20160812Chiles Direct.pdf

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Ronald L. Williams, ISB No. 3034
Williams Bradbury, P.C.
I 015 W. Hays St.
Boise, ID 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 RA TES ) 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 MARK A. CHILES
FOR INTERMOUNTAIN GAS COMPANY
August 12, 2016
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Please state your name, title and business address.
My name is Mark A. Chiles. I am the Vice President of Regulatory Affairs for
Intermountain Gas Company (IGC, Intermountain, or Company) and Cascade
Natural Gas Corporation and the Vice President of Customer Service for the
MDU Utilities Group (MDUG). My business address is 555 South Cole Road,
Boise, ID 83707.
Mr. Chiles, would you please summarize your educational and professional
experience.
I am a graduate of Boise State University with a Bachelor of Business
Administration degree in Accounting. I am a certified public accountant and a
member of the American Institute of Certified Public Accountants and the Idaho
Society of Certified Public Accountants. I have over 20 years of experience in the
energy industry including time spent in the utility, gas marketing, and exploration
and production industries. During my utility career, I have held the positions of
Accounting Manager, Director of Accounting and Finance, and Vice President
and Controller. I was appointed to my current position in March 2016. I am
responsible for providing executive leadership and management for regulatory
affairs and customer service including the scheduling and credit and collections
functions.
What is the purpose of your testimony in this proceeding?
The purpose of my testimony is to explain and support the capital structure and
return on rate base requested in this proceeding and provide some insight into the
customer service center structure, methodology of sharing customer service costs,
Chiles, Di 1
Intermountain Gas Company
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results of operations, and efficiencies gained in this area since the purchase of
IGC by MDU Resources, Inc. (MDUR).
Please summarize your testimony.
In brief, I will provide information that shows:
• Intermountain's proposed return on rate base (ROR) provides a reasonable
return for our investors at a fair cost to our customers. The ROR is based on a
50/50% common equity ratio with a Return on Equity (ROE) of9.9% and a
debt cost of 4.94%.
• The structure of the customer service function, how the customer service
function is charged out to the MDUG brands, efficiencies gained through the
organizational structure and implementation of customer focused technology,
and how these changes have provided significant savings to Intermountain's
customers.
What is the return on rate base and capital structure that Intermountain is
requesting in this case?
The Company is requesting a return on rate base of 7.42% with a capital structure
of 50% equity and 50% debt. The components and calculation of the proposed
rate of return are shown in Table C.1.
Total Debt
Common Equity
Table C.1 -Proposed Return on Rate Base
Capital Structure
50%
50%
100%
4.94%
9.90%
Component
2.47%
4.95%
7.42%
Chiles, Di 2
Intermountain Gas Company
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The Company is proposing a capital structure of 50% equity and 50% debt.
Why does the Company feel this is the appropriate capital structure?
Intermountain is proposing a capital structure consisting of 50% common equity
and 50% long-term debt, consistent with the Company's target capital structure
and in line with the Company's average actual capital structure for the last three
years and projected structure for 2016. Intermountain's parent company, MDU
Resources, makes equity infusions in order to maintain the target capital structure.
Intermountain is committed to maintaining a healthy balance of equity and debt,
as discussed in the direct testimony of Company witness, Dr. J. Stephen Gaske.
Table C.2 below provides a summary of the four-year history oflntermountain's
capital structure.
Total Debt
Common
Equity
Table C.2 -Capital Structure
12/31/2013
45.73%
54.27%
12/31/2014
47.60%
52.40%
12/31/2015
52.05%
47.95%
6/30/2016
48.15%
51.85%
How does Intermountain's proposed capital structure compare to that of
other gas distribution companies?
As discussed in Dr. Gaske's testimony, the median equity ratio for the companies
in his proxy group of gas distribution companies was approximately 53.80% as of
March 31 , 2016. As such, Intermountain' s proposed capital structure is in line
with other gas distribution companies.
Why is the Company proposing a 9.90% return on equity?
Chiles, Di 3
Intermountain Gas Company
1 A. The Company's request for a 9.90 % ROE is based on the testimony and exhibits
2 presented by Dr. Gaske. It is Intermountain's opinion and belief that a 9.90%
3 ROE represents a fair return on investment for Intermountain's shareholders, and
4 is also fair to Intermountain's customers.
5 Q. How did you calculate the cost of debt proposed in this filing?
6 A. The 4.94% cost of debt is calculated based on the weighted average debt of the
7 Company that is outstanding at June 30, 2016, as shown on page 1 of Exhibit 3,
8 and the projected weighted average cost of debt for expected new long-term debt,
9 as shown on page 1 of Exhibit 3.
10 Q. Will any of the debt included in this filing come due within the next five
11 years?
12 A. Yes, page 1 of Exhibit 3 also shows a schedule of current outstanding debt with
13 maturity dates.
14 Q. Does Intermountain plan to issue any equity or debt offerings in the near
15 future?
16 A. Yes, Intermountain plans to issue both equity and long-term debt in 2016. The
17 equity and debt issuances planned for the next five years are shown on page 2 of
18 Exhibit 3. The goal in issuing the new long-term debt is to match a funding
19 mechanism with the lives of the assets that Intermountain is investing in to serve
20 its customers. In this case the Company intends on issuing long-term debt with a
21 term of 30 years to coincide with the life of natural gas distribution system assets.
22 Q. Please describe the current structure of the customer service function of
23 Intermountain Gas Company.
Chiles, Di 4
Intermountain Gas Company
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In 2010 the MDUG went through the process of combining the customer service
centers of each of the brands into a single customer service entity providing
support to each of the utility group brands. The MDUG chose Meridian, Idaho as
the primary location of the service center. The Meridian location is home to the
customer service center, customer development and programs group, and the
scheduling group. A satellite customer service center is located in Bismarck, ND
along with the credit and collections department.
Now that the customer service function has been consolidated into one entity,
who do those employees work for?
All of the customer service employees working in the areas of customer service,
credit and collections, customer development and programs, and scheduling are
Montana-Dakota Utilities employees.
How is Intermountain charged for its portion of the customer service
expense?
The cost allocations of the customer service function are detailed in the
Intermountain Gas Company Cost Allocation Manual, which is Exhibit 10,
sponsored by Mr. Dedden.
What efficiencies have been gained through the structure and
implementation of technology?
From an employee head count standpoint, the MDUG has been able to reduce the
overall head count in the customer service area. Instead of each brand having its
own management team, there is a single management team. Also, prior to
combining the service center, each utility brand had its own customer information
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Intermountain Gas Company
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system. The MDUG has now successfully implemented a new customer
information system (CIS) across all of the brands, finishing with IGC in August
2015. The CIS implemented is an Oracle project called Customer Care and
Billing (CC&B). Having all of our brands on CC&B allows us to cross train our
customer service agents so they can handle calls from multiple brands instead of a
single brand.
What benefits to lntermountain's customers have resulted from these
structure changes and technology improvements you just described?
Due to the organizational restructuring, process improvements, and new
technology implementations, Intermountain has been able to reduce the cost of the
customer service function to its customers by nearly $1.0 million since 2010 to
2015. At the same time Intermountain has continued to provide the same, if not
better, level of service to its customers.
There has also been an economic impact to the Treasure Valley due to the
organizational restructuring. Intermountain employed 43 people in its customer
service department prior to the consolidation of the customer service operations in
Meridian. The Meridian location now employs 165 people, adding significant
payroll to the local economy.
How does Intermountain measure the quality of its customer service?
Intermountain uses several metrics in analyzing its service to customers, including
customer calls, response time, length of call, and number of dropped calls. During
2015, the Customer Service office answered 600,298 calls with an overall average
answer speed of 49 seconds. The average length of calls was 4 minutes 28
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Intermountain Gas Company
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seconds, and the abandoned or dropped call rate was 5.4 % of all calls. The
Company also tracks customer complaints. Of the 600,298 calls received in 2015,
complaints reported to the ID PUC or escalated to a supervisory level relating to
high bills and disconnection were only 69 and 175, respectively.
Are there other things the Company is doing in the customer service area?
Yes, Intermountain has been a leader in moving customers from paper billing and
payments to electronic billing and payment processing. Currently Intermountain
issues approximately 19% of the monthly customer bills in electronic form. From
June 2015 to June 2016 Intermountain has increased the number of electronic bills
issued by approximately 20%. Intermountain currently collects approximately
66.5% of its monthly customer payments through the electronic process.
Intermountain has also worked hard to reduce the amount of bad debt
expense by working with customers on payment plans. Intermountain is
projecting a bad debt expense of 0.43% of gross revenue for 2016 which is in line
with other gas only utilities in the Mountain region.
Intermountain also uses social media as a means to reach and inform our
customers. Our Intermountain website, Facebook and Twitter are the primary
sources of social media used by the Company.
Do you have any other comments on the customer service provided by
Intermountain?
Yes, only to reiterate what Nicole Kivisto pointed out in her testimony.
Intermountain has ranked at the very top in customer satisfaction according to the
JD Power's customer service ranking for midsized gas utilities in the West.
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Intermountain Gas Company
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According to mid-year results, Intermountain will finish near the top again in
2016.
Does this conclude your testimony?
Yes.
Chiles, Di 8
Intermountain Gas Company