20200611Comments.pdf

MATT HUNTER
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-007 4
[phone]
BAR NO. 10655
IN THE MATTER OF INTERMOUNTAIN GAS
COMPANY'S APPLICATION FOR
AUTHORITY TO REVISE ITS GENERAL
SERVICE PROVISIONS RELATED TO THE
INSTALLATION AND EXTENSION OF
NATURAL GAS MAINS AND SERVICES
ftilCTIVED
lil:i ..ili+ I I Plt lr ZT
i. .1,;l i'tj3t-lC" .' i:":.:, CCiifrii$g1go1
Street Address for Express Mail:
II33I W CHINDEN BLVD, BLDG 8, SUITE 2OI-A
BOISE, TD 83714
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
)
)
)
)
)
)
)
CASE NO. INT.G.2O.Ol
COMMENTS OF THE
COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
attorney of record, Matt Hunter, Deputy Attorney General, and in response to the Notice of
Modified Procedure issued in Order No. 34636 on April 21,2020, in Case No. INT-G-20-0I,
submits the following comments.
BACKGROUND
On January 27,2020,Intermountain Gas Company ("lntermountain" or "Company")
applied to the Commission for authority to revise the Company's General Service Provisions
related to the installation and extension of natural gas mains and services ("Line Extension
Policy"). This filing is in response to Commission Order No. 33757, issued in the Company's
last general rate case (INT-G-16-02), which ordered the Company to update its line extension
tariff to incorporate the Commission authorized rate of return ("ROR"), no later than 90 days
after the conclusion of Case No. INT-G-16-02. The Commission also encouraged lntermountain
1STAFF COMMENTS JUNE TI,2O2O
to modify its Line Extension Policy as soon as possible to address changes in references, rules,
and vested interest policy.
On February 25,2020, the Commission issued a notice setting a March Il,2020
intervention deadline. Order No. 34560. The Commission also suspended the Company's
proposed April 1, 2020 effective date for the tariff for 30 days plus 5 months, pursuant to ldaho
Code * 6I-622(4).
STAFF ANALYSIS
Staff believes that the proposed changes to the Company's Line Extension Policy will
result in a simpler and more equitable policy and recommends the Commission approve the
Company's proposed Line Extension Policy. Furthermore, Staff supports the Company's
proposal to update its Line Extension Policy annually through a tariff advice.
Staff notes that the existing Line Extension Policy was established as part of the
Company's 1985/1986 rate case proceedings (U-1034-99 and U-1034-122). Many of the
assumptions underlying the existing Line Extension Policy, such as the authorized Rate of
Return and relationships between consumption and weather, are outdated. In some cases, neither
Staff nor the Company was able to find documentation for the rationale underlying key portions
of the existing Line Extension Policy. As stated on page 4 of the Company's Application, Staff
and the Company worked collaboratively to develop the updated and improved tariff.
Staff also audited the cost accounting methods that the Company used to determine the
embedded costs and overhead charges used to determine the Company's Allowable Investment
("Allowance") and project cost estimates.
The primary purpose of a Line Extension Policy is to assure equity between new and
existing customers. A Line Extension Policy should assure that the costs of new
interconnections are not unfairly shifted to existing customers, while also assuring that the new
customers do not pay more for their interconnection than is necessary. So long as consumption
estimates and estimates of the embedded mains and services costs are accurate, the embedded
cost methodology proposed by the Company should achieve this result.
STAFF COMMENTS JUNE II,2O2O2
The Company's proposal also makes the following changes to its existing policy:
l) It uses the7.3Vo ROR authorized by the Commission in the Company's most recent rate
case instead of the 12.57o ROR that has been in use since the Company's 1985/1986 rate
cases.
2) It modifies the vested interest policy so that vested interest payments are based only on
mains-related revenue that is embedded in rates.
3) The text of the Line Extension Policy has been consolidated into a single section (Section
C) and re-written so that it is easier to read than the existing policy.
Proposed Computation of the Allowable Investment
The line extension allowance places an upper limit on the costs that can be included in
rate base. Its computation is predicated on the notion that new customers should pay the entire
cost of infrastructure needed to connect them with the Company's distribution system, either
through an up-front Contribution in Aid of Construction ("CIAC"), or through the revenue
related to mains and service drops that is embedded in base rates. Since it will take the Company
many years to collect the costs of mains and service drops through base rates, the Company must
make an up-front investment ("Allowable Investment" or "Allowance"). The relationship
between the cost of a line extension project, the CIAC, and the Allowance may be expressed by
the formula:
PROJECT COST = CIAC + ALLOWANCE
The Allowance is calculated using the present value of embedded line extension related revenue
that will be collected through base rates over the depreciation life of the line extension project.
This calculation depends on accurate estimates of the line extension related costs that are
embedded in base rates, as well as accurate estimates of gas consumption.
Because the Company's current Class Cost of Service ("CCOS") model lacks sufficient
detail to determine embedded line extension costs directly, Staff and the Company developed a
proxy methodology that can be used until a more detailed CCOS model can be developed and
presented in a future rate case. Details of the proxy methodology are discussed below.
As stated on page 5 of the Company's Application, residential gas consumption is
estimated by adding consumption estimates for natural gas appliances to an estimate of space
3STAFF COMMENTS JUNE 1I,2O2O
heating consumption determined using a factor of 0.234 therms per square foot per year.
Derivation of this factor is discussed more fully below.
Commercial establishments vary widely in size and the uses to which they put natural
gas; as a result, the Company estimates consumption on a case-by-case basis. Estimates for
commercial customers are based on factors such as climate zone, heated square footage,
commercial property type, and applicable gas appliances. Application at 5. Although not
specifically stated in the Company's Application, Staff found that the Company uses the
consumption of similarly situated customers as a guide. For example, the Company might use
actual gas consumption from an existing fast food restaurant as a guide for estimating gas
consumption for a similar, new fast food restaurant. Staff reviewed the Company's methodology
for estimating commercial gas consumption and believes it to be appropriate.
Staff notes that for service line extensions, the primary cost driver is the number of linear
feet between the Company's main and the customer's meter, and the Company expresses the
service line Allowance in terms of the number of linear feet that the Company will install
without charge to the customer. There are other possible cost drivers for mains extensions, so
the Company expresses this allowance in terms of dollars.
Class Cost of Service Proxy
Ideally, embedded costs used to estimate the Allowance would be obtained directly from
the Company's most recent CCOS model. Unfortunately, neither the CCOS model presented by
the Company in its last rate case (INT-G-L6-02), nor the Class Revenue Allocation ordered by
the Commission (Order No. 33757), provides a breakdown, by class, of the accounts in which
line extension costs are embedded. Staff and the Company worked together to develop a
methodology that can serve as a proxy for the needed CCOS information. The proxy allocates
each account using each class's share of the Commission-ordered Class Base Revenue
Requirement and the fraction of plant-in-service in each account. A gross-up, to account for the
effects oftaxes, is then added.
For the Mains Extension policy, proxies were developed for FERC Accounts 374
(Distribution Land & Land Rights), 375 (Distribution Structures and lmprovements), 376
(Distribution Mains), and 378 (Distribution Measuring and Regulation Station Equipment). For
the Service Line Extension policy, proxies were developed for Accounts 380 (Services) and 385
(Individual Regulator Stations). Because the Company installs meters and regulators for all
4STAFF COMMENTS JUNE II,2O2O
customers, and because these costs are not driven by conditions that are unique for each
customer, Accounts 381 (meters), 382 (Meter Installations), 383 (House Regulators), and 384
(House Regulator Installation) were excluded from both the project cost estimate and the
computation of the Allowance.
Estimating Residential Gas Consumption
The Company's proposed method for estimating residential gas consumption is both
simpler and more accurate than the existing method. The current method has been in use since
the Company's 1986 rate case (U-1034-122), and uses seven different space heating factors to
adjust the model for weather conditions in Nampa, Boise, Twin Falls, Pocatello, Idaho Falls,
Sun Valley, and Montpelier. Given the time elapsed since that case, Staff was unable to
determine how these seven factors were calculated. However, using actual consumption data
from homes constructed during calendar years 2015 and2016, Staff determined that use of these
space heating factors decreases the accuracy of the Company's estimates of residential gas
consumption.
On page 5 of its Application, the Company states that it commissioned Musgrove
Engineering ("Musgrove") to perform a study of gas consumption for space heating on a square
foot basis. Application at Exhibit 3. Staff, the Company, and Musgrove worked together to
verify Musgrove's modeling assumptions and inputs. The Musgrove model was then calibrated
and validated using actual consumption data from homes constructed during the 2015 and2016
calendar years.
The International Energy Conservation Code ("IECC"), which is the basis for Idaho
residential energy efficiency standards, recognizes two climate zones in the Company's service
territory: the Company's western service territories are in the relatively warm Zone 58, and its
eastern and northem service territories are in the relatively cool Zone 68. Although winter
temperatures are generally cooler inZone 68 than they are inZone 58, more stringent Zone 68
IECC building standards result in consumption that is similar in both zones.
Using the Musgrove model to analyze the heating requirements of several representative
floor plans, it can be shown that a single consumption factor of 0.243 therms per square foot per
year can be applied to both regions. Application, Exhibit 3 at 5. This simplifies calculations and
provides a more accurate estimate than is obtained using the current methodology.
STAFF COMMENTS JUNE II,2O2O5
The proposed methodology also includes updated consumption estimates for residential
gas appliances such as hot water heaters and gas ranges. Staff checked the updated consumption
estimates using publicly available information and believes them to be reasonable.
Vested Interest Policy
Staff supports implementation of the Company's proposed vested interest policy, and
believes it is more equitable than the current policy. Staff explains that without a vested interest
policy, it is possible for the first customer in a newly served area to bear a substantial portion of
the cost of a new main that may subsequently be used by new customers who pay no
contribution toward the cost of that main. Under the current vested interest policy, customers
with a vested interest receive 1.5 times the total annual revenue that the Company would receive
from the new customer(s). Staff believes that by using total revenue instead of only the
embedded revenue associated with mains, it is possible for the current policy to unfairly shift
costs to the general body of customers.
Under the Company's proposal, the vested interest holder will receive the main line
allowance amount as a vested interest payment for each new customer that connects to the main
within a 5-year period. The total amount of vested interest payments is limited by the initial
main extension CIAC paid by the vested interest holder. This limit ensures that the total
allowance amount plus the remaining CIAC amount never exceeds the total cost of the main.
Staff believes the proposed method provides the vested interest holder the opportunity to be
fairly reimbursed for each additional customer's share of the CIAC initially paid by the vested
interest holder, and ensures that the project cost is only recovered from the customers who
benefit from the main extension. The Company proposes that it review its records annually to
determine which customers would be eligible for refunds.
The proposed five-year limit on vested interest payments limits the administrative burden
on the Company, and it is consistent with the time limits used by other regulated Idaho
companies with vested interested policies. Likewise, the Company's proposal to review vested
interests annually is intended to limit administrative costs. Although Staff would prefer vested
interest payments be paid immediately after a new customer hooks up, Staff also believes the
increased administrative costs of doing so is not warranted by the relatively small number of
customers with vested interests.
6STAFF COMMENTS JUNE I1,2O2O
Policy Revised for Clarity
Staff appreciates the Company's efforts to reorganize and rewrite its Line Extension
Policy. The proposed text is succinct and easier to read than the existing text. The Company
consolidated its Line Extension Policy by moving information that had been in Section A to
Section C. Staff believes this revision will reduce misunderstandings and customer complaints
about the policy.
Proposed Annual Tariff Advice Filing
Staff supports implementing an annual filing requirement. The Company proposes to
update the tariff annually, via a tariff advice, to reflect changes to construction overhead charges
and service line cost per square foot. After each general rate case, the annual filing will also
need to include a change in the allowable investment since the embedded cost of line extensions
should change as a result.
Refunds
Commission Order No. 33757 dated April 28, 2017 required the Company to update its
Line Extension Policy for the new ROR within 90 days of the Commission order and encouraged
modification of other components. However, as noted earlier, calculations and workpapers from
the 1985/1986 cases were unavailable, and it was not possible to perform a simple update using
the Commission authorized ROR.
The Company continued to operate using the latest approved Line Extension Policy
authorized in the 1985/1986 case while the Company worked with Staff for more than two years
to develop the concepts of the proposed policy. Over time, interpretations and application of the
1985/1986 Line Extension Policy by the Company varied. As the work between Staff and the
Company progressed, it became apparent that the proposed Line Extension Policy would result
in lower CIAC payments going forward than some customers paid under the existing Line
Extension Policy.
According to the Company in its response to Staff s Production Request No. 5, between
May 1, 2Ol7 and November 18,2019, there were 277 different Mains extension projects which
could qualify for refunds under the Company's proposal. The total potential refunds for these
projects is $529,846. Staff notes that the Company has stated that it has made no representations
to its Residential and Commercial customers that they might receive refunds based on proposed
7STAFF COMMENTS JUNE 11,2020
changes to the Company's Line Extension Policy. Company Response to Staff s Production
Request No. 8.
It could be argued that the Company was following its existing Line Extension Policy and
no refunds should be required to be paid based on a proposal that has not been approved yet.
Because the Company was required to update its Line Extension Policy to reflect the new lower
authorized ROR and encouraged to work with Staff and file other changes to its Line Extension
Policy, it could also be argued that changes to the existing Line Extension Policy took too long to
update and refunds should be made to customers who have paid a higher line extension CIAC
since the conclusion of the Company's last rate case (INT-G-16-02). Any refunds could be the
difference between the higher CIAC under the existing Line Extension Policy and what would
have been paid under the proposed Line Extension Policy if approved by the Commission.
The Company offered to make refunds. Unless the Commission requires the refunds to
be booked below the line as a penalty, it is important to note that rate base will increase in the
same amount as the refunds due to a lower CIAC offset. The result will be all customers paying
increased rates for depreciation and a return on the higher rate base.
STAFF AUDIT
Staff audited the Company's treatment of costs used to determine the Allowable
Investment and project costs, including construction overhead charges. Staff agrees with the
methods used by the Company and agrees with the proposed lL9ZVo overhead charge rate.
Construction Overhead Charges and Project Costs
Construction overhead charges compensate the Company for costs incurred managing,
supervising, and administering line extension projects. These costs include construction and
labor related costs of engineering and supervision of staff; other general and administrative costs,
including the day-to-day costs ofproject operations; and expenses such as rent, utilities,
insurance, certain salaries, legal fees, meals, and travel. These charges are capitalized and
included in the Company's rate base.
During its audit, Staff found that the charges are recorded properly, and that overhead
costs for specific projects are recorded in the appropriate accounts.
In its response to Production Request Nos. 1-3, the Company provided a detailed
description and work papers that outline the trial balance and the calculations of these charges.
8STAFF COMMENTS JUNE II,2O2O
Staff has reviewed these workpapers and agrees with the accounting treatment methodology
used, as well as the calculations employed. The proposed overhead charge rate of Ll.927o has
been accurately calculated.
Determination of Allowable Investment
The Company proposes an embedded cost methodology for computing its Allowable
lnvestment in new gas facilities. This method will ensure that any project costs exceeding the
Allowable Investment will be paid by the customer as a customer advance and treated as a
CIAC.
Central to the embedded cost methodology are the Allowable lnvestment factors, which
are derived using the present values of the embedded cost of Mains and Services in the
Company's approved tariff.
Using the Commission approvedT.3OVo ROR as the discount rate, the Allowable
Investment factors for service line extensions are $0.593 and $0.445, respectively, for residential
and commercial customers. The Allowable Investment factors for Main line extensions are
$0.660 and $0.495, respectively, for residential and commercial customers. Staff has verified
and agrees with the derivation of Allowable Investment factors shown in Company Exhibits 4
and 5.
EFFECTIVE DATE
The Company will need time to develop a computer system that will ensure consistent
application of the new tariff across the Company's service territory. Application at 9. Staff
recommends an effective date of August l,2O2O.
CUSTOMER NOTICE
The Company's Notice of Application was sent to the customers, builders, developers,
and HVAC contractors that the Company believes would be affected by the proposed changes
As of June 10, 2020, the Commission received two public comments. One from a
builder/developer who indicated that the proposed service line extension allowance is too low.
The other comment was from the Rocky Mountain Propane Association stating that
Intermountain's Line Extension Policy should require line extension customers to pay proper
CIAC so that the connections are not subsidized by other customers.
9STAFF COMMENTS JUNE II,2O2O
STAFF RECOMMENDATIONS
Staff believes that the proposed changes to the Company's Line Extension Policy will
result in a simpler and more equitable policy. Staff makes the following recommendations:
1) That the Commission accept the Company's proposed General Service
Provisions, and Sections A and C be accepted as filed.
2) That the tariff changes be effective August 1,2020.
3) That the Commission order the Company to file an annual tariff update each
August 1't.
4) That the Commission determine if the Company should calculate and, when
appropriate, issue refunds to customers who have paid advances between May 1,
2017 and August I,2O2O, as proposed in the Company's Application.
Respectfully submitted this day of June2020.
Matt Hunter
Deputy Attorney General
Technical Staff: Mike Morrison
Kevin Keyt
Johan Kalala-Kasanda
Chris Hecht
i :umisc/comments/intg20. I mhmmkdrjkch comments
STAFF COMMENTS 10 JUNE 1,1,2020
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS llTH DAY OF JUNE 2020,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. INT-G-20-OI, BY E-MAILING A COPY THEREOF, TO THE
FOLLOWING:
LORI BLATTNER
DIR - REGULATORY AFFAIRS
INTERMOUNTAIN GAS CO
PO BOX 7608
BOISE ID 83707
E-MAIL: [e-mail]
BENJAMIN J OTTO
ID CONSERVATION LEAGUE
710 N 6TH STREET
BOISE TD 83702
E-MAIL: [e-mail]
PRESTON N CARTER
GTVENS PURSLEY LLP
601 W BANNOCK ST
BOISE ID 83702
E-MAIL: prestoncarter@ givenspursley.com
kendrah @ givenspursley.com
ABIGAIL R GERMAINE
BOISE CITY ATTORNEY'S OFFICE
PO BOX 500
BOISE rD 83701-0500
E-MAIL: agermaine @cityofboise.org
SECRETARY
CERTIFICATE OF SERVICE