20160812Blattner Direct.pdf

Ronald L. Williams, ISB No. 3034
Williams Bradbury, P.C.
1015 W. Hays St.
Boise, lD 83702
Telephone: [phone]
Email: [e-mail]
Attorneys for Intermountain Gas Company
BEFORE THE IDAHO PUBLIC UTILITES COMMISSION
IN THE MATTER OF THE APPLICATION OF )
INTERMOUNTAIN GAS COMPANY FOR )
THE AUTHORITY TO CHANGE ITS RATES ) Case No. INT-G-16-02
AND CHARGES FOR NATURAL GAS )
SERVICE TO NATURAL GAS CUSTOMERS )
IN THE STA TE OF IDAHO ) ________________ )
DIRECT TESTIMONY OF LORI A. BLATTNER
FOR INTERMOUNTAIN GAS COMPANY
August 12, 2016
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I. INTRODUCTION
Please state your name, title and business address.
My name is Lori A. Blattner. I am a Regulatory Analyst with Intermountain Gas
Company ("Intermountain" or "Company"). My business address is 555 South
Cole Road, Boise, ID 83707.
Ms. Blattner, would you please summarize your educational and professional
experience.
I graduated from University ofldaho in 1993 with a Bachelors degree in
Agricultural Economics. I joined Intermountain Gas in 1997. During my time in
the Regulatory Department, I have attended several ratemaking classes, including
a Threshold Associates cost allocation training, Navigant Consulting cost of
service workshop, and an SGA Ratemaking seminar. Throughout my career at
Intermountain, I have been responsible for cost of service and rate making. I have
also been involved at a high level in integrated resource planning, developing the
annual purchased gas cost adjustment, weather normalization and forecasting.
Have you previously testified before this Commission?
No.
What is the purpose of your testimony?
My testimony covers three areas. First, I will discuss and support the weather
normalization process used to develop the test period billing determinants.
Second, I will discuss the allocated class cost of service study prepared for this
case. Third I will discuss and explain the rate design changes that are being
proposed in this proceeding.
Blattner, Di 1
Intermountain Gas Company
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Are you sponsoring any exhibits with your testimony?
Yes, I am sponsoring the following exhibits:
Ex. 18 Weather Normalization Opinion
Ex. 19 Minimum System Study Results
Ex. 20 Class Cost of Service Summary Results
Ex.21 Class Cost of Service Results -Account Detail
Ex.22 Class Cost of Service Account Inputs
Ex. 23 Class Cost of Service Allocation Factors
Ex. 24 Rate Design Calculations
II. WEATHER NORMALIZATION
Is Intermountain proposing an adjustment to reflect normal weather?
Yes.
Why is an adjustment to gas utility revenues and volumes to normalize
weather appropriate?
Temperature is the primary driver of variances in natural gas usage, and the
Company's rates include charges that are based on consumption. Since these
charges are dependent on consumption, variations in weather will affect the
amount ofrevenue received by the Company. For example, a year with lower
consumption due to warmer than normal temperatures will result in lower
revenues for the Company. Conversely higher consumption due to colder than
normal temperatures will result in higher revenues for the Company. The
Company's proposed DSM programs will also result in incrementally lower usage
per customer.
Blattner, Di 2
Intermountain Gas Company
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Weather Normalization is the term used to describe the process by which
usage levels are adjusted to the level they would have been under normal weather
conditions and from which normalized (pro form.a) revenues can be determined.
Would you please describe the weather normalization process?
Yes. To determine the degree to which actual gas sales were higher or lower than
normal as a result of actual weather, it is necessary to first quantify the
relationship between weather and sales. This quantification is achieved through
the use of multiple regression analysis. The company developed regression
equations based on eleven years of data: one that describes RS-1 sales; another
that describes RS-2 sales; and one that describes small commercial sales (GS-1).
What are HDD's?
HDD's, or heating degree days, are units used to relate a day's temperature to the
energy demands of temperature sensitive load, primarily for space heating.
HDD's are calculated by subtracting a day's average temperature from a reference
temperature, in this case 65° Fahrenheit.
Please continue with your explanation of the weather normalization process.
Once the regression equations have been specified and estimated, it is the
coefficients of the weather variables that are of primary importance to the weather
adjustment process. These coefficients measure the response of sales to changes
in the weather. For example, the coefficient ofHDD65 in the residential equation
represents the change in the number of therms per customer that a change in one
HDD65 would cause. By multiplying this coefficient by the difference between
the normal number of heating degree days for a particular month and the number
Blattner, Di 3
Intermountain Gas Company
1 that actually occurred, the difference between actual and normal therms per
2 customer is determined.
3 Q. What data did you use to determine the normal heating degree days?
4 A. Normal heating degree days are based on a rolling 30-year average of heating
5 degree days reported each month by the National Weather Service. The IGC
6 service area contains regions with different weather patterns. To incorporate
7 these different weather patterns normal weather was constructed using customer
8 class weighted weather data from the Boise, Caldwell, Twin Falls, Sun Valley,
9 Pocatello, Rexburg, and Idaho Falls weather stations. Each year, normal is
10 recalculated to include the most recent year and drop off the oldest year, thereby
11 reflecting the most recent information available. The normal weather used in this
12 weather normalization process includes the 30 year period 1986 through 2015.
13 Q. Is your proposed weather adjustment process consistent with sound
14 statistical practices and the methodology approved in the Company's
15 Weather Normalization Case?
16 A. Yes, the methodology has been reviewed by two experts in statistics and
17 forecasting, Professors Fry and Shannon from Boise State University. In their
18 opinion, attached as Exhibit 18, ''the methods used by Intermountain Gas
19 Company are an appropriate and adequate basis for weather normalization". They
20 go on to state that Intermountain's approach follows the methodology approved
21 by the Idaho Public Utilities Commission in Case U-1034-134.
22 Q. What are the results of the weather normalization process?
Blattner, Di 4
Intermountain Gas Company
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The test year in this proceeding is the twelve months ending December 31, 2016,
and consists of six months of actual data, January through June of 2016, and six
months of forecasted data. The six months of actual data has been weather
normalized as discussed above. The results of the weather normalization are
summarized in Table B.1 below.
Table B.1: Weather Normalization Results
Rate Actual Normal Actual Normal Difference
Class HDD HDD Therms Therms Therms
R-1 4,003.2 3,985.6 22,722,002 22,660,127 (61,875)
R-2 3,891.0 3,931.4 118,984,790 119,838,399 853,609
GS-1 4,076.1 4,034.9 71,988,101 71,008,852 (979,249)
Total (187,515)
The actual and normal degree days vary for each of the rate classes due to the
weather station weighting process described above. Overall, the weather
normalization adjustment results in a reduction in usage of 187,515 therms. There
is a corresponding revenue adjustment as explained by Company witness
Darrington.
III. ALLOCATED CLASS COST OF SERVICE STUDY
What is an Allocated Class Cost of Service Study ("ACOSS")?
An ACOSS is an analysis of costs that assigns to each customer or rate class its
proportionate share of the utility's total cost of service, i.e., the utility's total
revenue requirement. The results of these studies can be utilized to determine the
relative cost of service for each customer class and to help determine the
individual class revenue responsibility.
What is the purpose of an ACOSS?
Blattner, Di 5
Intermountain Gas Company
1 A. The purpose of an ACOSS is to determine what costs are incurred to serve the
2 various classes of customers of the utility. When these costs are all tabulated, the
3 rate of return that is provided by each class of service of the utility can be
4 determined. The ACOSS is a tool used to assist in determining revenue
5 responsibility by rate class and rate design. The results of the A COSS will
6 provide the analyst with the data necessary to design cost-based rates.
7 Q. What is the guiding principal that should be followed when preparing an
8 ACOSS?
9 A. Cost causation is the fundamental principle applicable to all cost studies for
10 purposes of allocating costs to customer groups. Cost causation addresses the
11 question; which customer or group of customers causes the utility to incur
12 particular types of costs? In order to answer this question, it is necessary to
13 establish a relationship between a utility's customers and the particular costs
14 incurred by the utility in serving those customers.
15 Q. What are the steps to performing ACOSS?
16 A. In order to establish the cost responsibility of each customer class, initially a three
17 step analysis of the utility's total operating costs must be undertaken. The three
18 steps which are the predicate for an ACOSS are: (1) cost functionalization; (2)
19 cost classification; and (3) cost allocation of all the costs of the utility's system.
20 Q. Please describe cost functionalization.
21 A. The first step, cost functionalization, identifies and separates plant and expenses
22 into specific categories based on the various characteristics of utility operation.
23 Intermountain's functional cost categories associated with gas service include:
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Intermountain Gas Company
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Storage, Transmission, and Distribution. In addition, the ACOSS includes a
function for the cost of gas in order to separately track gas costs from base rate
costs. Gas costs are addressed in the Company's annual Purchased Gas Cost
Adjustment filing (PGA) and are not part of this proceeding.
Please describe cost classification.
Classification of costs, the second step, further separates the functionalized plant
and expenses into the three cost defining characteristics of: (1) customer related;
(2) demand or capacity related; and (3) commodity related.
Customer costs are incurred to extend service to and attach a customer to
the distribution system, meter any gas usage and maintain the customer's account.
Customer costs are largely a function of the number and density of customers
served, and continue to be incurred whether or not the customer uses any gas.
They may include capital costs associated with minimum size distribution mains,
services, meters, regulators and customer billing and accounting expenses.
Demand costs are capacity related costs associated with a plant that is
designed, installed and operated to meet maximum hourly or daily gas flow
requirements, such as transmission and distribution mains or more localized
distribution facilities which are designed to satisfy individual customer maximum
demands.
Commodity costs are those costs that vary with the throughput sold to, or
transported for, customers.
Please describe cost allocation.
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Intermountain Gas Company
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The final step is the allocation of each functionalized and classified cost element
to the individual customer or rate class. Costs are directly assigned or are
allocated on customer, demand, commodity and internal allocation factors.
Direct assigned relates to the specific identification and isolation of plant
and/or expenses that are incurred to serve a specific customer or group of
customers. Direct assignments are based on analyses of detailed data that directly
links costs to a rate class, or to a subset of customers in a rate class. Direct
assignment of costs is the preferred allocation approach because no allocation is
required to determine the costs of serving customers in each class. However, it is
not realistic to assume that a large portion of the Company's plant and expenses
can be directly assigned as the majority of the costs are joint use facilities.
Customer, demand and commodity external allocation factors such as the
number of customers, peak day usage, and annual usage are developed from the
Company's records. Internal allocation factors are developed within the ACOSS
from previously allocated costs, such as plant or labor costs.
How have the demand-related costs been allocated in the ACOSS?
Demand costs have been primarily allocated using a coincident peak demand
methodology. As described by Company Witness Gilchrist, Intermountain's
system has been designed and built to meet the peak demands of the customers,
therefore allocating the demand costs on the basis of peak day utilization is in
keeping with the cost causation principle. The coincident peak day used to
develop the allocation factor is the Company's most recent peak day which
occurred January 1, 2016.
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Intermountain Gas Company
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How was distribution mains plant account, Account 376, classified and
allocated in the ACOSS?
A portion of the distribution mains account was classified as customer and the
remaining costs were classified as demand. Identifying a portion of mains
investment as customer related is an accepted principle throughout the gas
industry. The assumption is that distribution mains (FERC Account No. 376) are
installed to meet both system peak load requirements and to connect customers to
the utility's gas system. Therefore, to ensure that the rate classes that cause the
investment in this plant are charged with its cost, distribution mains should be
allocated to the rate classes in proportion to their peak period load requirements
and numbers of customers.
What are the factors that affect the level of distribution mains facilities
installed by a utility?
There are two cost factors that influence the level of distribution mains facilities
installed by a utility in expanding its gas distribution system. First, the size of the
distribution main (i.e., the diameter of the main) is directly influenced by the sum
of the peak period gas demands placed on the utility's gas system by its
customers. Secondly, the total installed footage of distribution mains is
influenced by the need to expand the distribution system grid to connect new
customers to the system. Therefore, to recognize that these two cost factors
influence the level of investment in distribution mains, it is appropriate to allocate
such investment based on both peak period demands and the number of customers
served by the utility.
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Intermountain Gas Company
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How is the customer component of distribution mains determined?
The two most commonly used methods for determining the customer cost
component of distribution mains facilities are: (1) the zero-intercept approach;
and (2) the most commonly installed, minimum-sized unit of plant investment
approach.
Under the zero-intercept approach, which is the method utilized in
Intermountain's ACOSS, a customer cost component is developed through
regression analyses to determine the unit cost associated with a zero inch diameter
distribution main. The method regresses unit costs associated with the various
sized distribution mains installed on the utility's gas system against the actual size
(diameter) of the various distribution mains installed. The zero-intercept method
seeks to identify that portion of plant representing the smallest size pipe required
merely to connect any customer to the utility's distribution system, regardless of
the customer's peak or annual gas consumption.
The most commonly installed, minimum-sized unit approach is intended
to reflect the engineering considerations associated with installing distribution
mains to serve gas customers. This method utilizes actual installed investment
units to determine the minimum distribution system rather than a statistical
analysis based upon investment characteristics of the entire distribution system.
While the zero-intercept method, with reliable data, estimates the customer costs
associated with a zero-size pipe diameter, the minimum-size method may include
some capacity costs since any minimum size pipe considered will, in fact, be
capable of actually delivering some gas.
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Intermountain Gas Company
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Please discuss how the zero-intercept study was performed and its results.
The results of the zero-intercept study are shown in Exhibit 19. The Company's
plant accounting records provided the installed cost, footage, type (plastic, steel),
size ( diameter) and vintage ( date of installation) for the distribution mains. The
vintage installed costs were translated to a common current cost using the Handy­
Whitman Index ("HWI"). The HWI calculates cost trends for different types of
utility construction with separate indices for gas, electric and water industries.
Using the HWI adjusted costs, an installed cost per foot was calculated for each
pipe size and type and a regression analysis of the unit costs and pipe size was
performed for both steel and plastic pipe types. The results of the regression
analysis can be expressed formulaically as:
y=mx+b
Where: y = average cost per installed foot oflntermountain's
distribution mains
m = cost per installed foot per inch of pipe diameter
x = diameter of distribution mains
b = cost per installed foot
The regression analysis shows that regardless of the diameter of the main,
the average cost of a distribution main in Intermountain's system will be at
least equal to $8.55 per installed foot. This per foot cost component is
related to the process of extending the distribution mains to connect
customers, which is a function of the length of the main and not the size of
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the main, and represents the customer cost component of distribution
mains.
How were the results of the zero-intercept study used in the ACOSS?
As shown in Exhibit 19, the customer cost unit rate for both steel and plastic type
pipe was applied to the total distribution mains footage for each pipe type to
determine the total customer costs. This total customer cost was divided by the
total HWI adjusted cost of distribution mains to provide the customer cost
percentage of 4 7 .16%. This percentage was used in the A COSS to apportion the
historical installed costs of distribution mains to the customer component and
allocated to the rate classes on a customer factor. The remaining distribution
mains costs were classified as demand and allocated on the peak day factor.
How were the other distribution plant accounts classified in the ACOSS?
Plant accounts 380 through 385 are classified as customer related. These
accounts include costs related to services, meters, meter installations, and
regulators. Plant accounts 375, Structures and Improvements, and 378,
Measuring and Regulation, are classified as demand. Account 374, Land and
Land Rights, was allocated on an internal factor based on structures, mains, and
services and therefore has costs classified as both demand and customer.
How were the distribution plant accounts allocated to the rate classes?
As noted above the demand component of distribution mains is allocated on the
peak day factor. The other two demand related distribution plant accounts were
allocated using a peak and average methodology. Accounts 375, Distribution
Structures and Improvements, and 378, Distribution Measuring and Regulation
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Intermountain Gas Company
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Equipment, contain costs related to both peak and annual usage both of which are
included in the calculation of the peak and average allocation factor.
The services, meters, meter installation and house regulator accounts were
allocated on weighted customer basis. The weighting factor was based on a study
of the costs of meters for each rate class. Account 385, Industrial Regulation, was
allocated on a weighted customer basis excluding the residential classes.
How were the storage plant accounts treated in the ACOSS?
The storage plant accounts contain the costs related to the Company's LNG
facilities. As discussed by Company Witness Gilchrist these facilities are needed
to provide deliverability and reliability during peak periods. Therefore, the
storage plant accounts are classified as demand and allocated on a peak day basis.
How were the transmission plant accounts treated in the ACOSS?
The transmission plant accounts contain the costs related to the Company's high
pressure transmission facilities. As discussed by Company Witness Gilchrist
these facilities were designed and sized to provide deliverability during peak
periods. Therefore, the transmission plant accounts are classified as demand and
allocated on a peak day basis.
How were the general and intangible plant accounts treated in the ACOSS?
The general and intangible plant accounts were allocated on an internal factor
based on the allocations of storage, transmission and distribution plant.
Please describe the method used to allocate the accumulated depreciation
reserve and depreciation expenses.
Blattner, Di 13
Intermountain Gas Company
1 A. The accumulated reserve and depreciation expense were allocated on internal
2 factors based on the allocation of the associated plant.
3 Q. Please describe the method used to allocate the storage, transmission and
4 distribution Operations and Maintenance ("O&M") expense?
5 A. In general, these expenses were allocated on the basis of the cost allocation
6 methods used for the Company's corresponding plant accounts. A utility's O&M
7 expenses generally are thought to support the utility's corresponding plant in
8 service accounts. As a result, the allocation basis used to allocate a particular
9 plant account will be the same basis as used to allocate the corresponding expense
10 account.
11 Q. How were the customer accounting expenses, accounts 902 -904, treated in
12 theACOSS?
13 A. Meter reading expense, account 902, is allocated on the basis of the number of
14 customers. Customer records and collection expense, account 903, is allocated on
15 a weighted customer basis based on meter costs. Account 904, uncollectible
16 expense, is allocated to the residential and general service classes based on an
17 analysis of account write-offs.
18 Q. How were customer service and sales expenses treated in the ACOSS?
19 A. Customer service expenses, accounts 907 and-908, are allocated on a customer
20 basis. Sales expenses, accounts 910 -913, are allocated to the residential and
21 general service classes on a peak day throughput basis.
22 Q. Please describe the treatment of Administrative and General ("A&G") costs
23 in the ACOSS.
Blattner, Di 14
Intermountain Gas Company
1 A. Accounts 923 and 924, outside services and property insurance, are plant related
2 and allocated on an internal factor consisting of allocated storage, transmission
3 and distribution plant. Accounts 925 and 926, injuries and damage and employee
4 pensions and benefits, are labor related costs and are allocated on an internal labor
5 factor. Rents and general plant maintenance expenses, accounts 931 and 932, are
6 allocated on total plant basis and the remaining A&G expenses are allocated on an
7 internal factor comprised of O&M expenses excluding A&G.
8 Q. How were taxes other than income taxes treated in the ACOSS?
9 A. Taxes other than income were allocated on a plant or labor basis depending on the
10 nature of the tax. For example, payroll taxes were allocated on a labor basis while
11 property taxes were allocated on the basis of plant.
12 Q. How were income taxes allocated to each customer class?
13 A. Income taxes are calculated for each rate class based on the pre-tax net income for
14 the class.
15 Q. What rate classes were included in the ACOSS?
16 A. In this proceeding Intermountain is proposing to restructure some of its existing
17 rate classes and the revised rate classes are those used in the ACOSS. Currently
18 Intermountain has two residential rate classes with the primary difference between
19 the classes being the presence of gas water heating. Intermountain is proposing to
20 combine these two rate classes into a single residential rate class. Intermountain
21 is also proposing to combine its two industrial customer transportation rate
22 classes, T4 and TS, into a single rate class.
23 Q. Why are these classes being restructured?
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As more fully explained below, Rate Schedules RS-1 and RS-2 are being
combined because there is no justification for having different rate classifications
for customers based on whether they use gas for space heating or water heating in
addition to space heating.
With the addition of a demand charge to the T-4 customer class, the T-4
and T-5 classes are essentially the same type of service. Therefore, they are being
combined into a single class of service.
Please describe the results of the A COSS?
The results of the ACOSS are shown on Exhibit 20. Page 1 of this exhibit
provides a summary of the rate base, revenues, expenses and returns at current
rates by class. As shown on line 17, the residential class is slightly below the
system average return while the Large Volume Sales (L V-1) and Firm Transport
Service class (T-4) show returns well above the system average. The General
Service class (GS) shows a return significantly below the system average. The
Interruptible Transport Service (T-3) exhibits a return well above the system
average which is to be expected as this class is not allocated any peak demand
related costs.
Does the ACOSS show the class revenue requirements at equal rates of
return?
Yes. Exhibit 20, Page 2, provides the results by class at equal rates of return.
Line 10 of this exhibit shows the level of the revenue deficiency or surplus
necessary to move the class to the system average return. Line 12 of this exhibit
shows the revenue increase or decrease proposed for each rate class and line 20
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shows the propose return for each class at the proposed rates. This information is
summarized in Table 2 below:
TABLE B.2 -Summary of A COSS Results
Rate Class Return@
Current Rates
Proposed
Increase
Total
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$7,755305
$4,466,759
$10,165 700'
Please explain the remaining pages of Exhibit 20 and Exhibits 21, 22 and 23.
Exhibit 20, page 3 shows the rate base by function by class. Page 4 provides a
functional cost of service, by class at equal rates of return and page 5 provides a
functional and total unit cost analysis by class. The unit cost analysis provides
support for the proposed customer and demand charges.
Exhibit 21 shows how each account is classified and allocated to the
classes. Exhibit 22 shows how the amount of each account and how the account
is functionalized, classified and allocated. Exhibit 23 provides all the external and
internal allocation factors used in the study.
IV. RATE DESIGN
A. Introduction
Please explain the organization of your testimony concerning the Company's
proposed changes to rate classes, rate structures, and rate design.
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Intermountain Gas Company
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In subsections B, C, D, and E of this Section IV of my testimony, I will describe
and explain the Company's proposals related to rate schedules and rate structures
as follows. Specifically, I will explain the Company's proposals to:
1. Eliminate the current rate schedules for residential heating service (Rate
Schedule RS-I) and residential heating and hot water service (Rate Schedule
RS-2) and create a single rate schedule for service to all residential customers
(Rate Schedule RS);
2. Modify the Rate Schedule GS-I rate structure so that the rates charged to the
customers in this class more closely reflect the Company's costs to serve these
customers, helping to reduce subsidization within the class;
3. Eliminate the seasonal rate structures by which residential and general service
customers are charged higher rates in the summer than in the winter periods;
4. Combine the T-4 and T-5 rate schedules to create a single rate structure for the
Company's Industrial firm transportation service customers (Rate Schedule
T-4);
5. Modify the Rate Schedule L V -1 rate structure, by adding a demand charge, so
that the customers in this class are charged for the distribution system capacity
that is made available for their service;
6. Apply the current Rate Schedule T-5 rate structure, which includes a demand
charge, to the proposed Rate Schedule T-4 rate structure,
In subsection F of this Section IV of my testimony, I will present and support the
calculations and analysis that I performed to develop the Company's proposed
rates.
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Intermountain Gas Company
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In developing the rate design proposals that you describe and support in the
following sections, were you guided by any principles and directives?
Yes, I took into account (1) the findings and recommendations of Company
Witness Terzic, in his testimony in this proceeding concerning customer charges
and demand charges and (2) the principles of rate design that were developed by
James C. Bonbright.
Please summarize Company Witness Terzic's findings and recommendations
concerning customer charges and demand charges.
Mr. Terzic explains that customer charges and demand charges are two types of
fixed fees that are appropriate elements of sound rate design, because these
charges do not vary based on the level of natural gas volumes flowing through the
distribution system. Said another way, the Company's fixed costs to construct,
operate and maintain the Company's distribution system should be largely
recovered through fixed charges.
What are the Bonbright rate design directives?
The industry has long accepted the principles of rate design first put forth by
James C. Bonbright, 1 which are:
• Rate attributes: simplicity, understandability, public acceptability, and
feasibility of application and interpretation;
• Effectiveness of yielding total revenue requirements;
• Revenue (and cash flow) stability from year to year;
James C. Bonbright. Principles ofpublic Utility Rates (1st ed. 1961).
Blattner, Di 19
Intermountain Gas Company
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• Stability of rates themselves, minimal unexpected changes that are seriously
adverse to existing customers;
• Fairness in apportioning cost of service among different consumers (rates
based on cost causation);
• Avoidance of "undue discrimination"; and
• Efficiency, promoting efficient use of energy by the customer ( e.g., such that
utility's infrastructure and resources are not strained).
B. Proposed Revisions to Current Residential Rate Classifications
Please explain the Company's proposal to revise the residential rate
classifications.
Currently, the Company's Rate Schedule RS-1 is applicable to residential
customers that use natural gas for space heating, and other purposes, but not for
water heating, and Rate Schedule RS-2 is applicable to residential customers that
use natural gas for both natural gas water heating and natural gas space heating, as
well as other purposes. As I described in the introduction, the Company is
proposing to eliminate the separate Rate Schedules RS-1 and RS-2 and to create a
new Rate Schedule RS.
Please describe the current Rate Schedules RS-1 and RS-2.
In 2015 the Company provided service to 66,7832 RS-1 customers and 236,0072
RS-2 Customers. Actual RS-1 2015 consumption was 30,711,979 therms and
RS-2 consumption was 169,532,903. RS-1 customers paid an average cost of
$0.90657 per therm for gas service, which was 16 percent greater than the average
Customer numbers that support the revenue reported in Intermountain's 2015 FERC Form 2 ..
Blattner, Di 20
Intermountain Gas Company
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cost of $0. 78177 per therm that RS-2 customers paid for gas service. Table B.3
below shows the average monthly usage by RS -1 and RS-2 customers, and
Table 4, below, shows the currently effective RS-1 and RS-2 rates.
Table B.3 Residential Average Monthly Usage3
Residential Usage per Customer: 2015
150
125
100
V)
E
ai 75
.c I-
50
25
0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
-RS-1 100 70 55 37 18 8 3 3 4 7 31 88
-RS-2 138 101 80 58 36 24 16 16 18 22 48 121
Table B.4 Residential Distribution Rates4
RS-1 I RS-2 I Difference I % Difference
Customer Charge per month
Summer $2.50 I $2.50 I $0.00 I 0.0%
Winter $6.50 I $6.50 I $0.00 I 0.0%
Margin Charge per Therm5
Summer $0.316171 $0.19539 I $0.15199 I 38.20%
Winter $0.20361 I $0.16116 I $0.01306 I 20.55%
Please explain why the Company is proposing to eliminate the separate Rate
Schedules RS-1 and RS-2 and to create a new Rate Schedule RS.
The Company is proposing to eliminate the separate Rate Schedules RS-1 and
RS-2 because Intermountain's cost drivers6 for gas service to residential
The analysis summarized in Table 2X is derived from 2015 billing system data.
Fiftieth Revised Sheet No. 0 I, Fiftieth Revised Sheet No. 02. Effective July I, 2016.
RS-1 Commodity Charges shown are net of Cost of Gas, $0.55589 per therm. RS-2 Commodity
Charges are net of Cost of Gas, $0.51585 per Therm.
Blattner, Di 21
Intermountain Gas Company
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customers that use gas for space heating are not meaningfully different from the
cost drivers for gas service to customers that use gas for water heating as well as
space heating.
Further, there is certainly no cost justification for charging commodity
rates to RS-2 customers that are lower than the RS-1 rates by 21 percent in the
winter and 38 percent in the summer. It is not appropriate that, on an annual
basis, average annual charges per therm to RS-2 customers are 16 percent less
($.0.12481 per therm) than average annual charges to RS-1 customers.
Are you aware of any gas distribution companies that have separate rate
schedules for residential customers that use gas for (1) space heating and (2)
hot water in addition to space heating?
No, I am not. I reviewed the tariffs of A vista Idaho and gas distribution
companies in surrounding states 7 and I determined that, other than Intermountain
Gas, no gas distribution company has separate rate schedules for residential
customers that use gas for space heating and for hot water in addition to space
heating.
C. Modifications to Rate Schedule GS-1
Please describe the current Rate Schedules GS-1.
According to the provisions of Rate Schedule GS-1, service is available at any
point on the Company's distribution system to customers whose requirements for
natural gas do not exceed 2,000 therms per day. In 2015 the Company provided
These cost drivers are, generally, the allocators that are used in the ACOSS to allocate the balances in
the Company's plant and expense accounts to each rate class.
I reviewed the tariffs of the following gas distribution companies: Avista Utilities (Idaho), MDU
(Montana), Avista Utilities (Oregon), Cascade Natural Gas Corporation (Oregon), Cascade Natural
Gas Corporation (Washington), Avista Utilities (Washington).
Blattner, Di 22
Intermountain Gas Company
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service to 31,7388 GS-1 customers. Actual GS-1 consumption in 2015 was
103,111,511 therms and GS-1 customers paid an average cost of $0.71955 per
therm for gas service. Table B.5, below, shows the currently effective GS-1 rates.
Table B.5 General Service Distribution Rates9
RS-1
Summer Winter
Customer Charge $2.50 $6.50 per month
Commodity Charge per Therm 10
Block 1 1st 200 Therms per bill $0.21690 $0.16605 per Therm
Block 2 Next 1,800 Therms per Bill $0.19517 $0.14485 per Therm
Block 3 Over 2,000 Therms per bill $0.17415 $0.12439 per Therm
The customers in Rate Schedule GS-1 are very diverse. Approximately 60
percent of GS-1 customers use less than 1,200 therms annually11, which is
comparable to the annual consumption of Residential RS-2 customers who use
gas for space and hot water heating. At the other extreme, the largest 50
customers, which used at least 93,000 therms annually in 2015, represent 0.15
percent of total 2015 GS-1 customers, and 7 .1 percent (6,834,601 therms) of total
2015 GS-1 annual consumption. This diversity of GS-1 annual consumption is
demonstrated in Table 6 below, which shows the cumulative distribution of GS-1
customers, by annual consumption. Table B.6 demonstrates that Rate Schedule
GS-1 includes a wide range of customers that are very different. At one extreme,
97.5 percent of the GS-1 customers consumed less than 20,000 therms in 2015; at
8 Customer numbers that support the revenue reported in lntermountain's 2015 FERC Form 2.
9 Fifty-Second Revised Sheet No. 03. Effective July 1, 2016.
10 GS-1 Commodity Charges shown are net of cost of gas of$0.51167 per therm.
11 Intermountain provided service to 31,738 GS-I customers in 2015; 19,484 GS-1 customers (61.4
percent) used 1,200 therms or less. Total therm consumption by these customers was 9,323,339
therms, or 9.0 percent of total actual billing system GS-1 consumption.
Blattner, Di 23
Intermountain Gas Company
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the other extreme, 0.2 percent of the GS-1 customers consumed at least 100,000
therms.
Table B.6 GS-1 Annual Consumption Cumulative Distribution
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Cumulative Distribution of GS-1 Customers: 201S Annual Therms
0 20,000 40,000 60,000
Annual Therms
80,000
100,000
99.9%
100,000
As another approach to demonstrate the diversity of GS-1 customers, Table B. 7
below shows the average monthly usage by all GS-1 customers, and the 50 largest
GS-1 customers.
Blattner, Di 24
Intermountain Gas Company
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Table B.7 General Service Average Monthly Usage
General Service Usage per Customer: 2015
18,000
16,000 Largest 50 Customers
14,000 Annual Use: 135,585
12,000
VI 10,000 E ,._
Cl/ .c 8,000 I-
6,000 All GS Customers
4,000 Annual Use: 3,052 Therms
2,000
0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
-GS-1 602 427 341 247 158 114 93 94 119 120 213 525
-Lgst50 15,302 11,855 11,355 11,068 9,670 7,572 7,096 7,130 14,143 12,702 12,116 15,577
Based on this analysis of the GS-1 customers, the Company has determined that
although the current GS-1 rate structure is a reasonable basis for charging most of
the GS-1 customers, it is appropriate and necessary to make modifications to
GS-1 rates and rate structures that would impact mostly the largest GS-1
customers, because the largest GS-1 customers are similar to many Industrial
L V -1 customers, and very different from most GS-1 customers.
Please explain the Company's proposed modifications to the Rate Schedule
GS-1 rate structure.
The Company is proposing to add a fourth rate block to the GS-1 rate structure
that would apply to a GS-1 customer's monthly consumption that exceeds 10,000
therms in a month. The company selected 10,000 for the fourth block to more
reasonably reflect the cost to serve these largest GS-1 customers, which will
therefore reduce the subsidization by the largest GS-1 customers of the smaller
Blattner, Di 25
Intermountain Gas Company
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GS-I customers. This fourth block will also allow for better alignment between
the rates charged to the largest GS-I customers and the rates charged to the
Company's LV-1 Large Volume Firm Sales Service customers.'2
Customers that utilize the fourth block are typically small industrial type
customers. Often, they are growing businesses that will eventually qualify for an
industrial class. The fourth block rate will allow them to grow their business at a
rate that is fair in comparison to similar type businesses that are larger in scale.
Please explain how adding the fourth block, for monthly consumption in
excess of 10,000 therms, will better align the rates charged to the largest
GS-1 customers with the rates charged to the Company's LV-1 Large
Volume Firm Sales Service customers.
The Company is proposing to modify the GS-I rate structure -with specific
attention to the largest customers in this rate class: (1) to better align the
Company's rates with the costs to serve these customers, and (2) to align the rates
charged to large GS-I customers with the rates charged to L V-1 customers. The
50 largest GS-I customers, with annual consumption between 98,000 and 541,000
therms, are similar to Rate L V-1 customers, which typically use between 200,000
therms and 500,000 annually. However, the 2015 average cost per therm to these
large GS-I customers, $0.7004 pertherm,13 was significantly greater than the
2015 average cost per therm to the Company's L V-1 customers, $0.4945 per
therm. By adding a fourth block and setting the rate for monthly consumption in
12 Service under the Company's Rate Schedule L V-1 is available to customers that use at least 200,000
therms annually.
13 (1) Actual 2015 billing system revenues from all customers with annual usage of at 100,000 therms
was $4,540,601 ; (2) Annual 2015 billing system usage from all customers with annual usage of at least
100,000 therms was 6,482,602; (3) $4,540,601 / 6,482,602 = $0.7004.
Blattner, Di 26
Intermountain Gas Company
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the fourth block at an appropriate level, the Company's proposed modification to
the GS-1 rate structure will address the significant difference between rates
charged to large GS-1 customers and rates charged to the Company's LV-1
customers.
D. Elimination of Seasonal Rates
Please describe and explain the Company's current Rate Schedules that
charge different rates for gas service in the summer and winter.
A list of the current rate schedules with rates that differ by season are listed in
Table B.8, below.
Table B.8 Intermountain Rate Schedules with Seasonal Rate Structures
Rate Schedule
RS-1 Residential Service
RS-2 Residential Service-Space and Water Heating
GS-1 General Service
IS-R Residential Interruptible Snowmelt Service
IS-C Small Commercial Interruptible Snowmelt Service
For the Rate Schedules listed in Table 8, the customer charges and the per therm
charges for winter months (billing periods ending December through March) are
less than the customer charges and the per therm charges for summer months
(billing periods ending April through November).
The rates charged to customers in Industrial Rate Schedules L V -1 (Large
Volume Firm Sales Service), T-3 (Interruptible Distribution Transportation
Service), T-4 (Firm Distribution Only Transportation Service), and T-5 (Firm
Distribution Service with Maximum Daily Demands) are the same throughout the
year; the rates do not vary by season.
Blattner, Di 27
Intermountain Gas Company
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Q. Please explain why the Company is proposing to eliminate rate structures
with seasonal rates that are lower for gas service during winter months and
higher for gas usage in summer months.
A. The Company is proposing to eliminate seasonal rates because there is no cost
justification to continue the current seasonal rate structures. The results of the
Company's ACOSS are not developed or reported by season.
Q. Are you aware of any gas distribution companies that have rate structures
with seasonal rates that are lower for gas service during winter months and
higher for gas usage in summer months?
A. No, I am not. I reviewed the tariffs of A vista Idaho and gas distribution
companies in surrounding states 14 and I determined that, other than Intermountain
Gas, no gas distribution company has rates that are different by season.
E. Cost Based Customer Charges
Q. Please summarize the testimony of Company Witness Terzic that addresses
cost-based customer charges.
A. To summarize the points that Mr. Terzic makes in his testimony concerning
customer charges, Mr. Terzic recommends that Residential RS and General
Service GS-1 customer charges should be increased (1) to match the Company's
costs, which are largely fixed, from year to year with the Company's distribution
service revenues; (2) to make the Company's rates to these classes better reflect
the unit customer-related costs to serve customers in these classes.
Q. Please provide the current RS-1, RS-2 and GS-1 customer charges.
14 I reviewed the tariffs of the following gas distribution companies: Avista Utilities (Idaho), MDU
(Montana), Avista Utilities (Oregon), Cascade Natural Gas Corporation (Oregon), Cascade Natural
Gas Corporation (Washington), Avista Utilities (Washington).
Blattner, Di 28
Intermountain Gas Company
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I have prepared Table B.9, below, to show the current customer charges. To
demonstrate the large differences between the current Residential and General
Service customer charges and costs to serve, I have also included in Table B.9 the
unit customer-related costs as determined in Exhibit INT-20: Class Cost of
Service Summary Results.
Table B.9 Customer Charges and Unit customer-related ACOSS Results
Customer Charge per bill RS-1 RS-2 IS-R GS-1 IS-C
Summer $2.50 $2.50 $2.50 $2.00 $2.00
Winter $6.50 $6.50 $6.50 $9.50 $9.50
ACOSS $13.61 $13.61 $13.61 $46.85 $46.85
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The Company's proposed rates, which are described in the following Section IV.F
of my testimony, reduces the significant gap between the current customer
charges and the unit customer-related costs.
F. Proposed Large Industrial Firm Transportation Rate Schedule
Please summarize the Company's proposal relating to current Rate
Schedules T-4 and T-5.
As described and supported in the testimony of Company Witness Swenson, the
Company is proposing to combine Rate Schedules T-4 and T-5, and to charge one
set of rates to all customers in this new rate classification.
As I explain in Section IV .H, Rate Design, to design the single set of rates for
the new Rate Schedule T-4, I used the A COSS results for the new Rate T-4 and
the combined billing determinants of current T-4 and T-5 customers, accounting
for customer migration.
G. Cost-based Demand Charges
Blattner, Di 29
Intermountain Gas Company
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Please summarize the testimony of Company Witness Terzic that addresses
cost-based demand charges.
To summarize the points that Mr. Terzic makes in his testimony concerning
demand charges for large industrial customers, Mr. Terzic recommends that
demand charges should be implemented for Intermountain's large industrial firm
service rate classes because customers' demand (as measured by daily
consumption) is closely related to the required capacity of the distribution system,
and the capital investment in that distribution system.
Please describe how you designed the proposed demand charges for
Industrial customers.
The Company plans to implement demand charges for Rate Schedules L V -1 and
Rate Schedule T-4. As explained in the testimony of Mr. Swenson, the Company
has worked with customers in these classes to determine levels of contract
demand that appropriately reflect the capacity that the Company must have
available, to provide firm reliable service to each of these customers. I designed
the Rate Schedule L V -1 and T-4 demand charges to recover a large proportion of
the respective class distribution margin revenue requirement at equal rates of
return. I designed commodity (per therm) charges for these classes to recover the
smaller portion of the class distribution margin revenue requirement at equal rates
of return that was not recovered by the demand charges that I designed.
H. Rate Design
1. Introduction
Blattner, Di 30
Intermountain Gas Company
1 Q. Please describe the principles that you followed in designing the Company's
2 proposed base rates.
3 A. I developed the proposed rates to be consistent with what I am told are the
4 Commission's long standing rate structure goals of setting rates based primarily
5 on cost of service, and minimizing inter and intra class subsidies. I was also
6 generally guided by Bonbright's rate design principles, and especially Mr.
7 Bonbright's objectives that utility rate structures must be efficient, simple, and
8 ensure continuity of rates, fairness between rate classes, and corporate earnings
9 stability.
10 Q. Please explain your understanding of these principles.
11 A. An efficient rate structure promotes economically justified use of the Company's
12 sales and distribution services, and discourages wasteful use. Rate design
13 simplicity is achieved if the customers understand what they are being charged,
14 i.e., the level ofrates and the rate structure. Rate continuity requires that changes
15 to the rate structure should be gradual allowing customers to modify their usage
16 patterns over time. A rate design is fair if no customer class pays more than the
17 costs to serve that class. A rate design provides for earnings stability if the
18 Company has a reasonable opportunity to earn its allowed rate of return during
19 the time that the rates are in effect.
20 Q. Have you prepared a schedule that shows how you calculated the proposed
21 rates?
Blattner, Di 31
Intermountain Gas Company
1 A. Yes, I have prepared Exhibit 24 to show the analysis and calculations that I used
2 to determine the final proposed base rates. Exhibit 24 is organized into the
3 following sections that are related to steps in the rate design process.
4 • Section A shows proforma test year normalized calendar month revenue
5 detail.
6 • Section B shows billing determinant detail.
7 • Section C shows the development of class revenue targets.
8 • Section D shows the development of the proposed rates.
9 In each section, columns A through F show data and calculations by rate class and
10 totals. I have also provided a detailed line-by-line explanation of the calculations
11 in Column G.
12 1. Class Revenue Targets
13 Q. What is the revenue requirement that you used for the purpose of designing
14 rates?
15 A. I designed the Company's base rates to recover distribution margin of
16 $93,243,187 which is shown on Exhibit 20: Class Cost of Service Summary
17 Results, Page 2, Line 13 Column (b), less Line 3 Column (b) and Exhibit 24
18 Column F, Line 55.
19 Q. How did you assign the total distribution margin of $93,243,187 to each of
20 the Company's rate classes?
21 A. I determined class revenue targets based on the class revenue requirements at
22 equal rates ofreturn for each rate class 15 as determined in the ACOSS that I
15 The ACOSS develops separate revenue requirements for each rate class, as shown in Exhibit 20.
Blattner, Di 32
Intermountain Gas Company
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prepared. As described above in this testimony, the ACOSS total base-revenue
requirement for the Company is net of the costs recovered through
Intermountain's purchased gas adjustment mechanism.
2. Base Rate Calculations
Please explain how you designed the Company's proposed base rates.
To design base rates that would recover the class base revenue targets from the
previous step, I followed the process that is described below:
a. I (i) determined the appropriate level of customer charges for Rate
Schedules RS and GS-1 and (ii) calculated Customer Charge revenues for
these classes
b. I (i) determined the appropriate level of demand charges for the
Company's Industrial firm service Rate Schedules L V -1 and T-4 and (ii)
calculated Demand Charge revenues for these classes
c. I determined the remaining Rate Schedule class revenue requirement to be
recovered from volumetric rates in one of the following approaches:
1. For Rate Schedules RS and GS-1 , I subtracted Customer Charge
revenues from total Rate Schedule distribution margin revenue
requirements
2. For Rate Schedules LV-1 and T-4, I subtracted Demand Charge
Revenues from Rate Schedule distribution margin revenue
requirements
3. For Rate Schedule T-3, the volumetric rates were designed to recover
the total Rate Schedule class revenue requirement
Blattner, Di 33
Intermountain Gas Company
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d. I determined the appropriate commodity charges by block, for those Rate
Structures with multiple rate blocks
e. I calculated revenues at final rates.
Please explain Step (a) in the rate design process, which you described as
determining the appropriate level of customer charges and calculating
Customer Charge revenues.
To determine the appropriate level of customer charges for Rate Schedules RS
and GS-1, I considered: (1) the customer-related rates and unit costs, which are
summarized in Table B.9; in Section IV.E ofthis testimony, above and (2)
Bonbright's rate design principles ofrate continuity and customer impacts.
As shown in Table B.9, the customer related costs for the Residential class are
$13.61 per customer. However, to adhere to Bonbright's principles mentioned
above, the Company is proposing a more gradual increase in the Residential
customer charge to $10.00. The customer related costs for the GS-1 class are
$45.85. Again, the Company is proposing a more gradual change of $35.00.
Please explain the calculation of Rate Schedule RS and GS-1 class customer
charge revenues and the class volumetric revenue target.
I calculated class customer charge revenues by multiplying the proposed customer
charges times the customer count billing determinants, which are shown in
Exhibit 24, Line 12. To determine the commodity revenue targets for Rate
Schedule RS and GS-1, (the remaining class revenue target to be recovered from
volumetric rates to these classes), I subtracted the class customer charge revenues
from the total class revenue target, shown on Exhibit 24, Line 65.
Blattner, Di 34
Intermountain Gas Company
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To the extent the Company's required revenue is not collected through the
customer charge and the volumetric charge, the surplus or deficit will be trued up
using the Company's proposed FCCM as described by Company Witness
McGrath.
Please explain Step (b) in the rate design process, which you described as
determining the appropriate level of demand charges for the Company's
Industrial firm service rate classes and calculating Demand Charge revenues.
I set the demand charges for Rate Schedules L V-1 and T-4 at levels that would
recover a large portion of the class revenue requirement at equal rate of return.
The demand charges of $0.30 per therm for LV-1 and T-4 are shown on Exhibit
24, Line 79, and the demand charge revenues are shown on Exhibit 24, Line 80.
Please explain Step (d) in the rate design process, which you described as
determining the appropriate rates by block, for those Rate Structures with
multiple rate blocks.
As a preliminary matter, I determined that I would design the new fourth GS-1
rate block to apply to monthly usage of 10,000 therms or more, based on my
review of GS-1 billing data. I then determined that I should set the commodity
rate for that fourth block at $0.07500 per therm, to reduce the difference between
bills at GS-1 rates to these customers and bills at L V -1 rates.
After I determined the appropriate Rate for the fourth block, Rate
Schedule GS-1, I calculated volumetric rates for all other Rate Schedules, as
shown on Exhibit 24, Lines 110 through and 118.
Blattner, Di 35
Intermountain Gas Company
1 Q. Please explain Step (e) in the rate design process, which you described as
2 calculating revenues at final rates.
3 A. Step (e) is simply the calculation of the revenues that the proposed rates would
4 produce, based on rate case Billing Determinants. My calculations, which are
5 presented in Exhibit 24 Lines 120 to 133, show that the proposed base rates
6 produce total distribution margins of $93,244,715, which is greater than the base
7 revenue requirement of $93,243,187 by $1,528. The difference is caused by
8 rounding the proposed per therm rates to five significant digits and the proposed
9 customer charges and demand charges to two significant digits.
10 3. Bill Impact Analysis
11 Q. Have you prepared bill-impact analyses?
12 A. Yes. An average RS-1 customer will see an annual increase of approximately
13 $14.00 or 3% per year. Current RS-2 customers with average usage will
14 experience an increase of $27.70 per year, or 5%. A GS customer with average
15 usage will see an increase of 6% per year, or $145.90.
16 Q. Does this conclude your testimony on rate design?
17 A. Yes, it does.
Blattner, Di 36
Intermountain Gas Company