20160812Darrington Direct.pdf

Ronald L. Williams, ISB No. 3034
Williams Bradbury, P.C.
1015 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 RATES
AND CHARGES FOR NATURAL GAS
SERVICE TO NATURAL GAS CUSTOMERS
IN THE STATE OF IDAHO

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Case No. INT-G-16-02

DIRECT TESTIMONY OF JACOB DARRINGTON

FOR INTERMOUNTAIN GAS COMPANY

August 12, 2016

Darrington, Di 1
Intermountain Gas Company
I. INTRODUCTION 1
Q. Please state your name, business address, and present position with 2
Intermountain Gas Company. 3
A. My name is Jacob Darrington. I am employed by Intermountain Gas Company (“
Intermountain” or “the Company”) as a Regulatory Analyst. My business address
is 555 South Cole Road, Boise, Idaho 83707.
Q. Would you please describe your education and professional experience. 7
A. I graduated from Boise State University in May 2011 with a Bachelor of Arts
Degree in Accounting-Finance. In January 2012, I began work at Deloitte Tax as
a Tax Consultant where I prepared federal and multi-state tax returns for
businesses and high-net worth individuals. Additionally, I worked as a tax
specialist as a part of the audit team to help with auditing the provision for income
taxes for a regulated utility. I earned my CPA license in the summer of 2013. I
continue to keep my CPA license active in the state of Idaho. In the fall of 2013 I
was promoted to Tax Senior at Deloitte and took on the additional responsibility
of reviewing tax returns of other Tax Consultants. In April of 2015, I took a
position with Intermountain Gas Company as a Regulatory Analyst. In July of
2015 I attended the Regulatory Rate School in Chicago sponsored by the
American Gas Association.
Q. Would you briefly describe your responsibilities in your current position? 20
A. Yes. As a Regulatory Analyst, my primary responsibility as it relates to this
proceeding includes the gathering, analyzing, and coordinating of data from
Darrington, Di 2
Intermountain Gas Company
various departments throughout the Company required for the preparation and
calculation of the revenue requirement and rate base.
Q. What is the purpose of your testimony in this docket? 3
A. My testimony will cover two main areas. First, I will address Intermountain’s 4
regulatory adjustments to the Company’s rate base. Second, I will discuss the
Company’s adjustments to operating revenues and expenses. Third, I will discuss
Intermountain’s revenue requirement.
Q. What is the Company’s proposed test year for this case? 8
A. As described by Company witness Dedden, Intermountain is proposing a test
period reflecting six months actual and six months projected data for the twelve-
months ending December 31, 2016.
Q. Does the Company anticipate adjusting the test period projections later in 12
this docket? 13
A. Yes. The Company will provide to the Idaho Public Utilities Commission
(“Commission”) monthly updates to the six months of projections for the period
July 1, 2016, through December 31, 2016, to reflect actual data.
Q. Are you sponsoring any exhibits in this proceeding? 17
A. Yes. I am sponsoring the following exhibits, which are described in my
testimony:
Exhibit No. 12 Rate base
Exhibit No. 13 Rate Base Components and Adjustments
Exhibit No. 14 Operating Income
Exhibit No. 15 Adjustments to Operating Income
Darrington, Di 3
Intermountain Gas Company
Exhibit No. 16 Summary Revenue Requirement Calculation
II. RATE BASE 2
Q. What exhibits do you have that summarize the Company’s thirteen-month 3
average rate base and explains the adjustments to rate base? 4
A. Exhibit 12 is composed of two tables that shows summaries of the unadjusted
components of rate base as presented by Company witness Dedden as well as
adjustments to those components. Exhibit 13 is a series of worksheets that
describe each of the adjustments made to rate base.
Q. Is the thirteen-month average method used for all rate base items?
A. Yes, with the exception of the Cash Working Capital allowance, all items
included in the determination of rate base have been calculated using the average
of thirteen monthly balances. The average of the thirteen monthly balances
reflects the level of investment maintained by the Company during the course of
the year and is intended to normalize changes in the balances that occur during the
year. The derivation of the Cash Working Capital allowance is discussed later in
this testimony.
Q. What is Intermountain’s projected gas plant in service as of December 31, 17
2016?
A. The thirteen-month average level of gross investment in gas utility plant in service
included in the Company’s rate base as of December 31, 2016 is $596,065,559, as
shown on Exhibit 12, page 1, column (d), line 2. The thirteen-month average
calculation of this figure can be found on Exhibit 13, page 1, column (e), line 28.
Darrington, Di 4
Intermountain Gas Company
Q. Does this amount of gross plant investment as of December 31, 2016 reflect 1
any adjustments? 2
A. Yes. The balance of gross plant investment reflects an adjustment to remove the
Asset Retirement Obligations (“AROs”) in the amount of $16,555,572 as shown
on Exhibit 12, page 2, column (b), line 2 and Exhibit 13, page 1, column (c).
Q. What is the total amount of Intermountain’ s projected accumulated 6
provisions for depreciation and amortization? 7
A. Intermountain’s projected accumulated depreciation and amortization as of
December 31, 2016 is $308,450,846, as shown on Exhibit 12, page 1, column (d),
line 3. The thirteen-month average calculation of this figure can be found on
Exhibit 13, page 2, column (f), line 28.
Q. Are you proposing any adjustments be made to the accumulated reserve for 12
depreciation and amortization? 13
A. Yes. The accumulated provision balances have been adjusted to remove the AROs
and Retirement Work in Progress in the amount of $4,303,085 and $146,265,
respectively, as shown on Exhibit 12, page 2, column (b) and (c), line 3 and
detailed on Exhibit 13, page 2, column (c) and (d).
Q. How was the level of net plant included in rate base calculated? 18
A. Net plant included in rate base is $287,614,713, and was calculated by subtracting
the total amount of adjusted accumulated depreciation from the total amount of
adjusted gross plant as shown on Exhibit 12, page 1, column (d), line 4.
Q. What level of Materials and Supplies was included in rate base? 22
Darrington, Di 5
Intermountain Gas Company
A. Intermountain included in rate base a thirteen-month average of the materials and
supplies balance of $3,149,131, as shown on Exhibit 12, page 1, column (d), line
5 and as calculated on Exhibit 13, page 3, column (e), line 28.
Q. Did the Company include any gas storage inventory in rate base? 4
A. Yes. Intermountain included a thirteen-month average of the gas storage
inventory balance of $3,195,613 in rate base, as shown on Exhibit 12, page 1,
column (d), line 6 and as calculated on Exhibit 13, page 4, column (f), line 28.
Q. Does this amount of gas storage inventory reflect any adjustments? 8
A. Yes. The amount reflects two adjustments to the gas storage inventory held at the
Company’s Nampa storage facility. The first adjustment of $856,019, as seen on
Exhibit 12, page 2, column (d), line 6 and Exhibit 13, page 4, column (c),
removes the gas storage inventory associated with non-utility sales of liquefied
natural gas (“LNG"). The second adjustment of $3,890, as seen on Exhibit 12,
page 2, column (e), line 6 and Exhibit 13, page 4, column (d), removes those costs
associated with the utility portion of gas storage inventory at the Nampa storage
facility in excess of 2 million gallons.
Q. Why is the established level of utility storage gas at the Nampa storage 17
facility set to 2 million gallons?
A. This is the amount of LNG required to 1) maintain operational and training
requirements at the Nampa and Rexburg LNG Facilities, 2) maintain an adequate
supply of LNG to provide for the annual “boiloff” gas that naturally occurs with
the warming of LNG and 3) maintain minimum LNG levels to ensure the integrity
of the storage tank.
Darrington, Di 6
Intermountain Gas Company
Q. Is Cash Working Capital included in rate base?
A. Yes. Cash working capital ("CWC") is the amount of funds required to finance
the day-to-day operations of the Company. A CWC requirement represents the
amount of cash the Company needs to keep on hand to meet its cash operating
expenses. The test year rate base includes $1,032,688 for CWC as shown on
Exhibit 12, page 1, column (d), line 7 and calculated on Exhibit 13, page 5,
column (e), line 18. The CWC calculation is based upon a lead-lag study.
Q. What is a lead-lag study? 8
A. A lead-lag study analyzes the lag time between the date customers receive service
and the date that customers' payments are available to the Company. This lag is
offset by a lead time during which the Company receives goods and services, but
pays for them at a later date. The "leads" and "lags" are both measured in days.
The dollar-weighted lead and lag days are then divided by 365 to determine a
daily CWC factor. This CWC factor is then multiplied by the annual test year
cash revenues and expenses to determine the amount of CWC required for
operations.
Q. What is the amount of accumulated deferred income taxes (“ADIT”) 17
deducted from rate base? 18
A. The level of ADIT deducted from rate base is $50,172,477, as shown on Exhibit
12, page 1, column (d), line 8. The calculation of this number is shown on
Exhibit 13, page 6, column (k), line 28.
Q. What is ADIT and why is it a rate base adjustment? 22
Darrington, Di 7
Intermountain Gas Company
A. Deferred income taxes arise when income tax amounts provided for book
purposes differ from the amount of taxes due and payable in the test period. The
primary cause of this tax difference is the straight line depreciation rates used for
ratemaking purposes, versus the accelerated depreciation rates used when
calculating state and federal income tax obligations. For a utility with a growing
rate base, there is generally a higher depreciation expense for tax purposes than
for regulatory book purposes, causing the taxes computed for regulatory books
(and thus, included in revenue requirement) to be more than the taxes actually
payable, in the early years of the asset’s life. In later years, the situation reverses
itself. The accumulated balance of these deferred taxes is, in essence, either a
source or use of funds available to the company. The net balance of accumulated
deferred taxes has been deducted from rate base.
Q. Please explain how the level of ADIT was determined. 13
A. ADIT was analyzed on an item-by-item basis to determine whether the ADIT was
attributable to items included in rate base. Amounts attributable to an asset or
liability in rate base have been reflected in the ADIT adjustment. Additional
adjustments were made to remove state deferred income taxes and to comply with
various IRS rules related to deferred taxes. These adjustments total $13,183,858
and are shown on Exhibit 12, page 2, columns (f) – (l), line 8 and on Exhibit 13,
page 6, columns (c) – (i).
Q. How has Intermountain accounted for advances in aid of construction in the 21
Company’s rate base? 22
Darrington, Di 8
Intermountain Gas Company
A. Advances in aid of construction in the amount of $7,893,171 have been deducted
from rate base, as shown on Exhibit 12, page 1, column (d), line 9 and calculated
on Exhibit 13, page 7, column (c), line 28. This represents the thirteen-month
average balance of cash advances received from customers as of December 31,
2016 for construction attributable to Intermountain’s operations. Similar to
ADIT, the advances in aid of construction represent a source of funds available to
the Company and appropriately offset the plant in service balances reflected in
rate base.
Q. What is Intermountain’s proposed test year rate base? 9
A. The Company’s test year rate base, as of December 31, 2016, adjusted for the
known and measurable adjustments discussed above, is projected to be
$236,926,497, as shown on Exhibit 12, page 1, column (d), line 10.
Q. Does this conclude your testimony as it pertains to the Company’s rate base? 13
A. Yes. 14
III. OPERATING REVENUES AND EXPENSES 15
Q. What exhibits do you have that summarize the Company’s operating 16
revenues and expenses and the adjustments made thereto? 17
A. Exhibit 14 presents the unadjusted operating revenues and expenses as presented
by Company witness Dedden, regulatory adjustments to those operating revenues
and expenses, and the resulting Company proposed operating revenues and
expenses. Exhibit 15 presents the detail supporting the proposed regulatory
adjustments to Company’s operating revenues and expenses. 22
Darrington, Di 9
Intermountain Gas Company
Q. What is the unadjusted projected level of operating revenues and expenses 1
for the twelve months ended December 31, 2016? 2
A. As presented by Company witness Dedden, for the twelve months ended
December 31, 2016, the Company projects total operating revenues to be
$236,530,903, as shown on Exhibit 14, page 1, column (b), line 3. The Company
projects total operating expenses to be $235,335,918 as shown on Exhibit 14,
page 1, column (b), line 24. This produces unadjusted net operating income of
$1,194,985 as shown on Exhibit 14, page 1, column (b), line 25.
Q. Are you proposing any adjustments to the test year gas operating revenues 9
and expenses? 10
A. Yes. Exhibit 14, page 2 lists each proposed adjustment to test year gas operating
revenues and expenses.
Q. Please describe the Unbilled Adjustment shown on Exhibit 14, page 2, 13
column (b), lines 1 and 5.
A. This adjustment removes unbilled revenues and cost of gas expenses from the
determination of the revenue requirement. This unbilled adjustment is the result
of the difference in the timing of when gas is provided to our customers and when
those customers are billed for the gas used. To create a proper matching of gas
costs and revenues for the test year, unbilled revenues and cost of gas have been
excluded from the calculation of the revenue requirement. The adjustment
increases revenues by $27,605,926 and cost of gas expenses by $21,246,004, as
shown on Exhibit 15, page 1, column (d), lines 16 and 17. This adjustment
pertains only to the year-to-date actual data through June 2016. As discussed by
Darrington, Di 10
Intermountain Gas Company
Company witness Dedden, the forecast period July through December 2016 does
not include unbilled revenues and cost of gas expenses.
Q. Is the Company proposing an adjustment to revenues and expenses 3
associated with non-utility LNG sales from the Nampa facility? 4
A. Yes. Non-utility sales of liquefied natural gas have been removed from the
Company’s test year revenues and cost of gas expenses, as shown on Exhibit 14,
page 2, column (c), lines 1 and 5 and Exhibit 15, page 2, column (d), lines 1 and
2. The result of the adjustment reduces operating revenues by $1,813,230 and
related cost of gas expenses by $1,461,140. This adjustment eliminates revenues
and cost of gas expenses not associated with the provisioning of regulated gas
services to Intermountain’s customers.
Q. Please explain the franchise tax adjustment shown on Exhibit 14, page 2, 12
column (d), lines 1 and 19. 13
A. Franchise taxes are not recovered through base rates, and thus have been removed
from the Company’s revenues and expenses for the test year. As seen on Exhibit
15, page 3, column (d), lines 1 and 2, the adjustment reduces the Company’s test 16
year revenues by $7,087,154 and expense by $7,087,860.
Q. Please describe the proposed lost gas expense adjustment shown on Exhibit 18
14, page 2, column (e), line 5.
A. The purpose of this adjustment is to reflect the current level of lost gas expense.
This adjustment reduces operating expenses by $803,928. Exhibit 15, pages 4
and 5 support the calculation of this adjustment.
Darrington, Di 11
Intermountain Gas Company
Q. Please explain the proposed normalizing adjustment shown on Exhibit 14, 1
column (f), lines 1 and 5.
A. This adjustment represents the difference between test year revenues and cost of
gas and normalized revenues and costs of gas. Normalized revenues and cost of
gas reflect the effects from both weather normalization and customer rate class
migrations. The process for determining weather normalization is addressed by
Company witness Blattner. Customer rate class migrations refers to the
Company’s general service, large volume, or transport customers who have 8
changed rate classes at some point during the test year. The Company removed
these customers’ actual and forecasted volumes, revenues, and cost of gas from 10
their previous rate class and included them for a full twelve month period in their
new rate class.
As shown on Exhibit 15, page 6, column (b), lines 10 and 11, this
adjustment reduces operating revenues by $442,726 and operating expenses by
$336,443. Supporting calculations are presented on Exhibit 15, pages 7-16.
Q. Can you describe briefly Intermountain’s Non-Executive Incentive 16
Compensation Plan? 17
A. Yes. Intermountain’s plan consists of three components. The first component is
based on achieving a target level of net income. The second and third
components are based on cost control and customer satisfaction goals. Each
component is worth an equal portion of the incentive payment. There is also a
fourth goal -- for directors only -- based on a review of the Company’s Employee
Survey with employees during the year.
Darrington, Di 12
Intermountain Gas Company
Q. Is the Company proposing an adjustment to incentive compensation 1
expense? 2
A. Yes. Exhibit 14, page 2, column (g), line 9, 10, 11, 13, 14, and 17 and Exhibit 15,
page 17, column (b), lines 8 and 9 remove the portion of incentive compensation
expense that is based on the Company achieving a target level of net income. The
remaining portion of incentive compensation expense relates to the metrics
described above. These metrics are designed to benefit the Company’s customers
by incentivizing Company employees to control costs while maintaining a safe,
reliable system and a high level of customer satisfaction. The adjustment reduces
incentive compensation expense by $373,269 and payroll taxes by $32,728 for a
total adjustment to operating expenses of $405,997.
Exhibit 15, page 18 provides supporting calculations that are reflected on
page 17 of the Exhibit.
Q. Is the Company proposing an adjustment to the test year level of expenses 14
associated with Executive Compensation? 15
A. Yes. Exhibit 14, page 2, column (h), line 14, 15, and 17 and Exhibit 15, page 19,
column (d), lines 1 and 2 remove all Supplemental Executive Retirement Plan
compensation, Supplemental Income Security Plan compensation and executive
incentive compensation expenses. The Company has chosen to not charge its
customers for these expenses and has therefore removed them from the
determination of the revenue requirement. The Executive Compensation
adjustment reduces operating expenses by $1,052,398 and payroll taxes by
$68,332.
Darrington, Di 13
Intermountain Gas Company
Exhibit 15, pages 20 and 21 provide supporting calculations that are
reflected on page 19 of the Exhibit.
Q. Has the Company removed revenues and expenses associated with non-utility 3
activities? 4
A. Yes. Exhibit 14, page 2, column (i), lines 2 and 15 and Exhibit 15, page 22,
column (d), lines 4 and 10 remove from revenues and expenses those costs
associated with non-utility activities. Non-utility revenues include miscellaneous
revenue and interest income related to the non-qualifying executive
compensation. The non-utility expenses include donations, lobbying and Arid
Club dues. The “Other Revenue and Expense” adjustment increases other
revenues by $6,791 and reduces operating expenses by $256,321.
Q. Is the Company proposing to remove interest expense from the test year 12
expenses? 13
A. Yes. Exhibit 14, page 2, column (j), line 20 and Exhibit 15, page 23, column (d),
line 1 reduce operating expenses by $4,348,423. The interest expense for the test
period used to determine income tax expense will be the weighted average cost of
debt included in the Company’s cost of capital multiplied by average rate base.
Q. Has the Company adjusted the test year level of income tax expense?
A. Yes. Exhibit 14, page 2, column (k), line 23 and Exhibit 15, page 25, column (c),
line 78 increase test year income tax expense by $2,544,743. Exhibit 15, pages 24
and 25 present the entire test year income tax expense calculation and include the
adjusted level of revenues and expenses discussed above as well as various
permanent and temporary timing differences.
Darrington, Di 14
Intermountain Gas Company
Q. What are the adjusted level of revenues and operating expenses that result 1
from the adjustments you are proposing? 2
A. As shown on Exhibit 14, page 1, column (d), lines 3 and 24, the adjusted level of
operating revenues and expenses for the twelve months ended December 31, 2016
are $254,800,510 and $243,305,823, respectively.
Q. Does that conclude your testimony as it pertains to the Company’s operating 6
revenues and expenses? 7
A. Yes it does.
IV. REVENUE REQUIREMENT 9
Q. Please explain how the adjusted net income was converted to the required 10
level of operating revenues. 11
A. Exhibit 16, page 2, shows the calculation of the conversion factor, which is
applied to the required net income to produce the required revenue increase. The
conversion factor takes into account revenue-sensitive items that change as
revenue changes, including uncollectibles, the Commission’s regulatory fee,
Idaho state income taxes, and federal income taxes. As shown on Exhibit 16, page
2, column (c), line 9, the conversion factor was determined to be 1.67055.
Q. Please summarize the requested revenue requirement. 18
A. Page 1 of Exhibit 16 presents the calculation of the Company’s revenue
deficiency. Based upon an average rate base of $236,926,497, adjusted operating
income of $11,494,687, and a weighted average cost of capital of 7.42%, as
presented by Company witness Chiles, the Company’s projected after-tax
operating income at proposed rates is $17,579,946. Consequently, the Company’s 23
Darrington, Di 15
Intermountain Gas Company
revenue deficiency for the test period ending December 31, 2016 is $10,165,700.
This revenue deficiency requires an overall increase in rates to the Company’s 2
customers of 4.04%. 3
Q. Does this conclude your direct testimony? 4
A. Yes it does.