20161216Lobb Direct.pdf

BEFORE THE
L~L =:~~C 16 PM I: 33
IDAHO PUBLIC UTILITIES COMMl$Sf~~~? .. ff'~i\£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 RANDY LOBB
IDAHO PUBLIC UTILITIES COMMISSION
DECEMBER 16, 2016
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Q. Please state your name and business address for the
record.
A. My name is Randy Lobb and my business address is
472 West Washington Street, Boise, Idaho.
Q.
A.
By whom are you employed?
I am employed by the Idaho Public Utilities
Commission as Utilities Division Administrator.
Q. What is your educational and professional
background?
A. I received a Bachelor of Science Degree in
Agricultural Engineering from the University of Idaho in 1980
and worked for the Idaho Department of Water Resources from
June of 1980 to November of 1987. I received my Idaho
license as a registered professional Civil Engineer in 1985
and began work at the Idaho Public Utilities Commission in
December of 1987. I have analyzed utility rate applications,
rate design, tariff filings and customer petitions. I have
testified in numerous proceedings before the Commission
including cases dealing with rate structure, cost of service,
power supply, line extensions, regulatory policy and facility
acquisitions. My duties at the Commission include case
management and oversight of all technical Staff assigned to
Commission filings.
Q. What is the scope of your testimony in this
proceeding?
CASE NO. INT-G-16-02
12/16/16
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A. I will summarize Staff's recommendations, describe
case processing issues, and introduce each staff witness and
the issues they will address. I will also present Staff's
position regarding Intermountain Gas Company's (the Company,
IGC) proposal to implement a Fixed Cost Collection Mechanism
("FCCM") as part of this case.
CASE OVERVIEW
Q.
A.
Please summarize Staff's recommendation
Staff recommends increasing the Company's overall
revenue requirement by $3.62 million, or 1.44%, a return on
equity of 9.25%, and a capital structure of 50% debt and 50%
equity. Staff further recommends increasing revenue
requirement on a proportional basis for all customer classes,
with customer charges respectively increasing for residential
service (RS) and general service (GS) customers by about 44%
and 111%. As a result of increasing customer charges,
changes in RS base rate commodity charges (commodity not
including purchased gas) will range from an increase of about
3% to a decrease of about 24% depending upon a customer's
current RS class and the time of year. The change in GS base
rate commodity charges will decrease from 18% to 24%
depending upon commodity rate block.
Staff supports combining the two residential RSl
and RS2 classes into a single residential class, and adding a
fourth rate block to the GS class.
CASE NO. INT-G-16-02
12/16/16
Staff also supports a
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demand charge for the large commercial class, but at a lower
level than that proposed by the Company to reduce individual
customer bill impacts.
Staff maintains that the Company's cost of service
study is based on incomplete cost information and should be
rejected. Staff also maintains that the Staff-developed
weather normalization methodology is superior to that
provided by the Company, and should be accepted by the
Commission in establishing normal test period natural gas
consumption. Staff further maintains that the Company has
not justified its proposed FCCM on the basis of any
significant revenue loss from DSM programs or any other
showing of ongoing customer consumption decline. Instead,
Staff recommends that the Company, Staff, and other
interested parties meet after this case ends to discuss
accounting and record keeping improvements, cost of service
load studies, and customer consumption and investment
information that may allow more informed consideration of
cost allocation, a FCCM and Capital adjustment mechanisms in
future proceedings.
Staff recommends that the Company modify its line
extension tariff to incorporate rate of return approved by
the Commission in this case. Staff further recommends that
the Company file a case to update overall line extension
policy within a fixed time period upon completion of this
CASE NO. INT-G-16-02
12/16/16
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case.
Q. Please describe processing of the Company's
Application.
A. Staff evaluated IGC's Application in the same way
it has processed many other utility rate case applications in
the past. The filed testimony and exhibits were reviewed,
underlying work papers were requested and analyzed,
production requests were prepared, responses were reviewed,
and on-site audits were conducted.
Q. Was there anything unusual about this case when
compared to other rate cases previously processed by
Commission Staff?
A. Yes. The primary difference is the length of time
since the Company's last general rate case in 1985. During
the past 30 years, customer totals have increased from just
under 90,000 to over 300,000 while plant-in-service over the
same period has grown from $117 million to about $600
million. In addition, service line and main line extension
rules, which rely on project-specific internal rates of
return to establish Company investment and customer
contributions, have remained unchanged.
Other issues encountered in the Staff investigation
included changes in the Company's accounting systems over
time and the Company's decision to book individual project
costs and associated contributions by FERC account rather
CASE NO. INT-G-16-02
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than also having project-specific documentation. In
addition, the Company incorporate a variety of adjustments in
customer and consumption data over time that made comparing
and analyzing that data difficult.
Q. What problems did this present for Staff when it
evaluated the Company proposals?
A. Staff was not able to evaluate many of the
Company's underlying capital costs on an individual project
basis to determine total project cost, project justification,
and whether there were any contributions that offset Company
investment. This made it impossible for Staff to evaluate
construction processes, fully assess investment prudency, and
determine economic efficiency . It also made allocation of
costs among the customer classes inaccurate and incomplete.
Staff also struggled to duplicate Company customer
totals over time and total annual consumption for the purpose
of validating proposed weather normalization in establishing
test year billing determinates. Staff asked over 230
production requests and held numerous meetings with Company
representatives in an attempt to obtain and duplicate Company
calculations.
Q. Are you criticizing the Company for failure to file
a rate case for 30 years?
A. No, not at all. The Company should be commended
for maintaining stable base rates for such a long period of
CASE NO. INT-G-16-02
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time. The Company was also responsive in providing
information that was available. However, such a long stay
out without detailed, consistent record keeping makes
evaluation of underlying costs and class cost allocation very
difficult.
Q. What do you suggest to resolve these issue in
future cases?
A. I recommend that Staff and interested parties meet
with the Company after the conclusion of this case to address
the accounting processes and book keeping, cost allocation
and natural gas consumption patterns to better assess class
cost of service, fixed cost adjustment mechanisms and perhaps
capital investment trackers.
Q. Are you the policy witness for the Staff in this
case?
A. Yes, with the possible exception of some accounting
adjustments and cost of capital, I am the policy witness for
all Staff positions presented in this case.
STAFF WITNESESS
Q. Could you please introduce Staff witnesses and the
issues they will address?
A. Yes . Staff witnesses and the issues they address
are described below.
Staff Accountant Joe Terry sponsors the summary
revenue requirement exhibit showing 10 Staff adjustments
CASE NO. INT-G-16-02
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resulting in an overall revenue requirement increase of $3.62
million. Mr. Terry describes adjustments for updated
forecasts as of September 30, 2016, reducing the revenue
requirement by $574,214. He also adjusts salary expenses,
bank fees, profit sharing and for the customer service
center. These adjustments reduce revenue requirement by
$679,347.
Staff Accountant Barbara Romano presents
adjustments that reduce revenue requirement for specific
Advertising Expenses, General and Administrative Expenses and
injuries and damages. Her recommended adjustments total
$529,950.
Utility Anal y st Mark Rogers will address the
Company's use of the Basic Discounted Cash Flow (DCF)
methodology for determining its proposed return on equity
(ROE). Mr. Rogers will present his methodology with a
recommended DCF ROE range of 9.25% -9.56%.
Deputy Director and Audit Section Supervisor Terri
Carlock further discusses ROE and recommends a point estimate
of 9.25% and a weighted cost of capital of 7.10%. Ms.
Carlock also recommends removing cash working capital from
rate base. Rate base is reduced by $1,137,743 resulting in a
revenue requirement reduction of $134 ,947.
Technical Engineer Mike Morrison discusses the
Company's class Cost of Service methodology, weather
CASE NO. INT-G-16-02
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normalization, and mainline extension updates. Given the
inaccuracy of the Company's cost of service study, Mr.
Morrison recommends that the Company's revenue requirement be
allocated in proportion to the normalized revenue currently
being collected from each rate class. He further recommends
that the Commission accept his weather normalization
methodology as a more accurate representation of normal
annual gas consumption than that proposed by the Company.
The increased consumption from his methodology reduces the
required annual revenue increase by $3.4 million.
Mr. Morrison recommends that the Company,
Commission Staff, and the Company's stakeholders hold
workshops in order to develop a suitable Load Study and Cost
of Service methodology for use in the next rate case. He
also recommends that mainline extension tariffs be modified
to reflect updated rate of return.
Utility Analyst Stacey Donohue addresses the
Company's Demand Side management (DSM) proposal. Her
testimony focuses on avoided cost calculations and cost
effectiveness, the Conservation Potential Assessment (CPA),
and the very small amount of forecasted energy savings in the
first year and every year of the five-year period. Ms.
Donohue recommends several modifications to the Company's
cost effectiveness calculations for various measures and
proposes the Company's DSM portfolio be aligned with standard
CASE NO. INT-G-16-02
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Idaho Commission DSM expectations.
Utility Analyst Bentley Erdwurm addresses rate
design issues including residential and general service
customer charges, including a proposed increase in customer
charges and an associated decrease in base rate commodity
charges. He also addresses the Company's proposal to combine
the two current residential rate schedules (Schedule RS-1 and
Schedule RS-2) into a single rate schedule and rate design
for the large volume and transportation classes.
Consumer Investigator Johnathan Farley addresses
tariffs submitted with the Company's application and the need
for the Company to file both legislative and clean copies.
He also address the outdated nature of current line extension
tariffs and recommends that they be updated through Company
application. Finally, Mr. Farley addresses Gas Safety Rules
and recommends that the Company work with Staff to integrate
the rules into service tariffs.
Consumer Investigator Daniel Klein will address
various consumer issues including payment methods,
convenience fees, pay stations, Customer Service Center
performance, the new Customer Information System, customer
notice, customer relations and credit and collection activity
reports.
Mr. Klein recommends the Company eliminate
convenience fees for its residential customers and cover the
CASE NO. INT-G-16-02
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cost of accepting payments at authorized pay stations. Mr.
Klein recommends that Staff work with the Company after this
case to determine the cost of eliminating these fees, and how
the costs could be recovered by the Company.
The Fixed Cost Collection Mechanism
Q. Can you please summarize your position on the
Company's proposed FCCM?
A. Yes. The Company has failed to provide sufficient
evidence to justify implementing an FCCM at this time. The
Company has no history of energy efficiency programs, and its
proposed Demand Side Management (DSM) programs do not produce
savings this year or over the next five years that might
justify such a mechanism. Further, the Company has not
provided evidence of declining per-customer consumption,
quantified any long-term lost fixed margin, or provided any
associated financial impact that justifies such a mechanism.
I, therefore, recommend that the Commission deny the
Company's request for an FCCM in this case.
Q.
A.
What does the Company's proposed FCCM actually do?
The Company's proposed FCCM would guarantee the
Company recovers a specified level of annual fixed operating
costs regardless of volumetric sales. The total level of
fixed costs subject to recovery increases for every new
customer added to the system.
Q. Why has the Company requested the FCCM?
CASE NO. INT-G-16-02
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A. The Company maintains that implementing its
proposed DSM programs will exacerbate an already decreasing
usage that will further decrease the fixed cost collection
margin per customer. The Company also maintains that there
are other factors, such as weather and the economic
conditions, that can have short term effects on natural gas
deliveries.
Q. Has the Company provided any evidence to show the
effect of its proposed DSM programs on fixed cost collection
margin?
A. No, not directly. While the Company has shown the
level of fixed cost revenue collected through each therm
sold, and the projected annual therm savings in the first
five years of its DSM program, it has not provided the
estimated amount of lost fixed margin.
Q. What is the estimated therm savings in the first
year and over the first five years of the proposed DSM
program?
A. The estimated incremental therm savings are 97,825
or 0.03% of RS therm sales in the first year, and 496,496
incremental therm savings or 0.15% of RS sales in year five.
This very modest reduction in sales is assumed to occur even
when the DSM disincentive is removed through a FCCM under the
Company's proposal.
Q. How does the proposed DSM program of IGC compare to
CASE NO. INT-G-16-02
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other Idaho utilities that have requested fixed cost
adjustment mechanisms (FCA)?
A. Both Idaho Power and Avista had mature DSM programs
long before requesting an FCA (FCCM). Idaho Power showed
actual and forecasted DSM savings ranging from 0.14% to over
0.6% of total sales for all customer groups in the five years
prior to its request. Avista showed DSM savings ranging from
0.5% to 1.1% of total electric sales and 0.18% of total therm
sales from all customer groups in prior years. These
programs were generating many times the savings that IGC
forecasts, and without an FCCM.
Q. IGC also states that its consumption per customer
is declining. Has the Company provided any evidence to show
the decline?
A. No, it has not.
Q. The Company identified economic conditions as
having short term impacts on natural gas deliveries. Has the
Company quantified the short term impact of such conditions?
No. It has not. A.
Q. What effect does the addition of new customers have
on allowed fixed cost recovery under the Company's FCCM
proposal?
A. The Company's proposed FCCM incrementally increases
the total level of fixed costs the Company can collect from
customers each year. Rather than reimbursing the Company for
CASE NO. INT-G-16-02
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total fixed costs as approved by the Commission in a general
rate case, the Company collects through the FCCM, an
additional level of fixed cost per customer for each new
customer added in between rate cases.
The Commission has no opportunity to determine if
these costs are actually incurred until a general rate case
is filed. In the meantime, the Company recovers these
incremental costs through its proposed FCCM.
Q. How long has it been since the Company's last
general rate case?
A. The Company's last rate case was filed over 30
years ago. While it is remarkable that the Company has not
had to file a general rate case for such a long period of
time, it does raise questions regarding whether automatic
recovery of unsubstantiated fixed cost is appropriate in
between rate cases.
Q. Do you have any other concerns regarding the
Company's proposal to implement a FCCM in this case?
A. Yes. The Company justifies its FCCM primarily on
the basis of removing the disincentive for implementing DSM.
However, the Company proposes to recover lost fixed margin
from GS customers but offers no DSM programs for that
customer class.
In addition, a FCCM assumes that the underlying
cost of service, and therefore fixed costs allocated to each
CASE NO. INT-G-16-02
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class, is relatively accurate. In other words, an FCCM
should not be implemented to collect a specified level of
fixed costs from the RS class if those costs are more
appropriately assigned to another class. Given that the
current level of revenue collected from each class was
established without cost of service over the last 30 years,
and Staff witness Morrison has testified that underlying
information is not available at this time to properly
establish current cost of service, I believe it is
inappropriate to establish an FCCM in this case.
Q. Has Staff made any proposals in this case that
reduce the level of fixed costs recovered in the commodity
rate?
A. Yes, Staff has proposed to increase the RS customer
charge from an average of $3.83 per month to $5.50 per month.
Staff has also proposed to increase the GS customer charge
from an average of $4.50 per month to $9.50 per month. This
increases fixed cost recovery through the RS customer charge
by 44%, and fixed cost recovery through the GS customer
charge by 111%, while significantly reducing fixed cost
recovery through the commodity rate.
Q.
A.
What should the Commission do in this case?
I recommend that the Commission deny the Company's
FCCM request until it has a more mature, widely available DSM
program. And even then, the Company should be required to
CASE NO. INT-G-16-02
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provide a cost of service study that more accurately
allocates class specific fixed cost subject to recovery in an
FCCM. Finally, the Company should be required to provide
historic evidence that fixed cost recovery for new and
existing customers necessitates an FCCM.
Q. What do you recommend if the Commission chooses to
approve an FCCM for IGC?
A. The Commission should adjust the Company's ROE
downward to reflect reduced risk through automatic recovery
of embedded fixed costs for new and existing customers, and
the elimination of weather volatility-related lost fixed
margin from year to year .
Q.
A .
Does that conclude your testimony in this case?
Yes it does.
CASE NO. INT-G-16-02
12/16/16
LOBB, R. (Di) 15
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CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 16TH DAY OF DECEMBER 2016,
SERVED THE FOREGOING DIRECT TESTIMONY OF RANDY LOBB, IN CASE
NO. INT-G-16-02, BY MAILING A COPY THEREOF, POSTAGE PREPAID,
TO THE FOLLOWING:
MICHAEL P McGRATH
DIR-REGULATORY AFFAIRS
INTERMOUNTAIN 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 MADAMS
RICHARDSON ADAMS PLLC
515 N 27TH STREET
BOISE ID 83702
E-MAIL: [e-mail]
[e-mail]
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 RIVAS
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: s blickenstaff@ amalsugar.com
CERTIFICATE OF SERVICE
KEN MILLER
SNAKE RIVER ALLIANCE
PO BOX 1731
BOISE ID 83701
E-MAIL: [e-mail]
LANNY L ZIEMAN
NATALIE 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