20150601Miller Direct.pdf

DAVID J. MEYER VICE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY & GOVERNMENTAL AFFAIRS AVISTA CORPORATION P.O. BOX 3727 1411 EAST MISSION AVENUE SPOKANE, WASHINGTON 99220-3727
TELEPHONE: [phone] FACSIMILE: [phone] [e-mail]

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION ) CASE NO. AVU-G-15-01
OF AVISTA CORPORATION FOR THE ) AUTHORITY TO INCREASE ITS RATES ) AND CHARGES FOR ELECTRIC AND )
NATURAL GAS SERVICE TO ELECTRIC ) DIRECT TESTIMONY AND NATURAL GAS CUSTOMERS IN THE ) OF
STATE OF IDAHO ) JOSEPH D. MILLER )

FOR AVISTA CORPORATION
(NATURAL GAS)

I. INTRODUCTION 1
Q. Please state your name, business address and 2
present position with Avista Corporation. 3
A. My name is Joseph D. Miller. My business 4
address is 1411 East Mission Avenue, Spokane, Washington. 5
I am employed as a Senior Regulatory Analyst in the State 6
and Federal Regulation Department. 7
Q. Would you briefly describe your 8
responsibilities? 9
A. Yes. I am responsible for preparing and 10
maintaining the regulatory natural gas cost of service 11
models for the Company. I also provide support in the 12
preparation of revenue analysis, rate spread and rate 13
design, and miscellaneous other duties as required. 14
Q. Please describe your educational background 15
and professional experience. 16
A. I am a 1999 graduate of Portland State 17
University with a Bachelors degree in Business 18
Administration, majoring in Accounting. In 2005 I 19
graduated from Gonzaga University with a Masters degree in 20
Business Administration. I joined the Company in March 21
2008 after spending eight years in both the public and 22
private accounting sector. I started with Avista as a 23
Natural Gas Accounting Analyst in the Company’s Resource 24
Miller, Di Page 1 Avista Corporation
Accounting Department. In January 2009, I joined the 1
State and Federal Regulation Department as a Regulatory 2
Analyst. My primary responsibility was coordinating 3
discovery for the Company’s general rate case filings. In 4
my current role as a Senior Regulatory Analyst, I am 5
responsible for the Company’s natural gas cost of service 6
studies and revenue adjustments in all jurisdictions. 7
Q. What is the scope of your testimony in this 8
proceeding? 9
A. My testimony and exhibits will cover the 10
Company’s natural gas revenue normalization adjustments 11
and cost of service study performed for this proceeding. 12
A table of contents for my testimony is as follows: 13
Description Page 14
I. Introduction 1 15
II. Natural Gas Revenue Normalization 3 16
III. Natural Gas Cost of Service 7 17
IV. Cost of Service Results 12 18
19
Q. Are you sponsoring any Exhibits in this case? 20
A. Yes. I am sponsoring Exhibit 14, Schedule 1 21
which includes a narrative of the natural gas cost of 22
service study process, and Schedule 2, the natural gas 23
cost of service study summary results. 24
Miller, Di Page 2 Avista Corporation
Q. Were these Exhibits prepared by you or under 1
your direction? 2
A. Yes they were. 3
4
II. NATURAL GAS REVENUE NORMALIZATION 5
Q. Would you please describe the natural gas 6
revenue adjustment included in Company witness Ms. 7
Andrews’ pro forma results of operations? 8
A. Yes. Similar to the electric revenue 9
normalization adjustment, sponsored by Company witness Ms. 10
Knox, the natural gas revenue normalization adjustment 11
represents the difference between the Company’s actual 12
recorded retail revenues during the twelve months ended 13
December 2014 test period, and retail revenues on a 14
normalized (pro forma) basis. The adjustment includes the 15
re-pricing of pro forma sales and transportation volumes 16
at present rates using pro forma sales volumes that have 17
been adjusted for unbilled sales, abnormal weather, and 18
any material customer load or schedule changes. The rates 19
used exclude: 1) Purchase Gas Cost Adjustment Schedule 20
150, which reflects the costs related to purchasing and 21
transporting natural gas approved in the Company’s last 22
PGA filing, 2) Temporary Gas Rate Adjustment Schedule 155, 23
which reflects the approved amortization rate for prior 24
Miller, Di Page 3 Avista Corporation
deferred natural gas costs approved in the Company’s last 1
PGA filing, and 3) Rebate of 2013 Natural Gas Earnings 2
Test and DSM Deferrals Schedule 197.1 3
Q. Does the Revenue Normalization Adjustment 4
contain a component reflecting normalized natural gas 5
costs? 6
A. No, natural gas commodity costs previously shown 7
as an equal and offsetting amount in both revenue and 8
expenses, have been removed from the Company’s filing. 9
Q. Have you determined the impact of each of the 10
components of this adjustment? 11
A. Yes. The net operating income impact for each 12
of the components is as follows: 13
1. Re-pricing of base distribution revenue 14
decreased net operating income by $270,000. 15
2. Re-pricing base distribution unbilled revenue 16
increased net operating income by $307,000, 17
3. The weather adjustment at present base rates 18
increased net operating come by $664,000. 19
4. The elimination of the 2014 earnings sharing 20
(customer share), increased net operating 21
income by $137,000 22
1 Documentation related to this adjustment is detailed in my workpapers
accompanying this case.
Miller, Di Page 4 Avista Corporation

The total net amount of the natural gas revenue 1
normalization adjustment is an increase to net operating 2
income of $838,000, as shown in adjustment column 2.07, on 3
page 7 of Ms. Andrews Exhibit No. 12, Schedule 2. 4
Q. Would you please briefly discuss natural gas 5
weather normalization? 6
A. Yes. The natural gas weather normalization 7
adjustment is developed from a regression analysis of ten 8
years of billed usage per customer and billing period 9
heating degree-day data. The resulting seasonal weather 10
sensitivity factors (use-per-customer-per-heating-degree 11
day) are applied to monthly test period customers and the 12
difference between normal heating degree-days and monthly 13
test period observed heating degree-days. This 14
calculation produces the change in therm usage required to 15
adjust existing loads to the amount expected if weather 16
had been normal. 17
Q. In the discussion of electric weather 18
normalization sponsored by Ms. Knox, she indicated that 19
the adjustment utilized sensitivity factors from the ten 20
year period January 2004 through December 2013. Is this 21
true for natural gas as well? 22
A. Yes, the natural gas weather adjustment utilized 23
weather sensitivity factors for the same 10-year period. 24
Miller, Di Page 5 Avista Corporation
Q. What data did you use to determine “normal” 1
heating degree days? 2
A. Normal heating degree-days are based on a 3
rolling 30-year average of heating degree-days reported 4
for each month by the National Weather Service for the 5
Spokane Airport weather station. Each year the normal 6
values are adjusted to capture the most recent year with 7
the oldest year dropping off, thereby reflecting the most 8
recent information available at the end of each calendar 9
year. The calculation includes the 30-year period from 10
1985 through 2014. 11
Q. Is this proposed weather adjustment methodology 12
consistent with the methodology utilized in the Company’s 13
last general rate case in Idaho? 14
A. Yes. The process for determining the weather 15
sensitivity factors and the monthly adjustment calculation 16
is consistent with the methodology presented in Case No. 17
AVU-G-12-07. 18
Q. What was the impact of natural gas weather 19
normalization on the twelve months ended December 2014 20
test year? 21
A. Weather was warmer than normal during the months 22
of May, June, October, and December, which was partially 23
offset by a cooler than normal February. The adjustment 24
Miller, Di Page 6 Avista Corporation
to normal required the addition of 340 heating degree-days 1
from October through June.2 The adjustment to sales 2
volumes was an addition of 2,662,260 therms which is 3
approximately 2.3% of total billed usage. 4
5
III. NATURAL GAS COST OF SERVICE 6
Q. Please describe the natural gas cost of service 7
study and its purpose. 8
A. A natural gas cost of service study is an 9
engineering-economic study which separates the revenue, 10
expenses, and rate base associated with providing natural 11
gas service to designated groups of customers. The groups 12
are made up of customers with similar usage 13
characteristics and facility requirements. Costs are 14
assigned in relation to each group’s test year load and 15
facilities requirements, resulting in an evaluation of the 16
cost of the service provided to each group. The rate of 17
return by customer group indicates whether the revenue 18
provided by the customers in each group recovers the cost 19
to serve those customers. The study results are used as a 20
guide in determining the appropriate rate spread among the 21
groups of customers. Exhibit No. 14, Schedule 1 explains 22
2 Heating degree days that occur during July through September do not impact the natural gas weather normalization adjustment as the
seasonal sensitivity factor is zero for summer months.
Miller, Di Page 7 Avista Corporation

the basic concepts involved in performing a natural gas 1
cost of service study. It also details the specific 2
methodology and assumptions utilized in the Company’s Base 3
Case cost of service study. 4
Q. What is the basis for the natural gas cost of 5
service study provided in this case? 6
A. The cost of service study provided by the 7
Company as Exhibit 14, Schedule 2 is based on the twelve 8
months ended December 2014 test year pro forma results of 9
operations presented by Ms. Andrews in Exhibit 12, 10
Schedule 2. 11
Q. Would you please explain the natural gas cost of 12
service study presented in Schedule 2? 13
A. Yes. Exhibit 14, Schedule 2 is composed of a 14
series of summaries of the cost of service study results. 15
Page 1 shows the results of the study by FERC account 16
category. The rate of return and the ratio of each 17
schedule’s return to the overall return are shown on lines 18
38 and 39. This summary is provided to Company witness 19
Mr. Ehrbar for his consideration regarding rate spread and 20
rate design. The results will be presented later in my 21
testimony. Additional summaries show the costs organized 22
by functional category (page 2) and classification (page 23
3), including margin and unit cost analysis at current and 24
Miller, Di Page 8 Avista Corporation
proposed rates. Finally, page 4 is a summary identifying 1
specific customer-related costs embedded in the study. 2
The Excel model used to calculate the natural gas 3
cost of service and supporting schedules has been included 4
in its entirety both electronically and hard copy in the 5
natural gas workpapers accompanying this case. 6
Q. Does the Natural Gas Base Case cost of service 7
study utilize the methodology from the Company’s last 8
natural gas case in Idaho? 9
A. Yes, with the exception of a change related to 10
the allocation of common costs detailed below, the Base 11
Case cost of service study was prepared using the 12
methodology accepted by the Idaho Commission in Case No. 13
AVU-G-04-01, and presented in AVU-G-08-01, AVU-G-09-01, 14
AVU-G-10-01, AVU-G-11-01 and AVU-G-12-07. 15
Q. What are the key elements that define the cost 16
of service methodology? 17
A. Underground storage costs are allocated by 18
normalized winter throughput. Natural gas main investment 19
has been segregated into large and small mains. Large 20
usage customers that take service from large mains do not 21
receive an allocation of small mains. System facilities 22
that serve all customers are classified by the peak and 23
average ratio that reflects the system load factor, then 24
Miller, Di Page 9 Avista Corporation
allocated by coincident peak demand and throughput, 1
respectively. Meter installation and services investment 2
is allocated by number of customers weighted by the 3
relative current cost of those items. General plant is 4
allocated based on the Company’s blended 4-part factor 5
allocator (4-factor). Administrative & general expenses 6
are segregated into labor-related, plant-related, revenue-7
related, and “other”. The costs are then allocated by 8
factors associated with labor, plant in service, or 9
revenue, respectively. The “other” A&G amounts are 10
allocated based on the Company’s 4-factor. A detailed 11
description of the methodology is included in Exhibit 14, 12
Schedule 1. 13
14
General Plant Costs and Other A&G Expenses (Common Costs) 15
Q. What change is the Company proposing related to 16
the allocation of general plant costs and other A&G 17
expenses (common costs)? 18
A. The Company is proposing to allocate both 19
general plant and other A&G expenses, which are 20
functionalized as common costs, based on the Company’s 21
blended 4-part factor allocator (“4-factor”). This 22
allocation factor is used on all common plant and other 23
A&G expenses and is the cost of service equivalent of the 24
Miller, Di Page 10 Avista Corporation
4-factor allocator used in the Company’s results of 1
operations reporting. The 4-factor has historically been 2
utilized by the Company to allocate common operating costs 3
and plant between states (Washington, Idaho, and Oregon) 4
and among services (electric and natural gas) for purposes 5
of determining results of operations. 6
Q. How was the allocation of general plant costs 7
and other A&G expenses (common costs) done in prior rate 8
cases? 9
A. In prior cases, the “other” A&G amounts received 10
a combined allocation that was one-half based on O&M 11
expenses and one-half based on throughput. 12
The Company has prepared a cost of service study 13
based on the methodology utilized in prior cases for 14
comparison purposes. The Excel model used to calculate 15
the cost of service under the prior method has been 16
included in its entirety electronically. 17
Q. Please describe the components of the 4-factor? 18
A. The 4-factor is comprised of the following four 19
equally weighted components: 20
• Direct O&M excluding resource costs and labor 21
• Direct O&M labor 22
• Number of customers 23
• Net direct plant 24
Miller, Di Page 11 Avista Corporation
Q. Please describe the benefits of the 4-factor 1
allocator? 2
A. There are two primary benefits of using the 4-3
factor to allocate general plant and other A&G expenses. 4
First, it provides consistency and balance between the way 5
common costs are allocated for purposes of results of 6
operations and the cost of service study used in general 7
rate cases. Second, it provides consistency with how 8
common costs are allocated in the Company’s electric cost 9
of service study sponsored by Company witness Ms. Knox. 10
11
IV. RESULTS 12
Q. What are the results of the Company’s natural 13
gas cost of service study? 14
A. The Base Case cost of service study presented in 15
this filing we believe provides a fair representation of 16
the costs to serve each customer group. The study 17
indicates that the General Service Schedule 101 (serving 18
most residential customers) is providing less than the 19
overall rate of return (unity), and Large General, 20
Interruptible, and Transportation service schedules 21
(111/112, 131/132 and 146) are providing more than unity. 22
The following Table No. 1 shows the rate of return and the 23
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relative return ratio at present rates for each rate 1
schedule: 2
Table No.1: 3
Base Case Results 4
5
6
7
8
The summary results of this study were provided to 9
Mr. Ehrbar for consideration in the development of the 10
proposed rates. 11
Q. Does this conclude your pre-filed direct 12
testimony? 13
A. Yes. 14
Miller, Di Page 13 Avista Corporation
Customer Class Rate of Return Return Ratio
General Service Schedule 101 5.42%0.89
Large General Service Schedule 111/112 8.99%1.48
Interruptible Service Schedule 131/132 6.70%1.10
Transportation Schedule 146 7.72%1.27
Total Idaho Natural Gas System 6.07%1.00