D.P.U. 19-120 Exhibit AG-3 June 10, 2020 H.O. Kevin Crane National Grid
Boston Gas Company Essex Gas Company Colonial Gas Company
INVESTIGATION AS TO THE PROPRIETY OF PROPOSED TARIFF CHANGES
Testimony and Exhibits of:
Nickolas Stavropoulos James B. Howe William J. Akley Susan F. Tierney
Book 2 of 11
April 16, 2010
Submitted to: Massachusetts Department of Public Utilities D.P.U. 10-55
Submitted by: Testimony of Nickolas Stavropoulos Exhibit AG-3 Exhibit D.P.U. 19-120 D.P.U. June 10, 2020 June H.O. Kevin Crane H.O. 2020 AG-3 AG-3 Crane
19-120 19-120 Exhibit NG-NS-1 10, Kevin Kevin Exhibit Exhibit D.P.U. D.P.U. June H.O. D.P.U. 19-120 Exhibit AG-3 June 10, 2020 H.O. Kevin Crane
COMMONWEALTH OF MASSACHUSETTS DEPARTMENT OF PUBLIC UTILITIES
D.P.U. 10-55
DIRECT TESTIMONY OF NICKOLAS STAVROPOULOS
IN SUPPORT OF
NATIONAL GRID’S PETITION TO THE DEPARTMENT UNDER G.L. C. 164, 94
EXHIBIT NG-NS-1
April 16, 2010 D.P.U. 19-120 Exhibit AG-3 June 10, 2020 H.O. Kevin Crane
TESTIMONY OF NICKOLAS STAVROPOULOS
EXHIBIT NG-NS-1
TABLE OF CONTENTS
I. INTRODUCTION 1
II. PURPOSE OF TESTIMONY 3
III. DISCUSSION REGARDING COMPANY’S PROPOSALS 15
IV. STAKEHOLDER INITATIVES AS A GLOBAL ENERGY LEADER 37
V. CONCLUSION 49 D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 1 of 52
1 I. INTRODUCTION
2 Q. Please state your name and business address.
3 A. My name is Nickolas Stavropoulos. My business address is 40 Sylvan Road, Waltham,
4 MA 02451.
5 Q. By whom are you employed and in what capacity?
6 A. I am Executive Vice President, U.S. Gas Distribution for National Grid USA with
7 responsibility for overseeing National Grid USA’s regulated gas distribution operations
8 in Massachusetts, Rhode Island, New Hampshire and New York. I am also the President
9 and Chief Operating Officer of Boston Gas Company (“BOS”), Essex Gas Company
10 (“ESX”), and Colonial Gas Company (“Colonial” or “COL”), each d/b/a National Grid
11 (collectively, “National Grid” or the “Company”).
12 Q. What are your principal responsibilities in that position?
13 A. As Executive Vice President, U.S. Gas Distribution, I am the senior officer responsible
14 for safe and reliable operation of National Grid USA’s gas distribution system. This
15 system consists of over 35,000 miles of distribution and transmission main serving
16 approximately 3.5 million customers throughout New England and New York, which
17 makes National Grid USA the largest distributor of natural gas in the northeastern U.S.
18 In this capacity, I am responsible for overseeing approximately 5,500 employees in New
19 England and New York who perform all of the field work for maintenance, construction D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 2 of 52
1 and operation of the gas distribution system, as well as the Network Strategies group,
2 which encompasses engineering, reliability and integrity planning. I also oversee
3 National Grid USA’s liquefied natural gas (“LNG”) operations and the support functions
4 associated with gas operations.
5 Q. Please describe your educational background and professional experience.
6 A. I graduated from Bentley College in 1979 with a Bachelor of Science in Accounting.
7 Subsequently, I earned a Masters of Business Administration from Babson College. I
8 joined Colonial in 1979 as an analyst in the rates and accounting areas. In 1985, I was
9 named Vice President of Rates and Planning and, over the next ten years, held a series of
10 senior positions with Colonial, including Chief Financial Officer. In 1995, I assumed
11 responsibility for all of Colonial’s financial, marketing, information technology, and
12 customer-service functions as Executive Vice President of Finance and Marketing in
13 addition to my position as Chief Financial Officer. Following the acquisition of Colonial
14 by Eastern Enterprises (“Eastern”) in 1999, I was named Senior Vice President of
15 Marketing and Gas Resources for Eastern’s regulated gas distribution companies. When
16 KeySpan Corporation (“KeySpan”) acquired Eastern in 2000, I was named KeySpan’s
17 Senior Vice President of Sales and Marketing for New England. I was subsequently
18 named Executive Vice President of KeySpan and Head of KeySpan New England Gas
19 Operations in 2002, and then President of KeySpan Energy Delivery with responsibility
20 for KeySpan’s 2.6 million natural gas customers in Massachusetts, New Hampshire and D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 3 of 52
1 New York, in 2004. Following the acquisition of KeySpan by National Grid plc, I was
2 named to my current position. I am currently the Second Vice Chairman of the American
3 Gas Association (“AGA”) and former Chairman of the Board of Directors of the
4 Northeast Gas Association.
5 II. PURPOSE OF TESTIMONY
6 Q. What is the purpose of your testimony?
7 A. My testimony is designed to provide the Department of Public Utilities (the
8 “Department”) and other important constituencies of National Grid’s Massachusetts
9 natural gas business with an understanding of (1) the Company’s proposals to the
10 Department in this proceeding; (2) the business environment and operating factors
11 motivating those proposals; and (3) the context in which these proposals would be
12 implemented on a going forward basis to further the interests of the Company’s
13 customers, the communities in which we serve and the environment.
14 In particular, my testimony is designed to demonstrate that, although National Grid is a
15 shareholder-owned business interested in maintaining its financial integrity, the National
16 Grid organization is also one that fundamentally believes that shareholder interests are
17 served by a solid focus on the safety and reliability of the gas distribution system, the
18 safety of employees and contractors working on the system, the mitigation of
19 environmental impacts arising from operations, and ultimately, the satisfaction of D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 4 of 52
1 customers. As I will discuss below, the Company’s ability to serve these interests will be
2 assisted by two critical policy decisions made by the Department in Bay State Gas
3 Company, D.P.U. 09-30 (2009) (“D.P.U. 09-30”) and National Grid, D.P.U. 09-39 (2009)
4 (“D.P.U. 09-39”). When extended to National Grid’s gas distribution operations in
5 Massachusetts, these two policy decisions will support the Company’s commitment to the
6 aggressive implementation of energy efficiency programs and deployment of demand
7 resources, as well to the accelerated replacement of leak-prone distribution facilities,
8 which would yield benefits relating to the public safety, service reliability, cost-
9 effectiveness, public convenience and customer satisfaction, municipal cost and
10 convenience and environmental and economic benefits.
11 Q. How is your testimony organized?
12 A. My testimony is organized as follows: Sections I and II are introductory sections.
13 Section III discusses the primary components of the Company’s filing, including the
14 structure of the revenue-requirement calculations presented to support a change in base
15 rates, as well as other key elements of the Company’s proposal. Section III also
16 discusses the business environment and operating factors that are motivating the
17 Company’s proposals, including the evolving financial and regulatory challenges that
18 make it necessary and appropriate for the Department to extend the policy determinations
19 in D.P.U. 09-30 and D.P.U. 09-39 to the Company’s operations. In Section IV, I will
20 describe some of the significant initiatives that National Grid USA is undertaking to D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 5 of 52
1 achieve its core mission as a global energy industry leader. Lastly, in Section V, my
2 testimony presents some concluding statements regarding the Company’s filing.
3 Q. Would you please explain the naming conventions that you will be using in your 4 testimony and associated exhibits to identify the various National Grid USA entities 5 involved in this proceeding?
6 A. Yes. This proceeding is a ratemaking proceeding for Boston Gas Company, Essex Gas
7 Company, and Colonial Gas Company, which together represent the entirety of the
8 regulated gas distribution operations conducted in Massachusetts by National Grid USA,
9 as the associated indirect parent company. Above, I have indicated that I will refer to
10 these three regulated entities as “National Grid” or the “Company,” where the reference
11 is to all three companies on a collective basis. Where the term “Boston Gas” is used in
12 this proceeding, the Company will be referring to the consolidated operations of Boston
13 Gas Company and Essex Gas Company. Where there is a need to refer to the legacy,
14 “stand-alone” or individual operations of Boston Gas Company or Essex Gas Company,
15 the Company will use the designation “BOS” and “ESX”, respectively. The term
16 “Colonial” or “COL” will reference the Colonial operations as an individual entity.
17 Where the Company is referring to “National Grid USA” or “National Grid plc,” it will
18 use those precise terms.
19 Q. How has the Company approached the preparation of this case?
20 A. The Company’s overall approach in preparing this case reflects the Company’s D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 6 of 52
1 recognition that the determinations the Department will make in this proceeding are of
2 extreme importance to the Company’s going forward operations. For example, this case
3 is the first time that the Department will review operating costs and set new base rates for
4 Colonial and ESX customers since the mergers approved by the Department in Eastern-
5 Essex Acquisition, D.T.E. 98-27 (1998) and Eastern-Colonial Acquisition, D.T.E. 98-128
6 (1999). This is also the first time that BOS, ESX and Colonial are seeking rate review on
7 a collective basis, and as National Grid USA subsidiaries. Lastly, there are significant
8 changes that have taken place since the last rate case for BOS in 2003, including a
9 fundamental shift in environmental policy encouraging the ramp-up of energy efficiency
10 activities and a compelling need to address capital-recovery issues as a first priority
11 rather than as a perfunctory exercise in computing the base revenue requirement.
12 Within this context, the Company has endeavored to present an organized case that
13 attempts to minimize complexity and that adheres as closely as possible to the principles
14 established by the Department in D.P.U. 09-30 and D.P.U. 09-39. Based on my
15 experience with the Department’s ratemaking proceedings over the past 30 years, I
16 understand that removing the layers of complexity that could exist in this case is an
17 important step in facilitating the Department’s review and, ultimately, in obtaining an
18 outcome that assists the Company in meeting its public service obligation of providing
19 safe, reliable and cost-effective service to customers on a unified, rational basis and with
20 a level of financial integrity. D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 7 of 52
1 Q. What are the basic elements of the Company’s filing in this proceeding?
2 A. There are five elements to the Company’s filing. First, National Grid is requesting a
3 base-rate increase under G.L. c. 164, § 94 for its Massachusetts gas distribution
4 operation. Below, I will describe how the revenue requirement supporting the base-rate
5 increase is structured for the three legacy companies, BOS, ESX and Colonial. In
6 support of the revenue requirement calculations, the Company’s filing includes
7 supporting documentation and the results of a depreciation study, lead lag study,
8 allocated cost of capital study (“ACOSS”) and marginal cost study.
9 Second, National Grid is proposing to implement a revenue decoupling mechanism
10 (“RDM”) for its Massachusetts gas distribution operations in accordance with the
11 Department’s directives in Rate Structures to Promote Efficient Deployment of Demand
12 Resources, D.P.U. 07-50-A (2007) (“D.P.U. 07-50-A”). The RDM will support the
13 Company’s commitments under its three-year energy efficiency plan recently approved
14 by the Department in National Grid, D.P.U. 09-121, which significantly increases the
15 Company’s planned expenditures for energy efficiency programs with an approved
16 budget of $32M in 2009 ramping up to an approved budget of $85.3M in 2012.
17 Third, National Grid is proposing to implement a Targeted Infrastructure Recovery
18 Factor (“TIRF”) to support the accelerated replacement of leak-prone mains and services
19 on the Company’s Massachusetts distribution system. Since the test year for D.T.E. 03-
20 40, the Company has increased annual spending on the replacement of leak-prone mains D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 8 of 52
1 and services from approximately $32.5M to $77.9M, which represents an increase of
2 approximately 140 percent over the past seven years. This increase in spending follows
3 from the Company’s recognition that the system is aging and an increasing level of
4 investment is needed to improve the public safety. In fact, approximately 40 percent of
5 the Company’s Massachusetts distribution system is composed of leak-prone facilities
6 ranging in age from 50 to 100+ years. In the years 2004 through 2008, the Company’s
7 rate of replacement averaged approximately 35 miles per year for non-cathodically
8 protected steel and small diameter cast-iron main. In 2009, with an increased spending
9 level of $77.9M, the Company completed 70 miles, which represents a doubling of the
10 average rate. However, even at 70 miles per year of replacement, it would take more
11 than 60 years to replace facilities that today are 50-100 years of age. There is, therefore,
12 a compelling need for a more sizeable ramp-up in the pace of replacement, except that a
13 ramp-up of the magnitude necessary to make a tangible difference is unattainable without
14 implementation of the TIRF. As described by Company Witness Howe, implementation
15 of the TIRF would allow the Company to reduce its inventory of leak-prone mains and
16 services by approximately 50 percent in 10 years.
17 Both the Company’s RDM and TIRF proposals are structured to be consistent with the
18 approach reviewed and approved by the Department in D.P.U. 09-30, except where
19 unique circumstances existing on the National Grid distribution system warrant a refined
20 approach. D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 9 of 52
1 Fourth, National Grid is proposing to adjust distribution rates on an annual basis to
2 account for the impact of inflation and productivity between rate cases. In D.P.U. 09-39,
3 at 76-78, the Department found that it was necessary for a proponent of an inflation
4 adjustment factor to conduct a relevant productivity study in order to establish a
5 representative proxy for the level of productivity anticipated on a going forward basis. The
6 Company’s proposal for a net inflation adjustment factor addresses this requirement.
7 Lastly, the Company’s filing in this case encompasses a request to establish a funding
8 mechanism to support technology projects that are demonstrated to provide a direct benefit to
9 Massachusetts customers in relation to the safe, reliable and cost-effective operation of the
10 distribution system.
11 Q. Is the Company proposing to terminate the performance-based ratemaking plan that is 12 currently in effect for the BOS system?
13 A. As the question suggests, rates are currently set for the BOS system in accordance with a
14 price-cap formula and associated performance-based ratemaking plan (the “PBR Plan”)
15 approved by the Department in Boston Gas Company, D.T.E. 03-40 (2003) (“D.T.E. 03-40”).
16 The PBR Plan allows for an annual change in base revenues over a 10-year term
17 commencing November 1, 2003. The allowed change in base revenues under the PBR Plan
18 is set by a formula that effectively adjusts the revenue requirement approved by the
19 Department in D.T.E. 03-40 on an annual, cumulative basis to account for the growth in
20 inflation, less a productivity offset. The Company is proposing to terminate the PBR Plan in
21 its existing format and to substitute revenue decoupling, the proposed TIRF and an operating D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 10 of 52
1 expense net inflation adjustment. This substitution is needed for two reasons.
2 First, in D.P.U. 07-50-A, the Department set forth a plan for jurisdictional natural gas and
3 electric companies to decouple base distribution rates in order to (1) address profound
4 impacts of increases in the costs of natural gas and electricity on Massachusetts
5 customers, and (2) provide distribution companies with better incentives to promote a
6 cleaner, more efficient energy future consistent with the Green Communities Act. The
7 Department stated that distribution companies subject to its jurisdiction would be
8 operating under decoupling plans by year-end 2012 (D.P.U. 07-50-A, at 84). In setting
9 forth its plan, the Department emphasized its desire to implement decoupling
10 mechanisms through a base-rate proceeding so that those mechanisms would be initiated
11 with a clear understanding of the utility's underlying distribution revenue requirement and
12 allocation of the revenue requirement among customer classes through an ACOSS
13 (D.P.U. 07-50-A at 81). The term of the BOS PBR Plan extends through November 30,
14 2013. Therefore, it became necessary for National Grid to prepare a petition for base-rate
15 review under G.L. c. 164, § 94 in order to implement a revenue decoupling plan by year-
16 end 2012.
17 Second, although the PBR Plan approved by the Department in D.T.E. 03-40 is structured
18 to provide both incentives for long-term cost reductions that will benefit customers and a
19 measure of cost recovery to account for annual inflation, the PBR Plan is not adequately
20 structured to give recognition to the need for more timely recovery of incremental capital D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 11 of 52
1 investment made for safety and reliability purposes. This puts the Company at a
2 significant disadvantage in terms of maintaining an adequate return and attracting the
3 capital necessary to fund infrastructure replacements. Therefore, the Company is seeking
4 to increase base distribution rates to recover the cost of providing service to customers,
5 and to adjust the ratemaking paradigm applicable to its operations in this case so that
6 adequate cost recovery will occur on a going forward basis.
7 Q. Who are the witnesses appearing on behalf of National Grid in support of the five 8 elements of the Company’s filing?
9 A. National Grid’s request to the Department in this case is presented in the testimony of the
10 following witnesses:
11 James B. Howe -- Mr. Howe is Senior Vice President, U.S. Network Strategy for
12 National Grid USA Service Company, Inc. (“NGUSASC”). Mr. Howe is responsible for
13 investment planning for the capital and O&M programs of the U.S. gas distribution
14 subsidiaries of National Grid USA. Mr. Howe’s testimony presents the Company’s
15 proposal to implement a TIRF to support the accelerated replacement of leak-prone
16 facilities existing on the Company’s distribution system.
17 William J. Akley -- Mr. Akley is Senior Vice President, U.S. Gas Operations and
18 Construction for National Grid Corporate Services LLC (“NGSC”). Mr. Akley is
19 responsible for the oversight of the day-to-day operations of the U.S. gas distribution
20 subsidiaries of National Grid USA. Mr. Akley’s testimony describes how the Company D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 12 of 52
1 works to maintain and improve the safety and reliability of the distribution system in light
2 of the inventory of leak-prone facilities remaining on the system, and in compliance with
3 applicable state and federal pipeline safety regulations. Mr. Akley also discusses the
4 steps the Company has taken to contain O&M cost over the long term, while meeting its
5 public service obligations.
6 Susan F. Tierney, PhD. -- Dr. Tierney is a Managing Principal for Analysis Group, Inc.
7 and a former Commissioner of the Department. Dr. Tierney’s testimony presents the
8 Company’s revenue decoupling mechanism.
9 Lawrence R. Kaufmann, PhD. -- Dr. Kaufmann is Senior Advisor of Pacific Economics
10 Group LLC and Navigant Consulting. Dr. Kaufmann’s testimony discusses the rationale
11 for a mechanism that adjusts rates on an annual basis to account for the impact of
12 inflation and productivity between rate cases. Dr. Kaufmann also presents his analysis
13 supporting the appropriate value for the ‘X factor’ to be used in an operating expense net
14 inflation adjustment formula for National Grid.
15 Michael D. Laflamme -- Mr. Laflamme is Vice President, Regulation and Pricing for
16 Electric Distribution and Generation for NGUSASC. Mr. Laflamme is responsible for
17 overseeing the ratemaking activities of the U.S. electric distribution subsidiaries of
18 National Grid USA and is assisting the gas distribution organization in this case. Mr.
19 Laflamme’s testimony presents the Company’s revenue requirement analysis and D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 13 of 52
1 presents the Company’s application of the methodology approved by the Department in
2 Eastern-Colonial Acquisition, D.T.E. 98-128 (1999) to establish the “Merger Savings
3 Allowance” to be included in rates in this proceeding.
4 Paul R. Moul -- Mr. Moul is Managing Consultant at the firm of P. Moul & Associates,
5 an independent financial and regulatory consulting firm. Mr. Moul’s testimony presents
6 his recommendation regarding the appropriate rate of return that should be used in
7 establishing base rates in this proceeding.
8 Mark E. Smith -- Mr. Smith is the Vice President Human Resources for NGSC, which
9 coordinates employee compensation and benefits strategy for the U.S. gas distribution
10 subsidiaries of National Grid USA. Mr. Smith’s testimony provides the supporting
11 analysis and documentation required by the Department for the recovery of employee
12 compensation and benefit costs.
13 Paul M. Normand -- Mr. Normand is a principal of Management Applications
14 Consulting, Inc., which is a management consulting firm that provides rate and regulatory
15 assistance, including depreciation services for electric, gas, and water utilities. Mr.
16 Normand’s testimony presents the results of the Company’s depreciation study and lead
17 lag study. D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 14 of 52
1 Amy Smith -- Ms. Smith is the Company’s Director of Rate Case Strategy for NGSC.
2 Ms. Smith is the witness who will provide support for the Company’s historical rate-base
3 additions.
4 Ronald J. Amen -- Mr. Amen is Vice President, Concentric Energy Advisors, Inc. Mr.
5 Amen’s testimony presents the Company’s ACOSS for ratemaking purposes.
6 James D. Simpson -- Mr. Simpson is Vice President, Concentric Energy Advisors, Inc.
7 Mr. Simpson’s testimony presents the Company’s marginal cost of service study and
8 proposed rate design for the recovery of the approved revenue requirement.
9 Ann E. Leary -- Ms. Leary is the Company’s Manager of Pricing-New England for
10 NGSC. Ms. Leary’s testimony discusses the Company’s revenue adjustments and tariff
11 support.
12 Stan Blazewicz -- Mr. Blazewicz is Vice President-Global Head of Technology for
13 NGUSASC. Mr. Blazewicz’s testimony describes the Company’s initiatives to
14 encourage the development of innovative technology and the benefits that the Company
15 expects to achieve through this commitment. Mr. Blazewicz also presents the
16 Company’s proposal to fund technology and innovation (“T&I”) projects. D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 15 of 52
1 III. DISCUSSION REGARDING THE COMPANY’S PROPOSALS
2 Q. Would you please describe how the Company has approached the revenue- 3 requirement calculations for National Grid’s Massachusetts gas operations?
4 A. Currently, there are four sets of base rates in effect for National Grid’s Massachusetts gas
5 operations, which are the distribution rates for the legacy BOS, ESX and Colonial
6 companies, including separate rates for the Cape and Lowell Divisions of the Colonial
7 operation. In this case, the Company is proposing to establish two sets of base rates,
8 which would apply to the consolidated Boston Gas operations and to Colonial, thereby
9 eliminating the separate rates in existence today for ESX and the Cape/Lowell Divisions.
10 The presentation of a single revenue requirement for the consolidated Boston Gas
11 operations follows from the Company’s December 16, 2009 filing to the Department
12 requesting approval to consolidate BOS and ESX as legal entities, with Boston Gas as the
13 surviving entity. This request is pending before the Department in Boston Gas Company
14 and Essex Gas Company each d/b/a National Grid, D.P.U. 09-139. Although structured
15 as separate legal entities since 1998, the ESX operations were fully integrated with those
16 of BOS many years ago based on the Department’s approval of the merger rate plan in
17 D.T.E. 98-27. The establishment of base rates for the consolidated Boston Gas
18 operations reflects the fact that there is no longer any reasonable basis for differentiating
19 ESX customers from BOS customers in terms of the management and operational
20 structure in place to provide gas service. That said, the Company’s proposed rate design D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 16 of 52
1 and rate tariffs for the consolidated operations of Boston Gas are structured to mitigate
2 rate impacts arising from the consolidation for designated ESX customer classes, where it
3 is appropriate to do so.
4 A similar situation applies to the development of a single revenue requirement for
5 Colonial in that there is no longer any basis for separate distribution rates in the Cape and
6 Lowell Divisions of Colonial. In the past, separate base rates were established for the
7 Cape and Lowell Divisions because the distinct geographic areas served required two
8 distinct operating structures and related cost incurrence. For example, base rates were
9 last set by the Department for Colonial in 1993, which pre-dates the broad-based
10 implementation of information systems that now provide the backbone of the Company’s
11 day-to-day operations. With the implementation of these information systems, the
12 operational structure serving Colonial customers is no longer differentiated between the
13 Cape and Lowell Divisions. As a result, there is no longer any reasonable basis for
14 differentiating COL-Cape customers from COL-Lowell customers in terms of the
15 management and operational structure in place to provide gas service.
16 With the exception of the need to establish separate revenue requirements for Boston Gas
17 and Colonial, the Company’s filing is presented on a fully integrated basis. For example,
18 although the establishment of separate base rates for Colonial makes it necessary to apply
19 the RDM and TIRF mechanisms separately to Colonial customers, the structure of the
20 RDM and TIRF is identical for Boston Gas and Colonial. Aside from the separate D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 17 of 52
1 revenue requirements for Boston Gas and Colonial, all Company proposals in this case
2 are presented on a unified basis and would apply equally to Boston Gas and Colonial.
3 Q. Would you provide an overview of the revenue-requirement calculation?
4 A. The testimony of Company Witness Michael D. Laflamme presents the Company’s
5 revenue-requirement analysis for Boston Gas and Colonial. As he describes in his
6 testimony, the proposed revenue requirement for Boston Gas is $79,232,386 based on a
7 test year-end of December 31, 2009, adjusted for known and measurable changes, a
8 proposed return on common equity of 11.3 percent and a rate base totaling $982,651,878.
9 For Colonial, the proposed revenue requirement is $26,811,061 million based on a test
10 year-end of December 31, 2009, adjusted for known and measurable changes, a proposed
11 return on equity of 11.3 percent and a rate base totaling $242,923,161.
12 If approved by the Department as filed, the Company is projecting that the proposed rate
13 increase as of November 1, 2010 would be tempered by declining peak season 2010-2011
14 projected gas costs, resulting in an increase of 0.0 percent on the total bill for the typical
15 BOS residential heating customer consuming 1,000 therms annually and an increase of
16 approximately 7.7 percent on the total bill for the typical ESX residential heating
17 customer. On the Colonial system, the increase on the total bill for the typical Colonial
18 residential heating customer consuming 1,000 therms in the Cape Division would be 2.3
19 percent and in the Lowell Division would be 6.6 percent. D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 18 of 52
1 If the bill impacts are viewed without consideration of gas costs and energy efficiency
2 costs projected for November 2010, the Company’s rate request would result in an
3 increase of approximately 4 percent on the total bill for the typical BOS residential
4 heating customer consuming 1,000 therms annually and an increase of approximately 12
5 percent on the total bill for the typical ESX residential heating customer. On the Colonial
6 system, the increase on the total bill for the typical Colonial residential heating customer
7 consuming 1,000 therms in the Cape Division would be approximately 6 percent, and in
8 the Lowell Division would be approximately 11 percent.
9 Q. Does the Company’s cost of service reflect any impacts from the new federal 10 healthcare bill?
11 A. Recently, the U.S. Congress passed the Health Care and Education Reconciliation Act of
12 2010. National Grid USA has not yet had a chance to fully assess the impact that these
13 changes will have on the business, its employees or its costs. For example, the Company
14 knows that there will be a loss of Medicare Part D subsidy tax deduction, which is
15 currently estimated at about $138 million for the National Grid USA organization. Other
16 changes will need to be evaluated. The Company will keep the Department apprised
17 throughout this proceeding as information is developed.
18 Q. Why is it necessary for National Grid to request the Department’s review of its rate 19 proposals at this point in time?
20 A. There are several significant factors driving the need for rate relief at this point in time. D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 19 of 52
1 Fundamentally, it is necessary for the Company to recover its operating costs and achieve
2 a reasonable return for investors if it is to be in the position to meet its public service
3 obligation to provide safe, reliable and cost-effective service to customers. The
4 investment required to operate and maintain a distribution system like National Grid’s
5 Massachusetts system is substantial, especially in light of the relatively significant
6 amount of leak-prone facilities that remain on the system. These facilities require
7 constant attention and adherence to extensive regulation by state and federal pipeline
8 safety authorities. The need to conduct an active leak-management program in
9 compliance with state and federal pipeline safety regulations on an aging system like the
10 one operated by National Grid results in an ever-increasing need for O&M and capital
11 investment. Therefore, for the Company to keep up with its public safety and service
12 reliability obligations to customers, it needs to have a ratemaking structure in place that
13 provides adequate and timely funding of utility operations. This is not the situation at the
14 current point in time.
15 COLONIAL AND ESSEX OPERATIONS
16 Due to a number of factors, including the implementation of merger-related 10-year rate
17 freezes on each system, Colonial’s distribution rates have not increased since 1993
18 (Colonial Gas Company, D.P.U. 93-78), and ESX distribution rates have not changed
19 since 1996 (Essex Gas Company, D.P.U. 96-70). The Department has previously found
20 that the avoidance of base-rate cases over the merger-related rate-freeze period is of D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 20 of 52
1 substantial benefit to customers, with the value of avoided rate cases during that time
2 period placed at approximately $160 million on a combined basis for Colonial and ESX
3 customers. ESX and Colonial distribution rates were frozen over this extended time
4 period as a result of the Department’s approval of long-term, merger-related rate plans in
5 Eastern-Essex Acquisition, D.T.E. 98-27 (1999) (“D.T.E. 98-27”) (through September
6 2008) and Eastern-Colonial Acquisition, D.T.E. 98-128 (1999) (“D.T.E. 98-128”)
7 (through July 2009). The need for sequential base-rate cases in that time frame was
8 offset by the achievement of substantial cost reductions associated with the replacement
9 of human resources with information systems for back-room functions, the elimination of
10 redundant management and administrative functions, and the integration of customer-
11 service resources and field operations arising from the integration of the ESX and
12 Colonial operations with those of BOS. However, these cost reductions were not so great
13 as to permanently offset the cost of inflation, rising costs of employee compensation and
14 healthcare benefits, increasing uncollectible expense or the increasing expense and
15 investment demands associated with maintaining, repairing and reinforcing the natural
16 gas distribution system in accordance with evolving state and federal pipeline safety
17 requirements. After more than 14 years (17 in the case of Colonial), the Company is at a
18 point where a change in base rates is needed.
19 BOS OPERATIONS
20 The circumstances leading to this case are slightly different for BOS, although the end D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 21 of 52
1 result is the same. The Department established a 10-year PBR Plan for BOS in Boston
2 Gas Company, D.T.E. 03-40 (2003), based on a 2002 test year. Although the PBR Plan
3 provides for annual inflation adjustments, less a productivity offset, the PBR Plan did not
4 include any provision for the recovery of capital investment during its planned 10-year
5 duration. In accordance with then-existing Department precedent, only those rate-base
6 additions made through the end of the test year, or through December 31, 2002, were
7 included in rates set in D.T.E. 03-40. Without a base-rate proceeding, the Company is
8 unable to include capital additions occurring from year to year in rate base for appropriate
9 cost recovery. This is a critical point for the Company given that approximately 60
10 percent of the BOS distribution system is composed of leak-prone mains and services
11 requiring consistent increases in capital investment in order to protect public safety.
12 As the Department is aware, another factor affecting the Company’s finances is energy
13 conservation. Although declining usage as a result of technological improvements in the
14 efficiency of gas appliances has always been a factor for the natural gas distribution
15 industry, the Company has experienced relatively substantial declines in overall sales
16 growth since 2005. For National Grid, this is not a disappointing phenomenon. On an
17 enterprise-wide basis, National Grid plc and its U.S. subsidiaries are fully committed to
18 the achievement of energy efficiency goals that have the effect of lowering customer bills
19 and mitigating environmental impact. The issue for the Company is that the combination
20 of increasing costs and declining sales growth has had the inevitable effect of diminishing D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 22 of 52
1 the Company’s rate of return to a level that undermines the Company’s financial
2 integrity.
3 Q. Can you discuss more specifically how customer efforts to reduce energy 4 consumption have affected the Company?
5 A. Yes. Each year since the early 1980s, National Grid USA’s customers have used
6 approximately 1½ percent less gas on average than they consumed the year before.
7 However, during this time period, the Company was able to leverage the price advantage
8 that existed for natural gas in relation to the price of oil in generating interest in oil-to-gas
9 conversions, which helped to build demand for natural gas service in the Company’s
10 service territories. These new customer additions and increased sales provided the
11 Company with a relatively steady flow of increased revenues, which worked to offset the
12 average annual decline in natural gas usage per customer arising from energy efficiency
13 improvements.
14 Since the conclusion of D.T.E. 03-40 in 2003, the situation has been different. As
15 discussed in the testimony of Company Witness Susan F. Tierney, the average weather-
16 normalized gas use per residential heating customer has fallen between 14 percent and 17
17 percent from 2003 to 2009. This decline in usage has resulted from improvements in the
18 energy efficiency of customer homes and businesses, which in turn has largely resulted
19 from customer actions to abate increasing energy bills. During this same time period,
20 low load factor commercial and industrial customers reduced their average weather- D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 23 of 52
1 normalized gas use per customer, while usage per customer by high load factor
2 commercial and industrial customers has increased on average. In aggregate, declining
3 use per customer has more than offset the usage associated with new customer loads, so
4 that the Company’s total sales of natural gas delivery service has declined in the range of
5 0.1 percent and 4.5 percent in the period 2003 to 2009. If the Company is to continue its
6 active support and encouragement of this downward trend in energy consumption and
7 advance the objectives of Massachusetts policymakers, the Company must break the link
8 between revenues and customer usage through the implementation of an RDM.
9 Q. Will implementation of the proposed RDM further the interests of energy efficiency 10 and help to promote programs that allow customers to reduce energy usage and 11 lower their energy bills?
12 A. Yes. The Department’s decision to implement revenue decoupling as a ratemaking
13 paradigm stems from the recognition that traditional ratemaking practices provide a
14 disincentive to gas and electric companies to support the aggressive promotion of energy
15 efficiency and conservation measures because the level of revenue available to the
16 Company is directly linked to customer consumption. In that paradigm, efforts
17 undertaken by customers to lower their energy bills through energy-conservation
18 activities have the direct effect of depriving the Company of revenues that were factored
19 into existing distribution rates and are needed by the Company to recover operating costs.
20 As a result, the traditional ratemaking paradigm strongly discourages utility support for D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 24 of 52
1 energy-conservation activities.
2 In 2009, the Department approved an RDM for National Grid USA’s Massachusetts
3 electric distribution operations in National Grid, D.P.U. 09-39 (2009), and for Bay State
4 Gas Company in D.P.U. 09-30, while at the same time working diligently to expand the
5 energy efficiency programs conducted by Massachusetts utilities. As part of this work,
6 the Company expanded its energy efficiency programs with total annual energy
7 efficiency savings increasing from 7,241,878 therms in 2010 to 14,572,864 therms in
8 2012, or 33,353,813 therms over the three-year period 2010-2012. The Department’s
9 commitment to this policy direction reflects the fact that aggressive promotion of energy
10 efficiency and demand-resource programs will assist customers in lowering their bills,
11 while also serving important environmental policy goals. National Grid is an enthusiastic
12 supporter of the Department’s public-policy direction on energy efficiency, the
13 aggressive promotion of demand resources, and the protection of environmental interests.
14 Therefore, to advance the interests of customers through the public-policy goals shared
15 by the Department, the Massachusetts legislature, and National Grid USA, the Company
16 is proposing to implement an RDM for its Massachusetts gas distribution companies.
17 Q. Would implementation of the proposed TIRF Program have equally beneficial 18 impacts on customer interests?
19 A. Yes, without a doubt. The Company’s proposal for the TIRF Program is
20 comprehensively discussed in the testimony of Company Witness James B. Howe, and D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 25 of 52
1 without repeating the crux of his testimony here, I would like to emphasize that
2 implementation of the TIRF Program would have singular importance in terms of serving
3 a range of public interests. Most significantly, implementation of the TIRF would
4 provide the Company with the means to increase the pace of replacement for the highest
5 risk, leak-prone distribution mains and services remaining on the Company’s system,
6 which would have the effect of greatly reducing the number of leaks occurring on the
7 system each year. The reduction of gas leaks through an accelerated replacement
8 program would produce a range of public-interest benefits relating to public safety,
9 service reliability, cost-effectiveness, public convenience and customer satisfaction,
10 municipal cost and convenience, and environmental and economic impacts. From the
11 Company’s perspective, the benefits that would accrue from implementation of the
12 Company’s proposed TIRF Program simply cannot be overstated.
13 Q. Before you discuss the benefits of the proposed TIRF, would you briefly describe 14 how the program would operate?
15 A. Yes. As I mentioned at the outset of my testimony, the Company’s TIRF proposal is
16 structured identical to the mechanism approved by the Department in D.P.U. 09-30, with
17 two exceptions necessary to address considerations unique to the Company’s system.
18 First, the Company is proposing to include the replacement of small diameter cast-iron
19 main in the mechanism along with non-cathodically protected steel infrastructure. Unlike
20 other distribution systems in the Commonwealth, the Company’s system contains a D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 26 of 52
1 relatively large amount of small diameter cast-iron and wrought-iron facilities, which
2 have a high propensity to break due to their relatively lower beam strength.
3 Approximately 66 percent of the 7,100 leaks experienced on National Grid’s
4 Massachusetts gas distribution system in 2008 occurred on cast-iron mains, with the
5 lion’s share of that amount occurring on small diameter mains (categorized as 8” in
6 diameter and smaller). Given their age and physical characteristics, smaller diameter
7 mains represent an equal, if not greater public safety challenge on the Company’s system
8 than non-cathodically protected steel and capital constraints involved in replacing this
9 inventory are no different than for non-cathodically protected steel. Therefore, if it is in
10 the public interest to reduce leaks through the implementation of a TIRF Program, then it
11 is necessary and appropriate to include the Company’s inventory of small-diameter cast-
12 iron main in that program.
13 Second, the Company is proposing to include a carrying charge on the investments made
14 through the TIRF Program in a calendar year. As discussed in the testimony of Company
15 Witness Michael D. Laflamme, the Company is proposing to apply a return at the pre-tax
16 weighted average cost of capital for the 10-month period beginning at the end of the
17 investment year to the commencement of recovery the following November 1. Given the
18 substantial capital funding that will be required to support the program, the proposed
19 carrying charge is necessary to support ongoing investment. D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 27 of 52
1 As Company Witness Howe discusses, the Company’s proposed TIRF Program would
2 set a schedule for the reduction of this inventory by 50 percent over the next 10 years,
3 with measurable milestones to gauge the progress of the program during that time period.
4 Q. Could you provide a brief explanation as to the way in which the TIRF Program 5 would produce the public-interest benefits that you reference?
6 A. Yes. However, to appreciate the significant impact associated with implementation of the
7 TIRF Program, it is first necessary to understand that the Massachusetts gas distribution
8 system is one of the oldest systems in the U.S., encompassing a relatively large
9 proportion of leak-prone, fragile or deteriorating infrastructure that was installed
10 anywhere from 50 to 100 years in the past. Collectively, National Grid’s Massachusetts
11 gas companies have approximately 1,000 miles of mains remaining on the system with
12 installation dates in excess of 100 years. Approximately 2,000 additional miles were
13 originally constructed between 1910 and 1940, which means that almost one-third of the
14 entire distribution system in Massachusetts (or approximately 3,000 miles in total) is
15 older than 71 years as of this writing. This fact is important because the materials
16 commonly installed on the Company’s system prior to 1940 included non-cathodically
17 protected steel and cast-iron and wrought-iron facilities, which are now recognized as
18 “leak-prone” facilities by industry standards in light of their susceptibility to corrosion
19 and breakage. Unlike other distribution systems operating in the Commonwealth, the
20 Company’s system contains a relatively large proportion of leak-prone facilities, with D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 28 of 52
1 non-cathodically protected steel and cast-iron facilities comprising 40 percent of the
2 Company’s overall distribution infrastructure and 60 percent on the BOS system. In
3 2008, these facilities accounted for approximately 93 percent of the leaks that occurred
4 on the Company’s system.
5 As Company Witness Howe discusses in detail in his testimony, analysis of annual leak
6 data reported to the U.S. Department of Transportation indicates that National Grid’s leak
7 rates are notably higher than other regional distribution companies. Based on 2008 data,
8 National Grid’s leak rates in Massachusetts compare to regional companies as follows:
9
10 Table NS-1 11 Leak Rate Comparisons
Leak Rate Calculation Regional LDCs NATGRID/MA Leaks/Mile Leaks/Mile 1. Aggregate Leak Rate (all materials) 0.29 0.64 2. Leak-Prone Mains Leak Rate 0.89 1.42 3. Unprotected Steel Mains Leak Rate 0.69 1.23 4. Cast Iron Mains Leak Rate N/A 1.84
12 Taken together, the Aggregate Leak Rate and Leak-Prone Mains Leak Rate demonstrate
13 that the Company’s distribution system encompasses a substantially greater amount of
14 higher risk facilities, which are leaking at a much higher rate than similar inventories on
15 other systems. The Company’s proposed TIRF is intended to address this situation by
16 providing the financial support necessary to increase the pace of replacements and reduce
17 the number of leaks to a level that is in line with those of other LDCs. Accordingly, the D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 29 of 52
1 primary public benefit of the TIRF Program will be a systematic reduction in the number
2 of leaks, which will serve the interests of public safety and service reliability.
3 That said, the Company is also motivated by the fact that implementation of the TIRF
4 will allow the Company to increase the cost-effectiveness of its replacement projects as
5 well as producing meaningful improvements for other public-interest considerations
6 including municipal cost and convenience, customer satisfaction and economic and
7 environmental impacts.
8 Q. Can you be more specific about the impact of the TIRF Program on these other 9 public-interests considerations?
10 A. Yes. Again, Company Witness Howe is presenting the Company’s proposed TIRF
11 Program in this case and his testimony discusses the benefits that would be achieved
12 through implementation of the TIRF. However, these benefits include the following:
13 Reduced need for service interruption associated with leak investigation and
14 repair;
15 Reduced municipal cost associated with training, equipping and maintaining
16 resources for emergency leak response and attending to unplanned street
17 openings;
18 Reduced inconvenience for municipalities and the public relating to the need for
19 emergency or unplanned street openings; D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 30 of 52
1 Reduction of methane emissions associated with gas leaks;
2 Creation of an estimated 400 jobs within the Commonwealth as a result of an
3 increased scale of construction activities, and
4 Additional property tax revenue for Massachusetts cities and towns.
5 Q. If the implementation of the TIRF Program would produce benefits for customers, 6 the general public, and the municipalities in which service is provided, why is the 7 Department’s approval of the TIRF a prerequisite?
8 A. The Department’s ratemaking practices directly affect the timing and amount of
9 investment undertaken on a regulated distribution system because recovery of capital
10 investment can only occur through rates. The Company’s ability to support the
11 investment necessary for an accelerated pace of replacement is impaired where
12 ratemaking procedures do not provide for recovery of the revenue requirement associated
13 with capital investments unless the Company files for a change in base rates, which may
14 not occur for several years. This situation causes a paradoxical result for the Company in
15 that the more it invests and the more it achieves in relation to the elimination of
16 deteriorating facilities, the more debilitating the investment becomes to the Company’s
17 financial position. As the Company’s financial position declines, it becomes more
18 difficult for the Company to continue to devote capital to an aggressive replacement
19 schedule, because the availability of capital resources is inhibited as the Company’s
20 financial position weakens. As a result, it becomes necessary to slow replacement D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 31 of 52
1 activities until cost recovery is obtained to realign rates with investment. Consequently,
2 capital budgets are inherently susceptible to variation under this ratemaking paradigm.
3 For National Grid, this situation poses a substantial obstacle to a more aggressive
4 replacement schedule because the end-life of leak-prone and deteriorating infrastructure
5 has arrived or is fast approaching on National Grid’s Massachusetts distribution system,
6 and the current pace of replacement will not result in the elimination of these facilities
7 within a reasonable time frame. Although the Company conducts a proactive leak-
8 management program to detect and repair leaks in the interests of public safety, the
9 Company’s operating judgment is that a systematic ramp-up in replacement activities
10 makes more sense from a public interest perspective than continued leak-management
11 activities, which are driving O&M cost increases, causing cost and inconvenience to
12 customers and the municipalities in which they live, and involve an inherent public-safety
13 risk that does not exist when deteriorated facilities are replaced.
14 Despite the negative impact to the Company’s financial well-being, the Company has
15 increased capital investment in replacement activities since the implementation of the
16 PBR Plan in D.T.E. 03-40, increasing from approximately $32.5M in 2002 to $77.9M in
17 2009, which represents an increase of 140 percent over the past seven years for that
18 category of capital spending. From the Company’s perspective, an increasing level of
19 investment was necessary to accelerate replacement activities and maintain the safety and
20 reliability of the system. However, even with this increasing rate of capital investment, D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 32 of 52
1 the pace of replacement is still not fast enough to make a material difference in the
2 amount of leak-prone facilities existing on the system or the associated leak rate.
3 Therefore, the issue is that replacement of leak-prone facilities at an accelerated pace
4 would be desirable and beneficial to the public interest, but traditional cost recovery
5 policies do not support that goal.
6 The Department’s decision to approve Bay State’s proposed TIRF was a significant step
7 in providing the necessary regulatory support for more aggressive replacement of leak-
8 prone mains and services. Like revenue decoupling, the Department’s decision to
9 implement the TIRF reflects a sound public policy and, in retrospect, will prove to be an
10 important turning point in terms of furthering the public interest. Approval of the
11 Company’s proposed TIRF would extend this important public policy to infrastructure
12 existing on the Company’s system that is among the most leak-prone infrastructure in the
13 northeast.
14 Q. Are there any other proposals contained in the Company’s filing that you would like 15 to highlight?
16 A. Yes. In this filing, the Company is proposing a net inflation adjustment mechanism
17 applicable to operating expenses, which is based on a productivity study as suggested by
18 the Department in D.P.U. 09-39. The Company is also proposing to implement a
19 surcharge to fund specific innovative technology projects that will benefit Massachusetts
20 customers by improving the safety, reliability, or cost-effectiveness of gas distribution D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 33 of 52
1 operations.
2 Q. What is the Company proposing in relation to the establishment of a net inflation 3 adjustment mechanism?
4 A. The Company’s operating expense net inflation adjustment is discussed in detail in the
5 testimony of Company Witness Lawrence D. Kaufmann. Dr. Kaufmann has performed
6 the requisite study of O&M productivity for national and regional natural gas distributors.
7 The mechanism devised by Dr. Kaufmann would adjust base rates on an annual basis to
8 account for operating expense inflation, less a productivity offset.
9 Q. Why is the Company making this proposal?
10 A. The Company’s reasons for making this proposal are simple. In today’s business
11 environment, the Company’s financial condition is under close scrutiny by the investment
12 community because investors require a high degree of comfort in investing their funds.
13 The Company’s financial condition is largely a function of the parity between the costs
14 incurred to serve customers and revenues collected from customers. Given the
15 Company’s experience with the PBR Plan, it is clear that the Company’s operating costs
16 rise at a rate that is greater than the rate of inflation. Although the Company works
17 diligently to identify and implement initiatives to contain operating costs over the long
18 term, the fact remains that operating costs such as labor and materials used to construct
19 and repair the distribution system are highly susceptible to inflationary pressures. As
20 costs increase, the Company’s financial condition becomes more difficult to manage with D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 34 of 52
1 acceptable results. Therefore, without a net inflation adjustment, the Company is forced
2 to seek rate relief from the Department on a frequent basis. The Company’s proposal to
3 implement a net inflation factor is designed to maintain a level of parity between the
4 costs incurred to serve customers and the revenue available to the Company between rate
5 cases.
6 Q. Would you please review the Company’s Gas Operations T&I funding proposal?
7 A. Certainly. With the elimination of the FERC-approved interstate pipeline surcharge to
8 support research and development funding in the late 1990s, the coincident emergence of
9 natural gas as an efficient, low-carbon fuel and the pressing need to upgrade aging
10 infrastructure under increasingly stringent environmental and pipeline safety rules,
11 National Grid USA views there to be a benefit in accelerating company-specific
12 investment in technological innovations that would modernize and improve the safety
13 and reliability of the Company’s system and promote renewable energy solutions.
14 Specifically, the Company has developed a portfolio of projects that will promote Gas
15 Operations T&I as a solution to key challenges facing the Company and its customers
16 relating to cost, safety and reliability and climate change. These projects will result in
17 benefits to Massachusetts customers including lower energy use and energy bills (through
18 increased-efficiency appliances and equipment), increased safety, enhanced
19 deliverability, and containment of distribution O&M costs. D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 35 of 52
1 To achieve these objectives, the Company is proposing to establish a funding mechanism
2 that would allow the Company to come to the Department for review and approval of
3 T&I projects, with the budget recovered through a separate surcharge that would allow
4 for subsequent reconciliation of actual expenditures. The Company envisions that the
5 T&I surcharge would operate in a manner similar to the mechanism for energy efficiency.
6 The testimony of Company Witness Blazewicz reviews the details of the proposed Gas
7 Operations T&I Program and provides the Company’s quantification of the benefits that
8 will accrue to Massachusetts customers as a result of the implementation of each of these
9 technologies.
10 Q. What types of projects would be funded through the T&I surcharge?
11 A. Projects undertaken through Gas Operations T&I Program would fall into three
12 categories: Protection of Assets, Protection of the Environment and Operations
13 Improvements. Projects included in the Protection of Assets category are designed to
14 improve the reliability and performance of this gas delivery infrastructure. Projects
15 falling within the Protection of the Environment category would include projects that
16 would facilitate site remediation, leak detection and repair, and gas composition
17 investigation. Projects within the Operations Improvement category will be designed to
18 yield improvements in efficiency, tooling and safety. Some examples presented by
19 Company Witness Blazewicz would include CISBOT, which is robotic cast-iron joint D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 36 of 52
1 sealing; horizontal direction drilling, keyhole coring and cured-in-place pipe lining. As
2 with other initiatives promoted through the program, these items are designed to improve
3 the efficiency and safety of operations, avoid the need for customer interruptions and
4 reduce public inconvenience.
5 Q. Has the Company performed a cost benefit analysis to support the program?
6 A. Yes. The Company’s company-benefit analysis is presented in the testimony of
7 Company Witness Stanley Blazewicz. However, the Company’s analysis shows that the
8 Gas Operations T&I Program would have a benefit to cost ratio of 5.7:1, resulting in
9 annual benefits for Massachusetts customers estimated at $26.7M based on an annual
10 funding level of $4.7 million. As Mr. Blazewicz explains, the Company considers this to
11 be a conservative analysis in light of industry research showing that the calculated
12 customer energy savings resulting from technology investment range from 12:1 to 20:1,
13 depending on the end-use technology.
14 Q. How does the recently enacted Green Communities Act support National Grid 15 USA’s T&I strategy?
16 A. The Green Communities Act presents specific opportunities for the Company to advance
17 its T&I strategy through “programs for research, development and commercialization of
18 products or processes which are more energy-efficient than those generally available”
19 and “research and development within the commonwealth and the New England region
20 related to renewable energy matters.” With its leading universities and technologically- D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 37 of 52
1 oriented economy, Massachusetts is well-positioned to capitalize on the emerging clean
2 energy industry, which National Grid strongly endorses.
3 IV. STAKEHOLDER INITIATIVES AS A GLOBAL ENERGY LEADER
4 Q. What is National Grid’s perspective on its role as a global energy leader?
5 A. In today’s world, gas and electric utilities are being called upon to play a much larger role
6 in achieving public policy goals involving the safety and reliability of gas service, the
7 enabling of customer-initiated energy conservation and the reduction of environmental
8 impacts. For the gas distribution business, this impetus is heightened by the fact that
9 natural gas is the preferred energy solution for the foreseeable future given its efficiency
10 and relatively lower environmental impact as a fossil fuel. From the perspective of the
11 National Grid organization, this impetus requires the Company to take a leadership role
12 in shaping and meeting energy policies and goals nationally, regionally and within the
13 states where it provides service to customers.
14 For the National Grid organization, there are many facets to the leadership role including
15 a strong commitment to corporate social responsibility, sustainability and high standards
16 for business behavior. Recently, National Grid plc was names as one of Ethisphere’s
17 World’s Most Ethical Companies for 2010. The Ethisphere Institute is an international
18 research institute dedicated to creating, advancing and sharing best practices in business
19 ethics and this award has affirmed the commitment of the National Grid organization to D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 38 of 52
1 this mission.
2 Q. What is the leadership role that National Grid envisions for its U.S. natural gas 3 business?
4 A. National Grid’s mission is to be a leader on all fronts in natural gas distribution: to
5 deliver unparalleled efficiency, reliability, and safety; be an innovative leader in energy
6 management; and safeguard our global environment for future generations. Our
7 commitment to efficiency, reliability, and safety is at the core of all that we do now and
8 all that we plan to accomplish in the future. As an example, National Grid USA’s U.S.
9 Gas Distribution Operations has obtained certification under PAS 55, which is a
10 benchmark for the optimal management of physical assets published by the British
11 Standards Institution, to achieve National Grid plc’s global objective to adopt best-in-
12 class asset management policies and procedures. This certification aids the Company in
13 achieving its overall strategic objectives of safety, reliability, customer service and
14 efficiency.
15 In addition, the Company’s commitment to environmental stewardship and energy
16 management reflects an acknowledgment that the energy sector, including distribution
17 companies, distribution customers, vendors and other stakeholders are a significant part
18 of the global climate change challenge. Together we need to change the way we operate
19 our business and manage energy usage to deliver emission reductions, address climate
20 change and become a low-carbon society. National Grid has a clear vision and direction D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 39 of 52
1 for tackling climate change and will continue to take action over the coming months and
2 years toward the Company’s goal of delivering emission reductions and developing a
3 low-carbon future.
4 As stated by the President and CEO of AGA, David N. Parker, in connection with the
5 release of the AGA’s new study entitled “Natural Gas End Use: A Vision for Today and
6 the Future,” the immediate and future benefits of the increased use of natural gas are
7 clear: significant reductions in green house gas emissions, greater energy independence
8 and a stronger economy can all be achieved by increasing the widespread use of this
9 clean fuel. National Grid’s commitment to its leadership role aligns with these
10 conclusions.
11 Q. Would you provide some examples of the initiatives that National Grid is working 12 on in furtherance of its leadership objectives?
13 A. Yes. The Company’s commitment to this role involves active participation in a range of
14 activities that complement the Company’s delivery of natural gas to consumers.
15 However, three particular areas of focus for the Company include: climate change
16 initiatives to safeguard the environment for future generations, support of energy
17 efficiency and demand resource programs, technology and innovation to support the
18 commercialization of technologies that will improve operations and cultivation of a
19 qualified and customer-aware work force. Each of these areas of focus is discussed in
20 turn below. D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 40 of 52
1 CLIMATE CHANGE INITIATIVES
2 Q. What are some of the specific climate change initiatives that the Company is 3 working on?
4 A. The National Grid organization has established one of the most aggressive greenhouse
5 gas reduction goals in the industry, seeking to reduce its carbon emissions by 80 percent
6 by 2050. This goal affects the Company, the companies that co-exist within the National
7 Grid organization to serve the Company, and all other National Grid subsidiaries. As one
8 of the first companies to implement carbon budgets, National Grid plc has sharpened the
9 focus of management and the entire workforce in relation to carbon emissions. For
10 example, National Grid is working to reduce carbon emissions at its LNG facilities and
11 has added new vehicles to the vehicle fleet that have fewer emissions and are more fuel
12 efficient. In addition, National Grid established a Sustainable Gas Group to ensure that
13 gas remains a sustainable source of fuel and to pursue several initiatives that are
14 underway with respect to renewable natural gas (also called biomethane). The
15 production of biogas from various feedstocks is a renewable gas initiative that National
16 Grid is evaluating, which could have significant investment potential in Massachusetts
17 and an impact to the local economy in terms of job creation.
18 Q. How does the Company’s commitment to energy efficiency and demand resources 19 further the interests of climate change?
20 A. Energy efficiency programs are among the most cost-effective ways to reduce
21 greenhouse gas emissions. Energy efficiency has the potential to dramatically lower D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 41 of 52
1 greenhouse gas emissions and provides consumers with long-term savings on their
2 energy bills. As I noted above, National Grid strongly supports customer efforts to
3 conserve energy and promotes energy efficiency measures in all of the jurisdictions in
4 which it provides gas and electric distribution service. National Grid has furthered this
5 goal significantly by consolidating the Company’s New England offices into one location
6 at a central service area location in a building that has achieved a LEED Platinum rating,
7 which makes it among the most recognized environmentally responsible office buildings
8 in New England.1 In addition, we have developed our three-year plan for increased
9 energy efficiency in conjunction with the energy efficiency advisory council established
10 by the Green Communities Act, which was approved by the Department early this year.
11 Q. Would you describe the Company’s “3% Less” Campaign?
12 A. Yes. The Company’s “3% Less” Campaign is an effort to challenge customers to make a
13 commitment to use three percent less energy every year for the next 10 years. The
14 objectives of this program are to drive awareness and participation in energy efficiency
15 programs, motivate conversions to natural gas service and to actively engage customers
16 in the Company’s efforts to reduce its carbon footprint. To participate in the program,
17 customers are asked to visit www.powerofaction.com and to take the pledge. With a
1 LEED is an acronym for Leadership in Energy and Environmental Design and is designed to promote a whole-building approach to sustainability by recognizing performance in five key areas of human and environmental health: (1) sustainable site development; (2) water savings; (3) energy efficiency; (4) materials selection; and (5) indoor environmental quality. LEED-certified buildings have lower operating costs, reduce the amount of waste sent to landfills, conserve energy and water, are healthier and safer to occupants, and reduce harmful greenhouse gas emissions. D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 42 of 52
1 commitment from the customer to use three percent less per year, the customer can visit
2 the Company’s website for a free online energy audit and, based on that audit, receive
3 guidance on reducing their energy consumption to meet the challenge. To date, the
4 Company’s 3% Less Campaign has received strong positive feedback from Judith Ench,
5 Regional Administrator for the U.S. Environmental Protection Agency, who commented
6 that the Company’s promotional activities for this campaign are “the best ad of its kind.”
7 The Company obtained a customer response of 4.62 percent on its direct mail
8 solicitations, as compared to an expected rate of 2 percent, which is one of the highest
9 responses experienced by the Company in recent history.
10 Q. Would you provide some background on the “OPower” Home Energy Reports 11 Program?
12 A. The OPower Home Energy Reports Program is a comprehensive behavioral marketing
13 outreach program conducted through a partnership between NG and OPower, a Virginia-
14 based energy efficiency software organization. The program is designed to encourage
15 home owners to reduce usage based on comparison against their neighbors’ usage on an
16 anonymous basis. Market research shows that people are motivated by what their
17 neighbors do, and therefore, the program works to engage, motivate and educate
18 customers to improve daily habits and eliminate wasteful consumption through providing
19 energy savings tips and rebate information around Company’s current energy efficiency
20 programs. The Company’s pilot program originated in Massachusetts and is getting local D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 43 of 52
1 and national press. The original pilot consisted of 50,000 customers in Q4 2009 (half
2 gas/half electric). Preliminary statistics gathered through the pilot show 1.2 percent
3 reduction in electric savings (Q4 2009) and a 1.0 percent reduction in gas savings (Q4
4 2009) with greater savings expected. Individual gas customers who implement energy
5 efficiency tips provided through the Report could save approximately 18 therms per year.
6 If all 25,000 of the initial participating gas customers did the same, the savings would
7 total approximately 450,000 therms, which is the equivalent amount of gas to heat and
8 provide hot water to approximately 1,200 homes for one year. Through results from
9 other utilities who have implemented the OPower Home Energy Reports, the program
10 has proven to be effective in engaging and motivating up to 85 percent of the targeted
11 population to take energy saving actions. The Company recently expanded the pilot
12 program in Massachusetts to 125,000 participants.
13 Q. What are some other efforts the Company is making to reduce carbon emissions or 14 otherwise mitigate the environmental impact of its operations?
15 A. The largest contributor to carbon emissions for the Company, and the U.S. gas
16 distribution business in general, is release of methane gas to the atmosphere. By
17 investing in the distribution system to eliminate leak-prone pipe, the Company not only
18 improves the integrity of the distribution system, as well as its safety and reliability for
19 customers and communities, but also simultaneously provides a significant environmental
20 benefit through elimination of methane emissions. As a part of National Grid’s recently
21 announced recycling goals for its U.S. operations, the Company will also step up its D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 44 of 52
1 efforts to recycle road spoils (pavement and soils generated when excavations are
2 completed in roadways that cannot be returned to the excavation site), trash at both fixed
3 sites and construction sites and SIR wastes (wastes generated during clean up efforts at
4 former manufactured gas plant sites).
5 Q. Could you provide additional background on the Company’s activities that relate to 6 “renewable” natural gas?
7 A. Renewable gas has the potential to make a significant contribution in the reduction of
8 greenhouse gas (GHG) emissions, while creating local jobs and enhancing security of
9 supply. A National Grid study indicates that, over the long term, renewable gas has the
10 technical (maximum) potential to meet up to 25 percent of the demand in the four states
11 served by National Grid in the U.S. (Massachusetts, New Hampshire, New York and
12 Rhode Island), not including natural gas demand for power generation. In Massachusetts,
13 there is the potential to meet up to 10 percent of overall customer demand with renewable
14 gas supplies.
15 “Renewable Gas” is also known as biomethane. Biomethane is pipeline-quality gas that
16 is fully interchangeable with natural gas and may be directly injected into the gas network
17 for direct use in existing natural gas appliances. Renewable gas reduces greenhouse gas
18 emissions by fuel substitution, essentially fuel switching from a fossil fuel to a renewable
19 fuel. D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 45 of 52
1 Renewable Gas is produced using “feedstocks” such as waste-water treatment plants,
2 manure, municipal solid waste, wood waste, energy crops and other agricultural residues.
3 Renewable Gas is produced mainly via anaerobic digestion or thermal gasification.
4 Before Renewable Gas can be injected into the network, the gas must be cleaned-up and
5 conditioned to meet pipeline specifications. To date, direct injection of renewable gas
6 has been limited to a few projects in the United States. However, anaerobic digestion is a
7 commercially viable technology and there are many commercial injection facilities
8 around the world. Thermal gasification is a proven technology that is not currently
9 commercially available for biomass, however, there are a number of demonstration
10 projects in the U.S. and across Europe, and National Grid expects that the technology will
11 be commercially available over the next few years.
12 Q. What are the benefits associated with Renewable Gas?
13 A. Renewable Gas has the potential to make a significant contribution in the reduction of
14 greenhouse gas emissions while also producing the following benefits:
15 Providing a real solution for using local waste resources;
16 Enhancing diversity of supply;
17 Stimulating the local economy and creating green jobs;
18 Leveraging the existing gas network to deliver a renewable fuel;
19 Enabling the provision of renewable heat to gas heated homes without additional 20 investment by the home owner, and
21 Increasing efficiency by directly using the gas (for heating for example) instead of D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 46 of 52
1 power generation.
2 Currently, National Grid is in the process of finalizing a market assessment study and the
3 results of that study will be published over the next few months. Preliminary data
4 suggests there is a significant potential to achieve the goals associated with this resource.
5 Public policy will be the most critical factor for success. Currently, there is a very
6 significant disparity between policies supporting renewable gas and renewable electricity
7 in that Renewable Gas projects are not entitled to any incentives or tax credits. As a
8 result, one of National Grid’s objectives is to promote consideration of Renewable Gas as
9 a viable option to a sustainable low carbon economy of the future. National Grid is
10 committed to taking a leadership role in stimulating and facilitating this industry and is
11 eager to engage with all of the stakeholders to ascertain that it is successful.
12 BUILDING A QUALIFIED AND CUSTOMER-AWARE WORKFORCE
13 Q. Would you describe the Company’s efforts to secure the availability of a qualified 14 and customer-aware workforce?
15 A. The National Grid organization recognizes that the key to running a safe, reliable and
16 cost efficient system is the development of a qualified, dedicated and customer-aware
17 workforce. National Grid plc has a multitude of initiatives in place to achieve this
18 objective. However, there are a few initiatives of particular importance in reaching the
19 Company’s goals, which are the Foundation of Leadership Program and the Performance
20 for Growth program. D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 47 of 52
1 Q. Would you describe National Grid plc’s “Foundation of Leadership Program?”
2 A. The Foundations of Leadership program is a global development program launched in
3 May 2009 to focus on providing participants with business fundamental and leadership
4 skills. The program objective is to develop a talented and diverse population of leaders
5 within the National Grid organization to lead the organization through future growth and
6 change. The Foundations of Leadership Program applies to first level leaders who have
7 recently transitioned from individual contributor to leading others. Participants are
8 nominated through their line of business and, if selected, participate in a 15-month
9 program that provides an opportunity to learn and apply new concepts through the
10 extended experience. A key principle of the program is “leaders teaching leaders” where
11 experienced directors and managers have the opportunity to speak and present at sessions
12 to share personal experiences and stories.
13 Q. Would you describe the Performance for Growth employee initiative?
14 A. The Performance for Growth program is also referred to as “P4G.” P4G is an integrated
15 performance, talent and reward process, which is designed to align and engage
16 employees, teams, business units and all lines of business behind National Grid’s global
17 strategy for growth. P4G also is designed to stimulate employees to recognize their
18 potential to achieve their best performance and career aspirations; recognize and reward
19 performance excellence, and assist in developing a high performance culture. The P4G
20 program rewards performance excellence and develops leadership at all levels to enhance D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 48 of 52
1 the work culture, behaviors and mindsets to meet higher standards of performance. The
2 P4G program places an emphasis on leadership qualities to create the conditions for
3 success, a high performing culture and a great place to work. The leadership qualities are
4 designed to take the best practice competencies from National Grid and KeySpan
5 enterprises, while tying them to specific behaviors that are necessary to execute the
6 National Grid strategy.
7 Q. What has the Company done in relation to the availability of qualified pipeline 8 engineers?
9 A. As reported recently by the U.S. Power and Energy Engineering Workforce
10 Collaborative, approximately 45 percent of engineers currently employed by U.S. gas and
11 electric utilities will be eligible for retirement over the next five years. At the same time,
12 significantly fewer students are choosing to study engineering and related disciplines.
13 National Grid’s new “Engineering Our Future” program targets students of all ages and
14 backgrounds to encourage them to study science, technology, engineering, and math
15 (referred to as “STEM”). The National Grid organization has already invested more than
16 $3 million in this new program, which is the centerpiece of which is a six-year
17 development program called the “Engineering Pipeline” that creates a recruitment
18 pathway for promising high school students who want to become engineers. The
19 Company depends on engineers to design and build its systems to deliver energy safely
20 and reliably to customers and will benefit from National Grid’s efforts to inspire and D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 49 of 52
1 encourage the new generation of engineers who will develop innovative technologies like
2 those I noted above, as well as renewable energy solutions to meet energy policy goals.
3 V. CONCLUSION
4 Q. Do you have any summary comments on the Company’s proposals in this 5 proceeding?
6 A. In this case, the Company is proposing a ratemaking structure that would (1) provide
7 adequate revenue to the Company to support its operations and make capital available for
8 replacement activities, (2) equip the Company with the tools necessary to achieve public-
9 interest benefits identified by the Department and other stakeholders, and (3) promote a
10 longer-term period between rate cases in the interests of efficiency. To serve these goals,
11 the Company is requesting that the Department allow the following:
12 Base distribution rates that are designed to recover the Company's cost of service 13 including a fair return on capital investments made through the end of the test- 14 year period.
15 An authorized ROE that puts the Company on par with comparable investment 16 opportunities in the marketplace so that it can continue to attract necessary 17 capital.
18 An annual net inflation adjustment to provide the Company with the opportunity 19 to keep pace with inflation in operating costs, while also applying an inherent 20 incentive to reduce costs.
21 Implementation of revenue decoupling to account for declining throughput 22 volumes associated with energy efficiency and conservation efforts so that there is 23 an opportunity to recover the target revenue requirement deemed by the 24 Department in this case to be the cost of providing service to customers, as 25 adjusted for inflation each year. D.P.U. 19-120 Exhibit AG-3 June 10, 2020 Direct Testimony of Nickolas Stavropoulos H.O. Kevin Crane On Behalf of National Grid Exhibit NG-NS-1 D.P.U. 10-55 April 16, 2010 Page 50 of 52
1 Rate support for the accelerated replacement of leak-prone distribution 2 infrastructure, which would enable the Company to achieve a higher level of 3 public safety, service reliability and other public-interest goals.
4 The Company’s experience over the past seven years has demonstrated that these five
5 elements are critically necessary to maintain the financial health of the Company and
6 place the Company on par with comparable investment opportunities in the market place.
7 Q. Does this conclude your testimony?
8 A. Yes, it does.