 158
April-284 054 944,409 250,565
September-630,962 $ 1,485,017 556 573
November-077 232 $ 4 129 645 950,228 950,228
Grand Total 917 261 $ 15 620 085 337,523 950 228
Remove Backfill $ 4 265 579 446 158
Net Total $ 11 354 507 504 070
Source:
Erich D. Wilson, Exhibit 25
Case No. PAC-07-
Exhibit 219 (MPG-
ROCKY MOUNTAIN POWER
Adiustment to Pension Costs
Line Description Amount
(1 )
Pension Funding to Electric Expense 72,549,317
Actuarial Pension Expense in Results 49,648,020
Total Difference 22,901,297
O&M Portion 74.35%
Adjustment to O&M - Pension 027 114
Idaho Allocation Factor 873%
Idaho Allocated Adjustment to O&M - Pension 000,002
Source:
Steven McDougal, Exhibit 11 , pg 4.14 & 4.14.
Case No. PAC-07-
Exhibit 220 (MPG-
Page 1 of 2
ROCKY MOUNTAIN POWER
Remove Calendar Year 2007 Plant Additions
Revenue Impact
Idaho Allocation
Line Descri tion Amount Reference
(1)(2)
Rate Base Im act
Plant Additions 302 051 McDougal, Exh. 11 pg. 8.
Less: Accumulated Depreciation 500,429 McDougal, Exh. 11 pg. 6.
Less: Deferred Taxes 435 956 McDougal, Exh. 11 pg. 8.
Rate Base 365,666 Line 1 - Line 2 - Line 3
eratin ense Im act
Depreciation Expense 000 858 McDougal , Exh. 11 pg. 6.
Income Tax 048,554 Rate Base * (11.862%-519%)
Total Operating Expense 049,412 Line 5 + Line 6
Operating Income 671,950 Rate Base * 8.519%
Revenue Requirement 721 362 Line 7 + Line 8
Case No. PAC-07-
Exhibit 220 (MPG-
Page 2 of 2
ROCKY MOUNTAIN POWER
Rocky Mountain Power Proposed
Cost of Capital
Weighted
Return Pretax
Line Description Percent Cost Rate Component Return
(1)(2)(3)(4)
Total Debt 49.100%260%074%074%
Preferred Stock 500%410%027%044%
Common Equity 50.400%10.750%5.418%745%
Rate of Return 519%11.862%
Source:
Steven McDougal, Exhibit 11 , pg 2.
Tax Gross-up Factor = 1.614