20180627final_order_no_34090.pdf

Office of the Secretary
Service Date
June 27,2018
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION )CASE NO.INT-G-17-07
OF INTERMOUNTAIN GAS COMPANY FOR )AUTHORITY TO IMPLEMENT AN )INFRASTRUCTURE INTEGRITY )ORDER NO.34090
MANAGEMENT MECHANISM )
On December 18,2017,Intermountain Gas Company applied for authority to
implement an Infrastructure IntegrityManagementMechanism (IIMM).The Application included
the Company's proposed rate schedule and asked that the Commission process the case by
Modified Procedure.The Commission issued a Notice of Application and set a deadline for
petitions to intervene.Order No.33959.The Alliance of Western Energy Consumers (AWEC)I
timely intervened.Order No.33981.The Commission then issued a Notice of Modified Procedure
setting comment and reply deadlines.Order No.34008.Commission Staff,AWEC,and several
members of the public timely submitted comments and the Company filed a timely reply.
Having reviewed the record,the Commission now issues this Order denying the
Company's Application.
THE APPLICATION
The Company asserted that its proposed IIMM is a cost recovery mechanism designed
to allow it to accelerate the replacement of aging infrastructure,to mitigate the increasing impact
of regulation on the Company's capital and operations and maintenance (O&M)budgets,and to
more proactively address safety issues on its system.Application at 3.The Company stated the
proposed IIMM would be "an integral part of its mission to provide safe and reliable natural gas
service."Id According to the Company,state utilitycommissions across the countryhave granted
approval to "gas utility companies to implement some form of integrity management and
infrastructure replacement programs."Id at 4.Likewise,the Company stated it is committed to
safe and reliable service and works to proactively identify and remove risks to its system.Id.
The Company's Application described its programs related to the removal and
replacement of pipe carrying a risk of failure.Id The Company uses relative risk models to
manage and assess the risk of failures based on age,material,operating pressure,damage history,
'Formerly Northwest Industrial Gas Users (NWIGU).NWIGU merged with the Industrial Customers of Northwest
Utilities,which then changed its name to AWEC.
ORDER NO.34090 1
and other considerations.Based on the model outputs,the Cornpany prioritizes infrastructure
replacement projects within its total capital investment demands.Id The Company stated it would
like to accelerate replacement projects,but budget limitations "often only allow the Company to
maintain a more modest replacement schedule."Id.The Company anticipated that its proposed
IIMM would enable it to accelerate the replacement programs and "stay ahead of schedule."Id
The Company explained it must make certain capital investments to satisfy federal,
state,and local requirements,and sometimes must increase O&M spending and add personnel for
safety initiatives.Id at 5.The Company asserted these capital and O&M expenditures can
"challenge [its]financial situation as [it does]not provide the necessary supporting revenues."Id
The Company provided examples of projects that "contribute to budgetary constraints and compete
with other necessary capital investment projects."Id The Company stated that including these
capital projects in the IIMM would "give the Company more flexibility to concurrentlypursue
these pipeline related capital investments while also implementing other necessary capital
expenditures."Id.The Company explained the IIMM would not include capital investment
associated with incremental growth on the Company's system,and the rate base and expenses
embedded in the Commission-approved IIMM charge would switch from the IIMM to general
base rates through future general rate cases.Id at 6.
The Company also explained how the proposed IIMM would work.Specifically,the
Company would consult the Commission's Pipeline Safety Division about the projects and
expenses the Company would propose to recover through the IIMM.Id at 7-8.The Company
would then propose an IIMM revenue requirement for allocation to each rate class based on the
allocation of base rate revenues from the Company's most recent general rate case.Id The
resulting IIMM charge would equal the allocated IIMM revenue requirement divided by
normalized volumes from the Company's Purchased Gas Adjustment.Id Each year in May,the
Company would ask the Commission to update the IIMM charge,with the new prices to take effect
October 1.Id The Company provided illustrative examples of how it would calculate the above
components.See id Exhibit 2.
COMMENTS
1.Staff
In summary,Staff recommended the Commission deny the Company's IIMM
Application because the Company did not show that the costs are so unique that they must be
ORDER NO.34090 2
addressed outside of traditional ratemaking.Further,the Company has the financial strength and
access to capital to fund infrastructure improvements between rate cases.Staff Comments at 10.
Staff also expressed concern that the Company proposes to use the Commission's Pipeline Safety
Staff as a partner for determining which projects and expenses qualify for recovery in the IIMM,
where the proper forum for establishing rate recovery is in a general rate case.Id.at 9.
While Staff supports the Company's goal to upgrade its system for safety and
reliability,it maintains the costs the Company proposed to fund through the IIMM differ from
costs funded through other annual adjustment mechanisms.Specifically,in contrast to costs
funded through an adjustment mechanism,the Company's proposed IIMM costs:(1)are not
unpredictable or volatile;(2)do not remove the disincentive for energy efficiency;(3)are within
the Company's ability to plan and manage;and (4)do not present an urgent,immediate need for
replacement.Id.Staff concluded,contrary to the Company,that the Company can ask to recover
these types of known,predictable capital expendituresin a general rate case,and the Company has
the financial ability and access to capital to fund these projects between rate cases.Id.
Staff stated that infrastructure costs should be recovered in general rate cases where all
expenses,rate base,and impacts on the Company's return on equity can be examined.Id.at 4.
Staff further stated that annual adjustment mechanisms decrease a utility's incentive to control
costs.Id.Staff noted,for example,that other Idaho utilities have not needed an annual adjustment
to fund the replacement of pipe,because their regularlyfiled rate cases fund these ongoing projects.
Id.Staff also found that the Commission has never approved an open-ended,ongoing,annual cost
recovery mechanism for infrastructure upgrades such as that proposed by Intermountain.Id.Staff
opined that taking this unprecedented step may actually further discourage the Company from
filing general rate cases.Fewer general rate case filings impair Staff s ability to gain familiarity
with the Company's operational and accounting practices in furtherance of its regulatory
responsibilities.Id.
Further,Staff disagreed with the Company that the project expenses the Company lays
out in its Application are unpredictable or volatile.Id.Unpredictabilityand volatilitycreate issues
in traditional ratemaking when actual costs significantly vary from the revenue requirement
embedded in base rates.Id.Staff laid out instances where the Commission has approved annual
adjustment mechanisms,noting that in each case variable,unpredictable power and/or gas supply
costs were affecting a utilities'ability to earn a fair return.Id.at 5.
ORDER NO.34090 3
Therefore,in contrast to,for example,fluctuatingvariability of gas supply costs (which
Intermountain recovers through its Purchased Gas Adjustment (PGA))the Company now proposes
to recover reasonably predictable and stable investment costs.For example,the Company can
reasonably predict-asshown in its Application and its responses to discovery-thetotal cost for
replacing its Aldyl-Apipe,allowingfor some variation in pipe and labor costs.Id.However,Staff
argued that potential inflation in pipe costs and variation in labor costs are insufficient to justify
the proposed IIMM.Id.
Staff opined that a utility also might apply for an annual adjustment mechanism because
pursuing cost-effective energy efficiency could harm the utility's financial position (e.g.,a Fixed
Cost Adjustment (FCA)mechanism).Id.at 6.However,FCAs are only used to recover the fixed-
cost per customer established and approved in a rate case,not for infrastructure and upgrade costs.
Id.Intermountain's proposal would allow the Company to recover costs that have not been
evaluatedin a rate case and that are unrelated to energy efficiency.Id.
Next,Staff concluded that the expenditures the Company seeks to recover through the
IIMM are project costs that the Company can manage through planning.Id.For example,while
the Company cannot reliably forecast and control the cost of natural gas,and thus may recover
those costs through its PGA,the Company can plan for and manage the costs it seeks to recover
through the IIMM,because the Company can decide when to incur those costs through its
budgeting and infrastructure integrity processes.Thus,Staff believes the proposed IIMM
expenditureswould be best recovered through traditional ratemaking.Id.
While the Company claimed it needs the IIMM to fund critical safety and reliability
projects,Staff determined the Company lacks cast iron pipes or unprotected steel pipes,which are
a nationwide priority for replacement.Id.Staff agrees that the Company's Aldyl-A pipe should
be replaced with a newer,safer vintage of pipe.Id.If the Company's system contained significant
cast iron or unprotected steel pipe or issues with natural gas leaks,Staff stated that an IIMM might
be warranted.But as it stands,an IIMM is unnecessary because the Company is well positioned
to request infrastructure recovery in regular rate cases.Id.at 8.
Staff also expressed concern that the Company suggested the Commission's Pipeline
Safety Staff partner with Intermountain to determine which projects and expenses qualify for
recovery in the IIMM.Id.Staff noted that the Commission's Pipeline Safety Division audits and
inspects field-installed equipment on all intrastate natural gas pipeline under the Commission's
ORDER NO.34090 4
jurisdiction,and determines compliance with the Pipeline and Hazardous Materials Safety
Administration (PHMSA)rules and regulations.Therefore,meetings between the Company and
Pipeline Safety Staff are an inappropriate forum to decide if,and at what value,projects might
qualify for cost recovery.Id.at 9.Staff reiterated that a general rate case is the proper forum for
establishing cost recovery,after evaluation by Commission Staff,other intervenors,the
Company's customers,and,ultimately,the Commission.Id.
Finally,Staff stated that,if the Commission approves the proposed IIMM,then it also
should order Staff and the Company to work together to revise the proposed IIMM Rate Schedule
to create a concise,customer-facing document that clearly describes the purpose and calculation
of the IIMM charge.Id.
2.AWEC
Much like Staff,AWEC urged the Commission to reject Intermountain's Application.
AWEC Comments at 2.AWEC argued that the Company should recover prudentlyincurred costs
through traditional ratemaking,not single-issue ratemaking.2 Id.at 2.AWEC maintained that a
general rate case provides a holistic review of Intermountain's costs,revenues,and rate base,and
is the best place to determine whether overall rates are just,reasonable and in the public interest.
Id.
AWEC argued that considering some costs or revenues in isolation may cause a
regulator "to allow a utility to increase rates or defer costs in the area singled-out without
recognizing counterbalancing savings in another area [or]approve a level of rate base that exceeds
the actual level of rate base used and useful to provide services to ratepayers."Id.at 3.At base,
AWEC argued that customers pay more through trackers than they would through rate case
recovery because "net"plant does not accurately reflect all charges.AWEC argued this is not fair,
just or reasonable.Id.at 8.
AWEC argued that ratemaking is not an exercise in expense reimbursement,and that
the Commission has no obligation to ensure a utility is reimbursed for costs that differ from what
the utility expected when rates were set.Id.Rather,the Commission changes rates if they are
unjust,unreasonable,discriminatory,or insufficient,based on a used and useful rate base.Id.
2 AWEC defines single-issue ratemaking as "occur[ing]when utility rates are adjusted in response to a change in
cost or revenue items considered in isolation.By considering an operating expense or rate base item in isolation,
single-issue ratemaking ignores other factors that otherwise influence the utility's operating results,some of which
could,if properly considered,move revenue requirements in the opposite direction from the single-issue change."
ORDER NO.34090 5
AWEC also argued that the Company's proposal actually conflicts with Idaho's used and useful
statute because it would cause a return on rate base exceeding the used and useful level by
excluding the corresponding subtractions from rate base that have occurred since the last general
rate case.Id.at 5.Further,AWEC argued that excluding incremental depreciation reserves on
existing plant in service ignores the revenue requirement effect of retiring existing plant to
implement a safety program,and provides the Company with a return on property that has been
taken out of service.Id.at 6.Table 1 of AWEC's Comments is a Base Rate vs.Tracker Recovery
Illustration depicting these purported inequities.Id.at 7.
Like Staff,AWEC argued that immediate or deferred recovery mechanisms should be
limited to costs beyond the utility's control.Id.at 4.Routine investments,such as those made for
safety improvements are well within a utility's control.Id.Therefore,while AWEC does not
disagree with Intermountain's ability to recover prudentlyincurred safety costs,it objects to the
Company recovering them outside a rate proceeding.Further,the regulatory compact requires
Intermountain to maintain its systems and comply with state and federal laws,which already
change over time.Id.
Finally,AWEC argued that the Company's Application does not show that the
Company cannot make necessary investments while still earning fair returns on its investments.
More specifically,the Company has not shown that "infrastructure investments in the coming
years will so exceed the allowed depreciation expense and the financial incentive that comes from
having a fixed rate base ...[or]evidence that regulatory lag is eroding earnings due to enhanced
investment in safety related improvements."Id.at 5.
3.Intermountain Reply
Intermountain replied to Staff and AWEC by arguing it proposed two layers of
protection to ensure that the IIMM would not replace ratemaking.First,the Company reiterated
that it would meet with the Commission's Pipeline Safety Division to review and agree upon
projects that would qualify for later Commission consideration in the IIMM.Intermountain Reply
Comments at 2.In other words,it proposed to use the Commission's Pipeline Safety Division to
deem projects as "bona fide,"or "reasonable and necessary"and,therefore,able to be presented
to the Commission and Staff each year for approval.Id.The Company opined that Commission
Staff could then comment on recoverability,with the Commission retaining ultimate authority to
determine cost recovery.Id.The Company argued this process would ensure it only recovers
ORDER NO.34090 6
eligible costs,while allowing it to accelerate its safety and reliability projects.Id.at 3.The
Company also noted that AWEC could participate in IIMM filings and comment on particular
investments when the Company presents costs to Staff and the Commission for actual recovery.
Id.at 4.
Next,the Company reiterated that safety related projects,identified by the Company's
Transmission Integrity Management Program (TIMP)and Distribution Integrity Management
Program (DIMP),must be placed in line (and sometimes behind)capital projects while the
Company must continue to maintain the integrity of its distribution system.Id.Therefore,while
TIMP and DIMP have determined that the Company must replace about 600 miles of Aldyl-A
pipe,unless the Company can accelerate its recovery of the replacement costs,replacing the pipe
will take over 100 years.Id.Incidentally,the Company disagreed with Staff that,just because
other utilities'systems are worse off than the Company's system,the Company does not urgently
need to replace its Aldyl-A pipe.From a safety and reliability perspective,the Company needs
the IIMM.Id.at 4.The Company also noted that the IIMM would not only focus on replacing
Aldyl-A pipe but also-as encouraged by the Pipeline Safety Division-removingand replacing
High Pressure Service Sets.Id.
Next,the Company reiteratedthat 42 states have approved some form of IIMM,which
"complement the federally required TIMP and DIMP processes by encouraging acceleration of
TIMP-and DIMP-identified projects."Id.at 5.The Companythus argued single-issue ratemaking
is not as prohibited or discouraged as Staff and AWEC claim.Id.In support of its argument,the
Company listed single-issue trackers in Idaho and neighboring states that allow recovery for a
broad variety of projects,including,according to the Company,capital costs for safety and
reliability projects.Id.Therefore,the Company argued,where single-issue ratemaking should be
tightly controlled,the Company submits that its proposed IIMM projects fall well within the
bounds of rate adjustment mechanisms in Idaho and the Northwest.Id.
The Company next disagreed with AWEC and Staff that single-issue mechanisms like
the IIMM typically involve recovery of operational costs,costs beyond the utility's control,or
volatile or unpredictable costs,or that infrastructure costs are best addressed through traditional
ratemaking.Id.The Company "respectfullysubmits that the actual practice of this Commission
and others do not comport with Staff's and AWEC's proffered taxonomy."Id.at 5-6.Instead,
Intermountain argued the Commission has approved single-issue trackers for a wide variety of
ORDER NO.34090 7
infrastructure costs,which were not beyond the control of the utility or more unpredictable or
volatile than the situation Intermountain now faces.Id.Even if Staff and AWEC are correct,the
Company argued,it actually cannot control certain expenses it will seek to recover through the
IIMM,such as costs associated with regulations proposed by the PHMSA that may require
automatic and remote-controlled shutoff valves,or costs related to damage to the Company's
system by third parties.Id.at 6.Finally,the Company argued it must still prove that its
expenditures are prudent,reasonable,and necessary before actual recovery with or without the
IIMM.Id.
The Company next argued that Staff mischaracterized the Company's proposed IIMM
as "open-ended and ongoing,"by explaining that the IIMM is focused on safety and reliability
expenditures and is subject to review by Pipeline Safety,Staff and the Commission before
recovery.This proposed process,it argued,actuallyallows greater familiarity and understanding
for parties outside of a general rate case,and annual,gradual recovery versus recovery in a general
rate case.It argued that single-issue trackers (e.g.,Idaho Power's Advanced Metering
Infrastructure tracker approved in Order No.30829)actuallydemonstrate a proactive approach by
utilities that best serve long-term customer interests.Id.at 7-8.
The Company also disagreed with Staff that annual adjustment mechanisms decrease
cost-control incentives for utilities.Id.at 8.Instead,the Company argued that,for example,with
its PGA,all parties involved gain a level of understanding and familiarity through repeated
involvement with the narrowly defined issues,and therefore,cost controls incentives actually
increase.Id.
The Company next reiterated that safety and reliability expenditures challenge the
Company's financial situation because they do not provide supporting revenues.Id.at 8.While
the Company admits that it is not strictly unable to complete safety and reliability projects it
intends to complete under its proposed IIMM,"the current ratemaking structure does not provide
the flexibilityneeded to accelerate and prioritize these types of projects,"while the IIMM would.
Id.at 8.
Finally,the Company argued that AWEC's chart3 is misleading because it excludes
"normal"expenditures(e.g.,expendituresnot recoverable through the single-issue tracker).Id.at
9.The Company also argued that AWEC's arguments related to over-recovery are misplaced
3 See Base Rate vs.Tracker Recovery Illustration,AWEC Comments at 7.
ORDER NO.34090 8
because the Commission reviews and approves the Company's depreciationrates every three years
in a single-issue case where depreciation rates are specifically considered.Id.In terms of the
IIMM,the Company would apply these Commission-approved depreciation rates to the
incremental safety and reliability projects,which would actuallyprevent over-recovery.Id.
4.Public Comments
Four members of the public commented opposing the Company's proposed IIMM.
One commenter expressed that the costs the IIMM proposes to recover are variable maintenance
costs and should be part of operating the business;therefore,a separate charge is unnecessary.
Another recommended that the Commission consider the new tax law that will greatly reduce the
Company's corporate tax,suggesting the savings should bring down the consumer price and aid
in improving infrastructure.The third asked the Commission to deny the request,stating
Intermountain must use some ofits profits to keep operations in working order.The fourth asserted
that the Company has purposefully used obscure,hard-to-decipher language in its notice to
customers,arguing that customers deserve to know in clear,simple language what the Company
is up to and how its actions will affect rates.This customer also argued that when an application
before the Commission is approved,customers deserve clear notice of what was approved and
when a rate increase will go into effect.
COMMISSION FINDINGS AND DECISION
The Commission has jurisdiction over this matter under Idaho Code §§61-502 and 61-
503.The Commission has the express statutory authority to investigate rates,charges,rules,
regulations,practices,and contracts of public utilities and to determine whether they are just,
reasonable,preferential,discriminatory,or in violation of any provision of law,and may fix the
same by order.Idaho Code §§61-502 and 61-503.
We support the Company's stated goals related to the safety and reliability of its
infrastructure.The Company,of course,has the responsibility under the regulatory compact to
meet these and other goals regardless of the presence of a tracker mechanism.The Company is
requesting a cost recovery mechanism for predictable and planned infrastructure improvements
that do not pose an imminent threat to the safety or integrity of Intermountain's system.Based on
the Application and evidence before us,we find that a general rate case provides the best
comprehensive venue for review of the Company's costs,revenues,and rate base in terms of
known,routine,planned-for expenditures.
ORDER NO.34090 9
Allowingthe Company to implement its proposed rider would create conflict with the
statutory used and useful requirement under Idaho Code §61-502A.The Company's return on
rate base would exceed the used and useful amount because there is no provision for the less than
fully depreciated pipe that is removed.Without retiring existing pipe for purposes of depreciation,
the Company would be allowed a return on property that has been removed from service.Further,
the Company has not shown it cannot access capital to fund these projects between rate cases.
We also fmd that the costs the Company seeks to recover are predictable and not
necessarily volatile.While,as the Company argued,part of these costs may be unpredictable (e.g.,
destruction of Company property by the public;inflation of pipe costs),they are not the types of
costs that significantlyvary from the revenue requirement embedded in base rates.
We are unaware of any emergency or factual showing that would necessitate approval
of a special mechanism for the recovery of these expenditures.The Company should manage these
costs through prudent business planning.The Company has not shown it cannot make what it
considers exceptionally important infrastructure improvements and investments while earning fair
returns on its investments.The Company also has not shown that its infrastructure has
unreasonably outpaced depreciation,or that regulatory lag is unreasonably eroding earnings due
to safety infrastructure improvements.
Finally,the Commission's Pipeline Safety Staff is not in a position to determine what
safety and reliability projects might later qualify for recovery during ratemaking or are preferred
or bona fide.Recovery of costs related to the replacement of aging infrastructure,whether
accelerated or otherwise,is best accomplished in a general rate case that allows analysis of all
expenses,rate base,and impact on the Company's return on equity.Moreover,Intermountain has
failed to establish that it lacks the financial ability or access to capital to fund projects between
rate cases.We are confident that the Company can and will continue to provide safe and reliable
natural gas service,including expeditious replacement of aging infrastructure,despite our denial
of a special cost recovery mechanism.
ORDER
IT IS HEREBY ORDERED that the Application of Intermountain Gas Company for
authorityto implement an Infrastructure Integrity ManagementMechanism is denied.
THIS IS A FINAL ORDER.Any person interested in this Order may petition for
reconsideration within twenty-one (21)days of the service date of this Order with regard to any
ORDER NO.34090 10
rnatter decided in 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.
DONE by Order of the Idaho Public Utilities Commission at Boise,Idaho this
day of June 2018.
PAUL KJELLAND PRESIDENT
KRTSTINE RAPER,CO SIONER
ERIC ANDERSON,COMMISSIONER
ATTEST:
Diane M.Hanian
Commission Secretary
INTGl707 fo sc3
R NO.34090 11