20160812Madison 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 SCOTT MADISON

FOR INTERMOUNTAIN GAS COMPANY

August 12, 2016

Madison, Di 1
Intermountain Gas Company
Q. Please state your name and business address. 1
A. My name is Scott Madison.
Q. By whom are you employed and in what capacity? 3
A. I am Executive Vice President, Western Region, Operations and Business
Development, for Intermountain Gas Company (“Intermountain” or the 5
“Company”) and Cascade Natural Gas Corporation (Cascade). Intermountain and
Cascade are wholly owned subsidiaries of MDU Resources Group, Inc. (MDU
Resources) headquartered in Bismarck, North Dakota. Intermountain is
headquartered in Boise, Idaho and Cascade is headquartered in Kennewick,
Washington.
Q. Please describe your educational background and professional experiences. 11
A. I am a graduate of the University of Idaho with a Bachelor of Science degree in
Accounting. I have participated in several executive education programs,
including attending executive education at the Harvard Business School. I am a
Director of the Northwest Gas Association and the Western Energy Institute. I
am Chairman Elect and a member of the Executive Committee of the Idaho
Association of Commerce and Industry, and the Boise Metro Chamber of
Commerce, and am the former President of the Idaho Petroleum Council. I have
served as Chairman of the Board for the Better Business Bureau of Idaho.
Q. Please describe your work experience. 20
A. I served as Vice President, Controller and Chief Accounting Officer for
Intermountain Industries and each of its subsidiaries from 1997 to 2008. From
1987 to 1997 I was a Senior Manager with Arthur Andersen LLP. I am a
Madison, Di 2
Intermountain Gas Company
Certified Public Accountant and a member of the American Institute of Certified
Public Accountants and the Idaho Society of Certified Public Accountants.
Q. Please describe your duties for Intermountain and Cascade. 3
A. I oversee the day-to-day operations of both utilities. My office is located here in
Boise.
Q. Please provide a brief overview of the Company.
A. Intermountain provides natural gas distribution services to 75 communities in
Idaho, with 243 dedicated employees. During 2015, Intermountain had an average
of 334,650 customers in Idaho and the Company’s headquarters are located in
Boise, Idaho. Intermountain was incorporated in Idaho in 1950, and in 2008
became a wholly owned subsidiary company of MDU Resources.
Q. What is the purpose of your testimony? 12
A. First, I will introduce the other witnesses providing testimony on the Company’s 13
behalf. My testimony will then summarize the Company’s rate increase request, 14
identifying the primary drivers behind the need for rate relief. Specifically, I will
explain how customer growth has helped push Intermountain into needing a
general rate increase. I will compare the Company’s existing retail rates with 17
other similarly situated utilities. I am also available to answer questions of a
general nature.
Q. Would you please introduce and provide a brief description of each of the 20
witnesses filing testimony on behalf of Intermountain in this proceeding? 21
A. Yes. In addition to me, the following witnesses have, or will, present direct
testimony on behalf of Intermountain:
Madison, Di 3
Intermountain Gas Company
Ms. Nicole A. Kivisto, President and Chief Executive Officer (CEO) of
Intermountain, has provided an overview of the Company and its relationship
with other MDU Resources’ companies and MDU Utilities, and the economies of
scale savings this interrelationship brings to Intermountain. Ms. Kivisto
summarized the need for rate relief and highlighted the importance of attracting
the necessary capital investment needed to build and maintain the Company’s 6
infrastructure.
Mr. Hart Gilchrist, Vice President of Operations, will explain how a gas
company operates, will present evidence regarding the Company’s operations and 9
maintenance expenses and share the results of the A&G cost study and point out
how Intermountain’s A&G costs compare to other companies as well as compared
to pre and post-acquisition by MDU Resources. Mr. Gilchrist will also discuss
Intermountain’s investment in natural gas infrastructure.
Mr. Steve Gaske, Senior Vice President of Concentric Energy Advisors,
will testify as to the Company’s cost of capital and present studies that support his 15
recommended fair rate of return on Intermountain’s common equity.
Mr. Mark Chiles, Vice President, Regulatory Affairs and Customer
Service, will address the company’s capital structure, the proposed cost of 18
embedded debt, and the overall rate of return. He will also discuss
Intermountain’s commitment to outstanding customer service.
Mr. Ted Dedden, Director, Accounting and Finance for the Company, will
address Intermountain’s unadjusted rate base and earnings as well as the cross
charges between affiliate companies.
Madison, Di 4
Intermountain Gas Company
Mr. Jacob Darrington, Regulatory Analyst, will present Intermountain’s 1
regulated rate base and will calculate the Company’s regulated current revenue 2
deficiency.
Mr. Branko Terzic, Managing Director, Berkley Research Group, will
present testimony in support of the Company’s proposal to increase customer 5
charges to the residential and commercial markets, implement a demand charge
for the Company’s industrial customers and the reasons supporting the 7
implementation of the Company’s proposed fixed cost collection mechanism
(FCCM).
Ms. Lori Blattner, Senior Regulatory Analyst, will present the Company’s 10
Cost of Service study (COS) and will discuss other proposed changes to both
residential and general service rates and tariffs.
Mr. Dave Swenson, Manager of Industrial Services for Intermountain, will
explain proposed changes for the Company’s industrial tariffs that will provide an 14
incentive for economic development and industrial expansion within the
Company’s service territory.
Mr. Dan Kirchner, Executive Director of the Northwest Gas Association,
will discuss the current electric industry shift from coal to natural gas fired power
plants, and the comparative benefits of direct use of natural gas versus electricity,
for space and water heating.
Ms. Allison Spector, Manager of Conservation Policy for the Company
and Company affiliates, will discuss the development of Intermountain’s 22
proposed energy efficiency and demand side management programs.
Madison, Di 5
Intermountain Gas Company
Ms. Cheryl Imlach, Manager of Energy Utilization for the Company, will
discuss the implementation of Intermountain’s proposed demand side 2
management programs to include the proposed program tariffs.
Mr. Michael McGrath, Director, Regulatory Affairs, will discuss the
history of the Company’s general rate cases before the Commission and will
introduce the Company’s proposal to implement a fixed cost collection
mechanism (FCCM). Mr. McGrath will also present the proposed tariff changes.
Q. Do you have an initial observation regarding this rate case filing and general 8
rate increase request? 9
A. Yes. Intermountain faces many challenges in running a natural gas distribution
business, which challenges include maintaining a safe and reliable distribution
system for a growing customer base, installing new and expensive customer care
and billing system, and significant capital spending and associated depreciation
expense related to replacing core infrastructure. Despite these expense related
challenges, the Company has been able to provide to its customers the lowest
natural gas prices in the region, if not the country, and to avoid for several
decades having to file a general rate increase.
Q. Would you please summarize Intermountain’s requested increase in this 18
filing? 19
A. Increasing rate base and operating expenses require Intermountain to request a
rate increase of $10,165,700, or 4.04%. This increase is based on an overall rate
of return of 7.42 % with a capital structure common equity component of 50 %
and a return on equity of 9.90 %. The Company is using a 2016 test period that is
Madison, Di 6
Intermountain Gas Company
six months actual and six months forecast. Based on an average annual usage
level of 747 therms per year, the average RS-2 residential customer will see a bill
increase of $2.31 per month, from $46.83 to $49.14.
Q. When was the Company’s last general rate filing? 4
A. 1985.
Q. What are the Company’s current residential and commercial rates, the 6
proposed rates in this case, and the percentage rate increases by class?
A. Table M.1 below shows the Company’s percentage rate increase request for
Intermountain’s different rate schedules.
Table M.1 10
Rate Schedule Current
Rate
Proposed
Rate
%
Increase
$ Monthly
Increase
RS-1 Residential $0.89/Therm $0.92/Therm 3.26% $1.16
RS-2 Residential $0.75/Therm $0.79/Therm 4.93% $2.31
GS-1 General Service $0.69/Therm $0.73/Therm 6.29% $12.16
Q. What has been the Company’s history of rate changes over the last ten years, 11
and what has been the primary driver of those rate changes? 12
A. Shown below on Table M.2 are rate histories for Intermountain’s residential 13
customers from 1985 through 2016. As the Company has not filed a general rate
increase request since 1985, the retail residential rate decreases occurring from
2007 through 2016 are entirely a result of the drop in the wholesale price of gas.
Madison, Di 7
Intermountain Gas Company
Table M.2 1

Q. How do Intermountain’s retail rates compare to other natural gas utilities? 3
A. The company has worked hard to manage its business for the benefit of its
customers since its last general rate case, which was over thirty years ago. This
hard work has resulted in some of the most affordable residential prices in the
Western U.S. Tables M.3.1 and M.3.2 below, which were prepared at my
direction and are based on tariff reviews as of July 2016, compare
Intermountain’s residential and commercial rates to residential and commercial
rates of other gas utilities in the Northwest.
Madison, Di 8
Intermountain Gas Company
Table M.3.1– Comparison of IGC Residential Rates to other Northwest LDC Rates

Table M.3.2– Comparison of IGC Commercial Rates to other Northwest LDC Rates

As shown on Table M.3.1, comparing residential bills for 100 therms consumed,
Intermountain had the lowest bill out of ten different gas utility bills surveyed for
utilities in the Northwestern U.S. (Alaska, Idaho, Oregon, and Washington).
Table M.3.2 shows the same results regarding commercial gas utility rates, where
the Company had the lowest bill out of ten for 1,000 therms consumed. The
$114.31
$101.51 $99.26 $96.44 $91.83 $91.73 $88.29 $85.95 $85.14
$74.32
Avista-OR NW Nat-ORENSTAR-AK CNG-WA Avista-WA NW Nat-
WA
CNG-OR Avista-ID PSE-WA IGC-ID
(1) Data taken from tariffs as of 7/1/2016.
Residential Bill -100 Therms
Northwestern US(1)
$963
$901 $895 $863 $852
$776 $749 $721 $686 $671
Avista-OR CNG-WA NW Nat-OR NW Nat-
WA
ENSTAR-AK Avista-WA CNG-OR PSE-WA Avista-ID IGC-ID
(1) Data taken from tariffs as of 7/1/2016.
Commercial Bill -1,000 Therms
Northwestern US(1)
Madison, Di 9
Intermountain Gas Company
metrics shown on Tables M.3.1 and M.3.2 validate the Company’s commitment 1
to managing its business for the benefit of its customers.
Q. How do Intermountain’s A&G expenses compare to other natural gas 3
utilities? 4
As shown on Tables M.4.1, M.4.2 and M.4.3 Intermountain’s A&G expenses, on
a per customer basis, are consistently well below the average expense level of all
gas utilities, regional gas utilities, and like sized gas utilities included in the SNL
data base.
Table M.4.1 9
Table M.4.2 11
12
$2
3

$2
9

$2
8

$3
5

$1
9

$2
3

$1
5

$(
6
)
$(
2
)
$6
7

$6
6

$6
8

$5
2

$4
8

$4
2

$4
3

$4
3

$4
3

$3
1
6

$2
5
4

$3
3
4

$3
4
4

$3
3
0

$3
3
2

$3
7
1

$3
2
9

$5
2
0

$109 $107 $116 $119 $119 $120 $127 $123 $121
$(100)
$-
$100
$200
$300
$400
$500
$600
2007 2008 2009 2010 2011 2012 2013 2014 2015
Co
s
t
Year
A&G/Customer: All SNL Listed Gas Utilities
min IMG max average
$5
9

$6
6

$6
8

$5
2

$4
8

$4
2

$4
3

$4
3

$4
3

$6
7

$6
6

$6
8

$5
2

$4
8

$4
2

$4
3

$4
3

$4
3

$9
7

$1
2
0

$1
1
4

$1
3
7

$1
3
3

$1
2
3

$1
3
3

$1
3
2

$1
2
8

$80 $92 $90 $96 $88 $86 $85 $88 $91
$-
$50
$100
$150
2007 2008 2009 2010 2011 2012 2013 2014 2015
Co
s
t
Year
A&G/Customer: SNL Regional Gas Utilities
min IMG max average
Madison, Di 10
Intermountain Gas Company
Table M.4.3 1
2
Q. Is the Company proposing any rate changes in this case related to the 3
wholesale cost of natural gas? 4
A. No, Intermountain is not proposing changes in this filing related to the commodity
cost of natural gas or upstream pipeline transportation costs. Changes in the
commodity/wholesale cost of natural gas and transportation costs included in
customers’ rates are addressed in the Company’s annual Purchased Gas Cost
Adjustment (PGA) filing, which is occurring simultaneously with the filing of this
case. The concurrent PGA filing, if approved, will result in about a 6 % rate
reduction for Idaho customers. In other words, the PGA downward rate
adjustment is greater than the base rate increase proposed in this case, and the net
rate effect of the two filings, on their face, is an approximate 2 % rate reduction
for our customers.
Q. What are the factors causing Intermountain’s request for a base rate 15
increase in this filing? 16
A. Primarily, customer growth. Because of this growth, the Company’s rate base and
depreciation expenses are growing, along with concurrent increases in operating
$2
3

$4
2

$2
8

$5
0

$4
8

$4
2

$4
3

$4
3

$4
3

$6
7

$6
6

$6
8

$5
2

$4
8

$4
2

$4
3

$4
3

$4
3

$2
1
4

$2
1
2

$2
3
6

$2
7
4

$2
8
0

$2
8
6

$2
4
7

$2
3
9

$2
3
0

$102 $103 $110 $119 $122 $117 $113 $114 $112
$-
$100
$200
$300
$400
2007 2008 2009 2010 2011 2012 2013 2014 2015
Co
s
t
Year
A&G/Customer: SNL Like-Sized Gas Utilities
min IMG max average
Madison, Di 11
Intermountain Gas Company
costs necessary to serve this growing customer base. In addition to growth
stimulated investment and expenses, Intermountain is also needing to replace
information and technology systems that are primarily customer service related.
Another reason for the Company’s increasing operating expenses relates to the 4
regulatory demands associated with pipeline safety regulations and compliance.
Q. You mentioned that growth is a significant cost driver for this rate increase 6
filing. Could you explain that reason in greater detail? 7
A. Absolutely. Below is a table that charts customer growth in the Company’s 8
service territory that has occurred between 1985 and 2015.
Table M.5– 1985 – 2015 Customer Growth 10
11
Q. Is Customer growth important for the Company and the state of Idaho? 12
A. Yes. From a Company perspective, customer growth is important in allowing
Intermountain to spread its fixed costs more broadly and lower the per-customer
fixed cost component of rates. I also consider customer growth for the Company
Commercial
13,310
Commercial
31,860
Residential
85,418
Residential
302,790
-
50,000
100,000
150,000
200,000
250,000
300,000
1985 2015
Year
Intermountain Gas Company
Average Residential and Commercial Customers
1985 vs. 2015
Madison, Di 12
Intermountain Gas Company
to be a key indicator of a growing, healthy and diversified state economy.
Company witness Dave Swenson has additional testimony on this topic, on how
Intermountain could play a role in helping expand the Company’s customer base 3
and contribute to growing the state’s economy.
Q. You mentioned that growth allows the Company to spread fixed costs more 5
broadly among customers. If that is true, why is growth also a driver of this 6
rate increase request?
A. Primarily because of Intermountain’s investment in non-revenue generating
infrastructure, such as pipeline expansion and replacement. There are little or no
additional revenues associated with the Company having to replace pipe that is at
or nearing the end of its useful life, or where we have to replace a four-inch pipe
with an eight-inch pipe, because the smaller diameter can no longer meet the
transportation demand at that point in the system. Similarly, there is no additional
revenue generated as a result of Intermountain’s heavy investment in customer 14
care systems and information technology.
Q. Please summarize the Company’s proposal in this filing for a fixed cost 16
collection mechanism?
A. As discussed in much greater detail by Company witness Mike McGrath and
Intermountain’s consultant on this topic, Mr. Branko Terzic, the Company is
proposing a fixed cost collection mechanism (FCCM) that would break the link
between therm sales and revenues. The FCCM removes both the financial
disincentive to promote energy efficiency, as well as the incentive for the
Company to increase earnings by promoting gas usage. The FCCM would allow
Madison, Di 13
Intermountain Gas Company
Intermountain to partner more effectively with customers and other stakeholders
to support conservation efforts, without the conservation efforts having a negative
impact on the Company’s recovery of utility fixed costs. The Company is
proposing that these mechanisms become effective March 1, 2017.
Q. Does this conclude your direct testimony? 5
A. Yes. Thank you.