HomeMy WebLinkAbout20170428final_order_no_33757.pdfOffice ofthe Secretary
Service Date
April 28,2017
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF TIlE APPLICATION )
OF INTERMOUNTAIN GAS COMPANY )CASE NO.INT-G-16-02
TO CHANGE ITS RATES AND CHARGES )
FOR NATURAL GAS SERVICE IN THE )ORDER NO.33757
STATE OF IDAHO )
This Order establishes the revenue requirement and rates for Intermountain Gas
Company’s natural gas service in Idaho.Intermountain Gas Company (Intermountain;
Company)filed an Application with the Idaho Public Utilities Commission (Commission)on
August 12,2016,requesting authority to increase its rates by 4.06%to recover an additional
$10.2 million in annual revenue for its Idaho operations.See Application of Intermountain Gas
Company for General Rate Increase (Application)at 3.
In this Order,the Commission establishes a rate base for the Company of
$235,526,788,and a revenue requirement of $264,044,909.The Commission also approves a
9.5%return on equity,and a 7.3%overall weighted cost of capital.This $4,119,055 revenue
increase will increase customer rates by an average of 1.58%.Finally,we authorize the
Company to implement its proposed Demand-Side Management (DSM)program,but do not
approve its proposed Fixed Cost Collection Mechanism,as detailed herein.
BACKGROUND
Intermountain is a local gas distribution company (LDC)that transports and
distributes natural gas in Idaho.Intermountain’s parent company,MDU Resources Group,Inc.
(MDU),acquired Intermountain in 2008.Intermountain filed its last general rate case in 1985.
See Case No.U-1034-122.In its Application,the Company stated it needs to raise base rates to
recover increased operating expenses and costs associated with plant that the Company added
after the last rate case.The Company contends its existing rates are not fair,just,or reasonable,
and do not produce a fair Rate of Return (ROR),which negatively affects the Company’s ability
to adequately and reliably serve its customers.Intermountain represented that,among other
things,its maintenance of a safe and reliable distribution system for an expanding customer base,
installation of a new Customer Service Center,and significant spending and depreciation
expenses related to pipeline and infrastructure replacement have required it to ask for a general
ORDER NO.33757 1
rate increase for the first time in over 30 years.The Company proposed that the new rates take
effect September 12,2016.
After the Company filed its Application,the Commission issued a Notice of
Application and Notice of Intervention Deadline and Order suspending the proposed effective
date and inviting interested parties to intervene in the case.The following parties intervened:
Community Action Partnership Association of Idaho (CAPAI);the Northwest Industrial Gas
Users (NIGU);the Idaho Conservation League (ICL);the Northwest Energy Coalition (NWEC);
the Amalgamated Sugar Company,LLC (Amalgamated);the Snake River Alliance (SRA);and
the Federal Executive Agencies (FEA).See Order Nos.33608,33611,33613,33614,and
33630.
The Commission then issued a Notice of Schedule,Notice of Public Workshop,and
Notice of Technical Hearing,and found good cause to further suspend the proposed effective
date of the Company’s new rates until May 11,2017,as a result of the parties’negotiated
schedule.Order No.33648.Staff subsequently convened the public workshop for customers.
Additionally,the Commission convened a March 2,2017 public hearing to receive testimony
from the public and customers.No customers or members of the public attended the public
hearing or workshop,although the Commission did receive written comments from two
customers.1
The Commission held a technicai hearing for the Company,Commission Staff,and
intervening parties on March 1-3,2017.All parties,save the Snake River Alliance and the
Federal Executive Agencies,appeared and were represented by counsel at the technical hearing.
APPLICATION
The Company originally requested that the Commission approve an overall return on
rate base of 7.42%,utilizing a 9.90%return on common equity (ROE)and a 4.94%cost of debt
on an adjusted Idaho retail rate base of $236,926,497.Tr.at 124.The result would be an
additional annual revenue requirement of $10,165,700,4.06%for its Idaho operations.The
proposed increase is based upon normalized results of operations for the test year ending
December 31,2016.Id.at 237,11.14-17.The Company subsequently revised its request at the
technical hearing,based on adjusted test year data and certain party-proposed adjustments,to
The two public comments stated that an increase in rates for customers who have no other option for winter
heating would be “absurd,”based on the low price of natural gas,however,the comments state that ifthere is a rate
increase,it should be distributed at the same rate to all Interinountain customers.
ORDER NO.33757 2
modify its requested annual revenue requirement by $9,351,615 million,a revenue deficiency the
Company states would require an overall increase in customer rates of 3.70%.Tr.at 263.The
Company maintained the requested ROE of 9.90%.Id.at 98.Test period data was based on
actual 2016 account information for January through September 2016,and forecasted data from
October through December 2016.Tr.at 1059.
Based on a class cost-of-service study (COS Study)filed with its Application,
Intermountain proposed rate increases for its various customer classes.Tr.at 332-356.
Intermountain’s proposed rates would,on average,increase customers’bills by:(1)$2.31 per
month (4.93%)for customers who use gas for space and water heating;(2)$1.16 per month
(3.26%)for customers who use natural gas for space heating only;and (3)$12.16 per month
(6.29%)for commercial customers.Id.at 35.Intermountain asserted it notified the public about
its proposed rate increases by distributing a Press Release and Customer Notice on or about
August 12,2016.See Application at 4.
Besides increasing its base rates,Intermountain also sought to:(1)merge its
residential customers (i.e.,customers on rate schedules RS-1 and RS-2)into a single rate
schedule;(2)modify the General Services-i (GS-1)rate structure so that rates charged to the
GS-1 customer class more closely align with Intermountain’s costs and reduce subsidization;(3)
eliminate seasonal rate variation between summer and winter for residential and general service
customers;(4)combine two rate schedules into a single Industrial Firm Transportation Service
(T)customer class;(5)add a demand charge to Large Volume Firm Sales Service (LV-l)to
cover the costs of distributing gas to that class;and (6)apply the current Rate Schedule T-5,
which includes a demand charge,to the newly proposed Rate Schedule T-4 rate structure.Tr.at
358-359.
In addition,Intermountain asked to implement a DSM program that would help
customers decrease their need for gas through conservation,and thus decrease the amount of gas
the Company would otherwise have to buy from a natural gas wholesaler to supply those needs.
Specifically,the Company proposed to introduce a new Energy Efficiency Rebate Program
under which the Company would provide rebates to customers who install high-efficiency
natural gas equipment and have ENERGY Star-certified homes.See Tr.at 494-577.
Because the Company derives revenue by selling gas to customers,the Company also
proposed to implement a FCCM to help ensure the Company does not lose money if its proposed
ORI)ERNO.33757 3
DSM program causes its customers to buy less gas.Tr.at 662.In summary,Jntermountain
proposed raising its monthly fixed-customer charges for the residential and commercial classes
to more closely match the Company’s fixed costs to serve each customer class.2 The Company
proposed to recover these fixed costs through the FCCM,which the Company defined as total
sales service margin less Purchased Gas Cost Adjustment (PGA)revenues and less revenues
recovered from the customer charge for the applicable rate schedules.Tr.at 663.Under the
proposal,Intermountain would reconcile,and accrue through a balancing account,the difference
between its actual FCCM and the allowed or approved FCCM,and thus ensure the Company’s
revenues and earnings are separated from,and unaffected by,the amount of gas the Company
sells to its customers.Id.
DISCUSSION
I.TEST YEAR,CAPITAL STRUCTURE AND RATE OF RETURN
A.Test Year
The purpose of determining a test year for ratemaking purposes is to develop
representative operating data that will provide “a meaningful comparison and guide for
developing future revenue requirements,”and allow “the parties to work with actual data,while
still recognizing projected changes which are reasonably certain to occur.”See Order No.
12467.“In addition,we have on occasion accepted partial projections when circumstances
warranted,on the condition that the staff could verify projected data prior to presentations of its
case.”See Order No.14859.
In this case,Intermountain proposed a 2016 calendar year test year.Tr.at 207.The
Company originally utilized six months of actual data and six months of forecasted data,with the
forecasted data to be trued-up in January 2017.Id.However,at Staffs request,the Company
updated its test year data to reflect actual data for January through September 2016 and forecasts
for October through December 2016.The Company also updated year-end adjustments,
depreciation expenses,taxes,accumulated depreciation,and other rate base items.See Tr.at
202;Staff Exh.103.No party opposed the Company’s proposed year.
2 A “customer charge”is a flat minimum fee that customers pay each month regardless of how much gas they use.
The customer charge helps cover the utilities fixed costs to serve customers,which include,for example,costs
associated with billing,meter reading,operating and maintaining the system,and being available to distribute gas to
customers upon demand.
ORDER NO.33757 4
Commission Findings
The Commission finds it reasonable and appropriate for the Company to use a 12-
month test year ending December 31,2016,adjusted for known and measurable changes,and
using the latest data available after the Company trued-up part of its forecasted data through
September 2016.The proper actual and forecasted data forming the basis for our decisions in
this case is set forth in Attachment A to this Order.
Our adjustments to the test year revenues and expenses are addressed later in our
discussion of revenue,expense and rate base adjustments.
B.Capital Structure and Rate ofReturn
(1)Capital Structure,Cost of Long-Term Debt
Intermountain analyzed its historical,current and projected capital structures by
comparing them to those of a proxy group.The Company estimated its 2016 year-end balances
attributed to debt and equity,and proposed a capital structure consisting of 50%long-term debt
and 50%common stock equity for use in determining the overall ROR.Tr.at 98.
Staff proposed the same capital structure as the Company.Tr.at 1013.However,
NIGU stated that,because of the Company’s short-term debt,common equity is 47.95%and
should be rounded to 48%,with debt at 52%.Tr.at 737.The Company countered that NIGU
used 2013 data and ignored the more relevant data from hitermountain’s most recent quarterly
ratio calculation.The Company also argued that only long-term debt should be included in
capital structure.Tr.at 1706.
Commission Findings
The Commission finds that an average capital structure through December 31,2016,
consisting of 50%debt and 50%common equity,as proposed by the Company and Staff,and the
proposed uncontested cost of debt (4.94%),is reasonable and appropriate.
(2)Return on Equity
Intermountain defines cost of common equity as “the expected return that investors
require on an investment in the utility.Investors expect to earn their required return from
receiving dividends and through stock price appreciation.”Tr.at 766.To determine its ROE,
Intermountain analyzed a proxy group of Natural Gas Utility Industry companies and made
certain adjustments in order to compare the proxy utilities to Intermountain.Id.at 768-773.
ORDER NO.33757 5
The Company estimated its proposed ROE using several methods,including
Discounted Cash Flow (DCF)analyses,two Risk Premium analyses,a Market DCF analysis of
the S&P 500,and a Capital Asset Pricing Model.Tr.at 139.Based on its risk analyses,
Intermountain proposed a 9.90%ROE,which is approximately the midpoint between the median
and third quartile of the range it established in its Basic DCF analysis.Tr.at 198.
Staff estimated the Company’s cost of equity to be between 8.5%and 9.5%,with a
point value of 9.25%.Tr.at 1353.Staff based its estimates on a review of market data and
comparables to assess the average risk for companies having similar operating characteristics and
capital structure to Intermountain.Id.at 1358-1377.Staff recommended that the Commission
decrease the Company’s proposed ROE by 25 basis points,to 9.0%,if the Commission approves
the Company’s proposed FCCM.Id.at 1355.Staff maintained that Intermountain will have less
overall risk if the FCCM is approved.Id.
Staff adopted the Company’s proxy group for its DCF analysis.Staff adjustments
include using the blended growth rate (which is an average of the analysts’earnings growth
estimate and the sustainable growth rate,calculated using Value Line data)for the proxy group
analyzed by the Company,and reducing the Company’s proposed flotation cost adjustment.Id.
at 1377,11.7-18;and Staff Exhibit 107.
Staff also noted that utilities have less competition and risk than companies in other
industries.Id.at 1353,11.18-24.Staff believes that Intermountain’s major risks include
fluctuating gas prices,changing pipeline rates,and the replacement of mains.The costs
associated with these risks are fully recovered through the Company’s annual PGA or are
included in this case.Therefore,Staff asserted that they should not create an imbalanced effect
on risk analysis.Id.at 1354,11.3-8.
NIGU
NIGU estimated the Company’s cost of equity to be between 9.2%and 9.4%and,
therefore,recommended that the Company’s ROE be set at 9.3%.Tr.at 704.In formulating its
recommendation,NIGU analyzed authorized returns in various jurisdictions,and assessed the
regulated utility industry investment risk,credit standing,and stock price performance.Id.at
3The cost to issue stocks or bonds,such as costs associated with registering with the Securities and Exchange
Commission or paying an underwriter to sell stock,is commonly called a “flotation cost.”
ORDER NO.33757 6
738-739.NIGU performed several types of market analyses,and maintained its proposed 9.3%
ROE would fairly compensate the Company in the current low capital cost market environment
while maintaining the Company’s strong investment grade bond rating and access to external
capital.Id.at 706.Further,NIGU stated that 9.3%“represents a fair and balanced overall rate
of return that fairly compensates investors,and minimizes unnecessary rate increases on retail
customers.”Id.at 11.8-12.
NIGU disagreed with Intermountain’s flotation cost adjustment.Tr.at 832-833.
NIGU also stated that Intermountain faces risks that are comparable to the utilities in
Intermountain’s proxy group,and therefore Intermountain’s ROE should not be set above the
median DCF analysis results.Id.at 837.NIGU further disagreed with Intermountain’s Risk
Premium analyses and Capital Asset Pricing Model study.Id.at 850-853.
Intermountain Rebuttal
Intermountain disagreed with the ROE analyses conducted by Staff and NIGU.The
Company claimed the parties’analyses failed to adequately address:(1)Intermountain’s overall
risks compared to the proxy group;(2)the full range of results produced under the DCF model;
(3)the Risk Premium approach;(4)current market conditions compared to historical market
conditions;(5)investor expectations of higher interest rates as the Federal Reserve takes steps to
normalize monetary policy;(6)the recommendation of an inadequate flotation cost adjustment;
and (7)the inappropriate reduction of common equity ratio.Tr.at 1643-1644.
Intermountain also disagreed with Staffs recommendation that the proposed ROE be
decreased if Intermountain’s proposed FCCM is allowed.Intermountain reasoned that
disallowing the FCCM would increase rate design risk in terms of the proxy companies,which
already have mechanisms in place (FCCM and customer charge(s))to reduce rate design risk.
Tr.at 1653.
Commission Findings
The standards for determining a fair ROE for a regulated utility have been framed by
two decisions of the U.S.Supreme Court:Bluefield Water Works &Improvement Co.v.Public
Serv.Commission of West Virginia,262 U.S.679 (1923),and Federal Power Commission v.
Hope Natural Gas Co.,320 U.S.591 (1944).In these cases,the Court provided that the
authorized ROE should be:(1)sufficient to maintain financial integrity;(2)sufficient to attract
capital under reasonable terms;and (3)commensurate with returns investors could earn by
ORDER NO.33757 7
investing in other enterprises of comparable risk.In line with these decisions,the Idaho
Supreme Court has stated “that the primary objective in ratemaking is to allow the utility to meet
its legitimate operating expenses,as well as to pay creditors,provide dividends to shareholders,
and maintain its financial integrity so that it might attract new capital.”Application of Citizens
Utilities Co.,112 Idaho 1061,1067,739 P.2d 360,366 (1987).
Here,the parties have advanced various methods for determining a fair ROE,
including DCF analyses,the Comparable Earnings method,Risk Premium analyses,and the
Capital Asset Pricing Model.Each method attempts to estimate a sufficient ROE to attract free
market investors into buying the Company’s stock.In summary:
•A DCF method assumes an investor buys stock at a price reflecting the
present value of the future cash the investor expects to receive from
dividends and the ultimate sale of the stock.Since future dollars are worth
less than present dollars,the future cash flow is discounted back to the
present at the investor’s required ROR;
•A Comparable Earnings method evaluates returns earned by other
companies,including utilities,to quantify an investor’s expected return,
taking into account the risks associated with a particular investment;
•A Risk Premium method starts with the ROR for a low-risk investment—
such as government or utility bonds—and adds a premium based on the
relative risk associated with a utility’s stock;and
•A Capital Asset Pricing Model,measures risk in relation to the market as a
whole.As markets change new concerns develop in disparate financial
circles related to the calculations used to determine the cost of equity.
While each of these methods can be useful in estimating a utility’s ROE,as with other analytical
tools used in ratemaking,these methods only imperfectly predict the Company’s future
requirements and performance.Further,the ROE allowed by a regulatory agency is but one
factor that a prudent investor might consider when deciding whether to buy the Company’s
stock.
We have a dual obligation in rate cases,both to the utility and to its customers.To
customers,our duty is to establish rates that are fair and reasonable.To the utility,we must set
rates at a level that will allow it the opportunity to recover its reasonable operating expenses
while receiving a reasonable return on its prudent capital investments.Satisfying our duty to the
utility enables it to be financially sound and able to safely and reliably serve its customers,thus
ORDER NO.33757 8
addressing our obligation to customers.Ultimately,our decision-making on this issue requires
careful consideration of our statutory obligations and a balancing of interests.
Having considered the methods and rationales discussed in the witnesses’cost of
capital testimony,we find the upper limit for a return in the testimony of Staff Witness Rogers
(Carlock),and the median Basic DCF analysis provided by the Company,to be persuasive and
reasonable.The evidence in this case supports an ROE ranging from approximately 9.0-9.9%.
The higher end of this range encompasses the median of Intermountain’s recommended Basic
DCF range,and the upper limit of Staff’s Blended Growth Rate DCF Analysis.All ROE point
estimates made by the parties in this case are included in this range,i.e.,Staff at 9.25%,NIGU at
9.3%,and Intermountain at 9.9%.
We find that,under the facts of this case,Intermountain’s reasonably required ROE
should be set at 9.5%.In authorizing a 9.5%ROE,the Commission reaffirms its desire to
maintain Intermountain as a financially viable utility with credit ratings at or above the current
level.The use of this authorized ROE,together with the previously discussed cost of long-term
debt and capital structure,yields the following overall ROR:
Component Ratio Cost Weighted Cost
Debt 50%4.94%2.5%
Common Equity 50%9.50%4.8%
TOTAL 100%7.3%
This approved capital structure,overall return,and our ultimate findings on revenue
requirement maintain the Company’s business strength and reflect fair,just and reasonable
recovery from ratepayers.In separate security filings,the Commission has authorized
Intermountain to maintain adequate equity and debt authority.We believe this allows
Intermountain to adequately access capital markets.
II.ADJUSTMENTS TO TEST YEAR REVENUES,EXPENSES AND RATE BASE
Once a test year is selected,the test year revenue and expense accounts and rate base
are adjusted to reflect known and measurable changes so the test year totals will accurately
reflect anticipated amounts for the future period when rates will be in effect.There are generally
three types of adjustments:(I)normalizing adjustments made for unusual occurrences,like one
time events or extreme weather conditions,so they do not unduly affect the test year;(2)
ORDER NO.33757 9
annualizing adjustments made for events that occurred at some point in the test year to average
their effect as if they had been in existence during the entire year;and (3)known and measurable
adjustments made to include events that may occur outside the test year but will continue in the
future to affect Company income and expenses.
In this case,Intermountain determined its 2016 test year revenues and expenses in the
same way it established a test year rate base;it started with six months of 2016 actuals and six
months of 2016 forecast,and ended with nine months (January—September 2016)of trued-up
actual data and three months (October—December 2016)of forecasted data.Tr.at 1516.
Intermountain then attempted to adjust specific revenue and expense accounts for known and
measurable changes.Tr.at 239-249.Staff and other parties,however,objected to the
Company’s 2016 actual and forecasted revenue and expense items,and to the Company’s
proposed adjustments.The parties’objections and recommended account adjustments would,if
approved by this Commission,change the Company’s proposed revenue requirement.
On rebuttal,the Company further updated actuals through September,as noted
above,and properly reflected depreciation and taxes not included in its initial filing.See Tr.at
1503-1504;and Intermountain Rebuttal Exhibit 47.The Company also agreed to accept a
number of the parties’proposed adjustments to net operating income and/or rate base.Tr.at
1945-1947.On rebuttal,the Company thus decreased its originally proposed revenue
requirement increase of approximately $10.16 million (4.06%)to approximately $9.35 million
(3.7%).Tr.at23.
The remaining disputed adjustments to the Company’s revenue,expenses,and rate
base,and their effect on the Company’s revised $9.35 million increase to its revenue
requirement,are discussed below.
A.Disputed Revenue Adjustments
(1)Weather Normalization
In this case,the parties have disagreed on the use of weather normalization.Weather
normalization adjusts test year gas consumption to the level that would have been consumed in
an average weather year.Customers typically consume more or less than normal amounts of gas
when there is unusually warm,cold,wet or dry weather.The purpose of weather normalization
is to adjust test year customer gas consumption to the level that would be expected in a year with
normal weather conditions.Normalized customer gas consumption is then used to establish
ORDER NO.33757 10
retail sales revenue that can be expected in a normal year.The definition of “normal”is a
peculiarity of the estimation process.For ratemaking purposes,in the United States,“normal”
weather is usually defined as the average over the previous 30 years.Jonathan A.Lesser &
Leonardo R.Giacchino,Fundamentals ofEnergy Regulation 217,(2d.ed.2013).
Typically,analysts weather-normalize natural gas consumption using linear
regression techniques.Total gas consumption depends on numerous variables,e.g.,pricing,
number of customers,and weather conditions.Once the regression is fit,consumption is
estimated based on actual and “normal”weather conditions.The difference between those
estimated values is subtracted from the observed consumption to derive weather-normalized
demand.
Given this basic background,we consider the appropriateness of the Company’s
weather normalization method below.
Intermountain
Intermountain used the same weather normalization method in this case that it has
used since 1986 in its annual PGA filings with this Commission.Tr.at 1788.Although
Intermountain stated that it primarily uses the methodology to adjust sales that have already
occurred,it also uses the methodology to predict future sales and some forecasting.Id.
Staff,on the other hand,urged the Commission to reject the Company’s proposed
continued use of its 1986 weather normalization method,because the Company could not
provide evidence and information that would enable Staff to:(1)replicate the method used by
the Company in order to determine accuracy;(2)vary the analysis by using weather and
customer usage data for different periods of record than used by the Company;and (3)perform
weather normalization analysis for each of the Company’s customer classes to determine which
classes are sensitive to weather conditions.Tr.at 1120-1122.
Staff thus recommended that the Commission adopt a methodology based on an
Average Weather Year that Staff developed for this case.Staff believes its weather
normalization method more accurately depicts normal annual gas consumption than does
Intermountain’s Normal Heating Degree Days method from 1986.Tr.at 1015.In summary,
Staffs method used consumption models for residential and general services with multiple
statistical autoregressive models to estimate per-customer consumption for each class.Id.at
ORDERNO.33757 11
1122-1125.Staff argued that the Company used incorrect or extraneous autoregressive terms,
which caused it to underestimate monthly consumption estimates.Id.at 1120-1122.Staff
maintained that its modeling is simpler and more robust than the Company’s.Id.at 1104.
Intermountain Rebuttal
Intermountain disagreed with Staff’s proposal to use an Average Weather Year,
noting that the use of an Average Weather Year is not an industry standard,and that no other
LDC utilizes it.Instead the Company argued that the Commission should allow use of
Intermountain’s Rolling 30-year Normal.Tr.at 1798-1808.
Intermountain stated that Staffs data is improperly weighted,and does not reflect
Intermountain’s current customer base,because the number of customers living in warmer
portions of its western Idaho service area has increased significantly since 1986.Id.at 1806.
These increases have resulted in higher per customer gas use than assumed by Staff.Id.at 1805-
1806.
Intermountain also claimed that Staffs regression analyses improperly used certain
coefficients.Intermountain argued that,to properly explain gas use,regression analysis should
use weather concepts like Heating Degree Days,and economic factors like gas price.Id.at
1790,22-24.Intermountain maintained that its time frame was proper,allowing enough
variation in the data to gain information from more than one weather concept and from multiple
economic variables.Id.at 1791,11.1-3.Intermountain stated that once the regression equations
are estimated,it is the weather coefficients of the weather variables that are important to weather
adjustment because they measure the response of sales to changes in weather variables.Id.at
179 1-1792.
Intermountain contended that Staff did not compare the Company’s models to actual
consumption.Although Staff maintained that Intermountain did not provide pertinent
consumption information,Intermountain maintained that it did provide the proper data,and that
its own analysis showed that Staffs modeling would not have accurately predicted consumption
from 2012-2016.Id.at 1766,11.3-15.
Commission Findings
We find that the Company did not meet its burden of proof as related to weather
normalization.As a result,we adopt Staffs analysis for weather normalization.The weather
normalization adjustment decreases revenue requirement by $2,024,597.
ORDER NO.33757 12
The Company argued that we approved its weather normalization methodology in
1986.However,while we allowed the Company’s use of the methodology at that time because
that method was arguably better than Intermountain’s prior methods that we had rejected,we
noted we would not determine whether the 1986 method was,in fact,appropriate until the
Company filed its next rate case.
By way of background,Intermountain filed its 1986 weather normalization case
(which sets forth the method the Company says it used here),after a series of cases in which the
Commission had rejected the Company’s other weather normalization methods.See Case Nos.
U-1034-99,U-1034-122,U-1034-134,Order No.21048.In the 1986 case,the Company
solicited,received and incorporated Commission Staffs recommendations into its weather
normalization methodology and placed its new method before the Commission.In response,the
Commission said it “encourages Intermountain’s efforts to improve and refine its weather
normalization methodology,”and found the “proposed model to be a reasonable alternative to
continued utilization of the model rejected by the Commission in Case Nos.U-1034-99 and U-
1034-122.”Id.But,belying the Company’s claim here that the Commission actually approved
of that methodology,the Commission also stated that,while “[Intermountain]is authorized to
implement its proposed weather normalization model for internal forecasting and ratemaking
purposes,”the “Commission reserves decision on its appropriateness until such time as it is
presented in a ratemaking case for consideration.”Id.
When the Company filed its 1986 case,it typically came before this Commission on
an almost annual basis.After that case was filed,however,the Company waited almost 31 years
to file a general rate case in which the Commission or its Staff would have the opportunity to
weigh in on whether the 1986 method was,in fact,appropriate.It is worth noting that nothing
would have prevented the Company from presenting a weather normalization method before us
for a determination outside the constraints of a general rate case.
We find that,despite our having encouraged the Company in 1986 “to improve and
refine its weather normalization methodology,”the Company has not improved or refined its
methodology at all.Moreover,the Company was unable to show that the methodology is
reasonable,appropriate and reproducible.
We acknowledge that weather normalization and its underlying mathematical and
statistical bases can be complex and arcane,making the various results difficult to distinguish
ORDER NO.33757 13
and understand.However,the Company must still provide a reasonable explanation of the
methodology and the necessary underlying raw data to enable the Commission to verif’the
results and confirm the Company’s findings.
The Company did not heed our admonition from its prior rate case.We encourage
the Company to collect and maintain data in a format that is auditable and retrievable.In
contrast,we believe Staff has presented a reasonable alternative to the Company’s weather
normalization methodology,despite the confusion created by the Company’s data.
Consequently,at this time,we approve the weather normalization consumption adjustment as
proposed by Staff.
(2)Other Revenues
NIGU proposed to increase the Company’s test year Other Revenues4 by $206,000
because,it argued,the first six months of 2016 better represents ongoing,current actual other
revenues than the last six months of2015.Tr.at 706.
Intermountain
Intermountain stated that NIGU’s adjustment is obsolete,arguing that NIGU did not
update or address its direct testimony to reflect the materials provided to all parties in response to
Staffs Production Request 178.Tr.at 1516.Intermountain noted that once updated,forecasted
Other Revenues were “$27,352 (0.92%)lower than actual Other Revenues through December
31,2016.”Id.at 1517.
Neither Staff on direct,nor NIGU on rebuttal addressed this issue.
Commission Findings
Actual numbers through September 2016 for other revenues are better than the
forecasts used by Intermountain in Direct or by NIGU.The updated actuals as of September
2016 included in Staffs Exhibit 103 are generally accepted as the starting test year numbers.
We find that Other Revenues,as updated by Intermountain and used by Staff,represent a
reasonable and appropriate level.
“Intermountain stated that NIGU adj usted the wrong “Other Revenues.”According to the Company,NIGU
adjusted Exhibit No.9,Lines I through 12 and not total “Other Revenues,”Exhibit No.8,Line 2.Tr.at 1516.
ORDER NO.33757 14
B.Disputed Expense Adjustments
(1)Incentive Compensation
Intermountain requested $704,000 in Non-Executive Incentive Compensation Plan
funds because,it argued,the compensation is attributed to Intermountain employees meeting
metrics for net income,cost control and customer satisfaction.Tr.at 255-256.Intermountain
removed the portion of compensation expense related to achieving a target level of income,
because it did not consider this metric related to customer benefits.Tr.at 1524.On the other
hand,it sought recovery of incentive compensation expense metrics related to cost control and
customer service because,they were “designed to benefit the Company’s customers by
incentivizing Company employees to control costs while maintaining a safe,reliable system and
a high level of customer satisfaction.”Id.at 257.
Intermountain stated that the individual employee effort of each MDU subsidiary
combine to benefit customers because,for example,if Intermountain met cost control goals by
underspending,customers benefit through decreased cost recovery.Tr.at 1522.Further,
customer satisfaction is measured through inclusion of MDU Resources in the top 35 companies
in the JD Power Gas Utility Customer Satisfaction Study,benefiting customers because each
utility works diligently to achieve the highest level of customer satisfaction.Id.
Intermountain further argued that the Commission has allowed incentive
compensation for other utilities that show a direct benefit to customers or show a sufficient link
to operational efficiency,customer service,and safety.Id.at 1524.
NIGU
NIGU argued that Intermountain’s adjusted incentive compensation is measured
against the combined results achieved by all utility subsidiaries of MDU Resources spread across
eight states,and that there is no proof that specific employee performance resulting in customer
benefits or employee safety is tied to Intermountain’s stated customer benefits.Rather than help
ratepayers,the benefits inure to shareholders through enhanced stock valuation,earnings growth
and reduced investment risk.Tr.at 713-716.
Commission Findings
We find that Intermountain has not met its burden of showing that Intermountain’s
customers directly benefit from MDU’s incentive compensation plans related to cost control and
customer satisfaction.Intermountain must attempt to make a showing that these expenses
ORDERNO.33757 15
directly relate to improving service or reducing costs to Intermountain customers.Intermountain
cited several cases to show that the Commission has allowed other utilities to recover employee
incentive compensation.These cases are,however,distinguishable.Here,the incentive
compensation metrics for Intermountain are inextricably linked to MDU.Accordingly,we
decline to include incentive compensation related to cost control and customer satisfaction in the
revenue requirement for this case.
(2)Salary Expenses
Staff testified that Intermountain’s labor cost,as a percent of revenue,is higher than
Avista Gas:7.05%versus 4.75%.Tr.at 1086.Staff used a weighted average of three salary
studies,including the Occupational Employment Survey (OES)used by the Bureau of Labor
Statistics,which was double weighted in Staffs analysis.Id.at 1087.Staff believes that the
labor surveys utilized by Intermountain minimize the effects of regional markets on salaries,
where BLS data provides an analytical component related to regional pricing.Id.at 1087-1090.
As a result,Staff proposed a $214,296 reduction of salary expense in revenue requirement.Id.
Intermountain
Intermountain disagreed with Staffs analysis.Tr.at 1831-1836.Intermountain
maintained that the OES encompasses too many organizations,too broad of job descriptions,
does not take into account rural areas with lower salaries,and uses out-of-date data.Id.
Intermountain contended that its use of more current market survey data is sound and consistent
with the practices of other utilities.Id.at 1837.
To develop its salary expenses analysis,Intermountain used its own in-house survey
as well as contracting with independent consultants to review compensation.Id.at 1837-1844.
Intermountain claims that its 2013 independent survey,contracted through Aon Hewitt,showed
its compensation programs were well-designed and aligned well with other utilities,with
Intermountain paying slightly below market.Id.at 1840.Intermountain stated that it will
conduct another independent review in 2017.Id.at 1839.
Commission Findings
The Commission finds the Company’s salary expenses to be reasonable and
appropriate.Intermountain’s salary expense analytical approach is sound overall.While Staff’s
analysis may be reasonable when specific studies are not available,we are inclined to use the
most current,specific studies.
ORDER NO.33757 16
(3)Affiliate Expenses
NIGU argued that affiliate transaction costs,which are costs directly or indirectly
charged to the Company by affiliated companies,should be reduced to the five-year average
level experienced during 2011 through 2015,or by $1,381,000 in the test year,because
insufficient explanation or justification was provided for the Company’s forecast.Tr.at 712-
713.
Intermountain
Intermountain proposed including affiliated transaction costs related to the provision
of service to and between subsidiary companies of MDU Resources,such as payroll,
procurement,Enterprise,and General and Administrative Services.Tr.at 219.In response to
NIGU’s argument,Intermountain updated its affiliate costs and showed that its test year
forecasted affiliate costs were $15.55 million.The Company argued these costs are reasonable,
because they were only $52,500 (0.34%)lower than actuals.Tr.at 1519.Because the
Company’s actual updated data is more accurate than the previously-submitted forecasted data
that NIGU rejected,Intermountain asked that its updated level of affiliate costs be accepted.Id.
Commission Findings
The Commission finds that Intermountain failed to prove the reasonableness of its
affiliated transaction costs.Normally,a utility can establish a prima facie case of reasonableness
simply by showing it actually incurred the expenses through arms-length bargaining with another
company.See Boise Water Corporation v.Idaho Public Utilities Commission,97 Idaho 832,
838,555 P.2d 163,169 (1976).Payments to affiliates,on the other hand,do “not establish a
prima facie case of reasonableness,”and it is not enough for the utility to argue it has incurred
the expense or that the affiliate provided the goods or services “at cost.”Id.at 836-837.Rather,
the burden of affirmatively proving the reasonableness of expenses incurred between affiliates
falls upon the utility.General Telephone Company v.Idaho Public Utilities Commission,109
Idaho 942,950,712 P.2d 643,651 (1986).The Idaho Supreme Court provides the rationale for
applying a more rigorous standard to affiliated transactions,stating that the:
desire of public utility management,evidenced by various methods,to secure
the highest possible return to the ultimate owners is incompatible with the
semi-public nature of the utility business,which the management directs.It
therefore follows that the [C]ommission should scrutinize carefully charges by
affiliates,as inflated charges to [the]operating company may be a means to
improperly increase the allowable revenue and raise the cost to consumers of
ORDERNO.33757 17
utility service as well as the unwarranted source of profit to the ultimate
holding company.
Id.(citing Solar Electric Company v.Pennsylvania PUC,137 Pa.Super.325,9 A.2d 447,473
(1939)).The Commission may in its discretion find that it was unpersuaded by a utility’s
evidence concerning the reasonableness of its expenses.Id.
Here,the Commission finds the Company failed to prove that its proposed affiliated
transaction expenses are reasonable.A showing of costs is not enough to overcome the burden
of proving reasonableness with regard to affiliates.However,we acknowledge that some
allocation is reasonable and appropriate.In the absence of other proposals,and based on our
review of the extensive record in this case,we find NIGU’s proposal to be a fair and reasonable
alternative.When test year expenses are abnormal,higher or lower,it is common to use an
average.Therefore,we approve affiliate expenses based on the five-year average experienced
from 2011 through 2015,which amounts to a reduction of $1,381,000 in test year expenses.
(4)Miscellaneous Expense Adjustments
Staff argued that expenses to enhance a utility’s image,including donations to
charities or sponsorships of charitable events or golf tournaments,do not directly benefit
ratepayers.Also,ratepayers should not be forced to support organizations whose ideology may
not agree with theirs.Tr.at 1059-1060,and see Re Intermountain Gas Co.(1978)Order No.
14141.Staff thus recommended that the Commission disallow the Company’s expense related to
the following events and activities,because those expenses are not safety related and do not
directly benefit customers:(1)Chamber of Commerce (Chamber)and Rotary and Lions Club,
Tr.at 1062;(2)$32,765 from the 2016 test year actual expenses for monies spent on golf-related
activities and sponsorships,Id.at 1060-1061;and (3)$53,566 from test year actual expenses for
payments made in donations or contribution to charities.Id.Staff’s adjustments,above,
included adjusting the forecast expenses based on actuals.
Intermountain
Intermountain accepted Staff’s recommended adjustments for management expenses,
injuries and damages and “other proposed adjustments in Staff Exhibit No.101.”These
adjustments are reflected in the Commission’s approved revenue requirement,as illustrated by
Attachment A to this Order.Tr.at 1524.On the other hand,Intermountain did not accept Staff’s
adjustments for:(1)Chamber of Commerce (Chamber)expenses;(2)Rotary and Lions Club
ORDER NO.33757 18
dues;(3)certain expenses which were duplicated;5 (4)a refunded expense;and (5)Staffs
determination of disallowed expenses in the forecast period.Tr.at 1525.
Intermountain stated that Chamber fees ($18,150)should be allowed because
Intermountain faces competition from electricity and other heating fuels and Chambers “help the
Company compete in the marketplace thereby enabling it to offer its customers more and lower-
priced options for energy.”Tr.at 1530-1531.Intermountain stated that the Commission has
allowed Chamber expense recovery in other cases before it.Id.However,at hearing,
Intermountain admitted that in past cases cited by the Company,Chamber expenses were
grouped together with expenses related to several groups and organizations,including Edison
Electric Institute,(Order No.29505)and,therefore,were only partially allowed.In another case,
Chamber expenses were totally disallowed (AVU-E-04-01).Id.at 1538-1539.
Intermountain further argued that the networking advantages provided as a result of
its participation in the Rotary Club of Idaho Falls and Twin Falls Lions Club ($275)directly
benefit customers by providing opportunities to network with the Company’s customers and help
strengthen the communities in which they live.Id.at 1532.
Intermountain also argued that Staff should recalculate its disallowed expense
adjustment because certain expenses,specifically golf sponsorships and the American Heart
Association Heart Walk sponsorship,do not occur in the last three months of the year and should
be adjusted.Tr.at 1534.Intermountain argued that Staff used relative percentages of its
proposed disallowed expenses “to the total expenses for the period January through September of
2016 and applied that percentage to the forecast period October through December of 2016.”Id.
Therefore,the Company argued that its proposed recalculated adjustment,with these expenses
removed,should be used.See Exhibit 32,Page 1,Line 26.
Commission Findings
We continue to follow our well-established precedent as it relates to the disallowance
of expenses related to lobbying,enhancing the Company’s image in the community,and
maximizing shareholder value.Therefore,we find it just and reasonable to disallow the
Company’s claimed expenses related to the Chamber or service clubs,charitable sponsorships,
At hearing,Staff also noted that there were two expenses in Staff Witness Romano’s exhibits that were double
counted and one expense that was not removed that was later reimbursed.Tr.at 1053-1054.Staff’s proposed
adjustments were amended by $1,598 to reflect these mistakes.
ORDER NO.33757 19
community golf outings,and the like.We find these to be primarily image-enhancing activities
that primarily benefit the Company and its shareholders rather than customers.
Although the Company may experience certain elements of competition in the
marketplace,it is simply not a traditional market participant.It is a monopolistic public utility
that does not have to compete with other LDCs within its service area and is authorized a certain
ROR.To suggest otherwise is disingenuous.
Finally,we find that there is insufficient evidence in the record related to the
seasonality of certain expenses that Intermountain sought to remove from Staffs expense
adjustments.While we recognize that certain expenses occur at specific points in the year and
may not be recurring—as an example,a utility’s fourth quarter may also include expenses related
to holidays that do not occur at other times of the year—the Company did not provide sufficient
evidence to make this determination for its proposed seasonal expense adjustments.Therefore,
without more,we are persuaded by Staffs adjustment analysis and find the ratio it used to
allocate expense adjustments to be reasonable.
C.Rate Base
“Rate base”is “the utility’s capital investment amount.”Industrial Customers of
Idaho Power i Idaho PUC,134 Idaho 285,291,1 P.3d 786,792 (2000).In this case,
Intermountain proposed a $237,318,401 rate base consisting of six items:net gas plant-in-
service,materials and supplies inventory,gas storage inventory,cash working capital,
accumulated deferred income taxes,and customer advances.Tr.at 209;249.The Company
then proposed to adjust the rate base to reflect known and measurable changes.
Staff noted that Intermountain books individual program costs and associated
contributions by FERC account rather than having project-specific documentation,which Staff
believes is not a best practice for purposes of allocating the revenue requirement.Tr.at 1111-
1129.Staff recommended that the Company,Staff,and other interested parties address these and
other recordkeeping,accounting and organizational issues after this case ends.Id.;1015.Staff
and the other parties to this case otherwise accepted the Company’s proposed adjusted rate base,
with a few exceptions as discussed below.Tr.at 1077-1078.
ORDER NO.33757 20
(1)Disputed Rate Base Adjustments
(a)Bonus Depreciation
Bonus depreciation allows more rapid recovery of certain capital investments for tax
purposes than its economic depreciation by allowing a company to write-off 50-100%of the cost
of certain plant additions in the first year of operation,thereby reducing taxable income and the
amount of federal income tax paid.Tr.at 1592.For 2016,Intermountain found that the benefit
of foregoing bonus depreciation outweighed taking it.Id.at 1594-1595.MDU found that by not
electing its subsidiary Intermountain’s bonus depreciation for 2016,the consolidated company
could utilize about $9.5 million in tax credits that otherwise would have expired in other states
served by it.Id.
Critically,Intermountain and MDU maintained that adjusting rate base to account for
foregone bonus depreciation would violate IRS Normalization Rules.Id.at 1598-1602.
Intermountain contended that normalization spreads utility tax benefits over the life of the asset,
treating current and future utility customers equitably by allowing all customers to enjoy the tax
benefits of depreciation.Id.However,Intermountain stated that an impermissible flow of tax
benefits from accelerated depreciation to ratepayers results when the taxpayer (in this case
Intermountain)had not yet realized the benefit.Id.Intermountain stated that a violation of IRS
Normalization Rules could cause the permanent loss of using any form of accelerated
depreciation by MDU,thereby increasing costs of capital,and harming ratepayers through higher
rates.Id.at 1602.
NIGU
NIGU countered that MDU and Intermountain harmed ratepayers and inflated
Intermountain’s revenue requirement by $228,000 by not electing to deduct bonus depreciation
when calculating 2016 federal income tax.Tr.at 939.NIGU maintained that there is an inherent
conflict where MDU uses additional tax write-offs at the parent company level,while retail
utility customers of its subsidiary have to pay more income tax.Id.NIGU maintains that there
are benefits to the operating utility subsidiaries of MDU provided through its participation in a
parent company structure,but that MDU Resources should not transfer any additional expense to
Intermountain without a fair quid pro quo,in the best interest of Intermountain’s ratepayers.Id.
at 941.
ORDER NO.33757 21
Commission Findings
The Commission finds the Company’s argument persuasive as it relates to
normalization concerns from taking bonus depreciation benefits for customers faster than over
the depreciable life of the asset.While we understand the corporate benefits received by MDU
from not electing to take bonus depreciation when determining its 2016 federal income tax,we
find the Company has demonstrated that under these facts,and solely for the determination of
federal income tax in 2016,it is appropriate to exclude bonus depreciation related to
Intermountain because doing so will prevent a violation of IRS normalization rules.
We acknowledge NIGU’s arguments related to the MDU Resources-Intermountain
parent subsidiary relationship.Intermountain should not be permitted to use this relationship
both as a sword and as a shield,depending on the outcome.Such approach will not always inure
to the benefit of Intermountain’s customers.
(b)Cash Working Capital
Intermountain stated that Cash Working Capital (CWC)is the amount of funds
required to finance its day-to-day operations.Tr.at 1547.Intermountain included $1,143,988
for CWC in its proposed rate base,which increased its revenue requirement by $141,803.Tr.at
245;1945.
t1
Staff removed $1,137,7436 of CWC from rate base as shown on Revised Exhibit 103,
Adjustment 3.Tr.at 1352.Staff stated that Intermountain has not adequately shown that
shareholders provided CWC during the “lag”between when Intermountain incurs operating
expenses and the time revenues are received.Id.at 1350,1379.Staff stated that CWC is never
automatically included in rate base,but included only after a showing that CWC is supplied by
shareholders.Id.at 1351.Staff recommended that Intermountain undertake a “balance sheet
analysis.”Id.at 1379.
Staff stated that the Company should provide better evidence that CWC was provided
by shareholders because Intermountain also included materials and supplies and gas storage
incentives in rate base.Id.at 1351.When these items are included in rate base,CWC may not
be recognized by some commissions.Staff also stated that a change in operating practice could
alleviate the need for CWC;that the Company’s study and lead and lag inputs create the
6 CWC varies with each adjustment making the Company and Staff numbers different.
ORDER NO.33757 22
problem,not Intermountain’s practices,per Se,although practices could also be slightly altered to
erase the need for CWC.Id.at 1352,1379-1383.
Intermountain Rebuttal
intermountain disagreed with Staff’s proposal to remove Intermountain’s CWC from
rate base.The Company noted it had conducted a lead-lag study,which is the predominant
method that this Commission and other commissions use to determine the amount of CWC to be
included in rate base.The Company thus argued that it was unnecessary to determine the
sources of the CWC funds.Tr.at 1551-1559.Additionally,in response to Staff’s criticism,
Intermountain conducted a “balance sheet analysis”that confirmed the Company had a “working
capital deficiency.”Id.at 1563-1565.
Lastly,as an alternative to determining the amount of CWC based on its lead-lag
study,the Company noted the Commission could estimate CWC using the commonly accepted
45-day or 1/8 of Operations and Maintenance (O&M)Method.This alternative method would
provide for $28 million of CWC.Id.at 1566.
Commission Findings
Cash flow problems occur when a utility pays expenses before collecting revenue.
The Idaho Supreme Court has stated:
To the extent that such amount [of expense]exceeds the revenue collected,it
is supplied by the owners of the utility as a portion of their investment and
thus becomes a part of the rate base.Thus,cash working capital is a
recognition of the sum which the utility needs to supply from its own funds
(rather than the rate-payer’s [sic])to meet current obligations as they arise due
to the time lag between payment of expenses and collection of revenues.
[Citation omitted]Such allowances by the Commission are not guaranteed as
a matter of course;the utility carries the burden of showing by competent
evidence that the need therefore exists.[Citation omitted].
Boise Water Corp.,97 Idaho at 836,555 P.2d at 167.Further,this Commission has consistently
held that utilities requesting CWC in rate base must be able to demonstrate that CWC needs are
supplied by investors.See Order No.19333.
We find that including CWC in the Company’s rate base is unwarranted in this case.
With regard to its lead-lag study,Intermountain noted that while the Commission “accepted
Rocky Mountain Power’s 2007 lead-lag study”it did so with “the direction that in the next rate
case it demonstrate that a lead lag study appropriately considers the source of the funds.”Tr.at
ORDER NO.33757 23
1554,1555.Rocky Mountain’s next case settled and CWC was not further discussed in the
Commission’s final Order.Therefore,while Intermountain argued that some CWC has been
allowed into rate base in other ratemaking cases,its burden of proof still requires it to show that
it is reasonable to include CWC in its rate base.Even assuming the Company’s lead-lag study
adequately demonstrated a need for CWC,the Company’s methodology was insufficient to show
that shareholders provided the CWC.Until the Company is able to demonstrate that its CWC
needs are supplied but its investors,we will continue to disallow this expense.
The need for CWC is another area impacted by the Company’s relationship to its
parent,MDU.Cash pooling at the parent level,like consolidated tax returns,benefits the entity
as a whole.For Intermountain to meet its burden of proving that it needs to include CWC in rate
base,we find the Company must show:(a)a total working capital need beyond that included in
rate base;(b)that total working capital and its CWC component are provided by shareholders;
and (c)the need at the consolidated parent level is not offset by other consolidated benefits,such
as consolidated tax benefits discussed above.
(c)Customer Service Center
The Company included a net book value of MDU’s Customer Service Center
building and land costs allocated to Intermountain at $1,942,878 with depreciation of $28,859.
Tr.at 1094.However,Staff toured the facility and found that approximately one-third of the
building is not in use at this time.Id.Staff thus believes it is appropriate to reclassify this
amount from plant-in-service to plant held for future use,and to remove one-third of the
building’s and land’s net book value ($647,626)and depreciation ($9,620)from Intermountain’s
rate base and expenses.Id.at 1094-1095.No other party to these proceedings either rebutted or
addressed this adjustment.
Commission Findings
Based on our review of the record,we find that one-third of the Company’s Customer
Service Center is not yet used and useful.We thus find it fair,just,and reasonable to remove
one-third of the building’s and land’s net book value ($647,626)and depreciation ($9,620)from
Intermountain’s rate base and expenses,and to reclassify one-third of the Customer Service
Center from plant-in-service to plant held for future use.
ORDER NO.33757 24
D.Summary ofAdjustments to Test Year Revenues,Expenses and Rate Base
With the Idaho rate base,revenue requirement and return on equity established,the
Commission finds it fair,just,and reasonable to set the Company’s revenue requirement as
particularly shown on Attachment A to this Order,and as summarized below:
Rate Base $235,526,788
Rate of Return 7.3%
Total Revenue Requirement $264,044,909
Revenue Deficiency $4,119,055
Percent Increase Required 1.58%
III.COST-OF-SERVICE STUDY AND RATE DESIGN
A.Gas Cost-of-service
Intermountain’s cost-of-service methodology in this case is set forth in Exhibits 19-
23.Intermountain did not conduct a load study.See Tr.at 1616.However,Intermountain
maintained that its cost-of-service study is reasonable because,while a load study may more
precisely estimate each class’s peak use,a load study is not needed to properly meet cost
causation principles.Tr.at 1896.Intermountain argued that it lacks the meter technology
needed to conduct a load study.Also,unlike the electric industry,the natural gas industry does
not commonly use load studies to determine cost-of-service.Id.Rather,the natural gas industry
typically estimates rate class peak demands,as Intermountain argued it did in this case.Further,
Intermountain utilized the more common method of applying one peak day,as opposed to Staff’s
recommendation of using multiple peak days.Id.at 897.
Intermountain also disagreed with Staff’s proposal to allocate distribution plant using
non-coincident peak (NCP)allocators.Intermountain maintained that while this is another
common approach in the electric utility industry,it is not commonly used for LDCs.Tr.at 1898.
With respect to allocating its costs for distribution mains,Intermountain stated that
47.16%of those costs are customer related,while 52.84%are demand related.Tr.at 879.While
it has records of allocation of total costs for service and regulators,Intermountain does not
maintain records by rate class.It stated that using a weighing factor based on meter costs—such
that larger customers require larger and more expensive meters and services—is an accepted
industry approach.Id.at 867.
Intermountain disagreed with Staff that it is inappropriate to attribute any portion of
mains as customer allocated because some distribution main investments are needed to connect a
ORDER NO.33757 25
customer to a distribution system that is independent of the level of the customer’s peak demand.
Tr.at 1900-1901.Therefore,the Company asserted that main allocation costs should be based
on the number of customers requiring connection,and not on peak demand.Id.
Staff criticized Intennountain’s cost-of-service study for several reasons.First,Staff
noted that Intermountain did not conduct a traditional load study,which Staff maintained
invalidates Intermountain’s cost-of-service study.Tr.at 1103-1104.Because the cost-of-service
study is invalid,Staff recommended that the Company allocate its revenue requirement in
proportion to the normalized revenue it now collects from each rate class until it can conduct a
load study.Tr.at 1104.
Staff also criticized the Company’s cost-of-service study for using novel and
inappropriate cost allocators.Id.at 1103.Staff argued that,instead of conducting a load study,
Intermountain combined peak day data from industrial and transportation customers (who have
meters capable of recording daily demand)with monthly billing information from residential and
general service customers.Id.at 1108.Staff maintained that Intermountain then subtracted peak
use of industrial and transportation customers from system peak,and allocated the amount of
peak not serving these customers to residential and general service classes.Id.Staff stated that
Intermountain determined its peak day allocation by then allocating residential and general
service on their January 1,2016,consumption.Id.at 1109.
Staff also argued that classifying distribution main costs as both demand-and
customer-related is inappropriate because mains serve multiple users and the cost of connection
is already captured in customer-related distribution costs.Id.at 1113.Staff asserted that
Intermountain should maintain auditable records that would allow proper cost allocation.Id.at
1111.
Finally,Staff stated that Intermountain did not maintain records necessary to
determine net plant-in-service,so its cost-of-service model allocates gross,rather than net,rate
base.Id.at 1116.By allocating gross plant-in-service,Intermountain included every item of
unretired plant,including depreciated plant,Contributions in Aid of Construction (CIAC),and
other plant not paid for by investors.Id.Staff maintained that after allocating gross plant-in
service,Intermountain prorated its revenue requirement by customer class.As a result,only a
ORDER NO.33757 26
fraction of Intermountain’s gross plant-in-service was represented as Company investment,
despite the Company proposing to earn its allowed ROR on the entire amount.Id.at 1116-1117.
NIGU
NIGU generally supported Intermountain’s cost-of-service study.On the other hand,
NIGU opposed Staff’s recommendation to allocate by an equal percentage across all rate classes,
and argued that method would not send correct price signals to customers.Tr.at 858-862.
NIGU stated that most gas utilities do not have meters capable of measuring daily consumption
for residential and general service customers,but instead estimate peak consumption using
weather data from historical periods.Id.at 868-872.
NIGU argued that Intermountain used the best data available and,therefore,that its
cost-of-service study should be adopted.Id.at 865.Without implementing the results of the
Company’s cost-of-service study,NIGU argued that industrial customers will continue to
subsidize residential and general service customers.
NIGU generally agreed with the Company regarding main cost allocation,arguing
that the cost of distribution mains is partially customer driven because mains are installed to
meet both peak load and to connect customers to the system.Id.at 731.NIGU asserted that
peak requirements influence the diameter and capacity of mains,while customer location
influences their length.Id.Further,NIGU contended that without customer allocation,
interruptible customers would pay nothing for distribution mains because they do not contribute
to peak day demand.Id.at 886.
Commission Findings
A cost-of-service study is an imperfect tool for assigning system and service costs to
customer classes.We have previously recognized that cost-of-service modeling is not an exact
science,and that while most generally accepted cost-of-service methods are based on similar
principles,they may lead to disparate results and recommendations for class revenue allocation.
Thus,the Commission has repeatedly emphasized that “a cost of service study is not a perfect
tool for assigning system and service costs to customer classes.”Order Nos.29505 at 45;25880
at 25-26.This Commission last addressed cost-of-service issues for Intermountain in 1986.See
Case No.U-1034-122.
In this case,the Commission is committed to the task of selecting a cost-of-service
method that (1)properly classifies system costs;(2)accurately identifies their drivers or causes;
ORDER NO.33757 27
and (3)equitably distributes them among Intermountain’s various classes of customers.Once we
accept a cost-of-service as a starting point,we must then determine the appropriate revenue
requirement to be recovered in the rates of the different system customer classes.In doing so,
we strive to equitably and reasonably apportion the revenue requirement among the customer
classes.While we recognize “that the pricing of the utility’s services should be based primarily
on the cost of providing service to definable customer classes”(see Order No.13608),our
“dedication to cost-based rates does not...require slavish adherence to cost-of-service in every
detail.Although cost-of-service must support the basic rate structure,other considerations
should enter into the rate setting equation when necessary and appropriate.”Order No.14141.
The Commission uses its authority to fashion fair and reasonable rates that not only provide the
utility a fair return and generally follow cost-of-service study results,but also avoid dramatic and
sudden increases which can lead to rate shock.
While we find that the Company has data that supports the known and measurable
cost-of-service rate design within its large volume and transportation customers,it does not have
such data for use in definitively allocating revenue requirement among the various other
customer classes.As Staff stated,a load study with more class specific underlying cost
information,and a more appropriate derivation of net plant-in-service would provide this data.
Without full knowledge of the appropriate cost-of-service allocation,we adhere to the concept of
gradualism related to cost-of-service.
Therefore,we accept the Company’s cost-of-service study insomuch as it convinces
us to move partially to full Company cost-of-service for all customer classes save large volume
and transportation.Lack of a load study,lack of class specific project cost data over the 30-year
period,a disputed allocation of distribution mains,and questionable calculation of net plant-in-
service result in our finding that a 50%move toward cost-of-service is reasonable and warranted
under the facts of this case for all affected customer classes,as stated above.
This outcome results from the fact that,contrary to our findings related to the
Company’s large volume and transportation customers and associated cost-based rates within
those classes,Intermountain’s cost-of-service study does not provide sufficient justification to
move fully to the class allocation it proposes for all other classes.We find that the revenue
increase allocated to each class,as depicted in Attachment B to this Order,is fair,just and
reasonable.Finally,we would strongly encourage the Company,after over 30 years without
ORDER NO.33757 28
interacting in a general rate case with its primary regulator,to participate with Staff and other
interested parties in determining the best way forward as it relates to class cost-of-service
acquisition of appropriate cost causation and load data.
B.Class Consolidation
Intermountain proposed to consolidate its residential service (RS-1 and RS-2)classes
into a single class that eliminates the distinction based on the presence of gas water heating in
residences.Tr.at 16.Intermountain further proposed to combine its two industrial customer
transportation rate classes,T4 and T5,in a single rate class because the distinction between the
two is eliminated if and when the Company’s demand charge is allowed and implemented.Id.at
16.
Intermountain also proposed to introduce a new,fourth general service class tier to
address customers using in excess of 10,000 therms per month.The Company expects its
proposal to reduce the extent to which its largest GS-1 customers subsidize its smaller GS-1
customers,and better aligns rates charged to the largest GS-1 customers and the rates charged to
the Company’s LV-1 Large Volume Firm Sales Service customers.Id.at 371-375.
Finally,Intermountain proposed to eliminate seasonal rates.Id.at 358.The parties
did not object and generally supported eliminating seasonal rates as an antiquated rate design
characteristic.
LtT
Staff agreed that Intermountain’s RS-1 and RS-2 classes be combined,and T4 and T5
classes be combined.Tr.at 1218;1221.Staff also agreed with the Company’s proposal to
create a general service fourth block tier for customers who use more than 10,000 therms per
month.Tr.at 1212.
However,Staff also recommended that the Company study whether the GS class
should be divided into two or more classes as a result of the diversity of the class.Tr.at 1213.
Staff proposed that this study occur alongside the cost-of-service workshop proposed by Staff
and intervenors,to determine whether the smallest general service customers are subsidizing the
largest GS customers,and to determine whether each GS class should be charged a different
customer charge.Id.
ORDER NO.33757 29
CA PAI
CAPAI agreed with the other parties that there is no rationale for separating the
residential class,as it now stands.Tr.at 956.
Commission Findings
We find it appropriate and reasonable to combine the Company’s RS-1 and RS-2
classes,combine T4 and T5 classes,and create a GS fourth block tier for customers using more
than 10,000 therms.We note that all parties concurred in (or at least did not oppose)this result.
As alluded to at various points in this Order,we encourage the Company to undertake
a workshop related to the various issues that have arisen in this case.If the Company chooses to
engage in a more collaborative,more frequent,and engaged ratemaking process,we recommend
that as a part of that discussion,interested parties could address the potential for splitting GS into
subclasses to prevent cross-class subsidization.
C.Customer Charge
As it relates to natural gas utilities,a customer charge is a fixed amount that a
customer must pay each month without regard to how much gas the customer uses.
Intermountain currently charges residential customers $2.50 per month for billing months of
April through November and $6.50 per month for the billing months of December through
March.Tr.at 364.The current weighted average residential customer charge is $3.83.Tr.at
1204.General service customers currently pay $2.00 per month for the billing months of April
through November and $9.50 per month for the billing months of December through March,with
a weighted average of $4.50.Id.
Intermountain
Intermountain proposed increasing the residential (RS)customer charge to $10.00 per
month for all months,and the general service (GS)customer charge to $35.00 per month for all
months.Tr.at 1204.The Company supported these increases with an analysis of its risk profile
and evidence related to the recovery of fixed costs.The Company’s goal is to decrease the
disparity between the Company’s current customer charges and the actual level customer costs
associated with providing monthly natural gas service.Tr.at 272.
gff
Staff recommended that the Company’s customer charge be increased to $5.50 per
month for residential customers,and $9.50 for general service customers,regardless of
ORDER NO.33757 30
seasonality.Tr.at 1202.Staffs recommended increase in customer charges would result in an
average monthly increase of $1.67 for residential customers,and of $5.00 to $9.50 for general
services customers.Id.To balance its recommended increases in the customer charge,Staff also
recommended a concomitant $0.17147 per therm usage charge increase (excluding gas cost)for
residential customers,and $0.03530 per therm usage charge decrease for general services
customers.Id.at 1205-1206.
To support its recommendation,Staffpresented evidence and analysis of the customer
charge related to:(1)the level of customer-related cost;(2)the bill impact in moving from
current to proposed rates;(3)the total bill for “basic needs”;(4)the marginal cost pricing and
price signals that promote conservation and the efficient use of resources;and (5)the customer
charges of other utilities.Id.at 1207.
Staff noted that it was troubled by the range of customers represented in the GS
classes and in imposing one uniform customer charge on the entire class.Id.at 1213.Staff
recommended that,if the Company undertakes workshops related to the various ratemaking
issues presented in this case,the division of the GS class for purposes of customer charge be
analyzed and discussed.Id.
ICL/NWEC
ICL/NWEC opposed the Company’s proposed increase to $10.00 for residential
customers,as well as the proposed increase to $35.00 for GS customers because those proposed
increases would not send an appropriate price signal related to energy efficiency.Tr.at 997.
ICL/NWEC argued that when customers have no ability to affect the monthly charge,low-
income households are injured.Id.Instead,ICL/NWEC supported inclusion of a low monthly
customer charge with a decoupling mechanism (such as the Company’s proposed FCCM in this
case).Id.ICL/NWEC recommended that the customer charge be set at $3.50,with an adjusted
commodity charge to capture the remaining revenue requirement.Id.at 998-1001.ICL/NWEC
also recommended that all stakeholders participate in an effort to develop tiered,inclining-block
commodity rates,or a flat per therm rate,to achieve the greatest conservation impact.Id.at
1003.
CAPAI
CAPAI’s concerns related to how the proposed customer charge would impact low
income customers.CAPAI maintained,however,that the Company has never tracked low
ORDERNO.33757 31
income data.Consequently,CAPAI has been unable to properly analyze how an increased
customer charge and lower usage charge would affect low-income customers.Id.at 957.
CAPAI thus recommended that the Company use an advisory group to begin tracking low-
income data,ranging from the percentage of its customers who are low income to their
consumption habits,with that group,in turn,providing the data necessary to establish a low-
income weatherization program.Id.at 959-963.
Commission Findings
We find the Company’s proposals related to seasonal rates,RS class consolidation
and the combination of the T4 and T5 classes reasonable and appropriate.In addition,we find
the following customer charges fair,just and reasonable:
CUSTOMER CHARGE
Residential General Service
Commission Approved Charge $5.50/month $9.50/month
Per Therm Usage Charge Change +$0.17147 -$.03530
We direct the Company to continue to attempt to differentiate and align similarly
situated customers together in appropriate class structures.We find that workshops addressing
the various party recommendations related to class consolidation,improved tiers,and low-
income issues,would be beneficial as the Company moves forward in its rate design endeavors.
We note that the Company expressed its desire to implement a robust DSM program
that incentivizes energy efficiency.While we authorize the Company to increase its customer
charge to some degree,we note that any large increases in the customer charge could
disincentivize efficiency.Consequently,if the Company truly desires to incentivize efficiency,it
should plan for and maintain customer charges at reasonable levels.
D.Demand Charge
The Company proposed implementing a demand (usage)charge based on Minimum
Daily Firm Quantity (MDFQ)of $0.30 per therm for LV-l and current T4 and T5 customers.Tr.
at 391.It argued that a demand charge is long overdue,and that such a charge will help ensure
that that particular customers pay for the costs they cause the Company to incur to provide them
ORDER NO.33757 32
service.Thus,a demand charge represents the proper measure of the responsibility to pay for a
customer’s proportionate share of the demand it places on the system.Id.at 279.
Staff agreed that a demand charge is warranted.Tr.at 1219.But Staff recommended
that the Commission reject the Company’s proposed MDFQ demand charge because the
Company’s cost-of-service study is incomplete.Staff thus recommended that a lesser demand
charge be implemented until the proposed MDFQ charges can be properly addressed.Id.at
1203.
Specifically,Staff recommended a lesser charge of $0.20 per therm (a 28%increase)
because the demand charge will shift costs from higher load factor customers to lower load
factor customers.While Staff stated this shift is appropriate because lower load factor customers
should pay more to offset the higher costs to serve them,Staff believes the shift should be more
gradually implemented.Id.at 1219.Staffs recommended $0.20 demand charge reflects Staffs
support for a gradual shift.Id.
NIGU
NIGU generally supported Intermountain’s proposed demand charge for LV and T
customers as a sound way to recover fixed costs,stabilize revenues,and provide effective price
signals to customers,however,NIGU argued there should be an “open season”where all
industrial customers are allowed to reset MDFQ5.Tr.at 734-735.
As an option to mitigate the proposed demand charge’s effect on Amalgamated
Sugar,NIGU proposed that an Amalgamated-specific load retention rate be established that
would phase-in a demand-based pricing structure.During the phase-in,the Amalgamated
discount would be spread across all rate classes,not just firm transportation customers.Id.at
902-904.
Amalgamated Sugar
Amalgamated stated it is by far the Company’s largest individual transport customer
and its proposals in this case have an outsized effect on Amalgamated.Tr.at 1472.
Amalgamated stated that Intermountain originally proposed a 72.2%increase ($839,529)before
Amalgamated would be allowed to re-nominate its MDFQ,but that,based on Intermountain’s
updated MDFQ,Amalgamated’s increase would be 48.5%($563,494),which,Amalgamated
argued,is rate shock.Tr.at 1434;1438;1440.
ORDER NO.33757 33
Therefore,Amalgamated recommended that the Commission continue to take a
conservative gradual approach to moving utility customers toward full cost-of-service rates.Id.
at 1452-1455.Amalgamated argued that the Company,due to the period of time between
general rate cases,should be bound by the ratemaking principal of gradualism and,therefore,any
rate design changes should be spread over the Company’s next five rate cases.Id.at 1494.
Amalgamated acknowledged that costs it may be causing both now,and for as long the current
rate design is in place,may have to be paid by another class of customers.Id.at 1494-1500.
Amalgamated further argued that Staff’s recommendation to implement a demand
charge is arbitrary in light of the Staff’s concurrent recommendation that the Commission reject
the Company’s cost-of-service study.Id.at 1460-146 1.Amalgamated contended that even with
Staff’s proposed lower revenue requirement and rate design,the increase in demand charges is
still unreasonable and unacceptable.Amalgamated complained that the Company “ambushed”it
by proposing a full cost-of-service demand charge when Amalgamated had only paid commodity
charges for more than 30 years.Id.at 1474.
Amalgamated argued that the revenue requirement resulting from this case should be
spread equally to all customer bills,and that any significant rate design changes,including an
MDFQ-based demand charge,should only be allowed after a reasonable and appropriate cost-of-
service study is conducted and accepted by the Commission.Id.at 1474-1476.
Intermountain Rebuttal
In rebuttal,Intermountain argued that demand charges for a utility’s large industrial
customers are not atypical.Id.at 272.Further,a demand charge will help ration pipeline
capacity by encouraging large customers to judiciously elect their MDFQs.Tr.at 1850.
Intermountain assumed that demand charges would encourage T5 customers to set an MDFQ
that protects peak day needs while keeping monthly charges as low as possible.Id.;1851.
Intermountain next argued a demand charge is appropriate because its smaller-to
medium-sized customers are bearing a proportionately larger share of fixed-cost recovery.Id.
Jntern-iountajn stated that the T4 customer structure collects almost all fixed costs in the first two
price blocks (in a declining block rate)with recovery weighted to the first-block.Id.at 1851-
1852.Further,in 2016,only 10%of Amalgamated’s therm use was billed in the first-block,
while more than 70%was billed in the third-block,meaning that 70%of Amalgamated’s usage
ORDER NO.33757 34
contributed only to the variable cost of providing service,leaving other customers to provide the
bulk of Intermountain’s fixed-cost recovery.Id.at 1852.
Finally,Intermountain argued that Amalgamated has significantly ramped-up sales
since 2009 and now accounts for nearly one quarter of Intermountain’s Large Volume (LV)
sales,whereas,in 2010,it was only 2%to 4%of LV sales.Id.at 1852-1854.Intermountain
stated that “Amalgamated’s combined 2016 annualized usage exceeds 2009 by over 1400%.”Id.
at 1857.The Company argued that this change created a far more pronounced inter-class
subsidy,in Amalgamated’s favor.Id.at 1850-1854.Intermountain argued that when
considering both transport and energy costs,Amalgamated’s increased transport cost of 65%is
only a 2.6%increase in total cost of gas service,and that even at a 100%transport cost increase,
the cost of delivered gas only increases by 4%.Id.at 1859-1860.
Commission Findings
We continue to adhere to the principle of cost causation,namely that the cost causing
customer is responsible for the costs associated with its service.We also recognize that the
Company’s LV and T customers are aware,as is the Company,of the demand that each places
on the system because we have a cost-of-service study showing load data for these customers.
Consequently,it is now apparent the degree to which LV and T customers are subsidizing or
being subsidized by others.The theory behind gradualism cannot supplant the principle of cost —
causation —especially when the cost causation is known and measurable.Therefore,we find that
the Company’s proposals as they relate to the LV and T demand charge are reasonable and
appropriate.
E.Demand Side Management (DSM)and
Fixed Cost Collection Mechanism (FCCM)
As noted earlier in this Order,the Company proposed a DSM program with an
associated decoupling mechanism.That mechanism,called the Fixed Cost Collection
Mechanism (FCCM),is designed to separate the Company’s revenues from its gas sales and thus
remove the Company’s disincentive to offer energy efficiency programs that might cause its
customers to buy less gas.Tr.at 47.The Company maintained that its goal was to start with its
proposed DSM and FCCM as a way to build toward a robust program at some point in the future.
Tr.at 573.
ORDER NO.33757 35
Intermountain maintained that its RS-1 and RS-2 classes have experienced significant
decline in net use per customer since 1990.Intermountain stated that because it cannot control
external factors such as customer-initiated efficiencies,it must sever the link between earnings
and sales,enabling it to promote and encourage lower consumption,while still collecting its
underlying fixed costs.Id.at 665.
Intermountain stated that it is beholden to a high percentage of volumetric cost
recovery so the Company is financially vulnerable to sales variations between rate cases.Tr.at
1933.Intermountain maintained that it needs fixed-cost recovery in order to avoid the need of
filing more frequent rate cases.Id.The Company stated that FCCM calculated on a per-
customer approach would protect the Company from under-collecting its allowed revenue
requirement associated with new customers and the infrastructure needs they generate.Id.at
1934.
The Company opposed any cap associated with FCCM,arguing that its FCCM is a
symmetrical mechanism that can result in a surcharge or credit to customers.Id.at 1941.
Although Staff supported the Company’s proposed DSM program,Staff opposed the
Company’s proposed FCCM.Tr.at 1033-1035.Staff attested that Intermountain provided no
documentation indicating declining use per customer or any other evidence of impact of other
economic conditions.Id.Staff also noted that the FCCM would be used for the GS class even
though the Company does not propose to offer GS DSM opportunities.Id.at 1032.Further,
Staff maintained that Intermountain’s five-year DSM spending plan would have an insignificant
effect on energy savings in relation to total sales for all customer groups when compared with
other Idaho utilities.Id.at 1030.Staff contended that the Company’s proposed FCCM contains
a provision to collect incremental customer fixed costs,but Intermountain provided no evidence
that there are incremental costs to serve these customers.Id.at 1030-1032.Staff also
maintained that an increase in the Company’s allowed customer charge would reduce the need
for the FCCM.Id.1033.Finally,Staff asserted that the Company should implement DSM
energy efficiency measures because it has now identified energy efficiency as a least-cost
resource.Tr.at 1274-1275.
ORDER NO.33757 36
ICL/NWEC
ICL/NWEC asserted that Intermountain’s DSM program is more of a fuel-switching
incentive program than true DSM.Tr.at 970.ICL/NWEC maintained that Intermountain
should broaden its proposal to include high-efficiency equipment,weatherization,low-flow
shower heads and other methods of utilizing natural gas more efficiently.Id.at 982.
ICLINWEC stated that fuel-switching is not part of the Northwest Power Plan’s definition of
conservation.Id.at 971.
ICL/NWEC proposed that the Company’s DSM program should be spread beyond its
residential class to include the GS-1 class,with limitations,and that the program itself should be
capped at 3%of annual sales.Id.at 983;989.ICL/NWEC further stated that it will not support
any DSM or FCCM without a corollary low-income program.Id.at 983.
Commission Findings
We find that DSM,as both a least-cost resource and an important element of
promoting energy efficiency,is an important part of any utility’s provision of service.
Accordingly,we find it reasonable to authorize the Company to implement its proposed DSM
program,recognizing that the Company represents that this program will be used as a starting
point from which to develop more robust DSM offerings.We look forward to seeing the
program develop.
While we authorize the Company to implement its DSM program,we do not find it
reasonable or in the public interest to approve the Company’s proposed FCCM at this time.We
believe the Company must offer a more defined DSM program before we can authorize it to
implement a FCCM.The Company’s proposed DSM program is inadequate (in terms of its
stated goal of robustness)to justify a fixed-cost recovery for perceived lost therm sales.
We note that market transformation,evolving economic conditions,weather and
customer behavior are all part of the reality of the business of an LDC.And,while the Company
maintains that it needs an FCCM to avoid more frequent rate cases,we note the Company has
not filed a rate case in over 30 years.While Intermountain is to be commended for its ability to
defer a rate case for such a long period of time,neither the frequency of rate cases nor the
Company’s DSM program as proposed are compelling reasons for establishing an FCCM in this
case.We encourage the Company to do more in terms of energy efficiency,and note that neither
DSM nor FCCM need be tied to a general rate case,but can be presented to this Commission at
ORDER NO.33757 37
any time.We encourage increased evidentiary quantification of the Company’s need for an
FCCM and the benefits of its developing DSM program,and what it hopes to achieve through
energy efficiency programs and fixed-cost recovery.Based on these factors and the lack of
quantifiable evidence,we decline authorization of a FCCM.
F.Other Issues
(1)Convenience Fees,Western Union Fees,Credit/Collection Reports
Staff recommended that the Company remove a $1.99 convenience fee for payment
by debit or credit card but that Intermountain could later file to defer its costs to provide this
service through rates.Tr.at 1300-1301.According to Staff,all other methods of payment have
transaction costs and are embedded in rates.Staff asserted that using cards to pay for services is
now routine and that maintaining convenience fees carries a disparate impact on low-income
customers,about 28%of whom are “unbanked”or “underbanked.”Id.at 1302-1303.Staff
stated that this could also reduce collection fees for Intermountain.Id.at 1304.
Staff also proposed that Intermountain,like Avista Utilities,should absorb or collect
later in rates,the $1.00 fee it charges customers to use the authorized pay station (Western
Union)for cash payments.Id.at 1306.Staff recommended that Intermountain file monthly
reports regarding credit and collection activity,as do other utilities.Id.at 1318.
Intermountain
Intermountain opposed Staff’s recommendation.Intermountain argued that if it pays
a $1.99 convenience fee for customers,many customers would change from a less expensive
payment method to a credit card payment in order to earn reward points.Tr.at 113.If ordered
to cover this expense,Intermountain argued that it should be made whole as to its costs (both
credit/debit card convenience fees and Western Union fee(s)),and that it would be willing to
accept this additional expense if it could be deferred for later recovery in rates.Id.at 115.
Intermountain also asked that if the Commission were inclined to adopt Staffs recommendation,
that it be altered slightly to include submission of confidential credit and collection reports on a
quarterly basis.Id.at 116.
Commission Findings
We decline to implement Staff’s free payment proposal at this time.Adequate cost
estimates and benefit analyses were not provided.We nevertheless encourage the Company to
ORDER NO.33757 38
explore the possibility of removing these fees in the future to keep pace with what appears to be
an emerging industry standard.
(2)Line Extension Issues;Vested Interest Refund Program
Staff recommended that Intermountain modify its line extension tariff to incorporate
the Commission-approved ROR,and that Intermountain file a case to update its overall line
extension policy no later than 90 days after this case ends.The Company agreed that an update
needed to occur and suggested working with Staff in order to “prepare a compliance filing that
updates Intermountain’s Main &Service Extension provisions.”Tr.at 1338.
Amalgamated Sugar
Amalgamated proposed an industry standard vested interest program for customer-
funded line extensions and improvements.Tr.at 1424.This program would implement,for the
first time for Intermountain,a vested interest tariff for customer-funded line extensions and
system improvements.Id.at 1448.Amalgamated stated that its pursuit of the vested interest
program would align with Company and party discussions related to the revision of the
Company’s Main and Service Line Extension tariff.Id.at 1450.
Commission Findings
We find it reasonable and appropriate for the Company to update its line extension
tariffs to reflect the ROR approved in this case.Further,the updated tariff should accurately
reflect the extent to which customer contributions associated with line extensions depend on
ROR.We decline to order the Company to update other aspects of the overall line extension
policy within 90 days following the conclusion of this case.Rather,we encourage Intermountain
to modify its line extension policy as soon as possible to address changes in references,rules and
vested interest policy.
IV.INTERVENOR FUNDING
Intervenor funding is available pursuant to Idaho Code §61-617A and Commission
Rules of Procedure 161 through 165.Idaho Code §6l-617A(1)states that it is the “policy of
[Idaho]to encourage participation at all stages of all proceedings before this Commission so that
all affected customers receive full and fair representation in those proceedings.”The statute
authorizes the Commission to order any regulated utility with intrastate annual revenues
exceeding $3.5 million to pay all or a portion of the costs of one or more parties.Idaho Code §
61-617A(2).
ORDER NO.33757 39
Intervenor funding costs include:legal fees,witness fees,transportation and other
expenses so long as the total funding for all intervening parties does not exceed $40,000 in any
proceeding.Id.The Commission must consider the following factors when deciding whether to
award intervenor funding:
(1)That the participation of the intervenor has materially contributed to the
Commission’s decision;
(2)That the costs of intervention are reasonable in amount and would be a
significant financial hardship for the intervenor;
(3)The recommendation made by the intervenor differs materially from the
testimony and exhibits of the Commission Staff;and
(4)The testimony and participation of the intervenor addressed issues of
concern to the general body of customers.
Id.
To obtain an award of intervenor funding,an intervenor must further comply with
Commission Procedural Rules 161-165.IDAPA 31.01.01.161-165.The petition must contain
an itemized list of expenses broken down into categories,a statement explaining why the costs
constitute a significant financial hardship,and a statement showing the class of customer on
whose behalfthe intervenor participated.Rule 162;IDAPA 31.01.01.162.
As set out in greater detail below,the Commission received intervenor funding
petitions from four parties,requesting a total of approximately $25,000.
A.CAPAI
CAPAI timely filed a Petition for Intervenor Funding seeking recovery of $9,500 in
expenses,including an itemized list of expenses incurred.See generally CAPAI Petition for
Intervenor Funding (“CAPAI Petition”).CAPAI stated that it is a non-profit corporation
overseeing a number of agencies dealing with the causes and conditions of poverty throughout
Idaho.CAPAI Petition at 9.
CAPAI asserted that its sole source of funding to cover the up-front costs of
intervention is federal LIHEAP grant monies.Id.It maintained that it reduced expenses by not
hiring outside experts and instead relied on its in-house expert and Executive Director.CAPAI
also asserted it charged a per hour legal rate that is lower than the average first year associate in
Boise,Idaho.Id.at 8-9.
ORDER NO.33757 40
CAPAI stated that it has materially contributed to the Commission’s decision in this
matter by specifically focusing on rate increases and rate design issues affecting the Company’s
low-income customers.Id.at 4.Specifically,CAPAI provided expert testimony and discovery
related to the following low-income issues:(a)consolidation of residential classes;(b)increases
to the customer charge;(c)tracking low-income data;and (d)implementation of a low-income
weatherization program.Id.at 3-8.
CAPAI maintained that its recommendations differed materially from those of
Commission Staff because it was the only party to propose a low-income data tracking program
as well as the only party to propose a Low Income Weatherization Assistance Program,both to
be developed through an advisory group.Id.at 7.
CAPAI contended that the issues it presented during the pendency of this case
addressed issues representative of the Company’s general customers.Id.at 10-11.Finally,
CAPAI stated that Intermountain’s low-income customers constitute a significant and increasing
segment of the Company’s residential ratepayers.Thus,CAPAI noted the importance of its low-
income customer advocacy in this ratemaking proceeding.Id.at 10.
B.ICL/NWEC
ICL and NWEC jointly filed a timely Petition for Intervenor Funds (“ICL/NWEC
Petition”)in the amount of $5,678.27,including an itemized list of expenses incurred.
ICL/NWEC Petition at 2.Both ICL and NWEC are non-profit organizations supported solely
through charitable donations from their members and foundations.Id.at 3.
Both groups claimed that,due to the inherent instability of charitable contributions,
intervention funding is essential.Id.While both groups stated that they were heavily involved
in all aspects of this case,they “endeavored to limit the number of hours expended to the
maximum extent possible,jrimari1y by focusing on issues relevant to our constituents,and only
seek[ing]recovery for a fraction of the total hours spend,”and requesting legal and expert hourly
rates that are well below market rates.Id.
ICL and NWEC asserted that they materially contributed to the Commission’s
decision in this matter by lending “a voice for Intermountain Gas customers who desire to
conserve gas while keeping bills affordable.”Id.at 3-4.Specifically,ICL and NWEC provided
expert testimony and discovery related to the following issues:(a)conservation program
implementation and proposed adjustments;(b)the delay and adoption of ICL and NWEC’s
ORDER NO.33757 41
changes to Intermountain’s proposed FCCM;(c)the convening of an Energy Efficiency
Advisory Group;(d)the adjustment of the customer and per therm charge;and (e)the rejection
of fourth block general service class and inverted block per therm rates.Id.at 2.
ICL and NWEC maintained that their recommendations differed materially from
those of Commission Staff because they insisted upon immediate development of cost-effective
conservation measures,with specific recommendations,and the use of Intermountain’s sister
company Cascade Natural Gas as an example of the implementation of conservation measures.
Id.at 4.ICL and NWEC also specifically criticized and offered improvement to Intermountain’s
FCCM,including their recommendation to immediately add certain general service customers.
Id.at5.
Finally,ICL and NWEC contended that the issues they presented addressed matters
of concern to all Intermountain customers because rate design dynamics and gas conservation
program(s)have the ability to affect customers by avoiding higher cost supply-side options and
incent conservation.Id.at 5.Further,rate mechanisms like the FCCM —advocated for by ICL
and NWEC —can reduce volatility for the Company,implicitly aiding customers who depend on
Intermountain’s services.Id.
C.NIGU
NIGU timely filed a Petition for Intervenor Funding (“NIGU Petition”)seeking
recovery of $10,000 in expenses,including an itemized list of expenses incurred.NIGU Petition
at 2.NIGU is a non-profit social welfare organization advocating for certain industrial firm sales
and transportation customers of Intermountain Gas who made voluntary contributions to support
NIGU’s participation in this case.Id.at 4.NIGU stated that it has a significant financial
hardship because the costs for it to meaningfully participate in this proceeding exceeded its
assessments to its impacted members.Id.at 5.
NIGU maintained that,while it hired an outside expert witness,it capped recovery of
costs at $10,000,which does not include a request for any legal fees,travel expenses or any fees
associated with the testimony and participation of NIGU’s executive director.Id.at 2.Further,
NIGU stated that it only seeks fees for time spent by its expert on research and drafting
testimony related to ROE and revenue requirement and not on rate spread or rate design.Id.
NIGU stated that it has materially contributed to the Commission’s decision in this
matter related to revenue requirement,ROE,and rate design and spread.Id.at 5-6.Specifically,
ORDER NO.33757 42
its experts provided testimony,analysis,discovery,and recommendations on:ROE,capital
structure,adjustments to revenue requirement,viability and use of Intermountain’s proposed
COS study,and the demand charge for transportation customers based on customer MDFQ.Id.
at 6-7.
NIGU maintained that its recommendations differ materially from those of
Commission Staff,regarding ROE (although falling within the same range)and the use of a gas
proxy group,sustainable growth DCF model,a risk premium model,and CAPM.Id.at 5.
NIGU also recommended a change in capital structure from the Company’s proposal and Staffs
recommendation.Id.at 3.In addition,NIGU sponsored testimony on revenue adjustments that
Staff did not address,including bonus depreciation,affiliate costs,and incentive compensation.
Id.NIGU also disagreed with Staff as to rate spread and design,including by arguing that the
Company’s COS study was accurate and based on the best available data,and by supporting the
$.30 per therm demand charge.Id.at 5-6.
NIGU maintained that the issues it addressed are representative of issues that would
be addressed by Intermountain’s industrial firm sales and transportation customers.Id.at 7.
Commission Findings
The Commission reviewed the Petitions,associated briefs,and the record of
proceedings.Consistent with the policy expressed in Idaho Code §61-617A,we encourage
intervenors to participate in cases and decisions before us.
Based on their testimony and participation in this matter,we find that the Petitions
for Intervenor Funding filed by CAPAI,ICL/NWEC,and NIGU comport with the procedural
and technical requirements set forth in Rules 161-165 of the Commission’s Rules of Procedure.
We find that these intervenors have satisfied the criteria for an intervenor funding award under
Idaho Code §61-617A.
Specifically,we find that CAPAI,ICL/NWEC,and NIGU materially contributed to
our decision in this matter by addressing issues important to our consideration.These include,
but are not limited to,low-income customer interests (CAPAI),conservation issues
(ICL/NWEC),and the perspective of Intermountain’s industrial customers (NIGU).We further
find that much of the intervenors’evidence,and many of their positions,materially differed from
Staffs evidence and positions.Finally,we find that the intervenors addressed issues relevant to
ORDER NO.33757 43
all consumers,providing us with a more complete framework in which to evaluate the case and
render a decision in the public interest.
We appreciate the intervenors’participation and insights in this case.Having made
the requisite findings under Idaho Code §61-61 7A,we find it appropriate to grant their Petitions
and award intervenor funding to CAPAI in the amount of $9,500,to ICL/NWEC in the amount
of $5,678.27,and to NIGU in the amount of $10,000.Because,on balance,we find that the
various perspectives provided by the funding applicants benefited all Company customers,that
intervenor funding granted above should be spread on a proportional basis to all customer
classes.Specifically,we direct that the total amount be allocated to the various customer classes
according to the percentage of total base revenues generated from each class.This recovery will
take place through the Company’s 2018 Purchase Gas Adjustment (PGA)case before this
Commission.
ULTIMATE FINDINGS OF FACT
AND CONCLUSIONS OF LAW
Intermountain Gas is a gas corporation and public utility subject to the Commission’s
regulation under the Idaho Public Utilities Law.The Company’s rates,charges,classifications,
rules,and practices related to gas service are subject to the Commission’s jurisdiction.See Idaho
Code §61-117,-129,-501,-502,and -503.
Based upon the record,we find the Company’s present rates,charges,classifications,
rules,practices,tariffs,and schedules are insufficient,and that changing them as described in the
body of this Order is justified.See Idaho Code §6 1-122.In particular,we find that allowing the
Company to increase its base rates for gas service by $4,119,055 (or 1.58%)will provide the
Company an opportunity to earn a fair and reasonable return on its investment while providing
safe and reliable service to customers.The Company is authorized to earn an overall ROR of
7.3%.We further find the Company’s rate base to be $235,526,788.The Commission finds that
the rate design approved in this Order is fair,just and reasonable.We also find the changes to
Intermountain’s rules,practices,tariffs and schedules in the public interest.
ORDER
IT IS HEREBY ORDERED that the Company immediately file tariffs and schedules
in conformance with this Order,to be effective on May 1,2017,for service rendered on and after
that date.The authorized rates are set forth in Attachment A.
ORDER NO.33757 44
IT IS FURTHER ORDERED that the Company is authorized an overall ROR of
7.3%,and to recover an additional $4.12 million in annual base revenues.
IT IS FURTHER ORDERED that the Company is authorized to implement its
proposed DSM program.The Company’s request to implement a FCCM is denied.
IT IS FURTHER ORDERED that the Company move all customer classes toward
cost-of-service,as specified in this Order and Attachment B.
IT IS FURTHER ORDERED that the Company combine its RS-1 and RS-2 classes;
its T4 and T5 classes,and create a GS fourth block tier for customers using more than 10,000
therms,as specified in this Order.
IT IS FURTHER ORDERED that the Company increase its customer charge(s)and
eliminate season-based charges,as specified in this Order.
IT IS FURTHER ORDERED that the Company implement a demand charge,as
specified in this Order.
IT IS FURTHER ORDERED that the Company update its line extension policy and
related tariff,as specified in this Order.
IT IS FURTHER ORDERED that the Company take such other actions as may be set
forth in the body of this Order.
IT IS FURTHER ORDERED that intervenor funding is awarded to:CAPAI in the
amount of $9,500;ICL/NWEC in the amount of $5,678.27;and NIGU in the amount of $10,000.
These amounts will be recovered from all customers on a proportional basis,as more fully
described herein.
THIS IS A F11’1AL ORDER.Any person interested in this Order may petition for
reconsideration within twenty-one (21)days of the service date of this Order.Within seven (7)
days after any person has petitioned for reconsideration,any other person may cross-petition for
reconsideration.See Idaho Code §61-626.
ORDER NO.33757 45
DONE by Order of the Idaho Public Utilities Commission at Boise,Idaho this
day of April 2017.
PAtIL L ER,PRESIDENT
&
ERIC ANDERSON,COMMISSIONER
ATTEST:
Diane M.Hanian
Commission Secretary
O:ll’1T-G-1 6-02_sc2_kk_Final
ORDER NO.33757 46
Commission Ordered Revenue Requirement Summary (Attachment A)
Line
No.Description
1 Gas Operating Revenues
2 Other Revenues
3 Total Operating Revenue
Company Direct
$251,900,147
2,900,363
254,800,510
Commission Order
$256,962,485
$2,963,369
$259,925,854
4 Operating Expenses
5 Cost of Gas
6 Operation &Maintenance
7 Production
8 Natural Gas Storage,Terminalirig,and Processing
9 Transmission
10 Distribution
11 Customer Accounts
12 Customer Service and Informational
13 Sales
14 Administrative and General
15 Other
16 Depreciation
17 Payroll Taxes
18 Property Taxes
19 Franchise Taxes
20 Interest Expense
21 Total Operating Expense
22 Before Income Taxes
23 Income Taxes
24 Total Operating Expenses
25 Net Operating Income
26 Gas Plant in Service:
27 Original Cost
28 Less Accumulated Depreciation
29 Net Gas Plant in Service
30 Materials &Supplies Inventory
31 Gas Storage Inventory
32 Cash Working Capital
33 Accumulated Deferred Income Taxes
34 Advances in Aid of Construction
35 Rate Base
36 Rate Base
37 Operating Income at Present Rates
38 Earned Rate of Return
39 Cost of Capital
40 Operating Income at Proposed Rates
41 Operating Income Deficiency
42 Gross Revenue Conversion Factor
43 Deficiency in Operating Revenue
44 Percent increase
45 Capital Structure
46 Total Debt
47 Cost of Debt
48 Total Equity
49 Return on Equity
51 Total Cost of Capital
50.00%
4.94%
50.00%
9.90%
50.00%
4.94%
50.00%
9.50%
$168,822,659 $171,705,276
46,565
1,383,094
492,741
18,736,256
9,267,200
202,610
1,236,871
13,819,684
21,707,112
1,641 ,g42
3,198,871
82,580
1,124,985
433,579
18,305,396
9,084,125
171,769
1,131,006
12,244,268
20,859,316
1,611,398
3,191,226
S 240,555,605 $239,944,924
S 2,750,218 $5,253,094
5 243,305,823 $245,198,018
$11,494,687 $14,727,836
S 596,065,559 $594,058,317
5 (308,450,846)$(306,953,230)
S 287,614,713 $287,105,087
3,149,131 3,195,291
3,195,613 3,225,344
1,032,688 0
(50,172,477)(49,976,423)
(7,893,171)(8,022,511)
$236,926,497 $235,526,788
5 236,926,497 $235,526,788
11,494,687 14,727,836
4.852%
7.420%7300%
17,579,946 17,193,456
S 6,085,259 $2,465,619
1.67055 1.67055
$10165,700 $4,119,055
4.0356%1.6030%
45 Total Revenue Requirement 264,966,210 264,044,909
46 Base Rate Revenue Requirment 93,243,188 89,376,264
2.47%
4.95%
7.42%
2.5%
4.8%
7.3%ATTACHMENT A
ORDER NO.33757
CASE NO.INT-G-16-02
Commission Ordered Class Revenue Allocation (Attachment B)
Normalized Test Year Commission
Class Revenue Ordered Allocation Percentage Change
RS $167,628,976 $170,589,416 1.77%
GS 76,737,174 78,423,351 2.20%
LV 2,853,188 2,775,142 -2.74%
T-3 833,713 532,754 -36.10%
T-4 8,909,434 8,760,876 -1.67%
Gas Operating Revenues $256,962,485 $261,081,540 1.60%
Other Revenues 2,963,369 2,963,369 0.00%
Total Operating Revenues $259,925,854 $264,044,909 1.58%
ATTACHMENT B
ORDER NO.33757
CASE NO.1NT-G-16-02