20170215McGrath Rebuttal.pdf

Ronald L. Williams,ISB No. 3034
Williams Bradbury, P.C.
1015 W. Hays St.
Boise,ID 83702
Telephone: [phone]
Email: [e-mail]
Attomeys 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 MoGRATH
FOR INTERMOUNTAIN GAS COMPANY
February 15,2017
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Please state your name, position, and business address.
My name is Michael McGrath. I am the Director of Regulatory Affairs at
Intermountain Gas Company ("Company", "Intermountain" or "IGC"). My
business address is 555 S. Cole Road, Boise, Idaho 83707.
Are you the same Mike McGrath that pre-filed direct testimony in this case
on behalf of Intermountain Gas Company?
Yes.
What is the purpose of your rebuttal testimony?
The purpose of my rebuttal testimony is to address concerns related to the
proposed FCCM that were raised by Staffand the Idaho Conservation League
(ICL)AIW Energy Coalition ("NWEC"). I will also summaizethe effect on
revenue requirement from each of the adjustments proposed by the Company.
Please summarize your rebuttal to Staffs and NWEC's testimony that takes
issue with the Company's fixed cost collection mechanism (FCCM).
StafPs Mr. Lobb and NWEC's Mr. Rivera criticize the FCCM as follows:
l. Mr. Lobb asserts that the Company provided no support for declining use per
customer or impact of economic conditions (Lobb page l2,lines 12-15);
2. Mr. Lobb raises a concern that the Company proposes to include GS in the
FCCM, yet no DSM programs are currently proposed for the GS rate class
(Lobb page 13. Lines 17-23);
3. Mr. Lobb testifies that the Company's proposed five-year DSM spending plan
has an insignificant effect on sales, based on Staffanalysis of the revenue
impact of DSM programs on fixed revenue recovery for the Company,
McGrath, Reb. I
Intermountain Gas Company
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compared to Avista Electric, Avista Gas and Idaho Power. (Lobb, page 11, line
25 through Page l2,line 11);
4. Mr. Lobb asserts that the FCCM contains a provision to collect incremental
customer fixed costs in support of new customer additions, yet the Company has
provided no evidence that there are incremental costs to serve these customers
(Lobb page l2,line 20 through page 13, line 8);
5. Mr. Lobb argues that the Company cost of service study (COSS) is inadequate,
and therefore the Residential class' cost responsibilities under existing tariffs
may not be accurate, so therefore the FCCM revenues would also be
inaccurately weighted (Lobb page 13, line 17 through pagel4,line 10);
6. Mr. Lobb states that because both the Company and Staff are proposing
increases to fixed customer charges, that the FCCM is unnecessary. (Lobb page
14, line 1l through page 15, line 5),
7. Mr. Lobb recommends a reduction to allowed ROE if the FCCM is approved
(Lobb page 15, lines 6-12);
8. Mr. Rivas, representing NWECI, asserts that weather, economic conditions, or
customer behaviors are'oa normal risk to utility operations" (Rivas, page 9, lines
2t -23);
9. Mr. Rivas recommends that if the FCCM is approved,a3%o annual rate cap
should be implemented (Rivas,page 10, lines 19-20);
I ICL and NWEC generally support decoupling (referred to in testimony as "revenue
regulation"). (Rivas, page 9 lines 17-18).
McGrath, Reb. 2
Intermountain Gas Company
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10. Mr. Rivas further contends that sales will likely increase because of fuel
switching and the FCCM is unnecessary (Rivas page I l, lines 20-22), and
1 l. Mr. Rivas asserts that "A proper rate design includes a low monthly customer
charge along with a decoupling mechanism" (Rivas, Page l5 line 14).
What is the Company response to these criticisms?
My testimony below will discuss, and provide further evidence, in support of the
following:
1. Declining Normalized Use Per Customer ("NUPC") has been, and continues
to be, a significant issue for the Company;
2. Incremental costs for new customers added to the distribution system must be
considered in the design of the FCCM;
3. The FCCM must be implemented as part of the instant case in order to fairly
compensate for the adverse financial impacts that new conservation measures
will have on the Company's distribution revenues and returns;
4. Revenue stability helps the utility remain financially strong, can help reduce
the frequency of rate filings, but does not guarantee earnings;
5. Decoupling is symmetrical and fair, and eliminates risks to both the Company
and ratepayers, and works well with IGC's proposed rate design, and
6. Decoupling is widespread throughout the country, and the Company's
proposed FCCM will put the Company back in line with its peers.
Please discuss the Company's experience with declining NUPC.
McGrath, Reb. 3
lntermountain Gas Company
I A. The following summarizes IGC's residential use per customer, expressed on a
2 weather-normalizedbasis:2
3 RS-f Chart I
12-Month Rolting Normalized Use Per Customer (R$1)
650
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R' = o-7631
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I 5 S| B A 5l 3B B 2B I I E El gl a A I b a A P = S! S2 = P eeE-t t t s 6 6 t t f, tt6*fr t t6tt t fr t fr f, 6 6
As the above Chart I shows, Rate Class R-l has experienced a significant and
persistent decline in NUPC over the past two decades. Similarly, as shown on
Chart 2 below the R-2 residential class has also experienced significant and
consistent declining NUPC.
2 Historical usage normalized consistent with Company historical and proposed normalization
methodology.
McGrath, Reb. 4
Intermountain Gas Company
I RS-2 Chart2
l2-Mcnth Rolling Normalized Use Per Customer (RS-z)
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33383???3388??3?3?3?BE$E EEE
a. Please explain why R-l and R-2 NUPC has persistently declined over the past
A.
two and one half decades?
Declining NUPC is a documented, long-term trend throughout the country. This
trend was examined extensively by such organizations as the American Gas
Association, which reported a trend in declining use per residential natural gas
customer of 1 percent annually from 1980 to 2000, and accelerated thereafter:
o Weather-adjusted use per residential customer fell by 13.1 percent
from 2000 through 2006.
o The annual rate of decline in this 2000 to 2006 timeframe more than
doubled relative to the pre-2000 period, increasing to 2.2 percent
annually.
o Further acceleration was witnessed in the 2004 to 2006 period, as
evidenced by a4.9 percent annual rate of decline."3
3 An Economic Analysis of Consumer Response to Natural Gas Prices, by Frederick Joutz and Robert P.
Trost, prepared for the AGA, March 2007.
McGrath, Reb. 5
lntermountain Gas Company
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Categorically, declining NUPC can be attributable to:
l. Utility-sponsored Energy Efficiency (EE)/DSM programs;
2. Customer self-funded conservation measures;
3. Improvements in appliance efficiencies and building code
requirements,
4. Consumer responsiveness to increase in nafural gas prices
and/other economic factors, and
5. Trends in weather and climate changes.
Please explain each of these factors.
Utility-sponsored EE/DSM programs are similar to what the Company is
proposing in the instant case. These Company-funded measures result in direct
energy efficiency spending for Intermountain Gas customers. Each program will
have an avoided unit of energy and known levels of participation.
Customer-funded conservation measures are the result of customers acting
independently of utility-sponsored programs (e.g., when a customer installs
insulation purchased at a home improvement store). Unlike company-funded
conservation programs that track actual installed energy efficiency measures,
customer-funded installations are not tracked by the utility.
Intermountain Gas has proactively promoted customer self-funded conservation
through various publications and outreach.a This outreach, as well as broader
regional and national messaging, changes customers' attitudes towards energy use
and can spur investment in energy savings measures.
4 See*TIfr EFFICIENT AND DIRECT USE OF NATURAL GAS" section of the Company's 2015
Integrated Resource Plan, pages 80-85. Case No. INT-G-I5-01
McGrath, Reb. 6
Intermountain Gas Company
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Appliance effrciencies and building code changes affect customer usage whenever
an existing (less efficient) appliance is replaced by a new (more efficient) one,
and new housing stock replaces old stock. There are known changes to building
requirements and appliance efficiency standards that have been enacted over the
past few decades. These include increased appliance efficiency requirements for
furnaces and hot water heaters. Additionally, Idaho has passed a series of more
stringent building codes.
Price elasticity and economic impact on usage can be estimated using
econometric modelling, but will have less of a degree of accuracy compared to
known and measurable hard EE/DSM installations. Although prices are low now,
in the not so distant past, prices were high, and customers responded by installing
low cost permanent measures (weather stripping, water heater jackets, set back
thermostats, etc.) and high cost permanent measures (insulated doors, added wall
and attic insulation, efficient windows, etc.) as well as temporary measures
(closing off rooms, tuming down thermostats and wearing sweaters). The
permanent measures reduce NUPC forever, long after the natural gas prices return
to moderate levels.
Trends in climate and weather changes, over time, is self-explanatory.
The simplicity in design of the proposed FCCM captures all the above forms of
conservation, and is fair to both the utility and ratepayers, as the FCCM is
symmetrical.
Can utilities such as Intermountain Gas Company control any of these
variants?
McGrath, Reb. 7
Intermountain Gas Company
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No. Utilities are a key stakeholder in the determination of utility-sponsored
EEIDSM program spending, but the amount is ultimately decided by regulators.
Utilities have no control over nationally / internationally traded commodities such
as natural gas, and therefore cannot control the impact of price elasticity on
demand. Utilities may have only a minimal impact on customer-driven
conservation measures, and even less impact on housing stock, building codes, or
appliance replacement.
Please elaborate on how customer-funded conservation contributes to
declining NUPC.
Existing customers may choose to invest in conservation measures using their
own money, never utilizing company sponsored programs. This may occur
because of a lack of understanding of the existence of utility programs or
ineligibility based on program requirements. Because the utility is unaware of
these conservation measure installations, quantification of avoided usage is
impossible. However, quantification of energy savings for an individual,
representative premise is easily obtainable for many conservation measures. The
effectiveness of thermal resistance, for instance, is measured in "R-value" units.
Increasing a surface's R-value reduces heat loss. Therefore, when a consumer
installs additional insulation in their home, thus increasing the surface's R-value
(e.g., attic floor, ceilings, walls, etc.) their natural gas usage (a11 else being equal)
will decline. The following table demonstrates the impact of increasing R-values
in a sample 1,000square foot home in Boise, Idaho:s
McGrath, Reb. 8
Intermountain Gas Company
5 See www.energydepot.comiresidentialenergycalculator.
1 Table I
As the above table indicates, an existing homeowner who upgrades their home
with insulation, which increases the overall R-value of the dwelling, can decrease
their natural gas usage significantly. For example, increasing the R-value from R-
10 to R-l6 would reduce usage by more than ten percent.
As this table shows, even a modest improvement in R-value can have a significant
impact on declining usage. Attachment I provides the assumptions and
supporting documentation for Table I above.
Please elaborate on how increased appliance efficiencies contribute to
declining NUPC.
Appliance efficiencies have been increasing on both a mandated and voluntary
basis. The U.S. Department of Energy ("DOE") regulates minimum efficiency
standards for many appliances, including gas fumaces, boilers, and water heaters.
In the early 1990s the DOE changed the standards on Annual Fuel Utilization
Efficiency ("AFUE") factors. Under the new code, a gas furnace was required to
meet at least an 80% AFUE while high efficient gas furnaces must achieve at least
McGrath, Reb. 9
Intermountain Gas Company
2
R-Value AhR R-10 R-11 R-12 R-'t3 R-14 R-l5 R{6 Rr7 R-18 R-19
1 2.504
lR-',|2 2 4.60/o 2.10
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3 6.3%3.Ao/o l.AoA
4 7 904 5.404 3.30/6 1.504
9.204 6.7oln 4.6o/a 2.Ao/o 't.so6
10.30,6 7.Ao/"5.7o/"4.OoA 2.so/a 1.',to/n
7 11 304 I 80/6 6 70/n 5 Oolo 3 50/6 2 204 1.Oo/"
8 12 204 I70/n 7 60/r 59%4 404 3 104 'l .90/6 0.90,6
9 13.00,6 1O.50/6 4.4%6.704 5.204 3.90/"2.7%1.704 0.8%
R-20 10 13.70,/"11.2%9.2o/n 7.404 5.901 4.6o/a 3A%2.404 1
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1 a90yo AFUE to meet the new standard. This is an increase from the 78% AFUE
standard enacted in 19926.
Have building codes changed as well?
Yes. Idaho has adopted the International Energy Conservation Code ("IECC").
Significant changes to Idaho's building code changes are as follows:
Table 2 - HistoryT
How do these building code changes affect natural gas consumption?
Similar to the example provided in Table 1, changes in building codes have
resulted in mandatory increases in R-value. Therefore, new buildings will be
significantly more energy efficient. As old housing stock is replaced, average
consumption (all else being equal) decreases.
How does decoupling solve the problem of declining NUPC?
Utilities and regulators across the country have realized that they alone cannot
control customer usage, and that volumetric rates that affect the utilities' earnings
depending on how much (or how little) customers use is not good public policy.
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6 The National Appliance Energy Conservation Act of 1987, enacted March 17, 1987
7 See https: //rvwrv.energ.r-codes. govladoptior"Jstates/idaho.
McGrath, Reb. l0
Intermountain Gas Company
lJan-15
Commercial: 2012 IECC without amendments
Residential= 2012 IECC with amendments, bringing the effective
results back to the levels contained in the 2009 codes.
legislature in 2010, ldaho implements the
26-Mar-07
The 2006 IECC becomes mandatory for new buildings statewide
etfective January 1, 2008.
27-Mar-02 ldaho adopts the 2000 IECC effective January 1, 2003
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From a utility perspective, earnings fluctuate based on factors beyond their
control (i.e., weather, customer self-funded conservation, equipment replacement
and consumer behavior). This can result in uncontrollable earnings degradation
as conseryation/efficiency measures only result in lower usage. Over time, it is
expected that weather will average out. Severing the link between utility earnings
and sales enables the utility to freely promote, and encourage, lower usage
regardless of the impact of all these listed exogenous factors that impact sales.
Such regulatory treatment also provides flexibility between rate cases if state
policy dictates greater or reduced utility-funded EE/DSM, and general promotion
of the conservation of energy.
Does the Company's proposed FCCM eliminate the customer usage
dilemma?
Yes, it does. The Company's proposed FCCM protects both the utility and its
customers from changes in usage. The FCCM is symmetrical - it can result in
either a charge or a credit depending on actual revenues per customer (which is
largely driven by volumetric charges).
Does the proposed FCCM guarantee Intermountain Gas Company's
earnings?
No, it does not. The FCCM trues up revenues to the amount allowed on a per-
customer basis. It does not true up other revenue requirement components. The
utility remains at risk for managing its capital expenditure programs, managing its
operations (e.g., salaries and wages, benefits, overtime, maintenance progftlms,
McGrath, Reb. 11
Intermountain Gas Company
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uncollectibles, outside services, etc.), and paying taxes (including property taxes
that are adjusted annually by most municipalities).
Please explain any additional benefits that the proposed revenue per
customer FCCM construct has for the utility and ratepayers?
Intermountain Gas has a high percentage of volumetric cost recovery, which
makes the Company financially vulnerable to sales variations between rate cases.
This is illustrated in the following table:
Table 3 - Fixed and Variable Revenues (At Pronosed Rates $000's)
Distribution
Revenues Fixed Variable
Rate Class Total $$%$%
RS (Combined)$60,988 $37,018 6t%$23,970 39%
GS $23,997 $13,505 560/o $10,492 44%
(Blattner, Exhibit 24,page 4 of 4).
It is in ratepayer's best interest to have a financially stable utility along with more
stable energy bills. Revenue stability through decoupling helps avoid the need for
the Company to seek general rate increases more frequently as conservation
activities (and other contributors to declining use per customer) increase.
Why is the Company proposing to calculate the FCCM on a revenue-per-
customer basis?
Calculating decoupling adjustments using a per-customer approach protects the
utility from under-collecting revenue requirements associated with adding new
customers. Intermountain Gas has been very successful over the past decades in
promoting natural gas and adding new customers to its system. These new
customers can only be added if the utility can retain this new revenue stream to
McGrath, Reb. 12
Intermountain Gas Company
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1 pay for the incremental investments necessary to serve these customers (i.e., new
mains, service lines, meters, system maintenance, billing, etc.). If these revenues
from new customers were refunded through decoupling, then the Company would
incur a shortfall in revenues each time it attached a new customer. This would
lead to a rational decision by the Company to not expand, which would (over the
long run) adversely impact all ratepayers because new customers help spread
fixed costs over more units.
Has the Company quantified any of these incremental costs to serve new
customers?
Yes. Since its last rate case in 1985, the number of Intermountain Gas residential
customers has increased from 85,400 to more than 300,000. In the same period,
the number of commercial customers has increased from 13,300 to nearly
32,000. While more customers increase sales revenue, they also require more
investnent in non-revenue generating infrastructure such as pipeline expansion
and replacement and customer care systems and information technology
(Madison, page 10, line 15 through page l2,line l5).
Additionally, Intermountain has spent approximately $551 million in capital
additions, largely attributable to customer growth (Kivisto page2,lines l7-18.)
The Company's Application includes the following costs directly related to
service new customers:
McGrath, Reb. 13
Intermountain Gas Company
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I Table 4
Increase in Gross Plant in Service
Month Gross Plant
($000)
Line
Reference
Dec-15 $599,921 1
Dec-16 633,587 25
Change $33,666
2 (Darrington, Exhibit 13, page 1 of 7).
A.
Staff testimony of Mr. Lobb suggests that Intermountain's annual
percentage impact of EE/DSM programs on fixed revenue recovery is
insignificant in comparison to Avista Electric, Avista Gas and Idaho Power,
and that the Company does not need the FCCM at this time. Do you agree?
No. Mr. Lobb provides information comparing the Company's proposed five-
year DSM spending to the listed Companies as follows:
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As this comparison shows, there is a significant difference between gas LDC
spending and electric EDC spending. The proposed Intermountain Gas spending
8 *Low'refers to the lowest level ofannual spending percentage over the life ofthe respective plans, and
'oHigh" refers to the highest annual percentage.
McGrath, Reb. 14
Intermountain Gas Company
Company
EE/DSM Spending as a Percentage of Total
Distribution Revenues
Low %High 7o
Intermountain Gas 0.03%0.15%
Avista Gas 0.t8%0.18%
Idaho Power 0.14%
Avista Electric 0.50%t.ta%
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will ramp up to comparable levels to the other Idaho gas utility, Avista Gas.
Regardless of the potential impact of utility-sponsored EEIDSM programs may
have on fixed cost recovery, the FCMM should be implemented immediately
upon the final decision in this Case. The function of a decoupling mechanism
renders moot the magnitude of the utility-sponsored programs on utility earnings,
and alleviates the inevitable eamings degradation associated with appliance
efficiency, changes in building codes, and customer-funded EEIDSM.
Is Intermountain Gas' proposed EE/DSM program flexible over the five-
year plan?
Yes. As discussed in Company witness Ms. Allison Spector's pre-filed
testimony, the Company is proposing a deferral mechanism that enables the
Commission and interested parties to design flexible EE/DSM progftrms between
rate cases without the need for frequent rate cases. (Spector, page 5, lines l-5).
What is the impact of implementing Intermountain's higher proposed fixed
customer charges on the FCCM?
All else being equal, higher fixed charges result in higher fixed cost recovery and
fewer dollars subject to volumetric recovery. This translates into a comparatively
smaller FCCM adjustment than if customer charges are not increased (or
increased less than proposed). As illustrated above in Table 3, however, even with
the higher proposed customer charges, the level of volumetric recovery is still
substantial.
Mr. Rivas recommends a 37o cap for the FCCM. Do you agree?
McGrath, Reb. 15
Intermountain Gas Company
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No. The proposed cap is arbitrary and unnecessary. The FCCM is a symmetrical
mechanism that can result in either a charge or credit. As stated above, in
conjunction with IGC's proposed higher fixed customer charges the FCCM will
have less variability compared to implementing it at current rates.
Is Intermountain's FCCM considered mainstream for a U.S. gas utility?
Yes, it is. Two-thirds of the gas LDC decoupling mechanisms currently in place
are based on revenue per customer. The calculations are straight-forward and
easy for customers to understand. As of January 2017, sixty-seven (67) U.S.
LDCs have a decoupling mechanism. Covering twenty-nine (29) states, these 67
utilities represent approximately one-third of the natural gas LDCs in the country:
Summary of Decoupling Mechanism Concentrations in U.S.:
Exhibit 45 provides further detail by utility.
Please summarize your testimony as it relates to the Company's proposed
FCCM.
McGrath, Reb. 16
Intermountain Gas Company
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1A.By eliminating the link between customer consumption and Company earnings,
decoupling removes the disincentive for utilities to promote conservation and
energy effrciency programs. Companies that have implemented decoupling are
no longer caught between promoting conservation (that reduces sales) and
growing revenues (by increasing sales). Breaking the link between utility sales
and revenues is the best way to promote conservation activities fully and freely.
Other mechanisms that only compensate the utility for the costs of conservation
programs, fall short. Approaches that are limited to program cost recovery ignore
other very significant causes of sales reduction. As NIr. Terzic states in his direct
testimony: "[Arr] FCCM is a natural and important component or counter-weight
to a well designed and implemented demand-side management (DSM) program"
(Terzic, page l4,lines 3-4). He further states that decoupling is appropriate
whenever a utility rate design is such that a decrease in sales volumes adversely
affects the ability of the utility to earn a reasonable return on investment (Terzic,
page l6,lines 14-16).Mr.Terzic appropriately links the Company's financial
performance with declining use per customer that results from conservation
activities.
In summary, the proposed FCCM is fair, symmetrical, and a necessary first step
before Intermountain Gas can effectively promote conservation, regardless of the
source. The FCCM is also important in protecting the Company from revenue
degradation beyond its control.
Rebuttal testimonies by other Company Witnesses have either rejected or
modified the adjustments proposed by the IPUC Staff. Will you please
McGrath, Reb. 17
Intermountain Gas Company
a.
I summarize the effect on revenue requirement of each adjustment proposed by
the Company?
Yes. I will begin with the rebuttal testimony of Company Witness Gaske. Mr.
Gaske rejects the Staffs proposal to reduce the Company's return on equity to
9.25%. The effect of Mr. Gaske's rebuttal increases the Company's revenue
requirement by $1,259,070 as compared to the Staff s Revised Exhibit 103.
What effect on revenue requirement does the rebuttal testimony of Company
Witness Adams have?
Mr. Adams rejects Staff Witness Carlock's proposal to remove the Company's
Cash Working Capital requirement from rate base. The effect of this increases the
Company's revenue requirement by $141,803 as compared to the Staff s Revised
Exhibit 103.
Company Witnesses Blattner, Fry, and Darrington rebutted and rejected
certain aspects of StaffWitness Morrison's testimony. WilI you please
summarize the effect on revenue requirement that these Company rebuttals
have?
Yes. The combined effect of the rebuttals presented by Ms. Blattner, Dr. Fry, and
Mr. Darrington is an increase of $2,024,596 as compared to the Staff s Revised
Exhibit 103.
What effect on revenue requirement does the rebuttal testimony of Company
Witness Dedden have?
In his testimony, Mr. Dedden accepted certain of StafPs proposed adjustments,
however, he rejected others. The effect on revenue requirement of those items
McGrath, Reb. 18
Intermountain Gas Company
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20
2T
22
23
a.
A.
A
a.
A
I
2
5
4
5
6
7
8
9
10
ll
t2
t3
t4
15
t6
t7
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a.
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a.
A.
rejected by Mr. Dedden is an increase of $38,780 as compared to the Staff s
Revised Exhibit 103.
What effect on revenue requirement does the rebuttal testimony of Company
Witness Murray have?
Ms. Munay rejects Staff s adjustment to the Company's test year salary expense.
The effect of this increases the Company's revenue requirement by $214,296 as
compared to StafPs Revised Exhibit 103.
Are there any other adjustments to the Company's revenue requirement that
have not been mentioned elsewhere in testimony?
Yes. When the Staff submitted its revised Exhibit 103, the Company noticed that
the income tax amount presented in the column labeled o'New Adj from lllTllT
Updated PR#178", Line23 did not match the amoturt presented by the Company
and accepted by the Staff. The Company contacted the Staff regarding this issue
and the Staff told the Company that it would correct the error from the stand. The
revenue requirement effect of this issue is an increase of $328,257 as compared to
the Staff s Revised Exhibit 103.
Does this conclude your testimony?
Yes, it does.
McGrath, Reb. 19
Intermountain Gas Company
a.
A.