20160812McGrath 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 MICHAEL MCGRATH
FOR INTERMOUNTAIN GAS COMPANY
August 12, 2016

McGrath, Di 1
Intermountain Gas Company
Q. Please state your name, title and business address. 1
A. My name is Michael McGrath. I am the Director of Regulatory Affairs at
Intermountain Gas Company. My business address is 555 S. Cole Road, Boise,
Idaho 83707.
Q. Mr. McGrath, please summarize your educational and professional 5
experience.
A. I graduated from Brigham Young University with a Bachelor of Science Degree
in Business. I also have an MBA from Boise State University. I have attended,
and graduated from, numerous educational opportunities that focused on
regulatory ratemaking sponsored by the American Gas Association. I have been
with Intermountain Gas Company for over 30 years serving in progressively
responsible positions that included regulatory rate making, financial forecasting
and planning, industrial marketing and gas supply.
Q. What is the purpose of your testimony? 14
A. First I will discuss Intermountain’s proposal to implement a fixed cost collection 15
mechanism, in order to bring a level of consistency or stability to Company
revenues, from year-to-year. Second, I will discuss the tariffs that are attached to
the Application, pointing out tariff changes as well as describing the new tariffs.
Q. Addressing your first point, please describe the Company’s proposed 19
approach to fixed cost collection. 20
A. The Company is proposing to implement a Fixed Cost Collection Mechanism
(“FCCM”) that will break the link between Intermountain's (a) margin from its
residential and commercial customers and, (b) the natural gas deliveries to these
McGrath, Di 2
Intermountain Gas Company
same core market customers. As a result of the FCCM, the traditional link
between Intermountain’s gas deliveries and earnings will be broken. Therefore,
Intermountain’s revenues and earnings will be unaffected by variations in the
quantities of gas that it delivers to its residential and commercial customers.
Each month, the Company will reconcile the difference between (1) the
Company’s actual Fixed Cost Collection Margin per customer, by rate class, and
(2) the Company’s Allowed Fixed Cost Collection Margin per customer for that
month for the same rate class, as approved by the Commission in this proceeding.
Q. Please explain the term that you used, “Fixed Cost Collection Margin.” 9
A. The term Fixed Cost Collection Margin refers to the distribution margin that the
Company relies on to pay for the fixed costs of providing safe and reliable service
to its customers. The Fixed Cost Collection Margin is the margin associated with
the distribution cost per therm for the applicable rate schedules. Equivalently, the
Fixed Cost Collection Margin can also be calculated as total sales service margin
less PGA revenues and less revenues recovered from the customer charge for the
applicable rate schedules.
Q. Which rate schedules will be effected by the Company’s proposed Fixed Cost 17
Collection Mechanism?
A. The Company’s proposed FCCM will apply to Rate Schedules RS, Residential
Service; GS-1, General Service; IS-R, Residential Interruptible Snowmelt
Service; and IS-C, Small Commercial Interruptible Snowmelt Service.
In this testimony, references to Rate Schedule RS or Residential Service
will also include Rate Schedule IS-R, Residential Interruptible Snowmelt Service
McGrath, Di 3
Intermountain Gas Company
and references to Rate Schedule GS-1 or General Service will also include Rate
Schedule IS-C, Small Commercial Interruptible Snowmelt Service.
Q. Please explain why the Company is proposing to implement this FCCM. 3
A. The margin that the Company relies on to pay for the Company’s fixed costs to
(1) operate and maintain its system and (2) expand and replace aging portions of
its distribution system has been declining over time, as our customer’s homes and 6
businesses continue to use progressively less natural gas as a result of revisions to
building code standards, more efficient appliances as well as other customer
behaviors that conserve energy. While the Company’s proposal to implement a 9
Demand Side Management (DSM) program adds measurable value to our
customers and the environment, these same DSM programs will, nonetheless,
exacerbate an already decreasing usage, and therefore margin, per customer. The
FCCM that the Company is proposing will allow the Company to effectively
promote and advocate for its proposed DSM program without the financial
disincentives that currently exist, with margins directly connected to sales
volumes.
Q. In addition to the declining usage per customer resulting from energy 17
conservation measures, are there other determinants or factors than can also 18
influence the natural gas sales to the Company’s Rate Schedule RS and GS-1 19
customers? 20
A. Yes. The Company’s RS and GS-1 Fixed Cost Collection Margin can vary from
year-to-year due to fluctuations in the deliveries of natural gas (measured in
therms) caused by variability in the weather as well as changes in the local,
McGrath, Di 4
Intermountain Gas Company
regional, and national economy. The deviations in deliveries caused by these
determinants, however, are generally erratic and short-term in nature.
Q. How will the Allowed Fixed Cost Collection Margin per customer for Rate 3
Schedules RS and GS-1 be determined? 4
A. Each month, the Company will reconcile the difference between (1) the
Company’s actual Fixed Cost Collection Margin per customer, by the
aforementioned rate classes and, (2) the Company’s Allowed Fixed Cost 7
Collection Margin per customer for that month for those same rate classes, as
approved by the Idaho Commission in this proceeding. The initial Allowed Fixed
Cost Collection Margin per customer for each month will be calculated as the
monthly Fixed Cost Collection Margin divided by monthly billed customers,
separately for Rate Schedules RS and GS-1, based on the Distribution Cost per
therm rates and billing determinants1 that are approved in this proceeding, as
determined by the Idaho Commission, and calculated in the Company’s 14
compliance filing.
If the Distribution Cost per therm rates for Rate Schedule RS or Rate
Schedule GS-1 are revised at any time after the rates in this proceeding are
approved, the Allowed Fixed Cost Collection Margin per customer will be
accordingly revised based on the new Distribution Cost per therm rates for Rate
Schedule RS and Rate Schedule GS-1, and the billing determinants that are
approved in this proceeding.

1 For these rate schedules, “Billing Determinants” is the count of monthly bills (or customers) and the
total therms (and therms by rate block, if appropriate) that are used in a rate case, such as this
proceeding INT-G-16-02, to determine the rates that are approved by the Idaho Commission.
McGrath, Di 5
Intermountain Gas Company
The derivation of the initial Allowed Fixed Cost Collection Margin per
customer for Rate Schedules RS and GS-1, based on the Company’s proposed 2
rates, is shown in Exhibit 27.
Q. Please explain Exhibit 27. 4
A. The calculation of the Monthly RS Allowed Cost Collection Margin per customer
is shown on lines 1 to 9, and the calculation of the Monthly GS-1 Allowed Cost
Collection Margin per customer is shown on lines 10 to 30. Because the
methodologies that I used to calculate the RS and GS-1 Allowed Cost Collection
Margin per customer are identical I will only explain the RS methodology.
Rate Schedule RS customers and Therm sales are shown on Lines 1 and 2.
Company Witness Lori Blattner also used this data to calculate the Company’s 11
proposed RS and GS-1 rates and the annual totals on Exhibit 27 are also shown on
Ms. Blattner’s Exhibit 20. The Company’s proposed RS customer charge and 13
volumetric rate are shown on Exhibit 27, lines 4 and 5, and the calculated margins
associated with the customer charge and volumetric charge are shown on Exhibit
27, lines 7 and 8. Lastly, the monthly Allowed Cost Collection Margins per
customer are shown on line 9.
Q. Please explain (a) why the FCCM will apply only to Rate Schedules RS and 18
GS-1, and (b) why the FCCM will not apply to Rate Schedules LV-1, T-3 and 19
T-4. 20
A. The Company proposes to apply the FCCM to Rate Schedules RS and GS-1
because (1) the Company’s proposed DSM energy efficiency programs will
initially apply to residential and general service customers, but not to the
McGrath, Di 6
Intermountain Gas Company
customers served by rate schedules LV-1, T-3, and T-4; (2) most of the variability
in year-to-year FCCM margin that the Company experiences is associated with
sales to these two rate classes; and (3) these two customer groups represent a
significant portion of the Company’s allocated fixed costs and, therefore,
distribution margin.
I have prepared Table MM.1 below to show 2016 weather normalized deliveries
and distribution margin for Intermountain’s rate classes.
Table MM.1 2016 Weather Normalized Deliveries and Distribution Margin 8
RS
IS-R
GS-1
IS-C LV-1 T-3 T-4 Total
Distribution margin $53,232,253 $19,530,463 $403,987 $727,673 $9,183,113 $83,077,489
as % of total 64.1% 23.5% 0.5% 0.9% 11.1% 100.0%

Deliveries (MMBtu) 21,278,706 10,797,266 631,756 3,990,929 28,441,283 65,139,940
as % of total 32.7% 16.6% 1.0% 6.1% 43.7% 100.0%
Note: Proposed Rate Schedule RS includes current Rate Schedules RS-1 and RS-2. Proposed Rate
Schedule T-4 includes current Rate Schedules T-4 and T-5.
I have prepared Table MM.2 below to show total distribution margin and
volumetric margin by class, based on current rates and 2016 rate case billing
determinants.
Table MM. 2 Distribution Margin and FCCM Margin at Current Rates by 12
Proposed Class 13

RS
IS-R
GS-1
IS-C
CNG LV-1 T-3 T-4 Total
Distribution Margin $53,232,253 $19,530,463 $403,987 $727,673 $9,183,113 $83,077,489
Volumetric margin $39,048,014 $17,792,045 $403,987 $727,673 $8,731,332 $66,703,050
Volumetric as %
distribution margin
73.9% 91.1% 100.0% 100.0% 95.1% 80.3%
Note: Proposed Rate Schedule RS includes current Rate Schedules RS-1 and RS-2. Proposed Rate
Schedule T-4 includes current Rate Schedules T-4 and T-5.
McGrath, Di 7
Intermountain Gas Company
Table 1 demonstrates that 87.6 percent of total Company distribution margin are
provided by Residential Rate RS and General Service Rate GS-1 and 49.2 percent
of total deliveries are made to Residential Rate RS and General Service Rate
GS-1.
Q. Please describe specific elements of the FCCM. 5
A. The Company’s proposed FCCM will recover or return annual RS and GS-1
FCCM margin shortfalls or surpluses for each FCCM Year period, defined as the
12 months October through September. The RS and GS-1 FCCM adjustment
rates to be applied in the upcoming FCCM Year are calculated as the annual
margin shortfalls or surpluses for the 12 months ended September plus the final
reconciliation balance for the prior (October through September) FCCM Year
divided by projected annual RS and GS-1 therm deliveries for the upcoming 12
months ended September. The Company will file an annual FCCM calculation
prior to October 1st, using, as available, actual data and projected data for the
October through September period.
Q. Please describe the FCCM calculations that you mentioned in your prior 16
response. 17
A. I have prepared Exhibit 28 to provide an example of the calculations that I will
explain below. Example FCCM calculations for Rate Schedules RS and GS-1 are
provided on Exhibit 28, pages 1 and 2, respectively. The example “actual” 20
monthly customers and therms that are shown on lines 1 and 2 of both pages are
numbers that I created.
McGrath, Di 8
Intermountain Gas Company
The Company will determine the Fixed Cost Collection Adjustment Factor
(“FCCAF”) prior to the start of each annual FCCM year, i.e. each 12-month
period, October through September, according to the following process:
(1) For each month of the FCCM Year, the Company will calculate the monthly
actual FCCM margin per customer for Rate Schedules RS and GS-1 by
dividing monthly actual FCCM margin for Rate Schedules RS and GS-1 by
monthly billed customers for Rate Schedules RS and GS-1. Referring to the
FCCM calculations for Rate Schedule RS on Exhibit 28, page 1, monthly
actual FCCM margins are shown on line 8, and the monthly actual calculated
values of FCCM per customer are shown on line 11.
(2) For each month of the FCCM Year, the Company will calculate the difference
between Allowed and actual FCCM margin per customer, for Rate Schedules
RS and GS-1. The calculated monthly differences between allowed and actual
FCCM margin per customer Rate Schedule RS are shown on Exhibit 28, page
1, line 12.
(3) For each month of the FCCM Year period, the Company will calculate FCCM
margin shortfalls or surpluses by multiplying the margin per customer
differences times actual customers for each rate group, by month. The
calculated monthly FCCM margin shortfalls or surpluses for Rate Schedule
RS are shown on Exhibit 28, page 1, line 13.
(4) The Company will calculate RS and GS-1 FCCAFs by dividing the total
FCCM Year Rate Schedule-specific margin shortfall or surplus by projected
therm deliveries for the upcoming FCCM Year, October through September.
McGrath, Di 9
Intermountain Gas Company
The RS and GS-1 FCCAFs will also include a reconciliation of (a) the prior
FCCM Year (i.e., October through September) final FCCM margin shortfall
or surplus and (b) the prior FCCM Year adjustment charges or credits.
Referring to Exhibit 28, page 1, the Company would calculate the FCCM
Year 1 RS FCCAF by dividing the 12-month total deficiency, ($177,213;
Column (M), line 13) by projected FCCM Year 2 RS therms.
Q. Please explain how actual FCCM margin per customer will be calculated. 7
A. Every month, actual FCCM Margin, for RS and GS-1 separately, will be
determined directly from the actual booked base distribution margin on a billing
month basis, minus calculated customer charge margin.
Q. Please describe the timing of FCCM calculations, filings and rate 11
adjustments. 12
A. The FCCM Year adjustment factor that is in effect starting October 1st of each
year will be based on the calculations related to the prior FCCM Year, that is,
FCCM calculations for the prior October through September period. Each FCCM
filing will also include a final reconciliation of actual and allowed FCCM margin,
two FCCM Years ago. I have prepared Exhibit 29 to illustrate the timing of
FCCM calculations and FCCAFs. Referring to Exhibit 29, the FCCAFs that will
be in effect starting October 1 for FCCM Year 3 will be calculated based on (a)
FCCM Year 2 margin shortfalls or surpluses plus (b) a final reconciliation of
FCCM Year 1 margin shortfalls or surpluses and FCCM Year 1 FCCAF revenues,
(c) divided by FCCM Year 3 projected delivery volumes (therms).
McGrath, Di 10
Intermountain Gas Company
Q. Will the calculation of the first FCCAFs after the FCCM is approved be as 1
depicted in Exhibit 29? 2
A. It is not likely that the timing of the first FCCAF will be as depicted in Exhibit 29,
unless the FCCM is approved effective October 1. The initial FCCAF will
become effective upon Commission approval, on the first October 1 following the
effective date of the FCCM. That initial FCCAF will recover the actual and
projected margin surpluses and shortfalls for each month starting with the
effective date of the FCCM, through September. For example, if new rates and
the FCCM are approved in this proceeding effective February 1, 2017, the first
RS and GS-1 FCCAFs would become effective October 1, 2017 based on FCCM
margin surpluses and shortfalls for the eight months February through September,
2017, divided by projected therm sales for October 2017 through September
2018.
Q. If the Company’s base distribution rates are modified before new base rates 14
in the Company’s next base rate case become effective, will any of the FCCM 15
calculations be modified? 16
A. Yes. If the Company’s base distribution rates are modified before the Company’s 17
next base rate case, the Company will make a corresponding revision to the
Allowed Fixed Cost Collection Margins per customer, by month. The Company
will include the revised Allowed Fixed Cost Collection Margins per customer,
with supporting documentation, with between-rate-case rate change filings.
Q. Has the Company prepared an FCCM tariff? 22
McGrath, Di 11
Intermountain Gas Company
A. Yes. The Company’s proposed a FCCM Tariff which is shown as Original Tariff
Sheet No. 17, pages 1 through 4, which are shown on both Exhibit 30 and 31.
Q. Could you briefly describe the tariff package that implements the rates 3
proposed by Intermountain in this case? 4
A. Yes. Exhibit 30, which I am sponsoring, shows the changes to Intermountain’s 5
tariffs, by striking over proposed deletions to existing tariffs and underlining
additions or amendments to those existing tariffs. Exhibit 31, which I am also
sponsoring, shows these same tariffs, both existing and new, in a clean format.
Exhibit 31 is also shown as Attachment A to the Application.
Q. Does this conclude your testimony? 10
A. Yes.