20170215Adams Rebuttal.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 UTILITIES 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
Case No. INT-G-16-02
REBUTTAL TESTIMONY OF MICHAEL ADAMS
FOR INTERMOUNTAIN GAS COMPANY
February 15,2017
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I. INTRODUCTION AI\ID WITNESS QUALIFICATIONS
Please state your name and business address.
My name is Michael Adams. My business address is293 Boston Post Road West,
Suite 500, Marlborough, Massachusetts 01752.
By whom are you employed and in what position?
I am a Senior Vice President with Concentric Energy Advisors, Inc.
('oConcentric").
Please describe Concentric.
Concentric provides regulatory, economic, market analysis and financial advisory
services to energy and utility clients across North America. Our regulatory and
economic services include regulatory policy, utility ratemaking (e.g., cost of
service, cost of capital, rate design, and alternative forms of ratemaking), and the
implications of regulatory and ratemaking policies. Our market analysis services
include energy market assessments, market entry and exit analyses, and energy
contract negotiations. Our financial advisory activities include merger,
acquisition and divestiture assignments, due diligence and valuation assignments,
project and corporate finance services, and transaction support services.
What are your responsibilities in your current position?
As a consultant, my responsibilities include assisting clients in identiffing,
assessing and addressing business issues. My primary areas of focus have been
regulatory, financial, and accounting-related issues.
Have you ever testified in a regulatory proceeding?
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Yes. I have provided expert testimony or reports before the Arkansas Public
Service Commission; the Connecticut Public Utilities Regulatory Authority; the
Federal Energy Regulatory Commission (FERC); the Hawaii Public Utility
Commission; the Illinois Commerce Commission; the Maryland Public Service
Commission; the Massachusetts Department of Telecommunications and Energy;
the Missouri Public Service Commission; the New Hampshire Public Utilities
Commission; the Oklahoma Corporation Commission; the Ontario Energy Board;
the Pennsylvania Public Utility Commission; the Public Utilities Commission of
Texas; and the State Corporation Commission of Virginia. My testimonies
typically address issues related to cost of service/revenue requirement, shared
services, accounting-related issues, cash working capital, and/or cost allocations.
Please describe your education.
I have an M.B.A. in Finance from the University of Illinois - Springfield and a
B.S. in Accounting from Illinois College. I am a member of the American
Institute of Certified Public Accountants and the Illinois Society of Certified
Public Accountants.
Please describe your qualifications.
I have over thirty-five years of direct experience in the public utility industry. I
have worked for an investor-owned utility, a regulatory agency, and most recently
as a consultant to the energy industry. I have managed and/or participated in a
wide variety of consulting engagements and, as previously stated, I have provided
expert testimony before Federal and State regulatory bodies.
II. PURPOSE AND SCOPE
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What is the purpose of your rebuttal testimony?
I have been asked by Intermountain Gas Company ("Intermountain" or the
'oCompany") to respond to the direct testimony of Idaho Public Utilities
Commission (the "Commission") Staffwitness Terri Carlock, as it relates to
inclusion of cash working capital ("CWC") in the Company's rate base. First, I
will respond to the concems set forth in the direct testimony of Staff witness
Carlock. I will then provide a detailed explanation of how the Company's CWC
requirement, as included in the direct testimony of Company witness Jacob
Darrington, was determined.
Please define what you mean by the phrase "cash working capital."
Cash working capital is the amount of funds required to finance the day-to-day
operations of the Company.
Are you sponsoring any exhibits in this proceeding?
Yes. Company Exhibit Nos. 34 and 35 have been prepared under my direction
and supervision and are accurate and complete to the best of my knowledge and
belief. Specifically, Exhibit 34 shows the revenue lag and expense leads
developed by analyzing the Company's cash transactions and invoices for the
twelve months ended December 31,2015. The developed leads and lags were
applied to the 2016 test year expense levels to determine the Company's
requested level of CWC.
Exhibit 35 provides a list, by State regulatory jurisdiction, of whether the
State includes working capital in rate base, and, if so, the manner by which the
working capital requirement is determined.
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Did the Company include the requested level of CWC in its direct case?
Yes, the CWC requirement was presented in the direct testimony of Mr. Jacob
Darrington.
III. SUMMARY OF TIIE CONCERNS EXPRESSED BY STAFF WITNESS
CARLOCK
What position did Staff witness Carlock propose in response to the
Company's inclusion of CWC in its rate base?
As set forth in Ms. Carlock's direct testimony, Staff recommended removing the
CWC requirement from rate base.
What support does Ms. Carlock offer for her position?
Staff witness Carlock's position is based solely on the rationale that the Company
had used a lead-lag study to quantifu the amount of CWC. According to her
testimony, Staff does not believe that the Company had adequately shown that
Company shareholders had supplied the funds, and therefore Staff recommends
the removal of CWC from rate basel.
Does Ms. Carlock express other concerns regarding the inclusion of CWC in
the Company's rate base?
Yes. Ms. Carlock states that"a lead lag study does not adequately show that
shareholders are supplying the cash for CWC.2" She further opines that "often
when Inventories, and Materials and Supplies are included in rate base utilities
cannot demonstrate the need for CWC in rate base.3" Finally, Ms. Carlock states
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t Direct Testimony of Terri Carlock, p.4,lnes20-24.
2 Id., p. 5, lines 9-l l.3Id., lines l4-17.
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that "Lead times are directly determined by the Company operations and
practices. Revenue Lag times are also influenced by the Company billing
operations and collection practices. A change in operating practices will change
the level of working capital and can even show no working capital requirements.
Staff still doesn't believe the Company has adequately shown that the source of
the frrnds is truly supplied by the Company shareholders.a"
IV. RESPONSE TO STAFX'WITNESS CARLOCK'S POSITION
a. Is it unusual for regulated utilities to include a CWC requirement in rate
base?
A. No. Many state regulatory jurisdictions allow the utilities that they regulate to
include a CWC requirement in rate base, as shown on Exhibit No. 35. At least
four States determine the level of CWC employing the FERC methodology (i.e.,
1/8th of O&M) or some other method. Therefore, over 80 percent of the States
allow the inclusion of CWC in rate base. No instances were identified, excluding
Idaho, whereby a State determined a utilities' CWC allowance based upon a
"balance sheet analysis" as suggested by Staffwitness Carlock.
a. Is the use of a lead-lag study the predominant method relied upon by State
regulatory commissions to determine a regulated utilities' CWC
requirements?
A. Yes. Of the 50 States, over two-thirds of the States determine the level of cash
working capital based upon the results of a lead-lag study. I have included Idaho
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as a State which determines a utilities' CWC requirement based upon a lead-lag
study given the decisions in the Rocky Mountain Power proceedings.
a. What other methods have State regulatory agencies relied upon to determine
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a regulated utilities' CWC requirements?
While I have found the leadJag study to be the predominant method, the FERC
and some State regulatory agencies have utilized the 45 days, or 1/8th of "O&M"
expenses as an alternative method of determining a company's CWC
requirements. The method of determining a company's CWC requirement could
not be determined for seven (7) States.
Has the ldaho Public Utilities Commission relied upon a lead-lag study to
determine a regulated utilities' CWC requirements?
Yes. [n its' 2008 (PAC-E-08-07 (filed 91312008)) and 2011 (PAC-E-l1-12 (filed
412712011)) rate cases, Rocky Mountain Power Company updated lead-lag studies
supporting the calculation of CWC included in rate base. The CWC calculations
were stated to be consistent with the treatment included in its' last two general
rate cases. In the 2010 General Rate Case, the Commission accepted Rocky
Mountain Power's 2007 lead lag study with the directive that in the next rate case
it demonstate that a lead lag study appropriately considers the source of the
funds.
How did Roclry Mountain Power demonstrate the source of funds included in
the leadJag study, as directed by the Commission?
Rocky Mountain responded that a lead-lag study provided the best measurement
of its' required working capital funds and appropriately considered the source of
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I the funds.s A settlement was reached in the proceeding, and the Commission's
final Order was silent on the topic of CWC.
How do you respond to Ms. Carlock's statement that 6'a lead lag study does
not adequately show that shareholders are supplying the cash for CWC"?
I disagree with Ms. Carlock's statement. The Company has only two sources of
funds: investor-provided flrnds or customer payments. By examining the timing
of cash transactions via the lead-lag study, it can be determined whether the funds
are investor provided or customer provided. The net results of the lead-lag study
demonstrated that the Company's investors had, on a net basis, supplied funds to
maintain operations while awaiting customer funds.
Please elaborate.
As I previously discussed, the Company provides service to its customers
throughout a given month, bills its customers, and awaits payment for the services
provided. On average, the Company has a revenue lagof 44.96 days. This
represents the period of time during which investors provide funds that allows the
Company to continue to provide services to its customers while awaiting
payment.
The investor supplied funds are offset by services that are provided to the
Company by suppliers, for which customer payments are made prior to the
remittal of payments by the Company to its suppliers. These instances represent
customer provided funds.
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5 Direct Testimony of Steven R. McDougal, Case No. PAC-E-I1-l2,p.32,lne 14 -p.33, line 14.
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The lead-lag study found that, on average, dtring the test period, investor-
provided funds exceeded customer-provided funds in the amount of $1,143,988.
This is the amount of CWC that represents the net difference between investor-
provided funds and customer-supplied funds. This amount represents the amount
of net CWC that the Company has included in rate base and on which the Company
should be able to earn a return.
Please respond to Ms. Carlock's comment that "often when fnventories, and
Materials and Supplies are included in rate base utilities cannot demonstrate
the need for CWC in rate base."
The inclusion of Inventories, and Materials and Supplies in rate base have nothing
to do with the level of CWC that should be included in rate base. Inventories and
Materials and Supplies reflect expenditures that the Company makes to have the
necessary items on hand to be able to provide prompt and reliable service to its
customers. These are items that are included in rate base and on which the
Company eams a return. The inclusion of Inventories and Materials and Supplies
in rate base in no way diminishes the need for, or the appropriateness of,
including the CWC requirement in rate base.
Further, the lead-lag study only examined cash expenditures for services
provided by or to the Company, for the benefit of its customers. Therefore, the
items included in rate base as inventories and materials and supplies are not also
considered in the lead-lag study.
How do you respond to Ms. Carlock's statement that "Lead times are directly
determined by the Company operations and practices. Revenue Lag times are
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also inlluenced by the Company billing operations and collection practices. A
change in operating practices will change the level of working capital and can
even show no working capital requirements. Staff still doesn't believe the
Company has adequately shown that the source of the funds is truly supplied
by the Company shareholders"?
I have previously responded to Ms. Carlock's inaccurate assertion that the
Company has not adequately shown that the source of funds reflected by the
CWC requirement have been supplied by the Company's shareholders. But, I
also take exception to her statement that the lead times are directly determined by
Company operations and practices, and that the revenue lag is also influenced by
Company billing operations and collection practices.
Do you agree that lead times are directly determined by the Company
operations and practices?
No. While I understand Ms. Carlock's statement, it is not as cut and dry as she
implies. For example, when the Company uses a vendor to provide a service, the
service provider will perform the work, submit an invoice for reflecting the cost
that Intermountain should pay for the work performed, and the time to remit
payment for such services. While the Company could arguably delay payment for
the services provided, if done so repeatedly, the service provider will either
include an interest charge on the overdue balance, increase the cost of providing
the service to the Company, or refuse to work for the Company in the future.
Therefore, the terms of the expenditure are largely outside of the Company's
control.
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Using wages as another example, the Company has to compete for labor
against other companies. Employees look not only for a competitive wage, but
certainty as to the timing of payment for the services that the employee provides.
Once again, the Company's practices are largely driven by factors outside of its
control.
Based upon your review of the Company's operations and practices, did you
identify any practices that were materially different than those of other
utilities for which you have prepared leadJag studies?
No. The Company's operations and practices are, in large part, consistent with
those that I have examined for other regulated utilities.
How do respond to Ms. Carlock's statement that'.Revenue Lag times are also
influenced by the Company billing operations and collection practices"?
Once again, I disagree with Ms. Carlock. The timing of many of practices
associated with the provisioning of services to its customers and billing and
collection practices employed to receive payment for such services are set forth in
the Company's tariffs and administrative rules approved by the Commission.
Based upon your review of the Company's billing and collection practices, did
you identiff any practices that were materially different than those of other
utilities for which you have prepared leadJag studies?
No. The Company's billing and collection practices are, in large part, consistent
with those that I have examined for other regulated utilities.
Was Staff asked if they believed that the Company's billing operations and
practices were inappropriate?
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I A. Yes, and in response to Request No. 4, Staffresponded "No".
a. Has Staffsuggested an alternative to the inclusion of CWC in the Company's
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rate base?
In response to Request No. 6, Staffsuggested that the Company perform ooA
Balance Sheet Analysis demonstrating shareholder capital exceeds other sources
of capital when the use of funds exceeds rate base components earning a return."
Does Staff witness Carlock provide an explanation of what is meant by "A
Balance Sheet Analysis"?
No. Staff did not provide an explanation as to what analyses should be performed
and/or what the results of the analyses may indicate.
What does a t'Balance Sheet Analysis" mean from an accounting perspective?
A review of the balance sheet, which can be referred to as a "balance sheet
analysis", provides insight into the financial health of a company. Comparison of
the balance sheet of a business over time provides a general indication of
performance of the business.
The balance sheet analysis would begin with a comparison of total assets
and liabilities. The difference is a company's net worth. If total assets exceed
total liabilities, the business is solvent and net worth is positive. When liabilities
exceed assets, the business is insolvent and net worth is negative.
In your opinion, does the comparison of total assets and liabilities provide an
indication of Intermountain's CWC needs?
No. A company's net worth and its' CWC requirements are not the same thing.
Further, the Company's balance sheet may include both regulated and non-
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regulated assets and liabilities, whereas the leadJag study appropriately examines
only those revenues and expenses associated with the provisioning of regulated
gas service to Intermountain's customers.
Have you also examined Intermountain's current assets and current
liabilities?
Yes. From an accounting perspective, working capital can be assessed by
calculating current assets minus current liabilities. If current assets are less than
current liabilities, an entity has a working capital deficiency.
What were the results of the current asset and current liabilities analysis?
Based upon Intermountain's year end 2015 financials, current liabilities exceeded
current assets by $10.7 million, which means the Company has a working capital
deficiency.
Are there other methods that have been accepted by regulatory agencies to
quantify the level of working capital to be included in rate base?
Yes. The FERC and some State regulatory agencies have the approved the
inclusion of 45-days (or 1/8th) of annualized O&M expenses as an approximation
of CWC.
Have you calculated the level of CWC that would be included in rate base
using the 45 day or 1/8th method?
Yes, employing the 45 day or 1/8th method, the CWC requirement would be $28.1
million. This figure represents 1/8th of the Company's total O&M expenses of
$225 million6.
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After reviewing Staff witness Carlock's filed testimony, have you modified
your recommended level of CWC that should be included in the Company's
rate base?
Nothing in Ms. Carlock's testimony has modified my belief that the Company has
accurately quantified and properly included in rate base $1,143,9887 of CWC.
V. LEAD.LAG STUDY
Is the analysis of the Company's revenue lags and expense leads typically
referred to as a leadJag study?
Yes. The Company's CWC requirements were determined by the preparation of a
lead-lag study that analyzed 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 "lead" and "lag" are both
measured in days. The dollar-weighted lead and lag days were then divided by
365 to determine a daily CWC factor. This CWC factor was then multiplied by
the annual test year cash expenses to determine the amount of CWC required for
operations. The resulting amount of CWC was then included as part of the
Company's rate base. The test year operating expenses to which the leads and
lags were applied in this proceeding are described in the testimony of Company
witness Darrington.
What are the various leads and lags that were considered in the CWC
analysis?
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1A.Two broad categories of leads and lags were considered: 1) lags associated with
the collection of revenues owed to a company ("revenue lags"); afi2) lead times
associated with the payments for goods and services received by the Company
(o'expense leads").
What is a revenue lag?
A revenue lag refers to the elapsed time between the delivery of the Company's
product (i.e., natural gas) and its ability to use the funds received as payment for
the delivery of the product.
What is an expense lead?
The expense lead refers to the elapsed time from when a good or service is
provided to a company to the point in time when the company pays for the good
or service and the funds are no longer available to the company.
What was the source of information you employed to determine the leads and
lags in your CWC analysis?
Information from the Company was utilized, includingdata from their Accounts
Payable, Customer Service, Human Resources, Payroll, and Tax systems. The
information derived from these sources, together with analyses of specific
invoices, led to the determination of the appropriate number of leadJag days for
Intermountain.
1. Revenue Lag
How was the revenue lag determined?
The revenue lag measures the number of days from the date service was rendered
by the Company until the date payment was received from customers. In the
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calculation, the revenue lag was divided into three distinct components: l)
service lag;2) billing lag; and 3) collections lag. An explanation of each
component of the revenue lag follows.
What is meant by service lag?
The service lag refers to the number of days from the mid-point of the service
period to the meter reading date for that service period. Using the mid-point
methodology, the average lag associated with the provisioning of service was
15.21 days (365 days in the year dividedby 12 months divided by 2).
What is meant by billing lag?
Billing lag refers to the average number of days from the date on which the meter
was read until the customer was billed. The billing lag was determined by
atalyzingthe Company's monthly billing schedules and meter reading records.
The average billing lag was determined to be 4.40 days.
What is meant by collections lag?
The collections lag refers to the average amount of time from the date when the
customer received a bill to the date that the Company received payment from its
customers. Based on weighted average data from the Company and by
considering accounts receivables balances by days aged, the average collection
lag was determined to be 25.35 days.
Please summarize the calculation of base revenue lag days.
The calculation of the overall base revenue lag, by lag component, is summarized
in the following table.
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Revenue Lag by Component
Service Las 15.21
Billing Lag 4.40
Collections Lag 25.35
Total Las 44.96
2. Expense Leads
What expense-related leads were considered in the lead-Iag analysis?
Lead times associated with the following expense categories were considered in
the lead-lag study: a) employee benefits; b) base payroll; c) FICA (social security)
and other withholdings, including federal and state withholdings; d) cost of gas; e)
other operations and maintenance expenses; f) general taxes other than income
taxes, g) income taxes; and h) interest on long-term debt.
How was the expense lead associated with the Company's Employee Benefit
programs considered in the analysis?
The Company makes monthly premium payments to MDU Resources Group, Inc.
for various employee benefits. The premium payments include medical, dental,
vision, life, long-term disability, accidental death and dismemberment, business
travel, retiree medical, retiree dental, and retiree Medicare supplement payments.
Based on the monthly premium payments a dollar-weighted lead time of 9.24
days was calculated for the l2 months ended December 31,2015.
Provide an explanation of the expense leads associated with the Company's
payroll expenses.
Intermountain's employees are paid every other Friday. Payroll lead days were
determined by averaging the nominal lead time by pay period. The resulting
expense lead was 12.93 days.
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Please explain the lead effect associated with F'ederal Insurance Contribution
Act (6'FICA").
The Company electronically transfers the dollar amounts associated with the
employee and employer share of FICA to the appropriate federal authorities on
their respective due dates. For FICA, the next business day after payroll is the
statutory due date to the federal authorities. Taking this payment schedule into
account and considering weekends and bank holidays, an incremental lead time of
3.07 days was calculated for FlCA-related transactions. The FICA lead time is
"incremental" in the sense that it should be added to the lead time on base payroll
to derive the total amount of lead time associated with the remittance of FICA
withholdings. When added to the base payroll lead time, a total expense lead for
FICA of 16.00 days was calculated.
Please explain the lead effects associated with Federal and State withholding
taxes.
The Company electronically transfers the dollar amounts associated with the
employee and employer share of Federal withholding taxes on the next business
day after payroll is remitted and State withholding taxes per the Idaho State Tax
Commission payment due dates. Taking this payment schedule into account and
considering weekends and bank holidays, an incremental lead time of 3.07 days
was calculated for federal withholdings and 11.78 days for state withholdings.
The Federal and State withholding tax lead time is "incremental" in the sense that
it should be added to the lead time on base payroll to derive the total amount of
lead time associated with federal and state withholding taxes. When added to the
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base payroll lead time, a total expense lead of 16.00 days for Federal withholdings
and24.70 days for State withholdings was calculated.
What is the overall expense lead time associated with the Company's payroll
and withholdings?
Based on the expense leads explained above for payroll, FICA, and other Federal
and State withholding taxes and taking into account expense amounts for 2015, a
weighted average lead time of 13.82 days was determined for payroll and
withholdings.
What is the expense lead time associated with the Company's purchases of
natural gas?
Based on an examination of invoices from commodity and pipeline suppliers to
the Company, a weighted expense lead time of 41.29 days was determined. This
lead time includes a half month of service lead time.
What are other operations and maintenance (O&Nt) expenses and what lead
times were associated with such expenses?
The Company engages in transactions with other vendors (not associated with
pensions, benefits, payroll, fuel, or taxes) for a variety of purposes including
facility maintenance, system maintenance, and customer service. Invoices from
providers of such services were analyzedin order to estimate a lead time
associated with payment for services related to other O&M activities. The
analysis indicates that on average, invoices were paid by the Company 31.74 days
after receipt.
What are the various general taxes considered in the analysis?
Adams, Reb. 18
Intermountain Gas Company
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lA.The general taxes considered in the study included Franchise Fees, Property
Taxes and Payroll Taxes.
Explain the lead effects associated with each type of general taxes considered
in the analysis.
The statutory due date for franchise fees in Idaho vary by jurisdiction. Taking
these varied schedules and actual payment information into consideration, a
dollar-weighted expense lead of 169.50 days was calculated.
The Company makes semiannual property tax payments. Taking the
actual due dates into consideration, an expense lead of 131.88 days was
determined.
The State withholdings expense lead explained above, 24.70 days, was
utilized for the payroll taxes expense lead.
How did your study address State and Federal income taxes?
The lead time associated with State and Federal income tax payments was based
on the provisions of the Intemal Revenue Code that require estimated tax
payments of 25 percent of total income taxes due on April 15, June 15, September
15, and December 15 of the current year. Taking this schedule into consideration
a lead time of 37.88 days for income taxes was determined.
Provide a description of how lead times associated with the Company's
interest expenses were addressed by the study.
The Company generally made interest payments on its long-term debt twice a
year at varying times. Using actual payment dates on interest payments, a dollar-
weighted lead of 87.68 days for interest payments was determined.
Adams, Reb. 19
Intermountain Gas Company
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a.Based upon the results of the leadJag study and the level of expenses
sponsored by Company witness Darrington, what level of CWC
requirements was included in Intermountain's rate base?
As shown on Exhibit 34, a CWC requirement of $1,143,988 was included in the
Company's rate base.
Does this conclude your rebuttal testimony?
Yes, it does.
Adams, Reb. 20
Intermountain Gas Company