20161216Carlock Direct.pdf

BEFORE THE
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IDAHO PUBLIC UTILITIES COMMISSION'.: < Jl.~;.~lS SION
IN THE MATTER OF INTERMOUNTAIN
GAS COMPANY'S APPLICATION TO
CHANGE ITS RATES AND CHARGES
FOR NATURAL GAS SERVICE.
)
) CASE NO. INT-G-16-02
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___________ )
DIRECT TESTIMONY OF TERRI CARLOCK
IDAHO PUBLIC UTILITIES COMMISSION
DECEMBER 16, 2016
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Q. Please state your name and address for the
record.
A. My name is Terri Carlock. My business address
is 472 West Washington Street, Boise, Idaho.
Q.
A.
By whom are you employed and in what capacity?
I am the Deputy Administrator of the Utilities
Division at the Idaho Public Utilities Commission. I am
responsible for supervising the Accounting/Audit Section
and coordinating Staff's policy positions with Staff
Administrator Randy Lobb.
Q. Please outline your educational background and
experience.
A. I graduated from Boise State University in
1980, with B.B.A. Degrees in Accounting and Finance.
have attended various regulatory, accounting, rate of
return, economics, finance, and ratings programs. I
I
Chair the Task Force on International Financial Reporting
Standards with the National Association of Regulatory
Utility Commissioners (NARUC) Staff Subcommittee on
Accounting and Finance. I previously chaired the NARUC
Staff Subcommittee on Accounting and Finance for three
years, chaired the Subcommittee on Economics and Finance
for more than three years, and chaired the Ad Hoc
Committee on Diversification. I have been a presenter
for the Institute of Public Utilities at Michigan State
CASE NO. INT-G-16-02
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CARLOCK, T (Di) 1
STAFF
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University and for many other conferences. Since joining
the Commission Staff in May 1980, I have participated in
audits, performed financial analysis on various
companies, and have presented testimony before this
Commission on numerous occasions.
Q. Please describe the scope of your
responsibilities in the preparation of this case.
A. My responsibilities were numerous but generally
fall in three basic categories. The first category
includes analyzing accounting theories, policies and
ratemaking. This responsibility is to assure the
theories and policies used to establish rate base and the
revenue requirement are implemented appropriately and are
consistent with general ratemaking and accounting
theories.
The second category of responsibility involves
supervising all accountants working on this case. The
work of five Staff Auditors forms the basis of accounting
witness testimonies. I discussed numerous adjustments
with Staff and assisted in coordinating the positions and
testimonies. I support the adjustments and revenue
requirement impacts presented by Staff witnesses Romano
and Terry.
The third category of responsibility relates to
the cost of capital.
CASE NO. INT-G-16-02
12/16/2016
I supervised Staff witness Rogers
CARLOCK, T (Di) 2
STAFF
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in his work and testimony on the legal standards for
determining a fair and reasonable rate of return, and the
analysis to calculate the discounted cash flow (DCF) cost
of equity. I incorporate his DCF recommendations on cost
of equity with my additional evaluations to present
Staff's final cost of capital recommendations. My
testimony supports the Staff recommendations for the
9.25% return on equity and the development of the
recommended 7.1% overall rate of return.
Q.
A.
Please explain Staff's analysis of rate base.
The primary components in rate base are plant-
in-service accounts. Since many plant-in-service
accounts have long depreciation lives, a rate base audit
covers many years. A rate base audit focuses on
verifying that plant is used and useful, actual capital
expenditures are documented and reasonably incurred, and
plant is properly capitalized in the correct accounts and
properly depreciated. Usually these audits are completed
for all new plant installed since the last rate case.
With Intermountain Gas Company (Intermountain Gas;
Company) the last rate case was approximately 30 years
ago so plant items during that time may have been
replaced or may be fully depreciated. Due to the long
review period, the rate base audit was divided in several
parts and it began when Intermountain Gas filed its
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STAFF
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Notice of Intent . During the audit, Staff encountered
some difficulties because the Company has updated its
accounting systems and computer models. Differences
between the old and new systems resulted in specific
information requested by Staff not being available at all
or not in the form requested by Staff. Staff thus
conducted additional audit tests and trend analyses when
specific project records were not available.
Staff completed its audit and analyzed
various adjustments. Ultimately, Staff recommends only
two specific rate base adjustments as shown on Staff
Exhibit No . 103: (1) removing cash working capital; and
(2) reclassifying part of the Customer Services Center.
When Staff next audits the rate base, Staff will begin
its audit testing and verification at system conversion,
and will verify both account information and project
documentation from 2010 forward.
Q. Please explain the adjustment to remove Cash
Working Capital from rate base.
A. Intermountain Gas has used a lead-lag study to
quantify Cash Working Capital (CWC). Staff doesn't
believe the Company has adequately shown that Company
shareholders have supplied these funds. Therefore, Staff
recommends removing ewe from rate base.
Q. What is a "lead-lag study"?
CASE NO. INT-G-16-02
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STAFF
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A. A "lead-lag study" measures timing differences
between when a utility incurs operational expenses (the
expense lead) and the time revenues are received, i.e . it
gets paid for services provided (the revenue lag).
Q. Do you have any concerns with the Company using
a lead-lag study to recommend including ewe in rate base
for this case?
A. Yes . ewe reflects funds required to pay for
the ongoing utility operations. A lead-lag study does
not adequately show that shareholders are suppling the
cash for ewe. Only when the funds are supplied by
utility shareholders should it be included in rate base
to earn a return paid by customers. ewe is not
automatically included in rate base for utilities. Often
when Inventories, and Materials and Supplies are included
in rate base utilities cannot demonstrate the need for
ewe in rate base. In this case, rate base includes
$3,195,291 in Materials & Supplies Inventory and
$3,225,344 in Gas Storage Inventory.
Intermountain Gas explained its lead-lag study
in Response to Staff Production Request Nos. 5 and 6.
There, the Company concluded that revenue lag times
exceeded the expense lead times during 2015, so ewe is
supplied by the Company. The Company's workpapers show
existing lead and lag times under the Company operations
CASE NO. INT-G-16-02
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STAFF
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during 2015. Lead times are directly determined by the
Company operations and practices. Revenue lag times are
also influenced by the Company billing operations and
collection practices. A change in operating practices
will change the level of working capital and can even
show no working capital requirements. Staff still
doesn't believe the Company has adequately shown that the
source of the funds is truly supplied by the Company
shareholders.
Staff has thus removed $1,137,743 of Cash
Working Capital from rate base as shown on Exhibit No.
103, Adjustment 3. This results in a $134,947 reduction
in revenue requirement.
Q. Please explain how Staff witness Rogers's
testimony on cost of equity links with your testimony.
A. Staff witness Rogers prepared testimony and
exhibits under my direction on the legal standards for
cost of equity and the discounted cash flow (DCF) method
of determining the return on equity. I will discuss risk
factors, the Staff recommended return on equity range and
the Staff recommended overall rate of return range. I
will also support the point estimates recommended by
Staff to be applied to the rate base for the test year
revenue requirement calculation as shown on Exhibit No.
103, Adjustment 2.
CASE NO. INT-G-16-02
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STAFF
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Q. Please summarize the cost of capital
recommendations.
A. I am recommending a return on common equity in
the range of 8.5% -9.5% with a point of 9.25%. The
recommended overall weighted cost of capital is in the
range of 6.8% -7.3% with a point of 7.1%.
The theoretical approach used by the Company
for cost of capital is similar to that used by Staff. My
judgement and the judgement of Staff witness Rogers in
some application areas results in different outcomes and
recommendations from those expressed by the Company.
Since the approaches are very similar, Staff has not
developed a different proxy group for comparison
purposes.
Q. Please discuss risk considerations for
Intermountain Gas.
A. Risk is a degree of uncertainty relative to a
company. Utilities for the most part continue to be
lower risk than other industries. Utilities continue to
have limited competition for distribution of utility
services within the certificated area. With limited
competition for regulated services, there is less chance
of losses related to pricing practices and marketing
strategies. Under regulation, utilities are generally
allowed to recover through rates, reasonable, prudent and
CASE NO. INT-G-16-02
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STAFF
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justifiable cost expenditures related to regulated
services. Unregulated firms have no such assurance.
The main risks for Intermountain Gas relate to
gas price fluctuations, change in pipeline rates, and
replacement of gas mains. Price risks for Intermountain
Gas are minimal since all gas costs and pipeline costs
are deferred and recovered annually at 100% in the
Purchased Gas Adjustment.
Considering all of the factors evaluated by
myself and by Staff witness Rogers, I recommend a
reasonable return on equity attributed to Intermountain
Gas be set at 8.5% -9.5%. Although any point within
this range is reasonable, the return on equity granted
would not normally be at either extreme of the fair and
reasonable range. I utilized a point of 9.25% in
calculating the overall rate of return and revenue
requirement.
Q. What are the costs, capital structure and
overall cost of capital recommended by Staff?
A. The capital structure of 50% debt and 50%
equity is the same as recommended by the Company. This
capital structure is reasonable based on the analysis of
historical, current and projected capital structures for
Intermountain Gas and the proxy group.
CASE NO. INT-G-16-02
12/16/2016
CARLOCK, T (Di) 8
STAFF
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The cost of debt is 4.94%. The Company and
Staff recommendations are consistent for the cost of
debt.
The capital structure, component costs and
overall rate of return are shown in the following table:
Overall Weighted Cost of Capital
Source Percent Cost Overall Rate of Return
Long Term Debt 50% 4.94% 2.5%
Common Equity 50% 9.25% 4.6%
Total 100% 7.1%
Q. Are there decisions in this case that would
change your recommended return on equity?
A. Yes. Staff witness Lobb recommends that the
Fixed Cost Collection Mechanism (FCCM) not be adopted in
this case. If the FCCM mechanism is approved by the
Commission, the return on equity point within the range
of reasonableness should be reduced. Staff recommends
the point be reduced by 25 basis points resulting in a
return on equity of 9% and a 7% overall rate of return.
Q. Does this conclude your direct testimony in
this proceeding?
A. Yes, it does.
CASE NO. INT-G-16-02
12/16/2016
CARLOCK, T (Di) 9
STAFF
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 16TH DAY OF DECEMBER 2016,
SERVED THE FOREGOING DIRECT TESTIMONY OF TERRI CARLOCK, IN
CASE NO. INT-G-16-02 , BY MAILING A COPY THEREOF, POSTAGE PREPAID,
TO THE FOLLOWING:
MICHAEL P McGRATH
DIR-REGULATORY AFFAIRS
INTERMOUNT AIN GAS CO
PO BOX 7608
BOISE ID 83707
E-MAIL: [e-mail]
BRADMPURDY
ATTORNEY AT LAW
2019 N 17TH STREET
BOISE ID 83702
E-MAIL: [e-mail]
CHAD M STOKES
TOMMY A BROOKS
CABLE HUSTON LLP
1001 SW 5TH AVE STE 2000
PORTLAND OR 97204-1136
E-MAIL: [e-mail]
[e-mail]
BENJAMIN J OTTO
ID CONSERVATION LEAGUE
710 N 6TH STREET
BOISE ID 83702
E-MAIL: [e-mail]
PETER RICHARDSON
GREGORY M ADAMS
RICHARDSON ADAMS PLLC
515 N 27TH STREET
BOISE ID 83702
E-MAIL: [e-mail]
gre g@ri chardsonadams. com
RONALD L WILLIAMS
WILLIAMS BRADBURY
1015 W HAYS ST
BOISE ID 83702
E-MAIL: [e-mail]
EDWARD A FINKLEA
EXECUTIVE DIRECTOR
NW INDUSTRIAL GAS USERS
545 GRANDVIEW DR
ASHLAND OR 87520
E-MAIL: [e-mail]
ELECTRONIC ONLY
MICHAEL C CREAMER
GIVENS PURSLEY LLP
E-MAIL: [e-mail]
F DIEGO RIV AS
NW ENERGY COALITION
1101 8TH AVENUE
HELENA MT 59601
E-MAIL: [e-mail]
SCOTT DALE BLICKENSTAFF
AMALGAMATED SUGAR CO LLC
1951 S SATURN WAY
STE 100
BOISE ID 83702
E-MAIL: [e-mail]
CERTIFICATE OF SERVICE
KEN MILLER
SNAKE RIVER ALLIANCE
PO BOX 1731
BOISE ID 83701
E-MAIL: [e-mail]
LANNY L ZIEMAN
NAT ALIE A CEPAK
THOMAS A JERNIGAN
EBONY M PAYTON
AFLOA/JA-ULFSC
139 BARNES DR STE 1
TYNDALL AFB FL 32403
E-MAIL: lanny.zieman. l @us.af.mil
[e-mail]
[e-mail]
[e-mail]
ANDREW J UNSICKER MAJ USAF
AFLOA/JACE-ULFSC
139 BARNES DR STE 1
TYNDALL AFB FL 32403
E-MAIL: [e-mail]
CERTIFICATE OF SERVICE